Warehouse Profit Loss Account - PDF by kkw14579


More Info
									                                                                                            21 April 2004
                                     THE MALCOLM GROUP PLC


The Malcolm Group (MAL), the UK Logistics and Construction Services group, reports its preliminary
results for the year ended 30 January 2004.

Operating performance:

•   Turnover up 20% to £129.1m
•   Operating profit before goodwill amortisation and exceptional items £9.1m, up £0.3m on last year
•   Profit before tax excluding goodwill and exceptional items £7.4m (2002/03 £7.2m)
•   Profit before tax £7.0m (2002/03 £6.7m)
•   Profit after tax up 24% to £4.3m
•   Headline earnings per share up 7% to 7.4p
•   Proposed final dividend 3.3p, making a total of 5.0p for the year (2002/03 5.0p)
•   No exceptional items in current year

Logistics Services:
• Turnover up 8% due to new contract wins and organic growth
• Successful implementation of industry leading warehouse management system

Construction Services:
• Substantial 43% increase in activity levels due to continuing success of one stop shop approach
• Acquisition of Pirie Contracts enhances the product offering
• Record order book

David Mackay, Chairman, said:

“2003/04 was a very satisfactory year for the group in difficult economic conditions. Many challenges lie
ahead and therefore efficiency measures and cost controls are once again vital ingredients. We have a
record order book in Construction Services, and that coupled with several new business gains and
healthy enquiry levels in Logistics Services means that the outlook is positive and encouraging.”


The Malcolm Group PLC                                    Today:         0207 554 1400
Andrew Malcolm, Chief Executive                          Thereafter:    01505 324321
Alan Palmer, Finance Director

Gavin Anderson & Company                                                0207 554 1400
Byron Ousey, Ken Cronin


                                              Page 1 of 21

Donald J Malcolm
It is with deep regret that I have to record the death of Donald J Malcolm on 3 May 2003. Donald was the
founder of the main trading subsidiary in the Group, W H Malcolm Ltd. The Group acquired W H Malcolm
Ltd in 1960, and through Donald’s skill and expertise, the business grew from a local transport company
into a UK-wide business, with two complementary trading divisions. His contribution was immense and
he is sadly missed.

2003/04 was a very satisfactory year for the Group in difficult economic conditions. Turnover increased
from £107.2m to £129.1m, operating profit before goodwill amortisation increased from £8.8m to £9.1m,
and earnings per share increased from 5.1p to 6.8p. Cash generation was strong resulting in a reduction
in gearing levels to 47%, leaving the Group with a strong balance sheet.

The challenging market conditions evident in the first half of the year continued throughout the second
half. The Group is well accustomed to operating and responding accordingly in a climate where pricing
pressure has become the norm. Our strategy is to provide exceptional service levels and value to our
customers in both the Logistics and Construction sectors.

Our Logistics Services Division increased turnover by 8% to £74.3m, partly as a result of organic growth
with existing customers but also due to several important contract wins. Our significant investment in a
new industry leading warehouse management system played a vital part in this process and continues to
bring substantial benefits with increased visibility throughout the supply chain.

The substantial growth in activity levels in our Construction Services Division reported in the first half
continued throughout the full year. Turnover levels increased by 43% to £54.8m, very satisfactory and
again endorsing the strategic decision to provide a “one stop shop” integrated service to the Construction

Group results
Turnover for continuing operations reached a record level of £129.1m, up 20% on last year. In Logistics
Services this was due to the full year impact of contract wins in 2002/03 alongside new business gains in
the current year. In Construction Services the significant growth in turnover reflects the success of our
service commitment to the Construction market in Scotland.

Operating profit before goodwill amortisation and exceptional items increased 4% to £9.1m.

Exceptional items
I am pleased to report that the current year’s results contain no exceptional items. The comparative
period included an exceptional item relating to the conclusion of a dispute with the Inland Revenue
relating to the disposal of Grampian Pharmaceuticals Limited in 1997.

Earnings per share
Headline earnings per share increased 7% to 7.4p. FRS14 earnings per share increased from 5.1p to
6.8p, an increase of 33%, although the 2002/03 figure included the exceptional tax and interest costs
relating to the resolution of the above historic tax issue.

The Board proposes a final dividend for 2003/04 of 3.3p per ordinary share making a total of 5.0p for the
year, unchanged from last year. The Board’s policy remains that it should set a dividend which reflects
the Group’s earnings and growth potential, whilst ensuring it is adequately covered.

                                              Page 2 of 21
The Board considers that there is still significant growth potential in both divisions. The focus will
continue to be on organic growth although selective acquisition opportunities will be considered where
appropriate. During the year the Group acquired a small civil engineering and road surfacing business,
Pirie Contracts, to enhance the product offering of our Construction Services Division.

Board changes
Sir Donald MacKay retired as Chairman at the conclusion of the Annual General Meeting on 20 June
2003. Sir Donald was appointed Chairman on 31 July 1998 and I would like to pay tribute to his term of
leadership. Under his stewardship the Group was transformed from a conglomerate to a focused
business. The Board is grateful for the sound advice and strategic guidance he provided during this
difficult period of transition and wishes him well in his future ventures.

Management and employees
Every business relies on the professionalism and quality of its employees. The Malcolm Group is no
different in this respect. Our service standards are critical to the Group’s success, and are achieved
through the dedication and commitment of all our staff. I would therefore like to take this opportunity on
behalf of the Board to record our gratitude to all the Group’s employees for their important contribution.

Many challenges lie ahead and therefore efficiency measures and cost controls are once again vital

We have a record order book in Construction Services, and that coupled with several new business gains
and healthy enquiry levels in Logistics Services means that the outlook is positive and encouraging.

David J Mackay

                                               Page 3 of 21

In our second full year as a stand-alone business, it is gratifying to report record activity levels for the
Group. Turnover in the current year reached £129.1m up 20% compared to £107.2m in 2002/03, with
operating profit before goodwill amortisation increasing from £8.8m to £9.1m. In this climate we consider
a 20% increase in business activity and a £0.3m increase in operating profit before goodwill
amortisation, together with a 7% increase in headline earnings per share, to be a satisfactory

The trading environment in both the Logistics and Construction Services sectors has remained
challenging throughout the year. Pricing pressure and cost increases referred to in our Interim Report
continue to affect the Group’s short-term performance. As outlined in last year’s Annual Report, the
Group recommenced employer contributions to The Malcolm Group Staff Pension Scheme from
February 2003, a year ahead of the next formal actuarial valuation. This proactive measure will help to
restore the funding position of the scheme in light of the fall in equity markets since the previous formal
valuation in January 2001. In addition, an interim valuation of both the Group’s defined benefit pension
schemes was carried out during the year, resulting in a worsening of the funding position of both
schemes. The total charge for pension provision for the year has increased by £0.8m.

Agency labour usage continued at high levels in the East Midlands and London. The Group’s policy to
maintain customer service levels is paramount, and thus this outsourcing will continue for the
foreseeable future. Our Logistics Services Division’s spend on agency labour increased by
approximately £0.5m, largely to cater for new business.

Labour costs in the rest of the company have also increased above the rate of inflation. The Group has
again tried to mitigate the future impact of the Working Time Directive, which when implemented in full
during the Spring of 2005, may restrict the number of hours a driver can work. The Group has
deliberately enhanced drivers’ basic wages at well above the rate of inflation, in order to ensure
employees are less reliant on overtime, which may not be available to them in the future. The overall
increase for the average driver was an uplift in gross pay of approximately 5.2% when inflation was
under 3%. The additional cost to the Group in 2003/04 was in the region of £0.7m.

Insurance premium increases in the second half of 2002/03 amounted to circa 40%. The impact in the
current year is approximately £0.3m of additional insurance spend.

Highlights for the year include:

Logistics Services
• Major contract win with Diageo
• Successful implementation of industry leading warehouse management system
• Continuing expansion of our innovative rail solutions
• Continuing diversification of the customer base and mix of product stored and distributed

Construction Services
• 43% increase in activity levels reflecting continuing success of “one stop shop” strategy
• Acquisition of Pirie Contracts providing further integrated service
• Ongoing development of artificial sports pitch operations

                                                Page 4 of 21
Logistics Services
                           2003/04     2002/03      Change
                               £m          £m           £m
Turnover                      74.3        68.8        +5.5
Operating profit before
goodwill amortisation           8.3         8.1         +0.2
Operating margin             11.2%       11.8%        -0.6%

Logistics Services increased turnover levels by 8% to £74.3m. Part of this increase is due to the impact
of business gained in the second half of 2002/03, with the remainder coming from organic growth with
existing customers. In July 2003, the Group was awarded a contract to supply all transport and logistics
services for all of Diageo’s Scottish based operations. The contract was awarded after a tender process
involving the three existing service providers at that time.

The Logistics Services Division provides integrated logistics solutions, including warehousing, rail and
road distribution and supply chain management. Our aim is to provide practical and innovative solutions
to our customers, by working in close partnership with them, to achieve the highest possible level of
service at the most effective price. Record activity levels in this division provide testimony of the success
of our strategy.

Operating profit of £8.3m before goodwill amortisation was £0.2m higher than 2002/03. As already
mentioned several items have impacted the margins for the Group as a whole. Within Logistics
Services, additional employer pension costs in 2003/04 amounted to approximately £0.5m; increased
occupancy costs amounted to £0.2m; insurance cost increases amounted to £0.3m; increased agency
labour spend amounted to £0.5m. After taking account of these additional costs, the divisional operating
margin of 11.2% represents a resilient performance in difficult market conditions.

Rail freight activities have continued to increase during 2003/04 in line with our original forecasts. A
dedicated Malcolm Group train operates 6 days per week, with one northbound and one southbound
connection daily between our railheads at Crick and Grangemouth, i.e. 12 trains per week. At certain
peak times of the year this number has increased to meet levels of customer demand. In addition, the
average number of wagons in each train has increased against last year, further justifying our significant
investment in the sector over the last few years. As a consequence of this increase in activity levels, we
converted approximately 9 million road miles from the M74/M6 motorways onto rail.

Road and rail transport are complementary and the optimum transport strategy for each customer can
encompass elements of both. Our aim over the last two years has been to gain customer confidence in
our rail service. This has been achieved with customers additionally being offered onward warehousing
and road distribution as part of an overall integrated service.

The Group’s investment over the last few years in its depot infrastructure combined with the rail
connected complexes in Grangemouth and Crick, enables the Group to service most parts of the UK
from this network. The Group’s strategy continues to be to actively pursue organic growth opportunities
within the UK Logistics sector, both with existing and new customers. The successful implementation of
our new warehouse management system has also strengthened our integrated supply chain solution,
offering customers a service from the end of production line through to the ultimate customer delivery.
This gives customers the opportunity to concentrate on their core activities of manufacturing and selling,
whilst we manage the key tasks of supply, warehousing and distribution.

The Malcolm Group specialises in offering practical logistics solutions. In order to ensure customer
standards are maintained, we need to control the resource used throughout. In contrast to many of our
competitors who prefer to manage contracts, we fulfil customer needs using predominately our own fleet,
drivers, forklifts, and only subcontracting to supplement our in-house resource. We purchase our fleet
outright, only contract hiring company cars and specialist forklift equipment. We have workshop facilities

                                                Page 5 of 21
at all our key depots, and also service our fleet in-house. Any surplus workshop capacity is marketed
externally to ensure maximum return is gained.

As ever there are both challenges and opportunities ahead for the division and cost control will have an
even stronger focus.

Construction Services
                           2003/04     2002/03      Change
                               £m          £m           £m
Turnover                      54.8        38.4       +16.4
Operating profit before
goodwill amortisation           1.8          1.6        +0.2
Operating margin              3.3%         4.2%       -0.9%

In a competitive market, Construction Services again saw activity levels achieve double digit growth, with
turnover increasing by 43%. Over the last two years the division’s turnover has grown by 78% to
£54.8m, a clear indication of the success of the one stop shop philosophy adopted by the division.

Operating profit before goodwill amortisation increased £0.2m to £1.8m. Again pricing pressure in the
market place coupled with the cost increases that impacted the Group as a whole have affected
operating margins. Additional employer pension costs in 2003/04 amounted to approximately £0.3m.
The high level of growth during the year was predominantly from existing customers, and in order to
ensure contract deadlines were achieved, and service standards maintained, agency labour was used to
supplement our own in-house resources. In addition quality engineering staff are difficult to recruit, and
so where response times were short, agency resource provided the necessary solution, albeit at a
premium. Agency labour spend in our groundworks business increased by approximately £0.5m
compared to the previous year. We have already taken action to minimise our reliance on agency staff
with a recruitment drive for engineers with the requisite skills and experience.

Construction Services offers a wide range of products to customers from earth removal, plant/tipper hire,
recycling demolition waste, landfill sites, foundations, retaining walls and surfacing. These are fully
integrated with each individual product forming an essential component part of an overall groundworks
contract. In August 2003, a small strategic acquisition was made to enhance the existing product
offering, when the Group acquired the business and assets of the civil engineering and road surfacing
divisions of a local contractor Pirie Ltd. This brings to us an in-house expertise in road surfacing, a
service which previously we had to sub-contract. I am pleased to report that this business has already
been integrated successfully into The Malcolm Group.

The Malcolm Group philosophy is to provide practical solutions. Construction Services therefore where
possible, use in-house resource to physically carry out the work rather than purely acting as contract
manager. The Group boasts the largest tipper fleet in Scotland, alongside one of the largest plant hire
fleets, in addition to its own licensed landfill sites and extensive recycling facilities. Moreover, we can
now offer road surfacing expertise, together with the specialist knowledge of artificial and natural sports
pitch construction.

The main increase in activity during 2003/04 has been in our groundworks activities, where the value of
work done increased by £12.8m during the year. The increase in this area has the obvious benefit of
higher utilisation of our own tipper and plant fleets, leaving the Group less exposed to the highly
competitive spot-hire markets.

As with the Logistics Division, cost control will be a key success factor of the Construction Services
Division over the short to medium term.

                                                Page 6 of 21
The Malcolm Group remains dependent on the skills, commitment and experience of its entire workforce.
In particular, I would like to welcome those employees who joined the Group in August 2003 from Pirie
Ltd, and thank them for making a successful transition to the Group.

The successful achievement of the service levels expected by our customers is an integral part of our
success and reflects great credit on all the team who constantly rise to the challenges of change. I
would also like therefore to pay tribute to all staff for their achievements, resilience and dedication, and
gratefully acknowledge the support given.

Health & safety
The Group aims to achieve the highest standard of health, safety and welfare. Procedures and working
practices are constantly reviewed and we aim to instil a culture of responsibility within each employee
and activity.

Trading conditions in both Divisions remain challenging. Pricing pressures continue to be the norm and
the full implications of the EU Working Time Directive on the whole Transport industry have still to be

The new year has started well and enquiry levels within the Logistics Services Division are very
encouraging. The order book in Construction Services is at a record level, which depending on contract
commencement dates, should ensure encouraging activity levels for the first few months of 2004/05.
Wage inflation, the rising cost of pension provision, and the use of agency labour in certain areas of the
country will inevitably continue to have some impact on the Group’s results in the short term.

The second year for The Malcolm Group as a stand-alone business has been in many ways more
challenging than the first. However, successful contract wins in Logistics and record activity levels in
Construction Services have been very encouraging. Despite the Group absorbing some significant
increases in our cost base, operating profit before goodwill amortisation increased by 4% to £9.1m.

Overall, I believe we are well placed and, supported by a strong and committed management team, we
can rightly view the future with a degree of optimism.

Andrew B Malcolm
Chief Executive

                                                Page 7 of 21

An overview of the Group’s performance is provided in the Chairman’s Statement. The Group’s results
and activities have been fully covered in the Chief Executive’s Review. This section gives further
information on financial and accounting matters.

Segmental results
Logistics and Construction Services activities are reported as segments, reflecting the two operating
divisions within the Group. The segmental analysis continues to show Corporate and Central Services
costs separately.

Construction Services showed strong growth in activity levels, whilst Logistics Services achieved further
growth. Despite increased operating costs the Group produced operating profit levels slightly ahead of
last year. A summary of the Group’s trading results is set out below:

                                 2003/04     2002/03      Growth
                                     £m          £m           %
Logistics Services                  74.3         68.8         8%
Construction Services               54.8         38.4        43%
                                  –––––        –––––        –––––
                                   129.1        107.2        20%
                                  –––––        –––––        –––––

                                 2003/04     2002/03      Change
                                     £m          £m           £m
Operating profit
(before goodwill amortisation)
Logistics Services                   8.3          8.1          0.2
Construction Services                1.8          1.6          0.2
Corporate and Central Services      (1.0)        (0.9)        (0.1)
                                  –––––        –––––        –––––
                                     9.1          8.8          0.3
                                  –––––        –––––        –––––

Cash flow
A summary of the Group’s cash flow for 2003/04, together with comparatives, is set out below:

                                                 2003/04                   2002/03
                                            £m         £m             £m         £m
Operating profit before goodwill
amortisation and operating exceptionals                    9.1                    8.8
Depreciation                                              10.4                    9.6
Movement in working capital                               (1.7)                   0.3
Non-cash items                                            (1.4)                  (1.3)
Operating exceptionals                                     –                     (0.5)
                                                        –––––                  –––––
Operating cash flow                                       16.4                   16.9
Purchase of fixed assets                    (10.1)                   (11.6)
Grants received                               0.2                      0.4
Sale of fixed assets                          2.3                      3.0
                                           –––––                    –––––
Net capital expenditure                                   (7.6)                  (8.2)

                                               Page 8 of 21
Interest                                                  (1.6)                   (1.4)
Taxation                                                  (2.1)                   (3.1)
                                                        –––––                   –––––
Free cash flow                                             5.1                     4.2
Dividends paid                                            (3.2)                   (3.4)
Acquisitions and disposals                                (0.2)                    0.2
Net shares issued / (cancelled)                            –                     (41.5)
                                                        –––––                   –––––
Change in net debt resulting from cash flow                1.7                   (40.5)
Loan notes issued                                          –                      (3.5)
                                                        –––––                   –––––
Net movement                                               1.7                   (44.0)
Opening net (debt) / funds                               (29.2)                   14.8
                                                        –––––                   –––––
Closing net debt                                         (27.5)                  (29.2)
                                                        –––––                   –––––

Operating cash flow of £16.4m was £0.5m lower than 2002/03, largely due to higher working capital
requirements from additional business gained in the current year. Working capital levels are actively
managed and despite an increase in turnover of over 20%, net working capital only increased by £1.7m.

Net capital expenditure of £7.6m was slightly lower than last year’s £8.2m. The Group’s policy continues
to be to maintain the fabric of the business by investing up to our depreciation level. In addition, in
contrast to many of our competitors, the Group operates a strategic policy of purchasing rather than
leasing the vast majority of the Group’s vehicle and plant fleets. This provides operational flexibility,
which allows the Group to react to the ever-changing needs of today’s challenging market place.

Interest paid of £1.6m is up £0.2m against last year, partly as a result of the higher working capital levels.
In the prior year however, the Group benefited from approximately one month of interest income prior to
the £41.5m of cash returned to shareholders on 4 March 2002, following the court and shareholder
approval of the disposal of EWM.

Tax paid reduced by £1.0m to £2.1m largely due to the timing of payments following the settlement of
historic computations with the Revenue.

Dividend payments of £3.2m are down on the previous year by £0.2m, as the comparative included the
final dividend from 2001/02, which contained a non-recurring 1.0p per share to reflect the contribution of
EWM prior to disposal. The dividend in 2003/04 remains unchanged at 5.0p per share.

The year-end net debt of £27.5m reflects gearing of 47% and leaves considerable headroom to support
the Group’s development.

The Group’s effective tax rate expressed as a percentage of profit before goodwill amortisation and
exceptional items of 36.5% (2002/03: 34.5%) continues to be higher than the UK standard rate of 30.0%.
This is primarily attributable to depreciation on assets that do not qualify for capital allowances, together
with certain items not deductible for tax. A significant portion of this relates to the acquisition of the
Malcolm family companies where assets were acquired at market values in excess of their tax written
down values.

Exceptional items
The current year contains no exceptional items. During 2002/03, the Group concluded a dispute with the
Inland Revenue in relation to the disposal of Grampian Pharmaceuticals in 1997. The settlement agreed
with the Inland Revenue was reflected in the Interim Accounts in 2002/03 and comprised a payment of

                                                Page 9 of 21
£0.7m of corporation tax and estimated interest of £0.2m, together with the surrender of capital losses of
£1.1m in existence at the time of the disposal. Following finalisation of corporation tax payments made by
the Group, the interest element of the settlement was reduced to £138,000.

In May 2002, new banking facilities were negotiated following a tendering process. These facilities reflect
the Group’s size, prospects and capital structure following the return of capital to shareholders and
comprise a combination of term loans, multi-option and short-term facilities totalling £50m. Banking
arrangements now in place provide sufficient funding and a suitable platform to support the future
development of the Group.

Interest cover for the year was 5.5 times, broadly similar to last year.

Treasury operations
As The Malcolm Group’s operations are virtually all situated within the United Kingdom, the principal
financial risk is associated with interest rates. With the exception of the purchase of artificial sports turf for
Construction Services amounting to approximately £0.4m, together with the purchase of some new
containers for our rail freight operations amounting to £0.3m, the Group had minimal currency dealings
during 2003/04 (approximately £0.5m 2002/03).

The Board has agreed policies for interest rate and foreign currency risks to be managed by the central
treasury function on a day to day basis. The purpose of these policies is twofold. Firstly, they ensure that
the Group has adequate funding at all times. Secondly, the policies are designed to carefully manage all
interest rate and any foreign currency exposures. Transactions of a speculative nature are not permitted.

Operations have been financed through a combination of bank borrowings, long-term loans and short-
term cash deposits. The Group borrows in Sterling at floating rates of interest and utilises derivative
transactions to generate the desired effective interest rate and foreign currency profiles.
Derivatives used for this purpose are primarily interest rate swaps, interest rate caps and collars,
currency options and forward currency contracts.

Going concern
On the basis of current financial projections and facilities available, the directors are satisfied that the
Group has adequate resources to continue in operational existence for the foreseeable future and
accordingly, consider that it is appropriate to adopt the going concern basis in preparing the accounts.

Accounting developments
During the year, no new Financial Reporting Standards were issued by the Accounting Standards Board
although the process towards international convergence of accounting standards has gathered pace.
Under European legislation, the Group will require to adopt International Accounting Standards (“IAS”) in
preparing its accounts for the year ending 31 January 2006. Considerable harmonisation of accounting
practice is, however, required to establish the IAS to be utilised in 2005/06. In conjunction with the
Auditors, the Board is reviewing the impact of implementing the proposed International Financial
Reporting Standards (“IFRS”) for the financial year 2005/06. This review is ongoing at present, as the
IFRS in respect of pensions has still to be finalised. The Group is currently collating all data required to
produce an IFRS compliant balance sheet as at 30 January 2004.

Consequently, when the Group does report its first IFRS compliant results during 2005/06, there will be
some material and significant differences from the UK GAAP compliant results. Upon first time adoption,
the Group will provide three reconciliation statements in its 2005/06 financial statements, namely:

                                                 Page 10 of 21
1. A reconciliation of equity reported under UK GAAP at 30 January 2004 to the equity restated under
   IFRS at that date;
2. A reconciliation of equity reported under UK GAAP at 28 January 2005 to the equity restated under
   IFRS at that date;
3. A reconciliation of the UK GAAP reported profit and loss account for the year ended 28 January 2005
   with the restated IFRS income statement for the same period.

To avoid changing the accounting policy for retirement benefits twice, firstly to FRS17 and then to IAS19,
the Group has elected to defer full adoption of FRS17 – Retirement Benefits (“FRS17”). Consequently,
the Group continues to report pensions on the basis of SSAP 24. However, in order to enable
shareholders to assess the impact of FRS17 on the Group we have continued to provide information in
addition to that required by the accounting standard.

The Group operates two defined benefit pension schemes, The Malcolm Group Staff Pension Scheme
(the “Staff Scheme”) and The Malcolm Group Pension Scheme (1989) (the “1989 Scheme”).

FRS17 was introduced by the ASB to ensure that companies reflect the fair value of and changes to the
underlying assets and liabilities in pension schemes, record all costs associated with providing such
schemes and provide adequate disclosure on retirement benefits. Mandatory application of FRS17 has
been deferred until accounting periods beginning on or after 1 January 2005. However, full disclosure of
data on an FRS17 basis is required for accounting periods ending on or after 22 June 2003. The Group
has provided all the relevant disclosures in the accounts.

Under FRS17, the full notional cost of servicing pension provision relating to the period, together with the
cost of any benefits relating to past service, is charged against operating profit. Two new items require to
be included in the profit and loss account, classified as “other finance income”. These are:

       (1) Credit equating to the Group’s expected long term return on pension scheme assets, based on
       the market value of assets at the commencement of the period using an estimated rate of return
       provided by the directors; and

       (2) Debit equal to the expected increase in the present value of scheme liabilities as the
       retirement benefits are closer to settlement.

Any difference between the market value of scheme assets and the present value of pension liabilities is
shown as a pension asset or liability on the balance sheet, net of deferred tax. Variances between
expected and actual rates of return on assets are recognised in the Statement of Total Recognised Gains
and Losses together with differences arising from experience or changes in actuarial assumptions.

Set out below is a comparison of the accounting entries required in the financial statements for The
Malcolm Group in 2003/04 and 2002/03 under FRS17 and SSAP24. This information relates solely to the
Staff Scheme and 1989 Scheme and is provided in addition to the disclosure requirements detailed in the

                                               Page 11 of 21
                                              2003/04               2002/03
                                           FRS17 SSAP24          FRS17 SSAP24
                                             £m       £m            £m      £m
Profit and loss account impact
Operating profit                             (1.8)       (1.9)       (1.7)       (1.1)

Other finance income
  Expected return on assets                   2.7        –           3.8         –
  Interest on pension scheme liabilities     (3.3)       –          (3.3)        –
                                           –––––      –––––       –––––       –––––
Total other finance income                   (0.6)       –           0.5         –
                                           –––––      –––––       –––––       –––––

Profit before tax                            (2.4)      (1.9)       (1.2)       (1.1)
Tax                                           0.7        0.6         0.4         0.3
                                           –––––      –––––       –––––       –––––
Profit after tax                             (1.7)      (1.3)       (0.8)       (0.8)
                                           –––––      –––––       –––––       –––––

Statement of total recognised
gains and losses impact
Retained earnings                            (1.7)      (1.3)       (0.8)       (0.8)
Actuarial gain / (loss)                       2.2        –         (16.1)        –
Tax                                          (0.7)       –           4.8         –
                                           –––––      –––––       –––––       –––––
Total                                        (0.2)      (1.3)      (12.1)       (0.8)
                                           –––––      –––––       –––––       –––––
Balance sheet impact
Current asset                                 –          0.8         –           0.8
Pension liability                           (17.0)       –         (18.5)        –
Deferred tax asset / (liability)              5.1       (0.2)        5.6        (0.2)
                                           –––––      –––––       –––––       –––––
Net pension (liability) / asset             (11.9)       0.6       (12.9)        0.6
                                           –––––      –––––       –––––       –––––

Pension reserve                             (11.9)       –         (12.9)        –
                                           –––––      –––––       –––––       –––––

In comparison with the results of the actuarial valuations, FRS17 has reduced or eliminated surpluses
and increased deficiencies in existence. The improvement in the FRS17 funding position of the Group’s
pension schemes reflects the improvement in equity markets during 2003. However this improvement in
the schemes’ assets was partially offset by changes in actuarial assumptions, including the impact of new
joiners, higher actual salary increases and higher forecast levels of inflation, which have increased the
present value of both schemes’ liabilities.

Although as at 30 January 2004 the Group’s pension schemes have a deficit of £11.9m under FRS17, it
is important to record that this is not immediately payable. Pension liabilities are by their nature, long
term, as evidenced by an average remaining service life in excess of 13 years for members of both the
Staff Scheme and 1989 Scheme. In addition the net FRS17 deficit has improved by £1.0m since last

Following a review of the cost of funding the defined benefit schemes, the Group closed both the Staff
Scheme and 1989 Scheme to new members with effect from 30 June 2002. Employees joining after this

                                              Page 12 of 21
date have been offered membership of a defined contribution scheme as part of their remuneration
packages. In addition, the Board continues to monitor the funding position of both schemes. Although
the Group had enjoyed a contribution holiday in respect of the Staff Scheme for a number of years, the
Board decided to recommence employer contributions from February 2003, one year in advance of the
formal actuarial review in January 2004. Employer contributions of £0.6m were made during 2003/04 in
respect of the Staff Scheme. In relation to the 1989 Scheme, the Board made a lump sum contribution of
£0.8m in January 2002 and increased the contribution rate from 2002/03 onwards.

An interim actuarial valuation of both schemes as at 1 January 2003 was received in September 2003.
The results of these valuations were used as the basis for the SSAP24 charge from 1 October 2003

These measures are geared towards restoring the funding position of the pension schemes in order to
match the quantum and the timing of pension liabilities maturing.

Accounting policies
In accordance with FRS 18, the Board has reviewed its accounting policies to ensure that they remain
appropriate to its particular circumstances. No adjustments are considered necessary.

Alan C Palmer
Finance Director

                                            Page 13 of 21
Group Profit and Loss Account
For the year ended 30 January 2004
                                                                      2003/04                                2002/03
                                                          Before                                 Before
                                                      goodwill &  Goodwill &                  goodwill &     Goodwill &
                                                      exceptional exceptional                exceptional    exceptional
                                                          items        items       Total          items          items       Total
                                                  Note     (£000)       (£000)     (£000)          (£000)         (£000)     (£000)

Group turnover                                       2   129,062            –    129,062        107,248                –   107,248
Net operating costs excluding
goodwill amortisation                                    (119,978)          –    (119,978)       (98,486)              –   (98,486)
Goodwill amortisation                                           –        (402)       (402)             –           (395)      (395)
                                                         –––––––      –––––––    –––––––        –––––––        –––––––     –––––––
Group operating profit / (loss)                    2,3      9,084        (402)      8,682          8,762           (395)     8,367
  Interest excluding exceptional interest                  (1,664)          –      (1,664)        (1,565)              –    (1,565)
  Interest relating to tax on exceptional items      4          –           –           –              –           (138)      (138)
                                                         –––––––      –––––––    –––––––        –––––––        –––––––     –––––––
Net interest payable                                       (1,664)          –      (1,664)        (1,565)          (138)    (1,703)
                                                         –––––––      –––––––    –––––––        –––––––        –––––––     –––––––
Profit / (loss) on ordinary activities
before taxation                                             7,420        (402)      7,018          7,197           (533)     6,664
                                                         –––––––      –––––––    –––––––        –––––––        –––––––     –––––––
 Tax excluding tax on exceptional items                    (2,705)          –      (2,705)        (2,486)              –    (2,486)
  Tax on exceptional items                           4          –           –           –              –           (700)      (700)
                                                         –––––––      –––––––    –––––––        –––––––        –––––––     –––––––
Total taxation                                             (2,705)          –      (2,705)        (2,486)          (700)    (3,186)
                                                         –––––––      –––––––    –––––––        –––––––        –––––––     –––––––
Profit / (loss) attributable to shareholders                4,715        (402)      4,313          4,711         (1,233)     3,478
Dividends                                            5     (3,182)          –      (3,182)        (3,180)              –    (3,180)
                                                         –––––––      –––––––    –––––––        –––––––        –––––––     –––––––
Transferred to / (from) reserves                            1,533        (402)      1,131          1,531         (1,233)       298
                                                         –––––––      –––––––    –––––––        –––––––        –––––––     –––––––

Earnings per ordinary share                          6
Headline                                                                             7.4p                                     6.9p
UKSIP                                                                                7.4p                                     6.9p
FRS14                                                                                6.8p                                     5.1p
FRS14 (diluted)                                                                      6.8p                                     5.1p

                                                                Page 14 of 21
Group Statement of Total Recognised Gains and Losses
For the year ended 30 January 2004

                                                                           2003/04                        2002/03
                                                                            (£000)                         (£000)
Profit attributable to shareholders                                          4,313                          3,478
Deficit on revaluation of freehold warehousing                                (301)                             –
                                                                          –––––––                        –––––––
Total recognised gains                                                       4,012                          3,478
                                                                          –––––––                        –––––––

Group Balance Sheet
As at 30 January 2004
                                                                             2004                      2003
                                                        Note     (£000)             (£000)    (£000)          (£000)
Fixed assets
Intangible assets                                                                     910                     1,110

Tangible assets
  Land and buildings                                            62,267                        61,926
  Plant and machinery                                            3,565                         4,270
  Motor vehicles                                                21,193                        22,415
  Fixtures and fittings                                          1,782                         1,668
                                                               –––––––                       –––––––
                                                                                 88,807                   90,279
                                                                                –––––––                  –––––––
                                                                                 89,717                   91,389
Current assets
  Stocks                                                           579                           601
  Debtors                                                       26,070                        20,484
  Liquid investments                                             2,000                             –
  Cash at bank and in hand                                       1,408                         2,279
                                                               –––––––                       –––––––
                                                                30,057                        23,364
Creditors: amounts falling due within one year                  33,976                        27,291
                                                               –––––––                       –––––––
Net current liabilities                                                           (3,919)                  (3,927)
                                                                                –––––––                  –––––––
Total assets less current liabilities                                             85,798                  87,462
Creditors: amounts falling due after one year                                    22,817                   25,451
Accruals and deferred income
  Deferred government grants                                                        728                      590
Provisions for liabilities and charges                                            3,823                    3,856
                                                                                –––––––                  –––––––
Net assets                                                                       58,430                   57,565
                                                                                –––––––                  –––––––
Capital and reserves
  Called up share capital                                                        15,912                   15,900
  Share premium account                                                              23                        –
  Revaluation reserve                                                            14,050                   14,591
  Profit and loss account                                                        28,445                   27,074
                                                                                –––––––                  –––––––
                                                           7                     58,430                   57,565
                                                                                –––––––                  –––––––
Net assets per share
  Net assets per share                                     6                        91.8p                     90.5p
  Diluted net assets per share                             6                        91.1p                     90.5p

                                                 Page 15 of 21
Group Cash Flow Statement
For the year ended 30 January 2004

                                                                            2003/04                 2002/03
                                                            Note       (£000)     (£000)       (£000)     (£000)

Cash inflow from operating activities                          8                  16,406                  16,919
Returns on investments and servicing of finance                9                   (1,636)                 (1,454)
Taxation                                                                           (2,055)                 (3,153)
Capital expenditure and financial investment                   9                   (7,569)                 (8,207)
Acquisitions and disposals                                     9                     (213)                    213
Equity dividends paid                                                              (3,181)                 (3,434)
                                                                                 –––––––                 –––––––
Cash inflow before use of liquid resources and financing                            1,752                     884
Management of liquid resources
  Increase in short term cash deposits                                   (415)                     –
  Increase in liquid investments                                       (2,000)                     –
                                                                     –––––––                 –––––––
                                                                                   (2,415)                      –
Financing                                                      9
  Net issue / (cancellation) of shares                                    35                  (41,459)
  (Decrease) / increase in debt and lease financing                     (658)                  23,017
                                                                     –––––––                 –––––––
                                                                                     (623)                (18,442)
                                                                                 –––––––                 –––––––
Decrease in cash                                                                   (1,286)                (17,558)
                                                                                 –––––––                 –––––––

Reconciliation Of Net Cash Flow To Movement In Net (Debt) / Funds

                                                                            2003/04                 2002/03
                                                                       (£000)     (£000)       (£000)     (£000)

Decrease in cash                                                       (1,286)                (17,558)
Cash outflow / (inflow) from decrease / (increase)
in debt and lease financing                                              658                  (23,017)
Increase in short term cash deposits                                     415                        –
Increase in liquid investments                                         2,000                        –
                                                                     –––––––                 –––––––
Change in net debt resulting from cash flows                                        1,787                 (40,575)
Loan notes issued on share cancellation                                                 –                  (3,491)
Loans and finance leases acquired with subsidiaries                                   (89)                      –
                                                                                 –––––––                 –––––––
Decrease / (increase) in net (debt) / funds                                         1,698                 (44,066)
Opening net (debt) / funds                                                        (29,219)                 14,847
                                                                                 –––––––                 –––––––
Closing net debt                                                                  (27,521)                (29,219)
                                                                                 –––––––                 –––––––

                                                     Page 16 of 21
1. The abridged information in this document does not constitute full group accounts. The financial information
   contained in this document has been prepared on the basis of the accounting policies set out in the accounts
   for the year ended 31 January 2003. The financial information for the year ended 30 January 2004 is derived
   from the full statutory audited accounts, which will shortly be sent to shareholders and filed with the Registrar
   of Companies with an unqualified audit opinion. The financial information for the year ended 31 January 2003
   is derived from the full group accounts for that year, which have been filed with the Registrar of Companies.

2. Segmental analysis
                                                    Turnover            Operating profit/(loss)        Net assets
                                               2003/04    2002/03        2003/04     2002/03       2003/04 2002/03
                                                 (£000)     (£000)        (£000)       (£000)       (£000)    (£000)
By class of business (all continuing operations)
  Malcolm Logistics Services                     74,280    68,874            8,290        8,120
  Malcolm Construction Services                  54,782    38,374            1,846        1,584
                                              –––––––      ––––––           –––––        –––––
Logistics and Construction Services            129,062    107,248          10,136        9,704
Corporate and Central Services                        –          –         (1,052)        (942)
                                              –––––––      ––––––           –––––        –––––
Group total                                    129,062    107,248            9,084       8,762      88,936         86,583
                                              –––––––      ––––––
Goodwill amortisation                                                        (402)        (395)
                                                                            –––––        –––––
Group total                                                                 8,682        8,367
                                                                            –––––        –––––
Reconciliation of net assets:
Unallocated net liabilities                                                                   (30,506)        (29,018)
                                                                                             –––––––         –––––––
Net assets                                                                                     58,430          57,565
                                                                                             –––––––         –––––––
Due to the close integration of the Group’s Logistics and Construction Services assets and operations, it is not
possible to provide a segmental split of net assets for these divisions.

Unallocated net liabilities consist primarily of core Group cash and borrowings, dividends payable, taxation and
centrally held assets less centrally held liabilities.

Turnover by origin and destination, operating profit and net assets relate principally to operations in the UK.

3. Operating profit for continuing operations
                                                                                                  2003/04         2002/03
                                                                                                   (£000)          (£000)
Group turnover                                                                                    129,062         107,248
Cost of sales *                                                                                   103,100          84,134
                                                                                                  ––––––          ––––––
Gross profit                                                                                       25,962          23,114
                                                                                                  ––––––          ––––––
Selling and marketing expenses                                                                      1,330             931
Administrative expenses                                                                            15,652          13,441
Other operating income                                                                               (104)            (20)
                                                                                                  ––––––          ––––––
Net operating expenses                                                                             16,878          14,352
                                                                                                  ––––––          ––––––
Operating profit before goodwill amortisation                                                       9,084           8,762
Goodwill amortisation *                                                                              (402)           (395)
                                                                                                  ––––––          ––––––
Operating profit                                                                                    8,682           8,367
                                                                                                  ––––––          ––––––

                                                    Page 17 of 21
* Goodwill amortisation has been separately disclosed as operating profit before goodwill amortisation is
increasingly used by the investment community.

4. Exceptional items
                                                                                                 2003/04     2002/03
                                                                                                  (£000)       (£000)
Tax settlement relating to the disposal of Grampian Pharmaceuticals                                    –        (700)
Interest relating to tax on exceptional items                                                          –        (138)
                                                                                                 ––––––       ––––––
Total exceptional items                                                                                –        (838)
                                                                                                 ––––––       ––––––

5. Dividends
                                                                                                 2003/04      2002/03
                                                                                                  (£000)       (£000)
Equity – Ordinary – interim paid 1.7p per share (2002/03: 1.7p) and final
proposed 3.3p per share (2002/03: 3.3p)                                                           3,182         3,180
                                                                                                 ––––––        ––––––

The directors are recommending a final dividend of 3.3p per share making a total for the year of 5.0p per share.

The final dividend will be paid on 5 July 2004 to shareholders on the register on 4 June 2004.

6. Earnings per ordinary share                                                                  2003/04      2002/03
                                                                                               Number         Number
                                                                                              of shares      of shares
Weighted average number of shares                                                                  (000)         (000)
Basic weighted average number of ordinary shares in issue during the year:
(excluding shares owned by The Malcolm Group Employee Share Trust)                               63,631        68,106
Dilutive potential ordinary shares – employee share options                                         192            56
                                                                                                 ––––––        ––––––
Diluted weighted average number of ordinary shares in issue                                      63,823        68,162
                                                                                                 ––––––        ––––––
a) Actual
The calculations of earnings per 25p ordinary share are based on the following:

                                                                                 2003/04                   2002/03
                                                                         EPS                       EPS
                                                                           (p)       (£000)          (p)        (£000)
FRS14 earnings                                                             6.8        4,313         5.1          3,478
Goodwill amortisation                                                      0.6          402         0.6            395
Interest relating to tax on exceptional items                                –            –         0.2            138
Tax on exceptional items                                                     –            –         1.0            700
                                                                         ––––        –––––        –––––        ––––––
UKSIP earnings                                                             7.4        4,715         6.9          4,711
Exceptional items included in UKSIP EPS
   Operating exceptional items (exc. fixed asset impairment provision)      –            –            –             –
   Tax                                                                      –            –            –             –
                                                                         ––––        –––––        –––––        ––––––
Headline earnings (profit attributable to shareholders before goodwill
and exceptional items)                                                     7.4       4,715          6.9          4,711
                                                                         ––––        –––––        –––––        ––––––

Headline EPS                                                                           7.4p                      6.9p
UKSIP EPS                                                                              7.4p                      6.9p
FRS14 EPS                                                                              6.8p                      5.1p
Diluted FRS14 EPS                                                                      6.8p                      5.1p

                                                   Page 18 of 21
Headline EPS has been presented as this performance measure is commonly used by quoted companies.
Headline earnings are defined as the profit on ordinary activities before goodwill amortisation and exceptional
items but after interest and taxation.

UKSIP EPS has been presented as this figure is used by the investment community. The UKSIP EPS calculation
excludes goodwill amortisation, non-operating exceptionals items and impairment in the value of fixed assets, net
of tax.

The weighted average number of fully paid shares in issue is calculated excluding those held by employee share
trusts. The diluted weighted average is calculated by adjusting for all outstanding share options which are
potentially dilutive ordinary shares.

b) Unaudited Pro Forma 2002/03 Headline earnings per ordinary share
The completion of the significant restructuring of the Group during 2002/03, culminating with the share
cancellation and return of capital to shareholders in March 2002, means that direct comparison of earnings per
share for 2003/04 and 2002/03 is difficult. The directors therefore in last year’s Annual Report and Accounts
provided an indication of earnings per share for the continuing business based on the capital structure following
the share cancellation. A comparison of this year’s actual headline earnings per share with the pro forma
2002/03 figure is shown below:

                                                                                                  Continuing Business
                                                                                                 2003/04    2002/03
                                                                                                  (£000)      (£000)
Before goodwill amortisation and exceptional items
    Operating profit                                                                               9,084        8,762
    Interest                                                                                      (1,664)      (1,729)
    Taxation                                                                                      (2,705)      (2,437)
                                                                                                 ––––––      –––––––
     Headline earnings                                                                             4,715        4,596
                                                                                                 ––––––      –––––––
     No. of shares following capital reduction and return of cash to shareholders                63,647       63,602

     Headline EPS                                                                                   7.4p            7.2p

Headline earnings are defined as the profit on ordinary activities before goodwill amortisation and exceptional
items but after interest and taxation.

The interest charge for the previous year has been adjusted to reflect the additional interest payable had the
share cancellation and return of capital to shareholders taken place at the beginning of that financial year. Tax
relief has been assumed on this interest charge.

c) Net assets per share
                                                                                                    2004         2003
                                                                                                   (£000)       (£000)
Net assets                                                                                        58,430       57,565
Net assets per share                                                                               91.8p        90.5p
Diluted net assets per share                                                                       91.1p        90.5p

Net assets per share are defined as the Group’s net assets at the balance sheet date divided by the number of
shares in issue at the balance sheet date.

Diluted net assets per share are defined as the Group’s net assets at the balance sheet date divided by the
number of shares in issue together with potentially dilutive shares at the balance sheet date.

                                                   Page 19 of 21
                                                                                             2003/04      2002/03
                                                                                            Number        Number
                                                                                           of shares     of shares
Number of shares at the balance sheet date                                                      (000)         (000)
Basic number of ordinary shares in issue:
(excluding shares owned by The Malcolm Group Employee Share Trust)                            63,647      63,602
Dilutive potential ordinary shares – employee share options                                      514          40
                                                                                              ––––––     –––––––
Diluted number of ordinary shares in issue                                                    64,161      63,642
                                                                                              ––––––     –––––––

7. Reconciliation of movements in shareholders’ funds

                                                                                             2003/04     2002/03
                                                                                               (£000)      (£000)
Total recognised gains                                                                         4,012       3,478
Dividends                                                                                     (3,182)     (3,180)
Other movements:
     New shares issued                                                                            35            –
     Cancellation of shares                                                                        –      (44,950)
                                                                                             –––––––     –––––––
Total movements during the year                                                                  865      (44,652)
Shareholders’ funds at beginning of year                                                      57,565      102,217
                                                                                             –––––––     –––––––
Shareholders’ funds at end of year                                                            58,430       57,565
                                                                                              –––––––      –––––––

8. Reconciliation of operating profit to net cash inflow from operating activities
                                                                                             2003/04     2002/03
                                                                                               (£000)       (£000)
Operating profit                                                                               8,682        8,367
Amortisation of goodwill                                                                         402          395
Depreciation of fixed assets                                                                  10,403        9,604
Gain on disposal of tangible fixed assets                                                     (1,308)      (1,333)
Grants released                                                                                  (60)         (54)
Decrease in stocks                                                                                22           44
Increase in debtors                                                                           (5,686)      (3,227)
Increase in creditors                                                                          3,781        3,618
Increase / (decrease) in provisions for liabilities and charges                                  170          (15)
                                                                                             ––––––       ––––––
                                                                                              16,406      17,399
Net cash outflow in respect of operating exceptional items                                         –         (480)
                                                                                             ––––––       ––––––
Net cash inflow from operating activities                                                     16,406      16,919
                                                                                             ––––––       ––––––

The cash outflow in 2002/03 in respect of operating exceptional items of £480,000 relates to 2001/02 operating
exceptional items.

                                                    Page 20 of 21
9. Analysis of cash flows for headings netted in the cash flow statement
                                                                                   2003/04    2002/03
                                                                                    (£000)      (£000)
a) Returns on investments and servicing of finance
   Interest received                                                                    87         130
   Interest paid                                                                    (1,718)     (1,581)
   Interest element of finance lease rental payments and hire purchase contracts        (5)         (3)
                                                                                   ––––––      ––––––
Net cash outflow for returns on investments and servicing of finance                (1,636)     (1,454)
                                                                                   ––––––      ––––––
b) Capital expenditure and financial investment
   Purchase of tangible fixed assets                                               (10,112)    (11,569)
   Receipt of government grants                                                        198         424
   Sale of tangible fixed assets                                                     2,345       2,938
                                                                                   ––––––      ––––––
Net cash outflow for capital expenditure and financial investment                   (7,569)     (8,207)
                                                                                   ––––––      ––––––
c) Acquisitions and disposals
   Purchase of business                                                              (313)          –
   Sale of businesses – in respect of prior year disposals                            100         213
                                                                                   ––––––      ––––––
Net cash outflow for acquisitions and disposals                                      (213)        213
                                                                                   ––––––      ––––––
d) Financing
   Net issue / (cancellation) of ordinary share capital                                35      (41,459)
                                                                                   ––––––      ––––––
Debt due within one year:
  Repayment of borrowings                                                             (623)     (1,963)
Debt due beyond one year:
  Secured loans drawn                                                                   –       25,000
  Capital element of finance lease rental payments and hire purchase contracts        (35)         (20)
                                                                                   ––––––      ––––––
(Decrease) / increase in debt and lease financing                                    (658)      23,017
                                                                                   ––––––      ––––––
Net cash outflow from financing                                                      (623)     (18,442)
                                                                                    ––––––      ––––––

                                                     Page 21 of 21

To top