Hill International (HIL) 8-K/A Financial Statements and Exhibits

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15 (d) of

the Securities Exchange Act of 1934

Hill International, Inc.

(Exact name of registrant as specified in its charter)

Date of Report (Date of earliest event reported): August 31, 2006

HILL INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware	000-50781	20-0953973
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

303 Lippincott Centre, Marlton, NJ	08053
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code:   (856) 810-6200

Arpeggio Acquisition Corporation

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of Universal under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 230.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Explanatory Note:

Hill International, Inc., a Delaware corporation (“Hill” or “the Company"), hereby amends its Current Report on Form 8-K/A filed November 17, 2006, to include the consent of KPMG Audit Plc which had not been included in the previous 8-K/A filed on November 17, 2006; and to correct certain computational and typographical errors in that 8-K/A. The 8-K/A filed on November 17, 2006 included required financial statements relating to the acquisition of the common stock of James R. Knowles (Holdings) PLC by Hill International SA, the Company's wholly-owned subsidiary, as described in such Current Report; such financial statements and pro forma financial information are being filed again herewith.

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired:

Exhibit 99.1	Audited financial statements of Knowles as of July 31, 2006
Exhibit 99.2	Audited financial statements of Knowles as of July 31, 2005 and 2004

(b) Pro Forma Financial Information:

Exhibit 99.3 Unaudited pro forma condensed combined financial information

(c) Exhibits

Exhibit 23.1	Consent of Baker Tilly
Exhibit 23.2	Consent KPMG Audit Plc.

Table of Contents

(a) Historical financial statements of the business acquired (James R. Knowles (Holdings) PLC)
Exhibit 99.1 Audited financial statements of Knowles as of and for the year ended July 31, 2006
Independent Auditors' Report	3
Consolidated profit and loss account	4
Consolidated statement of total recognised gains and losses	5
Consolidated balance sheet	6
Consolidated cash flows statement	7
Notes to financial statements	8
Exhibit 99.2 Audited financial statements of Knowles as of and for the year ended July 31, 2005 and 2004
Independent Auditors' Report	25
Consolidated profit and loss accounts	26
Consolidated  statements of total recognised gains and losses	27
Consolidated balance sheets	28
Consolidated cash flow statements	29
Notes to Financial Statements	30
(b) Pro Forma Condensed Combined Financial Information
Exhibit 99.3 Unaudited Pro Forma Condensed Combined financial information
Contents	45
Introduction	46
Pro Forma Condensed Combined Balance Sheet at July 1, 2006 and related notes thereto.	47
Pro Forma Condensed Combined Statement of Operations for the nine months ended July 1, 2006 and related notes thereto.	49
Pro Forma Condensed Combined Statement of Operations for the twelve months ended December 31, 2006 and related notes thereto.	50
Signatures	51
(c) Exhibits
Exhibit 23.1 Consent of Baker Tilly
Exhibit 23.2 Consent KPMG Audit Plc

Independent Auditors’ Report

To the board of directors and shareholders of James R. Knowles (Holdings) PLC

We have audited the accompanying consolidated balance sheet of James R. Knowles (Holdings) PLC (the "Company"), as of July 31, 2006 and the related consolidated notes, statement of total recognised gains and losses profit and loss account and cash flows for the year ended July 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing  audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assesing the accounting principles used and significant estimates made by our management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of  James R. Knowles (Holdings) PLC and subsidiaries as of July 31, 2006 and the consolidated results of their operations and cash flows for the year ended July 31, 2006 in conformity with accounting principles generally accepted in the United Kingdom.

Baker Tilly

London, United Kingdom

November 2006 

3

James R. Knowles (Holdings) PLC

Consolidated profit and loss account

for the year ended 31 July 2006

	Note		2006
			Total
			£ 000
Turnover	2
Continuing operations				28,223
Discontinued operations				1,180
				29,403
Other external charges				(3,414	)
Staff costs		5		(18,064	)
Depreciation and amortisation				(1,327	)
Other operating charges		3		(9,806	)
Operating (loss) before exceptional items
Continuing operations				(711	)
Discontinued operations				(166	)
Exceptional items
Continuing operations		3		(2,271	)
Discontinued operations		3		(60	)
Operating (loss)
Continuing operations				(2,982	)
Discontinued operations				(226	)
				(3,208	)
Profit on disposal of operations		3		95
Loss on closure of branch		3		(197	)
(Loss) on ordinary activities before interest and taxation				(3,310	)
Other interest receivable and similar income				20
Interest payable and similar charges		6		(317	)
(Loss) profit on ordinary activities before taxation		3 - 6		(3,607	)
Tax on (loss) on ordinary activities		7		(388	)
(Loss) on ordinary activities after taxation				(3,995	)
Minority interests (equity)				(85	)
Retained (Loss) for the financial year		18		(4,080	)
Basic (loss) per share (pence)		8		(19.7	)

A note on historical cost profits has not been prepared as the historical cost profit and losses are the same as detailed in the above profit and loss account.

The notes on pages 8 to 24 form part of these financial statements.

4

James R. Knowles (Holdings) PLC

Consolidated statement of total recognised gains and losses

for the year ended 31 July 2006 

	2006
	£ 000
Loss for the financial year		(4,080	)
Currency translation differences on foreign investments		(66	)
Total recognised losses relating to the financial year		(4,146	)

5

James R. Knowles (Holdings) PLC

Consolidated balance sheet

at 31 July 2006

			2006
	Note		£ 000			£ 000
Fixed assets
Intangible assets		9					838
Tangible assets		10					1,129
Investments		11					1
							1,968
Current assets
Debtors		12		8,172
Cash at bank and in hand				1,563
				9,735
Creditors - Amounts falling due within one year		13		(10,161	)
Net current assets							(426	)
Total assets less current liabilities							1,542
Creditors - Amounts falling due after more than one year		14					(393	)
Provisions for liabilities and charges		15					(647	)
Net assets							502
Capital and Reserves
Called up share capital		17					1,059
Share premium account		18					3,333
Merger reserve		18					199
Profit and loss account		18					(4,209	)
Shareholders' funds		25					382
Minority interests (equity)							120
							502

These financial statements on pages 4 to 24 were approved by the board of directors and authorised for issue on 14 November 2006 and are signed on its behalf by:

R Borhan

Director

6

James R. Knowles (Holdings) PLC

Consolidated cash flow statement

for the year ended 31 July 2006

	Note		2006
			£ 000
Net cash inflow from operating activities		20		438
Return on investments and servicing of finance		22		(657	)
Taxation				(281	)
Capital expenditure and financial investment		22		(422	)
Acquisitions and disposals		22		601
Net cash outflow before financing				(321	)
Financing		22		(468	)
Decrease in cash in the year		23, 24		(789	)

7

James R. Knowles (Holdings) PLC

Notes

(forming part of the financial statements)

1 Accounting policies

The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group's financial statements except as noted below.

Basis of preparation

The financial statements have been prepared in accordance with applicable accounting standards and under the historical cost accounting rules.

Going Concern

The Directors consider that the losses sustained during the year are one off in nature. Current trading has improved and profits are forecasted going forward. Opportunities for growth exist as a consequence of the aquisition by Hill which have strengthened the position. The Knowles Group is also under receipt of full financial support from the new parent company. For these reasons the Directors consider the going concern basis is appropriate for preparing the financial statements.

Basis of consolidation

The Directors consider that the losses sustained during the year are one off in nature. Current trading has improved and profits are forecasted going forward. Opportunities for growth exist as a consequence of the aquisition by Hill which have strengthened the position. The Knowles Group is also under receipt of full financial support from the new parent company. For these reasons the directors consider the going concern basis for producing the financial statements is appropriate.

The Group accounts include the accounts of the Company and all its subsidiary undertakings made up to 31 July 2006. Unless otherwise stated, the acquisition method of accounting has been adopted. Under this method, the results of subsidiary undertakings acquired or disposed of in the year are included in the consolidated profit and loss account from the date of acquisition or up to the date of disposal.

Goodwill

Purchased goodwill (both positive and negative) arising on consolidation in respect of acquisitions before 1 August 1998, when FRS 10: Goodwill and intangible assets was adopted, was written off to reserves in the year of acquisition. When a subsequent disposal occurs, any related goodwill previously written off to reserves is written back through the profit and loss account as part of the profit or loss on disposal.

Purchased goodwill (representing the excess of the fair value of the consideration and associated costs given over the fair value of the separable net assets acquired) arising on consolidation in respect of acquisitions since 1 August 1998 is capitalised. Positive goodwill is amortised to nil by equal annual instalments over its estimated useful life which is 20 years.

On the subsequent disposal of a business acquired since 1 January 1998, the profit or loss on disposal is calculated after charging/(crediting) the unamortised amount of any related goodwill.

Investments

Investments are stated at cost less any impairment in value.

Tangible fixed assets and depreciation

Depreciation is provided by the Group to write off the cost or valuation less the estimated residual value of tangible fixed assets by equal instalments over their estimated useful economic lives as follows:

Leasehold buildings	-	Life of lease
Office equipment	-	10% - 33% per annum
Computer equipment	-	20% - 33% per annum
Motor vehicles	-	25% reducing balance
Technical publications	-	20% per annum

No depreciation is provided on freehold land.

Foreign currencies

Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the contracted rate or the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the profit and loss account.

The assets and liabilities of overseas subsidiary undertakings are translated at the closing exchange rates. Profit and loss accounts of such undertakings are consolidated at the average rates of exchange during the year. Gains and losses arising on these translations are taken to reserves, net of exchange differences arising on related foreign currency borrowings.

Leases

Assets acquired under finance leases are capitalised and the outstanding future lease obligations are shown in creditors. Operating lease rentals are charged to the profit and loss account on a straight line basis over the period of the lease.

Turnover

Turnover represents the amounts (excluding value added tax) recorded as turnover in respect of amounts recoverable on contracts and the amounts earned to date on other work to the extent that the Group has obtained the right to consideration.

Taxation

Deferred tax is recognised, without discounting, in respect of all timing differences between the treatment of certain items for taxation and accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS19: Deferred taxation.

Cash

Cash, for the purpose of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand.

8

James R. Knowles (Holdings) PLC

Notes

2 Segmental analysis

The table below sets out turnover, operating loss and net assets for each geographic area of operation by origin.

	2006
			Operating			Net
	Turnover		Loss			Assets
Continuing operations	£ 000		£ 000			£ 000
United Kingdom		15,508		(447	)		(886	)
Overseas		12,715		252			2,246
Holding Company Costs		-		(516	)		-
Exceptional operating charge		-		(2,271	)		-
		28,223		(2,982	)		1,360
Discontinued operations
United Kingdom		1,095		(73	)		(188	)
Overseas		85		(93	)		(670	)
Holding Company Costs		-		-			-
Exceptional operating charge		-		(60	)		-
		1,180		(226	)		(858	)

Turnover by geographical destination is significantly different from turnover by origin and is as follows:

	2006
	£ 000
Continuing operations
United Kingdom		14,171
Overseas		14,052
		28,223
Discontinued operations
United Kingdom		1,095
Overseas		85
		1,180

A split of overseas segmental information is not considered to be meaningful by the directors.

3 Loss on ordinary activities before taxation 

	Continuing		Discontinued		Total
	£ 000		£ 000		£ 000
Other external charges		3,340		74		3,414
Staff costs		17,265		799		18,064
Depreciation and amortisation		1,307		20		1,327
Other operating charges		9,293		513		9,806
						2006
						£ 000
Operating loss is stated after charging the following:
Auditors' remuneration for audit related services including expenses:
Principal						85
Secondary						54
						109
Hire of plant and machinery under operating leases						288
Amounts payable in respect of other operating leases						1,283
Depreciation and other amounts written off tangible fixed assets:
Owned						412
Leased						159
Amortisation of goodwill						33
Loss on foreign exchange						29
Impairment of Goodwill						721
Exceptional items:
Redundancy costs:
Continuing operations						223
Discontinued operations						27
Onerous lease provision:
Continuing operations						437
Discontinued operations						33
Directors retention bonus						110
Group disposal costs						122
Other costs						17
Impairment of goodwill on acquisition						721
Bad debt write off						115
Litigation costs						486
Taxation advice						40
						2,331

The effect of the above exceptional items is to decrease the taxation charge by £483,000.

(1) The Group's principal auditors, Baker Tilly, received £12,500 in respect of taxation work in addition to the fees disclosed above.

9

James R. Knowles (Holdings) PLC

Notes

3 Loss on ordinary activities before taxation (continued)

On 23 December 2005 the Group disposed of its 90% shareholding in Knowles Loss Adjusters Limited . The profit on disposal of this subsidiary has been calculated as follows:

	£ 000
Disposal proceeds		850
Expenses of disposal		(156	)
Net proceeds		694
Net assets of subsidiary at disposal		(666	)
Minority interest on disposal		67
Profit on disposal		95
The net inflow of cash in respect of the sale of Knowles Loss Adjusters Limited is as follows:-
Cash consideration		850
Cash transferred on disposal		(19	)
Associated costs of sale		(156	)
Net inflow of cash		675

There is no tax effect from the profit on disposal of operations due to the substantial shareholding exemption.

The net profit of Knowles Loss Adjusters Limited from 1 August 2005 to the date of disposal was £57,000.

On 31 October 2005 the Group decided to close its Paris branch of James R. Knowles (Europe) Limited. The related closure costs were £197,000.

4 Remuneration of directors

	2006
	£ 000
Directors' emoluments:
As directors		695
Other emoluments		30
		725

The remuneration of individual directors during the year was as follows:

	Year Ended 31 July 2006
	Salary		Other
	and Fees		Benefits		Total
		£ 000		£ 000		£ 000
Executive Directors
J. Roger Knowles1		185		1		186
Brian Quinn		360		18		378
Charlotte Parsons		116		11		127
		661		30		691
Non-Executive Directors
John Lee		17		-		17
Peter Bates		17		-		17
		34		-		34
		695		30		725

¹ A total of £165,400, in respect of the fees of J. Roger Knowles, has been paid to Wynton Services Limited, a company incorporated in the Republic of Cyprus.

5 Staff numbers and costs

The average number of persons employed by the Group (including directors) during the year, analysed by category, was as follows:

	Number of employees
	2006
Fee earning staff		212
Administrative staff		130
		342
The aggregate payroll costs of these persons were as follows:
		2006
		£ 000
Wages and salaries		16,516
Social security costs		1,263
Health insurance scheme		190
Staff accommodation		95
		18,064

6 Interest payable and similar charges

	2006
	£ 000
On bank loans and overdrafts		177
Finance charges payable in respect of finance leases and hire purchase contracts		53
Other interest		87
		317

10

James R. Knowles (Holdings) PLC

Notes

7 Taxation

(a) Analysis of charge in period

	2006
Current tax	£ 000		£ 000
UK corporation tax on profits in the period		-
Adjustments in respect of prior periods		347
				347
Foreign tax				226
Total current tax (note 7 (b))				573
Deferred tax
Origination and reversal of timing differences				(185	)
Tax on profit on ordinary activities				388

(b) Factors affecting the tax charge for the current period

The effective rate of tax of 11% is lower than the standard UK rate of corporation tax of 30% principally due to the net effects of UK tax losses, unrelieved overseas tax losses and differences in foreign tax rates.

The differences are explained below.

	2006
	£ 000
Loss on ordinary activities before tax		(3,607	)
Loss on ordinary activities multiplied by the standard rate of
corporation tax in the UK of 30%		(1,082	)
Effects of:
Expenses not deductible for tax purposes		363
Depreciation for period in excess of capital allowances		25
Unrelieved UK tax losses		718
Unrelieved overseas tax losses		273
Utilisation of tax losses brought forward		(66)
Other tax rates on overseas earnings		17
Adjustment to tax charge in respect of prior periods		347
Other tax adjustments		(22)
Current tax charge for the period (note 7 (a))		573

8 Earnings per share

							2006
	Continuing			Discontinued			Total
Loss for the financial year (£000)		(3,745	)		(335	)		(4,080	)
Weighted average number of shares		20,750,620			20,750,620			20,750,620
Basic (loss) per share (pence)		(18.0	)		(1.7	)		(19.7	)

The share options have no dilutive effect.

11

James R. Knowles (Holdings) PLC

Notes

9 Intangible fixed assets

	Goodwill
	£ 000
Cost
At 1 August 2005		524
Additions		1,142
Impairment		(721	)
At 31 July 2006		945
Amortisation
At 1 August 2005		74
Charge for the year		33
At 31 July 2006		107
Net book value
At 31 July 2006		838

On the 3rd July 2006, the Group acquired Knowles Lawyers Limited giving rise to goodwill of £721,000. Following an impairment review the carrying value of this goodwill was considered by the directors to be nil and the whole amount has been written off to the Profit & Loss account during the year.

The decision to acquire Knowles Lawyers Limited was taken in December 2005 by the Board, in the presence of its nominated advisors and solilcitors. The transaction was not however completed until 3rd July 2006 as the Company was regulated by The Law Society. The deregulation and related client matters were subsequently completed and the acquisition finalised. On 21 July 2006, Hill SA (a wholly owned subsidiary of Hill International Inc) were announced to The London Stock Exchange as the preferred bidders for the sale of the Group. Following this announcement it was made very clear to the Board of Directors that on completion of the sale, the Group would divest of this subsidiary as it did not fit with the core services of the new Group. As a direct consequence of this decision, the goodwill arising on the acquisition of Knowles Lawyers Limited has been fully impaired at the year end.

10 Tangible fixed assets

			Office and
	Land and		computer			Motor
	buildings		equipment			vehicles			Total
	£ 000		£ 000			£ 000			£ 000
Cost or valuation
At 1 August 2005		49		5,849			167			6,065
Additions		-		357			65			422
Acquisition of subsidiary		-		38			-			38
Disposals		-		(69	)		(46	)		(115	)
Disposal of subsidiary		-		(159	)		-			(159	)
Foreign exchange		-		(25	)		(4	)		(29	)
At 31 July 2006		49		5,991			182			6,222
Depreciation
At 1 August 2005		31		4,586			156			4,773
Charge for the year		1		562			8			571
Disposals		-		(62	)		(41	)		(103	)
Disposal of subsidiary		-		(121	)		-			(121	)
Foreign exchange		-		(23	)		(4	)		(27	)
At 31 July 2006		32		4,942			119			5,093
Net book value
At 31 July 2006		17		1,049			63			1,129

a) The above net book value includes an amount of £169,000 in respect of assets held under finance leases and similar hire purchase contracts. The total depreciation on such assets during the year amounts to £159,000.

b) Contained within land and buildings are short leaseholds as follows:

	2006
	£ 000
Cost		49
Depreciation		(32)
Net book value		17

12

James R. Knowles (Holdings) PLC

Notes

11 Fixed asset investments

	£ 000
Group
Listed investments
Cost at 1 August 2005	2
Provision made during the year	(1	)
Net book value
At 31 July 2006	1

The current market value of the listed investments is not considered by the directors to be materially different to the book value.

The companies in which the Group's interest at 31 July 2006 is more than 10% are as follows:

Subsidiary undertakings:	Country of registration or incorporation	Percentage of ordinary shares held
Knowles Limited	England and Wales	100	%
James R. Knowles Limited	England and Wales	100	%
James R. Knowles (Europe) Limited	England and Wales	100	%
Knowles Project Services Limited	England and Wales	100	%
Knowles Management Limited	England and Wales	75	%
Knowles Law Limited	England and Wales	75	%
James R. Knowles (Worldwide) Limited	England and Wales	100	%
James R Knowles Global Limited	England and Wales	100	%
Consortium James R. Knowles Limited	England and Wales	75	%*
Knowles Capital Projects Limited	England and Wales	75	%
Knowles Legal Limited	England and Wales	100	%
Knowles Commercial Services Limited	England and Wales	85	%
Knowles Construction Technology Limited	England and Wales	85	%
Knowles Legal Services Limited	England and Wales	100	%
Knowles Platinum Limited	England and Wales	100	%
Knowles Lawyers Limited	England and Wales	100	%
James R. Knowles (Deutschland) GmbH	Germany	100	%
James R. Knowles (Espana) SL	Spain	100	%
James R. Knowles (Overseas) Limited	Cyprus	100	%
James R Knowles (Singapore) Pte Limited	Singapore	90	%*
James R. Knowles (Hong Kong) Limited	Hong Kong	100	%*
James R. Knowles (Middle East) Limited	Cyprus	75	%*
James R. Knowles (M) Sdn Bhd	Malaysia	100	%*
Knowles Surveying Services Limited	Hong Kong	90	%*
James R. Knowles (Thailand) Ltd	Thailand	100	%*
James R. Knowles (B) Sdn Bhd	Brunei	100	%*
Knowles Consultancy Services Inc.	Canada	78	%*
Knowles North America Holdings Inc.	Canada	100	%*
1226545 Ontario Limited	Canada	65	%*
Baker, Bertrand, Chasse & Goguen Claim Services Limited	Canada	65	%*
James R. Knowles (Egypt) Limited	Egypt	75	%*
J R Knowles (USA) LLC	USA	70	%*
James R. Knowles (Australian Holdings) Pty Limited	Australia	90	%*
James R. Knowles (Australia) Pty Limited	Australia	90	%*
James R. Knowles (NSW) Pty Limited	Australia	90	%*
James R. Knowles Lawyers Pty Limited	Australia	90	%*
Knowles Adjusters Ireland Limited	Eire	90	%*
Associated undertakings:
Knowles Video Services Limited	Scotland	50	%

* Not directly owned by James R. Knowles (Holdings) PLC.

The above companies are principally involved in construction contracts consultancy and have all been included in the consolidation. The companies are all owned in the proportions stated either by James R. Knowles (Holdings) PLC or by James R. Knowles (Worldwide) Limited and James R Knowles Global Limited, both companies are registered in England and Wales which and are wholly owned subsidiaries of James R. Knowles (Holdings) PLC.

Of the above companies James R Knowles Limited, Knowles Project Services Limited, Knowles Management Limited, Consortium James R Knowles Limited, Knowles Capital Projects Limited, Knowles Legal Limited, Knowles Commercial Services Limited, Knowles Construction Technology Limited, Knowles Legal Services Limited, Knowles Platinum Limited, James R Knowles (NSW) Pty Limited and Knowles Video Services Limited did not trade during the year.

On 23 December 2005 the Group disposed of its 90% shareholding in Knowles Loss Adjusters Limited.

On 3 July 2006 the Group acquired 100% of the share capital of Knowles Lawyers Limited, a company registered in England and Wales.

13

James R. Knowles (Holdings) PLC

Notes

12 Debtors

	2006
	£ 000
Amounts falling due within one year
Trade debtors		6,280
Amounts recoverable on contracts		274
Other debtors		230
Deferred tax asset (Note 16)		816
Prepayments and accrued income		559
Corporation tax recoverable		13
		8,172

14

James R. Knowles (Holdings) PLC

Notes

13 Creditors: amounts falling due within one year

	2006
	£ 000
Bank overdrafts		2,654
Obligations under finance leases and hire purchase contracts		140
Bank loans		289
Trade creditors		1,488
Corporation tax		326
Other taxes and social security		1,449
Other creditors		505
Accruals and deferred income		3,310
		10,161

The bank loans and overdrafts are secured by fixed and floating charges on other assets of certain Group companies.

14 Creditors: amounts falling due after more than one year

	2006
	£ 000
Bank loans		265
Obligations under finance leases and hire purchase contracts		128
		393

Bank loans are repayable as follows:
	2006
	£ 000
Within one year	289
Between one and two years	138
Between two and five years	127
Total outstanding	554

15

James R Knowles (Holdings) PLC

Notes

14Creditors: amounts falling due after more than one year (continued)

Details of loans wholly repayable within 5 years:	2006
	£ 000
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.39% *	10
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 6.69% *	2
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 6.69% *	10
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.09% *	17
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.35% *	36
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.8% *	41
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.8% *	23
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.8% *	18
Bank loan repayable by monthly instalments. Interest charged at a variable rate of 6.00%*	10
Bank loan repayable by bi-annual instalments. Interest charged at a variable rate of 5.56%*	100
Bank loan repayable by monthly instalments. Interest charged at a variable rate of 7%*	287
	554

These loans are secured by fixed and floating charges on the relevant equipment being financed.

Obligations under finance leases and hire purchase contracts

	2006
	£ 000
Total outstanding	315
Interest attributable to future years	(47	)
	268

The maturity of obligations under finance leases and hire purchase contracts is as follows:

	2006
	£ 000
Within one year	140
In the second to fifth years	128
	268

Obligations under finance leases and hire purchase contracts are secured by retention of title to the relevant equipment.

15 Provisions for liabilities and charges

	Onerous
	leases
	£ 000
At 1 August 2005	177
Charged to the profit and loss for the year	470
At 31 July 2006	647

The onerous lease provision represents provision for vacant properties in the UK, the main provision £500,000 relates to 53 Bedford Square in London, the property is currently vacant and the Directors are currently negotiating to surrender the lease. The Directors consider that the amount will be settled in the next financial year.

16

16 Deferred Tax

The elements of deferred taxation are as follows:

	2006
	£ 000
Difference between accumulated depreciation and
amortisation and capital allowances	210
Other timing differences	75
Tax losses	531
Deferred tax asset (note 12)	816

17

James R Knowles (Holdings) PLC

Notes

17 Called up share capital

	2006		2006
	Number		£ 000
Authorised
26,000,000 ordinary shares of 5p each		26,000,000		1,300
Allotted, called up and fully paid
Ordinary shares of 5p each
At start of the year		19,921,853		996
Issue of shares		1,250,000		63
At end of the year		21,171,853		1,059

On 2 December 2005 the Group issued 305,800 new ordinary shares of 5p each to Mr Brian Quinn, Chief executive of the Group, at 30 pence per sharein respect of a retention bonus.

In addition, on the same day, the Group issued a further 944,200 new ordinary shares to Mr Brian Quinn in exchange for the minority interests he held in the Group's North American subsidiaries as follows:

Both of the above transactions were calculated on an arms length basis with the shares being awarded at the prevailing market values.

	Holding in subsidiary			Number of shares issued		Price per share
Knowles Consultancy Services Inc		7.50	%		542,235		28.8
1226545 Ontario Limited		Entitlement to 10	%		314,635		30
J R Knowles (USA) LLC		10	%		87,330		30

Goodwill arising as a result of the above transactions amounted to £307,000 which was capitalised and will be written off over 20 years

 

18 Reserves

	Share premium account		Merger reserve		Profit and loss account
	£ 000		£ 000		£ 000
At 1 August 2005		3,026		199		(63	)
Foreign exchange		-		-		(66	)
Retained loss for the year		-		-		(4,080	)
Premium on share issue		307		-		-
At 31 July 2006		3,333		199		(4,209	)

The cumulative total of goodwill written off against reserves in respect of acquisitions prior to 1 August 1998 when FRS 10: Goodwill and intangible assets was adopted amounts to £1,057,000 of which £1,019,000 was taken to the merger reserve and the remaining £38,000 was taken to the profit and loss reserve.

19 Commitments

(i) Capital commitments at the end of the financial year, for which no provision has been made, are as follows:

	2006
	£ 000
Contracted	-

(ii)  Annual commitments under non-cancellable operating leases are as follows: 

	2006
	Land &
	Buildings		Other
	£ 000		£ 000
Operating leases which expire:
Within one year		14		4
In the second to fifth years inclusive		412		284
After five years		187		10
		613		298

20 Reconciliation of operating profit to net cash inflow from operating activities

	2006
	£ 000
Operating loss		(3,208	)
Depreciation charge		571
Amortisation charge		33
Loss on disposal of fixed assets		12
Decrease in stocks		253
Decrease in debtors		1,542
Increase in creditors		30
Increase in provisions		470
Impairment of goodwill on acquisition of Knowles Lawyers Limited		721
Other non cash movements		91
Foreign exchange differences*		(77	)
Net cash inflow from operating activities		438

*Adjustment arising from re-translation of opening balance sheet. This has not been done on a line-by-line basis, as it cannot be determined without unreasonable expense.

The cash effect of exceptional operating items is £1,025,000.

It is not practicable to divide cashflows into those arising from continuing and discontinued operations.

18

James R. Knowles (Holdings) PLC

Notes

21 Acquisitions

On 3rd July 2006 the Group acquired Knowles Lawyers Limited from Mr Brian Quinn, Chief Executive of the Group  for £50,000 paid by cash (see note 9).

In calculating the goodwill arising on acquisition, the fair value of net assets have been assessed and are not considered to be materially different to the book value at that time.

	Fair
	Value
	£ 000
Fixed assets
Tangible		38
Current assets
Debtors		790
Cash at bank and in hand		110
Total assets		938
Creditors
Due within one year		(1,396	)
Due after more than one year		(213	)
Net liabilities		(671	)

	£ 000
Cash consideration		50
Net liabilities acquired		671
Goodwill arising on acquisition (note 9)		721

The net loss of Knowles Lawyers Limited in the year ended 31 July 2005 was £260,894 and in the period to 3rd July 2006 was £246,205:

Cash flows

The net outflow of cash arising from the acquisition of Knowles Lawyers Limited was as follows:-

	£ 000
Cash consideration		(50	)
Cash acquired		110
Overdraft acquired		(35	)
Net inflow of cash		25

22 Analysis of cash flows for headings netted in the cash flow statement

Returns on investments and servicing of finance
	2006
	£ 000
Interest received		20
Interest paid		(328	)
Interest element of finance leases		(53	)
Minority dividends paid		(296	)
		(657	)

Capital expenditure and financial investment
	2006
	£ 000
Purchase of tangible fixed assets		(422	)

19

Aquisitions and disposals

Net cash inflow from sale of Knowles Loss Adjusters Limited (note 3)	675
Net cash inflow from purchase of Knowles Lawyers Limited (note 22)	25
Net cash outflows from closure of branch	(8	)
Net cash outflow from purchase of minority in Knowles Consultancy Services Inc.	(91	)
	601

Financing
	2006
	£ 000
(Repayment)/inception of loans		(588	)
Inception of new finance leases		281
Capital element of finance lease rental payments		(161	)
		(468	)

20

James R. Knowles (Holdings) PLC

Notes

23 Reconciliation of net cash inflow to movement in net debt

	2006
	£ 000
Decrease in cash in the year		(789	)
Cash inflow from increase in debt and lease financing		468
Loan acquired with subsidiary		(293	)
		(614	)
Net debt at 31 July 2005		(1,299	)
Net debt at 31 July 2006		(1,913	)

24 Analysis of net debt

	At 31						Acquired with			Non cash			At 31
	July 2005			Cash flow			subsidiary			changes			July 2006
	£ 000			£ 000			£ 000			£ 000			£ 000
Cash at bank and in hand		1,761			(198	)		-			-			1,563
Overdraft		(2,063	)		(591	)		-			-			(2,654	)
		(302	)		(789	)		-			-			(1,091	)
Debt due after one year		(416	)		149			(213	)		215			(265	)
Debt due within one year		(433	)		439			(80	)		(215	)		(289	)
Finance leases		(148	)		(120	)		-			-			(268	)
		(1,299	)		(321	)		(293	)		-			(1,913	)

25 Reconciliations of movement in shareholders' funds

	2006
	£ 000
Retained loss for the financial year		(4,080	)
Foreign exchange movements		(66	)
New share capital subscribed		370
Net movement in shareholders' funds		(3,776	)
Opening shareholders' funds - equity		4,158
Closing shareholders' funds - equity		382

26  Financial Instruments and risk management

The Group finances its operations through a mixture of equity finance, retained profits, bank borrowings and various items such as trade debtors and trade creditors that arise directly from its operations. The Group's borrowings relate mainly to its working capital requirements. These borrowings take the form of bank overdraft facilities. The Group's short-term working capital requirements fluctuate significantly throughout the year because of seasonal factors, tax, bonus and dividend payments. In these circumstances the directors do not feel that it is appropriate to borrow at a fixed rate of interest. At the year-end, 88% of the Group's borrowings were at floating rates.

However, most fixed asset purchases are financed by fixed rate borrowings in the form of finance leases, hire purchase contracts and long-term loans. The term of the borrowings is matched to the length of the useful life of the assets. At the year end, 12% of the Group's borrowings were at fixed rates of interest.

It is, and has been throughout the period under review, the Group's policy that no trading in financial instruments shall be undertaken.

As permitted by FRS 13: Derivatives and other financial instruments: disclosures, short-term debtors and creditors have been excluded from the following analyses.

21

James R. Knowles (Holdings) PLC

Notes

26  Financial Instruments and risk management (continued)

Interest rate risk

The interest rate profile of the Group's financial liabilities as at 31 July 2006 was:

a)			Floating rate		Fixed rate
	Total		financial liabilities		financial liabilities
Currency		£ 000		£ 000		£ 000
Sterling		2,890		2,493		397
Hong Kong Dollar		25		10		15
Canadian Dollar		111		100		11
US Dollar		215		215		-
Malaysian Ringitts		2				2
Dirhams		233		233		-
		3,476		3,051		425

b)	Fixed rate financial liabilities
	Weighted average		Weighted average
	interest rate		period for which
Currency	%		rate is fixed
Sterling		8.25		2 years

The floating rate financial liabilities comprise bank overdraft and bank loan facilities that bear interest at rates based on clearing bank and finance house base rates.

There are no financial liabilities on which no interest is paid.

Borrowing facilities

The Group had undrawn committed borrowing facilities at 31 July 2006, in respect of which all conditions precedent had been met, as follows: 

	2006
	£ 000
Expiring in one year or less		550

Liquidity risk

As regards liquidity, the Group's working capital borrowing facilities are reviewed by its lenders on an annual or semi-annual basis.

The Group has no financial assets other than short-term debtors and cash at bank.

Foreign currency risk

The Group's U.K. subsidiaries price their export sales in sterling and hence there is no foreign currency risk on these transactions.

The Group has overseas subsidiaries and branches in: Hong Kong, Singapore, Malaysia, Germany, Spain, Italy, Egypt, U.A.E., Canada, USA and Australia. The revenues and expenses are mainly denominated in local currencies. The Group's sterling balance sheet is exposed to potential foreign currency losses on translation of the net assets of these overseas subsidiaries. However, the Group's policy is to maximise dividend payments and cash repatriation from these subsidiaries and branches to the holding company. The Directors do not consider it would be appropriate to borrow in matching foreign currencies to hedge against these translation risks as, in many cases, the net assets of these overseas operations are small and in addition taking on additional borrowings would create an unnecessary interest rate risk.

Fair values

The carrying value of financial assets and liabilities approximate to their fair value.

27 Related party transactions

Until 2 December 2005, the Group's Chief Executive, Mr Brian Quinn, had a 10% holding in Knowles Consultancy Services Inc. Following the declaration of a dividend by this company during the year, £16,000 was due to Mr Quinn, of which £Nil remains unpaid at the Balance Sheet date.

In addition, during the year a number of shares in James R Knowles (Holdings) PLC were issued to Mr Brian Quinn in exchange for minority holdings, see note 17

On 3 July 2006 the group acquired the share capital of Knowles Lawyers limited from Mr Brian Quinn,  details are given in note 21

During the period from 1 August 2005 to aquisition the following transactions took place between Knowles Lawyers Limited and other Group companies

	£ 000
Sales to Knowles Lawyers Limited		152
Purchases from Knowles Lawyers Limited		220

28 Ultimate parent undertaking and related party

On 31 August 2006 an offer from Hill SA, a company incorporated in Luxembourg, to purchase the whole of the company's share capital became unconditional. Any shareholdings where the offer to purchase had not been accepted were to be acquired under the provisions of Section 429 of the Companies Act 1985.

The ultimate parent undertaking is Hill International Inc, a company incorporated in the United States of America. Since acquisition Hill International Inc is the Group's ultimate controlling party, prior to 31 August 2006, the Group was controlled by J R Knowles, a director.

22

Notes

29 Reconciliation to accounting principles generally accepted in the United States

The principal differences between UK GAAP and US GAAP for the consolidated financial statements of James R. Knowles (Holdings) PLC can be summarised as follows:

	2006
	£ 000
Stockholders equity per UK GAAP		502
Adjustment to goodwill (Note A)		(193	)
Amortisation on reinstated goodwill (Note A)		(48	)
Recognition of intangible assets on business combinations (Note A)		1,399
Amortisation of intangibles (Note A)		(1,024	)
Deferred tax liabilities on business combinations (Note A)		(47	)
Adjustment in respect of leases (Note C)		(35	)
Taxation effect of all adjustments (Note D)		(10	)
Stockholders equity per US GAAP		544

Under US GAAP the effect on the profit and loss account would be as follows:

	2006
	£ 000
Loss on ordinary activities before minority interests
and dividends under UK GAAP		(3,995	)
Adjustment in respect of amortisation change in the year		(31	)
Adjustment in respect of Perform 21		173
Adjustment in respect of intangibles		(66	)
Taxation effect of all adjustments		(5	)
Net loss under US GAAP		(3,924	)

As a consequence of these restatements the loss per share would decrease by 0.3 pence.

Under US GAAP, the cash flow statement would be presented as follows:
	2006
	£ 000
Cash flow from operating activities		157
Cash flow from investing		(170	)
Cash flow from financing		(305	)
		(318	)

The Statement of Goup cash flow is prepared in accordance with UK FRS No 1 (Revised 1996) - Cash Flow Statements, the objective of which is similar to that set out in the US Standard SFAS No. 95 - Statements of Cash Flows. The two statements differ, however, in their definitions of cash and their presentation of the main constituents of the cash flow

The definition of cash in the UK standard is limited to cash plus depostits les overdrafts/borrowings repayable on demand without penalty. In the US, the definition in SFAS No. 95 excludes overdrafts but is widened to include cash equivalents comprising short-term highly liquid investments that are both readily convertible to known amounts of cash and so near their maturities that they present insignificant risk of changes in value.

a) Intangible assets and goodwill

In the consolidated financial statements, goodwill arising on acquisitions made prior to January 1998 accounted for under the purchase method, has been eliminated against shareholders’ equity, in accordance with UK GAAP. Under the requirements of UK Financial Reporting Standard 10 ‘Goodwill and intangible assets’, goodwill on acquisitions made after 1 January 1998 is capitalised and amortised over its estimated useful life, which is generally presumed not to exceed 20 years. UK GAAP requires that on subsequent disposal or termination of a previously acquired business, any goodwill previously taken directly to shareholders equity is charged in the income statement against the profit or loss on disposal or termination.

23

James R. Knowles (Holdings) PLC

Notes

29 Reconciliation to accounting principles generally accepted in the United States (continued)

The Company’s consolidated financial statements included in this annual report have been prepared in accordance with UK GAAP, which differs in certain significant respects from accounting principles generally accepted in the United States ("US GAAP"). The principal differences between UK GAAP and US GAAP are presented below together with explanations that affect total shareholders’ equity and net income as at and for the year ended 31 July 2006.

This US GAAP information provides a reconciliation between earnings available for shareholders under UK GAAP and net income under US GAAP and between shareholders’ funds under UK GAAP and shareholders’ equity under US GAAP respectively.

Under US GAAP, SFAS 142 ‘Goodwill and other intangible assets’ is applicable for accounting periods starting after 15 December 2001. This states that goodwill should be held on the balance sheet, it should not be amortised, but considered for impairment on an annual basis. Prior to this date, goodwill was amortised. For the purposes of US GAAP, the Group adopted Financial Accounting Standard 142 ‘Goodwill and other intangible assets’ in the year end 31 July 2003 and from this date, goodwill which arise would not be amortised but reviewed for impairment.

Under US GAAP, separately identified intangible assets arising on acquisitions, would be capitalised and amortised over their useful economic lives. Under UK GAAP, these assets are included in goodwill.

Impairment of goodwill: Under UK GAAP, goodwill is reviewed for potential impairment where there is an indicator that impairment may have occurred. The impairment is measured by comparing the carrying value of goodwill for each income-generating unit (IGU) with the higher of the net realisable value and value in use. Under US GAAP, goodwill impairment reviews are also conducted when an indicator of impairment exists, in addition to an annual impairment test required by FAS142. The impairment is measured by comparing the carrying value of each reporting unit with its fair value. Where the carrying value, including any separately identifiable intangible assets, is greater than the fair value, the impairment loss is based on the excess of the carrying value of goodwill over the implied fair value of the goodwill. Where reporting units identified under US GAAP differ from IGUs identified under UK GAAP, a reconciling item may arise.

As as result of the above a difference has arisen whereby goodwill which arose on acquisition has been reinstated to its original value and subsequently an element of this has been reclassified as an intangible asset. This intangible asset will be amortised over a period of 8 years from the date of acquisition with an anual impairment review.

b) ‘Work in Progress’ Perform 21

During the year, the Group capitalised time costs in creating a Partnering Contract and Toolkit and related website. The Group recognised these costs as an asset, as it was perceive the Group would derive some benefit from these costs. The costs were capitalised and included within work in progress under UK GAAP.

Under US GAAP, guidance on the recognition of intangibles is provided in EITF 00-2 ‘Accounting for website development costs’ and SFAS142 ‘Goodwill and intangible assets’.

The US Standards include stricter criteria in respect of the treatment of costs and provides condition as to whether costs should be capitalised or expensed. Following a review of this criteria, differences were noted between those amounts which would be capitalised under UK and US GAAP as to those values which should and should not be capitalised. As such a difference between UK and US GAAP results.

c) Leases

The Group has several operating leases which have incentives attached in the form of rent free periods.

Under UK GAAP the operating lease charges have been recognised when incurred, and the benefits of these rent free periods have been recognised in the periods in which the cash flow benefit was received.

Under US GAAP (SFAS 13 ‘Accounting for Leases’) operating lease charges are recognised on a straight line basis over the lease term, the rent free period should be spread over the same lease term

As a result of this, a difference results.

The GAAP difference is UKGAAP spread to break clause USGAAP over the whole lease.

.

d) Deferred tax

Following the implementation in the UK of FRS19 ‘Deferred tax’, both US GAAP and UK GAAP now provide for deferred taxation on a full liability basis. The Group provides for deferred taxation in respect of timing differences, subject to certain exceptions between the recognition of gains and losses in the financial statements and for tax purposes. Timing differences are recognised, include accelerated capital allowances, unrelieved tax losses and short term timing differences.

Under US GAAP, deferred taxation would be computed on all differences between the tax bases and book values of assets and liabilities which will result in taxable or tax deductible amounts arising in future years.

US GAAP requires provision for revaluation gains, fair value adjustments similar to revaluations arising on the acquisition of a business, latent rolled over gains and the retained earnings of foreign subsidiaries that are not permanently reinvested. These are not normally provided for under UK GAAP.

Deferred taxation assets under UK GAAP and US GAAP are recognised only to the extent that it is more likely than not that they will be realised.

e) Dividends

Under US GAAP final ordinary dividends are provided for in the year in respect of which they are proposed by the Board or approved by the shareholders. Under US GAAP, dividends would not be provided for until the year in which they are declared.

24

Independent Auditors' Report

To the Board of Directors and Shareholders of James R. Knowles (Holdings) PLC

We have audited the accompanying consolidated balance sheets of James R. Knowles (Holdings) PLC ("the Company") as of 31 July 2005 and 2004, and the related consolidated profit and loss accounts, statements of total recognised gains and losses and consolidated cash flow statements for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of 31 July 2005 and 2004, and of the results of its operations and its cash flows for the two years then ended in accordance with UK Generally Accepted Accounting Practice (GAAP).

These consolidated statements have been restated from the previously published UK statutory financial statements as described in Note 28.

UK GAAP varies in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 29 to the consolidated financial statements.

KPMG Audit plc

Leeds

United Kingdom

17-Nov-06

25

James R. Knowles (Holdings) PLC

Consolidated profit and loss accounts

for the year ended 31 July 2005

			2005			2004
			Restated			Restated
			(Note 28 )			(Note 28 )
	Note		£ 000			£ 000
Turnover		2		30,224			31,256
Change in work in progress				(74	)		28
Other external charges				(3,349	)		(4,251	)
Staff costs		5		(17,913	)		(18,016	)
Depreciation and amortisation				(690	)		(537	)
Other operating charges		3		(7,977	)		(7,886	)
Operating profit				221			594
Other interest receivable and similar income				8			50
Interest payable and similar charges		6		(247	)		(187	)
(Loss)/profit on ordinary activities before taxation		3 - 6		(18	)		457
Tax on profit on ordinary activities		7		4			(176	)
(Loss)/profit on ordinary activities after taxation				(14	)		281
Minority interests (equity)				(288	)		(226	)
(Loss)/profit for the financial year				(302	)		55
Dividends (equity)				-			(159	)
Retained loss for the financial year		19		(302	)		(104	)
Basic (loss)/earnings per share (pence)		8		(1.5	)		0.3
Diluted (loss)/earnings per share		8		(1.5	)		0.3

A note on historical cost profits has not been prepared as the historical cost profit and losses are the same as detailed in the above profit and loss account.

26

James R. Knowles (Holdings) PLC

Consolidated statements of total recognised gains and losses

for the year ended 31 July 2005

	2005			2004
	Restated			Restated
	(Note 28)			(Note 28)
	£ 000			£ 000
(Loss)/profit for the financial year		(302	)		55
Currency translation differences on foreign investments		147			(342	)
Total recognised losses relating to the financial year		(155	)		(287	)

27

James R. Knowles (Holdings) PLC

Consolidated balance sheets

at 31 July 2005

			2005						2004
			Restated						Restated
			(Note 28)						(Note 28)
	Note		£ 000			£ 000			£ 000			£ 000
Fixed assets
Intangible assets		9					450						476
Tangible assets		10					1,292						1,374
Investments		11					2						2
							1,744						1,852
Current assets
Stocks		12		903						977
Debtors		13		9,085						8,751
Cash at bank and in hand				1,761						2,056
				11,749						11,784
Creditors - Amounts falling due within one year		14		(8,378	)					(8,282	)
Net current assets							3,371						3,502
Total assets less current liabilities							5,115						5,354
Creditors - Amounts falling due after more than one year		15					(476	)					(783	)
Provisions for liabilities and charges		16					(177	)					(30	)
Net assets							4,462						4,541
Capital and Reserves
Called up share capital		18					996						996
Share premium account		19					3,026						3,026
Merger reserve		19					199						199
Profit and loss account		19					(63	)					92
Shareholders' funds		25					4,158						4,313
Minority interests (equity)							304						228
							4,462						4,541

28

James R. Knowles (Holdings) PLC

Consolidated cash flow statements

for the year ended 31 July 2005

			2005			2004
	Note		£ 000			£ 000
Net cash inflow from operating activities		21		1,330			973
Return on investments and servicing of finance		22		(381	)		(447	)
Taxation				(223	)		(203	)
Capital expenditure and financial investment		22		(582	)		(403	)
Equity dividends paid				-			(577	)
Net cash inflow/(outflow) before financing				144			(657	)
Financing		22		(343	)		13
Decrease in cash in the year		23,24		(199	)		(644	)

29

James R. Knowles (Holdings) PLC

Notes

(forming part of the financial statements)

1 Accounting policies

The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group's financial statements except as noted below.

Basis of preparation

These nonstatutory consolidated financial statements have been prepared in accordance with UK applicable accounting standards and under the UK historical cost accounting rules. They have been prepared for the purposes of US regulatory filing and have been restated from the previously published UK statutory financial statements as described in Note 28.

Basis of consolidation

The Group accounts include the accounts of the Company and all its subsidiary undertakings made up to 31 July 2005. Unless otherwise stated, the acquisition method of accounting has been adopted. Under this method, the results of subsidiary undertakings acquired or disposed of in the year are included in the consolidated profit and loss account from the date of acquisition or up to the date of disposal.

Goodwill

Purchased goodwill (both positive and negative) arising on consolidation in respect of acquisitions before 1 August 1998, when FRS 10: Goodwill and intangibleassets was adopted, was written off to reserves in the year of acquisition. When a subsequent disposal occurs, any related goodwill previously written off toreserves is written back through the profit and loss account as part of the profit or loss on disposal.

Purchased goodwill (representing the excess of the fair value of the consideration and associated costs given over the fair value of the separable net assets acquired) arising on consolidation in respect of acquisitions since 1 August 1998 is capitalised. Positive goodwill is amortised to nil by equal annual instalments over its estimated useful life which is 20 years.

On the subsequent disposal of a business acquired since 1 January 1998, the profit or loss on disposal is calculated after charging/(crediting) the unamortised amount of any related goodwill.

Tangible fixed assets and depreciation

Depreciation is provided by the Group to write off the cost or valuation less the estimated residual value of tangible fixed assets by equal instalments over their estimated useful economic lives as follows:

Leasehold buildings	-	Life of lease
Office equipment	-	10% - 33% per annum
Computer equipment	-	20% - 33% per annum
Motor vehicles	-	25% reducing balance
Technical publications	-	20% per annum

No depreciation is provided on freehold land.

Foreign currencies

Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the profit and loss account.

The assets and liabilities of overseas subsidiary undertakings are translated at the closing exchange rates. Profit and loss accounts of such undertakings are consolidated at the average rates of exchange during the year. Gains and losses arising on these translations are taken to reserves, net of exchange differences arising on related foreign currency borrowings.

Leases

Assets acquired under finance leases are capitalised and the outstanding future lease obligations are shown in creditors. Operating lease rentals are charged to the profit and loss account on a straight line basis over the period of the lease.

Stock: work in progress

Gross work in progress is stated at the lower of cost and net realisable value. Work in progress is defined as the employment cost of staff plus direct expenses and overheads related to staff time. Payments received on account of work in progress are shown as a deduction from gross work in progress. Payments received on account in excess of the carrying value of the relevant work in progress are included in creditors.

Long term work in progress

The amount of profit attributable to the stage of completion of a long term contract is recognised when the outcome of the contract can be foreseen with reasonable certainty. Turnover for such contracts is shown to the extent that the Group has obtained the right to consideration, which in most cases is recorded as cost appropriate to their stage of completion plus attributable profits, less amounts recognised in previous years. Provision is made for any losses as soon as they are foreseen. Long term work in progress is stated at cost, after deducting foreseeable losses and attributable payments received on account. Payments received on account in excess of applicable work in progress are included in creditors.

Turnover

Turnover represents the amounts (excluding value added tax) recorded as turnover in respect of long-term work in progress as described above and the amounts earned to date on other work to the extent that the Group has obtained the right to consideration.

Taxation

Deferred tax is recognised, without discounting, in respect of all timing differences between the treatment of certain items for taxation and accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS19: Deferred taxation.

Cash

Cash, for the purpose of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand.

Going Concern

The Directors consider that recent losses sustained are one off in nature. Current trading has improved and profits are forecasted going forward. Opportunities for growth exist as a consequence of the aquisition by Hill which have strengthened the position. The Knowles Group is also under receipt of full financial support from the new parent company. For these reasons the Directors consider the going concern basis is appropriate for preparing the financial statements.

30

James R. Knowles (Holdings) PLC

Notes

2 Segmental analysis

The table below sets out turnover, operating profit/(loss) and net assets for each geographic area of operation by origin.

	2005							2004
			Operating			Net				Operating			Net
			Profit/(loss)			Assets				Profit/(loss)			Assets
	Turnover		Restated  (Note 28)			Restated  (Note 28)		Turnover		Restated  (Note 28)			Restated  (Note 28)
	£ 000		£ 000			£ 000		£ 000		£ 000			£ 000
United Kingdom		18,745		389			1,736		20,178		1,200			2,465
Overseas		11,479		541			2,726		11,078		(75	)		2,076
Holding Company Costs		-		(216	)		-		-		(531	)		-
Exceptional operating charge		-		(493	)		-		-		-			-
		30,224		221			4,462		31,256		594			4,541

 Turnover by geographical destination is significantly different from turnover by origin and is as follows:

	2005		2004
	£ 000		£ 000
United Kingdom		17,806		17,461
Overseas		12,418		13,795
		30,224		31,256

3 Profit on ordinary activities before taxation

	2005		2004
	£ 000		£ 000
Operating profit is stated after charging the following:
Auditors' remuneration including expenses:
Audit - Parent company (1)		32		36
Audit - Rest of group		69		83
		101		119
Hire of plant and machinery under operating leases		357		414
Amounts payable in respect of other operating leases		1,320		1,063
Depreciation and other amounts written off tangible fixed assets:
Owned		287		199
Leased		377		312
Amortisation of goodwill		26		26
Loss on foreign exchange		10		9
Exceptional items:
Severance payment to Mr M Charlton		150		-
Restructuring of Far East operations		93		-
Redundancy costs		80		-
Onerous lease provision		170		-
		493		-

The effect of the above exceptional items is to decrease the taxation charge by £148,000 (2004: £Nil)

(1) The Group's principle auditors, KPMG Audit Plc, received £5,000 in respect of taxation work in addition to the fees disclosed above.

31

James R. Knowles (Holdings) PLC

Notes

4 Remuneration of directors

	2005		2004
	£ 000		£ 000
Directors' emoluments:
As directors		680		576
Other emoluments		38		91
		718		667

The remuneration of individual directors during the year was as follows:

		Year Ended 31 July 2005						Year Ended 31 July 2004
		Salary		Other				Salary		Other
		and Fees		Benefits		Total		and Fees		Benefits		Total
		£'000		£'000		£'000		£'000		£'000		£'000
Executive Directors
J. Roger Knowles	1		185		1		186		183		1		184
Michael Charlton	2		195		10		205		183		75		258
Brian Quinn			185		17		202		183		15		198
Charlotte Parsons			83		10		93		-		-		-
			648		38		686		549		91		640
Non-Executive Directors
Sir Michael Latham			-		-		-		3		-		3
John Lee			16		-		16		16		-		16
Peter Bates			16		-		16		8		-		8
			32		-		32		27		-		27
			680		38		718		576		91		667

¹ A total of £185,400 (2004 - £183,150) in respect of the fees of J. Roger Knowles has been paid to Wynton Services Limited, a company incorporated in the Republic of Cyprus.

² A total of £150,000 in respect of the salary for M.C. Charlton was paid as payment in lieu of notice.

5 Staff numbers and costs

The average number of persons employed by the Group (including directors) during the year, analysed by category, was as follows:

	Number of employees
	2005		2004
Fee earning staff		210		234
Administrative staff		144		132
		354		366

The aggregate payroll costs of these persons were as follows:

	2005		2004
	Restated		Restated
	(Note 28)		(Note 28)
	£ 000		£ 000
Wages and salaries		16,085		16,287
Social security costs		1,411		1,405
Health insurance scheme		259		250
Staff accommodation		158		74
		17,913		18,016

6 Interest payable and similar charges

	2005		2004
	£ 000		£ 000
On bank loans and overdrafts		171		156
Finance charges payable in respect of finance leases and hire purchase contracts		76		31
		247		187

7 Taxation

(a) Analysis of charge in period

	2005			2004
	Restated			Restated
	(Note 28)			(Note 28)
	£ 000	£ 000		£ 000		£ 000
Current tax
UK corporation tax on profits in the period	-			46
Adjustments in respect of prior periods	66			(27	)
		66				19
Foreign tax		203				192
Total current tax (note 7 (b))		269				211
Deferred tax
Origination and reversal of timing differences		(273	)			(35	)
Tax on profit on ordinary activities		(4	)			176

32

James R. Knowles (Holdings) PLC

Notes 

7 Taxation (continued)

(b) Factors affecting the tax charge for the current period

The effective rate of tax of 34% (2004: 38%) is higher than the standard UK rate of corporation tax of 30% (2004: 30%) principally due to the net effects of unrelieved overseas tax losses and differences in foreign tax rates.

The differences are explained below.

	2005			2004
	Restated			Restated
	(Note 28)			(Note 28)
	£ 000			£ 000
(Loss)/Profit on ordinary activities before tax		(18	)		457
Profit on ordinary activities multiplied by the standard rate of
corporation tax in the UK of 30% (2004: 30%)		(6	)		137
Effects of:
Expenses not deductible for tax purposes		(24	)		28
Depreciation for period in excess of capital allowances		43			23
Unrelieved UK tax losses		71			-
Unrelieved overseas tax losses		74			79
Lower tax rates on small UK company earnings		(1	)		(3	)
Other tax rates on overseas earnings		28			(50	)
Adjustment to tax charge in respect of prior periods		66			(27	)
Other tax adjustments		18			24
Current tax charge for the period (note 7 (a))		269			211

(c) Factors that may affect future tax charges

The Group envisages utilising its tax losses in the near future which will then mean the effective tax rate will be closer to 30%.

8 Earnings per share

	2005			2004
	Restated			Restated
	(Note 28)			(Note 28)
	£ 000			£ 000
(Loss)/profit for the financial year		(302	)		55
Weighted average number of shares		19,921,853			19,921,853
Diluted effect of options		-			-
Diluted weighted average number of shares		19,921,853			19,921,853
Basic (loss)/earnings per share		(1.5p	)		0.3p
Diluted (loss)/earnings per share		(1.5p	)		0.3p

The share options which currently exist are not considered to be dilutive.

33

James R. Knowles (Holdings) PLC

Notes

9 Intangible fixed assets

	Goodwill
	£ 000
Cost
At 1 August 2004		524
Additions		-
At 31 July 2005		524
Amortisation
At 1 August 2004		48
Charge for the year		26
At 31 July 2005		74
Net book value
At 31 July 2005		450
At 31 July 2004		476

 

10 Tangible fixed assets 

			Office and
	Land and		computer			Motor
	buildings		equipment			vehicles			Total
	£ 000		£ 000			£ 000			£ 000
Cost or valuation
At start of the year		49		5,267			229			5,545
Additions		-		582			-			582
Disposals		-		(52	)		(68	)		(120	)
Foreign exchange		-		52			6			58
At end of the year		49		5,849			167			6,065
Depreciation
At start of the year		29		3,936			206			4,171
Charge for the year		2		654			8			664
Disposals		-		(42	)		(64	)		(106	)
Foreign exchange		-		38			6			44
At end of the year		31		4,586			156			4,773
Net book value
At 31 July 2005		18		1,263			11			1,292
At 31 July 2004		20		1,331			23			1,374

a) The above net book value includes an amount of £573,000 (2004 : £941,000) in respect of assets held under finance leases and similar hire purchase contracts. The total depreciation on such assets during the year amounts to £377,000 (2004: £312,000).

b) Contained within land and buildings are short leaseholds as follows:

	2005			2004
	£ 000			£ 000
Cost		49			49
Depreciation		(31	)		(29	)
Net book value		18			20

34

James R. Knowles (Holdings) PLC

Notes

11 Fixed asset investments

	£ 000
Listed investments
Cost at beginning and end of the year		2

The current market value of the listed investments is not considered by the directors to be materially different to the book value.

The companies in which the Group's interest at 31 July 2005 is more than 10% are as follows:

Subsidiary undertakings:	Country of registration or incorporation		Percentage of ordinary shares held
Knowles Limited		England and Wales		100	%
James R. Knowles Limited		England and Wales		100	%
James R. Knowles (Europe) Limited		England and Wales		100	%
Knowles Project Services Limited		England and Wales		100	%
Knowles Loss Adjusters Limited		England and Wales		90	%
Knowles Management Limited		England and Wales		75	%
Knowles Law Limited		England and Wales		75	%
James R. Knowles (Worldwide) Limited		England and Wales		100	%
James R Knowles Global Limited		England and Wales		100	%
Consortium James R. Knowles Limited		England and Wales		75	%	*
Knowles Capital Projects Limited		England and Wales		75	%
Knowles Legal Limited		England and Wales		100	%
Knowles Commercial Services Limited		England and Wales		85	%
Knowles Construction Technology Limited		England and Wales		85	%
Knowles Legal Services Limited		England and Wales		100	%
Knowles Platinum Limited		England and Wales		100	%
James R. Knowles (Deutschland) GmbH		Germany		100	%	*
James R. Knowles (Espana) SL		Spain		100	%	*
James R. Knowles (Overseas) Limited		Cyprus		100	%	*
James R Knowles (Singapore) Pte Limited		Singapore		90	%	*
James R. Knowles (Hong Kong) Limited		Hong Kong		100	%	*
James R. Knowles (Middle East) Limited		Cyprus		75	%	*
James R. Knowles (M) Sdn Bhd		Malaysia		100	%	*
Knowles Surveying Services Limited		Hong Kong		90	%	*
James R. Knowles (Thailand) Ltd		Thailand		100	%	*
James R. Knowles (B) Sdn Bhd		Brunei		100	%	*
Knowles Consultancy Services Inc.		Canada		60	%	*
Knowles North America Holdings Inc.		Canada		100	%	*
1226545 Ontario Limited		Canada		65	%	*
Baker, Bertrand, Chasse & Goguen Claim Services Limited		Canada		65	%	*
James R. Knowles (Egypt) Limited		Egypt		75	%	*
J R Knowles (USA) LLC		USA		60	%	*
James R. Knowles (Australian Holdings) Pty Limited		Australia		90	%	*
James R. Knowles (Australia) Pty Limited		Australia		90	%	*
James R. Knowles (NSW) Pty Limited		Australia		90	%	*
James R. Knowles Lawyers Pty Limited		Australia		90	%	*
Knowles Adjusters Ireland Limited		Eire		90	%	*
Associated undertakings:
Knowles Video Services Limited		Scotland		50	%	*

* Not directly owned by James R. Knowles (Holdings) PLC.

The above companies are principally involved in construction contracts consultancy and have all been included in the consolidation. The companies are all owned in the proportions stated either by James R. Knowles (Holdings) PLC or by James R. Knowles (Worldwide) Limited, a company registered in England and Wales which is itself a wholly owned subsidiary of James R. Knowles (Holdings) PLC.

Of the above companies, Knowles Legal Limited, Knowles Legal Services Limited, Knowles Platinum Limited, Knowles Project Services Limited, Consortium James R. Knowles Limited, James R. Knowles (NSW) Pty Limited and Knowles Video Services Limited did not trade during the year.

35

James R. Knowles (Holdings) PLC

Notes

12 Stocks

	2005		2004
	£ 000		£ 000
Work in progress		849		931
Books held for re-sale		54		46
		903		977

13 Debtors

	2005 Restated (Note 28)		2004 Restated (Note 28)
	£ 000		£ 000
Amounts falling due within one year
Trade debtors		7,326		6,838
Other debtors		424		682
Deferred tax asset (note 17)		534		261
Prepayments and accrued income		801		970
		9,085		8,751

14 Creditors: amounts falling due within one year

	2005 Restated Note 28		2004 Restated Note 28
	£ 000		£ 000
Bank overdrafts		2,063		2,159
Obligations under finance leases and hire purchase contracts		88		77
Bank loans		433		480
Trade creditors		1,625		1,725
Other creditors including taxation and social security:
Corporation tax		17		(31	)
Other taxes and social security		1,789		1,382
Other creditors		319		443
Accruals and deferred income		1,966		2,006
Proposed dividend:
Minority interests		78		41
		8,378		8,282

The bank loans and overdrafts are secured by a floating charge on other assets of certain Group companies.

15 Creditors: amounts falling due after more than one year

	2005		2004
	£ 000		£ 000
Other loans		416		673
Obligations under finance leases and hire purchase contracts		60		110
		476		783
Bank loans are repayable as follows:
		2005		2004
		£ 000		£ 000
Within one year		433		480
Between one and two years		334		371
Between two and five years		82		302
Total outstanding		849		1,153

36

James R Knowles (Holdings) PLC

Notes

15 Creditors: amounts falling due after more than one year (continued)

	2005		2004
Details of loans wholly repayable within 5 years:	£ 000		£ 000
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 6.53%. *		-		8
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.39% *		58		138
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.91% *		2		17
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 6.93% *		8		42
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 6.21% *		6		21
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 6.21% *		4		13
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 6.69% *		8		15
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 6.69% *		39		78
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 13.18% *		14		27
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.63% *		20		35
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.09% *		40		63
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.35% *		73		105
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.8% *		72		-
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.8% *		38		-
Bank loan repayable by monthly instalments. Interest charged at fixed rate of 7.8% *		29		-
Bank loan repayable by monthly instalments. Interest charged at a variable rate of 6.00%*		83		152
Bank loan repayable by bi-annual instalments. Interest charged at a variable rate of 5.56%*		163		202
Bank loan repayable by monthly instalments. Interest charged at a variable rate of 5.75%*		192		237
		849		1,153

* These loans are secured by fixed charges on the relevant equipment being financed.

Obligations under finance leases and hire purchase contracts

	2005			2004
	£ 000			£ 000
Total outstanding		177			311
Interest attributable to future years		(29	)		(124	)
		148			187
The maturity of obligations under finance leases and hire purchase contracts is as follows:
		2005			2004
		£ 000			£ 000
Within one year		88			77
In the second to fifth years		60			110
		148			187

Obligations under finance leases and hire purchase contracts are secured by retention of title to the relevant equipment.

16 Provisions for liabilities and charges

	Onerous leases
	£ 000
At beginning of the year		(30	)
Charged to the profit and loss for the year		(147	)
At end of the year		(177	)

37

James R Knowles (Holdings) PLC

Notes

17 Deferred Tax

The elements of deferred taxation are as follows:

	2005 Restated (Note 28)		2004 Restated (Note 28)
	£ 000		£ 000
Difference between accumulated depreciation and
amortisation and capital allowances		184		76
Other timing differences		57		39
Tax losses		293		146
Deferred tax asset (note 13)		534		261

38

James R Knowles (Holdings) PLC

Notes

18 Called up share capital

	2005		2004
	£ 000		£ 000
Authorised
26,000,000 ordinary shares of 5p each		1,300		1,300
Allotted, called up and fully paid
19,921,853 ordinary shares of 5p each (2004 : 19,921,853 ordinary shares)		996		996

19 Reserves

	Share premium account		Merger reserve		Profit and loss account Restated (Note 28)
Group	£ 000		£ 000		£ 000
At beginning of the year		3,026		199		92
Foreign exchange		-		-		147
Retained loss for the year		-		-		(302	)
At end of the year		3,026		199		(63	)

The cumulative total of goodwill written off against reserves in respect of acquisitions prior to 1 August 1998 when FRS 10: Goodwill and intangible assets was adopted amounts to £1,057,000 (2004: £1,057,000) of which £1,019,000 was taken to the merger reserve and the remaining £38,000 was taken to the profit and loss reserve.

20 Commitments

(i) Capital commitments at the end of the financial year, for which no provision has been made, are as follows:

	2005		2004
	£000		£000
Contracted		-		194

(ii) Annual commitments under non-cancellable operating leases are as follows:

	2005				2004
	Land &				Land &
	Buildings		Other		Buildings		Other
	£ 000		£ 000		£ 000		£ 000
Operating leases which expire:
Within one year		11		-		32		-
In the second to fifth years inclusive		361		325		127		327
Over five years		223		-		517		-
		595		325		676		327

39

James R Knowles (Holdings) PLC

Notes

21 Reconciliation of operating profit to net cash inflow from operating activities

	2005			2004
	Restated (Note 28)			Restated (Note 28)
				Note 28
	£ 000			£ 000
Operating profit		221			594
Depreciation charge		664			511
Amortisation charge		26			26
Loss on disposal of fixed assets		14			-
Decrease/(increase) in stocks		74			(28	)
Increase in debtors		(52	)		(49	)
Increase in creditors		75			307
Increase/(decrease) in provisions		147			(79	)
Foreign exchange differences*		161			(309	)
Net cash inflow from operating activities		1,330			973

The cash effect of exceptional operating items is £206,000 (2004: £Nil).

22 Analysis of cash flows for headings netted in the cash flow statement

Returns on investments and servicing of finance

	2005			2004
	£ 000			£ 000
Interest received		-			50
Interest paid		(118	)		(157	)
Interest element of finance leases		(62	)		(31	)
Minority dividends paid		(201	)		(309	)
		(381	)		(447	)
Capital expenditure and financial investment
		2005			2004
		£ 000			£ 000
Purchase of tangible fixed assets		(582	)		(431	)
Sale of tangible fixed assets		-			28
		(582	)		(403	)
Financing
		2005			2004
		£ 000			£ 000
(Repayment)/inception of loans		(304	)		155
Capital element of finance lease rental payments		(39	)		(142	)
		(343	)		13

23 Reconciliation of net cash inflow to movement in net debt

	2005			2004
	£ 000			£ 000
Decrease in cash in the year		(199	)		(644	)
Cash inflow/(outflow) from increase/(decrease) in debt and lease financing		343			(13	)
		144			(657	)
Net debt at 31 July 2004		(1,443	)		(786	)
Net debt at 31 July 2005		(1,299	)		(1,443	)

24 Analysis of net debt

	At 31						Non cash			At 31
	July 2004			Cash flow			changes			July 2005
	£ 000			£ 000			£ 000			£ 000
Cash at bank and in hand		2,056			(295	)		-			1,761
Overdraft		(2,159	)		96			-			(2,063	)
		(103	)		(199	)		-			(302	)
Debt due after one year		(673	)		(112	)		369			(416	)
Debt due within one year		(480	)		416			(369	)		(433	)
Finance leases		(187	)		39			-			(148	)
		(1,443	)		144			-			(1,299	)

40

James R. Knowles (Holdings) PLC

Notes

25 Reconciliations of movement in shareholders' funds

	2005			2004
	Restated			Restated
	(Note 28)			(Note 28)
	£ 000			£ 000
(Loss)/profit for the financial year		(302	)		55
Dividends		-			(159	)
Retained loss for the financial year		(302	)		(104	)
Foreign exchange movements		147			(342	)
Net movement in shareholders' funds		(155	)		(446	)
Opening shareholders' funds - equity		4,313			4,759
Closing shareholders' funds - equity		4,158			4,313

26 Financial Instruments and risk management

The Group finances its operations through a mixture of equity finance, retained profits, bank borrowings and various items such as trade debtors and trade creditors that arise directly from its operations. The Group's borrowings relate mainly to its working capital requirements. These borrowings take the form of bank overdraft facilities. The Group's short-term working capital requirements fluctuate significantly throughout the year because of seasonal factors, tax, bonus and dividend payments. In these circumstances the directors do not feel that it is appropriate to borrow at a fixed rate of interest. At the year-end, 82% (2004: 79%) of the Group's borrowings were at floating rates.

However, most fixed asset purchases are financed by fixed rate borrowings in the form of finance leases, hire purchase contracts and long-term loans. Off-balance sheet fixed assets are financed by fixed rate operating leases. The term of the borrowings is matched to the length of the useful life of the assets. At the year end, 18% (2004: 21%) of the Group's borrowings were at fixed rates of interest.

It is, and has been throughout the period under review, the Group's policy that no trading in financial instruments shall be undertaken.

As permitted by FRS 13: Derivatives and other financial instruments: disclosures, short-term debtors and creditors have been excluded from the following analyses.

The interest rate profile of the Group's financial liabilities as at 31 July 2005 was:

a)

			Floating rate		Fixed rate
	Total		financial liabilities		financial liabilities
Currency	£ 000		£ 000		£ 000
Sterling		2,310		1,751		559
Hong Kong Dollar		83		83		-
Canadian Dollar		192		192		-
US Dollar		212		212		-
Dirhams		263		263		-
		3,060		2,501		559

b)

	Fixed rate financial liabilities
Currency	Weighted average interest rate %		Weighted average period for which rate is fixed
Sterling		7.58		2 years

The floating rate financial liabilities comprise bank overdraft and bank loan facilities that bear interest at rates based on clearing bank and finance house base rates.

There are no financial liabilities on which no interest is paid.

Liquidity risk

As regards liquidity, the Group's working capital borrowing facilities are reviewed by its lenders on an annual or semi-annual basis.

The Group has no financial assets other than short-term debtors and cash at bank.

41

James R. Knowles (Holdings) PLC

Notes

26 Financial Instruments and risk management (continued)

Foreign currency risk

The Group's U.K. subsidiaries price their export sales in sterling and hence there is no foreign currency risk on these transactions.

The Group has overseas subsidiaries and branches in: Hong Kong, Singapore, Malaysia, Germany, France, Spain, Italy, Egypt, U.A.E., Canada, USA and Australia. The revenues and expenses are mainly denominated in local currencies. The Group's sterling balance sheet is exposed to potential foreign currency losses on translation of the net assets of these overseas subsidiaries. However, the Group's policy is to maximise dividend payments and cash repatriation from these subsidiaries and branches to the holding company. The Directors do not consider it would be appropriate to borrow in matching foreign currencies to hedge against these translation risks as, in many cases, the net assets of these overseas operations are small and in addition taking on additional borrowings would create an unnecessary interest rate risk.

Fair values

The carrying value of financial assets and liabilities approximate to their fair value.

27 Related party transactions

The Group's Chief Executive, Mr Brian Quinn, has a 10% holding in Knowles Consultancy Services Inc. Following the declaration of a dividend by this company during the year, £14,000 (2004: £28,000) was due to Mr Quinn, of which £Nil (2004: £10,000) remains unpaid at the Balance Sheet date.

28  Post balance sheet events and restatement

During the course of 2006 it was identified that the Group had begun to make employment gratuities payments to employees working in the U.A.E. These amounts had been accruing over a number of years but had not previously been recognised in the historical financial statements of the Group. Accordingly these US GAAS financial statements have been restated to reflect these liabilities as follows:

	Gross		Tax		Net
	£ 000		£ 000		£ 000
Effect on net income and retained earnings
For the year ended 31 July 2003 and earlier (being the effect on reserves at 1 August 2003)		101		30		71
Charged in the year ending 31 July 2004		29		9		20
Amount provided as at 31 July 2004		130		39		91
Charged in the year ending 31 July 2005		59		18		41
Cumulative effect on retained earnings and amount provided as at 31 July 2005		189		57		132

The charge to income was made through the Staff Costs line item in the profit and loss account and the year end provision is included in the Accrual and Deferred Income line item. The deferred tax asset has been recognised on the amounts provided.  This has reduced the basic and diluted EPS by 0.1 pence in both years.

As at 31 July 2005 a number of claims were outstanding where the likelihood of settlement was remote and any potential settlement could not be estimated with reasonable certainty. However a number of these have progress during 2006 to such an extent that management have booked a provision of £250,000 in the year ended 31 July 2006. These financial statements have not been restated for this amount.

On 31 August 2006 an offer from Hill S.A., a company incorporated in Luxembourg, to purchase the whole of the company's share capital became unconditional. Any shareholdings where the offer to purchase had not been accepted were to be acquired under the provisions of Section 429 of the Company's Act 1985.

The ultimate parent undertaking is Hill International Inc., a company incorporated in the United States of America. Since acquisition Hill International Inc is the Group's ultimate controlling party, prior to 31 August 2006 and throughout the years ended 31 July 2005 and 2006, the Group was controlled by J R Knowles, a director.

29 Reconciliation to accounting principles generally accepted in the United States

The Company’s consolidated financial statements included in this annual report have been prepared in accordance with UK GAAP, which differs in certain significant respects from accounting principles generally accepted in the United States ("US GAAP"). The principal differences between UK GAAP and US GAAP are presented below together with explanations that affect total shareholders’ equity and net income as at and for the 2 years ended 31 July 2005.

This US GAAP information provides a reconciliation between earnings available for shareholders under UK GAAP and net income under US GAAP and between shareholders’ funds under UK GAAP and shareholders’ equity under US GAAP respectively.

The principle differences between UK GAAP and US GAAP for the consolidated financial statements of James R. Knowles (Holdings) PLC can be summarised as follows:

	2005			2004
	£ 000			£ 000
Stockholders equity per UK GAAP		4,462			4,541
Adjustments to goodwill (Note A)		(221	)		(247	)
Amortisation on reinstated goodwill (Note A)		(48	)		(48	)
Recogintion of intangible assets on business combinations (Note A)		1,399			1,399
Amortisation of intangibles (Note A)		(900	)		(746	)
Deferred tax liabilities on business combinations (Note A)		(47	)		(47	)
Adjustment in respect of development costs (Note B)		(173	)		(212	)
Adjustment in respect of leases (Note C)		(35	)		(43	)
Minority interest dividend unpaid at balance sheet date (Note E)		78			41
Taxation effect of all adjustments (Note D)		(5	)		20
Stockholders equity per US GAAP		4,510			4,658

42

James R. Knowles (Holdings) PLC

Notes

29 Reconsiliation to accounting principles generally accepted in the United States (continued)

Under US GAAP the effect on the profit and loss account would be as follows:

	2005			2004
	£ 000			£ 000
(Loss)/income on ordinary activities before minority interests		(14	)		281
Amortisation on reinstated goodwill (Note A)		26			26
Amortisation of intangibles (Note A)		(154	)		(168	)
Adjustment in respect of development costs (Note B)		39			(212	)
Adjustment in respect of leases (Note C)		8			(13	)
Taxation effect of all adjustments (Note D)		(25	)		52
Net income under US GAAP		(120	)		(34	)

As a consequence of their restatement the earnings per share would decrease by 0.5 pence in 2005 and 1.6 pence in 2004.

Under US GAAP the only effect on the cash flow would be within the note 'Reconciliation of operating profit to net cash inflow from operating activities':

Under US GAAP, the cash flow statement would be presented as follows:
	2005			2004
	£ 000			£ 000
Cash flow from operating activities		1,107			770
Cash flow from investing		(201	)		(886	)
Cash flow from financing		564			410
		1,470			294

The Statement of Goup cash flow is prepared in accordance with UK FRS No 1 (Revised 1996) - Cash Flow Statements, the objective of which is similar to that set out in the US Standard SFAS No. 95 - Statements of Cash Flows. The two statements differ, however, in their definitions of cash and their presentation of the main constituents of the cash flow

The definition of cash in the UK standard is limited to cash plus depostits less overdrafts/borrowings repayable on demand without penalty. In the US, the definition in SFAS No. 95 excludes overdrafts but is widened to include cash equivalents comprising short-term highly liquid investments that are both readily convertible to known amounts of cash and so near their maturities that they present insignificant risk of changes in value.

43

James R. Knowles (Holdings) PLC

Notes

29. Reconciliation to accounting principles generally accepted in the United States (continued)

a) Intangible assets and goodwill

In the consolidated financial statements, goodwill arising on acquisitions made prior to January 1998 accounted for under the purchase method, has been eliminated against shareholders’ equity, in accordance with UK GAAP. Under the requirements of UK Financial Reporting Standard 10 ‘Goodwill and intangible assets’, goodwill on acquisitions made after 1 January 1998 is capitalised and amortised over its estimated useful life, which is generally presumed not to exceed 20 years. UK GAAP requires that on subsequent disposal or termination of a previously acquired business, any goodwill previously taken directly to shareholders equity is charged in the income statement against the profit or loss on disposal or termination.

Under US GAAP, SFAS 142 ‘Goodwill and other intangible assets’ is applicable for accounting periods starting after 15 December 2001. This states that goodwill should be held on the balance sheet, it should not be amortised, but considered for impairment on an annual basis. Prior to this date, goodwill was amortised. For the purposes of US GAAP, the Group adopted Financial Accounting Standard 142 ‘Goodwill and other intangible assets’ in the year end 31 July 2003 and from this date, goodwill which arise would not be amortised but reviewed for impairment.

Under US GAAP, separately identified intangible assets arising on acquisitions, would be capitalised and amortised over their useful economic lives. Under UK GAAP, these assets are included in goodwill.

Impairment of goodwill: Under UK GAAP, goodwill is reviewed for potential impairment where there is an indicator that impairment may have occurred. The impairment is measured by comparing the carrying value of goodwill for each income-generating unit (IGU) with the higher of the net realisable value and value in use. Under US GAAP, goodwill impairment reviews are also conducted when an indicator of impairment exists, in addition to an annual impairment test required by FAS142. The impairment is measured by comparing the carrying value of each reporting unit with its fair value. Where the carrying value, including any separately identifiable intangible assets, is greater than the fair value, the impairment loss is based on the excess of the carrying value of goodwill over the implied fair value of the goodwill. Where reporting units identified under US GAAP differ from IGUs identified under UK GAAP, a reconciling item may arise.

As as result of the above a difference has arisen whereby goodwill which arose on acquisition has been reinstated to its original value and subsequently an element of this has been reclassified as an intangible asset. This intangible asset will be amortised over a period of 8 years from the date of acquisition with an anual impairment review.

b) Development costs

During the year, the Group capitalised time costs in creating a Partnering Contract and Toolkit and related website. The Group recognised these costs as an asset, as they met the criteria of SSAP 13 . The costs were capitalised and included within work in progress under UK GAAP.

Under US GAAP, guidance on the recognition of development costs is provided in EITF 00-2 ‘Accounting for website development costs’ and FAS-2 accounting for research and development costs. 

Following a review of the US criteria, differences between UK and US GAAP were noted. These largely relate to internal staff costs capitalised in the preparation of the contract.

c) Leases

The Group has several operating leases which have incentives attached in the form of rent free periods.

Under UK GAAP the operating lease charges are recognised on a systematic basis up to the period of the first break clause.

Under US GAAP (FAS 13 ‘Accounting for Leases’) operating lease charges are recognised on a straight line basis over the entire lease term. A difference has therefore arisen over the period that the lease incentive is recognized over.

d) Deferred tax

Following the implementation in the UK of FRS19 ‘Deferred tax’, both US GAAP and UK GAAP now provide for deferred taxation on a full liability basis. The Group provides for deferred taxation in respect of timing differences, subject to certain exceptions between the recognition of gains and losses in the financial statements and for tax purposes. Timing differences are recognised, include accelerated capital allowances, unrelieved tax losses and short term timing differences.

Under US GAAP, deferred taxation would be computed on all differences between the tax bases and book values of assets and liabilities which will result in taxable or tax deductible amounts arising in future years. This differs from the UK GAAP where deferred tax is recognized by reference to the income statement charge as opposed to the tax base of the assets and liabilities.

US GAAP requires provision for revaluation gains, fair value adjustments similar to revaluations arising on the acquisition of a business, latent rolled over gains and the retained earnings of foreign subsidiaries that are not permanently reinvested. These are not normally provided for under UK GAAP.

Deferred taxation assets under UK GAAP and US GAAP are recognised only to the extent that it is more likely than not that they will be realised.

e) Dividends

Under US GAAP final ordinary dividends are provided for in the year in respect of which they are proposed by the Board or approved by the shareholders. Under US GAAP, dividends would not be provided for until the year in which they are declared.

44

CONTENTS

	Page
FINANCIAL STATEMENTS
Pro Forma Condensed Combined Financial Statements Introduction (Unaudited)	46
Pro Forma Condensed Combined Balance Sheet (Unaudited)	47
Notes to Pro Forma Condensed Combined Balance Sheet (Unaudited)	48
Pro Forma Condensed Combined Statement of Operations for the nine months ended July 1, 2005 (Unaudited)	49
Notes to Pro Forma Condensed Nine Month Combined Statement of Operations (Unaudited)	49
Pro Forma Condensed Combined Statement of Operations for the twelve months ended December 31, 2006 (Unaudited)	50
Notes to Pro Forma Condensed Twelve Month Combined Statement of Operations (Unaudited)	50

45

Pro Forma Condensed Combined Financial Statements

Introduction

(Unaudited)

The unaudited pro forma condensed combined financial information presented herein gives effect to the purchase of James R. Knowles (Holdings) PLC (“Knowles”), by Hill International, Inc. (“Hill” or “the Company”) effective September 1, 2006.

The unaudited pro forma condensed combined balance sheet data at July 1, 2006 combines the historical condensed consolidated balance sheet of Hill as of July 1, 2006, and Knowles' balance sheet as of July 31, 2006. The pro forma adjustments to the balance sheet assume that the acquisition of Knowles was consummated at the end of the period being presented.

The unaudited condensed combined pro forma statement of operations data being presented for the nine months ended July 1, 2006 combines the historical condensed consolidated statements of operations of Hill for the nine months ended September 30, 2006 and Knowles’ statement of operations for the nine months ended July 31, 2006. The pro forma adjustments to the condensed combined pro forma statement of operations assume that the acquisition of Knowles was consummated on January 1, 2006.

The unaudited condensed combined pro forma statement of operations data being presented for the year ended December 31, 2005 combines the historical condensed consolidated statements of operations of Hill for the twelve months ended December 31, 2005 and Knowles’ statement of operations for the twelve months ended January 31, 2006. The pro forma adjustments to the condensed combined pro forma statement of operations assume that the acquisition of Knowles was consummated on January 1, 2005.

The pro forma adjustments to the unaudited condensed combined statement of operations give effect to events which are directly attributable to the transactions, factually supportable and expected to have a continuing impact.

The unaudited pro forma condensed combined financial statements are intended for information purposes only and are not necessarily indicative of the future financial position or future results of operations of the combined company, or of the financial position or results of operations of the combined company that would have actually occurred had the acquisitions taken place as of the date or for the periods presented.

These unaudited pro forma condensed combined financial statements should be read in conjunction with the financial statements, including the accompanying notes, of Knowles which are attached, and of Hill, included in the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2006 and the Company’s audited consolidated financial statements for the year ended December 31, 2005 and the notes thereto included in the Definitive Proxy Statement filed on June 6, 2006.

46

Pro Forma Condensed Combined Balance Sheet

July 1, 2006

(Dollars in thousands)

(Unaudited)

							Pro Forma Adjustments
	Hill			Knowles			Debits		Notes (1)		Credits		Notes		Pro Forma
ASSETS
CURRENT ASSETS
Cash	$	25,151		$	2,913						$	13,964		(2)	$	14,100
Restricted cash		1,361														1,361
Accounts receivable, net		39,522			15,229											54,751
Accounts receivable - related party		244														244
Prepaid expenses and other current assets		2,491			-											2,491
Total Current Assets		68,769			18,142			-				13,964				72,947
Property and equipment, net		3,355			2,104			267		(3)		178		(3)		5,548
Cash- restricted		3,820														3,820
Retainage receivable, net		1,145														1,145
Cost in excess of assets net acquired		1,359			1,564			15,190		(4)		1,564		(5)		16,549
Deferred tax assets, net		263			-											263
Investment in affiliate		325														325
Other assets		607														607
Total Assets	$	79,643		$	21,810		$	15,457			$	15,706			$	101,204
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Due to Bank	$	290		$	18,936											19,226
Current maturities of long-term debt		545			-											545
Current portion of capital lease obligations		121			-											121
Accounts payable and accrued expenses		24,307			-											24,307
Deferred tax liabilities		2,308														2,308
Income tax payable		2,785			-											2,785
Other current liabilties		7,714			-											7,714
Total Current Liabilities		38,070			18,936			-				-				57,006
Long-term debt, net of current maturities		965			732											1,697
Capital lease obligations, net of current maturities		4			-											4
Retainage payable		1,044														1,044
Other liabilities		1,962			1,429							463		(3)		3,855
Total Liabilities		42,045			21,098							463				63,606
Commitments and Contingencies
STOCKHOLDERS’ EQUITY
Common stock		2			1,974			1,974		(6)						2
Paid in capital		35,537			6,211			6,211		(6)						35,537
Retained earnings		8,562			(7,473	)		374		(3)		7,847		(6)		8,562
Accumulated other comprehensive loss		(64	)		-							-		(6)		(64	)
		44,037			712			8,559				7,847				44,037
Less treasury stock, at cost		(2,574	)													(2,574	)
Less shares held in escrow		(3,865	)													(3,865	)
Total Stockholders’ Equity		37,598			712			8,559				7,847				37,598
Total Liabilities and
Stockholders’ Equity	$	79,643		$	21,810		$	8,559			$	8,310			$	101,204

47

NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET

JULY 1, 2006

(Unaudited)

(1)   Reflects the acquisition by Hill at the end of the period being presented.

(2)   Reflects the acquisition of Knowles common stock for cash of $13,017 and the payment of certain other direct acquisition costs.

(3)   Reflects the recording of a liability for conditional asset retirement costs associated with the future expiration of certain real estate operating leases in which Knowles if the lessee, in accordance with Financial Accounting Standards Board Interpretation No. 47, Conditional Asset Retirement Obligations and the recording of the related leasehold improvements, depreciation of such leasehold improvements, and the cumulative effect of the accretion of the liability and depreciation of the leasehold improvements on the retained earnings of Knowles.

(4)   Reflects the recording as intangible assets the excess of the purchase price of the common stock and the other direct costs incurred by Hill over the assets acquired and liabilities assumed in the transaction.

(5)   Reflects the elimination of Knowles’ intangible assets.

(6)   Reflects the elimination of all components of the historical stockholders’ equity of Knowles.

48

Pro Forma Condensed Combined Statement of Operations

Nine months ended September 30, 2006

Dollars in thousands, except per share data

(Unaudited)

							Pro Forma
	Hill			Knowles			Adjustments			Notes (1)		Combined
Revenue	$	130,156		$	40,909			(4,255	)		(2)	$	166,810
Reimbursable expenses		42,778			6,358			(556	)		(2)		48,580
Revenue, less reimbursable expenses		87,378			34,551			(3,699	)				118,230
Direct expenses		48,611			23,520			(1,807	)		(2)		70,324
Gross profit		38,767			11,031			(1,892	)				47,906
Selling, general and administrative expenses		31,317			17,568			(1,534	)		(2)		47,357
								6			(3)
Equity in affiliate		(533	)		-								(533	)
Operating income (loss)		7,983			(6,537	)		(364	)				1,082
Interest expense, net		345			416			(58	)		(2)		709
								6			(3)
Minority interest		13			28			(13	)		(2)		28
Income (loss) before income taxes		7,625			(6,981	)		(299	)				345
Provision for income taxes		1,735			634			(52	)		(2)		2,309
								(8	)		(4)
Net income (loss)		5,890			(7,615	)		(239	)				(1,964	)
Basic net income (loss) per share	$	0.38											(0.13	)
Basic weighted average shares outstanding		15,504										$	15,504
Diluted net income (loss) per share	$	0.35										$	(0.13	)
Diluted weighted average shares outstanding		16,931											15,504

NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2006

(Unaudited)

(1)   Reflects the acquisition by Hill at the beginning of the period presented.

(2)   Reflects the removal of the one month of Knowles activity reported in Hill's nine month results ended September 30, 2006. 

(3)   Reflects accretion for a liability for conditional asset retirement costs associated with the future expiration of certain real estate operating leases in which Knowles if the lessee, in accordance with Financial Accounting Standards Board Interpretation No. 47, Conditional Asset Retirement Obligations and the depreciation of related leasehold improvements.

(4)   Reflects tax effects of accretion and depreciation adjustments described above.

49

Pro Forma Condensed Combined Statement of Operations

Twelve months ended December 31, 2005

(Dollars in thousands, except per share amounts)

(Unaudited)

							Pro Forma
	Hill			Knowles			Adjustments			Notes (1)		Combined
Revenue	$	112,229		$	52,900							$	165,129
Reimbursable expenses		32,121			6,848								38,969
Revenue, less reimbursable expenses		80,108			46,052								126,160
Direct expenses		43,276			29,753								73,029
Gross profit		36,832			16,299								53,131
Selling, general and administrative expenses		31,861			16,878			12			(2)		48,751
Equity in affiliate		(685	)		-								(685	)
Operating income (loss)		5,656			(579	)		(12	)				5,065
Interest expense, net		669			399			11			(2)		1,079
Minority interest					624								624
Income (loss) before income taxes		4,987			(1,602	)		(23	)				3,362
Provision for income taxes		1,845			95			(12	)		(3)		1,928
Net income (loss)	$	3,142		$	(1,697	)		(11	)			$	1,434
Basic net income per share	$	0.52										$	0.24
Basic weighted average shares outstanding		6,030										$	6,030
Diluted net income per share	$	0.44										$	0.20
Diluted weighted average shares outstanding		7,195											7,195

NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2005

(Unaudited)

(1)   Reflects the acquisition by Hill at the beginning of the period presented.

(2)   Reflects accretion for a liability for conditional asset retirement costs associated with the future expiration of certain real estate operating leases in which Knowles if the lessee, in accordance with Financial Accounting Standards Board Interpretation No. 47, Conditional Asset Retirement Obligations and the depreciation of related leasehold improvements.

(3)   Reflects tax effects of accretion and depreciation adjustments described above.

50

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Hill International, Inc
DATE: November 14, 2006	/s/ Irvin E. Richter
	Chairman and Chief Executive Officer

51