17th Oct 2005 07:00
Harvey Nash Group PLC17 October 2005 HARVEY NASH GROUP PLC("Harvey Nash" or "the Group")Interim Results for the six months ended 31 July 2005 Harvey Nash, the international professional recruitment services and IToutsourcing Group, with over 2800 staff and associates in 26 offices, announcesa strong performance in the first half year reflecting the initial benefits ofthe investment programme announced earlier in the year. Financial Results (Reported under IFRS) 2005 2004 ChangeTurnover £92.7m £78.9m e 17%Net Fee Income * £20.9m £18.6m e 12%Operating Profit £2.24m £1.55m e 44%Profit Before Tax £1.73m £1.18m e 47%Earnings Per Share 2.59p 1.73p e 50%Cash Flow from Operating Activities £1.7m (£2.6m) *Net fee income = gross profit (and this will apply throughout the statement) Operational Highlights • Excellent growth in Europe with profits up over 500% • Improved margins in the UK and US • Strong operational cash flow and reduction in net debt • Strong demand for IT professionals across all regions • Investment programme in new offices and services on track • Outsourcing division wins new contracts in the UK and US • Two new Board appointments Commenting on the results, the Chief Executive Officer, Albert Ellis, said: "We are pleased with our performance in the first half year. Our Europeanbusinesses continue to deliver strong increases in revenues and profits. In theUK our unique portfolio of services has delivered robust profit growth and weare seeing early returns on the investment we have made in the US. The Groupremains on course to deliver results for the full year in line with the Board'sexpectations." ENQUIRIES: Harvey Nash Tel: 020 7333 2635Albert Ellis, Chief Executive College Hill Tel: 020 7457 2020Mark Garraway A presentation of the results will take place at 09:30 this morning at theoffices of College Hill, 78 Cannon Street, London, EC4N 6HH CHAIRMAN'S STATEMENT I am delighted to report that the strong performance recorded in the firstquarter continued into the second. Net fee income in the UK and the US hasincreased and we are particularly pleased with the strength of the growth of ourcontinental European businesses. We are seeing robust demand for IT professionals across all our markets eventhough we continue to operate in a competitive environment. Our three-year plan,the parameters of which we set out in detail in the 2005 Annual Report, isdesigned to leverage this opportunity and deliver better than average marketgrowth through investment in headcount, infrastructure and our new outsourcingservices. Although still in the early stages of the investment programme, we areencouraged by the returns so far, with two outsourcing contract wins and the newoffices on track. Financial Results These results are the first set to be prepared under International FinancialReporting Standards (IFRS). The application of IFRS had no significant impact onthe Group's adjusted earnings per share for the six months ended 31 July 2005and the results for 2004 have been restated in accordance with IFRS. The impacton opening balances as a result of the application of the different standards isshown in Note 10. The Group's turnover for the six months ended 31 July 2005 increased by 17% to£92.7m (2004: £78.9m). Net fee income increased by 12% to £20.9m (2004: £18.6m)and operating profit increased by 44% to £2.24m (2004: £1.55m). Operatingmargin, as a percentage of net fee income, increased to 11% (2004: 8%). Profitbefore tax increased 47% to £1.73m (2004: £1.18m) and earnings per shareincreased 50% to 2.59p (2004: 1.73p). Net cash generated from operating activities was £1.9m (2004: outflow £3.3m)with debtor days similar to last year, not withstanding the significantly highertrading levels. After capital expenditure of £0.5m (2004: £0.3m) and interestpaid of £0.5m (2004: £0.4m), net debt was reduced by 7% to £8.2m (2004: £8.8m). The Group repaid £3.0m of the revolving credit facility on 30 April 2005, withthe final tranche of £3.1m payable on 30 April 2006. The underlying tax charge, which includes deferred and current taxation of£0.5m, has been reduced to £0.1m (2004: £0.1m) by the reversal of prior yearover-provisions. The underlying tax charge, excluding these adjustments, is aneffective tax rate of 28.7% (2004: 12%) on profit before taxation. The casheffect of tax was an inflow of £0.3m (2004: outflow £0.7m). Dividend The Board is not recommending the payment of an interim dividend (2004: nil) butit is the Board's intention to consider reinstatement of the dividend next year. Operational Review United Kingdom Our strategy in the UK has been to focus on higher margin revenue mainly in theIT sector. An example of this is our offshore outsourcing business which we havesuccessfully developed, building on our strong relationships in the UK. The results for the first six months reflect the successful implementation ofthis strategy with an increase in gross margin to 28% (2004: 26%). The effect ofincreased permanent and outsourcing revenues have helped boost profits by 21% to£1.2m (2004: £1.0m). In line with our strategy the Group exited a low margin, high volume managedservices contract in 2004. An amount of £3.3m included in last year's turnover(net fee income of £0.2m) related to this contract. As a result, overallturnover was £38.7m (2004: £40.9m) and net fee income was £10.9m (2004: £10.8m). Demand for executive search and interim management has remained resilient fromthe TMT sector. However, as we stated in April 2005, headcount was re-alignedto reflect lower levels of demand in other sectors. We are confident that our unique approach and broad portfolio of services willenable us to leverage our senior relationships and deliver a strong performancegoing forward. An example of this is the recent win of a major three-yearcontract (£2.7m) with a large software company to build an offshore softwaredevelopment centre for their product business. Continental Europe Our European businesses produced an outstanding result with revenues up 56% to£41.3m (2004: £26.5m), net fee income up 34% to £6.2m (2004: £4.6m) andoperating profit up 502% to £0.7m (2004: £0.1m). Demand for IT professionals has improved in Europe over the last 12 months andthis has resulted in higher permanent and temporary revenues. In addition, ournew outsourcing services have grown at a faster than expected rate. Growth has been strong across the board, particularly in the Netherlands andSwitzerland. In Zurich our business grew by 60% with strong demand from thefinancial services sector and an increased level of permanent revenues. We planto open a new office in Geneva during the fourth quarter to take advantage ofthe growth in this market. In Paris, where we recorded a reduced loss, we introduced additional ITspecialist recruitment services at the beginning of the year. We are pleasedwith the progress that this new service has made and we expect revenues toimprove in the second half of the year. In the Netherlands Harvey Nash has established strategic partnerships with anumber of the world's largest technology and financial services groups. Weprovide specific consulting services in relation to workforce risk management.As part of our portfolio approach, we also provided additional payroll servicesat the request of these clients during the period. As a result, this mix ofservices reduced gross margins in the Netherlands, but increased profits. Thecash flow effect was neutral. In Germany, where turnover increased 18%, the Group has five offices andoperates the full portfolio of services. As part of its investment programme,the Group has increased headcount by 28% to take advantage of its leading marketposition and the opportunities that Europe's largest economy offers. United States Turnover in our US business was £12.8m (2004: £11.8m), an increase of 9%. Netfee income improved 19% to £3.8m (2004: £3.2m), once again reflecting increasedmargins and quality of revenue. Operating profit was £0.3m (2004: £0.4m). Weare now seeing early returns on our investment in the New Jersey office and ouroutsourcing services. Market conditions in the US are favourable and our objective in the short termis to continue to grow organically our headcount and services. We are pleasedwith the progress that has been made in integrating and re-branding our newoffices. The New Jersey office is performing in line with budget and we expect sustainedcontribution to the Group's profits by the first quarter next year. Ouroutsourcing division has won its first significant contract, worth $1m over athree year period, and has a strong pipeline going forward. Board I am delighted to announce the appointment to the Board of Richard Ashcroft asGroup Finance Director and Simon Wassall as European Managing Director. Following qualification at PricewaterhouseCoopers, Richard has spent twentyyears in senior financial positions in a number of UK public companies, mostlyin the professional services sector, including Michael Page International PLC.The Board will benefit from his wide-ranging experience and proven financialtrack record. Simon has been with the Group for over ten years, most recently as EuropeanManaging Director. Simon is responsible for all operations in our IT recruitmentbusiness across Europe and he brings to the Board extensive knowledge of boththe industry and of Harvey Nash's operations. Outlook Demand for IT professionals remains robust in all of our markets and we areconfident of further progress in the second half. With our European businesses continuing to perform strongly and our UK and USbusinesses seeing improved profitability, we remain on course to deliver resultsfor the full year in line with the Board's expectations. Ian KirkpatrickChairman17 October 2005 Unaudited Consolidated Income Statement As restated 6 months 6 months ended ended Notes 31 July 2005 31 July 31 January £'000 2004 2005 £'000 £'000Revenue 6 92,705 78,907 163,374Cost of sales (71,826) (60,318) (125,269)Gross profit 20,879 18,589 38,105Administrative expenses (18,643) (17,040) (34,040)Operating profit 6 2,236 1,549 4,065Finance costs - net (504) (368) (896)Profit before tax 1,732 1,181 3,169Income tax expense 7 (120) (147) (820)Profit for the period 1,612 1,034 2,349 Analysed as:EBITDAS 2,677 2,117 5,187Share option charge (64) (51) (127)EBITDA 2,613 2,066 5,060Depreciation of property, plant and equipment (377) (358) (795)Operating profit before exceptional items 2,236 1,708 4,265Exceptional items - (159) (200)Operating profit after exceptional items 2,236 1,549 4,065 Basic earnings per share 8 2.59p 1.73p 3.90pDiluted earnings per share 8 2.30p 1.61p 3.62p Unaudited Consolidated Statement of Recognised Income and Expense As restated 6 months 6 months ended ended 31 July 2005 31 July 31 January £'000 2004 2005 £'000 £'000Profit for the period 1,612 1,034 2,349Foreign currency translation differences 161 (274) 163Total recognised income and expense for the period 1,773 760 2,512 Unaudited Consolidated Balance Sheet As restated Notes 31 July 31 July 31 January 2005 2004 2005 £'000 £'000 £'000ASSETSNon-Current AssetsProperty, plant and equipment 1,569 1,302 1,415Intangible assets 30,767 27,959 30,354Deferred income tax assets 7 1,147 1,931 1,665 33,483 31,192 33,434Current assetsTrade and other receivables 35,180 28,021 30,803Cash and cash equivalents - - - 35,180 28,021 30,803 Total assets 68,663 59,213 64,237 LIABILITIESCurrent liabilitiesTrade and other payables (25,813) (21,618) (22,497)Current income tax liabilities (373) (830) (318)Borrowings 9 (8,214) (8,840) (5,694) (34,400) (31,288) (28,509) Non-current liabilitiesBorrowings - - (3,112)Deferred income tax liabilities 7 (68) (29) (42)Provisions and other liabilities (54) (142) (280) (122) (171) (3,434)Total liabilities (34,522) (31,459) (31,943) Net assets 34,141 27,754 32,294 EQUITY Capital and reserves attributablethe Company's equity holdersShare capital 3,134 3,040 3,134Share premium 19,054 18,308 19,054Shares to be issued 2,555 1,239 2,386Fair value and other reserves 13,158 12,513 13,314Own shares held (656) (1,081) (1,081)Cumulative translation reserve 324 (274) 163Retained earnings (3,428) (5,991) (4,676)Total equity 34,141 27,754 32,294 Unaudited Changes in Shareholders' Equity Fair value Cumulative Share Share Shares to and other Own shares translation Retained Total capital premium be issued reserves held reserve earnings equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 2,984 18,023 1,648 11,988 (1,081) - (7,025) 26,537 1 February 2004 (asrestated)Currency translation - - - - - (274) - (274)adjustmentsEmployee share option 36 285 - 144 - - - 465and bonus planPayment of deferred 20 - (409) 381 - - - (8)considerationProfit for the period - - - - - - 1,034 1,034Balance at 3,040 18,308 1,239 12,513 (1,081) (274) (5,991) 27,754 31 July 2004 (asrestated)Currency translation - - - - - 437 - 437adjustmentsEmployee share option 13 166 - 168 - - - 347and bonus planShares to be issued - - 1,800 - - - - 1,800Payment of acquisition 81 580 (676) 633 - - - 618and deferredconsiderationExchange gain - - 23 - - - - 23Profit for the period - - - - - - 1,315 1,315Balance at 3,134 19,054 2,386 13,314 (1,081) 163 (4,676) 32,294 31 January 2005 (asrestated)Currency translation - - - - - 161 - 161adjustmentsEmployee share option - - - (156) 425 - (364) (95)and bonus planExchange gain - - 169 - - - - 169Profit for the period - - - - - - 1,612 1,612Balance at 31 July 2005 3,134 19,054 2,555 13,158 (656) 324 (3,428) 34,141 Unaudited Consolidated cash flow statement As restated 6 months 6 months ended ended Notes 31 July 31 July 31 January 2005 2004 2005 £'000 £'000 £'000 Profit before taxation 1,732 1,181 3,169Adjustments for:-depreciation 377 359 795-interest income (12) - (5)-interest expense 516 373 896- proceeds of sale of investment - - (51)- loss on disposal of fixed assets - - 24- share based employee settlement and share option charge 126 51 333Operating cash flows before changes in working capital 2,739 1,959 5,166Changes in working capital (excluding the effects ofacquisition and exchange differences on consolidation)-increase in trade and other receivables (4,444) (5,095) (8,483)-increase in trade and other payables 3,583 2,023 3,328-net movements in provisions for liabilities and charges (227) (1,361) (1,501)Cash flows from operating activities 1,651 (2,614) (1,350)Income tax received/(paid) 238 (690) (1,433)Net cash generated/(absorbed) from operating activities 1,889 (3,304) (2,783) Cash flows from investing activitiesPurchases of property, plant and equipment (PPE) (516) (317) (796)Cash acquired with acquisitions - - 278Purchase of subsidiary undertakings - - (329)Proceeds from sale of investment - 51 51Interest received 12 5 -Net cash absorbed from investing activities (504) (261) (796) Cash flows from financing activitiesRepayment of borrowings (3,045) - -Proceeds from issue of ordinary shares - - 228Issue of share capital and premium - 177 -Principal payments under finance leases - (121) (121)Interest paid (516) (373) (896)Net cash used in financing activities (3,561) (789) (317) Decrease in cash and cash equivalents (2,176) (3,882) (4,368)Cash and cash equivalents at the beginning of the period (2,694) 1,613 1,613Exchange (losses)/gains on cash and cash equivalents (38) (224) 61Cash and cash equivalents at the end of the period 9 (4,908) (2,493) (2,694) Notes to the Unaudited Interim Financial Statements 1 General information Harvey Nash Group Plc (the Company) and its subsidiaries (together "the Group")is a leading provider of specialist recruitment and outsourcing solutions. TheGroup has offices in the UK, Europe and the United States and a branch inVietnam. The Company is a public listed company incorporated in the UK. Its registeredaddress is 13 Bruton Street, London W1J 6QA and its primary listing is on theLondon Stock Exchange. 2 Accounting Policies (a) Basis of preparation Harvey Nash Group Plc's consolidated financial statements were prepared inaccordance with UK Generally Accepted Accounting Principles (GAAP) until 31January 2005. GAAP differs in some areas from International Financial ReportingStandards (IFRS). In preparing the consolidated interim financial statements,management has amended certain accounting, valuation and consolidation methodsapplied in the GAAP financial statements to comply with IFRS. The comparativefigures in respect of July 2004 and January 2005 have been restated to reflectthese adjustments, except as described in the accounting policies. The interim financial information has been prepared on the basis of therecognition and measurement requirements of IFRS in issue that either areendorsed by the EU and effective (or available for early adoption) at 31 January2006 or are expected to be endorsed and effective (or available for earlyadoption) at 31 January 2006, the Group's first annual reporting date at whichit is required to use adopted IFRSs. In addition, the adopted IFRSs that willbe effective (or available for early adoption) in the annual financialstatements for the year ending 31 January 2006 are still subject to change andto additional interpretation and therefore cannot be determined with certainty.Accordingly, the accounting policies for that annual period will be determinedfinally only when the annual financial statements are prepared for the yearending 31 January 2006. Reconciliations and descriptions of the effect of the transition from GAAP toIFRS on the Group's equity and its net income and cash flows are provided innote 10. During the year the Directors have reclassified certain costspreviously treated as costs of sale to administrative costs as they considerthis better reflects the nature of the business. The comparative accountingperiods have been restated. The preparation of financial statements requires the use of certain criticalaccounting estimates. It also requires management to exercise judgement in theprocess of applying the Company's accounting policies. The areas involving ahigher degree of judgement or complexity, or areas where the assumptions andestimates are significant to the consolidated interim financial statements aredisclosed in Note 4. The comparative figures for the year ended 31 January 2005, prior to theadjustments required on transition to IFRS as described in notes 5 and 10, havebeen extracted from the Group's financial statements, a copy of which has beendelivered to the Registrar of Companies. The auditors' report on thosestatements was unqualified and did not include a statement under Section 237(2)or (3) of the Companies Act 1985. The interim financial information does notconstitute statutory financial statements as defined under Section 240 of theCompanies Act 1985. (b) Basis of consolidation The consolidated income statement and balance sheet include the financialstatements of the Company and all its subsidiary undertakings made up to theyear end using the purchase method. The results of subsidiaries acquired areincluded in the consolidated income statement from the date the power toexercise control passes. Intra Group sales and profits are eliminated fully onconsolidation. On the acquisition of a subsidiary all of the subsidiary's assetsand liabilities that exist at the date of acquisition are recorded at their fairvalues reflecting their condition at that date. All changes to those assets andliabilities and the resulting gains and losses that arise after the Group hasgained control of the subsidiary are charged to the post acquisition incomestatement. Where deferred consideration on acquisitions is to be satisfied byHarvey Nash Group Plc shares, the directors estimate the contingentconsideration and establish a shares to be issued reserve. (c) Segment reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. A geographical segment is engaged inproviding products or services within a particular economic environment that issubject to risks and returns that are different from those of segments operatingin other economic environments. The Group considers the whole business to be theprimary segment with the Group's secondary segment being geography. (d) Revenue recognition Revenue comprises the fair value of the sale of goods and services, net ofvalue-added tax, rebates and discounts and after eliminating sales within theGroup. Revenue is recognised as follows: The Group derives its turnover in the contract services and interim businesseson a time and materials basis. It is recognised as services are rendered asvalidated by receipt of a client approved timesheet or equivalent. For fixedprice development work, revenue is recognised on the percentage completionbasis, using pre-specified milestones or a client sign off to trigger invoicesand the estimate of profit. For contingency permanent placements, revenue isrecognised and the client is invoiced on acceptance of the candidate. Executive search and permanent placement fees are recognised as services areprovided, typically in three stages; placement, shortlist and retainer fee. (e) Property, plant and equipment All property, plant and equipment (PPE) is shown at cost less subsequentdepreciation and impairment. Subsequent costs are included in the assets'carrying amount or recognised as a separate asset as appropriate, only when itis probable that future economic benefits associated with the item will flow tothe Group and the cost of the item can be measured reliably. All other repairsand maintenance are charged to the income statement during the financial periodin which they are incurred. Depreciation is provided on a monthly basis to write off the cost of each assetto its residual value over its estimated useful life according to the followingrates: Leasehold improvements - over the term of the leaseOffice equipment - 20% straight lineFurniture, fixtures and equipment - 20% straight lineComputer equipment - 33 1/3% straight lineMotor vehicles - 25% reducing balance The assets' residual values and useful lives are reviewed, and adjusted ifappropriate at each balance sheet date. An asset's carrying amount is writtendown immediately to its recoverable amount if the asset's carrying amount isgreater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carryingamounts. These are included in the income statement. (f) Foreign exchange Items included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operates (the "functional currency"). The consolidated financialstatements are presented in sterling which is the Company's functional andpresentational currency. Monetary assets and liabilities denominated in foreign currencies in eachcompany are translated at the rates of exchange prevailing at the balance sheetdate. Transactions in foreign currencies are translated at the rate prevailingat the date of the transaction. On consolidation, revenues, costs and cash flows of overseas undertakings areincluded in the Group income statement at average rates of exchange for theperiod. Assets and liabilities denominated in foreign currencies are translatedinto sterling using rates of exchange ruling at the balance sheet date. Exchange differences arising from the translation of the net investment inforeign entities, and of borrowings and other currency instruments designated ashedges of such investments, are taken to shareholders' equity on consolidation.When a foreign operation is sold, such exchange differences are recognised inthe income statement as part of the gain or loss on sale. (g) Leasing and hire purchase Leases of property, plant and equipment where the Group has substantially allthe risks and rewards of ownership are classified as finance leases. Assetsacquired under finance leases are capitalised as tangible assets at the lower ofthe fair value of the leased property and the present value of the minimum leasepayments, and depreciated over the shorter of the lease term and their usefullives. Finance charges and interest are taken to the income statement inconstant proportion to the remaining balance of capital repayments or netobligations outstanding. Profits made on sale and finance leaseback arrangementsare deferred and credited to the income statement over the shorter of the leaseterm and useful life of the asset. Rentals payable under operating lease and contract hire agreements are taken tothe income statement on a straight line basis over the lease term. Reversepremiums and lease incentive benefits are recognised as a reduction in rentalexpense. The benefit is allocated on a straight line basis over the shorter ofthe lease term and the first rent review date at which it is expected that theprevailing market rental will be payable. (h) Pensions Pension costs on defined contribution schemes are charged to the incomestatement in the year in which they arise. (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets of the acquired subsidiaryat the date of the acquisition. Goodwill is tested annually for impairment andcarried at cost less accumulated impairment losses. (j) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation andare tested annually for impairment and whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Animpairment loss is recognised for the amount by which the asset's carryingamount exceeds its recoverable amount. The recoverable amount is the higher ofthe asset's fair value less costs of sale and value in use. For the purposes ofassessing impairment, assets are grouped at the lowest levels for which thereare separately identifiable cash flows (cash generating units). (k) Trade receivables Trade receivables are recognised initially at fair value. A provision forimpairment is established when there is objective evidence that the Group willnot be able to collect all amounts due according to the original terms of thereceivables. (l) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks, other short-term liquid investments with original maturities of threemonths or less and bank overdrafts. Bank overdrafts are shown within borrowingsin current liabilities on the balance sheet. (m) Share capital Ordinary shares are classified as equity. Where any Group company purchases theCompany's equity share capital (treasury shares), the consideration paid isdeductible from equity attributable to the Company's equity holders until theshares are cancelled, reissued or disposed of. Where such shares aresubsequently sold or reissued, any consideration received is included in equityattributable to the Company's equity holders. (n) Deferred income tax Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the consolidated financial statements. Deferredincome tax is determined using tax rates (and laws) that have been enacted orsubstantially enacted by the balance sheet date and expected to apply when therelated deferred income tax asset is realised or the deferred income taxliability is settled. Deferred tax balances are not discounted unless theeffects are considered to be material to the Group's results. Deferred income tax assets are recognised to the extent that it is probable thatfuture taxable profit will be available against which the temporary differencescan be utilised. (o) Dividend distribution Dividend distribution to the Company's shareholders is recognised as a liabilityin the Group's financial statements in the period in which the dividends areapproved by the Company's shareholders. (p) Employee benefits Pension obligations The Group operates various pension plans all of which are defined contributionplans. The Group pays fixed contributions into a separate entity. The Grouphas no legal or constructive obligation to pay further contributions if the funddoes not hold sufficient assets to pay all employees the benefits relating toemployee service in the current and prior periods. Termination benefits Termination benefits are payable when employment is terminated before the normalretirement date or when an employee accepts voluntary redundancy in exchange forbenefits. The Group recognises termination benefits when it is demonstrablycommitted to terminating the employment of current employees according to adetailed formal plan without possibility of withdrawal. Bonus plan The Group recognises a liability and an expense for bonuses when contractuallyobliged or where there is a past practice that has created a constructiveobligation. Share-based plans The Group's management awards certain employees bonuses in the form of shareoptions on a discretionary basis. The options are subject to three-year vestingconditions and their fair value is recognised as an employee benefits expensewith a corresponding increase in other reserve over the vesting period. Theproceeds received net of any directly attributable transaction costs arecredited to share capital and share premium when the options are exercised. Foroptions exercised against own shares held, the shares are removed from the ownshares held reserve. (q) Provisions Provisions for restructuring costs and legal claims are recognised when theGroup has a present legal or constructive obligation as a result of past eventsand it is more likely than not that an outflow of resources will be required tosettle the obligation and the amount has been reliably estimated. Provisions aremeasured at the present value of management's best estimate of the expenditurerequired to settle the present obligation at the balance sheet date. (r) Interim measurement note Current income tax Current income tax expense is recognised in the interim financial statementsbased on management's best estimate of the weighted average annual income taxrate expected for the full financial year. Costs Costs that occur unevenly during the financial year are anticipated or deferredin the interim report only if it would also be appropriate to anticipate ordefer such costs at the end of the financial year. (s) Exceptional items Exceptional items are items of a one-off nature that are significant in size andare separated out for additional disclosure purposes only. 3 Financial risk management Financing The Group's principal financial instruments are bank loans, bank overdrafts,cash and short term deposits. The Group has other financial instruments such astrade debtors and trade creditors that arise directly from its operations.Acquisitions are financed through a mixture of equity and medium termborrowings. Working capital finance for day-to-day requirements is providedthrough operating cash generation, invoice discount facilities, debt factoringfacilities and small short term overdraft facilities. All of the Group's longterm borrowings are made centrally. Where applicable, funds are then madeavailable for the financing of the Group's subsidiaries through intercompanyloans. Objectives, policies and strategies The most significant treasury exposures faced by Harvey Nash are raisingfinance, managing interest rates and currency positions as well as investingsurplus cash in high quality assets. The Board has established clear parameters,including levels of authority, on the type and use of financial instruments tomanage these exposures. Transactions are only undertaken if they relate tounderlying exposures and cannot be viewed as speculative. Interest rate risk management The Group's policy is to minimise interest charges through cash pooling andactive cash management. Foreign exchange risk management The Group's policy is to minimise foreign currency risk. Harvey Nash manages itsexposure on equity investments in overseas subsidiaries through foreign currencyborrowings. The currency risk of holding assets and liabilities in foreigncurrencies across the Group is managed by partially matching foreign currencyassets with foreign currency liabilities. Credit risk The Group has no significant concentration of credit risk. It has policies inplace to ensure that sales of products are made to customers with an appropriatecredit history.4 Critical accounting judgements and estimates Impairment of goodwill Determining whether the goodwill is impaired required an estimation of the valuein use of the cash-generating units to which goodwill has been allocated. Thevalue in use calculation required the entity to estimate the future cash flowsexpected to arise from the cash-generating unit and a suitable discount rate inorder to calculate present value. Income tax The Group is subject to income taxes in numerous jurisdictions. Significantjudgement is required in determining the worldwide provision for income taxes.There are many transactions and calculations for which the ultimate taxdetermination is uncertain during the ordinary course of business. The Grouprecognises liabilities for anticipated tax issues based on estimates of whetheradditional taxes will be due. Where the final tax outcome of these matters isdifferent from the amounts that were initially recorded, such differences willimpact the income tax and deferred tax provisions in the period in which suchdetermination is made. Share options Share options are granted on a discretionary basis and vest after three yearsservice. The fair value of options granted during the period was determinedusing the Black-Scholes valuation model and ranges between £0.13 and £0.29. Thesignificant inputs into the model were share price at grant date, exerciseprice, expected option life of 36 months and risk free rate of 4.30%. Thevolatility measured at the standard deviation of expected share price returns isbased on statistical analysis of daily share prices. 5 Transition to IFRS Application of IFRS1 The Group's financial statements for the year ended 31 January 2006 will be thefirst annual statements that comply with IFRS. These interim statements havebeen prepared as described in note 2. The Group has applied IFRS1 in preparingthese interim consolidated financial statements. The Group's transition date is 1 February 2004. The Group prepared its openingIFRS balance sheet at that date. The reporting date of these interimconsolidated financial statements is 31 July 2005. The Group's IFRS adoptiondate is 1 February 2005. In preparing these interim consolidated financial statements in accordance withIFRS 1, the Group has applied the mandatory exemptions and certain of theoptional exemptions from the full retrospective application of IFRS. Exemptions from full retrospective application elected by the Group (a) Business combination exemption Harvey Nash has applied the business combinations exemption in IFRS1. It hasnot restated business combinations that took place prior to the 1 February 2004transition date. (b) Cumulative translation differences exemption Harvey Nash has elected to set the previous accumulated translation balances tozero at 1 February 2004. This exemption has been applied to all subsidiaries inaccordance with the available option under IFRS1. (c) Share-based payment transaction exemption The Group has elected to apply the share-based payment exemption. It appliedIFRS2 from 1 February 2004 to those options that were issued after 7 November2002 but that have not vested by 1 February 2005. Impairment of investment The impairment charge arose in the investment in Interim Management inTechnology Limited "IMIT" where the future discounted cash flows from thisbusiness did not support the carrying investment value. This followed using adifferent cost of capital under IFRS compared to UK GAAP. All investments are discounted using a weighted average cost of capital "WACC"which is based on a number of variables. IAS 38 requires the application of anindustry WACC. The industry WACC is calculating using variables of similarcompanies to Harvey Nash. This has resulted in a higher discount factor beingapplied under IFRS. Previously under UK GAAP the group used an appropriatecompany specific rate as the discount factor. 6. Segment Information The consolidated entity operates in one business segment being that ofrecruitment services. As a result, no additional business segment informationis required to be provided. The Group's secondary segment is geography. Thesegment results by geography are shown below: Analysis of Turnover As restated Unaudited Unaudited Unaudited 6 months to 6 months to 31 July 31 July 31 January 2005 2004 2005 £'000 £'000 £'000 United Kingdom 38,627 40,648 79,712Rest of Europe 41,252 26,504 59,545United States 12,826 11,755 24,117Total 92,705 78,907 163,374 Analysis of Operating Profit As restated Unaudited Unaudited Unaudited 6 months to 6 months to 31 July 31 July 31 January 2005 2004 2005 £'000 £'000 £'000 United Kingdom 1,200 991 2,217Rest of Europe 716 119 1,064United States 320 439 716 Asia Pacific - - 68 Total 2,236 1,549 4,065 7. Income tax As restated Unaudited Unaudited Unaudited 6 months to 6 months to 31 July 2005 31 July 2004 31 January 2005 £'000 £'000 £'000Corporation tax on profits in the period 173 540 421Adjustments in respect of prior years (377) 4 452Total current tax (204) 544 873Deferred tax 324 (397) (53)Total tax charge 120 147 820 Analysis of deferred tax Short term timing differences 54 31 185Share options 219 (71) (146)Tax losses carried forward 271 (423) (223)Deferred tax movement in the period 544 (463) (184)Net Deferred tax asset brought forward (1,623) (1,439) (1,439)Net Deferred tax asset carried forward (1,079) (1,902) (1,623) Deferred tax movement in the period 544 (463) (184)Share option element taken to equity (220) 66 131Deferred tax charge/(credit) for the period 324 (397) (53) Deferred tax comprises:AssetsShort-term timing differences (63) (271) (118)Share options (154) (297) (372)Tax losses (930) (1,363) (1,175)Deferred tax assets (1,147) (1,931) (1,665)LiabilitiesShort-term timing differences 68 29 42Deferred tax liabilities 68 29 42Net deferred tax asset (1,079) (1,902) (1,623) 8. Earnings per share As restated Unaudited 6 Unaudited 6 Unaudited months ended months ended 31 July 31 July 31 January 2005 2004 2005 Profit attributable to shareholders £'000 1,612 1,034 2,349 Weighted average number of shares 62,150,562 59,637,292 60,213,476 Basic earnings per share 2.59p 1.73p 3.90p Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary shares in issueduring the period, excluding those held in the Employee Benefit Trust which aretreated as cancelled. For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all dilutive potential ordinaryshares. The Group has two categories of potential ordinary shares: those shareoptions granted to employees where the exercise price is less than the averageprice of the Company's ordinary shares during the year, and deferredconsideration shares to be issued. As restated Unaudited 6 Unaudited 6 Unaudited months ended months ended 31 July 31 July 31 January 2005 2004 2005 Profit attributable to shareholders £'000 1,612 1,034 2,349 Weighted average number of shares 62,150,562 59,637,292 60,213,476 Effect of dilutive securities 7,953,224 4,434,672 4,613,186 Adjusted weighted average number of shares 70,103,786 64,071,964 64,826,662 Diluted earnings per share 2.30p 1.61p 3.62p 9. Cash and cash equivalents Cash and bank overdrafts include the following for the purposes of the cash flowstatement: Unaudited Unaudited Unaudited 31 July 31 July 31 January 2005 2004 2005 £'000 £'000 £'000 Cash and cash equivalents 3,450 1,942 2,628Invoice discounting (8,358) (4,435) (5,322)Total cash and cash equivalents (4,908) (2,493) (2,694) Debt within one year (3,306) (6,347) (3,000)Debt after one year - - (3,112)Net debt (8,214) (8,840) (8,806) 10. Adoption of IFRS Reconciliation of equity at 1 February 2004 Effects of transition Notes GAAP to IFRS IFRS £'000 £'000 £'000ASSETSNon-current assetsProperty, plant and equipment 1,413 - 1,413Goodwill (a) 30,759 (2,685) 28,074Deferred income tax assets (b) - 1,455 1,455 32,172 (1.230) 30,942 Current assetsTrade and other receivables (c) 23,662 (1,209) 22,453Cash and cash equivalents 1,613 - 1,613 25,275 (1,209) 24,066Total assets 57,447 (2,439) 55,008 LIABILITIESCurrent liabilitiesTrade and other payables (d) (19,487) (60) (19,547)Current income tax liabilities (933) - (933) (20,420) (60) (20,480) Non-current liabilitiesBorrowings (6,333) - (6,333)Deferred income tax liabilities (e) - (17) (17)Onerous lease provision (1,641) - (1,641) (7,974) (17) (7,991)Total liabilities (28,394) (77) (28,471)Net assets 29,053 (2,426) 26,537 EQUITYCapital and reserves attributable to equity holdersShare capital 2,984 - 2,984Share premium 18,023 - 18,023Shares to be issued 1,648 - 1,648Fair value and other reserves (f) 11,736 252 11,988Own shares held (1,081) - (1,081)Cumulative translation reserve - - -Retained earnings (g) (4,257) (2,768) (7,025)Total equity 29,053 (2,516) 26,537 10. Adoption of IFRS (continued) Explanation of the effect of the transition to IFRS at 1 February 2004 The following explains the material adjustments to the balance sheet and incomestatement. £'000(a) Goodwill Impairment of investment (see note 5) (2,685)Total impact - decrease in goodwill (2,685) (b) Deferred income tax asset Recognition of deferred tax asset under IFRS 2 1,455Total impact - increase in deferred income tax asset 1,455 (c) Trade and other receivables Reclassification of deferred tax asset under IFRS 2 (1,209)Total impact - reduction in trade and other receivables (1,209) (d) Trade and other payables Recognition of additional employee benefit costs (60)Total impact - decrease in trade and other payables (60) (e) Deferred income tax liability Recognition of deferred tax liability under IFRS 2 (17)Total impact - increase in deferred income tax liability (17) (f) Other reserves Recognition of share options issued after 7 November 2002 and not vested at 1 February2005 37Tax adjustment to reserves under IFRS 2 215Total impact - increase in fair value and other reserve 252 (g) Retained earnings All above adjustments were recorded against opening retained earnings at 1February 2004. The total net impact is a decrease in retained earnings of£2,768k. 10. Adoption of IFRS (continued) Reconciliation of equity at 1 August 2004 Effects of transition Notes GAAP to IFRS IFRS £'000 £'000 £'000ASSETSNon-current assetsProperty, plant and equipment 1,302 - 1,302Goodwill (a) 29,575 (1,616) 27,959Deferred income tax assets (b) - 1,931 1,931 30,877 315 31,192 Current assetsInventoriesTrade and other receivables (c) 29,596 (1,575) 28,021Cash and cash equivalents - - - 29,596 (1,575) 28,021Total assets 60,473 (1,260) 59,213 LIABILITIESCurrent liabilitiesTrade and other payables (d) (21,428) (190) (21,618)Current income tax liabilities (e) (858) 28 (830)Borrowings (8,840) - (8,840) (31,126) (162) (31,288) Non-current liabilitiesBorrowings - - -Deferred income tax liabilities (f) - (29) (29)Onerous lease provisions (142) - (142) (142) (29) (171)Total liabilities (31,268) (191) (31,459)Net assets 29,205 (1,451) 27,754 EQUITYCapital and reserves attributable to equity holdersShare capital 3,040 - 3,040Share premium 18,308 - 18,308Shares to be issued 1,239 - 1,239Fair value and other reserves (g) 12,117 396 12,513Own shares held (1,081) - (1,081)Cumulative translation reserve (h) - (274) (274)Retained earnings (i) (4,418) (1,573) (5,991)Total equity 29,205 (1,451) (27,754) 10. Adoption of IFRS (continued) Explanation of the effect of the transition to IFRS at 1 August 2004 The following explains the material adjustments to the balance sheet and incomestatement. £'000(a) Goodwill Amortisation charge no longer made under IFRS 1,069Impairment of investment (2,685)Total impact - decrease in goodwill (1,616) (b) Deferred income tax asset Recognition of deferred tax asset under IFRS 2 1,931Total impact - increase in deferred income tax asset 1,931 (c) Trade and other receivables Reclassification of deferred tax asset under IFRS 2 (1,575)Total impact - reduction in trade and other receivables (1,575) (d) Trade and other payables Recognition of additional employee benefit costs (190)Total impact - decrease in trade and other payables (190) (e) Current income tax Adjustment to current tax under IFRS 2 28Total impact - decrease in current corporation tax 28 (f) Deferred income tax liability Recognition of deferred tax liability under IFRS 2 (29)Total impact - increase in deferred income tax liability (29) (g) Other reserves Recognition of share options issued after 7 November 2002 and not vested at 1February 2005 88Tax adjustment to reserves under IFRS 2 308Total impact - increase in fair value and other reserve 396 (h) Cumulative translation adjustment Adjustments assessed on the basis of translation during the period (274) Total impact - increase in cumulative translation reserve (274) (i) Retained earnings All above adjustments were recorded against opening retained earnings at 1August 2004. The total net impact is a decrease in retained earnings of£1,573k. 10. Adoption of IFRS (continued) Reconciliation of equity at 1 February 2005 Effects of transition to Notes GAAP IFRS IFRS £'000 £'000 £'000ASSETSNon-current assetsProperty, plant and equipment 1,415 - 1,415Goodwill (a) 30,845 (491) 30,354Deferred income tax assets (b) - 1,665 1,665 32,260 1,174 33,434 Current assetsTrade and other receivables (c) 32,052 (1,249) 30,803Cash and cash equivalents - - - 32,052 (1,249) 30,803Total assets 64,312 (75) 64,237 LIABILITIESCurrent liabilitiesTrade and other payables (d) (22,375) (122) (22,497)Current income tax liabilities (e) (373) 55 (318)Borrowings (5,694) - (5,694) (28,442) (67) (28,509) Non-current liabilitiesBorrowings (3,112) - (3,112)Deferred income tax liabilities (f) - (42) (42)Provisions (280) - (280) (3,392) (42) (3,434)Total liabilities (31,834) (109) (31,943)Net assets 32,478 (184) 32,294 EQUITYCapital and reserves attributable to equity holdersShare capital 3,134 - 3,134Share premium 19,054 - 19,054Shares to be issued 2,386 - 2,386Fair value and other reserves (g) 12,750 564 13,314Own shares held (1,081) - (1,081)Cumulative translation reserve (h) - 163 163Retained earnings (i) (3,765) (911) (4,676)Total equity 32,478 (184) 32,294 10. Adoption of IFRS (continued) Explanation of the effect of the transition to IFRS at 1 February 2005 The following explains the material adjustments to the balance sheet and incomestatement. £'000(a) Goodwill Amortisation charge no longer made under IFRS 2,194Impairment of investment (see note 5) (2,685)Total impact - decrease in goodwill (491) (b) Deferred income tax asset Recognition of deferred tax asset under IFRS 2 1,665Total impact - increase in deferred income tax asset 1,665 (c) Trade and other receivables Reclassification of deferred tax asset under IFRS 2 (1,249)Total impact - reduction in trade and other receivables (1,249) (d) Trade and other payables Recognition of additional employee benefit costs (122)Total impact - decrease in trade and other payables (122) (e) Current income tax Adjustment to current tax under IFRS 2 55Total impact - decrease in current corporation tax 55 (f) Deferred income tax liability Recognition of deferred tax liability under IFRS 2 (42)Total impact - increase in deferred income tax liability (42) (g) Other reserves Recognition of share options issued after 7 November 2002 and not vested at 1 February2005 162Tax adjustment to reserves under IFRS 2 402Total impact - increase in fair value and other reserve 564 (h) Cumulative translation adjustment Adjustments assessed on the basis of translation during the period 163Total impact - increase in cumulative translation reserve 163 (h) Retained earnings All above adjustments were recorded against opening retained earnings at 1February 2005. The total net impact is a decrease in retained earnings of£911k. 10. Adoption of IFRS (continued) Reconciliation of profit for the 6 months ended 31 July 2004 Income statement GAAP (as restated *) (1) (2) (3) (4) IFRS £'000 £'000 £'000 £'000 £'000 £'000 Revenue 78,907 - - - 78,907 -Cost of sales (60,318) - - - (60,318) -Gross profit 18,589 - - - 18,589 -Administrative expensesExcluding goodwill amortisation (16,860) (129) (51) - (17,140)Goodwill amortisation (1,069) 1,069 - - - -Group operating profit 660 1,069 (129) (51) - 1,549Interest receivable 5 - - - 5 -Interest payable (373) - - - (373) -Profit before tax 292 1,069 (129) (51) - 1,181Tax (179) - - - 32 (147)Profit after tax 113 1,069 (129) (51) 32 1,034 (1) Amortisation charge no longer made under IFRS(2) Recognition of additional employee benefit costs(3) Recognition of share options issued after 7 November 2002 and not vested at 1 February 2005 (4) Tax adjustment to deferred tax under IFRS * The above GAAP figures have been restated to reclassify certain costspreviously treated as cost of sales to administration expenses (see note 2). 10. Adoption of IFRS (continued) Reconciliation of profit for the year ended 31 January 2005 Income statement GAAP (as restated *) (1) (2) (3) (4) IFRS £'000 £'000 £'000 £'000 £'000 £'000 Revenue 163,374 - - - - 163,374 Cost of sales (125,269) - - - - (125,269) Gross profit 38,105 - - - - 38,105 Administrative expenses Excluding goodwill (33,851) - (62) (127) - (34,040) amortisation Goodwill amortisation (2,194) 2,194 - - - - Group operating profit 2,060 2,194 (62) (127) - 4,065 Interest receivable - - - - - Interest payable (896) - - - - (896) Profit before tax 1,164 2,194 (62) (127) - 3,169 Tax (833) - - - 13 (820) Profit after tax 331 2,194 (62) (127) 13 2,349 (1) Amortisation charge no longer made under IFRS(2) Recognition of additional employee benefit costs(3) Recognition of share options issued after 7 November 2002 and not vested at 1 February 2005(4) Tax adjustment to deferred tax under IFRS * The above GAAP figures have been restated to reclassify certain costs previously treated as cost of sales to administration expenses (see note 2). 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