Final Results

Reliance Security Group PLC 30 June 2005 Reliance Security Group plc Preliminary announcement of results for the Year ended 29 April 2005 â€¢ Solid organic growth and ongoing investment in new markets and segments â€¢ Turnover up 6.1% to Â£310.3 million (2004: Â£292.3 million) â€¢ Pre-exceptional, pre-tax profit up 18.6% to Â£15.6 million (2004: Â£13.2 million). Profit before tax up 56.4% to Â£18.6 million (2004: Â£11.9 million) â€¢ Exceptional net pre-tax profit of Â£3.0 million (2004: Â£1.3 million charge) reflecting profit on disposal of Safe Estates, costs relating to regulation of the security industry and write down in carrying value of goodwill relating to Goldrange Limited â€¢ Basic earnings per share, excluding exceptional items, up 17.9% to 47.4p (2004: 40.2p), basic earnings per share up 77.7% to 61.3p (2004: 34.5p) â€¢ Dividend per share up 10.7% to 18.7p (2004: 16.9p) â€¢ Net cash generation from operations of Â£15.7 million (2004: Â£12.5 million) and net cash of Â£27.7 million at the year-end (2004: Â£10.5 million) Brian Kingham, Chairman, commenting on the results said: 'Market conditions in security have remained challenging in the run up to regulation. We believe they will improve thereafter. Facilities management offers significant opportunities and we have continued to invest and grow our share of this Â£60 billion per annum market.' Notes to Editors Reliance is an established market leader in the provision of contract security, facilities management and support services and in business process outsourcing. Reliance employs over 12,000 people from a network of offices throughout the UK. For further information: Brian Kingham Chairman 020 7730 9716 Neil French Group Finance Director 01895 205002 Chairman's Statement Introduction I am delighted once again to report increased turnover and profits for the year to 29 April 2005. The challenging conditions in the security market that I reported at the half year have continued, we believe influenced by impending security industry regulation currently due to take effect in March 2006. In the facilities management, support services and business process outsourcing markets we are achieving significant growth, particularly in the public sector. We are continuing to invest in new and enlarged capacity to drive our growth in markets for comprehensive and higher value added products and services. We are successfully growing our private finance initiative business and increasing our long term income streams. We are well positioned for future growth. Results Turnover for the year to 29 April 2005 increased by 6.1% to Â£310.3 million (2004: Â£292.3 million). Pre-exceptional, pre-tax profit for the year rose by 18.6% to Â£15.6 million (2004: Â£13.2 million). Excluding exceptional items, earnings per share rose by 17.9% to 47.4p (2004: 40.2p). Net cash generated from operations was Â£15.7 million (2004: Â£12.5 million) and we ended the year with net cash of Â£27.7 million (2004: Â£10.5 million), boosted by the receipt of Â£8.3 million from the disposal of the Group's interests in Command Security Corporation and Safe Estates Services Limited. Dividend A final dividend is proposed of 14.5p making a total for the year of 18.7p, 10.7% higher than last year (2004: final dividend 13.1p, total 16.9p). The proposed final dividend is subject to approval at the AGM on 7 September 2005 and payable on 23 September 2005 to shareholders on the register on 2 September 2005. Strategy Our long-term strategy is to add value for our shareholders by growing recurring revenues from a complementary range of products and support services delivered to businesses and the public sector. We will strengthen our leadership position in security and continue to increase our share of the Â£60 billion per annum facilities management and business process outsourcing market. A passion for excellence of service and an unremitting drive to add increasing value for our customers through high quality teamwork, appropriate technology and the use of innovative business processes are at the heart of our strategy. Growth will be generated organically and through bolt-on acquisitions and new start-ups complementary to our core competencies. AIM The directors have concluded that it is in the best interests of the Company and its shareholders as a whole to transfer trading in the Company's shares to AIM. AIM is specifically designed for smaller and mid-sized companies and provides a simplified and less costly regulatory environment. Further details are set out in a separate press release, issued today. Security Services Turnover was Â£192.7 million (2004: Â£209.3 million) and segment operating profit before exceptional items was Â£6.8 million (2004: Â£9.1 million). The reduction in segment profit reflects challenging market conditions and an additional week's trading in 2003/04, these factors more than offsetting an improvement in the performance of Reliance High-Tech, the Group's electronic security company. Over the last two years conditions in the private security market have been challenging, with sustained competitive pressure on prices and margins and uncertainties about the industry regulation due to take effect in March 2006. Our response has been an escalation of initiatives to differentiate and promote the attractions of the 'Reliance Difference' and our established ascendancy as providers of innovation and the highest levels of customer care. We have made encouraging progress in this regard, although more remains to be done. We have sought out new specialist markets for our products and services and have, again, increased emphasis on the use of technology in achieving greater effectiveness and economy for our customers. The extended use of technology to make savings in manpower use is a well established trend that will continue. We have grown our remote surveillance business and are investing more in IT and communications technology as well as software developments to achieve a higher degree of CCTV event editing and management of images. Our well developed nationwide capacity to monitor and respond speedily to time-critical events has enabled us to create new income streams. The re-encryption of ATM cash machines in 2004/05 was a new growth market, perfectly suited to our established security capabilities, comprising both fixed and highly mobile resources. We won significant multi-location contracts, including 1,400 Lloyds Chemists locations, 328 Waterstone stores, 146 British Homestores outlets and 220 Co-Op branches. Sporting and other entertainment events brought us new customers including, among others, Royal Ascot, Earls Court Exhibitions, Birmingham Gurunanak Festival and the Disney Channel Conference. There are encouraging signs of increased opportunity in the public sector as a result of security industry regulation and the Government's desire to promote the concept of the Wider Policing Family. The increased role of local authorities in aspects of policing following the 1998 Crime and Disorder Act has created new demands for our services. The CCTV Centre we operate for Northampton Borough Council is the largest in the UK, offering both local authority and Police a new dimension in town centre management and public safety. Our work for the London Borough of Newham won the safer parking 'Park Mark' award. We were delighted to win the ''Security Management Today'' magazine award for our work with electronics, including automatic number plate recognition, electronic patrolling and remote video surveillance, providing 'Integrated Security Solutions' for Arlington Property Services. Our long established relationship with Arlington in their 'Supplier Partnership' was extended by a further 55 properties following their acquisition of a leading property investment company. Regulation of Private Security Regulation, in the form of licensing and appropriate training of all security personnel, is due to take effect in March 2006. Although there are dangers and unintended consequences in any government regulation, we expect a long-term favourable impact for our employees, the public, our customers and our industry. Regulation will cause a significant rise in the cost of security. It will encourage changes in the mix of services provided, favouring the innovative use of technology and flexible security solutions. It is estimated that there are now more than 2,100 providers of manpower security services in the UK market and Reliance is the second largest provider. The British Security Industry Association estimates that this number could fall to 200 following regulation, because many will be unable or unwilling to comply with the new legislative requirements and this will benefit leading providers, such as Reliance. Facilities Management Turnover was Â£117.5 million (2004: Â£83.0 million) and segment operating profit before exceptional items was Â£8.3 million (2004: Â£4.3 million). This is the result of patient building of infrastructure and customer relationships within specialist facilities management markets. Despite the termination of our electronic monitoring contract in England, we have continued to grow our long-term contracted revenue streams and our forward order book (being the sales value of contracts currently in hand over the life of these contracts) is now Â£731 million (2004: Â£700 million). We provide a growing range of facilities management services at more than 2,500 locations across the UK and employ some 4,000 people in these activities. We add value for our customers by enabling organisational change, through re-engineered business processes, the introduction of new technology and more streamlined work practices. Demand for facilities management and business process outsourcing continues to grow, particularly in the public sector, offering significant opportunities for Reliance. We have won a number of important contracts and organically grown others. Mobilisation has commenced on our Private Finance Initiative ('PFI') contract for the 500,000 sq.ft headquarters at Bootle for the Health & Safety Executive which is due to open in August. Our PFI contract for the Gloucestershire Police HQ is on schedule for completion in December 2005. In partnership with others, we have won a 25 year PFI contract for Cleveland Police Authority to finance, design, build and provide a range of support services to three custody centres, two divisional headquarters and two town centre police stations. This year major shopping centres were an expanding part of our business with the introduction of our bespoke facilities management model. We won assignments at six centres including the Arndale at Luton for Prudential Property Investment Managers. With our partners Haden Building Management and Carillion we were delighted to have agreed in principle to extend our Â£100 million per annum facilities management contract with British Telecom for a further three years. At the time of its award in 2000, this complex and ground-breaking contract was the largest private sector FM contract then awarded. We have consistently outperformed our targets and in the last year successfully completed more than 4,500 extra works projects. The delivery of outstandingly high levels of customer service remains our key focus. We were delighted to win the 'Premises and Facilities Management' magazine award for our achievements in imaginative multi-service delivery for our customer Campbell's Foods at Kings Lynn. We extended our Campbell's contract to two further locations and now provide a seamless integration of more than 35 different services. We continue to invest in management and business development resources in pursuit of further growth. Exceptional Items In total, we have recognised a net exceptional pre-tax profit of Â£3.0 million this year (2004: net exceptional charge of Â£1.3 million). This is explained fully in the Financial Review. Community For more than 25 years the Group has been active in support of community activities and measures to encourage enterprise and prosperity. We contribute to more than 20 local crime prevention organisations and charities. Our work with the leading crime prevention charity, Crime Concern, recognises the important opportunities that exist for co-operative working with charities and not-for-profit organisations sharing our aims. We were delighted to sponsor the Cumberland Lodge annual conference for Police, local authorities and other criminal justice agencies on 'Neighbourhoods fit to live in'. For the second year we sponsored the Reliance Prize for Innovation and Enterprise at Brunel University where it was presented at their hugely successful annual Industrial Design Exhibition, which featured more than 200 innovative design concepts. People I particularly welcome the opportunity to pay tribute to the great professionalism and achievements of Reliance people. I thank everyone in Reliance most warmly on behalf of the board and the shareholders for our success this year. In my travels around our businesses throughout the UK, I never fail to be inspired by the commitment, enthusiasm and care shown by our people. These qualities are at the heart of the 'Reliance Difference' and our appeal to customers. More than 90% of our people are constantly in the public eye, sometimes in dangerous and difficult situations which demand skills of a high order. I want to pay special tribute this year to our people in Scotland who have worked with such professionalism and dedication in starting up our new five year court and custody services contract for the Scottish Executive. Our Investors in People accreditation emphasises the importance we attach to communication and involving our people in the key issues of the business. IIP offers a persuasive set of principles for improving business performance and competitiveness through a planned approach to setting and communicating business objectives and developing the training and skills required to achieve them. In February, our 'People First' initiative brought together and gave new focus to the extensive range of established Reliance policies to nurture and support our people in achieving the highest levels of job performance. Ken Allison, who as Managing Director of our core security business was the architect of our industry leadership, retired in September and we wish him every happiness in his retirement. Julian Nicholls was appointed Group Managing Director in June 2005. He has extensive experience of managing substantial companies in business-to-business services and brings a record of success as a strategist and business developer. The Group's scale and diversity in growing markets offer unique opportunity to create higher added value products and services where Julian has special skills. We are delighted to have him on board. In May, we welcomed Peter Watson as Chairman of Reliance in Scotland. He is the Senior Partner of leading Glasgow based international lawyers, Levy & McRae, a Past President of the Society of Solicitor Advocates, President of the Society of Media Lawyers, and a member of the Criminal Rules Council. Peter brings to the leadership of our businesses in Scotland a wide experience of the issues and opportunities. The Future As previously indicated, the termination of our electronic monitoring contract in England in April 2005 and the disposal of the Group's interest in Safe Estates last December will impact on the Group's trading results next year. However, we continue to make solid progress in securing new business opportunities and our forward order book remains healthy. Over the past two years, renewed focus on core competencies resulted in the disposal of non-core interests including, most recently, Safe Estates Services, realising approximately Â£10 million in cash. The Group's ongoing significant underlying cash generation and substantial committed borrowing facilities are more than adequate to sustain the Group's continuing growth, both organically and through bolt-on acquisitions. It is therefore our intention to return approximately Â£10 million in cash to shareholders within the next few months. Further details will be announced in due course. The board believes that market conditions in security services are likely to remain challenging in the period leading up to industry regulation, due to take effect in March 2006. We anticipate regulation will benefit the industry and its customers and, accordingly, we believe that market conditions will improve in the long term. The Group's capabilities in mobile response security, electronic surveillance and remote monitoring complement its manpower security capabilities and leave it well placed to benefit from the expected structural changes in the nature of security provision in the UK, following regulation. We expect that demand for facilities management and business process outsourcing will continue to grow, particularly in the public sector. This dynamic, Â£60 billion per annum market offers significant opportunities for Reliance to sustain growth and pursue its strategy through the development of longer term, higher value added contracts. We are continuing to invest to drive future growth. Brian Kingham Chairman Financial review Overview In the year to 29 April 2005, the Group has achieved solid growth in turnover and underlying profit and has generated a substantial cash inflow. Turnover for the year increased by 6.1% to Â£310.3 million (2004: Â£292.3 million), strong organic growth in the Facilities Management segment offsetting a reduction in turnover in the Security Services segment. In the period 2000-2005, the Group has grown its turnover at a compound annual rate of 15.2%. Pre-exceptional, pre-tax profit for the year rose by 18.6% to Â£15.6 million (2004: Â£13.2 million). The Facilities Management segment experienced strong organic growth and improved margins, more than offsetting a volume related reduction in profit in the Security Services segment, and the Group's increasing cash balances generated net interest income of Â£0.6 million (2004: Â£0.3 million net interest expense). In the period 2000-2005, the Group's pre-exceptional, pre-tax profits have increased at a compound annual rate of 17.3%. Net cash inflow from operating activities, notwithstanding significant organic growth in the year, was Â£15.7 million (2004: Â£12.5 million) and the Group ended the year with net cash of Â£27.7 million (2004: Â£10.5 million), boosted by the receipt of Â£8.3 million from the disposal of the Group's interests in Command Security Corporation and Safe Estates Services Limited. The Group continues to achieve high rates of return on capital employed. The return on operating assets (being the ratio of profit on ordinary activities, before finance charges and exceptional items to operating assets) was 191.2% (2004: 91.6%) and the return on shareholders' funds (being the ratio of profit after taxation, excluding exceptional items, to net assets) was 35.3% (2004: 43.7%). Over the past five years, the return on operating assets and the return on shareholders' funds have consistently exceeded 40% and 30% respectively. Exceptional items In total, we have recognised a net exceptional pre-tax profit of Â£3.0 million this year (2004: net exceptional charge of Â£1.3 million). We have incurred exceptional costs of Â£0.6 million (2004: Â£nil) in complying with the requirements of the Private Security Industry Act 2001. An explanation of the Group's approach to accounting for the implications of security industry regulation is set out below. We have reviewed the goodwill relating to Goldrange Limited, the Group's event security business, acquired in March 2001, for impairment and, in light of the current prospects for the business, have concluded that it would be prudent to write down its carrying value by Â£0.7 million to nil. In December 2004, we completed the disposal of our interest in Safe Estates Services Limited, for a cash consideration, net of expenses, of Â£7.3 million. The transaction crystallised a pre-tax non-operating profit of Â£4.3 million and no tax was payable on the disposal. Prior to disposal, we continued to account for Safe Estates as an associated undertaking and consolidated pre-tax profits of Â£1.8 million in respect of the Group's share of its results in the year to 29 April 2005 (2004: Â£1.5 million). Accounting matters Accounting policies The results for the year to 29 April 2005 have been prepared using the same accounting policies as in the prior year, with two exceptions. We have adopted Urgent Issues Task Force Abstract 38 ('UITF 38'), Accounting for Employee Share Ownership Plan (ESOP) Trusts. UITF 38 requires that an entity which holds its own shares should present them as a deduction in arriving at shareholders' funds rather than as an investment within fixed assets. The reclassification of shares held by the ESOP from fixed assets to equity has reduced consolidated net assets by Â£2.8 million at 29 April 2005 (2004: Â£2.8 million), with no impact on retained earnings. Where appropriate, prior year comparative figures have been restated accordingly. We have also adopted a new policy relating to accounting for the implications of security industry regulation. In the period leading up to the date on which the Private Security Industry Act 2001 (the 'Act') comes into force (the 'implementation period'), costs incurred by the Group in complying with the requirements of the Act will be expensed as exceptional charges. As noted in the Chairman's statement, the amount so expensed in the year to 29 April 2005 was Â£0.6 million. In order to recover the additional, ongoing costs of complying with the Act, we intend to introduce a special price increase, to apply to manpower security customers, with effect from late summer 2005. In the implementation period, all additional revenue secured through this special price increase will be recognised as exceptional turnover. Following the implementation period, all manpower security revenue and costs will be recognised within turnover, cost of sales and overheads in the usual way. Pre-contract and start-up costs The Group expenses all pre-contract costs except for certain directly attributable costs which, when it is virtually certain that a contract will be awarded, are capitalised and written off over the life of the contract. The element of bid costs so capitalised this year was Â£nil (2004: Â£0.2 million) and the total carrying value of such costs in the Group's balance sheet at the year-end was Â£0.1 million (2004: Â£0.2 million). The Group expenses all other business development costs, amounting to several million pounds per annum, when incurred. In connection with certain large contracts for services, extending over several years, the Group incurs start-up costs in the period between contract award and the commencement of service delivery. Where such costs are not reimbursed at the outset, but are contractually recoverable, they are held on the Group's balance sheet and amortised over the life of the underlying contract. The element of start-up costs so capitalised this year was approximately Â£3.7 million (2004: Â£1.6 million) and the total carrying value of such costs in the Group's balance sheet at the year-end was Â£4.4 million (2004: Â£1.7 million). Investments in PFI special purpose companies The Group's policy is to minimise its investment in special purpose companies established in connection with PFI contracts, subject to commercial considerations, and a rigorous risk assessment is undertaken in respect of all such investments. Currently, with one exception, the nature of the Group's participation in such entities does not require it to consolidate any share of their results, but simply to record the value of the investment at cost. The total carrying value of such investments held by the Group is Â£0.5 million (2004: Â£0.5 million). The exception relates to the PFI contract for Gloucester Police where, as a result of certain specific circumstances relating to that contract, the Group has taken a 50% stake in the relevant special purpose company. Consequently, we account for that investment as a joint venture. The amounts included in Group turnover and pre-tax profit relating to the joint venture are Â£nil (2004: Â£nil) and a loss of Â£0.1 million (2004: Â£nil) respectively and the Group's share of the joint venture's net liabilities is Â£0.1 million (2004: Â£nil). In due course, we intend to reduce our participation to a level which conforms to our general policy in respect of investments in PFI special purpose companies. International Financial Reporting Standards ('IFRS') Following the decision to transfer to AIM, and in accordance with the reporting requirements of that market, the Group currently intends to defer full adoption of IFRS until 2007/08. As previously indicated, the adoption of IFRS is not expected to have a material impact on reported earnings per share and the impact on consolidated net assets is expected to be immaterial. Group results Operating margin We have achieved increases in gross margins in the Security Services segment, despite challenging market conditions, and in the Facilities Management segment. As a result, Group gross margin increased to 19.9% (2004: 18.8%). The ratio of administrative expenses (excluding exceptional items) to turnover was 16.0% (2004:15.1%), reflecting continued investment in management, systems and training to support the Group's continuing growth. Consequently, the Group's operating margin, the ratio of pre-exceptional operating profit to turnover, increased slightly to 3.9% (2004: 3.7%). Goodwill amortisation and impairment The charge for goodwill amortisation in the year was Â£0.1 million (2004: Â£0.3 million), In addition, as noted above, an impairment write-down of Â£0.7 million has been recognised as an exceptional item. Net interest receivable Net interest receivable, including the Group's share of net interest receivable by associated undertakings, was Â£0.6 million (2004: Â£0.3 million payable) reflecting the Group's strong cash flow, increasing net cash balances and improved returns on deposits. Taxation The net taxation charge for the year, excluding exceptional items, was Â£4.9 million (2004: Â£4.1 million) which represents an effective rate of 31.0% (2004: 31.0%). Earnings per share Basic earnings per share, excluding exceptional items, increased by 17.9% to 47.4p (2004: 40.2p). In the period 2000-2005, the Group's underlying basic earnings per share, excluding exceptional items, have increased at a compound annual rate of 18.5%. The Group manages the performance of its business primarily on measures of earnings and cash flow before the impact of exceptional items. The statutory figure for earnings per share is therefore adjusted to exclude exceptional items, in order to give a more appropriate indication of underlying performance. Similarly, dividend cover is also calculated using this measure of earnings. Dividends Dividends paid or proposed were 18.7p per share, 10.7% higher than in the previous year and dividend cover, excluding exceptional items, was 2.5 times (2004: 2.4 times). In view of the Group's significant net cash balance, the board considers that this level of dividend cover is entirely appropriate. Cash flow EBITDA, excluding exceptional items, increased by 11.5% to Â£15.4 million (2004: Â£13.8 million) principally reflecting higher operating profit, driven by the strong performance of the Facilities Management segment. Effective cash controls resulted in a reduction in working capital of Â£0.9 million (2004: Â£1.4 million increase). Consequently, net cash inflow from operating activities was Â£15.7 million (2004: Â£12.5 million). Dividends received from associates were Â£1.4 million (2004: Â£1.0 million) and net interest received was Â£0.5 million (2004: Â£0.2 million paid), the latter reflecting the Group's growing net cash balances. Corporation tax paid was broadly unchanged at Â£3.2 million, despite an 21.4% increase in Group pre-tax profit, excluding exceptional items and associates, principally due to the refund of tax paid in prior years. The net cash outflow from investing activities was Â£0.2 million (2004: Â£0.3 million inflow). Compared with the prior year, a decrease in the proceeds from the sale of investments was largely offset by lower levels of capital expenditure and financial investment. Acquisitions gave rise to a net cash outflow of Â£0.3 million (2003: Â£1.0 million), the payments in both years relating principally to the completion of earn-out arrangements relating to Goldrange. The proceeds from the sale of the Group's interest in its associate, Safe Estates Services, were Â£7.3 million (2004: Â£nil). Dividends paid, excluding dividends paid in respect of shares held by the ESOP trust, increased by 10.6% to Â£3.9 million (2004: Â£3.6 million). Cash inflow before financing was Â£17.3 million (2004: Â£5.1 million). For management purposes, the Group focuses on free cash flow, being cash flow from operating activities less tax and interest paid plus dividends received from associates. Over time, the Group expects to achieve free cash flow of approximately 70% of pre-exceptional, pre-tax profit. In the period 2001 to 2005, in aggregate, the Group's free cash flow has been 87% of pre-exceptional, pre-tax profit. The Group will incur an increased level of capital expenditure in 2005/06, principally IT related, will make further investments in PFI special purpose companies and expects to suffer a further net cash outflow, larger than the 2004/05 such outflow, in complying with the requirements of the Private Security Industry Act 2001. Furthermore, no disposal of investments is expected in 2005/06, such transactions having generated net cash proceeds of Â£8.3 million in 2004/05. These factors notwithstanding, the Group expects to be modestly cash generative, overall, in 2005/06. The Group's policy is to maintain committed, medium term borrowing facilities that are more than sufficient to meet its foreseeable medium term financing requirements. Segment results The 'Security Services' and 'Facilities Management' segments include the results of those of the Group's businesses, joint ventures and associated undertakings that provide site-based security services and facilities management services respectively to their customers. Central administrative costs and operating assets have been allocated to the two segments. Segment operating profit, for each segment, excludes exceptional items and comprises profit on ordinary activities after share of associates' results and before finance charges. Note 2 to the attached financial statements includes a more detailed analysis of each segment's results than we have provided hitherto. Security Services Turnover was Â£192.7 million (2004: Â£209.3 million) reflecting challenging market conditions and an additional week's trading in 2003/04. Segment operating profit was Â£6.8 million (2004: Â£9.1 million); the reduction in turnover and generally high operational gearing more than offset an improvement in the performance of Reliance High -Tech. As a result, operating margin, the ratio of segment profit to turnover, fell to 3.5% (2004: 4.4%), despite a slight year-on-year increase in gross margins. Excellent control over working capital and the divestment of the Group's interest in Safe Estates Services resulted in a further 65.0% decrease in operating assets to Â£3.9 million (2004: Â£11.0 million). Consequently, the return on operating assets, the ratio of segment profit to operating assets, increased to 175.9% (2004: 82.9%). Facilities Management Turnover increased by 41.6% to Â£117.5 million (2004: Â£83.0 million), reflecting a number of new contract starts and organic growth in existing contracts. Segment operating profit increased by 92.1% to Â£8.3 million (2004: Â£4.3 million) and segment operating margin increased to 7.0% (2004: 5.2%). Productivity improvements more than offset adverse mix changes, resulting in an increase in gross margins, and overheads increased broadly in line with turnover, reflecting further significant strengthening and enlargement of management and business development teams to provide for continuing growth. Control over working capital remained tight but a significant investment in contract start-up costs and less favourable payment terms on some new contracts, resulted in a modest increase in operating assets to Â£4.0 million (2004: Â£3.6 million). The return on operating assets increased to 206.3% (2004: 118.1%). Neil French Group Finance Director Consolidated profit and loss account for the year ended 29 April 2005 -------------------------- ------ --------- --------- ------- ------- Notes Pre-exceptional Exceptional Total 2004 Items Items 2005 Â£'000 2005 2005 Â£'000 Â£'000 Â£'000 --------------------- ------- --------- --------- -------- -------- Group turnover - continuing operations 3 310,257 - 310,257 292,292 Cost of sales 4 (248,568) (386) (248,954) (237,360) --------------------- ------- --------- --------- -------- -------- Gross profit 61,689 (386) 61,303 54,932 -------- --------- -------- -------- Administrative expenses 4 (49,493) (218) (49,711) (44,262) Exceptional goodwill write-off 4 - (670) (670) (1,000) -------- --------- -------- -------- Total administrative expenses (49,493) (888) (50,381) (45,262) --------------------- ------- --------- --------- -------- -------- Group operating profit excluding share of joint venture and associates - continuing operations 3 12,196 (1,274) 10,922 9,670 -------- --------- -------- -------- Share of joint venture's operating loss - continuing operations 3 (138) - (138) - Share of associate's operating profits - continuing operations 3 1,181 - 1,181 1,237 Share of associates' operating profits - discontinued operations 3 1,818 - 1,818 1,532 Exceptional goodwill write-off relating to associate 3 - - - (280) -------- --------- -------- -------- Total share of operating profits of joint venture and associates 2,861 - 2,861 2,489 --------------------- ------- --------- --------- -------- -------- Operating profit: Group and share of joint venture and associates 3 15,057 (1,274) 13,783 12,159 --------------------- ------- --------- --------- -------- -------- Non-operating exceptional gain on disposal of investment in associate 4 - 4,256 4,256 - --------------------- ------- --------- --------- -------- -------- Profit on ordinary activities before finance income/(charges) 15,057 2,982 18,039 12,159 --------------------- ------- --------- --------- -------- -------- Finance income/(charges) 555 - 555 (170) Group 20 - 20 (91) Associates --------------------- ------- --------- --------- -------- -------- Profit on ordinary activities before taxation 15,632 2,982 18,614 11,898 Tax on profit on ordinary activities (4,854) 181 (4,673) (4,085) --------------------- ------- --------- --------- -------- -------- Profit on ordinary activities after taxation and for the financial year 10,778 3,163 13,941 7,813 Dividends paid and proposed 5 (4,257) - (4,257) (3,847) --------------------- ------- --------- --------- -------- -------- Retained profit for the year transferred to reserves 6,521 3,163 9,684 3,966 --------------------- ------- --------- --------- -------- -------- Earnings per ordinary share Basic, excluding exceptional items 6 47.4p 40.2p Effect of exceptional items 13.9p (5.7)p --------------------- ------- --------- --------- -------- -------- Basic 6 61.3p 34.5p --------------------- ------- --------- --------- -------- -------- Diluted, excluding exceptional items 6 47.1p 40.0p Effect of exceptional items 13.8p (5.6)p --------------------- ------- --------- --------- -------- -------- Diluted 6 60.9p 34.4p --------------------- ------- --------- --------- -------- -------- There are no material differences between reported and historical cost profits and losses. Consolidated statement of total recognised gains and losses for the year ended 29 April 2005 ------------------------------- ------------ -------- 2005 2004 Â£'000 Â£'000 ------------------------------- ------------ -------- Profit/(loss) for the financial year Group 11,982 6,226 Joint venture (138) - Associates 2,097 1,587 ------------------------------- ------------ -------- 13,941 7,813 Loss on foreign currency translation - (82) ------------------------------- ------------ -------- Total recognised gains and losses for the year 13,941 7,731 ------------------------------- ------------ -------- Consolidated balance sheet as at 29 April 2005 ------------------------------ ---------- ------------ 2005 Restated(*) Â£'000 2004 Â£'000 ------------------------------ ---------- ------------ Fixed assets Intangible assets: goodwill - 758 Tangible assets 6,138 8,027 Investments ---------- ------------ Share of gross assets of joint venture 7,675 - Share of gross liabilities of joint venture (7,808) - ---------- ----------- Share of net liabilities of joint venture (133) - Associates 253 2,581 Others 467 455 ---------- ----------- 587 3,036 ------------------------------ ---------- ----------- 6,725 11,821 ------------------------------ ---------- ----------- Current assets Stocks 1,465 1,670 Debtors: amounts due within one year 37,767 33,822 Debtors: amounts due after more than one year 4,253 1,353 Investments - 1,036 Cash at bank and in hand 31,107 14,097 ------------------------------ ---------- ----------- 74,592 51,978 ------------------------------ ---------- ----------- Liabilities: amounts falling due within one year Borrowings (3,378) (3,564) Creditors (41,177) (33,963) Corporation tax (2,750) (2,174) Proposed dividend (3,301) (2,982) ------------------------------ ---------- ----------- (50,606) (42,683) ------------------------------ ---------- ----------- Net current assets 23,986 9,295 ------------------------------ ---------- ----------- Total assets less current liabilities 30,711 21,116 ------------------------------ ---------- ----------- Liabilities: amounts falling due after more than one year Borrowings - (80) Other Creditors (200) - ------------------------------ ---------- ----------- (200) (80) ------------------------------ ---------- ----------- Provisions for liabilities and charges - (217) ------------------------------ ---------- ----------- Net assets 30,511 20,819 ------------------------------ ---------- ----------- Capital and reserves Called up share capital 1,165 1,165 Share premium account 2,534 2,320 Own shares held (2,825) (2,831) Revaluation reserve 152 152 Profit and loss account 29,485 20,013 ------------------------------ ---------- ----------- Equity shareholders' funds 30,511 20,819 ------------------------------ ---------- ----------- The preliminary announcement was approved by the Board on 29 June 2005 (*) See note 1 Consolidated cash flow statement for the year ended 29 April 2005 -------------------------------- ------ -------- -------- Notes 2005 Restated(*) Â£'000 2004 Â£'000 -------------------------------- ------ -------- -------- Net cash inflow from operating activities 7 15,726 12,462 -------------------------------- ------ -------- -------- Dividends from associates 1,421 977 -------------------------------- ------ -------- -------- Returns on investments and servicing of finance Interest received 809 142 Interest paid (293) (267) Interest element of finance lease repayments (30) (30) -------------------------------- ------ -------- -------- Net cash inflow/(outflow) from returns on investments and servicing of finance 486 (155) -------------------------------- ------ -------- -------- Taxation UK corporation tax paid (3,199) (3,272) -------------------------------- ------ -------- -------- Capital expenditure and financial investment Purchase of tangible fixed assets (1,252) (1,756) Sale of tangible fixed assets 11 42 Purchase of fixed asset investments (32) (188) Repayment of fixed asset investment 20 - Sale of current asset investment 1,036 1,637 -------------------------------- ------ -------- -------- Net cash outflow from investing activities (217) (265) -------------------------------- ------ -------- -------- Acquisitions and disposals Purchase of subsidiary undertaking - deferred consideration paid (266) (1,000) Purchase of interest in joint venture (5) - Investment in associate - (44) Sale of interest in associate 7,260 - -------------------------------- ------ -------- -------- Net cash inflow/(outflow) from acquisitions and disposals 6,989 (1,044) -------------------------------- ------ -------- -------- Equity dividends paid (3,938) (3,559) -------------------------------- ------ -------- -------- Net cash inflow before financing 17,268 5,144 -------------------------------- ------ -------- -------- Financing Issue of ordinary share capital - 36 Proceeds from exercise of options in shares held through the ESOP trust 8 450 Capital element of finance lease repayments (266) (382) -------------------------------- ------ -------- -------- Net cash (outflow)/inflow from financing (258) 104 -------------------------------- ------ -------- -------- Increase in cash in the year 17,010 5,248 -------------------------------- ------ -------- -------- Reconciliation of net cash flow to movement in net cash Increase in cash in the year 17,010 5,248 Cash flow from finance lease repayments 266 382 -------------------------------- ------ -------- -------- Movement in net cash in the year 17,276 5,630 Net cash at start of year 10,453 4,823 -------------------------------- ------ -------- -------- Net cash at end of year 10 8 27,729 10,453 -------------------------------- ------ -------- -------- (*) See note 1 Notes to the preliminary statement for the year ended 29 April 2005 The financial information set out above does not constitute the Group's statutory accounts for the years ended 29 April 2005 or 30 April 2004, but is derived from those accounts. Statutory accounts for 30 April 2004 have been delivered to the Registrar of Companies and those for 29 April 2005 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts: their reports were unqualified and did not contain statements under s237(2) or (3) Companies Act 1985. 1. Accounting convention The Group accounts have been prepared in accordance with applicable United Kingdom accounting standards and under the historical cost convention, as modified by the revaluation of land and buildings. This preliminary announcement has been prepared on the basis of the accounting policies laid down in those accounts. Accounting policies have been consistently applied in dealing with items which are considered material in relation to the Group's accounts, subject to the two changes in the year as set out below. The financial years of all Group companies are the 52 or 53 weeks up to the Friday before, or falling on, the accounting reference date of 30 April. The Group adopted Urgent Issues Task Force Abstract 38 (UITF 38) 'Accounting for ESOP trusts' during the year. This has resulted in the reclassification of own shares held in the ESOP trust, previously accounted for as a fixed asset investment, as a deduction from shareholders funds and accordingly the value of fixed asset investments, within net assets, and shareholders funds has been reduced at 29 April 2005 by Â£2,825,000 (2004: Â£2,831,000; 2003: Â£3,179,000). The Group has adopted a new accounting policy in the year to deal with the implications of the implementation of the Private Security Industry Act 2001, which is scheduled to come in to force for manpower security in March 2006. Costs incurred by the Group in preparing for compliance with the Act, up until the date it comes in to force (the implementation period), are treated as exceptional costs within operating profit and are classified as cost of sales or administrative expenses in line with the classification of similar non-exceptional expenditure. Additional revenue, resulting from special price increases negotiated with customers and intended to recover the additional costs incurred by the Group, will be recognised as exceptional turnover within operating profit during the implementation period. Once the Act has come in to force, all revenue and expenditure resulting from compliance with the regulations, will be treated as regular, non-exceptional, items within turnover, cost of sales and administrative expenses as appropriate. 2. Consolidation The consolidated profit and loss account and balance sheet incorporate the accounts of Reliance Security Group plc, its subsidiary undertakings and its share of the profits/losses and net assets/liabilities of its joint ventures and associates. The results of subsidiary undertakings, joint ventures or associates acquired or sold during the year are consolidated for the periods from or to the date on which control passed. 3. Segmental information Security Facilities Total Security Facilities Total Services Management Services Management 2005 2005 2005 2004 2004 2004 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 -------- --------- ------- ------- -------- ------- Turnover 192,730 117,527 310,257 209,264 83,028 292,292 -------- --------- ------- ------- -------- ------- Group operating profit before exceptional items, excluding share of joint venture and associates - continuing 4,979 7,217 12,196 7,608 3,062 10,670 operations ------- --------- ------- ------- -------- ------- Share of joint venture's operating loss - (138) (138) - - - - continuing operations Share of associate's operating profits - continuing operations - 1,181 1,181 - 1,237 1,237 Share of associates' operating profits - discontinued operations 1,818 - 1,818 1,532 - 1,532 ------- --------- ------- ------- -------- ------- Total share of operating profits of joint venture and associates before 1,818 1,043 2,861 1,532 1,237 2,769 exceptional ------- --------- ------- ------- -------- ------- items Operating profit before exceptional items: Group and share of joint venture and 6,797 8,260 15,057 9,140 4,299 13,439 associates ------- --------- ------- ------- -------- ------- Group operating exceptional items (1,274) - (1,274) (1,000) - (1,000) Group share of operating exceptional item of - - - (280) - (280) associate ------- --------- ------- ------- -------- ------- Operating exceptional items: Group and share of associates (1,274) - (1,274) (1,280) - (1,280) ------- --------- ------- ------- -------- ------- Operating profit: Group and share of joint venture and 5,523 8,260 13,783 7,860 4,299 12,159 associates ------- --------- ------- ------- -------- ------- Non-operating exceptional gain on disposal of investment in associate 4,256 - 4,256 - - - ------- --------- ------- ------- -------- ------- Profit on ordinary activities before finance income/ 9,779 8,260 18,039 7,860 4,299 12,159 (charges) ------- --------- ------- ------- -------- ------- 3. Segmental information (continued) Security Facilities Total Security Facilities Total Services Management Services Management 2005 2005 2005 2004 2004 2004 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 ------- --------- ------- ------- -------- ------ Group operating assets 3,870 3,884 7,754 8,243 2,808 11,051 Share of joint venture's net liabilities - (133) (133) - - - Share of associate's net assets - 253 253 2,784 833 3,617 ------------------- ------- --------- ------- ------- -------- ------ Total operating assets 3,870 4,004 7,874 11,027 3,641 14,668 ------------------- ------- --------- ------- ------- -------- ------ Reconciliation of total operating assets to total net assets: Operating assets 7,874 14,668 Items excluded: Net cash 27,729 10,453 Investments in other participating interests 467 455 Taxation payable (2,750) (2,174) Deferred taxation 460 436 Dividends payable (3,301) (2,982) Interest receivable/(pa yable) 32 (37) ------- ------ Total net assets (*) 30,511 20,819 ------- ------ All Group turnover is derived from within the United Kingdom. No turnover was reported in the year for the Group's joint venture, Gloucester FM Services Limited. In accordance with the equity method adopted for accounting for associates, Group turnover excludes its share of turnover of associated undertakings of Â£31,564,000 (2004: Â£44,542,000). Operating assets are those net assets controlled by Reliance's operating divisions. (*) The figure for total net assets reported for 2004 has been restated to reflect the reclassification of own shares held from a fixed asset investment to a deduction from shareholders' funds - see note 1. 4. Exceptional items 2005 During the year the Group incurred total expenditure of Â£604,000 (before a tax credit of Â£181,000) in respect of its preparation for the implementation of the Private Security Industry Act. In accordance with the Group's accounting policy for such expenses, they have been classified as operating exceptional items within cost of sales and administrative expenses as appropriate. The cash outflow in the year relating to this exceptional item was Â£604,000 (before taking into account the cash benefits of tax relief). The further operating exceptional item in the year of Â£670,000 shown within administrative expenses relates to the impairment of goodwill associated with the Group's interest in Goldrange Limited. In the opinion of the directors, the balance of goodwill held has no net realisable value and, accordingly, they have considered it to be most appropriate to write-off in full the remaining value of the goodwill. The non-operating exceptional gain in the year on disposal of the Group's interest in an associate of Â£4,256,000 arose on the sale of the Group's interests in Safe Estates Services Limited. The disposal was completed on 20 December 2004 for cash consideration, net of costs, of Â£7,260,000. There was no tax charge arising on the capital gain realised on disposal. 2004 The exceptional item of Â£1,000,000 shown within administrative expenses related to the impairment of goodwill associated with Goldrange Limited. The exceptional item of Â£280,000 shown within the Group's share of the operating profits of its joint venture and associates related to the impairment of goodwill in the Group's associated undertaking, Command Security Corporation. 5. Dividends paid and proposed 2005 2004 Â£'000 Â£'000 ------------------------------------- ------- ------- Interim paid 4.2p (2004: 3.8p) per share 979 892 Final proposed 14.5p (2004: 13.1p) per share 3,379 3,053 ------------------------------------- ------- ------- 4,358 3,945 Dividends payable to the ESOP trust (101) (98) ------------------------------------- ------- ------- Total dividends for the year 4,257 3,847 ------------------------------------- ------- ------- The assets and liabilities of the ESOP trust are reflected in the Group balance sheet. The dividends payable to the ESOP trust are therefore eliminated on consolidation. Subject to approval at the annual general meeting on 7 September 2005, the final dividend will be payable on 23 September 2005 to those shareholders on the register of members on 2 September 2005. 6. Earnings per share 2005 2004 -------- ------ ------- -------- ------ ------ Basic Diluted Basic Diluted pence pence pence pence per per per per Â£'000 share share Â£'000 share share ------------------ -------- ------ ------- -------- ------ ------ Profit for the financial 13,941 61.3p 60.9p 7,813 34.5p 34.4p year Add back/(deduct): Exceptional cost of 386 1.7p 1.7p - - - sales Exceptional administrative 218 1.0p 1.0p - - - expenses Exceptional goodwill write-offs - investment in subsidiaries 670 2.9p 2.9p 1,000 4.4p 4.4p - investment in associated - - - 280 1.3p 1.2p undertakings Exceptional gain on sale of investment in (4,256) (18.7p) (18.6p) - - - associated undertaking Tax on exceptional (181) (0.8p) (0.8p) - - - items ------------------ -------- ------ ------- -------- ------ ------ Earnings excluding exceptional items 10,778 47.4p 47.1p 9,093 40.2p 40.0p ------------------ -------- ------ ------- -------- ------ ------ 2005 2004 Number Number ------------------ -------- -------- Weighted average number 23,305,592 23,301,565 of shares Weighted average number of shares held in (544,907) (666,395) ESOP -------- -------- trust ------------------ Shares used to calculate 22,760,685 22,635,170 basic earnings per share Dilutive potential shares 138,557 82,177 ------------------ -------- -------- Shares used to calculate diluted earnings 22,899,242 22,717,347 per -------- -------- share ------------------ The basic and diluted earnings per share have been calculated in accordance with FRS14, based on profit after tax and the weighted average number of ordinary shares in issue during the year, less shares held by the ESOP trust. 7. Reconciliation of operating profit to net cash inflow from operating activities 2005 2004 Â£'000 Â£'000 --------------------------------------- ------- ------- Operating profit 10,922 9,670 Depreciation charges 3,045 2,894 Amortisation of goodwill 88 323 Exceptional impairment of goodwill 670 1,000 Gain on sale of fixed asset investments - (102) Loss on disposal of fixed assets 85 38 Decrease in stocks 205 891 (Increase)/decrease in debtors (6,756) 2,282 Increase/(decrease) in creditors 7,467 (4,534) --------------------------------------- ------- ------- Net cash inflow from operating activities 15,726 12,462 --------------------------------------- ------- ------- 8. Analysis and reconciliation of net cash 1 May 29 April 2004 Cash flow 2005 Â£'000 Â£'000 Â£'000 ------------------------------ -------- ------- ------- Cash at bank and in hand 14,097 17,010 31,107 ------------------------------ -------- ------- ------- Loan due within one year (3,315) - (3,315) Finance leases and hire purchase contracts (329) 266 (63) ------------------------------ -------- ------- ------- Total borrowings (3,644) 266 (3,378) ------------------------------ -------- ------- ------- ------------------------------ -------- ------- ------- Net cash 10,453 17,276 27,729 ------------------------------ -------- ------- ------- This information is provided by RNS The company news service from the London Stock Exchange

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