Preliminary Results - Part 2

Burberry Group PLC 22 May 2003 PART 2 1. Basis of preparation Burberry Group is a luxury goods manufacturer, wholesaler and retailer in Europe, North America and Asia Pacific; licensing activity is also carried out, principally in Japan. All of the companies which comprise the Burberry Group are owned by Burberry Group plc ('the Company') directly or indirectly. Prior to the completion of the initial public offering in July 2002, ownership of these companies was transferred to Burberry Group plc (formerly Burberry Group Limited), which was incorporated on 30 October 1997 in England and Wales. This annual report comprises the audited results for the twelve months ended 31 March 2003 and 2002. The pro forma financial information for the twelve months ended 31 March 2002 has been extracted from the Listing Particulars of the Company, dated 12 July 2002 and has only been presented where it differs from statutory financial information. The principal reason for the difference arising is due to the reclassification of certain balances for statutory reporting purposes which were previously reported as part of GUS investment in Burberry Group in the Listing Particulars. The proforma reconciliation of movement in Shareholders' Funds for the year ended 31 March 2003 has been presented to reconcile the GUS investment in Burberry Group at 31 March 2002 (as presented in the Listing Particulars of the Company) to the Shareholders' Funds as at 31 March 2003. The financial information has been prepared by consolidating (or combining proforma information only) the historical financial information for each of the companies that comprise Burberry Group from applicable individual financial returns of these companies for the years ended 31 March 2003 and 2002. As at 31 March 2002, the individual financial returns were prepared for GUS group consolidation purposes and have been adjusted for relevant items previously recorded only at a GUS plc level. Prior to flotation Burberry Group was reorganised, as described below, and a legal statutory group was formed. As a consequence a statutory consolidation has been prepared for the twelve months ended 31 March 2003 with comparative information presented for the year to 31 March 2002. Up until flotation Burberry Group was a member of the GUS group, and relied on other GUS group companies to provide administration, management and other services including, but not limited to, rental of premises, management information systems, accounting and financial reporting, treasury, taxation, cash management, insurance and insurance management, human resources, employee benefit administration, payroll, professional, logistics and distribution services. Burberry Group has been charged costs, recorded in the profit and loss account, by other GUS group companies for some of these services. Although these charges are intended broadly to reflect the costs that would apply on an arm's length basis, it is possible that the terms of the relevant transactions would have been different if the transacting partners had not been connected with Burberry Group. On flotation these arrangements were formalised; the cost impact on Burberry Group of these formalised arrangements is not material. The tax charge for the year ended 31 March 2002 was determined based on the tax charges recorded by Burberry Group companies in their local statutory accounts as well as certain adjustments made for GUS group consolidation purposes. The tax charges recorded in the profit and loss account up to 31 March 2002 have been affected by the taxation arrangements within the GUS group, and are not necessarily representative of the tax charges that would have been reported had Burberry Group been an independent group. The tax charges recorded in the year ended 31 March 2003 reflect the impact of the reorganisation, which occurred prior to flotation, as described below. Interest income and expense, as well as the foreign currency loss on loans with GUS (prior to flotation) recorded in the profit and loss account for both periods, have been affected by the financing arrangements within GUS group prior to flotation, and are not necessarily representative of the amounts that would have been reported had Burberry Group been independent. The rate of interest applying to funding accounts within GUS group prior to flotation was determined by GUS plc. Since flotation, funding arrangements and interest rate risk have been managed by Burberry Group. 1 Basis of preparation (continued) Prior to flotation, as shown in the pro forma information, the net assets of Burberry Group are represented by the cumulative investment of GUS group in Burberry Group (shown as 'GUS investment in Burberry Group'). All non-trading transactions between Burberry Group and GUS group have been reflected as movements in 'GUS investment in Burberry Group'. Prior to flotation the GUS investment in Burberry Group comprised: a) Assets and liabilities not forming part of Burberry Group after flotation. These assets and liabilities have been transferred on or before flotation to GUS group companies in part settlement of the loans outstanding between GUS group and Burberry Group; b) Loans due to and from GUS group companies. These amounts were settled fully either as part of the Burberry Group reorganisation with shares issued to GUS group and loan repayments, or by the waiver of such loans by GUS group; and c) Share capital and reserves of Burberry Group companies. In the cash flow statements up to 31 March 2002, the movements in those balances in (a) and (b) above represent the cash transactions undertaken by other GUS group companies on behalf of Burberry Group. The balances in (a) and (b) above are referred to as 'GUS group balances' in the 'Reconciliation of movement in Shareholders' funds/ GUS investment in Burberry Group', the 'Group cash flow statements', the 'Reconciliation of net cash flow to movement in net funds' and in the 'Analysis of net funds'. Burberry Group Reorganisation Immediately prior to the flotation on the London Stock Exchange, a reorganisation of Burberry Group took place resulting in Burberry Group directly owning all Burberry Group companies. Prior to this, a number of Burberry Group entities and certain Burberry-related assets and liabilities (together 'the Net Assets') were held underneath GUS group companies although Burberry Group indirectly controlled them and had the economic rights to, and was exposed to the risks in, the Net Assets. The Net Assets were accounted for as quasi- subsidiaries in accordance with FRS 5, 'Reporting the substance of transactions' and were thus consolidated as if their legal ownership rested with Burberry Group. The reorganisation involved the acquisition by Burberry Group of the legal ownership of the Net Assets and the disposal to GUS group of those assets and liabilities which did not form part of the Burberry Group post flotation. Burberry Group financed this reorganisation using loans from GUS group; such loans were repaid by a rights issue of ordinary share capital to GUS group (Â£486.7m), by loan repayment out of the proceeds of the Company's flotation on the London Stock Exchange (Â£250.5m) and by the waiver of the remaining debt (Â£37.6m) by GUS group. These transactions created a premium on the legal acquisition of the Net Assets of Â£704.1m ('the Premium'). The accounting treatment required by Schedule 4A to the Companies Act 1985 would recognise the Premium as goodwill. However, the directors consider that, in substance, the Premium represents the value that has been transferred outside of Burberry Group as a result of these transactions. In effect, Burberry Group made a payment to GUS group for assets that it already controlled prior to the reorganisation. Consequently, in order to meet the overriding requirement of the Companies Act 1985 to show a true and fair view, the Premium has been treated as a distribution to GUS group out of the consolidated reserves of Burberry Group ('the Deemed Distribution'). The directors consider that it is not meaningful to quantify the effects of this departure from the requirements of the Companies Act 1985. As a result of the Deemed Distribution, a net deficit arises on the accumulated profit and loss account in the Burberry Group consolidated balance sheet. In order to eliminate this deficit on consolidation an other reserve of Â£704.1m was created in the Company's own balance sheet by the transfer of this sum from the share premium account, following High Court approval of the capital reduction, shortly before the admission of the Company's ordinary shares to trading by the London Stock Exchange. 1 Basis of preparation (continued) This other reserve will be classified as distributable once all the Company's creditors in existence on 17 July 2002 (the date of approval of the capital reduction) have been settled fully. A capital reserve of Â£6.6m was also created as part of the reorganisation. Acquisitions The results of undertakings acquired are included in the financial information from the effective date of acquisition. On the acquisition of a company or business, all of its assets and liabilities that exist at the date of acquisition are recorded at their fair values reflecting their condition at that date. All changes to those assets and liabilities and the resulting gains and losses after the date of acquisition are dealt with in the profit and loss account. 2 Accounting policies The consolidated financial information has been prepared under the historical cost convention, modified by the revaluation of certain fixed assets, and in accordance with applicable accounting standards in the United Kingdom. The principal accounting policies are: a) Turnover Turnover, which is stated excluding VAT and other sales taxes, is the amount receivable for goods supplied (less returns, trade discounts and allowances) and royalties receivable. Wholesale sales are recognised when goods are despatched to trade customers, with provisions made for expected returns and allowances as necessary. Retail sales, returns and allowances are reflected at the dates of transactions with consumers. Royalty receivable from licensees is accrued as earned on the basis of the terms of the relevant royalty agreement which, in the case of Japanese licenses, is on the basis of production volumes. b) Intangible fixed assets Goodwill For acquisitions of companies or businesses made on or after 1 April 1998, goodwill (being the excess of purchase consideration over the fair value of net assets acquired) is capitalised as an intangible fixed asset. Fair values are attributed to the identifiable assets and liabilities that existed at the date of acquisition, reflecting their condition at that date. Adjustments are also made to bring the accounting policies of acquired businesses into alignment with those of Burberry Group. Goodwill on acquisitions prior to 1 April 1998 was written off to reserves in the year of acquisition. On the disposal of a business, any goodwill previously written off against reserves in Burberry Group is included in the profit or loss on disposal. 2 Accounting policies (continued) Goodwill on acquisitions after 1 April 1998 is capitalised and amortised by equal annual instalments over its estimated useful economic life, not exceeding 20 years, taking into account the nature of the business acquired and other competitive considerations. The useful economic life of goodwill arising is determined on a case by case basis. Impairment reviews are performed if events or changes in circumstances indicate that the carrying value may not be recoverable. Trademarks and other intellectual property The cost of securing and renewing trademarks and other intellectual property is capitalised as an intangible fixed asset and amortised by equal annual instalments over its useful economic life, typically 10 years. The useful economic life of trademarks and other intellectual property is determined on a case by case basis, typically in accordance with the terms of the underlying agreement. Impairment reviews are performed if events or changes in circumstances indicate that the carrying value may not be recoverable. c) Tangible fixed assets and depreciation Tangible fixed assets are stated at cost or revalued amount where relevant, less depreciation. Depreciation Depreciation of tangible fixed assets is calculated to write-off the cost or revalued amount, less residual value, of the assets in equal annual instalments over their estimated useful lives at the following rates: Land Not depreciated Freehold buildings Up to 50 years Leaseholds - less than 50 years expired Over the unexpired term of the lease Plant, machinery, fixtures and fittings 3 - 8 years Retail fixtures and fittings 2 - 5 years Office equipment 5 years Computer software and equipment 3 - 5 years Lease premiums Amounts paid to acquire the rights to a lease ('Lease Premiums') are written off in equal annual instalments over the life of the lease or to the next rental review. Valuations Burberry Group has adopted a policy of not revaluing properties as permitted under FRS 15 'Tangible Fixed Assets'. Previously revalued properties are included at their valuation at 31 March 1996 less depreciation. Some of Burberry Group's properties were professionally valued at 31 March 1996 on the basis of their open market value for existing use by Colliers Conrad Ritblat Erdman Limited, Chartered Surveyors. Freehold properties are included at this 1996 valuation or cost. Leasehold properties are carried at original cost and are amortised over the remainder of the lease term on a straight line basis. 2 Accounting policies (continued) Impairment Impairment reviews are undertaken when performance trends or changes in circumstances suggest that the net book value of a fixed asset is not fully recoverable. Profit/loss on disposal of fixed assets Profits and losses on disposal of tangible fixed assets represent the difference between the net proceeds and net book value at the date of sale. Disposals are accounted for when the relevant transaction becomes unconditional. d) Investments in group companies Investments held by the Holding Company are carried at cost less amounts written off in respect of impairment. When investments are fully or partially hedged by means of foreign currency borrowings, the hedged proportion of those investments is retranslated at the relevant exchange rate and the resulting exchanging difference taken to reserves along with the matching exchange difference on the foreign currency borrowings. e) Stock Stock and work in progress are valued on a first-in-first-out basis at the lower of cost (including an appropriate proportion of production overhead) and net realisable value. Provision is made to reduce cost to no more than net realisable value having regard to the age and condition of stock, as well as its anticipated saleability. f) Deferred tax Deferred taxation is recognised as a liability or asset if transactions have occurred at the balance sheet date that give rise to an obligation to pay more taxation in future, or a right to pay less taxation in future. An asset is not recognised to the extent that the realisation of economic benefits in the future is uncertain. Deferred tax assets and liabilities are not discounted. No deferred tax is recognised on the unremitted earnings of overseas subsidiaries. Deferred tax would be provided where remittance is anticipated and is expected to result in a charge to taxation. g) Pension costs The pension costs in the consolidated financial statements are determined in accordance with Statement of Standard Accounting Practice 24 ('SSAP24') which is to be replaced by a new Standard, Financial Reporting Standard 17 ('FRS17'). The transitional disclosure requirements required by FRS 17 are set out in note 33. GUS defined benefit scheme Eligible employees of Burberry Group participate in a number of GUS defined benefit schemes throughout the world; the most important defined benefit schemes are in the United Kingdom. The assets covering these arrangements are held in independently administered funds. The cost of providing defined pension benefits to participating Burberry employees is charged to the profit and loss account of Burberry Group over the anticipated period of employment, in accordance with recommendations made by independent qualified actuaries. 2 Accounting policies (continued) Defined contribution scheme Burberry Group eligible employees also participate in GUS group defined contribution pension schemes; the principal one being in the United Kingdom with its assets held in independently administered funds. The cost of providing these benefits to participating Burberry employees is recognised in the profit and loss account of Burberry Group and comprises the amount of contributions payable to the schemes in respect of the year. h) Share schemes Incentive plans The cost of shares acquired by the Burberry Group Employee Share Ownership Trusts ('ESOTs') or the fair market value of the shares at the date of the grant, less any consideration receivable from the participating Burberry employee, is charged to the profit and loss account. Where awards are contingent upon future events (other than continued employment) an assessment of the likelihood of these conditions being achieved will be made at the end of each reporting period and an appropriate accrual made over the period to which the participating Burberry employee's performance relates. Where awards are not contingent upon future events a full accrual is made immediately in the profit and loss account. Save As You Earn scheme GUS plc operates a Save As You Earn scheme (in which certain UK employees of Burberry Group participate) that allows for the grant of share options at a discount to the market price at the date of the grant. Burberry Group has made use of the exemption under UITF Abstract 17 not to recognise any compensation charge in respect of this scheme. i) Foreign currency translation Translation of the results of overseas businesses The results of overseas subsidiary undertakings are translated at the average exchange rate for the year. The assets and liabilities of such undertakings are translated at year end exchange rates. Differences arising on the retranslation of the opening net investment in subsidiary companies, and on the translation of their results, are taken to reserves and are reported in the statement of total recognised gains and losses. Transactions in foreign currencies Transactions denominated in foreign currencies are translated into sterling at the exchange rate ruling at the date of the transaction or at the forward contract rate where hedged. Monetary assets and liabilities denominated in foreign currencies which are held at year end are translated into sterling at the exchange rate ruling at the balance sheet date or at the forward contract rate where specifically hedged. Exchange differences on monetary items are taken to the profit and loss account except where they relate to loans hedging investments in overseas subsidiaries of Burberry Group, in which case such differences (including attributable taxation) are taken directly to reserves and limited to the foreign currency movement on the underlying investment. 2 Accounting policies (continued) j) Financial instruments Burberry Group uses derivative financial instruments to hedge its exposure to fluctuations in foreign exchange rates arising on certain trading transactions. The principal derivative instruments used are forward currency contracts taken out to hedge certain future royalty receivables and product purchases. Gains and losses on such forward currency contracts are recognised in the profit and loss account at the same date as the underlying transaction. Prior to flotation the financial instruments used by Burberry Group were managed by GUS group, with the principal instruments being loans to or from GUS group companies. The rate at which intercompany interest was payable or receivable (if any) on these balances was determined by GUS plc. Since flotation the financial instruments used and managed by Burberry Group consist primarily of cash and forward currency contracts used to hedge currency exposures. Burberry Group has taken advantage of the exemption available under FRS 13 'Derivatives and Financial Instruments', in respect of short term debtors and creditors, and details in respect of these balances are excluded from the required disclosures, other than within the currency risk disclosure. k) Operating leases Gross rental income and expenditure in respect of operating leases is recognised on a straight line basis over the period of the leases. Certain rental expenditure is determined on the basis of turnover achieved in specific retail locations and is accrued for on that basis. l) Related party transactions Financial Reporting Standard 8, 'Related Party Disclosures', requires the disclosure of the details of material transactions between the reporting entity and related parties. Burberry Group has taken advantage of an exemption under FRS 8 not to disclose transactions between Burberry Group companies which eliminate on consolidation. 3 Segmental analysis (i) Geographical analysis - analysis by origin (a) Turnover by origin Year ended 31 March 2003 2002 Â£m Â£m Europe 429.9 396.3 Less: European inter-segment turnover to other regions (57.5) (20.8) 372.4 375.5 North America 133.8 104.0 Asia Pacific 88.1 19.9 Less: Asia Pacific inter-segment turnover to Europe (0.7) (0.2) 87.4 19.7 593.6 499.2 The acquisition of the business in Korea on 1 July 2002 increased turnover in the Asia Pacific region by Â£28.3m (after excluding Â£9.6m for turnover arising within Asia Pacific) in the year ended 31 March 2003 and reduced net European turnover by Â£10.1m. (b) Profit before taxation - analysis by origin Year ended 31 March 2003 2002 Â£m Â£m Europe 92.6 81.6 North America 8.4 5.1 Asia Pacific 15.7 3.6 116.7 90.3 Net interest expense (0.9) (0.5) Foreign currency loss on loans with GUS group (pre flotation) (2.3) (0.1) Profit before goodwill amortisation, exceptional items and taxation 113.5 89.7 Goodwill amortisation - Europe (5.1) (4.8) - Asia Pacific (1.3) (0.1) Exceptional items - Europe (20.3) - - North America (1.6) - - Asia Pacific (0.1) - Profit before taxation 85.1 84.8 The results above are stated after the reallocation of certain costs. The acquisition of the business in Korea on 1 July 2002 increased profit before interest, goodwill amortisation, exceptional items and taxation in the Asia Pacific region (and in the Wholesale and Retail business) by Â£3.6m in the year ended 31 March 2003, before the reallocation of certain costs. 3 Segmental analysis (Continued) (i) Geographical analysis - analysis by origin (continued) (c) Net assets - analysis by origin At 31 March 2003 2002 2002 (proforma) Â£m Â£m Â£m Europe 129.1 115.2 115.2 North America 93.4 91.1 91.1 Asia Pacific 3.1 2.9 2.9 Net operating assets 225.6 209.2 209.2 Goodwill - Europe 94.2 88.1 88.1 - Asia Pacific 28.6 6.8 6.8 Deferred consideration for acquisitions - Europe (19.2) (17.5) (17.5) - Asia Pacific (12.5) (5.0) (5.0) Cash at bank, short term deposits, less bank overdrafts and borrowings 79.6 21.3 21.3 Investment in own shares 3.3 - - Net funding balances with GUS group companies - 192.1 - Taxation (including deferred taxation) 0.4 (20.5) (20.5) Dividends payable - GUS group companies (7.8) - - Dividends payable - other Shareholders (2.2) - - Net assets 390.0 474.5 282.4 The acquisition of the business in Korea on 1 July 2002 increased net operating assets in the Asia Pacific region (and in the Wholesale and Retail business) by Â£5.9m as at 31 March 2003. (ii) Geographical analysis - turnover by destination Year ended 31 March 2003 2002 Â£m Â£m Europe 302.7 286.7 North America 140.5 110.5 Asia Pacific 147.0 100.1 Other 3.4 1.9 593.6 499.2 3 Segmental analysis (continued) (iii) Class of business analysis (a) Turnover by class of business Year ended 31 March 2003 2002 Â£m Â£m Wholesale 306.9 288.8 Retail 228.4 156.9 Wholesale and Retail 535.3 445.7 License 58.3 53.5 593.6 499.2 The acquisition of the business in Korea on 1 July 2002 increased turnover in Wholesale and Retail by Â£18.2m in the year ended 31 March 2003. An analysis of turnover by product category is shown below: Year ended 31 March 2003 2002 Â£m Â£m Turnover analysis by product category Womenswear 197.9 165.2 Menswear 162.8 149.4 Accessories 169.5 125.8 Other 5.1 5.3 Wholesale and Retail 535.3 445.7 License 58.3 53.5 Total turnover 593.6 499.2 Number of directly operated stores, concessions and outlets open at 31 March 132 69 The acquisition of the business in Korea on 1 July 2002 increased the number of directly operated concessions by 46 and outlets by 1 as at the date of acquisition. 3 Segmental analysis (continued) (iii) Class of business analysis (continued) (b) Profit before taxation - analysis by class of business Year ended 31 March 2003 2002 Â£m Â£m Wholesale and Retail 64.3 42.7 License 52.4 47.6 116.7 90.3 Net interest expense (0.9) (0.5) Foreign currency loss on loans with GUS group (pre-flotation) (2.3) (0.1) Profit before goodwill amortisation, exceptional items and taxation 113.5 89.7 Goodwill amortisation - Wholesale and Retail (6.4) (4.9) Exceptional items - Wholesale and Retail (18.3) - - License (3.7) - Profit before taxation 85.1 84.8 The results above are stated after the reallocation of certain costs. The Wholesale and Retail business is managed in an integrated manner and therefore internal trading between these operations is not on a third-party basis in certain respects. The directors do not consider that an analysis of the profit and loss account within the Wholesale and Retail business would be meaningful. '3 Segmental analysis (continued) (iii) Class of business analysis (continued) (c) Net assets - analysis by class of business At 31 March 2003 2002 2002 Â£m Â£m proforma Â£m Wholesale and Retail 222.1 205.6 205.6 License 3.5 3.6 3.6 Net operating assets 225.6 209.2 209.2 Goodwill - Wholesale and Retail 122.8 94.9 94.9 Deferred consideration for acquisitions - Wholesale and Retail (31.7) (22.5) (22.5) Cash at bank, short term deposits, less bank overdrafts and borrowings 79.6 21.3 21.3 Investment in own shares 3.3 - - Net funding balances with GUS group companies - 192.1 - Taxation (including deferred taxation) 0.4 (20.5) (20.5) Dividends payable - GUS group companies (7.8) - - Dividends payable - other Shareholders (2.2) - - Net assets 390.0 474.5 282.4 4 Turnover and operating profit Year ended 31 March 2003 Pre goodwill Exceptional items and Total Year ended 31 amortisation and goodwill amortisation March 2002 exceptional items Â£m Â£m Â£m Â£m Turnover 593.6 - 593.6 499.2 Cost of sales (261.3) - (261.3) (248.1) Gross profit 332.3 - 332.3 251.1 Distribution costs (94.3) (3.7) (98.0) (71.0) Administrative - expenses (122.5) (18.3) (140.8) (91.8) - goodwill - (6.4) (6.4) (4.9) amortisation Other operating income 1.2 - 1.2 2.0 Operating profit 116.7 (28.4) 88.3 85.4 The incremental impact of the acquisition of the business in Korea on 1 July 2002 is shown in note 28. Other operating income arises from sub-letting certain surplus leasehold properties. Burberry Group's ability to sublet these properties has expired or will expire at various dates up to 2 January 2005, mainly due to the reversion of headlease interests. 5 Profit on ordinary activities before taxation Year ended 31 March 2003 2002 Â£m Â£m Profit before taxation is stated after charging/(crediting): Depreciation of tangible fixed assets 16.8 13.3 Fixed asset impairment charge relating to certain retail assets 2.1 0.6 Amortisation of goodwill 6.4 4.9 Amortisation of trademarks and other intellectual property 0.1 0.1 Employee costs (see note 7) 94.5 81.6 Loss on disposal of fixed assets 0.3 0.2 Property rental income under operating leases (see note 4) (1.2) (2.0) Operating lease rentals - land and buildings 31.7 19.3 Auditors' remuneration - audit services (including Â£3,000 for the Company, 2002: Â£100) 0.8 0.5 - non-audit services 0.8 0.6 Net exchange gain on trading items (1.3) - Exchange loss on loans with GUS group (pre flotation) (see note 9) 2.3 0.1 Auditor's remuneration for non-audit services in 2003 included Â£0.6m for tax related services and Â£0.2m for other matters. In addition, an amount of Â£0.1m was capitalised in 2003 (2002: Â£0.5m) in relation to acquisitions. 6 Exceptional items The exceptional charge arising in the year ended 31 March 2003 consists of the following amounts: Year ended 31 March 2003 2002 Â£m Â£m Granting of awards under the Senior Executive Restricted Share Plan (the 'RSP') 18.5 - Employers' National Insurance liability arising on the RSP awards 2.1 - Shares gifted to employees under the All Employee Share Plan 1.0 - Other costs relating to the Initial Public Offer 0.4 - 22.0 - The associated tax credit relating to these exceptional items is Â£6.3m and the cash outflow during the year in relation to these items was Â£0.3m. These amounts have principally been included in purchase of own shares. Awards were made under the RSP to the executive directors and other senior management of Burberry Group in respect of services provided prior to flotation. No previous awards had been made, and no further awards will be made, under the RSP. The cost of granting options under the RSP is equal to the amount by which the fair value of ordinary shares exceeds the exercise price at the date of grant of options. As the exercise price of these options is nil, the cost of granting options under the RSP equals the fair value of ordinary shares at the date the options were granted (Â£2.30 per ordinary share). This cost has been recognised in the profit and loss account as no performance criteria (other than continued employment with Burberry Group) are attached to these options. The total cost of the RSP (Â£18.5m) does not give rise to a reduction in net assets as there is a compensating entry on consolidation to the capital reserve reflecting the anticipated issue of new ordinary shares. As no further awards will be made under the RSP, the consolidated profit and loss account of Burberry Group in future years will not be affected by the RSP (except in respect of reserve movements and the number of shares in issue for the purpose of calculating earnings per share). The employers' National Insurance liability (or overseas equivalent) arising in respect of the RSP will become payable when the options are exercised by the individual employee. The basis of the exceptional charge recorded in the profit and loss account (Â£2.1m) is the employers' National Insurance (or overseas equivalent) arising on the fair value of the ordinary shares at the date the options were granted (Â£2.30 per ordinary share). In addition, shares with a value totalling Â£1.0m were gifted to Burberry Group employees under an All Employee Share Plan on flotation. The cost of this gift has been recognised immediately as no performance criteria are attached. All shares held in respect of the All Employee Share Plan and National Insurance liabilities (or overseas equivalent) are held in Employee Share Ownership Trusts ('ESOTs'). 7 Employee costs Staff costs, including directors' emoluments, during the year were as follows: Year ended 31 March 2003 2002 Â£m Â£m Wages and salaries 82.8 72.3 Social security costs 8.9 7.7 Other pension costs (see note 33) 2.8 1.6 Total 94.5 81.6 The average number of full time equivalent employees (including directors) during the year was as follows: Year ended 31 March 2003 2002 Number of employees Number of employees* Europe 2,594 2,531 North America 658 553 Asia Pacific 394 141 Total 3,646 3,225 *Amount has been restated to include 151 additional employees. SAYE Share Option Scheme A Save As You Earn (SAYE) share option scheme offering GUS plc shares was introduced for employees in the UK by GUS plc in the year ended 31 March 2001, with a further option scheme offered to all UK employees of GUS plc in the year ended 31 March 2003. The number of GUS plc shares subject to option held by Burberry Group employees (including a director of the Company) as at 31 March 2003 were as follows: Number of shares under option Period to exercise Exercise price At 31 March 2003 At 31 March 2002 From 01.05.2004 to 31.10.2004 384.0p 210,549 251,005 From 01.05.2006 to 31.10.2006 384.0p 151,833 175,641 From 01.09.2005 to 28.02.2006 523.0p 51,127 - From 01.09.2007 to 29.02.2008 523.0p 34,485 - Total 447,994 426,646 The administrative costs of this scheme have not been borne by Burberry Group and are not considered to be material. 7 Employee costs (continued) Share options and awards i GUS schemes Share options have been granted to Burberry employees under the GUS 1998 Approved and Non-Approved Executive Share option Schemes during the years ended 31 March 2001 and 2002 in respect of the ordinary shares of GUS plc. The unexercised options granted to Burberry employees (including those granted to directors of the Company) under these schemes are as follows: Period of exercise Exercise price Number of share options Number of share options at 31 March 2003 at 31 March 2002 From 07.04.2003 to 07.04.2010 375.7p 172,612 172,612 From 11.06.2004 to 11.06.2011 612.7p 1,175,381 1,270,069 From 17.12.2004 to 17.12.2011 635.0p 180,526 180,526 Total 1,528,519 1,623,207 ii The Burberry Senior Executive Restricted Share Plan (the 'RSP') On 11 July 2002 awards in respect of a total of 8,100,198 ordinary shares were made to directors and senior management under the RSP. At 31 March 2003 awards in respect of a total of 8,055,198 ordinary shares remained outstanding and , 923,236 shares (with a cost of Â£2.1m) have been purchased by the Burberry ESOTs to cover the Employer's National Insurance liability or overseas equivalent arising on this plan. The cost of the RSP shares (including the shares acquired to cover Employer's National Insurance liability thereon) has been provided for as an exceptional item in the year to 31 March 2003. No shares were issued during the year in respect of the RSP. Participant's awards were made in the form of options with an exercise price of nil. The unexercised awards granted under this scheme (including those granted to directors of the Company), in respect of ordinary shares of the Company are as follows: Period of exercise Exercise price Number of shares From 11.07.2005 to 11.07.2012 nil 4,027,600 From 11.07.2006 to 11.07.2012 nil 2,013,799 From 11.07.2007 to 11.07.2012 nil 2,013,799 Total 8,055,198 iii The Burberry Senior Executive IPO Share Option Scheme ('the IPO Option Scheme') On 11 July 2002 awards in respect of a total of 5,955,198 ordinary shares were made to directors and senior management under the IPO Option Scheme. At 31 March 2003 awards in respect of a total of 5,830,198 ordinary shares remained outstanding and, 490,097 shares (with a cost of Â£1.2m) have been purchased by the Burberry ESOTs to hedge the Employer's National Insurance liability or overseas equivalent that may arise in respect of this scheme. No shares were issued during the year in respect of the share options granted. 7 Employee costs (continued) iii The Burberry Senior Executive IPO Share Option Scheme ('the IPO Option Scheme') (continued) Participant's awards were made in the form of options with an exercise price equal to the price on flotation, 230 pence per share. The unexercised awards granted under this scheme (including those granted to directors of the Company) in respect of ordinary shares of the Company are as follows: Period of exercise Exercise price Number of shares From 11.07.2003 to 11.07.2012 230.0p 1,943,399 From 11.07.2004 to 11.07.2012 230.0p 1,943,399 From 11.07.2005 to 11.07.2012 230.0p 1,943,400 Total 5,830,198 iv All Employee Share Offer On flotation all employees were offered shares in the Company under the All Employee Share Plan. A total of 413,700 shares with a value of Â£1.0m were awarded to employees, and the options over the awards have an exercise price of nil. On flotation the Company purchased 421,450 shares at an aggregate cost of Â£969,335 in respect of these awards and the Employer's National Insurance liability or overseas equivalent arising thereon. These shares are held in two trusts, being the Burberry Group Share Incentive Plan and the Burberry International Free Share Plan. The shares must be held in trust between three and five years. The cost of these shares has been written off as an exceptional item in the year to 31 March 2003. The awards granted and remaining outstanding under this scheme as at 31 March 2003 (nil in respect of the directors of the Company) in respect of ordinary shares in the Company are as follows: Exercise price Number of shares Burberry Group Share Incentive Plan nil 241,700 Burberry International Free Share Plan nil 158,600 Total 400,300 8 Interest and similar income Year ended 31 March 2003 2002 Â£m Â£m Dividend income from trade investment 0.1 - Bank interest income 0.8 0.5 Interest income from GUS group companies 0.9 4.5 Interest receivable and similar income 1.7 5.0 Total 1.8 5.0 Interest income up to the date of flotation in July 2002 was affected by the financing arrangements within the GUS group, and is not necessarily representative of the interest income that would have been reported had Burberry Group been independent. 9 Interest expense and similar charges Year ended 31 March 2003 2002 Â£m Â£m On bank loans and overdrafts 1.2 0.9 Interest expense to GUS group companies 1.5 4.6 2.7 5.5 Foreign exchange loss on loans to GUS group companies 2.3 0.1 Total 5.0 5.6 Interest expense up to the date of flotation in July 2002 was affected by the financing arrangements within the GUS group, and is not necessarily representative of the interest that would have been reported had Burberry Group been independent. The foreign exchange losses on loans to GUS group companies have been recorded in the profit and loss account of Burberry Group as loans were made by Burberry Group companies to hedge the net assets of other GUS group companies. These losses relate to loans that existed prior to flotation and which were settled before or on flotation. 10 Taxation Year ended 31 March 2003 2002 Analysis of charge for the year Â£m Â£m Current tax UK corporation tax Current tax on income for the year ended 31 March 2003 at 30% (2002: 30%) 23.3 21.1 Double taxation relief (6.5) (6.0) 16.8 15.1 Foreign tax Current tax on income for the year 22.4 12.8 Adjustments in respect of prior years - 0.3 Total current tax 39.2 28.2 Deferred tax UK deferred tax Origination and reversal of timing differences (7.1) (0.3) Adjustments in respect of prior years - (0.6) (7.1) (0.9) Foreign deferred tax Origination and reversal of timing differences - 0.5 Adjustments in respect of prior years 0.8 0.5 Total deferred tax (6.3) 0.1 Tax on profit on ordinary activities 32.9 28.3 10 Taxation (continued) The tax rate applicable on profit on ordinary activities varied from the standard rate of corporation tax in the UK due to the following factors: Year ended 31 March 2003 2002 Â£m Â£m Tax at 30% on profit before taxation 25.5 25.4 Rate adjustments relating to overseas profits (0.9) 0.8 Permanent disallowables 1.3 - Tax losses utilised (0.2) (1.7) Tax losses not utilised 2.8 1.7 Goodwill amortisation not deductible 2.0 1.6 Tax arising on exceptional items 0.2 - Adjustments in respect of prior years - 0.3 Timing differences 7.1 0.1 Other 1.4 - Total current tax 39.2 28.2 Burberry has commenced proceedings with the Competent Authorities with regard to resolving transfer pricing of internal sales between the United Kingdom and USA. As part of the agreements with GUS, any liability which arises and relates to matters prior to 31 March 2002 will be met by GUS. From 1 April 2002 any liability will be due by the Burberry Group. No provision has been made for additional taxation arising for these proceedings as none is anticipated overall. 11 Profit on ordinary activities after taxation Profit on ordinary activities after taxation but before dividends payable includes Â£28.5m (2002: Â£171.0m) which is dealt with in the financial statements of the Company. As permitted by section 230 of the Companies Act 1985, the Company has not presented its own profit and loss account. 12 Dividends Ordinary dividends (Equity) Year ended 31 March 2003 2002 Â£m Â£m Dividend paid to GUS group (pre flotation) 219.0 - Interim dividend paid (1.0p per share) - GUS group 3.9 - - other Shareholders 1.1 Final dividend proposed (2.0p per share) - GUS group 7.8 - - other Shareholders 2.2 Total 234.0 - On 14 June 2002, prior to flotation, Burberry Group paid a dividend of Â£219.0m to GUS group as part of the Burberry Group reorganisation. Preference dividends (Non-Equity) On 31 March 2003 Burberry Group paid a total preference dividend of Â£18,454 (0.001p per preference share) to GUS group on the redeemable preference shares issued prior to flotation (see note 23 for further details). 13 Earnings per share The calculation of basic earnings per share is based on profit after taxation divided by the weighted average number of ordinary shares in issue during the period since flotation. Basic earnings per share before amortisation of goodwill and exceptional items is disclosed to indicate the underlying profitability of the group. The calculation of diluted earnings per share reflects the dilutive effect of the Restricted Share Plan ('RSP'). Year ended 31 March 2003 2002 Â£m Â£m Profit on ordinary activities after taxation, but before amortisation of goodwill 74.1 61.4 and exceptional items Effect of amortisation of goodwill (net of attributable taxation) (6.2) (4.9) Effect of exceptional items (net of attributable taxation) (15.7) - Profit on ordinary activities after taxation 52.2 56.5 The weighted average number of ordinary shares for 2003 represents the number of Burberry Group plc ordinary shares in issue at flotation through to 31 March 2003 (2002: number of Burberry Group plc shares in issue at flotation) excluding ordinary shares held in Burberry Group's ESOTs. Diluted earnings per share for the relevant financial period is based on the weighted average number of ordinary shares in issue at flotation through to 31 March 2003 (excluding any ordinary shares held in Burberry Group's ESOTs), together with the awards made under the RSP (which will have a dilutive effect when exercised) and assuming the full vesting of all outstanding awards. Year ended 31 March 2003 2002 Millions Millions Weighted average number of ordinary shares in issue during the year 498.1 498.2 Dilutive effect of the RSP 8.1 8.1 Diluted weighted average number of ordinary shares in issue during the year 506.2 506.3 Year ended 31 March 2003 2002 Basic earnings per share Pence Pence Basic earnings per share before amortisation of goodwill and exceptional items 14.9 12.3 Effect of amortisation of goodwill (1.2) (1.0) Effect of exceptional items (3.2) - Basic earnings per share 10.5 11.3 Year ended 31 March 2003 2002 Diluted earnings per share Pence Pence Diluted earnings per share before amortisation of goodwill and exceptional items 14.6 12.1 Effect of amortisation of goodwill (1.2) (1.0) Effect of exceptional items (3.1) - Diluted earnings per share 10.3 11.1 14 Intangible assets Goodwill Trademarks and other intellectual property Total Â£m Â£m Â£m Cost At 1 April 2002 103.3 1.1 104.4 Effect of foreign exchange rate changes 10.1 - 10.1 Additions 25.5 0.1 25.6 At 31 March 2003 138.9 1.2 140.1 Amortisation At 1 April 2002 8.4 0.2 8.6 Effect of foreign exchange rate changes 1.3 - 1.3 Charge for the year 6.4 0.1 6.5 At 31 March 2003 16.1 0.3 16.4 Net book value At 31 March 2003 122.8 0.9 123.7 At 31 March 2002 94.9 0.9 95.8 15 Tangible fixed assets Freehold land and Leasehold land Fixtures, Assets in the course Total buildings and buildings fittings and of less than 50 equipment construction years Cost or valuation Â£m Â£m Â£m Â£m Â£m At 1 April 2002 95.9 27.8 57.5 1.4 182.6 Effect of foreign (0.6) (1.6) 1.4 0.1 (0.7) exchange rate changes Acquisition of - - 0.5 - 0.5 subsidiaries Additions 0.7 34.7 21.0 0.9 57.3 Reclassifications (4.8) - 6.2 (1.4) - Disposals - (0.7) (1.2) - (1.9) At 31 March 2003 91.2 60.2 85.4 1.0 237.8 Depreciation Â£m Â£m Â£m Â£m Â£m At 1 April 2002 12.7 11.2 34.3 - 58.2 Effect of foreign exchange rate changes 0.5 (0.8) 1.0 - 0.7 Provided in year 2.8 3.5 10.5 - 16.8 Impairment charge on certain retail assets - 0.2 1.9 - 2.1 Reclassifications (2.3) - 2.3 - - Disposals - (0.3) (1.1) - (1.4) At 31 March 2003 13.7 13.8 48.9 - 76.4 Net book value At 31 March 2003 77.5 46.4 36.5 1.0 161.4 At 31 March 2002 83.2 16.6 23.2 1.4 124.4 During the year ended 31 March 2003 certain retail assets became impaired and the cost of these assets were written down. The impairment charge was based on a review of the value of the assets in use and was determined in accordance with FRS 11. The discount rate used in these calculations was 15% and applied to the pre-tax cash flows attributable to these assets. Certain properties were revalued at 31 March 1996 and are included at their valuation at this date less depreciation. Other properties are included at cost. The revaluations performed at 31 March 1996 were carried out by external valuers, Colliers Conrad Ritblat Erdman Limited, Chartered Surveyors, on an open market basis for existing use. This valuation was carried out in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Manual. At 31 March 2003 2002 Freehold and leasehold land and buildings held at revalued amount Â£m Â£m Revalued amount 29.4 30.3 Aggregate depreciation (5.3) (5.1) Net book value 24.1 25.2 15 Tangible fixed assets (continued) If the revalued assets were stated on the historical cost basis, the amounts would be: At 31 March 2003 2002 Freehold and leasehold land and buildings at historical cost Â£m Â£m Historical cost 8.6 9.4 Aggregate depreciation (5.1) (5.6) Net book value based on historical cost 3.5 3.8 16 Investments Group Interest in own shares Trade investment Total Number of shares Net book value cost and net book value 2003 2003 2003 2003 Number Â£m Â£m Â£m As at 1 April 2002 - - 0.1 0.1 Additions - on flotation 1.8 4.3 - 4.3 Additions - post flotation 0.5 1.2 - 1.2 Shares written off (All Employee - (2.2) - (2.2) Share Plan) At 31 March 2003 2.3 3.3 0.1 3.4 Company Interest in own shares Number of shares Net book value Group undertakings Total cost and net book value 2003 2003 2003 2003 Number Â£m Â£m Â£m At 1 April 2002 - - 169.5 169.5 Effect of foreign exchange rate - - (0.1) (0.1) changes Provision against investments - - (1.7) (1.7) Additions - on flotation 1.8 4.3 955.8 960.1 Additions - post flotation 0.5 1.2 - (1.2) Shares written off (All Employee - (2.2) - (2.2) Share Plan) Disposals - - (155.5) (155.5) At 31 March 2003 2.3 3.3 968.0 971.3 Investment in own shares represents the cost of 1,413,333 of the Company's ordinary shares (nominal value of Â£707) purchased in July 2002, which amounts to 0.3% of the called up share capital. These shares have been acquired by the Burberry Group ESOTs in the open market using funds provided by Burberry Group companies to meet Employer's National Insurance obligations arising on the RSP and IPO share option awards. The Burberry Group ESOTs have waived their entitlement to dividends of Â£16,741. In addition, the Company purchased 421,450 shares in July 2002 and 500,000 shares in March 2003, for a total cost of Â£2,193,885, to meet the Company's obligations in respect of awards made (or proposed as at 31 March 2003) to employees under the All Employee Share Plan. These shares were acquired by the Burberry Group plc ESOP Trust and The Burberry Group plc Share Incentive Plan in the open market using funds provided by Burberry Group companies. The cost of these shares has been written off, as they have been or will be gifted unconditionally to employees. 16 Investments (continued) The costs of funding and administering the trusts are charged to the profit and loss account of Burberry Group in the period to which they relate. The market value of all own shares held at 31 March 2003 was Â£5.5m. The trade investment represents an investment in Suit Spain S.L, a clothing manufacturing company incorporated in Spain in which the Burberry Group holds a 21.5% share of its ordinary share capital. The Burberry Group does not exercise any significant influence on the financial and operating decisions of the company. 17 Stock At 31 March 2003 2002 Â£m Â£m Raw materials 13.6 15.2 Work in progress 7.2 6.2 Finished goods 63.0 60.9 Total 83.8 82.3 There is no significant difference between the replacement cost of stock and the amounts shown above, on the basis that stock subject to provisioning would not be replaced, and is therefore excluded from this calculation. 18 Debtors Group Company At 31 March At 31 March 2003 2002 2002 2003 2002 Â£m Â£m (proforma) Â£m Amounts falling due within one year: Trade debtors 86.1 77.7 77.7 - - Other debtors 1.1 0.9 0.9 - - Prepayments and accrued income 11.3 12.1 12.1 - - Corporation tax 3.4 0.6 0.6 2.1 - Trading balances owed by GUS group companies 0.2 0.3 - - - Funding balances owed by GUS group companies - 298.8 - - 187.4 (pre flotation) Companies/assets to be disposed (on flotation) - 8.3 - - - Amounts receivable from subsidiary companies - - - 18.1 - 102.1 398.7 91.6 20.2 187.4 Amounts falling due after one year: Deferred tax assets 18.3 7.8 7.8 - - Corporation tax 0.8 - - - - Other debtors 0.8 - - - - Amounts receivable from subsidiary companies - - - 149.0 55.9 Total 122.0 406.5 99.4 169.2 243.3 18 Debtors (continued) Deferred tax assets Â£m Balance at 1 April 2002 7.8 Exchange adjustments (0.2) Credited/(charged) to the profit and loss account 6.3 Acquisition of subsidiaries 2.4 Other movements 2.0 Balance at 31 March 2003 18.3 The deferred tax asset recorded in each year arises from timing differences which are expected to reverse in the foreseeable future. The analysis of the deferred tax assets is shown below: At 31 March 2003 2002 Â£m Â£m Accelerated capital allowances 0.4 0.5 Unrealised stock profit and other stock provisions 8.2 2.3 Share schemes 6.3 - Net operating losses 0.3 0.1 Other short term timing differences 3.1 4.9 Undiscounted deferred tax assets 18.3 7.8 19 Cash and short term deposits At 31 March 2003 2002 Â£m Â£m Cash 37.2 27.8 Short term deposits (see note 32) 49.4 2.4 Total 86.6 30.2 20 Creditors - amounts falling due within one year Group Company At 31 March At 31 March 2003 2002 2002 2003 2002 (proforma) Â£m Â£m Â£m Â£m Â£m Secured: Bank loans (see note 32) - 8.2 8.2 - - Unsecured: Bank loans and overdrafts (see note 32) 7.0 0.7 0.7 - - Trade creditors 26.9 27.0 27.0 - - Dividends payable - GUS group 7.8 - - 7.8 - Dividends payable - other Shareholders 2.2 - - 2.2 - Trading balances owed to GUS group companies 5.1 0.3 0.3 - - Funding balances owed to GUS group companies (pre - 115.0 - - - flotation) Amounts due to subsidiary companies - - - 52.4 - Corporation tax (UK and overseas) 22.1 28.9 28.9 - 3.8 Other taxes and social security costs 4.6 4.0 4.0 - - Other creditors 18.4 17.0 17.0 - - Accruals and deferred income 54.5 37.3 37.3 0.4 - Deferred consideration for acquisitions 2.5 2.5 2.5 - - Total 151.1 240.9 125.9 62.8 3.8 Bank loans and overdrafts at 31 March 2003 represent unpresented cheques. The secured borrowings as at 31 March 2002 related to a specific freehold property and specific trade debtors. 21 Creditors - amounts falling due after more than one year Group Company At 31 March At 31 March 2003 2002 2003 2002 Â£m Â£m Â£m Â£m Unsecured: Other creditors, accruals and deferred income 6.0 3.1 - - Deferred consideration for acquisitions 29.2 20.0 - - Amounts due to subsidiary companies - - 98.6 - Total 35.2 23.1 98.6 - Deferred consideration due after more than one year arises from the acquisitions of two businesses, Burberry (Spain) S.A. and Mercader y Casadevall S.A. and the trade and certain assets of the Burberry business in Korea. The amounts due in relation to the acquisition of Burberry (Spain) S.A as at 31 March 2003 of Â£19.2m (2002: Â£17.5m) relate to an earn out agreement and is payable in cash, inter alia dependent upon the achievement of trading results in aggregate for the five years ending 31 March 2005. The consideration payable may vary from nil to a maximum of euro41.1m (Â£28.3m). Any incremental amounts arising since 31 March 2002 have been charged to the profit and loss account. 22 Provisions for liabilities and charges Pension obligations Other Total Â£m Â£m Â£m At 31 March 2002 0.3 0.5 0.8 Utilised - (0.3) (0.3) Charged to profit and loss account 0.1 4.0 4.1 At 31 March 2003 0.4 4.2 4.6 Information on pension obligations is set out in note 33 and relates to the retirement indemnities in France. Other amounts mainly relate to property obligations which are expected to be utilised over a 3 year period. 23 Called up share capital Group and Company 2003 2002 Authorised share capital Â£m Â£m 1,999,999,998,000 (2002: 1,000,000,000) ordinary shares of 0.05p (2002: Â£1) each 1,000.0 1,000.0 1,600,000,000 redeemable preferred shares of 0.05p each 0.8 - Total 1,000.8 1,000.0 2003 2003 Allotted, called up and fully paid share capital Number Â£m Ordinary shares of 0.05p each (2002: Â£1 each) At 1 April 2002 500 - Allotted to GUS group companies (pre flotation) 49,501 - Allotted to GUS group companies on share split (pre flotation) 99,951,999 - Allotted to GUS group companies on rights issue (pre flotation) 287,638,400 0.2 Allotted on flotation 112,359,600 0.1 At 31 March 2003 500,000,000 0.3 Redeemable preference shares of 0.05p each At 1 April 2002 - - Allotted to GUS group companies (pre flotation) 1,600,000,000 0.8 At 31 March 2003 1,600,000,000 0.8 Total called up ordinary and preference share capital 1.1 Prior to re-registering from Burberry Group Limited to Burberry Group plc the company had a share split and the nominal value of shares in issue was reduced from 100p per share to 0.05p per share. 23 Called up share capital (continued) Redeemable preference share capital Called up redeemable preference shares, which do not carry any voting rights, were issued prior to flotation and are held by GUS group. The redeemable preference shares have the right to a non-cumulative dividend at the rate per annum of six-monthly LIBOR minus one percent and to a further dividend equal to the dividend per share paid on the Company's ordinary shares once the total dividend on those ordinary shares that has been paid in any financial year reaches Â£100,000 per ordinary share. The Company has the right to redeem the preference shares at any time until 14 June 2007. On this date any preference shares outstanding will be redeemed in full for their face value and any dividends accruing up to 14 June 2007. On a return of capital on winding-up or otherwise (other than on redemption or purchase of shares), the holders of the preference shares shall be entitled in priority to any payment to the holders of any other class of shares to the repayment of a sum equal to the nominal capital paid up or credited as paid up on the preference shares held by them respectively. 24 Reserves Group Share premium Revaluation reserve Capital reserve Other reserve Profit and loss account account Â£m Â£m Â£m Â£m Â£m At 1 April 2002 89.4 25.5 23.3 - 336.3 Translation - (0.3) (1.3) - 2.3 differences Share premium 736.9 - - - - arising in the year Capital reduction (704.1) - - 704.1 - Capital reserve - - 18.5 - - arising on RSP Loss for the year - - - - (181.8) Other movements - - 6.6 - (666.5) relating to flotation At 31 March 2003 122.2 25.2 47.1 704.1 (509.7) Company Share premium account Other Profit and loss account reserve Â£m Â£m Â£m At 1 April 2002 89.4 - 319.6 Loss for the year - - (205.5) Share premium arising in the year 736.9 - - Capital reduction (704.1) 704.1 - Waiver of GUS group balances - - 37.6 At 31 March 2003 122.2 704.1 151.7 Issue costs of Â£7.9m have been offset against the share premium arising in the year. 24 Reserves (continued) The other reserve represents the amounts transferred from the share premium account within Burberry Group plc as a result of the capital reduction carried out immediately prior to flotation. This reserve will be classified as distributable when the creditors of Burberry Group plc as at the date of the capital reduction have been settled fully. The negative profit and loss account balance arising on consolidation resulted from the reorganisation of Burberry Group immediately prior to flotation (See Note 1 'Burberry Group Reorganisation'). This negative balance will be eliminated when the other reserve of Â£704.1m is classified as distributable. Dividend distributions are dependent on the Company's accumulated profit and loss account. As at 31 March 2003 the profit and loss account of Burberry Group plc was Â£151.7m (2002: Â£319.6m). Based upon the market price for Burberry Group shares at the year end, the expected impact on Burberry Group's consolidated profit and loss account of the RSP and IPO Option Scheme is a charge of Â£0.8m which would be taken direct to reserves. However, as this will be offset by an increase in share capital and share premium, there will be no net impact on Burberry Group's consolidated Shareholders' Funds. 25 Analysis of movement in net funds Other At non-cash movements At 1 April - interest and Waiver of GUS group Exchange 31 March 2002 Cash flow taxation balances movements 2003 Â£m Â£m Â£m Â£m Â£m Â£m Cash balances 27.8 9.3 - - 0.1 37.2 Overdrafts (0.7) (6.3) - - - (7.0) 27.1 3.0 - - 0.1 30.2 Bank loans due within (8.2) 7.9 - - 0.3 - year GUS group balances 192.3 (195.6) (24.8) 37.6 (9.5) - Liquid resources: 2.4 47.3 - - (0.3) 49.4 Short term deposits Total 213.6 (137.4) (24.8) 37.6 (9.4) 79.6 *Bank loans and overdrafts at 31 March 2003 represent unpresented cheques. Liquid resources as at 31 March 2003 comprise short term deposits and cash balances (principally denominated in Sterling, US and Hong Kong dollars) placed with banks and liquidity funds. 26 Reconciliation of net cash flow to movement in net funds Year to Year to 31 March 31 March 2003 2002 Â£m Â£m Increase in cash (see note 25) 3.0 11.0 Cash outflow from movement in external borrowings 7.9 2.6 Cash outflow from movement in liquid resources 47.3 2.4 Cash (inflow)/outflow arising from GUS group net balances (195.6) 12.7 Movement in net funds resulting from cash flows (137.4) 28.7 Non-cash movements on GUS group balances - tax and interest (24.8) (0.2) - waiver of balances by GUS group 37.6 - Exchange movements (9.4) 0.1 Movement in net funds (134.0) 28.6 Net funds at beginning of period 213.6 185.0 Net funds at end of period (see note 25) 79.6 213.6 27 Analysis of net funds As at As at 31 March 31 March 2003 2002 Â£m Â£m Cash and short term deposits 86.6 30.2 Unsecured bank loans and overdrafts* (7.0) (0.7) Secured bank loans due within one year - (8.2) GUS group balances - 192.3 Net funds at end of period (see note 25) 79.6 213.6 *Bank loans and overdrafts at 31 March 2003 represent unpresented cheques. 28 Acquisition Acquisition of the assets and business based in Korea ('the Korean acquisition') On 1 July 2002 Burberry Group purchased the Burberry trade and certain assets and liabilities of Euro Trading Limited, a Korean business which retailed Burberry merchandise in Korea and provided certain other distribution and selling services. The business and certain assets and liabilities were acquired by Burberry Korea Limited ('Burberry Korea') for a total consideration of Â£34.3m, including deferred consideration of Â£10.0m payable in June 2007. The total adjustments required to the book values of the assets and liabilities acquired in order to present these amounts purchased at fair values are set out in this note, together with the resultant amounts of goodwill arising. These purchases have been accounted for as acquisitions. 28 Acquisition (continued) The following financial information sets out the results of the Korean business in the period from the date of acquisition to 31 March 2003, as well as the incremental impact on Burberry Group as a result of the acquisition: 1 July 2002 to Burberry Group transactions Incremental impact of 31 March 2003 eliminated acquisition Â£m Â£m Â£m Turnover 37.9 (19.7) 18.2 Cost of sales (22.0) 19.7 (2.3) Gross profit 15.9 - 15.9 Net operating expenses (12.3) - (12.3) Operating profit before 3.6 - 3.6 interest, amortisation, exceptional items and taxation Amortisation of goodwill (1.0) - (1.0) Interest (0.8) 0.2 (0.6) Exceptional items (0.1) - (0.1) Profit before taxation 1.7 0.2 1.9 Taxation (0.8) - (0.8) Profit after taxation and 0.9 0.2 1.1 retained profit for the period The turnover and profit after taxation in the year ended 30 June 2002 of Burberry Korea relating to the assets and liabilities purchased were Â£38.6m and Â£5.3m respectively. These figures have been prepared in relation to the assets acquired rather than the entire asset base of the relevant company. The post acquisition cost structure of the business is different from that which existed prior to 1 July 2002. Accordingly these results are not necessarily representative of those that may arise in future periods. Included in the amounts above are purchases of Â£14.5m, commission income of Â£3.5m and advertising and promotion subsidies of Â£1.3m from businesses which are part of Burberry Group. The business had no recognised gains and losses other than those included in the profit and loss account and therefore no separate statement of total recognised gains and losses has been presented. Fair value Book value adjustments Fair value Burberry Korea Â£m Â£m Â£m Tangible fixed assets 0.5 - 0.5 Stock 14.1 (8.4) 5.7 Debtors 0.1 2.4 2.5 Creditors (0.7) - (0.7) Assets acquired 8.0 Goodwill 26.3 Consideration 34.3 Satisfied by: Cash 24.3 Deferred consideration 10.0 Total 34.3 28 Acquisition (continued) The value of the tangible fixed assets, stock, debtors and creditors at 1 July 2002 is taken from the accounts of the acquired business at that date, at exchange rates ruling on that date. The fair value adjustments recorded in respect of stock relate to unrealised profit in stock at the date of acquisition and provision for aged and obsolescent stock in accordance with Burberry Group accounting policy. The related deferred tax asset is reflected within debtors. These fair value adjustments are provisional, as they may be affected by the sale of the relevant stock acquired and will be finalised at 31 March 2004. The directors of Burberry Group consider that the estimated useful economic life of the acquired goodwill arising on the assets purchased is not less than 20 years as a result of the established nature of the Burberry brand in this market. Pre-acquisition related party transactions Prior to the acquisition, the business in Korea made product purchases from, and received commission payments and contributions for advertising costs from, other Burberry Group companies. The amount due to Burberry Korea for contributions for advertising costs and commissions was Â£0.5m in the quarter ended 30 June 2002. Product purchases from Burberry Group amounting to Â£3.9m were made by Burberry Korea in the quarter ended 30 June 2002. Impact of the acquisition on cashflows The subsequent impact on Burberry Group's cashflow statement as a result of the acquisition of the assets and liabilities of the Korean business in the year is shown below: Year ended 31 March 2003 Â£m Net cash inflow from operating activities 2.3 Interest paid (0.6) Purchase of tangible fixed assets (0.4) Cash inflow before use of liquid resources and financing 1.3 29 Financial commitments Burberry Group had annual commitments under non-cancellable operating leases as follows: As at 31 March 2003 2002 Land and buildings Â£m Â£m Expiry date: In one year 1.9 2.1 Between two and five years 6.3 4.8 After five years 9.4 8.7 17.6 15.6 The financial commitments for operating lease amounts calculated as a percentage of turnover ('turnover leases'), have been based on the minimum payment that is required under the terms of the relevant lease. Under certain turnover leases, there are no minimums and therefore no financial commitment is included in the table above. As a result, the amounts charged to the profit and loss account may be materially higher than the financial commitment at the prior year end. 30 Capital commitments Capital commitments contracted but not provided for by Burberry Group as at 31 March 2003 amounted to Â£6.9m (2002: Â£35.3m). Contracted capital commitments represent contracts entered into by the year end and major capital expenditure projects where activity has commenced by the year end. At 31 March 2002 capital commitments included an amount of Â£8.2m relating to a conditional contract to purchase a retail property lease. This purchase was completed in the year ended 31 March 2003. 31 Contingent liabilities Under the GUS group UK tax payment arrangements, Burberry Group is and will remain jointly and severally liable for any GUS liability attributable to the period of Burberry Group's membership of this payment scheme. Burberry Group's membership of this scheme was terminated with effect from 31 March 2002. Burberry (Spain) S.A. is liable for certain salary and social security contributions left unpaid by its sole contractors where the amounts are attributable to the period in which sub-contracting activity is undertaken on behalf of Burberry (Spain) S.A. It is not feasible to estimate the amount of contingent liability; but such expense has been minimal in prior years. A claim for Â£2.4m has been received from a number of the vendors of the Asian distribution businesses acquired on 31 December 2001. As reported in the Listing Particulars, Burberry Group intends to defend its position and has made appropriate provision for the outcome of this dispute. In the year ended 31 March 2002, Burberry Group received an invoice in respect of construction works at the Bond Street site from its former lessor totalling Â£0.5m. The Burberry Group has notified the other party that it is seeking recovery of certain costs incurred because of the late delivery of the store structure. The Burberry Group intends to defend its position. 32 Financial instruments Prior to Burberry Group's flotation in July 2002, the financial risk management of Burberry Group was controlled by GUS plc and co-ordinated with the overall risk management of GUS group. Up to flotation, Burberry Group's financial instruments consisted primarily of cash, borrowings and amounts loaned to and borrowed from other GUS group companies, with the interest rates set by GUS plc. The proceeds received by Burberry Group plc on flotation on the London Stock Exchange were used to repay, in cash, the funding balances held between GUS group companies and Burberry Group. After flotation, Burberry Group's financial instruments consisted primarily of cash, short term deposits, borrowings and foreign exchange contracts used to manage currency exposures. Financial risk management The policies that have been adopted since flotation in July 2002 are as follows: Liquidity and treasury management Burberry Group's management seeks to reduce financial risk and to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. Burberry Group's treasury function does not operate as a profit centre and transacts only in relation to the underlying business requirements. Prior to flotation these risks were monitored by GUS group's treasury function. Currency risk management Burberry Group's management has monitored the desirability of hedging the profits and net assets of overseas subsidiaries when translated into sterling for reporting purposes. It has not entered into any specific transactions for this purpose since flotation. Burberry Group's profit and loss account is affected by transactions denominated in foreign currency. To reduce exposure to currency fluctuations, Burberry Group has a policy of hedging foreign currency denominated transactions by entering into forward exchange contracts. Burberry Group's principal foreign currency denominated transactions arise from royalty income and the sale and purchase of overseas sourced products. In the UK, Burberry Group manages these exposures, by the use of Yen and Euro forward exchange contracts for a period of 12 months and up to 24 months respectively in advance. In addition, Burberry Group's overseas subsidiaries hedge the foreign currency element of their product purchases on a seasonal basis. The hedging activity involves the use of spot and forward currency instruments. 32 Financial instruments (continued) Financial risk management (continued) (a) Fair values of financial assets and financial liabilities Set out below is a comparison by category of book values and fair values of Burberry Group's financial assets and financial liabilities: As at 31 March 2003 2002 Book and Fair value Book and Fair value Â£m Â£m Primary financial instruments held or issued to finance the Group's operations: Investments 0.1 0.1 Cash at bank and in hand 37.2 27.8 Short term deposits 49.4 2.4 Loans to GUS group companies - 298.8 Total Financial Assets 86.7 329.1 Bank loans and overdrafts (7.0) (8.9) Short term loans from GUS group companies - (20.6) Long term loans from GUS group companies - (94.4) Other financial liabilities (40.2) (23.9) Total Financial Liabilities (47.2) (147.8) Total Net Financial Investments 39.5 181.3 2003 2002 Â£m Â£m Derivative financial instruments held to manage the currency profile: Forward foreign currency contracts - Book value - - - Fair value 5.5 1.9 32 Financial instruments (continued) Fair value methods and assumptions Fair value is the amount at which a financial instrument could be exchanged at an arm's length transaction between informed and willing parties, other than a forced or liquidation sale and excludes accrued interest. The principal assumptions are: i) The fair value of short-term deposits, loans and overdrafts approximates to the carrying amount because of the short maturity of these instruments. ii) The fair value of foreign currency contracts is based on a comparison of the contractual and year end spot exchange rates. iii) Prior to flotation, short and long term loans to and from GUS group companies were a mixture of interest bearing and non-interest bearing balances, with interest payable and receivable on a proportion of the amounts payable or receivable. These amounts were used to fund the Burberry Group. On flotation these balances were settled in cash. The fair value of these balances did not materially vary from the book value as the non-floating rate balances were primarily repayable on demand. (b) Interest rate risk profile Financial assets The interest rate risk profile of Burberry Group's financial assets (excluding investments) by currency is as follows: Cash at bank Short term Loans to GUS Total and in hand deposits group companies Currency Â£m Â£m Â£m Â£m At 31 March 2003 Sterling 5.7 21.8 - 27.5 US Dollars 3.7 7.9 - 11.6 Euros 20.2 14.3 - 34.5 Other currencies 7.6 5.4 - 13.0 Total 37.2 49.4 - 86.6 Floating rate assets 36.3 49.4 - 85.7 Balances for which no interest is paid 0.9 - - 0.9 At 31 March 2002 Sterling 1.7 - 155.7 157.4 US dollars 12.2 1.6 121.0 134.8 Euros 9.9 - 9.5 19.4 Other currencies 4.0 0.8 12.6 17.4 Total 27.8 2.4 298.8 329.0 Floating rate assets 27.3 2.4 297.8 327.5 Fixed rate assets 0.5 - - 0.5 Balances for which no interest is paid - - 1.0 1.0 Balances for which no interest is paid is made up of Sterling (Â£0.7m, 2002: Â£1.0m) and Euros (Â£0.2m, 2002: Â£nil). 32 Financial instruments (continued) (b) Interest rate risk profile (continued) In addition to the above, the investment of Â£0.1m at 31 March 2003 (2002: Â£0.1m) meets the definition of a financial asset. No interest is receivable on this Euro denominated financial asset. Floating rate assets earn interest based on the relevant national LIBID equivalents. Financial liabilities The interest rate risk profile of Burberry Group's financial liabilities by currency at 31 March is as follows: Financial Floating Fixed rate liabilities Total rate financial on which financial liabilities no interest liabilities is payable Currency Â£m Â£m Â£m Â£m At 31 March 2003 Sterling 3.1 - 7.2 10.3 US dollars 0.3 - 2.4 2.7 Euro 4.4 - 29.6 34.0 Other currencies - - 0.2 0.2 Total 7.8 - 39.4 47.2 At 31 March 2002 Sterling 0.7 - 6.1 6.8 US dollars 12.0 6.2 1.2 19.4 Euros 96.6 - 17.8 114.4 Other currencies 2.2 - 5.0 7.2 Total 111.5 6.2 30.1 147.8 The floating rate financial liabilities at 31 March 2003 and 2002 incurred interest based on relevant national LIBOR equivalents. The floating rate financial liabilities include preference shares of a total value of Â£0.8m and overdraft balances of Â£7.0m. See note 23 for further details regarding the preference shares. 32 Financial instruments (continued) (c) Currency exposures The tables below show the extent to which Burberry Group has monetary assets and liabilities at the year end in currencies other than the local currency of operation, after accounting for the effect of any specific forward contracts used to manage currency exposure. Monetary assets and liabilities refer to cash, deposits, borrowings and amounts to be received or paid in cash. Foreign exchange differences on retranslation of these assets and liabilities are taken to the profit and loss account, except where they hedge an investment in an overseas subsidiary of Burberry Group. Net foreign currency monetary assets/(liabilities) Sterling US Euro Other Total dollar currencies Â£m Â£m Â£m Â£m Â£m At 31 March 2003 Functional currency of operation: Sterling - (2.2) 29.0 4.7 31.5 US dollar (0.7) - (0.7) - (1.4) Euro (2.9) 0.1 - (0.1) (2.9) Other currencies 8.0 3.9 (0.1) - 11.8 Total 4.4 1.8 28.2 4.6 39.0 Year ended 31 March 2002 Functional currency of operation: Sterling - 0.2 11.4 0.7 12.3 US dollar (8.9) - (1.3) - (10.2) Euro - (0.3) - 0.5 0.2 Other currencies (0.5) (0.7) - (0.1) (1.3) Total (9.4) (0.8) 10.1 1.1 1.0 32 Financial instruments (continued) (d) Maturity of financial liabilities The maturity profile of the carrying amount of Burberry Group's financial liabilities, other than short-term trade creditors and accruals at 31 March, was as follows: Debt Non-equity Deferred Other financial Total shares consideration liabilities At 31 March 2003 Â£m Â£m Â£m Â£m Â£m In one year or less, or 7.0 - 2.5 1.3 10.8 on demand In more than one year - - - 1.7 1.7 but not more than two years In more than two years - 0.8 29.2 3.3 33.3 but not more than five years In more than five years - - - 1.4 1.4 7.0 0.8 31.7 7.7 47.2 Debt Deferred Other financial Total consideration liabilities At 31 March 2002 Â£m Â£m Â£m Â£m In one year or less, or on demand 29.5 2.5 - 32.0 In more than one year but not more than - 2.5 - 2.5 two years In more than two years but not more than 94.4 17.5 0.4 112.3 five years In more than five years - - 1.0 1.0 123.9 22.5 1.4 147.8 Debt balances as at 31 March 2003 relate to overdrafts and are repayable on demand. Non equity shares relate to redeemable preference shares, on which a non- cumulative dividend is paid (see note 23 for further details). All deferred consideration is payable in cash. Other financial liabilities principally relate to accrued lease liabilities (Â£2.4m), amounts payable in respect of the acquisition of Burberry (Spain) S.A. (Â£1.0m), which are both included in other creditors falling due after one year, and provision for onerous lease obligations (Â£4.0m) which is included in provisions. 32 Financial instruments (continued) (e) Borrowing facilities Prior to flotation, the facilities available to Burberry Group were controlled by GUS plc. These facilities enabled Burberry Group to finance its working capital requirements and for major capital projects. A committed unsecured facility of Â£150m was agreed with GUS plc commencing on 11 July 2002. Subsequent to the year end, this facility has been revised, with its amount reduced to Â£75m, and its committed term extended to July 2006. (f) Hedging Under Burberry Group's accounting policy (see note 2), the gains and losses on forward foreign currency contracts are deferred and accounted for when the underlying transaction is recognised. Certain gains and losses on such forward foreign currency contracts will be unrecognised in the financial statements and an analysis of these is shown below: Unrecognised gains Unrecognised losses Total net unrecognised Â£m Â£m gains/(losses) Â£m Gains and losses on hedges at 1 3.1 (1.2) 1.9 April 2002 Arising before 1 April 2002 (3.1) 1.1 (2.0) included in 2003 income Arising before 1 April 2002 and 0.3 0.1 0.4 not included in current year income Arising during the year and not 5.1 (0.2) 4.9 included in current year income Gains and losses on hedges at 31 5.4 (0.2) 5.2 March 2003 To be recognised in 2003/04 5.2 (0.2) 5.0 To be recognised thereafter 0.2 - 0.2 There are no material deferred gains or losses. 33 Post-retirement benefits (a) Accounting for pension costs Burberry Group, through membership of GUS group pension schemes, provides post retirement arrangements for its employees in the United Kingdom and its overseas operations which are both defined benefit and defined contribution in nature. Where arrangements are funded, assets are held in independently administered trusts. The pension costs charged to the profit and loss account in respect of the main plans were: Year ended 31 March 2003 2002 Â£m Â£m Defined benefit schemes GUS Pension Schemes UK (including special contribution of Â£0.5m) 1.4 0.6 Post retirement medical UK - 0.1 Unfunded retirement benefit plans US 0.4 - Defined contribution schemes GUS money purchase plan UK 0.5 0.5 Burberry money purchase plan US 0.5 0.4 Total pension costs 2.8 1.6 The unfunded retirement benefit plans in the US are classified as defined benefit schemes under FRS 17 because their exact cost cannot be quantified as the funds are subject to notional indexation according to specified investment return indices. Defined benefit schemes GUS defined benefit scheme Burberry Group companies participate in the GUS defined benefit scheme which offers benefits based on service and salary at retirement. Currently, Burberry Group is not permitting new entrants to the GUS defined benefit scheme. The GUS scheme has rules which specify the benefits to be paid and is financed accordingly, with assets being held in independently administered funds. A full actuarial valuation of the GUS scheme is carried out every three years with interim reviews in the intervening years. A full actuarial valuation of the GUS defined benefits scheme was carried out at 31 March 2001 by independent, qualified actuaries, Mercer Human Resource Consulting Limited, using the projected unit method. The principal actuarial assumptions used in that valuation for SSAP 24 purposes were as follows: Valuation at 31 March 2001 Valuation rate of interest - Pre-retirement 6.0% per annum - Post-retirement 6.0% per annum Rate of future earnings growth 4.3% per annum Pension and inflation increases 2.5% per annum 33 Post-retirement benefits (continued) At 31 March 2001 the market value of the GUS Scheme's assets was Â£327m. On the above assumptions, this represented 100% of the value of benefits that had accrued to members. For the year ended 31 March 2002, GUS group allocated to Burberry Group a share of the SSAP 24 charge calculated for GUS group as a whole. This allocated charge differed from the contributions Burberry Group made to the scheme. The difference was due to different assumptions and the treatment of surpluses and/or deficits. Any excess of the accumulated pension costs over the payment of contributions to the pension fund was recognised as a provision in the balance sheet. The pension provision held on the Burberry Group balance sheet was transferred to GUS plc prior to 31 March 2002. From 1 April 2002, Burberry Group's pension cost represents contributions payable to GUS defined benefit scheme. With effect from 1 April 2002, Burberry has been contributing 17.9% (2002: 13.8%) in respect of members in the main benefit section and 30.5% (2002: 27.9%) of pensionable salaries in respect of a director of Burberry Group plc. As at 31 March 2003 there were 90 (2002: 97) Burberry Group employees in the scheme (including a director of the Company) and Burberry Group contributions represented approximately 5.6% (2002: 5.1%) of total employer contributions to the scheme. During the year ended 31 March 2003 GUS made a special contribution to the Scheme of Â£10.0m (2002: Â£8.0m) in order to fund shortfalls disclosed by the valuation on the ongoing actuarial assumptions used for funding purposes. Burberry Group's share of this contribution is estimated at Â£0.5m (2002: Â£0.7m) and this amount has been charged in the profit and loss account. Unfunded retirement benefit plans US Rose Marie Bravo and Thomas O'Neill are entitled to unfunded retirement benefit plans. FRS 17 does not have a material impact on the reported obligation. Retirement indemnities (France) Burberry (France) S.A. offers lump sum benefits at retirement to all employees that are employed by the company based on the length of service and salary. The balance sheet provision at 31 March 2003 was Â£0.4m (2002: Â£0.3m). FRS 17 does not have a material impact on the reported obligation. There are no assets held by Burberry Group companies in relation to this commitment. Defined contribution schemes The GUS Money Purchase Pension Plan This scheme was introduced during the year ended 31 March 1999 with the aim of providing pension benefits for those GUS group employees in the United Kingdom who, hitherto, had been ineligible for GUS defined benefit pension scheme membership. The assets of the GUS scheme are held separately from those of GUS plc in an independently administered fund. At 31 March 2003, there were no prepayments or arrears in Burberry Group contributions (2002: nil). 33 Post-retirement benefits (continued) The Burberry Money Purchase Plan US Burberry Group administers a Money Purchase Plan in the USA (a 401(k) scheme) which covers all eligible full-time employees who have reached the age of 21 and have completed one full year of service. The assets of the scheme are held separately from those of Burberry Group in an independently administered fund. At 31 March 2003 there were no Burberry Group contributions in arrears (2002: Â£0.1m in arrears). (b) FRS 17 - Retirement benefits GUS defined benefit scheme Burberry Group participates in the GUS defined benefit scheme along with other GUS group companies. It is not possible to identify Burberry Group's share of the underlying assets and liabilities in the GUS defined benefit scheme on a consistent and reasonable basis. In accordance with FRS 17 the scheme is accounted for as a multi-employer scheme and from 1 April 2002 the defined benefit costs in respect of the GUS defined benefit pension scheme reflect the cash contribution that Burberry Group pays to the scheme. The principal actuarial assumptions used in the valuation for FRS 17 purposes of the GUS group defined benefit scheme were: At 31 March 2003 Rate of inflation 2.5% Rate of salary increases 4.3% Rate of increase for pensions in payment and deferred pensions 2.5% Discount rate 5.5% The deficit for the GUS group defined benefit scheme as a whole, on the above basis, was approximately Â£97.0m at 31 March 2003 (2002: Â£16.5m), after allowing for the Â£10.0m special contribution paid in March 2003 and before allowing for deferred tax. 34 Related party transactions GUS plc and other GUS group companies are related parties of Burberry Group as GUS plc owns the majority shareholding in Burberry Group plc. (a) Trading transactions and balances arising in the normal course of business The following sales/purchases and balances have arisen from transactions between Burberry Group and other GUS group companies including: the sale of merchandise and fabrics to GUS Home Shopping Limited, recharges made and the purchase of services from other GUS group companies, all of which are wholly owned subsidiaries of GUS plc. In addition a freehold industrial site in the UK was purchased from a GUS group company for Â£0.7m during the year. The services purchased by Burberry Group include treasury and tax management, cash management, insurance and insurance management, travel, pension, human resources, employee benefit administration, telephone network costs, vehicle hire, credit references, distribution and warehouse facilities, and certain internal audit support. GUS plc and other group companies Sales to/(purchases from) GUS group companies At 31 March Related party Related party's relationship to 2003 2002 GUS plc Â£m Â£m Sales to related parties GUS plc and other GUS group Ultimate parent company or 100% 0.3 2.3 companies subsidiary Purchases from related parties GUS plc and other GUS group Ultimate parent company or 100% (4.1) (6.6) companies subsidiary Amounts due from/(to) GUS group companies At 31 March Related party Related party's relationship to 2003 2002 GUS plc Â£m Â£m Related party debtors GUS plc and other GUS group Ultimate parent company or 100% 0.2 0.3 companies subsidiary Related party creditors GUS plc and other GUS group Ultimate parent company or 100% (5.1) (0.3) companies subsidiary Total (4.9) - 34 Related party transactions (continued) (b) Funding transactions and balances arising in the normal course of business Prior to flotation the funding balances were a mixture of interest bearing and non-interest bearing balances, with interest payable and receivable on a proportion of the amounts payable or receivable. These amounts were used to fund Burberry Group. As part of the flotation these balances were settled in cash or waived. Since flotation amounts have been deposited with GUS group companies in accordance with Burberry's counterparty risk policy. No amounts were outstanding at 31 March 2003. In addition forward currency contracts have been undertaken with GUS group companies, which since flotation have been subject to Burberry's counterparty risk policy. The fair value at 31 March 2003 of such hedges amounted to Â£4.3m. (c) Senior management On 31 December 2001 the Burberry trade and certain related assets of businesses in Hong Kong, Singapore and Australia were acquired. The vendors of the businesses, companies owned by Dr Tay, Mr Chan and Mr Ng, have been or are employed by Burberry Group. These individuals have interests in companies which lease properties to Burberry Group, purchase goods from Burberry Group companies and receive commission payments for the sale of Burberry goods in certain territories. Product sales to the companies owned by these individuals totalling Â£7.1m were recorded in the year ended 31 March 2003 (2002: Â£1.9m), and a balance owed by Burberry Group to these companies of Â£0.2m was outstanding at 31 March 2003 (2002: Â£0.5m). The total amounts paid to the companies owned by these individuals was Â£0.6m in relation to the provision of warehousing and office accommodation in the year ended 31 March 2003 (2002: Â£0.1m). At 31 March 2003 no amounts were owing by Burberry Group for services provided by these companies (2002: Â£nil). Commission of Â£0.6m was payable in respect of the year ended 31 March 2003 to the companies owned by these individuals (2002: Â£0.4m), with no amounts outstanding by Burberry Group at 31 March 2003 (2002: Â£0.1m) except in respect of prior years which are the subject of a claim from the vendors. On 1 July 2002 the Burberry trade and certain related assets of the business in Korea were acquired from Mr Shin, who is now employed by Burberry Group. Mr Shin has an interest in the Burberry Group companies through the provision of office space and IT services. The total amounts paid to the companies connected to Mr Shin in respect of lease rental and IT services were Â£0.3m and Â£0.1m respectively, with nil outstanding at 31 March 2003. Four year summary 2000 2001 2002 2003 Pro forma Pro forma Pro forma Turnover by product category Â£m Â£m Â£m Â£m Womenswear 63.4 134.7 165.2 197.9 Menswear 73.8 142.4 149.4 162.8 Accessories 50.2 98.0 125.8 169.5 Other 7.5 6.9 5.3 5.1 License 30.8 45.8 53.5 58.3 225.7 427.8 499.2 593.6 Turnover by destination Â£m Â£m Â£m Â£m Europe 115.5 259.0 286.7 302.7 North America 62.3 90.9 110.5 140.5 Asia Pacific 40.8 74.6 100.1 147.0 Other 7.1 3.3 1.9 3.4 225.7 427.8 499.2 593.6 Turnover by operation Â£m Â£m Â£m Â£m Retail 99.1 143.2 156.9 228.4 Wholesale 95.8 238.8 288.8 306.9 License 30.8 45.8 53.5 58.3 225.7 427.8 499.2 593.6 Profit by operation Â£m Â£m Â£m Â£m Wholesale and Retail (6.6) 29.2 42.7 64.3 License 25.1 39.5 47.6 52.4 Operating profit 18.5 68.7 90.3 116.7 Net interest income/(expense) 2.9 5.7 (0.5) (0.9) Foreign currency gain/(loss) on loans with GUS group (pre 0.6 6.8 (0.1) (2.3) flotation) Goodwill amortisation - (3.6) (4.9) (6.4) Exceptional items - 2.9 - (22.0) Profit on ordinary activities before taxation 22.0 80.5 84.8 85.1 Tax on profit on ordinary activities (6.6) (26.1) (28.3) (32.9) Profit on ordinary activities after taxation 15.4 54.4 56.5 52.2 % % % % Margin analysis Gross margin as % of turnover 46.8 47.8 50.3 56.0 Operating profit before goodwill amortisation and exceptional 8.2 16.1 18.1 19.7 items as % of turnover Four year summary (continued) 2000 2001 2002 2003 Pro forma Pro forma Pro forma Earnings and dividends Pence per share Pence per share Pence per share Pence per share Basic earnings per share 3.1 10.9 11.3 10.5 Basic earnings per share before 3.1 11.2 12.3 14.9 goodwill amortisation and exceptional items Diluted earnings per share 3.0 10.8 11.1 10.3 Diluted earnings per share before 3.0 11.1 12.1 14.6 goodwill amortisation and exceptional items Dividend per share (post flotation n/a n/a n/a 3.0 only) Dividend cover * n/a n/a n/a 5.0 * Based on profit after taxation before goodwill amortisation and exceptional items. 2000 2001 2002 2003 Pro forma Pro forma Pro forma Balance Sheet Â£m Â£m Â£m Â£m Working capital (excluding cash and borrowings) 42.7 76.1 87.7 73.8 Fixed assets, investment and other intangible assets 57.5 101.0 125.4 162.4 Other long term liabilities (14.2) (9.1) (3.9) (10.6) Net operating assets 86.0 168.0 209.2 225.6 Cash at bank, net of overdraft and borrowings 12.3 5.4 21.3 79.6 Taxation (including deferred taxation) 0.1 (10.0) (20.5) 0.4 Deferred consideration for acquisitions - (12.9) (22.5) (31.7) Goodwill - 89.2 94.9 122.8 Investment in own shares - - - 3.3 Dividends payable - - - (10.0) Net assets 98.4 239.7 282.4 390.0 2000 2001 2002 2003 Pro forma Pro forma Pro forma Cash flow Â£m Â£m Â£m Â£m Operating profit before goodwill amortisation and exceptional items 18.5 68.8 90.3 116.7 Depreciation, impairment and trademark amortisation charges 5.6 11.0 14.0 19.0 Loss on disposal of fixed assets and similar non-cash charges 0.2 - 0.2 1.5 Decrease/(increase) in stocks (0.4) (11.9) (7.0) 5.2 Increase in debtors (0.5) (1.0) (5.2) (2.4) Increase/(decrease) in creditors 4.3 22.2 (2.2) 25.0 Net cash inflow from operating activities before capital 27.7 89.1 90.1 165.0 expenditure and financial investment Purchase of tangible and intangible fixed assets (6.8) (39.3) (39.4) (55.7) Sale of tangible fixed assets 0.2 19.1 0.5 0.2 Purchase of own shares - - - (4.5) Net cash inflow from operating activities financial investment 21.1 68.9 51.2 105.0 Principal subsidiaries Company Country of incorporation Nature of business Europe Burberry Limited United Kingdom Luxury goods retailer, wholesale, manufacturer and licensor Burberry Italy Retail Limited United Kingdom Luxury goods retailer The Scotch House Limited * United Kingdom Luxury goods brand and licensor Woodrow-Universal Limited * United Kingdom Textile manufacturer Burberry (France) S.A. France Luxury goods retailer and wholesaler Burberry (Suisse) S.A.* Switzerland Luxury goods retailer Burberry Italy SRL* Italy Luxury goods wholesaler Burberry (Deutschland) GmbH Germany Luxury goods retailer and wholesaler Burberry (Spain) S.A. Spain Luxury goods wholesaler Mercader y Casadevall S.A. Spain Luxury goods retailer Burberry (Spain) Retail S.L. Spain Luxury goods retailer North America Burberry Limited United States of America Luxury goods retailer Burberry (Wholesale) Limited United States of America Luxury goods wholesaler Hampstead Properties Inc. United States of America Property company Burberry Realty, Inc. United States of America Property company Asia Pacific Burberry Asia Ltd2 Hong Kong Luxury goods retailer and wholesaler Burberry (Singapore) Distribution Company Singapore Luxury goods retailer and wholesaler Pte Ltd2 Burberry Pacific Pty Ltd2 Australia Luxury goods wholesaler Burberry Korea Ltd 1 Korea Luxury goods retailer and wholesaler *Held directly by Burberry Group plc Note 1 - assets and liabilities acquired 1 July 2002 Note 2 - assets acquired 31 December 2001 All principal subsidiary undertakings are wholly owned as at 31 March 2003 and operate principally in the country in which they are incorporated. Non operating intermediate holding and financing companies are excluded from the above. Burberry Group plc is 77.5% owned by GUS Holdings Limited, a subsidiary of GUS plc, which is registered in England and Wales. The ultimate parent undertaking and controlling party is GUS plc. Copies of GUS plc consolidated financial statements can be obtained from the Company Secretary at GUS plc, Universal House, Devonshire Street, Manchester, M60 1XA. Shareholder information Registrar Enquiries concerning holdings of the Company's shares and notification of the holder's change of address should be referred to Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6DA, telephone: 0870 600 3987. In addition, Lloyds TSB Registrars offer a range of shareholder information online at www.shareview.co.uk. A text phone facility for those with hearing difficulties is available by contacting telephone: 0870 600 3950. Share price information The latest Burberry Group plc share price is available on Ceefax and also on the Financial Times Cityline Service, telephone: 0906 843 2727(calls charged at 60p per minute). Internet A full range of investor relations information on Burberry Group plc, including latest share price and dividend history, is available at www.burberry.com Financial calendar for the year ending 31 March 2004 First quarter trading update and Annual General Meeting 15 July 2003 Final dividend record date 25 July 2003 Final dividend to be paid 6 August 2003 First half trading update October 2003 Preliminary announcement of interim results 18 November 2003 Third quarter trading update January 2004 Second half trading update April 2004 Preliminary announcement of annual results May 2004 Registered office Burberry Group plc 18-22 Haymarket London SW1Y 4DQ Telephone: 020 7968 0000 This information is provided by RNS The company news service from the London Stock Exchange

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