I. Table of Contents - ISS
I. Table of Contents - ISS
I. Table of Contents - ISS
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By e-mail to ost@bourse.lu, jpr@bourse.lu and cme@bourse.lu<br />
Luxembourg Stock Exchange 09 November 2005<br />
11, avenue de la Porte-Neuve<br />
B.P. 165<br />
L-2011 Luxembourg<br />
Dear Sirs,<br />
<strong>ISS</strong> Global A/S - Euro Medium Term Notes due 2010 and 2014<br />
<strong>ISS</strong> A/S (parent <strong>of</strong> <strong>ISS</strong> Global A/S) announces its release <strong>of</strong><br />
updated public information relating to <strong>ISS</strong> A/S, its subsidiaries and<br />
parent following the acquisition <strong>of</strong> <strong>ISS</strong> A/S by <strong>ISS</strong> Holding A/S<br />
(formerly known as PurusCo A/S). The release was prepared for<br />
the lending banks participating in the financing arrangements<br />
entered into in connection with the acquisition and contains<br />
information relating to the financing arrangements and postacquisition<br />
structure and capitalization. The document also<br />
includes <strong>ISS</strong> A/S's unaudited financial statements for the nine<br />
months ended September 30, 2005 and the unaudited consolidated<br />
preliminary interim balance sheet <strong>of</strong> <strong>ISS</strong> Holding A/S.<br />
Yours faithfully<br />
<strong>ISS</strong> Global A/S<br />
Bredgade 30<br />
1260 Copenhagen K<br />
+45 38 17 00 00<br />
Forward-looking Statements<br />
This Stock Exchange Release contains forward-looking statements within the meaning <strong>of</strong> the US<br />
Private Securities Litigation Act <strong>of</strong> 1995 and similar laws in other countries regarding expectations to<br />
the future development, in particular future sales, operating efficiencies and business expansion.<br />
Such statements are subject to risks and uncertainties as various factors, many <strong>of</strong> which are beyond<br />
<strong>ISS</strong>’ control, may cause the actual development and results to differ materially from the expectations<br />
expressed in the stock exchange release. Factors that might affect such expectations include, but are<br />
not limited to, overall economic and business conditions, fluctuations in currencies, the demand for<br />
<strong>ISS</strong>’ services, competitive factors in the service industry, operational problems in one or more <strong>of</strong> the<br />
Group’s business units and uncertainties concerning possible acquisitions and divestments.<br />
Reference is also made to the description <strong>of</strong> risk factors on pages 9-13 <strong>of</strong> the Interim Report January<br />
– March 2005 for <strong>ISS</strong> A/S.<br />
<strong>ISS</strong> Global A/S Bredgade 30<br />
DK-1260 Copenhagen K Telephone:+45 38 17 00 00 www.issworld.com<br />
Denmark Telefax:+45 38 17 00 11
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The factual information contained in this document concerning the Group has been obtained from the<br />
Group and other sources. The market data included in this document represent estimates taken from<br />
external sources. Within this document, the term “market” is used interchangeably with “segment”.<br />
While <strong>ISS</strong> has compiled, extracted and reproduced market or other industry data from external<br />
sources, including third party or industry or general publications, <strong>ISS</strong> has not independently verified<br />
such data. Where ranges are presented, these ranges represent the general variance among<br />
countries in the European facility services market. There can be no assurance as to the accuracy and<br />
completeness <strong>of</strong>, and <strong>ISS</strong> and its subsidiaries take no responsibility for, such data.<br />
The actual results may be materially affected by changes in economic, operational, or other<br />
circumstances, which cannot be foreseen. Any reliance, which can be placed upon the projections and<br />
forecasts, is a matter <strong>of</strong> commercial judgement. Any estimates regarding <strong>ISS</strong>’s business, projections,<br />
targets or forecasts relating to the Group and its operations contained herein have been prepared by<br />
the Group and involve significant elements <strong>of</strong> subjective judgement and analysis, which may or may<br />
not be correct. No representation or warranty is made as to the achievability or reasonableness <strong>of</strong> any<br />
estimate contained in this document. The information contained in this document should not be<br />
assumed to have been updated at any time subsequent to 9 November 2005 and the distribution <strong>of</strong><br />
this document does not constitute a representation by any person that such information will be<br />
updated at any time after the date <strong>of</strong> this document.<br />
2
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I. <strong>Table</strong> <strong>of</strong> <strong>Contents</strong><br />
I. Executive Summary 7<br />
A. Overview <strong>of</strong> the Acquisition 8<br />
B. Sources & Uses, Pro Forma Capitalisation and Key Credit Statistics 9<br />
C. Overview <strong>of</strong> Transaction Structure 11<br />
D. Company Overview 17<br />
E. Strategy 20<br />
F. Financials 22<br />
II. Company Characteristics 24<br />
A. Large and Diversified Business 25<br />
B. Leading Market Positions 25<br />
C. Cash Generative Business 26<br />
D. Flexible Cost Base 28<br />
E. Stable and Predictable Business 28<br />
F. Disciplined and Well-established Approach to Acquisitions 29<br />
G. Decentralized and Experienced Local Management Structure 30<br />
H. Comprehensive Financial Management and Control 31<br />
III. Summary <strong>of</strong> Principal Terms and Conditions 32<br />
A. Description <strong>of</strong> the Financing Structure 33<br />
IV. Industry Overview 38<br />
A. Industry Overview 39<br />
B. European Facility Services Market 40<br />
C. Demand Drivers 41<br />
D. Industry Characteristics 41<br />
E. Industry Trends 41<br />
V. Company Overview 43<br />
A. Company Description 44<br />
B. History 45<br />
C. Services Overview 46<br />
D. Operations 49<br />
E. Acquisition History 53<br />
F. Customers and Contracts 54<br />
G. Human Resources 55<br />
3
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I. <strong>Table</strong> <strong>of</strong> <strong>Contents</strong><br />
H. Sales and Marketing 56<br />
VI. Business Strategy 57<br />
A. Strategy 58<br />
VII. Legal Issues 59<br />
VIII. Corporate Governance and Management 62<br />
A. Board <strong>of</strong> Directors <strong>of</strong> <strong>ISS</strong> Holding, <strong>ISS</strong>, and <strong>ISS</strong> Global 63<br />
B. Board <strong>of</strong> Directors <strong>of</strong> <strong>ISS</strong> Management 64<br />
C. Executive Management Board <strong>of</strong> <strong>ISS</strong> Management 64<br />
D. Executive Officers <strong>of</strong> <strong>ISS</strong> Management 66<br />
IX. Historical Financial Information 68<br />
A. Introduction 69<br />
B. Income Statement 70<br />
C. Balance Sheet 73<br />
D. Cash Flow Statement 75<br />
E. Seasonality 77<br />
F. Overview <strong>of</strong> Impact <strong>of</strong> Transition to IFRS 79<br />
G. Current Trading Update 81<br />
X. Appendices 86<br />
List <strong>of</strong> <strong>Table</strong>s<br />
Appendix A: Consolidated Income Statement, <strong>ISS</strong> 87<br />
Appendix B: Consolidated Cash Flow Statement, <strong>ISS</strong> 88<br />
Appendix C: Consolidated Balance Sheet, <strong>ISS</strong> 89<br />
Appendix D: Consolidated Balance Sheet, <strong>ISS</strong> Holding 90<br />
<strong>Table</strong> 1: Acquisition Pro Forma Sources & Uses (1) 9<br />
<strong>Table</strong> 2: Pro Forma Capitalization <strong>Table</strong>, as <strong>of</strong> September 30, 2005 10<br />
<strong>Table</strong> 3: Senior Credit Facilities (Committed) 13<br />
<strong>Table</strong> 4: Senior Credit Facilities (Uncommitted) 13<br />
<strong>Table</strong> 5: Temporary Financing 14<br />
<strong>Table</strong> 6: Companies Providing Guarantees 15<br />
<strong>Table</strong> 7: Historical Financial Data 22<br />
<strong>Table</strong> 8: Pro Forma EBITDA, Twelve Months Ended September 30, 2005 23<br />
<strong>Table</strong> 9: <strong>ISS</strong>’s Ten Largest Customers (2004) 25<br />
4
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I. <strong>Table</strong> <strong>of</strong> <strong>Contents</strong><br />
<strong>Table</strong> 10: Overview <strong>of</strong> Key Controls and Systems in Place 31<br />
<strong>Table</strong> 11: Pro Forma Capitalization <strong>Table</strong>, as <strong>of</strong> September 30, 2005 33<br />
<strong>Table</strong> 12: Cash Balance Reconciliation, as <strong>of</strong> September 30, 2005 34<br />
<strong>Table</strong> 13: Senior Term Facilities 34<br />
<strong>Table</strong> 14: Revolving Credit Facilities and Letter <strong>of</strong> Credit Facility 35<br />
<strong>Table</strong> 15: Acquisition Facilities 35<br />
<strong>Table</strong> 16: Companies Providing Guarantees 36<br />
<strong>Table</strong> 17: Key Historical Events 46<br />
<strong>Table</strong> 18: Breakdown <strong>of</strong> Revenues, Cleaning Services 47<br />
<strong>Table</strong> 19: Breakdown <strong>of</strong> Revenues, Property Services 47<br />
<strong>Table</strong> 20: Breakdown <strong>of</strong> Revenues, Office Services 48<br />
<strong>Table</strong> 21: Breakdown <strong>of</strong> Revenues, Catering Services 48<br />
<strong>Table</strong> 22: Breakdown <strong>of</strong> Revenues, Integrated Facility Services 49<br />
<strong>Table</strong> 23: Unaudited Breakdown <strong>of</strong> Operations by Country (2004) 51<br />
<strong>Table</strong> 24: <strong>ISS</strong> Service Offering by Country 52<br />
<strong>Table</strong> 25: <strong>ISS</strong> Acquisition History 2002- present 54<br />
<strong>Table</strong> 26: Key Employee Statistics 56<br />
<strong>Table</strong> 27: Board <strong>of</strong> Directors, <strong>ISS</strong> Holding 63<br />
<strong>Table</strong> 28: Executive Management Board, <strong>ISS</strong> Management 64<br />
<strong>Table</strong> 29: Executive Officers, <strong>ISS</strong> Management 66<br />
<strong>Table</strong> 30: Consolidated Income Statement 70<br />
<strong>Table</strong> 31: Breakdown <strong>of</strong> Revenue Growth 70<br />
<strong>Table</strong> 32: Summary Historical Balance Sheets 73<br />
<strong>Table</strong> 33: Cash Flow Statement 75<br />
<strong>Table</strong> 34: Historical Overview <strong>of</strong> Operational Leases 76<br />
<strong>Table</strong> 35: IFRS implication on 2004 Income Statement 80<br />
<strong>Table</strong> 36: Pro Forma EBITDA, Twelve Months Ended September 30, 2005 80<br />
<strong>Table</strong> 37: Revenue Growth, 9M 2005 versus 9M 2004 81<br />
<strong>Table</strong> 38: Cash Flow Data, 9M 2005 versus 9M 2004 84<br />
<strong>Table</strong> 39: 9M Income Statements, IFRS (unaudited) 87<br />
<strong>Table</strong> 40: 9M Cash Flow Statement, IFRS (unaudited) 88<br />
<strong>Table</strong> 41: Assets, IFRS (unaudited) 89<br />
<strong>Table</strong> 42: Equity and Liabilities, IFRS (unaudited) 89<br />
<strong>Table</strong> 43: Assets, IFRS (unaudited) 91<br />
<strong>Table</strong> 44: Equity and Liabilities, IFRS (unaudited) 91<br />
5
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I. <strong>Table</strong> <strong>of</strong> <strong>Contents</strong><br />
List <strong>of</strong> Figures<br />
Figure 1: Overview <strong>of</strong> Group Structure (1) 12<br />
Figure 2: <strong>ISS</strong> Service Overview (1) 17<br />
Figure 3: Geographical Breakdown <strong>of</strong> Revenues in 2004 18<br />
Figure 4: Geographical Breakdown <strong>of</strong> EBITA in 2004 18<br />
Figure 5: Historical Overview <strong>of</strong> Acquisitions 2000 – 9M 2005 (Approximate Acquired Full<br />
Year Revenues) 19<br />
Figure 6: Overview <strong>of</strong> <strong>ISS</strong>’s Market Positions (2004) 26<br />
Figure 7: Historical Free Operating Cash Flow 2000 - 2004 27<br />
Figure 8: 2004 Cost Categories and EBITA (1) 28<br />
Figure 9: Historical Revenues and EBITA Margins, 1995 – 2004 29<br />
Figure 10: Overview <strong>of</strong> Historical Acquisitions, Revenues, 2000 – 9M 2005 (DKK million) 30<br />
Figure 11: Geographical Breakdown <strong>of</strong> Revenues in 2004 44<br />
Figure 12: Geographical Breakdown <strong>of</strong> EBITA in 2004 44<br />
Figure 13: <strong>ISS</strong> Service Overview (1) 45<br />
Figure 14: Approximate Acquired Revenues, Historical Overview <strong>of</strong> Acquisitions 2000 – 9M-<br />
2005 (Approximate Acquired Full Year Revenues) 53<br />
Figure 15: Total Number <strong>of</strong> Employees and Percentage <strong>of</strong> Full Time Employees 55<br />
Figure 16: Current Group Management Structure 65<br />
Figure 17: 2004 Organic Growth and Operating Margin (1) by Country 71<br />
Figure 18: Average Number <strong>of</strong> Employees & Staff Costs 2000-2004 72<br />
Figure 19: Historical Adjusted EBITDAR and EBITDAR Margin 2000-2004 72<br />
Figure 20: Capex 2000-2004 76<br />
Figure 21: Development in Receivable Days Outstanding, 2000-2004 77<br />
Figure 22: <strong>ISS</strong> Revenues, 2001-Q3 2005, by Quarter 77<br />
Figure 23: <strong>ISS</strong> EBITA Margin, 2001-Q3 2005, by Quarter 78<br />
Figure 24: <strong>ISS</strong> Working Capital, 2001-Q3 2005, by Quarter 78<br />
Figure 25: <strong>ISS</strong> Operating Cash Flow before Interest and Taxes, 2001-Q3 2005, by Quarter 79<br />
6
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I. Executive Summary<br />
7<br />
Executive Summary
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A. Overview <strong>of</strong> the Acquisition<br />
8<br />
Executive Summary<br />
On March 29, 2005, <strong>ISS</strong> Holding A/S 1 (“<strong>ISS</strong> Holding”), a newly incorporated Danish company<br />
ultimately controlled by funds advised by EQT Partners (“EQT”) and Goldman Sachs Capital Partners<br />
(“GSCP”) launched a voluntary public tender <strong>of</strong>fer to acquire the shares <strong>of</strong> <strong>ISS</strong> A/S and its subsidiaries<br />
(“<strong>ISS</strong>” or the “Company”).<br />
The <strong>of</strong>fer price was DKK 470 (EUR 2 62.98) per share, but was subsequently reduced to DKK 465<br />
(EUR 62.31) per share following <strong>ISS</strong>’s declaration on April 13, 2005 to pay a dividend <strong>of</strong> DKK 5 (EUR<br />
0.67) per share.<br />
On April 27, 2005, the Board <strong>of</strong> Directors <strong>of</strong> <strong>ISS</strong> unanimously recommended that <strong>ISS</strong> shareholders<br />
accept the tender <strong>of</strong>fer.<br />
On May 3, 2005, the voluntary tender <strong>of</strong>fer expired and, on May 9, 2005, <strong>ISS</strong> Holding announced that<br />
it had received tenders representing 91.55% <strong>of</strong> <strong>ISS</strong>’s outstanding shares.<br />
The provisions <strong>of</strong> the Danish Securities Act require that any acquirer <strong>of</strong> a majority interest in a Danish<br />
listed company shall institute a mandatory tender <strong>of</strong>fer for the shares that it has not already acquired,<br />
in this case during the voluntary tender <strong>of</strong>fer period. Accordingly, <strong>ISS</strong> Holding commenced a<br />
mandatory tender <strong>of</strong>fer for the remaining <strong>ISS</strong> shares, which expired on June 10, 2005. Upon expiration<br />
<strong>of</strong> this mandatory tender <strong>of</strong>fer <strong>ISS</strong> Holding held 98.30% <strong>of</strong> <strong>ISS</strong>’s shares.<br />
On July 26, 2005, the remaining outstanding shares <strong>of</strong> <strong>ISS</strong> were acquired by <strong>ISS</strong> Holding through a<br />
compulsory acquisition procedure regulated by the Danish Companies Act. Finally, <strong>ISS</strong> Holding and<br />
its subsidiaries have settled part <strong>of</strong> the outstanding options and warrants.<br />
In connection with the acquisition <strong>of</strong> <strong>ISS</strong> (the “Acquisition”), the Joint Book Runners (Citigroup Global<br />
Markets Limited and Goldman Sachs) and the Mandated Lead Arrangers (“MLAs”; Danske Bank A/S,<br />
Den Norske Bank, HSBC Bank plc, HVB, Nordea Bank Danmark A/S and Société Générale)<br />
committed to provide DKK 9,675 million (EUR 1,296 million) <strong>of</strong> Senior Facilities (the “Senior Credit<br />
Facilities” or “Senior Facilities”) to finance the purchase price, to pay transaction fees and expenses,<br />
and to finance certain ongoing capital requirements and expected acquisitions. The Senior Facilities<br />
include:<br />
� DKK 5,675 million (EUR 760 million) <strong>of</strong> Term Facilities (“Term Facilities” or “Terms Loan”),<br />
� DKK 1,750 million (EUR 235 million) Revolving Credit Facility (the “Revolving Credit Facility”),<br />
� DKK 500 million (EUR 67 million) Letter <strong>of</strong> Credit Facility (the “Letter <strong>of</strong> Credit Facility” or the “L/C<br />
Facility”), and<br />
� DKK 1,750 million (EUR 234 million) committed Acquisition Facility A (the “Acquisition Facility A”),<br />
In addition to the above mentioned senior financing commitments, the Acquisition was financed with a:<br />
� DKK 2,380 million (EUR 319 million) Cash Bridge Facility (the “Cash Bridge Facility”),<br />
� DKK 6,567 million (EUR 880 million) Subordinated Bridge Facility (the “Subordinated Bridge<br />
Facility”),<br />
� DKK 925 million (EUR 124 million) PIK Bridge Facility (the “PIK Bridge Facility”), and<br />
� DKK 7,693 million (EUR 1,031 million) <strong>of</strong> Cash Equity contributed by the Sponsors.<br />
1 Initially named PurusCo A/S.<br />
2 Solely for the convenience <strong>of</strong> the reader, certain amounts in this document stated in Danish Kroner (DKK) have been translated into Euro<br />
(EUR) at a rate <strong>of</strong> EUR 1= DKK 7.4624, which was the exchange rate as <strong>of</strong> September 30, 2005.
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9<br />
Executive Summary<br />
B. Sources & Uses, Pro Forma Capitalisation and Key Credit<br />
Statistics<br />
Sources and Uses<br />
The Acquisition was funded as follows:<br />
� The sources <strong>of</strong> funds for the Acquisition amounted to DKK 23,240 million (EUR 3,114 million). The<br />
Acquisition has been financed from drawings under a Senior Term Loan A and a Senior Term Loan<br />
B <strong>of</strong> DKK 5,675 million (EUR 760 million), a Cash Bridge Facility <strong>of</strong> DKK 2,380 million (EUR 319<br />
million), a Subordinated Bridge Facility <strong>of</strong> DKK 6,567 million (EUR 880 million) and a PIK Bridge<br />
facility <strong>of</strong> DKK 925 million (EUR 124 million). The Sponsors contributed DKK 7,693 million (EUR<br />
1,031 million) in the form <strong>of</strong> Cash Equity.<br />
� The uses <strong>of</strong> funds for the Acquisition amounted to DKK 23,240 million (EUR 3,114 million)<br />
comprising: the purchase <strong>of</strong> shares for an amount <strong>of</strong> DKK 21,896 million (EUR 2,934 million), the<br />
settlement or expected settlement <strong>of</strong> warrants and stock options for an amount <strong>of</strong> DKK 216 million<br />
(EUR 29 million), and the payment or expected payment <strong>of</strong> fees and expenses <strong>of</strong> an estimated<br />
amount <strong>of</strong> DKK 872 million (EUR 117 million). The resulting over-funding <strong>of</strong> DKK 256 million (EUR<br />
34 million) <strong>of</strong> Cash has been or will be used for general corporate purposes.<br />
� The table below outlines the Sources and Uses <strong>of</strong> the Acquisition as well as Drawings and<br />
Repayments ("Drawings/Repayments") made subsequent to the Acquisition. The table also<br />
outlines Foreign Exchange Adjustments ("FX") to the local currency drawings made to finance the<br />
Acquisition. The table is provided to allow a reconciliation to the outstanding amounts illustrated<br />
elsewhere in this document as Pro Forma Capitalization as <strong>of</strong> September 30, 2005.<br />
<strong>Table</strong> 1: Acquisition Pro Forma Sources & Uses (1)<br />
Drawing /<br />
Repayments FX (2)<br />
Capitalisations as <strong>of</strong><br />
September 30, 2005<br />
Sources DKK m EUR m DKK m DKK m DKK m<br />
Cash Bridge 2,380 319 (2,380) (3) 0<br />
Acquisition Facility 0 0 604 604<br />
Term Loan A 2,000 268 24 2,024<br />
Term Loan B 3,675 492 4 3,679<br />
Subordinated Bridge Facility 6,567 880 112 6,679<br />
PIK Bridge Facility 925 124 39 (4) 3 967<br />
Cash Equity 7,693 1,031 7,693<br />
Total Sources 23,240 3,114<br />
Uses DKK m EUR m<br />
Shares Purchases 21,896 2,934<br />
Net proceeds for settlement <strong>of</strong><br />
options and warrants (5) 216 29<br />
Estimated Fees & Expenses (6) 872 117<br />
Cash over-funding 256 34<br />
Total Uses<br />
Note:<br />
23,240 3,114<br />
(1) The existing debt <strong>of</strong> <strong>ISS</strong> <strong>of</strong> DKK 10,074 million European Medium Term Notes (“EMTN” or “EMTNs”) and the DKK 1,393 million local facilities will remain<br />
outstanding post completion <strong>of</strong> the new financing structure. See <strong>Table</strong> 3, Pro Forma Capitalisation table.<br />
(2) Represents changes in foreign exchange rates from funding to September 30, 2005.<br />
(3) The Cash Bridge Facility was repaid in full on August 31, 2005.<br />
(4) Represents rolled up interest since funding.<br />
(5) Represents net proceeds paid or expected to be paid to settle outstanding warrants and options.<br />
(6) The net fees and expenses <strong>of</strong> <strong>ISS</strong> Holding primarily relate to financing fees and fees paid or expected paid to advisors. The net fees and expenses <strong>of</strong> <strong>ISS</strong> include<br />
the settlement <strong>of</strong> bonuses payable to <strong>ISS</strong> management in connection with the Acquisition.<br />
Source: <strong>ISS</strong> Holding
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Pro Forma Capitalization<br />
10<br />
Executive Summary<br />
Since the completion <strong>of</strong> the tender <strong>of</strong>fer, <strong>ISS</strong> Holding and its subsidiaries have made a number <strong>of</strong><br />
changes and adjustments to their capital structure. On July 27, 2005 and August 31, 2005, <strong>ISS</strong><br />
Holding received dividends from <strong>ISS</strong> which it used primarily to repay outstanding amounts under the<br />
Cash Bridge Facility, Term Loan A and a portion <strong>of</strong> Term Loan B. <strong>ISS</strong> paid these dividends with<br />
proceeds by way <strong>of</strong> dividends it received from <strong>ISS</strong> Global A/S (“<strong>ISS</strong> Global”) and cash on hand. In<br />
addition, <strong>ISS</strong> Global financed its dividends to <strong>ISS</strong> from borrowings under Term Loan A, Term Loan B,<br />
and cash on hand. <strong>ISS</strong> Global also borrowed amounts under the Acquisition Facility A to replenish<br />
cash spent on acquisitions since September 30, 2005. Please see below for a summary <strong>of</strong> the pro<br />
forma capital structure <strong>of</strong> the Group as <strong>of</strong> September 30, 2005, adjusted for the changes described<br />
above.<br />
<strong>Table</strong> 2: Pro Forma Capitalization <strong>Table</strong>, as <strong>of</strong> September 30, 2005<br />
LTM September 30, 2005<br />
DKK m EUR m PF EBITDA (1)<br />
PF EBITDA – Capex % <strong>of</strong> Total<br />
Local Facilities (2) 1,393 187 0.42x 0.51x 4%<br />
Acquisition Facility (3) 604 81 0.61x 0.73x 2%<br />
Term Loan A 2,024 271 1.22x 1.48x 6%<br />
Term Loan B 3,679 493 2.34x 2.83x 12%<br />
Total Senior 7,700 1,032 2.34x 2.83x 24%<br />
Cash (1,493) (200) 1.89x 2.28x (4)%<br />
Total Net Senior 6,207 832 1.89x 2.28x 20%<br />
EMTN (4) 10,074 1,350 4.96x 5.98x 32%<br />
Subordinated Bridge Facility (5) 6,679 895 6.99x 8.44x 21%<br />
Net Cash Pay Debt 22,960 3,077 6.99x 8.44x 73%<br />
PIK Bridge Facility (6) 967 130 7.28x 8.79x 3%<br />
Cash Equity 7,693 1,031 9.63x 11.62x 24%<br />
Total Capitalization 31,620 4,238 9.63x 11.62x 100%<br />
Revolver (committed) (2) 1,750 235<br />
Revolver (uncommitted) 750 100<br />
Letter <strong>of</strong> Credit Facility<br />
(committed)<br />
500 67<br />
Acq. Facility A (committed) 1,750 235<br />
Acq. Facility B (uncommitted) 3,500 469<br />
Note:<br />
(1) Leverage multiples based on an estimated PF LTM September 2005 EBITDA <strong>of</strong> DKK 3,285 million and actual LTM September 2005 Capex <strong>of</strong> DKK 564<br />
million.<br />
(2) The Senior Credit Facilities Agreement allows <strong>ISS</strong> to retain up to EUR 100 million <strong>of</strong> its existing facilities which are provided on a bilateral basis<br />
primarily to fund local working capital requirements. As <strong>of</strong> September 30, 2005, these amounted to DKK 1,393 million. <strong>ISS</strong> expects to reduce these<br />
facilities by drawing on its Revolver.<br />
(3) Subsequent to closing (May 11, 2005), the company has made a number <strong>of</strong> acquisitions and has drawn down DKK 604 million on Acquisition Facility A.<br />
(4) EMTN refer to <strong>ISS</strong> Global’s European Medium Term Notes due 2010 and 2014.<br />
(5) The Subordinated Bridge Facility is expected to be rolled-up into a permanent financing or refinanced on or before May 11, 2006.<br />
(6) The PIK Bridge Facility entered into by <strong>ISS</strong> Equity, the parent <strong>of</strong> <strong>ISS</strong> Holding, is expected to be rolled into a permanent financing or refinanced on or<br />
before May 11, 2006.<br />
Source: <strong>ISS</strong> Holding<br />
In addition to the Senior Term Facilities required to finance the Acquisition, the Senior Facilities<br />
include committed facilities in the form <strong>of</strong> DKK 1,750 million (EUR 235 million) Revolving Credit<br />
Facility, a DKK 500 million (EUR 67 million) Letter <strong>of</strong> Credit Facility and a DKK 1,750 million (EUR 235<br />
million) Acquisition Facility A. The committed Revolving Credit Facility will be available to <strong>ISS</strong> Global or<br />
its subsidiaries to be used for general corporate purposes including working capital requirements. The<br />
Letter <strong>of</strong> Credit Facility will be available on an ongoing basis used for general guarantees (primarily<br />
performance bonds) required in <strong>ISS</strong> Global’s daily operations. The Acquisition Facility A will be<br />
available to fund general corporate acquisitions over the next 3 years, subject to satisfaction <strong>of</strong> several<br />
conditions precedent.
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11<br />
Executive Summary<br />
The Senior Credit Facilities Agreement also provides for uncommitted facilities in the form <strong>of</strong> DKK 750<br />
million (EUR 100 million) Revolving Credit Facility and a DKK 3,500 million Acquisition Facility B (EUR<br />
469 million). Acquisition Facility B, is available to fund general corporate acquisitions over the next 4<br />
years, subject to satisfaction <strong>of</strong> certain criteria.<br />
C. Overview <strong>of</strong> Transaction Structure<br />
The equity investment from the Sponsors totals DKK 7,693 million (EUR 1,031 million) and was initially<br />
made into <strong>ISS</strong> Equity. After a corporate reorganisation the Sponsors now hold their investment<br />
through <strong>ISS</strong> Invest SARL (“<strong>ISS</strong> Invest SARL”) and its direct subsidiary <strong>ISS</strong> Invest II SARL (“<strong>ISS</strong> Invest<br />
II SARL”), which are both wholly beneficially owned Luxembourg holding companies. Certain<br />
employees <strong>of</strong> the subsidiary <strong>ISS</strong> Management A/S have committed to co-invest alongside the<br />
Sponsors, however, the final structure <strong>of</strong> their investment has yet to be determined.<br />
The Figure below represents the capital structure prior to the expected re-financing <strong>of</strong> the DKK 6,567<br />
million (EUR 880 million) Subordinated Bridge Facility and the DKK 925 million (EUR 124 million) PIK<br />
Bridge Facility. A potential capital markets issuance would also be envisaged to raise additional<br />
funding for general corporate purposes <strong>of</strong> certain subsidiaries.
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Figure 1: Overview <strong>of</strong> Group Structure (1)<br />
12<br />
Executive Summary<br />
Note:<br />
(1) Amounts shown represent funded amounts before foreign exchange adjustments. Amounts shown for Senior Facilities represent committed<br />
amounts. Amounts shown for Local Facilities and European Medium Term Notes are outstanding amounts as <strong>of</strong> September 30, 2005.<br />
(2) As <strong>of</strong> September 30, 2005, <strong>ISS</strong> Holding’s subsidiaries had an amount equivalent to DKK 1,393 million (EUR 187 million) <strong>of</strong> outstanding<br />
borrowings under local debt facilities, comprising primarily working capital facilities entered into by <strong>ISS</strong> Holding’s subsidiaries and a marginal<br />
amount <strong>of</strong> local long-term mortgage facilities. <strong>ISS</strong> Holding is required pursuant to the Senior Credit Facilities Agreement to limit its<br />
subsidiaries’ borrowings under the local facilities to an amount equivalent to EUR 100 million. A portion <strong>of</strong> these local facilities may be<br />
refinanced with borrowings from the Revolving Credit Facility under the Senior Facilities.<br />
(3) Subsidiaries <strong>of</strong> <strong>ISS</strong> Global pay <strong>ISS</strong> a royalty <strong>of</strong> 0.75% <strong>of</strong> their annual revenue in consideration primarily for the use <strong>of</strong> <strong>ISS</strong>’s trademarks. The<br />
0.75% rate is lower than historical rates and is evaluated on an arm length’s basis on an ongoing basis. The royalty payments are made<br />
pursuant to agreements between <strong>ISS</strong> and its subsidiaries. A subsidiary may terminate its agreement upon six months prior written notice to<br />
<strong>ISS</strong>; however, it is presently expected that the subsidiaries will continue these arrangements. The agreement will automatically terminate in<br />
the event such subsidiary ceases to be a direct or indirect subsidiary <strong>of</strong> <strong>ISS</strong>. The trademarks <strong>of</strong> <strong>ISS</strong> have been pledged as security under<br />
the Senior Facilities.<br />
(4) <strong>ISS</strong> Global and certain <strong>of</strong> its subsidiaries will be able to draw directly on the Revolving Credit Facility, Local Credit Facility, and Acquisition<br />
Facility A.<br />
Source: <strong>ISS</strong> Holding<br />
Notes:<br />
� The Senior Facilities will be secured by a first-priority security interest in all <strong>of</strong> the share capital <strong>of</strong><br />
<strong>ISS</strong> and Material Companies (“Material Companies” are based on a test <strong>of</strong> 5% <strong>of</strong> aggregate gross<br />
assets, EBITDA or revenues). The Material Companies will grant a guarantee, together with<br />
security over its bank accounts, trade receivables, intercompany receivables and intellectual<br />
property. The guarantee and security package for the Senior Facilities comprise amongst others,<br />
guarantees from <strong>ISS</strong> Holding, <strong>ISS</strong> and <strong>ISS</strong> Global and a share pledge from <strong>ISS</strong> Holding over its<br />
shares in <strong>ISS</strong>. See section entitled “Security” for further detail on the full security and guarantee<br />
package.<br />
� The new Senior Facilities will not be secured by a security interest in the share capital <strong>of</strong> <strong>ISS</strong><br />
Global.
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13<br />
Executive Summary<br />
� In-line with the Senior Credit Facilities Agreement, the initial drawing <strong>of</strong> the Senior Term Debt at<br />
<strong>ISS</strong> Holding will be refinanced with a similar drawn amount by <strong>ISS</strong> Global. Following the<br />
refinancing in the end <strong>of</strong> July 2005, there is currently DKK 2,250 3 million (EUR 302 million) <strong>of</strong><br />
Senior Facilities (Term Loan B) drawn at <strong>ISS</strong> Holding, which the Company has agreed to use best<br />
endeavours to refinance as soon as possible. Any Senior Term debt outstanding at <strong>ISS</strong> Holding<br />
post August 31, 2006, will constitute an event <strong>of</strong> default. The next refinancing is scheduled for<br />
November 30, 2005, and is expected to amount to approximately DKK 1.0 billion. The refinancing<br />
<strong>of</strong> Senior Term Debt <strong>of</strong> <strong>ISS</strong> Holding is being facilitated via dividends based on distributable<br />
reserves. Following the final refinancing at <strong>ISS</strong> Holding on August 31, 2006, total free reserves are<br />
expected to be approximately DKK 1,087 million (EUR 134 million). Further details are provided in<br />
the PWC Structure Report.<br />
Summary <strong>of</strong> Credit Facilities<br />
<strong>Table</strong> 3 below illustrates the summary items <strong>of</strong> the committed Senior Credit Facilities<br />
<strong>Table</strong> 3: Senior Credit Facilities (Committed)<br />
Facility Size DKK<br />
2,000,000,000<br />
Drawn Amount DKK<br />
2,000,000,000<br />
Senior Term A Senior Term B<br />
DKK<br />
3,675,000,000<br />
DKK<br />
3,300,000,000<br />
Letter <strong>of</strong> Credit<br />
Facility<br />
DKK<br />
500,000,000<br />
L/C <strong>of</strong> EUR<br />
57,270,000<br />
Revolving Credit<br />
Facility<br />
DKK<br />
1,750,000,000<br />
Acquisition<br />
Facility A<br />
DKK<br />
1,750,000,000<br />
- DKK<br />
604,000,000<br />
Commitment Committed Committed Committed Committed Committed<br />
Drawdown SEK, NOK, CHF EUR and GBP Multi Currency Multi Currency Multi Currency<br />
Maturity 7 years 8.5 years 7 years 7 years 7 years<br />
Repayment<br />
Prepayment<br />
Penalties<br />
Amortizing Two Bullets, equal<br />
instalments<br />
Revolving Revolving Amortizing/<br />
Revolving<br />
None None None None None<br />
Initial Margin 2.25% 2.75% 2.25% 2.25% 2.25%<br />
Benchmark Interbank Offered<br />
Rate<br />
Interbank Offered<br />
Rate<br />
Interbank Offered<br />
Rate<br />
Interbank Offered<br />
Rate<br />
Interbank Offered<br />
Rate<br />
Margin Ratchet Applicable Applicable Applicable Applicable Applicable<br />
<strong>Table</strong> 4: Senior Credit Facilities (Uncommitted)<br />
Revolving Credit Facility Acquisition Facility B<br />
Facility Size DKK 750,000,000 DKK 3,500,000,000<br />
Drawn Amount - -<br />
Commitment Uncommitted Uncommitted<br />
Drawdown Multi Currency Multi Currency<br />
Maturity 7 years 8.5 years<br />
Repayment Revolving Two equal instalments,<br />
At 8 years and 8.5 years<br />
Prepayment Penalties None None<br />
Initial Margin 2.25% 2.25%<br />
Benchmark Interbank Offered Rate Interbank Offered Rate<br />
Margin Ratchet Applicable Applicable<br />
The Senior Facilities were used to finance part <strong>of</strong> the acquisition consideration, and expenses in<br />
connection with the Acquisition. The Revolving Credit Facility will be used to finance the Company’s<br />
on-going working capital requirements and for general corporate purposes. The Acquisition Facilities<br />
will be used for corporate acquisitions going forward.<br />
3 Based on the foreign exchange rates as <strong>of</strong> closing (May 11, 2005).
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<strong>Table</strong> 5: Temporary Financing<br />
Subordinated Bridge Facility PIK Bridge Facility<br />
14<br />
Executive Summary<br />
Amount DKK 6,567,000,000 DKK 925,000,000<br />
Maturity until conversion 364 days from May 11, 2005 364 days from May 11, 2005<br />
Maturity after conversion 9 years 9 years<br />
Initial Libor Margin 7.25% 11.00%<br />
Step-up 50bps/qtr capped at 1,000bps<br />
Not been refinanced by 31 Oct 2005, further<br />
increase <strong>of</strong> +75 bps<br />
25bps/qtr capped at 12.00%<br />
Post Conversion Libor Margin Tranche A: 5.50% Cash + 6.00% PIK<br />
Tranche B: 4.00% + 4.00% PIK + warrants,<br />
to achieve an IRR <strong>of</strong> 11.50% over cost funds<br />
11.00% + warrants, to achieve an IRR <strong>of</strong> 14.5%<br />
over cost <strong>of</strong> funds<br />
The Subordinated Bridge Facility and PIK Bridge Facility rank contractually subordinated to all the<br />
Senior Credit Facilities. Prior to the maturity <strong>of</strong> the Bridge Facilities, it is anticipated that they will be<br />
repaid with the proceeds from a future refinancing.<br />
Security<br />
The guarantee and security package for the Senior Facilities comprise guarantees from <strong>ISS</strong> Holding,<br />
<strong>ISS</strong> and <strong>ISS</strong> Global and a share pledge from <strong>ISS</strong> Holding over its shares in <strong>ISS</strong>. If the Senior Facilities<br />
were to be accelerated, it is most likely that any enforcement <strong>of</strong> the security would be by way <strong>of</strong><br />
enforcement <strong>of</strong> the <strong>ISS</strong> Holding guarantee and the share pledge, enabling the sale <strong>of</strong> the <strong>ISS</strong> Group<br />
as a whole.<br />
To the extent that the senior debt is refinanced by <strong>ISS</strong> Global, and such debt is secured by <strong>ISS</strong> Global,<br />
then the senior lenders will rank ahead <strong>of</strong> the EMTN holders, who have an unsecured claim against<br />
<strong>ISS</strong> Global. Please refer to the section entitled "Summary <strong>of</strong> Principle Terms and Conditions" and<br />
more specifically to the section entitled “Security” on page 44 for further information on the provisions<br />
on the security documents entered into by <strong>ISS</strong> Global and its subsidiaries.<br />
The Senior Credit Facilities Agreement requires additional guarantees and security to be put in place<br />
as a condition subsequent.
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<strong>Table</strong> 6: Companies Providing Guarantees<br />
Denmark<br />
France<br />
Spain<br />
Finland<br />
Norway<br />
Belgium<br />
The Netherlands<br />
Sweden<br />
UK<br />
Note:<br />
(1) Holding company<br />
Source: <strong>ISS</strong> Holding<br />
� <strong>ISS</strong> Holding A/S (Bidco) (1)<br />
� <strong>ISS</strong> A/S (Target) (1)<br />
� <strong>ISS</strong> Global A/S (1)<br />
� <strong>ISS</strong> Facility Services A/S<br />
� <strong>ISS</strong> Holding Paris SA (1)<br />
� <strong>ISS</strong> Abilis France SAS<br />
� Integrated Service Solutions S.L. (1)<br />
� <strong>ISS</strong> Palvelut Oy (1)<br />
� <strong>ISS</strong> Facility Services AS (1)<br />
� <strong>ISS</strong> NV (1)<br />
� <strong>ISS</strong> Holding Nederland BV (1)<br />
� <strong>ISS</strong> Nederland BV<br />
� <strong>ISS</strong> Facility Services Holding AB (1)<br />
� <strong>ISS</strong> Facility Services AB<br />
� <strong>ISS</strong> UK Holding Limited (1)<br />
� <strong>ISS</strong> UK Limited<br />
� <strong>ISS</strong> Mediclean Limited<br />
� <strong>ISS</strong> Facility Services Limited<br />
15<br />
Executive Summary<br />
Pursuant to the Senior Credit Facilities Agreement, each Material Company will grant a guarantee,<br />
together with security over its bank accounts, trade receivables, intercompany receivables and<br />
intellectual property. In addition the shares in such Material Company will be pledged and in<br />
specifically agreed cases shares that the Material Company holds in certain <strong>of</strong> its subsidiaries will be<br />
pledged (although please note that <strong>ISS</strong> will not pledge its shares in <strong>ISS</strong> Global).<br />
Given the granularity <strong>of</strong> the Group, which comprises a significant number <strong>of</strong> entities, the Arrangers<br />
have looked at the gross assets, revenues and EBITDA figures on a jurisdiction by jurisdiction basis to<br />
determine which jurisdiction is a material jurisdiction. The holding company in a material jurisdiction<br />
has then been identified as a Material Company. These countries include France, Spain, Finland,<br />
Norway, Belgium, The Netherlands, Sweden, the UK and Denmark. In addition, security includes<br />
share pledges over the holding company in: Hong Kong, Singapore, Austria, Germany, Portugal,<br />
Switzerland and Ireland. The total share pledges represent approximately 90% <strong>of</strong> revenues and assets<br />
<strong>of</strong> the Group 4 .<br />
The alternative enforcement scenario would therefore be enforcement <strong>of</strong> the share pledges on a<br />
jurisdiction by jurisdiction basis, so that local groups could be sold <strong>of</strong>f individually. As the vast majority<br />
<strong>of</strong> the group's intellectual property portfolio is held by <strong>ISS</strong>, the Lenders would also look to enforce their<br />
intellectual property pledge from <strong>ISS</strong> in these circumstances<br />
Notably, no security or guarantees were granted by <strong>ISS</strong> or its subsidiaries for the borrowings <strong>of</strong> <strong>ISS</strong><br />
Holding.<br />
Finally, subject to agreed limits, the providers <strong>of</strong> foreign exchange treasury transactions and local<br />
working capital facilities to the <strong>ISS</strong> Group will share in the senior guarantee and security package but<br />
without any rights <strong>of</strong> enforcement.<br />
The relationship between the senior secured and subordinated lenders will be governed by an<br />
intercreditor agreement. The equity contribution will be subordinated on terms agreeable to the senior<br />
and subordinated lenders.<br />
4 Note that jurisdictions report on a local GAAP basis, so only estimates are available. Average foreign exchange rates for the period January<br />
1 through December 31, 2004 were used to convert local revenues, assets, and EBITDA into DKK.
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Covenants<br />
16<br />
Executive Summary<br />
The financial covenants for the Credit Facilities are standard for a leveraged transaction <strong>of</strong> this type<br />
including:<br />
� Net Senior Bank Debt/Pro Forma EBITDA<br />
� Total Net Debt/Pro Forma EBITDA<br />
� EBITDA/Total Net Cash Interest<br />
� Free Cash Flow/Total Debt Service<br />
� Limitations on Capital Expenditure
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D. Company Overview<br />
1. Company Description<br />
17<br />
Executive Summary<br />
<strong>ISS</strong> is one <strong>of</strong> the world's largest providers <strong>of</strong> facility services, with operations in 43 countries in Europe,<br />
South America, Asia and Australia. <strong>ISS</strong> is Europe's largest provider <strong>of</strong> cleaning services and is one <strong>of</strong><br />
the top three cleaning companies, based on revenue, in Austria, Belgium, Hong Kong, the Netherlands,<br />
the Nordic region (Sweden, Denmark, Norway and Finland), Singapore, Spain, Switzerland, and the<br />
United Kingdom. <strong>ISS</strong> has a diversified customer base <strong>of</strong> more than 100,000 public and private sector<br />
customers. The Company employs more than 305,000 employees worldwide and is among Europe's<br />
ten largest private employers as <strong>of</strong> September 30, 2005. In 2004, <strong>ISS</strong> had total revenue <strong>of</strong> DKK 40.4<br />
billion (EUR 5.4 billion) and EBITDA <strong>of</strong> DKK 2.9 billion (EUR 386 million). For the twelve months<br />
ended September 30, 2005, <strong>ISS</strong> had revenue <strong>of</strong> DKK 45.1 billion (EUR 6.0 billion) and EBITDA <strong>of</strong><br />
DKK 3.3 billion (EUR 440 million).<br />
Figure 2: <strong>ISS</strong> Service Overview (1)<br />
Facilities Services<br />
Cleaning Property Catering Office IFS<br />
Daily Office<br />
Cleaning<br />
Dust Control<br />
Washroom<br />
Services<br />
Specialised<br />
Cleaning<br />
Food Hygiene<br />
Maintenance<br />
Landscaping<br />
HVAC<br />
Pest Control<br />
Damage Control<br />
Operation <strong>of</strong><br />
Canteens Within<br />
Customer<br />
Facilities<br />
Event Catering<br />
Call Centres<br />
Reception<br />
Services<br />
Office Logistics<br />
Access Control<br />
Integrated<br />
Facilities<br />
Services<br />
Revenues<br />
(’04 DKKm) 26,429 8,252 2,003 1,822 1,230<br />
% <strong>of</strong> Total<br />
Revenues 66% 21% 5% 5% 3%<br />
Note:<br />
(1) Excludes Health Care operations, which were divested in two separate transactions in H1 2005.<br />
Source: <strong>ISS</strong><br />
<strong>ISS</strong> has been operating for more than 100 years. The Company started as a security company and<br />
began <strong>of</strong>fering cleaning services in 1934. Since that time, <strong>ISS</strong> has expanded its business, both<br />
through organic growth and acquisitions, and its facility services currently include:<br />
� Cleaning Services, which represented approximately 66% <strong>of</strong> 2004 revenue, include daily <strong>of</strong>fice<br />
and facility cleaning, dust control, washroom and specialized cleaning services;<br />
� Property Services, which represented approximately 21% <strong>of</strong> 2004 revenue, include landscaping,<br />
damage control services, building maintenance and pest control services;<br />
� Office Support Services, which represented approximately 5% <strong>of</strong> 2004 revenue, include call<br />
centres, reception services, <strong>of</strong>fice logistics and access control;<br />
� Catering Services, which represented approximately 5% <strong>of</strong> 2004 revenue, include company<br />
restaurants, catering, event catering, executive dining and <strong>of</strong>fice catering solutions such as c<strong>of</strong>fee<br />
points; and
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18<br />
Executive Summary<br />
� Integrated Facility Services (“IFS”), which represented approximately 3% <strong>of</strong> 2004 revenue,<br />
consist <strong>of</strong> the provision <strong>of</strong> multiple facility services with on-site management and a single point <strong>of</strong><br />
contact for the customer.<br />
In recent years, <strong>ISS</strong> has increasingly <strong>of</strong>fered its customers integrated facility services. By providing onsite<br />
management, integrated facility services are intended to relieve a customer from the need to<br />
supervise and manage various suppliers <strong>of</strong> facility services and to reduce its overhead costs.<br />
Integrated facility services allows <strong>ISS</strong> to leverage on-site labour synergies.<br />
2. Operations<br />
<strong>ISS</strong> maintains a decentralized organizational structure in which the chief executive <strong>of</strong>ficer <strong>of</strong> each<br />
country’s operations typically reports directly to the <strong>ISS</strong> head <strong>of</strong>fice in Copenhagen. Each <strong>of</strong> the<br />
country organizations is separately organized and acts independently in its local market. <strong>ISS</strong>’s head<br />
<strong>of</strong>fice performs certain centralized functions, including procurement, risk management, finance, legal,<br />
treasury, information technology, human resources, marketing, international sales and key account<br />
management and supervision <strong>of</strong> mergers and acquisitions.<br />
� Northern Europe; comprising the United Kingdom, Denmark, Norway, Sweden, Finland, Ireland,<br />
Iceland, Russia, and Estonia.<br />
� Continental Europe; comprising France, the Netherlands, Belgium and Luxembourg, Spain,<br />
Germany, Switzerland, Austria, Central and Eastern Europe (the Czech Republic, Slovenia,<br />
Slovakia, Hungary, Croatia and Romania), Portugal, Greece, Italy, Poland and Turkey.<br />
� Overseas; comprising Israel, China, Hong Kong, Brazil, Singapore, Australia, Thailand, India,<br />
Indonesia, Malaysia, Argentina, Chile, Sri Lanka, Brunei, Uruguay and New Zealand.<br />
In 2004, Northern Europe, Continental Europe and Overseas represented 46%, 49% and 5% <strong>of</strong><br />
revenues respectively. <strong>ISS</strong> employed more than 305,000 employees as <strong>of</strong> September 30, 2005, <strong>of</strong><br />
which 91 employees were in its operational head <strong>of</strong>fice.<br />
Figure 3: Geographical Breakdown <strong>of</strong><br />
Revenues in 2004<br />
Germany<br />
4%<br />
Spain 4%<br />
Belgium and<br />
Luxembourg<br />
5%<br />
The Netherlands 8%<br />
Finland 6%<br />
Other<br />
14%<br />
Norway<br />
8%<br />
Denmark<br />
9%<br />
France<br />
19%<br />
UK<br />
14%<br />
Sweden<br />
(excluding<br />
Health Care<br />
operations)<br />
9%<br />
Figure 4: Geographical Breakdown <strong>of</strong><br />
EBITA in 2004<br />
Sweden (excluding Health Care operations) 5%<br />
Belgium and<br />
Luxembourg<br />
5%<br />
Other 2%<br />
Switzerland 3%<br />
Austria 4%<br />
Spain 5%<br />
Finland<br />
9%<br />
Norway<br />
9%<br />
France<br />
23%<br />
Denmark<br />
10%<br />
The Netherlands 9%<br />
Note:<br />
(1) EBITA represents Earnings before Interest, Taxes, Amortization, Other Income and Expenses, and Income from Associates. Further<br />
amortization, which is not included herein, is amortization <strong>of</strong> goodwill under Danish GAAP or amortization <strong>of</strong> customer contracts under IFRS.<br />
Source: <strong>ISS</strong><br />
UK<br />
16%
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3. Acquisitions<br />
19<br />
Executive Summary<br />
Consolidation <strong>of</strong> the industry is an integral part <strong>of</strong> <strong>ISS</strong>’s strategy and consequently <strong>ISS</strong> makes a large<br />
number <strong>of</strong> acquisitions every year in its key business areas to strengthen competencies, enhance<br />
service <strong>of</strong>ferings or establish critical mass.<br />
During the last 5 years <strong>ISS</strong> has expanded primarily by acquiring a large number <strong>of</strong> smaller companies.<br />
Since January 2000, <strong>ISS</strong> has acquired and integrated 375 companies in 30 countries for a total<br />
consideration <strong>of</strong> more than DKK 15 billion (EUR 2.0 billion) adding more than DKK 23 billion (EUR 3.1<br />
billion) <strong>of</strong> revenues. Most <strong>of</strong> these acquisitions have been <strong>of</strong> relatively small companies, typically with<br />
annual revenues <strong>of</strong> less than DKK 100 million (EUR 13 million). Acquisitions have been made in the<br />
following segments;<br />
Figure 5: Historical Overview <strong>of</strong> Acquisitions 2000 – 9M 2005 (Approximate Acquired Full Year<br />
Revenues)<br />
DKK million<br />
8,000<br />
7,000<br />
6,000<br />
5,000<br />
4,000<br />
3,000<br />
2,000<br />
1,000<br />
Source: <strong>ISS</strong><br />
0<br />
6,363<br />
4,384<br />
1,930<br />
1,280<br />
6,095<br />
3,150<br />
2000 2001 2002 2003 2004 9M 2005<br />
Cleaning Property Catering Office Support Integrated Facilities Services Other<br />
4. Customers and Contracts<br />
As <strong>of</strong> September 30, 2005, <strong>ISS</strong> had more than 100,000 public and private sector customers, and in<br />
2004, the revenue derived from its ten largest customers was less than 5% <strong>of</strong> its total revenue. In<br />
2004, no more than 19% <strong>of</strong> <strong>ISS</strong>’s 2004 revenue was generated in any one country, with France being<br />
the largest contributor to revenue. <strong>ISS</strong>’s customers operate in a number <strong>of</strong> industries, and <strong>ISS</strong> does<br />
not believe that its business is dependent on any particular industry segment in the private sector or<br />
particular authority in the public sector.<br />
<strong>ISS</strong>’s commercial customers range in size from small firms requiring a single service employee to<br />
large, multinational organizations seeking integrated facility services. <strong>ISS</strong> is focused on developing<br />
larger accounts, particularly European multinational companies, with the goal <strong>of</strong> becoming their<br />
provider <strong>of</strong> integrated facility services. In addition, <strong>ISS</strong> believes that these customers may be more<br />
likely to require integrated facility services.<br />
The terms <strong>of</strong> <strong>ISS</strong>’s customer contracts vary widely by country and customer segment due to different<br />
customer requirements and applicable legislation. However, <strong>ISS</strong> typically provides services under<br />
multi-year contracts with a stated term <strong>of</strong> between two and five years and reciprocal termination rights<br />
upon three to 12 months’ prior written notice. <strong>ISS</strong>’s commercial customer contracts typically provide for<br />
automatic renewal in the absence <strong>of</strong> a party’s notice to terminate the contract. For larger contracts, the<br />
quality <strong>of</strong> <strong>ISS</strong>’s services is <strong>of</strong>ten measured against defined quality benchmarks stipulated in service<br />
level agreements with the customer.
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20<br />
Executive Summary<br />
<strong>ISS</strong> is highly focused on customer retention and has introduced a wide range <strong>of</strong> initiatives, including<br />
dedicated management <strong>of</strong> key accounts and additional training <strong>of</strong> sales staff, to increase customer<br />
retention rates. <strong>ISS</strong> believes that it benefits from quality customer relationships and estimates that the<br />
average length <strong>of</strong> its customer relationships is approximately eight to ten years, equating to<br />
approximately 90% customer retention. According to an internationally recognised consulting firm, this<br />
level <strong>of</strong> contract churn is in line, and in some cases better compared with <strong>ISS</strong>’s main competitors and<br />
the industry average as a whole.<br />
<strong>ISS</strong> also provides its services to governmental entities, primarily in Europe. The contractual<br />
arrangements with these entities differ from <strong>ISS</strong>’s contracts with the commercial sector in that they are<br />
generally subject to public procurement rules. Under these rules, facility services contracts are<br />
generally retendered on a regular basis. As a result, <strong>ISS</strong> must tender to maintain existing<br />
governmental contracts.<br />
5. Human Resources<br />
The facility services industry is characterised by relatively high levels <strong>of</strong> employee turnover, as the<br />
industry is <strong>of</strong>ten considered a short-term or secondary source <strong>of</strong> employment. As a result, <strong>ISS</strong><br />
pursues a number <strong>of</strong> strategies to reduce the turnover among blue-collar employees, including<br />
arranging for more full-time and daytime work. In 2004, the share <strong>of</strong> full-time employees (working 25<br />
hours or more per week) increased to 57% from 55% in 2003. The distribution <strong>of</strong> employee tenure (in<br />
years) provides another perspective on employee loyalty at <strong>ISS</strong>. In 2004, 69% <strong>of</strong> the Group’s<br />
employees had been with <strong>ISS</strong> for more than one year.<br />
E. Strategy<br />
In April 2005 <strong>ISS</strong> announced its current business strategy, named "Route 101" which sets out the<br />
objective <strong>of</strong> achieving revenues <strong>of</strong> DKK 101 billion. Route 101 comprises a number <strong>of</strong> initiatives aimed<br />
at developing the Company, i.e. continue to train staff and continue to invest in group-wide systems<br />
and tools to support, whilst adhering to certain operational objectives. The plan does not contain a<br />
defined period <strong>of</strong> time for achieving DKK 101 billion revenue target.<br />
Consistent with this strategy, <strong>ISS</strong> intends to: (i) continue to focus on operational efficiency to maintain<br />
or improve its competitive position; (ii) increase its ability to deliver integrated facility services<br />
throughout its operations; (iii) continue to make selective acquisitions; and (iv) focus on reducing the<br />
Group’s financial leverage on a multiple basis. The principal elements <strong>of</strong> this strategy include the<br />
following:<br />
� Continue to focus on operational efficiency. <strong>ISS</strong> will seek to maintain and enhance operational<br />
efficiency by continuing its focus on three well-established and prioritized operational objectives for<br />
its local managers: (i) cash flow; (ii) operating margin; and (iii) pr<strong>of</strong>itable organic growth.<br />
— Cash flow. <strong>ISS</strong>’s first objective is to continue to maintain a relatively high rate <strong>of</strong> cash<br />
conversion by operating in a manner that optimizes working capital. Through this approach, <strong>ISS</strong><br />
expects to continue to generate positive Free Operating Cash Flow and <strong>ISS</strong> believes that, in a<br />
typical year, it should be able to achieve a target cash conversion ratio 5 <strong>of</strong> between 90% and<br />
95%.<br />
— Operating margin. <strong>ISS</strong>’s second objective is to maintain or increase its operating margin<br />
through continuous focus on costs. This will continue to be achieved by generating operational<br />
efficiencies by increasing its local market shares and operational densities, as well as through<br />
the implementation <strong>of</strong> company-wide best practices. Consistent with this approach, <strong>ISS</strong> has<br />
increased its operating margin, which <strong>ISS</strong> defines as operating pr<strong>of</strong>it before other income and<br />
expenses and income from associates divided by revenue, from 5.1% in 2000 to 5.6% in 2004.<br />
— Pr<strong>of</strong>itable organic growth. <strong>ISS</strong>’s third objective is to continue to leverage its international<br />
market position and service <strong>of</strong>fering in order to increase its local market positions and drive<br />
5 The cash conversion ratio, as calculated by <strong>ISS</strong>, represents Free Operating Cash Flow as a percentage <strong>of</strong> pr<strong>of</strong>it before goodwill amortisation<br />
under Danish GAAP, or pr<strong>of</strong>it before goodwill impairment and write-down and amortisation <strong>of</strong> customer contracts under IFRS. In 2002, the<br />
cash conversion ratio was adjusted to remove the effect <strong>of</strong> a one-time gain <strong>of</strong> DKK 74 million (EUR 9.9 million) related to the sale <strong>of</strong> a minority<br />
interest in another entity. In 2003, the cash conversion ratio was adjusted to remove the effect <strong>of</strong> a tax repayment <strong>of</strong> DKK 168 million (EUR<br />
22.5 million) related to the issuance <strong>of</strong> shares to employees.
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21<br />
Executive Summary<br />
organic growth. To do this, <strong>ISS</strong> has introduced a wide range <strong>of</strong> initiatives, including dedicated<br />
management <strong>of</strong> key accounts and additional training <strong>of</strong> sales staff, to increase customer<br />
retention rates. <strong>ISS</strong> will also continue to focus on the cross-selling <strong>of</strong> related services, such as<br />
pest control and washroom services, to existing customers. Additionally, <strong>ISS</strong> has established a<br />
market presence and operating platforms in, and will seek to leverage the growth potential <strong>of</strong>,<br />
selected high-growth economies, such as Brazil, Russia, India and China.<br />
� Increase Integrated Facility Services capabilities. <strong>ISS</strong> also intends to continue to broaden its<br />
service <strong>of</strong>fering in order to eventually <strong>of</strong>fer a full range <strong>of</strong> facility services in each <strong>of</strong> its markets,<br />
primarily through the introduction <strong>of</strong> additional services and by acquiring companies with additional<br />
competencies. <strong>ISS</strong> believes that integrated facility services strengthen customer relationships<br />
through <strong>ISS</strong>’s on-site management. In addition, Integrated Facility Services <strong>of</strong>fer the opportunity to<br />
reduce customers’ overhead costs and for <strong>ISS</strong> to leverage operational synergies.<br />
� Continue disciplined acquisition process. <strong>ISS</strong> expects to continue its well-established<br />
acquisition process to facilitate its strategy <strong>of</strong> increasing local scale, broadening its local service<br />
<strong>of</strong>fering and accessing new markets. <strong>ISS</strong> will continue to focus primarily on smaller acquisitions,<br />
which it believes will reduce the integration risks relating to individual acquisitions and enable it to<br />
leverage the experience <strong>of</strong> local management teams throughout its countries <strong>of</strong> operation. To<br />
access new geographic markets, <strong>ISS</strong> intends to establish operating platforms in higher growth<br />
markets, including through acquisitions.<br />
� Reduce financial leverage on a multiple basis. The Group intends to reduce its financial<br />
leverage (in terms <strong>of</strong> total debt to EBITDA) resulting from the acquisition financing, primarily<br />
through growth in operating pr<strong>of</strong>it. The Group intends to increase its operating pr<strong>of</strong>it through its<br />
continued focus on operational efficiency, organic growth and acquisitions.
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F. Financials<br />
22<br />
Executive Summary<br />
See below for Historical financials. This is discussed in more detail in the sections entitled “Historical<br />
Financials”.<br />
<strong>Table</strong> 7: Historical Financial Data<br />
Danish GAAP IFRS<br />
DKK million 2000 2001 2002 2003 2004 9M-2004 9M-2005<br />
EBITA (1) 1,454 1,633 2,010 2,032 2,279 1,664 1,944<br />
Depreciation and Amortisation (2) 468 551 603 587 617 444 482<br />
EBITDA 1,922 2,184 2,613 2,619 2,896 2,108 2,426<br />
Share-based Payment - - - - - 6 3<br />
Changes in Working Capital (125) 52 412 319 186 (618) (1,097)<br />
Changes in Provisions (10) 4 (98) (36) (91) (19) (49)<br />
Other inc. and Exp. Net Payment (3) (25) (67) (19) (76) (43) (162)<br />
Payments Related to Integration Cost - - - - - (15) (77)<br />
Operating Cash Flow before Interest and<br />
Tax<br />
1,784 2,215 2,860 2,883 2,915 1,419 1,044<br />
Net Interest Paid (225) (328) (333) (215) (334) (255) 261<br />
Corporate Tax Paid (294) (377) (263) (323) (602) (355) (497)<br />
Operating Cash Flow 1,265 1,510 2,264 2,345 1,979 809 808<br />
Capex Net (391) (452) (525) (403) (583) (417) (398)<br />
Free Operating Cash Flow 874 1,058 1,739 1,942 1,396 392 410<br />
Acquisitions <strong>of</strong> Businesses (3,003) (3,098) (1,898) (1,065) (3,886) (3,524) (1,937)<br />
Divestment <strong>of</strong> Businesses (1) 13 16 20 36 33 828<br />
Investments in Financial Assets, Net (21) (180) 269 29 (53) (888) 365<br />
Cash flow After Investments (2,151) (2,207) 126 926 (2,507) (3,987) (334)<br />
Financial payments, net 916 2,131 (782) 556 3,358 3,277 4,270<br />
Proceeds – issuance <strong>of</strong> share capital 1,042 789 569 25 793 - -<br />
Purchase/disposal <strong>of</strong> own shares 12 - (5) - (30) (30) -<br />
Dividend Paid to Shareholders - - - (88) (177) (177) (5,830)<br />
Options and Warrants Settled - - - - - - (163)<br />
Minority Interests (16) (15) (5) (8) (6) (4) (10)<br />
Cash flow from Financing Activities 1,954 2,905 (223) 485 3,938 3,066 (1,733)<br />
Net Change in Cash (197) 698 (97) 1,411 1,431 (921) (2,067)<br />
Cash conversion % (3) 105% 118% 167% 150% 107%<br />
Note:<br />
(1) EBITA represents Earnings before Interest, Taxes, Amortization, Other Income and Expenses, and Income from Associates. Amortization<br />
represents only the amortization <strong>of</strong> intangible assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is amortization <strong>of</strong><br />
goodwill under Danish GAAP or amortization <strong>of</strong> customer contracts under IFRS.<br />
(2) Amortization represents only the amortization for intangible assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is<br />
amortization <strong>of</strong> goodwill under Danish GAAP or amortization <strong>of</strong> customer contracts under IFRS.<br />
(3) In 2002, the cash conversion ratio was adjusted to remove the effect <strong>of</strong> a one-time gain <strong>of</strong> DKK 74 million (EUR 10 million) related to the<br />
sale <strong>of</strong> a minority interest in another entity. In 2003, the cash conversion ratio was adjusted to remove the effect <strong>of</strong> a tax repayment <strong>of</strong> DKK<br />
168 million (EUR 23 million) related to the issuance <strong>of</strong> shares to employees.<br />
Source: <strong>ISS</strong><br />
Set forth below is a reconciliation <strong>of</strong> EBITDA to Adjusted pro forma EBITDA to give effect to<br />
acquisitions and divestments during the twelve months ended September 30, 2005;<br />
� Pro Forma Effect <strong>of</strong> Acquisitions. The incremental EBITDA <strong>of</strong> entities acquired during the 12 month<br />
period to September 30, 2005, for the period in which such entities were not part <strong>of</strong> the Group. The<br />
amount <strong>of</strong> incremental EBITDA is based on <strong>ISS</strong>’s estimate, at the time <strong>of</strong> acquisition, as to the EBITDA<br />
to be generated by such acquired entities prior to the acquisition by <strong>ISS</strong>.<br />
� Pro Forma Effect <strong>of</strong> Health Care Operations Business. Reported EBITDA <strong>of</strong> entities divested<br />
during the 12 month period to September 30, 2005. The disposal <strong>of</strong> the Health Care operations<br />
business and <strong>ISS</strong>’s interest in CarePartner represented DKK 76 million (EUR 10 million) <strong>of</strong> EBITDA<br />
for the 12 month period. The remainder represents other minor divestments.
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<strong>Table</strong> 8: Pro Forma EBITDA, Twelve Months Ended September 30, 2005<br />
DKK million<br />
LTM<br />
September<br />
2005<br />
Acq during LTM<br />
(pro forma)<br />
23<br />
Divestments during<br />
LTM (pro forma)<br />
Executive Summary<br />
Adj. Health Care<br />
operations<br />
Pro forma<br />
September<br />
FY05<br />
Revenues 45,114 1,973 (250) (487) 46,350<br />
Operating Expense (41,918) (1,791) 233 411 (43,065)<br />
EBITDA 3,196 182 (17) (76) 3,285<br />
EBITDA % 7.1% 9.2% 6.8% 15.6% 7.1%<br />
Depreciation and Amortisation (1) (655) (43) 4 14 (680)<br />
EBITA (2) 2,541 139 (13) (62) 2,605<br />
EBITA % 5.6% 7.0% 5.2% 12.7% 5.6%<br />
Note:<br />
(1) Amortization represents only the amortization for intangible assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is<br />
amortization <strong>of</strong> goodwill under Danish GAAP or amortization <strong>of</strong> customer contracts under IFRS.<br />
(2) EBITA represents Earnings before Interest, Taxes, Amortization, Other Income and Expenses, and Income from Associates. Amortization<br />
represents only the amortization <strong>of</strong> intangible assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is amortization <strong>of</strong><br />
goodwill under Danish GAAP or amortization <strong>of</strong> customer contracts under IFRS.<br />
Source: <strong>ISS</strong>
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II. Company Characteristics<br />
24<br />
Company Characteristics
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A. Large and Diversified Business<br />
25<br />
Company Characteristics<br />
<strong>ISS</strong> is one <strong>of</strong> the world’s largest providers <strong>of</strong> facility services, with 2004 revenue <strong>of</strong> DKK 40.4 billion<br />
(EUR 5.4 billion) and operations in 43 countries in Europe, South America, Asia and Australia. In 2004,<br />
no more than 19% <strong>of</strong> <strong>ISS</strong>’s 2004 revenue was generated in any one country, with France being the<br />
largest contributor to revenue. The services <strong>ISS</strong> <strong>of</strong>fers are diverse and, in addition to cleaning, include<br />
property, <strong>of</strong>fice support, catering and integrated facility services. Through its size and diversification<br />
<strong>ISS</strong> has reduced its exposure to any single country, industry sector, customer or service.<br />
As <strong>of</strong> September 30, 2005, <strong>ISS</strong> had more than 100,000 public and private sector customers, and in<br />
2004, revenue derived from its ten largest customers was less than 5% <strong>of</strong> its total revenue.<br />
<strong>Table</strong> 9: <strong>ISS</strong>’s Ten Largest Customers (2004)<br />
Top 10 Customers<br />
Annual Contract Revenues<br />
DKK million % <strong>of</strong> Total Revenues<br />
1. Customer A 213 0.5%<br />
2. Customer B 203 0.5%<br />
3. Customer C 176 0.4%<br />
4. Customer D 149 0.4%<br />
5. Customer E 149 0.4%<br />
6. Customer F 144 0.4%<br />
7. Customer G 144 0.4%<br />
8. Customer H 137 0.3%<br />
9. Customer I 134 0.3%<br />
10. Customer J 129 0.3%<br />
1,578 3.9%<br />
Source: <strong>ISS</strong><br />
B. Leading Market Positions<br />
<strong>ISS</strong> is Europe’s largest provider <strong>of</strong> cleaning services and one <strong>of</strong> the largest providers <strong>of</strong> facility<br />
services globally. <strong>ISS</strong> is also one <strong>of</strong> the top three cleaning companies in the majority <strong>of</strong> the countries in<br />
which it operates, including in the United Kingdom, the Nordic Region (Sweden, Denmark, Norway<br />
and Finland), the Netherlands, Belgium, Switzerland, Austria, Spain, Hong Kong and Singapore. In<br />
2004, 67% <strong>of</strong> <strong>ISS</strong>’s revenue was derived from its top 13 countries. <strong>ISS</strong> believes that these market<br />
positions increases the company’s ability to leverage its resources through increased cross-utilisation<br />
and sharing <strong>of</strong> best practises. In addition, <strong>ISS</strong> believes that its market positions increase its credibility<br />
as a contract provider, assisting it in obtaining and effectively servicing new contracts from larger,<br />
high-volume customers, including contracts involving multiple services or locations. <strong>ISS</strong>’s market<br />
positions and size also enable the Company to achieve more efficient management and administrative<br />
functions i.e. leveraging overheads. <strong>ISS</strong> believes the same factors also assist it in attracting and<br />
retaining qualified local managers.
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Figure 6: Overview <strong>of</strong> <strong>ISS</strong>’s Market Positions (2004)<br />
Source: Internationally recognised consulting firm<br />
<strong>ISS</strong>’s European Contract Cleaning Market Position<br />
C. Cash Generative Business<br />
26<br />
Country<br />
Austria<br />
Belgium & Luxembourg<br />
Denmark<br />
Finland<br />
France<br />
Germany<br />
Italy<br />
The Netherlands<br />
Norway<br />
Spain<br />
Sweden<br />
Switzerland<br />
Company Characteristics<br />
<strong>ISS</strong>’s<br />
Market Position<br />
During the last six years, <strong>ISS</strong>’s cash conversion ratio, which <strong>ISS</strong> defines as Free Operating Cash Flow<br />
as a percentage <strong>of</strong> pr<strong>of</strong>it before goodwill amortisation under Danish GAAP, or <strong>of</strong> pr<strong>of</strong>it before goodwill<br />
impairment and write-down and amortisation <strong>of</strong> customer contracts under IFRS, has been above<br />
100%. <strong>ISS</strong> achieved this result primarily through a company-wide focus on reducing working capital<br />
and capital investment requirements, with particular emphasis on reducing debtor days and increasing<br />
the use <strong>of</strong> operating leases and rental arrangements rather than purchasing assets. In addition <strong>ISS</strong>’s<br />
business has relatively low capital expenditure requirements. For example, net investments in<br />
intangible assets and property, plant and equipment have averaged approximately 1.3% <strong>of</strong> revenue<br />
over the last five years. <strong>ISS</strong> expects to continue to generate positive Free Operating Cash Flow and<br />
aims to achieve a target cash conversion ratio <strong>of</strong> between 90% and 95%.<br />
UK<br />
1<br />
1<br />
1<br />
1<br />
3+<br />
3<br />
3+<br />
1<br />
1<br />
1<br />
1<br />
1<br />
2
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Figure 7: Historical Free Operating Cash Flow 2000 - 2004<br />
Free Operating Cash Flow<br />
(DKK million)<br />
2,500<br />
2,000<br />
1,500<br />
1,000<br />
500<br />
0<br />
874<br />
FOCF<br />
Cash Conversion<br />
105%<br />
118%<br />
1,058<br />
1,739<br />
27<br />
167%<br />
150%<br />
1,942<br />
Company Characteristics<br />
107%<br />
1,396<br />
2000 2001 2002 2003 2004<br />
Note:<br />
(1) The cash conversion ratio, as calculated by <strong>ISS</strong>, represents Free Operating Cash Flow as a percentage <strong>of</strong> pr<strong>of</strong>it before goodwill amortisation<br />
under Danish GAAP, or pr<strong>of</strong>it before goodwill impairment and write-down and amortisation <strong>of</strong> customer contracts under IFRS. In 2002, the<br />
cash conversion ratio was adjusted to remove the effect <strong>of</strong> a one-time gain <strong>of</strong> DKK 74 million (EUR 10 million) related to the sale <strong>of</strong> a<br />
minority interest in another entity. In 2003, the cash conversion ratio was adjusted to remove the effect <strong>of</strong> a tax repayment <strong>of</strong> DKK 168<br />
million (EUR 23 million) related to the issuance <strong>of</strong> shares to employees.<br />
(2) Free Operating Cash Flow, as calculated by <strong>ISS</strong>, represents cash flow from operating activities less investments in intangible assets and<br />
property, plant and equipment. Intangible assets do not include goodwill and customer contracts and related customer relationships and<br />
primarily relate to computer s<strong>of</strong>tware.<br />
Source: <strong>ISS</strong><br />
200%<br />
160%<br />
120%<br />
80%<br />
40%<br />
0%<br />
Cash Conversion
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D. Flexible Cost Base<br />
28<br />
Company Characteristics<br />
<strong>ISS</strong> has a flexible cost base, particularly with respect to staff costs, which, as a percentage <strong>of</strong> revenue,<br />
were approximately 66% in 2004. Due to the relatively high employee turnover that is characteristic <strong>of</strong><br />
the facility services industry, <strong>ISS</strong> is able to reduce its staffing levels when necessary by limiting its<br />
hiring <strong>of</strong> new employees. In addition, as a result <strong>of</strong> its local scale and density, <strong>ISS</strong> may also be able to<br />
shift employees among existing customers’ contracts and locations. Moreover, according to EU law,<br />
when facility services contracts are lost to a competitor, the former provider may under certain<br />
circumstances be able to pass on-site staff to the new provider, an option which provides additional<br />
operational flexibility.<br />
Figure 8: 2004 Cost Categories and EBITA (1)<br />
% <strong>of</strong> Revenues<br />
100%<br />
80%<br />
60%<br />
40%<br />
20%<br />
0%<br />
5.6%<br />
20.7%<br />
7.8%<br />
65.9%<br />
2004<br />
EBITA Margin<br />
Other<br />
Cost <strong>of</strong> Goods Sold<br />
Employee Costs<br />
Note:<br />
(1) EBITA represents Earnings before Interest, Taxes, Amortization, Other Income and Expenses, and Income from Associates. Amortization<br />
represents only the amortization <strong>of</strong> intangible assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is amortization <strong>of</strong><br />
goodwill<br />
Source: <strong>ISS</strong><br />
E. Stable and Predictable Business<br />
Demand for cleaning services, which comprised 66% <strong>of</strong> <strong>ISS</strong>’s revenue in 2004, has historically been<br />
relatively resilient to economic downturns as compared with other industries. <strong>ISS</strong> believes that its<br />
target customers consider a basic level <strong>of</strong> cleaning and other facility services to be necessary for the<br />
operation <strong>of</strong> their core businesses and operations. <strong>ISS</strong> believes that it benefits from quality customer<br />
relationships and estimates that the average length <strong>of</strong> its customer relationships is approximately eight<br />
to ten years, equating to approximately 90% customer retention. <strong>ISS</strong> believes that the steady demand<br />
for facility services, the characteristics <strong>of</strong> its customer contracts and its relatively flexible cost base<br />
have contributed to the stability and predictability <strong>of</strong> <strong>ISS</strong>’s operations in the last five years.
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Figure 9: Historical Revenues and EBITA Margins, 1995 – 2004<br />
Revenues (DKK billion)<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
4.4%<br />
5.1%<br />
9.2 10.7 11.8<br />
5.4% 5.3% 5.2%<br />
13.8<br />
19.8<br />
29<br />
5.1%<br />
28.7<br />
4.7%<br />
34.9<br />
5.3%<br />
38.0<br />
Company Characteristics<br />
5.6% 5.6%<br />
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004<br />
Revenues EBITA Margin<br />
Note:<br />
(1) EBITA represents Earnings before Interest, Taxes, Amortization, Other Income and Expenses, and Income from Associates. Amortization<br />
represents only the amortization <strong>of</strong> intangible assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is amortization <strong>of</strong><br />
goodwill<br />
Source: <strong>ISS</strong><br />
F. Disciplined and Well-established Approach to Acquisitions<br />
<strong>ISS</strong> has a well-developed approach to acquisitions that capitalizes on the market knowledge and<br />
acquisition experience <strong>of</strong> its local managers and the expertise <strong>of</strong> a centralized M&A department. Since<br />
the beginning <strong>of</strong> 2000, <strong>ISS</strong> has acquired and integrated 375 companies in more than 30 countries. The<br />
total consideration for these acquisitions was more than DKK 15 billion (EUR 2.0 billion). More than<br />
330 <strong>of</strong> these acquisitions were <strong>of</strong> relatively small companies, with annual revenues <strong>of</strong> less than DKK<br />
100 million (EUR 13 million). <strong>ISS</strong>’s local management teams are responsible for the acquisition<br />
process from target identification through integration <strong>of</strong> the acquired businesses. <strong>ISS</strong>’s centralized<br />
M&A department works closely with local <strong>ISS</strong> managers to facilitate this acquisition process, including<br />
the negotiation <strong>of</strong> material acquisition agreements and the performing <strong>of</strong> valuation analyses. In<br />
addition, every acquisition is approved by <strong>ISS</strong> Management A/S’s Executive Management Board. <strong>ISS</strong><br />
believes that its experienced local management teams, dedicated M&A resources and disciplined<br />
acquisition process allow it to understand local market conditions, identify opportunities and capitalize<br />
on the fragmented and consolidating facility services market. Moreover, <strong>ISS</strong> believes that its practice<br />
<strong>of</strong> acquiring mostly smaller companies helps to limit integration risks relating to individual acquisitions.<br />
In recent years, <strong>ISS</strong> has followed a strategy <strong>of</strong> selectively acquiring smaller companies, typically with<br />
annual revenues <strong>of</strong> less than DKK 100 million (EUR 13 million), in order to strengthen <strong>ISS</strong>’s<br />
competencies, enhance its service <strong>of</strong>fering or establish critical mass. The volume <strong>of</strong> acquisitions has<br />
varied in recent years depending upon market conditions. In the years ended December 31, 2002,<br />
2003 and 2004, <strong>ISS</strong> made 31, 51 and 95 acquisitions respectively. <strong>ISS</strong> reduced its acquisition activity<br />
in 2002 to concentrate on initiatives aimed at increasing its operating margin.<br />
Divestments in the last three years have been limited and have focused on under-performing and noncore<br />
businesses. Most <strong>of</strong> these divestments have been relatively small. However, in 2002 <strong>ISS</strong><br />
divested most <strong>of</strong> its aviation service operations in the United Kingdom, The Netherlands and the<br />
Nordic countries, with combined revenue <strong>of</strong> DKK 714 million (EUR 96 million) in 2001. In H1-2005, the<br />
Company divested the Health Care Operations in two separate transactions to funds advised by EQT.<br />
Figure 10 provides unaudited information concerning <strong>ISS</strong>’s acquisitions and divestments for the<br />
periods presented. Revenue presented in the table represents the prior year revenue <strong>of</strong> the acquired<br />
companies.<br />
36.2<br />
40.4<br />
6%<br />
5%<br />
4%<br />
3%<br />
2%<br />
1%<br />
0%<br />
EBITA Margin (%)
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30<br />
Company Characteristics<br />
Figure 10: Overview <strong>of</strong> Historical Acquisitions, Revenues, 2000 – 9M 2005 (DKK million)<br />
100%<br />
80%<br />
60%<br />
40%<br />
20%<br />
0%<br />
56 68 31 51 95 74<br />
2000 2001 2002 2003 2004 9M 2005<br />
< 100 million < 350 million < 750 million < 1,500 million<br />
Annualised<br />
Revenue <strong>of</strong><br />
# <strong>of</strong> Acquisitions<br />
Acquisition<br />
2000 2001 2002 2003 2004 9M-2005<br />
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H. Comprehensive Financial Management and Control<br />
31<br />
Company Characteristics<br />
<strong>ISS</strong> has implemented comprehensive financial management and control procedures, which it<br />
considers to be an essential element <strong>of</strong> its business. Through these procedures, <strong>ISS</strong> focuses, in<br />
particular, on cash management. Each country operation must submit monthly cash flow forecasts to<br />
the head <strong>of</strong>fice, and <strong>ISS</strong>’s corporate treasury monitors any deviations from these forecasts on a daily<br />
basis. In addition, these country operations are supervised by regional managers, and controllers<br />
employed by the head <strong>of</strong>fice visit the local operations regularly to ensure compliance with <strong>ISS</strong>’s control<br />
procedures.<br />
Please see below for a detailed summary <strong>of</strong> some <strong>of</strong> the key controls and systems which are in place:<br />
<strong>Table</strong> 10: Overview <strong>of</strong> Key Controls and Systems in Place<br />
Cash Forecasting Controls<br />
� Country CFOs required to make a daily forecast for the following month<br />
� Corporate treasury monitors actual development vs. forecast and follows up on deviations<br />
— Country CFO must be able to explain the actual development and deviations at very short notice<br />
Business Controls<br />
� Annual strategy reviews<br />
� Annual budget and financial plan<br />
� Quarterly forecast updates to budgets<br />
� Monthly business reviews<br />
� Cash flow statement<br />
� Monthly income statement, balance sheet and variance analysis<br />
� Monthly business reporting (P&L for local business units, portfolio reporting, sales status reporting, etc.)<br />
� Acquisitions approvals follow predefined formats<br />
� Corporate control function and strong local controls<br />
Source: <strong>ISS</strong>
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32<br />
Summary <strong>of</strong> Principal Terms and Conditions<br />
III. Summary <strong>of</strong> Principal Terms and<br />
Conditions
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A. Description <strong>of</strong> the Financing Structure<br />
33<br />
Summary <strong>of</strong> Principal Terms and Conditions<br />
In connection with the Acquisition, <strong>ISS</strong> Holding entered into a Senior Credit Facilities Agreement<br />
making available Term Facilities (Term Loan A and B), a Cash Bridge Facility, a Revolving Credit<br />
Facility, a Letter <strong>of</strong> Credit Facility and an Acquisition Facility. <strong>ISS</strong> Holding also entered into a<br />
Subordinated Bridge Facility and a PIK Bridge Facility. The rights and obligations <strong>of</strong> <strong>ISS</strong> Holding<br />
under the PIK Bridge Facility were subsequently assumed by its direct parent, <strong>ISS</strong> Equity and the<br />
proceeds <strong>of</strong> the PIK Bridge Facility have been lent by <strong>ISS</strong> Equity to <strong>ISS</strong> Holding under a Subordinated<br />
Shareholder Loan. <strong>ISS</strong> Holding used borrowings under the Term Facilities, the Cash Bridge Facility,<br />
the Subordinated Bridge Facility, cash equity contributed by EQT and GSCP, as well as proceeds from<br />
the Subordinated Shareholder Loan, to fund the Acquisition.<br />
Since the completion <strong>of</strong> the tender <strong>of</strong>fer, <strong>ISS</strong> Holding and its subsidiaries have made a number <strong>of</strong><br />
changes and adjustments to their capital structure. On July 27, 2005 and August 31, 2005, <strong>ISS</strong><br />
Holding received dividends from <strong>ISS</strong> which it used primarily to repay outstanding amounts under the<br />
Cash Bridge Facility, Term Loan A and a portion <strong>of</strong> Term Loan B. <strong>ISS</strong> paid these dividends with<br />
proceeds from dividends it received from <strong>ISS</strong> Global and cash on hand. In addition, <strong>ISS</strong> Global<br />
financed its dividends to <strong>ISS</strong> from borrowings under Term Loan A, Term Loan B, and cash on hand.<br />
<strong>ISS</strong> Global borrowed amounts under the Acquisition Facility A and Term Loan B. Please see below<br />
for a summary <strong>of</strong> the pro forma capital structure <strong>of</strong> the Group as <strong>of</strong> September 30, 2005, adjusted for<br />
the changes described above.<br />
<strong>Table</strong> 11: Pro Forma Capitalization <strong>Table</strong>, as <strong>of</strong> September 30, 2005<br />
LTM September 30, 2005<br />
DKK m EUR m PF EBITDA (1)<br />
PF EBITDA – Capex % <strong>of</strong> Total<br />
Local Facilities (2) 1,393 187 0.42x 0.51x 4%<br />
Acquisition Facility (3) 604 81 0.61x 0.73x 2%<br />
Term Loan A 2,024 271 1.22x 1.48x 6%<br />
Term Loan B 3,679 493 2.34x 2.83x 12%<br />
Total Senior 7,700 1,032 2.34x 2.83x 24%<br />
Cash (1,493) (200) 1.89x 2.28x (4)%<br />
Total Net Senior 6,207 832 1.89x 2.28x 20%<br />
EMTN (4) 10,074 1,350 4.96x 5.98x 32%<br />
Subordinated Bridge Facility (5) 6,679 895 6.99x 8.44x 21%<br />
Net Cash Pay Debt 22,960 3,077 6.99x 8.44x 73%<br />
PIK Bridge Facility (6) 967 130 7.28x 8.79x 3%<br />
Cash Equity 7,693 1,031 9.63x 11.62x 24%<br />
Total Capitalization 31,620 4,238 9.63x 11.62x 100%<br />
Revolver (committed) (2) 1,750 235<br />
Revolver (uncommitted) 750 100<br />
Letter <strong>of</strong> Credit Facility<br />
(committed)<br />
500 67<br />
Acq. Facility A (committed) 1,750 235<br />
Acq. Facility B (uncommitted) 3,500 469<br />
Note:<br />
(1) Leverage multiples based on an estimated PF LTM September 2005 EBITDA <strong>of</strong> DKK 3,285 million and actual LTM September 2005 Capex <strong>of</strong> DKK 564<br />
million.<br />
(2) The Senior Credit Facilities Agreement allows <strong>ISS</strong> to retain up to EUR 100 million <strong>of</strong> its existing facilities which are provided on a bilateral basis<br />
primarily to fund local working capital requirements. As <strong>of</strong> September 30, 2005, these amounted to DKK 1,393 million. <strong>ISS</strong> expects to reduce these<br />
facilities by drawing on its Revolver.<br />
(3) Subsequent to closing (May 11, 2005), the company has made a number <strong>of</strong> acquisitions and has drawn down DKK 604 million on Acquisition Facility A.<br />
(4) EMTN refer to <strong>ISS</strong> Global’s European Medium Term Notes due 2010 and 2014.<br />
(5) The Subordinated Bridge Facility is expected to be rolled-up into a permanent financing or refinanced on or before May 11, 2006.<br />
(6) The PIK Bridge Facility entered into by <strong>ISS</strong> Equity, the parent <strong>of</strong> <strong>ISS</strong> Holding, is expected to be rolled into a permanent financing or refinanced on or<br />
before May 11, 2006.<br />
Source: <strong>ISS</strong> Holding
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<strong>Table</strong> 12: Cash Balance Reconciliation, as <strong>of</strong> September 30, 2005<br />
34<br />
Summary <strong>of</strong> Principal Terms and Conditions<br />
As <strong>of</strong> September 30, 2005<br />
DKK million EUR million<br />
Cash on Balance Sheet at <strong>ISS</strong> 1,070 143<br />
Cash on Balance Sheet at <strong>ISS</strong> Holding 187 25<br />
Other Securities 85 11<br />
Expected drawdown on Term Loan B 375 50<br />
Settlement <strong>of</strong> Warrants (56) (8)<br />
Estimated Fees post September 30 (168) (23)<br />
Total Pro Forma Cash 1,493 200<br />
Source: <strong>ISS</strong> Holding, PWC<br />
In addition to the Senior Term Facilities required to finance the Acquisition and refinance existing debt,<br />
the Senior Facilities include committed facilities in the form <strong>of</strong> a DKK 1,750 million (EUR 235 million)<br />
Revolving Credit Facility, a DKK 500 million (EUR 67 million) Letter <strong>of</strong> Credit Facility and a DKK 1,750<br />
million (EUR 235 million) Acquisition A Facility. The committed Revolving Credit Facility will be<br />
available to <strong>ISS</strong> Global and certain <strong>of</strong> its subsidiaries for general corporate purposes including working<br />
capital requirements. The Letter <strong>of</strong> Credit Facility will be available on an ongoing basis for general<br />
guarantees (primarily performance bonds) required in <strong>ISS</strong>'s daily operations. The Acquisition Facility A<br />
will be available to fund general corporate acquisitions over the next 3 years, subject to satisfaction <strong>of</strong><br />
certain conditions precedent.<br />
The Senior Credit Facilities Agreement also provides for uncommitted facilities in the form <strong>of</strong> a DKK<br />
750 million (EUR 100 million) Revolving Credit Facility and a DKK 3,500 million (EUR 469 million)<br />
Acquisition Facility B. Acquisition Facility B is available to fund general corporate acquisitions over the<br />
next 4 years, subject to satisfaction <strong>of</strong> certain criteria.<br />
Please see tables 13, 14 and 15 below for an overview <strong>of</strong> the committed and uncommitted Senior<br />
Facilities, with the associated key commercial terms <strong>of</strong> the facilities.<br />
<strong>Table</strong> 13: Senior Term Facilities<br />
Senior Term A Senior Term B (1)<br />
Facility Size DKK 2,000,000,000 DKK 3,675,000,000<br />
Drawn Amount DKK 2,000,000,000 DKK 3,675,000,000<br />
Drawdown DKK 800,000,000 (Drawn in SEK)<br />
DKK 900,000,000 (Drawn in NOK)<br />
DKK 300,000,000 (Drawn in CHF)<br />
DKK 1,650,000,000 (Drawn in GBP)<br />
DKK 1,650,000,000 (Drawn in EUR)<br />
Maturity 7 years 8.5 years<br />
Repayment Amortizing Bullets, two equal instalments<br />
At 8 years and 8.5 years<br />
Prepayment Penalties None None<br />
Initial Margin 2.25% 2.75%<br />
Benchmark Interbank Offered Rate Interbank Offered Rate<br />
Margin Ratchet Applicable Applicable<br />
Note:<br />
(1) As <strong>of</strong> September 30, 2005, <strong>ISS</strong> Holding has drawn DKK 2,250 million and the remainder was drawn by <strong>ISS</strong> Global.
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<strong>Table</strong> 14: Revolving Credit Facilities and Letter <strong>of</strong> Credit Facility<br />
Revolving Credit Facility<br />
(committed)<br />
35<br />
Summary <strong>of</strong> Principal Terms and Conditions<br />
Revolving Credit Facility<br />
(uncommitted)<br />
Letter <strong>of</strong> Credit Facility<br />
(committed)<br />
Facility Size DKK 1,750,000,000 DKK 750,000,000 DKK 500,000,000<br />
Drawn Amount - - Letters <strong>of</strong> Credit <strong>of</strong> approximately<br />
EUR 57,270,000 issued<br />
Currency Multi currency Multi currency Multi currency<br />
Maturity 7 years 7 years 7 years<br />
Repayment Revolving Revolving Revolving<br />
Prepayment Penalties None None None<br />
Initial Margin 2.25% 2.25% 2.25%<br />
Benchmark Interbank Offered Rate Interbank Offered Rate Interbank Offered Rate<br />
Margin Ratchet Applicable Applicable Applicable<br />
The aggregate amount outstanding under utilisations <strong>of</strong> the Revolving Facility (including Ancillary<br />
Facilities and Fronted Ancillary Facilities) and the Letter <strong>of</strong> Credit Facility and local overdraft facilities<br />
(excluding treasury transactions), may not at any time exceed DKK 2,500 million (EUR 335 million),<br />
excluding all performance bonds.<br />
<strong>Table</strong> 15: Acquisition Facilities<br />
Acquisition Facility A (Committed) Acquisition Facility B (Uncommitted)<br />
Facility Size DKK 1,750,000,000 DKK 3,500,000,000<br />
Drawn Amount DKK 604,000,000 -<br />
Currency Multi currency Multi currency<br />
Availability 3 years 4 years<br />
Maturity 7 years 8.5 years<br />
Repayment Equal instalments year 5 – 7 Equal instalments at 8 years and 8.5 years<br />
Prepayment Penalties None None<br />
Initial Margin 2.25% 2.25%<br />
Benchmark Interbank Offered Rate Interbank Offered Rate<br />
Margin Ratchet Applicable Applicable<br />
The acquisition facilities are subject to certain restrictions which must be met in order for the facilities<br />
to be drawn down.<br />
Equity Account<br />
� The Sponsors contributed Cash Equity <strong>of</strong> DKK 7,693 million into the equity account.<br />
Security<br />
The guarantee and security package for the Senior Facilities comprise guarantees from <strong>ISS</strong> Holding,<br />
<strong>ISS</strong> and <strong>ISS</strong> Global and a share pledge from <strong>ISS</strong> Holding over its shares in <strong>ISS</strong>. If the Senior Facilities<br />
were to be accelerated, it is most likely that any enforcement <strong>of</strong> the security would be by way <strong>of</strong><br />
enforcement <strong>of</strong> the <strong>ISS</strong> Holding guarantee and the share pledge, enabling the sale <strong>of</strong> the <strong>ISS</strong> Group<br />
as a whole.<br />
To the extent that the senior debt is refinanced by <strong>ISS</strong> Global, and such debt is secured by <strong>ISS</strong> Global,<br />
then the senior lenders will rank ahead <strong>of</strong> the EMTN holders, who have an unsecured claim against<br />
<strong>ISS</strong> Global. Security documents entered into by <strong>ISS</strong> Global and its subsidiaries contain provisions to<br />
ensure that if any <strong>of</strong> the indebtedness that would otherwise be secured by them constitutes "Relevant<br />
Indebtedness", as defined in the Medium Term Notes, then that indebtedness is not secured by the<br />
relevant security document.<br />
The Senior Credit Facilities Agreement requires additional guarantees and security to be put in place<br />
as a condition subsequent.
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<strong>Table</strong> 16: Companies Providing Guarantees<br />
Denmark<br />
France<br />
Spain<br />
Finland<br />
Norway<br />
Belgium<br />
The Netherlands<br />
Sweden<br />
UK<br />
Note:<br />
(1) Holding company<br />
Source: <strong>ISS</strong> Holding<br />
� <strong>ISS</strong> Holding A/S (Bidco) (1)<br />
� <strong>ISS</strong> A/S (Target) (1)<br />
� <strong>ISS</strong> Global A/S (1)<br />
� <strong>ISS</strong> Facility Services A/S<br />
� <strong>ISS</strong> Holding Paris SA (1)<br />
� <strong>ISS</strong> Abilis France SAS<br />
� Integrated Service Solutions S.L. (1)<br />
� <strong>ISS</strong> Palvelut Oy (1)<br />
� <strong>ISS</strong> Facility Services AS (1)<br />
� <strong>ISS</strong> NV (1)<br />
� <strong>ISS</strong> Holding Nederland BV (1)<br />
� <strong>ISS</strong> Nederland BV<br />
� <strong>ISS</strong> Facility Services Holding AB (1)<br />
� <strong>ISS</strong> Facility Services AB<br />
� <strong>ISS</strong> UK Holding Limited (1)<br />
� <strong>ISS</strong> UK Limited<br />
� <strong>ISS</strong> Mediclean Limited<br />
� <strong>ISS</strong> Facility Services Limited<br />
36<br />
Summary <strong>of</strong> Principal Terms and Conditions<br />
Pursuant to the Senior Credit Facilities Agreement, each Material Company will grant a guarantee,<br />
together with security over its bank accounts, trade receivables, intercompany receivables and<br />
intellectual property. In addition the shares in such Material Company will be pledged and in<br />
specifically agreed cases shares that the Material Company holds in certain <strong>of</strong> its subsidiaries will be<br />
pledged (although please note that <strong>ISS</strong> will not pledge its shares in <strong>ISS</strong> Global). A floating charge will<br />
be granted from each Material Company incorporated in England and Wales.<br />
Given the granularity <strong>of</strong> the Group, which comprises a significant number <strong>of</strong> entities, the Arrangers<br />
have looked at the gross assets, revenues and EBITDA figures on a jurisdiction by jurisdiction basis to<br />
determine which jurisdiction is a material jurisdiction. The holding company in a material jurisdiction<br />
has then been identified as a Material Company. These countries include France, Spain, Finland,<br />
Norway, Belgium, The Netherlands, Sweden, the UK and Denmark. In addition, security includes<br />
share pledges over the holding company in: Hong Kong, Singapore, Austria, Germany, Portugal,<br />
Switzerland and Ireland. The total share pledges represent approximately 90% 6 <strong>of</strong> revenues and<br />
assets <strong>of</strong> the Group.<br />
The alternative enforcement scenario would therefore be enforcement <strong>of</strong> the share pledges on a<br />
jurisdiction by jurisdiction basis, so that local groups could be sold <strong>of</strong>f individually. As the vast majority<br />
<strong>of</strong> the group's intellectual property portfolio is held by <strong>ISS</strong>, the Lenders would also look to enforce their<br />
intellectual property pledge from <strong>ISS</strong> in these circumstances.<br />
Notably, no security or guarantees were granted by <strong>ISS</strong> or its subsidiaries for the borrowings <strong>of</strong> <strong>ISS</strong><br />
Holding.<br />
Finally, subject to agreed limits, the providers <strong>of</strong> foreign exchange treasury transactions and local<br />
overdraft facilities to the <strong>ISS</strong> Group will share in the senior guarantee and security package but without<br />
any rights <strong>of</strong> enforcement.<br />
The relationship between the senior secured and subordinated lenders will be governed by an<br />
intercreditor agreement. The equity contribution will be subordinated on terms agreeable to the senior<br />
and subordinated lenders.<br />
This Summary <strong>of</strong> Principal Terms and Conditions is for Senior Credit Facilities (the “Facilities”) made<br />
available to <strong>ISS</strong> Holding, for the purpose <strong>of</strong> financing the Acquisition.<br />
6 Note that jurisdictions report on a local GAAP basis, so only estimates are available. Average foreign exchange rates for the period January<br />
1 through December 31 were used to convert local revenues, assets, and EBITDA into DKK.
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II. Summary <strong>of</strong> Senior Facilities<br />
Terms Senior Secured Credit Facilities<br />
37<br />
Summary <strong>of</strong> Principal Terms and Conditions<br />
Borrower: <strong>ISS</strong> Holding A/S, <strong>ISS</strong> Global A/S and other members <strong>of</strong> the Group incorporated in<br />
approved jurisdictions which accede as borrowers.<br />
Amount: Term Loan A: DKK2,000m (EUR 270m), drawn down in 40% SEK, 45% NOK and<br />
15% CHF.<br />
Term Loan B: DKK3,675m (EUR 493m), drawn down in 50% EUR and 50% £<br />
Revolver: DKK1,750m (EUR 235m) (committed) and DKK 750m (EUR 100m)<br />
(uncommitted)<br />
L/C Facility: DKK500m (EUR 66m)<br />
Acquisition Facility: DKK1,750m (EUR 235m) (Committed – Tranche A) and<br />
DKK3,500m (EUR 470m) (Uncommitted – Tranche B)<br />
Maturity: Term Loan A : 7 years<br />
Term Loan B : 8.5 years<br />
Revolver : 7 years<br />
L/C Facility : 7 years<br />
Acquisition Facility : 7 years (Tranche A), 8.5 years (Tranche B)<br />
Indicative Interest Rates: Term Loan A : E/L +225bps<br />
Term Loan B : E/L +275bps<br />
Revolver : E/L +225bps<br />
L/C Facility : E/L +225bps<br />
Acquisition Facility : E/L +225bps<br />
Amortization Schedule: Term Loan A : WAL 4.5 years<br />
Term Loan B : In two equal instalments at 8 years and 8.5 years<br />
Revolver : Bullet<br />
L/C Facility : Bullet<br />
Acquisition Facility:<br />
Committed : Tranche A: Amortising<br />
Uncommitted : Tranche B: In two equal instalments at 8 years and<br />
8.5 years<br />
Ranking: Senior<br />
Security:<br />
Share pledge over the share capital <strong>of</strong> <strong>ISS</strong> A/S in addition to security over shares,<br />
receivables, IP and bank accounts and floating charges from material companies<br />
incorporated in the UK provided in accordance with the agreed principles.<br />
To the extent that the senior debt is refinanced by <strong>ISS</strong> Global, and such debt is<br />
secured by <strong>ISS</strong> Global, then the senior lenders will rank ahead <strong>of</strong> the EMTN<br />
holders, who have an unsecured claim against <strong>ISS</strong> Global. Security documents<br />
entered into by <strong>ISS</strong> Global and its subsidiaries contain provisions to ensure that if<br />
any <strong>of</strong> the indebtedness that would otherwise be secured by them constitutes<br />
"Relevant Indebtedness", as defined in the Medium Term Notes, then that<br />
indebtedness is not secured by the relevant security document.<br />
Notably, no security or guarantees were granted by <strong>ISS</strong> or its subsidiaries for the<br />
borrowings <strong>of</strong> <strong>ISS</strong> Holding.<br />
Guarantees: From <strong>ISS</strong> Holding A/S, <strong>ISS</strong> A/S, <strong>ISS</strong> Global A/S and each material company<br />
(determined by reference to 5% <strong>of</strong> EBITDA, gross assets or turnover), subject to the<br />
agreed principles<br />
Call/Repayment Premium: None<br />
Mandatory Repayment: In full upon a change <strong>of</strong> control or a sale <strong>of</strong> all or substantially all <strong>of</strong> the assets <strong>of</strong> the<br />
Group. With 100% <strong>of</strong> Net IPO Proceeds until a leverage ratio <strong>of</strong> 3.5:1 is achieved<br />
and thereafter 50% <strong>of</strong> Net IPO Proceeds until a leverage ratio <strong>of</strong> 2.5:1 is achieved.<br />
From net disposal, insurance and report proceeds, and from the proceeds <strong>of</strong> a<br />
permitted securitisation. With 50% <strong>of</strong> Excess Cashflow for any financial year<br />
commencing on or after 31 December 2005<br />
Covenants: Standard and customary to include: minimum interest and fixed charge coverage,<br />
maximum leverage, maximum capital expenditure
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IV. Industry Overview<br />
38<br />
Industry Overview
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A. Industry Overview<br />
39<br />
Industry Overview<br />
The market data included in this section represent estimates taken from external sources. While <strong>ISS</strong><br />
Holding has compiled, extracted and reproduced market or other industry data from external sources,<br />
including third party or industry or general publications, <strong>ISS</strong> has not independently verified such data.<br />
Where percentage ranges are presented, these ranges represent the estimated range <strong>of</strong> average<br />
growth rates <strong>of</strong> the relevant service in the major countries within the European facility services market.<br />
There can be no assurance as to the accuracy and completeness <strong>of</strong>, and <strong>ISS</strong> Holding and its<br />
subsidiaries take no responsibility for, such data.<br />
Acquisition vehicles controlled by funds advised by the Sponsors commissioned an internationally<br />
recognized consulting firm to prepare an independent survey <strong>of</strong> the European facility services market,<br />
<strong>ISS</strong>’s primary market. <strong>ISS</strong> believes that its non-European markets generally exhibit characteristics<br />
that are similar to the European facility services industry, although the European market may be more<br />
mature in certain respects. For purposes <strong>of</strong> the survey, the European facility services market was<br />
defined as cleaning, property, <strong>of</strong>fice and catering services within the broader market in Europe for<br />
support services that facilitate the primary operations <strong>of</strong> private and public sector entities. The facility<br />
services market and its various segments may be defined in a number <strong>of</strong> ways, and competitors within<br />
the facility services market may define the market differently.
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B. European Facility Services Market<br />
40<br />
Industry Overview<br />
According to the independent market survey, the European facility services market had an overall<br />
market size <strong>of</strong> approximately EUR 230 billion in 2004 and it has had average revenue growth <strong>of</strong><br />
approximately 3% per year between 2000 and 2004. The primary segments <strong>of</strong> the European facility<br />
services market are further described below:<br />
� Cleaning services. Includes cleaning <strong>of</strong> <strong>of</strong>fices and facilities, including window cleaning and<br />
washroom services, and specialized cleaning, including services for food producers and<br />
processors. The European cleaning services market in 2004 was approximately EUR 41 billion and<br />
its historical annual revenue growth was in the range <strong>of</strong> 2% to 4% from 2000 to 2004. Although<br />
growth varied by country and period, certain local markets experienced lower or higher growth and<br />
certain mature markets experienced lower or even negative growth.<br />
� Property services. Includes property maintenance, security, waste management, landscaping,<br />
ventilation, car-park services, pest control, sewage and damage control services. Damage control<br />
services relate to the remediation <strong>of</strong> damage caused to property by extraordinary events, such as<br />
fires, floods, storms and vandalism. The European market for property services in 2004 was<br />
approximately EUR 160 billion to EUR 167 billion and historical annual revenue growth was in the<br />
range <strong>of</strong> 1% to 4% from 2000 to 2004. The primary property services market segments are:<br />
— Building maintenance and general property services. The value <strong>of</strong> the European building<br />
maintenance and general property services market in 2004 was approximately EUR 65 billion<br />
and historical annual revenue growth was approximately 3% from 2000 to 2003.<br />
— Security services. The value <strong>of</strong> the European security services market in 2004 was<br />
approximately EUR 30 billion and historical annual revenue growth was approximately 4% from<br />
2000 to 2004.<br />
— Waste management. The value <strong>of</strong> the European waste management market in 2004 was<br />
approximately EUR 38 billion and historical annual revenue growth was approximately 2% from<br />
2000 to 2003<br />
— Damage control. The value <strong>of</strong> the European damage control services market in 2004 was<br />
approximately EUR 12 billion to EUR 16 billion and historical annual revenue growth was<br />
approximately 1% from 2000 to 2002.<br />
— Landscaping. The value <strong>of</strong> the European landscaping market in 2004 was approximately EUR<br />
7 to EUR 10 billion and historical annual revenue growth was in the range <strong>of</strong> 2% to 4% from<br />
2000 to 2003.<br />
— Pest control. The value <strong>of</strong> the European pest control market in 2004 was approximately EUR<br />
1 billion and historical annual revenue growth was approximately 1% from 2000 to 2003.<br />
� Office support services. Includes the operation <strong>of</strong> call centers, reception and mail room services<br />
within customer facilities, but excludes temporary staffing services where the provider does not<br />
manage the temporary staff. The European market for <strong>of</strong>fice support services in 2004 was<br />
approximately EUR 6 billion and historical annual revenue growth was approximately 4% from<br />
2000 to 2004, with higher growth in certain local markets particularly within emerging markets.<br />
Catering services. Includes the operation <strong>of</strong> canteens within customer facilities, but excludes<br />
concessions to operate catering facilities and vending machine operations. The value <strong>of</strong> the European<br />
catering services market in 2004 was approximately EUR 19 billion and historical annual revenue<br />
growth was approximately 4% from 2000 to 2004.
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C. Demand Drivers<br />
<strong>ISS</strong> believes that the key drivers <strong>of</strong> the demand for facility services are, amongst others:<br />
41<br />
Industry Overview<br />
� Macroeconomics. Within a particular country, the demand for facility services generally correlates<br />
with economic conditions, including growth in that country’s gross domestic product. However, the<br />
facility services industry is normally considered to be less sensitive to economic cycles than certain<br />
other industries as there is a basic demand among customers for cleaning and other facility<br />
services in order to maintain their facilities and operate their businesses. In addition to being<br />
resilient in economic downturns, economic trends tend to affect facility services providers later in a<br />
macroeconomic cycle.<br />
� Outsourcing. There is a general trend toward outsourcing <strong>of</strong> facility service functions, which has in<br />
the past been a driver <strong>of</strong> demand for these services. The decision to outsource is dependent upon<br />
customer perceptions regarding the price and quality <strong>of</strong> outsourced services. Focused facility<br />
services companies seek to improve service quality and reduce customer costs by creating skill,<br />
scale and scope benefits across the various services delivered. Within the public sector, the<br />
decision to outsource is also based on price and quality considerations. However, decision making<br />
in the public sector is additionally influenced by political considerations, which will vary from country<br />
to country.<br />
D. Industry Characteristics<br />
Fragmented industry. The market among small and medium sized customers for basic facility<br />
services is highly fragmented, and there are believed to be more than 75,000 operators in this market.<br />
The independent market survey concluded that about two-thirds <strong>of</strong> these operators employ fewer than<br />
ten people. Basic facility services, including general cleaning services, can be provided with very<br />
limited resources and, as a result <strong>of</strong> these low barriers to entry, it is likely that the market for basic<br />
facility services will continue to include a large number <strong>of</strong> smaller operators. However, within each<br />
market there are generally only a few providers that have sufficient resources to provide customers<br />
with a full-range <strong>of</strong> facility services and to service larger, multi-location customers.<br />
E. Industry Trends<br />
� Pr<strong>of</strong>essionalisation <strong>of</strong> the facility services industry. Facility services have historically been<br />
delivered on a local basis and, due to the fragmented nature <strong>of</strong> the market, users have in the past<br />
tended to view these services as a commoditized service. However, as part <strong>of</strong> the industry<br />
consolidation and emergence <strong>of</strong> integrated facility services, facility services providers like <strong>ISS</strong> are<br />
increasingly able to differentiate their services and leverage their scope and scale to establish<br />
reputations and brand identities. As a result, there is an increasing division between the larger<br />
facility services companies with integrated facility services capabilities and providers <strong>of</strong> basic<br />
services to smaller customers.<br />
� Industry consolidation. The facility services market is undergoing consolidation as larger facility<br />
services providers seek to achieve economic benefits associated with the creation <strong>of</strong> operational<br />
scale and scope at the local, national and international level. Local benefits include the crossutilization<br />
<strong>of</strong> resources between sites, leveraging <strong>of</strong> overhead costs and sharing <strong>of</strong> best practices.<br />
At the national level, benefits accrue mainly in the form <strong>of</strong> increased credibility as a contract<br />
provider and more efficient management and administrative functions. At the international level,<br />
the service provider is able to leverage existing customer relationships across regions to gain<br />
further contracts, purchasing benefits and further share best practices and management<br />
capabilities.<br />
� Service integration. <strong>ISS</strong> believes that there is increasing demand for integrated facility services,<br />
which the independent market survey defines as the provision <strong>of</strong> multiple facility services managed<br />
on-site by the provider through a single point <strong>of</strong> contact. The independent market survey<br />
concluded that the market for integrated facility services had revenue growth <strong>of</strong> approximately 12%<br />
from 2000 to 2003. As integrated facility services is a relatively new trend, its penetration rate<br />
remains low and projected revenue growth rates are higher than the growth rate <strong>of</strong> the general<br />
facility services market.
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42<br />
Industry Overview
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V. Company Overview<br />
43<br />
Company Overview
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A. Company Description<br />
44<br />
Company Overview<br />
<strong>ISS</strong> is one <strong>of</strong> the world's largest providers <strong>of</strong> facility services, with operations in 43 countries in Europe,<br />
South America, Asia, and Australia. <strong>ISS</strong> is Europe's largest provider <strong>of</strong> cleaning services and is one <strong>of</strong><br />
the top three cleaning companies, based on revenue, in Austria, Belgium, Hong Kong, the Netherlands,<br />
the Nordic region (Sweden, Denmark, Norway and Finland), Singapore, Spain, Switzerland, and the<br />
United Kingdom. <strong>ISS</strong> has a diversified customer base <strong>of</strong> more than 100,000 public and private sector<br />
customers. The Company employs more than 305,000 employees worldwide and is among Europe's<br />
ten largest private employers as <strong>of</strong> September 30, 2005. In 2004, <strong>ISS</strong> had total revenue <strong>of</strong> DKK 40.4<br />
billion (EUR 5.4 billion) and EBITDA <strong>of</strong> DKK 2.9 billion (EUR 386 million). For the twelve months<br />
ended September 30, 2005, <strong>ISS</strong> had revenue <strong>of</strong> DKK 45.1 billion (EUR 6.0 billion) and EBITDA <strong>of</strong><br />
DKK 3.3 billion (EUR 440 million).<br />
Figure 11: Geographical Breakdown <strong>of</strong><br />
Revenues in 2004<br />
Belgium and<br />
Luxembourg<br />
5%<br />
The Netherlands 8%<br />
Note:<br />
Germany<br />
4%<br />
Spain 4%<br />
Finland 6%<br />
Other<br />
14%<br />
Norway<br />
8%<br />
Denmark<br />
9%<br />
France<br />
19%<br />
UK<br />
14%<br />
Sweden<br />
(excluding<br />
Health Care<br />
operations)<br />
9%<br />
Figure 12: Geographical Breakdown <strong>of</strong> EBITA<br />
in 2004<br />
Sweden (excluding Health Care operations) 5%<br />
Belgium and<br />
Luxembourg<br />
5%<br />
Other 2%<br />
Switzerland 3%<br />
Austria 4%<br />
Spain 5%<br />
Finland<br />
9%<br />
Norway<br />
9%<br />
France<br />
23%<br />
Denmark<br />
10%<br />
The Netherlands 9%<br />
(1) EBITA represents Earnings before Interest, Taxes, Amortization, Other Income and Expenses, and Income from Associates. Further<br />
amortization, which is not included herein, is amortization <strong>of</strong> goodwill under Danish GAAP or amortization <strong>of</strong> customer contracts under IFRS.<br />
Source: <strong>ISS</strong><br />
<strong>ISS</strong> has been operating for more than 100 years. The Company began as a security company and<br />
began <strong>of</strong>fering cleaning services in 1934. Since that time, <strong>ISS</strong> has expanded its business, both<br />
through organic growth and acquisitions, and its facility services currently include:<br />
� Cleaning services, which represented approximately 66% <strong>of</strong> 2004 revenue, include daily <strong>of</strong>fice<br />
and facility cleaning, dust control, washroom and specialized cleaning services;<br />
� Property services, which represented approximately 21% <strong>of</strong> 2004 revenue, include landscaping,<br />
damage control, building maintenance and technical services and pest control services;<br />
� Office support services, which represented approximately 5% <strong>of</strong> 2004 revenue, include call<br />
centre, reception, <strong>of</strong>fice logistics and access control services;<br />
� Catering services, which represented approximately 5% <strong>of</strong> 2004 revenue, include company<br />
restaurants, event catering, executive dining and corporate catering and <strong>of</strong>fice catering solutions<br />
such as c<strong>of</strong>fee points; and<br />
UK<br />
16%
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45<br />
Company Overview<br />
� Integrated Facility Services, which represented approximately 3% <strong>of</strong> 2004 revenue, consist <strong>of</strong> the<br />
provision <strong>of</strong> multiple facility services with on-site management and a single point <strong>of</strong> contact for the<br />
customer.<br />
In recent years, <strong>ISS</strong> has increasingly <strong>of</strong>fered its customers integrated facility services. By providing onsite<br />
management, integrated facility services are intended to relieve a customer from the need to<br />
supervise and manage various suppliers <strong>of</strong> facility services and to reduce its overhead costs;<br />
integrated facility services also allow <strong>ISS</strong> to leverage on-site labour synergies.<br />
Figure 13: <strong>ISS</strong> Service Overview (1)<br />
Facilities Services<br />
Cleaning Property Catering Office IFS<br />
Daily Office<br />
Cleaning<br />
Dust Control<br />
Washroom<br />
Services<br />
Specialised<br />
Cleaning<br />
Food Hygiene<br />
Maintenance<br />
Landscaping<br />
HVAC<br />
Pest Control<br />
Damage Control<br />
Operation <strong>of</strong><br />
Canteens Within<br />
Customer<br />
Facilities<br />
Event Catering<br />
Call Centres<br />
Reception<br />
Services<br />
Office Logistics<br />
Access Control<br />
Integrated<br />
Facilities<br />
Services<br />
Revenue<br />
(’04 DKKmn) 26,429 8,252 2,003 1,822 1,230<br />
% <strong>of</strong> Total<br />
Revenue 66% 21% 5% 5% 3%<br />
Note:<br />
(1) Excludes Health Care operations, which was divested in two separate transactions in H1 2005.<br />
Source: <strong>ISS</strong><br />
B. History<br />
<strong>ISS</strong>’s business dates back to 1901 with the establishment <strong>of</strong> a security company in Copenhagen. In<br />
1934 this company’s activities were expanded to include cleaning services. The business expanded<br />
into Sweden in 1946 and into Norway in 1952. Expansion continued during the 1960s and 1970s, with<br />
new subsidiaries in Finland, Germany, Switzerland, Belgium, the Netherlands, Austria and Spain. In<br />
1973 the name <strong>of</strong> the parent company was changed to ‘‘<strong>ISS</strong>”. In 1977 <strong>ISS</strong>’s common shares were<br />
listed on the Copenhagen Stock Exchange. By the end <strong>of</strong> the 1970s, <strong>ISS</strong> had annual revenue in<br />
excess <strong>of</strong> DKK 1 billion, was operating in 15 countries and had approximately 50,000 employees. By<br />
1989, <strong>ISS</strong>’s revenue and its number <strong>of</strong> employees had doubled. International expansion continued<br />
throughout the 1980s and 1990s, primarily through acquisitions in countries in which <strong>ISS</strong> had existing<br />
operations, but also in South America. From 1979 to 1997 <strong>ISS</strong> had operations in the United States.<br />
<strong>ISS</strong> established its Asian operations in the late 1990s.
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<strong>Table</strong> 17: Key Historical Events<br />
1901<br />
1934<br />
1946<br />
1952<br />
1965<br />
1975<br />
1977<br />
1979<br />
1988<br />
1989<br />
1996<br />
1997<br />
1999<br />
2000<br />
2001<br />
2002<br />
2005<br />
2005<br />
2005<br />
<strong>ISS</strong> is established<br />
46<br />
Company Overview<br />
Det Danske Rengøringsselskab A/S (The Danish Cleaning Company) is established as an independent subsidiary <strong>of</strong> the security<br />
company<br />
The first geographical expansion outside Denmark, into the Swedish market<br />
Norsk Rengjøringsselskap AS is set up in Norway<br />
Starts up cleaning services operations in Germany<br />
The consolidated revenues <strong>of</strong> the Group reaches DKK 1 billion<br />
<strong>ISS</strong>’s shares are listed on the Copenhagen Stock Exchange (1)<br />
Expands into the US through acquisition<br />
Acquires cleaning companies in Denmark, Norway, Sweden, West Germany and the USA. These acquisitions bring the total<br />
number <strong>of</strong> Group employees past 100,000<br />
Acquires cleaning companies in the UK, Sweden and Germany. <strong>ISS</strong>’s B-shares are listed on the International Stock Exchange<br />
in London<br />
Signs an agreement to sell <strong>ISS</strong> Inc. (<strong>ISS</strong>’s US subsidiary) to Aaxis Limited, a Montreal-listed company, simultaneously taking a<br />
19.5% stake in Aaxis<br />
Sale <strong>of</strong> <strong>ISS</strong> Inc. is completed. <strong>ISS</strong> American Depositary Receipts (ADRs) are de-listed from the New York Stock Exchange<br />
Acquires Abilis, the second largest European provider <strong>of</strong> cleaning and specialised services, in a DKK 3.6 billion acquisition, the<br />
Group's largest ever. Abilis has approximately 50,000 employees and an annual revenues in 1998 <strong>of</strong> DKK 5.2 billion<br />
Eric Rylberg is appointed CEO. A new five-year strategy create2005 is launched introducing the facility services concept<br />
Celebrates 100 year anniversary.<br />
Acquires Eurogestion to expand service <strong>of</strong>fering in pest control and enters the Australian market<br />
Sale <strong>of</strong> 100% <strong>of</strong> the Health Care operations to EQT Partners in two separate transactions<br />
Route101 Strategy communicated to shareholders<br />
<strong>ISS</strong> taken private by funds advised by EQT Partners and Goldman Sachs Capital Partners<br />
Note:<br />
(1) <strong>ISS</strong>’s shares were delisted on June 21, 2005 in connection with the Acquisition.<br />
C. Services Overview<br />
Please see below for a more detailed description <strong>of</strong> the four individual service <strong>of</strong>ferings and IFS;<br />
1. Cleaning Services<br />
<strong>ISS</strong> provides daily <strong>of</strong>fice and facility cleaning for commercial customers, dust control and washroom<br />
services and specialized cleaning services. <strong>ISS</strong>’s dust control services consist primarily <strong>of</strong> the<br />
provision and cleaning <strong>of</strong> floor mats, as well as the provision <strong>of</strong> various other entry-way solutions.<br />
<strong>ISS</strong>’s washroom services include a washroom services solution, in which <strong>ISS</strong> provides technical and<br />
hygiene services and products, including hardware, such as soap dispensers, and consumables such<br />
as paper towels. <strong>ISS</strong> also provides cleaning services to customers with specialized requirements such<br />
as medical facilities, automotive paint shops and ‘‘clean room’’ facilities used by manufacturers <strong>of</strong><br />
electronic components. Specialized services also include food hygiene services, which involve the<br />
cleaning <strong>of</strong> food production and preparation facilities to particular hygiene standards and consulting<br />
services relating to bacterial management.<br />
<strong>ISS</strong> <strong>of</strong>fers cleaning services in all <strong>of</strong> its operations. Set forth below is unaudited information regarding<br />
<strong>ISS</strong>’s cleaning services revenue for the periods presented. Percentage figures represent the<br />
proportion <strong>of</strong> total <strong>ISS</strong> revenue for such periods.
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<strong>Table</strong> 18: Breakdown <strong>of</strong> Revenues, Cleaning Services<br />
47<br />
For the Year Ended 31-Dec<br />
2002 2003 2004<br />
Company Overview<br />
Revenues (1) : (unaudited) DKK (‘000) (% <strong>of</strong> total) DKK (‘000) (% <strong>of</strong> total) DKK (‘000) (% <strong>of</strong> total)<br />
Cleaning services:<br />
Other Cleaning Services 25,134 70 24,329 68 25,107 63<br />
Food Hygiene Services 1,058 3 861 2 930 2<br />
Washrooms and Dust Control 190 1 209 1 392 1<br />
Total Cleaning Services 26,382 74 25,399 71 26,429 66<br />
Note:<br />
(1) Excludes revenues attributable to discontinued operations.<br />
Source: <strong>ISS</strong><br />
2. Property Services<br />
<strong>ISS</strong> provides Property Services, which comprise landscaping, damage control, building maintenance<br />
and technical services and pest control services. <strong>ISS</strong>’s landscaping services include the design,<br />
construction and maintenance <strong>of</strong> gardens, parks and other green areas. <strong>ISS</strong> also provides damage<br />
control services in which it assists customers who have incurred damage as a result <strong>of</strong> natural<br />
disasters, fires, floods and other extraordinary events. These damage control services include<br />
restoration, including the recovery <strong>of</strong> data from information technology systems and damage<br />
containment. <strong>ISS</strong>’s building maintenance and technical services range from janitorial services to more<br />
specialized services such as the maintenance <strong>of</strong> heating, ventilation and air conditioning systems. Its<br />
pest control services range from prevention and eradication to disinfection and hygiene consulting<br />
services in relation to rodents, insects, birds and other pests.<br />
Currently, <strong>ISS</strong> <strong>of</strong>fers its property services primarily in Northern Europe, Continental Europe, and<br />
Australia. The following unaudited table indicates <strong>ISS</strong>’s revenue from its various property services for<br />
the periods presented. Percentage figures represent the proportion <strong>of</strong> total <strong>ISS</strong> revenue for such<br />
periods.<br />
<strong>Table</strong> 19: Breakdown <strong>of</strong> Revenues, Property Services<br />
For the Year Ended 31-Dec<br />
2002 2003 2004<br />
Revenues (1) : (unaudited)<br />
Property Services:<br />
DKK (‘000) (% <strong>of</strong> total) DKK (‘000) (% <strong>of</strong> total) DKK (‘000) (% <strong>of</strong> total)<br />
Landscaping 1,839 5 2,164 6 2,804 7<br />
Damage Control 1,731 5 1,818 5 1,656 4<br />
Building Maintenance and Technical<br />
Services<br />
1,560 4 1,612 5 2,696 7<br />
Pest Control 677 2 907 3 1,096 3<br />
Total Property Services 5,807 16 6,501 19 8,252 21<br />
Note:<br />
(1) Excludes revenues attributable to discontinued operations.<br />
Source: <strong>ISS</strong><br />
3. Office Support Services<br />
<strong>ISS</strong> provides a broad range <strong>of</strong> <strong>of</strong>fice support services such as call centres and reception services,<br />
including switchboard, help desk and front desk staffing and the booking <strong>of</strong> meeting rooms. In addition,<br />
<strong>of</strong>fice services include <strong>of</strong>fice logistics, including mail processing, document copying, printing and<br />
shredding, data entry and scanning, <strong>of</strong>fice moves and stationery supply services. <strong>ISS</strong> also provides<br />
access control services, including security protection <strong>of</strong> property, assets and people.
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48<br />
Company Overview<br />
<strong>ISS</strong> <strong>of</strong>fers <strong>of</strong>fice support services primarily in Northern Europe. Set forth below is unaudited<br />
information regarding <strong>ISS</strong>’s <strong>of</strong>fice support services revenue for the periods presented. Percentage<br />
figures represent the proportion <strong>of</strong> total <strong>ISS</strong> revenue for such periods.<br />
<strong>Table</strong> 20: Breakdown <strong>of</strong> Revenues, Office Services<br />
2002<br />
For the Year Ended 31-Dec<br />
2003 2004<br />
Revenues (1) : (unaudited) DKK (‘000) (% <strong>of</strong> total) DKK (‘000) (% <strong>of</strong> total) DKK (‘000) (% <strong>of</strong> total)<br />
Office Support Services 1,021 3 1,179 3 1,822 5<br />
Note:<br />
(1) Excludes revenues attributable to discontinued operations.<br />
Source: <strong>ISS</strong><br />
4. Catering services<br />
<strong>ISS</strong>’s catering services consist primarily <strong>of</strong> the operation <strong>of</strong> company restaurants, ranging from<br />
production floor canteens to event catering, executive dining rooms, corporate catering and <strong>of</strong>fice<br />
catering solutions such as c<strong>of</strong>fee points.<br />
Currently, <strong>ISS</strong> <strong>of</strong>fers its catering services primarily in Northern Europe. However, <strong>ISS</strong> recently<br />
introduced catering services in the Netherlands, Belgium and Singapore. Set forth below is unaudited<br />
information regarding the catering services revenue for the periods presented. Percentage figures<br />
represent the proportion <strong>of</strong> total <strong>ISS</strong> revenue for such periods.<br />
<strong>Table</strong> 21: Breakdown <strong>of</strong> Revenues, Catering Services<br />
2002<br />
For the Year Ended 31-Dec<br />
2003 2004<br />
Revenues (1) : (unaudited) DKK (‘000) (%) DKK (‘000) (%) DKK (‘000) (%)<br />
Catering Services 1,543 4 1,476 4 2,003 5<br />
Note:<br />
(1) Excludes revenues attributable to discontinued operations.<br />
Source: <strong>ISS</strong><br />
5. Integrated facility services<br />
Integrated facility services refers to the provision <strong>of</strong> two or more <strong>of</strong> the facility services described<br />
above, together with on-site management through a single point <strong>of</strong> contact with the customer. In<br />
addition, <strong>ISS</strong>’s integrated facility services may include, among other things, space management,<br />
relocation and move management, property management and project management services. Where it<br />
provides integrated facility services, <strong>ISS</strong> is able to assume responsibility for customers’ facilities, and<br />
manages the provision <strong>of</strong> other <strong>ISS</strong> services, as well as coordinating third party service suppliers.<br />
By providing on-site management, <strong>ISS</strong> believes that integrated facility services strengthen customer<br />
relationships by involving it in more aspects <strong>of</strong> the customer’s business. In addition, integrated facility<br />
services <strong>of</strong>fer the opportunity to reduce customers’ overhead costs and for <strong>ISS</strong> to leverage on-site<br />
labour synergies.<br />
<strong>ISS</strong>’s provision <strong>of</strong> integrated facility services varies depending on its service <strong>of</strong>ferings in a particular<br />
country. In general, the greatest opportunity to provide customers with integrated facility services is in<br />
those countries in Northern Europe in which <strong>ISS</strong> <strong>of</strong>fers its full range <strong>of</strong> facility services. In some<br />
regions, particularly Overseas, <strong>ISS</strong>’s does not <strong>of</strong>fer integrated facility services as its business in those
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49<br />
Company Overview<br />
countries remains focused almost exclusively on cleaning services. Set forth below is information<br />
regarding integrated facility services revenue for the periods presented. Percentage figures represent<br />
the proportion <strong>of</strong> total <strong>ISS</strong> revenue for such periods.<br />
<strong>Table</strong> 22: Breakdown <strong>of</strong> Revenues, Integrated Facility Services<br />
2002<br />
For the Year Ended 31-Dec<br />
2003 2004<br />
Revenues (1) : (unaudited) DKK (‘000) (%) DKK (‘000) (%) DKK (‘000) (%)<br />
Integrated Facility Services 907 3 916 3 1,229 3<br />
Note:<br />
(1) Excludes revenues attributable to discontinued operations.<br />
Source: <strong>ISS</strong><br />
It is <strong>ISS</strong>’s experience that both owners and users <strong>of</strong> facilities benefit from the outsourcing <strong>of</strong> support<br />
services. The extent <strong>of</strong> potential cost savings generally depends on whether the customers outsource<br />
single services, or opt for sourcing multiple services from one individual supplier. The more services<br />
and the higher the level <strong>of</strong> service integration, the greater the potential savings are as it enables the<br />
customer to effectively reduce overhead costs and the overall facility service costs. As part <strong>of</strong> the<br />
service solution, <strong>ISS</strong> can manage the entire service delivery and ensure staff flexibility, quality <strong>of</strong><br />
service and reliability in a cost efficient manner, whilst customers can focus on their core operations. It<br />
should also be stressed that the IFS market is predicted to grow the fastest <strong>of</strong> all the individual facility<br />
services markets over the coming years 7 .<br />
The transformation <strong>of</strong> the business towards integrated facility services suppliers varies by country. In<br />
particular some regions, Overseas and Southern Europe, the businesses remain almost exclusively a<br />
cleaning services which provides scope for further expansion <strong>of</strong> the IFS <strong>of</strong>fering. However, within<br />
most Northern European countries, <strong>ISS</strong> <strong>of</strong>fers a full range <strong>of</strong> integrated facility services, a trend which<br />
contributed to the improved margins in the region during 2004.<br />
The gradual transformation <strong>of</strong> <strong>ISS</strong> from a cleaning service supplier to a multi-services and IFS provider<br />
continued in 2004, spearheaded by those <strong>ISS</strong> organisations with the most developed facility services<br />
concepts e.g. Nordic countries. A number <strong>of</strong> new facility services contracts were won, some <strong>of</strong> which<br />
comprised a range <strong>of</strong> integrated services. These include:<br />
� Nordea. <strong>ISS</strong>’s contract with Nordea, a leading financial services group in the Nordic and Baltic<br />
regions, was signed in December 2004. Generating more than DKK 100 million annual revenue,<br />
the deal was one <strong>of</strong> the largest <strong>of</strong> its kind in Northern Europe covering three main areas: catering<br />
(canteens and restaurants on major Nordea sites), cleaning (some 400,000 metres squared <strong>of</strong><br />
<strong>of</strong>fice space) and reception services. The deal supports <strong>ISS</strong>’s ambition to deliver Integrated<br />
Facility Services solutions with both a domestic and an international scope and runs for three years,<br />
after which it is subject to renewal. More than 270 <strong>of</strong> <strong>ISS</strong>’s employees now work at Nordea’s sites<br />
in the four countries, including operatives and managers transferring from Nordea to <strong>ISS</strong>.<br />
� Other IFS Wins. Other examples <strong>of</strong> new integrated facility services contracts in 2004 include an<br />
expansion <strong>of</strong> the CSC contract on a pan-European scale, Norsk Hydro in Norway, Renault/Nissan,<br />
ICI and Chelsea & Westminster Hospital in the UK and Seagate in Thailand.<br />
D. Operations<br />
<strong>ISS</strong> maintains a decentralized organizational structure in which the chief executive <strong>of</strong>ficer <strong>of</strong> each<br />
country’s operations typically reports directly to the <strong>ISS</strong> head <strong>of</strong>fice in Copenhagen. Each <strong>of</strong> the<br />
country organizations is separately organized and acts independently in its local market. <strong>ISS</strong>’s head<br />
<strong>of</strong>fice performs certain centralized functions, including procurement, risk management, finance, legal,<br />
treasury, information technology, human resources, international sales and key account management<br />
and supervision <strong>of</strong> mergers and acquisitions. <strong>ISS</strong> is broken up into the following regions:<br />
� Northern Europe; comprising the United Kingdom, Denmark, Norway, Sweden, Finland, Ireland,<br />
7 Source: Internationally recognised consulting firm
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Iceland, and Russia.<br />
50<br />
Company Overview<br />
� Continental Europe; comprising France, the Netherlands, Belgium and Luxembourg, Spain,<br />
Germany, Switzerland, Austria, Central and Eastern Europe (the Czech Republic, Slovenia,<br />
Slovakia, Hungary, Croatia and Romania), Portugal, Greece, Italy, Poland, Turkey, and Estonia.<br />
� Overseas; comprising Israel, China, Hong Kong, Brazil, Singapore, Australia, Thailand, India,<br />
Indonesia, Malaysia, Argentina, Chile, Sri Lanka, Brunei, Uruguay and New Zealand.<br />
In 2004, Northern Europe, Continental Europe and Overseas represented 45%, 50% and 5% <strong>of</strong><br />
revenues respectively. <strong>ISS</strong> employed more than 305,000 employees as <strong>of</strong> September 30, 2005, <strong>of</strong><br />
which only approximately 91 employees were in its head <strong>of</strong>fice.<br />
The following table contains information relating to sales, operating pr<strong>of</strong>it, margin and employees for<br />
each <strong>of</strong> the countries in which <strong>ISS</strong> operates.
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<strong>Table</strong> 23: Unaudited Breakdown <strong>of</strong> Operations by Country (2004)<br />
51<br />
Company Overview<br />
Country (1) Revenue (DKK million) Margin (%) (2) Employees (3)<br />
Northern Europe:<br />
The United Kingdom 5,537 6.6 37,890<br />
Denmark (4) 3,349 6.6 12,064<br />
Norway 3,084 6.8 7,343<br />
Sweden (5) 3,009 3.5 10,146<br />
Finland 2,441 8.0 13,303<br />
Ireland 300 7.9 1,998<br />
Greenland 123 1.4 407<br />
Iceland 106 7.3 591<br />
Total Northern Europe 17,949 6.2 83,742<br />
Continental Europe<br />
France 7,799 6.8 37,973<br />
The Netherlands 3,094 6.2 21,904<br />
Belgium & Luxembourg 2,072 5.9 9,990<br />
Spain 1,791 5.7 18,091<br />
Germany 1,568 1.7 16,462<br />
Switzerland 1,153 6.2 7,156<br />
Austria 1,150 7.9 7,063<br />
Central & Eastern Europe (6) 466 6.4 8,216<br />
Portugal 226 6.9 2,746<br />
Greece 193 5.8 1,602<br />
Italy 192 6.6 616<br />
Poland 67 4.3 1,924<br />
Total Continental Europe 19,771 6.0 133,743<br />
Overseas<br />
Israel 373 5.0 5,821<br />
China & Hong Kong 354 5.1 5,033<br />
Brazil 341 5.4 12,381<br />
Singapore 307 6.6 3,818<br />
Australia 242 11.7 487<br />
Thailand 93 6.9 7,726<br />
Japan (7) 78 2.2 488<br />
Indonesia 69 9.4 6,977<br />
Malaysia 69 7.6 2,392<br />
Argentina 39 (2.8) 2,304<br />
Chile 19 5.2 1,582<br />
Sri Lanka 17 0.0 5,650<br />
Brunei 13 24.5 161<br />
Uruguay 2 10.0 260<br />
Total Overseas 2,016 6.0 55,080<br />
Total Operations (8) 39,736 6.1 272,565<br />
Corporate - (0.5) 77<br />
Health Care operations (9) (divested) 619 10.3 892<br />
Total 40,355 5.6 273,534<br />
Note:<br />
(1) <strong>ISS</strong>’s operations in India, New Zealand, Russia, and Turkey were established in 2005.<br />
(2) Operating pr<strong>of</strong>it before other items divided by revenue based on <strong>ISS</strong>’s consolidated preliminary financials prepared in accordance with IFRS.<br />
(3) At end <strong>of</strong> year.<br />
(4) Including the Greenland and Faroe Islands.<br />
(5) Excluding the Swedish Health Care operations business (which had 892 employees).<br />
(6) Including the Czech Republic, Slovenia, Slovakia, Romania, Hungary and Croatia.<br />
(7) Japan was divested on September 1, 2005.<br />
(8) Excluding Health Care operations prior to January 1, 2005.<br />
(9) In 2005 the Health Care operations business was sold to funds advised by EQT Partners in two separate transactions.<br />
Source: <strong>ISS</strong><br />
As indicated in the table above, among <strong>ISS</strong>’s more established operations, margins tend to be higher<br />
where <strong>ISS</strong> <strong>of</strong>fers a broader range <strong>of</strong> services and has higher customer density.
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52<br />
Company Overview<br />
The shaded boxes in the following table indicate the facility services provided in each country in which<br />
<strong>ISS</strong> operates. As part <strong>of</strong> its strategy, <strong>ISS</strong> intends to provide, when appropriate, a full range <strong>of</strong> services<br />
and integrated facility services capabilities in each <strong>of</strong> its markets.<br />
<strong>Table</strong> 24: <strong>ISS</strong> Service Offering by Country<br />
Country<br />
Northern Europe:<br />
United Kingdom<br />
Denmark (1)<br />
Norway<br />
Sweden<br />
Finland<br />
Ireland<br />
Russia<br />
Continental Europe:<br />
France<br />
The Netherlands<br />
Belgium and Luxembourg<br />
Spain<br />
Germany<br />
Switzerland<br />
Austria<br />
Central and Eastern Europe (2)<br />
Portugal<br />
Greece<br />
Italy<br />
Estonia<br />
Poland<br />
Turkey<br />
Overseas:<br />
Israel<br />
China and Hong Kong<br />
Brazil<br />
Singapore<br />
Australia<br />
Thailand<br />
Indonesia<br />
Malaysia<br />
Argentina<br />
Chile<br />
Sri Lanka<br />
Brunei<br />
Uruguay<br />
India<br />
New Zealand<br />
Cleaning<br />
Services<br />
Property<br />
Services Office Services<br />
Note:<br />
(1) Comprising Iceland, Greenland and the Faroe Islands.<br />
(2) Comprising the Czech Republic, Slovenia, Slovakia, Romania, Hungary and Croatia.<br />
Source: <strong>ISS</strong><br />
Catering<br />
Services<br />
Integrated<br />
Facility Services
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E. Acquisition History<br />
53<br />
Company Overview<br />
Consolidation <strong>of</strong> the industry is an integral part <strong>of</strong> <strong>ISS</strong>’s strategy and consequently <strong>ISS</strong> makes a large<br />
number <strong>of</strong> acquisitions every year in its key business areas. <strong>ISS</strong> has also done a few “platform”<br />
acquisitions to enter new geographies and / or areas <strong>of</strong> activities.<br />
In recent years, <strong>ISS</strong> has followed a strategy <strong>of</strong> selectively acquiring smaller companies, typically with<br />
annual revenues <strong>of</strong> less than DKK 100 million (EUR 13 million), in order to strengthen <strong>ISS</strong>’s<br />
competencies, enhance its service <strong>of</strong>fering or establish critical mass. The volume <strong>of</strong> acquisitions has<br />
varied in recent years depending upon market conditions. In the years ended December 31, 2002,<br />
2003 and 2004, <strong>ISS</strong> made 31, 51 and 95 acquisitions respectively. <strong>ISS</strong> reduced its acquisition activity<br />
in 2002 to concentrate on initiatives aimed at increasing its Operating Margins. These efforts included<br />
contract trimming in Belgium, Denmark, France, Germany and the Netherlands in 2002 and in Brazil<br />
initiated in 2003, in order to rationalize <strong>ISS</strong>’s contract portfolio following a period <strong>of</strong> significant growth.<br />
Following completion <strong>of</strong> these projects, <strong>ISS</strong> increased its acquisition activity in 2004. <strong>ISS</strong> has<br />
maintained a similar acquisition pace in 2005, completing 74 acquisitions through September 30, 2005.<br />
<strong>ISS</strong> has a well-developed acquisition process, which relies to a large extent on its local management<br />
teams in order to capitalize on their local market knowledge. These local management teams are<br />
responsible for target identification and for most <strong>of</strong> the acquisition process through to integration <strong>of</strong> the<br />
acquired business. <strong>ISS</strong>’s M&A department manages the acquisition process, primarily with respect to<br />
valuation <strong>of</strong> the acquisition and negotiation <strong>of</strong> the material acquisition agreements, to the extent that its<br />
centralized resources add value. This centralized department is responsible for quality assurance with<br />
respect to all acquisitions. <strong>ISS</strong>’s group M&A department is more heavily involved in all larger<br />
acquisitions and all acquisitions are approved by the Executive Management Board <strong>of</strong> <strong>ISS</strong><br />
Management A/S (“<strong>ISS</strong> Management”), and the approval <strong>of</strong> the Board <strong>of</strong> <strong>ISS</strong> Management is required<br />
for large or strategic acquisitions.<br />
Please see the following figure for an historical overview <strong>of</strong> <strong>ISS</strong> acquisitions since 2000, representing<br />
a total <strong>of</strong> more than 375 acquisitions; in more than 30 countries, with acquired Revenues <strong>of</strong> more than<br />
DKK 23 billion (EUR 3.1 billion).<br />
Figure 14: Approximate Acquired Revenues, Historical Overview <strong>of</strong> Acquisitions 2000 –<br />
9M-2005 (Approximate Acquired Full Year Revenues)<br />
DKK million<br />
8,000<br />
7,000<br />
6,000<br />
5,000<br />
4,000<br />
3,000<br />
2,000<br />
1,000<br />
Source: <strong>ISS</strong><br />
0<br />
6,363<br />
4,384<br />
1,930<br />
1,280<br />
6,095<br />
3,150<br />
2000 2001 2002 2003 2004 9M 2005<br />
Cleaning Property Catering Office Support Integrated Facilities Services Other
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54<br />
Company Overview<br />
<strong>ISS</strong> made 95 bolt-on acquisitions during 2004, <strong>of</strong> which two had particular strategic importance: the<br />
acquisitions <strong>of</strong> Grupo Unica in Spain and Engel Group in Finland. Through Grupo Unica, <strong>ISS</strong><br />
established a presence in Madrid and in southern Spain, where the Company previously had a weak<br />
or limited presence. With the acquisition <strong>of</strong> Engel, which provides cleaning, property services and<br />
security services, <strong>ISS</strong> strengthened the Finnish operations. A total <strong>of</strong> 74 acquisitions were made<br />
during the period January 1 – September 30, 2005, adding revenue <strong>of</strong> approximately DKK 3.2 billion<br />
on an annualised basis.<br />
Divestments in the last three years have been limited and have focused on under-performing and noncore<br />
businesses. Most <strong>of</strong> these divestments have been relatively small. However, in 2002 <strong>ISS</strong><br />
divested most <strong>of</strong> its aviation service operations in the United Kingdom, The Netherlands and the<br />
Nordic countries. The aviation services business had revenues <strong>of</strong> DKK 714 million in 2001. In<br />
November 2002, <strong>ISS</strong> sold 51% <strong>of</strong> CarePartner AB, its elderly care business which operated a number<br />
<strong>of</strong> old age homes in the Nordic region, to a group made up <strong>of</strong> this business’s local management. In<br />
February 2005, <strong>ISS</strong> sold its 49% interest in the elderly care business and 100% <strong>of</strong> its Swedish Health<br />
Care business, which provided diagnostic and certain other medical services in Sweden, to a newly<br />
formed joint venture entity between EQT and <strong>ISS</strong>. At the end <strong>of</strong> June 2005, <strong>ISS</strong> sold its 49% interest<br />
in the joint venture entity to EQT.<br />
The table below provides unaudited information concerning <strong>ISS</strong>’s acquisitions and divestments for the<br />
periods presented. Revenue presented in the table represents the prior year revenue <strong>of</strong> the acquired<br />
companies.<br />
<strong>Table</strong> 25: <strong>ISS</strong> Acquisition History 2002- present<br />
Acquisitions<br />
For the Year Ended 31-Dec<br />
2002 2003 2004<br />
2005<br />
(through September 30)<br />
Number <strong>of</strong> acquisitions 31 51 95 74<br />
Average annual Revenue <strong>of</strong> acquired companies (DKK<br />
62 25 64 43<br />
million) (1)<br />
Smallest acquisition (DKK million) 1 1 1 1<br />
Largest acquisition (DKK million) 902 217 1,443 242<br />
Sum <strong>of</strong> acquired revenue (DKK million) 1,930 1,280 6,095 3,150<br />
Acquired employees 9,871 5,255 37,057 29,493<br />
Divestments<br />
Number <strong>of</strong> divestments 15 7 8 7<br />
Revenue attributable to divestments<br />
(DKK million) (2)<br />
1,652 221 192 380<br />
Note:<br />
(1) Based on estimated revenue <strong>of</strong> the acquired companies made at the time <strong>of</strong> acquisition.<br />
(2) On an annualized basis according to revenue for the prior year<br />
Source: <strong>ISS</strong><br />
F. Customers and Contracts<br />
As <strong>of</strong> September 30, 2005, <strong>ISS</strong> had more than 100,000 public and private sector customers, and in<br />
2004, revenue derived from its ten largest customers was less than 5% <strong>of</strong> its total revenue. In 2004,<br />
no more than 19% <strong>of</strong> <strong>ISS</strong>’s revenue was generated in any one country, with France being the largest<br />
contributor to revenue. <strong>ISS</strong>’s customers operate in a number <strong>of</strong> industries, and <strong>ISS</strong> does not believe<br />
that its business is dependent on any particular industry segment in the private sector or particular<br />
authority in the public sector.<br />
<strong>ISS</strong>’s commercial customers range in size from small firms requiring a single cleaner to large,<br />
multinational organisations seeking integrated facility services. <strong>ISS</strong> is focused on developing larger<br />
accounts, particularly European multinational companies, with the goal <strong>of</strong> becoming their sole provider<br />
<strong>of</strong> integrated facility services. In addition, <strong>ISS</strong> believes that these customers may be more likely to<br />
require integrated facility services.
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55<br />
Company Overview<br />
For larger contracts, the quality <strong>of</strong> the service delivery is <strong>of</strong>ten measured against defined quality<br />
benchmarks stipulated in Service Level Agreements (SLA). More than 90% <strong>of</strong> <strong>ISS</strong>’s operations have<br />
adopted a formalised quality approach. Generally, <strong>ISS</strong> uses ISO certified quality management<br />
systems, and a number <strong>of</strong> countries have implemented Total Quality and Business Excellence models.<br />
The terms <strong>of</strong> <strong>ISS</strong>’s customer contracts vary widely by country and customer segment due to differing<br />
customer requirements and applicable legislation. However, <strong>ISS</strong> typically provides services under<br />
multi-year contracts with a stated term <strong>of</strong> between two and five years and reciprocal termination rights<br />
upon three to 12 months prior written notice. <strong>ISS</strong>’s commercial customer contracts typically provide<br />
for automatic renewal in the absence <strong>of</strong> a party’s notice to terminate the contract.<br />
<strong>ISS</strong> is highly focused on customer retention and, as a result, recently introduced Customer Retention<br />
Managers in a number <strong>of</strong> countries with the aim <strong>of</strong> improving customer churn rates even further.<br />
<strong>ISS</strong> also provides its services to governmental entities, primarily in Europe. The contractual<br />
arrangements with these entities differ from <strong>ISS</strong>’s commercial contracts in that they are generally<br />
subject to public procurement rules. Under these rules, facility services contracts are generally<br />
retendered on a regular basis. As a result, <strong>ISS</strong> must tender to maintain existing governmental<br />
contracts. <strong>ISS</strong> will seek to continue to provide facility services to public sector customers in the future.<br />
In the United Kingdom, <strong>ISS</strong> has entered into a number <strong>of</strong> arrangements with government-owned<br />
hospitals under Private Finance Initiative (PFI) contracts. The PFI contracts generally have a contract<br />
length <strong>of</strong> between five and 30 years. With respect to three projects, <strong>ISS</strong> has a joint equity investment<br />
in the entity providing services under the contract along with third party equity sponsors <strong>of</strong> the project.<br />
<strong>ISS</strong> is providing some form <strong>of</strong> facility services in each <strong>of</strong> the PFI projects, ranging from new hospital<br />
builds with integrated facility services to single services contracts. Under some <strong>of</strong> the PFI contracts,<br />
<strong>ISS</strong> has agreed that, in the event that the entity is unable to pay for <strong>ISS</strong>’s services, then <strong>ISS</strong> will<br />
convert its receivables from the entity into a loan.<br />
G. Human Resources<br />
The facility services industry is characterised by relatively high levels <strong>of</strong> employee turnover, as the<br />
industry is <strong>of</strong>ten considered a short-term or secondary source <strong>of</strong> employment. As a result, <strong>ISS</strong> pursues<br />
a number <strong>of</strong> strategies to reduce the turnover among blue collar employees, including arranging for<br />
more full-time and daytime work. <strong>ISS</strong> also seeks to enhance employee satisfaction and reduce<br />
turnover by providing multitasking jobs, encouraging career development opportunities and providing<br />
programs designed to promote teamwork and skills development. In 2004, the share <strong>of</strong> full-time<br />
employees (working 25 hours or more per week) rose to 57% from 55% in 2003. The distribution <strong>of</strong><br />
employee tenure (in years) provides another perspective on employee loyalty at <strong>ISS</strong>. In 2004, 69% <strong>of</strong><br />
the Group’s employees had been with <strong>ISS</strong> for more than one year.<br />
Figure 15: Total Number <strong>of</strong> Employees and Percentage <strong>of</strong> Full Time Employees<br />
# <strong>of</strong> Employees<br />
Source: <strong>ISS</strong><br />
400,000<br />
300,000<br />
200,000<br />
100,000<br />
0<br />
53%<br />
55%<br />
248,500 245,000<br />
57%<br />
273,500<br />
2002 2003 2004<br />
Number <strong>of</strong> Employees Share <strong>of</strong> employees full time<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
Share <strong>of</strong> Full-time<br />
Employees<br />
Reduction <strong>of</strong> employee turnover is one <strong>of</strong> the principal challenges <strong>ISS</strong> faces. <strong>ISS</strong>’s employees are<br />
generally members <strong>of</strong> trade unions, and employee and trade union relations have a high priority to <strong>ISS</strong>.
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56<br />
Company Overview<br />
In 1995 <strong>ISS</strong> established the European Works Counsel as an in-house forum for dialogue between <strong>ISS</strong><br />
management and employee representatives across Europe. In 2004, 31 employee representatives<br />
from 17 countries were engaged in European Works Counsel meetings.<br />
While <strong>ISS</strong> generally seeks to reduce its employee turnover, the relatively high rate <strong>of</strong> turnover<br />
characteristic <strong>of</strong> the facility services industry provides a certain amount <strong>of</strong> operational flexibility.<br />
Through natural attrition <strong>ISS</strong> is able to reduce staff costs in response to fluctuations in market demand.<br />
As a result <strong>of</strong> its local scale and density <strong>ISS</strong> can shift employees among existing customers. EU law,<br />
which under certain circumstances allows <strong>ISS</strong> to pass on site staff to the new service provider when a<br />
facility services contract is lost, provides additional operational flexibility.<br />
In the last five years <strong>ISS</strong> has not experienced any material disruption to its business as the result <strong>of</strong><br />
strikes, work stoppages or other labour disputes. In 2003, <strong>ISS</strong> signed a letter <strong>of</strong> agreement with the<br />
international service workers union UNI (Union Network International), under which <strong>ISS</strong> pledged to<br />
ensure good working standards in all <strong>of</strong> its countries <strong>of</strong> operation, and UNI pledged to expose<br />
companies in the industry that violate basic employment principles and applicable legislation.<br />
<strong>Table</strong> 26: Key Employee Statistics<br />
2002 2003 2004 (1)<br />
Number <strong>of</strong> Employees 248,500 245,000 273,500<br />
Share <strong>of</strong> Fulltime Employees (%) 53 55 57<br />
Staff Turnover Blue Collar Workers (%) 51 50 50<br />
Staff Turnover White Collar Workers (%) 18 19 24<br />
Total Staff Turnover (2) (%) 49 49 49<br />
Share <strong>of</strong> Employees with less than One Year Seniority (3) (%) - 31 31<br />
Share <strong>of</strong> Employees with One to Five Years <strong>of</strong> Seniority (3) (%) - 42 39<br />
Share <strong>of</strong> Employees with more than Five Years <strong>of</strong> Seniority (3) (%) - 27 30<br />
Note:<br />
(1) Approximate figures derived on the basis <strong>of</strong> 99% <strong>of</strong> the total number <strong>of</strong> employees.<br />
(2) Calculated as the number <strong>of</strong> employees who leave during the year divided by the average number <strong>of</strong> employees for the year.<br />
(3) At end <strong>of</strong> period.<br />
Source: <strong>ISS</strong><br />
H. Sales and Marketing<br />
<strong>ISS</strong> employs approximately 1,000 persons worldwide who are engaged in <strong>ISS</strong>’s sales and marketing<br />
efforts. <strong>ISS</strong>’s sales and marketing effort is predominantly organized and conducted through its country<br />
organizations. Each country has adapted its sales and marketing efforts to the challenges <strong>of</strong> its<br />
individual market.<br />
<strong>ISS</strong> maintains a centralized corporate marketing department that coordinates <strong>ISS</strong>’s branding strategy<br />
and its company-wide marketing initiatives. In addition, this department is responsible for sales and<br />
account management relating to multinational customers and other key clients and the marketing <strong>of</strong><br />
<strong>ISS</strong>’s integrated facility services to a select group <strong>of</strong> European multinational companies, comprised <strong>of</strong><br />
existing and potential customers. <strong>ISS</strong> intends to continue to expand this international sales force in<br />
the future.
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VI. Business Strategy<br />
57<br />
Business Strategy
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A. Strategy<br />
58<br />
Business Strategy<br />
In April 2005 <strong>ISS</strong> announced its current business strategy, named "Route 101" which sets out the<br />
objective <strong>of</strong> achieving revenues <strong>of</strong> DKK 101 billion. Route 101 comprises a number <strong>of</strong> initiatives aimed<br />
at developing the Company, i.e. continue to train staff and continue to invest in group-wide systems<br />
and tools to support, whilst adhering to certain operational objectives. The plan does not contain a<br />
defined period <strong>of</strong> time for achieving DKK 101 billion revenue target.<br />
Consistent with this strategy, <strong>ISS</strong> intends to: (i) continue to focus on operational efficiency to maintain<br />
or improve its competitive position; (ii) increase its ability to deliver integrated facility services<br />
throughout its operations; (iii) continue to make selective acquisitions; and (iv) focus on reducing the<br />
Group’s financial leverage on a multiple basis. The principal elements <strong>of</strong> this strategy include the<br />
following:<br />
� Continue to focus on operational efficiency. <strong>ISS</strong> will seek to maintain and enhance operational<br />
efficiency by continuing its focus on three well-established and prioritized operational objectives for<br />
its local managers: (i) cash flow; (ii) operating margin; and (iii) pr<strong>of</strong>itable organic growth.<br />
— Cash flow. <strong>ISS</strong>’s first operational objective is to continue to maintain a relatively high rate <strong>of</strong><br />
cash conversion 8 by operating in a manner that optimizes working capital. Through this<br />
approach, <strong>ISS</strong> expects to continue to generate positive Free Operating Cash Flow and <strong>ISS</strong><br />
believes that, in a typical year, it should be able to achieve a target cash conversion ratio <strong>of</strong><br />
between 90% and 95%.<br />
— Operating margin. <strong>ISS</strong>’s second operational objective is to maintain or increase its operating<br />
margin through continuous focus on costs. To reduce costs, <strong>ISS</strong> will seek to generate<br />
operational efficiencies by increasing its local market shares and operational densities, as well<br />
as through the implementation <strong>of</strong> company-wide best practices. Consistent with this approach,<br />
<strong>ISS</strong> has increased its operating margin, which <strong>ISS</strong> defines as operating pr<strong>of</strong>it before other<br />
income and expenses and income from associates divided by revenue, from 5.1% in 2000 to<br />
5.6% in 2004.<br />
— Pr<strong>of</strong>itable organic growth. <strong>ISS</strong>’s third operational objective is to continue to leverage its<br />
international market position and service <strong>of</strong>fering in order to increase its local market positions<br />
and drive organic growth. To do this, <strong>ISS</strong> has introduced a wide range <strong>of</strong> initiatives, including<br />
dedicated management <strong>of</strong> key accounts and additional training <strong>of</strong> sales staff, to increase<br />
customer retention rates. <strong>ISS</strong> will also continue to focus on the cross-selling <strong>of</strong> related services,<br />
such as pest control and washroom services, to existing customers. Additionally, <strong>ISS</strong> has<br />
established a market presence and operating platforms in, and will seek to leverage the growth<br />
potential <strong>of</strong>, selected high-growth economies, such as Brazil, Russia, India and China.<br />
� Increase integrated facility services capabilities. <strong>ISS</strong> also intends to continue to broaden its<br />
service <strong>of</strong>fering in order to eventually <strong>of</strong>fer a full range <strong>of</strong> facility services in each <strong>of</strong> its markets,<br />
primarily through the introduction <strong>of</strong> additional services and by acquiring companies with additional<br />
competencies. <strong>ISS</strong> believes that integrated facility services strengthen customer relationships<br />
through <strong>ISS</strong>’s on-site management. In addition, integrated facility services <strong>of</strong>fer the opportunity to<br />
reduce customers’ overhead costs and for <strong>ISS</strong> to leverage operational synergies.<br />
� Continue disciplined acquisition process. <strong>ISS</strong> expects to continue its well-established<br />
acquisition process to facilitate its strategy <strong>of</strong> increasing local scale, broadening its local service<br />
<strong>of</strong>fering and accessing new markets. <strong>ISS</strong> will continue to focus primarily on smaller acquisitions,<br />
which it believes will reduce the integration risks relating to individual acquisitions and enable it to<br />
leverage the experience <strong>of</strong> local management teams throughout its countries <strong>of</strong> operation. To<br />
access new geographic markets, <strong>ISS</strong> intends to establish operating platforms in higher growth<br />
markets, including through acquisitions.<br />
� Reduce financial leverage on a multiple basis. The Group intends to reduce the financial<br />
leverage, in terms <strong>of</strong> debt to EBITDA, resulting from the acquisition financing, primarily through<br />
growth in operating pr<strong>of</strong>it. The Group intends to increase its operating pr<strong>of</strong>it through its continued<br />
focus on operational efficiency, organic growth and acquisitions.<br />
8 The cash conversion ratio, as calculated by <strong>ISS</strong>, represents Free Operating Cash Flow as a percentage <strong>of</strong> pr<strong>of</strong>it before goodwill<br />
amortisation under Danish GAAP, or pr<strong>of</strong>it before goodwill impairment and write-down and amortisation <strong>of</strong> customer contracts under<br />
IFRS.
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VII. Legal Issues<br />
59<br />
Legal Issues
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60<br />
Legal Issues<br />
<strong>ISS</strong> Holding mandated international and Danish legal advisors to conduct legal due diligence on the<br />
<strong>ISS</strong> Group in 42 countries (<strong>of</strong> which 10 were examined in significantly greater detail) based on<br />
information provided by the Company in a data room in response to information requests. The<br />
sections below are not a substitute for, nor a summary <strong>of</strong> all material issues from each country's due<br />
diligence report and are provided strictly for the information <strong>of</strong> potential investors but are provided<br />
strictly without any representation or warranty to such investors.<br />
� SEC Issue. Information on accounting irregularities in <strong>ISS</strong> Inc, which emerged in 1996 and led to<br />
the divestment <strong>of</strong> <strong>ISS</strong> Inc, have been reported to US authorities. An international legal advisor has<br />
carried out a number <strong>of</strong> computer searches in an attempt to identify any criminal or civil<br />
proceedings instituted against <strong>ISS</strong> Inc. in relation to those accounting irregularities. These<br />
searches did not identify any criminal proceedings against <strong>ISS</strong> Inc, nor did they show any SEC civil<br />
enforcement or administrative actions against <strong>ISS</strong> Inc. involving any accounting irregularities in <strong>ISS</strong><br />
Inc. In addition, the searches did not identify any securities fraud class action suits or shareholder<br />
derivative suits involving the accounting irregularities in <strong>ISS</strong> Inc.<br />
� Contracts. <strong>ISS</strong> has contractual obligations under e.g. customer contracts, service agreements,<br />
shareholder agreements, joint venture contracts and PFI projects with public authorities or other<br />
third parties. Some <strong>of</strong> these agreements contain change <strong>of</strong> control provisions that were triggered<br />
by the Acquisition, but <strong>ISS</strong> consider these unlikely to cause any material change to the business.<br />
� Intellectual Property Rights. Generally, the <strong>ISS</strong> Group seems to have a well-protected<br />
trademark position with more than 300 identified trademarks in 29 countries, primarily registered in<br />
the name <strong>of</strong> <strong>ISS</strong> A/S.<br />
� Labour disputes. <strong>ISS</strong> does not have any significant or long-term disputes with larger labour<br />
organisations which on a consolidated basis may be considered a material risk to the <strong>ISS</strong> Group.<br />
� Litigation. The reports do not identify any litigation which, on the evidence available, is likely to<br />
result in any single claim in excess <strong>of</strong> EUR 3 million.<br />
� Environmental. <strong>ISS</strong> presently owns or operates a number <strong>of</strong> properties at which industrial<br />
activities or activities involving the daily handling <strong>of</strong> hazardous materials take place, including<br />
laundry facilities in Denmark and Norway and waste management facilities in France. The<br />
Company has within the last two years carried out an independent environmental assessment <strong>of</strong> 6<br />
sites in France which concluded that the waste management and landfill operations <strong>of</strong> <strong>ISS</strong><br />
reviewed were in all material respects in compliance with applicable environmental regulations. <strong>ISS</strong><br />
has not been subject to any material environmental sanctions.<br />
� Sweden: <strong>ISS</strong> Facility Services AB and <strong>ISS</strong> Health Care operations AB have given warranties to the<br />
purchaser <strong>of</strong> their Health Care operations business according to which they may become liable to<br />
pay compensation for any loss the purchaser might suffer as a result <strong>of</strong> future changes in the<br />
Swedish Health Care Operations regulation, preventing the purchaser from conducting these<br />
Health Care operations business acquired from the <strong>ISS</strong> companies. However, the parties have<br />
agreed to cap any potential liability <strong>of</strong> the <strong>ISS</strong> companies at a maximum amount <strong>of</strong> SEK100 million.<br />
� Financing. <strong>ISS</strong> Group has obligations under various loan and bank facilities some <strong>of</strong> which are<br />
secured. Some facilities are guaranteed by <strong>ISS</strong> Global. These facilities will either be refinanced,<br />
or brought within the scope <strong>of</strong> the exemptions agreed in the Senior Credit Facilities Agreement.<br />
� Pensions. <strong>ISS</strong> Group has various pension schemes in operation. Some <strong>of</strong> the pension schemes<br />
are currently under-funded but none <strong>of</strong> the schemes are being wound up.<br />
� UK PFI Projects. <strong>ISS</strong> Group participates in a number <strong>of</strong> limited recourse PFI projects in the UK as<br />
facilities management contractor and, in three instances, also as investor. The review undertaken<br />
by an international legal advisor identified various types <strong>of</strong> exposures such as the length <strong>of</strong> these<br />
contracts and the relatively broad representations and warranties given by the <strong>ISS</strong> UK Group in<br />
connection with these projects, which are to be expected in projects <strong>of</strong> this nature. Overall, there<br />
were no significant concerns arising from the review.<br />
� From the due diligence carried out and the information provided by <strong>ISS</strong>, nothing appeared that<br />
would indicate that the <strong>ISS</strong> Group is anything other than a well organised group <strong>of</strong> companies.
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<strong>ISS</strong> Global’s EMTNs 9<br />
61<br />
Legal Issues<br />
On May 27, 2005, the boards <strong>of</strong> directors <strong>of</strong> <strong>ISS</strong> Holding, <strong>ISS</strong> and <strong>ISS</strong> Global received a letter from a<br />
Danish law firm representing certain holders <strong>of</strong> <strong>ISS</strong> Global's EMTNs. The letter stated that these holders<br />
had incurred losses as a result <strong>of</strong> declines in the trading price <strong>of</strong> the EMTNs following <strong>ISS</strong> Holding's<br />
announcement <strong>of</strong> its tender <strong>of</strong>fer for the shares <strong>of</strong> <strong>ISS</strong> and the downgrading <strong>of</strong> the credit rating <strong>of</strong> <strong>ISS</strong><br />
Global following <strong>ISS</strong> Holding's announcement <strong>of</strong> its intention to increase the debt leverage <strong>of</strong> <strong>ISS</strong> Global<br />
in the future. It also stated that such holders would scrutinize whether any action taken or contemplated<br />
in connection with the Acquisition, including the implementation <strong>of</strong> <strong>ISS</strong>'s financing structure, was in<br />
violation <strong>of</strong> the Danish Companies Act. The letter also noted that if, at the time the EMTNs were <strong>of</strong>fered<br />
and sold in 2004, either <strong>ISS</strong> Global, any <strong>of</strong> its directors or any member <strong>of</strong> its management team knew or<br />
should have known <strong>of</strong> the Principal Shareholders' intention to acquire <strong>ISS</strong> and the resulting changes to<br />
<strong>ISS</strong> Global's capital structure, there could be "serious questions <strong>of</strong> liability".<br />
On July 28, 2005, <strong>ISS</strong> Global received a letter from an English law firm representing certain holders <strong>of</strong><br />
EMTNs requesting information concerning the structuring <strong>of</strong> the Acquisition and the <strong>of</strong>fering <strong>of</strong> the notes<br />
and again raising the possibility <strong>of</strong> legal action. Specifically, the letter contemplated legal action in<br />
England to seek a declaration that the implementation <strong>of</strong> <strong>ISS</strong>'s financing structure would result in a<br />
breach <strong>of</strong> the negative pledge covenant <strong>of</strong> the EMTNs, which restricts <strong>ISS</strong> Global issuing certain<br />
indebtedness represented or evidenced by securities ("Relevant Indebtedness") which is secured over<br />
assets <strong>of</strong> <strong>ISS</strong> Global or its subsidiaries.<br />
<strong>ISS</strong>'s English and Danish lawyers engaged in correspondence and provided relevant extracts <strong>of</strong> finance<br />
documentation to these law firms, and to the group <strong>of</strong> note holders who were instructing them, and who<br />
were prepared to agree to confidentiality undertakings (but did not necessarily constitute all <strong>of</strong> the note<br />
holders who had originally instructed or had otherwise been in contact with the two law firms) (the<br />
"Instructing Note Holders"), in order to demonstrate why <strong>ISS</strong> Global believed that these assertions were<br />
incorrect. In addition, the Sponsors and <strong>ISS</strong> confirmed to these law firms and the Instructing Note<br />
Holders that neither <strong>ISS</strong> nor any <strong>of</strong> its subsidiaries or any <strong>of</strong> the directors or managers <strong>of</strong> any such<br />
entities had any knowledge <strong>of</strong> the proposed Acquisition until March 2005, as the initial contacts relating<br />
to the Acquisition were made in March 2005, subsequent to the <strong>of</strong>fer or sale <strong>of</strong> the EMTNs.<br />
Following the review <strong>of</strong> these documents and the information provided to them, discussions with the<br />
English legal advisors to <strong>ISS</strong> Global and subsequent changes to the documents, the Instructing Note<br />
Holders advised <strong>ISS</strong> Global that they were satisfied that the financing arrangements under the Senior<br />
Credit Facilities Agreement will not result in any infringement <strong>of</strong> the terms <strong>of</strong> the EMTNs nor will these<br />
arrangements otherwise be unlawful. This conclusion is consistent with the Danish and English legal<br />
advice obtained by <strong>ISS</strong>.<br />
Notwithstanding the foregoing, <strong>ISS</strong> cannot assure you that holders <strong>of</strong> the EMTNs will not seek to<br />
institute an action or proceeding against <strong>ISS</strong> or any <strong>of</strong> its subsidiaries that could have the effect <strong>of</strong><br />
impeding or delaying the transactions described herein or the flow <strong>of</strong> funds from subsidiaries to <strong>ISS</strong>, or<br />
that if instituted, any such action or proceeding would not be decided adversely to one or more <strong>of</strong> <strong>ISS</strong><br />
or its subsidiaries.<br />
9 EMTN’s refer to <strong>ISS</strong>’s European Medium Term Notes due 2010 and 2014.
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VIII. Corporate Governance and<br />
Management<br />
62<br />
Corporate Governance and Management
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63<br />
Corporate Governance and Management<br />
A. Board <strong>of</strong> Directors <strong>of</strong> <strong>ISS</strong> Holding, <strong>ISS</strong>, and <strong>ISS</strong> Global<br />
The Board <strong>of</strong> Directors <strong>of</strong> <strong>ISS</strong> Holding functions in accordance with its rules <strong>of</strong> procedure, which<br />
provide guidelines for the Board <strong>of</strong> Director’s work. The following table sets forth information<br />
concerning the directors <strong>of</strong> <strong>ISS</strong> Holding. <strong>ISS</strong> is a direct subsidiary <strong>of</strong> <strong>ISS</strong> Holding and <strong>ISS</strong> Global is a<br />
direct subsidiary <strong>of</strong> <strong>ISS</strong>. The membership <strong>of</strong> the Boards <strong>of</strong> Directors <strong>of</strong> <strong>ISS</strong> and <strong>ISS</strong> Global is identical<br />
to that <strong>of</strong> the Board <strong>of</strong> Directors <strong>of</strong> the <strong>ISS</strong> Holding.<br />
<strong>Table</strong> 27: Board <strong>of</strong> Directors, <strong>ISS</strong> Holding<br />
Name Age Position<br />
Leif Östling 49 Chairman<br />
Ole Andersen 49 Director<br />
Richard Sharp 49 Director and Managing Director<br />
Sanjay Patel 44 Director<br />
Christian Sinding 32 Alternate Director<br />
Edward de Nor 36 Alternate Director<br />
Leif Östling is currently the President and Group Chief Executive <strong>of</strong> Scania AB, a position he has held<br />
since 1994. Prior to that time, Mr. Östling held various positions within Scania, including acting<br />
manager <strong>of</strong> Scania’s South American operations, head <strong>of</strong> Strategic Planning, Marketing Manager in<br />
The Netherlands and President <strong>of</strong> Scania Nederland. He has also served as Chairman <strong>of</strong> the Board <strong>of</strong><br />
the Danish company Sabroe Refrigeration, which was previously owned by EQT. Mr. Ostling is a<br />
member <strong>of</strong> the Board <strong>of</strong> Directors <strong>of</strong> Scania AB, AB SKF, Svensk Näringsliv and Teknikföretagen.<br />
Ole Andersen has been a partner <strong>of</strong> EQT Partners and head <strong>of</strong> its Copenhagen <strong>of</strong>fice since<br />
September 2003. Prior to joining EQT Partners, Mr. Andersen was employed at Enskilda Securities.<br />
From 1997 to 2000 he was head <strong>of</strong> the Copenhagen Branch and from 2000 to 2003 he was global<br />
head <strong>of</strong> Corporate Finance. From 1983 to 1997 Mr. Andersen worked for Arthur Andersen & Co.,<br />
Skandinavisk Holding, Scandinavian Capital Partner and Alfred Berg. Mr. Andersen is currently a<br />
director <strong>of</strong> Contex Holding A/S, Aleris AB, Brandtex Group A/S and Copenhagen Airports A/S. Mr.<br />
Andersen graduated from the Copenhagen Business School with a Masters degree in Economics.<br />
Richard Sharp is head <strong>of</strong> the Principal Investment Area Goldman Sachs in Europe and is on the<br />
Board <strong>of</strong> Directors <strong>of</strong> Goldman Sachs International. Mr. Sharp joined Goldman Sachs in 1984, was<br />
made a partner in 1994 and became a managing director in 1996. He is a member <strong>of</strong> the Supervisory<br />
Board <strong>of</strong> Cognis GmbH & Co. KG Mr. Sharp received a Bachelor <strong>of</strong> Arts degree and a Master <strong>of</strong> Arts<br />
degree from Oxford University.<br />
Sanjay Patel is co-head <strong>of</strong> Private Equity in Europe for the Principal Investment Area <strong>of</strong> Goldman<br />
Sachs. Prior to joining Goldman Sachs in 2005 he worked with GSC Partners, holding the position <strong>of</strong><br />
co-President from 1999 to 2004 when he became a Senior Advisor <strong>of</strong> GSC Partners until December<br />
2004. Mr. Patel previously worked in the Principal Investment Area <strong>of</strong> Goldman Sachs from 1987 to<br />
1997. Mr. Patel is a director <strong>of</strong> R.L. Winston Rod Company, and serves on the Advisory Boards <strong>of</strong><br />
International Asset Transactions, SmartAnalyst and The View Group. Mr. Patel received a Bachelor <strong>of</strong><br />
Arts degree magna cum laude and a Master <strong>of</strong> Science degree from Harvard University, and a Master<br />
<strong>of</strong> Business Administration degree from Stanford University.<br />
Alternates to the Board <strong>of</strong> Directors<br />
Christian Sinding is a partner in EQT Partners. Prior to joining EQT Partners in 1998 he was an<br />
Associate with AEA Investors Inc. in New York. Prior to his employment with AEA, Mr. Sinding was<br />
employed as a financial analyst with Bowles Hollowell Conner & Co. in the United States. Mr. Sinding<br />
is currently a director <strong>of</strong> Plantasjen ASA and Findus AB. Mr. Sinding holds a Bachelor <strong>of</strong> Science (in<br />
Commerce) degree from the University <strong>of</strong> Virginia, which he received with Distinction in 1994.<br />
Edward de Nor is a member <strong>of</strong> Goldman Sachs’ Principal Investments Area based in London with<br />
primary responsibility for the group’s UK and Northern European merchant banking business. Mr. De<br />
Nor joined PIA in 2000 in New York and moved to the London <strong>of</strong>fice two years later. He has held<br />
directorships at several companies and currently sits on the board <strong>of</strong> Autodis S.A. (an independent<br />
automotive wholesale distribution business). Prior to joining Goldman Sachs, Mr. De Nor was with<br />
Wasserstein Perella where he focused on leveraged transactions including the firm’s own merchant
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64<br />
Corporate Governance and Management<br />
banking transactions. He began his investment career in 1991 in the business development area <strong>of</strong><br />
IBM where he focused on developing investment strategies for emerging technologies in which IBM<br />
had made significant R&D investments. Mr. De Nor graduated from Texas A&M University with a BS<br />
in Electrical Engineering and received an MBA from Rice University’s Jesse H. Jones School <strong>of</strong><br />
Administration.<br />
The Principal Shareholders intend to elect at least two additional directors with relevant industry<br />
experience.<br />
B. Board <strong>of</strong> Directors <strong>of</strong> <strong>ISS</strong> Management<br />
<strong>ISS</strong> Management is a direct subsidiary <strong>of</strong> <strong>ISS</strong> Global. The membership <strong>of</strong> <strong>ISS</strong> Management’s Board <strong>of</strong><br />
Directors is identical to that <strong>of</strong> the Boards <strong>of</strong> Directors <strong>of</strong> <strong>ISS</strong> Holding, <strong>ISS</strong> and <strong>ISS</strong> Global, except that<br />
the Board <strong>of</strong> Directors <strong>of</strong> <strong>ISS</strong> Management includes the following directors elected by its employees:<br />
Karina Deacon, Executive Vice President, Head <strong>of</strong> Corporate Finance and Control <strong>of</strong> <strong>ISS</strong><br />
Management; Flemming Quist, Finance Manager with <strong>ISS</strong> Management; and Tina Hilligsø, a secretary<br />
with <strong>ISS</strong> Management.<br />
C. Executive Management Board <strong>of</strong> <strong>ISS</strong> Management<br />
The overall strategy <strong>of</strong> the Group is determined by the members <strong>of</strong> the Board <strong>of</strong> Directors <strong>of</strong> <strong>ISS</strong><br />
Holding and the Boards <strong>of</strong> its subsidiaries <strong>ISS</strong> and <strong>ISS</strong> Global. The Group’s day-to-day operations are<br />
managed by the Executive Management Board <strong>of</strong> <strong>ISS</strong> Management pursuant to a Management<br />
Services Agreement.<br />
On June 30, 2005, <strong>ISS</strong> entered into a Management Services Agreement with <strong>ISS</strong> Management, a<br />
wholly owned subsidiary <strong>of</strong> <strong>ISS</strong> Global, to which <strong>ISS</strong> Holding and <strong>ISS</strong> Equity subsequently acceded.<br />
Under this agreement, <strong>ISS</strong> Management provides certain operational management services for the<br />
subsidiaries <strong>of</strong> <strong>ISS</strong> Global and certain administrative services for <strong>ISS</strong>, <strong>ISS</strong> Equity, <strong>ISS</strong> Holding and <strong>ISS</strong><br />
Global. Under the agreement, <strong>ISS</strong> Management has also assumed the obligations <strong>of</strong> <strong>ISS</strong> under its<br />
management and royalty agreements with the operating subsidiaries <strong>of</strong> <strong>ISS</strong> Global. However,<br />
decisions regarding the Group’s strategy, financing and other policy matters continue to be made by,<br />
and are the responsibility <strong>of</strong>, the Boards <strong>of</strong> <strong>ISS</strong> Holding, <strong>ISS</strong> and <strong>ISS</strong> Global. In order to reflect the new<br />
governance structure, the <strong>of</strong>ficers and employees <strong>of</strong> <strong>ISS</strong> were transferred to <strong>ISS</strong><br />
Management effective July 1, 2005. As consideration for such management services, <strong>ISS</strong><br />
Management will receive a fee agreed with the management <strong>of</strong> the subsidiaries <strong>of</strong> each country.<br />
<strong>ISS</strong> Management has a two-tiered board structure consisting <strong>of</strong> a Board <strong>of</strong> Directors and an Executive<br />
Management Board. The Board <strong>of</strong> Directors supervises the Executive Management Board’s<br />
performance <strong>of</strong> its duties under the Management Services Agreement. The two bodies are separate<br />
and do not have overlapping members.<br />
The following table sets forth information concerning the members <strong>of</strong> the Executive Management<br />
Board <strong>of</strong> <strong>ISS</strong> Management.<br />
<strong>Table</strong> 28: Executive Management Board, <strong>ISS</strong> Management<br />
Name Age Position<br />
Eric S. Rylberg 48 Chief Executive Officer<br />
Thorbjørn Graarud 53 Chief Operating Officer, Northern Europe and Asia<br />
Jeff Gravenhorst 43 Chief Financial Officer<br />
Karsten Poulsen 41 Chief Treasury Officer<br />
Flemming Schandorff 56 Chief Operating Officer, Continental Europe and Overseas<br />
Effective July 1, 2005, in connection with the execution <strong>of</strong> the Management Services Agreement, the<br />
executive directors <strong>of</strong> <strong>ISS</strong> were appointed to the Executive Management Board <strong>of</strong> <strong>ISS</strong> Management<br />
and resigned from their positions with the Executive Management Board <strong>of</strong> <strong>ISS</strong>.<br />
Eric S. Rylberg has been Chief Executive Officer since 2000. Mr. Rylberg joined <strong>ISS</strong> as its Chief<br />
Financial Officer in 1997. From 1996 to 1997 he was the Chief Executive Officer <strong>of</strong> Jacob Holm &
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65<br />
Corporate Governance and Management<br />
Sons. Prior to that time he was the Chief Financial Officer <strong>of</strong> Incentive Group, a holding company for<br />
manufacturing and distribution activities. He received a Master <strong>of</strong> Business Economics from Aarhus<br />
University, Denmark and a Master <strong>of</strong> Business Administration degree from Henley Management<br />
College in the United Kingdom.<br />
Thorbjørn Graarud has been Chief Operating Officer, Northern Europe and Asia, since 2002.<br />
Previously, he served as a Managing Director, International, <strong>of</strong> <strong>ISS</strong> from 2000 to 2002. Mr. Graarud<br />
served as a Country Manager for <strong>ISS</strong> Norway from 1989 to 1999. He joined <strong>ISS</strong> in 1985. Mr. Graarud<br />
received a Bachelor <strong>of</strong> Arts degree in Business Economics from BI Business School, Oslo, Norway.<br />
Jeff Gravenhorst has been the Chief Financial Officer <strong>of</strong> <strong>ISS</strong> since October 1, 2005. Previously he<br />
was the Chief Financial Officer <strong>of</strong> <strong>ISS</strong> UK from 2002 to 2005. From 2000 to 2002 he was Chief<br />
Executive Officer and President <strong>of</strong> ALTO Copenhagen A/S, a division <strong>of</strong> Incentive A/S. From 1998 to<br />
1999 Mr. Gravenhorst was Vice President, Business Unit Consumer, <strong>of</strong> ALTO U.S. Inc. He also<br />
served as President and Chief Financial Officer <strong>of</strong> Clarke Industries Inc. and Finance Director <strong>of</strong><br />
Wittenborg UK Ltd, each a division <strong>of</strong> Incentive A/S, as well as a Manager <strong>of</strong> Arthur Andersen in<br />
Denmark. Mr. Gravenhorst holds a Master <strong>of</strong> Science in Business Administration and Auditing from<br />
the Copenhagen Business School.<br />
Karsten Poulsen has been Chief Treasury Officer <strong>of</strong> <strong>ISS</strong> since October 1, 2005. Previously he was<br />
the Chief Financial Officer <strong>of</strong> <strong>ISS</strong>. Mr. Poulsen joined <strong>ISS</strong> in 1998 as its Corporate Treasurer. From<br />
1997 to 1998 he was Treasurer for Jacob Holm & Sons and the Deputy Treasurer for Incentive Group<br />
from 1996 to 1997. Prior to that time Mr. Poulsen was a Senior Vice President for Danske Bank. Mr.<br />
Poulsen received a Master <strong>of</strong> Science in Economics and Business Administration degree from the<br />
Aarhus Business School.<br />
Flemming Schandorff has been Chief Operating Officer since 2002. Previously, he was a Managing<br />
Director, International, <strong>of</strong> <strong>ISS</strong> from 2000 to 2002. Mr. Schandorff was the Chief Executive Officer <strong>of</strong><br />
Kompan A/S from 1996 to 2000. He rejoined <strong>ISS</strong> in 2000, having held various positions with <strong>ISS</strong> from<br />
1973 to 1994. He is a member <strong>of</strong> the Board <strong>of</strong> Directors <strong>of</strong> Modulex A/S. Mr. Schandorff received a<br />
Diploma in Accounting and Management theory from the Copenhagen Business College.<br />
Please see the following figure for an overview <strong>of</strong> the organizational structure <strong>of</strong> <strong>ISS</strong>:<br />
Figure 16: Current Group Management Structure
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D. Executive Officers <strong>of</strong> <strong>ISS</strong> Management<br />
66<br />
Corporate Governance and Management<br />
The following table sets forth information concerning the executive <strong>of</strong>ficers <strong>of</strong> <strong>ISS</strong> Management.<br />
<strong>Table</strong> 29: Executive Officers, <strong>ISS</strong> Management<br />
Name Age Position<br />
Gerard Brand 49 Regional Director<br />
Jacob Götzsche 38 International Business Director<br />
Søren Kongsbak 48 International Business Director<br />
Henrik Juul Nordenlund 43 International Director<br />
Jens Ebbe Olesen 43 Executive Vice President, Mergers and Acquisitions<br />
Stig Pastwa 38 Regional Director<br />
Bjørn Raasteen 41 Senior Vice President, General Counsel<br />
Martin Gaarn Thomsen 35 Regional Director, Asia<br />
Effective July 1, 2005, in connection with the execution <strong>of</strong> the Management Services Agreement, the<br />
executive <strong>of</strong>ficers <strong>of</strong> <strong>ISS</strong> were appointed to their current positions with <strong>ISS</strong> Management and resigned<br />
from their positions with <strong>ISS</strong>.<br />
Gerard Brand has been a Regional Director since 2005. Previously, he served as the Chief Executive<br />
Officer <strong>of</strong> <strong>ISS</strong> Nederland B.V., <strong>ISS</strong>’s Dutch operating company, and as its Chief Operating Officer.<br />
Prior to joining <strong>ISS</strong>, Mr. Brand worked in a variety <strong>of</strong> positions with Sodexho NL, including as a<br />
Corporate Catering Division Director, Director <strong>of</strong> Sodexho Health Care and as a Regional Operating<br />
Manager. Mr. Brand has attended vocational and business courses at the Higher Hotel College,<br />
Maastrict, and IBO Zeist.<br />
Jacob Götzsche has been International Business Director since 2004. Previously, Mr. Götzsche served<br />
as Senior Vice President, Mergers and Acquisitions from 2002 to 2004 and Senior Vice President, Head<br />
<strong>of</strong> Corporate Finance and Control from 2001 to 2002. He served as <strong>ISS</strong>’s Chief Group Controller, Head<br />
<strong>of</strong> Corporate Finance in 2000 and International Controller from 1999 to 2000. Mr. Götzsche joined <strong>ISS</strong><br />
in 1999 from PriceWaterhouse where he was an auditor from 1994. Mr. Götzsche received a Master <strong>of</strong><br />
Auditing degree from Odense University.<br />
Søren Kongsbak has been an International Business Director since 2004. Mr. Kongsbak served as a<br />
Finance Director <strong>of</strong> <strong>ISS</strong> from 2000 to 2004. From 1999 to 2000, he served as a Finance Manager <strong>of</strong> <strong>ISS</strong><br />
Overseas. He joined <strong>ISS</strong> in 1997. Prior to that time he was Vice President Finance for Incentive Group.<br />
Mr. Kongsbak received a bachelor degree from Aarhus Business School.<br />
Henrik Juul Nordenlund has been an International Director since 2003. Mr. Nordenlund joined <strong>ISS</strong> in<br />
1999 and served with <strong>ISS</strong> Germany until 2003, including as Country Manager from 2000. Previously, Mr.<br />
Nordenlund was Chief Financial Officer, Business Development, <strong>of</strong> Steff Houlberg. Mr. Nordenlund<br />
received a graduate degree in Management Accounting from Aarhus Business School.<br />
Jens Ebbe Olesen has been Executive Vice President, Mergers and Acquisitions, since 1999. Mr.<br />
Olesen joined <strong>ISS</strong> in 1998. Prior to that time he was Chief Financial Officer <strong>of</strong> Jacob Holm & Sons from<br />
1991. He received a degree in Management Accounting from the Esbjerg Business School and a Master<br />
<strong>of</strong> Commerce degree from Kolding Business School.<br />
Stig Pastwa has been a Regional Director since 2004. Previously, he was <strong>ISS</strong>’s International Business<br />
Director for Southern Europe from 2001 to 2003 and Financial Director for Southern Europe in 2000. Mr.<br />
Pastwa also served as Senior Vice President <strong>of</strong> <strong>ISS</strong>’s Mergers and Acquisition department from 1998 to<br />
2000. He joined <strong>ISS</strong> in 1998. Prior to that time he served in various positions with A.P. Moller-Maersk,<br />
most recently as Chief Financial Officer <strong>of</strong> Maersk Ivory Coast. Mr. Pastwa received a PED degree from<br />
IMD, an ADP degree from the London Business School and a degree in Management Accounting from<br />
Copenhagen Business School.<br />
Bjørn Raasteen has been Senior Vice President and General Counsel since 2005. Previously, he was<br />
Assistant General Counsel since he joined <strong>ISS</strong> in 1999. Previously, Mr. Raasteen was a lawyer with the
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67<br />
Corporate Governance and Management<br />
Jonas Bruun and Hjejle, Gersted & Mogensen law firms. Mr. Raasteen received a Masters <strong>of</strong> Law<br />
degree from the University <strong>of</strong> Copenhagen.<br />
Martin Gaarn Thomsen has been Regional Director, Asia, since 2005. Previously, he served as<br />
International Operations Director for <strong>ISS</strong> Hygiene Services from 2002 to 2004. Mr. Thomsen served as<br />
Vice President, Corporate Affairs and <strong>ISS</strong> Innovation from 2000 to 2002. He joined <strong>ISS</strong> in 1999 and<br />
served as a Business Support Manager, Business Development until 2000. Prior to that time, Mr.<br />
Thomsen was IS Manager for Coca-Cola Nordic Beverages. Mr. Thomsen received a Master <strong>of</strong> Science<br />
degree in Business Administration from Copenhagen Business School.
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68<br />
Historical Financial Information<br />
IX. Historical Financial Information
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A. Introduction<br />
69<br />
Historical Financial Information<br />
The consolidated financial statements for the fiscal years 2000 to 2004 <strong>of</strong> <strong>ISS</strong> included in this<br />
document have been prepared in accordance with the provisions <strong>of</strong> the Danish Financial Statements<br />
Act, and the regulations for companies listed on the Copenhagen Stock Exchange, in accordance to<br />
Danish GAAP. However, as required by EU regulations, <strong>ISS</strong> will prepare its consolidated financial<br />
statements for the year ended 31 December 2005 in accordance with IFRS.<br />
As required by EU regulations, <strong>ISS</strong> will prepare its consolidated financial statements for the year<br />
ended 31 December 2005 in accordance with IFRS. Un-audited results for the year ended December<br />
31, 2004, which have been adjusted to reflect the expected application <strong>of</strong> IFRS, are included in section<br />
F to demonstrate the expected impact <strong>of</strong> <strong>ISS</strong>'s transition to IFRS. The unaudited financial information<br />
prepared on the basis <strong>of</strong> the expected application <strong>of</strong> IFRS included in this document are preliminary in<br />
nature and may not fully reflect IFRS as finally implemented by <strong>ISS</strong>.<br />
The consolidated results <strong>of</strong> <strong>ISS</strong> for the nine months ended September 30, for 2004 and for 2005<br />
respectively, are un-audited and adjusted to reflect the expected application <strong>of</strong> IFRS.<br />
The following definitions <strong>of</strong> certain financial measures should be noted:<br />
Revenues (“Revenues”), which are recorded net <strong>of</strong> VAT, duties and discounts, are comprised <strong>of</strong> the<br />
value <strong>of</strong> services provided. <strong>ISS</strong> recognizes revenue as services are performed for maintenance and<br />
service contracts. Additionally, <strong>ISS</strong> utilizes the percentage-<strong>of</strong>-completion method <strong>of</strong> accounting for<br />
installation contracts. Under this method, Revenues are recognized according to the ratio <strong>of</strong> costs<br />
incurred to estimated total contract costs. Changes in job performance, job conditions, estimated<br />
pr<strong>of</strong>itability, anticipated contract losses and final contract settlements may result in revisions to costs<br />
and income and are recognized in the period in which the revisions are determined.<br />
EBITDAR (“EBITDAR”) represents Earnings before interest, taxes, depreciation, amortization, Other<br />
Income and Expenses, Income from Associates, and rent.<br />
EBITDA (“EBITDA”), as calculated by <strong>ISS</strong>, represents operating pr<strong>of</strong>it before other income and<br />
expenses and associates, depreciation and amortization under Danish GAAP, or operating pr<strong>of</strong>it<br />
before other items, depreciation and amortization under IFRS. By using operating pr<strong>of</strong>it before other<br />
income and expenses and associates under Danish GAAP, or operating pr<strong>of</strong>it before other items<br />
under IFRS, as a starting point for the calculation <strong>of</strong> EBITDA instead <strong>of</strong> operating pr<strong>of</strong>it, <strong>ISS</strong> excludes<br />
from the calculation <strong>of</strong> EBITDA those items recorded under the line item ‘‘other income and expenses,<br />
net’’, in which <strong>ISS</strong> includes income and expenses that it believes do not form part <strong>of</strong> <strong>ISS</strong>’s normal<br />
ordinary operations, such as gains and losses arising from divestments, the winding-up <strong>of</strong> operations<br />
and disposals <strong>of</strong> property, as well as integration costs relating to acquisitions.<br />
EBITA (“EBITA”) represents Earnings before Interest, Taxes, Amortization, Other Income and<br />
Expenses, and Income from Associates. Amortization represents only the amortization <strong>of</strong> intangible<br />
assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is amortization <strong>of</strong> goodwill.<br />
Free Operating Cash Flow (“Free Operating Cash Flow”), as calculated by <strong>ISS</strong>, represents cash flow<br />
from operating activities less investments in intangible assets and property, plant and equipment.<br />
Intangible assets does not include goodwill and customer contract portfolios and related customer<br />
relationships.<br />
The cash conversion ratio (“Cash Conversion” or “Cash Conversion Ratio”), as calculated by <strong>ISS</strong>,<br />
represents Free Operating Cash Flow as a percentage <strong>of</strong> pr<strong>of</strong>it before goodwill amortization under<br />
Danish GAAP, or pr<strong>of</strong>it before goodwill impairment and write-down and amortization <strong>of</strong> customer<br />
contracts under IFRS.
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B. Income Statement<br />
70<br />
Historical Financial Information<br />
<strong>ISS</strong> has enjoyed almost uninterrupted revenue and EBITA growth over the last six years. Focusing on<br />
a strategy <strong>of</strong> increasing its international presence and increasing its breadth <strong>of</strong> services, <strong>ISS</strong> has<br />
grown revenues by a 9% CAGR between 2000 and 2004. In addition, the ability to control operating<br />
costs has allowed the Company to increase EBITDA margins from 6.7% in 2000 to 7.2% in 2004.<br />
<strong>Table</strong> 30: Consolidated Income Statement<br />
Danish GAAP IFRS<br />
DKK million 2000 2001 2002 2003 2004 9M 2004 9M 2005<br />
Net Revenues 28,719 34,852 37,984 36,165 40,355 29,398 34,157<br />
Growth Rate % 45.0% 21.4% 9.0% (4.8)% (3)<br />
11.6%<br />
Staff Costs (20,457) (24,365) (25,705) (24,414) (26,577) (19,547) (22,673)<br />
Cost <strong>of</strong> Goods Sold (1,670) (2,422) (2,825) (2,686) (3,146) (2,234) (2,681)<br />
Other (4,670) (5,881) (6,841) (6,446) (7,736) (5,509) (6,377)<br />
Total Operating Expenses (26,797) (32,668) (35,371) (33,546) (37,459) (27,290) (31,731)<br />
Where<strong>of</strong> Operational Leasing Costs (1) 503 768 1,121 1,154 1,272 na na<br />
EBITDAR 2,425 2,952 3,734 3,773 4,168 na na<br />
EBITDAR % 8.4% 8.5% 9.8% 10.4% 10.3% na na<br />
Where<strong>of</strong> Operational Leasing Costs (1) (503) (768) (1,121) (1,154) (1,272) na na<br />
EBITDA 1,922 2,184 2,613 2,619 2,896 2,108 2,426<br />
EBITDA % 6.7% 6.3% 6.9% 7.2% 7.2% 7.2% 7.1%<br />
Depreciation and Amortisation (2) (468) (551) (603) (587) (617) 444 482<br />
EBITA 1,454 1,633 2,010 2,032 2,279 1,664 1,944<br />
EBITA % 5.1% 4.7% 5.3% 5.6% 5.6% 5.7% 5.7%<br />
Other Income and Expenses (3) (24) 5 (75) (69) (18) (19)<br />
Note:<br />
(1) Operational leasing costs available at fiscal year end only.<br />
(2) The amounts exclude amortisation <strong>of</strong> goodwill.<br />
(3) Please note that the organic growth rate was flat, assuming no contract trimming would have occurred in 2003.<br />
Source: <strong>ISS</strong><br />
Revenue Growth<br />
The revenue growth from 2000 to 2004 was to a large extent driven by acquisitions. However, organic<br />
growth was also a reliable source <strong>of</strong> growth, apart from in 2003 when revenues declined by 4.8%. The<br />
decline in 2003 is explained by the divestment <strong>of</strong> the Elderly Care business and Aviation business in<br />
2002, engagement in an active contract trimming program to terminate unpr<strong>of</strong>itable contracts,<br />
currency fluctuations and overall challenging market conditions. <strong>Table</strong> 38 below provides further<br />
explanation on the breakdown <strong>of</strong> Revenues growth attributed to acquisitions, foreign exchange<br />
movements, organic growth, and contract trimming.<br />
<strong>Table</strong> 31: Breakdown <strong>of</strong> Revenue Growth<br />
2000 2001 2002 2003 2004<br />
Total revenue growth % 45% 21% 9% (5)% 12%<br />
� Foreign Exchange 3% (1)% 0% (3)% (0)%<br />
� Acquisitions, net 35% 18% 8% (0)% 11%<br />
� Organic Growth 7% 4% 1% (2)% 1.5%<br />
Source: <strong>ISS</strong><br />
In general, the company experienced an overall positive development in organic growth rates in 2004<br />
vs. 2003. Negative organic growth continued in Germany (13)% and the Netherlands (5)% during<br />
2004, due to a combination <strong>of</strong> reasons including company specific issues and general market pricing<br />
competition.
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71<br />
Historical Financial Information<br />
The two major revenue contributing countries the UK (14% <strong>of</strong> 2004 revenues) and France (19% <strong>of</strong><br />
2004 revenues), both had positive organic growth in 2004 <strong>of</strong> 5% and 6% respectively.<br />
Figure 17: 2004 Organic Growth and Operating Margin (1) by Country<br />
15.0%<br />
10.0%<br />
5.0%<br />
0.0%<br />
-5.0%<br />
-10.0%<br />
-15.0%<br />
10%<br />
8.0%<br />
Finland<br />
8%<br />
Spain<br />
5.7%<br />
6% 6.8% 6.6%<br />
5%<br />
5.9%<br />
6.6% 6.8% 6.2%<br />
2%<br />
0%<br />
France<br />
UK<br />
Organic Growth EBITA Margin<br />
Belgium &<br />
Luxembourg<br />
Note:<br />
(1) EBITA Margin in accordance with the expected application <strong>of</strong> IFRS<br />
(2) Sweden organic growth and EBITA Margin includes Health Care operations<br />
Source: <strong>ISS</strong><br />
Operating Costs<br />
Operating expenses as a percentage <strong>of</strong> revenues have remained fairly stable in the period <strong>of</strong> 2000-<br />
2004, accounting for 93% to 94% <strong>of</strong> revenue. <strong>ISS</strong>’s cost base is flexible, as in 2004 approximately<br />
71% <strong>of</strong> total operating costs constituted staff costs, including salaries and wages, pensions, and other<br />
employee-related expenses. In 2004, 57% <strong>of</strong> the personnel were full time employees 10 . Furthermore,<br />
according to EU law, when facility services contracts are lost to a competitor, the former provider may<br />
under certain circumstances be able to pass on-site staff to the new provider, an option which provides<br />
additional operational flexibility.<br />
Staff costs have declined steadily during the period from 71.2% in 2000 to 65.9% <strong>of</strong> Revenues in 2004.<br />
The development is mainly explained by a change in mix <strong>of</strong> services <strong>of</strong>fered by <strong>ISS</strong>, resulting in<br />
subcontracting <strong>of</strong> some services, thereby decreasing staff cost but increasing cost <strong>of</strong> goods sold. In<br />
2004, staff costs increased by 8.9% to DKK 26,577 million compared to 2003. This increase was<br />
primarily attributable to an increase in the average number <strong>of</strong> employees <strong>of</strong> 21,206 (or 8.6%). Cost <strong>of</strong><br />
goods sold increased from 5.8% in 2000 to 7.8% <strong>of</strong> Revenues in 2004.<br />
Other operating expenses have increased from 16.3% <strong>of</strong> Revenues in 2000 to 19.2% in 2004,<br />
principally due to the increased cost in connection with operating leases. Over the last few years <strong>ISS</strong><br />
has actively strived to shift from capex to operational leases (which consist <strong>of</strong> leases and rentals <strong>of</strong><br />
properties, cars - and other equipment), which are included in the operating expenses. Other operating<br />
expenses also include expenses for detergents, uniforms, expensed service equipment, subcontractor<br />
costs as well as other selling, distribution and administrative expenses, including management salaries,<br />
clerical and administrative overhead, pr<strong>of</strong>essional services, costs associated with marketing and<br />
Revenues efforts and costs associated with the Company’s information systems.<br />
10 Works more than 25 hours a week.<br />
Denmark<br />
-1%<br />
Norway<br />
-5%<br />
The<br />
Netherlands<br />
-6%<br />
(2)<br />
Sweden<br />
4.7%<br />
-13%<br />
Germany<br />
1.7%
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Figure 18: Average Number <strong>of</strong> Employees & Staff Costs 2000-2004 11<br />
Average Number <strong>of</strong><br />
Employees<br />
Source: <strong>ISS</strong><br />
280,000<br />
270,000<br />
260,000<br />
250,000<br />
240,000<br />
230,000<br />
EBITDA Margins<br />
71.2%<br />
253,200<br />
69.9%<br />
259,800<br />
67.7% 67.5% 65.9%<br />
256,573<br />
72<br />
246,073<br />
Historical Financial Information<br />
267,279<br />
80%<br />
70%<br />
60%<br />
50%<br />
40%<br />
2000 2001 2002 2003 2004<br />
Average No. Employees Staff Costs as % <strong>of</strong> Revenues<br />
The adjusted EBITDA margins (normalised for non-recurring items) have been stable around 7.0%<br />
since 1998, with the exceptions <strong>of</strong> 2000 and 2001 when EBITDA margins fell to 6.7% and 6.3%<br />
respectively. <strong>ISS</strong> also incurred costs in 2001 due to the restructurings <strong>of</strong> the Aviation business<br />
following the 9/11 event 12 . When adjusting for operational leases, which have increased over the last<br />
few years due to the Company’s strategic decision to reduce the assets on its balance sheet while<br />
increasing operational leases, EBITDAR margins have increased from 8.4% in 2000 to 10.3% in 2004.<br />
This is a direct result <strong>of</strong> the Company’s increased focus on pr<strong>of</strong>itability, illustrated by the active<br />
trimming <strong>of</strong> non-pr<strong>of</strong>itable contracts, and streamlining <strong>of</strong> the operations.<br />
Figure 19: Historical Adjusted EBITDAR and EBITDAR Margin 2000-2004 13<br />
EBITDAR<br />
5,500<br />
4,500<br />
3,500<br />
2,500<br />
1,500<br />
500<br />
-500<br />
8.4% 8.5%<br />
2,425 2,952<br />
Note: 2004 EBITDAR is not pro-forma adjusted<br />
Source: <strong>ISS</strong><br />
9.8%<br />
3,734<br />
10.4%<br />
3,773<br />
10.3%<br />
4,168<br />
2000 2001 2002 2003 2004<br />
EBITDAR EBITDAR Margin<br />
Taxes<br />
<strong>ISS</strong> was up until 2004 jointly taxed with a number <strong>of</strong> wholly owned Danish and foreign subsidiaries.<br />
The Danish income tax payable is allocated between the jointly taxed Danish companies based on<br />
their proportion <strong>of</strong> taxable income (full absorption including reimbursement <strong>of</strong> tax deficits). The jointly<br />
taxed companies are included in the Danish tax on account scheme. The foreign companies in the<br />
Group are subject to taxation in their local jurisdictions. As <strong>of</strong> 2005, the joint taxation has only included<br />
fully owned Danish subsidiaries.<br />
11 Represents average number <strong>of</strong> employees from January 1 through December 31.<br />
12 Source: <strong>ISS</strong> A/S Annual Report, 2001, p.25.<br />
13 Adjusted before impact from Other Income and Expenses relating to items regarded by management as non-recurring.<br />
12%<br />
10%<br />
8%<br />
6%<br />
4%<br />
2%<br />
0%<br />
Staff Costs as % <strong>of</strong><br />
Revenues<br />
EBITDAR Margin
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C. Balance Sheet<br />
<strong>Table</strong> 32: Summary Historical Balance Sheets<br />
73<br />
Historical Financial Information<br />
Danish GAAP IFRS<br />
DKK million 2000 2001 2002 2003 2004 9M 2005<br />
Goodwill 9,522 12,022 12,669 12,465 15,494 16,006<br />
Customer Contract Portfolio and Related<br />
Customer Relationships<br />
- - - - - 1,570<br />
S<strong>of</strong>tware / Other Intangible 57 108 194 164 175 149<br />
Tangible Assets 1,362 1,663 1,509 1,469 1,793 1,857<br />
Financial Assets 383 704 625 595 873 1,299<br />
Fixed Assets 11,324 14,497 14,997 14,693 18,335 20,881<br />
Acc. Receivable and Other Current assets 5,516 6,899 6,524 6,411 7,634 8,830<br />
Current Liabilities (6,022) (7,435) (7,401) (7,486) (8,843) (9,747)<br />
Net Working Capital (506) (536) (877) (1,075) (1,209) (917)<br />
Capital Employed 10,818 13,961 14,120 13,618 17,126 19,964<br />
Provisions (736) (966) (1,097) (1,093) (1,227) (1,736)<br />
Net Borrowings / Interest Bearing Debt (4,357) (6,317) (5,604) (4,784) (7,463) (14,516)<br />
Minority Interests (47) (57) (88) (108) (100) (58)<br />
Net Assets 5,678 6,621 7,331 7,633 8,336 3,654<br />
In Percentage <strong>of</strong> Revenues:<br />
Fixed Assets 39.4 41.6 39.5 40.6 45.4<br />
Net Working Capital (1.8) (1.5) (2.3) (3.0) (3.0)<br />
Capital Employed 37.7 40.1 37.2 37.7 42.4<br />
Net Assets 19.8 19.0 19.3 21.1 20.7<br />
Note:<br />
(1) Value <strong>of</strong> interest rate swap is included in NIBD in FY 2003 (DKK 0 million) and FY 2004 (DKK 294 million) and non-amortised loan costs in<br />
FY2003 (DKK 11 million) and FY2004 (DKK 17 million).<br />
(2) 2000 – 2004 data based on Danish GAAP, while 30 September 2005 is based on IFRS.<br />
Source: <strong>ISS</strong><br />
Fixed Assets<br />
The majority <strong>of</strong> the fixed assets is goodwill accounting for ca. 84% <strong>of</strong> total fixed assets in 2004.<br />
Goodwill and other fixed assets increased significantly from 2000-2004 due to acquisitions but also in<br />
relation to Revenues (from 39% <strong>of</strong> revenues in 2000 to 45% in 2004). Years 2000 and 2001<br />
experienced strong growth in Goodwill while growth stagnated in 2002-2003 as the group focused on<br />
contract trimming and on integrating already acquired companies. <strong>ISS</strong> will as from January 1, 2005<br />
adopt IFRS rules, which require <strong>ISS</strong> to recognise more intangible assets before the residual value is<br />
assigned to goodwill. For <strong>ISS</strong> this means that customer contracts and relationships will be recognised<br />
in the balance sheet. The carrying value <strong>of</strong> goodwill will be reduced accordingly. Customer contracts<br />
and relationships will be amortised while goodwill is not amortised under IFRS. Instead goodwill must<br />
be tested for impairment.<br />
Tangible assets include land, buildings and cleaning equipment. The level <strong>of</strong> tangible assets has also<br />
increased in the period from 2000-2004 in connection with the acquisitions <strong>of</strong> companies and general<br />
corporate growth. As previously mentioned, <strong>ISS</strong> is aiming at leasing its equipment if possible as<br />
operating leases and thus the items included on the balance sheet to a large extent relate to assets<br />
with no active lease market e.g. specialized vehicles. Financial assets mainly include deferred tax<br />
assets and investments in associated companies.
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74<br />
Historical Financial Information<br />
Current Assets<br />
Current assets (less liquid funds) amounted to 18.9% <strong>of</strong> revenues in 2004, which is a decline<br />
compared to 2000 when it accounted for 19.2%. This relative decline in current assets has been driven<br />
by accounts receivables, which represent approximately 84% <strong>of</strong> total current assets. The number <strong>of</strong><br />
days <strong>of</strong> revenues outstanding has been stable in 2004 but is lower than the higher levels in 2001 (49<br />
days) and 2002 (47 days).<br />
Inventories comprise mainly raw materials, supplies and finished goods. Contract work in progress has<br />
increased in the period 2000-2004 with the exception <strong>of</strong> 2003 when it decreased. The increase is<br />
related to management focusing more on integrated facility services, and also the fact that contracts<br />
are increasing in size and scope.<br />
Current Liabilities<br />
The majority <strong>of</strong> current liabilities relate to employee-related liabilities such as accrued salaries and<br />
holiday allowances. Trade payables increased in the period 2000-2004, but the increase is in line with<br />
the development <strong>of</strong> cost <strong>of</strong> goods sold and other operating expenses, hence current liabilities in<br />
relation to revenues have remained stable. Current liabilities have been impacted by an increase in<br />
prepayments from customers, as the company has continuously focused on generating cash flows.<br />
Total Non-Current Liabilities<br />
Provisions include pensions, deferred tax liabilities, and other provisions. As the company operates in<br />
various countries, there are different forms <strong>of</strong> pension schemes. The Group contributes to defined<br />
contribution plans as well as defined benefit plans. As <strong>of</strong> September 30, 2005, the Company had<br />
pension and similar obligations on its balance sheet equal to DKK 802 million, which comprise pension<br />
in relation to the defined benefit plans 14 . Provisions increased in the first nine months <strong>of</strong> 2005 due to<br />
adoption <strong>of</strong> IFRS regarding actuarial losses related to pensions. Other provisions include labour<br />
related items, self insurance, acquisitions and other which combined, have remained stable at around<br />
1.4% - 1.6% <strong>of</strong> revenues during 2000-2004 under Danish GAAP.<br />
14 <strong>ISS</strong> contributes to defined contribution plans as well as defined benefit plans. The majority <strong>of</strong> the pension plans are funded through payments<br />
<strong>of</strong> annual premiums to independent insurance companies responsible for the pension obligation towards the employees (defined contribution<br />
plans). In these plans <strong>ISS</strong> has no legal or constructive obligation to pay further contributions irrespective <strong>of</strong> the funding <strong>of</strong> these insurance<br />
companies. Pension costs related to such plans are recorded as expenses when incurred. For further information about <strong>ISS</strong>'s pension<br />
program, please refer to the Mercer Pension Report.
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D. Cash Flow Statement<br />
<strong>Table</strong> 33: Cash Flow Statement<br />
75<br />
Historical Financial Information<br />
Danish GAAP IFRS<br />
DKK million 2000 2001 2002 2003 2004 9M-2004 9M-2005<br />
EBITA (1) 1,454 1,633 2,010 2,032 2,279 1,664 1,944<br />
Depreciation and Amortisation (2) 468 551 603 587 617 444 482<br />
EBITDA 1,922 2,184 2,613 2,619 2,896 2,108 2,426<br />
Share-based Payment - - - - - 6 3<br />
Changes in Working Capital (125) 52 412 319 186 (618) (1,097)<br />
Changes in Provisions (10) 4 (98) (36) (91) (19) (49)<br />
Other inc. and Exp. Net Payment (3) (25) (67) (19) (76) (43) (162)<br />
Payments Related to Integration Cost - - - - - (15) (77)<br />
Operating Cash Flow before Interest and<br />
Tax<br />
1,784 2,215 2,860 2,883 2,915 1,419 1,044<br />
Net Interest Paid (225) (328) (333) (215) (334) (255) 261<br />
Corporate Tax Paid (294) (377) (263) (323) (602) (355) (497)<br />
Operating Cash Flow 1,265 1,510 2,264 2,345 1,979 809 808<br />
Capex Net (391) (452) (525) (403) (583) (417) (398)<br />
Free Operating Cash Flow 874 1,058 1,739 1,942 1,396 392 410<br />
Acquisitions <strong>of</strong> Businesses (3,003) (3,098) (1,898) (1,065) (3,886) (3,524) (1,937)<br />
Divestment <strong>of</strong> Businesses (1) 13 16 20 36 33 828<br />
Investments in Financial Assets, Net (21) (180) 269 29 (53) (888) 365<br />
Cash flow After Investments (2,151) (2,207) 126 926 (2,507) (3,987) (334)<br />
Financial payments, net 916 2,131 (782) 556 3,358 3,277 4,270<br />
Proceeds – issuance <strong>of</strong> share capital 1,042 789 569 25 793 - -<br />
Purchase/disposal <strong>of</strong> own shares 12 - (5) - (30) (30) -<br />
Dividend Paid to Shareholders - - - (88) (177) (177) (5,830)<br />
Options and Warrants Settled - - - - - - (163)<br />
Minority Interests (16) (15) (5) (8) (6) (4) (10)<br />
Cash flow from Financing Activities 1,954 2,905 (223) 485 3,938 3,066 (1,733)<br />
Net Change in Cash (197) 698 (97) 1,411 1,431 (921) (2,067)<br />
Cash conversion % (3) 105% 118% 167% 150% 107%<br />
Note:<br />
(1) EBITA represents Earnings before Interest, Taxes, Amortization, Other Income and Expenses, and Income from Associates. Amortization<br />
represents only the amortization <strong>of</strong> intangible assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is amortization <strong>of</strong><br />
goodwill under Danish GAAP or amortization <strong>of</strong> customer contracts under IFRS.<br />
(2) Amortization represents only the amortization for intangible assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is<br />
amortization <strong>of</strong> goodwill under Danish GAAP or amortization <strong>of</strong> customer contracts under IFRS.<br />
(3) In 2002, the cash conversion ratio was adjusted to remove the effect <strong>of</strong> a one-time gain <strong>of</strong> DKK 74 million (EUR 10 million) related to the<br />
sale <strong>of</strong> a minority interest in another entity. In 2003, the cash conversion ratio was adjusted to remove the effect <strong>of</strong> a tax repayment <strong>of</strong> DKK<br />
168 million (EUR 23 million) related to the issuance <strong>of</strong> shares to employees.<br />
Source: <strong>ISS</strong><br />
The table above reflects the strong cash generative aspect <strong>of</strong> <strong>ISS</strong>’s business model. In addition to<br />
growth in EBITDA, Free Operating Cash Flow has been improved by a continuously declining working<br />
capital level and relatively low maintenance investments requirements. Average cash conversion has<br />
consistently been above 100% over the last six years and the company aims to achieve a target cash<br />
conversion ratio <strong>of</strong> between 90-95% going forward.
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Capex and Operating Leases<br />
76<br />
Historical Financial Information<br />
As illustrated in Figure 20, capital expenditures have averaged 1.3% <strong>of</strong> Revenues between 2000 and<br />
2004.<br />
Figure 20: Capex 2000-2004<br />
DKK million<br />
700<br />
600<br />
500<br />
400<br />
300<br />
200<br />
100<br />
0<br />
Source: <strong>ISS</strong><br />
1.4%<br />
391<br />
1.3%<br />
452<br />
1.4%<br />
525<br />
1.1%<br />
403<br />
1.4%<br />
2000 2001 2002 2003 2004<br />
Capex Capex as % <strong>of</strong> Revenues<br />
Please see below for a summary <strong>of</strong> operating leasing payments and maintenance Capex from 2000-<br />
2004. <strong>ISS</strong> has certain <strong>of</strong>f-balance sheet liabilities, primarily contingent liabilities relating to operating<br />
leases, which consist <strong>of</strong> leases and rentals <strong>of</strong> properties, vehicles (primarily cars) 15 and other<br />
equipment. On January 1, 2005 <strong>ISS</strong> entered into a new global car fleet lease framework agreement for<br />
three years, including an option for extension for a subsequent three-year term. The framework<br />
agreement contains an option for <strong>ISS</strong> to terminate the underlying country agreement or the entire<br />
global commitment upon four weeks’ notice prior to the end <strong>of</strong> a calendar quarter and subject to <strong>ISS</strong>’s<br />
payment <strong>of</strong> a termination fee. The majority <strong>of</strong> the underlying agreements have a duration <strong>of</strong> three to<br />
five years. The disclosed contingent liability includes <strong>ISS</strong>’s total leasing commitment assuming no<br />
early termination <strong>of</strong> the agreement. The total expenses under operating leases in the income<br />
statement amounted to DKK 1,272 million in 2004 compared to DKK 1,154 million in 2003.<br />
<strong>Table</strong> 34: Historical Overview <strong>of</strong> Operational Leases<br />
DKK million 2000 2001 2002 2003 2004<br />
Operational Leasing Expenses 503 768 1,121 1,154 1,272<br />
Operational Leasing as % <strong>of</strong> Revenue 1.8% 2.2% 3.0% 3.2% 3.2%<br />
Capex 391 452 525 403 583<br />
Capex as % <strong>of</strong> Revenue 1.4% 1.3% 1.4% 1.1% 1.4%<br />
Source: <strong>ISS</strong><br />
Working Capital<br />
In recent years, there has been an increased focus on the optimisation <strong>of</strong> working capital with<br />
particular emphasis on the reduction <strong>of</strong> outstanding debtors as expressed in average receivable days<br />
for a given period and reporting entity. The Company has been and will continue to be focused on<br />
creating a faster and more effective process in all <strong>of</strong> its operations; from the time the initial contact with<br />
the customer is established until the customer's payment is registered in the Group's bank account.<br />
This is achieved through the improvement <strong>of</strong> internal paper-flows, the use <strong>of</strong> information technology<br />
and the optimisation <strong>of</strong> procedures for following up on outstanding debtors. This has resulted in a<br />
reduction in receivable days for the Group as a whole every fiscal year since the end <strong>of</strong> fiscal year<br />
2001 which has been the key driver behind the Cash Conversion reaching consistently more than<br />
15 The company has the ability to terminate its vehicle leases with six months notice in each individual country.<br />
583<br />
1.6%<br />
1.4%<br />
1.2%<br />
1.0%<br />
0.8%<br />
0.6%<br />
0.4%<br />
0.2%<br />
0.0%<br />
% <strong>of</strong> Net Revenues
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77<br />
Historical Financial Information<br />
100% in recent years. However, this reduction in working capital requirements is to some extent <strong>of</strong>fset<br />
by the growth <strong>of</strong> the Company in Continental European and International markets where average<br />
receivable days are typically less favourable than in Northern Europe. In September 2005 average<br />
receivable days were 62 days in Continental Europe, while in Northern Europe the average receivable<br />
days were 32 days. When comparing September 2005 average receivable days <strong>of</strong> individual countries<br />
within Europe the range varies from 16 days in Finland to 94 days in Italy.<br />
Figure 21: Development in Receivable Days Outstanding, 2000-2004<br />
Note:<br />
Receivables Days Outstanding<br />
45<br />
49<br />
47<br />
2000 2001 2002 2003 2004<br />
(1) Defined as (Accounts Receivable) divided by ((Revenue for the total number <strong>of</strong> months plus VAT) divided by 30 days)<br />
Source: <strong>ISS</strong><br />
E. Seasonality<br />
The demand for traditional facility services is generally stable and there appears to be limited<br />
seasonality in the quarterly revenue development over the historical period. However, some <strong>of</strong> the<br />
services <strong>ISS</strong> provides experience seasonality. In particular, demand for the landscaping and pest<br />
control services <strong>of</strong> property services segment are significantly higher in the summer months than in<br />
the fall and winter, which may cause Revenues to be higher in the second and third quarter <strong>of</strong> the year<br />
and lower in the first and fourth quarters. However, given the impact by the timing <strong>of</strong> acquisitions in<br />
particular 2000 and 2001, makes it very difficult to compare quarterly revenue development, hence no<br />
direct conclusions can be drawn.<br />
Figure 22: <strong>ISS</strong> Revenues, 2001-Q3 2005, by Quarter<br />
DKK million<br />
25,000<br />
20,000<br />
15,000<br />
10,000<br />
Source: <strong>ISS</strong><br />
5,000<br />
0<br />
Q1 Q2 Q3 Q4<br />
8,153<br />
8,559<br />
8,804<br />
9,336<br />
9,300<br />
9,683<br />
9,521<br />
9,480<br />
8,917<br />
9,013<br />
8,931<br />
9,304<br />
45<br />
9,244<br />
9,743<br />
10,411<br />
10,957<br />
FY01 FY02 FY03 FY04 FY05<br />
10,845<br />
44<br />
11,677<br />
11,635
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78<br />
Historical Financial Information<br />
For the EBITA margin, there is a clear trend <strong>of</strong> higher pr<strong>of</strong>itability in the second and third quarter since<br />
certain countries have their high-season in summer when the high-margin jobs not within contracts<br />
positively impact EBITA margins. <strong>ISS</strong> tends to incur higher staff costs in the fourth quarter <strong>of</strong> the year<br />
due to the payment <strong>of</strong> bonuses, the additional payment under 13 month salary arrangements and<br />
higher pension contributions. Furthermore, during the summer season labour costs are lower due to<br />
increased use <strong>of</strong> temporary staff.<br />
Figure 23: <strong>ISS</strong> EBITA Margin, 2001-Q3 2005, by Quarter<br />
% <strong>of</strong> Revenues<br />
Source: <strong>ISS</strong><br />
12.0%<br />
10.0%<br />
8.0%<br />
6.0%<br />
4.0%<br />
2.0%<br />
0.0%<br />
4.2%<br />
5.1%<br />
5.5%<br />
3.9%<br />
4.3%<br />
5.7%<br />
6.1%<br />
5.1%<br />
4.6%<br />
6.0%<br />
6.3%<br />
5.6%<br />
4.5%<br />
6.1%<br />
6.3%<br />
5.6%<br />
Q1 Q2 Q3 Q4<br />
4.5%<br />
5.9%<br />
6.6%<br />
FY01 FY02 FY03 FY04 FY05<br />
Figure 24: <strong>ISS</strong> Working Capital, 2001-Q3 2005, by Quarter<br />
% <strong>of</strong> Sales<br />
Source: <strong>ISS</strong><br />
5.0%<br />
2.5%<br />
0.0%<br />
(2.5)%<br />
(5.0)%<br />
(7.5)%<br />
(0.4)%<br />
0.8%<br />
0.1%<br />
(1.5)%<br />
(0.3)%<br />
0.3%<br />
(0.2)%<br />
(2.3)%<br />
(1.6)%<br />
(0.8)%<br />
(1.3)%<br />
(3.0)%<br />
(2.4)%<br />
(1.5)%<br />
(1.3)%<br />
(3.0)%<br />
Q1 Q2 Q3 Q4<br />
FY01 FY02 FY03 FY04 FY05<br />
<strong>ISS</strong>’s working capital requirements are generally higher during the first half <strong>of</strong> the year and lower<br />
during the second half <strong>of</strong> the year. In the first quarter, working capital development is usually negative,<br />
primarily due to low Revenues and a corresponding low Accounts Receivable in Property services /<br />
Landscaping. Working capital then worsens in Q2, primarily due to an increase in Accounts<br />
Receivable due to higher Revenues in Q2 than Q1 from Property services / Landscaping. Working<br />
Capital for Q3 is approximately at same level as Q2, but is influenced by high Accounts Receivable<br />
from generally higher activity in Cleaning Services. Working Capital is at its lowest point in Q4, which<br />
primarily is due to the Company proactively collecting cash before year-end. However, the Q4 working<br />
capital is also affected by the high payables which partly is due to tax withholding and VAT due for<br />
payment in the beginning <strong>of</strong> the following year, and partly due to timing <strong>of</strong> payments around year end.<br />
In the nine month period from January 1, 2005 to September 30, 2005, cash outflow from changes in<br />
working capital amounted to DKK 1,097 million (EUR 147 million). In the three month period from<br />
October 1, 2004 to December 31, 2004, cash inflow from changes in working capital was DKK 805<br />
million (EUR 108 million).<br />
(1.0)%<br />
(2.1)%<br />
(2.0)%
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79<br />
Historical Financial Information<br />
Figure 25: <strong>ISS</strong> Operating Cash Flow before Interest and Taxes, 2001-Q3 2005, by Quarter<br />
DKK million<br />
Source: <strong>ISS</strong><br />
3,000<br />
2,000<br />
1,000<br />
(1,000)<br />
49<br />
215<br />
567<br />
1,384<br />
36<br />
638<br />
874<br />
1,312<br />
240<br />
451<br />
876<br />
1,316<br />
217<br />
422<br />
801<br />
1,475<br />
Q1 Q2 Q3 Q4<br />
FY01 FY02 FY03 FY04 FY05<br />
<strong>ISS</strong>’s Operating Cash Flow tends to be lower in the first quarter <strong>of</strong> its fiscal year due to a number <strong>of</strong><br />
cash payments relating to, among other things, pension contributions, insurance premium payments,<br />
holiday payments and the payment <strong>of</strong> bonuses earned in the prior year. <strong>ISS</strong>’s operating cash flow is<br />
typically positive in the second quarter <strong>of</strong> its fiscal year, and typically becomes increasingly positive<br />
throughout the year and is usually highest in the fourth quarter <strong>of</strong> its fiscal year, when it collects<br />
revenue recognized in the third quarter <strong>of</strong> its fiscal year.<br />
F. Overview <strong>of</strong> Impact <strong>of</strong> Transition to IFRS<br />
<strong>ISS</strong> has historically prepared its consolidated financial statements according to Danish GAAP,<br />
however as previously mentioned, since January 1, 2005 the Company has shifted to prepare its<br />
consolidated financial statements in accordance with International Financial Reporting Standards<br />
(IFRS), as required by EU regulation. The conversion to IFRS will be prepared according to the set <strong>of</strong><br />
special standards in place for first-time adoption <strong>of</strong> IFRS. In general Danish GAAP and the associated<br />
accounting principles applied by <strong>ISS</strong> previous years is not that far from the IFRS requirements. Please<br />
see below for an overview <strong>of</strong> one <strong>of</strong> the main differences between Danish GAAP and IFRS, which is<br />
related to the treatment <strong>of</strong> goodwill.<br />
� IFRS requires an acquirer to recognise the target’s identifiable assets, liabilities and contingent<br />
liabilities that satisfy the relevant recognition criteria at their fair values at the acquisition date. The<br />
following customer-related intangible assets are relevant to <strong>ISS</strong>; customer contract portfolios and<br />
related customer relationships. These types <strong>of</strong> intangible assets have previously not been<br />
recognised by <strong>ISS</strong>, where goodwill and s<strong>of</strong>tware were the only intangible assets recognised i.e.<br />
these intangible assets have previously been included in goodwill.<br />
� The part <strong>of</strong> the purchase price which cannot be allocated to these intangible assets, which will be<br />
amortised assuming they have definite life, will be allocated to goodwill. The goodwill will no longer<br />
be subject to amortisation but rather impairment tests. Previously <strong>ISS</strong> has amortised goodwill over<br />
a period <strong>of</strong> the useful life <strong>of</strong> up to 20 years.<br />
� Under Danish GAAP the share <strong>of</strong> pr<strong>of</strong>it from associates is recognised before tax and the related<br />
tax is disclosed as corporate tax. Going forward pr<strong>of</strong>it from associates will be disclosed net <strong>of</strong> taxes.<br />
� Under IFRS, costs related to integration <strong>of</strong> acquired companies will not be included in the<br />
calculation <strong>of</strong> goodwill but will be charged to the income statement under Integration Costs when a<br />
legal or constructive obligation occurs. Costs related to integration in the acquiring <strong>ISS</strong> Company<br />
will be reclassified from "Other income and expenses, net” to "Integration Costs".<br />
In order to facilitate an understanding <strong>of</strong> the expected impact from the IFRS transition, the bridge to<br />
the 2004 IFRS Pro Forma Numbers Income Statement is presented below. As illustrated the impact <strong>of</strong><br />
the shift to IFRS, will be limited on the reported EBITA and EBITDA.<br />
(91)<br />
581<br />
554
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80<br />
Historical Financial Information<br />
<strong>Table</strong> 35: IFRS implication on 2004 Income Statement<br />
DKK million Actual 2004 IFRS Adj. Unaudited IFRS 2004<br />
Revenues 40,355 40,355<br />
Operating Expenses (37,459) (18) (37,477)<br />
EBITDA 2,896 (18) 2,878<br />
EBITDA % 7.2% 7.1%<br />
Depreciation and Amortisation (617) (617)<br />
EBITA 2,279 (18) 2,261<br />
EBITA % 5.6% 5.6%<br />
Other Income and Expenses, Net (69) 32 (37)<br />
Integration Costs - (142) (142)<br />
Share <strong>of</strong> Pr<strong>of</strong>its from Associates 39 (6) 33<br />
Operating Pr<strong>of</strong>it 2,249 (134) 2,115<br />
Net Finance Cost (343) 8 (335)<br />
Pr<strong>of</strong>it Before Tax And Goodwill Impairment 1,906 (126) 1,780<br />
Income Taxes (598) 44 (554)<br />
Pr<strong>of</strong>it Before Goodwill Impairment 1,308 (82) 1,226<br />
Goodwill Amortisation (1,217) 1,217 -<br />
Tax Effect <strong>of</strong> Goodwill Amortisation 59 (59) -<br />
Goodwill Impairment and Write-Down (344) (344)<br />
Customer Contracts Amortization FY04 (78) (78)<br />
Tax effect <strong>of</strong> Goodwill Impairment and Write-Down 33 33<br />
Net pr<strong>of</strong>it for the year 150 687 837<br />
Note:<br />
(1) Amortization represents only the amortization for intangible assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is<br />
amortization <strong>of</strong> goodwill under Danish GAAP or amortization <strong>of</strong> customer contracts under IFRS.<br />
Source: <strong>ISS</strong><br />
Set forth below is a reconciliation <strong>of</strong> EBITDA to Adjusted pro forma EBITDA to give effect to<br />
acquisitions and divestments during the twelve months ended September 30, 2005;<br />
� Pro Forma Effect <strong>of</strong> Acquisitions. The incremental EBITDA <strong>of</strong> entities acquired during the 12 month<br />
period to September 30, 2005, for the period in which such entities were not part <strong>of</strong> the Group. The<br />
amount <strong>of</strong> incremental EBITDA is based on <strong>ISS</strong>’s estimate, at the time <strong>of</strong> acquisition, as to the EBITDA<br />
to be generated by such acquired entities prior to the acquisition by <strong>ISS</strong>.<br />
� Pro Forma Effect <strong>of</strong> Health Care Operations Business. Reported EBITDA <strong>of</strong> entities divested<br />
during the 12 month period to September 30, 2005. The disposal <strong>of</strong> the Health Care operations<br />
business and <strong>ISS</strong>’s interest in CarePartner represented DKK 76 million (EUR 10 million) <strong>of</strong> EBITDA<br />
for the 12 month period. The remainder represents other minor divestments.<br />
<strong>Table</strong> 36: Pro Forma EBITDA, Twelve Months Ended September 30, 2005<br />
DKK million<br />
LTM<br />
September<br />
2005<br />
Acq during LTM<br />
(pro forma)<br />
Divestments during<br />
LTM (pro forma)<br />
Adj. Health Care<br />
operations<br />
Pro forma<br />
September<br />
FY05<br />
Revenues 45,114 1,973 (250) (487) 46,350<br />
Operating Expense (41,918) (1,791) 233 411 (43,065)<br />
EBITDA 3,196 182 (17) (76) 3,285<br />
EBITDA % 7.1% 9.2% 6.8% 15.6% 7.1%<br />
Depreciation and Amortisation (1) (655) (43) 4 14 (680)<br />
EBITA (2) 2,541 139 (13) (62) 2,605<br />
EBITA % 5.6% 7.0% 5.2% 12.7% 5.6%<br />
Note:<br />
(1) Amortization represents only the amortization for intangible assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is<br />
amortization <strong>of</strong> goodwill under Danish GAAP or amortization <strong>of</strong> customer contracts under IFRS.<br />
(2) EBITA represents Earnings before Interest, Taxes, Amortization, Other Income and Expenses, and Income from Associates. Amortization<br />
represents only the amortization <strong>of</strong> intangible assets and s<strong>of</strong>tware. Further amortization, which is not included herein, is amortization <strong>of</strong><br />
goodwill under Danish GAAP or amortization <strong>of</strong> customer contracts under IFRS.<br />
Source: <strong>ISS</strong> Holding
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G. Current Trading Update<br />
81<br />
Historical Financial Information<br />
Results <strong>of</strong> Operations - Nine Months Ended September 30, 2005 Compared to Nine Months<br />
Ended September 30, 2004<br />
The comments below relate to <strong>ISS</strong>’s unaudited consolidated interim income statements for the nine<br />
months ended September 30, 2004 and the nine months ended September 30, 2005, prepared in<br />
accordance with IFRS for interim reporting.<br />
Revenue. Revenue increased DKK 4,759 million, or 16%, from DKK 29,398 million in the nine months<br />
ended September 30, 2004 to DKK 34,157 million in the nine months ended September 30, 2005.<br />
Organic growth was 3% and net growth from acquisitions was 13%. Currency adjustments were<br />
insignificant in the first nine months <strong>of</strong> 2005.<br />
<strong>Table</strong> 37: Revenue Growth, 9M 2005 versus 9M 2004<br />
(Percentage, rounded) 9M 2004 9M 2005<br />
Organic Growth 1% 3%<br />
Acquisitions, net 9% 13%<br />
Foreign Currency Adjustments (1)% 0%<br />
Total 9% 16%<br />
Note:<br />
(1) In accordance with the announcement <strong>of</strong> certain business changes in Stock Exchange Release dated February 1, 2005. The calculation <strong>of</strong><br />
organic growth does not include the discontinued German hospital services. Discontinuation <strong>of</strong> the German hospital services business<br />
accounted for less than 1% on Group level.<br />
Source: <strong>ISS</strong><br />
Staff costs. Staff costs increased DKK 3,126 million, or 16%, from DKK 19,547 million in the nine<br />
months ended September 30, 2004 to DKK 22,673 million in the nine months ended September 30,<br />
2005. This increase was due primarily to an increase in the overall number <strong>of</strong> employees as a result <strong>of</strong><br />
acquisitions made in the second half <strong>of</strong> 2004 and the first nine months <strong>of</strong> 2005. Staff costs as a<br />
percentage <strong>of</strong> revenue was essentially unchanged at 66.4% for the nine months ended September 30,<br />
2005 compared to 66.5% in the nine months ended September 30, 2004.<br />
Cost <strong>of</strong> sales. Cost <strong>of</strong> sales increased by DKK 447 million, or 20%, from DKK 2,234 million in the nine<br />
months ended September 30, 2004 to DKK 2,681 million in the nine months ended September 30,<br />
2005. This increase was due primarily to acquisitions made in the second half <strong>of</strong> 2004 and the first<br />
nine months <strong>of</strong> 2005. Cost <strong>of</strong> sales as a percentage <strong>of</strong> revenue amounted to 7.8% in the nine months<br />
ended September 30, 2005 compared to 7.6% in the nine months ended September 30, 2004.<br />
Other operating expenses. Other operating expenses increased DKK 868 million, or 16%, from DKK<br />
5,509 million in the nine months ended September 30, 2004 to DKK 6,377 million in the nine months<br />
ended September 30, 2005. This increase was due primarily to acquisitions made in the second half <strong>of</strong><br />
2004 and the first nine months <strong>of</strong> 2005. Other operating expenses as a percentage <strong>of</strong> revenue<br />
remained unchanged at 18.7% for the nine months ended September 30, 2004 and September 30,<br />
2005.<br />
Depreciation and amortization. Depreciation and amortization increased DKK 38 million, or 9%, from<br />
DKK 444 million in the nine months ended September 30, 2004 to DKK 482 million in the nine months<br />
ended September 30, 2005. Depreciation and amortization, as a percentage <strong>of</strong> revenue, amounted to<br />
1.5% and 1.4% in the first nine months <strong>of</strong> 2004 and 2005, respectively.<br />
Operating pr<strong>of</strong>it before other items. Due to the factors discussed above, operating pr<strong>of</strong>it before<br />
other items increased DKK 280 million, or 17%, from DKK 1,664 million in the nine months ended<br />
September 30, 2004 to DKK 1,944 million in the nine months ended September 30, 2005. Operating<br />
pr<strong>of</strong>it before other items as a percentage <strong>of</strong> revenue, i.e., operating margin, was 5.7% for the nine<br />
months ended September 30, 2005 unchanged compared to the nine months ended September 30,<br />
2004.
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82<br />
Historical Financial Information<br />
Other income and expenses, net. Other income and expenses was a net expense <strong>of</strong> DKK 18 million<br />
in the nine months ended September 30, 2004 and a net expense <strong>of</strong> DKK 19 million in the nine<br />
months ended September 30, 2005. <strong>ISS</strong>’s gain on the sale <strong>of</strong> its health care operations was included<br />
in other income and expenses for the nine months ended September 30, 2005. The sale took place in<br />
two steps. When <strong>ISS</strong> sold its health care operations and its 49% interest in CarePartner to a joint<br />
venture between <strong>ISS</strong> and EQT, <strong>ISS</strong> realized a gain <strong>of</strong> DKK 131 million. At the end <strong>of</strong> June 2005, when<br />
<strong>ISS</strong> sold its interest in this joint venture to EQT, <strong>ISS</strong> realized a further gain <strong>of</strong> DKK 106 million.<br />
<strong>ISS</strong>’s decision to discontinue its hospital cleaning services business in Germany through a phase-out<br />
<strong>of</strong> the remaining customer contracts resulted in a DKK 35 million provision for termination costs,<br />
primarily redundancy payments. An announced downsizing <strong>of</strong> <strong>ISS</strong>’s damage control activities led to a<br />
charge <strong>of</strong> DKK 17 million and <strong>ISS</strong> anticipates that it will incur further costs up to a total <strong>of</strong> DKK 30<br />
million relating to downsizing <strong>of</strong> these activities in Denmark, Norway and Sweden.<br />
Other income and expenses, net, for the first nine months <strong>of</strong> 2005 also included DKK 173 million in<br />
costs relating to the Acquisition, including pr<strong>of</strong>essional and advisory fees, a stay-on bonus for the<br />
Executive Management Board and certain key employees <strong>of</strong> <strong>ISS</strong> Management A/S and settlement <strong>of</strong><br />
the Executive Management Board’s bonus accounts. Following the Acquisition, the settlement <strong>of</strong><br />
warrants and options was recognized directly in equity in the amount <strong>of</strong> DKK 159, net <strong>of</strong> tax.<br />
Integration costs. Integration costs decreased in the nine months ended September 30, 2005 to DKK<br />
37 million from DKK 72 million in the nine months ended September 30, 2004. Integration costs for the<br />
nine months ended September 30, 2005 primarily related to redundancy payments and rental<br />
obligations with respect to the acquisition <strong>of</strong> the Engel Group in Finland, Groupe F2E in France, Nobis<br />
Beteiligungen in Germany and Vandezande in Belgium. In 2005, integration costs are expected to<br />
include the estimated DKK 250 million cash effect <strong>of</strong> the restructuring activities included in the<br />
business plan.<br />
Operating pr<strong>of</strong>it. Due to the factors discussed above, operating pr<strong>of</strong>it increased DKK 314 million, or<br />
20%, from DKK 1,574 million in the nine months ended September 30, 2004 to DKK 1,888 million in<br />
the nine months ended September 30, 2005.<br />
Share <strong>of</strong> pr<strong>of</strong>it from associates. Share <strong>of</strong> pr<strong>of</strong>it from associates decreased DKK 11 million, or 65%,<br />
from DKK 17 million in the nine months ended September 30, 2004 to DKK 6 million in the nine<br />
months ended September 30, 2005. This decrease was due primarily to the sale <strong>of</strong> <strong>ISS</strong>’s 49% interest<br />
in CarePartner to a newly formed joint venture entity in which <strong>ISS</strong> retained a 45% interest. As a result<br />
<strong>of</strong> the sale, the results from CarePartner were no longer included in share <strong>of</strong> pr<strong>of</strong>it from associates, but<br />
were consolidated on a proportional basis in <strong>ISS</strong>’s financial statements from February 2005.<br />
Accordingly, CarePartner contributed DKK 11 million in the nine months ended September 30, 2004<br />
compared to DKK 1 million in the nine months ended September 30, 2005.<br />
Net finance costs. Net finance costs increased DKK 106 million, or 46%, from DKK 232 million in the<br />
nine months ended September 30, 2004 to DKK 338 million in the nine months ended September 30,<br />
2005, due primarily to higher net debt incurred in connection with acquisitions.<br />
Historically, <strong>ISS</strong> has swapped the interest on its EMTNs from fixed into floating rates. At the end <strong>of</strong><br />
June 2005, <strong>ISS</strong> settled the interest rate swaps relating to <strong>ISS</strong> Global’s EUR 850 million 2010 EMTNs<br />
and partially settled the interest rate swaps relating to <strong>ISS</strong> Global’s EUR 500 million 2014 EMTNs. The<br />
closing <strong>of</strong> these swaps generated proceeds <strong>of</strong> DKK 782 million, <strong>of</strong> which DKK 268 million was accrued<br />
interest. A gain <strong>of</strong> DKK 514 million will be recognized in <strong>ISS</strong>’s income statement under finance costs<br />
over the remaining term <strong>of</strong> the EMTNs.<br />
Pr<strong>of</strong>it before tax, goodwill impairment and write-down and amortization <strong>of</strong> customer contracts.<br />
As a result <strong>of</strong> the foregoing factors, pr<strong>of</strong>it before tax and goodwill impairment and write-down and<br />
amortization <strong>of</strong> customer contracts increased DKK 197 million, or 14%, from DKK 1,359 million in the<br />
nine months ended September 30, 2004 to DKK 1,556 million in the nine months ended September 30,<br />
2005.
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83<br />
Historical Financial Information<br />
Income taxes. Income taxes increased DKK 17 million, or 4%, from DKK 418 million in the nine<br />
months ended September 30, 2004 to DKK 435 million in the nine months ended September 30, 2005.<br />
Adjusted to exclude the one-time tax-free gain resulting from the divestment <strong>of</strong> the health care<br />
operations and certain non-deductible costs relating to the Acquisition and related financing, the<br />
effective tax rate (defined as income taxes relative to pr<strong>of</strong>it before tax, goodwill impairment and writedown<br />
and amortization <strong>of</strong> customer contracts less share <strong>of</strong> pr<strong>of</strong>it from associates) was 32.0% in the<br />
nine months ended September 30, 2005. In the nine months ended September 30, 2004, the effective<br />
tax rate was 30.7% and was positively impacted by a reversal <strong>of</strong> a tax provision.<br />
Until 2004, <strong>ISS</strong> maintained joint taxation with its wholly owned Danish subsidiaries and certain <strong>of</strong> its<br />
wholly owned foreign subsidiaries. Due to changes in the applicable laws, <strong>ISS</strong> withdrew from this joint<br />
taxation arrangement with its foreign subsidiaries with effect from January 1, 2005. As a result <strong>of</strong> this<br />
withdrawal, <strong>ISS</strong> is subject to re-taxation <strong>of</strong> tax-deductible losses realized in its foreign subsidiaries.<br />
However, according to the applicable transitional rules, <strong>ISS</strong> may repay this tax liability gradually over<br />
future years as these foreign subsidiaries achieve positive taxable income. Because <strong>ISS</strong> has<br />
historically recognized provisions to cover the eventual re-taxation <strong>of</strong> deferred taxes, <strong>ISS</strong>’s withdrawal<br />
from joint taxation with its foreign subsidiaries is not expected to lead to a higher income tax expense<br />
in its income statement.<br />
Pr<strong>of</strong>it before goodwill impairment and write-down and amortization <strong>of</strong> customer contracts.<br />
Pr<strong>of</strong>it before goodwill impairment and write-down and amortization <strong>of</strong> customer contracts increased<br />
DKK 180 million, or 19%, from DKK 941 million in the nine months ended September 30, 2004 to DKK<br />
1,121 million in the nine months ended September 30, 2005.<br />
Goodwill impairment and write-down. Goodwill impairment and write-down was DKK 180 million in<br />
the nine months ended September 30, 2005 compared to DKK 159 million in the nine months ended<br />
September 30, 2004. Goodwill write-down was DKK 5 million in the nine months ended September 30,<br />
2005 and related mainly to the sale <strong>of</strong> a business in Sweden. Impairment charges during the same<br />
period consisted <strong>of</strong> DKK 93 million relating to <strong>ISS</strong>’s business in Germany, DKK 64 million relating to<br />
<strong>ISS</strong>’s damage control activities in Sweden, DKK 10 million relating to <strong>ISS</strong>’s damage control activities in<br />
The Netherlands and DKK 8 million relating to <strong>ISS</strong>’s business in Italy.<br />
Amortization <strong>of</strong> customer contracts. Amortization <strong>of</strong> customer contracts increased DKK 94 million,<br />
from DKK 43 million in the nine months ended September 30, 2004 to DKK 137 million in the nine<br />
months ended September 30, 2005. Customer contract portfolios and related customer relationships<br />
are separated from goodwill for acquisitions carried out after January 1, 2004.<br />
Tax effect <strong>of</strong> goodwill impairment and write-down and amortization <strong>of</strong> customer contracts. The<br />
tax effect <strong>of</strong> goodwill impairment and write-down and amortization <strong>of</strong> customer contracts, which is<br />
presented separately in the income statement to show the effective tax percentage before goodwill<br />
impairment and write-down and amortization <strong>of</strong> customer contracts, was DKK 20 million in the nine<br />
months ended September 30, 2004 and DKK 42 million in the nine months ended September 30, 2005.<br />
This increase mainly related to an increase in acquired customer contract portfolios and related<br />
customer relationships.<br />
Net pr<strong>of</strong>it for the period. As a result <strong>of</strong> the foregoing factors, net pr<strong>of</strong>it for the period increased DKK<br />
87 million, or 11%, from DKK 759 million in the nine months ended September 30, 2004 to DKK 846<br />
million in the nine months ended September 30, 2005. In the nine months ended September 30, 2005,<br />
DKK 836 million was attributable to the equity holders <strong>of</strong> <strong>ISS</strong> and DKK 10 million to minority interests.<br />
In the nine months ended September 30, 2004, the comparative figures were DKK 745 million and<br />
DKK 14 million, respectively.<br />
EBITDA. As a result <strong>of</strong> the foregoing factors, EBITDA increased DKK 318 million, or 15%, from DKK<br />
2,108 million in the nine months ended September 30, 2004 to DKK 2,426 million in the nine months<br />
ended September 30, 2005.
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84<br />
Historical Financial Information<br />
Historical Cash Flow—Nine Months Ended September 30, 2004 and September 30, 2005<br />
The following table sets forth <strong>ISS</strong>’s cash flow statement data for the nine months ended September 30,<br />
2004 and September 30, 2005. This data is derived from <strong>ISS</strong>’s unaudited consolidated interim cash<br />
flow statements for the nine months ended September 30, 2004 and the nine months ended<br />
September 30, 2005, prepared in accordance with IFRS for interim reporting.<br />
<strong>Table</strong> 38: Cash Flow Data, 9M 2005 versus 9M 2004<br />
(DKK million) 9M 2004 9M 2005<br />
Cash Flow Statement Data:<br />
Cash flow from operating activities 809 808<br />
Cash flow from investing activities (4,796) (1,142)<br />
Cash flow from financing activities. 3,066 (1,733)<br />
Source: <strong>ISS</strong><br />
Cash flow from operating activities. Net cash flow from operating activities for the nine months<br />
ended September 30, 2005 was DKK 808 million compared to DKK 809 million for the nine months<br />
ended September 30, 2004. The Group has had a cash conversion <strong>of</strong> more than 100% at year-end for<br />
six consecutive years. Whilst the group expects a positive working capital movement in the fourth<br />
quarter <strong>of</strong> 2005 the working capital movement for the year is expected to be impacted by the year-end<br />
falling on a weekend and the expectation <strong>of</strong> a cash conversion below the level <strong>of</strong> previous years.<br />
During the nine months ended September 30, 2005, working capital used was DKK 1,097 million,<br />
compared to DKK 618 million for the nine months ended September 30, 2004. Interest paid, net,<br />
represented a cash inflow <strong>of</strong> DKK 261 million. In June 2005 <strong>ISS</strong> Global partially settled the interest<br />
rate swaps, which were hedging the coupon payments on <strong>ISS</strong> Global’s EMTNs. This resulted in a net<br />
cash inflow <strong>of</strong> DKK 782 million, <strong>of</strong> which DKK 268 million were accrued interest. This was partially<br />
<strong>of</strong>fset by the DKK 301 million coupon payment in September 2005 on the EMTNs expiring in<br />
September 2010. Interest paid used DKK 255 million <strong>of</strong> cash for the nine months ended September 30,<br />
2004.<br />
Income taxes paid, net, used DKK 497 million in cash for the nine months ended September 30, 2005<br />
compared to DKK 355 million for the nine months ended September 30, 2004. This increase was<br />
primarily due to additional tax payments <strong>of</strong> approximately DKK 92 million relating to the years 2001<br />
and 2002.<br />
Cash flow from investing activities. Net cash flow from investing activities represented an outflow <strong>of</strong><br />
DKK 1,142 million in the nine months ended September 30, 2005. During this period, acquisitions <strong>of</strong><br />
businesses used DKK 1,937 million in cash. This outflow was <strong>of</strong>fset by proceeds from divestments,<br />
primarily DKK 749 million from the sale <strong>of</strong> <strong>ISS</strong>’s health care operations. Investments in intangible<br />
assets and property, plant and equipment, net, were DKK 398 million during the period, representing<br />
1.2% <strong>of</strong> revenue. Investments in financial assets, net, were an inflow <strong>of</strong> DKK 365 million <strong>of</strong> cash in the<br />
nine months ended September 30, 2005. This inflow was primarily due to the sale <strong>of</strong> marketable<br />
securities.<br />
Net cash flow from investing activities represented an outflow <strong>of</strong> DKK 4,796 million in the nine months<br />
ended September 30, 2004. During this period, acquisitions <strong>of</strong> businesses used DKK 3,524 million <strong>of</strong><br />
cash. These comprised the acquisition <strong>of</strong> the Engel Group in Finland, Grupo Unica <strong>of</strong> Spain and a<br />
number <strong>of</strong> smaller acquisitions, including a facility management company and a catering company in<br />
the United Kingdom. Investments in intangible assets and property, plant and equipment, net, were<br />
DKK 417 million, equivalent to 1.4% <strong>of</strong> revenue, in the nine months ended September 30, 2004.<br />
Investments in financial assets, net, represented the investment <strong>of</strong> DKK 888 million in surplus cash.<br />
Cash flow from financing activities. Net cash flow from financing activities represented an outflow <strong>of</strong><br />
DKK 1,733 million in the nine months ended September 30, 2005. This amount reflected DKK 4,270<br />
million <strong>of</strong> cash received following an increase in indebtedness, which was <strong>of</strong>fset by the payment <strong>of</strong><br />
dividends to shareholders in the amount <strong>of</strong> DKK 5,830 million, payments to minority interests <strong>of</strong> DKK<br />
10 million and payments made upon the settlement <strong>of</strong> options and warrants in the amount <strong>of</strong> DKK 163<br />
million.
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85<br />
Historical Financial Information<br />
Net cash flow from financing activities represented an inflow <strong>of</strong> DKK 3,066 million in the nine months<br />
ended September 30, 2004. This amount reflected cash received following an increase in<br />
indebtedness <strong>of</strong> DKK 3,277 million, which was partly <strong>of</strong>fset by the payment <strong>of</strong> dividends to<br />
shareholders in the amount <strong>of</strong> DKK 177 million, payments to minority interests <strong>of</strong> DKK 4 million and<br />
the purchase <strong>of</strong> treasury shares in the amount <strong>of</strong> DKK 30 million.
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X. Appendices<br />
86<br />
Appendices
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Appendix A: Consolidated Income Statement, <strong>ISS</strong><br />
<strong>Table</strong> 39: 9M Income Statements, IFRS (unaudited)<br />
Amounts in DKK million 9M 2004 9M 2005<br />
Revenue 29,398 34,157<br />
Staff costs (19,547) (22,673)<br />
Cost <strong>of</strong> sales (2,234) (2,681)<br />
Other operating expenses (5,509) (6,377)<br />
Depreciation and amortization (444) (482)<br />
Operating pr<strong>of</strong>it before other items 1,664 1,944<br />
Other income and expenses, net (18) (19)<br />
Integration costs (72) (37)<br />
Operating pr<strong>of</strong>it 1,574 1,888<br />
Share <strong>of</strong> pr<strong>of</strong>its from associates 17 6<br />
Net finance costs (232) (338)<br />
Pr<strong>of</strong>it before tax, goodwill impairment and write-down and amortization <strong>of</strong><br />
customer contracts 1,359 1,556<br />
Income taxes (418) (435)<br />
Pr<strong>of</strong>it before goodwill impairment and write-down and amortization <strong>of</strong> customer<br />
contracts 941 1,121<br />
Goodwill impairment and write-down (159) (180)<br />
Amortisation <strong>of</strong> customer contracts (43) (137)<br />
Tax effect <strong>of</strong> goodwill charges and amortization <strong>of</strong> customer contracts 20 42<br />
Net pr<strong>of</strong>it for the period 759 846<br />
Attributable to:<br />
Equity holders <strong>of</strong> the Company 745 836<br />
Minority interests 14 10<br />
Net pr<strong>of</strong>it for the period 759 846<br />
87<br />
Appendices
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Appendix B: Consolidated Cash Flow Statement, <strong>ISS</strong><br />
<strong>Table</strong> 40: 9M Cash Flow Statement, IFRS (unaudited)<br />
Amounts in DKK million 9M 2004 9M 2005<br />
Operating pr<strong>of</strong>it before other items 1,664 1,944<br />
Share-based payments 6 3<br />
Depreciation and amortization 444 482<br />
Changes in working capital (618) (1,097)<br />
Changes in provisions (19) (49)<br />
Interest paid, net (255) 261<br />
Income taxes paid, net (355) (497)<br />
Payments related to other income and expenses, net (43) (162)<br />
Payments related to integration costs (15) (77)<br />
Cash flow from operating activities 809 808<br />
Acquisition <strong>of</strong> businesses (3,524) (1,937)<br />
Divestment <strong>of</strong> businesses 33 828<br />
Investments in intangible assets and property, plant and equipment, net (417) (398)<br />
Investments in financial assets, net (888) 365<br />
Cash flow from investing activities (4,796) (1,142)<br />
Financial payments, net (1) 3,277 4,270<br />
Purchase <strong>of</strong> treasury shares (30) -<br />
Dividend paid to shareholders (177) (5,830)<br />
Warrants and options settled - (163)<br />
Minority interests (4) (10)<br />
Cash flow from financing activities 3,066 (1,733)<br />
Total cash flow (921) (2,067)<br />
Cash and cash equivalents at beginning <strong>of</strong> period 2,243 3,121<br />
Total cash flow (921) (2,067)<br />
Foreign exchange adjustments 2 29<br />
Cash and cash equivalents at end <strong>of</strong> period 1,324 1,083<br />
Note:<br />
(1) Proceeds from bank debt less repayment <strong>of</strong> bank debt.<br />
88<br />
Appendices
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Appendix C: Consolidated Balance Sheet, <strong>ISS</strong><br />
<strong>Table</strong> 41: Assets, IFRS (unaudited)<br />
89<br />
As <strong>of</strong> September 30,<br />
Amounts in DKK million 2004 2005<br />
Goodwill 15,091 16,006<br />
Customer contracts 997 1,570<br />
S<strong>of</strong>tware and other intangible assets 158 149<br />
Total intangible assets 16,246 17,725<br />
Land and buildings 152 241<br />
Plant and equipment 1,531 1,616<br />
Total property, plant and equipment 1,683 1,857<br />
Investment in associates 86 126<br />
Receivables from associates - 164<br />
Other securities and investments 57 32<br />
Other receivables 261 167<br />
Deferred tax assets 542 810<br />
Total financial assets 946 1,299<br />
Total non-current assets 18,875 20,881<br />
Inventories 224 291<br />
Trade receivables 6,529 7,425<br />
Contract work in progress 192 226<br />
Other receivables 355 310<br />
Prepayments 523 361<br />
Income tax receivable 111 217<br />
Securities 950 85<br />
Liquid funds 1,321 1,070<br />
Total current assets 10,205 9,985<br />
Total assets 29,080 30,866<br />
<strong>Table</strong> 42: Equity and Liabilities, IFRS (unaudited)<br />
As <strong>of</strong> September 30,<br />
Amounts in DKK million 2004 2005<br />
Total equity attributable to equity holders <strong>of</strong> the parent 7,893 3,654<br />
Minority interests 102 58<br />
Total equity 7,995 3,712<br />
Pensions and similar obligations 660 802<br />
Deferred tax liabilities 487 639<br />
Other provisions 251 295<br />
Total provisions 1,398 1,736<br />
Long-term debt 9,685 14,368<br />
Total non-current liabilities 11,083 16,104<br />
Current portion <strong>of</strong> other provisions 350 371<br />
Current portion <strong>of</strong> long-term debt 1 4<br />
Interest-bearing loans and borrowings 1,205 1,299<br />
Prepayments from customers 145 304<br />
Trade payables 1,442 1,468<br />
Income tax payable 393 441<br />
Tax withholding, VAT etc. 2,025 2,327<br />
Accrued wages and holiday allowances 2,794 3,045<br />
Other payables and accrued expenses 1,647 1,791<br />
Total current liabilities 10,002 11,050<br />
Total liabilities 21,085 27,154<br />
Total equity and liabilities 29,080 30,866<br />
Appendices
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Appendix D: Consolidated Balance Sheet, <strong>ISS</strong> Holding<br />
90<br />
Appendices<br />
Note:<br />
Unaudited Consolidated Preliminary Interim Balance Sheet and Purchase price allocation<br />
The process <strong>of</strong> identifying and determining the fair values to be assigned to the acquired identifiable<br />
assets and liabilities and contingent liabilities assumed in the acquisition <strong>of</strong> <strong>ISS</strong> has not yet been<br />
completed. Accordingly, the unaudited consolidated preliminary interim balance sheet is based on<br />
initial accounting and provisional values.<br />
The preliminary purchase price allocation and calculation <strong>of</strong> goodwill are based on the carrying<br />
amount <strong>of</strong> the acquired net assets <strong>of</strong> <strong>ISS</strong> as <strong>of</strong> the Acquisition Date, adjusted for certain known events<br />
and transactions. These adjustments to the carrying amounts <strong>of</strong> the acquired net assets as <strong>of</strong> the<br />
Acquisition Date include:<br />
� a reduction <strong>of</strong> long-term debt to reflect the market price <strong>of</strong> <strong>ISS</strong> Global's debt obligation under its<br />
EMTNs as <strong>of</strong> the Acquisition Date, resulting in a DKK 1,811 million reduction <strong>of</strong> long-term debt, which<br />
includes reversal <strong>of</strong> DKK 389 million related to gains on interest rate swaps hedging the fixed interest<br />
rate <strong>of</strong> the EMTNs;<br />
� a DKK 107 million increase in pension obligations based on actuarial calculations updated in certain<br />
countries in connection with the preparation <strong>of</strong> the unaudited consolidated interim financial statements<br />
<strong>of</strong> <strong>ISS</strong> as <strong>of</strong> and for the nine months ended September 30, 2005;<br />
� recognition <strong>of</strong> transaction-related obligations <strong>of</strong> DKK 382 million regarding the settlement <strong>of</strong> options<br />
and warrants and certain obligations assumed by <strong>ISS</strong> as a direct consequence <strong>of</strong> the Transactions;<br />
and<br />
� the tax impact from the above adjustments.<br />
Additional fair value adjustments must, however, still be made in respect <strong>of</strong> the assets acquired and<br />
liabilities and contingent liabilities assumed, which are to be recognized under the following headings:<br />
� customer contract portfolios and related customer relationships;<br />
� s<strong>of</strong>tware and other intangible assets;<br />
� property, plant and equipment;<br />
� financial assets;<br />
� current assets;<br />
� pensions (with the exception <strong>of</strong> the DKK 107 million adjustment mentioned above); and<br />
� other provisions as well as contingent liabilities.<br />
Furthermore, any other identifiable intangible assets must be recognized at fair value as <strong>of</strong> the<br />
Acquisition Date, including the value <strong>of</strong> <strong>ISS</strong>'s brands and non-contractual relationships, etc. In<br />
particular, adjustments related to the amount to be recognized in respect <strong>of</strong> customer contract<br />
portfolios and related relationships and brands and other intangible assets are expected to be<br />
significant. Such fair value adjustments may have an impact on the recognized deferred tax assets<br />
and liabilities. As amounts to be recognized in respect <strong>of</strong> certain <strong>of</strong> these intangible assets must be<br />
amortized over their expected useful lives, <strong>ISS</strong> Holding will also experience a significant increase in its<br />
consolidated non-cash expenses and a corresponding decrease in its consolidated net pr<strong>of</strong>it or<br />
increase in its consolidated net loss and thereby a reduction <strong>of</strong> equity. In addition, the tax impact <strong>of</strong> the<br />
above adjustments may be significant.<br />
The amounts to be recognized when the purchase price allocation and goodwill calculation are<br />
finalized will deviate significantly from those recognized in this unaudited consolidated preliminary<br />
interim balance sheet as <strong>of</strong> September 30, 2005. Furthermore, <strong>ISS</strong> Holding cannot give any assurance<br />
that such adjustments will not also result in increases in the <strong>ISS</strong> Holding’s consolidated expenses and<br />
corresponding decreases in its consolidated net pr<strong>of</strong>it or increases in its consolidated net loss and<br />
thereby a reduction <strong>of</strong> equity.
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<strong>Table</strong> 43: Assets, IFRS (unaudited)<br />
91<br />
As <strong>of</strong> September 30,<br />
Amounts in DKK million 2005<br />
Goodwill 28,236<br />
Customer contracts 1,570<br />
S<strong>of</strong>tware and other intangible assets 149<br />
Total intangible assets 29,955<br />
Land and buildings 241<br />
Plant and equipment 1,616<br />
Total property, plant and equipment 1,857<br />
Investment in associates 126<br />
Receivables from associates 164<br />
Other securities and investments 32<br />
Other receivables 167<br />
Deferred tax assets 727<br />
Total financial assets 1,216<br />
Total non-current assets 33,028<br />
Inventories 291<br />
Trade receivables 7,425<br />
Contract work in progress 226<br />
Receivables from Affiliated Companies 1<br />
Other receivables 316<br />
Prepayments 361<br />
Income tax receivable 296<br />
Securities 85<br />
Liquid funds 1,257<br />
Total current assets 10,258<br />
Total assets 43,286<br />
<strong>Table</strong> 44: Equity and Liabilities, IFRS (unaudited)<br />
As <strong>of</strong> September 30,<br />
Amounts in DKK million 2005<br />
Total equity attributable to equity holders <strong>of</strong> the parent 7,673<br />
Minority interests 58<br />
Total equity 7,731<br />
Pensions and similar obligations 802<br />
Deferred tax liabilities 1,041<br />
Other provisions 295<br />
Total provisions 2,138<br />
Long-term debt 15,699<br />
Total non-current liabilities 17,837<br />
Current portion <strong>of</strong> other provisions 371<br />
Current portion <strong>of</strong> long-term debt 4<br />
Interest-bearing loans and borrowings 7,162<br />
Debt to Affiliated Companies 738<br />
Prepayments from customers 304<br />
Trade payables 1,478<br />
Income tax payable 441<br />
Tax withholding, VAT etc. 2,327<br />
Accrued wages and holiday allowances 3,045<br />
Other payables and accrued expenses 1,848<br />
Total current liabilities 17,718<br />
Total liabilities 35,555<br />
Total equity and liabilities 43,286<br />
Appendices