Restore Regulatory News (RST)

23 Nov 2005 07:02

Radstone Technology PLC23 November 2005 For Immediate Release 23 November 2005 Interim Results Radstone Technology, the world's leading independent supplier ofhigh-performance, embedded computer products for defence and aerospaceapplication today announces Interim results for the six months ended 30September 2005. Key Points • Sales up 29% to £21.2m (2004: £16.5m) • First half orders received by the Group of £27.2m compared to £20.9m • Order book for future delivery ended the period at a record level of £94.7m, 9% above the level at the start of the year. • Increase of 17% in Interim dividend of 1.05p per share (2004: 0.9p) • Record number of new product introductions • Major $12.5m multi-year production contract received in the period Jeff Perrin, Chief Executive commenting on the results said: "As in previous years, trading will be weighted towards the second half. Ourorder book and enquiry levels give us confidence of a strong performance for theremainder of the year". For further information: Radstone Technology 01327-359444Jeff Perrin, Chief Executive Web: http://www.radstone.co.ukKevin Boyd, Group FinanceDirector Buchanan Communications 020 7466 5000Tim Thompson or Nicola Cronk Email : nicolac@buchanan.uk.com Interim Financial Report30 September 2005 Chairman's Statementfor the six months ended 30 September 2005 Results Sales for the Group for the six months ended 30 September 2005 were £21.2mcompared to £16.5m last year, a growth of 29%. Excluding Octec, acquired at thebeginning of July 2004 and SensorCom, disposed of in March 2005, the increasewas 32%. Revenue in the first half of last year was depressed by production andsupply issues that were resolved in the third quarter. During the first half of the year the Group received new orders of £27.2mcompared to £20.9m last year, a book to bill ratio of 1.28. As I indicated in my AGM statement on 7 September 2005, underlying losses forthe six months (see below) were at a similar level to last year, principally dueto increased product development in response to a record level of design-winsand identified opportunities. Development expenditure at the half-year was £1.4mabove the same period last year and £0.9m excluding Octec and SensorCom. Theseincreased development costs led to an underlying loss before tax similar to lastyear of £1.0m (2004: loss £0.9m). Excluding acquisitions and disposals, the gross profit margin in the perioddecreased from last year's 41.3% to 37.3%. Of this, 2.1% was due to the effectof a weaker US$ hedged rate and the balance reflected a sales mix of slightlylower margin products. Operating costs, on a like for like basis (excludingacquisitions and disposals) increased by 17% compared to last year. Excludingdevelopment costs, the remaining overheads increased by approximately 6%. Basicloss per share was 2.77p (2004: earnings 5.90p). Underlying loss per share (seenote 7) was 1.57p (2004: loss 2.35p). The order book for future delivery ended the period at a record level of £94.7m;this is 9% above the level at the start of this year and 10% above the same timelast year. The amount of the order book scheduled for delivery in the secondhalf of this year is £25.2m, compared to an equivalent figure of £26.2m twelvemonths ago. Last year orders both booked and shipped within the second half ofthe year were £7.2m and if the current level of activity continues we wouldexpect to exceed that this year. Business Development Embedded Computing 2005 2004 £'000 £'000Third party sales 16,910 12,374Gross profit 7,512 5,965Contribution 457 622 Excluding acquisitions and disposals, sales on a like for like basis increasedby 44%. The underlying sales growth was 17% after taking into account theproduction delays that depressed last year's sales. Development expenditure was £3.9m and represented 22.8% of sales. In the firstsix months of the year we introduced eight new products. These included threeproducts aimed at high-end software radio and radar applications: AXIS (Advancedmulti-processor Integrated Software), which enables the development ofapplication software for complex multi-board systems; StarSwitch, which providesswitched fabric connectivity for multi-board systems and finally the ICS-8554radio frequency data acquisition PMC module. In November 2004 we opened our US technology centre in Billerica, Massachusetts.It is now fully operational and was responsible for developing the AXIS softwarementioned above. In June 2005 we transferred our US administrative functionsfrom New Jersey to this facility. It is our intention to continue to grow ourengineering resource and US customer service and support staff at this location. Order intake at £23.0m was 30% above the same period last year (2004: £17.7m).The major order received to date this year was for $12.5m from Raytheon on theAdvanced Targeting Forward Looking Infrared pod programme (ATFLIR) for the F/A-18 Hornet fighter aircraft. This brings the total value of orders received onthis programme to date to $22.7m. Chairman's Statement (continued)for the six months ended 30 September 2005 Electronic Manufacturing Services 2005 2004 £'000 £'000Total sales 4,635 4,395Sales to Embedded Computing (320) (284)External sales 4,315 4,111Gross profit 1,113 923Contribution 1,053 818 This was an excellent result from the EMS business, an improved performance overthe good result last year. Order intake for the period was £4.2m, 31% up on lastyear (2004: £3.2m), providing an order book for future delivery of £4.3m, withjust over 70% of this amount deliverable in the second half of this year;providing an unusually high level of visibility for this business. Financial The Group is reporting its results for the first time under InternationalFinancial Reporting Standards and has restated the comparative figures asappropriate. The main changes to the Group's income statement with the adoptionof IFRS have been the write back of previously amortised goodwill arising on theacquisition of ICS Limited, the re-classification of goodwill arising on theacquisition of Octec as intellectual property and residual goodwill, theinclusion of a charge for share based payments and the accounting for pensioncosts under IAS 19 as opposed to SSAP 24. The net effect on profit after tax forthe period ended 30 September 2004 is an increase of £0.2m to £1.7m as detailedin note 14. The major change to the balance sheet is the accounting for thedefined benefit pension deficit under IAS 19. In total, the effect has been toreduce net assets by £4.5m at 30 September 2004 as detailed in note 14. To assist with the understanding of earnings trends, underlying loss has beendefined to exclude the impact of the amortisation of intangible assetsrecognised on acquisition and those items that under UK GAAP would have beenclassified as "exceptional". A reconciliation of (loss)/profit before tax tounderlying loss before tax is given below: 2005 2004 £'000 £'000 (Loss)/profit before tax (1,505) 1,133Amortisation of intellectualproperty arising 524 233through acquisitionProfit on disposal of freehold land - (2,271)and buildingsUnderlying loss (981) (905) The US dollar exchange rate has again had a negative effect on the results forthe period amounting to £0.4m. Although the average spot rate for the first halfof the year at 1.81 was identical to that in the corresponding period last year,the average hedged rate moved from 1.70 last year to 1.80 in the current period. At £0.8m (2004: £0.6m), operating cash flows were higher than last year. Themovement in working capital was £1.7m (2004: £1.2m), £0.1m of tax was refunded(2004: £1.0m payment) and interest payments increased to £0.6m (2004: £0.3m) dueto the spend during the prior year on the acquisition of Octec and the ICSearn-out. As a result net cash from operating activities was higher at £2.1m(2004: £0.5m). This was used to fund capital expenditure of £0.9m (2004: £3.3m)and dividend payments of £0.8m (2004: £0.7m). After accounting for interestreceived of £0.1m (2004: £0.1m), disposal of fixed assets, issue of shares andshares bought for the employee trust, the net reduction in debt arising fromcash flows in the period was £0.4m (2004: £6.5m outflow). Net debt at 30 September 2005 was £16.8m (2004: £19.5m). Gearing was 41% at 30September 2005 compared to 53% at 30 September 2004. Dividend An interim dividend of 1.05 pence per share, a 17% increase over last year(2004: 0.90p), will be paid on 16 January 2006 to shareholders on the registeron 16 December 2005. Chairman's Statement (continued)for the six months ended 30 September 2005 Board Changes In December 2005 Malcolm Baggott will join the board as a non-executivedirector. He will bring extensive management experience and be a considerableasset to the Group. Sir Alan Thomas has indicated his intention to retire from the Board with effectfrom 1 January 2006; we thank him for his valued contribution and wish him wellin his other business activities. OutlookAs in previous years, trading will be weighted towards the second half. Ourrecord order book and continued high enquiry levels give us confidence for theremainder of the year and beyond. Rhys WilliamsChairman Consolidated income statementfor the six months ended 30 September 2005 6 months Restated Restated to 30/9/05 6 months 12 months (neither to 30/9/04 to 31/3/05 audited (neither (neither nor reviewed) audited audited nor nor reviewed) reviewed) Note £'000 £'000 £'000Continuing operationsRevenue 21,225 16,485 49,887Cost of sales (12,600) (9,597) (24,338) Gross profit 8,625 6,888 25,549 Other income and expensesProfit on disposal of freehold land and buildings - 2,271 2,271Gain on disposal ofSensorCom Inc. - - 641Amortisation of intellectualproperty arising through acquisition (524) (233) (757)Total other income and expenses (524) 2,038 2,155 Development costs (3,861) (2,437) (6,078)Distribution costs (3,254) (3,011) (6,346)Administrative expenses (1,945) (1,792) (3,652) (Loss)/Profit from operations 3 (959) 1,686 11,628 Investment income 133 144 160Finance costs 4 (679) (697) (1,496) (Loss)/Profit before tax (1,505) 1,133 10,292Tax 5 669 570 (2,045) (Loss)/profit for the periodfrom continuing operationsattributable to equity holders of the parent (836) 1,703 8,247 Ordinary dividends 6 819 681 954 Earnings per share (pence) From continuing operations Basic 7 (2.77) 5.90 27.97 Diluted 7 (2.77) 5.87 27.81 Consolidated balance sheetat six months ended 30 September 2005 at 30/9/05 Restated Restated (neither at 30/9/04 at 31/3/05 audited (neither (neither nor reviewed) audited audited nor nor reviewed) reviewed) Note £'000 £'000 £'000Non-current assetsGoodwill 24,736 24,306 24,649Intangible assets arisingfrom acquisitions 6,393 7,442 6,917Other intangible assets 32 83 46Property, plant and equipment 16,722 16,524 16,843Deferred tax assets 2,845 2,438 2,869 50,728 50,793 51,324 Current assetsInventories 11,975 12,847 11,219Trade and other receivables 17,193 12,037 17,874Cash and cash equivalents 1,973 1,256 3,766 31,141 26,140 32,859 Total assets 81,869 76,933 84,183 Current liabilitiesTrade and other payables 9,225 8,460 8,562Tax liabilities 1,482 429 1,161Obligations under financeleases 232 272 259Bank overdrafts and loans 1,785 2,175 2,962Short-term provisions - 55 - 12,724 11,391 12,944 Non-current liabilitiesBank loans 16,429 17,755 16,693Retirement benefitobligation 8 9,483 8,129 9,564Deferred tax liabilities 2,182 2,604 2,433Obligations under finance leases 298 534 406 28,392 29,022 29,096Total liabilities 41,116 40,413 42,040 Net assets 40,753 36,520 42,143 EquityShare capital 10 3,790 3,786 3,787Share premium account 25,112 25,761 25,059Own shares (488) (430) (431)Other reserve 11 1,388 666 1,388Hedging and translation reserves 62 26 139Retained earnings 10,889 6,711 12,201 Total equity attributable to equity holders of the parent 3 40,753 36,520 42,143 Consolidated cash flow statementfor the six months ended 30 September 2005 6 months Restated Restated to 30/9/05 6 months 12 months (neither to 30/9/04 to 31/3/05 audited (neither (neither nor reviewed) audited audited nor nor reviewed) reviewed) Note £'000 £'000 £'000Net cash from operatingactivities 9 2,051 540 5,234 Investing activitiesInterest received 133 76 159Proceeds on disposal ofSensorCom Inc. - - 832Proceeds on disposal ofproperty, plant andequipment 2 3,905 3,908Net cash disposed of with sale of SensorCom Inc. - - (251)Purchases of property, plant and equipment (922) (3,312) (4,701)Purchase of other intangibleassets - (5) (5)Purchases of trade and assets - - (92)Deferred consideration on acquisition of ICS Limited - (2,569) (3,254)Increase in cost of investment in ICS Limited - - (28)Net cash acquired withOctec Limited - 1,979 1,979Acquisition ofOctec Limited - (12,514) (12,501) Net cash used in investingactivities (787) (12,440) (13,954) Financing activitiesDividends paid (819) (681) (954)Issue of share capital 44 6,167 6,170Purchase of own shares under Employee Incentive Schemes (113) (128) (152)Repayments of borrowings (1,981) (1,241) (2,493)Repayments of obligationsunder finance leases (127) (143) (289)New bank loans raised 56 - 1,118 Net cash (used in)/fromfinancing activities (2,940) 3,974 3,400 Net decrease in cash andcash equivalents (1,676) (7,926) (5,320) Cash and cash equivalents atbeginning of period 3,766 9,150 9,150 Effect of foreign exchange ratechanges (117) 32 (64) Cash and cash equivalents atend of period 1,973 1,256 3,766 Consolidated statement of recognised income and expensefor the six months ended 30 September 2005 6 months Restated Restated to 30/9/05 6 months 12 months (neither audited to 30/9/04 to 31/3/05 nor reviewed) (neither (neither audited audited nor nor reviewed) reviewed) £'000 £'000 £'000 Losses on cash flow hedges (1,338) - - Exchange differences ontranslation of foreignoperations 431 461 505 Actuarial losses on definedbenefit pension schemes - (1,194) (2,391) Tax on items taken directlyto equity 426 358 717 Net expense recogniseddirectly in equity (481) (375) (1,169) (Loss)/Profit for the period (836) 1,703 8,247 Total recognised income andexpense for the periodattributable to equityholders of the parent (1,317) 1,328 7,078 The consolidated statement of recognised income and expense reflects theamendment to IAS 19 "Employment Benefits". Notes to the interim statementfor the six months ended 30 September 2005 1. Basis of preparation The attached interim financial statements are the first interim financialstatements following adoption of International Financial Reporting Standards(IFRS). As the Group has not previously published a full set of financialstatements under IFRS, the content of these statements has been expanded toinclude summarised reconciliations of net assets and equity from previouslyreported amounts under UK GAAP for the year ended 31 March 2005, together withdetailed explanations of the main UK GAAP - IFRS differences. See Appendix 1 -Adoption of IFRS. EU law (IAS regulation EC 1606/2002) requires that the next annual consolidatedfinancial statements of the Company, for the year ending 31 March 2006 beprepared in accordance with International Financial Reporting Standards (IFRSs)adopted for use in the EU ('adopted IFRSs'). This interim financial information has been prepared on the basis of therecognition and measurement requirements of IFRSs in issue that either areendorsed by the EU and effective (or available for early adoption) at 31 March2006 or are expected to be endorsed and effective (or available for earlyadoption) at 31 March 2006 the Company's first annual reporting date at which itis required to use adopted IFRSs. Based on these adopted and unadopted IFRSs,the directors have made assumptions about the accounting policies expected to beapplied, which are as set out in Appendix 2, when the first annual IFRSfinancial statements are prepared for the year ending 31 March 2006. In particular, the directors have assumed that the following IFRS issued by theInternational Accounting Standards Board will be adopted by the EU in sufficienttime that they will be available for use in the annual IFRS financial statementsfor the year ending 31 March 2006: IAS 19 "Employment Benefits" - amendment to allow actuarial gains and losses tobe recognised directly in the statement of recognised income and expenses. In addition, the adopted IFRSs that will be effective (or available for earlyadoption) in the annual financial statements for the year ending 31 March 2006are still subject to change and to additional interpretations and thereforecannot be determined with certainty. Accordingly, the accounting policies forthat annual period will be determined finally only when the annual financialstatements are prepared for the year ending 31 March 2006. 2. Section 240 Statement The information for the year ended 31 March 2005, which is prepared under IFRS,does not constitute statutory accounts as defined in section 240 of theCompanies Act 1985. A copy of the UK Generally Accepted Accounting Practicestatutory accounts for that year has been delivered to the Registrar ofCompanies. The auditors' report on those accounts was unqualified. 3. Business Segments For management purposes, the Group is organised into two operating divisions -Embedded Computing and Electronic Manufacturing Services. Segment information about these businesses is presented below. Notes to the interim statement (continued)for the six months ended 30 September 2005 3. Business segments (continued) Six months ended 30 September 2005 Embedded Electronic Eliminations Consolidated Computing Manufacturing Services £'000 £'000 £'000 £'000 Revenue External sales 16,910 4,315 - 21,225Inter-segment sales - 320 (320) - Total Revenue 16,910 4,635 (320) 21,225 Inter-segment sales are charged at prevailing market prices. ResultSegment result 457 1,053 - 1,510 Unallocated corporate expenses (1,945)Amortisation of acquiredintangible assets (524) Operating loss (959) Investment income 133Finance costs (679) Loss before tax (1,505) Tax 669 Loss after tax (836) Unallocated corporate expenses include a charge of £101,000 in respect ofshare-based payment which is classified as administrative expenses. All results arise from continuing activities. External revenue by geographical market £'000 North America 11,161United Kingdom 6,771Rest of Europe 2,296Rest of World 997 21,225 There are no inter-segment sales by geographic market Segmental net assets/(liabilities) 22,524 (1,640) - 20,884 Central net assets 38,128Net non-operatingliabilities (18,259) Net Assets 40,753 Central net assets have not been allocated between classes of business as to doso would be impracticable and misleading. Net non-operating liabilities includethe pension scheme deficit, net debt and taxation. Notes to the interim statement (continued)for the six months ended 30 September 2005 3. Business segments (continued) Six months ended 30 September 2004 Embedded Electronic Eliminations Consolidated Computing Manufacturing Services £'000 £'000 £'000 £'000RevenueExternal sales 12,374 4,111 - 16,485Inter-segment sales - 284 (284) - Total Revenue 12,374 4,395 (284) 16,485 Inter-segment sales are charged at prevailingmarket prices. ResultSegment result 622 818 - 1,440 Unallocated corporateexpenses (1,792)Amortisation of acquiredintangible assets (233)Profit on disposal offreehold landand buildings 2,271 Operating profit 1,686 Investment income 144Finance costs (697) Profit before tax 1,133 Tax 570 Profit after tax 1,703 Unallocated corporate expenses include a charge of £62,000 in respect ofshare-based payment which is classified as administrative expenses. All results arise from continuingactivities. External revenue bygeographical market £'000 North America 7,508United Kingdom 6,268Rest of Europe 1,409Rest of World 1,300 16,485 There are no inter-segment sales bygeographic market Segmental netassets/(liabilities) 23,503 2,493 - 25,996 Central net assets 35,380Net non-operatingliabilities (24,856) Net Assets 36,520 Central net assets have not been allocated between classes of business as to doso would be impracticable and misleading. Net non-operating liabilities includethe pension scheme deficit, net debt and taxation. Notes to the interim statement (continued)for the six months ended 30 September 2005 4. Finance costs 6 months 6 months 12 months to 30/9/05 to 30/9/04 to 31/3/05 £'000 £'000 £'000 Interest payable on bank loans andoverdrafts 539 467 1,071Interest payable under SWAParrangements - 50 64Interest payable on finance leasesand other outstanding liabilities 23 30 60 Total borrowing costs 562 547 1,195 Retirement benefit scheme financecharges 117 150 301 679 697 1,496 5. Tax 6 months 6 months 12 months to 30/9/05 to 30/9/04 to 31/3/05 £'000 £'000 £'000Current tax:United Kingdom (375) (587) 1,381Overseas (168) 19 908 (543) (568) 2,289Deferred tax:United Kingdom (151) (19) (248)Overseas 25 17 4Tax(credit)/expense (669) (570) 2,045 The tax credit for the 6 months to 30 September 2005 includes an amount inrespect of the release of the deferred tax liability of £162,000 (30 September2004: £71,000) relating to the amortisation of the intangible assets arisingfrom acquisitions. 6. Ordinary Dividends 6 months 6 months to 30/9/05 to 30/9/04 £'000 £'000Amounts recognised as distributions to equity holders inthe period: Final dividend for the year ended 31March 2005 of 2.7p (31 March 2004:2.25p) per ordinary share 819 681 Proposed interim dividend for theyear ended 31 March 2006 of 1.05p(31 March 2005: 0.90p) per ordinaryshare 318 273 The proposed interim dividend was approved by the Board after 30 September2005 and has not been included as a liability as at 30 September 2005. Notes to the interim statement (continued)for the six months ended 30 September 2005 7. Earnings per share 6 months 6 months 12 months to 30/9/05 to 30/9/04 to 31/3/05 £'000 £'000 £'000Earnings per shareFrom continuing operations Basic (2.77) 5.90 27.97 Diluted (2.77) 5.87 27.81 Underlying (1.57) (2.35) 20.56 The calculation of the basic, diluted and underlying earnings per share is basedon the following data: 6 months 6 months 12 months to 30/9/05 to 30/9/04 to 31/3/05 £'000 £'000 £'000 Earnings Earnings for the purposes of basicearnings per share being (loss)/profitfor the period from continuingoperations (836) 1,703 8,247 (Loss)/profit for the period fromcontinuing operations (836) 1,703 8,247 Adjustment to exclude amortisationof intangibles arising from acquisitions (net of tax) 362 161 525 Adjustment to exclude profit on disposal offreehold land and buildings (net of tax) - (2,541) (2,334) Adjustment to exclude gain on disposal ofSensorCom Inc. (net of tax) - - (376) Earnings for the purposes of underlyingearnings per share (474) (677) 6,062 Number of shares Weighted average number of ordinaryshares for the purposes of basic andunderlying earnings per share 30,139 28,838 29,488 Effect of dilutive potential ordinaryshares:Share options - 160 170 Weighted average number of ordinaryshares for the purposes of dilutedearnings per share 30,139 28,998 29,658 Notes to the interim statement (continued)for the six months ended 30 September 2005 8. Retirement benefit obligations The Group's defined benefit schemes were valued for IAS 19 purposes at 31 March2005. The movement in the liability to 30 September 2005 represents operatingservice costs and finance costs for the period. 9. Cash flow information 6 months 6 months 12 months to 30/9/05 to 30/9/04 to 31/3/05 £'000 £'000 £'000 (Loss)/profit from operations (959) 1,686 11,628Adjustments for:Profit on disposal of freehold landand buildings - (2,271) (2,271)Gain on disposal of SensorCom Inc. - - (641)Depreciation of property, plant andequipment 1,061 932 1,972Impairment loss onintangibles 4 - -Amortisation of intangible assets 534 252 798 EBITDA 640 599 11,486 Loss on disposal of property, plant andequipment 8 3 4Cost of equity settled employee shareschemes 101 114 187Increase/(decrease) in post employmentbenefit obligation 78 88 (46)Decrease in provisions - (161) (216) Operating cash flows before movements inworking capital 827 643 11,415 Increase in inventories (756) (3,069) (1,576)Decrease/(increase) in receivables 1,235 3,903 (3,132)Increase in payables 1,244 373 1,707 Cash generated by operations 2,550 1,850 8,414 Income taxes recovered/(paid) 115 (965) (2,136)Interest paid (614) (345) (1,044) Net cash from operatingactivities 2,051 540 5,234 Reconciliation of cash and cash equivalentsto net debt Decrease in cash and cash equivalents (1,676) (7,925) (5,320)Cash outflow from decrease in debt andlease financing 2,109 1,385 2,782Cash inflow from increase in debt andlease financing (56) - (1,118) Change in net debt arising from cash flows 377 (6,540) (3,656) Translation difference (594) (223) (181) Movement in net debt in the period (217) (6,763) (3,837) Net debt at start of period (16,554) (12,717) (12,717) Net debt at end of period (16,771) (19,480) (16,554) 10. Share capital 19,000 shares, with a nominal value of £2,375, have been allotted in the sixmonth period ended 30 September 2005 under the terms of the Group's variousshare option schemes. Aggregate consideration received by the Company was£44,000. Notes to the interim statement (continued)for the six months ended 30 September 2005 11. Other reserveThis reserve arose from s.131 merger relief under the Companies Act 1985. Itrepresents the fair value of the consideration of issued shares over theirnominal value between the date of issue and the date the acquisitions of ICSLimited and Octec Limited became unconditional. 12. Related party transactions Transactions between the company and its subsidiaries, which are relatedparties, have been eliminated on consolidation and are not disclosed in thisnote. 13. Financial Instruments: IAS 32/39 As explained in Appendix 1 - Adoption of IFRS, the Group has applied IAS 32"Financial Instruments: Disclosure and Presentation" and IAS 39 "FinancialInstruments: Recognition and Measurement" prospectively from 1 April 2005.Consequently the relevant comparative information does not reflect the impact ofthese standards and is accounted for on a UK GAAP basis. The pre-tax effect ofthe transitional adjustment on the balance sheet as at 1 April 2005 is toincrease debtors and hedging and translation reserves by £0.9 million. At 30September 2005 the derivative financial instruments were a net creditor of £0.4million. The pre-tax loss taken to the hedging and translation reserve for theperiod was £1.3 million. 14. Explanation of transition to IFRSs The reconciliations of equity at 1 April 2004 (date of transition to IFRS) andat 31 March 2005 (date of last UK GAAP financial statements) and thereconciliation of profit for the year ended 31 March 2005, as required by IFRS 1"First-time adoption of International Financial Reporting Standards" in the yearof transition, have been included in Appendix 1 - Adoption of IFRS. The reconciliation of equity at 30 September 2004 and the reconciliation ofprofit for the six months ended 30 September 2004 have been included below toenable a comparison of the 30 September 2005 interim figures with thecorresponding period of the previous financial year. The IFRS adjustments to the 30 September 2004 interim results are consistentwith those set out in Appendix 1 - Adoption of IFRS. The most significantadjustments to net assets and the income statement are as follows: Business combinations and goodwillGoodwill is no longer amortised and is instead subject to an annual impairmentreview. Goodwill charged under UK GAAP for the six months to 30 September 2004was £0.6 million and this amount is reversed in the income statement under IFRS. In accordance with IFRS 3, the Group allocated from the provisional goodwill anamount of £7.7 million to identifiable intangible assets, being intellectualproperty, on the acquisition of Octec Limited in July 2004. Amortisation of theidentifiable intangible assets was £0.2 million for the period. The allocationto intangible assets at this date resulted in a deferred tax liability beingrecognised of £2.3 million to be released over the period the intangible assetsare amortised. £0.1 million of deferred tax was released in the period to 30September 2004. Share based paymentsUnder UK GAAP, the Group recognised no profit and loss charge in respect ofemployee share option schemes. Under IFRS 2, where the cost of employee share options and performance sharescheme awards are based on their fair value at the date of grant an expense isrecognised over the expected vesting period of the award. As a result of these changes, the impact on the income statement of the employeeoption and performance share schemes recognised in the six months to 30September 2004 has been a net charge of £0.1 million. Reversal of accrued sharescheme awards resulted in an increase in net assets of £0.3 million. Notes to the interim statement (continued)for the six months ended 30 September 2005 14. Explanation of transition to IFRSs (continued) Post-employment benefitsThe accounting impact of IFRS for the six months to 30 September 2004 is adecrease in reported pre-tax profits of £0.2 million and a decrease inshareholders' funds of £5.5 million after deferred tax, being the elimination ofthe net pension accrual under SSAP 24 of £0.2 million and the creation of a netpension liability (after a deferred tax asset of £2.4 million) of £5.7 million. Proposed dividends Under UK GAAP, proposed dividends were recognised as a liability in the periodto which they related. Under IFRS, dividends are recognised as a liability inthe period in which they are declared. Net assets at 30 September 2004 increased by £0.3 million, representing thereversal of the accrual for the interim ordinary dividend proposed in respect ofthe year ended 31 March 2005. Deferred taxThe effect of IAS 12 on net assets is a net increase by £0.2 million. The IAS 19pension liability created a deferred tax asset of £2.4 million and theintangible asset recognised under IFRS 3 resulted in a deferred tax liability,after a release of £0.1 million in the period, of £2.2 million. Cumulative foreign translation difference Under IAS 21, "The Effects of Changes in Foreign Exchange Rates", the cumulativeforeign currency translation differences arising on the translation andconsolidation of foreign operations income statements and balance sheetsdenominated in foreign currencies must be recognised as a separate component ofequity. Applying the exemption under IFRS 1, the Group has elected to deem cumulativetranslation differences to be £nil at 1 April 2004. The effect of exchange ratesin the six months ended 30 September 2004 resulted in a credit to thetranslation reserve of £26,000. Summarised reconciliations from UK GAAP to IFRS: Income statement Six months ended 30 September 2004 £'000 Retained profit under UK GAAP 1,184 Goodwill - reversal of amortisation 590 Intangible assets - amortisation (net of deferred tax of (161)£72,000) Pensions (including deferred tax credit of £71,000) (167) Share-based payments (including deferred tax charge of £5,000) (67) Dividends 324 Profit after tax under IFRS 1,703 Net Assets At 30 September 2004 £'000 Net assets under UK GAAP 41,032 Goodwill - reversal of amortisation 590 Intangible assets - amortisation (net of deferred tax) (161) Pensions (net of deferred tax) (5,499) Share-based payments (including deferred tax) 285 Dividends - not declared at period end 273 Net assets under IFRS 36,520 Cash flow statementSix months ended 30 September 2004 There are no material adjustments to the cash flow statement for the sixmonths period to 30 September 2004. All adjustments made are for presentationonly. Notes to the interim statement (continued)for the six months ended 30 September 2005 14. Explanation of transition to IFRSs (continued) Reconciliation of equity at 30 September 2004 UK GAAP Effect of IFRS IFRS transition to £'000 Format IFRS £'000 £'000Non-current assetsGoodwill 29,088 (4,782) 24,306Intangible assets arisingfrom acquisitions - 7,442 7,442Other intangible assets 83 - 83Property, plant and equipment 16,524 - 16,524Deferred tax assets - 2,438 2,438 45,695 5,098 50,793Current assetsInventories 12,847 - 12,847Trade and other receivables 12,037 - 12,037Cash and cash equivalents 1,256 - 1,256 26,140 - 26,140Total Assets 71,835 5,098 76,933 Current liabilitiesTrade and other payables 9,261 (801) 8,460Tax liabilities 429 - 429Obligations under finance leases 272 - 272Bank overdraft and loans 2,175 - 2,175Short-term provisions 55 - 55 12,192 (801) 11,391 Non-current liabilitiesBank loans 17,755 - 17,755Retirement benefit obligations - 8,129 8,129Deferred tax liabilities 322 2,282 2,604Obligations under finance leases 534 - 534 18,611 10,411 29,022 Total liabilities 30,803 9,610 40,413 Net Assets 41,032 (4,512) 36,520 EquityShare capital 3,786 - 3,786Share premium account 25,761 - 25,761Own shares (430) - (430)Other reserve 666 - 666Hedging and translation reserves - 26 26Retained earnings 11,249 (4,538) 6,711Equity attributable to equity holders of the parent 41,032 (4,512) 36,520 Notes to the interim statement (continued)for the six months ended 30 September 2005 14. Explanation of transition to IFRSs (continued) Reconciliation of profit for the six months ended 30 September 2004 UK GAAP Effect of IFRS IFRS transition to £'000 Format IFRS £'000 £'000 Revenue 16,485 - 16,485Cost of sales (9,574) (23) (9,597) Gross profit 6,911 (23) 6,888 Other income and expensesProfit on disposal of freehold landand buildings 2,271 - 2,271Amortisation of intellectual propertyarising through acquisition (590) 357 (233) Total other income and expenses 1,681 357 2,038 Development costs (2,382) (55) (2,437)Distribution costs (3,000) (11) (3,011)Administrative expenses (1,730) (62) (1,792) Profit from operations 1,480 206 1,686 Investment income 144 - 144Finance costs (548) (149) (697) Profit before tax 1,076 57 1,133 Tax 432 138 570 Profit for the period from continuingoperations attributable to equity holders of the parent 1,508 195 1,703 15. Copies of the interim financial report will be sent to shareholders in duecourse. Further copies will be available from the registered office of RadstoneTechnology PLC, Tove Valley Business Park, Towcester, Northants, NN12 6PF. APPENDIX 1 - ADOPTION OF IFRS A summarised analysis of the main aspects of IFRS that impact on the financialstatements and a set of restated financial statements for the year ended 31March 2005, excluding detailed notes, are set out below. Restatement of the Group's accounting policies can be found in Appendix 2. Business combinations and goodwillIFRS 3 'Business Combinations' requires that goodwill is not amortised. Insteadit is subject to an annual impairment review. As the Group has elected not toapply IFRS 3 retrospectively to business combinations prior to the openingbalance sheet date under IFRS, the UK GAAP goodwill balance at 1 April 2004(£20.6 million) has been included in the opening IFRS consolidated balance sheetand will no longer be amortised. Goodwill amortisation charged under UK GAAP during the year ended 31 March 2005was £1.4 million and this amount is reversed in the income statement under IFRS. Under UK GAAP, the difference between the consideration paid for an acquisitionand the fair value of the net assets acquired is recognised as goodwill. IFRS 3requires that the intangible assets of an acquired business are recognisedseparately from goodwill and then amortised over their useful life. The Grouprecognised provisional goodwill of £10.2 million on the acquisition of OctecLimited in July 2004. Under IFRS the Group has recognised provisional goodwillof £2.5 million, and has allocated £7.7 million to identifiable intangibleassets, being acquired intellectual property. A deferred tax liability, on theintangible assets recognised, of £2.3 million resulted in additional goodwill ofan equal amount arising on acquisition accounting of Octec Limited. Under thetransition rules, the Group is not required to identify any acquired intangibleassets for acquisitions prior to 1 April 2004. IFRS 1 requires that an impairment review of goodwill be conducted in accordancewith IAS 36 "Impairment of Assets" at the date of transition irrespective ofwhether an indication exists that goodwill may be impaired. No impairments werenecessary as at 1 April 2004 following the review carried out in accordance withthis standard. In summary, the adjustments to the carrying value of goodwill were as follows: £ million Carrying value of goodwill under UK GAAP as at 31 March 2005 28.6Reversal of amortisation charge under UK GAAP in period 1.4Acquisitions - allocated to acquired intangible assets (7.7)- goodwill arising from deferred tax liability on intangible assets 2.3 Carrying value of goodwill under IFRS as at 31 March 2005 24.6 Amortisation of the identifiable intangible assets was £0.8million for the period. Share based paymentsUnder UK GAAP, the Group recognised no profit and loss charge in respect ofemployee share option schemes as the exercise prices for such schemes were setat the market price prevailing on the date of issue. Under IFRS 2, the main impact for the Group is that the cost of employee optionand performance share scheme awards are based on their fair value at the date ofgrant. IFRS 2 has only been applied to options awarded after 7 November 2002.The fair value has been calculated by the Group using the Black Scholes optionpricing model. The expense is recognised over the expected vesting period of theaward. As a result of these changes, and the reversal of accruals for performance sharescheme awards under UK GAAP, the impact on the income statement has been a netcharge of £0.1 million and an increase in net assets of £0.4 million. Post-employment benefitsUnder UK GAAP, the Group accounted for post-employment benefits under SSAP 24'Accounting for pension costs', whereby the cost of providing defined benefitpensions was charged against operating profit on a systematic basis withsurpluses and deficits arising being amortised over the expected averageremaining service lives of participating employees. Under IFRS (as required by IAS 19 revised, but closely in line with thedisclosures already made in the notes to the accounts under FRS 17), current andpast service costs of the Group's pension schemes, the expected return on thescheme's assets and any interest costs relating to the present value of thescheme's liabilities are charged to the income statement. Any actuarial gains orlosses are recognised through the statement of recognised income and expense(SORIE). Any surplus in the fair value of the pension scheme assets over thepresent value of the liabilities is recorded as an asset in the balance sheet,and any deficit as a liability. APPENDIX 1 - ADOPTION OF IFRS (continued) The accounting impact of IFRS for the period is a decrease in reported pre-taxprofits of £0.3 million and a decrease in shareholders' funds of £6.3 millionafter deferred tax, being the elimination of the net pension accrual under SSAP24 of £0.3 million and the creation of a net pension liability (after a deferredtax asset of £2.9 million) of £6.6 million. Proposed dividendsUnder UK GAAP, proposed dividends were recognised as a liability in the periodto which they related. Under IFRS, dividends are recognised as a liability inthe period in which they are declared. Net assets at 31 March 2005 increase by £0.8 million, representing the reversalof the accrual for the final ordinary dividend proposed in respect of the yearended 31 March 2005. Deferred taxUnder UK GAAP, deferred tax was provided on timing differences between theaccounting and taxable profit (an income statement approach). Under IFRS,deferred tax is provided on temporary differences between the book carryingvalue and the tax base of assets and liabilities (a balance sheet approach). The effect on net assets is an increase by £0.7 million. As stated above, theIAS 19 pension liability created a deferred tax asset of £2.9 million (£1.9million of which represents the deferred tax adjustment at 1 April 2004). Theintangible asset of £7.7 million recognised under IFRS 3 resulted in a deferredtax liability, after a release of £0.2 million in the period, of £2.1 million. Cumulative foreign translation differenceUnder UK GAAP, cumulative foreign currency translation differences arising onthe retranslation into sterling of the Group's net investment in foreignoperations were recognised in reserves. Under IFRS, cumulative foreign currencytranslation differences must be recognised as a separate component of equity andshould be taken into account in calculating the gain or loss on the disposal ofa foreign operation. Applying the exemption under IFRS 1, the Group has elected to deem cumulativetranslation differences to be £nil at 1 April 2004. The effect of exchange rate differences in the year ended 31 March 2005 resultedin a credit to the translation reserve of £0.1 million. Financial InstrumentsAs permitted under IFRS 1, the Group has elected to apply IAS 32 and IAS 39prospectively from 1 April 2005. As a result, the relevant comparativeinformation for the year ended 31 March 2005 does not reflect the impact ofthese standards and is accounted for on a UK GAAP basis. It will not be possible to estimate the effect on the Group's results until theend of each period when the fair value of the relevant hedging instruments atthe balance sheet date is known. The effect in the six months to 30 September2005 is shown in note 13 to the interim financial statements Development costsUnder UK GAAP, company funded development costs could either be capitalised orwritten off in the period in which they were incurred. The Group wrote-off thesecosts in the period in which they were incurred. Under IFRS, all research costs and any development costs that do not meet thecriteria specified within IAS 38 "Intangible Assets" will be written off in theperiod in which they are incurred. Development costs associated with new or substantially improved products must becapitalised from the time at which the development project satisfies theconditions. At 31 March 2005 no expenditure on internal product development metall the criteria of IAS 38 and therefore remains written off in the period. Other adjustmentsSmaller adjustments have also been made to reflect IFRS reclassifications APPENDIX 1 - ADOPTION OF IFRS (continued) Summarised reconciliations from UK GAAP to IFRS Income statementYear ended 31 March 2005 £'000 Retained profit under UK GAAP 6,560 Goodwill - reversal of amortisation 1,359Intangible assets - amortisation (net of deferred tax of £232,000) (525)Pensions (including deferred tax credit of £76,000) (179)Share-based payments (including deferred tax credit of £3,000) (110)Dividends 1,142 Profit after tax under IFRS 8,247 Net Assets At 31 March 2005 £'000 Net assets under UK GAAP 46,472 Goodwill - reversal of amortisation 1,359Intangible assets - amortisation (net of deferred tax) (525)Pensions (net of deferred tax) (6,349)Share-based payments (including deferred tax) 367Dividends - not declared at year end 819 Net assets under IFRS 42,143 Net AssetsAt 1 April 2004 £'000 Net assets under UK GAAP 32,914 Pensions (net of deferred tax) (4,497)Share-based payments (including deferred tax) 292Dividends - not declared at year end 630 Net assets under IFRS 29,339 APPENDIX 1 - ADOPTION OF IFRS (continued) Reconciliation of equity at 31 March 2005 (date of last UK GAAP financialstatements) UK GAAP Effect of IFRS IFRS transition to £'000 Format IFRS £'000 £'000Non-current assetsGoodwill 28,662 (4,013) 24,649Intangible assets arising fromacquisitions - 6,917 6,917Other intangible assets 46 - 46Property, plant and equipment 16,843 - 16,843Deferred tax assets - 2,869 2,869 45,551 5,773 51,324 Current assetsInventories 11,219 - 11,219Trade andotherreceivables 17,874 - 17,874Cash and cashequivalents 3,766 - 3,766 32,859 - 32,859Total Assets 78,410 5,773 84,183 Current liabilitiesTrade andother payables 10,205 (1,643) 8,562Taxliabilities 1,161 - 1,161Obligationsunder financeleases 259 - 259Bank overdraftand loans 2,962 - 2,962 14,587 (1,643) 12,944 Non-current liabilitiesBank loans 16,693 - 16,693Retirementbenefitobligations - 9,564 9,564Deferred taxliabilities 252 2,181 2,433Obligationsunder financeleases 406 - 406 17,351 11,745 29,096Totalliabilities 31,938 10,102 42,040Net Assets 46,472 (4,329) 42,143 EquityShare capital 3,787 - 3,787Share premiumaccount 25,059 - 25,059Own shares (431) - (431)Other reserve 1,388 - 1,388Hedging andtranslationreserves - 139 139Retainedearnings 16,669 (4,468) 12,201Equityattributableto equityholders of theparent 46,472 (4,329) 42,143 APPENDIX 1 - ADOPTION OF IFRS (continued) Reconciliation of profit for the year ended 31 March 2005 UK GAAP Effect of IFRS IFRS transition to £'000 Format IFRS £'000 £'000Revenue 49,887 - 49,887Cost of sales (24,351) 13 (24,338) Gross profit 25,536 13 25,549 Other income and expensesProfit on disposal offreehold land and buildings 2,271 - 2,271Gain on disposal ofSensorCom Inc. 641 - 641Amortisation of intellectual propertyarising through acquisition (1,360) 603 (757) Total other income and expenses 1,552 603 2,155 Development costs (6,106) 28 (6,078)Distribution costs (6,351) 5 (6,346)Administrative expenses (3,539) (113) (3,652) Profit from operations 11,092 536 11,628 Investment income 160 - 160Finance costs (1,195) (301) (1,496) Profit before tax 10,057 235 10,292 Tax (2,355) 310 (2,045) Profit for the period from continuingoperations attributable to equity holders of the parent 7,702 545 8,247 APPENDIX 1 - ADOPTION OF IFRS (continued) Reconciliation of equity at 1 April 2004 (date of transition to IFRSs) UK GAAP Effect of IFRS IFRS transition to £'000 Format IFRS £'000 £'000Non-current assetsGoodwill 20,613 - 20,613Other intangible assets 76 - 76Property, plant and equipment 15,350 - 15,350Deferred tax assets - 2,009 2,009 36,039 2,009 38,048 Current assetsInventories 9,266 - 9,266Trade and other receivables 13,870 - 13,870Cash and cash equivalents 9,150 - 9,150 32,286 - 32,286Total assets 68,325 2,009 70,334 Current liabilitiesTrade and other payables 12,361 (1,159) 11,202Tax liabilities 817 - 817Obligations under finance leases 284 - 284Bank overdraft and loans 2,449 - 2,449Short-term provisions 216 - 216 16,127 (1,159) 14,968 Non-current liabilitiesBank loans 18,487 - 18,487Retirement benefit obligations - 6,697 6,697Deferred tax liabilities 150 46 196Obligations under finance leases 647 - 647 19,284 6,743 26,027Total liabilities 35,411 5,584 40,995Net Assets 32,914 (3,575) 29,339 EquityShare capital 3,503 - 3,503Share premium account 19,962 - 19,962Revaluation reserve 218 - 218Own shares (354) - (354)Other reserve 199 - 199Retained earnings 9,386 (3,575) 5,811Equity attributable to equityholders of the parent 32,914 (3,575) 29,339 APPENDIX 2 - ACCOUNTING POLICIES This appendix provides a summary of Radstone Technology PLC's accountingpolicies under IFRS. All accounting policies not detailed below remainconsistent with their application under UK GAAP. Basis of accountingThe restated financial information for the transition to IFRS at 1 April 2004,the six months ended 30 September 2004 and the year ended 31 March 2005 has beenprepared in accordance with International Accounting Standards (IAS) andInternational Financial Reporting Standards (IFRS) issued by the InternationalAccounting Standards Board and expected to be endorsed by the EU and effectiveat 31 March 2006. The preparation of financial statements in conformity with IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets, liabilities, income andexpenses. The estimates and assumptions are based on historical experience andother factors considered reasonable at the time, but actual results may differfrom these estimates. Revisions to these estimates are made in the period inwhich they are recognised. Basis of consolidationThe consolidated financial statements include the financial statements ofRadstone Technology PLC ('the Company') and its subsidiary undertakings(together 'the Group'). A subsidiary is a company controlled directly or indirectly by the Group.Control is achieved where the Company has the power to govern the financial andoperating policies of the investee entity so as to obtain benefits from itsactivities. On acquisition, the assets and liabilities and contingent liabilities of asubsidiary are measured at their fair values at the date of acquisition. Anyexcess of the cost of acquisition over the fair values of the identifiable netassets acquired is recognised as goodwill. Any deficiency in the cost ofacquisition below the fair values of the identifiable net assets acquired iscredited to the profit and loss account in the period of acquisition. Theresults of subsidiary undertakings acquired or disposed of in the year areincluded in the consolidated income statement from the date of acquisition or upto the date of disposal. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. Business combinations and goodwillGoodwill arising on consolidation represents the excess of the cost ofacquisition over the Group's interest in the fair value of the identifiableassets and liabilities of a subsidiary at the date of acquisition. Goodwillarising on acquisitions is capitalised and subject to impairment review, bothannually and when there are indications that the carrying value may not berecoverable. Any impairments are recognised immediately in the income statementand are not subsequently reversed. Prior to 1 January 1998 goodwill was written off to reserves in the year ofacquisition. Goodwill arising since 1 January 1998 until 31 March 2004 wasamortised over its estimated useful life. In addition, annual impairment testswere performed. On disposal of a subsidiary the attributable amount of goodwill is included inthe determination of the profit or loss on disposal. Goodwill arising on acquisitions prior to 1 April 2004 has been retained at theprevious UK GAAP amounts subject to being tested for impairment at that date.Goodwill written off to reserves under UK GAAP prior to 1998 has not beenreinstated and is not included in determining any subsequent profit or loss ondisposal. Revenue recognitionRevenue is measured at the fair value of the consideration received orreceivable and represents amounts receivable for goods and services provided inthe normal course of business, net of discounts, VAT and other sales-relatedtaxes. Sales are recognised when the significant risk and rewards of ownership of goodsare transferred to the customer. Revenue from long-term contracts is recognised in accordance with the Group'saccounting policy (see below). Long-term contractsWhere the outcome of a long-term contract can be estimated reliably, revenue andcosts are recognised by reference to the stage of completion of the contractactivity at the balance sheet date. This is normally measured by the proportionthat contract costs incurred for work performed to date bear to the estimatedtotal contract costs, except where this would not be representative of the stageof completion. Variations in contract work, claims and incentive payments areincluded to the extent that they have been agreed with the customer. APPENDIX 2 - ACCOUNTING POLICIES (continued) Long-term contracts (continued)Where the outcome of a long-term contract cannot be estimated reliably, contractrevenue is recognised to the extent of contract costs incurred that it isprobable will be recoverable. Contract costs are recognised as expenses in theperiod in which they are incurred. When it is probable that total contract costs will exceed total contractrevenue, the expected loss is recognised as an expense immediately LeasingLeases 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. Assets held under finance leases are recognised as assets of the Group at theirfair value or, if lower, at the present value of the minimum lease payments,each determined at the inception of the lease. The corresponding liability tothe lessor is included in the balance sheet as a finance lease obligation. Leasepayments are apportioned between finance charges and reduction of the leaseobligation so as to achieve a constant rate of interest on the remaining balanceof the liability. Finance charges are charged directly against income inproportion to the reducing capital element outstanding. Operating lease rentals are charged to income on a straight-line basis over theterm of the relevant lease. Foreign currenciesTransactions in currencies other than pounds sterling are recorded at the ratesof exchange prevailing on the dates of the transactions. At each balance sheetdate, monetary assets and liabilities that are denominated in foreign currenciesare retranslated at the rates prevailing on the balance sheet date. Non-monetaryassets and liabilities carried at fair value that are denominated in foreigncurrencies are translated at the rates prevailing at the date when the fairvalue was determined. Gains and losses arising on retranslation are included innet profit or loss for the period, except for exchange differences arising onnon-monetary assets and liabilities where the changes in fair value arerecognised directly in equity. In order to hedge its exposure to certain foreign exchange risks, the Groupenters into forward contracts and options (see below for details of the Group'saccounting policies in respect of such derivative financial instruments). On consolidation, the assets and liabilities of the Group's overseas operationsare translated at exchange rates prevailing on the balance sheet date. Incomeand expense items are translated at the average exchange rates for the periodunless exchange rates fluctuate significantly. Exchange differences arising fromthe re-translation of the opening balance sheets and results are classified asequity and transferred to the Group's translation reserve. Such translationdifferences are recognised as income or expenses in the period in which theoperation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate. The Group has elected to treat goodwill and fairvalue adjustments arising on acquisitions before the date of transition to IFRSas sterling-denominated assets and liabilities. Retirement benefit costsPayments to defined contribution retirement benefit schemes are charged as anexpense as they fall due. Payments made to state-managed retirement benefitschemes are dealt with as payments to defined contribution schemes where theGroup's obligations under the schemes are equivalent to those arising in adefined contribution retirement benefit scheme. For defined benefit retirement benefit schemes, the cost of providing benefitsis determined using the Projected Unit Credit Method, with actuarial valuationsbeing carried out at each balance sheet date. Actuarial gains and losses arerecognised outside the income statement and presented in the statement ofrecognised income and expense. Past service cost is recognised immediately to the extent that the benefits arealready vested, and otherwise is amortised on a straight-line basis over theaverage period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents thepresent value of the defined benefit obligation as adjusted for unrecognisedpast service cost, and as reduced by the fair value of scheme assets. TaxationThe tax expense represents the sum of the tax currently payable and deferredtax. 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 or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date.APPENDIX 2 - ACCOUNTING POLICIES (continued) Taxation (continued)Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of 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 probable 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. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries except where the Group is able to controlthe reversal of the temporary difference and it is probable that the temporarydifference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. 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 in 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. Property, plant and equipmentProperty, plant and equipment are stated at original historical cost, net ofdepreciation and any provision for impairment. Depreciation is charged so as to write off the cost of assets, less estimatedresidual value, on a straight-line basis over their estimated useful lives inaccordance with the table below: Estimated useful economic lifeFreehold buildings 45 - 50 yearsPlant and machinery 3 - 10 yearsFixtures, fittings and 3 - 10 yearsequipment Freehold land is not depreciated. Assets held under finance leases are depreciated over their expected usefullives on the same basis as owned assets or, where shorter, over the term of therelevant lease. The gain or loss arising on the disposal or retirement of an asset is determinedas the difference between the sales proceeds and the carrying amount of theasset and is recognised in income. Research and developmentExpenditure on research activities is recognised as an expense in the period inwhich it is incurred. An internally-generated intangible asset arising from development activities isrecognised only if the criteria specified within IAS 38 "Intangible Assets" aremet. Internally-generated intangible assets are amortised on a straight-line basisover their useful lives. Where no internally-generated intangible asset can berecognised, development expenditure is recognised as an expense in the period inwhich it is incurred. APPENDIX 2 - ACCOUNTING POLICIES (continued) Other intangible assetsIntangible assets, representing manufacturing licences, are amortised over 3years, estimated to be the period in which the individual products to which theyrelate are to be sold. Where, in the directors' opinion, there has been animpairment in the value of intangible assets, this is charged to the incomestatement in the period in which the impairment occurs. Intangible assets arising from a business combination whose fair value can bereliably measured are separated from goodwill and amortised on a straight-linebasis over their remaining useful lives. Impairment of tangible and intangible assets excluding goodwillAt each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset is estimated in order to determine theextent of the impairment loss. Where the asset does not generate cash flows thatare independent from other assets, the Group estimates the recoverable amount ofthe cash-generating unit to which the asset belongs. An intangible asset with anindefinite useful life is tested for impairment annually and whenever there isan indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated future cash flows are discountedto their present value. If the recoverable amount of an asset is estimated to be less than its carryingamount, the carrying amount of the asset is reduced to its recoverable amount.An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the assetis increased to the revised estimate of its recoverable amount, but so that theincreased carrying amount does not exceed the carrying amount that would havebeen determined had no impairment loss been recognised for the asset in prioryears. A reversal of an impairment loss is recognised as income immediately. InventoriesInventories are stated at the lower of cost (determined on a first-in, first-outbasis and includes transport and handling costs) and net realisable value, lesspayments on account. Net realisable value represents the estimated selling priceafter allowing for the costs of realisation and, where appropriate, the cost ofconversion from their existing state into a finished condition. Provision ismade where necessary for obsolete, slow moving or defective inventories. Derivative financial instruments and hedge accountingAs permitted by IFRS 1, the Group has elected to apply IAS 32 "FinancialInstruments: Disclosure and Presentation" and IAS 39 "Financial Instruments:Recognition and Measurement" prospectively from 1 April 2005. As a result, therelative comparative information for the year ended 31 March 2005 does notreflect the impact of these standards and is accounted for in accordance with UKGAAP. The Group's activities expose it primarily to the financial risks of changes inforeign currency exchange rates and interest rates. The Group uses foreignexchange forward contracts and interest rate swaps to hedge these exposures. TheGroup does not use derivative financial instruments for speculative purposes. The use of financial derivatives is governed by the Group's policies approved bythe board of directors, which provide written principles on the use of financialderivatives. Derivative financial instruments are recognised as assets and liabilitiesmeasured at fair values at the balance sheet date. Changes in the fair values ofderivative financial instruments that are designated and effective as hedges offuture cash flows are recognised directly in equity and any ineffective portionis recognised immediately in the income statement. If the cash flow hedge of afirm commitment or forecasted transaction results in the recognition of an assetor a liability, then, at the time the asset or liability is recognised, theassociated gains or losses on the derivative that had previously been recognisedin equity are included in the initial measurement of the asset or liability. Forhedges that do not result in the recognition of an asset or a liability, amountsdeferred in equity are recognised in the income statement in the same period inwhich the hedged item affects net profit or loss. APPENDIX 2 - ACCOUNTING POLICIES (continued) Derivative financial instruments and hedge accounting (continued)For an effective hedge of an exposure to changes in the fair value, the hedgeditem is adjusted for changes in fair value attributable to the risk being hedgedwith the corresponding entry in profit or loss. Gains or losses fromre-measuring the derivative, or for non-derivatives the foreign currencycomponent of its carrying amount, are recognised in profit or loss. Changes in the fair value of derivative financial instruments that do notqualify for hedge accounting are recognised in the income statement as theyarise. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated, or exercised, or no longer qualifies for hedge accounting. At thattime, any cumulative gain or loss on the hedging instrument recognised in equityis retained in equity until the forecasted transaction occurs. If a hedgedtransaction is no longer expected to occur, the net cumulative gain or lossrecognised in equity is transferred to net profit or loss for the period. ProvisionsProvisions for warranty costs are recognised at the date of sale of the relevantproducts, at the directors' best estimate of the expenditure required to settlethe Group's liability. Share-based paymentsThe Group has applied the requirements of IFRS 2 'Share-based Payments'. Inaccordance with the transitional provisions, IFRS 2 has been applied to allgrants of equity instruments after 7 November 2002 that were unvested as of 1April 2005. The Group issues equity-settled share-based payments to certain employees.Equity-settled share-based payments are measured at fair value at the date ofgrant. The fair value determined at the grant date is expensed on astraight-line basis over the vesting period, based on the Group's estimate ofshares that will eventually vest. Fair value is measured by use of the Black-Scholes option pricing model. This information is provided by RNS The company news service from the London Stock Exchange