RNS Number:5856E
SMC Group Plc
27 September 2007
SMC GROUP PLC
("SMC", "the Company" or "the Group")
Interim Results for Six Months ended 30 June 2007
SMC Group, the architects and design business, announces its interim results for
the six month period ended 30 June 2007.
Highlights
* Turnover increased to #21.1m (2006: #11.3m)
* Gross profit increased to #10.6m (2006: #6.1m)
* Successfully implemented the recommendations of the internal review
committee
* Underperforming areas of the business either integrated into the Group
or have had offices closed
* Reduction in headcount to approximately 600 people from 650
* Work in progress reduced by 79 to 53 days, exceptional debtor provisions
of #2.9m
* Overhead reductions in excess of #2m annualised achieved.
* Discussions with Aukett Fitzroy Robinson Group Plc continuing
* Strong pipeline of existing and new business
* Pre-exceptional loss before tax and amortisation of #153,000 (2006:
Profit of #1.6m). Loss before tax and amortisation of #4.5m (2006: Profit
of #1.8m)
* Adjusted basic earnings per share of 0.48p (2006: 4.26p). Unadjusted
basic loss(earnings) per share -9.8p (2006: 2.9p)
Commenting on the results, Sir Rodney Walker, Executive Chairman of SMC said,
''"The first six months of the year has been a period of change. The
disappointing performance of 2006 required a detailed review of all of the
business and this has now been completed. The results are a more efficient and
streamlined business where underperforming business units and personnel have
left the Group, a number of offices have been closed and the Group's cost base
has been rationalised. Having implemented change and borne the associated costs,
the future prospects are encouraging. The Group continues to attract substantial
projects across the variety of market sectors in which it operates. It is this
ability to generate and retain high profile work - and therefore revenues - that
remains high and this is the underlying strength of the business which has
started to drive our return to day to day profitability."
- ends -
For further information please contact:
SMC Group Plc Tel: +44 (0)20 7495 5335
Sir Rodney Walker/Robert Boardman
Numis Securities Tel: +44 (0)20 7260 1000
James Serjeant/Stuart Skinner
Bell Pottinger Corporate & Financial Tel: +44 (0)20 7861 3232
David Rydell/Chris Hamilton
Chairman's Statement
Following a disappointing 2006 the Company has completed its strategic review
undertaken in the first half of 2007 and implemented all of its recommendations
put to the Board.
This review, which covered all aspects of management and operations, highlighted
a number of weaknesses and inconsistencies and pointed the need for radical
corrective action.
The Board was fully committed to addressing the problems revealed by the review.
We began restructuring the business by reducing headcount in the underperforming
business units, integrating certain other business units, and closing certain
offices. This has led to a comprehensive rationalisation of the Group's cost
base.
The Group's ability to win new business across various market sectors in which
we operate remains high and revenues are now at levels anticipated at the
beginning of 2007. This underlying strength together with the rationalised cost
base points the way to a much improved second half performance. Management
information available for July and August further underpins this view.
These restructuring initiatives have seen:
- a reduction in headcount from 650 to 600 employees as at
27th September 2007.
- net work in progress has reduced by #3.0m to 7.1m in
period.
- debtor and WIP provisions of #2.9m have been made in the
6 month period ending 30 June.
- overhead reductions in excess of #2m annualised together
with other efficiencies have been implemented.
All the above changes are continuing to bring benefits which are being reflected
in the Group's day to day performance.
The first half results, which for the first time have been stated in accordance
with IFRS, do of course reflect an extremely turbulent period and the changes
made have resulted in the need to provide for some #3.6m of exceptional costs.
Outlook
As previously announced we have recently refinanced the Group's debt position.
Our bankers have been particularly supportive and have confirmed that they will
continue to be so as we begin the next stage of recovery. We are working with
providers of finance and vendors to ensure that the Group's deferred
consideration liabilities are appropriately funded.
As shareholders know, the Group is liable to pay deferred consideration to
various previous owners of certain of our successful business units. We continue
to work with these vendors as well as providers of finance to ensure that these
liabilities are appropriately funded. The Board believes that it will achieve a
successful resolution to these discussions.
The Board is grateful for the support it has received from all the personnel
within the Group who have endured uncertainty and change but who have
nevertheless remained fully focused on their day to day responsibility to our
clients.
In August we announced that we had entered into a non-binding heads of agreement
with the Aukett Fitzroy Robinson Group Plc, the only other listed architecture
business, relating to a potential merger to form the largest architecture Group
in Europe. Our discussions are continuing and shareholders will be updated as
developments occur.
With the improved performance now evident following the changes made the Group
is well positioned to drive improved financial results thereby increasing
shareholder value. Thanks to everyone's support and patience, the prospects for
SMC are looking a good deal brighter.
REVIEW REPORT OF INDEPENDENT AUDITORS
Introduction
We have been instructed by the company to review the financial information for
the six months ended 30 June 2007 which comprises the Consolidated Income
Statement, Consolidated Balance Sheet, Consolidated Statement of Changes in
Equity, Consolidated Cash Flow Statement, and the related notes 1 to 10. We have
read the other information contained in the interim report and considered
whether it contains any apparent misstatements or material inconsistencies with
the financial information.
This report is made solely to the company having regard to guidance contained in
Bulletin 1999/4 'Review of interim financial information' issued by the Auditing
Practices Board. To the fullest extent permitted by the law, we do not accept or
assume responsibility to anyone other than the company, for our work, for this
report, or for the conclusions we have formed.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report as required by the AIM Rules
issued by the London Stock Exchange.
As disclosed in note 10, the next annual financial statements of the group will
be prepared in accordance with those IFRSs adopted for use by the European
Union.
The accounting policies are consistent with those that the directors intend to
use in the next financial statements.
Review work performed
We conducted our review having regard to the guidance contained in Bulletin 1999
/4 'Review of interim financial information' issued by the Auditing Practices
Board for use in the United Kingdom. A review consists principally of making
enquiries of group management and applying analytical procedures to the
financial information and underlying financial data, and based thereon,
assessing whether the accounting policies and presentation have been
consistently applied, unless otherwise disclosed. A review excludes audit
procedures such as tests of controls and verification of assets, liabilities and
transactions. It is substantially less in scope than an audit performed in
accordance with International Standards on Auditing (UK and Ireland) and
therefore provides a lower level of assurance than an audit. Accordingly we do
not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2007.
Emphasis of matter - Going Concern
In forming our conclusion, which is not modified, we have considered the
adequacy of the disclosures made in Note 1 to the financial information
concerning the steps that the Directors are taking to enable the Group to meet
its liabilities as they fall due. The validity of the going concern basis
depends on the Directors' ability to eliminate a potential funding shortfall by
measures that include renegotiating the Group's deferred consideration
obligations, seeking additional debt facilities and improving cash flow from
working capital. The interim financial information does not include any
adjustments that might result if the directors were unsuccessful in putting
these measures in place.
Ernst & Young LLP
London
26 September 2007
Consolidated income statement
For the six months ended 30 June 2007
Unaudited Unaudited Unaudited Unaudited
Before Exceptional
exceptional costs
costs (note 3) Total Total Total
6 months 6 months 6 months 6 months Year
ended 30 ended 30 ended 30 ended 30 ended 31
June 2007 June 2007 June 2007 June 2006 Dec 2006
Notes #'000 #'000 #'000 #'000 #'000
CONTINUING
OPERATIONS
REVENUE 21,106 - 21,106 11,306 30,875
Cost of sales (10,488) (10,488) (5,203) (16,285)
--------- --------- -------- -------- --------
GROSS PROFIT 10,618 - 10,618 6,103 14,590
Administrative
expenses (9,450) (3,614) (13,064) (3,767) (10,451)
Depreciation (360) - (360) (137) (420)
Amortisation
of intangible
assets (780) - (780) (97) (671)
Share of
results of
joint venture
- post tax - - - 107 90
--------- --------- -------- -------- --------
OPERATING
PROFIT /
(LOSS) 28 (3,614) (3,586) 2,209 3,138
Finance income 120 - 120 16 38
Finance costs (1,081) - (1,081) (442) (1,200)
--------- --------- -------- -------- --------
(LOSS)/PROFIT
BEFORE TAXATION (933) (3,614) (4,547) 1,783 1,976
Taxation 4 - - - (666) (988)
--------- --------- -------- -------- --------
(LOSS)/PROFIT
FOR THE PERIOD (933) (3,614) (4,547) 1,117 988
--------- --------- -------- -------- --------
ADJUSTED EARNINGS PER SHARE (IN
PENCE)
Basic 5 0.48 3.91 6.33
Diluted 5 0.45 3.68 5.83
--------- --------- -------- -------- --------
The 30 June 2006 and the 31 December 2006 results have been restated due to the
adoption of International Financial Reporting Standards ("IFRS") - see note 1.
Consolidated balance sheet
As at 30 June 2007
Unaudited Unaudited
30 June 2007 30 June 2006 31 Dec 2006
Notes #'000 #'000 #'000
NON-CURRENT ASSETS
Goodwill 20,963 15,625 20,815
Other intangible assets 14,811 4,523 14,628
Property, plant and equipment 1,910 1,052 1,956
Interests in joint venture 133 150 133
Other financial assets 1,560 - 1,429
-------- -------- --------
-------- -------- --------
TOTAL NON-CURRENT ASSETS 39,377 21,350 38,961
CURRENT ASSETS
Trade and other receivables 23,327 18,617 26,992
Cash and short term deposits 598 - 1,276
-------- -------- --------
TOTAL CURRENT ASSETS 23,925 18,617 28,268
-------- -------- --------
TOTAL ASSETS 63,302 39,967 67,229
-------- -------- --------
CURRENT LIABILITIES
Trade and other payables (10,579) (5,860) (10,581)
Current tax liabilities (1,222) (1,193) (1,550)
Bank overdrafts and loans (17,797) (2,690) (14,335)
Contingent consideration (2,757) (486) (5,549)
-------- -------- --------
TOTAL CURRENT LIABILITIES (32,355) (10,229) (32,015)
-------- -------- --------
NET CURRENT
(LIABILITIES)/ASSETS (6,869) 8,388 (3,747)
-------- -------- --------
NON-CURRENT LIABILITIES
Bank loans (1,350) (7,467) (1,350)
Contingent consideration (9,721) (7,735) (9,854)
Deferred tax liabilities (92) (32) (92)
Other payables (192) (389) (326)
-------- -------- --------
TOTAL NON-CURRENT LIABILITIES (11,355) (15,623) (11,622)
-------- -------- --------
TOTAL LIABILITIES (43,710) (25,852) (43,637)
-------- -------- --------
NET ASSETS 19,592 14,115 23,592
-------- -------- --------
EQUITY ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT
Share capital 244 197 230
Share premium 13,248 6,623 13,157
Other reserves 7,855 3,914 7,368
Own shares (158) (150) (150)
Retained earnings (1,597) 3,531 2,987
-------- -------- --------
TOTAL EQUITY 19,592 14,115 23,592
-------- -------- --------
The 30 June 2006 and the 31 December 2006 balances have been restated due to the
adoption of International Financial Reporting Standards ("IFRS") - see note 1.
Consolidated statement of changes in equity
For the six months ended 30
June 2007
Unaudited Unaudited Year
6 months ended 6 months ended ended 31
30 June 2007 30 June 2006 Dec 2006
Notes #'000 #'000 #'000
(Loss) / profit for the
period (4,547) 1,117 988
-------- -------- --------
Total recognised income and
expense for the period (4,547) 1,117 988
Shares issued in the period 583 5,758 15,779
Share -based payment 125 107 206
Dividends (161) - (394)
-------- -------- --------
Net change in equity in the
period (4,000) 6,982 16,579
-------- -------- --------
-------- -------- --------
Opening equity 23,592 7,133 7,013
-------- -------- --------
Closing equity 19,592 14,115 23,592
-------- -------- --------
The 30 June 2006 and the 31 December 2006 results and balances have been
restated due to the adoption of International Financial Reporting Standards
("IFRS") - see note 1.
Consolidated cash flow statement
For the six months ended 30 June 2007
Unaudited Unaudited
6 months ended 6 months ended Year ended 31
30 June 2007 30 June 2006 Dec 2006
Notes #'000 #'000 #'000
Operating activities
Cash generated from/
(absorbed by) operations 7a 1,385 (635) (349)
Tax paid (328) (716) (1,013)
-------- -------- --------
Net cash flow from
operating activities 1,057 (1,351) (1,362)
-------- -------- --------
Investing activities
Interest received 120 16 40
Proceeds on disposal of
property, plant and
equipment - - 370
Purchases of property,
plant and equipment (360) (21) (1,921)
Acquisition of
subsidiaries 7b (3,631) (5,755) (13,092)
-------- -------- --------
Net cash flow used in
investing activities (3,871) (5,760) (14,603)
-------- -------- --------
Financing activities
Interest paid (831) (324) (928)
Dividends paid to equity
holders of the parent (161) - (394)
New bank loans 3,000 5,826 15,125
Repayment of bank loans (862) (302) (8,856)
Proceeds from issue of
new shares 92 1,674 7,489
Repayment of hire purchase
and finance lease obligations (126) (61) (101)
-------- -------- --------
Net cash flow from
financing activities 1,112 6,813 12,335
-------- -------- --------
-------- -------- --------
Decrease in cash and cash
equivalents (1,702) (298) (3,630)
Cash and cash equivalents at
beginning of the period (5,191) (1,561) (1,561)
-------- -------- --------
Cash and cash equivalents at
end of the period 7c (6,893) (1,859) (5,191)
-------- -------- --------
The 30 June 2006 and the 31 December 2006 results have been restated due to the
adoption of International Financial Reporting Standards ("IFRS") - see note 1.
Notes to the financial information
For the six months ended 30 June 2007
1 Basis of preparation
This interim financial information was approved by the board on 26th September
2007. This statement will be sent to all shareholders and will be available from
Company's Registered Office.
The financial information contained in this interim report does not constitute
statutory accounts within the meaning of section 240 of the Companies Act 1985.
Statutory accounts for the year ended 31 December 2006 (prepared in accordance
with UK GAAP) were prepared and filed with the Registrar of Companies and
received an unqualified audit report and did not contain a statement under
section 237 (2) or (3) of the Companies Act 1985.
The Board of Directors regularly monitors the ability of the Group to meet its
liabilities as they fall due for the foreseeable future against the facilities
and funding options open to it. The Board of Directors adopts the going concern
basis of preparation of the financial statements if in its assessment it has a
reasonable expectation that the Group has adequate resources to continue for the
foreseeable future.
Having conducted a review in relation to the interim financial information as at
30th June 2007 the Directors have identified a potential shortfall in relation
to the Group's ability to meet the cash element of estimated contractual
contingent consideration payments in July 2008. However the Board is taking
steps including the renegotiation of contingent consideration obligations,
seeking additional debt facilities and improving cash flow from working capital
which in their opinion will give the Group every prospect of meeting its
liabilities as they fall due for the foreseeable future and therefore have
continued to adopt the going concern basis in the preparation of these financial
statements. The interim financial information does not include any adjustments
that might result if the directors were unsuccessful in putting these measures
in place.
2 Adoption of IFRS
SMC Group Plc has adopted International Financial Reporting Standards ('IFRS')
this year, having previously applied UK accounting standards. These interim
statements are the first that the company has prepared under IFRS and they have
been prepared in accordance with the IFRS accounting policies that management
expects to apply in the 31 December 2007 IFRS-compliant full year financial
statements. The comparative results for the six months ended 30 June 2006 and
the year ended 31 December 2006 have been restated accordingly. Reconciliations
from the previously stated UK GAAP financial information together with
explanations and the revised accounting policies are see out in notes 8, 9 and
10.
3 Exceptional costs
Exceptional costs are the costs associated with making additional provisions
against debtors and amounts recoverable on contracts where there has been a
reassessment of the recoverability of balances relating to prior years based on
further evidence becoming available in the period.
Exceptional costs also include the costs of rationalising the Group's
activities, in particular the costs associated with the termination of
employment and closure of various premises.
4 Taxation
Taxation for the six months to 30 June 2007 is based on the effective rate of
taxation which is estimated to apply for the year ending 31 December 2007
Taxation for the year ended 31 December 2006 is based on the actual rate of
taxation which applied for the year ended 31 December 2006
Taxation for the six months to 30 June 2006 was based on the effective rate of
taxation which was estimated to apply for the year ended 31 December 2006
5 Earnings per share
Unaudited Unaudited
6 months ended 6 months ended Year ended
30 June 2007 30 June 2006 31 Dec 2006
Weighted average number of
shares (#'000)
For basic earnings per share 46,517 36,782 39,940
Dilutive effect of share options 3,285 2,280 3,405
--------- -------- --------
For diluted earnings per share 49,802 39,062 43,345
--------- -------- --------
Profits for basic and diluted
earnings per share (#'000)
(Loss)/profit for the period (4,547) 1,117 988
Add back:-
- Exceptional costs 3,614 - -
- Amortisation of intangible
assets 780 97 1,083
- Share -based payment 125 107 206
- Interest on contingent
consideration 250 118 251
--------- -------- --------
Adjusted profit for the
period 222 1,439 2,528
--------- -------- --------
Adjusted earnings per share
(pence per share)
Basic 0.48 3.91 6.33
Diluted 0.45 3.68 5.83
--------- -------- --------
Adjusted earnings per share has been presented in to allow earnings per share to
reflect the earnings more directly related to the trading of the Group in each
period.
6 Dividend
An interim dividend of 0.35p per share was paid in January 2007 (A final
dividend of 1p per share was paid in July 2006 for the year ended 31 December
2005)
7 Notes to the cash flow statement
Unaudited Unaudited
6 months ended 6 months ended Year ended 31
30 June 2007 30 June 2006 Dec 2006
#'000 #'000 #'000
a Cash generated from/(absorbed by)
operations
Operating (loss)/profit (3,586) 2,209 3,138
Share -based payment 125 107 206
Share of results of joint venture
- post tax - (107) (90)
Depreciation of property, plant and
equipment 360 137 420
Profit on disposal of property,
plant and equipment - - 20
Amortisation of intangible
assets 780 97 671
Decrease/(increase) in trade
and other receivables 3,551 (3,806) (6,085)
Increase in trade and other payables 155 728 1,371
-------- -------- ---------
Cash generated from/(absorbed
by) operations 1,385 (635) (349)
-------- -------- ---------
b Acquisition of subsidiaries
Consideration paid on acquisitions - (6,311) (13,441)
Consideration paid on prior period
acquisitions (3,631) (486) (486)
Cash acquired with subsidiaries - 1,042 835
-------- -------- ---------
Net cash outflow for acquisitions (3,631) (5,755) (13,092)
-------- -------- ---------
c Analysis of cash and cash equivalents
Cash and cash equivalents per balance
sheet 598 - 1,276
Bank overdrafts (7,491) (1,859) (6,467)
-------- -------- ---------
Cash and cash equivalents per cash
flow statement (6,893) (1,859) (5,191)
-------- -------- ---------
8 Summary of significant accounting policies
As explained in note 2, the group will be presenting its financial statements in
accordance with IFRS for the first time in the 31 December 2007 full year
financial statements. Set out below are the accounting policies that management
expects to apply in the 31 December 2007 IFRS-compliant full year financial
statements.
Basis for preparation
The consolidated financial statements are prepared on the historical cost basis.
Figures are presented in Sterling and rounded to the nearest thousand (#'000)
except when otherwise indicated.
Basis of consolidation
The consolidated financial statements comprise the results of SMC Group Plc and
all of its subsidiaries. Subsidiaries are fully consolidated from the date of
acquisition, being the date on which the group obtains control, and continue to
be consolidated until the date that such control ceases.
All intra-group balances, transactions, income and expenses and profits and
losses resulting from intra-group transactions are eliminated in full.
Exemptions applied
IFRS 1 allows first-time adopters certain exemptions from the general
requirement to apply IFRS's as effective for December 2005 year ends
retrospectively. The Group has taken the following exemptions:
* IFRS 3 Business Combinations has not been applied to acquisitions of
subsidiaries or of interests in associates and joint ventures that occurred
before 1 January 2006.
* Cumulative currency translation differences for all foreign operations
are deemed to be zero as at 1 January 2006.
* IFRS 2 Share-based Payment has not been applied to any equity
instruments that were granted on or before 7 November 2002, nor has it been
applied to equity instruments granted after 7 November 2002 that vested before
1 January 2006. For cash-settled share-based payment arrangements, the Group
has not applied IFRS 2 to liabilities that were settled before 1 January 2006.
Business combinations
Business combinations are accounted for using the purchase method. This involves
recognising identifiable assets (including previously unrecognised intangible
assets) and liabilities (including contingent liabilities and excluding future
restructuring) of the acquired business at fair value.
Goodwill acquired in a business combination is initially measured at cost, being
the excess of the fair value of the cost of the business combination over the
group's share of the net fair value of the acquiree's identifiable assets,
liabilities and contingent liabilities.
Contingent consideration
Where the cost of a business combination includes amounts that are contingent on
future events, these amounts are included in the cost of the business
combination to the extent that they are probable and can be measured reliably.
Contingent cash consideration is discounted and recorded at net present value as
a provision. Contingent share consideration, where the number of shares to be
issued is dependent on the market price of the company's shares is measured on
the effective interest method and is also recorded as a liability.
If the events on which consideration is contingent do not occur, the cost of the
business combination is adjusted. If and when additional amounts of contingent
consideration become probable or payable, they are also treated as an adjustment
to the cost of the business combination.
Intangible assets
Goodwill
Following initial recognition, goodwill is measured at cost less any accumulated
impairment losses. For the purpose of impairment testing, goodwill is allocated
to the group's cash-generating units that are expected to benefit from the
synergies of the combination, irrespective of whether other assets or
liabilities of the group are assigned to those units.
Goodwill is reviewed for impairment annually or more frequently if there is an
indication of impairment. Impairment for goodwill is determined by assessing the
recoverable amount of the cash-generating unit to which the goodwill relates.
Where the recoverable amount of the cash-generating unit is less than the
carrying value of the cash-generating unit to which goodwill has been allocated,
an impairment loss is recognised. Impairment losses to goodwill cannot be
reversed in future periods.
Other intangible assets
Intangible assets acquired separately are measured on initial recognition at
cost. An intangible asset acquired as part of a business combination is
recognised outside goodwill if the asset is separable or arises from contractual
or other legal rights and its fair value can be measured reliably. Following
initial recognition, intangible assets are carried at cost less any accumulated
amortisation and any accumulated impairment losses. Internally generated
intangible assets, excluding capitalised development costs, are not capitalised
and expenditure is reflected in the income statement in the year in which the
expenditure is incurred.
Intangible assets with finite lives are amortised over their useful life and
assessed for impairment whenever there is an indication of impairment. The
amortisation period and the amortisation method for intangible assets with
finite useful lives are reviewed at least at each financial year end. The
amortisation expense on intangible assets with finite lives is recognised in the
income statement in the expense category consistent with the function of the
intangible asset.
Amortisation is provided on straight line basis on intangible assets with finite
lives as follows:
Order backlog over estimated remaining life of contracts
Customer Relationships 1-25 years
Trade names 1-50 years
Database 1-10 years
Joint venture
The group has an interest in a joint venture which is a jointly controlled
entity. A joint venture is a contractual arrangement whereby two or more parties
undertake an economic activity that is subject to joint control, and a jointly
controlled entity is a joint venture that involves the establishment of a
separate entity in which each venturer has an interest.
The group recognises its interest in a joint venture using the equity method of
accounting. Under the equity method, the interest in the joint venture is
carried in the balance sheet at cost plus post-acquisition changes in the
Group's share of its net assets, less distributions received and less any
impairment in value of the individual's investment.
The financial statements of the joint venture are prepared for the same
accounting period as the parent company and using consistent accounting
policies.
Share Incentive Plan Trust
The Company operates a Share Incentive Plan Trust ("SIP Trust") and has de facto
control of the unallocated shares held by the Trust and bears their benefit and
risks. In accordance with SIC-12 Consolidation - Special Purpose Entities, a SIP
Trust should be consolidated when the substance of the relationship indicates
that it is controlled by the reporting entity. The SIP Trust is a Special
Purpose Entity (SPE) which is indirectly controlled by the company. Investments
in own shares which comprise the unallocated shares of the SIP Trust are treated
as a deduction in arriving at shareholders' funds. Allocations of shares to
employees under the profit sharing scheme and exercise of share options are
treated as disposals
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation
and accumulated impairment in value.
Depreciation is provided at rates calculated to write each asset down to its
estimated residual value evenly over its expected useful life, as follows:
Short leasehold improvements over the shorter of the useful life and the lease
period
Motor vehicles 25% on reducing balance
Fixtures and fittings 20% to 25% on reducing balance
Computer and office equipment 25% on straight line or reducing balance
The carrying values of property, plant and equipment are reviewed for impairment
if events or changes in circumstances indicate that the carrying value may not
be recoverable, and are written down immediately to their recoverable amount.
Useful lives and residual values are reviewed annually and where adjustments are
required these are done prospectively.
Financial assets
Financial assets in the balance sheet are loans and receivables. Loans and
receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. They are included in current
assets, except for maturities greater than 12 months after the balance sheet
date. These are classified as non-current assets.
Investments
Investments in the parent company's balance sheet are stated at cost less
accumulated impairment. Investments in subsidiaries are eliminated on
consolidation.
Cash and cash equivalents
Cash and cash equivalents comprise cash at banks and in hand and short term
deposits with an original maturity of 3 months or less.
For the purpose of the consolidated cash flow statement, cash and cash
equivalents consist of cash and cash equivalents as defined above, net of
outstanding bank overdrafts.
Interest-bearing loans and borrowings
All loans and borrowings are initially recognised as financial liabilities at
fair value less directly attributable transaction costs.
After initial recognition, interest-bearing loans and borrowings are
subsequently measured at amortised cost using the effective interest rate
method.
Leases
Leases are classified as finance leases whenever the terms of the lease transfer
substantially all the risks and rewards of ownership to the lessee. All other
leases are classified as operating leases.
Finance leases are capitalised on commencement of the lease at the lower of the
fair value of the asset and the present value of the minimum lease payments.
Each payment is allocated between the liability and finance charges so as to
achieve a constant rate of interest on the finance balance outstanding. The
rental obligations, net of finance charges, are included in trade and other
payables.
The finance charges are charged to the income statement over the lease period so
as to produce a constant periodic rate of interest on the remaining balance of
the liability for each period.
Payments under operating leases are charged to the income statement on a
straight line basis of the term of the lease.
Revenue
Revenue is recognised to the extent that it is probable that economic benefits
will flow to the group and the revenue can be reliably measured.
Revenue from the provision of architecture and design services is recognised by
reference to the stage of completion of each project. Stage of completion is
measured by reference to labour hours incurred to date as a percentage of total
estimated labour hours on each project. Where the outcome of the project cannot
be reliably measured, revenue is recognised only to the extent of the expenses
incurred that are recoverable.
Interest income
Revenue is recognised as interest accrues using the effective interest method.
The effective rate is the rate that exactly discounts estimated future cash
receipts through the expected life of the financial instrument to its net
carrying amount
Dividends Receivable
Revenue is recognised when the Group's right to receive payment is established
Foreign currency translation
The consolidated financial statements are presented in Sterling, which is the
functional and presentational currency of the company.
Transactions in currencies other than Sterling are initially recorded at the
rates of exchange prevailing on the dates of the transactions. Monetary assets
and liabilities are retranslated at the rate prevailing on the balance sheet
date. Profits and losses arising on retranslation are included in the income
statement.
On consolidation, the assets and liabilities of the group's foreign operations
are translated into Sterling at exchange rates prevailing on the balance sheet
date. Exchange differences arising, if any, are classified as equity and
transferred to the group's translation reserve. Such translation differences are
recognised as income and expenses in the period in which the operation is
disposed of. Income and expense items are translated at the average exchange
rates for the period.
Pensions and other post employment benefits
Contributions to defined contribution or personal pension schemes are charged to
the income statement as they fall due. There are no defined benefit pension
schemes.
Share-based payment transactions
The Group has applied the requirements of IFRS 2 "Share-based payment". In
accordance with the transitional provisions, IFRS 2 has been applied to all
grants of equity instruments after 7 November 2002 that were unvested at 1
January 2006.
For all grants of share options, the fair value as at the date of grant is
calculated using an option pricing model and the corresponding expense is
recognised over the vesting period. The fair value of shares awarded is the
market value of the shares at the date of the award and the corresponding
expense is also recognised over the vesting period. The share-based payment
expense is recognised as a staff cost and the associated credit entry is made to
equity.
Taxation
The tax expense in the income statement represents the sum of tax currently
payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the income statement because it
excludes items of income and expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of the assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is likely that
taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the temporary
difference arises from goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a transaction that
affects neither the tax profit nor the accounting profit.
The carrying value of deferred tax assets is reviewed at each balance sheet date
and reduced to the extent that it is no longer probable that sufficient taxable
profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised. Deferred tax is
charged or credited to the income statement, except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also
dealt with in equity.
Interest Costs
Interest is recorded in the consolidated profit and loss account on an accruals
basis, except where it relates to payments made over an extended period of
development of large capital projects. Such interest is added to the capital
cost and amortised over the expected lives of those projects. Financing fees to
be written off in future periods are set against loan capital.
Interest includes exchange differences arising on cash or borrowings, including
any hedges in respect of such cash or borrowings, that do not hedge any other
assets or liabilities and which are denominated in a currency which is not the
functional currency of the subsidiary.
Exceptional items
The Group presents as exceptional items on the face of the income statement,
those material items of income and expense which, because of the nature and
expected infrequency of the events giving rise to them, merit separate
presentation to allow shareholders to understand better the elements of the
financial performance in the year, so as to facilitate comparison in prior
periods and to assess better trends in financial performance
Impairment of Non-current Assets
The Group assesses at each reporting date whether there is an indication that an
asset may be impaired. If any such indication exists, or when annual impairment
testing for an asset is required, the Group makes an estimate of the asset's
recoverable amount. An asset's recoverable amount is the higher of an asset's or
cash generating unit's fair value less costs to sell and its value in use and is
determined for an individual asset, unless that asset does not generate cash
inflows that are largely independent of those from other assets or groups of
assets. Where the carrying amount of an asset exceeds its recoverable amount,
the asset is considered impaired and is written down to its recoverable amount.
Impairment losses on continuing operations are recognised in the income
statement in those expense categories consistent with the function of the
impaired asset.
An assessment is made at each reporting date as to whether there is any
indication that previously recognised impairment losses may no longer exist or
may have decreased. If such indication exists, the recoverable amount is
estimated. A previously recognised impairment loss is reversed only if there has
been a change in the estimates used to determine the asset's recoverable
amount since the last impairment loss was recognised. If that is the case the
carrying amount of the asset is increased to its recoverable amount. That
increased amount cannot exceed the carrying amount that would have been
determined, net of depreciation, had no impairment loss been recognised for the
asset in prior years. Such reversal is recognised in profit or loss unless the
asset is carried at revalued amount, in which case the reversal is treated as a
revaluation increase. After such a reversal the depreciation charge is adjusted
in future periods to allocate the asset's revised carrying amount, less any
residual value, on a systematic basis over its remaining useful life.
Dividends
Dividends are recognised when they become legally payable. Interim dividends are
recognised when paid. Final dividends are recognised when approved by the
shareholders at an annual general meeting.
Significant accounting judgments, estimates and assumptions
The key assumptions and other key sources of estimation uncertainty at the
balance sheet date that have a significant risk of causing a material adjustment
to the carrying amounts of assets and liabilities within the next financial year
are discussed below.
Impairment of goodwill and other intangible assets
Goodwill and other intangible assets are tested for indication of impairment on
an annual basis. This requires an estimation of the recoverable amount of a cash
generating unit to which goodwill is allocated based on its 'value in use'.
Estimation of 'value in use' requires management to estimate the expected future
cash flows from the cash generating unit and choose an appropriate discount
factor in order to calculate the present value of those cash flows.
Amounts recoverable on contracts
The Group recognised revenues from the provision of architecture and design
services based on the stage of completion of projects. This requires management
to estimate the total labour hours that will be required to complete each
project. These estimates may be revised in future periods as a result of changes
in the nature of the projects that could not be foreseen at the balance sheet
date.
Contingent consideration
The Group recognises deferred contingent cash and share consideration that may
become payable based on forecasts. Management are required to make estimates,
judgments and assumptions to estimate any amounts that may be due in the future.
9 Explanation of transition to International Financial Reporting Standards
("IFRS")
This is the group's first interim report prepared in accordance with the IFRS
accounting policies management expect to apply in their first IFRS compliant
full year financial statements. The reconciliations of balance sheets and equity
at 1 January 2006 (date of transition to IFRS), 31 December 2006 (date of last
UK GAAP financial statements) and 30 June 2006 (date of last UK GAAP interim
report) are set out below. In addition, there is a reconciliation of profit for
the six month period to 30 June 2006 and the year ended 31 December 2006 below.
These reconciliations will enable comparison of the 2007 interim figures under
IFRS with those published under UK GAAP in the 2006 interim report and the
annual report for the year ended 31 December 2006.
a Consolidated balance sheet as at 1 January 2006
UK GAAP UK GAAP Effect of IFRS
Re-stated transition
Notes #'000 #'000 #'000 #'000
NON-CURRENT ASSETS
Goodwill 9,551 - - 9,551
Other intangible assets - - - -
Property, plant and
equipment 618 - - 618
Interests in joint venture 43 - - 43
Other financial assets - - - -
------- -------- --------- -----
TOTAL NON-CURRENT ASSETS 10,212 - - 10,212
CURRENT ASSETS
Trade and other receivables 10,508 - - 10,508
Cash and short term deposits 1 - - 1
------- -------- --------- -----
TOTAL CURRENT ASSETS 10,509 - - 10,509
------- -------- --------- -----
TOTAL ASSETS 20,721 - - 20,721
------- -------- --------- -----
CURRENT LIABILITIES
Trade and other payables (2,726) - - (2,726)
Current tax liabilities (1,226) - - (1,226)
Bank overdrafts and loans (1,862) - - (1,862)
Contingent consideration - - - -
------- -------- --------- -----
TOTAL CURRENT LIABILITIES (5,814) - - (5,814)
------- -------- --------- -----
NET CURRENT ASSETS 4,695 - - 4,695
------- -------- --------- -----
NON-CURRENT LIABILITIES
Bank loans (2,650) - - (2,650)
Contingent consideration (5,050) - - (5,050)
Deferred tax liabilities (32) - - (32)
Other payables (162) - - (162)
------- -------- --------- -----
TOTAL NON-CURRENT
LIABILITIES (7,894) - - (7,894)
------- -------- --------- -----
TOTAL LIABILITIES (13,708) - - (13,708)
------- -------- --------- -----
------- -------- --------- -----
NET ASSETS 7,013 - - 7,013
------- -------- --------- -----
b Consolidated balance sheet as at 31 December 2006
UK GAAP UK GAAP Effect of IFRS
Re-stated transition
#'000 #'000 #'000 #'000
NON-CURRENT ASSETS
Goodwill
10b 35,031 - (14,216) 20,815
Other intangible assets
10b - - 14,628 14,628
Property, plant and equipment 3,385 (1,429) 1,956
Interests in joint venture 133 - - 133
Other financial assets * - 1,429 - 1,429
-------- ------- ------- ----------
-------- ------- ------- ----------
TOTAL NON-CURRENT ASSETS 38,549 - 412 38,961
CURRENT ASSETS
Trade and other receivables 26,992 - - 26,992
Cash and short term deposits 1,276 - - 1,276
-------- ------- ------- ----------
TOTAL CURRENT ASSETS 28,268 - 28,268
-------- ------- ------- ----------
TOTAL ASSETS 66,817 - 412 67,229
-------- ------- ------- ----------
CURRENT LIABILITIES
Trade and other payables (10,581) - - (10,581)
Current tax liabilities (1,550) - - (1,550)
Bank overdrafts and loans (14,335) - - (14,335)
Contingent consideration (5,549) - - (5,549)
-------- ------- ------- ----------
TOTAL CURRENT LIABILITIES (32,015) - - (32,015)
-------- ------- ------- ----------
NET CURRENT LIABILITIES (3,747) - - (3,747)
-------- ------- ------- ----------
NON-CURRENT LIABILITIES
Bank loans (1,350) - - (1,350)
Contingent consideration (9,854) - - (9,854)
Deferred tax liabilities (92) - - (92)
Other payables (326) - - (326)
-------- ------- ------- ----------
TOTAL NON-CURRENT LIABILITIES (11,622) - - (11,622)
-------- ------- ------- ----------
TOTAL LIABILITIES (43,637) - - (43,637)
-------- ------- ------- ----------
-------- ------- ------- ----------
NET ASSETS 23,180 - 412 23,592
-------- ------- ------- ----------
* The Directors have reconsidered the accounting treatment regarding the recognition
of certain assets and have concluded that the assets are more appropriately
classified as other financial assets. Accordingly the assets have been reclassified
under UK GAAP.
c Consolidated balance sheet as at 30 June 2006
UK GAAP UK GAAP Effect of IFRS
Re-stated transition
#'000 #'000 #'000 #'000
NON-CURRENT ASSETS
Goodwill
10b 19,801 - (4,176) 15,625
Other intangible assets
10b - - 4,523 4,523
Property, plant and equipment 1,052 - - 1,052
Interests in joint venture 150 - - 150
Other financial assets - - - -
------- -------- -------- -------
TOTAL NON-CURRENT ASSETS 21,003 - 347 21,350
CURRENT ASSETS
Trade and other receivables 18,617 - - 18,617
Cash and short term deposits - - - -
------- -------- -------- -------
TOTAL CURRENT ASSETS 18,617 - - 18,617
------- -------- -------- -------
TOTAL ASSETS 39,620 - - 39,967
------- -------- -------- -------
CURRENT LIABILITIES
Trade and other payables 10c (5,731) - (129) (5,860)
Current tax liabilities (1,193) - - (1,193)
Bank overdrafts and loans (2,690) - - (2,690)
Contingent consideration (486) - - (486)
------- -------- -------- -------
TOTAL CURRENT LIABILITIES (10,100) - (129) (10,229)
------- -------- -------- -------
NET CURRENT ASSETS 8,517 - (129) 8,388
------- -------- -------- -------
NON-CURRENT LIABILITIES
Bank loans (7,467) - - (7,467)
Contingent consideration (7,735) - - (7,735)
Deferred tax liabilities (32) - - (32)
Other payables (389) - - (389)
------- -------- -------- -------
TOTAL NON-CURRENT LIABILITIES (15,623) - - (15,623)
------- -------- -------- -------
TOTAL LIABILITIES (25,723) - (129) (25,852)
------- -------- -------- -------
------- -------- -------- -------
NET ASSETS 13,897 - 218 14,115
------- -------- -------- -------
d Consolidated reconciliation of changes in equity
31 Dec 2006 30 June 2006 1 Jan
2006
Notes #'000 #'000 #'000
-------- ------ ---------
Total adjustment to equity 412 218 -
Total equity under UK GAAP 23,180 13,897 7,013
-------- ------ ---------
Total equity under IFRS 23,592 14,115 7,013
-------- ------ ---------
e Consolidated income statement for the six months ended 30 June 2006
UK GAAP Effect of IFRS
transition
Notes #'000 #'000 #'000
REVENUE 11,306 - 11,306
Cost of sales (5,203) - (5,203)
-------- ------ ---------
GROSS PROFIT 6,103 - 6,103
-
Administrative expenses 10c (3,638) (129) (3,767)
Depreciation (137) - (137)
Amortisation of intangible assets 10b (444) 347 (97)
Share of results of joint venture -
post tax 107 - 107
-------- ------ ---------
OPERATING PROFIT 1,991 218 2,209
Finance income 16 - 16
Finance costs (442) - (442)
-------- ------ ---------
PROFIT BEFORE TAXATION 1,565 218 1,783
Taxation (666) - (666)
-------- ------ ---------
PROFIT FOR THE PERIOD 899 218 1,117
-------- ------ ---------
ADJUSTED EARNINGS PER ORDINARY SHARE
(IN PENCE)
Basic 4.26 (0.35) 3.91
Diluted 4.01 (0.33) 3.68
-------- ------ ---------
f Consolidated income statement for the year ended 31 December 2006
UK GAAP Effect of IFRS
transition
Notes #'000 #'000 #'000
REVENUE 30,875 - 30,875
Cost of sales (16,285) - (16,285)
-------- ------ ---------
GROSS PROFIT 14,590 - 14,590
Administrative expenses (10,451) - (10,451)
Depreciation (420) - (420)
Amortisation of intangible assets 10b (1,083) 412 (671)
Share of results of joint venture -
post tax 10a 95 (5) 90
-------- ------ ---------
OPERATING PROFIT 2,731 407 3,138
Finance income 10a 40 (2) 38
Finance costs (1,200) - (1,200)
-------- ------ ---------
PROFIT BEFORE TAXATION 1,571 405 1,976
Taxation 10a (995) 7 (988)
-------- ------ ---------
PROFIT FOR THE YEAR 576 412 988
-------- ------ ---------
ADJUSTED EARNINGS PER SHARE (IN PENCE)
Basic 5.30 1.03 6.33
Diluted 4.88 0.95 5.83
-------- ------ ---------
10 Notes to the reconciliations explaining the transition to IFRS
a Accounting for Joint Ventures
The accounting policy detailed in note 9 explains that under IFRS the group
accounts for joint ventures using the net equity method of accounting which is
slightly different from the gross equity method adopted under UK GAAP. The
impact is that share of profit after tax is recognised as a single entry under
IFRS whereas under UK GAAP, the group's share of operating profit, interest and
taxation were disclosed separately. There is no impact on profit for the year or
the balance sheet of this change in policy.
b Accounting for Business Combinations
Under IFRS intangible assets acquired with businesses are separately identified
distinctly from goodwill. These intangible assets with finite lives are
amortised over their useful economic lives and any assets with infinite lives
are subject to annual impairment reviews.
The balance of the purchase price over the assets acquired including these
identified intangible assets is classified as goodwill which is subject to
annual impairment reviews rather than systematic depreciation.
The IFRS accounting policies are explained in more detail in note 8.
c Holiday Entitlements
Under IFRS the Group is required to account for any holiday to which its staff
is entitled but are yet to utilise.
This information is provided by RNS
The company news service from the London Stock Exchange
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