S & U Regulatory News (SUS)

30 Mar 2006 08:00

THURSDAY 30th MARCH 2006S & U PLC Providers of Consumer Credit & Motor Finance RESULTS FOR THE YEAR TO 31st JANUARY 2006 * REVENUE ‚£53.4m (2005 - ‚£50.7m) GROSS PROFITS ‚£28.1m (‚£27.7m). * PRE-TAX PROFITS ‚£9.1m (‚£9.5m), ACHIEVED IN FACE OF CHALLENGING TRADING CONDITIONS, RETURN ON CAPITAL EMPLOYED 16.4%. * TOTAL DIVIDEND FOR THE YEAR 31p UNCHANGED. EARNINGS PER SHARE 54.0p (56.5p). * HOME COLLECTED CREDIT - PRE-TAX PROFITS MAINTAINED SLIGHTLY BELOW LAST YEAR'S RECORDS. NEW OPPORTUNITIES ANTICIPATED IN MORE DYNAMIC MARKET IN 2006. * ADVANTAGE FINANCE - ENCOURAGING ADVANCE IN MOTOR CAR FINANCE PRE-TAX PROFITS ‚£2.24m (‚£2.07m). IMPROVEMENT IN ALL AREAS OF BUSINESS. * THE OUTLOOK FOR THE GROUP IS "GOOD". Issued on behalf of S & U plc by Simon Preston 0207 655 0500Enquiries: Derek Coombs or Anthony Coombs Chairman Managing Director S & U PLC S & U PLC Tel: 0207 655 0500 Tel: 07767 687150Date of issue: Thursday 30th March 2006POLHILL COMMUNICATIONS TEL: 0207 655 0500DOME HOUSE FAX: 0207 655 050148 ARTILLERY LANE WWW.POLHILL.COMLONDON E1 7LS Polwoods Limited Registration Number 1983318S & U PLCCHAIRMAN'S STATEMENTResultsGood news for S&U plc which continues to achieve steady and reliable growth andprofitability in the face of challenging trading conditions in the UK ConsumerCredit Market. Revenue for the year ended 31 January 2006 grew to ‚£53.4mcompared to ‚£50.7m for 2005. However, profit on ordinary activities before taxfor the year was ‚£9.1m compared to ‚£9.5m for 2005. Earnings per share for 2006was 54.0p (2005 56.5p), maintaining good cover.We maintained our dividend at 9p for the first half year's trading and we arealso pleased to announce a further 22p for the second half, making a combinedproposed dividend of 31p for the year as a whole. The dividend for ordinaryshares of 22p per share will be paid on the 2nd June 2006 and the shares willbe dealt ex dividend from the 3rd May 2006. Excellent dividend payment everyyear since 1988 is our proud achievement and we anticipate continuing thistrend.Home Collected CreditAll our three home collected credit companies, S&U, Wilson Tupholme and SDTaylor managed to maintain profits at levels slightly below last year's recordresults. This has been a challenging year and the second half of the yearcontinued to reflect the flagging consumer demand which I referred to in myinterim statement. Our own trading improved markedly during the busy Chistmasperiod and we look forward to 2006 with a strong team and new opportunities ina more dynamic market.Advantage Finance Limited - Motor Car FinanceOur motor car finance company Advantage Finance Limited continues to progressand every year is producing rising profits. In more challenging marketconditions, a further encouraging advance in profits to ‚£2.24m in 2006 wasachieved from ‚£2.07m in 2005. Advantage continues to improve in all areas ofbusiness activity and with the calibre of the team we have, I am very confidentthat these positive results will continue.StaffEvery company is only as good as the quality and dedication of its staff. S & Uis a very labour intensive operation and therefore even more dependent upon itsstaff. We have a superb team and I must take this opportunity to thank them onyour behalf for their contribution during the year.Outlook for the Group as a wholeGood.Derek M CoombsChairman29th March 2006S & U PLCMANAGING DIRECTOR'S REPORTThis year I announce a pre-tax profit for S&U Plc of ‚£9.1m, a fall of justunder 5% on last year's record result but, given the more challenging tradingand regulatory environment I predicted a year ago, a solid performancenevertheless. Group Revenue has increased slightly to ‚£53.4m whilst grossprofit rose to ‚£28.1m. Return on capital employed remains a very healthy 16.4%.S&U has always been conservatively managed and hence our financial positionremains strong. Group borrowing ended the year ‚£2.4m higher than 2004-2005,reflecting an additional ‚£3.5m investment in our growing Advantage motorfinance business. This was partly funded by our cash generative but relativelymature home credit operations. Group gearing remains low for the sector at 79%.Over the past year S&U has faced a number of challenges. Most important hasbeen a fall in consumer optimism, evidenced most recently in the British RetailConsortium's January Survey of High Street spending. A slowing economy,historically high levels of consumer debt, rising unemployment and higher taxesand utility prices have all inevitably led to restrictions in customers'disposable incomes. S&U has always maintained sensibly high underwritingstandards and therefore such conditions inevitably impact on book debt growthand the collecting environment. Nevertheless Group book debt grew last year by9.8%; most of this increase was at Advantage Finance which will feed through toprofitability in the next 3 years. Impairment charges rose by 9.8% overall, anincrease uniform across all operating companies and which partly reflects thenew, more conservative, impairment provisioning introduced under IFRS at Julyhalf-year.An additional challenge has been the continued interest Government and itsminions take in consumer credit in general and the home credit industry inparticular. Last year saw significant changes to our home credit and Advantageoperations in response to new Form and Content Insurance and AdvertisingRegulations. Consumer IVAs and bankruptcies have both, as we predicted, risenin line with recent legislation which has made such a step virtually a lifestyle choice for many consumers. Finally the Competition Commission Inquiryinto home credit has yet to produce its final report despite, in its EmergingThinking, confirming our industry's enduring popularity with our customers. Iam confident its findings will vindicate home credit as responsible and valuedlenders and provide a clear regulatory base for serving our customers over thenext 20 years.Operating Results Year Ended Year Ended 31st January 31st January 2006 2005 ‚£m ‚£m Revenue 53.4 50.7 Cost of Sales 25.3 23.0 Gross Profits 28.1 27.7 Administration Expenses 17.3 16.7 Operating Profit 10.8 11.0 Finance Costs 1.7 1.5 Profit before Taxation 9.1 9.5Home CreditOur three home credit subsidiaries continue to provide, at ‚£6.9m profit beforetaxation, over 75% of Group earnings. Nonetheless last year saw a decline of 8%on the record profits of the previous year, mainly due to static turnover andincreased impairment. Both productivity and profit on turnover remain high andsteps have been taken to ensure that we resume growth this year.In particular improvements to internal accounting systems should increase cashcollections from slow-paying customers and hence increase the proportion of ourcustomers with whom we can responsibly trade. Our revalidation as Investors inPeople, and the strengthening of our HR Department will improve the trainingand hence productivity of both our Representatives and branch management. A newIT system is already improving customer communications and analysis and will infuture streamline our new loans procedures. In addition we continue to acquiregood quality book debt and personnel from our competitors during a period ofconsolidation within the home credit industry as a whole.Advantage FinanceAdvantage, our Grimsby based motor finance subsidiary, increased profits in acompetitive used car market to ‚£2.24m, an increase of 8% on last year. Whilsttransactions rose by 7%, revenue improved by 10% as Advantage began to makeinroads into higher value better quality sub-prime customers, whilst retainingits traditionally close relationships with smaller car dealerships. Additionalinvestment of ‚£3.5m in the business has produced net receivables up 18% at ‚£30m.This is a creditable performance; this year we plan further investment on thebasis that Advantage will maintain its excellent collections record and tightcontrol of expenses. This is expected to produce accelerated profits growth anda return on assets employed to the level currently achieved by the S&U Group asa whole.Over the past year we have also been developing the infrastructure for asub-prime second mortgage based subsidiary, Communitas Finance. If successfulthis will build upon the skills and customer relationships inherent in our homecredit and, in particular, our Advantage Finance subsidiaries.A pilot scheme began in November and a network of around 15 brokers iscurrently producing leads for small loans in this market. Interest has beenencouraging; payment is very strong and the pilot will be evaluated after thefirst quarter of this financial year.Group Profit, Dividend and Earnings Per Share Year Year 6 months 6 months 6 months 6 months ended ended ended ended ended ended 31.1. 31.1. 31.1. 31.1. 31.7. 31.7. 2006 2005 2006 2005 2005 2004 ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Profit before 9.1 9.5 3.8 4.1 5.3 5.4tax Profit after 6.3 6.6 2.6 2.9 3.7 3.7tax Earnings per 54.0 56.5 22.5 24.7 31.5 31.8share Dividends per 31.0 31.0 22.0 22.0 9.0 9.0share Although the results reflect the continuing slowdown in sub-prime consumermarkets of last year, we judge that improving economic conditions will seerenewed growth this year. We therefore propose to maintain our dividend perOrdinary Share, thus making for a final payment of 22p (2005 - 22p) and a totalof 31p (2005-31p) for the year.Capital Structure, Liquidity and TreasuryThe company's financial position is strong and reflected in our current gearingof just 79% (2005 78%). This increase is partly explained by continuedinvestment in Advantage, by the piloting of Communitas and by accountingchanges to provisioning policies demanded by the International FinancialReporting Standards for home credit book debt.Our current bank facilities allow comfortably for anticipated organic growthand for small acquisitions when opportunities arise. Although we regard boththe current inflation and interest rate prospects as stable, we have put inplace hedging arrangements for ‚£20m of our longer-term debt.Whilst our corporate rate of taxation remains at 30% for the year, therevaluation of book debt at half-year associated with IFRS has allowed us a oneoff tax saving of ‚£3m. This will reduce cash flow required for our operationsthis year.ProspectsAlthough the level of consumer indebtedness remains high, I anticipate a higherrate of economic growth this year which, together with a historically firmlabour market, should allow our customers to borrow with confidence. Althoughour underwriting standards will remain high for our sector, we anticipate agrowth in new customers particularly from those who are increasingly findingthe mainstream banking sector unreceptive. All our businesses are in a positionto give these customers precisely the first class valued and profitable serviceour current customers enjoy.We can only do this with the support of our loyal, hardworking and committedstaff. I thank all of them, our Board of Directors, and most of all ourlong-standing customers for their excellent support. It is with their loyalsupport that I look forward to a year of renewed sales growth and further progress for S & U.Anthony M V CoombsManaging Director29.3.06S & U PLCCONSOLIDATED INCOME STATEMENTYear ended 31st January 2006 Note Unaudited Unaudited 2006 2005 ‚£000 ‚£000 Revenue 3 53,427 50,712 Cost of sales 4 (25,295) (22,965) Gross profit 28,132 27,747 Administrative expenses (17,314) (16,679) Operating profit 10,818 11,068 Finance costs 5 (1,694) (1,518) Profit before taxation 3 9,124 9,550 Taxation (2,787) (2,919) Profit for the year 6,337 6,631 Earnings per share basic and diluted 6 54.0p 56.5p Dividends per share - Proposed final dividend 22.0p 22.0p - Total dividend in respect of the year 31.0p 31.0p - Paid in the year 31.0p 30.0pAll activities derive from continuing operations.STATEMENT OF RECOGNISED INCOME AND EXPENSE Unaudited Unaudited 2006 2005 ‚£000 ‚£000 Profit for the Year 6,337 6,631 Actuarial gain on defined benefit pension 14 -scheme Total recognised income for the year attributable to equity holders of the parent 6,351 6,631S & U PLCCONSOLIDATED BALANCE SHEET31st January 2006 Note Unaudited Unaudited 2006 2005 ‚£000 ‚£000 ASSETS Non Current Assets Property, plant and equipment 2,283 2,357 Amounts Receivable from customers 7 19,807 15,994 Deferred tax assets 27 2,169 22,117 20,520 Current Assets Inventories 81 91 Amounts receivable from customers 7 44,375 42,456 Trade and other receivables 619 717 Current income tax assets 1,427 65 Cash 11 14 46,513 43,343 Total Assets 68,630 63,863 LIABILITIES Current liabilities Bank overdrafts (8,214) (5,791) Trade and other payables (953) (1,294) Tax liabilities (198) (210) Accruals and deferred income (1,303) (1,233) (10,668) (8,528) Non current liabilities Bank loans (20,000) (20,000) Retirement benefit obligation - (23) Deferred tax liabilities - (81) Financial liabilities (2,089) (2,089) Derivative financial instruments (19) - (22,108) (22,193) Total liabilities (32,776) (30,721) NET ASSETS 35,854 33,142 EQUITY Called up share capital 1,467 1,467 Share premium account 2,136 2,136 Profit and loss account 32,251 29,539 Total equity 8 35,854 33,142S & U PLCCONSOLIDATED CASH FLOW STATEMENTYear ended 31st January 2006 Note Unaudited Unaudited 2006 2005 ‚£000 ‚£000 Net cash from operating activities 10 1,657 1,779 Cash flows from investing activities Proceeds on disposal of property, plant 125 133and equipment Purchases of property, plant and (569) (567)equipment Net cash used in investing activities (444) (434) Cash flows from financing activities Dividends paid (3,639) (3,521) Repayment of borrowings - (15,000) Issue of new borrowings - 20,000 Net increase/(decrease) in overdraft 2,423 (2,820) Net cash (used in)/generated by financing (1,216) (1,341)activities Net (decrease)/increase in cash and cash (3) 4equivalents Cash and cash equivalents at the 14 10beginning of period Cash and cash equivalents at the end of 11 14period Cash and cash equivalents comprise Cash 11 14 There are no cash and cash equivalents which are not available for use by thegroup. (2005 ‚£nil).S & U PLCNOTES TO PRELIMINARY ANNOUNCEMENT 31ST JANUARY 20061. SHAREHOLDER INFORMATION 1.1 Preliminary Announcement The figures shown for the year ended 31 January 2006 are not statutory accountswithin the meaning of section 240 of the Companies Act 1985. The statutoryaccounts for the year ended 31 January 2006 upon which the auditors have stillto report, will be delivered to the Registrar of Companies following thecompany's annual general meeting. The figures shown for the year ended 31January 2005 are not statutory accounts. A copy of the statutory accountsprepared under UK GAAP has been delivered to the Registrar of Companies,contained an unqualified audit report and did not contain an adverse statementunder section 237(2) or 237 (3) of the Companies Act 1985. 1.2 Annual General Meeting The Annual General Meeting will be held on 19th May 2006. 1.3 Dividend If approved at the Annual General Meeting a final dividend of 22.0p perOrdinary Share is proposed, payable on 2nd June 2006 with a record date of 5May 2006. 1.4 Annual Report The 2006 Annual Report and Financial Statements will be posted to shareholdersin due course. Copies of this announcement are available from the CompanySecretary, S & U plc, Royal House, Prince's Gate, Homer Road, Solihull, WestMidlands B91 3QQ.2. KEY ACCOUNTING POLICIESThe 2006 financial statements have been prepared in accordance with applicableaccounting standards and accounting policies - these key accounting policiesare a subset of the full accounting policies. 2.1 Basis of preparation Prior to 2005 S&U plc has prepared its financial statements under UK generallyaccepted accounting principles ("UK GAAP") but as a listed company we are nowrequired to prepare our consolidated financial statements in accordance withinternational financial reporting standards (IFRS) as endorsed by the EuropeanUnion.The date of transition to IFRS for S&U plc was 1st February 2004 and thegroup has prepared its opening balance sheet at that date. Reconciliationsbetween previously reported UK GAAP results and IFRS as adopted are presentedin note 11. The financial information within this report has been prepared inaccordance with applicable accounting standards. 2.2 Revenue recognitionCredit charges are recognised in the income statement for all loans andreceivables measured at amortised cost using the effective interest rate method(EIR). The EIR is the rate that exactly discounts estimated future cash flowsthrough the contractual term or expected life of the loan if shorter, back tothe present value (the advance). Acceptance fees charged to customers areincluded as credit charges in the calculation and any direct transaction costsare added to the advance. Under IAS 39 credit charges on loan products continueto accrue at the EIR on all outstanding capital balances including arrears butexcluding impairment throughout the life of the agreement irrespective of theterms of the loan and whether the customer is actually being charged arrearsinterest. This is referred to as the gross up adjustment to revenue and isoffset by a corresponding gross up adjustment to the loan loss provisioningcharge to reflect the fact that this additional revenue is not collectable.Commission received from third party insurers for brokering the sale ofinsurance products, for which the group does not bear any underlying insurancerisk is recognised and credited to the income statement when the brokerageservice has been provided.Sales of goods are recognised in the income statement when the product has beensupplied. 2.3 Amounts receivable from customersAll customer receivables are initially recognised at the amount loaned to thecustomer plus direct transaction costs. After initial recognition the amountsreceivable from customers are subsequently measured at amortised cost.Amortised cost is the amount of the customer receivable at initial recognitionless customer repayments, plus revenue earned less any deduction forimpairment.The directors assess on an ongoing basis whether there is objective evidencethat a loan asset or group of loan assets is impaired and requires a deductionfor impairment. A loan asset or a group of loan assets is impaired only ifthere is objective evidence of impairment as a result of one or more eventsthat occurred after the initial recognition of the loan. Impairment is thencalculated by estimating the future cash flows for such impaired loans,discounting the flows to a present value using the original EIR and comparingthis figure with the balance sheet carrying value. All such impairments arecharged to the income statement. 2.4 Derivative financial instrumentsThe group's activities expose it to the financial risks of changes in interestrates and the group uses interest rate derivative contracts to hedge theseexposures. The group does not use derivative financial instruments forspeculative purposes. The use of financial derivatives is governed by thegroup's policies approved by the board of directors which provides writtenprinciples on the use of financial derivatives.Changes in the fair value of derivative financial instruments that aredesignated effective as hedges of future cash flows are directly recognised inequity and the ineffective portion is recognised immediately in the incomestatement. If the cash flow hedge of a firm commitment or forecastedtransaction results in the recognition of and asset or liability then at thetime the asset or liability is recognised the associated gains or losses on thederivative that had previously been recognised in equity are included in theinitial measurement of the asset or liability. For hedges that do not result inthe recognition of an asset or liability, amounts deferred in equity arerecognised in the income statement in the same period in which the hedged itemaffects profit or loss.Changes in the fair value of derivative financial instruments that do notqualify for hedge accounting are recognised in the income statement as theyarise.Hedge accounting is discontinued when the hedging instrument expires or issold, terminated or exercised or no longer qualifies for hedge accounting. Atthat time any cumulative gain or loss on the hedging instrument recognised inequity is retained in equity until the forecasted transaction occurs. If ahedged transaction is no longer expected to occur the net cumulative gain orloss is recognised in equity is transferred to net profit or loss for theperiod.Derivatives embedded in other financial instruments or other host contracts aretreated as separate derivatives when their risks and characteristics are notclosely related to those of host contracts and the host contracts are notcarried at fair value with gains or losses reported in the income statement.3. SEGMENTAL ANALYSISAnalyses by class of business of revenue and profit before taxation are statedbelow: Unaudited Unaudited ¢â€ _Revenue__¢â€ â€™ ¢â€  Profit before taxation¢â€ â€™ Class of business Year Year Year Year ended ended ended ended 31.1.06 31.1.05 31.1.06 31.1.05 ‚£000 ‚£000 ‚£000 ‚£000 Consumer credit, rentals and 43,633 41,746 6,887 7,485other retail trading Car finance 9,794 8,966 2,237 2,065 53,427 50,712 9,124 9,550 In accordance with IAS39 "Financial instruments recognition and measurement",additional interest is required to be accrued which will not be recovered fromthe customer due to the fixed charge nature of the loan agreement. The amountof this additional interest included in revenue is referred to as the gross upcharge and a full provision is made against it in cost of sales. For the yearended January 2006 the amount of the gross up charge and corresponding fullprovision was ‚£15,046,000 (2005 ‚£14,270,000).Analyses by class of business of assets and liabilities are stated below: Unaudited Unaudited ¢â€ __ Assets ___¢â€ â€™ ¢â€ ___ Liabilities __¢â€ â€™ Class of business Year Year Year Year ended ended ended ended 31.1.06 31.1.05 31.1.06 31.1.05 ‚£000 ‚£000 ‚£000 ‚£000 Consumer credit, rentals and 38,215 38,168 (5,425) (7,248)other retail trading Car finance 30,415 25,695 (27,351) (23,473) 68,630 63,863 (32,776) (30,721) Depreciation of assets for consumer credit was ‚£387,000 (2005 ‚£405,000) and forcar finance was ‚£90,000 (2005 ‚£ 88,000 ).The assets and liabilities of the parent company are classified as consumercredit, rentals and other retail trading.No geographical analysis is presented because all operations are situated inthe United Kingdom.4. COST OF SALES Unaudited Unaudited 2006 2005 ‚£000 ‚£000 Loan loss provisioning charge 21,836 19,880 Other cost of sales 3,459 3,085 25,295 22,965The loan loss provisioning charge includes the gross up adjustment of ‚£15,046,000 (2005 ‚£14,270,000), note 3.5. FINANCE COSTS Unaudited Unaudited 2006 2005 ‚£000 ‚£000 31.5% cumulative preference dividend 142 142 6% cumulative preference dividend 12 12 Bank loan and overdraft 1,515 1,353 Loss on financial derivative instrument 19 - Other interest payable 6 11 1,694 1,5186. EARNINGS PER ORDINARY SHAREThe calculation of earnings per Ordinary share is based on profit after tax of‚£6,337,000 (2005 -‚£6,631,000).The number of shares used in the calculation is the average number of shares inissue during the year of 11,737,228 (2005 - 11,737,228). There are no dilutiveshares.7. AMOUNTS RECEIVABLE FROM CUSTOMERS Unaudited Unaudited 2006 2005 ‚£000 ‚£000 Consumer Credit 48,857 46,529 Car finance hire purchase 37,920 31,438 86,777 77,967 Less: Loan loss provision (22,595) (19,517) Amounts receivable from customers 64,182 58,450 Analysed as -due within one year 44,375 42,456 - due in more than one year 19,807 15,994 64,182 58,4508. SHAREHOLDERS' FUNDS AND STATEMENT OF CHANGES IN EQUITY Called up Share Profit Total Share Premium and Loss Equity Capital Account Account The Group ‚£000 ‚£000 ‚£000 ‚£000 At 1 February 2004 Unaudited 1,467 2,136 26,429 30,032 Profit for year - - 6,631 6,631 Dividends - - (3,521) (3,521) At 1 February 2005 Unaudited 1,467 2,136 29,539 33,142 Actuarial gain on pension - - 14 14 Profit for year - - 6,337 6,337 Dividends - - (3,639) (3,639) At 31 January 2006 Unaudited 1,467 2,136 32,251 35,8549. DERIVATIVE FINANCIAL INSTRUMENTSThe group's activities expose it to the financial risks of changes in interestrates and the group uses interest rate derivative contracts to hedge theseexposures in accordance with the accounting policy noted in 2.4 above. A 5 yearhedge contract on ‚£20m of the group's borrowings was entered into on 20thSeptember 2005. The fair value of this contract at 31st January 2006 wasestimated to be a derivative liability of ‚£19,000. The contract is designatedand effective as a hedge. The charge of ‚£19,000 has been included withinfinance costs for the year (note 5).10. RECONCILIATION OF PROFIT BEFORE TAXATION TO NET CASH FROM OPERATING ACTIVITIES Unaudited Unaudited 2006 2005 ‚£000 ‚£000 Profit before taxation 9,124 9,550 Tax paid (2,074) (2,854) Depreciation on plant, property and 477 493equipment Loss on disposal of plant, property and 41 58equipment Increase in amounts receivable from (5,732) (5,975)customers Decrease in inventories 10 14 Decrease in trade and other receivables 98 87 Increase/(decrease) in trade and other (353) 32payables Increase in accruals and deferred income 70 439 Fair value movements on derivatives 19 - Decrease in retirement benefit (23) (65)obligations Net cash from operating activities 1,657 1,77911. RECONCILIATIONS BETWEEN IFRS AND UK GAAPa) ReclassificationsThe following reclassifications have been made within the income statement andthe balance sheet on transition from UK GAAP to IFRS;- Under UK GAAP preference share capital was shown as part of the issued sharecapital but under IFRS is now shown as a non current liability (see note e).- Under UK GAAP, excess depreciation on certain revalued properties was set offagainst a revaluation reserve. Under IFRS1 the group has elected to use therevalued amounts as the deemed cost of these properties and the balance on therevaluation reserve is transferred to accumulated profit and loss.- Under IFRS we have reanalysed deferred tax as a non current liability.Deferred tax at 30% has been provided on the net book value of those propertiesacquired as part of a business acquisition.b) Revenue and ImpairmentUnder UK GAAP credit charges were recognised on a received or receivable basisusing the sum of the digits method and acceptance fees in our car financebusiness were recognised upfront. Under IFRS, credit charges and acceptancefees are recognised in the income statement for all loans and receivablesmeasured at amortised cost using the effective interest rate method (EIR). TheEIR is the rate that exactly discounts estimated future cash flows of the loanback to the present value (the advance). Under IAS 39 credit charges on loanproducts continue to accrue at the EIR on all outstanding capital balancesincluding arrears throughout the life of the agreement irrespective of theterms of the loan and whether the customer is actually being charged arrearsinterest. This is referred to as the gross up adjustment to revenue and isoffset by a corresponding gross up adjustment to the impairment charge toreflect the fact that this additional revenue is not collectable.Under UK GAAP, a specific reserve being the difference between the carryingvalue of the debt and the expected actual cash flows was made on all debtswhich are considered doubtful. Under IFRS, debts are assessed for impairmentand the impairment charge to the income statement is then calculated byestimating the future cash flows for such impaired loans, discounting the flowsto a present value using the original EIR and comparing this figure with thebalance sheet carrying value.c) DividendsUnder UK GAAP dividends declared after the date of the balance sheet wererecorded in the balance sheet as at the balance sheet date. Under IFRS,dividends declared after the date of the balance sheet cannot be included as aliability at the balance sheet date.d) TaxThe tax asset derived from the IFRS adjustments above has been reclassified asdeferred tax, as opposed to current tax as disclosed in the interimannouncement of 6 October 2005, on the basis that the deductions are notcrystallised until the current year.e) Preference share capitalSince the interim announcement of 6 October 2005, in addition to thereclassification in point a) above, the preference share capital has beenincluded at transition at fair value. This has resultedin an increase in its value of ‚£1.44m and an equivalent decrease in profitand loss reserve.11. RECONCILIATIONS BETWEEN IFRS AND UK GAAP (CONTINUED)Income Statement Audited Reclassifications Revenue& Dividends Unaudited Impairment 31st January 2005 UK Gaap Note 11a Note 11b Note 11c IFRS ‚£'000 Revenue 36,363 14,349 50,712 Cost of sales (3,067) (19,898) (22,965) Gross Profit 33,296 (5,549) 27,747 Administrative (22,174) 5,495 (16,679)expenses Operating profit 11,122 (54) 11,068 Finance costs (1,364) (154) (1,518) Profit before 9,758 (154) (54) 9,550taxation Taxation (2,936) 17 (2,919) Profit for the 6,822 (154) (37) 6,631year 11. RECONCILIATIONS BETWEEN IFRS AND UK GAAP (CONTINUED)1st February 2004 Audited Reclassifications Revenue& Dividends Unaudited Impairment ‚£'000 UK Gaap Note 11a Note 11b Note 11c IFRS NET ASSETS Property plant 2,474 2,474and equipment Amounts 14,520 (704) 13,816receivable from customers Deferred tax 2,252 2,252asset Non current 16,994 1,548 18,542assets Inventories 105 105 Amounts 50,006 (11,347) 38,659receivable from customers Trade and Other 804 804Receivables Current Income 144 (53) 91tax assets Cash at bank and 10 10in hand Current assets 51,069 (53) (11,347) 39,669 Total assets 68,063 (53) (9,799) 58,211 Bank overdrafts (23,611) (23,611)and loans Trade and other (3,815) 88 2,465 (1,262)payables Tax liabilities (1,612) 1,363 (249) Accruals and (794) (794)Deferred Income Current (29,832) 88 1,363 2,465 (25,916)liabilities Retirement (88) (88)benefit obligation Deferred tax (86) (86)liability Financial (2,089) (2,089)liabilities Non current (2,263) (2,263)liabilities Total liabilities (29,832) (2,175) 1,363 2,465 (28,179) NET ASSETS 38,231 (2,228) (8,436) 2,465 30,032 Called up share 2,117 (650) 1,467capital Share premium 2,136 2,136account Revaluation 501 (501) -Reserve Profit and loss 33,477 (1,077) (8,436) 2,465 26,429account SHAREHOLDERS' 38,231 (2,228) (8,436) 2,465 30,032EQUITY 11. RECONCILIATIONS BETWEEN IFRS AND UK GAAP (CONTINUED)31st January 2005 Audited Reclassify Revenue & Dividends Unaudited Impairment ‚£'000 UK Gaap Note 11a Note 11b Note 11c IFRS NET ASSETS Property plant 2,357 2,357and equipment Amounts 16,758 (764) 15,994receivable from customers Deferred tax 2,169 2,169asset Non current 19,115 1,405 20,520assets Inventories 91 91 Amounts 53,799 (11,343) 42,456receivable from customers Trade and Other 717 717Receivables Current Income 123 (58) 65tax assets Cash at bank and 14 14in hand Current assets 54,744 (58) (11,343) 43,343 Total assets 73,859 (58) (9,938) 63,863 Bank overdrafts (5,791) (5,791)and loans Trade and other (3,900) 23 2,583 (1,294)payables Tax liabilities (1,674) 1,464 (210) Accruals and (1,233) (1,233)Deferred Income Current (12,598) 23 1,464 2,583 (8,528)liabilities Bank loans (20,000) (20,000) Retirement (23) (23)benefit obligation Deferred tax (81) (81)liabilities Financial (2,089) (2,089)liabilities Non current (20,000) (2,193) (22,193)liabilities Total liabilities (32,598) (2,170) 1,464 2,583 (30,721) NET ASSETS 41,261 (2,228) (8,474) 2,583 33,142 Called up share 2,117 (650) 1,467capital Share premium 2,136 2,136account Revaluation 496 (496) -Reserve Profit and loss 36,512 (1,082) (8,474) 2,583 29,539account SHAREHOLDERS' 41,261 (2,228) (8,474) 2,583 33,142EQUITY 12. RESTATEMENT OF CONSOLIDATED CASHFLOW STATEMENT ON ADOPTION OF IFRSThe presentation of the cashflow statement as specified by IAS 7 differs fromUK GAAP requirements. A number of items have been reclassified, but there is noimpact on cashflows. There is no change to the level of cash and cashequivalents at either the start or end of the year.13. NON STATUTORY FINANCIAL INFORMATIONKey ratios have been calculated as follows:"Return on capital employed" is calculated as Operating Profit divided by thesum of Total Equity plus Bank Overdrafts plus Bank Loans and FinancialLiabilities (both as disclosed within Non Current Liabilities)."Group Gearing" is calculated as the sum of Bank Overdrafts plus Bank Loans (asdisclosed within Non Current Liabilities) divided by Total EquityENDS & U PLC