APPORT DES ACTIONS A ATOS ORIGIN DE SEMA S.A. ET DE SEMA LTD APPARTENANT AU GROUPE SEMA
Annexe au rapport du Directoire de la société Atos Origin présenté à son assemblée générale extraordinaire des actionnaires du 22 janvier 2004
En application du règlement COB n° 98-01, l'Autorité des Marchés Financiers a apposé sur le présent document le numéro d’enregistrement E.04-004 en date du 16 janvier 2004.
Il a été établi par l'émetteur et engage la responsabilité de ses signataires.
Ce numéro d’enregistrement, attribué après examen de la pertinence et de la cohérence de l'information donnée sur les opérations réalisées et les sociétés concernées, n'implique ni approbation de l'opportunité de l'opération ni authentification des éléments comptables et financiers présentés.
Il atteste que l'information contenue dans ce document correspond aux exigences réglementaires en vue de l'admission ultérieure à la Cote du Premier Marché des titres qui, sous réserve de l'accord de l'assemblée générale, seront émis en rémunération des apports.
L'Autorité des Marchés Financiers attire l'attention du public sur la limitation suivante énoncée dans le rapport des commissaires aux comptes d'ATOS ORIGIN sur les comptes pro forma au 31 décembre 2002 et 30 juin 2003:
"Nous n'avons pas pu effectuer une revue des dossiers de PricewaterhouseCoopers portant sur les "états financiers pro forma combinés" du Groupe Sema ainsi que sur la réconciliation entre les principes comptables américains et français au 31 décembre 2002 et au 30 juin 2003. Nous nous sommes assurés que les rapports de PricewaterhouseCoopers ne comportaient pas de réserve."
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CONTRIBUTION TO ATOS ORIGIN OF SHARES OF SEMA S.A. AND SEMA LTD CONSTITUTING THE SEMA GROUP
Annex to the report of the Management Board of Atos Origin presented to the shareholders’ extraordinary general meeting of shareholders held on January 22, 2004
AMF
The Autorité des Marchés Financiers (AMF - the Financial Markets Authority) has accorded to this document the registration number E.04-004 on January 16, 2004.
It has been prepared by the issuer and engages the responsibility of its signatories.
This registration number, accorded after an examination of the relevance and coherence of the information provided regarding the described operations and the participating companies, does not imply approval of the merits of the described operations or validation of the accuracy of the accounting and financial information presented herein.
It attests that the information contained in this document corresponds to the regulatory requirements applicable for the future admission to listing on the Premier Marché in Paris of the ATOS ORIGIN shares which, subject to the approval of the shareholders in a general meeting, will be issued in remuneration of the contributed shares.
The Autorité des Marchés Financiers draws the public’s attention to the following qualification contained in the report of the statutory auditors of ATOS ORIGIN in respect of the pro forma financial statements for the periods ended December 31, 2002 and June 30, 2003:
"We were not able to review the PricewaterhouseCoopers files concerning the "pro forma combined financial statements" of the Sema Group and the reconciliation between French and US GAAP for the periods ended December 31, 2002 and June 30, 2003. We satisfied ourselves that the PricewaterhouseCoopers reports did not contain any qualifications."
This Document is a translation of the French original and has been prepared for informational purposes. The original Document E has been registered with the Autorité des Marchés Financiers as described herein and such original remains the sole controlling version.
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TABLE OF CONTENTS
PREAMBLE...... 5
Document E...... 5 Risk Factors ...... 5 Notion of "full scope" and "in scope" and the basis of preparation of the pro forma financial statements..... 5 Projections...... 6 Exchange Rates...... 7
RESPONSIBILITY...... 9
Persons who assume responsibility for this document...... 9 Persons responsible for examining the financial statements of Atos Origin...... 9 Attestation of the auditors of Atos Origin regarding the information given in the annex to the report of the Document E ...... 10
A FIRST PART: INFORMATION ON THE TRANSACTION AND ITS CONSEQUENCES...... 14 A.1 ECONOMIC ASPECTS OF THE TRANSACTION...... 16 A.1.1 Pre-existing links between the companies in question ...... 16 A.1.2 Rationale and goals of the acquisition...... 16 A.1.3 Risk factors ...... 25 A.2 LEGAL ASPECTS OF THE TRANSACTION...... 34 A.2.1 General presentation...... 34 A.2.2 The operation itself ...... 41 A.2.3 Control of the operation ...... 42 A.2.4 Report by the contribution auditors on the value and the remuneration of the acquired sema companies by Atos Origin, S.A. to the general meeting of the shareholders of January 22, 2004...... 42 A.2.5 Remuneration of the contributions...... 73 A.3 ACCOUNTING FOR THE CONTRIBUTED ASSETS...... 73 A.3.1 Designation and value of the contributed assets and of the assumed liabilities ...... 73 A.3.2 Table setting forth the revaluations and adjustments effected...... 73 A.3.3 Name and date of the expert report ...... 73 A.3.4 Detailed calculation of the share premium...... 74 A.4 VALUATION OF AND CONSIDERATION FOR THE CONTRIBUTIONS...... 74 A.4.1 Valuation methods used ...... 74 A.4.2 Valuation of the acquired company and the contributions ...... 75 A.4.3 Valuation of Atos Origin shares...... 77 A.4.4 Conclusion ...... 79 A.4.5 Consideration for contributions...... 79 A.4.6 Allocation of the acquisition price ...... 80 A.5 CONSEQUENCES ...... 81 A.5.1 Consequences for the company receiving the contributions and its shareholders...... 81 A.5.2 Consequences for the contributing companies and their shareholders...... 104 B SECOND PART: PRESENTATION OF THE COMPANY RECEIVING THE CONTRIBUTIONS 107 B.1 CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2002...... 107 B.1.1 COB registration date and number of the reference document ...... 107 B.1.2 COB cross reference table...... 107 B.2 ATOS ORIGIN EXISTING BUSINESS DESCRIPTION ...... 108 B.2.1 Group History...... 108 B.2.2 Approach...... 108 B.2.3 Service Lines...... 109 B.2.4 Industry Sectors...... 112 B.3 CONSOLIDATED SUMMARY FINANCIAL STATEMENTS AS OF JUNE 30, 2003...... 114 B.3.1 Chief Executive’s Statement ...... 114
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B.3.2 Half year operational review ...... 117 B.3.3 Consolidated half year Financial Statements ...... 125 B.3.4 Segment information...... 134 B.3.5 Statutory auditors’ report on the half-year consolidated financial statements...... 135 B.4 UNAUDITED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 ...... 136 B.4.1 Unaudited management report on the company's activity as of September 30, 2003 ...... 136 B.4.2 Pre-closing update...... 137 B.4.3 Summary of significant differences between french GAAP and U.S. GAAP...... 138 B.5 OTHER KEY EVENTS SINCE JUNE 30, 2003...... 145 B.5.1 Sale of 100% of Atos Origin's document management and cheque processing activities...... 145 B.5.2 Atos Origin sells its Hungarian operation ...... 145 B.6 STOCK MARKET DATA...... 145 B.6.1 Atos Origin market trends from January 1, 2003 to December 31, 2003...... 145 B.6.2 Atos Origin market capitalization trends from January 1, 2003 to December 31, 2003 ...... 146 C THIRD PART: DESCRIPTION OF THE CONTRIBUTIONS ...... 149 C.1 GENERAL INFORMATION ...... 149 C.1.1 Name, Headquarters...... 149 C.1.2 Date of incorporation and term of the company...... 149 C.1.3 Legislation governing the issuer and legal form ...... 149 C.1.4 Summary of Corporate purpose ...... 149 C.1.5 Trade Register Number– APE code ...... 149 C.1.6 Management...... 149 C.1.7 Auditors...... 150 C.1.8 RELATED PARTY TRANSACTIONS ...... 159 C.1.9 Locations where documents and information on the contributed companies may be consulted. 159 C.2 GENERAL INFORMATION ON THE SHARE CAPITAL...... 159 C.2.1 Amount of subscribed share capital, number and class of shares...... 159 C.2.2 Features of the securities giving rights to share capital...... 160 C.2.3 Breakdown of share capital and voting rights at June 30, 2003 ...... 160 C.3 BUSINESS INFORMATION...... 160 C.3.1 Description of the principal activities of the contributed companies ...... 160 C.3.2 Revenue earned in fiscal year ended 2002 and the first half of 2003 by activity and geographic market 169 C.3.3 type of clients by market ...... 170 C.3.4 Income from operations earned in fiscal year 2002 and the first half of 2003 by region...... 170 C.3.5 Staff evolution during fiscal year 2002 And first half 2003...... 171 C.3.6 Utilization rates ...... 171 C.3.7 Policy regarding partnerships and sub contractors...... 171 C.3.8 insurance policies and risk assessment processes...... 171 C.3.9 Exceptional events and litigation ...... 172 C.4 FINANCIAL INFORMATION ...... 172 C.4.1 Sema Group pro forma combined financial statements...... 172 C.4.2 "Full scope" combined financial statements...... 189 C.5 MARKET AND RETURN ON SECURITIES ...... 232 C.5.1 Listing market ...... 232 C.5.2 Market for the shares...... 232 C.5.3 Dividends and distribution policy ...... 233
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PREAMBLE
Document E
This Document E (hereinafter "the Document") consists of this Annex to the report of the Management Board of Atos Origin presented to the extraordinary general meeting of shareholders of January 22, 2004 and the annual report for the 2002 fiscal year of Atos Origin which was registered with the Commission des Operations de Bourse (COB) in application of regulation N°98-01 as a reference document on April 14, 2003 under number D03 – 0460 (refer to chapter B.1.1).
Risk factors
The company Atos Origin (hereinafter "Atos Origin") cautions that the statements and financial information presented in this Document are qualified by the risk factors described in this Document (see chapter A.1.3, "Risk Factors") which could cause actual results to differ materially from forward-looking statements. Atos Origin undertakes no obligation to update or revise any forecast, whether as a result of new information, future events or in any other circumstances.
Notion of "full scope" and "in scope" and the basis of preparation of the pro forma financial statements
On September 22, 2003, Atos Origin announced that it had entered into an agreement with Schlumberger Limited, Schlumberger Investments Limited, Schlumberger SA, Schlumberger BV, Schlumberger Technology Corporation (hereinafter "Schlumberger") with a view to acquiring all the capital stock held by Schlumberger in the Sema companies (hereinafter the "Sema Companies"), which with their subsidiaries (hereinafter the "Sema Group") make up the bulk of Schlumberger’s IT consulting services, system integration services and enterprise outsourcing services. For purposes of this Document:
• the contributions or activities sold by Schlumberger are defined as being "in scope", and will be called the "Sema Group" herein, • all the IT consulting services, system integration services and enterprise outsourcing services of Schlumberger, including activities not forming a part of the contributions or activities sold, are defined as "full scope", and will be called "SchlumbergerSema" herein.
The summary combined pro forma financial statements of the new group including Atos Origin and the Sema Group:
• have been prepared by Atos Origin and reviewed by Schlumberger • are described in chapter A.5.1.5 of this Document • have been prepared in accordance with French accounting principles applied by Atos Origin • are expressed in euros • have been reviewed by Atos Origin's auditors whose report appears at the beginning and in chapter A.5.1.5. of this Document
These summary combined pro forma financial statements are derived from:
• the consolidated financial statements of Atos Origin prepared by Atos Origin described in chapter B of this Document prepared in accordance with French accounting principles applied by Atos Origin expressed in euros certified for the period ending December 31, 2002 and subjected to a limited review for the period ending June 30, 2003 by Atos Origin's auditors, whose report appears in chapter B of this Document
• the combined pro forma financial statements of the Sema Group prepared by the board of Schlumberger Limited described in chapter C.4 of this Document prepared in accordance with U.S. accounting principles applied by Schlumberger Limited reconciled with French accounting principles applied by Atos Origin converted into euros
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submitted to examination by SchlumbergerSema's auditors whose reports appear in chapter C.4 of this Document
• combining entries relating to the Acquisition prepared by Atos Origin described in chapter A.5.1.5 of this Document prepared in accordance with French accounting principles applied by Atos Origin expressed in euros reviewed by Atos Origin's auditors whose report appears at the beginning of chapter A.5.1.5. of this Document
The combined pro forma financial statements of Sema Group have been prepared on the basis of:
• the combined financial statements of SchlumbergerSema ("full scope") : prepared by the management of Schlumberger Limited described in chapter C.4 of this Document prepared in accordance with U.S. accounting principles applied by Schlumberger Limited expressed in U.S. dollars certified for the period ending December 31, 2002 and subjected to a limited review for the period ending June 30, 2003 by SchlumbergerSema's auditors, whose reports appear in chapter C.4 of this Document from which activities not forming a part of the Acquisition, as described in chapter C.3 of this Document, have been excluded in order to establish the combined pro forma financial statements of Sema Group ("in scope")
• the combined pro forma financial statements of Sema Group ("in scope") have been: prepared by Schlumberger Limited described in chapter C.4 of this Document prepared in accordance with U.S. accounting principles applied by Schlumberger Limited expressed in U.S. dollars submitted to examination for the period ending December 31, 2002 and for the period ending June 30, 2003 by SchlumbergerSema's auditors, whose reports appear in chapter C.4 of this Document
The following adjustments and reclassifications have been made to the combined pro forma financial statements of Sema Group "in scope" in order to make them comparable to those of Atos Origin and to allow combined pro forma financial statements to be prepared including Atos Origin and Sema Group.
• reclassifications related to accounting principles • adjustments of the opening balance sheet • elimination of costs • conversion into euros and have been prepared by Atos Origin and reviewed by Schlumberger Limited are described in chapter A.3 of this Document have been reviewed by Atos Origin's auditors whose report appears at the beginning and in chapter A.5.1.5. of this Document
The summary pro forma combined financial statements of the new group have been prepared and communicated for informational purposes only and are not intended to represent the actual view of the new group, now or at any time in the future. Such representation based on historic data is intended to keep the readers of this Document better informed of Sema Group's activity and enable a better understanding of the combined activities of the two companies.
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Projections
This document contains statements that constitute "forward-looking statements" in that they include statements regarding the intent, belief or current expectations of Atos Origin and Sema Group, their respective directors or officers about Atos Origin and Sema Group and their businesses. Forward-looking statements generally can be identified by the use of terms such as "ambition", "may", "will", "expect", "intend", "estimate", "anticipate", "believe", "plan", "seek", "continue" or similar terms. These forward-looking statements are not guarantees of future financial performance. Rather, they are based on management’s current views and assumptions and involve known and unknown risks, uncertainties and other factors, many of which are outside Atos Origin’s and Sema Group’s control and are difficult to predict, that may cause actual results to differ materially from any future results expressed or implied from the forward-looking statements. These uncertainties include financial variations, changes in the regulatory environment, estimations of transaction synergies and cost savings, industry growth and trend predictions that could cause actual results, performance or events to differ materially from those expressed or implied in such statements due to, among other factors:
• the ability of Atos Origin to develop an integrated strategy for Atos Origin and Sema Group, • changing relationships with customers, suppliers and strategic partners, • the risk that Atos Origin and Sema Group will not be integrated successfully and expected synergies and cost savings will not be achieved,
Exchange rates
The revenue figures in Euros millions relating to Sema Group used in sections A.1.2, C.3.1 and C.3.2 have been prepared by Atos Origin based upon information received from Sema Group. The Sema Group US Dollar revenue numbers have been re-presented in accordance with Atos Origin's geographical, service line and industry segment structure and in line with Atos Origin's accounting conventions. The numbers have also been converted to Euros using the relevant average rate of exchange applicable for the relevant period.
Unless otherwise specified, financial information from SchlumbergerSema (for "full-scope" information) and from the Sema Group (for "in-scope" information) relating to the fiscal year ending December 31, 2002 and the period ending June 30, 2003 which appear in euros in this Document has been converted from U.S. dollars into euros at the respective rates of:
• 1 U.S. dollar ($) = 1.0616 euros (€) (average rate of exchange published by the Central European Bank, used for the income statement and cash flow statement figures of the fiscal year ending December 31, 2002 of Sema Group)
• 1 U.S. dollar ($) = 0.9536 euros (€) (rate of exchange at closing published by the Central European Bank, used for the balance sheet figures for the fiscal year ending December 31, 2002 of Sema Group)
• 1 U.S. dollar ($) = 0.9063 euros (€) (average rate of exchange published by the Central European Bank, used for the income statement and cash flow statement figures for the period ending June 30, 2003 of Sema Group)
• 1 U.S. dollar ($) = 0.8751 euros (€) (rate of exchange at closing published by the Central European Bank, used for the balance sheet figures for the period ending June 30, 2003 of Sema Group)
The exchange rate at closing on December 31, 2003 for the U.S. dollar in relation to the euro published by the Central European Bank was 1 U.S. dollar = 0.7918 euros. In view of the continuous decline in the U.S. dollar / euro exchange rate, financial information about the Sema Group as presented in U.S. dollars and euros would show significant differences in the case of conversion based on the current rate of exchange instead of the historic rate of exchange.
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The impact of applying the rate of exchange for the U.S. dollar / euro as at closing on December 31, 2003 to the balance sheet and the pro forma income statement for the periods ending December 31, 2002 and June 30, 2003 would be as follows:
Balance sheet June 30, 2003 June 30, 2003 Variation Closing rate Rate used 31/12/2003 Fixed assets 2,468.9 2,463.5 5.4 Working capital 457.9 486.6 -28.7 Total Assets 2,926.8 2,950.1 -23.3 Consolidated shareholders’ equity 1,588.1 1,581.3 6.8 Provisions for liabilities and charges 523.8 553.9 -30.1 Net indebtedness 814.9 814.9 0.0 Total liabilities and shareholders’ equity 2,926.8 2,950.1 -23.3
Balance sheet December 31, December 31, Variation 2002 2002 Closing rate Rate used 31/12/2003 Fixed Assets 2,570.9 2,606.1 -35.2 Working capital 410.7 455.5 -44.8 Total Assets 2,981.6 3,061.6 -80.0 Consolidated shareholders’ equity 1,580.1 1,604.5 -24.4 Provisions for liabilities and charges 538.7 594.3 -55.6 Net indebtedness 862.8 862.8 0.0 Total liabilities and shareholders’ equity 2,9810.6 3,061.6 -80.0
Income statement June 30, 2003 June 30, 2003 Variation Closing rate Rate used 31/12/2003 Revenues 2,589.0 2,740.3 -151.3 Operating income 143.9 147.0 -3.4 Net income – Group share -2.5 -0.8 -1.7
Income statement December 31, December 31, Variation 2002 2002 Closing rate Rate used 31/12/2003 Revenues 4,954.2 5,605.7 -651.5 Operating income 300.8 312.8 -12.0 Net income – Group share 3.4 2.7 0.7
It is important to note that the effects of the drop of the U.S. dollar against the euro on the financial statements of Sema Group would have been reduced significantly if the historical financial statements of Sema Group had been prepared in euros rather than U.S. dollars, as they will be in the context of the new group Atos Origin for which the consolidated financial statements are expressed in euros. In fact, based on the financial information for the first six months of 2003, approximately 40% of the turnover of the Sema Group and corresponding expenses are realized directly in euros and approximately 34% of the turnover and corresponding expenses are realized in pounds sterling, which has depreciated as compared with the euro to a lesser extent than the U.S. dollar since 2002 (an average rate of 1 pound sterling (£) = 1.591 euros (€) in 2002 and a rate at closing of 1.0 pound sterling (£) = 1.537 euros (€) on December 31, 2003).
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RESPONSIBILITY
PERSONS WHO ASSUME RESPONSIBILITY FOR THIS DOCUMENT
For Atos Origin
• Bernard Bourigeaud, Chairman of the Board of Directors
Attestation from the Person Responsible for this Document
"To our knowledge, the information given in this document conforms to the facts; it includes all the information necessary for investors to base their judgement on the assets, activity, financial situation, results and prospects of the issuer and on the rights attached to the securities offered; it does not omit any information that would alter their significance."
It is, however, pointed out that the information relating to the presentation of the contributions and activities provided in section C of this document comes in some cases from public documents or facts supplied by Schlumberger with regard to the legal and financial situation of the contributed companies and the activity of Sema Group forming the subject of this transaction, and which has been translated into French.
• Eric Guilhou, Administrative and Financial Director, Member of the Board of Directors Address: Immeuble Les Miroirs, 18 avenue d’Alsace, 92926 Paris La Défense Tél : 01 55 91 20 00
For SchlumbergerSema
• Jean-Marc Perraud, Executive Vice President and Chief Financial Officer, Schlumberger
"To my knowledge, the information given in this document relating to Sema Group conforms to the facts; it includes all the information necessary for investors to base their judgement on the assets, activity, financial situation, results and prospects of the Sema Group; it does not omit any information that would alter their significance. Nevertheless, this attestation does not relate to chapter A and chapter B of this document."
PERSONS RESPONSIBLE FOR EXAMINING THE FINANCIAL STATEMENTS OF ATOS ORIGIN
Principal auditors
Deloitte Touche Tohmatsu Represented by Jean-Paul Picard and Jean-Marc Lumet Date of first mandate: Ordinary General Shareholders Meeting of March 31, 1992 Date of current mandate: Ordinary General Shareholders Meeting of February 24, 2000 Expiry of current mandate: at the end of the General Shareholders Meeting which will be held to approve the financial statements for 2005
Amyot Exco Grant Thornton Represented by Daniel Kurkdjian and Vincent Papazian Date of first mandate: Ordinary General Shareholders Meeting of March 29, 1990 Date of current mandate: Ordinary General Shareholders Meeting of May 30, 2002 Expiry of current mandate: at the end of the General Shareholders Meeting which will be held to approve the financial statements for 2007
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Deputy auditors
BEAS 7/9 Villa Houssay 92200 Neuilly-sur-Seine Date of first mandate: Ordinary General Shareholders Meeting of February 24, 2000 Date of current mandate: Ordinary General Meeting of February 24, 2000 Expiry of current mandate: at the end of the General Shareholders Meeting which will be held to approve the financial statements for 2005
IGEC 2 rue Washington 75008 Paris Date of first mandate: Ordinary General Shareholders Meeting of February 24, 2000 Date of current mandate: Ordinary General Shareholders Meeting of May 30, 2002 Expiry of current mandate: at the end of the General Shareholders Meeting which will be held to approve the financial statements for 2007
ATTESTATION OF THE AUDITORS OF ATOS ORIGIN REGARDING THE INFORMATION GIVEN IN DOCUMENT E
As statutory auditors of Atos Origin and in accordance with regulation 98-01 of the Commission des Opérations de Bourse (COB) and professional standards applicable in France, we have performed procedures on the information contained in this prospectus relating to the financial position and historical financial statements of the company, with the exception of those presented in section C, prepared for the issue of Atos Origin ordinary shares in consideration for the contribution of Sema S.A. and Sema Ltd. (England) shares respectively by Schlumberger SA and Schlumberger Investment Ltd. (England). This contribution was part of the acquisition by Atos Origin of the Sema Group, the terms and conditions of which are described in this Document E.
This Document E supplements reference document No. D03-0460 filed on April 14, 2003 with the Commission des Opérations de Bourse, for which we have already expressed an opinion dated April 14, 2003, and in which we concluded that based on the procedures performed, we had no matters to report regarding the fairness of the information relating to the financial position and financial statements presented in the reference document.
The Chairman of the Management Board is responsible for the preparation of this Document E. Our responsibility is to report on the fairness of the information presented relating to the financial position and financial statements of the company.
We have performed our work in accordance with professional standards applicable in France. Those standards require that we assess the fairness of the information presented relating to the financial position and financial statements of the company and their consistency with the financial statements on which we issued a report.
Our procedures also included reading the other information contained in this Document E with respect to Atos Origin in order to identify, where necessary, material inconsistencies with the information relating to the financial position and financial statements of the company and to report any apparent misstatement of facts that we may have uncovered in reading the other information based on our general knowledge of the company obtained during the course of our engagement, it being noted that this Document E does not contain selected prospective data resulting from an organized process.
We have audited, in accordance with professional standards applicable in France, the consolidated financial statements of Atos Origin for the 12 months ended December 31, 2002, prepared in accordance with French accounting principles and approved by the Management Board. We expressed an unqualified opinion on such financial statements.
We performed a limited review, in accordance with professional standards applicable in France, of the condensed consolidated interim financial statements of Atos Origin for the 6 months ended June 30, 2003, prepared in accordance with French accounting principles and approved by the Management Board. We expressed an unqualified opinion on such financial statements.
The Management Board is responsible for the preparation of the pro forma condensed combined financial statements of Atos Origin ("Pro Forma Financial Statements") for the 12 months ended December 31, 2002 and the 6 months ended June 30, 2003, as presented in this Document E. The purpose of these statements is to reflect
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the impact of the acquisition of the Sema Group on the financial statements of Atos Origin, for which the terms and conditions are described in this Document E.
We have reviewed, in accordance with professional standards applicable in France, the "Pro Forma Financial Statements" for the periods ended December 31, 2002 and June 30, 2003.
Based on our review, and considering the limitation reported in our report on the "Pro Forma" Financial Statements, we did not identify any items likely to call into question the fairness of the conventions used to present the impact of the acquisition of the Sema Group on the pro forma financial statements for the periods ended December 31, 2002 and June 30, 2003, the quantification thereof and the compliance of the accounting methods used with those adopted in the preparation of the Atos Origin consolidated financial statements for the periods ended December 31, 2002 and June 30, 2003.
We have reviewed the accounting rules and methods used to write down the goodwill arising from the acquisition of KPMG Consulting, as presented in paragraph B.4.2 of this Document E, and disclosed to the public on December 22, 2003. The corresponding charge of € 224 million will be audited as part of our year-end procedures.
The information relating to the principal differences between French GAAP and US GAAP, as presented in paragraph B.4.3, was not covered by our audit, however procedures to assess the fairness with respect to their overall consistency and reasonableness were performed. We would draw your attention to the limitations mentioned in paragraph B.4.3.1 on the lack of identification of differences in the recognition of revenue, valuation of outstanding contracts acquired at their fair value and identification of any intangible assets.
Based on the procedures performed, and given the aforementioned limitation, we have no other matters to report regarding the fairness of the information relating to the financial position and financial statements of Atos Origin presented in this Document E for the purposes of the contemplated transaction.
Neuilly-sur-Seine and Paris, January 16, 2004
The Auditors
(This is a free translation of the original French text for information purposes only)
Deloitte Touche Tohmatsu Jean-Marc Lumet
Jean-Paul Picard
Amyot Exco Grant Thornton Daniel Kurkdjian
Vincent Papazian
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A FIRST PART: INFORMATION ON THE TRANSACTION AND ITS CONSEQUENCES 14 A.1 ECONOMIC ASPECTS OF THE TRANSACTION...... 16 A.1.1 Pre-existing links between the companies in question ...... 16 A.1.2 Rationale and goals of the acquisition...... 16 A.1.2.1 Interest of the acquisition for the beneficiary and its shareholders...... 16 A.1.2.1.1 The Market...... 16 A.1.2.1.2 Atos Origin’s Strategy ...... 18 A.1.2.1.3 Combined structure post acquisition of Sema Group...... 20 A.1.2.2 Interest of the operation for the contributor and its shareholders...... 25 A.1.3 Risk factors ...... 25 A.1.3.1 Sector-related risks ...... 25 A.1.3.1.1 Uncertainties relating to market changes ...... 25 A.1.3.1.2 Risks relating to technological changes ...... 26 A.1.3.1.3 Risks relating to fluctuating sales, operating results and profitability...... 26 A.1.3.2 Risks relating to the sector of activity...... 26 A.1.3.2.1 Uncertainties relating to competition ...... 26 A.1.3.2.2 Risks relating to liability to clients...... 27 A.1.3.2.3 Provisions relating to the termination of contractual undertakings ...... 27 A.1.3.2.4 Risks specific to fixed-rate contracts ...... 27 A.1.3.2.5 Risks specific to systems integration ...... 27 A.1.3.2.6 Risks relating to the inability to maintain prices...... 27 A.1.3.2.7 Risks with respect to suppliers...... 28 A.1.3.2.8 Exposure to exchange risks...... 28 A.1.3.2.9 Exposure to interest rate risks ...... 28 A.1.3.2.10 Exposure to credit risks...... 28 A.1.3.2.11 Risks relating to repayments of loans ...... 28 A.1.3.2.12 Risks relating to pension funds and to employee pension commitments ...... 29 A.1.3.2.13 Risks relating to changes in accounting methods...... 29 A.1.3.2.14 Risks of dependence on certain clients ...... 30 A.1.3.2.15 Risks relating to personnel...... 30 A.1.3.2.16 Risks relating to the international presence of Atos Origin and the Sema Group ...... 31 A.1.3.2.17 Risks relating to the ability to protect intellectual property rights and third party infringement of intellectual property rights...... 31 A.1.3.2.18 Risks relating to adverse changes in public spending ...... 31 A.1.3.2.19 Risks relating to information technology system implementation difficulties for the Olympic Games 31 A.1.3.3 Risks relating to the Acquisition...... 32 A.1.3.3.1 Risks relating to the valuation of the acquisition ...... 32 A.1.3.3.2 Uncertainties relating to the expected benefits of the Acquisition ...... 32 A.1.3.3.3 Risks relating to the loss of clients...... 32 A.1.3.3.4 Difficulties in comparing annual financial statements ...... 32 A.1.3.3.5 Pro forma financial data and other combined unaudited data ...... 32 A.1.3.3.6 Other acquisitions ...... 33 A.1.3.4 Risks relating to the capital markets...... 33 A.1.3.4.1 Risks relating to future funding requirements...... 33 A.1.3.4.2 Uncertainties regarding the large number of shares available for sale on the market ...... 33 A.1.3.4.3 Risks of volatility...... 33 A.2 LEGAL ASPECTS OF THE TRANSACTION...... 34 A.2.1 General presentation...... 34 A.2.1.1 Master Agreement ...... 34 A.2.1.2 Contribution Agreement...... 39 A.2.1.3 Liquidity Agreement ...... 39 A.2.1.4 IT Services Framework Agreement...... 40 A.2.2 The operation itself ...... 41 A.2.2.1 Date of the contribution agreement ...... 41 A.2.2.2 Retroactivity date of the operation...... 41 A.2.2.3 Dates of the meetings of the Supervisory Board that approved the operation ...... 41 A.2.2.4 Date of filing of the report by the contribution auditors ("Commissaires aux apports")...... 41 A.2.2.5 Tax regime governing the operation...... 41 A.2.3 Control of the operation ...... 42 A.2.3.1 Date of the general meeting convened to approve the operation ...... 42 A.2.3.2 Contribution Auditors ("Commissaires aux apports") ...... 42
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A.2.4 Report by the contribution auditors on the value and the remuneration of the acquired sema companies by atos origin, s.a. to the general meeting of the shareholders of january 22, 2004...... 42 A.2.5 Remuneration of the contributions...... 73 A.2.5.1 Capital increase ...... 73 A.3 ACCOUNTING FOR THE CONTRIBUTED ASSETS...... 73 A.3.1 Designation and value of the contributed assets and of the assumed liabilities ...... 73 A.3.2 Table setting forth the revaluations and adjustments effected...... 73 A.3.3 Name and date of the expert report ...... 73 A.3.4 Detailed calculation of the share premium...... 74 A.4 VALUATION OF AND CONSIDERATION FOR THE CONTRIBUTIONS...... 74 A.4.1 Valuation methods used ...... 74 A.4.2 Valuation of the acquired company and the contributions ...... 75 A.4.3 Valuation of Atos Origin shares...... 77 A.4.4 Conclusion ...... 79 A.4.5 Consideration for contributions...... 79 A.4.6 Allocation of the acquisition price ...... 80 A.5 CONSEQUENCES ...... 81 A.5.1 Consequences for the company receiving the contributions and its shareholders...... 81 A.5.1.1 Table showing the impact of the operation on equity ...... 81 A.5.1.2 Distribution of the capital before and after the operation ...... 81 A.5.1.3 Changes envisaged in the composition of the management and supervisory boards ...... 82 A.5.1.4 New organisational structure of the Group...... 83 A.5.1.5 Combined summary pro forma financial statements as at December 31, 2002 and June 30, 2003...... 84 A.5.1.5.1 Auditors’ report on the pro forma condensed combined financial statements of Atos Origin for the periods ended December 31, 2002 & June 30, 2003...... 84 A.5.1.5.2 PRINCIPLES RELATING TO THE PREPARATION OF THE FINANCIAL STATEMENTS...... 87 A.5.1.5.3 Pro Forma Financial Statements ...... 89 A.5.1.6 Change in market capitalization before and after the operation...... 97 A.5.1.7 Impact on the calculation of net earnings per share...... 97 A.5.1.8 Liquidity and capital resources...... 99 A.5.1.9 New directions planned ...... 103 A.5.1.10 Short and medium-term projections for the business ...... 103 A.5.2 Consequences for the contributing companies and their shareholders...... 104
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A FIRST PART: INFORMATION ON THE TRANSACTION AND ITS CONSEQUENCES
INTRODUCTION: SUMMARY OF THE TRANSACTION
On September 22, 2003, Atos Origin announced that it had entered into an agreement with Schlumberger to acquire the entire capital held by Schlumberger in Sema Companies which, together with their subsidiaries, constitute the bulk of Schlumberger’s IT services activities, herein referred to as the Sema Group. This transaction is referred to, in this document as the Acquisition. The completion of this transaction, which must be finalized by January 2004 at the latest, remains subject to the approval of Atos Origin's shareholders, the clearance of the European, American and South African competition authorities having been obtained. This transaction will allow Atos Origin to become one of the international leaders in IT services with annual revenues of more than 5 billion euros.
Key elements of the transaction
> Atos Origin with Sema Group attains a global position with annual revenues of more than 5 billion euros > A workforce of 50,000 employees across 50 countries > A major presence in the U.K. market > A firm foothold in the main European markets > Reinforced presence in the fields of outsourcing and the public sector
Atos Origin and Sema Group are strongly complementary, both geographically and in terms of key competencies this transaction will allow Atos Origin to strengthen still further its portfolio of solutions which can be offered to its entire extended base of clients.
Business rationale
The strategy of Atos Origin is to develop a strong presence in the main European markets in order to supply an extended range of IT services to its international clients. With the acquisition of Sema Group, Atos Origin will have a major presence in the IT service markets in France, the Benelux countries, the United Kingdom, Spain, Italy and Northern countries. Atos Origin wants to achieve critical mass in Central Europe. The transaction will allow Atos Origin to reinforce an element strategy, namely to serve its international clients in North and South America as well as in Asia Pacific.
Financial conditions
In consideration for the acquisition of the Sema Group, which constitutes the bulk of Schlumberger’s IT services activities, Atos Origin will deliver 19.3 million shares to Schlumberger representing 28.9% of the capital of Atos Origin post-acquisition, including 0.3 million treasury shares, as well as 400 million euros in cash. The transaction, based on the average volume weighted closing price of Atos Origin shares for the 20 days preceding the September 19, 2003, values the purchase consideration for the price of the Sema Group at 1.287 million euros on the date of the Acquisition. The acquisition price may be adjusted after the Acquistion is completed, upwards or downwards according to the procedures described in chapter A.2.1.1.
Upon completion of the transaction, the share of Atos Origin's capital held by its principal shareholder Philips Belgium SA, a wholly-owned subsidiary of Koninklijke Philips Electronics N.V (hereinafter "Philips") will be reduced as a result of dilution from 44.7% to 31.9%.
Upon completion of the transaction, subject to market conditions, Schlumberger intends to reduce its shareholding in Atos Origin from 28.9% to 19%, which will improve the liquidity and float of the Atos Origin shares on the market (see to chapter A.2.1.3 "Liquidity Agreement").
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Benefits of the transaction and financing
In connection with the Acquisition, Schlumberger and Atos Origin have agreed in principle to enter into a contract for the outsourcing of computer services for an overall minimum amount of $700 million over a period of 7 years (hereinafter the "IT Services Framework Agreement"). The contract is subject to final agreement, in particular concerning prices and levels of service.
In addition to the current internal restructuring plans initiated and executed by Sema Group during 2003, Atos Origin intends to put rapidly in place after completion of the Acquisition its integration plan for Sema Group, by combining commercial synergies for large clients and solutions, a simplification of the organization with regard to both the corporate structure and the operational structures, cost synergies based on the introduction of "best practices" within the new group, and on the improvement of operational performance and productivity, by increasing utilization rates, by rationalizing production centers, premises and indirect non-productive costs, by synergies in purchasing power over a broader cost base and by a reduction in overhead costs. Atos Origin expects gradually to achieve cost savings which could reach more than € 200 million per year within 2 years after the Acquisition, i.e., approximately 4% of current combined annual turnover, however, no assurances can be given that these objectives will be met. This transaction should have an accretive effect on earnings per share in 2004, before restructuring costs and depreciation for goodwill.
Following completion of the Acquisition, Atos Origin should have net debt of approximately € 750 million (based on an objective of net debt of € 350 million by the end of December 2003 for Atos Origin and € 400 million for payment of the cash portion of the acquisition price) representing a ratio of net debt to equity capital of approximately 50%. Atos Origin has negotiated a new syndicated credit facility of € 900 million which will not be used in its entirety, which in addition to the financing of the cash portion of the acquisition price, will allow the structure and repayment schedule of its debt to be reorganized in light of the size of the new group (see chapter A.5.1.8 relating to "Liquidity and Capital Sources"). Atos Origin also intends to sell certain non- strategic activities and thus reinforce its cash position.
The purpose of this Document is to present the terms and conditions of the contribution of 99.9% of the outstanding shares of Sema S.A. (France) and 97.8% of the outstanding shares of Sema Ltd (England) (hereinafter the "Contribution") by respectively Schlumberger SA (France) and Schlumberger Investments Ltd (England) to Atos Origin (see chapter A.4 relating to the "Consideration for the Contributions"). This contribution, in consideration of 19 million ordinary shares of Atos Origin, is being made in the context of the acquisition by Atos Origin of the Sema Companies which represent the bulk of the computer activities of Schlumberger, terms and conditions of which are described in this Document. The Acquisition was approved in principle at a meeting of the Supervisory Board on September 20, 2003. The terms and conditions of the contribution are subject to approval at the general shareholders meeting of Atos Origin to be held on January 22, 2004.
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A.1 ECONOMIC ASPECTS OF THE TRANSACTION
A.1.1 PRE-EXISTING LINKS BETWEEN THE COMPANIES IN QUESTION Prior to the operation, there was no link, either direct or indirect, in capital or voting rights between on the one hand Atos Origin, and on the other hand Schlumberger and the Sema Companies. Furthermore, there is no common subsidiary, no guarantee undertaking and no technical or commercial agreement between on the one hand Atos Origin and on the other hand Schlumberger and the Sema Companies with the exception of undertakings and agreements planned within the context of carrying out the Acquisition as described in the Document;
There is currently no officer or director common to the companies concerned.
A.1.2 RATIONALE AND GOALS OF THE ACQUISITION
A.1.2.1 INTEREST OF THE ACQUISITION FOR THE BENEFICIARY AND ITS SHAREHOLDERS
A.1.2.1.1 THE MARKET
Overview
The IT Services market grew at an annual rate in excess of 10% through the second half of the 1990’s and up to 2000. The main causes of that growth were the rapid acceptance of technology as a means of improving business efficiency and reducing administrative costs, and lower hardware costs. In particular, the market was driven by rapid demand for enterprise resource planning (ERP) systems, especially among large multinational companies, the growth of the Internet and by short-term issues such as Y2K compliance.
The bursting of the dot-com bubble in 2000 had a negative impact on investment sentiment. In 2001, growth in the IT Services market slowed considerably due to the worsening macroeconomic climate and during the past two years the industry has moved into a recessionary period. IT budgets have been heavily restricted as a result of tight economic circumstances affecting corporations in most industries. IT departments have been forced to cut back their spending on new projects and have sought to achieve maximum benefit from the substantial investments they made during the second half of the 1990’s. Project-based consulting and parts of the systems integration market have been most severely affected, resulting in significant numbers of staff being laid off throughout the industry in order to maintain profitability through acceptable levels of utilization.
In 2002 and 2003, IT spending has therefore been focused on maintenance and "value for money" projects. There has also been a significant increase in outsourcing, which has provided opportunities for clients to achieve short-term cost reduction, provide more flexibility (by converting their existing internal fixed cost into a semi- variable one) and enable their organizations to focus on core activities rather than administrative support. As we move into 2004, there is some prospect of very modest growth in areas where client spending has been curtailed for several years (especially on software upgrades), but most client budgets remain tightly constrained and projects continue to be aggressively reviewed.
We believe that multinational clients have shown a strong desire to reduce the number of vendors with whom they contract, and to allocate clear responsibility for end-to-end success on project implementations. These trends have favored IT service providers that have a full set of service offerings, including consulting, systems integration and the management of infrastructure, applications and on-line services, as well as an ability to execute end-to-end solutions.
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Consolidation
A number of providers in the IT Services industry have experienced financial difficulties during recent years and have merged or been acquired, thereby achieving scale economies in their operations.
For those companies whose activities are focused specifically on serving multinational clients, there has been the additional need to build global reach in order to be able to provide a full set of support offerings for those clients across multiple regions. Since 2000, most of the major IT consultancies (Ernst & Young, KPMG Consulting, PricewaterhouseCoopers Consulting and Arthur Anderson) have been acquired by the major IT service companies. The process has been accelerated by the demand from regulatory agencies in the US and Europe for a separation between audit and consulting responsibilities.
We believe that the trend towards consolidation will accelerate as large IT service companies serving multinational clients attempt to establish effective coverage in the major IT spending markets and achieve economies of scale in their global operations.
Current Market Drivers
In Europe, key catalysts for the technology services industry are expected to be the public and financial services sectors, with an improving trend among telecommunications. For instance, the UK government has made a strong commitment to using IT to improve the efficiency of government departments, as has the Dutch government. We believe that public sector outsourcing will become more prevalent throughout the remainder of Europe.
The financial services market remains important despite several years of scaled back IT spending. The new regulatory environment, including Basel II, Sarbanes-Oxley, Solvency II and the move to IAS accounting standards will drive increased demand for IT services. According to industry research, the majority of European banks have started to allocate budgets to fund these projects. IT services companies with deep expertise in financial services and global roll-out capabilities will be the main beneficiaries.
The key risk to more favorable market conditions in the technology services industry involves the timing and extent of a general economic recovery. It is anticipated that the shape of the recovery in the IT services industry will be more muted than prior tech recoveries due to (i) the lack of specific technological advances to act as catalysts for growth, (ii) the greater maturity of the industry and (iii) pricing pressure from offshore operations, as from India. Slow economic recovery is pushing companies to squeeze cost cutting from IT and other areas, but increased pressure for organizations to become more efficient and leaner should eventually lead to increased IT spending.
Technology drivers such as wireless-based systems and web services may have a significant impact in the medium-term. Nevertheless, IT investment spending in Europe as a percentage of GDP remains well below that in the US, suggesting that there remain many opportunities to improve business performance. Other important factors are:
• Momentum of globalization and consolidation: Continued merger and acquisition activity drives demand for IT consulting, integration and outsourcing services.
• Government Productivity: As governments become increasingly aware of the need to increase efficiency and transparency in their procedures, non-core procedures have been outsourced to IT service companies in order to tackle these issues. The desire to foster active citizenship by harnessing the power of Internet and knowledge management technology is a further driver in the public sector.
Outsourcing
Within the technology services industry, infrastructure outsourcing and business process outsourcing (BPO) remain attractive segments despite recent softness in the large-deals segment. Cost reduction initiatives by enterprises are the main driver for outsourcing. In addition, enterprises are often challenged by the growing complexity of the IT environment and the lack of talent available to manage it. Outsourcing can provide access to new and increasingly complex IT capacity and functionality.
According to several research reports (from banks and industry analysts such as Gartner, IDC - International Data Corporation - or Forrester) and other publicly available information, the prioritized areas of spending in
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2004 are Application Outsourcing, Business Process Outsourcing, Hosting, and Network Outsourcing. While companies are expected to maintain the goal of capping IT spending, outsourcing transfers IT spending from internal resources to external services, creating market growth while leaving the enterprise IT budget unchanged.
We believe that IT outsourcing represents a significant opportunity in Europe. According to IDC in 2002, the aggregate value of the 100 largest European outsourcing contracts amounted to over $25 billion, with six deals in excess of $1 billion, and with 49 deals having a value of less than $50 million.
According to IDC, the UK remains Europe’s leading geography for outsourcing with 57 of the 100 largest European outsourcing deals in 2002. Germany and France ranked second and third with 9 and 8 deals respectively. The Netherlands is also considered as a lucrative market.
Competitive Environment
In the large scale IT infrastructure outsourcing market, Atos Origin’s main competition comes from the US players such as EDS, IBM Global Services and CSC. While EDS and CSC have more variable/limited strength in parts of continental Europe, IBM Global Services has a broad and more balanced spread of geographic presence and is considered Atos Origin’s main competitor in outsourcing in Europe. The outsourcing activities of Cap Gemini Ernst & Young (CGEY) are largely in application maintenance and BPO and consequently Atos Origin does not often compete with CGEY currently.
In Consulting and Systems Integration, Atos Origin competes with a wider number of players, many of whom operate only on a national basis, using local knowledge and skills.
Atos Origin also focuses on value-added niche applications which require specialist know-how (e.g., card processing and the Euronext joint venture) where margins can be higher due to the specific knowledge and skills necessary to make that business successful.
Profitability Drivers
The key profitability drivers in the IT Services industry are:
• Staff Utilization Rates. By maintaining tight control on headcount and selectively using sub-contractors to manage internal resources, IT services companies improve staff utilization rates and flexibility. The maximum achievable staff utilization rate in systems integration varies by country but is broadly around 80%. In consulting, where projects are on average shorter in duration, 70% is considered as a good level of utilization.
• Fixed Asset Optimization. The rationalization and optimization of office space and data centers, mainly in Managed Operations.
• Purchasing Optimization. The reduction of purchasing costs by focusing on best practice and leveraging the Group’s purchasing power with suppliers.
• Control of indirect costs. All aspects of indirect cost must be tightly controlled.
• Limiting of corporate overheads.
A.1.2.1.2 ATOS ORIGIN’S STRATEGY
Atos Origin provides an integrated set of services – Consulting, Systems Integration and Managed Operations (Design, Build and Operate) - to a focused base of multinational clients in specifically targeted market segments, which include Financial Services, Public Sector, Telecom, High-Tech and Consumer Products, Retail, Oil & Gas and Utilities. The Group is an independent service-based company and does not consider that it is desirable to develop and promote its own software products to clients, except in a small number of niche markets.
The Group is committed to developing long-term relationships with its clients. This will involve expanding the geographic base of its operations in the medium-long term, in order to be able to provide its clients with effective
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support, on a global basis. This requires a significant presence in each of the major IT spending countries and regions.
The Group cannot build global presence overnight. In the short-term, its primary objective is therefore to become a leader in the major IT spending markets in Europe, and to ensure that in each of those markets there is a mix of services that reflects the group’s overall service offerings. This means building a stable base of outsourcing business comprising long-term contracts, alongside Consulting and Systems Integration support capability.
The Group has an operational presence in North America, but activity in that region is directed mainly towards supporting the extended operations of the Group’s European clients. The Group has a strong commitment to parts of the Asia Pacific region, in particular in China, where it has a strong client base, and in India, where it is expanding its offshore resources. The Group believes that there are exciting business opportunities in these regions but does not intend to expand its strategic presence significantly in these geographies until it has satisfactorily executed its European strategy.
Atos Origin believes that it is important to establish appropriate scale in each of its chosen markets, in order that it can provide an effective service for its clients and achieve acceptable profitability for its shareholders through economies of scale. In markets where the Group cannot see an opportunity to achieve scale in the foreseeable future, it is its policy to sell/transfer ownership of such businesses to strong local partners and to enter into reciprocal venture support agreements.
In the medium term, the Group believes that many segments of the Outsourcing market will continue to offer good opportunities for profitable growth in the foreseeable future, and it therefore intends to increase the proportion of its revenues in this area. We also intend to grow those parts of the Systems Integration business that support key solution offerings to our clients. However, the Group may reduce its participation in some parts of the system integration market over the next 3-5 years either by phasing out some activities, or by actively disposing of several non-core units. The Group intends to expand its Consulting activity by leveraging the KPMG Consulting acquisition. Our strategy is highly focused and clearly differentiated from the strategies of some of our competitors in the industry. The needs and wishes of our clients will, as always, be critical in making such decisions.
The Group’s plan is to move towards the following service mix over the medium-long term:
Key Service Line Revenue objective Strategic objective
IT outsourcing 60% of revenue Manage long-term relationships with clients
Consulting 20% of revenue Understand our clients’ business
Integration 20% of revenue Implement business solutions
Following the acquisition of Sema Group, the Group intends to dispose of certain activities that are not core to its strategic goals or which, in the opinion of management, will not achieve adequate profitability in the near future.
The Group maintains a policy of tough cost management to ensure that our clients achieve competitive service and that we are able to provide sound profitability for our shareholders. The primary criteria for justifying costs is their benefit for clients. This means not just reducing indirect and overhead costs, but simplifying organizational structures, increasing staff flexibility, utilizing offshore resources where appropriate, and using the knowledge base more effectively.
Atos Origin is building up its offshore support capability in line with its clients’ needs. The Group currently has more than 500 staff in a facility in Mumbai, India, which is CMM5 certified. We are building additional capability in other lower cost locations such as China, Poland and Brazil.
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The Group’s strategy can be summarized as follows:
• To maintain strong focus and priority on relationships with our clients • To develop a comprehensive, end to end set of service offerings • To achieve a carefully balanced mix of consulting, build and run capabilities • To expand our global capability in line with our clients’ needs • To capitalize on our specific industry sector knowledge • To leverage strong Human Resources management capabilities.
A.1.2.1.3 COMBINED STRUCTURE POST ACQUISITION OF SEMA GROUP The profile of the new Group immediately after the acquisition of Sema Group will be as follows (based on revenues for the six-month period to June 30, 2003 of € 1,543 million for Atos Origin and € 1,197 million for the Sema Group):
Ame ric as Asia- Ot he r Pacific Public Sector Consulting 8% Transport EMEA 3% 19% 10% 4% 6% Franc e 26% Oil & Gaz / Ce ntral Utilities Euro pe Finance 12% Managed 5% 21% Operations Spain 49% High Tech/CPG Systems 5% UK & Retail/Others Integration It a ly 21% 27% 41% 6% Telecom 17% Benelux End to end offerings 20% Global presence Well balanced industry mix
For Sema Group : Revenues for the six months to June 30, 2003 were $ 1,321 million based on an exchange rate of $ 1 = € 0.9063
The acquisition will create one of the leading global IT services companies, with annual combined revenues in excess of € 5 billion and a workforce of 50,000 staff operating in 50 countries as of 2002. The new group will have a major presence in France, Benelux, Spain, Italy and the UK, together with a strong foothold in other key European markets and a stronger base in Asia Pacific, North America and Scandinavia. The combination will transform Atos Origin into one of the largest (by revenue) European-listed IT Services company and will also strengthen Atos Origin’s industry expertise.
Leading country presence
The Acquisition of Sema Group will enable Atos Origin to build on its leading market positions in France and the Netherlands while dramatically strengthening its geographic footprint in the UK, Spain and Italy, as well as enhance its presence in North America and Asia.
• In France, Atos Origin will become one of the market leaders (according to Gartner) with more than € 1.5 billion pro forma combined 2002 revenues. The transaction will enable Atos Origin to double the size of its consulting business and to significantly advance its position in the Telecom market, with the addition of Sema Group’s telecom contracts and billing systems, while strengthening its position in the Public Sector, Utilities and Capital Markets sectors.
• In the Benelux countries, Atos Origin will have € 1.1 billion proforma combined 2002 revenues. Atos Origin will maintain its position as one of the market leaders in terms of revenues in the Netherlands (according to Gartner) and significantly increase the size of its Belgian operations.
• In the UK, Atos Origin will become one of the leading players with proforma combined 2002 revenues of € 1.0 billion. Atos Origin will benefit from the Sema Group’s critical mass and well-established reputation. Furthermore, the transaction brings Atos Origin’s business mix closer to its target of achieving more than
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50% of recurring revenue. Finally, the Acquisition will provide Atos Origin with access to some of the largest outsourcing deals and the ability to further leverage the Atos KPMG Consulting acquisition. The enlarged Atos Origin group will gain significant exposure to the Public Sector, one of the highest growth segments of IT spending (according to Gartner).
• Atos Origin will also gain critical mass in Italy where the group will become one of the leading players with € 390 million in proforma combined 2002 revenues. In particular, the Acquisition will provide Atos Origin with a leading position in the Telecom market and new opportunities in Public Sector and Utilities. The Acquisition will also provide solid SAP consulting and systems integration expertise.
• In Spain, Atos Origin will become one of the leading players with €240 million proforma combined 2002 revenues. Atos Origin will gain significant critical mass, thus opening access to large contracts. The new group will be well-positioned in consulting and fixed price systems integration projects with the addition of Sema Group’s strong SAP expertise. Atos Origin will also strengthen its position in the Financial Services and Telecom sectors and will benefit from a presence in the Public Sector.
• Following the acquisition of Sema Group, Atos Origin will reach critical size in the largest European IT services markets, in the UK, in France, in the Netherlands, in Spain and in Italy. In the Asia Pacific, Atos Origin’s services business will grow significantly and the combined entity will increase its offshore capabilities. The Company will also position itself among the leaders in the public sector.
Country Market Size Market Leader Atos Origin + Sema Main Competitors (€ bn) Market Share UK 43,728 EDS 2.7% IBM, Fujitsu
France 27,415 Atos Origin + Sema 6.1% IBM, CGEY, Accenture Netherlands 9,495 Atos Origin + Sema 8.9% Pinkroccade, CGEY
Italy 14,295 IBM 3.1% IT Mercato, EDS, Accenture Spain 7,970 Indra 3.2% IMB, Accenture, EDS Source: Company Information – Gartner - IDC
• In North America, the Acquisition provides Atos Origin with a mid-sized IT services operation, half of which is focused on business process outsourcing for the Utilities sector.
• The Acquisition will strengthen Atos Origin’s position in Asia, where the group will benefit from Sema Group’s offshore capabilities in Malaysia, which will add to its current offshore resources in India and China. The Acquisition will increase Atos Origin’s outsourcing capabilities with extensive IT infrastructure including a large outsourcing contract with a major financial institution in Asia and the ability to increase service capabilities to Philips, particularly in China. Sema Group is also the IT supplier to the 2008 Olympic Games in China which will provide high visibility combined with strong business potential.
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The geographic fit of Sema Group with Atos Origin is highly complementary: Atos Origin generated 70% of its 2002 Revenues in France and Benelux while Sema Group is strong in the UK (30% of 2002 Revenues), Italy, Spain and Asia, where Atos Origin has been less focused. The Acquisition will therefore rebalance Atos Origin’s revenue mix by geography.
Pro – Forma Revenues Breakdown By Geography (2002A)
€3,043 million €2,563 million €5,606 million 4% 2% 6% 4% 9% 17% 14% 23% 30% 33% 19% 2% 18% 27% 36% 30% 18% 8% Atos Origin Groupe Sema Combined UK France Benelux Other EMEA Americas Asia Pacific
For Sema Group : Revenues for 2002 were $ 2,414 million based on an exchange rate of $ 1 = € 1.0616
Complementary business lines
The Acquisition of Sema Group will augment Atos Origin’s existing technical skills and solutions and enable Atos Origin to reinforce its capabilities in consulting, systems integration and outsourcing while not altering its consolidated revenue mix by business lines.
• The Acquisition will transform Atos Origin into one of the largest European-based players in outsourcing in terms of revenue (according to Gartner), with critical mass in the 3 major countries, France, UK and Netherlands. As such, Atos Origin should gain better access to the largest deals in Europe. In particular, the Sema Group will add significant outsourcing contracts and capabilities in the UK market where there is a strong focus on the Public Sector. The Public Sector market for IT services in the UK is expected to progress at an annual growth rate of 9% for the period 2002-2006, reaching £ 7 billion in 2006. Furthermore, the Sema Group will contribute a sizeable network of data centres, extensive ERP outsourcing capabilities, significant desktop services capabilities and a strong expertise in network management, security and remote control, which will offer significant opportunities of costs savings through rationalization after the implementation of the Acquisition by Atos Origin.
• The Acquisition will also strengthen Atos Origin’s systems integration capabilities in Europe as well as Asia and North America. In particular, Atos Origin will strongly benefit from Sema Group’s experience in managing complex systems integration projects. Sema Group’s contract with the International Olympic Committee is an important benefit of the transaction both in terms of skills and enhancement of the brand. Sema Group has invested heavily in technology over the last years, and has been able to build a strong portfolio of solutions, including, for example, unique payment, billing and security solutions. Based on this expanded skillset, Atos Origin believes it will be better positioned to bid for large systems integration contracts. In addition, Sema Group will add SAP skills (700 SAP experts in total in addition to 2,000 for Atos Origin), strengthening Atos Origin’s SAP capabilities in certain geographies such as Spain and Italy.
• In consulting, the Acquisition will enable Atos Origin to expand its capabilities beyond the UK and the Netherlands, where Atos Origin’s operations were enhanced by the acquisition of KPMG Consulting’s operations in 2002. In particular, the Acquisition will strengthen Atos Origin’s consulting capabilities in France, Spain and Italy. Sema Group will add approximately 900 business consultants in total in addition to 1,600 for Atos Origin.
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Pro – Forma Revenues Breakdown By Business Lines (2002A)
€ 3,043 million € 2,563 million € 5,606 million 6% 5% 5%
41% 50% 45%
53% 45% 50%
Atos Origin Groupe Sema Combined Managed Operations Systems Integration Consulting
For Sema Group : Revenues for 2002 were $ 2,414 million based on an exchange rate of $ 1 = € 1.0616
Atos Origin has set a target business revenue mix of 60%/20%/20% for managed operations, systems integration and consulting respectively for the mid term, while maintaining a similar portfolio structure in each of the major countries.
Complementary market strengths
As a result of the Acquisition, Atos Origin will benefit from a more balanced industry mix with 4 sectors each representing more than 15% of combined revenue. In the Public Sector, in addition to its leading position in the Netherlands, Atos Origin will benefit from strong capabilities in the UK and strengthen its franchise in France. In addition, the Acquisition will provide Atos Origin with one of the leading European positions in the Financial Services and Telecom sectors.
The Sema Group will contribute its set of long-standing client relationships and strong portfolio of solutions to strengthen Atos Origin’s industry expertise:
• In the Public Sector, the Sema Group will contribute a strong set of governmental solutions, and its major contracts in the UK and France.
• Atos Origin will be one of the leading European players in the Financial Services sector and will be able to leverage Sema Group’s set of CRM, multi-channel banking platform, trading, clearing & settlement, security and payment solutions.
• The Acquisition also provides Atos Origin with one of the leading European position in the Telecom sector, where the new group will leverage Sema Group’s set of billing systems, messaging platform, CRM, and SIM card applications.
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Pro – Forma Revenues Breakdown By Industry (2002A)
€3,043 million €2,563 million €5,606 million 15% 30% 42% 14%
7% 12% 4% 10% 22% 2% 18% 16% 15% 21% 26% 27% 15% 4% Atos Origin Groupe Sema Combined Public Sector Finance Telecommunications Transport Energy & Utilities High Tech/CPG/Retail/Others
For Sema Group : Revenues for 2002 were $ 2,414 million based on an exchange rate of $ 1 = € 1.0616
Expanded client base
The Acquisition of Sema Group adds a portfolio of long-standing client relationships to Atos Origin’s current client base while reducing its client concentration. There is a strong fit between the client portfolios of Sema Group and Atos Origin since the overlap within the top client lists of the two groups is not significant. In the instances where overlap exists, the services provided by Atos Origin and Sema Group are in most cases in complementary, non-competing areas.
• The 15 biggest clients of Sema Group in 2002 (in terms of turnover and in alphabetical order) are the following: EDF, Ericsson, France Telecom, JEA, the British Ministry of Employment and Pensions, the British Ministry of the Environment, Food and Rural Affairs, the French Ministries of Agriculture, Social Affairs Finance and the Interior, the British public health system (National Health Service, NHS), the British Metropolitan Police, Schlumberger, private British railway companies, Standard Chartered Bank, Telecom Italia, and Vodafone.
• The 15 biggest clients of Atos Origin in 2002 (in terms of turnover and in alphabetical order) are the following: Akzo Nobel, BNP Paribas, Crédit Lyonnais, Eneco, Euronext, France Telecom, The British Ministry of Defence, Lucent, KPN, Philips, PPR, Saudi Aramco, Shell, Société Générale and Wolters Kluwer.
Atos Origin will gain Schlumberger as major client through the signing of a IT Services Framework Agreement, which is experted to provide $ 700 million in revenue over the next 7 years. This agreement is subject to final approval on prices and services levels. As part of this agreement, Atos Origin will provide systems integration services and infrastructure support services on a worldwide basis to Schlumberger.
Top-line growth opportunities
Through the acquisition of Sema Group, Atos Origin will gain access to the largest deals in respect of outsourcing and system integration in Europe and will be well-positioned to capture large Public Sector contracts in the UK, France and the Netherlands. In addition, Atos Origin expects to leverage its significant European positions in the Financial Services and Telecom sectors, and its strengthened skill set in the Healthcare sector. In the UK, Atos Origin expects to generate new revenues from the interaction between its consulting business, which was expanded in 2002 through the acquisition of KPMG Consulting, and its strengthened outsourcing capabilities. Furthermore, Atos Origin expects to grow its market share at large multinational clients.
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Strong cost savings potential
The transaction is expected to provide cost savings that Atos Origin has estimated at over €200 million per annum within 2 years after the Acquisition. These synergies include the savings expected from Sema Group’s own 2003 restructuring plan which have been estimated at €80 million as from 2004. The savings from Atos Origin’s integration plan will be obtained through the introduction of best practices across the combined group, improvements in operating performance and improved productivity. This will be achieved by better staff utilization, the consolidation of data centres and premises, rationalization of other indirect costs and the reduction of corporate costs.
The total merger costs in relation to Atos Origin’s integration plan of the Sema Group after the Acquisition have been estimated at €170 million over three years, an estimate which is subject to a detailed financial review. These costs split between €140 million to be spent on restructuring and a further €30 million to be spent on integration (IT infrastructure and branding efforts).
The amounts relating to cost savings and merger costs have been estimated, and are subject to further analysis in 2004. At this time, nothing has occurred to cause these estimates to be questioned, however they will be adjusted upwards or downwards after the budgetary process under way and the audit of the accounts as of December 31, 2003, in accordance with the market conditions of 2004 and overall risks relating to the activity.
Finally, Atos Origin expects to divest over several years activities currently identified as underperforming and non-core activities representing revenue of approximately €500 million.
A.1.2.2 INTEREST OF THE OPERATION FOR THE CONTRIBUTOR AND ITS SHAREHOLDERS Andrew Gould, Managing Director of Schlumberger, declared:
"The world industry of computer services has entered a phase of consolidation and a combination of the know- how of Sema Group and Atos Origin will create a European leader in IT services, operating throughout the world and with a broad range of capabilities.
Schlumberger will, however, keep a certain number of SchlumbergerSema activities, in particular its oil and gas services activities, Business Continuity, Infodata - a Swedish database company - and all the software relating to the telecommunications activities of SchlumbergerSema. These activities, together with smart cards, systems of payment by point of sale terminals and public telephones do not form part of the essential area of Schlumberger".
A.1.3 RISK FACTORS The purpose of this analysis is to describe certain risk factors specific to the IT services sector or possibly related to the acquisition of the activities of the Sema Group, and to identify the degree of risk they represent for the Atos Origin Group. This analysis supplements the information provided elsewhere in this Document E.
A.1.3.1 SECTOR-RELATED RISKS
A.1.3.1.1 UNCERTAINTIES RELATING TO MARKET CHANGES
The sector of activity in which Atos Origin and the Sema Group operate, namely principally the IT services sector including consulting, systems integration and outsourcing of information systems, is characterized by a wide variety of players and the high level of competition which motivates them. The intensified competition following the bursting of the "Internet bubble" and the post-2000 effect resulted in strong pressure on margins and sales. This pressure could extend beyond the 2003 fiscal year.
Furthermore, the demand for IT solutions is influenced by clients' level of commercial activity, which in turn is affected by the general economic climate, market conditions in the related sectors, the economic cycle, spending in the IT sector and the rate of technological development. During a recession, clients are liable to cancel, reduce or postpone existing contracts, and existing or prospective clients are likely to defer concluding new contracts. The current economic downturn prompts clients and competitors to apply pressure to prices, and this
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pressure leads to lasting changes in terms of pricing policy, delivery capabilities and market expectations, all factors which can have an impact on our margins and profitability.
• Changes in the Consulting Sector
The Consulting Sector has experienced a significant slump over the last two years, owing both to weak demand and the economic climate which has placed a heavy strain on company budgets. Against this background, companies have limited their spending on consulting services while reducing the average size of consulting contracts. Despite the structural readjustments made to adapt supply to demand, this change in the consulting sector has negatively affected the group's results, and this unfavorable trend could continue in the future.
• Changes in the Systems Integration Sector
Systems Integration activity is still characterized by intense pressure on prices owing to very strong competition among the different market players and a slowdown in demand. This trend is likely to persist during 2004 and could impact negatively on the group's results.
• Changes in the Managed Operations Sector
Outsourcing of information systems management is experiencing a strong upsurge, characterized by clients continuously seeking to reduce costs and to refocus on their core activities. This demand has become more and more pressing due to the current economic climate, and has an impact on both commitments to actual savings and commitments on results in respect of services provided. For service providers this demand leads to constant pressure on revenues and regular performance and benchmarking reviews.
A.1.3.1.2 RISKS RELATING TO TECHNOLOGICAL CHANGES
The IT services markets are undergoing rapid changes, caused in particular by technological innovations, the introduction of new products, fluctuations in client expectations and changes in industry standards. The advent of new products and new technologies often makes existing technological infrastructures or computer services obsolete, inordinately expensive or unmarketable. Success in this sector depends on the ability to innovate and integrate new technologies in the service offering promptly, train personnel appropriately and adapt to frequent changes in the Internet and e-business sectors.
Part of Atos Origin and the Sema Group's activities involves helping their clients to use Internet and e-business techniques in their activities. The Internet and e-business have grown considerably in recent years. However there is no guarantee that this will continue to be the case. Events which have a detrimental effect on the Internet and the e-business market, such as the security problems of Internet applications, the possibility of a hostile reception from the professional market or the general public, delays or technical defects in Internet rapid access technologies, could have an adverse effect on the Group's activity and results.
A.1.3.1.3 RISKS RELATING TO FLUCTUATING SALES, OPERATING RESULTS AND PROFITABILITY
Sales, operating results and profitability have fluctuated in the past and will probably continue to fluctuate significantly from one quarter to the next, making them difficult to predict. Possible causes of these variations include seasonal fluctuations, fluctuating exchange rates, timetables for projects and their completion, launch of new products or services on the market, changes in price policy, ability to manage costs and also the world economic and political climate and the associated risks, including acts of terrorism.
A.1.3.2 RISKS RELATING TO THE SECTOR OF ACTIVITY
A.1.3.2.1 UNCERTAINTIES RELATING TO COMPETITION
Reduced client demand in the IT and consulting services has increased competition among service providers. It is therefore necessary to continue increasing flexibility, functionality and the characteristics of the IT solutions on offer in order to comply with market standards and meet the increasingly complex requirements of clients. Failing to take up technological and market challenges effectively and promptly makes it difficult to remain competitive with other service providers. In addition, many competitors are established in, or are outsourcing a
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large part of their operations to countries where labor costs are lower, thus enabling them to reduce their prices. Sales, profit and cash flow could be adversely affected as a result of these factors.
A.1.3.2.2 RISKS RELATING TO LIABILITY TO CLIENTS
The services provided are to a large extent essential to our clients' activities, with IT solutions often playing a key role in the development of their business. Any inadequate implementation of sensitive IT systems or any deficiency in the execution of services may raise the risk of liability, which could adversely affect the operating results and financial situation as well as the professional reputation of Atos Origin and the Sema Group.
Since Atos Origin activity focuses on consulting, systems integration and outsourcing of information systems management systems on behalf of third parties, the main legal risk relates to deficient execution of contractual obligations. The civil liability likely to be incurred thereby may result either from delays in providing the services, or defects in the systems used in this context. The services however are largely dependent on the quality of the information communicated by the clients, who have in-house specialists and therefore must assist the service provider in carrying out its assignment.
No significant disputes in this respect have been brought to the attention of Atos Origin or the Sema Group; however both the Sema Group and Atos Origin have in the past received claims from clients relating to the services provided by their respective groups and there is no guarantee that any such claims will not be asserted in the future.
A.1.3.2.3 PROVISIONS RELATING TO THE TERMINATION OF CONTRACTUAL UNDERTAKINGS
Much of Atos Origin and the Sema Group's outsourcing business is based on contracts signed for relatively long periods. It should be noted however that in the systems integration sector, many contracts allow the client to terminate the contract within a short period or subject to a brief notice period. This termination option creates uncertainty which may have an adverse effect on the level of our revenues.
Similarly, a large majority of contracts permit termination in the event of a failure to adhere to contractual understandings or performance levels. If such a termination is justified, it could have an impact on the group's reputation to the detriment of its commercial activities and financial situation.
A.1.3.2.4 RISKS SPECIFIC TO FIXED-RATE CONTRACTS
A practice exists in the IT sector by which certain contracts are concluded on a fixed-rate basis. In such cases, a fixed price and results commitment are stipulated, regardless of the costs or difficulties inherent in the projects. Extending work beyond the initial estimate may generate operating losses. These are sometimes exacerbated by the existence of contractual penalties. In such situations, Atos Origin and the Sema Group would be exposed to the risk of incurring significant unforeseen costs or even incurring penalties on execution of the contract.
A.1.3.2.5 RISKS SPECIFIC TO SYSTEMS INTEGRATION
Systems integration activity frequently involves products designed and developed by third parties. These products may be standard or may need to be adapted to specific requirements. Certain standard products chosen by the systems integrator may not be adaptable to the specific characteristics of a project. Similarly, a client's special demands in terms of specific functionalities may either disrupt the operation of the product or lead to inadequate identification of the potential consequences of such demands or changes. In any event, this could cause significant delays or implementation problems which could result in the termination of the contract or penalties being imposed on Atos Origin or the Sema Group.
A.1.3.2.6 RISKS RELATING TO THE INABILITY TO MAINTAIN PRICES
Contract profitability depends on the prices that can be billed for the services as well as on the utilization rates of specialist employees. The price level is influenced by factors such as clients' perception of these services, the launch of new services and products onto market, including those of our competition, the price policy of our competitors and the general economic climate. Utilization rates are affected by factors such as the capacity to
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assign employees to new projects, the ability to retain staff on a suitable scale and to manage turnover. The inability to maintain prices, manage utilization rates and control costs could reduce profitability.
A.1.3.2.7 RISKS WITH RESPECT TO SUPPLIERS
We rely on a limited number of important suppliers in our business, notably with respect to software used in the design, implementation and running of IT systems. While there are alternative sources for most software and we have long-term licenses and other agreements with a number of important suppliers, difficulties encountered by such suppliers in continuing to produce innovative software or our inability to renew agreements on favorable terms may have an adverse effect on our business.
A.1.3.2.8 EXPOSURE TO EXCHANGE RISKS
The financial assets of Atos Origin comprise receivables and loans, investment securities and cash. Financial liabilities comprise financial debts, operating debts and miscellaneous debts.
Atos Origin has put in place a policy to hedge exchange rate risk resulting from commercial and financial transactions denominated in a currency other than the euro. These exposures are mainly denominated in British pounds sterling and U.S. dollars. This policy requires that we hedge invoices in foreign currencies as soon as the transaction commitment is firm. The hedge instruments used are forward contracts and currency swaps.
A.1.3.2.9 EXPOSURE TO INTEREST RATE RISKS
Exposure to interest rate risk covers two types of risks:
• Price risk relating to fixed-rate financial assets and liabilities. For instance, by contracting a fixed-rate debt, the company is exposed to an opportunity risk if rates go down. A fluctuation in rates will affect the market value of fixed-rate assets and liabilities, but will not affect financial proceeds and costs or consequently the future results of the company until the due date of said assets and liabilities.
• Cash flow risk relating to variable-rate financial assets and liabilities.
A.1.3.2.10 EXPOSURE TO CREDIT RISKS
Atos Origin has a strict procedure for analyzing credit risk. In the context of its commercial relations, Atos Origin manages its credit risk with a diversified client portfolio and instruments for monitoring risks.
At the financial level, Atos Origin manages the credit risk on its investments and its market operations by rigorously selecting leading institutions and diversifying its bank counterparties. Despite the control and management procedures put in place by the group, there is no guarantee that a credit risk will not occur or impact negatively on the group's results.
A.1.3.2.11 RISKS RELATING TO REPAYMENTS OF LOANS
In connection with the acquisition of the Sema Group, Atos Origin entered into a credit facility of € 900 million, of which €400 million will be used to finance the cash portion of the transaction. This will result in a high level of debt for Atos Origin, the reduction of which depends on Atos Origin's ability to generate positive cash flows. In the event of a significant deterioration in Atos Origin's environment, this repayment capability could be seriously impaired.
In recent years, Atos Origin has made several acquisitions which have substantially expanded the group, both geographically and in terms of revenue. This expansion was financed partly by issuing new shares and convertible bonds and partly by bank financing. Further financing might prove necessary in the future in order to take advantage of opportunities, particularly for external growth, to finance the requirement for working capital for substantial outsourcing contracts, particularly in the public sector, to acquire activities or new technologies or to develop new services and solutions, thereby increasing the Group's debt (See chapter A.5.1.8 "Liquidity and Capital Resources").
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Furthermore, the global risks relating to the economic climate or inherent in the activity, such as pricing pressure, could result in an erosion of margins and cash flows, thereby reducing the Group's ability to repay its debt.
A.1.3.2.12 RISKS RELATING TO PENSION FUNDS AND TO EMPLOYEE PENSION COMMITMENTS
The wide geographical diversity of the Atos Origin Group, particularly following the acquisition of the Sema Group, requires various pension fund requirements to be taken into account, and these are often complex in certain countries. In some countries in which the Atos Origin Group and/or the Sema Group operate, there are pension funds with defined benefits as opposed to pension funds with defined contributions. These funds are not necessarily managed by public authorities and are sometimes invested in the form of securities. Fluctuations in the stock markets, particularly in an unfavorable economic climate, may give rise to contribution deficits in relation to the contractual commitments made to employees. These deficits must then be covered by supplementary cash contributions. They must also be covered by provisions in accordance with IAS 19 standards.
A.1.3.2.13 RISKS RELATING TO CHANGES IN ACCOUNTING METHODS
• Change in accounting rules
Atos Origin will adopt new accounting rules in 2005. Nevertheless, the Group has anticipated the application of certain rules. Other items may be affected.
In June 2002, the European Union ("EU") adopted new provisions under the terms of which all listed companies of the EU, including Atos Origin, must adapt their financial statements to standard international accounting rules, IAS (International Accounting Standards), from January 1, 2005.
IAS rules favor the valuation of elements of a company’s assets and liabilities at their actual value. Consequently, the application of IAS rules may have a material impact on a number of financial statement items, including the timing of recognition of sales and other revenues, accounting for share-based compensation, goodwill and intangibles, employee benefit plans, marketable securities and hybrid derivative instruments and the classification of certain balance sheet items as debt or equity.
In addition, with regard to Atos Origin, the breakdown of its activities into segments, its financial instruments and pension scheme could all be impacted.
IAS rules will affect the valuation methods that analysts use to measure and evaluate Atos Origin’s performance. IAS could also have an effect on Atos Origin’s debt covenants and other contractual obligations. In particular, Atos Origin’s covenants linked to balance sheet ratios and income statement measures are likely to be significantly affected by the adoption of IAS in ways that are difficult to predict at this time.
• Acquisition price and amount of goodwill
This change in accounting rules may cause the amount of goodwill recognized in the Acquisition to be increased, which would have an adverse impact on 2004 earnings and other possible effects.
In accordance with existing French generally accepted accounting principles, Atos Origin values the Atos Origin shares transferred to Schlumberger in connection with the Acquisition based on the average closing market price of its shares during the 20 trading days preceding the announcement of the Acquisition on September 22, 2003 (i.e., 45.95 euros per share). This yields a total consideration of 1,287 million euros and an estimated goodwill of approximately 827 million euros (see chapter A.5.1.5 "combined pro forma accounts").
Although the position of IAS is not entirely clear at present, it is possible that, if applied, IAS would require valuation of the share consideration based on the market price preceding the closing and not the market price preceding the signing of the acquisition agreement. If such a rule were applied and the average market price of Atos Origin’s shares calculated prior to closing, a change of 1 euro in the average stock price would have an impact of 19.3 million euros on the purchase consideration and goodwill, either upwards or downwards.
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Because all listed French companies must transition to IAS rules for fiscal year 2005 with one comparative year, any impact on the accounts would take retroactive effect from the beginning of the 2004 fiscal year.
The higher amount of goodwill would have a number of consequences. In applying French GAAP still in effect for fiscal year 2004 and maintaining its current policy relating to the period of amortization, Atos Origin would amortize the goodwill over a period of 20 years. Based on a change of 1 euro in the average closing market price of the shares leading to a variation of 19.3 million euros in the goodwill, the impact on the amortization of goodwill would translate into 970 thousand euros for the 2004 fiscal year. IAS rules do not require the amortization of goodwill but do require a regular analysis to determine whether the book value of goodwill still corresponds to a reasonable estimate of market value In case of impairment in value, the resulting decrease must be recorded as a charge to earnings.
A.1.3.2.14 RISKS OF DEPENDENCE ON CERTAIN CLIENTS
The five largest clients of Atos Origin for the 2002 fiscal year represented 34% of the Group’s turnover. Atos Origin’s forty-two major client financial statements represented more than 55% of turnover. With the exception of Philips, which represented less than 14%, KPN 10% and Euronext 6%, no client generated more than 3% of the total turnover of Atos Origin in 2002.
For Sema Group, contracts concluded with the 80 largest clients represented approximately 70% of turnover of the 2002 fiscal year, and will continue to represent an important revenue source in the immediate future. Only one client, the Department for Work and Pensions in the U.K., with 7%, represented more than 5% of the total turnover of Sema Group in 2002. On the basis of the 2002 fiscal year, the five and ten largest clients of Sema Group represented respectively approximately 19% and 27% of its total turnover.
If technical performances fail to meet the expectations of clients, or if the reputation of Atos Origin or the Sema Group, or their relations with one or more clients were to deteriorate, this could significantly affect their turnover and operating results. As a general rule, clients choose Atos Origin and Sema Group on a case-by-case and non- exclusive basis. In certain cases, clients can terminate contracts in writing without being penalized but must, however, pay for the services that have already been provided. Longer-term or more complex contracts generally contemplate the payment of termination costs, such as employees' travel expenses and compensation for the termination of leases. Generally speaking, when contracts are terminated, Atos Origin and Sema Group will recover part of the investment costs but will lose all associated future revenue and may be unable to recover all of the associated costs.
A.1.3.2.15 RISKS RELATING TO PERSONNEL
• Dependence on qualified personnel
The success of Atos Origin and the Sema Group depends, to a large extent, on the skills, experience and performance of key members of their management teams. There is a high level of demand for qualified managers in the IT services and consultancy market. The loss of key managers could have a detrimental effect on the activities or results of Atos Origin and the Sema Group.
As service companies, Atos Origin and the Sema Group recognize that the relations that their employees forge with their clients, partners and communities are one of the pillars of their success. Failure to attract the number of qualified employees required to satisfy demand, however, or the loss of a significant number of staff could have serious repercussions for Atos Origin and the Sema Group, notably in terms of their capacity to secure and successfully conclude important client contracts and, thus, their ability to maintain or increase their turnover.
• Turnover
In order to confront difficult market conditions, and due to an excessively low voluntary turnover, Atos Origin and the Sema Group were forced to reduce their costs during 2002 and 2003, particularly within the areas of consulting and systems integration. This reduction resulted partly in staff restructuring plans.
When the economy recovers, the natural turnover should accelerate. If this acceleration proves to be too fast, it could hinder the group’s ability to fulfil its objectives due to under-capacity or recruitment difficulties.
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• Integration
The ability of Atos Origin to attract, secure the loyalty of and foster the development of relations with its employees is essential to sustaining its activities and its future growth. If the integration of Sema Group activities encounters difficulties, and/or if a large number of Atos Origin or Sema Group employees decide to lease Atos Origin, it could be more difficult for Atos Origin to attract clients, serve them and profit fully from the benefits of the Acquisition.
A.1.3.2.16 RISKS RELATING TO THE INTERNATIONAL PRESENCE OF ATOS ORIGIN AND THE SEMA GROUP
Atos Origin and the Sema Group conduct activities in nearly 50 countries. They are therefore vulnerable to various risk factors such as monetary risks (currency price fluctuations, price controls, exchange restrictions or restrictions on the movement of capital and other assets), legal risks (conforming with national and local regulations, particularly tax regulations, the absence in certain countries of laws that effectively protect intellectual property and restrictions regarding the import or export of certain technologies) and risks arising from political, social and economic instability. All these risks, whether taken individually or together, can affect international trade and could result in a drop in Atos Origin's and the Sema Group’s profitability.
A.1.3.2.17 RISKS RELATING TO THE ABILITY TO PROTECT INTELLECTUAL PROPERTY RIGHTS AND THIRD PARTY INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS
Certain products or services are protected by intellectual property rights or constitute trade secrets. The activities of Atos Origin or the Sema Group could be damaged if such rights were challenged or in case of infringement, or if their trade secrets are not suitably protected. It is also possible that competitors could independently develop similar technologies to those of Atos Origin or the Sema Group, without infringing the corresponding patents or gaining access to their trade secrets.
A.1.3.2.18 RISKS RELATING TO ADVERSE CHANGES IN PUBLIC SPENDING
The Sema Group is involved in public sector projects in the United Kingdom and, to a lesser extent, in France. The Sema Group believes that public contracts will continue to be an important revenue source in the immediate future. The Sema Group is subject to complex laws and regulations relating to the creation, administration and execution of these public contracts. New legislation or regulations in this area could restrict the Sema Group’s ability to continue to conclude contracts with its public sector clients. Certain existing contracts with the British government should be renewed over the course of the next two years. If the government chooses not to exercise its renewal option, the number of orders linked to these contracts is reduced, these contracts are cancelled or if temporary work suspension orders are issued, future turnover could be reduced significantly.
A.1.3.2.19 RISKS RELATING TO INFORMATION TECHNOLOGY SYSTEM IMPLEMENTATION DIFFICULTIES FOR THE OLYMPIC GAMES
The Sema Group was the "Official Information Technology Global Partner" of the 2002 Olympic Games in Salt Lake City and will similarly be for the Olympic Games in Athens in 2004, in Turin in 2006 and in Beijing in 2008. As a result, the Sema Group will provide personnel, processes and technologies required for the Olympic Games. The Sema Group is responsible for the complete IT strategy, project management, key software integration, network security and data integrity. As the location, infrastructure, number of events, number of participants and the number of sites differ for each Olympic Games, solutions must be customized in order to propose a project and risk management solution adapted to these changes. Although Sema Group has not experienced difficulties when executing these services for the required period, this contract is extremely important due to the media coverage of the Olympic Games. If the Sema Group were to experience difficulties when executing its commitments, its commercial reputation and competitive position, as information technology global partner, could be adversely affected.
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A.1.3.3 RISKS RELATING TO THE ACQUISITION
A.1.3.3.1 RISKS RELATING TO THE VALUATION OF THE ACQUISITION The Company has made certain estimates in this document as to the possible value of the Sema Group business being acquired, based on various valuation methodologies and assumptions. Such estimates are provided in accordance with French regulations in order to give an indication of possible valuations of the Sema Group business under such methodologies and assumptions. Such estimates are for indicative purposes only and are not intended to represent the price at which the Sema Group business has been purchased or could be sold in an actual market transaction either today or at any time in the future.
A.1.3.3.2 UNCERTAINTIES RELATING TO THE EXPECTED BENEFITS OF THE ACQUISITION
The integration of Atos Origin and the Sema Group constitutes a significant management challenge, particularly in terms of the scale and scope of the acquired activities. There can be no assurance that the benefits expected from this integration will be realized in line with forecasts or within the planned timelines, or that these benefits will actually be realized at all, or that the Acquisition will not have an adverse effect on the activities of Atos Origin.
A.1.3.3.3 RISKS RELATING TO THE LOSS OF CLIENTS
Certain contracts concluded between the Sema Group and its principal clients contain change of control or other similar provisions, which entitle the clients to terminate such contracts following the acquisition of the Sema Group. Common clients could also choose to reduce the total volume of services provided by Atos Origin and the Sema Group in order to diversify service providers. There is also a risk of losing clients whose competitors are also clients of Atos Origin. There can be no assurance that Atos Origin will be able to retain the clients of the Sema Group after the acquisition. The loss of one or more key Atos Origin or Sema Group clients could be detrimental to the activities and results of Atos Origin.
A.1.3.3.4 DIFFICULTIES IN COMPARING ANNUAL FINANCIAL STATEMENTS
The acquisition of the Sema Group will significantly alter the information reported in the financial statements and operating results of Atos Origin. The comparison of results from one period to the next could prove to be difficult, notably for the following reasons:
• There are no historical consolidated financial statements for the Sema Group. The pro forma unaudited financial statements of the Sema Group have been prepared for the purpose of the Document E only. The combined audited financial statements of Schlumberger Sema do not reflect all of the activities acquired by Atos Origin and, do reflect certain activities that have not been acquired by Atos Origin. Consequently, the combined unaudited pro forma data of Atos Origin and the Sema Group cannot be analyzed in the same way as the accounting data of two companies in the context of a merger.
• The combined financial statements of SchlumbergerSema and the pro forma combined financial statements of the Sema Group were prepared on the basis of generally accepted accounting principles in the United States. The historical financial statements of Atos Origin were prepared on the basis of generally accepted accounting principles in France. After the acquisition, Atos Origin intends to continue to prepare its annual financial statements on the basis of generally accepted accounting principles in France.
• The acquisition of the Sema Group will significantly change the dimension of Atos Origin’s activities, in such a way that any comparison between the annual financial statements contained in Document and those of subsequent financial years could prove to be difficult.
A.1.3.3.5 PRO FORMA FINANCIAL DATA AND OTHER COMBINED UNAUDITED DATA This Document contains certain pro forma financial data that permits an evaluation of Atos Origin on a combined basis. This Document also contains additional information relating to the new Atos Origin Group, particularly a breakdown of the new Group's pro forma revenue by geographical region, service line and market (based on the 2002 fiscal year and the first six months of 2003) of the new Atos Origin Group. This data is
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given for information purposes only and is not necessarily indicative of the financial position, operating results, market position or the geographical or sector-based breakdown of revenue of the new Atos Origin Group, such as it would be if Atos Origin and the Sema Group had operated on a combined basis during the indicated period. In addition, this information is not necessarily indicative of the way in which this data will be presented in the future.
A.1.3.3.6 OTHER ACQUISITIONS Atos Origin frequently examines other acquisition opportunities and similar arrangements such as the creation of joint ventures. Certain of these projects could prove to be important for the activity or financial position of Atos Origin. Future acquisitions and other similar transactions can create risks identical to those relating to the acquisition of the Sema Group. These projects could also require significant resources, notably management resources, and could therefore hinder the integration of the Sema Group.
A.1.3.4 RISKS RELATING TO THE CAPITAL MARKETS
A.1.3.4.1 RISKS RELATING TO FUTURE FUNDING REQUIREMENTS
Atos Origin may need to raise additional funds by incurring debt or issuing shares in order to:
- Capitalize on opportunities that present themselves, notably in order to accelerate growth; - Fund working capital requirements arising from new outsourcing contracts, notably for public services contracts; - Develop activities or complementary technologies; - Develop and offer new services;
Raising funds through new share issues risks diluting the interests of existing shareholders. In addition, depending on its results or on the economic or financial context, Atos Origin may not have access to satisfactory financing conditions.
A.1.3.4.2 UNCERTAINTIES REGARDING THE LARGE NUMBER OF SHARES AVAILABLE FOR SALE ON THE MARKET
Following the Acquisition, Philips and Schlumberger will, respectively, hold 31.9% and 28.9% of the capital of Atos Origin. The subsequent sale of these shares will be subject to the liquidity agreement among Atos Origin, Philips and Schlumberger, as described in paragraph A2.1.3 below. Schlumberger has announced its intention to reduce its shareholding in Atos Origin to 19.0% following the completion of the Acquisition, subject to market conditions. This sale by Schlumberger and any other sales, or anticipated sales, of a large number of shares could have a negative impact on the stock market price of our shares and could partially or temporarily compromise our future ability to raise funds through share issues.
A.1.3.4.3 RISKS OF VOLATILITY
The stock market price of shares can vary as a result of many factors including political or economic events or events specific to the IT industry, stock market conditions and the financial performance of the Atos Origin Group. The specific situation of the Atos Origin share ownership, which is characterized by a reduced number of shares currently available in the market, could result in limiting or accentuating the evolution of the share price, depending on the way that information is perceived by the shareholders.
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A.2 LEGAL ASPECTS OF THE TRANSACTION
A.2.1 GENERAL PRESENTATION
A.2.1.1 MASTER AGREEMENT Schlumberger and Atos Origin on 21st September 2003 signed a master agreement (the Master Agreement, hereinafter the "Contract") under which Schlumberger has undertaken to transfer, and Atos Origin have undertaken to acquire, all the capital held by Schlumberger in the Sema Companies.
The Contract specifies how a prior internal reorganization will be effected within the Schlumberger group pursuant to which (i) certain activities or companies operated or held by Schlumberger and defined in the Contract as within the scope of the Acquisition will be transferred to Sema Group and (ii) other activities or companies operated or held by Sema Group and defined in the Contract as being outside the scope of the Acquisition will be transferred to Schlumberger. In particular, the Essentis, Info Data, IT services for Oil and Gas clients and Business Continuity businesses, to name the most significant, must be transferred to Schlumberger before the Acquisition. Similarly, all assets relating to the International Olympic Committee contract must be transferred to Sema Group before the Acquisition. As of the date of this document, Schlumberger has indicated that the Essentis, Info Data and Business Continuity businesses and the major part of the IT services for Oil and Gas business have been transferred to the Schlumberger Group. Similarly, Schlumberger has indicated that the assets relating to the International Olympic Committee contract have been transferred to Sema Group.
The Contract also includes the undertaking by Schlumberger to assign to a third party the business of designing Telecom products, which is currently included in Sema Group, before December 15, 2003, in default of which this activity will be assigned on that date by Sema Group to a company in the Schlumberger group. As of the date of this document, Schlumberger has indicated that this business has been assigned to a company in the Schlumberger group.
The Acquisition will take place, subject to the fulfilment of the conditions precedent described below, under the following conditions:
by a contribution in kind by Schlumberger SA and Schlumberger Investments Ltd to Atos Origin, of securities held in the company Sema S.A. and a portion of the securities held in the company Sema Ltd as described in paragraph C below; in remuneration for this contribution, Atos Origin will issue 19,000,000 shares of 1 € nominal value each, cum-dividend, which will be divided between the contributing Schlumberger companies;
by a purchase of shares, for securities which are not the subject of the contribution mentioned above, held by Schlumberger in the Sema Companies, in exchange for:
- payment by Atos Origin on the date of the Acquisition to the selling Schlumberger companies of 400,000,000 € (i) reduced by the amount of the combined net debt estimated as of 31st December 2003 of Sema Group forming the subject of this Acquisition, (if this figure, is positive), or increased by the absolute value of the combined net debt estimated as of 31st December 2003 of Sema Group, (if this figure is negative); and (ii) increased by the difference between the total combined working capital estimated as of 31st December 2003 of Sema Group and the working capital of Sema Group as of 30th June 2003 fixed in the Contract and amounting to € 185.8 million if this difference is positive or reduced by the absolute value of the difference, if this is negative;
Example: if the combined net debt estimated as of December 31, 2003 is +€ 20 million and if the combined working capital estimated as of December 31, 2003 is +€200 million, the price paid will be €400,000,000 - €20,000,000 (debt) + [€200,000,000 - €185,800,000] (working capital); i.e., €400,000,000 - €20,000,000 + €14,200,000 = €394,200,000.
the amounts of the combined net debt estimated as of December 31, 2003 of Sema Group and the combined working capital estimated as of December 31, 2003 of Sema Group will be
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notified by Schlumberger to Atos Origin no later than five working days before the date of the Acquisition ("Closing Date").
These amounts correspond to the acquisition scope ("in scope" figures) and will be estimated on December 31, 2003.
- Atos Origin transferring to the selling Schlumberger companies on the Closing Date 300,000 Atos Origin treasury shares.
The Contract does not provide for an earn-out.
In addition, upon the request of Atos Origin, the shares held by minority shareholders in a German joint venture of Sema Group, have been bought by Schlumberger for a price of €250,000, such price to be reimbursed by Atos Origin.
After the Acquisition, Schlumberger will hold approximately 28.9% of the share capital and voting rights of Atos Origin and the share of capital held by Philips will be reduced by dilution from by 44.7% to 32%. The detailed structure of the share capital of Atos Origin after the Acquisition is described in paragraph A.5.1.2 below.
The Contract provides for an acquisition on a cash-free debt-free basis. Accordingly, the Contract includes an adjustment after the Acquisition, upwards or downwards, of the whole price of the Acquisition, in accordance with the methods described below. The price will be:
(i) increased or reduced by the difference between (a) the amount of the combined net debt of the Sema Group determined as of December 31, 2003 (or on the date of the pro forma consolidated accounts if different from December 31, 2003) and (b) the amount of the estimated combined net debt communicated five working days at the latest before the date of the Acquisition, whether this difference is positive or negative.
Example: using the same hypothesis of a price paid on Closing Date of €394,200,000 with an estimated combined net debt of €20,000,000, and of a final amount of combined net debt of €25,000,000, the final price will be €394,200,000 - [€25,000,000 - €20,000,000] = €389,200,000.
(ii) increased or reduced by the difference between (a) the amount of the combined working capital of Sema Group determined as of December 31, 2003 (or on the date of the pro forma consolidated accounts if different from December 31, 2003) and (b) the amount of the estimated working capital of Sema Group communicated no later than five working days before the date of the Acquisition, whether this difference is positive or negative.
Any variation in the combined working capital of Sema Group on the date of the pro forma consolidated accounts which has an impact on the consolidated net assets of Sema Group on such date must be taken into account only once.
Example: using the same hypothesis of a price paid on Closing Date of €394,200,000 with an estimated combined working capital of €200,000,000, and of a final amount of the combined working capital amounts of €190,000,000, the final price will be €394,200,000 - [€190,000,000 - €200,000,000] = €384,200,000.
(iii) reduced by the difference between (a) the consolidated net equity of Sema Group determined as of December 31, 2003 based on the pro forma consolidated accounts audited as of December 31, 2003 of Sema Group and (b) the consolidated net equity of Sema Group fixed in the contract at €311 million, this adjustment being a reduction only.
Example: using the same hypothesis of a price paid on Closing Date of €394,200,000, and of a consolidated net assets as of December 31, 2003 of €300,000,000, the final price will be €394,200,000 + [€300,000,000 - €311,000,000] = €383,200,000.
The Contract does not include a cap or a floor to such adjustment, which is on a euro for euro basis.
These adjustments will be charged to the cash portion of the purchase price.
These adjustments will be made on the Closing Date, which is currently scheduled for January 29, 2004.
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The company will issue a press release in order to inform the market and the company’s shareholders, when these adjustments and resulting payments have been finalized.
The combined pro forma financial statements audited as of December 31, 2003 (and as of the date of the pro forma consolidated accounts if different from December 31, 2003) will be established by Schlumberger according to US GAAP, for all the companies of Sema Group. They will be audited by PricewaterhouseCoopers, auditors for Sema Group, the auditors for Atos Origin having thereafter a period of time for review of such accounts. The procedure for adjustment of the portion of the price payable in cash provides in particular for an appeal to a third party expert in the case of disagreement over the financial statements and the amount of the price adjustment. The combined pro forma financial statements will be prepared in US dollars and converted at a fixed rate of 0.875 euros for 1 dollar.
The completion of the Acquisition is subject to approval by the extraordinary general shareholders’ meeting of Atos Origin of the Contribution and the resulting increase in capital. The other conditions precedent provided for in the Contract have been met. Such other conditions precedent were : (i) approval of the Acquisition under the merger regulation of the European Commission (it being stated in this respect that the European Commission has authorised the Acquisition by the COMP/M 3295 decision of November 10, 2003), by the American authorities (under the "Hart Scott Rodino" law) (in this respect the initial waiting period ended on November 7, 2003 without the operation being contested), and by the South African government authorities (in this respect the operation was authorised by the South African authorities by a decision of November 18, 2003), (ii) the Financial Markets Authority will not have stated that Schlumberger and Philips are acting in concert and will have granted in favour of Schlumberger or Philips, if necessary, a dispensation from the obligation to present an obligatory takeover bid for the Atos Origin securities (in this respect, the Committee of the Financial Markets Authority met on January 8, 2004 and stated that Schlumberger and Philips are not acting in concert).
The obligations of Atos Origin or Schlumberger for the Acquisition are also subject to the absence of any exceptional internal or external event, which has or could have a material adverse effect on the business, assets, operations or financial situation, respectively, of Sema Group or Atos Origin.
Operations prior to the completion of the Acquisition
In addition to the stages of the prior internal reorganisation of the activities of Sema Group described above, the Agreement provides that certain operations must be carried out prior to the Acquisition.
A process of identification of certain guarantees and securities given by Schlumberger or its banks for the benefit of third parties on the basis of obligations of the companies of Sema Group and, conversely, given by the companies of Sema Group for the benefit of third parties on the basis of obligations of the Schlumberger Group, has been agreed between the parties. At the end of this identification process, Atos Origin shall substitute for Schlumberger or its banks and, conversely, Schlumberger shall substitute for the companies of Sema Group, in respect of the guarantees and securities given. This process is ongoing and commitments taken by Atos Origin shall be included in the off-balance sheet commitments in the annexes to the company's financial statements as of December 31, 2003. Offers for substitution have been issued for guarantees granted by Schlumberger for an amount of 34 million British pounds sterling (48.2 million euros) and also for an unlimited amount in respect of a lease agreement for hardware. Bank guarantees for which Atos Origin may have to substitute Schlumberger have been identified for an amount of U.S.$98 million (77.6 million euros). Negotiations are under way with banks regarding the latter guarantees. Should such offers for substitution not be accepted, Atos Origin will counter-guarantee Schlumberger in accordance with the terms of the Contract.
Finally, Schlumberger has undertaken to continue the internal restructuring programme of Sema Group (outside France) that it has previously initiated. This programme concerns the departure of 1,000 employees. The cost of such a programme shall be borne by Schlumberger. As of the date of this document, Schlumberger has informed Atos Origin that the programme has been finalised.
In order to conclude these different restructuring operations to, the Contract provides for a committee to be established comprised of representatives of Schlumberger, Atos Origin and Philips, who are charged with supervising these operations prior to the completion of the Acquisition.
A mechanism to protect the two parties until the Acquisition is effected is also provided. Accordingly, the companies of Sema Group cannot distribute dividends or issue new shares in favour of persons other than Schlumberger, the other selling Schlumberger companies or a company of Sema Group, or modify their articles of association (apart from minor modifications). Until the Acquisition is effected, they must be managed within
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the customary framework of operations and obtain the prior consent of Atos Origin with respect to certain decisions, notably the entry into of new loans in excess of 10 million euros, to enter into new contractual agreements for an amount exceeding 10 million euros, to acquire or sell significant assets, to change their accounting methods, to grant guarantees or indemnities, to hire or fire employees, to increase the salaries of key personnel or to negotiate new collective bargaining agreements. It is also provided that Schlumberger and its subsidiaries cannot acquire or negotiate Atos Origin shares prior to Acquisition. Atos Origin has undertaken (i) not to ask for new authorisations to issue shares or to modify existing authorisations, other than to grant options to subscribe for shares in connection with the Acquisition, (ii) to maintain the listing of Atos Origin shares on the Premier Marché of Euronext Paris and (iii) not to buy back its own shares other than to stabilise the price of the Atos Origin share.
Atos Origin and Schlumberger have given each other guarantees concerning the Sema Group and the Atos Origin shares. The guarantees given by Schlumberger relate to the companies of Sema Group, notably: their constitution, their existence in accordance with the legal regulations, the pro-forma combined financial statements of Sema Group as of June 30, 2003, litigation (the absence of disputed claims exceeding €1,250,000 other than as identified by each of the parties), compliance with regulations in force, employees and social security legislation, pension funds, contractual and intellectual property declarations and compliance with tax obligations.
In addition to the guarantees described above, an obligation to indemnify Atos Origin was entered into by Schlumberger in respect of certain identified specific risks for which Schlumberger has undertaken, for all claims made within three years after the Acquisition and, for certain claims, with no time limit, to reimburse the indemnities and costs incurred by Sema Group following the Acquisition in respect of these identified specific risks. Such risks principally correspond to activities which are not within the Acquisition scope or to litigations with employees.
The declarations made by Atos Origin relate to (i) the fact that the audited consolidated accounts as of December 31, 2002 and unaudited six-months consolidated accounts as of June 30, 2003 gave a true and fair view of the business and assets of the company for the periods presented and have been certified without qualification by the auditors and to (ii) compliance with the regulations in force
Each party must report any claims no later than eighteen months of the Acquisition and, in the case of tax claims, no later than the expiry of the statute of limitations.
The guarantees can only be called upon if each claim exceeds €300,000 and all claims taken together exceed €5,000,000. The maximum indemnity paid by the indemnifying party cannot exceed the total amount of $175,000,000 (the total ceiling not being applicable to Schlumberger’s obligation to indemnify in respect of some of the identified specific risks described in the previous paragraphs).
Furthermore, the Contract provides for an obligation on the part of Schlumberger not to compete with Atos Origin with respect to the activities of Sema Group. Some businesses have been excluded from the scope of the non-competition clause, permitting Schlumberger (a) to continue to conduct certain activities retained by Schlumberger or activities whose exclusion from the scope of Sema Group was requested by Atos Origin and (b) to provide services to clients in the energy, water management, storage and distribution, and carbon sequestration services. The obligation not to compete is limited to a period of two years from the completion of the Acquisition.
The Contract also includes commitments towards employees notably:
Regarding pension schemes of Sema Group employees based in the United Kingdom, Schlumberger and Atos Origin shall equally support any increases in contributions that may come about over the next six years in relation to a reference contribution rate for 2003 under the terms and conditions defined in the Contract and based on the recommendations given by the fund actuaries, such recommendations being submitted for agreement to Schlumberger and Atos Origin and, failing agreement, being submitted to a third party expert.
Regarding the pension schemes existing in other countries or the health benefits for retired persons in the United States in particular, Schlumberger is under a specific obligation to indemnify Atos Origin in cash when, following a process stipulated in the Contract, these plans are insufficiently funded.
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The conclusion by Atos Origin of specific agreements with certain key employees of Sema Group that Schlumberger has undertaken not to hire for a period of 12 months following the Acquisition.
The agreement of Atos Origin to maintain the existing rights of Sema Group employees.
Regarding the rights of Schlumberger as a shareholder of Atos Origin, it is provided that:
In a separate agreement concluded on September 21, 2003 between Schlumberger SA, Schlumberger Investments Ltd, Atos Origin and Philips called the ‘Liquidity Agreement’, the terms and conditions are provided for which govern, over a given period, the disposal by Schlumberger SA and Schlumberger Investment Ltd of their participation in Atos Origin. A description of the Liquidity Agreement is provided at paragraph A.2.1.3 below.
Specific provisions in the Contract concern the representation of Schlumberger within the governance structure of Atos Origin. Schlumberger shall have (i) two representatives on the Supervisory Board out of the nine members making up the Supervisory Board, who shall be appointed for an initial term of office of five years, for as long as Schlumberger holds 19% or more of the capital of Atos Origin, (ii) one representative on the Supervisory Board out of the nine members making up the Supervisory Board in the event that Schlumberger holds 10% or more of the capital of Atos Origin and (iii) three representatives on the Supervisory Board if Schlumberger is unable to dispose of some of its shares in Atos Origin bringing Schlumberger’s participation in the capital down to 19% before the Priority Right Date defined in the Liquidity Agreement (which cannot be later than June 1, 2004 except in specific circumstances which could extend the Priority Right Date until June 30, 2004). Until the Closing Date, a Schlumberger representative shall take part in the deliberations of the Supervisory Board as non- voting observer, subject to certain conditions.
Schlumberger shall also have the right to appoint (i) one representative on the Nomination Committee of Atos Origin (out of three members) whose purpose is to recommend candidates to the membership of the Supervisory Board, (ii) a representative on the Investment Committee (out of five members), (iii) one representative on the Compensation Committee (out of three members) and (iv) one representative on the Audit Committee (out of three members).
Following the Acquisition, the undertaking entered into by Philips to limit its voting rights to 35% of the shares present or represented shall be suspended for as long as Schlumberger holds 10% or more of the capital of Atos Origin.
It is also anticipated that the Supervisory Board appoint, upon completion of the Acquisition, members of the Management Board as follows: the Management Board of Atos Origin shall be chaired by Bernard Bourigeaud and made up of Dominique Illien, Wilbert Kieboom, Xavier Flinois, Jans Tielman, Giovanni Linari and Eric Guilhou, who shall serve for a term of 5 years.
Furthermore, as an element of the transaction, under the Contract the parties have provided for the conclusion of an IT Services Framework Agreement for the provision of information technology services between certain companies of the Schlumberger Group and certain companies of the Atos Origin Group. This agreement is described in paragraph A.2.1.4 below.
In addition, to organise the provision of certain services and access to certain rights, the introduction of which is necessary in view of the separation of Sema Group from the scope of the Schlumberger Group, under the Contract the parties have provided for the execution of the following agreements:
A Transitional Services Agreement under which certain companies of the Schlumberger Group and Atos Origin will organise the provision of services, first, by the Schlumberger Group to Sema Group and, second, by the companies of Sema Group to certain companies of the Schlumberger Group. The parties have undertaken to identify the services concerned and to negotiate the conditions of these services in good faith.
An IP Licence Agreement to organise, between Atos Origin and the Schlumberger Group, the conditions of authorisation for the mutual use of certain intellectual and industrial property rights, either of Schlumberger or Atos Origin through the transferred companies of Sema Group.
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A.2.1.2 CONTRIBUTION AGREEMENT An agreement for the contribution of shares concluded on November 29, 2003 between Schlumberger SA and Schlumberger Investments Ltd and Atos Origin defines the terms and conditions of the contribution of the 2,713,999 shares of Sema S.A., representing 99.9% of the capital of this company, and of the 603,897,741 shares of Sema Ltd, representing 97.8% of the capital of this company, by the contributing companies for the benefit of Atos Origin (hereafter the ‘Contribution’). The remainder of the shares of Sema S.A. are negotiated on the Marché Libre of Euronext Paris, as described in paragraph C.5 below. The remainder of the shares of Sema Ltd will be acquired in cash by the remittance of 300,000 treasury shares held by the company.
In consideration for the Contribution, Atos Origin shall issue 19,000,000 new shares.
In consideration for their contribution, Schlumberger SA and Schlumberger Investments Ltd shall receive, respectively, 5,640,000 and 13,360,000 new Atos Origin shares of a par value of 1 euro each.
The contribution shall not become definitive until the conditions precedent and the conditions prior to the Acquisition stipulated in the Contract are met and the extraordinary general meeting of Atos Origin shareholders approves the valuation of the Contribution and the related capital increase through the issue of the 19,000,000 new Atos Origin shares. The contribution shall not therefore be finalised until the date of the Acquisition.
The conditions of these contributions are set out in section A.2.4 "Consideration for the contributions" and A.3 "Accounting for the contributions".
The extraordinary general meeting of Atos Origin shareholders is called to approve the valuation of the Contribution and the related capital increase on January 22, 2004.
A.2.1.3 LIQUIDITY AGREEMENT Concomitant with the conclusion of the Master Agreement, Atos Origin, Philips, Schlumberger SA and Schlumberger Investments Ltd (hereafter collectively referred to as the "Schlumberger Shareholder") concluded a Liquidity Agreement in order to determine, for an identified period, the conditions under which the Schlumberger Shareholder and Philips may dispose of their respective participations in the capital of Atos Origin.
First, it is provided that, subject to market conditions, the Schlumberger Shareholder may divest Atos Origin shares in one or more placements to enable it to bring its participation in Atos Origin to 19% of the capital (excluding any customary over-allotment option ("greenshoe")). The timing and conditions of these placements shall be determined at the sole discretion of the Schlumberger Shareholder, with the possible consultation of advisory banks chosen by the Schlumberger Shareholder, after consultation with Atos Origin or Philips at the request of Atos Origin or Philips. Atos Origin shares may not be placed outside the European Union in the form of a public offering. For the proper execution of these share placements by the Schlumberger Shareholder, Atos Origin agreed to actively cooperate with the Schlumberger Shareholder, notably by accepting to be party to any placement contract(s) and by accepting to give to the banks chosen by the Schlumberger Shareholder customary warranties and indemnities. These warranties and indemnities, given without limitation as to duration or amount, relate notably to the conformity of the issued shares with French laws, the conformity with the securities laws of the United States, and the absence of significant elements relating to the business that are not in the public domain at the time the placement is made.
From the date on which the Liquidity Agreement is signed until a date defined in the agreement as being the Priority Right Date (which cannot be later than June 1, 2004 except in specific circumstances which could extend this date until June 30, 2004), Philips and its subsidiaries have undertaken not to dispose of, or to announce their intention to dispose of, any or all of their Atos Origin shares, or to issue or dispose of any security which may give entitlement to Atos Origin shares (hereafter the ‘Philips lock-up’). However, Philips may dispose of, or propose to dispose of, the Atos Origin shares it holds (i) as part of a privately negotiated sale, where the purchaser(s) is/are financial institutions or companies of recognized international standing that want to invest in the medium or long term without any short-term speculative objective, and (ii) it/they substitute for Philips with respect to the Liquidity Agreement, and (iii) in the opinion of an investment bank of recognized international standing chosen by Schlumberger and Philips, the disposal will not cause a material market disruption for the Atos Origin shares or the capacity of Schlumberger to make a placement of Atos Origin shares under conditions that are reasonably acceptable to Schlumberger. Philips and its subsidiaries may also tender their Atos Origin shares in any tender or exchange offer, or any offer to acquire, Atos Origin shares provided that
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such an offer does not set a condition on the amount of Atos Origin shares required to be tendered to complete such offer or whereby, unless a certain minimum number of shares are acquired, the tender will not have a positive outcome, or if said condition bears on a number of Atos Origin shares representing less than 52% of the capital of Atos Origin.
Upon the expiration of the Priority Right Date, the Schlumberger Shareholder and Philips may freely and discretionarily dispose of their Atos Origin shares subject to the limitation described above that no placement may be made outside the European Union in the form of a public offering and on the understanding that, upon the expiration of a period of 18 months after the date of completion of the Acquisition, the Schlumberger Shareholder and Philips may only make one additional placement each during each consecutive period of 12 months. Should any placement by the Schlumberger Shareholder or Philips concern more than 5% of the capital of Atos Origin, Atos Origin shall participate in said placement with either Philips or the Schlumberger Shareholder under conditions that are substantially similar to those specified for the initial placement of the Schlumberger Shareholder for the period extending up to the Priority Right Date.
The conditions of the Liquidity Agreement provide that Philips or the Schlumberger Shareholder shall pay the costs and charges reasonably incurred by Atos Origin in connection with any placement made by Philips or the Schlumberger Shareholder. Atos Origin, Philips and the Schlumberger Shareholder have undertaken, more generally, to use their reasonable best efforts to facilitate the placement of Atos Origin shares by Philips or the Schlumberger Shareholder.
Atos Origin has undertaken, under the terms and conditions of the Liquidity Agreement, from its date until the date on which the participation of the Schlumberger Shareholder in Atos Origin is reduced to 19%, which cannot be later than the Priority Right Date, without the prior written agreement of the Schlumberger Shareholder, not to (i) issue securities giving access to its capital immediately or in the future and/or (ii) enter into any material transaction (financing, acquisition, merger, disposition of assets, corporate reorganisation or similar transaction), which could materially and adversely affect or interfere with a placement (hereafter the ‘Atos Origin lock-up’). This undertaking on the part of Atos Origin, however, does not concern (i) the securities issued or the options granted by Atos Origin under an employee benefit plan existing on the date of the Liquidity Agreement, (ii) the shares issued by way of the conversion, exchange or subscription of existing Atos Origin securities and (iii) the issue of convertible bonds or Oceane bonds, listed on a regulated market, for a maximum amount in principal of €200,000,000 provided these convertible bonds or Oceane bonds are issued at the same time as the first Placement made by the Schlumberger Shareholder.
For each of the placements made by Philips or the Schlumberger Shareholder, Atos Origin, Philips and the Schlumberger Shareholder shall negotiate in good faith the terms and conditions of the lock-up applicable to each party, taking into account the interest of each of the parties and the recommendations of the advisory banks.
Under the Liquidity Agreement, Philips agreed to vote in favor of the Contribution during the extraordinary meeting of shareholders of Atos Origin called to approve the Contribution, subject to the report of Contribution auditors being without reserve.
The Liquidity Agreement is concluded for a period which shall end on the later of the following two dates: (i) eighteen months after the completion of the Acquisition or (ii) on the day the respective participations of the Schlumberger Shareholder and Philips are less than 7.5% of the capital of Atos Origin. The completion of the Acquisition is currently scheduled on 29 January 2004.
A.2.1.4 IT SERVICES FRAMEWORK AGREEMENT On September 21, 2003, Atos Origin and Schlumberger BV concluded the IT Services Framework Agreement under the terms of which the parties agreed to establish the guidelines of the agreements for the provision of IT services to cover the provision of the services currently provided not only (i) to Schlumberger and its subsidiaries but also (ii) to third party client companies of the Schlumberger Group corresponding to activities that were not transferred during the Acquisition of Sema Group and (iii) as yet unidentified services.
Under the terms of this contract for the non-exclusive provision of services, certain Schlumberger companies undertake to contribute to Atos Origin a gross revenue, net of VAT, of at least $700,000,000 over a maximum period of seven years with an annual gross revenue, net of VAT, of at least $80,000,000.
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Should the annual minimum gross revenue not be realised, Schlumberger BV shall indemnify Atos Origin according to a formula provided for in the agreement, which specifies a principle of the indemnification of a portion of the shortfall of the revenue for a given year, weighted by the gross surplus revenue of the previous year and the following year. Such indemnification shall be paid at the end of the year following the year considered and may give rise to an adjustment at the end of the second year following the year considered.
Under the IT Services Framework Agreement, the parties intend to ensure that the rates paid by the Schlumberger Group are (i) for the provision of services to the Schlumberger Group, identical to the rates charged during the 2003 financial year for a period of two years from the Acquisition and, after this period, in accordance with the principles of the agreement, (ii) for the provision of services to a third party, identical to those currently charged by the Schlumberger Group or Sema Group to its client and (iii) for the future provision of services, fixed in accordance with the principles of the agreement.
The rates and the service levels shall be adjusted every two years on the basis of an objective benchmarking procedure, during which a third party expert shall determine the rates and service levels in accordance with a process established in the agreement. The first benchmarking procedure shall not be carried out until the expiration of the two-year period following the acquisition.
A.2.2 THE OPERATION ITSELF
A.2.2.1 DATE OF THE CONTRIBUTION AGREEMENT The contribution agreement between Atos Origin, Schlumberger Investments Ltd and Schlumberger SA was signed on November 29, 2003.
A.2.2.2 RETROACTIVITY DATE OF THE OPERATION The transaction shall be retroactive to January 1, 2004 for purposes of the consolidated accounts. It shall not be retroactive for tax and legal purposes.
A.2.2.3 DATES OF THE MEETINGS OF THE SUPERVISORY BOARD THAT APPROVED THE OPERATION The Supervisory Board of Atos Origin approved the general terms and conditions of the operation and the signing of the agreement at its meeting of September 20, 2003.
On November 4, 2003, the Management Board deliberated on the draft contribution agreement and delegated one of its representatives, with power of substitution, to sign the agreement.
On December 12, 2003, the Supervisory Board recommended to shareholders to vote in favour of the resolutions put to the vote during the extraordinary general meeting of Atos Origin shareholders called for January 22, 2004, notably, the proposed contributions and the resulting capital increase, on the terms and conditions provided for in the contract and its annexes and in the contribution agreement.
A.2.2.4 DATE OF FILING OF THE REPORT BY THE CONTRIBUTION AUDITORS ("COMMISSAIRES AUX APPORTS") The report of the contribution auditors was filed on January 15, 2004 with the Nanterre commercial court.
A.2.2.5 TAX REGIME GOVERNING THE OPERATION For the contributing companies and for the company benefiting from the contributions, the contribution operation will be governed by the general corporate tax legislation and will be subject to registration fees.
As regards value added tax, the contributing companies must comply with the tax legislation in force in their country of residence.
As to the taxation of any dividends that are subsequently paid in respect of the shares created in return for the contribution, the contributing companies shall consult their regular tax advisor about the tax regime that applies to their particular case.
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A.2.3 CONTROL OF THE OPERATION
A.2.3.1 DATE OF THE GENERAL MEETING CONVENED TO APPROVE THE OPERATION The extraordinary general meeting of Atos Origin shareholders called to decide on the contribution operations has been convened for January 22, 2004. The resolutions that will be submitted to the meeting were published in the Bulletin des Annonces Légales Obligatoires (BALO) (Obligatory Legal Announcements Bulletin) of December 8, 2003. Amended resolutions were published in the Bulletin des Annonces Légales Obligatoires (BALO) (Obligatory Legal Announcements Bulletin) of January 7, 2004.
A.2.3.2 CONTRIBUTION AUDITORS ("COMMISSAIRES AUX APPORTS") The following two contributions auditors were appointed by order of the Chairman of the Commercial Court of Nanterre: • Name and address:
François CARREGA Philippe QUINCY Ernst & Young Audit Audit Conseil Stratégie Tour Ernst & Young, Faubourg de l'Arche 7 rue d'Aguessau 92037 Paris La Défense 75008 Paris
• Date of appointment: October 2, 2003 • Date of report: January 9, 2004
Their mandate was to assess the contribution value of the contributed shares. Additionally, they were asked to give an opinion on the fairness of the consideration for the contributions. The Autorité des Marchés Financiers asked them to give an opinion as to the fairness of the consideration for the entire operation and not only on the share portion of the consideration.
In accordance with the applicable regulations, the resulting report has been placed at the disposal of shareholders at the registered office of Atos Origin and was deposited at the clerk’s office of the Commercial Court of Nanterre within the time frame permitted by the applicable regulations.
A.2.4 REPORT BY THE CONTRIBUTION AUDITORS ON THE VALUE AND THE REMUNERATION OF THE ACQUIRED SEMA COMPANIES BY ATOS ORIGIN, S.A. TO THE GENERAL MEETING OF THE SHAREHOLDERS OF JANUARY 22, 2004 (Free translation of the French original)
To the Shareholders,
In accordance with the assignment entrusted to us pursuant to an order handed down by the President of the Commercial Court of Nanterre dated October 2, 2003 within the scope of the contribution of shares to be carried out by Schlumberger SA and Schlumberger Ltd, we have prepared this report, as provided for by Article L. 225- 147 of the French Commercial Code, on the value of the contribution and the special benefits. Pursuant to the terms of the request filed by Atos Origin, this report will also express an opinion on the remuneration for this contribution.
The value of and remuneration for this contribution in kind were provided for in the contribution agreement signed by the representatives of the companies concerned on November 29, 2003, as supplemented by an addendum dated January 5, 2004. Our responsibility is to confirm that the value of these contributions has not been overestimated, and to express an opinion on the equitable nature of the remuneration.
Pursuant to the recommendations issued by the COB (French stock exchange authority) in July 1977 concerning shareholder information on remuneration for contributions in kind in transactions involving mergers, split-ups or partial contributions of assets, the scope of our assignment has been extended to include an assessment of the equitable nature of the remuneration for the overall transaction of which the contribution of shares is a part.
In this regard, pursuant to a Master Agreement dated September 21, 2003, Atos Origin acquired substantially all of SchlumbergerSema’s IT business activities from the Schlumberger Group. This transaction involved firstly,
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the contribution of the shares held in Sema, S.A. and Sema, Ltd, and secondly, the cash acquisition of certain assets not included in the scope of the contribution.
In this regard, we carried out our work in accordance with the standards of the French National Statutory Auditors Board ("la Compagnie Nationale des Commissaires aux Comptes") applicable to this assignment; those standards require that we plan and perform our work in order to: • Assess the value of the shares acquired including the contributed shares in Sema, S.A. and Sema, Ltd, to ensure that such value is not overestimated, and to verify that it corresponds at least to the par value of the shares to be issued by the beneficiary of the contribution plus the contribution premium, • Assess the equitable nature of the remuneration for the contributed shares in Sema, S.A. and Sema Ltd, • Assess the equitable nature of the remuneration for the transaction as a whole.
We invite you to read our observations and conclusions, set out using the following layout:
1. Presentation of the transaction 2. Presentation and description of the contribution 3. Work carried out and assessment of the overall value of the assets acquired, and hence, of the value of the contribution 4. Work carried out and assessment of the equitable nature of the overall remuneration for the transaction, and hence, of the remuneration for the contribution 5. General conclusion
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Table of contents
1. Presentation of the transaction 1.1 General presentation 1.2 Economic reasons for the transaction 1.3 Valuation of the acquired business 1.4 Remuneration for the Sema business acquired 1.5 Contractual framework 1.5.1 Master agreement dated 21 September 2003 1.5.2 Contribution agreement dated 29 November 2003 1.5.3 Liquidity agreement dated 21 September 2003 1.5.4 Conditions precedent 1.5.5 Prior conditions for the completion of the contribution 1.5.6 Terms and conditions of the price adjustment 1.5.7 Guarantees granted 1.5.8 Other agreement: IT Framework Agreement 2. Presentation et description of the contribution 2.1 The scope of companies 2.1.1 Atos Origin, beneficiary of the contribution 2.1.2 Schlumberger SA and Schlumberger Investments Ltd, the contributing companies, 2.1.3 Sema S.A. and Sema Ltd, the shares contributed. 2.2 Valuation of the contribution 2.2.1 Presentation of the valuation methods used 2.2.2 Value of the contribution 2.3 Remuneration of the transaction 2.4 Terms and conditions of the transaction 2.5 Conditions precedent 2.6 Warranties as regards the contribution 3. Work carried out and assessment of the overall value of the assets acquired and hence, of the value of the contribution 3.1 Work carried out in order to assess the value of the contribution 3.2 Conditions of the contribution 3.2.1 Content and completion of the contribution 3.2.2 Comments on the consequences of the contractual conditions between the parties on the value of the contribution 3.3 Assessment of the valuation of the acquired businesses 3.3.1 Assessment of the choice of methods used 3.3.2 Assessment of the valuation using the discounted cash flow method 3.3.3 Assessment of the application of the comparable companies method 3.3.4 Assessment of the application of the comparable transaction multiples method 3.4 Assessment of the valuation of the contribution itself 3.4.1 Assessment of the choice of methods used 3.4.2 Assessment of the financial data used for reference purposes 3.4.3 Assessment of the valuation using the discounted future cash flow method 3.4.4 Assessment of the implementation of the comparable companies method 3.4.5 Comparable transaction multiples method 3.5 Conclusion regarding the value of the contribution 4. Work carried out and assessment of the equitable nature of the overall remuneration for the transaction, and hence, of the remuneration for the contribution 4.1 Additional work carried out to assess the remuneration for the transaction 4.2 Assessment of the valuation used for Atos Origin 4.2.1 Main comments regarding the reasons for and objectives of the transaction 4.2.2 Comments regarding the valuation of Atos Origin shares. 4.3 Assessment of the remuneration for the transaction 4.3.1 Assessment of the remuneration for the entire Sema business transferred 4.3.2 Assessment of the remuneration for the contribution itself 5. General conclusion 5.1 Emphasis 5.1.1 Emphasis as regards the implementation of the Master Agreement 5.1.2 Emphasis of the assessment of the value of the business transferred and of the contribution
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5.1.3 Emphasis on the remuneration for the businesses transferred and for the contribution 5.2 Conclusions 5.2.1 Conclusions on the acquired business value and the contribution value 5.2.2 Conclusions on the remuneration of the acquired business and the contribution
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1. Presentation of the transaction
1.1. General presentation
The acquisition entered into between Atos Origin and Schlumberger Group (hereinafter "Schlumberger") on September 21, 2003 relates to all the capital held in the companies (hereinafter the "Sema Companies") that represent, with their subsidiaries, the major part of SchlumbergerSema’s IT activities (hereinafter the "acquired business").
This transaction is composed of an acquisition of shares by a contribution, in kind and an acquisition of shares for cash, the transaction as a whole being inseparable.
The acquisition covers:
• Shares contributed (hereinafter the "contribution"): 99.9% of the capital of Sema S.A. and 97.80% of Sema Ltd’s shares • Shares sold in exchange for treasury shares owned by Atos Origin: 2.2% of Sema Ltd’s shares • Shares sold and paid in cash being essentially those of Seahorse BV (Netherlands, 100 %): SchlumbergerSema Managed Gmbh (Germany, 100%), Sema SP (Italy, 100%), SchlumbergerSema Inc. (USA, 100%), Schlumberger IT SA DE CV (Mexico, 100%), Sema Belgium SA (Belgium, 100%), SchlumbergerSema SP ZOO (Poland, 100%), SchlumbergerSema Hellas SA (Greece, 98%), LHS AG (Switzerland, 100%), Schlumberger M&S SA (Switzerland, 100%), SchlumbergerSema Nederland BV (The Netherlands, 100%), SchlumbergerSema Norge AS (Norway, 100 %), Schlumberger New Technologies Inc. (The Virgin Islands, 100%) • Businesses globally not of a material nature, which will be held by Schlumberger until they are legally transferred to Atos Origin (Dubai, Egypt, etc) • An outsourcing agreement ("IT Framework Agreement") with Atos Origin in respect of Schlumberger’s IT requirements • Rights to software and related developments in connection with the international sporting events business (Olympic games, etc.), referred to as the "major events" business.
The acquisition does not cover:
• The IT agreements related to the Oil and Gas business • Telecom Products • The systems security business, referred to as the "business continuity & disaster recovery" business • The data research business, referred to as the "Infodata" business • The Essentis products • DeXa Company
These businesses were developed by Sema and purchased by Schlumberger in 2001 for $ 5.3 billion. This amount included the Telecom products businesses, which are excluded from the scope of the current transaction.
The businesses covered by the Master Agreement represent total revenues of € 2.4 billion (in 2003) and 22,000 persons.
1.2. Economic reasons for the transaction
Atos Origin entered into the acquisition for three main business reasons: • Competitivity: size of the new combined group • Competitivity: complementary nature of the offerings and lines of business • Protection: preservation and improvement of market positioning
In the present context of the grouping together of players in the IT sector, both at the European level and worldwide, Atos Origin expects that this acquisition will help it to achieve a leading position in the field of the provision of IT services in Europe.
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Upon completion of this transaction, Atos Origin should be the fourth largest IT services supplier on the European market, behind IBM, EDS and T-System, and should be: • No. 1 in France • No. 3 in Spain • No. 4 in the UK and Italy
Atos Origin should have greater access to the North American and Asian Pacific markets.
This position as a major player is necessary in order to respond to major invitations to tender domestic and international clients.
In consideration of the three areas of business represented by facilities management, systems integration, and consulting services, the new company will become one of the European leaders in facilities management (49% of overall activity) and strengthen its positions in the area of systems integration and consulting services, and more specifically in the management of large projects.
Until now Atos Origin has been mainly positioned on the finance, high technology, distribution and telecommunications markets; this acquisition should now enable Atos Origin to strengthen its positioning in the telecommunications field and also to acquire a better positioning on the public sector markets.
As well as the complementary nature of the markets, the acquisition should also lead to complementary customers. As the number of joint customers is low and the business activities carried out for joint customers do not compete with one another, the portfolio of solutions offered appears to be very complementary.
The acquisition of Sema by a competitor of Atos Origin would moreover have considerably weakened Atos Origin’s market positioning.
Finally, this acquisition will enable Atos Origin to acquire a major new customer due to the outsourcing agreement entered into with Schlumberger.
This transaction falls within the scope of the continuity of Atos Origin’s business strategy, which has been based on successive mergers and acquisitions.
1.3. Valuation of the acquired business
The discounted cash flow method was the principal method used as a basis for the valuation of the entire business acquired from Schlumberger, the cash flows used being calculated globally for all the Sema companies. Atos Origin’s management implemented this approach with the assistance of the bank acting as its advisor, Lehman Brothers, on the basis of historical financial data (December 31, 2002 and June 30, 2003) and projected data as of December 31, 2003 provided by the Schlumberger management.
The aim of this approach was to calculate the value of shareholders’ equity, independently of any valuation of future synergies related to this transaction.
Future cash flows were calculated: • Under the assumption that business activity would continue under the conditions prevailing as of June 30, 2003 • Taking into consideration the positive financial effects resulting from the restructuring plans initiated by Schlumberger in 2002 and 2003.
This valuation method was compared with the results of an analysis carried out using the valuation multiples of listed IT service companies with a similar profile to Sema and using valuation multiples observed in recent transactions.
The discounted cash flow method led to the entire business acquired being valued at: EUR 1,492 million
The "comparable companies" method led to an average value of: EUR 1,869 million
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And the "comparable transactions" method gave a value of EUR 1,669 million
The value finally applied by the parties to value the entire transaction in respect of all the acquired business: EUR 1,287 million
A similar approach was used for the contributed shares.
1.4. Remuneration for the Sema business acquired
The parties determined the remuneration for the acquired Sema business as follows: • 19,000,000 new shares Atos Origin, • 300,000 existing treasury shares, • EUR 400 million in cash
The parties arrived at the valuation used for Atos Origin by referring to the average closing stock market price weighted by the volumes for the 20 last trading days before the announcement of the transaction, i.e., from August 25, to September 19, 2003, which amounted to:
EUR 45.95 per share
On this basis, Atos Origin is valued at EUR 2,196 million (47,789,696 shares at EUR 45.95), which was the amount used to determine the remuneration for the contribution.
1.5. Contractual framework
1.5.1. Master Agreement dated September 21, 2003
On September 21, 2003 Schlumberger SA, Schlumberger BV, Schlumberger Investments Ltd, Schlumberger Technology Corporation and Schlumberger Limited, of the first part, and Atos Origin, of the second part, signed a Master Agreement (the "Master Agreement"), pursuant to which they agreed on the terms and conditions of the proposed transaction.
This agreement thus provides (i) the terms and conditions of the contribution and sale of all the shares held by the Schlumberger companies in the Sema companies, (ii) the remuneration for these shares contributed and sold, (iii) the obligations and commitments made by the parties prior to the date of the share transfer, (iv) the adjustment mechanism for the remuneration decided on after the date of the share transfer and calculated on the basis of the combined financial statements as of the final completion date of the transaction, (v) the warranties granted by the Schlumberger companies and by Atos Origin.
The Master Agreement provides that the date of transfer of the Sema companies’ shares to Atos Origin will be either 5 working days after the date of the Extraordinary General Meeting of Atos Origin’s shareholders, insofar as all the prior conditions for the completion of the transaction are fulfilled by 9 January 2004 at the latest, or, failing this, on the last working day of the month during which the prior condition(s) for the transaction is (are) fulfilled. Finally, the Master Agreement provides for the possibility for one of the parties to grant the other party an additional time period of two months to carry out the obligations incumbent upon it.
The Master Agreement lays down the terms and conditions for the assumption of Sema employees’ pensions by Atos Origin and Schlumberger.
The Master Agreement also lays down the terms and conditions for Schlumberger’s representation on the management and supervisory bodies of Atos Origin. It is thus provided that Schlumberger will have two representatives on the Supervisory Board, appointed for a term of 5 years, as long as it holds 19% or more of the capital of Atos Origin. This representation may be reduced to one member on the Supervisory Board in the event that Schlumberger holds 10% or more of the capital of Atos Origin.
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It is also provided that Schlumberger will have a representative on each of the committees set up by Atos Origin within the scope of its corporate governance, i.e., the Appointments Committee, Investments Committee, Compensation Committee, and Audit Committee.
1.5.2. Contribution agreement dated November 29, 2003
In accordance with the terms of the Master Agreement, a contribution agreement was entered into on November 29, 2003 between Schlumberger SA, a French société anonyme (corporation) and Schlumberger Investments Ltd., an English company, of the first part, and Atos Origin, of the second part.
In addition, an addendum to this contribution agreement was signed on January 5, 2004 pursuant to which Atos Origin undertakes to apply the price adjustment clause referred to in the Master Agreement and described at a later stage in this report, to the businesses contributed.
Pursuant to and in accordance with the terms and conditions of this contribution agreement, and subject to the fulfilment of the condition precedents provided for in said agreement, Schlumberger SA and Schlumberger Investments Ltd undertake to contribute to Atos Origin, by means of an outright contribution in kind, 2,713,999 Sema S.A. shares by Schlumberger SA, i.e., 99.9% of the capital and 603,897,741 Sema Ltd shares by Schlumberger Investments Ltd., i.e., 97.8 % of the capital.
In remuneration for these contributions, Atos Origin will increase its capital by issuing 19,000,000 new shares with immediate rights of enjoyment, with a par value of EUR 1 each, broken down as follows: 5,640,000 shares in favour of Schlumberger SA and 13,360,000 shares in favour of Schlumberger Investments Ltd. The difference between the contribution value and the par value of the shares issued as remuneration will comprise the contribution premium, i.e., EUR 854,100,000.
The following are attached as schedules to the contribution agreement: (i) a description of the subsidiaries and shareholdings of Sema S.A. and Sema Ltd, (ii) a description of the method used to value the contribution, the beneficiary company of the contribution, and the calculation of the remuneration, (iii) the conditions precedent and prior conditions for the final completion of this contribution, thereby reiterating the conditions laid down in the Master Agreement.
1.5.3. Liquidity agreement dated September 21, 2003
Concurrently with the signing of the Master Agreement, Schlumberger SA, Schlumberger Investments Ltd, Koninklijke Philips Electronics N.V. (hereinafter referred to as "Philips") and Atos Origin also signed a liquidity agreement pursuant to which the terms and conditions under which Schlumberger and Philips could reduce their respective shareholdings in the capital of Atos Origin were agreed on.
This liquidity agreement provides that Schlumberger may, as from the date of final completion of the transaction and if market conditions so permit, make one or more placements of Atos Origin shares received as remuneration for the contribution, in order to reduce its shareholding to 19%. It should be noted that no placement may be made outside the European Union by means of a public offering. Within the scope of these placements, which will take place at the sole discretion of Schlumberger, Schlumberger may request the active participation of Atos Origin. In this respect, Atos Origin may have to provide the banks chosen as advisors by Schlumberger with warranties giving rise to indemnification, where applicable. It should be mentioned that warranties may be given without any limitation as to time or amount.
It should be noted that the Schlumberger group has already shown its investor to reduce its shareholding to 19% immediately as from the final completion of the transaction.
1.5.4. Conditions precedent
In accordance with the terms of the Master Agreement, also reiterated in the contribution agreement, the contribution of Sema S.A.’s and Sema Ltd’s shares to Atos Origin will only be final and binding as from the date of fulfilment of the following conditions precedent: • Approval of the proposed transaction, from the standpoint of merger regulations, (i) by the European Commission, (ii) by the relevant US authorities, (iii) by the South African government authorities; • Confirmation, by the CMF (former French financial markets authority) or the AMF (new French financial markets authority), of the lack of any concerted action by Schlumberger and Philips and, if necessary,
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granting of a release to Schlumberger or Philips from the obligation to file a mandatory public offer to buy the Atos Origin shares; • Approval by the Extraordinary General Meeting of Atos Origin’s shareholders of the contribution and the capital increase resulting therefrom.
The Master Agreement and the contribution agreement stipulate that the obligations of the parties pursuant to this agreement are subject to the absence of any extraordinary internal or external event, which would or could have a material adverse impact on the business activity, assets, income, operations, or financial position of the Sema Group or Atos Origin.
1.5.5. Prior conditions for the completion of the contribution
Pursuant to the terms of the Master Agreement, each of the parties, and Schlumberger in particular, have undertaken to carry out certain transactions prior to the completion of the transaction. i) Internal reorganisation of the companies
Schlumberger must carry out the necessary operations within the Sema companies concerned in order that the business activities or companies connected with the acquired business may be isolated, with the business activities or companies that are Out of Scope being retained by Schlumberger. The Essentis, Info Data, and Telecom businesses, and the IT services business for Oil and Gas customers in particular must be transferred to Schlumberger prior to the completion of the transaction. Moreover, all the assets relating to the International Olympic Committee agreement must have been transferred to the Sema Group prior to the completion of the transaction.
In order to ensure the most successful outcome possible for these reorganisations, the Master Agreement provides for the setting up of a monitoring committee, including representatives from Schlumberger, Atos Origin and Philips. ii) Prior restructuring
Schlumberger undertakes to continue the internal restructuring of the transferred business itself, involving, in particular, adjustments to headcount, outside France, involving 1,000 employees. Schlumberger will bear the cost of this restructuring even if the departures in question take place after the date of completion of the transaction provided for in the Master Agreement. iii) Conduct of business activities before the date of completion
The parties agree to carry out their respective business activities under day-to-day and normal conditions during the period prior to the date of completion and to request the approval of the other party for certain transactions and/or undertakings expressly provided for in the Master Agreement. iv) Assumption of guarantees and security interests
Atos Origin undertakes to substitute itself for Schlumberger in respect of all guarantees and security interests granted by it or its banks to third parties as regards obligations entered into on behalf of the Sema companies concerned by the transaction. At the same time, Schlumberger undertakes to substitute itself in respect of all guarantees and security interests granted by the Sema companies to third parties as regards non-acquired activities.
If these undertakings are not complied with, the defaulting party shall compensate the other party. v) Review of any impairment or potential losses in value of Atos Origin’s assets, i.e., an Impairment Test
By December 31, 2003 at the latest, Atos Origin must provide Schlumberger with a review, carried out in accordance with US accounting standards (US GAAP), substantiating the value of its long-term assets.
This analysis, after taking into consideration of the impairement charge in relation with the goodwill of KPMG Consulting for an amount of EUR 224 million for the year ended December 31, 2003, did not evidence the need for further depreciation.
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1.5.6. Terms and conditions of the price adjustment
The Master Agreement sets out the terms and conditions of the price adjustment agreed upon on the basis of the combined financial statements of the Sema Companies for the period ended as of the nearest possible date to the completion of the transaction, i.e., December 31, 2003 if the closing takes place before January 17, 2004 or the last day of the month in progress if the closing takes place at a later date.
The General Meeting of shareholders is scheduled for January 22, 2004. We understand that an addendum to the Master Agreement was under negotiation and will crystallize all adjustments based on the combined financial statements as of December 31, 2003.
These adjustments concern the entire business acquired. It is however stipulated in the Master Agreement that the adjustment described hereinafter relates only to the part of the price payable in cash.
The amount of EUR 400 million to be paid in cash will thus be: i) Increased or decreased by the amount of the combined net debt of the Sema Companies, calculated as of the closing date of the combined financial statements, ii) Increased or decreased by the difference between (a) the amount of the combined working capital requirements of the Sema Companies calculated as of the closing date of the combined financial statements and (b) the reference value of EUR 185.6 million provided in the Master Agreement. iii) Decreased by the difference between (a) the net assets of the Sema Companies, calculated as of December 31, 2003 on the basis of the combined financial statements as of December 31, 2003 and (b) the reference value of EUR 311 million laid down in the Master Agreement it being understood that any change in the combined working capital requirements of the Sema Group, as of the closing date of the combined financial statements, which has an impact on the combined net assets of the Sema Group as of said date should not be taken into account, and vice-versa.
The combined financial statements of the Sema companies will be prepared by Schlumberger in accordance with US GAAP. They will be audited by Schlumberger’s auditor and Statutory Auditor and sent to Atos Origin.
In the absence of an agreement between the parties regarding these combined financial statements, an independent, internationally-reputed firm of accountants will be appointed by the parties and, failing this, by the President of the Commercial Court of Paris, to decide on the financial ratios which are the subject of the price adjustment.
1.5.7. Guarantees granted
1.5.7.1. Guarantees granted by Schlumberger
Subject to exceptions to the representations made by Schlumberger ("Sellers Disclosure Schedule") when the Master Agreement was entered into, as the guarantees given by Schlumberger do not cover such representations, Schlumberger has made representations and granted warranties in respect of the following:
• The formation, existence and due and proper nature of the companies that are the subject of the transaction • The shares of the companies that are the subject of the transaction (validly issued, fully paid up, free from any pledge) • Subsidiaries and joint ventures • Pro forma management financial statements for the Sema companies as of June 30, 2003 • The fact that the activity has been carried out under normal conditions from June 30, 2003 until the date of signature of the Master Agreement • Disputes – disclosure of disputes in respect of any legal actions or litigation that may lead to court action for an amount of more that EUR 1.25 million • Compliance with applicable legislation • Environment • Intellectual property • Real estate • Employment law
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• Contracts: list of the main business agreements in excess of EUR 10 million, and borrowings in excess of EUR 20 million • Insurance policies • Tax matters
At the same time as making these representations and warranties, Schlumberger has made a specific commitment to indemnify Atos Origin for a certain limited number of specific risks. This specific indemnification mainly covers disputes in progress, which are listed in a Schedule to the Master Agreement.
Pursuant to the terms of the Master Agreement, Schlumberger undertakes to indemnify Atos Origin for any harm suffered due to non-compliance with or inaccuracy of the representations and warranties granted. It should be specified that the indemnities will not be calculated on the basis of the impact of the harm on the value of the shares transferred or the shares given as remuneration, but in relation to the amount of damage assessed on a euro-per-euro basis.
The guarantee granted by Schlumberger to Atos Origin may only be called if each claim, after restatement to take account of the net loss, exceeds a total amount of EUR 300,000 (minimum limit), and if all the claims made exceed a combined threshold of EUR 5 million (triggering threshold) with a maximum limit to the guarantee set at USD 175 million. The minimum limit and the triggering threshold do not apply to the specific guarantees referred to above.
With the exception of the specific guarantees in respect of which Atos Origin has 3 years as from the date of closing of the transaction to make its claim, tax-related claims will expire at the end of statute of limitation provided for in this respect, and claims regarding the other guarantees must be made within 18 months.
Finally, as regards pension commitments, the Master Agreement treats the obligations regarding UK employees differently from those regarding employees from other countries. • For the UK, it has been agreed that any increases in contributions to the pension fund that may occur over the next six years will be shared, using the contribution for the first six months of 2003 as a reference, and taking into account recommendations that will be made by the fund’s actuary. • For the pension funds located in other countries, commitments will be assessed jointly by Schlumberger and Atos Origin in order to prepare the Sema Group’s combined financial statements as of the acquisition completion date. Provisions drawn up in this manner fall within the scope of the calculation of the financial ratios used for the purposes of the price adjustment. Moreover, Schlumberger undertakes to indemnify Atos Origin for all increases in contributions that may occur over the next six years, using the contribution for the first six months of 2003 as a reference.
1.5.7.2. Warranties granted by Atos Origin
The warranties granted relate to: i) The fact that consolidated financial statements as of December 31, 2002 and as of June 30, 2003 have been audited and certified without qualification, ii) Compliance with applicable law and regulations.
1.5.7.3. Guarantee of performance
Pursuant to the terms of the Master Agreement, Schlumberger's parent company, Schlumberger Limited, a Netherlands Antilles company, agrees to act as a joint and several guarantor without the right to require execution against the principal debtor or the right to obtain a court order that the procedures be directed against all the guaranteed parties with regard to the due and proper performance by Schlumberger of the commitments, obligations, and guarantees given to Atos Origin.
At the same time, Atos Origin agrees to act as a joint and several guarantor without the right to require execution against the principal debtor or the right to obtain a court order that the procedures be directed against all the guaranteed parties with regard to the compliance by its subsidiaries with all commitments and obligations that they may be led to make within the scope of agreements signed with Schlumberger.
1.5.7.4. Warranties regarding events occurring between the date of signature of the Master Agreement and the closing date of the transaction
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 52/233
Any new events or facts impacting the representations made by the parties and occurring between the date of signature of the Master Agreement and the closing date of the transaction must be notified to the other party and are then considered as exceptions to the warranties as provided in the Master Agreement. These new events or facts will then be the subject of specific provisions in the Sema Group’s financial statements as of the date of completion of the transaction.
In the event that a new event or fact occurs that will have a significant impact on the transaction, the parties will decide jointly and in good faith on the treatment of the loss that may result from said new event or fact. In the absence of an agreement, each party will have the right to terminate the transaction.
1.5.8. Other agreement: IT Framework Agreement
An IT Framework Agreement was signed by the parties, which sets out the principle of a partial outsourcing of Schlumberger’s IT requirements to Atos Origin. It is envisaged that this agreement will cover a total accrued amount of USD 700 million over seven years with an annual minimum of USD 80 million. The final content of the agreement is still to be set in accordance with the respective requirements of each party.
2. Presentation and description of the contribution
2.1 The scope of companies
2.1.1 Atos Origin, the company receiving of the contribution
Atos Origin is a French société anonyme (corporation) with a Management Committee and a Supervisory Board with capital of € 47,789,696 divided into 47,789,696 shares with a par value of one euro each. Its registered office is located at 3 Place de la Pyramide, La Défense 9, 92800 Puteaux, which is in the process of being transferred to 18 avenue d’Alsace, La Défense 3, 92400 Courbevoie. It is registered with the Nanterre Registry of Commerce and Companies under the number 323.623.603.
Atos Origin is listed on the Premier Marché of the Paris Stock Exchange. 44.7% of its capital is owned by Philips Belgium SA, a wholly-owned subsidiary of Koninklijke Philips Electronics N.V. Atos Origin’s corporate purpose is:
• Data processing, systems engineering, studies, and consulting and assistance, in particular in the areas of finance and banking; • Research, studies, the development and sale of products and services that assist the promotion or development of automated systems and the dissemination of information, in particular: the design, application and installation of software, IT systems, information retrieval and office systems; • And, in general, any industrial, commercial, civil, financial, real estate or moveable property transactions directly or indirectly related to the above purposes.
2.1.2 Schlumberger SA and Schlumberger Investments Ltd, the contributing companies
Schlumberger SA (formerly Schlumberger Industries) is a French société anonyme (corporation) whose registered office is located at 50 avenue Jean Jaurès, 92120 Montrouge. It is registered with the Nanterre Registry of Commerce and Companies under the number 542.062.120, and is a wholly-owned subsidiary of Schlumberger Limited, the group’s parent company.
Schlumberger Investments Ltd is an English Private Limited Company whose registered office is located at South Quay Plaza 2, 183 Marsh Wall, London E14 9SH, UK, and is a wholly-owned subsidiary of Schlumberger Limited, the group’s parent company.
2.1.3 Sema S.A. and Sema Ltd, the contributed shares
Sema S.A. is a French société anonyme (corporation) with capital of € 27,166,930 divided into 2,716,693 shares with a par value of € 10 each. Its registered office is located at 50 avenue Jean Jaurès, 92120 Montrouge and it is registered with the Nanterre Registry of Commerce of Companies under the number 642 005 094. The company is listed on the Euronext Paris OTC Market. Schlumberger SA owns 99.9% of its capital and the number of floating shares amounts to 2,694, i.e., 0.1% of the capital.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 53/233
Sema S.A.’s corporate purpose includes any business activities relating to the electronic processing of data in any form whatsoever and in particular: the development, manufacture and maintenance of operating software; the design, development and installation of information, technical or management systems; the study, creation and delivery of BOT systems; the development, manufacture and sale of electronic equipment; the creation of databases; the data processing of information and, in general, any industrial, commercial, civil, financial, real estate or moveable property transactions that may directly or indirectly relate to the above purposes.
Sema S.A. also owns the following shareholdings:
• SchlumbergerSema Sweden AB (Sweden, 100%) and its subsidiaries • SchlumbergerSema S.A.E (Spain, 100%) and its subsidiaries • Sema Télécom France (France, 100%) • Sema Global Services (France, 100%) • Netseenergie (France, 60%) • Sema Beijing IT (China, 100%).
The main financial data resulting from the pro forma combined financial statements of Sema S.A. (combination of the management financial statements of Sema S.A. and its subsidiaries for the contributed activity and established pursuant to US GAAP) are as follows as at December 31, 2002:
• Revenues: USD 835 million • Operating loss: USD –3.8 million • Shareholders’ equity: USD 91.1 million
Sema Ltd is an English Private Limited Company with capital of GBP 61,748,235 divided into 617,482,353 shares with a par value of GBP 0.10 each. Its registered office is located at South Quay Plaza 2, 183 Marsh Wall, London E14 9SH, UK and it is registered with the English Companies registry under the number 01240677. It is wholly-owned by Schlumberger Investments Ltd. Sema Ltd. is a holding company whose corporate purpose is to own shareholdings.
Sema Ltd. owns the following shareholdings: • Etourism Ltd (UK, 60 %) • Sema Barbados (UK, 100%) • Sema Investment UK Ltd (UK, 100%) • Sema International Ltd (UK, 100%) and its subsidiaries in South Africa, India and Malaysia • Sema Pension Trustee Ltd (UK, 100%) • Sema CS Pension Trustee Ltd (UK, 100%) • Sema Quest Trustee Ltd (UK, 100%) • Sema UK Ltd (UK, 100%).
The main financial data resulting from the pro forma combined financial statements of Sema Ltd (combination of the management financial statements of Sema Ltd and its subsidiaries for the contributed activity and established pursuant to US GAAP) is as follows as of December 31, 2002:
• Revenues: USD 789 million • Operating income: USD 50.3 million • Shareholders’ equity: USD 327 million
The contribution of Sema Ltd’s and Sema S.A.’s shares represents revenues of 65% as compared with the revenues of the contributed business.
2.2 Valuation of the contribution
Within the scope of this transaction, Schlumberger SA and Schlumberger Investments Ltd have agreed to contribute respectively to Atos Origin, 2,713,999 Sema S.A. shares representing 99.9% of the capital, and 603,897,741 Sema Ltd shares representing 97.8% of the capital. This transaction will be for its current value as set forth in the contribution agreement.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 54/233
2.2.1 Presentation of the valuation methods used
The valuation of the Sema S.A. and Sema Ltd shares used in the contribution agreement to calculate the value of the contribution uses the same approach and methods as those described in paragraph 1.3
It should however be noted that the reference to comparable transactions was not used as it was not deemed to be relevant in respect of the scope of these two transactions.
2.2.2 Value of the contribution
The methods used resulted in the following values:
Approach based on discounted cash flow:
Discounted cash flow Comparable Value applied in method method the contribution agreement
(in millions of €) Sema, S.A. (99,9%) 319 298 259,2 Sema Ltd. (97,8%) 733 728 613,9 1,052 1,026 873,1
• The contribution agreement states an amount of € 873.1 million which was computed based on the number of Atos Origin shares to be issued as negotiated between the parties.
• The value of this contribution was allocated between the two categories of shares contributed on a prorata basis of the calculated stand alone valuations. As a consequence, the value finally used in the contribution agreement is € 259 million for the Sema S.A. shares representing 99.9% of the capital and € 614 million for the Sema Ltd shares representing 97.8% of the capital.
2.3 Remuneration of the transaction
The remuneration was fixed on the basis of the same approach per share as that provided for the entire transaction and amounts to € 45.95 per Atos Origin share.
The contributions made by Schlumberger SA and Schlumberger Investments Limited will be remunerated by the creation of 19,000,000 new Atos Origin shares broken down into 5,640,000 new Atos Origin shares with a par value of € 1 each, for Schlumberger SA, and 13,360,000 new Atos Origin shares with a par value of € 1 each for Schlumberger Investments Limited. This remuneration will represent a capital increase for Atos Origin of € 19,000,000, i.e., 39.9% of the current capital. Upon completion of the transaction, the Schlumberger group will hold 28.9% of the capital.
The difference between the value of the contribution (€ 873.1 million) and the value of Atos Origin’s capital increase in remuneration for the contribution in kind (€ 19 million) represents the contribution premium, i.e., a sum of € 854.1 million.
This contribution premium, on which the current and future shareholders’ rights will be based, will be entered in the shareholders equity of Atos Origin’s balance sheet.
This contribution premium may be the subject of any allocation or withholding decided by the general shareholders meeting in accordance with French law.
2.4 Terms and conditions of the transaction
The 19,000,000 shares will be issued by Atos Origin to Schlumberger SA and Schlumberger Investments Ltd on the date of fulfillment of the conditions precedent affecting the resolutions relating to the contribution and its remuneration. The ownership thereof will accrue as of this date and the agreement will be deemed to be effective as of January 1, 2003.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 55/233
These shares will be fully paid up and will not be encumbered by any pledge, lien or other right restricting Schlumberger SA’s or Schlumberger Investments Ltd’s right of ownership of these shares.
The shares will be the subject of a request for admission for trading on the Euronext Paris Premier Marché, such that they may be quoted as soon as possible after their issue.
The shares will be subject to all the provisions of the statuts (by-laws and articles of association) of Atos Origin, will enjoy the same rights and be subject to the same charges as the existing shares.
This contribution agreement will be subject to the ordinary tax treatment in respect of outright contributions as defined by Articles 809-1-1 and 810-I of the French Tax Code. As a consequence, the Contribution will be subject to a single fixed registration duty of € 230. The entry tax values of the shares contributed to Atos Origin will be those provided for in the contribution agreement.
2.5 Conditions precedent
The conditions precedent contained in the Master Agreement were reiterated and included as Schedules to the contribution agreement. These conditions precedent are described in paragraph 1.5.4 above.
2.6 Warranties as regards the contribution
The warranties granted by the contributing companies are summarized in paragraph 1.5.7 above.
3. Scope of review and assessment of the total value of acquired assets and the value of the contribution
3.1 Scope of review
We carried out our review as we deemed necessary in accordance with the standards set forth by the French National Statutory Auditors Board in order to verify the actual substance of the contribution and the value assigned thereto. The review we performed included the following, in particular:
• We conducted a general review of the contemplated transaction, as well as its economic, legal and tax context. In this respect, we contacted the corporate officers from the various companies, the statutory auditors and the various advisors who had taken part in preparing the transaction.
• We analysed the actual substance and completeness of the contribution. In this regard, we verified the existence of the contributed shares and ensured that the contributing companies were entitled to transfer ownership of the assets.
• From a legal standpoint, we reviewed the draft contribution agreement – the reference document for our assignment – and the Master Agreement, in order to ascertain their impact on the transaction and the value of the contribution.
• We reviewed all the documents presenting the transaction which had been made available to Atos Origin’s shareholders. In this regard, as of the date of issuance of our report, Document E relating to the entire contribution transaction had not yet been approved by the French Financial Markets Authority (Autorité des Marchés Financiers). Our work was therefore based on the last draft submitted, dated December 23, 2003.
• We reviewed the reports of the meetings held between Atos Origin and Schlumberger in order to monitor the fulfilment of the conditions precedent to the completion of the transaction.
• We studied the findings of the review undertaken by Atos Origin’s management during the negotiation phase, and in particular, the work covering the financial and legal aspects and the pension commitments with regard to employees. The main participants informed us orally of their findings in such review. Furthermore, we were provided with a written account of the work carried out.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 56/233
• We met with the statutory auditor - Deloitte & Touche Tohmatsu – who took part in the due diligence process and we reviewed its findings, particularly in relation to the review of the valuation of pension commitments in the UK conducted by Towers Perrin.
• We were informed of the analyses carried out prior to the signing of the Master Agreement by Atos Origin’s counsel, which covered the main customer contracts and joint venture agreements made available involving the Sema companies.
• We met with a number of operational directors from Atos Origin or the Sema Companies in charge of the UK, French, Italian/Spanish markets, in order to ascertain the positioning of the companies, the risks associated with their business activities, the performance indicators and their prospects for growth.
• We carried out an analysis of the value proposed within the scope of the contribution agreement and of the relevance of the methods used to determine such value. Although no independent auditor was appointed, we reviewed the work carried out by banks acting as advisors in respect of the transaction: Lehman Brothers for Atos Origin, and Standard & Poors for Schlumberger. We discussed with them the assumptions they had applied.
• We assessed the value of the contribution using our own methods based on a profitability analysis (discounted future cash flow), the application of stock market multiples and a comparison with similar transactions. In this connection, we also verified the accuracy of the calculations made. We assessed the choice of assumptions applied (discount rate, growth rate, etc.).
• We reviewed the pro forma financial statements of the acquired businesses for the financial periods ended December 31, 2002 and June 30, 2003 in meetings with Schlumberger’s financial management.
• We obtained explanations regarding the consistency of the forecast data of the Sema Companies with the historical data; and we applied this approach for the financial data relating to Sema S.A. and Sema Ltd. We obtained explanations concerning the main assumptions underlying the estimates made (effect of the reorganisation, structural cost savings, etc.).
• We reviewed the working papers of the Sema Companies’ auditors (PricewaterhouseCoopers) concerning the preparation of the pro forma financial statements. We also reviewed the working papers relating to the individual financial statements of the French companies for the financial period ending on December 31, 2002. Finally, we reviewed the reports by the auditors or statutory auditors on the annual financial statements for the financial period ended December 31, 2002 of the main companies contributing to the value of the transaction. We ensured that these companies received a certified audit opinion with no qualifications or observations.
• We did not have access to the working papers of the auditors regarding the companies located in the UK. However, we were able to review a summary of their work and findings.
• We obtained the management financial statements as of September 30, 2003 drawn up by Schlumberger’s management, as well as the latest forecasts for 2003 in order to ensure the consistency of this information with the financial data used in the business plan.
• We asked the parties to inform us, up to the date of this report, of the occurrence of any events or any facts that could have an impact on the value of the contribution.
• We obtained the letters of representation issued by Atos Origin and Schlumberger, respectively, summarising the main representations made by the parties during our assignment as regards the value of the contribution.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 57/233
3.2 Conditions and closing of the contribution
3.2.1 Content and closing of the contribution
The contributions are specifically defined in the contribution agreement by the number of shares of the companies involved in the transaction; the completion of the contribution is, however, subject to the fulfillment of the pre-closing obligations to the transaction, as described above.
We obtained confirmation of the fulfillment of the conditions precedent regarding the approval of the transaction from the standpoint of merger regulations both by the European Commission (Decision no. COMP/M 3295 of November 10, 2003), the US authorities (the period for review ended on November 7, 2003 without any comments having been made) and the South African authorities (the transaction was authorized by a decision issued on November 18, 2003).
We were informed that the French Financial Markets Authority (Autorité des Marchés Financiers) had been asked to confirm the lack of any concerted action by the Schlumberger and Philips Groups; we were not aware of the Financial Market Authority's decision at the time of issuing this report.
To date, we have not been informed by any of the parties of the occurrence of an exceptional event liable to affect the closing of the transaction.
As regards the pre-closing obligations of each of the parties, we have not received any information or indications to date that lead us to believe that these obligations may not be fulfilled or that the date of closing of the transaction cannot be maintained at January 22, 2004.
In this respect, Atos Origin’s general shareholders’ meeting has been convened for January 22, 2004 for the purpose of approving the contribution discussed in this report.
The draft of the fourth resolution put to the vote of Atos Origin’s shareholders specifically grants powers to the Management Committee or its Chairman to pursue the contribution transaction through to final closing and in particular, to record the fulfillment of the conditions precedent and pre-closing obligations prior to the closing of the transaction, as provided for in the Master Agreement and included in the contribution agreement.
3.2.2 Comments on the consequences of the contractual conditions between the parties on the value of the contribution
The addendum to the contribution agreement dated January 5, 2004 applies the price adjustment mechanism provided for in the Master Agreement to the contributed shares, with Atos Origin being required to set the terms and conditions in order to maintain the value of the contribution for this amount.
The warranties granted by Schlumberger, which include minimum and maximum thresholds for payment and the time periods, appeared to us to be standard in this context. In addition, any events that arise prior to the final closing of the acquisition which Schlumberger does not bring to the attention of Atos Origin remain Schlumberger’s responsibility.
Furthermore, in addition to the information that was shared between the parties in the phase prior to the signing of the Master Agreement, it was deemed necessary to reserve the right for each party to terminate its commitment if an exceptional event affecting their respective businesses were to occur.
3.3 Assessment of the valuation of the acquired businesses
The valuation of the entire acquired business was conducted by Atos Origin’s management on behalf of the parties to the contribution agreement, based on information provided by Schlumberger. Three main methods were applied in relation to the Sema Companies: • the discounted future cash flow method, • an analysis of valuation multiples for the industry, • the comparable transactions method.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 58/233
3.3.1 Assessment of the choice of methods used
(i) Intrinsic valuation method (or discounted cash flow method)
From a methodological standpoint, this method allows the strategic, economic and financial components, as well as the growth prospects for the entity being valued, to be taken into account. However, it assumes that cash flows during the period of the forecasts and the estimated terminal value at the end of this period are adequately substantiated by reliable forecast data.
We have no specific observations to make as regards the choice of this method applied by the parties.
(ii) Analogical method
The analogical method of valuation is normally used to validate the values obtained by the intrinsic valuation methods.
The advantage of this method is that it reflects the opinion of the market at a given time. However, it may in fact lead to operators carrying out self-referenced valuations, which often bear no relation to the changes in the core valuation parameters regarding the companies concerned.
In order to be able to use this method, there must be a benchmark sample presenting the highest possible degree of homogeneity with the companies involved in the transaction in question (similar-sized companies operating in the same business sector as the parties to the transaction, and similar geographical markets, financial structures and growth prospects).
It also means that the valuation multiples used should not differ to a large extent, and must even be relatively similar.
This method was used by the parties for the purposes of supporting the intrinsic valuation method, using the forecast consolidated figures for the 2004 fiscal period only.
We have no specific observations to make regarding the choice of this method, which is used as an additional method.
3.3.2 Assessment of the valuation using the discounted cash flow method
A. Consistency and assessment of the cash flow forecasts
The estimates were prepared on the basis of the management financial statements as of December 31, 2002 and June 30, 2003 that were provided to Atos Origin during the negotiation phase (i.e., drawn up for the purposes of the acquisition). These financial statements were prepared by Schlumberger on the basis of the rules and management accounting system existing in the Schlumberger Group, taking into account, in particular, estimates regarding the business activities falling outside the scope of the acquisition.
In view of the geographically diverse locations of the entities concerned, no consolidated financial statements were available for the Sema Companies at the time the Master Agreement was signed. Pro forma financial statements for the financial period ended December 31, 2002 and the interim financial statements as of June 30, 2003 were drawn up after the signing of the Master Agreement and are included in Document E (Section C4).
These pro forma financial statements for the period ended December 31, 2002 and the interim financial statements as of June 30, 2003 were reviewed by Schlumberger’s auditor, PricewaterhouseCoopers, in accordance with the professional standards laid down by the French National Statutory Auditors Board with respect to pro forma financial statements. As was observed by PricewaterhouseCoopers in its reports on SchlumbergerSema’s combined financial statements, historically, SchlumbergerSema was a division which consisted of a number of Schlumberger Limited’s subsidiaries. Consequently, the combined financial statements were drawn up on the basis of the consolidated financial statements and accounting records of Schlumberger Limited and include many construction and allocation assumptions. Furthermore, Schlumberger Limited and its subsidiaries provide SchlumbergerSema with certain administrative and management services. Therefore, the combined financial statements presented do not necessarily reflect the financial position and results of operations as though SchlumbergerSema had been an independent entity during the period in question.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 59/233
These pro forma financial statements were established on the basis of US accounting standards and the principles applied by the Schlumberger Group. The main differences between the US and French accounting standards concerning net revenues and equity were reviewed by Schlumberger's auditor and did not demonstrate any items which could have a significant impact on future cash flow. However, while the identification of these differences was carried out by Schlumberger, the application of French accounting standards could differ from the methods applied by the Atos Origin Group in establishing these accounts.
We compared the amounts of revenue, operating income before taxes, shareholders’ equity and working capital requirements reported directly in the internal management financial statements with these pro forma financial statements. The variances identified were accounted for and we do not consider them likely to call into question the estimates of future cash flow.
A number of observations should also be made regarding the estimates as to the level of business for the 2003 financial period and the following periods, as well as estimates relating to balance sheet items (shareholders’ equity and calculation of working capital requirements) on which the calculation of future cash flows was based:
• The modeling exercise conducted by Atos Origin’s management on behalf of the parties is based on estimated forecast data covering an extremely short time-period (FY 2003 and 2004), which has been extrapolated for subsequent periods. • These estimates were assessed overall for the entire acquired business, but no analysis by geographical market or service line was carried out, as Atos Origin’s management considered that a global assessment could be made of the forecasts. In light of the objective being pursued, we considered this an acceptable position. • In addition to the contingencies inherent to any forecast, the construction of the business plan is based on a number of assumptions which, in our opinion, lead to the following risk factors:
The cash flows assume that all customer agreements in force will be renewed or extended. The downward pressure on prices generally expected to be exerted by customers does not appear to affect the overall expected profitability. The future cash flows assume a reduction in overheads regarding Sema’s businesses. These future cost savings were quantified by Atos Origin’s management on the basis of meetings with Schlumberger’s management and taking into account their own reference data. The extent to which these future cost savings will be achieved will depend on the speed with which Atos Origin is able to put in place the desired cost structure in the Sema Companies. The cost savings resulting from the restructuring measures in progress, the cost of which is to be borne by Schlumberger, were considered to have been achieved. These are mainly based on the savings estimated by Schlumberger in relation to the 2003 restructuring plan, which will only be reviewed by Atos Origin at a later date. As regards the pension commitments in the UK, the difference between the value of the pension fund assets and the actuarial value of said commitments as assessed by the actuary firm, Towers Perrin, amounts to GBP 207 million (approximately € 300 million), in respect of which a provision was set aside for an amount of USD 126 million (approximately € 10 million) in the pro forma financial statements as of June 30, 2003. This shortfall in the provision is mainly the result of the loss in value of funds invested in shares. Atos Origin’s management estimated the risk of an increase in contributions at a maximum amount of € 10 million/year, which, according to the Master Agreement, will be shared between the two parties. The actual increase will only be known in 2004 following the actuary’s valuation of the pension fund, and the overall amount of commitments will be recognised in the opening balance sheet for the acquired business, which therefore leads to a difference in relation to the pro forma combined financial statements presented. The annual growth rate for revenues in the medium-term was estimated at between 2% and 3% and was consistent with the current forecasts of most industry analysts.
Therefore, these fairly proactive assumptions point to a significant, rapid improvement in the financial performance of the Sema Companies as from 2004 onwards, which appears to suggest that the Group’s profitability in 2005 will be on a par with the profitability expected by analysts for comparable companies. In our opinion, this risk factor as well as the exposure for additional contribution to the pension fund in the UK has to be taken into consideration in our assessment of the discount rate.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 60/233
B. Assessment of the discount rate used
The technical calculation of the discount rate is based on "traditional" assumptions such as the industry risk coefficient, the risk-free asset rate, size premiums and stock market risk premiums, the "normative" tax rate and financial leverage.
We consider that the sampling criteria on which the valuation of the contribution is based for calculating this rate could not be considered free from criticism for their lack of homogeneity.
Therefore, we have prepared our own comparable sample of companies from the industry, firstly, by making a distinction between US and European players, and secondly, by identifying a restricted sample of European players, whose main operational and financial characteristics appear to achieve a greater degree of homogeneity with those of the Sema Companies (attractive positioning in the public sector, high degree of recurrence with respect to revenues, positive organic growth and margins lower than 5%).
On the basis of our work, we applied an industry risk coefficient excluding leverage of 1.49, compared to 1.40 used by Atos Origin’s management, which we were able to corroborate with the standard coefficients used by industry analysts (1.50).
The risk-free rate applied by Atos Origin’s management is the risk-free rate in force on the US market (4.40%), whereas we believe the appropriate rate to be used in light of the location of the Sema Companies’ operations in Europe and in particular in the UK, is the rate of return on government bonds in the UK (4.63%).
Moreover, in light of the size of the stock market sample and the uncertainty as regards the recovery of the Sema Companies’ financial performance in the current environment, we considered that a size premium should be envisaged.
The stock market premium applied by Atos Origin’s management (4.20%) is not in line with our assessment of the normal premiums currently used in the sector and the premium amounts applied by financial analysts. We decided to increase this premium to 4.50% (premium applicable to the euro zone).
We have no specific observations to make as regards the normative tax rate used (33%).
Finally, the financial leverage used by Atos Origin’s management (25%) appears to us to reflect the expected level of indebtedness required to finance the transaction. We preferred to use the normative financing structure observed for the IT services market. Our sampling work resulted in a normative leverage rate of 9.3%.
Based on our analysis, we would apply a basic discount rate of 10.9% (compared to a rate of 10% applied by Atos Origin), which we believe to be more in line with the benchmark rates applied by industry analysts.
C. Assessment of the terminal value (future cash flow forecasts from 2013 onwards)
On the basis of the modelling assumptions used by Atos Origin’s management with respect to the period 2008- 2013, it appears that the Sema Companies will have reached "maturity" as from 2008 onwards and that the terminal value should therefore be calculated on the basis of the cash flow generated this last period.
D. Sensitivity analysis
Our work leads us to consider that the total value of the Sema Companies is between € 1,435 million and € 1,559 million using a basic discount rate of 10.9% which should be compared with the value stated in the schedules to the contribution agreement, calculated in accordance with this method (€ 1,492 million), using a discount rate of 10%.
In order to take into account the risk factors mentioned in paragraph A above, we consider it prudent to increase the discount rate to 11.8%, which would result in a value based on this method for Sema’s entire business of between € 1,303 million and € 1,401 million.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 61/233
3.3.3 Assessment of the application of the comparable companies method
Certain companies selected in the sample of comparable companies used by Atos Origin’s management are characterised by either their position as leaders or by their medium size and profitability levels in excess of those posted by the Sema Companies, whereas other companies are not comparable in terms of customer profile, geographical coverage and/or scale of operations.
The analyses carried out by Atos Origin relate to multiples of revenue, EBITDA/EBITA1 and net earnings for FY 2004 only, considered as a "normative" year. These multiples were shown in notes drawn up by analysts on each of the companies included in the samples.
We recalculated the multiples on the basis of our own samples as described in the previous section and based on the restated forecasts using the average stock market price assumption for September 2003. We extended our analysis to include forecasts for the period 2003 to 2005 and we also took into account what is commonly referred to as an "illiquidity" discount of between 15% and 20% in order to reflect the Sema Companies’ low level of capital liquidity as compared to the listed companies included in our samples.
Based on the above, we obtain a range of values of between € 1,091 million and € 1,378 million which should be compared with the value stated in the schedules to the contribution agreement, calculated in accordance with this method (€ 1,869 million).
3.3.4 Assessment of the application of the comparable transaction multiples method
In light of the difficulties inherent to the confidential nature of the transactions, which prevents us from having full knowledge of the amount of the control premiums granted by the purchasers, we were only able to use this method to corroborate the valuations obtained using the afore-mentioned approaches.
Our work involved a review of the samples provided to us by Atos Origin in order to separate out those transactions involving advisory activities, which generate a higher operational margin than that generated by a company offering a variety of services.
These analyses do not call into question the findings obtained from the methods implemented previously.
3.3.5 Conclusion regarding the valuation of the entire Sema business
As a result of our work using the approaches described above, we propose a range of values of between:
€ 1,091 million and € 1,401 million for the Sema Companies
The value applied by the parties for the entire Sema business acquired is € 1,287 million, which falls within our own value range.
3.4 Assessment of the valuation of the contribution itself
3.4.1 Assessment of the choice of methods used
Atos Origin used a multi-criteria approach based around the discounted cash flow method and the market comparables method to be applied to the two transaction scopes, Sema Ltd and Sema S.A. We have no specific observations to make as regards the choice of methods used.
1 EBITDA: Earnings before Interest, Taxes, Depreciation and Amortization. EBITA: Earnings before Interest, Taxes and Amortization.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 62/233
3.4.2 Assessment of the financial data used for reference purposes
A. Observations regarding the management financial statements
The business plans for the scope of activity of both Sema S.A. and Sema Ltd were drawn up on the basis of management accounting data broken down by geographical area, known as a "geomarket" (UK geomarket for Sema Ltd and France, Spain and Sweden geomarkets for Sema S.A.). This geographical allocation was made in accordance with the management rules in place within the Schlumberger Group to monitor the performance of each operating unit.
Inevitably, this allocation is different from that resulting from the scope of consolidation defined by the sub- groups, Sema S.A. and Sema Ltd. Therefore, the allocation of value carried out on the basis of analyses of management accounting data is based on certain principles adopted and on the rules and allocations provided for by the agreements in force as of June 30, 2003 that are liable to be modified.
The management accounting data pertaining to these two transaction scopes was, however, reconciled with the data used in connection with the entire business acquired and the variances observed could be accounted for.
B. Observations regarding the pro forma financial statements (combined financial statements)
The accounting data regarding these two transaction scopes used to draw up the Sema Companies’ pro forma financial statements was reconciled with the management accounting data mentioned above and the variances observed were accounted for.
As mentioned in paragraph 2.1.3, Sema S.A. and Sema Ltd hold shares in various companies falling within the scope concerned by the transaction.
We reviewed the auditors’ reports on the statutory financial statements for the financial period ended December 31, 2002 of the main companies falling within these two transaction scopes and did not identify any limitation or observation liable to call into question the historical individual financial statements. We have no specific observation to make regarding the review of Sema S.A.’s auditors’ working papers Although we did not have access to the working papers of the auditors of Sema Ltd and its subsidiaries, we were nevertheless able to review a summary of their work and their opinions.
The pro forma financial statements for the transaction scopes of Sema S.A. and Sema Ltd were drawn up in order to obtain a consolidated picture of the financial performance of the two companies and their subsidiaries for the financial periods ended December 31, 2002 and June 30, 2003. These financial statements, drawn up by Schlumberger Sema’s management, are currently being reviewed by PricewaterhouseCoopers.
Our analyses regarding the reconciliation of these financial statements with those used for the purposes of the valuation confirm that the scope used in the management financial statements differs significantly from the scope of consolidation (certain activities falling within the legal scope of consolidation are reported in the management financial statements in different geographical areas) Therefore, the allocation of value carried out on the basis of the analyses of the management financial statements is based on the rules and allocations provided for by the agreements in force as of June 30, 2003 that are liable to be modified.
Differences in the allocation of the value between the shares being contributed and the shares acquired in cash which could result from the use of this approach did not appear to us to have a major impact on the value of the contribution.
3.4.3 Assessment of the valuation using the discounted future cash flow method
A. Assessment of cash flow forecasts
Our observations regarding the assumptions set out in paragraph 3.3.2 can also be applied to the calculation of the contribution values.
Moreover, it appears preferable to us to use an approach which takes into account the overheads allocable to the contributed businesses, insofar as the support functions generating these overheads appear to be essential from the standpoint of the company’s ability to continue as a going concern.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 63/233
Finally, the business plans for the France and UK transaction scopes have not been reconciled with the overall business plan, as the historical data used as a basis for the preparation of the business plans was based on this same information.
B. Assessment of the discount rate
The calculation of the discount rate is based on assumptions similar to those mentioned above for the overall valuation (financial leverage, stock market risk premium, industry risk coefficient, tax rate).
The industry risk coefficient to be used as a reference is the coefficient obtained previously; however, our additional sampling work results in average industry risk coefficients excluding leverage of 1.51 and 1.44 for the UK and France transaction scopes, respectively.
The risk-free rate applied by Atos Origin (4.08%) was established by reference to the market rate. For our part, we considered it preferable to apply the local risk-free asset rate, in light of the location of each entity’s operations (UK: 4.63%, France: 4.23%).
A number of financial leverage scenarios (between 0% and 43%) were drawn up by Atos Origin’s management; we preferred to limit the analysis to the "normative" financing structure for the IT services industry based on sampling work, used as a basis to calculate the industry risk coefficient. Therefore, our financial leverage indicators stand at 1.1% and 10.9% for the UK and France transaction scopes, respectively.
The "normative" tax rate is the same for each transaction scope (33%). In order to take into account local taxation, we applied different tax rates of 30% and 33.7% for the UK and France transaction scopes, respectively.
Finally, Atos Origin’s management applied the same stock market premium to each transaction scope (4.20%). The same observations as those set out above also apply to this rate.
Our analysis thus leads to an increase in the central discount rate used by Atos Origin’s management (10%) and to a different rate being applied to each transaction scope (UK: 11.3%, France: 10.4%).
C. Assessment of the terminal value (cash flow forecasts for 2013 onwards)
On the basis of our analysis of the business plan for each transaction scope, we consider that the UK transaction scope of Sema S.A. will have reached a "maturity" phase in its development cycle from 2008 onwards, whereas the France transaction scope could still show a significant residual growth potential at said time.
Whereas Atos Origin’s management calculated the terminal value of each transaction scope in 2013, we calculated the terminal value on the basis of the cash flows generated in 2008 by applying a weighting different to that of the three models normally used to calculate the terminal value for each transaction scope, in order to take into account its degree of maturity at said point in time.
D. Sensitivity analysis and conclusion
Based on our work, the median value of 99.9% of Sema S.A.’s shares and of 97.8% of Sema Ltd’s shares stands at € 262 million and € 604 million, respectively, applying discount rates of 10.4% and 11.3%, whereas the values indicated in the schedules to the contribution agreement are € 319 million for Sema S.A. and € 733 million for Sema Ltd, using the discounted cash flow method.
In order to take into account the risk factors specific to each transaction scope (as listed above), the uncertainties as regards the extent to which the business plans will be achieved and the speed with which margins will recover, we finally decided to increase the discount rates to 10.7% and 11.5% conservatively, which gives a range of values of between
€ 230 million and € 275 million for 99.9% of Sema S.A.’s shares and between €550 million and € 630 million for 97.8% of Sema Ltd’s shares.
3.4.4 Assessment of the implementation of the comparable companies method
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 64/233
Certain companies selected in the samples of comparable companies used by Atos Origin’s management have financial and operational characteristics that we consider to differ from those of the two transaction scopes.
In our sampling work for the two transaction scopes, we used:
• a "general" European sample, which was used as a basis for the multiple regression analyses; • a restricted sample specific to each transaction scope, composed of local competitors (France and the UK)
The analyses carried out by Atos Origin relate to multiples of revenue, EBITDA/EBITA and net earnings for FY 2004 only, considered to be a "normative" year. These multiples were shown in notes drawn up by analysts on each of the companies included in the samples.
In light of the significant disparity in the values observed within the scope of the comparables-based approach, and insofar as the financial data used for reference purposes (2003 to 2005) does not reflect a normative future profitability profile inasmuch as it is impacted to a large extent by the restructuring measures in progress, we limited our analysis concerning Sema S.A. to the comparable figures alone.
Based on the above, we obtain the following ranges of values:
between € 220 million and € 233 million for 99.9% of Sema S.A.’s shares, between € 527 million and € 563 million for 97.8% of Sema Ltd’s shares.
3.4.5. Comparable transaction multiples
Our work does not call into question the findings obtained from the methods used by Atos Origin’s management.
3.5 Conclusion regarding the value of the contribution
Our work, based on a multi-criteria approach (discounted cash flow and market comparables), can be summarised as follows:
Our multi-criteria approach Values as per Discounted cash Comparable Range of the contribution flow method value agreement (in millions of €) Sema, S.A. (99.9 %) 259,2 230 – 275 220 – 233 220 - 275 Sema, Ltd. (97.8 %) 613,9 550 – 630 527 – 563 527 - 630 873,1 757 - 905
The total value specified in the contribution agreement (€ 873.1 million) thus falls within the upper part of the value range resulting from our calculations.
However, we point out that the comparable method used as an additional analysis demonstrates slightly lower values, but which are consistent.
Based on our work, we conclude that the value of the contribution provided for, i.e. € 873.1 million, is not overestimated and that consequently, it is at least equal to the amount of the capital increase in the company receiving the contribution, plus the contribution premium.
4. Work carried out and assessment of the equitable nature of the overall remuneration for the transaction, and hence, of the remuneration for the contribution
We carried out the review we deemed necessary in accordance with the standards set forth by the French National Statutory Auditors Board in order to assess the remuneration for the transaction as a whole, and hence, the remuneration for the contribution.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 65/233
4.1 Additional work carried out to assess the remuneration for the transaction
• We met with the Atos Origin Group’s statutory auditors, Deloitte Touche Tomashu and Grant Thornton, and reviewed their working papers pertaining to the consolidated financial statements as of December 31, 2002 and June 30, 2003, the last date of review by the statutory auditors; we ensured that said financial statements had received a certified opinion with no qualifications or observations. • We reviewed the valuation work regarding the Atos Origin Group, carried out by the company’s management in conjunction with the bank acting as its advisor, Lehman Brothers, in order to assess the consistency of the valuation methods used and their degree of homogeneity as compared with the methods previously used in relation to the Sema Companies. • We assessed the relevance of the assumptions used to draw up Atos Origin’s business plan, in particular through an analysis of sector-related information. • In order to support the remuneration figure applied, we also assessed the value of Atos Origin using homogenous and additional methods (discounted cash flow, market comparables) and we corroborated the relevance of such methods using comparable transactions. • We obtained for the management of Atos Origin and Schlumberger letters of representation, relating, in particular, to the events occurring between June 30, 2003 and the date of preparation of our report, as well as the completeness of the information provided within the scope of this transaction.
4.2 Assessment of the valuation used for Atos Origin
4.2.1 Main comments regarding the reasons for and objectives of the transaction
Size of the business has undoubtedly become a key factor for success in the IT market. In this respect, a growing number of mergers and acquisitions took place in 2002 and 2003, including, for example, HP-Compaq, IBM- Price Waterhouse, CAP-Ernst & Young Conseil-Transiciel. In order to remain a major force, a company needs to ensure it remains among the leading players of its industry at a national level.
The strengths of the Sema Companies differ from one country to another: • In the UK, Sema has a strong foothold in the public procurement market, as well as in the facilities management and Business Process Outsourcing markets, • In France, Sema has a strong regional presence as well as a presence in the application maintenance market, • In Italy, Sema has a solid foothold in the telecommunications market, In Spain, Sema has a strong position in the financial market.
As is the case with Atos Origin, a characteristic feature of the Sema companies is the existence of a number of major contracts (the 15 largest customers account for approximately 34% of revenues). The continuation and development of these contracts are very closely linked with the quality of service and the management of the key resources associated with the service.
As the number of its employees has increased from 27,000 to 50,000, Atos Origin will now be a top-ranking competitor in the following main European countries: France, the UK, the Benelux countries, Italy and Spain.
This position means that the loyalty of Atos’ and Sema’s customers can be secured and also opens the door to competing for invitations to tender launched on an international scale by major, industrial and public sector companies.
We understand that the proposed acquisition does not lead to any change in the balance between the different lines of business (facilities management, systems integration, application maintenance and advisory services).
There does not appear to be a significant concentration of the major customers between the two companies. If the companies manage to secure customer loyalty, net earnings will increase. However, some customers are particularly important to income.
An analysis of the main business indicators such as productivity rates, order backlog and the portfolio at the time of the acquisition shows similar results for Atos Origin and Sema, in line with market standards.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 66/233
One third of the acquired business is located in countries where Atos Origin does not hold a dominant market position and these diverse geographical locations could prove costly in terms of management, even if they provide opportunities for additional growth. In Germany, in particular, Atos Origin will remain too small for it to be considered a major player there.
4.2.2 Comments regarding the valuation of Atos Origin shares.
4.2.2.1 Assessment of the choice of method used
Atos Origin’s management based its valuation analysis only on the average stock market price for the Atos Origin group’s shares over the 20 trading days preceding the date the transaction was announced Although we consider this method to be appropriate in the present case in light of the Group’s listing on an organised market and its regular monitoring by the financial community, the fact that a relatively small portion of its capital is floating capital (35%) in relation to other IT service companies at European level, prompted us to apply complementary valuation approaches, in line with those used to value the contributions.
4.2.2.2 Observations regarding the application of the method
In light of the volatility observed in the IT services market in the last two weeks of August and September due to rumours of a link-up, we limited the period to be used for reference purposes to the first fifteen trading days of September 2003.
This gives an average price of € 45.37 per share of Atos Origin, compared to € 45.95 as applied by Atos Origin’s management, i.e. a market capitalisation for Atos Origin of € 2,165 million, which remains largely similar to the figure used by its management (€ 2,192 million).
4.2.2.3 Presentation and summary of our additional work
The methodological framework that was previously applied to review the valuation of the Sema companies, was also applied to the Atos Origin group.
A. Implementation of the discounted cash flow method.
This method was implemented on the basis of the 10-year business plan drawn up by Atos Origin’s management.
In addition to the uncertainties inherent to any forecasts, the construction of the business plan is based on the following core assumptions: • relatively stable revenue growth of between 2% and 3%; • a conservative increase in the rate of operating margin.
We carried out our own sampling work in the IT services sector and were thereby able to determine the following discount rate components: • An industry risk coefficient, excluding leverage, of 1.35. • An average risk-free asset rate in France (September 2003) of 4.23%. • An average size premium of 0.21%. • A stock market premium identical to that used in the valuation of the Sema companies (4.50%, applicable to the euro zone). • An effective tax rate for the Group (30%) was deemed to be relevant within the scope of this exercise.
Based on the various scenarios used for calculating financial leverage, our analysis results in a discount rate of 10.1% being considered.
We considered that the Group will have reached the maturity phase in its development cycle in 2008 and that the terminal value can therefore be based on the cash flows for this period.
Based on the above, and in light of certain risk factors associated, in particular, with the extent to which the recent acquisition of KPMG Consulting can be integrated successfully and with the geographical concentration of the group’s activities in mature countries of the euro zone, we considered it more conservative to apply a basic discount rate of between 9.85% and 10.35%, which results in a valuation for the Atos Origin Group of between
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 67/233
€ 2,093 million and € 2,518 million, i.e. a value of between € 43.86 and € 52.77 per share.
B. Implementation of the stock market comparables method
In the same way as for our work regarding the Sema Companies, and on the basis of our own samples, we constructed a restricted sample taking into account the particular characteristics of Atos Origin (low public sector presence, guaranteed presence in France and in the Benelux countries, highly leveraged financial structure and expected short-term margin levels of more than 9%).
Based on the forecasts for the period 2003 to 2005 applied to multiples of revenue, EBITDA/EBITA and net earnings, we obtain a range of values for the Atos Origin Group of between
€ 2,269 million and € 2,644 million, i.e. a value of between € 47.56 and € 55.42 per share.
C. Implementation of the comparable transaction multiples method
As discussed in the section regarding the valuation of the Sema companies, we were only able to use this method to corroborate the valuations obtained by using the approaches described above.
Our work does not call into question the findings obtained from the methods previously implemented.
D. Assessment of the savings expected to be generated by the transaction
The cost savings resulting from the simplification of the future organisation in terms of the individual organisation of the companies as well as the operating structures, improvement of operating performances and productivity, streamlining of production centres, rationalisation of premises and non-productive indirect costs, and the reduction in overheads.
Atos Origin’s management estimates that cost savings of more than € 200 million per year could be gradually achieved between now and two years’ time.
The valuation of these synergies remains closely linked with the ability to successfully integrate the Sema Companies into the Atos Origin group; this ability was demonstrated by the successful link-up within the Atos Group in 2000. It should be pointed out that we did not take these synergies into account in calculating the remuneration for the contribution in light of the difficulties in quantifying the impacts generated by such synergies with any reasonable degree of accuracy.
However, our analysis work on the combined discounted cash flow of Sema and Atos Origin does, in fact, point to the possibility of achieving reasonable cost savings.
E. Conclusion regarding the valuation of Atos Origin
Our work, based on the approaches described above, results in a range of values for Atos Origin of between
€ 2,093 million and € 2,644 million, i.e. € 43.86 and € 55.42 per share,
Atos Origin’s management having applied an overall value of € 2,192 million, i.e. a value of € 45.95 per share.
4.3. Assessment of the remuneration for the transaction
Due to the differences in the assessment of the methods and parameters used within the scope of the valuation of the transferred business and Atos Origin, we reapplied the results of our work for each of the methods applied.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 68/233
4.3.1 Assessment of the remuneration for the entire Sema business transferred
Our analysis of the remuneration for the transferred business can be summarised in the table below (all figures in millions):
Values fixed Our approach by the Discounted cash flow Stock Market Comparables parties Valuation of the Between and Between And remuneration Atos Origin Valuation of the 19,000,000 EUR 873 EUR 833 EUR 1,003 EUR 904 EUR 1,053 shares to be issued Valuation of the 300,000 EUR 14 EUR 13 EUR 16 EUR 14 EUR 17 treasury shares Cash payment EUR 400 EUR 400 EUR 400 EUR 400 EUR 400 Total of the remuneration EUR 1,287 EUR 1,246 EUR 1,418 EUR 1,318 EUR 1,470 To be compared to Valuation of the acquired EUR 1,287 EUR 1,303 EUR 1,401 EUR 1,091 EUR 1,378 business
The variances, between the remuneration and the valuation of the acquired business appear to be acceptable for Atos Origin’s current shareholders for the following reasons: • The stock market comparables approach results in a remuneration figure situated in the upper limit of the range, but remains consistent, the comparison of the central values from this approach shows an over remuneration limited to 11%. • The discounted cash flow approach, which we consider should be favoured, results in a remuneration comprised between EUR 1,246 million and EUR 1,418 million.
Therefore, in our view, the remuneration is acceptable.
4.3.2 Assessment of the remuneration for the contribution itself
We obtained the following remuneration figures based on our various approaches:
Our approach on discounted cash flow
Remuneration (Atos Origin) Contribution value Value per share Range of number of (millions) shares to be issued Between and Between and Between And Sema, 99.90% EUR 230 EUR 275 EUR 43.86 EUR 52.77 4,358,537 6,269,950 S.A. Sema, 97.80% EUR 550 EUR 630 EUR 43.86 EUR 52.77 10,422,589 14,363,885 Ltd. EUR 780 EUR 905 14,781,126 20,633,835
Our approach on the comparable method
Remuneration (Atos Origin) Contribution value Value per share Range of number of (millions) shares to be issued Between And Between And Between and Sema, 99.90% EUR 220 EUR 233 EUR 47.56 EUR 52.42 3,696,686 4,899,075 S.A. Sema, 97.80% EUR 527 EUR 565 EUR 47.56 EUR 52.42 9,563,335 11,879,731 Ltd. EUR 747 EUR 800 13,533,021 16,778,806
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 69/233
We set out below the findings of our work:
• As regards the discounted cash flow method used to value the contribution, the 19.0 million shares to be issued fall within the upper limit of the range presented above (between 14.4 million and 20.6 million shares). • As regards the stock market comparable method, the number of shares to be issued exceeds the range obtained, which shows that based on the analysis of the central form this method, an over-remuneration of 20%. • This analysis should be mitigated by the following facts:
By construction, the remuneration for the contributed business was allocated to the shares being contributed by valuing the two transaction scopes (Sema S.A. and Sema Ltd) taken individually; the valuation of the other shares acquired in cash thus being obtained based on the difference between the valuation of the acquired business and the valuation of the contribution Therefore, the valuation of the contribution is to some extend based on certain arrangements between the parties as it did not include a specific valuation of the shares paid for in cash. The cost synergies expected to be generated by Atos Origin were deliberately not taken into account but should naturally have a positive effect on the countries in which the Sema and Atos Origin Groups have a strong presence (the UK, France, Spain and Italy).
The proposed remuneration figure is acceptable to us taking into consideration the foreseen growths and cost savings resulting from this merger, the positioning of the remuneration figure of the contribution agreement showing the implied acceptance of a control premium and the sharing of the synergies expected to be generated.
5. General conclusion
We carried out the procedures we deemed necessary within the scope of the assessment of the value of the contributions and the remuneration. The following observations can be made as a result of our work:
5.1 Emphasis
5.1.1 Emphasis as regards the implementation of the Master Agreement
The transaction submitted for the shareholders’ approval relates to the acquisition of Sema’s businesses, as defined in the Master Agreement and for which the remuneration includes 19.0 million new shares to be issued, 0.3 million treasury shares provided as payment and an amount of € 400 million payable in cash.
Consequently, the contribution transaction is an inseparable part of the transaction as a whole and the remuneration by means of the issue of new shares is only one of the methods of payment for the entire business acquired.
The reorganization and restructuring provided in the Master Agreement have two principal consequences on the transaction:
• Firstly, the realisation of the transaction is submitted to the fulfilment of the conditions precedent set out in section 1.5.5 of this report. As of the date of our report, this process is still in the process of being finalised. • Secondly, there were no historical consolidated financial statements for the Sema businesses that were acquired. The pro forma financial statements subsequently were drawn up in respect of certain assumptions and allocation criteria. By construction, these financial statements do not reflect the financial position and results of operations, as if acquired business had been independent entities during the historical reference periods. Furthermore, they were established on the basis of accounting principles that were not those of the Atos Origin Group. • In order to guarantee certain value indicators with regard to the assets transferred, the parties have put into place a price adjustment mechanism involving a number of financial ratios (net debt, working capital requirements, net assets) at the date of completion of the transaction, as compared to the reference values contained in the Master Agreement. An addendum to the contribution agreement applies this mechanism to the contribution in order to allow, wherever necessary, any potential variations liable to affect the values used in the contribution agreement to be offset for the same amount. The most appropriate methods to be used regarding the performance of the agreement remain to be defined by Atos Origin’s management.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 70/233
5.1.2. Emphasis of the assessment of the value of the business transferred and of the contribution
The valuation work was carried out by Atos Origin’s management on behalf of the parties based on the information provided by Schlumberger during the period prior to the signing of the Master Agreement. The use of an independent appraiser to review the assumptions applied was not deemed necessary.
The valuation carried out using the discounted cash flow method involves a certain number of contingencies inherent to all forecasted data, and is based on certain assumptions that (i) business activity is maintainable (ii) a reasonable growth (iii) a rapid return to a level of profitability similar to that posted by other market players (before taking into account all possible synergies).
The method of valuation of the businesses contributed, as applied by the parties results in an amount of € 1,287 million to be invested, compared to net assets of € 587 million as of June 30, 2003, i.e. a difference of a minimum of approximately € 700 million. The resulting goodwill prior to the adjustment of the opening balance sheet relates to the valuation of intangibles associated with the portfolio of agreements, the resources allocated thereto and the capacity of the Sema companies to maintain and develop their businesses.
The success of the transaction and the maintenance of the valuation of the underlying intangibles will thus be based to a large extent on the ability of Atos Origin’s management to rapidly integrate Sema’s businesses into its organisation, while preserving the value components.
Finally, the allocation of the value to the two businesses (Sema S.A. and Sema Ltd) to be contributed was carried out based on certain arrangements between the parties: i) the computation of the value carried out relies on management financial statements established on certain rules and allocations that prevailed June 30, 2003, these assumptions are liable to be modified. ii) The assessment of the shares was driven by the value of the acquired business without seeking to specifically value the shares acquired in cash.
5.1.3 Observations on the remuneration for the acquired businesses and for the contribution
The proposed remuneration for both the overall transaction and the contributions alone is supported by a valuation carried out using a number of approaches for the acquired business and is based on solely on the market share price for Atos Origin.
The remuneration proposed for the contribution takes into account the foreseen growth and the costs savings expected from this merger due to the fact that the positioning of the remuneration is situated in the upper part of the range of the remuneration when comparing the contribution agreement value and the range of values resulting from our approach.
5.2 Conclusions
5.2.1 Conclusions on the value of the acquired business and the value of the contribution
The value of the businesses acquired (i.e., € 1,287 million) falls within the range of values resulting from our analyses (between € 1,091 million and € 1,401 million).
Secondly, the value of the contribution as shown in the contribution agreement (€ 873 million) falls within the range of values that we were able to establish (between € 757 million and € 905 million).
On the basis of our work, we conclude that the contribution value which amount to € 873.1 million is not overestimated and that consequently, it is at least equal to the amount of the capital increase in the beneficiary of the contribution, plus the contribution premium.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 71/233
5.2.2 Conclusions on the remuneration of the acquired business and the contribution
We are of the opinion that: • The proposed remuneration for the overall transaction (19.3 million shares and an amount of € 400 million) is equitable; • The remuneration for the contribution, consisting of 99.9% of Sema S.A.’s shares and 97.8% of Sema Ltd’s shares by means of the issue of 19.0 million new Atos Origin shares, is equitable.
January 14th, 2004 The contribution Auditors
Philippe QUINCY François CARREGA Audit Conseil Stratégie Ernst & Young Audit 7, rue d'Aguesseau 41, rue Ybry 75008 Paris 92576 Neuilly-sur-Seine Cedex
Statutory Auditors Statutory Auditors Member of the Paris Regional Company Member of the Paris Regional Company
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 72/233
A.2.5 REMUNERATION OF THE CONTRIBUTIONS
A.2.5.1 CAPITAL INCREASE With due regard to the parities opted for and the scope of the contribution decided upon by Atos Origin and Schlumberger, the contributions shall be compensated for by the issue of a total of 19,000,000 Atos Origin ordinary shares. This number is in line with the number given in the Contract and in the contribution agreement.
As a result, the equity capital of Atos Origin shall be increased in the following proportions:
• Par value: 1 euro • Net number of shares created: 19,000,000 • Date from which interest begins to run: January 1, 2003, the new shares issued giving rise to a dividend in respect of Atos Origin’s profits in 2003. If the transaction is carried out after the annual shareholders meeting of Atos Origin convened to approve the financial statements for the 2003 financial year, the new shares issued shall not give rise to a dividend in respect of Atos Origin’s profits in 2003. • Negotiability date: on Closing Date scheduled on January 29, 2004 • Date of admission to listing: as soon as possible on the Premier Marché of Euronext Paris - should Closing Date be on January 29, 2004, shares may be listed as of February 2, 2004 (i.e., 2 stock exchange days after Closing Date) • Amount of capital increase: 873,100,000 euros on the basis of a reference price of 45.95 euros, including a share premium of 854,100,000 euros.
A.3 ACCOUNTING FOR THE CONTRIBUTED ASSETS
A.3.1 DESIGNATION AND VALUE OF THE CONTRIBUTED ASSETS AND OF THE ASSUMED LIABILITIES In the Agreement, Schlumberger and Atos Origin agreed on the terms and conditions of the acquisition, by Atos Origin, of the main part of the IT activities of the Sema Group. The terms and conditions indissociably include an acquisition to be paid for in new Atos Origin shares and an acquisition to be paid for in cash.
As a result, Schlumberger SA and Schlumberger Investments Ltd agreed to contribute to Atos Origin the totality of their interest in Sema S.A., that is, 2,713,999 shares, and part of their interest in Sema Ltd, that is, 603,897,741 shares. This contribution, which represents 99.9% of the capital of Sema S.A. and 97.8% of the capital of Sema Ltd respectively, was valued at a total value of € 873,100,000, divided up as follows:
• For Sema S.A.: € 259,200,000; • For Sema Ltd: € 613,900,000.
Furthermore, the overall transaction relating to the acquisition provides for a procedure to adjust the price paid in cash between Schlumberger and Atos Origin as described in paragraph A.2.1.1 above.
A.3.2 TABLE SETTING FORTH THE REVALUATIONS AND ADJUSTMENTS EFFECTED Not applicable.
A.3.3 NAME AND DATE OF THE EXPERT REPORT This information is given in paragraph A.2.3.2 above.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 73/233
A.3.4 DETAILED CALCULATION OF THE SHARE PREMIUM The share premium created on the occasion of the operation shall be equal to the difference between the above value and the nominal amount of the capital increase, the par value of the share being one euro.
(in €) Value of the contributions 873,100,000 Nominal value of the shares issued in consideration for the contribution (*) -19,000,000 Share premiums 854,100,000
(*) The number of shares issued for the benefit of Schlumberger SA is 5,640,000 and 13,360,000 for Schlumberger Investments Ltd.
A.4 VALUATION OF AND CONSIDERATION FOR THE CONTRIBUTIONS
The value of the transaction is the result of negotiations between Atos Origin and Schlumberger. The parties agreed that the acquisition, through contribution in kind and through the disposal of shares, would be compensated for by the issue of 19.3 million Atos Origin shares, that is, 19.0 million new shares and 0.3 million treasury shares, and 400 million euros in cash. The purchase price may be adjusted after the closing of the acquisition, upwards or downwards according to the terms described in chapter A.2.1.1.
The part compensated for in shares represents 28.9% of the capital of Atos Origin following the acquisition on the signature date. Based on the average closing price weighted by the volumes of the last 20 trading days preceding September 19, 2003 (i.e., 45.95 euros), the acquisition value was estimated at 1,287 million euros on that date.
This annex was prepared with the aim of explaining the process of the valuation of and compensation for the Sema Ltd and Sema S.A. contributions (the "Contribution").
The Company presents through this document certain estimations as to the possible value of the Sema Group business being acquired, based on various valuation methodologies and assumptions. Such estimations are provided in accordance with French regulations in order to give an indication of some possible valuations of the Sema Group business under such methodologies and assumptions. Such estimations are for indicative purposes only and are not intended to represent a price at which the Sema Group business could be sold in an actual market transaction either today or at any time in the future.
A.4.1 VALUATION METHODS USED
Valuation of Atos Origin: the acquiring company
As regards the valuation of the Atos Origin share, it was decided to rely on the market price of the Atos Origin share because the company is listed on the Premier Marché of the Paris Bourse, it gives rise to a significant market capitalization and it is overseen by financial analysts of prestigious financial institutions.
Valuation of Sema Ltd and Sema S.A.: the contributions
As regards the acquired company, the following valuation methods were used:
• Discounted cashflow method • Comparable companies method • Comparable transactions method
Valuation of Sema Ltd and Sema S.A.: the contributions
As regards the contributions, the following valuation methods were used:
• Discounted cashflow method
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 74/233
• Comparable companies method
A.4.2 VALUATION OF THE ACQUIRED COMPANY AND THE CONTRIBUTIONS Since the benefits of the restructuring plans initiated by the Sema companies at the end of the 2002 financial year are only now beginning to have a positive impact on the financial results, the valuation was based primarily on the discounted cash flow method, such method best reflecting the real future potential value of the activity, according to the going concern principle. The results obtained using this methodology were then compared to those obtained using the comparable companies and comparable transactions methods.
The Sema Group and the contributions have been valued at enterprise value, that is to say, with no adjustment to liquid assets or debt, in so far as it has been agreed that the contributions will be made on the basis of zero net indebtedness.
Discounted cash flow method
The intrinsic values of the Sema Group and the contributions have been estimated by discounting cash flows. This valuation approach is based on the idea that the value of a company depends on its future cash generation potential. The methodology consists of estimating cash flows in the medium term, determining a residual value at a future time (by using a terminal value) and discounting these values. The discounted cash flow method has been applied to two sets of financial projections, the first corresponding to the Sema Group business plan for the period 2004 to 2008, prepared by Atos Origin on the basis of data provided by Schlumberger and discussions with the management of the Sema Group, and the second set of projections corresponding to an extension of the business plan to 2013. The second plan has been prepared on the basis of an annual average increase in turnover of 2% between 2008 and 2013 and stable operating margins after 2008.
The future cash flows used for the valuation are defined as being free cash flows, that is, cash flows after tax, changes in working capital and investment requirement, but before interest expenses. They represent the cash available to pay back the capital used (equity and bank borrowing).
With regard to the contributions, two sets of projections have been put forward, that is to say one excluding and one including the Sema Group structure costs reallocated by country, in order to determine the values of each undertaking as an individual entity.
The discount rate corresponds to the weighted average cost of the capital. The discount rate has been determined on the basis of a risk free rate of 4.1%, an equity risk premium of 4.2%, a sectoral beta of 1.4, debt cost of 5.5% and corporate income tax at 33% (30% for Sema Ltd. and 35% for Sema S.A.), in conjunction with financing through a combination of equity and debt between 100%/0% and 70%/30%. The sectoral beta has been determined on the basis of a sample taken from comparable companies, the same companies used for the comparable companies method.
In order to determine the present value of the Sema Group and the contributions, a range of discount rates between 8% and 12% has been used in conjunction with a perpetual rate of growth of 1% to 3%. This range of discount rates is in line with the rates typically used by financial analysts covering the information technology sector. On the basis of these sets of projections,
• The enterprise value of the Sema Group has been estimated at between 1.1 and 2.3 billion euros with a median point of 1.5 billion euros.
• The enterprise value of Sema Ltd has been estimated at between 505 and 1 062 million euros with a median point of 683 million euros, and between 607 and 1 253 million euros with a median point of 814 million euros, respectively, including and excluding the Sema Group structure costs.
• The enterprise value of Sema S.A. has been estimated at between 183 and 449 million euros with a median point of 267 million euros, and between 264 and 600 million euros with a median point of 370 million euros respectively, including and excluding the Sema Group structure costs.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 75/233
Comparable companies method
This method, which is based on multiples, consists of applying the stock market multiples of companies comparable to the Sema Group in order to determine the value of the Sema Group and the contributions.
The multiples used represent the average enterprise value multiples based on turnover, EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization, i.e. the gross operating surplus or the operating profit before amortization and depreciation), and operating results, on the basis of stock market valuations in September 2003. The Sema Group is currently continuing with its restructuring plan which commenced in the second half of 2002. Since the resulting benefits are only now beginning to have a positive impact on the financial results, only the ratios for 2004 have been used within the framework of this analysis.
The range of companies for the Sema Group valuation has been determined on the basis of European information technology service companies - Atos Origin, Cap Gemini Ernst & Young, Indra, LogicaCMG, and Tietoenator, of a size, performance and risk profile similar to that of the Sema Group. Xansa and Computacenter complete the range of companies for the purposes of valuing Sema Ltd, and Steria, Unilog, Transitiel, GFI Informatique, Sopra and Alten complete the range of companies for the valuation of Sema S.A. The table of multiples used for 2004 is the following :
European companies French Companies English Companies Revenue 1.02 0.65 0.76 Cash flow excluding 8.7 7.4 4.7 extraordinary items Operating Revenue 1.1 8.8 9.8
• On the basis of the multiples for 2004 of Atos Origin and European information technology service companies, the enterprise value of Sema Group has been estimated at between 1.5 and 2.3 billion euros with an average value of 1.9 billion euros.
• On the basis of the multiples for 2004 of Atos Origin, European information technology service companies and British information technology service companies, the enterprise value of Sema Ltd has been estimated at between 638 and 734 million euros with an average value of 670 million euros, and between 734 and 911 million euros with an average value of 818 million euros, respectively including and excluding the Sema Group structure costs.
• On the basis of the 2004 multiples of Atos Origin, European information technology service companies and French information technology service companies, the enterprise value of Sema S.A. has been estimated at between -75 and 599 million euros with an average value of 233 million euros, and between 151 et 599 million euros with an average value of 363 million euros, respectively, including and excluding the Sema Group structure costs.
Comparable Transactions method
The comparable transactions method consists of applying to the turnover, the EBITDA and the operating results of the Sema Group an average of the multiples resulting from comparable transactions within the IT sector. The range used includes transactions having taken place since June 2002. Any transactions prior to that date have been excluded from the analysis due to unusually high multiples applied over the period 1999-2001 compared to an historical basis. The table of transactions taking place and the multiples used are the following:
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 76/233
Multiples Multiples Announcement Acquirer Currency Value for the for the year of this transaction following year Date / Acquired Revenue EBITDA Operating Revenue EBITDA Operating Income Income 13/12/02 CSC/DynCorp USD 922 0.40 10.8 13.7 NA NA NA 06/12/02 CGI/Cognicase CAD 285 0.55 7.3 15.6 0.52 5.0 8.6 08/10/02 Logica/CMG GBP 588 0.65 9.5 25.8 0.66 8.3 19.6 30/09/02 DigitalNet/Getronics EUR 247 0.65 NA NA NA NA NA 30/07/02 IMB/PWC Co USD 3,500 0.61 5.4 6.4 NA NA NA 10/06/02 KPMG Co EUR 685 1.60 11.2 13.7 NA NA NA Inc/KPMG Co GmbH 05/06/02 AO/KPMG Co UK- EUR 663 0.90 NA 8.0 1.11 NA 11.8 NLs Median 0.65 9.5 13.7 0.66 6.7 11.8
• On the basis of the median of the transaction multiples resulting from transactions since June 2002 applied to turnover, EBITDA and operating results, the enterprise value of the Sema Group has been estimated at between 1.6 and 1.7 billion euros with an average value of 1.7 billion euros.
Valuation criteria not used to value the acquired company
The following valuation methods have not been used:
• Sema Group contribution to the new group
The method by which the value of the proforma shares of the target within the combined group is compared with its financial contribution within the combined group has not been used because a significant part of the transaction is paid in cash, and therefore, the value of the shares does not reflect the total value of the transaction.
• The value of the net assets and revalued net assets
The revalued net asset approach was not deemed to be relevant having regard to the composition of the net assets of the companies comprising the contributions (see chapter A.3.2).
This method is primarily used for companies which, for economic or regulatory reasons, must evidence their high level of equity.
• Dividends
This method is not relevant in so far as the Sema Group has never paid dividends.
A.4.3 VALUATION OF ATOS ORIGIN SHARES As regards the valuation of Atos Origin shares, it was decided to rely on the market price of the shares due to the fact that the company is listed on the Premier Marché of the Paris Stock Exchange, it gives rise to a significant share capital market value and it is monitored by financial analysts belonging to the most recognized financial institutions in the market.
An Atos Origin share value of 45.95 euros has been used, by reference to the volume-weighted average of the closing price over the 20 days preceding the announcement of the transaction.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 77/233
The following table shows the highest and lowest prices and the volume-weighted average price over a period of 24 months preceding the announcement of the transaction.
Market capitalisation Price (in euros) Average daily volume value Number of Weighted % of capital (in millions of Period Highest Lowest shares traded Average traded euros) (in thousands) 19/09/2003 52.0 48.5 49.8 590 1.2% 2,378 20 days 52.8 36.2 46.0 331 0.7% 2,192 1 month 38.6 35.3 37.0 111 0.2% 1,695 2 months 38.6 29.2 35.5 136 0.3% 1,595 3 months 38.6 29.2 34.0 138 0.3% 1,520 6 months 38.6 23.5 29.7 161 0.4% 1,319 12 months 41.0 21.5 29.2 199 0.5% 1,291 24 months 94.4 21.5 47.3 181 0.4% 2,083 Source: Euronext
The weighted average price over the 24 months between September 2001 and August 2003 was 47.30 euros, an average price which is globally in line with the chosen value of the Atos Origin share price of 45,95 euros with reference to the volume-weighted average of the closing price over the 20 days preceding the announcement of the transaction
20 days 24 months Average Weighted average price (in euros) 45.95 47.30 Weighted average number of shares in 47,712,676 44,040,835 circulation Market capitalisation (in millions of euros) 2,192 2,083 2,138 Enterprise value (in millions of euros) 2,542 2,433 2,488
The enterprise value has been estimated by adding expected net indebtedness of 350 million euros as at the end of December 2003 to the market capitalisation.
Evaluation criteria not used to value Atos Origin
• Value of net assets and revalued net assets
This criterion has not been used to value the Sema Group.
• Discounted cash flow method
The discounted cash flow method was also considered superfluous in view of the use of the method based on market capitalisation In fact, in an efficient stock market, the method chosen is considered to be the most representative of the market value of future cash flows. Nevertheless, an analysis of discounted cash flows has been prepared and the enterprise value of Atos Origin has been estimated at between 2.0 and 4.3 billion euros with a median point of 2.8 billion euros.
• Comparable companies method
Since the multiples of comparable companies are for the most part in line with those of Atos Origin, it was deemed irrelevant to apply the method of stock market comparables given the use of the method based on market capitalisation Nevertheless, an analysis has been prepared on the basis of the multiples of European information technology service companies and the enterprise value of Atos Origin has been estimated at between 2.9 and 3.1 billion euros with an average value of 3.0 billion euros.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 78/233
• Comparable transactions method
The analysis has been prepared on the basis of average multiples arising out of transactions since June 2002 applied to turnover, EBITDA and operating results, and the enterprise value of Atos Origin has been estimated at between 2.2 and 3.1 billion euros with an average value of 2.6 billion euros.
• Dividends
This method is not relevant in so far as Atos Origin has never paid dividends.
A.4.4 CONCLUSION Sema Group: Average obtained from methods
Cash flow / Company multiples / Transaction multiples (in millions of euros) Cash flow Companies Transactions Average
Sema Group 1,492 1,869 1,669 1,677
Contributions: Average obtained from methods
Cash flow /Company multiples (in millions of euros) Cash flow Companies Average Including Group structure costs Sema Ltd 100% 683 670 676 Sema S.A. 100% 267 233 250 Excluding Group structure costs Sema Ltd 100% 814 818 816 Sema S.A. 100% 370 363 366 Average Sema Ltd 100% 749 744 746 Sema S.A. 100% 319 298 308
Atos Origin
An Atos Origin share value of € 45.95 was used during the negotiations between Atos Origin and Schlumberger, by reference to the volume-weighted average of the closing price over the 20 days preceding the announcement of the transaction.
A.4.5 CONSIDERATION FOR CONTRIBUTIONS On the basis of an Atos Origin share value of € 45.95, the delivery of 19.3 million Atos Origin shares, including 19.0 million new shares and 0.3 million treasury shares in consideration of the contributions is valued at € 887 million.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 79/233
A.4.6 ALLOCATION OF THE ACQUISITION PRICE These 19.3 million shares have been allocated to payment of 100% of the Sema Ltd shares and 100% of the shares of Sema S.A.
The acquisition price of the contributions has been allocated as follows:
In thousands of shares Sema Inv. Ltd Sema S.A. Total
New shares 13,360 5,640 19,000 Treasury 300 300 Sum 13,660 5,640 19,300
In millions of euros Sema Inv. Ltd Sema S.A. Total
New shares 613.9 259.2 873.1 Treasury 13.8 13.8 Sum 627.7 259.2 886.9
In % Sema Inv. Ltd Sema S.A.
New shares 97.8% 100.0% Treasury 2.2% Sum 100% 100%
This allocation corresponds to an acquisition price of 100% of Sema Ltd of 628 million euros and of 100% of Sema S.A. of 259 million euros.
Acquisition price 1,287 milllion euros
Sema Ltd Sema SA Rest of the group 628 million euros 259 million euros 400 million euros
United Kingdom France Other EMEA countries India Spain-Portugal The Americas Malaysia Sweden Rest of Asia Pacific South Africa
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 80/233
A.5 CONSEQUENCES
A.5.1 CONSEQUENCES FOR THE COMPANY RECEIVING THE CONTRIBUTIONS AND ITS SHAREHOLDERS
A.5.1.1 TABLE SHOWING THE IMPACT OF THE OPERATION ON EQUITY The impact on the equity of Atos Origin breaks down as follows (pro forma as at June 30, 2003 and based on a contribution of all the shares of Sema S.A. and Sema Investment Ltd).
Euros Equity as at Consideration Equity after June 30, 2003 Schlumberger contribution contribution (pro forma June 30, 2003) Number of shares 44,055,676 19,000,000 63,055,676 Nominal value 1 euro 1 euro 1 euro Common stock 44,055,676 19,000,000 63,055,676 Additional paid-in capital 228,466,973 854,050,000 1,082,516,973 Legal reserve 4,405,567 4,405,767 Special regulated reserve 25,297,038 25,297,038 Other reserves 834,153 834,153 Retained earnings 104,455,272 104,455,272 Net income as at June 30, 2003 52,411,548 52,411,548 Total equity 459,926,227 873,050,000 1,332,976,227
This change does not take into account the effect on equity of any capital gains resulting from delivery to the sellers of treasury shares by Atos Origin SA, nor its treatment for tax purposes.
As at June 30, 2003, the share capital was divided into 44,055,676 fully paid up shares, with a nominal value of 1 euro per share.
A.5.1.2 DISTRIBUTION OF THE CAPITAL BEFORE AND AFTER THE OPERATION On August 16, 2003, the Company issued 3,657,000 new ordinary shares, following the conversion of the 3,657,000 outstanding bonds redeemable in shares issued in consideration of the acquisition of KPMG Consulting in the United Kingdom and the Netherlands in August 2002. Taking into consideration the conversion of the bonds, the Company’s share capital was increased to 47,712,676 shares as at August 18, 2003
In addition, 77,020 options to acquire shares were exercised over the period from July 1, 2003 to September 30, 2003 and 79,937 options to acquire shares were exercised over the period from October 1, 2003 to December 31, 2003, and the corresponding increases of capital were made on September 30, 2003, bringing the Company’s capital to 47,789,696 shares, and on December 31, 2003, bringing the Company’s capital to 47,869,633 shares.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 81/233
The simplified breakdown of the capital and voting rights of Atos Origin before and after the contribution is shown below:
Before contribution After contribution Number of % of % of voting Shares % of % of voting shares capital rights capital rights Philips 21,321,043 44,5% 44,8% 21,321,043 31,9% 31,9% Schlumberger 19,300,000 28,9% 28,9% Threadneedle 2,398,047 5,0% 5,0% 2,398,047 3,6% 3,6% Autocontrol 301,293 0,6% 1,293 0,0% 0,0% Public 23,849,250 49,9% 50,2% 23,849,250 35,6% 35,6% Total 47,869,633 100% 100% 66,869,633 100% 100%
For a shareholder holding 1% of the capital and voting rights before the Acquisition, the dilution from the Acquisition represents 28.4%.
The distribution of the capital before the contribution is set forth on the basis of the situation known to the Management Board on the date on which this appendix to the Report of the Directors was filed.
Only those shareholders holding more than 5% of the share capital of Atos Origin SA before the contribution are shown.
Since the beginning of 2003 the Company has been given notice of eleven instances of thresholds being crossed (eight from BNP Paribas, one from Morgan Stanley, one from Threadneedle and one from Philips), pursuant to Section L233-13 of the Commercial Code. The latest statements in relation to these four shareholders were as follows:
Date of statement Shares % interest % voting rights (a) (b) Threadneedle (upwards) Nov. 3, 2003 2,398,047 5.01% 5.03% Philips (c) (upwards) Oct 8, 2003 21,321,043 44.54% 44.82% BNP Paribas (d) (downwards) Aug. 7, 2003 2,176,234 4.55% 4.57% Morgan Stanley (downwards) Aug. 4, 2003 1,744,530 3.64% 3.67% (a) On the basis of the capital as at the end of December 2003 (b) On the basis of the capital at the end of December 2003 excluding treasury shares (c) Transfer of shares between Koninklijke Philips Electronics NV and Philips Belgium SA (d) BNP Paribas Group, excluding BNP Paribas Asset Management
The Company has not been informed of any change in percentage interest since these last notifications.
As part of the agreements signed on August 27, 2000 between the Atos and Philips groups, an agreement relating to the management of Philips’ interest in the capital of Atos Origin was entered into. The terms and conditions of this agreement were described in paragraph 1.2.1.3. of the Document registered by the Commission des Opérations de Bourses on October 16, 2000 under number E00-519. This agreement provided that as of 2002, Philips would undertake to reduce its interest in Atos Origin to under 35%, subject to favourable market conditions, such decrease also being possible by dilution in the event of an acquisition.
A.5.1.3 CHANGES ENVISAGED IN THE COMPOSITION OF THE MANAGEMENT AND SUPERVISORY BOARDS Atos Origin will be led by a Management Board comprising 7 members, the CEO of which will be Bernard Bourigeaud. The composition and responsibilities of the Board will be as follows:
• Bernard Bourigeaud, CEO,
• Xavier Flinois, responsible for the United Kingdom, the Americas, Asia Pacific, and for co-ordinating global markets, key financial statements and the Olympics account
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 82/233
• Dominique Illien, responsible for France and Central Europe, and for global co-ordination of facilities management
• Wilbert Kieboom, responsible for Benelux, ICA and Scandinavia, and for co-ordinating Consulting and Systems Integration
• Giovanni Linari, responsible for Italy, Spain, the Middle East and Africa
• Eric Guilhou, Administrative and Financial Director
• Jans Tielman, Director of Human Resources and Communication
The Supervisory Board will comprise 9 members, and the following two names have been proposed by Schlumberger:
• Andrew Gould, Chairman and CEO Schlumberger
• Jean Marc Perraud, Executive Vice President and Chief Financial Officer, Schlumberger
A.5.1.4 NEW ORGANISATIONAL STRUCTURE OF THE GROUP Following the general meeting, the Group’s new organisational structure will be as follows:
ATOS ORIGIN Bernard Bourigeaud
Level 1 Group REGION 1 REGION 2 REGION 3 REGION 4 CORPORATE Wilbert Kieboom Dominique Illien Gianni Linari Xavier Finois Eric Guilhou Jans Tielman
THE FRANCE ITALY UNITED KINGDOM NETHERLANDS Level 2 Region
BELUX CENTRAL EUROPE SPAIN NORTH AMERICA
Level 3 Country SCANDINAVIA MIDDLE-EAST SOUTH AMERICA
AFRICA ASIA PACIFIC
OTHER MEDITERRANEAN COUNTRIES
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 83/233
A.5.1.5 COMBINED SUMMARY PRO FORMA FINANCIAL STATEMENTS AS AT DECEMBER 31, 2002 AND JUNE 30, 2003
A.5.1.5.1 AUDITORS’ REPORT ON THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF ATOS ORIGIN FOR THE PERIODS ENDED DECEMBER 31, 2002 & JUNE 30, 2003
Mr. Bernard Bourigeaud Chairman of the Management Board
You have requested that we review the accompanying pro forma condensed combined financial statements (the "Pro Forma Financial Statements") for the twelve months ended December 31, 2002 and the six months ended June 30, 2003. These Pro Forma Financial Statements are also presented in Document E, prepared upon the issue of ordinary shares by Atos Origin in consideration for the contribution of Sema S.A. and Sema Ltd (UK) shares, by Schlumberger SA and Schlumberger Investment Ltd. (UK) respectively, as part of the acquisition of the Sema Group by Atos Origin, the terms and conditions of which are set out in Document E.
The "Pro Forma Financial Statements" of Atos Origin for the periods ended December 31, 2002 and June 30, 2003, prepared by you, have sought to reflect the impact of the Sema Group acquisition on the financial position, assets and operating results of the Group, as if the acquisition had effectively taken place as of January 1, 2002.
The "Pro Forma Financial Statements" for the period ended December 31, 2002 have been prepared based on a combination of the following information:
• The condensed consolidated financial statements of the Atos Origin Group for the twelve months ended December 31, 2002, based on the consolidated financial statements for the period then ended in accordance with accounting principles generally accepted in France and approved by the Management Board. These financial statements were audited by us in accordance with professional standards applicable in France and an unqualified audit report issued;
• The "pro forma combined financial statements" of the Sema Group, the acquired company, for the twelve months ended December 31, 2002, prepared in accordance with accounting principles generally accepted in the United States of America, as presented in Document E. These financial statements were reviewed by PricewaterhouseCoopers in accordance with professional standards applicable in France and an unqualified report issued, as presented in Document E.
The "Pro Forma Financial Statements" for the period ended June 30, 2003 have been prepared based on a combination of the following information:
• The condensed interim consolidated financial statements of Atos Origin for the six months ended June 30, 2003, based on the interim consolidated financial statements for the period then ended in accordance with accounting principles generally accepted in France and approved by the Management Board. These financial statements were subject to a limited review by us in accordance with professional standards applicable in France and an unqualified review report issued;
• The "pro forma combined financial statements" of the Sema Group, the acquired company, for the six months ended June 30, 2003, prepared in accordance with accounting principles generally accepted in the United States of America, as presented in Document E. These financial statements were reviewed by PricewaterhouseCoopers in accordance with professional standards applicable in France and a negative assurance report without qualification issued, as presented in Document E.
The aforementioned "pro forma combined financial statements" of the Sema Group, the acquired company, are based on the combined financial statements for the periods ended December 31, 2002 and June 30, 2003 relating to the SchlumbergerSema activity.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 84/233
These combined financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, were audited by PricewaterhouseCoopers, in accordance with professional standards applicable in the United States of America An unqualified audit opinion was issued for the period ended December 31, 2002 and an unqualified review report was issued for the period ended June 30, 2003.
In their audit report for the period ended December 31, 2002 and review report for the period ended June 30, 2003, PricewaterhouseCoopers noted that these combined financial statements are themselves based on the consolidated financial statements and accounting ledgers of Schlumberger Limited (United States of America), considering the fact that the SchlumbergerSema activity, as managed by the Schlumberger Group, was historically a division comprising several Schlumberger Limited subsidiaries. Consequently, the combined financial statements do not necessarily reflect the financial position and results of the SchlumbergerSema activity for the periods ended December 31, 2002 and June 30, 2003, as if it had been an independent entity during these periods.
Group structure and accounting adjustments were included in the combined financial statements for the periods ended December 31, 2002 and June 30, 2003, with the aim of obtaining "pro forma combined financial statements" of the Sema Group, included in the combination with the historical financial statements of Atos Origin, in accordance with the group structure and the terms and conditions of the transaction. The "pro forma combined financial statements" of the Sema Group, including the notes, were reviewed by PricewaterhouseCoopers and a positive assurance conclusion without qualification was issued for the period ended December 31, 2002 and a negative assurance conclusion without qualification was issued for the period ended June 30, 2003. In addition, a statement of reconciliation between French and US GAAP was prepared and is presented in Document E. This reconciliation was reviewed by PricewaterhouseCoopers, who did not make comments in their report, as presented in Document E. Accordingly, our review procedures involved verifying the correct re-transcription of these adjustments and reconciliation items in the pro forma financial statements and their compliance with the accounting principles adopted by Atos Origin.
Based on the "pro forma combined financial statements" of the Sema Group, reconciled with accounting principles generally accepted in France, and the historical financial statements of Atos Origin, we conducted our review of the "Pro Forma Financial Statements" for the periods ended December 31, 2002 and June 30, 2003, in accordance with professional standards applicable in France. Those standards require that we assess the procedures implemented in order to select the accounting practices for combining and preparing the "Pro Forma Financial Statements". These standards also require that we plan and perform our procedures to assess whether the accounting practices are consistent, verify the quantification thereof and ensure the accounting methods implemented comply with those adopted in the preparation of the Atos Origin’s consolidated financial statements for the period ended December 31, 2002 and the Atos Origin condensed interim consolidated financial statements for the period ended June 30, 2003.
Our procedures were limited, as specified in the following paragraph:
We were not able to review the PricewaterhouseCoopers files concerning the "pro forma combined financial statements" of the Sema Group and the reconciliation between French and US GAAP for the periods ended December 31, 2002 and June 30, 2003. We satisfied ourselves that the PricewaterhouseCoopers reports did not contain any qualifications.
The purpose of "Pro Forma Financial Statements" is to reflect the impact on historical financial information of the completion, at a date prior to its actual or reasonably foreseeable occurrence, of a given transaction or event. However, such financial statements are not necessarily representative of the financial position or the performance which might have been recorded had the transaction or event occurred at a date prior to that of its actual or foreseeable occurrence.
Based on our review, and considering the aforementioned limitation, we did not identify any items likely to call into question the fairness of the conventions used to present the impact of the acquisition of the Sema Group on the "Pro Forma Financial Statements" for the periods ended December 31, 2002 and June 30, 2003, the quantification thereof and the compliance of the accounting methods used with those adopted in the preparation of the Atos Origin consolidated financial statements for the periods ended December 31, 2002 and June 30, 2003.
Given the specific context mentioned above, regarding the presentation of these "Pro Forma Financial Statements", their use, and the use of this report, may not be appropriate in a different context.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 85/233
Neuilly-sur-Seine and Paris, January 14, 2004
The Auditors
Deloitte Touche Tohmatsu Jean-Marc Lumet
Jean-Paul Picard
Amyot Exco Grant Thornton Daniel Kurkdjian
Vincent Papazian
(This is a free translation of the original French text for information purposes only.)
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A.5.1.5.2 PRINCIPLES RELATING TO THE PREPARATION OF THE FINANCIAL STATEMENTS
A.5.1.5.2.1 Scope of consolidation
• The combined summary pro forma financial statements of Atos Origin/Sema Group, ("pro forma financial statements") as at December 31, 2002 and June 30, 2003 have been prepared on the basis of:
• The consolidated financial statements of Atos Origin as at December 31, 2002 as included in the reference document filed on April 14, 2003 with the Commission des Opérations de Bourse under number: D03-0460 (these financial statements were audited by the auditors of Atos Origin) as at June 30, 2003 as described in Section B (these financial statements having been subject to a limited review by the auditors of Atos Origin).
• The combined pro forma financial statements of the Sema Group, adjusted in accordance with the scope of and conditions of the transaction, for the twelve month period ending as at December 31, 2002, prepared in accordance with generally accepted accounting principles in the United States of America as described in Section C.4.1 (these financial statements having been subject to review in accordance with industry standards applicable in France by the auditors of the Sema Group, who in this respect issued a positive assurance conclusion without qualification – see corresponding report in Section C.4.1).
• The combined pro forma financial statements of the Sema Group, adjusted in accordance with the scope and conditions of the transaction, for the six month period ending as at June 30, 2003, prepared in accordance with generally accepted accounting principles in the United States of America, as presented in Section C.4.1 (these financial statements having been subject to review in accordance with industry standards applicable in France by the auditors of the Sema Group, who in this respect issued a negative assurance conclusion without qualification – see corresponding report in Section C.4.1).
These "pro forma financial statements" are intended to reflect the financial position, the assets and operating results of the combined group for the twelve month period ending as at December 31, 2002 and the six month period ending as at June 30, 2003, as if the activities of the Sema Group had been operated on a combined basis with Atos Origin as of January 1, 2002, without however representing what could have been the results and the actual combined financial position on the various dates presented or the results in future years.
A.5.1.5.2.2 Accounting principles
The consolidated financial statements of Atos Origin have been prepared in accordance with accounting rules applicable in France, according to the same accounting principles as those set forth in the notes to the consolidated financial statements for the period ending December 31, 2002.
The combined pro forma financial statements of the Sema Group have been prepared in accordance with accounting principles applicable in the United States of America ("US GAAP") as described in Section C.4.1.
Additional notes to the combined pro forma financial statements, prepared by the Sema Group, show a reconciliation of net income and the net asset position as at December 31, 2002 and as at June 30, 2003 as between American accounting principles and French accounting principles. The reconciliation has been reviewed by the auditors of the Sema Group, who have expressed no comments.
A.5.1.5.2.3 Pro forma financial statements accounting principles
Acquisition cost
The acquisition cost of the activities of the Sema Group amounts to € 1,294,600,000, including acquisition expenses estimated at € 7.7 million net of tax. This is composed of the issue of 19,000,000 new shares, and 300,000 Atos Origin treasury shares delivered to the sellers, and a € 400 million payment in cash.
The valuation of the shares issued and delivered is based on the volume-weighted average of closing prices for the 20 days preceding the announcement of the operation, i.e. € 45.95 per share. The date and manner for
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 87/233
determining this fair value, determined by agreement for the preparation of the combined pro forma financial statements, is not determinative of the final fair value as it will be subsequently determined in the consolidated financial statements of Atos Origin, having regard to applicable French accounting principles and international standards on adoption of the IFRS reference system (see paragraph A.1.3).
The effect of the acquisition price adjustment clause as provided for in the "Master Agreement", and described later in this annex to the Report of the Management Board has not been taken into account in determining the acquisition cost of the activities of the Sema Group.
The "gross" goodwill, before adjustment of the opening balance sheet, amounts to € 706.8 million for a net acquired asset value of € 587.7 million as at June 30, 2003. The adjustments to the opening balance sheet are provisional and will be subject to review and a more accurate valuation by management upon final completion of the acquisition of the Sema Group. After adjustments, as described in paragraph A.5.1.5.3.3, the provisional goodwill stands at € 826,6 million. In accordance with the accounting principles applied by the Atos Origin group, the goodwill thus determined is amortised on a straight-line basis over a period of 20 years.
Cost of financing the acquisition
The cash portion of the price is assumed to be financed through an increase in the group’s net indebtedness. The combined pro forma financial statements therefore include the financial expenses, net of tax, resulting therefrom on a pro forma basis. This expense is assessed on the basis of the average cost of indebtedness of the Atos Origin group, as shown in the consolidated financial statements as at December 31, 2002.
Conversion of the combined pro forma financial statements of the Sema Group into Euros
The combined pro forma financial statements of the Sema Group have been prepared in US Dollars. In order to be able to effect a comparison with the consolidated financial statements of Atos Origin, they have been converted into Euros, for the income statement, on the basis of average exchange rates for 2002 [1,06163] and for the first six months of 2003 [0,90630], and for the balance sheets, on the basis of rates as at December 31, 2002 [0,95356] and as at June 30, 2003 [0,87512]. The conversion effect has been taken into reserves.
Accounting adjustments and reclassifications in the combined financial statements
The combined pro forma income statements and balance sheets of the Sema Group have been adjusted to take into account as if operations had been conducted on a combined basis with Atos Origin as of January 1, 2002.
The adjustments corresponding to the differences between French accounting principles, as applied by the Atos Origin group in its consolidated financial statements, and American accounting principles, have been recorded in the combined pro forma financial statements.
In addition, the Sema Group statements of income have been restated to take account the effect of Schlumberger group costs which the new group would not have borne if the acquisition had actually taken place on January 1, 2002. These adjustments are detailed below in "Adjustments to the income statement", and include the tax impact, assessed on the basis of the normative tax rate determined for the companies included in the scope of acquisition.
Certain reclassifications in the presentation of the balance sheet and income statement have been effected by Atos Origin in order to be able to present the pro forma financial statements in accordance with the accounting principles applied by Atos Origin. These reclassifications have no impact on net income or net assets. They are detailed below in paragraph A.5.1.5.3.3.
Finally, Atos Origin has undertaken a provisional valuation of the identifiable assets and liabilities of the activities of the Sema Group included in the scope of the transaction, within the framework of the provisions of Article 211 of Regulation 99-02 of the Comité de Réglementation Comptable (the French accounting regulatory committee).
Two types of adjustment have been identified: adjustments to the opening balance sheet and provisions for reorganisation and restructuring. The balance sheet adjustments are provisional and will be subject to review and a more accurate valuation by management upon final completion of the acquisition of the Sema Group. Provisions for restructuring and reorganisation could not be valued with sufficient precision and were therefore not taken into account.
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A.5.1.5.3 PRO FORMA FINANCIAL STATEMENTS
A.5.1.5.3.1 Combined pro forma income statements and balance sheets as at December 31, 2002 and June 30, 2003
• Combined Pro Forma Income Statements
(in millions of euros) June 30, 2003 December 31, 2002 (6 months) (12 months)
Revenue 2,740.3 5,605.7 Operating income 147.0 312.8 As % of turnover 5.4% 5.6% Profit/loss on financial operations (22.9) (47.7) Extraordinary income (47.1) (106.8) Taxes (21.4) (63.5) Contribution of companies under the equity method and minority (6.8) (12.4) interests Net income before amortization of goodwill 48.9 82.5 Amortization of goodwill (49.7) (79.8) Net income – Group share (0.8) 2.7 As % of turnover (0.03%) 0.05% Weighted average number of shares 63,055,676 62,954,677 Net earnings per share – undiluted before amortization of goodwill 0.78 1.31 Average number of shares, fully diluted 68,897,415 69,846,590 Net earnings per share, fully diluted before amortization of goodwill 0.71 1.18
• Combined Pro Forma Balance Sheets
(In millions of euros) June 30, 2003 December 31, 2002 (6 months) (12 months) ASSETS Intangible assets 1,774.0 1,847.5 Tangible assets 662.8 734.8 Financial investments 26.7 23.7 Total fixed assets 2,463.5 2,606.1 Working capital requirements 486.6 455.5 TOTAL ASSETS 2,950.1 3,061.6
LIABILITIES AND SHAREHOLDERS’ EQUITY Shareholders’ equity – Group share 1,532.2 1,557.7 Minority interests 49.1 46.8 Consolidated shareholders’ equity 1,581.3 1,604.5 Provisions for liabilities and charges 553.9 594.3 Net indebtedness 814.9 862.8 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 2,950.1 3,061.6
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 89/233
A.5.1.5.3.2 Adjustment of Atos Origin group shareholders’ equity to determine shareholders’ equity on the pro forma Atos Origin/Sema Group summary combined balance sheet
(in millions of euros) Shareholders’ equity – Atos Origin group share at June 30, 2003 728.9 Capital increase related to compensation of contributions 19.0 Share premium related to the contribution 854.1 Impact of the delivery to seller of treasury shares 13.8 Adjustments to net acquired assets (83.6) Financial interest net of tax on acquisition debt for 2002 and 2003 (21.6) Notional amortization of goodwill for 2002 and 2003 (62.0) Total (83.6) Atos Origin/Sema pro forma combined shareholders’ equity group 1,532.2 share at June 30, 2003
A.5.1.5.3.3 Table of restatements
• Sema Group income statement
Two types of adjustment have been made to the income statement:
• Adjustments based on accounting principles ("Adjust. GAAP") to harmonize the financial statements of the Sema Group with the French accounting principles applied by Atos Origin, • Elimination of costs ("Elim. Costs") to reflect the activity of the Sema Group as if it had been an independent entity during these periods.
(in millions of US $) June 30, 2003 (6 months) December 31, 2002 (12 months) Sema US Adjust. Elim. Sema Sema Adjust. Elim. Sema GAAP GAAP Charg French US GAAP Charges French es GAAP GAAP GAAP
Revenues 1,321.0 1,321.0 2,414.0 2,414.0 Operating income 20.7 (5.2) 11.4 26.9 (60.2) (13.3) 118.0 44.5 Financial income 0.9 (0.9) 0.0 17.8 (17.5) (0.3) 0.0 Extraordinary income (24.3) (24.3) 61.2 (95.1) (33.9) Taxes (2.1) 5.6 (3.2) 0.3 (4.1) (11.4) (6.9) (22.5) Contribution of companies under (0.3) (0.3) (1.0) (1.0) the equity method and minority interests Net income before 19.2 (23.8) 7.3 2.7 (47.5) 19.0 15.7 (12.9) amortization of goodwill Amortization of goodwill Net income – Group share 19.2 (23.8) 7.3 2.7 (47.5) 19.0 15.7 (12.9)
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(in millions of euros) June 30, 2003 (6 months) December 31, 2002 (12 months) Sema US Adjust. Elim. Sema Sema Adjust. Elim. Sema GAAP GAAP Charg French US GAAP Charges French es GAAP GAAP GAAP
Revenues 1,197.2 1,197.2 2,562.8 2,562.8 Operating income 18.8 (4.7) 10.2 24.4 (63.9) (14.1) 125.3 47.2 Financial income 0.8 (0.8) 0.0 18.9 (18.6) (0.3) 0.0 Extraordinary income (22.0) (22.0) 65.0 (101.1) (36.0) Taxes (1.9) 5.1 (2.9) 0.3 (4.4) (12.1) (7.4) (23.8) Contribution of companies (0.3) (0.3) (1.1) (1.1) under the equity method and minority interests Net income before 17.4 (21.6) 6.5 2.4 (50.4) 20.2 16.6 (13.6) amortization of goodwill Amortization of goodwill Net income – Group share 17.4 (21.6) 6.5 2.4 (50.4) 20.2 16.6 (13.6)
• Adjustments to accounting principles ("Adjust. GAAP")
June 30, 2003 (6 December 31, 2002 months) (12 months) In In In In millions of millions of millions of millions of US $ euros US $ euros Operating income (5.2) (4.7) (13.3) (14.1) Restatement of standard margin on loss-making contract (5.2) (4.7) (13.3) (14.1) Financial income (17.5) (18.6) Elimination of gain on real estate sale (17.5) (18.6) Extraordinary income (24.3) (22.0) 61.2 65.0 Restructuring costs (24.3) (22.0) Restructuring costs not recognized under French standards 61.2 65.0 Total impact before taxes (29.5) (26.7) 30.4 32.3 Taxes (30.7%) 5.6 5.1 (11.4) (12.1) Net impact (23.8) (21.6) 19.0 20.2
These adjustments reflect the differences between the French accounting principles applied by the Atos Origin Group in its consolidated statements and the American accounting principles applied by the Sema Group.
Additional information is provided in the explanatory notes in paragraph C.4.2.4.
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Elimination of costs from the income statement of the Sema Group ("Elim. Costs")
June 30, 2003 December 31, 2002 (6 months) (12 months) In In In In millions of millions of millions of millions of US $ euros US $ euros Operating income 11.4 10.2 118.0 125.3 Reclassified restructuring costs 95.1 101.0 Schlumberger fees 6.9 6.3 14.0 14.9 IT support 2.4 2.2 4.9 5.2 Support services 2.0 1.8 4.0 4.2 Financial income (0.9) (0.8) (0.3) (0.3) Reversal of financial income (0.9) (0.8) (0.3) (0.3) Extraordinary income (loss) (95.1) (101.1) Reclassified restructuring costs (95.1) (101.0) Total impact before taxes 10.5 9.4 22.6 24.0 Taxes (30.7%) (3.2) (2.9) (6.9) (7.4) Net impact 7.3 6.5 15.7 16.6
The eliminated costs represent the costs that the units of the Sema Group would not have paid in an Atos Origin environment if the acquisition had effectively occurred at January 1, 2002.
Adjustments to operating income
These adjustments primarily reflect shared services provided by Schlumberger which would not exist in an Atos Origin environment.
Adjustments to financial income
The 2002 and 2003 financial income was excluded in light of the terms of the acquisition.
Adjustments to extraordinary income (loss)
These restructuring costs relate to dismissals of employees and site closures as well as other costs related to the termination of operations which under French accounting principles may be included as an extraordinary loss.
Adjustments to taxes
The tax on income was calculated by applying the standard tax rate for the Sema Group (30.7%) to each of the adjustments described below.
• Sema Group balance sheets
Various types of adjustment have been made to the balance sheet:
• Presentation reclassifications ("Reclas.") which have no effect on the net profit or net asset position and which are intended to facilitate comparison and combination with Atos Origin; • adjustments of accounting principles ("Adjust. GAAP") to harmonize the financial statements of the Sema Group in harmony with the French accounting principles applied by Atos Origin; • adjustments of the opening balance sheet ("OBS") which result from a provisional, non-exhaustive evaluation of the identifiable assets and liabilities of the Sema Group.
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(in millions of US $) June 30, 2003 (6 months) December 31, 2002 (12 months)
ASSETS Sema Reclas. Adjust. Sema OB Sema Sema Reclas. Adjust. Sema OBS Sema US GAAP French S Pro US GAAP French Pro GAAP GAAP forma GAAP GAAP forma Intangible assets 14.2 (2.1) 12.1 (8.1) 4.0 11.2 (2.1) 9.1 (8.1) 1.0 Property, plant & 543.4 2.8 546.2 546.2 550.8 (8.0) 542.8 542.8 equipment Financial assets 15.5 (2.0) (6.5) 7.0 7.0 8.7 (2.0) (4.2) 2.5 2.5 Total fixed assets 573.1 (1.3) (6.5) 565.3 (8.1) 557.2 570.7 (12.1) (4.2) 554.4 (8.1) 546.3 Working capital 1.6 244.5 35.4 281.5 60.6 342.2 (81.9) 267.9 30.4 216.4 60.6 277.0 requirements TOTAL ASSETS 574.7 243.2 28.9 846.8 52.5 899.4 488.8 255.8 26.2 770.8 52.5 823.4
LIABILITIES Sema Reclas. Adjust. Sema OBS Sema Sema Reclas. Adjust. Sema OBS Sema US GAAP French Pro US GAAP French Pro GAAP GAAP forma GAAP GAAP forma Shareholders’ equity – 570.7 100.9 671.6 (136.9) 534.7 485.4 127.7 613.1 (136.9) 476.3 group share Minority interests 4.0 4.0 4.0 3.4 3.4 3.4 Consolidated equity 574.7 100.9 675.6 (136.9) 538.7 488.8 127.7 616.5 (136.9) 479.7 Provisions for risks 243.2 (72.0) 171.2 189.4 360.6 255.8 (101.5) 154.3 189.4 343.7 and contingencies Net debt TOTAL 574.7 243.2 28.9 846.8 52.5 899.4 488.8 255.8 26.2 770.8 52.5 823.4 LIABILITIES
(in millions of €) June 30, 2003 (6 months) December 31, 2002 (12 months)
ASSETS Sema Reclas. Adjust. Sema OBS Sema Sema Reclas. Adjust. Sema OBS Sema US GAAP French Pro US GAAP French Pro GAAP GAAP forma GAAP GAAP forma Intangible assets 12.4 (1.8) 10.6 (7.1) 3.5 10.7 (2.0) 8.7 (7.7) 1.0 Property, plant & 475.5 2.5 478.0 478.0 525.2 (7.6) 517.5 517.5 equipment Financial assets 13.6 (1.8) (5.7) 6.1 6.1 8.3 (1.9) (4.0) 2.4 2.4 Total fixed assets 501.5 (1.1) (5.7) 494.7 (7.1) 487.6 544.2 (11.5) (4.0) 528.6 (7.7) 520.9 Working capital 1.4 213.9 31.0 246.3 53.2 299.5 (78.1) 255.4 29.0 206.4 57.8 264.1 requirements TOTAL ASSETS 502.9 212.8 25.3 741.0 46.1 787.1 466.1 243.9 25.0 735.0 50.1 785.1
LIABILITIES Sema Reclas. Adjust. Sema OBS Sema Sema Reclas. Adjust. Sema OBS Sema US GAAP French Pro US GAAP French Pro GAAP GAAP forma GAAP GAAP forma Shareholders’ equity – 499.4 88.3 587.7 (119.8) 468.0 462.9 121.8 584.7 (130.5) 454.2 group share Minority interests 3.5 3.5 3.5 3.2 3.2 3.2 Consolidated equity 502.9 88.3 591.2 (119.8) 471.5 466.1 121.8 587.9 (130.5) 457.4 Provisions for risks 212.8 (63.0) 149.8 165.7 315.6 243.9 (96.8) 147.1 180.6 327.7 and contingencies Net debt TOTAL 502.9 212.8 25.3 741.0 46.1 787.1 466.1 243.9 25.0 735.0 50.1 785.1 LIABILITIES
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 93/233
Accounting reclassifications
Certain reclassifications in presenting the balance sheet were made on the combined pro forma balance sheets of the Sema Group at the initiative of Atos Origin in order to obtain a presentation of the overall combined pro forma financial statements in accordance with the accounting principles used by Atos Origin. These reclassifications have no impact on net income or the net assets.
They primarily include reclassifications for Working Capital Requirements / Provisions for risks and contingencies for a total amount of € 212.8 million ($243.2 million) at June 30, 2003 and € 243.9 million ($ 255.8 million) at December 31, 2002. They break down as follows:
June 30, 2003 December 31, 2002
In millions of euros Provision for pensions 131.3 132.8 Opening Balance Sheet Provisions 58.3 93.6 Other provisions 26.8 29.0 Provisions for depreciation of tangible, intangible and financial (3.6) (11.5) assets reclassified in assets ______TOTAL 212.8 243.9
Adjustments between U.S. accounting principles (US GAAP) and French accounting principles
BALANCE SHEET June 30, 2003 December 31, 2002 (6 months) (12 months) ASSETS In In In In millions of millions of millions of millions of US $ euros US $ euros
Financial assets (6.5) (5.7) (4.2) (4.0) Revalued financial instruments (6.5) (5.7) (4.2) (4.0) Pensions 65.2 57.1 68.2 65.0 Deferred taxes on adjustments (29.8) (26.1) (37.8) (36.0) TOTAL ADJUSTMENTS TO ASSETS 28.9 25.3 26.2 25.0
June 30, 2003 December 31, 2002 (6 months) (12 months) LIABILITIES In In In In millions of millions of millions of millions of US $ euros US $ euros
Net equity 100.9 88.3 127.7 121.8 Provisions for risks and contingencies (72.0) (63.0) (101.5) (96.8) Restructuring provisions (36.9) (32.3) (61.2) (58.4) Opening balance sheet provisions (35.1) (30.7) (40.3) (38.4) TOTAL ADJUSTMENTS TO LIABILITIES 28.9 25.3 26.2 25.0
These adjustments reflect the differences between the French accounting principles applied by the Atos Origin Group in its consolidated statements and the U.S. accounting principles applied by the Sema Group in its combined pro forma statements (see paragraph C.4.2.4).
Adjustments of the opening balance sheet and provisions for restructuring and reorganisation
Atos Origin has carried out a provisional evaluation of the identifiable assets and liabilities of the Sema Group within the context of the provisions set out in article 211 of regulation 99.02 of the French Committee of Accounting Regulations.
Two types of adjustment can be identified:
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• Adjustments of the opening balance sheet, • Provision for restructuring and reorganisation.
These provisions which must be recorded in the opening balance sheet of the Sema Group have not been taken into account in the pro forma financial statements as, based on current information, it has not been possible to evaluate these costs.
The provisional, non-exhaustive adjustments of the opening balance sheet are the following:
• Intangible fixed assets
The Sema Group has contracted long-term commitments to purchase software licences which are not expected to be used for € 5 million net of deferred tax (€ 7.1 million before tax).
• Pensions
The Sema Group offers its employees various benefits during retirement or conditional upon the accumulation of years of seniority within the Group, including pension schemes with defined benefits and end of career benefits.
These undertakings essentially cover the following countries: • United Kingdom • North America • Sweden • Italy (undertakings linked to the TFR) • France (benefit due upon retirement)
They have been evaluated in accordance with the US GAAP (FAS 87) the principles of which are similar to those of the IAS 19.
The information at our disposal has led us to make a fair value adjustment to the provision in the United Kingdom in the amount of € 114.8 million net of deferred tax (€ 165.7 million before tax) corresponding to unrecognised actuarial losses.
A.5.1.5.3.4 Impact of the Acquisition of the Sema Group
The pro forma statements at June 30, 2003 and December 31, 2002 have been adjusted to take into account the impact of the various financial operations that were part of the acquisition of the Sema Group, as if they had been performed on January 1, 2002.
These adjustments break down as follows: • financial interest on the acquisition debt at the rate of 5% per year showing the resulting tax savings; • amortization of goodwill over 20 years in accordance with the accounting principles applied by the Atos Origin Group.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 95/233
Income statement
(in millions of euros) June 30, 2003 (6 months) December 31, 2002 (12 months) Atos Sema Impacts of Total Atos Sema Impacts of Total Pro forma acquisition Pro forma acquisition Revenues 1,543.1 1,197.2 2,740.3 3,042.9 2,562.8 5,605.7 Operating income 122.6 24.4 147.0 265.6 47.2 312.8 Financial income (loss) ( 12.3) 0.0 (10.5) (22.9) ( 27.3) 0.0 (20.4) (47.7) Extraordinary income (loss) ( 25.1) (22.0) (47.1) ( 70.8) (36.0) (106.8) Taxes ( 25.4) 0.3 3.7 (21.4) ( 46.9) (23.8) 7.2 (63.5) Contribution of companies under the ( 6.5) (0.3) (6.8) ( 11.4) (1.1) (12.5) equity method and minority interests Net income before amortization of 53.3 2.4 (6.8) 48.9 109.2 (13.6) (13.2) 82.5 goodwill Amortization of goodwill ( 29.0) (20.7) (49.7) ( 38.4) (41.3) (79.8) Net income – Group share 24.3 2.4 (27.5) (0.8) 70.8 (13.6) (54.6) 2.7
Balance sheet
(in millions of euros) June 30, 2003 (6 months) December 31, 2002 (12 months) ASSETS Atos Sema pro Impacts of Total Atos Sema pro Impacts of Total forma acquisition forma acquisition
Intangible assets 1,005.9 3.5 764.6 1,774.0 1,061.3 1.0 785.5 1,847.5 Property, plant & equipment 184.8 478.0 662.8 217.3 517.5 734.8 Financial assets 20.6 6.1 26.7 21.3 2.4 23.7 Total fixed assets 1,211.3 487.6 764.6 2,463.5 1,299.9 520.9 785.5 2,606.1 Working capital s 187.1 299.5 486.6 191.1 264.1 455.1 TOTAL ASSETS 1,398.4 787.1 764.6 2,950.1 1,491.0 785.1 785.5 3,061.6
LIABILITIES Atos Sema pro Impacts of Total Atos Sema pro Impacts of Total forma acquisition forma acquisition
Shareholders’ equity – group 728.9 468.0 335.4 1,532.2 740.5 454.2 363.0 1,557.7 share Minority interests 45.6 3.5 49.1 43.6 3.2 46.8 Consolidated equity 774.5 471.5 335.4 1,581.3 784.1 457.4 363.0 1,604.5 Provisions for risks & 238.3 315.6 553.9 266.6 327.7 594.3 contingencies Net debt 385.6 429.3 814.9 440.3 422.5 862.8 TOTAL LIABILITIES 1,398.4 787.1 764.6 2,950.1 1,491.0 785.1 785.5 3,061.6
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 96/233
A.5.1.6 CHANGE IN MARKET CAPITALIZATION BEFORE AND AFTER THE OPERATION On the basis of the last closing price on September 19, 2003 before the announcement of the operation and on the closing price after the announcement of the operation on September 22, 2003, the impact of the operation on the theoretical market capitalization of Atos Origin is the following:
Number of shares Price (euros / share) Market capitalization outstanding before announcement (in millions of euros) (September 19, 2003) Before contribution 47,712,676 48.50 2,314.1 After contribution 66,712,676 48.50 3,235.6
Number of shares Price (euros / share) Market capitalization outstanding after announcement (in millions of euros) (September 22, 2003) Before contribution 47,712,676 51.65 2,464.4 After contribution 66,712,676 51.65 3,445.7
The change in the market capitalization of the group from January 1, 2003 to the end of December 2003, without taking into account the contribution (with an indication of the contribution at the end of December) is as follows in billion euros:
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0 July May June April March August January October With February December December November September contribution
A.5.1.7 IMPACT ON THE CALCULATION OF NET EARNINGS PER SHARE • At December 31, 2002 and June 30, 2003
The impact of the contribution to Atos Origin by the Schlumberger contributing companies of all the capital held in the Sema companies, which form with their subsidiaries most of Schlumberger’s IT business, i.e. the Sema Group, was calculated taking into consideration that the dilution was equal to the total number of shares that Atos Origin would issue in consideration for the contribution, i.e. 19 million shares.
The negative impact on 2002 diluted net earnings per share of Atos Origin before amortization of goodwill and extraordinary items, if the acquisition had been completed on January 1, 2002, would have been 23%, based on all the assumptions used to calculate the pro forma combined financial statements described in paragraph A.5.1.4, calculated on the basis of a diluted average number of shares outstanding of 50,846,590 Atos Origin shares at December 31, 2002, which is 2.71 euros per share compared with 3.54 euros per share. On the basis of the same assumptions, the impact would have been a negative 11% at June 30, 2003. This analysis of dilution-accretion was prepared on the basis of the historical data of Atos Origin and the Sema Group and does not include any revenue or cost savings synergies, which are expected from the operation.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 97/233
Dec 31 2002 June 30 2003 Before operation Net income (Group share) before amortization of goodwill and (in millions 180.0 78.3 extraordinary items of euros) (in millions 109.2 53.3 Net income (Group share) before amortization of goodwill of euros) (in millions 70.8 24.3 Net income – Group share of euros) Weighted average number of shares outstanding 43,954,677 44,055,676 Net EPS before amortization of goodwill and extraordinary items (Euros) 4.09 1.78 Net EPS before amortization of goodwill (Euros) 2.48 1.21 Net EPS – Group share (Euros) 1.61 0.55 Diluted average number of shares outstanding 50,846,590 49,897,415 Net EPS (diluted) before amortization of goodwill and extraordinary 3.54 1.57 items (Euros) Net EPS (diluted) before amortization of goodwill (Euros) 2.15 1.07 Net EPS (diluted) Group share (Euros) 1.39 0.49 After operation Pro forma combined net income (Group share) before amortization of (in millions 189.2 96.0 goodwill and extraordinary items of euros) Pro forma combined net income (Group share) before amortization of (in millions 82.5 48.9 goodwill of euros) (in millions 2.7 - 0.8 Pro forma combined net income – Group share of euros) Weighted average number of shares outstanding 62,954,677 63,055,676 Pro forma combined net EPS before amortization of goodwill and 3.01 1.52 extraordinary items (Euros) Pro forma combined net EPS before amortization of goodwill (Euros) 1.31 0.78 Pro forma combined net EPS – Group share (Euros) 0.04 - 0.01 Diluted average number of shares outstanding 69,846,590 68,897,415 Pro forma combined net EPS (diluted) before amortization of 2.71 1.39 goodwill and extraordinary items (Euros) Pro forma combined net EPS (diluted) before amortization of 1.18 0.71 goodwill (Euros) Pro forma combined net EPS (diluted) – Group share (Euros) 0.04 - 0.01 Accretion / Dilution Net EPS before amortization of goodwill and extraordinary items -27% -14% Net EPS before amortization of goodwill -47% -36% Net EPS – Group Share -97% -102% Net EPS (diluted) before amortization of goodwill and extraordinary -23% -11% items Net EPS (diluted) before amortization of goodwill -45% -34% Net EPS (diluted) – Group Share -97% -102%
The negative impact on pro forma earnings per share at June 30, 2003 is explained by the modest performance of the Sema Group in the first half of 2003, due to an economic downturn in business that is not in line with its historical performance and does not yet benefit from the action plans implemented during the period.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 98/233
• Fiscal year 2004
In view of the limited time between the end of the assessment of the 2004 budget, including the effects of integration, and the issue of this document and in the absence of global control over the Sema Group operations, the group is unable to today present an outlook for 2004. The vision for the year 2004 will however be presented at the general shareholders’ meeting on January 22, 2004. For this reason, the accretion-dilution analysis for 2004 is given in the form of a market consensus based on 15 reports from financial analysts at the most representative banks following the European IT services market. The summary below shows the results of the analysis reports received by Atos Origin, in respect of accretion-dilution of the net earnings per share before the amortisation of goodwill and exceptional items for year 2004. Column (A) represents a summary of the analysts’ reports received following the announcement of the Atos Origin interim results and before the operation was announced, while column (B) is a summary of the analysts’ reports issued in the two weeks after the operation was announced and thus incorporating the operation, and before publication of the third quarter revenue figures. Atos Origin cannot comment on this consensus or vouch for the accuracy of the information provided by the financial analysts. This consensus is provided for information purposes only and investors are cautioned that the year 2004 results may vary significantly from the financial analysts’ predictions.
Net EPS Net EPS Accretion / before after Dilution contribution (A) contribution (B) Consensus Average 3.33 3.61 +8% Median 3.29 3.64 +11%
A.5.1.8 LIQUIDITY AND CAPITAL RESOURCES • Source of liquidity
Atos Origin’s principal source of liquidity is net cash flow from current operations.
(in EUR millions) 6 months 6 months 12 months 12 months ended ended ended ended June 30, 2003 June 30, 2002 Dec. 31, 2002 Dec. 31, 2001 Net cash from operating activities 146.9 154.6 331.1 348.2 Change in working capital 29.1 (29.2) 51.2 48.9 Capital expenditure (36.9) (52.2) (102.3) (139.3) Net cash from current operations 139.1 73.2 280.0 257.8 Reorganization and restructuring (60.4) (24.2) (73.1) (140.3) Opening balance sheet adjustments (4.5) (6.5) (15.5) (69.0) Disposal of intangible, tangible and 4.8 36.6 107.7 53.9 financial assets Other changes (*) (14.6) (5.4) (11.6) (11.8) Net cash before financial 64.3 73.7 287.5 90.6 investments Financial investments (9.6) (19.9) (492.6) (212.2) Net cash flow 54.7 53.8 (205.1) (121.7) Opening net debt (440.3) (235.2) (235.2) (113.5) Closing net debt (385.6) (181.4) (440.3) (235.2) (*) Other changes include common stock issues, dividends paid to minority shareholders of subsidiaries, translation differences and profit-sharing amounts payable to French employees transferred to debt
The analysis above and which follows is based essentially on the liquidity resources and the net debt of Atos Origin, and does not take account of the Sema Group figures, except for that part of the acquisition price paid in cash of €400 million, in view of the fact that, on the one hand, it was agreed that the Acquisition would be made with a zero net debt (see chapter A.2.1), and that, on the other hand, the historical data of the Sema Group cash flows were not drawn up by SchlumbergerSema in the context of the Acquisition. It is important however to note that, in previous years, the Sema Group had recourse to significant outside financing and from Schlumberger in order to finance its restructuring costs and its working capital requirements for current transactions.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 99/233
At the end of June 2003, operating activities of Atos Origin generated EUR 176 million cash during the period before disbursement of reorganization and restructuring costs and of expenses related to opening balance sheet adjustments, representing 11.4% of consolidated revenue. It included a strong positive variation in working capital, which improved significantly due to a reduction in the average "days sales outstanding" (DSO) ratio for client payments, which amounted to 67 days at June 30, 2003, compared with 73 days and 68 days respectively at the end of June and December 2002. As a result, net cash from operating activities increased by 40% or EUR 51 million, in comparison with the same period last year.
Capital expenditure was down 29% on the first half of 2002, at EUR 37 million, and represented just 2.4% of revenue compared to 3.5% in the first half of 2002. This was attributable to the maintenance of tight control over the Group’s capital expenditure in this difficult market environment, and an emphasis both on productivity investments and improving the return on existing assets.
Reorganization and restructuring payments of EUR 60 million included EUR 47 million in relation to restructuring and EUR 13 million for other integration and rationalization, including the disentanglement of shared services from KPMG Audit. EUR 58 million was charged against existing provisions, and EUR 2 million directly through the profit & loss account.
Financial investments amounted to EUR 10 million, mainly due to the takeover of minority interests. In 2002, Group investments totalled EUR 493 million, mainly the acquisition of KMPG Consulting activities for EUR 438 million, which included transaction costs and net debt acquired, and the purchase of two additional KPN contracts for EUR 44 million.
As a result, net debt fell by EUR 55 million during the period, to stand at EUR 386 million at the end of June 2003. This was in spite of the expected costs of restructuring and reorganization in the first half and negative seasonality factors within working capital, including tax and annual bonuses payments.
Gearing at the period end was 50%, compared to 56% at December 31, 2002, and significantly lower than the figure of 86% at August 16th, 2002, immediately following the acquisition of Atos KPMG Consulting. At June 30, 2003, the Group is substantially within its borrowing covenants. Cash and cash equivalents at June 30, 2003 amounted to EUR 424 million, representing three times the amount needed to meet debt repayments that fall due within the next 12 months.
In addition, at December 31, 2002 Atos Origin had existing syndicated senior credit facilities of €840 million (of which approximately € 525 million was drawn as of September 30, 2003) (the "Existing Facilities"). The Existing Facilities were arranged in August 2002 in support of Atos Origin’ acquisition of KPMG consulting activities in The Netherlands and the UK. In addition, in June 1999, Atos Origin issued convertible bonds (the "Convertible Bonds") for €173 million due on October 1, 2004 and paying a fixed coupon rate of 1%.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 100/233
• Repayment schedule at the end of June 2003
The repayment schedule at the end of June 2003 was the following :
(in EUR millions) June 30, 2003 Dec. 31, June 30, Falling due within 2002 2002 Total 1 year 2 years 3 years 4 years 5 years Total Total or more Bonds (173.0) (173.0) 173.0 (173.0) Finance leases (11.0) (8.5) (2.0) (0.3) (0.1) (0.1) (17.2) (19.3) Long-term borrowings (584.9) (99.0) (156.7) (152.6) (125.3) (51.3) (636.7) (181.8) Other borrowings (40.7) (23.9) (2.0) (2.2) (5.5) (7.1) (35.3) (12.5) Total borrowings (809.5) (131.4) (333.7) (155.0) (130.9) (58.5) (862.1) (386.6) Transferable securities 30.1 30.1 133.1 100.3 Cash at bank and in hand 393.8 393.8 288.7 104.9 Total cash and cash 423.9 423.9 0.0 0.0 0,0 0.0 421.8 205.2 equivalents Net debt (385.6) 292.6 (333.7) (155.0) (130.9) (58.5) (440.3) (181.4)
In January 2004, Atos Origin signed a contract for a term loan and renewable credit (the "New Facilities") for € 900 million in order to re-finance the existing debt of Atos Origin, provide partial finance for the Acquisition and meet certain general objectives of the company.
• Structure of the New Facilities
The New Facilities are structured into three tranches as follows:
(€ million) Amount Purpose Maturity Repayment Facility A - term loan facility 250 To refinance part of the 5 years Bullet Existing Facilities Facility B - term loan facility 400 To finance the 5 years Amortizing Acquisition Facility C - revolving credit 250 General corporate 3 years Amortizing facility purposes
Atos Origin will meet the €400 million cash portion of the Acquisition consideration with a portion of the New Facilities. The balance of the Acquisition consideration is payable through the issuance or transfer of 19.3 million Atos Origin’s shares representing 28.9% of the outstanding capital after dilution, of which 19 million will be newly issued shares and 300,000 will be treasury shares, having an aggregate value of €887 million based on the volume-weighted average closing price of Atos Origin shares for the 20 days preceding September 19th, 2003 (EUR 45.95),
The Facilities will be partially drawn at the end of January 2004 to refinance existing indebtedness including the Existing Facilities, pay the €400 million cash consideration for the Acquisition and pay fees and expenses related to the Acquisition.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 101/233
The following table summarizes the sources and uses of funds for the proposed Acquisition and the refinancing of the Existing Facilities.
(€ million) Sources Uses Amount % Amount % New Facility Tranche A 250 13.7% Refinancing Existing 525 28.8% Facilities New Facility Tranche B 400 21.9% Acquisition (cash) 400 21.9% Total debt sources 650 35.6% Estimated fees 12 0.7% Acquisition (non-cash) 887 48.6% Atos Origin cash 287 15.8% Share issue 887 48.6%
Total sources 1,824 100% Total uses 1,824 100%
In order to accommodate Atos Origin’s scheduled repayments under the Convertible Bonds, the amortization schedule under Tranche B of the New Facilities provides for initial payments of principal commencing in June 2005, with semi-annual instalments of €50 million each. If entirely drawn, Tranche C of the New Facilities will be repayable in two equal instalments of €125 million, due respectively in November of each of 2005 and 2006. If only partially drawn, Tranche C of the New Facilities will be repayable in two instalments, one of € 125 million, due in November of 2005 and the balance due in November of 2006. The debt repayment schedule (assuming the closing of the Acquisition occurs) for the Convertible Bonds and the New Facilities is set out below. On this basis, the resulting average life of the New Facilities is 3.25 years.
Tranche C of the New Facilities could be used in order to:
• take advantage of opportunities, including more rapid expansion, • provide working capital for large new outsourcing contracts, particularly in the public sector, • acquire complementary businesses or technologies, • develop new services and solutions,
• New repayment schedule – Combined entity
€ millions
1,200 1,073
1,000 173
800
600 900 900 400 675 450 200 350
0 2003 2004 2005 2006 2007 2008
Bank Debt Convertible
Atos Origin is currently negotiating a securitisation program with a leading financial institution, which is expected to be in place in early 2004 in an amount of up to €200 million in order to further increase liquidity and strengthen Atos Origin’s balance sheet.
Atos Origin has started to identify a number of assets that could be disposed of among the acquired activities, which could accelerate the envisaged restructuring initiatives and provide further cash and an opportunity to
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 102/233
prepay the New Facilities. The disposal program has been estimated on the basis of businesses having approximately € 500 million in revenues, will be subject to review during fiscal 2004 and is anticipated to be executed during the course of the coming years.
Pursuant to the terms of the New Facilities Atos Origin is required to comply with two financial covenants, which are applied on a semi-annual basis on June 30, and December 31, and on a rolling 12-month annualised basis :
• Atos Origin’s Consolidated Leverage Ratio (Consolidated Net Debt divided by Consolidated EBITDA) may not be greater than 1.75 for the test periods up to and including December 31, 2004; and may not exceed 1.5 thereafter.
• Atos Origin’s Consolidated Interest Cover Ratio (Consolidated EBITA divided by Consolidated Net Interest Expense) may not be less than 5.0 throughout the term of the New Facilities.
As shown in the chart below, the net debt of Atos Origin has been heavily influenced by acquisitions (KPN Datacenter in the third quarter of 2001, Atos KPMG in the third quarter of 2002). The management of Atos Origin has continuously focused on net debt reduction and cash generation. This has led to significant reduction in net debt and as well as generally low cost financing. As a result, Atos Origin’s leverage ratio came back rapidly to a reasonable level after each acquisition. The Group’s strategy is also to maintain a level of cash available to meet at least one year’s debt repayment requirements. Cash and cash equivalents at June 30, 2003 amounted to EUR 424 million, representing 2.5 times the amount needed to meet new debt repayments that fall due within the next 12 months.
The reduction of net debt was mainly due to the continuous improvement in working capital, coming principally from the steady reduction in the average "days sales outstanding" (DSO) ratio for client receivables, and the maintenance of tight control over the Group’s capital expenditure in this difficult market environment, and an emphasis both on productivity investments and improving the return on existing assets.
1200 100%
1000 77% 71% 80%
800 56% 55% 50% 60% 46% 600 49% 37% 39% 34% 34% 27% 40% 400
20% 200
0 0% Q4 2000Q1 2001Q2 2001Q3 2001Q4 2001Q1 2002Q2 2002Q3 2002Q4 2002Q1 2003Q2 2003Q3 2003
Net Debt (M€) Equity (M€) Gearing
A.5.1.9 NEW DIRECTIONS PLANNED This point is discussed in paragraph A.1.2.
A.5.1.10 SHORT AND MEDIUM-TERM PROJECTIONS FOR THE BUSINESS This point is discussed in paragraphs A.6, B.3 and C.4.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 103/233
A.5.2 CONSEQUENCES FOR THE CONTRIBUTING COMPANIES AND THEIR SHAREHOLDERS
Upon completion of the operation, Schlumberger SA and Schlumberger Investments Ltd will hold approximately 28.9% of Atos Origin, in the form of shares of common stock traded on the Premier Marché of Euronext Paris.
The shareholder Schlumberger has already indicated its intention to reduce its holding in Atos Origin from 28.9% to 19% if market conditions are favorable, through one or more placements, in a form still to be determined, of about 6.6 million Atos Origin shares.
The Schlumberger Group will also enter into a contract for IT services (IT Services Agreement) with Atos Origin as described in paragraph A.2.1.4 above.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 104/233
B SECOND PART: PRESENTATION OF THE COMPANY RECEIVING THE CONTRIBUTIONS...... 107
B.1 CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2002 ...... 107 B.1.1 COB registration date and number of the reference document ...... 107 B.1.2 COB CROSS-REFERENCE TABLE...... 107 B.2 ATOS ORIGIN EXISTING BUSINESS DESCRIPTION ...... 108 B.2.1 GROUP HISTORY...... 108 B.2.2 Approach...... 108 B.2.3 Service Lines...... 109 B.2.3.1 Consulting ...... 109 B.2.3.2 Systems Integration ...... 110 B.2.3.3 Managed Operations...... 111 B.2.4 INDUSTRY SECTORS ...... 112 B.2.4.1 Financial Services...... 113 B.2.4.2 Telecom, Utilities & Media ...... 113 B.2.4.3 Discrete Manufacturing (including Automotive, High Tech & Electronics, Construction & Engineering) ...... 113 B.2.4.4 Process Industries (including Pharmaceutical, Oil & Gas, Chemical)...... 113 B.2.4.5 Public Sector...... 114 B.2.4.6 CPG / Retail...... 114 B.3 CONSOLIDATED SUMMARY FINANCIAL STATEMENTS AS OF JUNE 30, 2003...... 114 B.3.1 CHIEF EXECUTIVE’S STATEMENT...... 114 B.3.1.1 First Half Results...... 114 B.3.1.2 Regional Review ...... 115 B.3.1.3 Commercial Overview...... 116 B.3.1.4 Market Sectors...... 116 B.3.1.5 Outlook...... 117 B.3.2 HALF YEAR OPERATIONAL REVIEW ...... 117 B.3.2.1 Summary ...... 117 B.3.2.2 Activity by Quarter...... 118 B.3.2.3 Activity by Service Line...... 118 B.3.2.4 Activity by Geographical Area...... 120 B.3.2.5 Activity by Global Market...... 121 B.3.2.6 Income Statement ...... 122 B.3.2.7 Cash Flow and Net Debt...... 123 B.3.2.8 Human Resources...... 124 B.3.3 Consolidated half year Financial Statements ...... 125 B.3.3.1 Consolidated Income Statement ...... 125 B.3.3.2 Consolidated Balance Sheet ...... 126 B.3.3.3 Consolidated Cash Flow Statement ...... 127 B.3.3.4 Consolidated Statement of changes in Consolidated Shareholders’ equity ...... 128 B.3.3.5 Notes to the Consolidated Financial Statements...... 128 B.3.4 Segment information...... 134 B.3.4.1 Information by Service Line...... 134 B.3.4.2 Information by Geographical Area...... 134 B.3.5 Statutory auditors’ report on the half-year consolidated financial statements...... 135 B.4 UNAUDITED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 ...... 136 B.4.1 Unaudited management report on the company's activity as of september 30, 2003...... 136 B.4.2 PRE-CLOSING UPDATE ...... 137 B.4.3 Summary of significant differences between French GAAP and U.S. GAAP...... 138 B.4.3.1 Scope of our undertaking to prepare the US GAAP financial information...... 138 B.4.3.2 Content of financial information...... 138 B.4.3.3 Summary of Atos Origin accounting policies under French GAAP ...... 138 B.4.3.4 Summary of significant differences between French GAAP and U.S. GAAP which affect the financial information...... 139 B.4.3.4.1 Significant differences whose impact (if any) are not included in the French GAAP to U.S. GAAP reconciliation below...... 139 B.4.3.4.2 Summary of significant differences between French GAAP and U.S. GAAP included in the French GAAP to U.S. GAAP reconciliation...... 141 B.5 OTHER KEY EVENTS SINCE JUNE 30, 2003...... 145 B.5.1 SALE of 100% of Atos Origin's document management and cheque processing activities...... 145
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 105/233
B.5.2 Atos Origin sells its Hungarian Operation ...... 145 B.6 STOCK MARKET DATA...... 145 B.6.1 Atos Origin market trends FROM JANUARY 1, 2003 to December 31, 2003 ...... 145 B.6.2 Atos Origin market capitalization trends FROM JANUARY 1, 2003 to December 31, 2003.... 146
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 106/233
B SECOND PART: PRESENTATION OF THE COMPANY RECEIVING THE CONTRIBUTIONS
B.1 CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2002
B.1.1 COB REGISTRATION DATE AND NUMBER OF THE REFERENCE DOCUMENT Pursuant to regulation n° 98-01, the Commission des Opérations de Bourse (COB) registered this reference document on April 14, 2003, under the number D03 – 0460.
In addition to the Annual Report, which is published in English and French, the following information is available to shareholders:
• A Half-Year Report • Quarterly Revenue Statements • The Company’s informational website at www.atosorigin.com • Regular press releases, available through the web site or via the database of the Financial Markets Authority (the AMF)
Legal documents relating to the Company (bylaws, minutes of Shareholder Meetings, Auditors’ reports, etc.) may be viewed at the Company’s registered office (Legal Department) by prior appointment.
The "reference document" contains two sections: "Atos Origin in 2002" and "Annual Report 2002".
B.1.2 COB CROSS REFERENCE TABLE
Section Heading "Atos Origin "Annual in 2002" report 2002" pages pages 1.1 Name and position of persons responsible for the document 78 1.2 Attestation of persons responsible 79 1.3 Name, address and qualification of auditors 78 1.4 Information policy 63 3.1 General information on the Company 66-68 3.2 General information on the common stock 54 3.3 Current breakdown of common stock and voting rights 16, 55 3.4 Market in the common stock of the Company 60-62 3.5 Dividends 59 4.1 Overview of the Company and the Group 6-25 4-21, 49, 66 4.2 Information on the dependency of the Company 31, 46 4.3 Average number of employees and evolution 20 4.4 Investment policy 16 4.5 Information on the Company and its subsidiaries 49-52 4.6 If presentation of non-applicable business (not applicable) 4.7 Risks for the Company 44, 46 5.1 Financial statements of the Company 24-52 5.2 Specific information on non consolidated companies 30, 51 5.3 Table of subsidiaries and investments 51 5.4 Scope of consolidation and consolidation methods 30, 47-48 5.5, 5.6 Financial forecasts and specificity chart A & B (not applicable) 5.7 Auditors’ fees 79 6.1 Name and position of executive management members 30-31 68-70 6.2 Executive management interest in the common stock 55 6.3 Employee profit-sharing plan 21 7.1 Recent developments 3 4 7.2 Outlook for the future 4 5
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 107/233
B.2 ATOS ORIGIN EXISTING BUSINESS DESCRIPTION
B.2.1 GROUP HISTORY The merger of the French and Dutch companies Atos and Origin in 2000 marked a new beginning, creating a leading global business and technology integrator and the third largest listed IT services company in Europe.
The merger successfully broadened the company’s global geographic presence, and expanded its vertical industry specialization. It united a specialist range of front-end skills at Atos with the experience of back-end, backbone enterprise systems at Origin. Integrating these systems provided Atos Origin with its trademark approach, Atos Origin’s unique "Design, Build, Operate" ability to deliver true end-to-end integrated services for clients across the full range of functional, technical and geographic parameters.
In August 2002, KPMG Consulting was acquired in the UK and the Netherlands in August 2002, growing the number of company employees by 2,500 persons. This move provided Atos Origin with a complementary blue chip client base in both countries.
During 2003 the company generated annual revenues of € 3 billion. Over 50% of our revenues are recurring, for example deriving from multi-year contracts. We employed 28,000 employees in 30 countries organized into five operational regions:
• Region 1: Netherlands, Belgium & Luxembourg • Region 2: France, Spain, Portugal, Italy, Argentina, Brazil • Region 3: USA, Canada, Mexico, Middle East, Asia Pacific (India, Australia, Asian (Singapore, Thailand, Malaysia), PR China, Hong Kong, Taiwan) • Region 4: Germany, Austria, Switzerland, Poland • Region 5: United Kingdom
Atos Origin has its registered offices in Paris, France. The Corporate Headquarters are based in Hoofddorp, the Netherlands. Shares are traded on the Paris Euronext Premier Marché, under Euroclear code 5173, where they are part of the SBF 120, Euronext 100 and IT CAC 50 indices.
On September 22, 2003, Atos Origin announced that it had signed an agreement to acquire the IT services activities of SchlumbergerSema from Schlumberger. The agreement, which is expected to be completed no later than January 2004, will create one of the leading global IT services companies, with combined annual revenues in excess of € 5 billion.
B.2.2 APPROACH The following characteristics enable Atos Origin to address mission critical commercial and IT challenges and to implement innovative solutions and industry expertise across the complete value chain:
• Our business model and strategy • Alliances with key Independent Software Vendors such as IBM, Microsoft, SAP • Business stability to grow long term relationships • Proven track record and global presence • Ability to blend innovation and technology to satisfy business objectives
Atos Origin provides full business and technology integration to its clients which include ABN AMRO, Akzo Nobel, Alstom, BNP Paribas, BP, Euronext, Fiat, ICI, ING, KPN, Lucent, Philips, Renault, Royal Bank of Scotland, Saudi Aramco, Shell, UBS, Unilever, Vivendi Universal, Vodafone and Wolters Kluwer.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 108/233
We are one of the few companies with a proven track record of successfully implementing "Design, Build, Operate" solutions on a global and enterprise wide basis - either as discrete services or as integrated solutions packages.
Design (management, business and IT) Build (devise, design and, develop and system integration services) Operate (operations and outsourcing)
Atos Origin’s capability to Design, Build, and Operate end-to-end IT services sets it apart from the competition, offering end-to-end IT services. End-to-end means that Atos Origin can define the problem or challenge a client faces, determine the best solution based on knowledge of both the client’s company (strategy and operations) and the market within which it operates it, and implement and run that solution.
This holistic approach can be applied across Atos Origin’s three Global Service Lines (Consulting, Systems Integration and Managed Operations) and within a Service Line, for example using a range of complementary consultancy skills to address specific people, process and performance issues.
B.2.3 SERVICE LINES We deliver solutions through a global organizational framework of service lines: Consulting, Systems Integration and Managed Operations)
Systems Integration 36% Managed Operations 51% Consulting 13%
(Revenue per Service Line as part of total revenues – based on half-year results for the period ending June 2003)
B.2.3.1 CONSULTING Atos Origin provides end-to-end consulting services, including management consulting and IT consulting services. The service offerings and strengths of KPMG Consulting in the United Kingdom and the Netherlands (now Atos KPMG Consulting), which Atos Origin acquired in August 2002, are highly complementary with Atos Origin’s pre-existing service portfolio. As a result, Atos Origin is able to provide clients with the full spectrum of services required by an information system lifecycle, comprising consulting, systems integration and outsourcing.
Atos Origin’s consulting activities are organized in a matrix structure involving four industry sectors:
• Financial Services • Information, Communication and Entertainment • Consumer and Industrial Markets • Public Sector
Atos Origin has sought a more or less balanced focus in these four segments with particular strengths in Financial Services and a developing presence in the Public Sector.
Atos Origin integrates technology solutions, focusing on IT consulting to provide clients with value-added consulting services helping those organizations implement business and technology transformations which impact their strategy, structure, processes and information systems.
We provide consulting in the following areas, for example:
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 109/233
• Customer Relationship Management: e-local government, health e-communities (Oracle, ICL, Integris, SAP, Siebel, AIT), customer relationship management strategy, sales/channel management, billing and customer care, customer intelligence • Supply Chain Management: operational transformation (cost reduction, shared services process improvement and automation), business process re-engineering, public procurement, e-procurement, delivering benefits from post M&A integration (OST and Siebel), multichannel procurement, mergers and acquisitions integration (SAP Oracle and Ariba), manufacturing opportunity assessment, supply chain quick scan, strategic alignment of customer markets, quality management and C-commerce • World Class Finance Solutions: e-performance and cost management, management information systems, business planning and budgeting, value based management, interim and project management, shared services, enterprise resource planning (ERP) implementation (Microsoft, Oracle, SAP and PeopleSoft) • World Class HR (SAP Oracle and PeopleSoft) and Workforce: I-Learn, organizational learning and e-HR (Oracle, PeopleSoft HR, Digital Think and SAP) • eStrategy and eBusiness: business and operational transformation (business strategy and launch services, mobile and service strategy, business process improvement and quality management), risk management (credit risk, operational risk, market risk, rating models), STP systems and infrastructure strategy, business intelligence & reporting, E-integration • eIntegration: enterprise architecture and IT strategy, infrastructure strategy and assessment, infrastructure architecture and design, data architecture, enterprise program management and enterprise information portal • Knowledge Management
In addition to its core business and IT consulting activities, Atos KPMG Consulting NL’s Dutch subsidiaries include Nolan Norton & Co, KPMG Metrum and KPMG Interim Group, which specialize in strategic consulting, construction consulting and staffing services, respectively.
B.2.3.2 SYSTEMS INTEGRATION Our Systems Integration Service Line implements new IT solutions and ERP systems. It ensures a seamless fit with existing infrastructures and provides ongoing maintenance and enhancement of IT applications as necessary. We continue to work closely with our clients to develop long-term IT plans that will support and enhance their overall business strategy. We also provide Application Management Services and support, and develop partnerships and alliances with leading software vendors that create new opportunities for our clients.
Atos Origin has substantial capability in enterprise resource planning (ERP). Atos Origin has one of the largest SAP implementation groups in Europe and also has strong capabilities in Oracle, Peoplesoft and Microsoft. We have particular capabilities in the integration and standardization of core systems and in providing extension modules in customer relationship and supply chain management. One-third of Atos Origin’s activities in this Service Line in Consulting & Systems Integration are directly associated with the implementation of SAP, Oracle and other leading ERP products.
We provide Systems Integration in the following areas, for example:
• Application Management Services – Application, Functional and Technical Management • Application Development - Offshore Software Engineering Services, Software Engineering, Component Based Development, Requirements Definition Center • Business Intelligence - Datawarehousing • Corporate Performance Management - Awareness & opportunity scanning, Package Selection and Implementation and Solution Integration & Migration • Business Process Management - Business Process Management Tools and Workflow Management • Enterprise Content Management - Content, Document and Collaborative Knowledge Management • Product Lifecycle Management - Solution selection, assessment, implementation and management • 3D ERP - Discovery & Evaluation, Implementation, Development & integration, Operations & Continuous Improvement • Customer Relationship Management - Consulting and design, loyalty and application management, customer interaction centers, survey management • ICT Management - Enterprise ICT Strategy & Architecture and Cost Management • ICT Process Management & Improvement - Demand & Supply, Impress (Software Process Improvement), Testing, Auditing and Assessment
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 110/233
• Industry Solutions - ACTIS business suite for electronic data interchange, ACTIS-efors Automotive supplier solutions for just in time work, ICAM toolbox for warehouse management and logistics, SCOPE tools for optimization in production planning in the Metal/Paper and Wood Industry • Integration Services - eBusiness Integration, Enterprise Application Integration, Shape-shifting Enterprise Application Landscapes • Migration Services - Application Migration Services, Web Renovation Services, Web Enabling & Integration, Legacy Disclosure • Strategic Management - e-strategy and Mergers, Acquisitions & Divestitures (MAD) • Manufacturing Solutions - Logistic and Manufacturing Execution Systems • Supply Chain Management - Business Model Simulation, Migration & Implementation, Customization, Operation • Supplier Relationship Management - eProcurement • Payment Solutions - Poseidon, Atos Worldline • Transition Management - Management of organization change, Project Management, and Program Management • Human Resource Management - Employee Self-service, e-Learning, Survey management • Mobile Solutions - Mobility Packs • Portal Services - xSpace Community Portal, Customer and Trading Portals & Netmarkets
B.2.3.3 MANAGED OPERATIONS Managed Operations Services includes the core outsourcing activities of Atos Origin. Within the Managed Services activities, Atos Origin manages core IT infrastructure for its global clients, including data centers, server farms and network communication systems. This forms a crucial part of Atos Origin’s end-to-end solution offerings to its clients and the company has unrivalled experience in major roll-out programs for multi- nationals such as Philips, covering complex and multi-site solutions.
Atos Origin additionally provides 24-hour, 7 days-a-week infrastructure support through our global network of support operations in Europe, North America and Asia Pacific. Atos Origin manages value-added desktop support operations for our global clients in regions and industry sectors where we are able to do so effectively. Atos Origin ensures the outsourcing of ERP management and other applications on either a direct or remote basis. At a local level, Atos Origin provides cost-effective and high value-add desktop support for clients, with standardization across multiple regions to enable our global clients to benefit from rapid and effective information communication.
We provide Managed Operations services in the following areas for example:
• Workplace Management & Customer Support Services - Desktop / Helpdesk Services like WinNT, LAN, Print & File, OSC & Helpdesk, Next Generation Managed Desktop • Data Center Services - ERP Managed Operations, Enterprise Server Management including Unix, NT, and OS390 • Server & Storage Management Services - Server management and Storage on Demand and Printing/Publishing • Network Enabled Services - E-Business Hosting Solutions, Enterprise Application Integration Services, Security Services, Messaging Services, Enterprise ASP Services, Wide Area Network Services and Domain Outsourcing • Application Management for Collaboration & Content Management Solutions • Infrastructure Consulting - Infrastructure, Architecture & Solution design and Workplace transformation • Integrated Service Offerings
Atos Origin has integrated offerings to the specific needs of clients and industries. These are integrated solutions which incorporate various elements of the service line offerings for specific clients or needs.
One example of this is payment solutions, which we provide through Atos Worldline in Europe.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 111/233
Atos Worldline
Atos Worldline is a 100 % subsidiary of Atos Origin. Market leader in France and in Germany for processing services, payment services and solutions, CRM, internet services and interactive voice response services, Atos Worldline offers a comprehensive range of integrated services and solutions (design, build, operate) as well as a European team of key competencies in France, Germany and UK and services and solutions adapted to all the current and future channels of distribution.
Atos Worldline provides payment processing systems and services in the European payments market. Additionally it provides value-added internet processing services in such areas as on-line brokering and freight exchange information systems. Atos Worldline provides CRM systems, including loyalty program management systems for the retail and oil industries.
The on-line capabilities of Atos Origin provide differentiation on a global basis. Key technologies include multi- channel interactive systems, voice recognition, web-based CRM, N tier architecture, portals, market places, securitization and transaction certification, virtual card concepts and the integration of telecom services, as well as eBanking and eTrading.
International Competencies and Alliances ( ICA)
Atos Origin's clients are generally large national and multinational companies requiring:
• Uniform and global service delivery and methodologies • The implementation of cross border projects • One single point of contact
In order to coordinate international business development, international program, project and contract management for its global customer and alliance relationships, Atos Origin uses its own International Competencies and Alliances organization (ICA). ICA is responsible for global market management; thought leadership and innovation in conjunction with regional / country market leaders; coordination of market investments; international business; international contract, program & project management and consultancy and global alliance management. ICA manages the international QAD business and the International Software Engineering Group (ISEG), focusing on global offshore sourcing services and facilitating business development in emerging markets.
B.2.4 INDUSTRY SECTORS Atos Origin’s strong industry focus and historical industrial roots give it an in-depth view of how our clients’ business has developed and how it will continue to evolve. It also enables us to customize and package services and solutions to fit client needs, help them deal seamlessly with change, adapt and become more flexible, drive growth and profitability, reduce costs and turn marketplace volatility into opportunity.
We deliver global solutions and focus on carefully chosen market sectors, targeted for growth:
Financial Telecoms Services 23% 26% Others 5% Discrete Manuf. 20% CPG & Retail 7% Process Industries Public Sector 11% 8%
(Revenue per Service Line as part of total revenues – based on half year results for the period ending June 2003)
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 112/233
B.2.4.1 FINANCIAL SERVICES Financial institutions need innovative and specialist IT support to grow business efficiently and effectively. New technologies require increasing investments and complex developments in terms of loyalty programs both for banks and retailers. Atos Origins develops solutions to cut costs whilst implementing innovative service features and enterprises, combining extensive industry and IT knowledge and experience to help clients realize their business goals.
B.2.4.2 TELECOM, UTILITIES & MEDIA Players need to be stronger, smarter and well positioned to benefit from the future landscape of the telecommunication business. Atos Origin helps clients to leverage legacy and hidden network elements to expand services and improve profitability, changing business processes to keep up with the latest innovations and market drivers.
Atos Origin’s solutions help to reduce the Total Cost of Ownership of IT systems in Utilities companies, supporting enterprises in changing from production, technology-driven corporations to customer-oriented, multi- service, shareholder-value driven enterprises.
B.2.4.3 DISCRETE MANUFACTURING (INCLUDING AUTOMOTIVE, HIGH TECH & ELECTRONICS, CONSTRUCTION & ENGINEERING) Aggressive scientific progress and innovative product development is pushing the limits of product functionality, cost, size and quality at a high pace, leading to the outsourcing of core business and the creation of "fabless" companies.
Fierce competition is putting pressure on price, costs, flexibility, global process speed and integration and Atos Origin helps to satisfy customer demand and retain and grow market share through improved Supply Chain Management, Customer Relationship Management and Product Lifecycle Management solutions.
The Automotive business is being redefined to improve profitability, the alliance landscape within car and truck OEMs is rapidly changing, and changes being made to the European distribution system demand new solutions. Atos Origin helps cost savings by optimizing the supply chain and providing the partnership and integration needed between hardware, software, information services and telecom providers.
B.2.4.4 PROCESS INDUSTRIES (INCLUDING PHARMACEUTICAL, OIL & GAS, CHEMICAL) The Oil & Gas Industry has to manage globalization through mergers, acquisitions and divestments, the economic swings in the current geopolitical climate and the need to find new resources. Atos Origin’s solutions cover all industry aspects from exploration and production, through supply and refining, to final retailing of products to end consumers.
Atos Origin is one of the most successful consulting, enterprise application and service management firms for the chemical industry helping companies to manage the aggressive, cyclic economic environment, while seeking out the benefits of new IT enablers such as Business Intelligence, Knowledge Management, and Internet enabled technologies.
Pharmaceutical companies must deliver shareholder value through growth, by increasing margins, decreasing the cost of R&D and launch timescales and increasing product life – all within a high potential, high risk environment. Atos Origin's business and IT solutions play a vital role in supplying the services that facilitate research, development, manufacturing and distribution and which anticipate the requirements of tomorrow.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 113/233
B.2.4.5 PUBLIC SECTOR Governments are moving to implement leading edge IT solutions and upgrade their infrastructures to allow multi-channel access for users, suppliers and the public. They aim to promote new and improved services and deliver increased value for money, particularly in healthcare, education and transport.
Atos Origin has specific consulting skills in the Public Sector and delivers application maintenance and support services for a number of European government agencies, with a strong focus on security. And as additional services come on-line, and public acceptance and awareness grows, the company focuses on the ability to access services through the most appropriate and secure channel.
B.2.4.6 CPG / RETAIL Atos Origin is ideally placed to help retail companies improve business process management, turning customer data into valuable, profit-making information. Differentiation comes from strong trading concepts, operational excellence in supply chain execution, investment in customer relationship management and consistent multi- channel presence and branding.
Improving shareholder value is the primary business objective in the CPG industry with companies focusing on brand management as their core business and consolidating globally in all market segments around their core categories.
B.3 CONSOLIDATED SUMMARY FINANCIAL STATEMENTS AS OF JUNE 30, 2003
B.3.1 CHIEF EXECUTIVE’S STATEMENT
B.3.1.1 FIRST HALF RESULTS Our results for the first six months of 2003 are closely in line with the promises we communicated at the Annual Shareholders Meeting in May. Trading conditions in the European IT services market are starting to show some signs of recovery but they are unlikely to improve significantly before 2004. Nevertheless our financial performance has remained solid. This has been due largely to the stability and high visibility of our Managed Operations activities, together with tight control of our cost base, strong cash generation as a result of effective working capital management and, above all, the constant support and energy of our staff.
Revenues for the period amounted to € 1,543 million, which represented an increase of 3.8% compared with the same period last year. The group benefited from a first time revenue contribution from Atos KPMG Consulting, which was offset by a further decline in Systems Integration. Both the Consulting and Systems Integration markets continued to experience pricing pressure in the second quarter, although at a lesser rate. The volume declines experienced during the current cycle appear to have leveled off and are now improving slightly, and total group revenues were closely in line with our expectations. Managed Operations revenues were stable in comparison with the second half of 2002, and recurring business now makes up over 55% of total group revenues, including the application maintenance part of our systems integration business.
The operating margin for the first half was 7.9%. Profitability was below expectations in the first quarter of this year, largely due to the carry-over impact of pricing pressure and weak demand in the market during the second half of last year. However, a continuous focus on reducing our cost base and streamlining our organization paid dividends in the second quarter, with the operating margin rebounding sharply to 8.5%.
Net income was lower than last year due to higher interest and goodwill amortization costs relating to the acquisition of Atos KPMG Consulting last year, and to higher restructuring costs than we incurred in the first half of 2002.
Cash flow continues to be strong. Net debt fell to € 386 million at June 30, 2003 and we are well on the way towards our target of reducing borrowings to € 350 million by the end of this financial year.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 114/233
Systems Integration 36%
Managed Consulting Operations 13% 51%
B.3.1.2 REGIONAL REVIEW Sales in France remained resilient in spite of a general weakness in the local market. Nearly two-thirds of our sales in France are generated by Managed Operations, thereby providing revenue stability, good order visibility and strong profitability. Systems Integration was also sound because much of our business is in specialist areas such as the development of exchange systems for Euronext, payment systems for the financial services market and sophisticated communication systems for organizations such as EADS/Airbus. During the first half we won several significant orders with clients such as Redcats/Pinault Printemps Redoute and Linedata. We expect to complete the sale of the check and document processing business to Experian shortly.
Sales in the Netherlands in the first half were nearly 10% higher than for the same period last year. The last of the three KPN contracts was signed during the second half of 2002 and contributed in this period, as did Atos KPMG Consulting in the Netherlands. In spite of the fact that Philips has continued to cut its IT costs during the first half, there has been an encouraging flow of new orders from Heineken, Eneco, Akzo Nobel and others, which is helping to push Dutch revenues towards our primary target of € 1 billion per annum.
Reported revenues in the United Kingdom rose sharply from € 71 million to € 171 million due to the consolidation of Atos KPMG Consulting. Whilst pricing and exchange rate pressures undermined the sequential performance of the Consulting business, it is clear that our profile in the UK has substantially increased and that this is having a very positive impact on the order pipeline.
Performance in Germany has stabilized after a difficult 2002 and our German operation has won important orders with Walsrode/Bayer, Bakemark and Vodafone during the period. Elsewhere, trading remains at best flat and in some countries revenue is still showing a negative trend sequentially. In the Middle East, where last year we completed a major SAP roll-out for Saudi Aramco, operations were disrupted in the first half by the political situation in the region.
Our activities in the Americas and Asia Pacific remain focused on supporting the extended operations of our key clients in those regions. Both were negatively impacted by exchange rate factors in the first half, as well as by the transfer back to Europe by Philips of several infrastructure activities. We are continuing to expand our operations in some lower cost parts of these regions – including India, China and Brazil – to provide cost effective support for many of our European and North American clients. We intend to continue these initiatives in line with our clients’ needs.
Netherlands 31% United- France Kingdom 35% 11%
Other EMEA 18% Asia-Pacific 2% Americas 3%
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 115/233
B.3.1.3 COMMERCIAL OVERVIEW While there are some signs of a recovery in the US, the European IT services markets - where the majority of our key clients are based - remains tough. Many clients, including Philips, are continuing to cut their cost base in response to demanding economic circumstances. It is vital to support our key clients through this difficult phase and we will continue to focus our efforts on building market share among this community. In the long run I believe that we will see above-average growth through the adoption of this policy.
There is no doubt that the enhancement of our consulting activities last year with the acquisition of Atos KPMG Consulting, has strengthened our profile in the UK and the Netherlands in particular, and increasingly elsewhere. It has generated many new opportunities to broaden the range of services that we provide to existing clients and enabled us to attract important new clients. In turn, this has resulted in a sharp improvement in the volume of orders signed and order pipeline, especially in Managed Operations. Strategically, it remains a priority to strengthen our presence in the United Kingdom and Germany, the two largest IT service markets in Europe, by winning more business in the outsourcing arena. Acquisitions may be required at some point to accelerate our plans.
We continue to focus on building market share with our key clients and upgrading our skills and experience in outsourcing generally. We intend to increase still further the proportion of the group’s revenues that are derived from outsourcing, whilst selectively reducing our activities in those parts of the systems integration market which offer little opportunity to differentiate our services and where price competition is therefore likely to persist. In Consulting and Systems Integration the priority is to provide our key clients with end-to-end support, and to specialize only in high-end specialist parts of the market.
B.3.1.4 MARKET SECTORS After a difficult couple of years we are starting to see a number of potential drivers for growth in the Financial Services market including Basle 2, the introduction of new International Accounting Standard changes and merger activity. For Atos Origin, the Telecom sector grew significantly in importance last year following the KPN contract wins and we have built on our new strengths in this segment with contracts wins at Vodafone, Wanadoo and Bouygues Telecom. Elsewhere, we have been successful in Retail following the signing of some substantial orders with Brakes in the UK, Redcats/Pinault Printemps Redoute in France and Heineken in the Netherlands.
The Public Sector is growing in importance following the acquisition of Atos KPMG Consulting last year. In the first half, our revenues in the Public Sector trebled to € 120 million. Our involvement is being driven from the consulting end of the business, but we expect increasingly to be involved in mainstream service delivery projects in future, especially in continental Europe, where new market opportunities are opening up rapidly.
Discrete Manufacturing Telecom Utilities 20% Medias 23% Process Industries 11%
Financial Services 26% 7
Public Sector 8%
Others CPG & Retail 5% 7%
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 116/233
B.3.1.5 OUTLOOK The Group is now seeing some signs of a market recovery, although this is unlikely to occur before 2004. Consequently, we are still projecting modest reported revenue growth this year, which will be generated primarily by the consolidation of Atos KPMG Consulting for a full 12-month period, offset by some revenue erosion in Systems Integration and the adverse impact of exchange rate movements. In terms of full year profitability, we expect the Group’s operating margin to exceed 8%.
In spite of the fact that our working capital performance in the first half tends to be seasonally weaker than in the second half, net debt has fallen from € 440 million at the start of this year to € 386 million at June 30, 2003. We are therefore well on track to reduce that figure to € 350 million by the end of this financial year, representing a debt to equity level of 45% at equity levels as of June 30, 2003. We are also comfortably able to finance our foreseeable operational needs and meet our current debt repayment obligations.
B.3.2 HALF YEAR OPERATIONAL REVIEW
B.3.2.1 SUMMARY Consolidated revenue for the six months to June 30, 2003 totaled € 1,543 million, an increase of 3.8% compared with the first half of 2002. The strength of the Euro against both the US dollar and UK Pound had a negative impact on trading in the first half of this year and revenues would have been nearly 6.2% higher on a constant exchange rate basis.
Compared with the same period last year, the Group benefited from a first time revenue contribution of € 183 million from KPMG Consulting in the United Kingdom and the Netherlands, which represents 12.4% growth, offset by a further decline of 11% in Systems Integration and just under 3% in Managed Operations. Exchange rates had a negative impact of 2.4%. On a constant scope and exchange rate basis, reported Group revenues therefore fell by 6.2%.
In particular, Philips continued to reduce its cost base, including IT spending, and revenues with Philips were 16% lower during the first half 2003 compared with the second half of 2002. However, Philips remains our largest customer, representing 11% of total sales, and our Preferred Supplier Relationship Agreement has been extended for a further period of three years from September 1, 2003. Activity at Euronext declined by 6% during the first half of 2003 following completion of the Amsterdam and Brussels platform migrations in 2002 and due to an internal cost cutting program.
The Group has continued to focus strongly on its key account program. The top 50 client financial statements represented more than 55% of total revenue in the first half of 2003, including 9 new clients from Atos KPMG Consulting, and we are continuing to develop our relationships and increase market share at many of these financial statements. Order input has been encouraging during the first half and total order entry was € 1,661 million for the first six months of 2003, which represents a book-to-bill ratio of 108%. In Managed Operations the book-to-bill ratio was 115%.
Despite the continuation of difficult market conditions, the Group reached a 7.9% operating margin, and Income from Operations rose to € 123 million. Net income before non-recurring items and goodwill amortization was € 78 million, representing 5.1% of revenue.
Net debt fell to € 386 million at the end of June thanks to a strong operating cash flow, compared with our original target of maintaining last year’s closing figure of € 440 million at December 30, 2002.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 117/233
B.3.2.2 ACTIVITY BY QUARTER
(in millions of €) 1st quarter 2003 2d quarter 2003 1st half 2003 Revenue 780.5 762.6 1,543.1 % growth +4.2% +3.4% +3.8% Income from Operations 57.4 65.2 122.6 % profitability 7.4% 8.5% 7.9%
Profitability in the first quarter of 2003 was adversely affected by pricing and volume pressure in the Consulting and Systems Integration businesses in the second half of 2002, and by further pricing pressure at the start of 2003. The Group responded throughout the preceding periods with a continuous and proactive reduction of the cost base, reducing staff numbers in line with demand and cutting non-staff costs. The overall cost base has been reduced by 4% each quarter since the last quarter of 2002. As a result of this action in the first half of 2003, profitability increased sharply to 8.5% in the second quarter, resulting in a margin of 7.9% for the first half as a whole.
B.3.2.3 ACTIVITY BY SERVICE LINE Following the acquisition of Atos KPMG Consulting, the Group reclassified its activities. With effect from January 1, 2003, Consulting & Systems Integration were split. Consulting is now reported as a separate service activity, alongside Systems Integration and Managed Operations. Managed Operations comprises the former Managed Services and On-line Services, both of which are engaged in IT infrastructure and Business Process Outsourcing, activities based on long-term recurring revenue contracts. The following discussion is based on these revised headings, with figures for 2002 on a comparable basis.
• Revenue by Service Line
(in millions of €) 6 months ended 6 months ended % % June 30, 2003 June 30, 2002 Growth 2003 revenue Consulting 195.5 12.2 13% Systems Integration 555.1 647.1 -14.2% 36% Managed Operations 792.5 827.4 -4.2% 51% Total 1,543.1 1,486.7 +3.8% 100%
(in millions of €) 6 months ended 6 months ended % June 30, 2003 June 30, 2002 Growth Consulting 12.3 12.2 +0.2% Systems Integration 555.1 623.7 -11.0% Managed Operations 792.5 814.5 -2.7% Total organic growth 1,359.9 1,450.4 -6.2% Acquisitions 183.2 +12.4% Exchange rate 36.3 -2.4% Total 1,543.1 1,486.7 +3.8%
In Consulting, revenue for the first half was € 196 million, including a contribution of € 183 million from Atos KPMG Consulting. Revenue fell by 19% compared with the second half of 2002 and by 13% on a constant exchange rate basis, mainly due to pricing pressure in the United Kingdom. As far as new orders are concerned, the book-to-bill ratio in the first half of 2003 was 100% and the order pipeline improved significantly during the period.
Systems Integration bore the full brunt of the economic slowdown in 2002. As a consequence of the carry- forward impact, revenue in the first half of 2003 decreased by 11% compared with the same period last year (on a constant exchange rate basis), but by only 4% compared with the second half of 2002. As in Consulting, the result was mainly caused by pricing pressure, although the volume declines of the past 18 months have leveled off and are now increasing slightly. The book-to-bill ratio in the first half of 2003 was just over 100%.
Managed Operations revenues were € 793 million in the first half, showing a decrease of just under 3% on a constant exchange rate basis compared with the first half of 2002, and stable compared with the second half of
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 118/233
2002. During the first half of this year we have been successful in signing a steady and encouraging inflow of medium-sized orders including Redcats/Pinault Printemps Redoute and Aventis in France, Heineken, Eneco and Akzo Nobel in the Netherlands, Brakes in the United-Kingdom and other contracts that have not yet been announced. The book-to-bill ratio in the first half was 115%. The card processing business in France and Germany reported solid revenue growth of 7% year-on-year.
• Income from Operations by Service Line
(in millions of €) 6 months % 6 months % % ended profitability ended profitability growth June 30, June 30, 2003 2002 Consulting 13.0 6.6% 3.7 30.2% +253% Systems Integration 27.4 4.9% 45.9 7.1% -40% Managed Operations 96.3 12.2% 103.5 12.5% -7% Corporate (14.1) -0.9% (18.0) -1.2% +22% Total 122.6 7.9% 135.1 9.1% -9%
Consulting profitability was slightly down on the second half of 2002. The Atos KPMG Consulting UK restructuring plan was largely executed during the last quarter of 2002 but due to current low visibility we are continuing to adapt our UK resources to demand for the immediate future, although the longer-term pipeline is improving. Restructuring in the Netherlands is in progress and will be completed during the year through the full organizational integration of consulting with the other service lines and Dutch account management. In addition we have initiated action to reduce non-staff costs in 2003 through premises rationalization and broad operational efficiency improvements, and we are moving towards the successful disentanglement of shared service support from KPMG Audit by the end of this year. As a result, and in spite of continuous pressure on both volume and pricing, the margin rate was maintained at a reasonable level of 6.6%, with a significant improvement during the second quarter.
Systems Integration profitability was impacted by a further, but smaller, sequential decline in revenue during the period, including the effects of pricing pressure. The operating margin, which fell from 7.1% in the first half 2002 to 3.4% in the second half of 2002, rose to 4.9% in the first half 2003 thanks to aggressive and continuing management of key performance indicators during the past 18 months. Utilization has steadily increased from 69% at the end of 2001 to 74% during the last quarter 2002, reaching an average of 75% and 77% respectively during the first and second quarters of 2003. The Group will continue to adapt its resources in line with activity, given limited market visibility for the remainder of 2003 and the early part of 2004.
In Managed Operations, management has continued aggressively with a reduction of productive staff and data centers, further cuts in indirect costs and tight control of both capital assets and receivables. As a result of this action plan, the expected erosion of the margin rate due to new contracts and pre-sales costs has been limited to 0.3%, giving a 12.2% margin rate in the first half of 2003.
In summary, the Group has taken, and is continuing to take, decisive action to streamline its business by cutting subcontractors and permanent staff numbers, and reducing its cost base in all geographies and activities - especially indirect and corporate costs. Gross margin was 24.8% of Group revenue during the first half of 2003. In response, the Group has intensified the cost reduction initiatives launched in 2001 and continued in 2002, cutting indirect costs by a further 5% in the past 12 months. Indirect costs now represent 16.9% of Group revenues in 2003 and corporate costs have fallen to just 0.9% of Group revenue.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 119/233
B.3.2.4 ACTIVITY BY GEOGRAPHICAL AREA • Revenue by Geographical Area
(in millions of €) 6 months ended 6 months ended % % June 30, 2003 June 30, 2002 Growth 2003 revenue France 531.5 543.3 -2.2% 35% The Netherlands 482.4 440.6 +9.5% 31% United Kingdom 170.5 71.4 +138.8% 11% Rest of EMEA (a) 289.4 325.5 -11.1% 18% Americas 41.9 75.5 -44.5% 3% Asia – Pacific 27.4 30.4 -9.8% 2% Total 1,543.1 1,486.7 +3.8% 100% (a) Europe, Middle East, Africa
Europe remains the Group’s principal base, generating 94% of total revenue.
Revenues in France decreased by just over 2% year-on-year. Sales remained resilient in spite of the general market trend, reflecting the substantial proportion of outsourcing business in France and the specialized high added-value nature of the Systems Integration activities. There was a solid performance in Systems Integration, down only 7%, with revenues from Euronext lower following cuts in some project work. On the other hand, Managed Operations performed well.
In the Netherlands there was an overall increase of 10% year-on-year, including a first-time contribution from Atos KPMG Consulting. The Netherlands also benefited from its strong base of recurrent outsourcing revenue and from a steady flow of new orders. Excluding the Consulting activities, Dutch revenues declined 5% year- on-year.
Revenues in the United Kingdom increased sharply due to the consolidation of Atos KPMG Consulting, but growth was slowed by negative exchange rates and pricing pressure in Consulting and Systems Integration. There has been a good improvement in the order pipeline for Consulting and Managed Operations, as confirmed by the recent wins in this region, and this is largely due to the higher profile of Atos KPMG Consulting and operational synergies generated through its acquisition.
The other European countries - Germany, Italy, Spain and Benelux - continue to be affected by weak IT spending and the economic slowdown. We addressed these weaknesses with specific restructuring action last year and the result was that revenues in most of the "Other EMEA" countries performed better in comparison with the second half of 2002.
While the Americas represents only 3% of group revenues, sales in the first half of 2003 were 44% down year- on-year. Much of this decline was due to adverse exchange rate movement between the Euro and the US dollar, and the fact that Philips switched some activities back to Europe. There has been further impact from specific downsizing action taken during the last two years, which has been designed to put those operations on a profitable footing.
Asia-Pacific succeeded in maintaining a solid revenue base, which increased by 3% on a constant exchange rate basis.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 120/233
• Income from Operations by Geographical Area
(in millions of €) 6 months % 6 months % % ended profitability ended profitability growth June 30, June 30, 2003 2002 France 55.7 10.5% 57.9 10.6% -4% The Netherlands 54.8 11.4% 61.6 14.0% -11% United Kingdom 4.7 2.7% 5.5 7.8% -15% Rest of EMEA 18.0 6.2% 22.0 6.7% -18% Americas 1.3 3.0% 4.0 5.3% -69% Asia – Pacific 2.2 8.1% 2.1 6.9% +5% Corporate (14.1) -0.9% (18.0) -1.2% +22% Total 122.6 7.9% 135.1 9.1% -9%
All Group countries and regions continued to generate a positive operating margin.
France and the Netherlands benefited from critical mass and continued strong cost-cutting measures to compensate the negative effects of the market slowdown.
The decline in United Kingdom profit was due largely to continued pricing pressure in the Consulting and Systems Integration businesses, although swift and on-going management action produced a significantly better result in the second quarter than in the first. A combination of bid and start-up costs on new contracts is likely to result in profitability remaining below our target expectations in the short-term.
Rest of EMEA reported a decline in Income from Operations and profitability. Many of the component countries within the rest of EMEA were affected by a lack of critical mass, which made it difficult to absorb fully the effects of the economic downturn. Nevertheless, most of the major countries in this region improved their profitability significantly compared with the second half of 2002.
The decrease in profitability in North & South America is due to the lack of critical mass in those regions.
Asia-Pacific improved its profitability, particularly as a result of achieving good utilization rates. This was also partly due to the strategic development of IT maintenance and support business in India and China.
B.3.2.5 ACTIVITY BY GLOBAL MARKET The Group now has a well-balanced presence in chosen Global Market sectors, without an excessive exposure to any single market. In particular, the KPN contracts have strengthened our presence in the Telecommunications market and Atos KPMG Consulting has brought new experience in Public Sector.
(in millions of €) 6 months ended % 6 months ended % June 30, 2003 2003 revenue June 30, 2002 Growth Financial Services 403.4 26% 382.3 +6% Telecoms, Utilities and Media 353.3 23% 324.0 +9% Discrete Manufacturing 303.5 20% 372.9 -19% Process Industries 179.7 11% 193.0 -7% Public Sector 120.4 8% 40.7 +195% CPG & Retail 108.1 7% 94.3 +15% Others 74.7 5% 79.3 -6% Total 1,543.1 100% 1,486.7 +3.8%
The 2003 Key Account program has been increased to 50 clients, of which 9 clients come from Atos KPMG Consulting. The expansion of our consulting capability has enabled the Group to leverage cross-selling and outsourcing opportunities to a much greater extent than previously.
The Financial Services sector (26% of total Group revenue) increased by 6% in comparison with the first half of 2002, which was impacted by price and volume pressure. In spite of a decline of 6% in our activities with
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 121/233
Euronext, there was good growth in payment processing in France and Germany and a significant improvement in insurance sector business.
Telecoms, Utilities and Media (23% of total Group revenue) reported substantial revenue growth of 9%, benefiting notably from the new contracts with KPN signed in 2002 and an extension of our activities in Utilities and in Media through Atos KPMG Consulting.
Discrete Manufacturing (20% of total Group revenue) reported an overall fall of 19%, mainly in high-tech, which was directly linked to a 22% decline in the Philips account year-on-year.
Process Industries (11% of total Group revenue) reported an overall drop of 7%, although the pharmaceuticals and chemicals sectors performed well.
The Group strengthened its Public Sector position (8% of total Group revenue) with French, Dutch and British government ministries, mainly through Atos KPMG Consulting.
The 15% increase in Consumer Packaged Goods and Retail (7% of total Group revenue) was attributable to new contracts with Heineken, Redcats and Auchan, and the extension of our activities with existing clients.
B.3.2.6 INCOME STATEMENT (in millions of €) 6 months % 6 months % % ended profitability ended profitability growth June 30, June 30, 2003 2002 Income from Operations 122.6 7.9% 135.1 9.1% -9% Net financial expenses (12.3) (6.6) Non-recurring items (25.1) (9.7) Corporate income tax (25.4) (39.7) Minority interests (6.5) (5.7) Amortization of goodwill (29.0) (12.2) Net income for the period 24.3 1.6% 61.2 4.1% -60% Net income for the period before 78.3 5.1% 83.1 5.6% -6% goodwill and non-recurring items
Net financial expenses for the period were € 12 million. Based on an average net debt of € 417 million in the first six months of 2003, the costs of borrowings fell to 4.8% (versus 5.2% at the end of June 2002). Net financial expenses are covered 15 times by EBITDA (Income from Operations before Operating Amortization and Depreciation – € 178 million).
Non-recurring items included € 24 million of integration, rationalization and staff reorganization costs, of which provisions of € 21 million are to cover restructuring announced during the first half 2003 that will be completed in the near future.
The tax charge for 2003 fell to € 25 million, compared with nearly € 40 million for the first half 2002. The notional tax rate was 29.8% of pre-tax income, down from 33.4% for the comparable period last year. The lower charge is essentially due to deductible restructuring costs and the tax deductibility of some goodwill amortization.
Minority interests included shareholdings held by joint venture partners and other associates in AtosEuronext (50%), Atos Origin Processing Services in Germany (47.5%) and Atos Origin Softtech in Saudi Arabia (25%).
Net income for the period before the amortization of goodwill and non-recurring items reached € 78 million, representing 5.1% of revenue. Based on an average of 44,055,676 shares outstanding during the period, earnings per share before amortization of goodwill and non-recurring items, were € 1.78 for the first half of 2003.
The weighted-average number of shares excludes 3,657,000 million ORA bonds redeemable in Atos Origin ordinary shares, linked to the acquisition of Atos KPMG Consulting on August 16, 2002. The ORA bonds have
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 122/233
been transferred into new Atos Origin shares on August 16, 2003, on a one-for-one basis. The inclusion of ORA bonds for six months in 2003 would have resulted in further EPS dilution of approximately 8%.
B.3.2.7 CASH FLOW AND NET DEBT (in millions of €) 6 months 6 months 6 months ended ended ended June 30, 2003 Dec. 31, 2002 June 30, 2002 Net cash from operating activities 146.9 176.5 154.6 Change in working capital 29.1 80.4 (29.2) Capital expenditure (36.9) (50.1) (52.2) Net cash from current operations 139.1 206.8 73.3 Reorganization and restructuring (60.4) (48.9) (24.2) Origin fair value adjustments (4.5) (9.0) (6.5) Disposal of intangible, tangible and financial assets 4.8 71.1 36.6 Other changes (*) (14.6) (6.3) (5.4) Net cash before financial investments 64.3 213.8 73.7 Financial investments (9.6) (472.7) (19.9) Net cash flow 54.7 (258.9) 53.8 Opening net debt (440.3) (181.4) (235.2) Closing net debt (385.6) (440.3) (181.4) (*) Other changes include increases in capital, dividends paid to minority shareholders of subsidiaries, foreign exchange losses and profit-sharing amounts payable to French employees transferred to debt.
Operating activities generated € 176 million cash before reorganization, restructuring and fair value adjustment disbursements during the period, representing 11.4% of consolidated revenue, with a strong benefit from working capital. The further sharp improvement in working capital was mainly due to a reduction in the average "days sales outstanding" (DSO) ratio, which amounted to 67 days at June 30, 2003, compared with 73 days and 68 days respectively at the end of June and December 2002. As a result, net cash from operating activities increased by 40% or € 51 million, in comparison with the same period last year.
Capital expenditure was down 29% on the first half of 2002, at € 37 million, and represented just 2.4% of revenue compared to 3.5% in the first half of 2002. This was attributable to the maintenance of tight control over the Group’s capital expenditure in this difficult market environment, and an emphasis both on productivity investments and improving the return on existing assets.
Reorganization and restructuring payments of € 60 million included € 47 million in relation to restructuring and € 13 million for other integration and rationalization, including the termination of contracts relating to shared services with KPMG Audit. € 58 million was charged against existing provisions, and € 2 million directly through the profit and loss account.
Financial investments amounted to € 10 million, mainly due to the takeover of minority interests.
As a result, net debt fell by € 55 million during the period, to stand at € 386 million at the end of June 2003. This was in spite of the expected costs of restructuring and reorganization in the first half and negative seasonality factors within working capital, including tax and annual bonuses payments.
The net debt to equity ratio at the period end was 50%, compared to 56% at December 31, 2002, and significantly lower than the figure of 86% at August 16, 2002, immediately following the acquisition of Atos KPMG Consulting. At June 30, 2003, the Group is substantially within its borrowing covenants. Cash and cash equivalents at June 30, 2003 amounted to € 424 million, representing three times the amount needed to meet debt repayments that fall due within the next 12 months.
Capital employed as a percentage of revenue decreased to 52%, representing a diminution of 2 points compared with second half of 2002. This was mainly achieved through a reduction of € 33 million in tangible assets and a stabilization of the working capital requirements at 6.1% of revenue.
Despite difficult market conditions and the non-recurrent costs of restructuring during the first half 2003, the Group improved its return on capital employed to just under 8%, compared with 6% in the second half of 2002.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 123/233
B.3.2.8 HUMAN RESOURCES The workforce at Atos Origin decreased from 28,602 to 27,808 (-3%) between January 1, 2003 and June 30, 2003.
Headcount opening 28,602 Hires 971 Departures (1,032) Reorganization and restructuring (733) Headcount closing 27,808
The Group continued to limit recruitment in 2003. The number of employee hired, which was of 971 in the period represented a decrease by 37% compared with 3,100 over all of 2002, and a decrease of 68% compared with the hiring rate in 2001 (6,000). Staff turnover was 7.1% during the period, compared with 6.3% in 2002. The hiring figure for the first half included more than 200 staff taken over as part of new outsourcing contracts and to replace subcontractors.
During 2003, the Group pursued a vigorous program of cost-cutting action in response to the difficult market, particularly in Consulting and Systems Integration. A total of 381 employees left the business in Q1 2003 and a further 352 staff left in the second quarter, representing 3% of productive and non-productive staff at the start of 2003. The Group is broadly in line with its current restructuring plan, with 53% of the plan completed at the end of June. We currently intend to reduce staff numbers by 1,381 in 2003. Subcontractors are now stable at about 4% of productive staff.
Thanks to the internal employee reorganization and sub-contractor cost reduction programs, revenue per productive employee rose to € 123,000 in Q1 2003 on annual basis, compared with € 119,000 for the second half of 2002. Similarly, despite changes in the workforce structure and a move to higher skill sets and higher added- value business activities, the overall cost per employee (including payroll costs, travel and sub-contracting costs) has remained stable over the last five half-years at 66% of revenue.
The analysis of the workforce by Service Line and by Geographical Area is as follows:
Employees Employees Average Average June 30, Dec. 31, Change employees employees Change 2003 2002 1st half 1st half 2003 2002 Consulting 2,137 2,383 -246 2,227 130 +1613% Systems Integration 13,005 13,954 -949 13,329 14,287 -7% Managed Operations 12,573 12,166 +407 12,529 12,194 +3% Corporate 93 99 -6 98 102 -4% Total 27,808 28,602 -794 28,182 26,713 +5% France 8,678 8,685 -7 8,688 8,555 +2% The Netherlands 8,623 9,019 -396 8,829 7,654 +15% United-Kingdom 2,015 2,139 -124 2,060 1,106 +86% Other EMEA 6,240 6,319 -79 6,267 6,709 -7% Americas 1,045 1,210 -165 1,120 1,440 -22% Asia – Pacific 1,114 1,131 -17 1,120 1,147 -2% Corporate 93 99 -6 98 102 -4% Total 27,808 28,602 -794 28,182 26,713 +5%
Excluding changes in Group structure attributable to the acquisition of KPMG Consulting in the United Kingdom and the Netherlands in September 2002, there was a reduction of 3% in the average workforce.
Following completion of the disposal of the Company’s document and check processing activities to Experian, which has been effective in September 2003, the group’s workforce has been reduced by around 1,000 employees.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 124/233
B.3.3 CONSOLIDATED HALF YEAR FINANCIAL STATEMENTS
B.3.3.1 CONSOLIDATED INCOME STATEMENT (In millions of €) Notes * 6 months 6 months 12 months ended June ended June ended Dec 30, 2003 30, 2002 31, 2002
Revenue 1,543.1 1,486.7 3,042.9
Personnel expenses C (862,5) (800,8) (1,642.0) Operating costs and expenses C (558,0) (550.8) (1,135.3) Income from operations 122.6 135.1 265.6 % of revenue 7.9% 9.1% 8.7%
Net financial expense D (12.3) (6.6) (27.3) Net income on ordinary activities 110.3 128.5 238.3
Non-recurring items E (25.1) (9.7) (70.8) Corporate income tax F (25.4) (39.7) (46.9) Net income before equity affiliates, minority interests and 59.8 79.1 120.6 amortization of goodwill
Share in income of equity affiliates (0.1) Minority interests (6.5) (5.7) (11.3) Net income – Group Share before amortization of goodwill 53.3 73.4 109.2 % of revenue 3.5% 4.9% 3.6%
Amortization of goodwill G (29.0) (12.2) (38.4) Net income – Group Share 24.3 61.2 70.8 % of revenue 1.6% 4.1% 2.3%
In € Net earnings per share Weighted average number of shares 44,055,67 43,855,34 43,954,67 6 8 7 Earnings per share before amortization of goodwill 1.21 1.67 2.48 Net earnings per share 0.55 1.40 1.61 Diluted average number of shares 49,897,41 51,379,82 50,846,59 5 9 0 Earnings per share before amortization of goodwill 1.07 1.43 2.15 Diluted earnings per share 0.49 1.19 1.39 (*) See Notes to the consolidated financial statements
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 125/233
B.3.3.2 CONSOLIDATED BALANCE SHEET
(in millions of €) Notes * June 30, 2003 Dec. 31, 2002 June 30, 2002 ASSETS
Goodwill G 975.8 1 029.1 401.7 Other intangible fixed assets 30.1 32.2 27.4 Tangible fixed assets 184.8 217.3 259.6 Investments 20.6 21.3 37.4 Total fixed assets 1,211.3 1,299.9 726.1
Trade Accounts receivable H 883.1 871.9 887.1 Other Receivables, Prepayments and accrued income I 243.4 264.2 277.9 Transferable securities M 30.1 133.1 100.3 Cash at bank and in hand M 393.8 288.7 104.9 Total current assets 1,550.4 1,557.9 1,370.2 TOTAL Assets 2,761.7 2,857.8 2,096.3
(in millions of €) June 30, 2003 Dec. 31, 2002 June 30, 2002 LIABILITIES AND SHAREHOLDER’S EQUITY
Common stock J 44.1 44.1 44.1 Additional paid-in capital 44.0 44.0 44.0 Consolidated reserves 416.4 343.0 334.7 Foreign exchange losses or gains (34.7) 3.8 13.1 Net income for the period 24.3 70.8 61.2 Other consolidated Shareholder’s Equity 234.8 234.8 - Shareholders’ Equity – Group Share 728.9 740.5 497.1 Minority interests K 45.6 43.6 41.2 Total Shareholders’ Equity 774.5 784.1 538.3 Provisions for contingencies and losses L 238.3 266.6 218.5 Borrowings M 809.5 862.1 386.6 Trade Financial statements payable 340.6 342.8 366.9 Other Liabilities, Accruals and deferred income N 598.8 602.2 586.0 Total Liabilities 1,748.9 1,807.1 1,339.5 TOTAL Liabilities and Shareholders’ Equity 2,761.7 2,857.8 2,096.3 (*) See Notes to the consolidated financial statements
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 126/233
B.3.3.3 CONSOLIDATED CASH FLOW STATEMENT
(in millions of €) 6 months 6 months 12 months ended ended ended June 30, June 30, Dec 31, 2003 2002 2002
Net income before equity affiliates, minority interests and 59.8 79.1 120.6 amortization of goodwill
Depreciation, amortization and provisions 55.5 55.0 123.0 Financial provisions (0.2) (0.2) 10.5 Exceptional depreciation, amortization and provisions (36.3) (22.1) (23.6) Net losses (gains) on disposals of fixed assets and acquisition costs 2.5 (4.1) (6.1) Deferred taxes 0.6 16.2 18.2 Net cash from operations before changes in working capital 81.9 123.9 242.6 Changes in working capital 29.1 (29.2) 51.2 Net cash from operating activities 111.0 94.7 293.8
Purchases of tangible and intangible fixed assets (36.9) (52.1) (102.3) Proceeds from disposals of tangible and intangible fixed assets 2.2 30.5 62.3 Net Operating Investments (34.7) (21.6) (40.0) Purchases of financial investments (9.6) (18.5) (478.4) Proceeds from disposals of financial investments 2.6 6.1 45.4 Net cash and cash equivalents of companies purchased or sold during the 0.0 0.0 25.1 years Net Financial Investments (7.0) (12.4) (407.9) Net Cash used in investing activities (41.7) (34.0) (447.9)
Common stock issues 0.0 9.0 9.1 Dividends paid to minority shareholders of subsidiaries (3.5) (4.5) (11.3) New loans 0.0 50.5 634.1 Repayments of long and medium-term borrowings (64.0) (84.7) (228.2) Net cash from financing activities (67.5) (29.7) 403.7
Increase (Decrease) in cash and cash equivalents 1.8 31.0 249.6
Opening cash and cash equivalents 421.8 176.5 176.5 Increase (decrease) in cash and cash equivalents 1.8 31.0 249.6 Impacts of exchange rate fluctuations on cash and cash equivalents 0.3 (2.3) (4.3) Closing cash and cash equivalents 423.9 205.2 421.8
Opening net debt (440.3) (235.2) (235.2) New loans 0.0 (50.5) (634.1) Repayments of long-and medium-term borrowings 64.0 84.7 228.2 Increase (decrease) in cash and cash equivalents 1.8 31.0 249.6 Other movements (*) (11.1) (11.4) (48.8) Closing net debt (385.6) (181.4) (440.3) (*) "Other movements" include the net long and medium-term debt of companies purchased or sold during the period, and the impact of foreign exchange rates on net debt and profit-sharing amounts payable to French employees transferred to debt.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 127/233
B.3.3.4 CONSOLIDATED STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY
(in millions of €) Number of Com- Addit. Consoli- Foreign Net Other Equity, shares at mon Paid-in dated exchange income Share- Group period Stock capital reserves losses or for the holders’ share end (*) gains period equity At December 31, 2001 43,854 43.9 35.2 226.0 7.1 123.0 435.2 Common stock issues for cash 202 0.2 8.8 9.0 Foreign exchange losses or gains 1.4 (3.3) (1.9) Appropriation of net income 123.0 (123.0) 0.0 Net income for the period 70.8 70.8 Treasury stock (7.4) (7.4) ORA bonds 234.8 234.8 At December 31, 2002 44,056 44.1 44.0 343.0 3.8 70.8 234.8 740.5 Foreign exchange losses or gains 2.6 (38.5) (35.9) Appropriation of net income 70.8 (70.8) 0.0 Net income for the period 24.3 24.3 At June 30, 2003 44,056 44.1 44.0 416.4 (34.7) 24.3 234.8 728.9 (*) In thousands of shares
- Additional information regarding the published half year accounts. The variation in goodwill between December 31, 2002 and June 30, 2003 derives principally from: • The foreign exchange loss on the financing of the acquisition of KPMG Consulting in the UK in an amount of 16.7 million Euros, • The foreign exchange loss resulting from the conversion of the net assets of KPMG Consulting in the UK in an amount of 12.6 million Euros.
B.3.3.5 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A. Accounting Policies
With effect from January 1, 2001, the consolidated financial statements have been prepared in accordance with the "new accounting rules and methods applicable in France to consolidated financial statements" approved by the Order of June 22, 1999, implementing the Accounting Standards Committee Regulation CRC 99-02.
These accounting policies do not differ from those adopted by the Group and detailed in the notes to the consolidated financial statements presented in the 2002 Annual Report.
In accordance with the option offered by Regulation 99-02, Atos Origin has not retroactively adjusted investment and divestment transactions performed prior to January 1, 2001.
B. Changes in the scope of consolidation
• January 2003: Atos Origin increased its interest in Atos Odyssée from 93% to 100% in accordance with the progressive stock purchase agreement. Atos Odyssée is a French company included in the Consulting Division.
• April 2003: First consolidation of the French company Arema (percentage interest 95%), the joint venture with Redcats/Pinault Printemps Redoute to assist them in the consolidation and ongoing operation of their data centers.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 128/233
C. Operating costs and expenses
(in millions of €) 6 months 6 months 6 months ended ended ended June 30, 2003 Dec 31, 2002 June 30, 2002 Personnel expenses (862.5) (843.5) (798.5) Equipment, software and supplies (96.0) (86.8) (66.1) Sub-contracting costs (95.5) (108.2) (107.0) Real estate costs and maintenance (66.0) (72.0) (64.7) Equipment costs and maintenance (99.6) (92.7) (100.6) Travel and entertainment (37.7) (40.5) (41.3) Telecommunications (51.6) (57.5) (60.2) Depreciation and amortization (52.3) (60.2) (64.9) Other operating costs and expenses (59.3) (64.3) (48.3) Total (1,420.5) (1,425.7) (1,351.6)
D. Net financial expenses
(in millions of €) 6 months 6 months 6 months ended ended ended June 30, 2003 Dec 31, 2002 June 30, 2002 Convertible bond issues (0.9) (1.9) (1.9) Long- and medium-term borrowings (12.8) (10.7) (3.3) Lease financing (0.5) (0.6) (0.7) Short-term financing 4.1 2.5 - Net interest expense (10.1) (10.7) (5.9) Exchange gains and losses (1.5) (1.1) (0.9) Financial provision 0.2 (7.4) (1.1) Other (0.9) (1.4) 1.3 Total (12.3) (20.6) (6.6)
Average net debt increased from approximately € 228 million in the first half of 2002 to € 333 million in the second half of 2002 following the acquisition of KPMG Consulting in the United Kingdom and in the Netherlands in August 2002. Average net debt in the first half of 2003 totaled € 417 million. The costs of borrowings was 4.8%.
E. Non-recurring items
Net non-recurring expenses totaled € 25,1 million, and comprise mainly rationalization and reorganization costs.
F. Corporate income tax
(in millions of €) 6 months ended June 30, 2003 6 months ended June 30, 2002 France International Total France International Total Current taxes (12.6) (12.3) (24.9) (10.8) (12.7) (23.5) Deferred taxes (3.7) 3.2 (0.5) (2.5) (13.7) (16.2) Total (16.3) (9.1) (25.4) (13.3) (26.4) (39.7)
The Corporate income tax charge for the period ended June 30, 2003 is € 25.4 million, corresponding to an effective rate of 29.8% of income before tax and amortization of goodwill. This compares with a rate of 33.4% for the first half of 2002.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 129/233
G. Goodwill
(in millions of €) Dec. 31, Acq./ Disposals/ Dec. 31, Acq./ Translat° Disposals June 30, 2001 Charge Reversal 2002 Charge /Adjust / Reversal 2003 Gross value 503.1 690.9 - 1,194.0 4.1 (27.8) (0.2) 1,170.1 Amortization (*) (97.7) (67.1) - (164.8) (30.0) 0.5 - (194.3) Net book value (405.4) (623.8) - 1,029.2 (25.9) (27.3) (0.2) 975.8
(*) Depreciation and amortization charges for 2002 in the amount of € 67.1 million include an exceptional charge for the Origin goodwill in the amount of € 28.7 million. This exceptional charge offsets the reversals of provisions, which were no longer founded, as recorded in the Origin opening balance sheet as at October 1, 2000.
Adjustments during the period to June 30, 2003 totaled € 27.8 million in gross value are related to the foreign exchange movements in the United Kingdom.
- Additional information regarding the published half year accounts: Goodwill attributed to additional paid-in capital earned upon the acquisition of the shares of the Sligos and Origin companies through an exchange of shares amounted to € 185 million and results in a notional annual amortization of € 9.3 million.
H. Net financial statements receivable
(in millions of €) June 30, Dec. 31, June 30, 2003 2002 2002 Gross value 918.1 908.0 926.6 Provisions (35.0) (36.1) (39.5) Net book value 883.1 871.9 887.1 Payments on account received on orders (91.2) (87.2) (78.2) Deferred income and amounts due to customers (103.4) (66.0) (103.4) Net financial statements receivables (incl. VAT) 688.5 718.7 705.5 Number of days revenue outstanding 67 68 73
I. Other receivables, prepayments and accrued income
(in millions of €) June 30, Dec. 31, June 30, 2003 2002 2002 Recoverable VAT 36.7 56.3 42.1 Tax-related assets (carry back, minimum tax charge, tax credits) 33.3 43.7 41.4 Deferred tax assets 75.7 77.4 82.1 Amounts receivable on disposals of tangible assets and investments (*) 5.2 5.9 17.4 Other receivables 32.4 25.2 35.3 Prepayments and accrued income 60.1 55.7 59.6 Total 243.4 264.2 277.9 (*) Amounts receivable on asset disposals as of June 30, 2003 and December 31, 2002 comprise that portion of the customer contact center activities consideration receivable in 2004.
J. Common stock
June 30, Dec. 31, June 30, 2003 2002 2002 Number of shares 44,055,676 44,055,676 44,052,336 Par value EUR 1 EUR 1 EUR 1 Total (in thousands of €) 44,055.7 44,055.7 44,052.3 K. Minority interests
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 130/233
Minority interests in shareholders’ equity total € 45.6 million. The most significant balances concern: - AtosEuronext, Bourse Connect and companies in partnership with Euronext: € 35.8 million. - Atos Origin Processing Services (AOPS), a German payment specialist company: € 4.5 million. - Atos Origin Middle-East: € 3.2 million.
L. Provisions for contingencies and losses
(in millions of €) 31/12/01 Others Charge Release 31/12/02 Others Charge Release 30/06/03 (*) (*) Origin opening balance sheet 75.2 (18.9) - (15.5) 40.8 1.4 - (4.5) 37.7 Origin Merger integration 24.7 (4.5) - (14.0) 6.2 0.6 - (1.1) 5.7 Other provisions on acquisitions - 25.0 8.7 (9.6) 24.1 (1.0) 4.4 (23.7) 3.8 Operating provisions 58.2 12.1 52.4 (36.6) 86.1 3.0 24.0 (42.0) 71.1 Pensions 93.0 4.8 16.8 (5.2) 109.4 (0.9) 15.6 (4.1) 120.0 Total provisions for 251.1 18.5 77.9 (80.9) 266.6 3.1 44.0 (75.4) 238.3 contingencies and losses (*) The "Others" column comprises adjustments to the opening balance sheet, changes in Group structure foreign exchange movements, together with amounts transferred to operating liabilities.
• Origin Opening Balance Sheet
(in millions of €) 31/12/01 OthersCharge Release 31/12/02 OthersCharge Release 30/06/03 (a) (b) Origin Opening Balance Sheet 75.2 (18.9) - (15.5) 40.8 1.4 - (4.5) 37.7 (a) Adjustment on goodwill & foreign exchange movements, (b) foreign exchange movements
The above provisions were charged against equity to cover excess long term software license commitments together with employee and tax risks in Brazil relating to Origin pre-merger.
€ 4.5 million was charged against these provisions during the first half of 2003 primarily to cover the license costs of unused software. Employee and tax risks provided were not subject to change except for an amount of € 1.4 million to reflect foreign exchange movements.
• Origin Merger Integration
(in millions of €) 31/12/01 Others Charge Release 31/12/02 Others Charge Release 30/06/03 (a) (b) Reorganization 20.2 (4.5) - (11.9) 3.8 0.6 - (0.9) 3.5 Rationalization 3.1 - - (0.9) 2.2 (0.1) 2.1 Integration costs 1.4 - - (1.2) 0.2 (0.1) 0.1 Total 24.7 (4.5) - (14.0) 6.2 0.6 (1.1) 5.7 (a) Adjustment on goodwill & foreign exchange movements (b) foreign exchange movements
These provisions relate to the merger with Origin and covered primarily staff restructuring, data centers and premises rationalizations.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 131/233
• Other acquisitions
(in millions of €) 31/12/01 OthersCharge Release 31/12/02 Others Charge Release 30/06/03 (a) (b) Other acquisitions - 25.0 8.7 (9.6) 24.1 (1.0) 4.4 (23.7) 3.8 (a) Adjustment on goodwill & foreign exchange movements (b) foreign exchange movements
The provisions recorded on the acquisition of KPMG Consulting in the Netherlands and the United Kingdom cover unused shared services with KPMG Audit, employee-related costs resulting from economies of scale between Atos Origin activities in the United Kingdom and Atos KPMG Consulting, and employee-related costs associated with downsizing measures implemented in respect of identified over-capacity. These provisions are in line with those identified when the acquisition was announced.
During the first half of 2003, € 4.4 million was charged to cover additional staff reduction and premises rationalization to be incurred early in the second half of 2003. € 23.7 was released against these provisions during the same period to finance restructuring costs incurred during the period.
• Operating provisions
(in millions of €) 31/12/01 Others Charge Release 31/12/02 OthersCharge Release 30/06/03 (a) (b) Provisions for project commitments 18.1 2.0 9.4 (15.4) 14.1 (0.7) 5.0 (9.0) 9.4 Provisions for reorganization 4.2 1.2 27.7 (5.2) 27.9 0.1 15.9 (23.5) 20.4 Other 35.9 8.9 15.3 (16.0) 44.1 3.6 3.1 (9.5) 41.3 Operating provisions 58.2 12.1 52.4 (36.6) 86.1 3.0 24.0 (42.0) 71.1 (a) Adjustment on goodwill & foreign exchange movements (b) foreign exchange movements
Operating provisions include restructuring costs, operational project commitments, the convertible bond redemption premiums, and various contingencies and losses. The increase in operating provisions in 2002 was mainly due to staff restructuring arising from identified over-capacity. In the first half of 2003, the Group continued to favorably resolve project disputes and litigation issues.
During the same period, the Group pursued its restructuring plan in response to a difficult market, particularly in Consulting and Systems Integration. Other provisions remained stable.
• Pensions
(in millions of €) 31/12/01Others Charge Release 31/12/02Others Charge Release 30/06/03 (a) (b) Pensions 93.0 4.8 16.8 (5.2) 109.4 (0.9) 15.6 (4.1) 120.0 (a) Adjustment on goodwill & foreign exchange movements (b) foreign exchange movements
The increase in pension provisions in 2003 is primarily related to the defined benefit pension schemes in the Netherlands. The decrease in the same period concerned mainly staff reductions in Italy and Germany.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 132/233
M. Net debt
(in millions of €) June 30, 2003 Dec. 31, June 30, Falling due within 2002 2002 Total 1 year 2 years 3 years 4 years 5 years Total Total or more Bonds (173.0) (173.0) 173.0 (173.0) Finance leases (11.0) (8.5) (2.0) (0.3) (0.1) (0.1) (17.2) (19.3) Long-term borrowings (584.9) (99.0) (156.7) (152.6) (125.3) (51.3) (636.7) (181.8) Other borrowings (40.7) (23.9) (2.0) (2.2) (5.5) (7.1) (35.3) (12.5) Total borrowings (809.5) (131.4) (333.7) (155.0) (130.9) (58.5) (862.1) (386.6) Transferable securities 30.1 30.1 133.1 100.3 Cash at bank and in hand 393.8 393.8 288.7 104.9 Total cash and cash equivalents 423.9 423.9 0.0 0.0 0,0 0.0 421.8 205.2 Net debt (385.6) 292.6 (333.7) (155.0) (130.9) (58.5) (440.3) (181.4)
N. Other liabilities, accruals and deferred income
(in millions of €) June 30, Dec. 31, June 30, 2003 2002 2002 Payments on account received on orders 91.2 87.2 78.2 Employee-related liabilities 151.4 176.4 151.9 Social security and the other employee welfare liabilities 106.5 106.6 92.0 VAT payable 96.0 102.3 97.5 Corporate income tax payable 37.4 39.0 29.0 Deferred tax liabilities 9.6 9.7 9.9 Liabilities on acquisitions of participating interests 0.1 4.6 7.6 Miscellaneous creditors and other operating liabilities 38.8 29.3 56.2 Deferred income 67.8 47.1 63.7 Total 598.8 602.2 586.0
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 133/233
B.3.4 SEGMENT INFORMATION
B.3.4.1 INFORMATION BY SERVICE LINE (in millions of €) Consulting Systems Managed Corporate Group Integration Operations 6 months ended June 30, 2003 Revenue 195.5 555.1 792.5 - 1,543.1 Income from operations 13.0 27.4 96.3 (14.1) 122.6 Fixed assets 7.9 39.1 163.6 4.3 214.9 Period-end number of employees 2,137 13,005 12,573 93 27,808 6 months ended June 30, 2002 Revenue 12.2 647.1 827.4 - 1,486.7 Income from operations 3.7 45.9 103.5 (18.0) 135.1 Fixed assets 0.3 42.4 239.5 4.8 287.0 Period-end number of employees 138 13,962 12,453 99 26,652 12 months ended Dec. 31, 2002 Revenue 174.5 1,243.0 1,625.4 - 3,042.9 Income from operations 16.0 65.9 213.6 (30.0) 265.6 Fixed assets 8.8 37.5 197.9 5.3 249.5 Year-end number of employees 2,383 13,954 12,166 99 28,602
B.3.4.2 INFORMATION BY GEOGRAPHICAL AREA (in millions of €) France The UK EMEA Americas Asia Corporate Group Netherlands others (2) Pacific (1) (3) 6 months ended June 30, 2003 Revenue 531.5 481.4 171.5 289.4 41.9 27.4 - 1,543.1 Income from operations 55.7 54.8 4.7 18.0 1.3 2.2 (14.1) 122.6 Fixed assets 95.0 78.4 4.7 24.9 2.2 5.4 4.3 214.9 Period-end number of 8,678 8,623 2,015 6,240 1,045 1,114 93 27,808 employees 6 months ended June 30, 2002 Revenue 543.3 440.6 71.4 325.5 75.5 30.4 - 1,486.7 Income from operations 57.8 61.6 5.5 21.9 4.0 2.1 (18.0) 135.1 Fixed assets 110.7 125.6 5.5 29.2 4.8 6.4 4.8 287.0 Period-end number of 8,742 7,637 1,083 6,611 1,359 1,121 99 26,652 employees 12 months ended Dec. 31, 2002 Revenue 1,086.2 912.8 238.4 610.0 132.3 63.2 - 3,042.9 Income from operations 116.2 124.2 12.9 28.6 7.8 5.8 (30.0) 265.6 Fixed assets 106.1 95.5 5.5 27.6 3.3 6.2 5.3 249.5 Year-end number of employees 8,685 9,019 2,139 6,319 1,210 1,131 99 28,602
(1) Europe, Middle-East, Africa : Germany, Switzerland, Italy, Spain, Portugal, Belgium, Luxembourg, Poland, Austria, Hungary, Czech Republic, Saudi Arabia. (2) United States, Canada, Mexico, Argentina, Brazil, Peru. (3) Australia, China, Hong-Kong, India, Malaysia, Singapore, Taiwan, Thailand.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 134/233
B.3.5 STATUTORY AUDITORS’ REPORT ON THE HALF-YEAR CONSOLIDATED FINANCIAL STATEMENTS
Period from January 1, to June 30, 2003
Pursuant to article L. 232-7 of the French Commercial Code (Code de commerce), we have reviewed:
• the accompanying half-year summary financial statements of Atos Origin, covering the period from January 1 to June 30, 2003, and • verified the information contained in the half-year management report.
The half-year consolidated, summary financial statements are the responsibility of your Board of Directors. Our responsibility is to issue a report on these financial statements based on our review.
We conducted our review in accordance with professional standards applicable in France. Those standards require that we perform limited procedures, to obtain an assurance, which is less than obtained in an audit, as to whether the half-year consolidated summary financial statements are free of material errors. We have not performed an audit as a review is limited primarily to analytical procedures and to inquiries of group management and knowledgeable personnel on information that we deemed necessary.
Based on our review, nothing has come to our attention that causes us to believe that the half-year consolidated summary financial statements, prepared in accordance with accounting principles generally accepted in France, do not give a true and fair view of the financial position and the assets and liabilities of the Group as at June 30, 2003 and of the results of its operations for the six month period then ended.
We have also verified, in accordance with professional standards applicable in France, the information contained in the half-year management report supplementing the half-year consolidated summary financial statements submitted to our review.
We have no comment to make as to the consistency with the half-year consolidated summary financial statements and the fairness of the information contained in the half-year management report.
Neuilly-sur-Seine and Paris, September 10, 2003
The Auditors,
Deloitte Touche Tohmatsu Amyot Exco Grant Thornton
Jean-Paul Picard Daniel Kurkdjian Jean-Marc Lumet Vincent Papazian
(This is a free translation of the original text in French for information purposes only)
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 135/233
B.4 UNAUDITED FINANCIAL STATEMENTS AS OF JUNE 30, 2003
B.4.1 UNAUDITED MANAGEMENT REPORT ON THE COMPANY'S ACTIVITY AS OF SEPTEMBER 30, 2003 On November 14, 2003, Atos Origin announced that revenues for the third quarter of 2003 amounted to EUR 717 million, a decrease of 2.4% compared with the same period in 2002. On a constant scope and exchange rate basis, revenues fell by 6.6%, reflecting some continuing price pressure in Consulting and parts of the Systems Integration market. The European market for IT services continues to be variable in the mid-term, although there are clear signs of a modest improvement emerging.
The Group’s net debt fell to € 364 million and is expected to be below the target of € 350 million by December 31, 2003.
• Revenue per Service Line
3 months ended September 30, 2003 In millions of € 2003 2002 Change Consulting 82.0 46.7 +75.5% Systems Integration 252.4 283.4 -10.9% Managed Operations 382.5 404.3 -5.4% Total 716.9 734.4 -2.4% Acquisitions (50.3) Disposals (4.9) Exchange rates (16.1) At Constant Scope and Exchange Rates 666.6 713.4 -6.6%
• Revenue per Geographic Region
3 months ended September 30, 2003 In millions of € 2003 2002 Change France 248.2 264.1 -6.0% The Netherlands 220.9 220.9 +0.0% United Kingdom 80.6 62.2 +29.4% EMEA 135.7 140.8 -3.6% Americas 17.3 29.6 -41.6% Asia Pacific 14.2 16.8 -15.2% Total 716.9 734.4 -2.4%
In Consulting, reported revenues showed a significant year-on-year increase for the same period, although there was an underlying organic decline after adjusting for the acquisition of Atos KPMG Consulting, which was consolidated for only one month in the same period in Q3 2002. The decline reflects continuing pressure on prices and some adverse exchange impact.
Although Systems Integration revenues were € 31 million lower year-on-year for the same period (-11%), there was a modest 4% improvement in volume, more than offset by pricing erosion. The figures were also affected by some adverse impact from exchange rates. Pricing pressure remains at its strongest in those low-end parts of the market where there is little differentiation in service offering. It remains Atos Origin’s policy in the medium-long term to phase out of some of those areas and concentrate on providing high added value services in specialist parts of the market.
Managed Operations showed a decline of around 5%, both year-on-year and sequentially. This was due partly to exchange rates and partly to the de-consolidation of the group’s document management and check processing business with effect from September 1, 2003. Revenues were also affected adversely by some seasonality factors, especially in desktop support.
In France, revenues showed a slightly steeper decline year-on-year for the quarter than in the first half due to the sale and de-consolidation of the document management and check processing business. However, parts of the
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 136/233
Systems Integration business were also weaker than expected during the summer period. There was a similar situation in parts of the Netherlands and in the UK.
Net debt fell during the period from € 386 million at the end of June to € 364 million by the end of September, largely due to the receipt of € 20 million from the disposal of the French document management and check processing business. Given the seasonally strong profitability and cash flow expected in the fourth quarter, the Group believes that net debt will be below its target of € 350 million by the end of December 2003.
• Outlook
In the short-term, pricing pressure continues to affect both the Consulting and Systems Integration markets although volumes, especially in Systems Integration, are now stabilizing. As a consequence, the Group’s reported revenues for 2003 may be slightly lower than in 2002 as a result of the combined effect of pricing pressure and the downward movement of exchange rates.
The Group remains focussed on profitability and strong cash flow and still expects the operating margin for 2003 to exceed 8% as a result of continuous action to minimize the cost base and improve productivity. The performance in reducing net debt has been good and the year-end debt figure is likely to be below the target we established at the start of this year.
B.4.2 PRE-CLOSING UPDATE Atos Origin issued on December 22, 2003 a pre-closing update on trading for the year ending December 31, 2003 and announced details concerning completion of the acquisition of SchlumbergerSema.
Based on trading during October and November 2003, the Group’s expectations for 2003, as stated during the 3rd Quarter revenue announcement in November, have not changed. Reported revenues for the 12 months ending December 31, 2003 are expected to be marginally lower than in 2002. The Group remains focussed on profitability and cash flow and expects the operating margin for 2003 to exceed 8%. The performance in reducing borrowings has also been good and year-end net debt will be below EUR 350 million.
Earlier this year, the Group indicated to the market that it would make an assessment of the carrying value of goodwill at year-end in respect of Atos KPMG Consulting, under the requirements of IAS 36. The justification for that acquisition was strategic, based on driving growth in the medium-long term. The Group remains confident that the rationale for the acquisition is justified and sales synergies have been achieved across the group in 2003. However, based on current market conditions, and before taking into account the additional benefits that the Group expects to accrue from the acquisition of SchlumbergerSema, Atos Origin has decided to take a goodwill impairment charge of € 224 million in its financial statements for the year ending December 31, 2003.
In connection with the acquisition of SchlumbergerSema, Atos Origin considers it important to include preliminary details of the group’s results for the year ending December 31, 2003 in the prospectus (Document E) to be issued to shareholders. Consequently, Document E will incorporate preliminary revenue and profitability for 2003, and will be issued on or around January 16, 2004. The shareholder meeting to approve the acquisition of SchlumbergerSema has now been scheduled for Thursday, January 22, 2004 and closing is expected at the end of that month.
Recent trading results from SchlumbergerSema indicate that their restructuring program and trading in the 4th Quarter of 2003 are progressing according to plan. The Group has already announced details of the corporate and country organization structures for the new group, which will take effect at closing. Both sides are working to prepare for completion and to finalize the program of integration and restructuring, details of which will be communicated at the shareholder meeting in January.
Atos Origin is currently completing its 2004 Budget process. The Group continues to believe that the IT services market is stabilizing after a two-year recession. There are signs of recovery in certain parts of the market, although that recovery is variable and Atos Origin believes that trading in the first half of 2004 will remain tough in Europe, where the majority of the group’s activities are located. Guidance for 2004 will also be given at the shareholder meeting on January 22, 2004.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 137/233
B.4.3 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN FRENCH GAAP AND U.S. GAAP The following part is an extract of the report sent on December 15, 2003 to the Chairman & the Chief Financial Officer of Schlumberger Investment Limited.
This report has been prepared by the Management of Atos Origin (the "Company" or "we") in fulfilment of our obligation to provide certain financial information to Schlumberger N.V., ("Schlumberger") as outlined in the Master Share Purchase Agreement between Atos Origin SA, Schlumberger SA, Schlumberger Technology Corporation, Schlumberger BV, Schlumberger Investment Limited and Schlumberger Limited, dated September 21, 2003 ("Purchase Agreement"). In parallel, we have undertaken certain obligations towards Koninklijke Philips Electronics N.V. ("Philips") to provide it with such information on December 18, 2003.
B.4.3.1 SCOPE OF OUR UNDERTAKING TO PREPARE THE US GAAP FINANCIAL INFORMATION We launched a "U.S. GAAP" project and established a team dedicated to that project which includes accounting specialists. The objective of this team was to prepare the Financial Information included in this letter. In addition, we engaged US GAAP experts to advise and assist our project team. However, these experts were not engaged to and did not perform an audit or review of the Financial Information contained in this report. Had they performed an audit or review of the Financial Information, other matters might have come to our attention that would have affected the Financial Information.
Our project team commenced the project to prepare the Financial Information immediately after our signing of the Purchase Agreement. Every effort was made to identify the significant differences between French GAAP and U.S. GAAP that affect the Company’s equity and operating results as of September 30, 2003 and the twelve months then ended. However, given the complexities of this process, the breadth and scale of our operations, and the limited timeframe, there can be no assurance that all significant matters that would affect the Financial Information have been identified by us.
In addition, in certain instances, we have identified differences between French GAAP and U.S. GAAP that could affect the Financial Information contained herein. However, due to the limited timeframe of the project, quantification of these differences has not been performed and their effects, if any, are not recorded within the Financial Information presented herein. These differences relate to revenue recognition and the fair value of net assets acquired in conjunction with certain business acquisitions (and the related carry forward effects) and in conjunction with certain impairment tests. These differences and their potential effects on the Financial Information are discussed further below.
B.4.3.2 CONTENT OF FINANCIAL INFORMATION The Financial Information contained herein is solely related to the reconciliations of equity and net income of the Company determined in accordance with French GAAP to such amounts determined in accordance with U.S. GAAP as of September 30, 2003 and the twelve month period then ended, respectively.
B.4.3.3 SUMMARY OF ATOS ORIGIN ACCOUNTING POLICIES UNDER FRENCH GAAP Effective January 1, 2001, Atos Origin consolidated financial statements have been prepared in accordance with the "new accounting rules and methods applicable to consolidated financial statements" approved by the Order of June 22, 1999, implementing the Accounting Standards Committee Regulation CRC 99-02. As part of the preparation of our consolidated financial statements, we have adopted certain standards established by the International Accounting Standards Committee ("IASC") relating to the:
• recognition of operating revenue from services involving fixed price contracts (IAS 11); • recording of income taxes (IAS 12); • recording of property, plant and equipment (IAS 16); • accounting for leases (IAS 17); • measurement and recognition of employee benefits (IAS 19); • recording the effects of changes in foreign exchange rates (IAS 21); • impairment of assets (IAS 36); and • recognition of provisions, contingent liabilities and contingent assets (IAS 37).
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 138/233
Our accounting policies are outlined in our 2002 Annual Report.
B.4.3.4 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN FRENCH GAAP AND U.S. GAAP WHICH AFFECT THE FINANCIAL INFORMATION
B.4.3.4.1 SIGNIFICANT DIFFERENCES WHOSE IMPACT (IF ANY) ARE NOT INCLUDED IN THE FRENCH GAAP TO U.S. GAAP RECONCILIATION BELOW
Operating Revenue
Revenue recognition policies under French GAAP are determined separately for each of our service lines.
• Consulting and Systems Integration revenues from fixed price contracts are recognized in line with the technical completion of projects. With regard to multiple year contracts, operating revenue is recognized using the percentage of completion method. • Managed Services operating revenues are generally determined based on fixed-price and/or number of IT units. • On-line Services operating revenues are recognized based on transaction volume and/or as IT services are rendered.
In our assessment of potential differences between French GAAP and U.S. GAAP with respect to operating revenue recognition, we discussed with our operational managers various revenue streams of each service line, analyzed representative customer contracts, researched policies and practices of comparable companies reporting under U.S. GAAP and performed research with respect to U.S. GAAP to ascertain whether differences between French GAAP and U.S. GAAP may exist. We have identified the following differences between French GAAP and U.S. GAAP, which we believe are relevant to us:
• Contracts including performance measures
Under French GAAP, in certain circumstances, we recognize operating revenue attributable to achieving performance measures prior to satisfying the performance criteria. Under U.S. GAAP, all contingencies regarding performance measures must be resolved prior to recognizing operating revenue. This would result in deferral of certain revenues under U.S. GAAP.
• Managed Operations contracts
We separate outsourcing contracts into two parts (1) the transition phase and (2) the run phase. Under French GAAP, the costs associated with some contract transitions are expensed in the transition phase of the contract. Under U.S. GAAP, transition costs should generally be capitalized and amortized over the life of the contract.
In addition, under French GAAP, in certain instances, we record at book value fixed assets acquired by customers which are used to service the related customer contract, except when the assets were acquired in conjunction with a business combination. Under U.S. GAAP, the fixed assets purchased should be recorded at fair market value.
Given that our revenue is derived from thousands of customer contracts, many of which have unique terms or are customized, ascertaining and quantifying the differences in our revenue recorded in accordance with French GAAP and those prepared in accordance with U.S. GAAP would require reading and assessing each significant contract. Given the limited time frame of the project, completion of this process was not feasible. Accordingly, the differences identified above may not include all differences that may exist. No adjustments relating to the potential effects of differences under French GAAP revenue recognition and that of U.S. GAAP are reflected in the equity and net income reconciliations below.
Fair Market Value of Net Assets Acquired in Business Acquisitions and Reporting Units in Conjunction with Certain Impairment Tests
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 139/233
Fair Market Value of Net Assets Acquired in Business Acquisitions
Our policy under French GAAP for the allocation of purchase consideration in a business combination is based on management’s estimate of fair market value of the assets acquired. A fair market value analysis was performed for each business acquisition. However, historically, we have not valued contracts in progress at fair market value nor have we separately identified and assigned a portion of the purchase price to identifiable intangible assets other than goodwill that may have existed on the acquisition date.
U.S. GAAP requires that all assets and liabilities be recorded at their fair market value upon their acquisition including contracts in process and identified intangible assets. The excess of the fair market value of purchase consideration over the fair market value of net assets is then recorded as goodwill. Accordingly, the following differences between French GAAP and U.S. GAAP were identified and may have a significant effect on equity and net income prepared in accordance with U.S. GAAP as of September 30, 2003 and the twelve month period then ended included below.
• Under U.S. GAAP, customer contracts in progress on the date of acquisition should be recorded at their fair market value to allow the purchaser to earn a "reasonable profit margin".
The determination of the effects of recording customer contracts at their fair market value at the respective acquisition date necessitates the reading and assessment of each significant customer contract in place at the date of our significant acquisitions (i.e., Sligos, Origin, KPN and KPMG). Given the limited timeframe of the project, completion of this process was not feasible.
• Under U.S. GAAP, the allocation of purchase consideration to the estimated fair market values of the acquired assets and liabilities requires a careful analysis of the existence of identifiable intangible assets. We have researched the practices of other comparable companies who report under U.S. GAAP. We understand that certain of these companies have allocated a portion of the purchase consideration relating to business acquisitions to certain identified intangible assets, including among others, customer relationships, proprietary software, contract backlog, strategic alliances and trademarks. However, we believe that this practice has not been followed by European IT service companies. Such allocations were not performed in preparing our French GAAP financial statements.
Determination of adjustments relating to such allocations, if any, necessary to present equity and net income in accordance with U.S. GAAP requires careful consideration of the facts and circumstances of each of our business combinations. The limited timeframe of the project did not permit us to complete this consideration and the related valuation process requisite to ascribe a value to the other intangible assets to the extent we determined they existed.
• We have recorded certain material liabilities in our French GAAP financial statements in connection with the Origin acquisition in October 2000 which would not be in accordance with U.S. GAAP. Such provisions have the effect of increasing goodwill and increasing net income in the periods in which the related charge is incurred. We have not quantified or recorded any adjustments for such differences in the reconciliations of equity or net income presented below under the assumption that any resulting additional goodwill would be impaired and fully written-off prior to October 1, 2002.
Fair Market Value of Net Assets in Conjunction with Certain Impairment Tests
Under U.S. GAAP subsequent to December 31, 2001, goodwill acquired and recorded in conjunction with a business combination is not amortized. Rather, goodwill is tested annually for impairment at a level of reporting referred to as a reporting unit. The testing of goodwill for impairment is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair market value of a reporting unit with its book value, including goodwill. If the book value of a reporting unit exceeds its fair market value, a second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair market value of the goodwill reporting unit with the book value of that goodwill. The implied fair market value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. Similar to the above, the limited timeframe of this project did not permit us to complete an analysis of the existence or fair market values of identifiable intangible assets for the purposes of performing step two of the goodwill impairment test under
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 140/233
U.S. GAAP. Accordingly, we have measured goodwill impairment charges under U.S. GAAP based on the excess of the book value of a reporting unit (including goodwill) over its fair market value.
No adjustments relating to the potential effects of differences outlined above between French GAAP and U.S. GAAP relating to the allocation of purchase consideration to the fair market value of net assets acquired in a business acquisitions and the fair market value of net assets in conjunction with certain impairment tests are reflected in the equity and net income reconciliations below. Such adjustments would impact:
• The amount of goodwill subject to amortization and impairment • The amount of amortization and impairment provisions related to intangible assets (contract backlog, etc.) with finite lives • The amount of net income to the extent "profit normalization" adjustments relate to project revenue during the period.
B.4.3.4.2 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN FRENCH GAAP AND U.S. GAAP INCLUDED IN THE FRENCH GAAP TO U.S. GAAP RECONCILIATION
Reconciliation of the Company’s consolidated net income determined Under French GAAP to that amount determined under U.S. GAAP is below. Twelve Months Ended (in millions of €) REF September 30, 2003 N et Income, French GAAP 48.0 Reversal of goodwill amortization A 57.9 Stock-based compensation, KPMG Consulting E (19.9) Stock-based compensation, other F (10.8) Derivatives instruments G (5.9) Pension, other H (6.7) Convertible bonds I 2.4 Provisions J (14.9) Tax effect of above adjustments 0.3
N et Income, U.S. GAAP * 50.4
* - See "Scope of Our Understanding to Prepare the Financial Information" and "Differences Whose Impact, if any, are Not Identified in the French GAAP and to U.S. GAAP Reconciliation" above for a discussion of scope and limitations of this reconciliation.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 141/233
Reconciliation of the Company’s consolidated equity determined under French GAAP to that amount determined under U.S. GAAP is below.
(in millions of €) REF September 30, 2003 Net Equity, French GAAP 737.0 Reversal of goodwill amortization A 81.7 Business acquisitions, additional goodwill: Sligos B 318.2 Origin B 2 279.6 KPMG B (60.7) Goodwill impairment, prior to January 1, 2002 C (1 473.9) Goodwill impairment, after December 31, 2001 D (232.9) Derivative instruments G (5.9) Pension, additional minimum liability H (104.9) Pension, other H 41.5 Convertible bonds I 2.4 Provisions J 4.5 Tax effect of above adjustments 10.9
Equity, U.S. GAAP * 1 597.5
* - See "Scope of Our Understanding to Prepare the Financial Information" and "Differences Whose Impact, if any, are Not Identified in the French GAAP and to U.S. GAAP Reconciliation" above for a discussion of scope and limitations of this reconciliation.
A. Goodwill Amortization – Under French GAAP, goodwill recognized from business combinations is amortized over the expected period of benefit. The Company has amortized goodwill over a 20 year period. Under U.S. GAAP, goodwill recognized in a purchased business combination completed after June 30, 2001 is not amortized. Subsequent to January 1, 2002, all previously recorded goodwill is no longer amortized.
B. Business Combinations –Differences between French GAAP and U.S. GAAP giving rise to the adjustments for business combinations (additional goodwill) are comprised of the following:
• Under French GAAP, we have accounted for a portion of the goodwill arising in the Origin business combination as a direct charge to equity-capital surplus. Under U.S. GAAP, all goodwill arising from a business combination is recorded as an asset on the balance sheet. • Under French GAAP, the value of the contribution of the shares issued to acquire Origin was based on the corresponding net book value acquired from Origin. The fair market value of the securities issued in the KPMG Consulting acquisition was determined using a multi-criteria approach taking into account the stock market price of the Atos Origin shares and the transaction value set by the parties. Under U.S. GAAP, we have used an average of the fair market values of the securities issued for a period of time beginning two days before and ending two days after the date that the terms of the acquisition were agreed to and announced in determining the fair value of the securities issued to effect the business combination. The Company also considered the impact on fair market value of any restrictions or conditions inherent in the securities issued. • Under French GAAP, the ORA bonds paid to the KPMG Consulting partners in the Netherlands were accounted for as part of the purchase consideration. Under U.S. GAAP, such bonds are excluded from the purchase consideration and treated as compensation due to their vesting provisions. The impact on net income resulting from the recording of compensation expense over the vesting period is discussed in "E" below.
C. Goodwill Impairment, Prior to January 1, 2002 – Under French GAAP, goodwill, intangible assets and property, plant and equipment are reviewed for impairment whenever events or changes in markets indicate a potential impairment has occurred. However, we have adopted a policy to perform annual reviews of our long-lived assets for impairment. Assets deemed to be impaired are reduced to their estimated recoverable value. Impairment of long-term assets is measured by calculating its fair market value based on a discounted cash flow analysis of the future operating performance of the related
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 142/233
businesses. Prior to January 1, 2002, U.S. GAAP required a company to review long-lived assets and identifiable intangibles whenever events or changes in circumstances indicate that the book value of an asset may not be recoverable. If these events or changes in circumstances indicate that such amounts could not be recoverable, the future cash flow expected to result from the use of the assets and its eventual disposition are estimated. If the sum of the undiscounted future cash flows is less than the book value of the asset, a company recognizes an impairment loss for the difference between the book value of the asset and its fair value. The adjustment for U.S. GAAP above relating to goodwill impairment prior to January 1, 2002 is primarily the result of the additional goodwill recorded in the Sligos and Origin acquisitions for U.S. GAAP purposes as a result of the factors discussed in B above.
D. Goodwill Impairment, After December 31, 2001 – As of January 1, 2002, in conjunction with the adoption of the new standard of reporting goodwill and other indefinite-lived intangible assets, U.S. GAAP requires a company to perform a transitional impairment evaluation. To do this, we identified our reporting units, which coincide with the cash generating units utilized under French GAAP and the book value of each by assigning our assets and liabilities, including existing goodwill, to such reporting units. We then calculated the fair market value of each reporting unit by using a present value technique and compared it to the respective reporting unit’s book value. The present value technique used was based on an estimation of future discounted cash flows. The discount rates utilized correspond to the credit and risk profile for each reporting unit. In addition to the transition evaluation, goodwill was evaluated for impairment on an annual basis thereafter as of September 30. The adjustment for U.S. GAAP above relating to goodwill impairment after December 31, 2001 is primarily the result of the additional goodwill recorded in the Sligos and Origin acquisitions, for U.S. GAAP purposes. With respect to the quantification of the impairment charges under step two, as noted earlier in this report, no fair market value exercise was performed for the net assets of the reporting units in conjunction with step two of impairment test required under U.S. GAAP for goodwill impairment testing performed after December 31, 2001.
The evaluation of impairment as of September 30, 2003, utilizes discounted future cash flow data contained within our preliminary 2004 budget and this analysis indicated no impairment; however, we are currently in the process of finalizing the 2004 budget.
As such, the evaluation of impairment needs to be revised once our 2004 budget is completed which could impact the financial information above. We will provide you with the impairment charge, if any, based on the finalized 2004 budget.
E. Stock-Based Compensation, KPMG Consulting - Under French GAAP, stock-based consideration given to employees of the business acquired in a business acquisition is generally accounted for as additional purchase price. Under U.S. GAAP, a determination must be made as to whether such stock-based consideration should be accounted for as (1) an adjustment of the purchase price or (2) compensation for future services. Consideration deemed to be compensatory is recognized as compensation expense over the period the related services are provided. The adjustment above relates to the amortization of the compensation expense over the vesting period of stock consideration granted to employees in consideration with our acquisition of KPMG.
F. Stock-Based Compensation, Other – Under French GAAP, compensation cost is not recorded for stock options and stock purchase plans. Under U.S. GAAP, the intrinsic value of the option or shares granted to employees is measured and recognized as compensation expense over the vesting period.
G. Derivative Instruments – Under French GAAP, the fair market value of derivative instruments are recorded in the Company’s accounting records when the asset and liabilities are valued at their fair market value as the result of a business combination. In all other situations, French GAAP does not require the recognition of the fair market value of derivative instruments. As of January 1, 2001, under U.S. GAAP, a Company records financial instruments which meet the criteria for recognition as derivatives. Derivative instruments are valued at their market price and recorded on the balance sheet. The accounting for changes in fair market value of a derivative depends on the intended use of the derivative and the resulting designation. For a derivative designated as a hedge for fair market values, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative designated as a hedge for cash flow purposes, the effective portion of the derivative gain or loss is initially reported as a component of other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss on the hedge or other derivative
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 143/233
instrument to do not qualify as hedges is reported in earnings immediately. Under U.S. GAAP, our derivative instruments related to interest rate swaps and foreign currency forwards are recorded at their fair market value. These instruments did not qualify as hedges under U.S. GAAP as such instruments did not meet the documentation and effectiveness testing requirements under U.S. GAAP. Accordingly, changes in their fair value are recorded within net income.
H. Pension, Additional Minimum Liability – Our valuation policy for retirement benefits and similar commitments is in line with IAS 19. Accounting principles for retirement benefits and similar commitments under IAS 19 and U.S. GAAP are substantially the same except for the following. Under U.S. GAAP, an additional minimum liability must be recognized in the plan sponsor’s balance sheet to the extent that the liability recorded in a plan sponsor’s financial statements relating to the benefit plan is less than the plan’s unfunded accumulated benefit obligation. The adjustment, "Pension, additional minimum liability", above results from the recognition of an additional minimum liability for certain of our pension plans. In addition, certain unrecognized gains/losses are treated differently under U.S. GAAP compared to French GAAP. The adjustment, "Pension, other", above results from the effects of such differences.
I. Convertible Bonds - In June 1999, Atos carried out a € 172.5 million convertible bond issue, represented by 1,440,501 bonds with a nominal value of € 119.8 per bond and stated interest at 1% per year. They are redeemable at any time after October 1, 2002, at the issuers initiative, with a redemption price of € 131.4 per bond, representing a yield to maturity of 2.75%. The bonds may be converted at any time from July 1999 on the basis of one share per one bond. We have recorded the redemption premium on a straight-line basis over the life of the bonds net-of-tax. We adopted a position presented by the Commission des Opérations de Bourse ("COB") and provide for the entire redemption premium if the share price falls below the discounted value of the bonds. Accordingly, we provided for the entire remaining redemption premium during the twelve month period ended September 30, 2003 as the fair market value of the bonds was lower than their discounted amount.
Under U.S. GAAP, the bond premium or discount should be accreted to the face value of the obligation using the effective interest method over the life of the instrument. The adjustment above reduces the amount of the accretion expense recorded in the twelve months ended September 30, 2003 under French GAAP to that calculated under the effective interest rate method under U.S. GAAP.
J. Provisions - Under French GAAP, the allocation period for identifying and measuring the fair market value of the assets acquired and the liabilities assumed in a business acquisition continues through the end of the second fiscal year following the consummation date. Subsequent reductions to estimates of contingent liabilities and certain provisions are recorded as a reduction to goodwill. Additionally, costs related to restructuring activities or terminating employees of the acquiring company are included in the purchase price allocation at the acquisition date. Under U.S. GAAP, the allocation period does not usually exceed one year from the consummation date. Adjustments made to the allocation of the purchase price after this period are generally included in the determination of net income in the period in which the adjustment is determined. Costs related to restructuring activities or terminating employees of the acquiring company are expensed as incurred.
The comments above address areas where identified differences between our accounting policies and those of U.S. GAAP, which impact our equity and operating results as of September 30, 2003 and the twelve month period then ended, exist. Our project team also considered other areas, listed below. We identified no significant differences relating to these areas.
• Consolidation • Foreign currency translation • Income taxes • Investments • Marketable securities • Operating receivables • Provisions for contingencies and losses • Research and development expenses • Tangible fixed assets • Treasury stock
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 144/233
B.5 OTHER KEY EVENTS SINCE JUNE 30, 2003
B.5.1 SALE OF 100% OF ATOS ORIGIN'S DOCUMENT MANAGEMENT AND CHEQUE PROCESSING ACTIVITIES Following the issue of a clearance notice by the Conseil de la Concurrence (French Competition Authority), the French Ministry of the Economy, Finance and Industry has approved the acquisition by Experian on September 18, 2003 of 100% of Atos Origin's document management and cheque processing activities that was grouped, since last April, within Atos Origin DMS (DMS – Document Management Services).
As announced on January 15, 2003, Experian acquired Atos Origin DMS, a subsidiary of Atos Origin Services which specializes in two activities that are core to Experian's strategy in the Business Process Outsourcing market namely, document processing (remittance, payment slips, orders, subscription management) and cheque processing. Atos Origin and Experian have also entered into a commercial agreement under which Experian will subcontract to Atos Origin the IT application maintenance for these two activities only on a transitional basis, to ensure business continuity.
Experian's acquisition of Atos Origin DMS seeks to address the requirements of clients of the two companies, who can rely on a continuous partner capable of staying with them over time. Atos Origin DMS, which operates 18 sites in France and employs around 1,000 people, will become Experian DMS, a subsidiary of Experian SAS. In 2002, the company processed more than one billion documents and its turnover currently amounts to approximately € 60 million per annum.
B.5.2 ATOS ORIGIN SELLS ITS HUNGARIAN OPERATION On August 27, 2003, Atos Origin has announced that it has signed an agreement under which it will sell its operations in Hungary to Synergon Information Systems plc. The transaction received regulatory clearance from the Hungarian Competition Office in October 2003.
Atos Origin is transferring its wholly-owned Hungarian subsidiary - Atos Origin Information Technology Kft. - to Synergon and has entered into a partnership agreement under which Synergon will provide a full range of support services for Atos Origin's major international clients in Hungary.
Consideration for the sale is not disclosed but Atos Origin's revenues in Hungary are currently less than € 5 million per annum.
B.6 STOCK MARKET DATA
B.6.1 ATOS ORIGIN MARKET TRENDS FROM JANUARY 1, 2003 TO DECEMBER 31, 2003
Weighted Trading volume High low Trading volume Month average price (in thousands (in € per share) (in € per share) (in thousands of €) (in € per share) of shares) January 28.44 23.18 25.72 4,327 111,313 February 28.80 23.55 23.44 3,881 90,980 March 28.39 23.56 25.03 4,085 102,240 April 32.30 23.50 27.27 3,005 81,962 May 33.20 27.31 27.00 4,404 118,920 June 34.45 29.50 31.18 3,015 94,029 July 37.69 29.20 34.52 3,630 125,294 August 38.60 35.29 36.99 2,337 86,450 September 57.40 37.45 47.43 11,520 546,472 October 58.35 49.22 53.46 6,215 332,224 November 60.85 50.50 55.48 4,333 240,387 December 56.90 47.02 49.01 4,445 217,889
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 145/233
B.6.2 ATOS ORIGIN MARKET CAPITALIZATION TRENDS FROM JANUARY 1, 2003 TO DECEMBER 31, 2003
Common stock Market capitalization Closing price Month (closing period (closing period (in € per share) in number of shares) in thousands) January 25.92 44,055,676 1,141,923 February 27.71 44,055,676 1,220,783 March 24.10 44,055,676 1,061,742 April 31.97 44,055,676 1,408,460 May 31.47 44,055,676 1,386,432 June 30.12 44,055,676 1,326,957 July 37.07 44,055,676 1,633,144 August 38.10 47,712,676 1,817,853 September 49.49 47,789,696 2,365,112 October 57.40 47,789,696 2,743,128 November 55.00 47,789,696 2,628,427 December 50.70 47,869,633 2,426,990
60 3,0 M arket capitalization 50 2,5 Closing stock price
40 2,0
30 1,5
20 1,0
10 0,5
0 0,0 July May June April March August October January February December December November September
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 146/233
C THIRD PART: DESCRIPTION OF THE CONTRIBUTIONS ...... 149 C.1 GENERAL INFORMATION ...... 149 C.1.1 Name, Headquarters...... 149 C.1.2 Date of incorporation and term of the company...... 149 C.1.3 Legislation governing the issuer and legal form ...... 149 C.1.4 Summary of Corporate purpose ...... 149 C.1.5 Trade Register Number– APE code ...... 149 C.1.6 Management...... 149 C.1.7 Auditors...... 150 C.1.8 Related Party Transactions...... 159 C.1.9 Locations where documents and information on the contributed companies may be consulted. 159 C.2 GENERAL INFORMATION ON THE SHARE CAPITAL...... 159 C.2.1 Amount of subscribed share capital, number and class of shares...... 159 C.2.2 Features of the securities giving rights to share capital...... 160 C.2.3 Breakdown of share capital and voting rights at June 30, 2003 ...... 160 C.3 BUSINESS INFORMATION...... 160 C.3.1 Description of the principal activities of the contributed companies ...... 160 C.3.1.1 Key Service Lines...... 162 C.3.1.2 Key Industries Targeted...... 165 C.3.1.3 Key Geographies ...... 167 C.3.2 Revenue earned in fiscal year ended 2002 and the first half of 2003 by activity and geographic market ...... 169 C.3.2.1 Sema Group consolidated revenue by country ...... 169 C.3.2.2 Sema Group consolidated revenue by service line ...... 169 C.3.2.3 Sema Group consolidated revenue by industry...... 170 C.3.3 Type of clients by market...... 170 C.3.4 Income from operations earned in fiscal year 2002 and the first half of 2003 by region...... 170 C.3.5 Staff evolution during fiscal year 2002 and first half 2003...... 171 C.3.6 Utilization rates ...... 171 C.3.7 Policy regarding partnerships and sub contractors...... 171 C.3.8 Insurance policies and risk assessment processes ...... 171 C.3.8.1 Insurance policies ...... 171 C.3.8.2 Risk assessment processes...... 172 C.3.9 Exceptional events and litigation ...... 172 C.4 FINANCIAL INFORMATION ...... 172 C.4.1 Sema Group pro forma combined financial statements...... 172 C.4.1.1 Sema Group pro forma combined statements at June 30, 2003 ...... 172 C.4.1.1.1 Pro forma combined statement of income June 30, 2003...... 173 C.4.1.1.2 Combined balance sheet June 30, 2003...... 174 C.4.1.1.3 Notes to the proforma financial information ...... 175 C.4.1.1.4 Management’s Discussion and Analysis of Financial Condition and Results of In scope Operations ...... 177 C.4.1.1.5 Report of independent auditors ...... 179 C.4.1.2 Note on In Scope Operations for 2nd Half 2003...... 181 C.4.1.3 Sema Group pro forma combined financial statements at 31 December 2002 ...... 181 C.4.1.3.1 Proforma combined statement of income 31 December 2002...... 182 C.4.1.3.2 Combined balance sheet 31 December 2002...... 183 C.4.1.3.3 Notes to the proforma financial information ...... 184 C.4.1.3.4 Report of the independent auditors...... 186 C.4.1.3.5 Sema Group Results For Twelve Months Ended 31 December 2002 ...... 187 C.4.2 "Full scope" combined financial statements...... 189 C.4.2.1 "Full scope" combined financial statements in us GAAP at 30 June 2003...... 189 SchlumbergerSema combined statement of income (unaudited) (Stated in thousands of US$)...... 189 C.4.2.1.2 SchlumbergerSema – Unaudited combined balance sheet ...... 190 C.4.2.1.3 SchlumbergerSema unaudited combined statements of changes in invested equity and total comprehensive income ...... 191 C.4.2.1.4 SchlumbergerSema – Unaudited combined statement of cash flows (Stated in thousands of US $)192 C.4.2.1.5 Notes to the Unaudited Combined Financial Statements ...... 193 C.4.2.1.6 Report of independent auditors ...... 198 C.4.2.2 SchlumbergerSema division combined financial statements in US GAAP at 31 December 2002 ...... 200 C.4.2.2.1 SchlumbergerSema combined statement of income (Stated in thousands of US $) ...... 200
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 147/233
C.4.2.2.2 SchlumbergerSema – Combined balance sheet (Stated in thousands of US $) ...... 201 C.4.2.2.3 SchlumbergerSema – Combined statements of changes in invested equity and total comprehensive income (In thousands of US$) ...... 202 C.4.2.2.4 SchlumbergerSema combined statement of cash flows (Stated in thousands of US $) ...... 203 C.4.2.2.5 Notes to the Combined Financial Statements...... 204 C.4.2.2.6 Report of the independent auditors...... 225 C.4.2.3 Table of subsidiaries and equity interests ...... 226 C.4.2.4 French auditors’ report on the financial information presented in translations...... 229 C.4.2.5 Summary of differences between financial statements established in US GAAP and French GAAP ..... 231 C.5 MARKET AND RETURN ON SECURITIES ...... 232 C.5.1 Listing market ...... 232 C.5.2 Market for the shares...... 232 C.5.3 Dividends and distribution policy ...... 233
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 148/233
C THIRD PART: DESCRIPTION OF THE CONTRIBUTIONS
C.1 GENERAL INFORMATION
C.1.1 NAME, HEADQUARTERS
Sema S.A., whose headquarters are located at 50 Avenue Jean Jaurès, 92120 Montrouge, France Sema Ltd, whose headquarters are located at South Quay Plaza 2, 183 Marsh Wall, London E14 9SH, United Kingdom
C.1.2 DATE OF INCORPORATION AND TERM OF THE COMPANY Sema S.A. was incorporated on November 15, 1963 for a term until October 14, 2062. Sema Ltd was incorporated on January 16, 1976 for an unlimited duration.
The Sema group was founded in 1958 in France. In 1988, Sema Metra (now Sema S.A.) and Cap Group Plc merged through a public exchange offer. Subsequently, Sema S.A. continued to expand through various acquisitions. In 2001, Schlumberger acquired the Sema group through the purchase of the outstanding share capital of Sema Plc (currently known as Sema Ltd). At the time of the acquisition, Sema S.A. was a subsidiary of Sema Plc.
C.1.3 LEGISLATION GOVERNING THE ISSUER AND LEGAL FORM Sema S.A. is a French société anonyme (joint stock company) governed by French law.
Sema Ltd is a "private limited company", similar to a French stock company. In a Private Limited Company, the liability of shareholders is limited to their contributions. Sema Ltd is governed by English law.
C.1.4 SUMMARY OF CORPORATE PURPOSE The purpose of Sema S.A. is any activity related to the electronic processing of information in any form, particularly the development, manufacturing and maintenance of operating software, the design, development and installation of information, technical or management systems, as well as any activity related thereto, including holding equity interests.
Sema Ltd is a holding company whose purpose is to hold equity interests.
C.1.5 TRADE REGISTER NUMBER– APE CODE Sema S.A. is registered in the Nanterre Trade Register under Number 642.005.094. Its APE code is 721 Z.
Sema Ltd is registered in the Trade Register for England and Wales under Number 01240677.
C.1.6 MANAGEMENT Names of the principal officers and their respective positions within the company
Sema S.A. Chairman-Chief Executive Officer and member of the Board, Mr. Thierry Pilenko, Director of the French Belgian and Swiss Markets Executive Vice President and member of the Board, Mr. François Dufaux, Director of Business Continuity Services Executive Vice President and member of the Board, Mr. Pierre Charles Boccon-Liaudet, Chief Financial Officer for France Belgium Switzerland Member of the Board, Mr. Jean Dominique Percevault, Chairman France and Vice President of European Affairs Schlumberger Limited Member of the Board, Mr. Thierry Parmentier, Director of Personnel for France Belgium Switzerland
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 149/233
Sema Ltd
Member of the Board of Directors (Director), Alan J. Goldby, Tax Manager Member of the Board of Directors (Director), Neil Ray, Legal Financial Coordinator and Company Secretary
Compensation and benefits in kind allocated for the last fiscal year to the members of the administrative, management and supervisory boards by all the companies of the group.
Sema S.A.
The corporate officers of Sema S.A. received no compensation for their corporate duties. Mr. Dufaux, corporate officer and employee of Sema S.A., received compensation and benefits under his employment contract for fiscal year 2002 totalling: €448,074
Sema Ltd
The corporate officers received no compensation for their corporate duties.
C.1.7 AUDITORS Names, addresses Date of appointment and last renewal of appointment Name of the partner responsible for the audit.
Sema S.A.
Statutory Auditor: PricewaterhouseCoopers Audit, 34 place des Corolles, Tour AIG, 92908 Paris La Défense 2 Date of appointment and last renewal: June 6, 1995 and June 10, 1998 Partner responsible for the audit: Mr. Xavier Cauchois
Alternate Auditor: Paul Onillon 34 place des Corolles, Tour AIG, 92908 Paris La Défense 2 Date of appointment and last renewal: June 10, 1996 and June 10, 1998
Sema Ltd
Statutory Auditor: PricewaterhouseCoopers LLP Date of appointment and last renewal: February 24, 2003 for an indefinite period (Pursuant to English law) ("Elective resolution" of August 8, 2002) the company is released from the obligation of annually renewing the appointment of its auditors. Auditors are appointed until the company decides to appoint alternate auditors). Partner responsible for the audit: Mr. Kulwarn Nagra
The general elements concerning the subsidiaries and sub-subsidiaries of Sema S.A. and Sema Ltd are summarized below:
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 150/233
Sema S.A.
Registration number Country % Issued Number of Shareholders Activity Directors Name of statutory of owner- share outstanding at closing auditors Name incorporation ship capital shares Beginning/end of +par value mandate
Sema (Beijing) China 100 US 300,000 Sema S.A. Dormant Ping Lee Beijing Hua Yi Information $300,000 Finance (credit cards) Simon Choi Certified Public Technology Co Ltd Par value Fu Chunjing Accountants Co Ltd Reg. N° 012784 US $1 Jiang Lei Wang Ruixuan End : 31 December 2003
Sema Global Services 100 €9,280,000 580,000 Sema S.A. All activities Mr Pilenko PWC Audit France Par value (management, Mr Flamant (non 26 June 2002 N° 391 065 489 €16 commercialisation) executive director) Until shareholders relating to systems Mr Dufaux meeting 2008 and/or services in Sema S.A. Mazars et Guerard telecom, computer, Mr Rostand 21 June 1999 until network and shareholders communication sectors meeting 2006 Sema Telecom France 100 €18,000,000 1,200,000 Sema S.A. All activities Mr Aulagnon PWC Audit Par value (management, Mr Dufaux 30 June 2003 until N° 400 058 426 €15 commercialisation) Sema shareholders relating to systems Mr Pilenko meeting 2009 and/or services in telecom, computer, network and communication sectors
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 151/233
Registration number Country % Issued Number of Shareholders Activity Directors Name of statutory of owner- share outstanding at closing auditors Name incorporation ship capital shares Beginning/end of +par value mandate
SchlumbergerSema Spain 100 €462,119.05 76,905 Sema S.A. Sema, SA (sole B.D.O. S.A.E Par value Director Mr. Diego AUDIBERIA Fiscal Number: A- €6.01 Provision of Pavía) AUDITORES, S.L., 28240752 information technology Beginning: 1 Mercantile Registry of services.. All activities January 2003 Madrid: End: 31 December Volume 2701 2003 General 2033 Section 3ª Folio 58 Sheet 18242 Inscription 1ª
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 152/233
Registration number Country % Issued Number of Shareholders Activity Directors Name of statutory of owner- share outstanding at closing auditors Name incorporation ship capital shares Beginning/end of +par value mandate
Centro de Spain 90 €172,787.50 Total: 28,750 Schlumberger Sema 1.- Diego Pavía No legal Tecnologicas S.A.E Provision of information 2.- J. Luis Burgos requirement to audit Informaticas SA Par value SchlumbergerSema, technology services. Its 3.- María Pernas €6,01 SAE, 90% main customers are in 4.- J.D.Allona Fiscal Number: A- Invergestión, the finance sector 5.- Juan Amago 47214242 Sociedad de 6.- Caja España de Registered in Inversiones y Inversiones, C.A.M.P. Mercantile Registry of Gestión, S.A. (a 7.- Invergestión, Valladolid: company in the Sociedad de Volume 293 Caja España Group, inversiones y gestión, Book 233 10%) S.A. Section 3ª Folio 150 Sheet 3722 Inscription 1 Infoservicios SA Spain 75 €601.010 Total: 1,000 Schlumberger Sema 1.- Maria Pernas Auditors: B.D.O. Par value S.A.E Provision of 2.- Juan Amago AUDIBERIA Fiscal Number: A- €601,01 SchlumbergerSema, information technology 3.- Diego Pavía AUDITORES, S.L., 78804366 SAE, 75% services 4.- J.L. Burgos Beginning: 1 Mercantile Registry of Sociedad de 5.- Indalecio Gil January 2003 Madrid: Promoción y 6.- Agustín Ocaña End: 31 December Volume 8980 Participación 7.- Jose M. de Santiago 2003 General 7823 Empresarial de Caja Restoy Section 3ª Madrid, S.A. (a Folio 159 company in the Sheet 85342-1 Caja Madrid Group, 25%)
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 153/233
Registration number Country % Issued Number of Shareholders Activity Directors Name of statutory of owner- Ssare outstanding at closing auditors Name incorporation ship capital shares Beginning/end of +par mandate value Netseenergy France 60 €1,500,000 100,000 Sema S.A. : 60% Provision of database Mr Benoit Alquier PWC Audit Par value EDEV (EDF services for its 29 April 2002 N°442 091 062 €15 euros Environnement et shareholders and their until shareholders développement SA) affiliated companies meeting 2008 : 40% SchlumbergerSema Sweden 100 SEK 50,500 Sema S.A. Holding Company Tommy Boman PWC until 31 Sweden AB 5,050,000 December 2003 Reg. N° 556470-2222 Par value Borje Blomstrom SEK100 Hakan Farm Franck Stevenson Jones Thomas Moller Rolf Wasteson Billy Ollsson Sweden 100 SEK 4,000 Schlumberger Sema Information services Tommy Boman PWC until 31 SchlumbergerSema 400,000 Sweden AB Carl-Gustav Ling December 2003 PA-Konsult AB Par value Bo Persson SEK100 Reg. N° 556200-9786
SchlumbergerSema Sweden 100 SEK 1,420,000 Schlumberger Sema Holding Company Tommy Boman PWC until 31 AB 14,200,000 Sweden AB Vlademar Svensson December 2003 Par value Lennart Helsen SEK100 Goran Olsson Reg. N° 556259-6113
SchlumbergerSema Sweden 91 SEK 20,000 Schlumberger Sema Information services PWC until 31 Norr AB 2,000,000 AB Per Forsberg December 2003 Par value Luossavaara- Anders Forsman Reg. No. 556086-5619 SEK 100 Kiirunavaara AB Jan-Olov Hedstrom Rolf Johansson (LKAB) 9% Stig-Ove Lehto Nicklas Lundqvist
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 154/233
Registration number Country % Issued Number of Shareholders Activity Directors Name of statutory of owner- share outstanding at closing auditors Name incorporation ship capital shares Beginning/end of +par mandate value DC Tidingsdata AB Sweden 50 SEK 1,000 Schlumberger Sema Outsourcing, UL Norling PWC until 2003- 100,000 AB Information services Valdemar Svensson 12-31 Reg.#556071-1045 Par value Sydvenska Leif Anderhov SEK 100 Dagbladet AB Johnny Fonsmark
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SEMA LIMITED
Registration number Country of %owner Issued Number of Shareholders Activity Directors Name of - share outstanding incorporation at closing statutory Name ship capital+pa shares auditors r value Beginning/end of mandate Sema Pension Trustee UK 100 £1 1 Sema Limited Pension Trustee Frank Jones, Paul Greenaways* Limited Par value Matthews, Bernard £1 Owen, Darren Prosser, 4044489 Leni Vincent, William Wedgwood + Alternate Directors Neil Ray (secretary) Sema CS Pension UK 100 £1 1 Sema Limited Pension Trustee Kim Daniels, Paul Greenaways* Trustee Limited Par value Dyer, Frank Jones, £1 Darren Prosser, 4044483 Malcolm Traquaiir, Leni Vencent + Allternate Directors Neil Ray (secretary) Sema Quest Trustee UK 100 £1 1 Sema Limited Dormant Neil Ray, Alan Goldby PWC* Limited Par value £1 3871219 Sema UK Ltd UK 100 £12,750,00 12,750,000 Sema Limited Information Neil Ray, Alan Goldby, PWC* Par value services Frank Jones, Brendan 1245534 £1 Connolly, Pauline Droy (deputy secretary) Sema Barbados UK 100 £2.00 2 Sema UK Ltd outsourcing Neil Ray PWC* Limited Par value Alan Goldby 2144824 £1
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Registration number Country of %owner Issued Number of Shareholders Activity Directors Name of - share outstanding incorporation at closing statutory Name ship capital+pa shares auditors r value Beginning/end of mandate Etourism Limited UK 60 £100,000 60% Sema UK Ltd Visitscotland David Tait, Brendo0n N/A SC (Scotland) Par value 100,000 25% Tourco Outsourcing Connolly, Richard £1 15% Partnership UK contract Gould, Darren Gibson, 226890 (share and loan stock) – David Noble, Malcolm Roughead, William Wedgwood + Alternate
Directors Thomas J. Beattie, William MacLeod, Neil Ray (secretary), Pauline Droy (deputy secretary) Sema Investment UK UK 100 £2 2 Sema UK Ltd Dormant Dominic Mathon PWC* Limited Par value Neil Ray 4168291 £1 Sema International UK 100 £4,200 4,200 Sema UK Ltd Holding Neil Ray, Alan Goldby, PWC * Limited Par value Company Dominic Mathon £1 1907841
SchlumbergerSema South Africa 70 SAR 100,000 Sema International Ltd Information Taik Haw Lim PWC So. Africa. 100,000 Manteo Investments services for Giovanni Linari (Pty) Ltd annual mandate Par value (Proprietary) Limited, telecoms and Marc Saint-Martin Reg. N° SAR 1 30% major events. Yusuf Surtee 1998/012654/07
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Registration number Country of %owner Issued Number of Shareholders Activity Directors Name of - share outstanding incorporation at closing statutory Name ship capital+pa shares auditors r value Beginning/end of mandate Sema Software India India 85 Rp 1,300,000 Sema International Ltd Information Nandan Bhattacharya No legal Pte Ltd 13,000,000 West Bengal Electronic services Sanjay Bhutani requirement to Reg. N°21-80184 Par value Industry Development Chin Leong Lim audit Copn (aka WEBEL) - Rajinder Pal Singh Rp 10 15% Ho Yik Yong
* August 8, 2002: Pursuant to the English law "elective resolution", the company is released from the obligation to renew the auditors each year.
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C.1.8 RELATED PARTY TRANSACTIONS Related Party Transactions
The Sema S.A. auditors’ report for the fiscal year ended December 31, 2002 mentions the following agreements:
On November 15, 2002, the Board of Directors of Sema S.A. authorized financial assistance in the form of a subsidy in the amount of €14 million from Sema S.A. to its subsidiary Sema Global Services.
On September 5, 1996 Sema S.A. signed a group assistance agreement with Sema Global Services governing general management, marketing, management control and administration, which was authorized and renewed for fiscal year 2002.
C.1.9 LOCATIONS WHERE DOCUMENTS AND INFORMATION ON THE CONTRIBUTED COMPANIES MAY BE CONSULTED The documents and information on each of the companies contributed may be consulted at the corporate headquarters of each company.
C.2 GENERAL INFORMATION ON THE SHARE CAPITAL
C.2.1 AMOUNT OF SUBSCRIBED SHARE CAPITAL, NUMBER AND CLASS OF SHARES If applicable, number of double voting rights and treasury shares Not applicable
Information on the unpaid fraction of capital Not applicable
5-year table showing changes in capital
Sema S.A.
Number of shares Balance at December 31, 1998 2,716,693 Balance at December 31, 1999 2,716,693 Balance at December 31, 2000 2,716,693 Balance at December 31, 2001 2,716,693 Balance at December 31, 2002 2,716,693 Balance at June 30, 2003 2,716,693
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Sema Ltd
Number of shares Balance at December 31, 1998 114,867,389 Balance at December 31, 1999 460,745,722 Balance at December 31, 2000 463,412,109 Balance at December 31, 2001 614,088,332 Balance at December 31, 2002 617,482,353 Balance at June 30, 2003 617,482,353
The increase in the number of shares is a result of the issuance/allotment of new shares during the year.
C.2.2 FEATURES OF THE SECURITIES GIVING RIGHTS TO SHARE CAPITAL There is no security giving rights to share capital.
C.2.3 BREAKDOWN OF SHARE CAPITAL AND VOTING RIGHTS AT JUNE 30, 2003 The distribution of the share capital and voting rights is summarized in the table below:
Number of shares % of capital Sema S.A. Schlumberger SA 2,713,999 99.90% Public 2,694 0.10% Total 2,716,693 100.00%
Sema Ltd Schlumberger Investments Ltd 617,482,353 100.00% Total 617,482,353 100.00%
C.3 BUSINESS INFORMATION
C.3.1 DESCRIPTION OF THE PRINCIPAL ACTIVITIES OF THE CONTRIBUTED COMPANIES In April 2001, Schlumberger acquired Sema Group and combined it with certain businesses of Schlumberger Test & Transactions and Resource Management Services including Bull CP8 (which was separated later), CellNet and Convergent Group. Sema was founded in 1958 as Société d’Economie et de Mathématiques Appliquées in France. In 1988 Sema merged with UK company Cap Group, was listed both in London and Paris, and continued its expansion via numerous acquisitions, including the telecom software specialist LHS in 2000.
In September of 2003, Schlumberger entered into a binding agreement with Atos Origin to sell the majority of the SchlumbergerSema businesses. Included in the sale are the Sema Group core businesses of IT consulting services, system integration services and enterprise outsourcing services. Excluded from the sale and retained by Schlumberger are the following segments of the SchlumbergerSema business:
The Telecom Product Group The Essentis (banking) Product Group The Energy IT practice - principally activities for oil and gas IT clients The Business Continuity and Disaster Recovery business Infodata – the contact with the Swedish government to manage population database. All internal IT support provided by SchlumbergerSema to other Schlumberger companies All activities around providing and/or managing remote connectivity (including connections by satellite, microwave transmissions or transmissions on other frequencies) and network connectivity (including network connections, network bandwidth, carriage of data and traffic over the network) DeXa
Sema Group is organized by geographical organizations as well as by core practices. The geographical organizations are: North and South America, Europe, Middle East, Africa which includes Scandinavia, UK, The Netherlands, France, Belgium, Switzerland, Germany, Central Europe, South Europe, Middle East and Africa, Asia. Sema Group’s core practices are IT consulting services; systems integration services, and enterprise
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outsourcing services which Sema Group provides in specific regional markets spanning the telecommunications, finance, transport and public sectors. Sema Group focuses its service offerings on industry segments where it has prior experience enabling it to leverage knowledge to provide value-added solutions to clients enhancing their business performance.
The revenue figures in Euros millions used in this section have been prepared by Atos Origin based upon information received from Sema Group. The Sema Group US Dollar revenue numbers have been re-presented in accordance with Atos Origin's geographical, service line and industry segment structure and in line with Atos Origin's accounting conventions. The numbers have also been converted to Euros using the relevant average rate of exchange at the time the revenue was earned. Such re-presentation is expected to keep the readers of this Document better informed of Sema Group's activity and enable a better comprehension of the combined activities of the two companies.
As at June 30, 2003, Sema Group had over 21,000 employees located in over 50 countries. Total revenues for the in scope businesses of Sema Group for the year ended December 31, 2002 was USD 2,414 million (or €2,563 million in using an exchange rate of 1 USD = €1.0616). For the six months ended June 30, 2003, total revenue for the in scope businesses of Sema Group was USD 1,321 million (or €1,197 million in using an exchange rate of 1 USD = €0.9063).
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C.3.1.1 KEY SERVICE LINES
2002 Revenues Split by Service Line
Consulting 3%
Systems Integration Managed Operations 52% 45%
The information on the breakdown of the sales of the Sema Group for 2002 by service line was prepared by Atos Origin on the basis of information provided by the management of Sema Group. This information was produced for information purposes to estimate the position of the new combined group in different activity sectors.
Consulting
Sema Group offers business, organisation and IT consulting services with a strong market expertise in business process transformation, change management, program management, IT strategy and e-transformation. Sema Group advises clients on how to adapt their business operations to the technological context in which they are conducted and on any changes that need to be made in their technological environment, their organization and their manufacturing processes as new technologies are developed. In the area of web consulting, Sema Group offers business readiness, content management, process, e-commerce strategy and security consulting services.
The major service solutions within the consulting services division include:
• IS Strategy. IS strategy solutions work towards aligning clients’ business strategy and information systems. These solutions are designed to offer clients a pragmatic, implementable strategy that delivers fast returns through the exploitation of new technologies and the leveraging and refreshing of legacy systems.
• Process Transformation. Process transformation solutions are focused on the continual reinvention of clients’ businesses to keep pace with changing markets and aggressive competition while improving ways of working to deliver against key performance indicators. The goal of process transformation solutions is to increase clients’ efficiency, productivity and people skills allowing their businesses to become more flexible to respond to changing market conditions.
• Change Management. Change management solutions manage the human dimensions of change by addressing all people and organizational factors during major change initiatives to the end goal of: ensuring sponsorship and commitment at senior levels; providing the right communication to staff about the reasons for change; and gauging the scale and impact of the required change. This consulting solution involves ensuring that appropriate and effective communication and training are delivered to staff and management and ensuring shareholders embrace change by understanding and committing to the project. The goal of change management solutions is a business which becomes change oriented and able to meet the challenges of new initiatives and environments.
• Program Management. Program management solutions manage complex programs while managing risks and interdependencies in parallel with usual business practices. Sema Group’s work in this area focuses on avoiding delays and inconsistencies in critical programs resulting in a program delivered on time, within budget and to specification enabling clients to achieve self-sufficiency in running large and complex projects in the future. Program management work involves setting up a project management framework, providing program scoping and complexity management, applying project health check and rescue strategies, developing benefit realization plans and ensuring effective business case investment appraisals.
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• Knowledge Services. Knowledge services solutions aim to create an environment where collective knowledge can be easily captured, shared and applied, ensuring knowledge continuity. These solutions are designed to improve performance, lower risk and reduce costs. Knowledge services solutions focus on improving employee and asset productivity, reducing cycle time, facilitating better and faster decision making and speeding up organizational learning. Additionally, these solutions aim to improve clients’ service quality and technical support, retain institutional knowledge when key personnel leave the business and increase return on investment of Intranets and information resources.
• Customer Relationship Management. Customer relationship management solutions manage processes beyond the confines of clients’ organizations, identifying how issues in the supply chain impact performance, and define solutions to cut cost and increase value. The challenge presented in customer relationship management projects is to select the best solution for exchanging information and the right partner to provide added-value services across the chain, and around the globe. These solutions focus on supply chain diagnostics, operational improvements, supply chain systems and third party logistics support. These solutions aim to reduce clients’ time to market and to improve clients’ partnerships and suppliers.
• Business Intelligence. Business intelligence solutions aim to improve clients’ ability to gain a competitive advantage through improved corporate performance management. These solutions are designed to integrate technology and processes to facilitate the use of information to improve decision making and to reduce clients’ costs and increase the value of operational activity by understanding its market position. As part of the business intelligence solutions, Sema Group carries out business intelligence readiness assessments, develop data quality strategies, by design and develop data warehouse and entry portals and by outsource various decisional and data processes.
Systems Integration
Sema Group provides systems integration services for both business and technical systems. Sema Group’s skill base ranges from customer relationship management (including call centers, computer-telephony integration, automatic call routing and contact management) and e-commerce to data warehousing, workflow and document management.
Sema Group is recognised for its ability to manage large and complex systems integration assignments; in the past it has successfully accomplished complex projects, for instance, in the areas of defence and nuclear plants. Sema Group has an excellent track record in application management, middleware, database environment, web and ERP integration.
One of Sema Group’s most significant long-term systems integration projects is with the International Olympic Committee, for whom it is the Worldwide Information Technology Partner from 2002 to 2008. Sema Group provides operations management, software applications and integration services and is responsible for the timing and results services, the data centers for the sporting venues and villages, accreditation, athlete entries, transport and other key processes of this high-profile sporting event. After Salt Lake City in 2002, the new Olympic games will take place in Athens in 2004. During this period, Sema Group has managed other games as for the African games in 2003 in Nigeria.
The major service solutions within the systems integration division include:
• Enterprise Architecture & Infrastructure Modeling and Design. Enterprise architecture and infrastructure modeling and design solutions focus on developing and enhancing clients’ information technology systems in a controlled and progressive manner consistent with evolving business objectives and goals. Sema Group offers clients an implementation roadmap prioritized according to the value subsequently added by using proven systems integration city planning concept and the integrated business process modeling methodology. Clients are seeking to streamline their business architecture and reduce their overall complexity to ensure the delivery of a predictable and measurable return on investment.
• Functional Integration. Functional integration solutions integrate and renovate business processes to delivering an agreed-upon return on investment. Sema Group offers clients a general blueprint for new business functions and employ models to integrate and/or renovate selected business functions in their
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existing systems without disrupting ongoing operations. Functional integration solutions offer important non-functional features including performance, resilience, security and maintainability.
• Systems Development. Systems development solutions develop systems in an environment combining new business processes and legacy systems while delivering on time and within budget and reducing total cost of ownership. These solutions are designed to align the clients’ project size and status with best practices in project management and lifecycle management. Sema Group adheres to international standards such as Capability Maturity Model (CMM) and Project Management Institute (PMI).
• Applications Integration. Applications integration solutions integrate applications that have not been designed to work together, while delivering expected short-term benefits. These solutions are designed to minimize changes in existing applications by transferring most of the interfacing tasks to Enterprise Application Integration (EAI) tools. These solutions aim to extend the life of existing systems and deliver immediate returns through improved business process links.
• Data Migration. Data migration solutions aim to seamlessly transfer data between multiple systems with proper semantic controls, formats and timing while exposing current operations to minimal disruption. This process involves customer operations staff in the data validation and design and approval phases of a migration plan. Data migration solutions extend beyond the migration process to verify the accuracy of the migrated data.
• Operations Design, Roll-Out and Support. Operations design, roll-out and support solutions implement enterprise roadmaps without disrupting current operations while simultaneously providing the appropriate training, documentation and network and hardware logistics. We aim to mitigate risks associated with the roll out of projects and ensure that agreed-upon time frames are met.
• Applications Management. Applications management solutions provide maintenance and migration of enterprise applications while upgrading current releases and minimizing scope changes and associated cost and schedule impacts. Sema Group provides support 24 hours a day, seven days a week, throughout the entire lifecycle of an application regardless of the source (in-house, Sema Group or third party).
• Configuration Management. Configuration management solutions maintain and update records of previous versions of information systems as they evolve toward newer systems. These solutions are designed to offer clients the ability to optimize maintenance costs and ensure the functionality and compatibility of information systems at all times.
Managed Operations
• IT Outsourcing. Sema Group provides a comprehensive set of outsourcing services. The Sema Group has several data centres and offshore capability in Malaysia.
Desktop Management. In this area, Sema Group evaluates its clients' business and technical needs and assists them in transforming their computer systems. Sema Group provides methods for distributing and restoring new software and updates, including temporary corrections, repairs, virus signature updates and annotations. Sema Group offers its clients complete management of processes for continuous renewal of their applications as well as their hardware, and registration, control, operation and oversight of applications and systems and of the client's network.
Server Administration. Sema Group offers consulting services involving an analysis and evaluation of the client's existing infrastructure. Sema Group create environments for the purpose of administrating a range of hardware and software platforms, including the main system environment, control and management of the performance by these systems. Administrative services include services such as database management, archiving and security.
Network Administration. Sema Group offers consulting services that consist of analyzing and evaluating its clients' network infrastructures and network administration services such as performance and output control. Next to configuration and management of intranet and extranet services, Sema Group also provides network collaboration services allowing a local, closed-user community to share data and application securely and reliably with their business partners.
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Proprietary Solutions. Sema Group also provides customized services in connection with the systems designed to operate over the long term.
ERP Outsourcing. Sema Group provides ERP solutions enabling its clients to make the transition to fully outsource their environment. The Company offers oversight as well as administrative and operating management of a range of application environments such as operating systems, the hardware to support them, data centres and networks.
• Application Management. Sema Group provides an all-inclusive, managed, end-to-end application service including management of software licenses, hardware and infrastructure.
• Business Process Outsourcing. Sema Group provides complete management of its customers' business processes and infrastructure.
Help Desk. Sema Group offers multi-channel (telephone, email, fax, internet) single point of contact IT support for application, desktop, network and security issues.
Medical Services. Sema Group Medical Services is the largest employer of doctors outside the UK National Health Service (NHS), primarily as a result of the work the Company does on behalf of the Department for Work and Pensions, which contracted out its Medical Services to Sema Group in 1998. Over 200 fully employed and 2,500 sessional doctors work from over 150 examination centres across the UK, supported by extensive links with specialist and generalist practitioners and other healthcare and welfare professionals. Sema Group Medical Services manages the doctors and medical staff that conduct assessments for disability and incapacity benefits on behalf of the UK Benefits Agency.
Real Time Energy Management. In the US, Sema Group’s proprietary technology offering enables utilities companies to monitor their facilities energy consumption in real time. Sema Group implements these real time systems, manages technical data, links technical and business systems and integrates systems both upstream and downstream. RTEMs provides the processes, software tools and systems infrastructure needed for real-time collection of energy use data and the transformation of that data into value- added information required for the efficient management of energy-related business processes for both energy companies and end-users. Services offered include measurement equipment, data collection communication infrastructure, data collection management software, data warehousing and security software and infrastructure, data validation, display and analysis applications, energy management applications, application integration with customer relationship management, energy delivery and trading systems and information management portals.
C.3.1.2 KEY INDUSTRIES TARGETED Sema Group mainly focuses on clients in five vertical sectors: Public Sector, Finance, Telecom, Transport and Energy & Utilities, in which the Company attained domain experience and has reached critical mass. Although Sema Group may also carry out projects in other verticals, management has historically decided not to risk diluting its focus by actively pursuing new markets.
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2002 Revenues Split by Industry
Other 15% Public Sector 27%
Energy & Utilities 14%
Transport Finance 7% 15%
Telecommunications 22%
The information on the breakdown of the sales revenues of Sema Group for 2002 by market was prepared by Atos Origin on the basis of information provided by the management of Sema Group. This information was produced for information purposes to estimate the position of the new combined group within various activity sectors.
Public Sector
Sema Group has built a strong franchise in the Public Sector with particular focus on outsourcing projects with government bodies in healthcare, transport, defence and administration. Its e-government projects include back- office reengineering, IT outsourcing, systems integration and consulting services. Sema Group’s major recent projects include, for instance, an open government portal that serves more than 60 million people, enabling delivery of help desk services in Brussels, healthcare administration systems and national patient registration systems in the UK, as well as preventive care, payroll and hospital systems in Scotland. It also provides human resources management systems in France, workflow processes and software tools in Germany, and ERP implementation in Brussels.
Sema Group’s client base encompasses the UK and Scottish National Health Service (NHS), the UK Benefits Agency, the UK Department for Culture, Media and Sport, the UK Department of Social Security, the UK Home Office, the UK Department for Work and Pensions, the UK Metropolitan Police, the UK Ministry of Agriculture, Fisheries and Food, the UK Department for Environment, Food & Rural Affairs, the French Ministry of Agriculture, the French police force, the French Ministry of Finance, the French Ministry of Social Affairs, the Brussels regional government (Belgium), the European Commission, the Swedish prisons and probation service, the German finance ministry.
Finance
In the Financial Services sector, Sema Group offers highly recognised technical solutions including complete EMV migration, leading processing and back office systems for payment operations, securities trading and management software and clearing and settlement solutions.
Sema Group’s international client base includes 30 trade management system customers; Sema Group’s technology is used to process 30% of shares traded on the CAC-40 on Euronext Paris. Sema Group’s clients include Axa Banque (France), Banque Indosuez (France), Barclays (Spain), Crédit Lyonnais (France), BNP Paribas (France), Euronext Paris (France), the Saudi-British Bank (Saudi Arabia), the Shanghai Savings Bank (Taiwan), Société Générale (France), and Standard Chartered Bank (Asia).
Telecommunications
Sema Group has long expertise in integrating business support systems for fixed and mobile networks, and providers of cable and satellite TV services. Sema Group has a customer base exceeding 350 operators worldwide, which represents a large installed base of business support systems, including more than 65 million
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post-paid subscribers. Sema Group believes that it is the leader in pre-paid services, with 85 operators and 60 million pre-paid subscribers.
The international client list includes Airtel (Spain), Airtouch Cellular (USA), Americel (Brazil), BCTel (Canada), Bouygues Telecom (USA), ChileSat (Chile), China Telecom, Deutsche Telekom (Germany), KPN Orange (Belgium), Telefónica (Spain) and Turkcell (Turkey).
Transport
Sema Group provides consulting, systems integration and outsourcing services for integrated multi-modal passenger freight and infrastructure transport systems. Sema Group’s ticketing system has assisted UK train managers with the management of fares and timetables.
Customers include Deutsche Bahn (Germany), the French civil air traffic control centers, London Underground (UK), Nederlandse Spoorwegen (Netherlands), North Western Trains (UK), Rail Settlement Plan (UK), Railtrack (UK), RATP (France), SNCB (Belgium) and SNCF (France).
Energy & Utilities
Sema Group has more than 30 years of experience in the Utilities industry. Sema Group’s expertise in technologies such as internet metering and wireless connections, and its ability to run solutions based on these technologies enabled the Company to develop state-of-the art solutions for international Energy and Utilities companies. For example, Sema Group assisted an electricity supplier with the design and implementation of an energy management system allowing the company to plan further ahead and avoid buying electricity during expensive periods of the day.
Sema Group has deployed the industry’s largest wireless data network in the US, a trading and exchange solution to 85% of Europe’s energy trading exchanges, and has over 300 command and control systems at over 100 sites, including 15% of the world’s nuclear power plants.
Customers include Agence de l’Eau de Seine-Normandie (France), APX (Netherlands), Bord Gáis Éireann (Ireland), BotKyrka Energy (Sweden), Comel (Spain), Electricité de France, Energiewerke Nord (Germany), Graninge (Sweden), Ling'Ao nuclear power station (China), Red Eléctrica de Espana, Svenska Kraftnat (Sweden), Thames Water (UK), Veolia (France).
C.3.1.3 KEY GEOGRAPHIES 2002 Revenues Split by Geography
Asia Pacific 6% UK Americas 30% 14%
Central Europe 3% Nordic 7%
Other EMEA 5% France Italy 18% 10% Spain 7%
The information on the breakdown of the sales revenues of Sema Group for 2002 by region was prepared by Atos Origin on the basis of information provided by the management of Sema Group. This information was produced for information purposes to estimate the position of the new combined group within various activity sectors.
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UK
Sema Group generated €771 million of revenues in FY 2002. Sema Group has a good revenue base in systems integration and consulting and a strong market position in outsourcing, offering managed services such as help desks, data centers, network infrastructure outsourcing and network connectivity. It also has a significant BPO exposure providing HR payroll and benefit administration services and operation of ticketing machines. Sema Group has a considerable success in the Public Sector where it has worked on projects with the Labour Party, the Lord Chancellor’s Department and Home Office. Sema Group Medical Services manages the doctors and medical staff that conduct assessments for disability and incapacity benefits on behalf of the UK Benefits Agency; the Company owns and manages 150 examination centers.
France
Sema Group generated €469 million of revenues in FY 2002. Sema Group is very strong in systems integration, offering experts solutions including application life cycle management, fixed price projects, high technology and time & material projects. It is a strong player in the Public Sector (EDF and several French Ministries), with major positions in the Telecom industry (France Telecom), and offers expert skills and solutions for Financial Services and Energy and Utilities clients.
Italy
Sema Group generated €245 million of revenues FY 2002. The Company focuses on providing systems integration services, with particular strength in fixed price projects, and consulting, and employs around 250 consultants specialized in SAP integration. Its outsourcing offering includes ERP outsourcing, security services, card management, helpdesk and printing services. Sema Group has a major position in Telecom, with leading presence at all operators.
Spain
Sema Group generated €173 million of revenues FY 2002. It is well positioned in fixed price systems integration projects and consulting, having acquired DSI and Europa Management Consulting in 2000. DSI specialized in Internet technologies for e-commerce and online banking; Europa MC offers business, management and technology consulting. In addition, Sema Group has strong SAP expertise (with 200 consultants) and the Olympic Games competence center is based in Barcelona. Sema Group has a well balanced industry presence, with strong positions in the Telecom and Financial Services sectors where it has significant operations in banking and loyalty card management.
Americas
Sema Group generated €371 million of revenues in FY 2002 in North and South America. Sema Group has a balanced business mix, offering systems integration, consulting and outsourcing services. The traditional IT services business is focused on the Telecom, Public Sector and Finance segments. In addition, Sema Group has developed a unique business process outsourcing solution to the Utilities market in North America, the Real Time Energy Management activity (RTEMs), which generated approximately €133 million in 2002 Revenues. RTEMs provides the processes, software tools and systems infrastructure needed for real-time collection of energy use data and the transformation of that data into value- added information required for the efficient management of energy-related business processes for both energy companies and end-users. Services offered include measurement equipment, data collection communication infrastructure, data collection management software, data warehousing and security software and infrastructure, data validation, display and analysis applications, energy management applications, application integration with customer relationship management, energy delivery and trading systems and information management portals.
Asia Pacific
Sema Companies generated €149 million of revenues in FY 2002. The majority of its revenues were generated from outsourcing, having built an extensive IT infrastructure in the region. Its main focus is on telecom billing and credit card solutions and data center services, having offshore capacity in Malaysia and China. Sema Group is largely dependent on 3 main clients in this area (Standard Chartered Bank, Manulife and Mass Mutual) which account for a large portion of its Asian Pacific revenues. As part of its Olympic Games Contract with the
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International Olympic Committee, Sema Group is the IT services prime contractor for the 2008 Olympic Games in China, which provides high visibility combined with strong business potential.
C.3.2 REVENUE EARNED IN FISCAL YEAR ENDED 2002 AND THE FIRST HALF OF 2003 BY ACTIVITY AND GEOGRAPHIC MARKET The information on the breakdown of the revenues of Sema Group for the fiscal year ended 2002 and the first half of 2003 by service line, region and market was prepared by Atos Origin on the basis of information provided by the management of Sema Group. This information was produced for information purposes to estimate the position of the new combined group within various activity sectors.
Total revenues for the in scope businesses of Sema Group for the year ended December 31, 2002 was USD 2,414 million (or €2,563 million in using an exchange rate of 1 USD = €1.0616 ). For the six months ended June 30 , 2003, total revenue for the in scope businesses of Sema Group was USD 1,321 million (or €1,197 million in using an exchange rate of 1 USD = €0.9063).
C.3.2.1 SEMA GROUP CONSOLIDATED REVENUE BY COUNTRY (in millions) 6 months 12 months ended ended June 30th, 2003 % of total Dec. 31st, 2002 % of total United Kingdom 404 34% 771 30% France 195 16% 469 18% Italy 86 7% 245 10% Nordic 92 8% 191 7% Spain 94 8% 173 7% Central Europe 30 3% 92 3% Benelux 18 2% 48 2% Middle East & Africa 36 3% 22 1% Americas 171 14% 371 14% Asia Pacific 62 5% 149 6% Others* 9 0% 32 2% Total 1,197 100% 2,563 100% (*) Includes special events as Olympic Games
C.3.2.2 SEMA GROUP CONSOLIDATED REVENUE BY SERVICE LINE (in millions) 6 months % 12 months % ended revenue ended revenue June 30th, 2003 Dec. 31st, 2002 Consulting & Systems Integration 628 53% 1,416 55% Managed Operations 569 47% 1,147 45% Total 1,197 100% 2,563 100%
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C.3.2.3 SEMA GROUP CONSOLIDATED REVENUE BY INDUSTRY (in millions) 6 months 12 months ended ended June 30th, 2003 % of total Dec. 31st, 2002 % of total Public Sector 377 31% 692 27% Finance 167 14% 384 15% Telecommunications 234 20% 564 22% Transport 94 8% 179 7% Energy & Utilities 172 14% 359 14% Other 153 13% 384 15% Total 1,197 100% 2,563 100%
C.3.3 TYPE OF CLIENTS BY MARKET
The customer profile of Sema Group by market is analysed in detail in sub sections C.3.1 through C.3.2 of this Document.
The risk factors relating to clients are discussed in detail in sub sections A.1.3.1.1 through A.1.3.2.6, A.1.3.2.14, A.1.2.3.2.18, A.1.3.2.19 and A.1.3.3.3 of Section A.1.3 ("Risk Factors") of Part A of this Document. This information includes the risk factors related to Sema Group as well.
C.3.4 INCOME FROM OPERATIONS EARNED IN FISCAL YEAR 2002 AND THE FIRST HALF OF 2003 BY REGION The information on the breakdown of the income from operations of Sema Group for 2002 and the first half of 2003 by region was prepared by Atos Origin on the basis of information provided by the management of Sema Group. This information was produced for information purposes to estimate the position of the new combined group within various activity sectors.
Total income from operations for businesses ** of Sema Group for the year ended December 31, 2002 was US $44.5 million (or €47.2 million in using an exchange rate of US $1 = €1.0616). For the six months ended June 30 , 2003, total revenue for the in scope businesses of Sema Group was US $26.9 million (or €24.4 million in using an exchange rate of US $1 = €0.9063).
(in millions) 6 months 12 months ended ended June 30th, 2003 % profitability Dec. 31st, 2002 % profitability United-Kingdom 35.3 8.7% 111.2 14.4% France -0.6 -0.3% 43.7 9.3% Italy 1.7 2.0% 24.3 9.9% Nordic countries -5.1 -5.5% 10.1 5.3% Spain 9.7 10.4% 20.4 11.8% Central Europe 2.0 6.7% 1.8 2.0% Benelux 0.8 4.2% -0.1 -0.2% Middle-East & Africa 4.5 12.5% 10.9 49.1% Americas 4.6 2.7% -46.9 -12.6% Asia-Pacific 15.9 25.7% 10.9 7.3% Others * -2.5 -29% -1.1 -4% Corporate Group -42.0 -3.5% -138.1 -5.4% Total 24.4 ** 2.0% 47.2** 1.8% (*) Includes special events as Olympic Games . (**) The income from operations presented have been extracted from certain data, accounts and other information provided by Sema Group; this data and information has been subject to certain adjustments by Atos Origin which are described in section A.5.1.5.3.3. of this Document.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 170/233
C.3.5 STAFF EVOLUTION DURING FISCAL YEAR 2002 AND FIRST HALF 2003
Date Number January 2002 24,400* December 2002 21,645 Reduction mainly in Asia, Americas & Nordic countries June 2003 21,039 Based on Sema’s restructuring plan
(*) These numbers have been estimated on the basis of the proportion of the total number of Sema Group in relation to SchlumbergerSema as at December 31, 2002 compared to the total number of SchlumbergerSema as at January 1, 2002.
Staff June 30th, December 31, 2003 % total 2002 % total United-Kingdom 5,069 24% 5,180 24% France 4,367 21% 4,406 20% Italy 1,680 8% 1,717 8% Sweden 1,482 7% 1,482 7% Spain 3,402 16% 3,440 16% Germany 551 3% 610 3% Benelux 302 1% 308 1% Other EMEA countries 431 2% 463 2% Americas 2,161 10% 2,483 11% Asia-Pacific 980 5% 984 5% Corporate Group 614 3% 572 3% Total 21,039 100% 21,645 100%
C.3.6 UTILIZATION RATES
The average utilization rate in relation to the total hours billed compared to available hours in the fourth quarter of the fiscal year ended 2003 were as follows :
Consulting 68% Systems Integration 81%
C.3.7 POLICY REGARDING PARTNERSHIPS AND SUB CONTRACTORS Sema Group has no central policy regarding the formulation of partnerships and the use of sub contractors. In general, partnerships may be formed or sub contractors may be used in areas where Sema Group does not have the expertise required to fulfil the terms of a contract or to comply with local legal legislation. All such requests for forming partnerships and using sub contractors are initiated locally or the bid team evaluating the proposal. In each case, such requests are reviewed by the main office and approval, if any, is given by the main office.
C.3.8 INSURANCE POLICIES AND RISK ASSESSMENT PROCESSES
C.3.8.1 INSURANCE POLICIES Sema Group maintains global asset and liability insurance programmes. The global asset insurance programme is maintained by Schlumberger Limited and covers all properties and other assets up to their replacement values through the insurer FM Global. Liability policies are in place covering liabilities incurred in business operations. Third party property damage and personal injury liabilities are insured by a Comprehensive General Liability programme and professional errors and omissions liabilities are insured under an Errors and Omissions programme. In addition insurance cover is procured with respect to management and fiduciary liabilities. As with most other large corporations, significant deductible retentions and / or co-insurance participation form part of such programmes. On a local basis each country maintains other policies as required by local regulations or custom. These may include, but are not limited to, employer’s liability, workers compensation, auto and other such insurance coverage.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 171/233
C.3.8.2 RISK ASSESSMENT PROCESSES Sema Group operates a risk management system that facilitates the analysis (including the identification and assessment) and treatment (including control and financing) of business risk throughout the life cycle of a project. This process is integrated with the control and approval process for sales (or Capture Process).
Specifically, the risk management process: • Identifies potential exposures including technical and financial risks that could have an impact at any time during the life cycle of the project. • Evaluate, both qualitatively and quantitatively, the significance and materiality of any such exposures that have been identified. • Effects appropriate and cost effective risk control or risk mitigation measures to reduce the likelihood and impact of undesired volatility in the project. • Manages residual exposure through a combination of external risk transfer instruments and internal contingency reserves in order to optimise the use of exposed capital. • Allocates exposures to those organizations / balance sheets best suited to their management and mitigation. • Manages any remaining residual risk by implementing appropriate control measures.
C.3.9 EXCEPTIONAL EVENTS AND LITIGATION To the knowledge of the company, there is no litigation, arbitration or exceptional fact capable of having or having had in the recent past a material effect on the financial situation, results, activity or capital of the company or group.
An obligation to indemnify Atos Origin was entered into by Schlumberger in respect of certain identified specific risks for which Schlumberger has undertaken, for all claims made within three years after the Acquisition and, for certain claims, with no time limit, to reimburse the indemnities and costs incurred by Sema Group following the Acquisition in respect of these identified specific risks. Such risks principally correspond to activities which are not within the Acquisition scope or to litigations with employees.
C.4 FINANCIAL INFORMATION
C.4.1 SEMA GROUP PRO FORMA COMBINED FINANCIAL STATEMENTS
C.4.1.1 SEMA GROUP PRO FORMA COMBINED STATEMENTS AT JUNE 30, 2003 The following table sets forth pro forma financial data of the contributed or sold businesses of SchlumbergerSema ("The In Scope businesses") as of the dates and for the periods indicated. The Pro Forma Combined Financial Statements were prepared by the Company to illustrate the estimated financial position and result of operations of the In scope businesses described in the Notes to the Pro Forma Combined Financial Statements as if the transaction had occurred as of the beginning of the periods presented, for purposes of the pro forma combined statements of income and as of June 30, 2003 for purposes of the pro forma combined balance sheet. In addition, the Pro Forma Combined Financial Statements do not purport to represent what the results of operations or financial position of the In scope businesses would actually have been if the transaction had in fact occurred on such dates or to project the results of operations or financial position of the In scope businesses for any future period or date. The following data should be read in conjunction with, and are qualified by reference to, the Combined Financial Statements and the Interim Combined Financial Statements included in this Prospectus. The Pro Forma Combined Financial Statements are based on numerous assumptions and upon currently available information.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 172/233
C.4.1.1.1 PRO FORMA COMBINED STATEMENT OF INCOME JUNE 30, 2003
(*) 0,9063 Six months ended 30 June 2003 USD 000's EUR 000's Per 10K Carve Out Adjustments Proforma Proforma Note A Note B Note C Revenue Operating 1 629 487 (308 534) - 1 320 953 1 197 180 Interest and other income 4 210 (213) 3 997 3 622
Expenses Cost of goods sold and services (1 314 236) 222 348 24 663 (1 067 225) (967 226) Research & engineering (29 208) 14 584 798 (13 826) (12 531) Marketing (101 452) 8 382 (93 070) (84 349) General (163 873) 35 788 1 952 (126 133) (114 314) Interest (8 168) 707 4 376 (3 085) (2 796)
Loss before taxes and minority interes 16 760 (26 938) 31 789 21 611 19 586
Taxes on income (10 967) 12 210 (3 320) (2 077) (1 882) Loss before minority interest 5 793 (14 728) 28 469 19 534 17 704
Minority interest (336) (336) (305) Net Income 5 457 (14 728) 28 469 19 198 17 399
(*) The figures expressed in euros result from conversion of the figures into US dollars at the average rate of exchange for the half-year ending on June 30, 2003
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 173/233
C.4.1.1.2 COMBINED BALANCE SHEET JUNE 30, 2003
(*) 0,87512 USD 000's EUR 000's
Per 10K Carve Out Adjustments Proforma Proforma AS S E TS Note A Note B Note C Current Assets Cash 12 894 (926) (11 968) - - Short-term investments 70 445 (36 463) (33 982) - - Receivables less allowan ce for dou btfu l accou nt 1 113 010 (124 766) 988 244 864 832 (2003 - $45,450) - - Affiliated company receivables 33 354 19 075 52 429 45 882 Inventories 39 624 (7 489) 32 135 28 122 Deferred taxes 75 053 (3 627) (5 475) 65 951 57 715 Tax receivable 17 744 - 17 744 15 528 Other current assets 96 626 (31 591) (3 766) 61 269 53 618 Total current assets 1 458 750 (185 787) (55 191) 1 217 772 1 065 697
Investments in Affiliated Companies 1 596 (46) 1 550 1 356 Long Term Receivables 1 171 - 1 171 1 025 Fixed Assets less accumulated depreciation 718 112 (174 699) 543 413 475 552 Goodw ill 1 682 328 (81 307) (1 601 021) - - Intangible Assets 164 453 (2 650) (147 614) 14 189 12 417 Deferred Taxes - (14 268) 40 410 26 142 22 877 Other Assets 16 297 (836) 15 461 13 530 Total assets 4 042 707 (459 593) (1 763 416) 1 819 698 1 592 454 LIABILITIES AND STOCKHOLDERS' EQUITY Cu rren t Lia bilities Accou n ts payable an d accru ed liabilities (1 334 867) 223 216 29 792 (1 081 859) (946 756) Affiliated company payable (51 670) (19 374) (71 044) (62 172) Estim ated liability for taxes on in com e (79 409) 17 474 58 442 (3 493) (3 057) Dividend payable - - - Long-term debt - current portion (6 734) 242 6 492 - - Bank & short-term loans (69 673) 3 246 66 427 - - Total cu rren t liabilities (1 542 353) 224 804 161 153 (1 156 396) (1 011 985) Long-term Debt (179 278) 5 517 173 761 - - Pos tretirem ent Benefits (16 629) 2 608 14 021 - - Deferred taxes (14 868) 14 868 - - - Other Liabilities (97 051) 8 521 (88 530) (77 474) Total liabilities (1 850 179) 256 318 348 935 (1 244 926) (1 089 460)
Minority Interest (4 038) - - (4 038) (3 534)
Total invested equity (2 188 490) 203 275 1 414 481 (570 734) (499 461) Total liabilities, m in ority in terest and total invested equity (4 042 707) 459 593 1 763 416 (1 819 698) (1 592 454)
(*) The figures expressed in euros result from conversion of the figures into US dollars at the average rate of exchange for the half-year ending on June 30, 2003
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 174/233
C.4.1.1.3 NOTES TO THE PROFORMA FINANCIAL INFORMATION
A. As per the Historical financial statements of SchlumbergerSema.
B. Carve out of Out of Scope businesses
Certain businesses included in the historical SchlumbergerSema division are not contributed or sold to Atos Origin. Adjustments reflected in the column "carve out" of the combined Pro Forma Financial Statements reflect estimates of the assets, liabilities, revenues and expenses that were directly related to the businesses not contributed or sold by SchlumbergerSema to Atos Origin during the periods presented. However the pro-forma financial information provided herein may not reflect the combined financial position and operating results of the In scope businesses in the future or what they would have been had the contributed businesses been a separate, stand alone entity during the period presented.
The following specific businesses included in the historical SchlumbergerSema division are not contributed or sold to Atos Origin. Historically discrete financial information for these businesses may or may not have been prepared. In instances where no discrete financial information was available, financial information for the excluded businesses has been extracted from the historical financial statements of SchlumbergerSema based on carve out assumptions that management believes would reflect a reasonable estimate of the assets, liabilities, revenues and expenses directly attributable to those businesses.
• Schlumberger Information Systems ("SIS")
This business includes contracts with third party Oil & Gas customers as well as other Schlumberger Limited companies. The main activities include: Managed Services network connectivity, 2Net desktop outsourcing, remote connectivity (those three activities providing mainly information technology services to other companies and divisions of Schlumberger), and any outsourcing or systems integration contract with Oil & Gas customers. While revenue, cost of goods sold and most of the operating expenses associated with Oil & Gas customers were separately tracked and identifiable within the historical internal financial reporting of Schlumberger, the related balance sheet and certain other captions of the statement of operations were extracted from the historical financial statements of Schlumberger Limited using assumptions that management believe are reasonable. The revenue and costs for contracts with Oil & Gas customers were primarily based on a specific list of Third Party Oil & Gas customers identified by Schlumberger Limited.
• Telecom Products
This business includes the licensing of Messaging and Business Support and Customer Service software, maintenance and certain associated services. Historically this business was fully embedded within the Telecom division of SchlumbergerSema, which captured all transactions with Telecom companies, comprising mainly system integration and information technology services that are part of the In scope businesses as well as, to a lesser extent, the software license and maintenance services provided to the Telecom division by the Telecom Products business. Accordingly Telecom products revenue is primarily derived from related party sales to the Telecom division included in the In Scope business, and to a lesser extent, direct third party customers. Related party revenue of Telecom products reflects an estimate of what would have been the revenue had the terms and conditions of the resellers agreement specified in the master agreement between Schlumberger and Atos Origin been applied over the periods presented.
• Business Continuity
This business provides disaster recovery services. Assets, liabilities, revenues and expenses that were directly related to this business were separately tracked and identified within the historical internal financial reporting of Schlumberger.
• Infodata
Based in Sweden, this business sells data and information stored in a web based database. Assets, liabilities, revenues and expenses that were directly related to this business were separately tracked and identified within the historical internal financial reporting of Schlumberger.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 175/233
• Taxes on income
SchlumbergerSema’s operating results historically have been included in Schlumberger Limited’s consolidated U.S. and state income tax returns as well as those of certain Schlumberger Limited foreign subsidiaries. The provision for income taxes in SchlumbergerSema’s combined financial statements has been determined by applying the applicable current effective tax rate to the pretax result falling in a particular tax jurisdiction. Deferred tax assets and liabilities are recognised for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts.
C. Accounting adjustments
In preparing the Pro Forma Combined Financial Statements included herein, the following accounting adjustments were made. Most of these adjustments give effect to the deal structure agreed between Schlumberger and Atos Origin.
The goodwill, identifiable intangibles and related amortization, which are included in the combined historical Statement of Operations and Balance Sheet of SchlumbergerSema have been eliminated in the Pro Forma Combined Statement of Operations and Pro Forma Combined Balance Sheet to reflect the transaction scope.
Deferred tax liabilities relating to the above identifiable intangible assets have similarly been eliminated.
A current tax liability relating to tax contingencies for certain transactions within the Sema organisation was established at the time of acquisition of Sema. As per the master agreement signed by Schlumberger and Atos Origin, this liability is retained by Schlumberger Limited and thus the tax liability is eliminated.
Purchase accounting reserve arising from the acquisition of Sema Plc by Schlumberger Limited and consisting primarily of severances costs, facility reductions, and other exit costs has been allocated to the Schlumberger Sema Pro Forma In scope Combined Financial Statements, except when such purchase accounting reserve related to those specific businesses that are not contributed or sold to Atos Origin.
Capitalized network installation costs that had been incurred by SchlumbergerSema in connection with the integration of Sema Plc following the acquisition of that company in April 2001 by Schlumberger have been eliminated and any related amortization expense reversed in the Pro Forma Combined Financial Statements, as management estimates that these assets have no future value for Atos Origin.
All cash and cash equivalents, short-term investments and long-term debt have been removed from the SchlumbergerSema Pro Forma In Scope Combined Financial Statements, as the master agreement stipulates that the price of the contemplated transaction will be based on a cash and debt free balance sheet.
The master agreement provides that Schlumberger Ltd will retain the obligations and liabilities associated with United States defined benefits plans and United States post retirement benefits plan. Accordingly the liabilities associated with these plans have not been included in the SchlumbergerSema Pro Forma Combined Financial Statements. In addition the portion of the United Kingdom defined benefit pension plan relating to employees of the specific businesses not contributed to or sold to Atos Origin have been excluded from the Pro Forma Combined Financial Statements (Primarily Telecom Products and Business Continuity). Schlumberger Ltd will retain all obligation and liabilities for these employees, as stipulated in the master agreement.
Schlumberger Limited enters into currency exchange contracts to hedge against the future settlements of assets and liabilities denominated in currencies other than the functional currency of the individual Schlumberger Limited business. Gains or losses on currency exchange contracts are recognised at the Schlumberger Limited level when the currency exchange rates fluctuate. These gains or losses, however, are not allocated to individual Schlumberger Limited businesses and therefore are not reflected in SchlumbergerSema's combined financial statements to partially offset the realised and unrealised gains or losses recorded by the businesses. If SchlumbergerSema had operated as a separate, stand alone company, SchlumbergerSema would have held the hedge contracts at the local business level. As a result, the gain or loss on the currency exchange contracts should have substantially offset the gains or losses recorded by the businesses on assets and liabilities denominated in currencies other than the functional currency. Accordingly, the proforma combined financial statements reflect the elimination of the historical foreign exchange gains and losses as if the exchange contracts were held locally.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 176/233
C.4.1.1.4 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF IN SCOPE OPERATIONS
C.4.1.1.4.1 Introduction
The following discussion and analysis of results of operations of Sema Group for the six-month period ended 30 June 2003 and the twelve-month period ended 31 December 2002 should be read in conjunction with the respective Pro Forma Combined In Scope Income Statements of Sema Group which have been derived from the combined accounts of SchlumbergerSema and have been prepared in accordance with accounting principals generally accepted in the United States (US GAAP) for the comparable periods, as presented elsewhere in this Document E. Sema Group has historically divided and analyzed its business in three geographical segments: North and South America is a major self-contained market; Europe is a major self-contained market that includes the Middle East and Africa; and Asia includes the remainder of the Eastern Hemisphere.
Due to the absence of accounts prepared for the twelve months ended December 31, 2001 and the six months ended June 30, 2003, the analysis of changes presented below does not provide appropriate comparable figures for the six months ended 30 June 2002 and for the twelve months ended 31 December 2002. However, certain approximate percentage changes from the corresponding prior periods have been provided. This is due to the fact that the Sema Group businesses did not operate on a stand-alone basis during the periods under review and that significant restructurings render prior period comparisons difficult. In addition, Schlumberger acquired Sema on 1 April 2001. In order to facilitate comparison of 2002 and 2001, certain information for the nine months ended 31 December 2001 has been restated on a pro-forma basis by dividing the results of operations for 2001 by nine and multiplying the quotient by twelve months. Readers should be aware that the calculation does not reflect any seasonal fluctuations.
Readers should also be aware that the approximate percentage changes referred to in the MD&A are only approximate, and, together with the pro forma combined figures for Sema Group for the periods concerned, are provided for information purposes only and do not purport to be indicative of actual changes or results had Sema Group been operating as a stand-alone entity during the periods under review.
Finally, readers should note that the following figures and discussion are based on Sema Group’s results for the periods concerned in U.S. dollars, the currency in which Sema Group has historically stated its financial statements. Since, however, Sema Group realizes a substantial part of its revenues and expenses in Euros and Pounds Sterling, its U.S. dollar results during the periods under consideration have been significantly affected by the decline in the value of the U.S. dollar against such other currencies. Had Sema Group’s results been expressed in Euros, as they will be following the Acquisition, the impact of changing exchange rates would have been different. See Introductory Note on page 8 of this Document.
As used in the summary tables and discussion below, "Operating Revenue" represents the aggregate revenue from operations of the segment concerned or Sema Group as a whole, excluding interest and other non-operating revenues. The contribution of net interest and other non-operating revenues is, however, included in total "Income (loss) before taxes and minority interests" under "Eliminations/Other – Net Additional Costs". Inter- regional operating revenues of the three regions are included under segment revenues of the segment concerned and then eliminated under "Eliminations/Other – Interregional Revenue". "Pretax Segment Income (Loss)" represents the contribution of a segment to "Income (loss) before taxes and minority interests" after deduction of all costs, except unallocated headquarters costs (including some services provided by headquarters to the regions), financing costs and various non-recurring costs and write-offs related to the restructuring of operations (which Sema Group has historically recorded at the group level and not allocated to individual regions). The net pretax amount of these excluded costs are presented under "Eliminations/Other – Net Additional Costs".
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 177/233
C.4.1.1.4.2 Sema Group Results For Six Months Ended 30 June 2003
(in thousands of U.S.$) Six months 2003 NORTH AND SOUTH AMERICA Operating Revenue 187,289 Pretax Segment Income / (Loss) (841)
EUROPE, AFRICA & MIDDLE EAST Operating Revenue 1,059,830 Pretax Segment Income / (Loss) 14,927
ASIA Operating Revenue 82,371 Pretax Segment Income / (Loss) 17,713
ELIMINATIONS / OTHER
Interregional Revenue (8,537) Net Additional Costs (10,188)
TOTAL IN SCOPE
Operating Revenue 1,320,953 Income / (Loss) Before Taxes and Minority Interests 21,611
Total
Total Operating Revenue for the six months ended 30 June 2003 increased to $1,321 million, approximately 21% higher than for the six months ended 30 June 2002. The revenue increase reflects primarily the strengthening of the Euro, Swedish Krona and Sterling currencies against the US Dollar, which had a positive revenue impact of approximately 12% of revenues. The remaining increase in revenue was primarily attributable to increased public sector and finance activity in Europe and Asia respectively, which offset a decline in North American revenues.
The improvement in Income (Loss) Before Taxes and Minority Interests to an approximate $22 million profit for the six months ended 30 June 2003 from an estimated loss of approximately $3 million for the six months ended 30 June 2002 reflected the significant cost reduction programmes carried out in 2002 particularly in North and South America and Asia. Profitability in North and South America and Asia, however, was partially offset by lower profitability in Europe, the Middle East and Africa.
North and South America
Revenue of $187 million, which represented 14% of total Sema Group operating revenues for the six months ended 30 June 2003, decreased approximately 4% from the six months ended 30 June 2002 due primarily to a ramp down of the PECO project, a large multi-phase project which has been ongoing for several years and is scheduled to continue but at a lower level activity in the future. Otherwise, highly competitive conditions and restrained IT spending persisted in the U.S. and other American markets.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 178/233
Pre-tax operating loss of $1 million for the six months ended 30 June 2003 showed significant improvement from an estimated loss of $38 million in prior period. The decrease in revenue notwithstanding, pre-tax operating loss decreased mainly due to extensive cost reduction program carried out in North America mainly in the second half of 2002, which increased profitability on contracts and significantly reduced overhead costs.
Europe Middle East and Africa
Revenue for the six months ended 30 June 2003 was $1,060 million, representing 80% of total Sema Group operating revenues for the six months ended 30 June 2003, an increase of approximately 17% from the prior period. The revenue increase principally reflected the positive impact of the Euro and the UK pound appreciating approximately 23% and the Sterling 22% against the Dollar. The appreciation of such currencies against the Dollar represented approximately a 15% increase in operating revenues. The remaining 2% increase in revenues mainly arose from new public sector contracts such as Department of Works Pensions, Department of Trade & Industry, Consignia and Vehicle Inspectorate in the UK, the largest market in Europe for public sector information technology projects, and from the African Games contract which Sema Group was awarded in Nigeria in the second quarter of 2003. However, revenues decreased in France, mainly due to the decline in the French market for information technology services leading to lower daily fee rates, as well as in Germany, Eastern Europe and Italy, mainly due to diminished information technology spending in the Telecom sector.
Despite the increase in revenue, pre-tax operating income decreased $43 million from $58 million in the six months ended 30 June 2002 to $15 million in the first half of 2003, mainly due to deterioration in Sweden, France and Germany, which suffered from lower daily fee rates on Systems Integration projects reflecting increased competition and higher service delivery costs.
Asia
Revenue for the six months ended 30 June 2003 was $82 million, representing 6% of total Sema Group revenue for the period, an increase of approximately 10% from the six months ended 30 June 2002. Revenues in Japan increased in view of increased activity on systems integration projects such as Manulife and new contracts for Mass Mutual and Nissan.
Pre-tax operating income of $18 million increased significantly from $3 million in the prior period. Operating income in Asia increased mainly due to cost savings which have considerably improved gross margins and reduced overheads.
Eliminations/Other
Net Additional Costs of $10 million for the six months ended 30 June 2003 mainly reflected unallocated headquarters and financing costs, together with some net employee related costs for restructuring. This amount was down slightly from comparable costs during the first half of 2002.
C.4.1.1.5 REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Schlumberger Limited
You have requested us to examine the accompanying pro forma accounts as of 30 June 2003 and for the six month period then ended which have been prepared in connection with the planned acquisition by Atos Origin of certain businesses of Schlumberger Limited’s SchlumbergerSema division (the businesses sold or contributed are hereinafter referred to as the "Sema Group").
These pro forma financial statements are the responsibility of Schlumberger Limited’s management and were prepared on 13 January 2004 based on the following:
a) the combined interim financial statements of the "SchlumbergerSema" division for the six month period ended 30 June 2003, prepared in accordance with accounting principles generally accepted in the United States of America . We conducted our review of these accounts in accordance with the professional standards generally accepted in the United States of America. Those standards require that
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 179/233
we perform limited procedures to obtain reasonable assurance, below the level resulting from a audit, that the accounts do not contain any material misstatement. Our review report on these combined financial statements did not include any qualifications but did contain an explanatory paragraph relating to the principles of presentation and preparation used.
b) pro forma adjustments identified by Schlumberger Limited’s management relating to the exclusion of assets and liabilities, as well as the income statements of the SchlumbergerSema businesses not sold or contributed to Atos Origin.
Therefore, these pro forma financial accounts do not include any adjustments which may be necessary for the purpose of harmonization with the accounting policies applied by Atos Origin.
We have conducted our examination of the pro forma accounts in accordance with the professional standards generally accepted in France. Those standards require an assessment of the procedures applied to select the assumptions to prepare the pro forma accounts. They also require that we perform procedures to assess whether such assumptions provide a reasonable basis for presenting the significant effects attributable to the pro forma transaction or event, whether the pro forma adjustments give appropriate effect to such assumptions and whether the accounting policies applied in preparing the pro forma accounts are consistent with the accounting policies applied in preparing the last combined financial statements at 30 June 2003.
This report has been prepared solely in accordance with the professional standards generally accepted in France. Our examination was not performed in accordance with auditing standards generally accepted in the United States of America and therefore did not comply with those standards.
The pro forma financial statements are intended to reflect the effect of a given transaction or event on the historical financial information , had this transaction or event occurred at an earlier date than the date at which such transaction or event occurred or is reasonably expected to occur. However, they are not necessarily indicative of the financial position or results of operations which would have been recorded had this given transaction or event occurred at an earlier date than the date at which such transaction or event occurred or was reasonably expected to occur.
Based on our examination, nothing came to our attention that would indicate that the assumptions used would not provide a reasonable basis to reflect the business of "Group Sema", the related pro forma adjustments give appropriate effect to those assumptions in the pro forma accounts and the accounting policies applied in preparing the pro forma accounts are consistent with those applied in preparing the combined financial statements at 30 June 2003.
As the pro forma financial statements have been prepared for a specific purpose in relation to a particular situation as described above, the use of the said statements and this report may not be appropriate in a different situation.
Paris, January 13, 2004
PricewaterhouseCoopers Audit
Xavier Cauchois Stéphane Piffero Partner Partner
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 180/233
C.4.1.2 NOTE SEMA GROUP OPERATIONS FOR 2ND HALF 2003
Activity in the second half of 2003 has to a large extent revealed a continuation of the tendency observed in the first half of 2003 and in 2002. Operating profits for the second half of 2003 expressed in US dollars should continue to experience a modest improvement compared with the same period of the previous year due to the continued appreciation of the euro, the pound sterling and the Swedish crown in relation to the US dollar, this development being combined with an increase in activity in the British public sector, the contract for the new African Games signed in Nigeria, and a slight recovery of the French market. It is expected that these positive developments will be largely offset by the continued languor of the German and American markets. Furthermore, it is expected that operating profit will be affected by the usual seasonal fluctuations which favour the second half in the European computer industry, especially in the public sector. In the absence of favourable effects from the fall in value of the dollar, the operating profits of the Sema Group will probably experience only slight or nil growth compared with the same period of 2002.
C.4.1.3 SEMA GROUP PRO FORMA COMBINED FINANCIAL STATEMENTS AT 31 DECEMBER 2002 The following table sets forth pro forma financial data of the contributed or sold businesses of SchlumbergerSema ("The In Scope businesses") as of the dates and for the periods indicated. The Pro Forma Combined Financial Statements were prepared by the Company to illustrate the estimated financial position and result of operations of the In scope businesses described in the Notes to the Pro Forma Combined Financial Statements as if the transaction had occurred as of the beginning of the periods presented, for purposes of the pro forma combined statements of income and as of 31 December 2002 and 30 June 2003 for purposes of the pro forma combined balance sheet. In addition, the Pro Forma Combined Financial Statements do not purport to represent what the results of operations or financial position of the In scope businesses would actually have been if the transaction had in fact occurred on such dates or to project the results of operations or financial position of the In scope businesses for any future period or date. The following data should be read in conjunction with, and are qualified by reference to, the Combined Financial Statements and the Interim Combined Financial Statements included in this Prospectus. The Pro Forma Combined Financial Statements are based on numerous assumptions and upon currently available information.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 181/233
C.4.1.3.1 PROFORMA COMBINED STATEMENT OF INCOME 31 DECEMBER 2002 (*) 1.06163 USD 000's EUR 000's Per 10K Carve Out Adjustments Proforma Proforma Note A Note B Note C Revenue Operating 2 989 874 (575 884) - 2 413 990 2 562 764 Interest and other income 24 955 (950) 24 005 25 484
Expenses Cost of goods sold and services (6 493 562) 411 636 4 067 707 (2 014 219) (2 138 354) Research & engineering (85 224) 52 633 1 600 (30 991) (32 901) Marketing (218 863) 46 993 (171 870) (182 463) General (312 267) 55 803 (650) (257 114) (272 959) Interest (16 448) 1 935 8 326 (6 187) (6 568)
Loss before taxes and minority interest (4 111 535) (7 834) 4 076 983 (42 386) (44 997)
Taxes on income 23 736 2 941 (30 781) (4 104) (4 358) Loss before minority interest (4 087 799) (4 893) 4 046 202 (46 490) (49 355)
Minority interest (1 001) (1 001) (1 063) Net Loss (4 088 800) (4 893) 4 046 202 (47 491) (50 418)
(*) The figures expressed in euros result from conversion of the figures into US dollars at the average rate of exchange for the tax year ending on 31 December 2002
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 182/233
C.4.1.3.2 PRO FORMA COMBINED BALANCE SHEET 31 DECEMBER 2002
Per 10K Carve Out Adjustments Proforma Proforma Note A Note B Note C Current As s ets Cash 21 444 (22 231) 787 0 0 Short-term investments 42 681 (31 520) (11 161) 0 0 Receivables less allowance for doubtful 1 011 375 (85 477) 925 898 882 899 accounts (2002 - $37,292) 00 Affiliated com pan y receivables 77 763 (22 999) 54 764 52 221 Inventories 41 151 (4 660) 36 491 34 796 Deferred taxes 76 417 (7 155) (5 206) 64 056 61 081 Tax receivable 27 003 0 18 829 45 832 43 704 Other current assets 100 409 (35 245) 65 164 62 138 Total current assets 1 398 243 (209 288) 3 249 1 192 204 1 136 838
Inves tm en ts in Affilia ted Com pan ies 1 486 (34) 1 452 1 385 Lon g Term Receivables 1 083 0 1 083 1 033 Fixed As s ets les s accum u lated d epreciation 723 593 (172 836) 550 757 525 180 Goodw ill 1 543 055 (79 181) (1 463 874) 0 0 Inta ngible As s ets 174 604 (1 127) (162 239) 11 238 10 716 Deferred Taxes (1 622) 41 424 39 802 37 954 Other Assets 9 887 (1 185) 8 702 8 298 Total a ssets 3 851 951 (465 273) (1 581 440) 1 805 238 1 721 403
Cu rren t Lia bilities Accou n ts payable an d accru ed liabilities (1 434 987) 200 375 28 707 (1 205 905) (1 149 903) Affiliated com pan y payable (20 267) (16 084) (36 351) (34 663) Estim ated liability for taxes on in com e (50 453) 9 027 41 426 0 0 Dividend payable 0 0 0 Long-term debt - current portion (6 877) 6 097 780 0 0 Bank & short-term loans (39 741) (44 734) 84 475 0 0 Total cu rren t liabilities (1 552 325) 154 681 155 388 (1 242 256) (1 184 566) Long-term Debt (111 949) 7 111 942 0 0 Pos tretirem ent Benefits (8 217) 8 217 0 0 Deferred taxes (6 213) 6 213 0 0 Oth er Lia bilities (88 195) 14 040 (74 155) (70 711) Total liabilities (1 766 899) 174 941 275 547 (1 316 411) (1 255 277)
Minority Interes t (3 453) 0 0 (3 453) (3 293)
Total invested equity (2 081 599) 290 332 1 305 893 (485 374) (462 833) Total liabilities, m in ority in terest and total invested equity (3 851 951) 465 273 1 581 440 (1 805 238) (1 721 403)
(*) The figures expressed in euros result from conversion of the figures into US dollars at the rate of exchange at closure on 31 December 2002
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 183/233
C.4.1.3.3 NOTES TO THE PROFORMA FINANCIAL INFORMATION
A. As per the Historical financial statements of SchlumbergerSema .
B. Carve out of Out of Scope businesses
Certain businesses included in the historical SchlumbergerSema division are not contributed or sold to Atos Origin. Adjustments reflected in the column "carve out" of the combined Pro Forma Financial Statements reflect estimates of the assets, liabilities, revenues and expenses that were directly related to the businesses not contributed or sold by SchlumbergerSema to Atos Origin during the periods presented. However the pro-forma financial information provided herein may not reflect the combined financial position and operating results of the In scope businesses in the future or what they would have been had the contributed businesses been a separate, stand alone entity during the period presented.
The following specific businesses included in the historical SchlumbergerSema division are not contributed or sold to Atos Origin. Historically discrete financial information for these businesses may or may not have been prepared. In instances where no discrete financial information was available, financial information for the excluded businesses has been extracted from the historical financial statements of SchlumbergerSema based on carve out assumptions that management believes would reflect a reasonable estimate of the assets, liabilities, revenues and expenses directly attributable to those businesses.
• Schlumberger Information Systems ("SIS")
This business includes contracts with third party Oil & Gas customers as well as other Schlumberger Limited companies. The main activities include: Managed Services network connectivity, 2Net desktop outsourcing, remote connectivity (those three activities providing mainly information technology services to other companies and divisions of Schlumberger), and any outsourcing or systems integration contract with Oil & Gas customers. While revenue, cost of goods sold and most of the operating expenses associated with Oil & Gas customers were separately tracked and identifiable within the historical internal financial reporting of Schlumberger, the related balance sheet and certain other captions of the statement of operations were carved out using assumptions that management believe are reasonable. The revenue and costs for contracts with Oil & Gas customers were primarily based on a specific list of Third Party Oil & Gas customers identified by Schlumberger Limited.
• Telecom Products
This business includes the licensing of Messaging and Business Support and Customer Service software, maintenance and certain associated services. Historically this business was fully embedded within the Telecom division of SchlumbergerSema, which captured all transactions with Telecom companies, comprising mainly system integration and information technology services that are part of the In scope businesses as well as, to a lesser extent, the software license and maintenance services provided to the Telecom division by the Telecom Products business. Accordingly Telecom products revenue is primarily derived from related party sales to the Telecom division included in the In Scope business, and to a lesser extent, direct third party customers. Related party revenue of Telecom products reflects an estimate of what would have been the revenue had the terms and conditions of the resellers agreement specified in the master agreement between Schlumberger and Atos Origin been applied over the periods presented.
• Business Continuity
This business provides disaster recovery services. Assets, liabilities, revenues and expenses that were directly related to this business were separately tracked and identified within the historical internal financial reporting of Schlumberger.
• Infodata
Based in Sweden, this business sells data and information stored in a web based database. Assets, liabilities, revenues and expenses that were directly related to this business were separately tracked and identified within the historical internal financial reporting of Schlumberger.
• Taxes on income
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 184/233
SchlumbergerSema’s operating results historically have been included in Schlumberger Limited’s consolidated U.S. and state income tax returns as well as those of certain Schlumberger Limited foreign subsidiaries. The provision for income taxes in SchlumbergerSema’s combined financial statements has been determined by applying the applicable current effective tax rate to the pretax result falling in a particular tax jurisdiction. Deferred tax assets and liabilities are recognised for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts.
C. Accounting adjustments
In preparing the Pro Forma Combined Financial Statements included herein, the following accounting adjustments were made. Most of these adjustments give effect to the deal structure agreed between Schlumberger and Atos Origin.
The goodwill, identifiable intangibles and related amortization, which are included in the combined historical Statement of Operations and Balance Sheet of SchlumbergerSema have been eliminated in the Pro Forma Combined Statement of Operations and Pro Forma Combined Balance Sheet to reflect the transaction scope.
Deferred tax liabilities relating to the above identifiable intangibles have similarly been eliminated.
A current tax liability relating to tax contingencies for certain transactions within the Sema organisation was established at the time of acquisition of Sema. As per the master agreement signed by Schlumberger and Atos Origin, this liability is retained by Schlumberger Limited and thus the tax liability is eliminated.
Purchase accounting reserve arising from the acquisition of Sema Plc by Schlumberger Limited and consisting primarily of severances costs, facility reductions, and other exit costs has been allocated to the Schlumberger Sema Pro Forma In scope Combined Financial Statements, except when such purchase accounting reserve related to those specific businesses that are not contributed or sold to Atos Origin.
Capitalized network installation costs that had been incurred by SchlumbergerSema in connection with the integration of Sema Plc following the acquisition of that company in April 2001 by Schlumberger have been eliminated and any related amortization expense reversed in the Pro Forma Combined Financial Statements, as management estimates that these assets have no future value for Atos Origin.
All cash and cash equivalents, short-term investments and long-term debt have been removed from the SchlumbergerSema Pro Forma In Scope Combined Financial Statements, as the master agreement stipulates that the price of the contemplated transaction will be based on a cash and debt free balance sheet.
The master agreement provides that Schlumberger Ltd will retain the obligations and liabilities associated with United States defined benefits plans and United States post retirement benefits plan. Accordingly the liabilities associated with these plans have not been included in the SchlumbergerSema Pro Forma Combined Financial Statements. In addition the portion of the United Kingdom defined benefit pension plan relating to employees of the specific businesses not contributed to or sold to Atos Origin have been excluded from the Pro Forma Combined figures (Primarily Telecom Products and Business Continuity). Schlumberger Ltd will retain all obligation and liabilities for these employees, as stipulated in the agreement.
Schlumberger Limited enters into currency exchange contracts to hedge against the future settlements of assets and liabilities denominated in currencies other than the functional currency of the individual Schlumberger Limited business. Gains or losses on currency exchange contracts are recognised at the Schlumberger Limited level when the currency exchange rates fluctuate. These gains or losses, however, are not allocated to individual Schlumberger Limited businesses and therefore are not reflected in SchlumbergerSema's combined financial statements to partially offset the realised and unrealised gains or losses recorded by the businesses. If SchlumbergerSema had operated as a separate, stand alone company, SchlumbergerSema would have held the hedge contracts at the local business level. As a result, the gain or loss on the currency exchange contracts should have substantially offset the gains or losses recorded by the businesses on assets and liabilities denominated in currencies other than the functional currency. Accordingly, the proforma combined financial statements reflect the elimination of the historical foreign exchange gains and losses as if the exchange contracts were held locally.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 185/233
C.4.1.3.4 REPORT OF THE INDEPENDENT AUDITORS
To the Board of Directors of Schlumberger Limited
You have requested us to examine the accompanying pro forma accounts as of 31 December 2002 and for the year then ended which have been prepared in connection with the planned acquisition by Atos Origin of certain businesses of Schlumberger Limited’s SchlumbergerSema division (the businesses sold or contributed are hereinafter referred to as the "Sema Group").
These pro forma financial statements are the responsibility of Schlumberger Limited’s management and were prepared on 13 January 2004 based on the following:
a) the combined financial statements of the "SchlumbergerSema" division for the year ended 31 December 2002, prepared in accordance with accounting principles generally accepted in the United States of America . We conducted an audit of these accounts in accordance with the professional standards generally accepted in the United States of America. Those standards require that we perform procedures to obtain reasonable assurance about whether the accounts are free of material misstatement. Our audit report on these combined financial statements at 31 December 2002 did not include any qualifications but did contain an explanatory paragraph relating to the principles of presentation and preparation used.
b) pro forma adjustments identified by Schlumberger Limited’s management relating to the exclusion of assets and liabilities, as well as the income statements of the SchlumbergerSema businesses not sold or contributed to Atos Origin.
Therefore, these pro forma financial accounts do not include any adjustments which may be necessary for the purpose of harmonization with the accounting policies applied by Atos Origin.
We have conducted our examination of the pro forma accounts in accordance with the professional standards generally accepted in France. Those standards require an assessment of the procedures applied to select the assumptions to prepare the pro forma accounts. They also require that we perform procedures to assess whether such assumptions provide a reasonable basis for presenting the significant effects attributable to the pro forma transaction or event, whether the pro forma adjustments give appropriate effect to such assumptions and whether the accounting policies applied in preparing the pro forma accounts are consistent with the accounting policies applied in preparing the last combined financial statements at 31 December 2002.
This report has been prepared solely in accordance with the professional standards generally accepted in France. Our examination was not performed in accordance with auditing standards generally accepted in the United States of America and therefore did not comply with those standards.
The pro forma financial statements are intended to reflect the effect of a given transaction or event on the historical financial information, had this transaction or event occurred at an earlier date than the date at which such transaction or event occurred or is reasonably expected to occur. However, they are not necessarily indicative of the financial position or results of operations which would have been recorded had this given transaction or event occurred at an earlier date than the date at which such transaction or event occurred or was reasonably expected to occur.
In our opinion, the assumptions used as described in the notes a) and b) to these pro forma combined accounts provide a reasonable basis to reflect the business of "the Sema Group". The related pro forma adjustments give appropriate effect to those assumptions in the pro forma accounts and the accounting policies applied in preparing the pro forma accounts are consistent with those applied in preparing the combined financial statements at 31 December 2002.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 186/233
As the pro forma financial statements have been prepared for a specific purpose in relation to a particular situation as described above, the use of the said statements and this report may not be appropriate in a different situation.
Paris, January 13, 2004
PricewaterhouseCoopers Audit
Xavier Cauchois Stéphane Piffero Partner Associate-Partner
C.4.1.3.5 SEMA GROUP RESULTS FOR TWELVE MONTHS ENDED 31 DECEMBER 2002
Sema Group Results For Twelve Months Ended 31 December 2002
(in thousands of U.S. $) 2002
NORTH AND SOUTH AMERICA Operating Revenue 354 141 Pretax Segment Income / (Loss) (58 049)
EUROPE, AFRICA & MIDDLE EAST Operating Revenue 1 931 018 Pretax Segment Income / (Loss) 139 390
ASIA Operating Revenue 154 567 Pretax Segment Income / (Loss) 4 654
ELIMINATIONS/divers Interregional Revenue (25 736) Net Additional Costs (128 381)
TOTAL INSCOPE Operating Revenue 2 413 990 Income / (Loss) Before Taxes and Minority Interests (42 386)
Total
Operating revenue increased approximately 36% compared with 2001 mainly due to the acquisition of Sema plc, whose results were consolidated into Sema Group results of operations with effect from 1 April 2001. Assuming the acquisition had occurred on 1 January 2001, operating revenue in 2002 would have been essentially the same compared with 2001, after taking into account the decline of the U.S. dollar against the Euro, the Pound Sterling and other currencies.
Loss before taxes and minority interests was $42 million for the twelve months ended 31 December 2002, an increase from the $22 million estimated loss actually realized in the nine months ended 31 December 2001 (or an estimated loss of $30 million on a pro forma twelve-month basis). The $42 million loss, however, includes restructuring charges of approximately $95.1 million as well as a gain on disposal of buildings of $17.5 million. If these non-recurring items are excluded, Sema Group would have realized income before taxes and minority interests of approximately $35 million, a significant improvement over the prior year on both an actual and pro forma basis, reflecting cost reduction initiatives implemented since the integration of Sema plc into Sema Group.
In December 2002 an updated strategy for Sema Group was announced, which focuses on IT consulting and systems integration together with network and infrastructure solutions, primarily in public sector and energy, while continuing to develop specific regional market sectors in areas where it has a successful competitive position based on scale and domain knowledge.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 187/233
Sema Group won the top prize at the prestigious Management Consultancies Association (MCA) Best Management Practice Awards in London for its work on the 2002 Salt Lake City Olympic Winter Games. At the 2002 Winter Olympic Games, Sema Group led a consortium of 15 technology partners in a three-year long project to deliver the IT infrastructure needed to run the Games. Dr Jacques Rogge, president of the International Olympic Committee commented "The Information Technology operations of any Olympic Games play a vital role in the overall success of the Games". Sema Group is also the official Worldwide Information Technology Partner for the Olympic Games in 2004, 2006 and 2008.
North & South America
Operating revenue for 2002 was $354 million, a decrease of approximately 32% over 2001 on a comparable pro forma basis. This was primarily due to the decline in the telecom and utility industries in a weak IT services spending environment as customers faced economic challenges and continued to revise budgets downwards and delay decisions on contract awards. However, major contracts were awarded in the energy segment such as the Online Energy Management System for AES Infoenergy in Brazil and the systems integration and data management services contracts with Nebraska Public Power District (NPPD) of Columbus, Nebraska. These new contracts alone will, however, not be sufficient to offset the impact of existing contracts coming to an end.
Despite the decrease in operating revenue, pretax segment loss of $58 million decreased $10 million on a comparable basis, representing an improvement of approximately 15% over the approximate $68 million loss in 2001. The improvement was mainly attributable to the cost reduction programs implemented throughout the area.
Europe/Middle East/Africa
Operating revenue of $1.9 billion, representing 80% of total Sema Group operating revenues, marginally increased in U.S. dollars over 2001 on a comparable basis by approximately $5 million (0.3%), but would have decreased marginally without the effects of the decline of the U.S. dollar against the Euro (5.0%), Sterling (4.0%) and other European currencies. The underlying decrease resulted from a declining IT services market in Europe for the first time since 1993. Major contract awards in the public sector, mainly in the UK, where Sema Group won large outsourcing contracts with the Association of Train Operating Companies, the Department of Work and Pension and the Vehicle Inspectorate, partially offset the general decline in the industry due to overall lower spending on IT budgets. Also making a favorable contribution to operating revenue were an energy-related project for Brussels-based Electrabel S.A., a leading energy producer, distributor and supplier in Belgium, and a welfare services project for Consignia's 220,000 employees in the United Kingdom.
Pretax segment income likewise remained flat at $139 million year on year on a comparable basis, but would have suffered a decline without the favorable effects of the decline in the U.S. dollar noted above.
Asia
Operating revenue increased to $154 million for 2002, an increase of approximately 7% over 2001 on a comparable basis. The increase was principally attributable to new outsourcing contracts in the insurance sector in Japan for Mass Mutual and the delivery of payment systems in China. These increases were partially offset by decreased activity in telecommunications, mainly in China and Taiwan.
Pre-tax segment income decreased significantly to $5 million for 2002 on a comparable basis from approximately $14 million in 2001, mainly due to pricing pressure and economic declines in the telecommunications IT services industry.
Eliminations / Other
Net additional costs of $128.4 million for the year ended 31 December 2002 represented primarily restructuring charges and costs of approximately $95.1 million taken in the third and fourth quarters of 2002, as well as unallocated headquarter costs, including centrally managed costs for global service desks and financing charges. It involved both significant layoffs of personnel, by far Sema Group’s largest expense, and the early termination of leases or other disposition of unneeded facilities. Sema Group believes that this restructuring, whose effects began to be noted in 2003, was necessary to make Sema Group’s basic cost structure more consistent with its ongoing level of activity and to restore margins to more acceptable levels.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 188/233
C.4.2 "FULL SCOPE" COMBINED FINANCIAL STATEMENTS
C.4.2.1 "FULL SCOPE" COMBINED FINANCIAL STATEMENTS IN US GAAP AT 30 JUNE 2003
C.4.2.1.1 SCHLUMBERGERSEMA COMBINED STATEMENT OF INCOME (UNAUDITED) (STATED IN THOUSANDS OF US$)
Six Months Ended June 2003 Revenue: Operating $ 1 629 487 Interest & other income 4 210 1 633 697 Expenses: Cost of goods sold & services 1 314 236 Research & engineering 29 208 Marketing 101 452 General 163 873 Interest 8 168 1 616 937 Income before taxes and minority interest 16 760 Taxes on income (10 967) Income before minority interest 5 793 Minority interest (336) Net Income $ 5 457
The attached notes form an integral part of the financial statements.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 189/233
C.4.2.1.2 SCHLUMBERGERSEMA – UNAUDITED COMBINED BALANCE SHEET (Stated in thousands) June 30 ASSETS 2003
Current Assets: Cash $ 12 894 Short-term Investments 70 445 Receivables less allowance for doubtful accounts 1 113 010 (2003 - $45,450) Affiliated company receivables 33 354 Inventories 39 624 Deferred taxes 75 053 Taxes receivable 17 744 Other current assets 96 626 1 458 750 Investments in Affiliated Companies 1 596 Long term receivables 1 171 Fixed Assets 718 112 Goodwill 1 682 328 Intangible Assets 164 453 Deferred Taxes - Other Assets 16 297 $ 4 042 707 LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities $ 1 334 867 Affiliated company payables 51 670 Estimated liability for taxes on income 79 409 Long-term debt due within one year 6 734 Bank & short-term loans 69 673 1 542 353 Long-term Debt 179 278 Postretirement Benefits 16 629 Deferred taxes 14 868 Other Liabilities 97 051 1 850 179 Minority Interest 4 038
Stockholder's Equity 2 188 490 $ 4 042 707
The attached notes form an integral part of the financial statements.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 190/233
C.4.2.1.3 SCHLUMBERGERSEMA UNAUDITED COMBINED STATEMENTS OF CHANGES IN INVESTED EQUITY AND TOTAL COMPREHENSIVE INCOME (stated in thousands of US$)
June 30, 2003 SHAREHOLDER NET INVESTMENT Beginning balance $ 2 081 599 Net income 5 457 Shareholders net investment (distribution) (106 451) Other comprehensive income (loss) : Foreign currency translation adjustment 204 885 Alternate minimum pension liability (net of taxes of $312,000) 728 Unrealized Gain on hedge instruments 2 272 Total other comprehensive income (loss) 207 885 $ 207 885
TOTAL INVESTED EQUITY $ 2 188 490
TOTAL COMPREHENSIVE INCOME Net income (loss) $5 457 Other Comprehensive income (loss) 207 885 TOTAL COMPREHENSIVE INCOME $213 342
The attached notes form an integral part of the financial statements.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 191/233
C.4.2.1.4 SCHLUMBERGERSEMA – UNAUDITED COMBINED STATEMENT OF CASH FLOWS (STATED IN THOUSANDS OF US $)
Six Months End Cash flows from operating activities: 2003 Net income $ 5 457 Adjustments to reconcile net loss from continuing operations to cash provided by operating activities: Depreciation and amortization 99 055 Deferred tax (20 776) Postretirement benefits 8 412 Provision for losses on accounts receivable 5 848 Change in operating assets and liabilities: Increase in receivables (40 570) Decrease in inventories 10 047 Decrease in other current assets 8 802 Decrease in accounts payable and accrued liabilities (173 710) Increase in estimated liability for taxes on income 40 825 Other - net 65 204 NET CASH PROVIDED BY OPERATING ACTIVITIES 8 594 Cash flows from investing activities: Purchase of fixed assets (84 010) Capitalization of intangible assets (199) Retirement of fixed assets & other 3 314 Increase in short term investments (25 311) Proceeds on sale of Building 10 500 NET CASH USED IN INVESTING ACTIVITIES (95 706) Cash flows from financing activities: Net increase in long-term debt 54 565 Net increase in short-term debt 24 064 NET CASH PROVIDED BY FINANCING ACTIVITIES 78 629 Net decrease in cash before translation effect (8 483) Translation effect (67) Cash, beginning of period 21 444 CASH, END OF PERIOD $ 12 894
The attached notes form an integral part of the financial statements.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 192/233
C.4.2.1.5 NOTES TO THE UNAUDITED COMBINED FINANCIAL STATEMENTS
The accompanying unaudited combined financial statements, which include the accounts of SchlumbergerSema and its subsidiaries, have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. All intercompany transactions and balances have been eliminated in consolidation. Operating results for the six-month period ended 30 June 2003 are not necessarily indicative of the results that may be expected for the full year ending 31 December 2003. The 31 December 2002 balance sheet information has been derived from the 2002 financial statements. For further information, refer to the Combined Financial Statements and notes thereto, included in SchlumbergerSema’s Combined Financial Statements for the fiscal year ended 31 December 2002.
Charges – Continuing Operations
In the fourth quarter of 2002, SchlumbergerSema recorded pretax severance and facility charges as 31 December 2002 as below. The status of these charges as of 30 June 2003 is as follows:
Severance Facilities Amount People Amount Charges$ 52,2 1 638 $ 39,5
Paid 18,5 645 6,4
Balance December 31, 2002 33,7 993 33,1
Paid 12,6 272 12,0
Balance June 30, 2003$ 21,1 721 $ 21,1
The remaining severance costs are expected to be paid before 31 December 2003.
New Accounting Standards
In June 2001, SFAS 143 (Accounting for Asset Retirement Obligations) was issued. SFAS 143 was adopted by SchlumbergerSema commencing 1 January 2003. The implementation of this standard did not have any material effect on its financial position or results of operations.
In July 2002, the Financial Accounting Standards Board issued SFAS 146 (Accounting for Costs Associated with Exit or Disposal Activities). The standard required companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, (Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity [including Certain Costs Incurred in a Restructuring]). SFAS 146 replaced Issue 94-3. SchlumbergerSema adopted SFAS 146 prospectively to exit or disposal activities initiated after 31 December 2002.
In November 2002, FASB Interpretation No. 45 (Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others) was issued. It requires certain accounting and disclosures of guarantees to third parties including indebtedness. The statement is effective on a prospective basis for guarantees issued or modified after 31 December 2002. The implementation of this statement did not have a material effect on its financial position or results of operations.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 193/233
In January 2003, the Emerging Issues Task Force (EITF) issued No. 00-21 (Accounting for Revenue Arrangements with Multiple Deliverables). This EITF establishes the criteria for recognizing revenue in arrangements when several items are bundled into one agreement. EITF 00-21 does not allow revenue recognition unless the fair value of the undelivered element(s) is available and the element has stand-alone value to the customer. EITF 00-21 also provides guidance on allocating the total contract revenue to the individual elements based upon the available fair value of each deliverable. The implementation of this pronouncement did not have a material impact on its financial position or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation NO. 46, (Consolidation of Variable Interest Entities, and Interpretation of ARB No. 51). The primary objective of the Interpretation is to provide guidance on the identification of, and financial reporting for entities over which control is achieved through means other than voting rights; such entities are known as variable-interest entities (VIE’s). FIN 46 provides guidance that determines (1) whether consolidation is required under the "controlling financial interest" model of Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial Statements, or other existing authoritative guidance, or, alternative, (2) whether the variable-interest model under FIN 46 should be used to account for existing and new entities. Management does not believe that the adoption of this Statement will have a material effect on the financial position or the results of operations.
In May 2003, the FASB issued SFAS No. 150, (Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity). The Standard specifies that instruments within its scope embody obligations of the issuer and therefore, the issuer must classify them as liabilities. The Standard is effective July 1, 2003. The Standard will have no material effect on SchlumbergerSema’s financial position.
Inventory
A summary of inventory follows: (Stated in thousands) June 30 2003
Raw Materials & Field Materials$ 15 978 Work in Process 6 763 Finished Goods 19 916 42 657 Less: Reserves 3 033 $ 39 624
Fixed Assets
A summary of fixed assets follows: (Stated in thousands) June 30 2003
Property plant & equipment$ 1 120 103 Less: Accumulated depreciation 401 991 $ 718 112
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 194/233
Goodwill
The changes in the carrying amount of goodwill for the six months ended 30 June 2003 is as follows:
(Stated in thousands)
Balance at December 31, 2002$ 1 543 055 Impact of change in exchange rates 139 273 Balance at June 30, 2003$ 1 682 328
Intangible Assets
A summary of intangible assets follows:
(Stated in thousands) June 30 2003 Gross book value$ 262 364 Less: Accumulated amortization and impairment 97 911 $ 164 453
The amortization charged to income for the six months ended 30 June 2003 was $17 million.
Intangible assets principally comprise patents, software, technology and other. At 30 June 2003, the gross book value, accumulated amortization and amortization periods of intangible assets were as follows:
(Stated in thousands) Gross Accumulated Net Book Book Value Amortization Value Amortization Periods Software$ 168 565 $ 72 772 $ 95 793 5 - 10 years Technology 61 900 13 928 $ 47 972 5 - 10 years Other 31 899 11 211 $ 20 688 1 - 15 years $ 262 364 $ 97 911 $ 164 453
The weighted average amortization period for all intangible assets is approximately 9 years.
Derivative Instruments and Hedging Activities
At 30 June 2003, SchlumbergerSema recognized a net $2.3 million charge in Stockholders' Equity relating to derivative instruments and hedging activities. This charge was primarily due to the change in the fair market value of the cashflow hedge on the IOC contract.
Stock Compensation Plans
As of 30 June 2003, SchlumbergerSema had two types of stock-based compensation plans. SchlumbergerSema applies APB Opinion 25 and related Interpretations in accounting for its plans. For all periods presented, no compensation cost has been recognized for its stock option plans and its stock purchase plan. Had compensation cost for the stock-based SchlumbergerSema plans been determined based on the fair value at the grant dates for awards under those plans, consistent with the method of SFAS 123, SchlumbergerSema net income would have been the pro forma amounts indicated below:
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 195/233
(Stated in thousands) June 30 2003 Net income (loss) As reported $ 5 457 Pro forma $ (12 427)
Income Tax
Pretax book income from continuing operations subject to US and non-US income taxes was as follows:
(Stated in thousands) June 30 2003
United States$ 5 423 Outside United States 11 337 Pretax income$ 16 760
SchlumbergerSema has net deferred tax assets of $60.2 million on 30 June 2003 including a partial valuation allowance of $12.9 million due to the partial depreciation of deferred tax assets relating to a certain European net operating loss. Significant components of net deferred tax assets at 30 June 2003 included postretirement and other long-term benefits ($2.7 million), current employee benefits ($42.5 million), fixed assets, inventory and other ($2.8 million) and net operating losses ($28.4 million less a partial valuation allowance of $16.2 million).
The components of consolidated income tax expense from continuing operations were as follows:
(Stated in thousands) June 30 2003 Current: United States - Federal$ 7 364 United States - State (541) Outside United States 14 567 $ 21 390 Deferred: United States - Federal$ (5 538) United States - State 703 Outside United States (8 913) Valuation allowance 3 325 $ (10 423) Consolidated taxes on income$ 10 967
A reconciliation of the US statutory federal tax rate (35%) to the consolidated effective tax rate is:
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 196/233
June 2003
US federal statutory rate 35% US state income taxes 1% Non US income taxed at different rates 9% Valuation allowance (net of charges) 20% Charges - % Effective income tax rate 65%
Commitments and Contingencies
SchlumbergerSema and its subsidiaries are party to various other legal proceedings. Although the ultimate disposition of these proceedings is not presently determinable, in the opinion of SchlumbergerSema any liability that might ensue would not be material in relation to the combined liquidity, financial position or future results of operations.
These financial statements include all legal and environmental liabilities that are in the SchlumbergerSema business. Certain legal entities included in the Atos Origin transaction are subject to legal and environmental liability. However, certain liabilities have not been included in these financial statements as they relate to the Schlumberger Limited businesses and will be subject to the reimbursement by Schlumberger Limited should any settlement be required.
SchlumbergerSema’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and receivables from clients. SchlumbergerSema places its cash and cash equivalents with financial institutions and corporations, and limits the amount of credit exposure with any one of them. SchlumbergerSema actively evaluates the creditworthiness of the issuers in which it invests. The receivables from clients are concentrated within a few significant industries and geographies.
Related party transactions
The unaudited combined financial statements include estimates of certain corporate expenses, including legal, accounting, employee benefits, real estate, insurance services, information technology services, treasury and other corporate and infrastructure costs. These services are provided by wholly owned subsidiaries of Schlumberger. These estimates have been determined on bases that Schlumberger and SchlumbergerSema considered to be a reasonable reflection of the utilization of services provided or the benefit received by SchlumbergerSema. The estimates are based on the nature of the cost and include relative sales, headcount, information technology users and others.
In certain countries, SchlumbergerSema participates in Schlumberger’s centralized treasury and cash process. In these countries, cash is managed either through zero balance accounts or an interest bearing offsetting mechanism. Schlumberger cash pool is funded by Schlumberger through operations or long-term borrowing.
The remaining balance of the related party payables and receivables included in the combined financial balance sheet represents amounts arising from trade transactions entered into by SchlumbergerSema with other Schlumberger entities and certain local recharges of support services.
The combined financial statements include sales, receivables and cost of revenue related to products sold to Schlumberger. The revenue, cost of revenue, receivables and payables related to transactions with Schlumberger entities are as follows: $103.0m, $51.1m $34.5m and $51.7m respectively.
In certain countries, there are tax-sharing agreements between SchlumbergerSema and the respective entity of Schlumberger. In certain countries, SchlumbergerSema is a division of the Schlumberger legal entity that is the ultimate tax payer in that jurisdiction.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 197/233
Segment Information
Operating Revenue Six months 2003 Long-lived Assets Six months 2003 North and South $268,427 North and South $410,721 America America Europe, Africa & Middle $1,259,293 Europe, Africa & Middle $361,404 East East Asia $103,403 Asia $55,335 Eliminations / Other $(1,636) Eliminations / Other $1,737,433
TOTAL $1,629,487 TOTAL $2,564,893 SchlumbergerSema SchlumbergerSema
Post balance sheet event
On September 22, 2003 Atos Origin announced its intention to acquire certain businesses included within the combined accounts of SchlumbergerSema.
C.4.2.1.6 REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Schlumberger Limited
We have reviewed the accompanying combined balance sheet of SchlumbergerSema, a wholly owned business activity of Schlumberger Limited as defined in Note 1 of the combined financial statements at 31 December 2002 and for the year then ended, as of 30 June 2003, and the related combined statements of income, of changes in invested equity and total comprehensive income, and of cash flows for the six-month period then ended. These interim combined financial statements are the responsibility of SchlumbergerSema’s management and Schlumberger Limited’s management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards in the United States of America, the objective of which is the expression of an opinion regarding the combined financial statements taken as a whole. Accordingly, we do not express such an opinion.
SchlumbergerSema was historically a fully integrated business of several subsidiaries of Schlumberger Limited. Consequently, as indicated in Note 1 of the combined financial statements at 31 December 2002 and for the year then ended, these combined financial statements have been derived from the consolidated financial statements and accounting records of Schlumberger Limited and reflect significant assumptions and allocations. Moreover, as indicated in Note 1 of the combined financial statements at 31 December 2002 and for the year then ended, SchlumbergerSema relies on Schlumberger Limited and its other businesses for certain administrative, management and other services. Accordingly, these combined financial statements do not necessarily reflect the combined financial position, results of operations, changes in invested equity and cash flows of SchlumbergerSema had it been a separate, stand-alone entity during the period presented.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 198/233
Based on our review, we are not aware of any material modifications that should be made to the accompanying combined interim financial statements to be in conformity with accounting principles generally accepted in the United States of America.
Paris, January 13, 2004
PricewaterhouseCoopers Audit
Xavier Cauchois Stéphane Piffero Partner Partner
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 199/233
C.4.2.2 SCHLUMBERGER SEMA DIVISION COMBINED FINANCIAL STATEMENTS IN US GAAP AT 31 DECEMBER 2002
C.4.2.2.1 SCHLUMBERGERSEMA COMBINED STATEMENT OF INCOME (STATED IN THOUSANDS OF US $)
Year Ended December 31, 2002 Revenue Operating $ 2 989 874 Interest and other income 24 955 3 014 829 Expenses Cost of goods sold and services 6 493 562 Research & engineering 85 224 Marketing 218 863 General 312 267 Interest 16 448 7 126 364 Loss before taxes and minority interest (4 111 535)
Taxes on income 23 736 Loss before minority interest (4 087 799)
Minority interest (1 001) Net Loss $ (4 088 800)
See the Notes to the Combined Financial Statements
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 200/233
C.4.2.2.2 SCHLUMBERGERSEMA – COMBINED BALANCE SHEET (STATED IN THOUSANDS OF US $)
Current Assets Cash $ 21 444 Short-term investments 42 681 Receivables less allowance for doubtful accounts 1 011 375 (2002 - $41,326) Affiliated company receivables 77 763 Inventories 41 151 Deferred taxes 76 417 Tax receivable 27 003 Other current assets 100 409 Total current assets 1 398 243 Investments in Affiliated Companies 1 486 Long Term Receivables 1 083 Fixed Assets less accumulated depreciation 723 593 Goodwill 1 543 055 Intangible Assets 174 604 Other Assets 9 887 Total assets$ 3 851 951 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued liabilities$ 1 434 987 Affiliated company payable 20 267 Estimated liability for taxes on income 50 453 Dividend payable - Long-term debt - current portion 6 877 Bank & short-term loans 39 741 Total current liabilities 1 552 325 Long-term Debt 111 949 Postretirement Benefits 8 217 Deferred taxes 6 213 Other Liabilities 88 195 Total liabilities 1 766 899
Minority Interest 3 453
Invested equity 2 081 599 Total Liabilities, minority interest and total invested equity $ 3 851 951
See the Notes to the Combined Financial Statements
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 201/233
C.4.2.2.3 SCHLUMBERGERSEMA – COMBINED STATEMENTS OF CHANGES IN INVESTED EQUITY AND TOTAL COMPREHENSIVE INCOME (IN THOUSANDS OF US$)
December 31, 2002 SHAREHOLDER NET INVESTMENT Beginning balance $ 5 677 012 Net loss (4 088 800) Shareholders net investment (distribution) (2 056) Other comprehensive income (loss) : Foreign currency translation adjustment 548 254 Alternate minimum pension liability (net of taxes of $24,432) (57 008) Unrealized Gain on hedge instruments 4 197 Total other comprehensive income (loss) 495 443 $ 495 443
TOTAL INVESTED EQUITY $ 2 081 599
TOTAL COMPREHENSIVE LOSS Net income (loss) $ (4 088 800) Other Comprehensive income (loss) 495 443 TOTAL COMPREHENSIVE LOSS $ (3 593 357)
See the Notes to the Combined Financial Statements
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 202/233
C.4.2.2.4 SCHLUMBERGERSEMA COMBINED STATEMENT OF CASH FLOWS (STATED IN THOUSANDS OF US $)
Year Ended Dec. 31, 2002 Cash flows from operating activities: Net loss $ (4 088 800) Adjustments to reconcile net loss to net cash provided by operating activities: Fourth quarter charges 4 072 761 Gain on disposal of building (17 552) Depreciation and amortization 192 944 Deferred taxes (107 598) Postretirement benefits 1 565 Provision for losses on accounts receivable 1 777 Change in operating assets and liabilities: Decrease in receivables 18 639 Decrease in inventories 15 075 Decrease in other current assets 36 331 Decrease in accounts payable and accrued liabilities (138 136) Increase in estimated liability for taxes on income 34 965 Other - net 56 484
NET CASH PROVIDED BY OPERATING ACTIVITIES 78 455
Cash flows from investing activities: Purchases of fixed assets (210 295) Capitalization of intangible assets (14 963) Retirements of fixed assets & other 10 371 Decrease in short term investments 46 517 Deferred purchase consideration (25 600) Proceeds from sale of building 24 000
NET CASH USED IN INVESTING ACTIVITIES (169 970)
Cash flows from financing activities: Net increase in long term debt 96 225 Net decrease in short-term debt (22 598)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 73 627
Net decrease in cash before translation effect (17 888) Translation effect on cash (333) Cash, beginning of year 39 665 Cash, end of year $ 21 444
Supplemental disclosure of cash flow information Interest paid 1 371 Tax paid 24 533
The attached notes form an integral part of the financial statements.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 203/233
C.4.2.2.5 NOTES TO THE COMBINED FINANCIAL STATEMENTS
1 Business Description and Basis of Presentation
Business Description
SchlumbergerSema is an IT services company that provides its customers with design, implementation, operations and management of information systems and IT-related consulting services. Among the industry sectors which Sema serves, Sema has increasingly focused on the telecommunications and finance sectors, and provides a range of its own software products specifically designed for these sectors in addition to its IT services. SchlumbergerSema's customers include a wide variety of businesses and governmental departments around the world. SchlumbergerSema's services and product offerings include systems integration and consulting; software products for the telecommunications, energy, transport and finance sectors; and outsourcing.
Basis of Presentation
The accompanying combined SchlumbergerSema financial statements have been derived from the consolidated financial statements of Schlumberger Limited and have been prepared using Schlumberger’s historical bases in the assets and liabilities and the historical results of operations of SchlumbergerSema. The Company was historically a fully integrated business of several indirect wholly owned subsidiaries of Schlumberger. Although SchlumbergerSema was not a separate company, the accompanying combined financial statements are presented as if SchlumbergerSema had existed as an entity separate from Schlumberger and its subsidiaries. The combined financial statements include the historical assets, liabilities, revenues and expenses that were directly related to the SchlumbergerSema business of Schlumberger during the periods presented.
Certain amounts of Schlumberger’s corporate expenses, including legal, accounting, employee benefits, real estate, insurance services, information technology services, treasury and other corporate and infrastructure costs, although not directly attributable to SchlumbergerSema’s operations, have been allocated to SchlumbergerSema on bases that Schlumberger and SchlumbergerSema consider to be a reasonable reflection of the utilization of services provided or the benefit received by SchlumbergerSema (Note 17, Related Party Disclosures). These allocations have been based upon revenue, headcount or other methods depending on the nature of the costs. However, the financial information provided herein may not reflect the combined financial position, operating results, changes in invested equity and cash flows of SchlumbergerSema in the future or what they would have been had SchlumbergerSema been a separate, stand alone entity during the periods presented. All significant intercompany accounts and transactions within SchlumbergerSema have been eliminated.
Because SchlumbergerSema is not operated as a separate, stand-alone entity, and in many cases SchlumbergerSema’s results were included in the consolidated financial statements of Schlumberger on a divisional basis, there are no separate meaningful historical equity accounts for SchlumbergerSema. Changes in invested equity investment represent Schlumberger’s contribution of its net investment in SchlumbergerSema after giving effect to the net earnings of SchlumbergerSema, dividends paid, plus net cash transfers to and from Schlumberger and other transfers from Schlumberger.
2 Summary of Significant Accounting Policies
Principles of Combination
The combined Financial Statements of SchlumbergerSema and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America. All majority owned subsidiaries of Schlumberger that are directly related to the SchlumbergerSema business have been combined in the accompanying combined financial statements. SchlumbergerSema-related companies that Schlumberger owned 20-50% are carried on the equity method and classified in Investments in Affiliated Companies, which are reflected within other long term assets in the balance sheet. The pro-rata share of SchlumbergerSema after-tax earnings is included in Other Income. Investments less than 20% owned are carried at cost less any decrease in value deemed to be other than temporary in nature. All significant intercompany accounts and transactions are eliminated.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 204/233
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, SchlumbergerSema evaluates its estimates, including those related to bad debts, valuation of inventories and investments, recoverability of goodwill and intangible assets, income tax provision and deferred taxes, profit assumptions on long-term percentage-of-completion contracts, contingencies and litigation and actuarial assumptions for employee benefit plans. SchlumbergerSema bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
Products and Services Revenue
SchlumbergerSema’s products and services are generally sold based upon purchase orders or contracts with the customer that include fixed or determinable prices and that do not include right of return or other similar provisions or other significant post delivery obligations. Revenue is recognized for products upon delivery, customer acceptance and when title passes. Revenue is recognized when services are rendered and collectibility is reasonably assured.
Certain revenues are recognized on a time and materials basis, or on a percentage of completion basis, depending on the contract, as services are provided. Revenue from time and material service contracts is recognized as the services are provided. Revenue from fixed price contracts is recognized over the contract term based on the percentage of the cost of services provided during the period compared to the total estimated cost of services to be provided over the entire contract. Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimated.
Software Revenue
Revenue derived from the sale of licenses for its software, maintenance and related services may include installation, consulting and training services.
If services are not essential to the functionality of the software, the revenue for each element of the contract is recognized separately based on its respective vendor specific objective evidence of fair value when all of the following conditions are met: a signed contract is obtained, delivery has occurred, fee is fixed and determinable and collectibility is probable.
If an ongoing vendor obligation exists under the license arrangement, or if any uncertainties with regard to customer acceptance are significant, revenue for the related element is deferred based on its vendor specific objective evidence of fair value. Vendor specific objective evidence of fair value is determined as being the price for the element when sold separately. If vendor specific objective evidence of fair value does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered.
Multiple Element Arrangement and Collectibility
Many sales are generated from complex contractual arrangements that require significant revenue recognition judgments, particularly in the areas of multiple element arrangements. Revenues from contracts with multiple element arrangements, such as those including installation and integration services, are recognized as each element is earned based on the relative fair value of each element and when there are no undelivered elements that are essential to the functionality of the delivered elements.
The assessment of collectibility is particularly critical in determining whether revenue should be recognized in the current market environment. As part of the revenue recognition process, SchlumbergerSema determines whether trade and notes receivables are reasonably assured of collection based on various factors, including the
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 205/233
ability to sell those receivables and whether there has been deterioration in the credit quality of customers that could result in the inability to sell the receivables. In situations where SchlumbergerSema has the ability to sell the receivables without recourse, revenue is recognized to the extent of the value SchlumbergerSema could reasonably expect to realize from the sale. SchlumbergerSema defers revenue and related costs when it is uncertain as to whether it will be able to collect or sell the receivable. SchlumbergerSema defers revenue but recognizes costs when it determines that the collection or sale of the receivable is unlikely.
Deferred revenue
Deferred revenue includes amounts that have been billed per contractual terms but have not been recognized as income. Revenue in excess of amounts invoiced on long term contracts is recorded as work in progress and included in inventory.
Concentration of credit risk
Financial instruments which potentially subject SchlumbergerSema to concentration of credit risk consist primarily of accounts receivable. SchlumbergerSema maintains an allowance for uncollectible accounts receivable based on expected collectibility. SchlumbergerSema performs ongoing credit evaluations of its customers’ financial condition.
Foreign Currency Accounting
All assets and liabilities recorded in functional currencies other than U.S. dollars are translated at current exchange rates. The resulting adjustments are charged or credited directly to the equity section of the combined balance sheet. Revenue and expenses are translated at the weighted-average exchange rates for the period. Realized and unrealized transaction gains and losses are included in income in the period in which they occur. SchlumbergerSema’s policy is to hedge against unrealized gains and losses on a monthly basis. Currency exchange contracts are entered into as a hedge against the effect of future settlement of assets and liabilities denominated in other than the functional currency of the individual businesses. SchlumbergerSema’s entities exposures to currency fluctuations are pooled with those of the other businesses of Schlumberger, and the net positions at corporate level are hedged. Gains or losses on the contracts are recognized when the currency exchange rates fluctuate, and the resulting charge or credit partially offsets the unrealized currency gains and losses on those assets and liabilities. However, the gains or losses on the hedging contracts are not pushed down to the various businesses of Schlumberger, and are therefore not reflected in SchlumbergerSema’s combined accounts as offsets of the unrealized currency gains and losses. Transactions losses included in the results of operations were $14.3 million in 2002.
Fair value of financial instruments
The fair value of cash and cash equivalents, accounts receivable, trade accounts payable and accrued expenses are not materially different than their carrying amounts as reported at 31 December 2002 because of their short maturities.
Investments
Short-term investments, held to maturity comprise primarily deposits, certificates of deposit and commercial paper, substantially all denominated in US dollars. They are stated at cost plus accrued interest, which approximates market. Substantially all the investments designated as held to maturity that were purchased and matured during the year had original maturities of less than three months. Short-term investments that are designated as trading are stated at market value. For purposes of the Consolidated Statement of Cash Flows, Schlumberger does not consider short-term investments to be cash equivalents as they generally have original maturities in excess of three months.
Inventories
Inventories are stated at average cost or at market, whichever is lower. Inventory consists of materials, supplies and finished goods. The Company provides inventory allowances based on excess and obsolete inventories. Cost is determined using a specific identification methodology.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 206/233
Fixed Assets and Depreciation
Fixed assets are stated at cost less accumulated depreciation, which is provided for by charges to income over the estimated useful lives of the assets using the straight-line method. Expenditures for renewals, replacements and improvements that substantially increase an asset’s life are capitalized. Maintenance and repairs are charged to operating expenses as incurred. Upon sale or other disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to income.
Impairment of Long-lived Assets
On an annual basis SchlumbergerSema reviews the carrying value of its long-lived assets, including goodwill and intangible assets. In addition, whenever events or changes in circumstances indicate that the historical cost- carrying value of an asset may no longer be appropriate, a review is performed. SchlumbergerSema assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value.
In accordance with SFAS 142 (Goodwill and Other Intangible Assets), which was adopted by SchlumbergerSema commencing 1 January 2002, goodwill ceased to be amortized.
Taxes on Income
Up to now the profits of SchlumbergerSema were included in the tax declarations of Schlumberger Limited and its subsidiaries. Tax on profits payable by SchlumbergerSema and its subsidiaries are calculated in accordance with the current tax regulations in the various jurisdictions in which the profits are generated. The tax rates applicable in these jurisdictions may vary considerably. Furthermore, taxable profit may differ from accounting profit. To the extent that the differences involve profits and costs noted during one period for tax purposes and another period for accounting purposes, provision for deferred taxes is set up. The effect of any change occurring in taxation rates or tax regulations is taken into account in the provision for taxes to be paid for the year during which the change is confirmed. When it is likely that some or all of the assets from deferred taxes will not be achieved during a future tax year, provision is set up for the amount of which the collection is not assured.
Research & Engineering
All research and engineering expenditures are expensed as incurred, including costs relating to patents or rights that may result from such expenditures.
Capitalized Software
Costs associated with the development of software to be sold or otherwise marketed are capitalized subsequent to the establishment of technological feasibility up to the product’s general release under SFAS n°86 "Accounting of Costs Of Computer Software to be sold, leased, or otherwise Marketed". These costs are amortized over the estimated economic life of the software product. Accordingly Schlumberger capitalizes certain costs of internally developed software. Capitalized costs include purchased materials and services, payroll and payroll related costs and interest costs. The costs of internally developed software is amortized on a straight-line basis over the estimated useful life which is principally 6 years.
New Accounting Standards
In June 2001, SFAS 141 (Business Combinations) and SFAS 142 (Goodwill and Other Intangible Assets) were issued. SFAS 141 was adopted by SchlumbergerSema for acquisitions subsequent to 30 June 2001. SFAS 142 was adopted by SchlumbergerSema commencing 1 January 2002. As required by SFAS 142, SchlumbergerSema undertook an initial review of goodwill impairment in the first quarter of 2002 and completed an "event driven" review in the fourth quarter of 2002. The findings of the independent valuation indicated there was an impairment writedown of $3.9 billion in December 2002 in conjunction with the approval of the new strategic plan for SchlumbergerSema.
Amortization of goodwill and workforce ceased with effect from 1 January 2002. Assembled workforce, net of deferred taxes, of US $175 million was reclassified to Goodwill.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 207/233
In June 2001, SFAS 143 (Accounting for Asset Retirement Obligations) was issued. SFAS 143 will be adopted by SchlumbergerSema commencing 1 January 2003. SchlumbergerSema does not believe that the implementation of this standard will have any material effect on its financial position and results of operations.
In August 2001, SFAS 144 (Accounting for Impairment or Disposal of Long-Lived Assets) was issued. SFAS 144 was adopted by SchlumbergerSema commencing 1 January 2002 and did not have a material effect on its financial position or results of operations.
Effective 1 January 2002, SchlumbergerSema adopted the FASB EITF Abstract 01-14, (Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred). SchlumbergerSema segment was already in compliance with the new standard hence no restatement was necessary.
On 29 July 2002, the Financial Accounting Standards Board issued SFAS 146 (Accounting for Costs Associated with Exit or Disposal Activities). The standard required companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, (Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity [including Certain Costs Incurred in a Restructuring]). SFAS 146 replaced Issue 94-3. SchlumbergerSema will apply SFAS 146 prospectively to exit or disposal activities initiated after 31 December 2002. As a result, in the future, charges related to restructuring plans may be recorded over multiple reporting periods as opposed to the date the plan was approved.
In November 2002, FASB Interpretation No. 45 (Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others) was issued. It requires certain accounting and disclosures of guarantees to third parties including indebtedness. The statement is effective on a prospective basis for guarantees issued or modified after 31 December 2002. SchlumbergerSema does not believe that the implementation of this statement will have a material effect on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123 providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 for stock-based employee compensation and the effect of the method used on financial results if a Company decides to adopt the expense option under SFAS No. 123 instead of the disclosure method. SchlumbergerSema’s parent had continued to account for stock-based compensation in accordance with Accounting Principles Bulletin No. 25 "Accounting for Stock Issued to Employees" and therefore this standard will not have an effect on the financial statements.
In January 2003, the Emerging Issues Task Force (EITF) issued No. 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables". This EITF establishes the criteria for recognizing revenue in arrangements when several items are bundled into one agreement. EITF 00-21 does not allow revenue recognition unless the fair value of the undelivered element(s) is available and the element has stand-alone value to the customer. EITF 00-21 also provides guidance on allocating the total contract revenue to the individual elements based upon the available fair value of each deliverable. SchlumbergerSema is in the process of determining if this pronouncement will have a material impact on its financial position or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation NO. 46, (Consolidation of Variable Interest Entities, and Interpretation of ARB No. 51). The primary objective of the Interpretation is to provide guidance on the identification of, and financial reporting for entities over which control is achieved through means other than voting rights; such entities are known as variable-interest entities (VIE’s). FIN 46 provides guidance that determines (1) whether consolidation is required under the "controlling financial interest" model of Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial Statements, or other existing authoritative guidance, or, alternative, (2) whether the variable-interest model under FIN 46 should be used to account for existing and new entities. Management does not believe that the adoption of this Statement will have a material effect on the financial position or the results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 208/233
guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group ("DIG") process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after 30 June 2003 and for hedging relationships designated after 30 June 2003. The Company does not believe the adoption of SFAS No. 149 will have a material impact on its financial position, results of operations or cash flows.
3 Restructuring and Impairment Charges
SchlumbergerSema has entered the following exceptional items in the profit and loss account:
Restructuring charges
In 2002, SchlumbergerSema recorded the following charges for site closure costs, severance and termination charges. These costs related to expense that offer no future benefit to the ongoing operations of SchlumbergerSema’s activity. As of 31 December 2002 SchlumbergerSema had a remaining reserve for restructuring charges as detailed below : (Stated in millions) Severance Facilities Amount Headcount Amount
Charges $ 52,2 1 638 $ 39,5
Paid in December 2002 18,5 645 6,4
Balance, December 31, 2002$ 33,7 993 $ 33,1
The remaining severance and facility costs are expected to be paid before 31 December 2003.
Impairment charges
In December 2002, SchlumbergerSema entered into the accounts a net cost for the depreciation of assets of 4 billion dollars. On 10 December 2002, SchlumbergerSema presented its new mid-term plan. The new strategic prospects resulting from this plan, the valuation of existing activities and the reorganisation planned by SchlumbergerSema constitute so many elements making necessary an analysis of the value of the list of assets in accordance with SFAS n° 142. In this context, SchlumbergerSema has been valued as a branch with autonomous activity, by means of an evaluation of each economic unit by an independent expert referring to information from management. In order to determine the true value of economic units, implicit multiples obtained by application of the cash flow method and updated have been compared with the stock exchange multiples of comparable companies and the prices at which recent transactions were entered into involving technology service companies. These analyses have allowed us to conclude that the true value of SchlumbergerSema was lower than its accounting value. The acquisition variance has therefore been restored to its correct estimated value, based on the valuation of SchlumbergerSema. The loss of value from the acquisition variance is attributable, essentially, to current difficulties in the telecommunications sector, and the low market values of technology service companies operating in the same sector as SchlumbergerSema. Some tangible assets have also been identified and have been the subject of depreciation under the process described above.
The total of the above charges was $4.1 billion. A summary is as follows:
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 209/233
(Stated in thousands)
Goodwill impairment $ 3 939 743 Intangibles impairment 63 859 Severance 52 200 Other 39 500 Charges before tax 4 095 302 Tax 1 (22 541) $ 4 072 761
1 Includes deferred tax valuation allowance of $13 million.
4 Acquisitions
Acquisition of Sema plc
On 12 February 2001, Schlumberger announced that it had reached an agreement with the Board of Directors of Sema plc on the terms of a recommended offer for the entire issued and to be issued share capital of Sema plc.
On 8 March 2001, a wholly owned subsidiary of Schlumberger acquired, through market purchases, approximately 20% of the issued share capital of Sema at a cost of $1 billion.
On 6 April 2001, the offer for the shares of Sema plc was declared unconditional in all respects. The aggregate consideration for the acquisition of 100% of the issued Sema shares was $5.15 billion (including expenses of the transaction).
The aggregate value of goodwill and identifiable intangibles comprised the following:
(Dollars in billions)
Cost (including expenses) $ 5.15 Purchase accounting adjustments 0.34 Net tangible assets acquired (0.30) ------$ 5.19 =====
Purchase accounting adjustments consisted primarily of severance costs ($84 million) facility reductions ($33 million), pension plan adjustments ($136 million) and tax restructuring costs ($50 million) associated with the purchase of Sema Plc. As of 31 December 2002 all the severance costs had been paid
5 Investments
The Consolidated Balance Sheet reflects the Schlumberger investment portfolio separated between current and long term, based on maturity. Under normal circumstances it is the intent of Schlumberger to hold the investments until maturity, with the exception of investments which are consider trading.
On 31 December 2002, there were no interest rate swap arrangements outstanding related to investments. Interest rate swap arrangements had no material effect on consolidated interest income.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 210/233
6 Inventory
A summary of inventory follows: (Stated in thousands) As at December 31 2002
Raw Materials & Field Materials$ 17 956 Work in Process 10 986 Finished Goods 12 746 41 688 Less reserves for obsolescence 537 $ 41 151 7 Fixed Assets
A summary of fixed assets follows:
(Stated in thousands) As at December 31, 2002 Land $ 2 167 Buildings & Improvements 157 926 Machinery & Equipment 878 125 Total cost 1 038 218 Less accumulated depreciation 314 625 $ 723 593
The estimated useful lives of Buildings & Improvements are primarily 30 to 40 years. For Machinery & Equipment, 13% is being depreciated over 10 to 15 years and 87% over 2 to 9 years. The amortization expense for 2002 amounted to $ 146 million.
8 Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill by business segment in 2002 is as follows:
(Stated in thousands) Schlumberger Sema
Balance at beginning of year$ 4 979 658 Reclassification of Assembled Workforce, net of deferred taxes 175 000 Impairment, charged to cost of goods sold (3 939 743) Other 1 328 140 Balance at end of year $ 1 543 055
Including acquisitions and $ 305 million of foreign exchange effect.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 211/233
Intangible Assets
A summary of intangible assets follows: (Stated in thousands) As at December 31, 2002 Gross book value$ 305 412 Less: Accumulated amortization and Impairment 130 808 $ 174 604
The amortization charged to income was $47 million in 2002.
Intangible assets principally comprise patents, software, technology and other. At 31 December the gross book value, accumulated amortization and amortization periods of intangible assets were as follows:
2002 Gross Accumulated Net Book Book Value Amortization Value Amortization Periods Software$ 164,997 $ 69,016 $ 95,981 5 - 10 years Technology 96,840 47,568 $ 49,272 5 - 10 years Patents 9,505 9,328 $ 177 5 - 10 years Other 34,070 4,896 $ 29,174 1 - 15 years $ 305,412 $ 130,808 $ 174,604
The weighted average amortization period for all intangible assets is approximately 8 years.
Amortization charged to income for the subsequent five years is estimated, based on the 31 December 2002 Gross Book Value, to be 2003 - $33.9 million, 2004 - $35.3 million, 2005 - $35.1 million, 2006 - $34.1 million 2007 - $28.5 million.
9 Long-term Debt
A summary of long-term debt by currency at 31 December follows:
(Stated in thousands) 2002 Bonds CP Others Total
Financial debt$ - $ - $ 111 949 $ 111 949 Long term debt is held in Spain and Italy and interest rates ranged between 3.1125% and 3.37150%. Long-term debt on 31 December 2002, is due in its entirety by 2004.
10 Lines of Credit
On 31 December 2002, wholly owned subsidiaries of SchlumbergerSema had separate lines of credit agreements aggregating $119 million with commercial banks mainly in Europe. Interest rates and other terms of borrowing under these lines of credit vary from country to country.
Amounts and terms of unused lines of credit for short term financing are $256 million.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 212/233
11 Derivative Instruments and Hedging Activities
Commencing 1 January 2001, SchlumbergerSema adopted SFAS 133 (Accounting for Derivative Instruments and Hedging Activities). SchlumbergerSema uses derivative instruments such as interest rate swaps, currency swaps, forward currency contracts and foreign currency options. Forward currency contracts provide a hedge against currency fluctuations on assets/liabilities denominated in other than a functional currency. Options are usually entered into as a hedge against currency variations on firm commitments generally involving the construction of long-lived assets.
SchlumbergerSema maintains a foreign-currency risk management strategy that uses derivative instruments to protect its interests from unanticipated fluctuations in earnings and cash flows caused by volatility in currency exchange rates. Movements in foreign currency exchange rates pose a risk to SchlumbergerSema’s operations as exchange rate changes may affect profitability and cash flow. SchlumbergerSema uses foreign currency forward exchange contracts, swaps and options.
SchlumbergerSema also maintains an interest rate risk management strategy that uses fixed rate debt and derivatives to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility. SchlumbergerSema’s specific goals are (1) to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain of its debt and (2) to lower (where possible) the cost of borrowed funds.
By using derivative financial instruments to hedge exposure to changes in exchange rates and interest rates, SchlumbergerSema exposes itself to credit risk and market risk. SchlumbergerSema minimizes the credit risk by entering into transactions with high-quality counterparties, limiting the exposure to each counterparty and monitoring the financial condition of its counterparties. Market risk is managed through the setting and monitoring of parameters that limit the types and degree of market risk which are acceptable.
At 31 December 2002, SchlumbergerSema recognized a net $4.2 million charge in Stockholders' Equity relating to derivative instruments and hedging activities. This charge was primarily due to the change in the fair market value of the cashflow hedge on the IOC contract.
12 Stock Compensation Plans
As of 31 December 2002, Schlumberger had two types of stock-based compensation plans, which are described below. Schlumberger applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans and its stock purchase plan. Had compensation cost for the stock-based Schlumberger plans been determined based on the fair value at the grant dates for awards under those plans, consistent with the method of SFAS 123, Schlumberger net income and earnings per share would have been the pro forma amounts indicated below:
(Stated in thousands) 2002 Net loss As reported $ (4 088 800) Pro forma $ (4 129 736)
Stock Option Plans
During 2002 and in prior years, officers and key employees were granted stock options under Schlumberger stock option plans. For all of the stock options granted, the exercise price of each option equals the market price of Schlumberger stock on the date of grant; an option’s maximum term is ten years, and options generally vest in 20% increments over five years.
As required by SFAS 123, the fair value of each grant is estimated on the date of grant using the multiple option Black-Scholes option-pricing model with the following weighted-average assumptions for 2002: dividend of $0.75; expected volatility of 32-36%; risk-free interest rates of 4.73%; and expected option lives of 5.07 years.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 213/233
A summary of the status of the Schlumberger stock option plans as of 31 December 2002 and changes during the year ending on that date is presented below:
2002 Weighted- average exercise Fixed Options Shares price Outstanding at beginning of year 8 173 434 $ 59.80
Granted 2 588 667 $ 55.15
Exercised (350 851) $ 33.70
Forfeited (582 388) $ 66.51 Outstanding at year-end 9 828 862 $ 59.11
Options exercisable at year-end 4 119 011 Weighted-average fair value of options granted during the year $ 19.89
The following table summarizes information concerning currently outstanding and exercisable options by five ranges of exercise prices on 31 December 2002:
Options Outstanding Options Exercisable Weighted- Weighted- Weighted- Number average average Number average Range of outstanding remaining exercise exercisable exercise exercise prices as of 12/31/02 contractual life price as of 12/31/02 price
$ 3.831 - $22.073 0 0,00 $0,000 0 $0,000 $24.142 - $30.710 682 610 2,33 $28,288 682 610 $28,288 $30.795 - $44.843 907 019 4,30 $39,624 775 867 $39,501 $46.075 - $65.330 6 093 987 8,31 $58,044 1 232 012 $57,466 $71.315 - $82.348 2 145 246 6,42 $80,190 1 428 522 $80,379 9 828 862 7,11 $59,110 4 119 011 $57,193
Employee Stock Purchase Plan
Under the Schlumberger Discounted Stock Purchase Plan, Schlumberger is authorized to issue up to 22,012,245 shares of common stock to its employees. Under the terms of the Plan, employees can choose each year to have up to 10% of their annual earnings withheld to purchase Schlumberger common stock. The purchase price of the stock is 85% of the lower of its beginning or end of the Plan year market price. Under the Plan, SchlumbergerSema sold 322,765 shares to employees in 2002. Compensation cost has been computed for the fair value of the employees’ purchase rights, which was estimated using the Black-Scholes model with the following assumptions for 2002: Dividend of $0.75; expected life of one year; expected volatility of 34% for 2002; and risk-free interest rates of 1.74% for 2002. The weighted-average fair value of those purchase rights granted in 2002 was $13.324.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 214/233
13 Income Tax Expense
SchlumbergerSema and its subsidiaries operate in numerous taxing jurisdictions where statutory tax rates generally vary significantly.
Pretax book loss from continuing operations subject to US and non-US income taxes for the year ended 31 December 2002, was as follows:
(Stated in thousands) 2002
United States $ (372 795) Outside United States (3 738 740) Pretax loss $ (4 111 535)
SchlumbergerSema has net deferred tax assets of $70.2 million on 31 December 2002 including a partial valuation allowance of $12.9 million relating to a certain European net operating loss. Significant components of net deferred tax assets at 31 December 2002 included postretirement and other long-term benefits ($4.2 million), current employee benefits ($46.4 million), fixed assets, inventory and other ($18.1 million) and net operating losses ($14.4 million less a partial valuation allowance of $12.9 million).
A valuation allowance has been provided against a portion of SchlumbergerSema’s deferred tax assets, as it is more likely than not that such assets will not be realized by Schlumberger Limited. SchlumbergerSema has not recorded a deferred income tax liability for additional income taxes that would result from the distribution of the undistributed earnings of its foreign subsidiaries. If they were actually repatriated SchlumbergerSema intends to indefinitely reinvest the undistributed earnings of its foreign subsidiaries. The remaining deferred tax assets for net operating losses have been included in these financial statements on the basis that they are realizable by the parent and relate to loss carry forwards of the Schlumberger business. The components of consolidated income tax expense from continuing operations were as follows:
(Stated in thousands) 2002 Current: United States - Federal 11 046 United States - State 3 961 Outside United States (3 328) 11 679 Deferred: United States - Federal 8 315 United States - State (584) Outside United States 17 301 Valuation allowance (12 975) 12 057 Consolidated taxes on income 23 736
Effective tax rate 1%
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 215/233
SchlumbergerSema reported several charges/credits in continuing operations in the year. These are +more fully described in the note Charges – Continuing Operations . A reconciliation of the US statutory federal tax rate (35%) to the consolidated effective tax rate is:
2002
US federal statutory (benefit) rate 35% US state income taxes 1% Non US income taxed at different rates (2)% Valuation allowance 1% Charges and credits (34)% Effective income tax rate 1%
14 Leases and Lease Commitments
Total rental expense was $119 million in 2002. Future minimum rental commitments under noncancelable leases for years ending 31 December are: In 2003 $95 million; In 2004 $87 million; In 2005 $72 million; In 2006 $62 million; In 2007 $56 million.
For the ensuing three five-year periods, these commitments decrease from $205 million to $17 million. The minimum rentals over the remaining terms of the leases aggregate to $2 million.
15 Commitments and Contingencies
The combined Balance Sheet includes accruals for the estimated future costs associated with certain environmental remediation activities related to the past use or disposal of hazardous materials. Substantially all such costs relate to divested operations and to facilities or locations that are no longer in operation. Due to a number of uncertainties, including uncertainty of timing, the scope of remediation, future technology, regulatory changes, the risk of personal injury, natural resource or property damage claims and other factors, it is possible that the ultimate remediation costs may exceed the amounts estimated. However, in the opinion of management, such additional costs are not expected to be material relative to combined liquidity, financial position or future results of operations.
In addition, SchlumbergerSema and its subsidiaries are party to various other legal proceedings. Although the ultimate disposition of these proceedings is not presently determinable, in the opinion of SchlumbergerSema any liability that might ensue would not be material in relation to the combined liquidity, financial position or future results of operations.
These financial statements include all legal and environmental liabilities that are in the SchlumbergerSema business. Certain legal entities included in the Atos Origin transaction are subject to legal and environmental liability. However, certain liabilities have not been included in these financial statements as they relate to the Schlumberger Limited businesses and will be subject to the reimbursement by Schlumberger Limited should any settlement be required.
SchlumbergerSema’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and receivables from clients. SchlumbergerSema places its cash and cash equivalents with financial institutions and corporations, and limits the amount of credit exposure with any one of them. SchlumbergerSema actively evaluates the creditworthiness of the issuers in which it invests. The receivables from clients are concentrated within a few significant industries and geographies.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 216/233
16 Pension and Other Benefit Plans
US Pension Plans
SchlumbergerSema and its US subsidiary sponsor several defined benefit pension plans that cover substantially all employees. The benefits are based on years of service and compensation on a career-average pay basis. These plans are funded with a trustee in respect to past and current service. Charges to expense are based upon costs computed by independent actuaries. The funding policy is to annually contribute amounts that are allowable for federal income tax purposes. These contributions are intended to provide for benefits earned to date and those expected to be earned in the future.
The assumed discount rate, compensation increases and return on plan assets used to determine pension expense in 2002 were 7.25%, 3% and 8.5%, respectively.
Net pension cost in the US for 2002 included the following components:
(Stated in thousands) 2002
Service cost - benefits earned during the period $ 2 279 Interest cost on projected benefit obligation 1
Net pension cost $ 2 280
Effective 1 January 2000, SchlumbergerSema and its subsidiaries amended their pension plans to improve retirement benefits for active employees.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 217/233
The change in the projected benefit obligation, plan assets and funded status of the plans on 31 December 2002 was as follows:
(Stated in thousands) 2002
Projected benefit obligation at beginning of the year $ 14 Service cost 2 279 Interest cost 1 Actuarial losses 1 195
Projected benefit obligation at end of the year $ 3 489
Plan assets at market value at beginning of the year $ - Actual return on plan assets - Contribution - Benefits paid -
Plan assets at market value at end of the year $ -
Excess of projected benefit obligation over assets $ (3 489) Unrecognized net loss 1 209 Pension liability at end of the year $ (2 280)
Plan assets at market value at end of the year $ - Accumulated benefits obligation at end of the year (2 396) M inimum liability (2 396) Pension liability at end of the year 2 280 Prior service cost - Charged to other comprehensive income (loss) $ (117)
The assumed discount rate, the rate of compensation increases and the expected long-term rate of return on plan assets used to determine the projected benefit obligations were 6.75%, 3% and 8.5%, respectively, in 2002.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 218/233
Non-US Pension Plans
Based on plan assets and the projected benefit obligation, the only significant defined benefit plan is in the UK.
The assumed discount rate, compensation increases and return on plan assets used to determine pension expense in 2002 were 5.75%, 4.0% and 9.0% respectively.
Net pension cost in the UK Sema plans for 2002, (translated into US dollars at the average exchange rate for the period), included the following components:
(Stated in millions) 2002
Service cost - benefits earned during the period $ 33 Interest cost on projected benefit obligation 40 Expected return on plan assets (actual return: 2002 - $(105)) (54) Amortization of transition asset and other 1
Net pension cost $ 20
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 219/233
The change in the projected benefit obligation, plan assets and funded status of the plan (translated into US dollars at year-end exchange rates) was as follows:
(Stated in millions) 2002
Projected benefit obligation at beginning of the year $ 662 Service cost 33 Interest cost 40 Contributions by Plan participants 7 Actuarial (gains) losses (66) Loss (gain) on exchange 68 Benefits paid (13) Transfers in (1) Disposals (6) Projected benefit obligation at end of the year $ 724
Plan assets at market value at beginning of the year $ 534 Actual return on plan assets (105) Gain (loss) on exchange 48 Employer contributions 20 Employee contributions 7 Benefits paid (13) Transfers in (1) Disposals (7) Plan assets at market value at end of the year $ 483
Excess of projected benefit obligation over assets $ (241) Unrecognized net asset at transition date 197 Pension asset $ (44)
Assets of under-funded plans at market value at end of the year $ 314 Accumulated benefit obligation of under-funded plans at end of the year (473) Minimum liability of under-funded plans (159) Pension asset of under-funded plans 79 Accumulated other comprehensive income $ (80)
The market performance over the last two years has decreased the value of assets held in the UK pension plans and has correspondingly increased the amount by which the pension plans are under-funded. As a result of the decline in the value of the pension plan assets and a decline in the interest rates, which increased the present value of the benefit obligations, SchlumbergerSema recorded in the fourth quarter a non-cash charge to Stockholders’ Equity of $33 million. A recovery in market returns in future periods would reverse a portion of the charge.
The assumed discount rate and rate of compensation increases used to determine the projected benefit obligation were 5.70% and 3.75%-2.55% respectively in 2002. Plan assets consisted of common stocks ($455 million), cash or cash equivalents ($1 million) and fixed income investments ($75 million). None of the segregated plan assets represented Schlumberger common stock.
For defined contribution plans, funding and cost are generally based upon a predetermined percentage of employee compensation. Charges to expense in 2002 was $2 million.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 220/233
Other Deferred Benefits
In addition to providing pension benefits, SchlumbergerSema and its subsidiaries have other deferred benefit programs, primarily profit sharing. Expenses for these programs were $5 million in 2002.
Health Care Benefits
SchlumbergerSema and its US subsidiary provide health care benefits for certain active employees. The cost of providing these benefits is recognized as expense when incurred and aggregated $13.6 million in 2002. Outside the US, such benefits are mostly provided through government-sponsored programs.
Postretirement Benefits Other than Pensions
SchlumbergerSema and its US subsidiary provide certain health care benefits to former employees who have retired under the US pension plans.
The principal actuarial assumption used to measure costs was a discount rate of 7.25% in 2002. The overall medical cost trend rate assumption is 9.5% graded to 5% over the next six years and 5% thereafter.
Net periodic postretirement benefit cost in the US for 2002 included the following components:
(Stated in thousands) 2002
Service cost - benefits earned during the period $ 901
Interest cost on accumulated postretirement benefit obligation 95 $ 996
The change in accumulated postretirement benefit obligation and funded status on 31 December 2002 was as follows: 2002
Accumulated postretirement benefit obligation at beginning of the year $ 1 305 Service cost 901 Interest cost 95 Actuarial losses (gains) 1 041
Accumulated postretirement benefit obligation at the end of the year 3 342 Unrecognized net loss on December 31 (2 346) Postretirement benefit liability on December 31 $ 996
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 221/233
The components of the accumulated postretirement benefit obligation on 31 December 2002 was as follows:
(Stated in thousands) 2002
Fully eligible 58 Actives 3 283 $ 3 342
The assumed discount rate used to determine the accumulated postretirement benefit obligation was 6.75% for 2002.
If the assumed medical cost trend rate was increased by one percentage point, health care cost in 2002 would have been $1.4 million, and the accumulated postretirement benefit obligation would have been $4.5 million on 31 December 2002.
If the assumed medical cost trend rate was decreased by one percentage point, health care cost in 2002 would have been $0.7 million, and the accumulated postretirement benefit obligation would have been $2.5 million on 31 December 2002.
17 Related party transactions
The combined financial statements include estimates of certain corporate expenses, including legal, accounting, employee benefits, real estate, insurance services, information technology services, treasury and other corporate and infrastructure costs. These services are provided by a wholly owned subsidiary of Schlumberger. These estimates have been determined on bases that Schlumberger and SchlumbergerSema considered to be a reasonable reflection of the utilization of services provided or the benefit received by SchlumbergerSema. The estimates are based on the nature of the cost and include relative sales, headcount, information technology users and others. In certain countries, SchlumbergerSema participates in Schlumberger’s centralized treasury and cash process. In these countries, cash is managed either through zero balance accounts or an interest bearing offsetting mechanism. Schlumberger cash pool is funded by Schlumberger through operations or long-term borrowing.
The remaining balance of the related party payables and receivables included in the combined financial balance sheet represents amounts arising from trade transactions entered into by SchlumbergerSema with other Schlumberger entities and certain local recharges of support services.
The combined financial statements include sales, receivables and cost of revenue related to products sold to Schlumberger. The revenue, cost of revenue, receivables and payables related to transactions with Schlumberger entities are as follows: $217.9m, $111.1m, $78.9m and $20.3m respectively.
In certain countries, there are tax-sharing agreements between SchlumbergerSema and the respective local entity of Schlumberger. In certain countries, SchlumbergerSema is a division of the Schlumberger legal entity that is the ultimate tax payer in that jurisdiction.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 222/233
18 Supplementary Information
Operating revenue and related cost of goods sold and services for continuing operations comprised the following: (Stated in thousands) Year ended December 31, 2002
Operating revenue Services 2 989 874 $ 2 989 874
Direct operating costs Services 6 493 562 $ 6 493 562
Accounts payable and accrued liabilities are summarized as follows:
(Stated in thousands) As at December 31, 2002
Payroll, vacation and employee benefits$ 365 725 Trade 200 224 Taxes, other than income 110 717 Accrued expenses 194 226 Deferred revenue 198 454 Purchase accounting liabilities 143 503 Other 222 137 $ 1 434 987
Interest and other income includes the following:
(Stated in thousands) Year ended Decem ber 31, 2002
Interest incom e $ 7 291 Equity in net earnings of affiliated com panies 112 Gain on sale of building 17 552 $ 24 955
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 223/233
Allowance for doubtful accounts is as follows:
(Stated in thousands) Year ended December 31, 2002 Balance at beginning of year$ 51 069 Provision in year 2 015 Written off in year (11 758) Balance at end of year $ 41 326
19 Segment Information
The Company has adopted SFAS No 131, "Disclosures about Segments of an Enterprise and Related Information". This statement requires enterprises to report information about operating segments in annual financial statements. SchlumbergerSema’s operations are organized into geographical segments. The segments were determined in accordance with how SchlumbergerSema’s management reviews business performance and allocates resources. The accounting policies of the geographical segments are the same as those applied in the combined financial statements. The following tables present SchlumbergerSema’s revenues, pretax segment income, and long-lived assets items by segment.
Operating Revenue 2002 North and South America $541,753 Europe, Africa & Middle East $2,317,119 Asia $215,173 Eliminations / Other $(84,171) TOTAL SchlumbergerSema $2,989,874
Long-lived Assets 2002 North and South America $ 699,474 Europe, Africa & Middle East $ 355,056 Asia $ 63,282 Eliminations / Other $ 1,323,440 TOTAL SchlumbergerSema $ 2,441,252
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 224/233
C.4.2.2.6 REPORT OF THE INDEPENDENT AUDITORS
To the Board of Directors of Schlumberger Limited
In our opinion, the accompanying combined balance sheet and related combined statements of income, of changes in invested equity and total comprehensive income, and of cash flows present fairly, in all material respects, the combined financial position of SchlumbergerSema, a wholly owned business activity of Schlumberger Limited as defined in Note 1 to the combined financial at 31 December 2002 and the results of its combined operations and its combined cash flows for the year ended 31 December 2002, in conformity with accounting principles generally accepted in the United States of America. These combined financial statements are the responsibility of SchlumbergerSema’s management and Schlumberger Limited’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
SchlumbergerSema was historically a fully integrated business of several subsidiaries of Schlumberger Limited. Consequently, as indicated in Note 1 of the combined financial statements at 31 December 2002 and for the year then ended, these combined financial statements have been derived from the consolidated financial statements and accounting records of Schlumberger Limited and reflect significant assumptions and allocations. Moreover, as indicated in Note 1 of the combined financial statements at 31 December 2002 and for the year then ended, SchlumbergerSema relies on Schlumberger Limited and its other businesses for certain administrative, management and other services. Accordingly, these combined financial statements do not necessarily reflect the combined financial position, results of operations, changes in invested equity and cash flows of SchlumbergerSema had it been a separate, stand-alone entity during the periods presented.
Paris, January 13, 2004
PricewaterhouseCoopers Audit
Xavier Cauchois Stéphane Piffero Partner Partner
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 225/233
C.4.2.3 TABLE OF SUBSIDIARIES AND EQUITY INTERESTS
Immatriculation Joint Situation country / Location Entities Venture (%) Argentina Informatica Tecnologia Servicios SA Active Argentina SchlumbergerSema Sae - Argentina Branch Dormant
Barbados Sema Barbados Limited - Barbados Branch Active
Belgium Sema Belgium SA Active Belgium Sema Global Services Dormant
Brazil SchlumbergerSema do Brazil Active
BVI Schlumberger New Technologies Inc. Holding
Canada Convergent Group Ltd Active Canada Sema Canada Limited (UK) - Canada Branch Dormant
Canary Islands Schlumberger Canarisa S.A. Active
Chile SchlumbergerSema Sae - Chile Branch Dormant
China SchlumbergerSema Beijing IT Co Ltd Active China Sema Beijing IT Co Ltd Active
Colombia SchlumbergerSema Sae - Colombia Branch Active
Egypt Schlumberger New Technology Inc. - Egypt Branch Dormant
France Netseenergy 60% JV Active France Schlumberger Omnes SA Active France Sema Global Services Active France Sema SA Active France Sema Telecom Active France Parelli SA 49% JV Active France Centralp Automatismes 5% JV Active
Germany Competence Centre Informatik GmbH Active Germany SchlumbergerSema GmbH Active Germany SchlumbergerSema Managed Services GmbH Active Germany Sema Food Business GmbH Active Germany Sema GmbH Dormant
Greece Schlumberger New Technologies Inc. - Greece Branch Active Greece SchlumbergerSema Hellas SA Active
Hong-Kong Priority Call Management (Hong Kong) Ltd Active Hong-Kong Sema Group Ltd Active India LHS Asia Pacific Sdn Bhd - India Branch Dormant India Schlumberger IT India Private Ltd Active India Sema Software India Pte Ltd 85% JV Active
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 226/233
Immatriculation Joint Situation country / Location Entities Venture (%)
Italy Sema SPA Active Italy Servizi Telematici Siciliani 57.69% JV Active Italy Syntax Processing Spa Active
Japan Sema KK Active
Malaysia LHS Asia Pacific SDN/BHD Active Malaysia Schlumberger Technologies (M) Sdn BHD Active Malaysia SCS-Sema Outsourcing Sdn Bhd 40% JV Active
Mexico Schlumberger IT SA de CV Active
Morocco Sema SA - Morocco Branch Active
Netherland SchlumbergerSema Nederland BV Active
Netherland Seahorse Holding BV Holding
Peru Sema IT Servicios Peru Active
Norway SchlumbergerSema Norge AS Active Norway Sema Norge AS Dormant
Poland SchlumbergerSema SP Z.O.O. Active
Saudi Arabia Schlumberger New Technology Inc. - Saudi Arabia Branch Active
Singapour SchlumbergerSema Pte Ltd Active
South Africa SchlumbergerSema (Pty) Ltd 70% JV Active
Spain Centro de Tecnologicas Informaticas SA 90% JV Active Spain Infoservicios SA 75% JV Active Spain SchlumbergerSema SAE Active Spain SM2 Baleares SA 31.96% JV Active
Sweden DC Tidingsdata AB 50% JV Active Sweden SchlumbergerSema AB Active Sweden SchlumbergerSema Norr AB 91% JV Active Sweden SchlumbergerSema PA Konsult AB Active Sweden SchlumbergerSema Sweden AB Holding Sweden Sema Konsult AB Dormant Sweden Sema Infosynergi AB Dormant Sweden Sema Ronneby AB Dormant
Swiss LHS AG Active Swiss Schlumberger Measurement & Systems SA Dormant Swiss Sema (Suisse) SA Active Swiss Sema Lausanne SA Active
Thaïland Suppakorn Holdings (Thailand) Ltd Active
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 227/233
Immatriculation Joint Situation country / Location Entities Venture (%)
Turkey Sema Bili im dan 1 manl1k ve Mieteri Hizmetteri Sanyi ve Ticanet A Active
United Kingdom Barabas Limited Dormant United Kingdom BR Business Systems Limited Dormant United Kingdom Computer Analysts and Programmers Limited Dormant United Kingdom Convergent Group Europe Ltd Active United Kingdom Crisis Management Services Limited Dormant United Kingdom Data Recovery Limited Dormant United Kingdom Etourism Limited 60% JV Active United Kingdom LHS Europe Limited Dormant United Kingdom LHS Telecom Limited Dormant United Kingdom Meridian Information Systems Limited Dormant United Kingdom Metra-Hos Limited Dormant United Kingdom Perthcrest Limited Dormant United Kingdom Perthcrest Management Services Limited Dormant United Kingdom Principia Mechanica Limited Dormant United Kingdom Sema Atlanta Limited Dormant United Kingdom Sema Barbados Limited Active United Kingdom Sema Canada Limited (UK) Dormant United Kingdom Sema Consulting Limited Dormant United Kingdom Sema CS Pension Trustees Limited Pension trustee United Kingdom Sema International Limited Holding United Kingdom Sema Investment UK Limited Holding United Kingdom Sema Investments Limited Dormant United Kingdom Sema LHS (UK) Limited Dormant United Kingdom Sema LHS Europe Holdings Limited Dormant United Kingdom Sema Limited Holding United Kingdom Sema Mobile Communications Limited Dormant United Kingdom Sema Outsourcing Plc Dormant United Kingdom Sema Partner 1 Limited Dormant United Kingdom Sema Partner 2 Limited Dormant United Kingdom Sema Pension Trustee Limited Pension trustee United Kingdom Sema Quest Trustee Limited Pension trustee United Kingdom Sema Systems Limited Dormant United Kingdom Sema UK Limited Active United Kingdom Sema US Limited Dormant United Kingdom Syntax Managed Services Limited Dormant
USA Convergent Global Corp Active USA Convergent Group Corp Active USA GIS Research Corp Active USA Graphic Data Systems Corp Active USA Priority Call Management Inc Active USA SchlumbergerSema Inc Active USA Utility Graphics Consultants Corp Active USA Schlumberger Government Solutions Inc Dormant
Venezuela Venezuela Sema IT Servicios Active Venezuela SchlumbergerSema Sae - Venezuela Branch Active
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 228/233
C.4.2.4 FRENCH AUDITORS’ REPORT ON THE FINANCIAL INFORMATION PRESENTED IN TRANSLATIONS
We have reviewed the French translation of the original English language of the combined accounts of SchlumbergerSema and pro forma accounts of “Sema Group” as presented in paragraph C.4. of Document E.
The combined accounts of SchlumbergerSema for the year ended 31 December 2002 were prepared in accordance with accounting principles generally accepted in the United States of America and were audited by PricewaterhouseCoopers Audit in accordance with auditing standards generally accepted in the United States of America.
The combined accounts of SchlumbergerSema for the six-month period ended 30 June 2003 were prepared in accordance with accounting principles generally accepted in the United States of America and were the subject of a limited review by PricewaterhouseCoopers Audit in accordance with auditing standards generally accepted in the United States of America.
The application of accounting principles generally accepted in France and in the United States of America may lead to material differences.
As part of this review, nothing came to our attention that would warrant comments on the consistency of the French translation with the original English language documents.
We have also reviewed the French translation of the original English language of the unaudited combined pro forma accounts of “Sema Group” for the year ended 31 December 2002 and for the six month period ended 30 June 2003 together with the accompanying notes as presented in section C.4 of the accompanying Document E.
The Sema Group unaudited pro forma accounts for the year ended 31 December 2002 and the six-month period ended 30 June 2003 were prepared by Schlumberger Limited’s Management, based on accounting principles generally accepted in the United States of America, and were the subject of a review by PricewaterhouseCoopers Audit according to the professional standards applicable in France.
The application of accounting principles generally accepted in France and in the United States of America may lead to material differences. We have reviewed the differences between the application of the two sets of accounting standards as presented in section C.4.2.5. of Document E.
We have read the additional information included in section C of the accompanying Document E. They include certain information which differs from the underlying information as extracted from the combined pro forma accounts of “Sema Group”, because of adjustments applied on such information by Atos Origin relating to the presentation of the newly combined entity, as described in section A. As such, this information was reviewed by the statutory auditors of Atos Origin.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 229/233
In our opinion, the unaudited pro forma financial statements of “Sema Group” for the year ended 31 December 2002 and the six-month period ended 30 June 2003 as well as the above-mentioned additional information and the related auditors’ reports are aimed at providing for a French reader the impact on the historical financial information of a given transaction or event on a date prior to the date on which it actually took place, or prior to the date on which it may be reasonably expected to take place. However, they are not necessarily indicative of the financial position or performance which would have been recorded if the transaction or event had taken place on a date prior to that on which it actually took place or was reasonably expected to take place.
Paris, January 16, 2004
PricewaterhouseCoopers Audit Xavier Cauchois
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 230/233
C.4.2.5 SUMMARY OF DIFFERENCES BETWEEN FINANCIAL STATEMENTS ESTABLISHED IN US GAAP AND FRENCH GAAP The Company’s combined financial statements are prepared in accordance with US GAAP, which differ in certain respects from French GAAP. The primary differences between US GAAP and French GAAP including their estimated tax impact are presented below together with explanations of certain adjustments that affect combined net income and total shareholder’s equity as of and for the years ended 31 December 2002 and for the six months period ended 30 June 2003.
(In thousand of dollars) 2002 1st Half 2003 Reconciliation of net income Net income (loss) reported under US GAAP (47,491) 19,198 French GAAP Adjustments: Purchase accounting reserve (13,331) (5,203) Restructuring charges 61,198 (24,301)
Sale of Building (17,500) - Tax effect on Restructuring (12,575) 5,167
Tax effect on purchase accounting reserve 1,234 474 Net income (loss) under French GAAP (28,465) (4,665)
2002 2003 Reconciliation of shareholder’s equity Total shareholder’s equity reported under US GAAP 485, 374 570, 734 French GAAP Adjustments: Pension – Additional minimum pension liability 68, 160 65,143 Purchase accounting reserve 40,350 35,147 Restructuring charges 61,198 36,897
Derivatives instruments (4,197) (6,469) Tax effect on contract and restructuring (17,324) (10,266)
Deferred tax effect on Pension (20 448) (19,543) Total shareholder’s equity under French GAAP 613,113 671,643
Pension Additional minimum pension liability
Under US GAAP, the additional minimum pension liability (which is recorded when, as a result of unamortized actuarial losses and prior service costs, the accrued liability would be lower than the excess of the accumulated benefit obligation over the fair value of the plan asset) is recorded with a counterpart in other comprehensive income. Under French GAAP, the additional minimum pension liability required in similar circumstances is recorded with a counterpart in other long-term assets.
Purchase accounting reserve
The purchase accounting reserve and the IOC contract provision include a reserve with respect to contracts amounting to the difference between the actual margin and the normalized margin assessed by the Company. Under French GAAP, such provision related to margin should be reversed.
Restructuring charges
Under US GAAP, the Company recognized a provision for restructuring with respect to certain exit costs, employee termination costs and facility reduction costs at 31 December 2002.
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 231/233
Under French GAAP, costs related to employee termination costs and closing facilities are charged to expense in the period they are incurred if certain specified criteria are not met.
Derivatives instruments
Under French GAAP, financial instruments designated as hedging instruments are not reflected in the balance sheet but are disclosed as off-balance sheet instruments. The fair market value of a financial instrument is recognized when the hedged item is recognized in earnings. Under US GAAP, all derivative instruments are recorded in the balance sheet at fair value. Changes in the fair value are recognized in earnings, except in instances where a hedge qualifies for hedge accounting under SFAS 133. In this circumstance, the effective portion of the cash flow hedging instrument is reported as a component of other comprehensive income.
Sale of Building
In December 2002, SchlumbergerSema sold a building located in Montrouge (Paris) and realized a total profit of $17,5 million. This facility belonged to Sema prior to the acquisition by Schlumberger in April 2001. Under US GAAP, after the expiration of the allocation period, an adjustment resulting from a pre-acquisition contingency other than a loss carry forward shall be included in the determination of net income in the period in which the adjustment is determined. The allocation period should not usually exceed one year from the consummation of a business combination. Under French GAAP, the allocation period is longer and therefore total profit realized on sale of the building should be accounted for as an adjustment to goodwill.
C.5 MARKET AND RETURN ON SECURITIES Sema S.A. is listed on the OTC Marché Libre of Euronext Paris (France) under the symbole MLSEM and the ISIN code FR0000050262. On this date, the company is 99.90% owned by Schlumberger SA and the number of shares in the float is 2694.
During the period from 1 January 2003 to 31 October 2003, the volumes traded totaled only 321 shares and €10.3 thousand, representing five trading days over the period. At 31 October 2003, the price of the share was €86.65, without change since 27 October 2003.
C.5.1 LISTING MARKET Sema S.A. is listed on the OTC Marché Libre of Euronext Paris (France) under the symbole MLSEM and ISIN code FR0000050262.
C.5.2 MARKET FOR THE SHARES On this date, the company is 99.90% owned by Schlumberger SA and the number of shares in the float is 2694.
During the period from 1 January 2003 to 31 October 2003, the volumes traded totaled only 321 shares and €10.3 thousand, representing five trading days over the period. At 31 October 2003, the price of the share was €86.65, without change since 27 October 2003.
Atos Origin is considering the conditions for a public offer followed by a squeeze-out for the shares of Sema S.A. stock listed on the OTC Marché Libre of Euronext Paris (France).
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 232/233
C.5.3 DIVIDENDS AND DISTRIBUTION POLICY SEMA S.A.
No dividend has been paid during the last five years.
SEMA LTD
1998: £ 10.68 million 1999: £ 13 million 2000: £ 7.59 million 2001: £ 1.10 million 2002: no dividend
Contribution to Atos Origin of shares of Sema S.A. and Sema Ltd constituting the Sema Group 233/233