Interim Results

16th Sep 2005 06:00

Communisis plc 16 September 2005 INTERIM RESULTS FOR THE HALF YEAR TO 1 JULY 2005 AND ANNOUNCEMENT OF HSBC OUTSOURCING DEAL * Turnover up 3% at ‚£134.9 million (2004: ‚£131.6 million) * Adjusted profit from operations up 8% at ‚£8.1 million (2004: ‚£7.5 million) before restructuring costs of ‚£6.1 million (2004: ‚£5.1 million). Profit from operations ‚£2.0 million (2004: ‚£2.4 million) * Adjusted profit before tax ‚£6.5 million (2004: ‚£6.5 million) * Agreement to 10 year outsourcing contract with HSBC and acquisition of its UK statement production business * Five year HBOS deal including c-store * Other contract wins of ‚£25 million annualised in the first half * First major European print management contract * Interim dividend increased by 10% to 1.953p (2004: 1.775p) Commenting on the results David Jones, Chief Executive of Communisis plc, said:"We are very encouraged by the HSBC 10 year outsourcing and five year HBOSdeals together with the existing Barclays contract. These relationships areunrivalled in our industry and underpin Communisis' strategy for growth.Traditionally weak demand in the summer months in Print and Direct Mail hasbeen worse this year compared to previous years and we do not expect thatperformance in the fourth quarter will be sufficient to offset the weak tradingin July and August."For further information, please contact:David Jones, Chief Executive Communisis plc Tel: 0113 277 0202 Mark Whiteling, Finance Director Tel: 0113 277 0202 Communisis plc William Clutterbuck/Michelle Jeffery The Maitland Consultancy Tel: 020 7379 5151 Interim Statement 2005IntroductionFirst half turnover from ongoing operations was up 3% at ‚£134.9 million (2004:‚£131.6 million); this against the backdrop of continuing selling price erosionand weak demand in our Print and Direct Mail markets.Adjusted profit from operations was up 8% at ‚£8.1m (2004: ‚£7.5 million).Communisis continued its investment in people and IT to grow itssolutions-based contracts.We have reached agreement with HSBC to acquire their UK statement productionbusiness which handles the production and despatch of the majority of HSBC's UKpaper-based customer communications, including statements. This contract isestimated to be worth ‚£250 million over 10 years. We will transfer 255 staff toCommunisis of which 174 are permanent HSBC staff and 81 are temporary staff. Wewill pay ‚£3 million to acquire the assets relating to the operations to betransferred. We anticipate that the effective date of the transfer will beJanuary 2006. Additionally we are committed to build a world-class statementingfacility over the next 18 months. We see encouraging growth in this sector.We have further agreed a five year ‚£60 million deal with HBOS plc for theprovision of all direct mail and security printing services for a number of itsbrands. The deal includes the implementation of Communisis' proprietarydocument management software, c-store.The HSBC, Barclays and HBOS relationships are unrivalled in our industry andunderpin Communisis' strategy for growth.Financial ReviewThis is the first set of results for the Group presented in accordance withInternational Financial Reporting Standards (IFRS). Note 2 to the interimaccounts, provides a reconciliation between the results previously reportedunder UK GAAP and the comparative information presented here. The followingtable summarises the impact of the application of IFRS on the 2005 results. 2005 2004 ‚£m ‚£m Operating profit before goodwill 9.3 8.5amortisation and exceptional items under UK GAAP IFRS Accounting changes: - Intangible amortisation (0.2) -- Options expense (0.1) (0.1)- Change in pension expense (0.9) (0.9) Adjusted profit from operations 8.1 7.5The commentary that follows is based on the results as reported under IFRS.In the half year to 1 July 2005, turnover from continuing operations was ‚£134.9million (2004: ‚£131.6 million). Profit from operations was ‚£2.0 million (2004:‚£2.4 million) reflecting the impact of the loss on the sale of our Europeanforms business (Datadocs), sold in May 2005, and the reorganisation costsincurred in conjunction with the restructuring of our sales organisation andthe restructuring of our Transactional Print Services business. The 2004restructuring costs relate to our European forms business.The following table summarises the impact of these items on the 2005 and 2004results: 2005 2004 ‚£m ‚£m Adjusted profit from operations 8.1 7.5 Loss on sale of Datadocs (4.9) - Other restructuring costs (1.2) (5.1) Profit from operations 2.0 2.4Net finance costs (including the non-cash pension finance charge) increased to‚£1.6 million (2004: ‚£1.0 million), reflecting the higher debt levels followingthe Dataform acquisition and the additional ‚£10.0 million cash contributionpaid into the pension fund during the first half. Profit for the period of ‚£0.1million (2004: loss ‚£7.1 million) reflects the gain on sale of the propertyassociated with a business discontinued in 2004.An increased interim dividend of 1.953 pence per share, up 10% (2004: 1.775pence per share) is declared. This will be payable on 28 October 2005 toshareholders on the register at the close of business on 30 September 2005. Thedividend is payable out of adjusted earnings per share of 3.68 pence (2004 4.79pence) and is covered 1.9 times (2004: 2.7 times).Cash generated from operations in the period was an outflow of ‚£4.8 million(2004: Inflow of ‚£3.7 million) reflecting the significant additional pensioncontribution of ‚£10 million in the first half. The net working capital changewas an increase of ‚£8.1 million (2004: ‚£7.6 million) since December andreflects the working capital profile of the business. Net debt ended the periodat ‚£38.2 million (December 2004: ‚£27.6 million).Pension PlanUnder IFRS the Group now recognises on its balance sheet the gross retirementbenefit obligation of ‚£38.7 million (December 2004: ‚£42.7 million) withinnon-current liabilities on its balance sheet. The associated deferred tax assetof ‚£11.6 million (December 2004: ‚£12.8 million) is included separately withinthe non-current assets.Since December 2004, the gross deficit has decreased as follows: ‚£m Gross deficit - December 2004 42.7 Current service cost 2.9 Other financial charges 0.5 Contributions (12.1) Change in assumptions 4.7 38.7 At June 2005, the pension assets were invested in equities 59%, gilts/bonds 32%and cash 9%.At December 2004, the Group's estimated actuarial deficit was ‚£21.2 million.This deficit will have been reduced following the Group's additional ‚£10million cash contribution in the first half and the better than expected stockmarket performance over this period. However, the overall position can only bedetermined in conjunction with a review of all assumptions to be used in theactuarial calculation which is to be conducted at the end of September 2005. Wewould anticipate that following the completion of the actuarial work, we wouldseek to reach agreement with the Trustees on the revised contribution schedulein early 2006.Operational ReviewPrint Management turnover grew 15% in the first half to ‚£70.8 million,benefiting from the Dataform acquisition. Dataform's operational print andlogistics capabilities secured the recent contract win with the Department ofWork and Pensions, a new customer with substantial growth opportunities.New business contracts have been won with the Royal Bank of Scotland and LloydsTSB, and significant contract renewals have been achieved with Sainsbury's,Coors and Britvic.The Barclays contract continues to run above the initial ‚£50 million per annumthreshold with growth expected in 2006 to include potential in Europe, the USAand South Africa. This is the most advanced document management contract inEurope and is a significant reference point; instrumental in the prestigiousHSBC outsourcing deal, which is covered in Transactional Print Services.In Europe we are entering discussions with some of the major financialinstitutions backed by the successes with Barclays and HSBC. Business wins inthe first half include Axa and Disney, both initially `local' French contractsbut both with significant pan European potential. We see Europe as vital to thedevelopment of existing customers as well as having untapped potential,particularly in the financial services sector. We are already supplyingBarclays in France and Spain and will be extending this to other Europeancountries.We are committed to providing leading edge solutions for our customers. As partof the commitment we have launched a consolidation program of our UK PrintManagement Services business to enable us to serve all our customers from asingle operational platform, based out of Communisis' North East facility. Thisprogram will include the migration to a single Enterprise Resource Planningsolution which will be integrated into our customer front-end applications andwill enable us to consolidate support functions in one location. We expect thatthe program will take approximately 12 months to complete. It will involve acapital cost of approximately ‚£0.6 million and restructuring costs of ‚£1.3million. These outflows will occur primarily in 2006 and will produce a cashpayback in under one year.Our procurement business is key to our future, benefiting both our customersand our own profitability. We have extended our supply base into Central andEastern Europe and the Far East. We are deploying e-procurement tools toextract maximum value from the European print supply base and we are engagingdirectly with paper mills, leveraging our considerable purchasing power.The Transactional Print Services business has to date comprised our cheque bookbusiness where we have 100% share with the top five banks. This business is nowto be extended into statement production with the HSBC outsourcing deal,effective January 2006. We expect a healthy growth in the statementing businessto follow, supported by our existing facilities and capabilities but alsothrough our new purpose-built centre of excellence to be fully functional firstquarter 2007. This business fits the profile of our document managementstrategy to partner major European financial institutions. We will manage theirend-to-end document process; marketing campaigns through our c-store software,operational print and logistics; and data-critical regulatory customercommunications.Our Print and Direct Mail business continued to suffer from extreme pricepressure and reduced volumes. Profitability was supported by continuousimprovement in each of our facilities and substantial inter-company sales.In the first half we took the decision to exit our European forms manufacturingbusiness leaving us with one, well-invested facility in the UK which was formedfrom the six manufacturing sites originally acquired by Communisis in 2000.This is a reflection of much needed consolidation and continuousreorganisation.In Direct Mail we have the two best facilities in Europe and these have beenresponding to reducing volumes, particularly from the credit card banks, andprice reductions. These facilities remain exposed to spot pricing despite theincreased level of contract business that has been achieved.In May 2005, we disposed of the remaining European manufacturing business fornominal consideration. This led to the write-off of the net assets of thatbusiness (‚£2.3 million) and the write-back of goodwill previously written offto reserves (‚£2.4 million) and the write-back of the change in net assets dueto exchange movements previously taken directly to reserves (‚£0.2 million).These amounts are included in the current year's profit from operations. Aspart of the sale, Communisis has retained certain tax receivables totalling ‚£0.5 million which are expected to be received within the next 18 months.Trading and OutlookWe are very encouraged by the HSBC 10 year outsourcing and five year HBOSdeals. We can also be confident that the Barclays, HSBC and HBOS strategicrelationships will be the bedrock of further European document management wins.Communisis' exposure remains the over-capacity and price erosion in the Printand Direct Mail businesses, tempered by the degree of inter-company trading,but nevertheless vulnerable to the continuing level of spot business.Traditionally weak demand in the summer months has been worse this yearcompared to previous years and we do not expect that performance in the fourthquarter will be sufficient to offset the weak trading in July and August.Consolidated Interim Income Statementfor the half year ended 1 July 2005: unaudited Restated Restated Year Half year Half year ended 31 Note ended ended December 01-Jul-05 02-Jul-04 2004 ‚£000 ‚£000 ‚£000 Continuing operations Revenue 3 134,948 131,610 269,664 Changes in inventories of 190 ( 518) 95finished goods and work in progress Raw materials and consumables ( 69,639) ( 68,582) ( 144,413)used Employee benefits expense ( 36,945) ( 39,061) ( 76,454) Depreciation and amortisation ( 4,967) ( 4,845) ( 9,545)expense Other operating expenses ( 16,695) ( 16,229) ( 30,868) Loss on sale of Datadocs 4 ( 4,865) - -operation Profit from operations 3 2,027 2,375 8,479 Analysed as: Profit from operations before 8,084 7,457 15,266exceptional restructuring costs Restructuring costs 4 ( 6,057) ( 5,082) ( 6,787) Profit from operations 2,027 2,375 8,479 Finance income 167 72 351 Finance costs ( 1,753) ( 1,033) ( 2,605) Profit before taxation 441 1,414 6,225 Income tax expense 7 ( 833) 611 ( 1,215) (Loss)/profit for the period from ( 392) 2,025 5,010continuing operations Discontinued operations Profit / (loss) for the period 6 494 ( 9,162) ( 11,750)from discontinued operations Profit/(loss) for the period 102 ( 7,137) ( 6,740)attributable to equity holders Earnings per share 8 On profit/(loss) for the period attributable to equity holders - basic 0.07p (4.97p) (4.69p) - diluted 0.07p (4.97p) (4.69p) On (loss)/profit for the period from continuing operations - basic (0.27p) 1.41p 3.49p - diluted (0.27p) 1.41p 3.48p Dividend per share 9 - paid 3.549p 3.227p 5.002p - proposed 1.953p 1.775p 3.549pDividends paid and proposed during the period were ‚£5.1 million and ‚£2.8million respectively (2 July 2004: ‚£4.6 million and ‚£2.6 million respectively,31 December 2004: ‚£7.2 million and ‚£5.1 million respectively)The accompanying notes are an integral part of these consolidated interimfinancial statements.Consolidated Interim Balance Sheetfor the half year ended 1 July 2005: unaudited Restated Restated Half year Half year Year ended ended ended 31 1 July 2 July December Note 2005 2004 2004 ‚£000 ‚£000 ‚£000 ASSETS Non-current assets Property, plant and equipment 37,386 45,721 42,619 Goodwill 171,200 156,427 173,617 Intangible assets 2,831 289 2,920 Trade and other receivables 3,573 5,150 3,927 Deferred income tax assets 8,200 4,599 6,956 223,190 212,186 230,039 Current assets Inventories 15,222 13,695 15,982 Trade and other receivables 42,469 42,001 48,870 Cash and cash equivalents 7,300 5,347 12,963 64,991 61,043 77,815 Non-current assets classified as - - 996held for sale 64,991 61,043 78,811 TOTAL ASSETS 288,181 273,229 308,850 EQUITY 10 Equity attributable to the equity holders of the parent Share capital 36,008 35,977 35,999 Share premium account 152,287 152,256 152,261 Merger reserve 11,427 11,365 11,427 Share option reserve 505 226 359 Other reserves (374) (374) (374) Cumulative translation adjustment 8 (207) (253) Retained earnings (57,510) (45,080) (49,191) Total equity 142,351 154,163 150,228 LIABILITIES Non-current liabilities Borrowings 33,500 10,000 29,500 Retirement benefit obligations 38,703 38,258 42,664 Provisions 1,037 736 698 73,240 48,994 72,862 Current liabilities Short term borrowings, overdrafts 12,027 7,336 11,077and current instalments of loans Trade and other payables 60,526 58,248 73,556 Provisions 37 4,488 1,127 72,590 70,072 85,760 Total liabilities 145,830 119,066 158,622 TOTAL EQUITY AND LIABILITIES 288,181 273,229 308,850The accompanying notes are an integral part of these consolidated interimfinancial statements.Consolidated interim cash flow statementfor the half year ended 1 July 2005: unaudited Restated Restated Half year Half Year Year ended ended ended 31 1 July 2 July December Note 2005 2004 2004 ‚£'000 ‚£'000 ‚£'000 Cash flows from operating activities Cash generated from operations 5 (4,789) 3,660 18,332 Interest paid (1,195) (616) (1,634) Interest received 167 72 351 Income tax paid (970) (2,415) (5,217) Net cash (outflow)/ inflow from (6,787) 701 11,832operating activities Cash flows from investing activities Acquisition of subsidiary (1,136) - (16,804)undertaking Disposal of subsidiary undertakings 147 7,065 7,996 Purchases of property, plant and (2,523) (2,670) (7,778)equipment Disposal of property, plant and 4,880 - 1,557equipment Purchase of intangible assets (287) (145) (569) Net cash inflow / (outflow) from investing 1,081 4,250 (15,598)activities Cash flows from financing activities Proceeds from issue of share capital 35 - 7 New loans 10,000 - 22,000 Repayment of borrowings (5,000) (12,500) (12,500) Repayment of loans assumed on - - (4,216)acquisition Dividends paid (5,100) (4,634) (7,184) Net cash outflow from financing (65) (17,134) (1,893)activities Net decrease in cash and cash equivalents (5,771) (12,183) (5,659) Cash and cash equivalents at 9,386 15,343 15,343beginning of period Exchange rate effects 158 (150) (298) Cash and cash equivalents at end of 3,773 3,010 9,386period Cash and cash equivalents consist of: Cash and cash equivalents 7,300 5,347 12,963 Overdrafts (3,527) (2,337) (3,577) 3,773 3,010 9,386The accompanying notes are an integral part of these consolidated interimfinancial statements.Consolidated Interim Statement of Recognised Income and Expensefor the half year ended 1 July 2005: unaudited Restated Restated Half year Half year Year ended ended ended 31 1 July 2 July December 2005 2004 2004 ‚£'000 ‚£'000 ‚£'000 Exchange gains/(losses) on 261 (207) (253)translation of foreign operations Actuarial (losses)/gains on defined (4,744) 1,630 (1,167)benefit pension plans Tax on items taken directly to equity 1,423 (489) 350 Net income recognised directly in (3,060) 934 (1,070)equity Profit/(loss) for the period 102 (7,137) (6,740) Total recognised income and expense (2,958) (6,203) (7,810)for the period Attributable to: Equity holders of the parent (2,958) (6,203) (7,810) The accompanying notes are an integral part of these consolidated interimfinancial statements.Notes to the Interim Resultsfor the half year ended 1 July 2005: unaudited1 Summary of significant accounting policiesBasis of preparationThese 2005 interim consolidated financial statements of Communisis plc are forthe half year ended 1 July 2005. They have been prepared in accordance with theaccounting policies listed below, and are covered by IFRS 1 `First-TimeAdoption of IFRS', because they are part of the period covered by the Group'sfirst IFRS financial statements for the year ended 31 December 2005. Theseinterim financial statements have been prepared using policies in accordancewith those IFRS standards issued and effective or issued and early adopted asat the time of preparing these statements except for IAS 34 `Interim FinancialReporting'. The IFRS standards and IFRIC interpretations that will beapplicable at 31 December 2005, including those that will be applicable on anoptional basis, are not known with certainty at the time of preparing theseinterim financial statements.The policies comply with the amendment to IAS 19 that was published in December2004 which the Group expects to early adopt in its first IFRS financialstatements. The amendment to IAS 19 is yet to be endorsed by the EU.The policies set out below have been consistently applied to all periodspresented.Communisis plc's consolidated financial statements were prepared in accordancewith UK Generally Accepted Accounting Principles (GAAP) until 31 December 2004.UK GAAP differs in some areas from IFRS. In preparing Communisis plc's 2005consolidated interim financial statements, management has amended certainaccounting methods applied in the UK GAAP financial statements to comply withIFRS. The comparative figures in respect of 2004 have been restated to reflectthese adjustments.Reconciliations and descriptions of the effect of the transition from UK GAAPto IFRS on the Group's equity and its net income and cash flow are provided inNote 2.These consolidated interim financial statements have been prepared on ahistorical cost basis except for pension assets and liabilities and shareoptions that are stated at their fair values. The consolidated interimfinancial statements are presented in sterling and all values are rounded tothe nearest thousand (‚£000) except where otherwise indicated.Basis of consolidationThe consolidated financial statements comprise the financial statements ofCommunisis plc and its subsidiaries as at 2 July 2004, 31 December 2004 and 1July 2005. The results of subsidiaries prepared for the same reporting year asthe parent company are included in these consolidated financial statements,using consistent accounting policies. Adjustments are made to bring into lineany dissimilar accounting policies that may exist. All intercompany balancesand transactions, including unrealised profits arising from intra-grouptransactions, have been eliminated in full.Subsidiaries are consolidated from the date on which control is transferred tothe Group and cease to be consolidated from the date on which control istransferred out of the Group. Where there is a change of control of asubsidiary, the consolidated financial statements include the results for thepart of the reporting year during which Communisis plc has control.The Group has taken the exemption under IFRS 1 not to retrospectively applyIFRS 3 and restate business combinations prior to 1 January 2004 the Groupsdate of transition to IFRS.Foreign currency transactionsTransactions in foreign currencies are recorded at the rate ruling at the dateof the transaction. Monetary assets and liabilities denominated in foreigncurrencies are retranslated at the rate of exchange ruling at the balance sheetdate. All differences are taken to the consolidated income statement with theexception of differences on foreign currency borrowings that provide a hedgeagainst a net investment in a foreign entity. These are taken directly toequity until the disposal of the net investment, at which time they arerecognised in the consolidated income statement. Tax charges and creditsattributable to exchange differences on those borrowings are also dealt with inequity.Non-monetary items that are measured in terms of historical cost in a foreigncurrency are translated using the exchange rate as at the date of the initialtransaction. Non-monetary items measured at fair value in a foreign currencyare translated using the exchange rates at the date when the fair value wasdetermined.The functional currency of the overseas subsidiaries is the Euro. As at thereporting date, the assets and liabilities of these overseas subsidiaries aretranslated into sterling at the rate of exchange ruling at the balance sheetdate and their income statements are translated at the weighted averageexchange rates for the period. The exchange differences arising on theretranslation are taken directly to a separate component of equity described asthe cumulative translation adjustment. On disposal of a foreign entity, thecumulative amount recognised in equity relating to that particular foreignoperation is recognised in the income statement.The Group has taken advantage of the exemption from calculating the cumulativetranslation differences of net assets of foreign subsidiaries held in reservesat the date of transition.Property, plant and equipment.Property, plant and equipment is stated at cost less accumulated depreciationand any impairment in value. Land is not depreciated.Depreciation is calculated on a straight-line basis over the estimated usefullife of the asset as follows:Freehold buildings 25 to 50 years Plant, equipment and motor vehicles 4 to 10 years The carrying values of property, plant and equipment are reviewed forimpairment when events or changes in circumstances indicate the carrying valuemay not be recoverable. If any such indication exists, and where the carryingvalues exceed the estimated recoverable amount, the assets or cash-generatingunits are written down to their recoverable amount. The recoverable amount ofproperty, plant and equipment is the greater of fair value less costs on selland value in use. In assessing value in use, the estimated future cash flowsare discounted to their present value using a pre-tax discount rate thatreflects current market assessments of the time value of money and the risksspecific to the asset. Useful economic lives, depreciation methods andresidual values are reviewed annually. For an asset that does not generatelargely independent cash inflows, the recoverable amount is determined for thecash-generating unit to which the asset belongs. Impairment losses arerecognised in the income statement.The IFRS 1 option to fair value these assets on transition to IFRS has not beenapplied by the Group.GoodwillGoodwill on acquisition is initially measured at cost being the excess of thecost of the business combination over the acquirer's interest in the net fairvalue of the identifiable assets, liabilities and contingent liabilities.Following initial recognition, goodwill is measured at cost less anyaccumulated impairment losses. Goodwill on acquisitions after 1 January 2004 isnot amortised and goodwill already carried in the balance sheet is notamortised after 1 January 2004.Goodwill is reviewed for impairment, annually or more frequently if events orchanges in circumstances indicate that the carrying value may be impaired.Goodwill is allocated to operating divisions for the purpose of impairmenttesting. Each of those operating divisions represents the Group's investment ineach location of operation.The Group has taken advantage of the exemption available under IFRS 1 to notretranslate fair value adjustments and goodwill that arose on acquisitions offoreign entities which were made prior to the date of transition.Intangible assets(a) Acquired from a business combinationIntangibles arising from a business acquisition are capitalised at fair valueas at the date of acquisition, where it can be measured reliably. Followinginitial recognition, the cost model is applied to the class of intangibleassets. The useful lives of these intangible assets are assessed to be eitherfinite or indefinite. Where amortisation is charged on finite assets, thisexpense is taken to the income statement. Intangible assets currentlyrecognised are being amortised over six years.Intangible assets, excluding development costs, created within the business arenot capitalised and expenditure is charged against profits in the year in whichthe expenditure is incurred.Useful lives are also examined on an annual basis and adjustments, whereapplicable are made on a prospective basis.(b) Research and development costsResearch costs are expensed as incurred. Development expenditure incurred on anindividual project is carried forward when its future recoverability canreasonably be regarded as assured. Capitalisation commences from the point atwhich the technical feasibility and commercial viability of the product can bedemonstrated, and the Group is satisfied that it is probable that futureeconomic benefits will result from the product, once completed. Capitalisationceases when the product is ready for launch. Following the initial recognitionof the development expenditure, the cost model is applied requiring the assetto be carried at cost less any accumulated amortisation and accumulatedimpairment losses. Any expenditure carried forward is amortised over the periodof expected future sales from the related project.(c) Computer software costsAcquired computer software licenses are capitalised on the basis of the costsincurred to acquire and bring to use the specific software. These costs areamortised over their estimated useful lives (three to five years).Costs associated with maintaining computer software programs are recognised asan expense as incurred. Costs that are directly associated with the productionof identifiable and unique software products controlled by the Group, and thatwill probably generate economic benefits exceeding costs beyond one year, arerecognised as intangible assets. Direct costs include the costs of softwaredevelopment employees.The carrying value of intangible assets is reviewed for impairment when anindicator of impairment arises during the reporting year.Recoverable amount of non-current assetsAt each reporting date, the Group assesses whether there is any indication thatan asset may be impaired. Where an indicator of impairment exists, the Groupmakes a formal estimate of recoverable amount. Where the carrying amount of anasset exceeds its recoverable amount the asset is considered impaired and iswritten down to its recoverable amount. Recoverable amount is the higher of anasset's or cash-generating unit's fair value less costs to sell and its valuein use and is determined for an individual asset, unless the asset does notgenerate cash inflows that are largely independent of those from other assetsor groups of assets.InventoriesInventories are valued at the lower of cost and net realisable value.Raw materials are valued at purchase cost on a first-in, first-out basis oraverage cost basis. For finished goods and work-in-progress costs includedirectly attributable material and labour costs and certain overhead costs thatcontribute in bringing the inventories to their present location and condition.Selling expenses and other administrative overhead expenses are excluded.Net realisable value is the estimated selling price in the ordinary course ofbusiness, less estimated costs of completion and the estimated costs necessaryto make the sale.Provision is made for items of stock that are damaged, obsolete or slow moving.Trade and other receivablesTrade and other receivables, which generally have 60 day terms, are recognisedand carried at original invoice amount less an allowance for any uncollectibleamounts. An estimate for doubtful debts is made. Bad debts are written off whenidentified.Trade and other receivables include the contract premium payment made to securethe five year contract with Barclays Bank PLC. The premium is being amortisedon a straight line basis over the life of the contract.Non-current assets held for saleAssets or disposal Groups that are classified as held for sale are carried atthe lower of carrying amount and fair value less costs to sell and are notdepreciated. The applied accounting policies are also based on the Group'sadoption of IFRS 5 `Non-current assets held for sale and discontinuedoperations' retrospectively from the date of transition to IFRS.Cash and cash equivalentsCash and cash equivalents in the balance sheet comprise cash at bank and inhand.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.ProvisionsProvisions are recognised when the Group has a present obligation (legal orconstructive) as a result of a past event, it is probable that an outflow ofresources embodying economic benefits will be required to settle the obligationand a reliable estimate can be made of the amount of the obligation. If theeffect of the time value of money is material, provisions are determined bydiscounting the expected future cash flows at a pre-tax rate that reflectscurrent market assessments of the time value of money and, where appropriate,the risks specific to the liability. Where discounting is used, the increase inthe provision due to the passage of time is recognised as a borrowing cost.BorrowingsBorrowings are recognised initially at value, net of transaction costsincurred. Borrowings are subsequently stated at amortised cost; any differencebetween the proceeds(net of transaction costs) and the redemption value isrecognised in the income statement over the period of the borrowings using theeffective interest method.Borrowings are classified as current liabilities unless the Group has anunconditional right to defer settlement of the liability for at least twelvemonths after the balance sheet date.Loans and receivablesLoans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market; they areincluded in trade and other receivables in the balance sheet. Assets in thiscategory are recognised at amortised cost.Pensions and similar obligationsGroup companies operate defined contribution and defined benefit pension plans.Payments to defined contribution pension plans are charged as an expense to theincome statement as incurred when the related employee service is rendered. TheGroup has no further legal or constructive payment obligations once thecontributions have been made.For defined benefit pension plans, the cost of providing benefits is determinedusing the Projected Unit Credit Method and is charged to the income statementso as to spread the service cost over the service lives of the employees. Aninterest cost representing the unwinding of the discount rate on the scheme'sliabilities, net of the expected return on scheme assets, is charged to theincome statement. The liability recognised in the balance sheet in respect ofdefined benefit pension plans is the present value of the defined benefitobligation at the balance sheet date less the fair value of the plan assets.The defined benefit obligation is calculated annually by independent actuaries.The present value of the defined benefit obligation is determined bydiscounting the estimated future cash outflows using interest rates of AA ratedcorporate bonds that are denominated in a currency in which the benefits willbe paid and that have terms of maturity approximating to the terms of therelevant pension liability.All actuarial gains and losses that arise in calculating the present value ofthe defined benefit obligation and the fair value of plan assets are recognisedimmediately in the statement of recognised income and expense.Share-based payment transactionsExecutive Share Option Scheme 2000 and Communisis Matched Award PlanCertain directors and management are eligible to participate in the aboveschemes.The cost of equity-settled transactions with employees is measured by referenceto the fair value at the date at which they are granted. The fair value isdetermined by an external valuer using an appropriate model. In valuingequity-settled transactions, no account is taken of any performance conditions,other than conditions linked to the price of the shares of Communisis plc(`market conditions').The cost of equity-settled transactions is recognised, together with acorresponding increase in equity shown as the share options reserve, over theperiod in which the performance conditions are fulfilled, ending on the date onwhich the relevant employees become fully entitled to the award (`vestingdate'). The cumulative expense recognised for equity-settled transactions ateach reporting date until the vesting date reflects the extent to which thevesting period has expired and the number of awards that, in the opinion of thedirectors of the Group at that date, based on the best available estimate ofthe number of equity instruments that will ultimately vest.No expense is recognised for awards that do not ultimately vest, except forawards where vesting is conditional upon a market condition, which are treatedas vesting irrespective of whether or not the market condition is satisfied,provided that all other performance conditions are satisfied.Communisis Sharesave SchemeAll UK employees (including directors) are eligible to participate in theCommunisis Sharesave Scheme.Accounting for options under the scheme is identical to that of the other twoschemes.The dilutive effect of outstanding options is reflected as additional sharedilution in the computation of earnings per share.Employee Share Ownership PlanThe Group has an employee share ownership plan for the granting ofnon-transferable options. Shares in the Group held by the employee shareownership plan are treated as treasury shares and presented in the balancesheet as a deduction from equity described as `Other reserves'.The Group has taken advantage of the transitional provisions of IFRS 2 inrespect of equity-settled awards and has applied IFRS 2 only to equity-settledawards granted after 7 November 2002 that had not vested on or before 31December 2004.LeasesOperating lease payments are recognised as an expense in the income statementon a straight-line basis over the lease term.RevenueRevenue represents the turnover, net of discounts, derived from servicesprovided to customers and sales of products applicable to the period.Revenue is recognised to the extent that it is probable that the economicbenefits will flow to the Group and the revenue can be reliably measured. Thefollowing specific recognition criteria must also be met before revenue isrecognised:Sale of goodsRevenue is recognised when the significant risks and rewards of ownership ofthe goods have passed to the buyer and the amount of revenue can be measuredreliably, this is usually on despatch.Provision of servicesThe provision of print management services includes the sourcing and supply ofprinted material. Revenue from such services is recognised when the significantrisks and rewards of ownership of the printed material have passed to thecustomer for the service and the amount of revenue can be measured reliably,this is usually on despatch.InterestRevenue is recognised as the interest accrues using the effective interestmethod (that is the rate that exactly discounts estimated future cash receiptsthrough the expected life of the financial instrument to the net carryingamount).Income taxDeferred income tax is provided, using the liability method, on all temporarydifferences at the balance sheet date between the tax bases of assets andliabilities and their carrying amounts for financial reporting purposes.Deferred income tax liabilities are recognised for all taxable temporarydifferences except in respect of taxable temporary differences associated withinvestments in subsidiaries, where the timing of the reversal of the temporarydifferences can be controlled and it is probable that the temporary differenceswill not reverse in the foreseeable future.Deferred income tax assets are recognised for all deductible temporarydifferences, carry-forward of unused tax assets and unused tax losses, to theextent that it is probable that taxable profit will be available against whichthe deductible temporary differences, and the carry-forward of unused taxassets and unused tax losses can be utilised. In respect of deductibletemporary differences associated with investments in subsidiaries, deferred taxassets are only recognised to the extent that it is probable that the temporarydifferences will reverse in the foreseeable future and taxable profit will beavailable against which the temporary differences can be utilised.The carrying amount of deferred income tax assets is reviewed at each balancesheet date and reduced to the extent that it is no longer probable thatsufficient taxable profit will be available to allow all or part of thedeferred income tax asset to be utilised.Deferred income tax assets and liabilities are measured at the tax rates thatare expected to apply to the year when the asset is realised or the liabilityis settled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted at the balance sheet date.Deferred tax assets and liabilities are not recognised if the temporarydifferences arise from goodwill not deductible for tax purposes, or from theinitial recognition (other than in a business combination) of other assets andliabilities in a transaction that affects neither the taxable profit nor theaccounting profit.Income tax relating to items recognised directly in equity is also recognisedin equity.Revenues, expenses and assets are recognised net of the amount of sales taxexcept:¢â‚¬¢ where the sales tax incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and¢â‚¬¢ receivables and payables are stated with the amount of sales tax included.The net amount of sales tax recoverable from, or payable to, the taxationauthority is included as part of receivables or payables in the balance sheet.Dividend distributionFinal dividend distribution to the Company's shareholders is recognised as aliability in the Group's financial statements in the period in which thedividends are approved by the Company's shareholders. Interimdividends are recognised in the period in which they are paid.2 Transition to International Financial Reporting Standards (`IFRS')2.1 Basis of Transition to IFRS2.1.1 Application of IFRS 1 First-time adoption rules of IFRSThe Group's financial statements for the year ended 31 December 2005 will bethe first annual financial statements that comply with IFRS. These interimfinancial statements have been prepared in accordance with the stated Groupaccounting policies. The Group has applied IFRS 1 in preparing theseconsolidated interim financial statements.The transition date of Communisis plc was 1 January 2004. The Group preparedits opening IFRS balance sheet at that date. The reporting date of theseinterim consolidated financial statements is 1 July 2005. The Group's IFRSadoption date is 1 January 2005.In preparing these interim consolidated financial statements in accordance withIFRS 1, the Group has applied certain of the optional exemptions from fullretrospective application of IFRS.2.1.2 Exemptions from full retrospective application elected by the GroupCommunisis plc has elected to apply the following optional exemptions from fullretrospective application:(a) Business combination exemptionCommunisis plc has applied the business combinations exemption in IFRS 1. Ithas not restated business combinations that took place prior to the 1 January2004 transition date. The application of this exemption is detailed in Note2.2.4 (c).(b) Employee benefits exemptionCommunisis plc has elected to recognise all cumulative actuarial gains andlosses as at 1 January 2004. The application of this exemption is detailed inNote 2.2.2 (g).(c) Cumulative translation differences exemptionCommunisis plc has elected to set the previously accumulated translation tozero at 1 January 2004. This exemption has been applied to all subsidiaries inaccordance with IFRS 1. The application of this exemption is detailed in Note10.(d) Share-based payment transaction exemptionThe Group has elected to apply the share-based payment exemption. It appliedIFRS 2 from 1 January 2004 to those options that were issued after 7 November2002 but that have not vested by 1 January 2005. The application of theexemption is detailed in Note 2.2.2 (e).2.1.3 Early adoption of standardsCommunisis plc has elected to early adopt the following standards.(a) IAS 19 `Employee benefits'The Group expects to early adopt the amendment to IAS 19 in its first IFRSfinancial statements. Actuarial gains and losses have been taken straight tothe statement of recognised income and expense. The amendment to IAS 19 are yetto be endorsed by the EU.(b) IFRS 5 `Non-current assets held for sale and discontinued operations'IFRS 5 is first applicable to accounting periods beginning on or after 1January 2005. The Group has elected to apply IFRS 5 in comparative periods inthese financial statements.2.2 Reconciliation between IFRS and UK GAAPThe following reconciliations provide a quantification of the effect of thetransition to IFRS. The first reconciliation provides an overview of the impacton equity of the transition at 1 January 2004, 2 July 2004 and 31 December 2004(Note 2.2.1).The following seven reconciliations provide details of the impact of thetransition on:* equity at 1 January 2004 (Note 2.2.2) * equity at 2 July 2004 (Note 2.2.3) * equity at 31 December 2004 (Note 2.2.4) * net income for the half year ended 2 July 2004 (Note 2.2.5) * net income for the year ended 31 December 2004 (Note 2.2.6) * cash flows for the half year ended 2 July 2004 (Note 2.2.7) * cash flows for the year ended 31 December 2004 (Note 2.2.8) 2.2.1 Summary of equity 1 Jan 2 July 31 Dec 2004 Note 2004 Note 2004 Note ‚£000 ‚£000 ‚£000 Total equity under UK 188,651 175,228 166,782 GAAP Recognition of the net (38,240) 2.2.2(g) (38,258) 2.2.3(h) (42,664) 2.2.4(i)liability relating to the defined benefit pension scheme Write back of SSAP 24 (550) 2.2.2(d) (450) 2.2.3(e) (350) 2.2.4(e)pension asset Amortisation of customer - - (91) 2.2.4(c)relationships intangible asset Deferred tax adjustments 11,637 2.2.2(c) 11,613 2.2.3(d) 12,931 2.2.4(d)on above items Deferred tax asset - - 72 2.2.4(d)required to be recognised under IFRS2 in relation to share-based payments Deferred tax liability (1,264) 2.2.2(c) (1,235) 2.2.3(d) (1,208) 2.2.4(d)recognised on capital gains rolled over into replacement assets Reversal of proposed 4,634 2.2.2(i) 2,554 2.2.3(j) 5,100 2.2.4(k)ordinary dividend payable Write back of goodwill - 4,724 2.2.3(b) 9,682 2.2.4(b)amortisation Goodwill amortisation on - (13) 2.2.3(b) (26) 2.2.4(b)operations discontinued in period Total equity under IFRS 164,868 154,163 150,228 2.2.2 Reconciliation of equity at 1 January 2004 Effect of UK transition GAAP to IFRS IFRS Note ‚£000 ‚£000 ‚£000 ASSETS Non-current assets Property, plant and equipment a 54,169 (212) 53,957 Goodwill 161,576 - 161,576 Intangible assets b - 212 212 Deferred income tax assets c - 4,647 4,647 215,745 4,647 220,392 Current assets Inventories 19,225 - 19,225 Trade and other receivables d 51,608 (550) 51,058 Cash and cash equivalents 18,139 - 18,139 88,972 (550) 88,422 TOTAL ASSETS 304,717 4,097 308,814 EQUITY Equity attributable to the equity holders of the parent Share capital 35,977 - 35,977 Share premium account 152,256 - 152,256 Merger reserve 11,365 - 11,365 Share option reserve e - 94 94 Other reserves (374) - (374) Retained earnings f (10,573) (23,877) (34,450) Total equity 188,651 (23,783) 164,868 LIABILITIES Non-current liabilities Interest-bearing loans 15,000 - 15,000 Retirement benefit obligations g - 38,240 38,240 Provisions 2,871 - 2,871 Deferred income tax liabilities h 5,726 (5,726) - 23,597 32,514 56,111 Current liabilities Short term borrowings, overdrafts and current instalments of loans 15,296 - 15,296 Trade and other payables i 77,173 (4,634) 72,539 92,469 4,634) 87,835 Total liabilities 116,066 27,880 143,946 TOTAL EQUITY AND LIABILITIES 304,717 4,097 308,814Explanation of the effect of the transition to IFRS on the reconciliation ofequity at 1 January 2004The following explains the IFRS adjustments to the balance sheet as at 1January 2004.(a) Property, plant and equipment (`PPE') ‚£000 Reallocation of certain capitalised software costs to (212)intangible assets in accordance with IAS 38 'Intangible assets' Total Impact - decrease in PPE (212)(b) Intangible assetsReallocation of certain capitalised software costs from 212tangible assets in accordance with IAS 38 Total Impact - increase in intangible assets 212(c) Deferred income tax assetsI. Deferred tax asset recognised in relation to the net 11,472pension liability recognised under IAS 19 'Employee benefits' II. Reversal of deferred tax liability recognised on the 165SSAP 24 pension asset under UK GAAP III. Additional deferred tax liability required to be (1,264)recognised under IAS 12 `Income taxes' in relation to capital gains rolled over into replacement assets IV. Transfer of the deferred income tax liability under UK (5,726)GAAP to deferred income tax assets to reflect the net presentation permitted by IAS12 under certain conditions Total Impact - increase in deferred income tax assets 4,647IAS 12 `Income taxes' requires deferred tax to be provided on all temporarydifferences rather than just timing differences, as is required under UK GAAP.IAS 12 also requires deferred tax to be recognised in respect of the Group'sliabilities under its post-employment benefit arrangements to the extentrecovery is reasonably assured. As a result of these IFRS adjustments theGroup's deferred tax balance has moved from a liability to an asset and thereclassification has been made accordingly. Overall the Group has recalculateddeferred tax in accordance with IAS 12.(d) Trade and other receivablesWrite back of the UK GAAP SSAP 24 pension asset as (550)required by IAS 19 Total Impact - decrease in trade and other receivables (550)(e) Share option reserveRecognition of share options issued after 7 November 2002 94and not vested at 1 January 2004 Total Impact - increase in share option reserve 94IFRS 2 `Share-based payment' requires that an expense for equity instrumentsgranted be recognised in the financial statements based on their fair value atthe date of grant. This expense is then recognised over the vesting period ofthe scheme. The impact of this adjustment is through equity.(f) Retained earnings ‚£000 All the IFRS adjustments detailed in this section were (23,877)recorded against the opening retained earnings at 1 January 2004. Total Impact - decrease in retained earnings (23,877)(g) Retirement benefit obligationsRecognition of the net pension liability relating to the 38,240defined benefit pension scheme Total Impact - increase in retirement benefit obligations 38,240IAS 19 requires a market value based approach to valuing the pension liabilityand related expense recognition, similar to the approach adopted by the currentUK Financial Reporting Standard 17. The impact of the change to IFRS is torecognise a pension liability under IAS 19.(h) Deferred income tax liabilitiesTransfer of the existing UK GAAP deferred income tax (5,726)liability to deferred income tax assets to reflect the net presentation permitted by IAS12 under certain conditions total Impact - decrease in deferred income tax liabilities (5,726)(i) Trade and other payablesReversal of final dividend proposed for year ended 31 (4,634)December 2003 as required by IAS 10 Total Impact - decrease in Trade and other payables (4,634)IAS10 `Events after the Balance Sheet Date' requires that dividends declaredafter the balance sheet date should not be recognised as a liability at thatbalance sheet date as the liability does not represent a present obligation asdefined by IAS 37 `Provisions, Contingent Liabilities and Contingent Assets'.The final dividend declared in March 2004 in relation to the financial yearended 31 December 2003 of ‚£4,634,000 was reversed out of the transition balancesheet and charged against the profit and loss account in the restated 2 July2004 results.2.2.3 Reconciliation of equity at 2 July 2004 Effect of UK transition Note GAAP to IFRS IFRS ‚£000 ‚£000 ‚£000ASSETS Non-current assets Property, plant and equipment a 46,010 (289) 45,721 Goodwill b 151,716 4,711 156,427 Intangible assets c - 289 289 Trade and other receivables 5,150 - 5,150 Deferred income tax assets d - 4,599 4,599 202,876 9,310 212,186 Current assets Inventories 13,695 - 13,695 Trade and other receivables e 42,451 (450) 42,001 Cash and cash equivalents 5,347 - 5,347 61,493 (450) 61,043 TOTAL ASSETS 264,369 8,860 273,229 EQUITY Equity attributable to the equity holders of the parent Share capital 35,977 - 35,977 Share premium account 152,256 - 152,256 Merger reserve 11,365 - 11,365 Share option reserve f - 226 226 Cumulative translation adjustment k - (207) (207) Other reserves (374) - (374) Retained earnings g (23,995) (21,085) (45,080) Total equity 175,229 (21,066) 154,163 LIABILITIES Non-current liabilities Interest-bearing loans 10,000 - 10,000 Retirement benefit obligations h - 38,258 38,258 Provisions 736 - 736 Deferred income tax liabilities i 5,778 (5,778) - 16,514 32,480 48,994 Current liabilities Short term borrowings, overdrafts and current instalments of loans 7,336 - 7,336 Trade and other payables j 60,802 (2,554) 58,248 Provisions 4,488 - 4,488 72,626 (2,554) 70,072 Total liabilities 89,140 29,926 119,066 TOTAL EQUITY AND LIABILITIES 264,369 8,860 273,229Explanation of the effect of the transition to IFRS on the reconciliation ofequity at 2 July 2004The nature of the adjustments from UK GAAP to IFRS in the balance sheet at 2July 2004 are similar to those at 1 January 2004. There are three additionaladjustments at 2 July 2004. These relate to the write back of goodwillamortisation, goodwill amortisation on operations discontinued (see (b) below)and recognition of foreign exchange differences (see (k) below). Detailedexplanations of all other adjustments are disclosed in Note 2.2.2. ‚£000(a) Property, plant and equipment (PPE) Reallocation of certain capitalised software costs to intangible assets in accordance with IAS 38 (289) Total Impact - decrease in PPE (289) (b) Goodwill I. Reversal of amortisation of goodwill no longer permitted under 4,724IFRS 3 II. Goodwill amortisation on operations discontinued (13) Total Impact - increase in goodwill 4,711 Under IAS 38 goodwill is no longer amortised. Instead it is subject to an annual impairment review. (c) Intangible assets Reallocation of certain capitalised software costs from tangible assets in accordance with IAS 38 289 Total Impact - increase in intangible assets 289 (d) Deferred income tax assets I. Deferred tax asset recognised in relation to the net pension 11,477liability recognised under IAS 19 II. Reversal of deferred tax liability recognised on the SSAP 24 135pension asset under UK GAAP III. Additional deferred tax liability required to be recognised (1,235)under IAS 12 in relation to capital gains rolled over into replacement assets IV. Transfer of the existing deferred income tax liability under (5,778)UK GAAP to deferred income tax assets to reflect the net presentation permitted by IAS 12 under certain conditions Total Impact - increase in deferred income tax assets 4,599 (e) Trade and other receivables Write back of the SSAP 24 pension asset as required by IAS 19 (450) Total Impact - decrease in trade and other receivables (450) (f) Share option reserve Recognition of share options issued after 7 November 2002 and not vested at 2 July 2004 226 Total Impact - increase in share option reserve 226 (g) Retained earnings The cumulative effect of all the adjustments detailed in this (21,085)section have been recorded against retained earnings at 2 July 2004. Total Impact - decrease in retained earnings (21,085) (h) Retirement benefit obligations Recognition of the net liability relating to the defined benefit 38,258pension scheme Total Impact - increase in retirement benefit obligations 38,258 (i) Deferred income tax liabilities Transfer of the existing UK GAAP deferred income tax liability to 5,778deferred income tax assets to reflect the net presentation permitted by IAS12 under certain conditions Total Impact - decrease in deferred income tax liabilities 5,778 (j) Trade and other payables Reversal of interim dividend proposed for year ended 31 December (2,554)2004 as required by IAS 10 Total Impact - decrease in Trade and other payables (2,554) (k) Cumulative translation adjustment Exchange differences in the period taken directly to a separate (207)component of equity Total Impact - decrease in cumulative translation adjustment (207)From 1 January 2004 cumulative translation differences of overseas entities aretaken directly to equity until the disposal of the net investment, at whichtime they are recycled and recognised in the consolidated income statement asrequired by IAS 21.2.2.4 Reconciliation of equity at 31 December 2004 Effect of UK transition GAAP to IFRS IFRS Note ‚£'000 ‚£'000 ‚£'000ASSETS Non-current assets Property, plant and equipment a 43,448 (829) 42,619 Goodwill b 165,488 8,129 173,617 Intangible assets c - 2,920 2,920 Trade and other receivables 3,927 - 3,927 Deferred income tax assets d - 6,956 6,956 212,863 17,176 230,039 Current assets Inventories 15,982 - 15,982 Trade and other receivables e 50,216 (1,346) 48,870 Cash and cash equivalents 12,963 - 12,963 79,161 (1,346) 77,815 Non-current assets classified as f - 996 996held for sale 79,161 (350) 78,811 TOTAL ASSETS 292,024 16,826 308,850 EQUITY Equity attributable to the equity holders of the parent Share capital 35,999 - 35,999 Share premium account 152,261 - 152,261 Merger reserve 11,427 - 11,427 Share option reserve g - 359 359 Other reserves (374) - (374) Cumulative translation l - (253) (253)adjustment Retained earnings h (32,531) (16,660) (49,191) Total equity 166,782 (16,554) 150,228 LIABILITIES Non-current liabilities Interest-bearing loans 29,500 - 29,500 Retirement benefit obligations i - 42,664 42,664 Provisions 698 - 698 Deferred income tax liabilities j 4,184 (4,184) - 34,382 38,480 72,862 Current liabilities Short term borrowings, overdrafts and current instalments of loans 11,077 - 11,077 Trade and other payables k 78,656 (5,100) 73,556 Provisions 1,127 - 1,127 90,860 (5,100) 85,760 Total liabilities 125,242 33,380 158,622 TOTAL EQUITY AND LIABILITIES 292,024 16,826 308,850 Explanation of the effect of the transition to IFRS on the reconciliation ofequity at 31 December 2004The nature of the adjustments from UK GAAP to IFRS in the balance sheet at 31December 2004 are similar to those at 1 January 2004 and 2 July 2004. There arethree additional adjustments at 31 December 2004. These relate to thereclassification of separately identifiable assets on the acquisition ofDataform in September 2004, the deferred tax asset recognised on the sharebased payment liability and re-classification of property held for re-sale tonon-current assets. Detailed explanations of all other adjustments aredisclosed in Notes 2.2.2 and 2.2.3. ‚£000(a) Property, plant and equipment (PPE) Reallocation of certain capitalised software costs to intangible assets in accordance with IAS 38 (829) Total Impact - decrease in PPE (829) (b) Goodwill I. Reversal of amortisation of goodwill no longer permitted 9,682under IFRS 3 II. Goodwill amortisation on operations discontinued (26) III. Reclassification of separately identifiable intangibles on (2,182)acquisitions IV. Goodwill arising upon recognition of deferred tax liability 655on separately identifiable intangibles Total Impact - increase in goodwill 8,129 (c) Intangible assets I. Reallocation of certain capitalised software costs to 829intangible assets in accordance with IAS 38 II. Reclassification of separately identifiable intangibles on 2,182Dataform acquisition III. Amortisation incurred on Dataform intangible asset (91) Total Impact - increase in intangible assets 2,920From 1 January 2004 all acquisitions are required to be accounted for inaccordance with IFRS 3. Accordingly, the Group has identified within Dataform'sbusiness separately identifiable intangibles in relation to the existingcustomer base of ‚£2,182,000 which will be amortised over six years fromacquisition. Goodwill has arisen upon recognition of the deferred tax liabilityon separately identifiable intangibles.(d) Deferred income tax assets I. Deferred tax asset recognised in relation to the net pension 12,799liability recognised under IAS 19 II. Reversal of deferred tax liability recognised on the SSAP 24 105pension asset under UK GAAP III. Additional deferred tax liability required to be (1,208)recognised under IAS 12 in relation to capital gains rolled over into replacement assets IV. Deferred tax asset required to be recognised under IFRS 2 72in relation to share based payments V. Transfer of the existing deferred income tax liability to (4,184)deferred income tax assets to reflect the net presentation permitted by IAS 12 under certain conditions VI. Deferred tax liability on recognition of customer (655)relationships intangible asset VII. Deferred tax liability release upon amortisation of 27customer relationships intangible asset Total Impact - increase in deferred income tax assets 6,956IAS 12 requires deferred tax to be recognised in respect of the Group'sliabilities on share based payments to the extent recovery is reasonablyassured. ‚£000(e) Trade and other receivables I. Write back of the UK GAAP SSAP 24 pension asset as required (350)by IAS 19 II. Re-allocation of Gateshead property from property held for (996)resale to non current assets classified as held for sale Total Impact -decrease in trade and other receivables (1,346) (f) Non-current assets classified as held for sale Re-allocation of Gateshead property from property held for 996resale to non current assets classified as held for sale Total Impact - increase in non-current assets classified as held 996for sale (g) Share option reserve Recognition of share options issued after 7 November 2002 and not vested at 31 December 2004 359 Total Impact - increase in share option reserve 359 (h) Retained earnings The cumulative effect of all the above adjustments detailed in (16,660)this section have been recorded against retained earnings at 31 December 2004 Total Impact - decrease in retained earnings (16,660) (i) Retirement benefit obligations Recognition of the net pension liability relating to the defined 42,664benefit pension scheme Total Impact - increase in retirement benefit obligations 42,664 (j) Deferred income tax liabilities Transfer of the existing UK GAAP deferred income tax liability (4,184)to deferred income tax assets to reflect the net presentation permitted by IAS12 under certain conditions Total Impact - decrease in deferred income tax liabilities (4,184) (k) Trade and other payables Reversal of final dividend proposed for year ended 31 December (5,100)2004 as required by IAS10 Total Impact - decrease in Trade and other payables (5,100) (l) Cumulative translation adjustment Exchange differences in the period taken directly to a separate (253)component of equity Total Impact - decrease in cumulative translation adjustment (253) 2.2.5 Reconciliation of net income for the half year ended 2 July 2004 Effect of UK transition Note GAAP to IFRS IFRS ‚£000 ‚£000 ‚£000Continuing operations Revenue 131,610 - 131,610 Changes in inventories of finished (518) - (518)goods and work in progress Raw materials and consumables used (68,582) - (68,582) Employee benefits expense a (38,013) (1,048) (39,061) Depreciation and amortisation expense b (9,569) 4,724 (4,845) Other operating expenses (16,229) - (16,229) (Loss) / profit from operations (1,301) 3,676 2,375 Finance income 72 - 72 Finance costs c (546) (487) (1,033) (Loss) / profit before taxation (1,775) 3,189 1,414 Income tax expense d (103) 714 611 (Loss) / profit for the period from (1,878) 3,903 2,025continuing operations Discontinued operations Loss for the period from discontinued e (8,088) (1,074) (9,162)operations (Loss) / profit for the period (9,966) 2,829 (7,137) Earnings per share 8 - basic for loss for the period (6.94p) 1.97p (4.97p) - diluted for loss for the period (6.94p) 1.97p (4.97p)Explanation of the effect of the transition to IFRS on the reconciliation ofnet income for the half year ended 2 July 2004The following explains the IFRS adjustments to the income statement for thehalf year ended 2 July 2004. The UK GAAP results presented in Note 2.2.5 havebeen restated from those reported last year to reflect the presentation formatrequired under IFRS. ‚£000(a) Employee benefits expense I. IFRS 2 share-based payment expense for the period (129) II. Implementation of IAS 19 - excess of Income Statement (1,019)pension charge over contributions paid. III. Reversal of pension expense recognised under UK GAAP 100SSAP 24 pension requirements Total Impact - increase in employee benefits expense (1,048)IFRS 2 requires that an expense for equity instruments granted be recognised inthe financial statements based on their fair value at the date of grant. Thisexpense is then recognised over the vesting period of the scheme.IAS 19 requires a market value based approach to valuing the pension liabilityand related expense recognition, similar to the approach adopted by the currentUK Financial Reporting Standard 17. The impact of the change to IFRS is torecognise a pension liability under IAS 19. The impact of adopting IAS 19 wasan increase in operating costs.(b) Depreciation and amortisation expense Reversal of amortisation of goodwill no longer permitted 4,724under IFRS 3 Total Impact - decrease in depreciation and amortisation 4,724expense (c) Finance costs I. Additional pension expense incurred due to the (516)implementation of IAS19 II. Reallocation of finance costs on discontinued 29operations Total Impact - increase in finance costs (487) (d) Income tax expense I. Additional deferred tax credit recognised on IAS 19 460pension expense II. Reversal of deferred tax credit recognised on SSAP 24 (30)pension expense III. Reduction in the deferred tax liability on capital 29gains rolled over into replacement assets IV. Reallocation of income tax expense on discontinued 255operations Total Impact - decrease in income tax expense 714IAS 12 requires deferred tax to be provided on all temporary differences ratherthan just timing differences, as is required under UK GAAP. IAS 12 alsorequires deferred tax to be recognised in respect of the Group's liabilitiesunder its post-employment benefit arrangements to the extent recovery isreasonably assured. Overall the Group has recalculated deferred tax inaccordance with IAS 12. ‚£000(e) Loss for the period from discontinued operations I. IFRS 2 share-based payment expense for the period on the (3)label printing operation (see Note 2.2.5 (a)) II. Additional pension expense incurred due to the (75)implementation of IAS 19 on the label printing operation (see Note 2.2.5 (a)) III. Finance cost on pension expense incurred due to the (38)implementation of IAS 19 on the labels operation (see Note 2.2.5 (c)) IV. Goodwill amortisation on operations discontinued in period (13) V. Recycled cumulative exchange differences on disposal of (696)Colour Cards businesses VI. Finance cost on discontinued operations reallocated (29) VII. Additional deferred tax credit recognised on IAS 19 35pension expense (see Note 2.2.5 (d)) VIII. Income tax expense on discontinued operations reallocated (255)(see Note 2.2.5 (d)) Total Impact - increase in loss for the period from (1,074)discontinued operations 2.2.6 Reconciliation of net income for the year ended 31 December 2004 Effect of UK transition Note GAAP to IFRS IFRS ‚£000 ‚£000 ‚£000 Continuing operations Revenue 269,664 - 269,664 Changes in inventories of finished 95 - 95goods and work in progress Raw materials & consumables used (144,413) - (144,413) Employee benefits expense a (74,356) (2,098) (76,454) Depreciation and amortisation b (19,136) 9,591 (9,545)expense Other operating expenses (30,868) - (30,868) Profit from operations 986 7,493 8,479 Finance income 351 - 351 Finance costs c (1,674) (931) (2,605) (Loss) / profit before taxation (337) 6,562 6,225 Income tax expense d (561) (654) (1,215) (Loss) / profit for the year from (898) 5,908 5,010continuing operations Discontinued operations (Loss) / profit for the year from e (12,461) 711 (11,750)discontinued operations (Loss) / profit for the year (13,359) 6,619 (6,740) Earnings per share 8 - basic for loss for the year (9.30p) 4.61p (4.69p) - diluted for loss for the year (9.30p) 4.61p (4.69p)Explanation of the effect of the transition to IFRS on the reconciliation ofnet income for the year ended 31 December 2004The nature of the adjustments from UK GAAP to IFRS in the income statement forthe year ended 31 December 2004 are similar to those in the income statementfor the half year ended 2 July 2004. There are two additional adjustments forthe year ended 31 December 2004. These relate to the additional amortisationexpense incurred in relation to the Dataform intangible asset and the deferredtax asset recognised on the share-based payment liability. Detailedexplanations of all other adjustments are disclosed in Note 2.2.5.The UK GAAP results presented in Note 2.2.6 have been restated from thosereported last year to reflect the presentation format required under IFRS. ‚£000(a) Employee benefits expense I. IFRS 2 share-based payment expense for the year (259) II. Implementation of IAS 19 - excess of Income Statement (2,039)pension charge over contributions paid. III. Reversal of pension expense recognised under UK GAAP SSAP 20024 pension requirements Total Impact - increase in Employee benefits expense (2,098) (b) Depreciation and amortisation expense I. Reversal of amortisation of goodwill no longer permitted 9,682under IFRS 3 II. Amortisation incurred on Dataform intangible asset (91) Total Impact - decrease in depreciation and amortisation 9,591expense From 1 January 2004 all acquisitions are required to be accounted for inaccordance with IFRS 3. Accordingly, the Group has identified within Dataform'sbusiness separately identifiable intangibles in relation to the existingcustomer base of ‚£2,182,000 which has been amortised over six years fromacquisition.(c) Finance costs I. Additional pension expense incurred due to the (995)implementation of IAS19 II. Reallocation of interest costs on discontinued operations 64 Total Impact - increase in finance costs (931) (d) Income tax expense I. Additional deferred tax credit recognised on IAS 19 pension 910expense II. Reversal of deferred tax credit recognised on SSAP 24 (60)pension charge III. Reduction in the deferred tax liability on capital gains 56rolled over into replacement assets IV. Additional deferred tax credit recognised on IFRS 2 71share-based payment expense V. Reallocation of income tax expense on discontinued (1,658)operations VI. Deferred tax on amortisation on Dataform intangible asset 27 Total Impact - increase in income tax expense (654)IAS 12 requires deferred tax to be recognised in respect of the Group'sliabilities on share-based payments to the extent recovery is reasonablyassured ‚£000(e) Loss for the year from discontinued operations I. IFRS 2 share based payment expense for the year on the label (6)printing operation II. Additional pension expense incurred due to the (150)implementation of IAS 19 on the label printing operation III. Finance cost on pension expense incurred due to the (73)implementation of IAS19 on the labels operation (see Note 2.2.5 (c)) IV. Goodwill amortisation on operations discontinued in the (26)year V. Recycled cumulative exchange differences on disposal of (696)Colour Cards businesses VI. Interest expense on discontinued operations re-allocated (64) VII. Deferred tax credit in relation to additional pension 67expense in year under IAS 19 VIII. Deferred tax credit in relation to additional share-based 1payment expense in year under IFRS 2 (see Note 2.2.6 (d)) IX. Income tax expense on discontinued operations re-allocated 1,658 Total Impact - decrease in loss for the year from discontinued 711operations 2.2.7 Reconciliation of cash flows for the half year ended 2 July 2004 Effect of UK transition Note GAAP to IFRS IFRS ‚£000 ‚£000 ‚£000 Cash flows from operating activities Cash generated from operations a 3,660 - 3,660 Interest paid (616) - (616) Interest received 72 - 72 Income tax paid (2,415) - (2,415) Net cash inflow from operating 701 - 701activities Cash flows from investing activities Disposal of subsidiary undertakings 7,065 - 7,065 Purchases of property, plant and b (2,912) 145 (2,767)equipment Disposals of property, plant and 97 - 97equipment Purchases of intangible assets c - (145) (145) Net cash inflow from investing 4,250 - 4,250activities Cash flows from financing activities Repayment of borrowings (12,500) - (12,500) Dividends paid (4,634) - (4,634) Net cash outflow from financing (17,134) - (17,134)activities Net decrease in cash and cash (12,183) - (12,183)equivalents Cash and cash equivalents at 15,343 - 15,343beginning of period Exchange rate effects (150) - (150) Cash and cash equivalents at end of 3,010 - 3,010period Cash and cash equivalents consist of: Cash and cash equivalents 5,347 - 5,347 Overdrafts (2,337) - (2,337) 3,010 - 3,010 (a) Reconciliation of the cash flows from operating activities for the halfyear ended 2 July 2004 Effect of transition UK GAAP to IFRS IFRS ‚£000 ‚£000 ‚£000 Continuing operations (Loss)/profit for the period (1,878) 3,903 2,025 Adjustments for: - income tax expense 103 (714) (611) - depreciation and amortisation 5,324 (479) 4,845 - amortisation of contract premium payment 500 - 500 - goodwill amortisation 4,724 (4,724) - - restructuring costs 5,581 (499) 5,082 - excess of Income Statement pension charge - 1,094 1,094over contributions paid - profit on sale of tangible fixed assets (33) 9 (24) - share-based payment charge - 129 129 - net finance cost 474 487 961 Changes in working capital: (Increase) / decrease in inventories (80) 932 852 Decrease in trade & other receivables 2,123 131 2,254 Decrease in payables (9,855) (834) (10,689) Cash effect of restructuring continuing (2,714) - (2,714)operations Cash inflow from operating activities on 4,269 (565) 3,704continuing operations Discontinued operations Loss for the period (8,088) (1,074) (9,162) Adjustments for: - income tax expense - 221 221 - depreciation and amortisation - 492 492 - restructuring costs 7,479 498 7,977 - exchange difference transferred from - 696 696reserves - profit on sale of tangible fixed assets - (9) (9) - share-based payment charge - 3 3 - net finance cost - 67 67 Changes in working capital: Increase in inventories - (932) (932) Increase in trade & other receivables - (231) (231) Increase in payables - 834 834 Cash outflow from operating activities on (609) 565 (44)discontinued operations Cash generated from operations 3,660 - 3,660(b) Purchases of property, plant and equipment Re-allocation of software asset purchases to purchases of intangible 145assets Total Impact - decrease in cash outflow on purchases of property, 145plant and equipment ‚£000 (c) Purchases of intangible assets Re-allocation of software asset purchases from purchases of property, (145)plant and equipment payments Total Impact - increase in cash outflow on purchases of intangible (145)assets 2.2.8 Reconciliation of cash flows for the year ended 31 December 2004 Effect of transition Note UK GAAP to IFRS IFRS ‚£000 ‚£000 ‚£000Cash flows from operating activities Cash generated from operations a 18,332 - 18,332 Interest paid (1,634) (1,634) Interest received 351 - 351 Tax paid (5,217) - (5,217) Net cash inflow from operating activities 11,832 - 11,832 Cashflows from investing activities Acquisition of subsidiary undertaking (16,804) - (16,804) Disposal of subsidiary undertaking 7,996 - 7,996 Purchases of property, plant and equipment b (8,347) 569 (7,778) Disposals of property, plant and equipment 1,557 - 1,557 Purchases of intangible assets c - (569) (569) Net cash outflow from investing activities (15,598) - (15,598) Cashflows from financing activities Proceeds from issue of share capital 7 - 7 New loans 22,000 - 22,000 Repayment of borrowings (12,500) - (12,500) Repayment of loans assumed on acquisition (4,216) - (4,216) Dividends paid (7,184) - (7,184) Net cash outflow from financing activities (1,893) - (1,893) Net decrease in cash and cash equivalents (5,659) - (5,659) Cash and cash equivalents at beginning of 15,343 - 15,343year Exchange rate effects (298) - (298) Cash and cash equivalents at end of year 9,386 - 9,386 Cash and cash equivalents consist of: Cash and cash equivalents 12,963 - 12,963 Overdrafts (3,577) - (3,577) 9,386 - 9,386(a) Reconciliation of the cash flows from operating activities for year ended31 December 2004 Effect of transition UK GAAP to IFRS IFRS ‚£000 ‚£000 ‚£000 Continuing operations (Loss)/profit for the year (898) 5,908 5,010 Adjustments for: - income tax expense 561 654 1,215 - depreciation and amortisation 10,147 (602) 9,545 - amortisation of contract premium payment 1,000 - 1,000 - excess of Income Statement pension charge - 2,189 2,189over contributions paid - goodwill amortisation 9,682 (9,682) - - restructuring costs 7,290 (503) 6,787 - profit on sale of tangible fixed assets (91) 9 (82) - share-based payment charge - 259 259 - net finance cost 1,323 931 2254 Changes in working capital: Increase in inventories (370) (100) (470) (Increase) / decrease in trade & other (141) 341 200receivables Increase in payables 680 453 1,133 Cash effect of restructuring continuing (7,613) - (7,613)operations Cash inflow from operating activities on 21,570 (143) 21,427continuing operations Discontinued operations Profit for the period (12,461) 711 (11,750) Adjustments for: - income tax expense - (1,726) (1,726) - depreciation and amortisation - 719 719 - restructuring costs 11,655 503 12,158 - profit on sale of tangible fixed assets - (9) (9) - exchange difference transferred from - 696 696reserves - share-based payment charge - 6 6 - net finance cost - 137 137 Changes in working capital: Decrease in inventories - 100 100 Increase in trade and other receivables - (541) (541) Decrease in payables - (453) (453) Cash effect of closure of the label (2,432) - (2,432)printing operation Cash outflow from operating activities on (3,238) 143 (3,095)discontinued operations Cash generated from operations 18,332 - 18,332 ‚£000 (b) Purchases of property, plant and equipment Re-allocation of software asset purchases to purchases of intangible 569assets Total Impact - decrease in cash outflow on purchases of property, plant 569and equipment (c) Purchases of intangible assets Re-allocation of software asset purchases from purchases of property, (569)plant and equipment payments Total Impact - increase in cash outflow on purchases of intangible (569)assets 3 Business segments At 1 July 2005, the Group is organised into three main business segments: PrintManagement Services, Print and Direct Mail Services and Transactional PrintServices.The segment results for the half year ended 1 July 2005 are as follows: Continuing operations Discontinued operations Print Print and Trans- Corporate Total Colour Group Manage- Direct actional expenses Solutions ment Mail Print Services Services Services ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Revenue Total revenue 70,793 66,413 14,074 - 151,280 - 151,280 Inter-segment (580) (13,635) (2,117) - (16,332) - (16,332)sales External sales 70,213 52,778 11,957 - 134,948 - 134,948 Segment result 2,480 4,988 2,316 (1,700) 8,084 - 8,084before restructuring costs Restructuring (374) (399) (419) - (1,192) (1,192)costs Loss on sale of - (4,865) - - (4,865) - (4,865)Datadocs operations (Note 4) Segment result 2,106 (276) 1,897 (1,700) 2,027 - 2,027after restructuring costs Profit on sale of - - - - - 1,048 1,048property Loss on closure of - - - - - (381) (381)label printing operation Profit / (loss) 2,106 (276) 1,897 (1,700) 2,027 667 2,694from operations Net finance costs (1,586) (2) (1,588) Profit before 441 665 1,106taxation Income tax expense (833) (171) (1,004) (Loss)/profit for (392) 494 102the period The segment results for the half year ended 2 July 2004 are as follows: Continuing operations Discontinued operations Print Print and Trans- Corporate Total Colour Group Manage- Direct actional expenses Solutions ment Mail Print Services Services Services ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Revenue Total revenue 61,562 73,816 16,500 - 151,878 11,002 162,880 Inter-segment (1,694) (16,713) (1,861) - (20,268) (593) (20,861)sales External sales 59,868 57,103 14,639 - 131,610 10,409 142,019 Segment result 2,648 4,652 1,998 (1,841) 7,457 (188) 7,269before restructuring costs Restructuring - (5,082) - - (5,082) - (5,082)costs Segment result 2,648 (430) 1,998 (1,841) 2,375 (188) 2,187after restructuring costs Loss on - - - - - (8,687) (8,687)discontinued operations (Note 6) Profit / (loss) 2,648 (430) 1,998 (1,841) 2,375 (8,875) (6,500)from operations Net finance costs (961) (67) (1,028) Profit / (loss) 1,414 (8,942) (7,528)before taxation Income tax expense 611 (220) 391 Profit / (loss) 2,025 (9,162) (7,137)for the period The segment results for the year ended 31 December 2004 are as follows: Continuing operations Discontinued operations Print Print and Trans- Corporate Total Colour Group Manage- Direct actional expenses Solutions ment Mail Print Services Services Services ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Revenue Total revenue 135,783 139,266 30,415 - 305,464 17,114 322,578 Inter-segment (3,271) (28,747) (3,782) - (35,800) (1,171) (36,971)sales External sales 132,512 110,519 26,633 - 269,664 15,943 285,607 Segment result 4,644 10,109 4,688 (4,175) 15,266 (459) 14,807before restructuring costs Restructuring (330) (5,914) (543) - (6,787) - (6,787)costs Segment result 4,314 4,195 4,145 (4,175) 8,479 (459) 8,020after restructuring costs Loss on - - - - - (12,880) (12,880)discontinued operations (Note 6) Profit / (loss) 4,314 4,195 4,145 (4,175) 8,479 (13,339) (4,860)from operations Net finance costs (2,254) (137) (2,391) Profit / (loss) 6,225 (13,476) (7,251)before tax Income tax expense (1,215) 1,726 511 Profit / (loss) 5,010 (11,750) (6,740)for the year The contract premium payment to Barclays Bank PLC is being amortised over thelife of the contract. The directors consider that this will benefit all thecontinuing segments of the business. This cost is included in corporateexpenses.4 Restructuring costs Half year Half year Year ended ended ended 31 1 July 2 July December 2005 2004 2004 ‚£'000 ‚£'000 ‚£'000 Profit from operations is arrived at after charging the following items: Loss on sale of Datadocs operation 2,448 - - Write off of unamortised goodwill relating 2,417 - -to sale of Datadocs operation 4,865 - - Other restructuring costs 1,192 5,082 6,787 6,057 5,082 6,787 5 Cash generated from operations Half Year Half Year Year Ended ended ended 31 1 July 2 July December 2005 2004 2004 ‚£000 ‚£000 ‚£000 Continuing operations (Loss)/profit for the period (392) 2,025 5010 Adjustments for: - income tax expense 833 (611) 1,215 - depreciation and amortisation 4,967 4,845 9,545 - amortisation of contract premium payment 500 500 1,000 - excess of Income Statement pension charge 842 1,094 2,189over contributions paid - loss on sale of Datadocs operation 4,865 - - - restructuring costs 1,192 5,082 6,787 - profit on sale of tangible fixed assets (13) (24) (82) - share-based payment charge 143 129 259 - net finance cost 1,586 961 2,254 Changes in working capital: (Increase) / decrease in inventories (773) 852 (470) Decrease in trade and other receivables 1,247 2,254 200 (Decrease) / increase in payables (8,535) (10,689) 1,133 Additional contribution to the defined (10,000) - -benefit pension plan Cash effect of restructuring continuing (1,961) (2,714) (7,613)operations Cash (outflow)/inflow from operating (5,499) 3,704 21,427activities on continuing operations Discontinued operations Profit for the period 494 (9,162) (11,750) Adjustments for: - income tax expense 171 221 (1,726) - depreciation and amortisation - 492 719 - loss on sale of Color Cards operation - 7,247 7,308 - loss on closure of label printing - 730 4,850operation - profit on sale of tangible fixed assets (1,048) (9) (9) - exchange difference transferred from - 696 696reserves - share-based payment charge 3 3 6 - net finance cost 2 67 137 Changes in working capital: (Increase) / decrease in inventories - (932) 100 Decrease/(increase) in trade and other 3,635 (231) (541)receivables (Decrease) / (increase) in payables (2,547) 834 (453) Cash effect of closure of label printing - - (2,432)operation Cash inflow / (outflow) from operating 710 (44) (3,095)activities on discontinued operations Cash generated from operations (4,789) 3,660 18,3326. Discontinued operations Half year Half year Year ended ended ended 31 1 July 2 July December 2005 2004 2004 ‚£000 ‚£000 ‚£000 Revenue - 10,409 15,943 Expenses - (10,597) (16,402) - (188) (459) Profit on sale of property 1,048 - - Stock loss from flood damage - (499) (503) Loss on closure of the label printing (381) (353) (4,472)operation Write off of unamortised goodwill relating - (390) (403)to the closure of the label printing operation Loss on sale of Colour Cards businesses - (2,003) (2,059) Write off of unamortised goodwill relating - (4,746) (4,747)to the sale of Colour Cards businesses Foreign currency translation reserve - (696) (696)transferred from reserves on sale of Colour Cards businesses Profit / (loss) from discontinued operations 667 (8,875) (13,339) Net finance costs (2) (67) (137) Profit / (loss) before taxation from 665 (8,942) (13,476)discontinued operations Income tax expense (171) (220) 1,726 Profit / (loss) for the period from 494 (9,162) (11,750)discontinued operations Earnings per share on discontinued activities - basic for profit/(loss) for the period 0.34p (6.38p) (8.18p) - diluted for profit/(loss) for the period 0.34p (6.38p) (8.18p)The profit in discontinued operations in 2005 relates to the sale of theproperty of the label printing business which was closed in December 2004.Costs in 2004 relate to the sale of the Colour Cards businesses in March 2004and the closure of the label printing business in December 2004.7 TaxationThe tax charge on continuing operations for the period is based upon theestimated effective tax rate for the period of 31%.8 Earnings per share Half year Half year Year ended ended ended 31 1 July 2 July December 2005 2004 2004 ‚£000 ‚£000 ‚£000 Earnings per share is calculated as follows: Profit/(loss) attributable to equity 102 (7,137) (6,740)holders Calculations of basic and diluted earnings per share are based on the averagenumber of ordinary shares issued during the period ranking for dividend of143,701,697 (2 July 2004: 143,595,378 and 31 December 2004: 143,625,325) afterdeducting shares held in trust of 309,628 (2 July 2004 and 31 December 2004:309,628).Diluted earnings per share are calculated after the effect of dilutive shareoptions of 567,861 (2 July 2004: 317,479 and 31 December 2004: 325,645).As at 2 July 2004 and 31 December 2004 there was no dilution arising in respectof the standard earnings per share calculation as the dilutive shares reducethe loss per share.Adjusted earnings per shareEarnings per share excluding restructuring costs are also presented in order togive an indication of the underlying performance of the Group and arecalculated as follows:(Loss)/profit after taxation from continuing (392) 2,025 5,010operations Restructuring costs (Note 4) 6,057 5,082 6,787 Taxation on restructuring costs (358) (208) (738) Profit after taxation from continuing 5,307 6,899 11,059operations excluding restructuring costs Adjusted earnings per share Basic 3.69p 4.80p 7.70p Diluted 3.68p 4.79p 7.68p9 Dividends Half year Half year Year ended ended ended 31 1 July 2 July December 2005 2004 2004 ‚£000 ‚£000 ‚£000 Amounts recognised as distributions to equity holders in the period: Final dividend of the year ended 31 - 4,634 4,634December 2003 of 3.227p per share Interim dividend of the year ended 31 - - 2,550December 2004 of 1.775p (2003: 1.613p) per share Final dividend of the year ended 31 5,100 - -December 2004 of 3.549p per share 5,100 4,634 7,184 Proposed final dividend of the year ended - - 5,10031 December 2004 of 3.549p (2003: 3.227p) per share Proposed interim dividend of the year ended 2,805 2,550 -31 December 2005 of 1.953p (2004: 1.775p) per share The proposed interim dividend was approved by the Board on 15 September 2005and has not been included as a liability as at 1 July 2005.10 Consolidated changes in equity Share Share Cumulative Share premium Merger option Other translation Retained Total capital account reserve reserve reserves adjustment earnings equity ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Balance as at 1 35,977 152,256 11,365 94 (374) - (34,450) 164,868January 2004 Currency - - - - - (903) - (903)translation losses in period Foreign currency - - - - - 696 - 696translation difference transferred from reserves on sale of Colour Cards businesses Actuarial gains - - - - - - 1,630 1,630immediately recognised Deferred tax - - - - - - (489) (489)recognised on actuarial gains in period Net income - - - - - (207) 1,141 934recognised directly in equity Loss for the - - - - - - (7,137) (7,137)period Total recognised - - - - - (207) (5,996) (6,203)loss for the period Employee share option schemes: - value of - - - 132 - - - 132services provided Dividend - - - - - - (4,634) (4,634) Balance as at 2 35,977 152,256 11,365 226 (374) (207) (45,080) 154,163July 2004 Currency - - - - - (46) - (46)translation losses in period Actuarial losses - - - - - - (2,797) (2,797)immediately recognised Deferred tax - - - - - - 839 839recognised on actuarial losses in period Net loss - - - - - (46) (1,958) (2,004)recognised directly in equity Profit for the - - - - - - 397 397period Total recognised - - - - - (46) (1,561) (1,607)loss for the period Employee share option schemes: - value of - - - 133 - - - 133services provided Dividend - - - - - - (2,550) (2,550) New share 22 - - - - - - 22capital issued Share premium on - 5 - - - - - 5new share capital Merger reserve - - 62 - - - - 62arising on issue of new share capital Balance as at 31 35,999 152,261 11,427 359 (374) (253) (49,191) 150,228December 2004 10 Consolidated changes in equity (continued) Share Share Cumulative Share premium Merger option Other translation Retained Total capital account reserve reserve reserves adjustment earnings equity ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Balance as at 31 35,999 152,261 11,427 359 (374) (253) (49,191) 150,228December 2004 Currency - - - - - 108 - 108translation gains in period Foreign currency - - - - - 153 - 153translation difference transferred from reserves on sale of Datadocs business Actuarial losses - - - - - - (4,744) (4,744)immediately recognised Deferred tax - - - - - - 1,423 1,423recognised on actuarial losses in period Net loss - - - - - 261 (3,321) (3,060)recognised directly in equity Profit for the - - - - - - 102 102period Total recognised - - - - - 261 (3,219) (2,958)loss for the period Employee share option schemes: - value of - - - 146 - - - 146services provided Dividend - - - - - - (5,100) (5,100) New share 9 - - - - - - 9capital issued Share premium on - 26 - - - - - 26new share capital Balance as at 1 36,008 152,287 11,427 505 (374) 8 (57,510) 142,351July 2005 11 Additional informationThe figures for the year ended 31 December 2004 do not constitute the company'sstatutory accounts for that period but have been extracted from the statutoryaccounts and then translated into IFRS as per Note 2.The auditors' report on those accounts, which have been filed with theRegistrar of Companies, was unqualified and did not contain any statement undersection 237 (2) or (3) of the Companies Act 1985.The financial information for the half year ended 1 July 2005 and for theequivalent period in 2004 has not been audited or reviewed. It has beenprepared on the basis of the accounting policies as set out in Note 1.ENDCOMMUNISIS PLC

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