Final Results
NCC Group PLC
18 July 2006
18 July 2006
NCC Group pre tax profits up 44%
NCC Group plc (AIM: NCC), a provider of Escrow Solutions, Testing Solutions and
Consultancy, operating predominately in the UK and Europe, published its
preliminary results for the year ended 31 May 2006 today.
Financial Highlights
• Group revenue up by 15% to £20.7m (2005: £18.0m)
• Escrow Solutions UK revenue up by 21% to £9.8m
• Testing Solutions revenue up by 31% to £5.7m
• Consultancy revenue down by 13% to £4.7m
• Group IFRS operating profits up by 15% to £6.6m (2005: £5.8m)
• Underlying Group operating profits* up by 23% to £7.5m (2005: £6.1m)
• Escrow Solutions UK operating profits up by 27% to £6.1m
• Testing Solutions operating profits up by 34% to £1.3m
• Consultancy operating profits down by 36% to £0.6m
• Group operating margins at 32% (2005: 32%)
• Group pre tax profits up by 44% to £6.6m (2005: £4.6m)
• Basic earnings per share up 37% to 14.0p (2005: 10.2p)
• Final dividend proposed of 2.50p giving a total dividend of 3.50p, up 40%
• Net cash positive at £1.3m (2005: £0.0m)
• Annual UK renewals up to £8.1m (2006: £7.1m)
Operational Highlights
• Strong UK performance with operating profits growing by 21% to £6.9m
(2005: £5.7m)
• UK margins up at 34.1% (2005: 31.8%)
• Two acquisitions in the US completed on 29 December 2005 and 7 July 2006
for a combined $6.5m (£3.7m) provides additional $1.4m (£0.8m) renewals
base
• £0.5m investment in German Escrow Solutions business completed
*Underlying Group operating profits is Group UK GAAP operating profits excluding
the investment in Germany and the US acquisition.
Rob Cotton, NCC Group Chief Executive commented:
'We have delivered another excellent set of results despite some very demanding
trading conditions for parts of the business, particularly in the first half of
the year.
'Our Escrow solutions businesses, both in the UK and the recently acquired US
operations, are firmly established, providing us with extremely strong forward
earnings visibility and robust margins whilst our two largest testing operations
- verification and penetration - are showing strong growth.
'We are starting the current financial year with over £11.4m of orders and
renewals despite this being the weakest trading quarter.'
Enquiries:
NCC Group (www.nccgroup.com) 0161 209 5200
Rob Cotton, Chief Executive
Paul Edwards, Group Finance Director
College Hill
Adrian Duffield / Corinna Dorward 020 7457 2020
Overview
The year ended 31 May 2006 was a record year for NCC Group as it delivered its
strongest set of results yet. But, in delivering these, the Group has seen,
confronted and overcome some of the most demanding trading times for parts of
the business, as indicated at the half year.
Overall, the Group delivered a 15% growth in revenue as it increased to £20.7m,
from £18.0m in 2005. The growth in revenue led to a 15% growth in operating
profits, which grew from £5.8m to £6.6m.
The statutory accounts have been produced in accordance with IFRS, but if they
had been produced under UK GAAP, the growth in operating profits would have been
over 17% as the Group has a charge of £0.5m in respect of share schemes.
Additionally, when the Group excludes the £0.5m investment made into its German
Escrow Solutions business in the last 12 months, the increase is over 26%.
NCC Group continued to generate strong margins, with its operating margin being
32% (2005: 32%) after the investment in Germany. If this investment is excluded
the margin would have improved to over 34%.
Diluted earnings per share are up 36% to 13.6p per share (2005: 10.0p.) and the
Board is proposing a final dividend of 2.50p per share, which with an interim of
1.0p per share, is a 40% increase on the previous year.
NCC Group completed its first acquisition in December, which was a well
established US based Escrow Solutions provider based in San Jose, California for
a total consideration of up to $5m (£2.9m). In early July this year the Group
successfully completed a second acquisition of a smaller Escrow Solutions
provider in the same region for a total consideration up to $1.5m (£0.8m).
Both deals were funded from cash reserves and NCC Group was still £1.3m net cash
positive at the year end. Operating cash flow was 110% of operating profits.
Financial review
NCC Group revenue for the year to 30 May 2006 grew by 15% to £20.7m (2005:
£18.0m). The split of revenue has changed with the Escrow Solutions division
accounting for 50% of revenue (2005: 46%), Testing Solutions 28% (2005: 24%) and
Consultancy now the smallest division, accounting for 22% of revenue (2005:
30%).
The geographical split of revenue has marginally changed. However, the vast
majority of the revenue is still contributed by the UK at £17.7m (2005: £15.8m)
or 85% (2005: 88%) of total revenue. Revenue from the rest of the world was
£1.8m, an increase of 65% from 2005, with Europe contributing £1.3m (2005:
£1.1m).
Following the US acquisition in December 2005 and investment in the German
business, Escrow Solutions increased its revenue for the year by 26% to £10.4m
from £8.2m in 2005.
In line with prior years and supported by the US acquisition the Group's
performance was better in the second half year than the first, 47% of revenue
was delivered in the first half (2005: 47%) and 53% in the second half (2005:
53%).
Currency fluctuations had no material impact on the Group's results.
Group operating profit increased 15% to £6.6m from £5.8m in 2005. The operating
profit margin remained constant at 32% (2005: 32%) but this was a significant
increase from 27% at the time of the interim results.
The table below analyses the effect on Group operating profit of the investments
made in the US and German Escrow Solutions business. Both investments performed
in line with expectations.
The UK performance supported these investments with strong operating profit
growth of 21% to £6.9m (2005: £5.7m) and an increase in operating margin of 34%
(2005: 32%).
£000's UK US Germany 2006 Group UK US Germany 2005 Group
Revenue 20,193 371 183 20,747 17,831 - 140 17,971
Operating 6,889 131 (384) 6,636 5,674 - 115 5,789
profit/(loss)
Operating 34% - - 32% 32% - - 32%
margin %
Operating 21% - - 15% - - - -
profit growth %
As a result of IFRS, included in the operating profit is a charge for employee
based share options of £0.5m (2005: £0.3m). The Board anticipates that this
charge will increase by £0.2m, if the proposed additional equivalent LTIP
schemes are adopted in 2006/07.
Excluding the £0.5m investment in the German operation, the £0.2m contribution
from the US acquisition and the impact of IFRS, Group underlying operating
profit would have been up 23% to £7.5m (2005: £6.1m) and margin to over 37%.
The half year split of Group operating profit at 40:60 (2005: 45:55) was more
marked than the split of revenue following the re-alignment of the Consultancy
business which delivered a much stronger second half.
The Group's pre-tax profit was up 44% to £6.6m (2005: £4.6m).
The Group's tax charge is 30.4% (2005: 30.3%) marginally above the standard UK
rate of 30% as a result of a small amount of non-deductible expenses.
Basic earnings per share increased 37% to 14.0p (2005: 10.2p), whilst fully
diluted earning per share increased 36% to 13.6p (2005: 10.0p).
In line with the continuing progressive dividend policy, the Board is
recommending a final dividend of 2.5p per ordinary share, making the total 3.5p
for the year. This represents cover of 4.0 times (2005: 4.1 times) based on
basic earnings. If approved at the Annual General Meeting, the dividend will be
paid on 29 September 2006 to shareholders on the register at 30 August 2006. The
ex-dividend date will be 29 August 2006.
Shareholder funds at the end of the year were £28.2m (2005: £23.9).
The Group remains highly cash generative with operating cash flow before
interest and tax of £7.3m (2005: £7.6m) despite meeting the cost of the
acquisition out of cash reserves. This is 110% of operating profit before
interest and tax (2005: 132%). Debtor days increased to 51 (2005: 45) due
mainly to a greater balance of revenue invoiced in May 2006 in comparison with
May 2005.
The Group ended the year with net cash of £1.3m (2005: £0.0m) even following the
acquisition of the US based Escrow business which was financed from cash
reserves.
Capital expenditure remained constant at £0.8m (2005: £0.8m) and is likely to
continue at a similar level going in to the new financial year. This reflects
the continued growth of the business including the investment in establishing
the Escrow Solutions management system in Germany and the US.
Business Unit Performance/Review
Current market
Escrow continues as a 'peace of mind' assurance proposition which provides real
benefit in all economic climates. NCC Group continues to encourage its clients
to reach the correct level of protection and encouragingly, the Group is seeing
a good increase in their levels of risk awareness.
Apart from customers taking on more escrow agreements, many are now including
Verification Testing as part of their minimum standard. At present one in ten
new agreements are being ordered with Verification Testing and NCC Group is
seeing 40% of verifications being repeated on an annual basis.
Penetration Testing has seen, and will continue to see, strong growth. Hacking
is 'big business' with organised crime focussing on it as the rewards for
identity theft, banking and online frauds have continued to increase.
There is a stigma for businesses in admitting to security breaches, as it is
seen as a weakness. More alarmingly large scale fraud often simply goes
undetected. The full impact of fraud and loss caused by hackers has never been
calculated or disclosed, nor is it likely to be. Even when two hackers were
recently arrested on suspicion of defrauding British business of £50m, it was
not extensively reported by the media.
Increasingly common is the fraud and theft of corporate information by employees
or temporary workers. The temporary worker is rarely checked or vetted but is
often afforded extensive levels of access to corporate networks. The increase
in employee 'plants' and security breaches within an organisation has been
exacerbated by the ease with which criminals can now sell the information they
steal.
The proliferation of black market auction web sites has provided an easy way to
buy and sell hacking tools, bank details and individuals' personal identities.
These sites rate and score the quality and integrity of the buyers and sellers
in the same way as eBay. The most commonly advertised items are blocks of
stolen bank accounts or credit card information.
As such crime develops, so does the need for NCC Group's forensic services,
which determine what happened and how. The market is in an arms race, as the
Group takes every step to keep up with the real hackers.
The Specialist Testing business continues to see the results of the good work of
the last two years as it experiences strong consistent growth, due to the good
fit of its products and services with customer needs. NCC Group aims to ensure
performance and capability issues for customers are fully resolved prior to any
launch or upgrade in to the market.
The current day rate market is best described as 'normally competitive.' This
position is much better than last year when NCC Group started to see a downshift
in orders for its day rate businesses which lasted until early October for
Testing Solutions and through to the start of 2006 for the Consultancy business.
There is still a trend towards 'over procurement' of public and local authority
consultancy assignments. Work which should be awarded without a tender is now
being fully tendered, often just adding an inappropriate and burdensome stage to
the process.
Whilst NCC Group strongly supports the value for money approach that effective
procurement can achieve, the Board doubts it is as appropriate for small,
discrete, one off pieces of work as the costs of the process will negate any
savings made by the customer.
UK business performance
NCC Group continues to manage the Group through three distinct business units;
Escrow Solutions, Testing Solutions and Consultancy. Each is independent of the
others and each is run by an autonomous management team. There is no focus on
cross selling, other than by the Escrow Solutions account management teams for
Verification Testing.
Each business unit is responsible for setting and, after Board approval,
delivering its own plans, with each area being tasked with generating organic
growth.
Escrow Solutions
The UK Escrow Solutions business is the cornerstone of the Group. NCC Group has
experienced good growth in all its key performance measures of profitability,
new contracts and beneficiaries, renewals and sales opportunities for
Verification Testing.
Profitability in the UK grew to £6.1m, an increase of 27% on revenue of £9.8m,
up over 21%. UK contract renewals, which represented £7.1m in the year,
benefited from improvements in the termination process.
Contract terminations were less than 10% in the year and below 11% for agreement
beneficiaries. This is an improvement of at least 1% on the previous financial
year and still considerably below the 13% the Board uses as a guideline and safe
planning assumption.
The beneficiary base has now grown to over 13,500 and the number of contracts is
now at nearly 7,000. On average, each customer now is a party to over two
agreements.
The level of Escrow Solutions contract terminations has fallen to a record low
of less than 10%. This is the result of continued improvements to the
termination process. This coupled with the addition of the US acquisition has
resulted in contract renewals ending the year at £7.5m.
The rate of agreement completions, renewals and terminations in the year to May
2006 have been such that NCC Group is forecasting UK renewals for 2006/07 to be
£8.1m.
Testing Solutions
Testing Solutions profitability grew to £1.3m in 2006, an increase of 34%, with
revenue growth of 31% to £5.7m. The business unit has seen very strong growth
in each of the three testing areas as testing and the importance of risk
mitigation moves further up the corporate agenda. Penetration Testing growing
by 43% and both Verification Testing and Specialist Testing increasing revenue
by over 20%.
NCC Group carried out over 750 penetration tests in the last twelve months, a
growth of 43%. It now employs more testers than ever before, 15. In addition
to new contracts and clients, the Group is also seeing a move to regular repeat
testing, such that now it anticipates a repeat rate of at least 40%.
The Escrow Solutions business is responsible for generating the sales leads for
the Full Verification Testing service, which is currently the Group's second
biggest testing area. Once the lead is generated, it is the role of the
verification consultants to deliver the verification in association with both
the owner of the application and the licensee. At present NCC Group expects one
in ten new agreements to take a full verification and 40% verifications to be
repeated again the following year. During the year the Group performed over 320
verifications, a 34% increase on the prior year.
Specialist Testing has had an exceptionally strong year as it has broadened both
its product appeal and client base. The performance of Specialist Testing in
the last 24 months has shown that the business is robust, consistent and a good
reliable contributor to Group profitability. This year saw the highest ever
levels of revenue, profitability, utilisation and an overall strengthening of
the day rate.
Consultancy
Consultancy revenue fell by 14% to £4.7m due to a very difficult year. The
first six months reported a small loss, but from January onwards, NCC Group saw
a return to a more normal level of trading. Utilisation levels returned to the
80% mark and with careful cost control and the selective use of flexible
resources, the Group generated a profit of £0.7m in the second half of the year
which was stronger than the prior half year by over 20%, despite there being a
16% decline in revenue. Operating profits for the year were down by 36% to
£0.6m.
Consultancy remains an integral part of what NCC Group does and responded very
well to the challenges it faced.
International developments
In December 2005 the Group acquired the assets and renewals base of a top five
US escrow provider for a consideration of up to $5m (£2.9m). On 6 July 2006 NCC
Group completed the acquisition of the assets and renewals base of Source
Harbor, a small US escrow provider, for a consideration not exceeding $1.5m
(£0.8m). These acquisitions provide the Group with a renewals base of over
$1.4m (£0.8m) and give it a good initial foothold in to the US market.
The Group will now develop an account management model to focus on maximising
its potential with the customer base it has acquired. The Board plans to look
for bolt on acquisitions to underpin the business, whilst growing organically.
Although, it is still too early to be definitive, NCC Group aims to invest in
these businesses at a level which will maintain a contribution from them which
is no lower than the current return. The potential for growth is considerable,
particularly as there is currently no Verification Testing sold by the
businesses.
In Germany, NCC Group now has the infrastructure, systems and people in place to
start making inroads in to the market, having invested £0.5m.
NCC Group currently has eight trained account managers and have high hopes of
being able to sell as effectively as in the UK, by way of a similar account
management model.
A small facility for additional testing resources in Argentina has also been
established in June 2006.
Employees, recruitment and retention
Recruitment and retention remains the biggest obstacle to growth for a people
business such as NCC Group. The Group employs 221 staff, similar to last year
but a different mix. With the difficult first half of the year, consultancy
fell in size through natural wastage and redeployment in to other areas of the
business.
The main focus for recruitment is on Escrow Solutions, where NCC Group needs
account managers of the highest quality and potential. A process for graduate
recruitment has been developed and the Group now employs 69 account managers
(2005: 62).
As the Group is reliant on the Manchester recruitment market, the Board is
reviewing the options to develop a more substantial second location so as to
recruit from an alternative resource pool. Whilst there are no definite plans
as to its location, this will further enable NCC Group to meet our ambitious
growth plans. The Group remains committed to Manchester as the right location
for Head Office and will continue to develop both people and infrastructure
there.
Current trading and outlook
The Board is committed to continuing its investment in people to deliver organic
growth throughout the Group. This route has been a proven success and the
surest way to deliver the greatest returns.
NCC Group will invest in appropriate carefully selected acquisitions, but they
will only be considered if they enhance the scale of its operations and are
priced to offer a suitable level of earnings enhancement.
Despite the difficult conditions during the first half of last year, the Board
is confident in the Group's ability to deliver good growth. The start to the
current financial year sees Escrow renewals at £8.1m, up from £7.1m this time
last year. The Testing businesses order book improving to £1.6m from £1.5m with
the Consultancy business standing at £1.7m up from £1.3m last year.
The outlook for NCC Group remains good.
Consolidated income statement
For the year ended 31 May 2006
Notes 2006 2005
£000 £000
Revenue 2 20,747 17,971
Cost of sales (10,647) (9,415)
Gross profit 10,100 8,556
Administrative expenses before amortisation of intangible assets (3,417) (2,767)
Earnings before interest, tax and amortisation 6,683 5,789
Amortisation of intangible assets (47) -
Total administrative expenses (3,464) (2,767)
Operating profit 2 6,636 5,789
Financial income 6 175 162
Financial expenses
- Float related finance costs 3 - (861)
- Other financial expense 6 (260) (534)
Total financial expenses (260) (1,395)
Net financing costs (85) (1,233)
Profit before taxation 4 6,551 4,556
Taxation 7 (1,993) (1,379)
Profit for the year 4,558 3,177
Attributable to equity holders of the parent company 4,558 3,177
Profit for the year 4,558 3,177
Earnings per share 9
Basic earnings per share 14.0p 10.2p
Diluted earnings per share 13.6p 10.0p
Group balance sheet
At 31 May 2006
Notes 2006 2005
£000 £000 £000 £000
Non current assets
Intangible assets 10 30,420 27,401
Property, plant and equipment 11 1,257 1,002
Deferred tax assets 14 423 166
Total non-current assets 32,100 28,569
Current assets
Trade and other receivables 12 4,840 3,595
Cash and cash equivalents 5,139 5,103
Total current assets 9,979 8,698
Total assets 42,079 37,267
Equity
Issued capital 20 326 326
Share premium 19,913 19,819
Retained earnings 7,964 3,755
Currency translation reserve 15 -
Total equity attributable to equity
holders of the parent
28,218 23,900
Minority interest 21 - (23)
Total equity 28,218 23,877
Non current liabilities
Interest bearing loans 17 2,689 3,882
Other financial liabilities 123 137
Total non current liabilities 2,812 4,019
Current liabilities
Interest bearing loans 18 1,200 1,200
Trade and other payables 15 2,750 2,563
Deferred revenue 16 6,037 4,885
Current tax payable 1,062 723
Total current liabilities 11,049 9,371
Total liabilities 13,861 13,390
Total liabilities and equity 42,079 37,267
Group cash flow statement
For the year ended 31 May 2006
Notes 2006 2005
£000 £000
Cash inflow from operating activities
Profit for the year 4,558 3,177
Adjustments for:
Depreciation charge 550 354
Share based charges 468 297
Amortisation of intangible assets 47 -
Net financing costs 85 1,233
Profit on sale of property, plant and equipment (9) (11)
Income tax expense 1,993 1,379
Profit for the year before changes in working capital 7,692 6,429
Increase in receivables (1,045) (142)
Increase in payables 636 1,374
Cash generated from operating activities before interest and tax 7,283 7,661
Interest paid (272) (1,059)
Income taxes paid (1,808) (1,041)
Net cash generated from operating activities 5,203 5,561
Cash flows from investing activities
Interest received 175 123
Proceeds from the sale of plant and equipment 34 34
Acquisition of property, plant and equipment (824) (834)
Acquisition of business 13 (2,546) -
Net cash used in investing activities (3,161) (677)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital - 19,826
VAT recovered on fees relating to the issue of capital 94 -
Proceeds from borrowings - 5,975
Payment of bank loans (1,200) (12,875)
Receipt on disposal of interest rate swap - 39
Payment of loan notes - (16,779)
Payment for shares in minority interest (18) -
Equity dividends paid (897) (245)
Net cash from financing activities (2,021) (4,059)
Net increase in cash and cash equivalents 22 21 825
Cash and cash equivalents at beginning of year 5,103 4,278
Effect of exchange rate fluctuations on cash held 15 -
Cash and cash equivalents at end of year 5,139 5,103
Notes
1. Accounting Policies
The financial information in this preliminary announcement has been prepared in
accordance with the accounting policies set out in the financial statements of
NCC Group Plc for the year ended 31 May 2006 which have remained unchanged from
the financial year 2005.
The financial information set out above does not constitute the Group's
statutory accounts for the year ended 31 May 2006 or 2005, but is derived from
those accounts. Statutory accounts for the year ended 31 May 2005 have been
filed with the Registrar of companies. The statutory accounts for 2006 will be
delivered to the Registrar of Companies following the Company's Annual General
Meeting. The auditors have reported on those accounts; their reports were
unqualified and did not contain a statement under Section 237(2) or (3) of the
Companies Act 1985.
When published, the Company's Annual Report and Accounts will be sent to
shareholders and will be made available to the public at the Company's
registered office, Manchester Technology Centre, Oxford Road, Manchester. M1
7EF
The accounting policies set out below have, unless otherwise stated, been
applied consistently to all periods presented in these group financial
statements and in preparing an opening IFRS balance sheet at 1 June 2004 for the
purposes of the transition to Adopted IFRS.
Transition to Adopted IFRS
The Group and the company are preparing their financial statements in accordance
with Adopted IFRS for the first time and consequently both have applied IFRS 1.
An explanation of how the transition to Adopted IFRS has affected the reported
financial position, financial performance and cash flows of the Group is
provided in note 28.
IFRS 1 grants certain exemptions from the full requirements of IFRS in the
transition period. The following exemptions have been taken in these financial
statements:
• Business combinations - Business combinations that took place prior to 1
June 2004 have not been restated.
• Cumulative translation differences - Cumulative translation differences
for all foreign operations have been set to zero at 1 June 2004.
Intangible Assets and Goodwill
Subject to the transitional relief in IFRS 1, all business combinations are
accounted for by applying the purchase method. Goodwill represents amounts
arising on acquisition of subsidiaries. In respect of business acquisitions that
have occurred since 1 June 2004, goodwill represents the difference between the
cost of the acquisition and the fair value of the net identifiable assets
acquired. Identifiable intangibles are those which can be sold separately or
which arise from legal rights regardless of whether those rights are separable.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is
allocated to cash-generating units being the subsidiary companies acquired and
is not amortised but is tested annually for impairment.
In respect of acquisitions prior to 1 June 2004, goodwill is included at 1 June
2004 on the basis of its deemed cost, which represents the amount recorded under
UK GAAP which was broadly comparable save that only separable intangibles were
recognised and goodwill was amortised.
Other intangible assets that are acquired by the Group are stated at cost less
accumulated amortisation. Amortisation is charged to the income statement on a
straight line basis over the estimated useful lives of intangible assets unless
such lives are indefinite. Intangible assets with an indefinite useful life and
goodwill are systematically tested for impairment at each balance sheet date or
whenever there is an indication of impairment. Other intangibles are amortised
from the date they are available for use. Acquired customer contracts and
relationships are amortised over their estimated useful economic life of 20
years.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is charged to the income statement on a straight line basis over
the estimated useful lives of each part of an item of property, plant and
equipment. The estimated useful lives are as follows:
Computer equipment - 20% to 33%
Plant and equipment - 20%
Fixtures and fittings - 20%
Motor vehicles - 25%
Property, plant and equipment is also tested for impairment whenever there is an
indication.
Revenue Recognition
Revenue represents the invoiced value of goods and services provided during the
period, excluding VAT. The results of partially completed contracts whether
fixed price or on a time and materials basis are dealt with on a percentage
completion basis by including the profit or loss earned on work completed to the
balance sheet date. Provisions are made for any losses on uncompleted contracts
expected to be incurred after the balance sheet date. Maintenance and Escrow
Solutions agreement revenue is recognised on a straight-line basis over the life
of the related agreement.
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 income statement.
The assets and liabilities are translated at the closing rate and income
statements of overseas subsidiary undertakings are translated at the average
exchange rates. Gains and losses arising on these transactions are taken to the
translation reserve, net of exchange differences arising on related foreign
currency borrowings. They are released to the income statement upon disposal.
The Group has taken advantage of relief available in IFRS 1 to deem the
cumulative translation differences for all foreign operations to be zero at the
date of transition to IFRS (1 June 2004).
Pension Benefits
The Group operates a defined contribution pension scheme. The assets of the
scheme are kept separately from those of the Group in an independently
administered fund. The amount charged as expense in the income statement
represents the contributions payable to the scheme in respect of the accounting
period.
Share-Based Payment Transactions
The share option programme allows Group employees to acquire shares of the
ultimate parent company; these awards are granted by the ultimate parent. The
fair value of options granted is recognised as an employee expense with a
corresponding increase in equity. The fair value is measured at grant date and
spread over the period during which the employees become unconditionally
entitled to the options. The fair value of the options granted is measured using
an option valuation model, taking into account the terms and conditions upon
which the options were granted. The amount recognised as an expense is adjusted
to reflect the actual number of share options that vest except where forfeiture
is due only to share prices not achieving the threshold for vesting.
Net Financing Costs
Net financing costs comprise interest payable, interest receivable on funds
invested, dividend income and foreign exchange gains and losses recognised in
the income statement.
Interest income and interest payable is recognised in the income statement as it
accrues. Dividend income is recognised in the income statement on the date the
entity's right to receive the payments is established.
Taxation
Tax on the profit or loss for the year comprises current and deferred tax. Tax
is recognised in the income statement except to the extent that it relates to
items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantively enacted at the balance sheet date, and
any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used
for taxation purposes. The following temporary differences are not provided
for: the initial recognition of goodwill; the initial recognition of assets or
liabilities that affect neither accounting nor taxable profit other than in a
business combination, and differences relating to investments in subsidiaries to
the extent that they will probably not reverse in the foreseeable future. The
amount of deferred tax provided is based on the expected manner of realisation
or settlement of the carrying amount of assets and liabilities, using tax rates
enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that
future taxable profits will be available against which the asset can be
utilised.
Adopted IFRS Not Yet Applied
The following adopted IFRS were available for early adoption but have not been
applied by the Group in these financial statements;
International accounting standards (IFRS) Effective date
IFRS 7 Financial Instruments: Disclosures 1 January 2007
IAS 1 Amendment - Presentation of financial statements: Capital 1 January 2007
Disclosures
International Financial Reporting Interpretations Committee (IFRIC) Effective date
IFRIC 4 Determining when an arrangement is a lease 1 January 2006
IFRIC 6 Liabilities arising from participating in a specific market - 1 December 2005
waste electrical and electronic equipment
IFRIC 8 Scope of IFRS 2 1 May 2006
The directors do not anticipate that the adoption of these standards and
interpretations or any of the other standards available for early adoption will
have a material impact on the Group's financial statements. Certain of these
standards and interpretations will require additional disclosures over and above
those currently included in these financial statements in the period of initial
application.
The Company has not adopted amendments to IAS 39 and IFRS4 in relation to
financial guarantee contracts which will apply for the year ended 31 May 2006.
Where the Company enters into financial guarantee contracts to guarantee the
indebtedness of other companies within the Group, the Company considers these to
be insurance contracts and accounts for them as such. In this respect, the
Company treats the guarantee contract as a contingent liability until such a
time as it becomes probable that the Company will be required to make payment
under the guarantee. The Company does not expect the amendments to have any
impact on the financial statements for the period commencing 1 June 2006.
Trade and Other Receivables
Trade and other receivables are stated at their nominal amount less impairment
losses.
Cash and Cash Equivalents
Cash and cash equivalents, for the purpose of the cash flow statement and
balance sheet, comprises cash in hand and deposits repayable on demand less
overdrafts payable on demand.
2. Segmental Information
The Group is organised into three primary business segments; Escrow Solutions,
Testing Solutions and Consultancy. These three segments are the Group's primary
reporting format for segment information.
2006 2005
£000 £000
Revenue by business segment
Escrow Solutions (UK) 9,832 8,098
Escrow Solutions (Germany) 183 140
Escrow Solutions (US) 371 -
Total Escrow Solutions 10,386 8,238
Testing Solutions 5,704 4,352
Consultancy 4,657 5,381
Total external revenue 20,747 17,971
Operating profit by business segment
Escrow Solutions (UK) 6,065 4,765
Escrow Solutions (Germany) (384) 115
Escrow Solutions (US) 131 -
Total Escrow Solutions 5,812 4,880
Testing Solutions 1,300 972
Consultancy 616 956
Segment operating profit 7,728 6,808
Head office costs (1,092) (1,019)
Operating profit 6,636 5,789
Net assets / (liabilities) by business segment
Escrow Solutions (UK) (3,934) (3,688)
Escrow Solutions (Germany) 100 -
Escrow Solutions (US) 2,936 -
Total Escrow Solutions (898) (3,688)
Consultancy 723 280
Testing Solutions 194 48
Unallocated net assets 28,195 27,237
Total net assets 28,214 23,877
Unallocated net assets consist of goodwill arising on consolidation, cash, tax
payable and other centrally held assets and liabilities.
The table below provides additional disclosure on revenue by geographical market
where the customer is based.
2006 2005
£000 £000
Revenue by geographical segment
UK 17,699 15,790
Rest of Europe 1,275 1,104
Rest of the World 1,773 1,077
Total revenue 20,747 17,971
Net assets by geographical segment
UK 25,178 23,877
Rest of Europe 100 -
Rest of the World 2,936 -
Total revenue 28,214 23,877
3. Float Related Finance Costs
During the twelve months ended 31 May 2006, float related finance costs of £nil
(2005: £861,000 relating to the repayment of debt financing following the
Group's listing on Aim) were written off to the income statement.
4. Expenses and Auditors' Remuneration
2006 2005
£000 £000
Profit before taxation is stated after charging/(crediting):
Auditors' remuneration:
Group 29 26
Company 1 1
Non audit 9 15
Depreciation and other amounts written off tangible and intangible
fixed assets:
Owned 550 354
Amortisation of intangible assets 47 -
Exchange losses 10 -
Operating lease rentals charged:
Hire of plant and equipment 270 300
Other operating leases 385 340
Profit on disposal of fixed assets (9) (11)
5. Staff Numbers and Costs
The average number of persons employed by the Group during the year, including
directors is analysed by category as follows:
Number of employees
2006 2005
Operational 66 55
Administration, sales and marketing 142 134
208 189
The aggregate payroll costs of these persons were as follows:
2006 2005
£000 £000
Wages and salaries 7,853 6,968
Share based payments (note 19) 468 297
Social security costs 912 827
Other pension costs (note 24) 231 195
9,464 8,287
6. Net Finance Income
2006 2005
£000 £000
Financial income
Interest on short term deposits 175 123
Profit on disposal of interest rate swap - 39
175 162
Financial expenses
Interest payable on bank loans and overdrafts (253) (526)
Amortisation of deal fees on term loans (7) (8)
(260) (534)
7. Taxation
Recognised in the Income Statement
2006 2005
£000 £000
Current tax expense
Current year 2,151 1,483
Adjustment to tax charge in respect of prior periods (16) (9)
Foreign tax 5 -
Total current tax 2,140 1,474
Deferred tax (see note 14) (147) (95)
Tax in income statement 1,993 1,379
Reconciliation of Effective Tax Rate
2006 2005
£000 £000
Profit before taxation 6,551 4,556
Current tax using the UK corporation tax rate of 30% (2005: 30%) 1,965 1,367
Effects of:
Expenses not deductible for tax purposes 37 20
Depreciation in excess of capital allowances 26 6
Other timing differences 128 90
Adjustment to tax charge in respect of prior periods (16) (9)
Total current tax 2,140 1,474
Deferred tax recognised directly in equity was £103,000 (2005: nil)
8. Dividends
2006 2005
£000 £000
Dividends paid and recognised in the year 897 245
Dividends proposed but not recognised in the year 734 571
Dividends per share paid and recognised in the year 2.75p 0.75p
Dividends per share proposed but not recognised in the year 2.50p 1.75p
9. Earnings per Share
The calculation of earnings per share is based on the following:
2006 2005
£000 £000
Profit for the year 4,558 3,177
Number of Number of
Shares Shares
000's 000's
Basic weighted average number of shares in issue 32,604 31,292
Dilutive effect of share options 800 472
Diluted weighted average shares in issue 33,404 31,764
10. Intangible Fixed Assets
Customer Goodwill arising on Purchased Total
contracts and consolidation Goodwill
relationships
£000 £000 £000 £000
Cost
At 1 June 2004 - 27,401 - 27,401
Additions - - - -
At 31 May 2005 - 27,401 - 27,401
Additions 2,250 - 816 3,066
At 31 May 2006 2,250 27,401 816 30,467
Amortisation
At 31 May 2005 - - - -
Charge for year 47 - - 47
At 31 May 2006 47 - - 47
Net book value
At 31 May 2006 2,203 27,401 816 30,420
Net book value
At 31 May 2005 - 27,401 - 27,401
11. Property, Plant and Equipment
Computer Plant and Fixtures and Motor Total
equipment equipment fittings vehicles
£000 £000 £000 £000 £000
Cost
At 1 June 2004 1,249 117 126 130 1,622
Additions 241 227 328 38 834
Disposals (3) - - (65) (68)
At 31 May 2005 1,487 344 454 103 2,388
Additions 609 14 46 161 830
Disposals - - - (67) (67)
At 31 May 2006 2,096 358 500 197 3,151
Depreciation
At 1 June 2004 878 88 59 51 1,076
Charge for year 222 42 63 27 354
On disposals (1) - - (43) (44)
At 31 May 2005 1,099 130 122 35 1,386
Charge for year 343 63 111 33 550
On disposals - - - (42) (42)
At 31 May 2006 1,442 193 233 26 1,894
Net book value
At 31 May 2006 654 165 267 171 1,257
Net book value
At 31 May 2005 388 214 332 68 1,002
12. Trade and Other Receivables
Group Group Company Company
2006 2005 2006 2005
£000 £000 £000 £000
Trade debtors 3,464 2,653 - -
Amounts owed by group undertakings - - 165 205
Prepayments and accrued income 1,376 942 - -
4,840 3,595 165 205
All debtors fall due within one year.
13. Acquisitions
On 28 December 2005, the Group acquired the trade and net assets of the escrow
division of Recall Total Information Management Inc for a maximum consideration
of £2,946,000 of which £400,000 has been withheld subject to the achievement of
performance criteria specified in the purchase agreement. The performance
conditions are required to be satisfied by 31 December 2006.
The acquisition had the following effect on the Group's assets and liabilities.
Acquiree's Fair value Acquisition
book values Adjustments amounts
£000 £000 £000
Acquiree's net assets at the acquisition
date:
Property, plant and equipment 6 - 6
Trade and other receivables 200 - 200
Deferred revenue (308) - (308)
Intangible assets purchased - 2,250 2,250
Net identifiable assets / (liabilities) (102) 2,250 2,148
Goodwill on acquisition 798
Maximum consideration to be paid 2,946
Less purchase consideration withheld (400)
Net cash outflow 2,546
Goodwill has arisen on the acquisition because the purchase price exceeds the
value of the net assets acquired.
From the date of acquisition the US Escrow Solutions acquisition contributed
operating profit of £131,000 and revenue of £371,000 to the Group consolidated
income statement for the year ended 31 May 2006.
If the acquisition had occurred at the beginning of the financial year, the pro
rata consolidated revenue and operating profit for the year ended 31 May 2006
would have been approximately £21.3m and £6.8m respectively.
14. Deferred Tax Assets
Recognised deferred tax assets
Deferred tax assets are attributable to the following:
Assets Liabilities Net
2006 2005 2006 2005 2006 2005
£000 £000 £000 £000 £000 £000
Property, plant and 81 68 (7) - 74 68
equipment
Short term timing 9 9 - - 9 9
differences
Share based payments 333 89 - - 333 89
Deferred Tax assets / 423 166 (7) - 416 166
(liabilities)
Movement in deferred tax during the year
Recognised Recognised
1 June 2005 in income in equity 31 May 2006
£000 £000 £000 £000
Property, plant and equipment 68 7 - 75
Short term timing differences 9 - - 9
Share based payments 89 140 103 332
166 147 103 416
Movement in deferred tax during the prior year
Recognised Recognised
1 June 2004 in income in equity 31 May 2005
£000 £000 £000 £000
Property, plant and 64 4 - 68
equipment
Short term timing 7 2 - 9
differences
Share based payments - 89 - 89
71 95 - 166
15. Trade and Other Payables
Group Group Company Company
2006 2005 2006 2005
£000 £000 £000 £000
Trade creditors 448 332 - -
Amounts owed to group - - 646 90
undertakings
Interest 33 52 33 52
Other taxation and social 804 951 - -
security
Accruals 1,465 1,228 15 -
2,750 2,563 694 142
16. Deferred Revenue
Group Group Company Company
2005 2005 2006 2005
£000 £000 £000 £000
Deferred revenue 6,037 4,885 - -
6,037 4,885 - -
Deferred revenue of £6,037,000 (2005: £4,885,000) consists of Escrow Solutions
agreement revenue and maintenance revenue that has been deferred to be released
to the income statement over the contract term on a pro-rata basis.
17. Non Current Liabilities
Group Group Company Company
2006 2005 2006 2005
£000 £000 £000 £000
Unsecured bank loan 2,700 3,900 2,700 3,900
Total 2,700 3,900 2,700 3,900
Issue costs (26) (26) (26) (26)
Amortisation of issue costs 15 8 15 8
Net book value 2,689 3,882 2,689 3,882
The issue costs are being amortised over the term of the loan.
Loan repayments are to be made quarterly on the last day of March, June,
September and December of each year. The loan is unsecured.
18. Financial Instruments
Financial Instruments Policy
All instruments utilised by the Company and Group are for financing purposes.
The day-to-day financial management and treasury are controlled centrally for
all operations. During the year ended 31 May 2006 the Group realised proceeds of
£nil (2005: £39,000) on disposal of an interest rate swap, the proceeds are
included within interest receivable.
Interest Rate Risk
The Group and Company finances its operations through a mixture of retained
profits and bank borrowings. The Group borrows and invests surplus cash at
floating rates of interest based upon bank base rate.
The financial assets of the Group at the end of the financial year were as
follows
2006 2005
£000 £000
Sterling denominated floating rate financial assets 4,723 4,992
Euro denominated floating rate financial assets 58 111
US dollar denominated floating rate financial assets 358 -
5,139 5,103
The financial assets of the Company at the end of the financial year were as
follows
2006 2005
£000 £000
Sterling denominated floating rate financial assets 5 512
5 512
The financial liabilities of the Group and Company and their maturity profile is
as follows
Floating rate Floating rate
borrowings 2006 borrowings 2005
Maturity £000 £000
Less than 1 year 1,200 1,200
1 to 2 years 1,200 1,200
2 to 3 years 1,200 1,200
3 to 4 years 289 1,200
4 to 5 years - 282
Sterling denominated floating rate financial 3,889 5,082
liabilities
As at 31 May 2006 the Group and Company had a committed undrawn and unsecured
revolving credit facility of £6.1 million.
Liquidity Risk
The Group and Company's operations are cash generative. The Group and Company
considers that it has sufficient financial resources to meet its foreseeable
requirements.
Credit Risk
As at 31 May 2006 the Group and Company had no material exposure to credit risk.
Currency Exposure
As at 31 May 2006 the Group and Company had no material currency exposures
relating to trading activities. The Group and Company's financial instruments
are materially denominated in sterling.
Fair Value of Financial Instruments
As at 31 May 2006 the Group and Company had no other financial instruments.
19. Employee Benefits
Share-Based Payments
The company has a number of share option schemes under which options to
subscribe for the Company's shares have been granted to directors and staff,
details of which are illustrated in the tables below:
Approved EMI Scheme
Under the Approved EMI Scheme, options granted will be subject to performance
criteria. Options will vest if the average EPS growth for the 3 years to 31 May
2007 is greater than 3% above RPI per annum. The options are to be settled in
equity.
Date of grant Expected term of
options Exercise 2006 Number
Exercisable between price outstanding
July 2004 6 years July 2007 - July 2014 £1.70 964,412
July 2005 6 years July 2008 - July 2015 £2.565 42,882
LTIP Scheme
The vesting condition for the award of the July 2004 LTIP is average growth of
EBITA over the life of the LTIP. If average EBITA growth is above 25% the
shares will vest fully. If growth is less than 10% no shares will vest and if
the average EBITA growth is between 10% and 25% the shares vest on a straight
line basis between the two percentages.
The vesting condition for the award of the July 2005 LTIP is split 50:50 between
Total Shareholder Return (TSR) & EPS. The TSR condition compares the Group's
TSR performance over the 3 year performance period with the TSR performance of
the constituent companies of the FTSE software and computer services index.
Where the Group's TSR performance equates to median level in the comparator
group, 30% of the award governed by the TSR condition will vest. 100% of the
award governed by the TSR condition will vest for upper quartile performance or
above. Between these two points, vesting will be determined on a straight line
basis.
The EPS condition governs the vesting of the remaining 50% of the LTIP award and
relates to the growth in the Group's EPS over the performance period. If growth
is equal to 25% or more per annum then 100% of the award governed by the EPS
condition will vest. If, however, growth is less than 10% per annum, none of the
award governed by the EPS condition will vest. Between these two points, vesting
is determined on a straight line basis. The options are to be settled in equity.
Date of Grant Expected term of Exercisable between Exercise 2006 Number
options price outstanding
July 2004 3 years May 2007 - May 2008 nil* 169,118
July 2005 3 years May 2008 - May 2009 nil* 261,761
*The option exercise is nil however £1 is payable on each occasion of exercise.
Sharesave Scheme
The company operates a Sharesave scheme, which is available to all employees and
full time Executive Directors of the Company and its subsidiaries who have
worked for a qualifying period. All options are to be settled by equity.
Under the scheme the following options have been granted and are outstanding at
year end.
Date of Grant Expected term of Exercise 2006 Number
options Exercisable between price outstanding
July 2004 3.25 years September 2007 - February £1.36 291,803
2008
July 2005 3.25 years September 2008 - February £2.07 49,771
2009
The following table illustrates the number of share options for the schemes.
Scheme Number of Instruments Options Expired / Number of
instruments as granted during the exercised in Forfeitures instruments
at 1 June 2004 year the year in the year as at 31 May
2005
Approved EMI scheme - 1,249,578 - (117,498) 1,132,080
Sharesave scheme - 395,076 - (51,398) 343,678
LTIP - 169,118 - - 169,118
Scheme Number of Instruments Options Expired / Number of
instruments as granted during the exercised in Forfeitures instruments
at 1June 2005 year the year in the year as at 31 May
2006
Approved EMI scheme 1,132,080 - - (167,668) 964,412
Approved EMI scheme - 42,882 - - 42,882
Sharesave scheme 343,678 - - (51,875) 291,803
Sharesave scheme - 56,357 - (6,586) 49,771
LTIP 169,118 - - - 169,118
LTIP - 261,761 - - 261,761
The fair value of services received in return for share options is calculated
with reference to the fair value of the award on the date of grant. The fair
value is spread over the period during which the employee becomes
unconditionally entitled to the award, adjusted to reflect actual and expected
levels of vesting. Black-Scholes, Binomial and Monte Carlo simulation models
have been used to calculate the fair values of options on their grant date for
all options issued after 7 November 2002 which had not vested by 1 January 2005.
The assumptions used in the model are illustrated in the table below:
EMI EMI SAYE SAYE LTIP LTIP LTIP
Grant Date July 2004 July 2005 July 2004 July 2005 July 2004 Sept 2005 Sept 2005
Fair value at
measurement date £0.71 £1.07 £0.68 £1.00 £1.59 £1.87 £2.27
Exercise price £1.70 £2.565 £1.36 £2.07 £nil* £nil* £nil*
Expected volatility 44% 40% 44% 40% 44% 40% 40%
Option expected term 6 Years 6 Years 3.25 Years 3.25 Years 3 Years 3 Years 3 Years
Risk-free interest
rate 5.09% 5.09% 5.06% 5.06% 5.01% 5.01% 5.01%
* The option exercise is nil however £1 is payable on each occasion of exercise.
The expected volatility is based on the historic volatility (calculated based on
the weighted average remaining life of the share options), adjusted for any
expected changes to future volatility due to publicly available information.
Dividend yield assumed at the time of option grant is 2.3%.
A charge of £468,000 (2005: £297,000) has been made to cost of sales in the
group income statement in respect of share based payment transactions. A charge
of £146,000 (2005: £79,000) has been made to cost of sales in the company income
statement in respect of share based payment transactions.
20. Called Up Share Capital
Number of
shares 2006 2005
£000 £000
Authorised
Ordinary shares of 1p each 50,000,000 500 500
500 500
Allotted, called up and fully
paid
Ordinary shares of 1p each 32,604,185 326 326
326 326
21. Minority Interests
2006 2005
£000 £000
At beginning of year (23) (23)
Acquired 23 -
At end of year - (23)
Equity - (3)
Non-equity - (20)
- (23)
22. Cash and Cash Equivalents
At beginning Cash flow Non cash At end of
of year items year
£000 £000 £000 £000
Cash and cash equivalents per
balance sheet
5,103 21 15 5,139
Cash and cash equivalents per 5,103 21 15 5,139
cash flow statement
23. Other Financial Commitments and Contingent Liabilities
a) Capital commitments at the end of the financial year, for which no provision
has been made, are as follows:
2006 2005
£000 £000
Contracted - 55
b) Non-cancellable operating lease rentals are payable as follows:
2006 2005
Land and Land and Other
Buildings Buildings
Other £000
£000 £000
£000
Within 1 year - 46 20 43
In second to fifth year inclusive 407 225 334 198
Over 5 years - - - -
407 271 354 241
There are no contingent liabilities not provided for at the end of the financial
year.
24. Pension Scheme
The Group operates a defined contribution pension scheme that is open to all
eligible employees. The pension cost charge for the year represents
contributions payable by the group to the fund and amounted to £231,000 (2005:
£195,000). The outstanding contributions at the year end were £32,707 (2005:
£29,448).
For the Company, the pension cost charge for the year represents contributions
payable by the company to the fund and amounted to £23,000 (2005: £20,000).
25. Related Party Transactions
NCC Group's Non Executive chairman Paul Mitchell is a director of Rickitt
Mitchell and Partners Limited and the Group conducted business to the value of
£115,000 (2005: £301,000) with Rickitt Mitchell and Partners Limited. Included
within the charge is £70,000 relating to advice received in connection with the
acquisition of the business and assets of Recall Total Information Management's
escrow division, the remaining £45,000 relates to the services of the non
executive chairman. Included within the charge in 2005 is £266,000 relating to
financial advice provided during the floatation of the Group on AIM, the
remaining £35,000 relates to the services of the non executive chairman. Rickitt
Mitchell and Partners Limited also held 7,000 1p ordinary shares (2005: 7000).
At 31 May 2006, there was a £25,000 outstanding balance between the Group and
Rickitt Mitchell and Partners Limited (2005: nil).
The Group and Company's transactions with directors and key management personnel
are disclosed in the Directors' Remuneration Report.
26. Fixed Asset Investments in Subsidiaries
Shares in group
undertakings
Company £000
Cost
At beginning and end of 29,145
year
The cost represents the cost of acquiring the whole of the issued share capital
of NCC Group (Solutions) Limited and its subsidiary undertakings. Fixed asset
investments are recognised at cost.
The principal undertakings in which the Group's interest at the year end is 100%
are as follows:
Country of Principal
incorporation Activity
Subsidiary undertakings
NCC Group (Solutions) Limited England and Wales Escrow Solutions
& Consultancy services
NCC Services Limited England and Wales Escrow Solutions
& Consultancy services
NCC Escrow International Limited England and Wales Dormant
NCC Group Inc USA Escrow Solutions
NCC Group Employee's Trustees Limited England and Wales Employee Benefit Trust
NCC Escrow International GmbH Germany Escrow Solutions
The Group does not have an interest in any other subsidiary undertakings.
27. Explanation of Transition to IFRS
As a London Stock Exchange Aim listed company NCC Group plc will be required to
prepare its consolidated accounts in accordance with International Accounting
Standards (IAS) and International Financial Reporting Standards (IFRS) as
adopted by the European Union (EU) from 1 January 2007, having previously
prepared its accounts using UK Generally Accepted Accounting Principles (UK
GAAP). The Group has adopted the standards early and therefore NCC Group has
reported under IFRS for the year ended 31 May 2006.
There was no effect on the underlying cash generation and expenditures of the
Group, however there were some presentational changes on the adoption of IAS 7 '
Cash Flow Statements'.
28.a Effect of IFRS Adoption on Profit for the Year Ended 31 May 2005
Group
Note 2005
31 May
£000
Profit for the period under UK GAAP 1,895
Share-based charges A (297)
Tax movement on share options D 89
Goodwill amortisation C 1,500
Lease incentives B (15)
Tax movement on lease incentives D 5
Profit for the period reported under IFRS 3,177
28.b Effect of IFRS Adoption on Equity
Group
Note 2005 2004
31 May 31 May
£000 £000
Total equity under UK GAAP 21,727 822
Goodwill amortisation C 1,500 -
Dividends payable E 571 -
Deferred tax asset - share based payments D 89 -
Leasehold incentives B (15) -
Tax on leasehold incentives D 5 -
Total equity reported under IFRS 23,877 822
28.c Explanatory Notes to the IFRS Adjustments
As stated in note 1 these are the Group and Company's first consolidated
financial statements prepared in accordance with adopted IFRS.
The accounting policies set out in note 1 have been applied in preparing the
financial statements for the year ended 31 May 2006, the comparative information
presented in these financial statements for the year ended 31 May 2005 and in
the preparation of an opening IFRS balance sheet at 31 May 2004 (the Group and
Company's date of transition).
In preparing its opening IFRS balance sheet, the Group and Company have adjusted
amounts reported previously in financial statements prepared in accordance with
its old basis of accounting (UK GAAP). An explanation of how the transition from
UK GAAP to Adopted IFRS has affected the Group and Company's financial position,
financial performance and cash flows is set out in the preceding tables and the
notes that accompany the tables.
Transitional Arrangements upon First Time Adoption of IFRS (IFRS 1)
IFRS 1 'First-time Adoption of International Financial Reporting Standards' sets
out the transition rules, which must be applied, when IFRS is adopted for the
first time. The standard sets out certain mandatory exemptions to retrospective
application and certain optional exemptions. The most significant optional
exemptions available and taken by the Group are as follows:
The Group and Company have elected not to apply retrospectively the provisions
of IFRS 3 'Business Combinations', to acquisitions that occurred prior to the
Group and Company's transition date of 1 June 2004.
The Group and Company have elected not to apply the provisions of IFRS 2,
Share-based Payments, to share options granted on or before 7 November 2002
which had not vested on or before 1 January 2005.
The adjustments between UK GAAP and IFRS for the year are detailed below.
A Share-Based Payments (IFRS 2)
An additional charge of £468,000 for the year (2005: £297,000) has been made in
the Group IFRS income statement to spread the fair value of share options and
LTIPs over the vesting period of those incentives. A charge of £146,000 (2005:
£79,000) has been made to cost of sales in the company income statement in
respect of share based payment transactions.
B Leasehold Incentives (SIC 15)
An additional charge of £15,000 for the year (2005: £15,000) has been made in
the Group IFRS income statement to spread a lease incentive over the full lease
term as opposed to the period up to the next break clause under UK GAAP.
C Goodwill (IAS 36)
Under IFRS, goodwill has an indefinite life and is only written down when an
annual impairment test suggests that the carrying value is overstated. The
goodwill amortisation charge of nil (2005: £1,500,000) under UK GAAP is reversed
under IFRS following an impairment review of the goodwill.
D Taxation Effect of IFRS Adjustments (IAS 12)
Under IAS 12 the following tax adjustments are required and result in a £140,000
net increase in the tax charge for the year (2005: £94,000).
The temporary difference between the recognition of the IFRS 2 charge for share
based payments and the Group's expected future tax deduction under UK tax
legislation ('Schedule 23') is established as a deferred tax asset under IFRS
calculated by reference to the intrinsic value of all unexercised share options
at each balance sheet date (including those issued prior to November 2002 and
not otherwise valued under the IFRS transitional arrangements). The resultant
credit in the tax charge is restricted to the tax effect of the cumulative IFRS
2 charge with the difference credited directly to the profit and loss reserve.
This restriction also impacts the Schedule 23 tax credit previously recorded as
an exceptional tax credit in the income statement under UK GAAP. The resulting
additional tax charge in the IFRS income statement for the year is £140,000
(2005: £89,000).
A tax adjustment has been recognised in relation to the lease incentive charge.
E Dividends (IAS 10)
Dividends are non adjusting post-balance sheet events under IFRS and can only be
accrued if they have been formally approved at the balance sheet date.
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