Interim Results

Creston PLC 05 December 2005 Date: 5 December 2005 On behalf of: Creston Plc ("Creston" or "the Group") Embargoed until: 0700hrs Creston Plc Interim Results in accordance with IFRS for the six months ended 30 September 2005 Creston Plc, the diversified marketing services group, today announced its interim results for the six months ended 30 September 2005. The highlights, which demonstrate the Group's ability to acquire and manage companies in continuing challenging market conditions, are: FINANCIAL HIGHLIGHTS Headline* IFRS Change Change • Increase in turnover (gross billings) to £37.4m (2004: +133% +133% £16.0m) • Increase in revenue (fees earned) to £20.7m (2004: £8.5m) +142% +142% • Increase in PBIT to £2.8m (2004: £1.4m) +107% • Increase in Headline PBIT to £3.9m (2004: £1.5m) +158% • Growth in organic agency Headline PBIT +6% • Increase in Headline PBIT margin to 18.7% (2004: 17.6%) +6% • Increase in PBT to £1.9m (2004: £1.2m) +66% • Increase in Headline PBT to £3.6m (2004: £1.5m) +149% • Decrease in diluted EPS to 2.10 p (2004: 3.12p) -33% • Increase in Headline diluted EPS to 6.70p (2004: 4.34p) +54% • Increase in interim dividends to 0.80p (2004: 0.70p) +14% +14% * Headline figures are reconciled below: OPERATIONAL HIGHLIGHTS • Acquisition of Red Door Communications Limited (RDC) completed on 7 July 2005 for a maximum consideration of £13.5m - the acquisition broadens Creston's range of marketing services into healthcare and is expected to be earnings enhancing in the current year. • Appointment of Simon Williams as the Group's Synergy and Strategy Director on 5 December 2005. Commenting on today's announcement, Don Elgie, Group Chief Executive, said: "Our strategy of building a diversified international marketing services group through a combination of organic growth and selective acquisitions is progressing well. We are pleased to have delivered a good performance for our shareholders in the first half of the year and the depth of new business wins gives a strong foundation for the second half of the year, with trading since September being in line with the Board's expectations." FOR FURTHER INFORMATION, PLEASE CONTACT: Creston Plc 020 7930 9757 Don Elgie, Chief Executive Barrie Brien, COO/CFO www.creston.com Redleaf Communications 020 7955 1410 Emma Kane/Miranda Good 07876 338339 NOTES TO EDITORS: • Publication quality photographs are available through Redleaf on the numbers shown above. About Creston Plc • Creston's strategy is to build a diversified international marketing services group through a combination of organic growth and selective acquisitions. The Board's aim is to identify synergistic benefits between currently independent marketing services companies offering premium services such as market research, direct marketing, customer relationship marketing, advertising and other areas of marketing communications. • Creston's companies boast a range of blue-chip clients including the AA, AstraZeneca United Kingdom, Bacardi-Martini, Bayer, Canon, COI Communications, Cow & Gate, General Motors, George Wimpey, GlaxoSmithKline, Halifax, Kimberly- Clark, Lloyds Black Horse, NEC, Nestle Rowntree, NTL, Pfizer, Roche Diagnostics, Scottish Courage, Tesco, Toshiba and Unilever. • Creston's share price is quoted in the Financial Times, Telegraph, the Times and the London Evening Standard. CHAIRMAN AND CHIEF EXECUTIVE'S STATEMENT The Board is pleased to present the Group's interim results for the six months ended 30 September 2005. Creston has continued the successful implementation of its strategy of building a diversified international marketing services group through a combination of organic growth and selective acquisitions. The acquisition of Red Door Communications Limited ("RDC"), a leading specialist healthcare PR agency, on 7 July 2005 supported this strategy. The Group's interim results have been prepared under International Financial Reporting Standards ("IFRS"), which were adopted with effect from 1 April 2004. Due to the impact of IFRS (discussed below) Creston has presented headline results as the key profit performance indicators as these eliminate the volatile non-recurring impacts associated with the adoption of IFRS. Overall, trading during the first six months of the year ending 31 March 2006 has been ahead of expectations. The main operating companies delivered a combined increase in turnover (billings) of 133 per cent. and 142 per cent. in revenue over the prior year period. Profit before interest and tax ("PBIT") has increased by 107 per cent. under IFRS policies and headline PBIT has increased by 158 per cent. to £3.9m (2004: £1.5m). Results and impact of IFRS Turnover, which represents billings to our customers, grew by 133 per cent. to £37.4m (2004: £16.0m). More importantly revenue, which represents our income earned increased by 142 per cent. to £20.7m (2004: £8.5m). The reported PBIT grew from £1.4m to £2.8 m, an increase of 107 per cent.. Headline PBIT was £3.9m (2004: £1.5m), an increase of 158 per cent. on the prior year. The directors are of the opinion that certain IFRS accounting policies have a materially distortive impact on the reported results and introduce a volatility to the reported figures. In order to enable a better understanding of the underlying trading of the Group, Creston will refer to headline profit before taxation, which is derived from the reported figures as follows: Six months to Six months to 30 September 30 September 2005 2004 £'000 £'000 Headline Profit before taxation 3,611 1,452 IFRS Adjustments Notional finance costs on future deferred consideration payments (608) (140) Future acquisition payments to employees deemed as remuneration (714) (132) Amortisation of intangible assets (353) (13) Profit before taxation - IFRS 1,936 1,167 Headline profit after taxation 2,440 1,014 IFRS Adjustments Notional finance costs on future deferred consideration payments (608) (140) Future acquisition payments to employees deemed as remuneration (714) (132) Amortisation of intangible assets (353) (13) Taxation impact - - Profit after taxation IFRS 765 729 Headline Diluted EPS 6.70p 4.34p Diluted EPS - IFRS 2.10p 3.12p The contingent consideration deemed as remuneration arises on payments made by Creston to employees in respect of the deferred consideration on the business acquisitions. The notional finance costs also relate to the deferred consideration. Both of these charges will cease once the relevant earn-outs have been settled. A full reconciliation of the impacts of IFRS and an explanation of the adjustments can be found in the Notes and Appendix 1. Headline PBIT has increased from £1.5m to £3.9m driven by underlying organic growth in our companies representing 5 per cent. of revenue and 6 per cent. of profit before interest and tax. The headline PBIT margin has increased to 18.7 per cent. from 17.6 per cent. as a result of tight cost control, Group procurement initiatives and good profit conversion on incremental revenue. In addition DLKW Group has shown significant growth since it was acquired as a result of securing new clients such as the AA, Dollond & Aitchison, Blockbuster and Opel. The contribution from RDC has also been pleasing with the agency continuing its track record of impressive growth. Profit before taxation under IFRS increased by 66 per cent. to £1.9m from £1.2m in the prior six month period. Earnings per share ("EPS") were 2.14p (2004: 3.17p) and diluted EPS were 2.10p (2004: 3.12p). This decline of 33 per cent. is due to the volatile IFRS adjustments noted above principally arising on the IFRS accounting for the acquisition of DLKW Group. In order to give shareholders a better idea of the underlying trading, the directors have presented a headline EPS and headline diluted EPS which are 6.82p (2004: 4.41p) and 6.70p (2004: 4.34p) respectively. The headline diluted EPS growth of 54% is more representative of the underlying growth of the business. At 30 September 2005, Creston had net cash balances of £3.2m and total bank loans and loan notes of £7.6m. The resulting net bank debt of £4.4 m represents a gearing level of 10%. Creston continues to demonstrate impressive operating cash flow and maintains significant headroom in its banking covenants. Net finance costs cover is 3.2 times under IFRS and 15.1 times on a headline basis. Dividend An interim dividend per share of 0.80p (2004: 0.70p) is to be paid on 16 January 2006 to shareholders on the register on 16 December 2005. This is in line with the Board's stated strategy of implementing a progressive dividend policy. Divisional performance, organic growth and new business BRANDCOM DIVISION The BRANDCOM Division (responsible for brand building and communication) was formed in March 2005 following the acquisition of DLKW and this is its first full six months of trading. This division has been re-named from Advertising, as this did not truly reflect the overall Brand Communication Services offered. Its revenue of £7.0m and headline PBIT of £1.2m is ahead of management's expectations for the first half of the financial year, due to strong new business performance with wins including the AA, Opel, Dollond & Aitchison and Legoland. INSIGHT DIVISON Creston's Insight Division (responsible for quantitative and qualitative research) has contributed revenue of £3.3m (2004: £2.5million) and headline PBIT of £1.0m (2004: £0.7m). These six months show organic revenue and organic headline PBIT growth of 3.0 per cent. and 15.0 per cent. respectively. The headline PBIT margin has increased from 26.4 per cent. to 31.3 per cent. In addition, the division has benefited from the acquisition of CML, which was completed in September 2004 and therefore had a minimal impact on the results to September 2004. MARCOMS DIVISION The MARCOMS Division (responsible for the activation and generation of sales push communication) has shown strong growth with revenue increasing to £7.3m from £3.9m and headline PBIT increasing to £1.9m from £1.1m. Organic revenue growth was 5.4 per cent. Following the acquisition of DLKW Group this division was further strengthened by the addition of DLKW Dialogue and TCR, which together have generated revenue of £3.2m and headline PBIT of £0.8m in 2005. These two businesses have performed particularly strongly in the six months to 30 September 2005 following a number of new client wins including AA and Blockbuster. PUBLIC RELATIONS DIVISION The Public Relations Division has been strengthened by the acquisition of RDC during the period. The division has contributed revenue of £3.0m (2004:£2.1m) and headline PBIT of £0.9m (2004:£0.5m). Organic revenue and organic headline PBIT growth are 7.1 per cent. and 6.4 per cent, respectively. These two businesses have performed strongly in the first six months to 30 September 2005 following a number of new client wins including Kraft, Virgin Games, GLA, GE Healthcare and Roche Products. Acquisitions During the period, the Group acquired the business and assets of RDC, which was completed on 7 July 2005 for a maximum consideration of £13.5 million plus costs. RDC, based in London is one of Britain's leading specialist healthcare PR agencies. RDC's clients include AstraZeneca United Kingdom, Bayer, GlaxoSmithKline and Roche Diagnostics. Employees and Incentive Schemes As detailed in the 2005 Annual Report and approved at the Annual General Meeting, Creston has instituted long term incentive plans for senior management. In addition, there was a second offering under the Group's Sharesave scheme, which was offered to all employees. The take up under the Sharesave scheme continues to be excellent with 233 employees representing 44 per cent. of eligible employees participating in this scheme. We are pleased to announce the appointment of Simon Williams as the Group's Synergy and Strategy Director reporting to the Chief Executive Officer. Simon was European Managing Director of Vivaldi Partners, a US Strategic Brand and Marketing Communications Consultancy. Outlook Creston has had a very successful first six months with new business and additional assignments coming from: Dollond & Aitchison, Pfizer, Tena (SCA), Opel, Clerical & Medical, COI, BP, Argos, BP, BUPA, Premier, Carlsberg, General Mills, Danone, John West, Virgin, Kraft, GLA, GE Healthcare, Roche Products, Bristol Myers Squibb, Bayer, Sanofi, Ovaltine and Walker's Crisps. These new business and additional assignment wins have given a strong foundation for the second half of the year, with trading since September being in line with the Board's expectation. With the acquisition of RDC, which the Board expects to be earnings enhancing for the Group in the current year, we are confident that there will be further opportunities to leverage cross selling and client referrals across Group companies. As Creston's profile rises and a considerable amount of acquisition interest is generated, so more opportunities present themselves. In summary, we are pleased with the Group's performance in the reported period. Despite continuing challenging market conditions, the Group continues to demonstrate a resilient trading performance and the Board is confident of Creston's growth plans and the future prospects of the Group. David Marshall Don Elgie Chairman Chief Executive 5 December 2005 UNAUDITED CONSOLIDATED INCOME STATEMENT for the six months ended 30 September 2005 Note Six months ended Six months ended Year ended 30 September 2005 30 September 2004 31 March 2005 £'000 £'000 £'000 Turnover (billings) 2 37,352 16,021 35,870 Revenue (fees earned) 2 20,654 8,533 19,401 Operating Costs (17,853) (7,177) (16,308) Profit on ordinary activities before interest 2,801 1,356 3,093 Finance Income 84 71 162 Finance Costs 3 (949) (260) (665) Profit on ordinary activities before taxation 2 1,936 1,167 2,590 Taxation (1,171) (438) (857) Profit for the period 765 729 1,733 Basic earnings per share (pence) 5 2.14 3.17 7.04 Diluted earnings per share (pence) 5 2.10 3.12 6.93 Six months ended Six months Year 30 September ended ended 2005 30 September 31 March 2004 2005 £'000 £'000 £'000 Amounts recognised as distributions in the period 508 265 441 Amounts declared but not recognised as distributions in the period 297 176 508 UNAUDITED CONSOLIDATED BALANCE SHEET as at 30 September 2005 Note As at As at As at 30 September 30 September 31 March 2005 2004 2005 £'000 £'000 £'000 Non-current assets Intangible assets Goodwill 6 67,166 31,747 57,256 Other 350 27 533 Property, plant and equipment 2,535 932 1,740 Investments 15 - 15 Deferred tax assets 210 60 190 70,276 32,766 59,734 Current assets Inventories and work in progress 2,050 889 1,810 Trade and other receivables 15,129 7,014 14,638 Cash and short term deposits 3,215 3,976 5,419 20,394 11,879 21,867 Current liabilities Trade and other payables (16,647) (4,939) (16,441) Corporate income tax payable (1,849) (1,202) (668) Obligations under finance leases (149) (144) (216) Bank overdraft, loans and loan notes (1,687) (2,709) (1,687) Net current assets 62 2,885 2,855 Total assets less current liabilities 70,338 35,651 62,589 Non current liabilities Bank loans and loan notes (5,938) (4,282) (6,659) Obligations under finance leases (157) (56) (205) Other payables 8 (20,037) (5,743) (14,603) Net assets 44,206 25,570 41,122 Equity Called up share capital 3,712 2,519 3,493 Share premium account 19,333 10,070 19,168 Own shares (70) - - Shares to be issued 1,679 509 1,426 Special reserve 2,385 2,385 2,385 Other reserve 14,702 8,707 12,442 Capital redemption reserve 72 72 72 Retained earnings 2,393 1,308 2,136 Total equity 44,206 25,570 41,122 UNAUDITED CONSOLIDATED CASH FLOW STATEMENT for the six months ended 30 September 2005 Note Six months Six months Year ended ended ended 31 March 30 September 30 September 2005 2005 2004 £'000 £'000 £'000 Net cash inflow from operating activities 9 2,617 386 3,867 Investing activities Purchase of subsidiary undertakings (4,240) (3,161) (20,413) Net cash/(overdraft) acquired with subsidiaries 1,779 (118) 4,233 Purchase of property, plant and Equipment (1,110) (361) (549) Sale of property, plant and equipment 32 18 25 Decrease/(increase) in restricted cash 12 (491) 240 deposits Net cash outflow from investing activities (3,527) (4,113) (16,464) Financing activities Issue of shares 185 1,070 11,290 Share repurchases (30) - - Net decrease in borrowings (814) 2,429 3,791 Financing and share issue costs - - (416) Equity dividends paid (508) (265) (441) Capital element of finance lease payments (115) (60) (124) Net cash (outflow)/inflow from financing (1,282) 3,174 14,100 (Decrease)/increase in cash and cash (2,192) (553) 1,503 equivalents Cash and cash equivalents at start of period 5,357 3,854 3,854 Cash and cash equivalents at end of period 10 3,165 3,301 5,357 UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the six months ended 30 September 2005 Six months Six months Year ended ended ended 30 September 30 September 31 March 2005 2004 2005 £'000 £'000 £'000 At 1 April 52,341 25,254 25,254 Change in accounting policies relating to first time adoption of IFRS (11,219) (4,495) (4,495) At 1 April as restated 41,122 20,759 20,759 New share capital issued 2,644 4,287 18,094 Own shares purchased (70) 60 977 Credit for share based incentive schemes 253 - - Profit for the period 765 729 1,733 Dividends (508) (265) (441) At period end 44,206 25,570 41,122 NOTES TO THE INTERIM REPORT for the six months ended 30 September 2005 1. Presentation of financial information and accounting policies Creston prepared its consolidated financial statements under UK GAAP up to and including the year ended 31 March 2005. From 2005 onwards Creston is required to prepare its consolidated financial statements in accordance with International Accounting Standards and International Financial Reporting Standards ("IFRS") in accordance with European Union regulations. The accounting policies used are consistent with those that the directors intend to use in the next annual financial statements. There is, however, a possibility that the directors may determine that some changes to these policies are necessary when preparing the full annual financial statements for the first time in accordance with those IFRSs adopted for use by the European Union. This interim financial information has been prepared on the basis of the recognition and measurement requirements of IFRSs in issue that either are endorsed by the EU and effective (or available for early adoption) at 31 March 2006 or are expected to be endorsed and effective (or available for early adoption) at 31 March 2006, the Group's first annual reporting date at which it is required to use adopted IFRSs. Based on these adopted and unadopted IFRSs, the directors have made assumptions about the accounting policies expected to be applied when the first annual IFRS financial statements are prepared for the year ending 31 March 2006. The interim financial information presented includes Creston's first interim results reported under IFRS. This document includes an explanation of how Creston's reported performance and financial position are impacted by this change. The Group's revised principal accounting polices under IFRS are presented below. The comparative information contained within this document has been restated under these new accounting policies and a reconciliation to the UK GAAP profits as previously reported is provided in Appendix 1. Creston has taken advantage of the exemption available under IFRS 1 not to apply IAS 32 and IAS 39 until 1 April 2005. The interim results and the comparative information have been prepared on the basis of all currently issued IFRSs. The principal accounting policies affected by IFRS are: Goodwill Goodwill on acquisitions is initially measured at cost including deferred consideration being the excess of the cost of the business combination over the Group's fair value of the identifiable net assets (including any identified intangible assets in addition to goodwill). Following initial recognition, goodwill is carried at cost less any accumulated impairment losses. Deferred consideration on acquisitions is provided based on the directors' best estimate of the liability at the balance sheet date. The liability is discounted and a notional finance cost is included in the income statement. The effect has been to increase the finance costs by £0.6m in the six months ended 30 September 2005 (2004: £0.1m). Intangible assets Other acquired intangible assets are capitalised at cost. Intangible assets acquired as part of a business combination are capitalised at fair value at the date of acquisition. The list of such intangible assets is significantly more comprehensive under IFRS than was the case under UK GAAP. Intangible assets are amortised to residual values over the useful economic life of the asset. Where an asset's life is considered to be indefinite an annual impairment test is performed. The identified intangible assets and associated periods of amortisation are as follows: Intangible asset Period of amortisation Brands Indefinite life - subject to annual impairment Customer contracts Over the notice period of the contract (generally 1 to 3 months) The effect has been to charge amortisation costs of £0.4 m in the six months ended 30 September 2005 (2004: £nil). Share based payment transactions Creston has applied the requirements of IFRS 2 " Share-based payment". IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that remained unvested as of 1 January 2005. This policy affects the various Creston incentive schemes. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the vesting date on which the relevant employees become fully entitled to the award. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the number of awards that, in the opinion of the directors at that date, will ultimately vest. No expense is recognised for awards that do not ultimately vest. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share. Consideration deemed to be remuneration In accordance with IFRS 3 certain payments made to employees in respect of earn-out arrangements are required to be treated as remuneration within the income statement. These amounts are required to be charged to the income statement despite the director's opinion that they represent payments to acquire the business. This has the effect of reducing the reported profit by £0.7m in the six months to 30 September 2005 (£0.1 m in the six months ended 30 September 2004). 2. Segmental analysis Turnover, revenue and profit before tax attributable to Creston activities are shown below. Turnover represents the gross billings to customers. Revenue represents the fees earned by the companies. Turnover Revenue 2005 2004 2005 2004 £'000 £'000 £'000 £'000 Brandcom 16,012 - 7,041 - Insight 5,700 4,443 3,293 2,515 Marcoms 11,767 8,912 7,329 3,948 Public Relations 3,873 2,666 2,991 2,070 37,352 16,021 20,654 8,533 Headline profit before tax 2005 2004 £'000 £'000 Brandcom 1,248 - Insight 1,032 664 Marcoms 1,922 1,073 Public Relations 891 535 Agency Total 5,093 2,272 Head Office (1,225) (771) Profit before interest and tax 3,868 1,501 Net finance costs (257) (49) Profit before tax 3,611 1,452 It is not possible to present a segmental split of the IFRS PBIT and finance costs as the deemed remuneration and notional finance costs cannot be allocated between the business segments. As Headline PBT excludes these items (together with the amortisation of intangibles) a segmental split is presented on that basis. 3. Finance Costs Under IAS 39 (fair value of liabilities) the Group is required to discount liabilities to their fair value. This has a significant impact on the treatment of deferred consideration, which is generally paid more than three years after the date of acquisition. The difference between the fair value of the liabilities and the actual amounts payable are charged to the income statement as notional finance costs (calculated at the annual rate of 5.5%) over the life of the associated liability. This has the impact of increasing the finance costs by £608,000 in the six months ended 30 September 2005 (£140,000 in the six months ended 30 September 2004 and £327,000 for the year ended 31 March 2005). 4. Dividends The Board has recommended an interim dividend of 0.80p per share to all ordinary shareholders on the register at 16 December 2005. In accordance with IFRS this dividend is not reflected in the income statement for the six months to 30 September 2005 as it was not approved by the Board until 2 December 2005. 5. Earnings per share The calculation of the basic earnings per share is based on the profit attributable to ordinary shareholders divided by the weighted average number of shares in issue for each period, which was 35,768,390 for the period ended 30 September 2005 (year ended 31 March 2005: 24,617,806 and period ended 30 September 2004: 22,974,708). The calculation of the diluted earnings per share is based on the profit attributable to ordinary shareholders divided by the weighted average number of diluted shares in issue for each period, which was 36,436,925 for the period ended 30 September 2005 (year ended 31 March 2005: 24,990,613 and period ended 30 September 2004: 23,340,216). The headline EPS and headline diluted EPS are based on the headline PBT analysed in note 2 less attributable tax and divided by the weighted average number of shares and by the weighted average number of diluted shares respectively. 6. Goodwill A review of the carrying value of acquisitions has been carried out using reforecast profits. This has shown an increase in the value in use of the subsidiaries and a corresponding increase in the surplus over the carrying value in the accounts. No reduction in goodwill has therefore been made, as there are no indications of impairment. 7. Acquisition The acquisition of Red Door Communications Limited ("RDC") was completed on 7 July 2005. The maximum consideration payable (including deemed remuneration and notional finance costs) for RDC is £13.5m plus legal and professional costs of £0.3m. It is satisfied by an initial consideration of £6.5m, an estimated further £0.1m dependent upon the final determination of the net assets acquired and a deferred consideration of up to £6.7m, which is dependent on the financial performance of RDC in the period to 31 March 2009. As part of the acquisition, 1,595,724 new ordinary shares were issued and listed on the London Stock Exchange on 14 July 2005. The remaining acquisition costs of £4.2m were funded from existing working capital resources (£4.1m) and one year loan notes (£0.1m). At acquisition, RDC had (subject to audit) net assets of £1.2m comprising fixed assets of £0.1m and net current assets of £1.1m. The results for the period from completion to 30 September were £0.9m turnover, £0.8m revenue and £0.3m profit before interest and tax, which has been included within the consolidated results. 8. Other payables Other payables represent the accumulated amounts due under the deferred consideration arrangements with the vendors of the agency companies as calculated in accordance with IFRS. Creston has the right to settle these liabilities in equity opposed to loan notes and the decision will be made at the time of settlement. 9. Reconciliation of profit before interest and tax to net cash flow from operating activities Six months Six months Year ended ended Ended 30 September 30 September 31 March 2005 2004 2005 £'000 £'000 £'000 Profit before interest and tax 2,801 1,356 3,093 Depreciation 400 220 488 Amortisation of intangible assets 353 13 182 Share based payments 88 8 80 Deemed remuneration 714 132 325 Profit on disposal of fixed assets (8) (4) (6) (Increase)/decrease in inventories and work in progress (247) (113) 264 (Increase) in debtors (189) (368) (832) (Decrease)/increase in creditors (604) (819) 1,336 3,308 425 4,930 Net finance costs (257) (39) (176) Tax paid (434) - (887) Net cash inflow from operating activities 2,617 386 3,867 10. Analysis of Debt As at Cash Flow Acquisitions As at 1 April 31 September 2005 2005 £'000 £'000 £'000 £'000 Cash at bank and in hand 5,357 (2,192) - 3,165 Bank loans and loan notes (8,346) 814 (93) (7,625) Finance leases (421) 115 - (306) Net (debt) (3,410) (1,263) (93) (4,766) Restricted cash deposits 62 (12) - 50 Net (debt) including (3,348) (1,275) (93) (4,716) restricted cash deposits The restricted cash balances are maintained in a designated account as security for the loan notes issued on the acquisition of MSL and are, therefore, not freely available to the Group. 11. Publication of non-statutory accounts The Interim Report is unaudited and does not constitute statutory accounts within the meaning of s240 of the Companies Act 1985. The statutory accounts for the year ending 31 March 2005, which were prepared under UK Generally Accepted Accounting Principles, have been delivered to the Registrar of Companies. The auditors' opinion on these accounts was unqualified and did not contain a statement made under s237(2) or s237(3) of the Companies Act 1985. 12. Availability of the Interim Report Copies of the Interim Report will be sent to shareholders in due course and are available from the Company's registered office at City Group P.L.C., 30 City Road, London, EC1Y 2AG and on the company's website www.creston.com. APPENDIX 1 FIRST TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS Introduction This interim statement has been prepared in accordance with the revised accounting policies set out in note 1 above. These policies have been revised from those published in the Group's 2005 Report and Accounts following the Group's transition to reporting under IFRS. The following notes and reconciliations provide an explanation of the impact of the transition to IFRS. First-time adoption of IFRS The rules for the first time adoption of IFRS are set out in IFRS 1 "First Time Adoption of International Financial Reporting Standards". The Group is required to establish its IFRS accounting policies, which it will use to prepare its results for the year to 31 March 2006 and, in general, apply these retrospectively to determine its opening balance sheet under IFRS at the date of transition 1 April 2004. The standard permits certain optional exemptions from this general principle. The Group has elected to take the following principal exemptions and the information presented has been prepared on this basis. Business combinations prior to the date of transition The Group has elected not to apply IFRS 3 retrospectively to business combinations, which occurred prior to the date of transition. Share based payments The Group has elected not to apply IFRS 2 to all relevant share-based payment transactions granted after 7 November 2002 that had vested at 1 January 2005. Reconciliation of UK GAAP to IFRS The following reconciliations are presented below in order to explain the effect of the transition to IFRS and to show how the comparative results have been restated. - reconciliation of profit for the six months to 30 September 2004 - reconciliation of profit for the year ended 31 March 2005 - reconciliation of equity at 1 April 2004 - reconciliation of equity at 30 September 2004 - reconciliation of equity at 31 March 2005 The IFRS adjustments are explained in the notes to the reconciliations below. RECONCILIATION OF PROFIT FOR THE SIX MONTHS TO 30 SEPTEMBER 2004 As previously Notional Deemed Other As per reported Finance remuneration IFRS Costs £'000 £'000 £'000 £'000 £'000 Turnover (billings) 16,021 - - - 16,021 Revenue 8,533 - - - 8,533 Operating Costs (7,024) - (132) (21) (7,177) Profit on ordinary activities before interest 1,509 - (132) (21) 1,356 Finance Income 71 - - - 71 Finance Costs (120) (140) - - (260) Profit on ordinary activities before taxation 1,460 (140) (132) (21) 1,167 Taxation (438) - - - (438) Profit for the period 1,022 (140) (132) (21) 729 Other items comprise: £'000 Share based payments (8) Amortisation of intangible assets (13) (21) Headline PBIT is calculated as follows: £'000 IFRS PBIT 1,356 Add: Deemed remuneration 132 Amortisation of intangibles 13 Headline PBIT 1,501 RECONCILIATION OF PROFIT FOR THE YEAR ENDED 31 MARCH 2005 As previously Notional Deemed Other As per IFRS reported Finance remuneration Costs £'000 £'000 £'000 £'000 £'000 Turnover (billings) 35,870 - - - 35,870 Revenue 19,401 - - - 19,401 Operating Costs (15,721) - (325) (262) (16,308) Profit on ordinary activities before interest 3,680 - (325) (262) 3,093 Finance Income 162 - - - 162 Finance Costs (338) (327) - - (665) Profit on ordinary activities before taxation 3,504 (327) (325) (262) 2,590 Taxation (864) - - 78 (857) Profit for the period 2,640 (327) (325) (254) 1,733 Other items comprise: £'000 Share based payments (80) Amortisation of intangible assets (182) (262) Tax 7 (254) Headline PBIT is calculated as follows: £'000 IFRS PBIT 3,093 Add: Deemed remuneration 325 Amortisation of intangibles 182 Headline PBIT 3,600 RECONCILIATION OF PROFIT FOR THE SIX MONTHS TO 30 SEPTEMBER 2005 Headline PBIT is calculated as follows: £'000 IFRS PBIT 2,801 Add: Deemed remuneration 714 Amortisation of intangibles 353 Headline PBIT 3,868 RECONCILIATION OF EQUITY AT 1 APRIL 2004 £'000 UK GAAP reported 1 April 2004 25,254 IFRS 3 Business combinations (notes a to c) (5,209) IFRS 2 Share based payments (note c) 449 IAS 10 Events after the balance sheet date (note c) 265 IFRS restated 1 April 2004 20,759 RECONCILIATION OF EQUITY AT 30 SEPTEMBER 2004 £'000 UK GAAP reported 30 September 2004 31,000 IFRS 3 Business combinations (notes a to c) (6,107) IFRS 2 Share based payments (note c) 501 IAS 10 Events after the balance sheet date (note c) 176 IFRS restated 30 September 2004 25,570 RECONCILIATION OF EQUITY AT 31 MARCH 2005 £'000 UK GAAP reported 31 March 2005 52,341 IFRS 3 Business combinations (notes a to c) (13,080) IFRS 2 Share based payment (note c) 1,353 IAS 10 Events after the balance sheet date (note c) 508 IFRS restated 31 March 2005 41,122 NOTES TO IFRS ADJUSTMENTS a) Notional finance costs Deferred consideration on acquisitions is provided based on the directors' best estimate of the liability at the balance sheet date. The fair value of the consideration is obtained by discounting (at an interest rate of 5.5%) to present value the amounts expected to be payable in the future. The resulting notional finance cost is included in the income statement. The effect has been to increase the finance costs by £608,000 in the six months ended 30 September 2005 (£140,000 in the six months ended 30 September 2004 and £327,000 for the year ended 31 March 2005). b) Contingent consideration deemed as remuneration Under IFRS 3 payments made to employees of the acquiree who are not shareholders at the date of acquisition are considered to be remuneration and have to be charged to the income statement over the performance period (considered to be the earn-out period). The directors consider these payments form part of the cost of acquisition of the business and are paid to employees in recognition of their contribution in creating the value of the business. In order to comply with IFRS 3 £714,000 has been charged to the income statement in the six months ended 30 September 2005 (£132,000 in the six months ended 30 September 2004 and £325,000 for the year ended 31 March 2005). c) Other items Other adjustments have been made in respect of: Business combinations Under IFRS 3 the Group is required to identify intangible assets acquired on business combinations completed after the transition date of 1 April 2004. This has resulted in the recognition of intangible assets with a fair value of £925,000 at 30 September 2005 (2004: £40,000 and 31 March 2005: £755,000). In accordance with IAS 38 these intangibles assets (being brand names and customer contracts) are amortised over their useful economic lives, which vary depending on the individual characteristics of the intangibles concerned, but are no more than 10 years. The impact on the income statement is a charge of £353,000 in the six months ended 30 September 2005 (£13,000 in the six months ended 30 September 2004 and £182,000 for the year ended 31 March 2005). Under UK GAAP where contingent consideration may be settled by either the issue of shares or the issue of loan notes, these amounts are included in equity. Under IFRS they are treated as liabilities. An adjustment has been made to reallocate these amounts. This reduces net assets by £13,787,000 at 30 September 2005 (2004: £4,592,000). A summary of the total impact on net assets of all matters associated with business combinations is as follows: At At At 30 September 31 March 1 April 2004 2005 2004 £'000 £'000 £'000 Amortisation of intangible assets (13) (182) - Notional finance costs (note a) (648) (835) (508) Deemed remuneration (note b) (854) (1,047) (722) Reallocation of shares to be issued (4,592) (11,016) (3,979) (6,107) (13,080) (5,209) IFRS 2 Share based payment IFRS 2, "Share-based payment", requires the fair value of share-based payments (principally share options and other share based incentive schemes) to be recognised as an expense in the income statement, spread over the vesting period of the relevant scheme - typically three years. The group has used a Black-Scholes valuation model to calculate this fair value. There was no charge in the UK GAAP income statement as all options were issued at an exercise price equivalent to the market price at that date. Deferred tax is provided based upon the expected future tax deductions relating to share-based payment transactions, and is recognised over the vesting period of the relevant share award schemes. IAS 10 Events after the balance sheet date IAS 10, "Events after the Balance Sheet Date" requires that dividends declared after the balance sheet date should not be recognised as a liability at that balance sheet date, as the liability does not represent a present obligation as defined by IAS 37 "Provisions, Contingent Liabilities and Contingent Assets". The impact on retained earnings at 30 September 2005 is to exclude the proposed interim dividend of £297,000 as this was declared in December 2005 but to include the final proposed for the year ended 31 March 2005 of £508,000 as this was declared in the six months ended 30 September 2005. Similar adjustments were made at each period end. IAS 19 Employee benefits Holiday pay has been provided reflecting the unused leave accumulated at the period end. The only period affected by this adjustment is the six months ended 30 September 2005. This information is provided by RNS The company news service from the London Stock Exchange

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