Final Results

Reliance Security Group PLC 27 June 2002 EMBARGOED UNTIL 7.00 AM THURSDAY 27 JUNE 2002 Reliance Security Group plc Preliminary announcement of results for the year ended 26 April 2002 • Turnover up 28.8% to £231.6 million (2001: £179.8 million) • Profit before tax up 17.9% to £11.5 million (2001: £9.8 million) • Earnings per share up 22.1% to 35.8p (2001: 29.3p) • Dividend per share up 15.3% to 13.6p (2001: 11.8p) • Strong organic growth • Sustained investment in complementary businesses • Continued growth in facilities management and higher value added services Brian Kingham, Chairman, commenting on the results, said: 'Once again I am delighted to report outstanding progress in a year when we have again invested heavily for the future. The Group now employs over 10,000 people and is building upon its core competencies in security and facilities management creating an added dimension in value to customers and shareholders'. Notes to Editors Reliance is an established market leader in the provision of contract security, facilities management, and support services. Reliance employs over 10,000 people from a network of offices throughout the UK. For further information: Brian Kingham Chairman 020 7730 9716 Neil French Group Finance Director 01895 205105 27 June 2002 CHAIRMAN'S STATEMENT Once again I am delighted to report outstanding progress in a year when we have again invested heavily for the future. Our strong profits and turnover growth, which is all the more welcome because it is largely organic, is driven by continuing investment in complementary businesses and development of specialist skills to serve new market segments. The Group now employs over 10,000 people and is building upon its core competencies in security and facilities management, creating an added dimension in value for customers and shareholders. Results Turnover for the year to 26 April 2002 increased by 28.8% to £231.6m (2001: £179.8m). Profit before tax for the year rose by 17.9% to £11.5m (2001: £9.8m) and earnings per share rose by 22% to 35.8p (2001: 29.3p). Cash generated from operations more than doubled to £14.8m (2001: £6.5m). Dividend A final dividend is proposed of 10.45p making a total of 13.6p (2001: final dividend of 9.0p, total 11.8p) subject to approval at the AGM on 11 September 2002 and payable on 20 September 2002 to shareholders on the register on 30 August 2002. Overview Our strategic priorities are to extend and strengthen our market leadership in security services and solutions, where we are already one of the three largest providers, and to expand our strong presence in the fast growing and complementary facilities management and outsourced business process markets. Differentiation derives from a culture of continuous improvement and attitudes supportive of exceptional individual and team performance in delivering high levels of customer care. We have developed an innovative approach to work processes and the use of technology. This differentiation and our emphasis on long-term customer relationships and high levels of recurring revenue, will continue to deliver strong organic growth, which will be supplemented by new start-ups and bolt-on acquisitions complementary to our core competencies. Security Services We have continued to grow our overall business volume, we have added capacity to our infrastructure to handle further expansion and widened our IT support to achieve greater financial and competitive benefits. The tragic events of September 11th in the United States have heightened awareness of security issues everywhere and increased customers' desire for improvements and change. Whilst experiencing significant growth, the market remains highly competitive and exhibits interest in integrated solutions which offer economies and increased effectiveness. Our building of organisational capacities, including remote surveillance, to meet these needs over the last few years, has added to our competitive strength and enabled us to provide comprehensive security solutions. During the year, we mobilised a number of large scale and complex nationwide contracts involving teams with a variety of skills and disciplines, supported by appropriate technology. Notable were our £50m contract over five years for BAe Systems and the extension of our work for Norwich Union, following the creation of CGNU, and for SmithKline Beecham on becoming GlaxoSmithKline. We have maintained our focus on growing specialist market segments differentiating ourselves by offering a greater depth of skills and more comprehensive services. Our specialist retail security business, in its third year of existence, increased its business by 40%. We won significant new business in transport and distribution, manufacturing, and pharmaceuticals. A notably fast-growing segment this year has been Financial and Investment with 59% growth. Our new contract with Deutsche Bank, covering 32 locations, was mobilised as well as 11 other new contracts in this specialist market segment. Patrol Net, our national network of rapid response vehicles has won a variety of new customers, increasing sales by 25%. This service, when combined with other group products including remote electronic surveillance, has a capacity to offer customers highly flexible security as well as estate management options. We have a continuing programme of investment in IT systems and infrastructure directed to enhancing customer benefits, reducing costs, streamlining work processes and shifting resources to customer facing roles. We increased IT management resources, including two specialist board level appointments. Expenditure on IT in the year was £1.2m with £3.7m scheduled for 2002/2003. This will result in considerable benefits in competitive strength, enhanced customer services and new economies of scale from 2004. The UK government regulation of the private security industry through licensing of employees is to be rolled out in 2003/2004. We expect this to have a favourable effect on the industry by reducing irresponsible competitive pressure on wages and encouraging greater investment in training and contract management support. We would also expect to see the opening up of certain government security and quasi security activities indicated in the Home Secretary's support for 'a wider police family'. Our electronic surveillance business continues to progress, increasing sales by 24% and recurring revenues by over 30%. Our reputation for the highest technical standards in design, installation and maintenance was echoed in the much sought after Security Management Today security excellence awards where we won 'Best Security Installer' and 'Best Customer Care Initiative'. We have extended our support for charitable, voluntary and government organisations involved in community crime prevention initiatives. We worked with the Youth Justice Board in pioneering community merit awards. We worked with the Midlands Retail Crime Reduction Initiative in partnership with the local authorities and major retailers. We were proud once again to sponsor the Police Foundation annual lecture. We renewed support for Youth mentoring projects and for Crime Concern, the leading crime prevention charity. These initiatives serve to underline our active support for those working to develop and operate imaginative programmes which address the causes of crime. This is a long term investment in communities which benefits our customers and makes good business sense. USA In November 2001, following the tragic events of September 11th, the US Government enacted legislation to federalise pre-board security screening at US airports. When implemented, this will have an adverse impact on the aviation security business of Command Security Corporation, in which the Group has a 21.7% stake. We have considered carefully the carrying value of the investment in Command. Recognising the business's strong profit and cash generation in the period preceding the implementation of the legislation in November 2002, its recent growth in the unaffected parts of the business and the potential for pre-board screening to return to the private sector in 2005, we have determined that the carrying value of the Group's investment in Command at £4.6m at the year end is appropriate. Facilities Management The year has seen outstanding progress in our facilities management and support services businesses. We have won important new contracts with an annual sales value of £22m. We now directly employ more than 2,280 FM people providing a wide range of facilities and support services. In addition we deliver the services of more than 55 service partners through a process of seamless supply-chain integration. We provide our customers with increased flexibility and added value by managing change, multi-tasking and process re-engineering. We operate the facilities at 2,350 locations nationwide involving approximately 23 million sq. ft. of offices and industrial space. Planned maintenance programmes, performance management systems and daily support services are supplemented by 24 hour 7 day help desks which process large numbers of enquiries. We respond with a wide range of services including mechanical and electrical engineering, energy management, fabric and buildings services, cleaning, security, catering, grounds, reception, mailroom, health, safety and administration. Our £100m pa five year FM contract with the BT Group, the largest yet awarded in the private sector, in partnership with Carillion plc and Balfour Beatty/Haden, has now entered its second year. The groundbreaking innovative approach, offering multi-skilling and tasking continues to be refined and to offer our customer a wide range of operational efficiencies and economic benefits. To sustain high levels of growth we have enlarged and strengthened the management team at all levels, bringing into the business a powerful new dimension in FM expertise and achievement. Martin Pickard, a widely experienced facilities specialist and a founder of the Association of Facilities Management has joined the board of Reliance Integrated Services Limited as chief executive; Keith Glennister as business development director; Chris Adcock as finance director; and operations specialists Howard Cooper, Peter Jones and Graham Sherlock. Our provision of specialist FM and support services to the Criminal Justice System has made strong progress, growing by 55%. We announced in January the award by the Scottish Executive of the electronic monitoring (tagging) of offenders contract for the whole of Scotland, which is now fully mobilised and operating successfully. We believe we are now the largest UK provider of electronic tagging which as an alternative to imprisonment continues to gain popularity with the Home Office and the Courts. Our 30 year contract to finance, design, build and operate four buildings for the Police Service is on target for completion in October. Meanwhile, we have started operations with the provision of 'early services' at all locations. Our work for the Forensic Science Service has grown by 26% to serve 34 of our 43 Police Services. I reported in December the warrant enforcement contract for Magistrates Courts, which has made excellent progress exceeding its promised performance improvement by 25% in the first six months. Market growth in facilities management and outsourced business processes is estimated to be in the area of 15%pa. People It is my great pleasure to pay tribute to the achievements of our people and to extend my warmest thanks on behalf of the board. Our employees have done a tremendous job with great enthusiasm and professionalism. They have made the 'Reliance Difference' often with notable style, as in winning a record number of 'Security Officer of the Year' awards from the British Security Industry Association. Our people have built on last year's Government awarded Charter Mark for high achievement in customer service with a range of initiatives designed to renew and reinvent the many elements constituting outstanding customer service. A new method of measuring and benchmarking the 'Red Book' continuous improvement scheme was developed as well as new measurement processes for quality improvement. An exceptionally high proportion of our people, over 90%, are customer facing and are called upon to provide high levels of inter personal and communications skills. Almost 1,000 customer letters of commendation were received this year. Once again we increased spending on training, with particular emphasis given to the workplace and the development of continuous improvement champions. We provide a wide variety of in-house training courses with over 5,600 employees benefiting this year. Dedicated training days for managers and supervisors were increased by 34%. Training for our FM service delivery people is increasingly focused on multi-skilling to improve individual productivity and to enable the provision of more effective customer solutions. More than 300 employees achieved City and Guilds qualifications. Over 50% of appointments to existing management jobs were made by internal promotions. Preparations for assessment next year of our 'Investors in People' accreditation were started. Investors in People forms the core of our approach and affirms our belief in investing to enable our people to improve their knowledge and skills. It is the framework for continuously improving the performance of our business and making us more competitive through a planned approach to setting and communicating business objectives and developing our people to meet these objectives. James Graham, due to other commitments, stood down from the group board at the year end and I thank him for his wise counsel and valuable contribution. In March we were delighted to welcome to the group board Nigel Stapleton, a former chairman of Reed Elsevier plc. I also welcome Sir Neville Purvis, the former director general of the British Safety Council who in August became Chairman of Reliance Secure Task Management Ltd. The Future We operate in a growing £50 billion UK market which is fragmented with few barriers to substantial growth. In security services and solutions we have built a strong market leadership position and a momentum which we believe will benefit from impending regulation and increased demand. Our strong presence in the rapidly growing facilities management market complements and strengthens our competitive position. Our emphasis is on the specialist and higher value added areas of our markets where our core competencies and market achievements offer competitive advantage. We have consistently made the necessary investment to drive growth and we look to the future with confidence. Brian Kingham Chairman 26 June 2002 FINANCIAL REVIEW Overview In the year to 26 April 2002, the Group has achieved significant growth in turnover and profit and has generated a substantial cash inflow. Turnover for the year was £231.6 million, 28.8% higher than in the previous year, reflecting strong organic growth in the Group's operating companies. In the period 1997-2002, the Group has grown its turnover at a compound annual rate of 17.8%. Profit before taxation for the year was £11.5 million, 17.9% higher than in the prior year. In the period 1997-2002, the Group's pre-tax profits have increased at a compound annual rate of 30.4%. Net cash inflow from operating activities, after funding significant organic growth in the year, was £14.8 million (2001: £6.5 million). Over the period of three years to 26 April 2002, the total return to the Company's shareholders far exceeded the total returns calculated on the basis of the FTSE All Share and FTSE Support Services indices. Over the periods of five years and ten years to 26 April 2002, for which FTSE Support Services data are not available, the total return to the Company's shareholders also far exceeded the total returns calculated on the basis of the FTSE All Share index. We are committed to continuing to generate superior returns for our shareholders. Accounting standards The Group has adopted the requirements of Financial Reporting Standard 19 'Deferred Tax' and Urgent Issues Task Force Abstract 34 'Pre-contract Costs'. The impact on the results for the current and prior year, which is not material, is quantified in Note 6 to the Preliminary Announcement. The prior year's results have been restated as necessary. The Group does not currently operate a defined benefit pension scheme, so the requirements of Financial Reporting Standard 17, 'Retirement Benefits' do not currently apply. Group results Operating margin Gross margin, the ratio of gross profit to sales, is higher in Security Services than in Facilities Management, which latter, as a result of its faster growth, accounted for 20.6% of Group turnover compared with 10.1% in the prior year. As a result, Group gross margin was 18.8% compared with 19.1% in the prior year. The ratio of administrative expenses to turnover was 14.4% (2001: 14.1%), reflecting continued investment in management, systems and training to support the Group's continuing growth. Consequently, Group operating margin, the ratio of operating profit to turnover was 4.4% compared with 5.0% in the previous year. Goodwill amortisation The charge for goodwill amortisation in the year was £0.4 million (2001: £0.1 million), of which £0.2 million (2001: £0.1 million) was included in share of associates' operating profit. The increase in the overall charge in the year reflects a full year's charge in respect of acquisitions and investments completed in the year to April 2001 and a charge in the current year relating to the acquisition of the electronic monitoring services business. Net interest payable Net interest payable, including the Group's share of interest payable by associated undertakings, was £0.6 million (2001: £0.1 million). The increase, year on year, reflects the cost of financing the acquisitions and investments completed in the second half of the previous year, the aggregate cost of which was £10.5 million. Interest cover remained healthy at 19 times (2001: 93 times). Taxation The net taxation charge for the year was £3.5 million (2001: £3.2 million) which represents an effective rate of 30.2% (2001: 32.3%). The reduction in effective rate reflects the low effective rate of taxation on the Group's share of associated companies' profits in the current year. Earnings per share Basic earnings per share increased by 22.1% to 35.8p. In the period 1997-2002, the Group's underlying basic earnings per share have increased at a compound annual rate of 32.1%. Dividends Dividends paid or proposed were 13.6p per share, 15.3% higher than in the previous year. Dividend cover was 2.6 times (2001: 2.5 times), reflecting the Group's policy of retaining sufficient profit to facilitate its continuing growth. Over the past five years, the Group's return on shareholders' funds (the ratio of post-tax profit to shareholders' funds) has consistently exceeded 30%. Cash flow Net cash inflow from operating activities was £14.8 million (2001: £6.5 million) an increase of 127%. The year-on-year improvement reflects an increase in profit and tighter control over working capital. UK corporation tax paid was £3.0 million (2001: £2.7 million) reflecting higher profits and the progressive impact of self-assessment. Capital expenditure and financial investment resulted in a cash outflow of £2.8 million (2001: £7.1 million). The prior year figure included £5.4 million relating to investments in Chesterton International plc and Safe Estates Services Limited. The net cash outflow from acquisitions was £0.3 million (2001: £5.1 million) representing costs incurred in the year in connection with the acquisition of the electronic monitoring services business in the South of England. The prior year figure comprised the acquisition of Goldrange Limited and the investment in Command Security Corporation. Dividends paid, excluding dividends paid in respect of shares held by the ESOP trust, increased by 9.6% to £2.7 million. The improvement in operating cash flow and the reduced expenditure on acquisitions and investments resulted in a cash inflow before financing of £6.9 million (2001: £10.9 million outflow). Segment results Recognising the continuing growth and increasing significance of the Group's facilities management businesses, a segmental analysis of turnover, profit and operating assets has been introduced this year. Segment profit, for each segment, comprises profit on ordinary activities after share of associates' results and before finance charges. The 'Security Services' and 'Facilities Management' segments include the results of those of the Group's businesses and associated undertakings that provide to their customers site-based security services and facilities management services respectively. Central administrative costs and operating assets have been allocated to the two segments. Security Services Turnover was £183.8 million, 13.8% higher than in the previous year, reflecting strong organic growth, including the award of several large, multi-year contracts. Segment profit increased by 13.7% to £9.4 million (2001: £8.2 million), the increase matching growth in turnover. As a result, segment operating margin, the ratio of segment profit to turnover, was maintained at 5.1%. Effective control over working capital resulted in a 5.6% reduction in operating assets to £17.9 million (2001: £19.0 million), notwithstanding the growth in turnover. Consequently, the return on operating assets, the ratio of segment profit to operating assets, increased to 52.3% (2001: 43.4%). Facilities Management Turnover was £47.8 million, 162% higher than in the previous year. The increase in turnover reflects a full year's trading on major contracts in Reliance Integrated Services and the considerable expansion of Reliance Secure Task Management following the award of several significant contracts and the acquisition of the electronic monitoring services business in the South of England. Segment profit increased by 69.4% to £2.8 million (2001: £1.7 million). Segment operating margin was 5.9%, compared with 9.1% in the previous year, reflecting the transition from interim phase to full service delivery on certain major contracts and significant strengthening and enlargement of management and business development teams to provide for continuing growth. Good control over working capital, together with the receipt of a dividend from an associated undertaking, resulted in a 50% reduction in operating assets to £1.8 million (2001: £3.7 million), notwithstanding the increase in turnover. The return on operating assets therefore increased sharply to 152% (2001: 44.8%). Reliance Security Group plc Group profit and loss account (Audited) for the year ended 26 April 2002 Restated 2002 2001 Notes £'000 £'000 Group turnover 3 231,629 179,794 Cost of sales (188,165) (145,476) Gross profit 43,464 34,318 Administrative expenses (33,365) (25,378) Operating profit 10,099 8,940 Share of associates' operating profits 2,059 942 Profit on ordinary activities before finance charges 3 12,158 9,882 Net interest payable (567) (46) Group Associates (69) (60) Profit on ordinary activities before taxation 11,522 9,776 Tax on profit on ordinary activities (3,480) (3,154) Profit on ordinary activities after taxation 8,042 6,622 Dividends 4 (3,067) (2,665) Retained profit for the year transferred to reserves 4,975 3,957 Earnings per ordinary share Basic 35.8p 30.5p Effect of prior year adjustment - (1.2)p Restated basic 5 35.8p 29.3p Diluted 35.4p 30.0p Effect of prior year adjustment - (1.2)p Restated diluted 5 35.4p 28.8p The restatement of the prior year's results relates to the adoption of FRS 19 'Deferred Tax' and the early adoption of UITF 34 'Pre-Contract Costs' as disclosed in note 6. All material operations in the Group continued throughout both financial years. Reliance Security Group plc Group statement of total recognised gains and losses (Audited) for the year ended 26 April 2002 Restated 2002 2001 Note £'000 £'000 Profit for the financial year Group 6,511 6,038 Associates 1,531 584 Total recognised gains relating to the year 8,042 6,622 Cumulative effect of prior year adjustments 6 (84) - Total gains recognised since last financial statements 7,958 6,622 The restatement of the prior year's results relates to the adoption of FRS 19 'Deferred Tax' and the early adoption of UITF 34 'Pre-Contract Costs' as disclosed in note 6. Reliance Security Group plc Group balance sheet (Audited) as at 26 April 2002 Restated 2002 2001 £'000 £'000 Fixed Assets Intangible assets : goodwill 3,075 1,847 Tangible assets 6,407 6,585 Investments 13,438 11,906 22,920 20,338 Current assets Stocks 1,024 1,072 Debtors 37,038 29,252 Cash at bank and in hand 4,493 7 42,555 30,331 Creditors: amounts falling due within one year (37,706) (28,833) Net current assets 4,849 1,498 Total assets less current liabilities 27,769 21,836 Creditors: amounts falling due after more than one year (637) (821) Provisions for liabilities and charges (720) - Net assets 26,412 21,015 Capital and reserves Called up share capital 1,164 1,153 Share premium account 2,264 1,853 Revaluation reserve 152 152 Profit and loss account 22,832 17,857 Equity shareholders' funds 26,412 21,015 The restatement of the prior year's results relates to the adoption of FRS 19 'Deferred Tax' and the early adoption of UITF 34 'Pre-Contract Costs' as disclosed in note 6. Reliance Security Group plc Group cash flow statement (Audited) for the year ended 26 April 2002 2002 2001 Note £'000 £'000 Net cash inflow from operating activities 7 14,823 6,544 Returns on investments and servicing of finance Interest received 17 166 Interest paid (528) (135) Interest element of finance lease repayments (65) (45) Dividends received from associates 1,364 - Net cash inflow/(outflow) from returns on investments and servicing of finance 788 (14) Taxation UK corporation tax paid (2,950) (2,743) Capital expenditure and financial investment Purchase of tangible fixed assets (1,334) (1,304) Purchase of own shares by ESOP (1,533) (503) Sale of own shares by ESOP 23 - Purchase of fixed asset investments - (5,373) Sale of tangible fixed assets 85 94 Net cash outflow from investing activities (2,759) (7,086) Acquisitions Purchase of subsidiary undertakings - (593) Purchase of a business (305) - Investment in associates - (4,521) Net cash outflow from acquisitions (305) (5,114) Equity dividends paid (2,729) (2,489) Net cash inflow/(outflow) before financing 6,868 (10,902) Financing Issue of ordinary share capital 422 9 Increase in short term borrowings - 504 Capital element of finance lease repayments (356) (224) Net cash inflow from financing 66 289 Increase/(decrease) in cash in the year 6,934 (10,613) Reconciliation of net cash flow to movement in net cash/(debt) Increase/(decrease) in cash in the year 6,934 (10,613) Net cash inflow/(outflow) from borrowings and finance lease repayments 356 (280) Change in net cash/(debt) resulting from cash flows 7,290 (10,893) New finance leases (100) (822) Movement in net cash/(debt) in the year 7,190 (11,715) Opening net (debt)/cash at start of year (5,097) 6,618 Closing net cash/(debt) at end of year 2,093 (5,097) Reliance Security Group plc Notes to the accounts (Audited) for the year ended 26 April 2002 The financial information set out above does not comprise the Company's statutory accounts. The auditors have given an unqualified opinion on the accounts for the year ended 26 April 2002 which will be delivered to the Registrar of Companies following the annual general meeting. Statutory accounts for the previous year ended 27 April 2001 have been filed with the Registrar of Companies. The auditors' report on those accounts was unqualified and did not contain any statement under section 237(2) or (3) of the Companies Act 1985. 1 Accounting Convention The Group accounts have been prepared in accordance with applicable accounting standards and under the historical cost convention, as modified by the revaluation of land and buildings. The accounting policies have been consistently applied in dealing with items which are considered material in relation to the Group's accounts, except for the policy on deferred tax which has been changed to comply with FRS 19 'Deferred Tax' and the policy on bid costs which has been changed to comply with UITF 34 'Pre-contract costs' as explained in note 6. The financial years of all group companies are the 52 or 53 weeks up to the Friday nearest the accounting reference date of 30 April. 2 Consolidation The consolidated profit and loss account and balance sheet incorporate the accounts of Reliance Security Group plc and its subsidiary undertakings. The results of subsidiary undertakings acquired during the year are included in the consolidated profit and loss account from the date on which control passed. 3 Segmental information Turnover Segment profit Operating assets Restated Restated Restated 2002 2001 2002 2001 2002 2001 £'000 £'000 £'000 £'000 £'000 £'000 By activity Security services 183,827 161,572 9,359 8,230 17,891 18,960 Facilities management 47,802 18,222 2,799 1,652 1,840 3,685 231,629 179,794 12,158 9,882 19,731 22,645 Segment profit is profit on ordinary activities, including share of associates' operating profits, before finance charges. Operating assets are those net assets controlled by Reliance's operating divisions and reconcile with net assets as follows: - Restated 2002 2001 £'000 £'000 Operating assets 19,731 22,645 Items excluded:- Net cash / (debt) 2,093 (5,097) Listed and unlisted investments and loans 5,373 5,373 Investment in own shares 2,949 1,428 Taxation payable (1,913) (1,646) Deferred taxation 560 364 Dividends payable (2,357) (2,019) Interest payable (24) (33) Total net assets 26,412 21,015 In accordance with the equity method adopted for accounting for associates, Group turnover excludes turnover of Command Security Corporation Inc. All Group turnover is therefore derived from within the United Kingdom and represents the amount receivable for services supplied, net of VAT. 4 Dividends In addition to the interim dividend of 3.15p (2001: 2.80p), the directors recommend a final dividend of 10.45p (2001: 9.00p) which, subject to approval at the Annual General Meeting on 11 September 2002, will be payable on 20 September 2002 to those shareholders on the register of members on 30 August 2002. 5 Earnings per share Restated Note 2002 2001 £'000 £'000 Earnings (previously reported) 8,042 6,892 Prior year adjustment 6 - (270) Earnings (restated) 8,042 6,622 2002 2001 Number Number Weighted average number of shares 23,118,270 23,059,360 Weighted average number of shares held in ESOP trust (629,568) (447,974) Shares used to calculate basic earnings per share 22,488,702 22,611,386 Dilutive potential shares 232,391 335,522 Shares used to calculate diluted earnings per share 22,721,093 22,946,908 The basic and diluted earnings per share have been calculated in accordance with FRS14, based on profit after tax and the weighted average number of ordinary shares in issue during the year, less shares held by the ESOP trust. 6 Prior year adjustment The Group's policy for accounting for deferred tax has been revised to comply with FRS 19 'Deferred Tax'. Previously deferred tax assets were not recognised. Deferred tax assets are now recognised to the extent that, on the basis of available evidence, it is regarded more likely than not that there will be sufficient taxable profits from which the future reversal of the underlying timing differences can be deducted. The effects of the change in policy are: 2002 2001 £'000 £'000 Profit and loss account Decrease/(increase) in tax charge 196 (172) Balance sheet Recognition of deferred tax asset 560 364 The Group's policy for accounting for bid costs was not separately disclosed, but accounting practice was to defer these costs to the extent that recovery within the contract was reasonably assured. The Group has revised its policy to comply with UITF 34 'Pre-Contract Costs'. The revised policy is that the Group expenses all pre-contract costs except for certain directly attributable costs which, when it is virtually certain that a contract will be awarded, are capitalised and written off over the life of the contract. Costs incurred prior to the date when a contract award is virtually certain are not subsequently reinstated. The effects of the change in policy are: 2002 2001 £'000 £'000 Profit and loss account Decrease/(increase) in administrative expenses 100 (140) (Increase)/decrease in current year tax charge (30) 42 Increase/(decrease) in profit for the financial year 70 (98) Balance sheet Decrease in other debtors (540) (640) Reduction in provision for taxation 162 192 Decrease in net assets (378) (448) The cumulative effect of the prior year adjustments is: 2002 2001 £'000 £'000 Profit and loss account Decrease/(increase) in administrative expenses 100 (140) Decrease/(increase) in current year tax charge 166 (130) Increase/(decrease) in profit for the financial year 266 (270) Balance sheet Decrease in other debtors (540) (640) Recognition of deferred tax asset 560 364 Reduction in provision for taxation 162 192 Increase/(decrease) in net assets 182 (84) 7. Reconciliation of operating profit to net cash inflow from operating activities Restated 2002 2001 £'000 £'000 Operating profit 10,099 8,940 Depreciation charges 1,753 1,380 Amortisation of goodwill 214 77 Loss on sale of fixed assets 1 4 Increase in stocks 48 (549) Increase in debtors (8,068) (7,791) Increase in creditors 10,776 4,483 Net cash inflow from operating activities 14,823 6,544 8 Analysis and reconciliation of net cash/(debt) 28 April New finance 26 April 2002 Cash flow leases 2001 £'000 £'000 £'000 £'000 Cash at bank and in hand 7 4,486 - 4,493 Overdrafts (2,448) 2,448 - - (2,441) 6,934 - 4,493 Loan due within one year (1,471) - - (1,471) Finance leases (1,185) 356 (100) (929) (2,656) 356 (100) (2,400) Net cash / (debt) (5,097) 7,290 (100) 2,093 This information is provided by RNS The company news service from the London Stock Exchange

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