Headlam Group
Annual Report 2005

Plain-text annual report

Europe’s leading floorcovering distributor Annual Report and Accounts 2005 Headlam has a clear and focused strategy based on the creation of a diverse and autonomous structure. The group operates through 46 separate businesses in the UK and a further three in Continental Europe. A key factor contributing to the group’s success is the individuality of experienced management teams who are responsible for the market presence, development and ultimate profitability of their businesses. Each business is supported by the commitment to continued investment in people, product, facilities and IT. This commitment has provided the basis for the group’s growth and subsequent performance enabling it to develop into Europe’s leading floorcovering distributor. 02 Market Presence 10 14 20 24 25 26 28 31 38 45 Chairman’s Statement Chief Executive’s Review Financial Review Directors, Officers and Advisers Financial Calendar Directors’ Report Corporate and Social Responsibility Corporate Governance Remuneration Report Statement of Directors’ Responsibilities 46 47 48 Independent Auditors’ Report to the Members of Headlam Group plc Consolidated Income Statement Statement of Recognised Income and Expense Balance Sheets Cash Flow Statements Notes to the Financial Statements 49 51 52 109 Principal Trading Subsidiaries 110 Financial Record 111 Notice of Annual General Meeting Financial Highlights Financial Highlights Sales (£m) Operating Profit (£m) Earnings Per Share (p) Proposed Dividends (p) * not restated for IFRS 487 465 434 412 396 01 * 02 * 03 * 04 05 41.5 38.9 32.1 30.4 33.5 01 * 02 * 03 * 04 05 33.1 31.3 27.3 23.3 24.4 01 * 02 * 03 * 04 05 18.0 16.25 13.85 12.55 11.40 01 * 02 * 03 * 04 05 Headlam Group plc Annual Report and Accounts 2005 01 +4.7% +2.6m +5.8% +10.8% 02 Headlam Group plc Annual Report and Accounts 2005 Market Presence The UK operating structure incorporates 46 individual businesses located across 21 distribution centres. Of these, 25 are multi-product distribution businesses that trade on a regional basis. Six of the businesses provide national multi-product distribution whilst the remaining 15 are suppliers of specific types of floorcovering that target particular sectors within the residential and commercial markets. Our business in France operates from two distribution centres and 20 service centres and the businesses in Switzerland and the Netherlands each operate from a single distribution centre. All three businesses on the Continent offer an extensive range of floorcovering products providing full national coverage across their respective countries. Market Presence Headlam Group plc Annual Report and Accounts 2005 03 Regional Multi-product Distribution HFD 04 Headlam Group plc Annual Report and Accounts 2005 Market Presence (continued) Regional Multi-product Distribution MCD MCD MCD Market Presence Headlam Group plc Annual Report and Accounts 2005 05 National Multi-product Distribution Network 06 Headlam Group plc Annual Report and Accounts 2005 Market Presence (continued) National Residential and Commercial Specialist Products National Carpets Market Presence Headlam Group plc Annual Report and Accounts 2005 07 European Multi-product Distribution Lethem-Vergeer - The Netherlands La Maison du Sol - France Belcolor Flooring - Switzerland LMS Warehouses LMS Regional Service Centres 08 Headlam Group plc Annual Report and Accounts 2005 We are able to offer the independent floor covering retailer and contractor a huge breadth of product including the latest trends and innovations. The Year in Review Headlam Group plc Annual Report and Accounts 2005 09 Our businesses have clearly focused market objectives across a broad range of floorcovering products and are supported by comprehensive stockholdings. 10 Headlam Group plc Annual Report and Accounts 2005 Chairman’s Statement The group has had another successful year despite more difficult market conditions in 2005. The group's revenue and profit for the year were another record, with improvements being achieved across all sections of the business. Revenues from the group’s activities amounted to £486.6 million, an increase of 4.7% on last year, and profit before tax increased by 6.0% to £40.8 million. Earnings and dividend Basic earnings per share increased by 5.8% from 31.3p to 33.1p. The board is recommending a final dividend of 13.60p per share, an increase of 11.0% on last year. This increases the total dividend for the year by 10.8% from 16.25p to 18.00p. If approved, the final dividend will be paid on 3 July 2006 to shareholders on the register at 9 June 2006. Operations We have continued with our strategy of businesses operating autonomously to maximise market presence. We now have 46 businesses operating from 21 distribution centres in the UK and whilst enjoying this individuality, all the businesses operate to a defined strategy and comply with consistent reporting procedures. These businesses have clearly focused market objectives across a broad range of floorcovering products and are supported by comprehensive stockholdings. This ensures that we have strong long-term relationships with the leading floorcovering manufacturers and most importantly, offer the independent floorcovering retailer and contractor a huge breadth of product, including the latest trends and innovations. During the year, we completed the construction of the distribution facility in Tamworth at a cost of £5.2 million bringing the total amount invested on this facility to £13.9 million. Construction also commenced on the new purpose built freehold facility for our Wilkies business based in Leeds. During 2005, we invested £2.0 million and a further £9.4 million will be expended before the site becomes operational during the autumn of 2006. to retire from the board which I shall do at the conclusion of the forthcoming AGM. Graham Waldron, who has a wealth of experience in the floorcovering industry, will continue to guide the strategy of the group in an executive capacity and following my retirement, be appointed Chairman. I am pleased to have welcomed in recent months Dick Peters and Mike O'Leary to the board as non-executive directors, both of whom I expect will make positive contributions to the future growth and development of the group. It is with much sadness that I record the death of Roger Dickens in January 2006 and we send our sincere sympathy to Lainey Dickens and family. Roger was a highly respected member of our board and we have lost a valued colleague and friend. We shall miss him. Employees The group has great strength in its management teams across the whole business. It has been a particular pleasure to see how this has developed over the twelve years I have been a director. The group's performance reflects the commitment, dedication and efforts of our employees in providing the services given to our customers. The board wishes to record its thanks to all our employees for their hard work and continued customer service. Outlook The group’s structure and strategy of autonomous sales and marketing activities with common operational and financial disciplines is firmly established. This allows the individual businesses to optimise their relationship with suppliers and customers. With the benefit of these activities, our businesses in the UK and Continental Europe have made a positive start to 2006 and we believe the group is well positioned to achieve its objectives for the year. The Board I have now completed twelve years as a non-executive director of Headlam, the past six as Chairman and the time has come for me Trevor Larman, Chairman The Year in Review Headlam Group plc Annual Report and Accounts 2005 11 Our businesses in the UK and Continental Europe have made a positive start to 2006 and we believe the group is well positioned to achieve its objectives for the year. Trevor Larman, Chairman 12 Headlam Group plc Annual Report and Accounts 2005 We continue to invest in the latest order processing technology to help service our customers requirements. The Year in Review Headlam Group plc Annual Report and Accounts 2005 13 We are committed to offering our customers a comprehensive product range with stock levels to service their demand. 14 Headlam Group plc Annual Report and Accounts 2005 Chief Executive’s Review We are very pleased with the performance of the group in 2005. The UK businesses produced a particularly positive result following the significant growth in 2004. These businesses were able collectively to increase sales by 2.4% on a like for like basis, in more difficult market conditions and therefore established a further increase in our market share. The businesses are defined into four specific sectors. Regional multi-product: we have 25 businesses that operate regionally from their distribution facility, supplying floorcovering across all of our product categories. These businesses increased their sales by 1.9% and contribute 68% of UK turnover. The Continental European businesses in France, Switzerland and the Netherlands continue to improve their sales and profitability. National multi-product: Mercado through its six business identities and extensive product range was again able to improve its market position. UK operations The success of the UK businesses is established through the autonomous sales and marketing activities of 46 businesses operating from 21 distribution facilities. The experienced managers of these businesses continually work with the world’s leading floorcovering manufacturers to develop and launch new products. We have 297 employed external sales people who position these new products with independent flooring retailers and contractors, ensuring that our customers are at the forefront of all product innovation. These sales people subsequently maximise the market presence of their individual businesses and the group as a whole. It is fundamental to the group strategy and culture that whilst encouraging this sales and marketing autonomy, each of the businesses operate from an identical IT platform and comply with standard operational and financial disciplines. Residential specialist: we enjoyed significant growth within the 12 businesses specialising in middle to high price carpet products, increasing their sales by 41% and now contributing 11% of UK turnover. Commercial specialist: our three businesses increased sales by 2.8% and are now able to take full advantage of increased capacity following their relocation to the new facility in Tamworth. Customers Our customers, principally independent floorcovering retailers and contractors, continued to prosper. The group’s ongoing growth reflects the market presence of our active accounts which total 35,748. The Year in Review Headlam Group plc Annual Report and Accounts 2005 15 The experienced managers of our businesses continually work with the world’s leading floorcovering manufacturers to develop and launch new products. Tony Brewer, Group Chief Executive Business Sectors Proportion by Product Regional Multi-product (68%) National Multi-product (16%) Residential Specialist (11%) Commercial Specialist (5%) Carpet (50%) Vinyl (13%) Laminate & Wood (5%) Accessories (6%) Contract (26%) 16 Headlam Group plc Annual Report and Accounts 2005 Chief Executive’s Review (continued) Products Total carpet sales, which represent 50% of UK turnover, increased by 4%. This increase was aided by the launch of 2,486 new ranges, established in our customers through 626,482 point of sale items. Residential vinyl increased by 6%, supported by 693 new products marketed through 167,360 displays and samples. Wood and laminate products saw a small decline in sales, however this performance improved during the latter part of 2005. All residential product categories including wood and laminate have seen an improving sales trend during the first three months of 2006. As planned, our stock increased during the year with the enlarged capacity at Tamworth and Coleshill, in addition to the extension to our facilities at Thatcham and Stockport. This further demonstrates our commitment to our customers to offer a comprehensive product range with stock levels to service their demand. Construction is now underway for the 105,000 square feet purpose built freehold distribution facility for Wilkies, our regional multi-product business based in Leeds. This will be completed in the autumn of this year, enabling Wilkies to develop further its residential and commercial business in the north of England. Sales in the contract sector which represent 26% of UK turnover, showed strong growth of 8%. During the second half of 2005 and the first quarter of 2006, we have invested in additional sales people in order to enhance our market position and subsequently accelerate our sales growth in the contract sector. The strong cash generation by our operations allows continued investment to strengthen further the group’s position. We have other projects at various stages of the planning and development process, to ensure that the group remains the leader in European floorcovering distribution. Investments The new purpose built freehold distribution facility in Tamworth became fully operational during the year and also allowed us to move four businesses from Coleshill, therefore releasing capacity in the Coleshill distribution facility. Europe It is very encouraging to see our Continental European businesses in France, Switzerland and the Netherlands continue to improve their performance. This has been achieved consistently over the last four years. Market conditions and The Year in Review Headlam Group plc Annual Report and Accounts 2005 17 Outlook The first 12 weeks of 2006 have shown a positive sales trend throughout our businesses in both the UK and Continental Europe. Each of our businesses are clearly focused on maximising their individual market presence and with the contribution from all of these initiatives, we look forward to achieving another successful year. Tony Brewer, Group Chief Executive business development opportunities give every confidence that these businesses can continue to grow their sales and profitability over the coming years. Acquisitions During 2005 we acquired the businesses of Clarendon Carpets and Gaskell Wool Rich. We are currently investing in the sales and marketing of new products for both of these businesses along with the Gaskell Wool Rich brand of Mr Tomkinson Carpets and expect to enhance their performance during 2006. We continue to evaluate other acquisition opportunities, both in the UK and Continental Europe and with a cautious approach, we would expect to further enlarge the number of business activities. Information Technology LMS, our French business with two warehouses and 20 regional facilities, was successfully converted onto our common IT platform in January 2006. This completes the process that all of our businesses in the UK and Continental Europe now operate on the same IT system. This reflects the group policy of allowing sales and marketing autonomy with identical operational and financial controls. 18 Headlam Group plc Annual Report and Accounts 2005 During the year the extensions to our facilities at Thatcham and Stockport and our new distribution facility in Tamworth all became fully operational. The Year in Review Headlam Group plc Annual Report and Accounts 2005 19 Strong cash generation allows continued investment to ensure the group remains the leader in European floorcovering distribution. 20 Headlam Group plc Annual Report and Accounts 2005 Financial Review International Financial Reporting Standards Following a change in regulations, the group is reporting its financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. The group formerly reported its results under UK Generally Accepted Accounting Principles (UK GAAP). The results for 2005 comply with these new requirements and the accounting policies adopted under IFRS have been used to restate the comparative information for the year ended 31 December 2004. Both the group and the company are preparing their financial statements in accordance with IFRS for the first time and consequently both have applied IFRS 1. An explanation of how the transition to IFRS has affected the reported financial performance, financial position and cash flows of the group is provided in note 33. In addition to exempting companies from the requirement to restate comparatives for IAS 32 and IAS 39, IFRS 1 grants certain exemptions from the full requirements of IFRS in the transition period. The following exemptions have been taken in these financial statements: Business combinations – Business combinations that occurred prior to 1 January 2004 have not been restated. Properties - Both the group and the company have elected to restate the carrying value of freehold and long leasehold properties as at 1 January 2004 to historical cost. Previously, properties were stated at a combination of historical cost and market value. Employee benefits – All cumulative actuarial gains and losses on defined benefit plans have been recognised in equity at 1 January 2004. Cumulative translation differences – Cumulative translation differences for all foreign operations have been set to zero at 1 January 2004. Any gains and losses arising in the income statement on the subsequent disposal of an overseas subsidiary undertaking will only include those exchange gains or losses arising from the date of transition. Share based payments – IFRS 2 - Share based payments, has been applied only to grants of equity settled share based payments made after 7 November 2002 that had not vested by 1 January 2005. Following initial adoption, the group has taken the option not to comply with the hedge accounting requirements of IAS 39. Consequently, all movements in the fair value of the hedge are recognised immediately in the income statement, within net financing costs. A summary of the differences arising from the change to IFRS compared with the reporting basis used prior to the introduction of IFRS are shown below for the consolidated income statement and balance sheet. Consolidated income statement for year ended 31 December 2005 £000 2004 £000 Profit before goodwill amortisation and taxation – previous reporting basis Intangibles amortisation Retirement benefit obligation Share based payments Property leases Additional depreciation on revalued properties 42,279 (836) (463) (196) (3) 59 39,259 (836) 62 (57) (3) 59 Profit before tax – IFRS 40,840 38,484 Balance sheet at 31 December Net assets – previous reporting basis Intangibles amortisation Goodwill Retirement benefit obligation Deferred taxation Revaluation reserve Property leases Dividends Cash flow hedging 2005 £000 2004 £000 (1,672) 1,050 140,910 126,868 (836) 918 (20,886) (17,853) 6,322 (6,975) (42) 13,958 — 7,828 (6,916) (46) 15,572 (13) Net assets – IFRS 135,827 122,360 The Year in Review Headlam Group plc Annual Report and Accounts 2005 21 The group’s operating profit increased by 6.7% from £38.9 to £41.5 million with the UK and Continental European businesses achieving increases of 8.0% and 5.6% respectively. Stephen Wilson, Group Finance Director 22 Headlam Group plc Annual Report and Accounts 2005 Financial Review (continued) Overall, the effects of the change on profit before tax have not been significant. For 2005, profit before goodwill amortisation and taxation, derived on the basis used for previous reporting, reduced by £1,439,000 or 3.4%. The equivalent adjustment for 2004 was a reduction in profit before goodwill amortisation and taxation of £775,000 or 2.0%. As with the income statement, the overall effect on net assets arising from the adoption of IFRS, has not been particularly significant. Net assets derived from the previous reporting basis reduced by £5,083,000 in 2005 and £4,508,000 in 2004. Trading performance Group revenues increased during the year by 4.7% from £464.8 million to £486.6 million. Like for like improvement from the UK businesses amounted to 2.4% whilst the Continental European businesses achieved a collective like for like increase of 3.6% or 3.0% at constant rates of exchange. Further contributions to revenue for 2005 were made by National Carpets and Kingsmead, the two businesses acquired during 2004 but registering their first full year results during 2005 and Clarendon and Gaskell Wool Rich acquired during 2005. The group’s operating profit increased by 6.7% from £38.9 million to £41.5 million with the UK and Continental European businesses achieving increases before unallocated corporate expenses of 8.0% and 5.6% respectively. At constant rates of exchange, the increase for Continental Europe was 5.0%. Financial income and expense The components of financial income and expense are as follows: Financial income Bank interest Other interest received Return on defined pension plan assets Financial expense Bank loans, overdrafts and other financial expenses Interest on defined benefit pension plan obligation Finance leases Net financing costs 2005 £000 1,329 87 2,477 2004 £000 886 141 2,273 3,893 3,300 (1,503) (997) (2,987) (61) (2,654) (89) (4,551) (3,740) (658) (440) Net financing costs excluding net expenses relating to the defined benefit pension plans increased from £59,000 to £148,000 mainly as a consequence of increased investment in inventory during 2005. Net finance expense relating to the pension plans was higher during the year, rising from £381,000 to £510,000, because of the net increase in the employee benefits liability. Taxation The effective rate of taxation reduced to 30.2% compared with 30.5% for the previous year. The rate reflects the group’s current mix of business and it is anticipated that the effective tax rate should remain at around these levels for the foreseeable future. Employee benefits During the year, the net deficit relating to the defined benefit pension plans, as measured under IAS 19 – Employee benefits increased by £2.1 million from £18.4 million to £20.5 million. The deficit relates to the following: UK plan French retirement indemnity premium £000 (20,226) (286) (20,512) The Year in Review Headlam Group plc Annual Report and Accounts 2005 23 Whilst the UK plan asset base has benefited from the recent revival in the value of equities, the plan liabilities have increased at a faster rate because of the decline in bond yields. During the year, the UK plan actuary completed the triennial actuarial valuation of the UK defined benefit pension plan. The net deficit, as at 31 March 2005, amounted to £13.1 million. The principal differences between the IAS 19 deficit and the actuarial valuation are as follows: Actuarial valuation Investment returns Variation in assumptions relating to discount rates Death in service liability Other factors IAS 19 deficit £000 (13,100) 4,500 (11,700) (1,000) 1,074 (20,226) As already commented on in the Chief Executive’s Review, the additional net investment in working capital this year was due to the inventory investment required to support the additional capacity available from the new and extended facilities. This additional inventory investment amounted to £9.0 million. Cash flows from investing activities Net cash outflows from investing activities totalled £9.5 million compared with £16.8 million during 2004. The year on year reduction was attributable to lower levels of expenditure on acquisitions and investment in property, plant and equipment. For 2006, gross investment on property, plant and equipment is forecast to increase to approximately £15.3 million. Changes in net funds Group net funds remained virtually unchanged compared with 2004 at £35.5 million. Stephen Wilson, Group Finance Director Following final determination of the valuation, the company and trustees of the UK plan discussed a number of alternatives to assist with mitigating the cost of the plan. However, it was decided that these alternative arrangements would penalise the active members who currently represent 18% of total plan membership. The company has elected to maintain its commitment to the plan and in order to discharge the deficit, agreed to pay additional contributions. The additional contributions are intended to remove the deficit over 15 years, a period that equates with the average remaining working life of active plan members and will be subject to review every three years at the time the plan actuary completes the plan valuation. Additional contributions during 2005 amounted to £722,000. These additional amounts to be paid in 2006 will total £1,080,000 and contributions will increase at the rate of salary inflation thereafter. CASH FLOWS AND NET FUNDS Cash generated from operating activities Net cash generated from operating activities was £22.7 million, a decrease of £10.1 million compared with last year. The main reason for this decline was the net investment in working capital in 2005 of £10.7 million compared with a net cash release from working capital in 2004 of £2.7 million. 24 Headlam Group plc Annual Report and Accounts 2005 Directors, Officers and Advisors BOARD OF DIRECTORS T G Larman ◆●■ Non-executive Chairman Trevor was appointed a non-executive director in March 1994 and became Chairman on 1 January 2000. He was formerly the Finance Director of NFC plc (now Exel plc). He is a fellow of the Institute of Chartered Certified Accountants and a fellow of the Association of Corporate Treasurers. Age 60. A J Brewer ■ Group Chief Executive Tony was appointed an executive director in June 1991, becoming Managing Director of the Floorcoverings Division in January 1992, and was appointed Group Chief Executive in November 2000. He has 28 years experience in the floorcovering industry. Age 45. G Waldron ❉ Executive Director Graham was appointed an executive director in June 1991. He is the non-executive Chairman of Tandem Group plc. He has 53 years experience in the floorcovering industry. Age 75. S G Wilson Group Finance Director Steve was appointed Group Finance Director in December 1991. He is the non-executive Chairman of Synergy Healthcare plc and is a fellow of the Institute of Chartered Accountants. Age 51. T J Anderson ◆●■ Non-executive Director Tom was appointed a non-executive director in August 1998 and has chaired the Remuneration Committee since December 1998. He was formerly a non-executive director of Azlan Group PLC and a group general manager of Electrocomponents Plc. He is a chartered engineer and a member of the Institute of Electrical Engineers. Age 67. R J Dickens, CBE, DL ◆●■ Non-executive Director Roger was appointed a non-executive director in February 2004 and chaired the Audit Committee since March 2004. Age 58. Sadly Roger passed away on 29 January 2006. R W Peters ◆●■ Non-executive Director Dick was appointed a non-executive director in December 2005. He was formerly Senior Partner for the East Midlands practice of Deloitte & Touche in Nottingham. He is a BSc in Mathematics and Statistics and is a fellow of the Institute of Chartered Accountants. Age 51. A R Judge ▲ Managing Director, Coleshill and Tamworth businesses Tony joined the company in May 1992 and is Managing Director of all businesses operating from the Coleshill and Tamworth distribution centres. Tony has 25 years experience in the floorcovering industry. Age 41. M K O’Leary ◆●■ Non-executive Director Mike was appointed a non-executive director in March 2006. He has more than twenty years of public company board experience, focused primarily in the technology sector. He spent 14 years in helping to build Misys into a global FTSE 100 company following its initial public offering in 1987 and has also served as Chief Executive at Marlborough Stirling, a FTSE 250 outsourcing business. Mike has worked in domestic and international markets and brings a wealth of general management experience to the company. Age 53. G M Duggan Company Secretary Geoff joined the company in April 1998. He is an associate of the Institute of Chartered Secretaries and Administrators and a fellow of the Chartered Institute of Management Accountants. Age 45. ◆ Audit committee ● Remuneration committee ■ Nomination committee ▲ Executive management ❉ Charities committee EXECUTIVE MANAGEMENT A J W Simpson ▲ Managing Director UK Operations Andrew joined the company during September 1991 and is the Managing Director of UK Operations. Andrew has 33 years experience in the floorcovering industry. Age 53. G B Phillips ▲ Finance Director Operations Gary joined the company in June 1992 and is the Finance Director of floorcovering operations. He is an associate of the Chartered Institute of Management Accountants. Age 42. K R Yates ▲ Managing Director, Mercado Keith joined Mercado in April 1983 and was subsequently appointed its Managing Director in 1996. Keith has 23 years experience in the floorcovering industry. Age 50. ADVISERS Auditors KPMG Audit Plc 2 Cornwall Street Birmingham B3 2DL Taxation Advisers Deloitte & Touche Four Brindleyplace Birmingham B1 2HZ Principal Bankers Barclays Bank PLC PO Box 34 15 Colmore Row Birmingham B3 2BY The Royal Bank of Scotland plc Corporate and Institutional Banking 5th Floor, 2 St Philips Place Birmingham B3 2RB Solicitors Eversheds 115 Colmore Row Birmingham B3 3AL Stockbrokers Arden Partners Limited Arden House 17 Highfield Road, Edgbaston Birmingham B15 3DU Registrars Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield HD8 0LA Accounts Headlam Group plc Annual Report and Accounts 2005 25 Financial Calendar Group Results Annual General Meeting Interim results announced Full year results announced Dividend Dates Final dividend for 2005, if approved, payable to qualifying shareholders on the register as at 9 June 2006 Interim dividend for 2006 announced Interim dividend for 2006 payable 1 June 2006 September 2006 March 2007 3 July 2006 September 2006 January 2007 26 Headlam Group plc Annual Report and Accounts 2005 Director’s Report The directors present their annual report and the audited financial statements for the year ended 31 December 2005. Roger Dickens sadly passed away on 19th January 2006. Directors The names of the directors of the company at the date of this report and biographical details are given on page 24. A complete list of directors who served during the year is shown within the remuneration report on page 41. No other person has acted as a director of the company during the financial year ended 31 December 2005. Details of directors’ service contracts are given in the report on corporate governance. The company’s articles require that one third of the directors retire by rotation each year. Accordingly, the directors retiring by rotation at the forthcoming Annual General Meeting (“AGM”) are Graham Waldron and Tony Brewer, both of whom, being eligible, offer themselves for re-election. The ordinary resolution for the re-election of Graham Waldron will expire at the conclusion of the next AGM. Dick Peters was appointed to the board on 1 December 2005 and, in accordance with the company’s articles of association, offers himself for election at the forthcoming AGM. Dick has recently retired as the Senior Partner for the East Midlands practice of Deloitte & Touche based in Nottingham. He has considerable experience of auditing large companies, both UK and overseas, transactional support and project management activities and the board believes that his business knowledge and considerable financial and management expertise will be a positive contribution as the group continues to develop. In accordance with the recommendations of the Combined Code relating to non- executive directors, the board believes that Dick Peters should be elected and makes such a recommendation to shareholders. Mike O’Leary was appointed to the board on 10 March 2006 and in accordance with the company’s articles of association, offers himself for election at the forthcoming AGM. Mike has more than twenty years of public company board experience, focused primarily in the technology sector. He has worked in domestic and international markets and brings a wealth of general management experience to the company. In accordance with the recommendations of the Combined Code relating to non-executive directors, the board believes that Mike O’Leary should be elected and makes such a recommendation to shareholders. Trevor Larman retires from the board at the conclusion of the forthcoming AGM having completed twelve years as a non- executive director, at which time he will be succeeded in the short term by Graham Waldron. It had been the board’s intention that Roger Dickens succeed Trevor however this sadly was not possible. We are actively seeking to appoint an additional non- executive director and would hope to be able to announce a successor to Graham in the next twelve months. Graham has extensive experience in the flooring industry and has guided the company for many years, serving as Chairman from 1991 until 2000 when Trevor was appointed. Graham will not be joining the various committees of the board and will not participate in any bonus or share option schemes. No director had, at any time during the period under review, a material interest in any contract with the company or any of its subsidiaries. Directors’ interests in the company’s shares are shown on pages 42 and 43. Principal activity The group’s activities are wholly aligned to the sales, marketing, supply and distribution of floorcovering products. The principal subsidiary undertakings are listed on page 109. Review of the business A review of the group’s trading operations and future developments is contained in the Chairman’s Statement, the Group Chief Executive’s Review and the Financial Review on pages 10 to 23. Dividends An interim dividend of 4.4p per share (2004: 4.00p) was paid on 3 January 2006 and your board is recommending a final dividend of 13.60p per share (2004: 12.25p), making a total dividend of 18.00p per share for the year (2004: 16.25p). The final dividend, if approved by shareholders at the AGM, will be payable on 3 July 2006 to shareholders whose names appear on the register at the close of business on 9 June 2006. Accounts Headlam Group plc Annual Report and Accounts 2005 27 Director’s Report continued Supplier payment policy The group’s policy with regard to the payment of suppliers is to agree the terms of payment as part of the conditions of supply of goods and services. The group seeks to strictly comply with these payment terms whenever it is satisfied that the supplier has provided the goods and services in accordance with the agreed terms and conditions. The payment policy has been and will continue to be developed to meet the group’s specific requirements and is not based on any particular code or standard relating to payment practice. The number of creditor days of the company at 31 December 2005 was 41 days (2004: 41 days). Employment, training and development The group remains committed to providing a workplace that is safe and environmentally sound and which complies with applicable laws and regulations. The group expects employees to respect confidential information and company time and assets and believes in open and honest communication, fair treatment and equal opportunities. The group supports the fundamental principles of good governance. It is the group’s policy that employment opportunities, training, career development and promotion should be available to all, irrespective of age, gender, ethnic origin, religion or disability. Due consideration is given to applications for employment, having regard to the particular aptitudes and abilities of the applicants. Any employee who develops a disability during employment is given the opportunity to retrain for alternative employment where practicable, given the nature of the group’s activities. The group’s human resources policies are available to all staff and include guidance on employment matters, ethics, equal opportunities, staff benefits and training and development. It is the group’s continued practice to maintain employee participation and involvement in matters which affect their interests. The group places considerable value on the involvement of its employees and has continued to keep them informed on matters affecting them as employees and on the various factors affecting the performance of the group. This is achieved through formal and informal meetings and through the annual and interim financial statements. Employee representatives are consulted regularly on a wide range of matters affecting their current and future interests. The directors encourage employee interest in the group’s performance through the executive and savings related share option schemes. Employee turnover remains low and as a result the employee base remains stable. The group is firmly committed to developing the potential of its people and regularly reviews its succession planning processes. Recruitment, training and development is designed to ensure the group has suitably skilled and qualified employees to meet the operational needs of the business and offer the opportunity for employees to develop and grow. Training is delivered primarily through internal resources with assistance from external providers on specialist subjects as and when required. The group considers it important that its employees provide for their retirement and accordingly provides opportunities for them to participate in retirement programmes. Health and safety The group monitors its health and safety processes and seeks to make continual improvements. The group provides guidance and solutions to the operating businesses on all aspects of health and safety and serves to strengthen further the health and safety culture within the group. The system sets and closely monitors the achievement of standards for health and safety on all sites and during the year the average performance exceeded the benchmark standard set by the group. The board is committed to ensuring that the group’s activities are carried out in accordance with relevant statutory provisions and all reasonable and appropriate measures are taken to avoid risk to employees or others who may be affected. Whilst management is committed to providing a safe working environment with the appropriate working practices and training, this can only be achieved if employees equally give their commitment to a rigorous health and safety culture. The group continues to improve its health and safety performance with a reduction in reportable accidents and dangerous occurrences to the Health and Safety Executive. There were no prosecutions for breaches of health and safety in the year and furthermore, there were no fatalities. 28 Headlam Group plc Annual Report and Accounts 2005 Director’s Report continued Corporate and Social Responsibility Introduction This is the first year that we have formally reported on our environmental and social responsibility performance. Whilst we have not previously highlighted these aspects of the business, we have had a management structure in place for many years that allows the consideration of social and environmental factors by both individual businesses within the group and also at a group level. Our links with external stakeholders continue to grow including improved customer liaison and community involvement. We monitor our performance against objectives with the aim of continual improvement. In addition to improvements in respect of environmental and social responsibility performance, we have continued to make positive moves in waste and energy management, supply chain accountability, sustainable development, health and safety and staff development and welfare. Our policy Our policy sets out the framework for the development and implementation of corporate social responsibility activities across the group. We will conduct all our business activities in a fair and balanced manner, respecting and responding to legal, social and ethical issues arising from our commercial activities. We are committed across the group to continued progress in the following areas: • improving the quality of our products, processes and services. • becoming an employer of choice. • improving our health and safety performance. • working with the local communities around our businesses. • protecting the environment. • achieving sustained growth and profitability. These areas reflect our main responsibilities as the leading European floorcovering distributor. They will be widened to encompass other stakeholders as our corporate and social responsibility programme develops. Improving the quality of our products, processes and services We aim to increase awareness and communication of the environmental strategy and commitments through a programme of employee training. We work with our main suppliers to improve working practices and the environmental management of our supply chain, although we recognise that many of our main suppliers already work to exacting standards. We seek to improve in these areas and would comment on our commitment as follows: • increase the use of environmental specification. • increase the volume of certified sustainable natural products. • reduce the amount of CO2 emissions. • reduce fuel consumption and vehicle emissions. • reduce the amount of waste sent to landfill. • increase recycling rates. • reduce the amount of packaging. • increase the use of green energy. • reduce water consumption. • encourage the use of whole life cost assessments. • encourage pollution prevention initiatives. We seek to reduce energy and water consumption through the development of an awareness programme communicated to employees, the introduction on repair, renewal or installation of energy or water efficient techniques and equipment. We continue to invest in the commercial and private vehicles that we operate replacing them every five and three years respectively, so improving operational efficiencies and reducing operating costs and vehicle emissions. Our operations predominantly create waste materials in the form of protective plastic wrapping, cardboard and wooden pallets. We aim to collect the plastic and cardboard in discreet types and, with the use of baler units that we have invested in over the last few years, despatch these to specialist re-processing agents. Wooden pallets are re-cycled where possible or sent to specialist re-processors. In addition we recycle the cardboard poles that are used in the centre of rolls of carpet and vinyl until they are no longer capable of being re-used. In these ways we seek to reduce the amount of waste that is sent to landfill sites. Guidance on waste management is issued to the managers of the individual businesses to increase awareness of the need to control waste. Accounts Headlam Group plc Annual Report and Accounts 2005 29 Director’s Report continued Corporate and Social Responsibility – continued We continue to work with our suppliers to improve the re-cycling content of packaging materials and consequently reduce our packaging waste. Becoming an employer of choice At the heart of the group are our people who seek to deliver their best for the business, which combined with a fair and responsive way of doing business, generates a common ambition to add significant value. Our policy towards employees is set out above in the section on employment, training and development. Improving our health and safety performance The group attaches great significance to the management of the health, safety and welfare of both its employees and others. To this end we have adopted a policy that is available for inspection at all operating locations and which is reviewed on a regular basis. The board has put in place policies that seek to ensure that group operations are carried out at all times in such a manner as to ensure, so far as it is reasonably practicable, the health and safety at work of employees and all persons likely to be affected, including other contractors, clients, staff and members of the public where appropriate. The value of employee participation in delivering this commitment is recognised and management teams are encouraged to create a supportive culture. To achieve this we endeavour to ensure that: Protecting the environment We have a structure in place that facilitates the pooling of information and resources to ensure best practice is shared across the group. In recognising our responsibility to protect the environment we have adopted an environmental policy which is reviewed periodically. Our policy seeks to cover the various aspects that affect our businesses, including the following: • maintaining a management framework for implementing the environmental policy objectives into business decision making, alongside commercial, safety and other factors. • complying with applicable environment legislation, regulations and standards. • developing operational procedures designed to minimise pollution risks and to deal effectively with any incidents which occur. • taking positive action to minimise waste and to encourage recycling wherever practical. • improving efficiency in the use of facilities, energy, water and raw materials. • working with our advisors, suppliers and sub-contractors to ensure effective environmental supply chain management, alongside quality, price and other purchasing criteria. • reducing the environmental impact of our products through improved design and specification. • training employees to enhance their awareness of, and commitment to, maximising environmental performance. • reviewing the group’s environmental policy periodically to take • We continue to improve health and safety systems, procedures account of organisational, legislative and fiscal changes. and guidance. • Personnel are aware of this policy. • We maintain high standards of health and safety. • A consistent reporting structure is maintained. • Adequate resources are provided. Further details are given above in the section on health and safety. Working with the local communities around our businesses. We recognise that our business should be conducted in a socially as well as environmentally responsible way. Listening to and learning from what our customers, employees, suppliers and other stakeholders tell us about what is important to them is a feature of how we work. It has helped us keep in touch with what is happening in the markets in which we operate. We are committed to managing the social responsibilities connected with our business in an open and honest way. The group seeks to improve its environmental performance and to minimise the impact of its operations. Achieving sustained growth and profitability Whilst achieving the groups goal of sustained growth and profitability in future years, there are a number of key areas which will assist in attaining the financial objectives at the same time as meeting our corporate social responsibility obligations. Through improving our understanding and control of our supply chain, we shall be investigating the benefits from using green specification guides and developing an appropriate strategy. We shall continue to work with suppliers to ensure products are supplied from renewable sources and that their manufacturing processes fairly reward employees and do not seek to exploit. We shall continue to work with our suppliers to investigate the potential for improvements in product design. 30 Headlam Group plc Annual Report and Accounts 2005 Director’s Report continued Corporate and Social Responsibility – continued We place great importance on effectively managing our operations to minimise the likelihood of adverse impact. We pro-actively manage our facilities to minimise energy consumption utilising energy efficient lighting and heating. Our new sites are subjected to an environmental assessment prior to any construction taking place. This allows solutions to any identified environmental issues to be incorporated into the planning process. Recognising that development can be potentially damaging, we seek to minimise energy consumption during the construction of new premises and the effects on the environment. Wherever possible, subject to the operating constraints of the business, existing trees and vegetation are retained and augmented as necessary. Existing sites are maintained in a tidy condition to minimise ecological impact. As part of our commitment to sustainable development we work with transport consultants to formulate green travel plans incorporating car sharing schemes and provision for bicycles when designing new facilities. We recognise that our business operations will be around for many years, having an impact on future generations, and to this end we work with local authorities to design new properties which not only comply with guidelines but seek to blend in with their surroundings through the careful use of quality materials, landscaping and design features. We support the desire to see development take place in sustainable locations. Our new facility under construction in Leeds to re-house the Wilkies business is on the site of a former engineering business, the former premises having been removed by specialists and areas of environmental concern remediated. Financial Risk Management The financial risk management and objectives of the group and the exposure of the group to credit, interest rate and foreign currency risk are set out in note 23. Donations The group’s Charities Committee considers requests for charitable donations within a set criteria. The group contributed charitable donations of £36,289 (2004: £26,705) during the year. The board has maintained its policy of not making political donations. Share Capital Details of the company’s share capital, including the number of shares issued during the period under review are given in note 22 to the financial statements. Since the year end the company has issued 194,613 ordinary shares pursuant to the exercise of options under the Headlam Group 2002 Savings Related Share Option Scheme. During the year under review options over 1,300,000 shares (2004: nil) were granted to the group’s directors and employees under the company’s share option schemes. Substantial shareholdings At the date of this report, the following interests in 3% or more of the issued ordinary share capital had been notified to the company. Number of shares % Legal & General Investment Management Aberforth Smaller Companies trust plc Aviva plc 3,346,519 2,744,600 2,715,594 3.89 3.17 3.15 AGM The notice of the fifty eighth AGM to be held at 10.00am on 1 June 2006 at the group’s distribution facility in Coleshill, Warwickshire has been mailed to shareholders with this Annual Report. Allotment of shares The directors have received authority from shareholders to allot ordinary shares for cash otherwise than on a pro-rata basis. The authority is limited to allotting up to 4,335,748 ordinary shares, representing approximately 5% of the issued share capital at that time. Although no such issues have been made, the directors will seek renewal of these two authorities from shareholders at the AGM. Purchase of own shares In common with many other companies, the group seeks annually a limited authority from shareholders to purchase its own ordinary shares. Legislation now permits shares purchased by the company to be held in treasury rather than being cancelled immediately, for future resale in the market, for use in connection with employee share schemes or for cancellation at a later date. The purchase of the company’s own shares would only be made if the directors regarded such purchase as earnings enhancing. Although no such purchases have been made, the directors will seek to renew the authority from shareholders at the AGM. Accounts Headlam Group plc Annual Report and Accounts 2005 31 Director’s Report continued Corporate and Social Responsibility – continued Directors fees Article 98 of the articles of association of the company prescribes the maximum amount in fees payable in aggregate to non-executive directors each year. Current fees for non-executive directors are approaching this figure and the board believes that it is prudent to raise the authority thereunder to allow the board, should it deem it appropriate, to increase non-executive fees beyond that level. It is therefore proposed to increase the maximum amount from £150,000 to £200,000. Indemnity to Directors and Officers The articles of association of the company currently provide that every director or other officer of the company shall, in certain circumstances, be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings, whether civil or criminal, for negligence, default, breach of duty or breach of trust in relation to the affairs of the company. The amendment proposed by resolution 11 of the notice of meeting will, if approved, enable the company to make use of the changes introduced by the Companies (Audit, Investigations and Community Enterprise) Act 2004 that relax certain of the current prohibitions on companies indemnifying their directors against liability and permit companies to pay directors’ defence costs as they are incurred. Auditors KPMG Audit Plc has expressed its willingness to continue in office as auditor of the company and a resolution for its re-appointment and to authorise the directors to agree its remuneration will be proposed at the forthcoming AGM. Auditors remuneration and fees paid are set out in note 3 to the financial statements. Corporate Governance The Combined Code on Corporate Governance came into effect for UK listed companies for reporting years beginning on or after 1 November 2003. Following publication of the Code, the board reviewed its procedures with a view to complying with its detailed provisions. The following paragraphs, together with the report on directors’ remuneration on pages 38 to 44, provide a description of how the group has applied the main and supporting principles of the Combined Code. The directors’ statement of compliance with the Code is given on page 37. The Board of Directors The board is collectively responsible for the success of the group. Its role is to provide entrepreneurial leadership within a framework of prudent and effective controls which enables risk to be assessed and managed; to set strategic aims, ensure that the necessary financial and human resources are in place to meet its objectives, review management performance; to set the group’s values and standards and ensure that its obligations to its shareholders and others are understood and met. Specific responsibilities reserved to the board include: • setting group strategy and approving an annual budget and medium term projections. • reviewing operational and financial performance. • approving acquisitions, divestments and capital expenditure. • reviewing the group’s systems of financial control and risk management. • ensuring that appropriate management development and succession plans are in place. • reviewing the health and safety and environmental performance of the group. • approving appointments to the board and to the position of Company Secretary, and approving policies relating to directors’ remuneration and the severance of directors’ contracts. • ensuring that a satisfactory dialogue takes place with shareholders. The directors’ responsibility for the preparation of accounts is explained on page 45. The directors confirmation that they consider it appropriate to prepare the accounts for 2005 on a going concern basis is given on page 37. Further details of the board’s role in relation to the group’s systems of internal control and risk management are given on pages 35 and 36. Descriptions of the specific responsibilities which have been delegated to the principal board committees are given on pages 33 to 34. At the end of 2005 the board comprised three executive and four non-executive directors including the Chairman. Biographical details of the directors are given on page 24. With the exception of the Chairman, who is presumed under the Combined Code not to be independent, all the non-executive directors are regarded by the board as independent. The board does not consider that any relationships or circumstances exist that are likely to affect the judgement of any director. 32 Headlam Group plc Annual Report and Accounts 2005 Director’s Report continued Corporate Governance – continued The board normally meets ten times a year, including at least one meeting at a group operating business. Comprehensive briefing papers are provided to all directors one week before board meetings. During the year there are sufficient opportunities for the Chairman to meet with the non-executive directors without the executive directors being present should this be deemed appropriate. All directors have direct access to the advice and services of the Company Secretary who is tasked with ensuring that board procedures are followed. In addition, directors may, in furtherance of their duties, take independent professional advice, if necessary, at the company’s expense. Chairman and Chief Executive The roles of Chairman and Chief Executive are split. Whilst collectively they are responsible for the leadership of the group, the Chairman’s primary responsibility is for leading the board and ensuring its effectiveness and the Group Chief Executive is responsible for running the business. The other significant current commitments of the Chairman are listed in his biography on page 24 and the board is satisfied that his existing commitments do not unduly restrict his availability to the group. Induction and professional development On joining the board, a director receives a comprehensive induction pack which includes background information about the group and its directors, details of board meeting procedures, directors’ responsibilities, procedures for dealing in company shares and a number of other governance-related issues. The director meets with the Group Chief Executive to be briefed on the general group strategy encompassing visits to group businesses. External training, particularly on matters relating to the role of a director and the role and responsibilities of board committees, is arranged as appropriate. Ongoing training is provided as and when necessary and may be identified in annual performance reviews or on an ad hoc basis. The suitability of external courses is kept under review by the Company Secretary. Training and development of directors in the year took various forms, including visits to group businesses, both with the board as a whole and with the Group Chief Executive, and attendance by certain directors at courses run by professional bodies and solicitors, attendance at external training sessions and seminars on matters relevant to members of remuneration committees, seminars facilitated by external audit practices on the implementation of International Financial Reporting Standards and workshops run by external bodies on various commercial and regulatory matters. Board appointments and performance evaluation There is a formal, rigorous and transparent procedure for the appointment of new directors to the board. This is described in the section on the nominations committee below. The non- executive directors are initially appointed for a three-year term and, subject to review and re-election, can serve up to a maximum of three such terms. During the year, using an in-house process the board conducted, a formal and rigorous evaluation of its own performance and that of its committees and individual directors, including the Chairman. The process involved the completion of detailed questionnaires in respect of each board member. The output from the questionnaires was compiled into a report prepared for the board at its meeting in October. No actions were considered necessary as a result of the evaluations. The board intends to conduct a further evaluation of its performance during 2006. Director re-election All directors are subject to re-election by shareholders at the first AGM following their appointment by the board. Under the articles of association of the company, each of the directors is required to retire by rotation at least once every three years. Details of the directors retiring and seeking re-election at an AGM are given to shareholders in the Notice of Meeting. Communicating with shareholders Meetings between directors, senior management and major institutional shareholders are held during the year. The Senior Independent Director and the other non-executive directors are encouraged to attend presentations to analysts and shareholders, in particular the annual and interim results presentations. The Group Finance Director reports twice a year to the board on meetings with investors. These reports include summaries prepared by the company’s brokers on the market’s reaction to results announcements and the subsequent meetings between management and investors. External brokers’ reports on the company are circulated to all directors. Accounts Headlam Group plc Annual Report and Accounts 2005 33 Director’s Report continued Corporate Governance – continued All directors normally attend the AGM and shareholders are invited to ask questions during the meeting and to meet with directors after the formal proceedings have ended. Shareholders at the meeting are advised as to the level of proxy votes received, including the percentage for and against each resolution together with the level of abstentions, following each vote on a show of hands. The group seeks to present an accurate, objective and balanced picture in its annual and interim reports, trading statements, results presentations and City announcements in a style and format which is appropriate to the intended audience. Copies of annual and interim reports are available on its website. Board Committees The terms of reference of the following board committees are available upon request. Audit Committee The audit committee consists of the independent non-executive directors which operated under the Chairmanship of Roger Dickens during 2005. Following the death of Roger Dickens subsequent to the year end, Dick Peters was appointed Chairman of the audit committee on 27 February 2006 having joined the audit committee in December 2005. The committee monitors the integrity of the company’s financial statements and the effectiveness of the external audit process. It is responsible for ensuring that an appropriate relationship between the company and the external auditors is maintained, including reviewing non-audit services and fees, and makes recommendations to the board on the appointment, reappointment or dismissal of the external auditors. It also reviews the group’s systems of internal control and the processes for monitoring and evaluating the risks facing the group on an ongoing basis. The committee periodically reviews its terms of reference and its effectiveness and recommends to the board any changes required as a result of such review. The audit committee meets at least twice a year, including meetings before the annual and interim results announcements. Members’ attendance record at meetings of the committee in 2005 is given on page 35. The committee has authority to investigate any matters within its terms of reference, to access resources, to call for information and to obtain external professional advice at the cost of the company. Only members of the committee are entitled to be present at meetings however the auditors, Group Chief Executive and Group Finance Director attend when appropriate. At each meeting there is an opportunity for the external auditors to discuss matters with the committee without any executive management being present. The committee has independent access to the external auditors who have direct access to the Chairman of the committee outside formal committee meetings. The Audit committee has the specific task of keeping under review the nature and extent of non-audit services provided by the external auditors in order to ensure that objectivity and independence are maintained. The external auditors have in place processes to ensure their independence is maintained including safeguards to ensure that, where they do provide non-audit services, their independence is not compromised. They have written to the audit committee confirming that, in their opinion, they are independent. In 2005, the audit committee discharged its responsibilities by: • reviewing the group’s draft 2004 preliminary annual results announcement and financial statements and 2005 interim results statement prior to board approval, including consideration of the significant accounting judgements contained therein, and reviewing the external auditors’ detailed reports thereon. • reviewing the group’s trading update announcement prior to release at the AGM. • reviewing the appropriateness of the group’s accounting policies including changes necessary in the light of the transition to IFRS. • reviewing regularly the potential impact on the group’s financial statements of certain matters such as impairment of asset values, employee benefits and IFRS. 34 Headlam Group plc Annual Report and Accounts 2005 Director’s Report continued Corporate Governance – continued • reviewing the effectiveness of the 2004 external audit process and recommending to the board, after due consideration, the reappointment of the incumbent external auditors at the AGM. • reviewing the application of the board’s policy on non-audit work performed by the group’s external auditors together with the non-audit fees payable to the external auditors in 2004. • reviewing the external auditors’ plan for the audit of the group’s 2005 accounts, which included key areas of focus, key risks on the accounts, confirmations of auditor independence and the proposed audit fee, and approving the terms of engagement for the audit. • reviewing reports from the external auditors on the group’s systems of internal control in advance of the announcement of the group’s results for 2004 (the internal report included a summary of and commentary on the business risks and internal control processes) and reporting to the board on the results of this review, and reviewing interim updates prior to the interim results. • receiving regular updates from management on key financial control matters arising in the group. • reviewing the results of the performance evaluation questionnaire (see page 32) as it related to the committee and approving certain consequential changes to the committee’s procedures. Remuneration Committee The remuneration committee consists of the independent non- executive directors under the chairmanship of Tom Anderson. The committee is responsible for approving the terms of service and setting the remuneration of the executive directors in accordance with a remuneration policy which is approved by the board. It is also responsible for determining the terms upon which the service of executive directors is terminated, and for monitoring the remuneration of senior managers just below board level. Non- executive directors’ fees are determined by the board as a whole and no director may influence their own remuneration benefits. The committee meets periodically when required. Members’ attendance record at meetings of the committee in 2005 is given on page 35. Only the members of the committee are entitled to be present at meetings however the Group Chief Executive and Group Finance Director attend when appropriate. The committee has access to such information and advice both from within the group and externally, at the cost of the company, as it deems necessary. It is responsible for appointing consultants in respect of executive directors’ remuneration. The committee’s report on directors remuneration is set out in the remuneration report on page 41. Nominations Committee The nominations committee consists of the non-executive directors and the Chief Executive under the chairmanship in 2005 of Roger Dickens (except when the committee is dealing with the appointment of a successor as Chairman of the board when the Senior Independent Director chairs the committee). The committee leads the process for identifying and makes recommendations to the board on candidates for appointment as directors of the company and as Company Secretary, giving full consideration to succession planning and the leadership needs of the group. It also makes recommendations to the board on the composition and chairmanship of the audit and remuneration committees. It keeps under review the structure, size and composition of the board, including the balance of skills, knowledge and experience and the independence of the non- executive directors, and makes recommendations to the board with regard to any changes. The committee meets periodically when required. Members’ attendance record at meetings of the committee in 2005 is given on page 35. Only members of the committee are entitled to be present at meetings but others may be invited by the committee to attend. The board has agreed the procedures to be followed by the nominations committee in making appointments to the various positions on the board and as Company Secretary. The committee has access to such information and advice both from within the group and externally, at the cost of the company, as it deems necessary. This may include the appointment of external executive search consultants, where appropriate. The procedures referred to above were used in the appointment during 2005 of Dick Peters as a non-executive director. This included an assessment of the time commitment expected from the director. Independent executive search consultants were not used in connection with the appointment. Accounts Headlam Group plc Annual Report and Accounts 2005 35 Director’s Report continued Corporate Governance – continued Directors’ attendance record The attendance of directors at relevant meetings of the board and of the remuneration, audit and nominations committees held during 2005 was as follows: Scheduled board (10 meetings) Remuneration committee (3 meetings) Audit committee (3 meetings) Nominations committee (4 meetings) Non-executive director Trevor Larman (Chairman) Executive directors Tony Brewer (Group Chief Executive) Stephen Wilson (Group Finance Director) Graham Waldron Non-executive directors Tom Anderson (Senior Independent Director) Roger Dickens Dick Peters (appointed 1 December 2005) 10 10 10 10 10 6 1/1# 3 * * * 3 0 1/1# 3 * * * 3 0 1/1# 4 4 * * 4 1 1/1# *Executive directors do not attend these meetings unless invited to do so by the committee Chairman. # Actual attendance/maximum number of meetings director could attend as a member. Risk Management and Internal Controls In accordance with the guidance of the Turnbull committee, the directors are responsible for establishing and maintaining the group’s systems of internal control and for reviewing their effectiveness. The systems are designed to meet the group’s particular needs and to manage, rather than eliminate, the risks to which the businesses are exposed. By their nature, they provide only reasonable and not absolute assurance against material misstatement or loss. The board considers that the measures taken, including physical controls, segregation of duties and reviews by management, provide sufficient and objective assurance. During the year the board maintained its process of hierarchical reporting and review in order to evaluate the effectiveness of the group’s system of financial and non-financial controls. The group has developed a comprehensive series of operating and financial control procedures which are applied at all businesses and the group finance team perform annual reviews to verify that the businesses are complying with the prescribed operating and financial control procedures. In addition, the board reviews the group’s high level internal controls and risk management arrangements. Furthermore, the audit committee receive reports from the external auditor on matters identified in the course of its statutory audit work. 36 Headlam Group plc Annual Report and Accounts 2005 Director’s Report continued Corporate Governance – continued These provide a documented and auditable trail of accountability, the results of which are periodically reviewed by management for completeness and accuracy. These procedures allow for successive assurances to be given at increasingly higher levels of management through to the board. Planned corrective actions are monitored for timely completion. Having reviewed its effectiveness, the directors are not aware of anything in the group’s system of controls during the period covered by this report and accounts which could render them ineffective. There were no changes in the group’s internal controls or financial reporting that have materially affected, or are reasonably likely to affect, the group’s system of internal control. The group operates a comprehensive planning system, including detailed reviews at all subsidiary undertakings, together with formal reviews and approval of annual plans by the board. Actual performance is reported on a monthly basis measured against plan and prior year including a detailed explanation of major variances. The company and its subsidiary undertakings have implemented control procedures designed to ensure complete and accurate accounting for financial transactions and to limit the potential exposure to fraud. The group has clearly defined guidelines for capital expenditure and investment appraisal. These include annual plans, detailed appraisal and review procedures, levels of authority and due diligence requirements when businesses are acquired. Any acquisition or disposal of a business needs formal board approval. The board reports that full procedures are in place to achieve compliance with the internal control aspects of the Code for the next financial period. The output of these reviews form an important element of management reporting and a process is in place for monitoring the achievement of action plans together with the identification of new and emerging risks. An ongoing process of risk management and internal control in accordance with the Code has been in place for the financial year under review and up to the date of this report. The group views the careful management of risk as a key management activity in delivering business opportunities. The ethos of the group, delegation of responsibility and other control procedures together with accounting policies and procedures are communicated through the group and laid out in the group procedures manual which is periodically updated. The objective of the group’s risk management processes is to ensure sustainable development through the conduct of its business in a way which: • satisfies its customers. • maintains proper relationships with suppliers and contractors. • protects against losses from unforeseen causes. • provides a safe and healthy workplace. • develops environmentally friendly processes. • minimises the cost and consumption of increasingly scarce resources. • prevents pollution and waste. • maintains a positive relationship with the communities in which it does business. A high standard of health and safety management is promoted at all levels within the group. The group’s health and safety approach is supported by training programmes at operating businesses, group health and safety rules and monitoring and auditing to promote a high level of awareness and commitment. Individual businesses are assessed on a periodic basis, and remedial solutions implemented where necessary. Line management retain the responsibility for completion of action plans with progress being monitored and reported. The audit committee meets at least twice a year and in accordance with its terms of reference, reviews the effectiveness of the group’s systems of internal control. In accordance with the Code the board has undertaken an assessment of the need for a group internal audit function. The board considers that the control systems and procedures undertaken by the group are adequately performed by management and therefore does not currently propose to introduce a group internal audit function but will keep the matter under review. The integrity and competence of personnel is assessed during the recruitment process and monitored throughout employment. Ethical standards expected of personnel are laid out in the group procedures manual. Accounts Headlam Group plc Annual Report and Accounts 2005 37 Director’s Report continued Corporate Governance – continued Compliance with the Combined Code Throughout 2005, the group was in compliance with the relevant provisions of the Combined Code on Corporate Governance, except with regard to the following aspects: The Code provision A.3.1 states that the board should identify in the annual report each non-executive director it considers to be independent. The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including, amongst the seven stated reasons, if the director has served on the board for more than nine years from the date of their first election. Trevor Larman was first appointed on 28 March 1994 and has therefore served for a term of more than nine year’s. However the board considers that he continues to act independently. The Code provision A3.2 states that except for smaller companies, at least half of the board, excluding the Chairman, should comprise non-executive directors determined by the board to be independent. The board considers that compliance should have regard to the size of the group’s operations and believes that the structure of the Chairman, two non-executive’s and three executive directors is appropriate for the business. The Code provision B1.6 refers to directors service contracts and compensation and states that ‘notice or contract periods should be set at one year or less. The company complied with this rule following the signing of new agreements with executive directors on 11 October 2005 which provide for a notice period of twelve months. Prior to this change, executive directors notice period in the event of a change of control was reducing from two years to one year by January 2006. New executive appointments to the board will similarly be subject to Code compliant service contracts. The Code provisions B2.1 and C3.1 state that the board should establish both an audit and a remuneration committee of at least three, or in the case of smaller companies, two members, who should all be independent non-executive directors. The group complied with this provision following the appointment of Dick Peters who became a member of each of the remuneration, audit and nomination committees. The Code provision D.1.1 states that the senior independent director should attend sufficient meetings with a range of major shareholders to listen to their views in order to help develop a balanced understanding of the issues and concerns of major shareholders. Whilst the opportunities exist, such meetings do not currently take place, however the executive directors are fully aware of the issues and concerns of the major shareholders and share these with the board twice a year following the announcement of interim and final results and at other times as appropriate. Going Concern The group continues to place considerable emphasis on its budgeting and forecasting procedures and each month produces a forecast of trading and cash flow for the accounting period. Accordingly, the group continues to have in place all the procedures and information appropriate to the going concern assessment required by the Combined Code on Corporate Governance. Having reviewed the group’s resources and a range of likely trading out-turns, the directors believe that they have reasonable grounds for stating that the group has adequate resources to continue in operational existence for the foreseeable future and therefore to continue to adopt the going concern basis in preparing the financial statements. This directors report has been approved by the board and signed on its behalf by Geoff Duggan Company Secretary 10 April 2006 Registered office PO Box 1 Gorsey Lane Coleshill Birmingham B46 1LW Company registered in England and Wales No. 460129 38 Headlam Group plc Annual Report and Accounts 2005 Remuneration Report Composition and role of the remuneration committee The board’s remuneration committee comprises the independent non-executive directors and is Chaired by Tom Anderson. Trevor Larman and Roger Dickens were members of the committee throughout 2005. Dick Peters became a member of the committee when he joined the board in December 2005. To recognise performance against agreed objectives, the committee has put in place an annual bonus scheme for executive directors similar to that applying to other senior executives in the group. Annual bonuses for executive directors are only paid on the achievement of demanding individual, business and corporate objectives. The committee makes recommendations to the board, within formal terms of reference, on the policy and framework of executive remuneration and its cost to the company. The committee is also responsible for the implementation of remuneration policy and determining specific remuneration packages for each of the executive directors. It has access to advice provided by the Group Chief Executive, Company Secretary and external consultants. During 2005 the committee sought information from a wide variety of freely available published sources to assist in the formulation of the committee’s recommendations. Similar information was sought in respect of retirement benefits and non-executive directors’ fees during the year. This report, which will be submitted to the forthcoming AGM for approval, explains how the company has applied the principles of the Combined Code on Corporate Governance that relate to directors’ remuneration during the period. No director is involved in the determination of, or votes on any matter relating to, their own remuneration. Remuneration policy Framework and policy on executive directors’ remuneration The group’s remuneration policy is designed to provide competitive reward for its executive directors and other senior executives, taking into account the company’s performance, the markets in which the group operates and pay and conditions elsewhere in the group. In constructing the remuneration packages, the committee aims to achieve a balance between fixed and variable compensation for each director. Accordingly, a significant proportion of the remuneration package depends on the attainment of demanding performance objectives. In determining the level of base salaries and the annual performance bonus scheme, the committee takes into consideration the potential maximum remuneration that executives could receive. The committee reviews these packages and varies individual elements when appropriate from year to year. Under the executive share option scheme (ESOS) the practice is to make conditional awards up to a maximum of 200% of gross earnings when deemed appropriate. This scheme is designed to align the interests of executive directors and other senior executives with the longer term interests of shareholders by rewarding them for delivering increased shareholder value. The group does not currently operate a long term incentive plan. Executive directors also participate in a non-contributory final salary pension plan, details of which are given on page 44. The committee believes that these arrangements, which are further explained below, are important in providing a potential remuneration package that will attract, retain and continue to motivate executive directors and other senior executives in a marketplace that is challenging and competitive in both commercial and human resource terms. It is intended that the current remuneration policy, of which the ESOS element has been approved by shareholders, will continue for 2006 and succeeding years. The total emoluments of the executive directors are disclosed on page 41. Components of remuneration Base salary The committee seeks to establish a base salary for each executive director and other senior executives determined by individual performance and having regard to market salary levels for similar positions in comparable companies by reference to independent sources. Base salaries are reviewed annually. Base salary is the only element of remuneration that is pensionable. Accounts Headlam Group plc Annual Report and Accounts 2005 39 Remuneration Report Annual performance bonus At the beginning of each year, the committee reviews the bonus scheme to ensure that it remains competitive in the marketplace, continues to incentivise the executive directors and other senior executives and aligns their interests with those of shareholders. The scheme focuses on annual objectives and links individual performance with business targets. The financial targets are calculated by reference to the extent to which the group’s profit before taxation exceeds the planned target. The remuneration committee establishes the objectives that must be attained each financial year if a bonus is to be paid. If the performance target is not achieved the bonus is not normally payable. However, the remuneration committee has discretion to award part payment if circumstances are considered appropriate. The committee takes account of the relative success of the group’s performance for which the executive directors are responsible and the extent to which strategic objectives are being attained. A maximum bonus of 150% of basic salary is payable for achievement of performance related targets including over performance. The performance related elements of remuneration for executive directors and executive management are paid in March following the completion of the annual audit. Details of the payments to directors are included in the directors’ remuneration for the year on page 41. Executive share option schemes (ESOS) To the extent that performance conditions are satisfied, options granted under the ESOS become exercisable three years after the date of grant and remain so until the tenth anniversary of grant in respect of the approved scheme and the seventh anniversary of grant in respect of the unapproved scheme. Performance conditions are based on the extent to which growth in the group’s earnings per share (EPS growth) exceeds growth in the Retail Prices Index (RPI growth) over a three-year performance period. EPS is calculated as fully diluted earnings per share. The committee believes that this method of calculating EPS provides an objective, independent and verifiable measure of the group’s performance. In respect of each grant of options under the approved scheme, the committee has determined that, for the option to be exercisable, EPS growth must exceed RPI growth by 3% pa or more over the three-year performance period. In respect of each grant of options under the unapproved scheme, the committee has determined that, for options up to one times eligible earnings to be exercisable, EPS growth must exceed RPI growth by 3% pa or more over the three-year performance period and by 5% or more over the three-year performance period for options granted of between one times and two times eligible earnings. Options granted prior to 2004 under the ESOS permitted the group’s EPS to be measured annually for a further two years from the date of grant of the options, with the performance conditions increasing proportionately. Having reviewed market practice regarding the retesting of performance measures, the committee removed this element in respect of all option grants from January 2004. The committee continues to believe that, in relation to the ESOS, EPS growth in excess of RPI growth is the most appropriate measure for determining the increase in value delivered to shareholders by the company’s executive directors and other senior executives. The committee reviews the appropriateness of the performance measure and the specific targets set when considering each new grant of options. During 2006, it will consider the impact on EPS of the change in reporting under IFRS in order to determine whether EPS will remain the most appropriate and consistent performance measure for this scheme. In August 2005, options were granted to Tony Brewer and Steve Wilson equal to 82% and 80% respectively of their base salary and, at lower rates, to certain other senior executives. Details of options granted to executive directors are shown on page 43. It is the company’s intention that new shares be issued, subject to institutional guidelines, to satisfy the exercise of options granted under the ESOS. Long term incentive scheme (LTIS) The group does not currently operate a long term incentive plan. 40 Headlam Group plc Annual Report and Accounts 2005 Remuneration Report continued 5 Year Return Index for FTSE 250 Index as at 31 December 2005 450 400 350 300 250 200 150 100 50 0 x e d n I n r u t e R 31 December 2001 31 December 2002 31 December 2003 31 December 2004 Headlam Group plc FTSE MID 250 Ex Investment Trust 31 December 2005 Source: Thomson Financial Performance graph The above graph has been included to meet the requirements of Schedule 7a of the Companies Act 1985. It shows the group’s performance for the five year period to 31 December 2005 measured by total shareholder return (‘TSR’), compared with the performance of the FTSE 250 index also measured by TSR, which is defined as share price growth, plus re-invested dividends. The FTSE 250 index has been chosen because it provides a basis for comparison against companies in a relevant broad based equity index in which the group is a constituent member. Pension Executive directors also participate in a non-contributory, final salary pension plan, details of which are given on page 44. Other employment benefits In common with other senior management, executive directors are entitled to a range of benefits, including a company car, life assurance and private medical insurance. They are also eligible to participate in the company’s Inland Revenue-approved sharesave scheme which is open to all eligible employees on the same basis, providing a long-term savings and investment opportunity. Service contracts It is the company’s policy for the notice period in executive directors’ service contracts not to exceed one year. The executive directors’ service contracts have no fixed term but provide that either the director or the company may terminate the employment by giving one year’s written notice and that the company may pay compensation in lieu of notice. Executive directors’ service contracts were renewed in October 2005 to reflect a notice period of one year. Accounts Headlam Group plc Annual Report and Accounts 2005 41 Remuneration Report continued External appointments of executive directors The board believes that experience of other companies’ practices and challenges is valuable both for the personal development of its executive directors and for the company. It is therefore the company’s policy to allow each executive director to accept one non-executive directorship of another company, although the board retains the discretion to vary this policy. Fees received in respect of external appointments are retained by the individual director. Fees received in 2005 in respect of non-executive appointments by Graham Waldron and Steve Wilson were £50,000 and £44,000 respectively. Non-executive directors Non-executive directors including the Chairman do not hold service contracts. Their appointment is subject to the articles of association and the dates they joined the board are shown on page 24. Their fees are approved by the board. Upon the recommendation of the board, the fees payable to Trevor Larman as Chairman were agreed by the board as £75,000 per annum. Following the examination of the role of non-executive directors in the Higgs Report and the subsequent changes to the Combined Code, in 2005 the board conducted a review of non- executive directors’ fees (excluding fees paid to the chairman). This took into account not only the need to attract individuals of the right calibre and experience, but also their increased responsibilities and time commitment, as envisaged in the new Code, and the fees paid by other companies. The board received survey and other information from a variety of freely available sources. As a result of this review, their annual fees were increased from £30,000 to £31,500, with an additional £5,000 being paid to the respective Chairmen of the audit and remuneration committees. The non-executive directors, including the Chairman, do not participate in any of the company’s share schemes, incentive plans or pension schemes. The remuneration report from page 38 to page 41 up to this statement, with the exception of the performance graph on page 40, has not been audited. From this point until the end of the report on page 44 the disclosures have been audited by the company’s auditors, KPMG. Directors’ emoluments Details of directors’ emoluments for the year ended 31 December 2005 are set out below. Executive Tony Brewer Steve Wilson Graham Waldron Non-executive Trevor Larman Tom Anderson Roger Dickens Dick Peters (iii) Salary and fees 2004 £000 2005 £000 425 310 80 70 35 35 3 375 285 75 65 30 27 — 958 857 Benefits Performance related pay Total 2005 £000 2004 £000 27 31 21 — — — — 79 26 29 17 — — — — 72 2005 £000 465 350 — — — — — 2004 £000 562 427 — — — — — 2005 £000 917 691 101 70 35 35 3 2004 £000 963 741 92 65 30 27 — 815 989 1,852 1,918 Benefits include all taxable benefits arising from employment by the company, mainly the provision of a company car. Pensions and gains made by executive directors in respect of share options are excluded from the table above. The aggregate amount of gains made by executive directors on the exercise of share options was £363,750 (2004: £998,000). 42 Headlam Group plc Annual Report and Accounts 2005 Remuneration Report continued Directors’ Interests in Shares The following table and the tables on page 43 show the beneficial interests of the directors who held office at the end of the year in the ordinary shares of the company and the interests of the executive directors who served during the year in the company’s share schemes: Executive Directors Graham Waldron Tony Brewer Steve Wilson Non-executive Directors Trevor Larman Tom Anderson Shareholdings at 31 December 2005 Shareholdings at 31 December 2004 471,667 443,874 336,433 6,944 4,000 471,667 443,874 211,433 6,944 4,000 As at 5 January 2006, the beneficial shareholding of Graham Waldron had increased by 4,796 shares following the exercise of SAYE options on their normal maturity date. Directors’ interest in share option schemes Executive schemes During the year options held under the 1996 and 1998 unapproved schemes were exercised, details of which are shown under gains on share options below. Accounts Headlam Group plc Annual Report and Accounts 2005 43 Remuneration Report continued Details of executive options held by executive directors are set out below, a description of which is given on page 39. Options held at 1 January 2005 25,000 — — 8,337 25,000 100,000 — — 8,337 Options granted during the year — 342,858 7,142 — — — 242,858 7,142 — Options exercised during the year Options held at 31 December 2005 Exercise price (pence) Date from which exercisable Expiry date 25,000(b) — — — 25,000(a) 100,000(c) — — — — 342,858 7,142 8,337 — — 242,858 7,142 8,337 225.50 420.00 420.00 197.00 225.50 128.00 420.00 420.00 197.00 Dec 2001 Aug 2008 Aug 2008 Jan 2008 Dec 2001 Jan 2004 Aug 2008 Aug 2008 Jan 2008 Dec 2005 Aug 2012 Aug 2015 Jun 2008 Dec 2005 Jan 2008 Aug 2012 Aug 2015 Jun 2008 4,796 — — 4,796 197.00 Jan 2006 Jun 2006 Tony Brewer 1996 USOS(i) 1998 USOS (ii) 1998 ESOS(iii) Sharesave(iv) Steve Wilson 1996 USOS(i) 1998 USOS (ii) 1998 USOS(ii) 1998 ESOS(iii) Sharesave(iv) Graham Waldron Sharesave(iv) (i) Headlam Group Unapproved Executive share option scheme 1996 (1996 USOS) Options were granted to executives under the terms of the 1996 USOS on 14 April 1998. Details of the operation of the scheme are provided on page 39. (ii) Headlam Group Unapproved Executive share option scheme 1998 (1998 USOS) Options were granted to executives under the terms of the 1998 USOS on 22 August 2005. Details of the operation of the scheme are provided on page 39. (iii) Headlam Group Approved Executive share option scheme 1998 (1998 ESOS) Options were granted to executives under the terms of the 1998 ESOS on 22 August 2005 Details of the operation of the scheme are provided on page 39. (iv) Headlam Group Sharesave scheme 2002 (Sharesave) The company operates an Inland Revenue-approved all-employee savings-related share option scheme in the UK. The scheme is designed to provide a long-term savings and investment opportunity for employees and is described on page 40. (v) Exercise of share options The market prices of shares on the dates options were exercised were: (a) 3 May 2005 at 398.00 pence (b) 6 December 2005 at 400.00 pence (c) 16 December 2005 at 405.00 pence The closing price of a Headlam Group plc ordinary share on the last trading day of 2005 (30 December) was 432.00 pence. The range during the year was 464.25 pence (high) and 385.00 pence (low). 44 Headlam Group plc Annual Report and Accounts 2005 Remuneration Report continued Pension Benefits Tony Brewer and Stephen Wilson participate in the group’s defined benefit (final salary) pension scheme which provides benefits at a normal retirement age of sixty based upon pensionable service and basic pay, bonus being excluded. The maximum pension payable under the scheme is two-thirds of final pensionable pay subject to Inland Revenue limits. There are four times earnings lump sum death-in-service benefits and pension provisions for members’ dependents. During 2006, the company will be reviewing its pension policy as a result of the 2004 Pensions Act, the 2004 Finance Act and the result of the triennial valuation at the end of March 2005. Details of pensions earned by the executive directors for the year ended 31 December 2005 are shown below Increase in accrued pension during the year £pa 2,578 3,274 Transfer value of increase £ 31,784 51,478 Accumulated accrued pension at 31 December 2005 £pa 35,403 43,741 Change in accrued pension over the year £pa 3,565 4,491 Accumulated accrued pension at 31 December 2004 £pa 31,838 39,250 Tony Brewer Steve Wilson The increase in accrued pension during the year excludes any increase due to inflation of the accumulated accrued pension at the start of the year. The change in accrued pension over the year includes any increase due to inflation of the accumulated accrued pension at the start of the year. Tony Brewer Steve Wilson Transfer value of accrued pension at 31 December transfer 2005 £ 438,955 689,336 Change in value over the year £pa 90,277 145,325 Transfer value of accrued pension at 31 December 2004 £ 348,678 544,011 In addition to salary, Graham Waldron benefits from a payment of £7,000 (2004: £26,000) which is made directly to a personal pension arrangement. The final contribution to these pension arrangements was made on 14 April 2005 on Graham Waldron reaching his 75th birthday. On 23 March 2006 the normal retirement date of certain senior executives was moved from sixty to fifty five, including the two executive directors participating in the scheme. This report on remuneration has been approved by the board and signed on its behalf by Geoff Duggan Company Secretary 10 April 2006 Accounts Headlam Group plc Annual Report and Accounts 2005 45 Statement of Directors’ Responsibilities in respect of the Annual Report and the financial statements The directors are responsible for preparing the Annual Report and the group and parent financial statements in accordance with applicable law and regulations. • state whether they have been prepared in accordance with IFRS as adopted by the EU. Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law the directors are required to prepare the group financial statements in accordance with IFRS as adopted by the EU and have elected to prepare the parent company financial statements on the same basis. The group and parent company financial statements are required by law and IFRS as adopted by the EU to present fairly the financial position of the group and the parent company and the performance for that period; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. In preparing each of the group and parent company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently. • make judgments and estimates that are reasonable and prudent. • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Directors’ Report, Directors’ Remuneration Report and the Corporate Governance Statement that comply with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 46 Headlam Group plc Annual Report and Accounts 2005 Independent Auditors’ Report to the Members of Headlam Group plc We have audited the group and parent company financial statements (the ‘‘financial statements’’) of Headlam Group plc for the year ended 31 December 2005 which comprise the Consolidated Income Statement, the Consolidated and Parent Company Balance Sheets, the Consolidated and Parent Company Cash Flow Statement, the Consolidated and Parent Company Statements of Recognised Income and Expense and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited. This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the EU are set out in the Statement of Directors’ Responsibilities on page 45. Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and as regards the financial statements, Article 4 of the IAS Regulation. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the company’s compliance with the nine provisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: • the group financial statements give a true and fair view, in accordance with IFRS as adopted by the EU, of the state of the group’s affairs as at 31 December 2005 and of its profit for the year then ended; • the parent company financial statements give a true and fair view, in accordance with IFRS as adopted by the EU as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as a 31 December 2005; and • the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the financial statements, Article 4 of the IAS Regulation. KPMG Audit Plc Chartered Accountants Registered Auditor 2 Cornwall Street Birmingham B3 2DL 10 April 2006 Consolidated Income Statement for the year ended 31 December 2005 Revenue Cost of sales Gross profit Distribution expenses Administrative expenses Operating profit Financial income Financial expenses Net financing costs Profit before tax Taxation Profit for the year Dividend per share Earnings per share Basic Diluted Accounts Headlam Group plc Annual Report and Accounts 2005 47 Note 2005 £000 2004 £000 2 2 6 6 3 7 486,635 (336,570) 464,789 (323,924) 150,065 140,865 (77,507) (31,060) (70, 592) (31,349) 41,498 38,924 3,893 (4,551) 3,300 (3,740) (658) (440) 40,840 (12,352) 38,484 (11,738) 28,488 26,746 22 16.25p 13.85p 9 9 33.1p 32.8p 31.3p 31.0p 48 Headlam Group plc Annual Report and Accounts 2005 Statements of Recognised Income and Expense for year ended 31 December 2005 Foreign exchange translation differences arising on translation of overseas operations Recycling of cash flow hedging reserve balance Actuarial gains and losses on defined benefit pension plans Tax recognised on income and expenses recognised directly in equity Note Group Company 2005 £000 (321) 13 2004 £000 (256) – 2005 £000 2004 £000 – – (1,759) – (2,571) (3,748) (2,571) (3,748) 910 1,143 910 1,143 Net income recognised directly in equity (1,969) (2,861) (1,661) (4,364) Profit for the year 28,488 26,746 39,352 20,965 Total recognised income and expense 22 26,519 23,885 37,691 16,601 Effect of change in accounting policy Effect of adoption of IAS 32 and 39, net of tax, on 1 January 2005 (with 2004 not restated) on: cash flow hedge reserve 13 13 – – – – – – Accounts Headlam Group plc Annual Report and Accounts 2005 49 Note 10 12 11 13 14 15 16 17 18 18 19 20 18 20 13 Group Company 2005 £000 74,640 – 13,210 8,199 2004 £000 71,754 – 14,046 8,167 2005 £000 58,665 94,835 – 6,629 2004 £000 58,300 94,710 – 5,704 96,049 93,967 160,129 158,714 91,160 84,275 – 36,193 79,692 85,550 – 37,747 211,628 3,471 202,989 203 – 2,320 23,272 31,265 56,857 3,471 – 2,678 25,163 5,473 33,314 203 311,148 297,159 220,457 192,231 – (471) – (141,529) (1,080) (11,139) (279) (1,124) – (142,028) (722) (11,053) – (471) (855) (5,532) (1,080) (3,500) – (430) – (5,331) (722) (4,841) (154,219) (155,206) (11,438) (11,324) (267) – (19,432) (1,403) (738) – (17,643) (1,212) (267) (49,732) (19,146) (1,616) (738) (48,930) (17,192) (96) (21,102) (19,593) (70,761) (66,956) (175,321) (174,799) (82,199) (78,280) 135,827 122,360 138,258 113,951 Balance Sheets at 31 December 2005 Non-current assets Property, plant and equipment Investments in subsidiary undertakings Intangible assets Deferred tax assets Current assets Inventories Trade and other receivables Amounts due from subsidiary undertakings Cash and cash equivalents Non-current assets classified as held for sale Total assets Current liabilities Bank overdraft Other interest-bearing loans and borrowings Amounts due to subsidiary undertakings Trade and other payables Employee benefits Income tax payable Non-current liabilities Other interest-bearing loans and borrowings Amounts due to subsidiary undertakings Employee benefits Deferred tax liabilities Total liabilities Net assets 50 Headlam Group plc Annual Report and Accounts 2005 Balance Sheets continued at 31 December 2005 Equity attributable to equity holders of the parent Share capital Share premium Special reserve Translation reserves Retained earnings Total equity Note 22 22 22 22 22 Group Company 2005 £000 2004 £000 2005 £000 2004 £000 4,326 52,280 – (577) 79,798 4,306 51,731 – (256) 66,579 4,326 52,280 20,578 (1,759) 62,833 4,306 51,731 20,578 (1,759) 39,095 135,827 122,360 138,258 113,951 These financial statements were approved by the board of directors on 10 April 2006 and were signed on its behalf by: Tony Brewer Director Stephen Wilson Director Accounts Headlam Group plc Annual Report and Accounts 2005 51 Cash Flow Statements for year ended 31 December 2005 Cash flows from operating activities Profit before tax for the year Adjustments for: Depreciation, amortisation and impairment Financial income Financial expense (Profit)/loss on sale of property, plant and equipment Equity settled share-based payment expenses Operating profit before changes in working capital and provisions Decrease/(increase) in trade and other receivables Increase in inventories (Decrease)/increase in trade and other payables Cash generated from the operations Interest paid Tax (paid)/received Additional contributions to defined benefit pension plan Note Group 2005 £000 2004 £000 40,840 38,484 5,133 (3,893) 4,551 (228) 196 4,313 (3,300) 3,740 11 57 46,599 43,305 1,699 (11,335) (1,085) 35,878 (1,456) (10,994) (722) (8,118) (3,753) 14,588 46,022 (1,093) (12,082) – Company 2005 £000 135 1,249 (1,280) 2,035 (206) 71 2,004 1,801 – 832 4,637 (1,518) 843 (722) 2004 £000 1,558 913 (759) 597 (1) 2 2,310 3,560 – 573 6,443 (303) (725) – 5,415 Net cash from operating activities 22,706 32,847 3,240 Cash flows from investing activities Proceeds from sale of property, plant and equipment Interest received Dividends received Acquisition of subsidiary, net of cash acquired Acquisition of property, plant and equipment 598 1,335 – (426) (10,965) 282 1,055 – (3,779) (14,374) 445 1,154 39,910 – (5,121) 152 949 18,345 (4,501) (12,339) Net cash from investing activities (9,458) (16,816) 36,388 2,606 Cash flows from financing activities Proceeds from the issue of share capital Repayment of borrowings Payment of finance lease liabilities Dividends paid 570 (662) (438) (13,976) 2,763 (1,121) (498) (11,795) 570 – (430) (13,976) 2,763 – (393) (11,795) Net cash from financing activities (14,506) (10,651) (13,836) (9,425) Net increase in cash and cash equivalents Cash and cash equivalents at 1 January Effect of exchange rate fluctuations on cash held (1,258) 37,468 (17) 5,380 32,119 (31) 25,792 5,473 – (1,404) 6,877 Cash and cash equivalents at 31 December 25 36,193 37,468 31,265 5,473 52 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements 1 ACCOUNTING POLICIES Headlam Group Plc (the “company”) is a company incorporated in the UK. The group financial statements consolidate those of the company and its subsidiaries which together are referred to as the “group”. The parent company’s financial statements present information about the company as a separate entity and not about its group. Both the parent company’s financial statements and the group’s financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (“IFRS”). On publishing the parent company financial statements here together with the group financial statements, the company is taking advantage of the exemption in s230 of the Companies Act 1985 not to present its individual income statement and related notes that form a part of these approved financial statements. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements and in preparing an opening IFRS balance sheet at 1 January 2004 for the purposes of the transition to IFRS. The principal exception is that, as more fully explained below, financial instruments accounting is determined on different bases in 2005 and 2004 due to the transitional provisions of IAS 32 and IAS 39. Judgements made by the directors, in the application of these accounting policies that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 31. Transition to IFRS Both the company and the group are preparing their financial statements in accordance with IFRS for the first time and consequently both have applied IFRS 1. An explanation of how the transition to IFRS has affected the reported financial performance of the group and the financial position and cash flows of the company and group is provided in note 32. In addition to exempting companies from the requirement to restate comparatives for IAS 32 and IAS 39, IFRS 1 grants certain exemptions from the full requirements of IFRS in the transition period. The following exemptions have been taken in these financial statements: • Business combinations – Business combinations that took place prior to 1 January 2004 have not been restated. • The company and the group have elected to restate the carrying value of freehold and long leasehold properties as at 1 January 2004 to historical cost. Previously, properties were stated at a combination of historical cost and market value. • Employee benefits – All cumulative actuarial gains and losses on defined benefit plans have been recognised in equity at 1 January 2004. • Cumulative translation differences – Cumulative translation differences for all foreign operations have been set to zero at 1 January 2004. Any gains and losses arising in the income statement on the subsequent disposal of an overseas subsidiary undertaking will only include those exchange gains or losses arising from the date of transition. • Share based payments – IFRS 2 – Share based payments, has been applied only to grants of equity settled share based payments made after 7 November 2002 which had not vested by 1 January 2005. Following initial adoption, the group has decided not to apply the hedge accounting requirements of IAS 39. Consequently, all movements in the fair value of the hedge are recognised immediately in the income statement, within net financing costs. Measurement convention The company and group financial statements are prepared on the historical cost basis except for derivative financial instruments classified as fair value through the income statement. Non- current assets held for sale are stated at the lower of previous carrying amount and fair value less costs to sell. Accounts Headlam Group plc Annual Report and Accounts 2005 53 Notes to the Financial Statements continued Basis of consolidation Subsidiaries are entities controlled by the group. Control exists when the group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Foreign currency Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate ruling at that date or the contracted date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the period where this rate approximates to the foreign exchange rates ruling at the dates of the transactions. Exchange differences arising from this translation of foreign operations are taken directly to the translation reserve. They are released into the income statement upon disposal. The group has taken advantage of relief available in IFRS 1 to deem the cumulative translation differences for all foreign operations to be zero at the date of transition to IFRS on 1 January 2004. Classification of financial instruments issued by the group Following the adoption of IAS 32, financial instruments issued by the group are treated as equity, i.e. forming part of shareholders’ funds, only to the extent that they meet the following two conditions: (a)they include no contractual obligations upon the company, or group as the case may be, to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the company or group; and (b)where the instrument will or may be settled in the company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the company’s own equity instruments or is a derivative that will be settled by the company exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments. To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares. Finance payments associated with financial liabilities are dealt with as part of financial expenses. Finance payments associated with financial instruments that are classified in equity are dividends and are recorded directly in equity. Investments in debt and equity securities Investments in subsidiaries are carried at cost less impairment. Where the consideration for the acquisition of a subsidiary undertaking includes shares in the company to which the provisions of Section 131 of the Companies Act 1985 apply, cost represents the nominal value of shares issued, together with the fair value of any additional consideration given and costs. In the consolidated financial statements, the excess of the fair value of the consideration of shares issued over the nominal value is credited to the special reserve. 54 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 1 ACCOUNTING POLICIES – CONTINUED Derivative financial instruments and hedging Derivative financial instruments Derivative transactions relate to forward foreign currency contracts used to hedge the group’s exposure to currency risks arising from selling and buying activities. In accordance with its treasury policy, the group does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged as described below. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. Cash flow hedges On initial adoption of IAS 39, where a derivative financial instrument was designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any cumulative gain or loss on the derivative financial instrument since the inception of the hedge relationship was recognised directly in the hedging reserve. The associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss. Effect on the balance sheets at 1 January 2005 Trade and other payables Interest payable Cash flow hedging reserve Following initial adoption, the group has decided not to apply the hedge accounting requirements of IAS 39. Consequently, all movements in the fair value of the hedge are recognised immediately in the income statement, within net financing costs. Effect of first time adoption of IAS 32 and IAS 39 on 1 January 2005 The group has taken advantage of the transitional arrangements of IFRS 1 not to restate corresponding amounts in accordance with IAS 32 and IAS 39. Instead the following policies were applied in respect of financial instruments issued by the group, investments in debt and equity securities, derivative financial instruments and hedging: In the comparative period, other than the following exceptions, all financial assets and financial liabilities were carried at cost, amortised as appropriate, less, in the case of financial assets, provision for any permanent diminution in value. Gains and losses on forward foreign exchange contracts treated as hedging instruments were not recognised in the income statement. On recognition of the hedged transaction the unrecognised gains and losses arising on the instrument were recognised, either in the income statement or combined into the carrying value of the associated asset or liability. The following adjustments necessary to implement the revised policy have been made as at 1 January 2005 with the net adjustment to net assets, after tax, taken through the 2005 statement of recognised income and expense. Corresponding amounts for 2004 are presented and disclosed in accordance with the requirements of the Companies Act 1985, SSAP 20 and FRS 4, as applicable in 2004. The main differences between the 2004 and 2005 bases of accounting are shown and described below: Group £000 Company £000 (13) 13 – – Accounts Headlam Group plc Annual Report and Accounts 2005 55 Notes to the Financial Statements continued The nature of the main effects upon the balance sheets at 1 January 2005 and upon the 2005 income statement, statements of recognised income and expense and cash flow statements are as follows: • In 2005 hedging instruments and hedged items are accounted for separately in the balance sheet. Gains and losses in both are included in profit for the year when they arise, i.e. fair value hedges, or when the hedged transaction occurs having first recorded those on the hedging instrument in equity, i.e. cash flow hedges, to the extent effective. In 2004 hedging instruments were not recognised and hedged items were held at cost, amortised as appropriate, without any adjustment in respect of the hedged risk. On 1 January 2005, the hedged items and hedging instruments are brought separately on to the balance sheet in accordance with the 2005 policy. The cash flow statements are unaffected by this change in accounting policy. The main effects on the primary statements in the comparative year, had IAS 32 and IAS 39 been adopted, would have been similar to those stated above. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Leases in which the company and the group assume substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Where land and buildings are held under finance leases the accounting treatment of the land is considered separately from that of the buildings. Leased assets acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Lease payments are accounted for as described below. Depreciation is charged to the income statement on a straight- line basis over their estimated useful lives. Land is not depreciated. The annual rates applicable are: Freehold and long leasehold properties – 2% Short leasehold properties Motor vehicles Office and computer equipment Warehouse and production equipment – 10% - 20% – period of lease – 25% – 10% - 33.3% Intangible assets and goodwill Subject to the transitional relief in IFRS 1, all business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries. In respect of business acquisitions that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate. In respect of acquisitions prior to 1 January 2004, goodwill is included on the basis of its deemed cost, which represents the amount recorded under UK GAAP which was broadly comparable save that only separable intangibles were recognised and goodwill was amortised. On transition, certain items recognised as other intangibles under IFRS, but not all such items, have been separately accounted for with appropriate adjustments against goodwill and amortisation of goodwill has ceased as required by IFRS 1. 56 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 1 ACCOUNTING POLICIES – CONTINUED Intangible assets and goodwill –continued Goodwill relating to acquisitions made prior to 1 January 1998, and written off to reserves under UK GAAP, will not be charged to the consolidated income statement on subsequent disposal or termination of the acquired business. Negative goodwill arising on an acquisition is recognised in the income statement Expenditure on research activities is recognised in the income statement as an expense as incurred. Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the group has sufficient resources to complete development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. Other intangible assets that are acquired by the group are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight- line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: Customer lists 24 months Trade and other receivables Trade and other receivables are stated at their nominal amount, discounted if material, less impairment losses. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Inventory provisions are determined by reference to each individual product and are calculated by assessing the age, condition and quantity of each individual product. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of cash management of both the company and group are included as a component of cash and cash equivalents for the purpose only of the statement of cash flows. Impairment The carrying amounts of the group’s assets other than inventories and deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use were tested for impairment as at 1 January 2004, the date of transition to IFRS, even through no indication of impairment existed. When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity is recognised in profit or loss even though the financial asset has not been derecognised. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss. Accounts Headlam Group plc Annual Report and Accounts 2005 57 Notes to the Financial Statements continued Calculation of recoverable amount The recoverable amount of the group’s investments in held-to- maturity securities and receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate, i.e., the effective interest rate computed at initial recognition of these financial assets. Receivables with a short duration are not discounted. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Reversals of impairment An impairment loss in respect of a held-to-maturity security or receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. An impairment loss in respect of an investment in an equity instrument classified as available for sale is not reversed through profit or loss. If the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed when there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. Employee benefits The company and the group operate both defined benefit and defined contribution plans, the assets of which are held in independent trustee administered funds. The pension cost is assessed in accordance with the advice of a qualified actuary. Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. Defined benefit plans The group’s net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan assets, at bid price, is deducted. The liability discount rate is the yield at the balance sheet date using AA rated corporate bonds that have maturity dates approximating to the terms of the group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the income statement on a straight- line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement. All actuarial gains and losses as at 1 January 2004, the date of transition to IFRS, were recognised. In respect of actuarial gains and losses that arise subsequent to 1 January 2004, the group recognises them in the period they occur directly into equity through the statement of recognised income and expense. 58 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 1 ACCOUNTING POLICIES – CONTINUED Defined benefit plans – continued Where the calculation results in a benefit to the group, the asset recognised is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan. The group operates a group wide defined benefit pension plan. As there is no contractual agreement or stated group policy for charging the net defined benefit cost of the plan to participating entities, the net defined benefit cost of the pension plan is recognised fully by the sponsoring employer, which is Headlam Group plc. The company then recognises a cost equal to its contribution payable for the period. Share-based payment transactions The company and group operate various equity settled share option schemes under the approved and unapproved executive schemes and savings related schemes. Executive share option schemes – the option price may not be less than the mid market value of the group’s shares at the time when the options were granted or the nominal value. Approved These share options are subject to the movement of the group’s earnings per share exceeding that of the General Index of Retail Prices, all items, over the relevant period. Unapproved These share options are subject to the movement of the group earnings per share exceeding that of the General Index of Retail Prices, all items, by 2% per annum and 3% per annum over the relevant period. The performance is assessed by reference to the group’s published results. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is due only to share prices not achieving the threshold for vesting. When options are granted to employees of subsidiaries of the company, the fair value of options granted is recognised as an employee expense in the financial statements of the subsidiary undertaking together with the capital contribution received. In the financial statements of the company, the options granted are recognised as an investment in subsidiary undertakings with a corresponding increase in equity. Revenue Revenue from the sale of goods is measured at the fair value of the consideration, net of trade discounts. Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods are transferred to the buyer, the amount of revenue can be reliably measured and it is probable that the economic benefits associated with the transaction will flow to the group. Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Net financing costs Net financing costs comprise interest payable, finance charges on shares classified as liabilities, finance leases, interest receivable on funds invested, foreign exchange gains and losses and gains and losses on hedging instruments as outlined in the accounting policy relating to derivative financial instruments and hedging described above. Interest income and interest payable is recognised in the income statement as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the entity’s right to receive payments is established. The expected return on assets of funded defined benefits pension plans, less administration expenses of pension plans are recognised in financial income. The interest accruing on defined benefit pension plan liabilities are recognised in financial expenses. Accounts Headlam Group plc Annual Report and Accounts 2005 59 Notes to the Financial Statements continued Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. IFRS not yet applied The following IFRS’s are available for early application but have not been applied by the company or group in these financial statements: • IFRS 7 ‘Financial instruments: Disclosure’ applicable for years commencing on or after 1 January 2007 • Amendment to IFRS 39: Financial Guarantee Contracts’ applicable for years commencing on or after 1 January 2006 Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. The application of IFRS 7 in 2005 would not have affected the balance sheets or income statement as the standard is concerned only with disclosure. The group plans to adopt it on 1 January 2007. The application of the amendment to IFRS 39 is not expected to have any significant effect on the income statement. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Non-current assets held for sale A non-current asset is classified as held for sale if its carrying amount will be recovered principally through sale rather than through continuing use, it is available for immediate sale and sale is highly probable within one year. On initial classification as held for sale, non-current assets and disposal groups are measured at the lower of previous carrying amount and fair value less costs to sell with any adjustments taken to profit or loss. The same applies to gains and losses on subsequent remeasurement. IFRS 5 was adopted early on 1 January 2004. 60 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 2 SEGMENT REPORTING The group’s activities are wholly aligned to the sales, marketing, supply and distribution of floorcovering products. These activities are carried out from business centres located in both the UK and Continental Europe. The group’s internal management structure and financial reporting systems treat the UK and Continental Europe as two separate segments because of the difference in reward arising from these two markets and this forms the basis for the geographical presentation of the primary segment information given below. Revenue External sales Result Segment result Unallocated corporate expenses Operating profit Financial income Financial expense Taxation Profit for the year Other information Segment assets including inter segment assets Inter segment assets Segment assets Unallocated assets Consolidated total assets Segment liabilities including inter segment liabilities Inter segment liabilities Segment liabilities Unallocated liabilities Consolidated total liabilities Capital expenditure Depreciation Amortisation Asset impairment UK 2005 £000 2004 £000 Continental Europe 2004 2005 £000 £000 Total 2005 £000 2004 £000 415,038 395,696 71,597 69,093 486,635 464,789 41,905 38,784 1,815 1,719 43,720 40,503 (2,222) (1,579) 41,498 38,924 3,893 (4,551) (12,352) 3,300 (3,740) (11,738) 28,488 26,746 274,303 (3,229) 263,171 (3,424) 28,769 (365) 29,229 (187) 303,072 (3,594) 271,074 259,747 28,404 29,042 299,478 11,670 292,400 (3,611) 288,789 8,370 311,148 297,159 (127,623) 365 (127,560) 187 (18,238) 3,229 (20,219) 3,424 (145,861) 3,594 (147,779) 3,611 (127,258) (127,373) (15,009) (16,795) (142,267) (33,054) (144,168) (30,631) (175,321) (174,799) 10,462 3,451 836 215 13,907 2,937 836 – 503 631 – – 467 599 – – 10,965 4,082 836 215 14,374 3,536 836 – Each segment is a continuing operation. Unallocated assets comprise deferred tax assets and assets held for resale. Unallocated liabilities comprise income tax, deferred tax liabilities and employee benefits. Accounts Headlam Group plc Annual Report and Accounts 2005 61 Notes to the Financial Statements continued Management has access to information that provides details on sales and gross margin by principal product group and across the four principal business sectors which comprise Regional multi-product, National multi-product, Residential specialist and Commercial specialist. However, this information is not provided as a secondary segment since the group’s operations are not managed by reference to these sub classifications and the presentation would require an arbitrary allocation of overheads, assets and liabilities undermining the presentations validity and usefulness. 3 PROFIT BEFORE TAX AND AUDITORS’ REMUNERATION The following are included in profit before tax: Depreciation on property, plant and equipment Amortisation of intangible assets Impairment loss on property, plant and equipment (Profit)/loss on sale of property, plant and equipment Equity settled share-based payment expenses Operating lease rentals Plant and machinery Land and buildings Auditors’ remuneration: Group – audit – fees receivable by the auditors and their associates in respect of other services Company – audit 2005 £000 4,082 836 215 (228) 196 7,369 1,707 2005 £000 181 63 59 2004 £000 3,554 836 – 11 57 6,819 1,844 2004 £000 170 42 37 Amounts paid to the company’s auditor in respect of services to the company, other than the audit of the company’s financial statements, have not been disclosed as the information is required instead to be disclosed on a consolidated basis. 62 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 4 STAFF NUMBERS AND COSTS The average number of people employed, including directors, during the year, analysed by category, was as follows: Number of employees Group Number of employees Company 2005 2004 2005 2004 By sector: Floorcoverings Central operations By function: Sales and distribution Administration The aggregate payroll costs were as follows: Wages and salaries Equity settled transactions Social security costs Contributions to defined contribution plans Increase in liability for defined benefit plans 5 DIRECTORS’ EMOLUMENTS Directors’ emoluments Gains made on share options Company contributions to money purchase pension plans 2,025 9 2,034 1,853 181 2,034 1,911 9 1,920 1,747 173 1,920 £000 £000 49,617 196 6,437 1,307 1,644 47,911 57 5,896 1,158 1,372 59,201 56,394 – 9 9 – 9 9 £000 2,603 71 324 8 1,644 4,650 2005 £000 1,852 364 7 – 9 9 – 9 9 £000 2,196 2 215 7 1,372 3,792 2004 £000 1,918 998 26 Further details of directors’ emoluments, share options and pension entitlement are given in the remuneration report on pages 38 and 44. Accounts Headlam Group plc Annual Report and Accounts 2005 63 Notes to the Financial Statements continued 6 FINANCE INCOME AND EXPENSE Interest income Bank interest Other Return on defined pension plan assets Financial income Interest expense Bank loans, overdrafts and other financial expenses Interest on defined benefit pension plan obligation Finance leases and similar hire purchase contracts Financial expenses 7 TAXATION Recognised in the income statement Current tax expense Current year Adjustments for prior years Deferred tax expense Origination and reversal of temporary differences Adjustments for prior years Total tax in income statement Reconciliation of effective tax rate Profit before tax Tax using the UK corporation tax rate Non-deductible expenses Effect of tax rates in foreign jurisdictions Losses not recognised Non-taxable gain on disposal Over provided in prior years 2005 £000 1,329 87 2,477 3,893 2004 £000 886 141 2,273 3,300 (1,503) (2,987) (61) (997) (2,654) (89) (4,551) (3,740) 2005 £000 12,764 (1,652) 11,112 (101) 1,341 2004 £000 12,685 331 13,016 (212) (1,490) 1,240 (1,278) 12,352 11,738 2005 2004 % £000 % 40,840 12,252 362 (38) 87 – (311) 30% 0.9% (0.1%) 0.2% (0.8%) 30% 3.2% 0.0% 0.5% 0.2% (3.0%) £000 38,484 11,545 1,242 (9) 206 (87) (1,159) Total tax in income statement 30.2% 12,352 30.5% 11,738 During the period, certain computations under enquiry with HM Revenue and Customs have been finalised and agreed. The current position has been reconciled to date, giving a net prior year credit of £311,000. This is made up of a current tax credit of £1,652,000 which, to a large extent, is matched with a corresponding deferred tax charge of £1,341,000. 64 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 8 CURRENT TAX LIABILITIES The current tax liability of £11,139,000 (2004: £11,053,000) represents the amount of income taxes payable in respect of current and prior year periods which exceed any amounts recoverable. 9 EARNINGS PER SHARE The calculation of the basic and diluted earnings per share is based on the following data: Earnings Earnings for the purposes of basic earnings per share being profit attributable to equity holders of the parent Earnings for the purposes of diluted earnings per share Number of shares Issued ordinary shares at 1 January Effect of shares issued during the period 2005 £000 28,488 28,488 2004 £000 26,746 26,746 86,111,437 86,272 84,265,339 1,087,250 Weighted average number of ordinary shares for the purposes of basic earnings per share 86,197,709 85,352,589 Effect of diluted potential ordinary shares: Weighted average number of ordinary shares at 31 December Share options Number of shares that would have been issued at fair value Weighted average number of ordinary shares for the purposes of diluted earnings per share 86,197,709 2,407,331 (1,813,602) 85,352,589 1,534,175 (737,011) 86,791,438 86,149,753 Accounts Headlam Group plc Annual Report and Accounts 2005 65 Notes to the Financial Statements continued 10 PROPERTY, PLANT AND EQUIPMENT – GROUP AND COMPANY Group Land & buildings Freehold £000 Long leasehold £000 Short leasehold £000 Plant & equipment £000 Under construction £000 Cost Balance at 1 January 2004 Acquisitions through business combinations Additions Transfer to non-current assets held for sale Disposals Effect of movements in foreign exchange Reclassification Balance at 31 December 2004 Balance at 1 January 2005 Additions Transfer to non-current assets held for sale Disposals Effect of movements in foreign exchange Asset impairment Reclassification Balance at 31 December 2005 Depreciation Balance at 1 January 2004 Depreciation charge for the year Acquisitions through business combinations Transfer to non-current assets held for sale Disposals Effect of movements in foreign exchange Reclassification Balance at 31 December 2004 Balance at 1 January 2005 Depreciation charge for the year Transfer to non-current assets held for sale Disposals Effect of movements in foreign exchange Balance at 31 December 2005 Net book value At 1 January 2004 48,693 – 1,101 (926) – 62 119 49,049 49,049 3,052 (3,912) – (169) (215) 11,922 59,727 3,198 1,118 – (47) – 27 59 4,355 4,355 1,170 (441) – (60) 5,024 45,495 At 31 December 2004 and 1 January 2005 44,694 At 31 December 2005 54,703 2,136 – 2,737 – – – – 4,873 4,873 - – – – – – 4,873 20 21 – – – – – 41 41 76 – – – 117 2,116 4,832 4,756 13,496 455 2,001 – (1,063) 31 (22) 3,441 – 8,505 – – – – Total £000 68,129 455 14,374 (926) (1,063) 95 – 14,898 11,946 81,064 14,898 5,747 – (1,696) (135) – – 18,814 3,018 2,391 201 – (932) 19 (23) 4,674 4,674 2,820 – (1,530) (100) 5,864 10,478 10,224 11,946 1,977 – – – – (11,922) 81,064 10,964 (3,912) (1,696) (304) (215) – 2,001 85,901 – – – – – – – - – – – – – – 3,441 11,946 6,505 3,536 201 (47) (932) 47 – 9,310 9,310 4,082 (441) (1,530) (160) 11,261 61,624 71,754 363 – 30 – – 2 (97) 298 298 188 – – – – – 486 269 6 – – – 1 (36) 240 240 16 – – – 256 94 58 230 12,950 2,001 74,640 66 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 10 PROPERTY, PLANT AND EQUIPMENT – GROUP AND COMPANY – CONTINUED Asset impairment The asset impairment is recognised in administration expenses in the income statement. The impairment arises in connection with a property that will be vacated during 2007 and which does not presently meet the requirements of IFRS 5 relating to non-current assets held for sale. A preliminary assessment has indicated that net book value exceeds the property’s fair value which equates to market value less marketing and selling costs. Company Land & buildings Freehold £000 Long leasehold £000 Short leasehold £000 Plant & equipment £000 Under construction £000 Cost Balance at 1 January 2004 Additions Transfer to non-current assets held for sale Disposals Balance at 31 December 2004 Balance at 1 January 2005 Additions Transfer to non-current assets held for sale Disposals Reclassification Asset impairment Balance at 31 December 2005 Depreciation Balance at 1 January 2004 Depreciation charge for the year Disposals Transfer to non-current assets held for sale Balance at 31 December 2004 Balance at 1 January 2005 Depreciation charge for the year Transfer to non-current assets held for sale Disposals Balance at 31 December 2005 Net book value At 1 January 2004 44,090 1,096 (926) – 44,260 44,260 3,031 (3,912) – 11,922 (215) 55,086 1,987 860 – (47) 2,800 2,800 928 (441) – 3,287 42,103 At 31 December 2004 and 1 January 2005 41,460 At 31 December 2005 51,799 2,136 2,737 – – 4,873 4,873 – – – – – 4,873 20 21 – – 41 41 76 – – 117 2,116 4,832 4,756 196 – – – 196 196 – – – – – 196 196 – – – 196 196 – – – 196 - – – Total £000 50,436 12,340 (926) (22) 3,441 8,505 – – 11,946 61,828 11,946 1,977 – – (11,922) – 61,828 5,121 (3,912) (108) – (215) 2,001 62,714 – – – – - – – – – – 2,684 913 (22) (47) 3,528 3,528 1,034 (441) (72) 4,049 3,441 11,946 47,752 58,300 573 2 – (22) 553 553 113 – (108) – – 558 481 32 (22) – 491 491 30 – (72) 449 92 62 109 2,001 58,665 Accounts Headlam Group plc Annual Report and Accounts 2005 67 Notes to the Financial Statements continued 10 PROPERTY, PLANT AND EQUIPMENT – GROUP AND COMPANY – CONTINUED Leased plant and machinery At 31 December 2005, the net carrying amount of leased plant and machinery was £nil (2004: £100,000). Depreciation for the year on this asset was £nil (2004: £43,000). Property, plant and equipment under construction During the year ended 31 December 2005, the group acquired land in Leeds with the intention of building a new warehouse and distribution facility on the site. The costs incurred up to the balance sheet date on this new facility were £2,001,000. Fair value of UK freehold and long leasehold land and buildings A full independent valuation of UK freehold and long leasehold land and buildings was carried out as at 31 December 2004 by Lambert Smith Hampton, a firm of chartered surveyors and valuers, in accordance with the General Principles and Practice Statements contained within the Appraisal and Valuation Standards produced by the Royal Institution of Chartered Surveyors. Properties were valued on an existing use basis which is consistent with the basis used for previous valuations. The valuation revealed a surplus of £3,730,000 which when added to previous revaluations brings the total surplus at 31 December 2004 to £6,615,000. Following the adoption of IFRS, the revaluation surplus is not reflected in the balance sheets of the company or the group. 68 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 11 INTANGIBLE ASSETS – GROUP Cost Balance at 1 January 2004 Acquisitions through business combinations Balance at 31 December 2004 Balance at 1 January 2005 and 31 December 2005 Amortisation Balance at 1 January 2004 Amortisation for the year Balance at 31 December 2004 Balance at 1 January 2005 Amortisation for the year Balance at 31 December 2005 Net book value At 1 January 2004 At 31 December 2004 and 1 January 2005 At 31 December 2005 Amortisation The amortisation charge is recognised in administration expenses in the income statement. Impairment tests for cash-generating units containing goodwill The following cash-generating units have significant carrying amounts of goodwill: UK Continental Europe Goodwill £000 Customer lists £000 78,778 – 78,778 78,778 65,568 – 65,568 65,568 – 65,568 13,210 13,210 13,210 – 1,672 1,672 1,672 – 836 836 836 836 1,672 – 836 – Total £000 78,778 1,672 80,450 80,450 65,568 836 66,404 66,404 836 67,240 13,210 14,046 13, 210 2005 £000 6,671 6,539 2004 £000 7,507 6,539 13,210 14,046 On acquisition, each cash-generating unit is fully integrated into the group’s business model and benefits from shared purchasing, common IT systems and other shared support services including warehousing and logistics. Accordingly, it is not possible to separately test each individual cash-generating unit for goodwill impairment. Goodwill by geographical segments has been separately identified and measured for impairment. The recoverable amount of each cash- generating unit has been assessed on a value in use basis using the operating profit of each geographical segment for 2005 and extrapolating forward assuming forecast inflationary growth rates for the territories in which the cash-generating units are located. Accounts Headlam Group plc Annual Report and Accounts 2005 69 Notes to the Financial Statements continued 12 INVESTMENTS IN SUBSIDIARIES The company has the following investments in subsidiaries: Company HFD Limited MCD Group Limited Lethem-Vergeer BV DFA SA Belcolor AG Summary information on investments in subsidiary undertakings is as follows: Cost At 1 January 2005 Share options granted to employees of subsidiary undertakings Country of Incorporation Ownership 2005 2004 Great Britain Great Britain Netherlands France Switzerland Shares £000 118,143 125 100% 100% 100% 100% 100% Loans £000 28,437 – 100% 100% 100% 100% 100% Total £000 146,580 125 At 31 December 2005 118,268 28,437 146,705 Provisions At 1 January 2005 and 31 December 2005 At 31 December 2004 Carrying value At 31 December 2005 51,870 – 51,870 66,273 28,437 94,710 66,398 28,437 94,835 Loans shown as part of investment in subsidiaries occurred on acquisition and are deemed to be part of the investment cost of the related business. 70 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 13 DEFERRED TAX ASSETS AND LIABILITIES – GROUP Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net Property, plant and equipment Intangible assets Employee benefits Provisions Other items 2005 £000 1,403 2005 £000 2004 £000 (539) (7,047) (377) (236) (386) (5,772) (382) (1,627) Tax (assets) / liabilities (8,199) (8,167) 1,403 Movement in deferred tax during the year 2004 £000 1,139 73 – – – 1,212 2005 £000 1,403 (539) (7,047) (377) (236) 2004 £000 1,139 (313) (5,772) (382) (1,627) (6,796) (6,955) Property, plant and equipment Intangible assets Employee benefits Provisions Other Movement in deferred tax during the prior year Property, plant and equipment Intangible assets Employee benefits Provisions Other 1 January 2005 £000 Recognised in income £000 Recognised 31 December 2005 £000 in equity £000 1,139 (313) (5,772) (382) (1,627) 264 (226) (194) 5 1,391 – – (1,081) – – 1,403 (539) (7,047) (377) (236) (6,955) 1,240 (1,081) (6,796) 1 January 2004 £000 Recognised in income £000 Recognised in equity £000 31 December 2004 £000 1,981 (70) (5,478) (188) (1,627) (842) (243) 1 (194) – (5,382) (1,278) – – (295) – – (295) 1,139 (313) (5,772) (382) (1,627) (6,955) Accounts Headlam Group plc Annual Report and Accounts 2005 71 Notes to the Financial Statements continued 13 DEFERRED TAX ASSETS AND LIABILITIES – COMPANY Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net Property, plant and equipment Employee benefits Provisions 2005 £000 – (6,480) (149) 2004 £000 – (5,704) – 2005 £000 1,616 – – Tax (assets)/liabilities (6,629) (5,704) 1,616 2004 £000 96 – – 96 2005 £000 1,616 (6,480) (149) 2004 £000 96 (5,704) – (5,013) (5,608) Movement in deferred tax during the year Property, plant and equipment Employee benefits Provisions Movement in deferred tax during the prior year Property, plant and equipment Employee benefits Provisions 1 January 2005 £000 Recognised in income £000 Recognised 31 December 2005 £000 in equity £000 96 (5,704) – 1,520 (157) (149) – (619) – 1,616 (6,480) (149) (5,608) 1,214 (619) (5,013) 1 January 2004 £000 Recognised in income £000 Recognised in equity £000 31 December 2004 £000 1,361 (4,608) (64) (1,265) 20 64 – (1,116) – 96 (5,704) – (3,311) (1,181) (1,116) (5,608) 72 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 14 INVENTORIES Finished goods and goods held for resale Cost of sales consists of the following: Material cost Processing cost Other Group 2005 £000 2004 £000 91,160 79,692 Company 2005 £000 – Group Company 2005 £000 330,147 3,616 2,807 2004 £000 316,272 4,565 3,087 336,570 323,924 2005 £000 – – – – 2004 £000 – 2004 £000 – – – – Processing cost includes the net movement in inventory provisions. During the year provisions increased by £136,000 (2004: £664,000) to £5,869,000 (2004: £5,733,000). Inventory held at net book value at 31 December 2005 amounted to £24,882,000 (2004: £23,987,000). 15 TRADE AND OTHER RECEIVABLES Trade receivables Prepayments and accrued income Other receivables Group Company 2005 £000 66,602 3,480 14,193 84,275 2004 £000 66,274 3,794 15,482 85,550 2005 £000 217 420 1,683 2,320 2004 £000 22 310 2,346 2,678 Included within trade and other receivables is £1,500,000 (2004: £1,500,000) for the group and £1,500,000 (2004: £1,500,000) for the company expected to be recovered in more than twelve months. 16 CASH, CASH EQUIVALENTS AND BANK OVERDRAFTS Group Company Cash and cash equivalents per balance sheet Bank overdrafts 2005 £000 36,193 – 2004 £000 37,747 (279) 2005 £000 31,265 – Cash and cash equivalents per cash flow statements 36,193 37,468 31,265 2004 £000 5,473 – 5,473 Accounts Headlam Group plc Annual Report and Accounts 2005 73 Notes to the Financial Statements continued 17 NON-CURRENT ASSETS HELD FOR SALE Assets classified as held for sale: Property, plant and equipment Group Company 2005 £000 3,471 2004 £000 203 2005 £000 3,471 2004 £000 203 At 31 December 2005, assets classified as held for sale comprise two properties which are expected to be sold during 2006. Proceeds, net of sales and marketing costs, are likely to be £4,200,000. At 31 December 2004, a property at Somerton was held for sale with a carrying value of £203,000 and, on 29 July 2005, it was subsequently sold for proceeds of £397,000 net of costs totalling £5,000, creating a profit on disposal of £194,000. There was no gain or loss on initial classification of this asset. 18 OTHER INTEREST-BEARING LOANS AND BORROWINGS This note provides information about the contractual terms of the group’s and company’s interest-bearing loans and borrowings. For more information about the group’s and company’s exposure to interest rate and foreign currency risk, see note 23. Non-current liabilities Finance lease liabilities Current liabilities Unsecured bank loans Finance lease liabilities Group Company 2005 £000 267 267 – 471 471 2004 £000 738 738 687 437 1,124 2005 £000 267 267 – 471 471 2004 £000 738 738 – 430 430 The group has undrawn committed borrowing facilities expiring in one year or less which, at 31 December 2005, amounted to £51,802,000 (2004: £54,529,000). Terms and debt repayment schedule The unsecured bank loan from a Swiss bank, on which the interest was paid at a fixed rate of 1.98% was repaid during the year. As more fully explained in note 23, classifications of financial liabilities are determined on different bases in 2005 and 2004 due to the transitional provisions of IAS 32 and IAS 39. 74 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 18 OTHER INTEREST-BEARING LOANS AND BORROWINGS – CONTINUED Analysis of debt in 2004 Debt may be analysed as falling due as follows: Bank loans and overdrafts On demand Within one year Finance lease liabilities Finance lease liabilities are payable as follows: Group £000 Company £000 279 687 966 – – – Group Less than one year Between one and five years Company Less than one year Between one and five years Minimum lease payments 2005 £000 516 267 783 Minimum lease payments 2005 £000 516 267 783 Interest 2005 £000 Principal 2005 £000 (45) – (45) 471 267 738 Interest 2005 £000 Principal 2005 £000 (45) – (45) 471 267 738 Minimum lease payments 2004 £000 523 738 Interest 2004 £000 (86) (45) Principal 2004 £000 437 783 1,306 (131) 1,175 Minimum lease payments 2004 £000 523 738 Interest 2004 £000 (86) (45) Principal 2004 £000 437 783 1,306 (131) 1,175 19 TRADE AND OTHER PAYABLES Trade payables Taxation and social security Non-trade payables and accrued expenses Group Company 2005 £000 109,765 10,585 21,179 2004 £000 110,455 9,204 22,369 141,529 142,028 2005 £000 192 365 4,975 5,532 2004 £000 1,506 – 3,825 5,331 Accounts Headlam Group plc Annual Report and Accounts 2005 75 Notes to the Financial Statements continued 20 EMPLOYEE BENEFITS Pension plans During the year, the group operated defined benefit and of defined contribution plans. The Headlam Group plc Staff Retirement Benefits Scheme is the principal defined benefit plan which provides benefits to group employees that have been admitted into the scheme. The scheme is self-administered and its assets are held independently of the company’s finances. The scheme is funded partly by contributions from members and partly by contributions from the company at rates advised by professionally qualified actuaries. The latest actuarial valuation was carried out as at 31 March 2005 using the projected unit method. The main annual rate assumptions used by the actuary were, increase in salaries 4.5%, increase of pensions in payment 2.5%, discount rate before retirement 6.7%, discount rate after retirement 4.7% and inflation 2.5%. Assets were taken at their audited market value at the valuation date. The total group cost of operating the plans during the year was £2,951,000 (2004: £2,530,000) and, at 31 December 2005, there was an amount of £156,000 (2004: £226,000) owed to the plans, being employer and employee contributions due for December 2005 but not received by 31 December 2005. Included within the total group cost are costs relating to the group’s defined contribution plans. The pension cost for the year represents contributions payable by the group to the plans and amounted to £1,307,000 (2004: £1,158,000). Contributions amounting to £76,000 (2004: £103,000) were payable to the scheme at 31 December 2005 and these are included in creditors. As there is no contractual agreement or stated group policy for charging the net defined benefit cost of the plan to participating entities, the net defined benefit cost of the pension plan is recognised fully by the sponsoring employer, which is Headlam Group plc. The company then recognises a cost equal to its contribution payable for the period. Group Company 2005 £000 2004 £000 2005 £000 2004 £000 Present value of funded defined benefit obligations Fair value of plan assets (64,750) 44,524 (54,729) 36,815 (64,750) 44,524 (54,729) 36,815 Net obligations (20,226) (17,914) (20,226) (17,914) Recognised liability for defined benefit obligations Other long term employee benefits (20,226) (286) (17,914) (451) (20,226) – (17,914) – Total employee benefits Split: Current liabilities Non-current liabilities Total employee benefits (20,512) (18,365) (20,226) (17,914) (1,080) (19,432) (722) (17,643) (1,080) (19,146) (722) (17,192) (20,512) (18,365) (20,226) (17,914) 76 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 20 EMPLOYEE BENEFITS – CONTINUED Pension plans (continued) Movements in present value of defined benefit obligation At 1 January Current service cost Interest cost Actuarial losses Benefits paid Contributions by members At 31 December Movements in fair value of plan assets At 1 January Expected return on plan assets Actuarial gains Contributions by employer Contributions by members Benefits paid At 31 December Expense recognised in the income statement Current service cost Interest on defined benefit pension plan obligation Expected return on defined benefit pension plan assets Total Group Company 2005 £000 54,729 1,134 2,987 6,711 (1,072) 261 2004 £000 47,184 991 2,646 4,786 (1,138) 260 2005 £000 54,729 1,134 2,987 6,711 (1,072) 261 2004 £000 47,184 991 2,646 4,786 (1,138) 260 64,750 54,729 64,750 54,729 Group Company 2005 £000 36,815 2,477 4,134 1,909 261 (1,072) 2004 £000 33,018 2,273 1,030 1,372 260 (1,138) 2005 £000 36,815 2,477 4,134 1,909 261 (1,072) 2004 £000 33,018 2,273 1,030 1,372 260 (1,138) 44,524 36,815 44,524 36,815 Group 2005 £000 1,134 2,987 (2,477) 2004 £000 991 2,654 (2,273) 1,644 1,372 Accounts Headlam Group plc Annual Report and Accounts 2005 77 Notes to the Financial Statements continued 20 EMPLOYEE BENEFITS – CONTINUED Pension plans (continued) The expense is recognised in the following line items in the income statement: Administrative expenses Finance expense Group 2004 £000 991 381 1,372 2005 £000 1,134 510 1,644 Cumulative actuarial gains and losses reported in the statement of recognised income and expenses since 1 January 2004, the transition date to IFRS, are £6,325,000 (2004: £3,756,000). Company £6,325,000 (2004: £3,756,000). The fair value of the plan assets and the return on those assets were as follows: Equities Government debt Annuities Other Group Company 2005 Fair value £000 2004 Fair value £000 2005 Fair value £000 2004 Fair value £000 28,975 11,856 3,195 498 23,888 9,886 2,982 59 28,975 11,856 3,195 498 23,888 9,886 2,982 59 44,524 36,815 44,524 36,815 Actual return on plan assets 6,611 3,303 6,611 3,303 The expected rates of return on plan assets are determined by reference to relevant indices. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the plan’s investment portfolio. 78 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 20 EMPLOYEE BENEFITS – CONTINUED Principal actuarial assumptions, expressed as weighted averages, are as follows: Discount rate Future salary increases Future pension increases Inflation rate Expected rate of return on plan assets History of plans The history of the plans for the current and prior periods is as follows: Balance sheet Group Company 2004 % 5.50 4.90 2.90 2.90 6.62 2005 % 5.00 4.90 2.90 2.90 6.12 2004 % 5.50 4.90 2.90 2.90 6.62 2005 % 5.00 4.90 2.90 2.90 6.12 Group Company 2005 £000 2004 £000 2005 £000 2004 £000 Present value of defined benefit obligation Fair value of plan assets (64,750) 44,524 (54,729) 36,815 (64,750) 44,524 (54,729) 36,815 Deficit Experience adjustments Experience adjustments on plan liabilities Experience adjustments on plan assets Experience adjustment as a percentage of plan liabilities Experience adjustment as a percentage of plan assets (20,226) (17,914) (20,226) (17,914) Group Company 2005 £000 6,711 4,134 10.4% 9.3% 2004 £000 4,786 1,030 8.7% 2.8% 2005 £000 6,711 4,134 10.4% 9.3% 2004 £000 4,786 1,030 8.7% 2.8% The group and company expect to contribute approximately £2,063,000 to defined benefit plans in the next financial year. Accounts Headlam Group plc Annual Report and Accounts 2005 79 Notes to the Financial Statements continued 20 EMPLOYEE BENEFITS – CONTINUED Share-based payments – Group Executive directors and executive management currently participate in executive share option schemes. The option price may not be less than the greater of the mid-market value of the company’s shares at the time when the options were granted or the nominal value. Options granted under the 1998 Inland Revenue approved scheme are normally exercisable between the third and tenth anniversaries of their date of grant, subject to the movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices, all items, over the relevant period. Options granted under the 1996 and 1998 unapproved schemes are normally exercisable between the third and seventh anniversaries of their date of grant, subject to the movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices, all items, by 2% per annum and 3% per annum respectively over the relevant period. Additionally, the company operates a savings related share option scheme which is open to all UK employees subject to eligibility criteria determined by the directors prior to each option grant. The most recent grant was on 28 October 2002 where all employees with over one year’s service were invited to participate. As this savings related share option scheme was granted before 7 November 2002, the recognition and measurement principles in IFRS 2 have not been applied in accordance with the transitional provisions in IFRS 1 and IFRS 2. 80 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 20 EMPLOYEE BENEFITS – CONTINUED The terms and conditions of the grants are as follows, whereby all options are settled by physical delivery of shares: Grant date/employees entitled Unapproved 1998 scheme grant to key management 14 December 1998 Number of instruments 2005 – 2004 50,000 Approved 1988 scheme grant to key management 10 January 2001 35,500 102,500 Unapproved 1998 scheme grant to key management 10 January 2001 – 274,063 Vesting conditions Contractual life of options Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices by 3% pa over the relevant period 14/12/01 – 14/12/05 Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices over the relevant period 10/01/04 – 10/01/11 Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices by 3% pa over the relevant period 10/01/04 – 10/01/08 Three year sharesave scheme granted to other employees 28 October 2002 Five year sharesave scheme granted to other employees 28 October 2002 203,679 212,009 One year’s service 401,152 426,495 One year’s service Approved 1998 scheme grant to key management 14 April 2003 382,112 382,112 Unapproved 1998 scheme grant to key management 14 April 2003 84,888 84,888 Unapproved 1998 scheme grant to key management 22 August 2005 1,242,864 Approved 1998 scheme grant to key management 22 August 2005 57,136 – – Total share options 2,407,331 1,532,067 Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices over the relevant period Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices over the relevant period Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices by 3%-5% pa over the relevant period Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices by 2% pa over the relevant period 22/04/08 – 22/08/15 01/01/06 – 30/06/06 01/01/08 – 30/06/08 14/04/06 – 14/04/13 14/04/06 – 14/04/10 22/04/08 – 22/08/12 Accounts Headlam Group plc Annual Report and Accounts 2005 81 Notes to the Financial Statements continued 20 EMPLOYEE BENEFITS – CONTINUED Share-based payments – Group – continued The number and weighted average exercise prices of share options are as follows: Outstanding at the beginning of the year Exercised during the year Granted during the year Lapsed during the year Weighted average exercise price 2005 Number of options 2005 Weighted average exercise price 2004 Number of options 2004 186.5 141.9 420.0 197.0 1,532,067 (401,417) 1,300,000 (23,319) 166.5 149.6 – 179.3 3,417,356 (1,846,098) – (39,191) Outstanding at the end of the year 319.9 2,407,331 186.5 1,532,067 Exercisable at the end of the year 128.0 35,500 139.4 426,563 Options were exercised on a regular basis during the year. The average share price during the year was 432.0p (2004: 415.0p). The options outstanding at the year end have an exercise price in the range of 128.0p to 420.0p and a weighted average contractual life of 6.8 years. The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured using the Black-Scholes option pricing model. It is expected that the options will be exercised as soon as they reach maturity. There are no market conditions associated with the share option grants. The expected volatility is based on historic volatility calculated over the weighted average remaining life of the share options. 82 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 20 EMPLOYEE BENEFITS – CONTINUED Fair value at measurement date Weighted average share price Exercise price Expected volatility (expressed as weighted average volatility used in the modelling under the Black-Scholes model) Option life (expressed as weighted average life used in the modelling under the Black-Scholes model) Expected dividends Risk-free interest rate (based on UK Gilts) The total expenses recognised for the year arising from share based payments are as follows: Share options granted in 2003 under the approved 1998 scheme Share options granted in 2003 under the unapproved 1998 scheme Share options granted in 2005 under the approved 1998 scheme Share options granted in 2005 under the unapproved 1998 scheme Total carrying amount of liabilities 2005 2004 89.01p 37.13p 432p 420p 31.84 3 years 3.6% 4.3% 2005 £000 47 10 6 133 196 415p 215p 26.68 3 years 3.3% 4.0% 2004 £000 47 10 – – 57 Share-based payments – Company Executive directors and executive management currently participate in executive share option schemes. The option price may not be less than the greater of the mid-market value of the group’s shares at the time when the options were granted or the nominal value. Options granted under the 1998 Inland Revenue approved scheme are normally exercisable between the third and tenth anniversaries of their date of grant, subject to the movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices, all items, over the relevant period. Options granted under the 1996 and 1998 unapproved schemes are normally exercisable between the third and seventh anniversaries of their date of grant, subject to the movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices, all items, by 2% per annum and 3% per annum respectively over the relevant period. Additionally, the company operates a savings related share option scheme which is open to employees subject to eligibility criteria determined by the directors prior to each option grant. The most recent grant was on 28 October 2002 where employees with over one year’s service were invited to participate. As this savings related share option scheme was granted before 7 November 2002, the recognition and measurement principles in IFRS 2 have not been applied in accordance with the transitional provisions in IFRS 1 and IFRS 2. Accounts Headlam Group plc Annual Report and Accounts 2005 83 Notes to the Financial Statements continued 20 EMPLOYEE BENEFITS – CONTINUED The terms and conditions of the grants are as follows, whereby all options are settled by physical delivery of shares: Grant date/employees entitled Unapproved 1998 scheme grant to key management 14 December 1998 Unapproved 1998 scheme grant to key management 10 January 2001 Number of instruments Vesting conditions Contractual life of options 2005 – – 2004 50,000 100,000 Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices by 3% pa over the relevant period 14/12/01 – 14/12/05 Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices by 3% pa over the relevant period 10/01/04 – 10/01/08 Five year sharesave scheme granted to other employees 28 October 2002 38,144 38,144 One year’s service Approved 1998 scheme grant to key management 14 April 2003 15,000 15,000 Unapproved 1998 scheme grant to key management 22 August 2005 628,574 Approved 1998 scheme grant to key management 22 August 2005 21,426 – – Total share options 703,144 203,144 01/01/08 – 30/08/08 14/04/06 – 14/04/13 22/04/08 – 22/08/12 Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices over the relevant period Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices by 3%-5% pa over the relevant period Movement of the group’s basic earnings per share exceeding that of the General Index of Retail Prices by 2% pa over the relevant period 22/04/08 – 22/08/15 84 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 20 EMPLOYEE BENEFITS – CONTINUED Share-based payments – Company – continued The number and weighted average exercise prices of share options are as follows: Outstanding at the beginning of the year Exercised during the year Granted during the year Weighted average exercise price 2005 Number of options 2005 Weighted average exercise price 2004 171.4 160.5 420.0 203,144 (150,000) 650,000 192.5 200.4 – Number of options 2004 745,644 (542,500) – Outstanding at the end of the year 403.5 703,144 171.4 203,144 Exercisable at the end of the year – – 160.5 150,000 The weighted average share price at the date of exercise of share options exercised during the period was 403.0p (2004: 399.0). The options outstanding at the year end have an exercise price in the range of 197.0p to 420.0p and a weighted average contractual life of 9.1 years. The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured using the Black-Scholes option pricing model. It is expected that the options will be exercised as soon as they reach maturity. There are no market conditions associated with the share option grants. The expected volatility is based on historic volatility calculated over the weighted average remaining life of the share options. Fair value at measurement date Weighted average share price Exercise price Expected volatility (expressed as weighted average volatility used in the modelling under the Black-Scholes model) Option life (expressed as weighted average life used in the modelling under the Black-Scholes model) Expected dividends Risk-free interest rate (based on UK Gilts) 2005 2004 89.01 37.13p 432p 420p 31.84 3 years 3.6% 4.3% 415p 215p 26.68 3 years 3.3% 4.0% Accounts Headlam Group plc Annual Report and Accounts 2005 85 Notes to the Financial Statements continued 20 EMPLOYEE BENEFITS – CONTINUED Share-based payments – Company – continued The total expenses recognised for the year arising from share based payments are as follows: Share options granted in 2003 under the approved 1998 scheme Share options granted in 2005 under the approved 1998 scheme Share options granted in 2005 under the unapproved 1998 scheme Total carrying amount of liabilities 2005 £000 2 2 67 71 2004 £000 2 – – 2 Share based payments awarded to employees of subsidiary undertakings and recognised as an investment in subsidiary undertakings in the company are as follows: Share options granted in 2003 under the approved 1998 scheme Share options granted in 2003 under the unapproved 1998 scheme Share options granted in 2005 under the approved 1998 scheme Share options granted in 2005 under the unapproved 1998 scheme Total carrying amount of investments 2005 £000 45 10 4 66 125 2004 £000 45 10 – – 55 86 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 21 OTHER LONG TERM EMPLOYEE BENEFITS – GROUP During the year, the group operated an employment indemnity scheme in connection with a foreign subsidiary undertaking to provide for lump sum cash payments due to employees retiring on their normal retirement date. Present retirement indemnity obligations Movements in present value of retirement indemnity obligations Current service cost Actuarial (gains)/losses Group Group 2005 £000 286 2005 £000 (9) (156) (165) 2004 £000 451 2004 £000 40 36 76 The current service cost and actuarial gains and losses are recognised in the income statement in administration expenses. Accounts Headlam Group plc Annual Report and Accounts 2005 87 Notes to the Financial Statements continued 22 CAPITAL AND RESERVES Reconciliation of movement in capital and reserves – group Balance at 1 January 2004 Total recognised income and expense Equity-settled share based payment transactions, net of tax Share options exercised by employees Deferred tax on Schedule 23 share options (pre Nov 2002) Dividends Share capital Share premium Translation reserve £000 4,213 – – 93 – – £000 £000 49,061 – – 2,670 – – – (256) – – – – Balance at 31 December 2004 4,306 51,731 (256) Balance at 1 January 2005 Adjustment in respect of adoption of IAS 32 and IAS 39 on 1 January, net of tax Total recognised income and expense Equity-settled share based payment transactions, net of tax Share options exercised by employees Deferred tax on Schedule 23 share options (pre November 2002) Dividends 4,306 51,731 (256) – (321) (13) 13 – – – 20 – – – – – 549 – – – – – – Balance at 31 December 2005 4,326 52,280 (577) The aggregate current and deferred tax relating to items that are charged or credited to equity is £7,167,000 (2004: £6,085,000). Cash flow hedging reserve £000 Retained earnings Total equity £000 £000 – – – – – – – – – – – – – 55,024 24,141 57 – 108,298 23,885 57 2,763 (848) (11,795) (848) (11,795) 66,579 122,360 66,579 122,360 – 26,827 196 – (13) 26,519 196 569 172 (13,976) 172 (13,976) 79,798 135,827 88 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 22 CAPITAL AND RESERVES – CONTINUED Reconciliation of movement in capital and reserves – company Share capital Share premium Translation reserve Special reserve Retained earnings Total parent equity £000 106,352 16,601 57 2,763 Balance at 1 January 2004 Total recognised income and expense Equity-settled share based payment transactions, net of tax Share options exercised by employees Deferred tax on Schedule 23 share options (pre Nov 2002) Dividends £000 4,213 – – 93 – – £000 £000 £000 £000 49,061 – – 2,670 – – – (1,759) 20,578 – – – – – – – – – 32,500 18,360 57 – (27) (11,795) (27) (11,795) Balance at 31 December 2004 4,306 51,731 (1,759) 20,578 39,095 113,951 Balance at 1 January 2005 Total recognised income and expense Equity-settled share based payment transactions, 4,306 – 51,731 – (1,759) – 20,578 – net of tax Share options exercised by employees Deferred tax on Schedule 23 share options (pre Nov 2002) Dividends – 20 – – – 549 – – – – – – – – – – 39,095 37,691 196 – 113,951 37,691 196 569 (173) (13,976) (173) (13,976) Balance at 31 December 2005 4,326 52,280 (1,759) 20,578 62,833 138,258 The aggregate current and deferred tax relating to items that are charged or credited to equity is £6,066,000 (2004: £5,329,000). Accounts Headlam Group plc Annual Report and Accounts 2005 89 Notes to the Financial Statements continued 22 CAPITAL AND RESERVES – CONTINUED Share capital In thousands of shares On issue at 1 January Allotted under share option scheme On issue at 31 December – fully paid Authorised Ordinary shares of 5p each 5.6% cumulative preference shares of £1 each Allotted, called up and fully paid Ordinary shares of 5p each 5.6% cumulative preference shares of £1 each Shares classified as liabilities Shares classified in shareholders funds 5.6% cumulative preference shares of £1 each Ordinary shares 2005 2004 2005 2004 – – – – – – 86,111.437 401,417 84,265,339 1,846,098 86,512,854 86,111,437 2005 £000 5,392 50 5,442 4,326 – 4,326 – 4,326 4,326 2004 £000 5,392 50 5,442 4,306 – 4,306 – 4,306 4,306 Ordinary shares The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the company. Preference shares The preference shares carry a fixed cumulative preferential dividend at the rate of 5.6% per annum. On a winding up they entitle the holders to repayment of the capital paid up on the shares, together with a premium of 7.50p per share and a sum equal to any arrears of the fixed dividend thereon. The dividend will be calculated to the date of the return of capital and will be payable irrespective of whether such dividend has been declared or earned or not, in priority to any payment to the holders of any other shares. The preference shares do not entitle the holders to any further participation in the profits or assets of the company. The preference shares have no voting rights unless the fixed cumulative preference dividend is in arrears for a period of six months or a resolution is to be proposed to alter the provisions of the Memorandum of Association of the company with respect to its objects, or varying or abrogating any of the special rights or privilege attached to preference shares, or for winding up the company. 90 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 22 CAPITAL AND RESERVES – CONTINUED Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. Cash flow hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. Dividends Interim dividend for 2004 of 4.0p paid 3 January 2005 Final dividend for 2004 of 12.25p paid 4 July 2005 Interim dividend for 2003 of 3.56p paid 5 January 2004 Final dividend for 2003 of 10.25p paid 1 July 2004 2005 £000 3,421 10,555 – – 2004 £000 – – 3,030 8,765 13,976 11,795 The final proposed dividend of 13.6p per share (2004: £12.25p per share) will not be provided for until authorised by shareholders at the forthcoming AGM. Interim dividends of 4.4p per share (2004: 4.0p per share) are provided for when the dividend is paid. The total value of dividends proposed but not recognised at 31 December 2005 is £15,582,000 (2004: £13,976,000). 23 FINANCIAL INSTRUMENTS The main risks arising in the normal course of the group’s business are credit risk, interest rate risk and foreign currency risk. Derivative transactions relate to forward currency contracts used to manage the currency risks from the group’s selling and buying activities. Credit risk The group and company have a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all new customers requiring credit over a certain amount and these are frequently reviewed by management to limit exposure. The group does not require collateral in respect of financial assets. At the balance sheet date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet. Interest rate risk The group and company are exposed to interest rate fluctuations on its borrowings and cash deposits. It borrows principally in sterling, euros and Swiss francs at both fixed and floating rates and places cash on deposit in sterling and euros at floating rates. During the year, with the exception of a fixed term facility amounting to £nil (2004: £687,000) denominated in Swiss francs, the group maintained its policy of borrowing at floating rates. Accounts Headlam Group plc Annual Report and Accounts 2005 91 Notes to the Financial Statements continued 23 FINANCIAL INSTRUMENTS – CONTINUED Effective interest rates and repricing analysis – group In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they mature or, if earlier, are repriced. 2005 2004 Effective interest rate % Total £000 0 to <1years £000 1 to <2years £000 Effective interest rate % Total £000 0 to <1years £000 1 to <2years £000 2 to <5 years £000 Cash and cash equivalents Finance lease liabilities Unsecured Swiss franc bank loan Bank overdrafts 4.57 6.00 – – 36,193 (738) – – 36,193 (471) – – – (267) – – 4.59 6.00 1.98 2.49 37,747 (1,175) (687) (278) 37,747 (437) (687) (278) – (471) – – – (267) – – 35,455 35,722 (267) 35,607 36,345 (471) (267) The unsecured Swiss franc bank loan incurred interest at a fixed rate. Comparative information for 2004 is provided in accordance with previous GAAP. Effective interest rates and repricing analysis – company In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they mature or, if earlier, are repriced. 2005 2004 Effective interest rate % Total £000 0 to <1years £000 1 to <2years £000 Effective interest rate % Total £000 0 to <1years £000 1 to <2years £000 2 to <5years £000 Cash and cash equivalents Finance lease liabilities 4.57 6.00 31,265 (738) 31,265 (471) – (267) 4.59 6.00 5,473 (1,168) 5,473 (430) – (471) – (267) 30,527 30,794 (267) 4,305 5,043 (471) (267) Comparative information for 2004 is provided in accordance with previous GAAP. 92 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 23 FINANCIAL INSTRUMENTS – CONTINUED Foreign currency risk The group and company are exposed to movements in currency exchange rates arising from transaction currency cash flows and the translation of the results and net assets of overseas subsidiary operations. These exposures, however, have not had a significant effect on the results and financial position of the group overall. The currencies giving rise to this risk are primarily the euro and Swiss franc. For the twelve month period to 31 December 2005, 4.4% (2004: 4.4%) of the group’s operating profit was derived from overseas subsidiaries and at 31 December 2005, 8.5% (2004: 8.5%) of the group’s operating assets related to overseas subsidiary operations. Hedge accounting, following the adoption of IFRS, has not been applied to these operations given their relative size and because of the onerous level of compliance required under IAS 39. The group and company uses forward exchange contracts to hedge its foreign currency transactional risk. All forward exchange contracts have maturities of less than one year after the balance sheet date. Gains and losses on currency contracts recognised as a liability as at 31 December 2005 amounted to £43,000 (2004: £13,000). Unrecognised gains and losses on currency contracts and the movements during the year based on previous GAAP were as follows: Unrecognised gains and losses at 1 January Gains and losses arising in previous years that were recognised in the year Gains and losses arising before 1 January that were not recognised in the year Gains and losses arising in the year that were not recognised in the year Unrecognised gains and losses on currency contracts at 31 December Gains and losses expected to be recognised in the next financial year The group and company do not use derivatives other than as described above Gains £000 2004 Losses £000 Total net losses £000 – – – – – – (1) 1 – – (13) (13) (1) 1 – – (13) (13) Sensitivity analysis In managing interest rate and currency risks the company and group aims to reduce the impact of short-term fluctuations on company and group’s earnings. In the short term, income statement and net asset volatility arising from these exposures is not considered significant. Over the longer-term, however, permanent changes in interest rates and foreign exchange would have an impact on the consolidated income statement. Accounts Headlam Group plc Annual Report and Accounts 2005 93 Notes to the Financial Statements continued 23 FINANCIAL INSTRUMENTS – CONTINUED Fair values The fair values together with the carrying amounts shown in the balance sheet are as follows: Assets Cash and cash equivalent Trade and other receivables Liabilities Trade and other payables Borrowings Current Non-current Carrying amount 2005 £000 36,193 84,275 Group Company Fair value 2005 £000 36,193 84,275 Carrying amount 2005 £000 36,193 2,320 Fair value 2005 £000 36,193 2,320 120,468 120,468 38,513 38,513 141,529 141,529 5,532 5,532 471 267 471 267 471 267 471 267 142,267 142,267 6,270 6,270 Trade receivables, trade payables and cash and cash equivalents – Fair values are assumed to approximate to cost due to the short term maturity of the instrument. Borrowings, other financial assets and other financial liabilities – Where available, market values have been used to determine fair values. Where market values are not available, fair values have been estimated by discounting expected future cash flows using prevailing interest rate curves. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. 94 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 23 FINANCIAL INSTRUMENTS – CONTINUED The main functional currencies of the group are sterling, euros, Swiss francs and US dollars. The following analysis of net monetary assets and liabilities shows the group’s currency exposures after the effects of forward contracts used to manage currency exposure. The amount shown represents the transactional exposures which give rise to the net currency gains and losses recognised in the consolidated income statement. Such exposures comprise the monetary assets and monetary liabilities of the group which are not denominated in the operating currency of the operating unit involved. Sterling Other European Total Sterling Other European Total Sterling amount £000 – 3 3 Sterling amount £000 – – – 2005 Euro value £000 141 29 170 2004 Euro value £000 536 69 605 US Dollar amount £000 – – – US Dollar amount £000 38 – 38 value £000 141 32 173 value £000 574 69 643 Accounts Headlam Group plc Annual Report and Accounts 2005 95 Notes to the Financial Statements continued 24 ACQUISITIONS OF SUBSIDIARIES On 1 April 2005, the group acquired the trade and assets of the retail division of Gaskell Flooring Limited, trading as Gaskell Wool Rich and Tomkinson Carpets, for £425,596, satisfied in cash. The business supplies residential carpets to independent floorcovering retailers and department stores within the UK. In the nine months to 31 December 2005, the business contributed net profit of £161,000 to the consolidated net profit for the year. If the acquisition had occurred on 1 January 2005, contribution to the group revenue would have been an estimated £3,029,000 and net profit would have been an estimated £175,000. Effect of acquisitions The acquisitions had the following effect on the group’s assets and liabilities: Acquiree’s net assets at the acquisition date: Inventories Net identifiable assets and liabilities Goodwill on acquisition Consideration paid Net cash outflow Acquiree’s book values £000 Fair value adjustments £000 Acquisition amounts £000 426 426 – – 426 426 – (426) (426) No goodwill has arisen on the acquisition of the retail division of Gaskell Flooring Limited and no value has been attributed to the trade names or customer lists. 96 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 24 ACQUISITIONS OF SUBSIDIARIES – CONTINUED Acquisitions completed during 2004 had the following effect on the group’s assets and liabilities: Acquiree’s net assets at the acquisition date: Plant and equipment Inventories Trade and other receivables Cash and cash equivalents Trade and other payables Net identifiable assets and liabilities Intangible asset on acquisition Consideration paid Satisfied by: Cash Deferred consideration Acquisition costs capitalised Analysis of cash flows: On completion Costs of acquisition Cash and cash equivalents Acquiree’s book values £000 Fair value adjustments £000 Acquisition amounts £000 255 1,977 4,795 69 (4,320) 2,776 – – – – – – 255 1,977 4,795 69 (4,320) 2,776 1,672 (4,448) 3,788 600 60 4,448 (3,788) (60) 69 (3,779) The acquisitions during 2004 relate to the purchase of N.C.G. Limited, completed on 30 April 2004 and Kingsmead Carpets which was completed on 17 September 2004. Deferred consideration relates to the acquisition of N.C.G. Limited. £300,000 was paid on 29 April 2005 and £300,000 will be paid on 28 April 2006. The intangible asset relates to customer lists purchased with N.C.G. Limited and has been amortised in full during 2004 and 2005. Accounts Headlam Group plc Annual Report and Accounts 2005 97 Notes to the Financial Statements continued 25 ANALYSIS OF CHANGES IN NET FUNDS Cash at bank and in hand Bank overdraft Debt due after one year Finance leases and similar hire purchase contracts At 1 January 2005 £000 37,747 (279) 37,468 (687) (1,176) Cash flows £000 (1,527) 269 (1,258) 662 438 At Translation 31 December 2005 differences £000 £000 (27) 10 (17) 25 – 36,193 – 36,193 – (738) 35,605 (158) 8 35,455 98 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 26 OPERATING LEASES Non-cancellable operating lease rentals are payable as follows: Group Less than one year Between one and five years More than five years Company Less than one year Between one and five years Land and buildings £000 – – 2,741 2005 Plant and machinery £000 1,596 16,829 1,762 Total £000 1,596 16,829 4,503 2,741 20,187 22,928 Land and buildings £000 2005 Plant and machinery £000 – – – 2 42 44 Total £000 2 42 44 Land and buildings £000 – – 3,302 3,302 Land and buildings £000 – – – 2004 Plant and machinery £000 1,672 17,385 596 Total £000 1,672 17,385 3,898 19,653 22,955 2004 Plant and machinery £000 6 18 24 Total £000 6 18 24 The group leases the majority of its motor and commercial vehicles on terms that range between three and five years. During the year ended 31 December 2005, £9,076,000 was recognised as an expense in the consolidated income statement in respect of operating leases (2004: £8,663,000). Accounts Headlam Group plc Annual Report and Accounts 2005 99 Notes to the Financial Statements continued 27 CAPITAL COMMITMENTS Group During the year ended 31 December 2005, the group entered into contracts to purchase property, plant and equipment for £8,448,000 (2004: £4,085,000). These commitments are expected to be settled in the following financial year. Company During the year ended 31 December 2005, the company entered into contracts to purchase property, plant and equipment for £8,448,000 (2004: £nil). These commitments are expected to be settled in the following financial year. 28 CONTINGENCIES Third party guarantees 29 RELATED PARTIES Group Company 2005 460 2004 240 2005 – 2004 – Group Identity of related parties The group has a related party relationship with its subsidiaries and with its directors and executive officers. Transactions with key management personnel As at 31 December 2005, directors of the company and their immediate relatives controlled 1.6 per cent of the voting shares of the company. Key management personnel are considered to be the directors and their remuneration is disclosed within the Directors’ remuneration report on page 41. 100 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 29 RELATED PARTIES – CONTINUED Company Identity of related parties The company has a related party relationship with its subsidiaries and with its directors and executive officers. Transactions with key management personnel As at 31 December 2005, directors of the company and their immediate relatives control 1.6 per cent of the voting shares of the company. Key management are considered to be the directors and their remuneration is disclosed within the remuneration report on page 41. Transactions with other group companies Highest during Balance at the year 31 December 2005 £000 £000 Highest during the year £000 Balance at 31 December 2004 £000 Amounts due from subsidiary undertakings 25,163 23,272 29,340 25,163 Amounts due to subsidiary undertakings (50,587) (50,587) (50,682) (48,930) The disclosure of the year end balance and the highest balance during the year is considered to provide a meaningful representation of transactions between the company and its subsidiaries in the year. The highest balance is generally at the start or close of the financial period since this is the time when the company levies its management charge. Transactions reported in the income statement Rental income Dividends received Management charges Interest expense For year ended 31 December 2005 £000 For year ended 31 December 2004 £000 4,752 39,911 1,910 (1,254) 4,036 18,345 2,186 (117) Accounts Headlam Group plc Annual Report and Accounts 2005 101 Notes to the Financial Statements continued 30 SUBSEQUENT EVENTS With the exception of changes in directors, noted in the director’s report, there have been no events after the balance sheet date that require disclosure. 31 ACCOUNTING ESTIMATES AND JUDGEMENTS Management discussed the development, selection and disclosure of the group’s critical accounting policies and estimates and the application of these policies and estimates with the audit committee. In applying the accounting policies, appropriate estimates have been made in a number of areas and the actual outcome may differ from the position described in the company’s and group’s balance sheet at 31 December 2005. The key sources of estimation uncertainty at the balance sheet date that may give rise to a material adjustment to the carrying value of assets and liabilities within the next financial year are as follows: Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. The group is committed to investing in new facilities where existing facilities fail to provide satisfactory customer service in a cost effective manner. When construction on a new facility is initiated, the existing facility is marketed for sale and this action can on occasions give rise to an adverse difference between cost and fair value. It has been assumed that at the balance sheet date, cost equates to fair value. Goodwill impairment The impairment test for goodwill is dependent on the forecasts of the cash flows of the cash-generating units and the assumptions relating to growth rate. No impairment resulted from the annual impairment test for 2005. Deferred tax assets Deferred tax assets are recognised at the balance sheet date based on the assumption that there is a high expectation that the asset will be realised in due course. This assumption is dependant on the group’s ability to generate sufficient future taxable profits. Non-current assets classified as held for sale The inclusion of assets within non-current assets classified as held for sale and the realisation of the expected proceeds is based on the assumption that contracts will complete during the financial year. Employee benefits The deficit relating to the group’s defined benefit pension plans is assessed annually in accordance with IAS 19 and after taking independent actuarial advice. The amount of the deficit is dependent on plan asset and liability values and the actuarial assumptions used to determine the deficit. Assumptions include asset growth rates, pension and salary increases, price inflation, discount rate used to measure actuarial liabilities and mortality rates. 102 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 32 EXPLANATION OF TRANSITION TO IFRS – GROUP As stated in note 1, these are the company’s and group’s first consolidated financial statements prepared in accordance with IFRS. The accounting policies set out in note 1 have been applied in preparing the financial statements for the year ended 31 December 2005, the comparative information presented in these financial statements for the year ended 31 December 2004 and in the preparation of an opening IFRS balance sheet at 1 January 2004, the company’s and group’s date of transition. In preparing its opening IFRS balance sheet, the company and group have adjusted amounts reported previously in financial statements prepared in accordance with UK GAAP, its former basis of accounting. An explanation of how the transition from UK GAAP to IFRS has affected the group’s financial performance and the company and group financial position and cash flows is set out in the following tables and the notes that accompany the tables. Reconciliation of profit for year ended 31 December 2004 Revenue Cost of sales Gross profit Net operating expenses Operating profit Net financing costs Profit before tax Taxation Profit for the year Effect of transition to IFRS £000 - - - 524 524 UKGAAP £000 464,789 (323,924) 140,865 (102,465) 38,400 IFRS £000 464,789 (323,924) 140,865 (101,941) 38,924 (59) (381) (440) 38,341 (11,975) 26,366 143 237 380 38,484 (11,738) 26,746 Accounts Headlam Group plc Annual Report and Accounts 2005 103 Notes to the Financial Statements continued 32 EXPLANATION OF TRANSITION TO IFRS – GROUP – CONTINUED Reconciliation of equity Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Current assets Inventories Trade and other receivables Cash and cash equivalents Assets classified as held for sale 1 January 2004 Effect of transition to IFRS £000 (2,612) – 6,232 IFRS £000 61,624 13,210 7,458 31 December 2004 Effect of transition to IFRS £000 UK GAAP £000 75,256 13,964 1,390 (3,502) 82 6,777 IFRS £000 71,754 14,046 8,167 3,620 82,292 90,610 3,357 93,967 – 260 – (892) 73,889 73,137 32,336 150 79,692 85,293 37,747 3,975 – 257 – (3,772) 79,692 85,550 37,747 203 UK GAAP £000 64,236 13,210 1,226 78,672 73,889 72,877 32,336 1,042 180,144 (632) 179,512 206,707 (3,515) 203,192 Total assets 258,816 2,988 261,804 297,317 (158) 297,159 Current liabilities Short term borrowings Current portion of long term borrowings Trade and other payables Employee benefits Tax payable (2,045) – (2,045) (279) – (279) (499) (135,209) – (9,625) – 11,658 – – (499) (123,551) – (9,625) (1,124) (156,046) – (11,053) – 14,018 (722) – (1,124) (142,028) (722) (11,053) (147,378) 11,658 (135,720) (168,502) 13,296 (155,206) 104 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 32 EXPLANATION OF TRANSITION TO IFRS – GROUP – CONTINUED 1 January 2004 Effect of transition to IFRS £000 UK GAAP £000 IFRS £000 31 December 2004 Effect of transition to IFRS £000 UK GAAP £000 IFRS £000 (1,175) (375) (1,628) – (14,166) (442) (1,175) (14,541) (2,070) (738) (451) (758) – (17,192) (454) (738) (17,643) (1,212) (3,178) (14,608) (17,786) (1,947) (17,646) (19,593) (150,556) (2,950) (153,506) (170,449) (4,350) (174,799) 108,260 38 108,298 126,868 (4,508) 122,360 4,213 49,061 2,844 52,142 - - (2,844) 2,882 4,213 49,061 - 55,024 4,306 51,731 6,615 64,216 – – (6,615) 2,107 4,306 51,731 – 66,323 Non-current assets Other interest-bearing loans and borrowings Employee benefits Deferred tax liabilities Total liabilities Net assets Equity attributable to equity holders of the parent Share capital Share premium Revaluation reserve Retained earnings Total equity 108,260 38 108,298 126,868 (4,508) 122,360 Notes Removal of property revaluation As a result of opting to restate land and buildings back to their depreciated historical cost, property reported as a non-current asset has reduced because the revaluation surplus has been eliminated and depreciation charged in the twelve month periods has also decreased. Goodwill amortisation Goodwill represents the excess of the cost of acquisition over the fair value of the identifiable net assets of the acquired subsidiary undertakings at the date of acquisition and is included on the balance sheet as a non-current asset. Under UK GAAP, goodwill was amortised on a straight line basis over a period of 20 years representing the estimated useful economic life. This changes under IFRS as goodwill is not amortised but tested at least annually for impairment. Goodwill is then held in the balance sheet at cost less any accumulated impairment losses. Goodwill amortised in the twelve month periods under UK GAAP has therefore been reversed and the amount reported under non-current assets is now subject to an annual impairment review. Accounts Headlam Group plc Annual Report and Accounts 2005 105 Notes to the Financial Statements continued 32 EXPLANATION OF TRANSITION TO IFRS – GROUP – CONTINUED Non-current assets held for sale Under IFRS, a non-current asset held for sale must, at the balance sheet date, be available for immediate sale in its present condition and the sale must be highly probable and expected to be completed within one year. As a result, some of the properties that were previously shown as assets held for resale within current assets under UK GAAP have been reclassified to property, plant and equipment under non-current assets. These properties had a net book value of £623,000 at 1 January 2004 and £4,302,000 at 31 December 2004. IFRS 5 has been adopted early and hence reflected at 31 December 2004. Share based payments Under UK GAAP, the expense of granting employee share options was the difference between the exercise price and market price at the date the option was granted. Under IFRS, the expense is based upon the fair value of the option, as spread over the vesting period and adjusted for non-market conditions. The fair value of the share options granted after 7 November 2002 is calculated using an appropriate pricing model and the expense is recognised in the consolidated income statement. The charge for the group has been calculated using the Black-Scholes option pricing model. In accordance with the transitional provisions of IFRS 2, no income statement expense has been recorded in respect of grants of share options made prior to 7 November 2002. There is no impact to net assets or distributable reserves as a result of this adjustment which is credited directly to equity. Retirement benefit obligations Under UK GAAP, the cost of the group’s defined benefit plan was reported by reference to SSAP 24 and further disclosures were provided in accordance with FRS 17. These two standards have now been replaced by IAS 19. Cumulative actuarial gains and losses have been recognised within equity as at 1 January 2004 in respect of the group’s defined benefit plans as per the transitional exemption allowed by IFRS 1. This gives rise to a defined benefit scheme plan of £14,541,000 at 1 January 2004 and a liability of £18,365,000 at 31 December 2004. Deferred tax Under UK GAAP, with the exception of permanent differences, deferred tax should be recognised on all timing differences that have originated but not reversed by the balance sheet date. Non-reversing permanent differences fall outside the scope of deferred tax. Under IFRS, deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying value in the financial statements. Deferred tax is recognised in the consolidated income statement except if it relates to an item that is recognised directly in equity, in which case it is dealt with in the consolidated statement of changes in equity. The group’s transitional balance sheet at 1 January 2004 includes additional deferred tax assets and liabilities amounting to £6,232,000 and £442,000 respectively. The deferred tax assets principally relate to the tax provided on the defined benefit plan liability and the need to provide for the tax on the gains arising on share based payments. The additional deferred tax liabilities occur because of depreciating properties, acquired as part of a business combination, which are not eligible for tax relief. The consolidated income statement for the twelve month period ended 31 December 2004 contains an additional deferred tax credit of £237,000 because of the tax effects associated with the amortisation of intangibles assets and the recognition of additional costs relating to the defined benefit plan. 106 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 32 EXPLANATION OF TRANSITION TO IFRS – GROUP – CONTINUED Events after balance sheet date Under UK GAAP, equity dividends were recognised in the year to which they related and were an adjustable post balance sheet event. Under IFRS, final equity dividends proposed by the board are recognised only when approved by the shareholders at the AGM. Interim dividends are recognised when paid or when they are approved by the shareholders. Dividends are shown as a movement in equity and not on the face of the consolidated income statement. Property leases Under IFRS, property leases should be divided into two components with land and buildings considered as separate elements. Land is normally classified as an operating lease unless title passes to the lessee at the end of the lease term. The building is classified as an operating or finance lease by applying classification criteria in IAS 17 – Leases. At 1 January 2004, one property has been reclassified. Land amounting to £300,000 has been treated as an operating lease and has been transferred from property, plant and equipment under non-current assets and shown within other current assets in current assets. The value attributed to the land is being amortised over the life of the lease term and recognised in the consolidated income statement and, in the twelve month period to 31 December 2004, gives rise to an additional charge of £3,000. There are no other material differences between the cash flow statement presented under IFRS and the cash flow statement presented under UK GAAP. Cash flow There are no material differences between the cash flow statement for the group presented under IFRS and the cash flow statement presented under UK GAAP. Accounts Headlam Group plc Annual Report and Accounts 2005 107 Notes to the Financial Statements continued 32 EXPLANATION OF TRANSITION TO IFRS – COMPANY Reconciliation of equity Non-current assets Property, plant and equipment Investments in subsidiary undertakings Deferred tax assets Current assets Trade and other receivables Amounts due from subsidiary undertakings Cash and cash equivalents Assets classified as held for sale 1 January 2004 Effect of transition to IFRS £000 UK GAAP £000 IFRS £000 31 December 2004 Effect of transition to IFRS £000 UK GAAP £000 IFRS £000 50,365 (2,612) 47,753 61,802 (3,502) 58,300 90,112 – 41 4,608 90,153 4,608 94,614 285 96 5,419 94,710 5,704 140,477 2,037 142,514 156,701 2,013 158,714 1,825 47,682 6,875 1,042 257 2,082 2,421 257 2,678 (18,342) – (892) 29,340 6,875 150 49,574 5,473 3,975 (24,411) – (3,772) 25,163 5,473 203 57,424 (18,977) 38,447 61,443 (27,926) 33,517 Total assets 197,901 (16,940) 180,961 218,144 (25,913) 192,231 Current liabilities Other interest-bearing loans and borrowings Amount due to subsidiary undertakings Trade and other payables Employee benefits Tax payable (393) – (393) (430) – (430) (915) (14,757) – (3,805) – 11,658 – – (915) (3,100) – (3,805) – (19,350) – (4,841) – 14,019 (722) – – (5,331) (722) (4,841) (19,870) 11,658 (8,212) (24,621) 13,297 (11,324) 108 Headlam Group plc Annual Report and Accounts 2005 Notes to the Financial Statements continued 32 EXPLANATION OF TRANSITION TO IFRS – COMPANY – CONTINUED 1 January 2004 Effect of transition to IFRS £000 UK GAAP £000 IFRS £000 31 December 2004 Effect of transition to IFRS £000 UK GAAP £000 IFRS £000 (1,168) (49,766) – (903) – (1,168) (738) – (738) – (14,166) (394) (49,766) (14,166) (1,297) (48,930) – – – (17,192) (96) (48,930) (17,192) (96) (51,837) (14,560) (66,397) (49,668) (17,288) (66,956) (71,707) (2,902) (74,609) (74,289) (3,991) (78,280) 126,194 (19,842) 106,352 143,855 (29,904) 113,951 4,213 49,061 20,578 2,844 49,498 – – – (2,844) (16,998) 4,213 49,061 20,578 – 32,500 4,306 51,731 20,578 6,615 60,625 – – (6,615) (23,289) 4,306 51,731 20,578 – 37,336 126,194 (19,842) 106,352 143,855 (29,904) 113,951 Non-current liabilities Other interest-bearing loans and borrowings Amounts due to subsidiary undertakings Employee benefits Deferred tax liabilities Total liabilities Net assets Equity attributable to equity holders of the parent Share capital Share premium Special reserve Revaluation reserve Retained earnings Total equity Notes The IFRS adjustments relating to the company are in principal the same as those affecting the group. Therefore, the explanations given above for the group are the same for the company with the exception of the following: Goodwill amortisation There is no corresponding adjustment in the company. Events after the balance sheet date Under UK GAAP, equity dividends receivable from subsidiary undertakings were recognised in the year and were an adjustable post balance sheet event. Under IFRS, equity dividends are only recognised when the cash has been received from subsidiary undertakings. Dividends are shown as a movement in equity. Cash flow There are no material differences between the cash flow statement for the company presented under IFRS and the cash flow statement prepared under UK GAAP. Accounts Headlam Group plc Annual Report and Accounts 2005 109 Principal Trading Subsidiaries * HFD Limited * MCD Group Limited Lethem-Vergeer BV DFA SA * Belcolor AG Place of incorporation Great Britain Great Britain Netherlands France Switzerland All of these subsidiaries are wholly owned and are principally engaged as a distributor of floorcoverings and associated products. * These subsidiaries are owned directly by Headlam Group plc. The investment in subsidiary undertakings comprises ordinary share capital and loans. 110 Headlam Group plc Annual Report and Accounts 2005 Financial Record Trading results Revenue Operating profit before goodwill amortisation Goodwill amortisation Operating profit Loss on sale of land and buildings (Loss)/profit on disposal of discontinued operations Profit before net financing costs Net financing costs Profit on ordinary activities before tax Taxation (Loss)/profit on ordinary activities after taxation Dividends (Loss)/profit for the year Proposed dividend per share Earnings per share Net assets Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Current assets Inventories Trade and other receivables Cash and cash equivalents Non-current assets classified as held for sale Total assets Current liabilities Bank overdraft Other interest-bearing loans and borrowings Trade and other payables Employee benefits Income tax payable Non-current liabilities Other interest-bearing loans and borrowings Employee benefits Other payables Deferred tax liabilities Total liabilities Net assets 2001 £000 2002 £000 2003 £000 2004 £000 2005 £000 434,122 395,723 412,295 464,789 486,653 32,111 (783) 31,328 (434) (18,811) 12,083 (3,403) 8,680 (9,188) (508) (9,558) (10,066) 11.40p 23.3p 37,913 12,741 — 50,654 70,742 74,163 44,464 189,369 7,025 247,048 (1,695) (25,914) (120,622) — (5,572) 30,362 (825) 29,537 — 861 30,398 (521) 29,877 (9,335) 20,542 (10,550) 9,992 12.55p 24.4p 44,607 13,767 — 58,374 66,951 67,605 35,522 170,078 6,591 235,043 (635) (3,342) (123,805) — (7,505) 33,514 (835) 32,679 — — 32,679 (86) 32,593 (10,464) 22,129 (11,657) 10,472 13.85p 27.3p 64,236 13,210 — 77,446 73,889 72,877 32,336 179,102 1,042 257,590 (216) (2,328) (135,209) — (9,625) 38,924 — 38,924 — — 38,924 (440) 38,484 (11,738) 26,746 — 26,746 16.25p 31.3p 71,754 14,046 8,167 93,967 79,692 85,550 37,747 41,498 — 41,498 — — 41,498 (658) 40,840 (12,352) 28,488 — 28,488 18.0p 33.1p 74,640 13,210 8,199 96,049 91,160 84,275 36,193 202,989 211,628 203 3,471 297,159 311,148 (279) (1,124) (142,028) (722) (11,053) — (471) (141,529) (1,080) (11,139) (153,803) (135,287) (147,378) (155,206) (154,219) (4,498) — (107) (375) (4,980) (1,670) — (379) (297) (2,346) (1,175) — (375) (402) (1,952) (738) (17,643) — (1,212) (19,593) (267) (19,432) — (1,403) (21,102) (158,783) (137,633) (149,330) (174,799) (175,321) 88,265 97,410 108,260 122,360 135,827 The earnings per share for the years 2001 to 2003 is calculated by reference to operating profit before goodwill amortisation and exceptional items. The information relating to the years 2001 to 2003 has not been restated for IFRS. Accounts Headlam Group plc Annual Report and Accounts 2005 111 Notice of Annual General Meeting Notice is hereby given that the Annual General Meeting of Headlam Group plc will be held at the group’s distribution facility located at Gorsey Lane, Coleshill, Birmingham, B46 1LW on Thursday 1 June 2006 at 10.00 a.m. for the following purposes. As ordinary business 1 To receive, consider and adopt the report of the directors and the financial statements for the year ended 31 December 2005, together with the auditors’ report. 2 To declare a final dividend. 3 To re-elect as a director Graham Waldron who retires in accordance with the Articles of Association and is eligible for re-election. Graham Waldron has attained the age of 75, being born on 16 April 1930, therefore this resolution authorising his re-election as a director for a period of twelve months expires at the conclusion of the next AGM. 4 To re-elect as a director Tony Brewer who retires in accordance with the Articles of Association and is eligible for re-election. 5 To elect as a director, Dick Peters who, following his appointment on 1 December 2005, retires in accordance with the Articles of Association and is eligible for election. 6 To elect as a director, Mike O’Leary who, following his appointment on 10 March 2006, retires in accordance with the Articles of Association and is eligible for election. 7 To re-appoint KPMG Audit Plc as auditors of the company until the conclusion of the next AGM. 8 To authorise the directors to agree the remuneration of the independent auditors of the company. 9 That the Remuneration Report set out on pages 38 to 44 of the Report and Accounts for the year ended 31 December 2005 be approved. As special business As special business, to consider and, if thought fit, pass the following resolutions, which will be proposed as to resolution 10 as an Ordinary Resolution and as to resolutions 11 to 14 as Special Resolutions: 10 THAT, subject to and in accordance with Article 18 of the Articles of Association of the Company, the Directors be generally and unconditionally authorised in accordance with section 80 of the Companies Act 1985 (the “Act”) (in substitution for any existing authority to allot relevant securities) to exercise all the powers of the Company to allot relevant securities (within the meaning of section 80 of the Act) up to a maximum nominal amount of £216,790, provided that such authority shall expire on 30 September 2007, or such earlier time as this authority shall next be revoked or varied by the Company in general meeting, but so that the Company may, before such expiry, make an offer or agreement which would or might require relevant securities to be allotted after such expiry, and the Directors may allot relevant securities in pursuance of such offer or agreement as if the authority conferred by this resolution had not expired. 11 THAT, subject to the passing of resolution 10 as set out in the notice of this meeting, the directors be empowered pursuant to section 95 of the Companies Act 1985 (the “Act”) (in substitution for any existing authority to allot equity securities) to allot equity securities (as defined in section 94 of the Act) for cash pursuant to the general authority conferred by resolution 10 as set out in the notice of this meeting and to sell relevant shares (as defined in section 94 of the Act) held by the company as treasury shares (as 112 Headlam Group plc Annual Report and Accounts 2005 Notice of Annual General Meeting continued defined in section 162A of the Act) for cash, as if section 89(1) of the Act did not apply to such allotment or sale, provided that this power shall be limited to allotments of equity securities and the sale of treasury shares: (a) in connection with or pursuant to an offer by way of rights, open offer or other pre-emptive offer to the holders of shares in the company and other persons entitled to participate therein in proportion (as nearly as practicable) to their respective holdings, subject to such exclusions or other arrangements as the directors may consider necessary or expedient to deal with fractional entitlements or legal or practical problems under the laws of any territory or the regulations or requirements of any regulatory authority or any stock exchange in any territory; and (b) otherwise than pursuant to sub-paragraph (a) above, up to an aggregate nominal amount of £216,790; and such power shall expire on 30 September 2007, or such earlier time as this authority shall next be revoked or varied by the company in general meeting, but so that the company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted or treasury shares to be sold after such expiry, and the directors may allot equity securities or sell treasury shares in pursuance of such offer or agreement as if the power conferred by this resolution had not expired. 12 THAT the company be generally and unconditionally authorised, pursuant to Article 12.2 of the Articles of Association of the company and pursuant to section 166 of the Companies Act 1985 (the “Act”), to make market purchases (as defined in section 163 of the Act) of up to 13,007,600 ordinary shares of 5p each in the capital of the company (“Ordinary Shares”) on such terms and in such manner as the directors of the company may from time to time determine, provided that: (a) the amount paid for each Ordinary Share (exclusive of expenses) shall not be more than five per cent above the average of the middle market quotation for an Ordinary Share as derived from the Daily Official List of London Stock Exchange plc for the five business days before the date on which the contract for the purchase is made and, in any event, not less than 20p per Ordinary Share; and (b) the authority herein contained shall expire at the conclusion of the Annual General Meeting of the company to be held in 2007 or on 30 September 2007, whichever is earlier, provided that the company may, before such expiry, make a contract to purchase its own shares which would or might be executed wholly or partly after such expiry, and the company may make a purchase of its own shares in pursuance of such contract as if the authority hereby conferred hereby had not expired. 13 That, with effect from the passing of the resolution Article 98 of the Articles of Association of the company be amended such that the aggregate sum of fees payable to non-executive directors in respect of any year be increased by £50,000 to £200,000. 14 That the Articles of Association of the company be amended by the deletion of Article 184 and the insertion of a new Article 184 as follows: ‘‘184. (A) Without prejudice to any indemnity to which he may otherwise be entitled, every person who is or was a director, secretary or other relevant officer of the company shall be indemnified and kept indemnified out of the company’s assets against all liability incurred by him as such or as a director, secretary or relevant officer of an associated company: (a) in defending any proceedings, whether civil or criminal, in respect of alleged negligence, default, breach of duty, breach of trust or otherwise in relation to the company or an associated company or its or their affairs, in which judgement is given in his favour or in which he is acquitted or in defending or settling any such proceedings which are otherwise disposed of on terms previously agreed with the board or on terms otherwise approved by the board without a finding or admission of negligence, default, breach of duty or breach of trust on his part; or (b) in connection with any application under the statutes in which relief is granted to him by the court provided that this article shall not grant, or entitle any such person to, indemnification to the extent that it would cause this article, or any part of it, to be void under the statutes Accounts Headlam Group plc Annual Report and Accounts 2005 113 Notice of Annual General Meeting continued (B) Without prejudice to any indemnity to which he may otherwise be entitled (including, for the avoidance of doubt, any indemnity under or pursuant to these articles) and to the extent permitted by the statutes, the board shall have power in the name and on behalf of the company to: (a) grant on such terms as it sees fit any person who is or was a director, secretary or other relevant officer of the company an indemnity or indemnities out of the assets of the company in respect of any liability incurred by him as such or as a director, secretary or relevant officer of an associated company and to amend, vary or extend the terms of any such indemnity so granted, again on such terms as the board sees fit; and/or (b) enter into and amend, vary or extend such arrangements as it sees fit: (i) to provide any person who is or was a director, secretary or other relevant officer of the company with funds to meet expenditure incurred or to be incurred by him in defending any criminal or civil proceedings brought against him as such or as a director, secretary or relevant officer of an associated company or in connection with any application for relief under the statutes; or (ii) to enable any such person to avoid incurring any such expenditure (C) For the purposes of this article 184: (a) a ‘‘relevant officer’’ is any officer of the company or an associated company (other than in either case any person (whether or not an officer of the company or an associated company) engaged by the company or an associated company as auditor); (b ‘‘associated company’’ has the meaning given to that term in section 309A of the Act; and (c) a director shall be entitled to vote and to be counted in the quorum at any meeting of the board or a committee of the board at which any indemnity, arrangement or proposal falling within any of the provisions of Articles 184 is to be considered and, for the purposes of article 120, any interest which any director may have in such indemnity, arrangement or proposal shall not be a material interest unless the terms of such indemnity, arrangement or proposal confer upon such director a privilege or benefit not generally available to, or awarded to, any other director. The decision of the chairman of the meeting as to whether the indemnity, arrangement or proposal to be considered at the meeting falls within the provisions of Articles 184 or as to the materiality of any director’s interest therein for the purposes of this article and article 120 shall be final and conclusive’’ To consider and, if thought fit, pass the following resolution which will be proposed as an ordinary resolution: By order of the board Geoff Duggan Company Secretary 10 April 2006 Registered Office:- PO Box 1 Gorsey Lane Coleshill Birmingham B46 1LW 114 Headlam Group plc Annual Report and Accounts 2005 Notice of Annual General Meeting continued Notes 1 Any member entitled to attend and vote at the Annual General Meeting is entitled to appoint one or more proxies (who need not be a member of the company) to attend and, on a poll, to vote instead of the member. A form of proxy for use by members at the meeting is enclosed. Completion and return of a form of proxy will not preclude a member from attending and voting at the meeting in person, should he subsequently decide to do so. In accordance with regulation 34 of the Uncertified Securities Regulations 1995, the company has determined that only those members whose names are entered in the register of members at 10 a.m. on 30 May 2006 shall be entitled to attend and vote at the meeting. 2 In order to be valid, any form of proxy and power of attorney or other authority under which it is signed, or a notarially certified or office copy of such power or authority must reach the Company’s Registrars, Capita Registrars of The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU not less than 48 hours before the time of the meeting or any adjournment thereof. 3 CREST members who wish to appoint a proxy or proxies by utilising the CREST electronic proxy appointment service may do so for the meeting to be held on 1 June 2006 and any adjournment(s) thereof by utilising the procedures described in the CREST Manual. CREST personal members or other CREST sponsored members, and those CREST members who have appointed (a) voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment made by means of CREST to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with CRESTCo’s specifications and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by the issuer’s agent (ID RAIO) by the latest time for receipt of proxy appointments specified in note 2 above. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. CREST members and, where applicable, their CREST sponsors or voting service providers should note that CRESTCo does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed (a) voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. 4 As permitted by Regulation 41 of the Uncertificated Securities Regulations 2001, shareholders who hold shares in uncertificated form must be entered on the company’s share register at 6.00 p.m. on 30 May 2006 in order to be entitled to attend and vote at the Annual General Meeting. Such shareholders may only cast votes in respect of shares held at such time. Changes to entries on the relevant register after that time shall be disregarded in determining the rights of any person to attend or vote at the meeting. 5 Copies of the directors’ service contracts and, where appropriate, letters of appointment, a summary of the directors’ transactions in the company’s shares during the year and written terms of reference for each of the remuneration, audit and nomination committees will be available for inspection at the registered office of the company during normal business hours on any weekday (Saturdays, Sundays and public holidays excluded) from the date of this notice until the close of business on the business day preceding the AGM and will also be available for inspection for at least 15 minutes prior to the meeting and throughout the meeting. There are no service agreements between any director and any subsidiary of the company. Accounts Headlam Group plc Annual Report and Accounts 2005 115 Notice of Annual General Meeting continued Notes - continued 6 Biographical details of each director who is being proposed for re-appointment or re-election by shareholders, including their membership of board committees, are set out in the annual report and accounts posted to shareholders at the same time as this notice. Explanatory Notes: Ordinary Business Section 241A of the Companies Act 1985 requires quoted companies, at each general meeting at which statutory accounts are to be laid, to propose an ordinary resolution approving the directors’ remuneration report for the year. Resolution 9 will be proposed as an ordinary resolution for this purpose; a copy of the report is included in the annual report and accounts posted to shareholders at the same time as this notice. Explanation of Special Business The Companies Act 1985 provides that directors shall only allot unissued shares with the authority of shareholders in general meeting. Resolution 10 will be proposed as an Ordinary Resolution for the renewal of the directors’ general authority to issue relevant securities up to an aggregate nominal amount of £216,790, representing approximately 5% of the current issued share capital of the company. The directors have no present intention of exercising this authority. The Companies Act 1985 also provides that any allotment of new shares for cash must be made pro rata to individual shareholders’ holdings, unless such provisions are disapplied under section 95 of the Companies Act 1985. Resolution 11 will be proposed as a special resolution for the renewal of the directors’ authority to allot equity securities for cash, without first offering them to shareholders pro rata to their holdings. This authority facilitates issues made by way of rights to shareholders which are not strictly in accordance with section 89 of the Companies Act, and authorises other allotments of up to a maximum aggregate nominal amount of £216,790 of shares, representing approximately 5% of the current issued share capital of the company. This authority also allows the directors, within the same aggregate limit, to sell for cash shares that may be held by the company in treasury. The directors have no present intention of exercising this authority. Resolution 12 will be proposed as a special resolution for the renewal of the company’s authority to purchase its own shares in the market for up to 13,007,600 Ordinary Shares, representing approximately 5% of the issued share capital of the company. The price payable shall not be more than 5% above the average price of the middle market quotation as derived from the Daily Official List of London Stock Exchange plc for the Ordinary Shares for the five business days before the purchase is made and in any event not less than 5p per share, being the nominal value of the shares. It is the directors’ intention only to exercise the authority to purchase the company’s shares where it would increase the earnings per share of those Ordinary Shares that are not re-purchased. This power will only be used if the directors consider that to do so would be in the best interests of shareholders generally. 116 Headlam Group plc Annual Report and Accounts 2005 Shareholder helpline Headlam’s shareholder register is maintained by Capita Registrars (“Capita”), who are responsible for making dividend payments and updating the register, including details of changes to shareholders’ addresses and purchases or sales of Headlam shares. If you have a question about your shareholding in Headlam you should contact: Capita Registrars, Northern House, Woodsome Park, Fenay Bridge, Huddersfield, HD8 0LA, telephone +44 (0)870 1623131, email: shareholder.services@capitaregistrars.com Frequent shareholder enquires If you change your address Please notify Capita in writing. If shares are held in joint names, the notification must be signed by the first-named shareholder. If you change your name Please notify Capita in writing and enclose a copy of any marriage certificate or change of name deed as evidence. Lost Headlam share certificate If your share certificate is lost or stolen, you should call Capita immediately. A letter of indemnity will be sent to you to sign. Capita will charge for this service. Duplicate shareholder accounts If you receive more than one copy of Headlam communications you may have your shares registered inadvertently in at last two accounts. This happens when the registration details of separate transactions differ slightly. If you wish to consolidate such multiple accounts, call Capita to request the accounts are consolidated. Buying and selling shares in the UK If you wish to trade in Headlam shares, you can do so at Capita’s website, www.capitadeal.com or alternatively use a stockbroker or high street bank which trades on the London Stock Exchange. There are many telephone and online services available. If you are selling, you will need to present your share certificate at the time of sale. Transferring Headlam shares Transferring shares to someone else requires the completion of a stock transfer form. This form, and details of the procedure you need to follow, is available from Capita website. Stamp duty is not normally payable if the transfer is to a relative or if there is no money being paid in exchange for the shares. Share prices information Shareholders can find share prices listed in most national newspapers. Ceefax and Teletext pages also display share prices that are updated regularly throughout the trading day. For a real-time buying or selling price, you should contact a stockbroker. Additionally there is a link to the London Stock Exchange on the Headlam website. The Headlam website The Headlam website at www.headlam.com provides news and details of the company’s activities, plus information on the share price. The investor information section of the website contains up-to-date information for shareholders including the company’s latest results and key dates such as dividend payment dates. ShareGift ShareGift, the charity share donation scheme, is a free service for shareholders wishing to give shares to charitable causes. It may be especially useful for those who wish to dispose of a small parcel of shares which would cost more to sell than they are worth. There are no capital gains tax implications (i.e. no gain or loss) on gifts of shares to charity and it is also possible to obtain income tax relief. Further information can be obtained at www.sharegift.org The Unclaimed Assets Register The Unclaimed Assets Register is a unique search service that helps individuals to find their lost assets and re-establish contact with financial institutions. It has a database of unclaimed life policies, pensions, unit trust holdings, and share dividends drawn from many companies and can search for lost assets and entitlements. The Unclaimed Assets Register charges a small fixed fee for each search, 10% of which goes to charity. For further information, visit www.uar.co.uk Designed and produced by corporateprm, Edinburgh and London. www.corporateprm.co.uk Registered office Headlam Group plc PO Box 1 Gorsey Lane Coleshill Birmingham B46 1LW Website www.headlam.com E-mail headlamgroup@headlam.com Registration Registered in England and Wales Number 460129 

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