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78 Compass Group PLC Annual Report 2007Notes to the consolidated financial statementsfor the year ended 30 September 200726 Share-based payments continuedThe remaining 50% of awards made in the year to 30 September 2007 depend on the achievement of the Group Free Cash Flow (‘GFCF’) targetfor the three years from 1 October 2006 to 30 September 2009. 25% of the award will vest if GFCF of at least £859 million is achieved over theperiod and the full award will vest if GFCF of £959 million is achieved. 50% of awards made in the year to 30 September 2006 depend on theachievement of the GFCF target for the three years from 1 October 2005 to 30 September 2008. 25% of the award will vest if GFCF of at least£768 million is achieved over the period and the full award will vest if GFCF of £843 million is achieved. Awards will vest on a straight-line basisbetween these two points.The fair value of these awards was calculated using the Black-Scholes option pricing model, the vesting probability being assessed based ona simulation model of the GFCF forecast.The weighted average share price at the date of exercise for LTIP awards exercised during the year was 324.41 pence (2006: 225.47 pence).The LTIP awards outstanding at the end of the year have a weighted average remaining contractual life of 1.5 years (2006: 1.6 years).In 2007, LTIP awards were made on 8 March 2007 and 1 June 2007. The estimated fair value of awards granted on these dates was 251.88 pence.In 2006, LTIP awards were made on 14 June 2006. The estimated average fair value of these awards was 120.00 pence.The inputs to the option pricing models are reassessed for each award. The following assumptions were used in calculating the fair value of LTIPawards made during the year:Assumptions – long-term incentive plan 2007 2006Historical volatility 28.1% 28.2%Risk free interest rate 5.2% 4.7%Dividend yield 3.2% 4.3%Expected life 2.5 years 2.3 yearsWeighted average share price at date of grant 317.70p 206.25pLong-term bonus planCertain executives participating in the Long-Term Bonus Plan in prior years received an award of deferred Compass Group PLC shares.The award of bonus shares is subject to performance conditions and matching shares may be released by the Company following completionof a further period of service.The following table illustrates the movement in the number of awards during the year.2007 2006NumberNumberLong-term bonus plan of shares of sharesOutstanding at 1 October 6,514,317 9,984,014Awarded 222,932 174,628Adjustment of awards following acquisition of minority interests 295,984 –Vested (2,079,432) (958,590)Lapsed (cash settled) (1,020,400) (1,947,501)Forfeited (470,875) (738,234)Outstanding at 30 September 3,462,526 6,514,317Fair values for bonus shares awarded during the year were calculated using the Black-Scholes option pricing model. The inputs to the optionpricing model are reassessed for each grant. The following assumptions were used in calculating the fair value of awards granted:Assumptions – long-term bonus plan 2007 2006Historical volatility 31.0% 35.9%Risk free interest rate 4.3% 4.8%Dividend yield 4.3% 4.0%Expected life 3.0 years 3.0 yearsWeighted average share price at date of grant 222.28p 220.32pThe weighted average share price at the date of exercise for share bonus awards vesting during 2007 was 305.07 pence (2006: 211.54 pence).The share bonus awards outstanding at the end of the year have a weighted average remaining contractual life of 0.1 years (2006: 0.6 years).The estimated average fair value of share bonus awards made during the year was 280.56 pence (2006: 265.70 pence).
79 Compass Group PLC Annual Report 200726 Share-based payments continuedIncome statement expense and carrying valueThe Group recognised expenses of £24 million (2006: £21 million) for continuing operations and £1 million (2006: £4 million) for discontinuedoperations in respect of equity-settled share-based payment transactions.Cash-settled share-based paymentsThe Group has granted phantom share options to certain employees under the terms of the Management Equity Bonus Plan which mirrorgrants made under the Management Plan. These require the Group to pay the intrinsic value of the option to the employee at the date of exercise.At 30 September 2007, the Group has recorded liabilities of £1 million (2006: £2 million). The fair value of the phantom options is determinedusing the binomial distribution option pricing model using the assumptions shown above. The Group recorded a total credit of £1 million(2006: expense £1 million) during the year in respect of cash-settled phantom share options.27 Business combinationsAcquisitions in the year included the purchase of the final 5% minority interest in Onama S.p.A. for a consideration of £7 million and a numberof smaller infill acquisitions for a consideration of £7 million. Total £14 million.£12 million goodwill was recognised in respect of these acquisitions. This included a fair value adjustment of £2 million which increasedliabilities acquired.Goodwill arising on acquisitions in the year is attributable to the anticipated profitability that will be generated from an extension to theGroup’s operations.Onama was previously accounted for as a subsidiary and therefore there is no impact on the Group’s consolidated revenue or operating profitsin acquiring the final 5%. The impact on the Group’s consolidated revenue and operating profits had the other investments been owned forthe full year would have been minimal.The Group also paid deferred consideration relating to prior year acquisitions of £17 million, leaving £6 million deferred consideration outstanding.The total amount of cash paid in the year was £31 million.28 Reconciliation of operating profit to cash generated by operations2007 2006Reconciliation of operating profit to cash generated by operations £m £mOperating profit from continuing operations 525 455Adjustments for:Depreciation of property, plant and equipment 142 151Amortisation of intangible fixed assets 31 37Loss on disposal of property, plant and equipment 5 5Increase/(decrease) in provisions 43 (3)Decrease in pensions liability (42) (35)Share-based payments – charged to profits 1 23 21Share-based payments – settled in cash or existing shares 2 (11) –Operating cash flows before movement in working capital 716 631(Increase)/decrease in inventories (7) (4)(Increase)/decrease in receivables 8 (33)Increase/(decrease) in payables 36 57Cash generated by operations 753 6511. £24 million share based payments charge – £1 million credit in respect of cash-settled phantom share options (credited back to the income statement).2. It was originally anticipated that these payments would be satisfied by the issue of new shares.
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