Armour Group plc (AIM: AMR) Unaudited Interim Statement For the six months to 29 February 2008

Transcription

1 Armour Group plc (AIM: AMR) Unaudited Interim Statement For the six months to 29 February 2008 Armour Group plc is the United Kingdom s leading consumer electronics group focused on the in-car communications and entertainment and home entertainment markets. The Board is pleased to announce interim results for the six months to 29 February Financial Highlights Sales of 30.2 million (: 28.4 million) up 6%. EBITDA* of 3.4 million (: 3.2 million) up 6%. Profit before taxation of 2.6 million (: 2.4 million) up 9%. Continuing basic earnings per ordinary share of 2.7p (: 2.5p) up 8%. Continuing underlying basic earnings per ordinary share of 2.8p (: 2.6p) up 8%. Cash generated from operations of 1.6 million (: 1.5 million). * EBITDA is defined as earnings before interest, tax, depreciation, amortisation of goodwill and share-based payments. Commenting on today s results, George Dexter, CEO, said: We are pleased to report continued organic growth in the first half of the year. We believe that the group has benefited from our strategy of investment in our brands, research and development and extensive range of quality products. We aim to continue this strategy of investment and combine it with market leading customer service. For further information please contact: Armour Group plc Tel: George Dexter, Chief Executive John Harris, Finance Director FinnCap, Nominated Adviser and Broker Tel: Geoff Nash, Corporate Finance Director Threadneedle Communications, Financial PR Tel: Trevor Bass, Alex White Page 1 of 22

2 ABOUT ARMOUR Armour Group plc is the United Kingdom s leading consumer electronics group, focused on the in-car communications and entertainment and home entertainment markets. The Group has an impressive brand portfolio, which boasts some of the United Kingdom s market leaders, regularly winning industry awards for quality and innovation. In the United Kingdom consumer electronics market, the Group has direct access to over 5,000 retail outlets. It comprises two divisions: Armour Automotive and Armour Home. Armour Automotive The Automotive division is the market leader in Europe in the design, manufacture and supply of products for the in-car entertainment and communications markets. Its proprietary brands include Autoleads (connectivity leads and smartleads such as the telemute lead used in mobile telephone hands free kits), CTI (GSM and GPS aerials), VEBA (a range of in-car audio-visual entertainment systems) and Mutant (a range of quality amplifiers and speakers for the in-car entertainment enthusiast). The division has recently launched its proprietary io range of Bluetooth music streaming and mobile phone hands free solutions for the in-car environment ( Armour Automotive supplies both retail and non-retail customers which include Halfords, Motorworld, Carphone Warehouse, BMW and Hyundai. Armour Home The Home division is a market leader in the United Kingdom s specialist home entertainment market. It designs, manufactures, distributes and sells product into the hi-fi, home theatre and home entertainment markets. Its proprietary brands include QED (quality cables and interconnects), Systemline (multi-room home entertainment systems), Alphason (hi-fi and audio-visual furniture), Goldring (turntables, styli and headphones), Q Acoustics (award winning speakers) and Myryad (mid to high end hi-fi separates). The Home division also distributes third party brands, typically on an exclusive basis in the United Kingdom. These brands include Grado headphones, Nevo remote controls, Sonance speakers, NAD hi-fi separates, Tivoli radios and Audica speakers. The Home division s customers are both retail and non-retail and include Comet, Argos, John Lewis, Tesco, Sevenoaks Sound and Vision, Berkeley Homes, George Wimpey, Taylor Woodrow, Linden Homes and David Wilson Homes. Page 2 of 22

3 Interim Statement for the six months to 29 February 2008 Results and Dividend The Group s results for the six months to 29 February 2008 are pleasing with both sales and operating profit showing solid like for like growth on last year and cash generation ahead of our expectations. Sales of 30.2 million (: 28.4 million) up 6%. EBITDA of 3.4 million (: 3.2 million) up 6%. Profit before taxation of 2.6 million (: 2.4 million) up 9%. Continuing basic earnings per ordinary share of 2.7p (: 2.5p) up 8%. Continuing underlying basic earnings per ordinary share of 2.8p (: 2.6p) up 8%. Cash generated from operations of 1.6 million (: 1.5 million). The Board is not recommending an interim dividend. Operations Armour Automotive The Automotive division has won a considerable amount of new business and has successfully launched its io range of in-car Bluetooth music streaming and mobile phone hands free solutions. The first of the io Bluetooth products, io Play, which was launched in December, has been very well received in the market and is now being sold in all Carphone Warehouse s United Kingdom stores and will also be available from April 2008 in over four hundred Halfords stores. The io brand is building market awareness and will receive further market exposure with the release, in May 2008, of the second Bluetooth product, io Talk, which is targeted at the high volume business to business market. We expect io to have an increasing influence on the financial performance of the Automotive division over the coming months. Sales in the non-retail channel have been slow in the first six months, due to changes in the marketing programme of a major customer. In addition, there has been weaker demand for our GPS antennae than originally forecast by system manufacturers, due to slower take up of their vehicle tracking systems. We expect that business will improve over the remaining months of this calendar year. Sales into the retail channel have reduced in the first half of the year due to our decision to withdraw from selling low margin satellite navigation products at the end of last year. In the independent retail channel, and having adjusted to exclude satellite navigation product sales, like-for-like sales have increased. Sales to the national accounts have been delayed by product range reviews, which have now been completed, ready for the second half of the year. In the first six months Armour Automotive has been successful in winning new business across all channels. In non-retail, significant new contracts have been secured with LDV Group Limited, Case New Holland and Lunar Caravans with the realistic prospect of further contract wins in the coming months. In retail, the most important new business wins have been the listing of the io range with Carphone Warehouse and Halfords. The majority of this new business will start to generate sales over the course of the second half of the year. Page 3 of 22

4 Armour Home The Home division has had a good first six months of the year. All our core brands and channels to market have shown steady growth. Our retail channel sales have grown with QED cables, Alphason and Sona audio-visual furniture, Goldring headphones and Q Acoustics speakers all performing well. The NAD and Tivoli brands, whose distribution was taken on last year, are also now making a meaningful contribution in the retail channel. The wider consumer electronics market continues to be driven forward by the demand for flat screen televisions, which in turn stimulates sales of accessories such as cables and audio-visual furniture, two categories where we consider ourselves to be the United Kingdom market leader. The continued expansion of the home automation market has been to the benefit of our Home division. We have seen growth in sales for Systemline multi-room systems, Sonance speakers and QED Professional cables. The launch, in November, of our new Systemline S6 multi-room system has lifted sales and fuelled demand for Sonance speakers and our Systemline Music server, which was also launched last year. We believe that, through our Systemline Brand, we are the United Kingdom market leader for multi-room systems and now have over 100 home builders who have adopted and are installing Systemline. Our international sales have also continued to show good growth with Systemline, QED and Q Acoustics forming the backbone to our export business. The investment made last year to expand our international sales and distribution network is delivering increased sales and building the awareness of our brands internationally. Exciting opportunities exist in our export markets, particularly for Systemline Modular, which are expected to come to fruition over the coming months. Our channel expansion into hotels, lifestyle and e-commerce is making progress with new customers secured and sales generated. Whilst it is still early days for all these new channels, the signs are encouraging. Outlook The Group has performed well over the first six months of the year. Our strategy of investment to expand sales channels, develop new products and build our brands is delivering good organic growth. Through this momentum, and the financial strength of the Group, we are well placed to take advantage of opportunities as they arise in the market. Bob Morton Chairman 14 April 2008 George Dexter Chief Executive Page 4 of 22

5 CONSOLIDATED INCOME STATEMENT For the six months to 29 February 2008 Notes 29 February 2008 Unaudited 28 February Twelve months to 31 August Continuing operations: Revenue 3 30,225 28,435 55,171 Profit from operations 2,864 2,745 5,243 Share of (loss)/profit of associated undertakings (7) (4) 3 Finance income Finance costs (304) (390) (765) Profit before taxation 2,576 2,362 4,503 Taxation expense 4 (747) (686) (1,262) Profit from continuing operations 1,829 1,676 3,241 Discontinued operations - (100) (2,979) Profit for the financial period 1,829 1, Earnings/(loss) per ordinary share 5 From continuing and discontinued operations Basic 2.7p 2.3p 0.4p Diluted 2.7p 2.3p 0.4p From continuing operations Basic 2.7p 2.5p 4.8p Diluted 2.7p 2.5p 4.7p From discontinued operations Basic - (0.2)p (4.4)p Diluted - (0.2)p (4.3)p Page 5 of 22

6 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the six months to 29 February February 2008 Unaudited 28 February Twelve months to 31 August Profit for the financial period 1,829 1, Tax effect of share-based payments recognised - (7) - directly in equity Currency translation differences on foreign currency net investments 49 (1) (7) Total recognised income and expense for the financial period 1,878 1, Page 6 of 22

7 CONSOLIDATED BALANCE SHEET At 29 February 2008 Notes 29 February 2008 Unaudited 28 February 31 August Non-current assets Goodwill 21,082 23,338 21,082 Other intangible assets 1,233 1, Property, plant and equipment 1,425 2,081 1,604 Investment in associated undertakings Total non-current assets 24,108 26,814 24,052 Current assets Inventories 11,561 11,065 10,490 Trade and other receivables 11,055 10,946 11,430 Cash and cash equivalents Total current assets 22,861 22,456 22,812 Total assets 46,969 49,270 46,864 Current liabilities Bank overdrafts and borrowings (4,176) (2,456) (714) Trade and other payables (9,855) (13,626) (14,664) Corporation taxation liability (1,400) (1,410) (1,146) Provisions (266) (140) (296) Total current liabilities (15,697) (17,632) (16,820) Non-current liabilities Borrowings (2,739) (3,423) (3,082) Deferred taxation liability (84) (19) (18) Total non-current liabilities (2,823) (3,442) (3,100) Total liabilities (18,520) (21,074) (19,920) Total net assets 28,449 28,196 26,944 Equity Share capital 6,848 6,848 6,848 Share premium account 8,513 8,512 8,513 Other reserves Retained earnings 12,375 12,166 10,919 Translation reserve 42 (1) (7) Share trust reserve (200) (200) (200) Total equity 6 28,449 28,196 26,944 Page 7 of 22

8 CONSOLIDATED CASH FLOW STATEMENT For the six months to 29 February 2008 Notes 29 February 2008 Unaudited 28 February Twelve months to 31 August Cash flow from operating activities Cash generated from operations 7 1,614 1,539 5,892 Income taxes paid (427) (140) (919) Net cash from operating activities 1,187 1,399 4,973 Investing activities Acquisition of subsidiary, net of cash acquired 8 (4,302) (85) (155) Disposal of subsidiary, net of cash disposed Purchase of property, plant and equipment (146) (375) (718) Sale of property, plant and equipment Expenditure on intangible assets (384) (230) (646) Invested in associated undertakings - (372) (372) Interest received Net cash used in investing activities (4,283) (1,037) (1,785) Financing activities Proceeds on issue of shares Dividends paid (439) (371) (371) Repayment of bank loans (360) (360) (720) Repayment of finance lease creditors (16) (23) (44) Interest paid (263) (240) (511) Net cash used in financing activities (1,078) (971) (1,622) Net (decrease)/increase in cash and cash equivalents 9 (4,174) (609) 1,566 Page 8 of 22

9 Notes to the Interim Financial Statements 1. Basis of preparation Armour Group plc (the Company ) has historically prepared its consolidated financial statements in accordance with UK Generally Accepted Accounting Practice ( UK GAAP ). As required by the AIM Rules and European Union Law, the Company is required to prepare its consolidated financial statements for the accounting period ending 31 August 2008 in accordance with International Financial Reporting Standards ( IFRS ). Accordingly, these interim financial statements have been prepared using accounting policies consistent with those that the Board expects will apply to the Company s consolidated financial statements to be included in the first annual report to adopt IFRS, being that for the year ending 31 August The consolidated financial statements for the year ending 31 August 2008 will include IFRS re-stated comparative figures for the year ended 31 August. Therefore, the transition date for the adoption of IFRS is 1 September IFRS currently in issue are subject to ongoing review and endorsement by the European Commission, or possible amendment by the International Accounting Standards Board, and are therefore subject to change. Further standards or clarification of interpretations may be issued that could be applicable for the consolidated financial statements for the year ending 31 August These potential changes could result in the need to change the basis of accounting or presentation of certain financial information from that presented in this Interim Report. These results for the six months to 29 February 2008, and the comparative figures for the six months to 28 February, are and do not constitute statutory accounts within the meaning of Section 240 of the Companies Act Consolidated statutory accounts for the twelve months to 31 August, prepared in accordance with UK GAAP and on which the auditors gave an unqualified opinion, were approved by shareholders at the Annual General Meeting and have been delivered to the Registrar of Companies. They did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and did not include a statement under section 237(2) or 237(3) of the Companies Act Summary of Significant Accounting Policies The significant accounting policies used in the preparation of these interim financial statements are outlined as follows: IFRS 1 exemptions applied The Company has elected to apply the following exemptions: Not to apply IFRS 3: Business Combinations to acquisitions that occurred before the transition date. Not to revisit currency translation reserve movements prior to the transition date. Not to apply IFRS 2: Share-based Payments to share-based payments granted prior to 7 November The consolidated accounts for the twelve months to 31 August, prepared by the Company under UK GAAP, adopted FRS 20 Share-based Payments and therefore no additional adjustment is required on conversion to IFRS. Page 9 of 22

10 Basis of consolidation The Group s financial statements consolidate the financial information of the Company and its subsidiary undertakings. Subsidiary undertakings are entities over which the Group has control in terms of the power to govern the financial and operating policies of an acquired entity so as to obtain benefits from its activities. Goodwill Goodwill arising on the acquisition of a business represents any excess of the fair value of the consideration over the fair value of the identifiable assets and liabilities acquired. The identifiable assets and liabilities acquired are incorporated into the consolidated financial statements at their fair value to the Group. In accordance with IFRS 3, with effect from 1 September 2006 goodwill is not amortised but tested for impairment annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed. On disposal of a business, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Goodwill that arose on consolidation prior to 1 May 1998, which represented the excess of the fair value of the consideration over the fair value of the net assets acquired, was written off directly to reserves in accordance with the United Kingdom accounting standard then in force. This goodwill has not been reinstated and is not included in determining any subsequent profit or loss on disposal. Intangible assets (excluding goodwill) Intangible assets (excluding goodwill) include the following: (a) Development costs Development costs, both internal and external, associated with the production of saleable products, are capitalised as an intangible asset where an asset is created that can be identified, the cost can be measured reliably and it is probable that the asset will generate future economic benefits. The asset is then amortised on a straight line basis over the expected sales period for the product, on a product type by product type basis. Where no intangible asset can be identified, development expenditure is recognised as an expense in the financial period in which it is incurred. (b) Other intangible assets Other intangible assets include investments, recorded at cost, in software which is separately identifiable from the hardware on which it runs. The asset so created is then depreciated on a straight line basis over the software s expected useful life. Where the software is not separately identifiable from the hardware, it is included with the hardware in property, plant and equipment. Property, plant and equipment Property, plant and equipment are stated at cost less the accumulated depreciation and, where appropriate, provision for impairment in value or estimated loss on disposal. Property, plant and equipment are depreciated over their estimated useful lives on a straight line basis as follows: Plant and fixtures and fittings 10% - 33% Motor vehicles 20% - 25% Page 10 of 22

11 Associated undertakings An entity is treated as an associated undertaking where the Group exercises significant influence over its operating and financial policy decisions. Interests in associated undertakings are accounted for using the equity method of accounting. The Consolidated Income Statement includes the Group s share of the profit after taxation of such undertakings based upon the most recently available management information. In the Consolidated Balance Sheet, the investment in associated undertakings is shown as the Group s share of the identifiable net assets and the premium paid on acquisition, to the extent that the latter has not been impaired. Deferred taxation Deferred taxation is the taxation expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding taxation bases used in the computation of taxable profit. It is accounted for using the balance sheet liability method. Deferred taxation liabilities are generally recognised for all taxable temporary differences. Deferred taxation assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred taxation is calculated at the taxation rate that is expected to apply in the financial period when the liability is settled or the asset is realised. Inventories Inventories have been valued at the lower of cost and net realisable value. Cost includes all direct expenditure to bring items to their condition and location at the accounting date, together with, in the case of goods manufactured by the Group, an appropriate proportion of production overhead expenditure attributable thereto. Cash and cash equivalents Cash and cash equivalents comprise cash in hand, at bank and deposits where the amounts are not part of the Group s set-off arrangements and, in the case of deposits, where they are repayable within three months and are subject to an insignificant risk of a change in value. Overdrafts are shown within current liabilities in the Consolidated Balance Sheet but are included within cash and cash equivalents in respect of the Consolidated Cash Flow Statement. Foreign currencies The results of overseas subsidiary undertakings are translated into sterling at the actual rates of exchange during the financial period and their balance sheets at the rates ruling at the financial period end. Gains or losses arising on the translation of the opening net assets and results of overseas subsidiary undertakings are taken to the Group s Translation Reserve. Transactions denominated in foreign currencies are translated into sterling at the exchange rate in operation on the date of the transaction. Monetary assets and liabilities originally denominated in foreign currencies are translated into sterling at the exchange rate in operation at the date of the financial period end. Exchange gains and losses are reported as part of the Consolidated Income Statement. The Group makes use of foreign currency derivatives (forward foreign currency contracts) to protect its position on the purchase of inventories. Under UK GAAP, foreign currency derivatives were held off balance sheet. Under IAS 32 and IAS 39, derivative contracts are valued ( marked to market ) at the balance sheet date and any resulting gains or losses are taken to the Consolidated Income Statement. Page 11 of 22

12 Revenue Revenue represents the invoiced value of goods sold and the value of services provided to third party customers, excluding value added tax. Revenue is recognised when the risks and rewards of owning the goods have passed to the customer, which is generally on delivery or when services have been provided. Share-based payments Where share options are awarded to employees, the fair value of the option at the date of grant is charged to the Consolidated Income Statement over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition. Pension Costs The Group operates defined contribution arrangements. The pension costs payable by the Group in the financial period are charged to the Consolidated Income Statement. Financial Instruments (a) Derivative financial instruments The Group uses foreign exchange forward contracts to hedge financial risks to changes in foreign currency exchange rates. These financial instruments are included in the balance sheet as assets or liabilities at their fair values. The Group does not use derivative financial instruments for speculative purposes but its financial instruments do not qualify for hedge accounting under IFRS and consequently changes in their fair values are recognised in the Consolidated Income Statement as they arise. (b) Bank Borrowings Bank borrowings are initially recognised at fair value. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the balance sheet. The interest expense includes initial transaction costs and premiums payable on redemption, as well as any interest coupon payable while the liability is outstanding. (c) Trade receivables and trade payables Trade receivables and trade payables are non-derivative assets and liabilities of fixed or determinable amounts that are not quoted in an active market. They arise principally through the provision of goods and services to customers (trade debtors) or the purchase of goods and services (trade creditors, accruals and prepayments). They are carried at amortised cost less any provision for impairment. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Page 12 of 22

13 3. Business Segments 29 February 2008 Unaudited 28 February Twelve months to 31 August Revenue Armour Automotive 7,360 8,490 17,290 Armour Home 22,865 19,945 37,881 Total 30,225 28,435 55,171 Revenue by country of operation United Kingdom 29,939 28,163 54,591 Sweden ,198 Inter-area eliminations (267) (300) (618) 30,225 28,435 55,171 Revenue by country of destination United Kingdom 25,725 24,244 46,930 Rest of Europe 3,499 3,444 6,624 Rest of world 1, ,617 30,225 28,435 55, Taxation The taxation charge for the six months to 29 February 2008 is based on the effective taxation rate, which is estimated will apply to earnings for the year ending 31 August Earnings per Ordinary Share Basic earnings per ordinary share is calculated using the weighted average number of shares in issue during the financial period of 67,514,067 (28 February : 67,473,568 and 31 August : 67,493,840). Diluted earnings per ordinary share is calculated using the weighted average number of shares in issue during the financial period of 68,506,387 (28 February : 68,709,936 and 31 August : 68,831,976). The 966,000 ordinary shares held by the Armour Employees Share Trust are not included in either the weighted average, or diluted weighted average, ordinary shares in issue during the financial period. Underlying earnings per share is also shown calculated by reference to earnings before share-based payments. The Directors consider that this gives a useful additional indication of underlying performance. Page 13 of 22

14 5. Earnings per share (continued) 29 February 2008 Unaudited 28 February Twelve months to 31 August Basic earnings per ordinary share p p p Total operations Profit for the financial period 1, , Share-based payments Underlying earnings 1, , Continuing operations Profit from continuing operations 1, , , Share-based payments of continuing operations Underlying earnings 1, , , February 2008 Unaudited 28 February Twelve months to 31 August Diluted earnings per ordinary share p p p Total operations Profit for the financial period 1, , Share-based payments Underlying earnings 1, , Continuing operations Profit from continuing operations 1, , , Share-based payments of continuing operations Underlying earnings 1, , , Reconciliation of Movement in Equity 29 February 2008 Unaudited 28 February Twelve months to 31 August Opening equity 26,944 26,915 26,915 Profit for the financial period 1,829 1, Dividend (439) (371) (371) Profit/(loss) for the financial period retained 1,390 1,205 (109) New share capital subscribed Share-based payments Tax effect of share-based payments recognised directly in - (7) - equity Currency translation differences 49 (1) (7) Net movement in equity 1,505 1, Closing equity 28,449 28,196 26,944 Page 14 of 22

15 7. Net Cash Inflow from Operating Activities 29 February 2008 Unaudited 28 February Twelve months to 31 August Profit from operations 2,864 2,745 5,243 Loss from trading of discontinued operations - (143) (269) Depreciation of property, plant and equipment Amortisation of intangible assets Share-based payments (Gain)/loss on sale of property, plant and equipment (108) - 9 Earnings before movements in working capital 3,271 3,201 6,372 Increase in inventories (1,071) (1,229) (1,201) Increase in trade and other receivables (25) (1,244) (1,926) (Decrease)/increase in trade, other payables and provisions (561) 811 2,647 Net cash from operating activities 1,614 1,539 5, Acquisition of Subsidiary 4.2 million has been spent during the financial period, being deferred consideration relating to Alphason Designs Limited, acquired by the Group in February In addition, a payment of 0.1 million has been made being the final instalment of deferred consideration for Myryad Systems Limited, acquired by the Group in November Reconciliation of Net Cash Flow to Movement in Net Debt 29 February 2008 Unaudited 28 February Twelve months to 31 August Net (decrease)/increase in cash and cash equivalents (4,174) (609) 1,566 Net cash outflow from debt and lease financing Other non-cash movements 32 (17) (43) (Increase)/decrease in net debt in the financial period (3,766) (243) 2,287 Opening net debt (2,904) (5,191) (5,191) Closing net debt (6,670) (5,434) (2,904) 10. Copies of Interim Report Copies of this interim report are being sent to shareholders and will also be made available upon request to members of the public at the Company s Registered Office, Lonsdale House, 7 9 Lonsdale Gardens, Tunbridge Wells, Kent, TN1 1NU. This interim report can also be viewed on the Group s website: Page 15 of 22

16 11. Explanation of Transition to IFRS The differences between UK GAAP and IFRS are outlined below in the reconciliation of the consolidated balance sheets at 31 August 2006, 28 February and 31 August and in the reconciliations of net profit for the six months to 28 February and twelve months to 31 August. The following represents the differences relevant to the Group of moving from UK GAAP to IFRS: (a) Goodwill Under IFRS 3, goodwill is not amortised but instead is subject to an annual impairment review. An adjustment has been made to remove the goodwill amortisation charge made under UK GAAP. Under the transition rules, no adjustment need be made to the carrying value of goodwill at the date of transition. (b) Software costs Under UK GAAP, IT software was considered to be part of the operating system of the computer systems used by the Group and was capitalised within plant and equipment. Under IAS 38, this software should be separately identified as an intangible asset. (c) Product development expenditure Under UK GAAP, the Group s accounting policy was to expense all development expenditure when incurred. In accordance with IAS 38, costs incurred on product development are capitalised as an intangible asset where the asset created can be identified, its cost measured reliably and it is probable that the asset will generate future economic benefits. Capitalised development expenditure is amortised over its expected useful life. (d) Translation reserve Under IAS 21, foreign exchange differences arising from the translation of opening net assets, must be included in a separate translation reserve rather than being included in retained profit. The Group has elected not to revisit currency translation reserve movements prior to the date of transition. Accordingly, at the date of transition, the Translation Reserve balance was zero. Only cumulative translation differences arising after the date of transition in respect of overseas subsidiaries will be recycled to the income statement on disposal of these subsidiaries. (e) Forward foreign currency contracts The Group makes use of foreign currency derivatives (forward foreign currency contracts) to protect its position on the purchase of inventories. Under UK GAAP, foreign currency derivatives were held off balance sheet. Under IAS 32 and IAS 39, derivative contracts are valued ( marked to market ) at the balance sheet date and any resulting gains or losses are taken to the income statement. (f) Lease incentives In accordance with IAS 17: Leases and SIC 15: Operating Leases Incentives, adjustments have been made to recognise the benefit of lease incentives over the full lease term rather than to the date of the first break clause. (g) Share of profits/losses in associated undertakings Under UK GAAP, the premium on acquisition of the investment was amortised to nil in equal annual instalments over its estimated useful life of 20 years. Under IFRS, the premium is not amortised but instead is subject to an annual impairment review. An adjustment has been made to remove the amortisation charge made under UK GAAP. Page 16 of 22

17 11. Explanation of Transition to IFRS (continued) (h) Deferred taxation Adoption of IFRS has caused adjustment to the value of deferred taxation assets and liabilities. The most significant adjustment has been caused by the recognition of product development expenditure as an asset, thereby creating a deferred taxation liability. (i) Balance sheet reclassifications To comply with IFRS 1, various amounts have been reclassified within the balance sheet. Provisions have been separated within current liabilities and deferred taxation assets and liabilities are shown separately within non-current assets and liabilities respectively. Page 17 of 22

18 11. Explanation of Transition to IFRS (continued) Reconciliation of the Consolidated Balance Sheet at 31 August 2006 (date of transition to IFRS). Notes UK GAAP Transition adjustments IFRS Non-current assets Goodwill a 23,338-23,338 Other intangible assets b, c Property, plant and equipment b 2,256 (151) 2,105 Deferred taxation assets h, i 291 (291) - Total non-current assets 25, ,393 Current assets Inventories 9,836-9,836 Trade and other receivables 9,702-9,702 Cash and cash equivalents Total current assets 19,724-19,724 Total assets 45, ,117 Current liabilities Bank overdrafts and borrowings (1,610) - (1,610) Trade and other payables e, f, i (12,631) (8) (12,639) Corporation taxation liability (916) - (916) Provisions i - (140) (140) Total current liabilities (15,157) (148) (15,305) Non-current liabilities Borrowings (3,767) - (3,767) Deferred consideration (127) - (127) Deferred taxation liability h, i - (3) (3) Total non-current liabilities (3,894) (3) (3,897) Total liabilities (19,051) (151) (19,202) Total net assets 26, ,915 Equity Share capital 6,841-6,841 Share premium account 8,496-8,496 Other reserves Retained earnings 10, ,907 Share trust reserve (200) - (200) Total equity 26, ,915 Page 18 of 22

19 11. Explanation of Transition to IFRS (continued) Reconciliation of profit for the year ended 31 August UK GAAP Transition adjustments IFRS Revenue Continuing operations 55,171-55,171 Discontinued operations 2,185 (2,185) - 57,356 (2,185) 55,171 Profit from operations Continuing operations 4,118 1,125 5,243 Discontinued operations (360) 360-3,758 1,485 5,243 Share of (loss)/profit of associated undertakings (15) 18 3 Finance income Finance costs (765) - (765) Profit before taxation 3,000 1,503 4,503 Taxation expense (1,155) (107) (1,262) 1,845 1,396 3,241 Discontinued operations (2,711) (268) (2,979) (Loss)/profit for the financial period (866) 1, Summary of adjustments Notes Reversal of amortisation of goodwill a 1,168 Development costs capitalised in the financial period c 539 Amortisation and amounts written off capitalised development costs c (484) Losses recognised on derivatives e (58) Restatement of lease rental incentives f (40) Restatement of associated undertakings g 18 Deferred taxation adjustment h (15) Total of adjustments 1,128 The trading result of discontinued operations, being a post tax loss of 268,000, has been reclassified within the single income statement heading of Discontinued operations. Page 19 of 22

20 11. Explanation of Transition to IFRS (continued) Reconciliation of the Consolidated Balance Sheet at 31 August Notes UK GAAP Transition adjustments IFRS Non-current assets Goodwill a 19,914 1,168 21,082 Other intangible assets b, c Property, plant and equipment b 1,741 (137) 1,604 Investment in associated undertakings g Deferred taxation assets h, i 291 (291) - Total non-current assets 22,303 1,749 24,052 Current assets Inventories 10,490-10,490 Trade and other receivables 11,430-11,430 Cash and cash equivalents Total current assets 22,812-22,812 Total assets 45,115 1,749 46,864 Current liabilities Bank overdrafts and borrowings (714) - (714) Trade and other payables e, f, i (14,714) 50 (14,664) Corporation taxation liability (1,146) - (1,146) Provisions i - (296) (296) Total current liabilities (16,574) (246) (16,820) Non-current liabilities Borrowings (3,082) - (3,082) Deferred taxation liability h, i - (18) (18) Total non-current liabilities (3,082) (18) (3,100) Total liabilities (19,656) (264) (19,920) Total net assets 25,459 1,485 26,944 Equity Share capital 6,848-6,848 Share premium account 8,513-8,513 Other reserves Retained earnings 9,427 1,492 10,919 Translation reserve d - (7) (7) Share trust reserve (200) - (200) Total equity 25,459 1,485 26,944 Page 20 of 22

21 11. Explanation of Transition to IFRS (continued) Reconciliation of profit for the six months to 28 February UK GAAP Transition adjustments IFRS Revenue Continuing operations 28,435-28,435 Discontinued operations 1,054 (1,054) - 29,489 (1,054) 28,435 Profit from operations Continuing operations 2, ,745 Discontinued operations (188) 188-1, ,745 Share of loss of associated undertakings (13) 9 (4) Finance income Finance costs (390) - (390) Profit before taxation 1, ,362 Taxation expense (616) (70) (686) ,676 Discontinued operations - (100) (100) Profit for the financial period ,576 Summary of adjustments Notes Reversal of amortisation of goodwill a 655 Development costs capitalised in the period c 212 Amortisation and amounts written off capitalised development costs c (128) Losses recognised on derivatives e (65) Restatement of lease rental incentives f 13 Restatement of associated undertakings g 9 Deferred taxation adjustment h (27) Total of adjustments 669 The trading result of discontinued operations, being a post tax loss of 100,000, has been reclassified within the single income statement heading of Discontinued operations. Page 21 of 22

22 11. Explanation of Transition to IFRS (continued) Reconciliation of the Consolidated Balance Sheet at 28 February Notes UK GAAP Transition adjustments IFRS Non-current assets Goodwill a 22, ,338 Other intangible assets b, c - 1,027 1,027 Property, plant and equipment b 2,225 (144) 2,081 Investment in associated undertakings g Deferred taxation assets h, i 309 (309) - Total non-current assets 25,576 1,238 26,814 Current assets Inventories 11,065-11,065 Trade and other receivables 10,946-10,946 Cash and cash equivalents Total current assets 22,456-22,456 Total assets 48,032 1,238 49,270 Current liabilities Bank overdrafts and borrowings (2,456) - (2,456) Trade and other payables e, f, i (13,566) (60) (13,626) Corporation taxation liability (1,410) - (1,410) Provisions i - (140) (140) Total current liabilities (17,432) (200) (17,632) Non-current liabilities Borrowings (3,423) - (3,423) Deferred taxation liability h, i - (19) (19) Total non-current liabilities (3,423) (19) (3,442) Total liabilities (20,855) (219) (21,074) Total net assets 27,177 1,019 28,196 Equity Share capital 6,848-6,848 Share premium account 8,512-8,512 Other reserves Retained earnings 11,146 1,020 12,166 Translation reserve d - (1) (1) Share trust reserve (200) - (200) Total equity 27,177 1,019 28,196 Page 22 of 22