Final Results

Pennant International Group PLC 04 April 2008 Pennant International Group plc Preliminary Results for the year ended 31 December 2007 4 April 2008 Pennant International Group plc ('Pennant' or 'the Company'), the AIM quoted supplier of integrated logistic support solutions principally to the defence, rail, aerospace and naval markets, and products and services to a number of Government Departments, announces preliminary results for the year ended 31 December 2007. It is expected that the annual report and accounts will be posted to shareholders on 11 April 2008 and will be available from the Company's registered office and the Company's website at www.pennantplc.com, from this date. Turnover, operating profits, earnings per share and dividends all increased substantially compared to the previous year, while the completion of the sale of the Group's freehold property in Southampton during the second half contributed to a much improved cash position at the year-end. Results highlights • Third successive year of increased profits, earnings and dividends. • Group turnover up 9% to £12.35 million (2006: £11.31 million). • Group operating profit up 67% to £1.23 million (2006: £0.74 million) including profit on sale of freehold property of £0.38 million (2006: Nil). • Group trading profit up 16% to £0.86 million (2006: £0.74 million). • Earnings per share (basic) up 82% to 3.23 pence (2006: 1.77 pence) including profit on sale of freehold property (2006: Nil). • Earnings per share (basic) from trading activities up 15% to 2.03 pence (2006: 1.77 pence). • Net cash at year-end of £0.80 million (2006: Nil), including net proceeds from sale of freehold property of £0.75million (2006: Nil). • Proposed final dividend per share up 10% to 0.44 pence (2006: 0.40 pence), making a total dividend per share for the year of 0.66 pence (2006: 0.60 pence). In his statement to shareholders, Mr Christopher Powell, Chairman, said: 'Your Board has continued its approach to develop further our core strengths by continually enhancing our products and services in line with advances in technology and by nurturing long-term customer relationships in existing and new markets. This has again paid dividends with a third successive year of growth.' On current trading and prospects, Mr Powell added: 'The Software and Data Services Divisions have good forward visibility while the Training Systems Division has a number of long-term contracts that run through 2008 and are expected to increase in scope and value. Notwithstanding this, the Training Systems Division may see a reduction in revenues due to budget cuts and delays to contract placement by the UK Government. 'Tendering for medium-term opportunities, both in the UK and overseas, remains at a satisfactory level and the Group is underpinned by a robust balance sheet and strong cash resources. Your Board remains confident for the future.' Enquiries: Pennant International Group plc Tel: 01452 714914 Chris Snook, Chief Executive John Waller, Finance Director W.H. Ireland Tel: 0121 265 6330 Katy Birkin Winningtons Financial Tel: 0117 920 0092 Paul Vann/Tom Cooper CHAIRMAN'S STATEMENT AND BUSINESS REVIEW I am pleased to announce the third successive year of increased profits and dividend and a strong cash position. In addition to a satisfactory trading performance, the results and cash position have benefited from the successful completion of the sale of property in Southampton. Results and dividend Group turnover rose by 9% to £12,349,683 (2006: £11,311,954). Operating profits increased by 67% to £1,233,554 (2006: £740,700) and comprise profits arising from trading of £857,557, a 16% increase over 2006, plus the profit on sale of property of £375,997 (2006: Nil). Earnings were £1,013,259 (2006: £558,600) giving basic earnings per share of 3.23p (2006: 1.77p) an increase of 82%. Basic earnings per share excluding the profit on sale of property were 2.03p (2006: 1.77p) an increase of 15%. The tax charge at 9.4% (2006: 7.8%) of pre-tax profit reflects the benefit of significant tax losses. The Group has tax losses in the UK of £1.24 million and in the USA of £1.5 million (arising from past acquisitions) available for set-off against future profits. The cash position strengthened; net funds at the year end were £804,010 (2006: £1,520). The increase included net proceeds from the sale of property of £748,519. Your Board is recommending a final cash dividend of 0.44p per share (2006: 0.40p) which, together with the interim dividend of 0.22p per share gives a total dividend for the year of 0.66p (2006: 0.60p). The total dividend is 3 times covered by earnings excluding the profit on sale of property. The final dividend will be paid on 20 June 2008 to shareholders on the register at close of business on 23 May 2008. The shares are expected to go ex-dividend on 21 May 2008. Strategy The Board has continued its approach: • To develop the Group's core strengths by maintaining domain and platform expertise to complement customer requirements and continually enhancing its products and services in line with advances in technology. • To grow long term customer relationships in existing and new markets. The Group's sales team has been strengthened during the year to improve coverage and penetration. The Group operates principally in the defence, rail, aerospace and naval markets and also supplies products and services to Government departments. The Group wins work from customers as they introduce new products and services or as they secure work on new platforms and as existing platforms are updated. A significant part of the Group's revenue comes from major capital programmes and the timing of these contracts is usually beyond the Group's control. A principal medium-term risk reduction objective is therefore to increase the level of the Group's recurring revenues from product support contracts and software consultancy and maintenance contracts. The Board's approach has produced progress in each of the Group's three divisions during the year: Training Systems The Training Systems division provides and supports specialist training systems based on software emulation, hardware simulation and computer based training for engineer training. The division's sales revenue increased by 13% in 2007 to £6.0 million and profitability improved significantly; highlights included: • The addition of further equipment to the service provision contract awarded by the MOD in 2006. These packages boost the value of the service provision contract which was originally worth £3.8 million over 5 years until 2011. • Significant success in establishing a position in the naval market by winning two major contracts both of which will be in production throughout 2008: o A contract with BAE Insyte to provide computer based training courseware as part of the Royal Navy's Maritime Composite Training System which covers warfare operator training across the surface fleet. o A contract won in partnership with BAE Insyte under which Pennant is supplying maintenance training media for the T45 Destroyer Warfare System. • Scope and value growth in two large contracts with BAE for training equipment associated with their delivery of aircraft. These contracts now run well into 2008. Data Services The Data Services division supplies electronic documentation, e-learning products, virtual reality products, electronic data, publicity and newsletters, parts catalogues and authoring in support of technical products and skills. The division has maintained its sales revenue at £3.4 million. This division has also made progress in the naval arena supplying data modules and maintenance task analysis to BAE Systems in respect of the T45 Destroyer. This work continues into 2008. Other contracts in progress during the year have been: • Projects with Kawasaki for rail projects in Taiwan and the USA. • Two orders under a framework agreement with Siemens in Germany for documentation relating to rail projects in the USA. • Delivery of further e-learning packages to the Department of Work and Pensions in the UK. • A virtual reality walkthrough of a submarine in collaboration with Flagship Training Limited Profitability in this division has been below expectations arising from major reorganisations within Government and other customers disrupting the flow of orders and from start-up costs on a major contract. The management of the division has been strengthened and the division will benefit from the improvements to the Group's sales team. Software Services The Software Services division provides and supports software tools used to support complex long-life assets. It owns the rights to the market-leading OmegaPS suite of software which is sold world-wide and used by many major defence contractors and by the Defence Authorities in both Canada and Australia. During the year sales revenue increased by 8% to £2.96 million and the trading result improved by 35% The division continues to benefit from the on-going roll-out of the Canadian Government's Materiel Acquisition and Support Information System (MASIS), of which Pennant's OmegaPS supportability engineering software is a component. As the project reaches its fifth phase the implementation support provided by Pennant is expected to increase. Also the Australian Defence Organisation has continued to place orders to develop further its use of the OmegaPS software suite. In 2007, the division sold and installed Omega software to a number of new customers including, amongst others, Alenia in Italy, MAN trucks in Germany, Logica in the UK, Boeing in Australia and the Helicopter Institute in China. Joint Venture The joint venture with Sonovision-ITEP, setup to provide technical documentation and engineering support, principally for Airbus, has continued to suffer from the ongoing delays and problems at Airbus. Ongoing losses have been reduced by the closure of the office in Bristol and the redistribution of work to Pennant's Manchester office. People Max Pearce, a non-executive director of the Company, will retire from the Board at the AGM. He has served as a director since the flotation of the Company in 1998. His valued advice and counsel has made a significant contribution to the Group's development. A search and selection process to appoint a replacement non-executive director is underway. I would like once again to express the Board's very genuine thanks to the Group's personnel for a year of considerable effort and achievement. Outlook The Software and Data Services divisions have good forward visibility. Training Systems division has a number of long-term contracts that run through 2008 and are expected to increase in scope and value. Notwithstanding this, the division may see a reduction in revenues due to budget cuts and delays to contract placement by the UK Government. Tendering for medium-term opportunities, in the UK and overseas, remains at a satisfactory level and the Group is underpinned by a robust balance sheet and strong cash resources. Your Board remains confident for the future. C C Powell Chairman 3 April 2008 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 Notes 2007 2006 £ £ Revenue 3 12,349,683 11,311,954 Cost of sales (7,936,361) (7,196,241) Gross profit 4,413,322 4,115,713 Administration expenses (3,555,765) (3,375,013) Profit on sale of assets held for sale 375,997 - Operating Profit 1,233,554 740,700 Share of results of joint venture (33,070) (67,119) 1,200,484 673,581 Finance costs 8 (92,292) (75,262) Finance income 9 9,991 7,368 Profit before taxation 1,118,183 605,687 Taxation 10 (104,924) (47,087) Profit for the year attributable to equity holders of 6 1,013,259 558,600 parent Earnings per share 12 Basic 3.23p 1.77p Diluted 3.02p 1.65p CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 31 DECEMBER 2007 2007 2006 £ £ Exchange differences on translation of foreign operations 101,860 (63,905) Net income/(losses) recognised directly in equity 101,860 (63,905) Profit for the year 1,013,259 558,600 Total recognised income and expenses for the year attributable to 1,115,119 494,695 equity holders of the parent CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2007 Notes 2007 2006 £ £ Non-current assets Goodwill 13 909,697 904,228 Other intangible assets 14 117,731 43,008 Property, plant and equipment 15 2,051,477 2,073,213 Equity accounted interest in joint venture 16 16,956 60,027 Available for sale investments 17 6,135 6,135 Deferred tax assets 26 19,629 16,966 Total non-current assets 3,121,625 3,103,577 Current assets Inventories 18 27,378 112,939 Trade and other receivables 20 3,161,595 2,794,276 Cash and cash equivalents 21 1,568,620 909,609 Assets held for sale - 372,522 Total current assets 4,757,593 4,189,346 Total assets 7,879,218 7,292,923 Current liabilities Trade and other payables 23 1,445,520 1,530,004 Current tax liabilities 104,779 52,791 Obligations under finance leases 24 1,089 1,054 Bank loan 22 147,559 141,338 Deferred revenue 25 414,838 370,041 Total current liabilities 2,113,785 2,095,228 Net current assets 2,643,808 2,094,118 Non-current liabilities Bank loan 22 614,430 763,952 Obligations under finance leases 24 1,532 1,744 Deferred tax liabilities 26 32,000 32,000 Deferred revenue 25 25,781 25,877 Total non-current liabilities 673,743 823,573 Total liabilities 2,787,528 2,918,801 Net assets 5,091,690 4,374,122 Equity Share capital 27 1,600,000 1,600,000 Share premium account 3,582,329 3,582,329 Retained earnings 28 (128,594) (744,302) Translation reserve 29 37,955 (63,905) Total equity 5,091,690 4,374,122 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 Notes 2007 2006 £ £ Net cash from operations 30 563,799 773,120 Investing activities Interest received 9,991 7,368 Proceeds on disposal of property, plant 748,519 4,507 and equipment Purchase of intangible assets (107,542) (25,585) Purchase of property, plant and equipment (154,120) (213,005) Loan to Joint Venture 10,000 (45,000) Net cash from/(used in) investing activities 506,848 (271,715) Financing activities Dividends paid (194,098) (161,490) Transactions in own shares (176,225) (4,339) Repayment of borrowings (143,301) (141,062) Repayment of obligations under finance leases (177) (10,321) Net cash used in financing activities (513,801) (317,212) Net increase in cash and cash equivalents 556,846 184,193 Cash and cash equivalents at beginning of year 909,609 797,676 Effect of foreign exchange rates 102,165 (72,260) Cash and cash equivalents at end of year 21 1,568,620 909,609 Approved by the Board on 3 April 2008 and signed on its behalf C Snook J M Waller Director Director NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2007 1. General information Pennant International Group plc is a company incorporated in England and Wales under the Companies Act 1985. The address of the registered office is: Pennant Court Staverton Technology Park Cheltenham GL51 6TL The principal activity of Group companies during the year was the delivery of integrated logistic support solutions. These comprise Logistic Support Analysis Report software, technical documentation, simulation and computer based training systems to customers worldwide; principally those in defence and aerospace, but also in rail transport, oil & gas, petro-chemical, power, customer goods retail, information technology and telecommunications industries. 2. Accounting policies Basis of preparation The financial statements of Pennant International Group plc have been prepared for the first time in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the EU applied in accordance with the provisions of the Companies Act 1985. Standards and interpretations issued but not yet effective At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied to these financial statements were in issue but not yet effective. The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements. Standards Effective for IFRS 2 Share -based payment - Amendment relating to Annual periods beginning on or after 1 vesting conditions and cancellations. January 2009. Revised 2008 IFRS 3 Business combinations - Comprehensive revision on Annual periods beginning on or after 1 applying acquisition method. July 2009. Revised 2008 IFRS 8 Operating segments. Annual periods beginning on or after 1 January 2009. Original issuance 2006 IAS 1 Presentation of Financial Statements - Comprehensive Annual periods beginning on or after 1 revision including requiring of statement of January 2009. comprehensive income. 2007 IAS 1 Presentation of Financial Statements - Amendments Annual periods beginning on or after 1 relating to disclosure of puttable instruments and July 2009. obligations arising on liquidation. 2008 IAS 23 Borrowing costs - Comprehensive revision to prohibit Borrowing costs relating to qualifying immediate expensing 2005. assets for which the commencement date for capitalisation is on or after 1 2007 January 2009. IAS 27 Consolidated and Separate Financial Statements - Annual periods beginning on or after 1 Consequential amendments arising from amendments to July 2009 IFRS 3. 2008 IAS 27 Investments in Associates - Consequential amendments Annual periods beginning on or after 1 arising from amendments to IFRS 3. July 2009 2008 IAS 31 Interest in Joint Ventures - Consequential Annual periods beginning on or after 1 amendments arsing from amendments to IFRS 3. July 2009 2008 IAS 32 Financial Instruments: presentation - Amendments Annual periods beginning on or after 1 relating to puttable instruments and obligations January 2009. arising on liquidation. 2008 Interpretations IFRIC 11 IFRS 2 group and Treasury Share Transactions Annual periods beginning on or after 1 March 2007 IFRIC 12 Service Concession Arrangements Annual periods beginning on or after 1 January 2008 IFRIC 13 Customer Loyalty Programmes Annual periods beginning on or after 1 July 2008 IFRIC 14 IAS 19 - The Limit of a Defined Benefit Asset, Requirements and their Interaction Minimum Funding Requirements and their Interaction Annual periods beginning on or after 1 January 2008. The financial statements have been prepared on the historical cost basis. The principal accounting policies set out below have been consistently applied to all periods presented. IFRS transition IFRS 1 permits companies adopting IFRS for the first time to take certain exemptions from the full requirements of IFRS in the transition period. The financial statements have been prepared on the basis of the following exemptions: • Business combinations prior to January 2006 have not been restated to comply with IFRS 3 'Business Combinations'. • The Group has elected to deem the cumulative currency translation differences on its net investments in foreign operations to be £nil at 1 January 2006. • The Company has elected to use a previous UK GAAP valuation of an item of Property, Plant and Equipment, before the date of transition to IFRS, as deemed cost at the date of that valuation. • The Group has applied IFRS 2 'Share-based payments' except to those equity settled awards that were granted on or before 7 November 2002. The disclosures required by IFRS 1 concerning the transition from UK GAAP to IFRS are given in note 38. Basis of consolidation The financial statements incorporate the results of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has power to govern the financial and operating policies of the investee entity so as to obtain benefits from its activities. Where necessary, adjustments are made to the results of subsidiaries to bring accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Business combinations and goodwill On acquisition, the assets and liabilities and contingent liabilities of the subsidiaries are measured at their fair value at the date of acquisition. Any excess of cost of acquisition over fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of cost of acquisition below the fair value of the identified net assets acquired (i.e. discount on acquisition) is credited to profit and loss account in the period of acquisition. Goodwill arising on consolidation is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in the profit and loss account and is not subsequently reversed. Interest in joint venture The results and assets and liabilities of joint ventures are incorporated using the equity method of accounting. Investments in joint ventures are carried in the balance sheet at cost as adjusted by post acquisition changes in the Group's share of the net assets of the joint venture less any impairment in the value of the individual investments. Losses of a joint venture in excess of the Group's interest in that joint venture are not recognised. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes. Sales of goods are recognised when goods are delivered and title has passed. Revenues arising from the software maintenance programme provided to customers are invoiced in advance but recognised as revenue across the period to which the maintenance agreements relate. Amounts not taken to revenue at a period end are shown in the balance sheet as deferred revenue. Revenue from construction contracts is recognised in accordance with the Group's accounting policy on constructions contracts (see below). Construction contracts Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date. This is normally measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred where it is probable they will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Foreign currency The individual financial statements of each group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each group company are expressed in pounds sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements. In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency (foreign currencies) are recorded at rates of exchange prevailing on the dates of the transactions. At the balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the profit and loss account for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such monetary items, any exchange component of the gain or loss is also recognised directly in equity. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the date of transactions are used. 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 expense in the period in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rates. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from the net profits as reported on 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. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of 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 temporary differences and deferred tax assets are recognised to the extent that it is probable that the 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 the initial recognition of 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. Deferred tax liabilities are recognised for temporary differences arising on investments in subsidiaries, and interest in joint ventures, except where the Group is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. The carrying amount 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 at least realised. Deferred tax is charged or credited in 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. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Share-based payment The Group issues equity-settled share based payments to certain employees. Equity-settled share based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the date of grant is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest and adjusted for the effect of non market-based vesting conditions. Fair value is measured by use of the binomial model. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural conditions. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged to write off the cost of assets over their estimated useful lives on the following bases: Freehold land Nil Freehold buildings Net book value at 1 January 2007 being Short leasehold buildings written off over 35 years on a straight line basis. Long leasehold buildings (previously 1% per annum on cost or valuation) Plant and equipment 10% to 25% of written down value per annum Computers 33 1/3% of cost per annum Motor vehicles 25% of cost per annum Internally-generated intangible assets An internally generated intangible asset arising from the Company's software development is recognised only if all of the following conditions are met: • an asset is created that can be identified: • it is probable that the asset created will generate future economic benefits: and • the development cost of the asset can be measured reliably. Internally-generated intangible assets are amortised on a straight-line basis over their useful lives, normally three years. Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Internally-generated assets are only amortised when complete. Intangible assets Intangible assets are stated at cost less accumulated amortisation and any recognised impairment loss. Amortisation is charged to write off intangible assets over their estimated useful lives on the following basis: Computer software 33 1/3% Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Financial instruments Financial assets and liabilities are recognised in the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. Trade receivables Trade receivables are measured at initial recognition at fair value, and subsequently measured at amortised cost using the effective interest rate method. A provision is established when there is objective evidence that the Group will not be able to collect all amounts due. The amount of any provision is recognised in the income statement. Available for sale investments Available-for-sale investments are initially measured at cost, including transaction costs. At subsequent reporting dates available-for-sale investments are measured at fair value or cost where fair value is not readily ascertainable. Gains and losses arising from changes in fair value are recognised directly in equity until the investment is disposed of or is determined to be impaired, at which time the cumulative gain or loss recognised previously in equity is included in the income statement for the period. Dividends are recognised in the income statement when the right to receive payment has been established. Cash and cash equivalents Cash and cash equivalents comprise cash held by the Group and short term bank deposits with an original maturity date of three months or less. Trade payables Trade payables are initially measured at fair value, and subsequently measured at amortised cost, using the effective interest rate method. Financial liabilities Financial liabilities and equity instruments issued by the Group are classified in accordance with the substance of the contractual arrangements entered into and the definition of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Bank borrowings Interest bearing bank loans, overdrafts and other loans are recorded at the proceeds received, net of direct issue costs. Finance costs are accounted for on the accruals basis in the income statement using the effective interest rate. 3. Revenue An analysis of the Group's revenue is as follows: 2007 2006 £ £ Sale of goods 448,731 333,878 Rendering of service 1,681,995 1,449,962 Revenue from construction contracts 9,391,229 8,682,421 Software maintenance programme 827,728 845,693 12,349,683 11,311,954 Investment income 9,991 7,368 12,359,674 11,319,322 4. Business and geographical segments For management purposes the Group is currently organised into three operating divisions - Training Systems, Data Services and Software. These divisions are the basis on which the Group reports its primary segment information. Training Systems Data Services Software Eliminations Consolidated £ £ £ £ £ 2007 Revenue External sales 5,991,396 3,399,833 2,958,454 - 12,349,683 Inter-segment sales - 318,249 82,864 (401,113) - Total revenue 5,991,396 3,718,082 3,041,318 (401,113) 12,349,683 Result 737,025 13,041 396,850 - 1,146,916 Unallocated corporate (289,359) expenses Profit on sale of 375,997 property Share of results of (33,070) joint venture Operating profit 1,200,484 Finance income 9,991 Finance costs (92,292) Profit before tax 1,118,183 Tax (104,924) Profit after tax 1,013,259 Training Systems Data Services Software Eliminations Consolidated £ £ £ £ £ 2006 Revenue External sales 5,287,642 3,294,471 2,729,841 - 11,311,954 Inter-segment sales - 331,795 61,842 (393,637) - Total revenue 5,287,642 3,626,266 2,791,683 (393,637) 11,311,954 Result 260,245 156,790 294,595 - 711,630 Unallocated corporate 29,070 expenses Share of results of (67,119) joint venture Operating profit 673,581 Finance income 7,368 Finance costs (75,262) Profit before tax 605,687 Tax (47,087) Profit after tax 558,600 Training Systems Data Services Software Eliminations Consolidated £ £ £ £ £ 2007 Capital additions 71,482 83,198 106,982 - 261,662 Depreciation and (150,102) (38,908) (21,603) - (210,613) amortisation Balance sheet Assets Segment assets 5,040,275 2,100,906 3,815,836 (3,520,736) 7,436,281 Interest in joint 16,956 venture Unallocated corporate 425,980 assets Consolidated total 7,879,217 assets Liabilities Segment liabilities 1,982,398 1,259,472 1,498,444 (2,782,954) 1,957,360 Unallocated corporate 830,168 liabilities Consolidated total 2,787,528 liabilities Training Systems Data Services Software Eliminations Consolidated £ £ £ £ £ 2006 Capital additions 156,667 47,125 34,798 - 238,590 Depreciation and (140,601) (24,236) (27,098) - (191,935) amortisation Balance sheet Assets Segment assets 4,550,303 2,004,576 3,128,281 (2,557,792) 7,125,368 Interest in joint 60,027 venture Unallocated corporate 107,528 assets Consolidated total 7,292,923 assets Liabilities Segment liabilities 2,216,421 1,117,258 1,190,537 (2,544,385) 1,979,831 Unallocated corporate 938,970 liabilities Consolidated total 2,918,801 liabilities Geographical segments The Group's operations are located in the United Kingdom, USA, Canada and Australia. The following table provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods and services 2007 2006 £ £ United Kingdom 9,368,334 8,253,041 Europe 606,222 482,814 USA and Canada 1,854,660 1,597,598 Australasia 378,771 645,063 Africa 4,500 9,600 Far East 137,196 323,838 12,349,683 11,311,954 The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment and intangible assets, analysed by geographical area in which the assets are located: Carrying amount of segment assets Additions to property plant and equipment and intangible assets 2007 2006 2007 2006 £ £ £ £ United Kingdom 5,698,360 5,292,759 240,519 223,583 USA 53,766 52,981 13,703 - Canada 1,301,945 1,231,983 6,721 12,114 Australia 825,146 715,200 719 2,893 7,879,217 7,292,923 261,662 238,590 5. Staff costs 2007 2006 £ £ Wages and salaries 4,660,340 4,613,060 Social security costs 448,192 445,116 Pension costs 204,264 168,624 5,312,796 5,226,800 The average number of persons, including executive directors, employed by the Group during the year was: Number Number Office and management 21 24 Production 121 130 Selling 8 8 150 162 6. Profit for the year Profit for the year has been arrived at after £ £ charging: Net foreign exchange losses/(gains) 56,993 (13,370) Amortisation of intangible assets 32,832 59,264 Depreciation of property, plant and equipment 177,781 132,671 Staff costs (note 5) 5,312,796 5,226,800 Profit on sale of assets held for sale (375,997) - Share-based payment (note 32) (27,228) 17,965 7. Auditors' remuneration The analysis of auditors' remuneration is as follows: £ £ Fees payable to the Company's auditors for the audit 12,000 13,000 of the Company's annual accounts Fees payable to the Company's auditors for other services to the Group: - The audit of the Company's subsidiaries 24,500 22,625 - Tax services 5,500 300 - Other services 2,980 1,000 44,980 36,925 8. Finance costs 2007 2006 £ £ Interest expense for finance lease arrangements 980 1,077 Interest expense for borrowings at amortised cost 91,312 74,185 92,292 75,262 9. Finance income 2007 2006 £ £ Interest income from deposits 4,966 2,368 Interest on loan to joint venture 4,875 4,875 Dividends receivable 150 125 9,991 7,368 10. Taxation Recognised in the income statement 2007 2006 £ £ Current tax expense 107,587 80,099 Over provided in prior years - (29,824) Deferred tax expense relating to origination and (2,663) (3,188) reversal of temporary differences Total tax expense in income statement 104,924 47,087 Reconciliation of effective tax rate Profit before tax 1,118,183 605,687 Tax at the applicable tax rate of 30% (2006: 30%) 335,455 181,706 Tax effect of: Share of results of joint venture 9,921 20,135 Expenses not deductible for tax 9,214 14,365 Income not taxable (112,940) - Chargeable gain 83,478 - Losses (240,456) (182,108) Different tax rates for overseas subsidiaries 5,306 7,861 Other differences 17,609 38,140 Deferred tax (2,663) (3,188) Over provided in prior year - (29,824) Tax expense 104,924 47,087 11. Dividends 2007 2006 £ £ Amounts recognised as distributions to equity holders in the period: Final dividend for the year ended 31 December 2006 125,828 97,855 of 0.4p (2006: 0.31p) per share Interim dividend for the year ended 31 December 2007 68,270 63,635 of 0.22p (2006: 0.2p) per share 194,098 161,490 The proposed final dividend for the year ended 31 December 2007 of 0.44p (2006: 0.40p) per share is subject to approval of shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. 12. Earnings per share Earnings per share has been calculated by dividing the net profit attributable to equity holders by the weighted average number of ordinary shares in issue during the year as follows: 2007 2006 £ £ Profit after tax attributable to equity holders 1,013,259 558,600 Number Number Weighted average number of ordinary shares in issue 31,349,821 31,611,500 during the year Diluting effect of share options 2,230,000 2,207,500 Diluted average number of ordinary shares 33,579,821 33,819,000 13. Goodwill Carrying amount £ At 1 January 2006 906,066 Exchange translation differences (1,838) At 1 January 2007 904,228 Exchange translation differences 5,469 At 31 December 2007 909,697 The Group tests goodwill annually for impairment. 14. Other intangible assets Software Development costs Total £ £ £ Cost At 1 January 2007 295,630 - 295,630 Currency translation 8,335 - 8,335 Additions 29,451 78,091 107,542 Disposals (204) - (204) At 31 December 2007 333,212 78,091 411,303 Amortisation At 1 January 2007 252,622 - 252,622 Currency translation 8,322 - 8,322 Charge for year 32,832 - 32,832 Disposals (204) - (204) At 31 December 2007 293,572 - 293,572 Net book value At 31 December 2007 39,640 78,091 117,731 At 31 December 2006 43,008 - 43,008 The amortisation period for development cost in respect of the Group's software products is 3 years from the date that the software is available for sale to customers. 15. Property, plant and equipment Land and Fixtures and Motor vehicles Total buildings equipment £ £ £ £ Cost At 1 January 2007 1,816,015 1,426,325 16,869 3,259,209 Currency translation - 16,212 - 16,212 Additions 11,977 142,143 - 154,120 Disposals - (2,270) - (2,270) At 31 December 2007 1,827,992 1,582,410 16,869 3,427,271 Depreciation At 1 January 2007 245,937 923,190 16,869 1,185,996 Currency translation - 14,287 - 14,287 Charge for the year 45,669 132,112 - 177,781 Disposals - (2,270) - (2,270) At 31 December 2007 291,606 1,067,319 16,869 1,375,794 Net book value At 31 December 2007 1,536,386 515,091 - 2,051,477 At 31 December 2006 1,570,078 503,135 - 2,073,213 16. Equity accounted interest in joint venture The Group has a 50% interest, consisting of 5,000 ordinary shares in Pennant Sonovision ITEP Limited, a joint venture with Sonovision SAS of France. Aggregate amounts relating to the joint venture are: 2007 2006 £ £ Total assets 48,374 248,690 Total liabilities (234,461) (368,636) Revenues 263,680 376,549 Loss (66,141) (134,239) 17. Available for sale investments The Group owns a non-controlling interest of less than 1% in Quadnetics Group plc. The shares are not held for trading and accordingly are classified as available for sale. The fair value of the investment is based on the quoted market price. 18. Inventories Aggregate amounts relating to the joint venture are: 2007 2006 £ £ Raw materials and consumables 25,340 83,915 Work in progress 2,038 29,024 27,378 112,939 19. Construction contracts Contracts in progress at the balance sheet date: 2007 2006 £ £ Amounts due from contract customers included in trade and 1,164,933 1,015,200 other receivables Amounts due to contract customers included in trade and (19,520) (56,026) other payables 1,145,413 959,174 Contract costs incurred plus recognised profits less 8,507,703 8,275,682 recognised losses to date Less: progress billings (7,362,290) (7,316,508) 1,145,413 959,174 20. Trade and other receivables 2007 2006 £ £ Trade receivables 1,638,824 1,433,164 Amounts due from construction contract customers (note 1,164,933 1,015,200 19) Other debtors 76,101 8,288 Prepayments and accrued income 281,737 337,624 3,161,595 2,794,276 The directors consider that the carrying amount of trade and other receivables approximates their fair value. Some of the unimpaired trade receivables are past due as at the reporting date. The age of the trade receivables past due but not impaired is as follows: 2007 2006 £ £ Not more than 3 months 129,307 87,283 More than 3 months but not more than 6 months 83,302 36,104 More than 6 months but not more than 1year 31,169 - 243,778 123,387 21. Cash and cash equivalents 2007 2006 £ £ Bank balance 1,566,480 906,776 Cash 2,140 2,833 1,568,620 909,609 Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value. 22. Borrowings Secured borrowings 2007 2006 £ £ Bank loan 761,989 905,290 Amount due for settlement within 12 months 147,559 141,338 Amount due for settlement after 12 months 614,430 763,952 The Group has available bank overdraft facilities of £750,000. The facility was not being used at 31 December 2007. Any overdraft arising from the facility is repayable on demand and carries interest at 1.5% over bank base rate. The loan is repayable in monthly instalments and carries interest at 2.0% plus the Bank's base rate. The borrowings are secured by fixed and floating charges over the assets of Pennant International Group plc, Pennant Training Systems Limited, Pennant Software Services Limited and Pennant Information Services Limited 23. Trade and other payables 2007 2006 £ £ Amounts due to construction contract customers (note 19) 19,520 56,026 Trade creditors 661,134 751,849 Taxes and other social security costs 610,150 449,980 Other creditors 14,162 54,831 Accruals and deferred income 140,389 217,153 Unclaimed dividends 165 165 1,445,520 1,530,004 The directors consider that the carrying amount of trade payables approximates their fair value. 24. Obligations under finance leases Minimum payments Present value of minimum payments 2007 2006 2007 2006 £ £ £ £ Amounts payable Within 1 year 1,486 1,353 1,089 1,054 After 1 year 2,724 3,832 1,532 1,744 4,210 5,185 2,621 2,798 Less: future finance charges (1,589) (2,387) 2,621 2,798 Less: amounts due for settlement within 1 year (shown in (1,089) (1,054) current liabilities) Amount due for settlement after 1 year 1,532 1,744 Carrying amount of assets subject to finance lease Property, plant and equipment 2,004 2,469 The fair value of the Group's lease obligations approximates the carrying value. The Group's obligations under finance leases are secured by the lessor's rights over the leased assets. 25. Deferred revenue 2007 2006 £ £ Revenue deferred in respect of prepaid software 440,619 395,918 maintenance contracts Less: amount due for release to revenue within 1 year (414,838) (370,041) (shown in current liabilities) Amount due for release after 1 year 25,781 25,877 26. Deferred tax The following are the deferred tax (liabilities) and assets recognised by the Group and movements thereon during the current and prior reporting period: Accelerated tax Other timing Property Tax losses Total depreciation differences revaluation £ £ £ £ £ At 1 January 2006 (103,449) 5,233 (32,000) 110,414 (19,802) Exchange translation 1,580 - - - 1,580 Charge to income 10,057 (11,115) - 4,246 3,188 At 31 December 2006 (91,812) (5,882) (32,000) 114,660 (15,034) Charge (1,358) 13,359 - (9,338) 2,663 At 31 December 2007 (93,170) 7,477 (32,000) 105,322 (12,371) Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances for financial reporting purposes. 2007 2006 £ £ Deferred tax liabilities (32,000) (32,000) Deferred tax assets 19,629 16,966 (12,371) (15,034) At the balance sheet date the Group had unused tax losses of £2,754,283(2006: £3,551,022) available for set off against future profits. A deferred tax asset has been recognised in respect of £351,073 (2006: £382,200) of such losses. No deferred tax asset has been recognised in respect of the remaining £2,403,210 (2006: £3,168,822) due to the unpredictability of future profit streams. 27. Share capital 2007 2006 £ £ Authorised 51,092,000 ordinary shares of 5p each 2,554,600 2,554,600 Issued and fully paid 32,000,000 ordinary shares of 5p each 1,600,000 1,600,000 The Company has one class of ordinary shares which carry no right to fixed income. 28. Retained earnings £ Balance at 1 January 2007 (744,302) Retained profit for the year 1,013,259 Dividends (194,098) Transactions in treasury shares (176,225) Share-based payment (27,228) Balance at 31 December 2007 (128,594) 29. Translation reserve £ Balance at 1 January 2007 (63,905) Currency translation differences on foreign currency 101,860 net investments Balance at 31 December 2007 37,955 30. Note to the cash flow statement Cash generated from/(used in) operations 2007 2006 £ £ Profit for the year 1,013,259 558,600 Share of results of joint venture 33,070 67,119 Finance income (9,991) (7,368) Finance costs 92,292 75,262 Income tax expense 104,924 47,087 Depreciation charge 210,613 191,935 Profit/(loss) on sale of property plant and equipment (375,997) 2,092 Share based payment (27,228) 17,965 Operating cash flows before movement in working capital 1,040,942 952,692 (Increase)/decrease in receivables (367,319) 112,435 Decrease in inventories 85,561 87,893 (Decrease) in payables (84,484) (215,956) Increase/(decrease) in deferred revenue 44,701 (66,431) Cash generated from operations 719,401 870,633 Tax paid (63,310) (22,251) Interest paid (92,292) (75,262) Net cash generated from operations 563,799 773,120 31. Operating lease arrangements Minimum lease payments under operating leases recognised 227,371 179,125 as an expense in the year At 31 December 2007 the Company had commitments under non-cancellable operating leases as follows: Land and buildings Other 2007 2006 2007 2006 £ £ £ £ Within one year 129,893 135,651 100,793 84,896 In the second to fifth years 255,950 352,160 94,956 89,125 In the sixth to tenth years 134,833 169,833 - - After ten years 278,588 285,138 - - 799,264 942,782 195,749 174,021 Commitments after 10 years relate to ground rents on long leasehold properties that run until 2098. 32. Share based payments The Group operates a Share Option Scheme under which share options have been granted to employees as described below: Date granted Options outstanding Expired Options Exercisable Exercise price at 1 January 2007 outstanding at 31 December 2006 31 October 2000 17,500 (17,500) - 2003-2007 122.5p 15 October 2002 420,000 - 420,000 2005-2012 11.5p 27 March 2003 1,000,000 - 1,000,000 2006-2013 10p 3 May 2005 500,000 - 500,000 2008-2015 13p 12 October 2006 270,000 - 270,000 2009-2016 17.5p The options outstanding at 31 December 2007 had a weighted average remaining contractual life of 6 years. The exercise of the options granted on 15 October 2002 and 12 October 2006 is conditional upon the percentage growth in the Group's annualised earnings per share over a prescribed period being 2% over the movement in the Retail Price Index. The options granted on 27 March 2003 and 3 May 2005 may be exercised in the event that the Company is taken over. The directors consider that it is unlikely that these options will vest and, accordingly, the charges made against income in prior years in connection with these options have been reversed in 2007. Fair value of options The fair values of awards granted after 7 November 2002 under the Share Option Scheme and expected to vest have been calculated using a variation of the binomial option pricing model that takes into account the specific features of the scheme. The following principal assumptions were used in the valuation. Granted 12/10/2006 Share price at date of grant 17.5p Expected dividend yield 2.0% Expected volatility 64% Risk-free interest rate 4.61% Employee turnover None Volatility has been based on share prices from flotation in 1998 to date of grant. Using the above assumptions the fair value of the options granted on 12 October 2006 is estimated as 9.67p. Based on the above, the credit to income, arising from share options granted to employees is analysed follows: 2007 2006 £ £ (Credit)/charge in respect of options granted on 27 March (35,145) 16,059 2003 and 3 May 2005 Charge in respect of options granted 12 October 2006 7,917 1,906 (27,228) 17,965 33. Employee benefits Defined contribution The Group runs defined contribution pension schemes. The assets of the schemes are held separately from those of the Group in an independently administered funds. The pension cost charge represents contributions payable by the Group to the funds. 2007 2006 £ £ Contributions payable by the Group for the year 204,264 168,624 34. Financial assets and liabilities Financial assets by category The IAS 39 categories of financial asset included in the balance sheet and the headings in which they are included are as follows: 2007 2006 £ £ Non current assets Available for sale financial assets 6,135 6,135 Current assets Trade and other receivables - Loans and receivables 3,161,595 2,794,276 Cash and cash equivalents 1,568,620 909,609 4,736,350 3,710,020 Financial liabilities by category The IAS 39 categories of financial liability included in the balance sheet and the headings in which they are included are as follows: 2007 2006 £ £ Current liabilities Borrowings - Financial liabilities measured at amortised cost 147,559 141,338 Trade payables - Financial liabilities measured at amortised cost 1,445,520 1,530,004 Non current liabilities Borrowings - Financial liabilities measured at amortised cost 614,430 763,952 2,207,509 2,435,294 The directors consider that the carrying amounts of financial assets and liabilities approximate their fair values. 35. Risk management The Group's approach to credit and liquidity risk is set out in the directors' report. In the opinion of the directors the business has no significant exposure to market risk arising from interest rate, currency exchange or other price fluctuations and it has therefore not been deemed necessary to include a sensitivity analysis. 36. Capital commitments At 31 December 2007 and 31 December 2006 the Group had no capital commitments. 37. Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and the joint venture are disclosed below. During the year the following transactions took place with related parties who are not members of the Group: Sales of goods and services 2007 2006 £ £ Joint venture 57,639 39,758 There were no amounts outstanding in respect of the above services at 31 December 2007 or 31 December 2006. Sales and purchases of goods and services to related parties were made following the Group's usual policies. Loans made/(repayments received) Joint venture (10,000) 45,000 Year end loan balances Joint venture 115,000 125,000 The loan is unsecured and carries interest at 2% over Bank base rate. Remuneration of key management personnel Amounts paid to Group directors who are the key management personnel of the Group are set out in the Directors' Report. 38. Transition to IFRS Pennant International Group plc reported under UK GAAP in its previously published financial statements for the year ended 31 December 2006. The analysis below shows a reconciliation of equity and profits as reported under UK GAAP as at 31 December 2006 to the revised equity and profits under IFRS as reported in these financial statements. In addition, there is a reconciliation of equity under UKGAAP to IFRS at the transition date for this Company, being 1 January 2006. Reconciliation of equity Notes As at 31 December 2006 As at 1 January 2006 £ £ Equity shareholders' funds under UK GAAP 4,335,421 4,010,829 Adjustments: Goodwill (a) 66,975 - Negative goodwill (b) - 48,462 Assets held for sale (c) 3,726 - Deferred tax (d) (32,000) (32,000) Equity shareholders' funds under IFRS 4,374,122 4,027,291 Explanation of adjustments to equity (a) Goodwill Under UK GAAP, capitalised goodwill was amortised over its useful economic life. Under IFRS, this goodwill is no longer amortised but is tested at least annually for impairment. The impairment tests carried out by the Group have identified no impairment loss. The adjustments to the carrying amount of goodwill are as follows: 31 December 2006 £ Reversal of amortisation 68,696 Currency translation differences (1,721) 66,975 (b) Negative goodwill The Group carried negative goodwill of £48,462 in its balance sheet prepared under UK GAAP at 1 January 2006. This balance was credited to profit and loss account under UK GAAP in 2006. Under IFRS negative goodwill is written off immediately to profit and loss account. The balance carried at 1 January 2006 (the date of transition) has therefore been derecognised at that date and credited to retained earnings. The £48,462 credit to profit and loss account in 2006 under UK GAAP has been reversed in the income statement prepared under IFRS. (c) Assets held for sale IFRS 5 'Non-Current Assets Held for Sale and Discontinued Operations' requires that any asset held for sale that is expected to be sold within 1 year is recognised as a current asset in the balance sheet. This has resulted in a reclassification between non-current assets and current assets of £372,522 at the date of transition being the carrying amount at 1 January 2006 of property in Southampton that is subject to a conditional contract for sale. IFRS 5 also requires that assets held for sale are not depreciated. Accordingly depreciation previously charged under UK GAAP has been reversed. (d) Deferred Tax Under UK GAAP deferred tax was provided on timing differences between the accounting and taxable profit (and income statement approach). Under IFRS, deferred tax is provided on temporary differences between the book carrying value and tax base of assets and liabilities (a balance sheet approach). Under UK GAAP the Group did not provide for deferred tax on the amount of the revaluation of certain property on the basis that there was no binding agreement to sell the property. Under IFRS the difference between the carrying amount of a re-valued asset and its tax base is deemed to be a temporary difference and gives rise to a deferred tax liability. Accordingly at the transition date a deferred tax provision of £32,000 has been established and equity reduced by a corresponding amount. Reconciliation of profit for the year ended 31 December 2006 UK GAAP IAS 21 IAS11 IFRS3 IFRS 5 Restated presented in under IFRS IFRS format Foreign exchange Construction Goodwill Assets held contracts for resale Note (a) Note (b) Notes (c) & Note (e) (d) £ £ £ £ £ £ Revenue 11,262,322 152,319 (102,687) - - 11,311,954 Cost of sales (7,204,381) (94,547) 102,687 - - (7,196,241) Gross profit 4,057,941 57,772 - - - 4,115,713 Administration expenses (3,368,818) (30,155) - 20,234 3,726 (3,375,013) Operating profit 689,123 27,617 - 20,234 3,726 740,700 Share of results of (67,119) - - - - (67,119) joint venture 622,004 27,617 - 20,234 3,726 673,581 Finance costs (75,237) (25) - - - (75,262) Finance income 7,258 110 - - - 7,368 Profit before tax 554,025 27,702 - 20,234 3,726 605,687 Taxation (44,334) (2,753) - - - (47,087) Profit for the year 509,691 24,949 - 20,234 3,726 558,600 Explanation of adjustments to profit (a) Foreign currencies Under UK GAAP the profit and loss accounts of foreign subsidiaries were converted to pounds sterling for consolidation purposes at the year end rate. Under IFRS income and expenses have been translated at the average rate for the period. This change has resulted in an increase in Group profits for the year to 31 December 2006 of £24,949. (b) Construction contracts Under UK GAAP the Group valued construction contracts by reference to the stage of contract activity at the balance sheet date as required by IFRS. However, for certain small contracts the Group adjusted the movement of amounts due from contract customers against cost of sales rather than revenue. In the IFRS income statement this movement has been transferred and accounted for as revenue in accordance with IAS11. This adjustment has no affect on profits. (c) Goodwill Under UK GAAP, capitalised goodwill was amortised over its useful economic life. Under IFRS, this goodwill is no longer amortised but is tested at least annually for impairment. The impairment tests carried out by the Group have identified no impairment loss and the amortisation provided under UK GAAP has been reversed. The adjustments to profits are as follows: 31 December 2006 £ Reversal of amortisation 68,696 Reversal re negative goodwill (see (d) below) (48,462) 20,234 (d) Negative goodwill The Group carried negative goodwill of £48,462 in its balance sheet prepared under UK GAAP at 1 January 2006. This balance was credited to profit and loss account under UK GAAP in 2006. Under IFRS negative goodwill is written off immediately to profit and loss account. The balance carried at 1 January 2006 (the date of transition) has therefore been derecognised at that date and credited to retained earnings. The £48,462 credit to profit and loss account in 2006 under UK GAAP has been reversed in the income statement prepared under IFRS. (e) Assets held for sale IFRS 5 requires that assets held for sale are not depreciated. Accordingly depreciation previously charged under UK GAAP has been reversed. Explanation of adjustments to Cash flow statement The Group's cash flow statements are presented in accordance with IAS7. The statements present substantially the same information as that required under UK GAAP, with the following principal exceptions: - Under UK GAAP, cash flows are presented under nine standard headings, whereas IFRS requires the classification of cash flows resulting from operating, investing and financing activities. - The cash flows reported under IAS 7 relate to movements in cash and cash equivalents, which include short term liquid investments. Under UK GAAP, cash comprises cash in hand and deposits repayable on demand. This information is provided by RNS The company news service from the London Stock Exchange RSRAR

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