INCE.L Regulatory News (INCE)

12 Mar 2008 07:00

Work Group plc12 March 2008 WORK GROUP PLC A leading HR consulting services provider Preliminary Results for the year ended 31 December 2007 Highlights • Operating profit before exceptional items up 31% to £3.2m (2006: £2.5m) after incurring US start-up costs of £0.3m • Profit before tax up 24% to £2.0m (2006: £1.7m) • US office opening supports substantial increase in US based net fee income • Strong profit delivery from The Recruitment Communications Company Limited ("RCCHR") acquisition and successful integration • 69% increase in Employer Marketing operating profit before exceptional items to £2.4m (2006: £1.4m) • Three further global campus marketing contracts won • 25% increase in proposed final dividend of 0.5p (2006: 0.4p) • Diluted adjusted EPS (before exceptional items) up 21% to 7.82p (2006: 6.47p) -------------------------------------------------------------------------- Year ended Year ended % increase 31 December 31 December 2007 2006 -------------------------------------------------------------------------- £m £m -------------------------------------------------------------------------- Gross profit (Net fee income)^ 16.1 13.6 19 -------------------------------------------------------------------------- Operating profit before exceptional items 3.2 2.5 31 -------------------------------------------------------------------------- Operating profit 2.9 2.5 19 -------------------------------------------------------------------------- Profit before tax 3.0 2.4 24 -------------------------------------------------------------------------- Profit after tax 2.0 1.7 21 -------------------------------------------------------------------------- Diluted earnings per share 7.06p 6.47p 9 -------------------------------------------------------------------------- Diluted earnings per share adjusted* 7.82p 6.47p 21 -------------------------------------------------------------------------- ^ References in the report to "Net fee income" represent Gross profit * Adjusted diluted earnings per share is stated before exceptional items. (see note 3) Simon Howard, Chairman, commented: "Work Group has again delivered in 2007 and we are optimistic for our prospectsin 2008. Our commitment to producing consistent and sustainable value for Workshareholders has seen a tripling of reported pre-tax profits in the past twoyears (from £1.1m in 2005) and we are entering 2008 debt-free and with a strongbalance sheet. The decision to increase investment in the business is an indication of ourconfidence, in particular, the establishment of a presence in the Asia-Pacificregion to develop existing client relationships and build a local capability. Our plans for this year will deliver further growth. During the first twomonths, overall trading has been in line with expectations and we remainconfident of again delivering consistent progress in 2008 and beyond." Enquiries: Work Group Tel: +44 (0)20 7492 0000Simon HowardMichael Warren Altium Tel: +44 (0)20 7484 4040Tim RichardsonSam Fuller About Work Group Work Group offers a range of HR Consulting Services which enable employers towin the war for talent. It focuses on providing services in "talent acquisitionand talent development" which enable employers to more effectively recruit andretain key staff. Work Group's approach is to help employers reduce their traditional reliance onthird-party recruiters such as head-hunters and recruitment firms throughhelping them establish and maintain a direct relationship between employer andprospective employee. It also helps employers reduce attrition costs throughbetter people development and retention of key talent. Work Group currently operates through three divisions; Executive Research,Employer Marketing and Recruitment Process Outsourcing and provides servicesfrom its six locations in the UK and an office in New York. Chairman's statement 2007 represented another year of consistent and solid growth for Work Group. A net fee income increase of 19% to £16.1m (2006: £13.6m), a 31% rise inoperating profit before exceptional items to £3.2m (2006: £2.5m) and a 21%growth in adjusted diluted EPS+, represents another significant performance.Reported operating profit increased by 19% to £2.9m (2006: £2.5m). The Group maintained positive growth in both net fee income and margins. Thiswas also the first full year of contribution from RCCHR - an acquisition whichhas considerably strengthened our position outside London and enabled us to openan integrated North West hub in Autumn 2007. In the Work divisions, the positivetrend away from lower margin media-based income has continued, with this nowrepresenting just 26.7% of Group net fee income. However, there will always be arole for media as part of the Group offering and within this there is acontinuing rise in the revenue from digital media and other web-based marketingactivities. The market for our services The war for talent will continue to be a long term focus and challenge for themajority of employers. Two important drivers of this are the changingdemographics which are resulting in a shrinking and ageing workforce in manyparts of the world(1), and in the UK an education system which fails to deliversufficient high-calibre graduates. In both cases, these are long term issues andemployers are beginning to realise that endlessly pouring their recruitmentbudgets into traditional head-hunter and agency fees is not a solution.Consequently we remain firm in our view that employers will continue to exploremore efficient and cost-effective resourcing strategies - which in 2007 saw ourclients spend £35.0m* through Group companies. + Adjusted diluted earnings per share is stated before exceptional items1 Marketing talent a strategic priority; Mckinsey & Co. 2008* Reported turnover of £38.9m adjusted down to remove the effects of a media buying contract Strategy Historically, one of the greatest long term strategic challenges for all clientcompanies has been their ability to attract and retain quality customers.However in the twenty first century of equal, and for some businesses ofgreater, importance will be their ability to attract and retain talent. For manyyears, companies have invested heavily in the customer relationship anddeveloped many sophisticated techniques to find and keep customers. It is ourbelief that the same is becoming true for the talent relationship as they placean ever greater emphasis on finding and keeping good people. The purpose of Work Group is to enable companies to invest in that talentrelationship through helping them acquire and develop talent at all levels. Wedo this through the provision of added-value services, and it is our aim toassist them globally with a presence in every major marketplace across theglobe. Already we have a unique breadth of service offering and we aredetermined to grow our income in each location across all our service lines. Currently, most consultant-led recruitment provides little more than anassignment-driven service. Work Group rarely competes head to head with otherlisted recruitment companies, hence, both operationally and in stock marketterms, we are a company without established peers. International development In 2007 we established our first overseas office in New York. This was drivenprimarily by our need to service existing clients on existing contracts but alsopresented an opportunity to grow locally sourced business. The establishment ofour New York base was achieved in 2007 primarily through drawing on UK-basedresources. Local recruitment has now taken place and we look forward to buildinga growing presence in the region. Currently in Asia-Pacific we also provide services to clients as part of theirglobal campus marketing programmes. Recruitment markets in this region arehighly competitive and it is clear that with a local base we would have theopportunity to grow existing relationships as well as develop others. We willtherefore be opening an office during 2008 established initially with peopleseconded from our UK operations. Client spread An enduring strength of Work Group is our spread of clients across industrysectors. In 2007 the largest sector was Banking & Finance, representing 25% ofincome, followed by Retail & Leisure 14%, Utilities & Infrastructure 11% andBusiness & Professional Services on 10%. There is a wide variety of servicesprovided by each of the divisions in each of these sectors thus reinforcing thespread of client activity and income. Our top 50 clients represented 61% ofGroup income, with our largest client accounting for no more than 5.7%. Our people We can only be as good as the talent in our businesses, and as talent is ourstock in trade, we are only too aware of the need to attract and retain the verybest people. Throughout the Group we set high standards for our people and we believe ourteams represent some of the very best talent. We will always strive to improveour people practices as we need to be a first choice employer where talentedpeople are able to develop their careers. Above all we need to practise what wepreach to our clients about getting, growing and retaining talent. Acquisitions Our policy is that any acquisition should be earnings-enhancing. Despiteidentifying and negotiating with a number of targets during 2007, we found inthe early part of the year especially, that price expectations for targets hadreached unrealistic levels. The acquisition landscape changed post-August 2007 and we took the strategicdecision to withdraw from a number of active discussions. Our current positionis that we have a strong balance sheet and the Group is debt-free. We believethis is a particular strength in the current climate. Management In November 2007 Steve Halford left the Company, his executive responsibilitieshaving been assumed by Sue Craven and myself earlier in the year. Steve was afellow founder of the business and early in 2007 told us of his desire to take acareer break. While he may have left employment, he remains a committedshareholder and of course we thank him for everything he has contributed sinceour inception. We believe that we have very real management strength in depth and our businessleaders and their teams are a key force within the business. Increasingly thereare cross-company management initiatives as well as more client referralsbetween the businesses. Dividend Last year we paid our maiden dividend which reflected good trading results and astrong balance sheet. Again we have delivered an improved trading performanceand consequently the Board is recommending a 25% increase in the full yeardividend to 0.5p (2006: 0.4p). Outlook We have a very focused strategy and firm business plans for 2008 which build onthe progress made in 2007. We continue to see satisfactory trends in our currenttrading and are confident of our ability to deliver a strong performance for thefull year. Simon Howard Chairman Operating review The Group has continued to advance during 2007. Net fee income increased by 19%to £16.1m (2006: £13.6m) and operating profit before exceptional items grew by31% to £3.2m (2006: £2.5m). Operating profit increased by 19% to £2.9m (2006:£2.5m). Operating profit before exceptional items of £3.2m represents an operatingprofit margin of 19.9% (measured against net fee income) up from 18.1% in 2006.Operating profit of £2.9m results in a margin of 18.0% (2006: 18.1%). In 2007 the Group established its presence in the US and substantially grew itsUS based net fee income, successfully integrated the RCCHR acquisition anddelivered strong organic growth, particularly in the employer marketingdivision. This is the first full year reporting period where the financial information hasbeen prepared under International Financial Reporting Standards (IFRS). Theprincipal changes are that goodwill is no longer amortised and corporation taxrelief on the exercise of share options is no longer recognised in the incomestatement. All prior period comparatives have been restated and more detail onIFRS is given in note 6 to the financial information. --------------------------------------------------------------------------------Divisional Financial Performance Year ended Increase Year ended 31 December 31 December 2007 2006-------------------------------------------------------------------------------- £'000 % £'000--------------------------------------------------------------------------------Gross profit (net fee income)Employer marketing 9,482 30 7,317Recruitment process outsourcing 2,002 17 1,712Executive research 4,657 3 4,542--------------------------------------------------------------------------------Group gross profit 16,141 19 13,571-------------------------------------------------------------------------------- Operating profit before exceptional items(adjusted profit)--------------------------------------------------------------------------------Employer marketing 2,353 69 1,393Recruitment process outsourcing 447 (1) 450Executive research 985 13 874Work Group Inc (295) - -Corporate costs (270) (3) (263)Group adjusted profit 3,220 31 2,454-------------------------------------------------------------------------------- Operating profitEmployer marketing 2,065 48 1,393Recruitment process outsourcing 447 (1) 450Executive research 962 10 874Work Group Inc (295) - -Corporate costs (270) (3) (263)--------------------------------------------------------------------------------Group operating profit 2,909 19 2,454-------------------------------------------------------------------------------- Employer marketing Net fee income grew by 30% to £9.5m (2006: £7.3m). This was aided by a strongcontribution from RCCHR. Organic net fee income growth excluding RCCHR was 11%. Operating profit before exceptional items increased by 69% to £2.4m (2006:£1.4m). Operating profit grew by 48% to £2.1m (2006: £1.4m). The operatingprofit margin before exceptional items has surged to 24.8% (2006: 19.0%) as aconsequence of an increasing proportion of higher margin fee based work, and therelatively low overheads in the RCCHR business. Margins in this division arepeaking. Our employer marketing services continue to evolve to meet the needs ofemployers and are focused on talent acquisition. Services include helpingemployers develop their value proposition to candidates, designing and buildingwebsites, developing web and mobile marketing strategies, internal employeecommunications and the delivery of candidate acquisition strategies. Net fee income from fee based services grew by 38% (excluding RCCHR) and intotal now represents 54% of divisional net fee income. Global campus marketingcontracts delivered over £1.5m of net fee income during the year of which over£0.7m was delivered in the US. Although net fee income is our main Key Performance Indicator (KPI), in theemployer marketing division revenue is an indicator of the budgets clientsspend. Excluding media buying, revenue was £27.6m (2006: £21.9m). Exceptional costs of £0.3m, most of which were one-off property related costs,were incurred in fully integrating RCCHR with Work and moving two offices into alarger new one. This was achieved at the beginning of November following the endof the RCCHR earn out period and gives the business a strong regional hub basedin the North West. The maximum deferred consideration for RCCHR of £2.0m wassettled in January 2008 with the issue of £1.0m of loan notes and £1.0m of newWork shares. Recruitment process outsourcing (RPO) Net fee income grew by 17% in 2007 to £2.0m (2006: £1.7m). Operating profit wasstatic at £0.5m due to the investment made in sales and marketing during theyear. New business from these activities has been slow to materialise and thesales cycle has been longer than expected. However, the prospect pipeline at theend of 2007 was considerably stronger than at the previous year end. The division has been successful in growing net fee income from existing clientsand extending the reach of recruitment programme management further intoorganisations. This has enabled operational efficiencies to be achieved throughflexible resourcing and the maintenance of a good (but reduced) operating profitmargin despite the investment. The operating profit margin was 22.3% (2006:26.3%). Executive research Net fee income grew 3% to £4.7m (2006: £4.5m) and operating profit grew 10% to£1.0m (2006: £0.9m). This is a solid performance from Armstrong Craven. The market for executiveresearch or direct search has steadily matured leading to a more informed marketplace and greater competition. Armstrong Craven's services are positioned at thepremium end of the market and the focus during the year has been concentrated onwinning higher project fees from assignments. As reported at the Half Year, the final deferred consideration payment of £1.43mhas been made to the vendors of Armstrong Craven. Half of this was in the formof loan notes, the other half in new Work Group shares. The total considerationpaid for the business was £5.331m. Work Group Inc The cost of establishing Work Group Inc (US) in New York was £0.3m. Only minimalnet fee income was booked through the office in 2007. However, total Group USnet fee income grew to £0.9m (2006: £0.1m), the balance being booked through theUK. Of this, £0.7m was earned from global campus marketing projects in theemployer marketing division, the balance was executive research. A Head of US Operations based in New York has now been appointed and joined inJanuary 2008. This will greatly enhance our ability to win US based business andactively develop existing US clients. Our progress to date has been cautious.However, we will seek to build resource in the US if it is economically moreeffective than recharging higher cost UK based people. Excluding US start up costs, Group operating profit before exceptional costs wasup 43% to £3.5m (2006: £2.5m). Operating profit before US costs was £3.2m (2006:£2.5m). Group & tax --------------------------------------------------------------------------------Group Financial Performance Year ended Increase Year ended 31 December 2007 31 December 2006-------------------------------------------------------------------------------- £'000 % £'000-------------------------------------------------------------------------------- Operating profit before exceptionalcosts 3,220 31 2,454Operating profit 2,909 19 2,454Profit before tax 2,951 24 2,377Profit after tax 2,018 21 1,666 Diluted earnings per share 7.06p 9 6.47p Diluted earnings per share adjusted(see note 3) 7.82p 21 6.47p-------------------------------------------------------------------------------- Under IFRS a deferred tax asset should be recognised relating to the expectedincome tax relief available on the future exercise of share options. When shareoptions are actually exercised, the asset is unwound mainly through equity andnot the income statement. In comparison to the UK GAAP treatment, the resultanttax charge in the income statement is greater than the actual tax payable incash terms. The effect is to depress earnings per share. Diluted earnings per share have also been adjusted for exceptional items. Fulldetails are given in note 3. The adjusted diluted earnings per share show anincrease of 21% over 2006. The Group net cash position at the year end was £1.0m (2006 £0.9m). During theyear £0.7m of loan notes were redeemed and the dividend payment totalled £0.1m.The balance sheet remains strong with debt capacity. The board is recommending a dividend for the full year of 0.5p per share (2006:0.4p), an increase of 25%. The dividend will be payable on 16 June 2008 toshareholders on the register as at 16 May 2008. Michael Warren Finance Director12 March 2008 Consolidated income statementFor the year ended 31 December 2007 ----------------------------------------------------------------------------- 2007 2006 £'000 £'000----------------------------------------------------------------------------- Revenue 38,906 33,147Cost of sales (22,765) (19,576)-----------------------------------------------------------------------------Gross profit (net fee income) 16,141 13,571-----------------------------------------------------------------------------Net operating expenses (13,232) (11,117)-----------------------------------------------------------------------------Operating profit 2,909 2,454----------------------------------------------------------------------------- -----------------------------------------------------------------------------Operating profit before exceptional items 3,220 2,454Exceptional items (311) ------------------------------------------------------------------------------ Finance costs (22) (130)Finance income 64 53-----------------------------------------------------------------------------Profit before taxation 2,951 2,377Taxation (933) (711)-----------------------------------------------------------------------------Profit for the year 2,018 1,666----------------------------------------------------------------------------- Earnings per share (pence) 7.64 7.36Diluted earnings per share (pence) 7.06 6.47 Dividend paid per share (pence) 0.4 - The results above are all in respect of continuing operations. Balance sheetsAs at 31 December 2007 ------------------------------------------------------------------------------ Group Group 2007 2006 £'000 £'000------------------------------------------------------------------------------AssetsNon-current assetsGoodwill 12,197 11,451Property, plant & equipment 812 856Investment in subsidiaries - -Deferred tax asset 252 481------------------------------------------------------------------------------ 13,261 12,788------------------------------------------------------------------------------Current assetsInventories 241 95Trade and other receivables 6,944 5,857Cash and cash equivalents 1,638 1,274------------------------------------------------------------------------------ 8,823 7,226------------------------------------------------------------------------------LiabilitiesCurrent liabilitiesFinancial liabilities - borrowings (595) (379)Trade and other payables (4,973) (5,574)Provisions (2,000) (1,465)Current tax liabilities (883) (500)------------------------------------------------------------------------------ (8,451) (7,918)------------------------------------------------------------------------------Net current assets/(liabilities) 372 (692)------------------------------------------------------------------------------Non current liabilitiesProvisions - (1,250)------------------------------------------------------------------------------Net assets 13,633 10,846------------------------------------------------------------------------------ Shareholders' equityOrdinary share capital 542 510Share premium 7,261 6,433Other reserves 2,826 2,826Retained earnings 3,004 1,077------------------------------------------------------------------------------Total shareholders' equity 13,633 10,846------------------------------------------------------------------------------ Statements of changes in shareholders' equityFor the year ended 31 December 2007 ------------------------------------------------------------------------------Group Share Share Retained Special Total capital premium Earnings reserve Reserves £'000 £'000 £'000 £'000 £'000------------------------------------------------------------------------------1 January 2006 296 - (1,129) 2,826 1,993Profit for theyear - - 1,666 - 1,666Value of employeeservices - - 3 - 3Deferred taxationon share options - - 537 - 537Proceeds fromshares issued 214 6,433 - - 6,647------------------------------------------------------------------------------At 31 December2006 510 6,433 1,077 2,826 10,846------------------------------------------------------------------------------Profit for theyear - - 2,018 - 2,018Value of employeeservices - - 30 - 30Deferred taxationon share options - - (15) - (15)Proceeds fromshares issued 32 828 - - 860Dividends paid - - (106) - (106)------------------------------------------------------------------------------At 31 December 2007 542 7,261 3,004 2,826 13,633------------------------------------------------------------------------------ Cash flow statementFor the year ended 31 December 2007 ------------------------------------------------------------------------------ Note Group Group 2007 2006 £'000 £'000------------------------------------------------------------------------------Cash flows from operating activitiesCash generated from/(absorbed by) operations 5 1,457 2,118Interest paid (22) (168)Tax paid (336) (65)------------------------------------------------------------------------------Net cash inflow/(outflow) from operating 1,099 1,885activities ------------------------------------------------------------------------------ Cash flows from investing activitiesAcquisition of businesses (net of cash - (1,219)acquired)Acquisition expenses - (123)Deferred consideration paid - (400)Interest received 64 54Purchase of property, plant and equipment (323) (254)------------------------------------------------------------------------------Net cash (used in)/generated from investing (259) (1,942)activities ------------------------------------------------------------------------------ Cash flows from financing activitiesNet proceeds from issue of ordinary share 144 6,147capitalPreference shares redeemed - (500)Loan notes repaid (728) (386)Loan stock repaid - (1,500)Repayment of borrowing - (2,680)Dividend paid (106) -Finance lease payments (2) (24)------------------------------------------------------------------------------Net cash (outflow)/inflow from financing (692) 1,057activities ------------------------------------------------------------------------------ Increase in cash and cash equivalents in the 148 1,000year------------------------------------------------------------------------------Net cash and cash equivalents at start of the 895 (105)year ------------------------------------------------------------------------------Net cash and cash equivalents at end of the 1,043 895year ------------------------------------------------------------------------------ Notes to the financial informationFor the year ended 31 December 2007 1 Basis of preparation The preliminary results of the Group for the year ended 31 December 2007 wereapproved by the directors on 12 March 2008. The Annual General Meeting of WorkGroup plc will be held at Saffron House, 6-10 Kirby Street, London EC1N 8EQ on10 June 2008 at 12pm. The financial information has been prepared, in accordance with InternationalFinancial Reporting Standards (IFRS) adopted for use in the European Union andthose parts of the Companies Act 1985 which are applicable to companiesreporting under IFRS. The consolidated financial statements of Work Group plcwere prepared in accordance with UK GAAP until 31 December 2006. Reconciliationsand descriptions of the effect of the transition from UK GAAP to IFRS on theGroup's equity and its net profit are provided in note 6. The financial information in the preliminary announcement does not constitutethe Group's statutory accounts for the year ended 31 December 2006 and 2007.Statutory accounts for 2006, on which the auditors gave an unqualified reportpursuant to section 235 of the Companies Act 1985, have been delivered to theRegistrar of Companies and those for 2007 will be delivered following theCompany's Annual General Meeting. The financial information has been prepared in sterling, the currency in whichthe majority of the Group's transactions are denominated, and on the historicalcost basis, except for the revaluation of certain financial instruments. 2 Exceptional items Included in exceptional items incurred during the year were one-off costsassociated with the integration of Group services and RCCHR, totalling £205,000(2006: £Nil); and redundancy costs of £106,000 (2006: £Nil). 3 Earnings per share -------------------------------------------------------------------------------- 2007 2006 Weighted Weighted average average number Per share number Per share Earnings of shares amount Earnings of shares amount £'000 '000 Pence £'000 '000 pence--------------------------------------------------------------------------------Basic earningsper share 2,018 26,419 7.64 1,666 22,638 7.36--------------------------------------------------------------------------------Effect ofdilutive shareoptions - 2,180 (0.58) - 3,102 (0.89)--------------------------------------------------------------------------------Dilutedearnings pershare 2,018 28,599 7.06 1,666 25,740 6.47-------------------------------------------------------------------------------- Adjusted basicearnings pershare 2,236 26,419 8.46 1,666 22,638 7.36--------------------------------------------------------------------------------Effect ofdilutive shareoptions - 2,180 (0.64) - 3,102 (0.89)--------------------------------------------------------------------------------Adjusteddilutedearnings pershare 2,236 28,599 7.82 1,666 25,740 6.47-------------------------------------------------------------------------------- Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary shares in issueduring the period. For diluted earnings per share, the weighted average number of shares isadjusted to reflect the impact of all dilutive potential ordinary shares. Since 31 December 2007, an additional 1,483,680 shares have been issued asdeferred consideration for the acquisition of RCCHR. A further 47,000 shareshave been issued upon exercise of employee share options. Earnings reconciliation----------------------------------------------------------------------------- 2007 2006 £'000 £'000----------------------------------------------------------------------------- Statutory Earnings 2,018 1,666-----------------------------------------------------------------------------Add back exceptional items 311 -Tax on exceptional items (30%) (93) ------------------------------------------------------------------------------Revised earnings for Adjusted EPS 2,236 1,666----------------------------------------------------------------------------- Adjusted earnings per share excludes the cost of exceptional items (less tax at30%). 4 Dividends ------------------------------------------------------------------------------ 2007 2006 £'000 £'000------------------------------------------------------------------------------ 2006 Final dividend payment - 0.4 pence per share 106 ------------------------------------------------------------------------------- The proposed dividend for 2007 is 0.5p per share (2006: 0.4p), which will absorbapproximately £143,000 of shareholders' funds and will be paid on 16 June 2008.This is subject to the number of shares listed on the share register as at 16May 2008. This dividend has not been provided in the financial statements, in accordancewith IAS 10. 5 Reconciliation of operating profit to cash generated from/(absorbed by)operations ------------------------------------------------------------------------------ Group Group 2007 2006 £'000 £'000------------------------------------------------------------------------------Profit for the year 2,018 1,666Adjustments:Taxation 933 711Finance income (64) (53)Finance costs 22 130Depreciation of plant property and equipment 309 316Loss on disposal of plant property and equipment 58 5Share based payments 30 3Increase in inventories (146) (62)Increase in trade and other receivables (1,086) (861)(Decrease)/increase in trade and other payables (617) 376Decrease in provisions - (113)------------------------------------------------------------------------------Cash generated from/(absorbed by) 1,457 2,118operations------------------------------------------------------------------------------ 6 Transition to IFRS i) IFRS 1 - First time adoption of International Accounting Standards The Group prepared their financial statements under UK Generally AcceptedAccounting Principles (UK GAAP) for all reporting periods to 31 December 2006.With effect from 1 January 2007 all companies listed on the AlternativeInvestment Market (AIM) are required to report in accordance with InternationalFinancial Reporting Standards (IFRS). The Group's IFRS transition date was 1January 2006, being the first day of the comparative period. The financial information for the year ended 31 December 2006 has been extractedfrom the financial statements for this period prepared under UK GAAP, adjustedas appropriate to present the information in accordance with the Group's IFRSaccounting policies. The financial information in the IFRS reconciliations as at and for the yearended 31 December 2006 has been amended from that presented in the InterimStatement for the 6 months ended 30 June 2007, for a further adjustment todeferred taxation, the effect of which is to reduce profit and net assets by£129,000. In preparing this annual consolidated and company financial information inaccordance with IFRS 1, the Group has applied the mandatory exemptions andcertain of the optional exemptions from full retrospective application of IFRS. ii) Exemptions from full retrospective application applied by the Group Optional Exemptions Business combination exemption - The Group has not restated businesscombinations that took place prior to the 1 January 2006 transition date, asallowed under IFRS 1. Share-based payment transaction exemption - The Group has applied IFRS 2 only tothose options granted after 7 November 2002 but which had not vested by 1January 2005. Fair value deemed as cost exemption - The Group has used the cost of allproperty, plant and equipment as an approximation for the fair value of theassets. Mandatory Exemption UK GAAP estimates exemption - As there is no evidence that estimates made underUK GAAP at the transition date were in error, estimates under IFRS areconsistent with those original estimates. Reconciliations between IFRS and UK GAAP The reconciliations set out below show the effect of the transition from UK GAAPto IFRS. Reconciliations for equity have been provided as at the following dates: 1 January 200631 December 2006 Reconciliations for Net Income have been provided for the following periods: Year ended 31 December 2006 6 (a) Equity as at 1 January 2006 ------------------------------------------------------------------------------Group Effect of Transition to UK GAAP IFRS IFRS £'000 Notes £'000 £'000------------------------------------------------------------------------------Assets Non current assets Goodwill 8,643 - 8,643Property, plant &equipment 855 - 855Deferred tax assets - (a) 339 339 -------------------------------------------------------- 9,498 339 9,837 -------------------------------------------------------- Current Assets Inventories 33 - 33Trade and otherreceivables 4,753 (a) (339) 4,414Cash and cashequivalents 60 - 60 -------------------------------------------------------- 4,846 (339) 4,507 -------------------------------------------------------- Liabilities Current liabilities Financial liabilities- borrowings (1,139) - (1,139)Trade and otherpayables (6,545) (e) 400 (6,145)Provisions - (e) (400) (400)Current taxliabilities (65) - (65) -------------------------------------------------------- (7,749) - (7,749) -------------------------------------------------------- --------------------------------------------------------Net currentliabilities (2,903) - (3,242) -------------------------------------------------------- Non current liabilities Bank loan (1,654) - (1,654)Loan stock (1,000) - (1,000)Finance leases (5) - (5)Trade and otherpayables (1,830) (e) 1,830 -Provisions (113) (e) (1,830) (1,943) -------------------------------------------------------- (4,602) - (4,602) -------------------------------------------------------- --------------------------------------------------------Net Assets 1,993 - 1,993 -------------------------------------------------------- Shareholders' equity Ordinary share capital 296 - 296 Other reserves 2,826 - 2,826 Retained earnings (1,129) - (1,129) --------------------------------------------------------Total shareholders'equity 1,993 - 1,993 -------------------------------------------------------- 6 (a) Equity as at 31 December 2006 ------------------------------------------------------------------------------Group Effect of Transition to UK GAAP IFRS IFRS £'000 Notes £'000 £'000------------------------------------------------------------------------------Assets Non current assets Goodwill 10,984 (b) 467 11,451Property, plant &equipment 856 - 856Deferred income taxassets - (c),(f), (g) 481 481 -------------------------------------------------------- 11,840 948 12,788 -------------------------------------------------------- Current Assets Inventories 95 - 95Trade and otherreceivables 6,112 (f) (255) 5,857Cash and cashequivalents 1,274 - 1,274 -------------------------------------------------------- 7,481 (255) 7,226 -------------------------------------------------------- Liabilities Current liabilities Financial liabilities- borrowings (379) - (379)Trade and otherpayables (7,039) (e) 1,465 (5,574)Provisions - (e) (1,465) (1,465)Current taxliabilities (500) - (500) -------------------------------------------------------- (7,918) - (7,918) -------------------------------------------------------- --------------------------------------------------------Net currentliabilities (437) - (692) -------------------------------------------------------- Non current liabilities Trade and otherpayables (1,250) (e) 1,250 -Provisions - (e) (1,250) (1,250) -------------------------------------------------------- (1,250) - (1,250) -------------------------------------------------------- --------------------------------------------------------Net Assets 10,153 693 10,846 -------------------------------------------------------- Shareholders' equity Ordinary share capital 510 - 510 Share premium 6,433 - 6,433 Other reserves 2,826 - 2,826 Retained earnings 384 (b),(c), (g) 693 1,077 --------------------------------------------------------Total shareholders'equity 10,153 693 10,846 -------------------------------------------------------- 6 (a) Income statement as at 31 December 2006 ------------------------------------------------------------------------------Income statement as at Notes Effect of UK GAAP Transition to IFRS31 December 2006 £'000 IFRS £'000 -------------------------------------------------------- Revenue 33,147 - 33,147Cost of sales (19,576) - (19,576) --------------------------------------------------------Gross profit 13,571 - 13,571 Net operating expenses (b) (11,584) 467 (11,117) --------------------------------------------------------Operating profit 1,987 467 2,454 Finance cost (130) - (130)Finance income 53 - 53 --------------------------------------------------------Profit before taxation 1,910 467 2,377 --------------------------------------------------------Taxation (d),(g) (400) (311) (711) --------------------------------------------------------Profit for the year 1,510 156 1,666 -------------------------------------------------------- Explanation of the effect of transition to IFRS (a) Reclassification of Deferred tax asset, at 1 January 2006, from trade andother receivables to non current assets, Group £339k. (b) Reversal of goodwill amortisation calculated under UK GAAP but no longerrequired under IFRS, Group £467k. (c) Recognition of Deferred tax asset on future tax benefit of share options notyet exercised, Group £355k. (d) Tax saving on share options exercised in the period, now shown as a movementin equity in accordance with IAS 12, £182k. (e) Reclassification of deferred consideration payable from trade and otherpayables to Provisions. (f) Reclassification of Deferred tax asset, at 31 December 2006, from trade andother receivables to non current assets, Group £255k. (g) Other adjustments to deferred tax assets under IAS 12, Group £129k. Changes to the cash flow statement Under IFRS only three categories of cash flow activity are required to bereported; operating, investing and financing. There are no material differencesbetween the cash flow statement presented under IFRS and the cash flow statementunder UK GAAP. This information is provided by RNS The company news service from the London Stock Exchange