Eleco PLC 18 March 2008 For Immediate Release 18 March 2008 ELECO PLC The Building Systems and Software Group INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2007 "Continued strong growth by this specialist provider of offsite building systems and software solutions" Highlights - Turnover increased to £39.4m from £28.9m: an increase of 36.2% - Profit before tax increased to £3.7m from £2.5m: an increase of 47.9% - Earnings per share increased to 4.5p from 3.7p: an increase of 24.0% - Interim dividend increased to 1.0 p from 0.7p: an increase of 42.9% - Precast concrete interests significantly strengthened by the acquisition in November 2007 of Milbury Systems, a leading provider of precast concrete infrastructure products to the water, waste and civil engineering industries and the agricultural sector. John Ketteley, Executive Chairman of Eleco plc, commented: "Our strong growth in the year to June 2007 continued in the six months to December 2007. Increased demand for Bell & Webster's precast concrete products and significantly higher productivity at its Grantham plant, and improved performances from our building components operations and software interests, more than compensated for the lower outturn of our connector plate businesses. "The current turmoil in financial markets suggests that we might well expect to encounter more testing market conditions. However, Eleco is in a strong financial position and we entered the second half with improved order books. Milbury Systems will also be contributing to our results for the whole of the second half. I am therefore confident that despite the uncertain financial environment, Eleco will again acquit itself well." For further information please contact: Eleco plc Tel: 01920 443 830 John Ketteley, Executive Chairman http://www.eleco.com john.ketteley@eleco.com David Dannhauser, Finance Director david.dannhauser@eleco.com Collins Stewart Europe Limited 020 7523 8350 Nick Ellis / Philip Roe Buchanan Communications 020 7466 5000 Tim Anderson / Isabel Podda Chairman's Statement I am pleased to present my statement for the six months ended 31 December 2007. The condensed consolidated interim financial statements for the period on which my statement is based, have been prepared taking into account the requirements of IFRS 1 "First time Adoption of International Reporting Standards". Performance Summary Our strong growth in the year to 30 June 2007 continued in the period under review. . Increased demand for Bell & Webster's precast concrete products together with significantly higher productivity at its Grantham plant, and improved performances from our building components operations and software interests, more than compensated for the lower outturn of our connector plate businesses which were adversely affected by lower activity in the UK, Irish and South African house building markets. Our performance as measured by the key performance indicators set out below is again encouraging. - Revenue increased 36.2% to £39,351,000 (2006: £28,890,000) - Profit from operations increased 42.4% to £3,507,000 (2006: £2,462,000) - Profit before tax, increased 47.9% to £3,652,000 (2006:£2,469,000), including finance income of £145,000 (2006: £7,000) - Profit for the period increased 37.2% to £2,572,000 (2006: £1,872,000), after higher tax of £1,080,000 (2006: £597,000) - After taking account of net cash expenditure of £3,942,000 in connection with the acquisition of Milbury Systems in November 2007, net cash at 31 December 2007, amounted to £2,789,000 compared with £5,459,000 at 30 June 2007 Earnings per share and Dividends Earnings per share increased 24 per cent to 4.5p (2006: 3.7p). The Board has declared an interim dividend of 1.00p per share (2006: 0.70p per share), an increase of 42.9 per cent., which will be paid on 11 April 2008 to shareholders on the Register on 28 March 2008. The interim dividend is covered 4.5 times by earnings (2006: 4.4 times). Operational Review ELECO BUILDING SYSTEMS Revenue of our Building Systems operations increased by 33% to £33,180,000 (2006: £24,951,000). Profit from operations increased by 22.2% to £3,356,000 (2006: £2,747,000). Precast Concrete Continuing demand for Bell & Webster Concrete's FastBuild(R) Room system for hotels and student accommodation projects again enabled it to achieve higher revenue and operating profits in the period under review. A strengthened management team delivered a significant increase in productivity at its Grantham manufacturing site which was reflected in an outstanding performance. The major development in the period was the acquisition of Milbury Systems in November 2007 for a total consideration of £7.06 million, before expenses. Milbury Systems is a leading provider of precast concrete infrastructure products for the water, waste and civil engineering industries and for the agricultural sector. Further information regarding Milbury System's products and operations can be found on its website at www.milbury.com. I would like to take this opportunity to welcome all employees of Milbury Systems to the Eleco Group. Timber Engineering Systems Despite the exposure that our nail plate businesses have had to the sharply lower activity in the housing markets in the UK, Ireland and South Africa they performed creditably in the period under review. The revenue of these businesses overall was broadly in line with that for the corresponding period last year in a difficult trading environment. Profits of Gang-Nail Systems, our timber engineering systems business in the UK and Republic of Ireland were somewhat lower in the period due to the slowdown in both housing markets. International Truss Systems in South Africa also made lower profits partly as a consequence of less favourable market conditions but also owing to weakness in the SA Rand. By contrast, Eleco Bauprodukte in Germany, which is principally involved in commercial projects, made higher profits. However, the latter's improved performance in the period under review was not sufficient to prevent overall profits from our connector plate operations from being some 20% lower than in the corresponding period last year. Building Components Our roofing and cladding businesses, SpeedDeck(R) Building Systems, Downer Cladding and Prompt Profiles, and Eleco Timber Frame, which manufactures our patented ElecoFrame(R) system, achieved higher profits in the period despite significant pressure on margins in a difficult market environment. Our roofing and cladding businesses were also able to secure significantly higher orders in the period for delivery in the second half and the order books of our building components businesses and Eleco Timber Frame are higher than they have been for some time. SOFTWARE Revenue of our Software operations, including the contribution from Asta Development in the current period, increased by 50.3% to £6,389,000 (2006: £4,250,000) and the profit was £151,000 (2006 Loss: £285,000). Construction Software Construction Software produced a profit before tax in the period compared with a loss for the corresponding period last year, mainly due to the contribution of Asta Development which was acquired in December 2006. The results of Consultec in Sweden and the UK were broadly in line with the corresponding period last year. Visualisation Software Visualisation Software again made a much reduced loss in the period. It succeeded in signing up a number of international retail distributers for its main product, Arcon(R) 3D architectural visualisation software, which should enhance revenues in future periods. OUTLOOK The current turmoil in financial markets suggests that we might well expect to encounter more testing market conditions. However, Eleco is in a strong financial position and we entered the second half with improved order books. Milbury Systems will also be contributing to our results for the whole of the second half. I am therefore confident that despite the uncertain financial environment, Eleco will again acquit itself well. John Ketteley EXECUTIVE CHAIRMAN 18 March 2008 Condensed Consolidated Income Statement 6 months to 31 December Year to ----------------- 30 June 2007 2006 2007 (unaudited) (unaudited) (unaudited) Note £'000 £'000 £'000 Continuing operations Revenue 2 39,351 28,890 61,923 Cost of Sales (22,953) (16,199) (32,142) -------------- ----- -------- ------ --------- --- --------- --- --------- Gross Profit 16,398 12,691 29,781 Distribution costs (1,790) (1,422) (2,818) Administrative expenses (11,101) (8,807) (21,142) -------------- ----- -------- ------ --------- --- --------- --- --------- Profit from operations 2 3,507 2,462 5,821 Finance income 145 7 59 -------------- ----- -------- ------ --------- --- --------- --- --------- Profit before tax 3,652 2,469 5,880 Tax (1,080) (597) (942) -------------- ----- -------- ------ --------- --- --------- --- --------- Profit for the period 2,572 1,872 4,938 -------------- ----- -------- ------ --------- --- --------- --- --------- Attributable to: Equity holders of the parent 2,572 1,872 4,938 Earnings per share (EPS) - basic 4.5p 3.7p 9.3p - diluted 4.5p 3.7p 9.3p Condensed Consolidated Statement of Recognised Income and Expense 6 months to 31 December Year to ----------------- 30 June 2007 2006 2007 (unaudited) (unaudited) (unaudited) £'000 £'000 £'000 Actuarial gain on retirement benefit obligation - - 1,125 Associated deferred tax on retirement benefit obligation - - (407) Translation differences on foreign currency net investments 144 (125) (154) -------------------------- --- --------- --- --------- --- --------- Net income/(expens e) recognised directly in equity 144 (125) 564 Profit for the period 2,572 1,872 4,938 -------------------------- --- --------- --- --------- --- --------- Total recognised income and expense for the period 2,716 1,747 5,502 Attributable to: Equity holders of the parent 2,716 1,747 5,502 -------- -------- -------- --------- --- --------- --- --------- --- --------- --- Condensed Consolidated Balance Sheet 31 December 30 June 2007 2006 2007 (unaudited) (unaudited) (unaudited) Note £'000 £'000 £'000 Non current assets Goodwill and intangible assets 17,790 13,694 13,436 Property, plant & equipment 11,193 8,362 8,372 Deferred tax 922 1,466 984 -------------- ------- -------- ------ --------- --- --------- --- --------- Total non current assets 29,905 23,522 22,792 -------------- ------- -------- ------ --------- --- --------- --- --------- Current assets Inventories 3,804 3,902 3,441 Trade and other receivables 17,104 13,462 13,151 Cash and cash equivalents 6,589 3,089 5,940 -------------- -------- -------- ------ --------- --- --------- --- --------- Total current assets 27,497 20,453 22,532 -------------- -------- -------- ------ --------- --- --------- --- --------- -------------- -------- -------- ------ --------- --- --------- --- --------- Total assets 57,402 43,975 45,324 -------------- -------- -------- ------ --------- --- --------- --- --------- Current liabilities Borrowings - (813) (410) Obligations under finance leases (286) (385) (313) Trade and other payables (15,654) (11,900) (11,103) Current tax liabilities (1,271) (801) (982) Accruals and deferred income (5,547) (5,619) (6,468) -------------- -------- -------- ------ --------- --- --------- --- --------- Total current liabilities (22,758) (19,518) (19,276) -------------- -------- -------- ------ --------- --- --------- --- --------- Non current liabilities Borrowings (3,800) (113) (71) Obligations under finance leases (496) (360) (386) Deferred tax liabilities (1,100) (1,363) (1,051) Provisions for liabilities and charges (60) (85) (85) Retirement benefit obligation (3,242) (4,888) (3,514) -------------------- -------- ------ --------- --- --------- --- --------- Total non current liabilities (8,698) (6,809) (5,107) -------------------- -------- ------ --------- --- --------- --- --------- --------------- ------- -------- ------ --------- --- --------- --- --------- Total liabilities (31,456) (26,327) (24,383) --------------- ------- -------- ------ --------- --- --------- --- --------- --------- -------- ------- -------- ------ --------- --- --------- --- --------- Net assets 25,946 17,648 20,941 ========= ======== ======= ======== ====== ========= === ========= === ========= Equity Share capital 5,994 5,570 5,674 Share premium account 6,224 6,224 6,224 Merger reserve 7,371 4,453 4,453 Translation reserve (10) (125) (154) Other reserve (306) (102) (306) Retained earnings 6,673 1,628 5,050 -------------------- -------- ------- --------- ----- --------- ----- --------- Equity attributable to shareholders 25,946 17,648 20,941 ==================== ======== ======= ========= ===== ========= ===== ========= Condensed Consolidated Cash Flow Statement 6 months to 31 December Year to ----------------- 30 June 2007 2006 2007 (unaudited) (unaudited) (unaudited) Note £'000 £'000 £'000 Cash flows from operating activities Profit before interest and tax 3,507 2,462 5,821 Depreciation charge 707 712 1,440 Amortisation charge 196 102 386 Profit on sale of property,plant and equipment (9) (2) (250) Share-based payments 91 79 181 Retirement benefit obligation (190) (191) (378) ----------------------------- --------- --- --------- --- --------- Cash generated from operations before working capital 4,302 3,162 7,200 Increase in trade and other receivables (1,938) (2,442) (2,335) Decrease/(incr ease) in inventories and work in progress 568 (960) (628) Increase in trade and other payables 1,571 1,612 1,931 -------------------- -------- ------ --------- --- --------- --- --------- Cash generated from operations 4,503 1,372 6,168 Interest paid (50) (73) (250) Interest received 208 101 241 Income tax paid (967) (477) (663) ------------------------- ------ --------- --- --------- --- --------- Net cash generated from operating activities 3,694 923 5,496 ------------------------- ------ --------- --- --------- --- --------- Net cash used in investing activities Purchase of intangible assets (32) (65) (115) Purchase of property, plant and equipment (2,540) (570) (1,233) Acquisition of subsidiary undertakings net of cash acquired 5 (2,912) (2,587) (2,622) Proceeds from sale of property, plant, equipment and intangible assets 71 11 315 ------------------------- ------ --------- --- --------- --- --------- Net cash outflow from investing activities (5,413) (3,211) (3,655) ------------------------- ------ --------- --- --------- --- --------- Net cash used in financing activities Proceeds from new loan 3,800 - - Repayments of obligations under finance leases (178) (160) (374) Repayment of bank loans (540) (445) (891) Equity dividends paid (974) (750) (1,122) Own shares purchased by ESOT - - (204) -------------------- -------- ------ --------- --- --------- --- --------- Net cash outflow from financing 2,108 (1,355) (2,591) -------------------- -------- ------ --------- --- --------- --- --------- Net increase/(decr ease) in cash and cash equivalents 389 (3,643) (750) ------------------------- ------ --------- --- --------- --- --------- Cash and cash equivalents at beginning of period 5,940 6,852 6,852 Effects of changes in foreign exchange rates 260 (120) (162) ------------------------- ------ --------- --- --------- --- --------- Cash and cash equivalents at end of period 6,589 3,089 5,940 ------------------------- ------ --------- --- --------- --- --------- Notes to the Condensed Consolidated Financial Statements 1. Basis of preparation These condensed consolidated interim financial statements are for the six months ended 31 December 2007. They have been prepared taking into account the requirements of IFRS 1 "First Time Adoption of International Financial Reporting Standards". The accounts do not include all the information required for full annual statements and they should be read in conjunction with the year end financial statements to 30 June 2007. Outlined below is the Group's effective position on the transitional arrangements under IFRS 1: The Group has not elected to apply IFRS 3 Business combinations retrospectively to business combinations that took place before 1 July 2006. The Group will account for acquisitions prior to 1 July 2006 as follows: - the carrying amount of goodwill recognised under UK GAAP at 1 July 2006 will not be adjusted to reflect any separable intangible assets acquired unless they would be recognised under IFRS in the books of the acquiree. - from 1 July 2006, goodwill will no longer be amortised but will be reviewed annually for impairment; and - goodwill written off directly to reserves prior to 1998 under UK GAAP will not be included in determining any subsequent profit or loss on disposal. The group has taken advantage of the exemption in IFRS 1 and has deemed cumulative translation differences for all foreign operations to be nil at the date of transition to IFRS. In determining any subsequent gain or loss on disposal of these operations, translation differences that arose before the date of transition to IFRS will not be included. These condensed consolidated interim financial statements have been prepared in accordance with the accounting policies, which are based on the recognition and measurement principles of IFRS in issue and effective at 30 June 2008 or are expected to be adopted and effective at that date. The financial information does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The Group's consolidated financial statements for the year ended 30 June 2007, prepared under UK GAAP, have been filed and the audit report was not qualified and did not contain a statement under S237(2) or S237(3) of the Companies Act 1985. The date of transition to IFRS was 1 July 2006 and the comparative figures for periods commencing 1 July 2006 have been restated to reflect changes in accounting policies as a result of adoption of IFRS. The disclosures required by IFRS 1, concerning the transition from UK GAAP to IFRS, are given in the reconciliation schedules attached to this report. The significant accounting policies adopted in the preparation of these condensed consolidated interim financial statements are set out later in this report. 2. Segmental information 6 months to 31 December 2007 (unaudited) Pre cast Building Timber Construction Visualisation Elimination Group Concrete Components Engineering Software Software ------- ------- ------ -------- ------- -------- -------- £'000 £'000 £'000 £'000 £'000 £'000 £'000 Revenue 16,493 8,851 7,836 5,199 972 39,351 Inter-segment revenue - 1,182 1,093 218 - (2,493) - ------------ --- ------- -------- -------- -------- -------- ------- ------- Total segment revenue 16,493 10,033 8,929 5,417 972 (2,493) 39,351 Segment operating results 1,965 177 1,214 245 (94) 3,507 Unallocated results (935) ------------ --- ------- -------- -------- -------- -------- ------- ------- Profit after tax 2,572 ------------ --- ------- -------- -------- -------- -------- ------- ------- 6 months to 31 December 2006 (unaudited) Pre cast Building Timber Construction Visualisation Elimination Group Concrete Components Engineering Software Software ------- ------- ------ -------- ------- -------- -------- £'000 £'000 £'000 £'000 £'000 £'000 £'000 Revenue 9,908 7,131 7,912 3,186 753 28,890 Inter-segment revenue - 760 1,438 299 12 (2,509) - ------------ --- ------- -------- -------- -------- -------- ------- ------- Total segment revenue 9,908 7,891 9,350 3,485 765 (2,509) 28,890 Segment operating results 1,241 (28) 1,534 (33) (252) 2,462 Unallocated results (590) ------------ --- ------- -------- -------- -------- -------- ------- ------- Profit after tax 1,872 ------------ --- ------- -------- -------- -------- -------- ------- ------- 12 months to 30 June 2007 (unaudited) Pre cast Building Timber Construction Visualisation Elimination Group Concrete Components Engineering Software Software ------- ------- ------ -------- ------- -------- -------- £'000 £'000 £'000 £'000 £'000 £'000 £'000 Revenue 20,900 15,186 15,707 8,393 1,737 61,923 Inter-segment revenue - 1,945 2,699 223 200 (5,067) - ------------ --- ------- -------- -------- -------- -------- ------- ------- Total segment revenue 20,900 17,131 18,406 8,616 1,937 (5,067) 61,923 Segment operating results 2,569 488 3,061 239 (536) 5,821 Unallocated results (883) ------------ --- ------- -------- -------- -------- -------- ------- ------- Profit after tax 4,938 ------------ --- ------- -------- -------- -------- -------- ------- ------- 3. Earnings per share The calculations of the earnings per share are based on the total profit after tax attributable to ordinary equity shareholders of the Company and the weighted average number of shares in issue for the reporting period. 6 months to 31 December Year to ----------------- 30 June 2007 2006 2007 (unaudited) (unaudited) (unaudited) Profit after taxation £2,572,000 £1,872,000 £4,938,000 Weighted average number of shares in issue in the period 56,735,930 50,164,945 52,855,635 Dilutive effect of share options - 1,041,650 - -------------------------- --------- ---- --------- ---- --------- Number of shares for diluted earnings per share 56,735,930 51,206,595 52,855,635 -------------------------- --------- ---- --------- ---- --------- Basic earnings per share 4.5 p 3.7 p 9.3 p Diluted earnings per share 4.5 p 3.7 p 9.3 p -------------------------- --------- ---- --------- ---- --------- ---- 4. Dividends The Directors declared an interim dividend per share of x.xp (2007: 0.7p) after the interim balance sheet date, which will be payable on 11 April 2008 to shareholders on the register on 23 March 2008. 5. Business combinations On 22 November 2007, the Group acquired the entire issued share capital of Milbury Systems Limited for a total consideration of £7,065,000, before expenses, of which £1,030,000 relates to the separate purchase of freehold property and £75,000 of deferred consideration. At completion, £3,735,000 was settled in cash from the Group's existing resources, £3,030,000 was settled by the issue and placing of shares on behalf of the vendors and £225,000 by the allotment to the vendors of new ordinary shares in the Company. At the date of acquisition, the book value of Milbury Systems' net assets was £1,876,000. This amount is provisional and will be finalised in subsequent periods. In its last audited financial statements to 31 December 2006, Milbury Systems reported pre-tax profits of £682,000. Significant Accounting Policies The significant accounting policies adopted in the preparation of the Group's condensed consolidated financial statements are prepared using the recognition and measurement principles of the International Financial Reporting Standards ("IFRS"), as adopted by the European Union, are set out below: A. Basis of preparation The condensed consolidated financial statements have been prepared on the historical cost basis. B. Basis of consolidation The condensed consolidated financial statements include the financial statements of the Company and its subsidiary undertakings for the six months ended 31 December 2007 and the comparative six months ended 31 December 2006 and twelve months ended 30 June 2007. Subsidiaries are entities controlled by the Group. Control exists where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The Group obtains and exercises control through voting rights. The financial statements of the Company and each subsidiary are prepared in accordance with UK Generally Accepted Accounting Principles ("UK GAAP") or, where incorporated outside the UK, GAAP applicable to their local jurisdiction. Adjustments are made in the condensed consolidated financial statements to adjust for any differences in accounting policies that may exist between UK or local GAAP and IFRS. The results of subsidiaries acquired or sold in the year are included in the condensed consolidated income statement from or up to the date control passes until control ceases. The acquisition of subsidiaries is dealt with using the purchase method. The purchase method involves the recognition at fair value of all identifiable assets and liabilities at the acquisition date, including contingent liabilities of the subsidiary regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. All intercompany balances and transactions, including unrealised profits and losses arising from intra-Group transactions, are eliminated in full. C. Revenue Revenue from the sale of goods and services represents the fair value of consideration received or receivable in respect of goods and services supplied to third parties in the period, excluding value added tax and trade discounts. Long term contract revenue is stated at an amount appropriate to their stage of completion as measured by work performed. Revenue from software maintenance and support contracts is treated as deferred income and taken to revenue in the income statement on a straight line basis over the term of the contract. D. Intangible assets Goodwill arising on consolidation represents the excess of the cost of the acquisition, including expenses, over the Group's interest in the fair value of the identifiable net assets acquired. The carrying value of goodwill is recognised as an asset and reviewed for impairment at least annually and any impairment is recognised immediately in the income statement. On disposal, the attributable amount of goodwill is included in the determination of profit or loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous 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 been reinstated and is not included in determining any subsequent profit or loss on disposal. Other intangible assets acquired separately are capitalised at cost and on a business combination are capitalised at fair value as at the date of acquisition. Following initial recognition, an intangible asset is held at cost less accumulated amortisation and any accumulated impairment losses. Amortisation expense is charged to administration expenses on a straight line basis over its useful economic life. The Group owns intellectual property both in its software tools and software products. Intellectual property purchased is capitalised at cost and is amortised on a straight line basis over its expected useful life. Research expenditure is written off as incurred. Development expenditure on a project is written off as incurred unless and until the following principal criteria are all satisfied: - the project is for a new / substantially new product or process - comprehensive testing has been performed and has established the technical feasibility of the project is without doubt. - the commercial viability of the project has been measured by detailed market analysis and associated earnings projections. When a project meets all these criteria, subsequent development costs are capitalised and are amortised from the date the product or process is available for use, on a straight line basis over its estimated useful life. The carrying amounts of intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and in the case of capitalised development expenditure reviewed for impairment annually while the asset is not yet in use. E. Property, plant and equipment Property, plant and equipment is stated at purchase cost, together with any directly attributable costs of acquisition. The carrying amount and useful lives of property, plant and equipment with material residual values are reviewed at each balance sheet date. Depreciation is provided on all property, plant and equipment, except freehold land and assets in the course of construction, on a straight line basis to write down the assets to their estimated residual value over the useful economic life of the asset as follows: Freehold buildings - 50 years Short leasehold property - over the term of the lease Plant, equipment and vehicles - 2 to 10 years F. Impairment of assets The carrying amount of the Group's goodwill is assessed annually as to whether an impairment adjustment may be required. When annual impairment testing for an asset is required, the Group makes an estimate of the asset's recoverable amount, based on the higher of the asset's value in use and fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Any impairment loss is charged to the income statement under the relevant expense heading. A previously recognised impairment loss, other than goodwill, is reversed only if there has been a change in the previous indicator used to determine the assets recoverable amount since the last impairment loss was recognised. The reinstated carrying amount cannot exceed the carrying amount that would have been determined, net of amortisation, had no impairment loss been recognised for the asset in prior years. G. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is based on the weighted average method and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. The cost of manufactured inventories and work in progress includes related production overheads based on normal operating activity. Net realisable value is based on estimated selling price less further costs expected to be incurred to completion and disposal. On long-term contract work in progress, the amount of profit attributable to the stage of completion of a contract is recognised when the outcome of the contract can be estimated reliably. Contract work in progress is stated at costs incurred, less those transferred to the income statement, after deducting foreseeable losses and payments on account not matched with revenue. Amounts due from customers for long term contract work are included in trade and other receivables and represent revenue recognised in excess of payments on account. H. Leases Finance leases, which transfer to the Group substantially all of the benefits and risks of ownership of an asset, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated life of the asset or the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight line basis over the term of the lease. I. Pensions The Group operates a defined benefit pension scheme, which provides benefits based on final pensionable pay. The defined benefit scheme is valued every three years by a professionally qualified independent actuary, the rates of contribution payable being determined by the actuary. The service cost of providing retirement benefits to employees during the year is charged to the income statement in the year. The full cost of providing amendments to benefits in respect of past service, where amendments to benefits vest immediately, is also charged to the income statement in the year. The expected return on the assets of the scheme during the year, based on the market value of scheme assets at the start of the financial year, is included within finance income/charge. This also includes a charge representing the expected increase in liabilities of the scheme during the year, arising from the liabilities of the scheme being one year closer to payment. The resulting net finance amount is reported in the income statement. Differences between actual and expected returns on assets during the year are recognised in the statement of recognised income and expenses in the year, together with differences from actual experience and from changes in actuarial assumptions. The net deficit on the defined benefit pension scheme, representing the difference between the present value of the defined benefit obligation and the fair value of scheme assets (based upon market price information and in the case of quoted securities the published bid price) is reported on the balance sheet. Contributions to defined contribution pension schemes are charged to the income statement as they become payable. J. Share based payments The cost of equity-settled transactions with employees is measured by reference to the fair value at that date at which they are granted and is recognised as an expense over the vesting period, which ends on the date on which the relevant employees is unconditionally entitled to the award. The fair value of the employees services is determined by reference to the fair value of instruments granted using an appropriate pricing model. In valuing equity-settled transactions, account is taken of the probabilities of performance achievement and other conditions linked to the price of the shares of the Company (market conditions). No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate of the achievement or otherwise of non-market conditions. The movement in cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity. K. Foreign currencies Transactions in foreign currencies are translated at the exchange rate ruling at the date of transaction. Assets and liabilities in foreign currencies and assets and liabilities in the financial statements of foreign subsidiaries are translated into sterling at the rate of exchange ruling at the balance sheet date and results are translated at the average rate of exchange for the year. Differences on exchange, arising from the retranslation of the opening net investment in subsidiary companies and from the translation of the results of those companies at an average rate, are taken to reserves and reported in the statement of recognised income and expense. All other foreign exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were initially recorded are recognised in the income statement for the period in which they arise. L. Financial assets and liabilities Financial assets are recognised when the group becomes a party to the contractual provisions of the instrument and arise principally through the provision of goods and services to customers (trade and other receivables) but also include other types of contractual monetary assets. Trade and other receivables are measured subsequent to initial recognition at amortised cost using the effective interest method, less provision for impairment. A financial asset is derecognised only where the contractual rights to the cash flows from the asset expire or the financial asset is transferred and that transfer qualifies for derecognition. Financial liabilities are obligations to pay cash or other financial assets and are recognised when the group becomes a party to the contractual provisions of the instrument. Trade payables and other short term monetary liabilities are recorded at fair value and subsequently carried at amortised cost with any changes in fair value being recognised in the income statement. Bank borrowings are initially recognised at the amount advanced, exclusive of any transaction costs directly attributable to the issue of the instrument and subsequently carried at amortised cost. A financial liability is derecognised when the obligation is discharged, cancelled or expires. M. Taxation Current tax is the tax payable based on taxable profit for the year. Deferred tax is calculated using the liability method on temporary differences and provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill nor on the initial recognition of an asset or liability, unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided the expected tax rates are enacted or substantively enacted at the balance sheet date. Notes explaining transition to IFRS These are the Group's first condensed consolidated interim financial statements prepared using the recognition and measurement principles of the International Financial Reporting Standards ("IFRS"). The IFRS accounting policies of the Group are detailed earlier in this document. An explanation of how the transition from UK Generally Accepted Accounting Principles ("UK GAAP") to IFRS has affected the Group is set out below. Note 1. Goodwill Under UK GAAP, goodwill was capitalised and amortised on a straight line basis over its useful economic life, which ranges between five to twenty years. Under IFRS this goodwill balance is no longer amortised but instead subject to an annual impairment review. The carrying amount of the assets of each cash generating unit inclusive of attributable goodwill is compared to the present value of forecast net cash flows before interest and tax that are expected to flow from these units. An impairment adjustment is required where the carrying amount of the assets exceeds the value in use measured as the present value of the future cash flows. A benefit of £596,000 is recognised in the prior year condensed consolidated income statement relating to amortised goodwill with a corresponding increase in the balance sheet value at 30 June 07. Business Combinations The excess of the cost of an acquisition, including attributable expenses, above the fair value of the net assets acquired was deemed to be goodwill under UK GAAP. IFRS 3 requires that a value is attributed to any identifiable intangible assets, such as patents and copyrights, customer lists and relationships, brands and in progress research and development together with the related deferred tax liability. Hence, acquired goodwill is the difference between the cost of the investment and the fair value of the net assets including intangible assets and the related deferred tax liability and represents such items as the assembled workforce that do not qualify for separate recognition. The acquisition of Asta Development plc in December 2006 has been reviewed and a value of £3,227,000 has been attributed as at that date to the intangible asset comprising customer contracts and customer relationships with a related deferred tax liability of £904,000. The deferred income creditor has been reduced by £189,000 with a related deferred tax liability adjustment of £53,000. 2. Intangible assets Under UK GAAP, certain computer software was capitalised within tangible fixed assets. Under IFRS, only computer software that is integral to a related item of hardware should be included as property, plant and equipment. All other computer software should be recorded as an intangible asset. £94,000 has been restated as an intangible asset. 3. Holiday pay accruals An adjustment is required to record holiday pay liabilities in respect of all employees. IAS 19 requires that a liability is recorded for all accrued entitlements for holiday at each balance sheet date. The impact on the Group is an adjustment to employee benefits expense and accruals together with a related deferred tax liability adjustment. 4. Deferred Tax Deferred tax under UK GAAP was provided on all timing differences that had originated but not reversed at the balance sheet date. The principal impact of adopting IAS 12 has been to recognise separately, under non-current assets, the deferred tax asset on the retirement benefit obligation and to recognise the deferred tax liability on intangible assets recognised in accordance with IFRS 3 in relation to the acquisition of Asta Development plc. Reconciliation of profit for the 6 months ended 31 December 2006 UK GAAP IFRS -------- -------------- (unaudited) Effect of (unaudited) transition to IFRS Note £'000 £'000 £'000 --------- --------- ------- --------- -------- --------- Continuing operations Revenue 1 28,926 (36) 28,890 Cost of 3 (16,238) 39 (16,199) Sales -------- ------- --------- --- -------- --------- ---------- Gross Profit 12,688 3 12,691 Distribution costs (1,422) - (1,422) Administrative expenses 1,3 (9,023) 216 (8,807) --------------- ------- --------- --- -------- --------- Profit from operations 2,243 219 2,462 Finance income 7 - 7 --------------- ------- --------- --- -------- --------- Profit before tax 2,250 219 2,469 Tax 1,3,4 (597) - (597) --------------- ------- --------- --- -------- --------- Profit for the period 1,653 219 1,872 --------------- ------- --------- --- -------- --------- --------- --------- ------- --------- --- -------- --------- --- Reconciliation of profit for the year ended 30 June 2007 UK GAAP IFRS -------- -------------- (audited) Effect of (unaudited) transition to IFRS Note £'000 £'000 £'000 Continuing operations Revenue 1 62,078 (155) 61,923 Cost of 3 (32,142) - (32,142) Sales -------- ------- -------- --- -------- --------- ---------- Gross Profit 29,936 (155) 29,781 Distribution costs (2,818) - (2,818) Administrative expenses 1,3 (21,527) 385 (21,142) --------------- ------- -------- --- -------- --------- Profit from operations 5,591 230 5,821 Finance income 59 - 59 --------------- ------- -------- --- -------- --------- Profit before tax 5,650 230 5,880 Tax 1,3,4 (1,044) 102 (942) --------------- ------- -------- --- -------- --------- Profit for the period 4,606 332 4,938 --------------- ------- -------- --- -------- --------- Reconciliation of equity at 1 July 2006 UK GAAP IFRS -------- -------------- (audited) Effect of (unaudited) transition to IFRS Note £'000 £'000 £'000 Non current assets Goodwill and intangible assets 5,625 94 5,719 Property, plant & equipment 2 8,310 (94) 8,216 Deferred tax 3,4 - 1,517 1,517 ----------------- ------ ------- -------- -------- --------- Total non-current assets 13,935 1,517 15,452 ----------------- ------ ------- -------- -------- --------- Current assets Inventories 2,821 - 2,821 Trade and other receivables 9,891 - 9,891 Cash and cash equivalents 6,852 - 6,852 ------------ ------ ------ ------- -------- -------- --------- Total current assets 19,564 - 19,564 ------------ ------ ------ ------- -------- -------- --------- ------------ ------ ------ ------- -------- -------- --------- Total assets 33,499 1,517 35,016 ------------ ------ ------ ------- -------- -------- --------- Current liabilities Borrowings (891) - (891) Obligations under finance leases (325) - (325) Trade and other payables (9,798) - (9,798) Current tax liabilities (364) - (364) Accruals and deferred income 3 (5,016) (59) (5,075) ------------------ ----- ------- -------- -------- --------- Total current liabilities (16,394) (59) (16,453) ------------------ ----- ------- -------- -------- --------- Non current liabilities Borrowings (481) - (481) Obligation under finance leases (473) - (473) Deferred tax liabilities (340) 18 (322) Provisions for liabilities and charges (85) - (85) Retirement benefit obligation 4 (3,541) (1,517) (5,058) ---------------- ------- ------- -------- -------- --------- Total non-current liabilities (4,920) (1,499) (6,419) ---------------- ------- ------- -------- -------- --------- ------------ ------- ------- ------- -------- -------- --------- Total liabilities (21,314) (1,558) (22,872) ------------ ------- ------- ------- -------- -------- --------- ------------ ------- ------- ------- -------- -------- --------- Net assets 12,185 (41) 12,144 ============ ======= ======= ======= ======== ======== ========= Equity Share capital 5,033 - 5,033 Share premium account 6,224 - 6,224 Merger reserve 367 - 367 Translation - - - reserve Other reserve (127) - (127) Retained earnings 688 (41) 647 ---------------------- ------- -------- -------- --------- Equity attributable to shareholders 12,185 (41) 12,144 ====================== ======= ======== ======== ========= Reconciliation of equity at 31 December 2006 UK GAAP IFRS -------- -------------- (unaudited) Effect of (unaudited) transition to IFRS Note £'000 £'000 £'000 Non current assets Goodwill and intangible assets 12,658 1,036 13,694 Property, plant & equipment 2 8,431 (69) 8,362 Deferred tax 4 - 1,466 1,466 ------------------ ----- ------- --------- --- -------- --------- Total non-current assets 21,089 2,433 23,522 ------------------ ----- ------- --------- --- -------- --------- Current assets Inventories 3,902 - 3,902 Trade and other receivables 13,462 - 13,462 Cash and cash equivalents 3,089 - 3,089 ------------ ------- ----- ------- --------- -------- --------- Total current assets 20,453 - 20,453 ------------ ------- ----- ------- --------- -------- --------- ------------ ------- ----- ------- --------- -------- --------- Total assets 41,542 2,433 43,975 ------------ ------- ----- ------- --------- -------- --------- Current liabilities Borrowings (813) - (813) Obligations under finance leases (385) - (385) Trade and other payables (11,900) - (11,900) Current tax liabilities (801) - (801) Accruals and deferred income 3 (5,769) 150 (5,619) ------------------ ----- ------- --------- -------- --------- Total current liabilities (19,668) 150 (19,518) ------------------ ----- ------- --------- -------- --------- Non current liabilities Borrowings (113) - (113) Obligation under finance leases (360) - (360) Deferred tax liabilities 1 (424) (939) (1,363) Provisions for liabilities and charges (85) - (85) Retirement benefit obligation 4 (3,422) (1,466) (4,888) ---------------- ------- ------- --------- -------- --------- Total non-current liabilities (4,404) (2,405) (6,809) ---------------- ------- ------- --------- -------- --------- ------------ ------- ------- ------- --------- -------- --------- Total liabilities (24,072) (2,255) (26,327) ------------ ------- ------- ------- --------- -------- --------- ------------ ------- ------- ------- --------- -------- --------- Net assets 17,470 178 17,648 ============ ======= ======= ======= ========= ======== ========= Equity Share capital 5,570 - 5,570 Share premium account 6,224 - 6,224 Merger reserve 4,453 - 4,453 Translation reserve (125) - (125) Other reserve (102) - (102) Retained earnings 1,450 178 1,628 ---------------------- ------- --------- -------- --------- Equity attributable to shareholders 17,470 178 17,648 ====================== ======= ========= ======== ========= Reconciliation of equity at 30 June 2007 UK GAAP IFRS -------- -------------- (audited) Effect of (unaudited) transition to IFRS Note £'000 £'000 £'000 Non current assets Goodwill and intangible assets 12,184 1,252 13,436 Property, plant & equipment 2 8,417 (45) 8,372 Deferred tax 4 - 984 984 ----------------- ------ ------- -------- -------- --------- Total non-current assets 20,601 2,191 22,792 ----------------- ------ ------- -------- -------- --------- Current assets Inventories 3,441 - 3,441 Trade and other receivables 13,151 - 13,151 Cash and cash equivalents 5,940 - 5,940 ------------ ------ ------ ------- -------- -------- --------- Total current assets 22,532 - 22,532 ------------ ------ ------ ------- -------- -------- --------- ------------ ------ ------ ------- -------- -------- --------- Total assets 43,133 2,191 45,324 ------------ ------ ------ ------- -------- -------- --------- Current liabilities Bank overdraft (410) - (410) Obligations under finance leases (313) - (313) Trade and other payables (11,103) - (11,103) Current tax liabilities (982) - (982) Accruals and deferred income 3 (6,389) (79) (6,468) ------------------ ----- ------- -------- -------- --------- Total current liabilities (19,197) (79) (19,276) ------------------ ----- ------- -------- -------- --------- Non current liabilities Borrowings (71) - (71) Obligation under finance leases (386) - (386) Deferred tax liabilities 1 (214) (837) (1,051) Long-term provisions (85) - (85) Retirement benefit obligation 4 (2,530) (984) (3,514) ------------------ ----- ------- -------- -------- --------- Total non-current liabilities (3,286) (1,821) (5,107) ------------------ ----- ------- -------- -------- --------- ------------ -------- ----- ------- -------- -------- --------- Total liabilities (22,483) (1,900) (24,383) ------------ -------- ----- ------- -------- -------- --------- ------------ -------- ----- ------- -------- -------- --------- Net assets 20,650 291 20,941 ============ ======== ===== ======= ======== ======== ========= Equity Share capital 5,674 - 5,674 Share premium account 6,224 - 6,224 Merger reserve 4,453 - 4,453 Translation reserve (154) - (154) Other reserve (306) - (306) Retained earnings 4,759 291 5,050 ---------------------- ------- -------- -------- --------- Equity attributable to shareholders 20,650 291 20,941 ====================== ======= ======== ======== ========= This information is provided by RNS The company news service from the London Stock Exchange