31st Mar 2006 07:02
Watermark Group PLC31 March 2006 Embargoed until: 07.00 Friday 31 March 2006 WATERMARK GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 Watermark Group plc ("Watermark", or the "Group"), the leading provider ofinflight products, catering and cabin management services to the airline andtravel industry, today announces its preliminary results for the year ended 31December 2005. Financial HighlightsComparing consolidated operations in 2005 with 2004: Turnover up 8.7% to £80.09m (£73.71m) Adjusted EBITDA* up 13.7% to £8.52m (£7.49m) Operating profit up 32.7% to £6.17m (£4.65m) Adjusted Profit before tax** up 13.3% to £7.58m (£6.69m) Diluted earnings per share*** up 7.3% to 8.21 pence (7.65 pence) Total assets up 13.0% to £74.32m (£65.81m) *Adjusted EDITDA (earnings before interest, taxation, depreciation, amortisation and exceptional items) **Adjusted profit before tax (profit before tax, before exceptional items and share based payment expense) ***Diluted earnings per share are adjusted to included the dilution effect of contingent deferred shares to be issued John Caulcutt, Chief Executive commented: "In the short term current marketconditions and resultant price pressure will mean trading will be moredifficult; at this stage, the likely outcome for the current year will bebroadly in line with the previous year, but with further positive growth likelyin 2007. So, in the medium and longer term the board believes that the outlook is good with significant overseas opportunities to take our Encompass total cabinmanagement programme and set up operations similar to those at our HeathrowEncompass Centre; these operations would be supported by long term contracts forgroup services. "Bearing in mind the range, size and geographic spread of these opportunities,as well as their consequent funding requirements, the board has initiateddiscussions with providers of private equity finance on a variety of structures.Given the funding requirements and the operational impact that theseopportunities could have on the group as a whole, these structures mightpotentially include an offer for the company. Discussions are at an early stageand there is no certainty that they will result in an offer being made. Afurther announcement will be made when appropriate." For further information please contact: John Caulcutt/Crispin Quail Claire Melly/Jeremy CareyWatermark Group plc Tavistock CommunicationsTel: 020 8606 1300 Tel: 020 7920 [email protected] [email protected] Chairman's and Chief Executive's statement The year in brief 2005 has been another year of growth for Watermark, with sales revenues, as wellas gross and operating profits again reaching new all-time highs. Despite the squeeze put on airline suppliers, initially as a result of 9/11 andmore recently as a result of the rise in the price of oil, the wide portfolio ofproducts and services that Watermark offers has allowed the group to continueits expansion in 2005. The outlook for continuing growth in passenger demand is positive for theairline industry, with global economic growth and deregulation helping togenerate new traffic. In brief, more people than ever are flying and theindustry is proving vital to the expansion of the global economy. Financial highlights The group financial statements for the year ended 31 December 2005, have, forthe first time, been prepared in accordance with International FinancialReporting Standards as adopted by the European Union ("IFRS"). Full details ofthe reconciliation to UK Generally Accepted Accounting Principles ("UK GAAP") toIFRS were presented in our October 2005 press release. Comparing consolidated operations in 2005 with 2004: SalesTurnover up 8.7% to £80.09m (£73.71m) MarginsGross profit margin % up 9.3% to 37.74% (34.50%)Operating profit margin % up 22.1% to 7.71% (6.31%) ProfitsGross profit up 18.8% to £30.22m (£25.43m)EBITDA* up 38.6% to £7.16m (£5.17m)Adjusted EBITDA** up 13.7% to £8.52m (£7.49m)Operating profit up 32.7% to £6.17m (£4.65m)Adjusted profit before tax*** up 13.3% to £7.58m (£6.69m)Profit before tax up 3.9% to £4.99m (£4.80m) Earnings per shareBasic earnings per share up 8.3% to 9.09 pence (8.39 pence)Diluted earnings per share**** up 7.3% to 8.21 pence (7.65 pence) *EBITDA (earnings before interest, taxation, depreciation and amortisation) iscalculated in note 5. ** Adjusted EBITDA (earnings before interest, taxation, depreciation,amortisation and exceptional items) is calculated in note 5. ***Adjusted profit before tax (profit before tax, before exceptional items andshare based payment expense) is calculated in note 6. ****Diluted earnings per share are adjusted to include the dilution effect ofcontingent deferred shares to be issued. The calculation of earnings per sharefigures is shown in note 8. Total assets up 13.0% to £74.32m (£65.81m) Dividend Final dividend The proposed final dividend of 1.69 pence per share, is payable on 28 July 2006to share owners on the register at 30 June 2006, and is in addition to theinterim dividend of 0.56 pence per share paid in January 2006. The totaldividends declared or proposed for 2005 are 2.25 pence per share, which is anincrease of 14.8% over the previous financial year. General The business model of Watermark is to offer a wide range of cabin managementservices to the airline and travel industries. These can be bought individuallyor collectively through the group's total cabin management programme called'Encompass'. These services include catering, a range of some 400 cabinproducts, recycling of onboard products, distribution of newspapers andmagazines, cabin design, relationship marketing and logistics. All of theseservices are offered globally, with the exception of catering, which currentlyoperates from London Heathrow and Birmingham airports only. In addition to thesecore products and services, Watermark has a 16% stake in AeroTV - a companyoffering onboard entertainment systems to airlines, trains and coaches, as wellas a trading relationship with Aerobox plc to market composite aircraftcontainers to a number of Watermark clients throughout the globe. Operational highlights to December 2005 • New catering contract wins at Heathrow and Birmingham plus 3 year extension to existing major Heathrow contract. • Successful implementation and launch of major 'buy on board' food retail programme. • Further validation of Encompass business model with signing of second contract. • Re-entry into expanding market for aircraft containers with long term supply contract received. • Revenues generated through marketing, consultancy and commissions continue. • Roll out of new financial and operational IT system across the group's offices. Operational highlights post December 2005 • Purchasing consolidation award with 74 products from an Asia Pacific client. • 3 year extension to major UK recycling contract. • Industry award for innovation. • Further consolidation of UK operations, with the move of the Hampshire office to the Encompass Centre, Heathrow. • 4 year Products award from major European train operator. • Opening of a representative office in Sydney, Australia. Personnel Once again we offer our sincere thanks to all the staff across the group, whohave shown tremendous dedication and loyalty to our company. Outlook In the short term current market conditions and resultant price pressure willmean trading will be more difficult; at this stage, the likely outcome for thecurrent year will be broadly in line with the previous year, but with furtherpositive growth likely in 2007. So, in the medium and longer term the boardbelieves that the outlook is good with significant overseas opportunities totake our Encompass total cabin management programme and set up operationssimilar to those at our Heathrow Encompass Centre; these operations would besupported by long term contracts for group services. Bearing in mind the range, size and geographic spread of these opportunities, as well as their consequent funding requirements, the board has initiated discussions with providers of private equity finance on a variety of structures.Given the funding requirements and the operational impact that these opportunities could have on the group as a whole, these structures might potentially include an offer for the company. Discussions are at an early stage and there is no certainty that they will result in an offer being made. A further announcement will be made when appropriate. John Anstruther-Gough-Calthorpe John CaulcuttChairman Chief Executive Consolidated income statementfor the 12 months to 31 December 2005 Before Exceptional Total exceptional items 12 months to items 31 December 2005 £'000 £'000 £'000 Revenue 80,087 - 80,087Cost of sales (49,865) - (49,865) ------------------------------------------Gross profit 30,222 - 30,222 Operating and administrative costs (excluding exceptional items) (21,820) - (21,820) Movement in fair value of derivative financial instruments (872) - (872) Exceptional re-organisation costs - (1,358) (1,358) ------------------------------------------Total operating and administrative expenses (22,692) (1,358) (24,050) Operating profit 7,530 (1,358) 6,172 Finance costs (1,058) - (1,058)Finance income 91 - 91Movement in fair value of financial assets (179) - (179) Share of post tax loss of associate (40) - (40) ------------------------------------------ (1,186) - (1,186)Profit before tax attributable to equity share owners 6,344 (1,358) 4,986 Tax expense (1,493) 327 (1,166) ------------------------------------------ Profit after tax attributable to equity share owners 4,851 (1,031) 3,820 ========================================== Earnings per share (pence) Basic 9.09p Diluted 8.21p Consolidated income statementfor the 12 months to 31 December 2004 Before Exceptional Total exceptional items 12 months to items 31 December 2004 £'000 £'000 £'000 Revenue 73,706 - 73,706 Cost of sales (48,281) - (48,281) ------------------------------------------Gross profit 25,425 - 25,425 Operating and administrative costs (excluding exceptional items) (18,445) - (18,445) Exceptional re-organisation costs - (1,436) (1,436)Exceptional bad debt - (591) (591)Exceptional start-up costs - (302) (302) ------------------------------------------Total operating and administrative expenses (18,445) (2,329) (20,774) Operating profit 6,980 (2,329) 4,651 Finance costs (504) - (504)Finance income 64 - 64Movement in fair value of financial assets (89) - (89)Profit on sale of financial assets 676 - 676Share of post tax loss of associate (1) - (1) ------------------------------------------ 146 - 146 Profit before tax attributable to equity share owners 7,126 (2,329) 4,797 Tax expense (2,461) 781 (1,680) ------------------------------------------Profit after tax attributable to equity share owners 4,665 (1,548) 3,117 ========================================== Earnings per share (pence) Basic 8.39p Diluted 7.65p Consolidated balance sheetas at 31 December 2005 31 December 31 December 2005 2004 £'000 £'000 AssetsNon-current assetsProperty, plant and equipment 10,411 10,173Goodwill 30,075 30,075Intangible assets 1,308 249Investment in associate accounted for using the equity method - 40Available for sale financial assets - 31Financial assets held at fair value through profit or loss 19 145Trade and other receivables 1,092 112 --------------------------- 42,905 40,825 Current assetsInventories 3,378 3,919Trade and other receivables 18,828 15,173Prepayments 2,858 4,269Cash and short-term deposits 6,373 1,622 --------------------------- 31,437 24,983 ---------------------------Total assets 74,342 65,808 =========================== Equity and liabilitiesEquity attributable to equity share owners of the parentIssued share capital 430 404Share premium account 21,518 21,428Shares to be issued 3,813 6,496Capital redemption reserve 24 24Merger reserve 3,506 848Unrealised gains and losses reserve (79) -Foreign currency translation reserve 282 (273)Retained earnings 13,502 9,607 ---------------------------Total equity 42,996 38,534 Non-current liabilitiesTrade and other payables 50 111Interest bearing loans and borrowings 729 1,314Deferred consideration due after more than one year 2,125 3,187Deferred income tax liabilities 842 480 --------------------------- 3,746 5,092 Current liabilitiesTrade and other payables 12,720 13,937Interest bearing loans and borrowings 12,994 6,082Deferred consideration due within one year 1,063 1,063Current income tax 603 1,100Fair value of derivative financial instruments 220 - --------------------------- 27,600 22,182 ---------------------------Total liabilities 31,346 27,274 ---------------------------Total equity and liabilities 74,342 65,808 =========================== Consolidated cash flow statementfor the 12 months to 31 December 2005 12 months to 12 months to 31 December 31 December 2005 2004 £'000 £'000 Net cash flows from operating activitiesProfit before tax 4,986 4,797Depreciation and amortisation 989 794Profit on sale of investment - (676)Share based payment expense 184 151Finance income (91) (64)Finance cost 1,058 504Movement in fair value of financial assets 179 89Share of loss of associate 40 1Movement in fair value of forward exchange rate contracts 872 -Decrease/(increase) in inventories 695 (857)Increase in trade and other receivables (2,953) (2,616)(Decrease)/increase in trade payables and provisions (1,607) 3,416 ---------------------------Cash inflows generated from operations 4,352 5,539Interest received 91 64Interest paid (1,058) (504)Income taxes paid (1,294) (2,047) ---------------------------Net cash inflows from operating activities 2,091 3,052 --------------------------- Cash flows from investing activitiesProceeds from sale of available for sale financial assets - 761Purchase of property, plant and equipment (1,198) (7,439)Purchase of available for sale financial assets - (70)Purchase of intangible assets (1,088) (249)Acquisition of associate, net of cash acquired - (41)Acquisition of subsidiary, net of cash acquired (1,062) (19,308) ---------------------------Net cash flows used in investing activities (3,348) (26,346) --------------------------- Cash flows from financing activitiesProceeds from issue of shares 91 20,830Payment of hire purchase and finance lease obligations (552) (102)Repayment of borrowings - (2,979)Dividends paid to equity share owners (842) (719) ---------------------------Net cash flows (used in)/from financing activities (1,303) 17,030 --------------------------- Net decrease in cash and cash equivalents (2,560) (6,264)Net foreign exchange difference 432 (81)Cash and cash equivalents at 1 January 2005 (3,907) 2,438 ---------------------------Cash and cash equivalents at 31 December 2005 (6,035) (3,907) =========================== Consolidated statement of changes in equityfor the 12 months to 31 December 2005 Consolidated statement of changes in equity for the 12 months to 31 December 2005 Unrealised Shares Capital gains and Foreign Issued Share to be redemption Merger losses currency Retained Total capital premium issued reserve reserve reserve reserve earnings equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 31 December 2004 404 21,428 6,496 24 848 - (273) 9,607 38,534 Effects of adopting IAS 32 & IAS 39 - - - - - - - 731 731 --------------------------------------------------------------------------------------------- At 1 January 2005 404 21,428 6,496 24 848 - (273) 10,338 39,265Currency translation differences - - - - - - 555 - 555Profit for the year - - - - - - - 3,820 3,820Derivative forward exchange contracts - - - - - (79) - - (79)Cost of share based payments - - - - - - - 184 184Deferred taxation - - - - - - - 2 2 ----------- 14,344Issue of share capital 25 - (2,683) - 2,658 - - - -Exercise of share options 1 90 - - - - - - 91Equity dividends - - - - - - - (842) (842) ---------------------------------------------------------------------------------------------At 31 December 2005 430 21,518 3,813 24 3,506 (79) 282 13,502 42,996 ============================================================================================= Consolidated statement of changes in equity for the 12 months to 31 December 2004 Unrealised Shares Capital gains and Foreign Issued Share to be redemption Merger losses currency Retained Total capital premium issued reserve reserve reserve reserve earnings equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2004 249 599 8,172 24 (527) - - 7,057 15,574Currency translation differences - - - - - - (273) - (273)Profit for the year - - - - - - - 3,117 3,117 Cost of share based payments - - - - - - - 151 151Deferred taxation - - - - - - - 1 1 ----------- 10,326Issue of share capital 144 20,063 (1,676) - 1,375 - - - 19,906Exercise of share options 11 766 - - - - - - 777Equity dividends - - - - - - - (719) (719) ---------------------------------------------------------------------------------------------At 31 December 2004 404 21,428 6,496 24 848 - (273) 9,607 38,534 ============================================================================================= Notes to the preliminary announcement for the year ended 31 December 2005 1. Publication of non-statutory accounts The financial information set out in this preliminary announcement does notconstitute statutory accounts as defined in section 240 of the Companies Act1985. The balance sheet as at 31 December 2005 and the income statement, cash flowstatement, statement of changes in equity and associated notes for the year thenended have been extracted from the group's audited 2005 statutory financialstatements. 2. Summary of significant accounting policies i. Statement of compliance This financial information presented within the preliminary announcement hasbeen prepared on the basis of the recognition and measurement requirements ofIFRSs in issue that are adopted by the EU and effective at 31 December 2005, thegroup's first annual reporting date at which it is required to use adoptedIFRSs. The group has also complied with IFRSs as issued by the IASB. For thepurposes of this document the term IFRS is deemed to encompass IAS. ii. Basis of preparation The group issued a press release in October 2005 incorporating its preliminaryIFRS financial statements for 2004 and the reconciliations to IFRSs from thepreviously published UK GAAP financial statements. Details of the group'ssignificant accounting policies are set out in the October 2005 press release. Acopy of the IFRS restatement document detailing how the group's reportedperformance and financial position are affected by the change to IFRS, includingreconciliations from UK GAAP to IFRS for prior year results and the revisedsummary of significant accounting policies under IFRS is published on thecorporate website at www.watermark.co.uk. Printed copies of the transition toIFRS document are available from the company secretary. On 1 January 2005, the group adopted IAS 32 and IAS 39 and the relevantaccounting policies are set out in section 2.iii to 2.v. iii. Financial assets and liabilities Financial assets in the scope of IAS 39 are classified as financial assets atfair value through profit or loss; loans and receivables; held-to-maturityinvestments; or as available-for-sale financial assets, as appropriate. Thegroup determines the classification of its financial assets at initialrecognition and re-evaluates this designation at each financial year-end. Whenfinancial assets are recognised initially, they are measured at fair value,being the transaction price plus, in the case of financial assets not at fairvalue through profit or loss, directly attributable transaction costs. Asexplained in note 11, the group has not restated comparative amounts on firstapplying IAS 32 and IAS 39, as permitted in paragraph 36A of IFRS 1. All regular way purchases and sales of financial assets are recognised on thetrade date, being, the date that the group commits to purchase or sell theasset. Regular way transactions require delivery of assets within the timeframegenerally established by regulation or convention in the market place. Thesubsequent measurement of financial assets depends on their classification, asfollows: Held at fair value through profit or loss Assets designated at fair value through profit or loss are initially recognisedat cost, being the fair value of the consideration given and includingacquisition charges associated with the investment. Subsequent changes to the fair value of assets classified as held at fair valuethrough profit or loss are recognised in full within the income statement.Derivatives are also classified as held for trading unless they are designatedas hedging instruments. The group has designated its investment in FlightStore Group plc as held at fairvalue through profit or loss. Loans and receivables Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market, do not qualify astrading assets and have not been designated as either fair value through profitor loss or available for sale. Such assets are carried at amortised cost usingthe effective interest method if the time value of money is significant. Gainsand losses are recognised in income when the loans and receivables arederecognised or impaired, as well as through the amortisation process. Within this category of financial assets are trade and other receivables. Tradeand other receivables which generally have 30-90 day terms, are recognised andcarried at the lower of their original invoiced value and recoverable amount.Where the time value of money is material, receivables are carried at amortisedcost. Provision is made when there is objective evidence that the group will notbe able to recover balances in full. Balances are written off when theprobability of recovery is assessed as being remote. Available for sale financial assets Available for sale financial assets are those non-derivative financial assetsthat are designated as such or are not classified within any other category offinancial assets as set out within IAS 39. After initial recognition availablefor sale financial assets are measured at fair value with gains or losses beingrecognised as a separate component of equity until the investment isderecognised or until the investment is determined to be impaired at which timethe cumulative gain or loss previously reported in equity is included in theincome statement. Cash and cash equivalents Cash and short-term deposits in the balance sheet comprise cash at banks and inhand and short-term deposits with an original maturity of three months or less. For the purpose of the consolidated cash flow statement, cash and cashequivalents consist of cash and cash equivalents as defined above, net ofoutstanding bank overdrafts. Fair values The fair value of quoted investments is determined by reference to bid prices atthe close of business on the balance sheet date. Where there is no activemarket, fair value is determined using valuation techniques. These include usingrecent arm's length market transactions; reference to the current market valueof another instrument which is substantially the same; discounted cash flowanalysis and pricing models. Otherwise assets will be carried at cost. Financial liabilities Financial liabilities, other than derivatives and those held for trading, arerecognised initially at fair value net of transaction costs and are carriedsubsequently at amortised cost with finance charges calculated under theeffective interest rate method. Policy relating to financial assets and liabilities under previous accountingpolicies as reflected in the comparative figures Fixed asset investments, which are referred to for comparative purposes withinthe financial statements as available for sale financial assets or as financialassets held at fair value through profit or loss are stated at cost less amountswritten off through the income statement. Other financial assets and liabilities are generally recognised at cost. iv. Derivative financial instruments The group enters into forward exchange rate contracts in order to minimise itsexposure to foreign currency fluctuations. The group has taken the exemption set out in paragraph 36A of IFRS 1 First timeadoption of International Financial Reporting Standards, and has not restatedcomparative amounts on first applying IAS 32 and IAS 39. Accounting policy for derivative financial instruments under IAS 39 from 1January 2005 As at 1 January 2005, all outstanding forward exchange rate contracts wereinitially recognised at their fair value. All subsequent forward exchange ratecontracts entered into since 1 January 2005 are also initially recognised attheir fair value. The accounting treatment for subsequent changes to the fairvalue of forward exchange contracts is dependent upon whether the forwardexchange contract qualifies under the hedging rules set out within IAS 39. Where the forward exchange rate contract does not qualify as a hedge anysubsequent changes to the fair value of the forward exchange rate contract isrecognised through the income statement. Forward exchange rate contracts that are designated as a cash flow hedge or as ahedge against the net investment in a foreign entity are tested for hedgeeffectiveness at each reporting date. Where the forward exchange rate contractcontinues to be an effective hedge, any changes to the fair value of thederivative financial instrument is deferred within equity and released into theincome statement when the underlying hedged asset or liability is realised.Where the forward exchange rate contract is not considered to be an effectivehedge, subsequent fair value changes to the ineffective portion of thederivative financial instrument is immediately recognised through the incomestatement. The group does not hold or issue derivative financial instruments forspeculative purposes. The financial impact of adopting IAS 39 on 1 January 2005 is set out within note11. Accounting policy for derivative financial instruments under previous accountingstandards and as reflected in the comparative figures The group uses forward foreign currency contracts to reduce exposure to foreignexchange risk movements. The instrument must be related to specific foreigncurrency assets or liabilities or to a probable commitment reflected in the sameor similar currencies. Forward foreign currency contracts are not recognised within the financialstatements other than to translate the foreign currency monetary balances whichare covered by the financial instrument, using the forward exchange rate, whereappropriate. Gains and losses arising on these contracts are only recognised inthe profit and loss account when the underlying transaction covered by thefinancial instrument has itself been reflected in the group's accounts, or uponmaturity of the instrument. The group does not hold or issue derivative financial instruments forspeculative purposes. v. De-recognition of financial assets or liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of agroup of similar financial assets) is derecognised where: • the rights to receive cash flows from the asset have expired; • the group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; or • the group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the group has transferred its rights to receive cash flows from an assetand has neither transferred nor retained substantially all the risks and rewardsof the asset nor transferred control of the asset, the asset is recognised tothe extent of the group's continuing involvement in the asset. Continuinginvolvement that takes the form of a guarantee over the transferred asset ismeasured at the lower of the original carrying amount of the asset and themaximum amount of consideration that the group could be required to repay. Where continuing involvement takes the form of a written and/or purchased option(including a cash-settled option or similar provision) on the transferred asset,the extent of the group's continuing involvement is the amount of thetransferred asset that the group may repurchase, except that in the case of awritten put option (including a cash-settled option or similar provision) on anasset measured at fair value, the extent of the group's continuing involvementis limited to the lower of the fair value of the transferred asset and theoption exercise price. Financial liabilities A financial liability is derecognised when the obligation under the liability isdischarged or cancelled or expires. Where an existing financial liability is replaced by another from the samelender on substantially different terms, or the terms of an existing liabilityare substantially modified, such an exchange or modification is treated as aderecognition of the original liability and the recognition of a new liability,such that the difference in the respective carrying amounts together with anycosts or fees incurred are recognised in profit or loss. 3. Segmental reporting The Watermark group is organised on a worldwide basis into two primary businesssegments, namely the Products and Services divisions. These reportable segmentsare the two strategic divisions for which monthly financial information isprovided to the board. The Products division provides a broad range of travel supplies predominately tothe international travel industry on a global basis. The Services division isone of the major suppliers of catering and media services to the internationaltravel industry within the United Kingdom. Whilst the group's two divisions are managed on a worldwide basis, they operatein three principal geographical areas of the world. The main region wheresignificant group revenues are earned is the UK, Europe & Middle East region andthis business is conducted from the United Kingdom. Operations in Asia areconducted through the Hong Kong subsidiary and in the Americas through the USAsubsidiary, whose offices are in Miami. Information on primary reporting by business segment and secondary reporting bygeographical region is shown below. Segment revenue, expenses and results include transfers and transactions betweenbusiness segments and between geographical segments. Such transactions areaccounted for at competitive market prices which would be charged tounaffiliated clients for similar goods. All inter-segment transactions areeliminated on consolidation. Segment assets include all operating assets used by a segment and consistprincipally of operating cash, receivables, inventories, goodwill and property,plant and equipment, net of allowances and provisions. Whilst most assets can bedirectly attributable to individual segments, the carrying value of certainassets used jointly by two or more segments is allocated to the segments on areasonable basis. Where assets cannot be apportioned, they are classified asunallocated corporate assets. Segment liabilities include all operating liabilities and consist principally ofaccount payable, wages, and accrued liabilities. Where allocation is notpossible across more than one segment, such liabilities are classified asunallocated corporate liabilities. Segment assets and liabilities do not include deferred income taxes. Exceptional items relate to significant non-recurring expenditure of an unusualnature. Segmental analysis presented for the comparative period does not include thefinancial impact of adopting IAS 32 and IAS 39 which were adopted by the groupon 1 January 2005. Should IAS 32 and IAS 39 have been applied to the comparativeperiod, the financial impact would have been immaterial on the Servicesdivision. However, with regards to the Products division the financial impactwould have been to increase segmental assets by £11,150,000, increase segmentalliabilities by £10,419,000 and to increase segmental profit after tax by£731,000. Segmental information by business segment for 12 months to 31 December 2005 Products Services division division Eliminations Total 12 months to 12 months to 12 months to 12 months to 31 December 31 December 31 December 31 December 2005 2005 2005 2005 £'000 £'000 £'000 £'000 RevenueTravel supplies, catering and media services 34,072 43,826 - 77,898Marketing, design, consultancy and commission 2,189 - - 2,189Net sales to other segments - 83 (83) - ----------------------------------------------------Total revenue 36,261 43,909 (83) 80,087 ==================================================== ResultSegment result before exceptional items 3,355 4,751 (33) 8,073Exceptional restructuring costs (617) (741) - (1,358) ----------------------------------------------------Segment result 2,738 4,010 (33) 6,715 =========================================Unallocated corporate expenses (543) ----------Operating profit 6,172Interest expense (1,058)Interest income 91Movement in fair value of financial assets (179)Share of loss of associate (40)Income tax (1,166) ----------Profit after tax 3,820 ========== Other informationSegment assets 26,475 47,278 - 73,753Unallocated corporate assets 589 ----------Consolidated assets 74,342 ========== Segment liabilities (13,634) (8,464) - (22,098)Unallocated corporate liabilities (9,248) ----------Consolidated liabilities (31,346) ========== Capital expenditure including intangible assets 1,470 816 - 2,286 ====================================================Depreciation, impairment and amortisation 189 800 - 989 ==================================================== Segmental information by geographical region for 12 months to 31 December 2005 Capital expenditure Turnover 12 months to Segment assets as at 12 months to 31 December 2005 31 December 2005 31 December 2005 £'000 £'000 £'000UK, Europe & Middle East 65,659 65,573 2,272Asia 7,049 5,497 14Americas 7,379 3,272 - ------------------------------------------------------------- 80,087 74,342 2,286 ============================================================= Segmental information by business segment for 12 months to 31 December 2004 Products Services division division Eliminations Total 12 months to 12 months to 12 months to 12 months to 31 December 2004 31 December 2004 31 December 2004 31 December 2004 £'000 £'000 £'000 £'000 RevenueTravel supplies, catering and media services 36,956 34,569 - 71,525Marketing, design, consultancy and commission - 2,181 - 2,181Net sales to other segments 3 54 (57) - -------------------------------------------------------------Total revenue 36,959 36,804 (57) 73,706 =============================================================ResultSegment result before exceptional items 1,792 5,943 (20) 7,715Exceptional bad debt (146) (445) - (591)Exceptional start-up costs - (302) - (302)Exceptional restructuring costs (1,071) (365) - (1,436) ------------------------------------------------Segment result 575 4,831 (20) 5,386 ================================================Unallocated corporate expenses (735) -------Operating profit 4,651Interest expense (504)Interest income 64Movement in fair value of financial assets (89)Profit on sale of financial assets 676Share of loss of associate (1)Income tax (1,680) ------------Profit after tax 3,117 ============ Other informationSegment assets 21,988 41,246 - 63,234Investment in associate 40 - - 40Unallocated corporate assets 2,534 ------------Consolidated assets 65,808 ============ Segment liabilities (14,560) (3,596) - (18,156)Unallocated corporate liabilities (9,118) ------------Consolidated liabilities (27,274) ============ Capital expenditure including intangible assets 1,065 8,653 - 9,718 =============================================================Depreciation, impairment and amortisation 544 250 - 794 ============================================================= Segmental information by geographical region for 12 months to 31 December 2004 Capital expenditure Turnover 12 months to Segment assets as at 12 months to 31 December 2004 31 December 2004 31 December 2004 £'000 £'000 £'000 UK, Europe & Middle East 59,686 57,807 9,716Asia 8,164 4,758 -Americas 5,856 3,243 2 -------------------------------------------------------------- 73,706 65,808 9,718 ============================================================== 4. Exceptional items Exceptional items 12 months to 12 months to 31 December 31 December 2005 2004 £'000 £'000Exceptional re-organisation costs- Property closures 24 154- Asset write-off - 644- Redundancy and salary costs 1,296 581- Legal and professional 38 26- Other costs - 31 -------------------------Total exceptional re-organisation costs 1,358 1,436Exceptional bad debt - 591Exceptional contract start-up costs - 302 -------------------------Total exceptional items 1,358 2,329 ========================= The exceptional bad debt incurred during 2004 relates to the net amount writtenoff following the collapse of Duo Airlines Limited. Exceptional start-up costsincurred during 2004 relates to the costs associated with the setting up of anew catering contract. Exceptional re-organisation costs incurred during 2004 relate to the fundamentalre-organisation of the group's operations in terms of physical location,management and staffing. The costs associated with the re-organisation relateprincipally to the closure costs in the UK, the catering relocation and thegroup integration programme. Exceptional re-organisation costs amounting to £617,000 during 2005 relate tothe costs associated with the full closure of the group's Belmore Park locationand the move of the products operation to the Heathrow head office. A further£741,000 of exceptional items relate to initial upfront costs incurred withoutsourcing part of the Services divisions operational costs to a third party. 5. EBITDA (Earnings before interest, tax, depreciation and amortisation) Reconciliation of operating profit to EBITDA 12 months to 12 months to 31 December 31 December 2005 2004 £'000 £'000 Operating profit 6,172 4,651Depreciation 960 514Amortisation 29 - -------------------------EBITDA 7,161 5,165 ========================= Reconciliation of operating profit to adjusted EBITDA (Earnings before interest,tax, depreciation, amortisation and exceptional items) 12 months to 12 months to 31 December 31 December 2005 2004 £'000 £'000Operating profit 6,172 4,651Depreciation 960 514Amortisation 29 -Exceptional re-organisation costs 1,358 1,436Exceptional bad debt - 591Exceptional contract start up costs - 302 -------------------------Adjusted EBITDA 8,519 7,494 ========================= 6. Profit before tax attributable to equity share owners Reconciliation of profit before tax attributable to equity share owners toadjusted profit before tax attributable to equity share owners 12 months to 12 months to 31 December 31 December 2005 2004 £'000 £'000 Profit before tax attributable to equity share owners 4,986 4,797Movement in the fair value of derivative financial instruments 872 -Share based payment expense 184 151Exceptional bad debt - 591Exceptional start up costs - 302Exceptional re-organisation costs 1,358 1,436Movement in fair value of assets held at fair value through profit or loss 179 89 -------------------------Profit before tax and exceptional items 7,579 7,366 Profit on sale of investment - (676) -------------------------Adjusted profits 7,579 6,690 ========================= 7. Income tax Major components of income tax expense for the 12 months to 31 December 2005 and2004 are: Consolidated income statement 12 months to 12 months to 31 December 31 December 2005 2004 £'000 £'000Current income tax- Current UK income tax charge 589 1,110- Overseas taxation 267 190- Over accrual in previous year (54) (90)Deferred income tax- Origination and reversal of temporary timing differences 403 475- Deferred tax on revaluation of cash flow hedges (42) -- Deferred income tax on share option expense 3 (5) -------------------------Total income tax expense 1,166 1,680 ========================= Consolidated statement of changes in equity 12 months to 12 months to 31 December 31 December 2005 2004 £'000 £'000Deferred income tax- Deferred income tax on share option expense 22 1- Revaluation of cash flow hedges (24) - -------------------------Total income tax expense (2) 1 ========================= A reconciliation of income tax expense applicable to accounting profit beforeincome tax at the statutory income tax rate to income tax expense at the group'seffective income tax rate for the 12 months to 31 December 2005 and 31 December2004 is as follows: 12 months to 12 months to 31 December 31 December 2005 2004 £'000 £'000 Profit before tax 4,986 4,797 =========================At Watermark Group plc statutory income tax rate of 30% (2004: 30%) 1,496 1,439Under/(over) accrual in previous year (54) (90)Expenses not deductible for taxation purposes 79 258Gains - (2)Timing differences between depreciation and capital allowances (413) (389)Utilisation of tax losses (65) 58Lower taxation rates on overseas earnings (178) (96)Deferred tax 364 470Other (63) 32 -------------------------Total income tax expense at effective rate of 23% (2004: 35%) 1,166 1,680 ========================= Deferred income tax at 31 December 2005 relates to the following: Deferred income tax Consolidated balance sheet Consolidated income statement 12 months to 12 months to 31 December 31 December 31 December 31 December 2005 2004 2005 2004 £'000 £'000 £'000 £'000Deferred income tax liabilitiesAccelerated capital allowances (926) (523) 403 475 -------------------------------------------------------- (926) (523) ======================Deferred income tax assetsShare option expense 18 43 3 (5)Revaluations of foreign exchange contracts to fair value 66 - (42) - ---------------------- 84 43 ====================== ---------------------------------Deferred income tax charge 364 470 ================================= Net deferred income tax liability (842) (480) ====================== The group has not recognised any deferred tax liability that would becomepayable on unremitted overseas earnings. The group has no plans to remitoverseas earnings to the UK as at the balance sheet date. Should the groupchange its policy regarding unremitted overseas earnings there would be adeferred tax liability of £673,000 at 31 December 2005 (2004: £502,000). The group also has tax losses amounting to £859,000 (2004: £859,000) which areavailable indefinitely for offset against future taxable profits of thecompanies in which the losses arose at the underlying statutory tax rate.Deferred tax assets have not been recognised in respect of these losses as theymay not be used to offset taxable profits elsewhere in the group and they arosein a subsidiary which continues to be loss making. The deferred tax liability provided for accelerated capital allowances willreverse over the useful economic lives of the assets to which they relate. Thisis expected to be over the next 3 to 4 years. It is also anticipated that anelement of this balance will be replaced by new assets. There are no income tax consequences attaching to the payment of dividends byWatermark Group plc to its equity share owners. 8. Earnings per share Basic earnings per share amounts are calculated by dividing net profit for theyear attributable to equity share owners (numerator) of the parent by theweighted number of ordinary shares in issue during the year (denominator). Diluted earnings per share amounts are calculated using the same numerator withthe denominator adjusted for the dilutive effects of share options and shares tobe issued with regards to past acquisitions. Adjusted earnings per share, both basic and dilutive, use the denominatordescribed in the appropriate paragraphs above. For both adjusted basic earningsper share and adjusted diluted earnings per share the numerator is adjusted toremove the impact of exceptional items from the calculations. The following represents earnings and share data used to calculate basic,diluted and adjusted earnings per share: Earnings table 12 months to 12 months to Ref 31 December 2005 31 December 2004 £'000 £'000Net profit attributable to equity share owners A 3,820 3,117 - Exceptional items (post tax) 1,031 1,548- Share option costs 184 151- Movement in the fair value of derivatives 872 -- Movement in the fair value of assets held at fair value through profit or loss 179 89- Profit on sale of investment profit or loss - (473) ------------------------------------Adjusted net profit attributable to equity share owners B 6,086 4,432 ==================================== Share table Ref Weighted average Weighted average shares 12 months to shares 12 months to 31 December 2005 31 December 2004 Number NumberWeighted average shares for basic earnings per share C 42,035,227 37,134,205- Share options 1,962,907 1,152,929- Contingent shares to be issued 2,537,376 2,469,190 ------------------------------------Weighted average shares for diluted earnings per share D 46,535,510 40,756,324 ==================================== Earnings per share table Total earnings Total earnings per share per share 12 months to 12 months to Calculation 31 December 2005 31 December 2004 formula Pence PenceBasic earnings per share A/C 9.09 8.39Diluted earnings per share A/D 8.21 7.65Adjusted basic earnings per share B/C 14.48 11.93Adjusted diluted earnings per share B/D 13.08 10.87 9. Dividends paid and proposed 12 months to 12 months to 31 December 31 December 2005 2004 £'000 £'000Paid during the year- Final dividend for 2005 at 1.96 pence per share (2004: 1.78 pence per share) 842 719 ==================================== Interim dividend declared for paymentand final dividend proposed forapproval at AGM, not recognised as aliability at the year end- Interim dividend for 2005 at 0.56 pence per share 258 -- Final dividend for 2005 at 1.69 pence per share (2004: 1.96 pence per share) 727 841 ------------------------------------Total unrecognised dividend for 2005 985 841 ==================================== 10. Additional cash flow information 31 1 January Exchange Non-cash December 2005 Cash flow differences movements 2005 £'000 £'000 £'000 £'000 £'000Cash and cash equivalents 12,041 (6,136) 468 - 6,373Bank overdrafts (15,948) 3,576 (36) - (12,408) ---------------------------------------------------------Increase/(decrease) in cash for the year (3,907) (2,560) 432 - (6,035)Finance lease and hire purchase contracts (1,867) 552 - - (1,315) ---------------------------------------------------------Net debt (5,774) (2,008) 432 - (7,350) ========================================================= 31 1 January Exchange Non-cash December 2004 Cash flow differences movements 2004 £'000 £'000 £'000 £'000 £'000 Cash and cash equivalents 6,939 (5,220) (97) - 1,622Bank overdrafts (4,501) (1,044) 16 - (5,529) ---------------------------------------------------------Increase/(decrease) in cash for the year 2,438 (6,264) (81) - (3,907)Bank loans (2,983) 2,983 - - -Finance lease and hire purchase contracts (29) 102 - (1,940) (1,867) ---------------------------------------------------------Net debt (574) (3,179) (81) (1,940) (5,774) ========================================================= The comparative figure for 2004 excludes the impact of IAS 39, which was adoptedby the group on 1 January 2005. IAS 39 does not permit assets and liabilities tobe netted off within the financial statements unless the balances are to besettled net. The financial impact of adopting IAS 32 and IAS 39 on 1 January2005 is presented in note 11. 11. Adoption of IAS 32 and IAS 39 Under IFRS 1 First time adoption of International Financial Reporting Standards,the group is not required to present comparative information which complies withIAS 32 and IAS 39. The group's hedging strategy is unchanged in respect to bothhedging the net investment position of foreign subsidiaries and covering thetransactional risk of foreign currency sales and purchases. The accountingdifferences for which the opening 2005 balance sheet is restated and which willapply to the 2005 figures are noted below: IFRS pre Gross up for Transitional restatement for debt offset forward contracts Restated IAS 32 & 39 (a) (b) IFRS £'000 £'000 £'000 £'000 ASSETSNon-current assetsProperty, plant and equipment 10,173 - - 10,173Goodwill 30,075 - - 30,075Intangible fixed assets 249 - - 249Investment in associate 40 - - 40Available for sale financial assets (UK GAAP Trade investment) 31 - - 31Financial assets at fair value through profit or loss 145 - - 145Trade and other receivables 112 - - 112 --------------------------------------------------------- 40,825 - - 40,825 Current assetsInventories 3,919 - - 3,919Trade and other receivables 15,173 - - 15,173Prepayments 4,269 - - 4,269Forward currency contracts - - 731 731Cash and short-term deposits 1,622 10,419 - 12,041 --------------------------------------------------------- 24,983 10,419 731 36,133 ---------------------------------------------------------TOTAL ASSETS 65,808 10,419 731 76,958 ========================================================= EQUITY AND LIABILITIESEquity attributable to equity shareowners of the parentIssued share capital 404 - - 404Share premium account 21,428 - - 21,428Shares to be issued 6,496 - - 6,496Capital redemption reserve 24 - - 24Merger reserve 848 - - 848Foreign currency reserve (273) - - (273)Retained earnings 9,607 - 731 10,338 ---------------------------------------------------------Total equity 38,534 - 731 39,265 Non-current liabilitiesInterest bearing loans and borrowings 1,314 - - 1,314 Other payables due after more than one year 3,298 - - 3,298Deferred income tax liabilities 480 - - 480 --------------------------------------------------------- 5,092 - - 5,092 Current liabilitiesTrade and other payables 13,937 - - 13,937Interest bearing loans and borrowings 6,082 10,419 - 16,501Other payables due within one year 1,063 - - 1,063Income tax 1,100 - - 1,100 --------------------------------------------------------- 22,182 10,419 - 32,601 ---------------------------------------------------------TOTAL LIABILITIES 27,274 10,419 - 37,693 ---------------------------------------------------------TOTAL EQUITY AND LIABILITIES 65,808 10,419 731 76,958 ========================================================= (a) Under IFRS and UK GAAP an enforceable right of offset is required tooffset cash and borrowings. However, under IFRS there must also be an intentionto settle these balances net. This means that the gross cash and borrowingpositions included in the IFRS financial statements are different to those shownunder UK GAAP. (b) Under IAS 39, there is a requirement to recognise on the balance sheetforward exchange contracts and other derivatives at their fair value. The grouphad entered into forward exchange contracts prior to 1 January 2005 and oninitial recognition under IAS 39 this has resulted in a fair value asset beingrecognised on the balance sheet and within reserves of £731,000. On maturity of these forward exchange contracts, any realised gains or lossesare recognised within the income statement. Additionally, any changes to thefair value of forward exchange contracts from one reporting period to the nextis also reported within the income statement. Under IAS 39, certain types of forward exchange contracts can be designated as ahedging instrument. Where hedging criteria is satisfied and the relevantdocumentation has been put in place, any movement in the fair value of forwardexchange contracts is recognised within reserves rather than through the incomestatement. Where new forward exchange contracts are being entered into, the group isensuring these comply with the hedging criteria as set out within IAS 39. On thebasis the hedge effectiveness is maintained, any movements in the fair value offorward exchange contracts will be deferred within reserves and matched to thesettlement of the underlying hedged asset or liability. 12. Annual accounts The annual report and accounts will be posted to all share owners in April 2006and will be available at the company's registered office: The Encompass CentreInternational AvenueHestonMiddlesexTW5 9NJ 13. Dealing disclosure requirements Under the provisions of Rule 8.3 of the City Code on Takeovers and Mergers (the"Code"), if any person is, or becomes, "interested" (directly or indirectly) inone per cent. or more of any class of "relevant securities" of Watermark, all"dealings" in any "relevant securities" of that company (including by means ofan option in respect of, or a derivative referenced to, any such "relevantsecurities") must be publicly disclosed by no later than 3.30 pm (London time)on the London business day following the date of the relevant transaction. Thisrequirement will continue until the date on which the offer becomes, or isdeclared, unconditional as to acceptances, lapses or is otherwise withdrawn oron which the "offer period" otherwise ends. If two or more persons act togetherpursuant to an agreement or understanding, whether formal or informal, toacquire an "interest" in "relevant securities" of Watermark, they will be deemedto be a single person for the purpose of Rule 8.3. Under the provisions of Rule 8.1 of the Code, all "dealings" in "relevantsecurities" of Watermark by Watermark, or by any of their respective"associates", must be disclosed by no later than 12.00 noon (London time) on theLondon business day following the date of the relevant transaction. A disclosure table, giving details of the companies in whose "relevantsecurities" "dealings" should be disclosed, and the number of such securities inissue, can be found on the Takeover Panel's website atwww.thetakeoverpanel.org.uk. "Interests in securities" arise, in summary, when a person has long economicexposure, whether conditional or absolute, to changes in the price ofsecurities. In particular, a person will be treated as having an "interest" byvirtue of the ownership or control of securities, or by virtue of any option inrespect of, or derivative referenced to, securities. Terms in quotation marks are defined in the Code, which can also be found on thePanel's website. If you are in any doubt as to whether or not you are requiredto disclose a "dealing" under Rule 8, you should consult the Panel. Rule 2.10 Requirement In accordance with Rule 2.10 of the Code, Watermark confirms that it currentlyhas in issue 43,121,272 ordinary shares of 1p each. The International SecuritiesIdentification Number for the ordinary shares is GB0009422097. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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