Interim Results

Johnson Service Group PLC 12 September 2005 12th September 2005 Johnson Service Group PLC Statement for the Half Year to 25th June 2005 Johnson Service Group PLC, the textile related services and facilities management group announces its interim results for the 26 weeks to 25th June 2005. Operational Summary • Weaker consumer demand leads Drycleaning revenue down 2.4% on like for like basis with adjusted operating profits* at £2.7m (2004: £5m) • Apparelmaster returns to organic revenue growth of 1% (2004: 5% decline) • Corporatewear performing well with significant rollouts in the second half • Facilities Management and Specialist Supplies continues to drive organic growth through new contract wins • Six acquisitions completed for £38m - adding strong recurring revenue streams and increased exposure to growing markets Financial Summary 2005 2004 Change Turnover £215.0m £168.7m 27% Turnover (excluding costs recharged to customers) £171.3m £125.7m 36% Reported Operating Profit £14.1m £14.2m (1%) Adjusted Operating Profit* £15.0m £14.3m 5% Reported Profit Before Tax £10.2m £11.9m (14%) Adjusted Profit Before Tax* £11.1m £12.0m (7%) Interim dividend 4.4p 4.2p 5% Simon Sherrard, Chairman, Johnson Service Group, commented: 'With our Corporatewear and Facilities Management businesses performing well in growing markets and with improving market conditions in the Textile Rental business, we are confident in the future of the Group. Trading conditions for our retail drycleaning division were difficult during the first half of the year and remain unpredictable. Subject to the comments above, we remain well placed to deliver another satisfactory outcome for the year as a whole.' Website: www.johnsonplc.com * (before exceptional items and intangibles amortisation) For further information, please contact: Johnson Service Group PLC Hudson Sandler Stuart Graham, CEO Michael Sandler Jim Wilkinson, CFO James Benjamin Telephone Sandrine Gallien On 12th September: 020 7796 4133 Thereafter: 020 7290 0390 Telephone: 020 7796 4133 Chairman's Statement During the first half of the year, the Group recorded good organic growth in its Textile Rental and Hospitality, Corporatewear and Facilities Management and Specialist Supplies divisions. We have now positioned these businesses towards markets with a high degree of good quality, long-term recurring revenue. We are seeing improving industry conditions in Textile Rental, whilst our Corporatewear and Facilities Management businesses have increased our exposure to expanding markets with clear, sustainable growth being demonstrated. This leads the Group to look forward to the future with confidence despite the impact of drycleaning, which is clearly being affected by the poor retail trading conditions, as previously indicated in July, and saw like for like sales falling by 2.4% over the period. In total we spent £38 million on six acquisitions that meet our strict value criteria. These matched our strategic objectives of adding strong recurring revenue streams to the Group whilst increasing our exposure to growing markets. Group Results and Dividend The Group results for the six months were in line with our expectations. Total turnover was £215.0 million (2004: £168.7 million) and operating profit was £14.1 million (2004: £14.2 million). Turnover, excluding costs recharged to customers, increased by 36% to £171.3 million (2004: £125.7million) and adjusted operating profit, excluding amortisation of intangibles and exceptional items, increased by 5% to £15.0 million (2004: £14.3 million). The interest charge was £3.9 million, increased from £2.3 million in 2004, reflecting the higher borrowings following the acquisitions made over the last year. The interest charge was covered over 3.8 times by adjusted operating profit. Profit before tax was £10.2 million (2004: £11.9 million) and fully diluted earnings per share was 12.1p (2004: 14.1p). The decrease in profit compared to the prior year reflects the Group's increased profit bias towards the second half of this year. Recent acquisitions, particularly in the Corporatewear and Hospitality divisions are expected to generate a significant proportion of their business in the second half of this year. In addition the slow start to the year by our Drycleaning division is expected to skew its profits towards the second half of the year as our cost control measures take effect. Adjusted pre-tax profit, which excludes amortisation of intangibles and exceptional items, was £11.1 million (2004: £12.0 million) and adjusted fully diluted earnings per share, on the same basis, was 13.2p (2004: 14.3p). Exceptional items comprise acquisition restructuring costs (£0.6 million) and property related net income of £1.3 million. Following the significant number of acquisitions over the last 18 months we are currently reviewing the operational structure of each division in order to realise synergies available in the Group. We anticipate that the total cost in relation to the restructuring of businesses will be £3 million for the full year. We expect the reorganisation to result in annual savings of around £1 million with half of this amount benefiting 2005. With regard to property, we have disposed of a small group of trading properties realising cash proceeds of £3.4 million and a gain over book value of £2.3 million. We have also recognised an anticipated £1.0 million of costs in relation to the vacation of our existing site at Bootle. The Group's net debt position has increased by £44 million over the period, with net debt rising from £74.4 million at December 2004 to £118.4 million at June 2005. The main cash outflow has been the net cash spend on acquisitions of £34.1 million. In addition we have seen an increase in working capital of £7.8 million. This is largely a timing difference as we have increased stock levels of corporatewear ahead of several significant rollouts in the second half of the year to our blue chip customers. The Board has decided to pay an increased interim dividend of 4.4p per share (2004: 4.2p), an increase of 5%. This will be paid on the 21st October to shareholders on the register at close of business on 30th September. Bank Facility Since the period end we have signed a new financing agreement for a £200 million Revolving Credit Facility for a period of 5 years with 7 banks. The margin on the new facility is more favourable than the previous facility, which began to amortise at the end of June 2005. DIVISIONAL TRADING RESULTS Textile Rental and Hospitality Services Turnover increased by 12% to £61.2 million (2004: £54.6 million) with the majority of this rise, 6.5%, being organic growth. Operating profit excluding amortisation of intangibles and exceptional items was 8.1% lower than the first half of 2004 at £6.8 million (2004: £7.4 million). This was due to the increased seasonality of the hospitality business following the acquisition of HSS Events in the late spring of 2004. We are very encouraged by the first signs of organic revenue growth for several years in the Johnsons Apparelmaster business where revenue, excluding acquisitions, grew by 1%. This compares to a 5% decline in revenue the previous year and a fall of 16% from its peak in 2001. As anticipated, the margin has reduced from 2004 as costs move ahead at a slightly faster pace. We have continued to invest in our own business, to identify additional sales and marketing opportunities and to exploit production efficiencies that remain in this business. Market conditions in the workwear rental market are improving as production capacity decreases following the departure of several of our competitors from the industry. We expect this trend to continue in the immediate future. We have purchased the customer contracts from two of our smaller competitors for £3.7 million who were leaving the industry. The extra production has been absorbed in our existing facilities and should produce returns well in excess of our acquisition criteria. The Stalbridge Linen business is continuing its penetration of the premium hotel, restaurant and corporate hospitality market, again achieving substantial organic revenue growth of 28%. An additional laundry facility has been acquired in order to meet the increased production requirement. We see further growth potential within this expanding market and we are continuing the national roll-out of the brand. The results of the Johnson Hospitality Services (JHS) business have been affected by its increased seasonality. This follows the inclusion of a full year's trading of the HSS business, which was acquired in April 2004. The increased loss at the half-year of just over £1.0 million compared to 2004 is expected to be recouped through the main corporate hospitality sales months of July, September and December. We have decided to integrate JHS into Stalbridge to ensure a seamless service is delivered to our customers. We also expect to realise some production and cost efficiencies as a result of this action. Corporatewear Turnover increased to £39.6 million (2004: £10.5 million) and operating profit, excluding amortisation of intangibles and other exceptional items, to £4.1 million (2004: £1.0 million). This was mainly due to corporate activity following the acquisitions of Dimensions, Wessex and Yaffy in 2004 and DCC and Boyd Cooper this year. We are now the largest supplier of workwear and corporatewear in the UK, providing over 10 million garments to more than 2.2 million wearers. Our customers include major blue chip companies in the financial, retail, leisure, travel and workwear markets. In addition, we provide uniforms and protective outerwear for use by police, nurses and ambulance staff. The division increased its operating margin to 10.4% in the first half of 2005 compared to 9.5% in 2004. We expect to improve this further as we begin to take advantage of the synergies that are available to us. We have identified significant savings that can be achieved from combining the buying power of the division and through consolidation of the six companies' operating platforms. The businesses have continued to perform very well indeed with significant new business won in the retail, security, catering and public sector. In addition, we continue to re-sign existing customers as their contracts come up for renewal by emphasising the excellent design, service and quality of the products. We are also re-launching our catalogue sales business, an area where we have identified significant growth potential. We have achieved our objective of becoming market leader in this sector and continue to look at further organic and acquisition opportunities both within the UK and overseas. Drycleaning Turnover increased to £43.4 million (2004: £41.3 million) although operating profit, excluding amortisation of intangibles and exceptional items, reduced to £2.7 million (2004: £5.0 million). The increase in turnover reflects the inclusion of the Sketchley business, which was acquired in May 2004, for a full six months. The Sketchley business has now been fully integrated into the Johnson drycleaning operation and trading benefits are already being achieved. The trading conditions in the retail sector, led by weaker consumer demand, affected our business and we saw same source sales fall by 2.4% over the period. As the weak consumer demand became evident, we took action to improve the operating margin by reducing costs. We successfully reduced costs by £34,000 a week and remain prepared to take further action if necessary. We are continuing to improve the positioning of our shops by siting them within major supermarkets and by developing more drive-in sites. We remain clear market leader in UK drycleaning and are well-placed to respond to any increase in consumer spending. Following an unsatisfactory performance in 2004, the management of Jeeves was changed prior to the end of last year. Under the new management the cost base has been significantly reduced and all back office functions have been integrated into our existing drycleaning division. The roll-out of the GreenEarth(R) process has continued with 212 shops now converted. We remain committed to the conversion of the remaining shops over the next few years. We launched Johnson Fabric Restoration Service (JFRS) late last year and although loss-making it is performing better than budget. It has contributed losses of around £250,000 in the first half but is expected to be moving into profit next year. At the start of the year we purchased a small internet based laundry and drycleaning business offering a home collection and delivery service in London. We are now refining the model and intend to test the market in other UK cities. This is a potentially new and significant market for our drycleaning brands and laundry production capacity. Facilities Management and Specialist Supplies Turnover excluding costs recharged to customers increased to £27.1 million (2004: £19.3 million) and operating profit excluding amortisation of intangibles and other exceptional items increased to £1.4 million (2004: £0.9 million). Johnson Workplace Management Limited has continued to win new long-term contracts in both the public and private sectors, as reflected in the 9.2% organic growth in revenue achieved in the first half of the year. The acquisitions of ACE (Ascot) Ltd at the end of 2004 and Acame Ltd in January 2005 have added to the portfolio of added value services offered to existing customers, by bringing into the Group electrical, mechanical and engineering skills. These two companies have been combined and re-launched under the name ' Johnson Workplace Direct'. Alex Reid, the largest supplier of consumables to the drycleaning and laundry industry has achieved organic growth despite the difficult trading conditions. The sale of GreenEarth(R) licences both in the UK and Europe is continuing and offers an exciting opportunity for the future. IFRS As explained in the announcement made on 7th July, the Group is now required to report under International Financial Reporting Standards (IFRS) and the interim results are the first results of the Group to be reported under these new rules. Figures for June 2004 and December 2004 have been restated under IFRS and the required reconciliations included in this statement. All figures in this statement refer to reporting under IFRS. IT Investment As indicated in the 2004 annual report we identified the need for investment in the IT infrastructure and systems of the Group and we have commenced with the development of the new Enterprise Resource Planning system. The project remains on target in both time and implementation cost, with the first business employing the new system in the first quarter of 2006. Outlook During the first half, we have continued the considerable progress made over the last few years in reshaping the Group into a strong business with recurring revenues and opportunities in growth markets. Each of our four divisions has strong leadership and clear incentivised objectives to develop services and processes. We have started to combine the various businesses within each division to ensure best practice is adopted throughout, product-sourcing savings are captured and cross-selling opportunities are maximised. With our Corporatewear and Facilities Management businesses performing well in growing markets and with improving market conditions in the Textile Rental business, we are confident in the future of the Group. Trading conditions for our retail drycleaning division were difficult during the first half of the year and remain unpredictable. Subject to the comments above, we remain well placed to deliver another satisfactory outcome for the year as a whole. CONSOLIDATED INCOME STATEMENT 26 weeks 26 weeks 52 weeks ended ended ended 25th June 26th June 25th Dec 2005 2004 2004 Note £m £m £m 2 REVENUE 215.0 168.7 363.7 Costs recharged to customers (43.7) (43.0) (86.0) Revenue excluding costs recharged to customers 171.3 125.7 277.7 2 OPERATING PROFIT 14.1 14.2 27.3 2 OPERATING PROFIT BEFORE INTANGIBLES AMORTISATION AND EXCEPTIONAL 15.0 14.3 29.9 ITEMS Amortisation of intangible assets (1.6) (0.1) (0.6) 3 Exceptional items 0.7 - (2.0) 2 OPERATING PROFIT 14.1 14.2 27.3 Finance costs (net) (3.9) (2.3) (5.5) 4 PROFIT BEFORE TAXATION 10.2 11.9 21.8 5 Taxation (3.0) (3.7) (5.6) PROFIT FOR THE PERIOD 7.2 8.2 16.2 7 EARNINGS PER SHARE * Basic 12.4p 14.4p 28.3p Fully diluted 12.1p 14.1p 27.8p 6 ORDINARY DIVIDENDS PAID AND PROPOSED Interim dividend proposed 4.4p - - Interim dividend - 4.2p 4.2p Final dividend - - 14.3p * Earnings per share before intangibles amortisation and exceptional items are shown in Note 7. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE 26 weeks 26 weeks 52 weeks ended ended ended 25th June 26th June 25th Dec 2005 2004 2004 £m £m £m Actuarial (loss)/gain on defined benefit pension plans (5.0) - 0.2 Taxation in respect of actuarial loss 1.5 - - Net movement on reserves in respect of IAS 19 actuarial gains and (3.5) - 0.2 losses Adoption of IAS 39 (0.2) - - NET (EXPENSE)/INCOME RECOGNISED DIRECTLY IN EQUITY (3.7) - 0.2 Profit for the period 7.2 8.2 16.2 TOTAL RECOGNISED INCOME FOR THE PERIOD 3.5 8.2 16.4 CONSOLIDATED BALANCE SHEET As at As at As at 25th June 26th June 25th Dec 2005 2004 2004 Note £m £m £m ASSETS NON-CURRENT ASSETS Goodwill 124.9 91.9 108.3 Intangible assets 32.3 1.6 16.3 Property, plant and equipment 67.4 64.6 66.0 Rental items 27.6 22.3 24.5 Deferred tax assets 14.9 12.2 12.9 267.1 192.6 228.0 CURRENT ASSETS Inventories 29.9 9.7 19.8 Trade and other receivables 74.0 55.5 54.3 Cash and cash equivalents - 8.4 4.5 103.9 73.6 78.6 LIABILITIES CURRENT LIABILITIES Trade and other payables 31.9 20.9 25.1 Other creditors and accruals 63.5 46.8 50.1 Current income tax liabilities 3.1 3.1 2.0 Borrowings 7.4 0.6 4.2 Derivative financial instruments 0.2 - - 106.1 71.4 81.4 NET CURRENT (LIABILITIES)/ASSETS (2.2) 2.2 (2.8) NON-CURRENT LIABILITIES Borrowings 111.0 51.8 74.7 10 Retirement benefit obligations 39.8 34.6 34.4 Deferred tax liabilities 10.7 5.4 6.8 Provisions and other non-current liabilities 14.6 18.4 17.5 176.1 110.2 133.4 NET ASSETS 88.8 84.6 91.8 EQUITY CAPITAL AND RESERVES ATTRIBUTABLE TO THE COMPANY'S EQUITY HOLDERS 8 Called up share capital 5.9 5.8 5.8 8 Share premium 10.9 8.5 9.5 8 Other reserves 1.9 2.1 2.1 8 Retained earnings 70.1 68.2 74.4 TOTAL EQUITY 88.8 84.6 91.8 CONSOLIDATED CASH FLOW STATEMENT 26 weeks 26 weeks 52 weeks ended ended ended 25th June 26th June 25th Dec 2005 2004 2004 Note £m £m £m CASH FLOWS FROM OPERATING ACTIVITIES 4 Profit before taxation 10.2 11.9 21.8 Adjustments for: Finance income and expense 3.9 2.3 5.5 Depreciation and amortisation 14.2 10.8 22.8 Increase in net working capital (7.8) (0.3) (3.7) Profit on sale of property, plant and equipment (2.9) (0.6) (0.4) Other non-cash movements 0.2 (0.1) (1.1) Cash generated from operations 17.8 24.0 44.9 Finance costs (net) (3.3) (1.6) (4.2) Taxation paid (2.4) (2.3) (5.8) Net cash flows generated from operating activities 12.1 20.1 34.9 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of subsidiaries (net of cash acquired) (34.1) (2.1) (31.2) Proceeds from sale of investments in other companies - 0.2 1.1 Purchase of property, plant and equipment (4.5) (2.8) (4.6) Proceeds from sale of property, plant and equipment 4.6 1.0 1.5 Purchase of intangible assets (2.7) (0.2) (1.8) Purchase of textile rental items (12.0) (8.6) (19.4) Proceeds from sale of textile rental items 1.6 2.3 5.1 Net cash used in investing activities (47.1) (10.2) (49.3) CASH FLOWS FROM FINANCING ACTIVITIES 11 Net proceeds from borrowings 36.0 4.0 26.0 11 Repayments of borrowings (2.2) (0.3) (0.3) 11 Capital element of finance leases (0.5) (0.2) (0.5) Net proceeds from issue of share capital 1.5 0.6 1.6 Net proceeds from sale of own shares in relation to employee share - - 0.1 schemes Dividends paid to company shareholders (8.2) (7.8) (10.2) Net cash generated from financing activities 26.6 (3.7) 16.7 11 Net (decrease) / increase in cash and cash equivalents (8.4) 6.2 2.3 Cash and cash equivalents at beginning of period 4.5 2.2 2.2 Cash and cash equivalents at end of period (3.9) 8.4 4.5 NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1 BASIS OF PREPARATION These unaudited consolidated interim financial statements of Johnson Service Group PLC are for the six months ended 25th June 2005. They have been prepared for the first time in accordance with International Financial Reporting Standards (IFRS), and IFRS 1, First-time Adoption of IFRS, because they are part of the period covered by the Group's first IFRS financial statements for the year ending 31st December 2005. These interim financial statements have been prepared in accordance with those IFRS standards and IFRIC interpretations issued and endorsed, or issued and expected to be endorsed by the European Union (EU), as at the time of preparing these statements (September 2005). In addition the Group has elected to adopt the amendments of IAS 19, Employee Benefits, issued in December 2004 in advance of the effective date of 1st January 2006, as endorsement of these amendments by the EU is expected later this year. As a result the Group has recognised actuarial gains and losses arising on defined benefit pension plans in reserves. The IFRS standards and IFRIC interpretations that will be applicable at 31st December 2005, including those that will be applicable on an optional basis, are not known with certainty at the time of preparing these interim financial statements. The revised principal accounting policies set out on pages 17 to 18 are expected to be formally adopted by the Group when it prepares its first annual report for the year ending 31st December 2005. These standards will remain subject to further amendments and interpretative guidance from the International Accounting Standards Board (IASB) as well as ongoing review and endorsement by the EU. Consequently, the accounting policies are provisional and are subject to change. The accounting policies have been consistently applied to all the periods presented except for those relating to the classification and measurement of financial instruments. The Group has made use of the exemption available under IFRS 1 to only apply IAS 32 and IAS 39 from 26th December 2004. The Johnson Service Group PLC consolidated financial statements were prepared in accordance with UK Generally Accepted Accounting Principles (UK GAAP) until 25th December 2004. UK GAAP differs in some areas from IFRS. In preparing the Johnson Service Group PLC 2005 consolidated interim financial statements, management has amended certain accounting, valuation and consolidation methods applied in the UK GAAP financial statements to comply with IFRS. The comparative figures in respect of 2004 were restated to reflect these adjustments, except as described in the accounting policies below. The abridged profit and loss accounts, balance sheets and cash flow statements as at June 2005 and June 2004, are unaudited and have not been reviewed by the auditors. The profit and loss account, balance sheet and cash flow statement for December 2004 are abridged from the Group's full accounts for that year, as originally reported under UK GAAP, and as noted above, have subsequently been restated for transition to IFRS. Those UK GAAP accounts received an unqualified audit report and have been filed with the Registrar of Companies, and the auditors' report did not contain a statement under Section 237 (2) or (3) of the Companies Act 1985 (as amended). Reconciliations and descriptions of the effect of the transition from UK GAAP to IFRS on the Group's equity and its net income and cash flows are provided at the end of this report. 2 SEGMENT ANALYSIS At 25th June 2005, the Group is organised into four business segments: rental; corporatewear; drycleaning; facilities management and specialist supplies. The segment results for the 26 weeks ended 25th June 2005 are as follows: 26 weeks ended 26 weeks ended 52 weeks ended 25th June 26th June 25th Dec 2005 2004 2004 £m £m £m Revenue Rental 61.2 54.6 113.3 Corporatewear 39.6 10.5 37.6 Drycleaning 43.4 41.3 86.6 Facilities management and specialist supplies 70.8 62.3 126.2 215.0 168.7 363.7 Revenue excluding costs recharged to customers Rental 61.2 54.6 113.3 Corporatewear 39.6 10.5 37.6 Drycleaning 43.4 41.3 86.6 Facilities management and specialist supplies 27.1 19.3 40.2 171.3 125.7 277.7 Operating profit Rental 5.3 7.4 14.9 Corporatewear 2.5 1.0 3.2 Drycleaning 5.0 5.0 6.6 Facilities management and specialist supplies 1.3 0.8 2.6 14.1 14.2 27.3 Operating profit before intangibles amortisation and exceptional items Rental 6.8 7.4 14.9 Corporatewear 4.1 1.0 3.7 Drycleaning 2.7 5.0 8.6 Facilities management and specialist supplies 1.4 0.9 2.7 15.0 14.3 29.9 Revenue originates in the United Kingdom. 3 EXCEPTIONAL ITEMS 26 weeks ended 26 weeks ended 52 weeks ended 25th June 26th June 25th Dec 2005 2004 2004 £m £m £m Restructuring costs (0.6) - (2.0) Property disposals 2.3 - - Environmental provision (1.0) - - 0.7 - (2.0) Restructuring costs are in respect of the re-organisation of the operation and management of acquired businesses and comprise largely of redundancy costs and the write-off of fixed assets. Property disposals relate to the gain on disposal of a small group of trading properties and the environmental provision relates to the anticipated environmental remediation cost of vacating an existing site. 4 ADJUSTED PROFIT BEFORE TAXATION 26 weeks ended 26 weeks ended 52 weeks ended 25th June 26th June 25th Dec 2005 2004 2004 £m £m £m Profit before taxation 10.2 11.9 21.8 Intangibles amortisation 1.6 0.1 0.6 Exceptional items (0.7) - 2.0 Adjusted profit before taxation 11.1 12.0 24.4 5 TAXATION 26 weeks ended 26 weeks ended 52 weeks ended 25th June 26th June 25th Dec 2005 2004 2004 £m £m £m Taxation for the period: CURRENT TAX Current tax charge for the period 3.1 3.4 4.6 DEFERRED TAX Deferred tax charge for the period (0.1) 0.3 1.0 TOTAL CHARGE FOR TAXATION 3.0 3.7 5.6 The tax relief on exceptional items within the period has reduced UK corporation tax by £0.3 million (June 2004: £nil). There was no tax relief on intangibles amortisation within the period (June 2004: £nil). 6 DIVIDENDS 26 weeks ended 26 weeks ended 52 weeks ended 25th June 26th June 25th Dec 2005 2004 2004 £m £m £m ORDINARY DIVIDENDS PAID AND PROPOSED Interim dividend proposed 4.4p - - Interim dividend - 4.2p 4.2p Final dividend - - 14.3p The directors are proposing an interim dividend in respect of the financial year ending 31st December 2005 of 4.4p per share (2004: 4.2p) which will reduce shareholders' funds by £2.6 million (2004: £2.4 million). It will be paid on 21st October 2005 to shareholders who are on the register on 30th September 2005. In accordance with International Financial Reporting Standards, these financial statements do not reflect the dividend payable. 7 EARNINGS PER SHARE 26 weeks ended 26 weeks ended 52 weeks ended 25th June 26th June 25th Dec 2005 2004 2004 £m £m £m Profit attributable to Ordinary Shareholders 7.2 8.2 16.2 Exceptional items (net of taxation) (1.0) - 1.4 Intangibles amortisation (net of taxation) 1.6 0.1 0.5 Adjusted profit attributable to Ordinary Shareholders 7.8 8.3 18.1 Weighted average number of Ordinary shares 58,144,347 57,366,096 57,419,393 Fully diluted number of Ordinary shares 59,411,864 58,335,967 58,492,266 EARNINGS PER SHARE Basic 12.4p 14.4p 28.3p Fully diluted 12.1p 14.1p 27.8p ADJUSTED EARNINGS PER SHARE Basic 13.4p 14.5p 31.5p Fully diluted 13.2p 14.3p 30.9p Basic earnings per share is calculated using the weighted average number of shares in issue during the period, excluding those held by the ESOP, based on the profit attributable to Ordinary Shareholders. Adjusted earnings per share figures are given to exclude the effects of intangibles amortisation and exceptional items, all net of taxation. For fully diluted earnings per share, the weighted average number of Ordinary shares in issue is adjusted to assume conversion of all dilutive potential Ordinary shares. The Company has dilutive potential Ordinary shares arising from share options granted to employees where the exercise price is less than the average market price of the Company's Ordinary shares during the period. 8 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Share Share Other Retained Total capital premium reserves earnings equity £m £m £m £m £m Balance at 28th December 2003 5.7 8.0 2.1 67.7 83.5 Issue of share capital 0.1 0.5 - - 0.6 Profit for the period - - - 8.2 8.2 Dividends - - - (7.7) (7.7) Balance at 26th June 2004 5.8 8.5 2.1 68.2 84.6 Balance at 27th June 2004 5.8 8.5 2.1 68.2 84.6 Issue of share capital - 1.0 - - 1.0 Share options (value of employee - - - 0.5 0.5 services) Profit for the period - - - 8.0 8.0 Dividends - - - (2.5) (2.5) Net actuarial gain - - - 0.2 0.2 Balance at 25th December 2004 5.8 9.5 2.1 74.4 91.8 Adoption of IAS 39 - - (0.1) - (0.1) Balance at 26th December 2004 5.8 9.5 2.0 74.4 91.7 Issue of share capital 0.1 1.4 - - 1.5 Share options (value of employee - - - 0.2 0.2 services) Profit for the period - - - 7.2 7.2 Dividends - - - (8.2) (8.2) Cash flow hedge (transfer to net - - 0.1 - 0.1 profit) Cash flow hedge (fair value loss in - - (0.2) - (0.2) period) Net actuarial loss - - - (3.5) (3.5) Balance at 25th June 2005 5.9 10.9 1.9 70.1 88.8 9 BUSINESS COMBINATIONS Acquisitions Businesses acquired during the period are shown below: FAIR VALUE Tangible Separately Consideration assets identified and costs acquired intangibles Goodwill £m £m £m £m DCC 24.2 5.5 10.0 8.7 Others 13.8 3.6 5.9 4.3 38.0 9.1 15.9 13.0 Movements in respect of deferred tax on intangibles - (3.5) - 3.5 Adjustments to prior period 0.3 0.2 - 0.1 Total acquisitions in the period 38.3 5.8 15.9 16.6 Consideration has been satisfied by: £m Cash consideration payable 34.7 Deferred consideration 2.0 Loan notes issued 1.3 Costs relating to previous year acquisitions 0.3 38.3 The deferred consideration relates to the acquisitions as follows: £m DCC 1.3 Others 0.7 2.0 The deferred consideration is dependent upon the achievement of certain performance targets. Amounts provided represent the maximum amount payable should all targets be met. Fair value of assets acquired on current period acquisitions £m Tangible fixed assets - property, plant and equipment 2.4 Tangible fixed assets - rental items 1.2 Inventories 6.3 Trade and other receivables 5.5 Cash and cash equivalents 1.1 Creditors and other liabilities (7.4) 9.1 Adjustments made to the fair value of assets of businesses acquired in 2005 are provisional due to the short period of ownership. Adjustments in respect of acquisitions in 2004 arose due to additional costs and increased knowledge of assets and liabilities resulting from a longer period of ownership. 10 RETIREMENT BENEFITS The Group has applied the requirements of IAS 19 Employee Benefits (revised December 2004) to its employee pension schemes and post-retirement healthcare benefits. The adjustment to net assets of £25.5 million as at December 2004, as previously reported in the IFRS Impact Statement, comprised of a £34.4 million gross liability, an associated deferred tax asset of £10.4 million and the combined reversal of the previously recognised SSAP24 asset and a movement due to the variation in the method of valuing scheme assets as prescribed by IAS 19 of £1.5 million. Following discussions with the Group's appointed actuary it has been identified that the gross provision required at 25th June 2005 should be increased to £39.8 million. This is as a result of the scheme assets and liabilities performing differently to previous assumptions. A full actuarial valuation of the assets and liabilities of the scheme as at April 2005 is in progress, and any resultant changes to the valuation will be reflected within the full year financial statements to 31st December 2005. The gross retirement benefit liability and associated deferred tax asset thereon, together with the net liability is shown below. As at As at As at 25th June 26th June 25th Dec 2005 2004 2004 £m £m £m Retirement benefit liability (39.8) (34.6) (34.4) Deferred tax asset thereon 12.1 10.4 10.4 Net liability (27.7) (24.2) (24.0) 11 ANALYSIS OF NET DEBT Acquisitions At 25th (excluding Other At 25th Dec Cash cash and non-cash June 2004 flow overdrafts) changes 2005 £m £m £m £m £m Cash and cash equivalents 4.5 (8.4) - - (3.9) Debt due within one year (3.2) 2.2 - (1.3) (2.3) Debt due after more than one year (69.9) (36.0) - (0.1) (106.0) Finance leases (5.8) 0.5 (0.1) (0.8) (6.2) Total (74.4) (41.7) (0.1) (2.2) (118.4) 12 SUBSEQUENT EVENTS Bank facility Since the period end the Group has signed a new financing agreement for a £200 million Revolving Credit Facility for a period of five years with seven banks. 13 PUBLISHED INTERIM STATEMENT Copies of the interim report are to be sent to Shareholders and will be available to members of the public at the Company's registered office at Mildmay Road, Bootle, Merseyside L20 5EW. The report can also be accessed on the internet at www.johnsonplc.com SUMMARY OF THE REVISED PRINCIPAL ACCOUNTING POLICIES AS A RESULT OF THE ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS Consolidation The financial statements consolidate the results of Johnson Service Group PLC and its subsidiary undertakings. The accounting periods of subsidiary undertakings are co-terminous with those of the Company. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Subsidiaries' accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable tangible and intangible net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Group's share of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. Foreign currency translation The consolidated financial statements are presented in sterling, which is the Company's functional and presentational currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except where hedge accounting is applied as explained below. Accounting for derivative financial instruments and hedging activities From 28th December 2003 to 25th December 2004 Derivative financial instruments are designated 'hedging' or 'non-hedging' instruments. The transactions that can meet the conditions for hedge accounting, according to the Group's policy for risk management, are classified as hedging transactions; the others, although set up for the purpose of managing risk (since the Group's policy does not permit speculative transactions), have been designated as 'Trading'. The Group records derivative financial instruments at cost. The gains and losses on derivative financial instruments are included in the income statement on maturity to match the underlying hedge transactions where relevant. For foreign exchange instruments designated as hedges, the premium (or discount) representing the difference between the spot exchange at the inception of the contract and the forward exchange rate is included in the income statement, in finance costs, in accordance with the accrual method. For interest rate instruments designated as hedges, the interest rate differential is included in the income statement, in finance costs, in accordance with the accrual method, offsetting the effects of the hedged transaction. Derivative financial instruments designated as trading instruments are valued at year-end market value, and the difference between the nominal contract value and fair value is recorded in the income statement under finance cost. From 26th December 2004 Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of the variability of cash flows (cash flow hedge). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of hedged items. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for example, when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Such derivatives are classified as at fair value through profit or loss, and changes in their fair value are recognised immediately in the income statement. Fair value estimation The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price. The nominal value less estimated credit adjustments of trade receivables is assumed to approximate to their fair values. The fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. Intangible Assets (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in non-current assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. (ii) Intangible assets Intangible assets comprise of brands and customer contracts and relationships, recognised at cost or fair value. They have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of the intangible assets over their estimated useful lives (4 - 20 years). (iii) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software, and are included on the balance sheet within intangible assets. Costs are amortised over their estimated useful lives (4 - 10 years). Costs associated with the general development and maintenance of computer software programs are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the costs of employees involved in software development and an appropriate portion of relevant overheads. Computer software development costs recognised as assets are amortised over their estimated useful lives (not exceeding 10 years). Deferred taxation Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and that are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Employee benefits (i) Pension obligations Group companies operate various pension schemes. The schemes are funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated periodically by an independent actuary. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that have terms to maturity approximating to the terms of the related pension liability. Current service costs are recognised in operating costs in the income statement. Interest cost on plan liabilities and the expected return on plan assets are recognised in finance costs. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to the consolidated statement of recognised income and expense. For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. (ii) Share-based compensation The Group operates a number of equity-settled, share-based compensation plans. The economic cost of awarding shares and share options to employees is recognised as an expense in the income statement equivalent to the fair value of the benefit awarded. The fair value is determined by reference to option pricing models, principally Binomial and Monte Carlo models. The charge is recognised in the income statement over the vesting period of the award. At each balance sheet date, the Group revises its estimate of the number of options that are expected to become exercisable. Any revision to the original estimates is reflected in the income statement with a corresponding adjustment to equity immediately to the extent it relates to past service and the remainder over the rest of the vesting period. Dividend distribution Under IAS 10 (Events after the Balance Sheet Date) dividends to holders of equity instruments declared after the balance sheet date are not recognised as a liability as at the balance sheet date. Dividend distribution to the Company's shareholders is recognised in the Group's financial statements in the period in which the dividends are declared to the Company's shareholders. TRANSITION FROM ACCOUNTING PRACTICES GENERALLY ACCEPTED IN THE UK TO INTERNATIONAL FINANCIAL REPORTING STANDARDS Johnson Service Group PLC previously reported the impact of the adoption of International Financial Reporting Standards (IFRS) on the 2004 comparative financial information in July of this year. Set out below, in accordance with the provisions of IFRS 1 'First-time Adoption of International Financial Reporting Standards' are the reconciliations of total equity and reserves and income from UK GAAP to IFRS. RECONCILIATION OF UK GAAP PROFIT AND LOSS ACCOUNT TO IFRS INCOME STATEMENT FOR THE 26 WEEKS ENDED 26th JUNE 2004 As previously Effect of As restated reported under under IFRS UK GAAP 26th June transition 26th June 2004 to IFRS 2004 £m £m £m REVENUE 168.7 - 168.7 Costs recharged to customers (43.0) - (43.0) Revenue excluding costs recharged to customers 125.7 - 125.7 OPERATING PROFIT 10.8 3.4 14.2 OPERATING PROFIT BEFORE INTANGIBLES AMORTISATION AND EXCEPTIONAL ITEMS 14.0 0.3 14.3 Amortisation of goodwill (3.1) 3.1 - Amortisation of intangible assets (0.1) - (0.1) OPERATING PROFIT 10.8 3.4 14.2 Finance costs (net) (1.9) (0.4) (2.3) PROFIT BEFORE TAXATION 8.9 3.0 11.9 Taxation (3.6) (0.1) (3.7) PROFIT FOR THE PERIOD 5.3 2.9 8.2 RECONCILIATION OF UK GAAP PROFIT AND LOSS ACCOUNT TO IFRS INCOME STATEMENT FOR THE 52 WEEKS ENDED 25th DECEMBER 2004 As previously Effect of As restated reported under under IFRS UK GAAP 25th Dec transition 25th Dec 2004 to IFRS 2004 £m £m £m REVENUE 364.0 (0.3) 363.7 Costs recharged to customers (86.0) - (86.0) Revenue excluding costs recharged to customers 278.0 (0.3) 277.7 OPERATING PROFIT 20.4 6.9 27.3 OPERATING PROFIT BEFORE INTANGIBLES AMORTISATION AND EXCEPTIONAL ITEMS 29.6 0.3 29.9 Amortisation of goodwill (7.0) 7.0 - Amortisation of intangible assets (0.2) (0.4) (0.6) Exceptional items (2.0) - (2.0) OPERATING PROFIT 20.4 6.9 27.3 Finance costs (net) (4.7) (0.8) (5.5) PROFIT BEFORE TAXATION 15.7 6.1 21.8 Taxation (6.2) 0.6 (5.6) PROFIT FOR THE PERIOD 9.5 6.7 16.2 RECONCILIATION OF UK GAAP BALANCE SHEET TO IFRS BALANCE SHEET AS AT 27th DECEMBER 2003 As previously Effect of As restated reported under under IFRS UK GAAP 27th Dec transition 27th Dec 2003 to IFRS 2003 £m £m £m ASSETS NON-CURRENT ASSETS Goodwill 89.8 (0.7) 89.1 Intangible assets - 1.3 1.3 Property, plant and equipment 64.2 (0.6) 63.6 Rental items 21.4 - 21.4 Deferred tax assets - 12.9 12.9 175.4 12.9 188.3 CURRENT ASSETS Inventories 8.8 - 8.8 Trade and other receivables 53.5 (5.8) 47.7 Cash and cash equivalents 2.2 - 2.2 64.5 (5.8) 58.7 LIABILITIES CURRENT LIABILITIES Trade and other payables 12.8 - 12.8 Other creditors and accruals 55.5 (6.6) 48.9 Current income tax liabilities 2.4 - 2.4 Borrowings 0.3 - 0.3 71.0 (6.6) 64.4 NET CURRENT LIABILITIES (6.5) 0.8 (5.7) NON-CURRENT LIABILITIES Borrowings 45.3 0.3 45.6 Retirement benefit obligations 3.8 30.7 34.5 Deferred tax liabilities 0.7 2.3 3.0 Provisions and other non-current liabilities 14.2 1.8 16.0 64.0 35.1 99.1 NET ASSETS 104.9 (21.4) 83.5 EQUITY CAPITAL AND RESERVES ATTRIBUTABLE TO THE COMPANY'S EQUITY HOLDERS Called up share capital 5.7 - 5.7 Share premium account 8.0 - 8.0 Revaluation reserve 8.5 (8.5) - Other reserves 2.1 - 2.1 Retained earnings 80.6 (12.9) 67.7 TOTAL EQUITY 104.9 (21.4) 83.5 RECONCILIATION OF NET ASSETS PREVIOUSLY REPORTED UNDER UK GAAP TO NET ASSETS AS RESTATED UNDER IFRS AS AT 27TH DECEMBER 2003 £m £m NET ASSETS AS PREVIOUSLY REPORTED UNDER UK GAAP 104.9 IFRS adjustments in respect of: Dividends 7.8 Share options 0.3 Pensions and healthcare benefits (25.6) Goodwill amortisation - Recognition of intangibles - Other (3.9) (21.4) REVISED NET ASSETS AS RESTATED UNDER IFRS 83.5 RECONCILIATION OF UK GAAP BALANCE SHEET TO IFRS BALANCE SHEET AS AT 26th JUNE 2004 As previously Effect of As reported under restated UK GAAP under IFRS 26th June transition 26th June 2004 to IFRS 2004 £m £m £m ASSETS NON-CURRENT ASSETS Goodwill 86.8 5.1 91.9 Intangible assets - 1.6 1.6 Property, plant and equipment 65.6 (1.0) 64.6 Rental items 22.3 - 22.3 Deferred tax assets - 12.2 12.2 174.7 17.9 192.6 CURRENT ASSETS Inventories 9.7 - 9.7 Trade and other receivables 66.2 (10.7) 55.5 Cash and cash equivalents 8.4 - 8.4 84.3 (10.7) 73.6 LIABILITIES CURRENT LIABILITIES Trade and other payables 20.9 - 20.9 Other creditors and accruals 53.1 (6.3) 46.8 Current income tax liabilities 3.1 - 3.1 Borrowings 0.6 - 0.6 77.7 (6.3) 71.4 NET CURRENT ASSETS 6.6 (4.4) 2.2 NON-CURRENT LIABILITIES Borrowings 51.5 0.3 51.8 Retirement benefit obligations 3.6 31.0 34.6 Deferred tax liabilities 1.2 4.2 5.4 Provisions and other non-current liabilities 16.6 1.8 18.4 72.9 37.3 110.2 NET ASSETS 108.4 (23.8) 84.6 EQUITY CAPITAL AND RESERVES ATTRIBUTABLE TO THE COMPANY'S EQUITY HOLDERS Called up share capital 5.8 - 5.8 Share premium account 8.5 - 8.5 Revaluation reserve 8.3 (8.3) - Other reserves 2.1 - 2.1 Retained earnings 83.7 (15.5) 68.2 TOTAL EQUITY 108.4 (23.8) 84.6 RECONCILIATION OF NET ASSETS PREVIOUSLY REPORTED UNDER UK GAAP TO NET ASSETS AS RESTATED UNDER IFRS AS AT 26TH JUNE 2004 £m £m NET ASSETS AS PREVIOUSLY REPORTED UNDER UK GAAP 108.4 IFRS adjustments in respect of: Dividends 2.4 Share options 0.3 Pensions and healthcare benefits (25.5) Goodwill amortisation 3.1 Recognition of intangibles - Other (4.1) (23.8) REVISED NET ASSETS AS RESTATED UNDER IFRS 84.6 RECONCILIATION OF UK GAAP BALANCE SHEET TO IFRS BALANCE SHEET AS AT 25th DECEMBER 2004 As previously Effect of As restated reported under under IFRS UK GAAP 25th Dec transition 25th Dec 2004 to IFRS 2004 £m £m £m ASSETS NON-CURRENT ASSETS Goodwill 111.4 (3.1) 108.3 Intangible assets - 16.3 16.3 Property, plant and equipment 68.3 (2.3) 66.0 Rental items 24.5 - 24.5 Deferred tax assets - 12.9 12.9 204.2 23.8 228.0 CURRENT ASSETS Inventories 19.8 - 19.8 Trade and other receivables 59.8 (5.5) 54.3 Cash and cash equivalents 4.5 - 4.5 84.1 (5.5) 78.6 LIABILITIES CURRENT LIABILITIES Trade and other payables 25.1 - 25.1 Other creditors and accruals 56.7 (6.6) 50.1 Current income tax liabilities 2.0 - 2.0 Borrowings 4.2 - 4.2 88.0 (6.6) 81.4 NET CURRENT LIABILITIES (3.9) 1.1 (2.8) NON-CURRENT LIABILITIES Borrowings 74.4 0.3 74.7 Retirement benefit obligations 3.4 31.0 34.4 Deferred tax liabilities 1.3 5.5 6.8 Provisions and other non-current liabilities 15.7 1.8 17.5 94.8 38.6 133.4 NET ASSETS 105.5 (13.7) 91.8 EQUITY CAPITAL AND RESERVES ATTRIBUTABLE TO THE COMPANY'S EQUITY HOLDERS Called up share capital 5.8 - 5.8 Share premium account 9.5 - 9.5 Revaluation reserve 8.0 (8.0) - Other reserves 2.1 - 2.1 Retained earnings 80.1 (5.7) 74.4 TOTAL EQUITY 105.5 (13.7) 91.8 RECONCILIATION OF NET ASSETS PREVIOUSLY REPORTED UNDER UK GAAP TO NET ASSETS AS RESTATED UNDER IFRS AS AT 25TH DECEMBER 2004 £m £m NET ASSETS AS PREVIOUSLY REPORTED UNDER UK GAAP 105.5 IFRS adjustments in respect of: Dividends 8.2 Share options 0.4 Pensions and healthcare benefits (25.5) Goodwill amortisation 7.0 Recognition of intangibles (0.4) Other (3.4) (13.7) REVISED NET ASSETS AS RESTATED UNDER IFRS 91.8 RECONCILIATION OF CASH FLOWS FOR THE 26 WEEKS ENDED 26th JUNE 2004 Effect of transition UK GAAP to IFRS IFRS £m £m £m CASH FLOWS FROM OPERATING ACTIVITIES Profit before taxation 8.9 3.0 11.9 Adjustments for: Finance income and expense 1.9 0.4 2.3 Depreciation and amortisation 13.9 (3.1) 10.8 Decrease / (increase) in net working capital (0.4) 0.1 (0.3) Profit on sale of fixed assets (0.6) - (0.6) Other non-cash movements 0.3 (0.4) (0.1) Cash generated from operations 24.0 - 24.0 The adoption of IFRS has had no further impact on the June 2004 cash flow position of the Group, hence only the movements in the reconciliation of profit before taxation to cash generated from operations have been disclosed. RECONCILIATION OF CASH FLOWS FOR THE 52 WEEKS ENDED 25th DECEMBER 2004 Effect of transition UK GAAP to IFRS IFRS £m £m £m CASH FLOWS FROM OPERATING ACTIVITIES Profit before taxation 15.7 6.1 21.8 Adjustments for: Finance income and expense 4.7 0.8 5.5 Depreciation and amortisation 29.4 (6.6) 22.8 Decrease / (increase) in net working capital (3.9) 0.2 (3.7) Profit on sale of fixed assets (0.4) - (0.4) Other non-cash movements (0.6) (0.5) (1.1) Cash generated from operations 44.9 - 44.9 The adoption of IFRS has had no further impact on the December 2004 cash flow position of the Group, hence only the movements in the reconciliation of profit before taxation to cash generated from operations have been disclosed. PRINCIPAL ACCOUNTING POLICY CHANGES AND ADJUSTMENTS The revised 2004 financial statements have been prepared under the historical cost convention. As permitted by IFRS 1, the following optional exemptions from full retrospective application of IFRS accounting standards have been adopted: • Business combinations - the Group has elected not to apply IFRS 3 retrospectively to business combinations that took place before the date of transition. As a result, in the opening balance sheet, the net book value of goodwill arising from past business combinations remains as stated under UK GAAP at 27th December 2003. The provisions of IFRS 3 have been applied prospectively from 28th December 2003. • Valuation of properties - the Group has previously not adopted a policy of revaluation but, as permitted by the transitional provisions of FRS15, the carrying amounts of freehold and long leasehold properties reflected previous valuations. As allowed by IFRS 1, the Group has now elected to treat the revalued amount of properties at 28th December 2003 as deemed cost as at that date and will not revalue in future. IFRS 1 also provides three mandatory exemptions to full retrospective application of International Financial Reporting Standards: • Derecognition of financial assets and financial liabilities - the IAS 39 derecognition requirements are applied from 1st January 2001. Assets and liabilities derecognised before this date are not recognised in the first IFRS financial statements. • Hedge accounting - hedge accounting can be applied to transactions that satisfy the hedge accounting criteria in IAS 39 prospectively from the date of transition. Hedging relationships cannot be designated retrospectively and the supporting documentation cannot be created retrospectively. • Estimates - hindsight is not used to create or revise estimates. Estimates previously made under UK GAAP can only be revised to correct errors and for changes to accounting policies. The principal changes to the accounting policies of the Group as a result of the adoption of IFRS are outlined below. 1. IAS 10 Events after the balance sheet date Under IAS 10, dividends proposed after the balance sheet date do not meet the definition of a liability as at the period end and are therefore not accrued. Consequently, proposed dividends previously reported under UK GAAP have been reversed under IFRS. 2. IFRS 2 Share based payments In accordance with the transitional rules of IFRS 1, IFRS 2 has been applied to share options granted after 7th November 2002 that have not vested by the 26th December 2004. The fair value of employee share options (under the Unapproved Share Option Scheme and the SAYE scheme) have been calculated using a suitable valuation model in accordance with the rules set out in IFRS 2. The costs of the share options have been charged to the Income Statement over the period in which the options vest, and are adjusted to reflect the expected and actual levels of vesting. Under UK GAAP the charge for share based payments only applied to grants made at a discount to their market value and was based on intrinsic value. 3. IAS 19 Employee benefits The Group has applied the requirements of IAS 19 (revised December 2004) to defined benefit pension schemes, post-retirement healthcare and life insurance benefits. The actuarial assets and liabilities of these schemes have been shown on the balance sheet and the movement thereon has been reflected in the statement of recognised income and expense. As a result, obligations are measured at discounted present value and plan assets are recorded at fair value. The operating and financing costs are recognised separately in the Income Statement; service costs are spread over the service lives of employees (in open schemes) and financing costs are recognised in periods as they arise. The transitional adjustment of £25.5 million to net assets at December 2004 also includes the reversal of the SSAP 24 asset, net of deferred taxation. The IAS 19 liability is broadly similar to the FRS 17 liability disclosed in the 2004 annual report, the difference being due to the variation in the method of valuing scheme assets as prescribed by IAS 19. The Group has elected to disclose current service costs as a charge against operating profit whilst the net return on pension assets and interest expense on pension liabilities is charged to interest. Whilst the total pension costs charged to income under SSAP 24 and IAS 19 are broadly similar, the difference in the relative split between operating costs and finance costs results in an improvement of £0.7 million to the 2004 full year operating profit. 4. IAS 38 Goodwill Under IFRS, goodwill arising on acquisition is capitalised and subject to an annual impairment review. Under UK GAAP, goodwill was amortised over its estimated useful life. In the year to 25th December 2004, goodwill amortisation of £7.0 million was expensed to the profit and loss account in accordance with UK GAAP. Under IFRS, this charge has been reversed from the Group's income statement and added back to the net book value of goodwill. For acquisitions made during 2004, £13.9 million of previously identified goodwill has been reclassified as separately identifiable intangible assets, together with other reclassifications from goodwill to intangible assets of £0.4 million. The identification of the intangible assets on 2004 business combinations has resulted in the recognition of a £4.2 million deferred tax liability, together with a corresponding further increase to goodwill. The useful economic life of the intangible assets identified ranges between 4 and 20 years and, consequently, additional amortisation of £0.4 million has been charged to profit before tax under IFRS. 5. Other adjustments The 2004 income statement and balance sheet have been further affected by other minor changes to accounting treatment as a result of IFRS adoption. The net effect of these adjustments to profit after tax and net assets is an increase of £0.4 million (reduction of adjusted PBT and adjusted operating profit of £0.2 million) and a decrease of £3.4 million, respectively. These changes have arisen as a result of the reclassification of certain property leases from operating to finance, the revision of residual values on freehold properties, deferred taxation treatment and changes to deferred revenue and employee benefit balances. This information is provided by RNS The company news service from the London Stock Exchange

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