xchanging bv 2004 final version may 2005, a 7 year contract was signed with boots plc to manage a...

Registered Company Number: 34108659

XCHANGING B.V. Amsterdam

Annual report

for the year ended 31 December 2004

XCHANGING B.V.

Annual report for the year ended 31 December 2004 Directors and advisers 1 Directors’ report 2 – 7 Report of the independent auditors 8 Consolidated profit and loss account 9 Statement of group total recognised gains and losses 10 Company profit and loss account 10 Balance sheets 11 Consolidated cash flow statement 12 Notes to the financial statements 13 – 44 Other information 45

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Directors and advisers Directors

D W Andrews T J Bramley D Hodgson R Houghton F C Janssen T Tinsley Registered office

Locatellikade 1 Parnassustoren 1076 AZ Amsterdam Netherlands Independent auditors

PricewaterhouseCoopers Accountants NV Prins Bernhardplein 200 1097 JB Amsterdam Netherlands Solicitors

Allen & Overy Apollolaan 15 1077 AB Amsterdam Netherlands Bankers

ABN-AMRO Vijzelstraat 68 Postbus 407 1000 AK Amsterdam Netherlands

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Directors’ report for the year ended 31 December 2004 The directors present their report and the audited financial statements of the group for the year ended 31 December 2004. Principal activity The principal activity of the group is Business Process Outsourcing (“BPO”), specialising in increasing the efficiency of complex back-office functions to allow its customers to concentrate on their core operations. The group is engaged in BPO in human resources, procurement, customer administration and securities processing through outsourcing partnerships (“Enterprise Partnerships”) and also in the development and sale of computer software packages primarily for the insurance industry. Review of business and future developments The group virtually doubled in terms of revenues and employees during 2004. Group turnover increased 94% in the year to £254m (2003: £131m). During the year, a major partnership deal, etb, was signed with Deutsche Bank for the processing of securities in Germany. In addition, control over the RebusIS business was acquired effective January 1 2004 and made a full year’s contribution to the group. Significant organic growth was achieved in all existing businesses. Consolidated gross profit increased by 52% to £32.5m (2003: £20.7m). This improvement arose from the first time contributions from etb and RebusIS together with improved profits from existing businesses. Profit before tax increased from £0.6m to £13.1m. The consolidated results are set out in the profit and loss account on page 9. Each of the existing service lines (HR Services, Procurement Services and Customer Administration Services) was successful in growing their revenues in 2004. In the London Insurance market, the group continued to dominate the provision of integrated back office services to underwriting start-ups. Agreement was reached with market participants for the provision of a market-wide electronic claims file. In HR, additional services were sold to existing customers as well as attracting new customers. In procurement, a major contract was signed with United Biscuits for the provision of outsourced procurement services in the UK and Europe. The business also added a significant additional tranche of spend with BAE Systems. Rationalisation and streamlining continued in all service streams in order to improve productivity and widen margins. The biggest event of the year was the signing of a 12-year partnership arrangement with Deutsche Bank to provide securities processing to Deutsche and others in the German market. The value over the 12 year period of this contract is £1.2 billion. This was the culmination of a significant investment in expanding the group’s operations into continental Europe. The group now has approximately 850 employees in Germany. In January, agreement was reached to buy the RebusIS business from General Atlantic Partners and Warburg Pincus. RebusIS is a global leader in the provision of software and solutions to the commercial insurance sector. The RebusIS business has strengthened the company’s position in the London Insurance market and provides a springboard for providing BPO services to global insurance companies. The group continued to invest in its Xcellence methodologies, which provide the tools for implementing and sustaining its enterprise partnership and BPO activities. A number of restructuring actions were taken during the year to fully integrate the RebusIS acquisition. The most significant action was to consolidate the group’s activities in London from three buildings into one. This restructuring has resulted in an exceptional charge of £5.1m in the 2004 accounts. The total exceptional cost for the year end 31 December 2004 was £6.9m.

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Directors’ report for the year ended 31 December 2004 (cont.)

Future Developments

The group will continue to grow organically and via acquisition in the future with a projected investment programme to obtain one new enterprise partnership a year. The group will also continue to invest in contracted implementation and investment in current enterprise partnerships. In the short term additional funding will not be required within the group, however this need will be reviewed according to the nature and size of any future investments undertaken. There are no anticipated changes to the numbers of employees within the group.

Post Balance sheet events

In May 2005, a 7 year contract was signed with Boots plc to manage a total over the life of the contract of over £400m of procurement spend. Xchanging will also take over the full management of the Boot's Operational Purchasing Centre with responsibility for managing the transactional activity of Boot's indirect (not for resale) purchasing expenditure of over £800m per annum. Share warrants over 468,750 preference shares as previously issued as consideration for £690,000 of consulting services provided to Xchanging Limited, a subsidiary of the company, were exercised by McKinsey on 15 February 2005 at a strike price of US$3.20. Financial support of Xchanging Limited

The infrastructure and resources of the group are provided by Xchanging Limited. This has included the investment in improved processes and systems for the Enterprise Partnerships, all the business infrastructure to sustain the existing business and its future growth. Given its importance to the group, the obligations of Xchanging Limited are wholly supported by Xchanging BV. Funding

A £50 million equity facility was made available to Xchanging BV in November 2002 by its majority shareholder General Atlantic Partners. The facility is to be used for the funding of the expansion plans of the group. The terms of any drawdown are included in note 15. Separately from this facility, £5 million was loaned from General Atlantic Partners LLP during the year (2003: £5m) resulting in a total £10m loan to date. Results and dividends The group’s profit for the year was £3,179,000 (2003: £10,976,000 loss). The directors do not recommend the payment of a dividend (2003: £nil). The profit for the year has been transferred to reserves.

Directors and their interests

The directors who served during the year to the date of this report were:

D W Andrews T J Bramley D Hodgson T Tinsley R Houghton Appointed 23 February 2005 F C Janssen Appointed 23 February 2005

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Directors’ report for the year ended 31 December 2004 (cont.) Directors and their interests (cont.) The beneficial interests of the directors in the share capital of the company at 31 December 2004 are shown below. The company's register of directors' interests, which is open to inspection, contains full details of directors' shareholdings and options to subscribe Shareholdings - ordinary shares

2004

Common class A shares of

Euro 0.01 each

Common class B shares

of Euro 0.01 each

Common class C shares

of Euro 0.01 each

Common shares of

Euro 0.01 each

Scheme shares of

Euro 0.01 each

Class G shares of

Euro 0.01 each

D W Andrews 1,785,714 1,785,714 1,785,715 3,000,000 - 44,444 T J Bramley - - - 17,500 62,500 - R Houghton - - - 150,000 125,000 3,333

2003 Common class

A shares of Euro 0.01 each

Common class B shares of

Euro 0.01 each

Common class C shares of

Euro 0.01 each

Common shares of

Euro 0.01 each

Scheme shares of

Euro 0.01 each

Class G shares of

Euro 0.01 each

D W Andrews 1,785,714 1,785,714 1,785,715 3,000,000 - 44,444 T J Bramley - - - 17,500 62,500 - R Houghton - - - 150,000 125,000 3,333 Share options An analysis of the number of outstanding directors' share options over common shares in the company of Euro 0.01 is set out below: Under an approved scheme over common shares in the company of Euro 0.01:

Number of options

at 1 January

During the year At 31 December Exercise

Date from which

Expiry Director 2004 or on

appointment Granted Exercised 2004 price exercisable date

R Houghton 500 - - 500 207.0p 19/12/04 19/12/11 21,295 - - 21,295 136.0p 24/11/06 24/11/13

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Directors’ report for the year ended 31 December 2004 (cont.) Share options (cont.) Under an unapproved scheme over common shares in the company of Euro 0.01:

Number of options

at 1 January

During the year At 31 December Exercise

Date from which

Expiry Director 2004 or on

appointment Granted Exercised 2004 price exercisable date

T J Bramley 12,500 - - 12,500 136.0p 24/11/06 24/11/13 12,500 - - 12,500 383.0p 24/11/06 24/11/13

R Houghton 149,500 - - 149,500 207.0p 19/12/04 19/12/11 103,705 - - 103,705 136.0p 24/11/06 24/11/13 125,000 - - 125,000 383.0p 24/11/06 24/11/13 None of the other directors held share options during the year. Research and development The group incurs development costs in the design of processes and systems that substantially improve those already installed in the Enterprise Partnerships. The improvement of processes and systems covers two phases: re-alignment and streamlining. Re-alignment activities include business process mapping, staff restructuring and process reorganisation. Streamlining activities include management structuring, IT and site consolidation and supplier rationalisation. The group continues to invest in researching and developing new and innovative products and services to help improve the efficiency of the London Insurance Market. During the year, work continued on developing infrastructure, such as the market wide repository and CLASS at Lloyd’s, to support an electronic claims file. Additionally the group has invested resources into developing an electronic accounting and settlement system to support electronic processing of insurance transactions. The group continued to invest in the development of an underwriting system to support its BPO customer base. The amount capitalised in the year in respect of research and development expenditure was £2,569,000 (2003: £1,088,000). Minority interests The minority interest in the group at 31 December 2004 are set out as follows Minority interest Interest in Xchanging Group companies The Corporation of Lloyds 25% interest in Ins-Sure Holdings Limited 50% interest in Xchanging Claims Services Limited International Underwriting Association 25% interest in Ins-Sure Holdings Limited BAE SYSTEMS plc 50% interest in Xchanging Procurement Services (Holdco) Limited 50% interest in HR Enterprise Limited Deutsche Bank AG 49% interest in Xchanging etb GmbH The profits of the Xchanging group companies in which the minorities have an interest are not necessarily shared in proportion to the interest in that company as each individual enterprise partnership deal has a distinct contractual method of profit share.

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Directors’ report for the year ended 31 December 2004 (cont.) Disabled persons Applications for employment by disabled persons are always fully considered, bearing in mind the respective aptitudes and abilities of the applicant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the group continues and the appropriate training is arranged. It is the policy of the group that the training, career development and promotion of a disabled person should, as far as possible, be identical to that of a person who does not suffer from a disability. Employee involvement The group is also committed to providing employees with information on matters of concern to them on a regular basis, so that the views of employees can be taken into account when making decisions that are likely to affect their interests. Equal opportunities The group is committed to the principle of Equal Opportunities. All decisions relating to employment practices are objective, free from bias and based upon work criteria and individual merit. Auditors The auditors, PricewaterhouseCoopers Accountants NV, have indicated their willingness to continue in office, and a resolution that they be reappointed will be proposed at the annual general meeting. Statement of directors' responsibilities Company law requires the directors to prepare financial statements for each financial year, which give a true and fair view of the state of affairs of the company as at the end of the financial year and of the profit or loss of the company for that period. In preparing those financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable accounting standards have been followed;

• prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the company will continue in business.

The directors confirm that they have complied with these requirements. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

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Consolidated profit and loss account for the year ended 31 December 2004 Notes 2004 2003

£’000 £’000 Turnover - continuing operations 141,956 130,799 Turnover - acquisitions 112,183 - Turnover 2 254,139 130,799 Cost of sales – continuing operations (118,380) (110,054) Cost of sales - acquisitions (103,241) - Cost of sales (221,621) (110,054)

Gross profit 32,518 20,745 Administrative expenses – continuing operations (13,985) (20,832) Administrative expenses – exceptional items 3 (6,931) - Administrative expenses (20,916) (20,832) Operating profit (loss) - continuing operations 6,430 (87) Operating profit - acquisitions 5,172 - Group operating profit (loss) 4 11,602 (87) Interest receivable and similar income 7 1,827 673 Interest payable and similar charges 8 (360) (28)

Profit on ordinary activities before taxation 13,069 558 Tax in respect of current year (3,691) (3,702) Tax in respect of prior years (115) (1,201) Tax on profit on ordinary activities 9 (3,806) (4,903)

Profit (loss) on ordinary activities after taxation 9,263 (4,345) Equity minority interests 20 (6,084) (6,631) Profit (loss) for the financial year 19 3,179 (10,976)

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Statement of group total recognised gains and losses for the year ended 31 December 2004 Notes 2004 2003

£’000 £’000

Profit (loss) for the financial year 19 3,179 (10,976) Unrealised gain on partial disposal of a group company

19 1,904 -

Exchange differences 19 108 - Total recognised gains (losses) for the year 5,191 (10,976) There is no difference between the profit on ordinary activities before taxation and the retained profit for the financial year and their historical cost equivalents.

Company profit and loss account for the year ended 31 December 2004 Notes 2004 2003 £’000 £’000

Administrative expenses (22) (301)

Company operating loss (22) (301) Income from shares in group undertakings 10,612 5,205

Net operating profit 10,590 4,904 Interest receivable and similar income 7 26 42 Interest payable and similar charges 8 (166) (25)

Profit on ordinary activities before taxation 10,450 4,921 Tax (charge) credit on profit on ordinary activities (15) 79 Profit for the financial year 19 10,435 5,000

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Consolidated cash flow statement for the year ended 31 December 2004 Notes 2004 2003 £’000 £’000 Net cash inflow from operating activities 25 4,034 6,415

Returns on investments and servicing of finance Interest received 1,804 673 Interest paid (149) (28) Interest element of finance lease payments (44) Special dividend paid to minorities - (1,500) Dividends paid to minority interests (7,919) (7,238)

Net cash outflow from returns on investments and servicing of finance

(6,308) (8,093)

Taxation Corporation tax paid (4,897) (3,898)

Capital expenditure Purchase of tangible fixed assets (9,189) (5,717) Development expenditure (2,569) (1,092) Pre-contract expenditure (2,899) - Sale of tangible fixed assets 762 15 Investments (303) - Lease incentive received 9,800 -

Net cash outflow from capital expenditure (4,396) (6,794) Acquisitions Acquisition expenses (1,696) - Acquisition cost of subsidiaries (6,028) - Cash at bank and in hand acquired with subsidiaries 60,541 -

Net cash inflow from acquisitions 52,817 - Net cash inflow (outflow) before financing 41,250 (12,370)

Financing Proceeds from issue of shares 282 564 Increase in debt 6,055 - Shareholder loan 5,000 5,000 Capital element of finance lease payments (164) -

Net cash inflow from financing 11,173 5,564

Increase (decrease) in net cash in the year 27 52,423 (6,806)

XCHANGING B.V. 13

Notes to the financial statements for the year ended 31 December 2004 1 Principal accounting policies a) Basis of preparation of the financial statements The financial statements have been prepared on the going concern basis under the historical cost convention and in accordance with applicable United Kingdom accounting standards, the provisions of the United Kingdom Companies Act 1985 and Book 2 Title 9 of the Dutch Civil Code. The 31 December 2003 net assets of the group have been reduced by £18,036 following the reclassification of investment in own shares which is now categorised within capital and reserves (previously included in fixed asset investments) in accordance with UITF 38 (“Investments in own shares”). All other accounting policies have been applied consistently with the prior year. A summary of the more important accounting policies is set out below. b) Basis of consolidation The group financial statements consolidate those of the company and all of its subsidiary undertakings. Subsidiary undertakings include those companies in which the company has a 50% equity stake, commonly referred to by the directors as “Enterprise Partnerships”, but over which the company has overall operational and financial control. Interests acquired in subsidiary undertakings are consolidated from the date control passes to the acquirer. Transactions and balances between subsidiary undertakings are eliminated. Where shares are disposed in exchange for an interest in a subsidiary, the resulting gain on deemed disposal is taken to the Statement of Total Recognised Gains and Losses. c) Turnover Group turnover, which excludes value added tax, comprises the value of services provided for customer administration, human resources, procurement services, securities processing and software development. The Group provides administration services to the insurance market, from which there are three principal sources of revenue. These, together with the bases of revenue recognition are set out below:

i) Turnover in respect of the provision of administration services comprises amounts receivable for subscription fees, a transaction charge for the provision of administration services and other ad hoc services. Subscription fees are recognised in the profit and loss account on a straight-line basis according to the period to which they relate. Transactional revenue for these services is recognised in the period in which the transaction takes place. Ad-hoc revenue is recognised in the period in which the service is provided.

ii) Turnover in respect of Business Process Outsourcing contracts is divided into an implementation phase and a service provision phase. Turnover in respect of the implementation phase is accounted for on a long-term contract basis. Turnover and attributable profit is recognised on a percentage completion basis. Turnover in respect of the provision of post-implementation administration services to Business Process Outsourcing customers is recognised in the period to which the service relates.

iii) Turnover in respect of the rental or maintenance of computer software programs is recognised as earned. Billings are included in trade debtors in accordance with the terms of the relevant rental or maintenance contract. To the extent that billings are recorded in advance of the relevant turnover, such advance billings are included in deferred income. The income arising from the sale of an initial licence is recognised over the period of implementation of the software.

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Notes to the financial statements for the year ended 31 December 2004 (cont.) c) Turnover (cont.) Turnover from the provision of securities processing services is recognised on a straight-line basis according to the period to which the service relates, net of guaranteed rebates to customers. Turnover is recognised only when all obligations are fulfilled. Turnover from the provision of human resources services is recognised on a straight-line basis according to the period to which the service relates, net of guaranteed rebates to customers. Turnover from other HR services is recognised only when all obligations are fulfilled. Turnover from the provision of procurement services is recognised on a gross basis where the group is responsible for the whole supply chain process and associated business process from end-to-end. Where the group acts as an agent, turnover is recognised on a net basis. Turnover is recognised on a straight-line basis, net of guaranteed rebates to customers, according to the period to which the service relates and only when all obligations are fulfilled. d) Foreign currency transactions Profit and loss accounts of overseas operations are expressed in sterling at average rates of exchange ruling during the financial year. Monetary assets and liabilities denominated in foreign currencies are expressed in sterling at the rates of exchange ruling at the balance sheet date. Unrealised exchange differences arising on the translation into sterling of net assets of overseas subsidiary undertakings held at the beginning of the year, together with those differences resulting from the restatement of profits and losses from average to year-end rates, are taken to reserves. Exchange differences arising in the normal course of trade are included in the profit and loss account. e) Pre-contract costs Pre-contract costs comprise legal and other professional expenses and other directly attributable staff costs incurred in order to obtain a relevant contract. Costs that are directly attributable to a contract are capitalised when it is virtually certain that the contract will be awarded and the contract will result in future net cash inflows with a present value no less than all amounts recognised as an asset. These pre-contract costs are included within debtors and are amortised over the life of the contract, starting from the date when the contract commences. f) Development costs Development costs are stated at cost less a provision for amortisation and any provision for impairment. Costs incurred during the development period of new contracts, including the costs of process and system designs that substantially improve those processes and systems already installed in the Enterprise Partnerships, are treated as development costs. These costs are capitalised and amortised over the life of the contract. Costs that are capitalised comprise directly attributable incremental costs incurred during the development period, including wages and salaries of staff employed solely for the purpose of improving the processes and systems, and third party costs. Development costs do not include restructuring costs, (including redundancy, early termination penalties and such like), which are expensed to the profit and loss account as they are incurred. Amortisation of the development costs occurs on a straight line basis over the life of the contract. (between 10 to 12 years) Impairment reviews are performed annually to ensure the present value of estimated future income streams from the associated contracts exceeds the capitalised costs.

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Notes to the financial statements for the year ended 31 December 2004 (cont.) g) Goodwill Goodwill, arising from the purchase of subsidiary undertakings, represents the excess of the fair value of the consideration paid over the fair value of the identifiable net assets acquired. Goodwill is capitalised as an intangible asset and amortised on a straight-line basis from the time of acquisition over its expected useful economic life. The expected useful economic life is determined by reference to the underlying outsourcing contract to which the acquisition relates (between 10 and 12 years) or where no underlying outsourcing contract exists, up to a period of 20 years. h) Negative goodwill Where the fair value of the separable net assets exceeds the fair value of the consideration for an acquired undertaking the difference is treated as negative goodwill and is capitalised and amortised through the profit and loss account in the period in which the non-monetary assets acquired are recovered (between 10 and 12 years). In the case of fixed assets this is the period over which they are depreciated, and in the case of current assets, the period over which they are sold or otherwise realised. i) Tangible fixed assets The cost of tangible fixed assets is their purchase cost, together with any incidental costs of acquisition. Software costs are capitalised where they meet the criteria for recognition under FRS 10. Where the criteria for capitalisation are not met, software development expenditure is expensed as incurred. Assets in the course of development are not depreciated until completion at which point they are transferred to the relevant fixed asset category. Depreciation is calculated so as to write off the cost of tangible fixed assets, less their estimated residual values, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal annual rates used for this purpose are: Computer equipment 20 - 33% Fixtures and fittings 10 - 25% Leasehold improvements over the period of the lease Motor vehicles 25% Software development 20% . j) Fixed asset investments - company Fixed asset investments are stated at cost less any provision for impairment. k) Operating and finance leases Rental costs under operating leases are charged to the profit and loss account on a straight-line basis over the lease term. Assets held under finance lease are initially reported at the fair value of the assets with an equivalent liability categorised as appropriate under creditors due within or after one year. The asset is depreciated over the shorter of the lease term and its useful economic life. Finance charges are allocated to accounting periods over the period of the lease to produce a constant rate of return on the outstanding balance. Rentals are apportioned between finance charges and reduction of the liability, and allocated to administrative expenses as appropriate.

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Notes to the financial statements for the year ended 31 December 2004 (cont.) l) Deferred taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more, or a right to pay less, tax in the future have occurred at the balance sheet date. Deferred tax assets are regarded as recoverable and therefore recognised, only when, on the basis of all available evidence, the directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax is measured on a non-discounted basis at the rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. m) Pensions The group operates, or participates in, both defined contribution and defined benefit pension schemes. All the pension schemes are accounted for in accordance with Statement of Standard Accounting Practice (“SSAP”) 24 ‘Accounting for Pension Costs’ and the full transitional disclosures of FRS 17 are included for the defined benefit schemes. The regular cost of the defined benefit pension schemes are charged to the profit and loss account. A professional independent actuary values the funds triennially and the valuations were updated at the year-end. Differences between the amounts funded and charged to the profit and loss account are classified as either creditors or prepayments in the balance sheet. In accordance with the transitional provisions of FRS 17, scheme assets are measured using closing market values. Pension scheme liabilities are measured using the projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. Variations identified as a result of actuarial valuations are amortised over the average expected remaining working lives of employees in proportion to their expected payroll costs Contributions to the defined contribution schemes are charged to the profit and loss account as incurred. n) Related party transactions The company has taken advantage of the exemption available in FRS 8 ‘Related Party Transactions’ not to disclose consolidated transactions with group companies.

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Notes to the financial statements for the year ended 31 December 2004 (cont.) 2 Segmental information Contributions to turnover by geographical destination are: 2004 2003 £’000 £’000 United Kingdom 180,210 130,799 Continental Europe 70,577 - Rest of the World 3,352 -

254,139 130,799

Further segmental analysis is not provided as the directors consider this information to be seriously prejudicial to the group at its current stage of development.

3 Exceptional items Exceptional costs comprised the following: Group 2004 2003

£’000 £’000Integration of Rebus IS acquisition 5,425 -Software impairment 1,506 -Total exceptional items 6,931 -

Following the acquisition of Rebus IS, the group’s activities in London were consolidated from three buildings into one. This restructuring has resulted in an exceptional charge of £5,129,000 which relates to onerous lease charges on the empty properties. A further exceptional charge of £296,000 was recognised in relation to company and personnel restructuring following the acquisition. An impairment review was carried out during the year on the RiskWrite software and a write-down of £1,506,000 recognised as a result of this review.

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Notes to the financial statements for the year ended 31 December 2004 (cont.) 4 Operating profit (loss) Operating profit (loss) is stated after charging (crediting): 2004 2003 £’000 £’000 Staff costs Wages and salaries 86,280 39,708Social security costs 10,967 4,349Other pension costs 8,315 3,322 105,562 47,379 Exceptional item (note 3) 6,931 -Depreciation - owned assets 5,817 3,406Depreciation - assets held under finance leases 111 -Net amortisation of intangible assets 2,950 1,504Amortisation of pre-contract costs 416 266Operating leases - land and buildings 9,237 3,080 - plant and machinery 478 115Foreign exchange (gain) loss (31) 10Loss on disposal of fixed assets (including exceptional cost of £403,000 included above) 443 12

Auditors’ remuneration - audit services 534 339 - non-audit services 552 398 Fees in respect of audit services for the company were £4,000 (2003: £56,000). A further £75,000 of audit fees were borne by another group entity (2003: £nil).

5 Directors' emoluments Company 2004 2003

£’000 £’000 Aggregate emoluments 682 582

Highest paid director Aggregate emoluments 652 552

The directors emoluments above were borne by another group entity during the year. No directors accrued any pension benefits under defined contribution schemes.

XCHANGING B.V. 19

Notes to the financial statements for the year ended 31 December 2004 (cont.) 6 Employees The average monthly number of persons (including executive directors) employed by the group during the year was:

2004 2003 Number Number

By country United Kingdom 1,714 1,236 Continental Europe 878 4 Rest of World 235 1

2,827 1,241

The company does not have any employees.

7 Interest receivable and similar income Group Group Company Company

2004 2003 2004 2003

£’000 £’000 £’000 £’000

Bank interest 1,801 670 - 40 Other interest 26 3 26 2 Total interest receivable and similar income 1,827 673 26 42

8 Interest payable and similar charges Group Group Company Company

2004 2003 2004 2003

£’000 £’000 £’000 £’000

Interest payable on shareholder loan (note 15) 166 24 166 24 Interest payable on bank securities 115 - - - Interest payable on bank loans and overdrafts 35 4 - 1 Interest payable on finance leases 44 - - - Total interest payable and similar charges 360 28 166 25

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Notes to the financial statements for the year ended 31 December 2004 (cont.) 9 Tax on profit on ordinary activities

2004 2004 2003 2003

Taxation on the profit for the year £’000 £’000 £’000 £’000

Current tax:

UK corporation tax 4,025 3,959

Tax in respect of prior years 115 1,201

Foreign tax 340 -

Withholding tax written off 28 -

4,508 5,160

Deferred tax: Reversal of timing differences (644) (71) Charge for utilisation of tax losses (58) (186)

3,806 4,903 Factors affecting the current tax charge for the year The table below provides a reconciliation of the current tax charge on ordinary activities for the year reported in the profit and loss account to the current tax (credit)/charge that would result from applying the relevant standard rates of tax to the profit/(loss) on ordinary activities before tax. 2004 2003

£’000 £’000 Profit on ordinary activities before tax 13,069 558

Profit at standard rate of corporation tax of 30% (2003: 30%) 3,921 167 Overseas losses not available for group relief 243 109 Utilisation of tax losses (1,224) (20) Depreciation for the year in excess of capital allowances 457 489 Expenses not deductible for tax purposes 1,006 734 Short term timing differences 58 (113) Tax in respect of prior years - 1,201 Withholding tax written off 28 - Difference on foreign tax rates (41) - Deferred tax assets not recognised 60 2,593

Tax charge for the year 4,508 5,160 Factors that may affect future tax charges Tax losses arising amount to an estimated carried forward amount of £29,623,000 (2003: £25,730,000), which gives rise to an unrecognised deferred tax asset of £8,887,000 (2003: £7,719,000), assuming a tax rate of 30%. When the group undertakings in which these tax losses rest become profitable, future tax charges will be reduced as a result of the profits being offset by these tax losses. However no asset has been recognised as there is no certainty over the timing and availability of such future profits.

XCHANGING B.V. 21

Notes to the financial statements for the year ended 31 December 2004 (cont.)

10 Intangible assets and goodwill

Group

Goodwill Negative goodwill

Development costs

Software licence fee

Total

£’000 £’000 £’000 £’000 £’000

Cost

At 1 January 2004 4,699 (364) 8,243 1,360 13,938

Additions 14,753 - 2,569 - 17,322 Transfers from tangiblefixed assets *

- - 2,679 - 2,679

Disposals - - (73) - (73)

At 31 December 2004 19,452 (364) 13,418 1,360 33,866

Amortisation

At 1 January 2004 1,229 (79) 1,473 430 3,053

Charge/(credit) for year 1,209 (37) 1,506 272 2,950 Transfers from tangiblefixed assets *

- - 248 - 248

Disposals - - (19) - (19)

Impairment - - 1,506 - 1,506

At 31 December 2004 2,438 (116) 4,714 702 7,738

Net book amount At 31 December 2004 17,014 (248) 8,704 658 26,128

At 31 December 2003 3,470 (285) 6,770 930 10,885

The directors carried out an impairment review during the year on a specific technology asset, resulting in an impairment being recognised of £1,506,000 (2003: £nil). * Certain software developments have been reclassified from tangible fixed assets to intangible fixed assets during the year to more accurately reflect the nature of the capitalised expenditure.

XCHANGING B.V. 22


11 Tangible fixed assets

Group Leasehold

improvements

Computer Equipment

including software

costs Motor

vehicles

Fixtures and

fittings

Assets in the course of

development

Total £’000 £’000 £’000 £’000 £’000 £’000

Cost

At 1 January 2004 1,797 18,937 268 1,687 286 22,975

Acquisitions 2,208 10,146 211 2,686 - 15,251

Additions 2,352 5,540 86 739 998 9,715

Disposals (1,693) (195) (189) (272) - (2,349) Transfer to intangible fixedassets * - (2,679) - - - (2,679)

Exchange adjustments - (15) (3) 1 - (17)

At 31 December 2004 4,664 31,734 373 4,841 1,284 42,896

Depreciation

At 1 January 2004 1,059 8,129 164 981 - 10,333

Acquisitions 907 7,317 93 2,530 - 10,847

Charge for year 357 5,009 94 468 - 5,928

Disposals (773) (114) (138) (173) - (1,198) Transfer to intangible fixedassets * - (248) - - - (248)

Exchange adjustments 2 4 (1) 9 - 14

At 31 December 2004 1,552 20,097 212 3,815 - 25,676

Net book amount At 31 December 2004 3,112 11,637 161 1,026 1,284 17,220

At 31 December 2003 738 10,808 104 706 286 12,642

• Certain software developments have been reclassified from tangible fixed assets to intangible fixed

assets during the year to more accurately reflect the nature of the capitalised expenditure. • Included within motor vehicles at 31 December 2004 are assets with a net book value of £9,000 (31

December 2003: £nil) that are held under finance leases. • Included within fixtures and fittings at 31 December 2004 are assets with a net book value of

£381,000 (31 December 2003: £nil) that are held under finance leases.

XCHANGING B.V. 23


12 Investments Company £’000

At 1 January 2004 14,789

Additions 15,050

Disposals (16)

At 31 December 2004 29,823 During the year in order to acquire etb GmbH and the Rebus IS group, the company invested in two new subsidiaries, XUK Co Limited and Xchanging Holdco No 3 Limited (see note 23 for further information). The company also transferred its investment in Xchanging GmbH to another group company at cost. The company has the following principal subsidiary undertakings.

Name Country of incorporation

Principal activity

Effective interestand proportion

of equity held Xchanging Limited * England and Wales Management services to group

companies 100%

Xchanging Claims Services Limited England and Wales Intermediate holding company 50%Ins-sure Holdings Limited England and Wales Intermediate holding company 50%Xchanging Procurement Services (Holdco) Limited

England and Wales Intermediate holding company 50%

HR Enterprise Limited England and Wales Intermediate holding company 50%Ins-sure Services Limited England and Wales Business Process Outsourcing 50%London Processing Centre Limited England and Wales Business Process Outsourcing 50%LPSO Limited England and Wales Business Process Outsourcing 50%Xchanging Claims Services Limited England and Wales Business Process Outsourcing 50%LCO Non-Marine and Aviation Limited

England and Wales Business Process Outsourcing 50%

LCO Marine Limited England and Wales Business Process Outsourcing 50%Xchanging Procurement Services Limited

England and Wales Business Process Outsourcing 50%

Togethr HR Services Limited England and Wales Business Process Outsourcing 50%etb GmbH Germany Business Process Outsourcing 51%Xchanging Global Insurance Solutions Limited

England and Wales Software development 100%

Xchanging Systems & Services Inc USA Software development 100%Xchanging Resourcing Services Limited

England and Wales Recruitment 100%

Xchanging GmbH Germany Management services 100%Xchanging SAS * France Management services 100% * Held directly Entities in which the company holds 50% of the equity share capital are treated as subsidiaries because the company has overall operational and financial control. All subsidiaries are included in the consolidated financial statements.

XCHANGING B.V. 24


13 Debtors Group Group Company Company

2004 2003 2004 2003

Due within one year: £’000 £’000 £’000 £’000

Trade debtors 23,930 7,521 - -

Amounts owed by group undertakings - - 80,683 58,097

Taxes receivable 1,450 302 - -

Other debtors 4,957 1,673 443 459

Prepayments and accrued income 19,351 11,131 1 -

Pre-contract costs (see note below) 508 252 - -

Deferred tax (note 17) 1,305 257 - -

51,501 21,136 81,127 58,556

Due after more than one year:

Pre-contract costs (see note below) 3,871 1,644 - -

Other debtors 230 - - -

4,101 1,644 - - Pre-contract costs - Group 2004 2003

£’000 £’000

Written down value at 1 January 1,896 2,162

Pre-contracts costs deferred in year 2,899 -

4,795 2,162

Amortisation charge for the year (416) (266)

Written down value at 31 December 4,379 1,896 14 Cash at bank and in hand Group Company

2004 2003 2004 2003

£’000 £’000 £’000 £’000

Cash at bank and in hand 78,872 26,280 451 634

Within the balance shown above, there is £5,000,000 restricted cash held in respect of the collaterisation for the letter of credit provided for the etb acquisition (2003: £4,000,000 restricted cash held in respect of the consideration for the acquisition of Ins-sure Holdings Limited). The letter of credit is provided by Lloyds TSB for 3 years from signing of the contract and underwrites the savings guarantees that are being made by Xchanging to Deutsche Bank in respect of the acquisition of etb and may be called for an amount of up to Eur15m.

XCHANGING B.V. 25


15 Creditors (i) Amounts falling due within one year

Group Group Company Company

2004 2003 2004 2003

£’000 £’000 £’000 £’000

Bank loans and overdrafts 27 - - -

Obligations under finance leases 186 - - -

Trade creditors 18,122 6,687 - -

Amounts owed to group undertakings - - 15,539 -

Corporation tax 2,626 2,593 348 348

Other taxation and social security 4,590 2,133 - -

Other creditors 2,153 623 - -

Accruals and deferred income 50,613 15,156 15 44

Shareholder loan 10,191 5,024 10,191 5,024

Dividends due to minority interests 6,099 5,418 - -

94,607 37,634 26,093 5,416 All amounts owed to group undertakings included in the above balance are unsecured, interest free and have no fixed date of repayment. The shareholder loan was provided to fund the international expansion plans of the group and takes the form of an interest bearing convertible loan note at 1.71%, with interest rolling up into the principal. The maturity date of the loan note was 31 December 2004 which has subsequently been extended to 31 August 2005. It was advanced by General Atlantic Partners LLP.

(ii) Amounts falling due after more than one year Group Group Company Company

2004 2003 2004 2003

£’000 £’000 £’000 £’000

Convertible loan note 6,028 - 6,028 -

Obligations under finance leases 192 - - -

Accruals and deferred income 274 - - -

6,494 - 6,028 - The convertible loan note was issued on the acquisition of the RebusIS group. The value of the loan note is £15m on its maturity date of 28 January 2009 and is recorded in the balance sheet at its fair-value at the group weighted average cost of capital on the date of issue. Before maturity the loan note can be exercised for convertible preference class C shares at a price of £7.66/share. The loan note is not interest bearing.

XCHANGING B.V. 26


16 Provisions

Group Redundancy Property Pensions Operational

Risk Other Total

£’000 £’000 £’000 £’000 £’000 £’000

At 1 January 2004 1,166 127 - - - 1,293

Acquired in the year - - 11,900 13,846 13,177 38,923

Released in the year - - - (650) (44) (694)

Provided in the year - 3,853 - 643 2,350 6,846

Utilised in the year (1,166) (127) - (3,779) (3,212) (8,284)

Exchange adjustments - - - (104) 11 (93)

At 31 December 2004 - 3,853 11,900 9,956 12,282 37,991 The redundancy provision relates to redundancies announced to employees prior to the 2003 year-end. The property provision relates to dilapidations on the withdrawal from a number of operating leases and a provision to cover the shortfall between expected sub-letting rents and the cost of two onerous operating leases. The leases provided for have 6 and 10 years left to run. The operational provision comprises an estimated liability in respect of identified operating errors which had occurred in the securities processing division up to 31 December 2004. It also includes a provision arising on a loss making contract in the securities processing division which is being utilised as the losses are incurred over the life of the contract. The other provision relates to early retirement and other personnel related provisions. The provisions included above which are due for utilisation in greater than one year amount to £32,100,000.

17 Deferred tax

Group 2004 2003 £’000 £’000 Provided: Deferred tax asset at beginning of year 257 - Acquisition 345 - Credit to profit and loss account - Depreciation in excess of capital allowances 645 231 - Other timing differences 58 26

Deferred tax asset at end of year 1,305 257 Provided: Depreciation in excess of capital allowances 1,174 231 Other timing differences 131 26

1,305 257

XCHANGING B.V. 27


17 Deferred tax (cont.) 2004 2003 £’000 £’000 Unprovided: Tax losses carried forward 8,887 7,719 Other timing differences 63 - Accelerated capital allowances 794 -

9,744 7,719 The group has recognised all deferred tax assets, with the exception of any deferred tax assets arising due to tax losses carried forward and also the deferred tax asset described as below. The assets in relation to the tax losses have not been recognised due to the uncertainty of future suitable taxable profits within the respective companies. Xchanging Limited and Xchanging BV have unrecognised deferred tax assets of £58,000 (2003: £nil) and £781,000 (2003: £nil) in respect of accelerated capital allowances (capital allowances in excess of depreciation) and other timing differences which have not been recognised due to the uncertainty of future suitable taxable profits.

18 Called up share capital

Group and company 2004 2003

£’000 £’000

Authorised

19,500,000 convertible preference class A shares of Euro 0.01 each 109 109

4,826,255 convertible preference class B shares of Euro 0.01 each 28 28

20,000,000 convertible preference class C shares of Euro 0.01 each 128 128

11,151,189 convertible preference shares of Euro 0.01 each 62 62

1,785,714 common class A shares of Euro 0.01 each 10 10

1,785,714 common class B shares of Euro 0.01 each 10 10

1,785,715 common class C shares of Euro 0.01 each 10 10

53,581,245 common shares of Euro 0.01 each 307 307

3,063,500 scheme shares of Euro 0.01 each 17 17

100,000 class G shares of Euro 0.01 each 1 1

682 682

XCHANGING B.V. 28


18 Called up share capital (cont.)

2004 2003

£’000 £’000

Allotted, called up and fully paid

19,031,250 convertible preference class A shares of Euro 0.01 each 106 106

4,826,255 convertible preference class B shares of Euro 0.01 each 28 28

1,785,714 common class A shares of Euro 0.01 each 10 10

1,785,714 common class B shares of Euro 0.01 10 10

1,785,715 common class C shares of Euro 0.01 each 10 10

4,099,293 common shares of Euro 0.01 each (2003: 3,836,681) 24 23

1,063,500 scheme shares of Euro 0.01 6 6

84,440 class G shares of Euro 0.01 1 1

195 194 Increase in allotted share capital During the year the allotted share capital was increased by 262,612 shares as share options were exercised for a consideration of £282,795 (aggregate nominal share capital of £1,260 and share premium of £281,535). In addition a total of 11,110 G shares were bought back by the company from employees at nominal value. Share options During the year, 523,650 (2003: 263,210) options were granted under the Xchanging Group Approved Share Option Plan and 732,850 (2003: 1,659,290) options were granted under the Xchanging Group Unapproved Share Option Plan. At the year-end options were still outstanding over 4,784,493 common shares (2003: 4,059,000), exercisable in periods from 2005 to 2014, at prices ranging from £0.26 to £3.83 per share. Share rights Voting rights All classes of shares carry equal voting rights, except that those of the scheme shares are subject to a probationary period of 45 months from the date of issue of the scheme shares. Dividend rights Convertible preference class A, B and C shares, common shares and Class G shares carry equal dividend rights. Common class A, B and C shares have enhanced dividend rights subject to the achievement of milestones based on the market capitalisation of the company. Share scheme shares only gain dividend rights after completion of the probationary period referred to above, after which their dividend rights are equal to those of common shares. Class G shares shall be treated for the purposes of the allocation of interim and final dividends as if they had identical rights to those attaching to such number of common shares to which they have equivalent rights (not to exceed 5.5 million common shares) at the time of the distribution as is calculated using the procedure set out in article 4b of the company’s articles of association.

XCHANGING B.V. 29


18 Called up share capital (cont.) Rights on liquidation or winding up Convertible preference class A, B and C shares have a preferential right over all classes of common share and class G shares on liquidation or winding up to the return of the nominal amount plus any premium paid, and then an equal right with common shares and Class G shares to the remaining assets. Class G shares are only entitled to participate in the remaining assets as if they had identical rights to those attaching to such number of common shares (not to exceed 5.5 million common shares) to which they have equivalent rights as at the date of dissolution of the company as is calculated using the procedure set out in article 4b of the company’s articles of association. Common class A, B and C shares are only entitled to participate in the remaining assets equally with common shares on achievement of the market capitalisation milestones referred to above. Share scheme shares rank alongside common shares after the probationary period referred to above. Conversion rights Convertible preference class A, B and C shares are convertible to an equal number of common shares by resolution of the management board of the company.

19 Reserves

Group Warrant

reserve

Share premium

reserve Profit and

loss reserve £’000 £’000 £’000

At 1 January 2004 as previously reported 690 58,390 (31,662) Prior year adjustment –own shares previously held in investments - - (18)

At 1 January 2004 as restated (note 1) 690 58,390 (31,680)

Retained profit for the financial year - - 3,179 Unrealised gain on partial disposal of a group company (note 23) - - 1,904

Exchange adjustments - - 108

Increase in share premium in the year - 281 -

At 31 December 2004 690 58,671 (26,489)

The own shares held represent shares held by the Infrex Employee Share Trust which holds 62,500 common shares with an original cost of £18,036 (US$ 0.42 per share). The increase in share premium in the year arose due to the exercise of share options..

Company Warrant

reserve

Share premium

reserve Profit and

loss reserve £’000 £’000 £’000

At 1 January 2004 690 58,390 9,289

Retained profit for the financial year - - 10,435

Increase in share premium in the year - 281 -

At 31 December 2004 690 58,671 19,724

XCHANGING B.V. 30

Notes to the financial statements for the year ended 31 December 2004 (cont.) 20 Equity minority interests

Group Minority interests

£’000

At 1 January 2004 6,066

Minority interests’ share of profit for year 6,084

Minority interest on acquisition 2,112 Movement in dividends payable to minorityinterests (8,599)

At 31 December 2004 5,663

21 Warrants The warrant reserve relates to share warrants over 468,750 preference shares issued as consideration for £690,000 in consulting services provided to Xchanging Limited, a subsidiary of the company. The warrants were exercisable until 1 December 2004, or 180 days after any Public Offering, whichever was earlier, at a strike price of US$3.20. During the year this exercise period was extended and the warrant was exercised on 15 February 2005 (see Director’s report). BAE SYSTEMS hold a warrant to subscribe for 664,754 shares in the common stock of the company at the price of US$3.20 per share. Contingent upon the occurrence of certain other events, the warrant includes a right for BAE SYSTEMS to subscribe for additional shares in common stock of the company so that its total holding would be 957,244 shares. BAE SYSTEMS also has dilution protection in that if any shares in the common stock of the company are issued to a third party, subject to certain defined exceptions, BAE SYSTEMS has the right to subscribe for such additional number of shares (at the same price as paid by the respective third party) in the common stock of the company so that its percentage share post issue of shares to the third party would be the same as it was pre issue of shares to the third party.

22 Reconciliation of movements in equity shareholders’ funds


2004 2003 2004 2003

£’000 £’000 £’000 £’000 Opening equity shareholders’ funds as previously reported 27,594 38,024 68,563 62,999

Prior year adjustment –own shares previously held in investments - (18) - - Opening equity shareholders’ funds as restated (note 1) 27,594 38,006 68,563 62,999

Profit (loss) for the year 3,179 (10,976) 10,435 5,000 Unrealised gain on partial disposal of a group company 1,904 - - -

Exchange adjustments 108 - - - Net proceeds of issue of ordinary share capital 282 564 282 564

Closing equity shareholders’ funds 33,067 27,594 79,280 68,563

XCHANGING B.V. 31


23 Acquisitions (i) Rebus IS Group During the year Xchanging Group acquired 100% of the equity of the Rebus IS Group, taking control from 1 January 2004. The group was acquired by Xpanse Limited via the issue of a convertible loan note (see note 15). Details of the book value of the Rebus IS Group’s net assets acquired, fair value adjustments, consideration paid and the resulting goodwill and other intangibles, are set out below.

Book value

Accounting policy

alignment

Other fair value

adjustments Fair value

£’000 £’000 £’000 £’000 Tangible fixed assets 2,905 (298) - 2,607 Debtors 15,022 - - 15,022 Deferred tax asset 923 - (578) 345 Cash 833 - (524) 309 Creditors (12,739) (933) - (13,672) Provisions - - (11,900) (11,900)

Net assets acquired 6,944 (1,231) (13,002) (7,289) Goodwill 14,483 Costs of acquisition (1,166) Settled by convertible loan note (note15) 6,028 The fair value and accounting policy adjustments were as follows: i) A reduction to fixed assets of £298,000 in respect of alignment of depreciation and amortisation

policies ii) An increase in creditors in respect of alignment of revenue recognition policy and the subsequent

recognition of deferred income iii) A fair value decrease in the deferred tax asset resulting from the movement in the deferred tax

asset during the year following acquisition iv) A fair value adjustment to cash representing adjustments made to the completion balance sheet v) A fair value adjustment for the deficit on the pension fund at the date of acquisition, net of

deferred tax. Results of acquired companies prior to acquisition The combined results of the Rebus IS Group from 1 April 2003 to 31 December 2003 were as follows: £’000

Turnover 35,918

Operating loss (5,072)

Loss before tax (5,072)

Tax (269) Loss after tax (5,341) The results in the prior financial period ended 31 March 2003 were a combined loss before taxation of £1,092,000.

XCHANGING B.V. 32


23 Acquisitions (cont.) (ii) etb GmbH With effect from 1st June 2004, the Xchanging Group acquired a 51% interest in the equity of etb GmbH. This transaction has been accounted for in accordance with United Kingdom Urgent Issues Task Force Abstract 31 (‘UITF 31’) ’Exchange of businesses or other non-monetary assets for an interest in a subsidiary, joint venture or associate’. The net effect of this transaction was to dispose of a 49% interest in Xchanging etb GmbH (previously a 100% owned subsidiary of the Xchanging Group) in return for the acquisition of a 51% interest in etb GmbH. The unrealised gain on disposal of the 49% interest was £6.2 million and, in accordance with UITF 31, has been recognised in the Statement of Total Recognised Gains and Losses. Details of the book value of etb GmbH’s net assets acquired, consideration paid and the resulting goodwill and other intangibles, are set out below.

Book value

Accounting policy

alignment

Other fair value

adjustments Fair value

£’000 £’000 £’000 £’000 Tangible fixed assets 1,798 - - 1,798 Debtors 3,080 - - 3,080 Investments 41,225 (40,802) - 423 Cash 60,231 - - 60,231 Creditors (30,868) - (605) (31,473) Provisions (62,730) 33,037 (90) (29,783)

Net assets acquired 12,736 (7,765) (695) 4,276 Minority interest (2,112) Group interest in fair value of net assets acquired 2,164

Costs of acquisition (530) Gain on deemed disposal (see STRGL) (1,904)

Goodwill (270) The fair value and accounting policy adjustments were as follows: i) A reduction to investments of £33,037,000 in respect of pension accounting alignment to UK GAAP ii) A reduction to provisions of £33,037,000 in respect of alignment of pension accounting to UK GAAP iii) An adjustment to investments resulting from the excess investments held against the pension liability which should not be recognised under UK GAAP. iv) A fair value adjustment to provisions representing the movement on the pension liability in the period following acquisition. v) A fair value adjustment to creditors resulting from the movement on the pension assets since acquisition which was attributable to Deutsche Bank as the previous owner of etb. There was no requirement to recognise a provision for the pension deficit disclosed in note 28 as this deficit was contractually fully funded by Deutsche Bank.

XCHANGING B.V. 33


23 Acquisitions (cont.) (ii) etb GmbH (cont.) Results of acquired companies prior to acquisition The results of etb GmbH from 1 January 2004 to 31 May 2004 were as follows: €’000

Turnover 79,200

Operating profit 9,916

Profit before tax 10,272

Tax 0 Profit after tax 10,272 The results in the prior financial period ended 31 December 2003 were a profit before taxation of €23,108,000.

24 Financial commitments At 31 December 2004 annual commitments under non-cancellable operating leases were as follows: Group Group Company Company

2004 2003 2004 2003

£’000 £’000 £’000 £’000

Operating leases: land and buildings – expiring:

Within one year 1,958 121 - -

Between two to five years 467 1,264 - -

After five years 4,735 1,658 - -


2004 2003 2004 2003

£’000 £’000 £’000 £’000

Operating leases: other – expiring:

Within one year 427 77 - -

Between two to five years 39 18 - -

XCHANGING B.V. 34

Notes to the financial statements for the year ended 31 December 2004 (cont.) 24 Financial commitments (cont.) The group is contractually obligated to invest amounts, on behalf of the Enterprise Partnerships it acquired or set-up during 2001 and 2004, in technology development and maintenance and in the development of new processes and systems. The total commitment outstanding at 31 December 2004 is presented below as analysed by the period in which the commitment falls due:

Group 2004 2003

£’000 £’000

Financial investment commitments

Within one year 8,417 3,936

One to two years 3,209 4,324

Two to five years 17,635 3,938

29,261 12,198

25 Reconciliation of operating loss to net cash outflow from operating activities 2004 2003 £’000 £’000 Continuing operating activities Operating profit (loss) 10,462 (87) Depreciation on tangible fixed assets 5,928 3,406 Impairment of tangible fixed assets 1,506 - Amortisation of development costs 1,778 1,068 Amortisation of goodwill 1,172 440 Amortisation of pre-contract costs 416 266 Increase in debtors (10,025) (2,763) (Decrease) Increase in creditors (2,751) 3,365 Movement in provisions (4,895) 708 Loss on disposal of fixed assets 443 12

Net cash inflow from continuing operating activities 4,034 6,415

26 Reconciliation of cash inflow to movement in net funds 2004 2003 £’000 £’000 Increase (decrease) in cash in the year 47,422 (11,806) Cash inflow from shareholder loan 5,000 5,000 Increase in borrowings (6,418) - Borrowings acquired with subsidiary (15) - Exchange adjustments 170 - Net funds at 1 January 26,280 33,086

Net funds at 31 December 72,439 26,280

XCHANGING B.V. 35


27 Analysis of changes in net funds

At 1 January

2004 Cash flow Acquisitions

Other non-cash

movements Exchange

movements

At 31 December

2004 £’000 £’000 £’000 £’000 £’000 £’000 Cash at bank and in hand 26,280 (8,119) 60,541 - 170 78,872Overdrafts - (27) - - - (27)Loan note - - (6,028) - - (6,028)Finance leases due within 1 year - 164 (7) (343) - (186)Finance leases due after 1 year - - (8) (184) - (192)

26,280 (7,982) 54,498 (527) 170 72,439

28 Pensions The principal pension arrangements are set out below: (i) Group defined benefit scheme - LPC SSAP 24 disclosures The group operates a funded defined benefit scheme (which also includes a defined contribution section) in the UK. The scheme is now closed to new entrants. A full actuarial valuation was carried out at 1 July 2004 under the projected unit method and at that date the market value of the scheme assets was £24.9million. The assumptions used in the valuation of the scheme liabilities were as follows: At 31 December 2004 Rate of return on investments, pre retirement 7% Rate of return on investments, post retirement 5.5% Rate of increase in salaries 3.75% Rate of increase in pensions 2.75% The assets were valued at market value. As at the valuation date this represented 83% of the benefits accrued to members, after having allowed for estimated future increases in pensionable salaries. The company is currently paying contributions to the scheme of 20.8% of pensionable salaries to meet the cost of accruing benefits. In addition further contributions of 0.5% are being made to meet the deficit. These contributions will be reviewed following the next formal actuarial valuation of the scheme which is due as at 1 July 2007. The SSAP 24 charge for the year was £497,000 made up of £485,000 regular cost and £12,000 amortisation of deficit (2003: £492,000, made up of £467,000 of regular cost and £25,000 amortisation of deficit).

XCHANGING B.V. 36


28 Pensions (cont.) (i) Group defined benefit scheme – LPC (cont.) FRS 17 disclosures The actuarial valuation was updated at 31 December 2004 by a qualified independent actuary, as required by the transitional arrangements of FRS 17. The major assumptions used by the actuary were:

At 31

December 2004

At 31 December

2003

At 31 December

2002 Rate of increase in salaries 3.75% 3.50% 3.25% Rate of increase in deferred pensions 2.75% 2.50% 2.25% Rate of increase in pensions in payment 2.75% 2.50% 2.25% Discount rate 5.40% 5.50% 5.60% Inflation assumption 2.75% 2.50% 2.25% The following information is disclosed as per the transitional requirements of FRS 17 and does not impact on the group results or balance sheet. The assets in the defined benefit section of the scheme and the expected rates of return were:

Long-term rate of return

expected at 31 December

Value at 31 December £’000

2004 2003 2002 2004 2003 2002 Equities 7.00% 7.50% 7.50% 17,284 16,017 15,564 Bonds 5.30% 5.50% 5.50% 9,009 8,546 5,736 Property 4.50% 4.50% 4.50% 1,100 115 - Total market value of assets 27,393 24,678 21,300 Present value of scheme liabilities (34,110) (29,879) (26,722) Deficit in the scheme (6,717) (5,201) (5,422) Related deferred tax asset 2,015 1,560 1,627 Net pension liability (4,702) (3,641) (3,795) Analysis of amount charged to operating profit in respect of defined benefit schemes 2004 2003 £’000 £’000 Current service cost 577 532

Total operating charge 577 532

XCHANGING B.V. 37


28 Pensions (cont.) i) Group defined benefit scheme – LPC (cont.) Movement in surplus during the period

2004£’000

2003 £’000

Pension scheme deficit at start of period (5,201) (5,422) Movement in period: Current service cost (577) (532) Contributions 611 576 Other finance income/(expense) 34 (13) Actuarial (loss)/gain (1,584) 190

Deficit in scheme at end of the period (6,717) (5,201)

Analysis of other finance income 2004 2003 £’000 £’000 Expected return on pension scheme assets 1,676 1,483Interest on pension scheme liabilities (1,642) (1,496)

Net return 34 (13) Analysis of amount recognised in statement of total recognised gains and losses (STRGL)

2004£’000

2003 £’000

Actual return less expected return on assets 1,040 1,884 Experience gains and losses on liabilities (371) (285) Change in assumptions (2,253) (1,409)

Actuarial (loss) gain recognised in STRGL (1,584) 190 History of experience gains and losses 2004 2003 2002 Difference between the expected and actual return on scheme assets: Amount (£’000) 1,040 1,884 (3,879) Percentage of scheme liabilities 5% 8% (18%)

Experience gains and losses on scheme liabilities: Amount (£’000) (371) (285) (5,351) Percentage of scheme liabilities (1%) (1%) (20%)

Total amount recognised in statement of total recognised gains and losses: Amount (£’000) (1,584) 190 (3,356) Percentage of scheme assets (4%) 1% (13%)

XCHANGING B.V. 38


28 Pensions (cont.) i) Group defined benefit scheme – LPC (cont.) The contribution to the defined benefit scheme has been set at 21.3% (2003: 21.3%) of pensionable salaries, payable from 1 January 2004. (ii) The Corporation of Lloyd’s defined benefit scheme The group also participates in the defined benefit scheme run for the employees of The Corporation of Lloyd’s. Under SSAP 24, the pension cost charged to the profit and loss account for the year was £1,529,000 (2003: £1,607,000). As this is a multi-employer scheme, the group accounts for its contributions to the scheme as if it was a defined contribution scheme when FRS 17 is fully adopted, as it is not possible to identify the group’s share of the underlying assets and liabilities of the scheme on a consistent and reasonable basis and the contribution rate is set in relation to the current period only and not affected by any surplus or deficit in the scheme relating to past service of its own employees or other members of the scheme. An actuarial valuation by external professional actuaries is carried out triennially to determine the payments to be made to the scheme. The latest actuarial valuation was made as at 30 June 2004, and in accordance with the transitional arrangements of FRS 17 was updated as at 31 December 2004, the details of which are included in the accounts of Lloyd’s which are publicly available. (iii) BAE Systems defined benefit scheme The group also participates in a number of defined benefit schemes run for the employees of BAE Systems plc. Under SSAP 24, pension costs of £926,000 (2003: £897,000) were charged to the profit and loss account for the year. As these are multi-employer schemes, the group accounts for its contributions to the schemes as if they were defined contribution schemes, as it is not possible to identify the group’s share of the underlying assets and liabilities of the schemes on a consistent and reasonable basis and the contribution rate is contractually fixed and not affected by any surplus or deficit in the schemes relating to past service of its own employees or other members of the schemes. Actuarial valuations by external professional actuaries are carried out triennially. The latest actuarial valuation of the main scheme was made as at 5 April 2002, and in accordance with the transitional arrangements of FRS 17 was updated as at 31 December 2004, the details of which are included in the accounts of BAE Systems plc, which are publicly available. (iv) Xchanging Group defined contribution schemes The group also participates in defined contribution schemes run for the employees of Xchanging Limited, Xchanging Global Insurance Solutions Limited and related companies. Pension costs for the group that were charged to the profit and loss account for the year were £596,000 (2003: £297,000).

XCHANGING B.V. 39


28 Pensions (cont.) (v) Xchanging Global Insurance Solutions defined benefit scheme SSAP 24 disclosures Xchanging Global Insurance Systems Limited operates a pension scheme providing benefits calculated by reference to final pensionable salary – the Rebus Insurance Services Limited Final Salary Scheme (2003). The scheme is closed to new joiners. The scheme is a multi-employer scheme and includes employees of Xchanging Global Insurance Solutions Limited and Xchanging Resourcing Services Limited. The assets of the scheme are held separately from those of the group and are under the control of the trustees of the scheme. Contributions to the scheme are charged to the profit and loss account so as to spread the cost of pensions over employees’ working lives with the group. The pensions charge in the year in respect of this scheme was £1,271,000. The overall aggregate contributions by the participating companies and contributing members, was 16.5% of pensionable salaries for the year ended 31 December 2004. New employees and those previously employed by EPG Computer Services Limited are entitled to participate in the Rebus Insurance Systems Pension Scheme, a stakeholder scheme. The charge in the group for the year for this scheme was £130,000 A full actuarial valuation was carried out at 31 March 2004. FRS 17 disclosures The actuarial valuation was updated at 31 December 2004 by a qualified independent actuary, as required by the transitional arrangements of FRS 17. The major assumptions used by the actuary were:

At 31 December 2004

Rate of increase in salaries 3.80% Rate of increase in pensions in payment 2.00% – 5.00% Discount rate 5.30% Inflation assumption 2.80% The assets in the scheme and the expected rates of return were:

Long-term rate of return expected at

31 December

Value at 31 December

£’000 2004 2004 Equities 7.30% 11,343 Bonds 5.30% 13,831 Property 4.50% 2,813 678 Total market value of assets 28,665 Present value of scheme liabilities (49,350) Deficit in the scheme (20,685) Related deferred tax asset 6,206 Net pension liability (14,479)

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28 Pensions (cont.) (v) Xchanging Global Insurance Solutions defined benefit scheme (cont.) Analysis of amount charged to operating profit in respect of defined benefit schemes 2004 £’000 Current service cost 1,035

Total operating charge 1,035 Movement in surplus during the period

2004 £’000

Pension scheme deficit at acquisition (17,105) Movement in period: Current service cost (1,035) Contributions 1,263 Other finance (expense) (589) Actuarial (loss) (3,219)

Deficit in scheme at end of the period (20,685)

Analysis of other finance income 2004 £’000 Expected return on pension scheme assets 1,785 Interest on pension scheme liabilities (2,374)

Net return (589) Analysis of amount recognised in statement of total recognised gains and losses (STRGL)

2004 £’000

Actual return less expected return on assets 784 Experience gains and losses on liabilities 134 Change in assumptions (4,137)

Actuarial (loss) recognised in STRGL (3,219)

XCHANGING B.V. 41


28 Pensions (cont.) (v) Xchanging Global Insurance Solutions defined benefit scheme (cont.) History of experience gains and losses 2004 Difference between the expected and actual return on scheme assets: Amount (£’000) 784 Percentage of scheme liabilities 3% Experience gains and losses on scheme liabilities: Amount (£’000) 134 Percentage of scheme liabilities 3% Total amount recognised in statement of total recognised gains and losses: Amount (£’000) (3,219) Percentage of scheme assets (7%)

The contribution to the defined benefit scheme has been set at 16.5% of pensionable salaries, payable from 1 January 2004. (vi) Group defined benefit scheme - etb The group operates a funded defined benefit scheme in Germany.. The SSAP 24 charge for the period was £885,000 A full actuarial valuation was carried out at 31 December 2004 by a qualified independent actuary, as required by the transitional arrangements of FRS 17. The major assumptions used by the actuary were:

At 31 December 2004

Rate of increase in salaries 2.50% Rate of increase in pensions in payment 2.00% Discount rate 5.00% Inflation assumption 2.00% The assets in the scheme and the expected rates of return were:

Long-term rate of return expected at

31 December

Value at 31 December

£’000 2004 2004 Equities 7.74% 8,073 Corporate bonds 4.75% 24,219 Government bonds 4.50% 10,867 Other 0.66% 1,198 Total market value of assets 44,357 Present value of scheme liabilities (45,713) Deficit in the scheme (1,356) Related deferred tax asset - Net pension liability (1,356)

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28 Pensions (cont.) (vi) Group defined benefit scheme – etb (cont.) Analysis of amount charged to operating profit in respect of defined benefit schemes 2004 £’000 Current service cost 885

Total operating charge 885 Movement in surplus during the period

2004 £’000

Pension scheme deficit at acquisition (2,324) Movement in period: Current service cost (885) Benefit payments from book reserves 565 Employee transfer 1,145 Other finance income 465 Actuarial (loss) (322)

Deficit in scheme at end of the period (1,356)

Analysis of other finance income 2004 £’000 Expected return on pension scheme assets 1,324 Interest on pension scheme liabilities (859)

Net return 465 Analysis of amount recognised in statement of total recognised gains and losses (STRGL)

2004 £’000

Actual return less expected return on assets 1,719 Experience gains and losses on liabilities 81 Change in assumptions (2,122)

Actuarial (loss) recognised in STRGL (322)

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28 Pensions (cont.) (vi) Group defined benefit scheme – etb (cont.) History of experience gains and losses 2004 Difference between the expected and actual return on scheme assets: Amount (£’000) 1,719 Percentage of scheme liabilities 4%

Experience gains and losses on scheme liabilities: Amount (£’000) 81 Percentage of scheme liabilities 0%

Total amount recognised in statement of total recognised gains and losses: Amount (£’000) (322) Percentage of scheme assets (1%)

29 Related party transactions The companies set out below are considered to be related parties of the group. The first, The Corporation of Lloyds, held a 25% interest in Ins-Sure Holdings Limited and a 50% interest in Xchanging Claims Services Limited at 31 December 2004. The second, the International Underwriting Association, held a 25% interest in Ins-Sure Holdings Limited at 31 December 2004. The third, BAE SYSTEMS plc, held a 50% interest in Xchanging Procurement Services (Holdco) Limited and a 50% interest in HR Enterprise Limited at 31 December 2004. Some of the directors of Xchanging Procurement Services (Holdco) Limited and HR Enterprise Limited are employees of BAE SYSTEMS plc. The emoluments of these directors were borne by BAE SYSTEMS plc. The fourth, Deutsche Bank AG, held a 49% interest in Xchanging etb GmbH at 31 December 2004.

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29 Related party transactions (cont.) The individual companies together with a description of the nature of the services provided by (to) the company and the amount receivable (payable) in respect of each at 31 December 2004, are set out in the table below:

Related Party Services provided by (to) the company Revenue (charge)

Receivable (payable)

2004 2003 2004 2003 £'000 £'000 £'000 £'000

Lloyds Corporation

- (Operating systems, development, premises and other services in support of operating activities.) - Processing, expert and data services

(4,562)

1,115

(10,189)

1,555

(671)

89

(269)

206

International Underwriting Association

- Processing services 431 783 - -

BAE

SYSTEMS plc

- (Accommodation and IT services) - (Secondment charge for director - Procurement) - (Secondment charge for director - HR) - HR services - Procurement services

(1,185)

(50)

-

26,274

39,463

(1,299)

(40)

(58)

24,543

38,181

(556)

(50)

-

2,180

4,749

(246)

-

(58)

3,157

2,010

Deutsche Bank

AG

- Securities processing services - (IT costs) - (Divisional corporate charges) - (Sundry charges)

58,206

(15,183)

(1,008)

(552)

-

-

-

-

45,530

(3,130)

-

-

-

-

Xchanging BV At the year end, an amount of £398,697 (2003: £342,113) was due from the following officers in respect of the exercise of options during the year ended 31 December 2003 and 31 December 2004.

Officer John Attenborough Steve Bowen Adele Browne Clive Buesnel Richard Houghton David Rich-Jones

The loans are repayable on 30 November 2005 and bear interest at the rate of 5% per annum.

Formatted: Justified

XCHANGING B.V. 45

Other information for the year ended 31 December 2004 Appropriation of the net result for the year According to Article 24 of the company’s Articles of Association, the appropriation of profits is determined by the shareholders at the Annual General Meeting. No dividend was proposed for the year. The profit for the year of £10,435,000 (2003: £5,000,000) was transferred to reserves. Share rights to Financial Statements Details of share rights are given in note 18 to the financial statements. Auditors’ report The auditors’ report is included on page 8 to the financial statements.

xchanging bv 2004 final version may 2005, a 7 year contract was signed with boots plc to manage a...

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