ARL.L Regulatory News (ARL)

27 Sep 2007 07:03

SMC Group Plc27 September 2007 SMC GROUP PLC ("SMC", "the Company" or "the Group") Interim Results for Six Months ended 30 June 2007 SMC Group, the architects and design business, announces its interim results forthe six month period ended 30 June 2007. Highlights • Turnover increased to £21.1m (2006: £11.3m) • Gross profit increased to £10.6m (2006: £6.1m) • Successfully implemented the recommendations of the internal review committee • Underperforming areas of the business either integrated into the Group or have had offices closed • Reduction in headcount to approximately 600 people from 650 • Work in progress reduced by 79 to 53 days, exceptional debtor provisions of £2.9m • Overhead reductions in excess of £2m annualised achieved. • Discussions with Aukett Fitzroy Robinson Group Plc continuing • Strong pipeline of existing and new business • Pre-exceptional loss before tax and amortisation of £153,000 (2006: Profit of £1.6m). Loss before tax and amortisation of £4.5m (2006: Profit of £1.8m) • Adjusted basic earnings per share of 0.48p (2006: 4.26p). Unadjusted basic loss(earnings) per share -9.8p (2006: 2.9p) Commenting on the results, Sir Rodney Walker, Executive Chairman of SMC said, ''"The first six months of the year has been a period of change. Thedisappointing performance of 2006 required a detailed review of all of thebusiness and this has now been completed. The results are a more efficient andstreamlined business where underperforming business units and personnel haveleft the Group, a number of offices have been closed and the Group's cost basehas been rationalised. Having implemented change and borne the associated costs,the future prospects are encouraging. The Group continues to attract substantialprojects across the variety of market sectors in which it operates. It is thisability to generate and retain high profile work - and therefore revenues - thatremains high and this is the underlying strength of the business which hasstarted to drive our return to day to day profitability." - ends - For further information please contact: SMC Group Plc Tel: +44 (0)20 7495 5335Sir Rodney Walker/Robert Boardman Numis Securities Tel: +44 (0)20 7260 1000James Serjeant/Stuart Skinner Bell Pottinger Corporate & Financial Tel: +44 (0)20 7861 3232David Rydell/Chris Hamilton Chairman's Statement Following a disappointing 2006 the Company has completed its strategic reviewundertaken in the first half of 2007 and implemented all of its recommendationsput to the Board. This review, which covered all aspects of management and operations, highlighteda number of weaknesses and inconsistencies and pointed the need for radicalcorrective action. The Board was fully committed to addressing the problems revealed by the review.We began restructuring the business by reducing headcount in the underperformingbusiness units, integrating certain other business units, and closing certainoffices. This has led to a comprehensive rationalisation of the Group's costbase. The Group's ability to win new business across various market sectors in whichwe operate remains high and revenues are now at levels anticipated at thebeginning of 2007. This underlying strength together with the rationalised costbase points the way to a much improved second half performance. Managementinformation available for July and August further underpins this view. These restructuring initiatives have seen: - a reduction in headcount from 650 to 600 employees as at 27th September 2007. - net work in progress has reduced by £3.0m to 7.1m in period. - debtor and WIP provisions of £2.9m have been made in the 6 month period ending 30 June. - overhead reductions in excess of £2m annualised together with other efficiencies have been implemented. All the above changes are continuing to bring benefits which are being reflectedin the Group's day to day performance. The first half results, which for the first time have been stated in accordancewith IFRS, do of course reflect an extremely turbulent period and the changesmade have resulted in the need to provide for some £3.6m of exceptional costs. Outlook As previously announced we have recently refinanced the Group's debt position.Our bankers have been particularly supportive and have confirmed that they willcontinue to be so as we begin the next stage of recovery. We are working withproviders of finance and vendors to ensure that the Group's deferredconsideration liabilities are appropriately funded. As shareholders know, the Group is liable to pay deferred consideration tovarious previous owners of certain of our successful business units. We continueto work with these vendors as well as providers of finance to ensure that theseliabilities are appropriately funded. The Board believes that it will achieve asuccessful resolution to these discussions. The Board is grateful for the support it has received from all the personnelwithin the Group who have endured uncertainty and change but who havenevertheless remained fully focused on their day to day responsibility to ourclients. In August we announced that we had entered into a non-binding heads of agreementwith the Aukett Fitzroy Robinson Group Plc, the only other listed architecturebusiness, relating to a potential merger to form the largest architecture Groupin Europe. Our discussions are continuing and shareholders will be updated asdevelopments occur. With the improved performance now evident following the changes made the Groupis well positioned to drive improved financial results thereby increasingshareholder value. Thanks to everyone's support and patience, the prospects forSMC are looking a good deal brighter. REVIEW REPORT OF INDEPENDENT AUDITORS Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2007 which comprises the Consolidated IncomeStatement, Consolidated Balance Sheet, Consolidated Statement of Changes inEquity, Consolidated Cash Flow Statement, and the related notes 1 to 10. We haveread the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information. This report is made solely to the company having regard to guidance contained inBulletin 1999/4 'Review of interim financial information' issued by the AuditingPractices Board. To the fullest extent permitted by the law, we do not accept orassume responsibility to anyone other than the company, for our work, for thisreport, or for the conclusions we have formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report as required by the AIM Rulesissued by the London Stock Exchange. As disclosed in note 10, the next annual financial statements of the group willbe prepared in accordance with those IFRSs adopted for use by the EuropeanUnion. The accounting policies are consistent with those that the directors intend touse in the next financial statements. Review work performed We conducted our review having regard to the guidance contained in Bulletin 1999/4 'Review of interim financial information' issued by the Auditing PracticesBoard for use in the United Kingdom. A review consists principally of makingenquiries of group management and applying analytical procedures to thefinancial information and underlying financial data, and based thereon,assessing whether the accounting policies and presentation have beenconsistently applied, unless otherwise disclosed. A review excludes auditprocedures such as tests of controls and verification of assets, liabilities andtransactions. It is substantially less in scope than an audit performed inaccordance with International Standards on Auditing (UK and Ireland) andtherefore provides a lower level of assurance than an audit. Accordingly we donot express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2007. Emphasis of matter - Going Concern In forming our conclusion, which is not modified, we have considered theadequacy of the disclosures made in Note 1 to the financial informationconcerning the steps that the Directors are taking to enable the Group to meetits liabilities as they fall due. The validity of the going concern basisdepends on the Directors' ability to eliminate a potential funding shortfall bymeasures that include renegotiating the Group's deferred considerationobligations, seeking additional debt facilities and improving cash flow fromworking capital. The interim financial information does not include anyadjustments that might result if the directors were unsuccessful in puttingthese measures in place. Ernst & Young LLPLondon 26 September 2007 Consolidated income statementFor the six months ended 30 June 2007 Unaudited Unaudited Unaudited Unaudited Before Exceptional exceptional costs costs (note 3) Total Total Total 6 months 6 months 6 months 6 months Year ended 30 ended 30 ended 30 ended 30 ended 31 June 2007 June 2007 June 2007 June 2006 Dec 2006 Notes £'000 £'000 £'000 £'000 £'000CONTINUINGOPERATIONS REVENUE 21,106 - 21,106 11,306 30,875Cost of sales (10,488) (10,488) (5,203) (16,285) --------- --------- -------- -------- --------GROSS PROFIT 10,618 - 10,618 6,103 14,590 Administrativeexpenses (9,450) (3,614) (13,064) (3,767) (10,451)Depreciation (360) - (360) (137) (420)Amortisationof intangibleassets (780) - (780) (97) (671)Share ofresults ofjoint venture- post tax - - - 107 90 --------- --------- -------- -------- --------OPERATINGPROFIT /(LOSS) 28 (3,614) (3,586) 2,209 3,138 Finance income 120 - 120 16 38Finance costs (1,081) - (1,081) (442) (1,200) --------- --------- -------- -------- --------(LOSS)/PROFITBEFORE TAXATION (933) (3,614) (4,547) 1,783 1,976 Taxation 4 - - - (666) (988) --------- --------- -------- -------- --------(LOSS)/PROFITFOR THE PERIOD (933) (3,614) (4,547) 1,117 988 --------- --------- -------- -------- -------- ADJUSTED EARNINGS PER SHARE (INPENCE)Basic 5 0.48 3.91 6.33Diluted 5 0.45 3.68 5.83 --------- --------- -------- -------- -------- The 30 June 2006 and the 31 December 2006 results have been restated due to theadoption of International Financial Reporting Standards ("IFRS") - see note 1. Consolidated balance sheet As at 30 June 2007 Unaudited Unaudited 30 June 2007 30 June 2006 31 Dec 2006 Notes £'000 £'000 £'000NON-CURRENT ASSETSGoodwill 20,963 15,625 20,815Other intangible assets 14,811 4,523 14,628Property, plant and equipment 1,910 1,052 1,956Interests in joint venture 133 150 133Other financial assets 1,560 - 1,429 -------- -------- -------- -------- -------- --------TOTAL NON-CURRENT ASSETS 39,377 21,350 38,961 CURRENT ASSETSTrade and other receivables 23,327 18,617 26,992Cash and short term deposits 598 - 1,276 -------- -------- --------TOTAL CURRENT ASSETS 23,925 18,617 28,268 -------- -------- --------TOTAL ASSETS 63,302 39,967 67,229 -------- -------- -------- CURRENT LIABILITIESTrade and other payables (10,579) (5,860) (10,581)Current tax liabilities (1,222) (1,193) (1,550)Bank overdrafts and loans (17,797) (2,690) (14,335)Contingent consideration (2,757) (486) (5,549) -------- -------- --------TOTAL CURRENT LIABILITIES (32,355) (10,229) (32,015) -------- -------- --------NET CURRENT(LIABILITIES)/ASSETS (6,869) 8,388 (3,747) -------- -------- -------- NON-CURRENT LIABILITIESBank loans (1,350) (7,467) (1,350)Contingent consideration (9,721) (7,735) (9,854)Deferred tax liabilities (92) (32) (92)Other payables (192) (389) (326) -------- -------- --------TOTAL NON-CURRENT LIABILITIES (11,355) (15,623) (11,622) -------- -------- --------TOTAL LIABILITIES (43,710) (25,852) (43,637) -------- -------- --------NET ASSETS 19,592 14,115 23,592 -------- -------- -------- EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT Share capital 244 197 230Share premium 13,248 6,623 13,157Other reserves 7,855 3,914 7,368Own shares (158) (150) (150)Retained earnings (1,597) 3,531 2,987 -------- -------- --------TOTAL EQUITY 19,592 14,115 23,592 -------- -------- -------- The 30 June 2006 and the 31 December 2006 balances have been restated due to theadoption of International Financial Reporting Standards ("IFRS") - see note 1. Consolidated statement of changes in equity For the six months ended 30June 2007 Unaudited Unaudited Year 6 months ended 6 months ended ended 31 30 June 2007 30 June 2006 Dec 2006 Notes £'000 £'000 £'000 (Loss) / profit for theperiod (4,547) 1,117 988 -------- -------- --------Total recognised income andexpense for the period (4,547) 1,117 988 Shares issued in the period 583 5,758 15,779Share -based payment 125 107 206Dividends (161) - (394) -------- -------- --------Net change in equity in theperiod (4,000) 6,982 16,579 -------- -------- -------- -------- -------- --------Opening equity 23,592 7,133 7,013 -------- -------- --------Closing equity 19,592 14,115 23,592 -------- -------- -------- The 30 June 2006 and the 31 December 2006 results and balances have beenrestated due to the adoption of International Financial Reporting Standards("IFRS") - see note 1. Consolidated cash flow statement For the six months ended 30 June 2007 Unaudited Unaudited 6 months ended 6 months ended Year ended 31 30 June 2007 30 June 2006 Dec 2006 Notes £'000 £'000 £'000 Operating activitiesCash generated from/(absorbed by) operations 7a 1,385 (635) (349)Tax paid (328) (716) (1,013) -------- -------- --------Net cash flow from operating activities 1,057 (1,351) (1,362) -------- -------- -------- Investing activitiesInterest received 120 16 40Proceeds on disposal ofproperty, plant andequipment - - 370Purchases of property,plant and equipment (360) (21) (1,921)Acquisition ofsubsidiaries 7b (3,631) (5,755) (13,092) -------- -------- --------Net cash flow used ininvesting activities (3,871) (5,760) (14,603) -------- -------- -------- Financing activitiesInterest paid (831) (324) (928)Dividends paid to equityholders of the parent (161) - (394)New bank loans 3,000 5,826 15,125Repayment of bank loans (862) (302) (8,856)Proceeds from issue of new shares 92 1,674 7,489Repayment of hire purchaseand finance lease obligations (126) (61) (101) -------- -------- --------Net cash flow from financing activities 1,112 6,813 12,335 -------- -------- -------- -------- -------- --------Decrease in cash and cashequivalents (1,702) (298) (3,630) Cash and cash equivalents atbeginning of the period (5,191) (1,561) (1,561) -------- -------- --------Cash and cash equivalents atend of the period 7c (6,893) (1,859) (5,191) -------- -------- -------- The 30 June 2006 and the 31 December 2006 results have been restated due to theadoption of International Financial Reporting Standards ("IFRS") - see note 1. Notes to the financial information For the six months ended 30 June 2007 1 Basis of preparation This interim financial information was approved by the board on 26th September2007. This statement will be sent to all shareholders and will be available fromCompany's Registered Office. The financial information contained in this interim report does not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985.Statutory accounts for the year ended 31 December 2006 (prepared in accordancewith UK GAAP) were prepared and filed with the Registrar of Companies andreceived an unqualified audit report and did not contain a statement undersection 237 (2) or (3) of the Companies Act 1985. The Board of Directors regularly monitors the ability of the Group to meet itsliabilities as they fall due for the foreseeable future against the facilitiesand funding options open to it. The Board of Directors adopts the going concernbasis of preparation of the financial statements if in its assessment it has areasonable expectation that the Group has adequate resources to continue for theforeseeable future. Having conducted a review in relation to the interim financial information as at30th June 2007 the Directors have identified a potential shortfall in relationto the Group's ability to meet the cash element of estimated contractualcontingent consideration payments in July 2008. However the Board is takingsteps including the renegotiation of contingent consideration obligations,seeking additional debt facilities and improving cash flow from working capitalwhich in their opinion will give the Group every prospect of meeting itsliabilities as they fall due for the foreseeable future and therefore havecontinued to adopt the going concern basis in the preparation of these financialstatements. The interim financial information does not include any adjustmentsthat might result if the directors were unsuccessful in putting these measuresin place. 2 Adoption of IFRS SMC Group Plc has adopted International Financial Reporting Standards ('IFRS')this year, having previously applied UK accounting standards. These interimstatements are the first that the company has prepared under IFRS and they havebeen prepared in accordance with the IFRS accounting policies that managementexpects to apply in the 31 December 2007 IFRS-compliant full year financialstatements. The comparative results for the six months ended 30 June 2006 andthe year ended 31 December 2006 have been restated accordingly. Reconciliationsfrom the previously stated UK GAAP financial information together withexplanations and the revised accounting policies are see out in notes 8, 9 and10. 3 Exceptional costs Exceptional costs are the costs associated with making additional provisionsagainst debtors and amounts recoverable on contracts where there has been areassessment of the recoverability of balances relating to prior years based onfurther evidence becoming available in the period. Exceptional costs also include the costs of rationalising the Group'sactivities, in particular the costs associated with the termination ofemployment and closure of various premises. 4 Taxation Taxation for the six months to 30 June 2007 is based on the effective rate oftaxation which is estimated to apply for the year ending 31 December 2007 Taxation for the year ended 31 December 2006 is based on the actual rate oftaxation which applied for the year ended 31 December 2006 Taxation for the six months to 30 June 2006 was based on the effective rate oftaxation which was estimated to apply for the year ended 31 December 2006 5 Earnings per share Unaudited Unaudited 6 months ended 6 months ended Year ended 30 June 2007 30 June 2006 31 Dec 2006 Weighted average number ofshares (£'000)For basic earnings per share 46,517 36,782 39,940Dilutive effect of share options 3,285 2,280 3,405 --------- -------- --------For diluted earnings per share 49,802 39,062 43,345 --------- -------- -------- Profits for basic and dilutedearnings per share (£'000)(Loss)/profit for the period (4,547) 1,117 988Add back:-- Exceptional costs 3,614 - -- Amortisation of intangible assets 780 97 1,083- Share -based payment 125 107 206- Interest on contingent consideration 250 118 251 --------- -------- -------- Adjusted profit for theperiod 222 1,439 2,528 --------- -------- -------- Adjusted earnings per share(pence per share)Basic 0.48 3.91 6.33Diluted 0.45 3.68 5.83 --------- -------- -------- Adjusted earnings per share has been presented in to allow earnings per share toreflect the earnings more directly related to the trading of the Group in eachperiod. 6 Dividend An interim dividend of 0.35p per share was paid in January 2007 (A finaldividend of 1p per share was paid in July 2006 for the year ended 31 December2005) 7 Notes to the cash flow statement Unaudited Unaudited 6 months ended 6 months ended Year ended 31 30 June 2007 30 June 2006 Dec 2006 £'000 £'000 £'000 a Cash generated from/(absorbed by) operations Operating (loss)/profit (3,586) 2,209 3,138Share -based payment 125 107 206Share of results of joint venture- post tax - (107) (90)Depreciation of property, plant andequipment 360 137 420Profit on disposal of property,plant and equipment - - 20Amortisation of intangibleassets 780 97 671Decrease/(increase) in tradeand other receivables 3,551 (3,806) (6,085)Increase in trade and other payables 155 728 1,371 -------- -------- ---------Cash generated from/(absorbedby) operations 1,385 (635) (349) -------- -------- --------- b Acquisition of subsidiaries Consideration paid on acquisitions - (6,311) (13,441)Consideration paid on prior periodacquisitions (3,631) (486) (486)Cash acquired with subsidiaries - 1,042 835 -------- -------- ---------Net cash outflow for acquisitions (3,631) (5,755) (13,092) -------- -------- --------- c Analysis of cash and cash equivalents Cash and cash equivalents per balancesheet 598 - 1,276Bank overdrafts (7,491) (1,859) (6,467) -------- -------- ---------Cash and cash equivalents per cash flow statement (6,893) (1,859) (5,191) -------- -------- --------- 8 Summary of significant accounting policies As explained in note 2, the group will be presenting its financial statements inaccordance with IFRS for the first time in the 31 December 2007 full yearfinancial statements. Set out below are the accounting policies that managementexpects to apply in the 31 December 2007 IFRS-compliant full year financialstatements. Basis for preparation The consolidated financial statements are prepared on the historical cost basis. Figures are presented in Sterling and rounded to the nearest thousand (£'000)except when otherwise indicated. Basis of consolidation The consolidated financial statements comprise the results of SMC Group Plc andall of its subsidiaries. Subsidiaries are fully consolidated from the date ofacquisition, being the date on which the group obtains control, and continue tobe consolidated until the date that such control ceases. All intra-group balances, transactions, income and expenses and profits andlosses resulting from intra-group transactions are eliminated in full. Exemptions appliedIFRS 1 allows first-time adopters certain exemptions from the generalrequirement to apply IFRS's as effective for December 2005 year endsretrospectively. The Group has taken the following exemptions: • IFRS 3 Business Combinations has not been applied to acquisitions of subsidiaries or of interests in associates and joint ventures that occurred before 1 January 2006.• Cumulative currency translation differences for all foreign operations are deemed to be zero as at 1 January 2006.• IFRS 2 Share-based Payment has not been applied to any equity instruments that were granted on or before 7 November 2002, nor has it been applied to equity instruments granted after 7 November 2002 that vested before 1 January 2006. For cash-settled share-based payment arrangements, the Group has not applied IFRS 2 to liabilities that were settled before 1 January 2006. Business combinations Business combinations are accounted for using the purchase method. This involvesrecognising identifiable assets (including previously unrecognised intangibleassets) and liabilities (including contingent liabilities and excluding futurerestructuring) of the acquired business at fair value. Goodwill acquired in a business combination is initially measured at cost, beingthe excess of the fair value of the cost of the business combination over thegroup's share of the net fair value of the acquiree's identifiable assets,liabilities and contingent liabilities. Contingent consideration Where the cost of a business combination includes amounts that are contingent onfuture events, these amounts are included in the cost of the businesscombination to the extent that they are probable and can be measured reliably.Contingent cash consideration is discounted and recorded at net present value asa provision. Contingent share consideration, where the number of shares to beissued is dependent on the market price of the company's shares is measured onthe effective interest method and is also recorded as a liability. If the events on which consideration is contingent do not occur, the cost of thebusiness combination is adjusted. If and when additional amounts of contingentconsideration become probable or payable, they are also treated as an adjustmentto the cost of the business combination. Intangible assets Goodwill Following initial recognition, goodwill is measured at cost less any accumulatedimpairment losses. For the purpose of impairment testing, goodwill is allocatedto the group's cash-generating units that are expected to benefit from thesynergies of the combination, irrespective of whether other assets orliabilities of the group are assigned to those units. Goodwill is reviewed for impairment annually or more frequently if there is anindication of impairment. Impairment for goodwill is determined by assessing therecoverable amount of the cash-generating unit to which the goodwill relates.Where the recoverable amount of the cash-generating unit is less than thecarrying value of the cash-generating unit to which goodwill has been allocated,an impairment loss is recognised. Impairment losses to goodwill cannot bereversed in future periods. Other intangible assets Intangible assets acquired separately are measured on initial recognition atcost. An intangible asset acquired as part of a business combination isrecognised outside goodwill if the asset is separable or arises from contractualor other legal rights and its fair value can be measured reliably. Followinginitial recognition, intangible assets are carried at cost less any accumulatedamortisation and any accumulated impairment losses. Internally generatedintangible assets, excluding capitalised development costs, are not capitalisedand expenditure is reflected in the income statement in the year in which theexpenditure is incurred. Intangible assets with finite lives are amortised over their useful life andassessed for impairment whenever there is an indication of impairment. Theamortisation period and the amortisation method for intangible assets withfinite useful lives are reviewed at least at each financial year end. Theamortisation expense on intangible assets with finite lives is recognised in theincome statement in the expense category consistent with the function of theintangible asset. Amortisation is provided on straight line basis on intangible assets with finitelives as follows: Order backlog over estimated remaining life of contracts Customer Relationships 1-25 years Trade names 1-50 years Database 1-10 years Joint venture The group has an interest in a joint venture which is a jointly controlledentity. A joint venture is a contractual arrangement whereby two or more partiesundertake an economic activity that is subject to joint control, and a jointlycontrolled entity is a joint venture that involves the establishment of aseparate entity in which each venturer has an interest. The group recognises its interest in a joint venture using the equity method ofaccounting. Under the equity method, the interest in the joint venture iscarried in the balance sheet at cost plus post-acquisition changes in theGroup's share of its net assets, less distributions received and less anyimpairment in value of the individual's investment. The financial statements of the joint venture are prepared for the sameaccounting period as the parent company and using consistent accountingpolicies. Share Incentive Plan TrustThe Company operates a Share Incentive Plan Trust ("SIP Trust") and has de factocontrol of the unallocated shares held by the Trust and bears their benefit andrisks. In accordance with SIC-12 Consolidation - Special Purpose Entities, a SIPTrust should be consolidated when the substance of the relationship indicatesthat it is controlled by the reporting entity. The SIP Trust is a SpecialPurpose Entity (SPE) which is indirectly controlled by the company. Investmentsin own shares which comprise the unallocated shares of the SIP Trust are treatedas a deduction in arriving at shareholders' funds. Allocations of shares toemployees under the profit sharing scheme and exercise of share options aretreated as disposals Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciationand accumulated impairment in value. Depreciation is provided at rates calculated to write each asset down to itsestimated residual value evenly over its expected useful life, as follows: Short leasehold improvements over the shorter of the useful life and the lease period Motor vehicles 25% on reducing balance Fixtures and fittings 20% to 25% on reducing balance Computer and office equipment 25% on straight line or reducing balance The carrying values of property, plant and equipment are reviewed for impairmentif events or changes in circumstances indicate that the carrying value may notbe recoverable, and are written down immediately to their recoverable amount.Useful lives and residual values are reviewed annually and where adjustments arerequired these are done prospectively. Financial assets Financial assets in the balance sheet are loans and receivables. Loans andreceivables are non-derivative financial assets with fixed or determinablepayments that are not quoted in an active market. They are included in currentassets, except for maturities greater than 12 months after the balance sheetdate. These are classified as non-current assets. Investments Investments in the parent company's balance sheet are stated at cost lessaccumulated impairment. Investments in subsidiaries are eliminated onconsolidation. Cash and cash equivalents Cash and cash equivalents comprise cash at banks and in hand and short termdeposits with an original maturity of 3 months or less. For the purpose of the consolidated cash flow statement, cash and cashequivalents consist of cash and cash equivalents as defined above, net ofoutstanding bank overdrafts. Interest-bearing loans and borrowings All loans and borrowings are initially recognised as financial liabilities atfair value less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings aresubsequently measured at amortised cost using the effective interest ratemethod. Leases Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. Finance leases are capitalised on commencement of the lease at the lower of thefair value of the asset and the present value of the minimum lease payments.Each payment is allocated between the liability and finance charges so as toachieve a constant rate of interest on the finance balance outstanding. Therental obligations, net of finance charges, are included in trade and otherpayables. The finance charges are charged to the income statement over the lease period soas to produce a constant periodic rate of interest on the remaining balance ofthe liability for each period. Payments under operating leases are charged to the income statement on astraight line basis of the term of the lease. Revenue Revenue is recognised to the extent that it is probable that economic benefitswill flow to the group and the revenue can be reliably measured. Revenue from the provision of architecture and design services is recognised byreference to the stage of completion of each project. Stage of completion ismeasured by reference to labour hours incurred to date as a percentage of totalestimated labour hours on each project. Where the outcome of the project cannotbe reliably measured, revenue is recognised only to the extent of the expensesincurred that are recoverable. Interest incomeRevenue is recognised as interest accrues using the effective interest method.The effective rate is the rate that exactly discounts estimated future cashreceipts through the expected life of the financial instrument to its netcarrying amount Dividends ReceivableRevenue is recognised when the Group's right to receive payment is established Foreign currency translation The consolidated financial statements are presented in Sterling, which is thefunctional and presentational currency of the company. Transactions in currencies other than Sterling are initially recorded at therates of exchange prevailing on the dates of the transactions. Monetary assetsand liabilities are retranslated at the rate prevailing on the balance sheetdate. Profits and losses arising on retranslation are included in the incomestatement. On consolidation, the assets and liabilities of the group's foreign operationsare translated into Sterling at exchange rates prevailing on the balance sheetdate. Exchange differences arising, if any, are classified as equity andtransferred to the group's translation reserve. Such translation differences arerecognised as income and expenses in the period in which the operation isdisposed of. Income and expense items are translated at the average exchangerates for the period. Pensions and other post employment benefits Contributions to defined contribution or personal pension schemes are charged tothe income statement as they fall due. There are no defined benefit pensionschemes. Share-based payment transactions The Group has applied the requirements of IFRS 2 "Share-based payment". Inaccordance with the transitional provisions, IFRS 2 has been applied to allgrants of equity instruments after 7 November 2002 that were unvested at 1January 2006. For all grants of share options, the fair value as at the date of grant iscalculated using an option pricing model and the corresponding expense isrecognised over the vesting period. The fair value of shares awarded is themarket value of the shares at the date of the award and the correspondingexpense is also recognised over the vesting period. The share-based paymentexpense is recognised as a staff cost and the associated credit entry is made toequity. Taxation The tax expense in the income statement represents the sum of tax currentlypayable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income and expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of the assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is likely thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the tax profit nor the accounting profit. The carrying value of deferred tax assets is reviewed at each balance sheet dateand reduced to the extent that it is no longer probable that sufficient taxableprofits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited to the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. Interest Costs Interest is recorded in the consolidated profit and loss account on an accrualsbasis, except where it relates to payments made over an extended period ofdevelopment of large capital projects. Such interest is added to the capitalcost and amortised over the expected lives of those projects. Financing fees tobe written off in future periods are set against loan capital. Interest includes exchange differences arising on cash or borrowings, includingany hedges in respect of such cash or borrowings, that do not hedge any otherassets or liabilities and which are denominated in a currency which is not thefunctional currency of the subsidiary. Exceptional items The Group presents as exceptional items on the face of the income statement,those material items of income and expense which, because of the nature andexpected infrequency of the events giving rise to them, merit separatepresentation to allow shareholders to understand better the elements of thefinancial performance in the year, so as to facilitate comparison in priorperiods and to assess better trends in financial performance Impairment of Non-current Assets The Group assesses at each reporting date whether there is an indication that anasset may be impaired. If any such indication exists, or when annual impairmenttesting for an asset is required, the Group makes an estimate of the asset'srecoverable amount. An asset's recoverable amount is the higher of an asset's orcash generating unit's fair value less costs to sell and its value in use and isdetermined for an individual asset, unless that asset does not generate cashinflows that are largely independent of those from other assets or groups ofassets. Where the carrying amount of an asset exceeds its recoverable amount,the asset is considered impaired and is written down to its recoverable amount.Impairment losses on continuing operations are recognised in the incomestatement in those expense categories consistent with the function of theimpaired asset. An assessment is made at each reporting date as to whether there is anyindication that previously recognised impairment losses may no longer exist ormay have decreased. If such indication exists, the recoverable amount isestimated. A previously recognised impairment loss is reversed only if there hasbeen a change in the estimates used to determine the asset's recoverableamount since the last impairment loss was recognised. If that is the case thecarrying amount of the asset is increased to its recoverable amount. Thatincreased amount cannot exceed the carrying amount that would have beendetermined, net of depreciation, had no impairment loss been recognised for theasset in prior years. Such reversal is recognised in profit or loss unless theasset is carried at revalued amount, in which case the reversal is treated as arevaluation increase. After such a reversal the depreciation charge is adjustedin future periods to allocate the asset's revised carrying amount, less anyresidual value, on a systematic basis over its remaining useful life. Dividends Dividends are recognised when they become legally payable. Interim dividends arerecognised when paid. Final dividends are recognised when approved by theshareholders at an annual general meeting. Significant accounting judgments, estimates and assumptions The key assumptions and other key sources of estimation uncertainty at thebalance sheet date that have a significant risk of causing a material adjustmentto the carrying amounts of assets and liabilities within the next financial yearare discussed below. Impairment of goodwill and other intangible assets Goodwill and other intangible assets are tested for indication of impairment onan annual basis. This requires an estimation of the recoverable amount of a cashgenerating unit to which goodwill is allocated based on its 'value in use'.Estimation of 'value in use' requires management to estimate the expected futurecash flows from the cash generating unit and choose an appropriate discountfactor in order to calculate the present value of those cash flows. Amounts recoverable on contracts The Group recognised revenues from the provision of architecture and designservices based on the stage of completion of projects. This requires managementto estimate the total labour hours that will be required to complete eachproject. These estimates may be revised in future periods as a result of changesin the nature of the projects that could not be foreseen at the balance sheetdate. Contingent consideration The Group recognises deferred contingent cash and share consideration that maybecome payable based on forecasts. Management are required to make estimates,judgments and assumptions to estimate any amounts that may be due in the future. 9 Explanation of transition to International Financial Reporting Standards("IFRS") This is the group's first interim report prepared in accordance with the IFRSaccounting policies management expect to apply in their first IFRS compliantfull year financial statements. The reconciliations of balance sheets and equityat 1 January 2006 (date of transition to IFRS), 31 December 2006 (date of lastUK GAAP financial statements) and 30 June 2006 (date of last UK GAAP interimreport) are set out below. In addition, there is a reconciliation of profit forthe six month period to 30 June 2006 and the year ended 31 December 2006 below. These reconciliations will enable comparison of the 2007 interim figures underIFRS with those published under UK GAAP in the 2006 interim report and theannual report for the year ended 31 December 2006. a Consolidated balance sheet as at 1 January 2006 UK GAAP UK GAAP Effect of IFRS Re-stated transitionNotes £'000 £'000 £'000 £'000NON-CURRENT ASSETSGoodwill 9,551 - - 9,551Other intangible assets - - - -Property, plant andequipment 618 - - 618Interests in joint venture 43 - - 43Other financial assets - - - - ------- -------- --------- -----TOTAL NON-CURRENT ASSETS 10,212 - - 10,212 CURRENT ASSETSTrade and other receivables 10,508 - - 10,508Cash and short term deposits 1 - - 1 ------- -------- --------- -----TOTAL CURRENT ASSETS 10,509 - - 10,509 ------- -------- --------- -----TOTAL ASSETS 20,721 - - 20,721 ------- -------- --------- ----- CURRENT LIABILITIESTrade and other payables (2,726) - - (2,726)Current tax liabilities (1,226) - - (1,226)Bank overdrafts and loans (1,862) - - (1,862)Contingent consideration - - - - ------- -------- --------- -----TOTAL CURRENT LIABILITIES (5,814) - - (5,814) ------- -------- --------- -----NET CURRENT ASSETS 4,695 - - 4,695 ------- -------- --------- ----- NON-CURRENT LIABILITIESBank loans (2,650) - - (2,650)Contingent consideration (5,050) - - (5,050)Deferred tax liabilities (32) - - (32)Other payables (162) - - (162) ------- -------- --------- -----TOTAL NON-CURRENTLIABILITIES (7,894) - - (7,894) ------- -------- --------- -----TOTAL LIABILITIES (13,708) - - (13,708) ------- -------- --------- ----- ------- -------- --------- -----NET ASSETS 7,013 - - 7,013 ------- -------- --------- ----- b Consolidated balance sheet as at 31 December 2006 UK GAAP UK GAAP Effect of IFRS Re-stated transition £'000 £'000 £'000 £'000NON-CURRENT ASSETSGoodwill10b 35,031 - (14,216) 20,815Other intangible assets10b - - 14,628 14,628Property, plant and equipment 3,385 (1,429) 1,956Interests in joint venture 133 - - 133Other financial assets * - 1,429 - 1,429 -------- ------- ------- ---------- -------- ------- ------- ----------TOTAL NON-CURRENT ASSETS 38,549 - 412 38,961 CURRENT ASSETSTrade and other receivables 26,992 - - 26,992Cash and short term deposits 1,276 - - 1,276 -------- ------- ------- ----------TOTAL CURRENT ASSETS 28,268 - 28,268 -------- ------- ------- ----------TOTAL ASSETS 66,817 - 412 67,229 -------- ------- ------- ---------- CURRENT LIABILITIESTrade and other payables (10,581) - - (10,581)Current tax liabilities (1,550) - - (1,550)Bank overdrafts and loans (14,335) - - (14,335)Contingent consideration (5,549) - - (5,549) -------- ------- ------- ----------TOTAL CURRENT LIABILITIES (32,015) - - (32,015) -------- ------- ------- ----------NET CURRENT LIABILITIES (3,747) - - (3,747) -------- ------- ------- ---------- NON-CURRENT LIABILITIESBank loans (1,350) - - (1,350)Contingent consideration (9,854) - - (9,854)Deferred tax liabilities (92) - - (92)Other payables (326) - - (326) -------- ------- ------- ----------TOTAL NON-CURRENT LIABILITIES (11,622) - - (11,622) -------- ------- ------- ----------TOTAL LIABILITIES (43,637) - - (43,637) -------- ------- ------- ---------- -------- ------- ------- ----------NET ASSETS 23,180 - 412 23,592 -------- ------- ------- ---------- * The Directors have reconsidered the accounting treatment regarding the recognitionof certain assets and have concluded that the assets are more appropriatelyclassified as other financial assets. Accordingly the assets have been reclassifiedunder UK GAAP. c Consolidated balance sheet as at 30 June 2006 UK GAAP UK GAAP Effect of IFRS Re-stated transition £'000 £'000 £'000 £'000NON-CURRENT ASSETSGoodwill10b 19,801 - (4,176) 15,625Other intangible assets10b - - 4,523 4,523Property, plant and equipment 1,052 - - 1,052Interests in joint venture 150 - - 150Other financial assets - - - - ------- -------- -------- -------TOTAL NON-CURRENT ASSETS 21,003 - 347 21,350 CURRENT ASSETSTrade and other receivables 18,617 - - 18,617Cash and short term deposits - - - - ------- -------- -------- -------TOTAL CURRENT ASSETS 18,617 - - 18,617 ------- -------- -------- -------TOTAL ASSETS 39,620 - - 39,967 ------- -------- -------- ------- CURRENT LIABILITIESTrade and other payables 10c (5,731) - (129) (5,860)Current tax liabilities (1,193) - - (1,193)Bank overdrafts and loans (2,690) - - (2,690)Contingent consideration (486) - - (486) ------- -------- -------- -------TOTAL CURRENT LIABILITIES (10,100) - (129) (10,229) ------- -------- -------- -------NET CURRENT ASSETS 8,517 - (129) 8,388 ------- -------- -------- ------- NON-CURRENT LIABILITIESBank loans (7,467) - - (7,467)Contingent consideration (7,735) - - (7,735)Deferred tax liabilities (32) - - (32)Other payables (389) - - (389) ------- -------- -------- -------TOTAL NON-CURRENT LIABILITIES (15,623) - - (15,623) ------- -------- -------- -------TOTAL LIABILITIES (25,723) - (129) (25,852) ------- -------- -------- ------- ------- -------- -------- -------NET ASSETS 13,897 - 218 14,115 ------- -------- -------- ------- d Consolidated reconciliation of changes in equity 31 Dec 2006 30 June 2006 1 Jan 2006 Notes £'000 £'000 £'000 -------- ------ ---------Total adjustment to equity 412 218 - Total equity under UK GAAP 23,180 13,897 7,013 -------- ------ ---------Total equity under IFRS 23,592 14,115 7,013 -------- ------ --------- e Consolidated income statement for the six months ended 30 June 2006 UK GAAP Effect of IFRS transition Notes £'000 £'000 £'000 REVENUE 11,306 - 11,306Cost of sales (5,203) - (5,203) -------- ------ ---------GROSS PROFIT 6,103 - 6,103 -Administrative expenses 10c (3,638) (129) (3,767)Depreciation (137) - (137)Amortisation of intangible assets 10b (444) 347 (97)Share of results of joint venture -post tax 107 - 107 -------- ------ ---------OPERATING PROFIT 1,991 218 2,209 Finance income 16 - 16Finance costs (442) - (442) -------- ------ ---------PROFIT BEFORE TAXATION 1,565 218 1,783 Taxation (666) - (666) -------- ------ ---------PROFIT FOR THE PERIOD 899 218 1,117 -------- ------ --------- ADJUSTED EARNINGS PER ORDINARY SHARE(IN PENCE)Basic 4.26 (0.35) 3.91Diluted 4.01 (0.33) 3.68 -------- ------ --------- f Consolidated income statement for the year ended 31 December 2006 UK GAAP Effect of IFRS transition Notes £'000 £'000 £'000 REVENUE 30,875 - 30,875Cost of sales (16,285) - (16,285) -------- ------ ---------GROSS PROFIT 14,590 - 14,590 Administrative expenses (10,451) - (10,451)Depreciation (420) - (420)Amortisation of intangible assets 10b (1,083) 412 (671)Share of results of joint venture -post tax 10a 95 (5) 90 -------- ------ ---------OPERATING PROFIT 2,731 407 3,138 Finance income 10a 40 (2) 38Finance costs (1,200) - (1,200) -------- ------ ---------PROFIT BEFORE TAXATION 1,571 405 1,976 Taxation 10a (995) 7 (988) -------- ------ ---------PROFIT FOR THE YEAR 576 412 988 -------- ------ --------- ADJUSTED EARNINGS PER SHARE (IN PENCE)Basic 5.30 1.03 6.33Diluted 4.88 0.95 5.83 -------- ------ --------- 10 Notes to the reconciliations explaining the transition to IFRS a Accounting for Joint Ventures The accounting policy detailed in note 9 explains that under IFRS the groupaccounts for joint ventures using the net equity method of accounting which isslightly different from the gross equity method adopted under UK GAAP. Theimpact is that share of profit after tax is recognised as a single entry underIFRS whereas under UK GAAP, the group's share of operating profit, interest andtaxation were disclosed separately. There is no impact on profit for the year orthe balance sheet of this change in policy. b Accounting for Business Combinations Under IFRS intangible assets acquired with businesses are separately identifieddistinctly from goodwill. These intangible assets with finite lives areamortised over their useful economic lives and any assets with infinite livesare subject to annual impairment reviews. The balance of the purchase price over the assets acquired including theseidentified intangible assets is classified as goodwill which is subject toannual impairment reviews rather than systematic depreciation. The IFRS accounting policies are explained in more detail in note 8. c Holiday Entitlements Under IFRS the Group is required to account for any holiday to which its staffis entitled but are yet to utilise. This information is provided by RNS The company news service from the London Stock Exchange