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2009
ANNUAL REPORT AND ACCOUNTS
Walker Greenbank PLC
Luxury interior
furnishings group
www.walkergreenbank.com Walker Greenbank PLC
Chalfont House
Oxford Road
Denham
UB9 4DX
T: 08708 300 365
F: 08708 300 364
Walker Greenbank PLC ANNUAL REPORT AND ACCOUNTS 2009 Highlights from 2009
Contents
£63.70
m
Revenue up 2% (2008: £62.45 million) supported by
the continued progress of the Sanderson brand.
£2.79
m
Profit before taxation down 10% (2008: £3.10 million).
£3.56
m
Operating profit down 10% (2008: £3.96 million).
2.96
p
Earnings per share (2008: 14.49p). Adjusted
earnings per share 4.97p (2008: 5.44p) after
excluding the impact of deferred tax.
31 %
Gearing reduced to 31% (2008: 35%) with Shareholders’
Funds of £19.91 million (2008: £20.80 million) and
interest cover improved to 5.1 times (2008: 4.0 times).
Overview
02 Our business at a glance
06 Our brands
07 Our manufacturing
08 Chairman’s Statement
10 Chief Executive’s Review
12 Financial Review
14 Directors and Advisers
Directors’ Report
16 Report of the Directors
18 Statement of Directors’ Responsibilities
Accounts
19 Independent Auditors’ Report on
Consolidated Financial Statements
20 Consolidated Income Statement
21 Consolidated Statement of Recognised
Income and Expense
22 Consolidated Balance Sheet
23 Consolidated Cash Flow Statement
24 Notes to the Consolidated Accounts
52 Independent Auditors’ Report on
Company Financial Statements
53 Company Balance Sheet
54 Notes to the Accounts
62 Five Year Record
Inside back cover: Collection - Arkona
Design - Deco & Amalfi
Right: Le Temple De Jupiter, Chantemerle
Papers, Zoffany.
Walker Greenbank PLC is a luxury interiors group whose brands
include Harlequin, Sanderson, Morris & Co. and Zoffany. Our
brands are targeted at the mid to upper end of the premium market.
They have worldwide distribution including prestigious showrooms
at Chelsea Harbour, London and the D&D building, Manhattan,
New York. Half of the brand’s turnover is sourced in-house from
the Group’s own specialist manufacturing facilities. Walker Greenbank PLC
Annual Report and Accounts 2009
01
Overview
Luxury
interior
furnishings
group 02
Walker Greenbank PLC
Annual Report and Accounts 2009
Our business
at a glance
Our Brands
Collection - Identity
Design - Perception
Harlequin
Harlequin is a core supplier of high quality, design lead
collections to the mid to premium end of the worldwide
furnishings market.
Sanderson
Founded in 1860 and granted a Royal warrant in 1923,
Sanderson is one of the most renowned brands in interiors
worldwide, offering classic, inspirational product often based
on documents from its extensive archive. It is aimed at the mid
to upper end of the interiors market.
Morris & Co.
The Morris & Co. business has a heritage that dates back to
the mid 19th century when it was founded by William Morris,
the acclaimed designer. Its unique heritage is preserved
in the modern interpretation of its high quality fabrics
and wallcoverings.
Zoffany
Zoffany offers a range of products of the highest quality
including wallpaper, fabrics, trimmings, carpets, paint and
furniture. The designs are inspired by the rich traditions of
the past but look equally at home in contemporary interiors.
Walker Greenbank PLC is a luxury interior furnishings group
of companies which design, manufacture, market and distribute
wallcoverings, furnishing fabrics and associated products for
the consumer market. 03
Overview
Walker Greenbank PLC
Annual Report and Accounts 2009
Anstey
Anstey Wallpaper Company is the world’s leading
specialist commission printer. The business operates
at the premium end of the market, offering a unique
combination of design, printing and finishing of
wallcoverings by gravure, rotary, flexo, surface,
screen and hand block printing methods. As well
as producing for the Walker Greenbank brands it
also produces for third party customers.
Standfast
Standfast & Barracks is situated in Lancaster and
was bought by Walker Greenbank in March 2000.
The business is acknowledged as a worldwide leader
in its field. Standfast specialises in high quality volume
vat printing and dyeing, and rotary screen-printing of
fabrics. Barracks specialises in flatbed printing,
concentrating on very high specification for the
exclusive furnishing and apparel markets, printing
on a wide range of fabrics.
USA
Our distribution in the USA is carried out by Walker
Greenbank Inc. utilising third party showrooms
supported by Walker Greenbank Inc. offices based
in New Jersey and our own showroom in Manhattan.
France
Our distribution in France is by Arthur Sanderson
France through a network of sales agents, our own
sales force and a showroom in Rue du Mail, Paris.
Italy
We have a showroom and offices in Rome utilising
sales agents throughout the country.
Our Manufacturing Our Distribution
Oakwood, Options 9,
Sanderson.
Collection - Iznik
Design - Kasuri & Pasha 04
Walker Greenbank PLC
Annual Report and Accounts 2009
Our brands
www.harlequin.uk.com
Despite increasingly tough market conditions in the
second half, Harlequin has managed to maintain its
sales at the same level as last year having been 7% up
at the half year, and to continue its position as the
leading mid-market contemporary brand in the UK.
UK and Export markets flat >
Growth in emerging markets of the Far East, Middle East >
and Australia
Contract sales up 19% >
Collection - Iznik
Design - Kasuri & Pasha
Collection - Tamika
Design - Kimiko 05
Overview
Walker Greenbank PLC
Annual Report and Accounts 2009
www.sanderson-uk.com
Significant investment in product and marketing
over recent years has helped Sanderson to exploit
the unrivalled global recognition of the
Sanderson and Morris & Co brand names and to
grow its sales this year by 15%, having been up
25% at the half year.
UK growth 9% >
Export markets up 31% >
Contract sales up 34% >
Chrysanthemum,
Morris Volume V, Morris & Co.
Dandelion Clocks,
Options 9, Sanderson. 06
Walker Greenbank PLC
Annual Report and Accounts 2009
Our brands
www.zoffany.com
Having established Zoffany as a leading brand at the
premium end of the market and having invested
heavily in new product over recent years, we reported
last year that the design community had shown
increasing interest in the older collections of Zoffany
and that this had reinvigorated the sales of those
collections. This year we have experienced an
accelerating decline of those older collections but in
their place our newer collections have performed well.
Overall year on year sales have declined 1% having
been up 7% at the half year.
UK sales declined 2% >
Export markets up 5% >
Contract sales up 2% >
Anjolie & Venice collections, Zoffany.
Anjolie & Venice collections, Zoffany. 07
Overview
Walker Greenbank PLC
Annual Report and Accounts 2009
Our manufacturing
Anstey
Standfast
www.anstey.uk.com www.standfast-barracks.com
Anstey continues to benefit from the demand for
wallpaper and its unique position as market
leader in the UK for wallpaper manufacture
at the mid to premium end of the market.
Overall sales have grown year on year by 4%,
sales having been up at the half year by 5%.
Third party sales up 2% >
Sales to Group brands represents 51% >
Standfast has suffered particularly difficult trading
conditions with overall sales falling 9% over the same
period last year, sales were down 3% at the half year.
Third party sales down 16% >
Sales to Group brands represents 41% > Walker Greenbank PLC
Annual Report and Accounts 2009
08
Chairman’s
Statement
Overview
The year started well with a continuation of
the strong growth momentum of recent years
but performance was impacted by the
economic downturn as the year progressed.
Total revenues increased by 2% for the year
with growth of 7% at the half year and a
decline of 3% in the second half. In
challenging market conditions our
performance was supported by successful
design innovation and our strong portfolio of
brands including Sanderson and Harlequin
positioned at the mid market and Morris & Co
and Zoffany at the upper end of the interior
furnishings market. Revenues from these
brands have grown year on year by 5%.
Collection - Tamika
Design - Miya
Approximately half our manufacturing output
was to third parties and this business
declined by 9% in contrast to production for
our own brands which increased by 4%.
We have strengthened our balance sheet
during the year reducing net debt at the year
end to £6,218,000 from £7,289,000 in 2008.
The current economic environment is clearly
unfavourable. However many global
opportunities are available to us in the
medium term and a clear strategy to develop
the Group for a strong future and to manage
the downturn is set out in the Chief
Executive’s Review. Walker Greenbank PLC
Annual Report and Accounts 2009
09
Overview
Financials
Revenue increased 2% to £63,698,000, from
£62,448,000 over the same period last year.
The operating profit for the year decreased
10% to £3,561,000 (2008: £3,961,000). The
profit before tax decreased 10% to
£2,787,000 (2008: £3,099,000). The profit
after tax declined to £1,622,000 (2008:
£8,171,000), due almost entirely to non-cash
deferred tax movements as a consequence of
the recognition for the first time last year of a
deferred tax asset. This related predominantly
to historical corporation tax losses.
The earnings per share were 2.96p (2008:
14.49p). An adjusted earnings per share that
excludes the deferred tax movements and
reflects the cash tax of the Group is 4.97p
(2008: 5.44p).
Interest cover increased to 5.1 times,
compared with 4.0 times last year.
The Group’s net indebtedness at the year end
reduced to £6,218,000 (2008: £7,289,000).
This represents a reduction in gearing to 31%
(2008: 35%). The cash inflow from operating
activities was £2,830,000 (2008: £3,542,000),
reflecting higher stock levels as a result of
extensive brand product launches during the
year. At the year end, the Group had available
banking facilities of £12,773,000 (2008:
£14,183,000) representing headroom of
£6,555,000 (2008: £6,894,000).
Dividend
The Directors do not recommend the
payment of a dividend at this point in time. In
this current economic environment we remain
focused on continued cash generation and
reduction in net debt.
People
On 31 January 2009, Ian Kirkham retired from
the Board. He has served as Non-executive
Chairman for a period of five years and during
that time has overseen the transformation of
the Group’s fortunes. I would like to offer our
grateful thanks to Ian on behalf of the Board.
Following Ian’s retirement, I am delighted to
have become Chairman at the start of the
2009/10 financial year.
On 17 December 2008, Fiona Goldsmith
joined the Board as a Non-executive Director.
Her extensive financial background across a
variety of business sectors will be of great
value to the Group in future years.
Finally I would like to offer sincere thanks to all
of our management and employees for their
loyalty and commitment during the year.
Outlook
Over the past five years the Group has
established itself as a leader in its field
increasing revenue and profits significantly,
Collection - Arkona Weaves
Design - Arcadia
generating cash and building a strong balance
sheet. In the current uncertain global
environment in which we operate we have
focused on reducing our cost base, improving
manufacturing efficiency and reducing net
debt. In addition we continue to invest in the
strength of our exceptional brand portfolio.
Revenues in the first half will be significantly
down on a buoyant period last year, though
the impact of this reduction will to some
extent be mitigated by our focus on costs and
efficiency. With a clear strategy and a robust
balance sheet we believe that the Group is
well positioned to take advantage of an upturn
in its markets.
Terry Stannard
Non-executive Chairman
17 June 2009 Walker Greenbank PLC
Annual Report and Accounts 2009
10
Chief Executive’s
Review
Strategy
Despite the turbulent economic conditions in
which we are trading, we remain committed
to the five key elements of our growth strategy
which is supported by the Group’s cash
generation and a robust balance sheet.
In addition we benefit from world renowned
brands all of which can be expected to
return to strong growth on any upturn in
the trading environment. The key elements
of the strategy comprise:
UK growth – to continue to exploit >
the medium term organic growth
opportunities that exist for our Group in
the UK retail market.
Geographic expansion – to invest in >
marketing and distribution in the North
American market, where our Group is
currently immature relative to our peers,
and to focus on the distribution and
marketing of our brands in Europe and the
Rest of the World, where again as a Group
we are presently underdeveloped.
Contract sales – to drive the expansion of >
our developing contracts business through
further investment in people and contract
specific product supported by the strength
of our brand names and our manufacturing
capability, predominantly focusing at the
mid to upper end of the contract market;
Licensing income – to exploit the global >
recognition of the Sanderson and Morris &
Co. brand names and to develop further
the licensing opportunities that exist for
Harlequin in the UK.
Acquisitions – to evaluate acquisition >
opportunities that may fit with our current
brand portfolio and potentially provide
synergistic and earnings enhancing
opportunities.
Overview
Our brand sales have remained flat in the UK
retail market. In mainland Europe, retail sales
have grown 10% due to the strength of the
euro, although this equates to a 4% decline in
constant currency. In the Rest of the World
sales have grown by 16%. Sales in our US
retail business, which remains a relatively
small part of our Group, have increased 3%
due to the strength of the dollar, but fallen 7%
in constant currency. Within our brand
segment our Contract business continues to
benefit from strong investment and has
delivered 17% year on year growth. Our
licence business has grown 21% reflecting the
strength of our brands and their potential to
stretch into adjacent categories. Finally, our
manufacturing units have suffered from the
overall decline in the market with their third
party sales falling 9%.
The brands
Total sales have grown year on year by 5%
reflecting no growth in sales in the second
half due to a much tougher trading
environment, sales having been up 10% at the
Collection - Pasha
Design - Pasha
Hana, Options 9, Sanderson Walker Greenbank PLC
Annual Report and Accounts 2009
11
Overview
brands, the factories print for third party
customers.
Anstey
Anstey continues to benefit from the demand
for wallpaper and its unique position as
market leader in the UK for wallpaper
manufacture at the mid to premium end of the
market. Overall sales have grown year on year
by 4%, sales having been up at the half year
by 5%. Sales to Group company brands have
grown 5% representing 51% of the overall
sales, whilst external third party sales have
grown 2%, reflecting the relative success of
our brands in difficult markets. Margins have
fallen slightly due to increased energy costs
and overall profitability has slightly improved
over the same period last year. We remain
focused on improving factory efficiency and
service to our customers.
Standfast
Standfast has suffered particularly difficult
trading conditions with overall sales falling 9%
over the same period last year, sales were
down 3% at the half year. Sales to Group
company brands which represent 41% of the
overall sales were up 3%, whilst external third
party sales fell 16%, suggesting our Group
brands are performing well in very difficult
market conditions. Standfast has suffered
margin decline due to less production
throughput in the factory and increased
energy costs, two factors which combined
with the sales fall has led to a loss in the year.
At the beginning of the second half of the year
management took action to reduce the cost
base of this business in order to reflect the
lower level of volume activity, resulting in a
redundancy cost of £146,000.
Summary
All of our brands continue to perform
competitively in a difficult market. The
considerable investment we have made in
product and marketing in recent years places
us in a strong position to withstand the
current economic environment and ultimately
exploit the continuing and new business
opportunities that exist within the Group.
We remain confident about the progress the
Group will make in the medium term given
the global recognition of its brands and the
robustness of the Group’s finances.
John Sach
Group Chief Executive
17 June 2009
half year. Over recent years we have strongly
increased our investment in our product
launches across all our brands and this has
helped protect our market share in a much
tougher trading environment. We have a
strong portfolio of brands covering a wide
variety of market segments in the mid to
upper end of the interior furnishings market,
supported by a wide offering of product. We
are however conscious of the tougher market
in which we operate and, going forward, will
keep tight control of the amount of product
we launch to reduce cost while the current
economic environment prevails.
Harlequin
Despite increasingly tough market conditions
in the second half, it is pleasing to report that
Harlequin has managed to maintain its sales
at the same level as last year having been 7%
up at the half year and to continue its position
as the leading mid-market contemporary
brand in the UK. Overall both the UK market
and export markets were essentially flat.
However, within our export markets, Europe
was down year on year by 7% and by 14% in
constant currency. This was offset by growth
in the emerging markets of the Far East,
Middle East and Australia where overall sales
were up 21%. Woven product continued to
grow, up 4% on the same period last year,
whilst wallpaper sales declined by 4% and
printed fabrics declined by 8%.
Continued commitment and investment in our
Contract business has helped grow year on
year sales by 19%. Harlequin has also grown
its licensing income principally with the
development of a range of product lines in
the John Lewis Partnership. More than half of
Harlequin’s sales are from woven product
which is sourced primarily from Europe. For
this product category the gross margins have
declined due to the strengthening of the euro
which has led to a fall in profits.
Zoffany
Having established Zoffany as a leading brand
at the premium end of the market and having
invested heavily in new product over recent
years, we reported last year that the design
community had shown increasing interest
in the older collections of Zoffany and that
this had reinvigorated the sales of those
collections. This year we have experienced
an accelerating decline of those older
collections but in their place our newer
collections have performed well.
Overall year on year sales have declined 1%
having been up 7% at the half year. UK sales
declined 2% but export markets continued to
see overall growth of 5%, with Europe
growing 6%, representing an 11% decline in
constant currency and the Rest of the World
up 5% helped by strong growth from the
Middle East and Australasia. Woven fabric,
which now represents more than half of
Zoffany’s sales, grew 2% with both wallpaper
and printed fabrics having declined by 1%
each. Zoffany’s Contract business has grown
year on year 2%. The strong euro has led to a
decline in margins and this combined with
additional stock provisioning due to the faster
decline of the older collections has led to a
reduction in profits.
Arthur Sanderson & Sons incorporating
the Morris & Co. brand
Significant investment in product and
marketing over recent years has helped
Sanderson to exploit the unrivalled global
recognition of the Sanderson and Morris &
Co. brand names and to grow its sales this
year by 15%, having been up 25% at the half
year. The growth continues to be broad-
based with all geographic markets growing
strongly. The UK market delivered year on
year sales growth of 9% whilst overseas
markets were up 31%. This impressive export
sales growth was driven by European markets
up 32%, 17% in constant currency and the
Rest of the World up 28%. The growth has
been led by woven fabric, up by 22%, with
wallpaper up 19% and printed fabrics up 4%.
The growth has been supported by strong
progress in its Contract business up 34%.
Gross margins improved as the strengthening
euro benefited margins with Sanderson selling
more in Europe than it purchases. This margin
gain combined with the sales growth has
helped to improve profits significantly.
Overseas
USA
Sales in our US business have increased year
on year by 7% however they have fallen in
constant currency by 4% due to the
strengthening dollar. Sales at the half year in
local currency were broadly flat. The US still
forms a relatively small part of the overall
Group but we firmly believe in the medium to
long term potential for the Group in this
market. However economic conditions are
becoming increasingly challenging and whilst
this prevails we will remain tightly focused on
the level of investment in marketing,
patterning and sample support. Lower sales
have led to a continued loss.
Europe
The Group’s distribution businesses in Rome,
for Zoffany and Harlequin, and in Paris, for
Zoffany and Sanderson, remain relatively small.
Both these markets saw challenging trading
conditions but the appointment of an
experienced Export development director
towards the end of last year brought
improvements to both operations. Combined
revenues have increased by 14%, representing
a decline of 3% in constant currency.
Manufacturing
We have two freehold printing facilities in the
UK: Anstey, our wallpaper factory in
Loughborough; and Standfast, our fabric
printing factory in Lancaster. Both factories
offer highly specialised printing, and their UK
location brings benefits including the ability to
print very short runs and easy accessibility for
UK designers to visit the factories during the
printing process. In addition to printing the
wallpaper and fabrics for the Group’s own Walker Greenbank PLC
Annual Report and Accounts 2009
12
Financial
Review
Income Statement and exceptional items
The Chairman’s Statement and Chief
Executive’s Review provide an analysis of the
key factors impacting the revenue and operating
profit. In addition to the information on our
brands and production facilities included in
these reports, the Group has included in note
4 of the Consolidated Financial Statements,
information on our business segments.
Disposals
There were no major disposals during the year.
Interest
The net interest charge for the year was
£695,000 (2008: £981,000) including
amortisation of debt issue costs capitalised.
The reduced cost reflects the reduction in
interest rates over the year.
Net defined benefit pension
The charge during the year was £79,000
(2008: income £119,000). This is a
consequence of the increase in corporate
bond rates from the start of the financial year
compared with that at the beginning of the
previous year. The charge is also impacted if
the pension deficit increases which will be the
case in the coming year.
Mereville, Sanderson
Current taxation
There is a small corporation tax charge arising
from the taxable profits at the Italian subsidiary
and overseas licence income. The Group
continues to review the overseas tax position
to ensure every opportunity is considered to
minimise the amount incurred.
Deferred taxation
Due to the substantial nature of corporation
tax losses £21.3 million (2008: £23.7 million)
the Group does not anticipate incurring or
paying UK corporation tax in the immediate
future. However, as the majority of the
corporation tax losses have now been
recognised as a deferred tax asset, in the
current and future years there will be a
deferred tax charge in the Income Statement
until such time as the losses have been fully
utilised at which point the Group will incur and
pay UK corporation tax.
There is a one-off deferred tax charge of
£320,000 arising from the phasing out of
Industrial Building Allowances in the Finance
Act 2008.
The Group also continues to recognise the
deferred tax asset arising from the Pension
Deficit. As the Pension Deficit has increased
during the year an increase in the associated
deferred tax asset has been recognised.
Earnings per share (‘EPS’)
Last year the Group recognised a deferred
tax asset of £5,101,000 as the Group was,
and remains, confident of utilising historical
corporation tax losses as a result of
foreseeable sustainable future profits.
The impact of deferred tax in both years has
been removed in the analysis of adjusted EPS
discussed below, to enable better comparison
of the underlying performance of the Group.
The basic and diluted EPS was 2.96p (2008:
14.49p). The adjusted EPS was 4.97p for the
current year (2008: 5.44p), and is calculated
as follows:
2009 2008
£000 £000
Profit after tax per
the accounts 1,622 8,171
Exclude the impact
of deferred tax 1,108 (5,101)
Adjusted profit after tax 2,730 3,070
Adjusted EPS 4.97p 5.44p
The number of shares in issue remained
constant, however, on 1 July 2008 275,000
shares were purchased and brought into
Treasury. The weighted average number of
shares reduced to 54,880,000 for the year
ended 31 January 2009 from 56,397,000 in
the year ended 31 January 2008.
Walker Greenbank PLC
Annual Report and Accounts 2009
13
Overview
Operating cash flow
The Group generated net cash inflow from
operating activities during the year of
£2,830,000 (2008: £3,542,000) reflecting
higher stock levels as a result of extensive
brand product launches during the year.
The Group paid interest of £704,000 (2008:
£956,000) and capital expenditure of
£1,687,000 (2008: £1,674,000). Due to the
timing of actual payments the additions in the
fixed asset notes were £1,500,000 (2008:
£1,797,000). The depreciation and
amortisation charge during the period of
£1,846,000 (2008: £1,822,000) continue to be
greater than required capital expenditure.
The Group made additional payments to the
pension schemes of £1,052,000 (2008:
£1,059,000) to reduce the deficit, part of the
ongoing planned reduction, along with
£275,000 (2008: £231,000) of regular
contributions to fund scheme expenses.
The Group purchased 275,000 shares at a
cost of £83,000 in July 2008.
Net debt in the Group has reduced by
£1,071,000 to £6,218,000 (2008: £7,289,000).
Net debt to EBITDA ratio improved to 1.1
(2008: 1.3) and is set out below;
2009 2008
EBITDA £000 £000
Profit after tax 1,622 8,171
Interest 774 862
Tax 1,165 (5,072)
Depreciation and
amortisation 1,846 1,822
EBITDA 5,407 5,783
Net debt 6,218 7,289
Net debt : EBITDA 1.1 1.3
Pension deficit
The pension deficit has increased this year.
The key factors affecting the movement in the
deficit have been; firstly ongoing contributions
of £1,327,000 from the Company to reduce
the deficit; secondly a reduction in the
liabilities of the scheme arising predominantly
from the increase in discount rates during the
year and lastly the significant reduction in
scheme assets due to the current economic
climate. The impact of these factors is shown
as follows:
2009
£000
Deficit at beginning of period (3,409)
Scheme expenses (275)
Other finance income 196
Contributions 1,327
Actuarial loss on scheme assets (7,458)
Actuarial gains from the
change in discount factor 5,458
Gross deficit at the end of the year (4,161)
Long-Term Incentive Plan
There have not been any further awards
during the year under the Long-Term Incentive
Plan (‘LTIP’). There has been a charge of
£373,000 (2008: £429,000) in the Income
Statement for current awards.
Gearing
The gearing level for the Group fell during the
year to 31% at 31 January 2009 (2008: 35%).
Funding
The Group utilises facilities provided by
Barclays Bank Plc. The facilities were put in
place on 17 July 2007 replacing previous
facilities from another provider. There is a 10
year term property facility of £3,400,000 (2008:
£3,800,000) at the year end.
There is also a facility linked to working capital
which allows the Group to manage its cash
more effectively during the seasonal
fluctuations in working capital associated with
the industry in which the Group operates. This
facility has an initial three year term. The
borrowings at the end of the year under this
facility were £3,868,000 (2008: £5,506,000).
The available facility at the end of the year was
£9,373,000 (2008: £10,383,000) of which
£3,000,000 (2008: £3,000,000) is from a stock
facility which is effectively permanently
available due to the level of stocks in the
Group. The remainder of the working capital
facility arises from trade debtors and fluctuates
with the level of trade debtors. The total
facilities have a current limit of £16.4m.
All of the Group bank facilities remain secured
by first fixed and floating charges over the
Group’s assets.
Going concern
The Directors are confident, after having made
appropriate enquiries that the Group and
Company have adequate resources to
continue in the foreseeable future. For this
reason they continue to adopt the going
concern basis in preparing the accounts.
Treasury policy
The Group’s treasury policy is controlled
centrally in accordance with procedures
approved by the Board. It is run prudently as
a central Group function, providing services to
the other Group companies and adopts a risk
averse strategy.
The main risks covered by this policy are
interest rate risk, foreign currency risk and
liquidity risk.
Interest rate risk
The Group has continued to maintain its debt
in floating rate instruments in order to benefit
from the lower rates available and the
increasing reduction in borrowings. This
policy remains constantly under review to
ensure interest cost is minimised. The viability
of hedging instruments that would limit the
impact of interest rate movements will
continue to be reviewed based on the Board’s
perception of future rate increases and the
reducing level of borrowings.
Foreign currency risk
All foreign currencies are bought and sold
centrally on behalf of the Group. Regular
reviews take place of the foreign currency
cash flows and unmatched exposures are
covered by forward contracts wherever
economically practical.
The Group does not trade in financial
instruments and hedges are only used for
anticipated cash flows. There is a hedging
reserve of £812,000 (2008: £110,000) at the
end of the year.
The fluctuation in exchange rates during the
year has benefited the trading at the US
subsidiary but conversely the strengthening
euro has impacted negatively at the brands as
more product is sourced in euro than sold.
Liquidity risk
The Group ensures that it has adequate
facilities available to cover both its short term
and medium term commitments. The facility
available at the end of the year was
£12,773,000 (2008: £14,183,000) which
represents an additional borrowing capacity
of £6,555,000 (2008: £6,894,000).
Credit risk
The Group seeks to obtain credit insurance
on all its significant overseas customers.
However, credit insurers have been taking a
much more conservative position in recent
months on the level of credit insurance
provided or the insurance has even been
removed. The aging profile of trade debtors
shows that customers do pay to terms or
soon thereafter. Where credit insurance has
been removed and the customer has kept to
terms internal credit limits are set and strictly
adhered to, otherwise internal credit limits are
reduced and then strictly adhered to.
Alan Dix
Group Finance Director
17 June 2009 Walker Greenbank PLC
Annual Report and Accounts 2009
14
Overview
Directors
and Advisers
Terry Stannard (59)
Non-executive Chairman (A, R, N)
Terry joined the Board as a Non-executive
Director in September 2007 and became
Non-executive Chairman on 31 January 2009
following the retirement of Ian Kirkham from
the Board. He has particular expertise in
international brand-based businesses and his
executive career included senior roles at
United Biscuits and the positions of Chief
Executive of Uniq plc and Terranova Foods
plc. Since 2001, he has focused on non-
executive appointments at both quoted and
unquoted businesses. He is currently
Chairman of Gardman Holdings Ltd and holds
non-executive roles at Brintons Ltd, Daniels
Chilled Foods Ltd, International Cuisine Ltd,
Bradford & Sons Ltd, Macphie of Glenbervie
Ltd and Moloney Ventures Ltd.
Fiona Goldsmith (42)
Non-executive Director (A,R,N)
Fiona joined the Board as a Non-executive
Director on 17 December 2008. She is a
Chartered Accountant who started her career
with KPMG, where for nine years she focused
on the retail and leisure sectors in various
roles. She then moved to First Choice
Holidays plc, where she became European
Finance Director. From 2004 until October
2008 she was Finance Director of Land
Securities Trillium, a division of Land
Securities Group plc.
Directors Advisers
John Sach (53)
Chief Executive Officer
John joined the Group in 1994 as Group
Financial Controller and was appointed to
the Board as Group Finance Director in 1999.
He was appointed Chief Executive Officer in
May 2004.
David Smallridge (53)
Executive Director
David joined the Group in 2002 with a wide
experience as a managing director in the
consumer products services. He was
appointed to the Board in December 2004
following his appointment as Managing
Director of the Group’s four main fabric and
wallcovering brands, Harlequin, Sanderson,
Morris & Co. and Zoffany.
Alan Dix (50)
Group Finance Director
In July 2005, Alan Dix was appointed Group
Finance Director. He is a Chartered
Accountant with experience from a broad
range of industries.
A – Audit Committee
R – Remuneration Committee
N – Nominations Committee
Stockbrokers and Advisers
Arden Partners plc
Nicholas House
3 Laurence Pountney Hill
London EC4R 0EU
Auditors
PricewaterhouseCoopers LLP
Donington Court
Pegasus Business Park
Castle Donington
East Midlands DE74 2UZ
Tax Advisers
BDO Stoy Hayward LLP
55 Baker Street
London W1U 7EU
Public Relations
Buchanan Communications Ltd
45 Moorfields
London EC2Y 9AE
Solicitors
DLA Piper
Princes Exchange
Princes Square
Leeds LS1 4BY
Registrars
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield
West Yorkshire HD8 0LA
Bankers
Barclay’s Commercial Bank
Ashton House
497 Silbury Boulevard
Milton Keynes MK9 2LD Walker Greenbank PLC
Annual Report and Accounts 2009
15
Directors’ Report
and Accounts
Directors’ Report
and Accounts
In this section
Directors’ Report
16 Report of the Directors
18 Statement of Directors’ Responsibilities
Accounts
19 Independent Auditors’ Report on
Consolidated Financial Statements
20 Consolidated Income Statement
21 Consolidated Statement of Recognised
Income and Expense
22 Consolidated Balance Sheet
23 Consolidated Cash Flow Statement
24 Notes to the Consolidated Accounts
52 Independent Auditors’ Report on
Company Financial Statements
53 Company Balance Sheet
54 Notes to the Accounts
62 Five Year Record
Pondicherry, Options 9, Sanderson. Walker Greenbank PLC
Annual Report and Accounts 2009
16
Report of the Directors
The Directors submit their Annual Report together with the audited
financial statements of the Company and its subsidiary undertakings
(‘the Group’) for the year ended 31 January 2009.
Principal activities and Business Review
The principal activities of the Group are the design, manufacture,
marketing and distribution of wallcoverings, furnishing fabrics and
associated products for the consumer market. A review of activities is
given in the Chief Executive’s Review, which, taken with the Chairman’s
Statement, the Financial Review and the other information in the Report
of the Directors, represents the Group’s Business Review.
The Directors do not expect there to be any significant change in the
principal activities of the Group in the foreseeable future.
Group result
The profit before taxation amounted to £2,787,000 (2008: £3,099,000).
The Directors do not recommend payment of a final ordinary dividend
(2008: no dividend paid), which leaves a surplus of £1,622,000 to be
transferred to reserves (2008: £8,171,000).
Key Performance Indicators
The KPIs for the business are primarily financial.
2009 2008
Sales growth 2% 15%
Operating profit margin before
exceptional items 5.6% 6.3%
Gearing 31% 35%
Pension deficit as a percentage of
shareholders’ funds 21% 16%
Adjusted EPS 4.97p 5.44p
Business risks
The Directors have identified a number of financial risks for the Group
and these are explained and the degree of risk highlighted in note 2 of
the financial statements and in the Financial Review. Where
commercially appropriate the Group insures against financial loss
caused by unforeseen events by the means of insurance policies.
Apart from the impact of an event of a global nature or a significant
downturn in the UK market there are no other significant business
risks. Whilst the trading conditions in North America remain difficult,
this will affect trading of our business in North America but this
business is not currently a significant profit contributor to the
overall Group.
Pensions
The Group operates defined benefit and defined contribution schemes
in the UK and overseas for all qualifying employees. Further
information on the schemes and details of the valuations are given in
note 22 to the accounts.
Employees
The Group keeps its employees informed on matters affecting them
and on the progress of the Group by way of informal meetings and
consultation with employees’ representatives. All Group businesses
apply the principles of equal opportunity in recruitment, career
progression and remuneration. Disabled persons are given full and fair
consideration for employment where an appropriate vacancy occurs,
having regard to their particular aptitudes and abilities. Whenever
possible, arrangements are made for the continuing employment of
persons who have become disabled during service and for appropriate
training of all disabled employees, who are given equal consideration
with all other employees in promotion and career development.
Payments to suppliers
The Group agrees terms and conditions for its business transactions
with suppliers and makes payment in accordance with those terms
and conditions subject to the supplier meeting its obligations. The
amount of trade creditors shown in the consolidated balance sheet at
31 January 2009 represents 92 days (2008: 98 days) of average
purchases during the year for the Group.
The Company is a holding company and has no meaningful equivalent
of creditor days.
Market value of interests in land including buildings
The Directors do not believe there is a significant difference between
the current market value of the Group’s interests in land including
buildings and their carrying values in the financial statements.
Political and charitable donations
The Group has not made any political donations (2008: nil). During the
year the Group made no charitable donations (2008: nil).
Directors and their interests
The Directors in office at 31 January 2009 and their interests in the
shares of the Company were as follows:
1p ordinary 1p ordinary
shares shares
31 January 31 January
2009 2008
Number Number
I Kirkham* 900,000 800,000
T Stannard 35,000 35,000
F Goldsmith nil nil
J D Sach 610,000 590,000
D H Smallridge 120,000 100,000
A N Dix 132,000 70,000
* Includes 100,000 shares held by Mr Kirkham’s wife. Walker Greenbank PLC
Annual Report and Accounts 2009
17
Directors’ Report
On 17 December 2008 Fiona Goldsmith was appointed as a
Non-executive Director.
On 31 January 2009 Ian Kirkham retired from the Board and Terry
Stannard was appointed Chairman.
The Board of Directors as at the date of this report is set out on page
14, together with biographical details.
At the forthcoming Annual General Meeting (‘AGM’) Fiona Goldsmith
will stand for election following her appointment since the last AGM.
John Sach will retire by rotation and being eligible will offer himself
for re-election.
On 23 April 2009 T Stannard purchased 35,000 ordinary shares.
The share price on 1 February 2008 was 40.75p and on 31 January
2009 was 10.25p.
Long-Term Incentive Plan
There were no awards made under the Group’s Long-Term Incentive
Plan (‘LTIP’) during the year.
At the year end awards have been granted for a maximum of
3,964,093 shares.
As at the balance sheet date the awards granted to the Executive
Directors were:
Vesting 1p ordinary
date shares
J D Sach 25.07.2009 805,298
23.05.2011 495,283
D H Smallridge 25.07.2009 745,297
23.05.2011 353,774
A N Dix 25.07.2009 498,405
23.05.2011 283,019
On 27 May 2009 further awards were made to the Executive Directors,
a total of 1,700,000 ordinary shares.
Directors’ interests in material contracts
None of the Directors had any material interest in any contract during
the year which was significant to the business of the Group.
Acquisition of own shares
On 1 July 2008 the Company made market purchases into treasury of
275,000 ordinary shares of 1p each at a price of 30p per ordinary
share. The total number of shares held in Treasury is 1,690,093. It is
intended that these ordinary shares will be used to satisfy future
awards made under the Company’s LTIP.
Substantial shareholdings
At 7 June 2009 the Company is aware of the following substantial
shareholdings in its ordinary share capital, comparatives at 30 May
2008 are shown. Gartmore Investment Limited 20.2% (2008: 22.7%),
Blackrock Investment Management 5.8% (2008: 5.21%), Brewin
Dolphin 4.45% (2008: 4.71%), Barclays Wealth 4.06% (2008: 4.03%),
Royal London Asset Management 3.75% (2008: 0%), Axa Framlington
3.49% (2008: 3.39%), NW Brown Investment 3.2% (2008: 0%) and
Walker Greenbank EBT 4.45% (2008: 4.43%).
Environmental and social matters
The Group acknowledges the importance of environmental matters
and where possible uses environmentally friendly policies in all its
facilities, such as recycling, energy savings and efficiency initiatives,
and encouraging environmentally friendly travel.
Special Business
At the AGM on 22 July 2009 items 5, 6 and 7 will be proposed as
Special Business. Details of the business can be found in the Notice of
the Annual General Meeting separately distributed to shareholders.
Auditors
A resolution to reappoint PricewaterhouseCoopers LLP as auditors of
the Company will be proposed at the AGM.
So far as each of the Directors in office at the date of this report is
aware, there is no relevant audit information of which the Group’s
auditors are unaware. Relevant information is defined as information
needed by the Group’s auditors in connection with preparing their
report. Each Director has taken all the steps that he ought to have
taken to make himself aware of any relevant audit information and to
establish that the auditors are aware of that information.
By order of the Board
Julian Wilson
Company Secretary
17 June 2009
Registered Office
Chalfont House
Oxford Road
Denham UB9 4DX
Registered number 61880 Walker Greenbank PLC
Annual Report and Accounts 2009
18
The Directors are responsible for preparing the Annual Report and the
Group and the parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare financial statements for
each financial year. Under that law the Directors have prepared the
Group financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union and in
accordance with the AIM Rules for Companies, and the parent
Company financial statements in accordance with applicable law and
United Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice). The Group and parent Company
financial statements are required by law to give a true and fair view of
the state of affairs of the Company and the Group and of the profit or
loss of the Group for that period.
In preparing those financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently; >
make judgements and estimates that are reasonable and prudent; >
state that the Group financial statements comply with IFRSs as >
adopted by the European Union, and with regard to the parent
Company financial statements, that applicable UK Accounting
Standards have been followed, subject to any material departures
disclosed and explained in the financial statements.
Statement of Directors’ Responsibilities
The Directors confirm that they have complied with the above
requirements in preparing the financial statements.
The Directors are responsible for keeping proper accounting records
that disclose with reasonable accuracy at any time the financial position
of the Company and the Group and to enable them to ensure that the
Group and parent Company financial statements comply with the
Companies Act 1985. They are also responsible for safeguarding the
assets of the Company and the Group and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions. Walker Greenbank PLC
Annual Report and Accounts 2009
19
Accounts
Independent Auditors’ Report
To the members of Walker Greenbank PLC
We have audited the Group financial statements of Walker Greenbank
PLC for the year ended 31 January 2009 which comprise the
Consolidated Income Statement, the Consolidated Statement of
Recognised Income and Expense, the Consolidated Balance Sheet,
the Consolidated Cash Flow Statement, and the related notes to the
Consolidated Accounts. These group financial statements have been
prepared under the accounting policies set out therein.
We have reported separately on the parent company financial
statements of Walker Greenbank PLC for the year ended 31
January 2009.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the Annual Report and the
group financial statements in accordance with applicable law and
International Financial Reporting Standards (IFRSs) as adopted by the
European Union are set out in the Statement of Directors’ Responsibilities.
Our responsibility is to audit the group financial statements in
accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland). This report,
including the opinion, has been prepared for and only for the company’s
members as a body in accordance with Section 235 of the Companies
Act 1985 and for no other purpose. We do not, in giving this opinion,
accept or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
We report to you our opinion as to whether the group financial statements
give a true and fair view and whether the group financial statements have
been properly prepared in accordance with the Companies Act 1985. We
also report to you whether in our opinion the information given in the
Directors’ Report is consistent with the group financial statements. The
information given in the Directors’ Report includes that specific information
presented in the Chairman’s Statement, the Chief Executive’s Review, and
the Financial Review that is cross referred from the Business Review
section of the Directors’ Report.
In addition we report to you if, in our opinion, we have not received all
the information and explanations we require for our audit, or if
information specified by law regarding directors’ remuneration and
other transactions is not disclosed.
We read other information contained in the Annual Report and
consider whether it is consistent with the audited group financial
statements. The other information comprises only the Highlights from
2009, the Chairman’s Statement, the Chief Executive’s Review, the
Financial Review, the information on Directors and Advisers, the
Report of the Directors, the Statement of Directors’ Responsibilities
and all of the other information listed on the contents page. We
consider the implications for our report if we become aware of any
apparent misstatements or material inconsistencies with the group
financial statements. Our responsibilities do not extend to any
other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on
Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts
and disclosures in the group financial statements. It also includes an
assessment of the significant estimates and judgments made by the
directors in the preparation of the group financial statements, and of
whether the accounting policies are appropriate to the group’s
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information
and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the group
financial statements are free from material misstatement, whether
caused by fraud or other irregularity or error. In forming our opinion we
also evaluated the overall adequacy of the presentation of information
in the group financial statements.
Opinion
In our opinion:
the group financial statements give a true and fair view, in >
accordance with IFRSs as adopted by the European Union, of the
state of the group’s affairs as at 31 January 2009 and of its profit
and cash flows for the year then ended;
the group financial statements have been properly prepared in >
accordance with the Companies Act 1985; and
the information given in the Directors’ Report is consistent with the >
group financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
East Midlands, UK
17 June 2009 Walker Greenbank PLC
Annual Report and Accounts 2009
20
Consolidated Income Statement
Year ended 31 January 2009
2009 2008
Note £000 £000
Revenue 4 63,698 62,448
Operating profit 4–6 3,561 3,961
Net defined benefit pension (charge)/income 7 (79) 119
Net finance costs 8 (669) (906)
Amortisation of issue costs 8 (26) (75)
(774) (862)
Profit before taxation 2,787 3,099
Deferred tax – exceptional 11 (320) 5,101
Deferred tax – other 11 (788) –
Current taxation 11 (57) (29)
Total tax (charge)/credit 11 (1,165) 5,072
Profit for the year 25 1,622 8,171
Earnings per share – basic and diluted 12 2.96p 14.49p
All results arise from continuing operations
The notes on pages 24 to 51 form an integral part of the consolidated financial statements. Walker Greenbank PLC
Annual Report and Accounts 2009
21
Accounts
Consolidated Statement of Recognised Income and Expense
Year ended 31 January 2009
2009 2008
Note £000 £000
Actuarial losses on scheme assets 22 (7,458) (1,364)
Changes in actuarial mortality assumptions 22 – (2,868)
Other actuarial gains on scheme liabilities 22 5,458 4,932
Currency translation differences 25 (350) 27
Cash flow hedges 25 (702) (110)
Reduction in deferred tax relating to pension liability due to rate reduction – (110)
Recognition/(reduction) of deferred tax asset relating to pension scheme liability 211 (573)
Net expense recognised directly in equity (2,841) (66)
Profit for the year 1,622 8,171
Total recognised (expense)/income for the year (1,219) 8,105
The notes on pages 24 to 51 form an integral part of the consolidated financial statements. Walker Greenbank PLC
Annual Report and Accounts 2009
22
Consolidated Balance Sheet
At 31 January 2009
2009 2008
Note £000 £000
Non-current assets
Intangible assets 13 5,877 5,833
Property, plant and equipment 14 8,734 8,991
Deferred income tax assets 15 5,158 6,055
Trade and other receivables 16 12 253
19,781 21,132
Current assets
Trade and other receivables 16 12,552 13,475
Inventories 17 13,887 12,546
Cash and cash equivalents 18 1,050 2,017
27,489 28,038
Total assets 47,270 49,170
Current liabilities
Trade and other payables 19 (15,118) (15,546)
Derivative financial instruments 20 (812) (110)
Borrowings 21 (400) (400)
(16,330) (16,056)
Net current assets 11,159 11,982
Non-current liabilities
Borrowings 21 (6,868) (8,906)
Retirement benefit obligation 22 (4,161) (3,409)
(11,029) (12,315)
Total liabilities (27,359) (28,371)
Net assets 19,911 20,799
Equity
Share capital 24 590 590
Share premium account 25 457 457
Foreign currency translation reserve 25 (340) 10
Retained earnings 25 (20,491) (20,655)
Other reserves 25 39,695 40,397
Total equity 19,911 20,799
The notes on pages 24 to 51 form an integral part of the consolidated financial statements.
J D Sach A N Dix
Director Director
These accounts were approved by the Directors on 17 June 2009. Walker Greenbank PLC
Annual Report and Accounts 2009
23
Accounts
Consolidated Cash Flow Statement
Year ended 31 January 2009
2009 2008
Note £000 £000
Cash flows from operating activities
Cash generated from operations 27 3,536 4,623
Interest paid (704) (956)
Debt issue costs – (123)
Interest received 35 5
Income tax paid (37) (7)
2,830 3,542
Cash flows from investing activities
Purchase of intangible fixed assets (420) (365)
Purchase of property, plant and equipment (1,267) (1,309)
Proceeds on sale of property, plant and equipment 7 3
(1,680) (1,671)
Cash flows from financing activities
Purchase of treasury shares (83) (612)
Proceeds from borrowings – 11,296
Repayment of borrowings – (11,296)
Net repayment of borrowings (2,064) (1,315)
(2,147) (1,927)
Net (decrease)/increase in cash, cash equivalents and bank overdrafts (997) (56)
Cash, cash equivalents and bank overdrafts at beginning of year 2,017 2,065
Exchange gains on cash and bank overdrafts 30 8
Cash, cash equivalents and bank overdrafts at end of year 28 1,050 2,017
The notes on pages 24 to 51 form an integral part of the consolidated financial statements. Walker Greenbank PLC
Annual Report and Accounts 2009
24
Notes to the Consolidated Accounts
1. Accounting policies and general information
General information
Walker Greenbank PLC is a luxury interior furnishings group whose brands include Harlequin, Sanderson, Morris & Co. and Zoffany. The brands
are targeted at the mid to upper end of the premium market. They have worldwide distribution including prestigious showrooms at Chelsea
Harbour, London and the D&D building, Manhattan, New York. Half of the brand’s turnover is sourced in-house from the Group’s own specialist
manufacturing facilities of Standfast & Barracks, the fabric printing business situated in Lancaster, and Anstey Wallpaper Company situated in
Loughborough. The manufacturing businesses produce for other interior furnishing businesses both in the UK and throughout the world. The
Company is a public limited company which is listed on the Alternative Investment Market of the London Stock Exchange and is registered and
domiciled in the UK.
Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by
the European Union and International Financial Reporting Interpretation Committee (IFRIC) interpretations and the Companies Act 1985
applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention,
as modified by the valuation of derivative financial instruments at fair value, on a going concern basis and with the accounting policies set out
below which have been consistently applied to all periods presented unless otherwise indicated.
In preparing these financial statements the Group has applied the IFRS adopted by the European Union and the IFRIC interpretations where the
effective date is relevant to the financial year commencing on 1 February 2008 or ending 31 January 2009.
Since the Group’s previous annual financial report for the year ended 31 January 2008 the following pronouncements are now effective and have
been adopted by the Group:
IFRIC 11 ‘Group and treasury transactions’. >
Amendment to IAS 39 ‘Financial instruments: Recognition and measurement’ and IFRS 7 ‘Financial instruments: Disclosures’ on the >
‘Reclassification of financial assets’ (reclassifications after 1 July 2008).
The pronouncements above have had no impact on these consolidated financial statements.
The Group has not applied the following pronouncements for which adoption is not mandatory for the year ending 31 January 2009 and/or which
have not yet been endorsed by the EU. The Group has not concluded its evaluation of the impact of these pronouncements but at this stage does
not expect there to be any material impact on operating profit or cash flow.
(i) Standards, amendments and interpretations effective for the year ending 31 January 2009 but which have not yet been endorsed by
the EU:
IFRIC 14 ‘The limit on a defined benefit asset, minimum funding requirements and their interaction’ (effective for years commencing on or after >
1 January 2008 but EU endorsed for years commencing on or after 1 January 2009).
(ii) Standards, amendments and interpretations which have been endorsed by the EU but are not yet mandatory and have not been
early adopted for the year ending 31 January 2009:
IAS 1 (revised) ‘Presentation of financial statements’ >
IAS 23 (revised 2007) ‘Borrowing costs’ >
Amendment to IAS 32 ‘Financial Instruments: Presentation’ and IAS1 ‘Presentation of financial statements’ on ‘Puttable financial instruments >
and obligations arising on liquidation’
Amendment to IFRS 1 ‘First time adoption of IFRS’ and IAS 27 ‘Consolidated and separate financial statements’ on the ‘Cost of an investment >
in a subsidiary, jointly controlled entity or associate’
Amendment to IFRS 2 ‘Share based payments’ on ‘Vesting conditions and cancellations’ >
IFRS 8 ‘Operating segments’ >
IFRIC 12 ‘Service concession arrangements’ >
IFRIC 13 ‘Customer loyalty programmes relating to IAS 18, Revenue’ >
Annual improvements to IFRS (2007) >
(iii) Standards, amendments and interpretations which have not yet been endorsed by the EU and which are not yet effective for the
year ending 31 January 2009:
IAS 27 (revised) ‘Consolidated and separate financial statements’ >
Amendment to IAS 39 ‘Financial Instruments: recognition and measurement’ on ‘Eligible hedged items’ >
IFRS 1 (revised) ‘First time adoption of IFRS’ >
IFRS 3 (revised) ‘Business combinations’ >
Amendment to IFRS 7 ‘Financial instruments: Disclosures’ > Walker Greenbank PLC
Annual Report and Accounts 2009
25
Accounts
1. Accounting policies and general information continuedd
Amendment to IFRIC 9 and IAS 39 regarding ‘Embedded derivatives’ >
IFRIC 15 ‘Agreements for construction of real estates’ >
IFRIC 16 ‘Hedges of a net investment in a foreign operation’ >
IFRIC 17 ‘Distributions of non-cash assets to owners’ >
IFRIC 18 ‘Transfers of assets from customers’ >
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in
note 3.
The financial statements of the Company as an entity continue to be prepared under United Kingdom Generally Accepted Accounting Practice
and are presented separately from the consolidated financial statements (pages 53 to 61).
Basis of consolidation
The consolidated financial information incorporates the financial statements of the Company and all its subsidiary undertakings made up to
31 January each year. Subsidiaries are entities where the Company has the power to govern the financial and operating policies, generally
accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently
exercisable or convertible are considered when assessing whether the Group controls another entity.
The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement from the effective date on
which control is transferred to or from the Group, as appropriate.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used into line with those used by
the Group.
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured as the aggregate of the fair
values, at the date of exchange, of the assets given, liabilities incurred or assumed, and equity instruments issued by the Group, in exchange for
control of the acquirer. The identifiable assets, liabilities and contingent liabilities assumed in a business combination are measured initially at their
fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS5
‘Non Current Assets Held for Sale and Discontinued Operations’, which are recognised and measured at fair value less costs to sell.
Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the fair value of the consideration for
the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If,
after reassessment, the Group’s interest in the net fair value of the acquirer’s identifiable assets, liabilities and contingent liabilities exceeds the
cost of the business combination, the excess is recognised immediately in the income statement.
All inter-company transactions and balances are eliminated on consolidation. Profits and losses resulting from inter-company transactions that are
recognised in assets, such as inventory, are eliminated in full. Unrealised losses are also eliminated unless the transaction provides evidence of an
impairment of the assets transferred.
Foreign currencies
For the purpose of the consolidated financial statements, the results and financial position are expressed in sterling, which is the functional
currency of the Company, and the presentation currency for the consolidated financial statements.
Transactions in foreign currencies, which are those other than the functional currency of an entity, are recorded at the rate ruling at the date of the
transaction. Monetary assets and liabilities denominated in foreign currency are translated at the balance sheet date. All unhedged exchange
differences are recognised in the income statement for the period and classified as other operating income or charges.
The assets and liabilities of the Group’s overseas subsidiaries on consolidation are translated at the rates of exchange ruling at the balance sheet
date. The income and expenses are translated at the weighted average rate during the period. Differences on translation are recognised in a
separate foreign currency translation reserve within equity. On disposal of an overseas subsidiary, the cumulative exchange differences for that
subsidiary are recognised in the income statement as part of the profit or loss on disposal.
Intangible assets – Goodwill
Goodwill arising on acquisition is initially measured at cost, being the excess of the fair value of the consideration for the acquisition over the
Group’s interest in the net fair value of the acquired entity’s identifiable assets and liabilities at the date of acquisition. Goodwill is not amortised,
but reviewed for impairment annually, any impairment is recognised immediately in the income statement and is not subsequently reversed.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that
are expected to benefit from the business combination in which the goodwill arose.
On disposal of a subsidiary or cash generating unit the attributable amount of goodwill is included in the determination of the profit or loss
on disposal. Walker Greenbank PLC
Annual Report and Accounts 2009
26
1. Accounting policies and general information continuedd
Intangible assets – Archive
The Arthur Sanderson and William Morris archive comprises a historic record of unique designs that are used to generate a significant royalty
income in the business. The archive is valued at a historical cost. The Directors believe that the archive has an indefinite useful life and is therefore
not subject to amortisation. The carrying value of this asset will be reviewed annually and provision made for any impairment in the carrying value
if required.
Intangible assets – Software assets
Acquired computer software licences are capitalised at the cost incurred to bring the asset into use, including where relevant directly attributable
internal costs incurred in preparing the software for operation. The costs are amortised to their estimated residual value over their estimated
useful life which range from three to six years.
Intangible assets – Collection design
Research expenditure is recognised as an expense as incurred. Costs incurred on development projects relating to the design of new collections
are recognised as intangible assets when the following criteria are fulfilled:
It is technically feasible to complete the new collection so that it will be available for use or sale. >
Management intends to complete the new collection and use it or sell it. >
There is an ability to use or sell the new collection. >
It can be demonstrated how the new collection will generate probable future economic benefits. >
Adequate technical, financial and other resources to complete the development and to use or sell the new collection are available. >
The expenditure attributable to the new collection during its development can be reliably measured. >
Any costs relating to design of new collections that do not meet these criteria are recognised as an expense as incurred. Any such costs
recognised as an expense in previous periods are not recognised as an asset in a subsequent period. Capitalised collection design costs are
recognised as intangible assets and are amortised to their estimated residual value at 25% on a straight-line basis over the life of the asset, and
are tested for impairment if any impairment trigger events are identified in accordance with IAS 36.
Property, plant and equipment
Property, plant and equipment are stated at historical cost less accumulated depreciation and any recognised impairment loss. Historical cost
comprises the purchase price and costs directly incurred in bringing the asset into use. The assets residual values and useful lives are reviewed
annually and adjusted if appropriate, at each balance sheet date.
Depreciation is charged on a straight-line basis on the original costs (excluding freehold land) after deduction of any estimated residual value. The
principal annual rates are:
Freehold buildings 2%
Leasehold improvements Over the length of the lease
Plant, equipment and vehicles Between 5% and 33%
Computer assets 33%
Government grants received for property, plant and equipment are classified within the cost of property, plant and equipment and released to the
income statement over the life of the asset.
Impairment of non-financial assets
Intangible assets with finite useful lives and property, plant and equipment are tested for impairments if events or changes in circumstances
(assessed at each reporting date) indicate that the carrying amount may not be recoverable. When an impairment test is conducted, the
recoverable amount is assessed by reference to the higher of the value in use (net present value of expected future cash flows of the relevant
cash generating unit), or the fair value less cost to sell.
Goodwill and other intangible fixed assets with an indefinite useful life are tested for impairment at least annually.
If a cash generating unit is impaired, provision is made to reduce the carrying amount of the related assets to their estimated recoverable amount.
Impairment losses are allocated firstly against goodwill, and secondly on a pro rata basis against intangible and other assets.
Non-financial assets other than goodwill that suffer impairment are reviewed for possible reversal of the impairment at each reporting date.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials, on a first-in, first-out basis, and direct labour,
plus attributable production overheads based on a normal level of activity. Net realisable value is based on estimated selling prices less
anticipated costs of disposal. Provision is made for any slow moving and obsolete inventory.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
27
Accounts
1. Accounting policies and general information continuedd
Marketing materials
Marketing materials consist of patterning books and other marketing assets that will be used to support the sale of the Group’s products. They
are recognised at the lower of cost and net realisable value. Cost comprises direct materials plus costs of production. Net realisable value is
based on estimated recoveries less anticipated costs of disposals. An impairment allowance is made for any slow moving and obsolete marketing
materials. The Group’s policy is to classify marketing materials on the balance sheet within trade and other receivables.
Financial assets and liabilities – measurement basis
Financial assets and liabilities are recognised on the date on which the Group becomes a party to the contractual provisions of the instrument
giving rise to the asset or liability. Financial assets and liabilities are initially recognised at fair value plus transaction costs. Any impairment of a
financial asset is charged to the consolidated income statement when incurred. Financial assets are derecognised when the Group’s rights to
cash inflows from the asset expire: financial liabilities are derecognised when the contractual obligations are discharged, cancelled or expire.
Non-derivative financial assets are classified according to the purpose for which the asset was acquired. The Group’s financial assets are
classified as either:
‘trade and other receivables’ – these are non derivative financial assets with fixed or determinable payments that are not quoted in an active >
market. They arise when the Group provides goods directly to a debtor, or advances money, with no intention of trading the loan or receivable.
Subsequent to initial recognition loans and receivables are included in the balance sheet at amortised cost using the effective interest method
less any amounts written off to reflect impairment, with changes in carrying amount recognised in the consolidated income statement within
administrative expenses.
‘cash and cash equivalents’ – these comprise of deposits with an original maturity of three months or less with banks and financial institutions, >
bank balances, bank overdrafts and cash in hand.
A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect
all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will
enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable may be
impaired. The amount of the provision is the difference between the asset’s carrying amount and the net present value of estimated future cash
flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of provision account, and the
amount of the loss is recognised in the income statement within administrative expenses. When a trade receivable is uncollectible, it is written off
against the provision account for trade receivables. Subsequent recoveries of amounts previously written off are credited against administrative
expenses in the income statement.
The Group’s non-derivative financial liabilities are classified as ‘Other liabilities’. ‘Other liabilities’ are financial liabilities with fixed or determinable
payments that are not quoted in an active market. They arise when the Group receives goods or services directly from a creditor or supplier, or
borrows money, with no intention of trading the liability. This category includes:
‘trade and other payables’ – these are typically non-interest bearing and following initial recognition are included in the balance sheet at >
amortised cost;
‘bank loans and overdrafts’ – these are initially recorded at fair value based on proceeds received net of issue costs. Finance charges are >
accounted for on an accruals basis and charged to the Consolidated Income Statement using the effective interest rate method;
‘borrowings’ – these are recorded initially at the fair value, net of direct issue costs, and are subsequently stated at amortised cost. Finance >
charges, including premiums payable on settlement, or redemption and direct issue costs, are accounted for on an accruals basis in the
income statement, using the effective interest method, and are included within the carrying amount of the instrument to the extent that they
are not settled in the period in which they arise.
The Group does not have any non-derivative financial assets or liabilities classified as ‘at fair value through profit and loss’.
Derivative financial instruments and hedge accounting – measurement basis
The Group’s activities expose it to the financial risks of changes in exchange rates, and the Group uses forward exchange rate contracts to
manage these exposures. The use of derivative financial instruments is governed by the Group’s policies approved by the Board of Directors,
which provide written principles on the use of derivative financial instruments.
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items. The Group also
documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in fair values or cash flows of hedge items. The effective portion of changes in the fair value of derivatives
that are designated and qualify as cash flow hedges is recognised in equity. The gain or loss relating to the ineffective portion is recognised
immediately in the income statement within ‘other gains/(losses) – net’. Amounts accumulated in equity are released to the income statement
when the hedged item effects the income statement.
Derivatives that do not qualify for hedge accounting under IAS 39 are classified as ‘financial assets or liabilities at fair value through the profit or
loss’. They are initially recognised at fair value, with fair value being remeasured at each reporting date. The fair value of the derivative is based on
market price of comparable instruments at the balance sheet date. Changes in fair value are included in the consolidated income statement within
finance costs. Walker Greenbank PLC
Annual Report and Accounts 2009
28
1. Accounting policies and general information continuedd
The Group has no embedded derivatives that are not closely related to the host instrument.
Cash and cash equivalents
Cash and cash equivalents represent only liquid assets with original maturity of 90 days or less. Cash and cash equivalents include cash in hand,
deposits held at call with banks and bank overdrafts. Bank overdrafts that cannot be offset against other cash balances are shown within
borrowings in current liabilities on the balance sheet.
For the purposes of the cash flow statement it is the Group’s policy to classify interest income and expense, and other finance costs, within ‘cash
flows from operating activities’.
Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to
settle that obligation. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation at the balance
sheet date, and are discounted to present value where the effect is considered material.
Leases
Leases are classified as finance leases where the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All
other leases are classified as operating leases.
Assets used by the Group which have been funded through finance leases are capitalised in property, plant and equipment and the resulting lease
obligations are included in liabilities. The assets are depreciated over their useful lives and the interest element of the rental obligations is charged to
the income statement over the period of the lease, and represents a constant proportion of the balance of capital repayments outstanding.
Operating lease rentals are charged to the income statement on a straight-line basis over the period of the lease. Rent free periods receivable on
entering an operating lease are released on a straight-line basis over the term of the lease.
Employee benefits – Pension obligations
Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due.
For defined benefit retirement schemes, the funding of benefits is determined using the Projected Unit Credit Method, with full actuarial valuations
being carried out triennially.
Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the income statement and
presented in the statement of recognised income and expense.
Past service costs are recognised immediately to the extent that the benefits are already vested, and otherwise are amortised on a straight-line
basis over the average period until the benefits become vested.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for
unrecognised service cost, and as reduced by the fair value of the scheme assets. Any asset resulting from this calculation is limited to past
service cost, plus present value of available refunds and reductions in future contributions to the plan.
The defined benefit obligation is calculated annually by qualified independent actuaries using the projected unit credit method.
Scheme expenses met by the Group, expected returns on plan assets, and interest on pension scheme liabilities are classified within ‘Net defined
benefit pension costs’ on the consolidated income statement.
Employee benefits – share based payments under long term incentive plans (LTIP)
The Group issues equity-settled share based payments to certain employees which must be measured at fair value and recognised as an
expense in the income statement with a corresponding increase in equity. The fair values of these payments are measured at the dates of grant,
taking into account the terms and conditions upon which the awards are granted. The fair value is recognised over the period during which
employees become conditionally entitled to the awards, subject to the Group’s estimate of the number of awards which will lapse, either due to
employees leaving the Group prior to vesting or due to non-market based performance conditions not being met. The total amount recognised in
the income statement as an expense is adjusted to reflect the actual number of awards that vest.
Employee benefits – short-term bonus plans
The Group recognises a liability and an expense for bonuses where contractually obliged or where there is a past practice that has created a
constructive obligation.
Share capital
Ordinary shares are classified as equity. Costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of
tax, from the proceeds.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
29
Accounts
1. Accounting policies and general information continuedd
Treasury shares
Consideration paid including any directly attributable incremental costs (net of income taxes) on the purchase of the Company’s equity share
capital (treasury shares) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where
such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related
income tax effects is included in equity attributable to the Company’s equity shareholders.
Revenue
The Group revenue is measured at fair value of the consideration received or receivable and represents amounts recoverable by the Group for
goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes. Revenue comprises:
Sale of goods – sales of goods are recognised when the Group has transferred to the buyer the significant risks and rewards of ownership, >
which is usually at the point of delivery of the goods.
Royalty revenue – royalties are received from licence holders under the terms of various agreements, and are recognised on an accruals basis >
in accordance with the substance of the relevant agreement.
Exceptional items
Items that are both material and whose nature is sufficient to warrant separate disclosure and identification are disclosed within the financial
statements and classified within their relevant income statement category.
Taxation including deferred tax
The tax expense represents the sum of the current tax and deferred tax charges or credits.
Current tax is based on the taxable profit for the year. Taxable profits differs from the net profit as reported in the income statement because
it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or
deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance
sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability
method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent
that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities
are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other
assets and liabilities in a transaction that effects neither the tax profit nor the accounting profit.
IAS 12 Income taxes requires that the measurement of deferred tax should have regard to the tax consequences that would follow from the
manner of expected recovery or settlement at the balance sheet date of the carrying amount of its assets and liabilities. In calculating its deferred
tax liability the Group’s policy is to regard the depreciable amount of the carrying value of its property, plant and equipment to be recovered
through continuing use in the business, unless included within assets held for resale, where the policy is to regard the carrying amount as being
recoverable through sale.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Group is able to
control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax
is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred
tax is also dealt with in equity.
Segmental reporting
Walker Greenbank is a designer, manufacturer and distributor of furnishings, fabrics and wallpaper. The Group predominantly manages its
operations as two business segments which are the brands and manufacturing.
A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are
different to those of other business segments. A geographical segment is engaged in providing products and services within a particular economic
environment that are subject to risks and returns which are different from those of segments operating in other economic environments.
Interest received
Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Walker Greenbank PLC
Annual Report and Accounts 2009
30
2. Financial risk management
The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate
risk and price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to
hedge certain risk exposures.
Risk management is carried out at Board level under policies approved by the Board of Directors. Executive Directors identify, evaluate and
hedge financial risks in close co-operation with the Group’s operating units.
Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the
US dollar and the euro. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a
currency that is not the entity’s functional currency.
The Group’s policy is, where possible to allow the Group entities to settle liabilities in their functional currency with the cash generated from their
operations in that currency. Where the Group entities have liabilities denominated in a currency other than their functional currency (and have
insufficient reserves of that currency to settle them) cash already denominated in that currency will, where possible be transferred from elsewhere
in the Group.
To manage the foreign exchange risk arising on future transactions, it is the Group’s policy to enter into forward currency contracts to hedge
the exposure.
For the year ended 31 January 2009, the average sterling to US dollar translation rate applied by the Group including the impact of hedging
contracts was £1:US $2.06. If the rate had been £1:US $1.96 lower with all other variables held constant, profit before tax would have been higher
by £127,000. If the rate had been £1:US $2.16 higher with all other variables held constant, profit before tax would have been lower
by £115,000.
For the year ended 31 January 2009, the average sterling to euro translation rate applied by the Group was £1:euro 1.24. If the rate had been
£1:euro 1.14 lower with all other variables held constant, profit before tax would have been lower by £381,000. If the rate had been £1:euro 1.34
higher with all other variables held constant, profit before tax would have been higher by £324,000.
The sensitivity of movements in other currencies is not considered material to the performance of the Group.
Interest rate risk
As the Group has no significant interest bearing assets its revenue and cash generated from operations are substantially independent of changes
in market interest rates.
The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate
risk. The Group’s borrowings at variable rate are denominated in UK pounds or euros. The Group regularly analyses its interest rate exposure
calculating the impact on profit and loss of a defined interest rate shift. Based on the calculations the Board consider refinancing, renewal of
existing positions, alternative financing and hedging.
In July 2007 the Group entered into a new financing contract with Barclays Bank PLC, variable interest rates were negotiated on all the loans. The
Board continues to monitor the interest rates monthly.
For the year ended 31 January 2009, had benchmark interest rate levels been 0.5% higher/lower than actual experience, with all other variables
held constant, the profit before tax of the Group would have been lower/higher by £62,000 due to the change in interest rate expense on variable
rate borrowings.
Credit risk
Credit risk arises from the Group’s trade receivables, cash held with banks, and derivative financial instruments. It is the risk that the counterparty
fails to discharge its obligation in respect of the instrument.
The Group does not have any significant credit risk exposure to any single company or group of companies, as the nature of the Group’s
operations mean that trade receivables consist of a large number of customers spread across diverse industries and geographical areas.
Prior to accepting new customers an independent credit check is obtained. Based on this information individual credit limits and payment terms
are established and where appropriate credit guarantee insurance cover is sought. If no independent credit ratings are available, customers are
asked to pay on a proforma basis until creditworthiness can be established. The utilisation of credit limits is regularly monitored. Credit limits may
only be exceeded with the authorisation from key management, this is dependent on the amount expected to exceed the limit and the Group’s
trading history with that customer.
There is no difference between the carrying amount and the maximum credit risk exposure.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
31
Accounts
2. Financial risk management continued
Liquidity risk
Liquidity risk arises from the Group’s management of working capital and the finance charges and principal repayments on its debt instruments. It
is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The maturity profile of the Group’s debt and
other financial liabilities is disclosed in note 21.
During the year the Group had facilities with Barclays Bank PLC. A significant element of the facility is linked to working capital, which allows the
Group to manage its cash more effectively during the seasonal fluctuations in working capital associated with the industry. This element of the
facility is due to expire in July 2010.
Management monitors rolling forecasts of the Group’s cash and loan facility on a monthly basis. The Group ensures that it has adequate facilities
available to cover both its short-term and medium-term commitments. In addition, the Group’s liquidity management policy is to project cash
flows in major currencies and consider the level of liquid assets necessary to meet these.
Capital risk management
The Group’s objectives when managing capital are:
to safeguard the entities ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other >
stakeholders; and
to provide an adequate return for shareholders by pricing products and services commensurately with the level of risk. >
The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in light of
changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the
Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, buy back issued shares, or sell
assets to reduce debt.
The Group monitors capital on the basis of the average net debt to adjusted capital ratio (or ‘gearing ratio’). The ratio is calculated as average net
debt divided by adjusted capital. Average net debt is calculated as the total debt less cash and cash equivalents during the year. Adjusted capital
comprises all components of equity (i.e. share capital, share premium, retained earnings, and other reserves) other than amounts recognised in
equity relating to cash flow hedges and forward currency contracts.
During the year to 31 January 2009, the Group’s strategy, which was unchanged from the previous year, was to reduce the average gearing ratio.
The average gearing ratios for 2009 and 2008 were as follows:
31 January 31 January
2009 2008
Year ended £000 £000
Average net debt 11,233 10,777
Total equity 19,911 20,799
Less: amounts recognised in equity relating to currency contracts 812 110
Adjusted capital 20,723 20,909
Average net debt to adjusted capital ratio 54% 52%
Year end net debt to adjusted capital ratio 31% 35%
The Group considers the average debt to adjusted equity ratio to be too high currently, and will continue to reduce debt and the pension deficit by
cash generated from operations until the ratio is at a level considered appropriate.
The gearing ratio at the year end is lower than the average gearing ratio as the level of trade debtors is lower at the year end than the average
during the year due to the seasonal nature of trading in the months of December and January.
Fair value estimation
The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date provided by
relationship banks.
The carrying value less impairment provision of trade receivables and payables and cash and cash equivalents are assumed to approximate their
fair values. Walker Greenbank PLC
Annual Report and Accounts 2009
32
3. Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning future events. The resulting accounting estimates will seldom precisely equal the
related actual results. The Group applies its best endeavours in setting accounting estimates, and uses historical experience and other factors,
including input from experienced and specialist management. Estimates and assumptions are continually re-evaluated and the resulting
accounting balances updated as new information including actual outcomes become apparent.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within
the next financial year are discussed below.
a) Retirement benefit obligations
The Group recognises its obligations to employee retirement benefits. The quantification of these obligations is subject to significant estimates
and assumptions regarding life expectancy, discount and inflation rates, wage and salary changes, the rate of increase in pension payments, and
the market values of equities, bonds and other pension assets. In making these assumptions the Group takes advice from a qualified actuary
about which assumptions reflect the nature of the Group’s obligations to employee retirement benefits. The assumptions are regularly reviewed to
ensure their appropriateness.
The Group determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present
value of estimated future cash outflows expected to be required to settle pension obligations. In determining the appropriate discount rate, the
Group considers the interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and
that have terms to maturity approximating the terms of the related pension liability. Details of the estimates and assumptions applied, and carrying
amounts of retirement benefit obligations and pension assets, are set out in note 22.
b) Impairment of non-financial assets
The Group tests annually whether goodwill or its indefinite life intangible asset has suffered any impairment, in accordance with its accounting
policy. The recoverable amounts of cash generating units have been determined based on value in use (VIU) calculations. These calculations
require use of estimates of future sales, margins, and other operating and administrative expenses, and of discount rates. Further disclosures
relating to the estimates and assumptions applied, and carrying amounts of the non-financial assets, are set out in note 13.
The Group makes provision for impairment in the carrying amount of its inventories and marketing materials. The nature of the Group’s products
are exposed to changes in taste and attitudes from time to time, which can affect the demand for those products. The Group has skilled and
experienced management who utilise historical sales information, and exercise their judgement, in making estimates about the extent of
provisions necessary based on the realisable value of inventory and expected future benefit to the Group of marketing materials taking into
account the estimated price and volume of future sales or usage less the further costs of sale and holding costs. Further disclosures relating to
the effect on the income statement of the establishment and reversal of such provisions against inventory are included in note 6. Details of the
carrying amount of marketing materials is disclosed in note 16 and of inventories in note 17.
c) Deferred tax recognition
Following the completion of the Group’s recovery programme and return to sustained profitability over recent years, the Group has considered it
appropriate to recognise at the balance sheet date deferred tax assets resulting from historical trading losses. The amount of deferred tax
recognised is based on estimates of the timing and amount of future taxable profits of companies within the Group, which in turn relies upon
estimates of future operating profits and the occurrence, timing and tax treatment of significant items of income and expenditure including
contributions to pension schemes and the vesting of share based payment awards. Further disclosures relating to the effect on the income
statement of the recognition of deferred tax assets are included in note 11, and the amount of deferred tax asset recognised and other relevant
disclosures are included in note 15.
d) Share based payment awards
The Group has granted awards to Executive Directors and Senior Management which include vesting conditions relating to the future financial
performance of the Group as measured by Profit before tax (PBT). The number of awards that will ultimately vest, if any, varies based on the PBT
achieved by the Group in the years ending 31 January 2009 and 2011 and the continued employment of award recipients. The PBT target for the
year ending 31 January 2009 has been achieved. The fair value of the awards granted is charged against the income statement over the vesting
period; the amount of that charge is dependent upon the Group’s estimates of how many awards will ultimately vest, which is linked directly to its
estimates regarding future PBT achievement. Further disclosures relating to the effect on the financial statements of share awards is included in
note 24.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
33
Accounts
4. Segmental analysis
Walker Greenbank is a designer, manufacturer and distributor of luxury interior furnishings, fabrics and wallpaper. The Group predominantly
manages its operations as two segments which are the brands and manufacturing. Segmental information is also presented in respect of the
Group’s geographical segments. Unallocated expenses predominantly relate to head office and other corporate functions, including long term
incentive plan costs. This is the basis on which the Group presents its results:
a) Primary reporting format – business segment
Eliminations
and
Brands Manufacturing unallocated Total
Year ended 31 January 2009 £000 £000 £000 £000
Revenue – external 50,735 12,963 – 63,698
Revenue – internal – 10,992 (10,992) –
Total revenue 50,735 23,955 (10,992) 63,698
Operating profit 5,082 785 (2,306) 3,561
Financial costs – – (695) (695)
Net pension charge – – (79) (79)
Profit before tax 5,082 785 (3,080) 2,787
Tax – – (1,165) (1,165)
Profit for the year 5,082 785 (4,245) 1,622
Eliminations
and
Brands Manufacturing unallocated Total
£000 £000 £000 £000
Assets 29,496 15,841 1,933 47,270
Liabilities (14,390) (5,003) (7,966) (27,359)
Total net assets 15,106 10,838 (6,033) 19,911
Capital expenditure – intangible assets 275 145 – 420
Capital expenditure – property, plant and equipment 475 632 – 1,107
Depreciation 730 733 7 1,470
Amortisation 358 18 – 376
Impairment losses – trade receivables 279 25 – 304
Reversal of prior period impairment losses – trade receivables – (5) – (5)
Impairment losses – inventory 632 4 – 636
Reversal of prior period impairment losses – inventory – (95) – (95)
Write off of marketing material products (refer note 5) 615 – – 615
Insurance proceeds receivable (refer note 5) (465) – – (465)
Share based payment charges – – 373 373
Eliminations
and
Brands Manufacturing unallocated Total
Year ended 31 January 2008 £000 £000 £000 £000
Revenue – external 48,206 14,242 – 62,448
Revenue – internal – 10,570 (10,570) –
Total revenue 48,206 24,812 (10,570) 62,448
Operating profit 4,624 1,486 (2,149) 3,961
Financial costs – – (981) (981)
Net pension income – – 119 119
Profit before tax 4,624 1,486 (3,011) 3,099
Tax – – 5,072 5,072
Profit for the year 4,624 1,486 2,061 8,171 Walker Greenbank PLC
Annual Report and Accounts 2009
34
4. Segmental Analysis continued
Eliminations
and
Brands Manufacturing unallocated Total
£000 £000 £000 £000
Assets 28,506 15,406 5,258 49,170
Liabilities (13,463) (4,278) (10,630) (28,371)
Total net assets 15,043 11,128 (5,372) 20,799
Capital expenditure – intangible assets 273 92 – 365
Capital expenditure – property, plant and equipment 821 611 – 1,432
Depreciation 615 703 3 1,321
Amortisation 480 21 – 501
Impairment losses – trade receivables 38 84 – 122
Reversal of prior period impairment losses – trade receivables (13) (53) – (66)
Impairment losses – inventory 734 25 – 759
Reversal of prior period impairment losses – inventory – (15) – (15)
Share based payment charges – – 429 429
Inter-segment transactions are entered into under the normal commercial terms and conditions that would also be available to unrelated
third parties.
Segment assets consist primarily of goodwill, intangible assets, property plant and equipment, trade and other receivables including inter-
segment receivables, and inventories. Segment liabilities consist primarily of trade and other payables including inter-segment payables.
Unallocated assets and liabilities consists primarily of cash, deferred tax assets, borrowings, derivative financial instruments, and retirement
benefit obligations and elimination of inter-segment balances.
b) Secondary reporting format – geographical segments
2009 2008
Revenue by geographical location of customers £000 £000
United Kingdom 41,026 41,540
Continental Europe 10,987 9,710
United States of America 7,893 7,927
Rest of the World 3,792 3,271
63,698 62,448
The geographical segments have changed to reflect the strategic objectives of the Group. The 2008 comparative figures have been amended to
reflect this new analysis.
2009 2008
Total assets by geographical segment £000 £000
United Kingdom 44,955 47,436
Continental Europe 893 712
United States of America 1,422 1,022
47,270 49,170
2009 2008
Capital expenditure by geographical segment £000 £000
United Kingdom 1,470 1,695
Continental Europe 3 19
United States of America 54 83
1,527 1,797
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
35
Accounts
5. (a) Analysis of operating profit by function of expense
2009 2008
£000 £000
Turnover 63,698 62,448
Cost of sales (25,567) (25,362)
Gross profit 38,131 37,086
Net operating expenses:
Distribution costs (17,578) (16,265)
Administration expenses (17,354) (16,464)
Other operating income/(expense) 362 (396)
Net operating expenses (34,570) (33,125)
Operating profit 3,561 3,961
During the year ended 31 January 2009 redundancies took place at the Standfast factory at a cost of £146,000. This item is presented within
administration expenses. In January 2009 marketing material products held at a third party’s premises were destroyed in a fire, and the carrying
amount of £615,000 has been written off. This item is presented within distribution expenses. Expected recoveries from the third party to
compensate the Group for the loss of products destroyed in the fire have been estimated at £465,000, and are presented within other operating
income. In May 2009, an interim payment was received from the third party which was in line with the expected recoveries.
Analysis of revenue by category:
2009 2008
£000 £000
Sale of goods 62,423 61,397
Royalty income 1,275 1,051
63,698 62,448
(b) Analysis of expense by nature
2009 2008
£000 £000
Changes in inventories of finished goods and work in progress 1,093 342
Raw materials and consumables used 19,405 17,211
Employee benefit expense 18,682 18,536
Depreciation, amortisation and impairment charges 1,846 1,822
Transportation expenses 2,068 1,833
Advertising costs 981 1,117
Operating lease payments 1,712 1,604
Other expenses 14,712 15,626
Total cost of sales, distribution costs and administrative expenses 60,499 58,091 Walker Greenbank PLC
Annual Report and Accounts 2009
36
6. Group operating profit
2009 2008
£000 £000
Group operating profit is stated after charging/(crediting):
Auditor’s remuneration:
Fees payable to Company’s auditor for the audit of parent •
Company and consolidated financial statements 50 50
Audit of Company’s subsidiaries pursuant to legislation • 75 75
Other services • – 8
Accounting advice with respect to IFRS • – 10
Depreciation of property, plant and equipment 1,470 1,321
Amortisation of intangibles 376 501
Cost of inventories recognised as expense in cost of sales 20,498 17,553
Impairment of inventories 636 759
Reversal of impairment of inventories (95) (15)
Impairment of trade receivables 304 122
Reversal of impairment of trade receivables (5) (66)
Net foreign exchange (gains)/losses (472) 396
Operating lease rentals:
Hire of motor vehicles and plant and machinery • 494 399
Land and buildings • 1,218 1,205
Loss/(profit) on disposal of fixed assets 6 (3)
7. Net defined benefit pension costs
2009 2008
£000 £000
Expected return on pension scheme assets 2,829 2,721
Interest on pension scheme liabilities (2,633) (2,371)
Scheme expenses met by Group (275) (231)
Net (charge)/income (79) 119
8. Net finance costs
2009 2008
£000 £000
Interest expense:
Interest payable on bank borrowings (685) (875)
Interest and similar charges payable (19) (36)
Total interest expense (704) (911)
Interest income:
Interest receivable on bank deposits 35 5
Net finance costs (669) (906)
Amortisation of issue costs of bank loan (26) (75)
Total finance costs (695) (981)
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
37
Accounts
9. Emoluments of Directors
2009 2008
Salary Bonus Benefits Pension Total Total
£000 £000 £000 £000 £000 £000
Executive Directors:
John Sach 220 – 5 33 258 342
David Smallridge 160 – 1 16 177 234
Alan Dix 126 – 1 13 140 187
Non-executive Directors:
Ian Kirkham (retired 31 January 2009) 65 – – – 65 62
Terry Stannard 26 – – – 26 9
Fiona Goldsmith (appointed 17 December 2008) 4 – – – 4 –
Charles Gray (retired 12 February 2008) – – – – – 22
601 – 7 62 670 856
Executive Directors have been granted awards under long term incentive plans, no amounts are currently receivable by the Directors.
In both years, retirement benefits were accruing to one Director under a defined benefit scheme, who is the highest paid Director. Accrued annual
pension benefits at the year end were £10,188 (2008: £20,210). Benefits are accruing under defined contribution schemes for three Directors
(2008: three Directors).
10. Employee Information
2009 2008
£000 £000
Wages and salaries 15,971 15,858
Social security costs 1,659 1,581
Other pension costs 679 668
Share based payment awards, including NIC thereon 373 429
Employee benefit expense 18,682 18,536
2009 2008
The average monthly number of employees (including Directors) during the year Number Number
Sales, warehousing and administration 344 320
Manufacturing 250 266
594 586
Compensation of key management personnel
2009 2008
£000 £000
Short term employee benefits (including short term incentives) 2,164 2,460
Post employment benefits (including pension costs) 126 119
Share based payment awards 373 429
2,663 3,008
The Group regards its key management personnel to be its Directors and Senior Management having authority and responsibility for planning,
directing and controlling the activities of the Group, either directly or indirectly. Share based payment awards reflects the charge in the income
statement and does not reflect the market value of shares expected to vest. Walker Greenbank PLC
Annual Report and Accounts 2009
38
11. Tax
2009 2008
£000 £000
Current tax – overseas tax (57) (29)
Deferred tax – ordinary (788) –
Deferred tax – exceptional (320) 5,101
Deferred tax (1,108) 5,101
Tax (charge)/credit for the year (1,165) 5,072
2009 2008
£000 £000
Profit on ordinary activities before tax 2,824 3,099
Tax on profit on ordinary activities at standard rate 28% (2008: 30%) (791) (930)
Non deductible expenditure (48) (73)
Utilisation of losses and origination and reversal of temporary differences during the year – 974
Utilisation of parent losses and reversal of temporary differences not previously recognised as assets (6) –
Impact of phasing out of Industrial Building Allowances (320) –
Recognition of deferred tax asset at end of year – 5,101
Tax credit/(charge) for year (1,165) 5,072
Factors affecting current and future tax charges
The Finance Bill 2008 announced the phasing out of the relief for Industrial Building Allowances by 31 March 2011. An additional deferred tax
liability of £320,000 has been recognised as a consequence, and is classified as an exceptional item.
The deferred tax credit of £5.1 million in 2008 arose from the recognition of deferred tax losses incurred by the Group in prior years and
temporary differences. Because of the nature and size of this item it was disclosed as an exceptional item.
Following the recognition of deferred tax assets arising from losses and temporary differences the future effective tax rate will be influenced by
changes in deferred tax positions.
The Group does not anticipate that UK corporation tax will become payable on profits within the immediate future due to the availability of tax
losses of approximately £21.3 million.
12. Earnings per share
Basic earnings per share (‘EPS’) is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number
of shares outstanding during the year, excluding those held in the employee share trust (note 24) and those held in treasury, which are treated
as cancelled.
Adjusted earnings per share is also presented as, in the opinion of the Directors, this provides additional information to shareholders on the
results of the Group’s activities. Adjusted earnings per share has been calculated to remove any charge or credit arising from deferred tax in the
current and comparative periods. The impact on after tax profit of deferred tax during these periods has been significant, and varies from an
exceptional credit of £5,101,000 in the comparative year following the first time recognition of historical corporation tax losses, to a charge for the
current year of £1,108,000, including an exceptional charge of £320,000 (refer note 11), as the corporation tax losses are utilised and the impact of
the removal of IBA’s in the 2008 Finance Act takes effect. In the opinion of the Directors, the exclusion of the deferred tax charges or credits
creates a more comparable earnings base on which to assess the performance of the Group.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
39
Accounts
12. Earnings per share continued
2009 2008
Weighted Weighted
average average
number Per share number Per share
Earnings of shares amount Earnings of shares amount
£000 (000s) Pence £000 (000s) Pence
Basic and diluted:
Basic and diluted earnings per share 1,622 54,880 2.96 8,171 56,397 14.49
Adjusted:
Earnings attributable to ordinary shareholders 1,622 54,880 2.96 8,171 56,397 14.49
Reversal of impact of deferred tax charge/(credit) 1,108 – 2.01 (5,101) – (9.05)
Adjusted earnings per share 2,730 54,880 4.97 3,070 56,397 5.44
On 1 July 2008 Walker Greenbank PLC purchased 275,000 ordinary shares of 1p each in the Company at 30p per ordinary share. Following this
transaction Walker Greenbank’s issued ordinary share capital with voting rights consists of 59,006,162 (2008: 59,006,162) ordinary shares of
which 1,690,093 (2008: 1,415,093) ordinary shares are held in treasury and a further 2,549,146 (2008: 2,549,146) ordinary shares are held by the
Walker Greenbank PLC Employee Benefit Trust (‘EBT’). Shares held in treasury or by the EBT are treated as cancelled when calculating EPS. At
31 January 2009 the market value of the treasury shares was £173,235.
13. Intangible assets
Arthur
Sanderson
and William Collection
Morris design Software
Goodwill archive assets assets Total
£000 £000 £000 £000 £000
Cost:
1 February 2007 1,400 4,300 480 4,467 10,647
Additions – – 209 156 365
31 January 2008 1,400 4,300 689 4,623 11,012
Additions – – 268 152 420
31 January 2009 1,400 4,300 957 4,775 11,432
Amortisation:
1 February 2007 841 – 146 3,691 4,678
Charge – – 105 396 501
31 January 2008 841 – 251 4,087 5,179
Charge – – 148 228 376
31 January 2009 841 – 399 4,315 5,555
Net book amount:
31 January 2009 559 4,300 558 460 5,877
31 January 2008 559 4,300 438 536 5,833
The Arthur Sanderson and William Morris archive was purchased as part of the acquisition of Arthur Sanderson & Sons on 29 August 2003.
It comprises an historical record of unique designs that are used to generate royalty income in the business.
Amortisation of £376,000 (2008: £501,000) is included in administrative costs.
Impairment tests for goodwill and Arthur Sanderson and William Morris Archive
The carrying value of goodwill at the year end of £559,000 (2008: £559,000) is attributable to the manufacturing segment. The Archive is
attributable to the brands. Walker Greenbank PLC
Annual Report and Accounts 2009
40
13. Intangible Assets continued
The Group tests goodwill and the Archive for impairment annually or more frequently if there are indications that they might be impaired. There
was no impairment charge recognised in the year (2008: none).
In assessing whether an impairment of goodwill is required the carrying value of the cash generative unit (‘CGU’) or group of CGUs is compared
with its recoverable amount. The recoverable amount for each CGU and collectively for groups of CGUs that make up the segments of the
Group’s business have been based on the value in use (‘VIU’).
The Group estimates the VIU using a discounted cashflow model (‘DCF’), where the projected cash flows for separate or collective groups of
CGUs are discounted using a pre-tax rate of 9.50% (2008: 8.48%). The discount rate used is the same across all segments.
The Group has used formally approved budgets for the first two years (2008: one year) of its VIU calculation, with extrapolation beyond the last
explicit year using an assumption of growth for future years ranging from 1% to 2% (2008: no growth) depending upon the CGU being tested. The
cash flows used in the calculation of the VIU are derived from past experience and are based on operating profit forecasts, which in turn rely upon
assumptions relating to sales growth, margins and operating and administrative expenses. The cash flows have not included the benefits arising
from any future asset enhancement expenditure, as this is not permitted by IAS 36. The VIU calculations therefore exclude significant benefits
anticipated from future capital expenditure. The growth rates included within the assumptions supporting the VIU calculations do not therefore
represent the Group’s anticipated total forecast growth, but rather only the growth deriving from capital expenditure completed at the balance
sheet date.
The recoverable amount of the Archive intangible asset is estimated based on VIU, and comprises estimated future cash flows from royalty
income relating to the Archive. A discount rate of 9.50% (2008: 8.48%) is applied.
The Group does not consider there to be reasonably probable changes to the key assumptions that would result in impairment of either goodwill
or the Archive as at 31 January 2009.
14. Property, plant and equipment
Plant,
Land and equipment Computer
buildings and vehicles assets Total
£000 £000 £000 £000
Cost:
1 February 2007 6,281 14,216 1,093 21,590
Additions 40 1,171 221 1,432
Disposals (917) (534) (19) (1,470)
Currency movements – 27 – 27
31 January 2008 5,404 14,880 1,295 21,579
Additions – 1,079 28 1,107
Disposals – (361) (27) (388)
Currency movements – 198 38 236
31 January 2009 5,404 15,796 1,334 22,534
Depreciation:
1 February 2007 1,797 10,054 875 12,726
Charge 103 1,042 176 1,321
Disposals (917) (534) (19) (1,470)
Currency movements – 11 – 11
31 January 2008 983 10,573 1,032 12,588
Charge 109 1,220 141 1,470
Disposals – (348) (27) (375)
Currency movements – 83 34 117
31 January 2009 1,092 11,528 1,180 13,800
Net book amount:
31 January 2009 4,312 4,268 154 8,734
31 January 2008 4,421 4,307 263 8,991
Depreciation expense of £1,470,000 (2008: £1,321,000) has been charged in administrative expenses.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
41
Accounts
14. Property, plant and equipment continued
2009 2008
The net book amount of land and buildings comprises: £000 £000
Freehold land 450 450
Freehold buildings 3,862 3,971
Net book value 4,312 4,421
Land and buildings are stated at historical cost.
The carrying value of assets providing security under the Barclays facility was land and buildings of £4,312,000 (2008: £4,421,000).
15. Deferred income tax assets
A deferred tax asset of £5,158,000 (2008: £6,055,000) is recognised in respect of tax losses and other timing differences and £1,108,000 has
been charged to the income statement during the year as some of the tax losses have utilised and Industrial Buildings Allowances were phased
out in the Finance Act 2008.
2009 2008
£000 £000
Taxable temporary differences on property, plant and equipment (872) (533)
Taxable temporary differences on intangible assets (128) (106)
Tax losses 4,993 5,740
3,993 5,101
Pension scheme obligations 1,165 954
5,158 6,055
The movements in the deferred tax asset on pension scheme obligations are recognised in the Statement of Recognised Income and Expense.
At the balance sheet date the Group has unused tax losses of £21.3 million (2008: £23.7 million) available for offset against future profits. A
deferred asset is recognised in respect of £17.7 million (2008: £20.5 million) of such losses as the Group believes that realisation of the related tax
benefit through future taxable profit is probable and can be readily accessed under existing tax legislation. No deferred tax has been recognised
on the remaining £3.6 million (2008: £3.2 million) as these losses are not readily available for offset against the Group’s future profits under
existing tax legislation and therefore the realisation of these losses is not considered probable. The recognition of deferred tax on losses will be
assessed at each reporting date.
Potential deferred tax assets at 31 January 2009 of £1,269,000 (2008: £1,068,000) relating to tax losses and deductible temporary differences
have not been recognised as it is not considered probable that recovery of the potential deferred tax asset will arise under existing tax legislation.
2009 2008
£000 £000
Tax losses 997 893
Other deductible temporary differences 272 175
1,269 1,068
There are also capital tax losses at 31 January 2009 of £2,485,000 (2008: £2,485,000) but no deferred tax asset has been recognised as it is not
considered probable that these losses will be utilised. Walker Greenbank PLC
Annual Report and Accounts 2009
42
16. Trade and other receivables
2009 2008
Current £000 £000
Trade receivables 9,053 10,403
Less: provision for impairment of trade receivables (423) (186)
Net trade receivables 8,630 10,217
Other receivables 1,111 214
Marketing materials 1,385 1,872
Prepayments 1,426 1,172
12,552 13,475
2009 2008
Non-current £000 £000
Other receivables 12 253
The value of trade receivables providing funding under the Barclays facility was £6,721,000 (2008: £7,621,000).
There is no material difference between the carrying amount and the fair value of the trade and other receivables.
Credit quality of financial assets
(i) Neither past due nor impaired
Included in the Group’s trade receivable balances are debtors with a carrying value of £4,849,000 (2008: £7,058,000) which are neither past due
nor impaired at the reporting date. The nature of the Group’s business means that it has a long standing relationship with the majority of its
customers, who either have no experience of historical default or only temporary late payments with full recovery of balances due.
For the Group’s cash at bank, and the receivable leg of derivative financial instruments, the counterparty to the financial instruments is a major UK
bank, and the Group does not consider there to be any significant credit risk from holding these financial assets.
(ii) Past due – not impaired
Included in the Group’s trade receivable balances are debtors with a carrying value of £3,561,000 (2008: £2,930,000) which are past due at the
reporting date for which the Group does not consider the receivable to be impaired as there has not been a significant decline in credit quality
and the Group believes that the amounts are still fully recoverable. The table below shows the aging analysis of the receivables:
2009 2008
£000 £000
1–30 days past due 1,653 1,528
31–60 days past due 1,490 1,189
61–90 days past due 339 213
91+ days past due 79 –
3,561 2,930
(iii) Past due – impaired
As at 31 January 2009, trade receivables of £643,000 (2008: £415,000) were individually determined to be impaired and provided for. The amount
of the provision was £281,000 (2008: £186,000). The main factors used to assess the impairment of trade receivables is the age of the balance
and circumstances of the individual customer. It has been assessed that a proportion of the receivables is expected to be recovered. The
Directors believe that in the current economic environment there is objective evidence of credit deterioration and an impairment of £142,000
representing a collective assessment of risk has been made. Due to the nature of Group’s products, there is limited amount of stock left in the
possession of customers that could act as collateral under terms of trade. As the value of this stock is immaterial, it has not been disclosed in the
financial statements.
The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:
2009 2008
£000 £000
Sterling 7,101 8,337
Dollars 522 393
Euros 2,064 1,826
Other 66 128
9,753 10,684
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
43
Accounts
16. Trade and other receivables continued
The Group considers that any exposure to concentrations of credit risk will be impacted principally by underlying economic conditions in the
principal geographical segments in which the Group operates. As at the balance sheet date the carrying value of trade receivables by
geographical segment was:
2009 2008
£000 £000
United Kingdom 5,284 6,625
Continental Europe 2,117 2,271
United States of America 833 775
Rest of the World 396 546
8,630 10,217
As part of the Group’s credit risk management the Group seeks credit insurance on large overseas customers and also on large UK customers of
the manufacturing segment.
Provisions for impairment
Movements on the Group provision for impairment of trade receivables are as follows:
2009 2008
£000 £000
At 1 February (186) (232)
Provision for receivables impaired (304) (122)
Receivables written off in the year as uncollectible 68 105
Unused amounts reversed 5 66
Exchange difference (6) (3)
At 31 January (423) (186)
The creation and release of provision for impaired trade receivables have been included within ‘administrative expenses’ in the income statement.
17. Inventories
2009 2008
£000 £000
Raw materials 1,368 1,120
Work in progress 1,069 1,904
Finished goods 11,450 9,522
13,887 12,546
The cost of inventories recognised as an expense and included in ‘cost of sales’ amounted to £20,498,000 (2008: £17,553,000).
The value of inventories providing security under the Barclays facility, if it were to be fully drawn, was £8,637,000 (2008: £7,645,000).
18. Cash and cash equivalents
2009 2008
£000 £000
Cash at bank and in hand 1,050 2,017
There is a set off arrangement for bank accounts held with the UK clearing bank, and accordingly the amounts stated above represent the net of
accounts in funds and in overdraft. Walker Greenbank PLC
Annual Report and Accounts 2009
44
19. Trade and other payables
2009 2008
£000 £000
Trade payables 9,973 10,570
Corporation tax 85 65
Other taxes and social security 1,043 741
Other creditors 780 439
Accruals 3,237 3,731
15,118 15,546
20. Derivative financial instruments
2009 2008
£000 £000
Forward foreign exchange contracts – cash flow hedges (812) (110)
Forward foreign exchange contracts
The Group’s US based subsidiary, Walker Greenbank Inc., sells products to local customers with sales invoiced in US dollars. As the Group’s
presentation currency is sterling it is exposed to changes in the reported sterling value of these sales. The Group considers that it is highly
probable that future sales of this nature will continue to arise over at least the next 12 months. During the year Walker Greenbank PLC has
entered into monthly forward foreign exchange contracts up to January 2010, with a third party, to buy sterling and sell dollars. The Group has
designated these contracts as cash flow hedges of the foreign currency risk arising from the highly probable future forecast sales transactions. As
at the reporting date the fair value of the forward foreign contracts deferred in the hedging reserve relating to the exposure on these anticipated
future transactions is a liability of £820,000 (2008: £110,000). The amounts deferred in equity will be released into the income statement in the
period or periods during which the hedged forecast transactions effect the income statement, which is expected to be within 12 months of the
balance sheet date.
The brands make more purchases from the euro zone than sales made to the euro zone. As the Group’s presentation currency is sterling it is
exposed to changes in the reported sterling value of the purchases. The Group considers that it is highly probable that future purchases of this
nature will continue to arise over at least the next 12 months. During the second half of the year Walker Greenbank PLC has entered into monthly
forward foreign exchange contracts up to December 2009, with a third party, to buy euros and sell sterling. The Group has designated these
contracts as cash flow hedges of the foreign currency risk arising from the highly probable future forecast purchase transactions. As at the
reporting date the fair value of the forward foreign contracts deferred in the hedging reserve relating to the exposure on these anticipated future
transactions is an asset of £8,100 (2008: £nil). The amounts deferred in equity will be released into the income statement in the period or periods
during which the hedged forecast transactions effect the income statement, which is expected to be within 12 months of the balance sheet date.
21. Borrowings
2009 2008
£000 £000
Non-current:
Term loan 3,000 3,400
Trade receivables loan 3,862 5,502
Stock loan 6 4
6,868 8,906
Current:
Term loan 400 400
Total borrowings 7,268 9,306
In July 2007, the Group agreed terms for new facilities from Barclays Bank PLC replacing the Burdale Financial Limited funding. The facilities
comprises: a variable rate Term Loan secured on the Group’s freehold property of £4 million which is being repaid on a 10 year profile, and
Receivables and Inventory Financing Agreements which provide three year variable rate floating loans secured on the eligible trade receivables
and eligible inventories at any point in time (the working capital facilities). The working capital facilities may be drawn down in either sterling or
euros. The total Barclays loan facility is capped at £17 million; the utilisation of the facility at the year end was £7,268,000 (2008: £9,306,000). The
term loan bears interest at variable rates based on a margin above the Bank of England base rate. The working capital facilities bear finance costs
in the form of discount charges which are calculated periodically and vary at margins above the base rate published by Bank of England (for
sterling loans) or the European Central Bank (for euro loans).
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
45
Accounts
21. Borrowings continued
Under the Barclays Bank PLC facilities, the Group is subject to various financial covenants which apply to the term loan, including interest cover
and debt service. The receivables and inventory financing agreements require compliance with a number of operational covenants. Any non-
compliance with covenants could, if not remedied or waived, constitute an event of default with respect to any such arrangements. The Group
has reported to its financiers that it was in full compliance with its financial and operational covenants throughout each of the periods presented.
The fair value of current borrowings equal their carrying amount, as the impact of discounting is not significant. The carrying amounts and fair
value of the non-current borrowings are as follows:
Carrying amount Fair value
2009 2008 2009 2008
£000 £000 £000 £000
Property loan 3,000 3,400 3,000 3,400
Trade receivables loan 3,862 5,502 3,918 5,584
Stock loan 6 4 6 4
6,868 8,906 6,924 8,988
The fair values are based on cash flows discounted using a rate based on the borrowing rate of 2.75% (2008: 7.00%).
The table below analyses the Group’s financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings based on the
remaining period to contractual maturity at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows.
The maturity profile of undiscounted cash flows on variable interest rate borrowings has assumed interest rates as at the balance sheet date.
Less than Between Between Over
1 year 1 to 2 years 2 to 5 years 5 years
31 January 2009 £000 £000 £000 £000
Borrowings 494 4,339 1,365 1,510
Derivative financial instruments 812 – – –
Trade and other payables 13,990 – – –
15,296 4,339 1,365 1,510
Less than Between Between Over
1 year 1 to 2 years 2 to 5 years 5 years
31 January 2008 £000 £000 £000 £000
Borrowings 1,041 1,009 7,206 2,080
Derivative financial instruments 110 – – –
Trade and other payables 14,740 – – –
15,891 1,009 7,206 2,080
The carrying amounts of the Group’s borrowings are denominated in the following currencies:
2009 2008
£000 £000
Sterling 7,215 9,306
Euro 53 –
Total 7,268 9,306
22. Retirement benefit obligations
Defined contribution schemes
The Group contributes to the defined contribution section of the Abaris Holdings Limited Pension Scheme and to a Group Personal Pension Plan
which is also a defined contribution scheme. Contributions are charged to the income statement as incurred, and amounted to £404,000 (2008:
£437,000). Active members of the schemes are also able to make contributions.
Defined benefit schemes
The Group operates the following funded defined benefit pension schemes in the UK which offer pensions on retirement and death benefits to
members: the Walker Greenbank Pension Plan, the Abaris Holdings Limited Pension Scheme and the WG Senior Management Pension Scheme.
Pension benefits are related to the members’ salary at retirement and their length of service. The schemes are closed to new members and the
future accrual of benefits. The most recent triennial funding valuation for the defined benefit schemes was April 2006. An updated valuation for
IAS 19 financial reporting purposes has been completed at the balance sheet date. The Group’s contributions to the schemes for the year
beginning 1 February 2009 are expected to be £1,342,000. Walker Greenbank PLC
Annual Report and Accounts 2009
46
22. Retirement benefit obligations continued
The principal assumptions applied when valuing the defined benefit schemes were:
2009 2008
Discount rate 6.90% 6.10%
Rate of salary increase 3.20% 3.40%
Rate of increase to LPI pensions in payment 3.20% 3.40%
Rate of increase to pensions (in excess of GMP) in deferment 3.20% 3.40%
Rate of inflation 3.20% 3.40%
Expected return on plan assets 6.60% 7.00%
Members are assumed to commute 25% of their pension (2008: 25%).
The assumptions used in determining the overall expected return on assets of the scheme have been set with reference to yields available on
government bonds and appropriate risk margins for equities and other classes of assets.
The mortality assumptions applied are based on the PA92 year of birth with medium cohort tables (2008: PA92 with medium cohort tables). The
mortality assumptions imply the expected future lifetime from age 65 as follows:
2009 2008
Non-pensioner male currently 45 23.1 23.1
Pensioner male currently 65 21.9 21.9
Non-pensioner female currently 45 25.9 25.9
Pensioner female currently 65 24.8 24.8
The amounts recorded in the balance sheet are determined as follows:
2009 2008
£000 £000
Equities 22,458 22,512
Property – 3,607
Fixed interest 10,526 12,653
Insured annuities 1,609 1,739
Cash and other 470 340
Fair value of plan assets 35,063 40,851
Present value of funded defined benefit obligations (39,224) (44,260)
Net liability in balance sheet (4,161) (3,409)
Reconciliation of opening and closing balances of the present value of the defined benefit obligation
2009 2008
£000 £000
Benefit obligation at beginning of year 44,260 45,508
Scheme expenses 275 231
Interest cost 2,633 2,371
Contributions by plan participants – –
Actuarial loss – change in mortality assumptions – 2,868
Actuarial (gain) – other (5,458) (4,932)
Benefits paid (2,486) (1,786)
Past service cost – –
Curtailments and settlements – –
Benefit obligation at end of year 39,224 44,260
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
47
Accounts
22. Retirement benefit obligations continued
Reconciliation of opening and closing balances of the fair value of plan assets
2009 2008
£000 £000
Fair value of plan assets at beginning of year 40,851 39,990
Expected return on plan assets 2,829 2,721
Actuarial (loss) (7,458) (1,364)
Contributions by employers 1,327 1,290
Contributions by plan participants – –
Benefits paid (2,486) (1,786)
Fair value of plan assets at end of year 35,063 40,851
The amounts recognised in the income statement are:
2009 2008
£000 £000
Scheme expenses 275 231
Interest on obligation 2,633 2,371
Expected return on plan assets (2,829) (2,721)
Settlement and curtailments – –
Net defined benefit pension charge/(income) 79 (119)
The actual return on assets over the period was a loss of £4,629,000 (2008: profit of £1,357,000).
Actuarial gains and (losses) to be shown in Statement of Recognised Income and Expense
2009 2008
£000 £000
Actual return on scheme assets less than expected return (7,458) (1,364)
Change in mortality assumptions – (2,868)
Other actuarial gains on scheme liabilities 5,458 4,932
(2,000) 700
Other actuarial gains on scheme liabilities in the period arise mainly from increases in the discount rate used in determining the present value of
scheme liabilities. The cumulative amount of actuarial losses reported in the Statement of Recognised Income and Expense (including amounts
reported in the equivalent statement prior to the adoption of IFRS) before deferred taxation was £16,351,000 (2008: £14,351,000).
History of schemes’ assets, obligations and experience adjustments
2009 2008 2007 2006
£000 £000 £000 £000
Present value of defined benefit obligation 39,224 44,260 45,508 47,222
Fair value of scheme’s assets 35,063 40,851 39,990 39,189
(Deficit) in the schemes (4,161) (3,409) (5,518) (8,033)
Experience adjustments arising on scheme liabilities 5,458 2,064 (1,284) *
Experience adjustments arising on scheme assets (7,458) (1,364) (1,310) *
* Information not readily available for periods prior to the date of transition to IFRS.
Walker Greenbank PLC
Annual Report and Accounts 2009
48
23. Financial instruments by category
The accounting policies for financial instruments have been applied to the line items below:
Derivatives
Loans and Assets at used for
receivables fair value hedging Total
31 January 2009 £000 £000 £000 £000
Assets as per balance sheet
Trade and other receivables 9,753 – – 9,753
Cash and cash equivalents 1,050 – – 1,050
Total 10,803 – – 10,803
Other Derivatives
Liabilities at financial used for
fair value liabilities hedging Total
31 January 2009 £000 £000 £000 £000
Liabilities as per balance sheet
Derivative financial instruments – – 812 812
Borrowings – 7,268 – 7,268
Trade and other payables – 13,990 – 13,990
Total – 21,258 812 22,070
Derivatives
Loans and Assets at used for
receivables fair value hedging Total
31 January 2008 £000 £000 £000 £000
Assets as per balance sheet
Trade and other receivables 10,684 – – 10,684
Cash and cash equivalents 2,017 – – 2,017
Total 12,701 – – 12,701
Other Derivatives
Liabilities at financial used for
fair value liabilities hedging Total
31 January 2008 £000 £000 £000 £000
Liabilities as per balance sheet
Derivative financial instruments – – 110 110
Trade and other payables – 9,306 – 9,306
Borrowings – 14,740 – 14,740
Total – 24,046 110 24,156
24. Share Capital
Ordinary shares of 1 pence each Number of shares £
Authorised share capital:
1 February 2008 and 31 January 2009 85,000,000 850,000
Allotted, called up and fully paid:
1 February 2008 and 31 January 2009 59,006,162 590,062
All holders of ordinary shares have the right to vote at general meetings of the Company and to distributions from dividends or on winding up of
the Company.
The Walker Greenbank PLC Employee Benefit Trust (‘the trust’) holds 2,549,146 shares (2008: 2,549,146) with a cost of £601,202 (2008:
£601,202) and the market value at 31 January 2009 of £261,287 (2008: £1,038,777).
During the year Walker Greenbank PLC purchased 275,000 ordinary shares of 1p at a price of 30p per share and at a total cost of £82,748. The
total number of shares held in treasury are 1,690,093 (2008: 1,415,093) and represent 2.9% (2008: 2.4%) of the issued shares. The market value
of these shares at 31 January 2009 was £173,235 (2008: £576,650).
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
49
Accounts
24. Share Capital continued
The shares held by the trust and the treasury shares are held for the purpose of satisfying awards under long term incentive plans to Executive
Directors and senior management.
Long Term Incentive Plans (LTIPs)
The Group operates a Long Term Incentive Plan. At the balance sheet date two awards had been previously granted under this plan, in which
Executive Directors and senior management of the Group participate. The LTIP has previously been approved by the shareholders at an Annual
General Meeting.
Awards under the scheme are granted in the form of nil-priced share options, and are to be satisfied either using market-purchased shares or by
the issuing of new shares. The awards vest in full or in part dependent on the satisfaction of specified performance targets at the end of the
vesting period applying to each plan. The number of award that vest is dependent upon the profit before tax (‘PBT’) achieved for the relevant year.
As the awards carry a nil-value exercise price, the grant date fair value corresponds to the share price of the Group on the grant date. Details are
set out below:
Award One Award Two
Grant date of awards 25 July 2007 24 May 2008
Grant date fair value of award (pence per award) 26.75 53.00
Vesting date of awards 25 July 2009 24 May 2011
Maximum number of awards 2,549,000 1,415,093
Relevant year ending date for determination of PBT 31 January 2009 31 January 2011
Based on the performance of the Group for the year ended 31 January 2009 the Award One awards have satisfied the PBT vesting condition in
full, and are expected to vest on 25 July 2009.
Movements during the year in the number of awards outstanding, assuming maximum achievement of PBT targets, are as follows:
2009 2008
£000 £000
At 1 February 3,964,093 2,549,000
Granted – 1,415,093
Forfeited – –
Exercised – –
Expired – –
At 31 January 3,964,093 3,964,093
Refer to note 10 for disclosure of the charge to the consolidated income statement arising from share based payments.
On 27 May 2009 further awards were made to the Executive Directors, a total of 1,700,000 ordinary shares.
25. Consolidated statement of changes in equity
Other reserves
Share
Share premium Retained Capital Merger Hedge Translation
capital account earnings reserve reserve reserve reserve Total
£000 £000 £000 £000 £000 £000 £000 £000
1 February 2007 590 457 (28,594) 43,457 (2,950) – (17) 12,943
Actuarial losses on scheme assets – – (1,364) – – – – (1,364)
Changes in actuarial mortality assumptions – – (2,868) – – – – (2,868)
Other actuarial gains on scheme liabilities – – 4,932 – – – – 4,932
Deferred tax – – (683) – – – – (683)
Currency translation differences – – – – – – 27 27
Hedging reserve – – – – – (110) – (110)
Net income/(expense) recognised
in equity via SORIE – – 17 – – (110) 27 (66)
Reserve for long term incentive plan – – 363 – – – – 363
Purchase of treasury shares – – (612) – – – – (612)
Profit for the year – – 8,171 – – – – 8,171
31 January 2008 590 457 (20,655) 43,457 (2,950) (110) 10 20,799 Walker Greenbank PLC
Annual Report and Accounts 2009
50
25. Consolidated Statement of changes in equity continued
Other reserves
Share
Share premium Retained Capital Merger Hedge Translation
capital account earnings reserve reserve reserve reserve Total
£000 £000 £000 £000 £000 £000 £000 £000
1 February 2008 590 457 (20,655) 43,457 (2,950) (110) 10 20,799
Actuarial losses on scheme assets – – (7,458) – – – – (7,458)
Other actuarial gains on scheme liabilities – – 5,458 – – – – 5,458
Deferred tax – – 211 – – – – 211
Currency translation differences – – – – – – (350) (350)
Cash flow hedging reserve – released to
income statement – – – – – 110 – 110
Cash flow hedging reserve – recognised in equity
during the period – – – – – (812) – (812)
Net income/(expense) recognised in
equity via SORIE – – (1,789) – – (702) (350) (2,841)
Reserve for long term incentive plan – – 414 – – – – 414
Purchase of treasury shares – – (83) – – – – (83)
Profit for the year – – 1,622 – – – – 1,622
31 January 2009 590 457 (20,491) 43,457 (2,950) (812) (340) 19,911
Capital reserve represents £000
Share premium of companies acquired under merger accounting principles 1,276
Capital reserve arising on consolidation 293
Capital redemption reserve for deferred shares 1,003
Capital redemption reserve for ‘B’ shares 40,885
43,457
26. Dividends
The Directors do not propose a final dividend in respect of the year ended 31 January 2009 (2008: no dividend proposed).
27. Cash generated from operations
2009 2009 2008 2008
£000 £000 £000 £000
Operating profit 3,561 3,961
Depreciation 1,470 1,321
Amortisation 376 501
Charge for long-term incentive plan recognised in equity 414 363
Loss/(profit) on disposal of property, plant and equipment 6 (3)
Unrealised foreign exchange (gains)/losses included in operating profit (499) 2
Changes in working capital
Increase in inventories (1,341) (410)
Decrease/(increase) in trade and other receivables 1,164 (2,212)
(Decrease)/increase in trade and other payables (288) 2,390
Defined benefit pension cash contributions (1,327) (1,290)
(25) 662
Cash generated from operating activities 3,536 4,623
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
51
Accounts
28. Analysis of net debt
Other
1 February non-cash Exchange 31 January
2008 Cash flow changes movement 2009
£000 £000 £000 £000 £000
Cash and cash equivalent 2,017 (997) – 30 1,050
Borrowings due within one year (400) – – – (400)
Borrowings due after one year (8,906) 2,064 (26) – (6,868)
(9,306) 2,064 (26) – (7,268)
Net debt (7,289) 1,067 (26) 30 (6,218)
Other non-cash changes are amortisation of issue costs relating to the loan financing.
29. Commitments
a) Capital commitments
Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:
2009 2008
£000 £000
Property, plant and equipment 96 203
96 203
b) Lease commitments
Operating lease payments represent rentals payable by the Group for certain office properties and other assets. Land and building leases are
negotiated for an average of 16 years and rentals are fixed for an average of five years. Other leases are negotiated for an average term of three
years and rentals are fixed for an average of three years.
Total commitments due under non-cancellable operating leases are as follows:
Land and Land and
buildings Other buildings Other
2009 2009 2008 2008
£000 £000 £000 £000
Within one year 960 396 1,151 287
Between one and five years 3,305 512 3,161 359
Over five years 4,282 – 5,018 –
8,547 908 9,330 646
The Group expects to receive total sub-lease rental income of £81,000 (2008: £109,000) under the terms of sub-lease agreements entered into
with third parties.
Other leases include hire of plant, machinery and motor vehicles.
30. Principal subsidiary undertakings
The principal Group operating companies that traded during the year, and are wholly owned, and which are included in these consolidated financial
statements are as follows:
Abaris Holdings Limited – registered in England and Wales
Walker Greenbank Inc.* – incorporated in the USA
Arthur Sanderson & Sons Inc* – incorporated in the USA
Arthur Sanderson & Sons SARL * – incorporated in France
Whittaker & Woods SRL – incorporated in Italy
Investments in Group companies are ordinary shares.
* Shares held by subsidiary company.
The principal activities of the Group are design, manufacture, marketing and distribution of wallcoverings, furnishing fabrics and associated
products for the consumer market. Walker Greenbank PLC
Annual Report and Accounts 2009
52
We have audited the parent company financial statements of Walker
Greenbank PLC for the year ended 31 January 2009 which comprise
the balance sheet and the related notes.
We have reported separately on the group financial statements of
Walker Greenbank PLC for the year ended 31 January 2009.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the Annual Report and the
parent company financial statements in accordance with applicable
law and United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice) are set out in the Statement
of Directors’ Responsibilities.
Our responsibility is to audit the parent company financial statements in
accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland). This report,
including the opinion, has been prepared for and only for the company’s
members as a body in accordance with Section 235 of the Companies
Act 1985 and for no other purpose. We do not, in giving this opinion,
accept or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
We report to you our opinion as to whether the parent company
financial statements give a true and fair view and whether the parent
company financial statements have been properly prepared in
accordance with the Companies Act 1985. We also report to you
whether in our opinion the information given in the Directors’ Report is
consistent with the parent company financial statements. The
information given in the Directors’ Report includes that specific
information presented in the Chairman’s Statement, the Chief
Executive’s Review, and the Financial Review that is cross referred
from the Business Review section of the Directors’ Report.
In addition we report to you if, in our opinion, the company has not
kept proper accounting records, if we have not received all the
information and explanations we require for our audit, or if information
specified by law regarding directors’ remuneration and other
transactions is not disclosed.
We read other information contained in the Annual Report and
consider whether it is consistent with the audited parent company
financial statements. The other information comprises only the
Highlights from 2009, the Chairman’s Statement, the Chief Executive’s
Review, the Financial Review, the information on Directors and
Advisers, the Report of the Directors, the Statement of Directors’
Responsibilities and all of the other information listed on the contents
page. We consider the implications for our report if we become aware
of any apparent misstatements or material inconsistencies with the
parent company financial statements. Our responsibilities do not
extend to any other information.
Independent Auditors’ Report
To the members of Walker Greenbank PLC
Basis of audit opinion
We conducted our audit in accordance with International Standards on
Auditing (UK and Ireland) issued by the Auditing Practices Board. An
audit includes examination, on a test basis, of evidence relevant to the
amounts and disclosures in the parent company financial statements.
It also includes an assessment of the significant estimates and
judgments made by the directors in the preparation of the parent
company financial statements, and of whether the accounting policies
are appropriate to the company’s circumstances, consistently applied
and adequately disclosed.
We planned and performed our audit so as to obtain all the information
and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the
parent company financial statements are free from material
misstatement, whether caused by fraud or other irregularity or error. In
forming our opinion we also evaluated the overall adequacy of the
presentation of information in the parent company financial statements.
Opinion
In our opinion:
the parent company financial statements give a true and fair >
view, in accordance with United Kingdom Generally Accepted
Accounting Practice, of the state of the company’s affairs as at
31 January 2009; and
the parent company financial statements have been properly >
prepared in accordance with the Companies Act 1985; and
the information given in the Directors’ Report is consistent with the >
parent company financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
East Midlands, UK
17 June 2009 Walker Greenbank PLC
Annual Report and Accounts 2009
53
Accounts
Walker Greenbank PLC Company Accounts – UK GAAP
Company Balance Sheet
At 31 January 2009
2008
2009 £000
note £000 (restated)
Fixed assets 5 4,335 4,453
Investments 6 43,755 43,676
48,090 48,129
Current assets and liabilites
Debtors 7 15,307 18,919
Creditors: amounts falling due within one year 8 (9,639) (9,044)
Net current assets 5,668 9,875
Total assets less current liabilities 53,758 58,004
Creditors: amounts falling due after more than one year 9 (3,000) (3,400)
Provisions 10 – (74)
Net assets 50,758 54,530
Capital and reserves:
Share capital 11 590 590
Share premium account 12 457 457
Retained earnings 12 7,823 11,595
Other reserves 12 41,888 41,888
Total shareholders’ funds 50,758 54,530
The notes on pages 54 to 61 form an integral part of the Company financial statements.
J D Sach A N Dix
Director Director
These accounts were approved by the Directors on 17 June 2009.
Walker Greenbank PLC
Annual Report and Accounts 2009
54
Notes to the Accounts
1. Accounting policies
Accounting convention
The financial statements are prepared on a going concern basis and under the historical cost convention. They have been prepared in
accordance with applicable accounting standards and United Kingdom Generally Accepted Accounting Practice, with the Companies Act 1985,
and with the accounting policies set out below which have been consistently applied to all periods presented unless otherwise indicated.
Profit and loss account
No profit and loss account is presented for Walker Greenbank PLC (‘the Company‘) as it has applied the exemption provided by Section 230 of
the Companies Act 1985. A loss of £4,103,000 (2008: profit £275,000) has been dealt with in the accounts of the parent company.
Consolidation
These financial statements present information relating to the entity Walker Greenbank PLC, and are not consolidated. The consolidated financial
statements of the Group of which the Company is the parent are separately presented within this Annual Report and Accounts under IFRS.
Fixed assets
Depreciation is charged on tangible fixed assets (excluding freehold land) on a straight-line basis on the original cost after deduction of any
estimated residual value. The principal annual rates are:
Freehold buildings 2%
Short leasehold improvements Over the unexpired period of the lease
Plant, equipment and vehicles Between 5% and 33%
Computer assets Between 12.5% and 33%
Land and buildings are stated at cost less any provision for impairment.
Impairment of fixed assets and investments
Fixed assets and investments are subject to review for impairment in accordance with Financial Reporting Standard No.11. Where impairment
triggers are identified the recoverable amount of the relevant asset, or group of assets within an income generating unit, is determined, being the
higher of value in use and net realisable value. If the carrying amount of the asset exceeds its recoverable amount an impairment loss is
calculated. Any impairment is recognised in the profit and loss account in the year in which it occurs. Where impairments have been identified in
prior years and recoverable amount was based on value in use, an updated discounted cash flow is prepared annually to assess whether the
previous impairment in value has reversed. When all conditions are met, the impairment is reversed and recognised in the profit and loss in the
year in which the reversal occurs.
Financial instruments
The Company is listed on the Alternative Investment Market regulated by The London Stock Exchange. It is not required to adopt FRS26
‘Financial Instruments: Measurement’ or FRS29 ‘Financial Instruments: Disclosures’ in these financial statements, and has not elected to
voluntarily do so.
The Company continues to adopt the amortised cost basis of accounting for financial instruments, and had not elected to voluntarily apply fair
value measurements of financial instruments, including derivative financial instruments.
Foreign currencies
Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange ruling at the balance sheet date.
Transactions in foreign currencies are recorded at the rates ruling at the date of transaction. All differences are taken to the profit and loss
account. Further disclosure of the Group’s financial risk management policies is included in note 2 of the consolidated financial statements of the
Group which are separately presented from these Company accounts.
Employee share ownership plan (‘ESOP’)
Where the Company’s issued share capital is acquired by an ESOP trust sponsored by the Company the cost of acquisition is deducted from
profit and loss reserves in accordance with UITF Abstract 38.
Employee benefits – share based payments under Long Term Incentive Plans (LTIP)
In accordance with the transitional provisions, FRS20 has been applied to all grants of equity instruments after 7 November 2002 that had not
vested as of 1 January 2005.
The Group issues equity-settled share based payments to certain employees which must be measured at fair value and are recognised as an
expense in the income statement with a corresponding increase in equity. The fair values of these payments are measured at the dates of grant,
taking into account the terms and conditions upon which the awards are granted. The fair value is recognised over the period during which
employees become conditionally entitled to the awards, subject to the Group’s estimate of the number of awards which will lapse, either due to
employees leaving the Group prior to vesting or due to non-market based performance conditions not being met. The total amount recognised in
the income statement as an expense is adjusted to reflect the actual number of awards that vest. Walker Greenbank PLC
Annual Report and Accounts 2009
55
Accounts
1. Accounting policies continued
The Company has adopted UITF Abstract 44 ‘FRS20 – Group and treasury shares’. The adoption of UITF 44 has resulted in restatement of
comparative financial statements, with the portion of the fair value of awards granted to employees providing services to the Company’s
subsidiary companies being recognised as an additional investment in those subsidiaries, and not as an expense of the Company. This has been
applied retrospectively and has resulted in restatement of profit and loss account for year ended 31 January 2008 (note 12).
Employee benefits – pensions
The Walker Greenbank Group operates both defined benefit and defined contribution pension schemes for the benefit of its employees. Further
details of these schemes are included in note 22 of the consolidated financial statements of the Group presented within the Annual Report and
Accounts. Defined benefit pension schemes are now accounted for within the separate Financial Statements of Group’s trading subsidiary,
Abaris Holdings Limited. The parent company recognises contributions to defined contribution schemes in respect of its employees as expenses
when incurred.
Share capital
Ordinary shares are classified as equity. Costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of
tax, from the proceeds.
Treasury shares
Consideration paid including any directly attributable incremental costs (net of income taxes) on the purchase of the Company’s equity share
capital (treasury shares) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where
such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related
income tax effects is included in equity attributable to the Company’s equity shareholders.
Deferred taxation
Deferred taxation is recognised in respect of timing differences that have originated but not reversed at the balance sheet date and that give rise
to an obligation to pay more tax or a right to pay less tax in the future. Deferred tax is calculated using the average rates that are expected to
apply when the timing differences reverse, based on tax rates that have been substantively enacted by the balance sheet date. No provision has
been made for any liability arising from the distribution of past earnings of subsidiary undertakings. Deferred tax assets are only recognised when
it is more likely than not that they will be recovered in the foreseeable future.
Leases
Leases are classified as finance leases where the terms of the lease transfer substantially all the risks and rewards of ownership to the Company.
All other leases are classified as operating leases.
Assets used by the Company which have been funded through finance leases are capitalised in tangible fixed assets and the resulting lease
obligations are included in liabilities. The assets are depreciated over their useful lives and the interest element of the rental obligations is charged to
the profit and loss account over the period of the lease, and represents a constant proportion of the balance of capital repayments outstanding.
Operating lease rentals are charged to the profit and loss account on a straight-line basis over the period of the lease. Rent free periods
receivable on entering an operating lease are released on a straight-line basis to the next break point in the lease.
Related party
The Company has applied the exemption available in FRS 8 and has decided not to disclose transactions with wholly owned subsidiary undertakings.
2. Auditors’ remuneration
2009 2008
£000 £000
Audit fee – fees payable to the Company auditor for the audit of the parent company and the
consolidation of the Group accounts 50 50 Walker Greenbank PLC
Annual Report and Accounts 2009
56
3. Emoluments of Directors
2009 2008
Salary Bonus Benefits Pension Total Total
£000 £000 £000 £000 £000 £000
Executive Directors:
John Sach 220 – 5 33 258 342
David Smallridge 160 – 1 16 177 234
Alan Dix 126 – 1 13 140 187
Non-executive Directors:
Ian Kirkham (retired 31 January 2009) 65 – – – 65 62
Terry Stannard 26 – – – 26 9
Fiona Goldsmith (appointed 17 December 2008) 4 – – – 4 –
Charles Gray (retired 12 February 2009) – – – – – 22
601 – 7 62 670 856
In both years, retirement benefits were accruing to one Director under a defined benefit scheme, who is the highest paid Director. Accrued annual
pension benefits at the year end were £10,188 (2008: £20,210).
Benefits are accruing under defined contribution schemes for three Directors (2008: three Directors).
4. Employee information
2009 2008
£000 £000
(restated)
Wages and salaries 916 1,084
Social security costs 100 134
Other-pension costs 100 71
Share based payments, including NIC thereon 299 344
1,415 1,633
The average monthly number of employees (including Directors) during the year Number Number
Administration 10 13
5. Tangible fixed assets
Plant,
Land and equipment Computer
buildings and vehicles assets Total
£000 £000 £000 £000
Cost:
31 January 2008 5,404 50 18 5,472
Additions – – – –
Disposals – – – –
31 January 2009 5,404 50 18 5,472
Depreciation:
31 January 2008 983 20 16 1,019
Charge 109 8 1 118
Disposals – – – –
31 January 2009 1,092 28 17 1,137
Net book amount:
31 January 2009 4,312 22 1 4,335
31 January 2008 4,421 30 2 4,453
Notes to the Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
57
Accounts
5. Tangible fixed assets continued
2009 2008
The net book amount of land and buildings comprises: £000 £000
Freehold land 450 450
Freehold buildings 3,862 3,971
Net book value 4,312 4,421
The value of assets secured under the Barclays facility was property of £4,312,000 (2008: £4,421,000).
6. Investments
2009 2008
£000 £000
Shares in subsidiary undertakings (restated)
Cost:
As at 1 February 44,714 44,639
Additions 79 75
As at 31 January 44,793 44,714
Provision for impairment:
Beginning of year and end of year (1,038) (1,038)
Net book amount 43,755 43,676
Additions in both years relate to the adoption of UITF44.
Walker Greenbank PLC is registered and domiciled in the United Kingdom. It is the parent company of the Walker Greenbank Group. The
principal Group operating companies that traded during the year and are wholly owned are as follows:
Abaris Holdings Limited – registered in England and Wales
Walker Greenbank Inc.* – incorporated in the USA
Arthur Sanderson & Sons Inc* – incorporated in the USA
Arthur Sanderson & Sons SARL * – incorporated in France
Whittaker & Woods SRL – incorporated in Italy
Investments in Group companies are ordinary shares.
* Shares held by subsidiary company.
The principal activities of the Group are design, manufacture, marketing and distribution of wallcoverings, furnishing fabrics and associated
products for the consumer market.
The carrying value of the investment in Abaris Holdings Limited is reviewed annually by reference to its value in use to the Company. The value in
use was calculated using future expected cash flow projections, discounted at 9.5% (2008: 8.48%) on a pre-tax basis, and is not intended to
reflect a realisable value on disposal. The review as at 31 January 2008 resulted in a reversal of the impairment of £10,329,000 to investments in
subsidiary undertakings held by the Company.
7. Debtors
2009 2008
£000 £000
Amounts owed by subsidiary undertakings 15,005 18,458
Other debtors 165 268
Prepayments 137 193
15,307 18,919
Included within other debtors is an amount repayable after one year of £12,000 (2008: £253,000). Amounts owed by subsidiary undertakings are
non-interest bearing and are unsecured. These loans are callable on demand by the Company should payment be required, but full settlement
within the next 12 months is unlikely to be sought. Walker Greenbank PLC
Annual Report and Accounts 2009
58
8. Creditors: due within one year
2009 2008
£000 £000
(restated)
Bank term loans (note 9) 400 400
Bank overdrafts 1,069 106
Trade creditors 94 107
Amounts owed to subsidiary undertakings 7,500 7,500
Other taxes and social security 40 42
Other creditors 139 240
Accruals 397 649
9,639 9,044
Amounts owed to subsidiary undertakings are non-interest bearing and are unsecured. These loans are payable on demand by the Company
should payment be required, but full settlement within the next twelve months is unlikely to be sought.
9. Creditors: due after more than one year
2009 2008
£000 £000
Bank term loan 3,000 3,400
The term loan is secured by a floating charge over the property (note 5). Interest is charged at 1.25% (2008: 1.25%) over base rate.
Repayment of total borrowings
2009 2008
£000 £000
Over five years 1,400 1,800
Between two and five years 1,200 1,200
Between one and two years 400 400
After more than one year 3,000 3,400
Within one year (note 8) 400 400
3,400 3,800
In July 2007, the Company agreed terms for new facilities from Barclays Bank PLC replacing the Burdale Financial Limited funding. The facilities
comprise of a variable rate Term Loan secured on the Group’s freehold property of £4 million which is being repaid on a 10 year profile.
Under the Barclays Bank PLC facilities, the Group are subject to a various financial covenants which apply to the term loan, including interest
cover and debt service. The Group was also subject to similar covenants under the previous Burdale Financial Limited funding facilities.
Any non-compliance with covenants could, if not remedied or waived, constitute an event of default with respect to any such arrangements.
The Group has reported to its financiers that it was in full compliance with its financial and operational covenants throughout each of the
periods presented.
There is a set off arrangement for Group bank accounts held with the UK clearing bank.
10. Provisions – deferred tax liability
2009 2008
£000 £000
Balance at start of the year 74 –
(Credit)/charge to profit and loss account (74) 74
Balance at end of the year – 74
Notes to the Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
59
Accounts
10. Provisions – deferred tax liability continued
The deferred tax liability arises from:
2009 2008
£000 £000
Capital allowances in excess of depreciation – 74
Unrecognised net deferred tax assets at 31 January 2009 are £1,269,000 (2008: £1,068,000) relating to tax losses and other short-term timing
differences. These will be realised as and when they reverse against suitable future taxable profits.
2009 2008
£000 £000
Depreciation in excess of capital allowances 7 15
Tax losses 997 893
Other timing differences 265 160
1,269 1,068
There is also capital tax loss of the Company at 31 January 2009 of £4,885,000 (2008: £4,885,000) but no deferred tax asset has been
recognised as it is not considered probable that these losses will be utilised.
11. Share capital
Number of
Ordinary shares of 1p each: shares £
Authorised share capital:
1 February 2008 and 31 January 2009 85,000,000 850,000
Allotted, called up and fully paid:
1 February 2008 and 31 January 2009 59,006,162 590,062
The Walker Greenbank PLC Employee Benefit Trust (‘the trust’) holds 2,549,146 shares (2008: 2,549,146) with a cost of £601,202 (2008:
£601,202) and the market value at 31 January 2009 of £261,287 (2008: £1,038,777).
During the year Walker Greenbank PLC purchased 275,000 ordinary shares of 1p each at a price of 30p and at a total cost of £82,748. The total
number of shares held in treasury are 1,690,093 (2008: 1,415,093) and represent 2.9% (2008: 2.4%) of the issued shares. The market value of
these shares at 31 January 2009 was £173,235 (2008: £576,650).
The shares held by the trust and the treasury shares are held for the purpose of satisfying awards under long term incentive plans to Executive
Directors and senior management.
Long Term Incentive Plans (LTIPs)
The Group operates a Long Term Incentive Plan. As at the balance sheet date there had been two awards under this plan, in which Executive
Directors and senior management of the Group participate. The LTIP has previously been approved by the shareholders at an Annual General
Meeting. Further details are included in note 24 of the consolidated financial statements of the Group which are separately included within this
Annual Report and Accounts.
On 27 May 2009 further awards were made to the Executive Directors, a total of 1,700,000 ordinary shares. Walker Greenbank PLC
Annual Report and Accounts 2009
60
12. Shareholders fund and reserve movement
Share Profi t
Share premium and loss Capital
capital account account reserve Total
£000 £000 £000 £000 £000
1 February 2007
(as previously reported) 590 457 11,541 41,888 54,476
Restatement retained profit 31 January 2007 – – 28 – 28
1 February 2007
(as restated) 590 457 11,569 41,888 54,504
Accrual for long term incentive plan liabilities – – 363 – 363
Profit for the year – – 275 – 275
Treasury shares – – (612) – (612)
31 January 2008 590 457 11,595 41,888 54,530
Accrual for long term incentive plan liabilities – – 414 – 414
Loss for the year – – (4,103) – (4,103)
Treasury shares – – (83) – (83)
31 January 2009 590 457 7,823 41,888 50,758
The restatement referred to above arises from the adoption of UITF 44 and has resulted in an increase in profit for the year ended 31 January
2008 of £85,000 and an increase in net assets and share holders funds at 31 January 2008 of £113,000.
Capital reserve represents: £000
Capital redemption reserve for deferred shares 1,003
Capital redemption reserve for ‘B’ shares 40,885
41,888
13. Dividends
The Directors do not propose a final dividend in respect of the year ended 31 January 2009 (2008: no dividend proposed).
14. Operating lease commitments
Annual commitments due under non-cancellable operating leases are as follows:
Land and Land and
buildings Other buildings Other
2009 2009 2008 2008
£000 £000 £000 £000
Operating leases which expire:
Within one year – – – –
Between one and five years – – – –
Over five years 453 – 447 –
453 – 447 –
Notes to the Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
61
Accounts
15. Disclosure of fair values of derivative financial instruments
2009 2008
£000 £000
Forward foreign exchange contracts (812) (110)
The Group’s US based subsidiary, Walker Greenbank Inc., sells products to local customers with sales invoiced in US dollars. As the Group’s
presentation currency is sterling it is exposed to changes in the reported sterling value of these sales. The Group considers that it is highly
probable that future sales of this nature will continue to arise over at least the next 12 months. During the year Walker Greenbank PLC has
entered into monthly forward foreign exchange contracts up to January 2010, with a third party, to buy sterling and sell dollars. As at the reporting
date the fair value of the forward foreign contracts is a liability of £820,000 (2008: £110,000).
The Group make more purchases from the euro zone than sales made to the euro zone. As the Group’s presentation currency is sterling it is
exposed to changes in the reported sterling value of the purchases. The Group considers that it is highly probable that future purchases of this
nature will continue to arise over at least the next 12 months. During the second half of the year Walker Greenbank PLC has entered into monthly
forward foreign exchange contracts up to December 2009, with a third party, to buy euros and sell sterling. As at the reporting date the fair value
of the forward foreign contracts is an asset of £8,100 (2008: £nil).
16. Contingent liability
The Company is party to a cross guarantee relating to the borrowings of its subsidiary Abaris Holdings Limited under the funding arrangement
with Barclays Commercial Bank. Walker Greenbank PLC
Annual Report and Accounts 2009
62
Five Year Record
2005 2006 2007 2008 2009
UK GAAP UK GAAP IFRS IFRS IFRS
£000 £000 £000 £000 £000
Turnover 50,611 48,392 54,369 62,448 63,698
Overseas turnover by location of customer 19,724 18,916 18,374 20,908 22,672
Operating profit/(loss) (2,690) 5,018 3,757 3,961 3,561
Operating profit/(loss) before exceptional items and discontinued operations (3,062) 758 2,481 3,961 3,561
EBITDA (322) 2,845 4,323 5,783 5,407
Profit/(loss) before taxation (807) 2,625 2,694 3,099 2,787
Capital expenditure 1,187 710 1,447 1,797 1,527
Profit/(loss) per share (1.48p) 4.51p 4.67p 14.49p 2.96p
Average number of employees 613 539 548 586 594
Dividends – – – – –
Shareholders’ funds 7,070 8,597 12,943 20,799 19,911
Dividend per share – – – – –
The data for 2007 has been restated from UK GAAP to International Financial Reporting Standards. Data prior to 2007 has not been restated.
The operating loss for 2005 has been restated to reflect the impact of FRS 4.
EBITDA is based on operating profit before exceptional items.
Financial Calendar
Annual General Meeting 22 July 2009 Announcement of half-year results October 2009
Walker Greenbank PLC
Chalfont House
Oxford Road
Denham
UB9 4DX
T: 08708 300 365
F: 08708 300 364
www.walkergreenbank.com
Walker Greenbank PLC
Annual Report and Accounts 2009
63
Notes Walker Greenbank PLC
Annual Report and Accounts 2009
64
Notes Highlights from 2009
Contents
£63.70
m
Revenue up 2% (2008: £62.45 million) supported by
the continued progress of the Sanderson brand.
£2.79
m
Profit before taxation down 10% (2008: £3.10 million).
£3.56
m
Operating profit down 10% (2008: £3.96 million).
2.96
p
Earnings per share (2008: 14.49p). Adjusted
earnings per share 4.97p (2008: 5.44p) after
excluding the impact of deferred tax.
31 %
Gearing reduced to 31% (2008: 35%) with Shareholders’
Funds of £19.91 million (2008: £20.80 million) and
interest cover improved to 5.1 times (2008: 4.0 times).
Overview
02 Our business at a glance
06 Our brands
07 Our manufacturing
08 Chairman’s Statement
10 Chief Executive’s Review
12 Financial Review
14 Directors and Advisers
Directors’ Report
16 Report of the Directors
18 Statement of Directors’ Responsibilities
Accounts
19 Independent Auditors’ Report on
Consolidated Financial Statements
20 Consolidated Income Statement
21 Consolidated Statement of Recognised
Income and Expense
22 Consolidated Balance Sheet
23 Consolidated Cash Flow Statement
24 Notes to the Consolidated Accounts
52 Independent Auditors’ Report on
Company Financial Statements
53 Company Balance Sheet
54 Notes to the Accounts
62 Five Year Record
Inside back cover: Collection - Arkona
Design - Deco & Amalfi
Right: Le Temple De Jupiter, Chantemerle
Papers, Zoffany.
Walker Greenbank PLC is a luxury interiors group whose brands
include Harlequin, Sanderson, Morris & Co. and Zoffany. Our
brands are targeted at the mid to upper end of the premium market.
They have worldwide distribution including prestigious showrooms
at Chelsea Harbour, London and the D&D building, Manhattan,
New York. Half of the brand’s turnover is sourced in-house from
the Group’s own specialist manufacturing facilities. 2009
ANNUAL REPORT AND ACCOUNTS
Walker Greenbank PLC
Luxury interior
furnishings group
www.walkergreenbank.com Walker Greenbank PLC
Chalfont House
Oxford Road
Denham
UB9 4DX
T: 08708 300 365
F: 08708 300 364
Walker Greenbank PLC ANNUAL REPORT AND ACCOUNTS 2009 | Walker Greenbank PLC
Annual Report and Accounts 2009
10
Chief Executive’s
Review
Strategy
Despite the turbulent economic conditions in
which we are trading, we remain committed
to the five key elements of our growth strategy
which is supported by the Group’s cash
generation and a robust balance sheet.
In addition we benefit from world renowned
brands all of which can be expected to
return to strong growth on any upturn in
the trading environment. The key elements
of the strategy comprise:
UK growth – to continue to exploit >
the medium term organic growth
opportunities that exist for our Group in
the UK retail market.
Geographic expansion – to invest in >
marketing and distribution in the North
American market, where our Group is
currently immature relative to our peers,
and to focus on the distribution and
marketing of our brands in Europe and the
Rest of the World, where again as a Group
we are presently underdeveloped.
Contract sales – to drive the expansion of >
our developing contracts business through
further investment in people and contract
specific product supported by the strength
of our brand names and our manufacturing
capability, predominantly focusing at the
mid to upper end of the contract market;
Licensing income – to exploit the global >
recognition of the Sanderson and Morris &
Co. brand names and to develop further
the licensing opportunities that exist for
Harlequin in the UK.
Acquisitions – to evaluate acquisition >
opportunities that may fit with our current
brand portfolio and potentially provide
synergistic and earnings enhancing
opportunities.
Overview
Our brand sales have remained flat in the UK
retail market. In mainland Europe, retail sales
have grown 10% due to the strength of the
euro, although this equates to a 4% decline in
constant currency. In the Rest of the World
sales have grown by 16%. Sales in our US
retail business, which remains a relatively
small part of our Group, have increased 3%
due to the strength of the dollar, but fallen 7%
in constant currency. Within our brand
segment our Contract business continues to
benefit from strong investment and has
delivered 17% year on year growth. Our
licence business has grown 21% reflecting the
strength of our brands and their potential to
stretch into adjacent categories. Finally, our
manufacturing units have suffered from the
overall decline in the market with their third
party sales falling 9%.
The brands
Total sales have grown year on year by 5%
reflecting no growth in sales in the second
half due to a much tougher trading
environment, sales having been up 10% at the
Collection - Pasha
Design - Pasha
Hana, Options 9, Sanderson Walker Greenbank PLC
Annual Report and Accounts 2009
11
Overview
brands, the factories print for third party
customers.
Anstey
Anstey continues to benefit from the demand
for wallpaper and its unique position as
market leader in the UK for wallpaper
manufacture at the mid to premium end of the
market. Overall sales have grown year on year
by 4%, sales having been up at the half year
by 5%. Sales to Group company brands have
grown 5% representing 51% of the overall
sales, whilst external third party sales have
grown 2%, reflecting the relative success of
our brands in difficult markets. Margins have
fallen slightly due to increased energy costs
and overall profitability has slightly improved
over the same period last year. We remain
focused on improving factory efficiency and
service to our customers.
Standfast
Standfast has suffered particularly difficult
trading conditions with overall sales falling 9%
over the same period last year, sales were
down 3% at the half year. Sales to Group
company brands which represent 41% of the
overall sales were up 3%, whilst external third
party sales fell 16%, suggesting our Group
brands are performing well in very difficult
market conditions. Standfast has suffered
margin decline due to less production
throughput in the factory and increased
energy costs, two factors which combined
with the sales fall has led to a loss in the year.
At the beginning of the second half of the year
management took action to reduce the cost
base of this business in order to reflect the
lower level of volume activity, resulting in a
redundancy cost of £146,000.
Summary
All of our brands continue to perform
competitively in a difficult market. The
considerable investment we have made in
product and marketing in recent years places
us in a strong position to withstand the
current economic environment and ultimately
exploit the continuing and new business
opportunities that exist within the Group.
We remain confident about the progress the
Group will make in the medium term given
the global recognition of its brands and the
robustness of the Group’s finances.
John Sach
Group Chief Executive
17 June 2009
half year. Over recent years we have strongly
increased our investment in our product
launches across all our brands and this has
helped protect our market share in a much
tougher trading environment. We have a
strong portfolio of brands covering a wide
variety of market segments in the mid to
upper end of the interior furnishings market,
supported by a wide offering of product. We
are however conscious of the tougher market
in which we operate and, going forward, will
keep tight control of the amount of product
we launch to reduce cost while the current
economic environment prevails.
Harlequin
Despite increasingly tough market conditions
in the second half, it is pleasing to report that
Harlequin has managed to maintain its sales
at the same level as last year having been 7%
up at the half year and to continue its position
as the leading mid-market contemporary
brand in the UK. Overall both the UK market
and export markets were essentially flat.
However, within our export markets, Europe
was down year on year by 7% and by 14% in
constant currency. This was offset by growth
in the emerging markets of the Far East,
Middle East and Australia where overall sales
were up 21%. Woven product continued to
grow, up 4% on the same period last year,
whilst wallpaper sales declined by 4% and
printed fabrics declined by 8%.
Continued commitment and investment in our
Contract business has helped grow year on
year sales by 19%. Harlequin has also grown
its licensing income principally with the
development of a range of product lines in
the John Lewis Partnership. More than half of
Harlequin’s sales are from woven product
which is sourced primarily from Europe. For
this product category the gross margins have
declined due to the strengthening of the euro
which has led to a fall in profits.
Zoffany
Having established Zoffany as a leading brand
at the premium end of the market and having
invested heavily in new product over recent
years, we reported last year that the design
community had shown increasing interest
in the older collections of Zoffany and that
this had reinvigorated the sales of those
collections. This year we have experienced
an accelerating decline of those older
collections but in their place our newer
collections have performed well.
Overall year on year sales have declined 1%
having been up 7% at the half year. UK sales
declined 2% but export markets continued to
see overall growth of 5%, with Europe
growing 6%, representing an 11% decline in
constant currency and the Rest of the World
up 5% helped by strong growth from the
Middle East and Australasia. Woven fabric,
which now represents more than half of
Zoffany’s sales, grew 2% with both wallpaper
and printed fabrics having declined by 1%
each. Zoffany’s Contract business has grown
year on year 2%. The strong euro has led to a
decline in margins and this combined with
additional stock provisioning due to the faster
decline of the older collections has led to a
reduction in profits.
Arthur Sanderson & Sons incorporating
the Morris & Co. brand
Significant investment in product and
marketing over recent years has helped
Sanderson to exploit the unrivalled global
recognition of the Sanderson and Morris &
Co. brand names and to grow its sales this
year by 15%, having been up 25% at the half
year. The growth continues to be broad-
based with all geographic markets growing
strongly. The UK market delivered year on
year sales growth of 9% whilst overseas
markets were up 31%. This impressive export
sales growth was driven by European markets
up 32%, 17% in constant currency and the
Rest of the World up 28%. The growth has
been led by woven fabric, up by 22%, with
wallpaper up 19% and printed fabrics up 4%.
The growth has been supported by strong
progress in its Contract business up 34%.
Gross margins improved as the strengthening
euro benefited margins with Sanderson selling
more in Europe than it purchases. This margin
gain combined with the sales growth has
helped to improve profits significantly.
Overseas
USA
Sales in our US business have increased year
on year by 7% however they have fallen in
constant currency by 4% due to the
strengthening dollar. Sales at the half year in
local currency were broadly flat. The US still
forms a relatively small part of the overall
Group but we firmly believe in the medium to
long term potential for the Group in this
market. However economic conditions are
becoming increasingly challenging and whilst
this prevails we will remain tightly focused on
the level of investment in marketing,
patterning and sample support. Lower sales
have led to a continued loss.
Europe
The Group’s distribution businesses in Rome,
for Zoffany and Harlequin, and in Paris, for
Zoffany and Sanderson, remain relatively small.
Both these markets saw challenging trading
conditions but the appointment of an
experienced Export development director
towards the end of last year brought
improvements to both operations. Combined
revenues have increased by 14%, representing
a decline of 3% in constant currency.
Manufacturing
We have two freehold printing facilities in the
UK: Anstey, our wallpaper factory in
Loughborough; and Standfast, our fabric
printing factory in Lancaster. Both factories
offer highly specialised printing, and their UK
location brings benefits including the ability to
print very short runs and easy accessibility for
UK designers to visit the factories during the
printing process. In addition to printing the
wallpaper and fabrics for the Group’s own | 02
Walker Greenbank PLC
Annual Report and Accounts 2009
Our business
at a glance
Our Brands
Collection - Identity
Design - Perception
Harlequin
Harlequin is a core supplier of high quality, design lead
collections to the mid to premium end of the worldwide
furnishings market.
Sanderson
Founded in 1860 and granted a Royal warrant in 1923,
Sanderson is one of the most renowned brands in interiors
worldwide, offering classic, inspirational product often based
on documents from its extensive archive. It is aimed at the mid
to upper end of the interiors market.
Morris & Co.
The Morris & Co. business has a heritage that dates back to
the mid 19th century when it was founded by William Morris,
the acclaimed designer. Its unique heritage is preserved
in the modern interpretation of its high quality fabrics
and wallcoverings.
Zoffany
Zoffany offers a range of products of the highest quality
including wallpaper, fabrics, trimmings, carpets, paint and
furniture. The designs are inspired by the rich traditions of
the past but look equally at home in contemporary interiors.
Walker Greenbank PLC is a luxury interior furnishings group
of companies which design, manufacture, market and distribute
wallcoverings, furnishing fabrics and associated products for
the consumer market. 03
Overview
Walker Greenbank PLC
Annual Report and Accounts 2009
Anstey
Anstey Wallpaper Company is the world’s leading
specialist commission printer. The business operates
at the premium end of the market, offering a unique
combination of design, printing and finishing of
wallcoverings by gravure, rotary, flexo, surface,
screen and hand block printing methods. As well
as producing for the Walker Greenbank brands it
also produces for third party customers.
Standfast
Standfast & Barracks is situated in Lancaster and
was bought by Walker Greenbank in March 2000.
The business is acknowledged as a worldwide leader
in its field. Standfast specialises in high quality volume
vat printing and dyeing, and rotary screen-printing of
fabrics. Barracks specialises in flatbed printing,
concentrating on very high specification for the
exclusive furnishing and apparel markets, printing
on a wide range of fabrics.
USA
Our distribution in the USA is carried out by Walker
Greenbank Inc. utilising third party showrooms
supported by Walker Greenbank Inc. offices based
in New Jersey and our own showroom in Manhattan.
France
Our distribution in France is by Arthur Sanderson
France through a network of sales agents, our own
sales force and a showroom in Rue du Mail, Paris.
Italy
We have a showroom and offices in Rome utilising
sales agents throughout the country.
Our Manufacturing Our Distribution
Oakwood, Options 9,
Sanderson.
Collection - Iznik
Design - Kasuri & Pasha 04
Walker Greenbank PLC
Annual Report and Accounts 2009
Our brands
www.harlequin.uk.com
Despite increasingly tough market conditions in the
second half, Harlequin has managed to maintain its
sales at the same level as last year having been 7% up
at the half year, and to continue its position as the
leading mid-market contemporary brand in the UK.
UK and Export markets flat >
Growth in emerging markets of the Far East, Middle East >
and Australia
Contract sales up 19% >
Collection - Iznik
Design - Kasuri & Pasha
Collection - Tamika
Design - Kimiko 05
Overview
Walker Greenbank PLC
Annual Report and Accounts 2009
www.sanderson-uk.com
Significant investment in product and marketing
over recent years has helped Sanderson to exploit
the unrivalled global recognition of the
Sanderson and Morris & Co brand names and to
grow its sales this year by 15%, having been up
25% at the half year.
UK growth 9% >
Export markets up 31% >
Contract sales up 34% >
Chrysanthemum,
Morris Volume V, Morris & Co.
Dandelion Clocks,
Options 9, Sanderson. | Walker Greenbank PLC
Annual Report and Accounts 2009
08
Chairman’s
Statement
Overview
The year started well with a continuation of
the strong growth momentum of recent years
but performance was impacted by the
economic downturn as the year progressed.
Total revenues increased by 2% for the year
with growth of 7% at the half year and a
decline of 3% in the second half. In
challenging market conditions our
performance was supported by successful
design innovation and our strong portfolio of
brands including Sanderson and Harlequin
positioned at the mid market and Morris & Co
and Zoffany at the upper end of the interior
furnishings market. Revenues from these
brands have grown year on year by 5%.
Collection - Tamika
Design - Miya
Approximately half our manufacturing output
was to third parties and this business
declined by 9% in contrast to production for
our own brands which increased by 4%.
We have strengthened our balance sheet
during the year reducing net debt at the year
end to £6,218,000 from £7,289,000 in 2008.
The current economic environment is clearly
unfavourable. However many global
opportunities are available to us in the
medium term and a clear strategy to develop
the Group for a strong future and to manage
the downturn is set out in the Chief
Executive’s Review. Walker Greenbank PLC
Annual Report and Accounts 2009
09
Overview
Financials
Revenue increased 2% to £63,698,000, from
£62,448,000 over the same period last year.
The operating profit for the year decreased
10% to £3,561,000 (2008: £3,961,000). The
profit before tax decreased 10% to
£2,787,000 (2008: £3,099,000). The profit
after tax declined to £1,622,000 (2008:
£8,171,000), due almost entirely to non-cash
deferred tax movements as a consequence of
the recognition for the first time last year of a
deferred tax asset. This related predominantly
to historical corporation tax losses.
The earnings per share were 2.96p (2008:
14.49p). An adjusted earnings per share that
excludes the deferred tax movements and
reflects the cash tax of the Group is 4.97p
(2008: 5.44p).
Interest cover increased to 5.1 times,
compared with 4.0 times last year.
The Group’s net indebtedness at the year end
reduced to £6,218,000 (2008: £7,289,000).
This represents a reduction in gearing to 31%
(2008: 35%). The cash inflow from operating
activities was £2,830,000 (2008: £3,542,000),
reflecting higher stock levels as a result of
extensive brand product launches during the
year. At the year end, the Group had available
banking facilities of £12,773,000 (2008:
£14,183,000) representing headroom of
£6,555,000 (2008: £6,894,000).
Dividend
The Directors do not recommend the
payment of a dividend at this point in time. In
this current economic environment we remain
focused on continued cash generation and
reduction in net debt.
People
On 31 January 2009, Ian Kirkham retired from
the Board. He has served as Non-executive
Chairman for a period of five years and during
that time has overseen the transformation of
the Group’s fortunes. I would like to offer our
grateful thanks to Ian on behalf of the Board.
Following Ian’s retirement, I am delighted to
have become Chairman at the start of the
2009/10 financial year.
On 17 December 2008, Fiona Goldsmith
joined the Board as a Non-executive Director.
Her extensive financial background across a
variety of business sectors will be of great
value to the Group in future years.
Finally I would like to offer sincere thanks to all
of our management and employees for their
loyalty and commitment during the year.
Outlook
Over the past five years the Group has
established itself as a leader in its field
increasing revenue and profits significantly,
Collection - Arkona Weaves
Design - Arcadia
generating cash and building a strong balance
sheet. In the current uncertain global
environment in which we operate we have
focused on reducing our cost base, improving
manufacturing efficiency and reducing net
debt. In addition we continue to invest in the
strength of our exceptional brand portfolio.
Revenues in the first half will be significantly
down on a buoyant period last year, though
the impact of this reduction will to some
extent be mitigated by our focus on costs and
efficiency. With a clear strategy and a robust
balance sheet we believe that the Group is
well positioned to take advantage of an upturn
in its markets.
Terry Stannard
Non-executive Chairman
17 June 2009 | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input 2009
ANNUAL REPORT AND ACCOUNTS
Walker Greenbank PLC
Luxury interior
furnishings group
www.walkergreenbank.com Walker Greenbank PLC
Chalfont House
Oxford Road
Denham
UB9 4DX
T: 08708 300 365
F: 08708 300 364
Walker Greenbank PLC ANNUAL REPORT AND ACCOUNTS 2009 Highlights from 2009
Contents
£63.70
m
Revenue up 2% (2008: £62.45 million) supported by
the continued progress of the Sanderson brand.
£2.79
m
Profit before taxation down 10% (2008: £3.10 million).
£3.56
m
Operating profit down 10% (2008: £3.96 million).
2.96
p
Earnings per share (2008: 14.49p). Adjusted
earnings per share 4.97p (2008: 5.44p) after
excluding the impact of deferred tax.
31 %
Gearing reduced to 31% (2008: 35%) with Shareholders’
Funds of £19.91 million (2008: £20.80 million) and
interest cover improved to 5.1 times (2008: 4.0 times).
Overview
02 Our business at a glance
06 Our brands
07 Our manufacturing
08 Chairman’s Statement
10 Chief Executive’s Review
12 Financial Review
14 Directors and Advisers
Directors’ Report
16 Report of the Directors
18 Statement of Directors’ Responsibilities
Accounts
19 Independent Auditors’ Report on
Consolidated Financial Statements
20 Consolidated Income Statement
21 Consolidated Statement of Recognised
Income and Expense
22 Consolidated Balance Sheet
23 Consolidated Cash Flow Statement
24 Notes to the Consolidated Accounts
52 Independent Auditors’ Report on
Company Financial Statements
53 Company Balance Sheet
54 Notes to the Accounts
62 Five Year Record
Inside back cover: Collection - Arkona
Design - Deco & Amalfi
Right: Le Temple De Jupiter, Chantemerle
Papers, Zoffany.
Walker Greenbank PLC is a luxury interiors group whose brands
include Harlequin, Sanderson, Morris & Co. and Zoffany. Our
brands are targeted at the mid to upper end of the premium market.
They have worldwide distribution including prestigious showrooms
at Chelsea Harbour, London and the D&D building, Manhattan,
New York. Half of the brand’s turnover is sourced in-house from
the Group’s own specialist manufacturing facilities. Walker Greenbank PLC
Annual Report and Accounts 2009
01
Overview
Luxury
interior
furnishings
group 02
Walker Greenbank PLC
Annual Report and Accounts 2009
Our business
at a glance
Our Brands
Collection - Identity
Design - Perception
Harlequin
Harlequin is a core supplier of high quality, design lead
collections to the mid to premium end of the worldwide
furnishings market.
Sanderson
Founded in 1860 and granted a Royal warrant in 1923,
Sanderson is one of the most renowned brands in interiors
worldwide, offering classic, inspirational product often based
on documents from its extensive archive. It is aimed at the mid
to upper end of the interiors market.
Morris & Co.
The Morris & Co. business has a heritage that dates back to
the mid 19th century when it was founded by William Morris,
the acclaimed designer. Its unique heritage is preserved
in the modern interpretation of its high quality fabrics
and wallcoverings.
Zoffany
Zoffany offers a range of products of the highest quality
including wallpaper, fabrics, trimmings, carpets, paint and
furniture. The designs are inspired by the rich traditions of
the past but look equally at home in contemporary interiors.
Walker Greenbank PLC is a luxury interior furnishings group
of companies which design, manufacture, market and distribute
wallcoverings, furnishing fabrics and associated products for
the consumer market. 03
Overview
Walker Greenbank PLC
Annual Report and Accounts 2009
Anstey
Anstey Wallpaper Company is the world’s leading
specialist commission printer. The business operates
at the premium end of the market, offering a unique
combination of design, printing and finishing of
wallcoverings by gravure, rotary, flexo, surface,
screen and hand block printing methods. As well
as producing for the Walker Greenbank brands it
also produces for third party customers.
Standfast
Standfast & Barracks is situated in Lancaster and
was bought by Walker Greenbank in March 2000.
The business is acknowledged as a worldwide leader
in its field. Standfast specialises in high quality volume
vat printing and dyeing, and rotary screen-printing of
fabrics. Barracks specialises in flatbed printing,
concentrating on very high specification for the
exclusive furnishing and apparel markets, printing
on a wide range of fabrics.
USA
Our distribution in the USA is carried out by Walker
Greenbank Inc. utilising third party showrooms
supported by Walker Greenbank Inc. offices based
in New Jersey and our own showroom in Manhattan.
France
Our distribution in France is by Arthur Sanderson
France through a network of sales agents, our own
sales force and a showroom in Rue du Mail, Paris.
Italy
We have a showroom and offices in Rome utilising
sales agents throughout the country.
Our Manufacturing Our Distribution
Oakwood, Options 9,
Sanderson.
Collection - Iznik
Design - Kasuri & Pasha 04
Walker Greenbank PLC
Annual Report and Accounts 2009
Our brands
www.harlequin.uk.com
Despite increasingly tough market conditions in the
second half, Harlequin has managed to maintain its
sales at the same level as last year having been 7% up
at the half year, and to continue its position as the
leading mid-market contemporary brand in the UK.
UK and Export markets flat >
Growth in emerging markets of the Far East, Middle East >
and Australia
Contract sales up 19% >
Collection - Iznik
Design - Kasuri & Pasha
Collection - Tamika
Design - Kimiko 05
Overview
Walker Greenbank PLC
Annual Report and Accounts 2009
www.sanderson-uk.com
Significant investment in product and marketing
over recent years has helped Sanderson to exploit
the unrivalled global recognition of the
Sanderson and Morris & Co brand names and to
grow its sales this year by 15%, having been up
25% at the half year.
UK growth 9% >
Export markets up 31% >
Contract sales up 34% >
Chrysanthemum,
Morris Volume V, Morris & Co.
Dandelion Clocks,
Options 9, Sanderson. 06
Walker Greenbank PLC
Annual Report and Accounts 2009
Our brands
www.zoffany.com
Having established Zoffany as a leading brand at the
premium end of the market and having invested
heavily in new product over recent years, we reported
last year that the design community had shown
increasing interest in the older collections of Zoffany
and that this had reinvigorated the sales of those
collections. This year we have experienced an
accelerating decline of those older collections but in
their place our newer collections have performed well.
Overall year on year sales have declined 1% having
been up 7% at the half year.
UK sales declined 2% >
Export markets up 5% >
Contract sales up 2% >
Anjolie & Venice collections, Zoffany.
Anjolie & Venice collections, Zoffany. 07
Overview
Walker Greenbank PLC
Annual Report and Accounts 2009
Our manufacturing
Anstey
Standfast
www.anstey.uk.com www.standfast-barracks.com
Anstey continues to benefit from the demand for
wallpaper and its unique position as market
leader in the UK for wallpaper manufacture
at the mid to premium end of the market.
Overall sales have grown year on year by 4%,
sales having been up at the half year by 5%.
Third party sales up 2% >
Sales to Group brands represents 51% >
Standfast has suffered particularly difficult trading
conditions with overall sales falling 9% over the same
period last year, sales were down 3% at the half year.
Third party sales down 16% >
Sales to Group brands represents 41% > Walker Greenbank PLC
Annual Report and Accounts 2009
08
Chairman’s
Statement
Overview
The year started well with a continuation of
the strong growth momentum of recent years
but performance was impacted by the
economic downturn as the year progressed.
Total revenues increased by 2% for the year
with growth of 7% at the half year and a
decline of 3% in the second half. In
challenging market conditions our
performance was supported by successful
design innovation and our strong portfolio of
brands including Sanderson and Harlequin
positioned at the mid market and Morris & Co
and Zoffany at the upper end of the interior
furnishings market. Revenues from these
brands have grown year on year by 5%.
Collection - Tamika
Design - Miya
Approximately half our manufacturing output
was to third parties and this business
declined by 9% in contrast to production for
our own brands which increased by 4%.
We have strengthened our balance sheet
during the year reducing net debt at the year
end to £6,218,000 from £7,289,000 in 2008.
The current economic environment is clearly
unfavourable. However many global
opportunities are available to us in the
medium term and a clear strategy to develop
the Group for a strong future and to manage
the downturn is set out in the Chief
Executive’s Review. Walker Greenbank PLC
Annual Report and Accounts 2009
09
Overview
Financials
Revenue increased 2% to £63,698,000, from
£62,448,000 over the same period last year.
The operating profit for the year decreased
10% to £3,561,000 (2008: £3,961,000). The
profit before tax decreased 10% to
£2,787,000 (2008: £3,099,000). The profit
after tax declined to £1,622,000 (2008:
£8,171,000), due almost entirely to non-cash
deferred tax movements as a consequence of
the recognition for the first time last year of a
deferred tax asset. This related predominantly
to historical corporation tax losses.
The earnings per share were 2.96p (2008:
14.49p). An adjusted earnings per share that
excludes the deferred tax movements and
reflects the cash tax of the Group is 4.97p
(2008: 5.44p).
Interest cover increased to 5.1 times,
compared with 4.0 times last year.
The Group’s net indebtedness at the year end
reduced to £6,218,000 (2008: £7,289,000).
This represents a reduction in gearing to 31%
(2008: 35%). The cash inflow from operating
activities was £2,830,000 (2008: £3,542,000),
reflecting higher stock levels as a result of
extensive brand product launches during the
year. At the year end, the Group had available
banking facilities of £12,773,000 (2008:
£14,183,000) representing headroom of
£6,555,000 (2008: £6,894,000).
Dividend
The Directors do not recommend the
payment of a dividend at this point in time. In
this current economic environment we remain
focused on continued cash generation and
reduction in net debt.
People
On 31 January 2009, Ian Kirkham retired from
the Board. He has served as Non-executive
Chairman for a period of five years and during
that time has overseen the transformation of
the Group’s fortunes. I would like to offer our
grateful thanks to Ian on behalf of the Board.
Following Ian’s retirement, I am delighted to
have become Chairman at the start of the
2009/10 financial year.
On 17 December 2008, Fiona Goldsmith
joined the Board as a Non-executive Director.
Her extensive financial background across a
variety of business sectors will be of great
value to the Group in future years.
Finally I would like to offer sincere thanks to all
of our management and employees for their
loyalty and commitment during the year.
Outlook
Over the past five years the Group has
established itself as a leader in its field
increasing revenue and profits significantly,
Collection - Arkona Weaves
Design - Arcadia
generating cash and building a strong balance
sheet. In the current uncertain global
environment in which we operate we have
focused on reducing our cost base, improving
manufacturing efficiency and reducing net
debt. In addition we continue to invest in the
strength of our exceptional brand portfolio.
Revenues in the first half will be significantly
down on a buoyant period last year, though
the impact of this reduction will to some
extent be mitigated by our focus on costs and
efficiency. With a clear strategy and a robust
balance sheet we believe that the Group is
well positioned to take advantage of an upturn
in its markets.
Terry Stannard
Non-executive Chairman
17 June 2009 Walker Greenbank PLC
Annual Report and Accounts 2009
10
Chief Executive’s
Review
Strategy
Despite the turbulent economic conditions in
which we are trading, we remain committed
to the five key elements of our growth strategy
which is supported by the Group’s cash
generation and a robust balance sheet.
In addition we benefit from world renowned
brands all of which can be expected to
return to strong growth on any upturn in
the trading environment. The key elements
of the strategy comprise:
UK growth – to continue to exploit >
the medium term organic growth
opportunities that exist for our Group in
the UK retail market.
Geographic expansion – to invest in >
marketing and distribution in the North
American market, where our Group is
currently immature relative to our peers,
and to focus on the distribution and
marketing of our brands in Europe and the
Rest of the World, where again as a Group
we are presently underdeveloped.
Contract sales – to drive the expansion of >
our developing contracts business through
further investment in people and contract
specific product supported by the strength
of our brand names and our manufacturing
capability, predominantly focusing at the
mid to upper end of the contract market;
Licensing income – to exploit the global >
recognition of the Sanderson and Morris &
Co. brand names and to develop further
the licensing opportunities that exist for
Harlequin in the UK.
Acquisitions – to evaluate acquisition >
opportunities that may fit with our current
brand portfolio and potentially provide
synergistic and earnings enhancing
opportunities.
Overview
Our brand sales have remained flat in the UK
retail market. In mainland Europe, retail sales
have grown 10% due to the strength of the
euro, although this equates to a 4% decline in
constant currency. In the Rest of the World
sales have grown by 16%. Sales in our US
retail business, which remains a relatively
small part of our Group, have increased 3%
due to the strength of the dollar, but fallen 7%
in constant currency. Within our brand
segment our Contract business continues to
benefit from strong investment and has
delivered 17% year on year growth. Our
licence business has grown 21% reflecting the
strength of our brands and their potential to
stretch into adjacent categories. Finally, our
manufacturing units have suffered from the
overall decline in the market with their third
party sales falling 9%.
The brands
Total sales have grown year on year by 5%
reflecting no growth in sales in the second
half due to a much tougher trading
environment, sales having been up 10% at the
Collection - Pasha
Design - Pasha
Hana, Options 9, Sanderson Walker Greenbank PLC
Annual Report and Accounts 2009
11
Overview
brands, the factories print for third party
customers.
Anstey
Anstey continues to benefit from the demand
for wallpaper and its unique position as
market leader in the UK for wallpaper
manufacture at the mid to premium end of the
market. Overall sales have grown year on year
by 4%, sales having been up at the half year
by 5%. Sales to Group company brands have
grown 5% representing 51% of the overall
sales, whilst external third party sales have
grown 2%, reflecting the relative success of
our brands in difficult markets. Margins have
fallen slightly due to increased energy costs
and overall profitability has slightly improved
over the same period last year. We remain
focused on improving factory efficiency and
service to our customers.
Standfast
Standfast has suffered particularly difficult
trading conditions with overall sales falling 9%
over the same period last year, sales were
down 3% at the half year. Sales to Group
company brands which represent 41% of the
overall sales were up 3%, whilst external third
party sales fell 16%, suggesting our Group
brands are performing well in very difficult
market conditions. Standfast has suffered
margin decline due to less production
throughput in the factory and increased
energy costs, two factors which combined
with the sales fall has led to a loss in the year.
At the beginning of the second half of the year
management took action to reduce the cost
base of this business in order to reflect the
lower level of volume activity, resulting in a
redundancy cost of £146,000.
Summary
All of our brands continue to perform
competitively in a difficult market. The
considerable investment we have made in
product and marketing in recent years places
us in a strong position to withstand the
current economic environment and ultimately
exploit the continuing and new business
opportunities that exist within the Group.
We remain confident about the progress the
Group will make in the medium term given
the global recognition of its brands and the
robustness of the Group’s finances.
John Sach
Group Chief Executive
17 June 2009
half year. Over recent years we have strongly
increased our investment in our product
launches across all our brands and this has
helped protect our market share in a much
tougher trading environment. We have a
strong portfolio of brands covering a wide
variety of market segments in the mid to
upper end of the interior furnishings market,
supported by a wide offering of product. We
are however conscious of the tougher market
in which we operate and, going forward, will
keep tight control of the amount of product
we launch to reduce cost while the current
economic environment prevails.
Harlequin
Despite increasingly tough market conditions
in the second half, it is pleasing to report that
Harlequin has managed to maintain its sales
at the same level as last year having been 7%
up at the half year and to continue its position
as the leading mid-market contemporary
brand in the UK. Overall both the UK market
and export markets were essentially flat.
However, within our export markets, Europe
was down year on year by 7% and by 14% in
constant currency. This was offset by growth
in the emerging markets of the Far East,
Middle East and Australia where overall sales
were up 21%. Woven product continued to
grow, up 4% on the same period last year,
whilst wallpaper sales declined by 4% and
printed fabrics declined by 8%.
Continued commitment and investment in our
Contract business has helped grow year on
year sales by 19%. Harlequin has also grown
its licensing income principally with the
development of a range of product lines in
the John Lewis Partnership. More than half of
Harlequin’s sales are from woven product
which is sourced primarily from Europe. For
this product category the gross margins have
declined due to the strengthening of the euro
which has led to a fall in profits.
Zoffany
Having established Zoffany as a leading brand
at the premium end of the market and having
invested heavily in new product over recent
years, we reported last year that the design
community had shown increasing interest
in the older collections of Zoffany and that
this had reinvigorated the sales of those
collections. This year we have experienced
an accelerating decline of those older
collections but in their place our newer
collections have performed well.
Overall year on year sales have declined 1%
having been up 7% at the half year. UK sales
declined 2% but export markets continued to
see overall growth of 5%, with Europe
growing 6%, representing an 11% decline in
constant currency and the Rest of the World
up 5% helped by strong growth from the
Middle East and Australasia. Woven fabric,
which now represents more than half of
Zoffany’s sales, grew 2% with both wallpaper
and printed fabrics having declined by 1%
each. Zoffany’s Contract business has grown
year on year 2%. The strong euro has led to a
decline in margins and this combined with
additional stock provisioning due to the faster
decline of the older collections has led to a
reduction in profits.
Arthur Sanderson & Sons incorporating
the Morris & Co. brand
Significant investment in product and
marketing over recent years has helped
Sanderson to exploit the unrivalled global
recognition of the Sanderson and Morris &
Co. brand names and to grow its sales this
year by 15%, having been up 25% at the half
year. The growth continues to be broad-
based with all geographic markets growing
strongly. The UK market delivered year on
year sales growth of 9% whilst overseas
markets were up 31%. This impressive export
sales growth was driven by European markets
up 32%, 17% in constant currency and the
Rest of the World up 28%. The growth has
been led by woven fabric, up by 22%, with
wallpaper up 19% and printed fabrics up 4%.
The growth has been supported by strong
progress in its Contract business up 34%.
Gross margins improved as the strengthening
euro benefited margins with Sanderson selling
more in Europe than it purchases. This margin
gain combined with the sales growth has
helped to improve profits significantly.
Overseas
USA
Sales in our US business have increased year
on year by 7% however they have fallen in
constant currency by 4% due to the
strengthening dollar. Sales at the half year in
local currency were broadly flat. The US still
forms a relatively small part of the overall
Group but we firmly believe in the medium to
long term potential for the Group in this
market. However economic conditions are
becoming increasingly challenging and whilst
this prevails we will remain tightly focused on
the level of investment in marketing,
patterning and sample support. Lower sales
have led to a continued loss.
Europe
The Group’s distribution businesses in Rome,
for Zoffany and Harlequin, and in Paris, for
Zoffany and Sanderson, remain relatively small.
Both these markets saw challenging trading
conditions but the appointment of an
experienced Export development director
towards the end of last year brought
improvements to both operations. Combined
revenues have increased by 14%, representing
a decline of 3% in constant currency.
Manufacturing
We have two freehold printing facilities in the
UK: Anstey, our wallpaper factory in
Loughborough; and Standfast, our fabric
printing factory in Lancaster. Both factories
offer highly specialised printing, and their UK
location brings benefits including the ability to
print very short runs and easy accessibility for
UK designers to visit the factories during the
printing process. In addition to printing the
wallpaper and fabrics for the Group’s own Walker Greenbank PLC
Annual Report and Accounts 2009
12
Financial
Review
Income Statement and exceptional items
The Chairman’s Statement and Chief
Executive’s Review provide an analysis of the
key factors impacting the revenue and operating
profit. In addition to the information on our
brands and production facilities included in
these reports, the Group has included in note
4 of the Consolidated Financial Statements,
information on our business segments.
Disposals
There were no major disposals during the year.
Interest
The net interest charge for the year was
£695,000 (2008: £981,000) including
amortisation of debt issue costs capitalised.
The reduced cost reflects the reduction in
interest rates over the year.
Net defined benefit pension
The charge during the year was £79,000
(2008: income £119,000). This is a
consequence of the increase in corporate
bond rates from the start of the financial year
compared with that at the beginning of the
previous year. The charge is also impacted if
the pension deficit increases which will be the
case in the coming year.
Mereville, Sanderson
Current taxation
There is a small corporation tax charge arising
from the taxable profits at the Italian subsidiary
and overseas licence income. The Group
continues to review the overseas tax position
to ensure every opportunity is considered to
minimise the amount incurred.
Deferred taxation
Due to the substantial nature of corporation
tax losses £21.3 million (2008: £23.7 million)
the Group does not anticipate incurring or
paying UK corporation tax in the immediate
future. However, as the majority of the
corporation tax losses have now been
recognised as a deferred tax asset, in the
current and future years there will be a
deferred tax charge in the Income Statement
until such time as the losses have been fully
utilised at which point the Group will incur and
pay UK corporation tax.
There is a one-off deferred tax charge of
£320,000 arising from the phasing out of
Industrial Building Allowances in the Finance
Act 2008.
The Group also continues to recognise the
deferred tax asset arising from the Pension
Deficit. As the Pension Deficit has increased
during the year an increase in the associated
deferred tax asset has been recognised.
Earnings per share (‘EPS’)
Last year the Group recognised a deferred
tax asset of £5,101,000 as the Group was,
and remains, confident of utilising historical
corporation tax losses as a result of
foreseeable sustainable future profits.
The impact of deferred tax in both years has
been removed in the analysis of adjusted EPS
discussed below, to enable better comparison
of the underlying performance of the Group.
The basic and diluted EPS was 2.96p (2008:
14.49p). The adjusted EPS was 4.97p for the
current year (2008: 5.44p), and is calculated
as follows:
2009 2008
£000 £000
Profit after tax per
the accounts 1,622 8,171
Exclude the impact
of deferred tax 1,108 (5,101)
Adjusted profit after tax 2,730 3,070
Adjusted EPS 4.97p 5.44p
The number of shares in issue remained
constant, however, on 1 July 2008 275,000
shares were purchased and brought into
Treasury. The weighted average number of
shares reduced to 54,880,000 for the year
ended 31 January 2009 from 56,397,000 in
the year ended 31 January 2008.
Walker Greenbank PLC
Annual Report and Accounts 2009
13
Overview
Operating cash flow
The Group generated net cash inflow from
operating activities during the year of
£2,830,000 (2008: £3,542,000) reflecting
higher stock levels as a result of extensive
brand product launches during the year.
The Group paid interest of £704,000 (2008:
£956,000) and capital expenditure of
£1,687,000 (2008: £1,674,000). Due to the
timing of actual payments the additions in the
fixed asset notes were £1,500,000 (2008:
£1,797,000). The depreciation and
amortisation charge during the period of
£1,846,000 (2008: £1,822,000) continue to be
greater than required capital expenditure.
The Group made additional payments to the
pension schemes of £1,052,000 (2008:
£1,059,000) to reduce the deficit, part of the
ongoing planned reduction, along with
£275,000 (2008: £231,000) of regular
contributions to fund scheme expenses.
The Group purchased 275,000 shares at a
cost of £83,000 in July 2008.
Net debt in the Group has reduced by
£1,071,000 to £6,218,000 (2008: £7,289,000).
Net debt to EBITDA ratio improved to 1.1
(2008: 1.3) and is set out below;
2009 2008
EBITDA £000 £000
Profit after tax 1,622 8,171
Interest 774 862
Tax 1,165 (5,072)
Depreciation and
amortisation 1,846 1,822
EBITDA 5,407 5,783
Net debt 6,218 7,289
Net debt : EBITDA 1.1 1.3
Pension deficit
The pension deficit has increased this year.
The key factors affecting the movement in the
deficit have been; firstly ongoing contributions
of £1,327,000 from the Company to reduce
the deficit; secondly a reduction in the
liabilities of the scheme arising predominantly
from the increase in discount rates during the
year and lastly the significant reduction in
scheme assets due to the current economic
climate. The impact of these factors is shown
as follows:
2009
£000
Deficit at beginning of period (3,409)
Scheme expenses (275)
Other finance income 196
Contributions 1,327
Actuarial loss on scheme assets (7,458)
Actuarial gains from the
change in discount factor 5,458
Gross deficit at the end of the year (4,161)
Long-Term Incentive Plan
There have not been any further awards
during the year under the Long-Term Incentive
Plan (‘LTIP’). There has been a charge of
£373,000 (2008: £429,000) in the Income
Statement for current awards.
Gearing
The gearing level for the Group fell during the
year to 31% at 31 January 2009 (2008: 35%).
Funding
The Group utilises facilities provided by
Barclays Bank Plc. The facilities were put in
place on 17 July 2007 replacing previous
facilities from another provider. There is a 10
year term property facility of £3,400,000 (2008:
£3,800,000) at the year end.
There is also a facility linked to working capital
which allows the Group to manage its cash
more effectively during the seasonal
fluctuations in working capital associated with
the industry in which the Group operates. This
facility has an initial three year term. The
borrowings at the end of the year under this
facility were £3,868,000 (2008: £5,506,000).
The available facility at the end of the year was
£9,373,000 (2008: £10,383,000) of which
£3,000,000 (2008: £3,000,000) is from a stock
facility which is effectively permanently
available due to the level of stocks in the
Group. The remainder of the working capital
facility arises from trade debtors and fluctuates
with the level of trade debtors. The total
facilities have a current limit of £16.4m.
All of the Group bank facilities remain secured
by first fixed and floating charges over the
Group’s assets.
Going concern
The Directors are confident, after having made
appropriate enquiries that the Group and
Company have adequate resources to
continue in the foreseeable future. For this
reason they continue to adopt the going
concern basis in preparing the accounts.
Treasury policy
The Group’s treasury policy is controlled
centrally in accordance with procedures
approved by the Board. It is run prudently as
a central Group function, providing services to
the other Group companies and adopts a risk
averse strategy.
The main risks covered by this policy are
interest rate risk, foreign currency risk and
liquidity risk.
Interest rate risk
The Group has continued to maintain its debt
in floating rate instruments in order to benefit
from the lower rates available and the
increasing reduction in borrowings. This
policy remains constantly under review to
ensure interest cost is minimised. The viability
of hedging instruments that would limit the
impact of interest rate movements will
continue to be reviewed based on the Board’s
perception of future rate increases and the
reducing level of borrowings.
Foreign currency risk
All foreign currencies are bought and sold
centrally on behalf of the Group. Regular
reviews take place of the foreign currency
cash flows and unmatched exposures are
covered by forward contracts wherever
economically practical.
The Group does not trade in financial
instruments and hedges are only used for
anticipated cash flows. There is a hedging
reserve of £812,000 (2008: £110,000) at the
end of the year.
The fluctuation in exchange rates during the
year has benefited the trading at the US
subsidiary but conversely the strengthening
euro has impacted negatively at the brands as
more product is sourced in euro than sold.
Liquidity risk
The Group ensures that it has adequate
facilities available to cover both its short term
and medium term commitments. The facility
available at the end of the year was
£12,773,000 (2008: £14,183,000) which
represents an additional borrowing capacity
of £6,555,000 (2008: £6,894,000).
Credit risk
The Group seeks to obtain credit insurance
on all its significant overseas customers.
However, credit insurers have been taking a
much more conservative position in recent
months on the level of credit insurance
provided or the insurance has even been
removed. The aging profile of trade debtors
shows that customers do pay to terms or
soon thereafter. Where credit insurance has
been removed and the customer has kept to
terms internal credit limits are set and strictly
adhered to, otherwise internal credit limits are
reduced and then strictly adhered to.
Alan Dix
Group Finance Director
17 June 2009 Walker Greenbank PLC
Annual Report and Accounts 2009
14
Overview
Directors
and Advisers
Terry Stannard (59)
Non-executive Chairman (A, R, N)
Terry joined the Board as a Non-executive
Director in September 2007 and became
Non-executive Chairman on 31 January 2009
following the retirement of Ian Kirkham from
the Board. He has particular expertise in
international brand-based businesses and his
executive career included senior roles at
United Biscuits and the positions of Chief
Executive of Uniq plc and Terranova Foods
plc. Since 2001, he has focused on non-
executive appointments at both quoted and
unquoted businesses. He is currently
Chairman of Gardman Holdings Ltd and holds
non-executive roles at Brintons Ltd, Daniels
Chilled Foods Ltd, International Cuisine Ltd,
Bradford & Sons Ltd, Macphie of Glenbervie
Ltd and Moloney Ventures Ltd.
Fiona Goldsmith (42)
Non-executive Director (A,R,N)
Fiona joined the Board as a Non-executive
Director on 17 December 2008. She is a
Chartered Accountant who started her career
with KPMG, where for nine years she focused
on the retail and leisure sectors in various
roles. She then moved to First Choice
Holidays plc, where she became European
Finance Director. From 2004 until October
2008 she was Finance Director of Land
Securities Trillium, a division of Land
Securities Group plc.
Directors Advisers
John Sach (53)
Chief Executive Officer
John joined the Group in 1994 as Group
Financial Controller and was appointed to
the Board as Group Finance Director in 1999.
He was appointed Chief Executive Officer in
May 2004.
David Smallridge (53)
Executive Director
David joined the Group in 2002 with a wide
experience as a managing director in the
consumer products services. He was
appointed to the Board in December 2004
following his appointment as Managing
Director of the Group’s four main fabric and
wallcovering brands, Harlequin, Sanderson,
Morris & Co. and Zoffany.
Alan Dix (50)
Group Finance Director
In July 2005, Alan Dix was appointed Group
Finance Director. He is a Chartered
Accountant with experience from a broad
range of industries.
A – Audit Committee
R – Remuneration Committee
N – Nominations Committee
Stockbrokers and Advisers
Arden Partners plc
Nicholas House
3 Laurence Pountney Hill
London EC4R 0EU
Auditors
PricewaterhouseCoopers LLP
Donington Court
Pegasus Business Park
Castle Donington
East Midlands DE74 2UZ
Tax Advisers
BDO Stoy Hayward LLP
55 Baker Street
London W1U 7EU
Public Relations
Buchanan Communications Ltd
45 Moorfields
London EC2Y 9AE
Solicitors
DLA Piper
Princes Exchange
Princes Square
Leeds LS1 4BY
Registrars
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield
West Yorkshire HD8 0LA
Bankers
Barclay’s Commercial Bank
Ashton House
497 Silbury Boulevard
Milton Keynes MK9 2LD Walker Greenbank PLC
Annual Report and Accounts 2009
15
Directors’ Report
and Accounts
Directors’ Report
and Accounts
In this section
Directors’ Report
16 Report of the Directors
18 Statement of Directors’ Responsibilities
Accounts
19 Independent Auditors’ Report on
Consolidated Financial Statements
20 Consolidated Income Statement
21 Consolidated Statement of Recognised
Income and Expense
22 Consolidated Balance Sheet
23 Consolidated Cash Flow Statement
24 Notes to the Consolidated Accounts
52 Independent Auditors’ Report on
Company Financial Statements
53 Company Balance Sheet
54 Notes to the Accounts
62 Five Year Record
Pondicherry, Options 9, Sanderson. Walker Greenbank PLC
Annual Report and Accounts 2009
16
Report of the Directors
The Directors submit their Annual Report together with the audited
financial statements of the Company and its subsidiary undertakings
(‘the Group’) for the year ended 31 January 2009.
Principal activities and Business Review
The principal activities of the Group are the design, manufacture,
marketing and distribution of wallcoverings, furnishing fabrics and
associated products for the consumer market. A review of activities is
given in the Chief Executive’s Review, which, taken with the Chairman’s
Statement, the Financial Review and the other information in the Report
of the Directors, represents the Group’s Business Review.
The Directors do not expect there to be any significant change in the
principal activities of the Group in the foreseeable future.
Group result
The profit before taxation amounted to £2,787,000 (2008: £3,099,000).
The Directors do not recommend payment of a final ordinary dividend
(2008: no dividend paid), which leaves a surplus of £1,622,000 to be
transferred to reserves (2008: £8,171,000).
Key Performance Indicators
The KPIs for the business are primarily financial.
2009 2008
Sales growth 2% 15%
Operating profit margin before
exceptional items 5.6% 6.3%
Gearing 31% 35%
Pension deficit as a percentage of
shareholders’ funds 21% 16%
Adjusted EPS 4.97p 5.44p
Business risks
The Directors have identified a number of financial risks for the Group
and these are explained and the degree of risk highlighted in note 2 of
the financial statements and in the Financial Review. Where
commercially appropriate the Group insures against financial loss
caused by unforeseen events by the means of insurance policies.
Apart from the impact of an event of a global nature or a significant
downturn in the UK market there are no other significant business
risks. Whilst the trading conditions in North America remain difficult,
this will affect trading of our business in North America but this
business is not currently a significant profit contributor to the
overall Group.
Pensions
The Group operates defined benefit and defined contribution schemes
in the UK and overseas for all qualifying employees. Further
information on the schemes and details of the valuations are given in
note 22 to the accounts.
Employees
The Group keeps its employees informed on matters affecting them
and on the progress of the Group by way of informal meetings and
consultation with employees’ representatives. All Group businesses
apply the principles of equal opportunity in recruitment, career
progression and remuneration. Disabled persons are given full and fair
consideration for employment where an appropriate vacancy occurs,
having regard to their particular aptitudes and abilities. Whenever
possible, arrangements are made for the continuing employment of
persons who have become disabled during service and for appropriate
training of all disabled employees, who are given equal consideration
with all other employees in promotion and career development.
Payments to suppliers
The Group agrees terms and conditions for its business transactions
with suppliers and makes payment in accordance with those terms
and conditions subject to the supplier meeting its obligations. The
amount of trade creditors shown in the consolidated balance sheet at
31 January 2009 represents 92 days (2008: 98 days) of average
purchases during the year for the Group.
The Company is a holding company and has no meaningful equivalent
of creditor days.
Market value of interests in land including buildings
The Directors do not believe there is a significant difference between
the current market value of the Group’s interests in land including
buildings and their carrying values in the financial statements.
Political and charitable donations
The Group has not made any political donations (2008: nil). During the
year the Group made no charitable donations (2008: nil).
Directors and their interests
The Directors in office at 31 January 2009 and their interests in the
shares of the Company were as follows:
1p ordinary 1p ordinary
shares shares
31 January 31 January
2009 2008
Number Number
I Kirkham* 900,000 800,000
T Stannard 35,000 35,000
F Goldsmith nil nil
J D Sach 610,000 590,000
D H Smallridge 120,000 100,000
A N Dix 132,000 70,000
* Includes 100,000 shares held by Mr Kirkham’s wife. Walker Greenbank PLC
Annual Report and Accounts 2009
17
Directors’ Report
On 17 December 2008 Fiona Goldsmith was appointed as a
Non-executive Director.
On 31 January 2009 Ian Kirkham retired from the Board and Terry
Stannard was appointed Chairman.
The Board of Directors as at the date of this report is set out on page
14, together with biographical details.
At the forthcoming Annual General Meeting (‘AGM’) Fiona Goldsmith
will stand for election following her appointment since the last AGM.
John Sach will retire by rotation and being eligible will offer himself
for re-election.
On 23 April 2009 T Stannard purchased 35,000 ordinary shares.
The share price on 1 February 2008 was 40.75p and on 31 January
2009 was 10.25p.
Long-Term Incentive Plan
There were no awards made under the Group’s Long-Term Incentive
Plan (‘LTIP’) during the year.
At the year end awards have been granted for a maximum of
3,964,093 shares.
As at the balance sheet date the awards granted to the Executive
Directors were:
Vesting 1p ordinary
date shares
J D Sach 25.07.2009 805,298
23.05.2011 495,283
D H Smallridge 25.07.2009 745,297
23.05.2011 353,774
A N Dix 25.07.2009 498,405
23.05.2011 283,019
On 27 May 2009 further awards were made to the Executive Directors,
a total of 1,700,000 ordinary shares.
Directors’ interests in material contracts
None of the Directors had any material interest in any contract during
the year which was significant to the business of the Group.
Acquisition of own shares
On 1 July 2008 the Company made market purchases into treasury of
275,000 ordinary shares of 1p each at a price of 30p per ordinary
share. The total number of shares held in Treasury is 1,690,093. It is
intended that these ordinary shares will be used to satisfy future
awards made under the Company’s LTIP.
Substantial shareholdings
At 7 June 2009 the Company is aware of the following substantial
shareholdings in its ordinary share capital, comparatives at 30 May
2008 are shown. Gartmore Investment Limited 20.2% (2008: 22.7%),
Blackrock Investment Management 5.8% (2008: 5.21%), Brewin
Dolphin 4.45% (2008: 4.71%), Barclays Wealth 4.06% (2008: 4.03%),
Royal London Asset Management 3.75% (2008: 0%), Axa Framlington
3.49% (2008: 3.39%), NW Brown Investment 3.2% (2008: 0%) and
Walker Greenbank EBT 4.45% (2008: 4.43%).
Environmental and social matters
The Group acknowledges the importance of environmental matters
and where possible uses environmentally friendly policies in all its
facilities, such as recycling, energy savings and efficiency initiatives,
and encouraging environmentally friendly travel.
Special Business
At the AGM on 22 July 2009 items 5, 6 and 7 will be proposed as
Special Business. Details of the business can be found in the Notice of
the Annual General Meeting separately distributed to shareholders.
Auditors
A resolution to reappoint PricewaterhouseCoopers LLP as auditors of
the Company will be proposed at the AGM.
So far as each of the Directors in office at the date of this report is
aware, there is no relevant audit information of which the Group’s
auditors are unaware. Relevant information is defined as information
needed by the Group’s auditors in connection with preparing their
report. Each Director has taken all the steps that he ought to have
taken to make himself aware of any relevant audit information and to
establish that the auditors are aware of that information.
By order of the Board
Julian Wilson
Company Secretary
17 June 2009
Registered Office
Chalfont House
Oxford Road
Denham UB9 4DX
Registered number 61880 Walker Greenbank PLC
Annual Report and Accounts 2009
18
The Directors are responsible for preparing the Annual Report and the
Group and the parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare financial statements for
each financial year. Under that law the Directors have prepared the
Group financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union and in
accordance with the AIM Rules for Companies, and the parent
Company financial statements in accordance with applicable law and
United Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice). The Group and parent Company
financial statements are required by law to give a true and fair view of
the state of affairs of the Company and the Group and of the profit or
loss of the Group for that period.
In preparing those financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently; >
make judgements and estimates that are reasonable and prudent; >
state that the Group financial statements comply with IFRSs as >
adopted by the European Union, and with regard to the parent
Company financial statements, that applicable UK Accounting
Standards have been followed, subject to any material departures
disclosed and explained in the financial statements.
Statement of Directors’ Responsibilities
The Directors confirm that they have complied with the above
requirements in preparing the financial statements.
The Directors are responsible for keeping proper accounting records
that disclose with reasonable accuracy at any time the financial position
of the Company and the Group and to enable them to ensure that the
Group and parent Company financial statements comply with the
Companies Act 1985. They are also responsible for safeguarding the
assets of the Company and the Group and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions. Walker Greenbank PLC
Annual Report and Accounts 2009
19
Accounts
Independent Auditors’ Report
To the members of Walker Greenbank PLC
We have audited the Group financial statements of Walker Greenbank
PLC for the year ended 31 January 2009 which comprise the
Consolidated Income Statement, the Consolidated Statement of
Recognised Income and Expense, the Consolidated Balance Sheet,
the Consolidated Cash Flow Statement, and the related notes to the
Consolidated Accounts. These group financial statements have been
prepared under the accounting policies set out therein.
We have reported separately on the parent company financial
statements of Walker Greenbank PLC for the year ended 31
January 2009.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the Annual Report and the
group financial statements in accordance with applicable law and
International Financial Reporting Standards (IFRSs) as adopted by the
European Union are set out in the Statement of Directors’ Responsibilities.
Our responsibility is to audit the group financial statements in
accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland). This report,
including the opinion, has been prepared for and only for the company’s
members as a body in accordance with Section 235 of the Companies
Act 1985 and for no other purpose. We do not, in giving this opinion,
accept or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
We report to you our opinion as to whether the group financial statements
give a true and fair view and whether the group financial statements have
been properly prepared in accordance with the Companies Act 1985. We
also report to you whether in our opinion the information given in the
Directors’ Report is consistent with the group financial statements. The
information given in the Directors’ Report includes that specific information
presented in the Chairman’s Statement, the Chief Executive’s Review, and
the Financial Review that is cross referred from the Business Review
section of the Directors’ Report.
In addition we report to you if, in our opinion, we have not received all
the information and explanations we require for our audit, or if
information specified by law regarding directors’ remuneration and
other transactions is not disclosed.
We read other information contained in the Annual Report and
consider whether it is consistent with the audited group financial
statements. The other information comprises only the Highlights from
2009, the Chairman’s Statement, the Chief Executive’s Review, the
Financial Review, the information on Directors and Advisers, the
Report of the Directors, the Statement of Directors’ Responsibilities
and all of the other information listed on the contents page. We
consider the implications for our report if we become aware of any
apparent misstatements or material inconsistencies with the group
financial statements. Our responsibilities do not extend to any
other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on
Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts
and disclosures in the group financial statements. It also includes an
assessment of the significant estimates and judgments made by the
directors in the preparation of the group financial statements, and of
whether the accounting policies are appropriate to the group’s
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information
and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the group
financial statements are free from material misstatement, whether
caused by fraud or other irregularity or error. In forming our opinion we
also evaluated the overall adequacy of the presentation of information
in the group financial statements.
Opinion
In our opinion:
the group financial statements give a true and fair view, in >
accordance with IFRSs as adopted by the European Union, of the
state of the group’s affairs as at 31 January 2009 and of its profit
and cash flows for the year then ended;
the group financial statements have been properly prepared in >
accordance with the Companies Act 1985; and
the information given in the Directors’ Report is consistent with the >
group financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
East Midlands, UK
17 June 2009 Walker Greenbank PLC
Annual Report and Accounts 2009
20
Consolidated Income Statement
Year ended 31 January 2009
2009 2008
Note £000 £000
Revenue 4 63,698 62,448
Operating profit 4–6 3,561 3,961
Net defined benefit pension (charge)/income 7 (79) 119
Net finance costs 8 (669) (906)
Amortisation of issue costs 8 (26) (75)
(774) (862)
Profit before taxation 2,787 3,099
Deferred tax – exceptional 11 (320) 5,101
Deferred tax – other 11 (788) –
Current taxation 11 (57) (29)
Total tax (charge)/credit 11 (1,165) 5,072
Profit for the year 25 1,622 8,171
Earnings per share – basic and diluted 12 2.96p 14.49p
All results arise from continuing operations
The notes on pages 24 to 51 form an integral part of the consolidated financial statements. Walker Greenbank PLC
Annual Report and Accounts 2009
21
Accounts
Consolidated Statement of Recognised Income and Expense
Year ended 31 January 2009
2009 2008
Note £000 £000
Actuarial losses on scheme assets 22 (7,458) (1,364)
Changes in actuarial mortality assumptions 22 – (2,868)
Other actuarial gains on scheme liabilities 22 5,458 4,932
Currency translation differences 25 (350) 27
Cash flow hedges 25 (702) (110)
Reduction in deferred tax relating to pension liability due to rate reduction – (110)
Recognition/(reduction) of deferred tax asset relating to pension scheme liability 211 (573)
Net expense recognised directly in equity (2,841) (66)
Profit for the year 1,622 8,171
Total recognised (expense)/income for the year (1,219) 8,105
The notes on pages 24 to 51 form an integral part of the consolidated financial statements. Walker Greenbank PLC
Annual Report and Accounts 2009
22
Consolidated Balance Sheet
At 31 January 2009
2009 2008
Note £000 £000
Non-current assets
Intangible assets 13 5,877 5,833
Property, plant and equipment 14 8,734 8,991
Deferred income tax assets 15 5,158 6,055
Trade and other receivables 16 12 253
19,781 21,132
Current assets
Trade and other receivables 16 12,552 13,475
Inventories 17 13,887 12,546
Cash and cash equivalents 18 1,050 2,017
27,489 28,038
Total assets 47,270 49,170
Current liabilities
Trade and other payables 19 (15,118) (15,546)
Derivative financial instruments 20 (812) (110)
Borrowings 21 (400) (400)
(16,330) (16,056)
Net current assets 11,159 11,982
Non-current liabilities
Borrowings 21 (6,868) (8,906)
Retirement benefit obligation 22 (4,161) (3,409)
(11,029) (12,315)
Total liabilities (27,359) (28,371)
Net assets 19,911 20,799
Equity
Share capital 24 590 590
Share premium account 25 457 457
Foreign currency translation reserve 25 (340) 10
Retained earnings 25 (20,491) (20,655)
Other reserves 25 39,695 40,397
Total equity 19,911 20,799
The notes on pages 24 to 51 form an integral part of the consolidated financial statements.
J D Sach A N Dix
Director Director
These accounts were approved by the Directors on 17 June 2009. Walker Greenbank PLC
Annual Report and Accounts 2009
23
Accounts
Consolidated Cash Flow Statement
Year ended 31 January 2009
2009 2008
Note £000 £000
Cash flows from operating activities
Cash generated from operations 27 3,536 4,623
Interest paid (704) (956)
Debt issue costs – (123)
Interest received 35 5
Income tax paid (37) (7)
2,830 3,542
Cash flows from investing activities
Purchase of intangible fixed assets (420) (365)
Purchase of property, plant and equipment (1,267) (1,309)
Proceeds on sale of property, plant and equipment 7 3
(1,680) (1,671)
Cash flows from financing activities
Purchase of treasury shares (83) (612)
Proceeds from borrowings – 11,296
Repayment of borrowings – (11,296)
Net repayment of borrowings (2,064) (1,315)
(2,147) (1,927)
Net (decrease)/increase in cash, cash equivalents and bank overdrafts (997) (56)
Cash, cash equivalents and bank overdrafts at beginning of year 2,017 2,065
Exchange gains on cash and bank overdrafts 30 8
Cash, cash equivalents and bank overdrafts at end of year 28 1,050 2,017
The notes on pages 24 to 51 form an integral part of the consolidated financial statements. Walker Greenbank PLC
Annual Report and Accounts 2009
24
Notes to the Consolidated Accounts
1. Accounting policies and general information
General information
Walker Greenbank PLC is a luxury interior furnishings group whose brands include Harlequin, Sanderson, Morris & Co. and Zoffany. The brands
are targeted at the mid to upper end of the premium market. They have worldwide distribution including prestigious showrooms at Chelsea
Harbour, London and the D&D building, Manhattan, New York. Half of the brand’s turnover is sourced in-house from the Group’s own specialist
manufacturing facilities of Standfast & Barracks, the fabric printing business situated in Lancaster, and Anstey Wallpaper Company situated in
Loughborough. The manufacturing businesses produce for other interior furnishing businesses both in the UK and throughout the world. The
Company is a public limited company which is listed on the Alternative Investment Market of the London Stock Exchange and is registered and
domiciled in the UK.
Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by
the European Union and International Financial Reporting Interpretation Committee (IFRIC) interpretations and the Companies Act 1985
applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention,
as modified by the valuation of derivative financial instruments at fair value, on a going concern basis and with the accounting policies set out
below which have been consistently applied to all periods presented unless otherwise indicated.
In preparing these financial statements the Group has applied the IFRS adopted by the European Union and the IFRIC interpretations where the
effective date is relevant to the financial year commencing on 1 February 2008 or ending 31 January 2009.
Since the Group’s previous annual financial report for the year ended 31 January 2008 the following pronouncements are now effective and have
been adopted by the Group:
IFRIC 11 ‘Group and treasury transactions’. >
Amendment to IAS 39 ‘Financial instruments: Recognition and measurement’ and IFRS 7 ‘Financial instruments: Disclosures’ on the >
‘Reclassification of financial assets’ (reclassifications after 1 July 2008).
The pronouncements above have had no impact on these consolidated financial statements.
The Group has not applied the following pronouncements for which adoption is not mandatory for the year ending 31 January 2009 and/or which
have not yet been endorsed by the EU. The Group has not concluded its evaluation of the impact of these pronouncements but at this stage does
not expect there to be any material impact on operating profit or cash flow.
(i) Standards, amendments and interpretations effective for the year ending 31 January 2009 but which have not yet been endorsed by
the EU:
IFRIC 14 ‘The limit on a defined benefit asset, minimum funding requirements and their interaction’ (effective for years commencing on or after >
1 January 2008 but EU endorsed for years commencing on or after 1 January 2009).
(ii) Standards, amendments and interpretations which have been endorsed by the EU but are not yet mandatory and have not been
early adopted for the year ending 31 January 2009:
IAS 1 (revised) ‘Presentation of financial statements’ >
IAS 23 (revised 2007) ‘Borrowing costs’ >
Amendment to IAS 32 ‘Financial Instruments: Presentation’ and IAS1 ‘Presentation of financial statements’ on ‘Puttable financial instruments >
and obligations arising on liquidation’
Amendment to IFRS 1 ‘First time adoption of IFRS’ and IAS 27 ‘Consolidated and separate financial statements’ on the ‘Cost of an investment >
in a subsidiary, jointly controlled entity or associate’
Amendment to IFRS 2 ‘Share based payments’ on ‘Vesting conditions and cancellations’ >
IFRS 8 ‘Operating segments’ >
IFRIC 12 ‘Service concession arrangements’ >
IFRIC 13 ‘Customer loyalty programmes relating to IAS 18, Revenue’ >
Annual improvements to IFRS (2007) >
(iii) Standards, amendments and interpretations which have not yet been endorsed by the EU and which are not yet effective for the
year ending 31 January 2009:
IAS 27 (revised) ‘Consolidated and separate financial statements’ >
Amendment to IAS 39 ‘Financial Instruments: recognition and measurement’ on ‘Eligible hedged items’ >
IFRS 1 (revised) ‘First time adoption of IFRS’ >
IFRS 3 (revised) ‘Business combinations’ >
Amendment to IFRS 7 ‘Financial instruments: Disclosures’ > Walker Greenbank PLC
Annual Report and Accounts 2009
25
Accounts
1. Accounting policies and general information continuedd
Amendment to IFRIC 9 and IAS 39 regarding ‘Embedded derivatives’ >
IFRIC 15 ‘Agreements for construction of real estates’ >
IFRIC 16 ‘Hedges of a net investment in a foreign operation’ >
IFRIC 17 ‘Distributions of non-cash assets to owners’ >
IFRIC 18 ‘Transfers of assets from customers’ >
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in
note 3.
The financial statements of the Company as an entity continue to be prepared under United Kingdom Generally Accepted Accounting Practice
and are presented separately from the consolidated financial statements (pages 53 to 61).
Basis of consolidation
The consolidated financial information incorporates the financial statements of the Company and all its subsidiary undertakings made up to
31 January each year. Subsidiaries are entities where the Company has the power to govern the financial and operating policies, generally
accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently
exercisable or convertible are considered when assessing whether the Group controls another entity.
The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement from the effective date on
which control is transferred to or from the Group, as appropriate.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used into line with those used by
the Group.
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured as the aggregate of the fair
values, at the date of exchange, of the assets given, liabilities incurred or assumed, and equity instruments issued by the Group, in exchange for
control of the acquirer. The identifiable assets, liabilities and contingent liabilities assumed in a business combination are measured initially at their
fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS5
‘Non Current Assets Held for Sale and Discontinued Operations’, which are recognised and measured at fair value less costs to sell.
Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the fair value of the consideration for
the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If,
after reassessment, the Group’s interest in the net fair value of the acquirer’s identifiable assets, liabilities and contingent liabilities exceeds the
cost of the business combination, the excess is recognised immediately in the income statement.
All inter-company transactions and balances are eliminated on consolidation. Profits and losses resulting from inter-company transactions that are
recognised in assets, such as inventory, are eliminated in full. Unrealised losses are also eliminated unless the transaction provides evidence of an
impairment of the assets transferred.
Foreign currencies
For the purpose of the consolidated financial statements, the results and financial position are expressed in sterling, which is the functional
currency of the Company, and the presentation currency for the consolidated financial statements.
Transactions in foreign currencies, which are those other than the functional currency of an entity, are recorded at the rate ruling at the date of the
transaction. Monetary assets and liabilities denominated in foreign currency are translated at the balance sheet date. All unhedged exchange
differences are recognised in the income statement for the period and classified as other operating income or charges.
The assets and liabilities of the Group’s overseas subsidiaries on consolidation are translated at the rates of exchange ruling at the balance sheet
date. The income and expenses are translated at the weighted average rate during the period. Differences on translation are recognised in a
separate foreign currency translation reserve within equity. On disposal of an overseas subsidiary, the cumulative exchange differences for that
subsidiary are recognised in the income statement as part of the profit or loss on disposal.
Intangible assets – Goodwill
Goodwill arising on acquisition is initially measured at cost, being the excess of the fair value of the consideration for the acquisition over the
Group’s interest in the net fair value of the acquired entity’s identifiable assets and liabilities at the date of acquisition. Goodwill is not amortised,
but reviewed for impairment annually, any impairment is recognised immediately in the income statement and is not subsequently reversed.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that
are expected to benefit from the business combination in which the goodwill arose.
On disposal of a subsidiary or cash generating unit the attributable amount of goodwill is included in the determination of the profit or loss
on disposal. Walker Greenbank PLC
Annual Report and Accounts 2009
26
1. Accounting policies and general information continuedd
Intangible assets – Archive
The Arthur Sanderson and William Morris archive comprises a historic record of unique designs that are used to generate a significant royalty
income in the business. The archive is valued at a historical cost. The Directors believe that the archive has an indefinite useful life and is therefore
not subject to amortisation. The carrying value of this asset will be reviewed annually and provision made for any impairment in the carrying value
if required.
Intangible assets – Software assets
Acquired computer software licences are capitalised at the cost incurred to bring the asset into use, including where relevant directly attributable
internal costs incurred in preparing the software for operation. The costs are amortised to their estimated residual value over their estimated
useful life which range from three to six years.
Intangible assets – Collection design
Research expenditure is recognised as an expense as incurred. Costs incurred on development projects relating to the design of new collections
are recognised as intangible assets when the following criteria are fulfilled:
It is technically feasible to complete the new collection so that it will be available for use or sale. >
Management intends to complete the new collection and use it or sell it. >
There is an ability to use or sell the new collection. >
It can be demonstrated how the new collection will generate probable future economic benefits. >
Adequate technical, financial and other resources to complete the development and to use or sell the new collection are available. >
The expenditure attributable to the new collection during its development can be reliably measured. >
Any costs relating to design of new collections that do not meet these criteria are recognised as an expense as incurred. Any such costs
recognised as an expense in previous periods are not recognised as an asset in a subsequent period. Capitalised collection design costs are
recognised as intangible assets and are amortised to their estimated residual value at 25% on a straight-line basis over the life of the asset, and
are tested for impairment if any impairment trigger events are identified in accordance with IAS 36.
Property, plant and equipment
Property, plant and equipment are stated at historical cost less accumulated depreciation and any recognised impairment loss. Historical cost
comprises the purchase price and costs directly incurred in bringing the asset into use. The assets residual values and useful lives are reviewed
annually and adjusted if appropriate, at each balance sheet date.
Depreciation is charged on a straight-line basis on the original costs (excluding freehold land) after deduction of any estimated residual value. The
principal annual rates are:
Freehold buildings 2%
Leasehold improvements Over the length of the lease
Plant, equipment and vehicles Between 5% and 33%
Computer assets 33%
Government grants received for property, plant and equipment are classified within the cost of property, plant and equipment and released to the
income statement over the life of the asset.
Impairment of non-financial assets
Intangible assets with finite useful lives and property, plant and equipment are tested for impairments if events or changes in circumstances
(assessed at each reporting date) indicate that the carrying amount may not be recoverable. When an impairment test is conducted, the
recoverable amount is assessed by reference to the higher of the value in use (net present value of expected future cash flows of the relevant
cash generating unit), or the fair value less cost to sell.
Goodwill and other intangible fixed assets with an indefinite useful life are tested for impairment at least annually.
If a cash generating unit is impaired, provision is made to reduce the carrying amount of the related assets to their estimated recoverable amount.
Impairment losses are allocated firstly against goodwill, and secondly on a pro rata basis against intangible and other assets.
Non-financial assets other than goodwill that suffer impairment are reviewed for possible reversal of the impairment at each reporting date.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials, on a first-in, first-out basis, and direct labour,
plus attributable production overheads based on a normal level of activity. Net realisable value is based on estimated selling prices less
anticipated costs of disposal. Provision is made for any slow moving and obsolete inventory.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
27
Accounts
1. Accounting policies and general information continuedd
Marketing materials
Marketing materials consist of patterning books and other marketing assets that will be used to support the sale of the Group’s products. They
are recognised at the lower of cost and net realisable value. Cost comprises direct materials plus costs of production. Net realisable value is
based on estimated recoveries less anticipated costs of disposals. An impairment allowance is made for any slow moving and obsolete marketing
materials. The Group’s policy is to classify marketing materials on the balance sheet within trade and other receivables.
Financial assets and liabilities – measurement basis
Financial assets and liabilities are recognised on the date on which the Group becomes a party to the contractual provisions of the instrument
giving rise to the asset or liability. Financial assets and liabilities are initially recognised at fair value plus transaction costs. Any impairment of a
financial asset is charged to the consolidated income statement when incurred. Financial assets are derecognised when the Group’s rights to
cash inflows from the asset expire: financial liabilities are derecognised when the contractual obligations are discharged, cancelled or expire.
Non-derivative financial assets are classified according to the purpose for which the asset was acquired. The Group’s financial assets are
classified as either:
‘trade and other receivables’ – these are non derivative financial assets with fixed or determinable payments that are not quoted in an active >
market. They arise when the Group provides goods directly to a debtor, or advances money, with no intention of trading the loan or receivable.
Subsequent to initial recognition loans and receivables are included in the balance sheet at amortised cost using the effective interest method
less any amounts written off to reflect impairment, with changes in carrying amount recognised in the consolidated income statement within
administrative expenses.
‘cash and cash equivalents’ – these comprise of deposits with an original maturity of three months or less with banks and financial institutions, >
bank balances, bank overdrafts and cash in hand.
A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect
all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will
enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable may be
impaired. The amount of the provision is the difference between the asset’s carrying amount and the net present value of estimated future cash
flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of provision account, and the
amount of the loss is recognised in the income statement within administrative expenses. When a trade receivable is uncollectible, it is written off
against the provision account for trade receivables. Subsequent recoveries of amounts previously written off are credited against administrative
expenses in the income statement.
The Group’s non-derivative financial liabilities are classified as ‘Other liabilities’. ‘Other liabilities’ are financial liabilities with fixed or determinable
payments that are not quoted in an active market. They arise when the Group receives goods or services directly from a creditor or supplier, or
borrows money, with no intention of trading the liability. This category includes:
‘trade and other payables’ – these are typically non-interest bearing and following initial recognition are included in the balance sheet at >
amortised cost;
‘bank loans and overdrafts’ – these are initially recorded at fair value based on proceeds received net of issue costs. Finance charges are >
accounted for on an accruals basis and charged to the Consolidated Income Statement using the effective interest rate method;
‘borrowings’ – these are recorded initially at the fair value, net of direct issue costs, and are subsequently stated at amortised cost. Finance >
charges, including premiums payable on settlement, or redemption and direct issue costs, are accounted for on an accruals basis in the
income statement, using the effective interest method, and are included within the carrying amount of the instrument to the extent that they
are not settled in the period in which they arise.
The Group does not have any non-derivative financial assets or liabilities classified as ‘at fair value through profit and loss’.
Derivative financial instruments and hedge accounting – measurement basis
The Group’s activities expose it to the financial risks of changes in exchange rates, and the Group uses forward exchange rate contracts to
manage these exposures. The use of derivative financial instruments is governed by the Group’s policies approved by the Board of Directors,
which provide written principles on the use of derivative financial instruments.
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items. The Group also
documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in fair values or cash flows of hedge items. The effective portion of changes in the fair value of derivatives
that are designated and qualify as cash flow hedges is recognised in equity. The gain or loss relating to the ineffective portion is recognised
immediately in the income statement within ‘other gains/(losses) – net’. Amounts accumulated in equity are released to the income statement
when the hedged item effects the income statement.
Derivatives that do not qualify for hedge accounting under IAS 39 are classified as ‘financial assets or liabilities at fair value through the profit or
loss’. They are initially recognised at fair value, with fair value being remeasured at each reporting date. The fair value of the derivative is based on
market price of comparable instruments at the balance sheet date. Changes in fair value are included in the consolidated income statement within
finance costs. Walker Greenbank PLC
Annual Report and Accounts 2009
28
1. Accounting policies and general information continuedd
The Group has no embedded derivatives that are not closely related to the host instrument.
Cash and cash equivalents
Cash and cash equivalents represent only liquid assets with original maturity of 90 days or less. Cash and cash equivalents include cash in hand,
deposits held at call with banks and bank overdrafts. Bank overdrafts that cannot be offset against other cash balances are shown within
borrowings in current liabilities on the balance sheet.
For the purposes of the cash flow statement it is the Group’s policy to classify interest income and expense, and other finance costs, within ‘cash
flows from operating activities’.
Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to
settle that obligation. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation at the balance
sheet date, and are discounted to present value where the effect is considered material.
Leases
Leases are classified as finance leases where the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All
other leases are classified as operating leases.
Assets used by the Group which have been funded through finance leases are capitalised in property, plant and equipment and the resulting lease
obligations are included in liabilities. The assets are depreciated over their useful lives and the interest element of the rental obligations is charged to
the income statement over the period of the lease, and represents a constant proportion of the balance of capital repayments outstanding.
Operating lease rentals are charged to the income statement on a straight-line basis over the period of the lease. Rent free periods receivable on
entering an operating lease are released on a straight-line basis over the term of the lease.
Employee benefits – Pension obligations
Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due.
For defined benefit retirement schemes, the funding of benefits is determined using the Projected Unit Credit Method, with full actuarial valuations
being carried out triennially.
Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the income statement and
presented in the statement of recognised income and expense.
Past service costs are recognised immediately to the extent that the benefits are already vested, and otherwise are amortised on a straight-line
basis over the average period until the benefits become vested.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for
unrecognised service cost, and as reduced by the fair value of the scheme assets. Any asset resulting from this calculation is limited to past
service cost, plus present value of available refunds and reductions in future contributions to the plan.
The defined benefit obligation is calculated annually by qualified independent actuaries using the projected unit credit method.
Scheme expenses met by the Group, expected returns on plan assets, and interest on pension scheme liabilities are classified within ‘Net defined
benefit pension costs’ on the consolidated income statement.
Employee benefits – share based payments under long term incentive plans (LTIP)
The Group issues equity-settled share based payments to certain employees which must be measured at fair value and recognised as an
expense in the income statement with a corresponding increase in equity. The fair values of these payments are measured at the dates of grant,
taking into account the terms and conditions upon which the awards are granted. The fair value is recognised over the period during which
employees become conditionally entitled to the awards, subject to the Group’s estimate of the number of awards which will lapse, either due to
employees leaving the Group prior to vesting or due to non-market based performance conditions not being met. The total amount recognised in
the income statement as an expense is adjusted to reflect the actual number of awards that vest.
Employee benefits – short-term bonus plans
The Group recognises a liability and an expense for bonuses where contractually obliged or where there is a past practice that has created a
constructive obligation.
Share capital
Ordinary shares are classified as equity. Costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of
tax, from the proceeds.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
29
Accounts
1. Accounting policies and general information continuedd
Treasury shares
Consideration paid including any directly attributable incremental costs (net of income taxes) on the purchase of the Company’s equity share
capital (treasury shares) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where
such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related
income tax effects is included in equity attributable to the Company’s equity shareholders.
Revenue
The Group revenue is measured at fair value of the consideration received or receivable and represents amounts recoverable by the Group for
goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes. Revenue comprises:
Sale of goods – sales of goods are recognised when the Group has transferred to the buyer the significant risks and rewards of ownership, >
which is usually at the point of delivery of the goods.
Royalty revenue – royalties are received from licence holders under the terms of various agreements, and are recognised on an accruals basis >
in accordance with the substance of the relevant agreement.
Exceptional items
Items that are both material and whose nature is sufficient to warrant separate disclosure and identification are disclosed within the financial
statements and classified within their relevant income statement category.
Taxation including deferred tax
The tax expense represents the sum of the current tax and deferred tax charges or credits.
Current tax is based on the taxable profit for the year. Taxable profits differs from the net profit as reported in the income statement because
it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or
deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance
sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability
method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent
that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities
are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other
assets and liabilities in a transaction that effects neither the tax profit nor the accounting profit.
IAS 12 Income taxes requires that the measurement of deferred tax should have regard to the tax consequences that would follow from the
manner of expected recovery or settlement at the balance sheet date of the carrying amount of its assets and liabilities. In calculating its deferred
tax liability the Group’s policy is to regard the depreciable amount of the carrying value of its property, plant and equipment to be recovered
through continuing use in the business, unless included within assets held for resale, where the policy is to regard the carrying amount as being
recoverable through sale.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Group is able to
control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax
is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred
tax is also dealt with in equity.
Segmental reporting
Walker Greenbank is a designer, manufacturer and distributor of furnishings, fabrics and wallpaper. The Group predominantly manages its
operations as two business segments which are the brands and manufacturing.
A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are
different to those of other business segments. A geographical segment is engaged in providing products and services within a particular economic
environment that are subject to risks and returns which are different from those of segments operating in other economic environments.
Interest received
Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Walker Greenbank PLC
Annual Report and Accounts 2009
30
2. Financial risk management
The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate
risk and price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to
hedge certain risk exposures.
Risk management is carried out at Board level under policies approved by the Board of Directors. Executive Directors identify, evaluate and
hedge financial risks in close co-operation with the Group’s operating units.
Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the
US dollar and the euro. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a
currency that is not the entity’s functional currency.
The Group’s policy is, where possible to allow the Group entities to settle liabilities in their functional currency with the cash generated from their
operations in that currency. Where the Group entities have liabilities denominated in a currency other than their functional currency (and have
insufficient reserves of that currency to settle them) cash already denominated in that currency will, where possible be transferred from elsewhere
in the Group.
To manage the foreign exchange risk arising on future transactions, it is the Group’s policy to enter into forward currency contracts to hedge
the exposure.
For the year ended 31 January 2009, the average sterling to US dollar translation rate applied by the Group including the impact of hedging
contracts was £1:US $2.06. If the rate had been £1:US $1.96 lower with all other variables held constant, profit before tax would have been higher
by £127,000. If the rate had been £1:US $2.16 higher with all other variables held constant, profit before tax would have been lower
by £115,000.
For the year ended 31 January 2009, the average sterling to euro translation rate applied by the Group was £1:euro 1.24. If the rate had been
£1:euro 1.14 lower with all other variables held constant, profit before tax would have been lower by £381,000. If the rate had been £1:euro 1.34
higher with all other variables held constant, profit before tax would have been higher by £324,000.
The sensitivity of movements in other currencies is not considered material to the performance of the Group.
Interest rate risk
As the Group has no significant interest bearing assets its revenue and cash generated from operations are substantially independent of changes
in market interest rates.
The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate
risk. The Group’s borrowings at variable rate are denominated in UK pounds or euros. The Group regularly analyses its interest rate exposure
calculating the impact on profit and loss of a defined interest rate shift. Based on the calculations the Board consider refinancing, renewal of
existing positions, alternative financing and hedging.
In July 2007 the Group entered into a new financing contract with Barclays Bank PLC, variable interest rates were negotiated on all the loans. The
Board continues to monitor the interest rates monthly.
For the year ended 31 January 2009, had benchmark interest rate levels been 0.5% higher/lower than actual experience, with all other variables
held constant, the profit before tax of the Group would have been lower/higher by £62,000 due to the change in interest rate expense on variable
rate borrowings.
Credit risk
Credit risk arises from the Group’s trade receivables, cash held with banks, and derivative financial instruments. It is the risk that the counterparty
fails to discharge its obligation in respect of the instrument.
The Group does not have any significant credit risk exposure to any single company or group of companies, as the nature of the Group’s
operations mean that trade receivables consist of a large number of customers spread across diverse industries and geographical areas.
Prior to accepting new customers an independent credit check is obtained. Based on this information individual credit limits and payment terms
are established and where appropriate credit guarantee insurance cover is sought. If no independent credit ratings are available, customers are
asked to pay on a proforma basis until creditworthiness can be established. The utilisation of credit limits is regularly monitored. Credit limits may
only be exceeded with the authorisation from key management, this is dependent on the amount expected to exceed the limit and the Group’s
trading history with that customer.
There is no difference between the carrying amount and the maximum credit risk exposure.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
31
Accounts
2. Financial risk management continued
Liquidity risk
Liquidity risk arises from the Group’s management of working capital and the finance charges and principal repayments on its debt instruments. It
is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The maturity profile of the Group’s debt and
other financial liabilities is disclosed in note 21.
During the year the Group had facilities with Barclays Bank PLC. A significant element of the facility is linked to working capital, which allows the
Group to manage its cash more effectively during the seasonal fluctuations in working capital associated with the industry. This element of the
facility is due to expire in July 2010.
Management monitors rolling forecasts of the Group’s cash and loan facility on a monthly basis. The Group ensures that it has adequate facilities
available to cover both its short-term and medium-term commitments. In addition, the Group’s liquidity management policy is to project cash
flows in major currencies and consider the level of liquid assets necessary to meet these.
Capital risk management
The Group’s objectives when managing capital are:
to safeguard the entities ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other >
stakeholders; and
to provide an adequate return for shareholders by pricing products and services commensurately with the level of risk. >
The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in light of
changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the
Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, buy back issued shares, or sell
assets to reduce debt.
The Group monitors capital on the basis of the average net debt to adjusted capital ratio (or ‘gearing ratio’). The ratio is calculated as average net
debt divided by adjusted capital. Average net debt is calculated as the total debt less cash and cash equivalents during the year. Adjusted capital
comprises all components of equity (i.e. share capital, share premium, retained earnings, and other reserves) other than amounts recognised in
equity relating to cash flow hedges and forward currency contracts.
During the year to 31 January 2009, the Group’s strategy, which was unchanged from the previous year, was to reduce the average gearing ratio.
The average gearing ratios for 2009 and 2008 were as follows:
31 January 31 January
2009 2008
Year ended £000 £000
Average net debt 11,233 10,777
Total equity 19,911 20,799
Less: amounts recognised in equity relating to currency contracts 812 110
Adjusted capital 20,723 20,909
Average net debt to adjusted capital ratio 54% 52%
Year end net debt to adjusted capital ratio 31% 35%
The Group considers the average debt to adjusted equity ratio to be too high currently, and will continue to reduce debt and the pension deficit by
cash generated from operations until the ratio is at a level considered appropriate.
The gearing ratio at the year end is lower than the average gearing ratio as the level of trade debtors is lower at the year end than the average
during the year due to the seasonal nature of trading in the months of December and January.
Fair value estimation
The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date provided by
relationship banks.
The carrying value less impairment provision of trade receivables and payables and cash and cash equivalents are assumed to approximate their
fair values. Walker Greenbank PLC
Annual Report and Accounts 2009
32
3. Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning future events. The resulting accounting estimates will seldom precisely equal the
related actual results. The Group applies its best endeavours in setting accounting estimates, and uses historical experience and other factors,
including input from experienced and specialist management. Estimates and assumptions are continually re-evaluated and the resulting
accounting balances updated as new information including actual outcomes become apparent.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within
the next financial year are discussed below.
a) Retirement benefit obligations
The Group recognises its obligations to employee retirement benefits. The quantification of these obligations is subject to significant estimates
and assumptions regarding life expectancy, discount and inflation rates, wage and salary changes, the rate of increase in pension payments, and
the market values of equities, bonds and other pension assets. In making these assumptions the Group takes advice from a qualified actuary
about which assumptions reflect the nature of the Group’s obligations to employee retirement benefits. The assumptions are regularly reviewed to
ensure their appropriateness.
The Group determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present
value of estimated future cash outflows expected to be required to settle pension obligations. In determining the appropriate discount rate, the
Group considers the interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and
that have terms to maturity approximating the terms of the related pension liability. Details of the estimates and assumptions applied, and carrying
amounts of retirement benefit obligations and pension assets, are set out in note 22.
b) Impairment of non-financial assets
The Group tests annually whether goodwill or its indefinite life intangible asset has suffered any impairment, in accordance with its accounting
policy. The recoverable amounts of cash generating units have been determined based on value in use (VIU) calculations. These calculations
require use of estimates of future sales, margins, and other operating and administrative expenses, and of discount rates. Further disclosures
relating to the estimates and assumptions applied, and carrying amounts of the non-financial assets, are set out in note 13.
The Group makes provision for impairment in the carrying amount of its inventories and marketing materials. The nature of the Group’s products
are exposed to changes in taste and attitudes from time to time, which can affect the demand for those products. The Group has skilled and
experienced management who utilise historical sales information, and exercise their judgement, in making estimates about the extent of
provisions necessary based on the realisable value of inventory and expected future benefit to the Group of marketing materials taking into
account the estimated price and volume of future sales or usage less the further costs of sale and holding costs. Further disclosures relating to
the effect on the income statement of the establishment and reversal of such provisions against inventory are included in note 6. Details of the
carrying amount of marketing materials is disclosed in note 16 and of inventories in note 17.
c) Deferred tax recognition
Following the completion of the Group’s recovery programme and return to sustained profitability over recent years, the Group has considered it
appropriate to recognise at the balance sheet date deferred tax assets resulting from historical trading losses. The amount of deferred tax
recognised is based on estimates of the timing and amount of future taxable profits of companies within the Group, which in turn relies upon
estimates of future operating profits and the occurrence, timing and tax treatment of significant items of income and expenditure including
contributions to pension schemes and the vesting of share based payment awards. Further disclosures relating to the effect on the income
statement of the recognition of deferred tax assets are included in note 11, and the amount of deferred tax asset recognised and other relevant
disclosures are included in note 15.
d) Share based payment awards
The Group has granted awards to Executive Directors and Senior Management which include vesting conditions relating to the future financial
performance of the Group as measured by Profit before tax (PBT). The number of awards that will ultimately vest, if any, varies based on the PBT
achieved by the Group in the years ending 31 January 2009 and 2011 and the continued employment of award recipients. The PBT target for the
year ending 31 January 2009 has been achieved. The fair value of the awards granted is charged against the income statement over the vesting
period; the amount of that charge is dependent upon the Group’s estimates of how many awards will ultimately vest, which is linked directly to its
estimates regarding future PBT achievement. Further disclosures relating to the effect on the financial statements of share awards is included in
note 24.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
33
Accounts
4. Segmental analysis
Walker Greenbank is a designer, manufacturer and distributor of luxury interior furnishings, fabrics and wallpaper. The Group predominantly
manages its operations as two segments which are the brands and manufacturing. Segmental information is also presented in respect of the
Group’s geographical segments. Unallocated expenses predominantly relate to head office and other corporate functions, including long term
incentive plan costs. This is the basis on which the Group presents its results:
a) Primary reporting format – business segment
Eliminations
and
Brands Manufacturing unallocated Total
Year ended 31 January 2009 £000 £000 £000 £000
Revenue – external 50,735 12,963 – 63,698
Revenue – internal – 10,992 (10,992) –
Total revenue 50,735 23,955 (10,992) 63,698
Operating profit 5,082 785 (2,306) 3,561
Financial costs – – (695) (695)
Net pension charge – – (79) (79)
Profit before tax 5,082 785 (3,080) 2,787
Tax – – (1,165) (1,165)
Profit for the year 5,082 785 (4,245) 1,622
Eliminations
and
Brands Manufacturing unallocated Total
£000 £000 £000 £000
Assets 29,496 15,841 1,933 47,270
Liabilities (14,390) (5,003) (7,966) (27,359)
Total net assets 15,106 10,838 (6,033) 19,911
Capital expenditure – intangible assets 275 145 – 420
Capital expenditure – property, plant and equipment 475 632 – 1,107
Depreciation 730 733 7 1,470
Amortisation 358 18 – 376
Impairment losses – trade receivables 279 25 – 304
Reversal of prior period impairment losses – trade receivables – (5) – (5)
Impairment losses – inventory 632 4 – 636
Reversal of prior period impairment losses – inventory – (95) – (95)
Write off of marketing material products (refer note 5) 615 – – 615
Insurance proceeds receivable (refer note 5) (465) – – (465)
Share based payment charges – – 373 373
Eliminations
and
Brands Manufacturing unallocated Total
Year ended 31 January 2008 £000 £000 £000 £000
Revenue – external 48,206 14,242 – 62,448
Revenue – internal – 10,570 (10,570) –
Total revenue 48,206 24,812 (10,570) 62,448
Operating profit 4,624 1,486 (2,149) 3,961
Financial costs – – (981) (981)
Net pension income – – 119 119
Profit before tax 4,624 1,486 (3,011) 3,099
Tax – – 5,072 5,072
Profit for the year 4,624 1,486 2,061 8,171 Walker Greenbank PLC
Annual Report and Accounts 2009
34
4. Segmental Analysis continued
Eliminations
and
Brands Manufacturing unallocated Total
£000 £000 £000 £000
Assets 28,506 15,406 5,258 49,170
Liabilities (13,463) (4,278) (10,630) (28,371)
Total net assets 15,043 11,128 (5,372) 20,799
Capital expenditure – intangible assets 273 92 – 365
Capital expenditure – property, plant and equipment 821 611 – 1,432
Depreciation 615 703 3 1,321
Amortisation 480 21 – 501
Impairment losses – trade receivables 38 84 – 122
Reversal of prior period impairment losses – trade receivables (13) (53) – (66)
Impairment losses – inventory 734 25 – 759
Reversal of prior period impairment losses – inventory – (15) – (15)
Share based payment charges – – 429 429
Inter-segment transactions are entered into under the normal commercial terms and conditions that would also be available to unrelated
third parties.
Segment assets consist primarily of goodwill, intangible assets, property plant and equipment, trade and other receivables including inter-
segment receivables, and inventories. Segment liabilities consist primarily of trade and other payables including inter-segment payables.
Unallocated assets and liabilities consists primarily of cash, deferred tax assets, borrowings, derivative financial instruments, and retirement
benefit obligations and elimination of inter-segment balances.
b) Secondary reporting format – geographical segments
2009 2008
Revenue by geographical location of customers £000 £000
United Kingdom 41,026 41,540
Continental Europe 10,987 9,710
United States of America 7,893 7,927
Rest of the World 3,792 3,271
63,698 62,448
The geographical segments have changed to reflect the strategic objectives of the Group. The 2008 comparative figures have been amended to
reflect this new analysis.
2009 2008
Total assets by geographical segment £000 £000
United Kingdom 44,955 47,436
Continental Europe 893 712
United States of America 1,422 1,022
47,270 49,170
2009 2008
Capital expenditure by geographical segment £000 £000
United Kingdom 1,470 1,695
Continental Europe 3 19
United States of America 54 83
1,527 1,797
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
35
Accounts
5. (a) Analysis of operating profit by function of expense
2009 2008
£000 £000
Turnover 63,698 62,448
Cost of sales (25,567) (25,362)
Gross profit 38,131 37,086
Net operating expenses:
Distribution costs (17,578) (16,265)
Administration expenses (17,354) (16,464)
Other operating income/(expense) 362 (396)
Net operating expenses (34,570) (33,125)
Operating profit 3,561 3,961
During the year ended 31 January 2009 redundancies took place at the Standfast factory at a cost of £146,000. This item is presented within
administration expenses. In January 2009 marketing material products held at a third party’s premises were destroyed in a fire, and the carrying
amount of £615,000 has been written off. This item is presented within distribution expenses. Expected recoveries from the third party to
compensate the Group for the loss of products destroyed in the fire have been estimated at £465,000, and are presented within other operating
income. In May 2009, an interim payment was received from the third party which was in line with the expected recoveries.
Analysis of revenue by category:
2009 2008
£000 £000
Sale of goods 62,423 61,397
Royalty income 1,275 1,051
63,698 62,448
(b) Analysis of expense by nature
2009 2008
£000 £000
Changes in inventories of finished goods and work in progress 1,093 342
Raw materials and consumables used 19,405 17,211
Employee benefit expense 18,682 18,536
Depreciation, amortisation and impairment charges 1,846 1,822
Transportation expenses 2,068 1,833
Advertising costs 981 1,117
Operating lease payments 1,712 1,604
Other expenses 14,712 15,626
Total cost of sales, distribution costs and administrative expenses 60,499 58,091 Walker Greenbank PLC
Annual Report and Accounts 2009
36
6. Group operating profit
2009 2008
£000 £000
Group operating profit is stated after charging/(crediting):
Auditor’s remuneration:
Fees payable to Company’s auditor for the audit of parent •
Company and consolidated financial statements 50 50
Audit of Company’s subsidiaries pursuant to legislation • 75 75
Other services • – 8
Accounting advice with respect to IFRS • – 10
Depreciation of property, plant and equipment 1,470 1,321
Amortisation of intangibles 376 501
Cost of inventories recognised as expense in cost of sales 20,498 17,553
Impairment of inventories 636 759
Reversal of impairment of inventories (95) (15)
Impairment of trade receivables 304 122
Reversal of impairment of trade receivables (5) (66)
Net foreign exchange (gains)/losses (472) 396
Operating lease rentals:
Hire of motor vehicles and plant and machinery • 494 399
Land and buildings • 1,218 1,205
Loss/(profit) on disposal of fixed assets 6 (3)
7. Net defined benefit pension costs
2009 2008
£000 £000
Expected return on pension scheme assets 2,829 2,721
Interest on pension scheme liabilities (2,633) (2,371)
Scheme expenses met by Group (275) (231)
Net (charge)/income (79) 119
8. Net finance costs
2009 2008
£000 £000
Interest expense:
Interest payable on bank borrowings (685) (875)
Interest and similar charges payable (19) (36)
Total interest expense (704) (911)
Interest income:
Interest receivable on bank deposits 35 5
Net finance costs (669) (906)
Amortisation of issue costs of bank loan (26) (75)
Total finance costs (695) (981)
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
37
Accounts
9. Emoluments of Directors
2009 2008
Salary Bonus Benefits Pension Total Total
£000 £000 £000 £000 £000 £000
Executive Directors:
John Sach 220 – 5 33 258 342
David Smallridge 160 – 1 16 177 234
Alan Dix 126 – 1 13 140 187
Non-executive Directors:
Ian Kirkham (retired 31 January 2009) 65 – – – 65 62
Terry Stannard 26 – – – 26 9
Fiona Goldsmith (appointed 17 December 2008) 4 – – – 4 –
Charles Gray (retired 12 February 2008) – – – – – 22
601 – 7 62 670 856
Executive Directors have been granted awards under long term incentive plans, no amounts are currently receivable by the Directors.
In both years, retirement benefits were accruing to one Director under a defined benefit scheme, who is the highest paid Director. Accrued annual
pension benefits at the year end were £10,188 (2008: £20,210). Benefits are accruing under defined contribution schemes for three Directors
(2008: three Directors).
10. Employee Information
2009 2008
£000 £000
Wages and salaries 15,971 15,858
Social security costs 1,659 1,581
Other pension costs 679 668
Share based payment awards, including NIC thereon 373 429
Employee benefit expense 18,682 18,536
2009 2008
The average monthly number of employees (including Directors) during the year Number Number
Sales, warehousing and administration 344 320
Manufacturing 250 266
594 586
Compensation of key management personnel
2009 2008
£000 £000
Short term employee benefits (including short term incentives) 2,164 2,460
Post employment benefits (including pension costs) 126 119
Share based payment awards 373 429
2,663 3,008
The Group regards its key management personnel to be its Directors and Senior Management having authority and responsibility for planning,
directing and controlling the activities of the Group, either directly or indirectly. Share based payment awards reflects the charge in the income
statement and does not reflect the market value of shares expected to vest. Walker Greenbank PLC
Annual Report and Accounts 2009
38
11. Tax
2009 2008
£000 £000
Current tax – overseas tax (57) (29)
Deferred tax – ordinary (788) –
Deferred tax – exceptional (320) 5,101
Deferred tax (1,108) 5,101
Tax (charge)/credit for the year (1,165) 5,072
2009 2008
£000 £000
Profit on ordinary activities before tax 2,824 3,099
Tax on profit on ordinary activities at standard rate 28% (2008: 30%) (791) (930)
Non deductible expenditure (48) (73)
Utilisation of losses and origination and reversal of temporary differences during the year – 974
Utilisation of parent losses and reversal of temporary differences not previously recognised as assets (6) –
Impact of phasing out of Industrial Building Allowances (320) –
Recognition of deferred tax asset at end of year – 5,101
Tax credit/(charge) for year (1,165) 5,072
Factors affecting current and future tax charges
The Finance Bill 2008 announced the phasing out of the relief for Industrial Building Allowances by 31 March 2011. An additional deferred tax
liability of £320,000 has been recognised as a consequence, and is classified as an exceptional item.
The deferred tax credit of £5.1 million in 2008 arose from the recognition of deferred tax losses incurred by the Group in prior years and
temporary differences. Because of the nature and size of this item it was disclosed as an exceptional item.
Following the recognition of deferred tax assets arising from losses and temporary differences the future effective tax rate will be influenced by
changes in deferred tax positions.
The Group does not anticipate that UK corporation tax will become payable on profits within the immediate future due to the availability of tax
losses of approximately £21.3 million.
12. Earnings per share
Basic earnings per share (‘EPS’) is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number
of shares outstanding during the year, excluding those held in the employee share trust (note 24) and those held in treasury, which are treated
as cancelled.
Adjusted earnings per share is also presented as, in the opinion of the Directors, this provides additional information to shareholders on the
results of the Group’s activities. Adjusted earnings per share has been calculated to remove any charge or credit arising from deferred tax in the
current and comparative periods. The impact on after tax profit of deferred tax during these periods has been significant, and varies from an
exceptional credit of £5,101,000 in the comparative year following the first time recognition of historical corporation tax losses, to a charge for the
current year of £1,108,000, including an exceptional charge of £320,000 (refer note 11), as the corporation tax losses are utilised and the impact of
the removal of IBA’s in the 2008 Finance Act takes effect. In the opinion of the Directors, the exclusion of the deferred tax charges or credits
creates a more comparable earnings base on which to assess the performance of the Group.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
39
Accounts
12. Earnings per share continued
2009 2008
Weighted Weighted
average average
number Per share number Per share
Earnings of shares amount Earnings of shares amount
£000 (000s) Pence £000 (000s) Pence
Basic and diluted:
Basic and diluted earnings per share 1,622 54,880 2.96 8,171 56,397 14.49
Adjusted:
Earnings attributable to ordinary shareholders 1,622 54,880 2.96 8,171 56,397 14.49
Reversal of impact of deferred tax charge/(credit) 1,108 – 2.01 (5,101) – (9.05)
Adjusted earnings per share 2,730 54,880 4.97 3,070 56,397 5.44
On 1 July 2008 Walker Greenbank PLC purchased 275,000 ordinary shares of 1p each in the Company at 30p per ordinary share. Following this
transaction Walker Greenbank’s issued ordinary share capital with voting rights consists of 59,006,162 (2008: 59,006,162) ordinary shares of
which 1,690,093 (2008: 1,415,093) ordinary shares are held in treasury and a further 2,549,146 (2008: 2,549,146) ordinary shares are held by the
Walker Greenbank PLC Employee Benefit Trust (‘EBT’). Shares held in treasury or by the EBT are treated as cancelled when calculating EPS. At
31 January 2009 the market value of the treasury shares was £173,235.
13. Intangible assets
Arthur
Sanderson
and William Collection
Morris design Software
Goodwill archive assets assets Total
£000 £000 £000 £000 £000
Cost:
1 February 2007 1,400 4,300 480 4,467 10,647
Additions – – 209 156 365
31 January 2008 1,400 4,300 689 4,623 11,012
Additions – – 268 152 420
31 January 2009 1,400 4,300 957 4,775 11,432
Amortisation:
1 February 2007 841 – 146 3,691 4,678
Charge – – 105 396 501
31 January 2008 841 – 251 4,087 5,179
Charge – – 148 228 376
31 January 2009 841 – 399 4,315 5,555
Net book amount:
31 January 2009 559 4,300 558 460 5,877
31 January 2008 559 4,300 438 536 5,833
The Arthur Sanderson and William Morris archive was purchased as part of the acquisition of Arthur Sanderson & Sons on 29 August 2003.
It comprises an historical record of unique designs that are used to generate royalty income in the business.
Amortisation of £376,000 (2008: £501,000) is included in administrative costs.
Impairment tests for goodwill and Arthur Sanderson and William Morris Archive
The carrying value of goodwill at the year end of £559,000 (2008: £559,000) is attributable to the manufacturing segment. The Archive is
attributable to the brands. Walker Greenbank PLC
Annual Report and Accounts 2009
40
13. Intangible Assets continued
The Group tests goodwill and the Archive for impairment annually or more frequently if there are indications that they might be impaired. There
was no impairment charge recognised in the year (2008: none).
In assessing whether an impairment of goodwill is required the carrying value of the cash generative unit (‘CGU’) or group of CGUs is compared
with its recoverable amount. The recoverable amount for each CGU and collectively for groups of CGUs that make up the segments of the
Group’s business have been based on the value in use (‘VIU’).
The Group estimates the VIU using a discounted cashflow model (‘DCF’), where the projected cash flows for separate or collective groups of
CGUs are discounted using a pre-tax rate of 9.50% (2008: 8.48%). The discount rate used is the same across all segments.
The Group has used formally approved budgets for the first two years (2008: one year) of its VIU calculation, with extrapolation beyond the last
explicit year using an assumption of growth for future years ranging from 1% to 2% (2008: no growth) depending upon the CGU being tested. The
cash flows used in the calculation of the VIU are derived from past experience and are based on operating profit forecasts, which in turn rely upon
assumptions relating to sales growth, margins and operating and administrative expenses. The cash flows have not included the benefits arising
from any future asset enhancement expenditure, as this is not permitted by IAS 36. The VIU calculations therefore exclude significant benefits
anticipated from future capital expenditure. The growth rates included within the assumptions supporting the VIU calculations do not therefore
represent the Group’s anticipated total forecast growth, but rather only the growth deriving from capital expenditure completed at the balance
sheet date.
The recoverable amount of the Archive intangible asset is estimated based on VIU, and comprises estimated future cash flows from royalty
income relating to the Archive. A discount rate of 9.50% (2008: 8.48%) is applied.
The Group does not consider there to be reasonably probable changes to the key assumptions that would result in impairment of either goodwill
or the Archive as at 31 January 2009.
14. Property, plant and equipment
Plant,
Land and equipment Computer
buildings and vehicles assets Total
£000 £000 £000 £000
Cost:
1 February 2007 6,281 14,216 1,093 21,590
Additions 40 1,171 221 1,432
Disposals (917) (534) (19) (1,470)
Currency movements – 27 – 27
31 January 2008 5,404 14,880 1,295 21,579
Additions – 1,079 28 1,107
Disposals – (361) (27) (388)
Currency movements – 198 38 236
31 January 2009 5,404 15,796 1,334 22,534
Depreciation:
1 February 2007 1,797 10,054 875 12,726
Charge 103 1,042 176 1,321
Disposals (917) (534) (19) (1,470)
Currency movements – 11 – 11
31 January 2008 983 10,573 1,032 12,588
Charge 109 1,220 141 1,470
Disposals – (348) (27) (375)
Currency movements – 83 34 117
31 January 2009 1,092 11,528 1,180 13,800
Net book amount:
31 January 2009 4,312 4,268 154 8,734
31 January 2008 4,421 4,307 263 8,991
Depreciation expense of £1,470,000 (2008: £1,321,000) has been charged in administrative expenses.
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
41
Accounts
14. Property, plant and equipment continued
2009 2008
The net book amount of land and buildings comprises: £000 £000
Freehold land 450 450
Freehold buildings 3,862 3,971
Net book value 4,312 4,421
Land and buildings are stated at historical cost.
The carrying value of assets providing security under the Barclays facility was land and buildings of £4,312,000 (2008: £4,421,000).
15. Deferred income tax assets
A deferred tax asset of £5,158,000 (2008: £6,055,000) is recognised in respect of tax losses and other timing differences and £1,108,000 has
been charged to the income statement during the year as some of the tax losses have utilised and Industrial Buildings Allowances were phased
out in the Finance Act 2008.
2009 2008
£000 £000
Taxable temporary differences on property, plant and equipment (872) (533)
Taxable temporary differences on intangible assets (128) (106)
Tax losses 4,993 5,740
3,993 5,101
Pension scheme obligations 1,165 954
5,158 6,055
The movements in the deferred tax asset on pension scheme obligations are recognised in the Statement of Recognised Income and Expense.
At the balance sheet date the Group has unused tax losses of £21.3 million (2008: £23.7 million) available for offset against future profits. A
deferred asset is recognised in respect of £17.7 million (2008: £20.5 million) of such losses as the Group believes that realisation of the related tax
benefit through future taxable profit is probable and can be readily accessed under existing tax legislation. No deferred tax has been recognised
on the remaining £3.6 million (2008: £3.2 million) as these losses are not readily available for offset against the Group’s future profits under
existing tax legislation and therefore the realisation of these losses is not considered probable. The recognition of deferred tax on losses will be
assessed at each reporting date.
Potential deferred tax assets at 31 January 2009 of £1,269,000 (2008: £1,068,000) relating to tax losses and deductible temporary differences
have not been recognised as it is not considered probable that recovery of the potential deferred tax asset will arise under existing tax legislation.
2009 2008
£000 £000
Tax losses 997 893
Other deductible temporary differences 272 175
1,269 1,068
There are also capital tax losses at 31 January 2009 of £2,485,000 (2008: £2,485,000) but no deferred tax asset has been recognised as it is not
considered probable that these losses will be utilised. Walker Greenbank PLC
Annual Report and Accounts 2009
42
16. Trade and other receivables
2009 2008
Current £000 £000
Trade receivables 9,053 10,403
Less: provision for impairment of trade receivables (423) (186)
Net trade receivables 8,630 10,217
Other receivables 1,111 214
Marketing materials 1,385 1,872
Prepayments 1,426 1,172
12,552 13,475
2009 2008
Non-current £000 £000
Other receivables 12 253
The value of trade receivables providing funding under the Barclays facility was £6,721,000 (2008: £7,621,000).
There is no material difference between the carrying amount and the fair value of the trade and other receivables.
Credit quality of financial assets
(i) Neither past due nor impaired
Included in the Group’s trade receivable balances are debtors with a carrying value of £4,849,000 (2008: £7,058,000) which are neither past due
nor impaired at the reporting date. The nature of the Group’s business means that it has a long standing relationship with the majority of its
customers, who either have no experience of historical default or only temporary late payments with full recovery of balances due.
For the Group’s cash at bank, and the receivable leg of derivative financial instruments, the counterparty to the financial instruments is a major UK
bank, and the Group does not consider there to be any significant credit risk from holding these financial assets.
(ii) Past due – not impaired
Included in the Group’s trade receivable balances are debtors with a carrying value of £3,561,000 (2008: £2,930,000) which are past due at the
reporting date for which the Group does not consider the receivable to be impaired as there has not been a significant decline in credit quality
and the Group believes that the amounts are still fully recoverable. The table below shows the aging analysis of the receivables:
2009 2008
£000 £000
1–30 days past due 1,653 1,528
31–60 days past due 1,490 1,189
61–90 days past due 339 213
91+ days past due 79 –
3,561 2,930
(iii) Past due – impaired
As at 31 January 2009, trade receivables of £643,000 (2008: £415,000) were individually determined to be impaired and provided for. The amount
of the provision was £281,000 (2008: £186,000). The main factors used to assess the impairment of trade receivables is the age of the balance
and circumstances of the individual customer. It has been assessed that a proportion of the receivables is expected to be recovered. The
Directors believe that in the current economic environment there is objective evidence of credit deterioration and an impairment of £142,000
representing a collective assessment of risk has been made. Due to the nature of Group’s products, there is limited amount of stock left in the
possession of customers that could act as collateral under terms of trade. As the value of this stock is immaterial, it has not been disclosed in the
financial statements.
The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:
2009 2008
£000 £000
Sterling 7,101 8,337
Dollars 522 393
Euros 2,064 1,826
Other 66 128
9,753 10,684
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
43
Accounts
16. Trade and other receivables continued
The Group considers that any exposure to concentrations of credit risk will be impacted principally by underlying economic conditions in the
principal geographical segments in which the Group operates. As at the balance sheet date the carrying value of trade receivables by
geographical segment was:
2009 2008
£000 £000
United Kingdom 5,284 6,625
Continental Europe 2,117 2,271
United States of America 833 775
Rest of the World 396 546
8,630 10,217
As part of the Group’s credit risk management the Group seeks credit insurance on large overseas customers and also on large UK customers of
the manufacturing segment.
Provisions for impairment
Movements on the Group provision for impairment of trade receivables are as follows:
2009 2008
£000 £000
At 1 February (186) (232)
Provision for receivables impaired (304) (122)
Receivables written off in the year as uncollectible 68 105
Unused amounts reversed 5 66
Exchange difference (6) (3)
At 31 January (423) (186)
The creation and release of provision for impaired trade receivables have been included within ‘administrative expenses’ in the income statement.
17. Inventories
2009 2008
£000 £000
Raw materials 1,368 1,120
Work in progress 1,069 1,904
Finished goods 11,450 9,522
13,887 12,546
The cost of inventories recognised as an expense and included in ‘cost of sales’ amounted to £20,498,000 (2008: £17,553,000).
The value of inventories providing security under the Barclays facility, if it were to be fully drawn, was £8,637,000 (2008: £7,645,000).
18. Cash and cash equivalents
2009 2008
£000 £000
Cash at bank and in hand 1,050 2,017
There is a set off arrangement for bank accounts held with the UK clearing bank, and accordingly the amounts stated above represent the net of
accounts in funds and in overdraft. Walker Greenbank PLC
Annual Report and Accounts 2009
44
19. Trade and other payables
2009 2008
£000 £000
Trade payables 9,973 10,570
Corporation tax 85 65
Other taxes and social security 1,043 741
Other creditors 780 439
Accruals 3,237 3,731
15,118 15,546
20. Derivative financial instruments
2009 2008
£000 £000
Forward foreign exchange contracts – cash flow hedges (812) (110)
Forward foreign exchange contracts
The Group’s US based subsidiary, Walker Greenbank Inc., sells products to local customers with sales invoiced in US dollars. As the Group’s
presentation currency is sterling it is exposed to changes in the reported sterling value of these sales. The Group considers that it is highly
probable that future sales of this nature will continue to arise over at least the next 12 months. During the year Walker Greenbank PLC has
entered into monthly forward foreign exchange contracts up to January 2010, with a third party, to buy sterling and sell dollars. The Group has
designated these contracts as cash flow hedges of the foreign currency risk arising from the highly probable future forecast sales transactions. As
at the reporting date the fair value of the forward foreign contracts deferred in the hedging reserve relating to the exposure on these anticipated
future transactions is a liability of £820,000 (2008: £110,000). The amounts deferred in equity will be released into the income statement in the
period or periods during which the hedged forecast transactions effect the income statement, which is expected to be within 12 months of the
balance sheet date.
The brands make more purchases from the euro zone than sales made to the euro zone. As the Group’s presentation currency is sterling it is
exposed to changes in the reported sterling value of the purchases. The Group considers that it is highly probable that future purchases of this
nature will continue to arise over at least the next 12 months. During the second half of the year Walker Greenbank PLC has entered into monthly
forward foreign exchange contracts up to December 2009, with a third party, to buy euros and sell sterling. The Group has designated these
contracts as cash flow hedges of the foreign currency risk arising from the highly probable future forecast purchase transactions. As at the
reporting date the fair value of the forward foreign contracts deferred in the hedging reserve relating to the exposure on these anticipated future
transactions is an asset of £8,100 (2008: £nil). The amounts deferred in equity will be released into the income statement in the period or periods
during which the hedged forecast transactions effect the income statement, which is expected to be within 12 months of the balance sheet date.
21. Borrowings
2009 2008
£000 £000
Non-current:
Term loan 3,000 3,400
Trade receivables loan 3,862 5,502
Stock loan 6 4
6,868 8,906
Current:
Term loan 400 400
Total borrowings 7,268 9,306
In July 2007, the Group agreed terms for new facilities from Barclays Bank PLC replacing the Burdale Financial Limited funding. The facilities
comprises: a variable rate Term Loan secured on the Group’s freehold property of £4 million which is being repaid on a 10 year profile, and
Receivables and Inventory Financing Agreements which provide three year variable rate floating loans secured on the eligible trade receivables
and eligible inventories at any point in time (the working capital facilities). The working capital facilities may be drawn down in either sterling or
euros. The total Barclays loan facility is capped at £17 million; the utilisation of the facility at the year end was £7,268,000 (2008: £9,306,000). The
term loan bears interest at variable rates based on a margin above the Bank of England base rate. The working capital facilities bear finance costs
in the form of discount charges which are calculated periodically and vary at margins above the base rate published by Bank of England (for
sterling loans) or the European Central Bank (for euro loans).
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
45
Accounts
21. Borrowings continued
Under the Barclays Bank PLC facilities, the Group is subject to various financial covenants which apply to the term loan, including interest cover
and debt service. The receivables and inventory financing agreements require compliance with a number of operational covenants. Any non-
compliance with covenants could, if not remedied or waived, constitute an event of default with respect to any such arrangements. The Group
has reported to its financiers that it was in full compliance with its financial and operational covenants throughout each of the periods presented.
The fair value of current borrowings equal their carrying amount, as the impact of discounting is not significant. The carrying amounts and fair
value of the non-current borrowings are as follows:
Carrying amount Fair value
2009 2008 2009 2008
£000 £000 £000 £000
Property loan 3,000 3,400 3,000 3,400
Trade receivables loan 3,862 5,502 3,918 5,584
Stock loan 6 4 6 4
6,868 8,906 6,924 8,988
The fair values are based on cash flows discounted using a rate based on the borrowing rate of 2.75% (2008: 7.00%).
The table below analyses the Group’s financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings based on the
remaining period to contractual maturity at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows.
The maturity profile of undiscounted cash flows on variable interest rate borrowings has assumed interest rates as at the balance sheet date.
Less than Between Between Over
1 year 1 to 2 years 2 to 5 years 5 years
31 January 2009 £000 £000 £000 £000
Borrowings 494 4,339 1,365 1,510
Derivative financial instruments 812 – – –
Trade and other payables 13,990 – – –
15,296 4,339 1,365 1,510
Less than Between Between Over
1 year 1 to 2 years 2 to 5 years 5 years
31 January 2008 £000 £000 £000 £000
Borrowings 1,041 1,009 7,206 2,080
Derivative financial instruments 110 – – –
Trade and other payables 14,740 – – –
15,891 1,009 7,206 2,080
The carrying amounts of the Group’s borrowings are denominated in the following currencies:
2009 2008
£000 £000
Sterling 7,215 9,306
Euro 53 –
Total 7,268 9,306
22. Retirement benefit obligations
Defined contribution schemes
The Group contributes to the defined contribution section of the Abaris Holdings Limited Pension Scheme and to a Group Personal Pension Plan
which is also a defined contribution scheme. Contributions are charged to the income statement as incurred, and amounted to £404,000 (2008:
£437,000). Active members of the schemes are also able to make contributions.
Defined benefit schemes
The Group operates the following funded defined benefit pension schemes in the UK which offer pensions on retirement and death benefits to
members: the Walker Greenbank Pension Plan, the Abaris Holdings Limited Pension Scheme and the WG Senior Management Pension Scheme.
Pension benefits are related to the members’ salary at retirement and their length of service. The schemes are closed to new members and the
future accrual of benefits. The most recent triennial funding valuation for the defined benefit schemes was April 2006. An updated valuation for
IAS 19 financial reporting purposes has been completed at the balance sheet date. The Group’s contributions to the schemes for the year
beginning 1 February 2009 are expected to be £1,342,000. Walker Greenbank PLC
Annual Report and Accounts 2009
46
22. Retirement benefit obligations continued
The principal assumptions applied when valuing the defined benefit schemes were:
2009 2008
Discount rate 6.90% 6.10%
Rate of salary increase 3.20% 3.40%
Rate of increase to LPI pensions in payment 3.20% 3.40%
Rate of increase to pensions (in excess of GMP) in deferment 3.20% 3.40%
Rate of inflation 3.20% 3.40%
Expected return on plan assets 6.60% 7.00%
Members are assumed to commute 25% of their pension (2008: 25%).
The assumptions used in determining the overall expected return on assets of the scheme have been set with reference to yields available on
government bonds and appropriate risk margins for equities and other classes of assets.
The mortality assumptions applied are based on the PA92 year of birth with medium cohort tables (2008: PA92 with medium cohort tables). The
mortality assumptions imply the expected future lifetime from age 65 as follows:
2009 2008
Non-pensioner male currently 45 23.1 23.1
Pensioner male currently 65 21.9 21.9
Non-pensioner female currently 45 25.9 25.9
Pensioner female currently 65 24.8 24.8
The amounts recorded in the balance sheet are determined as follows:
2009 2008
£000 £000
Equities 22,458 22,512
Property – 3,607
Fixed interest 10,526 12,653
Insured annuities 1,609 1,739
Cash and other 470 340
Fair value of plan assets 35,063 40,851
Present value of funded defined benefit obligations (39,224) (44,260)
Net liability in balance sheet (4,161) (3,409)
Reconciliation of opening and closing balances of the present value of the defined benefit obligation
2009 2008
£000 £000
Benefit obligation at beginning of year 44,260 45,508
Scheme expenses 275 231
Interest cost 2,633 2,371
Contributions by plan participants – –
Actuarial loss – change in mortality assumptions – 2,868
Actuarial (gain) – other (5,458) (4,932)
Benefits paid (2,486) (1,786)
Past service cost – –
Curtailments and settlements – –
Benefit obligation at end of year 39,224 44,260
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
47
Accounts
22. Retirement benefit obligations continued
Reconciliation of opening and closing balances of the fair value of plan assets
2009 2008
£000 £000
Fair value of plan assets at beginning of year 40,851 39,990
Expected return on plan assets 2,829 2,721
Actuarial (loss) (7,458) (1,364)
Contributions by employers 1,327 1,290
Contributions by plan participants – –
Benefits paid (2,486) (1,786)
Fair value of plan assets at end of year 35,063 40,851
The amounts recognised in the income statement are:
2009 2008
£000 £000
Scheme expenses 275 231
Interest on obligation 2,633 2,371
Expected return on plan assets (2,829) (2,721)
Settlement and curtailments – –
Net defined benefit pension charge/(income) 79 (119)
The actual return on assets over the period was a loss of £4,629,000 (2008: profit of £1,357,000).
Actuarial gains and (losses) to be shown in Statement of Recognised Income and Expense
2009 2008
£000 £000
Actual return on scheme assets less than expected return (7,458) (1,364)
Change in mortality assumptions – (2,868)
Other actuarial gains on scheme liabilities 5,458 4,932
(2,000) 700
Other actuarial gains on scheme liabilities in the period arise mainly from increases in the discount rate used in determining the present value of
scheme liabilities. The cumulative amount of actuarial losses reported in the Statement of Recognised Income and Expense (including amounts
reported in the equivalent statement prior to the adoption of IFRS) before deferred taxation was £16,351,000 (2008: £14,351,000).
History of schemes’ assets, obligations and experience adjustments
2009 2008 2007 2006
£000 £000 £000 £000
Present value of defined benefit obligation 39,224 44,260 45,508 47,222
Fair value of scheme’s assets 35,063 40,851 39,990 39,189
(Deficit) in the schemes (4,161) (3,409) (5,518) (8,033)
Experience adjustments arising on scheme liabilities 5,458 2,064 (1,284) *
Experience adjustments arising on scheme assets (7,458) (1,364) (1,310) *
* Information not readily available for periods prior to the date of transition to IFRS.
Walker Greenbank PLC
Annual Report and Accounts 2009
48
23. Financial instruments by category
The accounting policies for financial instruments have been applied to the line items below:
Derivatives
Loans and Assets at used for
receivables fair value hedging Total
31 January 2009 £000 £000 £000 £000
Assets as per balance sheet
Trade and other receivables 9,753 – – 9,753
Cash and cash equivalents 1,050 – – 1,050
Total 10,803 – – 10,803
Other Derivatives
Liabilities at financial used for
fair value liabilities hedging Total
31 January 2009 £000 £000 £000 £000
Liabilities as per balance sheet
Derivative financial instruments – – 812 812
Borrowings – 7,268 – 7,268
Trade and other payables – 13,990 – 13,990
Total – 21,258 812 22,070
Derivatives
Loans and Assets at used for
receivables fair value hedging Total
31 January 2008 £000 £000 £000 £000
Assets as per balance sheet
Trade and other receivables 10,684 – – 10,684
Cash and cash equivalents 2,017 – – 2,017
Total 12,701 – – 12,701
Other Derivatives
Liabilities at financial used for
fair value liabilities hedging Total
31 January 2008 £000 £000 £000 £000
Liabilities as per balance sheet
Derivative financial instruments – – 110 110
Trade and other payables – 9,306 – 9,306
Borrowings – 14,740 – 14,740
Total – 24,046 110 24,156
24. Share Capital
Ordinary shares of 1 pence each Number of shares £
Authorised share capital:
1 February 2008 and 31 January 2009 85,000,000 850,000
Allotted, called up and fully paid:
1 February 2008 and 31 January 2009 59,006,162 590,062
All holders of ordinary shares have the right to vote at general meetings of the Company and to distributions from dividends or on winding up of
the Company.
The Walker Greenbank PLC Employee Benefit Trust (‘the trust’) holds 2,549,146 shares (2008: 2,549,146) with a cost of £601,202 (2008:
£601,202) and the market value at 31 January 2009 of £261,287 (2008: £1,038,777).
During the year Walker Greenbank PLC purchased 275,000 ordinary shares of 1p at a price of 30p per share and at a total cost of £82,748. The
total number of shares held in treasury are 1,690,093 (2008: 1,415,093) and represent 2.9% (2008: 2.4%) of the issued shares. The market value
of these shares at 31 January 2009 was £173,235 (2008: £576,650).
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
49
Accounts
24. Share Capital continued
The shares held by the trust and the treasury shares are held for the purpose of satisfying awards under long term incentive plans to Executive
Directors and senior management.
Long Term Incentive Plans (LTIPs)
The Group operates a Long Term Incentive Plan. At the balance sheet date two awards had been previously granted under this plan, in which
Executive Directors and senior management of the Group participate. The LTIP has previously been approved by the shareholders at an Annual
General Meeting.
Awards under the scheme are granted in the form of nil-priced share options, and are to be satisfied either using market-purchased shares or by
the issuing of new shares. The awards vest in full or in part dependent on the satisfaction of specified performance targets at the end of the
vesting period applying to each plan. The number of award that vest is dependent upon the profit before tax (‘PBT’) achieved for the relevant year.
As the awards carry a nil-value exercise price, the grant date fair value corresponds to the share price of the Group on the grant date. Details are
set out below:
Award One Award Two
Grant date of awards 25 July 2007 24 May 2008
Grant date fair value of award (pence per award) 26.75 53.00
Vesting date of awards 25 July 2009 24 May 2011
Maximum number of awards 2,549,000 1,415,093
Relevant year ending date for determination of PBT 31 January 2009 31 January 2011
Based on the performance of the Group for the year ended 31 January 2009 the Award One awards have satisfied the PBT vesting condition in
full, and are expected to vest on 25 July 2009.
Movements during the year in the number of awards outstanding, assuming maximum achievement of PBT targets, are as follows:
2009 2008
£000 £000
At 1 February 3,964,093 2,549,000
Granted – 1,415,093
Forfeited – –
Exercised – –
Expired – –
At 31 January 3,964,093 3,964,093
Refer to note 10 for disclosure of the charge to the consolidated income statement arising from share based payments.
On 27 May 2009 further awards were made to the Executive Directors, a total of 1,700,000 ordinary shares.
25. Consolidated statement of changes in equity
Other reserves
Share
Share premium Retained Capital Merger Hedge Translation
capital account earnings reserve reserve reserve reserve Total
£000 £000 £000 £000 £000 £000 £000 £000
1 February 2007 590 457 (28,594) 43,457 (2,950) – (17) 12,943
Actuarial losses on scheme assets – – (1,364) – – – – (1,364)
Changes in actuarial mortality assumptions – – (2,868) – – – – (2,868)
Other actuarial gains on scheme liabilities – – 4,932 – – – – 4,932
Deferred tax – – (683) – – – – (683)
Currency translation differences – – – – – – 27 27
Hedging reserve – – – – – (110) – (110)
Net income/(expense) recognised
in equity via SORIE – – 17 – – (110) 27 (66)
Reserve for long term incentive plan – – 363 – – – – 363
Purchase of treasury shares – – (612) – – – – (612)
Profit for the year – – 8,171 – – – – 8,171
31 January 2008 590 457 (20,655) 43,457 (2,950) (110) 10 20,799 Walker Greenbank PLC
Annual Report and Accounts 2009
50
25. Consolidated Statement of changes in equity continued
Other reserves
Share
Share premium Retained Capital Merger Hedge Translation
capital account earnings reserve reserve reserve reserve Total
£000 £000 £000 £000 £000 £000 £000 £000
1 February 2008 590 457 (20,655) 43,457 (2,950) (110) 10 20,799
Actuarial losses on scheme assets – – (7,458) – – – – (7,458)
Other actuarial gains on scheme liabilities – – 5,458 – – – – 5,458
Deferred tax – – 211 – – – – 211
Currency translation differences – – – – – – (350) (350)
Cash flow hedging reserve – released to
income statement – – – – – 110 – 110
Cash flow hedging reserve – recognised in equity
during the period – – – – – (812) – (812)
Net income/(expense) recognised in
equity via SORIE – – (1,789) – – (702) (350) (2,841)
Reserve for long term incentive plan – – 414 – – – – 414
Purchase of treasury shares – – (83) – – – – (83)
Profit for the year – – 1,622 – – – – 1,622
31 January 2009 590 457 (20,491) 43,457 (2,950) (812) (340) 19,911
Capital reserve represents £000
Share premium of companies acquired under merger accounting principles 1,276
Capital reserve arising on consolidation 293
Capital redemption reserve for deferred shares 1,003
Capital redemption reserve for ‘B’ shares 40,885
43,457
26. Dividends
The Directors do not propose a final dividend in respect of the year ended 31 January 2009 (2008: no dividend proposed).
27. Cash generated from operations
2009 2009 2008 2008
£000 £000 £000 £000
Operating profit 3,561 3,961
Depreciation 1,470 1,321
Amortisation 376 501
Charge for long-term incentive plan recognised in equity 414 363
Loss/(profit) on disposal of property, plant and equipment 6 (3)
Unrealised foreign exchange (gains)/losses included in operating profit (499) 2
Changes in working capital
Increase in inventories (1,341) (410)
Decrease/(increase) in trade and other receivables 1,164 (2,212)
(Decrease)/increase in trade and other payables (288) 2,390
Defined benefit pension cash contributions (1,327) (1,290)
(25) 662
Cash generated from operating activities 3,536 4,623
Notes to the Consolidated Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
51
Accounts
28. Analysis of net debt
Other
1 February non-cash Exchange 31 January
2008 Cash flow changes movement 2009
£000 £000 £000 £000 £000
Cash and cash equivalent 2,017 (997) – 30 1,050
Borrowings due within one year (400) – – – (400)
Borrowings due after one year (8,906) 2,064 (26) – (6,868)
(9,306) 2,064 (26) – (7,268)
Net debt (7,289) 1,067 (26) 30 (6,218)
Other non-cash changes are amortisation of issue costs relating to the loan financing.
29. Commitments
a) Capital commitments
Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:
2009 2008
£000 £000
Property, plant and equipment 96 203
96 203
b) Lease commitments
Operating lease payments represent rentals payable by the Group for certain office properties and other assets. Land and building leases are
negotiated for an average of 16 years and rentals are fixed for an average of five years. Other leases are negotiated for an average term of three
years and rentals are fixed for an average of three years.
Total commitments due under non-cancellable operating leases are as follows:
Land and Land and
buildings Other buildings Other
2009 2009 2008 2008
£000 £000 £000 £000
Within one year 960 396 1,151 287
Between one and five years 3,305 512 3,161 359
Over five years 4,282 – 5,018 –
8,547 908 9,330 646
The Group expects to receive total sub-lease rental income of £81,000 (2008: £109,000) under the terms of sub-lease agreements entered into
with third parties.
Other leases include hire of plant, machinery and motor vehicles.
30. Principal subsidiary undertakings
The principal Group operating companies that traded during the year, and are wholly owned, and which are included in these consolidated financial
statements are as follows:
Abaris Holdings Limited – registered in England and Wales
Walker Greenbank Inc.* – incorporated in the USA
Arthur Sanderson & Sons Inc* – incorporated in the USA
Arthur Sanderson & Sons SARL * – incorporated in France
Whittaker & Woods SRL – incorporated in Italy
Investments in Group companies are ordinary shares.
* Shares held by subsidiary company.
The principal activities of the Group are design, manufacture, marketing and distribution of wallcoverings, furnishing fabrics and associated
products for the consumer market. Walker Greenbank PLC
Annual Report and Accounts 2009
52
We have audited the parent company financial statements of Walker
Greenbank PLC for the year ended 31 January 2009 which comprise
the balance sheet and the related notes.
We have reported separately on the group financial statements of
Walker Greenbank PLC for the year ended 31 January 2009.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the Annual Report and the
parent company financial statements in accordance with applicable
law and United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice) are set out in the Statement
of Directors’ Responsibilities.
Our responsibility is to audit the parent company financial statements in
accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland). This report,
including the opinion, has been prepared for and only for the company’s
members as a body in accordance with Section 235 of the Companies
Act 1985 and for no other purpose. We do not, in giving this opinion,
accept or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
We report to you our opinion as to whether the parent company
financial statements give a true and fair view and whether the parent
company financial statements have been properly prepared in
accordance with the Companies Act 1985. We also report to you
whether in our opinion the information given in the Directors’ Report is
consistent with the parent company financial statements. The
information given in the Directors’ Report includes that specific
information presented in the Chairman’s Statement, the Chief
Executive’s Review, and the Financial Review that is cross referred
from the Business Review section of the Directors’ Report.
In addition we report to you if, in our opinion, the company has not
kept proper accounting records, if we have not received all the
information and explanations we require for our audit, or if information
specified by law regarding directors’ remuneration and other
transactions is not disclosed.
We read other information contained in the Annual Report and
consider whether it is consistent with the audited parent company
financial statements. The other information comprises only the
Highlights from 2009, the Chairman’s Statement, the Chief Executive’s
Review, the Financial Review, the information on Directors and
Advisers, the Report of the Directors, the Statement of Directors’
Responsibilities and all of the other information listed on the contents
page. We consider the implications for our report if we become aware
of any apparent misstatements or material inconsistencies with the
parent company financial statements. Our responsibilities do not
extend to any other information.
Independent Auditors’ Report
To the members of Walker Greenbank PLC
Basis of audit opinion
We conducted our audit in accordance with International Standards on
Auditing (UK and Ireland) issued by the Auditing Practices Board. An
audit includes examination, on a test basis, of evidence relevant to the
amounts and disclosures in the parent company financial statements.
It also includes an assessment of the significant estimates and
judgments made by the directors in the preparation of the parent
company financial statements, and of whether the accounting policies
are appropriate to the company’s circumstances, consistently applied
and adequately disclosed.
We planned and performed our audit so as to obtain all the information
and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the
parent company financial statements are free from material
misstatement, whether caused by fraud or other irregularity or error. In
forming our opinion we also evaluated the overall adequacy of the
presentation of information in the parent company financial statements.
Opinion
In our opinion:
the parent company financial statements give a true and fair >
view, in accordance with United Kingdom Generally Accepted
Accounting Practice, of the state of the company’s affairs as at
31 January 2009; and
the parent company financial statements have been properly >
prepared in accordance with the Companies Act 1985; and
the information given in the Directors’ Report is consistent with the >
parent company financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
East Midlands, UK
17 June 2009 Walker Greenbank PLC
Annual Report and Accounts 2009
53
Accounts
Walker Greenbank PLC Company Accounts – UK GAAP
Company Balance Sheet
At 31 January 2009
2008
2009 £000
note £000 (restated)
Fixed assets 5 4,335 4,453
Investments 6 43,755 43,676
48,090 48,129
Current assets and liabilites
Debtors 7 15,307 18,919
Creditors: amounts falling due within one year 8 (9,639) (9,044)
Net current assets 5,668 9,875
Total assets less current liabilities 53,758 58,004
Creditors: amounts falling due after more than one year 9 (3,000) (3,400)
Provisions 10 – (74)
Net assets 50,758 54,530
Capital and reserves:
Share capital 11 590 590
Share premium account 12 457 457
Retained earnings 12 7,823 11,595
Other reserves 12 41,888 41,888
Total shareholders’ funds 50,758 54,530
The notes on pages 54 to 61 form an integral part of the Company financial statements.
J D Sach A N Dix
Director Director
These accounts were approved by the Directors on 17 June 2009.
Walker Greenbank PLC
Annual Report and Accounts 2009
54
Notes to the Accounts
1. Accounting policies
Accounting convention
The financial statements are prepared on a going concern basis and under the historical cost convention. They have been prepared in
accordance with applicable accounting standards and United Kingdom Generally Accepted Accounting Practice, with the Companies Act 1985,
and with the accounting policies set out below which have been consistently applied to all periods presented unless otherwise indicated.
Profit and loss account
No profit and loss account is presented for Walker Greenbank PLC (‘the Company‘) as it has applied the exemption provided by Section 230 of
the Companies Act 1985. A loss of £4,103,000 (2008: profit £275,000) has been dealt with in the accounts of the parent company.
Consolidation
These financial statements present information relating to the entity Walker Greenbank PLC, and are not consolidated. The consolidated financial
statements of the Group of which the Company is the parent are separately presented within this Annual Report and Accounts under IFRS.
Fixed assets
Depreciation is charged on tangible fixed assets (excluding freehold land) on a straight-line basis on the original cost after deduction of any
estimated residual value. The principal annual rates are:
Freehold buildings 2%
Short leasehold improvements Over the unexpired period of the lease
Plant, equipment and vehicles Between 5% and 33%
Computer assets Between 12.5% and 33%
Land and buildings are stated at cost less any provision for impairment.
Impairment of fixed assets and investments
Fixed assets and investments are subject to review for impairment in accordance with Financial Reporting Standard No.11. Where impairment
triggers are identified the recoverable amount of the relevant asset, or group of assets within an income generating unit, is determined, being the
higher of value in use and net realisable value. If the carrying amount of the asset exceeds its recoverable amount an impairment loss is
calculated. Any impairment is recognised in the profit and loss account in the year in which it occurs. Where impairments have been identified in
prior years and recoverable amount was based on value in use, an updated discounted cash flow is prepared annually to assess whether the
previous impairment in value has reversed. When all conditions are met, the impairment is reversed and recognised in the profit and loss in the
year in which the reversal occurs.
Financial instruments
The Company is listed on the Alternative Investment Market regulated by The London Stock Exchange. It is not required to adopt FRS26
‘Financial Instruments: Measurement’ or FRS29 ‘Financial Instruments: Disclosures’ in these financial statements, and has not elected to
voluntarily do so.
The Company continues to adopt the amortised cost basis of accounting for financial instruments, and had not elected to voluntarily apply fair
value measurements of financial instruments, including derivative financial instruments.
Foreign currencies
Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange ruling at the balance sheet date.
Transactions in foreign currencies are recorded at the rates ruling at the date of transaction. All differences are taken to the profit and loss
account. Further disclosure of the Group’s financial risk management policies is included in note 2 of the consolidated financial statements of the
Group which are separately presented from these Company accounts.
Employee share ownership plan (‘ESOP’)
Where the Company’s issued share capital is acquired by an ESOP trust sponsored by the Company the cost of acquisition is deducted from
profit and loss reserves in accordance with UITF Abstract 38.
Employee benefits – share based payments under Long Term Incentive Plans (LTIP)
In accordance with the transitional provisions, FRS20 has been applied to all grants of equity instruments after 7 November 2002 that had not
vested as of 1 January 2005.
The Group issues equity-settled share based payments to certain employees which must be measured at fair value and are recognised as an
expense in the income statement with a corresponding increase in equity. The fair values of these payments are measured at the dates of grant,
taking into account the terms and conditions upon which the awards are granted. The fair value is recognised over the period during which
employees become conditionally entitled to the awards, subject to the Group’s estimate of the number of awards which will lapse, either due to
employees leaving the Group prior to vesting or due to non-market based performance conditions not being met. The total amount recognised in
the income statement as an expense is adjusted to reflect the actual number of awards that vest. Walker Greenbank PLC
Annual Report and Accounts 2009
55
Accounts
1. Accounting policies continued
The Company has adopted UITF Abstract 44 ‘FRS20 – Group and treasury shares’. The adoption of UITF 44 has resulted in restatement of
comparative financial statements, with the portion of the fair value of awards granted to employees providing services to the Company’s
subsidiary companies being recognised as an additional investment in those subsidiaries, and not as an expense of the Company. This has been
applied retrospectively and has resulted in restatement of profit and loss account for year ended 31 January 2008 (note 12).
Employee benefits – pensions
The Walker Greenbank Group operates both defined benefit and defined contribution pension schemes for the benefit of its employees. Further
details of these schemes are included in note 22 of the consolidated financial statements of the Group presented within the Annual Report and
Accounts. Defined benefit pension schemes are now accounted for within the separate Financial Statements of Group’s trading subsidiary,
Abaris Holdings Limited. The parent company recognises contributions to defined contribution schemes in respect of its employees as expenses
when incurred.
Share capital
Ordinary shares are classified as equity. Costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of
tax, from the proceeds.
Treasury shares
Consideration paid including any directly attributable incremental costs (net of income taxes) on the purchase of the Company’s equity share
capital (treasury shares) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where
such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related
income tax effects is included in equity attributable to the Company’s equity shareholders.
Deferred taxation
Deferred taxation is recognised in respect of timing differences that have originated but not reversed at the balance sheet date and that give rise
to an obligation to pay more tax or a right to pay less tax in the future. Deferred tax is calculated using the average rates that are expected to
apply when the timing differences reverse, based on tax rates that have been substantively enacted by the balance sheet date. No provision has
been made for any liability arising from the distribution of past earnings of subsidiary undertakings. Deferred tax assets are only recognised when
it is more likely than not that they will be recovered in the foreseeable future.
Leases
Leases are classified as finance leases where the terms of the lease transfer substantially all the risks and rewards of ownership to the Company.
All other leases are classified as operating leases.
Assets used by the Company which have been funded through finance leases are capitalised in tangible fixed assets and the resulting lease
obligations are included in liabilities. The assets are depreciated over their useful lives and the interest element of the rental obligations is charged to
the profit and loss account over the period of the lease, and represents a constant proportion of the balance of capital repayments outstanding.
Operating lease rentals are charged to the profit and loss account on a straight-line basis over the period of the lease. Rent free periods
receivable on entering an operating lease are released on a straight-line basis to the next break point in the lease.
Related party
The Company has applied the exemption available in FRS 8 and has decided not to disclose transactions with wholly owned subsidiary undertakings.
2. Auditors’ remuneration
2009 2008
£000 £000
Audit fee – fees payable to the Company auditor for the audit of the parent company and the
consolidation of the Group accounts 50 50 Walker Greenbank PLC
Annual Report and Accounts 2009
56
3. Emoluments of Directors
2009 2008
Salary Bonus Benefits Pension Total Total
£000 £000 £000 £000 £000 £000
Executive Directors:
John Sach 220 – 5 33 258 342
David Smallridge 160 – 1 16 177 234
Alan Dix 126 – 1 13 140 187
Non-executive Directors:
Ian Kirkham (retired 31 January 2009) 65 – – – 65 62
Terry Stannard 26 – – – 26 9
Fiona Goldsmith (appointed 17 December 2008) 4 – – – 4 –
Charles Gray (retired 12 February 2009) – – – – – 22
601 – 7 62 670 856
In both years, retirement benefits were accruing to one Director under a defined benefit scheme, who is the highest paid Director. Accrued annual
pension benefits at the year end were £10,188 (2008: £20,210).
Benefits are accruing under defined contribution schemes for three Directors (2008: three Directors).
4. Employee information
2009 2008
£000 £000
(restated)
Wages and salaries 916 1,084
Social security costs 100 134
Other-pension costs 100 71
Share based payments, including NIC thereon 299 344
1,415 1,633
The average monthly number of employees (including Directors) during the year Number Number
Administration 10 13
5. Tangible fixed assets
Plant,
Land and equipment Computer
buildings and vehicles assets Total
£000 £000 £000 £000
Cost:
31 January 2008 5,404 50 18 5,472
Additions – – – –
Disposals – – – –
31 January 2009 5,404 50 18 5,472
Depreciation:
31 January 2008 983 20 16 1,019
Charge 109 8 1 118
Disposals – – – –
31 January 2009 1,092 28 17 1,137
Net book amount:
31 January 2009 4,312 22 1 4,335
31 January 2008 4,421 30 2 4,453
Notes to the Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
57
Accounts
5. Tangible fixed assets continued
2009 2008
The net book amount of land and buildings comprises: £000 £000
Freehold land 450 450
Freehold buildings 3,862 3,971
Net book value 4,312 4,421
The value of assets secured under the Barclays facility was property of £4,312,000 (2008: £4,421,000).
6. Investments
2009 2008
£000 £000
Shares in subsidiary undertakings (restated)
Cost:
As at 1 February 44,714 44,639
Additions 79 75
As at 31 January 44,793 44,714
Provision for impairment:
Beginning of year and end of year (1,038) (1,038)
Net book amount 43,755 43,676
Additions in both years relate to the adoption of UITF44.
Walker Greenbank PLC is registered and domiciled in the United Kingdom. It is the parent company of the Walker Greenbank Group. The
principal Group operating companies that traded during the year and are wholly owned are as follows:
Abaris Holdings Limited – registered in England and Wales
Walker Greenbank Inc.* – incorporated in the USA
Arthur Sanderson & Sons Inc* – incorporated in the USA
Arthur Sanderson & Sons SARL * – incorporated in France
Whittaker & Woods SRL – incorporated in Italy
Investments in Group companies are ordinary shares.
* Shares held by subsidiary company.
The principal activities of the Group are design, manufacture, marketing and distribution of wallcoverings, furnishing fabrics and associated
products for the consumer market.
The carrying value of the investment in Abaris Holdings Limited is reviewed annually by reference to its value in use to the Company. The value in
use was calculated using future expected cash flow projections, discounted at 9.5% (2008: 8.48%) on a pre-tax basis, and is not intended to
reflect a realisable value on disposal. The review as at 31 January 2008 resulted in a reversal of the impairment of £10,329,000 to investments in
subsidiary undertakings held by the Company.
7. Debtors
2009 2008
£000 £000
Amounts owed by subsidiary undertakings 15,005 18,458
Other debtors 165 268
Prepayments 137 193
15,307 18,919
Included within other debtors is an amount repayable after one year of £12,000 (2008: £253,000). Amounts owed by subsidiary undertakings are
non-interest bearing and are unsecured. These loans are callable on demand by the Company should payment be required, but full settlement
within the next 12 months is unlikely to be sought. Walker Greenbank PLC
Annual Report and Accounts 2009
58
8. Creditors: due within one year
2009 2008
£000 £000
(restated)
Bank term loans (note 9) 400 400
Bank overdrafts 1,069 106
Trade creditors 94 107
Amounts owed to subsidiary undertakings 7,500 7,500
Other taxes and social security 40 42
Other creditors 139 240
Accruals 397 649
9,639 9,044
Amounts owed to subsidiary undertakings are non-interest bearing and are unsecured. These loans are payable on demand by the Company
should payment be required, but full settlement within the next twelve months is unlikely to be sought.
9. Creditors: due after more than one year
2009 2008
£000 £000
Bank term loan 3,000 3,400
The term loan is secured by a floating charge over the property (note 5). Interest is charged at 1.25% (2008: 1.25%) over base rate.
Repayment of total borrowings
2009 2008
£000 £000
Over five years 1,400 1,800
Between two and five years 1,200 1,200
Between one and two years 400 400
After more than one year 3,000 3,400
Within one year (note 8) 400 400
3,400 3,800
In July 2007, the Company agreed terms for new facilities from Barclays Bank PLC replacing the Burdale Financial Limited funding. The facilities
comprise of a variable rate Term Loan secured on the Group’s freehold property of £4 million which is being repaid on a 10 year profile.
Under the Barclays Bank PLC facilities, the Group are subject to a various financial covenants which apply to the term loan, including interest
cover and debt service. The Group was also subject to similar covenants under the previous Burdale Financial Limited funding facilities.
Any non-compliance with covenants could, if not remedied or waived, constitute an event of default with respect to any such arrangements.
The Group has reported to its financiers that it was in full compliance with its financial and operational covenants throughout each of the
periods presented.
There is a set off arrangement for Group bank accounts held with the UK clearing bank.
10. Provisions – deferred tax liability
2009 2008
£000 £000
Balance at start of the year 74 –
(Credit)/charge to profit and loss account (74) 74
Balance at end of the year – 74
Notes to the Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
59
Accounts
10. Provisions – deferred tax liability continued
The deferred tax liability arises from:
2009 2008
£000 £000
Capital allowances in excess of depreciation – 74
Unrecognised net deferred tax assets at 31 January 2009 are £1,269,000 (2008: £1,068,000) relating to tax losses and other short-term timing
differences. These will be realised as and when they reverse against suitable future taxable profits.
2009 2008
£000 £000
Depreciation in excess of capital allowances 7 15
Tax losses 997 893
Other timing differences 265 160
1,269 1,068
There is also capital tax loss of the Company at 31 January 2009 of £4,885,000 (2008: £4,885,000) but no deferred tax asset has been
recognised as it is not considered probable that these losses will be utilised.
11. Share capital
Number of
Ordinary shares of 1p each: shares £
Authorised share capital:
1 February 2008 and 31 January 2009 85,000,000 850,000
Allotted, called up and fully paid:
1 February 2008 and 31 January 2009 59,006,162 590,062
The Walker Greenbank PLC Employee Benefit Trust (‘the trust’) holds 2,549,146 shares (2008: 2,549,146) with a cost of £601,202 (2008:
£601,202) and the market value at 31 January 2009 of £261,287 (2008: £1,038,777).
During the year Walker Greenbank PLC purchased 275,000 ordinary shares of 1p each at a price of 30p and at a total cost of £82,748. The total
number of shares held in treasury are 1,690,093 (2008: 1,415,093) and represent 2.9% (2008: 2.4%) of the issued shares. The market value of
these shares at 31 January 2009 was £173,235 (2008: £576,650).
The shares held by the trust and the treasury shares are held for the purpose of satisfying awards under long term incentive plans to Executive
Directors and senior management.
Long Term Incentive Plans (LTIPs)
The Group operates a Long Term Incentive Plan. As at the balance sheet date there had been two awards under this plan, in which Executive
Directors and senior management of the Group participate. The LTIP has previously been approved by the shareholders at an Annual General
Meeting. Further details are included in note 24 of the consolidated financial statements of the Group which are separately included within this
Annual Report and Accounts.
On 27 May 2009 further awards were made to the Executive Directors, a total of 1,700,000 ordinary shares. Walker Greenbank PLC
Annual Report and Accounts 2009
60
12. Shareholders fund and reserve movement
Share Profi t
Share premium and loss Capital
capital account account reserve Total
£000 £000 £000 £000 £000
1 February 2007
(as previously reported) 590 457 11,541 41,888 54,476
Restatement retained profit 31 January 2007 – – 28 – 28
1 February 2007
(as restated) 590 457 11,569 41,888 54,504
Accrual for long term incentive plan liabilities – – 363 – 363
Profit for the year – – 275 – 275
Treasury shares – – (612) – (612)
31 January 2008 590 457 11,595 41,888 54,530
Accrual for long term incentive plan liabilities – – 414 – 414
Loss for the year – – (4,103) – (4,103)
Treasury shares – – (83) – (83)
31 January 2009 590 457 7,823 41,888 50,758
The restatement referred to above arises from the adoption of UITF 44 and has resulted in an increase in profit for the year ended 31 January
2008 of £85,000 and an increase in net assets and share holders funds at 31 January 2008 of £113,000.
Capital reserve represents: £000
Capital redemption reserve for deferred shares 1,003
Capital redemption reserve for ‘B’ shares 40,885
41,888
13. Dividends
The Directors do not propose a final dividend in respect of the year ended 31 January 2009 (2008: no dividend proposed).
14. Operating lease commitments
Annual commitments due under non-cancellable operating leases are as follows:
Land and Land and
buildings Other buildings Other
2009 2009 2008 2008
£000 £000 £000 £000
Operating leases which expire:
Within one year – – – –
Between one and five years – – – –
Over five years 453 – 447 –
453 – 447 –
Notes to the Accounts continued Walker Greenbank PLC
Annual Report and Accounts 2009
61
Accounts
15. Disclosure of fair values of derivative financial instruments
2009 2008
£000 £000
Forward foreign exchange contracts (812) (110)
The Group’s US based subsidiary, Walker Greenbank Inc., sells products to local customers with sales invoiced in US dollars. As the Group’s
presentation currency is sterling it is exposed to changes in the reported sterling value of these sales. The Group considers that it is highly
probable that future sales of this nature will continue to arise over at least the next 12 months. During the year Walker Greenbank PLC has
entered into monthly forward foreign exchange contracts up to January 2010, with a third party, to buy sterling and sell dollars. As at the reporting
date the fair value of the forward foreign contracts is a liability of £820,000 (2008: £110,000).
The Group make more purchases from the euro zone than sales made to the euro zone. As the Group’s presentation currency is sterling it is
exposed to changes in the reported sterling value of the purchases. The Group considers that it is highly probable that future purchases of this
nature will continue to arise over at least the next 12 months. During the second half of the year Walker Greenbank PLC has entered into monthly
forward foreign exchange contracts up to December 2009, with a third party, to buy euros and sell sterling. As at the reporting date the fair value
of the forward foreign contracts is an asset of £8,100 (2008: £nil).
16. Contingent liability
The Company is party to a cross guarantee relating to the borrowings of its subsidiary Abaris Holdings Limited under the funding arrangement
with Barclays Commercial Bank. Walker Greenbank PLC
Annual Report and Accounts 2009
62
Five Year Record
2005 2006 2007 2008 2009
UK GAAP UK GAAP IFRS IFRS IFRS
£000 £000 £000 £000 £000
Turnover 50,611 48,392 54,369 62,448 63,698
Overseas turnover by location of customer 19,724 18,916 18,374 20,908 22,672
Operating profit/(loss) (2,690) 5,018 3,757 3,961 3,561
Operating profit/(loss) before exceptional items and discontinued operations (3,062) 758 2,481 3,961 3,561
EBITDA (322) 2,845 4,323 5,783 5,407
Profit/(loss) before taxation (807) 2,625 2,694 3,099 2,787
Capital expenditure 1,187 710 1,447 1,797 1,527
Profit/(loss) per share (1.48p) 4.51p 4.67p 14.49p 2.96p
Average number of employees 613 539 548 586 594
Dividends – – – – –
Shareholders’ funds 7,070 8,597 12,943 20,799 19,911
Dividend per share – – – – –
The data for 2007 has been restated from UK GAAP to International Financial Reporting Standards. Data prior to 2007 has not been restated.
The operating loss for 2005 has been restated to reflect the impact of FRS 4.
EBITDA is based on operating profit before exceptional items.
Financial Calendar
Annual General Meeting 22 July 2009 Announcement of half-year results October 2009
Walker Greenbank PLC
Chalfont House
Oxford Road
Denham
UB9 4DX
T: 08708 300 365
F: 08708 300 364
www.walkergreenbank.com
Walker Greenbank PLC
Annual Report and Accounts 2009
63
Notes Walker Greenbank PLC
Annual Report and Accounts 2009
64
Notes Highlights from 2009
Contents
£63.70
m
Revenue up 2% (2008: £62.45 million) supported by
the continued progress of the Sanderson brand.
£2.79
m
Profit before taxation down 10% (2008: £3.10 million).
£3.56
m
Operating profit down 10% (2008: £3.96 million).
2.96
p
Earnings per share (2008: 14.49p). Adjusted
earnings per share 4.97p (2008: 5.44p) after
excluding the impact of deferred tax.
31 %
Gearing reduced to 31% (2008: 35%) with Shareholders’
Funds of £19.91 million (2008: £20.80 million) and
interest cover improved to 5.1 times (2008: 4.0 times).
Overview
02 Our business at a glance
06 Our brands
07 Our manufacturing
08 Chairman’s Statement
10 Chief Executive’s Review
12 Financial Review
14 Directors and Advisers
Directors’ Report
16 Report of the Directors
18 Statement of Directors’ Responsibilities
Accounts
19 Independent Auditors’ Report on
Consolidated Financial Statements
20 Consolidated Income Statement
21 Consolidated Statement of Recognised
Income and Expense
22 Consolidated Balance Sheet
23 Consolidated Cash Flow Statement
24 Notes to the Consolidated Accounts
52 Independent Auditors’ Report on
Company Financial Statements
53 Company Balance Sheet
54 Notes to the Accounts
62 Five Year Record
Inside back cover: Collection - Arkona
Design - Deco & Amalfi
Right: Le Temple De Jupiter, Chantemerle
Papers, Zoffany.
Walker Greenbank PLC is a luxury interiors group whose brands
include Harlequin, Sanderson, Morris & Co. and Zoffany. Our
brands are targeted at the mid to upper end of the premium market.
They have worldwide distribution including prestigious showrooms
at Chelsea Harbour, London and the D&D building, Manhattan,
New York. Half of the brand’s turnover is sourced in-house from
the Group’s own specialist manufacturing facilities. 2009
ANNUAL REPORT AND ACCOUNTS
Walker Greenbank PLC
Luxury interior
furnishings group
www.walkergreenbank.com Walker Greenbank PLC
Chalfont House
Oxford Road
Denham
UB9 4DX
T: 08708 300 365
F: 08708 300 364
Walker Greenbank PLC ANNUAL REPORT AND ACCOUNTS 2009 ### summary: |
ANNUAL REPORT 2004
LUMINAR PLC
41 King Street
Luton
Bedfordshire LU1 2DW
www.luminar.co.uk
LUMINAR PLC ANNUAL REPORT 2004 LUMINAR PLC Annual Report and Accounts 2004
CONTENTS
Financial Highlights 01
Chairman’s Statement 02
Our Winning Brands 04
Chief Executive’s Statement 06
Operating and Financial Review 10
Corporate Social Responsibility 16
Regulatory Challenges 19
The Board of Directors 20
Report of the Directors 22
Corporate Governance 24
Remuneration Report 28
Auditors Report 35
Principal Accounting Policies 36
Consolidated Profit and Loss Account 38
Consolidated Balance Sheet 39
Company Balance Sheet 40
Consolidated Cash Flow Statement 41
Notes to the Financial Statements 42
Notice of Annual General Meeting 55
Explanation of Resolutions 57
Shareholder Information 59
OUR MISSION IS TO...
ACHIEVE THE HIGHEST STANDARD OF CUSTOMER
SERVICE AND ENTERTAINMENT IN THE LEISURE
INDUSTRY BY OFFERING VALUE FOR MONEY
WITHIN OUR VENUES, TO SUPPORT OUR EMPLOYEES
AND DEVELOP THEIR POTENTIAL, TO ACHIEVE AND
EXCEED OUR INCOME TARGETS AND MAXIMISE
SHAREHOLDER VALUE. Annual Report and Accounts 2004 LUMINAR PLC 01
FINANCIAL HIGHLIGHTS
> Turnover up 2% to £400m (2003: £392m)
> Gross margins maintained at 81%
> Earnings before interest, tax, depreciation,
goodwill amortisation and exceptional items
was £111m (2003: £114m)
>Profit before goodwill amortisation, exceptional
items and taxation was £62m (2003: £67m)
> Loss before taxation of £11m after an exceptional item
of £60m relating to impairment and goodwill amortisation
of £13m
> Fully diluted EPS before exceptionals and FRS 10 goodwill
amortisation 60.4p (2003: 60.0p)
> Fully diluted EPS after exceptionals and FRS 10 goodwill
amortisation (34.9)p (2003: 42.4p)
> Free cash generated of £46m
ENTERT AIN
PEOPLE>> 02 LUMINAR PLC Annual Report and Accounts 2004
CHAIRMAN’S STATEMENT
The Company is now starting to come
through what has been a difficult
period. The Company’s sector has
been experiencing a downturn, primarily
due to excessive development of
capacity including a significant level
of poor quality product introduced
by competitors, which is now trading
badly and is affecting performance
throughout the sector.
Our management team have stabilised
and reorganised the business and
developed a clear and appropriate
strategy for building value and reducing
volatility. Luminar has outperformed
its competition, produced a strong cash
performance and delivered results in
line with expectations.
The profit, before goodwill amortisation,
exceptional items and taxation was
£62m (compared with £67m in the
previous year.)
In the Chief Executive’s Statement
on pages 6 to 9 Stephen Thomas sets
out the strategy which the Company
will be following focusing on branded
entertainment venues to achieve high
and predictable returns. Although it
will take time for the benefits of this
approach to come through, I am
confident that we are moving in the
right direction.
In the Operating and Financial Review
on page 10, Andrew Burns our Financial
Director, explains the robust financial
position of the Company EBITDA for the
year amounted to £111m (compared
with £114m in the previous year)
and free cash flow before dividends
amounted to £46m (including disposal
proceeds of £9m). The cash generation
has been primarily used to reduce
debt which has further strengthened
the Company’s balance sheet. These
strong financial attributes give the
Company the resources to implement
its new strategy.
CORPORATE SOCIAL RESPONSIBILITY
The Company’s activities are principally
in the late night sector, with the sale
of alcoholic drink being a significant
ancillary activity. We therefore have
to manage issues associated with the
welfare of our customers and staff
and the communities in which we
work. We have set out our policies
on these and related issues on pages
16 to 19. The Company has the most
experienced operational management
LUMINAR HAS OUTPERFORMED ITS
COMPETITION, PRODUCED A STRONG
CASH PERFORMANCE AND DELIVERED
RESULTS IN LINE WITH EXPECTATIONS. Annual Report and Accounts 2004 LUMINAR PLC 03
in our sector, who are dedicated to the
safety of our customers and staff
REMUNERATION
The Remuneration report is set out
on pages 28 to 34. Following extensive
consultations with shareholders, they
approved a long-term incentive plan
based on deferral and matching at
an EGM on 24 February 2004.
As noted on page 31 of this Report,
and as requested by some shareholders,
Stephen Thomas and the Company
have agreed to amend his contract to
reduce the notice period to 12 months.
BOARD
The Non-Executive team has been
changing significantly. During the year
Bob Wickham and Mike Payne both
retired from the Board. In addition
John Williams and Alan Goldman
will retire from the Board at the
AGM in June. All four Non-Executive
Directors have provided many years
of invaluable service to the Company
which they have seen grow at
a remarkable speed into the leader in
its sector. I would like to thank them
for their invaluable contribution and
wish them good luck for the future.
During the year, Martin Gatto (Interim
Finance Director of British Energy)
and Richard Brooke (former Finance
Director for BskyB plc) joined the
Board as Non-Executive Directors.
We have also subsequently announced
the appointment of David Longbottom
(a Director of Dixons Group plc).
CURRENT TRADING AND OUTLOOK
Market conditions have remained
difficult. Like-for-like sales have
continued the same trend (-3%)
as the second half of the financial year,
but the impact has been compensated
by net margins performing better
than expected. Performance is in line
with expectations.
DIVIDEND
In light of the Board’s confidence in
the future benefits of the strategy
being followed, it is recommending
a final dividend of 8.87p, giving a total
dividend of 12.54p, which represents
an increase of 10%
SUMMARY
I would like to thank the management
and staff for their substantial
and successful efforts to produce
satisfactory results in what have
been demanding circumstances.
Whilst recovery will take time we are
pursuing a clear and correct strategy,
which will enable us to achieve high
and predictable returns. We face the
future with increasing confidence.
KEITH HAMILL
CHAIRMAN
20 MAY 2004
RIGHT: Aspen ski lodge, Oceana
FAR RIGHT: Parisian Boudoir , Oceana CHICAGO ROCK CAFÉ
Chicago Rock Café is the place to eat
drink and party. Classic designed
venues with central island bars,
stage for live acts and decorated
with an eclectic mix of rock, pop and
contemporary culture memorabilia.
The daytime, child friendly, laid back
style of a café-bar is transformed in the
evening when the venue comes alive
with DJ, dancing, live music video and
music from the favourite artistes of
yesteryear. The great alternative to the
high street pub to club scene.
HIGHLIGHTS OF 2004
> The year saw the first 2 Chicago
Rock Cafés open north of the border
in Scotland.
> In order to add another dimension
to the brand, New York, New York
1970s rooms have been added to
3 existing Chicago Rock Cafés.
JUMPIN JAKS
The live entertainment brand where
even the customer service crew do
their best to entertain customers with
their choreographed dance routines
on stage and bars! The wooden floored
‘alligator skinning warehouse’ theme
is designed for partying. The music
played provides songs to sing along
and dance to and sets the tempo for
a great night with a great atmosphere.
HIGHLIGHTS OF 2004
> The arrival of Jumpin Jaks in
the heart of its city centre has
changed the face of going out
in Carlisle forever.
> Manchester Jumpin Jaks received
‘best bar none’ award from
Manchester City Safe Scheme,
after scrutiny of door policy,
crime prevention strategy,
emergency procedures and
drink and drugs policy.
LIQUID
21st century clubbing in an ultramodern
environment. State-of-the-art lighting
effects, sound and laser technology,
provide all the entertainment a modern
clubber requires with a chill out room
and VIP suite to appeal to the broadest
range of tastes.
HIGHLIGHTS OF 2004
> Liquid arrives in Sunderland as
part of a twin scene offering and
takes the town by storm.
> The brand goes from strength to
strength with Ashford and Windsor
exceeding all expectations.
ENTERTAINMENT DANCING
INVEST IN
MAINTAIN OUR LEADING POSITION IN PROVIDING LATE NIGHT
ENTERTAINMENT THROUGH A PORTFOLIO OF BRANDS THAT
OFFER SOMETHING FOR EVERYONE AND, WHEN APPROPRIATE,
TACTICAL ACQUISITIONS AND PARTNERSHIPS>>
OUR STRATEGY IS TO
04 LUMINAR PLC Annual Report and Accounts 2004 OCEANA
Multi-award-winning brand, offering
five different themed bars and two
distinctive clubs, all under one roof.
Travel from an Aspen ski lodge to
a 1970’s New York disco via a Parisian
boudoir and a futuristic Tokyo concept
bar. A venue offering great ports of
call in one destination.
HIGHLIGHTS OF 2004
> The continued roll out of the
Oceana brand has been a huge
success with Kingston upon
Thames and Milton Keynes going
from strength to strength.
> Oceana Kingston upon Thames
has become probably the highest
earning nightclub in the UK.
LAVA AND IGNITE
A new twist on the multi scene venue.
A main room complete with sound
and light effects to amaze clubbers
but with the flexibility to show major
sporting events or even stage
a corporate event or live mainstream
music act. Alongside sits a themed
bar to cater for the “drink before club”
and two further rooms for a change
of music and mood.
HIGHLIGHTS OF 2004
> Burnley receives the first Lava and
Ignite as the new template brand
is launched and immediately
becomes a success.
> With plans very much advanced,
Rotherham is next in line for the
Lava and Ignite rebranding exercise.
LIFE
Life is a bar concept designed to appeal
to young and old alike, to provide for
a group of business people relaxing
after work to a group of girls on a hen
night. Designed to fit into smaller towns
and become a major part of that town’s
community, Life is a versatile brand
catering for not only the traditional
pub and club market, but also for
meetings and corporate events. Open
seven days a week, at the weekend
a screen is drawn back to reveal club
life where customers can dance until
the early hours.
HIGHLIGHTS OF 2004
> Wellingborough saw the launch
of the new Luminar Life concept.
The town has embraced the brand
and accommodates a large cross-
section of the community.
> Work is well underway preparing
the next Life opening in Andover.
WINNING
BRANDS> >
Annual Report and Accounts 2004 LUMINAR PLC 05 06 LUMINAR PLC Annual Report and Accounts 2004
CHIEF EXECUTIVE’S STATEMENT
INDUSTRY OVERVIEW
As part of a policy to regenerate town
centres many local councils during the
last decade granted planning consents
for leisure use and reduced the number
of objections made to the magistrates
courts for the granting of licensing
hours beyond 11pm. This contributed
to a proliferation of licensed premises
opening in high streets across the UK.
Demand grew with the increase in
capacity as many high streets grew
into thriving leisure centres. By the
second half of 2002 demand began
to decrease. With continued expansion
in capacity the market for high street
leisure became increasingly competitive
with many operators entering into
aggressive price competition in order to
maintain volumes. This was compounded
by operators who had developed weak
product which was inappropriate for
the late night market using discounting
as a reaction to increased competition.
Within each local market the operation
with the leading and best differentiated
offering has fared best. Marginalised
undifferentiated operations relying solely
on discounting have underperformed.
Given this material adverse change in
the market conditions from previously
highly favourable conditions, the
Company conducted a strategic review,
the results of which were announced
last November.
STRATEGY
The Board has concluded that the best
strategy to grow shareholder value
is to pursue a policy of developing
a portfolio of branded units which will
occupy the leading trading position
within their local markets. This strategy
will meet the needs of modern leisure
consumers with consistent products
which will support strong customer
relationships and widen the user base.
Specifically, this will be accomplished
by providing an entertainment-led
experience in a safe and friendly but
exciting environment, with an emphasis
on value for money. It is the Company’s
strongly held belief that this approach
will reduce the need for ongoing
refurbishment capital costs and will
reduce trading volatility, which will
deliver consistent above average
returns over the long term.
In order to allow the Company to focus on
implementing this strategy and to apply
the appropriate management approach
to the branded and the unbranded
estate it is necessary to ring-fence
non-core unbranded businesses from
the rest of the estate. Those units
which are not ultimately capable
of branding will be sold over time.
APPLICATION OF STRATEGY
TO CORE ESTATE
Since January we have focused on
four branded templates alongside the
two existing branded templates of
Chicago Rock Café and Jumpin Jaks
for the Entertainment Division.
Each branded template will be positioned
within towns where the demographic
profile ensures that a suitable market
exists for the brand’s customer profile.
The unit will be designed with the
appropriate capacity to enable it
to achieve a leading position within
its local marketplace. Each brand
provides a high quality entertainment-
led leisure experience within a well
located modern property with a safe
and friendly atmosphere. The brands
OUR STRATEGY IS TO GROW
SHAREHOLDER VALUE BY
PURSUING A POLICY OF
DEVELOPING A PORTFOLIO
OF BRANDED UNITS WHICH
WILL OCCUPY THE LEADING
TRADING POSITION WITHIN
THEIR LOCAL MARKETS Annual Report and Accounts 2004 LUMINAR PLC 07
will have the flexibility to be able to
cater for a wider market to increase
utilisation of the premises. Recruiting
and training the correct standard of
management is considered key to the
development of consistently branded
businesses. The Company will ensure
that adequate resources are allocated
to this important area.
Chicago Rock Café is the Company’s
longest established and most successful
brand. However, its performance over
the last financial year has reflected the
highly competitive trading conditions.
A detailed review including market
research has confirmed that the brand
has a unique position within the high
street and still has a strong appeal to
the over-25 customer. The research
demonstrates that Chicago Rock Café
is a strong brand appreciated by its
customer base but would benefit from
further capital investment. It is also
clear that some units developed in
recent years and some management
techniques used have led the brand
away from its core brand standards.
The Company has developed a clear
programme to re-invigorate the Chicago
Rock Café brand based on its core values.
The programme includes three areas;
development of 70’s style rooms adjacent
to existing units, major refits which
will include sports bar areas and other
initiatives to develop incremental income
and a higher level of small maintenance
refurbishments to refresh the estate.
A further 43 units within the Company’s
estate benefit from strong positions
within key markets but the properties
will not currently accommodate any
of our branded concepts. These units
will be retained for their long-term
licensing value. It is expected that
it will be possible to develop branded
product within relevant towns over
time through acquiring space adjacent
to the existing properties or acquiring
alternative properties.
The Emerging Business Division
comprises 23 bars developed on an
experimental basis in recent years.
Given current market circumstances
the Company is reviewing the options
for this business.
APPLICATION OF STRATEGY
TO NON-CORE ESTATE
A total of 61 units which do not fit our
branding criteria have been transferred
to a wholly-owned separate ring-fenced
subsidiary. A new management team
has been created to manage these
businesses on an entrepreneurial
basis which is more relevant to
unbranded businesses. The new team
is headed by Tim Roberts who has
over 20 years’ experience of running
unbranded nightclubs.
The objective for the non-core
venues is to realise maximum value
for shareholders over the short to
medium term.
PROGRESS
The first conversion of an unbranded
nightclub to a branded template took
place in April last year when the former
Options nightclub in Kingston upon
Thames re-opened as an Oceana. Pilot
sites for the first Lava/Ignite and Life
opened in November last year in Burnley
and Wellingborough respectively.
Three units have had a complementary
70’s room developed adjacent to the
existing Chicago Rock Café and a further
Chicago Rock Café has benefited from
an extensive refit including a sports
bar area. A further 15 Chicago Rock
Cafés benefited from more limited
refurbishments. A further 22 other
units have benefited from the
refurbishment programme.
Total capital expenditure on this
programme was £33.1m. Cash returns
on these investments during the year
amounted to 31%, including the highly
successful Oceana, Kingston. Excluding
that development, the sales uplift was
44% and the cash returns were 17%,
including initial developments of the
new branded concepts.
In the current financial year the
Company expects to rebrand a further
11 unbranded units. Three 70’s rooms
will be added to existing Chicago Rock
Cafés, two Chicago Rock Cafés will be
extensively refurbished and a further
15 will benefit from freshen up
refurbishments. Capital expenditure
Currently in Identified for
Brand Location operation conversion Total
Oceana Cities 2 11 13
Lava/Ignite Large towns 1 25 26
Liquid Medium towns 20 4 24
Life Small towns 1 13 14
Chicago Rock Café Small/medium towns 58 – 58
Jumpin Jaks Small/medium towns 22 – 22
Total 104 53 157 08 LUMINAR PLC Annual Report and Accounts 2004
CHIEF EXECUTIVE’S STATEMENT
CONTINUED
for these projects is expected to be
in the region of £30m.
Last year the Company disposed of
18 units for total proceeds of £9m.
Of these units nine were unbranded
trading units which were sub-let.
The remaining nine units were closed
prior to sale as they were trading
at uneconomic levels. The Company
will continue to close and dispose of
uneconomic units and to sell unbranded
units where appropriate prices can
be obtained. Increasing opportunities
are arising to utilise spare capacity for
town centre residential development.
The Company is at an early stage in
the programme to convert its estate
to predominantly branded units.
A good start has been made and the
opportunity remains to accelerate
our plan should market conditions
and performance allow.
FINANCIAL STRENGTH
Throughout the recent period of
uncertainty the Company has
focused on generating surplus cash.
Last year the Company generated
a free cash flow before dividends
of £46m. This result, which has
been achieved through a significant
reduction in expansion capital
expenditure, underlines the impressive
cash generating characteristics of
the business. The Company’s overall
financial position has been significantly
strengthened and it is now well
positioned to benefit from a recovery
in its markets.
DISCOUNTING
Over the last year there has been much
debate in the media about an increase
in the discounting of alcoholic drinks by
high street leisure operators. Luminar
has always used promotional offers on
both admissions and drinks as part of
the marketing strategy to grow and
protect volumes. The Company’s
promotional schemes are agreed with
the relevant local licensing authorities
before implementation. Luminar’s
promotions as a percentage of sales
has not increased and our overall gross
margin has been maintained at over
80% for the last three years. This is in
spite of a 19% increase in duty for pre-
packaged spirits which was introduced
by the Government two years ago.
We have consistently supported the
introduction of local council backed
minimum pricing levels and would
welcome a broadening of these schemes.
Luminar is a responsible operator on
the high street and supports the recent
Government initiatives on anti-social
drinking including the Alcohol Harm
Reduction Strategy.
DEREGULATION
The new Licensing Act, which became
law in July 2003, brought to an end
a considerable period of uncertainty
regarding the future shape of alcohol
licensing in England and Wales.
Under the Act, responsibility for
licensing will transfer from the judiciary
to local councils. The Government has
announced that the first appointed
date for the start of the transition
period in which the transfer from the
magistrates to the local authorities
will take place is November 2004.
The Government’s present timetable
provides for a period of nine months to
complete the transition period. Luminar
welcomes the introduction of the new
system which is intended to reduce
crime and disorder. We believe that it is
unlikely that the authorities will permit
24-hour drinking. There may be some
relaxation of the closing time for both
pubs and nightclubs which would
benefit both sets of operators. More
importantly, the grant of new licences
will become more difficult and it is likely
that poor quality operators will have
their licences withdrawn. Both of these
measures will help to reduce the over-
capacity currently in the marketplace.
GAMING
Planned changes in the regulation
of gaming in the UK will create
opportunities for the Company. First,
it is likely that existing units will be
able to increase the use of gaming
machines. Secondly, the development
of medium-sized casinos in provincial
towns with a significant entertainment
component will enable the Company
to use its present skills and assets
within this sector.
WHERE TO FIND OUR BRANDS: ABERDEEN
1,2,4
, ASHFORD
3,4
,
AYLESBURY
1
, BANBURY
1
, BARNSLEY
1
, BASILDON
1,2
, BASINGSTOKE
1,4
,
BEDFORD
1
, BIRMINGHAM
1
, BISHOP’S STORTFORD
1
, BLACKBURN
2
,
BOLTON
3
, BOURNEMOUTH
2
, BRAINTREE
1
, BRISTOL
1
, BURTON ON
TRENT
1
, BURY
1
, CANTERBURY
1
, CARDIFF
2,4
, CARLISLE
2
,
CHELMSFORD
1
, CHICHESTER
1
, COLCHESTER
1
, COVENTRY
1,2
,
DUMFRIES
2
, DUNSTABLE
2
, EAST GRINSTEAD
2
, EPSOM
1
, GLASGOW
2
,
GLOUCESTER
2,4
, GRIMSBY
1
, HUDDERSFIELD
1,2
, HALIFAX
2
, HEMEL
HEMPSTEAD
2
, HANLEY
1,2,4
,HARLOW
2
, ILFORD
2
, IPSWICH
4
, ISLE OF
WIGHT
1
, JERSEY
1
, KING’S LYNN
1
, KINGSTON UPON THAMES
5
, Annual Report and Accounts 2004 LUMINAR PLC 09
LANCASTER
1,4
, LEEDS
2,
, LINCOLN
1
, LIVINGSTON
1
, LUTON
1,4
,
MACCLESFIELD
1
, MAIDENHEAD
1
, MAIDSTONE
1,2
, MANCHESTER
2
,
MANSFIELD
1,4
, MIDDLESBROUGH
1,2
, MILTON KEYNES
5
, NEWBURY
4
,
NORTHAMPTON
1
, NORWICH
1,4
, NOTTINGHAM
2
, NUNEATON
1
,
OLDHAM
1,4
, PETERBOROUGH
1,4
, REDDITCH
1
, SALISBURY
1
,
SHREWSBURY
4
, SOUTHAMPTON
2
, SOUTHSEA
1
, ST HELENS
1
,
STAFFORD
1
, STEVENAGE
1,2
, STRATFORD UPON AVON
1
,
SUNDERLAND
4
, SUTTON
1
, SWANSEA
1,2
, TAMWORTH
1
, TROWBRIDGE
1
,
WALSALL
1
, WARRINGTON
1
, WATFORD
1
, WIGAN
1,2,4
, WINDSOR
1,4
,
WOLVERHAMPTON
1
, WORCESTER
1
, WREXHAM
1,4
, YEOVIL
1
1=CHICAGO ROCK CAFÉS 2=JUMPIN JAKS 3=LIFE 4=LIQUID 5=OCEANA 6=LAVA/IGNITE
The Company has entered into an
agreement with Accor Casinos S.A,
the operator of 23 casinos in Europe,
to establish a joint venture to operate
a new concept of entertainment based
casinos. The initial pilot template will
be in Leeds, subject to approvals.
The joint venture is intended to form
the basis of further developments
from within our estate.
SUMMARY
Luminar has a well considered strategy
which we have started to implement on
a phased basis. I am given considerable
confidence from our performance
against our competitors, our financial
strength and the skills of our people.
Luminar has much opportunity including
new developments in the gaming
sector to leverage the quality assets
within our business.
STEPHEN C THOMAS
CHIEF EXECUTIVE
20 MAY 2004 10 LUMINAR PLC Annual Report and Accounts 2004
FINANCE DIRECTOR’S REVIEW
LIQUID
Liquid is the UK’s leading night club
brand encompassing the finest in
21st century clubbing entertainment
along with the highest standards
of customer care.
Liquid has a modern award-winning
design with state-of-the-art lighting,
sound and laser technology, to appeal
to broad range of tastes from the main
arena, chill out room and VIP suite.
Liquid’s ongoing market research
enables our management to deliver
exactly the entertainment that a
modern clubber requires, coupled with
the country’s top DJs and entertainers.
OCEANA
This award-winning brand is currently
operating in Milton Keynes and
Kingston upon Thames. Both venues
have a capacity in excess of 2000
and comprise of nightclubs, bars and
restaurants all under the same roof.
Different themed rooms take the visitor
on a journey “around the world”,
from Tokyo, Aspen, Paris, Reykjavik,
Sydney, New York and beyond.
The venues have been designed and
fitted to the highest possible standards,
not only re-creating authentic themed
spaces but also incorporating the very
latest in state-of-the-art technology.
Turnover for the year increased by 1.9%
to £399.7m (2002/2003: £392.4m).
Gross margins were stable at 80.8%
(2002/2003: 81.0%) reflecting
the Company’s ability to maintain
pricing levels through the quality of the
entertainment provided. This is against
a market where discounting has
increased not least from the expansion
of operators whose sole marketing
effort is to sell discounted drinks.
Operating profit before goodwill
amortisation and exceptional items
decreased by 7.5% to £75.2m
(2002/2003: £81.3m). Operating
profit margin before goodwill
amortisation and exceptional items
has decreased by 1.9 percentage
points to 18.8% (2002/2003: 20.7%).
The operating profit margin before
goodwill amortisation and exceptional
items fell steeply in the first half of the
year to 17.0% (2002/2003: 21.7%)
and recovered significantly in the
second half to 19.7% (2002/2003:
19.8%). This improvement came
through disciplined cost control.
Increases in the fixed cost base for
the Company, particularly rent and
insurance totalled £4m and for the
period it is anticipated that the rate
of increase in rents will reduce in the
current year and that insurance costs
will decrease.
Earnings Before Interest, Tax,
Depreciation and Amortisation and
Exceptional Items (EBITDA) have
decreased by 3.0% to £110.6m
(2002/2003: £114.0m). EBITDA margin
has decreased by 1.4 percentage points
to 27.7% (2002/2003: 29.1%).
The Company will now include the sales
uplift from refurbishments and re-brands
from the point of opening within the
like-for-like sales measurement.
THE DANCING DIVISION
The Dancing Division operates a total
of 160 units including 20 Liquids, 2
Oceanas, 1 Lava/Ignite and 1 Life.
The Division has achieved a stable
performance in the year. Like-for-likes
declined by 4% for the year. Sales
growth came from the opening of the
re-branded Oceana in Kingston and
the new Liquid in Sunderland together
with a full year contribution from the
seven new branded units which opened
in 2002/2003.
During the year a total of 15 units left the
Division. Three were sold, seven stopped
trading when the leases ended or were
sub-let and five units were closed
pending redevelopment or sale. The
majority of these closures took place in
the second half of the year. The stability
of operating margins was assisted by the
reductions in promotional and marketing
spend against the previous year,
particularly in the second half of the year .
52 weeks to 52 weeks to
THE DANCING DIVISION 29 February 2004 2 March 2003
Turnover £242.5m £240.2m
Net operating profit £69.9m £70.0m
Operating margin 28.8% 29.1%
Number of units at year end 160 174 Annual Report and Accounts 2004 LUMINAR PLC 11
LAVA AND IGNITE
A multi-scene venue consisting of
a main room with sound and light
effects to amaze, the ability to stage
mainstream chart acts, host major
sporting events or launch this season’s
holiday brochure.
Alongside the main room there is
a themed bar for that “drink before
the club” along with two other rooms
for a change in mood and music.
BAR AND CLUB LIFE
Life is a bar concept designed to
capitalise on both early and late markets
in smaller towns. Life is a versatile
design, meaning that as well as the
traditional bar and club markets,
the venues can also be utilised for
meetings and corporate events.
Bar life is open seven days a week
and on Thursday, Friday and Saturday
nights a screen is drawn back to
reveal club life, giving customers
the opportunity to dance until the
early hours.
DANCIN
G 12 LUMINAR PLC Annual Report and Accounts 2004
FINANCE DIRECTOR’S REVIEW
CONTINUED
52 weeks to 52 weeks to
THE ENTERTAINMENT DIVISION 29 February 2004 2 March 2003
Turnover £130.8m £121.1m
Net operating profit £25.3m £29.3m
Operating margin 19.3% 24.2%
Number of units at year end 96 92
THE ENTERTAINMENT DIVISION
The Entertainment Division now operates
a total of 96 units comprising 71 Chicago
Rock Cafés and 25 Jumpin Jaks.
The Entertainment Division started to
move towards stability in the second
half of the financial year after a sharp
decline in the first half of the year.
During the year, like-for-like sales
declined by 6.5%. The like-for-like
decline is concentrated on 16 units
that deviate from the brand standard.
These units will now form part of the
Non-Core Division. The trend has
improved through the last financial
year with invested like-for-likes
reaching positive territory for the last
two months of the period. Overall sales
grew by 8% to £130.8m due to the
contribution from the 17 new units
that have opened in the last two years.
Gross margins have been static at
78.0% but net operating margin has
eroded by a significant 4.9 percentage
points to 19.3%. Over half of this
erosion is attributable to increased
fixed property costs. The remainder of
the erosion is due to the fixed element
of staff and promotional costs.
Five new units were opened in the first
half of the year. Four Chicago Rock
Cafés opened in Aberdeen, Chichester,
Macclesfield, and Livingstone. One
Jumpin Jaks opened in Aberdeen.
Since the start of the new financial year
a further two units have opened,
a Chicago Rock Café in Chester-le-Street
and a Jumpin Jaks in Carlisle. It is
anticipated that another three new units
will open later in the financial year as the
pipeline of site commitments unwinds.
JUMPIN JAKS
Jumpin Jaks is the place to party.
The brand, which stages live
entertainment every night the
doors are open, has been a huge hit
with people of all ages, thanks to its
unique party atmosphere. Jumpin Jaks
feature all genres of the UK’s best live
acts along with guest performances
from celebrities.
Key to the success of the brand is
the music it plays. The songs you will
hear are those you love to sing along
to, dance to and the ones that set the
tempo for a great atmosphere, good
feeling and real interaction.
ENTERTAI Annual Report and Accounts 2004 LUMINAR PLC 13
CHICAGO ROCK CAFÉ
Chicago Rock Café is the place to eat,
drink and party. Appealing to a mature
20-something age group with a mix of
food, drink and entertainment based
around music, comedy, memories
and nostalgia.
Tasty Tex-Mex food is served all day,
lunch and evening, whilst our
bartenders mix the most tantalising
cocktails. Whether you choose to eat
or drink, Chicago Rock Cafés offer
an alternative to the high street pub
to club scene.
NMENT 14 LUMINAR PLC Annual Report and Accounts 2004
FINANCE DIRECTOR’S REVIEW
CONTINUED
EMERGING BUSINESS DIVISION
The experimental concepts that have been developed
within the Emerging Business Division continue to deliver
unsatisfactory returns. Sales have improved for the period
to £25.4m (2002/2003: 23.1m) with like-for-like sales
increasing by 13%. This strong sales performance has come
at the expense of considerable margin decline. Net operating
profit was £1.0m (2002/2003: £1.9m). In response the
Company will now review its options for this Division.
NON-CORE UNITS
The 61 units that now comprise the Non-Core Division will
be reported separately going forward. For the period under
review, sales and EBITDA for these units were £52.1m and
£9.5m respectively.
CENTRAL OVERHEADS
Central overheads measured as a percentage of turnover have
stayed level at 4.8% and total £19.0m (2002/2003: 4.8% at
a total of £18.8m). The trend of turnover growth outpacing
administration costs has now levelled off.
OTHER
The ongoing property costs associated with units that are
closed pending sale or re-development together with net
sub-let income were a loss of £2.0m (2002/2003: £1.1m).
In 2002/2003 five freehold sites which were fully sub-let
were sold. The annual rental lost was £0.6m per annum.
EXCEPTIONAL CHARGE
The Company incurred an exceptional charge for £60m
as follows:
£m
Provision for loss on future disposal of units 45.9
Impairment on fixed assets 12.0
Impairment on other assets 2.1
Total 60.0
The provision for loss on future disposals of £45.9m is
necessary to write down the carrying values of assets
which are intended to be disposed of in the short term.
This comprises units that are currently closed pending
disposal and those units that are now trading in the ring-
fenced Non-Core Division.
The impairment provision of £14.1m principally reflects the
difference between the net present value (NPV) of income
generating units, i.e. discrete trading units and their carrying
value. The NPV is calculated by discounting an estimate of
future cash flows by the Company’s weighted average cost
of capital. If net realisable value (NRV) is higher than NPV
then NRV would be compared to the carrying value.
The write-down reflects the reduction in the market value for
leisure assets. This write-down does not indicate a shortening
in the estimated normal useful life of the assets employed in
the business.
The cause of each element of the exceptional charge can
be linked to the material deterioration in market conditions
experienced over the last 18 months.
CASH FLOW
52 weeks to 52 weeks to
29 February 2004 2 March 2003
Earnings before tax,
goodwill amortisation
and exceptional items 61.6 66.6
Depreciation 35.4 32.7
Interest 13.6 14.7
Earnings before tax, interest,
depreciation and goodwill
amortisation and exceptional items 110.6 114.0
Asset realisations 0.3 (0.9)
Working capital change 2.9 0.2
Capital expenditure and acquisitions (52.1) (82.9)
Disposal proceeds 9.2 8.6
Taxation (11.8) (15.2)
Interest (13.6) (14.7)
Free cash flow before dividend 45.5 1.5
Dividends (8.6) (7.6)
Reduction in debt 36.9 1.5
Depreciation has increased to £35.4m (2002/2003: £32.7m).
Depreciation as a percentage of turnover has increased to 8.9%
(2002/2003: 8.3%) and as a percentage of average net book
amount 6.5% (2002/2003: 6.0%).
Working capital has decreased by £2.9m (2002/2003: £0.2m).
This is mainly due to an increase in capital creditors.
Capital expenditure has decreased to £52.1m (2002/2003:
£82.9m). This reduction has come from a significant reduction
in expansion expenditure.
£m
New developments 13.7
Refurbishments and re-branded units 33.1
Central 5.3
Total 52.1 Annual Report and Accounts 2004 LUMINAR PLC 15
Disposal proceeds from the sale of 18 units generated £9.2m
(2002/2003: £8.6m). Acquisition expenditure was reduced
to nil (2002/2003: £0.9m).
Taxation paid was £11.8m (2002/2003: £15.2m).
The reduction is due to the favourable settlements of prior
year submissions with the Revenue. The cash tax rate has
reduced to 19.1% (2002/2003: 22.8%).
The effective tax rate before exceptional items has reduced
to 28.2% (2002/2003: 34.1%).
The reduction reflects the favourable settlement of prior year
submissions. This is a one-off adjustment, the on going
effective tax rate is likely to be similar to 2002/2003.
The effective tax rate after exceptional items has reduced
further to 23.0% (2002/2003: 34.1%). The total deferred
tax provision required has reduced due to the exceptional
write-off lowering temporary timing differences between tax
written down values and financial accounts carrying values.
BALANCE SHEET AND GEARING
£m
Tangible assets 517.6
Goodwill 212.8
Stocks 3.9
Debtors 8.0
Creditors (48.7)
Working capital (36.8)
Provisions (19.9)
Dividends (6.5)
Tax (12.2)
Net Assets 655.0
Net Debt (188.7)
Shareholders’ Funds 466.3
T angible assets include £130.4m relating to freehold properties.
Net debt at the end of the year was £188.7m (2002/2003:
£225.6m). The interest cover ratio for the year, before
exceptional items and goodwill amortisation, was 5.5
(2002/2003: 5.5). The net borrowings to EBITDA ratio before
exceptional items at the year end was 1.7 (2002/2003: 2.0).
Fixed charge cover for the year was 2.8 (2002/2003: 2.9).
Gearing, measured as a percentage of shareholders’ funds,
was 40% at the year end (2002/2003: 45%).
The cash return on average net tangible assets employed
was 20% (2002/2003: 21%).
BANKING FACILITIES
The Group has syndicated facilities with seven banks totalling
£283.5m which expire in March 2006.
INTEREST RATE RISK
Interest rate risk is managed through swapping between
floating rate debt into fixed rate debt. This has been achieved
through the purchase of a £70m five-year swap and a £65m
five-year swap callable by the counter party after three years.
Liquidity risk is managed through an assessment of short-,
medium- and long-term cash flow forecasts to ensure the
adequacy of debt facilities. Short-term liquidity risk is managed
through overdraft facilities and short-term deposits.
CURRENCY RISK
The Group operates wholly within the United Kingdom and
all transactions are denominated in sterling.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Luminar plc will be required to adopt International Financial
Reporting Standards (IFRS) for the year ended 26 February
2006. The Group will continue to assess the impact of
adopting IFRS on an ongoing basis give that both UK and
International Standards are undergoing a period of rapid
change to assist harmonisation.
ANDREW BURNS
FINANCE DIRECTOR
20 MAY 2004 16 LUMINAR PLC Annual Report and Accounts 2004
CORPORATE SOCIAL RESPONSIBILITY
The Company trades in the late night
entertainment market and therefore
operates in an environment where it is
responsible for the safely of customers
and staff. Particular risks arise with
regards to maintaining the safety of
premises, prevention of excessive
alcohol consumption, prevention of
drug use and the management of door
stewards. In the case of nightclubs many
customers have visited other bars prior
to visiting the Company’s premises,
which increases the demands on the
Company in relation to the management
of customers.
The Company’s primary activity is the
provision of entertainment, to which
alcohol is an ancillary activity. It is not
possible for the Company to achieve
its objectives unless there is a high
standard of control in managing
customer behaviour. The Company
also operates non-tolerance polices
over drugs. Its primary method of
protecting customers and staff is
control of admissions.
The Company has the most experienced
operational management in its sector
and operates policies and processes
designed to protect customers, staff
and local communities from primary
risks associated with late night
entertaining. It also maintains the
highest possible levels of co-operation
with the police and relevant authorities
in all related areas.
The Company is a member of the
FTSE4Good Index, designed to identify
those companies who display good
records of corporate social responsibility.
Specific policies have been developed
in regard to drugs, door stewards,
price discounting, anti-social drinking
and smoking. These are set out below.
DRUG POLICY
The Company has a zero tolerance
towards drugs and makes every effort
to ensure that its premises are drug
free. The Company does not tolerate
drug handling or use by its employees.
The Company policy regarding drug use
within its venues by customers is clearly
communicated to all employees via the
Company’s employee handbook, and
anyone found in possession of such
substances will have them confiscated
and be removed from the premises
immediately. Any person attempting
to sell or distribute drugs within the
Company’s premises will be reported
to and arrested by the police.
Ongoing training provided to its
employees reinforces the Company’s
policy towards drugs. The training
provides employees with the knowledge
to recognise drugs and the use of drugs
and the ability to assist and care for
those found suffering from the effects
of drug misuse.
In addition, the Company employs other
methods to deal with misuse, for
THE COMPANY HAS THE MOST
EXPERIENCED OPERATIONAL
MANAGEMENT IN ITS SECTOR
AND OPERATES POLICIES AND
PROCESSES DESIGNED TO PROTECT
CUSTOMERS, STAFF AND LOCAL
COMMUNITIES FROM PRIMARY
RISKS ASSOCIATED WITH LATE
NIGHT ENTERTAINING. Annual Report and Accounts 2004 LUMINAR PLC 17
instance, unscheduled visits to the
Company’s premises by trained
and qualified teams of drug sniffer
dogs. These teams will search,
where appropriate, both employees
and customers.
Also, the licensee at all the Company’s
premises has the authority to refuse
entry to persons suspected of dealing
or possessing drugs.
DISCOUNTING AND
ANTI-SOCIAL DRINKING
The increase in the granting of late
licences in recent years has increased
competition in many of the Company’s
trading locations. This increased
competition has contributed to many
operators discounting the price of their
products and to the rise in promotion-
led cost-cutting.
The Government has recently brought
the issue of ‘anti-social drinking’ to
national prominence. The link between
crime and drunkenness has been
established in the statistics issued
by the Government. The Company
welcomes the increased profile given
to this important issue and supports an
industry-wide solution to the problem.
The Company operates the highest
standards of control and security in
its premises to ensure the safety of its
customers. Various methods are used
to maximise the safety of our customers
and these include the use of CCTV
cameras (internally and externally),
training of management and staff to
control drunken behaviour and the
stringent use of licensee’s powers not to
serve customers who become drunk or
to refuse entry to those already drunk.
In line with normal trade practice, price
promotions are used by the Company
in certain circumstances as a genuine
marketing tool and are generally
introduced only after consultation
with local police. The Company also
uses, in a competitive market, strategic
discounting measures; however,
discounting as a percentage of the
Company’s sales has not increased
over the last three years and the
Company’s overall gross margin has
been maintained at over 80% for the
last three years. In any event, the
paramount concern of the Company in
the pricing of its products is its
responsibility for the safety and well-
being of its customers.
The Company’s employees are trained
to recognise those customers that
it would be unsafe to allow into its
premises because they are already
intoxicated. The Company is actively
promoting the provision of other safety
initiatives across its estate, including
the use of plastic bottles and glasses
and shatterproof glass products.
The Company welcomes initiatives to
enhance the experience of all users of
busy town and city centres and actively
participates in this by use of CCTV and
regular liaison with police and council
officials. The Company would also
welcome the introduction of minimum
tariffs, as have been introduced by
some local authorities. The Company
is fully supportive of the Government’s
Alcohol Harm Reduction Strategy and
welcomes it and all such initiatives that
encourage safe and sensible drinking.
The Company welcomes deregulation of
the existing licensing laws and continues
to work closely with the appropriate
authorities to ensure that its customers
enjoy a safe environment when visiting
our premises.
The Company is optimistic that the
deregulation of the country’s
anachronistic licensing laws will help
provide a more responsible approach
to alcohol abuse by all concerned in
the production, distribution, sale and
consumption of alcoholic beverages.
Luminar is committed to using its
position in the late night entertainment
industry to support all statutory,
regulatory and other organisations
committed to dealing with alcohol abuse.
DOOR STEWARDS
It is the Company’s policy that all door
stewards used by the Company are
employed by a nominated security
company, on a standard contract.
This approach enables the Company
to ensure, so far as is possible, that the
door stewards at its premises meet the
highest industry standards. Security
RIGHT: New York, New York, Oceana
FAR RIGHT: Chicago Rock Café 18 LUMINAR PLC Annual Report and Accounts 2004
companies employed by the Company
must comply with all appropriate local
registration schemes and any other
statutory requirements. The provisions
of the contract require compliance with
BSI standards 7960 and 7858, which
are the Government’s best practise
guidelines for the security industry.
The standard contract also provides
that the security company must have
in place public liability insurance in the
sum of £5m.
As a consequence of the approach
outlined above, the Company is
well placed to cope with the ongoing
implementation of the Security
Industry Agency licensing scheme.
The new licensing regime provides
for the vetting, training and regulation
of door stewards, and for the granting
of national badge licences. This is
a move welcomed by the Company.
SMOKING
The adoption of a ban on smoking in
work places in Ireland has refocused
attention on the possibility of a similar
approach in the UK. Whilst the Company
recognises the potential health benefits
of a smoking ban, it nevertheless
believes that the industry can self-
regulate by following best practice
guidelines from Government and by
ensuring its premises meet all statutory
guidelines in relation to the standard of
air flow and air extraction in its premises.
The Company believes that the adoption
of these measures provides both our
staff and customers with a comfortable
environment for work and enjoyment
of our venues.
It has been the Company’s long term
policy that it’s premises should possess
air circulation and handling equipment
to the prevailing standards at the
time of their installation. All new and
refurbished premises comply with
CIBSE design guidelines, BSI British
Standard 5720 and technical standards
for places of entertainment as published
by the District Surveyors Association.
EMPLOYMENT POLICIES
The Company believes that the way in
which it recruits, develops, motivates
and retains its employees determines
its ability to serve its customers
efficiently and successfully.
The Company has continued to adopt
a policy of promotion from within, and
all employees are encouraged to make
a real commitment to the growth of
the business. The Company places
great emphasis on, and invests
significant resources in, the training
and development of its employees,
believing that this ensures that the
highest operating standards and
service are provided to its customers.
The Company’s in-house magazine
and other methods of communication
continue to ensure that all employees
are well informed about ongoing
initiatives and any other issues affecting
their employment and the progress of
the business.
The Company operates a contributory
pension scheme and all new employees
are encouraged to join the scheme.
The Company contributes to the
scheme a percentage of the employee’s
salary. The percentage contributed
is dependent on the seniority of the
individual employee.
In addition employees are invited
to participate in the Company’s Save
As You Earn share option scheme,
encouraging a strong involvement
in the performance of the Company.
The Company’s employment policies
do not discriminate between employees
or potential employees on the grounds of
sex, race, creed, colour or ethnic origin.
Consideration is given to all applicants
for employment from handicapped and
disabled persons where the requirement
of the job may be adequately covered by
those persons. If employees become
disabled, every effort is made to ensure
their employment continues, with
appropriate training where necessary.
The Company has considered its
training and employment policies in
light of the introduction of The
Disability and Discrimination Act 1995,
the last requirements of which are to
be introduced in October 2004. This
new legislation imposes an obligation
on service providers to ensure that
their buildings are as accessible as is
physically possible to disabled persons.
The key features of the Group’s
personnel support systems are:
> Board approval of a detailed
Manpower and Development
Recruitment Plan.
> Continual assessment under the
Investors In People accreditation.
> Publication and constant review of
employment procedures including:
–Employee handbooks
–Award of Merit schemes
> Continuous health and safety
risk assessment.
> Ongoing provision of job related
and management training.
> Annual staff appraisals identifying
individual staff and employment needs.
SUPPLIER PAYMENT POLICY
AND PRACTICE
The Group’s policy with regard to the
payment of suppliers is to agree terms
of payment at the start of business
with each supplier, to ensure that the
supplier is made aware of the standard
payment terms. Such terms include
an undertaking to pay suppliers within
an agreed period subject to terms
and conditions being met by suppliers.
Creditor days at the period end
amounted to 30 days (2003: 31 days)
of total supplies for the period.
RESEARCH AND DEVELOPMENT
All businesses within the Group continue
to be active in developing new ways of
working for the benefit of the business
and its customers.
CHARITABLE AND
POLITICAL DONATIONS
The Company has established a
charitable trust, the ECHO Trust,
to channel the Company’s charitable
activities to those in need. During
the year, a total of £455,795 (2003:
£322,642) was donated by our
customers in charity collections to
ECHO Trust and other local charities.
Direct contributions for charitable
purposes were made during the period
amounting to £10,195 (2003: £848).
No political donations were made
during the year (2003: £nil).
CORPORATE SOCIAL RESPONSIBILITY
CONTINUED Annual Report and Accounts 2004 LUMINAR PLC 19
During the year ended 29 February 2004
the businesses of the Company faced
many regulatory challenges. The
Company takes compliance with it’s
statutory and regulatory obligations
very seriously and two examples of
our position on specific issues are set
out below:
Disabled Discrimination Act 1995
The Company has considered its
position in light of the introduction
of The Disability and Discrimination
Act 1995, the last requirements of
which are to be introduced in October
2004. This new legislation imposes an
obligation on service providers to ensure
that their buildings are as accessible as
is physically possible to disabled persons.
In order to ensure that its venues meet
the requirements of the new legislation,
the Company is undertaking a detailed
survey of all its premises with particular
emphasis on the older units. This will
be undertaken by both our in-house
staff and external consultants. Where
improvements are identified as being
required, the works will either be actioned
or phased in as part of the Company’s
rolling refurbishment programme.
Control of Asbestos Regulations 2002
In accordance with its responsibilities
under the current asbestos legislation,
the Company has updated its asbestos
management procedures and instigated
a detailed survey of all our premises.
Where asbestos materials have been
identified, they have been either removed
or steps have been taken to manage
the situation pending the Company’s
phased refurbishment programme.
LICENSING REFORM AND LUMINAR
The new Licensing Act received Royal
Assent last year. The Act is the first
serious review of our anachronistic
licensing laws since 1964. The Act seeks
to modernise the licensing process and
also has a wider ambition in terms of
its social policies. This wider ambition,
it is hoped, will lead to a reduction in
binge drinking and social disorder.
The main weapon in the Government’s
armoury is a complete shift away from
existing procedures centred on the
Magistrates Courts and a transfer of
administrative duties for the licensing
system in its entirety to local authorities.
Amongst the tranche of reforms is the
possibility of extended trading hours.
Whilst many operators in the leisure
sector have openly expressed concerns
about this development, Luminar is
broadly optimistic about the outcome.
We are optimistic of the benefits of the
reforms because:
> The Licensing Act 2003 provides
for all licensing in future to be
administered by local authorities.
The latest version of the draft
guidance places a much higher
emphasis on regulation in order
to control crime and disorder as well
as promote public safety. This is
likely to be a culture shock for
companies which have previously
operated premises trading to normal
permitted hours, particularly on the
high street. The local authorities will
also have far greater control of all
premises. Companies such as
Luminar, with effective procedures
to ensure compliance, will be less
vulnerable than those who have not
previously required such procedures.
Luminar is therefore ideally placed
to take advantage of the new
regulatory environment, which is likely
to follow the implementation
of the Licensing Act 2003.
> In recent years there have been
a large number of premises that
have taken advantage of the relaxed
licensing environment to obtain
Special Hours Certificates without
strictly complying with the criteria.
Luminar recently obtained a landmark
judgement from the Court of Appeal
in respect of Lloyds No 1 in Norwich.
This case will make it difficult, if not
impossible, for premises who do
not comply with the Special Hours
Certificate regime to obtain late
licences. The Court specifically
disapproved of any extension of
hours simply for the purpose of
drinking. This case should lead to
greater scrutiny of such applications
in the period leading up to and beyond
licensing reform.
> Our branded development strategy
mentioned earlier in this Report
has been developed with licensing
reform very much in mind.
> Our scale of operation and expertise
provides a platform for the
management of change.
> Because of Luminar’s existing licence
structure, the cost to the Company
in managing these changes will be
minimal. After an initial increase,
the broad impact across our business
will lead to a reduction in costs.
REGULATORY CHALLENGES 20 LUMINAR PLC Annual Report and Accounts 2004
THE BOARD OF DIRECTORS
KEITH HAMILL
CHAIRMAN
Keith, 51, was appointed Chairman
on 16 January 2001. He is also
Chairman of Collins Stewart Tullet PLC,
Travelodge-Little Chef and Moss Bros
PLC and Non-Executive director of
Electrocomponents PLC. He was
previously finance director of WH Smith,
Forté and United Distillers and a Partner
at PricewaterhouseCoopers.
STEPHEN THOMAS
CHIEF EXECUTIVE
Stephen, 51, was a founder member
of Luminar Leisure in 1987 and has
remained Chief Executive throughout.
Prior to that he was a regional director
at a leisure subsidiary of Whitbread
PLC. He is currently a Non-Executive
Director of Hartford Group Plc, Paddy
Power Plc and Saracens Ltd.
ANDREW BURNS
FINANCE
Andrew, 40, qualified as a chartered
accountant with Price Waterhouse in
London in 1989. He moved to The Rank
Group in 1990 to work in Business
Development. Latterly, he was the
Finance and Commercial Director for
Rank Video Services Europe. He joined
Luminar as Finance Director in 1997.
JOHN WILLIAMS
SENIOR NON-EXECUTIVE DIRECTOR
John, 70, known as John Wills, was
a Managing Partner until 1 May 1996
in Healey & Baker with whom he
remained as a consultant until May
1998. He joined Healey & Baker in
1955 becoming a Partner in 1964.
His specialism is retail property and
from 1987 he was the Senior Retail
Partner responsible for the firm’s
retailing activities in the United
Kingdom and overseas. He was
appointed to the Board in April 1996.
ALAN GOLDMAN
NON-EXECUTIVE
Alan, 61, was appointed on 3 March 1998
following his retirement from Rank
Leisure Limited where he was latterly
Development Director responsible
for the acquisition and development
of Rank’s “Leisureworlds”. He has
considerable experience of operating
discotheques and nightclubs and in
the acquisition and development of
leisure businesses.
LINDA WILDING
NON-EXECUTIVE
Linda, 45, was previously Managing
Director of Mercury Private Equity,
a division of Merrill Lynch Investment
Managers, specialising in providing
private equity finance. She resigned
from that post at the end of April 2001.
Linda served as a Director representing
Mercury private Equity from 1990
until the flotation of the Company
in November 1997. Because of her
experience of the Company and
expertise she was invited to re-join
the Board as a Non-Executive Director
in November 1998. Linda is also
Chairman of Sanctuary Spa Group
Limited. Annual Report and Accounts 2004 LUMINAR PLC 21
BOARD COMMITTEES
NOMINATIONS COMMITTEE
John Williams (Chair)
Alan Goldman
Keith Hamill
Michael Payne*
Linda Wilding
Robert Wickham*
AUDIT COMMITTEE
Keith Hamill (Chair)
Michael Payne*
Robert Wickham*
John Williams
Richard Brooke
Martin Gatto
REMUNERATION COMMITTEE
Linda Wilding (Chair)
Alan Goldman
Michael Payne*
Robert Wickham*
John Williams
Richard Brooke
Martin Gatto
David Longbottom
RISK MANAGEMENT
COMMITTEE
John Williams (Chair)
Andrew Burns
Alan Goldman
Henry Andrew Willits,
Company Secretary
Tony Steed, Health &
Safety Manager
CAPITAL COMMITTEE
Keith Hamill (Chair)
John Williams
Stephen Thomas
Andrew Burns
Brendan McLoughlin
Alistair Burford
MARTIN GATTO
NON-EXECUTIVE
Martin, 54, is Finance Director of
British Energy and was appointed to
the Board on 1 January 2004. Martin
was previously Finance Director of
Somerfield plc and has a wealth of
experience in both the leisure and
retail industries.
RICHARD BROOKE
NON-EXECUTIVE
Richard, 50, was appointed to the Board
on 1 January 2004. Richard is Managing
Director of St James’s Investment
Partnership (SJIP), the advisory arm
of Media Ventures Partners (MVP),
the specialist media investment firm.
Richard has been in this position since
January 1998, before which he was
Group Finance Director of BskyB plc.
He was also a Non-Executive director
of Gallagher plc from 1996 to 2002.
DAVID LONGBOTTOM
NON-EXECUTIVE
David, 59, was appointed to the Board
on 17 April 2004. David is the Human
Resources Director of Dixons Group
Plc, a position he has held since 1996.
In addition David is the current Dixons
Group Board member with
responsibility for Corporate Social
Responsibility. David has worked in a
variety of positions with Dixons since
1987 and prior to that held senior
positions with Lloyd’s of London and
Courtaulds plc.
ALISTAIR BURFORD
DIRECTOR OF OPERATIONS
Alistair, 51, was appointed to the
Board on 1 January 2002. He joined
Luminar Leisure Limited in 1988 having
previously gained industry experience
at Whitbread Plc and Civil Service
Catering. During his time with Luminar,
he has held the positions of General
Manager, Area Manager, Operations
Manager and most recently Managing
Director of the Entertainments Division.
BRENDAN MCLOUGHLIN
PROPERTY & DEVELOPMENT DIRECTOR
Brendan, 43, was appointed to the
Board on 1 January 2003. He joined
Luminar following the merger with
Northern Leisure where he was a
Director. Brendan is an experienced
operator of late night bars and clubs
and has worked in the industry for
over 20 years.
* retired during the period ending 29 February 2004. 22 LUMINAR PLC Annual Report and Accounts 2004
REPORT OF THE DIRECTORS
FOR THE YEAR ENDED 29 FEBRUARY 2004
PRINCIPAL ACTIVITIES
The principal activity of the Group during the period was
as owner, developer and operator of theme bars, nightclubs
and restaurants.
BUSINESS REVIEW
During the period, the Company announced its intention to
review the potential benefits of the Government’s planned
deregulation of the gaming industry. The Board feels that
the Company is well placed to take advantage of the proposed
reforms and is considering the strategic options available to
the Company. Further details of the potential opportunities
are contained in the Chief Executive’s Statement.
During the period, the Company announced the planned
creation of a new business division to contain 61 units. These
units are venues which the Board feel cannot be branded within
the Company’s core brands and should be developed by
an entrepreneurial management team led by Tim Roberts.
Further details can be found in the Chief Executive’s Statement.
A review of the business and future developments are included
in the Chairman’s Statement, the Chief Executive’s Statement
and the Finance Director’s Review, set out on pages 02 to
03, 06 to 09 and 10 to 15 respectively of this Report.
PROFIT AND DIVIDENDS
The profit before goodwill, exceptional items and taxation
for the 52 weeks ended 29 February 2004 amounted to
£61.6m (2003: £66.6m) and is reported in the Group profit
and loss account on page 38.
The Directors declared an interim dividend payment of 3.67p
per Ordinary Share, which was paid to shareholders on
9 January 2004. The Board recommends the payment of a
final dividend of 8.87p per Ordinary Share to the shareholders;
subject to approval at the AGM, this will be paid on 8 July 2004
to shareholders on the register on 4 June 2004. The total
dividend payment in respect of the period ended 29 February
2004 will therefore be £9.2m (2003: £8.3m).
DIRECTORS
The current Board of Directors is shown on pages 20 and 21
of this Report.
During the year, Michael Payne and Robert Wickham retired
from the Board, and the Board wish to record their thanks
for their contribution to the Company. John Aust retired as
a Director at the conclusion of the Annual General Meeting
held on 1 July 2003.
As previously announced, John Williams and Alan Goldman
will retire as Directors immediately following the 2004 Annual
General Meeting.
Since the last Annual General Meeting, Martin Gatto, Richard
Brooke and David Longbottom have been appointed as
members of the Board. It is the opinion of the Board, having
regard to their experience and skills as outlined below, that
their appointments strengthen the Board and the governance
of the Company. The Board confirms that it considers Martin
Gatto, Richard Brooke and David Longbottom all to be
independent of the management of the Company.
Martin Gatto
Martin, 54, is Interim Finance Director of British Energy and
was appointed to the Board on 1 January 2004. Martin was
previously Finance Director of Somerfield plc, and has held
senior positions at Sun International, Hilton International
and Grand Metropolitan. Martin brings to the Board a wealth
of experience in both the leisure and retail industries.
Richard Brooke
Richard, 50, was appointed to the Board on 1 January 2004.
Richard was previously Group Finance Director of BskyB plc
and has also held a Non-Executive Directorship at Gallagher
plc in recent years.
David Longbottom
David, 59, was appointed to the Board on 17 April 2004. David
is the Human Resources Director of Dixons Group plc, a
position he has held since 1996. David has worked in a variety
of positions within Dixons since 1987 and prior to that held
senior positions with Lloyd’s of London and Courtaulds plc.
In accordance with the requirements of the Articles of
Association, Martin Gatto, Richard Brooke and David
Longbottom will retire from office at the Annual General Meeting
and offer themselves for re-election by the shareholders.
The Articles of Association require that one-third of the
continuing Directors retire by rotation at the Annual General
Meeting. Accordingly, Linda Wilding will retire and offer herself
for re-election by the shareholders. Given the retirement
following the Annual General Meeting of John Williams and
Alan Goldman, all other Company Directors have been elected
by the shareholders at one of the last two Annual General
Meetings. The Board confirms that, following a review of the
skills and experience of the Directors, and of their personal
positions and commitments, it is satisfied that Keith Hamill,
Linda Wilding, Martin Gatto, Richard Brooke and David
Longbottom remain independent of the management of the
Company and continue to make a substantive contribution
to the work of the Board.
During the period, the Company maintained liability insurance
for its Directors and officers.
No Director had a material interest in any contract or
arrangement to which the Company or any subsidiary was
a party.
During the period, Henry Andrew Willits was appointed Company
Secretary, and Andrew Burns accordingly retired from that role.
Although Linda Wilding served on the Board prior to the
Company’s flotation, the Board has concluded that the nature
of changes to the capital structure, size and scale of the
Company, together with her limited financial dependency
on the Company and her expertise and professionalism mean
that it is appropriate and in the best interests of the Company
and the shareholders to regard her as an independent Director
with her term of office commencing when she was re-appointed
to the Board on 3 November 1998.
The interests of the Directors in the Ordinary Shares of the
Company at 29 February 2004 and 2 March 2003 were
as follows: Annual Report and Accounts 2004 LUMINAR PLC 23
29 February 2004 2 March 2003
Keith Hamill 30,113 30,113
Stephen Thomas 243,904 243,904
Andrew Burns 3,968 3,968
John Williams 18,645 17,993
Linda Wilding 16,929 16,277
Alan Goldman 6,066 4,767
Brendan McLoughlin 21,605 21,605
Alistair Burford 8,754 8,574
Martin Gatto – –
Richard Brooke – –
David Longbottom – –
The interests of the Directors in the Warrants of the Company
at 29 February 2004 and 2 March 2003 were as follows:
29 February 2004 2 March 2003
Stephen Thomas 43,410 43,410
Alistair Burford 1,178 1,178
On 17 March 2004, the Company acquired shares for the
Non-Executive Directors (excluding Keith Hamill) as part of
the contractual remuneration of those Directors. The shares
acquired were as follows:
Shares Acquired Total interests as at
17 March 2004 17 March 2004
John Williams 625 19,270
Linda Wilding 1,250 18,179
Alan Goldman 1,223 7,289
Martin Gatto 729 729
Richard Brooke 729 729
This Acquisition was announced to the Stock Exchange on
18 March 2004. Other than the above there has been no
change in the interests of the Directors in the share capital
of the Company between 29 February 2004 and the date
of the signing of this report, 20 May 2004.
No Director had any interest in the shares of any of the
Group’s subsidiaries during the 52-week period ended
29 February 2004.
The interests of the Directors in share options are set out in
the Report on Remuneration on page 28.
SHARE CAPITAL
At the 2003 Annual General Meeting, the shareholders
gave the Company authority to purchase up to a maximum
of 10% of its own shares. This authority will expire at the
conclusion of the forthcoming Annual General Meeting,
at which a Special Resolution will be proposed to renew
the authority for a further year.
The Board has not exercised this power during the 52 weeks
ended 29 February 2004, nor in the period between then
and the signing of this report (20 May 2004).
SUBSTANTIAL SHAREHOLDERS
At 20 May 2004 (the last practical date before the approval
of this Report), the Company had been notified of the
following interests in the shares of the Company, pursuant
to Sections 198-202 of the Companies Act 1985:
Number of shares %
Hermes Pensions Management 6,426,189 8.78
AllianceBernstein 5,206,454 7.12
Fidelity Investments 4,937,622 6.75
Morgan Stanley Investment Management 4,631,227 6.33
Goldman Sachs Asset Management 4,514,799 6.17
Devon County Council 3,661,962 5.00
SG Asset Management 3,111,659 4.25
Legal & General Investment 2,616,275 3.58
MLIM 2,509,057 3.43
Capital Group 2,500,000 3.42
BGI 2,262,955 3.09
Invesco 2,209,756 3.02
DIRECTORS’ RESPONSIBILITY FOR
THE FINANCIAL STATEMENTS
Company Law requires the Directors to prepare financial
statements for each financial year that give a true and fair view
of the state of affairs of the Company and the Group, and of
the profit or loss of the Group for that period. In preparing
the financial statements, the Directors are required to:
i. select suitable accounting policies and then apply
them consistently;
ii. make judgements and estimates that are reasonable
and prudent;
iii.state whether applicable accounting standards have been
followed, subject to any material departures disclosed
and explained in the financial statements;
iv.prepare the financial statements on the going concern
basis, unless it is inappropriate to assume that the Group
will continue in business.
The Directors confirm that they have complied with the
above requirements in preparing the financial statements.
The Directors are responsible for maintaining proper
accounting records that disclose with reasonable accuracy
at any time the financial position of the Company and the
Group, and to enable them to ensure that the financial
statements comply with the Companies Act 1985. They are
also responsible for safeguarding the assets of the Company
and the Group and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and
integrity of the website. Legislation in the UK concerning
the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
GOING CONCERN
The Directors have made enquiries into the adequacy of
the Company’s financial resources and, having conducted
a review of the Company’s budget and medium term plans
which include capital expenditure projections and cash flow
forecasts, have satisfied themselves that adequate resources
exist to ensure that the Company will continue in operational
existence for the foreseeable future. For this reason, the
Directors continue to adopt the going concern basis in
preparing the Company’s financial statements.
AUDITORS
PricewaterhouseCoopers LLP have indicated their willingness
to continue in office, and a resolution for their re-appointment
will be proposed to the Annual General Meeting.
By Order of the Board
HENRY ANDREW WILLITS
COMPANY SECRETARY
20 MAY 2004 24 LUMINAR PLC Annual Report and Accounts 2004
CORPORATE GOVERNANCE STATEMENT 2004
APPLICATION OF PRINCIPLES
This statement describes how the Company applies the
principles contained within the Combined Code appended
to the Listing Rules of the Financial Services Authority.
The Company has noted that the Financial Reporting Council
issued a revised version of the Code in July 2003, which is
effective for reporting periods beginning on or after November
2003. The Board is committed to working towards meeting
the standards set out in the revision to the Combined Code,
and to full explanation to shareholders where a divergence
from the Code is considered desirable. The Company has
prepared a full analysis of the new requirements and the
Board will consider the implementation of any appropriate
changes in the current year.
DIRECTORS
The Board is responsible for setting the Group’s strategic
direction, the establishment of Group policies and internal
controls, and the monitoring of operational performance.
It meets regularly throughout the year and, in addition to
the routine reporting of financial and operational issues,
reviews each of its trading divisions and key functions in detail.
The Board has a schedule of matters specifically reserved
to it for decision and delegates certain powers to the Board
Committees and to the Executive Directors collectively and
individually. The Schedule of reserved matters is periodically
reviewed by the Board and presently includes annual budgets,
strategic plans, approval of major capital expenditure and
significant financing.
Information is provided to all Board members in the week
prior to a Board meeting to enable the Directors to consider
the issues for discussion, and to request clarification or
additional information. The Board regularly reviews the type
and amount of information provided. The Board meets eight
times a year and, in addition, has an Away Day in January
for full consideration of strategic issues facing the Company.
All Directors have access to the advice of the Company
Secretary, who is responsible to the Board for ensuring that
procedures are followed. During the year, Mr H A Willits,
a Solicitor, was appointed as the Secretary. The appointment
and removal of the Company Secretary is reserved for the
consideration of the Board as a whole.
In addition, there is an agreed procedure for seeking
independent professional advice at the Company’s expense.
On appointment to the Board, every Director is provided
with opportunities for appropriate training to enable them
to discharge their duties as a Director. It is the intention of
the Company to create opportunities for new Non-Executive
Directors to meet with significant shareholders should this
be requested by them.
The Board consists of the Chairman, six Non-Executive
Directors and four Executive Directors. This provides
a balance whereby no individual or small group can dominate
the Board’s decision-making. The Chairman of the Board
is Keith Hamill. Stephen Thomas is Chief Executive and is
responsible for the executive leadership and co-ordination
of the Company’s business activities. John Williams was the
Senior Independent Director during the year under review;
with his retirement at the 2004 Annual General Meeting, this
role will be assumed by another of the Non-Executive Directors
who will be chosen following the Annual General Meeting.
The Non-executive Directors have met without the chairman
or the Executive Directors and the senior Independent
Director , John Williams, has provided feedback to the Chairman
following this meeting.
Although Linda Wilding served on the Board prior to the
Company’s flotation, the Board has concluded that the nature
of changes to the capital structure, size and scale of the
Company, together with her limited financial dependency
on the Company and her expertise and professionalism
mean that it is appropriate and in the best interests of
the Company and the shareholders to regard her as an
independent Director with her term of office commencing
when she was re-appointed to the Board on 3 November 1998.
Board members are appointed by the Board on the
recommendation of the Nominations Committee, which
is chaired by the Chairman and consists of all the Non-
Executive Directors. The Company’s Articles of Association
provide that one-third (or the number nearest to but
not exceeding one-third) of the Directors shall stand for
re-election at each Annual General Meeting. Furthermore,
the Articles of Association require a Director to stand for
re-election if they were not appointed or re-appointed
at either of the last two Annual General Meetings. Newly
appointed Directors are required to retire and seek
shareholder election at the first Annual General Meeting
after their appointment. Therefore, Martin Gatto, Richard
Brooke, David Longbottom and Linda Wilding will all seek
re-election at the Annual General Meeting.
All Non-Executive Directors are appointed for a three-year
term. A Non-Executive Director may be appointed for
a further three-year term by agreement with the Company.
If appropriate, and following review, a further term of
three years may be agreed. In addition, the Board are
implementing arrangements for the performance and
contribution of the Non-Executive Directors and the
Chairman, to be assessed on an annual basis.
The Chairman of the Board has instigated a review of the
effectiveness of the Board. This review, carried out by the
Chairman, involved full consultation with all the Directors
and the Company Secretary. The conclusions of the review
have been discussed by the Board as a whole and will be
kept under review during the forthcoming year. Annual Report and Accounts 2004 LUMINAR PLC 25
BOARD COMMITTEES
In accordance with the Combined Code and corporate
governance best practice, the Board has established
a number of committees. All of the Committees have
written terms of reference, approved by the Board,
which are described below.
AUDIT COMMITTEE
The Audit Committee is chaired by Keith Hamill and also
comprised during the financial year of John Williams,
Michael Payne, Martin Gatto and Richard Brooke. During the
year, Robert Wickman and Michael Payne stood down from
the Committee following retirement from the Board.
The Committee meets at least three times a year and reports
to the Board on all matters relating to the regulatory and
accounting requirements that may affect the Group,
together with the financial reporting and internal control
procedures including the annual and interim financial
statements. In addition, the Committee ensures that an
objective and professional relationship is maintained with
the external auditors, with particular regard to the nature
and extent of any non-audit functions they provide.
During the financial year ended 29 February 2004, the
Company’s external auditors have provided advice to
the Company, including a reorganisation of the Company’s
subsidiaries, which was completed in August 2003.
The external auditors may attend all meetings of the Audit
Committee and have direct access to the Committee and
its Chairman at all times. The Executive Directors are not
members of the Committee, but may attend meetings of
the Committee as necessary to facilitate its business.
The Company has an internal audit function, which is charged
with ensuring adequate controls exist and are complied with
at a unit level over cash and stock. They also ensure that
the standard of operation at unit level is compliant with the
requirements of the local authorities for that area, and other
statutory compliance.
To comply with the provisions of the combined code,
Keith Hamill will stand down as Chairman of the Committee
following the Annual General Meeting in July. The Committee
will select a new Chairman at that time.
REMUNERATION COMMITTEE
The Remuneration Committee is chaired by Linda Wilding,
and consists of all the Non-Executive Directors.
Robert Wickham and Michael Payne stood down from the
Committee during the year. Keith Hamill retired from the
Committee with effect from 1 March 2004 but is invited
to attend Committee meetings. Martin Gatto and Richard
Brooke attended meetings of the Committee following their
appointment in January 2004 but did not officially join the
Committee until 1 April 2004.
The Committee operates within agreed terms of reference
in advising the Board on the remuneration policy for the
Executive Directors and senior executives. When making
its decisions, the views of the Chief Executive are considered
and appropriate professional advice is sought where needed.
The Board, excluding the Non-Executive Directors, review
the fees for Non-Executive Directors annually.
Professional advisers consulted during the year were Keplar
Associates and Watson Wyatt, who did not provide any other
services to the Company.
The Directors’ Report on Remuneration, which has been
prepared in accordance with the requirements of the
Directors’ Remuneration Report Regulations 2002 and
approved by the Board, is set out on pages 28 to 34.
NOMINATIONS COMMITTEE
The Nominations Committee is chaired by John Williams
and also consists of all the Non-Executive Directors.
Following John Williams’ retirement at the AGM, it will
be chaired by Keith Hamill. It monitors and reviews the
membership of and succession to the Board of Directors,
and makes recommendations to the Board, inter alia, on
the identification and recruitment of potential Executive
and Non-Executive Directors.
During the year, two Non-Executive Directors, Martin Gatto
and Richard Brooke, joined the Board with effect from
1 January 2004. In recommending these appointments,
the Committee reviewed the skills and experience represented
on the Board and identified areas where additional skills
would enhance the effectiveness of the Board. A third
new Non-Executive Director, David Longbottom, joined
the Board in April of this year. The backgrounds and skills
of these Directors are set out on page 20 of this Report.
The Directors’ Report sets out details of the skills and
experience of Mr Gatto, Mr Brooke and Mr Longbottom,
which form the basis of the recommendation to shareholders
that they be elected as Directors of the Company.
The Committee, having regard to the direction of the Combined
Code, considers that Ms Wilding continues to be effective
and committed, and recommends her to the shareholders
for re-election on this basis.
RISK MANAGEMENT COMMITTEE
The Board is responsible for the Company’s risk management
process. It has delegated responsibility for implementing an
appropriate risk management programme to a committee
comprising Andrew Burns, John Williams, Alan Goldman,
Henry Andrew Willits (Company Secretary) and Tony Steed,
who has responsibility for health and safety issues. The Board
sets guidelines on the general level of risk that is acceptable
and has a considered approach to evaluating risks and
controls. More details of the operation of this process are
given in the Internal Controls section of this Report. Following
the retirement of John Williams, Keith Hamill will become
Chairman of the committee immediately following the
Annual General Meeting. 26 LUMINAR PLC Annual Report and Accounts 2004
EXECUTIVE COMMITTEE
The Executive Committee consists of Stephen Thomas,
who is Chairman of the Committee, Andrew Burns, Alistair
Burford and Brendan McLoughlin. The Company Secretary
also attends all meetings of the Committee. This Committee
exercises the day-to-day management function of the
Company. The Committee meets weekly and considers
amongst its standing agenda items all capital expenditure,
revenue expenditure not authorised by the Executive
Directors within their individual authority levels, regular
reports from the Directors and a regular review of the
strategic aims of the Company.
CAPITAL COMMITTEE
The creation of the Capital Committee received Board
approval in September 2003. Its membership consists of
Keith Hamill, who chairs the Committee, John Williams and
the four Executive Directors. The function of the Committee
is threefold. First, to oversee the capital expenditure of the
Company. Secondly, the committee has responsibility for
capital expenditure planning and budgeting. Thirdly, to
exercise a limited delegated function to approve capital
expenditure up to an agreed limit. Expenditure that exceeds
the agreed limit is approved by the full Board. At present
the Committee has delegated authority from the Board up
to a limit of £1m.
RISK MANAGEMENT
The Company continued to invest significant resources in
its Risk Management processes and function. More details of
the operation of the Company’s risk management strategies
are given below.
(a) Internal control
The Board is responsible for maintaining a sound system
of internal control and for reviewing its effectiveness. The
system can only manage rather than eliminate risk and can
only provide reasonable and not absolute assurance against
material misstatement or loss.
The Board confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks
faced by the Company. This was introduced during the year
to 25 February 2001 and has remained in place up to
the date of approval of the Annual Report and Accounts.
The process is regularly reviewed by the Board.
The Combined Code requires that the Directors review the
effectiveness of the Company’s system of internal control,
which includes financial, operational, compliance and risk
management controls.
The Board has reviewed the effectiveness of the system
of internal control. As part of the review process, the Risk
Management Committee carried out a detailed review of
the current system of internal control and, in particular, the
process for identifying and evaluating the significant risks
affecting the business and the policies and procedures by
which these risks are managed. During the review process,
members of the Risk Management Committee had the
opportunity to discuss any areas of concern with management.
In order to ensure that the system of internal control becomes
embedded in the operations and culture of the Company,
management are required to identify and evaluate the
significant risks applicable to their areas of business and
design and operate suitable controls. These risks are assessed
on a continual basis and may relate to internal and external
sources including disruption in information systems,
competition and changes in the regulatory environment.
To further improve the monitoring of risks, the Company
has recently installed a computerised risk management
system. The system is in the first stage of roll-out and will
further ensure that the Company’s internal control procedures
become embedded in the culture of the Company.
In addition, the Board has established a Risk Management
Committee that meets at least three times a year and whose
main purposes are as follows:
> To review, on behalf of the Board, the key risks inherent
in the business and the system of control necessary to
manage such risks and present their findings to the Board.
> To reinforce management’s control consciousness
and foster a culture within the Group that emphasises
risk management.
> To keep under review the effectiveness of the Company’s
risk management infrastructure.
> To consider the risks of new ventures and other
strategic initiatives.
In addition to the major risk review process, the Company
operates under an established internal control framework,
the key features of which are as follows:
(b) Decision-making
The full Board meets regularly and has adopted a schedule
of matters which are required to be brought to it for decision,
thus ensuring it maintains control over appropriate strategic,
financial, organisational, compliance and risk issues.
A meeting of the Executive Directors takes place each week
to make decisions relating to investment issues such as
property acquisitions, capital expenditure and important
operational issues. The Company Secretary attends these
meetings to ensure that procedures are followed and decisions
minuted. The Operations Committee also meets on a weekly
basis to review financial and operating performance. These
meetings are attended by each of the Managing Directors
and any issues are reported through to the meeting of
the Executive Directors. The Board has put in place an
organisational structure with clearly defined lines of
responsibility and delegation of authority. The structure
is reviewed from time to time to ensure that appropriate
controls exist and that financial and operational issues
are dealt with in an effective manner.
(c) Financial and operational controls
There are established procedures for budgeting and planning
capital expenditure, together with reporting systems for
monitoring the Group’s business and performance.
CORPORATE GOVERNANCE STATEMENT 2004
CONTINUED Annual Report and Accounts 2004 LUMINAR PLC 27
> There is a rolling three-year forecast in place, which is
used to assess the financial impact of the Company’s
strategy and there is a comprehensive budgeting system
with an annual budget (approved by the Board), half-yearly
budget and monthly forecasts for the remainder of the
financial period. A monthly report to the Board details the
financial performance of the Group for the preceding period
versus budget and includes a forecast of future profitability.
> Management is accountable to the Directors for the
implementation of the system of internal financial control
throughout the Group. This enables the Board to meet
its ongoing responsibilities for the integrity and accuracy
of the Company’s accounting records and ensures that
ongoing financial performance is monitored in a timely
and corrective manner and that risk is identified as early
as practicably possible. These controls include:
–Comprehensive budgeting systems with annual budgets
for sales, profits, cash and capital expenditure approved
by the Board.
–Detailed variance analysis of actual results compared to
budget on a period and year to date basis.
–Constant monitoring and regular review of sales, cash,
assets and operational compliance at unit level by the
internal audit function.
(d) Property acquisitions and investment appraisal
The Company has clearly defined guidelines for the acquisition
of properties and for capital expenditure. These include
annual budgets, detailed appraisal and review procedures,
levels of authority and due diligence requirements. In addition,
and as a further layer of control, the Capital Committee has
a review function in relation to the capital budget.
(e) Business unit controls
Controls and procedures, including information systems
controls, are detailed in procedure manuals and other written
instructions. Compliance with these procedures is reviewed
by the Company’s internal audit function and management
at divisional level.
(f) Information computer technology
The Company has completed an extensive reorganisation
of its ICT function aimed at closely aligning its strategy
with Information Technology Infrastructure Library Best
Practice guidelines.
One part of this reorganisation has been the outsourcing
of first line and field support to all the Company’s premises
nationally. This provides significant service improvements
and cost savings for its venues and the Company as a whole.
IT policies and procedures have been independently audited
to ensure control and provision of stability to the ICT function.
In line with risk governance procedures we have implemented
a full disaster recovery strategy, including multi-site failure
to ensure business continuity.
The Company’s extensive portfolio of applications designed
to automate and control its core business processes are being
extended from the administrative centres to our premises
nationally to provide automation and time-saving initiatives
for the employees operating those businesses. This provides
significant opportunities for the Company in the future.
The Company has equipped its premises with leading-edge
customer entertainment technology including digital media,
mobile and wireless CRM and customer loyalty systems.
Such systems are designed to engage the customer whilst
providing the business with demographic and micro marketing
analysis linked into our cutting-edge EPOS and CRM
systems. These systems allow the Company to
communicate directly with its customers and to target any
promotions or incentives accurately to the appropriate target
audience.
The Company utilises a dedicated customer data centre to
provide business managers and marketers with targeted
marketing across multiple channels, delivering excellent
return on investment to business units.
(g) Public liability
An electronic checking system has been developed to monitor
housekeeping and customer safety standards within the
Company’s venues. Initial trials demonstrated that the
scanning system assisted both operators and support
departments to provide a due diligence defence against
public liability claims. This has led to a marked reduction in the
number of public liability claims experienced by the Company.
(h) Health and safety
The Company continues to promote both the safety of its
customers and staff through its health and safety standards.
Regular health and safety audits (including 30 independent
audits a year carried out by the Company’s insurance brokers
Marsh) together with management training courses, ensure
that our customers benefit from the highest standards of
risk management. This focus on risk management has also
enabled the Company to reduce its insurance premiums
significantly for the forthcoming year.
The Company has introduced a new food safety system,
allowing it to demonstrate compliance with existing legislation
and the proposed changes in food legislation scheduled
for 2006. 28 LUMINAR PLC Annual Report and Accounts 2004
THE REMUNERATION COMMITTEE
During the year ending February 2004, the Remuneration
Committee consisted of the following Directors:
Linda Wilding (Chairman) John Williams
Keith Hamill Michael Payne
Alan Goldman
Robert Wickham and Michael Payne ceased to be members
of the Committee during the year, on their retirement as
Directors on 30 September 2003 and 29 February 2004
respectively. Keith Hamill retired from the Committee on
1 March 2004 but is invited to attend Committee meetings.
Martin Gatto, David Longbottom and Richard Brooke have
joined the Remuneration Committee since the year end.
The members of the Committee are independent Directors
who have no personal financial interest (other than as
shareholders) in the matters addressed by the Committee,
have no conflicts of interest arising from cross-directorships
and no day-to-day involvement in running the business of
the Company. The Committee has responsibility for making
recommendations to the Board on the Company’s general
policy on executive remuneration, and to determine, on
behalf of the Board, specific remuneration packages for
the Executive Directors. The Committee meets as required,
but at least four times a year. Its meetings are scheduled by
reference to its function and the discharge of its obligations
to oversee both the Company’s share option schemes and
other incentive plans.
During the year, the Committee retained Keplar Associates,
remuneration consultants, to advise on the Deferred Bonus
Plan and Watson Wyatt to advise on pension arrangements.
The remuneration of the Chairman is determined by the
Remuneration Committee (in the absence of the Chairman
and led by John Williams, the Senior Independent Director)
and the Board. The remuneration of the Non-Executive
Directors is determined by the Board, excluding the Non-
Executive Directors.
REMUNERATION POLICY
GENERAL
The Remuneration Committee determines the Company’s
policy on Executive Directors’ remuneration.
The Committee also offers supervisory assistance and
guidance to the Executive Directors in the remuneration
of senior employees and in the issue of share options and
other incentives to senior employees. The objectives of
the Committee’s policies are:
> To ensure that senior executive rewards and incentives
are directly aligned with the interests of the shareholders,
in order to optimise the performance of the Company and
create sustained growth in shareholder value.
> To provide the level of remuneration required to attract,
retain and motivate Executive Directors of an appropriate
calibre.
The cost and value of the components of the remuneration
package are considered as a whole and are designed:
> To ensure a proper balance of fixed and variable
performance-related components, linked to short
and longer-term objectives; and
> To reflect market competitiveness, taking account of
the total value of all the benefit components.
The benefit components contained in the total remuneration
package are:
(a) Basic salaries
Salaries and other benefits are reviewed annually, and the
Remuneration Committee takes into account the performance
of the individual, comparisons with peer group companies
within the industry, institutional guidelines and reports from
specialist consultants. The experience of the individual and
level of responsibility are also taken into account.
(b) Bonus
(i) Bonuses for year ended 29 February 2004
Bonus arrangements in place for the year ended 29 February
2004 enabled the Executive Directors to earn up to 75-100% of
salary subject to the attainment of specific and stretching
objectives which were set for each individual. The objectives
principally related to the financial performance of the Company,
and also included operational and functional performance.
The Executive Directors received bonuses relating to financial
performance and the achievement of personal objectives.
These amounted to 35 % of basic salary for Stephen Thomas,
75% for Brendan McLoughlin and 23% for Andrew Burns
and Alistair Burford. The financial objectives for the year
for profits were not achieved but those relating to cash flow
were achieved in full. Other objectives involved specific
matters relating to personal accountabilities, including new
unit and refurbishment targets – which were achieved.
(ii) New bonuses and deferred bonus plan
During the period ended 29 February 2004, and following
consultation with the major shareholders, the Company
asked the shareholders to approve a long-term incentive
plan for Executive Directors, called the Deferred Bonus Plan.
The shareholders approved this on 24 February 2004. Under
the Deferred Bonus Plan, the Executive Directors can now
earn up to 150% of salary if they achieve demanding and
specific objectives. The Plan provides a mix of short-term
and long-term incentives to the participants and the
Committee considers it to be a suitable vehicle to retain,
incentivise and reward Executive Directors.
The Remuneration Committee has set the objectives for
the year to 28 February 2005. These include Operating
profit performance, free cash flow and certain strategic
objectives. They are quantified and the achievement of
maximum bonuses will require performance significantly
above market expectations.
REMUNERATION REPORT Annual Report and Accounts 2004 LUMINAR PLC 29
Under the Plan 50% of the bonus accruing to the Executive
Directors will be deferred, being credited to the purchase
of a notional holding of Luminar plc shares within the Plan.
Shares to meet this notional holding may be purchased and
released to Directors from the Plan, three years after the
notional holding is credited, together with matching shares
contributed by the Company. Dividends on the notional
holding are accrued for the benefit of the Executive Director.
An award of matching shares will be made dependent on
performance over three financial years. The matching ratio
will depend upon the total shareholder return of the Company
relative to the total shareholder return of companies in the
FTSE 250 Index over that three year period. Matching shares
will be granted on the basis of the following ratios:
> Two matching shares for one initial share for top
decile performance
> One matching share for four initial shares for
median performance
> Pro rata on a straight-line basis between these points
> No matching for less than median performance
The Company has chosen to compare its total shareholder
return performance with the total shareholder return
of companies in the FTSE 250 Index over the three year
performance period. This Index has been selected because
of the difficulty of constructing a meaningful peer group for
the areas in which the Company trades.
Participants are required to pay the employer’s National
Insurance contributions.
In order to provide effective incentives over an appropriate
period the Remuneration Committee has decided to make
an initial contribution of £150,000 of notional shares in
relation to Stephen Thomas, who has deferred the receipt of
£50,000 of his bonus for the year to 29 February 2004 as a
contribution to the Plan.
Any participant in the Plan will not be eligible to receive share
option grants pursuant to either the approved or unapproved
Schemes, other than SAYE schemes. However, it is the
intention of the Committee to continue to use the grant
of share options for senior employees.
The Remuneration Committee will have discretion to settle
benefits under the plan in cash if considered appropriate.
The Board will determine whether it is appropriate to hedge
against potential liabilities under the Plan.
c) Share Options
The Company has two share option schemes – The 1996
and 1999 Schemes. The 1999 Scheme is approved by the
Inland Revenue.
During the year, the Remuneration Committee granted share
options to incentivise future performance. Shares were granted
to Executive Directors under the 1996 Executive Share Option
Scheme, which is not approved by the Inland Revenue.
The Committee set a performance condition in relation to
the grant of these options, in that growth in pre-tax Earnings
Per Share (EPS) must exceed RPI plus 3% compounded,
over the relevant three-year period. The achievement of the
condition is measured by reference to the annual accounts
of the Company for the relevant year, and Government
statistics for inflation. This measure was chosen as commonly
available and easily understood by the participants in
the scheme. The Remuneration Committee consults with
the external auditors to confirm the calculation of pre-tax
EPS growth.
Following the adoption by shareholders of the Deferred Bonus
Plan, it is now the policy of the Remuneration Committee
not to grant share options within the Executive Share Option
Schemes to Executive Directors in normal circumstances.
(d) Save-as-you-Earn Share Option Scheme
Since 1996 the Company has operated an all-employee
Save-As-You-Earn share option scheme. Executive Directors,
and employees of the Company with more than one year’s
service, may participate in the scheme. Options were granted
at the prevailing market rate, with no discount in the last
financial year.
Options are normally exercisable three years after the date
of grant. The Company intends to continue with this scheme.
(e) Warrant Scheme
On 22 February 1999, the shareholders of Luminar plc
approved the establishment of a discretionary Trust.
The Trust held approximately 3.2 million Warrants. Each
Warrant carried the right to subscribe for one Ordinary share
at a subscription price of £6.67 per share. At 29 February 2004,
the Trust held 1,620,129 Warrants, which are to be allocated
to employees in the absolute discretion of the Trustee who
may call for guidance from the Remuneration Committee.
The Warrant Scheme was subject to performance criterion
which were fully met by February 2002. An allocation of
50% of the Warrants was made by the Trustee in May 2002.
The Trustee has not made an further allocation.
The subscription period in the approved scheme provides
that the Warrants will lapse if not exercised in the period
of 28 days following the publication of the Annual Report for
the year ending on or around 28 February 2009.
SHARE OPTIONS – INTERESTS OF DIRECTORS
Details of each Director’s interests in the share options of
the Company are set out on pages 33 to 34 of this Report.
No other Director has been granted options over the shares
of the Company, or other group entities. The attention of
shareholders is drawn to the table in the Directors’ Report,
indicating the interests in Ordinary Shares and the number
of Warrants held by Directors. 30 LUMINAR PLC Annual Report and Accounts 2004
Owing to a change in legislation, for all awards of Share
Options after 2000 the participant and the Company are
required to pay National Insurance contributions relating
to the options. The Committee has recognised this in its
awards since that date.
None of the terms or conditions of an option grant were
varied during the year. All grants were undertaken on a
basis consistent with that described earlier in this Report,
and were granted at nil cost to the Directors. The right
to exercise the option is conditional on the relevant
performance condition being achieved.
The mid-market price of the Company’s shares at 29 February
2004 was £4.76, and for the year then ended the range was
between £2.75 and £4.95.
The unrealised gain for each Director on options for the year
is as follows:
Options 2004
£000’s £000’s
Stephen Thomas 197 197
Andrew Burns 91 91
Alistair Burford 34 34
Brendan McLoughlin 31 31
John Aust – –
EXECUTIVE DIRECTORS’ SERVICE CONTRACTS
The details of the service contracts of those who served as
Executive Directors during the year are as follows:
TARGETED REMUNERATION
The targeted composition of each Director’s remuneration
was as follows for the year ended 29 February 2004:
Performance-related Non-Performance-
related
Executive
Stephen Thomas 50% 50%
Andrew Burns 50% 50%
Alistair Burford 38% 62%
Brendan McLoughlin 38% 62%
Non-Executive
Keith Hamill 0% 100%
Alan Goldman 0% 100%
Linda Wilding 0% 100%
John Williams 0% 100%
Michael Payne 0% 100%
S Martin Gatto 0% 100%
Richard Brooke 0% 100%
David Longbottom 0% 100%
REMUNERATION REPORT
CONTINUED
Contract Unexpired Notice
term period Contract termination Period
Stephen C Thomas 12.4.1996 N/A 1 year 1 year’s salary plus pension, bonus,
PHI and car payments.
Andrew R Burns 2.9.1997 N/A 1 year 1 year’s salary plus pension, PHI and car payments.
Alistair G Burford 1.1.2002 N/A 1 year 1 year’s salary plus pension, PHI and car payments.
Brendan McLoughlin 1.1.2002 N/A 364 days Payment equivalent to 364 days of final salary plus
bonus, pension, PHI and car payments.
John N Aust 1.1.2000 N/A 1 year Mr Aust retired as a Director on 1.7.2003.
No termination payment was made. Annual Report and Accounts 2004 LUMINAR PLC 31
All of the Executive Directors are employed on rolling contracts
with a retirement age of 60.
During the period, as requested by some shareholders,
Stephen Thomas and the Company agreed an amendment
to his contract to reduce the notice period to 12 months.
The contracts of Mr Burns and Mr Burford contain a provision
entitling the Company to make a payment in lieu of notice.
No such provision is made in the contracts of Mr Thomas
and Mr McLoughlin. Mr Thomas is entitled, in the event of
his contract being terminated on grounds of redundancy or
in the event of wrongful dismissal, to a payment representing
the difference between the option price and the fair value of
any share options he holds at that date.
It is the policy of the Remuneration Committee to seek to
mitigate termination payments in appropriate circumstances.
EXECUTIVE DIRECTOR’S DETAILED EMOLUMENTS
Full details of the emoluments of the Directors, relating
to the year ended 29 February 2004 are as follows:
Salary Benefits Total Total
& Fees in Kind Bonus 2004 2003
£000’s £000’s £000’s £000’s £000’s
Executive
Stephen Thomas 400 27 142 569 424
Andrew Burns 190 13 44 247 199
Alistair Burford 154 13 35 202 164
John Aust
a
4580 53 148
Brendan McLoughlin 144 23 108 275 162
a
John Aust retired as a Director of the Company on 1 July 2003.
Benefits in kind include the provision to every Executive
Director of a company car and private medical insurance.
NON-EXECUTIVE DIRECTORS’ SERVICE ARRANGEMENTS
All Non-Executive Directors are appointed for a three-year
term. A Non–Executive Director may be re-appointed for
a further three-year term by agreement with the Company.
If appropriate, and following review, a further term of
three years may be agreed. Either the Company or the Non-
Executive Director must give six months notice to terminate
the service arrangement.
The details of the service arrangements for the Non-
Executive Directors through the year were as follows:
Appointment date
Keith Hamill 16 January 2001
Alan Goldman
a
3 March 1998
Robert Wickham
b
5 September 2000
Linda Wilding 3 November 1998
John Williams
c
23 April 1996
Michael Payne
d
5 September 2000
Martin Gatto 1 January 2004
Robert Brooke 1 January 2004
David Longbottom
e
17 April 2004
a
Alan Goldman has announced that he will retire as a Director at the conclusion
of the 2004 Annual General Meeting.
b
Robert Wickham retired as a Director on 30 September 2003.
c
John Williams has announced that he will retire as a Director at the conclusion of
the 2004 Annual General Meeting.
d
Michael Payne retired as a Director on 29 February 2004.
e
David Longbottom was appointed on 17 April 2004.
NON-EXECUTIVE DIRECTOR’S DETAILED EMOLUMENTS
Details of the emoluments of the Non-Executive Directors,
relating to the year ended 29 February 2004, and entirely
composed of fees are as follows:
Salary Total Total
& Fees 2004 2003
£000’s £000’s £000’s
Non-Executive
Keith Hamill 75 75 75
Alan Goldman 30 30 30
Robert Wickham
a
18 18 30
Linda Wilding 30 30 30
John Williams 30 30 45
Michael Payne
b
30 30 30
Martin Gatto
c
6 6 0
Richard Brooke
c
6 6 0
a
Robert Wickham retired as a Director of the Company on 30 September 2003.
b
Michael Payne retired as a Director of the Company on 29 February 2004.
c
Martin Gatto and Richard Brooke were appointed as Directors on 1 January 2004.
The Non-Executive Directors (excluding Keith Hamill) receive
cash payments equivalent to £20,000 and receive the balance
of £10,000 in shares in the Company. The shareholdings of all
the Directors are listed in this Report. 32 LUMINAR PLC Annual Report and Accounts 2004
DIRECTORS PENSION ENTITLEMENTS
PENSION POLICY
It is the policy of the Remuneration Committee that all
Executive Directors will be invited to join the Luminar Group
pension plan, which has been approved by the Inland
Revenue. The Scheme is a contributory, defined contribution
scheme and also provides for dependent’s pensions and
lump sums on death in service of four times basic salary.
The Company makes no pension provision in respect of the
Non-Executive Directors.
For each Executive Director, the payments made by the
Company in the year in respect of their pension provisions
are as follows:
2004 2003
£000’s £000’s
Stephen Thomas 185 370
Andrew Burns 29 28
Alistair Burford 23 22
John Aust
a
7 19
Brendan McLoughlin 22 21
a
John Aust retired as a Director of the Company on 1 July 2003.
The Company makes normal pension contributions of 25%
of basic salary to Stephen Thomas and 15% of basic salary
to the other Executive Directors. Over recent years additional
payments have been made for Stephen Thomas as part of
his Remuneration arrangements. These are partly held in
the Pension Plan and partly held as a Deferred Unapproved
Retirement Benefit Scheme the funds for which are held
in a segregated bank account. The amount in this account
at the 29 February 2004 was £245,000.
TOTAL SHAREHOLDER RETURN GRAPH
Reproduced below is a line graph indicating the Total
Shareholder Return (calculated in accordance with the
Director’s Remuneration Report Regulations 2002) for
a shareholding in Luminar plc, and a notional shareholding
in the FTSE 250 Index.
The Directors have chosen to compare its total shareholder
return performance with the total shareholder return of
companies in the FTSE 250 Index.This index has been selected
because of the difficulty of constructing a meaningful peer
group for the areas in which The Company trades.
REMUNERATION REPORT
CONTINUED
0
20
40
60
80
100
120
140
Total shareholder return
99 00 01 02 03 04
● Luminar
● FTSE 250 Annual Report and Accounts 2004 LUMINAR PLC 33
INTEREST OF THE DIRECTORS IN THE SHARE OPTIONS OF THE COMPANY
STEPHEN THOMAS
At
Earliest Exercise At 2 March Granted Exercised Lapsed 29 February
Date of exercise Expiry price 2003 in year in year in year 2004
Grant date date £ No No No No No
1996 Executive Share Option Scheme (Unapproved)
18/11/98 18/11/01 17/11/08 6.640 121,500 – – – 121,500
22/02/99 22/02/02 21/02/09 8.050 50,000 – – – 50,000
11/07/00 11/07/03 10/07/10 7.140 500,000 – – – 500,000
04/07/01 04/07/04 03/07/11 8.800 26,136 – – – 26,136
22/05/03 22/05/06 21/05/13 4.060 – 197,044 – – 197,044
697,636 197,044 – 894,680
1999 Executive Share Option Scheme (Approved)
04/07/01 04/07/04 03/07/11 8.800 3,409 – – – 3,409
SAYE Share Option Scheme
13/07/01 01/09/04 28/02/05 7.280 1,330 – – – 1,330
702,375 197,044 – – 899,419
ANDREW BURNS
At
Earliest Exercise At 2 March Granted Exercised Lapsed 29 February
Date of exercise Expiry price 2003 in year in year in year 2004
Grant date date £ No No No No No
1996 Executive Share Option Scheme (Unapproved)
22/02/99 22/02/02 21/02/09 8.050 50,000 – – – 50,000
11/07/00 11/07/03 10/07/10 7.140 100,000 – – 100,000
04/07/01 04/07/04 03/07/11 8.800 12,500 – – 12,500
10/07/02 10/07/05 09/07/12 7.850 41,242 41,242
22/05/03 22/05/06 21/05/13 4.060 91,133 91,133
203,742 – 294,875
1999 Executive Share Option Scheme (Approved)
04/07/01 04/07/04 03/07/11 8.800 3,409 – – – 3,409
207,151 91,133 – 298,284 34 LUMINAR PLC Annual Report and Accounts 2004
INTEREST OF THE DIRECTORS IN THE SHARE OPTIONS OF THE COMPANY
ALISTAIR BURFORD
At
Earliest Exercise At 2 March Granted Exercised Lapsed 29 February
Date of exercise Expiry price 2003 in year in year in year 2004
Grant date date £ No No No No No
1996 Executive Share Option Scheme (Unapproved)
09/01/98 09/01/01 08/01/08 5.035 12,500 – – – 12,500
22/02/99 22/02/02 21/02/09 8.050 40,000 – – – 40,000
11/07/00 11/07/03 10/07/10 7.140 200,000 – – – 200,000
04/07/01 04/07/04 03/07/11 8.300 10,636 – – – 10,636
10/07/02 10/07/05 09/07/12 7.850 33,439 – – – 33,439
00/07/03 00/07/06 00/07/13 4.513 34,212 34,212
296,575 – – 330,787
1999 Executive Share Option Scheme (Approved)
04/07/01 04/07/04 03/07/11 8.800 3,409 – – – 3,409
SAYE Share Option Scheme
13/07/01 01/09/04 28/02/05 7.280 1,330 – – – 1,330
301,314 34,212 – 335,526
BRENDAN MCLOUGHLIN
At
Earliest Exercise At 2 March Granted Exercised Lapsed 29 February
Date of exercise Expiry price 2003 in year in year in year 2004
Grant date date £ No No No No No
Northern Leisure 1998 Executive Share Option Scheme (‘Rolled over’ options)
16/06/98 16/06/03 15/06/08 8.740 57,500 – – – 57,500
1996 Executive Share Option Scheme (Unapproved)
16/01/01 16/01/04 15/01/11 7.520 63,830 – – – 63,830
04/07/01 04/07/04 03/07/11 8.800 10,636 – – – 10,636
10/07/02 10/07/05 09/07/12 7.850 31,210 31,210
00/07/03 00/07/06 00/07/13 4.513 31,952
31,952 – –
163,176 – – 137,628
1999 Executive Share Option Scheme (Approved)
04/07/01 04/07/04 03/07/11 8.800 3,409 – – – 3,409
SAYE Share Option Scheme
13/07/01 01/09/04 28/02/05 7.280 1,330 – – – 1,330
167,915 31,952 – – 199,867
The above tables contain audited information.
REMUNERATION REPORT
CONTINUED Annual Report and Accounts 2004 LUMINAR PLC 35
REPORT OF THE INDEPENDENT AUDITORS
TO THE MEMBERS OF LUMINAR PLC
We have audited the Financial Statements that comprise
the Consolidated Profit and Loss Account, the Balance Sheets,
the Consolidated Cash Flow Statement and the Related Notes.
We have also audited the disclosures required by Part 3 of
Schedule 7A to the Companies Act 1985 contained in the
Directors’ Remuneration Report (‘the auditable part’).
RESPECTIVE RESPONSIBILITIES
OF DIRECTORS AND AUDITORS
The Directors’ responsibilities for preparing the Annual Report
and the Financial Statements in accordance with applicable
United Kingdom law and accounting standards are set out
in the statement of Directors’ responsibilities. The Directors
are also responsible for preparing the Directors’
Remuneration Report.
Our responsibility is to audit the Financial Statements and
the auditable part of the Directors’ Remuneration Report in
accordance with relevant legal and regulatory requirements
and United Kingdom Auditing Standards issued by the Auditing
Practices Board. This report, including the opinion, has been
prepared for and only for the Company’s members as a body
in accordance with Section 235 of the Companies Act 1985
and for no other purpose. We do not, in giving this opinion,
accept or assume responsibility for any other purpose or
to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed
by our prior consent in writing.
We report to you our opinion as to whether the Financial
Statements give a true and fair view and whether the
Financial Statements and the auditable part of the Directors’
Remuneration Report have been properly prepared in
accordance with the Companies Act 1985. We also report
to you if, in our opinion, the Directors’ Report is not consistent
with the Financial Statements, if the Company has not kept
proper accounting records, if we have not received all the
information and explanations we require for our audit,
or if information specified by law regarding Directors’
remuneration and transactions is not disclosed.
We read the other information contained in the Annual Report
and consider the implications for our report if we become aware
of any apparent misstatements or material inconsistencies
with the financial statements. The other information comprises
only the Chairman’s Statement, the Chief Executive’s
Statement, the Finance Director’s Review, the Directors’
Report, the unaudited part of the Directors’ Remuneration
Report and the Corporate Governance Statement.
We review whether the Corporate Governance Statement
reflects the Company’s compliance with the seven
provisions of the Combined Code issued in June 1998
specified for our review by the Listing Rules of the Financial
Services Authority, and we report if it does not. We are not
required to consider whether the Board’s statements on
internal control cover all risks and controls, or to form an
opinion on the effectiveness of the Group’s corporate
governance procedures or its risk and control procedures.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with auditing standards
issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the
amounts and disclosures in the Financial Statements and
the auditable part of the Directors’ Remuneration Report.
It also includes an assessment of the significant estimates
and judgements made by the Directors in the preparation
of the Financial Statements, and of whether the accounting
policies are appropriate to the Company’s circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary
in order to provide us with sufficient evidence to give
reasonable assurance that the Financial Statements and
the auditable part of the Directors’ Remuneration Report
are free from material misstatement, whether caused by
fraud or other irregularity or error. In forming our opinion
we also evaluated the overall adequacy of the presentation
of information in the Financial Statements.
OPINION
In our opinion:
> the financial statements give a true and fair view of
the state of affairs of the Company and the Group at
29 February 2004 and the loss and cash flows of the
Group for the year then ended;
> the Financial Statements have been properly prepared
in accordance with the Companies Act 1985; and
> those parts of the Directors’ Remuneration Report
required by Part 3 of Schedule 7A to the Companies Act
1985 have been properly prepared in accordance with
the Companies Act 1985.
PRICEWATERHOUSECOOPERS LLP
REGISTERED AUDITORS AND CHARTERED ACCOUNTANTS
20 MAY 2004 36 LUMINAR PLC Annual Report and Accounts 2004
PRINCIPAL ACCOUNTING POLICIES
In accordance with FRS18, the Directors have reviewed the
accounting policies of the Group set out below and consider
them to be appropriate.
BASIS OF PREPARATION
The financial statements have been prepared in accordance
with applicable accounting standards, the Companies Act
1985 and under the historical cost convention except that
certain freehold and leasehold properties are shown at their
revalued amounts. The accounting policies are set out below
and have remained unchanged from the previous year.
BASIS OF CONSOLIDATION
The principles of merger accounting have been applied
on the original formation of Luminar plc. All subsequent
acquisitions have been accounted for using the principles
of acquisition accounting.
The Group financial statements consolidate those of the
Company and of its subsidiary undertakings (see note 10)
drawn up to 29 February 2004. The results of subsidiary
undertakings acquired during the year have been included
from the date of acquisition. Profits or losses on intra-group
transactions are eliminated in full.
On acquisition of a subsidiary, all of the subsidiary’s assets
and liabilities, which exist at the date of acquisition, are
recorded at their fair values reflecting their condition at that
date. Goodwill arising on consolidation, representing the
excess of the fair value of the consideration given over the
fair values of the identifiable net assets acquired, is capitalised
and is amortised on a straight-line basis over its useful
economic life.
The Company was entitled to merger relief offered by
section 131 of the Companies Act 1985 in respect of the
consideration received in excess of the nominal value of
the equity shares issued in connection with the acquisition
of Northern Leisure PLC.
FINANCIAL INSTRUMENTS
The Group uses derivative financial instruments, primarily
to manage exposures to fluctuations in interest rates.
Discounts and premiums are charged or credited to the profit
and loss account over the life of the asset or liability to which
they relate.
Discounts or premiums on financial instruments designated
as interest rate hedges are reflected as adjustments to
interest payable.
Income and expenditure arising on financial instruments
is recognised on the accruals basis, and credited or charged
to the profit and loss account in the financial period to which
it relates.
Interest differentials, under which the amounts and periods
for which interest rates on borrowing are varied, are reflected
as adjustments to interest payable.
INTANGIBLE FIXED ASSETS AND GOODWILL
Trademarks purchased separately from a business are
included at cost and amortised over their useful economic
lives as shown in note 8.
Purchased goodwill is capitalised and is amortised on a
straight-line basis over its estimated useful economic life,
which does not exceed 20 years.
TURNOVER
Turnover is the total amount receivable by the Group for
goods supplied and services provided, excluding VAT and
is recognised on delivery of the goods/services.
TANGIBLE FIXED ASSETS AND DEPRECIATION
Tangible fixed assets are stated at cost, net of depreciation
and any provision for impairment. Finance costs on fixed asset
additions are capitalised during the period of construction
and written off as part of the total cost. No depreciation is
charged during the period of construction.
Depreciation is calculated to write down the cost less estimated
residual value of all tangible fixed assets by equal annual
instalments over their estimated useful economic lives.
The periods generally applicable are:
> Freehold and long leasehold land and buildings and
related structural fixtures and fittings – 50 years
> Short leasehold land and buildings and related structural
fixtures and fittings – over the period of the lease
> Other fixtures and fittings, furniture and equipment –
between two years and 10 years.
> Motor vehicles – three years.
Any impairment made on tangible fixed assets is determined
as the difference between the net present value of income
generating units, i.e. discrete trading units, and their carrying
value. The net present value is calculated by discounting an
estimate of future cash flows by the Company’s weighted
average cost of capital. If net realisable value is higher than
net present value the net realisable value is compared to the
carrying value. Annual Report and Accounts 2004 LUMINAR PLC 37
INVESTMENTS
Investments are stated at cost less amounts written off.
STOCKS
Stocks are stated at the lower of cost and net realisable value.
TAXATION
UK corporation tax is provided at amounts expected to be paid
(or recovered) using the tax rates and laws that have been
enacted or substantially enacted by the balance sheet date.
Deferred taxation is recognised in respect of all timing
differences that have originated but not reversed at the
balance sheet date, where transactions or events that result
in an obligation to pay more tax in the future, or a right to pay
less tax in the future, have occurred at the balance sheet date.
Timing differences are differences between the Company’s
taxable profits and its results as stated in the financial
statements that arise from the inclusion of gains and losses
in tax assessments in periods different from those in which
they are recognised in the financial statements.
A net deferred tax asset is regarded as recoverable and
therefore recognised only when, on the basis of all available
evidence, it can be regarded as more likely than not that there
will be suitable taxable profits from which the future reversal
of the underlying timing differences can be deducted.
Deferred tax is measured at the average tax rates and laws
that are expected to apply in the periods in which the timing
differences are expected to reverse, based on tax rates and
laws that have been enacted or substantively enacted by
the balance sheet date. Deferred tax assets and liabilities
recognised have not been discounted.
LEASED ASSETS
All leases are regarded as operating leases and the payments
made under them are charged to the profit and loss account
on a straight-line basis over the lease term.
CONTRIBUTIONS TO PENSION FUNDS
DEFINED CONTRIBUTION SCHEMES
The pension costs charged against profits represent the
amount of the contributions payable to the schemes in
respect of the accounting period. CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE 52 WEEKS ENDED 29 FEBRUARY 2004
38 LUMINAR PLC Annual Report and Accounts 2004
52 weeks ended 52 weeks ended
29 February 2004 29 February 2004
Pre-Exceptionals Exceptionals 52 weeks ended 52 weeks ended
& Goodwill & Goodwill 29 February 2004 2 March 2003
Notes Amortisation Amortisation Total Total
£m £m £m £m
TURNOVER 1 399.7 – 399.7 392.4
Cost of sales (76.6) – (76.6) (74.6)
GROSS PROFIT 323.1 – 323.1 317.8
ADMINISTRATIVE EXPENSES
– pre goodwill amortisation (247.9) (60.0) (307.9) (236.5)
– goodwill amortisation – (12.9) (12.9) (12.9)
– total (247.9) (72.9) (320.8) (249.4)
OPERATING PROFIT
– pre goodwill amortisation 75.2 (60.0) 15.2 81.3
– goodwill amortisation – (12.9) (12.9) (12.9)
– total 75.2 (72.9) 2.3 68.4
Net interest 2 (13.6) – (13.6) (14.7)
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
– pre goodwill amortisation 61.6 (60.0) 1.6 66.6
– goodwill amortisation – (12.9) (12.9) (12.9)
– total1 61.6 (72.9) (11.3) 53.7
Tax on (loss) / profit on ordinary activities 4 (17.4) 3.2 (14.2) (22.7)
PROFIT/(LOSS) FOR THE FINANCIAL PERIOD 5 44.2 (69.7) (25.5) 31.0
Dividends 6 (9.2) – (9.2) (8.3)
PROFIT/(LOSS) TRANSFERRED TO RESERVES 19 35.0 (69.7) (34.7) 22.7
EARNINGS PER SHARE
Basic 7 (34.9)p 42.4p
Diluted 7 (34.9)p 42.4p
EARNINGS PER SHARE BEFORE EXCEPTIONALS
& GOODWILL AMORTISATION
Basic 7 60.4p 60.0p
Diluted 7 60.4p 60.0p
DIVIDEND PER SHARE 12.54p 11.40p
There were no recognised gains or losses other than the (loss)/profit for the financial period.
The above results relate to continuing operations.
The accompanying accounting policies and notes form an integral part of these financial statements. Annual Report and Accounts 2004 Luminar plc 39
CONSOLIDATED BALANCE SHEET
AT 29 FEBRUARY 2004
29 February 2004 29 February 2004 2 March 2003 2 March 2003
Note £m £m £m £m
FIXED ASSETS
Intangible assets 9 212.8 225.7
Tangible assets 10 517.6 567.9
730.4 793.6
CURRENT ASSETS
Stocks 12 3.9 4.6
Debtors 13 8.0 10.3
Cash at bank and in hand 55.2 22.6
67.1 37.5
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 14 (105.8) (81.7)
NET CURRENT LIABILITIES (38.7) (44.2)
TOTAL ASSETS LESS CURRENT LIABILITIES 691.7 749.4
CREDITORS: AMOUNTS FALLING DUE
AFTER MORE THAN ONE YEAR 15 (205.5) (229.0)
PROVISIONS FOR LIABILITIES AND CHARGES 17 (19.9) (19.4)
466.3 501.0
CAPITAL AND RESERVES
Called up share capital 18 18.3 18.3
Share premium account 19 60.9 60.9
Capital reserve 19 2.3 2.3
Merger reserve 19 342.4 342.4
Profit and loss account 19 42.4 77.1
EQUITY SHAREHOLDERS’ FUNDS 20 466.3 501.0
The financial statements were approved by the Board of Directors on 20 May 2004.
ANDREW BURNS
FINANCE DIRECTOR
The accompanying accounting policies and notes form an integral part of these financial statements. COMPANY BALANCE SHEET
AT 29 FEBRUARY 2004
40 LUMINAR PLC Annual Report and Accounts 2004
29 February 2004 29 February 2004 2 March 2003 2 March 2003
Note £m £m £m £m
FIXED ASSETS
Investments 11 67.7 62.6
CURRENT ASSETS
Debtors 13 357.4 300.7
Cash at bank and in hand 0.1 –
357.5 300.7
Creditors: amounts falling due within one year 14 (86.8) (40.0)
NET CURRENT ASSETS 270.7 260.7
TOTAL ASSETS LESS CURRENT LIABILITIES 338.4 323.3
CREDITORS: AMOUNTS FALLING DUE AFTER MORE
THAN ONE YEAR 15 (205.5) (229.0)
132.9 94.3
CAPITAL AND RESERVES
Called up share capital 18 18.3 18.3
Share premium account 19 60.9 60.9
Profit and loss account 19 53.7 15.1
EQUITY SHAREHOLDERS’ FUNDS 132.9 94.3
The financial statements were approved by the Board of Directors on 20 May 2004.
ANDREW BURNS
FINANCE DIRECTOR
The accompanying accounting policies and notes form an integral part of these financial statements. CONSOLIDATED CASH FLOW STATEMENT
FOR THE 52 WEEKS ENDED 29 FEBRUARY 2004
Annual Report and Accounts 2004 LUMINAR PLC 41
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
Note £m £m
Net cash flow from operating activities 21 113.8 113.3
Returns on investment and servicing of finance 22 (13.6) (14.7)
Taxation (11.8) (15.2)
Capital expenditure and financial investment 22 (42.9) (73.4)
Acquisitions and disposals – (0.9)
Equity dividends paid (8.6) (7.6)
NET CASH INFLOW BEFORE FINANCING 36.9 1.5
Financing 22 (4.3) 7.3
INCREASE IN CASH IN THE PERIOD 24 32.6 8.8
The accompanying accounting policies and notes form an integral part of these financial statements. NOTES TO THE FINANCIAL STATEMENTS
FOR THE 52 WEEKS ENDED 29 FEBRUARY 2004
42 LUMINAR PLC Annual Report and Accounts 2004
1 TURNOVER AND PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
The turnover and operating profit by class of business are given on pages 10 and 12.
The profit on ordinary activities before taxation is stated after:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
Auditors’ remuneration
– audit services 0.2 0.1
– non audit services 0.4 –
Depreciation, amortisation & impairment 106.2 47.6
Operating lease rentals of land and buildings 23.3 19.1
Rents receivable and other income (1.2) (1.7)
2 NET INTEREST
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
On bank overdraft and loans (14.4) (15.3)
Loan note interest (0.1) (0.1)
(14.5) (15.4)
Capitalised interest 0.2 0.4
(14.3) (15.0)
Other interest receivable and similar income 0.7 0.3
(13.6) (14.7) Annual Report and Accounts 2004 LUMINAR PLC 43
3 DIRECTORS AND EMPLOYEES
Staff costs during the year were as follows:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
Wages and salaries 69.7 66.9
Social security costs 5.1 5.2
Other pensions costs 1.1 1.3
75.9 73.4
The Group operates defined contribution pension schemes. The assets of these schemes are held separately from those of the
Group. The pension cost is shown above.
The average number of employees of the Group during the period was:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
Administration centre 334 369
Operations 8,071 7,973
8,405 8,342
Remuneration in respect of Executive Directors of Luminar plc was as follows:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£000 £000
Emoluments 1,296 1,097
Gains made from the sale of share warrants – 3,405
Pension contributions to money purchase pension schemes 266 460
Management remuneration 1,562 4,962
Directors’ fees 227 240
1,789 5,202
During the year, five Directors (2003: five Directors) participated in a defined contribution pension scheme.
During the year, none of the Directors (2003:four Directors) sold share warrants in the company.
The amounts set out above include remuneration of the highest paid Director as follows:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£000 £000
Emoluments 569 424
Gains made on sale of share warrants – 2,472
Pension contributions to money purchase pension schemes 185 370
More detailed audited information concerning the emoluments and share warrants is shown in the Report of the
Remuneration Committee on pages 28 to 34. NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
44 LUMINAR PLC Annual Report and Accounts 2004
4 TAX ON PROFIT ON ORDINARY ACTIVITIES
(a) Analysis of charge in year
The taxation charge is based on the profit for the year and represents:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
CURRENT TAX
UK corporation tax on profits of the year 17.9 19.3
Adjustments in respect of previous years (4.2) –
Total current tax 13.7 19.3
DEFERRED TAX
Origination and reversal of timing differences:
current year 0.5 3.4
Total deferred tax 0.5 3.4
Tax on profit on ordinary activities 14.2 22.7
(b) Factors affecting tax charge for year
The tax assessed for the year is higher than the standard rate of corporation tax in the UK. The differences are explained
as follows:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
(Loss)/profit on ordinary activities before tax (11.3) 53.7
(Loss)/profit on ordinary activities multiplied by standard
rate of corporation tax in the UK of 30% (2003: 30%) (3.4) 16.1
EFFECTS OF:
Expenses not deductible for tax purposes (0.7) 0.1
Non – deductible exceptional items 18.0 –
Goodwill amortisation 3.9 3.9
Capital allowances for year in excess of depreciation 0.1 (0.1)
Rollover relief on profit on disposal of property – (0.7)
Adjustments to tax charge in respect of previous year (4.2) –
Current tax charge for year 13.7 19.3
5 PROFIT FOR THE FINANCIAL YEAR
The holding Company has taken advantage of Section 230 of the Companies Act 1985 and has not included its own profit
and loss account in these financial statements. The Company profit after tax for the year was £47.8m (2003: £8.7m). Annual Report and Accounts 2004 LUMINAR PLC 45
6 DIVIDENDS
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
Equity dividends
Ordinary shares – interim dividend of 3.67p per share 2.7 2.4
Paid 9 January 2004 (2003: 3.34p per share)
Ordinary shares – proposed final dividend of 8.87p 6.5 5.9
per share (2003: 8.06p per share)
9.2 8.3
7 EARNINGS PER SHARE
The calculation of the basic earnings per share is based on the earnings attributed to ordinary shareholders divided by the
weighted average number of shares in issue during the year.
The calculation of diluted earnings per share is based on the basic earnings per share, adjusted to allow for the issue of
shares and the post tax effect of interest, on the assumed conversion of all dilutive options and other dilutive potential
ordinary shares.
Reconciliation of the earnings and weighted average number of shares used in the calculations are set out below.
2004 2003
Earning Weighted average Per Earnings Weighted average Per
£m number of shares share amount £m number of shares share amount
(Loss)/profit attributable
to shareholders (25.5) 31.0
Basic earnings per share 73,175,280 (34.9)p 73,152,125 42.4p
Dilutive effect of warrants
and options 21,001 12,861
Diluted earnings per share 73,196,281 (34.9)p 73,164,986 42.4p
The Group has provided an alternative calculation of earnings per share before goodwill amortisation and exceptional items
to provide a measure of performance more reflective of the trading of the Group.
2004 2003
Earning Weighted average Per Earnings Weighted average Per
£m number of shares share amount £m number of shares share amount
Profit attributable to
shareholders before adjustments
for goodwill amortisation and
exceptional items 44.2 43.9
Basic earnings per share 73,175,280 60.4p 73,152,125 60.0p
Dilutive effect of warrants
and options 21,001 12,861
Diluted earnings per share 73,196,281 60.4p 73,164,986 60.0p NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
46 LUMINAR PLC Annual Report and Accounts 2004
8 EXCEPTIONAL CHARGE
The Company incurred an exceptional charge during the period as follows:
£m
Provision for loss on future disposal of units 45.9
Impairment on fixed assets 12.0
Impairment on other assets 2.1
60.0
The exceptional charge reflects the reduction in the market value for leisure assets. This write-down does not indicate a
shortening in the estimated normal useful life of the assets employed in the business.
The cause of each element of the exceptional charge analysed above can be linked to the material deterioration in market
conditions experienced over the last 18 months.
9 INTANGIBLE FIXED ASSETS
Group
Goodwill Trademarks Total
£m £m £m
COST
At 2 March 2003 and 29 February 2004 258.9 0.1 259.0
AMORTISATION
At 2 March 2003 33.3 – 33.3
Charge 12.9 – 12.9
AT 29 FEBRUARY 2004 46.2 – 46.2
NET BOOK AMOUNT AT 29 FEBRUARY 2004 212.7 0.1 212.8
Net book amount at 2 March 2003 225.6 0.1 225.7
The carrying value at 29 February 2004 of goodwill is made up as follows:
Total
£m
Dancing units purchased from Allied Leisure plc on 6 December 1999 10.8
Acquisition of Northern Leisure PLC on 11 July 2000 198.4
Other units acquired 3.5
212.7
Goodwill is being amortised over 20 years being the Directors’ estimate of its useful economic life based on the assessment
of the industry in which the Group operates. Annual Report and Accounts 2004 LUMINAR PLC 47
10 TANGIBLE FIXED ASSETS
Group
Long Short Fixtures,
Freehold leasehold leasehold fittings,
land and land and land and furniture and Motor
buildings buildings buildings equipment vehicles Total
£m £m £m £m £m £m
COST
At 2 March 2003 164.5 18.7 148.8 324.1 3.1 659.2
Additions 2.2 – 0.4 49.1 0.8 52.5
Disposals (9.9) – (0.2) (7.3) (1.4) (18.8)
AT 29 FEBRUARY 2004 156.8 18.7 149.0 365.9 2.5 692.9
DEPRECIATION
At 2 March 2003 2.5 1.4 17.0 69.1 1.3 91.3
Charge 27.1 2.8 12.9 49.4 1.1 93.3
Disposals (3.2) – (0.2) (4.8) (1.1) (9.3)
AT 29 FEBRUARY 2004 26.4 4.2 29.7 113.7 1.3 175.3
NET BOOK AMOUNT AT
29 FEBRUARY 2004 130.4 14.5 119.3 252.2 1.2 517.6
NET BOOK AMOUNT AT
2 MARCH 2003 162.0 17.3 131.8 255.0 1.8 567.9
On 12 November 2003, an impairment review was carried out upon which a write down of £57.9m was made against tangible
fixed assets. This write down is included within the tangible fixed assets note above of which, £25.5m was made against
freehold land and buildings, £2.2m was made against long leasehold land and buildings, £6.2m was made against short
leasehold land and buildings with the remaining £24.0m being made against fixtures and fittings, furniture and equipment.
11 FIXED ASSET INVESTMENTS
Company
Shares in Loan to
subsidiary subsidiary
undertakings undertaking Total
£m £m £m
At 2 March 2003 38.1 24.5 62.6
Additions in the year 5.1 – 5.1
AT 29 FEBRUARY 2004 43.2 24.5 67.7
The additions relate to the acquisition of share capital in new subsidiaries that were set up during the year. These subsidiaries
are listed in the table below. NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
48 LUMINAR PLC Annual Report and Accounts 2004
11 FIXED ASSET INVESTMENTS CONTINUED
SUBSIDIARY UNDERTAKINGS
The Company’s principal subsidiary undertakings (which have been consolidated into these financial statements) are listed
below together with details of their businesses. The share capital consists of ordinary shares, all of which are wholly owned.
Class of Issued Proportion Nature of
share capitalshare capital hel d business
Luminar Leisure Limited Ordinary £28.3m 100% Licensed
premises
Luminar (Dancing Scotland) Limited Ordinary £1m 100% Licensed
premises
Luminar (Dancing North) Limited Ordinary £1m 100% Licensed
premises
Luminar (Dancing South) Limited Ordinary £1m 100% Licensed
premises
Luminar (Camden Palace) Limited Ordinary £0.1m 100% Licensed
Premises
Luminar (South East) Limited Ordinary £1m 100% Licensed
premises
Luminar (Entertainment) Limited Ordinary £1m 100% Licensed
premises
Evered Employee Benefit Trustees Limited Ordinary £10 100% Trustee
(registered in Jersey) company
Unless otherwise stated, all subsidiaries are registered in England and Wales.
12 STOCKS
Group Group Company Company
29 February 2004 2 March 2003 29 February 2004 2 March 2003
£m £m £m £m
Goods held for resale 3.9 4.6 – –
13 DEBTORS
Group Group Company Company
29 February 2004 2 March 2003 29 February 2004 2 March 2003
£m £m £m £m
Amounts owed by group undertakings – – 356.3 299.2
Other debtors 2.7 5.1 0.9 1.2
Prepayments and accrued income 5.3 5.2 0.2 0.3
8.0 10.3 357.4 300.7 Annual Report and Accounts 2004 LUMINAR PLC 49
14 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Group Group Company Company
29 February 2004 2 March 2003 29 February 2004 2 March 2003
£m £m £m £m
Bank loans and overdrafts (see note 16) 38.4 19.2 38.4 19.2
Trade creditors 7.6 8.2 – –
Amounts owed to group undertakings – – 36.8 10.8
Corporation tax 12.2 10.3 2.0 0.6
Social security and other taxes 7.4 6.5 0.2 0.1
Proposed dividends 6.5 5.9 6.5 5.9
Accruals and deferred income 33.7 31.6 2.9 3.4
105.8 81.7 86.8 40.0
15 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Group Group Company Company
29 February 2004 2 March 2003 29 February 2004 2 March 2003
£m £m £m £m
Bank loans (see note 16) 204.6 228.0 204.6 228.0
Loan notes (see note 16) 0.9 1.0 0.9 1.0
205.5 229.0 205.5 229.0
16 FINANCIAL INSTRUMENTS
The Group uses financial instruments in order to reduce its exposure to financial risk. The use of such financial instruments
constitutes an integral part of the group’s funding strategy. The Group manages its financial instrument credit risk by only
undertaking transactions with relationship banks, holding good credit ratings. Such transactions are governed by board
policies and procedures.
As all the Group’s operations are transacted in the reporting currency, there is no currency exposure.
Short-term debtors and creditors have been excluded from all the following disclosures.
Interest rate risk
The principal area of financial risk is interest rate risk.
The Group finances its operations through a mixture of retained profits and bank borrowings.
Interest rate risk on borrowings is minimised by using interest rate swaps and forward rate agreements.
It is considered appropriate to have between 40% and 50% of debt facility at fixed rates, depending on the maturity profile
of the Group’s outstanding facilities. NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
50 LUMINAR PLC Annual Report and Accounts 2004
16 FINANCIAL INSTRUMENTS CONTINUED
a) Interest rate exposure of financial liabilities
After taking into account the various interest rate swaps entered into by the group, the interest rate profile of the Group’s
financial liabilities at 29 February 2004 was:
Fixed rate weighted average
Fixed rate Floating rate Total Interest rate Time period
£m £m £m % Years
2004 135.9 108.0 243.9 5.4 1.7
2003 136.0 112.2 248.2 5.4 2.7
The floating rate borrowings bear interest at rates based on LIBOR for periods of between one month and six months.
b) Maturity analysis of financial liabilities
The maturity profile of the group’s financial liabilities as at the year-end was as follows:
Bank and other borrowings
Group Group Company Company
2004 2003 2004 2003
£m £m £m £m
Within one year or on demand 38.4 19.2 38.4 19.2
Between one and two years 52.1 38.4 52.1 38.4
Between two and five years 153.4 190.6 153.4 190.6
As at year end 243.9 248.2 243.9 248.2
c) Borrowing facilities
The Group’s undrawn floating facilities as at the year-end were as follows:
2004 2003
£m £m
Expiring after two years 40.5 55.5
40.5 55.5
Of these facilities, £35.5m is committed and secured by means of a floating charge over the Group’s current and future assets.
d) Fair values of financial assets and liabilities
At 29 February 2004 At 2 March 2003
Book value Fair value Book value Fair value
£m £m £m £m
PRIMARY FINANCIAL INSTRUMENTS HELD OR ISSUED
TO FINANCE THE GROUP OPERATIONS
Short-term financial liabilities and current portion
of long-term borrowings (38.4) (38.4) (19.2) (19.2)
Long-term borrowings (205.5) (205.5) (229.0) (229.0)
Cash at bank and in hand 55.2 55.2 22.6 22.6
DERIVATIVE FINANCIAL INSTRUMENTS HELD TO MANAGE
THE INTEREST RATE AND CURRENCY PROFILE
Interest rate swaps – (2.7) – (7.5)
The fair value of interest rate swaps have been determined with reference to market rates at the balance sheet date.
The fair values of all primary financial assets and liabilities are deemed to approximate to their book values.
e) Hedges on future transactions
The Group’s policy is to hedge interest rate risk by using interest rate swaps and forward rate agreements.
The unrecognised losses on interest rate swaps as at the balance sheet date are disclosed in Note (d).
f) Financial instruments held for trading purposes
The Group does not trade in financial instruments. Annual Report and Accounts 2004 LUMINAR PLC 51
17 PROVISIONS FOR LIABILITIES AND CHARGES
Deferred Tax
Group
£m
Provision at 2 March 2003 19.4
Deferred tax charge in profit and loss account for period 0.5
PROVISION AT 29 FEBRUARY 2004 19.9
Deferred taxation provided for in the accounts at the year-end represents provision at 30% on accelerated capital allowances.
18 SHARE CAPITAL
29 February 2004 2 March 2003
Number £m £m
AUTHORISED
Ordinary shares of 25p (2003: 106,000,000) 106,000,000 26.5 26.5
ALLOTTED CALLED UP AND FULLY PAID
Ordinary shares of 25p each (2003:73,175,280) 73,175,280 18.3 18.3
Allotments made during the period
During the year ended 29 February 2004, no allotments of shares were made.
1996 Executive Share Option Scheme
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
13/05/96 907 1.915 13/05/99 to 12/05/06
09/01/98 12,500 5.035 09/01/01 to 08/01/08
18/11/98 121,500 6.64 18/11/01 to 17/11/08
22/02/99 180,000 8.05 22/02/02 to 21/02/09
04/08/99 33,500 9.366 04/08/02 to 03/08/09
14/02/00 40,000 8.35 14/02/03 to 13/02/10
11/07/00 1,270,000 7.14 11/07/03 to 10/07/10
21/08/00 27,875 6.85 21/08/03 to 20/08/10
16/01/01 127,660 7.52 16/01/04 to 15/01/11
23/02/01 35,435 8.13 23/02/04 to 22/02/11
04/07/01 104,332 8.80 04/07/04 to 03/07/11
09/07/01 46,634 8.94 09/07/04 to 08/07/11
10/07/02 133,758 7.85 10/07/05 to 09/07/12
09/12/02 428,685 4.19 09/12/05 to 08/12/12
22/05/03 288,177 4.06 22/05/06 to 21/05/13
18/06/03 21,455 4.60 18/06/06 to 17/06/13
25/07/03 81,675 4.513 25/07/06 to 24/07/13
Save As You Earn Option Scheme
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
13/07/01 38,713 7.28 01/09/04 to 28/02/05
12/07/02 27,385 6.62 01/09/05 to 28/02/06
23/07/03 67,147 4.69 01/09/06 to 28/02/07 NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
52 LUMINAR PLC Annual Report and Accounts 2004
18 SHARE CAPITAL CONTINUED
1999 Company Share Option Plan
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
27/07/99 27,291 9.375 27/07/02 to 26/07/09
04/08/99 12,250 9.366 04/08/02 to 03/08/09
21/08/00 55,181 6.85 21/08/03 to 20/08/10
04/07/01 34,090 8.80 04/07/04 to 03/07/11
09/07/01 34,282 8.94 09/07/04 to 08/07/11
25/07/03 91,804 4.513 25/07/06 to 24/07/13
Northern Leisure 1998 Executive Share Options Scheme (‘Rolled over’ options)
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
16/06/98 319,750 8.74 16/06/03 to 15/06/08
01/12/99 10,435 6.80 01/12/02 to 30/11/04
Warrants
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
24/02/99 4,081,012 6.675 2003 to 2009
Warrants are only exercisable in a 28-day period starting with the publication of the audited accounts for the relevant year.
Mr Jools Holland
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
03/07/01 50,000 8.77 03/07/06 to 02/01/07
The options granted to Mr Holland only become exercisable on the fifth anniversary of the grant date, and only if Mr Holland
is still involved with the Company and its Jam House brand at that time.
19 RESERVES
Group
Share Profit and
premium account Capital reserve Merger reserve loss account
£m £m £m £m
At 2 March 2003 60.9 2.3 342.4 77.1
Retained profit for 52 weeks ended 29 February 2004 – – – (34.7)
Premium on allotments during the year ––––
AT 29 FEBRUARY 2004 60.9 2.3 342.4 42.4
The capital reserve arose in the formation of Luminar plc when the principles of merger accounting were followed.
The merger reserve arose on the acquisition of Northern Leisure plc where the principles of acquisition accounting
were followed. These reserves are not distributable.
Company
Share Profit and
premium account loss account
£m £m
At 2 March 2003 60.9 15.1
Retained profit for 52 weeks ended 29 February 2004 – 38.6
Premium on allotments during the year ––
AT 29 FEBRUARY 2004 60.9 53.7 Annual Report and Accounts 2004 LUMINAR PLC 53
20 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
Group
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
(Loss)/profit for the financial year (25.5) 31.0
Dividends (9.2) (8.3)
(34.7) 22.7
Issue of shares – 0.6
Net increase in shareholders’ funds (34.7) 23.3
Opening shareholders’ funds 501.0 477.7
Closing shareholders’ funds 466.3 501.0
21 RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOW
52 weeks ended 52 weeks ended 52 weeks ended 52 weeks ended
29 February 2004 29 February 2004 2 March 2003 2 March 2003
£m £m £m £m
Operating profit 2.3 68.4
Depreciation and amortisation of goodwill 106.2 45.6
Provision for impairment of assets to be disposed – 2.0
Loss/(profit) on sale of fixed assets 0.3 (4.6)
Provision against carrying value of investments – 1.7
0.3 (0.9)
Change in stocks 0.7 (0.1)
Change in debtors 2.3 1.1
Change in creditors 2.0 (0.8)
Net cash inflow from operating activities 113.8 113.3
22 GROSS CASH FLOW
52 weeks ended 52 weeks ended 52 weeks ended 52 weeks ended
29 February 2004 29 February 2004 2 March 2003 2 March 2003
£m £m £m £m
RETURNS ON INVESTMENT AND SERVICING OF FINANCE
Interest received 0.7 0.3
Interest paid (14.3) (15.0)
NET CASH OUTFLOW FROM RETURNS ON
INVESTMENTS AND SERVICING OF FINANCE (13.6) (14.7)
CAPITAL EXPENDITURE
Purchase of tangible fixed assets (52.1) (81.3)
Purchase of intangible fixed assets – (0.2)
Purchase of fixed asset investments – (0.5)
Sale of fixed assets 9.2 8.6
NET CASH OUTFLOW FOR CAPITAL EXPENDITURE (42.9) (73.4)
FINANCING
Issue of shares (net of expenses) – 0.6
Repayment of secured loan (19.3) (1.9)
Issue of new secured loan 15.0 8.6
NET CASH INFLOW FROM FINANCING (4.3) 7.3 NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
54 LUMINAR PLC Annual Report and Accounts 2004
23 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
Increase in cash in the year 32.6 8.8
Cash inflow from financing 4.3 (6.7)
Movement in net debt in the year 36.9 2.1
OPENING NET DEBT (225.6) (227.7)
CLOSING NET DEBT (188.7) (225.6)
24 ANALYSIS OF CHANGES IN NET DEBT
2 March 2003 Cash flow 29 February 2004
£m £m £m
Cash at bank and in hand 22.6 32.6 55.2
22.6 32.6 55.2
Short term loans (19.2) (19.2) (38.4)
Long term loans (229.0) 23.5 (205.5)
(225.6) 36.9 (188.7)
25 FINANCIAL COMMITMENTS
At 29 February 2004, the Group had annual commitments under non-cancellable operating leases as follows:
Land and buildings Land and buildings
29 February 2004 2 March 2003
£m £m
Expiring in less than one year – 0.3
Expiring between one and five years 0.8 0.7
Expiring in over five years 21.1 20.4
21.9 21.4
26 PENSIONS
Defined Contributions Schemes
The Group operates defined contribution schemes for the benefit of Directors and employees. The schemes are administered
by trustees and the assets are held in a fund independent from those of the Group.
27 CONTINGENT LIABILITIES
The Group had no contingent liabilities at 29 February 2004 (2003: None).
28 RELATED PARTY TRANSACTIONS
During the 52 week period to 29 February 2004, the Group did not enter into any related party transactions (2003: None). Annual Report and Accounts 2004 LUMINAR PLC 55
NOTICE OF ANNUAL GENERAL MEETING
Notice is hereby given that the sixth Annual General Meeting
of Luminar plc will be held at the offices of CMS Cameron
McKenna, 160 Aldersgate Street, London, EC1A 4DD on
Tuesday 6 July 2004 at 2.30pm for the transaction of the
following business:
ORDINARY BUSINESS
1. To receive the Company’s audited accounts for the
period ended 29 February 2004 together with the last
Directors’ report, the last Directors’ remuneration report
and the auditors report on those accounts and the
auditable part of the Directors’ report on remuneration.
2. To approve the Director’s Report on Remuneration.
3. To declare a final dividend of 8.87p per ordinary share.
4. To re-elect Mr D Longbottom as a director.
5. To re-elect Mr R Brooke as a director.
6. To re-elect Mr M Gatto as a director.
7. To re-elect Ms L Wilding as a director.
8. To appoint PricewaterhouseCoopers LLP as auditors of
the Company, to hold office until the conclusion of the
next general meeting at which accounts are laid before
the company and that their remuneration be fixed by
the Directors.
SPECIAL BUSINESS
9. To consider and, if thought fit, to pass the following
resolution as an ordinary resolution:
THAT the Directors be and are hereby generally and
unconditionally authorised to exercise all the powers
of the Company to allot relevant securities (within the
meaning of section 80 of the Companies Act 1985) up to
an aggregate nominal amount of £6,097,940 and that
this authority shall expire on the earlier of the
conclusion of the next Annual General Meeting of the
Company to be held after the passing of this resolution
and the date falling 15 months after the passing of this
resolution (unless previously renewed, varied or
revoked by the Company), save that the Company may
before such expiry make an offer or agreement which
would or might require relevant securities to be allotted
after such expiry and the Directors may allot relevant
securities in pursuance of such offer or agreement as if
the authority conferred hereby had not expired.
10. To consider and, if thought fit, to pass the following
resolution as a special resolution:
THAT, subject to the passing of resolution 9 above,
the Directors be and are hereby empowered pursuant
to Section 95 of the Companies Act 1985 to allot equity
securities (within the meaning of Section 94 of that Act)
for cash pursuant to the authority conferred by
resolution 10 as if sub-section 89(1) of that Act did not
apply to any such allotment, provided that this power
shall be limited:
(a) to the allotment of equity securities in connection
with an issue in favour of ordinary shareholders on a
fixed record date (whether by way of a rights issue,
open offer or otherwise) where the equity securities
attributable to such ordinary shareholders are
proportionate (as nearly as may be) to the respective
number of ordinary shares held by them on such record
date, but subject to such exclusions or other
arrangements as the Directors may deem necessary or
expedient to deal with fractional entitlements, legal or
practical problems arising in any overseas territory, the
requirements of any regulatory body or stock exchange
or any other matter whatsoever; and
(b) to the allotment (otherwise than pursuant to sub-
paragraph (a) above) of equity securities up to an
aggregate nominal value of £914,691;
and shall expire on the earlier of the conclusion of the
next Annual General Meeting of the Company to be held
after the passing of this resolution and the date falling
15 months after the passing of this resolution (unless
previously renewed, varied or revoked by the Company)
save that the Company may before such expiry make
an offer or arrangement which would or might require
equity securities to be allotted after such expiry and the
Directors may allot equity securities pursuant to such
offer or arrangement as if the power conferred hereby
had not expired. 11. To consider and, if thought fit, to pass the following
resolution as a special resolution:
THAT, subject to the Company’s Articles of Association
from time to time, the Company be and is hereby
generally and unconditionally authorised for the
purposes of section 166 of the Companies Act 1985 to
make one or more market purchases (within the
meaning of section 163 (3) of that Act) of its own
ordinary shares on such terms and in such manner as
the Directors shall determine, provided that:
(a) the maximum aggregate number of ordinary shares
hereby authorised to be purchased is 7,317,528
representing approximately 10% of the Company’s
issued ordinary share capital;
(b) the maximum price which may be paid for each
ordinary share is an amount equal to 105% of the
average of the closing mid market prices for the
ordinary shares of the Company (derived from the
London Stock Exchange Daily Official List) for the five
business days immediately preceding the date of
purchase and the minimum price per ordinary share is
the nominal value thereof exclusive of any expenses
payable by the Company; and
(c) unless previously renewed, varied or revoked the
authority hereby given shall expire on the earlier of the
conclusion of the next Annual General Meeting of the
Company to be held after the passing of this resolution
and the date falling twelve months after the passing of
this resolution, save that the Company may make any
purchase of ordinary shares after the expiry of such
authority in execution of a contract of purchase that was
made under and before the expiry of such authority.
By order of the Board
HENRY ANDREW WILLITS
COMPANY SECRETARY
12 MAY 2004
56 LUMINAR PLC Annual Report and Accounts 2004 This is an important document. If there is anything you do not
understand, please contact an appropriate professional adviser .
1. DIRECTORS’ REPORT AND ACCOUNTS
(ITEM 1 ON THE AGENDA)
The Directors are required to present to the meeting the
Directors’ and Auditors’ reports and the accounts for the
year ended 29 February 2004.
2. CONSIDER AND ADOPT THE REPORT ON REMUNERATION
(ITEM 2 ON THE AGENDA)
In accordance with recommended best practice, the Directors
are presenting the Report of the Remuneration Committee
for approval. The Report is set out on pages 28 to 34.
3. DECLARATION OF DIVIDEND
(ITEM 3 ON THE AGENDA)
The proposed final dividend of 8.87p per ordinary share will be
paid on 8 July 2004 to shareholders who are on the Register
of Members as at the close of business on 4 June 2004. This
dividend is in addition to the interim dividend of 3.37p per
ordinary share, which was paid on 9 January 2004. The shares
will become ex-dividend on 2 June 2004.
4. RE-ELECTION OF DIRECTORS
(ITEMS 4, 5, 6 AND 7 ON THE AGENDA)
Article 87 of the Company’s Articles of Association states that
any Director who has not been appointed or re-appointed
at either of the Company’s last two Annual General Meetings
should retire. Ms L Wilding is retiring and offering herself for
re-election under this provision.
Article 93 allows the Board to appoint a person to the Board,
subject to that person being re-elected at the subsequent
Annual General Meeting. Mr S M Gatto and Mr R Brooke were
appointed on 1 January 2004, Mr D Longbottom was appointed
on 17 April 2004 and all are offering themselves for re-election.
Full biographical details of all Directors are on page 20 of
this Report.
5. APPOINTMENT AND REMUNERATION OF AUDITORS
(ITEM 8 ON THE AGENDA)
This resolution proposes the re-appointment of
PricewaterhouseCoopers LLP as the Company’s auditors,
and permits the Directors to fix their remuneration.
6. RENEWAL OF AUTHORITY TO ALLOT SHARES
(ITEMS 9 AND 10 ON THE AGENDA)
The existing authorities given to the Directors at the last
Annual General Meeting to allot unissued share capital and
to allot shares for cash in limited circumstances expire on
[9 July 2002]. It is proposed that further authorities be
granted which shall expire on the earlier of the date of the
next Annual General Meeting to be held after the passing
of the resolution and the date falling fifteen months after the
passing of the resolution. An ordinary resolution (item 10)
will be proposed to authorise the Directors to allot unissued
share capital up to an aggregate nominal amount of
£6,097,940 being 24,391,760 ordinary shares of
25p each representing approximately 33% of the share
capital currently in issue. A special resolution (item 11)
will be proposed authorising the Directors to allot shares
in connection with a pre-emptive issue to existing
shareholders or for cash up to £914,691 (being
approximately 5% of the share capital currently in issue).
There are no present plans to issue shares, except as
required to satisfy the exercise of options or warrants under
the Company’s employee share incentive schemes.
7. AUTHORITY TO PURCHASE OWN SHARES
(ITEM 11 ON THE AGENDA)
The special resolution proposed at item 10 would authorise
the Company to acquire its own shares subject to the
constraints set out in the resolution. The Directors would
exercise this power only if satisfied that it was in the interests
of the shareholders as a whole to do so and that it was likely
to result in an increase in earnings per share. Any shares
purchased in accordance with this authority will subsequently
be cancelled.
As at 20 May 2004, options and warrants were outstanding
to subscribe for a total number of 7,803,433 ordinary
shares, or 10.66% of the Company’s issued share capital.
If this authority to purchase shares is ever used in full,
the proportion of issued share capital represented by this
figure would be 11.93%.
EXPLANATION OF RESOLUTIONS
Annual Report and Accounts 2004 LUMINAR PLC 57 ACTION TO BE TAKEN
Whether or not you intend to attend the Annual General
Meeting, you are requested to complete the enclosed form
of proxy and return it to the Company’s Registrars, Lloyds
TSB Registrars Scotland, P O Box 28448, Finance House,
Orchard Brae, Edinburgh EH4 1WQ as soon as possible and
in any event so as to be received no later than 48 hours
before the time appointed for the Annual General Meeting.
The completion and submission of a form of proxy will not
prevent you from attending and voting in person if you so wish.
RECOMMENDATION
Your Board believes that the proposed resolutions to be put
to the meeting are in the best interests of shareholders as a
whole and, accordingly, recommends that shareholders vote
in favour of the resolutions, as the Directors intend to do in
respect of their own beneficial shareholdings in the Company.
ATTENDANCE AND VOTING
As a shareholder of Luminar plc, you have the right to attend
and vote at the Annual General Meeting.
Please bring with you the accompanying form of proxy/
admission Card. It will authenticate your right to attend,
speak and vote and will speed your admission. Please keep
it until the end of the meeting. The meeting will commence
at 3.30pm and refreshments will be available from 3.00pm.
You may also find it helpful to bring your Annual Report with
you so that you can refer to it at the meeting.
If you do not wish, or are unable, to attend, you may appoint
either the Chairman of the meeting or someone else of your
choice to act on your behalf and to vote in the event of a poll.
That person is known as a “proxy”. You can use the enclosed
form of proxy to appoint a proxy.
A proxy need not be a shareholder and may attend and vote
(on a poll) on behalf of the shareholder who appointed him
or her.
At the meeting, the proxy can act for the member he or she
represents. This includes the right to join in or demand a poll,
but it does not include the right to vote on a show of hands.
The proxy is valid for any adjournment of the meeting.
Please tick the appropriate box alongside each resolution
to indicate whether you wish your votes to be cast “for”,
or “against” that resolution. Unless you give specific
instructions on how you wish to vote on a particular resolution,
your proxy will be able, at his or her discretion, either to vote
“for” or “against” that resolution or to abstain from voting.
Before posting the form of proxy to the Registrars, please
check that you have signed it. In the case of joint holders,
either of you may sign it.
To be effective the form of proxy must be received by the
Company’s Registrars at the address shown above by no
later than 8.30am on 5 July 2004. Any form of proxy
received after this time will be declared void.
NOTES
1. Any member entitled to attend and vote at this meeting
may appoint one or more proxies to attend and, on a poll,
vote on his behalf. A proxy need not be a member.
2. Instruments appointing proxies must be received by the
Company’s Registrars not less than 48 hours before the
time the meeting is to be held.
3. For the purpose of determining entitlement to attend and
vote at the meeting, the name of the member must be
entered on the register of members at 8.30am on 5 July
2004. If you have recently sold or transferred all of your
shares in the Company please send this notice and the
accompanying form of proxy form to the broker who sold
your shares for you. The broker can then send them to
the new owner of the shares.
4. The following documents are available for inspection during
normal business hours (Saturdays, Sundays and public
holidays excepted) at the Company’s registered office
and at the offices of CMS Cameron McKenna at 160
Aldersgate Street, London EC1A 4DD from the date of this
notice until the conclusion of the Annual General Meeting:
a) The Register of Directors (and their families’) interests
in the share capital of the Company.
b) Copies of all Directors’ service contracts for periods
in excess of one year with the Company or any of
its subsidiaries.
c) The existing Memorandum and Articles of Association.
58 LUMINAR PLC Annual Report and Accounts 2004 ANNUAL GENERAL MEETING
6 July 2004, 2.30pm at the offices of CMS Cameron
McKenna, 160 Aldersgate Street, London, EC1A 4DD
TIMETABLE FOR RESULTS
For the year to 1 March 2005
Interim Results announced – 12 November 2004
Interim Statement circulated – 12 November 2004
*Preliminary announcement of full year results – May 2005
*Annual Report circulated – June 2005
DIVIDEND PAYMENTS
The proposed final dividend (if approved) will be paid on
8 July 2004 to shareholders registered on 4 June 2004.
The expected dividend payment dates for the year to 1
March 2005 are:
**Interim Dividend – January 2005
**Final Dividend – July 2005
SHAREHOLDERS SERVICES
On the Company’s behalf, Natwest Stockbrokers Limited
operates a low cost share dealing service in Luminar plc
shares. Details are available on telephone 0870 6002050 or
email on [email protected] quoting reference:
Luminar plc
PRIVATE SHAREHOLDERS
If you have a query about your holding of Luminar plc
shares or need to change your details, for example your
address or payment of dividend requirements, please
contact the registrars at the address shown below.
WEBSITE
Further details of the Group’s activities and products can be
seen on its website at www.luminar.co.uk.
COMPANY SECRETARY AND REGISTERED OFFICE
Harry Willits
41 King Street, Luton LU1 2DW
Telephone 01582 589 400
Facsimile 01582 589 667
REGISTRATION
Luminar plc is registered in England and Wales (no.
3170142)
REGISTRARS
Lloyds TSB Registrars Scotland
PO Box 28448
Finance House
Orchard Brae
Edinburgh
EH4 1WQ
Telephone 0870 6015366
Facsimile 0870 9000030
You can check details of your shareholding on Lloyds TSB
Registrars website at www.shareview.co.uk
STOCKBROKER
Investec Henderson Crosthwaite
Institutional Brokers Limited
2 Gresham Street
London
EC2V 7QP
AUDITORS
PricewaterhouseCoopers LLP
1 Embankment Place
London
WC2N 6NN
SOLICITORS
CMS Cameron McKenna
Mitre House
160 Aldersgate Street
London
EC1A 4DD
* Provisional dates to be confirmed
** Provisional dates to be confirmed
SHAREHOLDER INFORMATION
Annual Report and Accounts 2004 LUMINAR PLC 59 Designed and produced by Addison Corporate Marketing Limited.
Printed by St Ives, Westerham Press. ANNUAL REPORT 2004
LUMINAR PLC
41 King Street
Luton
Bedfordshire LU1 2DW
www.luminar.co.uk
LUMINAR PLC ANNUAL REPORT 2004 | 06 LUMINAR PLC Annual Report and Accounts 2004
CHIEF EXECUTIVE’S STATEMENT
INDUSTRY OVERVIEW
As part of a policy to regenerate town
centres many local councils during the
last decade granted planning consents
for leisure use and reduced the number
of objections made to the magistrates
courts for the granting of licensing
hours beyond 11pm. This contributed
to a proliferation of licensed premises
opening in high streets across the UK.
Demand grew with the increase in
capacity as many high streets grew
into thriving leisure centres. By the
second half of 2002 demand began
to decrease. With continued expansion
in capacity the market for high street
leisure became increasingly competitive
with many operators entering into
aggressive price competition in order to
maintain volumes. This was compounded
by operators who had developed weak
product which was inappropriate for
the late night market using discounting
as a reaction to increased competition.
Within each local market the operation
with the leading and best differentiated
offering has fared best. Marginalised
undifferentiated operations relying solely
on discounting have underperformed.
Given this material adverse change in
the market conditions from previously
highly favourable conditions, the
Company conducted a strategic review,
the results of which were announced
last November.
STRATEGY
The Board has concluded that the best
strategy to grow shareholder value
is to pursue a policy of developing
a portfolio of branded units which will
occupy the leading trading position
within their local markets. This strategy
will meet the needs of modern leisure
consumers with consistent products
which will support strong customer
relationships and widen the user base.
Specifically, this will be accomplished
by providing an entertainment-led
experience in a safe and friendly but
exciting environment, with an emphasis
on value for money. It is the Company’s
strongly held belief that this approach
will reduce the need for ongoing
refurbishment capital costs and will
reduce trading volatility, which will
deliver consistent above average
returns over the long term.
In order to allow the Company to focus on
implementing this strategy and to apply
the appropriate management approach
to the branded and the unbranded
estate it is necessary to ring-fence
non-core unbranded businesses from
the rest of the estate. Those units
which are not ultimately capable
of branding will be sold over time.
APPLICATION OF STRATEGY
TO CORE ESTATE
Since January we have focused on
four branded templates alongside the
two existing branded templates of
Chicago Rock Café and Jumpin Jaks
for the Entertainment Division.
Each branded template will be positioned
within towns where the demographic
profile ensures that a suitable market
exists for the brand’s customer profile.
The unit will be designed with the
appropriate capacity to enable it
to achieve a leading position within
its local marketplace. Each brand
provides a high quality entertainment-
led leisure experience within a well
located modern property with a safe
and friendly atmosphere. The brands
OUR STRATEGY IS TO GROW
SHAREHOLDER VALUE BY
PURSUING A POLICY OF
DEVELOPING A PORTFOLIO
OF BRANDED UNITS WHICH
WILL OCCUPY THE LEADING
TRADING POSITION WITHIN
THEIR LOCAL MARKETS Annual Report and Accounts 2004 LUMINAR PLC 07
will have the flexibility to be able to
cater for a wider market to increase
utilisation of the premises. Recruiting
and training the correct standard of
management is considered key to the
development of consistently branded
businesses. The Company will ensure
that adequate resources are allocated
to this important area.
Chicago Rock Café is the Company’s
longest established and most successful
brand. However, its performance over
the last financial year has reflected the
highly competitive trading conditions.
A detailed review including market
research has confirmed that the brand
has a unique position within the high
street and still has a strong appeal to
the over-25 customer. The research
demonstrates that Chicago Rock Café
is a strong brand appreciated by its
customer base but would benefit from
further capital investment. It is also
clear that some units developed in
recent years and some management
techniques used have led the brand
away from its core brand standards.
The Company has developed a clear
programme to re-invigorate the Chicago
Rock Café brand based on its core values.
The programme includes three areas;
development of 70’s style rooms adjacent
to existing units, major refits which
will include sports bar areas and other
initiatives to develop incremental income
and a higher level of small maintenance
refurbishments to refresh the estate.
A further 43 units within the Company’s
estate benefit from strong positions
within key markets but the properties
will not currently accommodate any
of our branded concepts. These units
will be retained for their long-term
licensing value. It is expected that
it will be possible to develop branded
product within relevant towns over
time through acquiring space adjacent
to the existing properties or acquiring
alternative properties.
The Emerging Business Division
comprises 23 bars developed on an
experimental basis in recent years.
Given current market circumstances
the Company is reviewing the options
for this business.
APPLICATION OF STRATEGY
TO NON-CORE ESTATE
A total of 61 units which do not fit our
branding criteria have been transferred
to a wholly-owned separate ring-fenced
subsidiary. A new management team
has been created to manage these
businesses on an entrepreneurial
basis which is more relevant to
unbranded businesses. The new team
is headed by Tim Roberts who has
over 20 years’ experience of running
unbranded nightclubs.
The objective for the non-core
venues is to realise maximum value
for shareholders over the short to
medium term.
PROGRESS
The first conversion of an unbranded
nightclub to a branded template took
place in April last year when the former
Options nightclub in Kingston upon
Thames re-opened as an Oceana. Pilot
sites for the first Lava/Ignite and Life
opened in November last year in Burnley
and Wellingborough respectively.
Three units have had a complementary
70’s room developed adjacent to the
existing Chicago Rock Café and a further
Chicago Rock Café has benefited from
an extensive refit including a sports
bar area. A further 15 Chicago Rock
Cafés benefited from more limited
refurbishments. A further 22 other
units have benefited from the
refurbishment programme.
Total capital expenditure on this
programme was £33.1m. Cash returns
on these investments during the year
amounted to 31%, including the highly
successful Oceana, Kingston. Excluding
that development, the sales uplift was
44% and the cash returns were 17%,
including initial developments of the
new branded concepts.
In the current financial year the
Company expects to rebrand a further
11 unbranded units. Three 70’s rooms
will be added to existing Chicago Rock
Cafés, two Chicago Rock Cafés will be
extensively refurbished and a further
15 will benefit from freshen up
refurbishments. Capital expenditure
Currently in Identified for
Brand Location operation conversion Total
Oceana Cities 2 11 13
Lava/Ignite Large towns 1 25 26
Liquid Medium towns 20 4 24
Life Small towns 1 13 14
Chicago Rock Café Small/medium towns 58 – 58
Jumpin Jaks Small/medium towns 22 – 22
Total 104 53 157 08 LUMINAR PLC Annual Report and Accounts 2004
CHIEF EXECUTIVE’S STATEMENT
CONTINUED
for these projects is expected to be
in the region of £30m.
Last year the Company disposed of
18 units for total proceeds of £9m.
Of these units nine were unbranded
trading units which were sub-let.
The remaining nine units were closed
prior to sale as they were trading
at uneconomic levels. The Company
will continue to close and dispose of
uneconomic units and to sell unbranded
units where appropriate prices can
be obtained. Increasing opportunities
are arising to utilise spare capacity for
town centre residential development.
The Company is at an early stage in
the programme to convert its estate
to predominantly branded units.
A good start has been made and the
opportunity remains to accelerate
our plan should market conditions
and performance allow.
FINANCIAL STRENGTH
Throughout the recent period of
uncertainty the Company has
focused on generating surplus cash.
Last year the Company generated
a free cash flow before dividends
of £46m. This result, which has
been achieved through a significant
reduction in expansion capital
expenditure, underlines the impressive
cash generating characteristics of
the business. The Company’s overall
financial position has been significantly
strengthened and it is now well
positioned to benefit from a recovery
in its markets.
DISCOUNTING
Over the last year there has been much
debate in the media about an increase
in the discounting of alcoholic drinks by
high street leisure operators. Luminar
has always used promotional offers on
both admissions and drinks as part of
the marketing strategy to grow and
protect volumes. The Company’s
promotional schemes are agreed with
the relevant local licensing authorities
before implementation. Luminar’s
promotions as a percentage of sales
has not increased and our overall gross
margin has been maintained at over
80% for the last three years. This is in
spite of a 19% increase in duty for pre-
packaged spirits which was introduced
by the Government two years ago.
We have consistently supported the
introduction of local council backed
minimum pricing levels and would
welcome a broadening of these schemes.
Luminar is a responsible operator on
the high street and supports the recent
Government initiatives on anti-social
drinking including the Alcohol Harm
Reduction Strategy.
DEREGULATION
The new Licensing Act, which became
law in July 2003, brought to an end
a considerable period of uncertainty
regarding the future shape of alcohol
licensing in England and Wales.
Under the Act, responsibility for
licensing will transfer from the judiciary
to local councils. The Government has
announced that the first appointed
date for the start of the transition
period in which the transfer from the
magistrates to the local authorities
will take place is November 2004.
The Government’s present timetable
provides for a period of nine months to
complete the transition period. Luminar
welcomes the introduction of the new
system which is intended to reduce
crime and disorder. We believe that it is
unlikely that the authorities will permit
24-hour drinking. There may be some
relaxation of the closing time for both
pubs and nightclubs which would
benefit both sets of operators. More
importantly, the grant of new licences
will become more difficult and it is likely
that poor quality operators will have
their licences withdrawn. Both of these
measures will help to reduce the over-
capacity currently in the marketplace.
GAMING
Planned changes in the regulation
of gaming in the UK will create
opportunities for the Company. First,
it is likely that existing units will be
able to increase the use of gaming
machines. Secondly, the development
of medium-sized casinos in provincial
towns with a significant entertainment
component will enable the Company
to use its present skills and assets
within this sector.
WHERE TO FIND OUR BRANDS: ABERDEEN
1,2,4
, ASHFORD
3,4
,
AYLESBURY
1
, BANBURY
1
, BARNSLEY
1
, BASILDON
1,2
, BASINGSTOKE
1,4
,
BEDFORD
1
, BIRMINGHAM
1
, BISHOP’S STORTFORD
1
, BLACKBURN
2
,
BOLTON
3
, BOURNEMOUTH
2
, BRAINTREE
1
, BRISTOL
1
, BURTON ON
TRENT
1
, BURY
1
, CANTERBURY
1
, CARDIFF
2,4
, CARLISLE
2
,
CHELMSFORD
1
, CHICHESTER
1
, COLCHESTER
1
, COVENTRY
1,2
,
DUMFRIES
2
, DUNSTABLE
2
, EAST GRINSTEAD
2
, EPSOM
1
, GLASGOW
2
,
GLOUCESTER
2,4
, GRIMSBY
1
, HUDDERSFIELD
1,2
, HALIFAX
2
, HEMEL
HEMPSTEAD
2
, HANLEY
1,2,4
,HARLOW
2
, ILFORD
2
, IPSWICH
4
, ISLE OF
WIGHT
1
, JERSEY
1
, KING’S LYNN
1
, KINGSTON UPON THAMES
5
, Annual Report and Accounts 2004 LUMINAR PLC 09
LANCASTER
1,4
, LEEDS
2,
, LINCOLN
1
, LIVINGSTON
1
, LUTON
1,4
,
MACCLESFIELD
1
, MAIDENHEAD
1
, MAIDSTONE
1,2
, MANCHESTER
2
,
MANSFIELD
1,4
, MIDDLESBROUGH
1,2
, MILTON KEYNES
5
, NEWBURY
4
,
NORTHAMPTON
1
, NORWICH
1,4
, NOTTINGHAM
2
, NUNEATON
1
,
OLDHAM
1,4
, PETERBOROUGH
1,4
, REDDITCH
1
, SALISBURY
1
,
SHREWSBURY
4
, SOUTHAMPTON
2
, SOUTHSEA
1
, ST HELENS
1
,
STAFFORD
1
, STEVENAGE
1,2
, STRATFORD UPON AVON
1
,
SUNDERLAND
4
, SUTTON
1
, SWANSEA
1,2
, TAMWORTH
1
, TROWBRIDGE
1
,
WALSALL
1
, WARRINGTON
1
, WATFORD
1
, WIGAN
1,2,4
, WINDSOR
1,4
,
WOLVERHAMPTON
1
, WORCESTER
1
, WREXHAM
1,4
, YEOVIL
1
1=CHICAGO ROCK CAFÉS 2=JUMPIN JAKS 3=LIFE 4=LIQUID 5=OCEANA 6=LAVA/IGNITE
The Company has entered into an
agreement with Accor Casinos S.A,
the operator of 23 casinos in Europe,
to establish a joint venture to operate
a new concept of entertainment based
casinos. The initial pilot template will
be in Leeds, subject to approvals.
The joint venture is intended to form
the basis of further developments
from within our estate.
SUMMARY
Luminar has a well considered strategy
which we have started to implement on
a phased basis. I am given considerable
confidence from our performance
against our competitors, our financial
strength and the skills of our people.
Luminar has much opportunity including
new developments in the gaming
sector to leverage the quality assets
within our business.
STEPHEN C THOMAS
CHIEF EXECUTIVE
20 MAY 2004 | Annual Report and Accounts 2004 LUMINAR PLC 01
FINANCIAL HIGHLIGHTS
> Turnover up 2% to £400m (2003: £392m)
> Gross margins maintained at 81%
> Earnings before interest, tax, depreciation,
goodwill amortisation and exceptional items
was £111m (2003: £114m)
>Profit before goodwill amortisation, exceptional
items and taxation was £62m (2003: £67m)
> Loss before taxation of £11m after an exceptional item
of £60m relating to impairment and goodwill amortisation
of £13m
> Fully diluted EPS before exceptionals and FRS 10 goodwill
amortisation 60.4p (2003: 60.0p)
> Fully diluted EPS after exceptionals and FRS 10 goodwill
amortisation (34.9)p (2003: 42.4p)
> Free cash generated of £46m
ENTERT AIN
PEOPLE>> | 02 LUMINAR PLC Annual Report and Accounts 2004
CHAIRMAN’S STATEMENT
The Company is now starting to come
through what has been a difficult
period. The Company’s sector has
been experiencing a downturn, primarily
due to excessive development of
capacity including a significant level
of poor quality product introduced
by competitors, which is now trading
badly and is affecting performance
throughout the sector.
Our management team have stabilised
and reorganised the business and
developed a clear and appropriate
strategy for building value and reducing
volatility. Luminar has outperformed
its competition, produced a strong cash
performance and delivered results in
line with expectations.
The profit, before goodwill amortisation,
exceptional items and taxation was
£62m (compared with £67m in the
previous year.)
In the Chief Executive’s Statement
on pages 6 to 9 Stephen Thomas sets
out the strategy which the Company
will be following focusing on branded
entertainment venues to achieve high
and predictable returns. Although it
will take time for the benefits of this
approach to come through, I am
confident that we are moving in the
right direction.
In the Operating and Financial Review
on page 10, Andrew Burns our Financial
Director, explains the robust financial
position of the Company EBITDA for the
year amounted to £111m (compared
with £114m in the previous year)
and free cash flow before dividends
amounted to £46m (including disposal
proceeds of £9m). The cash generation
has been primarily used to reduce
debt which has further strengthened
the Company’s balance sheet. These
strong financial attributes give the
Company the resources to implement
its new strategy.
CORPORATE SOCIAL RESPONSIBILITY
The Company’s activities are principally
in the late night sector, with the sale
of alcoholic drink being a significant
ancillary activity. We therefore have
to manage issues associated with the
welfare of our customers and staff
and the communities in which we
work. We have set out our policies
on these and related issues on pages
16 to 19. The Company has the most
experienced operational management
LUMINAR HAS OUTPERFORMED ITS
COMPETITION, PRODUCED A STRONG
CASH PERFORMANCE AND DELIVERED
RESULTS IN LINE WITH EXPECTATIONS. Annual Report and Accounts 2004 LUMINAR PLC 03
in our sector, who are dedicated to the
safety of our customers and staff
REMUNERATION
The Remuneration report is set out
on pages 28 to 34. Following extensive
consultations with shareholders, they
approved a long-term incentive plan
based on deferral and matching at
an EGM on 24 February 2004.
As noted on page 31 of this Report,
and as requested by some shareholders,
Stephen Thomas and the Company
have agreed to amend his contract to
reduce the notice period to 12 months.
BOARD
The Non-Executive team has been
changing significantly. During the year
Bob Wickham and Mike Payne both
retired from the Board. In addition
John Williams and Alan Goldman
will retire from the Board at the
AGM in June. All four Non-Executive
Directors have provided many years
of invaluable service to the Company
which they have seen grow at
a remarkable speed into the leader in
its sector. I would like to thank them
for their invaluable contribution and
wish them good luck for the future.
During the year, Martin Gatto (Interim
Finance Director of British Energy)
and Richard Brooke (former Finance
Director for BskyB plc) joined the
Board as Non-Executive Directors.
We have also subsequently announced
the appointment of David Longbottom
(a Director of Dixons Group plc).
CURRENT TRADING AND OUTLOOK
Market conditions have remained
difficult. Like-for-like sales have
continued the same trend (-3%)
as the second half of the financial year,
but the impact has been compensated
by net margins performing better
than expected. Performance is in line
with expectations.
DIVIDEND
In light of the Board’s confidence in
the future benefits of the strategy
being followed, it is recommending
a final dividend of 8.87p, giving a total
dividend of 12.54p, which represents
an increase of 10%
SUMMARY
I would like to thank the management
and staff for their substantial
and successful efforts to produce
satisfactory results in what have
been demanding circumstances.
Whilst recovery will take time we are
pursuing a clear and correct strategy,
which will enable us to achieve high
and predictable returns. We face the
future with increasing confidence.
KEITH HAMILL
CHAIRMAN
20 MAY 2004
RIGHT: Aspen ski lodge, Oceana
FAR RIGHT: Parisian Boudoir , Oceana | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input ANNUAL REPORT 2004
LUMINAR PLC
41 King Street
Luton
Bedfordshire LU1 2DW
www.luminar.co.uk
LUMINAR PLC ANNUAL REPORT 2004 LUMINAR PLC Annual Report and Accounts 2004
CONTENTS
Financial Highlights 01
Chairman’s Statement 02
Our Winning Brands 04
Chief Executive’s Statement 06
Operating and Financial Review 10
Corporate Social Responsibility 16
Regulatory Challenges 19
The Board of Directors 20
Report of the Directors 22
Corporate Governance 24
Remuneration Report 28
Auditors Report 35
Principal Accounting Policies 36
Consolidated Profit and Loss Account 38
Consolidated Balance Sheet 39
Company Balance Sheet 40
Consolidated Cash Flow Statement 41
Notes to the Financial Statements 42
Notice of Annual General Meeting 55
Explanation of Resolutions 57
Shareholder Information 59
OUR MISSION IS TO...
ACHIEVE THE HIGHEST STANDARD OF CUSTOMER
SERVICE AND ENTERTAINMENT IN THE LEISURE
INDUSTRY BY OFFERING VALUE FOR MONEY
WITHIN OUR VENUES, TO SUPPORT OUR EMPLOYEES
AND DEVELOP THEIR POTENTIAL, TO ACHIEVE AND
EXCEED OUR INCOME TARGETS AND MAXIMISE
SHAREHOLDER VALUE. Annual Report and Accounts 2004 LUMINAR PLC 01
FINANCIAL HIGHLIGHTS
> Turnover up 2% to £400m (2003: £392m)
> Gross margins maintained at 81%
> Earnings before interest, tax, depreciation,
goodwill amortisation and exceptional items
was £111m (2003: £114m)
>Profit before goodwill amortisation, exceptional
items and taxation was £62m (2003: £67m)
> Loss before taxation of £11m after an exceptional item
of £60m relating to impairment and goodwill amortisation
of £13m
> Fully diluted EPS before exceptionals and FRS 10 goodwill
amortisation 60.4p (2003: 60.0p)
> Fully diluted EPS after exceptionals and FRS 10 goodwill
amortisation (34.9)p (2003: 42.4p)
> Free cash generated of £46m
ENTERT AIN
PEOPLE>> 02 LUMINAR PLC Annual Report and Accounts 2004
CHAIRMAN’S STATEMENT
The Company is now starting to come
through what has been a difficult
period. The Company’s sector has
been experiencing a downturn, primarily
due to excessive development of
capacity including a significant level
of poor quality product introduced
by competitors, which is now trading
badly and is affecting performance
throughout the sector.
Our management team have stabilised
and reorganised the business and
developed a clear and appropriate
strategy for building value and reducing
volatility. Luminar has outperformed
its competition, produced a strong cash
performance and delivered results in
line with expectations.
The profit, before goodwill amortisation,
exceptional items and taxation was
£62m (compared with £67m in the
previous year.)
In the Chief Executive’s Statement
on pages 6 to 9 Stephen Thomas sets
out the strategy which the Company
will be following focusing on branded
entertainment venues to achieve high
and predictable returns. Although it
will take time for the benefits of this
approach to come through, I am
confident that we are moving in the
right direction.
In the Operating and Financial Review
on page 10, Andrew Burns our Financial
Director, explains the robust financial
position of the Company EBITDA for the
year amounted to £111m (compared
with £114m in the previous year)
and free cash flow before dividends
amounted to £46m (including disposal
proceeds of £9m). The cash generation
has been primarily used to reduce
debt which has further strengthened
the Company’s balance sheet. These
strong financial attributes give the
Company the resources to implement
its new strategy.
CORPORATE SOCIAL RESPONSIBILITY
The Company’s activities are principally
in the late night sector, with the sale
of alcoholic drink being a significant
ancillary activity. We therefore have
to manage issues associated with the
welfare of our customers and staff
and the communities in which we
work. We have set out our policies
on these and related issues on pages
16 to 19. The Company has the most
experienced operational management
LUMINAR HAS OUTPERFORMED ITS
COMPETITION, PRODUCED A STRONG
CASH PERFORMANCE AND DELIVERED
RESULTS IN LINE WITH EXPECTATIONS. Annual Report and Accounts 2004 LUMINAR PLC 03
in our sector, who are dedicated to the
safety of our customers and staff
REMUNERATION
The Remuneration report is set out
on pages 28 to 34. Following extensive
consultations with shareholders, they
approved a long-term incentive plan
based on deferral and matching at
an EGM on 24 February 2004.
As noted on page 31 of this Report,
and as requested by some shareholders,
Stephen Thomas and the Company
have agreed to amend his contract to
reduce the notice period to 12 months.
BOARD
The Non-Executive team has been
changing significantly. During the year
Bob Wickham and Mike Payne both
retired from the Board. In addition
John Williams and Alan Goldman
will retire from the Board at the
AGM in June. All four Non-Executive
Directors have provided many years
of invaluable service to the Company
which they have seen grow at
a remarkable speed into the leader in
its sector. I would like to thank them
for their invaluable contribution and
wish them good luck for the future.
During the year, Martin Gatto (Interim
Finance Director of British Energy)
and Richard Brooke (former Finance
Director for BskyB plc) joined the
Board as Non-Executive Directors.
We have also subsequently announced
the appointment of David Longbottom
(a Director of Dixons Group plc).
CURRENT TRADING AND OUTLOOK
Market conditions have remained
difficult. Like-for-like sales have
continued the same trend (-3%)
as the second half of the financial year,
but the impact has been compensated
by net margins performing better
than expected. Performance is in line
with expectations.
DIVIDEND
In light of the Board’s confidence in
the future benefits of the strategy
being followed, it is recommending
a final dividend of 8.87p, giving a total
dividend of 12.54p, which represents
an increase of 10%
SUMMARY
I would like to thank the management
and staff for their substantial
and successful efforts to produce
satisfactory results in what have
been demanding circumstances.
Whilst recovery will take time we are
pursuing a clear and correct strategy,
which will enable us to achieve high
and predictable returns. We face the
future with increasing confidence.
KEITH HAMILL
CHAIRMAN
20 MAY 2004
RIGHT: Aspen ski lodge, Oceana
FAR RIGHT: Parisian Boudoir , Oceana CHICAGO ROCK CAFÉ
Chicago Rock Café is the place to eat
drink and party. Classic designed
venues with central island bars,
stage for live acts and decorated
with an eclectic mix of rock, pop and
contemporary culture memorabilia.
The daytime, child friendly, laid back
style of a café-bar is transformed in the
evening when the venue comes alive
with DJ, dancing, live music video and
music from the favourite artistes of
yesteryear. The great alternative to the
high street pub to club scene.
HIGHLIGHTS OF 2004
> The year saw the first 2 Chicago
Rock Cafés open north of the border
in Scotland.
> In order to add another dimension
to the brand, New York, New York
1970s rooms have been added to
3 existing Chicago Rock Cafés.
JUMPIN JAKS
The live entertainment brand where
even the customer service crew do
their best to entertain customers with
their choreographed dance routines
on stage and bars! The wooden floored
‘alligator skinning warehouse’ theme
is designed for partying. The music
played provides songs to sing along
and dance to and sets the tempo for
a great night with a great atmosphere.
HIGHLIGHTS OF 2004
> The arrival of Jumpin Jaks in
the heart of its city centre has
changed the face of going out
in Carlisle forever.
> Manchester Jumpin Jaks received
‘best bar none’ award from
Manchester City Safe Scheme,
after scrutiny of door policy,
crime prevention strategy,
emergency procedures and
drink and drugs policy.
LIQUID
21st century clubbing in an ultramodern
environment. State-of-the-art lighting
effects, sound and laser technology,
provide all the entertainment a modern
clubber requires with a chill out room
and VIP suite to appeal to the broadest
range of tastes.
HIGHLIGHTS OF 2004
> Liquid arrives in Sunderland as
part of a twin scene offering and
takes the town by storm.
> The brand goes from strength to
strength with Ashford and Windsor
exceeding all expectations.
ENTERTAINMENT DANCING
INVEST IN
MAINTAIN OUR LEADING POSITION IN PROVIDING LATE NIGHT
ENTERTAINMENT THROUGH A PORTFOLIO OF BRANDS THAT
OFFER SOMETHING FOR EVERYONE AND, WHEN APPROPRIATE,
TACTICAL ACQUISITIONS AND PARTNERSHIPS>>
OUR STRATEGY IS TO
04 LUMINAR PLC Annual Report and Accounts 2004 OCEANA
Multi-award-winning brand, offering
five different themed bars and two
distinctive clubs, all under one roof.
Travel from an Aspen ski lodge to
a 1970’s New York disco via a Parisian
boudoir and a futuristic Tokyo concept
bar. A venue offering great ports of
call in one destination.
HIGHLIGHTS OF 2004
> The continued roll out of the
Oceana brand has been a huge
success with Kingston upon
Thames and Milton Keynes going
from strength to strength.
> Oceana Kingston upon Thames
has become probably the highest
earning nightclub in the UK.
LAVA AND IGNITE
A new twist on the multi scene venue.
A main room complete with sound
and light effects to amaze clubbers
but with the flexibility to show major
sporting events or even stage
a corporate event or live mainstream
music act. Alongside sits a themed
bar to cater for the “drink before club”
and two further rooms for a change
of music and mood.
HIGHLIGHTS OF 2004
> Burnley receives the first Lava and
Ignite as the new template brand
is launched and immediately
becomes a success.
> With plans very much advanced,
Rotherham is next in line for the
Lava and Ignite rebranding exercise.
LIFE
Life is a bar concept designed to appeal
to young and old alike, to provide for
a group of business people relaxing
after work to a group of girls on a hen
night. Designed to fit into smaller towns
and become a major part of that town’s
community, Life is a versatile brand
catering for not only the traditional
pub and club market, but also for
meetings and corporate events. Open
seven days a week, at the weekend
a screen is drawn back to reveal club
life where customers can dance until
the early hours.
HIGHLIGHTS OF 2004
> Wellingborough saw the launch
of the new Luminar Life concept.
The town has embraced the brand
and accommodates a large cross-
section of the community.
> Work is well underway preparing
the next Life opening in Andover.
WINNING
BRANDS> >
Annual Report and Accounts 2004 LUMINAR PLC 05 06 LUMINAR PLC Annual Report and Accounts 2004
CHIEF EXECUTIVE’S STATEMENT
INDUSTRY OVERVIEW
As part of a policy to regenerate town
centres many local councils during the
last decade granted planning consents
for leisure use and reduced the number
of objections made to the magistrates
courts for the granting of licensing
hours beyond 11pm. This contributed
to a proliferation of licensed premises
opening in high streets across the UK.
Demand grew with the increase in
capacity as many high streets grew
into thriving leisure centres. By the
second half of 2002 demand began
to decrease. With continued expansion
in capacity the market for high street
leisure became increasingly competitive
with many operators entering into
aggressive price competition in order to
maintain volumes. This was compounded
by operators who had developed weak
product which was inappropriate for
the late night market using discounting
as a reaction to increased competition.
Within each local market the operation
with the leading and best differentiated
offering has fared best. Marginalised
undifferentiated operations relying solely
on discounting have underperformed.
Given this material adverse change in
the market conditions from previously
highly favourable conditions, the
Company conducted a strategic review,
the results of which were announced
last November.
STRATEGY
The Board has concluded that the best
strategy to grow shareholder value
is to pursue a policy of developing
a portfolio of branded units which will
occupy the leading trading position
within their local markets. This strategy
will meet the needs of modern leisure
consumers with consistent products
which will support strong customer
relationships and widen the user base.
Specifically, this will be accomplished
by providing an entertainment-led
experience in a safe and friendly but
exciting environment, with an emphasis
on value for money. It is the Company’s
strongly held belief that this approach
will reduce the need for ongoing
refurbishment capital costs and will
reduce trading volatility, which will
deliver consistent above average
returns over the long term.
In order to allow the Company to focus on
implementing this strategy and to apply
the appropriate management approach
to the branded and the unbranded
estate it is necessary to ring-fence
non-core unbranded businesses from
the rest of the estate. Those units
which are not ultimately capable
of branding will be sold over time.
APPLICATION OF STRATEGY
TO CORE ESTATE
Since January we have focused on
four branded templates alongside the
two existing branded templates of
Chicago Rock Café and Jumpin Jaks
for the Entertainment Division.
Each branded template will be positioned
within towns where the demographic
profile ensures that a suitable market
exists for the brand’s customer profile.
The unit will be designed with the
appropriate capacity to enable it
to achieve a leading position within
its local marketplace. Each brand
provides a high quality entertainment-
led leisure experience within a well
located modern property with a safe
and friendly atmosphere. The brands
OUR STRATEGY IS TO GROW
SHAREHOLDER VALUE BY
PURSUING A POLICY OF
DEVELOPING A PORTFOLIO
OF BRANDED UNITS WHICH
WILL OCCUPY THE LEADING
TRADING POSITION WITHIN
THEIR LOCAL MARKETS Annual Report and Accounts 2004 LUMINAR PLC 07
will have the flexibility to be able to
cater for a wider market to increase
utilisation of the premises. Recruiting
and training the correct standard of
management is considered key to the
development of consistently branded
businesses. The Company will ensure
that adequate resources are allocated
to this important area.
Chicago Rock Café is the Company’s
longest established and most successful
brand. However, its performance over
the last financial year has reflected the
highly competitive trading conditions.
A detailed review including market
research has confirmed that the brand
has a unique position within the high
street and still has a strong appeal to
the over-25 customer. The research
demonstrates that Chicago Rock Café
is a strong brand appreciated by its
customer base but would benefit from
further capital investment. It is also
clear that some units developed in
recent years and some management
techniques used have led the brand
away from its core brand standards.
The Company has developed a clear
programme to re-invigorate the Chicago
Rock Café brand based on its core values.
The programme includes three areas;
development of 70’s style rooms adjacent
to existing units, major refits which
will include sports bar areas and other
initiatives to develop incremental income
and a higher level of small maintenance
refurbishments to refresh the estate.
A further 43 units within the Company’s
estate benefit from strong positions
within key markets but the properties
will not currently accommodate any
of our branded concepts. These units
will be retained for their long-term
licensing value. It is expected that
it will be possible to develop branded
product within relevant towns over
time through acquiring space adjacent
to the existing properties or acquiring
alternative properties.
The Emerging Business Division
comprises 23 bars developed on an
experimental basis in recent years.
Given current market circumstances
the Company is reviewing the options
for this business.
APPLICATION OF STRATEGY
TO NON-CORE ESTATE
A total of 61 units which do not fit our
branding criteria have been transferred
to a wholly-owned separate ring-fenced
subsidiary. A new management team
has been created to manage these
businesses on an entrepreneurial
basis which is more relevant to
unbranded businesses. The new team
is headed by Tim Roberts who has
over 20 years’ experience of running
unbranded nightclubs.
The objective for the non-core
venues is to realise maximum value
for shareholders over the short to
medium term.
PROGRESS
The first conversion of an unbranded
nightclub to a branded template took
place in April last year when the former
Options nightclub in Kingston upon
Thames re-opened as an Oceana. Pilot
sites for the first Lava/Ignite and Life
opened in November last year in Burnley
and Wellingborough respectively.
Three units have had a complementary
70’s room developed adjacent to the
existing Chicago Rock Café and a further
Chicago Rock Café has benefited from
an extensive refit including a sports
bar area. A further 15 Chicago Rock
Cafés benefited from more limited
refurbishments. A further 22 other
units have benefited from the
refurbishment programme.
Total capital expenditure on this
programme was £33.1m. Cash returns
on these investments during the year
amounted to 31%, including the highly
successful Oceana, Kingston. Excluding
that development, the sales uplift was
44% and the cash returns were 17%,
including initial developments of the
new branded concepts.
In the current financial year the
Company expects to rebrand a further
11 unbranded units. Three 70’s rooms
will be added to existing Chicago Rock
Cafés, two Chicago Rock Cafés will be
extensively refurbished and a further
15 will benefit from freshen up
refurbishments. Capital expenditure
Currently in Identified for
Brand Location operation conversion Total
Oceana Cities 2 11 13
Lava/Ignite Large towns 1 25 26
Liquid Medium towns 20 4 24
Life Small towns 1 13 14
Chicago Rock Café Small/medium towns 58 – 58
Jumpin Jaks Small/medium towns 22 – 22
Total 104 53 157 08 LUMINAR PLC Annual Report and Accounts 2004
CHIEF EXECUTIVE’S STATEMENT
CONTINUED
for these projects is expected to be
in the region of £30m.
Last year the Company disposed of
18 units for total proceeds of £9m.
Of these units nine were unbranded
trading units which were sub-let.
The remaining nine units were closed
prior to sale as they were trading
at uneconomic levels. The Company
will continue to close and dispose of
uneconomic units and to sell unbranded
units where appropriate prices can
be obtained. Increasing opportunities
are arising to utilise spare capacity for
town centre residential development.
The Company is at an early stage in
the programme to convert its estate
to predominantly branded units.
A good start has been made and the
opportunity remains to accelerate
our plan should market conditions
and performance allow.
FINANCIAL STRENGTH
Throughout the recent period of
uncertainty the Company has
focused on generating surplus cash.
Last year the Company generated
a free cash flow before dividends
of £46m. This result, which has
been achieved through a significant
reduction in expansion capital
expenditure, underlines the impressive
cash generating characteristics of
the business. The Company’s overall
financial position has been significantly
strengthened and it is now well
positioned to benefit from a recovery
in its markets.
DISCOUNTING
Over the last year there has been much
debate in the media about an increase
in the discounting of alcoholic drinks by
high street leisure operators. Luminar
has always used promotional offers on
both admissions and drinks as part of
the marketing strategy to grow and
protect volumes. The Company’s
promotional schemes are agreed with
the relevant local licensing authorities
before implementation. Luminar’s
promotions as a percentage of sales
has not increased and our overall gross
margin has been maintained at over
80% for the last three years. This is in
spite of a 19% increase in duty for pre-
packaged spirits which was introduced
by the Government two years ago.
We have consistently supported the
introduction of local council backed
minimum pricing levels and would
welcome a broadening of these schemes.
Luminar is a responsible operator on
the high street and supports the recent
Government initiatives on anti-social
drinking including the Alcohol Harm
Reduction Strategy.
DEREGULATION
The new Licensing Act, which became
law in July 2003, brought to an end
a considerable period of uncertainty
regarding the future shape of alcohol
licensing in England and Wales.
Under the Act, responsibility for
licensing will transfer from the judiciary
to local councils. The Government has
announced that the first appointed
date for the start of the transition
period in which the transfer from the
magistrates to the local authorities
will take place is November 2004.
The Government’s present timetable
provides for a period of nine months to
complete the transition period. Luminar
welcomes the introduction of the new
system which is intended to reduce
crime and disorder. We believe that it is
unlikely that the authorities will permit
24-hour drinking. There may be some
relaxation of the closing time for both
pubs and nightclubs which would
benefit both sets of operators. More
importantly, the grant of new licences
will become more difficult and it is likely
that poor quality operators will have
their licences withdrawn. Both of these
measures will help to reduce the over-
capacity currently in the marketplace.
GAMING
Planned changes in the regulation
of gaming in the UK will create
opportunities for the Company. First,
it is likely that existing units will be
able to increase the use of gaming
machines. Secondly, the development
of medium-sized casinos in provincial
towns with a significant entertainment
component will enable the Company
to use its present skills and assets
within this sector.
WHERE TO FIND OUR BRANDS: ABERDEEN
1,2,4
, ASHFORD
3,4
,
AYLESBURY
1
, BANBURY
1
, BARNSLEY
1
, BASILDON
1,2
, BASINGSTOKE
1,4
,
BEDFORD
1
, BIRMINGHAM
1
, BISHOP’S STORTFORD
1
, BLACKBURN
2
,
BOLTON
3
, BOURNEMOUTH
2
, BRAINTREE
1
, BRISTOL
1
, BURTON ON
TRENT
1
, BURY
1
, CANTERBURY
1
, CARDIFF
2,4
, CARLISLE
2
,
CHELMSFORD
1
, CHICHESTER
1
, COLCHESTER
1
, COVENTRY
1,2
,
DUMFRIES
2
, DUNSTABLE
2
, EAST GRINSTEAD
2
, EPSOM
1
, GLASGOW
2
,
GLOUCESTER
2,4
, GRIMSBY
1
, HUDDERSFIELD
1,2
, HALIFAX
2
, HEMEL
HEMPSTEAD
2
, HANLEY
1,2,4
,HARLOW
2
, ILFORD
2
, IPSWICH
4
, ISLE OF
WIGHT
1
, JERSEY
1
, KING’S LYNN
1
, KINGSTON UPON THAMES
5
, Annual Report and Accounts 2004 LUMINAR PLC 09
LANCASTER
1,4
, LEEDS
2,
, LINCOLN
1
, LIVINGSTON
1
, LUTON
1,4
,
MACCLESFIELD
1
, MAIDENHEAD
1
, MAIDSTONE
1,2
, MANCHESTER
2
,
MANSFIELD
1,4
, MIDDLESBROUGH
1,2
, MILTON KEYNES
5
, NEWBURY
4
,
NORTHAMPTON
1
, NORWICH
1,4
, NOTTINGHAM
2
, NUNEATON
1
,
OLDHAM
1,4
, PETERBOROUGH
1,4
, REDDITCH
1
, SALISBURY
1
,
SHREWSBURY
4
, SOUTHAMPTON
2
, SOUTHSEA
1
, ST HELENS
1
,
STAFFORD
1
, STEVENAGE
1,2
, STRATFORD UPON AVON
1
,
SUNDERLAND
4
, SUTTON
1
, SWANSEA
1,2
, TAMWORTH
1
, TROWBRIDGE
1
,
WALSALL
1
, WARRINGTON
1
, WATFORD
1
, WIGAN
1,2,4
, WINDSOR
1,4
,
WOLVERHAMPTON
1
, WORCESTER
1
, WREXHAM
1,4
, YEOVIL
1
1=CHICAGO ROCK CAFÉS 2=JUMPIN JAKS 3=LIFE 4=LIQUID 5=OCEANA 6=LAVA/IGNITE
The Company has entered into an
agreement with Accor Casinos S.A,
the operator of 23 casinos in Europe,
to establish a joint venture to operate
a new concept of entertainment based
casinos. The initial pilot template will
be in Leeds, subject to approvals.
The joint venture is intended to form
the basis of further developments
from within our estate.
SUMMARY
Luminar has a well considered strategy
which we have started to implement on
a phased basis. I am given considerable
confidence from our performance
against our competitors, our financial
strength and the skills of our people.
Luminar has much opportunity including
new developments in the gaming
sector to leverage the quality assets
within our business.
STEPHEN C THOMAS
CHIEF EXECUTIVE
20 MAY 2004 10 LUMINAR PLC Annual Report and Accounts 2004
FINANCE DIRECTOR’S REVIEW
LIQUID
Liquid is the UK’s leading night club
brand encompassing the finest in
21st century clubbing entertainment
along with the highest standards
of customer care.
Liquid has a modern award-winning
design with state-of-the-art lighting,
sound and laser technology, to appeal
to broad range of tastes from the main
arena, chill out room and VIP suite.
Liquid’s ongoing market research
enables our management to deliver
exactly the entertainment that a
modern clubber requires, coupled with
the country’s top DJs and entertainers.
OCEANA
This award-winning brand is currently
operating in Milton Keynes and
Kingston upon Thames. Both venues
have a capacity in excess of 2000
and comprise of nightclubs, bars and
restaurants all under the same roof.
Different themed rooms take the visitor
on a journey “around the world”,
from Tokyo, Aspen, Paris, Reykjavik,
Sydney, New York and beyond.
The venues have been designed and
fitted to the highest possible standards,
not only re-creating authentic themed
spaces but also incorporating the very
latest in state-of-the-art technology.
Turnover for the year increased by 1.9%
to £399.7m (2002/2003: £392.4m).
Gross margins were stable at 80.8%
(2002/2003: 81.0%) reflecting
the Company’s ability to maintain
pricing levels through the quality of the
entertainment provided. This is against
a market where discounting has
increased not least from the expansion
of operators whose sole marketing
effort is to sell discounted drinks.
Operating profit before goodwill
amortisation and exceptional items
decreased by 7.5% to £75.2m
(2002/2003: £81.3m). Operating
profit margin before goodwill
amortisation and exceptional items
has decreased by 1.9 percentage
points to 18.8% (2002/2003: 20.7%).
The operating profit margin before
goodwill amortisation and exceptional
items fell steeply in the first half of the
year to 17.0% (2002/2003: 21.7%)
and recovered significantly in the
second half to 19.7% (2002/2003:
19.8%). This improvement came
through disciplined cost control.
Increases in the fixed cost base for
the Company, particularly rent and
insurance totalled £4m and for the
period it is anticipated that the rate
of increase in rents will reduce in the
current year and that insurance costs
will decrease.
Earnings Before Interest, Tax,
Depreciation and Amortisation and
Exceptional Items (EBITDA) have
decreased by 3.0% to £110.6m
(2002/2003: £114.0m). EBITDA margin
has decreased by 1.4 percentage points
to 27.7% (2002/2003: 29.1%).
The Company will now include the sales
uplift from refurbishments and re-brands
from the point of opening within the
like-for-like sales measurement.
THE DANCING DIVISION
The Dancing Division operates a total
of 160 units including 20 Liquids, 2
Oceanas, 1 Lava/Ignite and 1 Life.
The Division has achieved a stable
performance in the year. Like-for-likes
declined by 4% for the year. Sales
growth came from the opening of the
re-branded Oceana in Kingston and
the new Liquid in Sunderland together
with a full year contribution from the
seven new branded units which opened
in 2002/2003.
During the year a total of 15 units left the
Division. Three were sold, seven stopped
trading when the leases ended or were
sub-let and five units were closed
pending redevelopment or sale. The
majority of these closures took place in
the second half of the year. The stability
of operating margins was assisted by the
reductions in promotional and marketing
spend against the previous year,
particularly in the second half of the year .
52 weeks to 52 weeks to
THE DANCING DIVISION 29 February 2004 2 March 2003
Turnover £242.5m £240.2m
Net operating profit £69.9m £70.0m
Operating margin 28.8% 29.1%
Number of units at year end 160 174 Annual Report and Accounts 2004 LUMINAR PLC 11
LAVA AND IGNITE
A multi-scene venue consisting of
a main room with sound and light
effects to amaze, the ability to stage
mainstream chart acts, host major
sporting events or launch this season’s
holiday brochure.
Alongside the main room there is
a themed bar for that “drink before
the club” along with two other rooms
for a change in mood and music.
BAR AND CLUB LIFE
Life is a bar concept designed to
capitalise on both early and late markets
in smaller towns. Life is a versatile
design, meaning that as well as the
traditional bar and club markets,
the venues can also be utilised for
meetings and corporate events.
Bar life is open seven days a week
and on Thursday, Friday and Saturday
nights a screen is drawn back to
reveal club life, giving customers
the opportunity to dance until the
early hours.
DANCIN
G 12 LUMINAR PLC Annual Report and Accounts 2004
FINANCE DIRECTOR’S REVIEW
CONTINUED
52 weeks to 52 weeks to
THE ENTERTAINMENT DIVISION 29 February 2004 2 March 2003
Turnover £130.8m £121.1m
Net operating profit £25.3m £29.3m
Operating margin 19.3% 24.2%
Number of units at year end 96 92
THE ENTERTAINMENT DIVISION
The Entertainment Division now operates
a total of 96 units comprising 71 Chicago
Rock Cafés and 25 Jumpin Jaks.
The Entertainment Division started to
move towards stability in the second
half of the financial year after a sharp
decline in the first half of the year.
During the year, like-for-like sales
declined by 6.5%. The like-for-like
decline is concentrated on 16 units
that deviate from the brand standard.
These units will now form part of the
Non-Core Division. The trend has
improved through the last financial
year with invested like-for-likes
reaching positive territory for the last
two months of the period. Overall sales
grew by 8% to £130.8m due to the
contribution from the 17 new units
that have opened in the last two years.
Gross margins have been static at
78.0% but net operating margin has
eroded by a significant 4.9 percentage
points to 19.3%. Over half of this
erosion is attributable to increased
fixed property costs. The remainder of
the erosion is due to the fixed element
of staff and promotional costs.
Five new units were opened in the first
half of the year. Four Chicago Rock
Cafés opened in Aberdeen, Chichester,
Macclesfield, and Livingstone. One
Jumpin Jaks opened in Aberdeen.
Since the start of the new financial year
a further two units have opened,
a Chicago Rock Café in Chester-le-Street
and a Jumpin Jaks in Carlisle. It is
anticipated that another three new units
will open later in the financial year as the
pipeline of site commitments unwinds.
JUMPIN JAKS
Jumpin Jaks is the place to party.
The brand, which stages live
entertainment every night the
doors are open, has been a huge hit
with people of all ages, thanks to its
unique party atmosphere. Jumpin Jaks
feature all genres of the UK’s best live
acts along with guest performances
from celebrities.
Key to the success of the brand is
the music it plays. The songs you will
hear are those you love to sing along
to, dance to and the ones that set the
tempo for a great atmosphere, good
feeling and real interaction.
ENTERTAI Annual Report and Accounts 2004 LUMINAR PLC 13
CHICAGO ROCK CAFÉ
Chicago Rock Café is the place to eat,
drink and party. Appealing to a mature
20-something age group with a mix of
food, drink and entertainment based
around music, comedy, memories
and nostalgia.
Tasty Tex-Mex food is served all day,
lunch and evening, whilst our
bartenders mix the most tantalising
cocktails. Whether you choose to eat
or drink, Chicago Rock Cafés offer
an alternative to the high street pub
to club scene.
NMENT 14 LUMINAR PLC Annual Report and Accounts 2004
FINANCE DIRECTOR’S REVIEW
CONTINUED
EMERGING BUSINESS DIVISION
The experimental concepts that have been developed
within the Emerging Business Division continue to deliver
unsatisfactory returns. Sales have improved for the period
to £25.4m (2002/2003: 23.1m) with like-for-like sales
increasing by 13%. This strong sales performance has come
at the expense of considerable margin decline. Net operating
profit was £1.0m (2002/2003: £1.9m). In response the
Company will now review its options for this Division.
NON-CORE UNITS
The 61 units that now comprise the Non-Core Division will
be reported separately going forward. For the period under
review, sales and EBITDA for these units were £52.1m and
£9.5m respectively.
CENTRAL OVERHEADS
Central overheads measured as a percentage of turnover have
stayed level at 4.8% and total £19.0m (2002/2003: 4.8% at
a total of £18.8m). The trend of turnover growth outpacing
administration costs has now levelled off.
OTHER
The ongoing property costs associated with units that are
closed pending sale or re-development together with net
sub-let income were a loss of £2.0m (2002/2003: £1.1m).
In 2002/2003 five freehold sites which were fully sub-let
were sold. The annual rental lost was £0.6m per annum.
EXCEPTIONAL CHARGE
The Company incurred an exceptional charge for £60m
as follows:
£m
Provision for loss on future disposal of units 45.9
Impairment on fixed assets 12.0
Impairment on other assets 2.1
Total 60.0
The provision for loss on future disposals of £45.9m is
necessary to write down the carrying values of assets
which are intended to be disposed of in the short term.
This comprises units that are currently closed pending
disposal and those units that are now trading in the ring-
fenced Non-Core Division.
The impairment provision of £14.1m principally reflects the
difference between the net present value (NPV) of income
generating units, i.e. discrete trading units and their carrying
value. The NPV is calculated by discounting an estimate of
future cash flows by the Company’s weighted average cost
of capital. If net realisable value (NRV) is higher than NPV
then NRV would be compared to the carrying value.
The write-down reflects the reduction in the market value for
leisure assets. This write-down does not indicate a shortening
in the estimated normal useful life of the assets employed in
the business.
The cause of each element of the exceptional charge can
be linked to the material deterioration in market conditions
experienced over the last 18 months.
CASH FLOW
52 weeks to 52 weeks to
29 February 2004 2 March 2003
Earnings before tax,
goodwill amortisation
and exceptional items 61.6 66.6
Depreciation 35.4 32.7
Interest 13.6 14.7
Earnings before tax, interest,
depreciation and goodwill
amortisation and exceptional items 110.6 114.0
Asset realisations 0.3 (0.9)
Working capital change 2.9 0.2
Capital expenditure and acquisitions (52.1) (82.9)
Disposal proceeds 9.2 8.6
Taxation (11.8) (15.2)
Interest (13.6) (14.7)
Free cash flow before dividend 45.5 1.5
Dividends (8.6) (7.6)
Reduction in debt 36.9 1.5
Depreciation has increased to £35.4m (2002/2003: £32.7m).
Depreciation as a percentage of turnover has increased to 8.9%
(2002/2003: 8.3%) and as a percentage of average net book
amount 6.5% (2002/2003: 6.0%).
Working capital has decreased by £2.9m (2002/2003: £0.2m).
This is mainly due to an increase in capital creditors.
Capital expenditure has decreased to £52.1m (2002/2003:
£82.9m). This reduction has come from a significant reduction
in expansion expenditure.
£m
New developments 13.7
Refurbishments and re-branded units 33.1
Central 5.3
Total 52.1 Annual Report and Accounts 2004 LUMINAR PLC 15
Disposal proceeds from the sale of 18 units generated £9.2m
(2002/2003: £8.6m). Acquisition expenditure was reduced
to nil (2002/2003: £0.9m).
Taxation paid was £11.8m (2002/2003: £15.2m).
The reduction is due to the favourable settlements of prior
year submissions with the Revenue. The cash tax rate has
reduced to 19.1% (2002/2003: 22.8%).
The effective tax rate before exceptional items has reduced
to 28.2% (2002/2003: 34.1%).
The reduction reflects the favourable settlement of prior year
submissions. This is a one-off adjustment, the on going
effective tax rate is likely to be similar to 2002/2003.
The effective tax rate after exceptional items has reduced
further to 23.0% (2002/2003: 34.1%). The total deferred
tax provision required has reduced due to the exceptional
write-off lowering temporary timing differences between tax
written down values and financial accounts carrying values.
BALANCE SHEET AND GEARING
£m
Tangible assets 517.6
Goodwill 212.8
Stocks 3.9
Debtors 8.0
Creditors (48.7)
Working capital (36.8)
Provisions (19.9)
Dividends (6.5)
Tax (12.2)
Net Assets 655.0
Net Debt (188.7)
Shareholders’ Funds 466.3
T angible assets include £130.4m relating to freehold properties.
Net debt at the end of the year was £188.7m (2002/2003:
£225.6m). The interest cover ratio for the year, before
exceptional items and goodwill amortisation, was 5.5
(2002/2003: 5.5). The net borrowings to EBITDA ratio before
exceptional items at the year end was 1.7 (2002/2003: 2.0).
Fixed charge cover for the year was 2.8 (2002/2003: 2.9).
Gearing, measured as a percentage of shareholders’ funds,
was 40% at the year end (2002/2003: 45%).
The cash return on average net tangible assets employed
was 20% (2002/2003: 21%).
BANKING FACILITIES
The Group has syndicated facilities with seven banks totalling
£283.5m which expire in March 2006.
INTEREST RATE RISK
Interest rate risk is managed through swapping between
floating rate debt into fixed rate debt. This has been achieved
through the purchase of a £70m five-year swap and a £65m
five-year swap callable by the counter party after three years.
Liquidity risk is managed through an assessment of short-,
medium- and long-term cash flow forecasts to ensure the
adequacy of debt facilities. Short-term liquidity risk is managed
through overdraft facilities and short-term deposits.
CURRENCY RISK
The Group operates wholly within the United Kingdom and
all transactions are denominated in sterling.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Luminar plc will be required to adopt International Financial
Reporting Standards (IFRS) for the year ended 26 February
2006. The Group will continue to assess the impact of
adopting IFRS on an ongoing basis give that both UK and
International Standards are undergoing a period of rapid
change to assist harmonisation.
ANDREW BURNS
FINANCE DIRECTOR
20 MAY 2004 16 LUMINAR PLC Annual Report and Accounts 2004
CORPORATE SOCIAL RESPONSIBILITY
The Company trades in the late night
entertainment market and therefore
operates in an environment where it is
responsible for the safely of customers
and staff. Particular risks arise with
regards to maintaining the safety of
premises, prevention of excessive
alcohol consumption, prevention of
drug use and the management of door
stewards. In the case of nightclubs many
customers have visited other bars prior
to visiting the Company’s premises,
which increases the demands on the
Company in relation to the management
of customers.
The Company’s primary activity is the
provision of entertainment, to which
alcohol is an ancillary activity. It is not
possible for the Company to achieve
its objectives unless there is a high
standard of control in managing
customer behaviour. The Company
also operates non-tolerance polices
over drugs. Its primary method of
protecting customers and staff is
control of admissions.
The Company has the most experienced
operational management in its sector
and operates policies and processes
designed to protect customers, staff
and local communities from primary
risks associated with late night
entertaining. It also maintains the
highest possible levels of co-operation
with the police and relevant authorities
in all related areas.
The Company is a member of the
FTSE4Good Index, designed to identify
those companies who display good
records of corporate social responsibility.
Specific policies have been developed
in regard to drugs, door stewards,
price discounting, anti-social drinking
and smoking. These are set out below.
DRUG POLICY
The Company has a zero tolerance
towards drugs and makes every effort
to ensure that its premises are drug
free. The Company does not tolerate
drug handling or use by its employees.
The Company policy regarding drug use
within its venues by customers is clearly
communicated to all employees via the
Company’s employee handbook, and
anyone found in possession of such
substances will have them confiscated
and be removed from the premises
immediately. Any person attempting
to sell or distribute drugs within the
Company’s premises will be reported
to and arrested by the police.
Ongoing training provided to its
employees reinforces the Company’s
policy towards drugs. The training
provides employees with the knowledge
to recognise drugs and the use of drugs
and the ability to assist and care for
those found suffering from the effects
of drug misuse.
In addition, the Company employs other
methods to deal with misuse, for
THE COMPANY HAS THE MOST
EXPERIENCED OPERATIONAL
MANAGEMENT IN ITS SECTOR
AND OPERATES POLICIES AND
PROCESSES DESIGNED TO PROTECT
CUSTOMERS, STAFF AND LOCAL
COMMUNITIES FROM PRIMARY
RISKS ASSOCIATED WITH LATE
NIGHT ENTERTAINING. Annual Report and Accounts 2004 LUMINAR PLC 17
instance, unscheduled visits to the
Company’s premises by trained
and qualified teams of drug sniffer
dogs. These teams will search,
where appropriate, both employees
and customers.
Also, the licensee at all the Company’s
premises has the authority to refuse
entry to persons suspected of dealing
or possessing drugs.
DISCOUNTING AND
ANTI-SOCIAL DRINKING
The increase in the granting of late
licences in recent years has increased
competition in many of the Company’s
trading locations. This increased
competition has contributed to many
operators discounting the price of their
products and to the rise in promotion-
led cost-cutting.
The Government has recently brought
the issue of ‘anti-social drinking’ to
national prominence. The link between
crime and drunkenness has been
established in the statistics issued
by the Government. The Company
welcomes the increased profile given
to this important issue and supports an
industry-wide solution to the problem.
The Company operates the highest
standards of control and security in
its premises to ensure the safety of its
customers. Various methods are used
to maximise the safety of our customers
and these include the use of CCTV
cameras (internally and externally),
training of management and staff to
control drunken behaviour and the
stringent use of licensee’s powers not to
serve customers who become drunk or
to refuse entry to those already drunk.
In line with normal trade practice, price
promotions are used by the Company
in certain circumstances as a genuine
marketing tool and are generally
introduced only after consultation
with local police. The Company also
uses, in a competitive market, strategic
discounting measures; however,
discounting as a percentage of the
Company’s sales has not increased
over the last three years and the
Company’s overall gross margin has
been maintained at over 80% for the
last three years. In any event, the
paramount concern of the Company in
the pricing of its products is its
responsibility for the safety and well-
being of its customers.
The Company’s employees are trained
to recognise those customers that
it would be unsafe to allow into its
premises because they are already
intoxicated. The Company is actively
promoting the provision of other safety
initiatives across its estate, including
the use of plastic bottles and glasses
and shatterproof glass products.
The Company welcomes initiatives to
enhance the experience of all users of
busy town and city centres and actively
participates in this by use of CCTV and
regular liaison with police and council
officials. The Company would also
welcome the introduction of minimum
tariffs, as have been introduced by
some local authorities. The Company
is fully supportive of the Government’s
Alcohol Harm Reduction Strategy and
welcomes it and all such initiatives that
encourage safe and sensible drinking.
The Company welcomes deregulation of
the existing licensing laws and continues
to work closely with the appropriate
authorities to ensure that its customers
enjoy a safe environment when visiting
our premises.
The Company is optimistic that the
deregulation of the country’s
anachronistic licensing laws will help
provide a more responsible approach
to alcohol abuse by all concerned in
the production, distribution, sale and
consumption of alcoholic beverages.
Luminar is committed to using its
position in the late night entertainment
industry to support all statutory,
regulatory and other organisations
committed to dealing with alcohol abuse.
DOOR STEWARDS
It is the Company’s policy that all door
stewards used by the Company are
employed by a nominated security
company, on a standard contract.
This approach enables the Company
to ensure, so far as is possible, that the
door stewards at its premises meet the
highest industry standards. Security
RIGHT: New York, New York, Oceana
FAR RIGHT: Chicago Rock Café 18 LUMINAR PLC Annual Report and Accounts 2004
companies employed by the Company
must comply with all appropriate local
registration schemes and any other
statutory requirements. The provisions
of the contract require compliance with
BSI standards 7960 and 7858, which
are the Government’s best practise
guidelines for the security industry.
The standard contract also provides
that the security company must have
in place public liability insurance in the
sum of £5m.
As a consequence of the approach
outlined above, the Company is
well placed to cope with the ongoing
implementation of the Security
Industry Agency licensing scheme.
The new licensing regime provides
for the vetting, training and regulation
of door stewards, and for the granting
of national badge licences. This is
a move welcomed by the Company.
SMOKING
The adoption of a ban on smoking in
work places in Ireland has refocused
attention on the possibility of a similar
approach in the UK. Whilst the Company
recognises the potential health benefits
of a smoking ban, it nevertheless
believes that the industry can self-
regulate by following best practice
guidelines from Government and by
ensuring its premises meet all statutory
guidelines in relation to the standard of
air flow and air extraction in its premises.
The Company believes that the adoption
of these measures provides both our
staff and customers with a comfortable
environment for work and enjoyment
of our venues.
It has been the Company’s long term
policy that it’s premises should possess
air circulation and handling equipment
to the prevailing standards at the
time of their installation. All new and
refurbished premises comply with
CIBSE design guidelines, BSI British
Standard 5720 and technical standards
for places of entertainment as published
by the District Surveyors Association.
EMPLOYMENT POLICIES
The Company believes that the way in
which it recruits, develops, motivates
and retains its employees determines
its ability to serve its customers
efficiently and successfully.
The Company has continued to adopt
a policy of promotion from within, and
all employees are encouraged to make
a real commitment to the growth of
the business. The Company places
great emphasis on, and invests
significant resources in, the training
and development of its employees,
believing that this ensures that the
highest operating standards and
service are provided to its customers.
The Company’s in-house magazine
and other methods of communication
continue to ensure that all employees
are well informed about ongoing
initiatives and any other issues affecting
their employment and the progress of
the business.
The Company operates a contributory
pension scheme and all new employees
are encouraged to join the scheme.
The Company contributes to the
scheme a percentage of the employee’s
salary. The percentage contributed
is dependent on the seniority of the
individual employee.
In addition employees are invited
to participate in the Company’s Save
As You Earn share option scheme,
encouraging a strong involvement
in the performance of the Company.
The Company’s employment policies
do not discriminate between employees
or potential employees on the grounds of
sex, race, creed, colour or ethnic origin.
Consideration is given to all applicants
for employment from handicapped and
disabled persons where the requirement
of the job may be adequately covered by
those persons. If employees become
disabled, every effort is made to ensure
their employment continues, with
appropriate training where necessary.
The Company has considered its
training and employment policies in
light of the introduction of The
Disability and Discrimination Act 1995,
the last requirements of which are to
be introduced in October 2004. This
new legislation imposes an obligation
on service providers to ensure that
their buildings are as accessible as is
physically possible to disabled persons.
The key features of the Group’s
personnel support systems are:
> Board approval of a detailed
Manpower and Development
Recruitment Plan.
> Continual assessment under the
Investors In People accreditation.
> Publication and constant review of
employment procedures including:
–Employee handbooks
–Award of Merit schemes
> Continuous health and safety
risk assessment.
> Ongoing provision of job related
and management training.
> Annual staff appraisals identifying
individual staff and employment needs.
SUPPLIER PAYMENT POLICY
AND PRACTICE
The Group’s policy with regard to the
payment of suppliers is to agree terms
of payment at the start of business
with each supplier, to ensure that the
supplier is made aware of the standard
payment terms. Such terms include
an undertaking to pay suppliers within
an agreed period subject to terms
and conditions being met by suppliers.
Creditor days at the period end
amounted to 30 days (2003: 31 days)
of total supplies for the period.
RESEARCH AND DEVELOPMENT
All businesses within the Group continue
to be active in developing new ways of
working for the benefit of the business
and its customers.
CHARITABLE AND
POLITICAL DONATIONS
The Company has established a
charitable trust, the ECHO Trust,
to channel the Company’s charitable
activities to those in need. During
the year, a total of £455,795 (2003:
£322,642) was donated by our
customers in charity collections to
ECHO Trust and other local charities.
Direct contributions for charitable
purposes were made during the period
amounting to £10,195 (2003: £848).
No political donations were made
during the year (2003: £nil).
CORPORATE SOCIAL RESPONSIBILITY
CONTINUED Annual Report and Accounts 2004 LUMINAR PLC 19
During the year ended 29 February 2004
the businesses of the Company faced
many regulatory challenges. The
Company takes compliance with it’s
statutory and regulatory obligations
very seriously and two examples of
our position on specific issues are set
out below:
Disabled Discrimination Act 1995
The Company has considered its
position in light of the introduction
of The Disability and Discrimination
Act 1995, the last requirements of
which are to be introduced in October
2004. This new legislation imposes an
obligation on service providers to ensure
that their buildings are as accessible as
is physically possible to disabled persons.
In order to ensure that its venues meet
the requirements of the new legislation,
the Company is undertaking a detailed
survey of all its premises with particular
emphasis on the older units. This will
be undertaken by both our in-house
staff and external consultants. Where
improvements are identified as being
required, the works will either be actioned
or phased in as part of the Company’s
rolling refurbishment programme.
Control of Asbestos Regulations 2002
In accordance with its responsibilities
under the current asbestos legislation,
the Company has updated its asbestos
management procedures and instigated
a detailed survey of all our premises.
Where asbestos materials have been
identified, they have been either removed
or steps have been taken to manage
the situation pending the Company’s
phased refurbishment programme.
LICENSING REFORM AND LUMINAR
The new Licensing Act received Royal
Assent last year. The Act is the first
serious review of our anachronistic
licensing laws since 1964. The Act seeks
to modernise the licensing process and
also has a wider ambition in terms of
its social policies. This wider ambition,
it is hoped, will lead to a reduction in
binge drinking and social disorder.
The main weapon in the Government’s
armoury is a complete shift away from
existing procedures centred on the
Magistrates Courts and a transfer of
administrative duties for the licensing
system in its entirety to local authorities.
Amongst the tranche of reforms is the
possibility of extended trading hours.
Whilst many operators in the leisure
sector have openly expressed concerns
about this development, Luminar is
broadly optimistic about the outcome.
We are optimistic of the benefits of the
reforms because:
> The Licensing Act 2003 provides
for all licensing in future to be
administered by local authorities.
The latest version of the draft
guidance places a much higher
emphasis on regulation in order
to control crime and disorder as well
as promote public safety. This is
likely to be a culture shock for
companies which have previously
operated premises trading to normal
permitted hours, particularly on the
high street. The local authorities will
also have far greater control of all
premises. Companies such as
Luminar, with effective procedures
to ensure compliance, will be less
vulnerable than those who have not
previously required such procedures.
Luminar is therefore ideally placed
to take advantage of the new
regulatory environment, which is likely
to follow the implementation
of the Licensing Act 2003.
> In recent years there have been
a large number of premises that
have taken advantage of the relaxed
licensing environment to obtain
Special Hours Certificates without
strictly complying with the criteria.
Luminar recently obtained a landmark
judgement from the Court of Appeal
in respect of Lloyds No 1 in Norwich.
This case will make it difficult, if not
impossible, for premises who do
not comply with the Special Hours
Certificate regime to obtain late
licences. The Court specifically
disapproved of any extension of
hours simply for the purpose of
drinking. This case should lead to
greater scrutiny of such applications
in the period leading up to and beyond
licensing reform.
> Our branded development strategy
mentioned earlier in this Report
has been developed with licensing
reform very much in mind.
> Our scale of operation and expertise
provides a platform for the
management of change.
> Because of Luminar’s existing licence
structure, the cost to the Company
in managing these changes will be
minimal. After an initial increase,
the broad impact across our business
will lead to a reduction in costs.
REGULATORY CHALLENGES 20 LUMINAR PLC Annual Report and Accounts 2004
THE BOARD OF DIRECTORS
KEITH HAMILL
CHAIRMAN
Keith, 51, was appointed Chairman
on 16 January 2001. He is also
Chairman of Collins Stewart Tullet PLC,
Travelodge-Little Chef and Moss Bros
PLC and Non-Executive director of
Electrocomponents PLC. He was
previously finance director of WH Smith,
Forté and United Distillers and a Partner
at PricewaterhouseCoopers.
STEPHEN THOMAS
CHIEF EXECUTIVE
Stephen, 51, was a founder member
of Luminar Leisure in 1987 and has
remained Chief Executive throughout.
Prior to that he was a regional director
at a leisure subsidiary of Whitbread
PLC. He is currently a Non-Executive
Director of Hartford Group Plc, Paddy
Power Plc and Saracens Ltd.
ANDREW BURNS
FINANCE
Andrew, 40, qualified as a chartered
accountant with Price Waterhouse in
London in 1989. He moved to The Rank
Group in 1990 to work in Business
Development. Latterly, he was the
Finance and Commercial Director for
Rank Video Services Europe. He joined
Luminar as Finance Director in 1997.
JOHN WILLIAMS
SENIOR NON-EXECUTIVE DIRECTOR
John, 70, known as John Wills, was
a Managing Partner until 1 May 1996
in Healey & Baker with whom he
remained as a consultant until May
1998. He joined Healey & Baker in
1955 becoming a Partner in 1964.
His specialism is retail property and
from 1987 he was the Senior Retail
Partner responsible for the firm’s
retailing activities in the United
Kingdom and overseas. He was
appointed to the Board in April 1996.
ALAN GOLDMAN
NON-EXECUTIVE
Alan, 61, was appointed on 3 March 1998
following his retirement from Rank
Leisure Limited where he was latterly
Development Director responsible
for the acquisition and development
of Rank’s “Leisureworlds”. He has
considerable experience of operating
discotheques and nightclubs and in
the acquisition and development of
leisure businesses.
LINDA WILDING
NON-EXECUTIVE
Linda, 45, was previously Managing
Director of Mercury Private Equity,
a division of Merrill Lynch Investment
Managers, specialising in providing
private equity finance. She resigned
from that post at the end of April 2001.
Linda served as a Director representing
Mercury private Equity from 1990
until the flotation of the Company
in November 1997. Because of her
experience of the Company and
expertise she was invited to re-join
the Board as a Non-Executive Director
in November 1998. Linda is also
Chairman of Sanctuary Spa Group
Limited. Annual Report and Accounts 2004 LUMINAR PLC 21
BOARD COMMITTEES
NOMINATIONS COMMITTEE
John Williams (Chair)
Alan Goldman
Keith Hamill
Michael Payne*
Linda Wilding
Robert Wickham*
AUDIT COMMITTEE
Keith Hamill (Chair)
Michael Payne*
Robert Wickham*
John Williams
Richard Brooke
Martin Gatto
REMUNERATION COMMITTEE
Linda Wilding (Chair)
Alan Goldman
Michael Payne*
Robert Wickham*
John Williams
Richard Brooke
Martin Gatto
David Longbottom
RISK MANAGEMENT
COMMITTEE
John Williams (Chair)
Andrew Burns
Alan Goldman
Henry Andrew Willits,
Company Secretary
Tony Steed, Health &
Safety Manager
CAPITAL COMMITTEE
Keith Hamill (Chair)
John Williams
Stephen Thomas
Andrew Burns
Brendan McLoughlin
Alistair Burford
MARTIN GATTO
NON-EXECUTIVE
Martin, 54, is Finance Director of
British Energy and was appointed to
the Board on 1 January 2004. Martin
was previously Finance Director of
Somerfield plc and has a wealth of
experience in both the leisure and
retail industries.
RICHARD BROOKE
NON-EXECUTIVE
Richard, 50, was appointed to the Board
on 1 January 2004. Richard is Managing
Director of St James’s Investment
Partnership (SJIP), the advisory arm
of Media Ventures Partners (MVP),
the specialist media investment firm.
Richard has been in this position since
January 1998, before which he was
Group Finance Director of BskyB plc.
He was also a Non-Executive director
of Gallagher plc from 1996 to 2002.
DAVID LONGBOTTOM
NON-EXECUTIVE
David, 59, was appointed to the Board
on 17 April 2004. David is the Human
Resources Director of Dixons Group
Plc, a position he has held since 1996.
In addition David is the current Dixons
Group Board member with
responsibility for Corporate Social
Responsibility. David has worked in a
variety of positions with Dixons since
1987 and prior to that held senior
positions with Lloyd’s of London and
Courtaulds plc.
ALISTAIR BURFORD
DIRECTOR OF OPERATIONS
Alistair, 51, was appointed to the
Board on 1 January 2002. He joined
Luminar Leisure Limited in 1988 having
previously gained industry experience
at Whitbread Plc and Civil Service
Catering. During his time with Luminar,
he has held the positions of General
Manager, Area Manager, Operations
Manager and most recently Managing
Director of the Entertainments Division.
BRENDAN MCLOUGHLIN
PROPERTY & DEVELOPMENT DIRECTOR
Brendan, 43, was appointed to the
Board on 1 January 2003. He joined
Luminar following the merger with
Northern Leisure where he was a
Director. Brendan is an experienced
operator of late night bars and clubs
and has worked in the industry for
over 20 years.
* retired during the period ending 29 February 2004. 22 LUMINAR PLC Annual Report and Accounts 2004
REPORT OF THE DIRECTORS
FOR THE YEAR ENDED 29 FEBRUARY 2004
PRINCIPAL ACTIVITIES
The principal activity of the Group during the period was
as owner, developer and operator of theme bars, nightclubs
and restaurants.
BUSINESS REVIEW
During the period, the Company announced its intention to
review the potential benefits of the Government’s planned
deregulation of the gaming industry. The Board feels that
the Company is well placed to take advantage of the proposed
reforms and is considering the strategic options available to
the Company. Further details of the potential opportunities
are contained in the Chief Executive’s Statement.
During the period, the Company announced the planned
creation of a new business division to contain 61 units. These
units are venues which the Board feel cannot be branded within
the Company’s core brands and should be developed by
an entrepreneurial management team led by Tim Roberts.
Further details can be found in the Chief Executive’s Statement.
A review of the business and future developments are included
in the Chairman’s Statement, the Chief Executive’s Statement
and the Finance Director’s Review, set out on pages 02 to
03, 06 to 09 and 10 to 15 respectively of this Report.
PROFIT AND DIVIDENDS
The profit before goodwill, exceptional items and taxation
for the 52 weeks ended 29 February 2004 amounted to
£61.6m (2003: £66.6m) and is reported in the Group profit
and loss account on page 38.
The Directors declared an interim dividend payment of 3.67p
per Ordinary Share, which was paid to shareholders on
9 January 2004. The Board recommends the payment of a
final dividend of 8.87p per Ordinary Share to the shareholders;
subject to approval at the AGM, this will be paid on 8 July 2004
to shareholders on the register on 4 June 2004. The total
dividend payment in respect of the period ended 29 February
2004 will therefore be £9.2m (2003: £8.3m).
DIRECTORS
The current Board of Directors is shown on pages 20 and 21
of this Report.
During the year, Michael Payne and Robert Wickham retired
from the Board, and the Board wish to record their thanks
for their contribution to the Company. John Aust retired as
a Director at the conclusion of the Annual General Meeting
held on 1 July 2003.
As previously announced, John Williams and Alan Goldman
will retire as Directors immediately following the 2004 Annual
General Meeting.
Since the last Annual General Meeting, Martin Gatto, Richard
Brooke and David Longbottom have been appointed as
members of the Board. It is the opinion of the Board, having
regard to their experience and skills as outlined below, that
their appointments strengthen the Board and the governance
of the Company. The Board confirms that it considers Martin
Gatto, Richard Brooke and David Longbottom all to be
independent of the management of the Company.
Martin Gatto
Martin, 54, is Interim Finance Director of British Energy and
was appointed to the Board on 1 January 2004. Martin was
previously Finance Director of Somerfield plc, and has held
senior positions at Sun International, Hilton International
and Grand Metropolitan. Martin brings to the Board a wealth
of experience in both the leisure and retail industries.
Richard Brooke
Richard, 50, was appointed to the Board on 1 January 2004.
Richard was previously Group Finance Director of BskyB plc
and has also held a Non-Executive Directorship at Gallagher
plc in recent years.
David Longbottom
David, 59, was appointed to the Board on 17 April 2004. David
is the Human Resources Director of Dixons Group plc, a
position he has held since 1996. David has worked in a variety
of positions within Dixons since 1987 and prior to that held
senior positions with Lloyd’s of London and Courtaulds plc.
In accordance with the requirements of the Articles of
Association, Martin Gatto, Richard Brooke and David
Longbottom will retire from office at the Annual General Meeting
and offer themselves for re-election by the shareholders.
The Articles of Association require that one-third of the
continuing Directors retire by rotation at the Annual General
Meeting. Accordingly, Linda Wilding will retire and offer herself
for re-election by the shareholders. Given the retirement
following the Annual General Meeting of John Williams and
Alan Goldman, all other Company Directors have been elected
by the shareholders at one of the last two Annual General
Meetings. The Board confirms that, following a review of the
skills and experience of the Directors, and of their personal
positions and commitments, it is satisfied that Keith Hamill,
Linda Wilding, Martin Gatto, Richard Brooke and David
Longbottom remain independent of the management of the
Company and continue to make a substantive contribution
to the work of the Board.
During the period, the Company maintained liability insurance
for its Directors and officers.
No Director had a material interest in any contract or
arrangement to which the Company or any subsidiary was
a party.
During the period, Henry Andrew Willits was appointed Company
Secretary, and Andrew Burns accordingly retired from that role.
Although Linda Wilding served on the Board prior to the
Company’s flotation, the Board has concluded that the nature
of changes to the capital structure, size and scale of the
Company, together with her limited financial dependency
on the Company and her expertise and professionalism mean
that it is appropriate and in the best interests of the Company
and the shareholders to regard her as an independent Director
with her term of office commencing when she was re-appointed
to the Board on 3 November 1998.
The interests of the Directors in the Ordinary Shares of the
Company at 29 February 2004 and 2 March 2003 were
as follows: Annual Report and Accounts 2004 LUMINAR PLC 23
29 February 2004 2 March 2003
Keith Hamill 30,113 30,113
Stephen Thomas 243,904 243,904
Andrew Burns 3,968 3,968
John Williams 18,645 17,993
Linda Wilding 16,929 16,277
Alan Goldman 6,066 4,767
Brendan McLoughlin 21,605 21,605
Alistair Burford 8,754 8,574
Martin Gatto – –
Richard Brooke – –
David Longbottom – –
The interests of the Directors in the Warrants of the Company
at 29 February 2004 and 2 March 2003 were as follows:
29 February 2004 2 March 2003
Stephen Thomas 43,410 43,410
Alistair Burford 1,178 1,178
On 17 March 2004, the Company acquired shares for the
Non-Executive Directors (excluding Keith Hamill) as part of
the contractual remuneration of those Directors. The shares
acquired were as follows:
Shares Acquired Total interests as at
17 March 2004 17 March 2004
John Williams 625 19,270
Linda Wilding 1,250 18,179
Alan Goldman 1,223 7,289
Martin Gatto 729 729
Richard Brooke 729 729
This Acquisition was announced to the Stock Exchange on
18 March 2004. Other than the above there has been no
change in the interests of the Directors in the share capital
of the Company between 29 February 2004 and the date
of the signing of this report, 20 May 2004.
No Director had any interest in the shares of any of the
Group’s subsidiaries during the 52-week period ended
29 February 2004.
The interests of the Directors in share options are set out in
the Report on Remuneration on page 28.
SHARE CAPITAL
At the 2003 Annual General Meeting, the shareholders
gave the Company authority to purchase up to a maximum
of 10% of its own shares. This authority will expire at the
conclusion of the forthcoming Annual General Meeting,
at which a Special Resolution will be proposed to renew
the authority for a further year.
The Board has not exercised this power during the 52 weeks
ended 29 February 2004, nor in the period between then
and the signing of this report (20 May 2004).
SUBSTANTIAL SHAREHOLDERS
At 20 May 2004 (the last practical date before the approval
of this Report), the Company had been notified of the
following interests in the shares of the Company, pursuant
to Sections 198-202 of the Companies Act 1985:
Number of shares %
Hermes Pensions Management 6,426,189 8.78
AllianceBernstein 5,206,454 7.12
Fidelity Investments 4,937,622 6.75
Morgan Stanley Investment Management 4,631,227 6.33
Goldman Sachs Asset Management 4,514,799 6.17
Devon County Council 3,661,962 5.00
SG Asset Management 3,111,659 4.25
Legal & General Investment 2,616,275 3.58
MLIM 2,509,057 3.43
Capital Group 2,500,000 3.42
BGI 2,262,955 3.09
Invesco 2,209,756 3.02
DIRECTORS’ RESPONSIBILITY FOR
THE FINANCIAL STATEMENTS
Company Law requires the Directors to prepare financial
statements for each financial year that give a true and fair view
of the state of affairs of the Company and the Group, and of
the profit or loss of the Group for that period. In preparing
the financial statements, the Directors are required to:
i. select suitable accounting policies and then apply
them consistently;
ii. make judgements and estimates that are reasonable
and prudent;
iii.state whether applicable accounting standards have been
followed, subject to any material departures disclosed
and explained in the financial statements;
iv.prepare the financial statements on the going concern
basis, unless it is inappropriate to assume that the Group
will continue in business.
The Directors confirm that they have complied with the
above requirements in preparing the financial statements.
The Directors are responsible for maintaining proper
accounting records that disclose with reasonable accuracy
at any time the financial position of the Company and the
Group, and to enable them to ensure that the financial
statements comply with the Companies Act 1985. They are
also responsible for safeguarding the assets of the Company
and the Group and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and
integrity of the website. Legislation in the UK concerning
the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
GOING CONCERN
The Directors have made enquiries into the adequacy of
the Company’s financial resources and, having conducted
a review of the Company’s budget and medium term plans
which include capital expenditure projections and cash flow
forecasts, have satisfied themselves that adequate resources
exist to ensure that the Company will continue in operational
existence for the foreseeable future. For this reason, the
Directors continue to adopt the going concern basis in
preparing the Company’s financial statements.
AUDITORS
PricewaterhouseCoopers LLP have indicated their willingness
to continue in office, and a resolution for their re-appointment
will be proposed to the Annual General Meeting.
By Order of the Board
HENRY ANDREW WILLITS
COMPANY SECRETARY
20 MAY 2004 24 LUMINAR PLC Annual Report and Accounts 2004
CORPORATE GOVERNANCE STATEMENT 2004
APPLICATION OF PRINCIPLES
This statement describes how the Company applies the
principles contained within the Combined Code appended
to the Listing Rules of the Financial Services Authority.
The Company has noted that the Financial Reporting Council
issued a revised version of the Code in July 2003, which is
effective for reporting periods beginning on or after November
2003. The Board is committed to working towards meeting
the standards set out in the revision to the Combined Code,
and to full explanation to shareholders where a divergence
from the Code is considered desirable. The Company has
prepared a full analysis of the new requirements and the
Board will consider the implementation of any appropriate
changes in the current year.
DIRECTORS
The Board is responsible for setting the Group’s strategic
direction, the establishment of Group policies and internal
controls, and the monitoring of operational performance.
It meets regularly throughout the year and, in addition to
the routine reporting of financial and operational issues,
reviews each of its trading divisions and key functions in detail.
The Board has a schedule of matters specifically reserved
to it for decision and delegates certain powers to the Board
Committees and to the Executive Directors collectively and
individually. The Schedule of reserved matters is periodically
reviewed by the Board and presently includes annual budgets,
strategic plans, approval of major capital expenditure and
significant financing.
Information is provided to all Board members in the week
prior to a Board meeting to enable the Directors to consider
the issues for discussion, and to request clarification or
additional information. The Board regularly reviews the type
and amount of information provided. The Board meets eight
times a year and, in addition, has an Away Day in January
for full consideration of strategic issues facing the Company.
All Directors have access to the advice of the Company
Secretary, who is responsible to the Board for ensuring that
procedures are followed. During the year, Mr H A Willits,
a Solicitor, was appointed as the Secretary. The appointment
and removal of the Company Secretary is reserved for the
consideration of the Board as a whole.
In addition, there is an agreed procedure for seeking
independent professional advice at the Company’s expense.
On appointment to the Board, every Director is provided
with opportunities for appropriate training to enable them
to discharge their duties as a Director. It is the intention of
the Company to create opportunities for new Non-Executive
Directors to meet with significant shareholders should this
be requested by them.
The Board consists of the Chairman, six Non-Executive
Directors and four Executive Directors. This provides
a balance whereby no individual or small group can dominate
the Board’s decision-making. The Chairman of the Board
is Keith Hamill. Stephen Thomas is Chief Executive and is
responsible for the executive leadership and co-ordination
of the Company’s business activities. John Williams was the
Senior Independent Director during the year under review;
with his retirement at the 2004 Annual General Meeting, this
role will be assumed by another of the Non-Executive Directors
who will be chosen following the Annual General Meeting.
The Non-executive Directors have met without the chairman
or the Executive Directors and the senior Independent
Director , John Williams, has provided feedback to the Chairman
following this meeting.
Although Linda Wilding served on the Board prior to the
Company’s flotation, the Board has concluded that the nature
of changes to the capital structure, size and scale of the
Company, together with her limited financial dependency
on the Company and her expertise and professionalism
mean that it is appropriate and in the best interests of
the Company and the shareholders to regard her as an
independent Director with her term of office commencing
when she was re-appointed to the Board on 3 November 1998.
Board members are appointed by the Board on the
recommendation of the Nominations Committee, which
is chaired by the Chairman and consists of all the Non-
Executive Directors. The Company’s Articles of Association
provide that one-third (or the number nearest to but
not exceeding one-third) of the Directors shall stand for
re-election at each Annual General Meeting. Furthermore,
the Articles of Association require a Director to stand for
re-election if they were not appointed or re-appointed
at either of the last two Annual General Meetings. Newly
appointed Directors are required to retire and seek
shareholder election at the first Annual General Meeting
after their appointment. Therefore, Martin Gatto, Richard
Brooke, David Longbottom and Linda Wilding will all seek
re-election at the Annual General Meeting.
All Non-Executive Directors are appointed for a three-year
term. A Non-Executive Director may be appointed for
a further three-year term by agreement with the Company.
If appropriate, and following review, a further term of
three years may be agreed. In addition, the Board are
implementing arrangements for the performance and
contribution of the Non-Executive Directors and the
Chairman, to be assessed on an annual basis.
The Chairman of the Board has instigated a review of the
effectiveness of the Board. This review, carried out by the
Chairman, involved full consultation with all the Directors
and the Company Secretary. The conclusions of the review
have been discussed by the Board as a whole and will be
kept under review during the forthcoming year. Annual Report and Accounts 2004 LUMINAR PLC 25
BOARD COMMITTEES
In accordance with the Combined Code and corporate
governance best practice, the Board has established
a number of committees. All of the Committees have
written terms of reference, approved by the Board,
which are described below.
AUDIT COMMITTEE
The Audit Committee is chaired by Keith Hamill and also
comprised during the financial year of John Williams,
Michael Payne, Martin Gatto and Richard Brooke. During the
year, Robert Wickman and Michael Payne stood down from
the Committee following retirement from the Board.
The Committee meets at least three times a year and reports
to the Board on all matters relating to the regulatory and
accounting requirements that may affect the Group,
together with the financial reporting and internal control
procedures including the annual and interim financial
statements. In addition, the Committee ensures that an
objective and professional relationship is maintained with
the external auditors, with particular regard to the nature
and extent of any non-audit functions they provide.
During the financial year ended 29 February 2004, the
Company’s external auditors have provided advice to
the Company, including a reorganisation of the Company’s
subsidiaries, which was completed in August 2003.
The external auditors may attend all meetings of the Audit
Committee and have direct access to the Committee and
its Chairman at all times. The Executive Directors are not
members of the Committee, but may attend meetings of
the Committee as necessary to facilitate its business.
The Company has an internal audit function, which is charged
with ensuring adequate controls exist and are complied with
at a unit level over cash and stock. They also ensure that
the standard of operation at unit level is compliant with the
requirements of the local authorities for that area, and other
statutory compliance.
To comply with the provisions of the combined code,
Keith Hamill will stand down as Chairman of the Committee
following the Annual General Meeting in July. The Committee
will select a new Chairman at that time.
REMUNERATION COMMITTEE
The Remuneration Committee is chaired by Linda Wilding,
and consists of all the Non-Executive Directors.
Robert Wickham and Michael Payne stood down from the
Committee during the year. Keith Hamill retired from the
Committee with effect from 1 March 2004 but is invited
to attend Committee meetings. Martin Gatto and Richard
Brooke attended meetings of the Committee following their
appointment in January 2004 but did not officially join the
Committee until 1 April 2004.
The Committee operates within agreed terms of reference
in advising the Board on the remuneration policy for the
Executive Directors and senior executives. When making
its decisions, the views of the Chief Executive are considered
and appropriate professional advice is sought where needed.
The Board, excluding the Non-Executive Directors, review
the fees for Non-Executive Directors annually.
Professional advisers consulted during the year were Keplar
Associates and Watson Wyatt, who did not provide any other
services to the Company.
The Directors’ Report on Remuneration, which has been
prepared in accordance with the requirements of the
Directors’ Remuneration Report Regulations 2002 and
approved by the Board, is set out on pages 28 to 34.
NOMINATIONS COMMITTEE
The Nominations Committee is chaired by John Williams
and also consists of all the Non-Executive Directors.
Following John Williams’ retirement at the AGM, it will
be chaired by Keith Hamill. It monitors and reviews the
membership of and succession to the Board of Directors,
and makes recommendations to the Board, inter alia, on
the identification and recruitment of potential Executive
and Non-Executive Directors.
During the year, two Non-Executive Directors, Martin Gatto
and Richard Brooke, joined the Board with effect from
1 January 2004. In recommending these appointments,
the Committee reviewed the skills and experience represented
on the Board and identified areas where additional skills
would enhance the effectiveness of the Board. A third
new Non-Executive Director, David Longbottom, joined
the Board in April of this year. The backgrounds and skills
of these Directors are set out on page 20 of this Report.
The Directors’ Report sets out details of the skills and
experience of Mr Gatto, Mr Brooke and Mr Longbottom,
which form the basis of the recommendation to shareholders
that they be elected as Directors of the Company.
The Committee, having regard to the direction of the Combined
Code, considers that Ms Wilding continues to be effective
and committed, and recommends her to the shareholders
for re-election on this basis.
RISK MANAGEMENT COMMITTEE
The Board is responsible for the Company’s risk management
process. It has delegated responsibility for implementing an
appropriate risk management programme to a committee
comprising Andrew Burns, John Williams, Alan Goldman,
Henry Andrew Willits (Company Secretary) and Tony Steed,
who has responsibility for health and safety issues. The Board
sets guidelines on the general level of risk that is acceptable
and has a considered approach to evaluating risks and
controls. More details of the operation of this process are
given in the Internal Controls section of this Report. Following
the retirement of John Williams, Keith Hamill will become
Chairman of the committee immediately following the
Annual General Meeting. 26 LUMINAR PLC Annual Report and Accounts 2004
EXECUTIVE COMMITTEE
The Executive Committee consists of Stephen Thomas,
who is Chairman of the Committee, Andrew Burns, Alistair
Burford and Brendan McLoughlin. The Company Secretary
also attends all meetings of the Committee. This Committee
exercises the day-to-day management function of the
Company. The Committee meets weekly and considers
amongst its standing agenda items all capital expenditure,
revenue expenditure not authorised by the Executive
Directors within their individual authority levels, regular
reports from the Directors and a regular review of the
strategic aims of the Company.
CAPITAL COMMITTEE
The creation of the Capital Committee received Board
approval in September 2003. Its membership consists of
Keith Hamill, who chairs the Committee, John Williams and
the four Executive Directors. The function of the Committee
is threefold. First, to oversee the capital expenditure of the
Company. Secondly, the committee has responsibility for
capital expenditure planning and budgeting. Thirdly, to
exercise a limited delegated function to approve capital
expenditure up to an agreed limit. Expenditure that exceeds
the agreed limit is approved by the full Board. At present
the Committee has delegated authority from the Board up
to a limit of £1m.
RISK MANAGEMENT
The Company continued to invest significant resources in
its Risk Management processes and function. More details of
the operation of the Company’s risk management strategies
are given below.
(a) Internal control
The Board is responsible for maintaining a sound system
of internal control and for reviewing its effectiveness. The
system can only manage rather than eliminate risk and can
only provide reasonable and not absolute assurance against
material misstatement or loss.
The Board confirms that there is an ongoing process for
identifying, evaluating and managing the significant risks
faced by the Company. This was introduced during the year
to 25 February 2001 and has remained in place up to
the date of approval of the Annual Report and Accounts.
The process is regularly reviewed by the Board.
The Combined Code requires that the Directors review the
effectiveness of the Company’s system of internal control,
which includes financial, operational, compliance and risk
management controls.
The Board has reviewed the effectiveness of the system
of internal control. As part of the review process, the Risk
Management Committee carried out a detailed review of
the current system of internal control and, in particular, the
process for identifying and evaluating the significant risks
affecting the business and the policies and procedures by
which these risks are managed. During the review process,
members of the Risk Management Committee had the
opportunity to discuss any areas of concern with management.
In order to ensure that the system of internal control becomes
embedded in the operations and culture of the Company,
management are required to identify and evaluate the
significant risks applicable to their areas of business and
design and operate suitable controls. These risks are assessed
on a continual basis and may relate to internal and external
sources including disruption in information systems,
competition and changes in the regulatory environment.
To further improve the monitoring of risks, the Company
has recently installed a computerised risk management
system. The system is in the first stage of roll-out and will
further ensure that the Company’s internal control procedures
become embedded in the culture of the Company.
In addition, the Board has established a Risk Management
Committee that meets at least three times a year and whose
main purposes are as follows:
> To review, on behalf of the Board, the key risks inherent
in the business and the system of control necessary to
manage such risks and present their findings to the Board.
> To reinforce management’s control consciousness
and foster a culture within the Group that emphasises
risk management.
> To keep under review the effectiveness of the Company’s
risk management infrastructure.
> To consider the risks of new ventures and other
strategic initiatives.
In addition to the major risk review process, the Company
operates under an established internal control framework,
the key features of which are as follows:
(b) Decision-making
The full Board meets regularly and has adopted a schedule
of matters which are required to be brought to it for decision,
thus ensuring it maintains control over appropriate strategic,
financial, organisational, compliance and risk issues.
A meeting of the Executive Directors takes place each week
to make decisions relating to investment issues such as
property acquisitions, capital expenditure and important
operational issues. The Company Secretary attends these
meetings to ensure that procedures are followed and decisions
minuted. The Operations Committee also meets on a weekly
basis to review financial and operating performance. These
meetings are attended by each of the Managing Directors
and any issues are reported through to the meeting of
the Executive Directors. The Board has put in place an
organisational structure with clearly defined lines of
responsibility and delegation of authority. The structure
is reviewed from time to time to ensure that appropriate
controls exist and that financial and operational issues
are dealt with in an effective manner.
(c) Financial and operational controls
There are established procedures for budgeting and planning
capital expenditure, together with reporting systems for
monitoring the Group’s business and performance.
CORPORATE GOVERNANCE STATEMENT 2004
CONTINUED Annual Report and Accounts 2004 LUMINAR PLC 27
> There is a rolling three-year forecast in place, which is
used to assess the financial impact of the Company’s
strategy and there is a comprehensive budgeting system
with an annual budget (approved by the Board), half-yearly
budget and monthly forecasts for the remainder of the
financial period. A monthly report to the Board details the
financial performance of the Group for the preceding period
versus budget and includes a forecast of future profitability.
> Management is accountable to the Directors for the
implementation of the system of internal financial control
throughout the Group. This enables the Board to meet
its ongoing responsibilities for the integrity and accuracy
of the Company’s accounting records and ensures that
ongoing financial performance is monitored in a timely
and corrective manner and that risk is identified as early
as practicably possible. These controls include:
–Comprehensive budgeting systems with annual budgets
for sales, profits, cash and capital expenditure approved
by the Board.
–Detailed variance analysis of actual results compared to
budget on a period and year to date basis.
–Constant monitoring and regular review of sales, cash,
assets and operational compliance at unit level by the
internal audit function.
(d) Property acquisitions and investment appraisal
The Company has clearly defined guidelines for the acquisition
of properties and for capital expenditure. These include
annual budgets, detailed appraisal and review procedures,
levels of authority and due diligence requirements. In addition,
and as a further layer of control, the Capital Committee has
a review function in relation to the capital budget.
(e) Business unit controls
Controls and procedures, including information systems
controls, are detailed in procedure manuals and other written
instructions. Compliance with these procedures is reviewed
by the Company’s internal audit function and management
at divisional level.
(f) Information computer technology
The Company has completed an extensive reorganisation
of its ICT function aimed at closely aligning its strategy
with Information Technology Infrastructure Library Best
Practice guidelines.
One part of this reorganisation has been the outsourcing
of first line and field support to all the Company’s premises
nationally. This provides significant service improvements
and cost savings for its venues and the Company as a whole.
IT policies and procedures have been independently audited
to ensure control and provision of stability to the ICT function.
In line with risk governance procedures we have implemented
a full disaster recovery strategy, including multi-site failure
to ensure business continuity.
The Company’s extensive portfolio of applications designed
to automate and control its core business processes are being
extended from the administrative centres to our premises
nationally to provide automation and time-saving initiatives
for the employees operating those businesses. This provides
significant opportunities for the Company in the future.
The Company has equipped its premises with leading-edge
customer entertainment technology including digital media,
mobile and wireless CRM and customer loyalty systems.
Such systems are designed to engage the customer whilst
providing the business with demographic and micro marketing
analysis linked into our cutting-edge EPOS and CRM
systems. These systems allow the Company to
communicate directly with its customers and to target any
promotions or incentives accurately to the appropriate target
audience.
The Company utilises a dedicated customer data centre to
provide business managers and marketers with targeted
marketing across multiple channels, delivering excellent
return on investment to business units.
(g) Public liability
An electronic checking system has been developed to monitor
housekeeping and customer safety standards within the
Company’s venues. Initial trials demonstrated that the
scanning system assisted both operators and support
departments to provide a due diligence defence against
public liability claims. This has led to a marked reduction in the
number of public liability claims experienced by the Company.
(h) Health and safety
The Company continues to promote both the safety of its
customers and staff through its health and safety standards.
Regular health and safety audits (including 30 independent
audits a year carried out by the Company’s insurance brokers
Marsh) together with management training courses, ensure
that our customers benefit from the highest standards of
risk management. This focus on risk management has also
enabled the Company to reduce its insurance premiums
significantly for the forthcoming year.
The Company has introduced a new food safety system,
allowing it to demonstrate compliance with existing legislation
and the proposed changes in food legislation scheduled
for 2006. 28 LUMINAR PLC Annual Report and Accounts 2004
THE REMUNERATION COMMITTEE
During the year ending February 2004, the Remuneration
Committee consisted of the following Directors:
Linda Wilding (Chairman) John Williams
Keith Hamill Michael Payne
Alan Goldman
Robert Wickham and Michael Payne ceased to be members
of the Committee during the year, on their retirement as
Directors on 30 September 2003 and 29 February 2004
respectively. Keith Hamill retired from the Committee on
1 March 2004 but is invited to attend Committee meetings.
Martin Gatto, David Longbottom and Richard Brooke have
joined the Remuneration Committee since the year end.
The members of the Committee are independent Directors
who have no personal financial interest (other than as
shareholders) in the matters addressed by the Committee,
have no conflicts of interest arising from cross-directorships
and no day-to-day involvement in running the business of
the Company. The Committee has responsibility for making
recommendations to the Board on the Company’s general
policy on executive remuneration, and to determine, on
behalf of the Board, specific remuneration packages for
the Executive Directors. The Committee meets as required,
but at least four times a year. Its meetings are scheduled by
reference to its function and the discharge of its obligations
to oversee both the Company’s share option schemes and
other incentive plans.
During the year, the Committee retained Keplar Associates,
remuneration consultants, to advise on the Deferred Bonus
Plan and Watson Wyatt to advise on pension arrangements.
The remuneration of the Chairman is determined by the
Remuneration Committee (in the absence of the Chairman
and led by John Williams, the Senior Independent Director)
and the Board. The remuneration of the Non-Executive
Directors is determined by the Board, excluding the Non-
Executive Directors.
REMUNERATION POLICY
GENERAL
The Remuneration Committee determines the Company’s
policy on Executive Directors’ remuneration.
The Committee also offers supervisory assistance and
guidance to the Executive Directors in the remuneration
of senior employees and in the issue of share options and
other incentives to senior employees. The objectives of
the Committee’s policies are:
> To ensure that senior executive rewards and incentives
are directly aligned with the interests of the shareholders,
in order to optimise the performance of the Company and
create sustained growth in shareholder value.
> To provide the level of remuneration required to attract,
retain and motivate Executive Directors of an appropriate
calibre.
The cost and value of the components of the remuneration
package are considered as a whole and are designed:
> To ensure a proper balance of fixed and variable
performance-related components, linked to short
and longer-term objectives; and
> To reflect market competitiveness, taking account of
the total value of all the benefit components.
The benefit components contained in the total remuneration
package are:
(a) Basic salaries
Salaries and other benefits are reviewed annually, and the
Remuneration Committee takes into account the performance
of the individual, comparisons with peer group companies
within the industry, institutional guidelines and reports from
specialist consultants. The experience of the individual and
level of responsibility are also taken into account.
(b) Bonus
(i) Bonuses for year ended 29 February 2004
Bonus arrangements in place for the year ended 29 February
2004 enabled the Executive Directors to earn up to 75-100% of
salary subject to the attainment of specific and stretching
objectives which were set for each individual. The objectives
principally related to the financial performance of the Company,
and also included operational and functional performance.
The Executive Directors received bonuses relating to financial
performance and the achievement of personal objectives.
These amounted to 35 % of basic salary for Stephen Thomas,
75% for Brendan McLoughlin and 23% for Andrew Burns
and Alistair Burford. The financial objectives for the year
for profits were not achieved but those relating to cash flow
were achieved in full. Other objectives involved specific
matters relating to personal accountabilities, including new
unit and refurbishment targets – which were achieved.
(ii) New bonuses and deferred bonus plan
During the period ended 29 February 2004, and following
consultation with the major shareholders, the Company
asked the shareholders to approve a long-term incentive
plan for Executive Directors, called the Deferred Bonus Plan.
The shareholders approved this on 24 February 2004. Under
the Deferred Bonus Plan, the Executive Directors can now
earn up to 150% of salary if they achieve demanding and
specific objectives. The Plan provides a mix of short-term
and long-term incentives to the participants and the
Committee considers it to be a suitable vehicle to retain,
incentivise and reward Executive Directors.
The Remuneration Committee has set the objectives for
the year to 28 February 2005. These include Operating
profit performance, free cash flow and certain strategic
objectives. They are quantified and the achievement of
maximum bonuses will require performance significantly
above market expectations.
REMUNERATION REPORT Annual Report and Accounts 2004 LUMINAR PLC 29
Under the Plan 50% of the bonus accruing to the Executive
Directors will be deferred, being credited to the purchase
of a notional holding of Luminar plc shares within the Plan.
Shares to meet this notional holding may be purchased and
released to Directors from the Plan, three years after the
notional holding is credited, together with matching shares
contributed by the Company. Dividends on the notional
holding are accrued for the benefit of the Executive Director.
An award of matching shares will be made dependent on
performance over three financial years. The matching ratio
will depend upon the total shareholder return of the Company
relative to the total shareholder return of companies in the
FTSE 250 Index over that three year period. Matching shares
will be granted on the basis of the following ratios:
> Two matching shares for one initial share for top
decile performance
> One matching share for four initial shares for
median performance
> Pro rata on a straight-line basis between these points
> No matching for less than median performance
The Company has chosen to compare its total shareholder
return performance with the total shareholder return
of companies in the FTSE 250 Index over the three year
performance period. This Index has been selected because
of the difficulty of constructing a meaningful peer group for
the areas in which the Company trades.
Participants are required to pay the employer’s National
Insurance contributions.
In order to provide effective incentives over an appropriate
period the Remuneration Committee has decided to make
an initial contribution of £150,000 of notional shares in
relation to Stephen Thomas, who has deferred the receipt of
£50,000 of his bonus for the year to 29 February 2004 as a
contribution to the Plan.
Any participant in the Plan will not be eligible to receive share
option grants pursuant to either the approved or unapproved
Schemes, other than SAYE schemes. However, it is the
intention of the Committee to continue to use the grant
of share options for senior employees.
The Remuneration Committee will have discretion to settle
benefits under the plan in cash if considered appropriate.
The Board will determine whether it is appropriate to hedge
against potential liabilities under the Plan.
c) Share Options
The Company has two share option schemes – The 1996
and 1999 Schemes. The 1999 Scheme is approved by the
Inland Revenue.
During the year, the Remuneration Committee granted share
options to incentivise future performance. Shares were granted
to Executive Directors under the 1996 Executive Share Option
Scheme, which is not approved by the Inland Revenue.
The Committee set a performance condition in relation to
the grant of these options, in that growth in pre-tax Earnings
Per Share (EPS) must exceed RPI plus 3% compounded,
over the relevant three-year period. The achievement of the
condition is measured by reference to the annual accounts
of the Company for the relevant year, and Government
statistics for inflation. This measure was chosen as commonly
available and easily understood by the participants in
the scheme. The Remuneration Committee consults with
the external auditors to confirm the calculation of pre-tax
EPS growth.
Following the adoption by shareholders of the Deferred Bonus
Plan, it is now the policy of the Remuneration Committee
not to grant share options within the Executive Share Option
Schemes to Executive Directors in normal circumstances.
(d) Save-as-you-Earn Share Option Scheme
Since 1996 the Company has operated an all-employee
Save-As-You-Earn share option scheme. Executive Directors,
and employees of the Company with more than one year’s
service, may participate in the scheme. Options were granted
at the prevailing market rate, with no discount in the last
financial year.
Options are normally exercisable three years after the date
of grant. The Company intends to continue with this scheme.
(e) Warrant Scheme
On 22 February 1999, the shareholders of Luminar plc
approved the establishment of a discretionary Trust.
The Trust held approximately 3.2 million Warrants. Each
Warrant carried the right to subscribe for one Ordinary share
at a subscription price of £6.67 per share. At 29 February 2004,
the Trust held 1,620,129 Warrants, which are to be allocated
to employees in the absolute discretion of the Trustee who
may call for guidance from the Remuneration Committee.
The Warrant Scheme was subject to performance criterion
which were fully met by February 2002. An allocation of
50% of the Warrants was made by the Trustee in May 2002.
The Trustee has not made an further allocation.
The subscription period in the approved scheme provides
that the Warrants will lapse if not exercised in the period
of 28 days following the publication of the Annual Report for
the year ending on or around 28 February 2009.
SHARE OPTIONS – INTERESTS OF DIRECTORS
Details of each Director’s interests in the share options of
the Company are set out on pages 33 to 34 of this Report.
No other Director has been granted options over the shares
of the Company, or other group entities. The attention of
shareholders is drawn to the table in the Directors’ Report,
indicating the interests in Ordinary Shares and the number
of Warrants held by Directors. 30 LUMINAR PLC Annual Report and Accounts 2004
Owing to a change in legislation, for all awards of Share
Options after 2000 the participant and the Company are
required to pay National Insurance contributions relating
to the options. The Committee has recognised this in its
awards since that date.
None of the terms or conditions of an option grant were
varied during the year. All grants were undertaken on a
basis consistent with that described earlier in this Report,
and were granted at nil cost to the Directors. The right
to exercise the option is conditional on the relevant
performance condition being achieved.
The mid-market price of the Company’s shares at 29 February
2004 was £4.76, and for the year then ended the range was
between £2.75 and £4.95.
The unrealised gain for each Director on options for the year
is as follows:
Options 2004
£000’s £000’s
Stephen Thomas 197 197
Andrew Burns 91 91
Alistair Burford 34 34
Brendan McLoughlin 31 31
John Aust – –
EXECUTIVE DIRECTORS’ SERVICE CONTRACTS
The details of the service contracts of those who served as
Executive Directors during the year are as follows:
TARGETED REMUNERATION
The targeted composition of each Director’s remuneration
was as follows for the year ended 29 February 2004:
Performance-related Non-Performance-
related
Executive
Stephen Thomas 50% 50%
Andrew Burns 50% 50%
Alistair Burford 38% 62%
Brendan McLoughlin 38% 62%
Non-Executive
Keith Hamill 0% 100%
Alan Goldman 0% 100%
Linda Wilding 0% 100%
John Williams 0% 100%
Michael Payne 0% 100%
S Martin Gatto 0% 100%
Richard Brooke 0% 100%
David Longbottom 0% 100%
REMUNERATION REPORT
CONTINUED
Contract Unexpired Notice
term period Contract termination Period
Stephen C Thomas 12.4.1996 N/A 1 year 1 year’s salary plus pension, bonus,
PHI and car payments.
Andrew R Burns 2.9.1997 N/A 1 year 1 year’s salary plus pension, PHI and car payments.
Alistair G Burford 1.1.2002 N/A 1 year 1 year’s salary plus pension, PHI and car payments.
Brendan McLoughlin 1.1.2002 N/A 364 days Payment equivalent to 364 days of final salary plus
bonus, pension, PHI and car payments.
John N Aust 1.1.2000 N/A 1 year Mr Aust retired as a Director on 1.7.2003.
No termination payment was made. Annual Report and Accounts 2004 LUMINAR PLC 31
All of the Executive Directors are employed on rolling contracts
with a retirement age of 60.
During the period, as requested by some shareholders,
Stephen Thomas and the Company agreed an amendment
to his contract to reduce the notice period to 12 months.
The contracts of Mr Burns and Mr Burford contain a provision
entitling the Company to make a payment in lieu of notice.
No such provision is made in the contracts of Mr Thomas
and Mr McLoughlin. Mr Thomas is entitled, in the event of
his contract being terminated on grounds of redundancy or
in the event of wrongful dismissal, to a payment representing
the difference between the option price and the fair value of
any share options he holds at that date.
It is the policy of the Remuneration Committee to seek to
mitigate termination payments in appropriate circumstances.
EXECUTIVE DIRECTOR’S DETAILED EMOLUMENTS
Full details of the emoluments of the Directors, relating
to the year ended 29 February 2004 are as follows:
Salary Benefits Total Total
& Fees in Kind Bonus 2004 2003
£000’s £000’s £000’s £000’s £000’s
Executive
Stephen Thomas 400 27 142 569 424
Andrew Burns 190 13 44 247 199
Alistair Burford 154 13 35 202 164
John Aust
a
4580 53 148
Brendan McLoughlin 144 23 108 275 162
a
John Aust retired as a Director of the Company on 1 July 2003.
Benefits in kind include the provision to every Executive
Director of a company car and private medical insurance.
NON-EXECUTIVE DIRECTORS’ SERVICE ARRANGEMENTS
All Non-Executive Directors are appointed for a three-year
term. A Non–Executive Director may be re-appointed for
a further three-year term by agreement with the Company.
If appropriate, and following review, a further term of
three years may be agreed. Either the Company or the Non-
Executive Director must give six months notice to terminate
the service arrangement.
The details of the service arrangements for the Non-
Executive Directors through the year were as follows:
Appointment date
Keith Hamill 16 January 2001
Alan Goldman
a
3 March 1998
Robert Wickham
b
5 September 2000
Linda Wilding 3 November 1998
John Williams
c
23 April 1996
Michael Payne
d
5 September 2000
Martin Gatto 1 January 2004
Robert Brooke 1 January 2004
David Longbottom
e
17 April 2004
a
Alan Goldman has announced that he will retire as a Director at the conclusion
of the 2004 Annual General Meeting.
b
Robert Wickham retired as a Director on 30 September 2003.
c
John Williams has announced that he will retire as a Director at the conclusion of
the 2004 Annual General Meeting.
d
Michael Payne retired as a Director on 29 February 2004.
e
David Longbottom was appointed on 17 April 2004.
NON-EXECUTIVE DIRECTOR’S DETAILED EMOLUMENTS
Details of the emoluments of the Non-Executive Directors,
relating to the year ended 29 February 2004, and entirely
composed of fees are as follows:
Salary Total Total
& Fees 2004 2003
£000’s £000’s £000’s
Non-Executive
Keith Hamill 75 75 75
Alan Goldman 30 30 30
Robert Wickham
a
18 18 30
Linda Wilding 30 30 30
John Williams 30 30 45
Michael Payne
b
30 30 30
Martin Gatto
c
6 6 0
Richard Brooke
c
6 6 0
a
Robert Wickham retired as a Director of the Company on 30 September 2003.
b
Michael Payne retired as a Director of the Company on 29 February 2004.
c
Martin Gatto and Richard Brooke were appointed as Directors on 1 January 2004.
The Non-Executive Directors (excluding Keith Hamill) receive
cash payments equivalent to £20,000 and receive the balance
of £10,000 in shares in the Company. The shareholdings of all
the Directors are listed in this Report. 32 LUMINAR PLC Annual Report and Accounts 2004
DIRECTORS PENSION ENTITLEMENTS
PENSION POLICY
It is the policy of the Remuneration Committee that all
Executive Directors will be invited to join the Luminar Group
pension plan, which has been approved by the Inland
Revenue. The Scheme is a contributory, defined contribution
scheme and also provides for dependent’s pensions and
lump sums on death in service of four times basic salary.
The Company makes no pension provision in respect of the
Non-Executive Directors.
For each Executive Director, the payments made by the
Company in the year in respect of their pension provisions
are as follows:
2004 2003
£000’s £000’s
Stephen Thomas 185 370
Andrew Burns 29 28
Alistair Burford 23 22
John Aust
a
7 19
Brendan McLoughlin 22 21
a
John Aust retired as a Director of the Company on 1 July 2003.
The Company makes normal pension contributions of 25%
of basic salary to Stephen Thomas and 15% of basic salary
to the other Executive Directors. Over recent years additional
payments have been made for Stephen Thomas as part of
his Remuneration arrangements. These are partly held in
the Pension Plan and partly held as a Deferred Unapproved
Retirement Benefit Scheme the funds for which are held
in a segregated bank account. The amount in this account
at the 29 February 2004 was £245,000.
TOTAL SHAREHOLDER RETURN GRAPH
Reproduced below is a line graph indicating the Total
Shareholder Return (calculated in accordance with the
Director’s Remuneration Report Regulations 2002) for
a shareholding in Luminar plc, and a notional shareholding
in the FTSE 250 Index.
The Directors have chosen to compare its total shareholder
return performance with the total shareholder return of
companies in the FTSE 250 Index.This index has been selected
because of the difficulty of constructing a meaningful peer
group for the areas in which The Company trades.
REMUNERATION REPORT
CONTINUED
0
20
40
60
80
100
120
140
Total shareholder return
99 00 01 02 03 04
● Luminar
● FTSE 250 Annual Report and Accounts 2004 LUMINAR PLC 33
INTEREST OF THE DIRECTORS IN THE SHARE OPTIONS OF THE COMPANY
STEPHEN THOMAS
At
Earliest Exercise At 2 March Granted Exercised Lapsed 29 February
Date of exercise Expiry price 2003 in year in year in year 2004
Grant date date £ No No No No No
1996 Executive Share Option Scheme (Unapproved)
18/11/98 18/11/01 17/11/08 6.640 121,500 – – – 121,500
22/02/99 22/02/02 21/02/09 8.050 50,000 – – – 50,000
11/07/00 11/07/03 10/07/10 7.140 500,000 – – – 500,000
04/07/01 04/07/04 03/07/11 8.800 26,136 – – – 26,136
22/05/03 22/05/06 21/05/13 4.060 – 197,044 – – 197,044
697,636 197,044 – 894,680
1999 Executive Share Option Scheme (Approved)
04/07/01 04/07/04 03/07/11 8.800 3,409 – – – 3,409
SAYE Share Option Scheme
13/07/01 01/09/04 28/02/05 7.280 1,330 – – – 1,330
702,375 197,044 – – 899,419
ANDREW BURNS
At
Earliest Exercise At 2 March Granted Exercised Lapsed 29 February
Date of exercise Expiry price 2003 in year in year in year 2004
Grant date date £ No No No No No
1996 Executive Share Option Scheme (Unapproved)
22/02/99 22/02/02 21/02/09 8.050 50,000 – – – 50,000
11/07/00 11/07/03 10/07/10 7.140 100,000 – – 100,000
04/07/01 04/07/04 03/07/11 8.800 12,500 – – 12,500
10/07/02 10/07/05 09/07/12 7.850 41,242 41,242
22/05/03 22/05/06 21/05/13 4.060 91,133 91,133
203,742 – 294,875
1999 Executive Share Option Scheme (Approved)
04/07/01 04/07/04 03/07/11 8.800 3,409 – – – 3,409
207,151 91,133 – 298,284 34 LUMINAR PLC Annual Report and Accounts 2004
INTEREST OF THE DIRECTORS IN THE SHARE OPTIONS OF THE COMPANY
ALISTAIR BURFORD
At
Earliest Exercise At 2 March Granted Exercised Lapsed 29 February
Date of exercise Expiry price 2003 in year in year in year 2004
Grant date date £ No No No No No
1996 Executive Share Option Scheme (Unapproved)
09/01/98 09/01/01 08/01/08 5.035 12,500 – – – 12,500
22/02/99 22/02/02 21/02/09 8.050 40,000 – – – 40,000
11/07/00 11/07/03 10/07/10 7.140 200,000 – – – 200,000
04/07/01 04/07/04 03/07/11 8.300 10,636 – – – 10,636
10/07/02 10/07/05 09/07/12 7.850 33,439 – – – 33,439
00/07/03 00/07/06 00/07/13 4.513 34,212 34,212
296,575 – – 330,787
1999 Executive Share Option Scheme (Approved)
04/07/01 04/07/04 03/07/11 8.800 3,409 – – – 3,409
SAYE Share Option Scheme
13/07/01 01/09/04 28/02/05 7.280 1,330 – – – 1,330
301,314 34,212 – 335,526
BRENDAN MCLOUGHLIN
At
Earliest Exercise At 2 March Granted Exercised Lapsed 29 February
Date of exercise Expiry price 2003 in year in year in year 2004
Grant date date £ No No No No No
Northern Leisure 1998 Executive Share Option Scheme (‘Rolled over’ options)
16/06/98 16/06/03 15/06/08 8.740 57,500 – – – 57,500
1996 Executive Share Option Scheme (Unapproved)
16/01/01 16/01/04 15/01/11 7.520 63,830 – – – 63,830
04/07/01 04/07/04 03/07/11 8.800 10,636 – – – 10,636
10/07/02 10/07/05 09/07/12 7.850 31,210 31,210
00/07/03 00/07/06 00/07/13 4.513 31,952
31,952 – –
163,176 – – 137,628
1999 Executive Share Option Scheme (Approved)
04/07/01 04/07/04 03/07/11 8.800 3,409 – – – 3,409
SAYE Share Option Scheme
13/07/01 01/09/04 28/02/05 7.280 1,330 – – – 1,330
167,915 31,952 – – 199,867
The above tables contain audited information.
REMUNERATION REPORT
CONTINUED Annual Report and Accounts 2004 LUMINAR PLC 35
REPORT OF THE INDEPENDENT AUDITORS
TO THE MEMBERS OF LUMINAR PLC
We have audited the Financial Statements that comprise
the Consolidated Profit and Loss Account, the Balance Sheets,
the Consolidated Cash Flow Statement and the Related Notes.
We have also audited the disclosures required by Part 3 of
Schedule 7A to the Companies Act 1985 contained in the
Directors’ Remuneration Report (‘the auditable part’).
RESPECTIVE RESPONSIBILITIES
OF DIRECTORS AND AUDITORS
The Directors’ responsibilities for preparing the Annual Report
and the Financial Statements in accordance with applicable
United Kingdom law and accounting standards are set out
in the statement of Directors’ responsibilities. The Directors
are also responsible for preparing the Directors’
Remuneration Report.
Our responsibility is to audit the Financial Statements and
the auditable part of the Directors’ Remuneration Report in
accordance with relevant legal and regulatory requirements
and United Kingdom Auditing Standards issued by the Auditing
Practices Board. This report, including the opinion, has been
prepared for and only for the Company’s members as a body
in accordance with Section 235 of the Companies Act 1985
and for no other purpose. We do not, in giving this opinion,
accept or assume responsibility for any other purpose or
to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed
by our prior consent in writing.
We report to you our opinion as to whether the Financial
Statements give a true and fair view and whether the
Financial Statements and the auditable part of the Directors’
Remuneration Report have been properly prepared in
accordance with the Companies Act 1985. We also report
to you if, in our opinion, the Directors’ Report is not consistent
with the Financial Statements, if the Company has not kept
proper accounting records, if we have not received all the
information and explanations we require for our audit,
or if information specified by law regarding Directors’
remuneration and transactions is not disclosed.
We read the other information contained in the Annual Report
and consider the implications for our report if we become aware
of any apparent misstatements or material inconsistencies
with the financial statements. The other information comprises
only the Chairman’s Statement, the Chief Executive’s
Statement, the Finance Director’s Review, the Directors’
Report, the unaudited part of the Directors’ Remuneration
Report and the Corporate Governance Statement.
We review whether the Corporate Governance Statement
reflects the Company’s compliance with the seven
provisions of the Combined Code issued in June 1998
specified for our review by the Listing Rules of the Financial
Services Authority, and we report if it does not. We are not
required to consider whether the Board’s statements on
internal control cover all risks and controls, or to form an
opinion on the effectiveness of the Group’s corporate
governance procedures or its risk and control procedures.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with auditing standards
issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the
amounts and disclosures in the Financial Statements and
the auditable part of the Directors’ Remuneration Report.
It also includes an assessment of the significant estimates
and judgements made by the Directors in the preparation
of the Financial Statements, and of whether the accounting
policies are appropriate to the Company’s circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary
in order to provide us with sufficient evidence to give
reasonable assurance that the Financial Statements and
the auditable part of the Directors’ Remuneration Report
are free from material misstatement, whether caused by
fraud or other irregularity or error. In forming our opinion
we also evaluated the overall adequacy of the presentation
of information in the Financial Statements.
OPINION
In our opinion:
> the financial statements give a true and fair view of
the state of affairs of the Company and the Group at
29 February 2004 and the loss and cash flows of the
Group for the year then ended;
> the Financial Statements have been properly prepared
in accordance with the Companies Act 1985; and
> those parts of the Directors’ Remuneration Report
required by Part 3 of Schedule 7A to the Companies Act
1985 have been properly prepared in accordance with
the Companies Act 1985.
PRICEWATERHOUSECOOPERS LLP
REGISTERED AUDITORS AND CHARTERED ACCOUNTANTS
20 MAY 2004 36 LUMINAR PLC Annual Report and Accounts 2004
PRINCIPAL ACCOUNTING POLICIES
In accordance with FRS18, the Directors have reviewed the
accounting policies of the Group set out below and consider
them to be appropriate.
BASIS OF PREPARATION
The financial statements have been prepared in accordance
with applicable accounting standards, the Companies Act
1985 and under the historical cost convention except that
certain freehold and leasehold properties are shown at their
revalued amounts. The accounting policies are set out below
and have remained unchanged from the previous year.
BASIS OF CONSOLIDATION
The principles of merger accounting have been applied
on the original formation of Luminar plc. All subsequent
acquisitions have been accounted for using the principles
of acquisition accounting.
The Group financial statements consolidate those of the
Company and of its subsidiary undertakings (see note 10)
drawn up to 29 February 2004. The results of subsidiary
undertakings acquired during the year have been included
from the date of acquisition. Profits or losses on intra-group
transactions are eliminated in full.
On acquisition of a subsidiary, all of the subsidiary’s assets
and liabilities, which exist at the date of acquisition, are
recorded at their fair values reflecting their condition at that
date. Goodwill arising on consolidation, representing the
excess of the fair value of the consideration given over the
fair values of the identifiable net assets acquired, is capitalised
and is amortised on a straight-line basis over its useful
economic life.
The Company was entitled to merger relief offered by
section 131 of the Companies Act 1985 in respect of the
consideration received in excess of the nominal value of
the equity shares issued in connection with the acquisition
of Northern Leisure PLC.
FINANCIAL INSTRUMENTS
The Group uses derivative financial instruments, primarily
to manage exposures to fluctuations in interest rates.
Discounts and premiums are charged or credited to the profit
and loss account over the life of the asset or liability to which
they relate.
Discounts or premiums on financial instruments designated
as interest rate hedges are reflected as adjustments to
interest payable.
Income and expenditure arising on financial instruments
is recognised on the accruals basis, and credited or charged
to the profit and loss account in the financial period to which
it relates.
Interest differentials, under which the amounts and periods
for which interest rates on borrowing are varied, are reflected
as adjustments to interest payable.
INTANGIBLE FIXED ASSETS AND GOODWILL
Trademarks purchased separately from a business are
included at cost and amortised over their useful economic
lives as shown in note 8.
Purchased goodwill is capitalised and is amortised on a
straight-line basis over its estimated useful economic life,
which does not exceed 20 years.
TURNOVER
Turnover is the total amount receivable by the Group for
goods supplied and services provided, excluding VAT and
is recognised on delivery of the goods/services.
TANGIBLE FIXED ASSETS AND DEPRECIATION
Tangible fixed assets are stated at cost, net of depreciation
and any provision for impairment. Finance costs on fixed asset
additions are capitalised during the period of construction
and written off as part of the total cost. No depreciation is
charged during the period of construction.
Depreciation is calculated to write down the cost less estimated
residual value of all tangible fixed assets by equal annual
instalments over their estimated useful economic lives.
The periods generally applicable are:
> Freehold and long leasehold land and buildings and
related structural fixtures and fittings – 50 years
> Short leasehold land and buildings and related structural
fixtures and fittings – over the period of the lease
> Other fixtures and fittings, furniture and equipment –
between two years and 10 years.
> Motor vehicles – three years.
Any impairment made on tangible fixed assets is determined
as the difference between the net present value of income
generating units, i.e. discrete trading units, and their carrying
value. The net present value is calculated by discounting an
estimate of future cash flows by the Company’s weighted
average cost of capital. If net realisable value is higher than
net present value the net realisable value is compared to the
carrying value. Annual Report and Accounts 2004 LUMINAR PLC 37
INVESTMENTS
Investments are stated at cost less amounts written off.
STOCKS
Stocks are stated at the lower of cost and net realisable value.
TAXATION
UK corporation tax is provided at amounts expected to be paid
(or recovered) using the tax rates and laws that have been
enacted or substantially enacted by the balance sheet date.
Deferred taxation is recognised in respect of all timing
differences that have originated but not reversed at the
balance sheet date, where transactions or events that result
in an obligation to pay more tax in the future, or a right to pay
less tax in the future, have occurred at the balance sheet date.
Timing differences are differences between the Company’s
taxable profits and its results as stated in the financial
statements that arise from the inclusion of gains and losses
in tax assessments in periods different from those in which
they are recognised in the financial statements.
A net deferred tax asset is regarded as recoverable and
therefore recognised only when, on the basis of all available
evidence, it can be regarded as more likely than not that there
will be suitable taxable profits from which the future reversal
of the underlying timing differences can be deducted.
Deferred tax is measured at the average tax rates and laws
that are expected to apply in the periods in which the timing
differences are expected to reverse, based on tax rates and
laws that have been enacted or substantively enacted by
the balance sheet date. Deferred tax assets and liabilities
recognised have not been discounted.
LEASED ASSETS
All leases are regarded as operating leases and the payments
made under them are charged to the profit and loss account
on a straight-line basis over the lease term.
CONTRIBUTIONS TO PENSION FUNDS
DEFINED CONTRIBUTION SCHEMES
The pension costs charged against profits represent the
amount of the contributions payable to the schemes in
respect of the accounting period. CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE 52 WEEKS ENDED 29 FEBRUARY 2004
38 LUMINAR PLC Annual Report and Accounts 2004
52 weeks ended 52 weeks ended
29 February 2004 29 February 2004
Pre-Exceptionals Exceptionals 52 weeks ended 52 weeks ended
& Goodwill & Goodwill 29 February 2004 2 March 2003
Notes Amortisation Amortisation Total Total
£m £m £m £m
TURNOVER 1 399.7 – 399.7 392.4
Cost of sales (76.6) – (76.6) (74.6)
GROSS PROFIT 323.1 – 323.1 317.8
ADMINISTRATIVE EXPENSES
– pre goodwill amortisation (247.9) (60.0) (307.9) (236.5)
– goodwill amortisation – (12.9) (12.9) (12.9)
– total (247.9) (72.9) (320.8) (249.4)
OPERATING PROFIT
– pre goodwill amortisation 75.2 (60.0) 15.2 81.3
– goodwill amortisation – (12.9) (12.9) (12.9)
– total 75.2 (72.9) 2.3 68.4
Net interest 2 (13.6) – (13.6) (14.7)
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
– pre goodwill amortisation 61.6 (60.0) 1.6 66.6
– goodwill amortisation – (12.9) (12.9) (12.9)
– total1 61.6 (72.9) (11.3) 53.7
Tax on (loss) / profit on ordinary activities 4 (17.4) 3.2 (14.2) (22.7)
PROFIT/(LOSS) FOR THE FINANCIAL PERIOD 5 44.2 (69.7) (25.5) 31.0
Dividends 6 (9.2) – (9.2) (8.3)
PROFIT/(LOSS) TRANSFERRED TO RESERVES 19 35.0 (69.7) (34.7) 22.7
EARNINGS PER SHARE
Basic 7 (34.9)p 42.4p
Diluted 7 (34.9)p 42.4p
EARNINGS PER SHARE BEFORE EXCEPTIONALS
& GOODWILL AMORTISATION
Basic 7 60.4p 60.0p
Diluted 7 60.4p 60.0p
DIVIDEND PER SHARE 12.54p 11.40p
There were no recognised gains or losses other than the (loss)/profit for the financial period.
The above results relate to continuing operations.
The accompanying accounting policies and notes form an integral part of these financial statements. Annual Report and Accounts 2004 Luminar plc 39
CONSOLIDATED BALANCE SHEET
AT 29 FEBRUARY 2004
29 February 2004 29 February 2004 2 March 2003 2 March 2003
Note £m £m £m £m
FIXED ASSETS
Intangible assets 9 212.8 225.7
Tangible assets 10 517.6 567.9
730.4 793.6
CURRENT ASSETS
Stocks 12 3.9 4.6
Debtors 13 8.0 10.3
Cash at bank and in hand 55.2 22.6
67.1 37.5
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 14 (105.8) (81.7)
NET CURRENT LIABILITIES (38.7) (44.2)
TOTAL ASSETS LESS CURRENT LIABILITIES 691.7 749.4
CREDITORS: AMOUNTS FALLING DUE
AFTER MORE THAN ONE YEAR 15 (205.5) (229.0)
PROVISIONS FOR LIABILITIES AND CHARGES 17 (19.9) (19.4)
466.3 501.0
CAPITAL AND RESERVES
Called up share capital 18 18.3 18.3
Share premium account 19 60.9 60.9
Capital reserve 19 2.3 2.3
Merger reserve 19 342.4 342.4
Profit and loss account 19 42.4 77.1
EQUITY SHAREHOLDERS’ FUNDS 20 466.3 501.0
The financial statements were approved by the Board of Directors on 20 May 2004.
ANDREW BURNS
FINANCE DIRECTOR
The accompanying accounting policies and notes form an integral part of these financial statements. COMPANY BALANCE SHEET
AT 29 FEBRUARY 2004
40 LUMINAR PLC Annual Report and Accounts 2004
29 February 2004 29 February 2004 2 March 2003 2 March 2003
Note £m £m £m £m
FIXED ASSETS
Investments 11 67.7 62.6
CURRENT ASSETS
Debtors 13 357.4 300.7
Cash at bank and in hand 0.1 –
357.5 300.7
Creditors: amounts falling due within one year 14 (86.8) (40.0)
NET CURRENT ASSETS 270.7 260.7
TOTAL ASSETS LESS CURRENT LIABILITIES 338.4 323.3
CREDITORS: AMOUNTS FALLING DUE AFTER MORE
THAN ONE YEAR 15 (205.5) (229.0)
132.9 94.3
CAPITAL AND RESERVES
Called up share capital 18 18.3 18.3
Share premium account 19 60.9 60.9
Profit and loss account 19 53.7 15.1
EQUITY SHAREHOLDERS’ FUNDS 132.9 94.3
The financial statements were approved by the Board of Directors on 20 May 2004.
ANDREW BURNS
FINANCE DIRECTOR
The accompanying accounting policies and notes form an integral part of these financial statements. CONSOLIDATED CASH FLOW STATEMENT
FOR THE 52 WEEKS ENDED 29 FEBRUARY 2004
Annual Report and Accounts 2004 LUMINAR PLC 41
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
Note £m £m
Net cash flow from operating activities 21 113.8 113.3
Returns on investment and servicing of finance 22 (13.6) (14.7)
Taxation (11.8) (15.2)
Capital expenditure and financial investment 22 (42.9) (73.4)
Acquisitions and disposals – (0.9)
Equity dividends paid (8.6) (7.6)
NET CASH INFLOW BEFORE FINANCING 36.9 1.5
Financing 22 (4.3) 7.3
INCREASE IN CASH IN THE PERIOD 24 32.6 8.8
The accompanying accounting policies and notes form an integral part of these financial statements. NOTES TO THE FINANCIAL STATEMENTS
FOR THE 52 WEEKS ENDED 29 FEBRUARY 2004
42 LUMINAR PLC Annual Report and Accounts 2004
1 TURNOVER AND PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
The turnover and operating profit by class of business are given on pages 10 and 12.
The profit on ordinary activities before taxation is stated after:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
Auditors’ remuneration
– audit services 0.2 0.1
– non audit services 0.4 –
Depreciation, amortisation & impairment 106.2 47.6
Operating lease rentals of land and buildings 23.3 19.1
Rents receivable and other income (1.2) (1.7)
2 NET INTEREST
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
On bank overdraft and loans (14.4) (15.3)
Loan note interest (0.1) (0.1)
(14.5) (15.4)
Capitalised interest 0.2 0.4
(14.3) (15.0)
Other interest receivable and similar income 0.7 0.3
(13.6) (14.7) Annual Report and Accounts 2004 LUMINAR PLC 43
3 DIRECTORS AND EMPLOYEES
Staff costs during the year were as follows:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
Wages and salaries 69.7 66.9
Social security costs 5.1 5.2
Other pensions costs 1.1 1.3
75.9 73.4
The Group operates defined contribution pension schemes. The assets of these schemes are held separately from those of the
Group. The pension cost is shown above.
The average number of employees of the Group during the period was:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
Administration centre 334 369
Operations 8,071 7,973
8,405 8,342
Remuneration in respect of Executive Directors of Luminar plc was as follows:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£000 £000
Emoluments 1,296 1,097
Gains made from the sale of share warrants – 3,405
Pension contributions to money purchase pension schemes 266 460
Management remuneration 1,562 4,962
Directors’ fees 227 240
1,789 5,202
During the year, five Directors (2003: five Directors) participated in a defined contribution pension scheme.
During the year, none of the Directors (2003:four Directors) sold share warrants in the company.
The amounts set out above include remuneration of the highest paid Director as follows:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£000 £000
Emoluments 569 424
Gains made on sale of share warrants – 2,472
Pension contributions to money purchase pension schemes 185 370
More detailed audited information concerning the emoluments and share warrants is shown in the Report of the
Remuneration Committee on pages 28 to 34. NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
44 LUMINAR PLC Annual Report and Accounts 2004
4 TAX ON PROFIT ON ORDINARY ACTIVITIES
(a) Analysis of charge in year
The taxation charge is based on the profit for the year and represents:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
CURRENT TAX
UK corporation tax on profits of the year 17.9 19.3
Adjustments in respect of previous years (4.2) –
Total current tax 13.7 19.3
DEFERRED TAX
Origination and reversal of timing differences:
current year 0.5 3.4
Total deferred tax 0.5 3.4
Tax on profit on ordinary activities 14.2 22.7
(b) Factors affecting tax charge for year
The tax assessed for the year is higher than the standard rate of corporation tax in the UK. The differences are explained
as follows:
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
(Loss)/profit on ordinary activities before tax (11.3) 53.7
(Loss)/profit on ordinary activities multiplied by standard
rate of corporation tax in the UK of 30% (2003: 30%) (3.4) 16.1
EFFECTS OF:
Expenses not deductible for tax purposes (0.7) 0.1
Non – deductible exceptional items 18.0 –
Goodwill amortisation 3.9 3.9
Capital allowances for year in excess of depreciation 0.1 (0.1)
Rollover relief on profit on disposal of property – (0.7)
Adjustments to tax charge in respect of previous year (4.2) –
Current tax charge for year 13.7 19.3
5 PROFIT FOR THE FINANCIAL YEAR
The holding Company has taken advantage of Section 230 of the Companies Act 1985 and has not included its own profit
and loss account in these financial statements. The Company profit after tax for the year was £47.8m (2003: £8.7m). Annual Report and Accounts 2004 LUMINAR PLC 45
6 DIVIDENDS
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
Equity dividends
Ordinary shares – interim dividend of 3.67p per share 2.7 2.4
Paid 9 January 2004 (2003: 3.34p per share)
Ordinary shares – proposed final dividend of 8.87p 6.5 5.9
per share (2003: 8.06p per share)
9.2 8.3
7 EARNINGS PER SHARE
The calculation of the basic earnings per share is based on the earnings attributed to ordinary shareholders divided by the
weighted average number of shares in issue during the year.
The calculation of diluted earnings per share is based on the basic earnings per share, adjusted to allow for the issue of
shares and the post tax effect of interest, on the assumed conversion of all dilutive options and other dilutive potential
ordinary shares.
Reconciliation of the earnings and weighted average number of shares used in the calculations are set out below.
2004 2003
Earning Weighted average Per Earnings Weighted average Per
£m number of shares share amount £m number of shares share amount
(Loss)/profit attributable
to shareholders (25.5) 31.0
Basic earnings per share 73,175,280 (34.9)p 73,152,125 42.4p
Dilutive effect of warrants
and options 21,001 12,861
Diluted earnings per share 73,196,281 (34.9)p 73,164,986 42.4p
The Group has provided an alternative calculation of earnings per share before goodwill amortisation and exceptional items
to provide a measure of performance more reflective of the trading of the Group.
2004 2003
Earning Weighted average Per Earnings Weighted average Per
£m number of shares share amount £m number of shares share amount
Profit attributable to
shareholders before adjustments
for goodwill amortisation and
exceptional items 44.2 43.9
Basic earnings per share 73,175,280 60.4p 73,152,125 60.0p
Dilutive effect of warrants
and options 21,001 12,861
Diluted earnings per share 73,196,281 60.4p 73,164,986 60.0p NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
46 LUMINAR PLC Annual Report and Accounts 2004
8 EXCEPTIONAL CHARGE
The Company incurred an exceptional charge during the period as follows:
£m
Provision for loss on future disposal of units 45.9
Impairment on fixed assets 12.0
Impairment on other assets 2.1
60.0
The exceptional charge reflects the reduction in the market value for leisure assets. This write-down does not indicate a
shortening in the estimated normal useful life of the assets employed in the business.
The cause of each element of the exceptional charge analysed above can be linked to the material deterioration in market
conditions experienced over the last 18 months.
9 INTANGIBLE FIXED ASSETS
Group
Goodwill Trademarks Total
£m £m £m
COST
At 2 March 2003 and 29 February 2004 258.9 0.1 259.0
AMORTISATION
At 2 March 2003 33.3 – 33.3
Charge 12.9 – 12.9
AT 29 FEBRUARY 2004 46.2 – 46.2
NET BOOK AMOUNT AT 29 FEBRUARY 2004 212.7 0.1 212.8
Net book amount at 2 March 2003 225.6 0.1 225.7
The carrying value at 29 February 2004 of goodwill is made up as follows:
Total
£m
Dancing units purchased from Allied Leisure plc on 6 December 1999 10.8
Acquisition of Northern Leisure PLC on 11 July 2000 198.4
Other units acquired 3.5
212.7
Goodwill is being amortised over 20 years being the Directors’ estimate of its useful economic life based on the assessment
of the industry in which the Group operates. Annual Report and Accounts 2004 LUMINAR PLC 47
10 TANGIBLE FIXED ASSETS
Group
Long Short Fixtures,
Freehold leasehold leasehold fittings,
land and land and land and furniture and Motor
buildings buildings buildings equipment vehicles Total
£m £m £m £m £m £m
COST
At 2 March 2003 164.5 18.7 148.8 324.1 3.1 659.2
Additions 2.2 – 0.4 49.1 0.8 52.5
Disposals (9.9) – (0.2) (7.3) (1.4) (18.8)
AT 29 FEBRUARY 2004 156.8 18.7 149.0 365.9 2.5 692.9
DEPRECIATION
At 2 March 2003 2.5 1.4 17.0 69.1 1.3 91.3
Charge 27.1 2.8 12.9 49.4 1.1 93.3
Disposals (3.2) – (0.2) (4.8) (1.1) (9.3)
AT 29 FEBRUARY 2004 26.4 4.2 29.7 113.7 1.3 175.3
NET BOOK AMOUNT AT
29 FEBRUARY 2004 130.4 14.5 119.3 252.2 1.2 517.6
NET BOOK AMOUNT AT
2 MARCH 2003 162.0 17.3 131.8 255.0 1.8 567.9
On 12 November 2003, an impairment review was carried out upon which a write down of £57.9m was made against tangible
fixed assets. This write down is included within the tangible fixed assets note above of which, £25.5m was made against
freehold land and buildings, £2.2m was made against long leasehold land and buildings, £6.2m was made against short
leasehold land and buildings with the remaining £24.0m being made against fixtures and fittings, furniture and equipment.
11 FIXED ASSET INVESTMENTS
Company
Shares in Loan to
subsidiary subsidiary
undertakings undertaking Total
£m £m £m
At 2 March 2003 38.1 24.5 62.6
Additions in the year 5.1 – 5.1
AT 29 FEBRUARY 2004 43.2 24.5 67.7
The additions relate to the acquisition of share capital in new subsidiaries that were set up during the year. These subsidiaries
are listed in the table below. NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
48 LUMINAR PLC Annual Report and Accounts 2004
11 FIXED ASSET INVESTMENTS CONTINUED
SUBSIDIARY UNDERTAKINGS
The Company’s principal subsidiary undertakings (which have been consolidated into these financial statements) are listed
below together with details of their businesses. The share capital consists of ordinary shares, all of which are wholly owned.
Class of Issued Proportion Nature of
share capitalshare capital hel d business
Luminar Leisure Limited Ordinary £28.3m 100% Licensed
premises
Luminar (Dancing Scotland) Limited Ordinary £1m 100% Licensed
premises
Luminar (Dancing North) Limited Ordinary £1m 100% Licensed
premises
Luminar (Dancing South) Limited Ordinary £1m 100% Licensed
premises
Luminar (Camden Palace) Limited Ordinary £0.1m 100% Licensed
Premises
Luminar (South East) Limited Ordinary £1m 100% Licensed
premises
Luminar (Entertainment) Limited Ordinary £1m 100% Licensed
premises
Evered Employee Benefit Trustees Limited Ordinary £10 100% Trustee
(registered in Jersey) company
Unless otherwise stated, all subsidiaries are registered in England and Wales.
12 STOCKS
Group Group Company Company
29 February 2004 2 March 2003 29 February 2004 2 March 2003
£m £m £m £m
Goods held for resale 3.9 4.6 – –
13 DEBTORS
Group Group Company Company
29 February 2004 2 March 2003 29 February 2004 2 March 2003
£m £m £m £m
Amounts owed by group undertakings – – 356.3 299.2
Other debtors 2.7 5.1 0.9 1.2
Prepayments and accrued income 5.3 5.2 0.2 0.3
8.0 10.3 357.4 300.7 Annual Report and Accounts 2004 LUMINAR PLC 49
14 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Group Group Company Company
29 February 2004 2 March 2003 29 February 2004 2 March 2003
£m £m £m £m
Bank loans and overdrafts (see note 16) 38.4 19.2 38.4 19.2
Trade creditors 7.6 8.2 – –
Amounts owed to group undertakings – – 36.8 10.8
Corporation tax 12.2 10.3 2.0 0.6
Social security and other taxes 7.4 6.5 0.2 0.1
Proposed dividends 6.5 5.9 6.5 5.9
Accruals and deferred income 33.7 31.6 2.9 3.4
105.8 81.7 86.8 40.0
15 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Group Group Company Company
29 February 2004 2 March 2003 29 February 2004 2 March 2003
£m £m £m £m
Bank loans (see note 16) 204.6 228.0 204.6 228.0
Loan notes (see note 16) 0.9 1.0 0.9 1.0
205.5 229.0 205.5 229.0
16 FINANCIAL INSTRUMENTS
The Group uses financial instruments in order to reduce its exposure to financial risk. The use of such financial instruments
constitutes an integral part of the group’s funding strategy. The Group manages its financial instrument credit risk by only
undertaking transactions with relationship banks, holding good credit ratings. Such transactions are governed by board
policies and procedures.
As all the Group’s operations are transacted in the reporting currency, there is no currency exposure.
Short-term debtors and creditors have been excluded from all the following disclosures.
Interest rate risk
The principal area of financial risk is interest rate risk.
The Group finances its operations through a mixture of retained profits and bank borrowings.
Interest rate risk on borrowings is minimised by using interest rate swaps and forward rate agreements.
It is considered appropriate to have between 40% and 50% of debt facility at fixed rates, depending on the maturity profile
of the Group’s outstanding facilities. NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
50 LUMINAR PLC Annual Report and Accounts 2004
16 FINANCIAL INSTRUMENTS CONTINUED
a) Interest rate exposure of financial liabilities
After taking into account the various interest rate swaps entered into by the group, the interest rate profile of the Group’s
financial liabilities at 29 February 2004 was:
Fixed rate weighted average
Fixed rate Floating rate Total Interest rate Time period
£m £m £m % Years
2004 135.9 108.0 243.9 5.4 1.7
2003 136.0 112.2 248.2 5.4 2.7
The floating rate borrowings bear interest at rates based on LIBOR for periods of between one month and six months.
b) Maturity analysis of financial liabilities
The maturity profile of the group’s financial liabilities as at the year-end was as follows:
Bank and other borrowings
Group Group Company Company
2004 2003 2004 2003
£m £m £m £m
Within one year or on demand 38.4 19.2 38.4 19.2
Between one and two years 52.1 38.4 52.1 38.4
Between two and five years 153.4 190.6 153.4 190.6
As at year end 243.9 248.2 243.9 248.2
c) Borrowing facilities
The Group’s undrawn floating facilities as at the year-end were as follows:
2004 2003
£m £m
Expiring after two years 40.5 55.5
40.5 55.5
Of these facilities, £35.5m is committed and secured by means of a floating charge over the Group’s current and future assets.
d) Fair values of financial assets and liabilities
At 29 February 2004 At 2 March 2003
Book value Fair value Book value Fair value
£m £m £m £m
PRIMARY FINANCIAL INSTRUMENTS HELD OR ISSUED
TO FINANCE THE GROUP OPERATIONS
Short-term financial liabilities and current portion
of long-term borrowings (38.4) (38.4) (19.2) (19.2)
Long-term borrowings (205.5) (205.5) (229.0) (229.0)
Cash at bank and in hand 55.2 55.2 22.6 22.6
DERIVATIVE FINANCIAL INSTRUMENTS HELD TO MANAGE
THE INTEREST RATE AND CURRENCY PROFILE
Interest rate swaps – (2.7) – (7.5)
The fair value of interest rate swaps have been determined with reference to market rates at the balance sheet date.
The fair values of all primary financial assets and liabilities are deemed to approximate to their book values.
e) Hedges on future transactions
The Group’s policy is to hedge interest rate risk by using interest rate swaps and forward rate agreements.
The unrecognised losses on interest rate swaps as at the balance sheet date are disclosed in Note (d).
f) Financial instruments held for trading purposes
The Group does not trade in financial instruments. Annual Report and Accounts 2004 LUMINAR PLC 51
17 PROVISIONS FOR LIABILITIES AND CHARGES
Deferred Tax
Group
£m
Provision at 2 March 2003 19.4
Deferred tax charge in profit and loss account for period 0.5
PROVISION AT 29 FEBRUARY 2004 19.9
Deferred taxation provided for in the accounts at the year-end represents provision at 30% on accelerated capital allowances.
18 SHARE CAPITAL
29 February 2004 2 March 2003
Number £m £m
AUTHORISED
Ordinary shares of 25p (2003: 106,000,000) 106,000,000 26.5 26.5
ALLOTTED CALLED UP AND FULLY PAID
Ordinary shares of 25p each (2003:73,175,280) 73,175,280 18.3 18.3
Allotments made during the period
During the year ended 29 February 2004, no allotments of shares were made.
1996 Executive Share Option Scheme
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
13/05/96 907 1.915 13/05/99 to 12/05/06
09/01/98 12,500 5.035 09/01/01 to 08/01/08
18/11/98 121,500 6.64 18/11/01 to 17/11/08
22/02/99 180,000 8.05 22/02/02 to 21/02/09
04/08/99 33,500 9.366 04/08/02 to 03/08/09
14/02/00 40,000 8.35 14/02/03 to 13/02/10
11/07/00 1,270,000 7.14 11/07/03 to 10/07/10
21/08/00 27,875 6.85 21/08/03 to 20/08/10
16/01/01 127,660 7.52 16/01/04 to 15/01/11
23/02/01 35,435 8.13 23/02/04 to 22/02/11
04/07/01 104,332 8.80 04/07/04 to 03/07/11
09/07/01 46,634 8.94 09/07/04 to 08/07/11
10/07/02 133,758 7.85 10/07/05 to 09/07/12
09/12/02 428,685 4.19 09/12/05 to 08/12/12
22/05/03 288,177 4.06 22/05/06 to 21/05/13
18/06/03 21,455 4.60 18/06/06 to 17/06/13
25/07/03 81,675 4.513 25/07/06 to 24/07/13
Save As You Earn Option Scheme
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
13/07/01 38,713 7.28 01/09/04 to 28/02/05
12/07/02 27,385 6.62 01/09/05 to 28/02/06
23/07/03 67,147 4.69 01/09/06 to 28/02/07 NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
52 LUMINAR PLC Annual Report and Accounts 2004
18 SHARE CAPITAL CONTINUED
1999 Company Share Option Plan
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
27/07/99 27,291 9.375 27/07/02 to 26/07/09
04/08/99 12,250 9.366 04/08/02 to 03/08/09
21/08/00 55,181 6.85 21/08/03 to 20/08/10
04/07/01 34,090 8.80 04/07/04 to 03/07/11
09/07/01 34,282 8.94 09/07/04 to 08/07/11
25/07/03 91,804 4.513 25/07/06 to 24/07/13
Northern Leisure 1998 Executive Share Options Scheme (‘Rolled over’ options)
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
16/06/98 319,750 8.74 16/06/03 to 15/06/08
01/12/99 10,435 6.80 01/12/02 to 30/11/04
Warrants
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
24/02/99 4,081,012 6.675 2003 to 2009
Warrants are only exercisable in a 28-day period starting with the publication of the audited accounts for the relevant year.
Mr Jools Holland
Number of Ordinary Exercise price Exercise
Date of Grant Shares under option £ period
03/07/01 50,000 8.77 03/07/06 to 02/01/07
The options granted to Mr Holland only become exercisable on the fifth anniversary of the grant date, and only if Mr Holland
is still involved with the Company and its Jam House brand at that time.
19 RESERVES
Group
Share Profit and
premium account Capital reserve Merger reserve loss account
£m £m £m £m
At 2 March 2003 60.9 2.3 342.4 77.1
Retained profit for 52 weeks ended 29 February 2004 – – – (34.7)
Premium on allotments during the year ––––
AT 29 FEBRUARY 2004 60.9 2.3 342.4 42.4
The capital reserve arose in the formation of Luminar plc when the principles of merger accounting were followed.
The merger reserve arose on the acquisition of Northern Leisure plc where the principles of acquisition accounting
were followed. These reserves are not distributable.
Company
Share Profit and
premium account loss account
£m £m
At 2 March 2003 60.9 15.1
Retained profit for 52 weeks ended 29 February 2004 – 38.6
Premium on allotments during the year ––
AT 29 FEBRUARY 2004 60.9 53.7 Annual Report and Accounts 2004 LUMINAR PLC 53
20 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
Group
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
(Loss)/profit for the financial year (25.5) 31.0
Dividends (9.2) (8.3)
(34.7) 22.7
Issue of shares – 0.6
Net increase in shareholders’ funds (34.7) 23.3
Opening shareholders’ funds 501.0 477.7
Closing shareholders’ funds 466.3 501.0
21 RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOW
52 weeks ended 52 weeks ended 52 weeks ended 52 weeks ended
29 February 2004 29 February 2004 2 March 2003 2 March 2003
£m £m £m £m
Operating profit 2.3 68.4
Depreciation and amortisation of goodwill 106.2 45.6
Provision for impairment of assets to be disposed – 2.0
Loss/(profit) on sale of fixed assets 0.3 (4.6)
Provision against carrying value of investments – 1.7
0.3 (0.9)
Change in stocks 0.7 (0.1)
Change in debtors 2.3 1.1
Change in creditors 2.0 (0.8)
Net cash inflow from operating activities 113.8 113.3
22 GROSS CASH FLOW
52 weeks ended 52 weeks ended 52 weeks ended 52 weeks ended
29 February 2004 29 February 2004 2 March 2003 2 March 2003
£m £m £m £m
RETURNS ON INVESTMENT AND SERVICING OF FINANCE
Interest received 0.7 0.3
Interest paid (14.3) (15.0)
NET CASH OUTFLOW FROM RETURNS ON
INVESTMENTS AND SERVICING OF FINANCE (13.6) (14.7)
CAPITAL EXPENDITURE
Purchase of tangible fixed assets (52.1) (81.3)
Purchase of intangible fixed assets – (0.2)
Purchase of fixed asset investments – (0.5)
Sale of fixed assets 9.2 8.6
NET CASH OUTFLOW FOR CAPITAL EXPENDITURE (42.9) (73.4)
FINANCING
Issue of shares (net of expenses) – 0.6
Repayment of secured loan (19.3) (1.9)
Issue of new secured loan 15.0 8.6
NET CASH INFLOW FROM FINANCING (4.3) 7.3 NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
54 LUMINAR PLC Annual Report and Accounts 2004
23 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
52 weeks ended 52 weeks ended
29 February 2004 2 March 2003
£m £m
Increase in cash in the year 32.6 8.8
Cash inflow from financing 4.3 (6.7)
Movement in net debt in the year 36.9 2.1
OPENING NET DEBT (225.6) (227.7)
CLOSING NET DEBT (188.7) (225.6)
24 ANALYSIS OF CHANGES IN NET DEBT
2 March 2003 Cash flow 29 February 2004
£m £m £m
Cash at bank and in hand 22.6 32.6 55.2
22.6 32.6 55.2
Short term loans (19.2) (19.2) (38.4)
Long term loans (229.0) 23.5 (205.5)
(225.6) 36.9 (188.7)
25 FINANCIAL COMMITMENTS
At 29 February 2004, the Group had annual commitments under non-cancellable operating leases as follows:
Land and buildings Land and buildings
29 February 2004 2 March 2003
£m £m
Expiring in less than one year – 0.3
Expiring between one and five years 0.8 0.7
Expiring in over five years 21.1 20.4
21.9 21.4
26 PENSIONS
Defined Contributions Schemes
The Group operates defined contribution schemes for the benefit of Directors and employees. The schemes are administered
by trustees and the assets are held in a fund independent from those of the Group.
27 CONTINGENT LIABILITIES
The Group had no contingent liabilities at 29 February 2004 (2003: None).
28 RELATED PARTY TRANSACTIONS
During the 52 week period to 29 February 2004, the Group did not enter into any related party transactions (2003: None). Annual Report and Accounts 2004 LUMINAR PLC 55
NOTICE OF ANNUAL GENERAL MEETING
Notice is hereby given that the sixth Annual General Meeting
of Luminar plc will be held at the offices of CMS Cameron
McKenna, 160 Aldersgate Street, London, EC1A 4DD on
Tuesday 6 July 2004 at 2.30pm for the transaction of the
following business:
ORDINARY BUSINESS
1. To receive the Company’s audited accounts for the
period ended 29 February 2004 together with the last
Directors’ report, the last Directors’ remuneration report
and the auditors report on those accounts and the
auditable part of the Directors’ report on remuneration.
2. To approve the Director’s Report on Remuneration.
3. To declare a final dividend of 8.87p per ordinary share.
4. To re-elect Mr D Longbottom as a director.
5. To re-elect Mr R Brooke as a director.
6. To re-elect Mr M Gatto as a director.
7. To re-elect Ms L Wilding as a director.
8. To appoint PricewaterhouseCoopers LLP as auditors of
the Company, to hold office until the conclusion of the
next general meeting at which accounts are laid before
the company and that their remuneration be fixed by
the Directors.
SPECIAL BUSINESS
9. To consider and, if thought fit, to pass the following
resolution as an ordinary resolution:
THAT the Directors be and are hereby generally and
unconditionally authorised to exercise all the powers
of the Company to allot relevant securities (within the
meaning of section 80 of the Companies Act 1985) up to
an aggregate nominal amount of £6,097,940 and that
this authority shall expire on the earlier of the
conclusion of the next Annual General Meeting of the
Company to be held after the passing of this resolution
and the date falling 15 months after the passing of this
resolution (unless previously renewed, varied or
revoked by the Company), save that the Company may
before such expiry make an offer or agreement which
would or might require relevant securities to be allotted
after such expiry and the Directors may allot relevant
securities in pursuance of such offer or agreement as if
the authority conferred hereby had not expired.
10. To consider and, if thought fit, to pass the following
resolution as a special resolution:
THAT, subject to the passing of resolution 9 above,
the Directors be and are hereby empowered pursuant
to Section 95 of the Companies Act 1985 to allot equity
securities (within the meaning of Section 94 of that Act)
for cash pursuant to the authority conferred by
resolution 10 as if sub-section 89(1) of that Act did not
apply to any such allotment, provided that this power
shall be limited:
(a) to the allotment of equity securities in connection
with an issue in favour of ordinary shareholders on a
fixed record date (whether by way of a rights issue,
open offer or otherwise) where the equity securities
attributable to such ordinary shareholders are
proportionate (as nearly as may be) to the respective
number of ordinary shares held by them on such record
date, but subject to such exclusions or other
arrangements as the Directors may deem necessary or
expedient to deal with fractional entitlements, legal or
practical problems arising in any overseas territory, the
requirements of any regulatory body or stock exchange
or any other matter whatsoever; and
(b) to the allotment (otherwise than pursuant to sub-
paragraph (a) above) of equity securities up to an
aggregate nominal value of £914,691;
and shall expire on the earlier of the conclusion of the
next Annual General Meeting of the Company to be held
after the passing of this resolution and the date falling
15 months after the passing of this resolution (unless
previously renewed, varied or revoked by the Company)
save that the Company may before such expiry make
an offer or arrangement which would or might require
equity securities to be allotted after such expiry and the
Directors may allot equity securities pursuant to such
offer or arrangement as if the power conferred hereby
had not expired. 11. To consider and, if thought fit, to pass the following
resolution as a special resolution:
THAT, subject to the Company’s Articles of Association
from time to time, the Company be and is hereby
generally and unconditionally authorised for the
purposes of section 166 of the Companies Act 1985 to
make one or more market purchases (within the
meaning of section 163 (3) of that Act) of its own
ordinary shares on such terms and in such manner as
the Directors shall determine, provided that:
(a) the maximum aggregate number of ordinary shares
hereby authorised to be purchased is 7,317,528
representing approximately 10% of the Company’s
issued ordinary share capital;
(b) the maximum price which may be paid for each
ordinary share is an amount equal to 105% of the
average of the closing mid market prices for the
ordinary shares of the Company (derived from the
London Stock Exchange Daily Official List) for the five
business days immediately preceding the date of
purchase and the minimum price per ordinary share is
the nominal value thereof exclusive of any expenses
payable by the Company; and
(c) unless previously renewed, varied or revoked the
authority hereby given shall expire on the earlier of the
conclusion of the next Annual General Meeting of the
Company to be held after the passing of this resolution
and the date falling twelve months after the passing of
this resolution, save that the Company may make any
purchase of ordinary shares after the expiry of such
authority in execution of a contract of purchase that was
made under and before the expiry of such authority.
By order of the Board
HENRY ANDREW WILLITS
COMPANY SECRETARY
12 MAY 2004
56 LUMINAR PLC Annual Report and Accounts 2004 This is an important document. If there is anything you do not
understand, please contact an appropriate professional adviser .
1. DIRECTORS’ REPORT AND ACCOUNTS
(ITEM 1 ON THE AGENDA)
The Directors are required to present to the meeting the
Directors’ and Auditors’ reports and the accounts for the
year ended 29 February 2004.
2. CONSIDER AND ADOPT THE REPORT ON REMUNERATION
(ITEM 2 ON THE AGENDA)
In accordance with recommended best practice, the Directors
are presenting the Report of the Remuneration Committee
for approval. The Report is set out on pages 28 to 34.
3. DECLARATION OF DIVIDEND
(ITEM 3 ON THE AGENDA)
The proposed final dividend of 8.87p per ordinary share will be
paid on 8 July 2004 to shareholders who are on the Register
of Members as at the close of business on 4 June 2004. This
dividend is in addition to the interim dividend of 3.37p per
ordinary share, which was paid on 9 January 2004. The shares
will become ex-dividend on 2 June 2004.
4. RE-ELECTION OF DIRECTORS
(ITEMS 4, 5, 6 AND 7 ON THE AGENDA)
Article 87 of the Company’s Articles of Association states that
any Director who has not been appointed or re-appointed
at either of the Company’s last two Annual General Meetings
should retire. Ms L Wilding is retiring and offering herself for
re-election under this provision.
Article 93 allows the Board to appoint a person to the Board,
subject to that person being re-elected at the subsequent
Annual General Meeting. Mr S M Gatto and Mr R Brooke were
appointed on 1 January 2004, Mr D Longbottom was appointed
on 17 April 2004 and all are offering themselves for re-election.
Full biographical details of all Directors are on page 20 of
this Report.
5. APPOINTMENT AND REMUNERATION OF AUDITORS
(ITEM 8 ON THE AGENDA)
This resolution proposes the re-appointment of
PricewaterhouseCoopers LLP as the Company’s auditors,
and permits the Directors to fix their remuneration.
6. RENEWAL OF AUTHORITY TO ALLOT SHARES
(ITEMS 9 AND 10 ON THE AGENDA)
The existing authorities given to the Directors at the last
Annual General Meeting to allot unissued share capital and
to allot shares for cash in limited circumstances expire on
[9 July 2002]. It is proposed that further authorities be
granted which shall expire on the earlier of the date of the
next Annual General Meeting to be held after the passing
of the resolution and the date falling fifteen months after the
passing of the resolution. An ordinary resolution (item 10)
will be proposed to authorise the Directors to allot unissued
share capital up to an aggregate nominal amount of
£6,097,940 being 24,391,760 ordinary shares of
25p each representing approximately 33% of the share
capital currently in issue. A special resolution (item 11)
will be proposed authorising the Directors to allot shares
in connection with a pre-emptive issue to existing
shareholders or for cash up to £914,691 (being
approximately 5% of the share capital currently in issue).
There are no present plans to issue shares, except as
required to satisfy the exercise of options or warrants under
the Company’s employee share incentive schemes.
7. AUTHORITY TO PURCHASE OWN SHARES
(ITEM 11 ON THE AGENDA)
The special resolution proposed at item 10 would authorise
the Company to acquire its own shares subject to the
constraints set out in the resolution. The Directors would
exercise this power only if satisfied that it was in the interests
of the shareholders as a whole to do so and that it was likely
to result in an increase in earnings per share. Any shares
purchased in accordance with this authority will subsequently
be cancelled.
As at 20 May 2004, options and warrants were outstanding
to subscribe for a total number of 7,803,433 ordinary
shares, or 10.66% of the Company’s issued share capital.
If this authority to purchase shares is ever used in full,
the proportion of issued share capital represented by this
figure would be 11.93%.
EXPLANATION OF RESOLUTIONS
Annual Report and Accounts 2004 LUMINAR PLC 57 ACTION TO BE TAKEN
Whether or not you intend to attend the Annual General
Meeting, you are requested to complete the enclosed form
of proxy and return it to the Company’s Registrars, Lloyds
TSB Registrars Scotland, P O Box 28448, Finance House,
Orchard Brae, Edinburgh EH4 1WQ as soon as possible and
in any event so as to be received no later than 48 hours
before the time appointed for the Annual General Meeting.
The completion and submission of a form of proxy will not
prevent you from attending and voting in person if you so wish.
RECOMMENDATION
Your Board believes that the proposed resolutions to be put
to the meeting are in the best interests of shareholders as a
whole and, accordingly, recommends that shareholders vote
in favour of the resolutions, as the Directors intend to do in
respect of their own beneficial shareholdings in the Company.
ATTENDANCE AND VOTING
As a shareholder of Luminar plc, you have the right to attend
and vote at the Annual General Meeting.
Please bring with you the accompanying form of proxy/
admission Card. It will authenticate your right to attend,
speak and vote and will speed your admission. Please keep
it until the end of the meeting. The meeting will commence
at 3.30pm and refreshments will be available from 3.00pm.
You may also find it helpful to bring your Annual Report with
you so that you can refer to it at the meeting.
If you do not wish, or are unable, to attend, you may appoint
either the Chairman of the meeting or someone else of your
choice to act on your behalf and to vote in the event of a poll.
That person is known as a “proxy”. You can use the enclosed
form of proxy to appoint a proxy.
A proxy need not be a shareholder and may attend and vote
(on a poll) on behalf of the shareholder who appointed him
or her.
At the meeting, the proxy can act for the member he or she
represents. This includes the right to join in or demand a poll,
but it does not include the right to vote on a show of hands.
The proxy is valid for any adjournment of the meeting.
Please tick the appropriate box alongside each resolution
to indicate whether you wish your votes to be cast “for”,
or “against” that resolution. Unless you give specific
instructions on how you wish to vote on a particular resolution,
your proxy will be able, at his or her discretion, either to vote
“for” or “against” that resolution or to abstain from voting.
Before posting the form of proxy to the Registrars, please
check that you have signed it. In the case of joint holders,
either of you may sign it.
To be effective the form of proxy must be received by the
Company’s Registrars at the address shown above by no
later than 8.30am on 5 July 2004. Any form of proxy
received after this time will be declared void.
NOTES
1. Any member entitled to attend and vote at this meeting
may appoint one or more proxies to attend and, on a poll,
vote on his behalf. A proxy need not be a member.
2. Instruments appointing proxies must be received by the
Company’s Registrars not less than 48 hours before the
time the meeting is to be held.
3. For the purpose of determining entitlement to attend and
vote at the meeting, the name of the member must be
entered on the register of members at 8.30am on 5 July
2004. If you have recently sold or transferred all of your
shares in the Company please send this notice and the
accompanying form of proxy form to the broker who sold
your shares for you. The broker can then send them to
the new owner of the shares.
4. The following documents are available for inspection during
normal business hours (Saturdays, Sundays and public
holidays excepted) at the Company’s registered office
and at the offices of CMS Cameron McKenna at 160
Aldersgate Street, London EC1A 4DD from the date of this
notice until the conclusion of the Annual General Meeting:
a) The Register of Directors (and their families’) interests
in the share capital of the Company.
b) Copies of all Directors’ service contracts for periods
in excess of one year with the Company or any of
its subsidiaries.
c) The existing Memorandum and Articles of Association.
58 LUMINAR PLC Annual Report and Accounts 2004 ANNUAL GENERAL MEETING
6 July 2004, 2.30pm at the offices of CMS Cameron
McKenna, 160 Aldersgate Street, London, EC1A 4DD
TIMETABLE FOR RESULTS
For the year to 1 March 2005
Interim Results announced – 12 November 2004
Interim Statement circulated – 12 November 2004
*Preliminary announcement of full year results – May 2005
*Annual Report circulated – June 2005
DIVIDEND PAYMENTS
The proposed final dividend (if approved) will be paid on
8 July 2004 to shareholders registered on 4 June 2004.
The expected dividend payment dates for the year to 1
March 2005 are:
**Interim Dividend – January 2005
**Final Dividend – July 2005
SHAREHOLDERS SERVICES
On the Company’s behalf, Natwest Stockbrokers Limited
operates a low cost share dealing service in Luminar plc
shares. Details are available on telephone 0870 6002050 or
email on [email protected] quoting reference:
Luminar plc
PRIVATE SHAREHOLDERS
If you have a query about your holding of Luminar plc
shares or need to change your details, for example your
address or payment of dividend requirements, please
contact the registrars at the address shown below.
WEBSITE
Further details of the Group’s activities and products can be
seen on its website at www.luminar.co.uk.
COMPANY SECRETARY AND REGISTERED OFFICE
Harry Willits
41 King Street, Luton LU1 2DW
Telephone 01582 589 400
Facsimile 01582 589 667
REGISTRATION
Luminar plc is registered in England and Wales (no.
3170142)
REGISTRARS
Lloyds TSB Registrars Scotland
PO Box 28448
Finance House
Orchard Brae
Edinburgh
EH4 1WQ
Telephone 0870 6015366
Facsimile 0870 9000030
You can check details of your shareholding on Lloyds TSB
Registrars website at www.shareview.co.uk
STOCKBROKER
Investec Henderson Crosthwaite
Institutional Brokers Limited
2 Gresham Street
London
EC2V 7QP
AUDITORS
PricewaterhouseCoopers LLP
1 Embankment Place
London
WC2N 6NN
SOLICITORS
CMS Cameron McKenna
Mitre House
160 Aldersgate Street
London
EC1A 4DD
* Provisional dates to be confirmed
** Provisional dates to be confirmed
SHAREHOLDER INFORMATION
Annual Report and Accounts 2004 LUMINAR PLC 59 Designed and produced by Addison Corporate Marketing Limited.
Printed by St Ives, Westerham Press. ANNUAL REPORT 2004
LUMINAR PLC
41 King Street
Luton
Bedfordshire LU1 2DW
www.luminar.co.uk
LUMINAR PLC ANNUAL REPORT 2004 ### summary: |
Carr’s Milling Industries PLC
Old Croft, Stanwix
Carlisle CA3 9BA
www.carrs-milling.com
Carr’s Milling Industries PLC Annual Report & Accounts 2006
organic
growth
Carr’s Milling Industries PLC
Annual Report & Accounts 2006 Designed and produced by corporateprm, Edinburgh and London. www.corporateprm.co.uk
01 Financial Highlights
02 Chairman’s Statement
04 Chief Executive’s Review
08 Operating and Financial Review
12 Board of Directors
12 Registered Office and Advisers
13 Directors’ Report
16 Corporate Governance
19 Independent Auditors’ Report
20 Directors’ Remuneration Report
24 Consolidated Income Statement
25 Consolidated and Company Statement
of Recognised Income and Expense
26 Consolidated and Company Balance
Sheet
27 Consolidated and Company Cash
Flow Statement
28 Principal Accounting Policies
33 Notes to the Financial Statements
73 Five Year Statement
75 Notice of Annual General Meeting
76 Directory of Operations
Financial Highlights
• Revenue up 26% to £242.6m
• Profit before tax down 39% at £6.3m
• Adjusted profit* before tax up 9% at £7.3m
• Basic earnings per share down 45% at 51.0p
• Adjusted earnings per share
*
up 17% to 59.7p
• Dividend up 13% to 18.0p per share
• Strong operating cash generation
* excluding non-recurring items and amortisation of intangible assets
agriculture
page 5
food
page 6
Carr’s Milling Industries activities are
focussed on Agriculture, Food and
Engineering with increased Annual Sales of
£242.6m 01
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Statutory numbers are given in the Chairman’s Statement and reconciliations are given in the Notes to the Financial Statements
2002 - 2004 prepared under UKGAAP and 2005 - 2006 under IFRS
* excludes non-recurring items and amortisation of intangible assets
engineering
page 7
02 03 04 05 06
143
149
156
192
243
Revenue £m
02 03 04 05 06
3.3
4.6
5.1
6.7
7.3
Profit before tax * £m
02 03 04 05 06
33.3
34.7
39.9
50.9
59.7
Earnings per share * (p)
02 03 04 05 06
9.5
11.5
13.5
16.0
18.0
Dividends (p) 02
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Chairman’s Statement
Richard
Inglewood
It gives me great satisfaction to report to
Shareholders that Carr’s has once again raised
adjusted pre-tax profits to record levels, with a
9.2% increase to £7.3m. Growth in our existing
business and expansion in Germany reflects a
good performance from all three divisions.
FINANCIAL OVERVIEW
The annual figures have, for the first time, been prepared under
International Financial Reporting Standards (“IFRS”) and those for 2005
have been restated on a comparable basis.
Revenue in the 52 weeks to 2 September 2006 rose 26.3% to £242.6m
(53 weeks to 3 September 2005: £192.1m), partially due to the inclusion
for the full year of the animal feed business acquired by our associate from
Pye in July 2005 and of the flour business acquired by Carr's Flour Mills
from Meneba in November 2004.
Profit before tax was £6.3m (2005: £10.4m). Profit before tax
excluding non-recurring items (principally the £4.1m gain on disposal of
the Bendall’s factory in the previous year) and amortisation of intangible
assets increased by 9.2% to £7.3m (2005: £6.7m). Adjusted earnings
per share, on a similar basis, rose 17.3% to 59.7p (2005: 50.9p) - an
eighth successive annual increase. Basic earnings per share was 51.0p
(2005: 92.1p).
Operating cash flow in the year was strong. Cash generated from
operations of £11.1m compared with £6.7m in the previous period. Net
debt reduced to £13.9m (2005: £14.9m), representing gearing of 68.3%
(2005: 73.9%). The net interest charge of £1.0m (2005: £1.2m) was
covered 7.9 times (2005: 6.7 times) by adjusted Group operating profit.
The results are considered in more detail in the Chief Executive’s Review.
DIVIDENDS
Reflecting the Group’s progressive dividend policy, its good performance
and its encouraging prospects, the Board is proposing an increase in the
final dividend of 13.6% to 12.5p per share. Along with the interim dividend
of 5.5p per share, paid in May 2006 (2005: 5.0p), this makes a total
dividend for the period of 18.0p per share, an increase of 12.5% on last
period’s 16.0p. The final dividend, if approved by Shareholders, will be paid
on 19 January 2007 to Shareholders on the register at the close of 03
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
expanding
in europe
business on 15 December 2006. Shares will be ex-dividend on
13 December 2006.
DEVELOPMENT OF CARR’S AGRICULTURE BUSINESS
In anticipation of a decline in divisional profit in the face of a further
deterioration in the UK market for agriculture, during the period Carr’s
made various changes to its animal feed business.
As reported in the Interim Announcement of 26 April 2006, to address a
noticeable reduction in demand and serious industry over-production of
compound and blended feed, our associate’s compound feed mills at
Blackburn (Lancashire), Penrith (Cumbria), and Shrewsbury (Shropshire)
were closed. The remaining Pye animal feed business, is now fully
integrated into Carrs Billington Agriculture Operations. The integration of
the sales teams, systems and product ranges proved challenging, and it is
to the credit, and demonstrates the strength, of our management teams
that this is complete and the business is focussed on the challenges
ahead.
The animal feed business expanded into Wales with the formation in
September 2005 of a new joint venture company, Bibby Agriculture,
together with Wynnstay Group and Welsh Feed Producers; Carr's
Billington Agriculture Sales is a 50% shareholder. Bibby Agriculture
traded profitably.
Since 2001, we have sold our Crystalyx low moisture feed blocks through
a large distributor in Germany, Agravis. Volumes have steadily increased
and reached a stage where it was viable to build a manufacturing plant in
Germany using our patented manufacturing process. A new company,
Crystalyx Products GmbH, jointly owned by Carr’s and Agravis, was formed
and the new plant was commissioned in January 2006. In the early
months, new sales outlets have been sourced and we are encouraged by
the performance to date.
In the US, we replaced a production line at our factory in Belle Fourche,
South Dakota, completing in November 2006. This new line incorporates
the new technology developed by our own engineering staff and is
designed to meet the expected increased demand.
BUSINESS OVERVIEW
The Pye acquisition in July 2005 nearly doubled Carr’s compound and
blended feed volumes. In the period there was a further deterioration in the
UK market for agriculture, including the Group’s principal trading area of
North West England and South West Scotland, as a result of delays in
farmers’ receiving subsidies (in the form of the initial Single Farm
Payment), the low price of milk and animals feeding outside in the mild
winter weather. In addition, margins were squeezed due to higher energy
costs. Consequently, Agriculture’s contribution reduced, as forecast in the
Interim Announcement.
The Meneba acquisitions, comprising mills at Kirkcaldy in Fife and Maldon
in Essex, more than doubled the size of Carr’s flour business, previously
comprising a single mill at Silloth in Cumbria. Demand for flour from both
bakers and biscuit producers was high throughout the period and, together
with the success in winning new customers, the three mills operated to
near capacity throughout the period. Accordingly, a substantial increase in
Food’s contribution to the Group’s profit before non-recurring items and
amortisation was achieved, as anticipated in the Interim Announcement.
The Bendalls engineering business re-located to its new factory in July
2005 and has benefited from the improved facilities and production layout.
The three engineering businesses made good progress in 2006.
BOARD
In September 2005, Alastair Wannop was appointed a non-executive
Director, bringing non-executive Directors to three and independent non-
executive Directors to two, and I succeeded David Newton as Chairman.
As in previous years, the Board reviewed best practice Corporate
Governance policies and procedures and made changes to ensure the
Group remains where appropriate compliant, bearing in mind its size, with
the Combined Code.
OUTLOOK
In the 52 weeks to 2 September 2006, the performance of the business
continued to benefit from the strength of the management teams at the
Group’s operational activities. This attribute has enabled the Group to
continue its progress despite the difficulties posed by increased costs,
particularly energy, and the general trading environment. We expect these
challenges to continue into the current year. However, I can report that
trading in the opening weeks is in line with management’s expectations but
with the high cost increases being experienced the management will be
challenged to continue the Group’s growth.
Richard Inglewood
Chairman
21 November 2006 04
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Chief Executive’s Review
In the period to 2 September 2006, Carr’s both achieved an eighth
successive annual increase in adjusted earnings per share and further
strengthened its business. The two large acquisitions of the previous
year - the Meneba flour mills and the Pye feed mills by our associate -
were successfully incorporated into the Group activities and three joint
ventures, mainly in the area of manufacture and supply of animal feed,
were established.
Chris Holmes 05
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
agriculture
The Group’s Agriculture business comprises, in the UK primarily in the
North West of England and South West of Scotland, four related activities
- animal feed manufacture, fertiliser blending, agricultural retailing and oil
distribution - and, in the USA and Germany, animal feed manufacture.
Operating profit of £5.0m (2005: £5.9m) was achieved on a revenue of
£174.5m (2005: £132.7m).
UNITED KINGDOM
Agriculture’s UK market place was even more challenging than last period.
In general, this reflected delays and uncertainty in farmers’ receiving the
initial Single Farm Payment (indeed, considerable sums are still outstanding
in respect of the 2005 harvest year), the unprecedented low farm gate
milk price and higher energy costs.
Further problems specifically affecting the manufacture of compound
ruminant animal feed included the mild winter weather (enabling animals to
feed outside) and substantial over-production, reflecting reduced demand,
in the Group’s trading area.
In the latter context, the Group, together with its associate, took decisive
action (as it has often done when faced with adverse conditions). Within
months of the acquisition in July 2005 by the Group’s associate company,
Carr's Billington Agriculture Operations, of certain assets of W&J Pye
(in Administration), compound feed mills were closed at Blackburn
(Lancashire), Penrith (Cumbria) and Shrewsbury (Shropshire). This left
Carr's Billington Agriculture Operations with four compound feed mills -
at Carlisle (Cumbria), Langwathby (Cumbria), Lancaster (Lancashire)
and Stone (Staffordshire) - and three blended feed mills - at Askrigg
(North Yorkshire), Kirkbride (Cumbria) and Lancaster. Notwithstanding,
manufacturing capacity remains in excess of demand. The rationalisation
and integration of the two entities has gone well as too has the capital
expenditure to improve the efficiency and quality of product at the
Lancaster Mill.
In March 2006, Afgritech, a joint venture company in which Carr’s Milling
Industries is a 50% shareholder, was formed with Afgri Operations, one of
the largest South African agricultural companies. Afgritech has invested
£0.7m in a new plant at Langwathby to produce by-pass protein for
ruminant animals, which will initially be available exclusively to customers of
Carr's Billington Agriculture, simultaneously increasing labour productivity at
that plant. Production will start in November 2006.
The Caltech division, which has a plant at Silloth (Cumbria), again
increased revenue and profits from its manufacture of low-moisture feed
blocks for the domestic, agricultural livestock and equine market. The
successful launch of a new product, Garlyx, designed to repel biting insects
on cattle and horses, will fully benefit the new financial year.
Bibby Agriculture, the joint venture company formed in September 2005 in
which Carr's Billington Agriculture Sales is a 50% shareholder, has made a
good start selling in Wales animal feed manufactured by its shareholders,
fertiliser and other farming supplies.
Fertiliser, produced at the Group’s three blending plants - at Invergordon
(Easter Ross), Montrose (Angus) and Silloth - marginally increased its
volumes, but profits slightly reduced. This reflected a difficult first half
and peak period of March/April, reflecting farmers’ reluctance to pay
energy-related higher prices. The Group’s unique range of
environmentally-protective fertiliser, New Choice, increased both
revenue, by 15%, and profit.
Carr’s agricultural retailing increased both revenue and profits from its
14 branches, operating as Carr's Billington Agriculture, from Perth in the
North to Leek (Staffordshire) in the South, selling farm supplies. Carr’s
Machinery distributes new and used agricultural and groundcare machinery
from six of these branches, across the north of England and in Dumfries
and Galloway in South West Scotland. Sales of Massey Ferguson
machinery again exceeded expectations and the increased sales of parts
and workshop services again contributed to the result.
Wallace Oils, which was acquired in April 2005, supplies oils and lubricants
to a broad customer base out of three depots, located at Carlisle, Dumfries
and Stranraer, the latter two in Dumfries and Galloway.
In its first full year of ownership, Wallace Oils performed satisfactorily and
began to make inroads into the Group’s customer base.
OVERSEAS
In the US, our subsidiary, Animal Feed Supplement, which produces
Smartlic and Feed in a Drum low-moisture animal feed blocks at mills in
Belle Fourche (South Dakota) and Poteau (Oklahoma), substantially
increased its volumes, but profit margins were lower as a result of further
cost increases in the base raw material, molasses. The installation of a
new production line to replace the 1998 production line, the older of the
two, at Belle Fourche will be completed in November 2006 without
disrupting production.
In Germany, a 50:50 joint venture, Crystalyx Products, was established in
2005 in conjunction with Agravis, one of Germany’s largest agricultural
companies. In January 2006, a new low-moisture animal feed plant was
commissioned to manufacture Crystalyx in Oldenburg, North West
Germany for the domestic market. The business has commenced well,
breaking into new European markets. 06
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Chief Executive’s Review continued
food
Operating profit before non-recurring items and amortisation of
intangible assets of £3.3m (2005: £2.3m) was achieved on revenue of
£55.7m (2005: £48.0m).
Carr’s principal food businesses are Carr’s Flour Mills, with a flour mill at
Silloth, and, since November 2004, the two former Meneba flour mills,
Hutchisons at Kirkcaldy (Fife) and Greens at Maldon (Essex). The
Meneba acquisition more than doubled the size of Carr’s flour business.
In a favourable market for flour, all three mills worked near capacity
throughout the period and a price increase was implemented in
September 2005 partially offsetting increases in the cost of electricity
and distribution. Higher margin speciality flours are performing
particularly well. Silloth suffered no repetition of the previous period’s
three month loss of flour sales to United Biscuits’ factory in Carlisle, as
a result of flooding, and increased its sales to United Biscuits’ Tollcross
factory outside Glasgow. The Kirkcaldy and Maldon mills benefited from
a full year’s trading and the greater efficiencies implemented since
acquisition.
The Carr’s Breadmaker range of retail flours continues to sell well, with
listings in three major multiple retailers. 07
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Engineering operating profit totalled £1.1m (2005: £0.8m, before the gain
on disposal of property of £4.1m) on a revenue of £12.2m (2005: £11.2m).
Engineering comprises Bendalls and R Hind, which are based in
Carlisle, and Carr's MSM, which is based in Swindon (Wiltshire).
Bendall’s designs and manufactures specialist steel fabrications for the
global petrochemical, nuclear, renewable energy and process industries.
R Hind provides vehicle bodybuilding and accident repairs for cars and
commercial vehicles. Carr's MSM designs and manufactures master
slave manipulators, which are key components for many industries but
notably the nuclear industry.
Bendalls, which is much the largest of the three activities, benefited
from more efficient working conditions following the move into larger,
modern premises in July 2005. A £2.5m contract to supply to the
Azerbaijan oil pipeline pressure vessels was constructed and
successfully delivered in the year. The SeaGen next generation tidal
energy device, for which Bendalls has manufactured a part of the
structure, is expected to be delivered to Strangford Lough, outside
Belfast, and connected to the National Grid in January 2007. Prospects
for improved orders from British Nuclear Group at Sellafield are good as
its decommissioning programme progresses.
Of the smaller divisions, R Hind traded satisfactorily, whilst Carr's MSM
traded well gaining some new customers and enters the new year with
a strong order book.
STAFF
In October this year Carr’s celebrated its 175th Anniversary - a great
achievement, particularly made even more special by it being the eighth
year in a row of hitting new records of profitability and shareholder
returns.
This is a great achievement for the Company and I would like to pay
tribute to all my colleagues here in the UK, the USA and Europe for
their dedication and commitment to the continued growth of the
Company.
PROSPECTS
Market conditions for Agriculture are not getting any easier with the low
farm gate milk price and again unbelievable expected delays of the
Single Farm Payment. The massive increase in wheat prices combined
with high-energy costs will make it a tough year for the Food division.
Engineering made good progress this period, but this is unlikely to be
repeated in the current period.
Given these trading environments, to achieve a ninth successive annual
increase in adjusted profit before tax will be challenging, despite the
greater strength of the business and Carr’s track record in successfully
combating adverse conditions.
Chris Holmes
Chief Executive Officer
21 November 2006
engineering Ron Wood
08
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Operating and Financial Review
The Group’s business
The Group’s operations are organised into three business divisions,
agriculture, food and engineering, and the performance of these three
divisions in the period is discussed in the Chief Executive’s Review on
pages 4 to 7. The agriculture business operates predominately in the
North of England, Wales and Scotland, in addition there are two animal
feed plants in the US and a plant in Germany. The flour and the
engineering business operate entirely within the UK although a proportion
of sales from the engineering business are export.
The markets in which all three businesses operate are competitive both in
terms of pricing from other suppliers and the retail environment in general
which has a direct impact on many of our customers. Despite this, Carr’s
businesses have a long record of increasing sales and profits through a
combination of investing in modern efficient factories, developing a range
of quality products and making sound acquisitions. The businesses are
under the control of stable, experienced and talented operational
management teams supported by a skilled workforce. the group
09
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Business objectives
There are five key elements to the Group’s strategy for meeting its
objectives which are continuing growth and profitability:
• Deliver quality, innovative and cost-effective products and services to our
customers
• Organic growth
• Seek acquisitions to complement our existing businesses
• Maximise operational efficiency
• Securing employee health and safety
We monitor our performance against the strategy by means of key
performance indicators (‘KPIs’):
• Organic sales growth – year on year increase in sales revenue excluding
the impact of acquisitions and disposals
• Gross return on sales – gross profit as a percentage of sales revenue
• Net return on sales – operating profit before non-recurring items and
amortisation as a percentage of sales revenue
• Adjusted earnings per share – profit attributed to equity shareholders
before non-recurring items and amortisation divided by the weighted
average number of shares in issue during the period
• Return on net assets – profit before tax and before non-recurring items
and amortisation as a percentage of net assets
• Free cash flow – cash generated from operations less tax and net
interest paid
Business strategies
The Group’s market strategy is to focus on growing the quality end of the
markets in which we operate, to establish meaningful and long lasting
relationships with our customers by a combination of product development
and high service levels and to invest in quality facilities. Each business within
the Group is given the responsibility for developing its own plans to deliver
the objectives of the Group with particular emphasis on growing sales
through the supply of quality products, service and product innovation,
improving operational efficiency and securing employee health and safety.
The role of the Board in achieving Group objectives has been to support
operational management and to identify suitable acquisitions that will create
new customers to the Group or will secure existing market positions.
Performance against KPIs
2006 2005
Organic sales growth 5.3% 13.6%
Gross return on sales 14.8% 16.0%
Net return on sales 3.3% 4.2%
Adjusted earnings per share 59.7p 50.9p
Return on net assets 32.3% 27.8%
Free cash flow £7.2m £3.7m
FINANCIAL REVIEW
Basis of preparation
The full year accounts are being reported under IFRS for the first time. The
effect of the Group’s conversion to IFRS has already been communicated
to Shareholders in our statement in April 2006 together with the
reconciliations and accompanying narrative explaining the restatement of
the UK GAAP financial statements for 2005. As previously stated, the
impact on the Group’s results of the adoption of IFRS has not been
significant to the underlying business and the fundamentals of the Group’s
business and the way in which it is managed are unaltered by the change
in accounting regime. The main differences between IFRS and the former
UK GAAP which have affected the Group are in relation to business
combinations, pensions and deferred taxation.
Overview
Group revenue from activities during the period was £242.6 million
(2005: £192.1 million). The increase in revenue comprised a full years
trading of the animal feed business acquired by our associate from
W & J Pye in July 2005 and the additional 11 weeks revenue from
the two flour mills acquired in November 2004.
Profit before taxation and before non-recurring items and amortisation
of intangible assets increased to £7.3 million (2005: £6.7 million).
Non-recurring items and amortisation are disclosed in Note 6 to the
financial statements.
Net finance costs were £1.0 million (2005: £1.2 million) and were
covered 7.9 times (2005: 6.7 times) by adjusted Group operating profits.
Taxation
The Group’s effective tax charge on profit from activities after net finance
costs was 31.5% (2005: 24.7%). A reconciliation of the actual total tax
charge to the standard rate of corporation tax in the UK of 30% is set out
in note 9 to the financial statements.
Earnings per share
The profit attributable to the equity holders of the Company amounted to
£4.2 million (2005: £7.5 million), and basic earnings per share was 51.0p
(2005: 92.1p). Adjusted earnings per share of 59.7p (2005: 50.9p) is
calculated by dividing the operating profit for the period, before non-
recurring items and amortisation of intangible assets, by the weighted
average number of shares in issue during the period. 10
Carr’s Milling Industries PLC
Annual Report & Accounts 2005
Operating and Financial Review continued
The valuation under IAS19 accounting basis showed a deficit before
related deferred tax asset in the scheme at 2 September 2006 of £15.8
million (3 September 2005: £12.1 million). The movement in the current
period arose principally as a result of a re-assessment of the mortality
rates, applicable discount rates and inflation rates that caused a significant
increase in the deficit.
Following the triennial valuation at 1 January 2006, the trustees and the
company are considering a strategy designed to eliminate the deficit within
ten years.
Currently, the contributions paid by participating companies has increased
by £1.3 million to £2.6 million.
A Group subsidiary undertaking is a participating employer in a defined
benefit pension scheme of our associate. The IAS19 accounting basis
showed a total deficit, for that scheme, before related tax asset at
2 September 2006 of £5.7 million (2005 : £6.5 million). The Group
recognises approximately 50% of the scheme deficit and related
deferred tax asset in its investment in associate. The details of both
pension schemes are given on note 28 to the financial statements.
Treasury Policy
The Group’s policy is structured to ensure adequate financial resources are
available for the development of its business while managing its currency
and interest rate risks. The Group’s strategy, policy and controls are
developed centrally and approved by the Board. The Group does not
engage in speculative transactions.
The main elements of treasury activity are outlined below.
Foreign currency risk
The major foreign currency risk facing the Group is in the purchasing of
raw materials in the fertiliser and flour milling operations. The major
currency involved is the US dollar. The policy of the Group is to hedge
using forward foreign exchange contracts with UK banks as soon as
commitment has been given to the underlying transaction.
The result of the foreign subsidiary is translated into sterling at the average
rate of exchange for the period concerned. As this translation has no
impact on cash flow, the Group chooses not to hedge its foreign subsidiary
earnings.
Balance sheet review
We have continued to invest in the business with total capital expenditure
in the year of £4.0 million, making our total capital expenditure since 2003
£13.8 million. In the current period we have continued to invest in
production facilities with £1.8 million spent on our flour mills and the
placement production line at our low moisture feed block plant in the US.
Intangible assets increased in November 2004 as a result of the
acquisition of Meneba UK Limited and in 2006 £0.9 million was amortised.
Inventories have decreased by 8.0% from £12.9 million, mainly due to
lower engineering work in progress following the completion of contracts in
the last quarter.
Trade and other receivables have decreased by £1.65 million, principally
due to the decrease in trade receivables of £2.4 million arising from better
collections, particularly in agriculture.
Trade and other payables have decreased by £3.9 million due to a
decrease in trade payables of £2.2 million which is simply due to the timing
of payments. The retirement benefit obligation adverse movement of £3.7
million in the period is discussed in the section headed Pensions.
Overall net assets increased by £0.4 million to £22.3 million.
Cash flow and net debt
The Group’s operational cash generation increased in the period with cash
flows generated from operations in the current year of £11.1 million
(2005: £6.7 million). This has assisted the Group in funding the capital
investment programme previously discussed, resulting in net cash
generated of £4.3 million (2005: £0.3 million) before investment and
financing activities. Dividend payments and loan repayments contributed to
a £4.9 million outflow in financing activities (2005: £3.3 million).
Net debt at the year end was £13.9 million (2005: £14.9 million) with
gearing at 68.3% (2005: 73.9%). Net debt is expected to decrease over
the next couple of years excluding any acquisition funding.
Pensions
The Group operates its current pension arrangements on a defined benefit
and defined contribution basis. The defined benefit section is closed to new
members and has 125 active members, 147 deferred members and 146
current pensioners and the scheme received contributions from the Group
and members which almost match the pensions paid out in 2006. 11
Carr’s Milling Industries PLC
Annual Report & Accounts 2005
Manufacturing facilities
The Group has continued to invest in its production facilities in all three
divisions and it intends to continue investing to ensure that it maintains a
competitive edge. The investment in new premises and equipment for our
engineering business, Bendalls, in Carlisle in 2005 has improved
efficiencies.
Employees
While the Group continues to invest in facilities and equipment we also
continue to invest in our people. The Group offers training programmes
where additional skills are required to undertake their responsibilities. The
businesses have strategies for retaining staff, including the provision of
competitive terms and conditions, a contributory occupational pension
scheme and share options. The Group introduced a Savings–related Share
Option Scheme in May 2006.
Principal risks and uncertainties
Each year the Group carries out a formal exercise to identify and assess
the impact of risks on its business and this year the exercise was carried
out in August 2006. The more significant risks and uncertainties faced by
the Group were identified as customer retention, employee retention,
margins, profitability and competition. The corporate governance statement
describes more about the Group’s risk management process.
On behalf of the Board
Ronald C Wood
Finance Director
21 November 2006
The balance sheet of the foreign subsidiary is translated into sterling at the
closing US dollar exchange rate. Any gains or losses on the translation of
the balance sheet into sterling are recorded in reserves. Currency
translation risks of net assets in the US subsidiary are not hedged.
Interest rate risk
The Board set the policy on interest rate risk and this was reviewed at the
time of the Meneba UK acquisition when borrowings increased significantly.
The policy is to cover approximately 50% of the risk and was implemented
by taking out interest cap and rate swap agreements with a UK bank. The
policy will be reviewed from time to time as circumstances change. The
monitoring of the interest rate risk is managed at head office based on
cash flow projections.
Credit risk
Practically all sales are made on credit terms to an extensive range of
customers, UK food producers, agricultural merchants, farmers and the
nuclear industry. Overdue accounts are reviewed monthly at divisional
management meetings. Historically, the incidence of bad debts is low.
Funding
The Group has historically been cash generative. The bank position for
each operation is monitored on a daily basis and capital expenditure above
a certain level is approved at the monthly Group board meeting. Each
operation has access to the Group’s overdraft facility or has facilities
specific to that operation and all term debt is arranged centrally. The
current bank facilities available to the Group are a term loan of £2.0 million
repayable in October 2009, a revolving credit facility of £4.5 million and
overdraft facilities of £8.0 million. Unutilised facilities at 2 September 2006
were £10.9 million (2005: £14.6 million).
Resources, risks and uncertainties
The Group aims to safeguard the assets that give it competitive advantage,
being its product quality, product innovation and service levels; its
operational management, skilled workforce and its modern well-equipped
factories.
Reputation
It is the responsibility of local operational management assisted by the
Group Health and Safety Manager to maintain and where possible
enhance the Group’s reputation for product quality, product innovation,
service levels and a culture of safe working. 12
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Board of Directors
Top, left to right:
Lord Inglewood
Non-Executive Chairman
Chris Holmes
Chief Executive Officer
Ron Wood
Finance Director
Bottom, left to right:
Robert Heygate
Non-Executive Director
Alistair Wannop
Non-Executive Director
Registered Office
Carr’s Milling Industries PLC
Old Croft, Stanwix
Carlisle CA3 9BA
Registered No. 98221
Independent Auditors
PricewaterhouseCoopers LLP
89 Sandyford Road
Newcastle upon Tyne NE1 8HW
Bankers
Clydesdale Bank PLC
82 English Street
Carlisle CA3 8HP
The Royal Bank of Scotland plc
37 Lowther Street
Carlisle CA3 8EL
Financial Adviser and Broker
Investec Bank (UK) Limited
2 Gresham Street
London EC2V 7QP
Solicitors
DLA
India Buildings
Water Street
Liverpool L2 ONH
Atkinson Ritson
15 Fisher Street
Carlisle CA3 8RW
Registrars
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield HD8 0LA
Registered Office and Advisers 13
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Directors’ Report
The Directors submit their report and the audited accounts of the
Company for the period ended 2 September 2006.
PRINCIPAL ACTIVITIES, BUSINESS REVIEW AND FUTURE
DEVELOPMENTS
The Company’s activities are Agriculture, Food and Engineering.
A review of the business and future development of the Group
and a discussion of the principal risks and uncertainties faced by
the Group is presented in the Chief Executive’s Review on pages
4 to 7 and in the Operating and Financial Review on pages 8 to 11.
RESULTS AND DIVIDENDS
The profit before taxation was £6.3 million (2005: £10.4 million).
After taxation charge of £2.0 million (2005: £2.6 million), the profit
for the period is £4.3 million (2005: £7.8 million). An interim dividend
of 5.5p per ordinary share was paid on 31 May 2006. The Directors
recommend the payment of a final dividend for the period, which is
not reflected in these accounts, of 12.5p per ordinary share which,
together with the interim dividend, represents 18.0p per ordinary
share, totalling £1.5 million (2005: 16.0p per ordinary share, totalling
£1.3 million).
Subject to approval at the Annual General Meeting, the final
dividend will be paid on 19 January 2007 to members on the
register at the close of business on 15 December 2006. Shares
will be ex-dividend on 13 December 2006.
FINANCIAL INSTRUMENTS
The Group’s risk management objectives and policy are discussed
in the Treasury Policy section of the Operating and Financial Review
on page 10.
DIRECTORS
The Directors of the Company currently in office are as stated on
page 12. Each of the current Directors served for the whole of the
period under review. W R Inglewood and A R Heygate retire in
accordance with the Articles of Association and, being eligible, each
offers himself for re-election.
Biographical details of the directors are shown below:
Non-executive directors
Lord Inglewood (55) was a Conservative member of the European
Parliament for ten years until his retirement in 2004, was a
Government Minister from 1995 to 1997 and has been a member
of the House of Lords since 1989. He brings to the Board wide
experience, in particular of EU and Westminster politics, allied with
a knowledge of farming and of Carr’s north-west England heartland.
He is also chairman of CN Group Limited the Carlisle based
regional media company.
Mr A R Heygate (61) is an executive director of Heygate & Sons
Limited, the UK’s largest independent flour miller, and is also
engaged in animal feed compounding and other agricultural
activities.
Mr A G M Wannop (44) is a director of English Food and Farming
Partnership and of Cumbria Vision. He has actively farmed in
Cumbria for many years.
Lord Inglewood, Mr A R Heygate and Mr A G M Wannop have two
year fixed term contracts which expire on 31 August 2007.
Executive directors
Mr C N C Holmes (55) was appointed to the Board in January
1992, and as CEO in September 1994. Previously he held senior
management positions in the agricultural division of J Bibby & Sons.
Mr R C Wood (58) was appointed to the Board as Finance Director
in January 1988 and is a member of the Chartered Institute of
Management Accountants. Mr R C Wood is also Company
Secretary.
The two executive directors have service contracts which provide for
a rolling two year notice period.
EMPLOYMENT POLICIES
The Company’s policy on employee involvement is to adopt an open
management style, thereby encouraging informal consultation at all
levels about aspects of the Company’s operations. Employees
participate directly in the success of the business by contributing to
the SAYE share option schemes.
Employment policies are designed to provide equal opportunities
irrespective of colour, ethnic or natural origin, nationality, sex,
religion, marital or disabled status. Full consideration is given to
applications for employment by and the continuing employment,
training and career development of disabled people.
POLITICAL AND CHARITABLE DONATIONS
During the period ended 2 September 2006 the Group contributed
£11,346 (2005: £12,443) in the UK for charitable purposes. There
were no political donations during the period (2005: Nil).
PAYMENT OF SUPPLIERS
Payment terms are agreed with each supplier and every endeavour
is made to adhere to the agreed terms. The average credit terms for
the Group as a whole, based on the year-end trade payables figure
and a 364 day year, is 42 days (2005: 42 days). The Company has
no outstanding trade payables at the end of the financial period.
SHARE CAPITAL
The movement in the share capital during the period is detailed in
note 29 to the financial statements. 14
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
AUDITORS
PricewaterhouseCoopers LLP have expressed their willingness to
continue in office and a resolution proposing their re-appointment
will be submitted at the Annual General Meeting.
DIRECTORS’ STATEMENT AS TO DISCLOSURE OF
INFORMATION TO AUDITORS
The Directors who were members of the Board at the time of
approving the Directors’ Report are listed on page 12. Having made
enquiries of fellow Directors and of the Company’s auditors, each of
these Directors confirm that:
• to the best of each Director’s knowledge and belief, there is no
audit information relevant to the preparation of their report of
which the Company’s auditors are unaware; and
• each Director has taken all the steps a director might
reasonably be expected to have taken to be aware of relevant
audit information and to establish that the Company’s auditors
are aware of that information.
DIRECTORS INTERESTS
The interests of the Directors, as defined by the Companies Act 1985, in the ordinary shares of the Company, other than in
respect of options to acquire ordinary shares (which are detailed in the analysis of options included in the Directors’
Remuneration Report on pages 20 to 23), are as follows:
on 2 September 2006 on 3 September 2005
Ordinary Shares Ordinary Shares
C N C Holmes 47,990 47,990
A R Heygate 37,225 37,225
R C Wood 25,090 25,090
W R Inglewood 3,510 1,250
A G M Wannop 2,261 2,261
All the above interests are beneficial. There have been no other changes to the above interests in the period from 3 September
2006 to 13 November 2006.
MAJOR SHAREHOLDERS
The Company has been informed of the following interests at 6 November 2006 in the 8,233,579 ordinary shares of the
Company, as required by the Companies Act 1985:
Percentage of
Number of shares Issued share capital
Heygate & Sons Limited 1,332,762 16.2%
T W G Charlton 1,177,500 14.3%
HSBC Global Custody Nominee (UK) Limited 350,000 4.0%
Chase Nominees Limited 325,548 4.0%
Directors’ Report continued 15
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
ANNUAL GENERAL MEETING AND SPECIAL BUSINESS TO BE
TRANSACTED AT THE ANNUAL GENERAL MEETING
The Notice convening the Annual General Meeting appears on page
75 and includes the following items of Special Business:
(i) Resolution 7 : Disapplication of pre-emption rights
The resolution renews the existing authority to the Directors
under Section 95 of the Companies Act 1985 to allot shares by
way of rights to shareholders and to allot shares for cash up to
a nominal value of £102,920 (representing 5 per cent of the
issued share capital) without first offering such shares pro rata
to existing shareholders, as would otherwise be required under
Section 89 of that Act. This will allow the Directors some
flexibility when considering how best to finance new business
opportunities. In accordance with the requirements of the
London Stock Exchange this resolution will come up for
renewal at the next Annual General Meeting.
(ii) Resolution 8 : Purchase its own shares
This resolution renews the existing authority to the directors to
buy, by way of market purchases, up to 823,358 of its own
shares (representing 10 per cent of the issued share capital).
The proposal should not be taken as an indication that the
Company will purchase its own shares. This authority will only
be exercised by the Directors if they are satisfied that it would
result in an increase in earnings per share and would be in the
best interest of shareholders generally.
DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable United
Kingdom law and those International Financial Reporting Standards
as adopted by the European Union.
The Directors are required to prepare financial statements for each
financial period which present fairly the financial position of the
Company and of the Group and the financial performance and cash
flows of the Company and of the Group for that period. In preparing
those financial statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
• provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other events
and conditions on the entity’s financial position and financial
performance; and
• state that the company has complied with IFRS, subject to any
material departures disclosed and explained in the financial
statements.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company and of the Group and enable them
to ensure that the financial statements comply with the Companies
Act 1985 and Article 4 of the IAS Regulation. They are also
responsible for safeguarding the assets of the Company and hence
for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
The maintenance and integrity of the Carr’s Milling Industries
website is the responsibility of the directors; the work carried out by
the auditors does not involve consideration of these matters and,
accordingly, the auditors accept no responsibility for any changes
that may have occurred to the financial statements since they were
initially presented on the website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in
other jurisdictions.
The requirements to provide an enhanced Directors’ Report under
Section 243ZZB of the Companies Act have been addressed in this
Report and the preceding Operating and Financial Review.
By Order of the Board
Ronald C Wood
Secretary
21 November 2006 16
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Corporate Governance
STATEMENT BY THE DIRECTORS ON COMPLIANCE WITH THE
PROVISIONS OF THE COMBINED CODE
PRINCIPLES OF GOOD GOVERNANCE
The Board is committed to high standards of corporate governance.
The adoption and maintenance of good governance is the
responsibility of the Board as a whole. This report, together with the
Directors’ Remuneration Report on pages 20 to 23, describes how
the Board applies the principles of good governance and best
practice as set out in the Combined Code on Corporate
Governance (the “Combined Code”). A statement of compliance
can be found at the end of this report.
THE BOARD
The Board consists of a non-executive Chairman, two executive
Directors and two other non-executives. A R Heygate is a non-
executive director and the Board considers him to be independent
although the Combined Code would not deem him independent due
to his long association with the Company and he represents a
significant shareholder. The Board believes that he acts in the best
interests of the Company and that his holding of shares in the
Company aligns his interests with that of the shareholders. A G M
Wannop is the senior independent non-executive director. The
Combined Code recommends that the Board of Directors of a UK
public company should include a balance of executive and non-
executive Directors (including independent non-executives) such that
no individual or small group of individuals can dominate the Board’s
decision-making. The Board is confident that it now meets the
requirements of the Combined Code with the exception of A R
Heygate as outlined above.
The Board meets nine times throughout the year to direct and
control the overall strategy and operating performance of the Group.
To enable them to carry out these responsibilities all Directors have
full and timely access to all relevant information. Training resources
are available to all Directors. A formal schedule of matters reserved
for decision by the Board covers key areas of the Group’s affairs
including acquisition and divestment policy, approval of budgets,
major capital expenditure projects, profit and cash flow performance
and general treasury and risk management policies. Responsibility
for the Group’s day to day operations is delegated to the Chief
Executive who, supported by the Finance Director and executive
management, implement the Board’s strategy and manage the
Group’s business. The roles of the Chairman and the Group Chief
Executive are separated and clearly defined. The Chairman’s overall
responsibility is to ensure that the Board carries out its
responsibilities. The Group Chief Executive’s responsibilities are to
direct and promote the operation and development of the Group.
Procedures are in place for Directors to seek both independent
advice at the expense of the Company and the advice and services
of the Company Secretary in order to fulfil their duties. The
Company Secretary is responsible to the Board for ensuring that
Board procedures are complied with and for advising the Board,
through the Chairman, on all governance matters. The appointment
and removal of the Company Secretary is determined by the Board
as a whole.
The Company’s Articles of Association provide that one third of the
Directors retire by rotation each year at the Annual General Meeting.
The Combined Code requires that Directors are required to present
themselves for re-election at intervals of no more than three years. It
is the Board’s intention to amend the Articles of Association at an
appropriate time to ensure compliance with this provision, but in the
interim, the Board intends to operate re-elections of Directors in a
manner to ensure compliance with the Combined Code. All new
Directors are subject to election by shareholders at the first
opportunity following their appointment.
Directors’ biographies and membership of the various committees
are shown on page 13. The formal terms of reference for the main
Board Committees together with the terms and conditions of
appointment of non-executive Directors are reviewed annually and
are available for inspection at the Company’s Registered Office and
at the Annual General Meeting.
BOARD COMMITTEES
Audit Committee
The Audit Committee currently comprises the three non-executives,
W R Inglewood, A R Heygate and A G M Wannop. The Committee
is chaired by A R Heygate. The Board considers that the Company
meets the main requirements of the Combined Code for a Company
of Carr’s size.
The board are responsible for assessing the Group’s internal
financial controls and meet with the external auditors as appropriate.
The external auditors have the opportunity for direct access to the
Committee without the executive Directors being present.
The Committee reviews the Group’s accounting policies and internal
reports on accounting and internal financial control matters together
with reports from the external auditors. The Audit Committee has
overall responsibility for monitoring the integrity of financial
statements and related announcements and for all aspects of
internal control and meets at least two times a year, which involve a
review of the Group’s interim and full year statements. The Audit
Committee is also responsible for recommendations for the
appointment, reappointment or removal of the external auditors and
for reviewing their effectiveness. It also approves the terms of
engagement and remuneration and monitors their independence
including the nature and levels of non-audit services.
The Chairman of the Audit Committee will be available at the Annual
General Meeting to respond to any shareholder questions that might
be raised on the Committee’s activities. 17
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Audit Remuneration
Board Committee Committee
No. of meetings 9 2 3
W R Inglewood 9 2 3
C N C Holmes 9 — —
R C Wood 8 — —
A R Heygate 8 2 3
A G M Wannop 9 2 3
MEETINGS ATTENDANCE
Details of the number of meetings and members’ attendance at, the Board, Audit and Remuneration Committees during the period are set
out in the table below.
Remuneration Committee
The Remuneration Committee currently comprises W R Inglewood
(Chairman), A R Heygate and A G M Wannop. It is a requirement of
the Combined Code that the Remuneration Committee should, in
the case of smaller companies, consist of at least two members who
are considered by the Combined Code to be independent. The
Company has complied with this. The Board is confident that the
Company complies with the requirements of the Combined Code in
terms of the required number of independent Directors for a
Company of Carr’s size. C N C Holmes, Chief Executive, attends
meetings of the Remuneration Committee by invitation and in an
advisory capacity. No Director attends any part of a meeting at
which his own remuneration is discussed. The Chairman and the
executive Directors determine the remuneration of the other non-
executive Directors.
The Committee recommends to the Board the policy for executive
remuneration and determines, on behalf of the Board, the other
terms and conditions of service for each executive Director. It
determines appropriate performance conditions for the annual cash
bonus and deferred bonus scheme and approves awards and the
issue of options in accordance with the terms of those schemes.
The executive directors’ contract periods are two years and the
Board has not set an objective on the reduction of these contract
periods to one year or less as it feels that this is the minimum
appropriate to retain the services of key executives with significant
knowledge of the business in which the Group trades. The
Remuneration Committee also monitors the level and structure of
remuneration of senior management below that of main board
Director. The Remuneration Committee has access to advice from
the Company Secretary and to detailed analysis of executive
remuneration in comparable companies. Details of the Committee’s
current remuneration policies are given in the Directors’
Remuneration Report on pages 20 to 23.
The Chairman of the Remuneration Committee attends the Annual
General Meeting to respond to any shareholder questions that might
be raised on the Committee’s activities.
RELATIONS WITH SHAREHOLDERS
The Board recognises the importance of good communications with
all shareholders. The Company maintains dialogue with institutional
shareholders and analysts, and general presentations are made
when financial results are announced. Shareholders have access to
the Company’s website at www.carrs-milling.com.
The Annual General Meeting is the principal forum for all the
directors to engage in dialogue with private investors. All
shareholders are given the opportunity to raise questions at the
meeting. The Company aims to send notices of Annual General
Meetings to shareholders at least 20 working days before the
meeting, as required by the Combined Code, and it is the
Company’s practice to indicate the proxy voting results on all
resolutions at the meetings.
GOING CONCERN
The Directors have prepared the accounts on a going concern
basis, having satisfied themselves from a review of internal budgets
and forecasts and current bank facilities that the Group has
adequate resources to continue in operational existence for the
foreseeable future.
INTERNAL CONTROL
The Board of Directors has overall responsibility for the Group’s
systems of internal control, including financial, operational and
compliance controls and risk management, which safeguards the
shareholders’ investment and the Group’s assets, and for reviewing
its effectiveness. Such a system can only provide reasonable and
not absolute assurance against material misstatement or loss, as it is
designed to manage rather than eliminate the risk of failure to
achieve business objectives.
The Group operates within a clearly defined organisational structure
with established responsibilities, authorities and reporting lines to the
Board. The organisational structure has been designed in order to
plan, execute, monitor and control the Group’s objectives effectively
and to ensure that internal control becomes embedded in the
operations. The Board confirms that the key on-going processes and 18
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Corporate Governance continued
features of the Group’s internal risk based control system, which
accord with the Turnbull guidance, have been fully operative and up
to the date of the Annual Report being approved. These include: a
process to identify and evaluate business risk; a strong control
environment; an information and communication process; a
monitoring system and a regular Board review for effectiveness. The
Finance Director and Group Financial Accountant are responsible
for overseeing the Group’s internal controls.
The Group does not have an internal auditor as the Board consider
that the Group has not yet reached a size where a separate internal
audit function would be an appropriate or cost effective method of
ensuring compliance with Group policies, and therefore does not
currently propose to introduce a Group internal audit function. This
area will be kept under review as part of the Board’s assessment of
the Group’s systems of internal control.
The management of the Group’s businesses identified the key
business risks within their operations, considered the financial
implications and assessed the effectiveness of the control processes
in place to mitigate these risks. The Board reviewed a summary of
the findings and this, along with direct involvement in the strategies
of the businesses, investment appraisal and budgeting process,
enabled the Board to report on the effectiveness of internal control.
AUDITOR INDEPENDENCE
The Board is satisfied that PricewaterhouseCoopers LLP has
adequate policies and safeguards in place to ensure that auditor
objectivity and independence is maintained. The Company meets its
obligations for maintaining the appropriate relationship with the
external auditors through the Audit Committee whose terms of
reference include an obligation to consider and keep under review
the degree of work undertaken by the external auditors, other than
the statutory audit, to ensure such objectivity and independence is
safeguarded.
COMPLIANCE WITH THE REVISED COMBINED CODE
The Directors consider that the Company has, during the period
ended 2 September 2006, complied with the requirements of the
revised Combined Code other than as set out below.
• bonuses and benefits in kind paid to executive directors are
pensionable (Sch. A.6)
• the directors’ contract periods are two years (B.1.6)
• there are no specific provisions for compensation on early
termination (B.1.5)
• the Board did not have in place during the period a formal and
rigorous process of evaluation of its own performance and that
of its committees (A.6.1). Rigorous but informal evaluation has
historically been carried out by the Chairman and Chief
Executive, an evaluation of the performance of the individual
directors has also been carried out by the Remuneration
Committee
• there is no separate Nominations Committee (A.4.1) to assess
and recommend new directors. Instead the Board as a whole
considers these areas following initial scrutiny and
recommendations by the Chief Executive and Chairman
• there has been no formal review by the Audit Committee of the
arrangements by which staff of the Group may, in confidence,
raise concerns about possible improprieties in matters of
financial reporting or other matters (C.3.4). A review has been
undertaken and a procedure is to be issued.
By order of the Board
Ronald C Wood
Secretary
Carlisle
CA3 9BA
21 November 2006 19
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
We have audited the group and parent company financial statements
(the ‘‘financial statements’’) of Carr’s Milling Industries PLC for the
period ended 2 September 2006 which comprise the Consolidated
Income Statement, the Consolidated and Parent Company
Statements of Recognised Income and Expense, the Consolidated
and Parent Company Balance Sheets, the Consolidated and Parent
Company Cash Flow Statements, the principal accounting policies
and the related notes. These financial statements have been
prepared under the accounting policies set out therein. We have
also audited the information in the Directors’ Remuneration Report
that is described as having been audited.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND
AUDITORS
The directors’ responsibilities for preparing the Annual Report, the
Directors’ Remuneration Report and the financial statements in
accordance with applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union are set out in
the Statement of Directors’ Responsibilities.
Our responsibility is to audit the financial statements and the part of
the Directors’ Remuneration Report to be audited in accordance
with relevant legal and regulatory requirements and International
Standards on Auditing (UK and Ireland). This report, including the
opinion, has been prepared for and only for the company’s members
as a body in accordance with Section 235 of the Companies Act
1985 and for no other purpose. We do not, in giving this opinion,
accept or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
We report to you our opinion as to whether the financial statements
give a true and fair view and whether the financial statements and
the part of the Directors’ Remuneration Report to be audited have
been properly prepared in accordance with the Companies Act
1985 and Article 4 of the IAS Regulation. We report to you whether
in our opinion the information given in the Directors’ Report is
consistent with the financial statements. We also report to you if, in
our opinion, the company has not kept proper accounting records, if
we have not received all the information and explanations we require
for our audit, or if information specified by law regarding directors’
remuneration and other transactions is not disclosed.
We review whether the Corporate Governance Statement reflects
the company’s compliance with the nine provisions of the 2003 FRC
Combined Code specified for our review by the Listing Rules of the
Financial Services Authority, and we report if it does not. We are not
required to consider whether the board’s statements on internal
control cover all risks and controls, or form an opinion on the
effectiveness of the group’s corporate governance procedures or its
risk and control procedures.
We read other information contained in the Annual Report and
consider whether it is consistent with the audited financial
statements. The other information comprises only the financial
highlights, the Chief Executive’s Review, the Chairman’s Statement,
the Operating and Financial Review, the Directors’ Report, the
unaudited part of the Directors’ Remuneration Report and the
Corporate Governance Statement. We consider the implications for
our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements. Our
responsibilities do not extend to any other information.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) issued by the Auditing Practices
Board. An audit includes examination, on a test basis, of evidence
relevant to the amounts and disclosures in the financial statements
and the part of the Directors’ Remuneration Report to be audited. It
also includes an assessment of the significant estimates and
judgments made by the directors in the preparation of the financial
statements, and of whether the accounting policies are appropriate
to the group’s and company’s circumstances, consistently applied
and adequately disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in
order to provide us with sufficient evidence to give reasonable
assurance that the financial statements and the part of the Directors’
Remuneration Report to be audited are free from material
misstatement, whether caused by fraud or other irregularity or error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of information in the financial statements and the part of
the Directors’ Remuneration Report to be audited.
OPINION
In our opinion:
• the group financial statements give a true and fair view, in
accordance with IFRSs as adopted by the European Union, of
the state of the group’s affairs as at 2 September 2006 and of
its profit and cash flows for the period then ended;
• the parent company financial statements give a true and fair
view, in accordance with IFRSs as adopted by the European
Union as applied in accordance with the provisions of the
Companies Act 1985, of the state of the parent company’s
affairs as at 2 September 2006 and cash flows for the period
then ended;
• the financial statements and the part of the Directors’
Remuneration Report to be audited have been properly
prepared in accordance with the Companies Act 1985 and
Article 4 of the IAS Regulation; and
• the information given in the Directors’ Report is consistent with
the financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
Newcastle upon Tyne
21 November 2006
Independent Auditors’ Report
to the Members of Carr’s Milling Industries PLC 20
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Directors’ Remuneration Report
REMUNERATION COMMITTEE
All matters relating to executive remuneration are determined by the
Remuneration Committee, a sub-committee of the Board of
Directors. The Remuneration Committee, comprises the Chairman,
A R Heygate and A G M Wannop. As appropriate, the Committee
may invite the Chief Executive Officer to participate in some of its
discussions. The Committee is responsible for determining the terms
and conditions of employment of executive directors. It is also
responsible for considering management recommendations for
remuneration and employment terms of the Company’s senior staff,
including incentive arrangements for bonus payments and grant of
share options.
The remuneration of the non-executive directors is determined by the
Chairman and the Chief Executive Officer and reflects the time,
commitment and responsibility of their roles.
The Remuneration Committee’s decisions are made on the basis of
rewarding individuals for the nature of jobs they undertake and their
performance therein. Proper regard is given to the need to attract
and retain high quality, well-motivated staff at all levels and to the
remuneration being paid by similar companies.
DETAILS OF REMUNERATION
The remuneration of directors is set out in detail on page 22. The
Company’s Remuneration Committee decides the remuneration
policy that applies to executive directors and the Group’s other
senior management.
Each of the executive directors has a two-year rolling contract. The
most recent executed contracts for the executive directors were
dated 10 June 2002. In the event of termination the executive
directors would be entitled to loss of salary, benefits and
pensionable service for the notice periods. The contracts of non-
executive directors of the Company are fixed for two years and the
most recent executed contracts for W R Inglewood, A R Heygate
and A G M Wannop were 1 September 2005.
The Company’s policy is that a proportion of the remuneration of the
executive directors should be performance related. As described
opposite, executive directors may earn annual incentive payments
together with the benefits of participation in Share Option Schemes.
CONSTITUENT ELEMENTS OF REMUNERATION PACKAGE
In applying the above principles to the determination of executive
director remuneration, the Remuneration Committee gives
consideration to several components which together comprise the
total remuneration package; these consist of the following:
• Basic Salary is determined by the Committee at the beginning
of each year. In deciding appropriate levels, the Committee
considers the position in the Group, personal and Company
performance and relies on information on a comparable group
of companies. Basic salaries were last reviewed in August
2006, with increases taking effect from 1 September 2006. The
next review will take place in August 2007. Executive directors’
contracts of service, which include details of remuneration, will
be available for inspection at the Annual General Meeting.
• Annual Bonus is paid up to a maximum of 50% of Basic Salary
on achievement of profit targets and is pensionable.
• Benefits in Kind comprise private healthcare which is
pensionable and critical illness/death in service cover.
• Pension Contribution. The Company’s defined benefit pension
scheme aims at producing a pension of two-thirds final
pensionable salary at normal retirement age of 60. The two
executive directors are members of the pension scheme and
can opt, after age 50, to retire early without actuarial reduction
to their pension. Non-executive directors do not participate in
the scheme. Pension entitlement is calculated on the salary
element of remuneration plus the average of the last three
years’ bonuses and taxable benefits in kind. The executive
directors’ pension information is given in the section subject to
audit. 21
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
The pension entitlement is that which would be paid annually on
retirement based on service to the end of the period. Members of
the scheme have the option to pay additional voluntary contributions,
neither the contributions nor the resulting benefits are included in the
table on page 22.
The normal retirement age is 60 with a two-thirds surviving spouse’s
pension. On death in service a lump sum equal to four times
pensionable salary is payable together with a surviving spouse’s
pension of two-thirds of the director’s prospective pension. For
death after retirement a spouse’s pension of two-thirds of the
member’s pension is payable plus the balance of a five year
guarantee if applicable.
Pensions in payment are guaranteed to be increased annually by
5% or the increase in the Index of Retail Prices (RPI) if less.
Up to 5 April 2006 the Group had established for C N C Holmes a
funded unapproved retirement benefit scheme (FURBS) for the
element of gross salary in excess of the Inland Revenue limits.
The enactment of the Pensions Act 2004 removes the need to
operate a FURBS. C N C Holmes’ pension arrangement is now
funded by the Group’s main pension scheme, the Carr’s Milling
Industries Pension Scheme 1993.
• Share Options. Salary and a bonus scheme are intended as the
most significant part of Directors’ remuneration; in addition,
executive share options can be proposed by the Remuneration
Committee and are granted periodically to promote the
involvement of senior management in the longer term success of
the Company. Options can only be exercised if certain
performance criteria are achieved by the Company. These
criteria are based on the growth in the Company’s adjusted
earnings per share in excess of the growth in the retail price
index over the performance period by an average 2% per
annum for each of the three years in the performance period.
PERFORMANCE GRAPH
The following graph illustrates the
Company’s total shareholder return
performance since 31 August 2001
relative to the FTSE All-share index.
The Company considers that the
FTSE All-share index to be the most
appropriate comparator group as it is
a broad index and reflects the
Company’s broad range of activities.
2002 2003 2004 2005 2006
Carr’s Milling Industries
FTSE All-Share Price Index
Source: Datastream
600
800
700
500
400
300
200
100
0 22
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Directors’ Remuneration Report continued
DIRECTORS’ REMUNERATION
2006 2005
Gain on Gain on
Fees & Total Total 2006 2005 Exercise Exercise
Basic Annual Emoluments Emoluments Pension Pension of Share of Share
Salary Bonus Benefits 2006 2005 Contributions Contributions Options Options
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Executive directors
C N C Holmes 187 93 1 281 251 90 75 — 52
R C Wood 163 81 1 245 215 57 49 — 52
Non-executive directors
D A Newton — — — — 3 — — — —
W R Inglewood 40 — — 40 17 — — — —
A R Heygate 20 — — 20 17 — — — —
A G M Wannop 20 — — 20 — — — — —
430 174 2 606 503 147 124 — 104
NON-EXECUTIVE REMUNERATION
The remuneration of the non-executive directors is agreed by the Group Board taking into account a number of factors pertinent to their
position and role as non-executive directors.
Information subject to audit
EXECUTIVE DIRECTORS’ PENSION INFORMATION
C N C Holmes R C Wood
Age at 2 September 2006 54 58
£’000 £’000
Directors’ contributions during the period 1 15
Increase in accrued pension entitlement for the period
excluding inflation 71 19
including inflation 73 22
Total accrued pension entitlement
At 2 September 2006 138 133
At 3 September 2005 120 111
Transfer value of pension
At 2 September 2006 2,237 2,614
At 3 September 2005 1,820 2,013
Increase in transfer value less contributions made by directors 1,203 586
Transfer value of the increase in accrued benefits less contributions made by directors 307 419
Notes
(a) The actuarial assumptions used for calculating transfer values for all members, including the directors, have been
amended since the 2005 disclosure. This was necessary to ensure that transfer values (i.e. the cash equivalent value of
the accrued benefits) account for recent improvements in life expectancy and the reduction in the long-term yields
expected on assets. As a result there is a larger increase in the transfer values than would otherwise be expected.
(b) C N C Holmes joined the approved pension scheme after 1 June 1989 and the part of his benefit promise that was
funded through this scheme was therefore previously restricted by the statutory Salary Cap (which was £105,600 for the
2005/06 tax year). The Salary Cap was lifted on 6 April 2006 as a consequence of tax simplification and the whole of
the benefit promise is therefore now provided through the approved scheme. The transfer value as at 3 September 2005
included that part of the unapproved benefit that was funded within a separate Funded Unapproved Retirement Benefit
Scheme (“FURBS”). 23
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
At 3 Granted At 2 Earliest date
September during September Exercise Date of from which Expiry
2005 period 2006 price Grant exercisable date
C N C Holmes 40,000 — 40,000 161.0p 1 May 2002 May 2005 April 2009
18,500 — 18,500 161.0p 1 May 2002 May 2005 April 2012
— 6,000 6,000 502.3p 20 February 2006 February 2009 February 2016
58,500 6,000 64,500
R C Wood 50,000 — 50,000 161.0p 1 May 2002 May 2005 April 2009
18,500 — 18,500 161.0p 1 May 2002 May 2005 April 2012
— 6,000 6,000 502.3p 20 February 2006 February 2009 February 2016
68,500 6,000 74,500
The middle market closing price of the shares at 2 September 2006 was 568.0p (2 September 2005: 558.5p) and the range
throughout the period was 456.5p to 568.5p.
SHARESAVE SCHEME 2006
At Granted At Average Exercise
3 September during 2 September exercise date
2005 period 2006 price
C N C Holmes — 1,951 1,951 479.0p May 2009
R C Wood — 1,951 1,951 479.0p May 2009
The Directors are eligible, as are other employees of the Group, to participate in the Sharesave scheme, which by its nature
does not have performance conditions.
On behalf of the Board
W R Inglewood
Chairman of the Remuneration Committee
21 November 2006
SHARE OPTIONS GRANTED TO DIRECTORS
The Company operates an Inland Revenue approved and an
unapproved share option scheme to reward employees’
performance and to incentivise at senior levels. Exercise is subject
to performance conditions.
For all options granted the exercise criterion has been that earnings
should achieve growth which exceeds the percentage growth in the
Retail Price Index by 2% or more. The rules of the schemes
conform to institutional investor guidelines.
The performance criterion, which applies to the executive directors
to whom options have been granted under the Schemes, was
chosen as it requires significant improvement in financial
performance. No options have been granted at a discount to the
market price at the date of their grant.
Options to acquire shares in the Company, granted to directors
under the Scheme but not exercised, as at 2 September 2006 are: 24
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Consolidated Income Statement
for the period ended 2 September 2006
52 week 53 week
period period
2006 2005
Notes £’000 £’000
2,3 Revenue 242,576 192,124
3 Cost of sales (206,658) (161,296)
3 Gross profit 35,918 30,828
3 Net operating expenses (28,802) (18,564)
3,4 Group operating profit 7,116 12,264
Analysed as:
Operating profit before non-recurring items and amortisation 7,987 7,975
6 Non-recurring items and amortisation (871) 4,289
Group operating profit 7,116 12,264
8 Net finance costs (1,011) (1,198)
5,6 Share of post-tax profit/(loss) in associate and joint ventures 218 (697)
2 Profit before taxation 6,323 10,369
2,9 Taxation (1,989) (2,557)
Profit for the period 4,334 7,812
Profit attributable to minority interest 139 329
Profit attributable to equity shareholders 4,195 7,483
4,334 7,812
Earnings per share (pence)
11 Basic 51.0 92.1
11 Diluted 50.4 90.3
All of the above are derived from continuing operations. 25
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Group Company
52 week 53 week 52 week 53 week
period period period period
2006 2005 2006 2005
Notes £’000 £’000 £’000 £’000
Foreign exchange translation differences arising on
30 translation of overseas subsidiaries (150) (80) — —
Actuarial (losses)/gains on retirement benefit obligation:
28 - Group (3,900) (1,543) (3,900) (1,543)
28 - Share of associate 206 (944) — —
Taxation credit/(charge) on actuarial movement
on retirement benefit obligation:
19 - Group 1,170 463 1,170 463
- Share of associate (62) 283 — —
Net expenses recognised directly in equity (2,736) (1,821) (2,730) (1,080)
Profit for the period 4,334 7,812 5,536 2,105
30 Total recognised income for the period 1,598 5,991 2,806 1,025
30 Attributable to minority interest 139 329 — —
30 Attributable to equity shareholders 1,459 5,662 2,806 1,025
1,598 5,991 2,806 1,025
Consolidated and Company Statement
of Recognised Income and Expense
for the period ended 2 September 2006 26
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Consolidated and Company Balance Sheet
As at 2 September 2006
Group Company
2006 2005 2006 2005
Notes £’000 £’000 £’000 £’000
Assets
Non-current assets
12 Goodwill 235 400 — —
12 Other intangible assets 802 1,738 — —
13 Property, plant and equipment 29,172 28,838 — —
14 Investment property 794 822 — —
15,18 Investment in subsidiary undertakings — — 12,864 13,072
15,16 Investment in associate 982 445 1,470 1,470
15,17 Interest in joint ventures 704 172 272 172
15 Other investments 254 255 201 202
Financial assets
27 - Derivative financial instruments 37 — 31 —
21 - Non-current receivables 208 223 — —
19 Deferred tax assets 5,162 3,962 4,761 3,672
38,350 36,855 19,599 18,588
Current assets
20 Inventories 11,944 12,947 — —
21 Trade and other receivables 33,546 35,197 14,325 14,048
22 Current tax assets 1 87 900 602
23 Cash and cash equivalents 2,292 3,149 — —
47,783 51,380 15,225 14,650
Total assets 86,133 88,235 34,824 33,238
Liabilities
Current liabilities
Financial liabilities
26 - Borrowings (9,682) (10,666) (4,251) (7,214)
27 - Derivative financial instruments (27) — (4) —
24 Trade and other payables (25,387) (29,318) (1,025) (665)
25 Current tax liabilities (1,324) (1,581) — —
(36,420) (41,565) (5,280) (7,879)
Non-current liabilities
Financial liabilities
26 - Borrowings (6,512) (7,399) (5,610) (6,503)
27 - Derivative financial instruments — (106) — (106)
28 Retirement benefit obligation (15,796) (12,119) (15,796) (12,119)
19 Deferred tax liabilities (3,600) (3,854) — —
24 Other non-current liabilities (1,524) (1,287) — —
(27,432) (24,765) (21,406) (18,728)
Total liabilities (63,852) (66,330) (26,686) (26,607)
Net assets 22,281 21,905 8,138 6,631
Shareholders' equity
29 Ordinary shares 2,058 2,053 2,058 2,053
30 Share premium 5,004 4,977 5,004 4,977
30,31 Equity compensation reserve 22 — 27 —
30 Foreign exchange reserve (230) (80) — —
30 Other reserve 1,601 1,632 — —
30 Retained earnings 11,895 11,613 1,049 (399)
30 Total shareholders' equity 20,350 20,195 8,138 6,631
30 Minority interests in equity 1,931 1,710 — —
30 Total equity 22,281 21,905 8,138 6,631
The financial statements set out on pages 24 to 72 were approved by the Board on 21 November 2006 and signed on its behalf by:
Christopher N C Holmes
Ronald C Wood 27
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Group Company
52 week 53 week 52 week 53 week
period period period period
2006 2005 2006 2005
Notes £’000 £’000 £’000 £’000
Cash flows from operating activities
33 Cash generated from/(used by) operations 11,069 6,663 (332) 363
Interest received 379 95 548 280
Interest paid (1,755) (1,195) (747) (641)
Tax (paid)/received (2,454) (1,855) (58) 44
Net cash generated from/(used by) operating activities 7,239 3,708 (589) 46
Cash flows from investing activities
Acquisition of subsidiaries (net of cash acquired) - group (3) (10,256) — —
Investment in subsidiaries - company — — — (5,527)
Proceeds from redemption of preference shares in subsidiaries — — 233 —
Investment in joint ventures (710) (172) (100) (172)
Dividends received from subsidiaries — — 3,629 2,152
Payment of loans to subsidiaries — — — (5,467)
Payment of loans to joint ventures (280) — (205) —
Purchase of intangible assets (9) — — —
Proceeds from sale of property, plant and equipment 192 3,114 — —
Purchase of property, plant and equipment (2,901) (3,396) — —
Proceeds from sale of investments 1 — 1 —
Purchase of investments — (2) — —
Net cash (used by)/generated from investing activities (3,710) (10,712) 3,558 (9,014)
Cash flows from financing activities
Net proceeds from issue of ordinary share capital 32 260 32 260
Net proceeds from issue of new bank loans and other borrowings — 13,668 — 6,965
Net proceeds from loans from subsidiaries — — 1,779 2,776
Finance lease principal repayments (1,047) (804) — —
Repayment of borrowings (2,487) (1,375) (2,550) (1,375)
Dividends paid to shareholders (1,358) (1,136) (1,358) (1,136)
Net cash (used by)/generated from financing activities (4,860) 10,613 (2,097) 7,490
Effects of exchange rate changes (88) (28) (25) 25
Net (decrease)/increase in cash and cash equivalents (1,419) 3,581 847 (1,453)
23 Cash and cash equivalents at beginning of the period 2,503 (1,078) (1,730) (277)
23 Cash and cash equivalents at end of the period 1,084 2,503 (883) (1,730)
Consolidated and Company Cash Flow Statement
For the period ended 2 September 2006 28
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Principal Accounting Policies
BASIS OF ACCOUNTING
The consolidated financial statements are prepared in accordance
with International Financial Reporting Standards (IFRS) and IFRIC
interpretations by the European Union (EU) and with those parts of
the Companies Act 1985 applicable to companies reporting under
IFRS.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Although these
estimates are based on management’s best knowledge of the
amount, event or actions, actual results ultimately may differ from
those estimates.
The consolidated financial statements are prepared under historic
cost other than certain assets, which are deemed cost under the
transition rules, derivative financial instruments and share based
payments, which are included at fair value.
The consolidated financial statements for the period ended 2
September 2006 are the first financial statements to be prepared in
accordance with IFRS. IFRS 1 details the requirements and
guidance to be used by first time adopters of IFRS in preparing their
first IFRS accounts. IFRS 1 requires the Group to select accounting
policies at 4 September 2005 and to apply these policies
retrospectively from 29 August 2004, the date of transition.
IFRS 1 provides optional exemptions to first time adopters. The
exemptions adopted by the Group are as follows:
IFRS 3, Business combinations
Business combinations that took place prior to the date of transition
to IFRS have not been restated.
IAS 16, Property, plant and equipment
The Group has opted to use previous revaluations of property made
under UK GAAP as deemed cost.
IAS 19, Employee benefits
The Group has opted to recognise in equity all cumulative actuarial
gains and losses at the date of transition. The Group has also opted
to account for pension benefits under the amendment to IAS 19
issued in December 2004 in which all actuarial gains and losses are
recognised in the Statement of Recognised Income and Expense
(SORIE). This is consistent with the UK GAAP requirement under
FRS 17 ‘Retirement benefits’, the effect of which has been
disclosed previously in the Annual Report.
IAS 21, The effects of changes in foreign exchange rates
IFRS 1 permits an exemption where the Group’s cumulative foreign
exchange translation differences are set to zero at the date of
transition. The Group has adopted this exemption. On subsequent
disposal of an overseas subsidiary, exchange differences arising
after the date of transition will be recycled through the income
statement.
IFRS 2, Share-based payments
IFRS 1 permits a company to apply IFRS 2 only to equity-settled
share-based awards granted on or after 7 November 2002, which
have not vested by the later of the date of transition to IFRS (29
August 2004) and 1 January 2005. The Group has taken advantage
of this exemption.
Tables setting out the reconciliation of opening UK GAAP balances
to IFRS are provided in note 40.
BASIS OF CONSOLIDATION
The consolidated financial statements comprise Carr’s Milling
Industries PLC and all its subsidiaries, together with the Group’s
share of the results of its associate and joint ventures. The financial
statements of the subsidiaries, associate and joint ventures are
prepared as of the same reporting date using consistent accounting
policies. Group inter-company balances and transactions, including
any unrealised profits arising from Group inter-company
transactions, are eliminated in full.
Results of subsidiary undertakings acquired during the previous
financial period were included in the financial statements from the
effective date of control. The separable net assets, both tangible and
intangible, of the acquired subsidiary undertakings were
incorporated into the financial statements on the basis of the fair
value as at the effective date of control.
Subsidiaries are entities where the Group has the power to govern
the financial and operating policies, generally accompanied by a
share of more than 50% of the voting rights. Subsidiaries are
consolidated from the date on which control is transferred to the
Group and are included until the date on which the Group ceases to
control them. Associates are entities over which the Group has
significant influence but not control, generally accompanied by a
share of between 20% and 50% of the voting rights. Joint ventures
are entities over which the Group has joint control, established by
contractual agreement. Investments in associates and joint ventures
are accounted for using the equity method. If the Group’s share of
losses in an associate or joint venture equals or exceeds its
investment in the associate or joint venture, the Group does not
recognise further losses, unless it has incurred obligations or made
payments on behalf of the associate or joint venture.
All business combinations are accounted for by applying the
purchase method. The cost of a business combination is measured
as the aggregate of the fair values, at the acquisition date, of the
assets given, liabilities incurred or assumed, and equity instruments
issued by the Group, together with any costs directly attributable to
the combination. The identifiable assets, liabilities and contingent
liabilities of the acquiree are measured initially at fair value at the
acquisition date, irrespective of the extent of any minority interest.
The excess of the cost of the business combination over the
Group’s interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities is recognised as goodwill. 29
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
CURRENCY TRANSLATION
The financial statements for the Group’s subsidiaries, associate and
joint ventures are prepared using their functional currency. The
functional currency is the currency of the primary economic
environment in which an entity operates. The presentation currency
of the Group and functional currency of Carr’s Milling Industries
PLC is Sterling.
Foreign currency transactions are translated into the functional
currency using exchange rates prevailing at the dates of the
transactions. Exchange differences resulting from the settlement of
such transactions and from the translation, at exchange rates ruling
at the balance sheet date, of monetary assets and liabilities
denominated in currencies other than the functional currency are
recognised in the consolidated income statement.
The balance sheets of foreign operations are translated into sterling
using the exchange rate at the balance sheet date and the income
statements are translated into sterling using the average exchange
rate for the period. Where this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the
transaction dates, the exchange rate on the transaction date is used.
Exchange differences arising from 29 August 2004 are recognised
as a separate component of shareholders’ equity. On disposal of a
foreign operation any cumulative exchange differences held in
shareholders’ equity are transferred to the consolidated income
statement.
REVENUE RECOGNITION
Revenue from the sale of goods or services is measured at the fair
value of the consideration, net of rebates and excluding value added
tax. Revenue from the sale of goods or services is recognised when
the Group has transferred the significant risks and rewards of
ownership of the goods to the buyer, when the amount of revenue
can be measured reliably and when it is probable that the economic
benefits associated with the transaction will flow to the Group.
In respect of long-term contracts, revenue is calculated on the basis
of the stage of completion and the total sales value of each contract.
RETIREMENT BENEFIT OBLIGATIONS
The Group participates in two defined benefit pension schemes,
Carr’s Milling Industries Pension Scheme 1993 and Carrs Billington
Agriculture Pension Scheme. The Group also offers various defined
contribution schemes to its employees.
The assets of the above named schemes are held separately from
those of the Group and are invested with independent investment
managers.
Contributions to defined contribution schemes are charged to the
consolidated income statement in the period to which they relate.
The liability recognised in the consolidated balance sheet at the
period end in respect of defined benefit pension schemes is the
present value of the defined benefit obligation and future
administration costs at the balance sheet date less the fair value of
scheme assets. Independent actuaries calculate the defined benefit
obligation annually. The present value of the defined benefit
obligation is determined by discounting the estimated future cash
outflows using interest rates of high-quality corporate bonds that are
denominated in the currency in which the benefits will be paid, and
that have terms to maturity approximating to the terms of the related
pension liability.
The current service costs, past service costs and gains and losses
on settlements and curtailments are included in operating profit in
the consolidated income statement.
A charge is made within operating costs representing the expected
increase in the liabilities of the pension schemes during the period.
This arises from the liabilities of the schemes being one year closer
to payment.
A credit representing the expected return on the assets of the
pension schemes during the period is netted against the above
charge within operating costs. This is based on the market value of
the assets of the schemes at the start of the financial period.
Actuarial gains and losses are recognised in the consolidated
statement of recognised income and expense. The pension
schemes’ deficits or surpluses, to the extent that they are
considered recoverable, are recognised in full on the consolidated
balance sheet.
SHARE BASED PAYMENTS
The Group issues equity-settled share-based payments to certain
employees. Equity-settled share-based payments are measured at
fair value at the date of the grant. The fair value determined at the
grant date of the equity-settled share-based payments is expensed
on a straight-line basis over the vesting period, based on the
Group’s estimate of shares that will eventually vest.
Fair value is measured by use of a valuation model. The expected
life used in the model has been adjusted, based on management’s
best estimate, for the effects of non-transferability, exercise
restrictions and behavioural considerations.
INTEREST
Interest is recognised in the consolidated income statement on an
accruals basis using the effective interest method.
SEGMENTAL REPORTING
The Group’s primary reporting format is business segments and its
secondary format is geographical segments. A business segment is
a component of the Group that is engaged in providing a group of
related products and is subject to risks and returns that are different
from those of other business segments. A geographical segment is
a component of the Group that operates within a particular
economic environment and this is subject to risks and returns that
are materially different from those of components operating in other
economic environments. 30
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Principal Accounting Policies continued
NON-RECURRING ITEMS AND AMORTISATION
Non-recurring items and amortisation that are material by size and/or
by nature are presented within their relevant income statement
category. Items that management consider fall into this category are
disclosed on the face of the consolidated income statement and
within a note to the financial statements. The separate disclosure of
non-recurring items and amortisation helps provide a better
indication of the Group’s underlying business performance. Events
which may give rise to non-recurring items and amortisation include
gains or losses on the disposal of businesses, the restructuring of
businesses, the integration of new businesses, asset impairments,
gains and losses on the disposal of property, plant and equipment,
amortisation of intangible assets, the recognition of deferred assets
on prior year business combinations and exchange gains and losses
on inter-company funding.
GOODWILL
Goodwill arising on consolidation represents the excess of the cost
of acquisition over the fair value of the identifiable assets, liabilities
and contingent liabilities of the acquired entity at the date of the
acquisition.
At the date of acquisition, goodwill is allocated to cash generating
units for the purpose of impairment testing.
Goodwill is recognised as an asset and assessed for impairment
annually. Any impairment is recognised immediately in the income
statement. Once recognised, an impairment of goodwill is not
reversed under any circumstance.
Negative goodwill resulting from business combinations is credited
to the consolidated income statement in the period of acquisition.
Goodwill written off to reserves under UK GAAP prior to 31 August
1998 has not been reinstated and would not form part of the gain or
loss on the disposal of a business.
OTHER INTANGIBLE ASSETS
Other intangible assets are carried at cost less accumulated
amortisation. Amortisation commences when assets are available for
use and is calculated on a straight-line basis over their expected
useful lives which are generally as follows:
Customer relationships 3 - 5 years
Brands 20 years
Know-how 5 years
Patents and trademarks over contractual life
The cost of intangible assets acquired in a business combination is
the fair value at the acquisition date. The cost of separately acquired
intangible assets comprises the purchase price and any directly
attributable costs of preparing the assets for use.
All research costs are recognised in the consolidated income
statement as incurred. Development costs are recognised as an
asset only to the extent that specific recognition criteria, as set out in
IAS38 ‘Intangible assets’, relevant to the proposed application are
met and the amount recognised is recoverable through future
economic benefits.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost less accumulated
depreciation and accumulated impairment losses. Cost comprises
purchase price and directly attributable costs.
Freehold land and assets under construction are not depreciated.
For all other property, plant and equipment, depreciation is
calculated on a straight-line basis to allocate cost less residual
values of the assets over their estimated useful lives as follows:
Freehold buildings up to 50 years
Leasehold buildings shorter of 50 years or lease term
Plant 5 to 20 years
Computer hardware/software 3 to 5 years
Vehicles 4 to 10 years
Fixtures and fittings 3 to 5 years
Residual values and useful lives are reviewed at each financial
period-end.
The cost of maintenance, repairs and minor equipment is charged to
the income statement as incurred; the cost of major renovations and
improvements is capitalised.
INVESTMENT PROPERTY
Investment properties are properties held for long-term rental yields.
Investment properties are carried in the balance sheet at cost less
accumulated depreciation. Freehold land is not depreciated. For all
other investment property, depreciation is calculated on a straight-
line basis to allocate cost less residual values of the assets over
their estimated useful lives as follows:
Freehold buildings up to 50 years
The cost of maintenance, repairs and minor equipment is charged to
the income statement as incurred; the cost of major renovations and
improvements is capitalised.
IMPAIRMENT OF ASSETS
At each reporting date, the Group assesses whether there is any
indication that an asset may be impaired. Where an indicator of
impairment exists, the Group makes an estimate of recoverable
amount. Where the carrying amount of an asset exceeds its
recoverable amount the asset is written down to its recoverable
amount. Recoverable amount is the higher of fair value less costs to
sell and value in use and is deemed for an individual asset. If the
asset does not generate cash flows that are largely independent of
those from other assets or groups of assets, the recoverable amount
of the cash generating unit to which the asset belongs is
determined. Discount rates reflecting the asset specific risks and the
time value of money are used for the value in use calculation.
INVENTORIES
Inventories are stated at the lower of cost and net realisable value.
Cost comprises direct materials and, where applicable, direct labour
costs and those overheads that have been incurred in bringing the
inventories to their present location and condition. Where
appropriate, cost is calculated on a specific identification basis.
Otherwise inventories are valued using the first-in first-out method.
Contract work in progress is measured at the selling price of the
work performed at the balance sheet date. The selling price is 31
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
measured by reference to the stage of completion at the balance
sheet date and total expected income from the contract work.
The stage of completion is determined as the proportion that
contract costs incurred for work performed to date bear to the total
estimated total contract costs. Amounts invoiced for work completed
are deducted from the selling price, while amounts invoiced in
excess of work completed are recognised as current liabilities.
Net realisable value represents the estimated selling price less all
estimated costs to completion and costs to be incurred in marketing,
selling and distribution.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents for the purposes of the consolidated
cash flow statement comprise cash at bank and in hand, money
market deposits and other short term highly liquid investments with
original maturities of three months or less and bank overdrafts. Bank
overdrafts are presented in borrowings within current liabilities in the
consolidated balance sheet.
GRANTS
Grants received on capital expenditure are recorded as deferred
income and taken to the consolidated income statement in equal
annual instalments over the expected useful lives of the assets
concerned.
Revenue grants and contributions are taken to the consolidated
income statement in the period to which they apply.
PROVISIONS
Provisions are recognised when a present legal or constructive
obligation exists, as a result of past events, where it is more likely
than not that an outflow of resources will be required to settle the
obligation and the amount can be reliably measured.
Provisions for restructuring are recognised for direct expenditure on
business reorganisations where plans are sufficiently detailed and
well advanced, and where appropriate communication to those
affected has been undertaken on or before the balance sheet date.
Provisions are discounted where the time value of money is
considered material.
LEASES
Leases are classified as finance leases at inception where
substantially all of the risks and rewards of ownership are
transferred to the Group. Assets classified as finance leases are
capitalised on the consolidated balance sheet and are depreciated
over the expected useful life of the asset. The interest element of the
rental obligations is charged to the consolidated income statement
over the period of the lease using the actuarial method.
Rentals paid under operating leases are charged to the consolidated
income statement on a straight-line basis over the term of the lease.
Leasehold land is normally classified as an operating lease. Payments
made to acquire leasehold land are included in prepayments at cost
and are amortised over the life of the lease. Any incentives to enter into
operating leases are recognised as a reduction of rental expense over
the lease term on a straight-line basis.
TAX
Deferred tax is provided in full, using the liability method, on
temporary differences arising between the tax base of assets and
liabilities and their carrying amounts in the consolidated financial
statements. Deferred tax arising from initial recognition of an asset
or liability in a transaction, other than a business combination, that at
the time of the transaction affects neither accounting nor taxable
profit or loss, is not recognised. Deferred tax is measured using tax
rates that have been enacted or substantively enacted by the
balance sheet date and are expected to apply when the asset is
realised or the liability is settled.
Deferred tax assets are recognised to the extent that it is probable
that future taxable profit will be available against which the
temporary differences can be utilised.
Deferred tax is provided on temporary differences arising on
investments in subsidiaries, associates and joint ventures, except
where the Group is able to control the timing of the reversal of the
temporary difference and it is probable that the temporary difference
will not reverse in the foreseeable future.
Tax is recognised in the consolidated income statement, unless the
tax relates to items recognised directly in shareholders’ equity, in
which case the tax is recognised directly in shareholders’ equity
through the consolidated statement of recognised income and
expense.
DIVIDENDS
Final equity dividends to the shareholders of the Company are
recognised in the period that they are approved by the shareholders.
Interim equity dividends are recognised in the period that they are
paid.
FINANCIAL INSTRUMENTS
Financial assets and liabilities are recognised on the Group’s
consolidated balance sheet when the Group becomes a party to the
contractual provisions of the instrument.
Trade receivables
Trade receivables are recorded at their nominal amount less an
allowance for doubtful debts.
Investments
Investments are initially measured at cost, including transaction
costs. They are classified as either ‘available-for-sale’, ‘fair values
through profit or loss’ or ‘held to maturity’. Where securities are
designated as ‘at fair value through profit or loss’, gains and losses
arising from changes in fair value are included in net profit or loss
for the period. For ‘available-for-sale’ investments, gains or losses
arising from changes in fair value are recognised directly in equity,
until the security is disposed of or is determined to be impaired, at
which time the cumulative gain or loss previously recognised in
equity is included in the net profit or loss for the period.
Equity investments that do not have a quoted market price in an
active market and whose fair value cannot be reliably measured by
other means are held at cost. ‘Held-to-maturity’ investments are
measured at amortised cost using the effective interest method. 32
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Principal Accounting Policies continued
Financial liability and equity
Financial liabilities and equity instruments are classified according to
the substance of the contractual arrangements entered into. An
equity instrument is any contract that evidences a residual interest in
the assets of the Group after deducting all of its liabilities.
Bank borrowings
Interest-bearing loans and overdrafts are recorded at the proceeds
received, net of direct issue costs. Finance charges, including
premiums payable on settlement or redemption and direct issue
costs, are accounted for on an effective interest method and are
added to the carrying amount of the instrument to the extent that
they are not settled in the period in which they arise.
Trade payables
Trade payables are stated at their nominal value.
Equity instruments
Equity instruments issued by the Company are recorded at the
proceeds received, net of direct issue costs.
Derivative financial instruments and hedging activities
The Group primarily uses interest rate swaps, caps and collars and
forward foreign currency contracts to manage its exposures to
fluctuating interest and foreign exchange rates. These instruments
are initially recognised at fair value and are subsequently re-
measured at their fair value at each balance sheet date. The Group
does not designate derivatives as hedge instruments and therefore
does not adopt hedge accounting. As a result changes in the fair
value of derivative financial instruments are recognised in the
consolidated income statement as they arise.
The Group does not use derivatives to hedge balance sheet and
income statement translation exposures. Where appropriate,
borrowings are arranged in local currencies to provide a natural
hedge against overseas assets.
IFRS NOT YET APPLIED
The following standards and interpretations, which are in issue at the
balance sheet date but not yet effective, have not been applied in
these financial statements:
IFRS 7 “Financial instruments: Disclosures”, and related amendment
to IAS 1 on capital disclosures, which is effective for periods
commencing on or after 1 January 2007.
Amendment to IAS 39 and IFRS 4 “Financial guarantee contracts”,
which is effective for periods commencing on or after 1 January
2006.
SIGNIFICANT JUDGEMENTS, KEY ASSUMPTIONS AND
ESTIMATES
Application of certain Group accounting policies requires
management to make judgements, assumptions and estimates
concerning the future as detailed below.
Valuation of pension obligations
The deficit on the Group’s defined benefit pension scheme is
determined each year following advice from the Group’s actuary and
can fluctuate based on a number of external factors over which
management have no control. Such factors include:
Major assumptions as shown in the table in note 28; and
Actual returns on scheme assets compared to those predicted in the
previous scheme valuation.
Valuation of share-based payments
The fair value of share-based payments is determined using
valuation models and is charged to the income statement over the
vesting period.
The valuation models require certain assumptions to be made as
shown in the tables in note 31. Estimations of vesting and
satisfaction of performance criteria are required to determine fair
value.
Impairment of goodwill
The carrying value of goodwill must be assessed for impairment
annually. This requires an estimation of the value in use of the cash
generating units to which goodwill is allocated. Value in use is
dependent on estimations of future cash flows from the cash
generating unit and the use of an appropriate discount rate to
discount those cash flows to their present value.
No impairment has been identified in the period.
Provision for impairment of trade receivables
The financial statements include a provision for impairment of trade
receivables that is based on management’s estimation of
recoverability. There is a risk that the provision will not match the
trade receivables that ultimately prove to be irrecoverable. 33
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
1 The Company has taken advantage of the exemption, under section 230 of the Companies Act 1985, from presenting its own income
statement. The profit after tax for the period dealt with in the accounts of the Company was £5,536,000 (2005: £2,105,000).
2 SEGMENTAL REPORTING
Primary reporting format - business segments
The segment results for the period ended 2 September 2006 are as follows:
Agriculture Food Engineering Other Group
£’000 £’000 £’000 £’000 £’000
Total gross segment revenue 174,793 55,703 12,345 213 243,054
Inter-segment revenue (301) (3) (174) — (478)
Revenue 174,492 55,700 12,171 213 242,576
Operating profit before retirement benefit charge* 4,954 2,506 1,055 (325) 8,190
Analysed as:
Before non-recurring items and amortisation 4,998 3,333 1,055 (325) 9,061
Non-recurring items and amortisation (44) (827) — — (871)
4,954 2,506 1,055 (325) 8,190
Retirement benefit charge* (1,074)
Net finance costs (1,011)
Share of post-tax profit of associate 393
Share of post-tax loss of joint ventures (175)
Profit before taxation 6,323
Taxation (1,989)
Profit for the period 4,334
Segment assets 39,974 28,723 8,341 784 77,822
Unallocated assets
- Investment in associate 982
- Investment in joint ventures 704
- Other investments 254
- Income tax assets 5,163
Total assets 84,925
Total assets in the above analysis represents total assets as disclosed in the balance sheet of £86,133,000 less bank overdrafts
of £1,208,000.
Segment liabilities 18,643 5,128 1,979 1,188 26,938
Unallocated liabilities
- Group borrowings 14,986
- Retirement benefit obligation* 15,796
- Income tax liabilities 4,924
Total liabilities 62,644
Total liabilities in the above analysis represents total liabilities as disclosed in the balance sheet of £63,852,000 less bank overdrafts
of £1,208,000.
Other segment items
Capital expenditure
- Property, plant and equipment 1,782 2,029 141 53 4,005
- Other intangible assets 50 — — — 50
Depreciation 1,349 1,664 279 127 3,419
Loss/(profit) on the disposal of property,
plant and equipment 16 10 (2) 3 27
Amortisation of intangible assets 128 826 32 — 986
* It is not possible to allocate the assets and liabilities of the defined benefit pension scheme across the segments. Therefore, this is
shown as a reconciling item.
Notes to the Financial Statements 34
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
2 SEGMENTAL REPORTING CONTINUED
Primary reporting format - business segments
The segment results for the period ended 3 September 2005 are as follows:
Agriculture Food Engineering Other Group
£’000 £’000 £’000 £’000 £’000
Total gross segment revenue 132,745 48,006 11,297 259 192,307
Inter-segment revenue (83) (2) (98) — (183)
Revenue 132,662 48,004 11,199 259 192,124
Operating profit before retirement benefit charge* 5,866 2,441 4,874 15 13,196
Analysed as:
Before non-recurring items and amortisation 5,866 2,262 764 15 8,907
Non-recurring items and amortisation — 179 4,110 — 4,289
5,866 2,441 4,874 15 13,196
Retirement benefit charge* (932)
Net finance costs (1,198)
Share of post-tax loss of associate:
- normal (70)
- non-recurring (627)
Profit before taxation 10,369
Taxation (2,557)
Profit for the period 7,812
Segment assets 45,126 29,145 8,857 (460) 82,668
Unallocated assets
- Investment in associate 445
- Investment in joint ventures 172
- Other investments 255
- Income tax assets 4,049
Total assets 87,589
Total assets in the above analysis represents total assets as disclosed in the balance sheet of £88,235,000 less bank overdrafts of
£646,000.
Segment liabilities 21,757 5,529 2,641 784 30,711
Unallocated liabilities
- Group borrowings 17,419
- Retirement benefit obligation* 12,119
- Income tax liabilities 5,435
Total liabilities 65,684
Total liabilities in the above analysis represents total liabilities as disclosed in the balance sheet of £66,330,000 less bank overdrafts of
£646,000.
Other segment items
Capital expenditure (including acquisitions)
- Property, plant and equipment 3,432 6,961 2,930 130 13,453
- Investment property — 657 — — 657
- Other intangible assets 172 2,451 — — 2,623
Depreciation 1,228 1,589 137 101 3,055
Loss/(profit) on the disposal of property,
plant and equipment 11 (5) (4,131) (74) (4,199)
Amortisation of intangible assets — 997 32 — 1,029
* It is not possible to allocate the assets and liabilities of the defined benefit pension scheme across the segments. Therefore, this is
shown as a reconciling item. 35
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
2 SEGMENTAL REPORTING CONTINUED
Secondary reporting format - geographical segments
Revenue Segment assets Capital Expenditure
2006 2005 2006 2005 2006 2005
£’000 £’000 £’000 £’000 £’000 £’000
UK 231,810 184,721 74,984 79,772 3,609 16,617
Other 10,766 7,403 2,838 2,896 446 116
242,576 192,124 77,822 82,668 4,055 16,733
The geographical analysis of revenue is presented by revenue origin. There is no material difference between revenue by origin and
revenue by destination.
3 REVENUE, COST OF SALES, OTHER OPERATING INCOME AND NET OPERATING EXPENSES
2006 2005
£’000 £’000 £’000 £’000
Revenue 242,576 192,124
Cost of sales (206,658) (161,296)
Gross profit 35,918 30,828
Net operating expenses:
Distribution costs (17,192) (13,188)
Administrative expenses - normal (10,739) (9,665)
- non-recurring items
and amortisation (see note 6) (871) 4,289
(11,610) (5,376)
(28,802) (18,564)
Group operating profit 7,116 12,264
4 GROUP OPERATING PROFIT 2006 2005
£’000 £’000
Group operating profit is stated after charging/(crediting):
Amortisation of grants (18) (50)
Profit on disposal of investments (1) —
Loss/(profit) on disposal of property, plant and equipment 27 (4,199)
Depreciation of property, plant and equipment held under finance lease 746 558
Depreciation of owned property, plant and equipment 2,645 2,490
Depreciation of owned investment property 28 7
Amortisation of intangible assets 986 1,029
Foreign exchange gains (86) (28)
Derivative financial instruments losses 27 6
Operating lease charges:
Plant and machinery 604 233
Other 25 12
Auditors remuneration:
Audit services (Company £10,000; 2005 £10,000) 179 149
Accounting advisory services (IFRS transition) 32 —
Tax services (including IFRS transition services) 92 71
Included within group operating profit is the following in respect of investment property:
Rental income 33 33
Operating expenses (65) (46)
(32) (13) 36
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
5 SHARE OF POST-TAX PROFIT/(LOSS) IN ASSOCIATE AND JOINT VENTURES 2006 2005
£’000 £’000
Share of post-tax profit/(loss) in associate - normal 393 (70)
- non-recurring items and amortisation (see note 6) — (627)
393 (697)
Share of post-tax loss in joint ventures - normal (46) —
- non-recurring items and amortisation (see note 6) (129) —
(175) —
Total share of post-tax profit/(loss) in associate and joint ventures 218 (697)
6 NON-RECURRING ITEMS AND AMORTISATION 2006 2005
Amount Tax credit Amount Tax credit
£’000 £’000 £’000 £’000
Group operating profit:
Cost of reorganising food division — — (350) 105
Profit on disposal of property, plant and equipment —— 4,110 (719)
Immediate recognition of negative goodwill 77 — 1,526 —
Amortisation of intangible assets (948) 284 (997) 299
(871) 284 4,289 (315)
Share of post-tax (loss)/profit in associate and joint ventures:
Cost of reorganising associate, net of tax —— (627) —
Amortisation of intangible asset and impairment of goodwill
recognised in joint ventures, net of tax (129) — ——
Total non-recurring items and amortisation (1,000) 284 3,662 (315)
Profit before taxation 6,323 10,369
Non-recurring items and amortisation (1,000) 3,662
Adjusted profit before taxation 7,323 6,707
Group operating profit 7,116 12,264
Non-recurring items and amortisation (871) 4,289
Adjusted Group operating profit 7,987 7,975
7 STAFF COSTS 2006 2005
£’000 £’000
Wages and salaries 17,888 15,398
Social security costs 1,782 1,653
Other pension costs 2,120 1,912
Cost of share based awards 27 —
21,817 18,963
Included within other pension costs is £1,074,000 (2005: £932,000) in respect of the defined benefit pension scheme.
The average monthly number of employees, including directors and key management personnel, during the period was made up as
follows:
2006 2005
Number Number
Sales, office and management 433 365
Manufacture and distribution 304 294
737 659
Full details of the directors' emoluments, pension benefits and share options are given in the Directors' Remuneration Report. 37
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
8 NET FINANCE COSTS 2006 2005
£’000 £’000
Interest expense
Interest payable on bank overdrafts (355) (515)
Interest payable on bank loans and other borrowings (939) (437)
Interest payable on finance leases and hire purchase contracts (128) (111)
Other interest (110) (122)
Total interest expense (1,532) (1,185)
Other finance income/(costs)
Movement in fair value of interest related derivative instruments (note 27) 143 (106)
Total other finance income/(costs) 143 (106)
Interest income
Bank interest 366 75
Other interest 12 18
Total interest income 378 93
Net finance costs (1,011) (1,198)
9 TAXATION 2006 2005
£’000 £’000
(a) Analysis of the charge in the period
Current tax:
UK corporation tax
Current period 1,861 1,797
Prior period (711) 24
Foreign tax
Current period 514 270
Consortium relief
Prior period 625 —
Group current tax 2,289 2,091
Deferred tax:
Origination and reversal of timing differences (300) 466
Group deferred tax (300) 466
Tax on profit on ordinary activities 1,989 2,557
(b) Factors affecting tax charge for the period
The tax assessed for the period is higher (2005: lower) than the rate of corporation tax in the UK (30%). The differences are explained
below:
2006 2005
£'000 £'000
Profit before tax 6,323 10,369
Tax at 30% 1,897 3,111
Effects of:
Tax effect of share of (loss)/profit in associate and joint ventures (65) 209
Tax effect of expenses/(income) that are not deductible/(allowable) in determining taxable profit 204 (1,510)
Tax on rolled over gain — 719
Effects of different tax rates of foreign subsidiaries 11 30
Effects of changes in tax rates of subsidiaries (3) (43)
(Over)/under provision in prior years (55) 16
Other — 25
Total tax charge for the period 1,989 2,557 38
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
10 DIVIDENDS 2006 2005
Equity £’000 £’000
Final dividend for the period ended 3 September 2005 of 11.0p per 25.0p share (2004: 9.0p) 905 730
Interim paid of 5.5p per 25.0p share (2005: 5.0p) 453 406
1,358 1,136
The proposed dividend to be considered by shareholders at the Annual General Meeting is £1,029,197, being 12.5p per share, making a
total for the year of 18.0p.
11 EARNINGS PER ORDINARY SHARE
Earnings per share are calculated by reference to a weighted average of 8,227,329 shares (2005: 8,127,328) in issue during the period.
Non-recurring costs and amortisation that are charged or credited to profit do not relate to the profitability of the Group on an ongoing
basis. Therefore an adjusted earnings per share is presented as follows:
2006 2005
Earnings Earnings
Earnings per share Earnings per share
£’000 pence £’000 pence
Earnings per share - basic 4,195 51.0 7,483 92.1
Non-recurring items and intangible asset amortisation:
Cost of reorganising food division —— 350 4.3
Cost of reorganising associate, net of tax — — 627 7.7
Profit on disposal of property, plant and equipment —— (4,110) (50.5)
Immediate recognition of negative goodwill (77) (0.9) (1,526) (18.8)
Amortisation of intangible asset 948 11.5 997 12.2
Amortisation of intangible asset and impairment of goodwill
recognised in joint ventures, net of tax 129 1.6 — —
Taxation arising on non-recurring items (284) (3.5) 315 3.9
Earnings per share - adjusted 4,911 59.7 4,136 50.9
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all
dilutive potential ordinary shares. The potentially dilutive ordinary shares, where the exercise price is less than the average market price
of the Company's ordinary shares during the period, are disclosed in note 31.
2006 2005
Weighted Earnings Weighted Earnings
Earnings average number per share Earnings average number per share
£’000 of shares pence £’000 of shares pence
Earnings per share 4,195 8,227,329 51.0 7,483 8,127,328 92.1
Effect of dilutive securities:
Options — 97,288 (0.6) — 158,591 (1.8)
Save as you earn (SAYE) — 3,949 — —— —
Diluted earnings per share 4,195 8,328,566 50.4 7,483 8,285,919 90.3 39
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
12 GOODWILL AND OTHER INTANGIBLE ASSETS
Customer Patents and
Goodwill relationships Brands Know-how trademarks Total
Group £’000 £’000 £’000 £’000 £’000 £’000
Cost
As at 29 August 2004 173 — — 160 — 333
Additions 360 2,266 357 — — 2,983
Disposals (73) — — — — (73)
At 3 September 2005 460 2,266 357 160 — 3,243
Re-assessment of deferred consideration (245) — — — — (245)
Additions 80———50130
As at 2 September 2006 295 2,266 357 160 50 3,128
Amortisation
At 29 August 2004 133 — — 16 — 149
Charge for the period — 969 28 32 — 1,029
Disposals (73) — — — — (73)
At 3 September 2005 60 969 28 48 — 1,105
Charge for the period — 913 35 32 6 986
At 2 September 2006 60 1,882 63 80 6 2,091
Net book value
At 28 August 2004 40 — — 144 — 184
At 3 September 2005 400 1,297 329 112 — 2,138
At 2 September 2006 235 384 294 80 44 1,037
Goodwill of £80,000 arose during the period on the purchase of further shares in Northern Feeds Solutions Limited.
Goodwill brought forward at 4 September 2005 includes deferred consideration of £322,000 on the acquisition of Wallace Oils Holdings
Limited. The directors estimate that the likelihood of the deferred consideration becoming payable is now remote. This has resulted in the
creation of negative goodwill of £76,810 which has been credited to the income statement during the period. This change in accounting
estimate has been accounted for prospectively in accordance with IAS 8.
Goodwill is tested annually for impairment, or more frequently if there are indications that goodwill might be impaired. No impairment has
been identified in the period.
Customer relationships are being amortised in line with the profit streams generated over the life of the relationship. The life of the
relationships range between three and five years.
Brands are being amortised on a straight line basis over a twenty year period, being the directors' estimate of the useful economic life.
Know-how is being amortised on a straight line basis over five years, being the directors' estimate of the useful economic life.
Patents and trademarks are being amortised over their contractual life.
There is no goodwill or intangible assets in the company. 40
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
13 PROPERTY, PLANT AND EQUIPMENT
Assets in
Land and Plant and course of
buildings equipment construction Total
Group £’000 £’000 £’000 £’000
Cost
At 29 August 2004 11,692 24,973 567 37,232
Exchange differences (24) (86) (4) (114)
Subsidiaries acquired 4,214 9,411 — 13,625
Additions 2,740 2,245 1,154 6,139
Disposals (1,276) (1,390) — (2,666)
Reclassifications 31 1,216 (1,247) —
At 3 September 2005 17,377 36,369 470 54,216
Exchange differences (27) (5) — (32)
Additions 285 3,358 362 4,005
Disposals (22)(1,957)—(1,979)
Reclassifications 456 9 (465) —
At 2 September 2006 18,069 37,774 367 56,210
Depreciation
At 29 August 2004 2,160 15,512 — 17,672
Exchange differences (6) (43) — (49)
Subsidiaries acquired 369 5,942 — 6,311
Charge for the period 520 2,528 — 3,048
Disposals (371) (1,233) — (1,604)
At 3 September 2005 2,672 22,706 — 25,378
Exchange differences (6) 34 — 28
Charge for the period 518 2,873 — 3,391
Disposals (22) (1,737) — (1,759)
At 2 September 2006 3,162 23,876 — 27,038
Net book value
At 28 August 2004 9,532 9,461 567 19,560
At 3 September 2005 14,705 13,663 470 28,838
At 2 September 2006 14,907 13,898 367 29,172
Freehold land amounting to £2,261,045 (2005: £2,261,045) has not been depreciated.
Land and buildings acquired from business combinations in the prior period were professionally valued as part of the fair value
accounting.
As permitted under IFRS1, the Group has opted to treat previous revaluations of property made under UK GAAP as deemed cost at the
date of transition.
2006 2005
£’000 £’000
The net book value of land and buildings comprises:
Freehold 11,694 11,369
Long leasehold 3,213 3,336
The net book value of plant and equipment includes £2,723,049 (2005: £2,535,253 ) in respect of assets held under finance leases.
The company has no property, plant and equipment. 41
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
14 INVESTMENT PROPERTY
Land and
buildings
Group £’000
Cost
At 29 August 2004 211
Subsidiaries acquired 685
At 3 September 2005 and 2 September 2006 896
Depreciation
At 29 August 2004 39
Subsidiaries acquired 28
Charge for the period 7
At 3 September 2005 74
Charge for the period 28
At 2 September 2006 102
Net book value
At 28 August 2004 172
At 3 September 2005 822
At 2 September 2006 794
Included within investment property are properties occupied by life tenants. The net book value of these properties at 2 September 2006
is £242,000 (2005: £251,000).
The directors do not consider that the fair value of investment properties differs materially from carrying value.
There is no investment property in the company. 42
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
15 INVESTMENTS
Joint Other
ventures Associate investments Total
Group £’000 £’000 £’000 £’000
Cost
At 4 September 2005 172 445 273 890
Exchange difference (3) — — (3)
Additions 710 — — 710
Disposals — — (10) (10)
Share of post-tax (loss)/profit (175) 393 — 218
Share of recognised gains — 144 — 144
At 2 September 2006 704 982 263 1,949
Provision for impairment
At 4 September 2005 — — 18 18
Disposals — — (9) (9)
At 2 September 2006 — — 9 9
Net book value
At 3 September 2005 172 445 255 872
At 2 September 2006 704 982 254 1,940
Joint Shares in Other
ventures Associate subsidiaries investments Total
Company £’000 £’000 £’000 £’000 £’000
Cost
At 4 September 2005 172 1,470 18,158 211 20,011
Share awards granted to
employees of subsidiary
undertakings — — 25 — 25
Additions 100 — — — 100
Disposals — — — (10) (10)
Redemption of preference shares — — (233) — (233)
At 2 September 2006 272 1,470 17,950 201 19,893
Provision for impairment
At 4 September 2005 — — 5,086 9 5,095
Disposals — — — (9) (9)
At 2 September 2006 — — 5,086 — 5,086
Net book value
At 3 September 2005 172 1,470 13,072 202 14,916
At 2 September 2006 272 1,470 12,864 201 14,807
Other investments comprise shares in several private limited companies. As a result of adoption of IAS32 and IAS39, these investments
have been classified as unquoted investments for which fair value cannot be reliably measured and are held at cost. There has been no
impact on the total value of these assets.
During the period a new joint venture company was formed, Bibby Agriculture Limited, with Carrs Billington Agriculture (Sales) Limited
being a 50% shareholder and Wynnstay Group PLC and Welsh Feed Producers Limited each having a 25% shareholding. The joint
venture markets and sells animal feed, fertilisers and other farm requirements in Wales.
During the period a new joint venture company was formed, Afgritech Limited, with Carr's Milling Industries PLC being a 50%
shareholder and Afgri Operations SA being the other 50% shareholder. The joint venture will produce ingredients for animal feed.
During the period preference share capital in several subsidiaries were redeemed at par.
The Group’s investment in the associate at 4 September 2005 has been revised from £800,000, which was disclosed in the Group’s
IFRS transition document issued in April 2006, to £445,000 following the finalisation of the fair values of the assets and liabilities
acquired from W & J Pye Limited in 2005 and adjustments made to taxation in the associate on transition to IFRS. 43
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
16 INVESTMENT IN ASSOCIATES
The associated undertakings at 2 September 2006 are:
Group and company
Proportion
of shares held
Ordinary Country of
Name % incorporation Activity
Carrs Billington Agriculture (Operations) Limited 49 England Manufacture of
animal feed
Associates are accounted for using the equity method.
The aggregate amounts relating to associates, of which the group recognises 49%, are:
2006 2005
£'000 £'000
Total assets 22,367 27,350
Total liabilities (22,864) (28,942)
Revenues 69,744 45,775
Profit/(loss) after tax 803 (1,423)
17 INTEREST IN JOINT VENTURES
The joint ventures at 2 September 2006 are:
Group
Proportion of shares held
Ordinary Preference Country of
Name % % incorporation Activity
Crystalyx Products GmbH 50 — Germany Manufacture of animal feed blocks
Bibby Agriculture Limited 26 17 England Sale of agricultural products
Afgritech Limited 50 — England Producers of ingredients of animal feed
Crystalyx Products GmbH has a 31 December accounting period end.
Interests in the joint ventures listed above are held directly by the holding company with the following exception: Carrs Billington
Agriculture (Sales) Limited holds 50% of the ordinary share capital and 33% of the preference share capital in Bibby Agriculture Limited.
Joint ventures are accounted for using the equity method.
The aggregate amounts included in the financial statements relating to the Group’s share of joint ventures are:
2006 2005
£'000 £'000
Non-current assets 1,629 172
Current assets 1,542 —
Current liabilities (2,116) —
Non-current liabilities (931) —
Income 8,045 —
Expenses (8,197) —
Net finance costs (23) — 44
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
18 INVESTMENT IN SUBSIDIARY UNDERTAKINGS
Proportion of
Shares Held
Ordinary Country of
Name % incorporation Activity
Carrs Agriculture Ltd. 100 England Manufacture of animal
feed blocks and fertiliser
Carrs Billington Agriculture (Sales) Ltd. 51 England Agricultural retailers
Animal Feed Supplement Inc. 100 USA Manufacture of animal feed blocks
Northern Feeds Solutions Ltd. 51 England Agricultural retailers
Carr's Flour Mills Ltd. 100 England Flour milling
Carrs Engineering Ltd. 100 England Engineering
Bowie and Aram Ltd. 100 Scotland Travel agents
B.R.B. Trust Ltd. 100 England Financial services
Carrs Properties Ltd. 100 England Property holding
Investments in the subsidiaries listed above are held directly by the holding company with the following exceptions: Northern Feeds
Solutions Limited is held by Carrs Billington Agriculture (Sales) Limited.
During the period Carrs Billington Agriculture (Sales) Limited increased its shareholding in Northern Feeds Solutions Limited to 100%.
Dormant subsidiaries are not shown above because disclosure would be excessively lengthy. A full list of subsidiary undertakings will be
annexed to the Company's next annual return.
19 DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and liabilities are attributable to the following:
Assets Liabilities Net
2006 2005 2006 2005 2006 2005
Group £’000 £’000 £’000 £’000 £’000 £’000
Accelerated tax depreciation — — (2,692) (2,846) (2,692) (2,846)
Employee benefits 4,739 3,636 — — 4,739 3,636
Other 423 326 (908) (1,008) (485) (682)
Tax assets/(liabilities) 5,162 3,962 (3,600) (3,854) 1,562 108
Movement in deferred tax during the period
At At
4September Exchange Recognised Recognised 2 September
2005 differences in income in equity 2006
£’000 £’000 £’000 £’000 £’000
Accelerated tax depreciation (2,846) — 154 — (2,692)
Employee benefits 3,636 — (67) 1,170 4,739
Other (682) (16) 213 — (485)
108 (16) 300 1,170 1,562
Movement in deferred tax
during the prior period At At
29 August Exchange In respect of Recognised Recognised 3 September
2004 differences acquisitions in income in equity 2005
£’000 £’000 £’000 £’000 £’000 £’000
Accelerated tax depreciation (1,073) — (2,067) 294 — (2,846)
Employee benefits 3,282 — — (109) 463 3,636
Other (25)(12)6(651) —(682)
2,184 (12) (2,061) (466) 463 108 45
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
19 DEFERRED TAX ASSETS AND LIABILITIES (CONTINUED)
Assets
2006 2005
Company £’000 £’000
Employee benefits 4,739 3,636
Other 22 36
Tax assets 4,761 3,672
Movement in deferred tax during the period At At
4September Recognised Recognised 2 September
2005 in income in equity 2006
£’000 £’000 £’000 £’000
Employee benefits 3,636 (67) 1,170 4,739
Other 36 (14) — 22
3,672 (81) 1,170 4,761
Movement in deferred tax At At
during the prior period 29 August Recognised Recognised 3 September
2004 in income in equity 2005
£’000 £’000 £’000 £’000
Accelerated tax depreciation 1 (1) — —
Employee benefits 3,282 (109) 463 3,636
Other — 36 — 36
3,283 (74) 463 3,672 46
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
20 INVENTORIES 2006 2005
Group £’000 £’000
Raw materials and consumables 5,364 4,574
Work in progress 695 1,784
Finished goods and goods for resale 5,885 6,589
11,944 12,947
Inventories is stated after a provision for impairment of £276,000 (2005: £232,000).
Cost of sales consists of the following:
Material cost 191,362 148,586
Processing cost 5,024 4,690
Other 10,272 8,020
206,658 161,296
The company has no inventories.
21 TRADE AND OTHER RECEIVABLES Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Current:
Trade receivables 29,704 32,042 — —
Amounts recoverable on contracts 22 189 — —
Amounts owed by Group undertakings (note 39) — — 13,933 13,913
Amounts owed by other related parties (note 39) 616 409 209 —
Other receivables 2,029 1,172 36 47
Prepayments and accrued income 1,175 1,385 147 88
33,546 35,197 14,325 14,048
Non-current:
Other receivables 208 223 — —
208 223 — —
The directors consider that the carrying amount of trade and other receivables approximates to their fair value.
Trade receivables is stated after a provision for impairment of £3,061,000 (2005: £2,761,000).
22 CURRENT TAX ASSETS Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Corporation tax recoverable 1 87 657 410
Group taxation relief — — 243 192
1 87 900 602 47
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
23 CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Cash and cash equivalents per the balance sheet 2,292 3,149 — —
Bank overdrafts (note 26) (1,208) (646) (883) (1,730)
Cash and cash equivalents per the cash flow statement 1,084 2,503 (883) (1,730)
24 TRADE AND OTHER PAYABLES Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Current:
Trade payables 15,034 17,242 — —
Payments on account 1,100 1,481 — —
Amounts owed to Group undertakings (note 39) — — 18 122
Amounts owed to other related parties (note 39) 3,499 5,787 — —
Other taxes and social security payable 1,370 1,214 213 136
Other payables 1,640 1,310 200 67
Accruals and deferred income 2,744 2,284 594 340
25,387 29,318 1,025 665
Non-current:
Other payables 1,358 1,103 — —
Accruals and deferred income 166 184 — —
1,524 1,287 — —
The directors consider that the carrying amount of trade and other payables approximates to their fair value.
Included within non-current accruals and deferred income is the following in respect of government grants:
Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
At the beginning of the period 184 244 — —
Arising on acquisitions — 25 — —
Amortisation in the period (18) (50) — —
Provision for repayment — (35) — —
At the end of the period 166 184 — —
25 CURRENT TAX LIABILITIES Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Current tax 722 1,581 — —
Consortium tax relief 602 — — —
1,324 1,581 — — 48
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
26BORROWINGS Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Current:
Bank overdrafts 1,208 646 883 1,730
Bank loans and other borrowings 6,409 7,995 893 1,293
Loans from group undertakings — — 2,475 4,191
Other loans 1,225 1,225 — —
Finance leases 840 800 — —
9,682 10,666 4,251 7,214
Non-current:
Bank loans 5,610 6,503 5,610 6,503
Other loans 30 31 — —
Finance leases 872 865 — —
6,512 7,399 5,610 6,503
Borrowings are repayable as follows:
On demand or within one year 9,682 10,666 4,251 7,214
In the second year 1,082 1,493 493 893
In the third to fifth years inclusive 5,430 5,906 5,117 5,610
16,194 18,065 9,861 13,717
Group and company borrowings are shown in the balance sheet net of arrangement fees of £22,458 of which £7,000 is deducted from
current liabilities (2005: £29,459 of which £7,000 is deducted from current liabilities).
Finance leases are repayable as follows:
On demand or within one year 840 800 — —
In the second year 559 569 — —
In the third to fifth years inclusive 313 296 — —
1,712 1,665 — —
The net borrowings are:
Borrowings as above 16,194 18,065 9,861 13,717
Cash and cash equivalents (2,292) (3,149) — —
Net borrowings 13,902 14,916 9,861 13,717
Finance lease obligations are secured on the assets to which they relate. Bank loans and other borrowings includes an amount of
£5,516,000 (2005: £6,703,000) which is secured on trade debtors. The Company, together with certain subsidiaries, act as guarantors
on the bank loans.
Other loans are non-interest bearing and have no fixed date for repayment. The bank loans are repayable by instalments and the overdraft
is repayable on demand.
Non-current bank loans includes a revolving credit facility of £4.5 million which is not repayable until October 2009. 49
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
27 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The main risk from the Group's financial instruments are interest rate risk, liquidity risk and foreign currency risk. The Board reviews
and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged
throughout the period.
Interest rate risk
The Group finances its operations through a mixture of retained earnings and bank borrowings. The Group borrows in the desired
currencies at fixed and floating rates of interest and then uses interest rate caps and swaps to manage the Group's exposure to
interest rate fluctuations. At the period end £6.5 million (2005: £6.6 million) of the Group's borrowings were at a fixed rate of interest.
Liquidity rate risk
As regards liquidity, the Group's policy throughout the period has been to maintain a mix of short and medium term borrowings. Short-
term flexibility is achieved by overdraft facilities. In addition it is the Group's policy to maintain committed undrawn facilities in order to
provide flexibility in the management of the Group's liquidity.
Foreign currency risk
The Group's subsidiary, Animal Feed Supplement Inc., operates in the USA and its revenues and expenses are denominated
exclusively in US dollars.
Crystalyx Products GmbH, a joint venture of the Group, operates in Germany and its revenues and expenses are denominated
exclusively in Euros.
Effective interest rates at the balance sheet date and borrowing maturity
Weighted Weighted
average 2006 average 2005
effective Within One to Two to effective Within One to Two to
interest one two five interest one two five
rate Total year years years rate Total year years years
Group % £’000 £’000 £’000 £’000 % £’000 £’000 £’000 £’000
Bank overdrafts 5.75 1,208 1,208 — — 5.50 646 646 — —
Bank loans and other borrowings 6.08 12,019 6,409 493 5,117 5.74 14,498 7,995 893 5,610
Other loans — 1,255 1,225 30 — — 1,256 1,225 31 —
Finance lease liabilities 6.90 1,712 840 559 313 6.90 1,665 800 569 296
16,194 9,682 1,082 5,430 18,065 10,666 1,493 5,906
Fixed rate 6,712 840 559 5,313 6,665 800 569 5,296
Floating rate 8,227 7,617 493 117 10,144 8,641 893 610
Non-interest bearing 1,255 1,225 30 — 1,256 1,225 31 —
16,194 9,682 1,082 5,430 18,065 10,666 1,493 5,906
The effect of the Group's interest rate swap is to classify £5 million (2005: £5 million) of floating rate borrowings in the above table as
fixed rate.
The floating rate financial liabilities bear interest determined as follows:
Bank overdrafts Base rate + 1% margin; US prime rate + 1% margin
Bank loans and other borrowings Libor + 1.25% or + 1.125%; Base rate + 1.25% margin 50
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
27 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
Weighted Weighted
average 2006 average 2005
effective Within One to Two to effective Within One to Two to
interest one two five interest one two five
rate Total year years years rate Total year years years
Company % £’000 £’000 £’000 £’000 % £’000 £’000 £’000 £’000
Bank overdrafts 5.75 883 883 — — 5.50 1,730 1,730 — —
Bank loans and other borrowings 6.14 6,503 893 493 5,117 5.73 7,796 1,293 893 5,610
Loans from group undertakings 4.78 2,475 2,475 — — 5.34 4,191 4,191 — —
9,861 4,251 493 5,117 13,717 7,214 893 5,610
Fixed rate 5,000 — — 5,000 5,000 — — 5,000
Floating rate 4,861 4,251 493 117 8,717 7,214 893 610
9,861 4,251 493 5,117 13,717 7,214 893 5,610
The effect of the Company's interest rate swap is to classify £5 million (2005: £5 million) of floating rate borrowings in the above table as fixed rate.
The Company's floating rate financial liabilities bear interest determined as follows:
Bank overdrafts Base rate + 1% margin
Bank loans and other borrowings Libor + 1.25% or + 1.125%
Analysis of borrowings by currency:
2006 2005
US US
Sterling Dollar Euro Total Sterling Dollar Euro Total
Group £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Bank overdrafts 1,006 186 16 1,208 601 45 — 646
Bank loans and other borrowings 12,019 — — 12,019 14,498 — — 14,498
Other loans 1,225 — 30 1,255 1,225 — 31 1,256
Finance leases 1,712 — — 1,712 1,665 — — 1,665
15,962 186 46 16,194 17,989 45 31 18,065
Company
Bank overdrafts 867 — 16 883 1,730 — — 1,730
Bank loans and other borrowings 6,503 — — 6,503 7,796 — — 7,796
Loans from group undertakings 114 2,361 — 2,475 2,839 1,352 — 4,191
7,484 2,361 16 9,861 12,365 1,352 — 13,717
Borrowing facilities
The Group had various undrawn committed facilities. The facilities available at 2 September 2006, in respect of which all conditions
precedent had been met, were as follows:
2006 2005
Floating rate Floating rate
£'000 £'000
Expiring in one year or less 10,928 14,630
The Company’s overdraft is within a group facility and it is therefore not possible to determine the Company’s undrawn committed
facilities at the balance sheet date.
Derivative financial instruments
The Group and Company does not adopt hedge accounting. Any gains or losses on derivative financial instruments have been
recognised in the Income Statement in the period they arise. 51
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
27 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
Currency derivatives
The Group and Company uses forward foreign currency contracts to manage its exchange risk exposure. At the balance sheet date, the
fair value of outstanding forward foreign currency contracts are as below:
Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
At beginning of period — 6 — —
Losses during the period (27) (6) (4) —
At end of period (27) — (4) —
Fair value has been determined by reference to the value of equivalent forward foreign currency contracts at the balance sheet date.
All forward foreign currency contracts have a maturity of less than one year after the balance sheet date. Gains and losses on currency
related derivatives are included within operating profit.
Interest rate derivatives
The Group uses interest rate caps and swaps to manage its interest rate risk exposure. At the balance sheet date, the fair value of these
instruments are as below:
Interest rate cap Interest rate swap
Group Company Group Company
2006 2005 2006 2005 2006 2005 2006 2005
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At beginning of period — — — — (106) — (106) —
Gains/(losses) during the period 6 — — — 137 (106) 137 (106)
At end of period 6 — — — 31 (106) 31 (106)
Fair value has been determined by reference to the value of equivalent instruments at the balance sheet date. Gains and losses on
interest related derivatives are included within net finance costs in the income statement.
The interest rate cap has a notional value of £3,500,000 and a strike rate of 5.5%. The date of maturity is 30 September 2008.
The interest rate swap has a notional value of £5,000,000 and a fixed interest rate of 4.88%, with interest payments being made at
quarterly intervals. The date of maturity is 10 December 2009.
Fair values of financial assets and financial liabilities
Group Company
2006 2005 2006 2005
Book Fair Book Fair Book Fair Book Fair
value value value value value value value value
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Assets
Other investments 254 254 255 255 201 201 202 202
Non-current derivatives 37 37 —— 31 31 ——
Non-current receivables 208 208 223 223 — — — —
Current trade and other
receivables 33,546 33,546 35,197 35,197 14,325 14,325 14,048 14,048
Cash and cash equivalents 2,292 2,292 3,149 3,149 —— —
36,337 36,337 38,824 38,824 14,557 14,557 14,250 14,250
Liabilities
Current borrowings 9,682 9,682 10,666 10,666 4,251 4,251 7,214 7,214
Current derivatives 27 27 — — 4 4 — —
Trade and other payables 25,387 25,387 29,318 29,318 1,025 1,025 665 665
Non-current borrowings 6,512 6,532 7,399 7,541 5,610 5,691 6,503 6,686
Non-current derivatives — — 106 106 — — 106 106
Other non-current liabilities 1,524 1,524 1,287 1,287 —— ——
43,132 43,152 48,776 48,918 10,890 10,971 14,488 14,671
Other investments consist of investments in unquoted companies, which are held at cost due to the lack of reliable measurability.
Derivative instruments are recognised in the balance sheet at fair value.
The fair value of current assets and current liabilities are assumed to approximate to book value due to the short term maturity of the instrument.
Where market values are not available, fair values have been calculated by discounting expected cash flows at prevailing interest and
exchange rates. 52
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
28 RETIREMENT BENEFIT OBLIGATION
The Group participates in two defined benefit pension schemes, Carr's Milling Industries Pension Scheme 1993 and Carrs Billington
Agriculture Pension Scheme.
Carr's Milling Industries
The Company sponsors the Carr's Milling Industries Pension Scheme 1993 and offers a defined contribution and a defined benefit
section. The assets of the scheme are held separately from those of the Group and are invested with independent investment managers.
The pension expense for the defined contribution section of the scheme for the period was £181,000 (2005: £177,000). Contributions
totalling £8,141 (2005: £8,000) were payable to the fund at the period end and are included in creditors.
During the period contributions were payable to a Group Personal Pension plan for certain employees of Carr’s Flour Mills Limited.
The pension expense for this scheme for the period was £260,000 (2005: £173,000).
The defined benefit section of the scheme is funded to cover future pension liabilities (including expected future earnings and pension
increases). It is subject to an independent valuation on a triennial basis by a qualified actuary who determines the rate of the employer's
contribution. The most recent valuation of the scheme was at 1 January 2006 and adopted the Projected Unit Method. It was assumed
that the investment returns would be 6.5% per annum and that the salary increases would average 4.0% per annum. It was also
assumed that present and future pensions, in excess of the Guaranteed Minimum Pension (GMPs), would increase once in payment at
the lesser of 5.0% per annum and price inflation and that GMPs would increase at the rate of 3.0% per annum.
The actuarial valuation as at 1 January 2006 shows that the market value of assets relating to the defined benefit section of the scheme
was £29,104,000 and that the actuarial value of those assets represented 68.0% of the actuarial value of benefits that had accrued to
members, after allowing for expected future increases in earnings. At 1 January 2006, the scheme showed a deficit of £13,541,000.
The pension contribution made by the Group over the period to the defined benefit section was £1,297,000 (2005: £1,296,000).
The following disclosures relate to the defined benefit section. The last full actuarial valuation of this scheme was carried out by a
qualified independent actuary as at 1 January 2006 and updated on an approximate basis to 2 September 2006.
Major assumptions:
2006 2005
£’000 £’000
Inflation 3.0% 2.75%
Salary increases 4.0% 3.75%
Rate of discount 5.1% 5.4%
Pension in payment increases:
Pre 1 September 2001 3.25% 3.0%
Post 1 September 2001 3.0% 2.75%
Revaluation rate for deferred pensioners for pensions revaluing at 5.0% per annum or RPI if less 3.0% 2.75%
Amounts recognised in the Income Statement in respect of defined benefit schemes:
2006 2005
£’000 £’000
Current service cost 714 513
Interest on pension scheme liabilities 2,131 2,037
Expected return on pension scheme assets (1,771) (1,618)
1,074 932
The expense is recognised within the Income Statement as shown below:
2006 2005
£’000 £’000
Cost of Sales 399 355
Administrative expenses 675 577
1,074 932
Actuarial losses of £3,900,000 (2005: £1,543,000) have been reported in the Statement of Recognised Income and Expense. 53
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
28 RETIREMENT BENEFIT OBLIGATION (CONTINUED)
Amounts included in the Balance Sheet:
2006 2005
£’000 £’000
Present value of defined benefit obligations (45,794) (39,556)
Fair value of scheme assets 29,998 27,437
Deficit in scheme (15,796) (12,119)
Past service cost not yet recognised in the balance sheet — —
Total liability recognised in the balance sheet (15,796) (12,119)
Amount included in current liabilities — —
Amount included in non-current liabilities (15,796) (12,119)
Movements in the present value of defined benefit obligations:
2006 2005
£’000 £’000
At the beginning of the period 39,556 33,991
Current service cost 714 513
Interest cost 2,131 2,037
Changes in assumptions underlying the defined benefit obligation 4,258 3,561
Benefits paid (865) (546)
At the end of the period 45,794 39,556
Movements in the fair value of scheme assets:
2006 2005
£’000 £’000
At the beginning of the period 27,437 23,051
Expected return on scheme assets 1,771 1,618
Actual return less expected return on scheme assets 358 2,018
Contributions by employer 1,297 1,296
Benefits paid (865) (546)
At the end of the period 29,998 27,437
Analysis of the scheme assets, expected rate of return and actual return:
Expected return Fair value of assets
2006 2005 2006 2005
% % £’000 £’000
Equity instruments 7.5 7.5 15,776 14,520
Debt instruments 4.75 5.0 11,936 10,629
Property 7.0 6.5 1,831 1,665
Other assets 4.75 4.5 455 623
6.3 6.4 29,998 27,437
Actual return on scheme assets 2,129 3,636
The expected long term return on cash is equal to bank base rates at the balance sheet date. The expected return on bonds is
determined by reference to UK long dated gilt and bond yields at the balance sheet date. The expected rate of return on equities and
property have been determined by setting an appropriate risk premium above gilt/bond yields having regard to market conditions at the
balance sheet date. 54
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
28 RETIREMENT BENEFIT OBLIGATION (CONTINUED)
History of scheme:
2006 2005 2004 2003 2002
£'000 £'000 £'000 £'000 £'000
Present value of the defined benefit obligation (45,794) (39,556) (33,991) (32,068) (27,396)
Fair value of scheme assets 29,998 27,437 23,051 21,315 19,802
Deficit (15,796) (12,119) (10,940) (10,753) (7,594)
Difference between expected and actual returns on scheme assets:
Amount £'000 358 2,018 (397) (280) (3,784)
Percentage of scheme assets 1.2% 7.4% 1.7% 1.3% 19.1%
Experience gains and losses on scheme liabilities:
Amount £'000 (4,258) (3,561) (227) (3,303) (1,232)
Percentage of scheme liabilities 9.3% 9.0% 0.7% 10.3% 4.5%
The Group expects to contribute approximately £2,600,000 to the defined benefit scheme in the next financial period.
The Company expects to contribute approximately £2,082,000 to the defined benefit scheme in the next financial period.
Carrs Billington Agriculture
Carrs Billington Agriculture (Sales) Limited, one of the Group's subsidiary undertakings, is a participating employer of the Carrs Billington
Agriculture Pension Scheme, another funded defined benefit scheme.
The pension contribution made by Carrs Billington Agriculture (Sales) Limited over the period to the Carrs Billington Agriculture Pension
Scheme was £84,000 (2005: £295,000).
The actuarial valuation as at 31 December 2003 shows that the market value of assets relating to the scheme was £14,600,000 and the
actuarial value of those assets represented 81% of the actuarial value of benefits that had accrued to members, after allowing for
expected future increase in earnings. The assumptions used in arriving at the valuations were a real rate of return over salary increases
on funds invested of 2% and rate increase in present and future pensions of 2.65%. At 31 December 2003, the scheme showed a
deficit of £3,500,000.
Carrs Billington Agriculture (Sales) Limited offers a Group Personal Pension Plan to its employees and the pension expense for this plan
in the period was £70,000 (2005: £39,000).
During the period contributions were also payable to a defined contribution pension scheme for certain employees of Carrs Billington
Agriculture (Sales) Limited. The pension expense for this scheme for the period was £9,000 (2005: £3,000).
The following disclosures relate to the defined benefit section. The last full actuarial valuation of this scheme was carried out by a
qualified independent actuary as at 31 December 2003 and updated on an approximate basis to 2 September 2006.
It is not possible to identify the underlying share of the pension scheme assets and liabilities that relate to Carr's Milling Industires PLC.
Approximately 50% of the assets and liabilities of the pension scheme relate to Carr's Milling Industries PLC and under IFRS
approximately 50% of the assets and liabilities are included in the Group's financial statements through the investment in associate. 55
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
28 RETIREMENT BENEFIT OBLIGATION (CONTINUED)
Major assumptions:
2006 2005
£’000 £’000
Inflation 3.0% 2.73%
Salary increases 3.5% 3.5%
Rate of discount 5.1% 4.88%
Pension in payment increases 3.0% 2.73%
Revaluation rate for deferred pensioners for pensions revaluing at 5.0% per annum or RPI if less 3.0% 2.73%
Amounts recognised in the Income Statement of the associate in respect of defined benefit schemes:
2006 2005
£’000 £’000
Current service cost 157 130
Interest on pension scheme liabilities 1,150 1,086
Expected return on pension scheme assets (1,033) (965)
274 251
The Group's share of the expense is recognised within the Income Statement through the share of post-tax profit/(loss) in associate.
The Group's share of the actuarial gains of £419,000 (2005: losses £1,925,000) have been reported in the Statement of Recognised
Income and Expense.
Amounts included in the Balance Sheet of the associate:
2006 2005
£’000 £’000
Present value of defined benefit obligations (24,698) (23,943)
Fair value of scheme assets 19,008 17,466
Deficit in scheme (5,690) (6,477)
Past service cost not yet recognised in the balance sheet — —
Total liability recognised in the balance sheet (5,690) (6,477)
The Group's share of the deficit is recognised within the Balance Sheet through the investment in associate.
Movements in the present value of defined benefit obligations:
2006 2005
£’000 £’000
At the beginning of the period 23,943 19,677
Current service cost 157 130
Interest cost 1,150 1,086
Changes in assumptions underlying the defined benefit obligation 364 3,613
Benefits paid (916) (563)
At the end of the period 24,698 23,943
Movements in the fair value of scheme assets:
2006 2005
£’000 £’000
At the beginning of the period 17,466 14,820
Expected return on scheme assets 1,033 965
Actual return less expected return on scheme assets 783 1,688
Contributions by employer 642 556
Benefits paid (916) (563)
At the end of the period 19,008 17,466 56
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
28 RETIREMENT BENEFIT OBLIGATION (CONTINUED)
Analysis of the scheme assets, expected rate of return and actual return:
Expected return Fair value of assets
2006 2005 2006 2005
% % £'000 £'000
Equity instruments 6.7 6.7 13,459 12,288
Debt instruments 4.1 4.2 4,991 4,194
Other assets 4.1 4.2 558 984
5.9 6.0 19,008 17,466
Actual return on scheme assets 1,816 2,653
The expected rates of return on scheme assets are determined by reference to relevant indices. The overall rate of return is calculated by
weighting the individual rates in accordance with the anticipated balance in the plan's investment portfolio.
History of scheme:
2006 2005 2004 2003 2002
£'000 £'000 £'000 £'000 £'000
Present value of the defined benefit obligation (24,698) (23,943) (19,677) (17,576) (15,853)
Fair value of scheme assets 19,008 17,466 14,820 14,116 13,582
Deficit (5,690) (6,477) (4,857) (3,460) (2,271)
Difference between expected and actual returns on scheme assets:
Amount £'000 783 1,688 100 136 (2,866)
Percentage of scheme assets 4.1% 9.7% 0.7% 1.0% 21.0%
Experience gains and losses on scheme liabilities:
Amount £'000 (364) (3,613) (1,628) (1,326) (631)
Percentage of scheme liabilities 1.5% 15.1% 8.3% 7.5% 4.0%
It is expected that contributions of approximately £700,000 will be paid to the defined benefit scheme in the next financial period.
29 CALLED-UP SHARE CAPITAL 2006 2005
Group and Company £'000 £'000
Authorised:
10,500,000 ordinary shares of 25p each (2005: 10,500,000) 2,625 2,625
Allotted and fully paid: 8,233,579 ordinary shares of 25p each (2005: 8,213,579) 2,058 2,053
For details of share option and share save schemes see note 31. 57
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
30 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND MINORITY INTEREST
Share Equity Foreign Total
Share Premium Compensation Exchange Other Retained Shareholders’ Minority
Capital Account Reserve Reserve Reserves Earnings Equity Interest Total
Group £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Balance at
29 August 2004 2,018 4,752 — — 1,663 7,382 15,815 1,272 17,087
Total recognised
income and expense
for the period — — — (80) — 5,742 5,662 329 5,991
Dividends — — — — — (1,136)(1,136) — (1,136)
Share options exercised
by employees 35 225 — — — — 260 — 260
Elimination of goodwill
arising on prior years'
acquisitions — — — — — (406) (406) — (406)
Minority interest on
increase in shareholding
in subsidiary — — — — — — — 109 109
Transfer — — — — (31) 31 — — —
Balance at
3 September 2005 2,053 4,977 — (80) 1,632 11,613 20,195 1,710 21,905
Balance at
4 September 2005 2,053 4,977 — (80) 1,632 11,613 20,195 1,710 21,905
Total recognised
income and expense
for the period — — — (150) — 1,609 1,459 139 1,598
Dividends — — — — — (1,358) (1,358) — (1,358)
Equity settled share-
based payment
transactions, net of tax —— 22——— 22 5 27
Share options exercised
by employees 5 27 — — — — 32 — 32
Minority interest on
increase in shareholding
in subsidiary — — — — — — — 77 77
Transfer — — — — (31) 31 — — —
Balance at
2 September 2006 2,058 5,004 22 (230) 1,601 11,895 20,350 1,931 22,281
Retained earnings at 29 August 2004 have been revised from £7,502,000, which was disclosed in the Group’s IFRS transition document
issued in April 2006, to £7,382,000 following adjustments made to taxation in the associate at the transition date.
Retained earnings at 3 September 2005 have been revised from £11,967,000, which was disclosed in the group’s IFRS transition
document issued in April 2006, to £11,613,000 following the finalisation of the fair values of the assets and liabilities acquired from
W & J Pye Limited by the Group’s associate in 2005. 58
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
30 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
Share Equity
Share Premium Compensation Retained Total
Capital Account Reserve Earnings Equity
Company £’000 £’000 £’000 £’000 £’000
Balance at
29 August 2004 2,018 4,752 — (288) 6,482
Total recognised
income and expense
for the period — — — 1,025 1,025
Dividends — — — (1,136) (1,136)
Share options
exercised by employees 35 225 — — 260
Balance at
3 September 2005 2,053 4,977 — (399) 6,631
Balance at
4 September 2005 2,053 4,977 — (399) 6,631
Total recognised income
and expense for the
period — — — 2,806 2,806
Dividends — — — (1,358) (1,358)
Equity settled share-based
payment transactions,
net of tax — — 27 — 27
Share options exercised
by employees 5 27 — — 32
Balance at
2 September 2006 2,058 5,004 27 1,049 8,138
31 SHARE-BASED PAYMENTS
The Group operates five share based payment schemes. Two schemes, the Executive Scheme 1996 and the Company Plan 1996, were
granted before 7 November 2002, the recognition and measurement principles in IFRS2 have not been applied in accordance with the
transitional provisions in IFRS1 and IFRS2. Disclosure in respect of these two schemes is as follows:
Option Schemes
Outstanding share options 2006 2005 Price Dates of
Range Grant
Executive Scheme 1996 90,000 90,000 161p 2002
Company Plan 1996 37,000 57,000 161p 2002
During the period 20,000 (2005: 139,980) shares were issued under these share option schemes.
Options granted on the Company Plan 1996 are normally exercisable 3-10 years from the date of the grant. Options granted in the
Executive Scheme 1996 are normally exercisable 3-7 years from the date of the grant. 59
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
31 SHARE-BASED PAYMENTS (CONTINUED)
New Schemes
Group
During the period the Group entered into three new schemes, an Inland Revenue approved discretionary employee share option scheme,
an unapproved discretionary share option scheme and a share save scheme.
Both the approved and unapproved share options were granted to certain senior employees and directors. Options are exercisable
between three and ten years from the date of grant, subject to the movement of the Group's adjusted earnings per share over the three
years to 31 August 2008 exceeding that of the RPI by an average of 2% per annum.
All employees, subject to eligiblity criteria, may participate in the share save scheme. Under this scheme employees are offered savings
contracts for both 3 year and 5 year vesting period plans. The exercise period is 6 months from the vesting date.
The fair value per option granted and the assumptions used in the calculation of fair values are as follows:
Approved and Unapproved Share Save Share Save
Executive Share Option Scheme 2006 Scheme 2006
Scheme 2006 (3-Year Plan) (5-Year Plan)
2006 2005 2006 2005 2006 2005
Grant date (approved) 24/2/06 — 1/6/06 — 1/6/06 —
Grant date (unapproved) 20/2/06 — — — — —
Share price at grant date
(weighted average) £4.78 — £4.64 — £4.64 —
Exercise price (weighted average) £4.78 — £4.79 — £4.79 —
Number of employees 30 — 56 — 73 —
Shares under option (approved) 132,000 — 27,117 — 66,515 —
Shares under option (unapproved) 12,000 — — — — —
Vesting period (years) 3 — 3 — 5 —
Model used for valuation Binomial — Black Scholes — Black Scholes —
Expected volatility 22.44% — 20.18% — 21.37% —
Option life (years) 10 — 3.5 — 5.5 —
Expected life (years) 6.5 — 3.25 — 5.25 —
Risk-free rate 4.224% — 4.683% — 4.623% —
Expected dividends expressed
as a dividend yield 3.36% — 3.56% — 3.56% —
Expectations of vesting 100% — 75% — 75% —
Expectations of meeting
performance criteria 100% — N/A — N/A —
Fair value per option £0.99 — £0.60 — £0.78 —
The expected volatility is based on historical volatility calculated over the weighted average remaining life of the award being valued. The
expected life is the average expected period to exercise. The risk-free rate of return is the implied yield of zero-coupon UK Government
bonds with a remaining term equal to the expected term of the award being valued. 60
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
31 SHARE-BASED PAYMENTS (CONTINUED)
Approved and Unapproved Executive Share Option Scheme 2006
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period —— — —
Granted during the period 4.78 144 — —
Exercised during the period —— — —
Lapsed during the period —— — —
Outstanding at the end of the period 4.78 144 — —
Exercisable at the end of the period —— ——
At the period end the weighted average remaining contractual life of the options is 9.5 years with a weighted average remaining expected
life of 6 years.
Share Save Scheme 2006 - 3 Year Plan
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period — — — —
Granted during the period 4.79 27 ——
Exercised during the period —— ——
Lapsed during the period — — — —
Outstanding at the end of the period 4.79 27 ——
Exercisable at the end of the period —— ——
At the period end the weighted average remaining contractual life of the options is 3.25 years with a weighted average remaining
expected life of 3 years.
Share Save Scheme 2006 - 5 Year Plan
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period —— ——
Granted during the period 4.79 67 ——
Exercised during the period — — — —
Lapsed during the period —— ——
Outstanding at the end of the period 4.79 67 ——
Exercisable at the end of the period — — — —
At the period end the weighted average remaining contractual life of the options is 5.25 years with a weighted average remaining
expected life of 5 years. 61
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
31 SHARE-BASED PAYMENTS (CONTINUED)
The total expense recognised for the period arising from share based payments are as follows:
2006 2005
£’000 £’000
Approved and Unapproved Executive Share Option Scheme 2006 24 —
Share Save Scheme 2006 - 3 Year Plan 1 —
Share Save Scheme 2006 - 5 Year Plan 2 —
27 —
New Schemes
Company
During the period the company entered into three new schemes, an Inland Revenue approved discretionary employee share option
scheme, an unapproved discretionary share option scheme and a share save scheme.
Both the approved and unapproved share options were granted to certain senior employees and directors. Options are exercisable
between three and ten years from the date of grant, subject to the movement of the Group's adjusted earnings per share over the three
years to 31 August 2008 exceeding that of the RPI by an average of 2% per annum.
All employees, subject to eligiblity criteria, may participate in the share save scheme. Under this scheme employees are offered savings
contracts for both 3 year and 5 year vesting period plans. The exercise period is 6 months from the vesting date.
The fair value per option granted and the assumptions used in the calculation of fair values are as follows:
Unapproved Share Save Share Save
Executive Share Option Scheme 2006 Scheme 2006
Scheme 2006 (3-Year Plan) (5-Year Plan)
2006 2005 2006 2005 2006 2005
Grant date 20/2/06 — 1/6/06 — 1/6/06 —
Share price at grant date £5.02 — £4.64 — £4.64 —
Exercise price £5.02 — £4.79 — £4.79 —
Number of employees 2 — 6 — 1 —
Shares under option 12,000 — 6,133 — 1,344 —
Vesting period (years) 3 — 3 — 5 —
Model used for valuation Binomial — Black Scholes — Black Scholes —
Expected volatility 22.44% — 20.18% — 21.37% —
Option life (years) 10 — 3.5 — 5.5 —
Expected life (years) 6.5 — 3.25 — 5.25 —
Risk-free rate 4.224% — 4.683% — 4.623% —
Expected dividends expressed
as a dividend yield 3.36% — 3.56% — 3.56% —
Expectations of vesting 100% — 75% — 75% —
Expectations of meeting
performance criteria 100% — N/A — N/A —
Fair value per option £0.99 — £0.60 — £0.78 —
The expected volatility is based on historical volatility calculated over the weighted average remaining life of the award being valued. The
expected life is the average expected period to exercise. The risk-free rate of return is the implied yield of zero-coupon UK Government
bonds with a remaining term equal to the expected term of the award being valued. 62
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
31 SHARE-BASED PAYMENTS (CONTINUED)
Unapproved Executive Share Option Scheme 2006
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period —— — —
Granted during the period 5.02 12 — —
Exercised during the period —— — —
Lapsed during the period —— — —
Outstanding at the end of the period 5.02 12 — —
Exercisable at the end of the period —— ——
At the period end the weighted average remaining contractual life of the options is 9.5 years with a weighted average remaining expected
life of 6 years.
Share Save Scheme 2006 - 3 Year Plan
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period — — — —
Granted during the period 4.79 6 ——
Exercised during the period —— ——
Lapsed during the period — — — —
Outstanding at the end of the period 4.79 6 ——
Exercisable at the end of the period —— ——
At the period end the weighted average remaining contractual life of the options is 3.25 years with a weighted average remaining
expected life of 3 years. 63
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
31 SHARE-BASED PAYMENTS (CONTINUED)
Share Save Scheme 2006 - 5 Year Plan
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period —— ——
Granted during the period 4.79 1 ——
Exercised during the period —— ——
Lapsed during the period —— ——
Outstanding at the end of the period 4.79 1 — —
Exercisable at the end of the period —— ——
At the period end the weighted average remaining contractual life of the options is 5.25 years with a weighted average remaining
expected life of 5 years.
The total expense recognised for the period arising from share based payments are as follows:
2006 2005
Unapproved Executive Share Option Scheme 2006 2 —
Share Save Scheme 2006 - 3 Year Plan — —
Share Save Scheme 2006 - 5 Year Plan — —
2 —
Share based payments awarded to employees of subsidiary undertakings and recognised as an investment in subsidiary undertakings in
the company are as follows:
2006 2005
Unapproved Executive Share Option Scheme 2006 22 —
Share Save Scheme 2006 - 3 Year Plan 1 —
Share Save Scheme 2006 - 5 Year Plan 2 —
Total carrying amount of investments 25 —
32 ACQUISITIONS
Wallace Oils Holdings Limited
In 2005 Carrs Billington Agriculture (Sales) Limited acquired the whole of the issued share capital of Wallace Oils Holdings Limited for a
total consideration including costs of £1,746,000. This consideration included £322,000 of deferred consideration, payable over two
years on achievement of profit targets, which was provided in the period ended 3 September 2005.
The directors estimate that the likelihood of the deferred consideration becoming payable is now remote. This has resulted in negative
goodwill of £76,810 arising on the acquisition which has been recognised immediately in the income statement for the period ended
2 September 2006.
Other acquisitions
On 5 June 2006 Carrs Billington Agriculture (Sales) Limited increased its shareholding in Northern Feeds Solutions Limited to 100% for
a cash consideration of £3,200 generating goodwill of £79,992. This transaction has increased the Group's effective shareholding in
Northern Feeds Solutions Limited to 51%. 64
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
33 CASH GENERATED FROM/(USED BY) OPERATIONS Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Profit for the period 4,334 7,812 5,536 2,105
Adjustments for:
Tax 1,989 2,557 (159) (108)
Dividends received from subsidiaries — — (5,754) (2,152)
Depreciation 3,419 3,055 — —
Loss/(profit) on disposal of property, plant and equipment 27 (4,199) — —
Profit on disposal of investments (1) — (1) —
Immediate recognition of negative goodwill (77) (1,526) — —
Intangible asset amortisation 986 1,029 — —
Provision against investment in/loans to subsidiaries — — — 87
Net fair value losses on derivative financial instruments in operating profit 27 6 4 —
Net fair value loss on share based payments 27 — 2 —
Net foreign exchange differences 14 19 (93) (24)
Net finance costs:
Interest income (378) (93) (436) (389)
Interest expense and borrowing costs 1,539 1,191 695 679
Net fair value (gains)/losses on derivative financial instruments (143) 106 (137) 106
Share of (profit)/loss from associate and joint ventures (218) 697 — —
Changes in working capital (excluding the effects of acquisitions)
Decrease/(increase) in inventories 1,003 (1,009) — —
Decrease/(increase) in receivables 1,903 (6,595) (183) 280
(Decrease)/increase in payables (3,382) 3,613 194 (221)
Cash generated from/(used by) continuing operations 11,069 6,663 (332) 363
34 ANALYSIS OF NET DEBT
At 4 Other At 2
September non-cash Exchange September
2005 Cash flow changes movements 2006
Group £'000 £'000 £'000 £'000 £'000
Cash and cash equivalents 3,149 (857) — — 2,292
Bank overdrafts (646) (474) — (88) (1,208)
2,503 (1,331) — (88) 1,084
Loans and other borrowings:
- current (9,220) 2,487 (901) — (7,634)
- non-current (6,534) — 894 — (5,640)
Finance leases:
- current (800) 1,047 (1,087) — (840)
- non-current (865) — (7) — (872)
(14,916) 2,203 (1,101) (88) (13,902)
Other non-cash changes relate to finance leases and transfers between categories of borrowings. It also includes the release of
borrowing costs to the income statement. 65
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
35 CASH FLOWS RELATING TO NON-RECURRING ITEMS AND AMORTISATION
Cash generated from/(used by) operations includes an outflow of £nil (2005: £350,000) which relates to the non-recurring cost of
reorganising the Food Division. The cash consideration received on the disposal of the Bendall's site on London Road, Carlisle was £nil
(2005: £2,846,000) net of expenses.
There are no cash flows in respect of the immediate recognition of negative goodwill and amortisation of intangible assets.
36 CAPITAL COMMITMENTS 2006 2005
Group £'000 £'000
Capital expenditure that has been contracted for but has not been provided for in the accounts 182 225
The Company has no capital commitments.
37 OTHER FINANCIAL COMMITMENTS
Group
At 2 September 2006 the Group had commitments under non-cancellable operating leases as follows:
Land and buildings Other
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Within one year — — 464 138
Within two and five years inclusive — — 423 271
After five years — — 4 7
— — 891 416
Company
At 2 September 2006 the Company had commitments under non-cancellable operating leases as follows:
Land and buildings Other
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Within one year — — 1 1
Within two and five years inclusive — — 4 4
After five years — — 3 4
— — 8 9
38 FINANCIAL GUARANTEES
The Company, together with certain subsidiary undertakings, has entered into a guarantee with Clydesdale Bank PLC in respect of the
Group loans and overdraft with that bank, which at 2 September 2006 amounted to £nil (2005: £nil).
The Company, together with certain subsidiary undertakings, has a £1.25 million (2005: £1 million) letter of credit by Clydesdale Bank
PLC in favour of Crystalyx Products GmbH, a joint venture arrangement.
The Company, together with certain subsidiary undertakings, has entered into a guarantee with Royal Bank of Scotland PLC in respect of
the overdraft with that bank, which at 2 September 2006 amounted to £573,000 (2005: £601,000).
One of the Group's bankers in the normal course of business, enters into certain specific guarantees with some of a subsidiary's
customers. All these guarantees allow the bank to have recourse to the Company if a guarantee is enforced. The total outstanding of
such guarantees entered into by the bank at 2 September 2006 was £1,200,737 (2005: £429,000).
A subsidiary undertaking of the Company, together with an associated undertaking of the Company, has entered into a guarantee with
Royal Bank of Scotland PLC in respect of a loan with that bank. The Group's exposure to this liability at 2 September 2006 amounts to
£2,250,000 (2005: £2,500,000). 66
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
39 RELATED PARTIES
Group and Company
Identity of related parties
The Group has a related party relationship with its subsidiaries, associate and joint ventures and with its directors. The balances and
transactions shown below were all undertaken on an arms’ length basis.
Transactions with key management personnel
Key management personnel are considered to be the directors and their remuneration is disclosed within the Directors' Remuneration Report.
Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Balances reported in the Balance Sheet
Amounts due from key personnel (in a trading capacity)
Trade receivables 94 18 — —
94 18 — —
Transactions reported in the Income Statement:
Revenue 352 52 — —
Purchases (4) (4) — —
348 48 — —
Transactions with subsidiaries Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Balances reported in the Balance Sheet
Amounts due from subsidiary undertakings:
Loans — — 13,618 13,618
Trade receivables — — 315 295
— — 13,933 13,913
Amounts due to subsidiary undertakings:
Loans — — (2,475) (4,191)
Trade payables — — (18) (122)
— — (2,493) (4,313)
Transactions reported in the Income Statement
Management charges receivable — — 1,522 1,432
Dividends received — — 5,754 2,152
Interest receivable — — 402 377
Interest payable — — (167) (154)
— — 7,511 3,807
Transactions with associate Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Balances reported in the Balance Sheet
Amounts due from associate:
Trade and other receivables 241 391 3 —
241 391 3 —
Amounts due to associate:
Trade payables (3,499) (5,787) — —
(3,499) (5,787) — — 67
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
39 RELATED PARTIES (CONTINUED)
Transactions reported in the Income Statement Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Revenue 824 380 — —
Rental income 17 17 — —
Net management charges (payable)/receivable (368) (69) 14 13
Purchases (58,171) (39,826) — —
(57,698) (39,498) 14 13
Transactions with joint ventures Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Balances reported in the Balance Sheet
Amounts due from joint ventures:
Loans 280 — 205 —
Other receivables 1 — 1 —
281 — 206 —
Transactions reported in the Income Statement
Management charges receivable 50 — — —
50 — — —
Transactions with other related parties
During the period the Company issued a management charge of £nil (2005: £20,000) to Edward Billington & Son Limited, the ultimate
parent of Carrs Billington Agriculture (Operations) Limited. This was in respect of services on the acquisition of the assets of W & J Pye
Limited by Carrs Billington Agriculture (Operations) Limited 68
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
40 EXPLANATION OF TRANSITION TO IFRS
The selection of IFRS accounting policies as required by IFRS 1 creates a number of adjustments that are required to transition from UK
GAAP to IFRS. Each of these is discussed in turn below in the context of the appropriate standard and the guidance it gives:
EMPLOYEE BENEFITS (IAS 19)
IAS 19 is more encompassing than the UK equivalent FRS 17. Specifically, IAS 19 covers all employee benefits, which include post
retirement benefits such as pensions and medical care and short-term employee benefits payable in employment such as holiday pay.
Under UK GAAP, the pension costs associated with the defined benefit scheme were accounted for under SSAP 24 ‘Accounting for
pensions costs’ and detailed disclosures were provided in accordance with the transitional provisions of FRS 17.
In terms of the initial recognition of the pension deficit, IAS 19 and FRS 17 are similar however, under FRS17, the pension scheme
liability is shown net of the deferred tax asset.
FINANCIAL INSTRUMENTS (IAS 32 and IAS 39)
IFRS requires derivative financial instruments to be recorded in the balance sheet at fair value with any change in fair value charged or
credited to the income statement. Previously under UK GAAP these were not required to be recorded in the balance sheet.
DEFERRED AND INCOME TAX (IAS 12)
IAS 12 is more encompassing than FRS 19 ‘Deferred tax’, in that it requires deferred tax to be provided on all temporary differences
rather than just taxable timing differences.
IAS 12 also requires that deferred tax assets should be presented within non-current assets and deferred tax liabilities within non-current
liabilities. They are only offset on the balance sheet if the entity has a legally enforceable right to set off current tax assets against current
tax liabilities and they are levied by the same tax authority on either the same taxable entity or different taxable entities which intend to
settle current tax liabilities and assets on a net basis.
INTANGIBLE ASSETS (IAS 38)
IAS 38 prohibits the amortisation of goodwill. Instead goodwill is subject to an annual impairment review. The Group has opted to apply
IFRS 3 prospectively from the date of transition. Goodwill has been frozen at 29 August 2004.
Under UK GAAP, capitalised computer software is classified within tangible fixed assets. Under IFRS, computer software that is not
integral to an item of property, plant or equipment must be classified as an intangible asset. The value of capitalised computer software is
deemed immaterial and has not been classified as an intangible asset.
IMPAIRMENT OF ASSETS (IAS 36)
IAS 36 requires that at each balance sheet date all tangible and intangible assets should be reviewed for indication of impairment.
IFRS 1 requires that an impairment review of goodwill should be conducted in accordance with IAS 16 at the date of transition and at the
balance sheet date. The Group has performed this review and no material adjustment is required for 2004/05. There is no impact on the
2004/05 opening balance sheet or on the income statement for 2004/05. 69
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
40 EXPLANATION OF TRANSITION TO IFRS (CONTINUED)
LEASES (IAS 17)
IFRS requires property leases to be split into their separate land and building elements with leasehold land normally treated as an
operating lease.
A detailed review of the company’s lease portfolio has resulted in one lease being reclassified as an operating lease, and being classified
on the balance sheet as prepaid leases and amortised over the life of the lease.
SHARE-BASED PAYMENTS (IFRS 2)
IFRS 2 requires that share-based payment transactions be expensed to the income statement. The expense is calculated with reference
to the fair value of the award on the date of the grant and is recognised over the vesting period of the scheme, with adjustments being
made to reflect actual and expected levels of vesting.
IFRS 1 permits a company to apply IFRS 2 only to equity settled share-based awards granted on or after 7 November 2002, which have
not vested by the later of the date of transition of IFRS (29 August 2004) and 1 January 2005. The Group has taken advantage of this
exemption and as such there is no impact on the 2004/05 opening balance sheet.
PROPERTY, PLANT AND EQUIPMENT (IAS 16)
The Group has opted to use previous revaluations of property made under UK GAAP as deemed cost. The impact on 2004/05 opening
balance sheet is a reclassification from the revaluation reserve to other reserves. There is no impact on the income statement for
2004/05.
No adjustment has been made to the carrying value on plant and equipment in the 2004/05 opening balance sheet.
POST BALANCE SHEET EVENTS (IAS 10)
IAS 10 requires that dividends declared after the balance sheet date should not be recognised as a liability at that date as the dividend
does not represent a present obligation. Under UK GAAP, the period-end balance sheet includes an accrual for the proposed final
dividend.
BUSINESS COMBINATIONS (IFRS 3)
IFRS requires the acquirer of a business to identify and value acquired intangible assets. This has resulted in the recognition of customer
relationships and brands on the face of the balance sheet.
IFRS 3 requires negative goodwill (excess of acquirer’s interest in the fair value of acquiree’s identifiable assets, liabilities and contingent
liabilities over costs) arising on the acquisition of a business to be recognised immediately in the income statement.
CUMULATIVE TRANSLATION DIFFERENCES (IAS 21)
IAS 21 requires cumulative translation differences arising from translation of foreign operations to be recorded separately within equity
and included in the gain or loss on disposal when the operation is sold.
The Group has adopted the exemption from reflecting this aspect of IAS 21 retrospectively as permitted by in IFRS 1. 70
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
40 EXPLANATION OF TRANSITION TO IFRS (CONTINUED)
Reconciliation of profit for the 53 week period ended 3 September 2005 UK GAAP Effect of
in IFRS transition
format to IFRS IFRS
Group £'000 £'000 £'000
Revenue
Continuing operations 158,876 — 158,876
Acquisitions - Meneba UK Holdings Limited 26,299 — 26,299
- Wallace Oils Holdings Limited 6,949 — 6,949
Total revenue 192,124 — 192,124
Cost of sales (161,532) 236 (161,296)
Gross profit 30,592 236 30,828
Net operating expenses (19,666) 1,102 (18,564)
Group operating profit 10,926 1,338 12,264
Analysed as:
Operating profit before non-recurring items and amortisation 7,166 809 7,975
Non-recurring items and amortisation 3,760 529 4,289
Group operating profit 10,926 1,338 12,264
Net finance costs (1,092) (106) (1,198)
Share of post-tax loss in associate and joint ventures (531) (166) (697)
Profit before taxation 9,303 1,066 10,369
Taxation (1,912) (645) (2,557)
Profit for the period 7,391 421 7,812
Profit attributable to minority interest 276 53 329
Profit attributable to equity shareholders 7,115 368 7,483
7,391 421 7,812
Company £'000
Profit after taxation under UK GAAP 5,326
Effect of transition to IFRS:
- Employee benefits 657
- Dividends receivable from subsidaries (3,602)
- Movement in fair value of derivative financial instruments (106)
- Deffered taxation (170)
Profit after taxation under IFRS 2,105 71
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
40 EXPLANATION OF TRANSITION TO IFRS (CONTINUED)
Reconciliation of total equity
29 August 2004 3 September 2005
UK GAAP Effect of UK GAAP Effect of
in IFRS transition in IFRS transition
format to IFRS IFRS format to IFRS IFRS
Group £'000 £'000 £'000 £'000 £'000 £'000
Assets
Non-current assets
Negative goodwill — — — (539) 539 —
Goodwill 40 — 40 422 (22) 400
Other intangible assets 144 — 144 112 1,626 1,738
Property, plant and equipment 20,474 (988) 19,486 30,232 (1,394) 28,838
Investment property — 246 246 — 822 822
Investment in associate 3,217 (1,414) 1,803 2,686 (2,241) 445
Interest in joint venture — — — 172 — 172
Other investments 253 — 253 255 — 255
Financial assets
-Non-current receivables 200 — 200 223 — 223
Deferred tax assets 170 3,376 3,546 204 3,758 3,962
24,498 1,220 25,718 33,767 3,088 36,855
Current assets
Inventories 10,387 — 10,387 12,947 — 12,947
Financial assets
- Derivative financial instruments — 6 6 — — —
Trade and other receivables 19,491 742 20,233 34,463 734 35,197
Current tax assets 82 — 82 87 — 87
Cash and cash equivalents 1,091 — 1,091 3,149 — 3,149
31,051 748 31,799 50,646 734 51,380
Total assets 55,549 1,968 57,517 84,413 3,822 88,235
Liabilities
Current liabilities
Financial liabilities
- Borrowings (4,013) — (4,013) (10,666) — (10,666)
Trade and other payables (20,308) 1,160 (19,148) (30,983) 1,665 (29,318)
Current tax liabilities (944) — (944) (1,581) — (1,581)
(25,265) 1,160 (24,105) (43,230) 1,665 (41,565)
Non-current liabilities
Financial liabilities
-Borrowings (2,836) — (2,836) (7,399) — (7,399)
- Derivative financial instruments — — — — (106) (106)
Retirement benefit obligation — (10,940) (10,940) — (12,119) (12,119)
Deferred tax liabilities (951) (411) (1,362) (1,226) (2,628) (3,854)
Other non-current liabilities (1,187) — (1,187) (1,287) — (1,287)
(4,974) (11,351) (16,325) (9,912) (14,853) (24,765)
Total liabilities (30,239) (10,191) (40,430) (53,142) (13,188) (66,330)
Net assets 25,310 (8,223) 17,087 31,271 (9,366) 21,905
Shareholders' equity
Ordinary shares 2,018 — 2,018 2,053 — 2,053
Share premium 4,752 — 4,752 4,977 — 4,977
Revaluation reserve 1,663 (1,663) — 1,632 (1,632) —
Foreign exchange reserve — — — — (80) (80)
Other reserve — 1,663 1,663 — 1,632 1,632
Retained earnings 15,605 (8,223) 7,382 20,952 (9,339) 11,613
Total shareholders' equity 24,038 (8,223) 15,815 29,614 (9,419) 20,195
Minority interests in equity 1,272 — 1,272 1,657 53 1,710
Total equity 25,310 (8,223) 17,087 31,271 (9,366) 21,905 72
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
40 EXPLANATION OF TRANSITION TO IFRS (CONTINUED)
Reconciliation of total equity
29 August 2004 3 September 2005
UK GAAP Effect of UK GAAP Effect of
in IFRS transition in IFRS transition
format to IFRS IFRS format to IFRS IFRS
Company £'000 £'000 £'000 £'000 £'000 £'000
Assets
Non-current assets
Investment in subsidiaries 7,370 — 7,370 13,072 — 13,072
Investment in associate 1,470 — 1,470 1,470 — 1,470
Interest in joint venture — — — 172 — 172
Other investments 202 — 202 202 — 202
Deferred tax assets 148 3,136 3,284 242 3,430 3,672
9,190 3,136 12,326 15,158 3,430 18,588
Current assets
Trade and other receivables 11,169 (2,152) 9,017 19,802 (5,754) 14,048
Current tax assets 463 — 463 602 — 602
11,632 (2,152) 9,480 20,404 (5,754) 14,650
Total assets 20,822 984 21,806 35,562 (2,324) 33,238
Liabilities
Current liabilities
Financial liabilities
-Borrowings (2,490) — (2,490) (7,214) — (7,214)
Trade and other payables (1,709) 1,215 (494) (2,349) 1,684 (665)
(4,199) 1,215 (2,984) (9,563) 1,684 (7,879)
Non-current liabilities
Financial liabilities
- Borrowings (1,400) — (1,400) (6,503) — (6,503)
- Derivative financial instruments — — — — (106) (106)
Retirement benefit obligation — (10,940) (10,940) — (12,119) (12,119)
(1,400) (10,940) (12,340) (6,503) (12,225) (18,728)
Total liabilities (5,599) (9,725) (15,324) (16,066) (10,541) (26,607)
Net assets 15,223 (8,741) 6,482 19,496 (12,865) 6,631
Shareholders' equity
Ordinary shares 2,018 — 2,018 2,053 — 2,053
Share premium 4,752 — 4,752 4,977 — 4,977
Retained earnings 8,453 (8,741) (288) 12,466 (12,865) (399)
Total shareholders' equity 15,223 (8,741) 6,482 19,496 (12,865) 6,631
Minority interests in equity — — — — — —
Total equity 15,223 (8,741) 6,482 19,496 (12,865) 6,631 73
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
UK GAAP (in IFRS format) IFRS
2002 2003 2004 2005 2006
Revenue and results £'000 £'000 £'000 £'000 £'000
Revenue 143,378 148,688 155,749 192,124 242,576
Group operating profit 4,062 4,011 5,036 12,264 7,116
Analysed as:
Operating profit before non-recurring items
and amortisation 3,755 4,011 5,036 7,975 7,987
Non-recurring items and amortisation 307 — — 4,289 (871)
Group operating profit 4,062 4,011 5,036 12,264 7,116
Net finance costs (822) (584) (575) (1,198) (1,011)
Share of post-tax profit/(loss) in associate
and joint ventures 604 693 531 (697) 218
Profit before taxation 3,844 4,120 4,992 10,369 6,323
Taxation (647) (1,331) (1,498) (2,557) (1,989)
Profit for the period 3,197 2,789 3,494 7,812 4,334
Ratios
Operating margin (excluding
non-recurring items and amortisation) 2.6% 2.7% 3.2% 4.2% 3.3%
Return on net assets (excluding
non-recurring items and amortisation) 16.6% 17.7% 19.7% 27.8% 32.3%
Earnings per share - basic 36.3p 30.5p 39.9p 92.1p 51.0p
- adjusted 33.3p 34.7p 39.9p 50.9p 59.7p
Dividends per ordinary share 9.5p 11.5p 13.5p 16.0p 18.0p
Five Year Statement 74
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Five Year Statement continued
UK GAAP (in IFRS format) IFRS
2002 2003 2004 2005 2006
Net assets employed £'000 £'000 £'000 £'000 £'000
Non-current assets
Goodwill 96 63 40 400 235
Other intangible assets — — 144 1,738 802
Property, plant and equipment 19,232 19,723 20,474 28,838 29,172
Investment property — — — 822 794
Investments 2,146 2,839 3,470 872 1,940
Financial assets
- Derivative financial instruments — — — — 37
- Non-current receivables 17 8 5 223 208
Deferred tax assets 47 172 170 3,962 5,162
21,538 22,805 24,303 36,855 38,350
Current assets
Inventories 9,057 9,123 10,387 12,947 11,944
Trade and other receivables 18,411 18,240 19,686 35,197 33,546
Current tax assets 222 274 82 87 1
Cash and cash equivalents 856 1,472 1,091 3,149 2,292
28,546 29,109 31,246 51,380 47,783
Total assets 50,084 51,914 55,549 88,235 86,133
Current liabilities
Financial liabilities
- Borrowings (2,373) (3,627) (4,013) (10,666) (9,682)
- Derivative financial instruments — — — — (27)
Trade and other payables (20,010) (18,592) (20,308) (29,318) (25,387)
Current tax liabilities (554) (793) (944) (1,581) (1,324)
(22,937) (23,012) (25,265) (41,565) (36,420)
Non-current liabilities
Financial liabilities
- Borrowings (4,470) (3,460) (2,836) (7,399) (6,512)
- Derivative financial instruments — — — (106) —
Retirement benefit obligation — — — (12,119) (15,796)
Deferred tax liabilities (1,129) (1,099) (951) (3,854) (3,600)
Other non-current liabilities (179) (1,108) (1,187) (1,287) (1,524)
(5,778) (5,667) (4,974) (24,765) (27,432)
Total liabilities (28,715) (28,679) (30,239) (66,330) (63,852)
Net assets 21,369 23,235 25,310 21,905 22,281 75
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notice of Annual General Meeting
Notice is hereby given that the Ninety Eighth Annual General Meeting of Carr's Milling Industries PLC will be held at the Crown Hotel, Wetheral,
Carlisle on Tuesday 9 January, 2007 at 11.30 a.m. for the transaction of the following business.
ORDINARY BUSINESS
1. To adopt the Report of the Directors and Financial Statements for the period ended 2 September 2006
2. To approve the Remuneration Committee’s Report for the period ended 2 September 2006
3. To declare a final dividend of 12.5p per share on the Ordinary Share Capital
4. To re-elect as a Director W R Inglewood who retires by rotation
5. To re-elect as a Director A R Heygate who retires having been appointed to the Board since the last Annual General Meeting
6. To re-appoint PricewaterhouseCoopers LLP as Auditors and to authorise the Directors to fix their remuneration
SPECIAL BUSINESS
7. Disapplication of pre-emption rights
To resolve as a special resolution that the directors of the Company be and are hereby empowered pursuant to section 95 of the Companies
Act 1985 to allot equity securities (as defined in sub-section (2) of section 94 of the Companies Act 1985) pursuant to the authority conferred
on them for the purposes of section 80 of the Act by the special resolution of the Company passed on 6 January 2005 as if section 89(1) of
the said Act did not apply to such allotment provided that this power is limited to:
(i) the allotment of equity securities in connection with a rights issue in favour of the holders of ordinary shares in the capital of the Company
where the equity securities attributable to the interests of such holders are proportionate (as nearly as may be) to the respective number of
such ordinary shares held by them, subject only to such exclusions or other arrangements as the directors feel necessary or expedient to deal
with fractional entitlements or legal or practicable problems arising under the laws or the requirements of any recognised regulatory body; and
(ii) the allotment (otherwise than pursuant to sub-paragraph (i) above) of equity securities up to an aggregate nominal amount of £102,920, and
shall expire at the conclusion of the next Annual General Meeting of the Company or 15 months from the date hereof, whichever is the earlier,
save that the Company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted after
such expiry and the Board may allot equity securities in pursuance of such offer or agreement as if the power conferred hereby had not
expired.
8. Company’s authority to purchase its own shares
To resolve as a special resolution that in accordance with Chapter VII of the Companies Act 1985, the Company be generally and
unconditionally authorised to make market purchases (as defined in section 163(3) of that Act) of its own ordinary shares of 25p each
(“ordinary shares”) on such terms and in such manner as the directors may, from time to time, determine provided that:
(i) The maximum number of ordinary shares hereby authorised to be purchased is 823,358;
(ii) the minimum price which may be paid for any ordinary share is 25 pence (excluding expenses);
(iii) the maximum price which may be paid for any ordinary share is an amount equal to 105 per cent of the average of the middle market
quotations for an ordinary share as derived from the London Stock Exchange Daily Official List for the five business days immediately
preceding the day on which the share is contracted to be purchased (excluding expenses); and
(iv) the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2008, if earlier, on 8
April 2008, but a contract of purchase may be made before such expiry which will or may be executed wholly or partly thereafter and a
purchase of shares may be made in pursuance of any such contract.
Stanwix By Order of the Board
Carlisle CA3 9BA Ronald C Wood
21 November 2006 Secretary
There will be available for inspection at the registered office of the Company during normal business hours from the date of this notice until
the date of the Annual General Meeting:
(a) register of directors’ interests
(b) copies of all contracts of service relating to directors employed by the Company.
These documents will also be available for inspection during the Annual General Meeting and for at least fifteen minutes before it begins. 76
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Directory of Operations
Carr’s Milling Industries PLC
Old Croft, Stanwix, Carlisle,
Cumbria CA3 9BA
Tel: 01228 554600
Fax: 01228 554601
Website: www.carrs-milling.com
Animal Feed Supplements Inc
East Highway 212,
PO Box 188, Belle Fourche,
South Dakota 57717 USA
Tel: 00 1 605 892 3421
Fax: 00 1 605 892 3473
Animal Feed Supplements Inc
PO Box 105,
101 Roanoke Avenue, Poteau,
Oklahoma 74953 USA
Tel: 00 1 918 647 8133
Fax: 00 1 918 647 7318
Caltech
Solway Mills, Silloth, Wigton,
Cumbria CA7 4AJ
Tel: 016973 32592
Fax: 016973 32339
Crystalyx Products GmbH**
Am Stau 199-203, 26122,
Oldenburg, Germany
Tel: 00 49 441 2188 92142
Fax: 00 49 441 2188 92177
Carrs Billington Agriculture
(Operations)*
Parkhill Road,
Kingstown Industrial Estate,
Carlisle CA3 0EX
Tel: 01228 529 021
Fax: 01228 554 397
Carrs Billington Agriculture
(Operations)*
Lansil Way, Lancaster LA1 3QY
Tel: 01524 597 200
Fax: 01524 597 219
Carrs Billington Agriculture
(Operations)*
High Mill, Langwathby, Penrith,
Cumbria CA10 1NB
Tel: 01768 889 800
Fax: 01768 889 807
Carrs Billington Agriculture
(Operations)*
Cold Meece, Stone,
Staffordshire ST15 0QW
Tel: 01785 760 535
Fax: 01785 760 888
Carrs Billington Agriculture
(Operations)*
Powhill, Kirkbride,
Cumbria CA5 5AJ
Tel: 01697 352 229
Fax: 01697 352 248
Carrs Billington Agriculture
(Operations)*
Uredale Mill, Askrigg, Leyburn,
North Yorkshire DL8 7HZ
Tel: 01969 650 229
Fax: 01969 650 770
Carrs Fertilisers, Invergordon
Inverbreakie Industrial Estate,
Invergordon, Ross-shire IV18 0QN
Tel: 01349 853 745
Fax: 01349 854 066
Carrs Fertilisers, Montrose
River Street, Montrose,
Angus DD10 9RT
Tel: 01674 678 400
Fax: 01674 671 318
Carrs Fertilisers, Silloth
The Wath, Silloth, Wigton,
Cumbria CA7 4PH
Tel: 016973 32333
Fax: 016973 32279
Carrs Billington Agriculture
(Sales), Annan
25 High Street, Annan,
Dumfriesshire DG12 6AE
Tel: 01461 202 772
Fax: 01461 202 712
Carrs Billington Agriculture
(Sales), Barnard Castle
Montalbo Road, Barnard Castle,
Co Durham DL12 8ED
Tel: 01833 637 537
Fax: 01833 638 010
Carrs Billington Agriculture
(Sales), Buchlyvie
Main Street, Buchlyvie,
Stirling FK8 3NQ
Tel & Fax: 01360 850 372
Carrs Billington Agriculture
(Sales), Carlisle
Montgomery Way, Rosehill
Estate, Carlisle CA1 2UY
Tel: 01228 520 212
Fax: 01228 512 572
Carrs Billington Agriculture
(Sales), Cockermouth
Unit 5, Lakeland Agricultural
Centre, Cockermouth CA13 0QQ
Tel: 01900 824 105
Fax: 01900 826 860
Carrs Billington Agriculture
(Sales), Hexham
Tyne Mills Industrial Estate,
Hexham,
Northumberland NE46 1XL
Tel: 01434 605 371
Fax: 01434 608 938
Carrs Billington Agriculture
(Sales), Milnathort
Stirling Road, Milnathort,
Kinross KY13 9UZ
Tel: 01577 862 381
Fax: 01577 863 057
Carrs Billington Agriculture
(Sales), Morpeth
20c Coopies Lane Industrial
Estate, Morpeth,
Northumberland NE61 6JN
Tel: 01670 503 930
Fax: 01670 504 404
Carrs Billington Agriculture
(Sales), Perth
Highland House,
St Catherine’s Road,
Perth PH1 5YA
Tel & Fax: 01738 643 022
Carrs Billington Agriculture
(Sales), Brock
Brockholes Way,
Claughton Trading Estate,
Lancaster Old Road,
Claughton on Brock,
Preston PR3 0PZ
Tel: 01995 643 200
Fax: 01995 643 220
Carrs Billington Agriculture
(Sales), Gisburn
Pendle Mill, Mill Lane, Gisburn,
Clitheroe, Lancashire BB7 4ES
Tel & Fax: 01200 445 491
Carrs Billington Agriculture
(Sales), Hawes
Burtersett Road, Hawes,
North Yorkshire DL8 3NP
Tel: 01969 667 334
Fax: 01969 667 335
Carrs Billington Agriculture
(Sales), Leek
Macclesfield Road, Leek,
Staffordshire ST13 8NR
Tel & Fax: 01538 383 277
Wallace Oils, Carlisle
Stephenson Industrial Estate,
Willowholme, Carlisle,
Cumbria CA2 5RN
Tel: 01228 534 342
Fax: 01228 590 820
Wallace Oils, Dumfries
Heath Hall, Dumfries,
Dumfriesshire DG1 3NX
Tel: 01387 250 525
Fax: 01387 250 656
Wallace Oils, Stranraer
Droughduil, Dunragit,
Stranraer DG9 8QA
Tel & fax: 01581 400 356
Afgritech**
Old Croft
Stanwix, Carlisle
Tel: 01228 554600
Fax: 01228 554601
Bibby Agriculture**
Dairy Centre
Fair Lane, Carmarthen
SA31 1RX
Tel: 01267 232 041
Fax: 01267 232 374
Bibby Agriculture**
1A Network House
Badgers Way
Oxon Business Park
Shrewsbury, Shropshire
SY3 5AB
Tel: 01743 237 890
Fax: 01743 351 552
Bendalls
Brunthill Road,
Kingstown Industrial Estate,
Carlisle CA3 0EH
Tel: 01228 526 246
Fax: 01228 525 634
R Hind
Kingstown Broadway,
Kingstown Industrial Estate,
Carlisle CA3 0HA
Tel: 01228 523 647
Fax: 01228 512 712
Carrs MSM
Unit 1 Spitfire Way,
Hunts Rise,
South Marston Park,
Swindon, Wiltshire SN3 4TX
Tel: 01793 824 891
Fax: 01793 824 894
Carrs Flour
Solway Mills, Silloth, Wigton,
Cumbria CA7 4AJ
Tel: 016973 31661
Fax: 016973 32543
Greens Flour
Station Road, Maldon,
Essex CM9 4LQ
Tel: 01621 852 696
Fax: 01621 854 525
Hutchisons Flour
East Bridge, Kirkcaldy,
Fife KY1 2SR
Tel: 01592 267 191
Fax: 01592 641 805
John Stronach
Solway Mills, Silloth, Wigton,
Cumbria CA7 4AJ
Tel: 016973 31456
Fax: 016973 32808
B&A Travel
18 Main Street, Beith,
Ayrshire KA15 2AA
Tel: 01505 504 547
Fax: 01505 504 812
* associate company
** joint venture company Designed and produced by corporateprm, Edinburgh and London. www.corporateprm.co.uk
01 Financial Highlights
02 Chairman’s Statement
04 Chief Executive’s Review
08 Operating and Financial Review
12 Board of Directors
12 Registered Office and Advisers
13 Directors’ Report
16 Corporate Governance
19 Independent Auditors’ Report
20 Directors’ Remuneration Report
24 Consolidated Income Statement
25 Consolidated and Company Statement
of Recognised Income and Expense
26 Consolidated and Company Balance
Sheet
27 Consolidated and Company Cash
Flow Statement
28 Principal Accounting Policies
33 Notes to the Financial Statements
73 Five Year Statement
75 Notice of Annual General Meeting
76 Directory of Operations
Financial Highlights
• Revenue up 26% to £242.6m
• Profit before tax down 39% at £6.3m
• Adjusted profit* before tax up 9% at £7.3m
• Basic earnings per share down 45% at 51.0p
• Adjusted earnings per share
*
up 17% to 59.7p
• Dividend up 13% to 18.0p per share
• Strong operating cash generation
* excluding non-recurring items and amortisation of intangible assets
agriculture
page 5
food
page 6
Carr’s Milling Industries activities are
focussed on Agriculture, Food and
Engineering with increased Annual Sales of
£242.6m Carr’s Milling Industries PLC
Old Croft, Stanwix
Carlisle CA3 9BA
www.carrs-milling.com
Carr’s Milling Industries PLC Annual Report & Accounts 2006
organic
growth
Carr’s Milling Industries PLC
Annual Report & Accounts 2006 | 04
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Chief Executive’s Review
In the period to 2 September 2006, Carr’s both achieved an eighth
successive annual increase in adjusted earnings per share and further
strengthened its business. The two large acquisitions of the previous
year - the Meneba flour mills and the Pye feed mills by our associate -
were successfully incorporated into the Group activities and three joint
ventures, mainly in the area of manufacture and supply of animal feed,
were established.
Chris Holmes 05
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
agriculture
The Group’s Agriculture business comprises, in the UK primarily in the
North West of England and South West of Scotland, four related activities
- animal feed manufacture, fertiliser blending, agricultural retailing and oil
distribution - and, in the USA and Germany, animal feed manufacture.
Operating profit of £5.0m (2005: £5.9m) was achieved on a revenue of
£174.5m (2005: £132.7m).
UNITED KINGDOM
Agriculture’s UK market place was even more challenging than last period.
In general, this reflected delays and uncertainty in farmers’ receiving the
initial Single Farm Payment (indeed, considerable sums are still outstanding
in respect of the 2005 harvest year), the unprecedented low farm gate
milk price and higher energy costs.
Further problems specifically affecting the manufacture of compound
ruminant animal feed included the mild winter weather (enabling animals to
feed outside) and substantial over-production, reflecting reduced demand,
in the Group’s trading area.
In the latter context, the Group, together with its associate, took decisive
action (as it has often done when faced with adverse conditions). Within
months of the acquisition in July 2005 by the Group’s associate company,
Carr's Billington Agriculture Operations, of certain assets of W&J Pye
(in Administration), compound feed mills were closed at Blackburn
(Lancashire), Penrith (Cumbria) and Shrewsbury (Shropshire). This left
Carr's Billington Agriculture Operations with four compound feed mills -
at Carlisle (Cumbria), Langwathby (Cumbria), Lancaster (Lancashire)
and Stone (Staffordshire) - and three blended feed mills - at Askrigg
(North Yorkshire), Kirkbride (Cumbria) and Lancaster. Notwithstanding,
manufacturing capacity remains in excess of demand. The rationalisation
and integration of the two entities has gone well as too has the capital
expenditure to improve the efficiency and quality of product at the
Lancaster Mill.
In March 2006, Afgritech, a joint venture company in which Carr’s Milling
Industries is a 50% shareholder, was formed with Afgri Operations, one of
the largest South African agricultural companies. Afgritech has invested
£0.7m in a new plant at Langwathby to produce by-pass protein for
ruminant animals, which will initially be available exclusively to customers of
Carr's Billington Agriculture, simultaneously increasing labour productivity at
that plant. Production will start in November 2006.
The Caltech division, which has a plant at Silloth (Cumbria), again
increased revenue and profits from its manufacture of low-moisture feed
blocks for the domestic, agricultural livestock and equine market. The
successful launch of a new product, Garlyx, designed to repel biting insects
on cattle and horses, will fully benefit the new financial year.
Bibby Agriculture, the joint venture company formed in September 2005 in
which Carr's Billington Agriculture Sales is a 50% shareholder, has made a
good start selling in Wales animal feed manufactured by its shareholders,
fertiliser and other farming supplies.
Fertiliser, produced at the Group’s three blending plants - at Invergordon
(Easter Ross), Montrose (Angus) and Silloth - marginally increased its
volumes, but profits slightly reduced. This reflected a difficult first half
and peak period of March/April, reflecting farmers’ reluctance to pay
energy-related higher prices. The Group’s unique range of
environmentally-protective fertiliser, New Choice, increased both
revenue, by 15%, and profit.
Carr’s agricultural retailing increased both revenue and profits from its
14 branches, operating as Carr's Billington Agriculture, from Perth in the
North to Leek (Staffordshire) in the South, selling farm supplies. Carr’s
Machinery distributes new and used agricultural and groundcare machinery
from six of these branches, across the north of England and in Dumfries
and Galloway in South West Scotland. Sales of Massey Ferguson
machinery again exceeded expectations and the increased sales of parts
and workshop services again contributed to the result.
Wallace Oils, which was acquired in April 2005, supplies oils and lubricants
to a broad customer base out of three depots, located at Carlisle, Dumfries
and Stranraer, the latter two in Dumfries and Galloway.
In its first full year of ownership, Wallace Oils performed satisfactorily and
began to make inroads into the Group’s customer base.
OVERSEAS
In the US, our subsidiary, Animal Feed Supplement, which produces
Smartlic and Feed in a Drum low-moisture animal feed blocks at mills in
Belle Fourche (South Dakota) and Poteau (Oklahoma), substantially
increased its volumes, but profit margins were lower as a result of further
cost increases in the base raw material, molasses. The installation of a
new production line to replace the 1998 production line, the older of the
two, at Belle Fourche will be completed in November 2006 without
disrupting production.
In Germany, a 50:50 joint venture, Crystalyx Products, was established in
2005 in conjunction with Agravis, one of Germany’s largest agricultural
companies. In January 2006, a new low-moisture animal feed plant was
commissioned to manufacture Crystalyx in Oldenburg, North West
Germany for the domestic market. The business has commenced well,
breaking into new European markets. 06
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Chief Executive’s Review continued
food
Operating profit before non-recurring items and amortisation of
intangible assets of £3.3m (2005: £2.3m) was achieved on revenue of
£55.7m (2005: £48.0m).
Carr’s principal food businesses are Carr’s Flour Mills, with a flour mill at
Silloth, and, since November 2004, the two former Meneba flour mills,
Hutchisons at Kirkcaldy (Fife) and Greens at Maldon (Essex). The
Meneba acquisition more than doubled the size of Carr’s flour business.
In a favourable market for flour, all three mills worked near capacity
throughout the period and a price increase was implemented in
September 2005 partially offsetting increases in the cost of electricity
and distribution. Higher margin speciality flours are performing
particularly well. Silloth suffered no repetition of the previous period’s
three month loss of flour sales to United Biscuits’ factory in Carlisle, as
a result of flooding, and increased its sales to United Biscuits’ Tollcross
factory outside Glasgow. The Kirkcaldy and Maldon mills benefited from
a full year’s trading and the greater efficiencies implemented since
acquisition.
The Carr’s Breadmaker range of retail flours continues to sell well, with
listings in three major multiple retailers. 07
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Engineering operating profit totalled £1.1m (2005: £0.8m, before the gain
on disposal of property of £4.1m) on a revenue of £12.2m (2005: £11.2m).
Engineering comprises Bendalls and R Hind, which are based in
Carlisle, and Carr's MSM, which is based in Swindon (Wiltshire).
Bendall’s designs and manufactures specialist steel fabrications for the
global petrochemical, nuclear, renewable energy and process industries.
R Hind provides vehicle bodybuilding and accident repairs for cars and
commercial vehicles. Carr's MSM designs and manufactures master
slave manipulators, which are key components for many industries but
notably the nuclear industry.
Bendalls, which is much the largest of the three activities, benefited
from more efficient working conditions following the move into larger,
modern premises in July 2005. A £2.5m contract to supply to the
Azerbaijan oil pipeline pressure vessels was constructed and
successfully delivered in the year. The SeaGen next generation tidal
energy device, for which Bendalls has manufactured a part of the
structure, is expected to be delivered to Strangford Lough, outside
Belfast, and connected to the National Grid in January 2007. Prospects
for improved orders from British Nuclear Group at Sellafield are good as
its decommissioning programme progresses.
Of the smaller divisions, R Hind traded satisfactorily, whilst Carr's MSM
traded well gaining some new customers and enters the new year with
a strong order book.
STAFF
In October this year Carr’s celebrated its 175th Anniversary - a great
achievement, particularly made even more special by it being the eighth
year in a row of hitting new records of profitability and shareholder
returns.
This is a great achievement for the Company and I would like to pay
tribute to all my colleagues here in the UK, the USA and Europe for
their dedication and commitment to the continued growth of the
Company.
PROSPECTS
Market conditions for Agriculture are not getting any easier with the low
farm gate milk price and again unbelievable expected delays of the
Single Farm Payment. The massive increase in wheat prices combined
with high-energy costs will make it a tough year for the Food division.
Engineering made good progress this period, but this is unlikely to be
repeated in the current period.
Given these trading environments, to achieve a ninth successive annual
increase in adjusted profit before tax will be challenging, despite the
greater strength of the business and Carr’s track record in successfully
combating adverse conditions.
Chris Holmes
Chief Executive Officer
21 November 2006
engineering | 01
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Statutory numbers are given in the Chairman’s Statement and reconciliations are given in the Notes to the Financial Statements
2002 - 2004 prepared under UKGAAP and 2005 - 2006 under IFRS
* excludes non-recurring items and amortisation of intangible assets
engineering
page 7
02 03 04 05 06
143
149
156
192
243
Revenue £m
02 03 04 05 06
3.3
4.6
5.1
6.7
7.3
Profit before tax * £m
02 03 04 05 06
33.3
34.7
39.9
50.9
59.7
Earnings per share * (p)
02 03 04 05 06
9.5
11.5
13.5
16.0
18.0
Dividends (p) | 02
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Chairman’s Statement
Richard
Inglewood
It gives me great satisfaction to report to
Shareholders that Carr’s has once again raised
adjusted pre-tax profits to record levels, with a
9.2% increase to £7.3m. Growth in our existing
business and expansion in Germany reflects a
good performance from all three divisions.
FINANCIAL OVERVIEW
The annual figures have, for the first time, been prepared under
International Financial Reporting Standards (“IFRS”) and those for 2005
have been restated on a comparable basis.
Revenue in the 52 weeks to 2 September 2006 rose 26.3% to £242.6m
(53 weeks to 3 September 2005: £192.1m), partially due to the inclusion
for the full year of the animal feed business acquired by our associate from
Pye in July 2005 and of the flour business acquired by Carr's Flour Mills
from Meneba in November 2004.
Profit before tax was £6.3m (2005: £10.4m). Profit before tax
excluding non-recurring items (principally the £4.1m gain on disposal of
the Bendall’s factory in the previous year) and amortisation of intangible
assets increased by 9.2% to £7.3m (2005: £6.7m). Adjusted earnings
per share, on a similar basis, rose 17.3% to 59.7p (2005: 50.9p) - an
eighth successive annual increase. Basic earnings per share was 51.0p
(2005: 92.1p).
Operating cash flow in the year was strong. Cash generated from
operations of £11.1m compared with £6.7m in the previous period. Net
debt reduced to £13.9m (2005: £14.9m), representing gearing of 68.3%
(2005: 73.9%). The net interest charge of £1.0m (2005: £1.2m) was
covered 7.9 times (2005: 6.7 times) by adjusted Group operating profit.
The results are considered in more detail in the Chief Executive’s Review.
DIVIDENDS
Reflecting the Group’s progressive dividend policy, its good performance
and its encouraging prospects, the Board is proposing an increase in the
final dividend of 13.6% to 12.5p per share. Along with the interim dividend
of 5.5p per share, paid in May 2006 (2005: 5.0p), this makes a total
dividend for the period of 18.0p per share, an increase of 12.5% on last
period’s 16.0p. The final dividend, if approved by Shareholders, will be paid
on 19 January 2007 to Shareholders on the register at the close of 03
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
expanding
in europe
business on 15 December 2006. Shares will be ex-dividend on
13 December 2006.
DEVELOPMENT OF CARR’S AGRICULTURE BUSINESS
In anticipation of a decline in divisional profit in the face of a further
deterioration in the UK market for agriculture, during the period Carr’s
made various changes to its animal feed business.
As reported in the Interim Announcement of 26 April 2006, to address a
noticeable reduction in demand and serious industry over-production of
compound and blended feed, our associate’s compound feed mills at
Blackburn (Lancashire), Penrith (Cumbria), and Shrewsbury (Shropshire)
were closed. The remaining Pye animal feed business, is now fully
integrated into Carrs Billington Agriculture Operations. The integration of
the sales teams, systems and product ranges proved challenging, and it is
to the credit, and demonstrates the strength, of our management teams
that this is complete and the business is focussed on the challenges
ahead.
The animal feed business expanded into Wales with the formation in
September 2005 of a new joint venture company, Bibby Agriculture,
together with Wynnstay Group and Welsh Feed Producers; Carr's
Billington Agriculture Sales is a 50% shareholder. Bibby Agriculture
traded profitably.
Since 2001, we have sold our Crystalyx low moisture feed blocks through
a large distributor in Germany, Agravis. Volumes have steadily increased
and reached a stage where it was viable to build a manufacturing plant in
Germany using our patented manufacturing process. A new company,
Crystalyx Products GmbH, jointly owned by Carr’s and Agravis, was formed
and the new plant was commissioned in January 2006. In the early
months, new sales outlets have been sourced and we are encouraged by
the performance to date.
In the US, we replaced a production line at our factory in Belle Fourche,
South Dakota, completing in November 2006. This new line incorporates
the new technology developed by our own engineering staff and is
designed to meet the expected increased demand.
BUSINESS OVERVIEW
The Pye acquisition in July 2005 nearly doubled Carr’s compound and
blended feed volumes. In the period there was a further deterioration in the
UK market for agriculture, including the Group’s principal trading area of
North West England and South West Scotland, as a result of delays in
farmers’ receiving subsidies (in the form of the initial Single Farm
Payment), the low price of milk and animals feeding outside in the mild
winter weather. In addition, margins were squeezed due to higher energy
costs. Consequently, Agriculture’s contribution reduced, as forecast in the
Interim Announcement.
The Meneba acquisitions, comprising mills at Kirkcaldy in Fife and Maldon
in Essex, more than doubled the size of Carr’s flour business, previously
comprising a single mill at Silloth in Cumbria. Demand for flour from both
bakers and biscuit producers was high throughout the period and, together
with the success in winning new customers, the three mills operated to
near capacity throughout the period. Accordingly, a substantial increase in
Food’s contribution to the Group’s profit before non-recurring items and
amortisation was achieved, as anticipated in the Interim Announcement.
The Bendalls engineering business re-located to its new factory in July
2005 and has benefited from the improved facilities and production layout.
The three engineering businesses made good progress in 2006.
BOARD
In September 2005, Alastair Wannop was appointed a non-executive
Director, bringing non-executive Directors to three and independent non-
executive Directors to two, and I succeeded David Newton as Chairman.
As in previous years, the Board reviewed best practice Corporate
Governance policies and procedures and made changes to ensure the
Group remains where appropriate compliant, bearing in mind its size, with
the Combined Code.
OUTLOOK
In the 52 weeks to 2 September 2006, the performance of the business
continued to benefit from the strength of the management teams at the
Group’s operational activities. This attribute has enabled the Group to
continue its progress despite the difficulties posed by increased costs,
particularly energy, and the general trading environment. We expect these
challenges to continue into the current year. However, I can report that
trading in the opening weeks is in line with management’s expectations but
with the high cost increases being experienced the management will be
challenged to continue the Group’s growth.
Richard Inglewood
Chairman
21 November 2006 | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input Carr’s Milling Industries PLC
Old Croft, Stanwix
Carlisle CA3 9BA
www.carrs-milling.com
Carr’s Milling Industries PLC Annual Report & Accounts 2006
organic
growth
Carr’s Milling Industries PLC
Annual Report & Accounts 2006 Designed and produced by corporateprm, Edinburgh and London. www.corporateprm.co.uk
01 Financial Highlights
02 Chairman’s Statement
04 Chief Executive’s Review
08 Operating and Financial Review
12 Board of Directors
12 Registered Office and Advisers
13 Directors’ Report
16 Corporate Governance
19 Independent Auditors’ Report
20 Directors’ Remuneration Report
24 Consolidated Income Statement
25 Consolidated and Company Statement
of Recognised Income and Expense
26 Consolidated and Company Balance
Sheet
27 Consolidated and Company Cash
Flow Statement
28 Principal Accounting Policies
33 Notes to the Financial Statements
73 Five Year Statement
75 Notice of Annual General Meeting
76 Directory of Operations
Financial Highlights
• Revenue up 26% to £242.6m
• Profit before tax down 39% at £6.3m
• Adjusted profit* before tax up 9% at £7.3m
• Basic earnings per share down 45% at 51.0p
• Adjusted earnings per share
*
up 17% to 59.7p
• Dividend up 13% to 18.0p per share
• Strong operating cash generation
* excluding non-recurring items and amortisation of intangible assets
agriculture
page 5
food
page 6
Carr’s Milling Industries activities are
focussed on Agriculture, Food and
Engineering with increased Annual Sales of
£242.6m 01
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Statutory numbers are given in the Chairman’s Statement and reconciliations are given in the Notes to the Financial Statements
2002 - 2004 prepared under UKGAAP and 2005 - 2006 under IFRS
* excludes non-recurring items and amortisation of intangible assets
engineering
page 7
02 03 04 05 06
143
149
156
192
243
Revenue £m
02 03 04 05 06
3.3
4.6
5.1
6.7
7.3
Profit before tax * £m
02 03 04 05 06
33.3
34.7
39.9
50.9
59.7
Earnings per share * (p)
02 03 04 05 06
9.5
11.5
13.5
16.0
18.0
Dividends (p) 02
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Chairman’s Statement
Richard
Inglewood
It gives me great satisfaction to report to
Shareholders that Carr’s has once again raised
adjusted pre-tax profits to record levels, with a
9.2% increase to £7.3m. Growth in our existing
business and expansion in Germany reflects a
good performance from all three divisions.
FINANCIAL OVERVIEW
The annual figures have, for the first time, been prepared under
International Financial Reporting Standards (“IFRS”) and those for 2005
have been restated on a comparable basis.
Revenue in the 52 weeks to 2 September 2006 rose 26.3% to £242.6m
(53 weeks to 3 September 2005: £192.1m), partially due to the inclusion
for the full year of the animal feed business acquired by our associate from
Pye in July 2005 and of the flour business acquired by Carr's Flour Mills
from Meneba in November 2004.
Profit before tax was £6.3m (2005: £10.4m). Profit before tax
excluding non-recurring items (principally the £4.1m gain on disposal of
the Bendall’s factory in the previous year) and amortisation of intangible
assets increased by 9.2% to £7.3m (2005: £6.7m). Adjusted earnings
per share, on a similar basis, rose 17.3% to 59.7p (2005: 50.9p) - an
eighth successive annual increase. Basic earnings per share was 51.0p
(2005: 92.1p).
Operating cash flow in the year was strong. Cash generated from
operations of £11.1m compared with £6.7m in the previous period. Net
debt reduced to £13.9m (2005: £14.9m), representing gearing of 68.3%
(2005: 73.9%). The net interest charge of £1.0m (2005: £1.2m) was
covered 7.9 times (2005: 6.7 times) by adjusted Group operating profit.
The results are considered in more detail in the Chief Executive’s Review.
DIVIDENDS
Reflecting the Group’s progressive dividend policy, its good performance
and its encouraging prospects, the Board is proposing an increase in the
final dividend of 13.6% to 12.5p per share. Along with the interim dividend
of 5.5p per share, paid in May 2006 (2005: 5.0p), this makes a total
dividend for the period of 18.0p per share, an increase of 12.5% on last
period’s 16.0p. The final dividend, if approved by Shareholders, will be paid
on 19 January 2007 to Shareholders on the register at the close of 03
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
expanding
in europe
business on 15 December 2006. Shares will be ex-dividend on
13 December 2006.
DEVELOPMENT OF CARR’S AGRICULTURE BUSINESS
In anticipation of a decline in divisional profit in the face of a further
deterioration in the UK market for agriculture, during the period Carr’s
made various changes to its animal feed business.
As reported in the Interim Announcement of 26 April 2006, to address a
noticeable reduction in demand and serious industry over-production of
compound and blended feed, our associate’s compound feed mills at
Blackburn (Lancashire), Penrith (Cumbria), and Shrewsbury (Shropshire)
were closed. The remaining Pye animal feed business, is now fully
integrated into Carrs Billington Agriculture Operations. The integration of
the sales teams, systems and product ranges proved challenging, and it is
to the credit, and demonstrates the strength, of our management teams
that this is complete and the business is focussed on the challenges
ahead.
The animal feed business expanded into Wales with the formation in
September 2005 of a new joint venture company, Bibby Agriculture,
together with Wynnstay Group and Welsh Feed Producers; Carr's
Billington Agriculture Sales is a 50% shareholder. Bibby Agriculture
traded profitably.
Since 2001, we have sold our Crystalyx low moisture feed blocks through
a large distributor in Germany, Agravis. Volumes have steadily increased
and reached a stage where it was viable to build a manufacturing plant in
Germany using our patented manufacturing process. A new company,
Crystalyx Products GmbH, jointly owned by Carr’s and Agravis, was formed
and the new plant was commissioned in January 2006. In the early
months, new sales outlets have been sourced and we are encouraged by
the performance to date.
In the US, we replaced a production line at our factory in Belle Fourche,
South Dakota, completing in November 2006. This new line incorporates
the new technology developed by our own engineering staff and is
designed to meet the expected increased demand.
BUSINESS OVERVIEW
The Pye acquisition in July 2005 nearly doubled Carr’s compound and
blended feed volumes. In the period there was a further deterioration in the
UK market for agriculture, including the Group’s principal trading area of
North West England and South West Scotland, as a result of delays in
farmers’ receiving subsidies (in the form of the initial Single Farm
Payment), the low price of milk and animals feeding outside in the mild
winter weather. In addition, margins were squeezed due to higher energy
costs. Consequently, Agriculture’s contribution reduced, as forecast in the
Interim Announcement.
The Meneba acquisitions, comprising mills at Kirkcaldy in Fife and Maldon
in Essex, more than doubled the size of Carr’s flour business, previously
comprising a single mill at Silloth in Cumbria. Demand for flour from both
bakers and biscuit producers was high throughout the period and, together
with the success in winning new customers, the three mills operated to
near capacity throughout the period. Accordingly, a substantial increase in
Food’s contribution to the Group’s profit before non-recurring items and
amortisation was achieved, as anticipated in the Interim Announcement.
The Bendalls engineering business re-located to its new factory in July
2005 and has benefited from the improved facilities and production layout.
The three engineering businesses made good progress in 2006.
BOARD
In September 2005, Alastair Wannop was appointed a non-executive
Director, bringing non-executive Directors to three and independent non-
executive Directors to two, and I succeeded David Newton as Chairman.
As in previous years, the Board reviewed best practice Corporate
Governance policies and procedures and made changes to ensure the
Group remains where appropriate compliant, bearing in mind its size, with
the Combined Code.
OUTLOOK
In the 52 weeks to 2 September 2006, the performance of the business
continued to benefit from the strength of the management teams at the
Group’s operational activities. This attribute has enabled the Group to
continue its progress despite the difficulties posed by increased costs,
particularly energy, and the general trading environment. We expect these
challenges to continue into the current year. However, I can report that
trading in the opening weeks is in line with management’s expectations but
with the high cost increases being experienced the management will be
challenged to continue the Group’s growth.
Richard Inglewood
Chairman
21 November 2006 04
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Chief Executive’s Review
In the period to 2 September 2006, Carr’s both achieved an eighth
successive annual increase in adjusted earnings per share and further
strengthened its business. The two large acquisitions of the previous
year - the Meneba flour mills and the Pye feed mills by our associate -
were successfully incorporated into the Group activities and three joint
ventures, mainly in the area of manufacture and supply of animal feed,
were established.
Chris Holmes 05
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
agriculture
The Group’s Agriculture business comprises, in the UK primarily in the
North West of England and South West of Scotland, four related activities
- animal feed manufacture, fertiliser blending, agricultural retailing and oil
distribution - and, in the USA and Germany, animal feed manufacture.
Operating profit of £5.0m (2005: £5.9m) was achieved on a revenue of
£174.5m (2005: £132.7m).
UNITED KINGDOM
Agriculture’s UK market place was even more challenging than last period.
In general, this reflected delays and uncertainty in farmers’ receiving the
initial Single Farm Payment (indeed, considerable sums are still outstanding
in respect of the 2005 harvest year), the unprecedented low farm gate
milk price and higher energy costs.
Further problems specifically affecting the manufacture of compound
ruminant animal feed included the mild winter weather (enabling animals to
feed outside) and substantial over-production, reflecting reduced demand,
in the Group’s trading area.
In the latter context, the Group, together with its associate, took decisive
action (as it has often done when faced with adverse conditions). Within
months of the acquisition in July 2005 by the Group’s associate company,
Carr's Billington Agriculture Operations, of certain assets of W&J Pye
(in Administration), compound feed mills were closed at Blackburn
(Lancashire), Penrith (Cumbria) and Shrewsbury (Shropshire). This left
Carr's Billington Agriculture Operations with four compound feed mills -
at Carlisle (Cumbria), Langwathby (Cumbria), Lancaster (Lancashire)
and Stone (Staffordshire) - and three blended feed mills - at Askrigg
(North Yorkshire), Kirkbride (Cumbria) and Lancaster. Notwithstanding,
manufacturing capacity remains in excess of demand. The rationalisation
and integration of the two entities has gone well as too has the capital
expenditure to improve the efficiency and quality of product at the
Lancaster Mill.
In March 2006, Afgritech, a joint venture company in which Carr’s Milling
Industries is a 50% shareholder, was formed with Afgri Operations, one of
the largest South African agricultural companies. Afgritech has invested
£0.7m in a new plant at Langwathby to produce by-pass protein for
ruminant animals, which will initially be available exclusively to customers of
Carr's Billington Agriculture, simultaneously increasing labour productivity at
that plant. Production will start in November 2006.
The Caltech division, which has a plant at Silloth (Cumbria), again
increased revenue and profits from its manufacture of low-moisture feed
blocks for the domestic, agricultural livestock and equine market. The
successful launch of a new product, Garlyx, designed to repel biting insects
on cattle and horses, will fully benefit the new financial year.
Bibby Agriculture, the joint venture company formed in September 2005 in
which Carr's Billington Agriculture Sales is a 50% shareholder, has made a
good start selling in Wales animal feed manufactured by its shareholders,
fertiliser and other farming supplies.
Fertiliser, produced at the Group’s three blending plants - at Invergordon
(Easter Ross), Montrose (Angus) and Silloth - marginally increased its
volumes, but profits slightly reduced. This reflected a difficult first half
and peak period of March/April, reflecting farmers’ reluctance to pay
energy-related higher prices. The Group’s unique range of
environmentally-protective fertiliser, New Choice, increased both
revenue, by 15%, and profit.
Carr’s agricultural retailing increased both revenue and profits from its
14 branches, operating as Carr's Billington Agriculture, from Perth in the
North to Leek (Staffordshire) in the South, selling farm supplies. Carr’s
Machinery distributes new and used agricultural and groundcare machinery
from six of these branches, across the north of England and in Dumfries
and Galloway in South West Scotland. Sales of Massey Ferguson
machinery again exceeded expectations and the increased sales of parts
and workshop services again contributed to the result.
Wallace Oils, which was acquired in April 2005, supplies oils and lubricants
to a broad customer base out of three depots, located at Carlisle, Dumfries
and Stranraer, the latter two in Dumfries and Galloway.
In its first full year of ownership, Wallace Oils performed satisfactorily and
began to make inroads into the Group’s customer base.
OVERSEAS
In the US, our subsidiary, Animal Feed Supplement, which produces
Smartlic and Feed in a Drum low-moisture animal feed blocks at mills in
Belle Fourche (South Dakota) and Poteau (Oklahoma), substantially
increased its volumes, but profit margins were lower as a result of further
cost increases in the base raw material, molasses. The installation of a
new production line to replace the 1998 production line, the older of the
two, at Belle Fourche will be completed in November 2006 without
disrupting production.
In Germany, a 50:50 joint venture, Crystalyx Products, was established in
2005 in conjunction with Agravis, one of Germany’s largest agricultural
companies. In January 2006, a new low-moisture animal feed plant was
commissioned to manufacture Crystalyx in Oldenburg, North West
Germany for the domestic market. The business has commenced well,
breaking into new European markets. 06
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Chief Executive’s Review continued
food
Operating profit before non-recurring items and amortisation of
intangible assets of £3.3m (2005: £2.3m) was achieved on revenue of
£55.7m (2005: £48.0m).
Carr’s principal food businesses are Carr’s Flour Mills, with a flour mill at
Silloth, and, since November 2004, the two former Meneba flour mills,
Hutchisons at Kirkcaldy (Fife) and Greens at Maldon (Essex). The
Meneba acquisition more than doubled the size of Carr’s flour business.
In a favourable market for flour, all three mills worked near capacity
throughout the period and a price increase was implemented in
September 2005 partially offsetting increases in the cost of electricity
and distribution. Higher margin speciality flours are performing
particularly well. Silloth suffered no repetition of the previous period’s
three month loss of flour sales to United Biscuits’ factory in Carlisle, as
a result of flooding, and increased its sales to United Biscuits’ Tollcross
factory outside Glasgow. The Kirkcaldy and Maldon mills benefited from
a full year’s trading and the greater efficiencies implemented since
acquisition.
The Carr’s Breadmaker range of retail flours continues to sell well, with
listings in three major multiple retailers. 07
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Engineering operating profit totalled £1.1m (2005: £0.8m, before the gain
on disposal of property of £4.1m) on a revenue of £12.2m (2005: £11.2m).
Engineering comprises Bendalls and R Hind, which are based in
Carlisle, and Carr's MSM, which is based in Swindon (Wiltshire).
Bendall’s designs and manufactures specialist steel fabrications for the
global petrochemical, nuclear, renewable energy and process industries.
R Hind provides vehicle bodybuilding and accident repairs for cars and
commercial vehicles. Carr's MSM designs and manufactures master
slave manipulators, which are key components for many industries but
notably the nuclear industry.
Bendalls, which is much the largest of the three activities, benefited
from more efficient working conditions following the move into larger,
modern premises in July 2005. A £2.5m contract to supply to the
Azerbaijan oil pipeline pressure vessels was constructed and
successfully delivered in the year. The SeaGen next generation tidal
energy device, for which Bendalls has manufactured a part of the
structure, is expected to be delivered to Strangford Lough, outside
Belfast, and connected to the National Grid in January 2007. Prospects
for improved orders from British Nuclear Group at Sellafield are good as
its decommissioning programme progresses.
Of the smaller divisions, R Hind traded satisfactorily, whilst Carr's MSM
traded well gaining some new customers and enters the new year with
a strong order book.
STAFF
In October this year Carr’s celebrated its 175th Anniversary - a great
achievement, particularly made even more special by it being the eighth
year in a row of hitting new records of profitability and shareholder
returns.
This is a great achievement for the Company and I would like to pay
tribute to all my colleagues here in the UK, the USA and Europe for
their dedication and commitment to the continued growth of the
Company.
PROSPECTS
Market conditions for Agriculture are not getting any easier with the low
farm gate milk price and again unbelievable expected delays of the
Single Farm Payment. The massive increase in wheat prices combined
with high-energy costs will make it a tough year for the Food division.
Engineering made good progress this period, but this is unlikely to be
repeated in the current period.
Given these trading environments, to achieve a ninth successive annual
increase in adjusted profit before tax will be challenging, despite the
greater strength of the business and Carr’s track record in successfully
combating adverse conditions.
Chris Holmes
Chief Executive Officer
21 November 2006
engineering Ron Wood
08
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Operating and Financial Review
The Group’s business
The Group’s operations are organised into three business divisions,
agriculture, food and engineering, and the performance of these three
divisions in the period is discussed in the Chief Executive’s Review on
pages 4 to 7. The agriculture business operates predominately in the
North of England, Wales and Scotland, in addition there are two animal
feed plants in the US and a plant in Germany. The flour and the
engineering business operate entirely within the UK although a proportion
of sales from the engineering business are export.
The markets in which all three businesses operate are competitive both in
terms of pricing from other suppliers and the retail environment in general
which has a direct impact on many of our customers. Despite this, Carr’s
businesses have a long record of increasing sales and profits through a
combination of investing in modern efficient factories, developing a range
of quality products and making sound acquisitions. The businesses are
under the control of stable, experienced and talented operational
management teams supported by a skilled workforce. the group
09
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Business objectives
There are five key elements to the Group’s strategy for meeting its
objectives which are continuing growth and profitability:
• Deliver quality, innovative and cost-effective products and services to our
customers
• Organic growth
• Seek acquisitions to complement our existing businesses
• Maximise operational efficiency
• Securing employee health and safety
We monitor our performance against the strategy by means of key
performance indicators (‘KPIs’):
• Organic sales growth – year on year increase in sales revenue excluding
the impact of acquisitions and disposals
• Gross return on sales – gross profit as a percentage of sales revenue
• Net return on sales – operating profit before non-recurring items and
amortisation as a percentage of sales revenue
• Adjusted earnings per share – profit attributed to equity shareholders
before non-recurring items and amortisation divided by the weighted
average number of shares in issue during the period
• Return on net assets – profit before tax and before non-recurring items
and amortisation as a percentage of net assets
• Free cash flow – cash generated from operations less tax and net
interest paid
Business strategies
The Group’s market strategy is to focus on growing the quality end of the
markets in which we operate, to establish meaningful and long lasting
relationships with our customers by a combination of product development
and high service levels and to invest in quality facilities. Each business within
the Group is given the responsibility for developing its own plans to deliver
the objectives of the Group with particular emphasis on growing sales
through the supply of quality products, service and product innovation,
improving operational efficiency and securing employee health and safety.
The role of the Board in achieving Group objectives has been to support
operational management and to identify suitable acquisitions that will create
new customers to the Group or will secure existing market positions.
Performance against KPIs
2006 2005
Organic sales growth 5.3% 13.6%
Gross return on sales 14.8% 16.0%
Net return on sales 3.3% 4.2%
Adjusted earnings per share 59.7p 50.9p
Return on net assets 32.3% 27.8%
Free cash flow £7.2m £3.7m
FINANCIAL REVIEW
Basis of preparation
The full year accounts are being reported under IFRS for the first time. The
effect of the Group’s conversion to IFRS has already been communicated
to Shareholders in our statement in April 2006 together with the
reconciliations and accompanying narrative explaining the restatement of
the UK GAAP financial statements for 2005. As previously stated, the
impact on the Group’s results of the adoption of IFRS has not been
significant to the underlying business and the fundamentals of the Group’s
business and the way in which it is managed are unaltered by the change
in accounting regime. The main differences between IFRS and the former
UK GAAP which have affected the Group are in relation to business
combinations, pensions and deferred taxation.
Overview
Group revenue from activities during the period was £242.6 million
(2005: £192.1 million). The increase in revenue comprised a full years
trading of the animal feed business acquired by our associate from
W & J Pye in July 2005 and the additional 11 weeks revenue from
the two flour mills acquired in November 2004.
Profit before taxation and before non-recurring items and amortisation
of intangible assets increased to £7.3 million (2005: £6.7 million).
Non-recurring items and amortisation are disclosed in Note 6 to the
financial statements.
Net finance costs were £1.0 million (2005: £1.2 million) and were
covered 7.9 times (2005: 6.7 times) by adjusted Group operating profits.
Taxation
The Group’s effective tax charge on profit from activities after net finance
costs was 31.5% (2005: 24.7%). A reconciliation of the actual total tax
charge to the standard rate of corporation tax in the UK of 30% is set out
in note 9 to the financial statements.
Earnings per share
The profit attributable to the equity holders of the Company amounted to
£4.2 million (2005: £7.5 million), and basic earnings per share was 51.0p
(2005: 92.1p). Adjusted earnings per share of 59.7p (2005: 50.9p) is
calculated by dividing the operating profit for the period, before non-
recurring items and amortisation of intangible assets, by the weighted
average number of shares in issue during the period. 10
Carr’s Milling Industries PLC
Annual Report & Accounts 2005
Operating and Financial Review continued
The valuation under IAS19 accounting basis showed a deficit before
related deferred tax asset in the scheme at 2 September 2006 of £15.8
million (3 September 2005: £12.1 million). The movement in the current
period arose principally as a result of a re-assessment of the mortality
rates, applicable discount rates and inflation rates that caused a significant
increase in the deficit.
Following the triennial valuation at 1 January 2006, the trustees and the
company are considering a strategy designed to eliminate the deficit within
ten years.
Currently, the contributions paid by participating companies has increased
by £1.3 million to £2.6 million.
A Group subsidiary undertaking is a participating employer in a defined
benefit pension scheme of our associate. The IAS19 accounting basis
showed a total deficit, for that scheme, before related tax asset at
2 September 2006 of £5.7 million (2005 : £6.5 million). The Group
recognises approximately 50% of the scheme deficit and related
deferred tax asset in its investment in associate. The details of both
pension schemes are given on note 28 to the financial statements.
Treasury Policy
The Group’s policy is structured to ensure adequate financial resources are
available for the development of its business while managing its currency
and interest rate risks. The Group’s strategy, policy and controls are
developed centrally and approved by the Board. The Group does not
engage in speculative transactions.
The main elements of treasury activity are outlined below.
Foreign currency risk
The major foreign currency risk facing the Group is in the purchasing of
raw materials in the fertiliser and flour milling operations. The major
currency involved is the US dollar. The policy of the Group is to hedge
using forward foreign exchange contracts with UK banks as soon as
commitment has been given to the underlying transaction.
The result of the foreign subsidiary is translated into sterling at the average
rate of exchange for the period concerned. As this translation has no
impact on cash flow, the Group chooses not to hedge its foreign subsidiary
earnings.
Balance sheet review
We have continued to invest in the business with total capital expenditure
in the year of £4.0 million, making our total capital expenditure since 2003
£13.8 million. In the current period we have continued to invest in
production facilities with £1.8 million spent on our flour mills and the
placement production line at our low moisture feed block plant in the US.
Intangible assets increased in November 2004 as a result of the
acquisition of Meneba UK Limited and in 2006 £0.9 million was amortised.
Inventories have decreased by 8.0% from £12.9 million, mainly due to
lower engineering work in progress following the completion of contracts in
the last quarter.
Trade and other receivables have decreased by £1.65 million, principally
due to the decrease in trade receivables of £2.4 million arising from better
collections, particularly in agriculture.
Trade and other payables have decreased by £3.9 million due to a
decrease in trade payables of £2.2 million which is simply due to the timing
of payments. The retirement benefit obligation adverse movement of £3.7
million in the period is discussed in the section headed Pensions.
Overall net assets increased by £0.4 million to £22.3 million.
Cash flow and net debt
The Group’s operational cash generation increased in the period with cash
flows generated from operations in the current year of £11.1 million
(2005: £6.7 million). This has assisted the Group in funding the capital
investment programme previously discussed, resulting in net cash
generated of £4.3 million (2005: £0.3 million) before investment and
financing activities. Dividend payments and loan repayments contributed to
a £4.9 million outflow in financing activities (2005: £3.3 million).
Net debt at the year end was £13.9 million (2005: £14.9 million) with
gearing at 68.3% (2005: 73.9%). Net debt is expected to decrease over
the next couple of years excluding any acquisition funding.
Pensions
The Group operates its current pension arrangements on a defined benefit
and defined contribution basis. The defined benefit section is closed to new
members and has 125 active members, 147 deferred members and 146
current pensioners and the scheme received contributions from the Group
and members which almost match the pensions paid out in 2006. 11
Carr’s Milling Industries PLC
Annual Report & Accounts 2005
Manufacturing facilities
The Group has continued to invest in its production facilities in all three
divisions and it intends to continue investing to ensure that it maintains a
competitive edge. The investment in new premises and equipment for our
engineering business, Bendalls, in Carlisle in 2005 has improved
efficiencies.
Employees
While the Group continues to invest in facilities and equipment we also
continue to invest in our people. The Group offers training programmes
where additional skills are required to undertake their responsibilities. The
businesses have strategies for retaining staff, including the provision of
competitive terms and conditions, a contributory occupational pension
scheme and share options. The Group introduced a Savings–related Share
Option Scheme in May 2006.
Principal risks and uncertainties
Each year the Group carries out a formal exercise to identify and assess
the impact of risks on its business and this year the exercise was carried
out in August 2006. The more significant risks and uncertainties faced by
the Group were identified as customer retention, employee retention,
margins, profitability and competition. The corporate governance statement
describes more about the Group’s risk management process.
On behalf of the Board
Ronald C Wood
Finance Director
21 November 2006
The balance sheet of the foreign subsidiary is translated into sterling at the
closing US dollar exchange rate. Any gains or losses on the translation of
the balance sheet into sterling are recorded in reserves. Currency
translation risks of net assets in the US subsidiary are not hedged.
Interest rate risk
The Board set the policy on interest rate risk and this was reviewed at the
time of the Meneba UK acquisition when borrowings increased significantly.
The policy is to cover approximately 50% of the risk and was implemented
by taking out interest cap and rate swap agreements with a UK bank. The
policy will be reviewed from time to time as circumstances change. The
monitoring of the interest rate risk is managed at head office based on
cash flow projections.
Credit risk
Practically all sales are made on credit terms to an extensive range of
customers, UK food producers, agricultural merchants, farmers and the
nuclear industry. Overdue accounts are reviewed monthly at divisional
management meetings. Historically, the incidence of bad debts is low.
Funding
The Group has historically been cash generative. The bank position for
each operation is monitored on a daily basis and capital expenditure above
a certain level is approved at the monthly Group board meeting. Each
operation has access to the Group’s overdraft facility or has facilities
specific to that operation and all term debt is arranged centrally. The
current bank facilities available to the Group are a term loan of £2.0 million
repayable in October 2009, a revolving credit facility of £4.5 million and
overdraft facilities of £8.0 million. Unutilised facilities at 2 September 2006
were £10.9 million (2005: £14.6 million).
Resources, risks and uncertainties
The Group aims to safeguard the assets that give it competitive advantage,
being its product quality, product innovation and service levels; its
operational management, skilled workforce and its modern well-equipped
factories.
Reputation
It is the responsibility of local operational management assisted by the
Group Health and Safety Manager to maintain and where possible
enhance the Group’s reputation for product quality, product innovation,
service levels and a culture of safe working. 12
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Board of Directors
Top, left to right:
Lord Inglewood
Non-Executive Chairman
Chris Holmes
Chief Executive Officer
Ron Wood
Finance Director
Bottom, left to right:
Robert Heygate
Non-Executive Director
Alistair Wannop
Non-Executive Director
Registered Office
Carr’s Milling Industries PLC
Old Croft, Stanwix
Carlisle CA3 9BA
Registered No. 98221
Independent Auditors
PricewaterhouseCoopers LLP
89 Sandyford Road
Newcastle upon Tyne NE1 8HW
Bankers
Clydesdale Bank PLC
82 English Street
Carlisle CA3 8HP
The Royal Bank of Scotland plc
37 Lowther Street
Carlisle CA3 8EL
Financial Adviser and Broker
Investec Bank (UK) Limited
2 Gresham Street
London EC2V 7QP
Solicitors
DLA
India Buildings
Water Street
Liverpool L2 ONH
Atkinson Ritson
15 Fisher Street
Carlisle CA3 8RW
Registrars
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield HD8 0LA
Registered Office and Advisers 13
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Directors’ Report
The Directors submit their report and the audited accounts of the
Company for the period ended 2 September 2006.
PRINCIPAL ACTIVITIES, BUSINESS REVIEW AND FUTURE
DEVELOPMENTS
The Company’s activities are Agriculture, Food and Engineering.
A review of the business and future development of the Group
and a discussion of the principal risks and uncertainties faced by
the Group is presented in the Chief Executive’s Review on pages
4 to 7 and in the Operating and Financial Review on pages 8 to 11.
RESULTS AND DIVIDENDS
The profit before taxation was £6.3 million (2005: £10.4 million).
After taxation charge of £2.0 million (2005: £2.6 million), the profit
for the period is £4.3 million (2005: £7.8 million). An interim dividend
of 5.5p per ordinary share was paid on 31 May 2006. The Directors
recommend the payment of a final dividend for the period, which is
not reflected in these accounts, of 12.5p per ordinary share which,
together with the interim dividend, represents 18.0p per ordinary
share, totalling £1.5 million (2005: 16.0p per ordinary share, totalling
£1.3 million).
Subject to approval at the Annual General Meeting, the final
dividend will be paid on 19 January 2007 to members on the
register at the close of business on 15 December 2006. Shares
will be ex-dividend on 13 December 2006.
FINANCIAL INSTRUMENTS
The Group’s risk management objectives and policy are discussed
in the Treasury Policy section of the Operating and Financial Review
on page 10.
DIRECTORS
The Directors of the Company currently in office are as stated on
page 12. Each of the current Directors served for the whole of the
period under review. W R Inglewood and A R Heygate retire in
accordance with the Articles of Association and, being eligible, each
offers himself for re-election.
Biographical details of the directors are shown below:
Non-executive directors
Lord Inglewood (55) was a Conservative member of the European
Parliament for ten years until his retirement in 2004, was a
Government Minister from 1995 to 1997 and has been a member
of the House of Lords since 1989. He brings to the Board wide
experience, in particular of EU and Westminster politics, allied with
a knowledge of farming and of Carr’s north-west England heartland.
He is also chairman of CN Group Limited the Carlisle based
regional media company.
Mr A R Heygate (61) is an executive director of Heygate & Sons
Limited, the UK’s largest independent flour miller, and is also
engaged in animal feed compounding and other agricultural
activities.
Mr A G M Wannop (44) is a director of English Food and Farming
Partnership and of Cumbria Vision. He has actively farmed in
Cumbria for many years.
Lord Inglewood, Mr A R Heygate and Mr A G M Wannop have two
year fixed term contracts which expire on 31 August 2007.
Executive directors
Mr C N C Holmes (55) was appointed to the Board in January
1992, and as CEO in September 1994. Previously he held senior
management positions in the agricultural division of J Bibby & Sons.
Mr R C Wood (58) was appointed to the Board as Finance Director
in January 1988 and is a member of the Chartered Institute of
Management Accountants. Mr R C Wood is also Company
Secretary.
The two executive directors have service contracts which provide for
a rolling two year notice period.
EMPLOYMENT POLICIES
The Company’s policy on employee involvement is to adopt an open
management style, thereby encouraging informal consultation at all
levels about aspects of the Company’s operations. Employees
participate directly in the success of the business by contributing to
the SAYE share option schemes.
Employment policies are designed to provide equal opportunities
irrespective of colour, ethnic or natural origin, nationality, sex,
religion, marital or disabled status. Full consideration is given to
applications for employment by and the continuing employment,
training and career development of disabled people.
POLITICAL AND CHARITABLE DONATIONS
During the period ended 2 September 2006 the Group contributed
£11,346 (2005: £12,443) in the UK for charitable purposes. There
were no political donations during the period (2005: Nil).
PAYMENT OF SUPPLIERS
Payment terms are agreed with each supplier and every endeavour
is made to adhere to the agreed terms. The average credit terms for
the Group as a whole, based on the year-end trade payables figure
and a 364 day year, is 42 days (2005: 42 days). The Company has
no outstanding trade payables at the end of the financial period.
SHARE CAPITAL
The movement in the share capital during the period is detailed in
note 29 to the financial statements. 14
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
AUDITORS
PricewaterhouseCoopers LLP have expressed their willingness to
continue in office and a resolution proposing their re-appointment
will be submitted at the Annual General Meeting.
DIRECTORS’ STATEMENT AS TO DISCLOSURE OF
INFORMATION TO AUDITORS
The Directors who were members of the Board at the time of
approving the Directors’ Report are listed on page 12. Having made
enquiries of fellow Directors and of the Company’s auditors, each of
these Directors confirm that:
• to the best of each Director’s knowledge and belief, there is no
audit information relevant to the preparation of their report of
which the Company’s auditors are unaware; and
• each Director has taken all the steps a director might
reasonably be expected to have taken to be aware of relevant
audit information and to establish that the Company’s auditors
are aware of that information.
DIRECTORS INTERESTS
The interests of the Directors, as defined by the Companies Act 1985, in the ordinary shares of the Company, other than in
respect of options to acquire ordinary shares (which are detailed in the analysis of options included in the Directors’
Remuneration Report on pages 20 to 23), are as follows:
on 2 September 2006 on 3 September 2005
Ordinary Shares Ordinary Shares
C N C Holmes 47,990 47,990
A R Heygate 37,225 37,225
R C Wood 25,090 25,090
W R Inglewood 3,510 1,250
A G M Wannop 2,261 2,261
All the above interests are beneficial. There have been no other changes to the above interests in the period from 3 September
2006 to 13 November 2006.
MAJOR SHAREHOLDERS
The Company has been informed of the following interests at 6 November 2006 in the 8,233,579 ordinary shares of the
Company, as required by the Companies Act 1985:
Percentage of
Number of shares Issued share capital
Heygate & Sons Limited 1,332,762 16.2%
T W G Charlton 1,177,500 14.3%
HSBC Global Custody Nominee (UK) Limited 350,000 4.0%
Chase Nominees Limited 325,548 4.0%
Directors’ Report continued 15
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
ANNUAL GENERAL MEETING AND SPECIAL BUSINESS TO BE
TRANSACTED AT THE ANNUAL GENERAL MEETING
The Notice convening the Annual General Meeting appears on page
75 and includes the following items of Special Business:
(i) Resolution 7 : Disapplication of pre-emption rights
The resolution renews the existing authority to the Directors
under Section 95 of the Companies Act 1985 to allot shares by
way of rights to shareholders and to allot shares for cash up to
a nominal value of £102,920 (representing 5 per cent of the
issued share capital) without first offering such shares pro rata
to existing shareholders, as would otherwise be required under
Section 89 of that Act. This will allow the Directors some
flexibility when considering how best to finance new business
opportunities. In accordance with the requirements of the
London Stock Exchange this resolution will come up for
renewal at the next Annual General Meeting.
(ii) Resolution 8 : Purchase its own shares
This resolution renews the existing authority to the directors to
buy, by way of market purchases, up to 823,358 of its own
shares (representing 10 per cent of the issued share capital).
The proposal should not be taken as an indication that the
Company will purchase its own shares. This authority will only
be exercised by the Directors if they are satisfied that it would
result in an increase in earnings per share and would be in the
best interest of shareholders generally.
DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable United
Kingdom law and those International Financial Reporting Standards
as adopted by the European Union.
The Directors are required to prepare financial statements for each
financial period which present fairly the financial position of the
Company and of the Group and the financial performance and cash
flows of the Company and of the Group for that period. In preparing
those financial statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
• provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other events
and conditions on the entity’s financial position and financial
performance; and
• state that the company has complied with IFRS, subject to any
material departures disclosed and explained in the financial
statements.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company and of the Group and enable them
to ensure that the financial statements comply with the Companies
Act 1985 and Article 4 of the IAS Regulation. They are also
responsible for safeguarding the assets of the Company and hence
for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
The maintenance and integrity of the Carr’s Milling Industries
website is the responsibility of the directors; the work carried out by
the auditors does not involve consideration of these matters and,
accordingly, the auditors accept no responsibility for any changes
that may have occurred to the financial statements since they were
initially presented on the website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in
other jurisdictions.
The requirements to provide an enhanced Directors’ Report under
Section 243ZZB of the Companies Act have been addressed in this
Report and the preceding Operating and Financial Review.
By Order of the Board
Ronald C Wood
Secretary
21 November 2006 16
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Corporate Governance
STATEMENT BY THE DIRECTORS ON COMPLIANCE WITH THE
PROVISIONS OF THE COMBINED CODE
PRINCIPLES OF GOOD GOVERNANCE
The Board is committed to high standards of corporate governance.
The adoption and maintenance of good governance is the
responsibility of the Board as a whole. This report, together with the
Directors’ Remuneration Report on pages 20 to 23, describes how
the Board applies the principles of good governance and best
practice as set out in the Combined Code on Corporate
Governance (the “Combined Code”). A statement of compliance
can be found at the end of this report.
THE BOARD
The Board consists of a non-executive Chairman, two executive
Directors and two other non-executives. A R Heygate is a non-
executive director and the Board considers him to be independent
although the Combined Code would not deem him independent due
to his long association with the Company and he represents a
significant shareholder. The Board believes that he acts in the best
interests of the Company and that his holding of shares in the
Company aligns his interests with that of the shareholders. A G M
Wannop is the senior independent non-executive director. The
Combined Code recommends that the Board of Directors of a UK
public company should include a balance of executive and non-
executive Directors (including independent non-executives) such that
no individual or small group of individuals can dominate the Board’s
decision-making. The Board is confident that it now meets the
requirements of the Combined Code with the exception of A R
Heygate as outlined above.
The Board meets nine times throughout the year to direct and
control the overall strategy and operating performance of the Group.
To enable them to carry out these responsibilities all Directors have
full and timely access to all relevant information. Training resources
are available to all Directors. A formal schedule of matters reserved
for decision by the Board covers key areas of the Group’s affairs
including acquisition and divestment policy, approval of budgets,
major capital expenditure projects, profit and cash flow performance
and general treasury and risk management policies. Responsibility
for the Group’s day to day operations is delegated to the Chief
Executive who, supported by the Finance Director and executive
management, implement the Board’s strategy and manage the
Group’s business. The roles of the Chairman and the Group Chief
Executive are separated and clearly defined. The Chairman’s overall
responsibility is to ensure that the Board carries out its
responsibilities. The Group Chief Executive’s responsibilities are to
direct and promote the operation and development of the Group.
Procedures are in place for Directors to seek both independent
advice at the expense of the Company and the advice and services
of the Company Secretary in order to fulfil their duties. The
Company Secretary is responsible to the Board for ensuring that
Board procedures are complied with and for advising the Board,
through the Chairman, on all governance matters. The appointment
and removal of the Company Secretary is determined by the Board
as a whole.
The Company’s Articles of Association provide that one third of the
Directors retire by rotation each year at the Annual General Meeting.
The Combined Code requires that Directors are required to present
themselves for re-election at intervals of no more than three years. It
is the Board’s intention to amend the Articles of Association at an
appropriate time to ensure compliance with this provision, but in the
interim, the Board intends to operate re-elections of Directors in a
manner to ensure compliance with the Combined Code. All new
Directors are subject to election by shareholders at the first
opportunity following their appointment.
Directors’ biographies and membership of the various committees
are shown on page 13. The formal terms of reference for the main
Board Committees together with the terms and conditions of
appointment of non-executive Directors are reviewed annually and
are available for inspection at the Company’s Registered Office and
at the Annual General Meeting.
BOARD COMMITTEES
Audit Committee
The Audit Committee currently comprises the three non-executives,
W R Inglewood, A R Heygate and A G M Wannop. The Committee
is chaired by A R Heygate. The Board considers that the Company
meets the main requirements of the Combined Code for a Company
of Carr’s size.
The board are responsible for assessing the Group’s internal
financial controls and meet with the external auditors as appropriate.
The external auditors have the opportunity for direct access to the
Committee without the executive Directors being present.
The Committee reviews the Group’s accounting policies and internal
reports on accounting and internal financial control matters together
with reports from the external auditors. The Audit Committee has
overall responsibility for monitoring the integrity of financial
statements and related announcements and for all aspects of
internal control and meets at least two times a year, which involve a
review of the Group’s interim and full year statements. The Audit
Committee is also responsible for recommendations for the
appointment, reappointment or removal of the external auditors and
for reviewing their effectiveness. It also approves the terms of
engagement and remuneration and monitors their independence
including the nature and levels of non-audit services.
The Chairman of the Audit Committee will be available at the Annual
General Meeting to respond to any shareholder questions that might
be raised on the Committee’s activities. 17
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Audit Remuneration
Board Committee Committee
No. of meetings 9 2 3
W R Inglewood 9 2 3
C N C Holmes 9 — —
R C Wood 8 — —
A R Heygate 8 2 3
A G M Wannop 9 2 3
MEETINGS ATTENDANCE
Details of the number of meetings and members’ attendance at, the Board, Audit and Remuneration Committees during the period are set
out in the table below.
Remuneration Committee
The Remuneration Committee currently comprises W R Inglewood
(Chairman), A R Heygate and A G M Wannop. It is a requirement of
the Combined Code that the Remuneration Committee should, in
the case of smaller companies, consist of at least two members who
are considered by the Combined Code to be independent. The
Company has complied with this. The Board is confident that the
Company complies with the requirements of the Combined Code in
terms of the required number of independent Directors for a
Company of Carr’s size. C N C Holmes, Chief Executive, attends
meetings of the Remuneration Committee by invitation and in an
advisory capacity. No Director attends any part of a meeting at
which his own remuneration is discussed. The Chairman and the
executive Directors determine the remuneration of the other non-
executive Directors.
The Committee recommends to the Board the policy for executive
remuneration and determines, on behalf of the Board, the other
terms and conditions of service for each executive Director. It
determines appropriate performance conditions for the annual cash
bonus and deferred bonus scheme and approves awards and the
issue of options in accordance with the terms of those schemes.
The executive directors’ contract periods are two years and the
Board has not set an objective on the reduction of these contract
periods to one year or less as it feels that this is the minimum
appropriate to retain the services of key executives with significant
knowledge of the business in which the Group trades. The
Remuneration Committee also monitors the level and structure of
remuneration of senior management below that of main board
Director. The Remuneration Committee has access to advice from
the Company Secretary and to detailed analysis of executive
remuneration in comparable companies. Details of the Committee’s
current remuneration policies are given in the Directors’
Remuneration Report on pages 20 to 23.
The Chairman of the Remuneration Committee attends the Annual
General Meeting to respond to any shareholder questions that might
be raised on the Committee’s activities.
RELATIONS WITH SHAREHOLDERS
The Board recognises the importance of good communications with
all shareholders. The Company maintains dialogue with institutional
shareholders and analysts, and general presentations are made
when financial results are announced. Shareholders have access to
the Company’s website at www.carrs-milling.com.
The Annual General Meeting is the principal forum for all the
directors to engage in dialogue with private investors. All
shareholders are given the opportunity to raise questions at the
meeting. The Company aims to send notices of Annual General
Meetings to shareholders at least 20 working days before the
meeting, as required by the Combined Code, and it is the
Company’s practice to indicate the proxy voting results on all
resolutions at the meetings.
GOING CONCERN
The Directors have prepared the accounts on a going concern
basis, having satisfied themselves from a review of internal budgets
and forecasts and current bank facilities that the Group has
adequate resources to continue in operational existence for the
foreseeable future.
INTERNAL CONTROL
The Board of Directors has overall responsibility for the Group’s
systems of internal control, including financial, operational and
compliance controls and risk management, which safeguards the
shareholders’ investment and the Group’s assets, and for reviewing
its effectiveness. Such a system can only provide reasonable and
not absolute assurance against material misstatement or loss, as it is
designed to manage rather than eliminate the risk of failure to
achieve business objectives.
The Group operates within a clearly defined organisational structure
with established responsibilities, authorities and reporting lines to the
Board. The organisational structure has been designed in order to
plan, execute, monitor and control the Group’s objectives effectively
and to ensure that internal control becomes embedded in the
operations. The Board confirms that the key on-going processes and 18
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Corporate Governance continued
features of the Group’s internal risk based control system, which
accord with the Turnbull guidance, have been fully operative and up
to the date of the Annual Report being approved. These include: a
process to identify and evaluate business risk; a strong control
environment; an information and communication process; a
monitoring system and a regular Board review for effectiveness. The
Finance Director and Group Financial Accountant are responsible
for overseeing the Group’s internal controls.
The Group does not have an internal auditor as the Board consider
that the Group has not yet reached a size where a separate internal
audit function would be an appropriate or cost effective method of
ensuring compliance with Group policies, and therefore does not
currently propose to introduce a Group internal audit function. This
area will be kept under review as part of the Board’s assessment of
the Group’s systems of internal control.
The management of the Group’s businesses identified the key
business risks within their operations, considered the financial
implications and assessed the effectiveness of the control processes
in place to mitigate these risks. The Board reviewed a summary of
the findings and this, along with direct involvement in the strategies
of the businesses, investment appraisal and budgeting process,
enabled the Board to report on the effectiveness of internal control.
AUDITOR INDEPENDENCE
The Board is satisfied that PricewaterhouseCoopers LLP has
adequate policies and safeguards in place to ensure that auditor
objectivity and independence is maintained. The Company meets its
obligations for maintaining the appropriate relationship with the
external auditors through the Audit Committee whose terms of
reference include an obligation to consider and keep under review
the degree of work undertaken by the external auditors, other than
the statutory audit, to ensure such objectivity and independence is
safeguarded.
COMPLIANCE WITH THE REVISED COMBINED CODE
The Directors consider that the Company has, during the period
ended 2 September 2006, complied with the requirements of the
revised Combined Code other than as set out below.
• bonuses and benefits in kind paid to executive directors are
pensionable (Sch. A.6)
• the directors’ contract periods are two years (B.1.6)
• there are no specific provisions for compensation on early
termination (B.1.5)
• the Board did not have in place during the period a formal and
rigorous process of evaluation of its own performance and that
of its committees (A.6.1). Rigorous but informal evaluation has
historically been carried out by the Chairman and Chief
Executive, an evaluation of the performance of the individual
directors has also been carried out by the Remuneration
Committee
• there is no separate Nominations Committee (A.4.1) to assess
and recommend new directors. Instead the Board as a whole
considers these areas following initial scrutiny and
recommendations by the Chief Executive and Chairman
• there has been no formal review by the Audit Committee of the
arrangements by which staff of the Group may, in confidence,
raise concerns about possible improprieties in matters of
financial reporting or other matters (C.3.4). A review has been
undertaken and a procedure is to be issued.
By order of the Board
Ronald C Wood
Secretary
Carlisle
CA3 9BA
21 November 2006 19
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
We have audited the group and parent company financial statements
(the ‘‘financial statements’’) of Carr’s Milling Industries PLC for the
period ended 2 September 2006 which comprise the Consolidated
Income Statement, the Consolidated and Parent Company
Statements of Recognised Income and Expense, the Consolidated
and Parent Company Balance Sheets, the Consolidated and Parent
Company Cash Flow Statements, the principal accounting policies
and the related notes. These financial statements have been
prepared under the accounting policies set out therein. We have
also audited the information in the Directors’ Remuneration Report
that is described as having been audited.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND
AUDITORS
The directors’ responsibilities for preparing the Annual Report, the
Directors’ Remuneration Report and the financial statements in
accordance with applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union are set out in
the Statement of Directors’ Responsibilities.
Our responsibility is to audit the financial statements and the part of
the Directors’ Remuneration Report to be audited in accordance
with relevant legal and regulatory requirements and International
Standards on Auditing (UK and Ireland). This report, including the
opinion, has been prepared for and only for the company’s members
as a body in accordance with Section 235 of the Companies Act
1985 and for no other purpose. We do not, in giving this opinion,
accept or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
We report to you our opinion as to whether the financial statements
give a true and fair view and whether the financial statements and
the part of the Directors’ Remuneration Report to be audited have
been properly prepared in accordance with the Companies Act
1985 and Article 4 of the IAS Regulation. We report to you whether
in our opinion the information given in the Directors’ Report is
consistent with the financial statements. We also report to you if, in
our opinion, the company has not kept proper accounting records, if
we have not received all the information and explanations we require
for our audit, or if information specified by law regarding directors’
remuneration and other transactions is not disclosed.
We review whether the Corporate Governance Statement reflects
the company’s compliance with the nine provisions of the 2003 FRC
Combined Code specified for our review by the Listing Rules of the
Financial Services Authority, and we report if it does not. We are not
required to consider whether the board’s statements on internal
control cover all risks and controls, or form an opinion on the
effectiveness of the group’s corporate governance procedures or its
risk and control procedures.
We read other information contained in the Annual Report and
consider whether it is consistent with the audited financial
statements. The other information comprises only the financial
highlights, the Chief Executive’s Review, the Chairman’s Statement,
the Operating and Financial Review, the Directors’ Report, the
unaudited part of the Directors’ Remuneration Report and the
Corporate Governance Statement. We consider the implications for
our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements. Our
responsibilities do not extend to any other information.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) issued by the Auditing Practices
Board. An audit includes examination, on a test basis, of evidence
relevant to the amounts and disclosures in the financial statements
and the part of the Directors’ Remuneration Report to be audited. It
also includes an assessment of the significant estimates and
judgments made by the directors in the preparation of the financial
statements, and of whether the accounting policies are appropriate
to the group’s and company’s circumstances, consistently applied
and adequately disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in
order to provide us with sufficient evidence to give reasonable
assurance that the financial statements and the part of the Directors’
Remuneration Report to be audited are free from material
misstatement, whether caused by fraud or other irregularity or error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of information in the financial statements and the part of
the Directors’ Remuneration Report to be audited.
OPINION
In our opinion:
• the group financial statements give a true and fair view, in
accordance with IFRSs as adopted by the European Union, of
the state of the group’s affairs as at 2 September 2006 and of
its profit and cash flows for the period then ended;
• the parent company financial statements give a true and fair
view, in accordance with IFRSs as adopted by the European
Union as applied in accordance with the provisions of the
Companies Act 1985, of the state of the parent company’s
affairs as at 2 September 2006 and cash flows for the period
then ended;
• the financial statements and the part of the Directors’
Remuneration Report to be audited have been properly
prepared in accordance with the Companies Act 1985 and
Article 4 of the IAS Regulation; and
• the information given in the Directors’ Report is consistent with
the financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
Newcastle upon Tyne
21 November 2006
Independent Auditors’ Report
to the Members of Carr’s Milling Industries PLC 20
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Directors’ Remuneration Report
REMUNERATION COMMITTEE
All matters relating to executive remuneration are determined by the
Remuneration Committee, a sub-committee of the Board of
Directors. The Remuneration Committee, comprises the Chairman,
A R Heygate and A G M Wannop. As appropriate, the Committee
may invite the Chief Executive Officer to participate in some of its
discussions. The Committee is responsible for determining the terms
and conditions of employment of executive directors. It is also
responsible for considering management recommendations for
remuneration and employment terms of the Company’s senior staff,
including incentive arrangements for bonus payments and grant of
share options.
The remuneration of the non-executive directors is determined by the
Chairman and the Chief Executive Officer and reflects the time,
commitment and responsibility of their roles.
The Remuneration Committee’s decisions are made on the basis of
rewarding individuals for the nature of jobs they undertake and their
performance therein. Proper regard is given to the need to attract
and retain high quality, well-motivated staff at all levels and to the
remuneration being paid by similar companies.
DETAILS OF REMUNERATION
The remuneration of directors is set out in detail on page 22. The
Company’s Remuneration Committee decides the remuneration
policy that applies to executive directors and the Group’s other
senior management.
Each of the executive directors has a two-year rolling contract. The
most recent executed contracts for the executive directors were
dated 10 June 2002. In the event of termination the executive
directors would be entitled to loss of salary, benefits and
pensionable service for the notice periods. The contracts of non-
executive directors of the Company are fixed for two years and the
most recent executed contracts for W R Inglewood, A R Heygate
and A G M Wannop were 1 September 2005.
The Company’s policy is that a proportion of the remuneration of the
executive directors should be performance related. As described
opposite, executive directors may earn annual incentive payments
together with the benefits of participation in Share Option Schemes.
CONSTITUENT ELEMENTS OF REMUNERATION PACKAGE
In applying the above principles to the determination of executive
director remuneration, the Remuneration Committee gives
consideration to several components which together comprise the
total remuneration package; these consist of the following:
• Basic Salary is determined by the Committee at the beginning
of each year. In deciding appropriate levels, the Committee
considers the position in the Group, personal and Company
performance and relies on information on a comparable group
of companies. Basic salaries were last reviewed in August
2006, with increases taking effect from 1 September 2006. The
next review will take place in August 2007. Executive directors’
contracts of service, which include details of remuneration, will
be available for inspection at the Annual General Meeting.
• Annual Bonus is paid up to a maximum of 50% of Basic Salary
on achievement of profit targets and is pensionable.
• Benefits in Kind comprise private healthcare which is
pensionable and critical illness/death in service cover.
• Pension Contribution. The Company’s defined benefit pension
scheme aims at producing a pension of two-thirds final
pensionable salary at normal retirement age of 60. The two
executive directors are members of the pension scheme and
can opt, after age 50, to retire early without actuarial reduction
to their pension. Non-executive directors do not participate in
the scheme. Pension entitlement is calculated on the salary
element of remuneration plus the average of the last three
years’ bonuses and taxable benefits in kind. The executive
directors’ pension information is given in the section subject to
audit. 21
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
The pension entitlement is that which would be paid annually on
retirement based on service to the end of the period. Members of
the scheme have the option to pay additional voluntary contributions,
neither the contributions nor the resulting benefits are included in the
table on page 22.
The normal retirement age is 60 with a two-thirds surviving spouse’s
pension. On death in service a lump sum equal to four times
pensionable salary is payable together with a surviving spouse’s
pension of two-thirds of the director’s prospective pension. For
death after retirement a spouse’s pension of two-thirds of the
member’s pension is payable plus the balance of a five year
guarantee if applicable.
Pensions in payment are guaranteed to be increased annually by
5% or the increase in the Index of Retail Prices (RPI) if less.
Up to 5 April 2006 the Group had established for C N C Holmes a
funded unapproved retirement benefit scheme (FURBS) for the
element of gross salary in excess of the Inland Revenue limits.
The enactment of the Pensions Act 2004 removes the need to
operate a FURBS. C N C Holmes’ pension arrangement is now
funded by the Group’s main pension scheme, the Carr’s Milling
Industries Pension Scheme 1993.
• Share Options. Salary and a bonus scheme are intended as the
most significant part of Directors’ remuneration; in addition,
executive share options can be proposed by the Remuneration
Committee and are granted periodically to promote the
involvement of senior management in the longer term success of
the Company. Options can only be exercised if certain
performance criteria are achieved by the Company. These
criteria are based on the growth in the Company’s adjusted
earnings per share in excess of the growth in the retail price
index over the performance period by an average 2% per
annum for each of the three years in the performance period.
PERFORMANCE GRAPH
The following graph illustrates the
Company’s total shareholder return
performance since 31 August 2001
relative to the FTSE All-share index.
The Company considers that the
FTSE All-share index to be the most
appropriate comparator group as it is
a broad index and reflects the
Company’s broad range of activities.
2002 2003 2004 2005 2006
Carr’s Milling Industries
FTSE All-Share Price Index
Source: Datastream
600
800
700
500
400
300
200
100
0 22
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Directors’ Remuneration Report continued
DIRECTORS’ REMUNERATION
2006 2005
Gain on Gain on
Fees & Total Total 2006 2005 Exercise Exercise
Basic Annual Emoluments Emoluments Pension Pension of Share of Share
Salary Bonus Benefits 2006 2005 Contributions Contributions Options Options
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Executive directors
C N C Holmes 187 93 1 281 251 90 75 — 52
R C Wood 163 81 1 245 215 57 49 — 52
Non-executive directors
D A Newton — — — — 3 — — — —
W R Inglewood 40 — — 40 17 — — — —
A R Heygate 20 — — 20 17 — — — —
A G M Wannop 20 — — 20 — — — — —
430 174 2 606 503 147 124 — 104
NON-EXECUTIVE REMUNERATION
The remuneration of the non-executive directors is agreed by the Group Board taking into account a number of factors pertinent to their
position and role as non-executive directors.
Information subject to audit
EXECUTIVE DIRECTORS’ PENSION INFORMATION
C N C Holmes R C Wood
Age at 2 September 2006 54 58
£’000 £’000
Directors’ contributions during the period 1 15
Increase in accrued pension entitlement for the period
excluding inflation 71 19
including inflation 73 22
Total accrued pension entitlement
At 2 September 2006 138 133
At 3 September 2005 120 111
Transfer value of pension
At 2 September 2006 2,237 2,614
At 3 September 2005 1,820 2,013
Increase in transfer value less contributions made by directors 1,203 586
Transfer value of the increase in accrued benefits less contributions made by directors 307 419
Notes
(a) The actuarial assumptions used for calculating transfer values for all members, including the directors, have been
amended since the 2005 disclosure. This was necessary to ensure that transfer values (i.e. the cash equivalent value of
the accrued benefits) account for recent improvements in life expectancy and the reduction in the long-term yields
expected on assets. As a result there is a larger increase in the transfer values than would otherwise be expected.
(b) C N C Holmes joined the approved pension scheme after 1 June 1989 and the part of his benefit promise that was
funded through this scheme was therefore previously restricted by the statutory Salary Cap (which was £105,600 for the
2005/06 tax year). The Salary Cap was lifted on 6 April 2006 as a consequence of tax simplification and the whole of
the benefit promise is therefore now provided through the approved scheme. The transfer value as at 3 September 2005
included that part of the unapproved benefit that was funded within a separate Funded Unapproved Retirement Benefit
Scheme (“FURBS”). 23
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
At 3 Granted At 2 Earliest date
September during September Exercise Date of from which Expiry
2005 period 2006 price Grant exercisable date
C N C Holmes 40,000 — 40,000 161.0p 1 May 2002 May 2005 April 2009
18,500 — 18,500 161.0p 1 May 2002 May 2005 April 2012
— 6,000 6,000 502.3p 20 February 2006 February 2009 February 2016
58,500 6,000 64,500
R C Wood 50,000 — 50,000 161.0p 1 May 2002 May 2005 April 2009
18,500 — 18,500 161.0p 1 May 2002 May 2005 April 2012
— 6,000 6,000 502.3p 20 February 2006 February 2009 February 2016
68,500 6,000 74,500
The middle market closing price of the shares at 2 September 2006 was 568.0p (2 September 2005: 558.5p) and the range
throughout the period was 456.5p to 568.5p.
SHARESAVE SCHEME 2006
At Granted At Average Exercise
3 September during 2 September exercise date
2005 period 2006 price
C N C Holmes — 1,951 1,951 479.0p May 2009
R C Wood — 1,951 1,951 479.0p May 2009
The Directors are eligible, as are other employees of the Group, to participate in the Sharesave scheme, which by its nature
does not have performance conditions.
On behalf of the Board
W R Inglewood
Chairman of the Remuneration Committee
21 November 2006
SHARE OPTIONS GRANTED TO DIRECTORS
The Company operates an Inland Revenue approved and an
unapproved share option scheme to reward employees’
performance and to incentivise at senior levels. Exercise is subject
to performance conditions.
For all options granted the exercise criterion has been that earnings
should achieve growth which exceeds the percentage growth in the
Retail Price Index by 2% or more. The rules of the schemes
conform to institutional investor guidelines.
The performance criterion, which applies to the executive directors
to whom options have been granted under the Schemes, was
chosen as it requires significant improvement in financial
performance. No options have been granted at a discount to the
market price at the date of their grant.
Options to acquire shares in the Company, granted to directors
under the Scheme but not exercised, as at 2 September 2006 are: 24
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Consolidated Income Statement
for the period ended 2 September 2006
52 week 53 week
period period
2006 2005
Notes £’000 £’000
2,3 Revenue 242,576 192,124
3 Cost of sales (206,658) (161,296)
3 Gross profit 35,918 30,828
3 Net operating expenses (28,802) (18,564)
3,4 Group operating profit 7,116 12,264
Analysed as:
Operating profit before non-recurring items and amortisation 7,987 7,975
6 Non-recurring items and amortisation (871) 4,289
Group operating profit 7,116 12,264
8 Net finance costs (1,011) (1,198)
5,6 Share of post-tax profit/(loss) in associate and joint ventures 218 (697)
2 Profit before taxation 6,323 10,369
2,9 Taxation (1,989) (2,557)
Profit for the period 4,334 7,812
Profit attributable to minority interest 139 329
Profit attributable to equity shareholders 4,195 7,483
4,334 7,812
Earnings per share (pence)
11 Basic 51.0 92.1
11 Diluted 50.4 90.3
All of the above are derived from continuing operations. 25
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Group Company
52 week 53 week 52 week 53 week
period period period period
2006 2005 2006 2005
Notes £’000 £’000 £’000 £’000
Foreign exchange translation differences arising on
30 translation of overseas subsidiaries (150) (80) — —
Actuarial (losses)/gains on retirement benefit obligation:
28 - Group (3,900) (1,543) (3,900) (1,543)
28 - Share of associate 206 (944) — —
Taxation credit/(charge) on actuarial movement
on retirement benefit obligation:
19 - Group 1,170 463 1,170 463
- Share of associate (62) 283 — —
Net expenses recognised directly in equity (2,736) (1,821) (2,730) (1,080)
Profit for the period 4,334 7,812 5,536 2,105
30 Total recognised income for the period 1,598 5,991 2,806 1,025
30 Attributable to minority interest 139 329 — —
30 Attributable to equity shareholders 1,459 5,662 2,806 1,025
1,598 5,991 2,806 1,025
Consolidated and Company Statement
of Recognised Income and Expense
for the period ended 2 September 2006 26
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Consolidated and Company Balance Sheet
As at 2 September 2006
Group Company
2006 2005 2006 2005
Notes £’000 £’000 £’000 £’000
Assets
Non-current assets
12 Goodwill 235 400 — —
12 Other intangible assets 802 1,738 — —
13 Property, plant and equipment 29,172 28,838 — —
14 Investment property 794 822 — —
15,18 Investment in subsidiary undertakings — — 12,864 13,072
15,16 Investment in associate 982 445 1,470 1,470
15,17 Interest in joint ventures 704 172 272 172
15 Other investments 254 255 201 202
Financial assets
27 - Derivative financial instruments 37 — 31 —
21 - Non-current receivables 208 223 — —
19 Deferred tax assets 5,162 3,962 4,761 3,672
38,350 36,855 19,599 18,588
Current assets
20 Inventories 11,944 12,947 — —
21 Trade and other receivables 33,546 35,197 14,325 14,048
22 Current tax assets 1 87 900 602
23 Cash and cash equivalents 2,292 3,149 — —
47,783 51,380 15,225 14,650
Total assets 86,133 88,235 34,824 33,238
Liabilities
Current liabilities
Financial liabilities
26 - Borrowings (9,682) (10,666) (4,251) (7,214)
27 - Derivative financial instruments (27) — (4) —
24 Trade and other payables (25,387) (29,318) (1,025) (665)
25 Current tax liabilities (1,324) (1,581) — —
(36,420) (41,565) (5,280) (7,879)
Non-current liabilities
Financial liabilities
26 - Borrowings (6,512) (7,399) (5,610) (6,503)
27 - Derivative financial instruments — (106) — (106)
28 Retirement benefit obligation (15,796) (12,119) (15,796) (12,119)
19 Deferred tax liabilities (3,600) (3,854) — —
24 Other non-current liabilities (1,524) (1,287) — —
(27,432) (24,765) (21,406) (18,728)
Total liabilities (63,852) (66,330) (26,686) (26,607)
Net assets 22,281 21,905 8,138 6,631
Shareholders' equity
29 Ordinary shares 2,058 2,053 2,058 2,053
30 Share premium 5,004 4,977 5,004 4,977
30,31 Equity compensation reserve 22 — 27 —
30 Foreign exchange reserve (230) (80) — —
30 Other reserve 1,601 1,632 — —
30 Retained earnings 11,895 11,613 1,049 (399)
30 Total shareholders' equity 20,350 20,195 8,138 6,631
30 Minority interests in equity 1,931 1,710 — —
30 Total equity 22,281 21,905 8,138 6,631
The financial statements set out on pages 24 to 72 were approved by the Board on 21 November 2006 and signed on its behalf by:
Christopher N C Holmes
Ronald C Wood 27
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Group Company
52 week 53 week 52 week 53 week
period period period period
2006 2005 2006 2005
Notes £’000 £’000 £’000 £’000
Cash flows from operating activities
33 Cash generated from/(used by) operations 11,069 6,663 (332) 363
Interest received 379 95 548 280
Interest paid (1,755) (1,195) (747) (641)
Tax (paid)/received (2,454) (1,855) (58) 44
Net cash generated from/(used by) operating activities 7,239 3,708 (589) 46
Cash flows from investing activities
Acquisition of subsidiaries (net of cash acquired) - group (3) (10,256) — —
Investment in subsidiaries - company — — — (5,527)
Proceeds from redemption of preference shares in subsidiaries — — 233 —
Investment in joint ventures (710) (172) (100) (172)
Dividends received from subsidiaries — — 3,629 2,152
Payment of loans to subsidiaries — — — (5,467)
Payment of loans to joint ventures (280) — (205) —
Purchase of intangible assets (9) — — —
Proceeds from sale of property, plant and equipment 192 3,114 — —
Purchase of property, plant and equipment (2,901) (3,396) — —
Proceeds from sale of investments 1 — 1 —
Purchase of investments — (2) — —
Net cash (used by)/generated from investing activities (3,710) (10,712) 3,558 (9,014)
Cash flows from financing activities
Net proceeds from issue of ordinary share capital 32 260 32 260
Net proceeds from issue of new bank loans and other borrowings — 13,668 — 6,965
Net proceeds from loans from subsidiaries — — 1,779 2,776
Finance lease principal repayments (1,047) (804) — —
Repayment of borrowings (2,487) (1,375) (2,550) (1,375)
Dividends paid to shareholders (1,358) (1,136) (1,358) (1,136)
Net cash (used by)/generated from financing activities (4,860) 10,613 (2,097) 7,490
Effects of exchange rate changes (88) (28) (25) 25
Net (decrease)/increase in cash and cash equivalents (1,419) 3,581 847 (1,453)
23 Cash and cash equivalents at beginning of the period 2,503 (1,078) (1,730) (277)
23 Cash and cash equivalents at end of the period 1,084 2,503 (883) (1,730)
Consolidated and Company Cash Flow Statement
For the period ended 2 September 2006 28
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Principal Accounting Policies
BASIS OF ACCOUNTING
The consolidated financial statements are prepared in accordance
with International Financial Reporting Standards (IFRS) and IFRIC
interpretations by the European Union (EU) and with those parts of
the Companies Act 1985 applicable to companies reporting under
IFRS.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Although these
estimates are based on management’s best knowledge of the
amount, event or actions, actual results ultimately may differ from
those estimates.
The consolidated financial statements are prepared under historic
cost other than certain assets, which are deemed cost under the
transition rules, derivative financial instruments and share based
payments, which are included at fair value.
The consolidated financial statements for the period ended 2
September 2006 are the first financial statements to be prepared in
accordance with IFRS. IFRS 1 details the requirements and
guidance to be used by first time adopters of IFRS in preparing their
first IFRS accounts. IFRS 1 requires the Group to select accounting
policies at 4 September 2005 and to apply these policies
retrospectively from 29 August 2004, the date of transition.
IFRS 1 provides optional exemptions to first time adopters. The
exemptions adopted by the Group are as follows:
IFRS 3, Business combinations
Business combinations that took place prior to the date of transition
to IFRS have not been restated.
IAS 16, Property, plant and equipment
The Group has opted to use previous revaluations of property made
under UK GAAP as deemed cost.
IAS 19, Employee benefits
The Group has opted to recognise in equity all cumulative actuarial
gains and losses at the date of transition. The Group has also opted
to account for pension benefits under the amendment to IAS 19
issued in December 2004 in which all actuarial gains and losses are
recognised in the Statement of Recognised Income and Expense
(SORIE). This is consistent with the UK GAAP requirement under
FRS 17 ‘Retirement benefits’, the effect of which has been
disclosed previously in the Annual Report.
IAS 21, The effects of changes in foreign exchange rates
IFRS 1 permits an exemption where the Group’s cumulative foreign
exchange translation differences are set to zero at the date of
transition. The Group has adopted this exemption. On subsequent
disposal of an overseas subsidiary, exchange differences arising
after the date of transition will be recycled through the income
statement.
IFRS 2, Share-based payments
IFRS 1 permits a company to apply IFRS 2 only to equity-settled
share-based awards granted on or after 7 November 2002, which
have not vested by the later of the date of transition to IFRS (29
August 2004) and 1 January 2005. The Group has taken advantage
of this exemption.
Tables setting out the reconciliation of opening UK GAAP balances
to IFRS are provided in note 40.
BASIS OF CONSOLIDATION
The consolidated financial statements comprise Carr’s Milling
Industries PLC and all its subsidiaries, together with the Group’s
share of the results of its associate and joint ventures. The financial
statements of the subsidiaries, associate and joint ventures are
prepared as of the same reporting date using consistent accounting
policies. Group inter-company balances and transactions, including
any unrealised profits arising from Group inter-company
transactions, are eliminated in full.
Results of subsidiary undertakings acquired during the previous
financial period were included in the financial statements from the
effective date of control. The separable net assets, both tangible and
intangible, of the acquired subsidiary undertakings were
incorporated into the financial statements on the basis of the fair
value as at the effective date of control.
Subsidiaries are entities where the Group has the power to govern
the financial and operating policies, generally accompanied by a
share of more than 50% of the voting rights. Subsidiaries are
consolidated from the date on which control is transferred to the
Group and are included until the date on which the Group ceases to
control them. Associates are entities over which the Group has
significant influence but not control, generally accompanied by a
share of between 20% and 50% of the voting rights. Joint ventures
are entities over which the Group has joint control, established by
contractual agreement. Investments in associates and joint ventures
are accounted for using the equity method. If the Group’s share of
losses in an associate or joint venture equals or exceeds its
investment in the associate or joint venture, the Group does not
recognise further losses, unless it has incurred obligations or made
payments on behalf of the associate or joint venture.
All business combinations are accounted for by applying the
purchase method. The cost of a business combination is measured
as the aggregate of the fair values, at the acquisition date, of the
assets given, liabilities incurred or assumed, and equity instruments
issued by the Group, together with any costs directly attributable to
the combination. The identifiable assets, liabilities and contingent
liabilities of the acquiree are measured initially at fair value at the
acquisition date, irrespective of the extent of any minority interest.
The excess of the cost of the business combination over the
Group’s interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities is recognised as goodwill. 29
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
CURRENCY TRANSLATION
The financial statements for the Group’s subsidiaries, associate and
joint ventures are prepared using their functional currency. The
functional currency is the currency of the primary economic
environment in which an entity operates. The presentation currency
of the Group and functional currency of Carr’s Milling Industries
PLC is Sterling.
Foreign currency transactions are translated into the functional
currency using exchange rates prevailing at the dates of the
transactions. Exchange differences resulting from the settlement of
such transactions and from the translation, at exchange rates ruling
at the balance sheet date, of monetary assets and liabilities
denominated in currencies other than the functional currency are
recognised in the consolidated income statement.
The balance sheets of foreign operations are translated into sterling
using the exchange rate at the balance sheet date and the income
statements are translated into sterling using the average exchange
rate for the period. Where this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the
transaction dates, the exchange rate on the transaction date is used.
Exchange differences arising from 29 August 2004 are recognised
as a separate component of shareholders’ equity. On disposal of a
foreign operation any cumulative exchange differences held in
shareholders’ equity are transferred to the consolidated income
statement.
REVENUE RECOGNITION
Revenue from the sale of goods or services is measured at the fair
value of the consideration, net of rebates and excluding value added
tax. Revenue from the sale of goods or services is recognised when
the Group has transferred the significant risks and rewards of
ownership of the goods to the buyer, when the amount of revenue
can be measured reliably and when it is probable that the economic
benefits associated with the transaction will flow to the Group.
In respect of long-term contracts, revenue is calculated on the basis
of the stage of completion and the total sales value of each contract.
RETIREMENT BENEFIT OBLIGATIONS
The Group participates in two defined benefit pension schemes,
Carr’s Milling Industries Pension Scheme 1993 and Carrs Billington
Agriculture Pension Scheme. The Group also offers various defined
contribution schemes to its employees.
The assets of the above named schemes are held separately from
those of the Group and are invested with independent investment
managers.
Contributions to defined contribution schemes are charged to the
consolidated income statement in the period to which they relate.
The liability recognised in the consolidated balance sheet at the
period end in respect of defined benefit pension schemes is the
present value of the defined benefit obligation and future
administration costs at the balance sheet date less the fair value of
scheme assets. Independent actuaries calculate the defined benefit
obligation annually. The present value of the defined benefit
obligation is determined by discounting the estimated future cash
outflows using interest rates of high-quality corporate bonds that are
denominated in the currency in which the benefits will be paid, and
that have terms to maturity approximating to the terms of the related
pension liability.
The current service costs, past service costs and gains and losses
on settlements and curtailments are included in operating profit in
the consolidated income statement.
A charge is made within operating costs representing the expected
increase in the liabilities of the pension schemes during the period.
This arises from the liabilities of the schemes being one year closer
to payment.
A credit representing the expected return on the assets of the
pension schemes during the period is netted against the above
charge within operating costs. This is based on the market value of
the assets of the schemes at the start of the financial period.
Actuarial gains and losses are recognised in the consolidated
statement of recognised income and expense. The pension
schemes’ deficits or surpluses, to the extent that they are
considered recoverable, are recognised in full on the consolidated
balance sheet.
SHARE BASED PAYMENTS
The Group issues equity-settled share-based payments to certain
employees. Equity-settled share-based payments are measured at
fair value at the date of the grant. The fair value determined at the
grant date of the equity-settled share-based payments is expensed
on a straight-line basis over the vesting period, based on the
Group’s estimate of shares that will eventually vest.
Fair value is measured by use of a valuation model. The expected
life used in the model has been adjusted, based on management’s
best estimate, for the effects of non-transferability, exercise
restrictions and behavioural considerations.
INTEREST
Interest is recognised in the consolidated income statement on an
accruals basis using the effective interest method.
SEGMENTAL REPORTING
The Group’s primary reporting format is business segments and its
secondary format is geographical segments. A business segment is
a component of the Group that is engaged in providing a group of
related products and is subject to risks and returns that are different
from those of other business segments. A geographical segment is
a component of the Group that operates within a particular
economic environment and this is subject to risks and returns that
are materially different from those of components operating in other
economic environments. 30
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Principal Accounting Policies continued
NON-RECURRING ITEMS AND AMORTISATION
Non-recurring items and amortisation that are material by size and/or
by nature are presented within their relevant income statement
category. Items that management consider fall into this category are
disclosed on the face of the consolidated income statement and
within a note to the financial statements. The separate disclosure of
non-recurring items and amortisation helps provide a better
indication of the Group’s underlying business performance. Events
which may give rise to non-recurring items and amortisation include
gains or losses on the disposal of businesses, the restructuring of
businesses, the integration of new businesses, asset impairments,
gains and losses on the disposal of property, plant and equipment,
amortisation of intangible assets, the recognition of deferred assets
on prior year business combinations and exchange gains and losses
on inter-company funding.
GOODWILL
Goodwill arising on consolidation represents the excess of the cost
of acquisition over the fair value of the identifiable assets, liabilities
and contingent liabilities of the acquired entity at the date of the
acquisition.
At the date of acquisition, goodwill is allocated to cash generating
units for the purpose of impairment testing.
Goodwill is recognised as an asset and assessed for impairment
annually. Any impairment is recognised immediately in the income
statement. Once recognised, an impairment of goodwill is not
reversed under any circumstance.
Negative goodwill resulting from business combinations is credited
to the consolidated income statement in the period of acquisition.
Goodwill written off to reserves under UK GAAP prior to 31 August
1998 has not been reinstated and would not form part of the gain or
loss on the disposal of a business.
OTHER INTANGIBLE ASSETS
Other intangible assets are carried at cost less accumulated
amortisation. Amortisation commences when assets are available for
use and is calculated on a straight-line basis over their expected
useful lives which are generally as follows:
Customer relationships 3 - 5 years
Brands 20 years
Know-how 5 years
Patents and trademarks over contractual life
The cost of intangible assets acquired in a business combination is
the fair value at the acquisition date. The cost of separately acquired
intangible assets comprises the purchase price and any directly
attributable costs of preparing the assets for use.
All research costs are recognised in the consolidated income
statement as incurred. Development costs are recognised as an
asset only to the extent that specific recognition criteria, as set out in
IAS38 ‘Intangible assets’, relevant to the proposed application are
met and the amount recognised is recoverable through future
economic benefits.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost less accumulated
depreciation and accumulated impairment losses. Cost comprises
purchase price and directly attributable costs.
Freehold land and assets under construction are not depreciated.
For all other property, plant and equipment, depreciation is
calculated on a straight-line basis to allocate cost less residual
values of the assets over their estimated useful lives as follows:
Freehold buildings up to 50 years
Leasehold buildings shorter of 50 years or lease term
Plant 5 to 20 years
Computer hardware/software 3 to 5 years
Vehicles 4 to 10 years
Fixtures and fittings 3 to 5 years
Residual values and useful lives are reviewed at each financial
period-end.
The cost of maintenance, repairs and minor equipment is charged to
the income statement as incurred; the cost of major renovations and
improvements is capitalised.
INVESTMENT PROPERTY
Investment properties are properties held for long-term rental yields.
Investment properties are carried in the balance sheet at cost less
accumulated depreciation. Freehold land is not depreciated. For all
other investment property, depreciation is calculated on a straight-
line basis to allocate cost less residual values of the assets over
their estimated useful lives as follows:
Freehold buildings up to 50 years
The cost of maintenance, repairs and minor equipment is charged to
the income statement as incurred; the cost of major renovations and
improvements is capitalised.
IMPAIRMENT OF ASSETS
At each reporting date, the Group assesses whether there is any
indication that an asset may be impaired. Where an indicator of
impairment exists, the Group makes an estimate of recoverable
amount. Where the carrying amount of an asset exceeds its
recoverable amount the asset is written down to its recoverable
amount. Recoverable amount is the higher of fair value less costs to
sell and value in use and is deemed for an individual asset. If the
asset does not generate cash flows that are largely independent of
those from other assets or groups of assets, the recoverable amount
of the cash generating unit to which the asset belongs is
determined. Discount rates reflecting the asset specific risks and the
time value of money are used for the value in use calculation.
INVENTORIES
Inventories are stated at the lower of cost and net realisable value.
Cost comprises direct materials and, where applicable, direct labour
costs and those overheads that have been incurred in bringing the
inventories to their present location and condition. Where
appropriate, cost is calculated on a specific identification basis.
Otherwise inventories are valued using the first-in first-out method.
Contract work in progress is measured at the selling price of the
work performed at the balance sheet date. The selling price is 31
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
measured by reference to the stage of completion at the balance
sheet date and total expected income from the contract work.
The stage of completion is determined as the proportion that
contract costs incurred for work performed to date bear to the total
estimated total contract costs. Amounts invoiced for work completed
are deducted from the selling price, while amounts invoiced in
excess of work completed are recognised as current liabilities.
Net realisable value represents the estimated selling price less all
estimated costs to completion and costs to be incurred in marketing,
selling and distribution.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents for the purposes of the consolidated
cash flow statement comprise cash at bank and in hand, money
market deposits and other short term highly liquid investments with
original maturities of three months or less and bank overdrafts. Bank
overdrafts are presented in borrowings within current liabilities in the
consolidated balance sheet.
GRANTS
Grants received on capital expenditure are recorded as deferred
income and taken to the consolidated income statement in equal
annual instalments over the expected useful lives of the assets
concerned.
Revenue grants and contributions are taken to the consolidated
income statement in the period to which they apply.
PROVISIONS
Provisions are recognised when a present legal or constructive
obligation exists, as a result of past events, where it is more likely
than not that an outflow of resources will be required to settle the
obligation and the amount can be reliably measured.
Provisions for restructuring are recognised for direct expenditure on
business reorganisations where plans are sufficiently detailed and
well advanced, and where appropriate communication to those
affected has been undertaken on or before the balance sheet date.
Provisions are discounted where the time value of money is
considered material.
LEASES
Leases are classified as finance leases at inception where
substantially all of the risks and rewards of ownership are
transferred to the Group. Assets classified as finance leases are
capitalised on the consolidated balance sheet and are depreciated
over the expected useful life of the asset. The interest element of the
rental obligations is charged to the consolidated income statement
over the period of the lease using the actuarial method.
Rentals paid under operating leases are charged to the consolidated
income statement on a straight-line basis over the term of the lease.
Leasehold land is normally classified as an operating lease. Payments
made to acquire leasehold land are included in prepayments at cost
and are amortised over the life of the lease. Any incentives to enter into
operating leases are recognised as a reduction of rental expense over
the lease term on a straight-line basis.
TAX
Deferred tax is provided in full, using the liability method, on
temporary differences arising between the tax base of assets and
liabilities and their carrying amounts in the consolidated financial
statements. Deferred tax arising from initial recognition of an asset
or liability in a transaction, other than a business combination, that at
the time of the transaction affects neither accounting nor taxable
profit or loss, is not recognised. Deferred tax is measured using tax
rates that have been enacted or substantively enacted by the
balance sheet date and are expected to apply when the asset is
realised or the liability is settled.
Deferred tax assets are recognised to the extent that it is probable
that future taxable profit will be available against which the
temporary differences can be utilised.
Deferred tax is provided on temporary differences arising on
investments in subsidiaries, associates and joint ventures, except
where the Group is able to control the timing of the reversal of the
temporary difference and it is probable that the temporary difference
will not reverse in the foreseeable future.
Tax is recognised in the consolidated income statement, unless the
tax relates to items recognised directly in shareholders’ equity, in
which case the tax is recognised directly in shareholders’ equity
through the consolidated statement of recognised income and
expense.
DIVIDENDS
Final equity dividends to the shareholders of the Company are
recognised in the period that they are approved by the shareholders.
Interim equity dividends are recognised in the period that they are
paid.
FINANCIAL INSTRUMENTS
Financial assets and liabilities are recognised on the Group’s
consolidated balance sheet when the Group becomes a party to the
contractual provisions of the instrument.
Trade receivables
Trade receivables are recorded at their nominal amount less an
allowance for doubtful debts.
Investments
Investments are initially measured at cost, including transaction
costs. They are classified as either ‘available-for-sale’, ‘fair values
through profit or loss’ or ‘held to maturity’. Where securities are
designated as ‘at fair value through profit or loss’, gains and losses
arising from changes in fair value are included in net profit or loss
for the period. For ‘available-for-sale’ investments, gains or losses
arising from changes in fair value are recognised directly in equity,
until the security is disposed of or is determined to be impaired, at
which time the cumulative gain or loss previously recognised in
equity is included in the net profit or loss for the period.
Equity investments that do not have a quoted market price in an
active market and whose fair value cannot be reliably measured by
other means are held at cost. ‘Held-to-maturity’ investments are
measured at amortised cost using the effective interest method. 32
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Principal Accounting Policies continued
Financial liability and equity
Financial liabilities and equity instruments are classified according to
the substance of the contractual arrangements entered into. An
equity instrument is any contract that evidences a residual interest in
the assets of the Group after deducting all of its liabilities.
Bank borrowings
Interest-bearing loans and overdrafts are recorded at the proceeds
received, net of direct issue costs. Finance charges, including
premiums payable on settlement or redemption and direct issue
costs, are accounted for on an effective interest method and are
added to the carrying amount of the instrument to the extent that
they are not settled in the period in which they arise.
Trade payables
Trade payables are stated at their nominal value.
Equity instruments
Equity instruments issued by the Company are recorded at the
proceeds received, net of direct issue costs.
Derivative financial instruments and hedging activities
The Group primarily uses interest rate swaps, caps and collars and
forward foreign currency contracts to manage its exposures to
fluctuating interest and foreign exchange rates. These instruments
are initially recognised at fair value and are subsequently re-
measured at their fair value at each balance sheet date. The Group
does not designate derivatives as hedge instruments and therefore
does not adopt hedge accounting. As a result changes in the fair
value of derivative financial instruments are recognised in the
consolidated income statement as they arise.
The Group does not use derivatives to hedge balance sheet and
income statement translation exposures. Where appropriate,
borrowings are arranged in local currencies to provide a natural
hedge against overseas assets.
IFRS NOT YET APPLIED
The following standards and interpretations, which are in issue at the
balance sheet date but not yet effective, have not been applied in
these financial statements:
IFRS 7 “Financial instruments: Disclosures”, and related amendment
to IAS 1 on capital disclosures, which is effective for periods
commencing on or after 1 January 2007.
Amendment to IAS 39 and IFRS 4 “Financial guarantee contracts”,
which is effective for periods commencing on or after 1 January
2006.
SIGNIFICANT JUDGEMENTS, KEY ASSUMPTIONS AND
ESTIMATES
Application of certain Group accounting policies requires
management to make judgements, assumptions and estimates
concerning the future as detailed below.
Valuation of pension obligations
The deficit on the Group’s defined benefit pension scheme is
determined each year following advice from the Group’s actuary and
can fluctuate based on a number of external factors over which
management have no control. Such factors include:
Major assumptions as shown in the table in note 28; and
Actual returns on scheme assets compared to those predicted in the
previous scheme valuation.
Valuation of share-based payments
The fair value of share-based payments is determined using
valuation models and is charged to the income statement over the
vesting period.
The valuation models require certain assumptions to be made as
shown in the tables in note 31. Estimations of vesting and
satisfaction of performance criteria are required to determine fair
value.
Impairment of goodwill
The carrying value of goodwill must be assessed for impairment
annually. This requires an estimation of the value in use of the cash
generating units to which goodwill is allocated. Value in use is
dependent on estimations of future cash flows from the cash
generating unit and the use of an appropriate discount rate to
discount those cash flows to their present value.
No impairment has been identified in the period.
Provision for impairment of trade receivables
The financial statements include a provision for impairment of trade
receivables that is based on management’s estimation of
recoverability. There is a risk that the provision will not match the
trade receivables that ultimately prove to be irrecoverable. 33
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
1 The Company has taken advantage of the exemption, under section 230 of the Companies Act 1985, from presenting its own income
statement. The profit after tax for the period dealt with in the accounts of the Company was £5,536,000 (2005: £2,105,000).
2 SEGMENTAL REPORTING
Primary reporting format - business segments
The segment results for the period ended 2 September 2006 are as follows:
Agriculture Food Engineering Other Group
£’000 £’000 £’000 £’000 £’000
Total gross segment revenue 174,793 55,703 12,345 213 243,054
Inter-segment revenue (301) (3) (174) — (478)
Revenue 174,492 55,700 12,171 213 242,576
Operating profit before retirement benefit charge* 4,954 2,506 1,055 (325) 8,190
Analysed as:
Before non-recurring items and amortisation 4,998 3,333 1,055 (325) 9,061
Non-recurring items and amortisation (44) (827) — — (871)
4,954 2,506 1,055 (325) 8,190
Retirement benefit charge* (1,074)
Net finance costs (1,011)
Share of post-tax profit of associate 393
Share of post-tax loss of joint ventures (175)
Profit before taxation 6,323
Taxation (1,989)
Profit for the period 4,334
Segment assets 39,974 28,723 8,341 784 77,822
Unallocated assets
- Investment in associate 982
- Investment in joint ventures 704
- Other investments 254
- Income tax assets 5,163
Total assets 84,925
Total assets in the above analysis represents total assets as disclosed in the balance sheet of £86,133,000 less bank overdrafts
of £1,208,000.
Segment liabilities 18,643 5,128 1,979 1,188 26,938
Unallocated liabilities
- Group borrowings 14,986
- Retirement benefit obligation* 15,796
- Income tax liabilities 4,924
Total liabilities 62,644
Total liabilities in the above analysis represents total liabilities as disclosed in the balance sheet of £63,852,000 less bank overdrafts
of £1,208,000.
Other segment items
Capital expenditure
- Property, plant and equipment 1,782 2,029 141 53 4,005
- Other intangible assets 50 — — — 50
Depreciation 1,349 1,664 279 127 3,419
Loss/(profit) on the disposal of property,
plant and equipment 16 10 (2) 3 27
Amortisation of intangible assets 128 826 32 — 986
* It is not possible to allocate the assets and liabilities of the defined benefit pension scheme across the segments. Therefore, this is
shown as a reconciling item.
Notes to the Financial Statements 34
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
2 SEGMENTAL REPORTING CONTINUED
Primary reporting format - business segments
The segment results for the period ended 3 September 2005 are as follows:
Agriculture Food Engineering Other Group
£’000 £’000 £’000 £’000 £’000
Total gross segment revenue 132,745 48,006 11,297 259 192,307
Inter-segment revenue (83) (2) (98) — (183)
Revenue 132,662 48,004 11,199 259 192,124
Operating profit before retirement benefit charge* 5,866 2,441 4,874 15 13,196
Analysed as:
Before non-recurring items and amortisation 5,866 2,262 764 15 8,907
Non-recurring items and amortisation — 179 4,110 — 4,289
5,866 2,441 4,874 15 13,196
Retirement benefit charge* (932)
Net finance costs (1,198)
Share of post-tax loss of associate:
- normal (70)
- non-recurring (627)
Profit before taxation 10,369
Taxation (2,557)
Profit for the period 7,812
Segment assets 45,126 29,145 8,857 (460) 82,668
Unallocated assets
- Investment in associate 445
- Investment in joint ventures 172
- Other investments 255
- Income tax assets 4,049
Total assets 87,589
Total assets in the above analysis represents total assets as disclosed in the balance sheet of £88,235,000 less bank overdrafts of
£646,000.
Segment liabilities 21,757 5,529 2,641 784 30,711
Unallocated liabilities
- Group borrowings 17,419
- Retirement benefit obligation* 12,119
- Income tax liabilities 5,435
Total liabilities 65,684
Total liabilities in the above analysis represents total liabilities as disclosed in the balance sheet of £66,330,000 less bank overdrafts of
£646,000.
Other segment items
Capital expenditure (including acquisitions)
- Property, plant and equipment 3,432 6,961 2,930 130 13,453
- Investment property — 657 — — 657
- Other intangible assets 172 2,451 — — 2,623
Depreciation 1,228 1,589 137 101 3,055
Loss/(profit) on the disposal of property,
plant and equipment 11 (5) (4,131) (74) (4,199)
Amortisation of intangible assets — 997 32 — 1,029
* It is not possible to allocate the assets and liabilities of the defined benefit pension scheme across the segments. Therefore, this is
shown as a reconciling item. 35
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
2 SEGMENTAL REPORTING CONTINUED
Secondary reporting format - geographical segments
Revenue Segment assets Capital Expenditure
2006 2005 2006 2005 2006 2005
£’000 £’000 £’000 £’000 £’000 £’000
UK 231,810 184,721 74,984 79,772 3,609 16,617
Other 10,766 7,403 2,838 2,896 446 116
242,576 192,124 77,822 82,668 4,055 16,733
The geographical analysis of revenue is presented by revenue origin. There is no material difference between revenue by origin and
revenue by destination.
3 REVENUE, COST OF SALES, OTHER OPERATING INCOME AND NET OPERATING EXPENSES
2006 2005
£’000 £’000 £’000 £’000
Revenue 242,576 192,124
Cost of sales (206,658) (161,296)
Gross profit 35,918 30,828
Net operating expenses:
Distribution costs (17,192) (13,188)
Administrative expenses - normal (10,739) (9,665)
- non-recurring items
and amortisation (see note 6) (871) 4,289
(11,610) (5,376)
(28,802) (18,564)
Group operating profit 7,116 12,264
4 GROUP OPERATING PROFIT 2006 2005
£’000 £’000
Group operating profit is stated after charging/(crediting):
Amortisation of grants (18) (50)
Profit on disposal of investments (1) —
Loss/(profit) on disposal of property, plant and equipment 27 (4,199)
Depreciation of property, plant and equipment held under finance lease 746 558
Depreciation of owned property, plant and equipment 2,645 2,490
Depreciation of owned investment property 28 7
Amortisation of intangible assets 986 1,029
Foreign exchange gains (86) (28)
Derivative financial instruments losses 27 6
Operating lease charges:
Plant and machinery 604 233
Other 25 12
Auditors remuneration:
Audit services (Company £10,000; 2005 £10,000) 179 149
Accounting advisory services (IFRS transition) 32 —
Tax services (including IFRS transition services) 92 71
Included within group operating profit is the following in respect of investment property:
Rental income 33 33
Operating expenses (65) (46)
(32) (13) 36
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
5 SHARE OF POST-TAX PROFIT/(LOSS) IN ASSOCIATE AND JOINT VENTURES 2006 2005
£’000 £’000
Share of post-tax profit/(loss) in associate - normal 393 (70)
- non-recurring items and amortisation (see note 6) — (627)
393 (697)
Share of post-tax loss in joint ventures - normal (46) —
- non-recurring items and amortisation (see note 6) (129) —
(175) —
Total share of post-tax profit/(loss) in associate and joint ventures 218 (697)
6 NON-RECURRING ITEMS AND AMORTISATION 2006 2005
Amount Tax credit Amount Tax credit
£’000 £’000 £’000 £’000
Group operating profit:
Cost of reorganising food division — — (350) 105
Profit on disposal of property, plant and equipment —— 4,110 (719)
Immediate recognition of negative goodwill 77 — 1,526 —
Amortisation of intangible assets (948) 284 (997) 299
(871) 284 4,289 (315)
Share of post-tax (loss)/profit in associate and joint ventures:
Cost of reorganising associate, net of tax —— (627) —
Amortisation of intangible asset and impairment of goodwill
recognised in joint ventures, net of tax (129) — ——
Total non-recurring items and amortisation (1,000) 284 3,662 (315)
Profit before taxation 6,323 10,369
Non-recurring items and amortisation (1,000) 3,662
Adjusted profit before taxation 7,323 6,707
Group operating profit 7,116 12,264
Non-recurring items and amortisation (871) 4,289
Adjusted Group operating profit 7,987 7,975
7 STAFF COSTS 2006 2005
£’000 £’000
Wages and salaries 17,888 15,398
Social security costs 1,782 1,653
Other pension costs 2,120 1,912
Cost of share based awards 27 —
21,817 18,963
Included within other pension costs is £1,074,000 (2005: £932,000) in respect of the defined benefit pension scheme.
The average monthly number of employees, including directors and key management personnel, during the period was made up as
follows:
2006 2005
Number Number
Sales, office and management 433 365
Manufacture and distribution 304 294
737 659
Full details of the directors' emoluments, pension benefits and share options are given in the Directors' Remuneration Report. 37
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
8 NET FINANCE COSTS 2006 2005
£’000 £’000
Interest expense
Interest payable on bank overdrafts (355) (515)
Interest payable on bank loans and other borrowings (939) (437)
Interest payable on finance leases and hire purchase contracts (128) (111)
Other interest (110) (122)
Total interest expense (1,532) (1,185)
Other finance income/(costs)
Movement in fair value of interest related derivative instruments (note 27) 143 (106)
Total other finance income/(costs) 143 (106)
Interest income
Bank interest 366 75
Other interest 12 18
Total interest income 378 93
Net finance costs (1,011) (1,198)
9 TAXATION 2006 2005
£’000 £’000
(a) Analysis of the charge in the period
Current tax:
UK corporation tax
Current period 1,861 1,797
Prior period (711) 24
Foreign tax
Current period 514 270
Consortium relief
Prior period 625 —
Group current tax 2,289 2,091
Deferred tax:
Origination and reversal of timing differences (300) 466
Group deferred tax (300) 466
Tax on profit on ordinary activities 1,989 2,557
(b) Factors affecting tax charge for the period
The tax assessed for the period is higher (2005: lower) than the rate of corporation tax in the UK (30%). The differences are explained
below:
2006 2005
£'000 £'000
Profit before tax 6,323 10,369
Tax at 30% 1,897 3,111
Effects of:
Tax effect of share of (loss)/profit in associate and joint ventures (65) 209
Tax effect of expenses/(income) that are not deductible/(allowable) in determining taxable profit 204 (1,510)
Tax on rolled over gain — 719
Effects of different tax rates of foreign subsidiaries 11 30
Effects of changes in tax rates of subsidiaries (3) (43)
(Over)/under provision in prior years (55) 16
Other — 25
Total tax charge for the period 1,989 2,557 38
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
10 DIVIDENDS 2006 2005
Equity £’000 £’000
Final dividend for the period ended 3 September 2005 of 11.0p per 25.0p share (2004: 9.0p) 905 730
Interim paid of 5.5p per 25.0p share (2005: 5.0p) 453 406
1,358 1,136
The proposed dividend to be considered by shareholders at the Annual General Meeting is £1,029,197, being 12.5p per share, making a
total for the year of 18.0p.
11 EARNINGS PER ORDINARY SHARE
Earnings per share are calculated by reference to a weighted average of 8,227,329 shares (2005: 8,127,328) in issue during the period.
Non-recurring costs and amortisation that are charged or credited to profit do not relate to the profitability of the Group on an ongoing
basis. Therefore an adjusted earnings per share is presented as follows:
2006 2005
Earnings Earnings
Earnings per share Earnings per share
£’000 pence £’000 pence
Earnings per share - basic 4,195 51.0 7,483 92.1
Non-recurring items and intangible asset amortisation:
Cost of reorganising food division —— 350 4.3
Cost of reorganising associate, net of tax — — 627 7.7
Profit on disposal of property, plant and equipment —— (4,110) (50.5)
Immediate recognition of negative goodwill (77) (0.9) (1,526) (18.8)
Amortisation of intangible asset 948 11.5 997 12.2
Amortisation of intangible asset and impairment of goodwill
recognised in joint ventures, net of tax 129 1.6 — —
Taxation arising on non-recurring items (284) (3.5) 315 3.9
Earnings per share - adjusted 4,911 59.7 4,136 50.9
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all
dilutive potential ordinary shares. The potentially dilutive ordinary shares, where the exercise price is less than the average market price
of the Company's ordinary shares during the period, are disclosed in note 31.
2006 2005
Weighted Earnings Weighted Earnings
Earnings average number per share Earnings average number per share
£’000 of shares pence £’000 of shares pence
Earnings per share 4,195 8,227,329 51.0 7,483 8,127,328 92.1
Effect of dilutive securities:
Options — 97,288 (0.6) — 158,591 (1.8)
Save as you earn (SAYE) — 3,949 — —— —
Diluted earnings per share 4,195 8,328,566 50.4 7,483 8,285,919 90.3 39
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
12 GOODWILL AND OTHER INTANGIBLE ASSETS
Customer Patents and
Goodwill relationships Brands Know-how trademarks Total
Group £’000 £’000 £’000 £’000 £’000 £’000
Cost
As at 29 August 2004 173 — — 160 — 333
Additions 360 2,266 357 — — 2,983
Disposals (73) — — — — (73)
At 3 September 2005 460 2,266 357 160 — 3,243
Re-assessment of deferred consideration (245) — — — — (245)
Additions 80———50130
As at 2 September 2006 295 2,266 357 160 50 3,128
Amortisation
At 29 August 2004 133 — — 16 — 149
Charge for the period — 969 28 32 — 1,029
Disposals (73) — — — — (73)
At 3 September 2005 60 969 28 48 — 1,105
Charge for the period — 913 35 32 6 986
At 2 September 2006 60 1,882 63 80 6 2,091
Net book value
At 28 August 2004 40 — — 144 — 184
At 3 September 2005 400 1,297 329 112 — 2,138
At 2 September 2006 235 384 294 80 44 1,037
Goodwill of £80,000 arose during the period on the purchase of further shares in Northern Feeds Solutions Limited.
Goodwill brought forward at 4 September 2005 includes deferred consideration of £322,000 on the acquisition of Wallace Oils Holdings
Limited. The directors estimate that the likelihood of the deferred consideration becoming payable is now remote. This has resulted in the
creation of negative goodwill of £76,810 which has been credited to the income statement during the period. This change in accounting
estimate has been accounted for prospectively in accordance with IAS 8.
Goodwill is tested annually for impairment, or more frequently if there are indications that goodwill might be impaired. No impairment has
been identified in the period.
Customer relationships are being amortised in line with the profit streams generated over the life of the relationship. The life of the
relationships range between three and five years.
Brands are being amortised on a straight line basis over a twenty year period, being the directors' estimate of the useful economic life.
Know-how is being amortised on a straight line basis over five years, being the directors' estimate of the useful economic life.
Patents and trademarks are being amortised over their contractual life.
There is no goodwill or intangible assets in the company. 40
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
13 PROPERTY, PLANT AND EQUIPMENT
Assets in
Land and Plant and course of
buildings equipment construction Total
Group £’000 £’000 £’000 £’000
Cost
At 29 August 2004 11,692 24,973 567 37,232
Exchange differences (24) (86) (4) (114)
Subsidiaries acquired 4,214 9,411 — 13,625
Additions 2,740 2,245 1,154 6,139
Disposals (1,276) (1,390) — (2,666)
Reclassifications 31 1,216 (1,247) —
At 3 September 2005 17,377 36,369 470 54,216
Exchange differences (27) (5) — (32)
Additions 285 3,358 362 4,005
Disposals (22)(1,957)—(1,979)
Reclassifications 456 9 (465) —
At 2 September 2006 18,069 37,774 367 56,210
Depreciation
At 29 August 2004 2,160 15,512 — 17,672
Exchange differences (6) (43) — (49)
Subsidiaries acquired 369 5,942 — 6,311
Charge for the period 520 2,528 — 3,048
Disposals (371) (1,233) — (1,604)
At 3 September 2005 2,672 22,706 — 25,378
Exchange differences (6) 34 — 28
Charge for the period 518 2,873 — 3,391
Disposals (22) (1,737) — (1,759)
At 2 September 2006 3,162 23,876 — 27,038
Net book value
At 28 August 2004 9,532 9,461 567 19,560
At 3 September 2005 14,705 13,663 470 28,838
At 2 September 2006 14,907 13,898 367 29,172
Freehold land amounting to £2,261,045 (2005: £2,261,045) has not been depreciated.
Land and buildings acquired from business combinations in the prior period were professionally valued as part of the fair value
accounting.
As permitted under IFRS1, the Group has opted to treat previous revaluations of property made under UK GAAP as deemed cost at the
date of transition.
2006 2005
£’000 £’000
The net book value of land and buildings comprises:
Freehold 11,694 11,369
Long leasehold 3,213 3,336
The net book value of plant and equipment includes £2,723,049 (2005: £2,535,253 ) in respect of assets held under finance leases.
The company has no property, plant and equipment. 41
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
14 INVESTMENT PROPERTY
Land and
buildings
Group £’000
Cost
At 29 August 2004 211
Subsidiaries acquired 685
At 3 September 2005 and 2 September 2006 896
Depreciation
At 29 August 2004 39
Subsidiaries acquired 28
Charge for the period 7
At 3 September 2005 74
Charge for the period 28
At 2 September 2006 102
Net book value
At 28 August 2004 172
At 3 September 2005 822
At 2 September 2006 794
Included within investment property are properties occupied by life tenants. The net book value of these properties at 2 September 2006
is £242,000 (2005: £251,000).
The directors do not consider that the fair value of investment properties differs materially from carrying value.
There is no investment property in the company. 42
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
15 INVESTMENTS
Joint Other
ventures Associate investments Total
Group £’000 £’000 £’000 £’000
Cost
At 4 September 2005 172 445 273 890
Exchange difference (3) — — (3)
Additions 710 — — 710
Disposals — — (10) (10)
Share of post-tax (loss)/profit (175) 393 — 218
Share of recognised gains — 144 — 144
At 2 September 2006 704 982 263 1,949
Provision for impairment
At 4 September 2005 — — 18 18
Disposals — — (9) (9)
At 2 September 2006 — — 9 9
Net book value
At 3 September 2005 172 445 255 872
At 2 September 2006 704 982 254 1,940
Joint Shares in Other
ventures Associate subsidiaries investments Total
Company £’000 £’000 £’000 £’000 £’000
Cost
At 4 September 2005 172 1,470 18,158 211 20,011
Share awards granted to
employees of subsidiary
undertakings — — 25 — 25
Additions 100 — — — 100
Disposals — — — (10) (10)
Redemption of preference shares — — (233) — (233)
At 2 September 2006 272 1,470 17,950 201 19,893
Provision for impairment
At 4 September 2005 — — 5,086 9 5,095
Disposals — — — (9) (9)
At 2 September 2006 — — 5,086 — 5,086
Net book value
At 3 September 2005 172 1,470 13,072 202 14,916
At 2 September 2006 272 1,470 12,864 201 14,807
Other investments comprise shares in several private limited companies. As a result of adoption of IAS32 and IAS39, these investments
have been classified as unquoted investments for which fair value cannot be reliably measured and are held at cost. There has been no
impact on the total value of these assets.
During the period a new joint venture company was formed, Bibby Agriculture Limited, with Carrs Billington Agriculture (Sales) Limited
being a 50% shareholder and Wynnstay Group PLC and Welsh Feed Producers Limited each having a 25% shareholding. The joint
venture markets and sells animal feed, fertilisers and other farm requirements in Wales.
During the period a new joint venture company was formed, Afgritech Limited, with Carr's Milling Industries PLC being a 50%
shareholder and Afgri Operations SA being the other 50% shareholder. The joint venture will produce ingredients for animal feed.
During the period preference share capital in several subsidiaries were redeemed at par.
The Group’s investment in the associate at 4 September 2005 has been revised from £800,000, which was disclosed in the Group’s
IFRS transition document issued in April 2006, to £445,000 following the finalisation of the fair values of the assets and liabilities
acquired from W & J Pye Limited in 2005 and adjustments made to taxation in the associate on transition to IFRS. 43
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
16 INVESTMENT IN ASSOCIATES
The associated undertakings at 2 September 2006 are:
Group and company
Proportion
of shares held
Ordinary Country of
Name % incorporation Activity
Carrs Billington Agriculture (Operations) Limited 49 England Manufacture of
animal feed
Associates are accounted for using the equity method.
The aggregate amounts relating to associates, of which the group recognises 49%, are:
2006 2005
£'000 £'000
Total assets 22,367 27,350
Total liabilities (22,864) (28,942)
Revenues 69,744 45,775
Profit/(loss) after tax 803 (1,423)
17 INTEREST IN JOINT VENTURES
The joint ventures at 2 September 2006 are:
Group
Proportion of shares held
Ordinary Preference Country of
Name % % incorporation Activity
Crystalyx Products GmbH 50 — Germany Manufacture of animal feed blocks
Bibby Agriculture Limited 26 17 England Sale of agricultural products
Afgritech Limited 50 — England Producers of ingredients of animal feed
Crystalyx Products GmbH has a 31 December accounting period end.
Interests in the joint ventures listed above are held directly by the holding company with the following exception: Carrs Billington
Agriculture (Sales) Limited holds 50% of the ordinary share capital and 33% of the preference share capital in Bibby Agriculture Limited.
Joint ventures are accounted for using the equity method.
The aggregate amounts included in the financial statements relating to the Group’s share of joint ventures are:
2006 2005
£'000 £'000
Non-current assets 1,629 172
Current assets 1,542 —
Current liabilities (2,116) —
Non-current liabilities (931) —
Income 8,045 —
Expenses (8,197) —
Net finance costs (23) — 44
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
18 INVESTMENT IN SUBSIDIARY UNDERTAKINGS
Proportion of
Shares Held
Ordinary Country of
Name % incorporation Activity
Carrs Agriculture Ltd. 100 England Manufacture of animal
feed blocks and fertiliser
Carrs Billington Agriculture (Sales) Ltd. 51 England Agricultural retailers
Animal Feed Supplement Inc. 100 USA Manufacture of animal feed blocks
Northern Feeds Solutions Ltd. 51 England Agricultural retailers
Carr's Flour Mills Ltd. 100 England Flour milling
Carrs Engineering Ltd. 100 England Engineering
Bowie and Aram Ltd. 100 Scotland Travel agents
B.R.B. Trust Ltd. 100 England Financial services
Carrs Properties Ltd. 100 England Property holding
Investments in the subsidiaries listed above are held directly by the holding company with the following exceptions: Northern Feeds
Solutions Limited is held by Carrs Billington Agriculture (Sales) Limited.
During the period Carrs Billington Agriculture (Sales) Limited increased its shareholding in Northern Feeds Solutions Limited to 100%.
Dormant subsidiaries are not shown above because disclosure would be excessively lengthy. A full list of subsidiary undertakings will be
annexed to the Company's next annual return.
19 DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and liabilities are attributable to the following:
Assets Liabilities Net
2006 2005 2006 2005 2006 2005
Group £’000 £’000 £’000 £’000 £’000 £’000
Accelerated tax depreciation — — (2,692) (2,846) (2,692) (2,846)
Employee benefits 4,739 3,636 — — 4,739 3,636
Other 423 326 (908) (1,008) (485) (682)
Tax assets/(liabilities) 5,162 3,962 (3,600) (3,854) 1,562 108
Movement in deferred tax during the period
At At
4September Exchange Recognised Recognised 2 September
2005 differences in income in equity 2006
£’000 £’000 £’000 £’000 £’000
Accelerated tax depreciation (2,846) — 154 — (2,692)
Employee benefits 3,636 — (67) 1,170 4,739
Other (682) (16) 213 — (485)
108 (16) 300 1,170 1,562
Movement in deferred tax
during the prior period At At
29 August Exchange In respect of Recognised Recognised 3 September
2004 differences acquisitions in income in equity 2005
£’000 £’000 £’000 £’000 £’000 £’000
Accelerated tax depreciation (1,073) — (2,067) 294 — (2,846)
Employee benefits 3,282 — — (109) 463 3,636
Other (25)(12)6(651) —(682)
2,184 (12) (2,061) (466) 463 108 45
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
19 DEFERRED TAX ASSETS AND LIABILITIES (CONTINUED)
Assets
2006 2005
Company £’000 £’000
Employee benefits 4,739 3,636
Other 22 36
Tax assets 4,761 3,672
Movement in deferred tax during the period At At
4September Recognised Recognised 2 September
2005 in income in equity 2006
£’000 £’000 £’000 £’000
Employee benefits 3,636 (67) 1,170 4,739
Other 36 (14) — 22
3,672 (81) 1,170 4,761
Movement in deferred tax At At
during the prior period 29 August Recognised Recognised 3 September
2004 in income in equity 2005
£’000 £’000 £’000 £’000
Accelerated tax depreciation 1 (1) — —
Employee benefits 3,282 (109) 463 3,636
Other — 36 — 36
3,283 (74) 463 3,672 46
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
20 INVENTORIES 2006 2005
Group £’000 £’000
Raw materials and consumables 5,364 4,574
Work in progress 695 1,784
Finished goods and goods for resale 5,885 6,589
11,944 12,947
Inventories is stated after a provision for impairment of £276,000 (2005: £232,000).
Cost of sales consists of the following:
Material cost 191,362 148,586
Processing cost 5,024 4,690
Other 10,272 8,020
206,658 161,296
The company has no inventories.
21 TRADE AND OTHER RECEIVABLES Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Current:
Trade receivables 29,704 32,042 — —
Amounts recoverable on contracts 22 189 — —
Amounts owed by Group undertakings (note 39) — — 13,933 13,913
Amounts owed by other related parties (note 39) 616 409 209 —
Other receivables 2,029 1,172 36 47
Prepayments and accrued income 1,175 1,385 147 88
33,546 35,197 14,325 14,048
Non-current:
Other receivables 208 223 — —
208 223 — —
The directors consider that the carrying amount of trade and other receivables approximates to their fair value.
Trade receivables is stated after a provision for impairment of £3,061,000 (2005: £2,761,000).
22 CURRENT TAX ASSETS Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Corporation tax recoverable 1 87 657 410
Group taxation relief — — 243 192
1 87 900 602 47
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
23 CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Cash and cash equivalents per the balance sheet 2,292 3,149 — —
Bank overdrafts (note 26) (1,208) (646) (883) (1,730)
Cash and cash equivalents per the cash flow statement 1,084 2,503 (883) (1,730)
24 TRADE AND OTHER PAYABLES Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Current:
Trade payables 15,034 17,242 — —
Payments on account 1,100 1,481 — —
Amounts owed to Group undertakings (note 39) — — 18 122
Amounts owed to other related parties (note 39) 3,499 5,787 — —
Other taxes and social security payable 1,370 1,214 213 136
Other payables 1,640 1,310 200 67
Accruals and deferred income 2,744 2,284 594 340
25,387 29,318 1,025 665
Non-current:
Other payables 1,358 1,103 — —
Accruals and deferred income 166 184 — —
1,524 1,287 — —
The directors consider that the carrying amount of trade and other payables approximates to their fair value.
Included within non-current accruals and deferred income is the following in respect of government grants:
Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
At the beginning of the period 184 244 — —
Arising on acquisitions — 25 — —
Amortisation in the period (18) (50) — —
Provision for repayment — (35) — —
At the end of the period 166 184 — —
25 CURRENT TAX LIABILITIES Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Current tax 722 1,581 — —
Consortium tax relief 602 — — —
1,324 1,581 — — 48
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
26BORROWINGS Group Company
2006 2005 2006 2005
£’000 £’000 £’000 £’000
Current:
Bank overdrafts 1,208 646 883 1,730
Bank loans and other borrowings 6,409 7,995 893 1,293
Loans from group undertakings — — 2,475 4,191
Other loans 1,225 1,225 — —
Finance leases 840 800 — —
9,682 10,666 4,251 7,214
Non-current:
Bank loans 5,610 6,503 5,610 6,503
Other loans 30 31 — —
Finance leases 872 865 — —
6,512 7,399 5,610 6,503
Borrowings are repayable as follows:
On demand or within one year 9,682 10,666 4,251 7,214
In the second year 1,082 1,493 493 893
In the third to fifth years inclusive 5,430 5,906 5,117 5,610
16,194 18,065 9,861 13,717
Group and company borrowings are shown in the balance sheet net of arrangement fees of £22,458 of which £7,000 is deducted from
current liabilities (2005: £29,459 of which £7,000 is deducted from current liabilities).
Finance leases are repayable as follows:
On demand or within one year 840 800 — —
In the second year 559 569 — —
In the third to fifth years inclusive 313 296 — —
1,712 1,665 — —
The net borrowings are:
Borrowings as above 16,194 18,065 9,861 13,717
Cash and cash equivalents (2,292) (3,149) — —
Net borrowings 13,902 14,916 9,861 13,717
Finance lease obligations are secured on the assets to which they relate. Bank loans and other borrowings includes an amount of
£5,516,000 (2005: £6,703,000) which is secured on trade debtors. The Company, together with certain subsidiaries, act as guarantors
on the bank loans.
Other loans are non-interest bearing and have no fixed date for repayment. The bank loans are repayable by instalments and the overdraft
is repayable on demand.
Non-current bank loans includes a revolving credit facility of £4.5 million which is not repayable until October 2009. 49
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
27 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The main risk from the Group's financial instruments are interest rate risk, liquidity risk and foreign currency risk. The Board reviews
and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged
throughout the period.
Interest rate risk
The Group finances its operations through a mixture of retained earnings and bank borrowings. The Group borrows in the desired
currencies at fixed and floating rates of interest and then uses interest rate caps and swaps to manage the Group's exposure to
interest rate fluctuations. At the period end £6.5 million (2005: £6.6 million) of the Group's borrowings were at a fixed rate of interest.
Liquidity rate risk
As regards liquidity, the Group's policy throughout the period has been to maintain a mix of short and medium term borrowings. Short-
term flexibility is achieved by overdraft facilities. In addition it is the Group's policy to maintain committed undrawn facilities in order to
provide flexibility in the management of the Group's liquidity.
Foreign currency risk
The Group's subsidiary, Animal Feed Supplement Inc., operates in the USA and its revenues and expenses are denominated
exclusively in US dollars.
Crystalyx Products GmbH, a joint venture of the Group, operates in Germany and its revenues and expenses are denominated
exclusively in Euros.
Effective interest rates at the balance sheet date and borrowing maturity
Weighted Weighted
average 2006 average 2005
effective Within One to Two to effective Within One to Two to
interest one two five interest one two five
rate Total year years years rate Total year years years
Group % £’000 £’000 £’000 £’000 % £’000 £’000 £’000 £’000
Bank overdrafts 5.75 1,208 1,208 — — 5.50 646 646 — —
Bank loans and other borrowings 6.08 12,019 6,409 493 5,117 5.74 14,498 7,995 893 5,610
Other loans — 1,255 1,225 30 — — 1,256 1,225 31 —
Finance lease liabilities 6.90 1,712 840 559 313 6.90 1,665 800 569 296
16,194 9,682 1,082 5,430 18,065 10,666 1,493 5,906
Fixed rate 6,712 840 559 5,313 6,665 800 569 5,296
Floating rate 8,227 7,617 493 117 10,144 8,641 893 610
Non-interest bearing 1,255 1,225 30 — 1,256 1,225 31 —
16,194 9,682 1,082 5,430 18,065 10,666 1,493 5,906
The effect of the Group's interest rate swap is to classify £5 million (2005: £5 million) of floating rate borrowings in the above table as
fixed rate.
The floating rate financial liabilities bear interest determined as follows:
Bank overdrafts Base rate + 1% margin; US prime rate + 1% margin
Bank loans and other borrowings Libor + 1.25% or + 1.125%; Base rate + 1.25% margin 50
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
27 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
Weighted Weighted
average 2006 average 2005
effective Within One to Two to effective Within One to Two to
interest one two five interest one two five
rate Total year years years rate Total year years years
Company % £’000 £’000 £’000 £’000 % £’000 £’000 £’000 £’000
Bank overdrafts 5.75 883 883 — — 5.50 1,730 1,730 — —
Bank loans and other borrowings 6.14 6,503 893 493 5,117 5.73 7,796 1,293 893 5,610
Loans from group undertakings 4.78 2,475 2,475 — — 5.34 4,191 4,191 — —
9,861 4,251 493 5,117 13,717 7,214 893 5,610
Fixed rate 5,000 — — 5,000 5,000 — — 5,000
Floating rate 4,861 4,251 493 117 8,717 7,214 893 610
9,861 4,251 493 5,117 13,717 7,214 893 5,610
The effect of the Company's interest rate swap is to classify £5 million (2005: £5 million) of floating rate borrowings in the above table as fixed rate.
The Company's floating rate financial liabilities bear interest determined as follows:
Bank overdrafts Base rate + 1% margin
Bank loans and other borrowings Libor + 1.25% or + 1.125%
Analysis of borrowings by currency:
2006 2005
US US
Sterling Dollar Euro Total Sterling Dollar Euro Total
Group £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Bank overdrafts 1,006 186 16 1,208 601 45 — 646
Bank loans and other borrowings 12,019 — — 12,019 14,498 — — 14,498
Other loans 1,225 — 30 1,255 1,225 — 31 1,256
Finance leases 1,712 — — 1,712 1,665 — — 1,665
15,962 186 46 16,194 17,989 45 31 18,065
Company
Bank overdrafts 867 — 16 883 1,730 — — 1,730
Bank loans and other borrowings 6,503 — — 6,503 7,796 — — 7,796
Loans from group undertakings 114 2,361 — 2,475 2,839 1,352 — 4,191
7,484 2,361 16 9,861 12,365 1,352 — 13,717
Borrowing facilities
The Group had various undrawn committed facilities. The facilities available at 2 September 2006, in respect of which all conditions
precedent had been met, were as follows:
2006 2005
Floating rate Floating rate
£'000 £'000
Expiring in one year or less 10,928 14,630
The Company’s overdraft is within a group facility and it is therefore not possible to determine the Company’s undrawn committed
facilities at the balance sheet date.
Derivative financial instruments
The Group and Company does not adopt hedge accounting. Any gains or losses on derivative financial instruments have been
recognised in the Income Statement in the period they arise. 51
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
27 DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
Currency derivatives
The Group and Company uses forward foreign currency contracts to manage its exchange risk exposure. At the balance sheet date, the
fair value of outstanding forward foreign currency contracts are as below:
Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
At beginning of period — 6 — —
Losses during the period (27) (6) (4) —
At end of period (27) — (4) —
Fair value has been determined by reference to the value of equivalent forward foreign currency contracts at the balance sheet date.
All forward foreign currency contracts have a maturity of less than one year after the balance sheet date. Gains and losses on currency
related derivatives are included within operating profit.
Interest rate derivatives
The Group uses interest rate caps and swaps to manage its interest rate risk exposure. At the balance sheet date, the fair value of these
instruments are as below:
Interest rate cap Interest rate swap
Group Company Group Company
2006 2005 2006 2005 2006 2005 2006 2005
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
At beginning of period — — — — (106) — (106) —
Gains/(losses) during the period 6 — — — 137 (106) 137 (106)
At end of period 6 — — — 31 (106) 31 (106)
Fair value has been determined by reference to the value of equivalent instruments at the balance sheet date. Gains and losses on
interest related derivatives are included within net finance costs in the income statement.
The interest rate cap has a notional value of £3,500,000 and a strike rate of 5.5%. The date of maturity is 30 September 2008.
The interest rate swap has a notional value of £5,000,000 and a fixed interest rate of 4.88%, with interest payments being made at
quarterly intervals. The date of maturity is 10 December 2009.
Fair values of financial assets and financial liabilities
Group Company
2006 2005 2006 2005
Book Fair Book Fair Book Fair Book Fair
value value value value value value value value
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Assets
Other investments 254 254 255 255 201 201 202 202
Non-current derivatives 37 37 —— 31 31 ——
Non-current receivables 208 208 223 223 — — — —
Current trade and other
receivables 33,546 33,546 35,197 35,197 14,325 14,325 14,048 14,048
Cash and cash equivalents 2,292 2,292 3,149 3,149 —— —
36,337 36,337 38,824 38,824 14,557 14,557 14,250 14,250
Liabilities
Current borrowings 9,682 9,682 10,666 10,666 4,251 4,251 7,214 7,214
Current derivatives 27 27 — — 4 4 — —
Trade and other payables 25,387 25,387 29,318 29,318 1,025 1,025 665 665
Non-current borrowings 6,512 6,532 7,399 7,541 5,610 5,691 6,503 6,686
Non-current derivatives — — 106 106 — — 106 106
Other non-current liabilities 1,524 1,524 1,287 1,287 —— ——
43,132 43,152 48,776 48,918 10,890 10,971 14,488 14,671
Other investments consist of investments in unquoted companies, which are held at cost due to the lack of reliable measurability.
Derivative instruments are recognised in the balance sheet at fair value.
The fair value of current assets and current liabilities are assumed to approximate to book value due to the short term maturity of the instrument.
Where market values are not available, fair values have been calculated by discounting expected cash flows at prevailing interest and
exchange rates. 52
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
28 RETIREMENT BENEFIT OBLIGATION
The Group participates in two defined benefit pension schemes, Carr's Milling Industries Pension Scheme 1993 and Carrs Billington
Agriculture Pension Scheme.
Carr's Milling Industries
The Company sponsors the Carr's Milling Industries Pension Scheme 1993 and offers a defined contribution and a defined benefit
section. The assets of the scheme are held separately from those of the Group and are invested with independent investment managers.
The pension expense for the defined contribution section of the scheme for the period was £181,000 (2005: £177,000). Contributions
totalling £8,141 (2005: £8,000) were payable to the fund at the period end and are included in creditors.
During the period contributions were payable to a Group Personal Pension plan for certain employees of Carr’s Flour Mills Limited.
The pension expense for this scheme for the period was £260,000 (2005: £173,000).
The defined benefit section of the scheme is funded to cover future pension liabilities (including expected future earnings and pension
increases). It is subject to an independent valuation on a triennial basis by a qualified actuary who determines the rate of the employer's
contribution. The most recent valuation of the scheme was at 1 January 2006 and adopted the Projected Unit Method. It was assumed
that the investment returns would be 6.5% per annum and that the salary increases would average 4.0% per annum. It was also
assumed that present and future pensions, in excess of the Guaranteed Minimum Pension (GMPs), would increase once in payment at
the lesser of 5.0% per annum and price inflation and that GMPs would increase at the rate of 3.0% per annum.
The actuarial valuation as at 1 January 2006 shows that the market value of assets relating to the defined benefit section of the scheme
was £29,104,000 and that the actuarial value of those assets represented 68.0% of the actuarial value of benefits that had accrued to
members, after allowing for expected future increases in earnings. At 1 January 2006, the scheme showed a deficit of £13,541,000.
The pension contribution made by the Group over the period to the defined benefit section was £1,297,000 (2005: £1,296,000).
The following disclosures relate to the defined benefit section. The last full actuarial valuation of this scheme was carried out by a
qualified independent actuary as at 1 January 2006 and updated on an approximate basis to 2 September 2006.
Major assumptions:
2006 2005
£’000 £’000
Inflation 3.0% 2.75%
Salary increases 4.0% 3.75%
Rate of discount 5.1% 5.4%
Pension in payment increases:
Pre 1 September 2001 3.25% 3.0%
Post 1 September 2001 3.0% 2.75%
Revaluation rate for deferred pensioners for pensions revaluing at 5.0% per annum or RPI if less 3.0% 2.75%
Amounts recognised in the Income Statement in respect of defined benefit schemes:
2006 2005
£’000 £’000
Current service cost 714 513
Interest on pension scheme liabilities 2,131 2,037
Expected return on pension scheme assets (1,771) (1,618)
1,074 932
The expense is recognised within the Income Statement as shown below:
2006 2005
£’000 £’000
Cost of Sales 399 355
Administrative expenses 675 577
1,074 932
Actuarial losses of £3,900,000 (2005: £1,543,000) have been reported in the Statement of Recognised Income and Expense. 53
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
28 RETIREMENT BENEFIT OBLIGATION (CONTINUED)
Amounts included in the Balance Sheet:
2006 2005
£’000 £’000
Present value of defined benefit obligations (45,794) (39,556)
Fair value of scheme assets 29,998 27,437
Deficit in scheme (15,796) (12,119)
Past service cost not yet recognised in the balance sheet — —
Total liability recognised in the balance sheet (15,796) (12,119)
Amount included in current liabilities — —
Amount included in non-current liabilities (15,796) (12,119)
Movements in the present value of defined benefit obligations:
2006 2005
£’000 £’000
At the beginning of the period 39,556 33,991
Current service cost 714 513
Interest cost 2,131 2,037
Changes in assumptions underlying the defined benefit obligation 4,258 3,561
Benefits paid (865) (546)
At the end of the period 45,794 39,556
Movements in the fair value of scheme assets:
2006 2005
£’000 £’000
At the beginning of the period 27,437 23,051
Expected return on scheme assets 1,771 1,618
Actual return less expected return on scheme assets 358 2,018
Contributions by employer 1,297 1,296
Benefits paid (865) (546)
At the end of the period 29,998 27,437
Analysis of the scheme assets, expected rate of return and actual return:
Expected return Fair value of assets
2006 2005 2006 2005
% % £’000 £’000
Equity instruments 7.5 7.5 15,776 14,520
Debt instruments 4.75 5.0 11,936 10,629
Property 7.0 6.5 1,831 1,665
Other assets 4.75 4.5 455 623
6.3 6.4 29,998 27,437
Actual return on scheme assets 2,129 3,636
The expected long term return on cash is equal to bank base rates at the balance sheet date. The expected return on bonds is
determined by reference to UK long dated gilt and bond yields at the balance sheet date. The expected rate of return on equities and
property have been determined by setting an appropriate risk premium above gilt/bond yields having regard to market conditions at the
balance sheet date. 54
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
28 RETIREMENT BENEFIT OBLIGATION (CONTINUED)
History of scheme:
2006 2005 2004 2003 2002
£'000 £'000 £'000 £'000 £'000
Present value of the defined benefit obligation (45,794) (39,556) (33,991) (32,068) (27,396)
Fair value of scheme assets 29,998 27,437 23,051 21,315 19,802
Deficit (15,796) (12,119) (10,940) (10,753) (7,594)
Difference between expected and actual returns on scheme assets:
Amount £'000 358 2,018 (397) (280) (3,784)
Percentage of scheme assets 1.2% 7.4% 1.7% 1.3% 19.1%
Experience gains and losses on scheme liabilities:
Amount £'000 (4,258) (3,561) (227) (3,303) (1,232)
Percentage of scheme liabilities 9.3% 9.0% 0.7% 10.3% 4.5%
The Group expects to contribute approximately £2,600,000 to the defined benefit scheme in the next financial period.
The Company expects to contribute approximately £2,082,000 to the defined benefit scheme in the next financial period.
Carrs Billington Agriculture
Carrs Billington Agriculture (Sales) Limited, one of the Group's subsidiary undertakings, is a participating employer of the Carrs Billington
Agriculture Pension Scheme, another funded defined benefit scheme.
The pension contribution made by Carrs Billington Agriculture (Sales) Limited over the period to the Carrs Billington Agriculture Pension
Scheme was £84,000 (2005: £295,000).
The actuarial valuation as at 31 December 2003 shows that the market value of assets relating to the scheme was £14,600,000 and the
actuarial value of those assets represented 81% of the actuarial value of benefits that had accrued to members, after allowing for
expected future increase in earnings. The assumptions used in arriving at the valuations were a real rate of return over salary increases
on funds invested of 2% and rate increase in present and future pensions of 2.65%. At 31 December 2003, the scheme showed a
deficit of £3,500,000.
Carrs Billington Agriculture (Sales) Limited offers a Group Personal Pension Plan to its employees and the pension expense for this plan
in the period was £70,000 (2005: £39,000).
During the period contributions were also payable to a defined contribution pension scheme for certain employees of Carrs Billington
Agriculture (Sales) Limited. The pension expense for this scheme for the period was £9,000 (2005: £3,000).
The following disclosures relate to the defined benefit section. The last full actuarial valuation of this scheme was carried out by a
qualified independent actuary as at 31 December 2003 and updated on an approximate basis to 2 September 2006.
It is not possible to identify the underlying share of the pension scheme assets and liabilities that relate to Carr's Milling Industires PLC.
Approximately 50% of the assets and liabilities of the pension scheme relate to Carr's Milling Industries PLC and under IFRS
approximately 50% of the assets and liabilities are included in the Group's financial statements through the investment in associate. 55
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
28 RETIREMENT BENEFIT OBLIGATION (CONTINUED)
Major assumptions:
2006 2005
£’000 £’000
Inflation 3.0% 2.73%
Salary increases 3.5% 3.5%
Rate of discount 5.1% 4.88%
Pension in payment increases 3.0% 2.73%
Revaluation rate for deferred pensioners for pensions revaluing at 5.0% per annum or RPI if less 3.0% 2.73%
Amounts recognised in the Income Statement of the associate in respect of defined benefit schemes:
2006 2005
£’000 £’000
Current service cost 157 130
Interest on pension scheme liabilities 1,150 1,086
Expected return on pension scheme assets (1,033) (965)
274 251
The Group's share of the expense is recognised within the Income Statement through the share of post-tax profit/(loss) in associate.
The Group's share of the actuarial gains of £419,000 (2005: losses £1,925,000) have been reported in the Statement of Recognised
Income and Expense.
Amounts included in the Balance Sheet of the associate:
2006 2005
£’000 £’000
Present value of defined benefit obligations (24,698) (23,943)
Fair value of scheme assets 19,008 17,466
Deficit in scheme (5,690) (6,477)
Past service cost not yet recognised in the balance sheet — —
Total liability recognised in the balance sheet (5,690) (6,477)
The Group's share of the deficit is recognised within the Balance Sheet through the investment in associate.
Movements in the present value of defined benefit obligations:
2006 2005
£’000 £’000
At the beginning of the period 23,943 19,677
Current service cost 157 130
Interest cost 1,150 1,086
Changes in assumptions underlying the defined benefit obligation 364 3,613
Benefits paid (916) (563)
At the end of the period 24,698 23,943
Movements in the fair value of scheme assets:
2006 2005
£’000 £’000
At the beginning of the period 17,466 14,820
Expected return on scheme assets 1,033 965
Actual return less expected return on scheme assets 783 1,688
Contributions by employer 642 556
Benefits paid (916) (563)
At the end of the period 19,008 17,466 56
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
28 RETIREMENT BENEFIT OBLIGATION (CONTINUED)
Analysis of the scheme assets, expected rate of return and actual return:
Expected return Fair value of assets
2006 2005 2006 2005
% % £'000 £'000
Equity instruments 6.7 6.7 13,459 12,288
Debt instruments 4.1 4.2 4,991 4,194
Other assets 4.1 4.2 558 984
5.9 6.0 19,008 17,466
Actual return on scheme assets 1,816 2,653
The expected rates of return on scheme assets are determined by reference to relevant indices. The overall rate of return is calculated by
weighting the individual rates in accordance with the anticipated balance in the plan's investment portfolio.
History of scheme:
2006 2005 2004 2003 2002
£'000 £'000 £'000 £'000 £'000
Present value of the defined benefit obligation (24,698) (23,943) (19,677) (17,576) (15,853)
Fair value of scheme assets 19,008 17,466 14,820 14,116 13,582
Deficit (5,690) (6,477) (4,857) (3,460) (2,271)
Difference between expected and actual returns on scheme assets:
Amount £'000 783 1,688 100 136 (2,866)
Percentage of scheme assets 4.1% 9.7% 0.7% 1.0% 21.0%
Experience gains and losses on scheme liabilities:
Amount £'000 (364) (3,613) (1,628) (1,326) (631)
Percentage of scheme liabilities 1.5% 15.1% 8.3% 7.5% 4.0%
It is expected that contributions of approximately £700,000 will be paid to the defined benefit scheme in the next financial period.
29 CALLED-UP SHARE CAPITAL 2006 2005
Group and Company £'000 £'000
Authorised:
10,500,000 ordinary shares of 25p each (2005: 10,500,000) 2,625 2,625
Allotted and fully paid: 8,233,579 ordinary shares of 25p each (2005: 8,213,579) 2,058 2,053
For details of share option and share save schemes see note 31. 57
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
30 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND MINORITY INTEREST
Share Equity Foreign Total
Share Premium Compensation Exchange Other Retained Shareholders’ Minority
Capital Account Reserve Reserve Reserves Earnings Equity Interest Total
Group £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Balance at
29 August 2004 2,018 4,752 — — 1,663 7,382 15,815 1,272 17,087
Total recognised
income and expense
for the period — — — (80) — 5,742 5,662 329 5,991
Dividends — — — — — (1,136)(1,136) — (1,136)
Share options exercised
by employees 35 225 — — — — 260 — 260
Elimination of goodwill
arising on prior years'
acquisitions — — — — — (406) (406) — (406)
Minority interest on
increase in shareholding
in subsidiary — — — — — — — 109 109
Transfer — — — — (31) 31 — — —
Balance at
3 September 2005 2,053 4,977 — (80) 1,632 11,613 20,195 1,710 21,905
Balance at
4 September 2005 2,053 4,977 — (80) 1,632 11,613 20,195 1,710 21,905
Total recognised
income and expense
for the period — — — (150) — 1,609 1,459 139 1,598
Dividends — — — — — (1,358) (1,358) — (1,358)
Equity settled share-
based payment
transactions, net of tax —— 22——— 22 5 27
Share options exercised
by employees 5 27 — — — — 32 — 32
Minority interest on
increase in shareholding
in subsidiary — — — — — — — 77 77
Transfer — — — — (31) 31 — — —
Balance at
2 September 2006 2,058 5,004 22 (230) 1,601 11,895 20,350 1,931 22,281
Retained earnings at 29 August 2004 have been revised from £7,502,000, which was disclosed in the Group’s IFRS transition document
issued in April 2006, to £7,382,000 following adjustments made to taxation in the associate at the transition date.
Retained earnings at 3 September 2005 have been revised from £11,967,000, which was disclosed in the group’s IFRS transition
document issued in April 2006, to £11,613,000 following the finalisation of the fair values of the assets and liabilities acquired from
W & J Pye Limited by the Group’s associate in 2005. 58
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
30 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
Share Equity
Share Premium Compensation Retained Total
Capital Account Reserve Earnings Equity
Company £’000 £’000 £’000 £’000 £’000
Balance at
29 August 2004 2,018 4,752 — (288) 6,482
Total recognised
income and expense
for the period — — — 1,025 1,025
Dividends — — — (1,136) (1,136)
Share options
exercised by employees 35 225 — — 260
Balance at
3 September 2005 2,053 4,977 — (399) 6,631
Balance at
4 September 2005 2,053 4,977 — (399) 6,631
Total recognised income
and expense for the
period — — — 2,806 2,806
Dividends — — — (1,358) (1,358)
Equity settled share-based
payment transactions,
net of tax — — 27 — 27
Share options exercised
by employees 5 27 — — 32
Balance at
2 September 2006 2,058 5,004 27 1,049 8,138
31 SHARE-BASED PAYMENTS
The Group operates five share based payment schemes. Two schemes, the Executive Scheme 1996 and the Company Plan 1996, were
granted before 7 November 2002, the recognition and measurement principles in IFRS2 have not been applied in accordance with the
transitional provisions in IFRS1 and IFRS2. Disclosure in respect of these two schemes is as follows:
Option Schemes
Outstanding share options 2006 2005 Price Dates of
Range Grant
Executive Scheme 1996 90,000 90,000 161p 2002
Company Plan 1996 37,000 57,000 161p 2002
During the period 20,000 (2005: 139,980) shares were issued under these share option schemes.
Options granted on the Company Plan 1996 are normally exercisable 3-10 years from the date of the grant. Options granted in the
Executive Scheme 1996 are normally exercisable 3-7 years from the date of the grant. 59
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
31 SHARE-BASED PAYMENTS (CONTINUED)
New Schemes
Group
During the period the Group entered into three new schemes, an Inland Revenue approved discretionary employee share option scheme,
an unapproved discretionary share option scheme and a share save scheme.
Both the approved and unapproved share options were granted to certain senior employees and directors. Options are exercisable
between three and ten years from the date of grant, subject to the movement of the Group's adjusted earnings per share over the three
years to 31 August 2008 exceeding that of the RPI by an average of 2% per annum.
All employees, subject to eligiblity criteria, may participate in the share save scheme. Under this scheme employees are offered savings
contracts for both 3 year and 5 year vesting period plans. The exercise period is 6 months from the vesting date.
The fair value per option granted and the assumptions used in the calculation of fair values are as follows:
Approved and Unapproved Share Save Share Save
Executive Share Option Scheme 2006 Scheme 2006
Scheme 2006 (3-Year Plan) (5-Year Plan)
2006 2005 2006 2005 2006 2005
Grant date (approved) 24/2/06 — 1/6/06 — 1/6/06 —
Grant date (unapproved) 20/2/06 — — — — —
Share price at grant date
(weighted average) £4.78 — £4.64 — £4.64 —
Exercise price (weighted average) £4.78 — £4.79 — £4.79 —
Number of employees 30 — 56 — 73 —
Shares under option (approved) 132,000 — 27,117 — 66,515 —
Shares under option (unapproved) 12,000 — — — — —
Vesting period (years) 3 — 3 — 5 —
Model used for valuation Binomial — Black Scholes — Black Scholes —
Expected volatility 22.44% — 20.18% — 21.37% —
Option life (years) 10 — 3.5 — 5.5 —
Expected life (years) 6.5 — 3.25 — 5.25 —
Risk-free rate 4.224% — 4.683% — 4.623% —
Expected dividends expressed
as a dividend yield 3.36% — 3.56% — 3.56% —
Expectations of vesting 100% — 75% — 75% —
Expectations of meeting
performance criteria 100% — N/A — N/A —
Fair value per option £0.99 — £0.60 — £0.78 —
The expected volatility is based on historical volatility calculated over the weighted average remaining life of the award being valued. The
expected life is the average expected period to exercise. The risk-free rate of return is the implied yield of zero-coupon UK Government
bonds with a remaining term equal to the expected term of the award being valued. 60
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
31 SHARE-BASED PAYMENTS (CONTINUED)
Approved and Unapproved Executive Share Option Scheme 2006
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period —— — —
Granted during the period 4.78 144 — —
Exercised during the period —— — —
Lapsed during the period —— — —
Outstanding at the end of the period 4.78 144 — —
Exercisable at the end of the period —— ——
At the period end the weighted average remaining contractual life of the options is 9.5 years with a weighted average remaining expected
life of 6 years.
Share Save Scheme 2006 - 3 Year Plan
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period — — — —
Granted during the period 4.79 27 ——
Exercised during the period —— ——
Lapsed during the period — — — —
Outstanding at the end of the period 4.79 27 ——
Exercisable at the end of the period —— ——
At the period end the weighted average remaining contractual life of the options is 3.25 years with a weighted average remaining
expected life of 3 years.
Share Save Scheme 2006 - 5 Year Plan
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period —— ——
Granted during the period 4.79 67 ——
Exercised during the period — — — —
Lapsed during the period —— ——
Outstanding at the end of the period 4.79 67 ——
Exercisable at the end of the period — — — —
At the period end the weighted average remaining contractual life of the options is 5.25 years with a weighted average remaining
expected life of 5 years. 61
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
31 SHARE-BASED PAYMENTS (CONTINUED)
The total expense recognised for the period arising from share based payments are as follows:
2006 2005
£’000 £’000
Approved and Unapproved Executive Share Option Scheme 2006 24 —
Share Save Scheme 2006 - 3 Year Plan 1 —
Share Save Scheme 2006 - 5 Year Plan 2 —
27 —
New Schemes
Company
During the period the company entered into three new schemes, an Inland Revenue approved discretionary employee share option
scheme, an unapproved discretionary share option scheme and a share save scheme.
Both the approved and unapproved share options were granted to certain senior employees and directors. Options are exercisable
between three and ten years from the date of grant, subject to the movement of the Group's adjusted earnings per share over the three
years to 31 August 2008 exceeding that of the RPI by an average of 2% per annum.
All employees, subject to eligiblity criteria, may participate in the share save scheme. Under this scheme employees are offered savings
contracts for both 3 year and 5 year vesting period plans. The exercise period is 6 months from the vesting date.
The fair value per option granted and the assumptions used in the calculation of fair values are as follows:
Unapproved Share Save Share Save
Executive Share Option Scheme 2006 Scheme 2006
Scheme 2006 (3-Year Plan) (5-Year Plan)
2006 2005 2006 2005 2006 2005
Grant date 20/2/06 — 1/6/06 — 1/6/06 —
Share price at grant date £5.02 — £4.64 — £4.64 —
Exercise price £5.02 — £4.79 — £4.79 —
Number of employees 2 — 6 — 1 —
Shares under option 12,000 — 6,133 — 1,344 —
Vesting period (years) 3 — 3 — 5 —
Model used for valuation Binomial — Black Scholes — Black Scholes —
Expected volatility 22.44% — 20.18% — 21.37% —
Option life (years) 10 — 3.5 — 5.5 —
Expected life (years) 6.5 — 3.25 — 5.25 —
Risk-free rate 4.224% — 4.683% — 4.623% —
Expected dividends expressed
as a dividend yield 3.36% — 3.56% — 3.56% —
Expectations of vesting 100% — 75% — 75% —
Expectations of meeting
performance criteria 100% — N/A — N/A —
Fair value per option £0.99 — £0.60 — £0.78 —
The expected volatility is based on historical volatility calculated over the weighted average remaining life of the award being valued. The
expected life is the average expected period to exercise. The risk-free rate of return is the implied yield of zero-coupon UK Government
bonds with a remaining term equal to the expected term of the award being valued. 62
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
31 SHARE-BASED PAYMENTS (CONTINUED)
Unapproved Executive Share Option Scheme 2006
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period —— — —
Granted during the period 5.02 12 — —
Exercised during the period —— — —
Lapsed during the period —— — —
Outstanding at the end of the period 5.02 12 — —
Exercisable at the end of the period —— ——
At the period end the weighted average remaining contractual life of the options is 9.5 years with a weighted average remaining expected
life of 6 years.
Share Save Scheme 2006 - 3 Year Plan
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period — — — —
Granted during the period 4.79 6 ——
Exercised during the period —— ——
Lapsed during the period — — — —
Outstanding at the end of the period 4.79 6 ——
Exercisable at the end of the period —— ——
At the period end the weighted average remaining contractual life of the options is 3.25 years with a weighted average remaining
expected life of 3 years. 63
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
31 SHARE-BASED PAYMENTS (CONTINUED)
Share Save Scheme 2006 - 5 Year Plan
The number and weighted average exercise prices are as follows:
2006 2005
Weighted Weighted
average average
exercise Number of exercise Number of
price options price options
£ ('000) £ ('000)
Outstanding at the beginning of the period —— ——
Granted during the period 4.79 1 ——
Exercised during the period —— ——
Lapsed during the period —— ——
Outstanding at the end of the period 4.79 1 — —
Exercisable at the end of the period —— ——
At the period end the weighted average remaining contractual life of the options is 5.25 years with a weighted average remaining
expected life of 5 years.
The total expense recognised for the period arising from share based payments are as follows:
2006 2005
Unapproved Executive Share Option Scheme 2006 2 —
Share Save Scheme 2006 - 3 Year Plan — —
Share Save Scheme 2006 - 5 Year Plan — —
2 —
Share based payments awarded to employees of subsidiary undertakings and recognised as an investment in subsidiary undertakings in
the company are as follows:
2006 2005
Unapproved Executive Share Option Scheme 2006 22 —
Share Save Scheme 2006 - 3 Year Plan 1 —
Share Save Scheme 2006 - 5 Year Plan 2 —
Total carrying amount of investments 25 —
32 ACQUISITIONS
Wallace Oils Holdings Limited
In 2005 Carrs Billington Agriculture (Sales) Limited acquired the whole of the issued share capital of Wallace Oils Holdings Limited for a
total consideration including costs of £1,746,000. This consideration included £322,000 of deferred consideration, payable over two
years on achievement of profit targets, which was provided in the period ended 3 September 2005.
The directors estimate that the likelihood of the deferred consideration becoming payable is now remote. This has resulted in negative
goodwill of £76,810 arising on the acquisition which has been recognised immediately in the income statement for the period ended
2 September 2006.
Other acquisitions
On 5 June 2006 Carrs Billington Agriculture (Sales) Limited increased its shareholding in Northern Feeds Solutions Limited to 100% for
a cash consideration of £3,200 generating goodwill of £79,992. This transaction has increased the Group's effective shareholding in
Northern Feeds Solutions Limited to 51%. 64
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
33 CASH GENERATED FROM/(USED BY) OPERATIONS Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Profit for the period 4,334 7,812 5,536 2,105
Adjustments for:
Tax 1,989 2,557 (159) (108)
Dividends received from subsidiaries — — (5,754) (2,152)
Depreciation 3,419 3,055 — —
Loss/(profit) on disposal of property, plant and equipment 27 (4,199) — —
Profit on disposal of investments (1) — (1) —
Immediate recognition of negative goodwill (77) (1,526) — —
Intangible asset amortisation 986 1,029 — —
Provision against investment in/loans to subsidiaries — — — 87
Net fair value losses on derivative financial instruments in operating profit 27 6 4 —
Net fair value loss on share based payments 27 — 2 —
Net foreign exchange differences 14 19 (93) (24)
Net finance costs:
Interest income (378) (93) (436) (389)
Interest expense and borrowing costs 1,539 1,191 695 679
Net fair value (gains)/losses on derivative financial instruments (143) 106 (137) 106
Share of (profit)/loss from associate and joint ventures (218) 697 — —
Changes in working capital (excluding the effects of acquisitions)
Decrease/(increase) in inventories 1,003 (1,009) — —
Decrease/(increase) in receivables 1,903 (6,595) (183) 280
(Decrease)/increase in payables (3,382) 3,613 194 (221)
Cash generated from/(used by) continuing operations 11,069 6,663 (332) 363
34 ANALYSIS OF NET DEBT
At 4 Other At 2
September non-cash Exchange September
2005 Cash flow changes movements 2006
Group £'000 £'000 £'000 £'000 £'000
Cash and cash equivalents 3,149 (857) — — 2,292
Bank overdrafts (646) (474) — (88) (1,208)
2,503 (1,331) — (88) 1,084
Loans and other borrowings:
- current (9,220) 2,487 (901) — (7,634)
- non-current (6,534) — 894 — (5,640)
Finance leases:
- current (800) 1,047 (1,087) — (840)
- non-current (865) — (7) — (872)
(14,916) 2,203 (1,101) (88) (13,902)
Other non-cash changes relate to finance leases and transfers between categories of borrowings. It also includes the release of
borrowing costs to the income statement. 65
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
35 CASH FLOWS RELATING TO NON-RECURRING ITEMS AND AMORTISATION
Cash generated from/(used by) operations includes an outflow of £nil (2005: £350,000) which relates to the non-recurring cost of
reorganising the Food Division. The cash consideration received on the disposal of the Bendall's site on London Road, Carlisle was £nil
(2005: £2,846,000) net of expenses.
There are no cash flows in respect of the immediate recognition of negative goodwill and amortisation of intangible assets.
36 CAPITAL COMMITMENTS 2006 2005
Group £'000 £'000
Capital expenditure that has been contracted for but has not been provided for in the accounts 182 225
The Company has no capital commitments.
37 OTHER FINANCIAL COMMITMENTS
Group
At 2 September 2006 the Group had commitments under non-cancellable operating leases as follows:
Land and buildings Other
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Within one year — — 464 138
Within two and five years inclusive — — 423 271
After five years — — 4 7
— — 891 416
Company
At 2 September 2006 the Company had commitments under non-cancellable operating leases as follows:
Land and buildings Other
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Within one year — — 1 1
Within two and five years inclusive — — 4 4
After five years — — 3 4
— — 8 9
38 FINANCIAL GUARANTEES
The Company, together with certain subsidiary undertakings, has entered into a guarantee with Clydesdale Bank PLC in respect of the
Group loans and overdraft with that bank, which at 2 September 2006 amounted to £nil (2005: £nil).
The Company, together with certain subsidiary undertakings, has a £1.25 million (2005: £1 million) letter of credit by Clydesdale Bank
PLC in favour of Crystalyx Products GmbH, a joint venture arrangement.
The Company, together with certain subsidiary undertakings, has entered into a guarantee with Royal Bank of Scotland PLC in respect of
the overdraft with that bank, which at 2 September 2006 amounted to £573,000 (2005: £601,000).
One of the Group's bankers in the normal course of business, enters into certain specific guarantees with some of a subsidiary's
customers. All these guarantees allow the bank to have recourse to the Company if a guarantee is enforced. The total outstanding of
such guarantees entered into by the bank at 2 September 2006 was £1,200,737 (2005: £429,000).
A subsidiary undertaking of the Company, together with an associated undertaking of the Company, has entered into a guarantee with
Royal Bank of Scotland PLC in respect of a loan with that bank. The Group's exposure to this liability at 2 September 2006 amounts to
£2,250,000 (2005: £2,500,000). 66
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
39 RELATED PARTIES
Group and Company
Identity of related parties
The Group has a related party relationship with its subsidiaries, associate and joint ventures and with its directors. The balances and
transactions shown below were all undertaken on an arms’ length basis.
Transactions with key management personnel
Key management personnel are considered to be the directors and their remuneration is disclosed within the Directors' Remuneration Report.
Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Balances reported in the Balance Sheet
Amounts due from key personnel (in a trading capacity)
Trade receivables 94 18 — —
94 18 — —
Transactions reported in the Income Statement:
Revenue 352 52 — —
Purchases (4) (4) — —
348 48 — —
Transactions with subsidiaries Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Balances reported in the Balance Sheet
Amounts due from subsidiary undertakings:
Loans — — 13,618 13,618
Trade receivables — — 315 295
— — 13,933 13,913
Amounts due to subsidiary undertakings:
Loans — — (2,475) (4,191)
Trade payables — — (18) (122)
— — (2,493) (4,313)
Transactions reported in the Income Statement
Management charges receivable — — 1,522 1,432
Dividends received — — 5,754 2,152
Interest receivable — — 402 377
Interest payable — — (167) (154)
— — 7,511 3,807
Transactions with associate Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Balances reported in the Balance Sheet
Amounts due from associate:
Trade and other receivables 241 391 3 —
241 391 3 —
Amounts due to associate:
Trade payables (3,499) (5,787) — —
(3,499) (5,787) — — 67
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
39 RELATED PARTIES (CONTINUED)
Transactions reported in the Income Statement Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Revenue 824 380 — —
Rental income 17 17 — —
Net management charges (payable)/receivable (368) (69) 14 13
Purchases (58,171) (39,826) — —
(57,698) (39,498) 14 13
Transactions with joint ventures Group Company
2006 2005 2006 2005
£'000 £'000 £'000 £'000
Balances reported in the Balance Sheet
Amounts due from joint ventures:
Loans 280 — 205 —
Other receivables 1 — 1 —
281 — 206 —
Transactions reported in the Income Statement
Management charges receivable 50 — — —
50 — — —
Transactions with other related parties
During the period the Company issued a management charge of £nil (2005: £20,000) to Edward Billington & Son Limited, the ultimate
parent of Carrs Billington Agriculture (Operations) Limited. This was in respect of services on the acquisition of the assets of W & J Pye
Limited by Carrs Billington Agriculture (Operations) Limited 68
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
40 EXPLANATION OF TRANSITION TO IFRS
The selection of IFRS accounting policies as required by IFRS 1 creates a number of adjustments that are required to transition from UK
GAAP to IFRS. Each of these is discussed in turn below in the context of the appropriate standard and the guidance it gives:
EMPLOYEE BENEFITS (IAS 19)
IAS 19 is more encompassing than the UK equivalent FRS 17. Specifically, IAS 19 covers all employee benefits, which include post
retirement benefits such as pensions and medical care and short-term employee benefits payable in employment such as holiday pay.
Under UK GAAP, the pension costs associated with the defined benefit scheme were accounted for under SSAP 24 ‘Accounting for
pensions costs’ and detailed disclosures were provided in accordance with the transitional provisions of FRS 17.
In terms of the initial recognition of the pension deficit, IAS 19 and FRS 17 are similar however, under FRS17, the pension scheme
liability is shown net of the deferred tax asset.
FINANCIAL INSTRUMENTS (IAS 32 and IAS 39)
IFRS requires derivative financial instruments to be recorded in the balance sheet at fair value with any change in fair value charged or
credited to the income statement. Previously under UK GAAP these were not required to be recorded in the balance sheet.
DEFERRED AND INCOME TAX (IAS 12)
IAS 12 is more encompassing than FRS 19 ‘Deferred tax’, in that it requires deferred tax to be provided on all temporary differences
rather than just taxable timing differences.
IAS 12 also requires that deferred tax assets should be presented within non-current assets and deferred tax liabilities within non-current
liabilities. They are only offset on the balance sheet if the entity has a legally enforceable right to set off current tax assets against current
tax liabilities and they are levied by the same tax authority on either the same taxable entity or different taxable entities which intend to
settle current tax liabilities and assets on a net basis.
INTANGIBLE ASSETS (IAS 38)
IAS 38 prohibits the amortisation of goodwill. Instead goodwill is subject to an annual impairment review. The Group has opted to apply
IFRS 3 prospectively from the date of transition. Goodwill has been frozen at 29 August 2004.
Under UK GAAP, capitalised computer software is classified within tangible fixed assets. Under IFRS, computer software that is not
integral to an item of property, plant or equipment must be classified as an intangible asset. The value of capitalised computer software is
deemed immaterial and has not been classified as an intangible asset.
IMPAIRMENT OF ASSETS (IAS 36)
IAS 36 requires that at each balance sheet date all tangible and intangible assets should be reviewed for indication of impairment.
IFRS 1 requires that an impairment review of goodwill should be conducted in accordance with IAS 16 at the date of transition and at the
balance sheet date. The Group has performed this review and no material adjustment is required for 2004/05. There is no impact on the
2004/05 opening balance sheet or on the income statement for 2004/05. 69
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
40 EXPLANATION OF TRANSITION TO IFRS (CONTINUED)
LEASES (IAS 17)
IFRS requires property leases to be split into their separate land and building elements with leasehold land normally treated as an
operating lease.
A detailed review of the company’s lease portfolio has resulted in one lease being reclassified as an operating lease, and being classified
on the balance sheet as prepaid leases and amortised over the life of the lease.
SHARE-BASED PAYMENTS (IFRS 2)
IFRS 2 requires that share-based payment transactions be expensed to the income statement. The expense is calculated with reference
to the fair value of the award on the date of the grant and is recognised over the vesting period of the scheme, with adjustments being
made to reflect actual and expected levels of vesting.
IFRS 1 permits a company to apply IFRS 2 only to equity settled share-based awards granted on or after 7 November 2002, which have
not vested by the later of the date of transition of IFRS (29 August 2004) and 1 January 2005. The Group has taken advantage of this
exemption and as such there is no impact on the 2004/05 opening balance sheet.
PROPERTY, PLANT AND EQUIPMENT (IAS 16)
The Group has opted to use previous revaluations of property made under UK GAAP as deemed cost. The impact on 2004/05 opening
balance sheet is a reclassification from the revaluation reserve to other reserves. There is no impact on the income statement for
2004/05.
No adjustment has been made to the carrying value on plant and equipment in the 2004/05 opening balance sheet.
POST BALANCE SHEET EVENTS (IAS 10)
IAS 10 requires that dividends declared after the balance sheet date should not be recognised as a liability at that date as the dividend
does not represent a present obligation. Under UK GAAP, the period-end balance sheet includes an accrual for the proposed final
dividend.
BUSINESS COMBINATIONS (IFRS 3)
IFRS requires the acquirer of a business to identify and value acquired intangible assets. This has resulted in the recognition of customer
relationships and brands on the face of the balance sheet.
IFRS 3 requires negative goodwill (excess of acquirer’s interest in the fair value of acquiree’s identifiable assets, liabilities and contingent
liabilities over costs) arising on the acquisition of a business to be recognised immediately in the income statement.
CUMULATIVE TRANSLATION DIFFERENCES (IAS 21)
IAS 21 requires cumulative translation differences arising from translation of foreign operations to be recorded separately within equity
and included in the gain or loss on disposal when the operation is sold.
The Group has adopted the exemption from reflecting this aspect of IAS 21 retrospectively as permitted by in IFRS 1. 70
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
40 EXPLANATION OF TRANSITION TO IFRS (CONTINUED)
Reconciliation of profit for the 53 week period ended 3 September 2005 UK GAAP Effect of
in IFRS transition
format to IFRS IFRS
Group £'000 £'000 £'000
Revenue
Continuing operations 158,876 — 158,876
Acquisitions - Meneba UK Holdings Limited 26,299 — 26,299
- Wallace Oils Holdings Limited 6,949 — 6,949
Total revenue 192,124 — 192,124
Cost of sales (161,532) 236 (161,296)
Gross profit 30,592 236 30,828
Net operating expenses (19,666) 1,102 (18,564)
Group operating profit 10,926 1,338 12,264
Analysed as:
Operating profit before non-recurring items and amortisation 7,166 809 7,975
Non-recurring items and amortisation 3,760 529 4,289
Group operating profit 10,926 1,338 12,264
Net finance costs (1,092) (106) (1,198)
Share of post-tax loss in associate and joint ventures (531) (166) (697)
Profit before taxation 9,303 1,066 10,369
Taxation (1,912) (645) (2,557)
Profit for the period 7,391 421 7,812
Profit attributable to minority interest 276 53 329
Profit attributable to equity shareholders 7,115 368 7,483
7,391 421 7,812
Company £'000
Profit after taxation under UK GAAP 5,326
Effect of transition to IFRS:
- Employee benefits 657
- Dividends receivable from subsidaries (3,602)
- Movement in fair value of derivative financial instruments (106)
- Deffered taxation (170)
Profit after taxation under IFRS 2,105 71
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
40 EXPLANATION OF TRANSITION TO IFRS (CONTINUED)
Reconciliation of total equity
29 August 2004 3 September 2005
UK GAAP Effect of UK GAAP Effect of
in IFRS transition in IFRS transition
format to IFRS IFRS format to IFRS IFRS
Group £'000 £'000 £'000 £'000 £'000 £'000
Assets
Non-current assets
Negative goodwill — — — (539) 539 —
Goodwill 40 — 40 422 (22) 400
Other intangible assets 144 — 144 112 1,626 1,738
Property, plant and equipment 20,474 (988) 19,486 30,232 (1,394) 28,838
Investment property — 246 246 — 822 822
Investment in associate 3,217 (1,414) 1,803 2,686 (2,241) 445
Interest in joint venture — — — 172 — 172
Other investments 253 — 253 255 — 255
Financial assets
-Non-current receivables 200 — 200 223 — 223
Deferred tax assets 170 3,376 3,546 204 3,758 3,962
24,498 1,220 25,718 33,767 3,088 36,855
Current assets
Inventories 10,387 — 10,387 12,947 — 12,947
Financial assets
- Derivative financial instruments — 6 6 — — —
Trade and other receivables 19,491 742 20,233 34,463 734 35,197
Current tax assets 82 — 82 87 — 87
Cash and cash equivalents 1,091 — 1,091 3,149 — 3,149
31,051 748 31,799 50,646 734 51,380
Total assets 55,549 1,968 57,517 84,413 3,822 88,235
Liabilities
Current liabilities
Financial liabilities
- Borrowings (4,013) — (4,013) (10,666) — (10,666)
Trade and other payables (20,308) 1,160 (19,148) (30,983) 1,665 (29,318)
Current tax liabilities (944) — (944) (1,581) — (1,581)
(25,265) 1,160 (24,105) (43,230) 1,665 (41,565)
Non-current liabilities
Financial liabilities
-Borrowings (2,836) — (2,836) (7,399) — (7,399)
- Derivative financial instruments — — — — (106) (106)
Retirement benefit obligation — (10,940) (10,940) — (12,119) (12,119)
Deferred tax liabilities (951) (411) (1,362) (1,226) (2,628) (3,854)
Other non-current liabilities (1,187) — (1,187) (1,287) — (1,287)
(4,974) (11,351) (16,325) (9,912) (14,853) (24,765)
Total liabilities (30,239) (10,191) (40,430) (53,142) (13,188) (66,330)
Net assets 25,310 (8,223) 17,087 31,271 (9,366) 21,905
Shareholders' equity
Ordinary shares 2,018 — 2,018 2,053 — 2,053
Share premium 4,752 — 4,752 4,977 — 4,977
Revaluation reserve 1,663 (1,663) — 1,632 (1,632) —
Foreign exchange reserve — — — — (80) (80)
Other reserve — 1,663 1,663 — 1,632 1,632
Retained earnings 15,605 (8,223) 7,382 20,952 (9,339) 11,613
Total shareholders' equity 24,038 (8,223) 15,815 29,614 (9,419) 20,195
Minority interests in equity 1,272 — 1,272 1,657 53 1,710
Total equity 25,310 (8,223) 17,087 31,271 (9,366) 21,905 72
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notes to the Financial Statements continued
40 EXPLANATION OF TRANSITION TO IFRS (CONTINUED)
Reconciliation of total equity
29 August 2004 3 September 2005
UK GAAP Effect of UK GAAP Effect of
in IFRS transition in IFRS transition
format to IFRS IFRS format to IFRS IFRS
Company £'000 £'000 £'000 £'000 £'000 £'000
Assets
Non-current assets
Investment in subsidiaries 7,370 — 7,370 13,072 — 13,072
Investment in associate 1,470 — 1,470 1,470 — 1,470
Interest in joint venture — — — 172 — 172
Other investments 202 — 202 202 — 202
Deferred tax assets 148 3,136 3,284 242 3,430 3,672
9,190 3,136 12,326 15,158 3,430 18,588
Current assets
Trade and other receivables 11,169 (2,152) 9,017 19,802 (5,754) 14,048
Current tax assets 463 — 463 602 — 602
11,632 (2,152) 9,480 20,404 (5,754) 14,650
Total assets 20,822 984 21,806 35,562 (2,324) 33,238
Liabilities
Current liabilities
Financial liabilities
-Borrowings (2,490) — (2,490) (7,214) — (7,214)
Trade and other payables (1,709) 1,215 (494) (2,349) 1,684 (665)
(4,199) 1,215 (2,984) (9,563) 1,684 (7,879)
Non-current liabilities
Financial liabilities
- Borrowings (1,400) — (1,400) (6,503) — (6,503)
- Derivative financial instruments — — — — (106) (106)
Retirement benefit obligation — (10,940) (10,940) — (12,119) (12,119)
(1,400) (10,940) (12,340) (6,503) (12,225) (18,728)
Total liabilities (5,599) (9,725) (15,324) (16,066) (10,541) (26,607)
Net assets 15,223 (8,741) 6,482 19,496 (12,865) 6,631
Shareholders' equity
Ordinary shares 2,018 — 2,018 2,053 — 2,053
Share premium 4,752 — 4,752 4,977 — 4,977
Retained earnings 8,453 (8,741) (288) 12,466 (12,865) (399)
Total shareholders' equity 15,223 (8,741) 6,482 19,496 (12,865) 6,631
Minority interests in equity — — — — — —
Total equity 15,223 (8,741) 6,482 19,496 (12,865) 6,631 73
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
UK GAAP (in IFRS format) IFRS
2002 2003 2004 2005 2006
Revenue and results £'000 £'000 £'000 £'000 £'000
Revenue 143,378 148,688 155,749 192,124 242,576
Group operating profit 4,062 4,011 5,036 12,264 7,116
Analysed as:
Operating profit before non-recurring items
and amortisation 3,755 4,011 5,036 7,975 7,987
Non-recurring items and amortisation 307 — — 4,289 (871)
Group operating profit 4,062 4,011 5,036 12,264 7,116
Net finance costs (822) (584) (575) (1,198) (1,011)
Share of post-tax profit/(loss) in associate
and joint ventures 604 693 531 (697) 218
Profit before taxation 3,844 4,120 4,992 10,369 6,323
Taxation (647) (1,331) (1,498) (2,557) (1,989)
Profit for the period 3,197 2,789 3,494 7,812 4,334
Ratios
Operating margin (excluding
non-recurring items and amortisation) 2.6% 2.7% 3.2% 4.2% 3.3%
Return on net assets (excluding
non-recurring items and amortisation) 16.6% 17.7% 19.7% 27.8% 32.3%
Earnings per share - basic 36.3p 30.5p 39.9p 92.1p 51.0p
- adjusted 33.3p 34.7p 39.9p 50.9p 59.7p
Dividends per ordinary share 9.5p 11.5p 13.5p 16.0p 18.0p
Five Year Statement 74
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Five Year Statement continued
UK GAAP (in IFRS format) IFRS
2002 2003 2004 2005 2006
Net assets employed £'000 £'000 £'000 £'000 £'000
Non-current assets
Goodwill 96 63 40 400 235
Other intangible assets — — 144 1,738 802
Property, plant and equipment 19,232 19,723 20,474 28,838 29,172
Investment property — — — 822 794
Investments 2,146 2,839 3,470 872 1,940
Financial assets
- Derivative financial instruments — — — — 37
- Non-current receivables 17 8 5 223 208
Deferred tax assets 47 172 170 3,962 5,162
21,538 22,805 24,303 36,855 38,350
Current assets
Inventories 9,057 9,123 10,387 12,947 11,944
Trade and other receivables 18,411 18,240 19,686 35,197 33,546
Current tax assets 222 274 82 87 1
Cash and cash equivalents 856 1,472 1,091 3,149 2,292
28,546 29,109 31,246 51,380 47,783
Total assets 50,084 51,914 55,549 88,235 86,133
Current liabilities
Financial liabilities
- Borrowings (2,373) (3,627) (4,013) (10,666) (9,682)
- Derivative financial instruments — — — — (27)
Trade and other payables (20,010) (18,592) (20,308) (29,318) (25,387)
Current tax liabilities (554) (793) (944) (1,581) (1,324)
(22,937) (23,012) (25,265) (41,565) (36,420)
Non-current liabilities
Financial liabilities
- Borrowings (4,470) (3,460) (2,836) (7,399) (6,512)
- Derivative financial instruments — — — (106) —
Retirement benefit obligation — — — (12,119) (15,796)
Deferred tax liabilities (1,129) (1,099) (951) (3,854) (3,600)
Other non-current liabilities (179) (1,108) (1,187) (1,287) (1,524)
(5,778) (5,667) (4,974) (24,765) (27,432)
Total liabilities (28,715) (28,679) (30,239) (66,330) (63,852)
Net assets 21,369 23,235 25,310 21,905 22,281 75
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Notice of Annual General Meeting
Notice is hereby given that the Ninety Eighth Annual General Meeting of Carr's Milling Industries PLC will be held at the Crown Hotel, Wetheral,
Carlisle on Tuesday 9 January, 2007 at 11.30 a.m. for the transaction of the following business.
ORDINARY BUSINESS
1. To adopt the Report of the Directors and Financial Statements for the period ended 2 September 2006
2. To approve the Remuneration Committee’s Report for the period ended 2 September 2006
3. To declare a final dividend of 12.5p per share on the Ordinary Share Capital
4. To re-elect as a Director W R Inglewood who retires by rotation
5. To re-elect as a Director A R Heygate who retires having been appointed to the Board since the last Annual General Meeting
6. To re-appoint PricewaterhouseCoopers LLP as Auditors and to authorise the Directors to fix their remuneration
SPECIAL BUSINESS
7. Disapplication of pre-emption rights
To resolve as a special resolution that the directors of the Company be and are hereby empowered pursuant to section 95 of the Companies
Act 1985 to allot equity securities (as defined in sub-section (2) of section 94 of the Companies Act 1985) pursuant to the authority conferred
on them for the purposes of section 80 of the Act by the special resolution of the Company passed on 6 January 2005 as if section 89(1) of
the said Act did not apply to such allotment provided that this power is limited to:
(i) the allotment of equity securities in connection with a rights issue in favour of the holders of ordinary shares in the capital of the Company
where the equity securities attributable to the interests of such holders are proportionate (as nearly as may be) to the respective number of
such ordinary shares held by them, subject only to such exclusions or other arrangements as the directors feel necessary or expedient to deal
with fractional entitlements or legal or practicable problems arising under the laws or the requirements of any recognised regulatory body; and
(ii) the allotment (otherwise than pursuant to sub-paragraph (i) above) of equity securities up to an aggregate nominal amount of £102,920, and
shall expire at the conclusion of the next Annual General Meeting of the Company or 15 months from the date hereof, whichever is the earlier,
save that the Company may, before such expiry, make an offer or agreement which would or might require equity securities to be allotted after
such expiry and the Board may allot equity securities in pursuance of such offer or agreement as if the power conferred hereby had not
expired.
8. Company’s authority to purchase its own shares
To resolve as a special resolution that in accordance with Chapter VII of the Companies Act 1985, the Company be generally and
unconditionally authorised to make market purchases (as defined in section 163(3) of that Act) of its own ordinary shares of 25p each
(“ordinary shares”) on such terms and in such manner as the directors may, from time to time, determine provided that:
(i) The maximum number of ordinary shares hereby authorised to be purchased is 823,358;
(ii) the minimum price which may be paid for any ordinary share is 25 pence (excluding expenses);
(iii) the maximum price which may be paid for any ordinary share is an amount equal to 105 per cent of the average of the middle market
quotations for an ordinary share as derived from the London Stock Exchange Daily Official List for the five business days immediately
preceding the day on which the share is contracted to be purchased (excluding expenses); and
(iv) the authority hereby conferred shall expire at the conclusion of the annual general meeting of the Company to be held in 2008, if earlier, on 8
April 2008, but a contract of purchase may be made before such expiry which will or may be executed wholly or partly thereafter and a
purchase of shares may be made in pursuance of any such contract.
Stanwix By Order of the Board
Carlisle CA3 9BA Ronald C Wood
21 November 2006 Secretary
There will be available for inspection at the registered office of the Company during normal business hours from the date of this notice until
the date of the Annual General Meeting:
(a) register of directors’ interests
(b) copies of all contracts of service relating to directors employed by the Company.
These documents will also be available for inspection during the Annual General Meeting and for at least fifteen minutes before it begins. 76
Carr’s Milling Industries PLC
Annual Report & Accounts 2006
Directory of Operations
Carr’s Milling Industries PLC
Old Croft, Stanwix, Carlisle,
Cumbria CA3 9BA
Tel: 01228 554600
Fax: 01228 554601
Website: www.carrs-milling.com
Animal Feed Supplements Inc
East Highway 212,
PO Box 188, Belle Fourche,
South Dakota 57717 USA
Tel: 00 1 605 892 3421
Fax: 00 1 605 892 3473
Animal Feed Supplements Inc
PO Box 105,
101 Roanoke Avenue, Poteau,
Oklahoma 74953 USA
Tel: 00 1 918 647 8133
Fax: 00 1 918 647 7318
Caltech
Solway Mills, Silloth, Wigton,
Cumbria CA7 4AJ
Tel: 016973 32592
Fax: 016973 32339
Crystalyx Products GmbH**
Am Stau 199-203, 26122,
Oldenburg, Germany
Tel: 00 49 441 2188 92142
Fax: 00 49 441 2188 92177
Carrs Billington Agriculture
(Operations)*
Parkhill Road,
Kingstown Industrial Estate,
Carlisle CA3 0EX
Tel: 01228 529 021
Fax: 01228 554 397
Carrs Billington Agriculture
(Operations)*
Lansil Way, Lancaster LA1 3QY
Tel: 01524 597 200
Fax: 01524 597 219
Carrs Billington Agriculture
(Operations)*
High Mill, Langwathby, Penrith,
Cumbria CA10 1NB
Tel: 01768 889 800
Fax: 01768 889 807
Carrs Billington Agriculture
(Operations)*
Cold Meece, Stone,
Staffordshire ST15 0QW
Tel: 01785 760 535
Fax: 01785 760 888
Carrs Billington Agriculture
(Operations)*
Powhill, Kirkbride,
Cumbria CA5 5AJ
Tel: 01697 352 229
Fax: 01697 352 248
Carrs Billington Agriculture
(Operations)*
Uredale Mill, Askrigg, Leyburn,
North Yorkshire DL8 7HZ
Tel: 01969 650 229
Fax: 01969 650 770
Carrs Fertilisers, Invergordon
Inverbreakie Industrial Estate,
Invergordon, Ross-shire IV18 0QN
Tel: 01349 853 745
Fax: 01349 854 066
Carrs Fertilisers, Montrose
River Street, Montrose,
Angus DD10 9RT
Tel: 01674 678 400
Fax: 01674 671 318
Carrs Fertilisers, Silloth
The Wath, Silloth, Wigton,
Cumbria CA7 4PH
Tel: 016973 32333
Fax: 016973 32279
Carrs Billington Agriculture
(Sales), Annan
25 High Street, Annan,
Dumfriesshire DG12 6AE
Tel: 01461 202 772
Fax: 01461 202 712
Carrs Billington Agriculture
(Sales), Barnard Castle
Montalbo Road, Barnard Castle,
Co Durham DL12 8ED
Tel: 01833 637 537
Fax: 01833 638 010
Carrs Billington Agriculture
(Sales), Buchlyvie
Main Street, Buchlyvie,
Stirling FK8 3NQ
Tel & Fax: 01360 850 372
Carrs Billington Agriculture
(Sales), Carlisle
Montgomery Way, Rosehill
Estate, Carlisle CA1 2UY
Tel: 01228 520 212
Fax: 01228 512 572
Carrs Billington Agriculture
(Sales), Cockermouth
Unit 5, Lakeland Agricultural
Centre, Cockermouth CA13 0QQ
Tel: 01900 824 105
Fax: 01900 826 860
Carrs Billington Agriculture
(Sales), Hexham
Tyne Mills Industrial Estate,
Hexham,
Northumberland NE46 1XL
Tel: 01434 605 371
Fax: 01434 608 938
Carrs Billington Agriculture
(Sales), Milnathort
Stirling Road, Milnathort,
Kinross KY13 9UZ
Tel: 01577 862 381
Fax: 01577 863 057
Carrs Billington Agriculture
(Sales), Morpeth
20c Coopies Lane Industrial
Estate, Morpeth,
Northumberland NE61 6JN
Tel: 01670 503 930
Fax: 01670 504 404
Carrs Billington Agriculture
(Sales), Perth
Highland House,
St Catherine’s Road,
Perth PH1 5YA
Tel & Fax: 01738 643 022
Carrs Billington Agriculture
(Sales), Brock
Brockholes Way,
Claughton Trading Estate,
Lancaster Old Road,
Claughton on Brock,
Preston PR3 0PZ
Tel: 01995 643 200
Fax: 01995 643 220
Carrs Billington Agriculture
(Sales), Gisburn
Pendle Mill, Mill Lane, Gisburn,
Clitheroe, Lancashire BB7 4ES
Tel & Fax: 01200 445 491
Carrs Billington Agriculture
(Sales), Hawes
Burtersett Road, Hawes,
North Yorkshire DL8 3NP
Tel: 01969 667 334
Fax: 01969 667 335
Carrs Billington Agriculture
(Sales), Leek
Macclesfield Road, Leek,
Staffordshire ST13 8NR
Tel & Fax: 01538 383 277
Wallace Oils, Carlisle
Stephenson Industrial Estate,
Willowholme, Carlisle,
Cumbria CA2 5RN
Tel: 01228 534 342
Fax: 01228 590 820
Wallace Oils, Dumfries
Heath Hall, Dumfries,
Dumfriesshire DG1 3NX
Tel: 01387 250 525
Fax: 01387 250 656
Wallace Oils, Stranraer
Droughduil, Dunragit,
Stranraer DG9 8QA
Tel & fax: 01581 400 356
Afgritech**
Old Croft
Stanwix, Carlisle
Tel: 01228 554600
Fax: 01228 554601
Bibby Agriculture**
Dairy Centre
Fair Lane, Carmarthen
SA31 1RX
Tel: 01267 232 041
Fax: 01267 232 374
Bibby Agriculture**
1A Network House
Badgers Way
Oxon Business Park
Shrewsbury, Shropshire
SY3 5AB
Tel: 01743 237 890
Fax: 01743 351 552
Bendalls
Brunthill Road,
Kingstown Industrial Estate,
Carlisle CA3 0EH
Tel: 01228 526 246
Fax: 01228 525 634
R Hind
Kingstown Broadway,
Kingstown Industrial Estate,
Carlisle CA3 0HA
Tel: 01228 523 647
Fax: 01228 512 712
Carrs MSM
Unit 1 Spitfire Way,
Hunts Rise,
South Marston Park,
Swindon, Wiltshire SN3 4TX
Tel: 01793 824 891
Fax: 01793 824 894
Carrs Flour
Solway Mills, Silloth, Wigton,
Cumbria CA7 4AJ
Tel: 016973 31661
Fax: 016973 32543
Greens Flour
Station Road, Maldon,
Essex CM9 4LQ
Tel: 01621 852 696
Fax: 01621 854 525
Hutchisons Flour
East Bridge, Kirkcaldy,
Fife KY1 2SR
Tel: 01592 267 191
Fax: 01592 641 805
John Stronach
Solway Mills, Silloth, Wigton,
Cumbria CA7 4AJ
Tel: 016973 31456
Fax: 016973 32808
B&A Travel
18 Main Street, Beith,
Ayrshire KA15 2AA
Tel: 01505 504 547
Fax: 01505 504 812
* associate company
** joint venture company Designed and produced by corporateprm, Edinburgh and London. www.corporateprm.co.uk
01 Financial Highlights
02 Chairman’s Statement
04 Chief Executive’s Review
08 Operating and Financial Review
12 Board of Directors
12 Registered Office and Advisers
13 Directors’ Report
16 Corporate Governance
19 Independent Auditors’ Report
20 Directors’ Remuneration Report
24 Consolidated Income Statement
25 Consolidated and Company Statement
of Recognised Income and Expense
26 Consolidated and Company Balance
Sheet
27 Consolidated and Company Cash
Flow Statement
28 Principal Accounting Policies
33 Notes to the Financial Statements
73 Five Year Statement
75 Notice of Annual General Meeting
76 Directory of Operations
Financial Highlights
• Revenue up 26% to £242.6m
• Profit before tax down 39% at £6.3m
• Adjusted profit* before tax up 9% at £7.3m
• Basic earnings per share down 45% at 51.0p
• Adjusted earnings per share
*
up 17% to 59.7p
• Dividend up 13% to 18.0p per share
• Strong operating cash generation
* excluding non-recurring items and amortisation of intangible assets
agriculture
page 5
food
page 6
Carr’s Milling Industries activities are
focussed on Agriculture, Food and
Engineering with increased Annual Sales of
£242.6m Carr’s Milling Industries PLC
Old Croft, Stanwix
Carlisle CA3 9BA
www.carrs-milling.com
Carr’s Milling Industries PLC Annual Report & Accounts 2006
organic
growth
Carr’s Milling Industries PLC
Annual Report & Accounts 2006 ### summary: |
NAHL Group plc
Annual report and accounts
2014
NAHL Group plc Annual report and accounts 2014 NAHL Group plc is a leading
consumer marketing business
focused on the UK legal services
market. Our core brand,
National Accident Helpline (NAH),
was established in 1993, and since
then the Group’s business has
grown to an industry-leading
position as an outsourced
marketing services provider.
As the nation’s most
searched for and most
trusted Personal Injury (PI)
brand NAH attracts around
240,000 consumer contacts
per annum.
We listen to our consumers
and provide dedicated
support when they need
it most. Using experience
gained over 20 years we
determine if they have a
genuine claim and connect
them to an expert solicitor
to assist them
Front Cover:
Jenna Reid
Contact Centre Team Manager 1 NAHL Group plc
Annual report and accounts 2014 Strategic report
2011 2013 2012 2014 2011 2013 2012 2014 2011 2013 2012 2014
(25.3m)
(14.0m)
(4.8m)
1.2m
Debt
Cash
6.0
6.8
9.8
12.7
Net Cash/(Debt) Underlying operating profit £m
34.7
39.2 39.7
43.8
Revenue from continuing operations £m
Net cash/(debt) Underlying operating profit
2
£m
2011 2013 2012 2014 2011 2013 2012 2014 2011 2013 2012 2014
(25.3m)
(14.0m)
(4.8m)
1.2m
Debt
Cash
6.0
6.8
9.8
12.7
Net Cash/(Debt) Underlying operating profit £m
34.7
39.2 39.7
43.8
Revenue from continuing operations £m
2011 2013 2012 2014 2011 2013 2012 2014 2011 2013 2012 2014
(25.3m)
(14.0m)
(4.8m)
1.2m
Debt
Cash
6.0
6.8
9.8
12.7
Net Cash/(Debt) Underlying operating profit £m
34.7
39.2 39.7
43.8
Revenue from continuing operations £m
Revenue from continuing operations
1
£m
+15.3%
Enquiries increased by 15.3%.
£43.8m
Revenue from continuing operations
1
increased by 10.4% to £43.8m (2013: £39.7m).
29%
Underlying operating profit
2
margin
increased by 4 percentage points to 29%
(2013: 25%).
Financial
– Revenue from continuing operations
1
up
10.4% to £43.8m (2013: £39.7m)
– Underlying operating profit
2
up 29.3% to
£12.7m (2013: £9.8m)
– Underlying operating profit
2
margin increased
by 4 percentage points to 29% (2013: 25%)
– Excellent cash generation with 97.6% operating
cash conversion from continuing operations
1
– Robust balance sheet with net cash of £1.2m at
period end (net debt of £4.8m at 31 December 2013)
– Basic EPS of 20.6p (23.0p from continuing operations)
– Board proposed final dividend of 10.7p giving total
dividend of 15.7p
Operational
– Strong enquiry growth of 15.3% delivered from
increased market share in all areas
– 76% of enquiries generated from faster growing
non-RTA and medical negligence sectors
– Launched Stop Nuisance Calls campaign to drive
out unsolicited texts and calls
– Post period end acquisition of Fitzalan Partners extends our
core marketing and panel management expertise into another
segment of the fragmented consumer legal services sector
Strategic report
Highlights 1
Our business 2
Our market 3
Chairman’ s statement 4
Business model 6
Business model in action 8
Chief Executive’ s review 12
Strategy for growth 16
Chief Financial Officer’s review 18
Risks 21
CSR – Thought leadership 22
CSR – Our people 24
CSR – Our community 26
Governance
Board of Directors 28
Directors’ report 30
Corporate governance report 31
Directors’ remuneration report 33
Statement of Directors’ responsibilities 39
Contents
Highlights
Financials
Independent Auditor’ s report 40
Consolidated statement of
comprehensive income 41
Consolidated statement of
financial position 42
Company balance sheet 43
Consolidated statement of
changes in equity 44
Company statement of total
recognised gains and losses 45
Consolidated cash flow statement 46
Notes to the financial statements 47
Other information
Advisors 70
Glossary 71
1 Continuing operations excludes the demerged PPI
Claimline division and a legacy ATE insurance product
used prior to enactment of the Legal Aid, Sentencing
and Punishment of Offenders Act 2012 (LASPO) on 1
April 2013
2 Underlying operating profit excludes pre-LASPO ATE
items, share-based payments and one-off items NAHL Group plc 2
Annual report and accounts 2014 Strategic report
1993
Founded
2015
Fitzalan
Partners
acquired
1994
First national
press
adverts
2010
Underdog
created
2014
NAHL Group
plc listed
on AIM
2014
Over 2m
consumers
helped
1998
Contact centre
opened
Marketing spend in 2014
£23m
Experienced LSAs
60
Specialist PLFs
50
Stop Nuisance Calls
We do not cold call or send spam
texts or emails. We are acutely
aware of how invasive and upsetting
nuisance calls can be and believe
this unscrupulous practice should
be stamped out. In October 2014 we
launched our Stop Nuisance Calls
campaign calling upon the
government to take a much stronger
stance against the offenders in UK
industry and to proactively support
consumers who are subject to millions
of nuisance calls every year. On
25 February 2015 the Government
increased penalties and lowered the
threshold for imposing fines, which is
a positive first step.
Connecting
Once the LSA has established all the relevant
facts and details the consumer is connected
directly to a PLF. We connect around 80,000
qualified PI enquiries to our panel of 50
specialist PLFs each year. Our PLFs value
the consistent quality and mix of enquiries.
Without the service which NAH provides
thousands of genuine PI victims would be
left without a route to justice.
We believe that access to justice is a
fundamental right and our business helps
secure this for hundreds of people every
week. For more than 20 years National
Accident Helpline has helped millions of
people who have suffered a genuine
injury through no fault of their own.
Our business
Our history
Listening
Our Legal Service Advisors (LSAs) are
trained to help consumers understand if they
have a valid claim. LSAs are experienced at
identifying claims with merit and only pass
these across to our Panel Law Firms (PLFs).
Critics of the PI sector make sweeping
statements about fraudulent claims
without due consideration for the
essential assistance that NAH and the PI
sector provides to genuine claimants.
Attracting
We understand that Personal Injury victims
can feel like the Underdog when making a
claim and many are not comfortable
contacting a solicitor directly. Consumers
see us as approachable experts who will
listen and advise in an empathetic way.
Our NAH brand and marketing activity
generated around 248,000 inbound consumer
contacts in 2014. We do not cold call and we
lobby against nuisance marketing. 3 NAHL Group plc
Annual report and accounts 2014 Strategic report
%
75
50
25
RTA Non-RTA Medical
negligence
*Compound Annual Growth Rate 2012-14
Source: CRU analysis 2014 and management estimates
-0.8%* +7.1%* +12.4%*
PI market % split of claims NAH % split of enquiries
Our market
We have a leading position in
the PI market and NAH’s focus
is on the higher margin, faster
growing segments.
The PI market is large and fragmented with approximately one million claims per
annum. Claims can be divided into three segments: Road Traffic Accident (RTA);
non-Road Traffic Accident (non-RTA) and medical negligence. Whilst over three
quarters of the overall PI market comprises RTA claims, NAH’s focus remains on
the higher margin, faster growing segments of medical negligence and non-RTA
claims. These accounted for 76% of NAH’s total qualified enquiries passed on to
PLFs in 2014.
The UK PI market is relatively flat, in overall terms, but medical negligence is
growing at about 12%
1
and non-RTA at about 7%
1
pa. NAH’s estimated market
shares are 1.9%
2
in RTA, 11.6%
2
in non-RTA and 5.8%
2
in medical negligence. The
regulatory environment is driving industry consolidation with a 56% reduction
in the number of regulated claims management companies as at 31 March 2014
3
.
1 Source: Compensation Recovery Unit (CRU) analysis 2014
2 Source: CRU analysis 2014 and management estimates
3 Source: Claims Management Regulator (CMR) Annual Report 2013/14
Market overview
NAH’s focus is on higher growth segments
1m
Approximately one million PI claims per annum.
4%
NAH market share in PI.
Source: CRU analysis, 2014 and management estimates NAHL Group plc 4
Annual report and accounts 2014 Strategic report
Our results continue to demonstrate
the importance and value of our NAH
brand and marketing expertise as
we continue to generate increasing
numbers of quality enquiries for our
Panel Law Firms.
Chairman’s
statement
I am pleased to report the Group’s
first full-year results, for the year
ended 31 December 2014, since the
Company’s IPO on the AIM market
of the London Stock Exchange on
29 May 2014.
Steve Halbert
Chairman
Summary of financial performance
NAHL Group plc has performed well in its
first year as a listed company, with revenue
from continuing operations of £43.8m, up
10.4% (2013: £39.7m). This translated into an
increase in underlying operating profit from
continuing operations of 29.3%, up from
£9.8m to £12.7m.
Underlying profit before tax from continuing
operations, before pre-LASPO (Legal Aid,
Sentencing and Punishment of Offenders
Act 2012) After The Event insurance (ATE)
profits, share-based payments and one-off
items, also increased to £13.0m (2013:
£5.4m). Earnings from continuing operations
per share were 23.0p (2013: 25.1p) the
reduction is due to pre-LASPO ATE profits
in 2013, which is a legacy item.
During the period, in line with our strategy
post-LASPO, we sold PPI Claimline Limited,
resulting in a loss from discontinued
operations of £1.0m. Final reported figures
are shown in note 3 to the financial
statements.
NAHL’s business model within the PI sector,
operating through our successful NAH
subsidiary, continues to be highly cash
generative, with a 97.6% (2013: 106.3%)
conversion of operating profit from
continuing operations into cash. The balance
sheet is robust and at the period end we had
cash of £13.6m (2013: £14.2m). Our balance
sheet also shows £5.9m of interest-bearing
loans and borrowings (2013: £6.9m) and
non-interest-bearing liabilities of £6.5m
(2013: £12.1m) relating to the legacy
pre-LASPO ATE product, which we expect
will be substantially repaid in 2015 and 2016,
giving an effective adjusted net cash position
of £1.2m (2013 net debt of £4.8m) at
31 December 2014.
Final dividend
The Board proposes, subject to approval of
shareholders at the Annual General Meeting
to be held on 27 May 2015, a final dividend of
10.7p per share payable on 29 May 2015 to
ordinary shareholders registered on 24 April
2015. Together with our interim dividend
already paid of 5.0p per share, this takes
total proposed distributions to 15.7p per
share representing 68% of earnings from
continuing operations per share of 23.0p. 5 NAHL Group plc
Annual report and accounts 2014 Strategic report
10.7 p
Final dividend.
Business review
The Group’s results reflect a strong trading
performance, both in terms of our enquiry
generation and the affordability of those
enquiries to our PLFs. Enquiry generation
shows volume up 15.3%. Pleasingly, the mix
of enquiries has continued its trend towards
the higher value categories, and about 76%
of the Group’s enquiries are generated from
the faster growing non-RTA and medical
negligence sectors.
Revenue growth from enquiry generation
(referred to as solicitor income) is up 11.7%
on 2013. This growth is derived from a
core UK PI market that continues to be
broadly static in terms of overall enquiry
volumes and we are confident that we have
continued to gain market share. This has
been achieved through a combination of
factors, from the effectiveness of our
Underdog advertising campaigns, through
increasing sophistication in our Search
Engine Optimisation (SEO) and digital
strategies, to the effective call handling
and direct transfer of consumers to our PLFs.
The Group continues to invest in its
multi-channel approach to marketing and
NAH, supported by the Underdog, remains
the most trusted and recognised brand in
the sector.
Revenue from the sale of products (medicals,
insurance, insight and costs), which are
related to the various services required by
our PLFs to run a case efficiently, was up
2.1% in 2014. This is in part a reflection of the
decline in products related to pre-LASPO
cases. However, this is more than offset by
11.2% growth in our continuing products.
Looking ahead, our aim is to see the Group’s
continuing product income grow in line with
solicitor income.
Board appointment
In November 2014, I was delighted to
welcome Gillian Kent to the Board. Gillian
has significant digital experience from her
time as CEO of MSN (Microsoft) UK and
Propertyfinder.com and brings valuable
expertise to the Board as we look to other
lead generation opportunities.
Acquisition of Fitzalan Partners
The acquisition of Fitzalan Partners
(Fitzalan), completed in February 2015 for up
to £4.3m, provides us with a platform to use
our lead generation and SEO expertise in a
sector with close parallels to our core PI
business.
Conveyancing is a significant sector in the
personal legal services market, and we are
excited about the opportunities that this
acquisition brings. We expect Fitzalan to be
immediately earnings enhancing and to
broaden our platform for delivering
long-term, sustainable growth.
We look forward to working with the
Fitzalan team and continuing their
impressive growth story.
Looking forward
Our results continue to demonstrate the
importance and value of our well recognised
and trusted NAH brand, and the strength
and expertise of our marketing strategy.
We have continued to generate increasing
numbers of high quality enquiries for our
PLFs. Early signs from the beginning of 2015
are encouraging and we have started the
year in line with our expectations.
Our strategy of working across the wider
personal legal services market is gaining
momentum and we expect growth from our
core PI market and a positive contribution
from Fitzalan in the conveyancing market.
The business has seen considerable change
during 2014 and delivered excellent results.
I would like to thank our many stakeholders,
and our employees in particular, for their
continued support and contribution to our
success.
We look forward to 2015 with enthusiasm.
Steve Halbert
Chairman NAHL Group plc 6
Annual report and accounts 2014 Strategic report
Applying brand
and marketing
expertise to attract
consumers
Inbound contacts
become quality
enquiries
see our
business
model
in action
on pages
8 and 9
Gross leads in 2014
248,000
Clean leads in 2014
110,000
National Accident Helpline’s
core business model is based on
enquiry origination through direct
response TV and online marketing,
connecting consumers who have
suffered a non-fault Personal Injury
with specialist law firms.
Business
model
Research
1
shows that consumers are not
always comfortable dealing directly with a
solicitor and the NAH brand provides the
consumer with the confidence that they will
be given the right support and advice to
start their claim.
Through the strength and trust generated by the
NAH brand and our Underdog character we
attracted around 248,000 consumer contacts in
2014 either via website visits, inbound telephone
contact or live web chat. Our contact centre
screens out spurious claims and claims where
the victim is at fault, along with hoax calls and
duplicates, resulting in a bank of about 110,000
clean leads.
NAH does not cold call. All inbound
consumer leads are generated through
NAH’s advertising and online activity and
come through to a central, UK-based contact
centre where they speak to an LSA. The LSA
is a well-informed but empathetic
intermediary between the consumer and the
law firm and helps the consumer to
understand if they have a claim.
Our LSAs receive extensive training and use
specific criteria to filter consumer contacts
effectively into qualified enquiries with good
prospects of success. With almost two thirds of
initial leads being sifted out of the process,
almost 83,000 enquiries are passed through to
specialist PLFs to proceed with a claim.
1 Source: Independent research, The Nursery, 2014 7 NAHL Group plc
Annual report and accounts 2014 Strategic report
Satisfied
solicitors
see our
business
model
in action
on pages
10 and 11
Satisfied
consumers
Connecting
consumers and
solicitors
seamlessly
Qualified enquiries in 2014
83,000
We have helped over 2 million
consumers since 1993.
More consumers search for
NAH than any other PI brand.
Source: Google, December 2014
More than half of our PLFs
have worked with us for over
10 years.
2m
10 years
Once the lead has been qualified, the enquiry
and all related information is transferred
via direct electronic transfer to one of 50
specialist law firms on NAH’s nationwide
panel. The consumer does not have to repeat
information already shared with NAH and
this results in improved conversion rates
and improved profitability for PLFs.
The solicitor then conducts a further risk
assessment to decide whether to proceed
with the claim and contracts directly with
the consumer (thereafter referred to as the
claimant). According to PLF data we believe this
results in approximately 48,000 running cases. Strategic report Annual report and accounts 2014
NAHL Group plc 8
Strategic report Annual report and accounts 2014
NAHL Group plc 8
Business model in action
brand awareness
strong
NAH has significant experience in brand building and
integrated multi-channel marketing and we conduct
extensive market research programmes to enhance
our understanding of the consumer and their needs. As
a result, we are very effective in attracting the types of
enquiries that our PLFs find valuable.
NAH has invested significantly in TV
advertising to build awareness of the brand
and the services we offer. With a highly
differentiated advertising campaign that
uses the Underdog character to engage
consumers, NAH has the highest branded
recognition
1
of any PI TV advert and the
highest prompted awareness
2
of any brand in
our sector. Consumers also say NAH is the
brand they would most trust to act on their
behalf
1
and the brand they would contact
first, clearly demonstrating how strongly
NAH’s advertising campaign and brand
resonates with consumers.
As the digital and online landscape evolves
consumers are increasingly using the internet
as a search tool to find out more about claiming.
NAH is well placed to capitalise on this trend.
TV advertising has built awareness to such a
level that NAH is the most searched for PI
brand by name
3
.
We lead the field in digital marketing
and have
a highly optimised bidding strategy for our
online Pay Per Click (PPC) campaigns
3
.
According to Google, NAH has a greater
number of advert appearances at a higher
rank and with a better click through rate
when compared to our peer set. Importantly,
this is achieved without attracting a
disproportionately high cost per click relative
to the PI industry benchmark.
Another essential component of our digital
strategy is delivering organic enquiries
through SEO and public relations activities.
This has proved highly effective with organic
enquiries increasing significantly year on year.
86% of our consumers
choose to go online and
of those, nearly 50%
start their claim using
our online claim form.
NAH invests in website
design to ensure
conversion is optimised
at every stage.
www.underdog.co.uk
1 Source: Independent brand tracking, The Nursery, 2014
2 Source: Independent research, The Nursery, 2014
3 Source: Google, February 2015 Strategic report Annual report and accounts 2014
NAHL Group plc 9 9
Annual report and accounts 2014
NAHL Group plc
Strategic report
Photo courtesy of Portsmouth News
Satisfied consumer
Katie’s story
Katie’s mother contacted NAH to establish whether they might be
able to claim against the hospital which had failed to diagnose her
daughter’s appendicitis for 17 days. Katie was given multiple
incorrect diagnoses and finally had an appendectomy two months
later, when they discovered her appendix had wrapped itself
around other organs causing avoidable damage.
“When I first approached NAH I used web chat. I’d seen the advert on
TV, Googled it and then spoke to an advisor who was very helpful
and sympathetic. Right from the start to the end there were no
complaints whatsoever. NAH put me straight through to a solicitor
and I was kept informed right the way through the process. I would
rate them 5/5, everything was absolutely spot on. The hospital
swiftly admitted liability and our claim was successful. I believe
that if this outcome can help prevent this happening to someone else
in the future, then justice will have been served for Katie.”
Julie
Katie’s mother
NAH has ten times more reviews on Trustpilot than our competitors,
with an average rating of 8.7 across more than 2,000 reviews.
Source: trustpilot.co.uk, February 2015
8.7 a v er age r at i n g
In 2010 NAH created the
Underdog character to feature
in advertising primarily across
TV and digital media.
The Underdog portrays what it is like to be
‘the little guy’. He characterises how NAH’s
core consumer group feels about making a
claim when they have suffered a personal
injury and illustrates the potential for every
consumer to access justice and the
compensation they deserve.
£200m
NAH has invested more than
£200 million in marketing over
the past 20 years.
85%
Our NAH brand and Underdog are well
recognised, with our prompted brand
awareness at 85%, 17% ahead of our
nearest competitor.
Source: Brand tracking, December 2014 Strategic report Annual report and accounts 2014
NAHL Group plc 10
Business model in action
connecting
consumers and solicitors seamlessly
On average our PLFs
rate NAH as nine out of
ten for our consultancy
and performance audit
services
2
.
9/10
In 2014 NAH connected around 83,000
consumers to our panel of 50 specialist law
firms across the UK. Our PLFs cover all areas
of PI claims and are selected based on their
ability to deliver quality advice and
outcomes for consumers and abide by a
rigorous Service Level Agreement. It is vital
to the NAH brand that from the first call to
case conclusion the consumer experience is a
positive one. We conduct regular audits of
our PLFs and share best practice to ensure we
achieve this important goal.
Our research confirms that many consumers are not
comfortable dealing directly with a solicitor, (only 22%
1
choose to contact a solicitor when initially considering
making a claim). The NAH brand provides consumers
with the confidence and reassurance that they will be
given the appropriate support and advice from the
outset, without the worry of dealing with legal jargon
or hidden fees.
Satisfied solicitor
“We started working with NAH in 1995. They understand
consumers’ needs and have built a brand which consumers
trust. Their Legal Services Advisors are very effective in
filtering calls to ensure we receive quality enquiries from
genuine claimants. Their solicitor services help our firm to
process claims efficiently and profitably, and importantly,
improve the experience for the claimant.
They lobby government effectively and actively champion
the cause of the underdog with campaigns such as Stop
Nuisance Calls. They are truly passionate about delivering a
positive consumer experience and conduct regular solicitor
firm audits and share best practice among the Panel Law
Firms. We find their approach innovative and professional
and enjoy working together to deliver access to justice to our
consumers.”
David Byrne
Partner, Scott Rees & Co Solicitors
1 Source: Independent research, The Nursery, 2014
2 Source: Average of survey results following NAH visits, 2014 Strategic report Annual report and accounts 2014
NAHL Group plc 11
connecting
Once their enquiry is qualified, 95% of
consumers choose to be transferred
immediately to a solicitor using our direct
call transfer technology. This supports
case conversion and delivers a better
consumer experience.
50
NAH works with 50 of the leading PI law
firms in the country, more than half of
which we have partnered with for over
ten years.
95%
direct call
transfers
As a market leader with years of experience
and a robust business model, solicitor firms
are keen to work with us. Our scale and
marketing expertise means we are able to
deliver the certainty of consistent volumes
of the right mix of enquiries. This
supports our PLFs to optimise
business performance by effectively
planning budgets and resource
and managing growth in a
sustainable way. PLFs also use
services from NAH such as
ATE insurance and medical
assessments which help
them to run cases
effectively, providing an
additional revenue stream
for NAH.
NAH’s national solicitor network comprises four
panels:
Personal Injury Panel: covering employment liability, occupier liability,
public liability and RTA cases.
Medical Negligence Panel: covering medical negligence cases which are
more complex and specialised.
Specialist Panel: covering a number of different enquiry types which fall
outside the other panels, such as industrial disease and international cases.
Associate Panel: this panel does not take enquiries from NAH, but takes
products such as ATE insurance.
Katy Philpin
Contact Centre Team Manager NAHL Group plc 12
Annual report and accounts 2014 Strategic report
We have achieved positive results in
a period of considerable change for the
business. We have made good progress
with our growth strategy, supported
by our first acquisition.
We have made positive progress
in 2014 and despite our leadership
position, the Group has plenty of
opportunity to increase our share
in a large, fragmented market.
Chief
Executive’s
review
Overview
2014 was an important year for NAHL as we
took the step to become a quoted company.
Throughout the year trading remained
strong and we are delighted to report results
ahead of market expectations. The growth
achieved is testimony to the professionalism
of our team and the continued support that
we receive from our consumers, our PLFs and
our partners.
The PI market has undoubtedly gone through
a period of dramatic change in the last few
years. The new regulatory regime is now
well embedded. NAH goes from strength to
strength on the back of a single minded
approach to serving our PLFs and retaining
our position as the UK’s leading consumer
business in the PI market. Our focus on
quality and our passion for providing access
to justice for those with a valid injury claim
remains at the core of our proposition.
Results
For the past 20 years we have been
committed to our ethical approach in a
challenging sector. 2014 saw a significant
growth in the NAH business with a 15.3%
increase in enquiries driving a 10.4%
increase in revenue and a 29.3% operating
profit improvement. This growth resulted
from improved operational efficiency, more
effective marketing, and an increase in RTA
driven by market consolidation, as many
small claims management companies ceased
operating in the PI market. Our brand
leadership enabled us to take advantage of
this and increase our share in all of the key
sectors in which we operate. Our enquiry
growth has also been strong in our target
sectors of non-RTA and medical negligence
which has enabled us to retain the high
quality mix of enquiries that our PLFs value.
Market overview
The PI market is estimated at £3bn
1
and has
approximately one million claims per
annum. The market remains relatively flat,
although medical negligence is growing at
12.4%
1
and non-RTA at 7.1%
1
pa. The market
has seen some consolidation, however, it
remains fragmented with our overall share
at an estimated 4%
2
, with market shares of
1.9%
2
in RTA, 11.6%
2
in non-RTA and 5.8%
2
in medical negligence.
Russell Atkinson
Chief Executive Officer
1 Source: CRU analysis 2014
2 Source: CRU analysis and management estimates 13 NAHL Group plc
Annual report and accounts 2014 Strategic report
No. 1
NAH is the number one daytime TV and
online spender in the PI sector.
Source: Neilsen Media Research 2014
Key strengths
NAH benefits from a number of
strengths which make it the ideal
marketing and services provider for
legal practices, connecting injured
parties with high quality PLFs and
promoting access to justice within
the UK:
• Market leader which is well
positioned to benefit from continued
consolidation.
• Well recognised, trusted brand
supported by differentiated
marketing, established through
more than £200 million of media
spend since 1993.
• Brand media spend, marketing
know-how and PLF relationships
that act as barriers to entry.
• Focused on the highest growth
segments of a large, fragmented
market.
• Strong financial performance
supported by high cash generation
and a robust balance sheet.
• Experienced management team with
proven ability to manage change.
1 Source: Independent research, The Nursery, 2014
2 Source: Google, December 2014
3 Source: Neilsen Media Research 2014
Brand
The cornerstone of our proposition is the
NAH brand and its Underdog character
which is based on insight into how our
consumers feel when making a claim.
Throughout 2014 we have continued to
strengthen our position within the PI sector
as:
• The most trusted brand on TV
1
• The most searched for online brand
by name
2
• The number one daytime TV and overall
online spender
3
• The number one in internet hits
3
The strength of the brand positioning and in
particular our trust rating has allowed us to
continue to lead the way as the market’s
leading online brand. Our expertise in
marketing has helped us to navigate our way
through the changing media landscape and
make real progress in SEO and social media.
For the past 20 years we have been
committed to the highest ethical standards
and improving those of the industry in
which we operate. We are particularly
passionate about our Stop Nuisance Calls
campaign which we launched during 2014
and the Group remains at the forefront of
efforts to drive out unsolicited texts and calls
which our consumers tell us are a real issue.
Panel Law Firms
NAH prides itself on the relationships that it
has with its PLFs, many dating back over ten
years. Throughout 2014 we have continued
to support our panel of leading specialist
injury lawyers with data and information
that will help them to understand best
practice in running cases. This continuing
investment in data sharing and advice is
designed to improve our PLFs’ profitability
and further enhance the attractiveness of
our cases.
During 2014, we have evolved and developed
our PLF strategy. With increasing enquiries,
we work hard to ensure that we are aligned
with quality law firms who can handle large
volumes of caseloads with the highest
calibre of advice to our consumers, whilst
delivering a cost effective service. PLFs need
depth of resources, both legal and financial,
to cope with constant growth in volumes.
The success of our PLFs is closely entwined
with our own success and is a significant
focus of our attention. During 2014 the
average price paid by PLFs was down 3.2%.
The membership of our Panel during 2014 has
changed in line with our expectations,
although with increasing volumes, we are
beginning to explore new partnering
arrangements that will allow us to better deal
with volume growth. This allows us to
develop alternative strategies for dealing
with high growth in volumes cost effectively,
whilst maintaining the quality of our panel.
Products
Providing first class products and services
through our key partnership relationships is
critical to our PLFs being able to process the
case efficiently. In particular ATE is the
cornerstone of ‘no win no fee’ and is
fundamental to the consumer feeling
confident in progressing a case without risk
of any legal costs.
The Group’s products continue to perform
broadly in line with our expectations,
although it has become clear that we need to
adapt our non-medical negligence ATE
product in the light of post-LASPO market
practices. As a result we expect to launch a
new product in the first half of 2015 that
should be better suited to current market risk
and pricing, and we expect this will deliver
increased volumes during the second half of
the year.
We have also trialled and will shortly be
launching an enhanced medical negligence
screening service. This service will
accelerate the case progression and reduce
cost risk for our PLFs, bringing more
certainty to the legal process. We expect to
see material benefit from 2016. NAHL Group plc 14
Annual report and accounts 2014 Strategic report
Our values
1 We are curious…
We question the status quo, seek to
understand our customers and resolve
how we could do things better for them.
2 We are driven…
We value achieving results, we strive
to make them happen, we want to
build something meaningful and have
fun while we do it.
3 We are passionate…
We care about what we do and how we
do it, we empathise with our customers
and keep our promises.
4 We are unified…
We are one team committed to acting
with integrity, taking individual
responsibility for our actions whilst
trusting and respecting each other.
We set ourselves higher
standards and our values
are core to what we do.
They distinguish us in our
sector.
Our vision
To be the UK’s leading marketing
and services provider to our
chosen legal markets.
Our mission
To be the partner of choice for law
firms seeking to:
attract and retain customers;
utilise best in class products
and services; and
optimise business performance.
Operations
Our contact centre in Kettering dealt with
248,000 consumer contacts in 2014 (2013:
225,000) and is the crucial link between the
consumer and the solicitor that will handle
their case. Our ability to filter calls and pass
on only cases with real merit is critical to the
value that our PLFs get from our relationship.
Throughout 2014 we have been successful in
eliminating a larger number of spurious and
hoax calls whilst increasing the conversion
of leads to enquiries. It is critical that we
only pass enquiries that have a significant
chance of success to our panel. Calls with
higher chances of success are clearly more
valuable to our PLFs. We continue to drive
improved performance in NAH and our PLFs.
Our IT team has developed web services
platforms that result in a seamless
electronic data transfer for the consumer
without the need to repeat information to
the PLF. This is a key factor in conversion
improvements and is an area for continued
development going forward.
People
Our people are at the heart of what we do and
fundamental to our continued success. Our
employee engagement programme has
continued throughout 2014 with a number
of initiatives including:
• The launch of our Save As You Earn
(SAYE) share scheme which was taken up
by 52% of our staff at the time of IPO.
• Our biannual employee survey which was
completed by 89% of staff and showed a
significant improvement across all
comparable metrics.
• The launch of an award-winning
employee benefits programme.
• The launch of a new management
development programme across the
employee base, and a new values
programme.
• The award of the Investors in People (IiP)
standard.
I am particularly proud of the effort that we
put into developing our talent and
communicating with our team especially as
they are the first point of contact for our
consumers.
Chief Executive’s review
continued
National Accident Helpline employees in our Kettering office 15 NAHL Group plc
Annual report and accounts 2014 Strategic report
90%
90% of our inbound calls are answered
within ten seconds.
Acquisition
The Group acquired Fitzalan in February
2015 signalling our commitment to strategic
growth. Fitzalan was founded in 2011 and
provides lead generation services to law
firms and surveyors in the residential
conveyancing sector. The addition of
Fitzalan to the Group allows us to extend our
reach into broader legal markets and utilise
our advantage and skill set from the PI
market to capitalise on the significant
growth opportunities already identified. We
look forward to the contribution Fitzalan will
make to the wider Group and welcome the
team to NAHL.
Outlook
We have made good progress throughout
2014 and we intend to continue this journey
in 2015 driven by controlled enquiry growth
and innovative product and service
development.
The PI market remains large and fragmented
and despite our leadership position, the
Group has plenty of opportunity to continue
increasing its market share and develop our
product offerings. Whilst we expect the
consolidation gains in RTA that have
contributed to the growth in 2014 to have
been largely realised, the opportunity to
continue to develop our market share in our
key higher value target segments of
non-RTA and medical negligence remains.
The continued development of our PLF
strategy will ensure that we work with high
quality law firms capable of handling
increasing numbers of enquiries. This will
ensure we continue to manage volume
growth.
The development of a new ATE product and
the launch of the enhanced medical
screening service will ensure we continue to
benefit from good returns in the products
area.
There are no significant planned regulatory
developments that will have any material
effect on our progress and our PLFs can
continue to develop their business as a result
of working with NAH. The NAH brand goes
from strength to strength and we are
confident this will cement our leadership
position even further.
Russell Atkinson
Chief Executive Officer NAHL Group plc 16
Annual report and accounts 2014 Strategic report
NAHL is well positioned to take
advantage of the growth opportunities
provided by the consumer legal market.
Our vision is to be the UK’s leading
marketing and services provider to our
chosen legal markets.
Strategy
for growth
Strategy
The IPO has positioned NAHL well to move into the next phase
of its growth. Over the years the Group has developed into an
acknowledged leader in supporting the legal industry by
attracting consumers, assessing their needs and providing
products and services to support the PLF. The opportunity
exists to grow by further enhancing our offerings and
supporting a wider range of legal markets.
This growth strategy is based upon the following key areas:
Market
share
growth
The legal services market is large and highly fragmented. Despite its leadership position NAHL still has
a relatively small market share in both PI and residential conveyancing. This gives us the opportunity
to focus on the key PI growth sectors of non-RTA and medical negligence to further increase our share. The
Group has historically been stronger in these markets which are perceived as more valuable by our PLFs.
Further focus on these segments can generate better value from our mix of enquiries.
In addition growth opportunities also exist at Fitzalan since internet search for conveyancing is at a
relatively early stage of its development.
Partnership
development
Over the last 18 months we have been working in partnership with our PLFs to develop data sharing across
the life of the case. NAH aggregate this data and can use it to share best practice with our partners. This
will increase firm profitability and enhance the value of our enquiries. This will allow us to understand the
return generated by our PLFs at a granular level and enable us to target our marketing more efficiently.
Providing a broader range of legal services to our PLFs, many of which offer both conveyancing and PI,
will further cement our relationships.
Product
and service
development
Extending the range of products and services, an important driver of our profitability, has a direct impact
on our results. By extending our range of services and optimising our commercial arrangements we can
further develop this part of our business.
Throughout 2014 we have been developing and testing a new type of medical negligence screening service
which will significantly reduce case lengths, handling costs and settlement times for these extremely
complex cases. Initial trials have proved successful and this service will gradually be rolled out in 2015.
We have also been investigating the opportunity to aggregate volume of quasi administrative tasks that
our PI PLFs currently perform. These can be outsourced to the Group and completed at a lower cost than an
individual firm could negotiate. During 2014 we rolled out our enhanced capture service which takes more
data during the initial call and prepares it for our PLFs. This has the benefit of increasing conversion of
enquiries as the consumer experience is seamless and the solicitor has knowledge of the consumer thus
avoiding repetitive questions.
Fitzalan presents further exciting opportunities to provide added value services to specialist areas of the
residential legal services sector.
Targeted
acquisitions
A key benefit of our plc status is the ability to utilise the cash generated in the business to fund
acquisitions. NAHL will continue to focus on a small number of right-sized income-generative
acquisitions that either add value to our core PI business or enable us to extend into related areas of
consumer law where we can replicate our model in different markets, as we have done with Fitzalan. 17 NAHL Group plc
Annual report and accounts 2014 Strategic report
The acquisition of Fitzalan represents the
Group’s first move into an adjacent
consumer legal services market. Fitzalan
was founded in 2011 out of Fridays
Property Lawyers, and is based in Hatton
Garden, London.
The company is an online marketing
specialist targeting home buyers and
sellers in England and Wales through its
four web-based platforms; Fridaysmove;
In-Deed; Surveyor Local and Homeward
Legal. Through these platforms,
Fitzalan generates confirmed leads
for conveyancing and home surveys
in England and Wales, and offers
these to PLFs and panel surveyors.
The success of the business model lies in
Fitzalan’s expertise in marketing to a large
number of consumers, processing
incoming enquiries through a full sales
cycle and converting these into confirmed
instructions rather than the partially
qualified leads typical of the rest of the
market. The conveyancing and surveying
panel firms prefer to concentrate on their
core skills and benefit from the expertise
of Fitzalan’s marketing and sales
capability, rather than try to do this
themselves. In many respects this
proposition is similar to the benefit that
NAH offers in the PI market.
Customers are attracted to the proposition
due to the assurance provided in dealing
with the company’s brands:
• Highly competitive fixed fees on
conveyancing transactions.
• Enhanced service features such as
Search Plus Protection and No Sale
No Fee.
• Quality assurance through a
comprehensive PLF service
level agreement.
• Service mediation in the event of
client complaints.
• Advice and information on the
conveyancing and surveying process.
Fitzalan currently generates enquiries
in the form of incoming calls, online
call-back requests and specific leads
generated by its web quote engines.
Confirmed conveyancing instructions
from consumers are then passed to one of
over 50 PLFs, who pay Fitzalan a
marketing fee per instruction. Additional
revenue is generated through agreements
that Fitzalan has with related suppliers
such as search and surveyor companies,
who deliver complementary services
which facilitate the customer instruction.
Fitzalan’s surveyor panel comprises
around 150 firms of Royal Institute of
Chartered Surveyors (RICS) qualified
surveyors. The business markets Home
Buyer Reports and Building Surveys to
both buyers and sellers and provides its
survey panel with a steady, controllable
workflow, allowing them to plan their
workload efficiently.
The acquisition of Fitzalan has a powerful
strategic rationale:
• It broadens NAHL’s portfolio by
providing access to a new market
within consumer legal services.
• NAHL has a similar but more mature
business model, and can generate real
value by bringing their experience to
bear in refining and extending
Fitzalan’s operations.
• There are opportunities to use NAHL’s
core skill sets and resources to grow a
closely related business.
Despite the fact that there were over 1.2m
1
residential property transactions in 2014,
both the conveyancing and the home
surveying markets are fragmented.
There is significant potential to continue
to grow Fitzalan’s market share (which is
less than 1%), and at the same time
develop new sources of business that can
significantly enhance both market share
and bottom line growth in future years.
Fitzalan Partners acquisition
we make the legal side simple
1 Source: Land Registry data, 2014
“Superb service, extremely competitive, was kept up
to date at every step and always returned my calls if
I couldn’t reach you. Would definitely recommend to
anyone involved in a sale or purchase or both. 5 star .”
Mr Michael and Mrs Sharon R
(Fridaysmove) NAHL Group plc 18
Annual report and accounts 2014 Strategic report
We are pleased to report a strong set of
results with good growth in enquiries,
revenue and profit.
NAHL’s business model is very cash
generative and we continue to return
operating cash in excess of 90% of
operating profits.
Chief
Financial
Officer’s
review
Trading results
2014
£m
2013
£m
Operating profit
(excluding share-
based payments,
one-off items and
pre-LASPO ATE) 12.7 9.8
Share-based payments (0.3) –
One-off items (0.6) –
Pre-LASPO ATE
operating profit – 9.4
Total operating profit 11.8 19.2
Financial income 0.6 0.3
Financial expense (0.3) (4.8)
Profit before tax 12.1 14.7
Operating profit from continuing activities and
before share-based payments, one-off items
and pre-LASPO ATE increased by 29.3% to
£12.7m. This was driven by good revenue
growth and an improvement in our gross profit
margins. Efficient marketing, improved
performance from SEO and an increase in the
number of enquiries due in part to market
consolidation in RTA allowed us to reduce the
cost per enquiry to our PLFs by 3.2% yet still
enjoy an increase in the overall gross margin
from 41.9% to 45.5%.
Our business model and control of central
costs ensures that increases in gross margin
convert well into operating profit and as a
result our return on sales increased from
24.7% to 29.0%; we remain on track to
achieve our target of 30%.
After allowing for share-based payments,
one-off IPO related items and financial
income and expense the business returned a
profit before tax of £12.1m which is ahead of
market expectations.
Taxation
The Group’s tax charge of £2.6m represents an
effective tax rate (ETR) of 21.5% (2013:
29.9%). The 8.4 percentage point decrease in
the ETR represents a combination of reduced
tax rates in the UK, the repayment of loan
notes in 2013 which were not fully deductable
and £480k of financial income in 2014 which
is not a taxable income to the Group.
Earnings per share (EPS) and dividend
Basic EPS is calculated on the total profit of
the Group and most closely relates to the
ongoing cash which will be attributable to
shareholders and in turn the Group’s ability
to fund its dividend programme. The
Remuneration Committee uses the same
metric in assessing the remuneration of its
Executive Directors (see remuneration
report). The Group also has a number of share
options outstanding (see note 19 of the
financial statements) which results in a
Diluted EPS.
Steve Dolton
Chief Financial Officer 19 NAHL Group plc
Annual report and accounts 2014 Strategic report
29.3%
Underlying operating profit of £12.7m
increased by 29.3%.
Basic EPS for the year was 20.6p (2013:
23.0p), the reduction is as a result of the
pre-LASPO ATE profits and Diluted EPS
was 20.2p (2013: 22.5p).
The Directors have proposed a final dividend
of 10.7p reflecting the Group’s stated policy of
paying out two thirds of its retained earnings.
The ability to pay this level of dividend is due
to the solid financial performance for the year,
a robust balance sheet with positive net cash
and the ongoing cash generative nature of the
business. With the 5.0p interim dividend paid
in October 2014 the full-year dividend will be
15.7p. The full-year dividend per share is
covered 1.5 times by the continuing
operations EPS of 23.0p.
Operating cash generation
2014
£m
2013
£m
Operating profit
(excluding share-
based payments,
one-off items and
pre-LASPO ATE) 12.7 9.8
Depreciation 0.2 0.2
Working capital
movements
(excluding
discontinued
activities) (0.5) 0.4
Net operating
cash generated
from operating
activities 12.4 10.4
Net operating
cash generated as
a percentage of
operating profits 97.6% 106.3%
NAHL’s business model is very cash
generative and we continue to return an
operating cash conversion in excess of 90%
of operating profits. In 2014 the level was
97.6% (2013: 106.3%). A major factor in our
conversion is that our solicitor income is
fully paid by direct debit within the month of
invoice and our commissions earned on our
product offerings are also received in a
timely manner.
Balance sheet
2014
£m
2013
£m
Net assets
Goodwill 39.9 39.9
Adjusted net cash:
Cash and cash
equivalents 13.6 14.2
Borrowings ( 5.9 ) ( 6.9 )
Other payables
relating to
discontinued pre-
LASPO ATE product ( 6.5 ) ( 12.1 )
Total adjusted net
cash 1.2 ( 4.8 )
Other net liabilities ( 4.9 ) ( 4.9 )
Total net assets 36.2 30.2
The Group’s net assets at 31 December 2014
were £36.2m (2013: £30.2m) reflecting the
retained earnings for the year and the
changes in the financial structure
implemented as part of the IPO.
The significant balance sheet items are
goodwill, adjusted net cash (which includes
cash and cash equivalents, borrowings and
other payables relating to a legacy pre-LASPO
ATE product) and other net liabilities.
Goodwill
The Group’s goodwill of £39.9m (2013:
£39.9m) arises from the business acquisition
of NAH. Management reviewed the goodwill
value for impairment as at 31 December 2014
and believes there are no indications of
impairment.
Adjusted net cash
The Group considers that its adjusted net
cash comprises cash and cash equivalents,
other interest-bearing loans and borrowings
and other payables relating to legacy
pre-LASPO ATE product. At 31 December
2014 adjusted net cash was £1.2m
(2013: adjusted net debt £4.8m).
Cash and cash equivalents
At 31 December 2014 the Group had £13.6m
of cash and cash equivalents (2013: £14.2m).
Since the year end the Group has utilised
£3.0m of this to fund the initial consideration
for the acquisition of Fitzalan (with a
further amount of up to £1.3m to be paid by
31 December 2015) but still retains a healthy
level of cash. All of the Group’s cash is held
in its trading entities and the Group takes
advantage of medium term deposit rates in
maximising its interest returns.
Borrowings
At 31 December 2014 the Group had £5.9m of
other interest-bearing loans and borrowings
(2013: £6.9m). The Group refinanced its
borrowing arrangements during the year
as follows:
Date due £m
31 December 2015 2.95
31 December 2016 2.95
The current rate of interest payable on these
borrowings is 2.5% above LIBOR.
Other payables relating to a discontinued
pre-LASPO ATE product
At 31 December 2014 the Group had £6.5m of
other payables relating to a legacy pre-LASPO
ATE product (2013: £12.1m). This amount is
repayable to Allianz for previously received
commissions when certain of the policies
either fail or are abandoned. The provision is
calculated using actuarial rates and is likely
to be materially repaid by the end of 2016.
Equity restructure
It is the Board’s intention at its AGM to seek
shareholder approval to restructure its
merger reserve and share premium accounts
through the normal court procedures.
This ensures that the Group has maximum
flexibility to access reserves within the
Group to support its future dividend policy. NAHL Group plc 20
Annual report and accounts 2014 Strategic report
Enquiries £‘000s
0
10
20
30
40
50
Group revenues £m
0
5
10
15
20
25
Underlying operating profit £m Net debt £m and cash conversion %
Group revenues £m
50%
75%
100%
125%
0
10%
20%
30%
40%
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013
2.5
2.7
2.8
2.7
18.3
19.4
16.1
19.0
20.8
22.1
18.9
21.7
Total
RTA
Non-RTA
Med Neg
H1 2013 H1 2014 H2 2013 H2 2014
Total
Solicitors
income
Products
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013 H1 2014 H2 2013 H2 2014
(5.4)
(4.8)
(2.0)
1.2
6.6 6.1 5.0 4.8
Debt
Cash
Cash
conversion
%
Enquiries £‘000s
0
10
20
30
40
50
Group revenues £m
0
5
10
15
20
25
Underlying operating profit £m Net debt £m and cash conversion %
Group revenues £m
50%
75%
100%
125%
0
10%
20%
30%
40%
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013
2.5
2.7
2.8
2.7
18.3
19.4
16.1
19.0
20.8
22.1
18.9
21.7
Total
RTA
Non-RTA
Med Neg
H1 2013 H1 2014 H2 2013 H2 2014
Total
Solicitors
income
Products
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013 H1 2014 H2 2013 H2 2014
(5.4)
(4.8)
(2.0)
1.2
6.6 6.1 5.0 4.8
Debt
Cash
Cash
conversion
%
Enquiries £‘000s
0
10
20
30
40
50
Group revenues £m
0
5
10
15
20
25
Underlying operating profit £m Net debt £m and cash conversion %
Group revenues £m
50%
75%
100%
125%
0
10%
20%
30%
40%
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013
2.5
2.7
2.8
2.7
18.3
19.4
16.1
19.0
20.8
22.1
18.9
21.7
Total
RTA
Non-RTA
Med Neg
H1 2013 H1 2014 H2 2013 H2 2014
Total
Solicitors
income
Products
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013 H1 2014 H2 2013 H2 2014
(5.4)
(4.8)
(2.0)
1.2
6.6 6.1 5.0 4.8
Debt
Cash
Cash
conversion
%
Key performance indicators
Enquiries 000s
Enquiries are the basis of generating solicitor income revenue
and ultimately additional product revenue.
During H1 2013 the business changed its approach as a result of
LASPO and focused on generating a more cost efficient level of
enquiries. Having introduced this strategy the Group then saw a
good increase in enquiries in 2014 (up 15.3% on 2013) as a result
of marketing efficiencies and market consolidation.
Total
RTA
Non-RTA
Med Neg
Group operating profit £m and operating profit return % Net (debt)/cash £m and cash conversion %
Operating profit is a key measure for the Group. The Group
measures this by the sectors of solicitor income, products
and then in total after the allocation of Group costs.
The Group has enjoyed consistent growth in its operating
profit and has seen its overall return on revenue increase
from 23.0% in H1 2013 (and 24.7% in 2013 full year) to
30.6% in H2 2014 (and 29.0% in 2014 full year).
The business continues to have a very strong operational
cash generation conversion (2014 97.6%, 2013 106.3%) and
as a result has seen an improvement in overall net cash
from £4.8m net debt in December 2013 to £1.2m net cash in
December 2014. The Group continues to target its overall
operating cash generation in excess of 90%.
Debt Operating
profit
Cash
Operating
cash %
Operating
profit
return %
Group revenues £m
Revenue is earned from solicitor income (the charge to PLFs for
providing a postcode exclusive transfer of enquiries) and products
used by PLFs to operate the cases (ATE, medicals, costs).
During 2014 the business saw the benefit of the increase in enquiry
volumes with H2 revenue 15.2% up on the same period in the prior
year. Product revenue has remained relatively flat mainly due to the
expected decline in products impacted by LASPO. Ongoing products
have grown 11.2% year on year.
Enquiries £‘000s
0
10
20
30
40
50
Group revenues £m
0
5
10
15
20
25
Underlying operating profit £m Net debt £m and cash conversion %
Group revenues £m
50%
75%
100%
125%
0
10%
20%
30%
40%
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013
2.5
2.7
2.8
2.7
18.3
19.4
16.1
19.0
20.8
22.1
18.9
21.7
Total
RTA
Non-RTA
Med Neg
H1 2013 H1 2014 H2 2013 H2 2014
Total
Solicitors
income
Products
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013 H1 2014 H2 2013 H2 2014
(5.4)
(4.8)
(2.0)
1.2
6.6 6.1 5.0 4.8
Debt
Cash
Cash
conversion
%
Products
Solicitor
income
The Group has performed well in 2014 and has a robust balance sheet with adjusted net cash. Our strong cash generation metrics mean we
will continue to have good levels of cash in order to fund our stated dividend policy and to acquire good earnings accretive businesses in the
legal services market.
Steve Dolton
Chief Financial Officer 21 NAHL Group plc
Annual report and accounts 2014 Strategic report
The Board has ultimate responsibility for setting the Group’s risk appetite and for effective management of risk. An annual assessment of
key risks is performed by the Executive Directors and presented to the Board. A risk register is maintained and regularly reviewed by the
Executive Directors. All risks take into consideration the likelihood of the event occurring and the impact of that event. Once the risks have
been assessed appropriate mitigation actions are determined for each key risk identified.
The following sets out the Group’s
principal risks that the Board considers
may have a material impact on the
Group’s financial performance.
Risks
Principal risk Description Mitigation
Regulatory
The Group and its PLFs are subject to an extensive
regulatory and legal framework. This includes the need to
comply with the provisions of the LASPO and regulation by
either the Claims Management Regulation Unit (CMRU) or
the Solicitors Regulation Authority (SRA). Regulations and
laws are open to change and in the event either the Group or
its PLFs fails to make the necessary changes then corrective
action may be required.
The Group will continue to monitor regulatory and legal
developments and use these to underpin its strategic and
competitive response and ensure compliance with its
obligations. It will also continue to work with its PLFs to ensure
they comply with relevant regulations. The business model has
proven to be adaptable and resilient to change over a number of
years and the business has continued to develop through the
various regulatory changes.
Market and
competition
The Group operates in a competitive market and although a
number of competitors have left the market in 2014 the
Group could still face competition from other consumer
marketing businesses in the legal services market. The
Group is also reliant on the PI sector for the majority of its
revenue and profits.
The Group has historically taken market share and with its
strong brand and leadership positions acting as a continued
barrier to entry the Group will continue to compete effectively
against the competition. The recent acquisition of Fitzalan
supports the Group’s strategy to develop into other chosen legal
markets through targeted acquisitions which helps to mitigate
its reliance on the PI sector.
PLFs
The Group is dependent upon its PLFs to take its enquiries
each month and to pay for these enquiries prior to the
satisfactory completion of the case by the PLF. Any
termination by the PLF of this relationship or any significant
change in the financial situation of the PLF could have a
material impact on the financial performance of the Group.
The Group continues to provide its PLFs with high quality
enquiries that ensure the PLF maximises its financial
performance. The Group has a number of panel relationships and
ensures that no single PLF accounts for more than 20% of the
Group’s business each month. The Group continues to explore new
PLF relationships to ensure there is a replacement PLF available
in the event of termination of any existing relationship.
Reliance on
TV and
online
marketing
The Group relies upon its TV and online marketing strategy
to retain its market leading position in the PI sector. Any
significant change in technology, cost increases, changes to
search engine algorithms or terms of services could impact
the Group’s ability to maintain its high rankings on search
results and ultimately lead it to having to spend more
resource and expenditure to meet its financial results.
The Group has extensive experience of managing its
marketing strategy through a combination of internal
marketing experts and external agencies. The relationships
with the external agencies go back many years and ensure
the Group has flexibility and the speed required to react to
the potential risks outlined.
Brand
reputation
The Group’s success and results are dependent in part on the
strength and reputation of the Group and its NAH brand. The
Group relies on its brands which includes NAH and on its
advertising character, the Underdog, and is exposed to the
risk of the brand being tarnished via any significant adverse
publicity.
Brand performance is tracked and measured on an ongoing basis
to ensure that it remains ahead of competitors and delivers
compelling messages which drive consumer contacts. The
Group is also active in public affairs and thought leadership,
effectively lobbying in areas of importance to the sector,
demonstrated through activities such as the Stop Nuisance
Calls campaign. This ensures the Group maintains its brand
trust ratings and its reputation.
Dependence
on key
personnel
The Group’s future growth and success depends, in part,
upon the leadership and performance of its Executive
Directors and senior management team. The loss of any key
individual or the inability to attract appropriate personnel
could impact on its ability to execute its business strategy
successfully which could negatively impact upon the Group’s
future performance.
The Group maintains competitive and attractive employment
terms and conditions, fully empowering key individuals and
allowing them to maximise their job satisfaction. The Group
incentivises key management through annual incentive plans
in the short term and through share options for medium and
long-term retention. NAHL Group plc 22
Annual report and accounts 2014 Strategic report
NAHL never cold calls or cold texts and has campaigned against nuisance marketing for many years.
Our independent research
shows that millions of UK
consumers are plagued by
nuisance calls and two
thirds do not know where to
turn to stop them.
The Real Cost of Personal Injury
A National Accident Helpline report
We take our role as an
ethical business and
consumer champion
very seriously, and have
taken positive steps
in 2014 to enhance our
thought leadership status
and reinforce the vital
requirement for legitimate
access to justice.
Russell Atkinson
Chief Executive
81% 73% 66%
As an ethical market leader, the Group
sets the standards in our chosen markets
and in so doing acts in the best interest
of our consumers, Panel Law Firms and
our shareholders.
Thought
leadership
of the population receive
cold calls regularly
of people do not think
the government is doing
enough to prevent cold
calls
of people are not
confident they know
where to report cold calls
Corporate social responsibility 23 NAHL Group plc
Annual report and accounts 2014 Strategic report
Standards for the industry
It is vital that we establish our thought
leadership status, particularly in the PI
sector where misperceptions persist and
can undermine the valuable role that ethical
companies like NAH play in helping genuine
injury victims access justice. We welcome
proportionate regulation that reduces fraud
but does not inhibit access to justice and
have lobbied government and worked
alongside regulators to effect positive
change for our consumers and industry.
In 2014 we launched two strategic
communications campaigns (‘The Real Cost
of Injury’ and ‘Stop Nuisance Calls’) which
focused on the plight of UK consumers and
reinforced our role as a consumer champion.
We proactively encourage our sector and
other industries to act with integrity as
demonstrated in our Stop Nuisance Calls
campaign.
Access to justice
People who have suffered a personal injury
through no fault of their own should be
entitled to redress which helps them to
resume their life and work, in so far as is
possible. Our research shows that 81%
1
of
personal injury victims used their
compensation to offset losses or costs
associated with their injury.
The PI sector is subject to unjustified
negative misperceptions which hinder
access to justice for legitimate claimants
and as a market-leader we believe it is
important to draw attention to the plight
of these individuals.
NAH helps over 200,000 people every year to
understand whether they have a legitimate
claim. We sift out two thirds of the consumer
contacts made to us each year and only pass
the remaining enquiries on to our PLFs. It is
not in our interest, nor that of our PLFs, to
proceed with cases which do not have merit.
The impact of personal injury
In April 2014 we commissioned independent
research to inform our report on The Real
Cost of Personal Injury and it was clear that
the impact of a personal injury goes beyond
inconvenience and physical pain, to
significant financial and emotional hardship.
The impact is not limited just to the
individual, it extends to families and
co-workers, with more than two thirds of
work colleagues citing that they are affected
if a colleague suffers a personal injury. Our
research showed that 88% of 18-24 year olds
who suffered a personal injury lost earnings
as a result and almost a third were worried
about losing their job.
Despite media and government concerns
over a compensation culture, our research
1
has revealed these fears to be overstated and
at worst, discourage genuine claimants from
seeking the justice they deserve. The
positive effect of financial compensation for
an individual is relatively easy to measure,
but the psychological benefits of the right
kind of legal and rehabilitation support are
harder to quantify.
NAH effectively used The Real Cost of
Personal Injury Report to initiate discussions
with both the media and key stakeholders to
highlight the plight of the personal injury
victim and why it is important they get
access to the justice they deserve.
NAH has never used cold calls or
spam texts to attract new consumers and
is fully aware how frustrating, intrusive
and often distressing these calls can be.
Unfortunately, some other companies
do use these underhanded techniques,
and we even receive complaints from
consumers who have been targeted by
cold calls and texts from companies
purporting to be NAH. We take these
matters very seriously and report all
incidents to the appropriate authorities.
In October 2014 we commissioned an
independent survey which revealed that
UK consumers don’t know where to turn
when they become a victim of nuisance
calls and texts. As a result, we introduced
a three-step campaign, Stop Nuisance
Calls calling upon the government to:
1. set up a one-stop complaints
process to clarify how to stop
unwanted cold calls and make an
effective complaint;
2. take stronger legal action
against cold calls coming from
international numbers, alongside
ongoing work to ensure regulators
can prosecute domestic cold calls
more effectively; and
3. enforce simple, clear and consistent
‘opt-ins’ to email marketing or calls,
that don’t trick or confuse consumers.
We are pleased to see that on
25 February 2015 the Government
lowered the threshold required for the
Information Commissioner’s Office
(ICO) to impose fines and increase
penalties for cold calling offenders.
1 Source: The Real Cost of Personal Injury Report, 2014 NAHL Group plc 24
Annual report and accounts 2014 Strategic report
“ I’ve worked for National Accident Helpline for over 1 2 years and feel a great sense of pride
from helping others. During my time here the Personal Injury sector has changed but the
regular training and coaching sessions I receive enable me to develop my skills and knowledge
to ensure I can continue to listen to and support our consumers in the right way. People tell us
what a difference we make to their recovery journey and that is really satisfying.”
Riv Singh
Legal Service Advisor
Our people are the foundation of
the Group’s success and we recognise
that employee development is vital
to continue our growth.
Our people
Growing our future leaders and
nurturing our resources
In 2014 we launched an Employee
Development Programme following the
principles of the Institute of Leadership and
Management (ILM). The 18-month
programme is a combination of internal
coaching and training, with external
tutoring, and is assessed through practical,
coaching and theory based assignments.
The programme ensures we build our talent
pool from within; reinvesting time and money
in the business through our people. Other
benefits include improvements in thought
leadership and innovation, and enhanced
productivity and capability.
Across the three tiers of the programme (ILM
level 3, 4 and 5 certificates) we are currently
developing nine of our potential future
leaders, giving them the skills that bring
value to them and our business.
This focus on development extends
throughout the workforce with on the job
training, coaching and mentoring central to
the progress of our people. Starting with a
comprehensive induction programme, we
equip our people with the skills required to
ensure they are making a valuable
contribution from day one. Our LSAs and
contact centre employees progress through
a variety of training modules and
environments, coaching, skills and
knowledge assessments. We monitor their
ongoing performance through a customer
experience scoring system. Developed in
conjunction with employees, the system is a
positive coaching tool that sets clear delivery
expectations across the entire consumer
journey.
Our senior managers receive regular coaching
sessions to ensure they remain expert in their
field and are skilled at leading their people to
success. This is carried out on a one-to-one
basis and addresses key leadership
capabilities and performance.
In our 2014 Employee Opinion Survey (89%
response rate), the strength of our senior
leaders was recognised with 93% of
respondents having confidence in the
leadership skills within the business.
Investing in our people
At the beginning of 2015 we received our
Investors in People accreditation. This is a
rigorous, objective assessment of how we
lead, manage, develop and communicate with
our people and measures it against best
practice standards.
The Group is focused on continuous
improvement and has embarked on a
development plan dedicated to maintaining
this standard and ensuring that as an
employer we can continue to attract, retain
and develop talent.
Creating a great place to work
Our employees are fully committed to our
Code of Conduct ensuring that we deliver to
the highest standards of honesty, integrity,
respect and fairness when dealing with each
other, our consumers, partners and suppliers.
We have a strong team ethos across the
business and are focused on creating a great
place to work for our people. Our corporate
values underpin how we do business and
encourage a curious, driven, passionate and
unified workforce. We encourage diversity
across gender, ethnicity and age range and
have built a diverse, lively workforce.
A culture of recognising our people and
celebrating success is key to ensuring our
people feel valued for the work they do. Great
behaviours are recognised through our Values
Champion Recognition Scheme, as well as
rewards through prize draws, incentives and
social events. Our new cash-back and
discounts reward package was winner of a
Reward Gateway Benefits Excellence Award
in 2014, in recognition of the targeted
approach we took to developing the scheme
for our workforce, based on their needs.
Corporate social responsibility 25 NAHL Group plc
Annual report and accounts 2014 Strategic report
I was delighted to be
selected for the Employee
Development Programme.
It’s a great opportunity to
learn more about the
business and invest in my
career at National Accident
Helpline. I’m gaining
valuable skills and
knowledge which I will be
able to give back to the
business in the future.
Kelly Affronti
Legal and Compliance Officer
Employee survey highlights (2014)
Have confidence in the
leadership skills across the
Company.
93%
Believe that the Company
makes a positive difference to
others.
89%
Are happy with how senior
leaders seek their views.
87%
Feel loyal to the Company.
84% NAHL Group plc 26
Annual report and accounts 2014 Strategic report
Giving something back is important to
our employees and they have always
been enthusiastic about volunteering
and raising money for charity.
Our
community
The support of National Accident
Helpline has been fantastic. By raising
over £10,000 in 2014 they’ve helped us to
fund six life-saving missions. Without
fundraising efforts I wouldn’t be able to
get to the people who need help the
most, sometimes following horrific
accidents. It’s company donations and
support that keep our helicopters flying.
Paul Hogan
Pilot, The Air Ambulance Service
Corporate social responsibility 27 NAHL Group plc
Annual report and accounts 2014 Strategic report
Team challenge
One of the highlight events within our
fundraising plans for 2014 was the Way
of the Roses cycle challenge. A team of
eight riders, including Chief Executive
Russell Atkinson, cycled a gruelling 167
miles from Morecombe to Bridlington
over three days.
The ride covered quaint riverside trails
and strenuous climbs in the Yorkshire
Dales. By the end of the challenge on day
three our team had braved the weather,
overcome bike failures and repairs and
had raised over £1,000 towards our
£10,000 target for the year.
Supporting our community
In 2014 our employees voted
overwhelmingly to support The Air
Ambulance Service including the
Warwickshire & Northamptonshire Air
Ambulance (WNAA), Derbyshire,
Leicestershire & Rutland Air Ambulance and
the national Children’s Air Ambulance.
Over the past year we have formed a
successful working partnership with the Air
Ambulance Service which saw over £10,000
raised in 2014. By giving their time and
fundraising for this worthwhile cause, our
employees exceeded our target and helped to
keep the helicopters flying. In total, the
money we’ve raised to date will cover the
cost of six life-saving missions.
When it came to showing their support, our
employees took part in a range of creative
fun and challenging activities from dragon
boat racing, endurance events and cycle
challenges to cake baking competitions and
quiz nights.
Team spirit
Every employee supported The Air
Ambulance Service in one way or another
throughout the year, with over two thirds of
employees taking part in a fundraising event
or challenge themselves.
In autumn 2014 two teams of employees
went head-to-head (as well as against other
companies) in The Big £50 Business
Challenge, hosted across Northamptonshire.
The competing teams, each sponsored by an
Executive Director, started with just £50
cash and used their commercial,
entrepreneurial and innovation skills to
multiply their cash in aid of The Air
Ambulance Service. Our teams raised £1,500
and won the Enterprise, Special Recognition
and Entrepreneur of the Year Awards.
Continuing the support
Our support for The Air Ambulance Service
will continue into 2015 with new challenges,
and enthusiastic involvement from our
people. We will also enhance our
participation in the local communities where
we operate and we intend to engage with
local education, business and charities.
In 2014 we asked employees for ideas on how
to engage more with our local community.
Following a shortlisting process, we chose to
explore a partnership with local education
which will see us share the skills and
expertise of our people with young people
preparing to enter the world of business.
£10,000
We raised over £10,000 for
The Air Ambulance Service in 2014. NAHL Group plc 28
Annual report and accounts 2014 Governance
Board of
Directors
Steve Dolton
Chief Financial Officer
Steve Halbert
Chairman
Russell Atkinson
Chief Executive Officer
Gillian Kent
Non-Executive Director
S a m a n t h a P o r te o u s
Non-Executive Director 29 NAHL Group plc
Annual report and accounts 2014 Governance
Steve Halbert
Chairman
Steve Halbert is Non-Executive Chairman
of the Group, which he joined in 2010.
Steve is Chair of the Audit Committee and
Nomination Committee and has over 25
years’ Board experience.
Steve is also Chairman of Safestyle UK plc, an
AIM-quoted retailer and manufacturer of
replacement doors and windows.
Prior to this, Steve held various Board
positions including Chairman of United
House, Non-Executive Director at
Employment Services Holdings, and
Executive Chairman of GVA. Prior to this,
Steve worked as a Senior Corporate Financier
for 15 years at KPMG UK.
He is a qualified Chartered Accountant and is
a fellow of the ICAEW.
Russell Atkinson
Chief Executive Officer
Russell Atkinson became Chief Executive
Officer of NAHL, following Admission. He
joined the Company in 2012 as Managing
Director of National Accident Helpline and
had a pivotal role in implementing its strategy
post-LASPO.
His responsibilities include developing and
implementing the Group-wide strategy and
ensuring delivery of budgeted financial
performance.
Prior to joining NAHL, Russell held Managing
Director roles at international firms including
UK Managing Director of Lebara Mobile
Limited, Managing Director of Blackhawk
Network (UK) Limited, a division of Safeway
Inc. and Director of E-Payments at Travelex.
Russell holds a Bachelor of Arts from Leicester
Polytechnic and a diploma in marketing from
The Chartered Institute of Marketing.
Steve Dolton
Chief Financial Officer
Steve Dolton is Chief Financial Officer of the
Group having joined in 2012.
His responsibilities include overall
management of the finance function within
the Group and liaising with the Group’s
investors and the banks.
Steve has over 20 years’ experience as
Finance Director. Prior to joining NAHL, he
was Chief Financial Officer of several
companies including NSL Services Group,
Azzurri Communications Limited,
Safety-Kleen Group (European operations)
and Walker Dickson Group Limited. Prior to
that, Steve worked in various financial roles
with Peek Plc, including a two-year period in
Asia as Regional Controller.
He is a qualified Chartered Accountant and
has been a member of the ICAEW since 1989,
having qualified with Grant Thornton LLP. He
is a fellow of the Institute of Directors in the
UK, and holds a Bachelor of Arts from
Huddersfield Polytechnic.
Samantha Porteous
Non-Executive Director
Samantha Porteous became a Non-Executive
Director on Admission, and is currently also
Chair of the Remuneration Committee. Prior
to this she was CEO of NAH Ltd from 2009 to
2011 and then Group CEO until the IPO.
She joined the Group in 2006 as Finance
Director after the LDC management buyout.
Prior to this she held a number of senior finance
roles at Nexus Media Ltd, Thomson Scientific
Ltd (part of the publicly listed company
Thomson Reuters), and Reed Elsevier.
Samantha is a fellow of the Chartered Institute
of Management Accountants (CIMA).
Gillian Kent
Non-Executive Director
Gillian Kent became Non-Executive Director
in November 2014.
Gillian is a co-founder of private company
Skadoosh where she remains as Chief
Executive Officer and is also an independent
Non-Executive Director at Pendragon plc.
Her executive career in the digital and online
sectors includes senior roles at Microsoft
where she was Managing Director of its
largest online business in the UK, MSN UK.
Gillian has also served as Chief Executive
Officer and Digital Consultant at GK
Associates, Chief Executive Officer at
Propertyfinder.com, and Director of Strategy
and Business Development at Microsoft
(MSN).
With effect from the 2015 Annual General
Meeting, Gillian will chair NAHL’s
Remuneration Committee. NAHL Group plc 30
Annual report and accounts 2014 Governance
Directors’ report
The Directors of NAHL Group plc present their Annual Report and audited financial statements for the year ended 31 December 2014.
Results and dividend
The Group’s profit after tax for continuing operations for the year was £9.5m (2013: £10.3m).
The Directors propose a final dividend of 10.7p per share (2013: £nil) which, subject to approval at the Annual General Meeting will be paid on
29 May 2015 to shareholders registered on 24 April 2015.
Details of significant events affecting the Company and Group since the balance sheet date are given in note 27 to the financial statements.
A fair review of the business including future developments is included in the strategic report on pages 1 to 27.
Directors’ third party indemnity provisions
The Company maintained during the period and to the date of approval of the financial statements indemnity insurance for its Directors and
Officers against liability in respect of proceedings brought by third parties, subject to the terms and conditions of the Companies Act 2006.
Capital structure
Details of the Capital Structure can be found in note 18 of the consolidated financial statements. The Company has employee share option
plans in place, full details of which can be found in note 19 to the financial statements.
Financial instruments
The Group’s principal financial instruments comprise cash and cash equivalents, other receivables, interest-bearing loans and trade payables.
Further details on financial instruments are given in note 21 to the financial statements.
Directors
Biographies of the present Directors of the Company are listed on page 29.
Details of the remuneration of the Directors is disclosed in the Remuneration Report on pages 33 to 38.
Political donations
No political donations were made during the year or the previous year.
Disclosure of information to the Auditor
Each of the persons who is a Director at the date of approval of this Annual Report confirms that:
• so far as the Director is aware, there is no relevant audit information of which the Company’s Auditor is unaware; and
• the Director has taken all the steps that ought to have been taken as a Director in order to make himself aware of any relevant audit
information and to establish that the Company’s Auditor is aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006.
Auditor
KPMG LLP have been appointed as Auditor and have expressed their willingness to continue in office as Auditor and a resolution to reappoint
them will be proposed at the forthcoming Annual General Meeting.
Other information
An indication of likely future developments in the business and particulars of significant events which have occured since the end of the year
have been included in the strategic report on pages 1 to 27.
Going concern
The Group’s business activities, together with risk factors which impact these activities are included within the Chief Financial Officer’s
review on pages 18 to 20. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described in
the Chief Financial Officer’s review. Having regard to the matters above, and after making reasonable enquiries, the Directors have a
reasonable expectation that the Company and the Group have adequate resources to continue operations for the foreseeable future. For that
reason, they continue to adopt the going concern basis in the preparation of the accounts.
Approved by the Board of Directors and signed on behalf of the Board.
Steve Dolton
Chief Financial Officer
23 March 2015 31 NAHL Group plc
Annual report and accounts 2014 Governance
Corporate governance report
The UK corporate governance code
Companies listed on the main market of the London Stock Exchange are required to comply with the UK Corporate Governance Code. NAHL
Group plc’s shares are traded on AIM and as such, the Company is not subject to the requirements of the UK Corporate Governance Code on
corporate governance, nor is it required to disclose its specific policies in relation to corporate governance.
However, as a publicly quoted company, the Company will maintain appropriate standards of corporate governance. The UK Corporate
Governance Code represents the ‘gold standard’. However, the UK Corporate Governance Code was not designed with smaller companies in
mind. Adherence to the full UK Corporate Governance Code is often impractical for smaller companies. In the past, in the absence of an
alternative code, many AIM companies have adopted the UK Corporate Governance Code ‘to the extent applicable’.
In July 2005, the QCA introduced a simple set of guidelines for corporate governance for AIM companies, which were updated in July 2007 and
again in September 2010. According to the QCA, the guidelines have been devised in consultation with a number of significant institutional
smaller company investors.
The Directors recognise the importance of sound corporate governance and the Company holds membership of the QCA and complies with
the QCA Guidelines and the main provisions of the UK Corporate Governance Code, insofar as is practicable to do so for a company of NAHL
Group plc’s current size and stage of development, save in relation to certain Directors, who will not be independent because of the grant or
proposed grant of options to them by the Company.
The Board of Directors operates within the framework described below.
Table of committees
The Board is responsible for formulating, reviewing and approving the Company’s strategy, budgets and corporate actions. Board meetings
are held at least every two months and at such other times as the Directors deem necessary.
The Company has appointed Steve Halbert as the Company’s Senior Independent Non-Executive Director. The Board has created a
Remuneration Committee, an Audit Committee and a Nomination Committee where the current composition and responsibilities of the
committees are as follows:
Audit Committee
The Audit Committee consists of Steve Halbert as Chairman, Gillian Kent and Samantha Porteous. It meets at least twice each year and is
responsible for ensuring that the financial performance of the Company is properly monitored and reported on and for meeting with the
Auditor and reviewing findings of the audit with the external Auditor. It is authorised to seek any information it properly requires from any
employee and may ask questions of any employee. It meets with the Auditor at least twice a year and is also responsible for considering and
making recommendations regarding the identity and remuneration of such Auditor.
Remuneration Committee
The Remuneration Committee consists of Samantha Porteous as Chairman, Steve Halbert and Gillian Kent. Gillian Kent will replace
Samantha Porteous as Chairman after the AGM. It meets at least once each year and considers and recommends to the Board the framework
for the remuneration of the Executive Directors of the Company and any other senior management. It further considers and recommends to
the Board the total individual remuneration package of each Executive Director including bonuses, incentive payments and share options or
other share awards. In addition, subject to existing contractual obligations, it reviews the structure of all share incentive plans for approval
by the Board and, for each such plan, recommends whether awards are made and, if so, the overall amount of such awards, the individual
awards to Executive Directors and the performance targets to be used. No Director is involved in decisions concerning his own remuneration.
Nomination Committee
The Nomination Committee consists of Steve Halbert as Chairman, Samantha Porteous and Gillian Kent. The Nomination Committee meets
at least once each year and considers the selection and re-appointment of Directors. It identifies and nominates candidates to all Board
vacancies and regularly reviews the structure, size and composition of the Board (including the skills, knowledge and experience) and makes
recommendations to the Board with regard to any changes. The Company has adopted a share dealing code (based on the AIM Rules) and the
Company takes all proper and reasonable steps to ensure compliance by the Directors and relevant employees.
The Board is also responsible for ensuring the Company’s compliance with all applicable anti-corruption legislation, including, but not limited to,
the UK Bribery Act 2010 and the US Foreign Corrupt Practices Act 1977. The Company complies and always has complied with all applicable
anti-corruption laws. In view of the requirement in the UK Bribery Act 2010 for relevant companies to have adequate anti-bribery procedures,
the Company has devised and implemented a suite of anti-corruption policies and procedures designed to prevent corruption by anyone working
on its behalf. The Company has adopted a ‘zero tolerance’ approach to corruption and is committed to ethical business practices. NAHL Group plc 32
Annual report and accounts 2014 Governance
Corporate governance report continued
The Board of Directors
Director Date appointed
Remuneration
Committee
Audit
Committee
Nomination
Committee
Russell Atkinson 1 May 2014
Steve Dolton 14 April 2014
Steve Halbert 1 May 2014 (Chair) (Chair)
Samantha Porteous 14 April 2014 (Chair)
Gillian Kent 3 November 2014
Internal control
The Company has introduced policies on internal control and corporate governance. These have been prepared in order to ensure that:
• proper business records are maintained and reported on, which might reasonably affect the conduct of the business;
• monitoring procedures for the performance of the Group are presented to the Board at regular intervals;
• budget proposals are submitted to the local Board no later than two months before the start of each financial year;
• budget proposals are submitted to the Board no later than one month before the start of each financial year;
• accounting policies and practices suitable for the Group’s activities are followed in preparing the financial statements;
• the Group is provided with general accounting, administrative and secretarial services as may reasonably be required; and
• interim and annual accounts are prepared and submitted in time to enable the Group to meet statutory filing deadlines.
Communication with shareholders
Communications with shareholders are given a high priority by the Board of Directors who take responsibility for ensuring that a satisfactory
dialogue takes place. This is achieved through its Annual Report, Interim Report and comprehensive website (www.nahlgroupplc.co.uk). There
is also a regular dialogue between the Chief Executive Officer, the Chief Financial Officer and institutional investors and other financial
institutions in addition to the required public announcements. A constant and up-to-date information flow is maintained on the website
containing all press announcements and financial reports.
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare
the group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and
have also chosen to prepare the parent company financial statements under IFRSs as adopted by the EU. Under company law the Directors must
not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or
loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable
information;
• provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the
impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and
• make an assessment of the Company’s ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions
and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial
statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and
integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
By order of the Board
Russell Atkinson Steve Dolton
Chief Executive Officer Chief Financial Officer
23 March 2015 23 March 2015 33 NAHL Group plc
Annual report and accounts 2014 Governance
Directors’ remuneration report
Statement from the Chairman of the Remuneration Committee
Dear Shareholder,
I am pleased to present the Directors’ Remuneration Report for the financial year ended 31 December 2014.
As an AIM listed Company, NAHL Group plc is not required to comply with the UK Listing Authority Rules or the UK Corporate Governance
Code. Nevertheless, since its admission to AIM in May 2014, one of the key areas of focus of the Committee has been the development of a
comprehensive remuneration policy. Furthermore, the Company is committed to a responsible and transparent approach in respect of
executive pay and has decided to conform to best practice for a large AIM listed company in respect of executive remuneration reporting.
The Company has therefore adopted a number of the key reporting requirements included within the new Directors’ Remuneration
Reporting regulations.
This report is presented in two sections: the Directors’ Remuneration Policy and the Annual Report on Remuneration. The Directors’
Remuneration Policy sets out the forward-looking remuneration policy. The Annual Report on remuneration provides details of the amounts
earned in respect of the year ended 31 December 2014 and how the Directors’ Remuneration Policy will be operated for the year commencing
1 January 2015.
Both the Annual Report on Remuneration and the Directors’ Remuneration Policy are subject to an advisory vote at the 2015 Annual General
Meeting. The Committee believes the advisory votes will provide a greater degree of accountability and give shareholders a say on this
important area of corporate governance. The advisory vote on the Directors’ Remuneration Policy will apply for three years, unless the
Committee deems it appropriate to put the Policy to shareholders again before then.
Review of the 2014 financial year
As described earlier in the Executive’s reports, the Company has performed well in its first year as a listed company with both revenue and
underlying operating profit up on 2013 by 10.4% and 29.3% respectively. Consequently, the annual bonus conditions have been exceeded.
NAHL Group plc believes that the ongoing success of the Company depends to a high degree on retaining and incentivising the performance
of key personnel. To this end, the Company adopted the Long-Term Incentive Plan, Enterprise Management Incentive Plan and SAYE Plan
on its admission to AIM to align interests of senior management, and the wider workforce, with those of the shareholders. Subsequently,
Executive Directors were granted long-term incentive awards with a face value of between £745,000 and £895,000, the vesting of which
is subject to achieving average annual compound growth in Earnings per Share (EPS) of at least 10% over a three-year period ending
31 December 2016. The Committee considers EPS to be the key external measure of financial performance over the longer term in delivering
value to shareholders.
Changes for the 2015 financial year
During 2014 the Committee commissioned Deloitte LLP to undertake a review of remuneration at NAHL and propose changes to the
remuneration structure. As a result of the review, the Committee has agreed to the following key changes to Executive Directors’
remuneration at the Company in 2015:
• Executive Directors were awarded a 2.5% increase to base salary in 2015.
• For 2015 the Chief Executive’s maximum annual bonus award will be set at 100% of salary. The maximum annual bonus opportunity for
the Chief Financial Officer is 70% of salary.
• Annual bonus awards for 2015 will be based on operating profit and individual objectives.
The Company has experienced considerable share price growth since its admission to AIM. Against this background, and in order to
further align the interests of the Executives with the shareholders of the Company, the Committee intends to grant market value
non-tax-advantaged share options under the Enterprise Management Incentive Plan to Executive Directors in 2015. It is intended that
Russell Atkinson will be granted an award equal to 100% of salary and Steve Dolton will be granted an award equal to 80% of salary. The
vesting of the awards will be subject to achieving average annual compound growth in EPS of at least 10% over a three year period ending
31 December 2017.
The Committee will continue to monitor remuneration policy to ensure it remains aligned to the business strategy and delivery of
shareholder value.
Samantha Porteous
Chairman of the Remuneration Committee
23 March 2015 NAHL Group plc 34
Annual report and accounts 2014 Governance
Directors’ remuneration report continued
This section sets out the Company’s Directors’ Remuneration Policy, which will apply from the date of the 2015 Annual General Meeting.
The Policy is determined by the Committee of the Company.
Key principles
The Company’s remuneration package for Executive Directors has been designed based on the following key principles:
• promote the long-term success of the Company, with transparent and stretching performance conditions, which are rigorously applied;
• provide appropriate alignment between the Company’s strategic goals, shareholder returns and executive reward; and
• have a competitive mix of base salary and short and long-term incentives, with an appropriate proportion of the package determined by
stretching targets linked to the Company’s performance.
Policy table for Executive Directors
Component Purpose and link to strategy Operation Maximum opportunity Performance measures
Base salary Fixed remuneration to
provide a competitive base
salary for the market in
which the Company
operates to attract and
retain executives of a
suitable calibre.
Salaries are reviewed annually
taking into account:
• underlying Group performance;
• role, experience and individual
performance; and
• competitive salary levels and
market forces.
No overall maximum has
been set under the Policy.
However, salary increases
are reviewed in the context
of the wider workforce
increases.
Not applicable.
Benefits To provide a market
competitive benefits
package as part of total
remuneration.
Executive Directors receive benefits
in line with market practice, and
these include principally life
insurance, private medical
insurance and a car allowance.
Set at a level which the
Committee deems
appropriate.
Not applicable.
Retirement
benefits
To provide an appropriate
level of retirement benefit.
Executive Directors are eligible to
participate in the Company’s
defined contribution pension plan.
Executive Directors
currently receive nominal
or no pension contributions.
The Committee will review
options to implement a
defined pension
contribution of up to
10% at a future date.
Not applicable.
SAYE Plan To create alignment with
the Company and promote a
sense of ownership.
Executive Directors are entitled to
participate in a tax qualifying all
employee SAYE Plan.
Participation limits are
those set by the UK tax
authorities.
Not subject to performance
measures in line with HMRC
practice.
Annual bonus Rewards performance
against annual targets
which support the strategic
direction of the Company.
Awards are based on annual
performance against key financial
targets and/or the delivery of
strategic/personal objectives.
The Committee has discretion to
amend the pay-out should any
formulaic output not reflect the
Committee’s assessment of overall
business performance.
Maximum bonus
opportunity for the Chief
Executive is up to 100% of
base salary in respect of a
financial year.
Maximum bonus
opportunity for the Chief
Financial Officer is up to
70% of base salary in
respect of a financial year.
Targets are set annually
reflecting the Company’s
strategy and aligned with
key financial, strategic and/
or individual targets.
At least 50% of the bonus is
assessed against financial
performance of the business
and the balance is based
on strategic/personal
objectives.
Stretching targets are
required for maximum
pay-out. 35 NAHL Group plc
Annual report and accounts 2014 Governance
Component Purpose and link to strategy Operation Maximum opportunity Performance measures
Long-term
incentive
To drive and reward the
achievement of longer-term
objectives, support
retention and promote share
ownership for Executive
Directors.
The Company operates a Long-Term
Incentive Plan (LTIP) and
Enterprise Management Incentive
(EMI) Plan.
Under the LTIP, awards may be
granted in the form of nil or nominal
cost share options, or contingent
rights to receive shares.
Under the EMI Plan, awards may be
granted in the form of tax-favoured
share options or non-tax-favoured
share options. It is intended that
the exercise price of a share option
under the EMI Plan shall be the
market value of the underlying
share at grant.
The vesting of awards granted
under the LTIP and EMI Plan will
normally be subject to the
achievement of specified
performance conditions, normally
over a period of at least three years.
Awards granted under the LTIP
and EMI Plan may be subject to
malus provisions at the discretion
of the Committee.
Under the LTIP and EMI Plan
rules the overall maximum
award that may be granted
in respect of a financial year
is 300% of salary.
Furthermore, both the LTIP
and EMI Plan rules prescribe
that awards may be granted
in excess of these limits in
exceptional circumstances.
It is intended that the actual
annual grants in 2015 will
be lower than the overall
maximum awards per the
plan rules and will be
disclosed within the annual
report on remuneration.
Relevant performance
measures are set that
reflect underlying
business performance.
Performance measures and
their weighting where there
is more than one measure
are reviewed annually to
maintain appropriateness
and relevance.
For awards granted in 2015,
the vesting of awards will
be subject to stretching
Earnings per Share (EPS)
targets.
Non-Executive Directors
Purpose and link to strategy Approach of the Company
Sole element of
Non-Executive Director
remuneration, set at a
level that reflects market
conditions and is sufficient
to attract individuals with
appropriate knowledge
and experience.
Fees are normally reviewed annually.
Fees paid to Non-Executive Directors for their services are approved by the Remuneration Committee. Fees
may include a basic fee and additional fees for further responsibilities (for example, chairmanship of Board
committees).
Non-Executive Directors do not participate in any of the Company’s share options schemes or annual bonus
scheme nor do they receive any pension contributions. Non-Executive Directors may be eligible to receive
benefits such as the use of secretarial support, travel costs or other benefits that may be appropriate.
Explanation of performance measures chosen
Performance measures are selected that are aligned with the performance of the Group and the interests of shareholders. Stretching
performance targets are set each year for the annual bonus and long-term incentive awards. When setting these performance targets, the
Committee will take into account a number of different reference points, which may include the Group’s business plans and strategy and the
economic environment. Full vesting will only occur for what the Committee considers to be stretching performance.
The annual bonus is predominantly based on financial metrics. Long-term incentive awards are based on EPS growth.
The Committee retains the ability to adjust or set different performance measures if events occur which cause the Committee to determine
that the measures are no longer appropriate and that amendment is required so that they achieve their original purpose.
Awards and options may be adjusted in the event of a variation of share capital in accordance with the rules of the LTIP and EMI Plans.
Policy for the remuneration of employees more generally
Remuneration arrangements are determined throughout the Group based on the same principle that reward should be achieved for delivery of
the business strategy and should be sufficient to attract, retain and motivate high-calibre employees. The Company operates a HMRC approved
SAYE Plan and invites all employees to participate at the discretion of the Committee, therefore encouraging wider workforce share ownership.
There is no consultation with employees regarding Director’s remuneration. NAHL Group plc 36
Annual report and accounts 2014 Governance
Directors’ remuneration report continued
Service contracts
Russell Atkinson’s service contract is on a rolling basis and may be terminated on nine months’ notice by the Company or the Executive.
Steve Dolton’s service contract is on a rolling basis and may be terminated on six months’ notice by the Company or the Executive.
All Non-Executive Directors have initial fixed-term agreements with the Company of no more than three years, commencing 29 May 2014, or
in the case of Gillian Kent, 3 November 2014. Three months’ notice is required.
Statement of consideration of shareholder views
The Committee considers shareholder feedback received on remuneration matters, including issues arising in relation to the AGM, as well as
any additional comments received during any other meetings with shareholders. The Committee will seek to engage directly with major
shareholders and their representative bodies should any material changes be made to the Directors’ Remuneration Policy.
Remuneration
The tables below detail the total remuneration receivable by each Director for the financial year ended 31 December 2014. Remuneration has
been calculated from the date at which the Directors were appointed to the Board of NAHL Group plc. Where necessary, further explanation
of the values provided are included in the footnotes to the table or the additional information that follows it.
2014
Salary and
fees
£000
Benefits
£000
Annual
cash bonus
£000
Pension
£000
Total
remuneration
£000
Executive Directors
Russell Atkinson 134 12 115 1 262
Steve Dolton
1
130 12 109 – 251
Non–Executive Directors
Steve Halbert 49 – – – 49
Samantha Porteous
2
63 3 – – 66
Gillian Kent
3
7 – – – 7
1 Steve Dolton is contracted to work four days per week and his salary is pro-rated to reflect this time commitment
2 Figures for Samantha Porteous include remuneration as an Executive Director prior to 29 May 2014
3 Gillian Kent was appointed to the Board on 3 November 2014
The taxable value of benefits received in the period shown above are from the Directors’ appointment to the Board to 31 December
2014. These are principally car allowance and private medical insurance.
Individual elements of remuneration
Base salary and fees
The base salaries for 2014 and 2015 are as set out below:
2014 base
salary
2015 base
salary
1
% increase
Russell Atkinson £205,250 £210,381 2.5%
Steve Dolton £164,200 £168,305 2.5%
Details of Non-Executive Directors’ fees for 2014 and 2015 are as set out below:
2014 fee 2015 fee
1
% increase
Chairman’s fees £80,000 £81,600 2%
Non-Executive Director’s fee £40,000 £40,800 2%
Chair of the Remuneration Committee £5,000 £5,100 2%
1 Salary increase with effect from 1 March 2015 37 NAHL Group plc
Annual report and accounts 2014 Governance
Annual bonus plan
The maximum annual bonus opportunity for each Executive Director in respect of the year ended 31 December 2014 was 70% of base salary.
Payments were based on the delivery of EBITDA targets and individual objectives.
The following table sets out the bonus pay-out to the Executive Directors for 2014 and how this reflects performance for the year.
The bonus reportable in the single figure table on page 36 has been pro-rated for the period from the Directors’ appointment to the Board
to 31 December 2014.
Performance target Actual performance
Executive Director
bonus as a
percentage of salary
Earnings Before Income Tax, Depreciation and Amortisation
(EBITDA) £12,500,000 Achieved 44-52%
Individual objectives Objective achievement Achieved 12-14%
Total bonus earned 56-66%
Long-term incentives
Awards vesting in respect of the financial year
No long-term incentive awards vested during the financial year.
Awards granted during the financial year
On the Company’s admission to AIM Executive Directors were granted awards on the following basis:
Type of award
Number of
shares
Face value
at grant
1
Performance
period
Russell Atkinson Nominal cost options granted under the LTIP 312,501 £625,002 3 years
Russell Atkinson Market value options granted under the EMI Plan
2
124,999 £269,998 3 years
Steve Dolton Nominal cost options granted under the LTIP 237,501 £475,002 3 years
Steve Dolton Market value options granted under the EMI Plan
2
124,999 £269,998 3 years
1 Options are valued by taking their fair value at the date of grant, which is calculated as the number of options multiplied by the share price at grant
2 EMI plan options above the £250,000 individual face value limit have been awarded as unapproved options
The awards will be based on the following Earnings per Share (EPS) targets.
Average annual compound growth in EPS between 2013 and 2016. Percentage of option vesting
10% 100%
Statement of Directors’ shareholding and share interests
The interests of the Directors and their immediate families in the Company’s Ordinary Shares as at 31 December 2014 were as follows.
31 December
2014
Executive Directors
Russell Atkinson 0.83%
Steve Dolton 2.07%
Non-Executive Directors
Steve Halbert 1.57%
Samantha Porteous 7.54%
Gillian Kent 0.00% NAHL Group plc 38
Annual report and accounts 2014 Governance
Directors’ remuneration report continued
Implementation of Directors’ Remuneration Policy for the financial year commencing 1 January 2015
Information on how the Company intends to implement the Directors’ Remuneration Policy for the financial year commencing on 1 January
2015 is set out below.
Salary/fees and benefits
The Executive Directors were awarded a 2.5% increase to base salary, with effect from 1 March 2015. Non-Executive Directors’ fees increased
by 2%, with effect from 1 March 2015.
Annual bonus plan
The maximum bonus opportunity for the Chief Executive and Chief Financial Officer will be 100% and 70% of salary respectively.
At least 50% of the annual bonus will be assessed against operating profit performance and the balance based on individual objectives.
Performance targets will continue to be set at the challenging levels of previous years. The actual performance targets are not disclosed as
they are considered to be commercially sensitive at this time. The targets will be disclosed in next year’s Directors’ Remuneration Report or
at such point that the Committee considers that the performance targets are no longer commercially sensitive.
Long-term incentives
It is proposed that non-tax-favoured share options, with an exercise price equal to the market value of the underlying shares at grant, will be
granted under the EMI Plan to Executive Directors in 2015. The Company intends to deliver a maximum opportunity of awards equal to 100%
of base salary to Russell Atkinson and 80% of base salary to Steve Dolton, vesting on the EPS targets noted above.
Approval
This report was approved by the Board on 23 March 2015 and signed on its behalf by
Samantha Porteous
Chairman of the Remuneration Committee
23 March 2015 39 NAHL Group plc
Annual report and accounts 2014 Governance
Statement of Directors’ responsibilities
in respect of the strategic report, the Directors’ report and the financial statements
The Directors are responsible for preparing the strategic report, the Directors’ report and the Group and parent company financial statements
in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and parent company financial statements for each financial year. As required by the
Alternative Investment Market Rules of the London Stock Exchange they are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and applicable law and have elected to prepare
the parent company financial statements in accordance with UK Accounting Standards and applicable law - UK Generally Accepted
Accounting Practice (UK GAAP).
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of
the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent
company financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• for the Group financial statements, state whether they have been prepared in accordance with IFRS as adopted by the EU;
• for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any
material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company
will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s
transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that
its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open
to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s
website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in
other jurisdictions. NAHL Group plc 40
Annual report and accounts 2014 Financials
Independent Auditor’s report to the members of NAHL Group plc
We have audited the financial statements of NAHL Group plc for the year ended 31 December 2014 set out on pages 22 to 61*. The financial
reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the parent
company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice).
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page 19*, the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on,
the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at
www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2014
and of the group’s profit for the year then ended;
• the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
• the parent company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements
are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from
branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
David Simpson (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
Altius House
One North Fourth Street
Milton Keynes
MK9 1NE
23 March 2015
* The page numbers quoted above in the auditor’s statement for the financial statements and Statement of Directors’ Responsibilities refer to the relevant pages in the signed
financial statements filed with Companies House. This is also the case for references to the Strategic report. 41 NAHL Group plc
Annual report and accounts 2014 Financials
Consolidated statement of comprehensive income
for the year ended 31 December 2014
Note
2014
£000
2013
£000
Continuing operations
Revenue (excluding pre-LASPO ATE) 2 43,848 39,717
Pre-LASPO ATE revenue
1
2 – 9,406
Total revenue 1,2 43,848 49,123
Cost of sales (23,885) (23,090)
Gross profit 19,963 26,033
Administrative expenses 4 (8,190) (6,819)
Operating profit (excluding share-based payments, one-off items and pre-LASPO ATE) 12,713 9,829
Share-based payments 19 (288) 7
One-off items 5 (652) –
Pre-LASPO ATE operating profit 2 – 9,378
Total operating profit 2 11,773 19,214
Financial income 8 590 332
Financial expense 9 (291) (4,805)
Profit before tax 12,072 14,741
Taxation 10 (2,594) (4,411)
Profit from continuing operations 9,478 10,330
Discontinued operation
Loss from discontinued operation, net of tax 3 (1,005) (872)
Profit for the year and total comprehensive income 8,473 9,458
All profits and losses and total comprehensive income are attributable to the owners of the Company.
1 Pre-LASPO ATE revenue means commissions received from the use of an ATE insurance product by participating solicitor firms before the implementation of the LASPO.
As a result of the LASPO regulatory changes, which were effective from 1 April 2013, this product is no longer available in the same form and has therefore been
separately identified
2014
2013
(Adjusted)
Basic earnings per share (p)
Group 20 20.6 23.0
Continuing operations 20 23.0 25.1
Diluted earnings per share (p)
Group 20 20.2 22.5
Continuing operations 20 22.6 24.6
Discontinued earnings per share are shown in note 20. Comparatives for earnings per share have been adjusted as described in note 20. NAHL Group plc 42
Annual report and accounts 2014 Financials
Consolidated statement of financial position
at 31 December 2014
Note
2014
£000
2013
£000
Non-current assets
Goodwill 12 39,897 39,897
Property, plant and equipment 14 186 371
Deferred tax asset 11 77 61
40,160 40,329
Current assets
Trade and other receivables 15 3,725 3,168
Cash and cash equivalents 13,637 14,249
Assets classified as held for sale 3 – 3,138
17,362 20,555
Total assets 57,522 60,884
Current liabilities
Other interest-bearing loans and borrowings 17 (2,950) (6,789)
Trade and other payables 16 (7,688) (7,838)
Other payables relating to legacy pre-LASPO ATE product 2 (6,511) (12,086)
Tax payable (1,248) (3,107)
Liabilities classified as held for sale 3 – (843)
(18,397) (30,663)
Non-current liabilities
Other interest-bearing loans and borrowings 17 (2,951) (70)
Total liabilities (21,348) (30,733)
Net assets 36,174 30,151
Equity
Share capital 18 103 231
Share option reserve 288 –
Interest in own shares – (14)
Share premium 49,533 100
Merger reserve (50,000) –
Retained earnings 36,250 29,834
T otal equity 36,174 30,151
These financial statements were approved by the Board of Directors on 23 March 2015 and were signed on its behalf by
Russell Atkinson
Chief Executive Officer
Company registered number: 08996352 43 NAHL Group plc
Annual report and accounts 2014 Financials
Company balance sheet
at 31 December 2014
Note
2014
£000
2013
£000
Non-current assets
Investments 13 52,700 –
Current assets
Trade and other receivables 15 25,306 –
Net assets 78,006 –
Equity
Share capital 18 103 –
Share option reserve 288 –
Share premium 49,533 –
Merger reserve 16,928 –
Retained earnings 11,154 –
Total equity 78,006 –
These financial statements were approved by the Board of Directors on 23 March 2015 and were signed on its behalf by
Russell Atkinson
Chief Executive Officer
Company registered number: 08996352 NAHL Group plc 44
Annual report and accounts 2014 Financials
Consolidated statement of changes in equity
for the year ended 31 December 2014
Share
capital
£000
Share
option
reserve
£000
Interest
in own
shares
£000
Share
premium
£000
Merger
reserve
£000
Retained
earnings
£000
Total
equity
£000
Balance at 1 January 2013 231 – (14) 100 – 20,383 20,700
Total comprehensive income for the year
Profit for the year – – – – – 9,458 9,458
Total comprehensive income – – – – – 9,458 9,458
Transactions with owners, recorded directly in
equity
Equity-settled share-based payments – – – – – (7) (7)
Balance at 31 December 2013 231 – (14) 100 – 29,834 30,151
Total comprehensive income for the year
Profit for the year – – – – – 8,473 8,473
Total comprehensive income – – – – – 8,473 8,473
Transactions with owners, recorded directly in
equity
Issue of deferred share (note 24) – – – 50,000 (50,000) – –
Disposal of assets held for sale (note 24) – – – (1,500) – – (1,500)
Issue of new Ordinary Shares (note 24) 3 – – 861 – – 864
Share-based payments (note 19) – 288 – – – – 288
Other transactions with owners (note 24) (131) – 14 72 – – (45)
Dividends paid – – – – – (2,057) (2,057)
Balance at 31 December 2014 103 288 – 49,533 (50,000) 36,250 36,174 45 NAHL Group plc
Annual report and accounts 2014 Financials
Company statement of total recognised gains and losses
for the year ended 31 December 2014
Share
capital
£000
Share
option
reserve
£000
Share
premium
£000
Merger
reserve
£000
Retained
earnings
£000
Total
equity
£000
Balance at 1 January 2014 – – – – – –
Total comprehensive income for the year
Profit for the year – – – – 13,211 13,211
Total comprehensive income – – – – 13,211 13,211
Transactions with owners, recorded directly in equity
Fair value of shares acquired through share for share exchange 272 – – 66,928 – 67,200
Issue of deferred share (note 24) – – 50,000 (50,000) – –
Disposal of assets held for sale (note 24) – – (1,500) – – (1,500)
Issue of new Ordinary Shares (note 24) 3 – 861 – – 864
Share-based payments (note 19) – 288 – – – 288
Other transactions with owners (note 24) (172) – 172 – – –
Dividends paid – – – – (2,057) (2,057)
Balance at 31 December 2014 103 288 49,533 16,928 11,154 78,006 NAHL Group plc 46
Annual report and accounts 2014 Financials
Consolidated cash flow statement
for the year ended 31 December 2014
Note
2014
£000
2013
£000
Cash flows from operating activities
Continuing operations
Profit for the year 9,478 10,330
Adjustments for:
Depreciation 4 212 245
Financial income 8 (590) (332)
Financial expense 9 291 4,805
Share-based payments 6/19 288 (7)
Taxation 10 2,594 4,411
12,273 19,452
Increase in trade and other receivables (557) (1,818)
Increase/(decrease) in trade and other payables 40 (113)
Decrease in other payables relating to legacy pre-LASPO ATE product (5,575) (3,177)
6,181 14,344
Interest paid (443) (3,050)
Tax paid (4,469) (3,133)
Net cash from operating activities – continuing operations 1,269 8,161
Net cash from operating activities – discontinued operations
1
3 (654) 711
Net cash from operating activities 615 8,872
Cash flows from investing activities
Continuing operations
Acquisition of property, plant and equipment 14 (27) (177)
Interest received 110 332
Income from crystallisation of contingent asset 5 480 –
Net cash from/(used in) investing activities – continuing operations 563 155
Net cash used in investing activities – discontinued operations 3 – (3,629)
Net cash used in investing activities 563 (3,474)
Cash flows from financing activities
Continuing operations
New share issue 819 –
Repayment of borrowings (996) (28,322)
Dividends paid (2,057) –
Net cash used in financing activities – continuing operations (2,234) (28,322)
Net cash used in financing activities – discontinued operations 3 250 2,902
Net cash used in financing activities (1,984) (25,420)
Net decrease in cash and cash equivalents (806) (20,022)
Cash and cash equivalents at 1 January 14,443 34,465
Cash and cash equivalents at 31 December
2
21 13,637 14,443
1 Net cash from operating activities, discontinued operations, includes operating cashflows of £444,000 (2013: £711,000) from discontinued operations and £210,000 (2013: nil) of
costs borne by the Group
2 Cash and cash equivalents at 31 December 2013 include cash for discontinued operations of £194,000 not included on the face of the consolidated statement of financial position 47 NAHL Group plc
Annual report and accounts 2014 Financials
Notes to the financial statements
1. Accounting policies
Basis of preparation
Consolidated financial statements
The consolidated financial statements for the year ended 31 December 2014 have been prepared in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies
reporting under IFRS.
The consolidated financial information has been prepared on a going concern basis and under the historical cost convention.
The first consolidated financial statements which were prepared under IFRS as adopted by the European Union, are the Historical Financial
Information included within the AIM Admission Document. A copy of these financial statements can be obtained from the Group’s website
www.nahlgroupplc.co.uk. The date of transition to IFRS was 1 January 2011, and disclosures concerning the transition from UK GAAP to
IFRS are detailed in note 24 of the AIM Admission Document. Therefore, the consolidated financial statements for the year ended
31 December 2014 do not constitute the first IFRS financial statements of the Group, and accordingly no associated disclosures are provided.
The Directors have prepared cash flow forecasts for the period until December 2016. Based on these, the Directors confirm that there are
sufficient cash reserves to fund the business for the period under review, and believe that the Group is well placed to manage its business risk
successfully. For this reason they continue to adopt the going concern basis in preparing the financial statements.
The share capital relating to NAHL Group plc is a result of a share for share exchange with the shareholders of Consumer Champion Group
Limited. There was no change of control as a result of the transaction.
Parent company
The individual Company financial statements have been prepared in accordance with applicable accounting standards (UK GAAP) and under
the historical cost accounting rules.
Under FRS 1 the Company is exempt from the requirement to prepare a cash flow statement on the grounds that a parent undertaking
includes the Company in its own published consolidated financial statements.
Basis of consolidation
The financial statements represent a consolidation of the Company and its subsidiary undertakings as at the statement of financial position
date and for the year then ended. In accordance with IFRS 10 the definition of control is such that an investor has control over an investee
when a) it has power over the investee, b) it is exposed, or has the rights, to variable returns from its involvement with the investee and c) has
the ability to use its power to affect its returns. All three of these criteria must be met for an investor to have control over an investee. All
subsidiary undertakings in which the Group has a greater than 50 percent shareholding have been consolidated in the Group’s results.
The consolidated financial information incorporates the results of business combinations using the purchase method. In the Group statement
of financial position, the acquiree’s identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the
acquisition date. The results of acquired operations are included in the Group statement of comprehensive income from the date on which
control is obtained. They are deconsolidated from the date on which control ceases. Acquisition costs are expensed as incurred. This policy
does not apply on the acquisition of Consumer Champion Group Limited for which reverse acquisition accounting has been applied.
Use of judgements and estimates
The preparation of financial statements in conformity with IFRSs requires management to make judgements and estimates that affect the
application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these
estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
year in which the estimates are revised and in any future years affected.
Revenue, other than pre-LASPO ATE insurance income, is not considered to be a key judgement or estimate as the revenue recognised is equal
to the cash received with no further clawback or commitments. All solicitor income cash is collected by direct debit in the month within
which it is billed.
Judgements
In applying the Group’s accounting policies, management has applied judgement in the following areas that have a significant impact on the
amounts recognised in the financial statements.
Intangible assets
When the Group makes an acquisition, management determines whether any intangible assets should be recognised separately from goodwill. NAHL Group plc 48
Annual report and accounts 2014 Financials
1. Accounting policies continued
Estimates
Discussed below are key assumptions concerning the future, and other key sources of estimation at the reporting date, that have a risk of
causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.
Impairment of goodwill
The Group determines on an annual basis whether goodwill is impaired. This requires an estimation of the future cash flows of
the cash-generating units to which the goodwill is allocated; see note 12.
Contingent consideration
When the Group acquires businesses, total consideration may consist of additional amounts payable on agreed post-completion dates. These
further amounts are contingent on the acquired business meeting agreed performance targets. At the date of acquisition, the Group reviews
the profit and cash forecasts for the acquired business and estimates the amount of contingent consideration that is likely to be due.
Recoverability of trade receivables
Trade receivables are reflected net of an estimated provision for impairment losses. This provision considers the past payment history and the
length of time that the debt has remained unpaid; see note 15 and 21.
Deferred tax
Deferred tax assets and liabilities require management judgement in determining the amounts to be recognised, with consideration given to
the timing and level of future taxable income; see note 11.
Revenue recognition
Pre-LASPO ATE revenue is recognised in full upon inception of the associated policy, less an allowance for the estimated claw back of revenue
based upon the underlying historic failure rate of claims.
New standards, interpretations and amendments not yet effective
The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective:
• IFRS 9: Financial Instruments - Effective for annual reporting periods beginning on or after 1 January 2018, with early application
permitted.
• IFRS 15: Revenue from Contracts with Customers - Effective for annual reporting periods beginning on or after 1 January 2017,
with early application permitted.
• Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation - Effective for annual reporting
periods beginning on or after 1 January 2016, with early application permitted.
• Amendments to IAS 19: Defined Benefit Plans; Employee Contributions - Effective for annual reporting periods beginning on or after 1
July 2014, with early application permitted.
• Amendments to IFRSs: Annual Improvements to IFRSs 2010-2012 Cycle - Effective for annual reporting periods beginning on or after 1
July 2014, with limited exceptions. Earlier application is permitted. The Annual Improvements to IFRSs 2010-2012 Cycle include a number
of amendments to various IFRSs such as; IFRS 2 ‘Share-based Payment’, IFRS 3 ‘Business Combinations’, IFRS 8 ‘Operating Segments’,
IFRS 13 ‘Fair Value Measurement’, IAS 16 ‘Property, Plant and Equipment’, IAS 38 ‘Intangible Assets’ and IAS 24 ‘Related Party
Disclosures’.
• Amendments to IFRSs: Annual Improvements to IFRSs 2011-2013 Cycle - Effective for annual reporting periods beginning on or after 1
July 2014, with early application permitted. The Annual Improvements to IFRSs 2011-2013 Cycle include a number of amendments to
various IFRSs such as; IFRS 3 ‘Business Combinations’, IFRS 13 ‘Fair Value Measurement’ and IAS 40 ‘Investment Property’.
The Group has considered the impact of the above standards and revisions and has concluded that they will not have a material impact on the
Group’s financial statements.
Going concern
The Group had cash balances of £13,637,000 (2013: £14,443,000), net assets of £36,174,000 (2013: £30,151,000) and net current liabilities of
£1,035,000 (2013: £10,108,000) as at each year end.
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational
existence for the foreseeable future. As a consequence, the Directors believe that the Group is well placed to manage its business risks
successfully. As part of the normal management process, detailed projections of future trading are prepared, which includes the impact for
possible changes in market or regulatory conditions. Based on these projections the Board remain very positive about the Group’s short and
long-term prospects.
Accordingly, the Directors continue to adopt the going concern basis in preparing the strategic report, Directors’ report and financial statements.
Notes to the financial statements continued 49 NAHL Group plc
Annual report and accounts 2014 Financials
1. Accounting policies continued
Revenue
Revenue relating to solicitor income (including recharged costs), means income received for the provision of enquiries to solicitor firms on a
cost-plus model. Revenue recognised is equal to the cash received with no further clawback or commitments. All cash is collected by direct
debit in the month within which it is billed.
Pre-LASPO ATE Revenue means commissions received from the use of an ATE insurance product by participating solicitor firms before the
implementation of LASPO. As a result of the LASPO regulatory changes, which were effective from 1 April 2013, this product is no longer
available in the same form and has therefore been separately disclosed on the face of the consolidated income statement, and is separately
identified as an operational segment. Whilst the income is contingent upon the successful outcome of the associated case, the Directors
consider that a right to consideration occurs at the point at which an insurance policy is incepted, and at this point the obligations of the
Group are discharged. Accordingly, expected income is recognised in full upon inception of the associated policy, less an allowance for the
estimated claw back of income based upon the underlying failure rate of claims.
Products revenue relates to commissions for the sale of additional products which aid the claims process to solicitor firms with which the
Group has an ongoing relationship. The commissions received are recognised as revenue in the period in which the product is used.
Revenue relating to PPI Claimline Limited has been included as a discontinued operation, as a decision was made by the Directors to sell this
major line of business on 15 May 2014. Revenue is recognised on confirmation of successful completion of a claim.
All revenue is stated net of Value Added Tax. The entire revenue arose in the United Kingdom.
Goodwill
Goodwill represents the excess of the fair value of the consideration given over the fair value of the Group’s share of the net identifiable
assets of the acquired subsidiary at the date of acquisition. Goodwill is not amortised but is tested for impairment annually and again
whenever indicators of impairment are detected and is carried at cost less any provision for impairment. Any impairment is recognised
in the income statement.
Other intangible assets
Other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and
any accumulated impairment losses.
Amortisation
Intangible assets are amortised on a straight-line basis over their estimated useful lives as follows:
• Customer-related intangibles – 1 year
Depreciation
Depreciation is calculated to write off the cost, less estimated residual value, of property, plant and equipment by equal instalments over their
estimated useful economic lives as follows:
• Office equipment – 3 to 5 years
• Computers – 3 years
Operating leases
Operating lease rentals are charged to the income statement account on a straight-line basis over the period of the lease.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part
of the Group’s cash management are included as a component of cash and cash equivalents for the purpose only of the cash flow statement.
Taxation
Tax on the income statement for the year comprises current and deferred tax. Tax is recognised in the statement of comprehensive income
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 or receivable on the taxable income or loss 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 temporary difference can be utilised. NAHL Group plc 50
Annual report and accounts 2014 Financials
1. Accounting policies continued
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost using the effective interest method, less any impairment losses.
Classification of financial instruments issued by the Group
Financial instruments issued by the Group are treated as equity (i.e. forming part of equity) only to the extent that they meet the following
two conditions:
a) they include no contractual obligations upon the Company (or Group as the case may be) to deliver cash or other financial assets or to
exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company
(or Group); and
b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no
obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company’s
exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified
takes the legal form of the Company’s own shares, the amounts presented in these financial statements for called up share capital and share
premium account exclude amounts in relation to those shares.
Finance payments associated with financial liabilities are dealt with as part of interest payable and similar charges. Finance payments
associated with financial instruments that are classified as part of shareholders’ funds, are dealt with as appropriations in the reconciliation
of movements in equity.
Employee share schemes
The share option plans allow employees of the Group to acquire shares of the Company. 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 pricing
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 only due to share prices not achieving the threshold
for vesting.
Impairment
The carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine
whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill,
and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at
the same time.
The recoverable amount of an asset or cash-generating unit (CGU) is the greater of its value in use and its fair value less costs to sell. In
assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot
be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or groups of assets (the CGU). The goodwill acquired in a business combination, for the
purpose of impairment testing, is allocated to CGUs. Subject to an operating segment ceiling test, for the purposes of goodwill impairment
testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at
which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that
are expected to benefit from the synergies of the combination.
An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment
losses are recognised in the income statement. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying
amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on
a pro-rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are
assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has
been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s
carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no
impairment loss had been recognised.
Non-current assets held for sale and discontinued operations
A non-current asset or a group of assets containing a non-current asset (a disposal group) is classified as held for sale if its carrying amount
will be recovered principally through sale rather than through continuing use, it is available for immediate sale and sale is highly probable
within one year.
Notes to the financial statements continued 51 NAHL Group plc
Annual report and accounts 2014 Financials
1. Accounting policies continued
On initial classification as held for sale, non-current assets and disposal groups are measured at the lower of previous carrying amount
and fair value less costs to sell with any adjustments taken to the income statement. The same applies to gains and losses on subsequent
re-measurement, although gains are not recognised in excess of any cumulative impairment loss. Any impairment loss on a disposal group
first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories,
financial assets, deferred tax assets, employee benefit assets and investment property, where applicable, which continue to be measured in
accordance with the Group’s accounting policies. Intangible assets and property, plant and equipment once classified as held for sale or
distribution are not amortised or depreciated.
In accordance with IFRS 5, the above policy is effective from transition date; no reclassifications are made in prior periods.
A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of
operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a
discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an
operation is classified as a discontinued operation, the comparative income statement is restated as if the operation has been discontinued
from the start of the comparative period.
2. Operating segments
Solicitor
income
£000
Products
£000
Pre-LASPO
ATE
£000
Other
segments
£000
One-off
items
£000
Total -
continuing
£000
PPI Claimline
(discontinued)
£000
Total
£000
Year ended 31 December 2014
Revenue 38,445 5,403 – – – 43,848 1,506 45,354
Depreciation and amortisation (212) – – – – (212) (31) (243)
Operating profit/(loss) 9,020 5,301 – (1,608) (940) 11,773 (232) 11,541
Financial income 590 – 590
Financial expenses (291) – (291)
Profit/(loss) before tax 12,072 (232) 11,840
Trade receivables 3,126 50 – – – 3,176 – 3,176
Segment liabilities (5,565) (878) (6,511) (1,245) – (14,199) – (14,199)
Capital expenditure 27 – – – – 27 – 27
Year ended 31 December 2013
Revenue 34,423 5,294 9,406 – – 49,123 12,245 61,368
Depreciation and amortisation (245) – – – – (245) (4,969) (5,214)
Operating profit/(loss) 5,588 5,256 9,378 (1,008) – 19,214 (3,494) 15,720
Financial income 332 2,903 3,235
Financial expenses (4,805) (88) (4,893)
Profit/(loss) before tax 14,741 (679) 14,062
Trade receivables 2,373 508 – – – 2,881 1,130 4,011
Segment liabilities (3,976) (312) (12,086) (3,550) – (19,924) (843) (20,767)
Capital expenditure 177 – – – – 177 – 177
Geographic information
All revenue and assets of the Group are based in the UK.
Operating segments
The segments used in reporting by the Chief Operating Decision Maker (CODM), being the Board, and considered relevant to the business are
segmented on a product basis. These segments are:
Solicitor income
Revenue from the provision of enquiries to the PLFs, based on a cost plus margin model, (based on fixed fee for the period to 31 March 2013).
Products
Commissions received from providers for the sale of additional products by them to the PLFs.
Pre-LASPO ATE
Commissions received from the insurance provider for the use of ATE policies by panel law firms. From 1 April 2013, this product was no
longer available as a result of LASPO regulatory changes. Included in the balance sheet is a liability that has been separately identified due to
its material value. This balance is commissions received in advance that are due to be paid back to the insurance provider. No interest is due
on this liability.
Other segments
Costs that are incurred in managing Group activities or not specifically related to a product and including share-based payments.
One-off items
Costs for the payment of employee bonuses relating to admission of the Company to AIM.
PPI Claimline (discontinued)
Provision of claims management services focused on recovery of mis-sold payment protection insurance. This business was sold on 15 May 2014. NAHL Group plc 52
Annual report and accounts 2014 Financials
2. Operating segments continued
Cash flows from operating activities – continuing operations
A reconciliation of operating profit to cash generation from operations for continuing operations has been presented below separately
identifying net cash flows relating to continuing products (comprising cash flows associated with solicitor income, products and other
segments), the pre-LASPO ATE product segment and cash flows within continuing operations that related to the PPI Claimline division,
which is now discontinued.
For the period ended 31 December 2014, one-off items have also been separately identified.
Reconciliation of operating profit to net cash flows from operating activities – continued operations
Continuing
products
£000
Pre-LASPO
ATE
£000
Sub-total
£000
One-off
items
£000
Total
£000
12 months ended 31 December 2014
Operating profit 12,425 – 12,425 (652) 11,773
Equity-settled share-based payments 288 – 288 – 288
Underlying operating profit 12,713 – 12,713 (652) 12,061
Depreciation 212 – 212 – 212
Increase in trade/other receivables (557) – (557) – (557)
Increase in trade/other payables 40 – 40 – 40
Decrease in liabilities relating to pre-LASPO ATE product – (5,575) (5,575) – (5,575)
Net cash flows from operating activities before interest and tax 12,408 (5,575) 6,833 (652) 6,181
Continuing
products
£000
Pre-LASPO
ATE
£000
Sub-total
£000
PPI
Claimline
related
£000
Total
£000
12 months ended 31 December 2013
Operating profit 9,836 9,378 19,214 – 19,214
Equity-settled share-based payments (7) – (7) – (7)
Underlying operating profit 9,829 9,378 19,207 – 19,207
Depreciation 245 – 245 – 245
Decrease/(increase) in trade/other receivables 487 – 487 (2,305) (1,818)
Decrease in trade/other payables (113) – (113) – (113)
Decrease in liabilities relating to pre-LASPO ATE product – (3,177) (3,177) – (3,177)
Net cash flows from operating activities before interest and tax 10,448 6,201 16,649 (2,305) 14,344
3. Non-current assets held for sale and discontinued operation
The PPI Claimline division was acquired in February 2011 and was classified as held for sale in the 31 December 2013 Historical Financial
Information as the Company had committed to selling this division and expected to conclude a sale within the next six months. The related
assets and liabilities were classified as held for sale in the year ended 31 December 2013, and therefore the statement of comprehensive
income was restated for discontinued operations for all three years presented.
On the 15 May 2014, the division was sold for £1,500,000 resulting in a loss on disposal of £563,000.
Trading results of the discontinued operation
2014
£000
2013
£000
Revenue 1,506 12,245
Adminstrative expenses (1,738) (15,739)
Financial income – 2,903
Financial expense – (88)
Loss before tax (232) (679)
Tax on loss – (193)
Loss for the year (232) (872)
Notes to the financial statements continued 53 NAHL Group plc
Annual report and accounts 2014 Financials
3. Non-current assets held for sale and discontinued operation continued
Loss from discontinued operations
2014
£000
2013
£000
Proceeds
Capital reduction 1,500 –
Disposal
Net assets at 31 December 2013 2,295 –
Loss in the period (232) –
2,063 –
Loss on disposal (563) –
Other losses attributable to discontinued operations
Loss in the period (232) (872)
Reorganisation costs (98) –
Fees relating to disposal (112) –
(442) (872)
Total loss from discontinued operations (1,005) (872)
Loss before tax is stated after charging/(crediting):
2014
£000
2013
£000
Impairment of goodwill – 4,888
Depreciation of property, plant and equipment 31 81
Operating leases – land and buildings 49 115
Operating leases – other – 5
Early settlement of contingent consideration – (2,902)
Assets and liabilities held for sale/disposal group
2014
£000
2013
£000
Assets classified as held for sale/disposal group:
Intangible assets – 1,265
Property, plant and equipment – 96
Trade and other receivables – 1,583
Cash and cash equivalents – 194
– 3,138
Liabilities classified as held for sale/disposal group:
Trade and other payables – (843)
– 2,295 NAHL Group plc 54
Annual report and accounts 2014 Financials
3. Non-current assets held for sale and discontinued operation continued
Cash flow statement for discontinued operations
2014
£000
2013
£000
Cash flows from operating activities
Discontinued operations
Loss for the year (1,005) (872)
Adjustments for:
Depreciation, amortisation and impairment 31 4,969
Financial income – (2,903)
Financial expense – 88
Taxation – 193
(974) 1,475
Decrease in trade and other receivables 1,583 1,038
Decrease in trade and other payables (843) (1,599)
Cost borne by Group Company (210) –
(444) 914
Interest paid – (10)
Tax paid – (193)
(444) 711
Cash flows from investing activities
Discontinued operations
Interest received – 1
Acquisition of subsidiary – (3,630)
Net cash from investing activities – (3,629)
Cash flows from financing activities
Discontinued operations
Funding from Group companies 250 –
Early settlement of contingent consideration – 2,902
Net cash from financing activities 250 2,902
Net decrease in cash and cash equivalents (194) (16)
Cash and cash equivalents at 1 January 194 210
Cash and cash equivalents at 31 December – 194
Intangible assets
Customer-
related
intangibles
£000
Goodwill
£000
Total
£000
Cost
At 1 January 2014 312 6,153 6,465
Disposal (312) (6,153) (6,465)
At 31 December 2014 – – –
Amortisation and impairment
At 1 January 2014 312 4,888 5,200
Disposal (312) (4,888) (5,200)
At 31 December 2014 – – –
Net book value
At 31 December 2013 – 1,265 1,265
At 31 December 2014 – – –
Notes to the financial statements continued 55 NAHL Group plc
Annual report and accounts 2014 Financials
4. Administrative expenses and Auditor’s remuneration*
Included in consolidated statement of comprehensive income are the following:
2014
£000
2013
£000
Depreciation of property, plant and equipment 212 245
Operating leases – land and buildings 120 170
Operating leases – other 40 57
Auditor’s remuneration 352 133
The analysis of Auditor’s remuneration is as follows:
2014
£000
2013
£000
Audit services - statutory audit 58 38
Other assurance services 8 –
Taxation compliance 8 13
Taxation advisory services 5 –
Corporate finance services 270 82
Other assurance & non-audit services 3 –
Total non-audit remuneration 294 95
* Information given excludes that of discontinued operations which are disclosed in note 3
5. One-off items
As a result of the admission to AIM process, income was realised on the crystallisation of an asset that was contingent on an exit event. This
contingent asset arose as a result of the award of shares to employees by the Employee Benefit Trust (EBT) under the EMI scheme creating
loans repayable on exit. This income totalled £480,000. Under the trust rules this cash and any previously recognised cash in the EBT is
required to be used for the benefit of employees. As a result, Company-wide bonuses were paid in recognition of the successful completion of
the IPO. The costs of these bonuses have been included in the consolidated statement of comprehensive income as one-off items totalling
£652,000 (2013: nil). The £480,000 income received for the contingent asset has been detailed in note 8.
6. 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
2014 2013
Directors 3 4
Others (excluding discontinued operation) 119 120
Others (from discontinued operation) 33 148
155 272
The aggregate payroll costs of these persons were as follows:
2014
£000
2013
£000
Wages and salaries 5,231 8,602
Share-based payments (see note 19) 288 (7)
Social security costs 599 856
Pension costs 14 –
6,132 9,451 NAHL Group plc 56
Annual report and accounts 2014 Financials
7. Directors’ emoluments
Proforma emoluments relate to amounts paid to current Directors applying those directorships retrospectively for 2013 and 2014, prior to
incorporation of NAHL Group plc. Statutory Directors’ emoluments relate to Directors registered at Companies House as Directors of NAHL
Group plc for the period during which they were Directors.
2014
£000
2013
£000
Proforma Directors’ emoluments 1,220 995
Statutory Directors’ emoluments 635 –
Proforma Directors’ emoluments
2014
Salary
and fees
£000
Benefits
£000
Annual
bonus
£000
IPO bonus
£000
Pension
£000
Total
£000
Executive Directors
Russell Atkinson 192 25 115 59 1 392
Steve Dolton 181 14 109 171 – 475
Non-Executive Directors
Steve Halbert 71 – – 104 – 175
Samantha Porteous
1
118 7 45 1 – 171
Gillian Kent 7 – – – – 7
2013
Salary
and fees
£000
Benefits
£000
Annual
bonus
£000
Total
£000
Executive Directors
Russell Atkinson 170 16 82 268
Steve Dolton 200 16 100 316
Non-Executive Directors
Steve Halbert 72 – – 72
Samantha Porteous 215 16 108 339
Statutory Directors’ emoluments
2014
Salary
and fees
£000
Benefits
£000
Annual
bonus
£000
Pension
£000
Total
£000
Executive Directors
Russell Atkinson 134 12 115 1 262
Steve Dolton 130 12 109 – 251
Non-Executive Directors
Steve Halbert 49 – – – 49
Samantha Porteous 63 3 – – 66
Gillian Kent 7 – – – 7
1. Figures for Samantha Porteous include remuneration as an Executive Director prior to 29 May 2014
The Group contributed £3,000 to pension schemes in respect of Directors during the year (2013: nil).
The emoluments of the highest paid Director were £262,000 (2013: nil).
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the
Group. Key management personnel include members of the Operational Board who are not statutory Directors in addition to the main Board.
Disclosure of transactions with key management is detailed in note 25.
Notes to the financial statements continued 57 NAHL Group plc
Annual report and accounts 2014 Financials
8. Financial income*
2014
£000
2013
£000
Bank interest income 110 332
Income from crystallisation of contingent asset (note 5) 480 –
590 332
* Information given excludes that of discontinued operations which are disclosed in note 3
9. Financial expense*
2014
£000
2013
£000
On bank loans 157 415
On loan notes – 1,705
Dividends on preference shares 134 6
Unwinding of loan note discounting – 64
Loss on settlement of loan notes – 2,609
Bank charges – 6
Total finance expense 291 4,805
* Information given excludes that of discontinued operations which are disclosed in note 3 NAHL Group plc 58
Annual report and accounts 2014 Financials
10. Taxation
Recognised in the consolidated statement of comprehensive income
2014
£000
2013
£000
Current tax expense (excluding tax on discontinued operation)
Current tax on income for the period 2,610 4,393
Adjustments in respect of prior periods – (1)
Total current tax (excluding tax on discontinued operation) 2,610 4,392
Deferred tax expense
Origination and reversal of temporary differences (16) 12
Adjustments in respect of prior periods – (3)
Effects of change in standard rate of corporation tax – 10
Total deferred tax (excluding tax on discontinued operation) (16) 19
Tax expense in income statement (excluding tax on discontinued operation) 2,594 4,411
Current tax expense from discontinued operation
Current tax on income for the period – 193
Tax from discontinued operation – 193
Total tax charge 2,594 4,604
Reconciliation of effective tax rate
2014
£000
2013
£000
Profit for the year 8,473 9,458
Total tax expense (including tax on discontinued operations) 2,594 4,604
Profit excluding taxation 11,067 14,062
Tax using the UK corporation tax rate of 21.5% (2013: 23.25%) 2,379 3,269
Amortisation, impairment and unwinding of discounting not deductible for tax purposes – 1,669
Non-chargeable gain – (675)
Income disallowable for tax purposes (104) –
Non-deductible expenses 296 249
Short-term timing differences for which no deferred tax is recognised 39 125
Effects of change in standard rate of corporation tax – 10
Adjustments in respect of prior periods – (4)
Change in recognised temporary differences (16) –
Recognition of tax effect of previously unrecognised tax losses – (39)
Total current tax charge (including tax on discontinued operations) 2,594 4,604
Changes in tax rates and factors affecting the future tax charge
Reductions in the UK corporation tax rate from 23% to 21% (effective from 1 April 2014) and to 20% (effective 1 April 2015) were
substantively enacted on 2 July 2013. This will reduce the Company’s future current tax charge accordingly.
The deferred tax asset at 31 December 2013 has been calculated based on the rates of 20% substantively enacted at the balance sheet date.
Notes to the financial statements continued 59 NAHL Group plc
Annual report and accounts 2014 Financials
11. Deferred tax asset
2014
£000
2013
£000
At beginning of year 61 80
Recognised in profit or loss (see note 10) 16 (19)
Deferred tax asset at end of year 77 61
The asset for deferred taxation consists of the tax effect of temporary differences in respect of:
Property,
plant &
equipment
£000
Bad debt
provisions
£000
Total
£000
At 1 January 2013 60 20 80
Recognised in profit or loss (13) (6) (19)
At 31 December 2013 47 14 61
Recognised in profit or loss 16 – 16
At 31 December 2014 63 14 77
At 31 December 2013 the Group had additional unrecognised net deferred tax assets of £451,000. Following the sale of PPI Claimline Limited
no further unrecognised deferred tax asset exists at 31 December 2014.
2014
£000
2013
£000
Unrecognised deferred tax asset
Bad debt provisions – 431
Property, plant & equipment – 20
At 31 December 2014 – 451
12. Goodwill
NAH
£000
PPIC
£000
Total
£000
Cost
At 1 January 2013 39,897 6,153 46,050
Transfer to assets held for sale – (6,153) (6,153)
At 31 December 2013 39,897 – 39,897
At 31 December 2014 39,897 – 39,897
Impairment
At 1 January 2013 – – –
Impairment charge for the year – 4,888 4,888
Transfer to assets held for sale – (4,888) (4,888)
At 31 December 2013 – – –
At 31 December 2014 – – –
Net book value
At 31 December 2013 39,897 – 39,897
At 31 December 2014 39,897 – 39,897
Where goodwill arose as part of a business acquisition, it forms part of the CGU asset carrying value which is tested for impairment annually. The
Group has determined that for the purposes of impairment testing each segment, i.e. solicitor income and products and pre-LASPO ATE, is the
appropriate level at which to test. NAH comprises three CGUs namely the operating segments of solicitor income, products and pre-LASPO ATE,
whereas PPI Claimline is its own CGU. Goodwill in relation to the acquisition of PPI Claimline has been included within assets held for sale in 31
December 2013 and was sold during 2014, therefore goodwill at 31 December 2013 and 2014 related to the NAH segments only. Due to the
discontinued nature of the pre-LASPO ATE product, no goodwill has been allocated to it.
The recoverable amounts for the CGUs are predominantly based on value in use which is calculated on the cash flows expected to be generated by
the division using the latest budget data for the coming year, extrapolated at a 5% (2013: 5%) annual growth rate for four years and no growth into
perpetuity, discounted at a post tax WACC of 8% (2013: 14%). The key assumptions in the value in use calculation are the discount rate and
growth rate. The discount rate is based on the Group’s post-tax cost of capital and estimated cost of equity, which the Directors consider equated to
market participants’ rate. The movement in discount rate compared to prior year is a result of having greater access to capital as a direct result of
listing on AIM. NAHL Group plc 60
Annual report and accounts 2014 Financials
12. Goodwill continued
In preparing the formal budget for the next financial period, expected EBITDA is based on past experience of the performance of the CGUs adjusted
for known changes.
Based on the operating performance of the NAH CGU, no impairment loss was identified at any of the two years under review, and there is
sufficient headroom to indicate that no reasonable change to key assumptions would result in an impairment of this goodwill. The key
assumptions were as follows:
2014 2013
Discount rate 8% 14%
Budgeted operating cash flow growth (average of next 4 years) 5% 5%
The following table shows the percentage to which the discount rate would need to increase and the percentage by which the budgeted operating
cash flows would need to decrease in order for the estimated recoverable amount of the CGU to be equal to the carrying amount:
2014 2013
Discount rate 42% 57%
Budgeted operating cash flow growth (average of next 5 years) (20%) (32%)
13. Investments
The Company has the following investments in subsidiaries:
Ownership
Name of subsidiary
Country of
incorporation and
principal place of
business
Class of
shares held
Principal
activity 2014 2013
Consumer Champion Group Limited United Kingdom Ordinary Holding company 100% –%
NAH Holdings Limited United Kingdom Ordinary Holding company 100% –%
NAH Group Limited United Kingdom Ordinary Ordinary 100% –%
Seebeck 62 Limited* United Kingdom Ordinary Ordinary –% –%
National Accident Helpline Limited United Kingdom Ordinary Agency services for solicitors 100% –%
PPI Claimline Limited* United Kingdom Ordinary Agency services for solicitors –% –%
Lawyers Agency Services Limited United Kingdom Ordinary Non-trading 100% –%
Accident Helpline Limited United Kingdom Ordinary Dormant 100% –%
NAH Support Services Limited United Kingdom Ordinary Dormant 100% –%
Tiger Claims Limited United Kingdom Ordinary Dormant 100% –%
Your Law Limited United Kingdom Ordinary Dormant 100% –%
NAH Legal Services Limited United Kingdom Ordinary Dormant 100% –%
* These subsidiaries have been disposed of during the year and were classified as held for sale at 31 December 2013
At the 31 December 2014 the value of the investment in Consumer Champion Group Limited, it’s only directly owned subsidiary was as follows:
Valuation
Total
£000
At 1 January 2014 –
At acquisition 67,200
Realisation of investment (14,500)
At 31 December 2014 52,700
The valuation of the investment at acquisition was management’s best estimate at the time of the transaction.
Notes to the financial statements continued 61 NAHL Group plc
Annual report and accounts 2014 Financials
14. Property, plant and equipment
Fixtures and
fittings
£000
Total
£000
Cost
At 1 January 2014 1,045 1,045
Additions 27 27
At 31 December 2014 1,072 1,072
Depreciation and impairment
At 1 January 2014 674 674
Depreciation charge for the year 212 212
At 31 December 2014 886 886
Net book value
At 31 December 2013 371 371
At 31 December 2014 186 186
Fixtures and
fittings
£000
Total
£000
Cost
At 1 January 2013 1,138 1,138
Additions 177 177
Transfer to assets held for sale (270) (270)
At 31 December 2013 1,045 1,045
Depreciation and impairment
At 1 January 2013 522 522
Depreciation charge for the year 245 245
Transfer of assets held for sale (93) (93)
At 31 December 2013 674 674
Net book value
At 31 December 2012 616 616
At 31 December 2013 371 371
15. Trade and other receivables
Group
2014
£000
Company
2014
£000
Group
2013
£000
Company
2013
£000
Trade receivables 3,176 – 2,881 –
Other receivables 355 – 78 –
3,531 – 2,959 –
Prepayments 194 – 209 –
Amounts due from Group undertakings – 25,306 – –
3,725 25,306 3,168 –
16. Trade and other payables
2014
£000
2013
£000
Current
Trade payables 1,442 851
Other taxation and social security 414 693
Other creditors and accruals 2,962 3,053
Customer deposits 2,870 3,241
7,688 7,838 NAHL Group plc 62
Annual report and accounts 2014 Financials
17. Other interest-bearing loans and borrowings
This note provides information about the contractual terms of the Company’s other interest-bearing loans and borrowings, which are
measured at amortised cost. For more information about the Company’s exposure to interest rate and foreign currency risk, see note 21.
2014
£000
2013
£000
Current liabilities
Current portion of secured bank loans 2,950 6,789
2,950 6,789
Non-current liabilities
Secured bank loans 2,951 –
Shares classified in Consumer Champion Group Limited as debt – 70
2,951 70
Total other interest-bearing loans and borrowings 5,901 6,859
Terms and debt repayment schedule
Currency
Nominal
interest
rate
Year of
maturity
Face
value
2014
£000
Carrying
amount
2014
£000
Face
value
2013
£000
Carrying
amount
2013
£000
Loan A GBP 3.00% above Libor 2014 – – 926 921
Loan B GBP 3.50% above Libor 2014 – – 5,901 5,868
Bank loan GBP 2.50% above Libor 2016 5,901
1
5,901 – –
Shares classified as debt GBP 8% 2014 – – 70 70
5,901 5,901 6,897 6,859
1 The loan of £5,901,000 is payable 50% on 30 December 2015 and 50% on 30 December 2016. Interest is payable at 2.5% above LIBOR
18. Share capital
2014 2013
Number of shares
41,150,000 ‘A’ Ordinary Shares of £0.0025 each 41,150,000 –
125,000 ‘A’ Ordinary Shares of £0.50 each (cancelled) – 125,000
75,000 ‘B’ Ordinary Shares of £0.50 each (cancelled) – 75,000
67,533 ‘C’ Ordinary Shares of £1 each (cancelled) – 67,533
37,092 ‘D’ Ordinary Shares of £1 each (cancelled) – 37,092
25,663 ‘E’ Ordinary Shares of £1 each (cancelled) – 25,663
40,957 ‘F’ Ordinary Shares of £0.01 each (cancelled) – 40,957
69,000 ‘A’ Preference Shares of £1 each (cancelled) – 69,000
1,000 ‘B’ Preference Shares of £1 each (cancelled) – 1,000
41,150,000 411,245
£000 £000
Allotted, called up and fully paid
41,150,000 ‘A’ Ordinary Shares of £0.0025 each 103 –
125,000 ‘A’ Ordinary Shares of £0.50 each (cancelled) – 63
75,000 ‘B’ Ordinary Shares of £0.50 each (cancelled) – 38
67,533 ‘C’ Ordinary Shares of £1 each (cancelled) – 68
37,092 ‘D’ Ordinary Shares of £1 each (cancelled) – 37
25,663 ‘E’ Ordinary Shares of £1 each (cancelled) – 25
40,957 ‘F’ Ordinary Shares of £0.01 each (cancelled) – –
69,000 ‘A’ Preference Shares of £1 each (cancelled) – 69
1,000 ‘B’ Preference Shares of £1 each (cancelled) – 1
103 301
Shares classified as liabilities – 70
Shares classified in equity 103 231
103 301
The share for share exchange includes all share classes with the exception of ‘A’ preference shares and ‘B’ preference shares.
Notes to the financial statements continued 63 NAHL Group plc
Annual report and accounts 2014 Financials
19. Share-based payments
During the year, share options of employees in the shares of Consumer Champion Group Limited vested as the change of control vesting
condition was met as a result of the placing of shares on AIM. All options held at the 31 December 2013 were exercised.
The Group now operates three employee share plans as follows:
SAYE plan
The SAYE plan is available to all employees. Options may be satisfied by newly issued Ordinary Shares, Ordinary Shares purchased in the
market by an employees’ trust or by the transfer of Ordinary Shares held in treasury.
EMI Scheme
The EMI Plan provides for the grant, to selected employees of the Group, of rights to acquire (whether by subscription or market purchase)
Ordinary Shares in the Company (Options). Options may be granted as tax-favoured enterprise management incentive options (EMI Options)
or non-tax favoured Options.
LTIP
The LTIP will enable selected employees (including Executive Directors) to be granted awards in respect of Ordinary Shares. Awards may be
granted in the form of nil or nominal cost options to acquire Ordinary Shares; or contingent rights to receive Ordinary Shares. Awards may be
satisfied by newly issued Ordinary Shares, Ordinary Shares purchased in the market by an employees’ trust or by the transfer of Ordinary
Shares held in treasury.
The terms and conditions of grants of share options to employees of the Group, in the shares of NAHL Group plc are as follows:
Grant date/employees entitled/nature of scheme Number of instruments Vesting conditions Contractual life of options
Equity-settled award to 21 employees granted by the
parent Company on 26 January 2010
5,683 ‘D’ and ‘E’ shares,
and 5,683 ‘F’ shares
Vested on change
of control
Vested
Equity-settled award to 8 employees granted by the
parent Company on 25 August 2010
868 ‘E’ shares and 1,262
‘F’ shares
Vested on change
of control
Vested
Equity-settled award to 26 employees granted by the
parent Company on 10 October 2011
2,350 ‘E’ shares and
2,350 ‘F’ shares
Vested on change
of control
Vested
Equity-settled award to 18 employees granted by the
parent Company on 1 November 2012
685 ‘E’ shares and
685 ‘F’ shares
Vested on change
of control
Vested
Equity-settled award to 3 employees granted by the
parent Company on 3 December 2012
375 ‘E’ shares and
375 ‘F’ shares
Vested on change
of control
Vested
Equity-settled award to 3 employees granted by the
parent Company on 31 December 2013
1,045 ‘E’ shares and
1,045 ‘F’ shares
Vested on change
of control
Vested
SAYE Equity-settled award to 56 employees granted by
the parent Company on 29 May 2014
270,448 Ordinary Shares Performance based Announcement of
2017 results
LTIP Equity-settled award to 4 employees granted by the
parent Company on 29 May 2014
790,004 Ordinary Shares Performance based Announcement of
2017 results
EMI Equity-settled award to 9 employees granted by the
parent Company on 11 December 2014
899,996 Ordinary Shares Performance based Announcement of
2017 results
The number and weighted average exercise prices of share options are as follows:
2014
Weighted
average
exercise
price
£
2014
Number of
options
No.
2013
Weighted
average
exercise
price
£
2013
Number of
options
No.
Outstanding at the beginning of the year 6.66 16,356 5.98 16,288
Exercised during the year (6.66) (16,356) – –
Granted during the year 1.13 1,970,448 12.01 2,090
Forfeited during the year (1.60) (20,700) (4.98) (2,022)
Outstanding at the end of the year 1.13 1,949,748 6.66 16,356
Exercisable at the end of the year – – – –
A charge of £288,000 (2013: credit of £7,000) has been made through profit and loss in the current year. NAHL Group plc 64
Annual report and accounts 2014 Financials
Notes to the financial statements continued
20. Basic earnings per share
The calculation of basic earnings per share at 31 December 2014 is based on profit attributable to ordinary shareholders of £8,473,000
(2013: £9,458,000) and a weighted average number of Ordinary Shares outstanding of 41,150,000. As a result of the transactions relating to
Company’s IPO on 29 May 2014, the total issued Ordinary Shares have changed materially. The Directors have presented adjusted
comparative periods to provide an EPS that gives users a useful comparison for basic and diluted EPS.
Profit attributable to ordinary shareholders (basic)
£000 2014 2013
Profit for the year attributable to the shareholders – continuing 9,478 10,330
Loss for the year attributable to the shareholders – discontinued (1,005) (872)
Profit for the year attributable to the shareholders – Total 8,473 9,458
Weighted average number of Ordinary Shares (basic)
Number Note 2014 2013 (Adjusted)
Issued Ordinary Shares at 1 January 18 41,150,000 41,150,000
Weighted average number of Ordinary Shares at 31 December 18 41,150,000 41,150,000
Basic earnings per share (p)
2014 2013 (Adjusted)
Group 20.6 23.0
Continuing operations 23.0 25.1
Discontinued operations (2.4) (2.1)
The Company has in place share-based payment schemes to reward employees. At the 31 December 2014, the LTIP, EMI and SAYE schemes
are at a value that would reasonably result in the options being exercised. The total number of options available for these schemes included in
the diluted earnings per share calculation is 790,004. There are no other diluting items.
Diluted earnings per share (p)
2014 2013 (Adjusted)
Group 20.2 22.5
Continuing operations 22.6 24.6
Discontinued operations (2.4) (2.1)
21. Financial instruments
(a) Fair values of financial instruments
The Group’s principal financial instruments comprise interest-bearing borrowings, cash and short-term deposits. The main purpose of these
financial instruments is to raise finance for the Group’s operations. The Group has various other financial instruments such as trade and
other receivables and trade and other payables that arise directly from its operations.
The main risks arising from the Group’s financial instruments are interest rate risk and liquidity risk. The Board reviews and agrees policies
for managing each of these risks and they are summarised below. There have been no substantive changes in the Group’s exposure to
financial instrument risks or its objectives, policies and processes for managing and measuring those risks during the periods in this report
unless otherwise stated.
Trade and other receivables
The fair value of trade and other receivables are estimated as the present value of future cash flows, discounted at the market rate of interest
at the balance sheet date if the effect is material.
Trade payables
The fair value of trade payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance
sheet date if the effect is material.
Cash and cash equivalents
The fair value of cash and cash equivalents is estimated as its carrying amount where the cash is repayable on demand. Where it is not repayable on
demand then the fair value is estimated at the present value of future cash flows, discounted at the market rate of interest at the balance sheet date.
Interest-bearing borrowings
Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the
balance sheet date.
The interest rate used to discount estimated cash flows of 8% is based on market rates. 65 NAHL Group plc
Annual report and accounts 2014 Financials
21. Financial instruments continued
The fair values of all financial assets and financial liabilities by class, which approximate to their carrying values, shown in the balance sheet
are as follows:
Fair value
hierarchy
Carrying
amount
2014
£000
Fair
value
2014
£000
Carrying
amount
2013
£000
Fair
value
2013
£000
Cash and receivables
Cash and cash equivalents Level 1 13,637 13,637 14,249 14,249
Cash and cash equivalents (note 3) – – 194 194
13,637 13,637 14,443 14,443
Trade and other receivables (note 15) Level 3 3,531 3,531 2,959 2,959
Trade and other receivables (note 3) Level 3 – – 1,201 1,201
Total financial assets 17,168 17,168 18,603 18,603
Financial liabilities measured at amortised cost
Other interest-bearing loans and borrowings (note 17) Level 3 5,901 5,901 (6,859) (6,859)
Trade payables (note 16) Level 3 1,442 1,442 (851) (851)
Trade payables (note 3) – – (99) (99)
Total financial liabilities measured at amortised cost 7,343 7,343 (7,809) (7,809)
Fair value hierarchy
IFRS 7 requires fair value measurements to be recognised using a fair value hierarchy that reflects the significance of the inputs used in the
value measurements:
Level 1 – inputs are quoted prices in active markets.
Level 2 – a valuation that uses observable inputs for the asset or liability other than quoted prices in active markets.
Level 3 – a valuation using unobservable inputs, i.e. a valuation technique.
There were no transfers between levels throughout the periods under review.
(b) Credit risk
Financial risk management
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Company’s receivables from customers and investment securities.
Management consider the credit risk to be low as a result of the deposits held for all significant customers. As at 31 December 2014 these
deposits reflect 90.4% (2013: 112.5%) of the balance of trade receivables.
Exposure to credit risk
The maximum exposure to credit risk at the balance sheet date by class of financial instrument was:
2014
£000
2013
£000
Trade receivables 3,176 2,881
Deposits with key customers are held to mitigate the potential credit risk. At each balance sheet date, the amount of deposit held was:
2014
£000
2013
£000
Customer deposits 2,870 3,241
Credit quality of financial assets and impairment losses
The aging of trade receivables at the balance sheet date was:
Gross
2014
£000
Impairment
2014
£000
Gross
2013
£000
Impairment
2013
£000
Not past due 1–30 days 3,247 (71) 2,951 (70)
3,247 (71) 2,951 (70) NAHL Group plc 66
Annual report and accounts 2014 Financials
21. Financial instruments continued
The movement in the allowance for impairment in respect of trade receivables during the year was as follows:
2014
£000
2013
£000
Balance at 1 January 70 1,465
Allowance recognised/(reversed) 1 (19)
Transferred to assets held for sale – (1,376)
Balance at 31 December 71 70
The allowance account for trade receivables is used to record impairment losses unless the Company is satisfied that no recovery of the
amount owing is possible; at that point the amounts considered irrecoverable are written off against the trade receivables directly.
(c) Liquidity risk
Financial risk management
Liquidity risk arises from the Group’s management of working capital and the finance charges on its debt instruments and repayments of
principal. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The Group’s objective is to
maintain a balance between continuity of funding and flexibility through the use of overdrafts and loans to ensure that it will always have
sufficient cash to allow it to meet its liabilities when they become due.
The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the effects of
netting agreements:
2014
Secured
bank loans
£000
Shares
classified as
debt
£000
Trade
and other
payables
£000
Total
£000
Non-derivative financial instruments
Carrying amount (5,901) – (1,442) (7,343)
Contractual cash flows
1 year or less (3,131) – (1,442) (4,573)
1 to 2 years (3,041) – – (3,041)
2 to 5 years – – – –
5 years and over – – – –
(6,172) – (1,442) (7,614)
2013
Non-derivative financial instruments
Carrying amount (6,789) (70) (851) (7,710)
Contractual cash flows
1 year or less (7,261) – (851) (8,112)
1 to 2 years – – – –
2 to 5 years – (95) – (95)
5 years and over – – – –
(7,261) (95) (851) (8,207)
(d) Market risk
Financial risk management
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the
Company’s income or the value of its holdings of financial instruments.
Market risk – foreign currency risk
The Company has no foreign currency risk as all transactions are in Sterling.
Market risk – interest rate risk
Profile
The Group is exposed to interest rate risk from its use of interest-bearing financial instruments. This is a market risk that the fair value or
future cash flows of a financial instrument will fluctuate because of changes in interest rates.
Notes to the financial statements continued 67 NAHL Group plc
Annual report and accounts 2014 Financials
21. Financial instruments continued
At the balance sheet dates, there were no interest-bearing financial assets, however the interest rate profile of the Company’s
interest-bearing financial liabilities was:
2014
£000
2013
£000
Fixed rate instruments
Financial liabilities – 4,194
Variable rate instruments
Financial liabilities 5,901 2,665
Total interest-bearing financial instruments 5,901 6,859
Sensitivity analysis
A change of 0.5% in interest rates at the balance sheet date would increase/(decrease) profit or loss in the following year by the amounts
shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at
that date.
This analysis assumes that all other variables remain constant and considers the effect of financial instruments with variable interest rates.
The analysis is performed on the same basis for the comparative periods.
2014
£000
2013
£000
Profit for the year
Increase (30) (12)
Decrease 30 12
Market risk – equity price risk
The Company does not have an exposure to equity price risk as it holds no investment in equity securities which are classified as available for
sale financial assets or designated at fair value through profit or loss.
(e) Capital management
Company
The Group’s objectives when maintaining capital are to safeguard the entity’s ability to continue as a going concern and to provide an
adequate return to shareholders. Capital comprises the Group’s equity i.e. share capital including preference shares, share premium, own
shares and retained earnings, as well as bank loans.
22. Operating leases
Non-cancellable operating lease rentals are payable as follows:
2014
£000
2013
£000
Less than one year 31 232
Between one and five years 66 259
97 491
The Company leases a number of office buildings under operating leases. During the year £160,000 was recognised as an expense in the
income statement in respect of operating leases (2013: £227,000). At 31 December 2014 leases for the office buildings had three months
remaining. The Company expects to enter into leases for these properties in the next year.
23. Commitments
Capital commitments
At 31 December 2014 the Group had no capital commitments (2013: £nil). NAHL Group plc 68
Annual report and accounts 2014 Financials
Notes to the financial statements continued
24. Transactions with owners, recorded directly in equity
On 29 May 2014, NAHL Group plc was admitted to trading on AIM. The steps required to complete this admission have been included within
the condensed consolidated statement of changes in equity and have been further explained below:
Issue of deferred share
A deferred share was issued at a premium resulting in the transfer of £50,000,000 from the merger reserve to share premium. NAHL Group plc
declared a bonus issue of a single deferred share of £0.0001 (a ‘Deferred Share’) with a share premium £50,000,000. This transaction resulted
in £50,000,000 of the merger reserve being transferred to the share premium account split pro rata between the different classes of shares.
Disposal of assets held for sale
The market value of the Group of companies, headed by Seebeck 62 Limited, classified as held for sale was calculated as being £1,500,000
by the Directors of the Company. On 15 May 2014, Seebeck 62 Limited was then demerged via a capital reduction of this value to the share
premium account. A same day registration of the reduction of capital at Companies House has been made. Further details of the demerger
can be seen in note 3.
Issue of new Ordinary Shares
On 29 May 2014, 1,150,000 new Ordinary Shares with a par value of £0.0025 were issued. These raised an additional £2,300,000 funds for the
Company. The fees relating to this transaction totalled £1,436,000. These costs have been charged as a reduction to share premium resulting
in a net increase to share premium of £861,000 and share capital of £3,000.
Other transactions with owners
Included within other transactions with owners are the following transactions resulting in a net impact of £45,000:
• Share capital has been reduced by £131,000. This is the result of £172,000 reduction in the par value of existing shares and the bonus issue
of F shares increasing share capital by £41,000. The bonus issue occurred prior to merger where Consumer Champion Group Limited
declared a 99 for 1 F share bonus issue to all shareholders using distributable reserves. There was then an F share 1 for 100 consolidation.
• Acquisition accounting for the purchase also resulted in the removal of interest in own shares of £14,000.
• Share premium has been increased to allow the £172,000 reduction in the par value of shares set off by the removal of £100,000 existing
share premium as part of the acquisition accounting.
25. Related parties
Transactions with key management personnel
Key management personnel in situ at 31 December 2014 and their immediate relatives control 13.7% of the voting shares of the Company.
Key management personnel are considered to be the Directors of the Company as well as those of National Accident Helpline Limited and any
other management serving as part of the Executive team. Detailed below is the total value of transactions with these individuals.
2014
£000
2013
£000
Short-term employment benefits 2,307 2,364
Termination benefits 150 –
2,457 2,364
Some members of key management personnel received loans from the company for the purchase of Consumer Champion Group Limited
shares from the Employee Benefit Trust (EBT). These loans were not recognised on the balance sheet as the assets and liabilities of the EBT
are recognised on the Company balance sheet. All loans were repaid during 2014. The total value of these loans at 31 December 2013 was
£186,000. These loans do not accrue interest.
At 31 December 2014, no loans remained outstanding from key management personnel (2013: £27,000). This loan is included within other
receivables and was made to enable the Director to purchase shares in the company. The loan did not accrue interest and was repaid during 2014.
On 15 May 2014 PPI Claimline Limited (PPI), a previously 100% owned subsidiary, was sold. As a result of the Directors of NAHL Group plc
continuing to own shares in PPI it is considered to be a related party. Transactions with PPI since the disposal were invoices for services
provided by Consumer Champion Group Limited for IT related solutions totalling £2,366. At 31 December 2014 £360 remained outstanding. 69 NAHL Group plc
Annual report and accounts 2014 Financials
26. Net debt
Net cash included cash and cash equivalents, secured bank loans, loan notes and preference shares.
2014
£000
2013
£000
Cash and cash equivalents 13,637 14,249
Other interest-bearing loans and loan notes – current liabilities (5,901) (6,789)
Preference shares – non current liabilities – (70)
Net cash 7,736 7,390
Set out below is a reconciliation of movements in net cash during the period.
2014
£000
2013
£000
Net decrease in cash and cash equivalents (806) (20,022)
Cash relating to discontinued operations 194 (196)
Cash and cash equivalents net inflow from increase in debt and debt financing 996 29,038
Movement in net borrowings resulting from cash flows 384 8,820
Other non-cash changes (38) (2,674)
Movement in cash in period 346 6,146
Net cash at beginning of period 7,390 1,244
Net cash at end of period 7,736 7,390
27. Events after the reporting period
On 17 February 2015 the Group acquired the entire share capital of Fitzalan Partners Limited. Due to the proximity of the acquisition date to
the release of the annual report, valuations of assets and liabilities acquired along with the disclosures required by IFRS 3 (Revised) have not
yet been prepared. Disclosure will be made in future annual financial statements. NAHL Group plc is paying up to £4.3m consideration made up
of an initial cash consideration of £3.0m and further cash of up to £1.3m prior to 31 December 2015 dependent on certain conditions being met.
Fitzalan Partners Limited, a UK company founded in 2011, is an online marketing specialist that uses innovative proprietary technology
platforms to target home buyers and sellers in England and Wales and offers lead generation services to PLFs and surveyors in the
conveyancing sector. NAHL Group plc 70
Annual report and accounts 2014 Other Information
Company registration number:
08996352
Auditors:
KPMG LLP
Altius House
One North Fourth Street
Milton Keynes
MK9 1NE
Solicitors to the Company:
Pinsent Masons LLP
3 Colmore Circus
Birmingham
B4 6BH
Bankers:
Yorkshire Bank plc
Temple Point
No.1 Temple Row
Birmingham
B2 5YB
NOMAD:
Investec Bank plc
2 Gresham Street
London
EC2V 7QP
United Kingdom
Company Registrars:
Capita Asset Services
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Financial PR:
FTI Consulting
200 Aldersgate
Aldersgate Street
London
EC1A 4HD
Advisors 71 NAHL Group plc
Annual report and accounts 2014 Other Information
Access to Justice Bill Act of Parliament replacing the Legal Aid system
After The Event Insurance An insurance product offered to consumers through Allianz to insure any compensation when
the claim is settled
Allianz National Accident Helpline’s insurance partner providing After The Event insurance
ATE After The Event insurance
CMR Claims Management Regulator
CRU Compensation Recovery Unit
Fitzalan Fitzalan Partners
Group NAHL Group plc
LASPO Legal Aid, Sentencing and Punishment of Offenders Act 2012 (enacted 1 April 2013)
Live chat Web-based chat service offered to consumers online via the National Accident Helpline and
Underdog websites
LSA Legal Service Advisor - fully trained employees within National Accident Helpline’s contact
centre taking calls from consumers to assist with their claim
NAH National Accident Helpline
Non-RTA Non-Road Traffic Accident (includes employer, occupier and public liability)
PI Personal Injury - an injury or illness suffered through no fault of an individual’s own (for
example, in a road accident, a slip, trip or fall, medical negligence, work accident or an
industrial disease)
PLF Panel Law Firm – a Personal Injury law firm selected to sit on our panel and take our enquiries
Post-LASPO After enactment of LASPO on 1 April 2013
PPC Pay Per Click
Pre-LASPO Before enactment of LASPO on 1 April 2013
RTA Road Traffic Accident
SAYE The Save As You Earn share scheme that was introduced for employees on admission, giving
them an opportunity to purchase shares in the company at a discounted rate following a
three-year savings period
SEO Search Engine Optimisation
Glossary NAHL Group plc Annual report and accounts 2014
NAHL Group plc
1430 Montagu Court,
Kettering Parkway,
Kettering,
Northamptonshire,
NN15 6XR
T: +44 (0) 1536 527 500
E: [email protected]
www nahlgroupplc.co.uk | Strategic report Annual report and accounts 2014
NAHL Group plc 10
Business model in action
connecting
consumers and solicitors seamlessly
On average our PLFs
rate NAH as nine out of
ten for our consultancy
and performance audit
services
2
.
9/10
In 2014 NAH connected around 83,000
consumers to our panel of 50 specialist law
firms across the UK. Our PLFs cover all areas
of PI claims and are selected based on their
ability to deliver quality advice and
outcomes for consumers and abide by a
rigorous Service Level Agreement. It is vital
to the NAH brand that from the first call to
case conclusion the consumer experience is a
positive one. We conduct regular audits of
our PLFs and share best practice to ensure we
achieve this important goal.
Our research confirms that many consumers are not
comfortable dealing directly with a solicitor, (only 22%
1
choose to contact a solicitor when initially considering
making a claim). The NAH brand provides consumers
with the confidence and reassurance that they will be
given the appropriate support and advice from the
outset, without the worry of dealing with legal jargon
or hidden fees.
Satisfied solicitor
“We started working with NAH in 1995. They understand
consumers’ needs and have built a brand which consumers
trust. Their Legal Services Advisors are very effective in
filtering calls to ensure we receive quality enquiries from
genuine claimants. Their solicitor services help our firm to
process claims efficiently and profitably, and importantly,
improve the experience for the claimant.
They lobby government effectively and actively champion
the cause of the underdog with campaigns such as Stop
Nuisance Calls. They are truly passionate about delivering a
positive consumer experience and conduct regular solicitor
firm audits and share best practice among the Panel Law
Firms. We find their approach innovative and professional
and enjoy working together to deliver access to justice to our
consumers.”
David Byrne
Partner, Scott Rees & Co Solicitors
1 Source: Independent research, The Nursery, 2014
2 Source: Average of survey results following NAH visits, 2014 Strategic report Annual report and accounts 2014
NAHL Group plc 11
connecting
Once their enquiry is qualified, 95% of
consumers choose to be transferred
immediately to a solicitor using our direct
call transfer technology. This supports
case conversion and delivers a better
consumer experience.
50
NAH works with 50 of the leading PI law
firms in the country, more than half of
which we have partnered with for over
ten years.
95%
direct call
transfers
As a market leader with years of experience
and a robust business model, solicitor firms
are keen to work with us. Our scale and
marketing expertise means we are able to
deliver the certainty of consistent volumes
of the right mix of enquiries. This
supports our PLFs to optimise
business performance by effectively
planning budgets and resource
and managing growth in a
sustainable way. PLFs also use
services from NAH such as
ATE insurance and medical
assessments which help
them to run cases
effectively, providing an
additional revenue stream
for NAH.
NAH’s national solicitor network comprises four
panels:
Personal Injury Panel: covering employment liability, occupier liability,
public liability and RTA cases.
Medical Negligence Panel: covering medical negligence cases which are
more complex and specialised.
Specialist Panel: covering a number of different enquiry types which fall
outside the other panels, such as industrial disease and international cases.
Associate Panel: this panel does not take enquiries from NAH, but takes
products such as ATE insurance.
Katy Philpin
Contact Centre Team Manager NAHL Group plc 12
Annual report and accounts 2014 Strategic report
We have achieved positive results in
a period of considerable change for the
business. We have made good progress
with our growth strategy, supported
by our first acquisition.
We have made positive progress
in 2014 and despite our leadership
position, the Group has plenty of
opportunity to increase our share
in a large, fragmented market.
Chief
Executive’s
review
Overview
2014 was an important year for NAHL as we
took the step to become a quoted company.
Throughout the year trading remained
strong and we are delighted to report results
ahead of market expectations. The growth
achieved is testimony to the professionalism
of our team and the continued support that
we receive from our consumers, our PLFs and
our partners.
The PI market has undoubtedly gone through
a period of dramatic change in the last few
years. The new regulatory regime is now
well embedded. NAH goes from strength to
strength on the back of a single minded
approach to serving our PLFs and retaining
our position as the UK’s leading consumer
business in the PI market. Our focus on
quality and our passion for providing access
to justice for those with a valid injury claim
remains at the core of our proposition.
Results
For the past 20 years we have been
committed to our ethical approach in a
challenging sector. 2014 saw a significant
growth in the NAH business with a 15.3%
increase in enquiries driving a 10.4%
increase in revenue and a 29.3% operating
profit improvement. This growth resulted
from improved operational efficiency, more
effective marketing, and an increase in RTA
driven by market consolidation, as many
small claims management companies ceased
operating in the PI market. Our brand
leadership enabled us to take advantage of
this and increase our share in all of the key
sectors in which we operate. Our enquiry
growth has also been strong in our target
sectors of non-RTA and medical negligence
which has enabled us to retain the high
quality mix of enquiries that our PLFs value.
Market overview
The PI market is estimated at £3bn
1
and has
approximately one million claims per
annum. The market remains relatively flat,
although medical negligence is growing at
12.4%
1
and non-RTA at 7.1%
1
pa. The market
has seen some consolidation, however, it
remains fragmented with our overall share
at an estimated 4%
2
, with market shares of
1.9%
2
in RTA, 11.6%
2
in non-RTA and 5.8%
2
in medical negligence.
Russell Atkinson
Chief Executive Officer
1 Source: CRU analysis 2014
2 Source: CRU analysis and management estimates 13 NAHL Group plc
Annual report and accounts 2014 Strategic report
No. 1
NAH is the number one daytime TV and
online spender in the PI sector.
Source: Neilsen Media Research 2014
Key strengths
NAH benefits from a number of
strengths which make it the ideal
marketing and services provider for
legal practices, connecting injured
parties with high quality PLFs and
promoting access to justice within
the UK:
• Market leader which is well
positioned to benefit from continued
consolidation.
• Well recognised, trusted brand
supported by differentiated
marketing, established through
more than £200 million of media
spend since 1993.
• Brand media spend, marketing
know-how and PLF relationships
that act as barriers to entry.
• Focused on the highest growth
segments of a large, fragmented
market.
• Strong financial performance
supported by high cash generation
and a robust balance sheet.
• Experienced management team with
proven ability to manage change.
1 Source: Independent research, The Nursery, 2014
2 Source: Google, December 2014
3 Source: Neilsen Media Research 2014
Brand
The cornerstone of our proposition is the
NAH brand and its Underdog character
which is based on insight into how our
consumers feel when making a claim.
Throughout 2014 we have continued to
strengthen our position within the PI sector
as:
• The most trusted brand on TV
1
• The most searched for online brand
by name
2
• The number one daytime TV and overall
online spender
3
• The number one in internet hits
3
The strength of the brand positioning and in
particular our trust rating has allowed us to
continue to lead the way as the market’s
leading online brand. Our expertise in
marketing has helped us to navigate our way
through the changing media landscape and
make real progress in SEO and social media.
For the past 20 years we have been
committed to the highest ethical standards
and improving those of the industry in
which we operate. We are particularly
passionate about our Stop Nuisance Calls
campaign which we launched during 2014
and the Group remains at the forefront of
efforts to drive out unsolicited texts and calls
which our consumers tell us are a real issue.
Panel Law Firms
NAH prides itself on the relationships that it
has with its PLFs, many dating back over ten
years. Throughout 2014 we have continued
to support our panel of leading specialist
injury lawyers with data and information
that will help them to understand best
practice in running cases. This continuing
investment in data sharing and advice is
designed to improve our PLFs’ profitability
and further enhance the attractiveness of
our cases.
During 2014, we have evolved and developed
our PLF strategy. With increasing enquiries,
we work hard to ensure that we are aligned
with quality law firms who can handle large
volumes of caseloads with the highest
calibre of advice to our consumers, whilst
delivering a cost effective service. PLFs need
depth of resources, both legal and financial,
to cope with constant growth in volumes.
The success of our PLFs is closely entwined
with our own success and is a significant
focus of our attention. During 2014 the
average price paid by PLFs was down 3.2%.
The membership of our Panel during 2014 has
changed in line with our expectations,
although with increasing volumes, we are
beginning to explore new partnering
arrangements that will allow us to better deal
with volume growth. This allows us to
develop alternative strategies for dealing
with high growth in volumes cost effectively,
whilst maintaining the quality of our panel.
Products
Providing first class products and services
through our key partnership relationships is
critical to our PLFs being able to process the
case efficiently. In particular ATE is the
cornerstone of ‘no win no fee’ and is
fundamental to the consumer feeling
confident in progressing a case without risk
of any legal costs.
The Group’s products continue to perform
broadly in line with our expectations,
although it has become clear that we need to
adapt our non-medical negligence ATE
product in the light of post-LASPO market
practices. As a result we expect to launch a
new product in the first half of 2015 that
should be better suited to current market risk
and pricing, and we expect this will deliver
increased volumes during the second half of
the year.
We have also trialled and will shortly be
launching an enhanced medical negligence
screening service. This service will
accelerate the case progression and reduce
cost risk for our PLFs, bringing more
certainty to the legal process. We expect to
see material benefit from 2016. | NAHL Group plc
Annual report and accounts
2014
NAHL Group plc Annual report and accounts 2014 | NAHL Group plc 2
Annual report and accounts 2014 Strategic report
1993
Founded
2015
Fitzalan
Partners
acquired
1994
First national
press
adverts
2010
Underdog
created
2014
NAHL Group
plc listed
on AIM
2014
Over 2m
consumers
helped
1998
Contact centre
opened
Marketing spend in 2014
£23m
Experienced LSAs
60
Specialist PLFs
50
Stop Nuisance Calls
We do not cold call or send spam
texts or emails. We are acutely
aware of how invasive and upsetting
nuisance calls can be and believe
this unscrupulous practice should
be stamped out. In October 2014 we
launched our Stop Nuisance Calls
campaign calling upon the
government to take a much stronger
stance against the offenders in UK
industry and to proactively support
consumers who are subject to millions
of nuisance calls every year. On
25 February 2015 the Government
increased penalties and lowered the
threshold for imposing fines, which is
a positive first step.
Connecting
Once the LSA has established all the relevant
facts and details the consumer is connected
directly to a PLF. We connect around 80,000
qualified PI enquiries to our panel of 50
specialist PLFs each year. Our PLFs value
the consistent quality and mix of enquiries.
Without the service which NAH provides
thousands of genuine PI victims would be
left without a route to justice.
We believe that access to justice is a
fundamental right and our business helps
secure this for hundreds of people every
week. For more than 20 years National
Accident Helpline has helped millions of
people who have suffered a genuine
injury through no fault of their own.
Our business
Our history
Listening
Our Legal Service Advisors (LSAs) are
trained to help consumers understand if they
have a valid claim. LSAs are experienced at
identifying claims with merit and only pass
these across to our Panel Law Firms (PLFs).
Critics of the PI sector make sweeping
statements about fraudulent claims
without due consideration for the
essential assistance that NAH and the PI
sector provides to genuine claimants.
Attracting
We understand that Personal Injury victims
can feel like the Underdog when making a
claim and many are not comfortable
contacting a solicitor directly. Consumers
see us as approachable experts who will
listen and advise in an empathetic way.
Our NAH brand and marketing activity
generated around 248,000 inbound consumer
contacts in 2014. We do not cold call and we
lobby against nuisance marketing. 3 NAHL Group plc
Annual report and accounts 2014 Strategic report
%
75
50
25
RTA Non-RTA Medical
negligence
*Compound Annual Growth Rate 2012-14
Source: CRU analysis 2014 and management estimates
-0.8%* +7.1%* +12.4%*
PI market % split of claims NAH % split of enquiries
Our market
We have a leading position in
the PI market and NAH’s focus
is on the higher margin, faster
growing segments.
The PI market is large and fragmented with approximately one million claims per
annum. Claims can be divided into three segments: Road Traffic Accident (RTA);
non-Road Traffic Accident (non-RTA) and medical negligence. Whilst over three
quarters of the overall PI market comprises RTA claims, NAH’s focus remains on
the higher margin, faster growing segments of medical negligence and non-RTA
claims. These accounted for 76% of NAH’s total qualified enquiries passed on to
PLFs in 2014.
The UK PI market is relatively flat, in overall terms, but medical negligence is
growing at about 12%
1
and non-RTA at about 7%
1
pa. NAH’s estimated market
shares are 1.9%
2
in RTA, 11.6%
2
in non-RTA and 5.8%
2
in medical negligence. The
regulatory environment is driving industry consolidation with a 56% reduction
in the number of regulated claims management companies as at 31 March 2014
3
.
1 Source: Compensation Recovery Unit (CRU) analysis 2014
2 Source: CRU analysis 2014 and management estimates
3 Source: Claims Management Regulator (CMR) Annual Report 2013/14
Market overview
NAH’s focus is on higher growth segments
1m
Approximately one million PI claims per annum.
4%
NAH market share in PI.
Source: CRU analysis, 2014 and management estimates | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input NAHL Group plc
Annual report and accounts
2014
NAHL Group plc Annual report and accounts 2014 NAHL Group plc is a leading
consumer marketing business
focused on the UK legal services
market. Our core brand,
National Accident Helpline (NAH),
was established in 1993, and since
then the Group’s business has
grown to an industry-leading
position as an outsourced
marketing services provider.
As the nation’s most
searched for and most
trusted Personal Injury (PI)
brand NAH attracts around
240,000 consumer contacts
per annum.
We listen to our consumers
and provide dedicated
support when they need
it most. Using experience
gained over 20 years we
determine if they have a
genuine claim and connect
them to an expert solicitor
to assist them
Front Cover:
Jenna Reid
Contact Centre Team Manager 1 NAHL Group plc
Annual report and accounts 2014 Strategic report
2011 2013 2012 2014 2011 2013 2012 2014 2011 2013 2012 2014
(25.3m)
(14.0m)
(4.8m)
1.2m
Debt
Cash
6.0
6.8
9.8
12.7
Net Cash/(Debt) Underlying operating profit £m
34.7
39.2 39.7
43.8
Revenue from continuing operations £m
Net cash/(debt) Underlying operating profit
2
£m
2011 2013 2012 2014 2011 2013 2012 2014 2011 2013 2012 2014
(25.3m)
(14.0m)
(4.8m)
1.2m
Debt
Cash
6.0
6.8
9.8
12.7
Net Cash/(Debt) Underlying operating profit £m
34.7
39.2 39.7
43.8
Revenue from continuing operations £m
2011 2013 2012 2014 2011 2013 2012 2014 2011 2013 2012 2014
(25.3m)
(14.0m)
(4.8m)
1.2m
Debt
Cash
6.0
6.8
9.8
12.7
Net Cash/(Debt) Underlying operating profit £m
34.7
39.2 39.7
43.8
Revenue from continuing operations £m
Revenue from continuing operations
1
£m
+15.3%
Enquiries increased by 15.3%.
£43.8m
Revenue from continuing operations
1
increased by 10.4% to £43.8m (2013: £39.7m).
29%
Underlying operating profit
2
margin
increased by 4 percentage points to 29%
(2013: 25%).
Financial
– Revenue from continuing operations
1
up
10.4% to £43.8m (2013: £39.7m)
– Underlying operating profit
2
up 29.3% to
£12.7m (2013: £9.8m)
– Underlying operating profit
2
margin increased
by 4 percentage points to 29% (2013: 25%)
– Excellent cash generation with 97.6% operating
cash conversion from continuing operations
1
– Robust balance sheet with net cash of £1.2m at
period end (net debt of £4.8m at 31 December 2013)
– Basic EPS of 20.6p (23.0p from continuing operations)
– Board proposed final dividend of 10.7p giving total
dividend of 15.7p
Operational
– Strong enquiry growth of 15.3% delivered from
increased market share in all areas
– 76% of enquiries generated from faster growing
non-RTA and medical negligence sectors
– Launched Stop Nuisance Calls campaign to drive
out unsolicited texts and calls
– Post period end acquisition of Fitzalan Partners extends our
core marketing and panel management expertise into another
segment of the fragmented consumer legal services sector
Strategic report
Highlights 1
Our business 2
Our market 3
Chairman’ s statement 4
Business model 6
Business model in action 8
Chief Executive’ s review 12
Strategy for growth 16
Chief Financial Officer’s review 18
Risks 21
CSR – Thought leadership 22
CSR – Our people 24
CSR – Our community 26
Governance
Board of Directors 28
Directors’ report 30
Corporate governance report 31
Directors’ remuneration report 33
Statement of Directors’ responsibilities 39
Contents
Highlights
Financials
Independent Auditor’ s report 40
Consolidated statement of
comprehensive income 41
Consolidated statement of
financial position 42
Company balance sheet 43
Consolidated statement of
changes in equity 44
Company statement of total
recognised gains and losses 45
Consolidated cash flow statement 46
Notes to the financial statements 47
Other information
Advisors 70
Glossary 71
1 Continuing operations excludes the demerged PPI
Claimline division and a legacy ATE insurance product
used prior to enactment of the Legal Aid, Sentencing
and Punishment of Offenders Act 2012 (LASPO) on 1
April 2013
2 Underlying operating profit excludes pre-LASPO ATE
items, share-based payments and one-off items NAHL Group plc 2
Annual report and accounts 2014 Strategic report
1993
Founded
2015
Fitzalan
Partners
acquired
1994
First national
press
adverts
2010
Underdog
created
2014
NAHL Group
plc listed
on AIM
2014
Over 2m
consumers
helped
1998
Contact centre
opened
Marketing spend in 2014
£23m
Experienced LSAs
60
Specialist PLFs
50
Stop Nuisance Calls
We do not cold call or send spam
texts or emails. We are acutely
aware of how invasive and upsetting
nuisance calls can be and believe
this unscrupulous practice should
be stamped out. In October 2014 we
launched our Stop Nuisance Calls
campaign calling upon the
government to take a much stronger
stance against the offenders in UK
industry and to proactively support
consumers who are subject to millions
of nuisance calls every year. On
25 February 2015 the Government
increased penalties and lowered the
threshold for imposing fines, which is
a positive first step.
Connecting
Once the LSA has established all the relevant
facts and details the consumer is connected
directly to a PLF. We connect around 80,000
qualified PI enquiries to our panel of 50
specialist PLFs each year. Our PLFs value
the consistent quality and mix of enquiries.
Without the service which NAH provides
thousands of genuine PI victims would be
left without a route to justice.
We believe that access to justice is a
fundamental right and our business helps
secure this for hundreds of people every
week. For more than 20 years National
Accident Helpline has helped millions of
people who have suffered a genuine
injury through no fault of their own.
Our business
Our history
Listening
Our Legal Service Advisors (LSAs) are
trained to help consumers understand if they
have a valid claim. LSAs are experienced at
identifying claims with merit and only pass
these across to our Panel Law Firms (PLFs).
Critics of the PI sector make sweeping
statements about fraudulent claims
without due consideration for the
essential assistance that NAH and the PI
sector provides to genuine claimants.
Attracting
We understand that Personal Injury victims
can feel like the Underdog when making a
claim and many are not comfortable
contacting a solicitor directly. Consumers
see us as approachable experts who will
listen and advise in an empathetic way.
Our NAH brand and marketing activity
generated around 248,000 inbound consumer
contacts in 2014. We do not cold call and we
lobby against nuisance marketing. 3 NAHL Group plc
Annual report and accounts 2014 Strategic report
%
75
50
25
RTA Non-RTA Medical
negligence
*Compound Annual Growth Rate 2012-14
Source: CRU analysis 2014 and management estimates
-0.8%* +7.1%* +12.4%*
PI market % split of claims NAH % split of enquiries
Our market
We have a leading position in
the PI market and NAH’s focus
is on the higher margin, faster
growing segments.
The PI market is large and fragmented with approximately one million claims per
annum. Claims can be divided into three segments: Road Traffic Accident (RTA);
non-Road Traffic Accident (non-RTA) and medical negligence. Whilst over three
quarters of the overall PI market comprises RTA claims, NAH’s focus remains on
the higher margin, faster growing segments of medical negligence and non-RTA
claims. These accounted for 76% of NAH’s total qualified enquiries passed on to
PLFs in 2014.
The UK PI market is relatively flat, in overall terms, but medical negligence is
growing at about 12%
1
and non-RTA at about 7%
1
pa. NAH’s estimated market
shares are 1.9%
2
in RTA, 11.6%
2
in non-RTA and 5.8%
2
in medical negligence. The
regulatory environment is driving industry consolidation with a 56% reduction
in the number of regulated claims management companies as at 31 March 2014
3
.
1 Source: Compensation Recovery Unit (CRU) analysis 2014
2 Source: CRU analysis 2014 and management estimates
3 Source: Claims Management Regulator (CMR) Annual Report 2013/14
Market overview
NAH’s focus is on higher growth segments
1m
Approximately one million PI claims per annum.
4%
NAH market share in PI.
Source: CRU analysis, 2014 and management estimates NAHL Group plc 4
Annual report and accounts 2014 Strategic report
Our results continue to demonstrate
the importance and value of our NAH
brand and marketing expertise as
we continue to generate increasing
numbers of quality enquiries for our
Panel Law Firms.
Chairman’s
statement
I am pleased to report the Group’s
first full-year results, for the year
ended 31 December 2014, since the
Company’s IPO on the AIM market
of the London Stock Exchange on
29 May 2014.
Steve Halbert
Chairman
Summary of financial performance
NAHL Group plc has performed well in its
first year as a listed company, with revenue
from continuing operations of £43.8m, up
10.4% (2013: £39.7m). This translated into an
increase in underlying operating profit from
continuing operations of 29.3%, up from
£9.8m to £12.7m.
Underlying profit before tax from continuing
operations, before pre-LASPO (Legal Aid,
Sentencing and Punishment of Offenders
Act 2012) After The Event insurance (ATE)
profits, share-based payments and one-off
items, also increased to £13.0m (2013:
£5.4m). Earnings from continuing operations
per share were 23.0p (2013: 25.1p) the
reduction is due to pre-LASPO ATE profits
in 2013, which is a legacy item.
During the period, in line with our strategy
post-LASPO, we sold PPI Claimline Limited,
resulting in a loss from discontinued
operations of £1.0m. Final reported figures
are shown in note 3 to the financial
statements.
NAHL’s business model within the PI sector,
operating through our successful NAH
subsidiary, continues to be highly cash
generative, with a 97.6% (2013: 106.3%)
conversion of operating profit from
continuing operations into cash. The balance
sheet is robust and at the period end we had
cash of £13.6m (2013: £14.2m). Our balance
sheet also shows £5.9m of interest-bearing
loans and borrowings (2013: £6.9m) and
non-interest-bearing liabilities of £6.5m
(2013: £12.1m) relating to the legacy
pre-LASPO ATE product, which we expect
will be substantially repaid in 2015 and 2016,
giving an effective adjusted net cash position
of £1.2m (2013 net debt of £4.8m) at
31 December 2014.
Final dividend
The Board proposes, subject to approval of
shareholders at the Annual General Meeting
to be held on 27 May 2015, a final dividend of
10.7p per share payable on 29 May 2015 to
ordinary shareholders registered on 24 April
2015. Together with our interim dividend
already paid of 5.0p per share, this takes
total proposed distributions to 15.7p per
share representing 68% of earnings from
continuing operations per share of 23.0p. 5 NAHL Group plc
Annual report and accounts 2014 Strategic report
10.7 p
Final dividend.
Business review
The Group’s results reflect a strong trading
performance, both in terms of our enquiry
generation and the affordability of those
enquiries to our PLFs. Enquiry generation
shows volume up 15.3%. Pleasingly, the mix
of enquiries has continued its trend towards
the higher value categories, and about 76%
of the Group’s enquiries are generated from
the faster growing non-RTA and medical
negligence sectors.
Revenue growth from enquiry generation
(referred to as solicitor income) is up 11.7%
on 2013. This growth is derived from a
core UK PI market that continues to be
broadly static in terms of overall enquiry
volumes and we are confident that we have
continued to gain market share. This has
been achieved through a combination of
factors, from the effectiveness of our
Underdog advertising campaigns, through
increasing sophistication in our Search
Engine Optimisation (SEO) and digital
strategies, to the effective call handling
and direct transfer of consumers to our PLFs.
The Group continues to invest in its
multi-channel approach to marketing and
NAH, supported by the Underdog, remains
the most trusted and recognised brand in
the sector.
Revenue from the sale of products (medicals,
insurance, insight and costs), which are
related to the various services required by
our PLFs to run a case efficiently, was up
2.1% in 2014. This is in part a reflection of the
decline in products related to pre-LASPO
cases. However, this is more than offset by
11.2% growth in our continuing products.
Looking ahead, our aim is to see the Group’s
continuing product income grow in line with
solicitor income.
Board appointment
In November 2014, I was delighted to
welcome Gillian Kent to the Board. Gillian
has significant digital experience from her
time as CEO of MSN (Microsoft) UK and
Propertyfinder.com and brings valuable
expertise to the Board as we look to other
lead generation opportunities.
Acquisition of Fitzalan Partners
The acquisition of Fitzalan Partners
(Fitzalan), completed in February 2015 for up
to £4.3m, provides us with a platform to use
our lead generation and SEO expertise in a
sector with close parallels to our core PI
business.
Conveyancing is a significant sector in the
personal legal services market, and we are
excited about the opportunities that this
acquisition brings. We expect Fitzalan to be
immediately earnings enhancing and to
broaden our platform for delivering
long-term, sustainable growth.
We look forward to working with the
Fitzalan team and continuing their
impressive growth story.
Looking forward
Our results continue to demonstrate the
importance and value of our well recognised
and trusted NAH brand, and the strength
and expertise of our marketing strategy.
We have continued to generate increasing
numbers of high quality enquiries for our
PLFs. Early signs from the beginning of 2015
are encouraging and we have started the
year in line with our expectations.
Our strategy of working across the wider
personal legal services market is gaining
momentum and we expect growth from our
core PI market and a positive contribution
from Fitzalan in the conveyancing market.
The business has seen considerable change
during 2014 and delivered excellent results.
I would like to thank our many stakeholders,
and our employees in particular, for their
continued support and contribution to our
success.
We look forward to 2015 with enthusiasm.
Steve Halbert
Chairman NAHL Group plc 6
Annual report and accounts 2014 Strategic report
Applying brand
and marketing
expertise to attract
consumers
Inbound contacts
become quality
enquiries
see our
business
model
in action
on pages
8 and 9
Gross leads in 2014
248,000
Clean leads in 2014
110,000
National Accident Helpline’s
core business model is based on
enquiry origination through direct
response TV and online marketing,
connecting consumers who have
suffered a non-fault Personal Injury
with specialist law firms.
Business
model
Research
1
shows that consumers are not
always comfortable dealing directly with a
solicitor and the NAH brand provides the
consumer with the confidence that they will
be given the right support and advice to
start their claim.
Through the strength and trust generated by the
NAH brand and our Underdog character we
attracted around 248,000 consumer contacts in
2014 either via website visits, inbound telephone
contact or live web chat. Our contact centre
screens out spurious claims and claims where
the victim is at fault, along with hoax calls and
duplicates, resulting in a bank of about 110,000
clean leads.
NAH does not cold call. All inbound
consumer leads are generated through
NAH’s advertising and online activity and
come through to a central, UK-based contact
centre where they speak to an LSA. The LSA
is a well-informed but empathetic
intermediary between the consumer and the
law firm and helps the consumer to
understand if they have a claim.
Our LSAs receive extensive training and use
specific criteria to filter consumer contacts
effectively into qualified enquiries with good
prospects of success. With almost two thirds of
initial leads being sifted out of the process,
almost 83,000 enquiries are passed through to
specialist PLFs to proceed with a claim.
1 Source: Independent research, The Nursery, 2014 7 NAHL Group plc
Annual report and accounts 2014 Strategic report
Satisfied
solicitors
see our
business
model
in action
on pages
10 and 11
Satisfied
consumers
Connecting
consumers and
solicitors
seamlessly
Qualified enquiries in 2014
83,000
We have helped over 2 million
consumers since 1993.
More consumers search for
NAH than any other PI brand.
Source: Google, December 2014
More than half of our PLFs
have worked with us for over
10 years.
2m
10 years
Once the lead has been qualified, the enquiry
and all related information is transferred
via direct electronic transfer to one of 50
specialist law firms on NAH’s nationwide
panel. The consumer does not have to repeat
information already shared with NAH and
this results in improved conversion rates
and improved profitability for PLFs.
The solicitor then conducts a further risk
assessment to decide whether to proceed
with the claim and contracts directly with
the consumer (thereafter referred to as the
claimant). According to PLF data we believe this
results in approximately 48,000 running cases. Strategic report Annual report and accounts 2014
NAHL Group plc 8
Strategic report Annual report and accounts 2014
NAHL Group plc 8
Business model in action
brand awareness
strong
NAH has significant experience in brand building and
integrated multi-channel marketing and we conduct
extensive market research programmes to enhance
our understanding of the consumer and their needs. As
a result, we are very effective in attracting the types of
enquiries that our PLFs find valuable.
NAH has invested significantly in TV
advertising to build awareness of the brand
and the services we offer. With a highly
differentiated advertising campaign that
uses the Underdog character to engage
consumers, NAH has the highest branded
recognition
1
of any PI TV advert and the
highest prompted awareness
2
of any brand in
our sector. Consumers also say NAH is the
brand they would most trust to act on their
behalf
1
and the brand they would contact
first, clearly demonstrating how strongly
NAH’s advertising campaign and brand
resonates with consumers.
As the digital and online landscape evolves
consumers are increasingly using the internet
as a search tool to find out more about claiming.
NAH is well placed to capitalise on this trend.
TV advertising has built awareness to such a
level that NAH is the most searched for PI
brand by name
3
.
We lead the field in digital marketing
and have
a highly optimised bidding strategy for our
online Pay Per Click (PPC) campaigns
3
.
According to Google, NAH has a greater
number of advert appearances at a higher
rank and with a better click through rate
when compared to our peer set. Importantly,
this is achieved without attracting a
disproportionately high cost per click relative
to the PI industry benchmark.
Another essential component of our digital
strategy is delivering organic enquiries
through SEO and public relations activities.
This has proved highly effective with organic
enquiries increasing significantly year on year.
86% of our consumers
choose to go online and
of those, nearly 50%
start their claim using
our online claim form.
NAH invests in website
design to ensure
conversion is optimised
at every stage.
www.underdog.co.uk
1 Source: Independent brand tracking, The Nursery, 2014
2 Source: Independent research, The Nursery, 2014
3 Source: Google, February 2015 Strategic report Annual report and accounts 2014
NAHL Group plc 9 9
Annual report and accounts 2014
NAHL Group plc
Strategic report
Photo courtesy of Portsmouth News
Satisfied consumer
Katie’s story
Katie’s mother contacted NAH to establish whether they might be
able to claim against the hospital which had failed to diagnose her
daughter’s appendicitis for 17 days. Katie was given multiple
incorrect diagnoses and finally had an appendectomy two months
later, when they discovered her appendix had wrapped itself
around other organs causing avoidable damage.
“When I first approached NAH I used web chat. I’d seen the advert on
TV, Googled it and then spoke to an advisor who was very helpful
and sympathetic. Right from the start to the end there were no
complaints whatsoever. NAH put me straight through to a solicitor
and I was kept informed right the way through the process. I would
rate them 5/5, everything was absolutely spot on. The hospital
swiftly admitted liability and our claim was successful. I believe
that if this outcome can help prevent this happening to someone else
in the future, then justice will have been served for Katie.”
Julie
Katie’s mother
NAH has ten times more reviews on Trustpilot than our competitors,
with an average rating of 8.7 across more than 2,000 reviews.
Source: trustpilot.co.uk, February 2015
8.7 a v er age r at i n g
In 2010 NAH created the
Underdog character to feature
in advertising primarily across
TV and digital media.
The Underdog portrays what it is like to be
‘the little guy’. He characterises how NAH’s
core consumer group feels about making a
claim when they have suffered a personal
injury and illustrates the potential for every
consumer to access justice and the
compensation they deserve.
£200m
NAH has invested more than
£200 million in marketing over
the past 20 years.
85%
Our NAH brand and Underdog are well
recognised, with our prompted brand
awareness at 85%, 17% ahead of our
nearest competitor.
Source: Brand tracking, December 2014 Strategic report Annual report and accounts 2014
NAHL Group plc 10
Business model in action
connecting
consumers and solicitors seamlessly
On average our PLFs
rate NAH as nine out of
ten for our consultancy
and performance audit
services
2
.
9/10
In 2014 NAH connected around 83,000
consumers to our panel of 50 specialist law
firms across the UK. Our PLFs cover all areas
of PI claims and are selected based on their
ability to deliver quality advice and
outcomes for consumers and abide by a
rigorous Service Level Agreement. It is vital
to the NAH brand that from the first call to
case conclusion the consumer experience is a
positive one. We conduct regular audits of
our PLFs and share best practice to ensure we
achieve this important goal.
Our research confirms that many consumers are not
comfortable dealing directly with a solicitor, (only 22%
1
choose to contact a solicitor when initially considering
making a claim). The NAH brand provides consumers
with the confidence and reassurance that they will be
given the appropriate support and advice from the
outset, without the worry of dealing with legal jargon
or hidden fees.
Satisfied solicitor
“We started working with NAH in 1995. They understand
consumers’ needs and have built a brand which consumers
trust. Their Legal Services Advisors are very effective in
filtering calls to ensure we receive quality enquiries from
genuine claimants. Their solicitor services help our firm to
process claims efficiently and profitably, and importantly,
improve the experience for the claimant.
They lobby government effectively and actively champion
the cause of the underdog with campaigns such as Stop
Nuisance Calls. They are truly passionate about delivering a
positive consumer experience and conduct regular solicitor
firm audits and share best practice among the Panel Law
Firms. We find their approach innovative and professional
and enjoy working together to deliver access to justice to our
consumers.”
David Byrne
Partner, Scott Rees & Co Solicitors
1 Source: Independent research, The Nursery, 2014
2 Source: Average of survey results following NAH visits, 2014 Strategic report Annual report and accounts 2014
NAHL Group plc 11
connecting
Once their enquiry is qualified, 95% of
consumers choose to be transferred
immediately to a solicitor using our direct
call transfer technology. This supports
case conversion and delivers a better
consumer experience.
50
NAH works with 50 of the leading PI law
firms in the country, more than half of
which we have partnered with for over
ten years.
95%
direct call
transfers
As a market leader with years of experience
and a robust business model, solicitor firms
are keen to work with us. Our scale and
marketing expertise means we are able to
deliver the certainty of consistent volumes
of the right mix of enquiries. This
supports our PLFs to optimise
business performance by effectively
planning budgets and resource
and managing growth in a
sustainable way. PLFs also use
services from NAH such as
ATE insurance and medical
assessments which help
them to run cases
effectively, providing an
additional revenue stream
for NAH.
NAH’s national solicitor network comprises four
panels:
Personal Injury Panel: covering employment liability, occupier liability,
public liability and RTA cases.
Medical Negligence Panel: covering medical negligence cases which are
more complex and specialised.
Specialist Panel: covering a number of different enquiry types which fall
outside the other panels, such as industrial disease and international cases.
Associate Panel: this panel does not take enquiries from NAH, but takes
products such as ATE insurance.
Katy Philpin
Contact Centre Team Manager NAHL Group plc 12
Annual report and accounts 2014 Strategic report
We have achieved positive results in
a period of considerable change for the
business. We have made good progress
with our growth strategy, supported
by our first acquisition.
We have made positive progress
in 2014 and despite our leadership
position, the Group has plenty of
opportunity to increase our share
in a large, fragmented market.
Chief
Executive’s
review
Overview
2014 was an important year for NAHL as we
took the step to become a quoted company.
Throughout the year trading remained
strong and we are delighted to report results
ahead of market expectations. The growth
achieved is testimony to the professionalism
of our team and the continued support that
we receive from our consumers, our PLFs and
our partners.
The PI market has undoubtedly gone through
a period of dramatic change in the last few
years. The new regulatory regime is now
well embedded. NAH goes from strength to
strength on the back of a single minded
approach to serving our PLFs and retaining
our position as the UK’s leading consumer
business in the PI market. Our focus on
quality and our passion for providing access
to justice for those with a valid injury claim
remains at the core of our proposition.
Results
For the past 20 years we have been
committed to our ethical approach in a
challenging sector. 2014 saw a significant
growth in the NAH business with a 15.3%
increase in enquiries driving a 10.4%
increase in revenue and a 29.3% operating
profit improvement. This growth resulted
from improved operational efficiency, more
effective marketing, and an increase in RTA
driven by market consolidation, as many
small claims management companies ceased
operating in the PI market. Our brand
leadership enabled us to take advantage of
this and increase our share in all of the key
sectors in which we operate. Our enquiry
growth has also been strong in our target
sectors of non-RTA and medical negligence
which has enabled us to retain the high
quality mix of enquiries that our PLFs value.
Market overview
The PI market is estimated at £3bn
1
and has
approximately one million claims per
annum. The market remains relatively flat,
although medical negligence is growing at
12.4%
1
and non-RTA at 7.1%
1
pa. The market
has seen some consolidation, however, it
remains fragmented with our overall share
at an estimated 4%
2
, with market shares of
1.9%
2
in RTA, 11.6%
2
in non-RTA and 5.8%
2
in medical negligence.
Russell Atkinson
Chief Executive Officer
1 Source: CRU analysis 2014
2 Source: CRU analysis and management estimates 13 NAHL Group plc
Annual report and accounts 2014 Strategic report
No. 1
NAH is the number one daytime TV and
online spender in the PI sector.
Source: Neilsen Media Research 2014
Key strengths
NAH benefits from a number of
strengths which make it the ideal
marketing and services provider for
legal practices, connecting injured
parties with high quality PLFs and
promoting access to justice within
the UK:
• Market leader which is well
positioned to benefit from continued
consolidation.
• Well recognised, trusted brand
supported by differentiated
marketing, established through
more than £200 million of media
spend since 1993.
• Brand media spend, marketing
know-how and PLF relationships
that act as barriers to entry.
• Focused on the highest growth
segments of a large, fragmented
market.
• Strong financial performance
supported by high cash generation
and a robust balance sheet.
• Experienced management team with
proven ability to manage change.
1 Source: Independent research, The Nursery, 2014
2 Source: Google, December 2014
3 Source: Neilsen Media Research 2014
Brand
The cornerstone of our proposition is the
NAH brand and its Underdog character
which is based on insight into how our
consumers feel when making a claim.
Throughout 2014 we have continued to
strengthen our position within the PI sector
as:
• The most trusted brand on TV
1
• The most searched for online brand
by name
2
• The number one daytime TV and overall
online spender
3
• The number one in internet hits
3
The strength of the brand positioning and in
particular our trust rating has allowed us to
continue to lead the way as the market’s
leading online brand. Our expertise in
marketing has helped us to navigate our way
through the changing media landscape and
make real progress in SEO and social media.
For the past 20 years we have been
committed to the highest ethical standards
and improving those of the industry in
which we operate. We are particularly
passionate about our Stop Nuisance Calls
campaign which we launched during 2014
and the Group remains at the forefront of
efforts to drive out unsolicited texts and calls
which our consumers tell us are a real issue.
Panel Law Firms
NAH prides itself on the relationships that it
has with its PLFs, many dating back over ten
years. Throughout 2014 we have continued
to support our panel of leading specialist
injury lawyers with data and information
that will help them to understand best
practice in running cases. This continuing
investment in data sharing and advice is
designed to improve our PLFs’ profitability
and further enhance the attractiveness of
our cases.
During 2014, we have evolved and developed
our PLF strategy. With increasing enquiries,
we work hard to ensure that we are aligned
with quality law firms who can handle large
volumes of caseloads with the highest
calibre of advice to our consumers, whilst
delivering a cost effective service. PLFs need
depth of resources, both legal and financial,
to cope with constant growth in volumes.
The success of our PLFs is closely entwined
with our own success and is a significant
focus of our attention. During 2014 the
average price paid by PLFs was down 3.2%.
The membership of our Panel during 2014 has
changed in line with our expectations,
although with increasing volumes, we are
beginning to explore new partnering
arrangements that will allow us to better deal
with volume growth. This allows us to
develop alternative strategies for dealing
with high growth in volumes cost effectively,
whilst maintaining the quality of our panel.
Products
Providing first class products and services
through our key partnership relationships is
critical to our PLFs being able to process the
case efficiently. In particular ATE is the
cornerstone of ‘no win no fee’ and is
fundamental to the consumer feeling
confident in progressing a case without risk
of any legal costs.
The Group’s products continue to perform
broadly in line with our expectations,
although it has become clear that we need to
adapt our non-medical negligence ATE
product in the light of post-LASPO market
practices. As a result we expect to launch a
new product in the first half of 2015 that
should be better suited to current market risk
and pricing, and we expect this will deliver
increased volumes during the second half of
the year.
We have also trialled and will shortly be
launching an enhanced medical negligence
screening service. This service will
accelerate the case progression and reduce
cost risk for our PLFs, bringing more
certainty to the legal process. We expect to
see material benefit from 2016. NAHL Group plc 14
Annual report and accounts 2014 Strategic report
Our values
1 We are curious…
We question the status quo, seek to
understand our customers and resolve
how we could do things better for them.
2 We are driven…
We value achieving results, we strive
to make them happen, we want to
build something meaningful and have
fun while we do it.
3 We are passionate…
We care about what we do and how we
do it, we empathise with our customers
and keep our promises.
4 We are unified…
We are one team committed to acting
with integrity, taking individual
responsibility for our actions whilst
trusting and respecting each other.
We set ourselves higher
standards and our values
are core to what we do.
They distinguish us in our
sector.
Our vision
To be the UK’s leading marketing
and services provider to our
chosen legal markets.
Our mission
To be the partner of choice for law
firms seeking to:
attract and retain customers;
utilise best in class products
and services; and
optimise business performance.
Operations
Our contact centre in Kettering dealt with
248,000 consumer contacts in 2014 (2013:
225,000) and is the crucial link between the
consumer and the solicitor that will handle
their case. Our ability to filter calls and pass
on only cases with real merit is critical to the
value that our PLFs get from our relationship.
Throughout 2014 we have been successful in
eliminating a larger number of spurious and
hoax calls whilst increasing the conversion
of leads to enquiries. It is critical that we
only pass enquiries that have a significant
chance of success to our panel. Calls with
higher chances of success are clearly more
valuable to our PLFs. We continue to drive
improved performance in NAH and our PLFs.
Our IT team has developed web services
platforms that result in a seamless
electronic data transfer for the consumer
without the need to repeat information to
the PLF. This is a key factor in conversion
improvements and is an area for continued
development going forward.
People
Our people are at the heart of what we do and
fundamental to our continued success. Our
employee engagement programme has
continued throughout 2014 with a number
of initiatives including:
• The launch of our Save As You Earn
(SAYE) share scheme which was taken up
by 52% of our staff at the time of IPO.
• Our biannual employee survey which was
completed by 89% of staff and showed a
significant improvement across all
comparable metrics.
• The launch of an award-winning
employee benefits programme.
• The launch of a new management
development programme across the
employee base, and a new values
programme.
• The award of the Investors in People (IiP)
standard.
I am particularly proud of the effort that we
put into developing our talent and
communicating with our team especially as
they are the first point of contact for our
consumers.
Chief Executive’s review
continued
National Accident Helpline employees in our Kettering office 15 NAHL Group plc
Annual report and accounts 2014 Strategic report
90%
90% of our inbound calls are answered
within ten seconds.
Acquisition
The Group acquired Fitzalan in February
2015 signalling our commitment to strategic
growth. Fitzalan was founded in 2011 and
provides lead generation services to law
firms and surveyors in the residential
conveyancing sector. The addition of
Fitzalan to the Group allows us to extend our
reach into broader legal markets and utilise
our advantage and skill set from the PI
market to capitalise on the significant
growth opportunities already identified. We
look forward to the contribution Fitzalan will
make to the wider Group and welcome the
team to NAHL.
Outlook
We have made good progress throughout
2014 and we intend to continue this journey
in 2015 driven by controlled enquiry growth
and innovative product and service
development.
The PI market remains large and fragmented
and despite our leadership position, the
Group has plenty of opportunity to continue
increasing its market share and develop our
product offerings. Whilst we expect the
consolidation gains in RTA that have
contributed to the growth in 2014 to have
been largely realised, the opportunity to
continue to develop our market share in our
key higher value target segments of
non-RTA and medical negligence remains.
The continued development of our PLF
strategy will ensure that we work with high
quality law firms capable of handling
increasing numbers of enquiries. This will
ensure we continue to manage volume
growth.
The development of a new ATE product and
the launch of the enhanced medical
screening service will ensure we continue to
benefit from good returns in the products
area.
There are no significant planned regulatory
developments that will have any material
effect on our progress and our PLFs can
continue to develop their business as a result
of working with NAH. The NAH brand goes
from strength to strength and we are
confident this will cement our leadership
position even further.
Russell Atkinson
Chief Executive Officer NAHL Group plc 16
Annual report and accounts 2014 Strategic report
NAHL is well positioned to take
advantage of the growth opportunities
provided by the consumer legal market.
Our vision is to be the UK’s leading
marketing and services provider to our
chosen legal markets.
Strategy
for growth
Strategy
The IPO has positioned NAHL well to move into the next phase
of its growth. Over the years the Group has developed into an
acknowledged leader in supporting the legal industry by
attracting consumers, assessing their needs and providing
products and services to support the PLF. The opportunity
exists to grow by further enhancing our offerings and
supporting a wider range of legal markets.
This growth strategy is based upon the following key areas:
Market
share
growth
The legal services market is large and highly fragmented. Despite its leadership position NAHL still has
a relatively small market share in both PI and residential conveyancing. This gives us the opportunity
to focus on the key PI growth sectors of non-RTA and medical negligence to further increase our share. The
Group has historically been stronger in these markets which are perceived as more valuable by our PLFs.
Further focus on these segments can generate better value from our mix of enquiries.
In addition growth opportunities also exist at Fitzalan since internet search for conveyancing is at a
relatively early stage of its development.
Partnership
development
Over the last 18 months we have been working in partnership with our PLFs to develop data sharing across
the life of the case. NAH aggregate this data and can use it to share best practice with our partners. This
will increase firm profitability and enhance the value of our enquiries. This will allow us to understand the
return generated by our PLFs at a granular level and enable us to target our marketing more efficiently.
Providing a broader range of legal services to our PLFs, many of which offer both conveyancing and PI,
will further cement our relationships.
Product
and service
development
Extending the range of products and services, an important driver of our profitability, has a direct impact
on our results. By extending our range of services and optimising our commercial arrangements we can
further develop this part of our business.
Throughout 2014 we have been developing and testing a new type of medical negligence screening service
which will significantly reduce case lengths, handling costs and settlement times for these extremely
complex cases. Initial trials have proved successful and this service will gradually be rolled out in 2015.
We have also been investigating the opportunity to aggregate volume of quasi administrative tasks that
our PI PLFs currently perform. These can be outsourced to the Group and completed at a lower cost than an
individual firm could negotiate. During 2014 we rolled out our enhanced capture service which takes more
data during the initial call and prepares it for our PLFs. This has the benefit of increasing conversion of
enquiries as the consumer experience is seamless and the solicitor has knowledge of the consumer thus
avoiding repetitive questions.
Fitzalan presents further exciting opportunities to provide added value services to specialist areas of the
residential legal services sector.
Targeted
acquisitions
A key benefit of our plc status is the ability to utilise the cash generated in the business to fund
acquisitions. NAHL will continue to focus on a small number of right-sized income-generative
acquisitions that either add value to our core PI business or enable us to extend into related areas of
consumer law where we can replicate our model in different markets, as we have done with Fitzalan. 17 NAHL Group plc
Annual report and accounts 2014 Strategic report
The acquisition of Fitzalan represents the
Group’s first move into an adjacent
consumer legal services market. Fitzalan
was founded in 2011 out of Fridays
Property Lawyers, and is based in Hatton
Garden, London.
The company is an online marketing
specialist targeting home buyers and
sellers in England and Wales through its
four web-based platforms; Fridaysmove;
In-Deed; Surveyor Local and Homeward
Legal. Through these platforms,
Fitzalan generates confirmed leads
for conveyancing and home surveys
in England and Wales, and offers
these to PLFs and panel surveyors.
The success of the business model lies in
Fitzalan’s expertise in marketing to a large
number of consumers, processing
incoming enquiries through a full sales
cycle and converting these into confirmed
instructions rather than the partially
qualified leads typical of the rest of the
market. The conveyancing and surveying
panel firms prefer to concentrate on their
core skills and benefit from the expertise
of Fitzalan’s marketing and sales
capability, rather than try to do this
themselves. In many respects this
proposition is similar to the benefit that
NAH offers in the PI market.
Customers are attracted to the proposition
due to the assurance provided in dealing
with the company’s brands:
• Highly competitive fixed fees on
conveyancing transactions.
• Enhanced service features such as
Search Plus Protection and No Sale
No Fee.
• Quality assurance through a
comprehensive PLF service
level agreement.
• Service mediation in the event of
client complaints.
• Advice and information on the
conveyancing and surveying process.
Fitzalan currently generates enquiries
in the form of incoming calls, online
call-back requests and specific leads
generated by its web quote engines.
Confirmed conveyancing instructions
from consumers are then passed to one of
over 50 PLFs, who pay Fitzalan a
marketing fee per instruction. Additional
revenue is generated through agreements
that Fitzalan has with related suppliers
such as search and surveyor companies,
who deliver complementary services
which facilitate the customer instruction.
Fitzalan’s surveyor panel comprises
around 150 firms of Royal Institute of
Chartered Surveyors (RICS) qualified
surveyors. The business markets Home
Buyer Reports and Building Surveys to
both buyers and sellers and provides its
survey panel with a steady, controllable
workflow, allowing them to plan their
workload efficiently.
The acquisition of Fitzalan has a powerful
strategic rationale:
• It broadens NAHL’s portfolio by
providing access to a new market
within consumer legal services.
• NAHL has a similar but more mature
business model, and can generate real
value by bringing their experience to
bear in refining and extending
Fitzalan’s operations.
• There are opportunities to use NAHL’s
core skill sets and resources to grow a
closely related business.
Despite the fact that there were over 1.2m
1
residential property transactions in 2014,
both the conveyancing and the home
surveying markets are fragmented.
There is significant potential to continue
to grow Fitzalan’s market share (which is
less than 1%), and at the same time
develop new sources of business that can
significantly enhance both market share
and bottom line growth in future years.
Fitzalan Partners acquisition
we make the legal side simple
1 Source: Land Registry data, 2014
“Superb service, extremely competitive, was kept up
to date at every step and always returned my calls if
I couldn’t reach you. Would definitely recommend to
anyone involved in a sale or purchase or both. 5 star .”
Mr Michael and Mrs Sharon R
(Fridaysmove) NAHL Group plc 18
Annual report and accounts 2014 Strategic report
We are pleased to report a strong set of
results with good growth in enquiries,
revenue and profit.
NAHL’s business model is very cash
generative and we continue to return
operating cash in excess of 90% of
operating profits.
Chief
Financial
Officer’s
review
Trading results
2014
£m
2013
£m
Operating profit
(excluding share-
based payments,
one-off items and
pre-LASPO ATE) 12.7 9.8
Share-based payments (0.3) –
One-off items (0.6) –
Pre-LASPO ATE
operating profit – 9.4
Total operating profit 11.8 19.2
Financial income 0.6 0.3
Financial expense (0.3) (4.8)
Profit before tax 12.1 14.7
Operating profit from continuing activities and
before share-based payments, one-off items
and pre-LASPO ATE increased by 29.3% to
£12.7m. This was driven by good revenue
growth and an improvement in our gross profit
margins. Efficient marketing, improved
performance from SEO and an increase in the
number of enquiries due in part to market
consolidation in RTA allowed us to reduce the
cost per enquiry to our PLFs by 3.2% yet still
enjoy an increase in the overall gross margin
from 41.9% to 45.5%.
Our business model and control of central
costs ensures that increases in gross margin
convert well into operating profit and as a
result our return on sales increased from
24.7% to 29.0%; we remain on track to
achieve our target of 30%.
After allowing for share-based payments,
one-off IPO related items and financial
income and expense the business returned a
profit before tax of £12.1m which is ahead of
market expectations.
Taxation
The Group’s tax charge of £2.6m represents an
effective tax rate (ETR) of 21.5% (2013:
29.9%). The 8.4 percentage point decrease in
the ETR represents a combination of reduced
tax rates in the UK, the repayment of loan
notes in 2013 which were not fully deductable
and £480k of financial income in 2014 which
is not a taxable income to the Group.
Earnings per share (EPS) and dividend
Basic EPS is calculated on the total profit of
the Group and most closely relates to the
ongoing cash which will be attributable to
shareholders and in turn the Group’s ability
to fund its dividend programme. The
Remuneration Committee uses the same
metric in assessing the remuneration of its
Executive Directors (see remuneration
report). The Group also has a number of share
options outstanding (see note 19 of the
financial statements) which results in a
Diluted EPS.
Steve Dolton
Chief Financial Officer 19 NAHL Group plc
Annual report and accounts 2014 Strategic report
29.3%
Underlying operating profit of £12.7m
increased by 29.3%.
Basic EPS for the year was 20.6p (2013:
23.0p), the reduction is as a result of the
pre-LASPO ATE profits and Diluted EPS
was 20.2p (2013: 22.5p).
The Directors have proposed a final dividend
of 10.7p reflecting the Group’s stated policy of
paying out two thirds of its retained earnings.
The ability to pay this level of dividend is due
to the solid financial performance for the year,
a robust balance sheet with positive net cash
and the ongoing cash generative nature of the
business. With the 5.0p interim dividend paid
in October 2014 the full-year dividend will be
15.7p. The full-year dividend per share is
covered 1.5 times by the continuing
operations EPS of 23.0p.
Operating cash generation
2014
£m
2013
£m
Operating profit
(excluding share-
based payments,
one-off items and
pre-LASPO ATE) 12.7 9.8
Depreciation 0.2 0.2
Working capital
movements
(excluding
discontinued
activities) (0.5) 0.4
Net operating
cash generated
from operating
activities 12.4 10.4
Net operating
cash generated as
a percentage of
operating profits 97.6% 106.3%
NAHL’s business model is very cash
generative and we continue to return an
operating cash conversion in excess of 90%
of operating profits. In 2014 the level was
97.6% (2013: 106.3%). A major factor in our
conversion is that our solicitor income is
fully paid by direct debit within the month of
invoice and our commissions earned on our
product offerings are also received in a
timely manner.
Balance sheet
2014
£m
2013
£m
Net assets
Goodwill 39.9 39.9
Adjusted net cash:
Cash and cash
equivalents 13.6 14.2
Borrowings ( 5.9 ) ( 6.9 )
Other payables
relating to
discontinued pre-
LASPO ATE product ( 6.5 ) ( 12.1 )
Total adjusted net
cash 1.2 ( 4.8 )
Other net liabilities ( 4.9 ) ( 4.9 )
Total net assets 36.2 30.2
The Group’s net assets at 31 December 2014
were £36.2m (2013: £30.2m) reflecting the
retained earnings for the year and the
changes in the financial structure
implemented as part of the IPO.
The significant balance sheet items are
goodwill, adjusted net cash (which includes
cash and cash equivalents, borrowings and
other payables relating to a legacy pre-LASPO
ATE product) and other net liabilities.
Goodwill
The Group’s goodwill of £39.9m (2013:
£39.9m) arises from the business acquisition
of NAH. Management reviewed the goodwill
value for impairment as at 31 December 2014
and believes there are no indications of
impairment.
Adjusted net cash
The Group considers that its adjusted net
cash comprises cash and cash equivalents,
other interest-bearing loans and borrowings
and other payables relating to legacy
pre-LASPO ATE product. At 31 December
2014 adjusted net cash was £1.2m
(2013: adjusted net debt £4.8m).
Cash and cash equivalents
At 31 December 2014 the Group had £13.6m
of cash and cash equivalents (2013: £14.2m).
Since the year end the Group has utilised
£3.0m of this to fund the initial consideration
for the acquisition of Fitzalan (with a
further amount of up to £1.3m to be paid by
31 December 2015) but still retains a healthy
level of cash. All of the Group’s cash is held
in its trading entities and the Group takes
advantage of medium term deposit rates in
maximising its interest returns.
Borrowings
At 31 December 2014 the Group had £5.9m of
other interest-bearing loans and borrowings
(2013: £6.9m). The Group refinanced its
borrowing arrangements during the year
as follows:
Date due £m
31 December 2015 2.95
31 December 2016 2.95
The current rate of interest payable on these
borrowings is 2.5% above LIBOR.
Other payables relating to a discontinued
pre-LASPO ATE product
At 31 December 2014 the Group had £6.5m of
other payables relating to a legacy pre-LASPO
ATE product (2013: £12.1m). This amount is
repayable to Allianz for previously received
commissions when certain of the policies
either fail or are abandoned. The provision is
calculated using actuarial rates and is likely
to be materially repaid by the end of 2016.
Equity restructure
It is the Board’s intention at its AGM to seek
shareholder approval to restructure its
merger reserve and share premium accounts
through the normal court procedures.
This ensures that the Group has maximum
flexibility to access reserves within the
Group to support its future dividend policy. NAHL Group plc 20
Annual report and accounts 2014 Strategic report
Enquiries £‘000s
0
10
20
30
40
50
Group revenues £m
0
5
10
15
20
25
Underlying operating profit £m Net debt £m and cash conversion %
Group revenues £m
50%
75%
100%
125%
0
10%
20%
30%
40%
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013
2.5
2.7
2.8
2.7
18.3
19.4
16.1
19.0
20.8
22.1
18.9
21.7
Total
RTA
Non-RTA
Med Neg
H1 2013 H1 2014 H2 2013 H2 2014
Total
Solicitors
income
Products
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013 H1 2014 H2 2013 H2 2014
(5.4)
(4.8)
(2.0)
1.2
6.6 6.1 5.0 4.8
Debt
Cash
Cash
conversion
%
Enquiries £‘000s
0
10
20
30
40
50
Group revenues £m
0
5
10
15
20
25
Underlying operating profit £m Net debt £m and cash conversion %
Group revenues £m
50%
75%
100%
125%
0
10%
20%
30%
40%
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013
2.5
2.7
2.8
2.7
18.3
19.4
16.1
19.0
20.8
22.1
18.9
21.7
Total
RTA
Non-RTA
Med Neg
H1 2013 H1 2014 H2 2013 H2 2014
Total
Solicitors
income
Products
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013 H1 2014 H2 2013 H2 2014
(5.4)
(4.8)
(2.0)
1.2
6.6 6.1 5.0 4.8
Debt
Cash
Cash
conversion
%
Enquiries £‘000s
0
10
20
30
40
50
Group revenues £m
0
5
10
15
20
25
Underlying operating profit £m Net debt £m and cash conversion %
Group revenues £m
50%
75%
100%
125%
0
10%
20%
30%
40%
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013
2.5
2.7
2.8
2.7
18.3
19.4
16.1
19.0
20.8
22.1
18.9
21.7
Total
RTA
Non-RTA
Med Neg
H1 2013 H1 2014 H2 2013 H2 2014
Total
Solicitors
income
Products
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013 H1 2014 H2 2013 H2 2014
(5.4)
(4.8)
(2.0)
1.2
6.6 6.1 5.0 4.8
Debt
Cash
Cash
conversion
%
Key performance indicators
Enquiries 000s
Enquiries are the basis of generating solicitor income revenue
and ultimately additional product revenue.
During H1 2013 the business changed its approach as a result of
LASPO and focused on generating a more cost efficient level of
enquiries. Having introduced this strategy the Group then saw a
good increase in enquiries in 2014 (up 15.3% on 2013) as a result
of marketing efficiencies and market consolidation.
Total
RTA
Non-RTA
Med Neg
Group operating profit £m and operating profit return % Net (debt)/cash £m and cash conversion %
Operating profit is a key measure for the Group. The Group
measures this by the sectors of solicitor income, products
and then in total after the allocation of Group costs.
The Group has enjoyed consistent growth in its operating
profit and has seen its overall return on revenue increase
from 23.0% in H1 2013 (and 24.7% in 2013 full year) to
30.6% in H2 2014 (and 29.0% in 2014 full year).
The business continues to have a very strong operational
cash generation conversion (2014 97.6%, 2013 106.3%) and
as a result has seen an improvement in overall net cash
from £4.8m net debt in December 2013 to £1.2m net cash in
December 2014. The Group continues to target its overall
operating cash generation in excess of 90%.
Debt Operating
profit
Cash
Operating
cash %
Operating
profit
return %
Group revenues £m
Revenue is earned from solicitor income (the charge to PLFs for
providing a postcode exclusive transfer of enquiries) and products
used by PLFs to operate the cases (ATE, medicals, costs).
During 2014 the business saw the benefit of the increase in enquiry
volumes with H2 revenue 15.2% up on the same period in the prior
year. Product revenue has remained relatively flat mainly due to the
expected decline in products impacted by LASPO. Ongoing products
have grown 11.2% year on year.
Enquiries £‘000s
0
10
20
30
40
50
Group revenues £m
0
5
10
15
20
25
Underlying operating profit £m Net debt £m and cash conversion %
Group revenues £m
50%
75%
100%
125%
0
10%
20%
30%
40%
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013
2.5
2.7
2.8
2.7
18.3
19.4
16.1
19.0
20.8
22.1
18.9
21.7
Total
RTA
Non-RTA
Med Neg
H1 2013 H1 2014 H2 2013 H2 2014
Total
Solicitors
income
Products
H1 2013 H1 2014 H2 2013 H2 2014 H1 2013 H1 2014 H2 2013 H2 2014
(5.4)
(4.8)
(2.0)
1.2
6.6 6.1 5.0 4.8
Debt
Cash
Cash
conversion
%
Products
Solicitor
income
The Group has performed well in 2014 and has a robust balance sheet with adjusted net cash. Our strong cash generation metrics mean we
will continue to have good levels of cash in order to fund our stated dividend policy and to acquire good earnings accretive businesses in the
legal services market.
Steve Dolton
Chief Financial Officer 21 NAHL Group plc
Annual report and accounts 2014 Strategic report
The Board has ultimate responsibility for setting the Group’s risk appetite and for effective management of risk. An annual assessment of
key risks is performed by the Executive Directors and presented to the Board. A risk register is maintained and regularly reviewed by the
Executive Directors. All risks take into consideration the likelihood of the event occurring and the impact of that event. Once the risks have
been assessed appropriate mitigation actions are determined for each key risk identified.
The following sets out the Group’s
principal risks that the Board considers
may have a material impact on the
Group’s financial performance.
Risks
Principal risk Description Mitigation
Regulatory
The Group and its PLFs are subject to an extensive
regulatory and legal framework. This includes the need to
comply with the provisions of the LASPO and regulation by
either the Claims Management Regulation Unit (CMRU) or
the Solicitors Regulation Authority (SRA). Regulations and
laws are open to change and in the event either the Group or
its PLFs fails to make the necessary changes then corrective
action may be required.
The Group will continue to monitor regulatory and legal
developments and use these to underpin its strategic and
competitive response and ensure compliance with its
obligations. It will also continue to work with its PLFs to ensure
they comply with relevant regulations. The business model has
proven to be adaptable and resilient to change over a number of
years and the business has continued to develop through the
various regulatory changes.
Market and
competition
The Group operates in a competitive market and although a
number of competitors have left the market in 2014 the
Group could still face competition from other consumer
marketing businesses in the legal services market. The
Group is also reliant on the PI sector for the majority of its
revenue and profits.
The Group has historically taken market share and with its
strong brand and leadership positions acting as a continued
barrier to entry the Group will continue to compete effectively
against the competition. The recent acquisition of Fitzalan
supports the Group’s strategy to develop into other chosen legal
markets through targeted acquisitions which helps to mitigate
its reliance on the PI sector.
PLFs
The Group is dependent upon its PLFs to take its enquiries
each month and to pay for these enquiries prior to the
satisfactory completion of the case by the PLF. Any
termination by the PLF of this relationship or any significant
change in the financial situation of the PLF could have a
material impact on the financial performance of the Group.
The Group continues to provide its PLFs with high quality
enquiries that ensure the PLF maximises its financial
performance. The Group has a number of panel relationships and
ensures that no single PLF accounts for more than 20% of the
Group’s business each month. The Group continues to explore new
PLF relationships to ensure there is a replacement PLF available
in the event of termination of any existing relationship.
Reliance on
TV and
online
marketing
The Group relies upon its TV and online marketing strategy
to retain its market leading position in the PI sector. Any
significant change in technology, cost increases, changes to
search engine algorithms or terms of services could impact
the Group’s ability to maintain its high rankings on search
results and ultimately lead it to having to spend more
resource and expenditure to meet its financial results.
The Group has extensive experience of managing its
marketing strategy through a combination of internal
marketing experts and external agencies. The relationships
with the external agencies go back many years and ensure
the Group has flexibility and the speed required to react to
the potential risks outlined.
Brand
reputation
The Group’s success and results are dependent in part on the
strength and reputation of the Group and its NAH brand. The
Group relies on its brands which includes NAH and on its
advertising character, the Underdog, and is exposed to the
risk of the brand being tarnished via any significant adverse
publicity.
Brand performance is tracked and measured on an ongoing basis
to ensure that it remains ahead of competitors and delivers
compelling messages which drive consumer contacts. The
Group is also active in public affairs and thought leadership,
effectively lobbying in areas of importance to the sector,
demonstrated through activities such as the Stop Nuisance
Calls campaign. This ensures the Group maintains its brand
trust ratings and its reputation.
Dependence
on key
personnel
The Group’s future growth and success depends, in part,
upon the leadership and performance of its Executive
Directors and senior management team. The loss of any key
individual or the inability to attract appropriate personnel
could impact on its ability to execute its business strategy
successfully which could negatively impact upon the Group’s
future performance.
The Group maintains competitive and attractive employment
terms and conditions, fully empowering key individuals and
allowing them to maximise their job satisfaction. The Group
incentivises key management through annual incentive plans
in the short term and through share options for medium and
long-term retention. NAHL Group plc 22
Annual report and accounts 2014 Strategic report
NAHL never cold calls or cold texts and has campaigned against nuisance marketing for many years.
Our independent research
shows that millions of UK
consumers are plagued by
nuisance calls and two
thirds do not know where to
turn to stop them.
The Real Cost of Personal Injury
A National Accident Helpline report
We take our role as an
ethical business and
consumer champion
very seriously, and have
taken positive steps
in 2014 to enhance our
thought leadership status
and reinforce the vital
requirement for legitimate
access to justice.
Russell Atkinson
Chief Executive
81% 73% 66%
As an ethical market leader, the Group
sets the standards in our chosen markets
and in so doing acts in the best interest
of our consumers, Panel Law Firms and
our shareholders.
Thought
leadership
of the population receive
cold calls regularly
of people do not think
the government is doing
enough to prevent cold
calls
of people are not
confident they know
where to report cold calls
Corporate social responsibility 23 NAHL Group plc
Annual report and accounts 2014 Strategic report
Standards for the industry
It is vital that we establish our thought
leadership status, particularly in the PI
sector where misperceptions persist and
can undermine the valuable role that ethical
companies like NAH play in helping genuine
injury victims access justice. We welcome
proportionate regulation that reduces fraud
but does not inhibit access to justice and
have lobbied government and worked
alongside regulators to effect positive
change for our consumers and industry.
In 2014 we launched two strategic
communications campaigns (‘The Real Cost
of Injury’ and ‘Stop Nuisance Calls’) which
focused on the plight of UK consumers and
reinforced our role as a consumer champion.
We proactively encourage our sector and
other industries to act with integrity as
demonstrated in our Stop Nuisance Calls
campaign.
Access to justice
People who have suffered a personal injury
through no fault of their own should be
entitled to redress which helps them to
resume their life and work, in so far as is
possible. Our research shows that 81%
1
of
personal injury victims used their
compensation to offset losses or costs
associated with their injury.
The PI sector is subject to unjustified
negative misperceptions which hinder
access to justice for legitimate claimants
and as a market-leader we believe it is
important to draw attention to the plight
of these individuals.
NAH helps over 200,000 people every year to
understand whether they have a legitimate
claim. We sift out two thirds of the consumer
contacts made to us each year and only pass
the remaining enquiries on to our PLFs. It is
not in our interest, nor that of our PLFs, to
proceed with cases which do not have merit.
The impact of personal injury
In April 2014 we commissioned independent
research to inform our report on The Real
Cost of Personal Injury and it was clear that
the impact of a personal injury goes beyond
inconvenience and physical pain, to
significant financial and emotional hardship.
The impact is not limited just to the
individual, it extends to families and
co-workers, with more than two thirds of
work colleagues citing that they are affected
if a colleague suffers a personal injury. Our
research showed that 88% of 18-24 year olds
who suffered a personal injury lost earnings
as a result and almost a third were worried
about losing their job.
Despite media and government concerns
over a compensation culture, our research
1
has revealed these fears to be overstated and
at worst, discourage genuine claimants from
seeking the justice they deserve. The
positive effect of financial compensation for
an individual is relatively easy to measure,
but the psychological benefits of the right
kind of legal and rehabilitation support are
harder to quantify.
NAH effectively used The Real Cost of
Personal Injury Report to initiate discussions
with both the media and key stakeholders to
highlight the plight of the personal injury
victim and why it is important they get
access to the justice they deserve.
NAH has never used cold calls or
spam texts to attract new consumers and
is fully aware how frustrating, intrusive
and often distressing these calls can be.
Unfortunately, some other companies
do use these underhanded techniques,
and we even receive complaints from
consumers who have been targeted by
cold calls and texts from companies
purporting to be NAH. We take these
matters very seriously and report all
incidents to the appropriate authorities.
In October 2014 we commissioned an
independent survey which revealed that
UK consumers don’t know where to turn
when they become a victim of nuisance
calls and texts. As a result, we introduced
a three-step campaign, Stop Nuisance
Calls calling upon the government to:
1. set up a one-stop complaints
process to clarify how to stop
unwanted cold calls and make an
effective complaint;
2. take stronger legal action
against cold calls coming from
international numbers, alongside
ongoing work to ensure regulators
can prosecute domestic cold calls
more effectively; and
3. enforce simple, clear and consistent
‘opt-ins’ to email marketing or calls,
that don’t trick or confuse consumers.
We are pleased to see that on
25 February 2015 the Government
lowered the threshold required for the
Information Commissioner’s Office
(ICO) to impose fines and increase
penalties for cold calling offenders.
1 Source: The Real Cost of Personal Injury Report, 2014 NAHL Group plc 24
Annual report and accounts 2014 Strategic report
“ I’ve worked for National Accident Helpline for over 1 2 years and feel a great sense of pride
from helping others. During my time here the Personal Injury sector has changed but the
regular training and coaching sessions I receive enable me to develop my skills and knowledge
to ensure I can continue to listen to and support our consumers in the right way. People tell us
what a difference we make to their recovery journey and that is really satisfying.”
Riv Singh
Legal Service Advisor
Our people are the foundation of
the Group’s success and we recognise
that employee development is vital
to continue our growth.
Our people
Growing our future leaders and
nurturing our resources
In 2014 we launched an Employee
Development Programme following the
principles of the Institute of Leadership and
Management (ILM). The 18-month
programme is a combination of internal
coaching and training, with external
tutoring, and is assessed through practical,
coaching and theory based assignments.
The programme ensures we build our talent
pool from within; reinvesting time and money
in the business through our people. Other
benefits include improvements in thought
leadership and innovation, and enhanced
productivity and capability.
Across the three tiers of the programme (ILM
level 3, 4 and 5 certificates) we are currently
developing nine of our potential future
leaders, giving them the skills that bring
value to them and our business.
This focus on development extends
throughout the workforce with on the job
training, coaching and mentoring central to
the progress of our people. Starting with a
comprehensive induction programme, we
equip our people with the skills required to
ensure they are making a valuable
contribution from day one. Our LSAs and
contact centre employees progress through
a variety of training modules and
environments, coaching, skills and
knowledge assessments. We monitor their
ongoing performance through a customer
experience scoring system. Developed in
conjunction with employees, the system is a
positive coaching tool that sets clear delivery
expectations across the entire consumer
journey.
Our senior managers receive regular coaching
sessions to ensure they remain expert in their
field and are skilled at leading their people to
success. This is carried out on a one-to-one
basis and addresses key leadership
capabilities and performance.
In our 2014 Employee Opinion Survey (89%
response rate), the strength of our senior
leaders was recognised with 93% of
respondents having confidence in the
leadership skills within the business.
Investing in our people
At the beginning of 2015 we received our
Investors in People accreditation. This is a
rigorous, objective assessment of how we
lead, manage, develop and communicate with
our people and measures it against best
practice standards.
The Group is focused on continuous
improvement and has embarked on a
development plan dedicated to maintaining
this standard and ensuring that as an
employer we can continue to attract, retain
and develop talent.
Creating a great place to work
Our employees are fully committed to our
Code of Conduct ensuring that we deliver to
the highest standards of honesty, integrity,
respect and fairness when dealing with each
other, our consumers, partners and suppliers.
We have a strong team ethos across the
business and are focused on creating a great
place to work for our people. Our corporate
values underpin how we do business and
encourage a curious, driven, passionate and
unified workforce. We encourage diversity
across gender, ethnicity and age range and
have built a diverse, lively workforce.
A culture of recognising our people and
celebrating success is key to ensuring our
people feel valued for the work they do. Great
behaviours are recognised through our Values
Champion Recognition Scheme, as well as
rewards through prize draws, incentives and
social events. Our new cash-back and
discounts reward package was winner of a
Reward Gateway Benefits Excellence Award
in 2014, in recognition of the targeted
approach we took to developing the scheme
for our workforce, based on their needs.
Corporate social responsibility 25 NAHL Group plc
Annual report and accounts 2014 Strategic report
I was delighted to be
selected for the Employee
Development Programme.
It’s a great opportunity to
learn more about the
business and invest in my
career at National Accident
Helpline. I’m gaining
valuable skills and
knowledge which I will be
able to give back to the
business in the future.
Kelly Affronti
Legal and Compliance Officer
Employee survey highlights (2014)
Have confidence in the
leadership skills across the
Company.
93%
Believe that the Company
makes a positive difference to
others.
89%
Are happy with how senior
leaders seek their views.
87%
Feel loyal to the Company.
84% NAHL Group plc 26
Annual report and accounts 2014 Strategic report
Giving something back is important to
our employees and they have always
been enthusiastic about volunteering
and raising money for charity.
Our
community
The support of National Accident
Helpline has been fantastic. By raising
over £10,000 in 2014 they’ve helped us to
fund six life-saving missions. Without
fundraising efforts I wouldn’t be able to
get to the people who need help the
most, sometimes following horrific
accidents. It’s company donations and
support that keep our helicopters flying.
Paul Hogan
Pilot, The Air Ambulance Service
Corporate social responsibility 27 NAHL Group plc
Annual report and accounts 2014 Strategic report
Team challenge
One of the highlight events within our
fundraising plans for 2014 was the Way
of the Roses cycle challenge. A team of
eight riders, including Chief Executive
Russell Atkinson, cycled a gruelling 167
miles from Morecombe to Bridlington
over three days.
The ride covered quaint riverside trails
and strenuous climbs in the Yorkshire
Dales. By the end of the challenge on day
three our team had braved the weather,
overcome bike failures and repairs and
had raised over £1,000 towards our
£10,000 target for the year.
Supporting our community
In 2014 our employees voted
overwhelmingly to support The Air
Ambulance Service including the
Warwickshire & Northamptonshire Air
Ambulance (WNAA), Derbyshire,
Leicestershire & Rutland Air Ambulance and
the national Children’s Air Ambulance.
Over the past year we have formed a
successful working partnership with the Air
Ambulance Service which saw over £10,000
raised in 2014. By giving their time and
fundraising for this worthwhile cause, our
employees exceeded our target and helped to
keep the helicopters flying. In total, the
money we’ve raised to date will cover the
cost of six life-saving missions.
When it came to showing their support, our
employees took part in a range of creative
fun and challenging activities from dragon
boat racing, endurance events and cycle
challenges to cake baking competitions and
quiz nights.
Team spirit
Every employee supported The Air
Ambulance Service in one way or another
throughout the year, with over two thirds of
employees taking part in a fundraising event
or challenge themselves.
In autumn 2014 two teams of employees
went head-to-head (as well as against other
companies) in The Big £50 Business
Challenge, hosted across Northamptonshire.
The competing teams, each sponsored by an
Executive Director, started with just £50
cash and used their commercial,
entrepreneurial and innovation skills to
multiply their cash in aid of The Air
Ambulance Service. Our teams raised £1,500
and won the Enterprise, Special Recognition
and Entrepreneur of the Year Awards.
Continuing the support
Our support for The Air Ambulance Service
will continue into 2015 with new challenges,
and enthusiastic involvement from our
people. We will also enhance our
participation in the local communities where
we operate and we intend to engage with
local education, business and charities.
In 2014 we asked employees for ideas on how
to engage more with our local community.
Following a shortlisting process, we chose to
explore a partnership with local education
which will see us share the skills and
expertise of our people with young people
preparing to enter the world of business.
£10,000
We raised over £10,000 for
The Air Ambulance Service in 2014. NAHL Group plc 28
Annual report and accounts 2014 Governance
Board of
Directors
Steve Dolton
Chief Financial Officer
Steve Halbert
Chairman
Russell Atkinson
Chief Executive Officer
Gillian Kent
Non-Executive Director
S a m a n t h a P o r te o u s
Non-Executive Director 29 NAHL Group plc
Annual report and accounts 2014 Governance
Steve Halbert
Chairman
Steve Halbert is Non-Executive Chairman
of the Group, which he joined in 2010.
Steve is Chair of the Audit Committee and
Nomination Committee and has over 25
years’ Board experience.
Steve is also Chairman of Safestyle UK plc, an
AIM-quoted retailer and manufacturer of
replacement doors and windows.
Prior to this, Steve held various Board
positions including Chairman of United
House, Non-Executive Director at
Employment Services Holdings, and
Executive Chairman of GVA. Prior to this,
Steve worked as a Senior Corporate Financier
for 15 years at KPMG UK.
He is a qualified Chartered Accountant and is
a fellow of the ICAEW.
Russell Atkinson
Chief Executive Officer
Russell Atkinson became Chief Executive
Officer of NAHL, following Admission. He
joined the Company in 2012 as Managing
Director of National Accident Helpline and
had a pivotal role in implementing its strategy
post-LASPO.
His responsibilities include developing and
implementing the Group-wide strategy and
ensuring delivery of budgeted financial
performance.
Prior to joining NAHL, Russell held Managing
Director roles at international firms including
UK Managing Director of Lebara Mobile
Limited, Managing Director of Blackhawk
Network (UK) Limited, a division of Safeway
Inc. and Director of E-Payments at Travelex.
Russell holds a Bachelor of Arts from Leicester
Polytechnic and a diploma in marketing from
The Chartered Institute of Marketing.
Steve Dolton
Chief Financial Officer
Steve Dolton is Chief Financial Officer of the
Group having joined in 2012.
His responsibilities include overall
management of the finance function within
the Group and liaising with the Group’s
investors and the banks.
Steve has over 20 years’ experience as
Finance Director. Prior to joining NAHL, he
was Chief Financial Officer of several
companies including NSL Services Group,
Azzurri Communications Limited,
Safety-Kleen Group (European operations)
and Walker Dickson Group Limited. Prior to
that, Steve worked in various financial roles
with Peek Plc, including a two-year period in
Asia as Regional Controller.
He is a qualified Chartered Accountant and
has been a member of the ICAEW since 1989,
having qualified with Grant Thornton LLP. He
is a fellow of the Institute of Directors in the
UK, and holds a Bachelor of Arts from
Huddersfield Polytechnic.
Samantha Porteous
Non-Executive Director
Samantha Porteous became a Non-Executive
Director on Admission, and is currently also
Chair of the Remuneration Committee. Prior
to this she was CEO of NAH Ltd from 2009 to
2011 and then Group CEO until the IPO.
She joined the Group in 2006 as Finance
Director after the LDC management buyout.
Prior to this she held a number of senior finance
roles at Nexus Media Ltd, Thomson Scientific
Ltd (part of the publicly listed company
Thomson Reuters), and Reed Elsevier.
Samantha is a fellow of the Chartered Institute
of Management Accountants (CIMA).
Gillian Kent
Non-Executive Director
Gillian Kent became Non-Executive Director
in November 2014.
Gillian is a co-founder of private company
Skadoosh where she remains as Chief
Executive Officer and is also an independent
Non-Executive Director at Pendragon plc.
Her executive career in the digital and online
sectors includes senior roles at Microsoft
where she was Managing Director of its
largest online business in the UK, MSN UK.
Gillian has also served as Chief Executive
Officer and Digital Consultant at GK
Associates, Chief Executive Officer at
Propertyfinder.com, and Director of Strategy
and Business Development at Microsoft
(MSN).
With effect from the 2015 Annual General
Meeting, Gillian will chair NAHL’s
Remuneration Committee. NAHL Group plc 30
Annual report and accounts 2014 Governance
Directors’ report
The Directors of NAHL Group plc present their Annual Report and audited financial statements for the year ended 31 December 2014.
Results and dividend
The Group’s profit after tax for continuing operations for the year was £9.5m (2013: £10.3m).
The Directors propose a final dividend of 10.7p per share (2013: £nil) which, subject to approval at the Annual General Meeting will be paid on
29 May 2015 to shareholders registered on 24 April 2015.
Details of significant events affecting the Company and Group since the balance sheet date are given in note 27 to the financial statements.
A fair review of the business including future developments is included in the strategic report on pages 1 to 27.
Directors’ third party indemnity provisions
The Company maintained during the period and to the date of approval of the financial statements indemnity insurance for its Directors and
Officers against liability in respect of proceedings brought by third parties, subject to the terms and conditions of the Companies Act 2006.
Capital structure
Details of the Capital Structure can be found in note 18 of the consolidated financial statements. The Company has employee share option
plans in place, full details of which can be found in note 19 to the financial statements.
Financial instruments
The Group’s principal financial instruments comprise cash and cash equivalents, other receivables, interest-bearing loans and trade payables.
Further details on financial instruments are given in note 21 to the financial statements.
Directors
Biographies of the present Directors of the Company are listed on page 29.
Details of the remuneration of the Directors is disclosed in the Remuneration Report on pages 33 to 38.
Political donations
No political donations were made during the year or the previous year.
Disclosure of information to the Auditor
Each of the persons who is a Director at the date of approval of this Annual Report confirms that:
• so far as the Director is aware, there is no relevant audit information of which the Company’s Auditor is unaware; and
• the Director has taken all the steps that ought to have been taken as a Director in order to make himself aware of any relevant audit
information and to establish that the Company’s Auditor is aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006.
Auditor
KPMG LLP have been appointed as Auditor and have expressed their willingness to continue in office as Auditor and a resolution to reappoint
them will be proposed at the forthcoming Annual General Meeting.
Other information
An indication of likely future developments in the business and particulars of significant events which have occured since the end of the year
have been included in the strategic report on pages 1 to 27.
Going concern
The Group’s business activities, together with risk factors which impact these activities are included within the Chief Financial Officer’s
review on pages 18 to 20. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described in
the Chief Financial Officer’s review. Having regard to the matters above, and after making reasonable enquiries, the Directors have a
reasonable expectation that the Company and the Group have adequate resources to continue operations for the foreseeable future. For that
reason, they continue to adopt the going concern basis in the preparation of the accounts.
Approved by the Board of Directors and signed on behalf of the Board.
Steve Dolton
Chief Financial Officer
23 March 2015 31 NAHL Group plc
Annual report and accounts 2014 Governance
Corporate governance report
The UK corporate governance code
Companies listed on the main market of the London Stock Exchange are required to comply with the UK Corporate Governance Code. NAHL
Group plc’s shares are traded on AIM and as such, the Company is not subject to the requirements of the UK Corporate Governance Code on
corporate governance, nor is it required to disclose its specific policies in relation to corporate governance.
However, as a publicly quoted company, the Company will maintain appropriate standards of corporate governance. The UK Corporate
Governance Code represents the ‘gold standard’. However, the UK Corporate Governance Code was not designed with smaller companies in
mind. Adherence to the full UK Corporate Governance Code is often impractical for smaller companies. In the past, in the absence of an
alternative code, many AIM companies have adopted the UK Corporate Governance Code ‘to the extent applicable’.
In July 2005, the QCA introduced a simple set of guidelines for corporate governance for AIM companies, which were updated in July 2007 and
again in September 2010. According to the QCA, the guidelines have been devised in consultation with a number of significant institutional
smaller company investors.
The Directors recognise the importance of sound corporate governance and the Company holds membership of the QCA and complies with
the QCA Guidelines and the main provisions of the UK Corporate Governance Code, insofar as is practicable to do so for a company of NAHL
Group plc’s current size and stage of development, save in relation to certain Directors, who will not be independent because of the grant or
proposed grant of options to them by the Company.
The Board of Directors operates within the framework described below.
Table of committees
The Board is responsible for formulating, reviewing and approving the Company’s strategy, budgets and corporate actions. Board meetings
are held at least every two months and at such other times as the Directors deem necessary.
The Company has appointed Steve Halbert as the Company’s Senior Independent Non-Executive Director. The Board has created a
Remuneration Committee, an Audit Committee and a Nomination Committee where the current composition and responsibilities of the
committees are as follows:
Audit Committee
The Audit Committee consists of Steve Halbert as Chairman, Gillian Kent and Samantha Porteous. It meets at least twice each year and is
responsible for ensuring that the financial performance of the Company is properly monitored and reported on and for meeting with the
Auditor and reviewing findings of the audit with the external Auditor. It is authorised to seek any information it properly requires from any
employee and may ask questions of any employee. It meets with the Auditor at least twice a year and is also responsible for considering and
making recommendations regarding the identity and remuneration of such Auditor.
Remuneration Committee
The Remuneration Committee consists of Samantha Porteous as Chairman, Steve Halbert and Gillian Kent. Gillian Kent will replace
Samantha Porteous as Chairman after the AGM. It meets at least once each year and considers and recommends to the Board the framework
for the remuneration of the Executive Directors of the Company and any other senior management. It further considers and recommends to
the Board the total individual remuneration package of each Executive Director including bonuses, incentive payments and share options or
other share awards. In addition, subject to existing contractual obligations, it reviews the structure of all share incentive plans for approval
by the Board and, for each such plan, recommends whether awards are made and, if so, the overall amount of such awards, the individual
awards to Executive Directors and the performance targets to be used. No Director is involved in decisions concerning his own remuneration.
Nomination Committee
The Nomination Committee consists of Steve Halbert as Chairman, Samantha Porteous and Gillian Kent. The Nomination Committee meets
at least once each year and considers the selection and re-appointment of Directors. It identifies and nominates candidates to all Board
vacancies and regularly reviews the structure, size and composition of the Board (including the skills, knowledge and experience) and makes
recommendations to the Board with regard to any changes. The Company has adopted a share dealing code (based on the AIM Rules) and the
Company takes all proper and reasonable steps to ensure compliance by the Directors and relevant employees.
The Board is also responsible for ensuring the Company’s compliance with all applicable anti-corruption legislation, including, but not limited to,
the UK Bribery Act 2010 and the US Foreign Corrupt Practices Act 1977. The Company complies and always has complied with all applicable
anti-corruption laws. In view of the requirement in the UK Bribery Act 2010 for relevant companies to have adequate anti-bribery procedures,
the Company has devised and implemented a suite of anti-corruption policies and procedures designed to prevent corruption by anyone working
on its behalf. The Company has adopted a ‘zero tolerance’ approach to corruption and is committed to ethical business practices. NAHL Group plc 32
Annual report and accounts 2014 Governance
Corporate governance report continued
The Board of Directors
Director Date appointed
Remuneration
Committee
Audit
Committee
Nomination
Committee
Russell Atkinson 1 May 2014
Steve Dolton 14 April 2014
Steve Halbert 1 May 2014 (Chair) (Chair)
Samantha Porteous 14 April 2014 (Chair)
Gillian Kent 3 November 2014
Internal control
The Company has introduced policies on internal control and corporate governance. These have been prepared in order to ensure that:
• proper business records are maintained and reported on, which might reasonably affect the conduct of the business;
• monitoring procedures for the performance of the Group are presented to the Board at regular intervals;
• budget proposals are submitted to the local Board no later than two months before the start of each financial year;
• budget proposals are submitted to the Board no later than one month before the start of each financial year;
• accounting policies and practices suitable for the Group’s activities are followed in preparing the financial statements;
• the Group is provided with general accounting, administrative and secretarial services as may reasonably be required; and
• interim and annual accounts are prepared and submitted in time to enable the Group to meet statutory filing deadlines.
Communication with shareholders
Communications with shareholders are given a high priority by the Board of Directors who take responsibility for ensuring that a satisfactory
dialogue takes place. This is achieved through its Annual Report, Interim Report and comprehensive website (www.nahlgroupplc.co.uk). There
is also a regular dialogue between the Chief Executive Officer, the Chief Financial Officer and institutional investors and other financial
institutions in addition to the required public announcements. A constant and up-to-date information flow is maintained on the website
containing all press announcements and financial reports.
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare
the group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and
have also chosen to prepare the parent company financial statements under IFRSs as adopted by the EU. Under company law the Directors must
not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or
loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable
information;
• provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the
impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and
• make an assessment of the Company’s ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions
and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial
statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and
integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
By order of the Board
Russell Atkinson Steve Dolton
Chief Executive Officer Chief Financial Officer
23 March 2015 23 March 2015 33 NAHL Group plc
Annual report and accounts 2014 Governance
Directors’ remuneration report
Statement from the Chairman of the Remuneration Committee
Dear Shareholder,
I am pleased to present the Directors’ Remuneration Report for the financial year ended 31 December 2014.
As an AIM listed Company, NAHL Group plc is not required to comply with the UK Listing Authority Rules or the UK Corporate Governance
Code. Nevertheless, since its admission to AIM in May 2014, one of the key areas of focus of the Committee has been the development of a
comprehensive remuneration policy. Furthermore, the Company is committed to a responsible and transparent approach in respect of
executive pay and has decided to conform to best practice for a large AIM listed company in respect of executive remuneration reporting.
The Company has therefore adopted a number of the key reporting requirements included within the new Directors’ Remuneration
Reporting regulations.
This report is presented in two sections: the Directors’ Remuneration Policy and the Annual Report on Remuneration. The Directors’
Remuneration Policy sets out the forward-looking remuneration policy. The Annual Report on remuneration provides details of the amounts
earned in respect of the year ended 31 December 2014 and how the Directors’ Remuneration Policy will be operated for the year commencing
1 January 2015.
Both the Annual Report on Remuneration and the Directors’ Remuneration Policy are subject to an advisory vote at the 2015 Annual General
Meeting. The Committee believes the advisory votes will provide a greater degree of accountability and give shareholders a say on this
important area of corporate governance. The advisory vote on the Directors’ Remuneration Policy will apply for three years, unless the
Committee deems it appropriate to put the Policy to shareholders again before then.
Review of the 2014 financial year
As described earlier in the Executive’s reports, the Company has performed well in its first year as a listed company with both revenue and
underlying operating profit up on 2013 by 10.4% and 29.3% respectively. Consequently, the annual bonus conditions have been exceeded.
NAHL Group plc believes that the ongoing success of the Company depends to a high degree on retaining and incentivising the performance
of key personnel. To this end, the Company adopted the Long-Term Incentive Plan, Enterprise Management Incentive Plan and SAYE Plan
on its admission to AIM to align interests of senior management, and the wider workforce, with those of the shareholders. Subsequently,
Executive Directors were granted long-term incentive awards with a face value of between £745,000 and £895,000, the vesting of which
is subject to achieving average annual compound growth in Earnings per Share (EPS) of at least 10% over a three-year period ending
31 December 2016. The Committee considers EPS to be the key external measure of financial performance over the longer term in delivering
value to shareholders.
Changes for the 2015 financial year
During 2014 the Committee commissioned Deloitte LLP to undertake a review of remuneration at NAHL and propose changes to the
remuneration structure. As a result of the review, the Committee has agreed to the following key changes to Executive Directors’
remuneration at the Company in 2015:
• Executive Directors were awarded a 2.5% increase to base salary in 2015.
• For 2015 the Chief Executive’s maximum annual bonus award will be set at 100% of salary. The maximum annual bonus opportunity for
the Chief Financial Officer is 70% of salary.
• Annual bonus awards for 2015 will be based on operating profit and individual objectives.
The Company has experienced considerable share price growth since its admission to AIM. Against this background, and in order to
further align the interests of the Executives with the shareholders of the Company, the Committee intends to grant market value
non-tax-advantaged share options under the Enterprise Management Incentive Plan to Executive Directors in 2015. It is intended that
Russell Atkinson will be granted an award equal to 100% of salary and Steve Dolton will be granted an award equal to 80% of salary. The
vesting of the awards will be subject to achieving average annual compound growth in EPS of at least 10% over a three year period ending
31 December 2017.
The Committee will continue to monitor remuneration policy to ensure it remains aligned to the business strategy and delivery of
shareholder value.
Samantha Porteous
Chairman of the Remuneration Committee
23 March 2015 NAHL Group plc 34
Annual report and accounts 2014 Governance
Directors’ remuneration report continued
This section sets out the Company’s Directors’ Remuneration Policy, which will apply from the date of the 2015 Annual General Meeting.
The Policy is determined by the Committee of the Company.
Key principles
The Company’s remuneration package for Executive Directors has been designed based on the following key principles:
• promote the long-term success of the Company, with transparent and stretching performance conditions, which are rigorously applied;
• provide appropriate alignment between the Company’s strategic goals, shareholder returns and executive reward; and
• have a competitive mix of base salary and short and long-term incentives, with an appropriate proportion of the package determined by
stretching targets linked to the Company’s performance.
Policy table for Executive Directors
Component Purpose and link to strategy Operation Maximum opportunity Performance measures
Base salary Fixed remuneration to
provide a competitive base
salary for the market in
which the Company
operates to attract and
retain executives of a
suitable calibre.
Salaries are reviewed annually
taking into account:
• underlying Group performance;
• role, experience and individual
performance; and
• competitive salary levels and
market forces.
No overall maximum has
been set under the Policy.
However, salary increases
are reviewed in the context
of the wider workforce
increases.
Not applicable.
Benefits To provide a market
competitive benefits
package as part of total
remuneration.
Executive Directors receive benefits
in line with market practice, and
these include principally life
insurance, private medical
insurance and a car allowance.
Set at a level which the
Committee deems
appropriate.
Not applicable.
Retirement
benefits
To provide an appropriate
level of retirement benefit.
Executive Directors are eligible to
participate in the Company’s
defined contribution pension plan.
Executive Directors
currently receive nominal
or no pension contributions.
The Committee will review
options to implement a
defined pension
contribution of up to
10% at a future date.
Not applicable.
SAYE Plan To create alignment with
the Company and promote a
sense of ownership.
Executive Directors are entitled to
participate in a tax qualifying all
employee SAYE Plan.
Participation limits are
those set by the UK tax
authorities.
Not subject to performance
measures in line with HMRC
practice.
Annual bonus Rewards performance
against annual targets
which support the strategic
direction of the Company.
Awards are based on annual
performance against key financial
targets and/or the delivery of
strategic/personal objectives.
The Committee has discretion to
amend the pay-out should any
formulaic output not reflect the
Committee’s assessment of overall
business performance.
Maximum bonus
opportunity for the Chief
Executive is up to 100% of
base salary in respect of a
financial year.
Maximum bonus
opportunity for the Chief
Financial Officer is up to
70% of base salary in
respect of a financial year.
Targets are set annually
reflecting the Company’s
strategy and aligned with
key financial, strategic and/
or individual targets.
At least 50% of the bonus is
assessed against financial
performance of the business
and the balance is based
on strategic/personal
objectives.
Stretching targets are
required for maximum
pay-out. 35 NAHL Group plc
Annual report and accounts 2014 Governance
Component Purpose and link to strategy Operation Maximum opportunity Performance measures
Long-term
incentive
To drive and reward the
achievement of longer-term
objectives, support
retention and promote share
ownership for Executive
Directors.
The Company operates a Long-Term
Incentive Plan (LTIP) and
Enterprise Management Incentive
(EMI) Plan.
Under the LTIP, awards may be
granted in the form of nil or nominal
cost share options, or contingent
rights to receive shares.
Under the EMI Plan, awards may be
granted in the form of tax-favoured
share options or non-tax-favoured
share options. It is intended that
the exercise price of a share option
under the EMI Plan shall be the
market value of the underlying
share at grant.
The vesting of awards granted
under the LTIP and EMI Plan will
normally be subject to the
achievement of specified
performance conditions, normally
over a period of at least three years.
Awards granted under the LTIP
and EMI Plan may be subject to
malus provisions at the discretion
of the Committee.
Under the LTIP and EMI Plan
rules the overall maximum
award that may be granted
in respect of a financial year
is 300% of salary.
Furthermore, both the LTIP
and EMI Plan rules prescribe
that awards may be granted
in excess of these limits in
exceptional circumstances.
It is intended that the actual
annual grants in 2015 will
be lower than the overall
maximum awards per the
plan rules and will be
disclosed within the annual
report on remuneration.
Relevant performance
measures are set that
reflect underlying
business performance.
Performance measures and
their weighting where there
is more than one measure
are reviewed annually to
maintain appropriateness
and relevance.
For awards granted in 2015,
the vesting of awards will
be subject to stretching
Earnings per Share (EPS)
targets.
Non-Executive Directors
Purpose and link to strategy Approach of the Company
Sole element of
Non-Executive Director
remuneration, set at a
level that reflects market
conditions and is sufficient
to attract individuals with
appropriate knowledge
and experience.
Fees are normally reviewed annually.
Fees paid to Non-Executive Directors for their services are approved by the Remuneration Committee. Fees
may include a basic fee and additional fees for further responsibilities (for example, chairmanship of Board
committees).
Non-Executive Directors do not participate in any of the Company’s share options schemes or annual bonus
scheme nor do they receive any pension contributions. Non-Executive Directors may be eligible to receive
benefits such as the use of secretarial support, travel costs or other benefits that may be appropriate.
Explanation of performance measures chosen
Performance measures are selected that are aligned with the performance of the Group and the interests of shareholders. Stretching
performance targets are set each year for the annual bonus and long-term incentive awards. When setting these performance targets, the
Committee will take into account a number of different reference points, which may include the Group’s business plans and strategy and the
economic environment. Full vesting will only occur for what the Committee considers to be stretching performance.
The annual bonus is predominantly based on financial metrics. Long-term incentive awards are based on EPS growth.
The Committee retains the ability to adjust or set different performance measures if events occur which cause the Committee to determine
that the measures are no longer appropriate and that amendment is required so that they achieve their original purpose.
Awards and options may be adjusted in the event of a variation of share capital in accordance with the rules of the LTIP and EMI Plans.
Policy for the remuneration of employees more generally
Remuneration arrangements are determined throughout the Group based on the same principle that reward should be achieved for delivery of
the business strategy and should be sufficient to attract, retain and motivate high-calibre employees. The Company operates a HMRC approved
SAYE Plan and invites all employees to participate at the discretion of the Committee, therefore encouraging wider workforce share ownership.
There is no consultation with employees regarding Director’s remuneration. NAHL Group plc 36
Annual report and accounts 2014 Governance
Directors’ remuneration report continued
Service contracts
Russell Atkinson’s service contract is on a rolling basis and may be terminated on nine months’ notice by the Company or the Executive.
Steve Dolton’s service contract is on a rolling basis and may be terminated on six months’ notice by the Company or the Executive.
All Non-Executive Directors have initial fixed-term agreements with the Company of no more than three years, commencing 29 May 2014, or
in the case of Gillian Kent, 3 November 2014. Three months’ notice is required.
Statement of consideration of shareholder views
The Committee considers shareholder feedback received on remuneration matters, including issues arising in relation to the AGM, as well as
any additional comments received during any other meetings with shareholders. The Committee will seek to engage directly with major
shareholders and their representative bodies should any material changes be made to the Directors’ Remuneration Policy.
Remuneration
The tables below detail the total remuneration receivable by each Director for the financial year ended 31 December 2014. Remuneration has
been calculated from the date at which the Directors were appointed to the Board of NAHL Group plc. Where necessary, further explanation
of the values provided are included in the footnotes to the table or the additional information that follows it.
2014
Salary and
fees
£000
Benefits
£000
Annual
cash bonus
£000
Pension
£000
Total
remuneration
£000
Executive Directors
Russell Atkinson 134 12 115 1 262
Steve Dolton
1
130 12 109 – 251
Non–Executive Directors
Steve Halbert 49 – – – 49
Samantha Porteous
2
63 3 – – 66
Gillian Kent
3
7 – – – 7
1 Steve Dolton is contracted to work four days per week and his salary is pro-rated to reflect this time commitment
2 Figures for Samantha Porteous include remuneration as an Executive Director prior to 29 May 2014
3 Gillian Kent was appointed to the Board on 3 November 2014
The taxable value of benefits received in the period shown above are from the Directors’ appointment to the Board to 31 December
2014. These are principally car allowance and private medical insurance.
Individual elements of remuneration
Base salary and fees
The base salaries for 2014 and 2015 are as set out below:
2014 base
salary
2015 base
salary
1
% increase
Russell Atkinson £205,250 £210,381 2.5%
Steve Dolton £164,200 £168,305 2.5%
Details of Non-Executive Directors’ fees for 2014 and 2015 are as set out below:
2014 fee 2015 fee
1
% increase
Chairman’s fees £80,000 £81,600 2%
Non-Executive Director’s fee £40,000 £40,800 2%
Chair of the Remuneration Committee £5,000 £5,100 2%
1 Salary increase with effect from 1 March 2015 37 NAHL Group plc
Annual report and accounts 2014 Governance
Annual bonus plan
The maximum annual bonus opportunity for each Executive Director in respect of the year ended 31 December 2014 was 70% of base salary.
Payments were based on the delivery of EBITDA targets and individual objectives.
The following table sets out the bonus pay-out to the Executive Directors for 2014 and how this reflects performance for the year.
The bonus reportable in the single figure table on page 36 has been pro-rated for the period from the Directors’ appointment to the Board
to 31 December 2014.
Performance target Actual performance
Executive Director
bonus as a
percentage of salary
Earnings Before Income Tax, Depreciation and Amortisation
(EBITDA) £12,500,000 Achieved 44-52%
Individual objectives Objective achievement Achieved 12-14%
Total bonus earned 56-66%
Long-term incentives
Awards vesting in respect of the financial year
No long-term incentive awards vested during the financial year.
Awards granted during the financial year
On the Company’s admission to AIM Executive Directors were granted awards on the following basis:
Type of award
Number of
shares
Face value
at grant
1
Performance
period
Russell Atkinson Nominal cost options granted under the LTIP 312,501 £625,002 3 years
Russell Atkinson Market value options granted under the EMI Plan
2
124,999 £269,998 3 years
Steve Dolton Nominal cost options granted under the LTIP 237,501 £475,002 3 years
Steve Dolton Market value options granted under the EMI Plan
2
124,999 £269,998 3 years
1 Options are valued by taking their fair value at the date of grant, which is calculated as the number of options multiplied by the share price at grant
2 EMI plan options above the £250,000 individual face value limit have been awarded as unapproved options
The awards will be based on the following Earnings per Share (EPS) targets.
Average annual compound growth in EPS between 2013 and 2016. Percentage of option vesting
10% 100%
Statement of Directors’ shareholding and share interests
The interests of the Directors and their immediate families in the Company’s Ordinary Shares as at 31 December 2014 were as follows.
31 December
2014
Executive Directors
Russell Atkinson 0.83%
Steve Dolton 2.07%
Non-Executive Directors
Steve Halbert 1.57%
Samantha Porteous 7.54%
Gillian Kent 0.00% NAHL Group plc 38
Annual report and accounts 2014 Governance
Directors’ remuneration report continued
Implementation of Directors’ Remuneration Policy for the financial year commencing 1 January 2015
Information on how the Company intends to implement the Directors’ Remuneration Policy for the financial year commencing on 1 January
2015 is set out below.
Salary/fees and benefits
The Executive Directors were awarded a 2.5% increase to base salary, with effect from 1 March 2015. Non-Executive Directors’ fees increased
by 2%, with effect from 1 March 2015.
Annual bonus plan
The maximum bonus opportunity for the Chief Executive and Chief Financial Officer will be 100% and 70% of salary respectively.
At least 50% of the annual bonus will be assessed against operating profit performance and the balance based on individual objectives.
Performance targets will continue to be set at the challenging levels of previous years. The actual performance targets are not disclosed as
they are considered to be commercially sensitive at this time. The targets will be disclosed in next year’s Directors’ Remuneration Report or
at such point that the Committee considers that the performance targets are no longer commercially sensitive.
Long-term incentives
It is proposed that non-tax-favoured share options, with an exercise price equal to the market value of the underlying shares at grant, will be
granted under the EMI Plan to Executive Directors in 2015. The Company intends to deliver a maximum opportunity of awards equal to 100%
of base salary to Russell Atkinson and 80% of base salary to Steve Dolton, vesting on the EPS targets noted above.
Approval
This report was approved by the Board on 23 March 2015 and signed on its behalf by
Samantha Porteous
Chairman of the Remuneration Committee
23 March 2015 39 NAHL Group plc
Annual report and accounts 2014 Governance
Statement of Directors’ responsibilities
in respect of the strategic report, the Directors’ report and the financial statements
The Directors are responsible for preparing the strategic report, the Directors’ report and the Group and parent company financial statements
in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and parent company financial statements for each financial year. As required by the
Alternative Investment Market Rules of the London Stock Exchange they are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and applicable law and have elected to prepare
the parent company financial statements in accordance with UK Accounting Standards and applicable law - UK Generally Accepted
Accounting Practice (UK GAAP).
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of
the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent
company financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• for the Group financial statements, state whether they have been prepared in accordance with IFRS as adopted by the EU;
• for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any
material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company
will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s
transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that
its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open
to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s
website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in
other jurisdictions. NAHL Group plc 40
Annual report and accounts 2014 Financials
Independent Auditor’s report to the members of NAHL Group plc
We have audited the financial statements of NAHL Group plc for the year ended 31 December 2014 set out on pages 22 to 61*. The financial
reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the parent
company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice).
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page 19*, the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on,
the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at
www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2014
and of the group’s profit for the year then ended;
• the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
• the parent company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements
are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from
branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
David Simpson (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
Altius House
One North Fourth Street
Milton Keynes
MK9 1NE
23 March 2015
* The page numbers quoted above in the auditor’s statement for the financial statements and Statement of Directors’ Responsibilities refer to the relevant pages in the signed
financial statements filed with Companies House. This is also the case for references to the Strategic report. 41 NAHL Group plc
Annual report and accounts 2014 Financials
Consolidated statement of comprehensive income
for the year ended 31 December 2014
Note
2014
£000
2013
£000
Continuing operations
Revenue (excluding pre-LASPO ATE) 2 43,848 39,717
Pre-LASPO ATE revenue
1
2 – 9,406
Total revenue 1,2 43,848 49,123
Cost of sales (23,885) (23,090)
Gross profit 19,963 26,033
Administrative expenses 4 (8,190) (6,819)
Operating profit (excluding share-based payments, one-off items and pre-LASPO ATE) 12,713 9,829
Share-based payments 19 (288) 7
One-off items 5 (652) –
Pre-LASPO ATE operating profit 2 – 9,378
Total operating profit 2 11,773 19,214
Financial income 8 590 332
Financial expense 9 (291) (4,805)
Profit before tax 12,072 14,741
Taxation 10 (2,594) (4,411)
Profit from continuing operations 9,478 10,330
Discontinued operation
Loss from discontinued operation, net of tax 3 (1,005) (872)
Profit for the year and total comprehensive income 8,473 9,458
All profits and losses and total comprehensive income are attributable to the owners of the Company.
1 Pre-LASPO ATE revenue means commissions received from the use of an ATE insurance product by participating solicitor firms before the implementation of the LASPO.
As a result of the LASPO regulatory changes, which were effective from 1 April 2013, this product is no longer available in the same form and has therefore been
separately identified
2014
2013
(Adjusted)
Basic earnings per share (p)
Group 20 20.6 23.0
Continuing operations 20 23.0 25.1
Diluted earnings per share (p)
Group 20 20.2 22.5
Continuing operations 20 22.6 24.6
Discontinued earnings per share are shown in note 20. Comparatives for earnings per share have been adjusted as described in note 20. NAHL Group plc 42
Annual report and accounts 2014 Financials
Consolidated statement of financial position
at 31 December 2014
Note
2014
£000
2013
£000
Non-current assets
Goodwill 12 39,897 39,897
Property, plant and equipment 14 186 371
Deferred tax asset 11 77 61
40,160 40,329
Current assets
Trade and other receivables 15 3,725 3,168
Cash and cash equivalents 13,637 14,249
Assets classified as held for sale 3 – 3,138
17,362 20,555
Total assets 57,522 60,884
Current liabilities
Other interest-bearing loans and borrowings 17 (2,950) (6,789)
Trade and other payables 16 (7,688) (7,838)
Other payables relating to legacy pre-LASPO ATE product 2 (6,511) (12,086)
Tax payable (1,248) (3,107)
Liabilities classified as held for sale 3 – (843)
(18,397) (30,663)
Non-current liabilities
Other interest-bearing loans and borrowings 17 (2,951) (70)
Total liabilities (21,348) (30,733)
Net assets 36,174 30,151
Equity
Share capital 18 103 231
Share option reserve 288 –
Interest in own shares – (14)
Share premium 49,533 100
Merger reserve (50,000) –
Retained earnings 36,250 29,834
T otal equity 36,174 30,151
These financial statements were approved by the Board of Directors on 23 March 2015 and were signed on its behalf by
Russell Atkinson
Chief Executive Officer
Company registered number: 08996352 43 NAHL Group plc
Annual report and accounts 2014 Financials
Company balance sheet
at 31 December 2014
Note
2014
£000
2013
£000
Non-current assets
Investments 13 52,700 –
Current assets
Trade and other receivables 15 25,306 –
Net assets 78,006 –
Equity
Share capital 18 103 –
Share option reserve 288 –
Share premium 49,533 –
Merger reserve 16,928 –
Retained earnings 11,154 –
Total equity 78,006 –
These financial statements were approved by the Board of Directors on 23 March 2015 and were signed on its behalf by
Russell Atkinson
Chief Executive Officer
Company registered number: 08996352 NAHL Group plc 44
Annual report and accounts 2014 Financials
Consolidated statement of changes in equity
for the year ended 31 December 2014
Share
capital
£000
Share
option
reserve
£000
Interest
in own
shares
£000
Share
premium
£000
Merger
reserve
£000
Retained
earnings
£000
Total
equity
£000
Balance at 1 January 2013 231 – (14) 100 – 20,383 20,700
Total comprehensive income for the year
Profit for the year – – – – – 9,458 9,458
Total comprehensive income – – – – – 9,458 9,458
Transactions with owners, recorded directly in
equity
Equity-settled share-based payments – – – – – (7) (7)
Balance at 31 December 2013 231 – (14) 100 – 29,834 30,151
Total comprehensive income for the year
Profit for the year – – – – – 8,473 8,473
Total comprehensive income – – – – – 8,473 8,473
Transactions with owners, recorded directly in
equity
Issue of deferred share (note 24) – – – 50,000 (50,000) – –
Disposal of assets held for sale (note 24) – – – (1,500) – – (1,500)
Issue of new Ordinary Shares (note 24) 3 – – 861 – – 864
Share-based payments (note 19) – 288 – – – – 288
Other transactions with owners (note 24) (131) – 14 72 – – (45)
Dividends paid – – – – – (2,057) (2,057)
Balance at 31 December 2014 103 288 – 49,533 (50,000) 36,250 36,174 45 NAHL Group plc
Annual report and accounts 2014 Financials
Company statement of total recognised gains and losses
for the year ended 31 December 2014
Share
capital
£000
Share
option
reserve
£000
Share
premium
£000
Merger
reserve
£000
Retained
earnings
£000
Total
equity
£000
Balance at 1 January 2014 – – – – – –
Total comprehensive income for the year
Profit for the year – – – – 13,211 13,211
Total comprehensive income – – – – 13,211 13,211
Transactions with owners, recorded directly in equity
Fair value of shares acquired through share for share exchange 272 – – 66,928 – 67,200
Issue of deferred share (note 24) – – 50,000 (50,000) – –
Disposal of assets held for sale (note 24) – – (1,500) – – (1,500)
Issue of new Ordinary Shares (note 24) 3 – 861 – – 864
Share-based payments (note 19) – 288 – – – 288
Other transactions with owners (note 24) (172) – 172 – – –
Dividends paid – – – – (2,057) (2,057)
Balance at 31 December 2014 103 288 49,533 16,928 11,154 78,006 NAHL Group plc 46
Annual report and accounts 2014 Financials
Consolidated cash flow statement
for the year ended 31 December 2014
Note
2014
£000
2013
£000
Cash flows from operating activities
Continuing operations
Profit for the year 9,478 10,330
Adjustments for:
Depreciation 4 212 245
Financial income 8 (590) (332)
Financial expense 9 291 4,805
Share-based payments 6/19 288 (7)
Taxation 10 2,594 4,411
12,273 19,452
Increase in trade and other receivables (557) (1,818)
Increase/(decrease) in trade and other payables 40 (113)
Decrease in other payables relating to legacy pre-LASPO ATE product (5,575) (3,177)
6,181 14,344
Interest paid (443) (3,050)
Tax paid (4,469) (3,133)
Net cash from operating activities – continuing operations 1,269 8,161
Net cash from operating activities – discontinued operations
1
3 (654) 711
Net cash from operating activities 615 8,872
Cash flows from investing activities
Continuing operations
Acquisition of property, plant and equipment 14 (27) (177)
Interest received 110 332
Income from crystallisation of contingent asset 5 480 –
Net cash from/(used in) investing activities – continuing operations 563 155
Net cash used in investing activities – discontinued operations 3 – (3,629)
Net cash used in investing activities 563 (3,474)
Cash flows from financing activities
Continuing operations
New share issue 819 –
Repayment of borrowings (996) (28,322)
Dividends paid (2,057) –
Net cash used in financing activities – continuing operations (2,234) (28,322)
Net cash used in financing activities – discontinued operations 3 250 2,902
Net cash used in financing activities (1,984) (25,420)
Net decrease in cash and cash equivalents (806) (20,022)
Cash and cash equivalents at 1 January 14,443 34,465
Cash and cash equivalents at 31 December
2
21 13,637 14,443
1 Net cash from operating activities, discontinued operations, includes operating cashflows of £444,000 (2013: £711,000) from discontinued operations and £210,000 (2013: nil) of
costs borne by the Group
2 Cash and cash equivalents at 31 December 2013 include cash for discontinued operations of £194,000 not included on the face of the consolidated statement of financial position 47 NAHL Group plc
Annual report and accounts 2014 Financials
Notes to the financial statements
1. Accounting policies
Basis of preparation
Consolidated financial statements
The consolidated financial statements for the year ended 31 December 2014 have been prepared in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies
reporting under IFRS.
The consolidated financial information has been prepared on a going concern basis and under the historical cost convention.
The first consolidated financial statements which were prepared under IFRS as adopted by the European Union, are the Historical Financial
Information included within the AIM Admission Document. A copy of these financial statements can be obtained from the Group’s website
www.nahlgroupplc.co.uk. The date of transition to IFRS was 1 January 2011, and disclosures concerning the transition from UK GAAP to
IFRS are detailed in note 24 of the AIM Admission Document. Therefore, the consolidated financial statements for the year ended
31 December 2014 do not constitute the first IFRS financial statements of the Group, and accordingly no associated disclosures are provided.
The Directors have prepared cash flow forecasts for the period until December 2016. Based on these, the Directors confirm that there are
sufficient cash reserves to fund the business for the period under review, and believe that the Group is well placed to manage its business risk
successfully. For this reason they continue to adopt the going concern basis in preparing the financial statements.
The share capital relating to NAHL Group plc is a result of a share for share exchange with the shareholders of Consumer Champion Group
Limited. There was no change of control as a result of the transaction.
Parent company
The individual Company financial statements have been prepared in accordance with applicable accounting standards (UK GAAP) and under
the historical cost accounting rules.
Under FRS 1 the Company is exempt from the requirement to prepare a cash flow statement on the grounds that a parent undertaking
includes the Company in its own published consolidated financial statements.
Basis of consolidation
The financial statements represent a consolidation of the Company and its subsidiary undertakings as at the statement of financial position
date and for the year then ended. In accordance with IFRS 10 the definition of control is such that an investor has control over an investee
when a) it has power over the investee, b) it is exposed, or has the rights, to variable returns from its involvement with the investee and c) has
the ability to use its power to affect its returns. All three of these criteria must be met for an investor to have control over an investee. All
subsidiary undertakings in which the Group has a greater than 50 percent shareholding have been consolidated in the Group’s results.
The consolidated financial information incorporates the results of business combinations using the purchase method. In the Group statement
of financial position, the acquiree’s identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the
acquisition date. The results of acquired operations are included in the Group statement of comprehensive income from the date on which
control is obtained. They are deconsolidated from the date on which control ceases. Acquisition costs are expensed as incurred. This policy
does not apply on the acquisition of Consumer Champion Group Limited for which reverse acquisition accounting has been applied.
Use of judgements and estimates
The preparation of financial statements in conformity with IFRSs requires management to make judgements and estimates that affect the
application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these
estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
year in which the estimates are revised and in any future years affected.
Revenue, other than pre-LASPO ATE insurance income, is not considered to be a key judgement or estimate as the revenue recognised is equal
to the cash received with no further clawback or commitments. All solicitor income cash is collected by direct debit in the month within
which it is billed.
Judgements
In applying the Group’s accounting policies, management has applied judgement in the following areas that have a significant impact on the
amounts recognised in the financial statements.
Intangible assets
When the Group makes an acquisition, management determines whether any intangible assets should be recognised separately from goodwill. NAHL Group plc 48
Annual report and accounts 2014 Financials
1. Accounting policies continued
Estimates
Discussed below are key assumptions concerning the future, and other key sources of estimation at the reporting date, that have a risk of
causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.
Impairment of goodwill
The Group determines on an annual basis whether goodwill is impaired. This requires an estimation of the future cash flows of
the cash-generating units to which the goodwill is allocated; see note 12.
Contingent consideration
When the Group acquires businesses, total consideration may consist of additional amounts payable on agreed post-completion dates. These
further amounts are contingent on the acquired business meeting agreed performance targets. At the date of acquisition, the Group reviews
the profit and cash forecasts for the acquired business and estimates the amount of contingent consideration that is likely to be due.
Recoverability of trade receivables
Trade receivables are reflected net of an estimated provision for impairment losses. This provision considers the past payment history and the
length of time that the debt has remained unpaid; see note 15 and 21.
Deferred tax
Deferred tax assets and liabilities require management judgement in determining the amounts to be recognised, with consideration given to
the timing and level of future taxable income; see note 11.
Revenue recognition
Pre-LASPO ATE revenue is recognised in full upon inception of the associated policy, less an allowance for the estimated claw back of revenue
based upon the underlying historic failure rate of claims.
New standards, interpretations and amendments not yet effective
The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective:
• IFRS 9: Financial Instruments - Effective for annual reporting periods beginning on or after 1 January 2018, with early application
permitted.
• IFRS 15: Revenue from Contracts with Customers - Effective for annual reporting periods beginning on or after 1 January 2017,
with early application permitted.
• Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation - Effective for annual reporting
periods beginning on or after 1 January 2016, with early application permitted.
• Amendments to IAS 19: Defined Benefit Plans; Employee Contributions - Effective for annual reporting periods beginning on or after 1
July 2014, with early application permitted.
• Amendments to IFRSs: Annual Improvements to IFRSs 2010-2012 Cycle - Effective for annual reporting periods beginning on or after 1
July 2014, with limited exceptions. Earlier application is permitted. The Annual Improvements to IFRSs 2010-2012 Cycle include a number
of amendments to various IFRSs such as; IFRS 2 ‘Share-based Payment’, IFRS 3 ‘Business Combinations’, IFRS 8 ‘Operating Segments’,
IFRS 13 ‘Fair Value Measurement’, IAS 16 ‘Property, Plant and Equipment’, IAS 38 ‘Intangible Assets’ and IAS 24 ‘Related Party
Disclosures’.
• Amendments to IFRSs: Annual Improvements to IFRSs 2011-2013 Cycle - Effective for annual reporting periods beginning on or after 1
July 2014, with early application permitted. The Annual Improvements to IFRSs 2011-2013 Cycle include a number of amendments to
various IFRSs such as; IFRS 3 ‘Business Combinations’, IFRS 13 ‘Fair Value Measurement’ and IAS 40 ‘Investment Property’.
The Group has considered the impact of the above standards and revisions and has concluded that they will not have a material impact on the
Group’s financial statements.
Going concern
The Group had cash balances of £13,637,000 (2013: £14,443,000), net assets of £36,174,000 (2013: £30,151,000) and net current liabilities of
£1,035,000 (2013: £10,108,000) as at each year end.
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational
existence for the foreseeable future. As a consequence, the Directors believe that the Group is well placed to manage its business risks
successfully. As part of the normal management process, detailed projections of future trading are prepared, which includes the impact for
possible changes in market or regulatory conditions. Based on these projections the Board remain very positive about the Group’s short and
long-term prospects.
Accordingly, the Directors continue to adopt the going concern basis in preparing the strategic report, Directors’ report and financial statements.
Notes to the financial statements continued 49 NAHL Group plc
Annual report and accounts 2014 Financials
1. Accounting policies continued
Revenue
Revenue relating to solicitor income (including recharged costs), means income received for the provision of enquiries to solicitor firms on a
cost-plus model. Revenue recognised is equal to the cash received with no further clawback or commitments. All cash is collected by direct
debit in the month within which it is billed.
Pre-LASPO ATE Revenue means commissions received from the use of an ATE insurance product by participating solicitor firms before the
implementation of LASPO. As a result of the LASPO regulatory changes, which were effective from 1 April 2013, this product is no longer
available in the same form and has therefore been separately disclosed on the face of the consolidated income statement, and is separately
identified as an operational segment. Whilst the income is contingent upon the successful outcome of the associated case, the Directors
consider that a right to consideration occurs at the point at which an insurance policy is incepted, and at this point the obligations of the
Group are discharged. Accordingly, expected income is recognised in full upon inception of the associated policy, less an allowance for the
estimated claw back of income based upon the underlying failure rate of claims.
Products revenue relates to commissions for the sale of additional products which aid the claims process to solicitor firms with which the
Group has an ongoing relationship. The commissions received are recognised as revenue in the period in which the product is used.
Revenue relating to PPI Claimline Limited has been included as a discontinued operation, as a decision was made by the Directors to sell this
major line of business on 15 May 2014. Revenue is recognised on confirmation of successful completion of a claim.
All revenue is stated net of Value Added Tax. The entire revenue arose in the United Kingdom.
Goodwill
Goodwill represents the excess of the fair value of the consideration given over the fair value of the Group’s share of the net identifiable
assets of the acquired subsidiary at the date of acquisition. Goodwill is not amortised but is tested for impairment annually and again
whenever indicators of impairment are detected and is carried at cost less any provision for impairment. Any impairment is recognised
in the income statement.
Other intangible assets
Other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and
any accumulated impairment losses.
Amortisation
Intangible assets are amortised on a straight-line basis over their estimated useful lives as follows:
• Customer-related intangibles – 1 year
Depreciation
Depreciation is calculated to write off the cost, less estimated residual value, of property, plant and equipment by equal instalments over their
estimated useful economic lives as follows:
• Office equipment – 3 to 5 years
• Computers – 3 years
Operating leases
Operating lease rentals are charged to the income statement account on a straight-line basis over the period of the lease.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part
of the Group’s cash management are included as a component of cash and cash equivalents for the purpose only of the cash flow statement.
Taxation
Tax on the income statement for the year comprises current and deferred tax. Tax is recognised in the statement of comprehensive income
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 or receivable on the taxable income or loss 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 temporary difference can be utilised. NAHL Group plc 50
Annual report and accounts 2014 Financials
1. Accounting policies continued
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost using the effective interest method, less any impairment losses.
Classification of financial instruments issued by the Group
Financial instruments issued by the Group are treated as equity (i.e. forming part of equity) only to the extent that they meet the following
two conditions:
a) they include no contractual obligations upon the Company (or Group as the case may be) to deliver cash or other financial assets or to
exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company
(or Group); and
b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no
obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company’s
exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified
takes the legal form of the Company’s own shares, the amounts presented in these financial statements for called up share capital and share
premium account exclude amounts in relation to those shares.
Finance payments associated with financial liabilities are dealt with as part of interest payable and similar charges. Finance payments
associated with financial instruments that are classified as part of shareholders’ funds, are dealt with as appropriations in the reconciliation
of movements in equity.
Employee share schemes
The share option plans allow employees of the Group to acquire shares of the Company. 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 pricing
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 only due to share prices not achieving the threshold
for vesting.
Impairment
The carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine
whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill,
and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at
the same time.
The recoverable amount of an asset or cash-generating unit (CGU) is the greater of its value in use and its fair value less costs to sell. In
assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot
be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or groups of assets (the CGU). The goodwill acquired in a business combination, for the
purpose of impairment testing, is allocated to CGUs. Subject to an operating segment ceiling test, for the purposes of goodwill impairment
testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at
which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that
are expected to benefit from the synergies of the combination.
An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment
losses are recognised in the income statement. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying
amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on
a pro-rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are
assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has
been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s
carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no
impairment loss had been recognised.
Non-current assets held for sale and discontinued operations
A non-current asset or a group of assets containing a non-current asset (a disposal group) is classified as held for sale if its carrying amount
will be recovered principally through sale rather than through continuing use, it is available for immediate sale and sale is highly probable
within one year.
Notes to the financial statements continued 51 NAHL Group plc
Annual report and accounts 2014 Financials
1. Accounting policies continued
On initial classification as held for sale, non-current assets and disposal groups are measured at the lower of previous carrying amount
and fair value less costs to sell with any adjustments taken to the income statement. The same applies to gains and losses on subsequent
re-measurement, although gains are not recognised in excess of any cumulative impairment loss. Any impairment loss on a disposal group
first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories,
financial assets, deferred tax assets, employee benefit assets and investment property, where applicable, which continue to be measured in
accordance with the Group’s accounting policies. Intangible assets and property, plant and equipment once classified as held for sale or
distribution are not amortised or depreciated.
In accordance with IFRS 5, the above policy is effective from transition date; no reclassifications are made in prior periods.
A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of
operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a
discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an
operation is classified as a discontinued operation, the comparative income statement is restated as if the operation has been discontinued
from the start of the comparative period.
2. Operating segments
Solicitor
income
£000
Products
£000
Pre-LASPO
ATE
£000
Other
segments
£000
One-off
items
£000
Total -
continuing
£000
PPI Claimline
(discontinued)
£000
Total
£000
Year ended 31 December 2014
Revenue 38,445 5,403 – – – 43,848 1,506 45,354
Depreciation and amortisation (212) – – – – (212) (31) (243)
Operating profit/(loss) 9,020 5,301 – (1,608) (940) 11,773 (232) 11,541
Financial income 590 – 590
Financial expenses (291) – (291)
Profit/(loss) before tax 12,072 (232) 11,840
Trade receivables 3,126 50 – – – 3,176 – 3,176
Segment liabilities (5,565) (878) (6,511) (1,245) – (14,199) – (14,199)
Capital expenditure 27 – – – – 27 – 27
Year ended 31 December 2013
Revenue 34,423 5,294 9,406 – – 49,123 12,245 61,368
Depreciation and amortisation (245) – – – – (245) (4,969) (5,214)
Operating profit/(loss) 5,588 5,256 9,378 (1,008) – 19,214 (3,494) 15,720
Financial income 332 2,903 3,235
Financial expenses (4,805) (88) (4,893)
Profit/(loss) before tax 14,741 (679) 14,062
Trade receivables 2,373 508 – – – 2,881 1,130 4,011
Segment liabilities (3,976) (312) (12,086) (3,550) – (19,924) (843) (20,767)
Capital expenditure 177 – – – – 177 – 177
Geographic information
All revenue and assets of the Group are based in the UK.
Operating segments
The segments used in reporting by the Chief Operating Decision Maker (CODM), being the Board, and considered relevant to the business are
segmented on a product basis. These segments are:
Solicitor income
Revenue from the provision of enquiries to the PLFs, based on a cost plus margin model, (based on fixed fee for the period to 31 March 2013).
Products
Commissions received from providers for the sale of additional products by them to the PLFs.
Pre-LASPO ATE
Commissions received from the insurance provider for the use of ATE policies by panel law firms. From 1 April 2013, this product was no
longer available as a result of LASPO regulatory changes. Included in the balance sheet is a liability that has been separately identified due to
its material value. This balance is commissions received in advance that are due to be paid back to the insurance provider. No interest is due
on this liability.
Other segments
Costs that are incurred in managing Group activities or not specifically related to a product and including share-based payments.
One-off items
Costs for the payment of employee bonuses relating to admission of the Company to AIM.
PPI Claimline (discontinued)
Provision of claims management services focused on recovery of mis-sold payment protection insurance. This business was sold on 15 May 2014. NAHL Group plc 52
Annual report and accounts 2014 Financials
2. Operating segments continued
Cash flows from operating activities – continuing operations
A reconciliation of operating profit to cash generation from operations for continuing operations has been presented below separately
identifying net cash flows relating to continuing products (comprising cash flows associated with solicitor income, products and other
segments), the pre-LASPO ATE product segment and cash flows within continuing operations that related to the PPI Claimline division,
which is now discontinued.
For the period ended 31 December 2014, one-off items have also been separately identified.
Reconciliation of operating profit to net cash flows from operating activities – continued operations
Continuing
products
£000
Pre-LASPO
ATE
£000
Sub-total
£000
One-off
items
£000
Total
£000
12 months ended 31 December 2014
Operating profit 12,425 – 12,425 (652) 11,773
Equity-settled share-based payments 288 – 288 – 288
Underlying operating profit 12,713 – 12,713 (652) 12,061
Depreciation 212 – 212 – 212
Increase in trade/other receivables (557) – (557) – (557)
Increase in trade/other payables 40 – 40 – 40
Decrease in liabilities relating to pre-LASPO ATE product – (5,575) (5,575) – (5,575)
Net cash flows from operating activities before interest and tax 12,408 (5,575) 6,833 (652) 6,181
Continuing
products
£000
Pre-LASPO
ATE
£000
Sub-total
£000
PPI
Claimline
related
£000
Total
£000
12 months ended 31 December 2013
Operating profit 9,836 9,378 19,214 – 19,214
Equity-settled share-based payments (7) – (7) – (7)
Underlying operating profit 9,829 9,378 19,207 – 19,207
Depreciation 245 – 245 – 245
Decrease/(increase) in trade/other receivables 487 – 487 (2,305) (1,818)
Decrease in trade/other payables (113) – (113) – (113)
Decrease in liabilities relating to pre-LASPO ATE product – (3,177) (3,177) – (3,177)
Net cash flows from operating activities before interest and tax 10,448 6,201 16,649 (2,305) 14,344
3. Non-current assets held for sale and discontinued operation
The PPI Claimline division was acquired in February 2011 and was classified as held for sale in the 31 December 2013 Historical Financial
Information as the Company had committed to selling this division and expected to conclude a sale within the next six months. The related
assets and liabilities were classified as held for sale in the year ended 31 December 2013, and therefore the statement of comprehensive
income was restated for discontinued operations for all three years presented.
On the 15 May 2014, the division was sold for £1,500,000 resulting in a loss on disposal of £563,000.
Trading results of the discontinued operation
2014
£000
2013
£000
Revenue 1,506 12,245
Adminstrative expenses (1,738) (15,739)
Financial income – 2,903
Financial expense – (88)
Loss before tax (232) (679)
Tax on loss – (193)
Loss for the year (232) (872)
Notes to the financial statements continued 53 NAHL Group plc
Annual report and accounts 2014 Financials
3. Non-current assets held for sale and discontinued operation continued
Loss from discontinued operations
2014
£000
2013
£000
Proceeds
Capital reduction 1,500 –
Disposal
Net assets at 31 December 2013 2,295 –
Loss in the period (232) –
2,063 –
Loss on disposal (563) –
Other losses attributable to discontinued operations
Loss in the period (232) (872)
Reorganisation costs (98) –
Fees relating to disposal (112) –
(442) (872)
Total loss from discontinued operations (1,005) (872)
Loss before tax is stated after charging/(crediting):
2014
£000
2013
£000
Impairment of goodwill – 4,888
Depreciation of property, plant and equipment 31 81
Operating leases – land and buildings 49 115
Operating leases – other – 5
Early settlement of contingent consideration – (2,902)
Assets and liabilities held for sale/disposal group
2014
£000
2013
£000
Assets classified as held for sale/disposal group:
Intangible assets – 1,265
Property, plant and equipment – 96
Trade and other receivables – 1,583
Cash and cash equivalents – 194
– 3,138
Liabilities classified as held for sale/disposal group:
Trade and other payables – (843)
– 2,295 NAHL Group plc 54
Annual report and accounts 2014 Financials
3. Non-current assets held for sale and discontinued operation continued
Cash flow statement for discontinued operations
2014
£000
2013
£000
Cash flows from operating activities
Discontinued operations
Loss for the year (1,005) (872)
Adjustments for:
Depreciation, amortisation and impairment 31 4,969
Financial income – (2,903)
Financial expense – 88
Taxation – 193
(974) 1,475
Decrease in trade and other receivables 1,583 1,038
Decrease in trade and other payables (843) (1,599)
Cost borne by Group Company (210) –
(444) 914
Interest paid – (10)
Tax paid – (193)
(444) 711
Cash flows from investing activities
Discontinued operations
Interest received – 1
Acquisition of subsidiary – (3,630)
Net cash from investing activities – (3,629)
Cash flows from financing activities
Discontinued operations
Funding from Group companies 250 –
Early settlement of contingent consideration – 2,902
Net cash from financing activities 250 2,902
Net decrease in cash and cash equivalents (194) (16)
Cash and cash equivalents at 1 January 194 210
Cash and cash equivalents at 31 December – 194
Intangible assets
Customer-
related
intangibles
£000
Goodwill
£000
Total
£000
Cost
At 1 January 2014 312 6,153 6,465
Disposal (312) (6,153) (6,465)
At 31 December 2014 – – –
Amortisation and impairment
At 1 January 2014 312 4,888 5,200
Disposal (312) (4,888) (5,200)
At 31 December 2014 – – –
Net book value
At 31 December 2013 – 1,265 1,265
At 31 December 2014 – – –
Notes to the financial statements continued 55 NAHL Group plc
Annual report and accounts 2014 Financials
4. Administrative expenses and Auditor’s remuneration*
Included in consolidated statement of comprehensive income are the following:
2014
£000
2013
£000
Depreciation of property, plant and equipment 212 245
Operating leases – land and buildings 120 170
Operating leases – other 40 57
Auditor’s remuneration 352 133
The analysis of Auditor’s remuneration is as follows:
2014
£000
2013
£000
Audit services - statutory audit 58 38
Other assurance services 8 –
Taxation compliance 8 13
Taxation advisory services 5 –
Corporate finance services 270 82
Other assurance & non-audit services 3 –
Total non-audit remuneration 294 95
* Information given excludes that of discontinued operations which are disclosed in note 3
5. One-off items
As a result of the admission to AIM process, income was realised on the crystallisation of an asset that was contingent on an exit event. This
contingent asset arose as a result of the award of shares to employees by the Employee Benefit Trust (EBT) under the EMI scheme creating
loans repayable on exit. This income totalled £480,000. Under the trust rules this cash and any previously recognised cash in the EBT is
required to be used for the benefit of employees. As a result, Company-wide bonuses were paid in recognition of the successful completion of
the IPO. The costs of these bonuses have been included in the consolidated statement of comprehensive income as one-off items totalling
£652,000 (2013: nil). The £480,000 income received for the contingent asset has been detailed in note 8.
6. 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
2014 2013
Directors 3 4
Others (excluding discontinued operation) 119 120
Others (from discontinued operation) 33 148
155 272
The aggregate payroll costs of these persons were as follows:
2014
£000
2013
£000
Wages and salaries 5,231 8,602
Share-based payments (see note 19) 288 (7)
Social security costs 599 856
Pension costs 14 –
6,132 9,451 NAHL Group plc 56
Annual report and accounts 2014 Financials
7. Directors’ emoluments
Proforma emoluments relate to amounts paid to current Directors applying those directorships retrospectively for 2013 and 2014, prior to
incorporation of NAHL Group plc. Statutory Directors’ emoluments relate to Directors registered at Companies House as Directors of NAHL
Group plc for the period during which they were Directors.
2014
£000
2013
£000
Proforma Directors’ emoluments 1,220 995
Statutory Directors’ emoluments 635 –
Proforma Directors’ emoluments
2014
Salary
and fees
£000
Benefits
£000
Annual
bonus
£000
IPO bonus
£000
Pension
£000
Total
£000
Executive Directors
Russell Atkinson 192 25 115 59 1 392
Steve Dolton 181 14 109 171 – 475
Non-Executive Directors
Steve Halbert 71 – – 104 – 175
Samantha Porteous
1
118 7 45 1 – 171
Gillian Kent 7 – – – – 7
2013
Salary
and fees
£000
Benefits
£000
Annual
bonus
£000
Total
£000
Executive Directors
Russell Atkinson 170 16 82 268
Steve Dolton 200 16 100 316
Non-Executive Directors
Steve Halbert 72 – – 72
Samantha Porteous 215 16 108 339
Statutory Directors’ emoluments
2014
Salary
and fees
£000
Benefits
£000
Annual
bonus
£000
Pension
£000
Total
£000
Executive Directors
Russell Atkinson 134 12 115 1 262
Steve Dolton 130 12 109 – 251
Non-Executive Directors
Steve Halbert 49 – – – 49
Samantha Porteous 63 3 – – 66
Gillian Kent 7 – – – 7
1. Figures for Samantha Porteous include remuneration as an Executive Director prior to 29 May 2014
The Group contributed £3,000 to pension schemes in respect of Directors during the year (2013: nil).
The emoluments of the highest paid Director were £262,000 (2013: nil).
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the
Group. Key management personnel include members of the Operational Board who are not statutory Directors in addition to the main Board.
Disclosure of transactions with key management is detailed in note 25.
Notes to the financial statements continued 57 NAHL Group plc
Annual report and accounts 2014 Financials
8. Financial income*
2014
£000
2013
£000
Bank interest income 110 332
Income from crystallisation of contingent asset (note 5) 480 –
590 332
* Information given excludes that of discontinued operations which are disclosed in note 3
9. Financial expense*
2014
£000
2013
£000
On bank loans 157 415
On loan notes – 1,705
Dividends on preference shares 134 6
Unwinding of loan note discounting – 64
Loss on settlement of loan notes – 2,609
Bank charges – 6
Total finance expense 291 4,805
* Information given excludes that of discontinued operations which are disclosed in note 3 NAHL Group plc 58
Annual report and accounts 2014 Financials
10. Taxation
Recognised in the consolidated statement of comprehensive income
2014
£000
2013
£000
Current tax expense (excluding tax on discontinued operation)
Current tax on income for the period 2,610 4,393
Adjustments in respect of prior periods – (1)
Total current tax (excluding tax on discontinued operation) 2,610 4,392
Deferred tax expense
Origination and reversal of temporary differences (16) 12
Adjustments in respect of prior periods – (3)
Effects of change in standard rate of corporation tax – 10
Total deferred tax (excluding tax on discontinued operation) (16) 19
Tax expense in income statement (excluding tax on discontinued operation) 2,594 4,411
Current tax expense from discontinued operation
Current tax on income for the period – 193
Tax from discontinued operation – 193
Total tax charge 2,594 4,604
Reconciliation of effective tax rate
2014
£000
2013
£000
Profit for the year 8,473 9,458
Total tax expense (including tax on discontinued operations) 2,594 4,604
Profit excluding taxation 11,067 14,062
Tax using the UK corporation tax rate of 21.5% (2013: 23.25%) 2,379 3,269
Amortisation, impairment and unwinding of discounting not deductible for tax purposes – 1,669
Non-chargeable gain – (675)
Income disallowable for tax purposes (104) –
Non-deductible expenses 296 249
Short-term timing differences for which no deferred tax is recognised 39 125
Effects of change in standard rate of corporation tax – 10
Adjustments in respect of prior periods – (4)
Change in recognised temporary differences (16) –
Recognition of tax effect of previously unrecognised tax losses – (39)
Total current tax charge (including tax on discontinued operations) 2,594 4,604
Changes in tax rates and factors affecting the future tax charge
Reductions in the UK corporation tax rate from 23% to 21% (effective from 1 April 2014) and to 20% (effective 1 April 2015) were
substantively enacted on 2 July 2013. This will reduce the Company’s future current tax charge accordingly.
The deferred tax asset at 31 December 2013 has been calculated based on the rates of 20% substantively enacted at the balance sheet date.
Notes to the financial statements continued 59 NAHL Group plc
Annual report and accounts 2014 Financials
11. Deferred tax asset
2014
£000
2013
£000
At beginning of year 61 80
Recognised in profit or loss (see note 10) 16 (19)
Deferred tax asset at end of year 77 61
The asset for deferred taxation consists of the tax effect of temporary differences in respect of:
Property,
plant &
equipment
£000
Bad debt
provisions
£000
Total
£000
At 1 January 2013 60 20 80
Recognised in profit or loss (13) (6) (19)
At 31 December 2013 47 14 61
Recognised in profit or loss 16 – 16
At 31 December 2014 63 14 77
At 31 December 2013 the Group had additional unrecognised net deferred tax assets of £451,000. Following the sale of PPI Claimline Limited
no further unrecognised deferred tax asset exists at 31 December 2014.
2014
£000
2013
£000
Unrecognised deferred tax asset
Bad debt provisions – 431
Property, plant & equipment – 20
At 31 December 2014 – 451
12. Goodwill
NAH
£000
PPIC
£000
Total
£000
Cost
At 1 January 2013 39,897 6,153 46,050
Transfer to assets held for sale – (6,153) (6,153)
At 31 December 2013 39,897 – 39,897
At 31 December 2014 39,897 – 39,897
Impairment
At 1 January 2013 – – –
Impairment charge for the year – 4,888 4,888
Transfer to assets held for sale – (4,888) (4,888)
At 31 December 2013 – – –
At 31 December 2014 – – –
Net book value
At 31 December 2013 39,897 – 39,897
At 31 December 2014 39,897 – 39,897
Where goodwill arose as part of a business acquisition, it forms part of the CGU asset carrying value which is tested for impairment annually. The
Group has determined that for the purposes of impairment testing each segment, i.e. solicitor income and products and pre-LASPO ATE, is the
appropriate level at which to test. NAH comprises three CGUs namely the operating segments of solicitor income, products and pre-LASPO ATE,
whereas PPI Claimline is its own CGU. Goodwill in relation to the acquisition of PPI Claimline has been included within assets held for sale in 31
December 2013 and was sold during 2014, therefore goodwill at 31 December 2013 and 2014 related to the NAH segments only. Due to the
discontinued nature of the pre-LASPO ATE product, no goodwill has been allocated to it.
The recoverable amounts for the CGUs are predominantly based on value in use which is calculated on the cash flows expected to be generated by
the division using the latest budget data for the coming year, extrapolated at a 5% (2013: 5%) annual growth rate for four years and no growth into
perpetuity, discounted at a post tax WACC of 8% (2013: 14%). The key assumptions in the value in use calculation are the discount rate and
growth rate. The discount rate is based on the Group’s post-tax cost of capital and estimated cost of equity, which the Directors consider equated to
market participants’ rate. The movement in discount rate compared to prior year is a result of having greater access to capital as a direct result of
listing on AIM. NAHL Group plc 60
Annual report and accounts 2014 Financials
12. Goodwill continued
In preparing the formal budget for the next financial period, expected EBITDA is based on past experience of the performance of the CGUs adjusted
for known changes.
Based on the operating performance of the NAH CGU, no impairment loss was identified at any of the two years under review, and there is
sufficient headroom to indicate that no reasonable change to key assumptions would result in an impairment of this goodwill. The key
assumptions were as follows:
2014 2013
Discount rate 8% 14%
Budgeted operating cash flow growth (average of next 4 years) 5% 5%
The following table shows the percentage to which the discount rate would need to increase and the percentage by which the budgeted operating
cash flows would need to decrease in order for the estimated recoverable amount of the CGU to be equal to the carrying amount:
2014 2013
Discount rate 42% 57%
Budgeted operating cash flow growth (average of next 5 years) (20%) (32%)
13. Investments
The Company has the following investments in subsidiaries:
Ownership
Name of subsidiary
Country of
incorporation and
principal place of
business
Class of
shares held
Principal
activity 2014 2013
Consumer Champion Group Limited United Kingdom Ordinary Holding company 100% –%
NAH Holdings Limited United Kingdom Ordinary Holding company 100% –%
NAH Group Limited United Kingdom Ordinary Ordinary 100% –%
Seebeck 62 Limited* United Kingdom Ordinary Ordinary –% –%
National Accident Helpline Limited United Kingdom Ordinary Agency services for solicitors 100% –%
PPI Claimline Limited* United Kingdom Ordinary Agency services for solicitors –% –%
Lawyers Agency Services Limited United Kingdom Ordinary Non-trading 100% –%
Accident Helpline Limited United Kingdom Ordinary Dormant 100% –%
NAH Support Services Limited United Kingdom Ordinary Dormant 100% –%
Tiger Claims Limited United Kingdom Ordinary Dormant 100% –%
Your Law Limited United Kingdom Ordinary Dormant 100% –%
NAH Legal Services Limited United Kingdom Ordinary Dormant 100% –%
* These subsidiaries have been disposed of during the year and were classified as held for sale at 31 December 2013
At the 31 December 2014 the value of the investment in Consumer Champion Group Limited, it’s only directly owned subsidiary was as follows:
Valuation
Total
£000
At 1 January 2014 –
At acquisition 67,200
Realisation of investment (14,500)
At 31 December 2014 52,700
The valuation of the investment at acquisition was management’s best estimate at the time of the transaction.
Notes to the financial statements continued 61 NAHL Group plc
Annual report and accounts 2014 Financials
14. Property, plant and equipment
Fixtures and
fittings
£000
Total
£000
Cost
At 1 January 2014 1,045 1,045
Additions 27 27
At 31 December 2014 1,072 1,072
Depreciation and impairment
At 1 January 2014 674 674
Depreciation charge for the year 212 212
At 31 December 2014 886 886
Net book value
At 31 December 2013 371 371
At 31 December 2014 186 186
Fixtures and
fittings
£000
Total
£000
Cost
At 1 January 2013 1,138 1,138
Additions 177 177
Transfer to assets held for sale (270) (270)
At 31 December 2013 1,045 1,045
Depreciation and impairment
At 1 January 2013 522 522
Depreciation charge for the year 245 245
Transfer of assets held for sale (93) (93)
At 31 December 2013 674 674
Net book value
At 31 December 2012 616 616
At 31 December 2013 371 371
15. Trade and other receivables
Group
2014
£000
Company
2014
£000
Group
2013
£000
Company
2013
£000
Trade receivables 3,176 – 2,881 –
Other receivables 355 – 78 –
3,531 – 2,959 –
Prepayments 194 – 209 –
Amounts due from Group undertakings – 25,306 – –
3,725 25,306 3,168 –
16. Trade and other payables
2014
£000
2013
£000
Current
Trade payables 1,442 851
Other taxation and social security 414 693
Other creditors and accruals 2,962 3,053
Customer deposits 2,870 3,241
7,688 7,838 NAHL Group plc 62
Annual report and accounts 2014 Financials
17. Other interest-bearing loans and borrowings
This note provides information about the contractual terms of the Company’s other interest-bearing loans and borrowings, which are
measured at amortised cost. For more information about the Company’s exposure to interest rate and foreign currency risk, see note 21.
2014
£000
2013
£000
Current liabilities
Current portion of secured bank loans 2,950 6,789
2,950 6,789
Non-current liabilities
Secured bank loans 2,951 –
Shares classified in Consumer Champion Group Limited as debt – 70
2,951 70
Total other interest-bearing loans and borrowings 5,901 6,859
Terms and debt repayment schedule
Currency
Nominal
interest
rate
Year of
maturity
Face
value
2014
£000
Carrying
amount
2014
£000
Face
value
2013
£000
Carrying
amount
2013
£000
Loan A GBP 3.00% above Libor 2014 – – 926 921
Loan B GBP 3.50% above Libor 2014 – – 5,901 5,868
Bank loan GBP 2.50% above Libor 2016 5,901
1
5,901 – –
Shares classified as debt GBP 8% 2014 – – 70 70
5,901 5,901 6,897 6,859
1 The loan of £5,901,000 is payable 50% on 30 December 2015 and 50% on 30 December 2016. Interest is payable at 2.5% above LIBOR
18. Share capital
2014 2013
Number of shares
41,150,000 ‘A’ Ordinary Shares of £0.0025 each 41,150,000 –
125,000 ‘A’ Ordinary Shares of £0.50 each (cancelled) – 125,000
75,000 ‘B’ Ordinary Shares of £0.50 each (cancelled) – 75,000
67,533 ‘C’ Ordinary Shares of £1 each (cancelled) – 67,533
37,092 ‘D’ Ordinary Shares of £1 each (cancelled) – 37,092
25,663 ‘E’ Ordinary Shares of £1 each (cancelled) – 25,663
40,957 ‘F’ Ordinary Shares of £0.01 each (cancelled) – 40,957
69,000 ‘A’ Preference Shares of £1 each (cancelled) – 69,000
1,000 ‘B’ Preference Shares of £1 each (cancelled) – 1,000
41,150,000 411,245
£000 £000
Allotted, called up and fully paid
41,150,000 ‘A’ Ordinary Shares of £0.0025 each 103 –
125,000 ‘A’ Ordinary Shares of £0.50 each (cancelled) – 63
75,000 ‘B’ Ordinary Shares of £0.50 each (cancelled) – 38
67,533 ‘C’ Ordinary Shares of £1 each (cancelled) – 68
37,092 ‘D’ Ordinary Shares of £1 each (cancelled) – 37
25,663 ‘E’ Ordinary Shares of £1 each (cancelled) – 25
40,957 ‘F’ Ordinary Shares of £0.01 each (cancelled) – –
69,000 ‘A’ Preference Shares of £1 each (cancelled) – 69
1,000 ‘B’ Preference Shares of £1 each (cancelled) – 1
103 301
Shares classified as liabilities – 70
Shares classified in equity 103 231
103 301
The share for share exchange includes all share classes with the exception of ‘A’ preference shares and ‘B’ preference shares.
Notes to the financial statements continued 63 NAHL Group plc
Annual report and accounts 2014 Financials
19. Share-based payments
During the year, share options of employees in the shares of Consumer Champion Group Limited vested as the change of control vesting
condition was met as a result of the placing of shares on AIM. All options held at the 31 December 2013 were exercised.
The Group now operates three employee share plans as follows:
SAYE plan
The SAYE plan is available to all employees. Options may be satisfied by newly issued Ordinary Shares, Ordinary Shares purchased in the
market by an employees’ trust or by the transfer of Ordinary Shares held in treasury.
EMI Scheme
The EMI Plan provides for the grant, to selected employees of the Group, of rights to acquire (whether by subscription or market purchase)
Ordinary Shares in the Company (Options). Options may be granted as tax-favoured enterprise management incentive options (EMI Options)
or non-tax favoured Options.
LTIP
The LTIP will enable selected employees (including Executive Directors) to be granted awards in respect of Ordinary Shares. Awards may be
granted in the form of nil or nominal cost options to acquire Ordinary Shares; or contingent rights to receive Ordinary Shares. Awards may be
satisfied by newly issued Ordinary Shares, Ordinary Shares purchased in the market by an employees’ trust or by the transfer of Ordinary
Shares held in treasury.
The terms and conditions of grants of share options to employees of the Group, in the shares of NAHL Group plc are as follows:
Grant date/employees entitled/nature of scheme Number of instruments Vesting conditions Contractual life of options
Equity-settled award to 21 employees granted by the
parent Company on 26 January 2010
5,683 ‘D’ and ‘E’ shares,
and 5,683 ‘F’ shares
Vested on change
of control
Vested
Equity-settled award to 8 employees granted by the
parent Company on 25 August 2010
868 ‘E’ shares and 1,262
‘F’ shares
Vested on change
of control
Vested
Equity-settled award to 26 employees granted by the
parent Company on 10 October 2011
2,350 ‘E’ shares and
2,350 ‘F’ shares
Vested on change
of control
Vested
Equity-settled award to 18 employees granted by the
parent Company on 1 November 2012
685 ‘E’ shares and
685 ‘F’ shares
Vested on change
of control
Vested
Equity-settled award to 3 employees granted by the
parent Company on 3 December 2012
375 ‘E’ shares and
375 ‘F’ shares
Vested on change
of control
Vested
Equity-settled award to 3 employees granted by the
parent Company on 31 December 2013
1,045 ‘E’ shares and
1,045 ‘F’ shares
Vested on change
of control
Vested
SAYE Equity-settled award to 56 employees granted by
the parent Company on 29 May 2014
270,448 Ordinary Shares Performance based Announcement of
2017 results
LTIP Equity-settled award to 4 employees granted by the
parent Company on 29 May 2014
790,004 Ordinary Shares Performance based Announcement of
2017 results
EMI Equity-settled award to 9 employees granted by the
parent Company on 11 December 2014
899,996 Ordinary Shares Performance based Announcement of
2017 results
The number and weighted average exercise prices of share options are as follows:
2014
Weighted
average
exercise
price
£
2014
Number of
options
No.
2013
Weighted
average
exercise
price
£
2013
Number of
options
No.
Outstanding at the beginning of the year 6.66 16,356 5.98 16,288
Exercised during the year (6.66) (16,356) – –
Granted during the year 1.13 1,970,448 12.01 2,090
Forfeited during the year (1.60) (20,700) (4.98) (2,022)
Outstanding at the end of the year 1.13 1,949,748 6.66 16,356
Exercisable at the end of the year – – – –
A charge of £288,000 (2013: credit of £7,000) has been made through profit and loss in the current year. NAHL Group plc 64
Annual report and accounts 2014 Financials
Notes to the financial statements continued
20. Basic earnings per share
The calculation of basic earnings per share at 31 December 2014 is based on profit attributable to ordinary shareholders of £8,473,000
(2013: £9,458,000) and a weighted average number of Ordinary Shares outstanding of 41,150,000. As a result of the transactions relating to
Company’s IPO on 29 May 2014, the total issued Ordinary Shares have changed materially. The Directors have presented adjusted
comparative periods to provide an EPS that gives users a useful comparison for basic and diluted EPS.
Profit attributable to ordinary shareholders (basic)
£000 2014 2013
Profit for the year attributable to the shareholders – continuing 9,478 10,330
Loss for the year attributable to the shareholders – discontinued (1,005) (872)
Profit for the year attributable to the shareholders – Total 8,473 9,458
Weighted average number of Ordinary Shares (basic)
Number Note 2014 2013 (Adjusted)
Issued Ordinary Shares at 1 January 18 41,150,000 41,150,000
Weighted average number of Ordinary Shares at 31 December 18 41,150,000 41,150,000
Basic earnings per share (p)
2014 2013 (Adjusted)
Group 20.6 23.0
Continuing operations 23.0 25.1
Discontinued operations (2.4) (2.1)
The Company has in place share-based payment schemes to reward employees. At the 31 December 2014, the LTIP, EMI and SAYE schemes
are at a value that would reasonably result in the options being exercised. The total number of options available for these schemes included in
the diluted earnings per share calculation is 790,004. There are no other diluting items.
Diluted earnings per share (p)
2014 2013 (Adjusted)
Group 20.2 22.5
Continuing operations 22.6 24.6
Discontinued operations (2.4) (2.1)
21. Financial instruments
(a) Fair values of financial instruments
The Group’s principal financial instruments comprise interest-bearing borrowings, cash and short-term deposits. The main purpose of these
financial instruments is to raise finance for the Group’s operations. The Group has various other financial instruments such as trade and
other receivables and trade and other payables that arise directly from its operations.
The main risks arising from the Group’s financial instruments are interest rate risk and liquidity risk. The Board reviews and agrees policies
for managing each of these risks and they are summarised below. There have been no substantive changes in the Group’s exposure to
financial instrument risks or its objectives, policies and processes for managing and measuring those risks during the periods in this report
unless otherwise stated.
Trade and other receivables
The fair value of trade and other receivables are estimated as the present value of future cash flows, discounted at the market rate of interest
at the balance sheet date if the effect is material.
Trade payables
The fair value of trade payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance
sheet date if the effect is material.
Cash and cash equivalents
The fair value of cash and cash equivalents is estimated as its carrying amount where the cash is repayable on demand. Where it is not repayable on
demand then the fair value is estimated at the present value of future cash flows, discounted at the market rate of interest at the balance sheet date.
Interest-bearing borrowings
Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the
balance sheet date.
The interest rate used to discount estimated cash flows of 8% is based on market rates. 65 NAHL Group plc
Annual report and accounts 2014 Financials
21. Financial instruments continued
The fair values of all financial assets and financial liabilities by class, which approximate to their carrying values, shown in the balance sheet
are as follows:
Fair value
hierarchy
Carrying
amount
2014
£000
Fair
value
2014
£000
Carrying
amount
2013
£000
Fair
value
2013
£000
Cash and receivables
Cash and cash equivalents Level 1 13,637 13,637 14,249 14,249
Cash and cash equivalents (note 3) – – 194 194
13,637 13,637 14,443 14,443
Trade and other receivables (note 15) Level 3 3,531 3,531 2,959 2,959
Trade and other receivables (note 3) Level 3 – – 1,201 1,201
Total financial assets 17,168 17,168 18,603 18,603
Financial liabilities measured at amortised cost
Other interest-bearing loans and borrowings (note 17) Level 3 5,901 5,901 (6,859) (6,859)
Trade payables (note 16) Level 3 1,442 1,442 (851) (851)
Trade payables (note 3) – – (99) (99)
Total financial liabilities measured at amortised cost 7,343 7,343 (7,809) (7,809)
Fair value hierarchy
IFRS 7 requires fair value measurements to be recognised using a fair value hierarchy that reflects the significance of the inputs used in the
value measurements:
Level 1 – inputs are quoted prices in active markets.
Level 2 – a valuation that uses observable inputs for the asset or liability other than quoted prices in active markets.
Level 3 – a valuation using unobservable inputs, i.e. a valuation technique.
There were no transfers between levels throughout the periods under review.
(b) Credit risk
Financial risk management
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Company’s receivables from customers and investment securities.
Management consider the credit risk to be low as a result of the deposits held for all significant customers. As at 31 December 2014 these
deposits reflect 90.4% (2013: 112.5%) of the balance of trade receivables.
Exposure to credit risk
The maximum exposure to credit risk at the balance sheet date by class of financial instrument was:
2014
£000
2013
£000
Trade receivables 3,176 2,881
Deposits with key customers are held to mitigate the potential credit risk. At each balance sheet date, the amount of deposit held was:
2014
£000
2013
£000
Customer deposits 2,870 3,241
Credit quality of financial assets and impairment losses
The aging of trade receivables at the balance sheet date was:
Gross
2014
£000
Impairment
2014
£000
Gross
2013
£000
Impairment
2013
£000
Not past due 1–30 days 3,247 (71) 2,951 (70)
3,247 (71) 2,951 (70) NAHL Group plc 66
Annual report and accounts 2014 Financials
21. Financial instruments continued
The movement in the allowance for impairment in respect of trade receivables during the year was as follows:
2014
£000
2013
£000
Balance at 1 January 70 1,465
Allowance recognised/(reversed) 1 (19)
Transferred to assets held for sale – (1,376)
Balance at 31 December 71 70
The allowance account for trade receivables is used to record impairment losses unless the Company is satisfied that no recovery of the
amount owing is possible; at that point the amounts considered irrecoverable are written off against the trade receivables directly.
(c) Liquidity risk
Financial risk management
Liquidity risk arises from the Group’s management of working capital and the finance charges on its debt instruments and repayments of
principal. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The Group’s objective is to
maintain a balance between continuity of funding and flexibility through the use of overdrafts and loans to ensure that it will always have
sufficient cash to allow it to meet its liabilities when they become due.
The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the effects of
netting agreements:
2014
Secured
bank loans
£000
Shares
classified as
debt
£000
Trade
and other
payables
£000
Total
£000
Non-derivative financial instruments
Carrying amount (5,901) – (1,442) (7,343)
Contractual cash flows
1 year or less (3,131) – (1,442) (4,573)
1 to 2 years (3,041) – – (3,041)
2 to 5 years – – – –
5 years and over – – – –
(6,172) – (1,442) (7,614)
2013
Non-derivative financial instruments
Carrying amount (6,789) (70) (851) (7,710)
Contractual cash flows
1 year or less (7,261) – (851) (8,112)
1 to 2 years – – – –
2 to 5 years – (95) – (95)
5 years and over – – – –
(7,261) (95) (851) (8,207)
(d) Market risk
Financial risk management
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the
Company’s income or the value of its holdings of financial instruments.
Market risk – foreign currency risk
The Company has no foreign currency risk as all transactions are in Sterling.
Market risk – interest rate risk
Profile
The Group is exposed to interest rate risk from its use of interest-bearing financial instruments. This is a market risk that the fair value or
future cash flows of a financial instrument will fluctuate because of changes in interest rates.
Notes to the financial statements continued 67 NAHL Group plc
Annual report and accounts 2014 Financials
21. Financial instruments continued
At the balance sheet dates, there were no interest-bearing financial assets, however the interest rate profile of the Company’s
interest-bearing financial liabilities was:
2014
£000
2013
£000
Fixed rate instruments
Financial liabilities – 4,194
Variable rate instruments
Financial liabilities 5,901 2,665
Total interest-bearing financial instruments 5,901 6,859
Sensitivity analysis
A change of 0.5% in interest rates at the balance sheet date would increase/(decrease) profit or loss in the following year by the amounts
shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at
that date.
This analysis assumes that all other variables remain constant and considers the effect of financial instruments with variable interest rates.
The analysis is performed on the same basis for the comparative periods.
2014
£000
2013
£000
Profit for the year
Increase (30) (12)
Decrease 30 12
Market risk – equity price risk
The Company does not have an exposure to equity price risk as it holds no investment in equity securities which are classified as available for
sale financial assets or designated at fair value through profit or loss.
(e) Capital management
Company
The Group’s objectives when maintaining capital are to safeguard the entity’s ability to continue as a going concern and to provide an
adequate return to shareholders. Capital comprises the Group’s equity i.e. share capital including preference shares, share premium, own
shares and retained earnings, as well as bank loans.
22. Operating leases
Non-cancellable operating lease rentals are payable as follows:
2014
£000
2013
£000
Less than one year 31 232
Between one and five years 66 259
97 491
The Company leases a number of office buildings under operating leases. During the year £160,000 was recognised as an expense in the
income statement in respect of operating leases (2013: £227,000). At 31 December 2014 leases for the office buildings had three months
remaining. The Company expects to enter into leases for these properties in the next year.
23. Commitments
Capital commitments
At 31 December 2014 the Group had no capital commitments (2013: £nil). NAHL Group plc 68
Annual report and accounts 2014 Financials
Notes to the financial statements continued
24. Transactions with owners, recorded directly in equity
On 29 May 2014, NAHL Group plc was admitted to trading on AIM. The steps required to complete this admission have been included within
the condensed consolidated statement of changes in equity and have been further explained below:
Issue of deferred share
A deferred share was issued at a premium resulting in the transfer of £50,000,000 from the merger reserve to share premium. NAHL Group plc
declared a bonus issue of a single deferred share of £0.0001 (a ‘Deferred Share’) with a share premium £50,000,000. This transaction resulted
in £50,000,000 of the merger reserve being transferred to the share premium account split pro rata between the different classes of shares.
Disposal of assets held for sale
The market value of the Group of companies, headed by Seebeck 62 Limited, classified as held for sale was calculated as being £1,500,000
by the Directors of the Company. On 15 May 2014, Seebeck 62 Limited was then demerged via a capital reduction of this value to the share
premium account. A same day registration of the reduction of capital at Companies House has been made. Further details of the demerger
can be seen in note 3.
Issue of new Ordinary Shares
On 29 May 2014, 1,150,000 new Ordinary Shares with a par value of £0.0025 were issued. These raised an additional £2,300,000 funds for the
Company. The fees relating to this transaction totalled £1,436,000. These costs have been charged as a reduction to share premium resulting
in a net increase to share premium of £861,000 and share capital of £3,000.
Other transactions with owners
Included within other transactions with owners are the following transactions resulting in a net impact of £45,000:
• Share capital has been reduced by £131,000. This is the result of £172,000 reduction in the par value of existing shares and the bonus issue
of F shares increasing share capital by £41,000. The bonus issue occurred prior to merger where Consumer Champion Group Limited
declared a 99 for 1 F share bonus issue to all shareholders using distributable reserves. There was then an F share 1 for 100 consolidation.
• Acquisition accounting for the purchase also resulted in the removal of interest in own shares of £14,000.
• Share premium has been increased to allow the £172,000 reduction in the par value of shares set off by the removal of £100,000 existing
share premium as part of the acquisition accounting.
25. Related parties
Transactions with key management personnel
Key management personnel in situ at 31 December 2014 and their immediate relatives control 13.7% of the voting shares of the Company.
Key management personnel are considered to be the Directors of the Company as well as those of National Accident Helpline Limited and any
other management serving as part of the Executive team. Detailed below is the total value of transactions with these individuals.
2014
£000
2013
£000
Short-term employment benefits 2,307 2,364
Termination benefits 150 –
2,457 2,364
Some members of key management personnel received loans from the company for the purchase of Consumer Champion Group Limited
shares from the Employee Benefit Trust (EBT). These loans were not recognised on the balance sheet as the assets and liabilities of the EBT
are recognised on the Company balance sheet. All loans were repaid during 2014. The total value of these loans at 31 December 2013 was
£186,000. These loans do not accrue interest.
At 31 December 2014, no loans remained outstanding from key management personnel (2013: £27,000). This loan is included within other
receivables and was made to enable the Director to purchase shares in the company. The loan did not accrue interest and was repaid during 2014.
On 15 May 2014 PPI Claimline Limited (PPI), a previously 100% owned subsidiary, was sold. As a result of the Directors of NAHL Group plc
continuing to own shares in PPI it is considered to be a related party. Transactions with PPI since the disposal were invoices for services
provided by Consumer Champion Group Limited for IT related solutions totalling £2,366. At 31 December 2014 £360 remained outstanding. 69 NAHL Group plc
Annual report and accounts 2014 Financials
26. Net debt
Net cash included cash and cash equivalents, secured bank loans, loan notes and preference shares.
2014
£000
2013
£000
Cash and cash equivalents 13,637 14,249
Other interest-bearing loans and loan notes – current liabilities (5,901) (6,789)
Preference shares – non current liabilities – (70)
Net cash 7,736 7,390
Set out below is a reconciliation of movements in net cash during the period.
2014
£000
2013
£000
Net decrease in cash and cash equivalents (806) (20,022)
Cash relating to discontinued operations 194 (196)
Cash and cash equivalents net inflow from increase in debt and debt financing 996 29,038
Movement in net borrowings resulting from cash flows 384 8,820
Other non-cash changes (38) (2,674)
Movement in cash in period 346 6,146
Net cash at beginning of period 7,390 1,244
Net cash at end of period 7,736 7,390
27. Events after the reporting period
On 17 February 2015 the Group acquired the entire share capital of Fitzalan Partners Limited. Due to the proximity of the acquisition date to
the release of the annual report, valuations of assets and liabilities acquired along with the disclosures required by IFRS 3 (Revised) have not
yet been prepared. Disclosure will be made in future annual financial statements. NAHL Group plc is paying up to £4.3m consideration made up
of an initial cash consideration of £3.0m and further cash of up to £1.3m prior to 31 December 2015 dependent on certain conditions being met.
Fitzalan Partners Limited, a UK company founded in 2011, is an online marketing specialist that uses innovative proprietary technology
platforms to target home buyers and sellers in England and Wales and offers lead generation services to PLFs and surveyors in the
conveyancing sector. NAHL Group plc 70
Annual report and accounts 2014 Other Information
Company registration number:
08996352
Auditors:
KPMG LLP
Altius House
One North Fourth Street
Milton Keynes
MK9 1NE
Solicitors to the Company:
Pinsent Masons LLP
3 Colmore Circus
Birmingham
B4 6BH
Bankers:
Yorkshire Bank plc
Temple Point
No.1 Temple Row
Birmingham
B2 5YB
NOMAD:
Investec Bank plc
2 Gresham Street
London
EC2V 7QP
United Kingdom
Company Registrars:
Capita Asset Services
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Financial PR:
FTI Consulting
200 Aldersgate
Aldersgate Street
London
EC1A 4HD
Advisors 71 NAHL Group plc
Annual report and accounts 2014 Other Information
Access to Justice Bill Act of Parliament replacing the Legal Aid system
After The Event Insurance An insurance product offered to consumers through Allianz to insure any compensation when
the claim is settled
Allianz National Accident Helpline’s insurance partner providing After The Event insurance
ATE After The Event insurance
CMR Claims Management Regulator
CRU Compensation Recovery Unit
Fitzalan Fitzalan Partners
Group NAHL Group plc
LASPO Legal Aid, Sentencing and Punishment of Offenders Act 2012 (enacted 1 April 2013)
Live chat Web-based chat service offered to consumers online via the National Accident Helpline and
Underdog websites
LSA Legal Service Advisor - fully trained employees within National Accident Helpline’s contact
centre taking calls from consumers to assist with their claim
NAH National Accident Helpline
Non-RTA Non-Road Traffic Accident (includes employer, occupier and public liability)
PI Personal Injury - an injury or illness suffered through no fault of an individual’s own (for
example, in a road accident, a slip, trip or fall, medical negligence, work accident or an
industrial disease)
PLF Panel Law Firm – a Personal Injury law firm selected to sit on our panel and take our enquiries
Post-LASPO After enactment of LASPO on 1 April 2013
PPC Pay Per Click
Pre-LASPO Before enactment of LASPO on 1 April 2013
RTA Road Traffic Accident
SAYE The Save As You Earn share scheme that was introduced for employees on admission, giving
them an opportunity to purchase shares in the company at a discounted rate following a
three-year savings period
SEO Search Engine Optimisation
Glossary NAHL Group plc Annual report and accounts 2014
NAHL Group plc
1430 Montagu Court,
Kettering Parkway,
Kettering,
Northamptonshire,
NN15 6XR
T: +44 (0) 1536 527 500
E: [email protected]
www nahlgroupplc.co.uk ### summary: |
annual report 2011
www.groupnbt.com about
Group NBT is a leading provider of domain names, hosting and brand
protection services.
It provides the essential building blocks to create, maintain and protect
online brands.
Customers include British Airways, The New Statesman, Centrica, Unilever
and Thomas Cook.
Group NBT has 330 employees and is based in London with offices
in Cambridge, Copenhagen, Munich, New York, Nice, Oslo, Paris,
Stockholm and Zurich.
Contents
About Group NBT IFC
Highlights 2010/11 1
Group NBT at a Glance 2
Chairman’s Statement 4
Chief Executive’s Review 5
Report on Corporate Governance 7
Board of Directors 8
Directors’ Remuneration Report 9
Directors’ Report 11
Statement of Directors’ Responsibilities 13
Report of the Independent Auditors 14
Consolidated Income Statement 15
Consolidated Statement of Comprehensive Income 15
Consolidated Statement of Financial Position 16
Consolidated Statement of Changes in Equity 17
Consolidated Statement of Cash Flows 18
Notes to the Consolidated Financial Statements 19
Company Balance Sheet 40
Notes to the Company Financial Statements 41
Officers and Advisers IBC
Group NBT Offices IBC
* excluding amortisation, restructuring costs, acquisition related
expenses and unexpected financial loss
2007 2008 2009 2010 2011
£3.7m
£5.5m
£6.7m
£8.1m
£9.6m
Underlying pre-tax profit*
£9.6m
+18%
2007 2008 2009 2010 2011
£22.4m
£35.3m
£41.5m
£43.9m
£49.5m
Revenue
£49.5m
+13%
£20.3m
£6.4m
£8.4m
£7.1m
£1.7m
2010 2011
Revenue by service
Corporate domain names
Brand protection
Managed hosting
Reseller
Online
£22.4m
£19.2m
£2.3m
2010 2011
Revenue by region
UK
Other European
US
£6.1m
£25.2m
£7.0m
£9.0m
£2.2m
£23.1m
£23.8m
£2.6m 1 group NBT pLC annual report 2011
highlights 2010/11
revenue
revenue up 13% to £49.5 million
organic* revenue up 4% at £45.7 million and up
5% excluding revenues from our domain name
acquisitions business (6% in constant currency)
netnames p latinum Service revenue up 13%
in constant currency to £15.5 million
Managed hosting revenue up 10% in constant
currency to £7.0 million
Brand protection revenue up by 28% in constant
currency to £2.1 million
underlying** profit before tax
underlying** profit before tax at £9.6 million up 18%
organic* underlying** profit before tax was up 9%
to £8.9 million, and excluding domain acquisitions
profit was up 15% (16% in constant currency)
Indom, acquired 14 December 2010, has traded well
with revenue of £3.8 million and underlying** pre-tax
profit of £0.7 million
underlying** diluted epS was up 11% to 26.22 pence and
on an organic* basis, excluding domain acquisitions, up 9%
net cash at year end £6.2 million
recommended Cash offer from newton Bidco limited,
an investment vehicle owned indirectly by certain funds
managed by HgCapital llp
an interim dividend of 1.68 pence, up 20%, was paid in
april 2011. as a result of the Cash offer, no final dividend
is proposed
organic revenue growth
+4%
underlying pre-tax profit
+18%
underlying diluted epS
+11%
* excluding the results of Indom SaS, acquired on 14 December 2010
** excluding amortisation, restructuring costs, acquisition related expenses and an unexpected
financial loss (see Cash flow section of the Chief executive’s review) group NBT pLC annual report 2011 2
gROUP NBt A t A glANCE
our business consists of five market leading services…
www.netnames.com
www.indom.com
www.envisional.com
Domain name management
NetNames platinum Service allows organisations
and Intellectual property professionals to implement
and maintain an effective domain name management
and online brand protection strategy . Customers come
from a wide variety of industries and include unilever,
Barclays and ladbrokes.com.
netnames is an Internet Company for assigned names
and numbers (ICann) accredited registrar with the
ability to register domain names in all available suffixes
worldwide. netnames provides comprehensive
coverage of country code t op l evel Domains (cctl Ds)
such as .de and .es. Following the acquisitions of
ascio t echnologies in Denmark and InDoM in
France, netnames became one of europe’s largest
corporate domain name management specialists.
netnames guarantees renewal of domain names
and provides a secure, high performance Domain
name Server (DnS) infrastructure. p latinum Service
customers also have access to SSl certificates and
other providers to further secure their online presence.
netnames provides a domain name acquisition service
to assist customers in purchasing domain names that
have been registered by other organisations and
supports customers during domain name disputes.
netnames p latinum Service includes a suite of
online brand monitoring products. using envisional’s
technology to monitor the Internet, brand violations
from suspect domain name registrations to brand
abuse such as auction sites carrying fake consumer
goods can be identified and action taken.
Brand protection
Envisional provides automated Internet search and
monitoring services to identify and deal with Internet
based brand abuse, counterfeiting, piracy and fraud.
Its Discovery engine can identify, filter and prioritise
information on websites, blogs, forums, newsgroups
and Internet relay Chat. t he technology applies
advanced artificial intelligence techniques to the task
of classifying information and pinpointing the most
important findings for clients.
Customers include banks and insurers, major film
studios, copyright holders and their trade bodies,
luxury goods firms, multi-brand corporations and
the legal firms and marketing agencies that work
with them.
envisional’s brand protection services include: the
ImageFlare image matching software, providing
accurate identification of logos and images even
where a logo has been modified; and a service for
companies with large networks of affiliates or
resellers to enable them to ensure compliance.
envisional has started to exploit the cross-selling
opportunities for brand protection services within
the large netnames customer base. t hese products –
Domain alert, Domain Monitor, Brand Monitor and
eBay auction Monitor – are standard packages
of services, based on envisional’s intelligent
search technology. 3 group NBT pLC annual report 2011
www.ascio.com www.easily.co.uk
www.speednames.com
www.netbenefit.com
digital
online
The online Business operates in both the consumer
and the SMe marketplace under four brands offering
a full range of domain name, shared hosting and email
services through fully transactional websites.
easily.co.uk has more than 75,000 customers with
a focus on offering low cost, good quality products
backed up by exceptional support. t he brand
targets a number of niche markets, including the
small business start up market, offering ecommerce
solutions for trading online. easily.co.uk also has
strategic partnerships with, amongst others, t esco
and orange.co.uk to provide online services
to their customers.
t he Speednames brand operates throughout
Scandinavia, having provided domain name services
since 2000. Speednames offers a wide range of domain
name suffixes coupled with excellent service. t he main
focus of Speednames is the business customer who
wishes to secure a number of domain names in a variety
of overseas markets.
netnames and netBenefit both provide services
online. although these brands are targeted at
customers for managed services they retain unique
or specialist services for which there is continued
demand from customers who buy online.
Managed hosting
NetBenefit provides managed hosting services in
the uK and France. It is focused on providing reliable
and flexible managed hosting solutions designed to
meet customers’ business requirements. Customers
range from small start-ups looking for scalable solutions
that will grow with their business requirements to
financial services companies and major uK retailers
for whom just minutes of downtime would translate
into thousands of pounds in lost revenue.
netBenefit works with customers directly and through
an indirect channel model comprising digital agencies
and It consultancies. netBenefit partners with a number
of the uK’s top 100 digital agencies providing the
hosting for online advertising campaigns for some
of the world’s most recognisable brands.
Services range from single server solutions to complex
database clusters, they include high availability or
disaster recovery solutions through multiple data
centres allowing the provision of resilient web hosting
deployed over dual sites. netBenefit also provides:
Content Delivery network services; backup and
recovery services with eVault; and virtualisation
services which are based upon either VMware
or Microsoft’s Hyper-V .
netBenefit’s newest data centre is entirely powered
by renewable energy . t his combined with the adoption
of virtualisation, where a physical server is split up
into a number of virtual machines, will allow netBenefit
to be more efficient in the way that it uses power
in its data centres.
reseller services
Ascio provides a white-label domain name registration
service for partners such as Internet Service providers
(ISps), t elcos, domain name resellers and Intellectual
property law firms. ascio works exclusively through
partners with a clear focus on providing the premium
quality and exceptional service that domain name
professionals need.
ascio is an automated service with a broad range
of cctl Ds. It provides a registration engine that offers
access to 250 top level domains (tl Ds) through one
standard interface. It is easily integrated into any existing
order provisioning system using an XMl-based apI
or standard email template.
ascio has over 350 partners throughout the world
with particular emphasis on Continental europe
and has approximately two million domains under
management. partners include Cable and Wireless,
Hostpoint and t elenor.
partners are able to offer their customers a wide
selection of tl Ds without needing to invest in the
infrastructure required to register names globally.
ascio also provides powerful, packaged marketing
campaigns to help its partners stimulate new business.
t hese may be topical, themed or geographically
targeted campaigns in a variety of different forms
and media. group NBT pLC annual report 2011 4
ChAiRmAN’s st AtEmENt “t he Company’s strategy is to build
recurring revenue by delivering excellent
products with a high service content.
t his strategy has served the Company
well and will remain in place while the
markets continue to grow and companies
need to outsource the management
of the services we provide.”
amid the turbulence caused by an offer for the Company I thought it appropriate
to reflect on the achievements of the Company against the key tenets of our
growth strategy that I set out in my last statement.
Focus on strong value-added services for our customers and recurring
“sticky revenue” for us
our core offering with these characteristics, netnames p latinum, Brand
protection and Managed Hosting have grown revenue 13%, 28% and 10%
respectively. Sales to new customers continue to be challenging as budgets
are constrained; but once we have secured clients we have been gratified by
their propensity to increase their spend with us. our focus on these services
has once again been vindicated by the increasingly competitive environment
in online domain name sales. revenue in this segment of our business fell by
14%, a disappointing outcome. It should be noted, however, that this segment
now accounts for only 12% of our revenue.
provide our core brand management expertise in multiple geographies
and through multiple channels
Much of the growth in Brand protection has been driven through sales
to netnames customers. We are particularly excited by the early success
of the sales to uK customers and the enthusiasm with which our sales
force internationally has embraced the opportunity to provide this
additional service.
Extend our product offering through adding complementary products
We are constantly adding functionality across all of our offering. I will pick out
three examples for particular mention. We have launched platinum Manager
which represents a significant development in the flexibility we afford to our
customers in the management of their domain name portfolios. at envisional,
we have added technology to enable Brand protection customers to identify
pirate websites and to issue “take down” orders. and finally the launch of our
“cloud” initiative has been a driver of sales in our hosting business.
Deploy our capital to extend both geographical and product expertise
t he acquisition of Indom in France was clearly the major event of the year
in this area. t he business has performed better than we had anticipated and
the paris based team is making a very positive contribution to the Group as
a whole. Furthermore we have been penetrating a number of new territories
in Central and eastern europe with our reseller products.
Improve our operations and technology to increase efficiency
and serve our customers better
We have invested in the integration of our systems infrastructure to deliver
a single, robust and scalable platform for the whole Group. t his is a work
of constant improvement but we have achieved significant milestones during
the year and we are now managing all new domain name management
customers from our new platform. t he acquisition of Indom adds a further
integration project but the system developments and our expertise in such
projects leaves us confident that we will deliver a strong result.
once again I am pleased to report a year of progress in challenging markets –
a year in which our underlying earnings (excluding domain acquisitions) grew
by 15% and our share price by 51% in the year to June 2011.
richard Madden
Chairman 5 group NBT pLC annual report 2011
Financial overview
revenue for the Group was £49.5 million for the year to 30 June 2011, up
13% on the previous year including the impact of the acquisition of Indom,
a French competitor, in December 2010. excluding the impact of this acquisition,
Group revenue was £45.7 million, up 4% year-on-year and up 5% on a constant
currency basis.
underlying profit before tax was £9.6 million, up 18% on the previous year and,
excluding the impact of Indom, up 9% year-on-year and up 10% on a constant
currency basis.
Cash generation was particularly good during the year and at the end of the
financial year the Group had £6.2 million net cash before unamortised facility fees.
t his compares with £11.4 million at the end of the previous year and includes
the subsequent acquisition of Indom for £12.0 million in net cash.
Corporate brand services
Group nBt , through its subsidiary netnames, provides a range of services to
manage and protect companies’ online activities. Companies are able to register
domain names in over 250 jurisdictions around the world and frequently build
significant sized portfolios of domain names which, like trademarks, often form
part of their valuable intellectual property assets. netnames manages these
portfolios for many companies to ensure that they are registered properly,
renewed in a timely manner and used appropriately.
additionally, Group nBt helps its customers to protect their brands against
online fraud, digital piracy, counterfeiting and other online infringements.
t his range of products is provided by the netnames and envisional brands.
revenue for Corporate Brand Services for the year under review was £23.6 million,
up 7% on last year , or 9% at constant currency rates and excluding domain acquisitions,
revenue was up 10% on last year, or 11% at constant currency rates. Within these
numbers, revenue for domain name management was £21.5 million and revenue
for brand protection services was £2.1 million. revenue for netnames p latinum
Service, the Group’s flagship domain name management product, grew 12%
during the year, 13% at constant currency rates.
Growth for domain name management has improved on the previous year as we
have seen better levels of new sales and lower levels of cancellations. overall growth
was held back by lower revenue from domain acquisitions, where we act for our
customers to buy names for them in the secondary market. Domain acquisitions
experienced exceptional sales in the year ending 30 June 2010 which, as we
noted in previous communications, was unlikely to be repeated in the year
under review.
envisional’s brand protection services did particularly well with revenue for the
year to 30 June 2011 up 28% on the previous year. not only have we acquired
some excellent new customers but we have also improved customer retention.
Growth is also, in part, due to an enhanced product offering, allowing customers
the ability to remove infringing websites and auctions.
Managed hosting
Managed hosting services are provided to companies in the uK and France.
revenue for the year under review was £7.0 million, up 10% on the previous year.
t echnology has played an important role in the improvement of our performance
as much of our new revenue comes from our new cloud based services. We have
also experienced an improvement in market conditions which is reflected in higher
levels of new business.
partner and reseller services
ascio is our partner and reseller brand which offers other ISp s the ability
to register a wide range of domain names using our technology and systems.
revenue for the year was £9.0 million, up 6% on last year, or 9% at constant
currency rates. Some of our larger partners have experienced lower growth
as a result of the prevailing market conditions which, in turn, affects our revenue.
We have, however, continued to add new partners at a similar rate to last year
and this will help to maintain growth rates in the future.
Group nBt is pleased to announce another year of good growth. t he Group
continued to grow revenue both organically and through acquisition and at the
same time maintained its margins, despite markets remaining difficult throughout
the year . our domain name management business was a key focus for development
and we are particularly pleased with the excellent revenue growth achieved in
our brand protection business. t here are signs of improving market conditions
especially for domain name management where the potential for new domain
name extensions is being pursued vigorously.
t he Board announced on 23 September that it had agreed terms with newton
Bidco limited, an investment vehicle owned indirectly by certain funds managed
by HgCapital llp , in respect of a recommended Cash offer for the Company at
a price of 550 pence per share, valuing the entire issued and to be issued share
capital at approximately £153 million. t he Cash offer values the Company’s shares
at an attractive premium to both the current and recent closing prices at which
the shares have been traded and exceeds the highest price at which the shares
have traded at any time in the last ten years. t he Cash offer is to be implemented
by means of a scheme of arrangement (the Scheme). Investors will be invited
to approve the Scheme at a Court Meeting and General Meeting, details of which
have been posted to shareholders.
Since commencing the strategy of developing a corporate domain name management
and hosting business nearly a decade ago, the Company has made good progress
in establishing itself as a market leader in europe. In HgCapital the Board believes
it has found a partner which will support Group nBt in achieving its commercial
and strategic objectives and will help it grow both organically by investment and
through securing acquisition opportunities that would otherwise be beyond its
current financial resources as a quoted company.
Strategy
our strategy is to build recurring revenue by delivering excellent products
with a high service content. t his strategy has served us well and will remain
in place while the markets continue to grow and companies need to outsource
the management of the services we provide. t his model has been a key part of
sustaining the steady progress we have made over a number of years. In the year
under review we achieved good growth in Continental europe and in the uS,
while maintaining steady growth in our home market.
Market conditions
Higher levels of new business, combined with lower levels of cancellations,
indicate some improvement in certain areas of our business although economic
conditions remain uncertain. as a result, customer activity has not yet reached
the levels we have seen in previous years. In the domain name management
market there has been a great deal of interest in the new domain name extensions
which were finally agreed by ICann in June. Whilst this did not have any impact
on revenue during the year it did serve to raise awareness of the need to manage
what are increasingly valuable domain name assets.
“We have experienced another
good year and although growth is not
back to levels seen before economic
conditions deteriorated we have seen
some improvement. t he acquisition
of Indom during the year supports our
position as a market leader for domain
name management services in europe
and we will continue to look for similar
acquisition possibilities.”
ChiEf ExECUtivE’s REviEw group NBT pLC annual report 2011 6
Cash flow
at 30 June 2011, the Group had net cash balances of £6.2 million (2010: £11.4 million)
before unamortised facility fees. t his comprised cash balances of £12.4 million
(2010: £13.4 million) and debt, before unamortised facility fees, of £6.2 million
(2010: £2.0 million).
Cash conversion remained strong over the year with cash generated from
operations increasing to £10.7 million including Indom, up from £9.4 million
last year. Free cash flow, comprising cash flows from operations, interest, tax
and capital expenditure, was up 9% to £7.8 million from £7.1 million last year
with tax payments increasing by 68% to £1.9 million.
net cash outflow in connection with the acquisition of Indom was £12.0 million.
While this was funded mostly through existing cash resources, a £4.5 million
three-year term loan together with a three-year revolving credit facility of
£1.5 million, currently undrawn, was secured in December 2010. t his is in
addition to the existing debt of £1.0 million which is repayable by July 2012.
In February 2011, an unexpected financial loss arose from our primary Danish
clearing bank filing for bankruptcy following which, after a distribution of 66%,
£0.3 million of our cash balances were lost. t he bank, which is now under state
ownership, has announced that the eventual distribution may increase to 84%
in total but this is subject to a legal process and therefore no further recovery
has been provided for in the financial statements. t he Group’s policy in respect
of surplus funds is to distribute them amongst various banks and this policy was
in place at the time of the bankruptcy.
Dividend
an interim dividend of 1.68 pence was paid on 15 april 2011. as a result of the
Cash offer, no final dividend is proposed.
geoff Wicks
Chief Executive
partner and reseller services continued
We continue to be focused on Continental europe where we have a resilient
customer base and we have extended this focus into eastern europe in order
to drive new business.
online services
Group nBt’s online services register and renew domain names and provide
hosting and email services through the websites of several of our brands, primarily
the easily brand in the uK and Speednames in europe. revenue for these services
for the year under review was £6.1 million, 14% down on last year, or 13% at
constant currency rates. t he previous year’s result benefited from the transfer
of some revenue within the Group which did not recur this year. However, we
expect to experience decline in this segment of the market as we continue
to concentrate on our managed services.
Indom
Indom, a market leader for the provision of domain name management services
in France, was acquired by the Group on 14 December 2010. Since the acquisition
Indom has continued to perform ahead of initial expectations. We have embarked
on restructuring and integration which will take up to two years to complete.
over time Group nBt France and Indom will be merged and the Indom business
will be transferred to the Group’s systems. t his project is progressing well and
we are already experiencing some of the benefits of the acquisition. t his acquisition
also brings significant expertise into the Group. Stéphane Van Gelder who will
manage the Group’s business in France is an expert in the domain name market
and is the chairman of a key ICann committee.
profit
t he overall gross margin of 73.3% decreased from 73.6% last year . excluding Indom,
gross margin was 72.6%, below last year’s rate, as the result of relatively small
changes to the revenue mix.
underlying operating profit at £9.6 million increased 19% year-on-year and
the margin at 19.5% was up from 18.5% last year. excluding Indom, underlying
operating profit was up 10% at £8.9 million at a margin of 19.6%. excluding both
Indom and domain acquisitions, the underlying operating profit grew strongly
at 16% year-on-year with a margin of 18.0%, up from 16.3%, as overheads
remained largely flat and revenues grew.
on a statutory basis operating profit was £7.3 million, up 2% from £7.1 million
last year, and profit before tax was £7.2 million, up 1% from last year . t he amounts
by which these statutory profit measures were adjusted to arrive at the underlying
profit measures used, comprise amortisation of intangible assets acquired through
acquisitions of £1.3 million (2010: £1.0 million) which increased as a result of the
acquisition of Indom; advisory and professional fees in respect of the acquisition
of Indom of £0.4 million (2010: nil) which were expensed instead of being capitalised
in accordance with the revised accounting standard on accounting for acquisitions;
technical and other one-off costs relating to the integration of Indom of £0.3 million
(2010: nil); and the unexpected financial loss arising from our Danish bank as
described below of £0.3 million (2010: nil).
Basic epS was 20.04 pence, down 7% from 21.48 pence last year, and diluted
epS was 19.46 pence, down 7% from 20.99 pence last year . Both these measures
were impacted by the adjusting items mentioned above, namely amortisation,
restructuring costs, acquisition related expenses and the financial loss, which
in total amounted to £2.3 million compared to £1.0 million last year.
Taxation
a tax charge of £2.0 million (2010: £1.7 million) arose in the year representing
an effective tax rate of 28.3% (2010: 23.2%).
t he effective tax rate on underlying profit before tax (excluding amortisation,
restructuring costs, acquisition related expenses and the financial loss together
with associated tax credits) was 27.0% (2010: 23.5%). t here were numerous
factors that drove up the effective rate of tax from last year including the addition
of Indom. t he main factors were non-uK regions where the effective tax rates
moved towards higher statutory rates as anticipated; and the proportion of uK
profits, taxed at a relatively higher rate, increasing within the mix.
ChiEf ExECUtivE’s REviEw continued 7 group NBT pLC annual report 2011
t he Company is listed on aIM and is not required to comply with the provisions of the 2008 FrC Combined Code (the Code) and therefore this is not a statement
of compliance as required by the Code. nevertheless the Board is committed to ensuring that proper standards of corporate governance operate throughout the
Group and has followed the principles of the Code so far as is practicable and appropriate for the nature and size of the Group.
a statement of the Directors’ responsibilities in respect of the financial statements is set out on page 13. Below is a brief description of the role of the Board and its
Committees, followed by a statement regarding the Group’s system of internal controls. t he Directors recognise the value of, and are committed to, high standards
of corporate governance.
Board of Directors
t he Board currently comprises the non-executive Chairman, the Chief executive officer, a further executive and three non-executive Directors. t he Directors’
biographies, set out on page 8, demonstrate the broad range of experience and knowledge they bring to the Company enabling them to offer sound judgement
on the proper management of the Group.
t he Board meets at least ten times per year and has a schedule of matters specifically reserved for it for decision. It is responsible for approving the overall Group
strategy, acquisitions, major capital expenditure projects, reviewing the trading performance, ensuring adequate funding and reporting to shareholders. t o enable
the Board to discharge its duties, management provides appropriate and timely information in advance of each meeting. all Directors have access to advice from
the Company Secretary and are able to take independent professional advice as required.
t he longest serving Directors, since their last appointment or reappointment, are richard Madden and Keith Young. t he notice of the next annual General Meeting
will set out the details of the Directors offering themselves for re-election.
t he Board of Directors considers all the non-executive Directors to be independent of management and, in making this decision, have had regard to guidance issued
by several of the Group’s largest institutional investors. Martin Bellamy is the Senior Independent Director.
t he following Committees deal with specific aspects of the Group’s affairs:
remuneration Committee
t he remuneration Committee is chaired by Martin Bellamy. Its other members are richard Madden and Keith Young. t he Committee meets at least twice a year.
t he Committee’s report to shareholders on Directors’ remuneration is set out on pages 9 to 10.
Audit Committee
t he audit Committee is chaired by richard Madden. Its other member is Keith Young. Meetings may also be attended, by invitation, by the Chief executive officer
and the Finance Director. t he Committee meets at least twice a year and provides a forum for reporting by the Group’s external auditors.
relationship with shareholders
Communication with shareholders is given high priority. t he Chairman’s Statement and the Chief executive’s review on pages 4 to 6 include a detailed review
of the business and future developments. t here is regular dialogue with institutional shareholders including presentations after the Group’s announcements of the
interim and annual results. t he Company’s website carries reproductions of the Group’s financial reports and announcements. t he annual General Meeting provides
a further forum for private and institutional shareholders to communicate with the Board and their active participation is welcomed. Details of resolutions to be proposed
at the next annual General Meeting will be sent out in due course as appropriate.
Internal control
t he Directors are responsible for the Group’s system of internal control and for reviewing its effectiveness. However, such a system can only provide reasonable,
but not absolute, assurance against material misstatement or loss. t he Board believes that the Group has internal control systems in place appropriate to the size
and nature of its business.
an ongoing process for identifying, evaluating and managing the significant risks faced by the Group has been in place throughout the year. t hat process is regularly
reviewed by the Board and accords with the Internal Control: Guidance for Directors, in the Combined Code.
t he Board intends to keep its risk control procedures under constant review particularly as regards the need to embed internal control and risk management
procedures further into the operations of business, both in the uK and overseas, and to deal with areas of improvement which come to management and the
Board’s attention.
Financial reporting
t here is a comprehensive budgeting system with an annual budget approved by the Board. Monthly trading results, balance sheets and cash flow statements
are reported against the budget and prior year. updated forecasts are presented in light of the reported trading performance.
operating control
each executive Director has defined responsibility for specific aspects of the Group’s operations. t he executive Directors, together with key senior executives,
meet regularly to discuss day-to-day operational matters.
Investment appraisal
Capital expenditure is controlled via the budgetary process and set levels of authorisation. For expenditure beyond a specified level, a written proposal is submitted
to the Board for approval.
risk management
t he Board is responsible for identifying the major business risks faced by the Group and for determining the appropriate course of action to manage such risks.
all potential acquisitions are subject to appropriate due diligence.
REPORt ON CORPORA tE gO vERNANCE group NBT pLC annual report 2011 8
BOARd Of diRECt ORs richard Madden
Non-executive Chairman
richard Madden is an investment banker and has experience in equity and M&a transactions throughout europe and the uSa. He qualified as a chartered accountant
with arthur andersen and holds a degree in Classics from the university of Cambridge.
geoff Wicks
Chief Executive officer
Geoff Wicks joined the Board in September 2001. He had spent the previous twenty years with reuters Group in a variety of roles, including heading various uK
divisions and time in France and the nordic region. latterly he was director of corporate relations. p rior to reuters, Geoff worked in the City within the banking
and insurance industries.
raj Nagevadia
Finance Director
raj nagevadia joined Group nBt as Financial Controller in october 2003. He became Finance Director in February 2004 and joined the Board in november 2005.
prior to this raj was financial controller at t empo plc, a national electrical retailer, for six years and he has held various roles in an offshore oil and gas construction
business and at a leading firm of accountants.
Keith Young MBE
Non-executive Director
Keith Young is an entrepreneur with considerable experience in the Internet, communications and publishing industries. He co-founded the Group nBt business
in 1995 and was also a significant shareholder in easynet Group plc prior to its flotation. In addition, he has significant interests in several other companies spanning
a diverse range of sectors.
Claus Anderson
Non-executive Director
Claus anderson is a partner in nordic Venture p artners K/S, a venture capital firm and a significant shareholder of Group nBt . Claus has been with nordic Venture
partners K/S since its inception in early 2000 and has focused primarily on enterprise software and internet-related investments. prior to this he worked for a number
of nordic financial institutions as an investment banker in various european countries and holds a degree in Credit and Finance from Copenhagen Business School.
Martin Bellamy
Non-executive Director
Martin Bellamy is Director of Information and Communications t echnology for the national offender Management Service (noMS). p rior to working for noMS,
Martin worked at the Cabinet office, the Department of Work and p ensions, reuters, Bt and KpMG. Martin is a Visiting Fellow at the ashridge Business School. 9 group NBT pLC annual report 2011
t he Company is listed on aIM. t he Directors’ remuneration report, as set out below, is required to satisfy the aIM requirements.
remuneration Committee
t he Committee consists of three non-executive Directors: richard Madden and Keith Young, under the chairmanship of Martin Bellamy. none of the Committee
members have any personal financial interests (other than as shareholders), conflicts of interest arising from cross-directorships or day-to-day involvement in running
the business. t he Committee consults the Chief executive officer about its proposals and has access to professional advice from inside and outside the Company.
t he Committee determines the remuneration of executive Directors and other senior executives on behalf of the Board and reports to the Board on general conclusions
reached by the Committee. no Director plays a part in any discussions about their own remuneration.
remuneration policy
executive remuneration packages are prudently designed to attract, motivate and retain directors of the high calibre needed to maintain the Company’s
position as a market leader. t he performance measurement of the executive Directors and key members of senior management and the determination of their
annual remuneration package are undertaken by the Committee. t he remuneration of the non-executive Directors is determined by the Board within the limits
set out in the articles of association.
t here are four main elements of the remuneration package for executive Directors and senior management:
basic annual salary (including Directors’ fees) and benefits;
annual bonus payments;
long-term incentive awards; and
pension arrangements.
Basic salary
an executive Director’s basic salary is determined by the Committee at the beginning of each year and when an individual changes position or responsibility .
In deciding appropriate levels the Committee considers the Group as a whole and relies on objective research and independent surveys. executive Directors’
contracts of service, which include details of remuneration, will be available for inspection at the annual General Meeting. t he executive Directors are entitled
to accept appointments outside the Company providing the Chairman’s permission is sought in advance.
Annual bonus payments
t he Committee establishes the objectives that must be met for each financial year if a cash bonus is to be paid and these objectives target both revenue and profit
growth. account is also taken of the relative success of the different parts of the business for which the executive Directors are responsible and the extent to which
the strategic objectives set by the Board are being met.
Long-term incentives
t he Board believes that long-term incentive schemes are important in retaining and recruiting high-calibre individuals and ensuring that the performance of executives
is focused on creating long-term shareholder value. a wards of shares and options will be considered by the Committee on an ongoing basis. t he current long t erm
Incentive plan has performance targets related to the growth in the Company’s earnings per share.
Directors’ pensions
up to 10% of salary is paid by the Company into Directors’ personal pension schemes, although they may also sacrifice basic annual salary to supplement
pension contributions.
performance graph
t he following graph shows the Company’s share price performance, compared with the performance of the Ft Se aIM and the Ft Se Small Cap Indices. t he Ft Se
aIM Index was selected as the Company is a constituent of that index. t he Ft Se Small Cap Index was selected as this is believed to be the most appropriate and
broad comparator of the Company’s performance.
Directors’ contracts
executive Directors currently have up to six-month rolling service contracts. t he Company may have a contractual obligation to pay compensation for the
unexpired portion of a Director’s contract if it is terminated early together with related payments, if any, at the discretion of the Committee.
directors’ remuneration report group NBT pLC annual report 2011 10
Non-executive Directors
non-executive Directors currently have up to twelve-month rolling contracts. remuneration is determined by the Board based within the limits set out in the
articles of association and based upon independent surveys of fees paid to non-executive directors of similar companies. t he annual fee payable for the role
of non-executive Chairman is £45,000 (2010: £27,500) and the annual fee payable for the role of non-executive Director is £20,000 (2010: £20,000). richard Madden,
an existing non-executive Director, appointed non-executive Chairman on 25 november 2010, received fees of £32,500 (2010: £20,000) in the year to 30 June 2011.
John parcell, who stepped down as non-executive Chairman on 25 november 2010, received £11,460 (2010: £27,500). Martin Bellamy joined the Board as
a non-executive Director on 1 august 2010 and commenced receiving fees from 1 March 2011. Claus anderson does not receive a fee for his services.
Directors’ remuneration
Directors’ remuneration for the year was as follows:
Salary/ annual Share-based other 2011 2010
fees bonuses pensions payments
1
benefits
2
Total total
£’000 £’000 £’000 £’000 £’000 £’000 £’000
r Madden 33 — — — — 33 20
G Wicks 168 61 — 41 13 283 284
r nagevadia 125 50 13 33 8 229 230
K Young 20 — — — — 20 20
M Bellamy (appointed 1 august 2010) 7 — — — — 7 —
C anderson — — — — — — —
J parcell (resigned 25 november 2010) 11 — — — — 11 28
t ashley (resigned 12 october 2009) — — — — — — 6
YeAr eNDeD 30 JuNe 2011 364 111 13 74 21 583 588
Year ended 30 June 2010 367 139 13 49 20
1. Directors’ share of the year’s accounting charge.
2. other benefits consist of car allowances and private health insurance.
Long Term Incentive plans
Details of current Directors’ interests in long-term incentive plans of the Company are set out below:
at Granted exercised At exercise
1 July during during 30 June price Date of exercisable expiry
Scheme 2010 the year the year 2011 £ grant from date
G Wicks unapproved 105,000 — — 105,000 0.25 30/06/03 30/06/04 27/06/13
unapproved 70,000 — — 70,000 3.14 26/03/07 01/07/07 23/03/17
unapproved 50,000 — — 50,000 3.03 18/07/07 30/06/08 15/07/17
unapproved 50,000 — — 50,000 2.29 22/07/08 30/06/09 22/07/18
ltIp 41,826 — — 41,826 0.00 06/11/09 06/11/12 06/11/19
316,826 — — 316,826
r nagevadia eMI 4,000 — — 4,000 0.01 07/04/04 30/06/04 05/04/14
eMI 38,610 — — 38,610 1.30 10/04/06 10/04/06 07/04/16
eMI 14,000 — — 14,000 3.14 26/03/07 01/07/07 23/03/17
unapproved 56,000 — — 56,000 3.14 26/03/07 01/07/07 23/03/17
unapproved 50,000 — — 50,000 3.03 18/07/07 30/06/08 15/07/17
unapproved 50,000 — — 50,000 2.29 22/07/08 30/06/09 22/07/18
unapproved 25,000 — — 25,000 2.29 22/07/08 22/07/08 22/07/18
ltIp 34,088 — — 34,088 0.00 06/11/09 06/11/12 06/11/19
271,698 — — 271,698
r Madden unapproved 100,000 — — 100,000 1.30 10/04/06 10/04/06 07/04/16
total options 688,524 — — 688,524
t he ordinary share price ranged from £2.80 to £4.40 during the year and stood at £4.35 at the year end. t he gains made on the exercise of share options by Directors
were nil (2010: £1,305,000).
on behalf of the Board
Martin Bellamy
Chairman of the remuneration Committee
25 october 2011
directors’ remuneration report continued 11 group NBT pLC annual report 2011
t he Directors present their annual report and accounts for the year ended 30 June 2011.
principal activities
t he principal activities of the Group during the year were the provision of domain name, web-hosting, brand protection and other internet-related services.
Business review
a review of the business and future developments together with the key performance indicators of business performance is set out in the Chairman’s Statement
and the Chief executive’s review on pages 4 to 6.
results and dividends
t he results of the Group for the year are shown in the Consolidated Income Statement on page 15.
an interim dividend of 1.68 pence (2010: 1.4 pence) per ordinary share was paid on 15 april 2011. as a result of the Cash offer, no final dividend is proposed,
making the total for the year 1.68 pence (2010: 4.2 pence).
principal risks and future developments
t he Directors believe that the principal risks faced by the Group arise in the areas of its services, its technology platforms and its staff.
t he Group’s services are primarily delivered over the Internet through a complex technical infrastructure and therefore its availability and security are critical
in delivering our services. t he Group has processes, plans and safeguards in place to the extent it is reasonable or feasible. t he Internet and related technologies
continue to develop fast. Given this operating environment there may be rapid changes in the market, technology and operational methodologies. t he Group
has an ongoing programme of market and competitive review, service development and infrastructure enhancement.
t he Group operates in growing markets with varying degrees of competition in the different sectors it serves. In the corporate domain name management market,
where the Group has operations in both europe and the uS, it has a leading position in europe primarily through its high market share in a number of countries. While its
position in the uS is steadily improving, this market is home to the Group’s major corporate domain name management competitors. t he managed hosting market,
where the Group operates largely in the uK, has fragmented competition and the Group has positioned itself as a mid-market specialist provider. t he online market
is large with substantial competition and the Group differentiates its offering by combining cost effective solutions with higher levels of service.
t he Group’s services and infrastructure are supported by skilled staff, from account management and fulfilment through to technical support. t he Group is therefore
reliant upon its ability to attract, train and retain the right mix of staff.
t he Directors monitor the risks facing the Group on a regular basis.
Financial risks
Details of the Group’s financial risks together with exposures to interest rate, credit, liquidity and currency risks are contained in note 19 Financial instruments,
in the notes to the Consolidated Financial Statements.
Directors
t he Directors of the Company who served during the year to 30 June 2011 are shown below together with their interests in the shares of the Company at the year end:
At at
30 June 30 June
2011 2010
r Madden — —
G Wicks 500,000 500,000
r nagevadia 2,500 2,500
K Young 887,432 887,432
M Bellamy (appointed 1 august 2010) — —
C anderson* — —
J parcell (resigned 25 november 2010) — 575,877
* Claus anderson is a partner in nordic Venture p artners K/S, a venture capital firm, which also had a substantial shareholding in the ordinary share capital of the Company.
t he Directors’ interests in the long-term incentive plans of the Company are detailed on page 10.
In accordance with the Company’s articles of association, details of the Directors offering themselves for re-election will be set out in the notice of the next
annual General Meeting as necessary.
Directors’ and officers’ liability insurance and indemnities
t he Company has purchased insurance to cover its Directors and officers against any costs arising from defending themselves in legal proceedings taken against
them as a direct result of duties carried out on behalf of the Company.
as at the date of this report, indemnities are in force under which the Company has agreed to indemnify the Directors, to the extent permitted by law and by the
Company’s articles of association, in respect of losses arising out of, or in connection with, the execution of their powers, duties and responsibilities, as Directors
of the Company or any of its subsidiaries.
directors’ report group NBT pLC annual report 2011 12
Substantial shareholdings
at 19 october 2011, the Company had or had been notified of the following holdings of 3% or more in the ordinary share capital of the Company excluding
Directors’ interests shown on page 11:
number %
Blackrock Investment Management 3,389,273 13.0
Herald Investment Management 2,518,250 9.7
artemis Investment Management 2,402,627 9.2
nordic Venture partners K/S 1,807,268 7.0
Hargreave Hale, Stockbrokers (for discretionary clients) 1,415,708 5.5
octopus Investments 1,013,275 3.9
Investec Wealth & Investment 941,642 3.6
Ignis asset Management 905,002 3.5
employees
Group nBt offers a wide range of services to companies and relies on the knowledge and expertise of its staff. t he Company endeavours to ensure that
it consistently improves the Group’s performance by attracting and retaining the right people and by developing the skills of its staff through training and
development programmes.
performance is rewarded on merit without regard to gender, age, race, colour, religion, sexual orientation or marital status. t he Company encourages the involvement
and participation of staff in building a successful business. Communication plays a key part in creating an environment in which all staff can contribute and develop
to their full potential.
environment
t he Group acknowledges the importance of environmental matters and where possible utilises environment friendly policies in its offices such as recycling and energy
efficient practices.
Supplier payment policy
t he Group agrees terms and conditions with individual suppliers at the time orders for the services are placed. It is the Group’s policy to make payment in accordance
with those terms and conditions providing they have been fully complied with by the supplier.
t he Group’s creditor days at 30 June 2011, calculated in accordance with the requirements of the Companies act 2006, were 22 (2010: 27).
research and development
t he Group operates within the rapidly developing internet environment. t here are few, if any, proprietary systems available to meet its product requirements and as
a result the Group has developed, in-house, the systems required to meet its customers’ needs. t hese costs of research and development have been written off to the
Consolidated Income Statement as they are incurred where permitted by IaS 38 Intangible assets and not carried forward as assets in the Consolidated Statement
of Financial position.
going concern
a review of the Group’s activities, market conditions, performance in the year under review, details of its cash flows and financial position are set out in the
Chairman’s Statement and the Chief executive’s review on pages 4 to 6.
after making appropriate enquiries, the Directors have formed a judgement at the time of approving the annual accounts that there is a reasonable expectation
that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going
concern basis in preparing the annual accounts.
Annual general Meeting
In light of the recommended Cash offer from newton Bidco limited to acquire the entire issued and to be issued share capital of the Company announced
on 23 September 2011, the Company will give notice of and convene its 2011 annual General Meeting as necessary in due course.
Auditors
all of the Directors have taken all the steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the
auditors are aware of that information. t he Directors are not aware of any relevant audit information of which the auditors are unaware.
a resolution in respect of auditors will be proposed at the next annual General Meeting as necessary.
By order of the Board
raj Nagevadia
Company Secretary
25 october 2011
directors’ report continued 13 group NBT pLC annual report 2011
t he Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. under that law the Directors have elected to prepare the Group Financial
Statements in accordance with International Financial reporting Standards (IFrSs) as adopted by the european union and the Company financial statements in accordance
with united Kingdom Generally accepted accounting p ractice (united Kingdom accounting Standards and applicable law). under company law the Directors must
not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit
or loss of the Group for that period. t he Directors are also required to prepare financial statements in accordance with the rules of the london Stock exchange
for companies trading securities on aIM.
In preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and accounting estimates that are reasonable and prudent;
state whether they have been prepared in accordance with applicable accounting standards, subject to any material departures disclosed and explained
in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
t he Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with
reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements
of the Companies act 2006. t hey are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Website publication
t he Directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the
Company’s website in accordance with legislation in the united Kingdom governing the preparation and dissemination of financial statements, which may vary from
legislation in other jurisdictions. t he maintenance and integrity of the Company’s website is the responsibility of the Directors. t he Directors’ responsibility also extends
to the ongoing integrity of the financial statements contained therein.
statement of directors’ responsibilities group NBT pLC annual report 2011 14
We have audited the financial statements of Group nBt plc for the year ended 30 June 2011 which comprise the Consolidated Income Statement, the Consolidated
Statement of Comprehensive Income, the Consolidated Statement of Financial position, the Consolidated Statement of Changes in equity, the Consolidated Statement
of Cash Flows and the Company Balance Sheet and the related notes. t he financial reporting framework that has been applied in the preparation of the Group financial
statements is applicable law and International Financial reporting Standards (IFrSs) as adopted by the european union. t he financial reporting framework that has
been applied in the preparation of the parent company financial statements is applicable law and united Kingdom accounting Standards (united Kingdom
Generally accepted accounting p ractice).
t his report is made solely to the Company’s members, as a body, in accordance with sections Chapter 3 of part 16 of the Companies act 2006. our audit work has
been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose.
t o the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our
audit work, for this report, or for the opinions we have formed.
respective responsibilities of Directors and auditors
as explained more fully in the Statement of Directors’ responsibilities, the Directors are responsible for the preparation of the financial statements and for being
satisfied that they give a true and fair view. our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and
International Standards on auditing (uK and Ireland). t hose standards require us to comply with the auditing p ractices Board’s (apB’s) ethical Standards for auditors.
Scope of the audit of the financial statements
a description of the scope of an audit of financial statements is provided on the apB’s website at www.frc.org.uk/apb/scope/private.cfm.
opinion on financial statements
In our opinion:
the financial statements give a true and fair view of the state of the Group’s and the parent company’s affairs as at 30 June 2011 and of the Group’s profit
for the year then ended;
the Group financial statements have been properly prepared in accordance with IFrSs as adopted by the european union;
the parent company’s financial statements have been properly prepared in accordance with united Kingdom Generally accepted accounting p ractice; and
the financial statements have been prepared in accordance with the requirements of the Companies act 2006.
opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the
financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies act 2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited
by us;
the parent company financial statements are not in agreement with the accounting records and returns;
certain disclosures of Directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Scott McNaughton (senior statutory auditor)
For and on behalf of BDo LLp, statutory auditor
London
united Kingdom
25 october 2011
BDo llp is a limited liability partnership registered in england and Wales (with registered number oC305127).
report of the independent auditors 15 group NBT pLC annual report 2011
2011 2010
notes £’000 £’000
reveNue 3 49,459 43,921
Cost of sales 13,227 11,590
groSS proFIT 3 36,232 32,331
operating expenses 28,955 25,184
operATINg proFIT 4 7,277 7,147
Finance income 6 108 81
Finance expense 7 (147) (41)
proFIT BeFore TAxATIoN 3 7,238 7,187
taxation 8 (2,049) (1,666)
proFIT For The YeAr 5,189 5,521
eArNINgS per ShAre
Basic 10 20.04p 21.48p
Diluted 10 19.46p 20.99p
all amounts relate to continuing activities.
2011 2010
£’000 £’000
proFIT For The YeAr 5,189 5,521
oTher CoMpreheNSIve INCoMe
exchange translation differences 3,268 (1,503)
ToTAL CoMpreheNSIve INCoMe For The YeAr 8,457 4,018
t he deferred tax credits in relation to share-based payments previously shown in this statement have now been removed and is part of the Consolidated Statement
of Changes in equity (see note 1 for further details).
t he notes on pages 19 to 39 form part of these Consolidated Financial Statements.
c onsolidated income statement
For tHe Y ear enDeD 30 June 2011
c onsolidated statement of comprehensive income
For tHe Y ear enDeD 30 June 2011 group NBT pLC annual report 2011 16
2011 2010
notes £’000 £’000
ASSeTS
NoN-CurreNT ASSeTS
Goodwill 11 39,805 27,523
other intangible assets 11 6,116 1,619
property, plant and equipment 12 1,883 2,213
Deferred tax asset 15 1,412 1,084
49,216 32,439
CurreNT ASSeTS
trade and other receivables 14 7,956 5,960
Cash and cash equivalents 24 12,407 13,443
20,363 19,403
ToTAL ASSeTS 69,579 51,842
LIABILITIeS
CurreNT LIABILITIeS
Bank loan 17 (2,874) (983)
trade and other payables 16 (16,223) (12,348)
taxation (1,614) (1,530)
(20,711) (14,861)
NoN-CurreNT LIABILITIeS
Bank loan 17 (3,236) (991)
Deferred tax liability 15 (1,786) —
(5,022) (991)
ToTAL LIABILITIeS (25,733) (15,852)
NeT ASSeTS 43,846 35,990
CApITAL AND reServeS
Called up share capital 20 260 259
Share premium account 4,055 3,824
Merger reserve 12,008 12,008
other reserve 2,121 1,794
Cumulative translation reserve 5,851 2,583
profit and loss account 19,551 15,522
ToTAL equITY 43,846 35,990
t hese financial statements were approved by the Board of Directors and authorised for issue on 25 october 2011.
Signed on behalf of the Board of Directors
geoff Wicks
Chief executive officer
t he notes on pages 19 to 39 form part of these Consolidated Financial Statements.
c onsolidated statement of financial position
aS at 30 June 2011 17 group NBT pLC annual report 2011
Cumulative
Share Share Merger other translation retained
capital premium reserve reserve reserve profit total
notes £’000 £’000 £’000 £’000 £’000 £’000 £’000
YeAr eNDeD 30 JuNe 2011
Balance at 1 July 2010 259 3,824 12,008 1,794 2,583 15,522 35,990
Comprehensive income for the year — — — — 3,268 5,189 8,457
Dividends 9 — — — — — (1,160) (1,160)
Share-based payment credit — — — 142 — — 142
Deferred tax recognised on share-based payment — — — 185 — — 185
Issue of share capital 1 231 — — — — 232
BALANCe AT 30 JuNe 2011 260 4,055 12,008 2,121 5,851 19,551 43,846
Year ended 30 June 2010
Balance at 1 July 2009 254 3,536 12,008 1,467 4,086 10,880 32,231
Comprehensive income for the year — — — — (1,503) 5,521 4,018
Dividends 9 — — — — — (879) (879)
Share-based payment credit — — — 98 — — 98
Deferred tax recognised on share-based payment — — — 229 — — 229
Issue of share capital 5 288 — — — — 293
Balance at 30 June 2010 259 3,824 12,008 1,794 2,583 15,522 35,990
t he nature and purpose of each reserve is disclosed in note 20.
t he notes on pages 19 to 39 form part of these Consolidated Financial Statements.
c onsolidated statement of changes in equity
For tHe Y ear enDeD 30 June 2011 group NBT pLC annual report 2011 18
2011 2010
notes £’000 £’000
CASh FLoW FroM operATINg ACTIvITIeS
profit before taxation 7,238 7,187
Finance expense/(income) (net) 39 (40)
Depreciation and amortisation 2,777 2,487
profit on disposal of assets (44) —
Share-based payments 142 98
exchange differences (147) (324)
(Increase)/decrease in trade and other receivables (286) 919
Increase/(decrease) in trade and other payables 939 (907)
Cash generated from operations 10,658 9,420
taxation paid (1,894) (1,125)
NeT CASh INFLoW FroM operATINg ACTIvITIeS 8,764 8,295
CASh FLoW FroM INveSTINg ACTIvITIeS
Interest received 6 108 81
purchase of property, plant and equipment 12 (1,025) (1,211)
proceeds from the disposal of fixed assets 62 —
purchase of subsidiary undertakings 26 (14,170) (147)
net cash acquired with subsidiary undertaking 26 2,183 —
NeT CASh ouTFLoW FroM INveSTINg ACTIvITIeS (12,842) (1,277)
CASh FLoW FroM FINANCINg ACTIvITIeS
Interest paid 7 (147) (41)
Dividends paid 9 (1,160) (879)
long-term loan receipt/(repayments) 3,882 (983)
proceeds from issue of share capital 232 293
NeT CASh INFLoW/(ouTFLoW) FroM FINANCINg ACTIvITIeS 2,807 (1,610)
NeT (DeCreASe)/INCreASe IN CASh AND CASh equIv ALeNTS (1,271) 5,408
CASh AND CASh equIv ALeNTS AT STAr T oF YeAr 13,443 8,157
effects of exchange rate changes 235 (122)
CASh AND CASh equIv ALeNTS AT eND oF YeAr 24 12,407 13,443
t he notes on pages 19 to 39 form part of these Consolidated Financial Statements.
c onsolidated statement of cash flows
For tHe Y ear enDeD 30 June 2011 19 group NBT pLC annual report 2011
1 Accounting policies
t he accounting policies set out below, unless otherwise stated, have been applied consistently to all periods presented in these Consolidated Financial Statements.
general information
Group nBt plc (the Company) and its subsidiaries (together the Group) is a leading provider of domain names and internet-related services. operating in eight countries,
it has 330 employees.
t he Company is a public limited company incorporated and domiciled in the uK. t he address of the registered office is 3rd Floor, prospero House,
241 Borough High Street, london Se1 1Ga.
t he Company is listed on aIM.
a) Basis of preparation
t he Consolidated Financial Statements have been prepared in accordance with eu endorsed International Financial reporting Standards (IFrS) and the IFrIC
interpretations issued by the IaSB and the Companies act 2006 applicable to companies reporting under IFrS. t he Consolidated Financial Statements are
prepared under the historic cost convention as modified by share-based payments measured at fair value through the income statement.
t he principal accounting policies of the Group are set out below:
b) Basis of consolidation
t he Consolidated Financial Statements of the Group comprise the financial statements of the Company and entities controlled by the Company (its subsidiaries)
at the balance sheet date. Control is achieved where the Company has the power to govern the financial and operating policies of a subsidiary so as to obtain
benefits from its activities.
t he results of subsidiaries acquired (or disposed of) in the year are included (or excluded) in the Consolidated Income Statement from the effective date
of acquisition or up to the effective date of disposal, as appropriate.
all intra-group transactions, balances, income and expenses are eliminated on consolidation. accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the Group.
c) Business combinations
t he Group uses the acquisition method of accounting to account for business combinations in accordance with IFrS 3 (revised) Business Combinations.
t he consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests
issued by the Group. acquisition related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in
a business combination are measured initially at their fair values at the acquisition date.
t he excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity
interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill.
d) Revenue recognition
revenue is derived from the Group’s principal activities which are the provision of domain name, web-hosting, brand protection and other internet-related
services and, in general, is measured as the fair value of the consideration received or receivable, and represents amounts receivable for services provided in the
normal course of business, net of discounts, Vat and other sales related taxes. Where services are billed in advance revenue is deferred until the services have
been provided. t he Group reports its revenue by service which are described below together with the relevant revenue recognition policies applied.
Corporate domain names – services include annual or rolling contracts for management of domain name portfolios where services are billed in advance
and revenue recognised evenly over the billing period, the basis on which services are supplied; registration of domain names where services are billed on
a transactional basis and revenue recognised when the registration process is complete where the customer becomes the legal owner of the domain name
registered; other short-term domain name related advisory and administrative services where these are billed either at commencement or on completion
and revenue is recognised when these services are performed; domain name ancillary products and services where these are billed in advance and revenue
recognised evenly over the billing period, the basis on which services are supplied; and domain name acquisitions, the sales and purchases of pre-registered
domain names, where transactions are billed either in advance or in arrears with revenue, representing the net margin as these transactions are undertaken
on a brokerage basis, being recognised when the transfer of the legal owner of the domain name being transacted has completed.
Managed hosting – services encompass the provision of managed web-hosting solutions where the billing frequency is largely monthly in advance and revenue
is recognised in line with the provision of services.
partner and reseller – services which enable ISps and other intermediaries to offer their customers domain name registration services on a white-label basis
using our systems and revenue is recognised when the registration process is complete where the end customer becomes the legal owner of a domain name
with billing taking place at process completion on a transactional basis.
online – services include domain name registration services, shared hosting, email and other internet-related services. Domain names are billed on a transactional
basis and revenue is recognised when the registration process is complete with the customer becoming the legal owner of the domain name registered. t he other
services are typically billed annually in advance and revenue is recognised evenly over the billing period as these services are provided in the same manner.
Brand protection – services include monitoring the Internet for and advice on brand abuse, fraud, piracy and counterfeiting. Monitoring services are billed
in advance, ranging from monthly to annual basis, and revenue is recognised in line with performance of these services. advisory and consulting services
are billed either at commencement or on completion and revenue is recognised on delivery of these services.
notes to the consolidated financial statements For tHe Y ear enDeD 30 June 2011 notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 20
1 Accounting policies continued
general information continued
e) Goodwill
Goodwill represents the excess of the fair value of consideration over the fair value of the identifiable net assets at the date of their acquisition. Goodwill is recognised
as an asset and reviewed annually for impairment. any impairment is recognised immediately in the income statement and is not subsequently reversed. on disposal
of a subsidiary, the attributable amount of goodwill is included in the determination of the profit and loss on disposal. Goodwill is denominated in the functional
currency in which the acquired entity operates.
f) impairment of assets
Goodwill is allocated to cash-generating units for the purposes of impairment testing. t he recoverable amount of the cash-generating unit to which the goodwill
relates is tested annually for impairment or when events or changes in circumstances indicate that it might be impaired. t he carrying values of property, plant and
equipment and intangible assets other than goodwill are reviewed for impairment only when events indicate that the carrying value may be impaired.
In an impairment test, the recoverable amount of the cash-generating unit or asset is estimated to determine the extent of any impairment loss. t he recoverable
amount is the higher of fair value less costs to sell and the value-in-use to the Group. an impairment loss is recognised to the extent that the carrying value exceeds
the recoverable amount.
In determining a cash-generating unit’s or asset’s value-in-use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and risks specific to the cash-generating unit or asset that have not already been included in the
estimate of future cash flows.
g) other intangible assets
Intangible assets purchased separately, such as domain names, are capitalised at cost and amortised over their useful economic life. Intangible assets acquired
through a business combination such as customer lists and intellectual property are initially measured at fair value and amortised over their useful economic life.
amortisation of intangible assets is charged to the income statement on a straight-line basis over the estimated useful lives of each intangible asset. Intangible assets
are amortised from the date they are available for use.
t he estimated useful lives are as follows:
domain names – 20 years
technology-based assets – 5 to 7 years
customer lists – 5 to 10 years
h) Property, plant and equipment
property, plant and equipment are stated at cost less accumulated depreciation. t he cost of an item of property, plant and equipment comprises its purchase price
and any costs directly attributable to bringing the asset into use. Depreciation is calculated to write down the cost of all property, plant and equipment to their estimated
residual value over their expected useful economic life as follows:
computer equipment – 2 to 4 years
fixtures, fittings and equipment – 3 years
leasehold improvements – over the period of the lease
t he assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date. t he gain or loss arising on the disposal
or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.
i) t axation
t he tax expense represents the aggregate of the tax currently payable and movement in deferred tax. t he tax currently payable is based on taxable profit for the period.
t he Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements
and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax assets are
generally recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. t he carrying
amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled
or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which
case the deferred tax is also charged or credited directly to equity.
under the requirements of IaS 12.62(a) deferred tax credits in relation to share-based payments have been recognised directly in the Consolidated Statement
of Changes in equity rather than in the Consolidated Statement of Comprehensive Income and comparative amounts have been restated accordingly.
However, deferred tax is not provided for temporary differences that arise from initial recognition of an asset or liability in a transaction other than a business
combination that at the time of the transaction affects neither accounting nor taxable profits or loss; and on the initial recognition of goodwill.
j) Financial instruments
Financial assets and liabilities are recognised on the Group’s Consolidated Statement of Financial position when the Group becomes a party to the contractual terms
of the financial instrument. 21 group NBT pLC annual report 2011
1 Accounting policies continued
general information continued
j) Financial instruments continued
Financial assets – loans and receivables
cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and short-term deposits with an original maturity period of less than three-months.
t rade and other receivables
t rade receivables do not carry any interest and are stated at their fair value on initial recognition, and then subsequently at amortised cost as reduced by
appropriate allowances for estimated irrecoverable amounts. Impairment provisions are recognised when there is objective evidence that the Group will
be unable to collect all of the amounts due under the terms receivable.
Financial liabilities – held at amortised cost
t rade payables
t rade payables are not interest bearing and are stated at their fair value on initial recognition, and then subsequently at amortised cost.
Loans and borrowings
Bank borrowings represent interest bearing loans which are recorded at fair value on initial recognition, being proceeds received net of direct issue costs.
Finance charges are accounted for on an accruals basis and are recognised in the income statement over the term of the borrowing using the effective
interest rate method.
capital
Financial instruments issued by the Group are treated as equity if the holders have only a residual interest in the assets of the Group after the deduction of all
liabilities. t he Group’s ordinary shares are classified as equity instruments. For the purposes of the disclosures given in note 20 the Group considers its capital
to comprise its ordinary share capital, share premium and accumulated retained earnings.
k) Foreign currencies
t ransactions in foreign currencies are translated into the functional currency, Sterling, at the rate ruling on the date of the transaction. exchange differences arising
from the movement in rates between the date of transaction and the date of settlement are taken to the income statement as they arise.
assets and liabilities (including goodwill and intangible assets which are allocated to overseas income-generating units) of overseas subsidiaries are translated into
Sterling at the rate ruling on the balance sheet date. t he results of these subsidiaries are translated at an average rate of exchange for the year.
exchange gains or losses arising on the translation of the opening net assets of an overseas subsidiary, together with exchange differences arising on the use
of the average rate of exchange, are taken directly to shareholders’ equity and recognised in the cumulative translation reserve. on disposal of a foreign subsidiary,
the cumulative translation differences are recycled to the income statement and recognised as part of the gain or loss on disposal.
t he main foreign currency exchange rates used in the financial statements to consolidate the overseas subsidiaries are as follows:
Closing rate a verage rate
2011 2010 2011 2010
uS Dollar 1.60 1.51 1.59 1.58
euro 1.11 1.23 1.17 1.14
Danish Krone 8.31 9.20 8.71 8.47
l) Leases
assets held under finance leases and hire purchase contracts are capitalised at their fair value on the inception of the leases and depreciated over the shorter of the
period of the lease and the estimated useful economic life of the assets. t he finance charges are allocated over the period of the lease in proportion to the capital
amount outstanding and are charged to the income statement. operating lease rentals are charged to the income statement in equal amounts over the lease term.
m) Retirement benefit costs
t he Company makes contributions to a defined contribution plan for Directors and employees. t he amount charged to the income statement in respect of pension
costs is the contributions payable in the year.
n) Share-based payments
t he Group operates an equity-settled, share-based compensation plan together with a long t erm Incentive plan (ltIp). t he fair value of the services received
is determined by the fair value of the options and shares granted, which in turn is recognised as an employee expense with a corresponding increase in equity . t he fair
value of options and shares is measured at the grant date using the Black-Scholes valuation model taking into account the terms and conditions of grant and the
resulting fair value spread over the vesting period. non-market vesting conditions are taken into account by adjusting the number of equity instruments expected
to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options and shares that
eventually vest.
o) dividends
equity dividends are recognised when they become legally payable. Interim dividends are recognised when paid. Final dividends are recognised when approved
by the Company’s shareholders at annual General Meetings. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 22
1 Accounting policies continued
general information continued
p) Segment reporting
a business segment is a group of assets and operations whose operating results are regularly reviewed by the Group’s Board and for which discrete financial
information is available. a geographical business segment is engaged in providing services within a particular economic environment that is subject to risks
and returns that are different from those of segments operating in other economic environments.
q) Provisions
provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to settle that obligation.
provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date and are discounted to present
value where the effect is material.
r) Research and development
an internally generated intangible asset arising from the Group’s development is recognised only if all the following conditions are met:
an asset is created that can be identified;
it is probable that the asset created will generate future economic benefits; and
the development cost of the asset can be measured reliably.
Internally generated intangible assets are amortised on a straight-line basis over their useful lives. t he amortisation charge is within operating expenses
in the Consolidated Income Statement.
Where no internally generated asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.
s) Holiday pay accrual
employee benefit accruals are made in respect of holiday entitlements that have accrued to employees but have not been taken at the balance sheet date.
t) Adoption of new and revised iFRSs
during the year the Group has adopted the following new standards:
revised IFrS 3 Business Combinations (effective for accounting periods beginning on or after 1 July 2009). t his revision was endorsed by the european union (eu)
on 15 June 2009. t his revision requires prospective application and may result in acquisition costs being recognised immediately in the Consolidated Income
Statement, intangible assets being recognised even when they cannot be reliably measured and the option to gross up the balance sheet for goodwill attributable
to minority interests.
amendment to IaS 27 Consolidated and Separate Financial Statements (effective for periods beginning on or after 1 July 2009). t his amendment was endorsed by
the eu on 15 June 2009. t his amendment requires prospective application and could result in a change in differences where acquisitions or disposals of subsidiaries
are made in stages. t his could be applicable if the Company made piecemeal acquisitions or disposals in the future, which is not currently anticipated.
none of the other new standards, interpretations and amendments, also effective for the first time from 1 July 2010, have had a material effect on the financial statements.
Standards, amendments and interpretations to published standards not yet effective
Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods
beginning after 1 July 2011 and which the Group has decided not to adopt early.
IFrS 9 Financial Instruments was issued in november 2009. t his standard is the first step in the process to replace IaS 39 Financial Instruments: recognition
and measurement. IFrS 9 introduces new requirements for classifying and measuring financial assets and is likely to affect the Group’s accounting for its
financial assets. t he standard is not applicable until 1 January 2013 but is available for early adoption. However, the standard has not yet been endorsed by
the eu. t he Group is yet to assess IFrS 9’s full impact.
IaS 24 (revised) related p arty Disclosures, issued in november 2009. It supersedes IaS 24 related p arty Disclosures, issued in 2003. IaS 24 (revised)
is mandatory for periods beginning on or after 1 January 2011. earlier application, in whole or in part, is permitted. t he revised standard clarifies and simplifies
the definition of a related party and removes the requirement for government-related entities to disclose details of all transactions with the government and
other government-related entities. t he Group will apply the revised standard from 1 January 2011. When the revised standard is applied, the Group and the
parent will need to disclose any transactions between its subsidiaries and its associates. t he Group will review its list of related parties and the transactions
between them in 2011. It is, therefore, not possible at this stage to disclose the impact, if any, of the revised standard on the related party disclosures.
new standards and amendments below are generally applicable for annual periods beginning after 1 July 2011. t he impact of these standards and amendments
on the Group and the parent company’s financial reporting in the future will be assessed closer to the date of their respective effective dates unless otherwise stated.
presentation of financial statements (amendment to IaS 1). t his amendment clarifies that an entity will present an analysis of other comprehensive income for
each component of equity either in statement of changes in equity or in the notes to the financial statements. t his amendment is to be applied retrospectively.
IFrS 10 Consolidated Financial Statements. t he IFrS supersedes IaS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special
purpose entities. t his standard contains a revised definition of control and related application guidance so that a single control model can be applied to all entities.
It also contains enhanced disclosures about consolidated and unconsolidated entities to be published in a separate comprehensive disclosure standard related
to involvement with other entities. t his standard is effective for annual periods beginning on or after 1 January 2013 with permission to early adopt but is yet
subject to be endorsed by the eu. 23 group NBT pLC annual report 2011
1 Accounting policies continued
general information continued
t) Adoption of new and revised iFRSs continued
Standards, amendments and interpretations to published standards not yet effective continued:
IFrS 12 Disclosures of Interest in other entities – t his is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities,
including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. It is effective for periods on or beginning after 1 January 2013.
early adoption is permitted. t he standard has not yet been endorsed by the eu.
IFrS 13 Fair value measurement – t he standard is effective from 1 January 2013, defines fair value and sets out in a single standard a framework for measuring
fair value and requires disclosures about fair value measurements. IFrS 13 does not determine when an asset, a liability or an entity’s own equity instrument
is measured at fair value. rather, the measurement and disclosure requirements of IFrS 13 apply when another IFrS requires or permits the item to be measured
at fair value (with limited exceptions). t he standard has not been endorsed by the eu yet. early adoption is permitted.
Financial Instruments (amendments to IFrS 7). t he amendments will allow users of financial statements to improve their understanding of transfer transactions
of financial assets (for example, securitisations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets.
t he amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period.
It is subject to eu endorsement. early adoption is permitted.
none of the other changes are considered to have a material effect on the Group’s financial statements.
2 Critical accounting estimates and judgements
In preparing the Consolidated Financial Statements, the Directors have to make judgements on how to apply the Group’s accounting policies and make estimates
about the future. t he critical judgements that have been made in arriving at the amounts recognised in the Consolidated Financial Statements and the key sources
of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying value of assets and liabilities in the next financial year are
discussed below:
Acquisitions
When acquiring a business, the Directors have to make judgements and best estimates about the fair value allocation of the purchase price and seek appropriate
competent and professional advice before making any such allocations.
Determination of fair values of intangible assets acquired in business combinations
externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives. t he amortisation
expense is included within operating expenses in the Consolidated Income Statement. Intangible assets are recognised on business combinations if they are separable
from the acquired entity or give rise to other contractual/legal rights. t he amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques.
Deferred tax on business combinations
t he recognition of a deferred tax asset in respect of trading losses is based on the assessment of future profits around which there is always a degree of uncertainty .
Impairment reviews
t he Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated above. t he recoverable amounts
of cash-generating units have been determined based on value-in-use calculations. t hese calculations require the use of estimates (note 11). t he use of this
method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. actual outcomes
may vary.
Income taxes
t he Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes (note 8).
t here are transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. t he Group recognises liabilities
for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts
that were recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
useful lives of intangible assets and property, plant and equipment
Intangible assets are amortised and property, plant and equipment are depreciated over their useful lives. useful lives are based on the Directors’ estimates of the
period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in significant variations
in the carrying value and amounts charged to the income statement in specific periods.
Share-based payments
t he Group has four equity-settled share-based remuneration schemes for employees. employee services received, and the corresponding increase in equity,
are measured by reference to the fair value of the equity instruments at the date of grant, excluding the impact of any non-market vesting conditions. t he fair value
of shares and share options is estimated by using the Black-Scholes valuation model, on the date of grant based on certain assumptions. t hose assumptions are
described in note 21 and include, among others, the dividend growth rate, expected volatility, expected continued employment, expected life of the options and
number of options expected to vest. More details, including carrying values, are disclosed in note 21. t he charge recognised in future periods in respect of these
schemes will vary if changes are made in respect of the estimates for the rate of lapse of the options.
Deferred tax on share options
t he deferred tax asset on shares and share option charges is affected by the difference between the grant price of the shares and share options and the market
price of the Company’s shares at the accounting year end. If the market value of the shares at the date of exercise were to be lower than the market value at the
accounting year end, the amount of tax relief obtained would be less than anticipated in the deferred tax calculations. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 24
3 Segmental analysis
t he Group reports operating performance of the business by revenue from each of its following services: domain name services – management of corporate domain
name portfolios; managed hosting services – dedicated hosting solutions; reseller services – white-labelled domain name registration services for ISps and other
intermediaries; online services – domain names, shared hosting, email, and other internet-related services; and brand protection services – monitoring the Internet
for brand abuse, fraud, piracy and counterfeiting.
t he chief operating decision maker is the Chief executive officer, who reviews these Group results together with gross profit margin and other measures for decision
making purposes. on this basis it is considered that as the Group’s activities are operated largely through a common infrastructure and support functions its activities
constitute one operating segment. t he format set out below is used to report results internally.
2011 2010
£’000 £’000
reveNue BY ServICe
Corporate domain names 25,231 20,300
Managed hosting 7,031 6,397
reseller 8,963 8,468
online 6,099 7,084
Brand protection 2,135 1,672
49,459 43,921
Gross profit 36,232 32,331
underlying operating profit* 9,625 8,109
net finance (expense)/income (39) 40
underlying profit before tax** 9,586 8,149
restructuring costs (312) —
acquisition related expenses (398) —
Financial loss (314) —
amortisation (1,324) (962)
profit before taxation 7,238 7,187
* underlying operating profit is defined as operating profit excluding amortisation, restructuring costs, acquisition related expenses and an unexpected financial loss (see Cash flow section
of Chief executive’s review for details).
** underlying profit before tax is defined as profit before tax excluding amortisation, restructuring costs, acquisition related expenses and an unexpected financial loss (see Cash flow section
of Chief executive’s review for details).
t he assets and liabilities of the Group cannot be allocated to the above segments. For internal reporting purposes balance sheets are not split into segments.
other geographical information
t he Group operates in three main geographic areas: uK, other european countries and the uSa. revenue, profit before tax and non-current assets by origin
of geographical segment are as follows:
revenue profit before tax non-current assets
as restated
2011 2010 2011 2010 2011 2010
£’000 £’000 £’000 £’000 £’000 £’000
uK 23,045 22,438 5,263 4,664 10,688 11,280
other european countries 23,838 19,211 1,290 2,013 37,100 20,060
uSa 2,576 2,272 685 510 16 15
49,459 43,921 7,238 7,187 47,804 31,355
under the requirements of IFrS 8 deferred tax has been removed from the non-current assets analysis and comparative amounts have been restated accordingly. 25 group NBT pLC annual report 2011
4 operating profit
operating profit is stated after charging:
2011 2010
£’000 £’000
Share-based payments 142 98
research and development 663 713
Depreciation of owned assets 1,453 1,525
profit on disposal of fixed assets (44) —
other intangibles amortisation 1,324 962
operating lease rentals – land and buildings 1,155 957
– other 48 39
auditors’ remuneration – subsidiaries audit fee 136 137
– Company audit fee 15 15
– taxation services 54 63
– other services 7 4
Foreign exchange gains (36) (222)
Group restructuring – staff costs 7 —
– software integration 186 —
– legal and professional 53 —
– travel costs 66 —
t he Group restructuring costs have arisen as a direct result of the acquisition of Indom SaS.
5 Information regarding employees
Staff costs (including Directors’ emoluments) incurred in the year were as follows:
2011 2010
£’000 £’000
Wages and salaries 15,105 14,502
Social security costs 1,626 1,208
Share-based payments 142 98
pension costs 416 400
17,289 16,208
a verage number of employees during the year:
2011 2010
Number number
administrative 54 48
operational 280 239
334 287
Key management remuneration
Key management has been defined as the executive and the non-executive Directors of Group nBt plc.
2011 2010
£’000 £’000
Directors’ emoluments 496 526
Share-based payments 74 49
pension costs 13 13
583 588
emoluments of highest paid Director 283 284
Gain made on exercise of share options — 1,305
Directors’ emoluments are detailed, by Director, in the Directors’ remuneration report on page 9, and this information includes the payments made to the personal
pension scheme of the Directors. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 26
6 Finance income
2011 2010
£’000 £’000
Bank interest 89 69
other interest 19 12
108 81
7 Finance expense
2011 2010
£’000 £’000
Bank loan interest payable 133 37
other interest payable 14 4
147 41
8 Taxation
a) Analysis of tax expense
2011 2010
£’000 £’000
CurreNT TAx
Current year tax 2,410 1,439
adjustment in respect of prior periods (94) 78
total current tax expense 2,316 1,517
DeFerreD TAx
origination and reversal of temporary differences (242) 297
adjustment in respect of prior period losses (25) (148)
total deferred tax expense (267) 149
total tax expense (note 8b) 2,049 1,666
b) Tax expense reconciliation
t he tax assessed for the period is lower than the standard rate of corporation tax in the uK. t he differences are explained below:
2011 2010
£’000 £’000
profit before taxation 7,238 7,187
profit before taxation multiplied by standard rate of corporation tax in the uK of 27.75% (2010: 28%) 2,008 2,012
eFFeCTS oF:
expenses not deductible for tax purposes 67 (45)
unrecognised losses arising in the year 89 322
losses recognised in the year (54) (5)
overseas tax reliefs — (535)
Difference in overseas tax rates 58 (13)
adjustment to prior year tax charge (119) (70)
total tax expense (note 8a) 2,049 1,666 27 group NBT pLC annual report 2011
9 Dividends
2011 2010
£’000 £’000
Final paid of 2.8 pence (2010: 2.0 pence) per share – relating to previous year’s results 725 517
Interim paid of 1.68 pence (2010: 1.4 pence) per share 435 362
Dividends paid in the year 1,160 879
t he Board of Directors has proposed no final dividend as a result of the Cash offer (2010: 2.8 pence).
10 earnings per share
t he basic and diluted earnings per share for the year ended 30 June 2011 are based on the profit for the year attributable to ordinary shareholders of £5,189,000
(2010: £5,521,000) and on the weighted average number of shares of 25,896,000 (2010: 25,705,000).
an adjusted earnings per share has also been presented in addition to the earnings per share and is based on earnings adjusted to eliminate the effects of amortisation
expense, restructuring costs, acquisition related expenses and the unexpected financial loss, referred to in the cash flow section of the Chief executive’s review.
It has been calculated to allow shareholders to gain a clearer understanding of the trading performance of the Group.
t he basis of the calculation of the basic and diluted profit per share is set out below:
2011 2010
£’000 £’000
profit attributable to ordinary shareholders 5,189 5,521
amortisation of intangible assets (net of tax) 958 716
restructuring costs (net of tax) 213 —
acquisition related expenses (net of tax) 398 —
Financial loss (net of tax) 236 —
profit attributable to ordinary shareholders before amortisation, restructuring, acquisition related costs and financial loss 6,994 6,237
Weighted average and adjusted weighted average number of ordinary shares:
2011 2010
Number number
000s 000s
Shares used for basic earnings per share 25,896 25,705
effect of dilutive share options 766 599
Shares used for diluted earnings per share 26,662 26,304
earnings per share:
Basic Diluted
2011 2010 2011 2010
pence pence pence pence
earnings per share 20.04 21.48 19.46 20.99
amortisation of intangible assets (net of tax) 3.70 2.79 3.59 2.72
restructuring costs (net of tax) 0.82 — 0.80 —
acquisition related expenses (net of tax) 1.54 — 1.49 —
Financial loss (net of tax) 0.91 — 0.88 —
adjusted earnings per share 27.01 24.27 26.22 23.71
at 30 June 2011, there were nil (2010: 483,000) potentially dilutive share options which have not been included in the above calculation as they are not currently
dilutive and therefore do not affect the diluted earnings per share shown above. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 28
11 goodwill and intangible assets
Domain other
Goodwill names technology intangibles total
£’000 £’000 £’000 £’000 £’000
CoST
at 1 July 2010 27,523 31 1,188 3,533 32,275
acquisition of subsidiaries 9,563 — 1,366 4,012 14,941
Foreign exchange movements 2,719 — 155 600 3,474
AT 30 JuNe 2011 39,805 31 2,709 8,145 50,690
AMor TISATIoN
at 1 July 2010 — 7 653 2,473 3,133
provided in year — 1 359 964 1,324
Foreign exchange movements — — 52 260 312
AT 30 JuNe 2011 — 8 1,064 3,697 4,769
NeT BooK v ALue
AT 30 JuNe 2011 39,805 23 1,645 4,448 45,921
Cost
at 1 July 2009 28,598 31 1,215 3,678 33,522
adjustment to deferred consideration (note 18) (137) — — — (137)
Foreign exchange movements (938) — (27) (145) (1,110)
at 30 June 2010 27,523 31 1,188 3,533 32,275
amortisation
at 1 July 2009 — 5 466 1,843 2,314
provided in year — 2 211 749 962
Foreign exchange movements — — (24) (119) (143)
at 30 June 2010 — 7 653 2,473 3,133
net book value
at 30 June 2010 27,523 24 535 1,060 29,142
other intangibles include customer lists.
goodwill impairment tests
During the year, goodwill was reviewed for impairment in accordance with the Group’s accounting policy. Goodwill was allocated to individual cash-generating
units based on the Group’s operations and the carrying value of each unit is set out below:
2011 2010
£’000 £’000
uK 8,753 8,753
other european countries:
Group nBt a/S – Denmark 20,818 18,770
Indom SaS – France 10,234 —
39,805 27,523
t he recoverable amounts of the cash-generating units were determined from value-in-use calculations. t hese calculations were based on cash flow projections
from approved budgets and forecasts, past performance and Directors’ expectations of future performance of the relevant cash-generating units which cover
a five-year period. other key assumptions used in these calculations were the discount rate applied to future cash flows of 13% (2010: 13%) and a future perpetuity
rate of 3% (2010: 3%). as a result of these tests, no impairment provisions are considered necessary. 29 group NBT pLC annual report 2011
12 property, plant and equipment
Fixtures,
Computer fittings and leasehold
equipment equipment improvements total
£’000 £’000 £’000 £’000
CoST
at 1 July 2010 9,983 792 418 11,193
acquisition of subsidiaries — 299 — 299
additions 947 13 65 1,025
Disposals (485) (104) — (589)
exchange differences 48 (12) 7 43
AT 30 JuNe 2011 10,493 988 490 11,971
DepreCIATIoN
at 1 July 2010 8,009 707 264 8,980
acquisition of subsidiaries — 200 — 200
Disposals (468) (103) — (571)
provided in year 1,294 74 85 1,453
exchange differences 31 (13) 8 26
AT 30 JuNe 2011 8,866 865 357 10,088
NeT BooK v ALue
AT 30 JuNe 2011 1,627 123 133 1,883
Cost
at 1 July 2009 7,599 2,031 410 10,040
additions 1,181 20 10 1,211
re-allocation 1,255 (1,255) — —
exchange differences (52) (4) (2) (58)
at 30 June 2010 9,983 792 418 11,193
Depreciation
at 1 July 2009 6,322 970 216 7,508
provided in year 1,383 92 50 1,525
re-allocation 351 (351) — —
exchange differences (47) (4) (2) (53)
at 30 June 2010 8,009 707 264 8,980
net book value
at 30 June 2010 1,974 85 154 2,213
t he re-allocation of fixed assets in the year to 30 June 2010 was to re-align the type of fixed asset to the appropriate category. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 30
13 Investments
all subsidiaries have been included in the consolidation. Details of the principal subsidiary undertakings at 30 June 2011 are as follows:
Country of proportion
incorporation of voting
and operation equity held
netBenefit (uK) limited uK 100%
netnames limited* uK 100%
easily limited uK 100%
netnames Inc.* uSa 100%
eurl Group nBt France France 100%
Group nBt a/S Denmark 100%
ascio technologies Inc.* uSa 100%
ascio technologies GmbH* Germany 100%
Speednames aB* Sweden 100%
Speednames GmbH* Germany 100%
Speednames aS* norway 100%
Speednames GmbH* Switzerland 100%
Speednames technology Holding apS* Denmark 100%
Speednames a/S* Denmark 100%
envisional limited* uK 100%
Indom SaS* France 100%
* t hese investments are not held directly by the ultimate holding company.
all of the above companies are involved in the provision of domain name, hosting, brand protection or other internet related services.
14 Trade and other receivables
2011 2010
£’000 £’000
trade receivables 4,666 3,170
other receivables 382 299
prepayments and accrued income 2,908 2,491
7,956 5,960
all amounts shown under receivables fall due for payment within one year. t he fair values of trade and other receivables are the same as the book values as credit risk
has been addressed as part of impairment provisioning and, due to the short-term nature of the amounts receivable, they are not subject to other ongoing fluctuations
in market rates. 31 group NBT pLC annual report 2011
15 Deferred tax
Deferred tax has been calculated at 26% (2010: 28%) in respect of uK companies and at the appropriate rate for foreign subsidiary undertakings.
t he Group only recognises deferred tax assets to the extent that future taxable profits will be available to allow all or part of the asset to be recovered.
t he movement in the deferred tax account is shown below:
2011 2010
£’000 £’000
ASSeTS
at 1 July 2010 1,084 1,011
prior period adjustment 25 148
Movements taken to reserves 185 229
Foreign exchange movements 3 (7)
origination and reversal of temporary differences 115 (297)
AT 30 JuNe 2011 1,412 1,084
t his amount is represented by:
excess depreciation over capital allowances 587 478
Short-term temporary differences 194 234
Intangible assets (194) (385)
tax deductible goodwill 212 354
unrelieved trading losses 216 212
Share option relief 397 191
AT 30 JuNe 2011 1,412 1,084
Deferred tax assets and liabilities have been netted off as the Directors believe the unwinding of the deferred tax liability to be at the same time and in the same
jurisdiction as the deferred tax assets.
t he Group had potential deferred tax assets that were not recognised at 30 June 2011 as the timing of the relief could not be assessed with sufficient certainty
and a proportion of the tax losses have yet to be agreed with the appropriate revenue authority. t he unrecognised amounts shown below are the gross temporary
differences, not their value in tax terms.
2011 2010
£’000 £’000
excess depreciation over capital allowances 991 1,016
Short-term timing differences 258 337
unrelieved trading losses 10,232 9,329
11,481 10,682
Deferred tax liability
2011 2010
£’000 £’000
LIABILITIeS
at 1 July 2010 — —
arising in respect of intangible assets recognised on acquisitions (1,793) —
Foreign exchange movements (120) —
origination and reversal of temporary differences 127 —
AT 30 JuNe 2011 (1,786) — notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 32
15 Deferred tax continued
Deferred tax (credited)/charged to the Consolidated Income Statement
2011 2010
£’000 £’000
excess depreciation over capital allowances (109) (82)
Short-term temporary differences 40 103
unrelieved trading losses 37 (107)
tax deductible goodwill 125 128
Intangible assets (366) (246)
Share option relief 6 353
(267) 149
16 Trade and other payables
2011 2010
£’000 £’000
trade payables 1,348 1,384
other taxation and social security taxes 2,049 1,423
other payables 1,106 616
accruals and deferred income 11,720 8,925
16,223 12,348
Settlement of trade and other payables is in accordance with our terms of trade established with our suppliers. t he fair values of trade and other payables are the
same as the book values and, due to the short-term nature of the amounts payable, they are not subject to ongoing fluctuations in market rates.
17 Loans and borrowings
2011 2010
£’000 £’000
CurreNT : secured bank loan 2,874 983
NoN-CurreNT : secured bank loan 3,236 991
6,110 1,974
Bank loan
on 16 January 2007, a five-year term bank loan of £5,000,000 was arranged and drawn down in connection with the acquisition of Group nBt a/S. on 14 December 2010,
a three-year term bank loan of £4,500,000 was arranged and drawn down in connection with the acquisition of Indom SaS. t hese loans bear interest based on lIBor
which for the year was at an average rate of 3.27% (2010: 1.60%) and are secured by a fixed and floating charge over the Group’s assets and will be repaid by equal
amounts over the loan term. t he maturity of the bank loans are shown in note 19(iii).
In the above table, loans are stated net of unamortised issue costs of £71,800 (2010: £26,208). t he Group has charged to the Consolidated Income Statement issue
costs of £33,250 (2010: £17,000) in respect of these facilities. t hese costs are allocated to the Consolidated Income Statement over the term of the facility at a constant
rate on the carrying amount.
18 provision
t he provision relates to a deferred contingent consideration arising in connection with the acquisition of envisional Solutions limited on 10 July 2007.
2011 2010
£’000 £’000
Balance 1 July 2010 — 284
amounts paid — (147)
adjustment to deferred consideration — (137)
BALANCe AT 30 JuNe 2011 — —
of the above amount which was based on achieving revenue targets, £147,000 has been earned and was paid in March 2010. t his was determined to be the final
settlement of deferred contingent consideration in relation to the acquisition of envisional Solutions limited, therefore the remaining provision relating to the deferred
contingent consideration was released during the year to 30 June 2010. 33 group NBT pLC annual report 2011
19 Financial instruments
t his note describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them.
t here have been no substantive changes in the Group’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks
or the methods used to measure them from previous periods unless otherwise stated in this note.
t he Group’s financial instruments at 30 June 2011 comprised trade and other receivables; cash and cash equivalents; loans and borrowings; and trade
and other payables.
Fair value of financial instruments
all the Group’s financial instruments are carried at amortised cost.
t he Group believes that there is no material difference between the book and fair value of its financial instruments, in the current or prior year, due to the
instruments bearing interest at floating rates or being of short-term nature.
general objectives, policies and procedures
t he Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, whilst retaining ultimate responsibility
for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the
executive Directors and senior management.
t he overall objective of the Board is to set policies that seek to reduce risk as far as possible, without unduly affecting the Group’s competitiveness and flexibility.
i) credit risk
Credit risk refers to the possibility that a financial loss will occur as a result of a customer’s inability to meet its financial obligations.
Credit risk arises principally from the Group’s trade and other receivables. potential customers are subjected to credit verification procedures before credit terms
are granted. t he quality of existing debt which has not been provided for is considered to be collectable and procedures are in place to monitor trade receivables
on an ongoing basis to minimise exposure to bad debts. t rade receivables are only written off once all methods of collection have been exhausted.
t he maximum exposure to credit risk is the trade receivable balance at the year end. t he Group has no significant exposure to large or key customers.
loans and receivables are summarised as follows:
t rade receivables Cash and cash equivalents
2011 2010 2011 2010
£’000 £’000 £’000 £’000
up to 30 days 3,303 1,870 12,407 13,443
past due but not impaired:
30 to 90 days 1,359 1,179 — —
More than 90 days 1,019 800 — —
Gross 5,681 3,849 12,407 13,443
less: allowance for impairment (1,015) (679) — —
net 4,666 3,170 12,407 13,443
Movements on the group provision for impairment of trade receivables are as follows:
2011 2010
£’000 £’000
opening balance 679 770
acquisition of subsidiary 335 —
Increase in provisions 456 39
Written-off amounts (455) (130)
Closing balance 1,015 679
ii) Market risk
Market risk refers to fluctuations in interest rates and exchange rates.
a) interest risk
t he Group analyses the interest rate exposure on a quarterly basis and analyses the sensitivity of the net result for the year to a reasonable possible change in interest
rates of +1% and -1%. t he impact on the income and net assets of a 1% change would be up to £63,000 (2010: £112,000). t he gain or loss potential is then compared
to the limits determined by the Directors. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 34
19 Financial instruments continued
general objectives, policies and procedures continued
ii) Market risk continued
b) currency risk
t he Group has overseas subsidiaries, which operate in Continental europe and the uSa. t heir activities and net assets are denominated in the functional currencies
of the operating units. t he Group’s principal exposure to exchange rate fluctuations arises on translation of the overseas net assets and results into Sterling for accounting
purposes. In addition the Group as a whole is exposed to transactions which give rise to foreign exchange risk. t he Group reviews its exposure on an ongoing basis.
t he foreign currency monetary assets and liabilities are as follows:
other
european
Sterling uS Dollar euro currencies total
£’000 £’000 £’000 £’000 £’000
AS AT 30 JuNe 2011
t rade and other receivables 1,263 344 2,740 701 5,048
Cash and cash equivalents 5,180 699 4,018 2,510 12,407
trade and other payables (3,535) (1,775) (1,972) (2,597) (9,879)
Bank loans (5,928) — (182) — (6,110)
(3,020) (732) 4,604 614 1,466
as at 30 June 2010
t rade and other receivables 1,623 572 745 529 3,469
Cash and cash equivalents 5,940 240 1,799 5,464 13,443
trade and other payables (3,437) (1,911) (1,081) (2,052) (8,481)
Bank loans (1,974) — — — (1,974)
2,152 (1,099) 1,463 3,941 6,457
t he Group’s currency exposures are in part minimised as natural hedging occurs through costs and revenues incurred in the same currency. t he exposures
that arise give rise to net currency gains and losses which are recognised in the Consolidated Income Statement. Such exposures reflect the monetary assets
and liabilities of the Group that are not denominated in the operating or functional currency of the operating unit involved. at 30 June 2011 and 30 June 2010,
these exposures are immaterial to the Group.
If exchange rates had moved by +10% or -10% over and above the rates at the year end, the change in monetary assets and liabilities would be £449,000 (2010: £430,000).
iii) Liquidity risk
liquidity risk is the risk that the Group is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when
they are withdrawn.
t he Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably, by the
use of medium-term and long-term facilities. at the balance sheet date all borrowing facilities were held with the Bank of Scotland. t he Group believes that there
is a low likelihood on there being an immediate call on its liabilities.
t he table below analyses the Group’s financial liabilities by remaining contractual maturities, at the balance sheet date, and financial assets which mitigate liquidity risk.
t he amounts disclosed in the table are the contractual undiscounted cash flows.
up to 3 3 to 12 1 to 5
months months years total
£’000 £’000 £’000 £’000
AT 30 JuNe 2011
trade and other receivables 4,903 114 31 5,048
Cash and cash equivalents 12,407 — — 12,407
trade and other payables (5,382) (3,957) (540) (9,879)
Bank loans (1,419) (1,455) (3,236) (6,110)
loan interest (12) (137) (48) (197)
10,497 (5,435) (3,793) 1,269
at 30 June 2010
trade and other receivables 3,428 41 — 3,469
Cash and cash equivalents 13,443 — — 13,443
trade and other payables (4,861) (3,037) (583) (8,481)
Bank loans (492) (491) (991) (1,974)
loan interest (1) (19) (5) (25)
11,517 (3,506) (1,579) 6,432 35 group NBT pLC annual report 2011
19 Financial instruments continued
general objectives, policies and procedures continued
iv) capital
as described in note 1j, the Group considers capital to comprise its ordinary share capital, share premium and accumulated retained earnings. In managing its capital,
the Group’s primary objective is to ensure its continued ability to provide a consistent return for its equity shareholders through a combination of capital growth and
distributions. t he Group considers the appropriate type of funding according to its requirements.
20 Called up share capital
2011 2010 2011 2010
Number number £’000 £’000
AuThorISeD orDINAr Y ShAreS oF 1 peNCe eACh
at 1 July 2010 and 30 June 2011 40,000,000 40,000,000 400 400
ALLoTTeD, CALLeD up AND FuLLY p AID orDINAr Y ShAreS oF 1 peNCe eACh
at 1 July 2010 25,881,360 25,350,860 259 254
Share options exercised 102,000 530,500 1 5
at 30 June 2011 25,983,360 25,881,360 260 259
During the year, 102,000 shares (2010: 530,500) were issued following the exercise of share options at exercise prices ranging from £0.01 to £2.29 (2010: £0.01
to £2.75), for a total consideration of £232,300 (2010: £293,065). all shares issued during the year have the same rights, preferences and restrictions as those
relating to the ordinary shares still in issue.
reserves
t he following describes the nature and purpose of each reserve within capital and reserves:
reserve Description and purpose
Share capital amount subscribed for share capital at nominal value
Share premium amount subscribed for share capital in excess of nominal value
Merger reserve t he premium on shares issued where the Company has taken advantage of the merger relief provisions
on the acquisition of subsidiaries
other reserve amounts arising from share-based payments charge on employee share options and in respect
of options issued in connection with acquisitions
Currency translation Gains and losses arising on retranslating the net assets of overseas operations into Sterling
retained profit Cumulative net gains and losses recognised in the Consolidated Income Statement
21 Share-based payments
t he Group has a number of employee schemes as shown below. as at the date of transition to IFrS all options granted after 7 november 2002 had vested
and therefore were not required to be accounted for in accordance with IFrS 2 Share-based payments.
t he Group operates an enterprise Management Incentive plan (eMI), an Inland revenue approved Scheme, an unapproved Scheme and a long t erm Incentive plan (ltIp).
t he eMI plan is a HM revenue & Customs approved discretionary director and employee share option scheme. all options under this scheme have vested
and no grants have been made since March 2007.
t he unapproved Scheme exists for grants to Directors and key management where the value of the options granted is in excess of the eMI scheme limits or where
options cannot be granted under the eMI scheme. t here are no performance conditions attached to the grant of options save for the vesting periods.
t he Group has no options outstanding under an HM revenue & Customs approved Scheme. no grants have been made under this scheme since September 2000.
t he details of outstanding share options over ordinary shares of the parent company are set out below. all option agreements are for a ten-year period. all of the
options listed below had vested and were exercisable by 30 June 2011.
t he ltIp has been issued to certain Directors and senior employees. t he ltIp awards of ordinary shares of 1 pence each have a vesting period of three years from
grant and will be released to the participants at the end of the vesting period for nil consideration, subject to their continued employment and to the achievement
of performance targets related to growth in the Group’s earnings per share. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 36
21 Share-based payments continued
enterprise Management Incentive plan
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
22 august 2003 0.01 2,500 — 2,500 — — —
7 april 2004 0.01 6,500 — 2,500 — 4,000 4,000
10 april 2006 1.30 38,610 — — — 38,610 38,610
26 March 2007 3.14 62,000 — — 18,000 44,000 44,000
109,610 — 5,000 18,000 86,610 86,610
Weighted average exercise price (£)
2011: 2.23 — 0.01 3.14 2.17 2.17
2010: 0.63 — 0.25 — 2.23 2.23
t he weighted average share price at the date of exercise for the options exercised was £3.99 (2010: £3.14). t he total charge for the year relating to the scheme was
nil (2010: nil).
unapproved Scheme
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
30 June 2003 0.25 105,000 — — — 105,000 105,000
10 april 2006 1.30 100,000 — — — 100,000 100,000
26 March 2007 3.14 218,000 — — 52,000 166,000 166,000
18 July 2007 3.03 200,000 — — 50,000 150,000 150,000
22 July 2008 2.29 275,000 — 75,000 — 200,000 200,000
898,000 — 75,000 102,000 721,000 721,000
Weighted average exercise price (£)
2011: 2.31 — 2.29 3.08 2.20 2.20
2010: 2.31 — 2.29 — 2.31 2.31
t he weighted average share price at the date of exercise for the options exercised was £4.10 (2010: £2.94). t he total charge for the year relating to the scheme was
nil (2010: nil).
Approved Scheme
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
18 September 2000 4.55 2,708 — — 2,708 — —
Long Term Incentive plan
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
6 november 2009 — 150,775 — — 3,368 147,407 —
t he total charge for the year relating to the plan was £142,000 (2010: £98,000). 37 group NBT pLC annual report 2011
21 Share-based payments continued
Long Term Incentive plan continued
t he fair value of the options granted under the unapproved scheme during the current and prior year was calculated using the Black-Scholes model as follows:
options issued in year
2011 2010
Share price — —
expected life (years) — —
Strike price — —
Volatility — —
Dividend yield — —
risk free interest rate — —
Fair value of each option at measurement date — —
t he volatility assumption is based upon a statistical analysis of daily share prices over a period of between two and three years. t he expected life of options is based
on historical data and is not necessarily indicative of exercise patterns that may occur.
Directors’ share options are set out in the Directors’ remuneration report and total 612,610 (2010: 612,610).
t he fair value of the ltIp s awarded during the current year was calculated using the Black-Scholes model as follows:
ltIp s awarded in year
2011 2010
Share price — £3.04
expected life (years) — 3.00
Strike price — £0.00
Volatility — n/a
Dividend yield — 1.2%
risk free interest rate — n/a
Fair value of each option at measurement date — £2.93
Directors’ shares are set out in the Directors’ remuneration report and total 75,914 (2010: 75,914).
other share-based payments
t he Group committed to grant 1,000,000 options at an exercise price of £2.75 per share, vesting immediately and exercisable over a five-year term, on 16 January 2007
as part of the consideration in connection with the acquisition of Group nBt a/S. t he total fair value of these options, £423,000, was calculated using the Black-Scholes
model and was included as part of the cost of investment. at 30 June 2011, 882,000 (2010: 918,000) options were in existence. During the year 22,000 (2010: 24,000)
options were exercised at £2.75 (2010: £2.75) with a total consideration of £60,500 (2010: £66,000). a further 14,000 (2010: 2,000) options lapsed during the year.
22 operating lease commitments
at 30 June 2011 the Group had the following operating lease commitments:
2011 2010
£’000 £’000
LAND AND BuILDINgS
In one year or less 1,377 985
Between one and five years 3,298 1,654
4,675 2,639
oTher
In one year or less 31 24
Between one and five years 15 11
46 35 notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 38
23 Contingent liabilities
at 30 June 2011, the Group had contingent liabilities in respect of the following:
standby letters of credit and credit guarantees to domain name registries of £9,000 (2010: £46,000); and
bank guarantee covering deductions of tax for employees in norway of £29,000 (2010: £26,000).
24 Cash and cash equivalents
Cash Cash on
available treasury
on demand deposit total
£’000 £’000 £’000
at 1 July 2010 13,242 201 13,443
Cash flow (4,934) 3,898 (1,036)
AT 30 JuNe 2011 8,308 4,099 12,407
Cash on treasury deposit is held for periods up to six weeks.
25 related parties
all transactions with subsidiary undertakings have been eliminated on consolidation. t here are no transactions with external related parties. Key management personnel
remuneration is disclosed in note 5.
26 Acquisition during the period
on 14 December 2010 the Group acquired 100% of the voting share capital Indom SaS (formerly Indom Sa) for a cash consideration of £14,170,000 (¬16,882,000).
Indom SaS had £2,183,000 (¬2,600,000) of net cash balances at acquisition. t he consideration paid is subject to agreement on the working capital position prior to the
acquisition and could result in a reduction of the cash consideration paid of up to £630,000 (¬700,000). as these discussions are ongoing no adjustment has been
made to the fair value of the consideration paid.
Indom is based in paris and is a provider of domain name management services in France. It provides services similar to Group nBt’s netnames p latinum Service and
has a customer list comprising many of France’s largest companies including half of the CaC 40. Indom was formed in 1999 and works exclusively in the French market.
Indom provides scale in an important part of the european market and helps cement our position in this market.
t he details of the fair value of the assets and liabilities acquired, purchase consideration and the goodwill arising at the date of acquisition, all of which were translated
to Sterling from euro at an exchange rate of £1/¬1.1914, are set out below:
Book value of Fair value
assets acquired adjustments Fair value
£’000 £’000 £’000
Intangible fixed assets 972 4,406 5,378
tangible fixed assets 99 — 99
Current assets 1,710 — 1,710
Cash at bank 2,183 — 2,183
Current liabilities (2,857) — (2,857)
long-term liabilities (113) — (113)
Deferred tax — (1,793) (1,793)
1,994 2,613 4,607
Goodwill 9,563
CoNSIDerATIoN 14,170
Satisfied by: cash consideration 14,170
effects on Group cash flow:
Cash consideration 14,170
Cash balances on acquisition (2,183)
NeT CASh ouTFLoW 11,987
t he fair value adjustment is in respect of intangible assets acquired and resulted in the following assets being recognised: customer lists valued at £3,977,000,
technology valued at £1,366,000 and non-compete agreements valued at £35,000.
Goodwill represents the Indom SaS’ position in the French corporate domain name market and the expected revenue and costs synergies arising from combining
the French business within the enlarged Group. t he goodwill recognised is not deductible for tax purposes.
Current assets at acquisition included trade receivables with a book and fair value of £1,572,000 representing contractual receivables of £1,907,000. Whilst every
effort will be made to collect all contractual receivables, it is estimated that based on current information £335,000 is unlikely to be recovered.
t ransaction costs of £398,000 were incurred, comprising mainly of professional fees, which have been charged to the Consolidated Income Statement within
operating expenses. 39 group NBT pLC annual report 2011
26 Acquisition during the period continued
t he results of Indom SaS for the post acquisition period to 30 June 2011 together with the last full year’s unaudited results are set out below:
15 Dec
2010 unaudited
to Year ended
30 June 31 Dec
2011 2010
£’000 £’000
revenue 3,764 6,589
Gross profit 3,059 5,289
underlying*** operating profit 688 1,023
net finance income 23 38
underlying*** profit before tax 711 1,061
restructuring costs (186) —
employment termination settlement — (302)
Doubtful debt provision — (344)
Deferred income adjustment relating to prior years (net of tax) — (684)
profit/(loss) before tax and amortisation per local Gaap statutory accounts 525 (269)
*** t he underlying profit measures exclude:
amortisation of capitalised software in the local entity’s financial statements;
restructuring costs relating to It expenditure in connection with systems integration and the cost of abandoning existing projects;
employment termination costs;
one-off increase in provisions for doubtful debts; and
one-off change from correction in revenue recognition accounting policy.
Had Indom SaS’ results been included in the Group results from July 2010, Group revenue would have increased by approximately £2,872,000 and Group
underlying*** profit before tax by £483,000.
27 post balance sheet events
on 23 September 2011 a recommended Cash offer was made for the entire existing issued and to be issued ordinary share capital of Group nBt plc at a price
of 550 pence per share. t he offer was made by newton Bidco limited, an investment vehicle owned indirectly by certain funds managed by HgCapital llp , and
is to be to be effected by means of a Scheme of arrangement under p art 26 of the Companies act 2006. t he Cash offer will be put to Group nBt plc’s shareholders
at the forthcoming court and general meetings. group NBT pLC annual report 2011 40
company balance sheet
aS a t 30 June 2011
2011 2010
notes £’000 £’000
FIxeD ASSeTS
tangible assets 6 724 1,072
Investments 7 35,165 26,779
35,889 27,851
CurreNT ASSeTS
Debtors 8 13,524 2,184
Cash at bank and in hand 5,561 6,568
19,085 8,752
CreDITorS: AMouNTS FALLINg Due WIThIN oNe YeAr 10 (23,375) (13,070)
NeT CurreNT LIABILITIeS (4,290) (4,318)
ToTAL ASSeTS LeSS CurreNT LIABILITIeS 31,599 23,533
CreDITorS: AMouNTS FALLINg Due AFTer More ThAN oNe YeAr 11 (3,175) (991)
NeT ASSeTS 28,424 22,542
CApITAL AND reServeS
Called up share capital 13 260 259
Share premium account 15 4,055 3,824
Merger reserve 15 12,098 12,098
other reserve 15 1,266 1,124
profit and loss account 15 10,745 5,237
ShArehoLDerS’ FuNDS 16 28,424 22,542
t hese financial statements were approved by the Board of Directors and authorised for issue on 25 october 2011.
Signed on behalf of the Board of Directors
geoff Wicks
Chief executive officer
t he notes on pages 41 to 48 form part of these Financial Statements. 41 group NBT pLC annual report 2011
1 Accounting policies
Basis of preparation
t hese Financial Statements present financial information for Group nBt plc as a separate entity, and have been prepared in accordance with the historical cost
convention, the Companies act 2006 and united Kingdom accounting Standards (uK Generally accepted accounting p ractice). t he Company’s Consolidated
Financial Statements, prepared in accordance with IFrSs as adopted by the european union, are separately presented. t he principal accounting policies adopted
in these Company Financial Statements are set out below and, unless otherwise indicated, have been consistently applied for all periods presented.
In accordance with FrS 18 accounting p olicies, the Directors have reviewed the accounting policies of the Company as set out below and consider them to be appropriate.
t he principal accounting policies are:
Share-based payments
When shares and share options are granted to employees a charge is made to the profit and loss account and a reserve created in capital and reserves to record the
fair value of the awards at the date of grant in accordance with FrS 20 Share-Based p ayment. t his charge is spread over the vesting period. When shares and share
options are granted to employees of subsidiary companies, the fair value of the awards is treated as a capital contribution, increasing the cost of the investment and
spread over the period of performance relating to the grant. t he corresponding entry is made in reserves.
revenue
revenue is the total amount receivable by the Company for management and other services provided to other Group companies, excluding V at , and is recognised
on performance of these services.
Tangible fixed assets
Depreciation is provided on tangible fixed assets at the rates calculated to write off the cost of each asset evenly over its expected useful life as follows:
computer equipment – 2 to 4 years
fixtures, fittings and equipment – 3 years
leasehold improvements – over the period of the lease
Investments
Investments held as fixed assets are stated at cost less any provision for impairment in value. Where applicable, the Company takes advantage of merger relief,
recording the investment in the Company’s balance sheet at the fair value of the shares issued, with any premium included within the merger reserve.
Impairment of fixed assets
t he need for any fixed asset impairment write-down is assessed by comparison of the carrying value of the asset against the higher of its net realisable value
and value-in-use.
pension costs
Contributions to the Company personal pension scheme are charged to the profit and loss account in the period in which they become payable. t he Company
does not operate any defined benefit pension plans.
Dividend income
Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.
Deferred taxation
Deferred tax is recognised in respect of all timing differences that have originated but not reversed by the balance sheet date except the recognition of deferred tax is
limited to the extent that the Company anticipates to make sufficient taxable profits in the future to absorb the reversal of underlying timing differences. Deferred tax
liabilities and assets are not discounted.
equity dividends
Final dividends are recognised in the Company’s financial statements in the period in which the dividends are approved by shareholders. Interim equity dividends
are recognised in the period they are paid.
2 result for the financial year
t he Company has taken advantage of Section 408 of the Companies act 2006 and has not included its own profit and loss account in these financial statements.
t he Company profit for the year ended 30 June 2011 under uK Gaap was £6,668,000 (2010: profit £181,000).
Fees paid to BDo llp and its associates for audit and other services to the Company itself are not disclosed in the individual accounts of Group nBt plc because
the Company’s consolidated accounts are required to disclose such fees on a consolidated basis.
notes to the company financial statements For tHe Y ear enDeD 30 June 2011 notes to the company financial statements ContInueD
group NBT pLC annual report 2011 42
3 Information regarding employees
Staff costs (including Directors’ emoluments) incurred in the year were as follows:
2011 2010
£’000 £’000
Wages and salaries 7,062 6,821
Social security costs 761 753
Share-based payments 142 98
pension costs 120 113
8,085 7,785
Staff costs for the uK based employees, except those for employed by envisional limited, are shown above. appropriate recharges are made to the uK subsidiary
undertakings to reflect staff costs incurred by those undertakings.
4 Directors
t he remuneration of Directors is set out below:
2011 2010
£’000 £’000
Directors’ emoluments 496 526
Share-based payments 74 49
pension costs 13 13
583 588
emoluments of highest paid Director 283 284
Gain made on exercise of share options — 1,305
Directors’ emoluments are detailed, by Director, in the Directors’ remuneration report on page 9 and this information includes the payments made to the personal
pension scheme of the Directors.
5 Dividends
2011 2010
£’000 £’000
Final paid of 2.8 pence (2010: 2.0 pence) per share – relating to previous year’s results 725 517
Interim paid of 1.68 pence (2010: 1.4 pence) per share 435 362
Dividends paid in the year 1,160 879
t he Board of Directors has proposed no final dividend as a result of the Cash offer (2010: 2.8 pence).
6 Tangible fixed assets
Fixtures,
fittings
Computer and leasehold
equipment equipment improvements total
£’000 £’000 £’000 £’000
CoST
at 1 July 2010 2,326 300 152 2,778
additions 144 2 65 211
AT 30 JuNe 2011 2,470 302 217 2,989
DepreCIATIoN
at 1 July 2010 1,341 275 90 1,706
provided during year 473 20 66 559
AT 30 JuNe 2011 1,814 295 156 2,265
NeT BooK v ALue
AT 30 JuNe 2011 656 7 61 724
at 30 June 2010 985 25 62 1,072 43 group NBT pLC annual report 2011
7 Investments
Shares in
subsidiary
undertakings
£’000
CoST
at 1 July 2010 47,323
acquisition of subsidiary 8,386
AT 30 JuNe 2011 55,709
provISIoN
AT 1 JuLY 2010 AND 30 JuNe 2011 20,544
NeT BooK v ALue
AT 30 JuNe 2011 35,165
at 30 June 2010 26,779
Details of the principal subsidiary undertakings at 30 June 2011 are as follows:
Country of proportion
incorporation of voting
and operation equity held
netBenefit (uK) limited uK 100%
netnames limited* uK 100%
easily limited uK 100%
netnames Inc.* uSa 100%
eurl Group nBt France France 100%
Group nBt a/S Denmark 100%
ascio technologies Inc.* uSa 100%
ascio technologies GmbH* Germany 100%
Speednames aB* Sweden 100%
Speednames GmbH* Germany 100%
Speednames aS* norway 100%
Speednames GmbH* Switzerland 100%
Speednames technology Holding apS* Denmark 100%
Speednames a/S* Denmark 100%
envisional limited* uK 100%
Indom SaS* France 100%
* t hese investments are not held directly by the ultimate holding company.
all of the above companies are involved in the provision of domain name, hosting, brand protection or other internet related services.
8 Debtors: amounts falling due within one year
2011 2010
£’000 £’000
amounts owed by Group undertakings 12,827 1,418
Deferred tax asset (note 9) 101 63
other receivables 316 409
prepayments and accrued income 280 294
13,524 2,184
t he carrying amount of trade and other receivables approximates to their fair value. all amounts shown under receivables fall due for payment within one year. notes to the company financial statements ContInueD
group NBT pLC annual report 2011 44
9 Deferred tax asset
t he Company has recognised deferred tax assets to the extent that they are expected to be relieved by future taxable profits. t he assessment of the recognised
deferred tax assets has been made with reference to all available evidence including budgets and forecasts. t he recognised deferred tax assets are as follows:
2011 2010
£’000 £’000
at 1 July 2010 63 52
prior period adjustment 27 18
Charge/(credit) to profit and loss account 11 (7)
AT 30 JuNe 2011 101 63
t his amount is represented by:
excess depreciation over capital allowances 98 55
Short-term timing differences 3 8
AT 30 JuNe 2011 101 63
t he Company had potential deferred tax assets of £228,000 (2010: £206,000) that were not recognised at 30 June 2011 as the timing of the relief could not be
assessed with sufficient certainty and a proportion of the tax losses has yet to be agreed with the uK revenue authority:
2011 2010
£’000 £’000
Short-term timing differences 219 197
unrelieved trading losses 8 9
227 206
10 Creditors: amounts falling due within one year
2011 2010
£’000 £’000
Bank loan 2,753 983
trade payables 169 328
amounts owed to Group undertakings 18,611 10,435
other taxation and social security 369 300
other creditors 300 255
accruals and deferred income 1,173 769
23,375 13,070
t he carrying amount of trade and other payables approximates to their fair value. Settlement of trade and other payables is in accordance with our terms of trade
established with our suppliers.
11 Creditors: amounts falling due after more than a year
2011 2010
£’000 £’000
Bank loan 3,175 991
on 16 January 2007, a five-year term bank loan of £5,000,000 was arranged for the acquisition of Group nBt a/S. t he loan is secured by a fixed and floating charge
over the Group’s assets and will be repaid by equal amounts over the loan term.
on 14 December 2010, a three-year term bank loan of £4,500,000 was arranged for the acquisition of Indom SaS. t he loan is secured by a fixed and floating charge
over the Group’s assets and will be repaid by equal amounts over the loan term. 45 group NBT pLC annual report 2011
12 provisions
Deferred contingent consideration:
2011 2010
£’000 £’000
at 1 July 2010 — 284
amounts paid on acquisition of subsidiary — (147)
adjustment to deferred consideration — (137)
AT 30 JuNe 2011 — —
of the above amount which was based on achieving revenue targets, £147,000 has been earned and was paid in March 2010. t his was determined to be the final
settlement of deferred contingent consideration in relation to the acquisition of envisional Solutions limited, therefore the remaining provision relating to the deferred
contingent consideration was released during the year to 30 June 2010.
13 Called up share capital
2011 2010 2011 2010
Number number £’000 £’000
ALLoTTeD, CALLeD up AND FuLLY p AID orDINAr Y ShAreS oF 1 peNCe eACh
at 1 July 2010 25,881,360 25,350,860 259 254
Share options exercised 102,000 530,500 1 5
AT 30 JuNe 2011 25,983,360 25,881,360 260 259
During the year, 102,000 shares (2010: 530,500) were issued following the exercise of share options at exercise prices ranging from £0.01 to £2.29 (2010: £0.01
to £2.75), for a total consideration of £232,300 (2010: £293,065).
14 Share-based payments
t he Company has a number of employee schemes as shown below and options were granted both before and after 7 november 2002, the applicable date from
which FrS 20 Share-based payments became effective. as at 30 June 2005 all options granted after 7 november 2002 had vested and therefore were not required
to be accounted for in accordance with FrS 20.
t he Company operates an enterprise Management Incentive plan (eMI), an Inland revenue approved Scheme, an unapproved Scheme and a long t erm
Incentive plan (ltIp).
t he eMI plan is a HM revenue & Customs approved discretionary director and employee share option scheme. all options under this scheme have vested and no
grants have been made since March 2007.
t he unapproved Scheme exists for grants to Directors and key management where the value of the options granted is in excess of the eMI scheme limits or where
options cannot be granted under the eMI scheme. t here are no performance conditions attached to the grant of options save for the vesting periods.
t he Company has no options outstanding under an HM revenue & Customs approved Scheme. no grants have been made under this scheme since September 2000.
t he details of outstanding share options over ordinary shares of the parent company are set out below. all option agreements are for a ten-year period. all of the options
listed below had vested and were exercisable by 30 June 2011.
t he ltIp has been issued to certain Directors and senior employees. t he ltIp awards of ordinary shares of 1 pence each have a vesting period of three years from
grant and will be released to the participants at the end of the vesting period for nil consideration, subject to their continued employment and to the achievement
of performance targets related to growth in the Group’s earnings per share.
enterprise Management Incentive plan
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
22 august 2003 0.01 2,500 — 2,500 — — —
7 april 2004 0.01 6,500 — 2,500 — 4,000 4,000
10 april 2006 1.30 38,610 — — — 38,610 38,610
26 March 2007 3.14 62,000 — — 18,000 44,000 44,000
109,610 — 5,000 18,000 86,610 86,610
Weighted average exercise price (£)
2011: 2.23 — 0.01 3.14 2.17 2.17
2010: 0.63 — 0.25 — 2.23 2.23
t he weighted average share price at the date of exercise for the options exercised was £3.99 (2010: £3.14). t he total charge for the year relating to the scheme
was nil (2010: nil). notes to the company financial statements ContInueD
group NBT pLC annual report 2011 46
14 Share-based payments continued
unapproved Scheme
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
30 June 2003 0.25 105,000 — — — 105,000 105,000
10 april 2006 1.30 100,000 — — — 100,000 100,000
26 March 2007 3.14 218,000 — — 52,000 166,000 166,000
18 July 2007 3.03 200,000 — — 50,000 150,000 150,000
22 July 2008 2.29 275,000 — 75,000 — 200,000 200,000
898,000 — 75,000 102,000 721,000 721,000
Weighted average exercise price (£)
2011: 2.31 — 2.29 3.08 2.20 2.20
2010: 2.31 — 2.29 — 2.31 2.31
t he weighted average share price at the date of exercise for the options exercised was £4.10 (2010: £2.94). t he total charge for the year relating to the scheme
was nil (2010: nil).
Approved Scheme
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
18 September 2000 4.55 2,708 — — 2,708 — —
Long Term Incentive plan
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
6 november 2009 — 150,775 — — 3,368 147,407 —
t he total charge for the year relating to the plan was £142,000 (2010: £98,000).
t he fair value of the options granted under the unapproved scheme during the current and prior year was calculated using the Black-Scholes model as follows:
options issued in year
2011 2010
Share price — —
expected life (years) — —
Strike price — —
Volatility — —
Dividend yield — —
risk free interest rate — —
Fair value of each option at measurement date — —
t he volatility assumption is based upon a statistical analysis of daily share prices over a period of between two and three years. t he expected life of options is based
on historical data and is not necessarily indicative of exercise patterns that may occur.
Directors’ share options are set out in the Directors’ remuneration report and total 612,610 (2010: 612,610). 47 group NBT pLC annual report 2011
14 Share-based payments continued
Long Term Incentive plan continued
t he fair value of the ltIp s awarded in the current year was calculated using the Black-Scholes model as follows:
ltIp s awarded in year
2011 2010
Share price — £3.04
expected life (years) — 3.00
Strike price — £0.00
Volatility — n/a
Dividend yield — 1.2%
risk free interest rate — n/a
Fair value of each option at measurement date — £2.93
Directors’ shares are set out in the Directors’ remuneration report and total 75,914 (2010: 75,914).
other share-based payments
t he Company committed to grant 1,000,000 options at an exercise price of £2.75 per share, vesting immediately and exercisable over a five-year term, on
16 January 2007 as part of the consideration in connection with the acquisition of Group nBt a/S. t he total fair value of these options, £423,000, was calculated
using the Black-Scholes model and was included as part of the cost of investment. at 30 June 2011, 882,000 (2010: 918,000) options were in existence. During the
year 22,000 (2010: 24,000) options were exercised at £2.75 (2010: £2.75) with a total consideration of £60,500 (2010: £66,000). a further 14,000 (2010: 2,000)
options lapsed during the year.
15 Statement of movements on reserves
Share Share Merger other p rofit and loss
capital premium reserve reserve account
£’000 £’000 £’000 £’000 £’000
at 1 July 2010 259 3,824 12,098 1,124 5,237
Issue of shares 1 231 — — —
FrS 20 Share-based payment charge — — — 142 —
Dividends — — — — (1,160)
retained profit for the financial year — — — — 6,668
AT 30 JuNe 2011 260 4,055 12,098 1,266 10,745
16 reconciliation of movements in shareholders’ funds
2011 2010
£’000 £’000
retained profit for the financial year 6,668 181
Dividends (1,160) (815)
5,508 (634)
new share capital subscribed 1 5
Share premium on issued shares 231 288
FrS 20 Share-based payment charge 142 98
net increase/(decrease) to shareholders’ funds 5,882 (243)
opening shareholders’ funds 22,542 22,785
Closing shareholders’ funds 28,424 22,542 notes to the company financial statements ContInueD
group NBT pLC annual report 2011 48
17 operating lease commitments
at 30 June 2011 the Company was committed to making the following minimum payments during the next financial year in respect of operating leases:
Land and buildings
operating leases which expire:
2011 2010
£’000 £’000
In two to five years 376 376
18 related parties
t he Company has taken advantage of FrS 8 related p arty Disclosures in not disclosing transactions with Group undertakings as 100% of its shares are controlled
within the Group which is headed by Group nBt plc. t here are no transactions with external related parties.
19 post balance sheet events
on 23 September 2011 a recommended Cash offer was made for the entire existing issued and to be issued ordinary share capital of Group nBt plc at a price
of 550 pence per share. t he offer was made by newton Bidco limited, an investment vehicle owned indirectly by certain funds managed by HgCapital llp , and is
to be to be effected by means of a Scheme of arrangement under p art 26 of the Companies act 2006. t he Cash offer will be put to Group nBt plc’s shareholders
at the forthcoming court and general meetings. officers and advisers
Directors
Richard Madden
Non-executive Chairman
Geoff Wicks
Chief Executive Officer
Raj Nagevadia
Finance Director
Keith Young
Non-executive
Claus Andersen
Non-executive
Martin Bellamy
Non-executive
Secretary
Raj Nagevadia
Registered and head office
3rd Floor
Prospero House
241 Borough High Street
London SE1 1GA
Company number
3709856
Registrars
Capita Registrars Limited
Northern House
Woodsome Park
Fenay Bridge
Huddersfield
West Yorkshire HD8 0LA
Bankers
Bank of Scotland plc
25 Gresham Street
London EC2V 7HN
Solicitors
Boodle Hatfield
89 New Bond Street
London W1S 1DA
Financial advisers
Numis Securities Limited
10 Paternoster Square
London EC4M 7LT
Stockbrokers
Numis Securities Limited
10 Paternoster Square
London EC4M 7LT
Auditors
BDO LLP
55 Baker Street
London W1U 7EU
GrouP nbt offices
United Kingdom
London
3rd Floor
Prospero House
241 Borough High Street
London SE1 1GA
Cambridge
Betjeman House
104 Hills Road
Cambridge CB2 1LQ
Sweden
Master Samuelsgatan 60
8th floor
Stockholm 111 21
USA
13th Floor
55 Broad Street
New York NY 10004–3715
France
Nice
Green Side BP 296
400 Avenue Roumanille
06906 Sophia Antipolis Cedex
Paris
124–126, rue de Provence
75008 Paris
Germany
4. OG, Nord
Landshuter Allee 12–14
80637 München
Denmark
Arne Jacobsens Allé 15
2300 Copenhagen S
Denmark
Norway
C J Hambros Plass 2c
2 estasje
0164 Oslo
Switzerland
Staffelstrasse 10
CH–8045 Zürich Group NBT plc
3rd Floor
Prospero House
241 Borough High Street
London SE1 1GA
Tel: +44 (0) 207 015 9200
Fax: +44 (0) 870 458 9506
visit us online at www.groupnbt.com | 5 group NBT pLC annual report 2011
Financial overview
revenue for the Group was £49.5 million for the year to 30 June 2011, up
13% on the previous year including the impact of the acquisition of Indom,
a French competitor, in December 2010. excluding the impact of this acquisition,
Group revenue was £45.7 million, up 4% year-on-year and up 5% on a constant
currency basis.
underlying profit before tax was £9.6 million, up 18% on the previous year and,
excluding the impact of Indom, up 9% year-on-year and up 10% on a constant
currency basis.
Cash generation was particularly good during the year and at the end of the
financial year the Group had £6.2 million net cash before unamortised facility fees.
t his compares with £11.4 million at the end of the previous year and includes
the subsequent acquisition of Indom for £12.0 million in net cash.
Corporate brand services
Group nBt , through its subsidiary netnames, provides a range of services to
manage and protect companies’ online activities. Companies are able to register
domain names in over 250 jurisdictions around the world and frequently build
significant sized portfolios of domain names which, like trademarks, often form
part of their valuable intellectual property assets. netnames manages these
portfolios for many companies to ensure that they are registered properly,
renewed in a timely manner and used appropriately.
additionally, Group nBt helps its customers to protect their brands against
online fraud, digital piracy, counterfeiting and other online infringements.
t his range of products is provided by the netnames and envisional brands.
revenue for Corporate Brand Services for the year under review was £23.6 million,
up 7% on last year , or 9% at constant currency rates and excluding domain acquisitions,
revenue was up 10% on last year, or 11% at constant currency rates. Within these
numbers, revenue for domain name management was £21.5 million and revenue
for brand protection services was £2.1 million. revenue for netnames p latinum
Service, the Group’s flagship domain name management product, grew 12%
during the year, 13% at constant currency rates.
Growth for domain name management has improved on the previous year as we
have seen better levels of new sales and lower levels of cancellations. overall growth
was held back by lower revenue from domain acquisitions, where we act for our
customers to buy names for them in the secondary market. Domain acquisitions
experienced exceptional sales in the year ending 30 June 2010 which, as we
noted in previous communications, was unlikely to be repeated in the year
under review.
envisional’s brand protection services did particularly well with revenue for the
year to 30 June 2011 up 28% on the previous year. not only have we acquired
some excellent new customers but we have also improved customer retention.
Growth is also, in part, due to an enhanced product offering, allowing customers
the ability to remove infringing websites and auctions.
Managed hosting
Managed hosting services are provided to companies in the uK and France.
revenue for the year under review was £7.0 million, up 10% on the previous year.
t echnology has played an important role in the improvement of our performance
as much of our new revenue comes from our new cloud based services. We have
also experienced an improvement in market conditions which is reflected in higher
levels of new business.
partner and reseller services
ascio is our partner and reseller brand which offers other ISp s the ability
to register a wide range of domain names using our technology and systems.
revenue for the year was £9.0 million, up 6% on last year, or 9% at constant
currency rates. Some of our larger partners have experienced lower growth
as a result of the prevailing market conditions which, in turn, affects our revenue.
We have, however, continued to add new partners at a similar rate to last year
and this will help to maintain growth rates in the future.
Group nBt is pleased to announce another year of good growth. t he Group
continued to grow revenue both organically and through acquisition and at the
same time maintained its margins, despite markets remaining difficult throughout
the year . our domain name management business was a key focus for development
and we are particularly pleased with the excellent revenue growth achieved in
our brand protection business. t here are signs of improving market conditions
especially for domain name management where the potential for new domain
name extensions is being pursued vigorously.
t he Board announced on 23 September that it had agreed terms with newton
Bidco limited, an investment vehicle owned indirectly by certain funds managed
by HgCapital llp , in respect of a recommended Cash offer for the Company at
a price of 550 pence per share, valuing the entire issued and to be issued share
capital at approximately £153 million. t he Cash offer values the Company’s shares
at an attractive premium to both the current and recent closing prices at which
the shares have been traded and exceeds the highest price at which the shares
have traded at any time in the last ten years. t he Cash offer is to be implemented
by means of a scheme of arrangement (the Scheme). Investors will be invited
to approve the Scheme at a Court Meeting and General Meeting, details of which
have been posted to shareholders.
Since commencing the strategy of developing a corporate domain name management
and hosting business nearly a decade ago, the Company has made good progress
in establishing itself as a market leader in europe. In HgCapital the Board believes
it has found a partner which will support Group nBt in achieving its commercial
and strategic objectives and will help it grow both organically by investment and
through securing acquisition opportunities that would otherwise be beyond its
current financial resources as a quoted company.
Strategy
our strategy is to build recurring revenue by delivering excellent products
with a high service content. t his strategy has served us well and will remain
in place while the markets continue to grow and companies need to outsource
the management of the services we provide. t his model has been a key part of
sustaining the steady progress we have made over a number of years. In the year
under review we achieved good growth in Continental europe and in the uS,
while maintaining steady growth in our home market.
Market conditions
Higher levels of new business, combined with lower levels of cancellations,
indicate some improvement in certain areas of our business although economic
conditions remain uncertain. as a result, customer activity has not yet reached
the levels we have seen in previous years. In the domain name management
market there has been a great deal of interest in the new domain name extensions
which were finally agreed by ICann in June. Whilst this did not have any impact
on revenue during the year it did serve to raise awareness of the need to manage
what are increasingly valuable domain name assets.
“We have experienced another
good year and although growth is not
back to levels seen before economic
conditions deteriorated we have seen
some improvement. t he acquisition
of Indom during the year supports our
position as a market leader for domain
name management services in europe
and we will continue to look for similar
acquisition possibilities.”
ChiEf ExECUtivE’s REviEw group NBT pLC annual report 2011 6
Cash flow
at 30 June 2011, the Group had net cash balances of £6.2 million (2010: £11.4 million)
before unamortised facility fees. t his comprised cash balances of £12.4 million
(2010: £13.4 million) and debt, before unamortised facility fees, of £6.2 million
(2010: £2.0 million).
Cash conversion remained strong over the year with cash generated from
operations increasing to £10.7 million including Indom, up from £9.4 million
last year. Free cash flow, comprising cash flows from operations, interest, tax
and capital expenditure, was up 9% to £7.8 million from £7.1 million last year
with tax payments increasing by 68% to £1.9 million.
net cash outflow in connection with the acquisition of Indom was £12.0 million.
While this was funded mostly through existing cash resources, a £4.5 million
three-year term loan together with a three-year revolving credit facility of
£1.5 million, currently undrawn, was secured in December 2010. t his is in
addition to the existing debt of £1.0 million which is repayable by July 2012.
In February 2011, an unexpected financial loss arose from our primary Danish
clearing bank filing for bankruptcy following which, after a distribution of 66%,
£0.3 million of our cash balances were lost. t he bank, which is now under state
ownership, has announced that the eventual distribution may increase to 84%
in total but this is subject to a legal process and therefore no further recovery
has been provided for in the financial statements. t he Group’s policy in respect
of surplus funds is to distribute them amongst various banks and this policy was
in place at the time of the bankruptcy.
Dividend
an interim dividend of 1.68 pence was paid on 15 april 2011. as a result of the
Cash offer, no final dividend is proposed.
geoff Wicks
Chief Executive
partner and reseller services continued
We continue to be focused on Continental europe where we have a resilient
customer base and we have extended this focus into eastern europe in order
to drive new business.
online services
Group nBt’s online services register and renew domain names and provide
hosting and email services through the websites of several of our brands, primarily
the easily brand in the uK and Speednames in europe. revenue for these services
for the year under review was £6.1 million, 14% down on last year, or 13% at
constant currency rates. t he previous year’s result benefited from the transfer
of some revenue within the Group which did not recur this year. However, we
expect to experience decline in this segment of the market as we continue
to concentrate on our managed services.
Indom
Indom, a market leader for the provision of domain name management services
in France, was acquired by the Group on 14 December 2010. Since the acquisition
Indom has continued to perform ahead of initial expectations. We have embarked
on restructuring and integration which will take up to two years to complete.
over time Group nBt France and Indom will be merged and the Indom business
will be transferred to the Group’s systems. t his project is progressing well and
we are already experiencing some of the benefits of the acquisition. t his acquisition
also brings significant expertise into the Group. Stéphane Van Gelder who will
manage the Group’s business in France is an expert in the domain name market
and is the chairman of a key ICann committee.
profit
t he overall gross margin of 73.3% decreased from 73.6% last year . excluding Indom,
gross margin was 72.6%, below last year’s rate, as the result of relatively small
changes to the revenue mix.
underlying operating profit at £9.6 million increased 19% year-on-year and
the margin at 19.5% was up from 18.5% last year. excluding Indom, underlying
operating profit was up 10% at £8.9 million at a margin of 19.6%. excluding both
Indom and domain acquisitions, the underlying operating profit grew strongly
at 16% year-on-year with a margin of 18.0%, up from 16.3%, as overheads
remained largely flat and revenues grew.
on a statutory basis operating profit was £7.3 million, up 2% from £7.1 million
last year, and profit before tax was £7.2 million, up 1% from last year . t he amounts
by which these statutory profit measures were adjusted to arrive at the underlying
profit measures used, comprise amortisation of intangible assets acquired through
acquisitions of £1.3 million (2010: £1.0 million) which increased as a result of the
acquisition of Indom; advisory and professional fees in respect of the acquisition
of Indom of £0.4 million (2010: nil) which were expensed instead of being capitalised
in accordance with the revised accounting standard on accounting for acquisitions;
technical and other one-off costs relating to the integration of Indom of £0.3 million
(2010: nil); and the unexpected financial loss arising from our Danish bank as
described below of £0.3 million (2010: nil).
Basic epS was 20.04 pence, down 7% from 21.48 pence last year, and diluted
epS was 19.46 pence, down 7% from 20.99 pence last year . Both these measures
were impacted by the adjusting items mentioned above, namely amortisation,
restructuring costs, acquisition related expenses and the financial loss, which
in total amounted to £2.3 million compared to £1.0 million last year.
Taxation
a tax charge of £2.0 million (2010: £1.7 million) arose in the year representing
an effective tax rate of 28.3% (2010: 23.2%).
t he effective tax rate on underlying profit before tax (excluding amortisation,
restructuring costs, acquisition related expenses and the financial loss together
with associated tax credits) was 27.0% (2010: 23.5%). t here were numerous
factors that drove up the effective rate of tax from last year including the addition
of Indom. t he main factors were non-uK regions where the effective tax rates
moved towards higher statutory rates as anticipated; and the proportion of uK
profits, taxed at a relatively higher rate, increasing within the mix.
ChiEf ExECUtivE’s REviEw continued | annual report 2011
www.groupnbt.com | group NBT pLC annual report 2011 4
ChAiRmAN’s st AtEmENt “t he Company’s strategy is to build
recurring revenue by delivering excellent
products with a high service content.
t his strategy has served the Company
well and will remain in place while the
markets continue to grow and companies
need to outsource the management
of the services we provide.”
amid the turbulence caused by an offer for the Company I thought it appropriate
to reflect on the achievements of the Company against the key tenets of our
growth strategy that I set out in my last statement.
Focus on strong value-added services for our customers and recurring
“sticky revenue” for us
our core offering with these characteristics, netnames p latinum, Brand
protection and Managed Hosting have grown revenue 13%, 28% and 10%
respectively. Sales to new customers continue to be challenging as budgets
are constrained; but once we have secured clients we have been gratified by
their propensity to increase their spend with us. our focus on these services
has once again been vindicated by the increasingly competitive environment
in online domain name sales. revenue in this segment of our business fell by
14%, a disappointing outcome. It should be noted, however, that this segment
now accounts for only 12% of our revenue.
provide our core brand management expertise in multiple geographies
and through multiple channels
Much of the growth in Brand protection has been driven through sales
to netnames customers. We are particularly excited by the early success
of the sales to uK customers and the enthusiasm with which our sales
force internationally has embraced the opportunity to provide this
additional service.
Extend our product offering through adding complementary products
We are constantly adding functionality across all of our offering. I will pick out
three examples for particular mention. We have launched platinum Manager
which represents a significant development in the flexibility we afford to our
customers in the management of their domain name portfolios. at envisional,
we have added technology to enable Brand protection customers to identify
pirate websites and to issue “take down” orders. and finally the launch of our
“cloud” initiative has been a driver of sales in our hosting business.
Deploy our capital to extend both geographical and product expertise
t he acquisition of Indom in France was clearly the major event of the year
in this area. t he business has performed better than we had anticipated and
the paris based team is making a very positive contribution to the Group as
a whole. Furthermore we have been penetrating a number of new territories
in Central and eastern europe with our reseller products.
Improve our operations and technology to increase efficiency
and serve our customers better
We have invested in the integration of our systems infrastructure to deliver
a single, robust and scalable platform for the whole Group. t his is a work
of constant improvement but we have achieved significant milestones during
the year and we are now managing all new domain name management
customers from our new platform. t he acquisition of Indom adds a further
integration project but the system developments and our expertise in such
projects leaves us confident that we will deliver a strong result.
once again I am pleased to report a year of progress in challenging markets –
a year in which our underlying earnings (excluding domain acquisitions) grew
by 15% and our share price by 51% in the year to June 2011.
richard Madden
Chairman | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input annual report 2011
www.groupnbt.com about
Group NBT is a leading provider of domain names, hosting and brand
protection services.
It provides the essential building blocks to create, maintain and protect
online brands.
Customers include British Airways, The New Statesman, Centrica, Unilever
and Thomas Cook.
Group NBT has 330 employees and is based in London with offices
in Cambridge, Copenhagen, Munich, New York, Nice, Oslo, Paris,
Stockholm and Zurich.
Contents
About Group NBT IFC
Highlights 2010/11 1
Group NBT at a Glance 2
Chairman’s Statement 4
Chief Executive’s Review 5
Report on Corporate Governance 7
Board of Directors 8
Directors’ Remuneration Report 9
Directors’ Report 11
Statement of Directors’ Responsibilities 13
Report of the Independent Auditors 14
Consolidated Income Statement 15
Consolidated Statement of Comprehensive Income 15
Consolidated Statement of Financial Position 16
Consolidated Statement of Changes in Equity 17
Consolidated Statement of Cash Flows 18
Notes to the Consolidated Financial Statements 19
Company Balance Sheet 40
Notes to the Company Financial Statements 41
Officers and Advisers IBC
Group NBT Offices IBC
* excluding amortisation, restructuring costs, acquisition related
expenses and unexpected financial loss
2007 2008 2009 2010 2011
£3.7m
£5.5m
£6.7m
£8.1m
£9.6m
Underlying pre-tax profit*
£9.6m
+18%
2007 2008 2009 2010 2011
£22.4m
£35.3m
£41.5m
£43.9m
£49.5m
Revenue
£49.5m
+13%
£20.3m
£6.4m
£8.4m
£7.1m
£1.7m
2010 2011
Revenue by service
Corporate domain names
Brand protection
Managed hosting
Reseller
Online
£22.4m
£19.2m
£2.3m
2010 2011
Revenue by region
UK
Other European
US
£6.1m
£25.2m
£7.0m
£9.0m
£2.2m
£23.1m
£23.8m
£2.6m 1 group NBT pLC annual report 2011
highlights 2010/11
revenue
revenue up 13% to £49.5 million
organic* revenue up 4% at £45.7 million and up
5% excluding revenues from our domain name
acquisitions business (6% in constant currency)
netnames p latinum Service revenue up 13%
in constant currency to £15.5 million
Managed hosting revenue up 10% in constant
currency to £7.0 million
Brand protection revenue up by 28% in constant
currency to £2.1 million
underlying** profit before tax
underlying** profit before tax at £9.6 million up 18%
organic* underlying** profit before tax was up 9%
to £8.9 million, and excluding domain acquisitions
profit was up 15% (16% in constant currency)
Indom, acquired 14 December 2010, has traded well
with revenue of £3.8 million and underlying** pre-tax
profit of £0.7 million
underlying** diluted epS was up 11% to 26.22 pence and
on an organic* basis, excluding domain acquisitions, up 9%
net cash at year end £6.2 million
recommended Cash offer from newton Bidco limited,
an investment vehicle owned indirectly by certain funds
managed by HgCapital llp
an interim dividend of 1.68 pence, up 20%, was paid in
april 2011. as a result of the Cash offer, no final dividend
is proposed
organic revenue growth
+4%
underlying pre-tax profit
+18%
underlying diluted epS
+11%
* excluding the results of Indom SaS, acquired on 14 December 2010
** excluding amortisation, restructuring costs, acquisition related expenses and an unexpected
financial loss (see Cash flow section of the Chief executive’s review) group NBT pLC annual report 2011 2
gROUP NBt A t A glANCE
our business consists of five market leading services…
www.netnames.com
www.indom.com
www.envisional.com
Domain name management
NetNames platinum Service allows organisations
and Intellectual property professionals to implement
and maintain an effective domain name management
and online brand protection strategy . Customers come
from a wide variety of industries and include unilever,
Barclays and ladbrokes.com.
netnames is an Internet Company for assigned names
and numbers (ICann) accredited registrar with the
ability to register domain names in all available suffixes
worldwide. netnames provides comprehensive
coverage of country code t op l evel Domains (cctl Ds)
such as .de and .es. Following the acquisitions of
ascio t echnologies in Denmark and InDoM in
France, netnames became one of europe’s largest
corporate domain name management specialists.
netnames guarantees renewal of domain names
and provides a secure, high performance Domain
name Server (DnS) infrastructure. p latinum Service
customers also have access to SSl certificates and
other providers to further secure their online presence.
netnames provides a domain name acquisition service
to assist customers in purchasing domain names that
have been registered by other organisations and
supports customers during domain name disputes.
netnames p latinum Service includes a suite of
online brand monitoring products. using envisional’s
technology to monitor the Internet, brand violations
from suspect domain name registrations to brand
abuse such as auction sites carrying fake consumer
goods can be identified and action taken.
Brand protection
Envisional provides automated Internet search and
monitoring services to identify and deal with Internet
based brand abuse, counterfeiting, piracy and fraud.
Its Discovery engine can identify, filter and prioritise
information on websites, blogs, forums, newsgroups
and Internet relay Chat. t he technology applies
advanced artificial intelligence techniques to the task
of classifying information and pinpointing the most
important findings for clients.
Customers include banks and insurers, major film
studios, copyright holders and their trade bodies,
luxury goods firms, multi-brand corporations and
the legal firms and marketing agencies that work
with them.
envisional’s brand protection services include: the
ImageFlare image matching software, providing
accurate identification of logos and images even
where a logo has been modified; and a service for
companies with large networks of affiliates or
resellers to enable them to ensure compliance.
envisional has started to exploit the cross-selling
opportunities for brand protection services within
the large netnames customer base. t hese products –
Domain alert, Domain Monitor, Brand Monitor and
eBay auction Monitor – are standard packages
of services, based on envisional’s intelligent
search technology. 3 group NBT pLC annual report 2011
www.ascio.com www.easily.co.uk
www.speednames.com
www.netbenefit.com
digital
online
The online Business operates in both the consumer
and the SMe marketplace under four brands offering
a full range of domain name, shared hosting and email
services through fully transactional websites.
easily.co.uk has more than 75,000 customers with
a focus on offering low cost, good quality products
backed up by exceptional support. t he brand
targets a number of niche markets, including the
small business start up market, offering ecommerce
solutions for trading online. easily.co.uk also has
strategic partnerships with, amongst others, t esco
and orange.co.uk to provide online services
to their customers.
t he Speednames brand operates throughout
Scandinavia, having provided domain name services
since 2000. Speednames offers a wide range of domain
name suffixes coupled with excellent service. t he main
focus of Speednames is the business customer who
wishes to secure a number of domain names in a variety
of overseas markets.
netnames and netBenefit both provide services
online. although these brands are targeted at
customers for managed services they retain unique
or specialist services for which there is continued
demand from customers who buy online.
Managed hosting
NetBenefit provides managed hosting services in
the uK and France. It is focused on providing reliable
and flexible managed hosting solutions designed to
meet customers’ business requirements. Customers
range from small start-ups looking for scalable solutions
that will grow with their business requirements to
financial services companies and major uK retailers
for whom just minutes of downtime would translate
into thousands of pounds in lost revenue.
netBenefit works with customers directly and through
an indirect channel model comprising digital agencies
and It consultancies. netBenefit partners with a number
of the uK’s top 100 digital agencies providing the
hosting for online advertising campaigns for some
of the world’s most recognisable brands.
Services range from single server solutions to complex
database clusters, they include high availability or
disaster recovery solutions through multiple data
centres allowing the provision of resilient web hosting
deployed over dual sites. netBenefit also provides:
Content Delivery network services; backup and
recovery services with eVault; and virtualisation
services which are based upon either VMware
or Microsoft’s Hyper-V .
netBenefit’s newest data centre is entirely powered
by renewable energy . t his combined with the adoption
of virtualisation, where a physical server is split up
into a number of virtual machines, will allow netBenefit
to be more efficient in the way that it uses power
in its data centres.
reseller services
Ascio provides a white-label domain name registration
service for partners such as Internet Service providers
(ISps), t elcos, domain name resellers and Intellectual
property law firms. ascio works exclusively through
partners with a clear focus on providing the premium
quality and exceptional service that domain name
professionals need.
ascio is an automated service with a broad range
of cctl Ds. It provides a registration engine that offers
access to 250 top level domains (tl Ds) through one
standard interface. It is easily integrated into any existing
order provisioning system using an XMl-based apI
or standard email template.
ascio has over 350 partners throughout the world
with particular emphasis on Continental europe
and has approximately two million domains under
management. partners include Cable and Wireless,
Hostpoint and t elenor.
partners are able to offer their customers a wide
selection of tl Ds without needing to invest in the
infrastructure required to register names globally.
ascio also provides powerful, packaged marketing
campaigns to help its partners stimulate new business.
t hese may be topical, themed or geographically
targeted campaigns in a variety of different forms
and media. group NBT pLC annual report 2011 4
ChAiRmAN’s st AtEmENt “t he Company’s strategy is to build
recurring revenue by delivering excellent
products with a high service content.
t his strategy has served the Company
well and will remain in place while the
markets continue to grow and companies
need to outsource the management
of the services we provide.”
amid the turbulence caused by an offer for the Company I thought it appropriate
to reflect on the achievements of the Company against the key tenets of our
growth strategy that I set out in my last statement.
Focus on strong value-added services for our customers and recurring
“sticky revenue” for us
our core offering with these characteristics, netnames p latinum, Brand
protection and Managed Hosting have grown revenue 13%, 28% and 10%
respectively. Sales to new customers continue to be challenging as budgets
are constrained; but once we have secured clients we have been gratified by
their propensity to increase their spend with us. our focus on these services
has once again been vindicated by the increasingly competitive environment
in online domain name sales. revenue in this segment of our business fell by
14%, a disappointing outcome. It should be noted, however, that this segment
now accounts for only 12% of our revenue.
provide our core brand management expertise in multiple geographies
and through multiple channels
Much of the growth in Brand protection has been driven through sales
to netnames customers. We are particularly excited by the early success
of the sales to uK customers and the enthusiasm with which our sales
force internationally has embraced the opportunity to provide this
additional service.
Extend our product offering through adding complementary products
We are constantly adding functionality across all of our offering. I will pick out
three examples for particular mention. We have launched platinum Manager
which represents a significant development in the flexibility we afford to our
customers in the management of their domain name portfolios. at envisional,
we have added technology to enable Brand protection customers to identify
pirate websites and to issue “take down” orders. and finally the launch of our
“cloud” initiative has been a driver of sales in our hosting business.
Deploy our capital to extend both geographical and product expertise
t he acquisition of Indom in France was clearly the major event of the year
in this area. t he business has performed better than we had anticipated and
the paris based team is making a very positive contribution to the Group as
a whole. Furthermore we have been penetrating a number of new territories
in Central and eastern europe with our reseller products.
Improve our operations and technology to increase efficiency
and serve our customers better
We have invested in the integration of our systems infrastructure to deliver
a single, robust and scalable platform for the whole Group. t his is a work
of constant improvement but we have achieved significant milestones during
the year and we are now managing all new domain name management
customers from our new platform. t he acquisition of Indom adds a further
integration project but the system developments and our expertise in such
projects leaves us confident that we will deliver a strong result.
once again I am pleased to report a year of progress in challenging markets –
a year in which our underlying earnings (excluding domain acquisitions) grew
by 15% and our share price by 51% in the year to June 2011.
richard Madden
Chairman 5 group NBT pLC annual report 2011
Financial overview
revenue for the Group was £49.5 million for the year to 30 June 2011, up
13% on the previous year including the impact of the acquisition of Indom,
a French competitor, in December 2010. excluding the impact of this acquisition,
Group revenue was £45.7 million, up 4% year-on-year and up 5% on a constant
currency basis.
underlying profit before tax was £9.6 million, up 18% on the previous year and,
excluding the impact of Indom, up 9% year-on-year and up 10% on a constant
currency basis.
Cash generation was particularly good during the year and at the end of the
financial year the Group had £6.2 million net cash before unamortised facility fees.
t his compares with £11.4 million at the end of the previous year and includes
the subsequent acquisition of Indom for £12.0 million in net cash.
Corporate brand services
Group nBt , through its subsidiary netnames, provides a range of services to
manage and protect companies’ online activities. Companies are able to register
domain names in over 250 jurisdictions around the world and frequently build
significant sized portfolios of domain names which, like trademarks, often form
part of their valuable intellectual property assets. netnames manages these
portfolios for many companies to ensure that they are registered properly,
renewed in a timely manner and used appropriately.
additionally, Group nBt helps its customers to protect their brands against
online fraud, digital piracy, counterfeiting and other online infringements.
t his range of products is provided by the netnames and envisional brands.
revenue for Corporate Brand Services for the year under review was £23.6 million,
up 7% on last year , or 9% at constant currency rates and excluding domain acquisitions,
revenue was up 10% on last year, or 11% at constant currency rates. Within these
numbers, revenue for domain name management was £21.5 million and revenue
for brand protection services was £2.1 million. revenue for netnames p latinum
Service, the Group’s flagship domain name management product, grew 12%
during the year, 13% at constant currency rates.
Growth for domain name management has improved on the previous year as we
have seen better levels of new sales and lower levels of cancellations. overall growth
was held back by lower revenue from domain acquisitions, where we act for our
customers to buy names for them in the secondary market. Domain acquisitions
experienced exceptional sales in the year ending 30 June 2010 which, as we
noted in previous communications, was unlikely to be repeated in the year
under review.
envisional’s brand protection services did particularly well with revenue for the
year to 30 June 2011 up 28% on the previous year. not only have we acquired
some excellent new customers but we have also improved customer retention.
Growth is also, in part, due to an enhanced product offering, allowing customers
the ability to remove infringing websites and auctions.
Managed hosting
Managed hosting services are provided to companies in the uK and France.
revenue for the year under review was £7.0 million, up 10% on the previous year.
t echnology has played an important role in the improvement of our performance
as much of our new revenue comes from our new cloud based services. We have
also experienced an improvement in market conditions which is reflected in higher
levels of new business.
partner and reseller services
ascio is our partner and reseller brand which offers other ISp s the ability
to register a wide range of domain names using our technology and systems.
revenue for the year was £9.0 million, up 6% on last year, or 9% at constant
currency rates. Some of our larger partners have experienced lower growth
as a result of the prevailing market conditions which, in turn, affects our revenue.
We have, however, continued to add new partners at a similar rate to last year
and this will help to maintain growth rates in the future.
Group nBt is pleased to announce another year of good growth. t he Group
continued to grow revenue both organically and through acquisition and at the
same time maintained its margins, despite markets remaining difficult throughout
the year . our domain name management business was a key focus for development
and we are particularly pleased with the excellent revenue growth achieved in
our brand protection business. t here are signs of improving market conditions
especially for domain name management where the potential for new domain
name extensions is being pursued vigorously.
t he Board announced on 23 September that it had agreed terms with newton
Bidco limited, an investment vehicle owned indirectly by certain funds managed
by HgCapital llp , in respect of a recommended Cash offer for the Company at
a price of 550 pence per share, valuing the entire issued and to be issued share
capital at approximately £153 million. t he Cash offer values the Company’s shares
at an attractive premium to both the current and recent closing prices at which
the shares have been traded and exceeds the highest price at which the shares
have traded at any time in the last ten years. t he Cash offer is to be implemented
by means of a scheme of arrangement (the Scheme). Investors will be invited
to approve the Scheme at a Court Meeting and General Meeting, details of which
have been posted to shareholders.
Since commencing the strategy of developing a corporate domain name management
and hosting business nearly a decade ago, the Company has made good progress
in establishing itself as a market leader in europe. In HgCapital the Board believes
it has found a partner which will support Group nBt in achieving its commercial
and strategic objectives and will help it grow both organically by investment and
through securing acquisition opportunities that would otherwise be beyond its
current financial resources as a quoted company.
Strategy
our strategy is to build recurring revenue by delivering excellent products
with a high service content. t his strategy has served us well and will remain
in place while the markets continue to grow and companies need to outsource
the management of the services we provide. t his model has been a key part of
sustaining the steady progress we have made over a number of years. In the year
under review we achieved good growth in Continental europe and in the uS,
while maintaining steady growth in our home market.
Market conditions
Higher levels of new business, combined with lower levels of cancellations,
indicate some improvement in certain areas of our business although economic
conditions remain uncertain. as a result, customer activity has not yet reached
the levels we have seen in previous years. In the domain name management
market there has been a great deal of interest in the new domain name extensions
which were finally agreed by ICann in June. Whilst this did not have any impact
on revenue during the year it did serve to raise awareness of the need to manage
what are increasingly valuable domain name assets.
“We have experienced another
good year and although growth is not
back to levels seen before economic
conditions deteriorated we have seen
some improvement. t he acquisition
of Indom during the year supports our
position as a market leader for domain
name management services in europe
and we will continue to look for similar
acquisition possibilities.”
ChiEf ExECUtivE’s REviEw group NBT pLC annual report 2011 6
Cash flow
at 30 June 2011, the Group had net cash balances of £6.2 million (2010: £11.4 million)
before unamortised facility fees. t his comprised cash balances of £12.4 million
(2010: £13.4 million) and debt, before unamortised facility fees, of £6.2 million
(2010: £2.0 million).
Cash conversion remained strong over the year with cash generated from
operations increasing to £10.7 million including Indom, up from £9.4 million
last year. Free cash flow, comprising cash flows from operations, interest, tax
and capital expenditure, was up 9% to £7.8 million from £7.1 million last year
with tax payments increasing by 68% to £1.9 million.
net cash outflow in connection with the acquisition of Indom was £12.0 million.
While this was funded mostly through existing cash resources, a £4.5 million
three-year term loan together with a three-year revolving credit facility of
£1.5 million, currently undrawn, was secured in December 2010. t his is in
addition to the existing debt of £1.0 million which is repayable by July 2012.
In February 2011, an unexpected financial loss arose from our primary Danish
clearing bank filing for bankruptcy following which, after a distribution of 66%,
£0.3 million of our cash balances were lost. t he bank, which is now under state
ownership, has announced that the eventual distribution may increase to 84%
in total but this is subject to a legal process and therefore no further recovery
has been provided for in the financial statements. t he Group’s policy in respect
of surplus funds is to distribute them amongst various banks and this policy was
in place at the time of the bankruptcy.
Dividend
an interim dividend of 1.68 pence was paid on 15 april 2011. as a result of the
Cash offer, no final dividend is proposed.
geoff Wicks
Chief Executive
partner and reseller services continued
We continue to be focused on Continental europe where we have a resilient
customer base and we have extended this focus into eastern europe in order
to drive new business.
online services
Group nBt’s online services register and renew domain names and provide
hosting and email services through the websites of several of our brands, primarily
the easily brand in the uK and Speednames in europe. revenue for these services
for the year under review was £6.1 million, 14% down on last year, or 13% at
constant currency rates. t he previous year’s result benefited from the transfer
of some revenue within the Group which did not recur this year. However, we
expect to experience decline in this segment of the market as we continue
to concentrate on our managed services.
Indom
Indom, a market leader for the provision of domain name management services
in France, was acquired by the Group on 14 December 2010. Since the acquisition
Indom has continued to perform ahead of initial expectations. We have embarked
on restructuring and integration which will take up to two years to complete.
over time Group nBt France and Indom will be merged and the Indom business
will be transferred to the Group’s systems. t his project is progressing well and
we are already experiencing some of the benefits of the acquisition. t his acquisition
also brings significant expertise into the Group. Stéphane Van Gelder who will
manage the Group’s business in France is an expert in the domain name market
and is the chairman of a key ICann committee.
profit
t he overall gross margin of 73.3% decreased from 73.6% last year . excluding Indom,
gross margin was 72.6%, below last year’s rate, as the result of relatively small
changes to the revenue mix.
underlying operating profit at £9.6 million increased 19% year-on-year and
the margin at 19.5% was up from 18.5% last year. excluding Indom, underlying
operating profit was up 10% at £8.9 million at a margin of 19.6%. excluding both
Indom and domain acquisitions, the underlying operating profit grew strongly
at 16% year-on-year with a margin of 18.0%, up from 16.3%, as overheads
remained largely flat and revenues grew.
on a statutory basis operating profit was £7.3 million, up 2% from £7.1 million
last year, and profit before tax was £7.2 million, up 1% from last year . t he amounts
by which these statutory profit measures were adjusted to arrive at the underlying
profit measures used, comprise amortisation of intangible assets acquired through
acquisitions of £1.3 million (2010: £1.0 million) which increased as a result of the
acquisition of Indom; advisory and professional fees in respect of the acquisition
of Indom of £0.4 million (2010: nil) which were expensed instead of being capitalised
in accordance with the revised accounting standard on accounting for acquisitions;
technical and other one-off costs relating to the integration of Indom of £0.3 million
(2010: nil); and the unexpected financial loss arising from our Danish bank as
described below of £0.3 million (2010: nil).
Basic epS was 20.04 pence, down 7% from 21.48 pence last year, and diluted
epS was 19.46 pence, down 7% from 20.99 pence last year . Both these measures
were impacted by the adjusting items mentioned above, namely amortisation,
restructuring costs, acquisition related expenses and the financial loss, which
in total amounted to £2.3 million compared to £1.0 million last year.
Taxation
a tax charge of £2.0 million (2010: £1.7 million) arose in the year representing
an effective tax rate of 28.3% (2010: 23.2%).
t he effective tax rate on underlying profit before tax (excluding amortisation,
restructuring costs, acquisition related expenses and the financial loss together
with associated tax credits) was 27.0% (2010: 23.5%). t here were numerous
factors that drove up the effective rate of tax from last year including the addition
of Indom. t he main factors were non-uK regions where the effective tax rates
moved towards higher statutory rates as anticipated; and the proportion of uK
profits, taxed at a relatively higher rate, increasing within the mix.
ChiEf ExECUtivE’s REviEw continued 7 group NBT pLC annual report 2011
t he Company is listed on aIM and is not required to comply with the provisions of the 2008 FrC Combined Code (the Code) and therefore this is not a statement
of compliance as required by the Code. nevertheless the Board is committed to ensuring that proper standards of corporate governance operate throughout the
Group and has followed the principles of the Code so far as is practicable and appropriate for the nature and size of the Group.
a statement of the Directors’ responsibilities in respect of the financial statements is set out on page 13. Below is a brief description of the role of the Board and its
Committees, followed by a statement regarding the Group’s system of internal controls. t he Directors recognise the value of, and are committed to, high standards
of corporate governance.
Board of Directors
t he Board currently comprises the non-executive Chairman, the Chief executive officer, a further executive and three non-executive Directors. t he Directors’
biographies, set out on page 8, demonstrate the broad range of experience and knowledge they bring to the Company enabling them to offer sound judgement
on the proper management of the Group.
t he Board meets at least ten times per year and has a schedule of matters specifically reserved for it for decision. It is responsible for approving the overall Group
strategy, acquisitions, major capital expenditure projects, reviewing the trading performance, ensuring adequate funding and reporting to shareholders. t o enable
the Board to discharge its duties, management provides appropriate and timely information in advance of each meeting. all Directors have access to advice from
the Company Secretary and are able to take independent professional advice as required.
t he longest serving Directors, since their last appointment or reappointment, are richard Madden and Keith Young. t he notice of the next annual General Meeting
will set out the details of the Directors offering themselves for re-election.
t he Board of Directors considers all the non-executive Directors to be independent of management and, in making this decision, have had regard to guidance issued
by several of the Group’s largest institutional investors. Martin Bellamy is the Senior Independent Director.
t he following Committees deal with specific aspects of the Group’s affairs:
remuneration Committee
t he remuneration Committee is chaired by Martin Bellamy. Its other members are richard Madden and Keith Young. t he Committee meets at least twice a year.
t he Committee’s report to shareholders on Directors’ remuneration is set out on pages 9 to 10.
Audit Committee
t he audit Committee is chaired by richard Madden. Its other member is Keith Young. Meetings may also be attended, by invitation, by the Chief executive officer
and the Finance Director. t he Committee meets at least twice a year and provides a forum for reporting by the Group’s external auditors.
relationship with shareholders
Communication with shareholders is given high priority. t he Chairman’s Statement and the Chief executive’s review on pages 4 to 6 include a detailed review
of the business and future developments. t here is regular dialogue with institutional shareholders including presentations after the Group’s announcements of the
interim and annual results. t he Company’s website carries reproductions of the Group’s financial reports and announcements. t he annual General Meeting provides
a further forum for private and institutional shareholders to communicate with the Board and their active participation is welcomed. Details of resolutions to be proposed
at the next annual General Meeting will be sent out in due course as appropriate.
Internal control
t he Directors are responsible for the Group’s system of internal control and for reviewing its effectiveness. However, such a system can only provide reasonable,
but not absolute, assurance against material misstatement or loss. t he Board believes that the Group has internal control systems in place appropriate to the size
and nature of its business.
an ongoing process for identifying, evaluating and managing the significant risks faced by the Group has been in place throughout the year. t hat process is regularly
reviewed by the Board and accords with the Internal Control: Guidance for Directors, in the Combined Code.
t he Board intends to keep its risk control procedures under constant review particularly as regards the need to embed internal control and risk management
procedures further into the operations of business, both in the uK and overseas, and to deal with areas of improvement which come to management and the
Board’s attention.
Financial reporting
t here is a comprehensive budgeting system with an annual budget approved by the Board. Monthly trading results, balance sheets and cash flow statements
are reported against the budget and prior year. updated forecasts are presented in light of the reported trading performance.
operating control
each executive Director has defined responsibility for specific aspects of the Group’s operations. t he executive Directors, together with key senior executives,
meet regularly to discuss day-to-day operational matters.
Investment appraisal
Capital expenditure is controlled via the budgetary process and set levels of authorisation. For expenditure beyond a specified level, a written proposal is submitted
to the Board for approval.
risk management
t he Board is responsible for identifying the major business risks faced by the Group and for determining the appropriate course of action to manage such risks.
all potential acquisitions are subject to appropriate due diligence.
REPORt ON CORPORA tE gO vERNANCE group NBT pLC annual report 2011 8
BOARd Of diRECt ORs richard Madden
Non-executive Chairman
richard Madden is an investment banker and has experience in equity and M&a transactions throughout europe and the uSa. He qualified as a chartered accountant
with arthur andersen and holds a degree in Classics from the university of Cambridge.
geoff Wicks
Chief Executive officer
Geoff Wicks joined the Board in September 2001. He had spent the previous twenty years with reuters Group in a variety of roles, including heading various uK
divisions and time in France and the nordic region. latterly he was director of corporate relations. p rior to reuters, Geoff worked in the City within the banking
and insurance industries.
raj Nagevadia
Finance Director
raj nagevadia joined Group nBt as Financial Controller in october 2003. He became Finance Director in February 2004 and joined the Board in november 2005.
prior to this raj was financial controller at t empo plc, a national electrical retailer, for six years and he has held various roles in an offshore oil and gas construction
business and at a leading firm of accountants.
Keith Young MBE
Non-executive Director
Keith Young is an entrepreneur with considerable experience in the Internet, communications and publishing industries. He co-founded the Group nBt business
in 1995 and was also a significant shareholder in easynet Group plc prior to its flotation. In addition, he has significant interests in several other companies spanning
a diverse range of sectors.
Claus Anderson
Non-executive Director
Claus anderson is a partner in nordic Venture p artners K/S, a venture capital firm and a significant shareholder of Group nBt . Claus has been with nordic Venture
partners K/S since its inception in early 2000 and has focused primarily on enterprise software and internet-related investments. prior to this he worked for a number
of nordic financial institutions as an investment banker in various european countries and holds a degree in Credit and Finance from Copenhagen Business School.
Martin Bellamy
Non-executive Director
Martin Bellamy is Director of Information and Communications t echnology for the national offender Management Service (noMS). p rior to working for noMS,
Martin worked at the Cabinet office, the Department of Work and p ensions, reuters, Bt and KpMG. Martin is a Visiting Fellow at the ashridge Business School. 9 group NBT pLC annual report 2011
t he Company is listed on aIM. t he Directors’ remuneration report, as set out below, is required to satisfy the aIM requirements.
remuneration Committee
t he Committee consists of three non-executive Directors: richard Madden and Keith Young, under the chairmanship of Martin Bellamy. none of the Committee
members have any personal financial interests (other than as shareholders), conflicts of interest arising from cross-directorships or day-to-day involvement in running
the business. t he Committee consults the Chief executive officer about its proposals and has access to professional advice from inside and outside the Company.
t he Committee determines the remuneration of executive Directors and other senior executives on behalf of the Board and reports to the Board on general conclusions
reached by the Committee. no Director plays a part in any discussions about their own remuneration.
remuneration policy
executive remuneration packages are prudently designed to attract, motivate and retain directors of the high calibre needed to maintain the Company’s
position as a market leader. t he performance measurement of the executive Directors and key members of senior management and the determination of their
annual remuneration package are undertaken by the Committee. t he remuneration of the non-executive Directors is determined by the Board within the limits
set out in the articles of association.
t here are four main elements of the remuneration package for executive Directors and senior management:
basic annual salary (including Directors’ fees) and benefits;
annual bonus payments;
long-term incentive awards; and
pension arrangements.
Basic salary
an executive Director’s basic salary is determined by the Committee at the beginning of each year and when an individual changes position or responsibility .
In deciding appropriate levels the Committee considers the Group as a whole and relies on objective research and independent surveys. executive Directors’
contracts of service, which include details of remuneration, will be available for inspection at the annual General Meeting. t he executive Directors are entitled
to accept appointments outside the Company providing the Chairman’s permission is sought in advance.
Annual bonus payments
t he Committee establishes the objectives that must be met for each financial year if a cash bonus is to be paid and these objectives target both revenue and profit
growth. account is also taken of the relative success of the different parts of the business for which the executive Directors are responsible and the extent to which
the strategic objectives set by the Board are being met.
Long-term incentives
t he Board believes that long-term incentive schemes are important in retaining and recruiting high-calibre individuals and ensuring that the performance of executives
is focused on creating long-term shareholder value. a wards of shares and options will be considered by the Committee on an ongoing basis. t he current long t erm
Incentive plan has performance targets related to the growth in the Company’s earnings per share.
Directors’ pensions
up to 10% of salary is paid by the Company into Directors’ personal pension schemes, although they may also sacrifice basic annual salary to supplement
pension contributions.
performance graph
t he following graph shows the Company’s share price performance, compared with the performance of the Ft Se aIM and the Ft Se Small Cap Indices. t he Ft Se
aIM Index was selected as the Company is a constituent of that index. t he Ft Se Small Cap Index was selected as this is believed to be the most appropriate and
broad comparator of the Company’s performance.
Directors’ contracts
executive Directors currently have up to six-month rolling service contracts. t he Company may have a contractual obligation to pay compensation for the
unexpired portion of a Director’s contract if it is terminated early together with related payments, if any, at the discretion of the Committee.
directors’ remuneration report group NBT pLC annual report 2011 10
Non-executive Directors
non-executive Directors currently have up to twelve-month rolling contracts. remuneration is determined by the Board based within the limits set out in the
articles of association and based upon independent surveys of fees paid to non-executive directors of similar companies. t he annual fee payable for the role
of non-executive Chairman is £45,000 (2010: £27,500) and the annual fee payable for the role of non-executive Director is £20,000 (2010: £20,000). richard Madden,
an existing non-executive Director, appointed non-executive Chairman on 25 november 2010, received fees of £32,500 (2010: £20,000) in the year to 30 June 2011.
John parcell, who stepped down as non-executive Chairman on 25 november 2010, received £11,460 (2010: £27,500). Martin Bellamy joined the Board as
a non-executive Director on 1 august 2010 and commenced receiving fees from 1 March 2011. Claus anderson does not receive a fee for his services.
Directors’ remuneration
Directors’ remuneration for the year was as follows:
Salary/ annual Share-based other 2011 2010
fees bonuses pensions payments
1
benefits
2
Total total
£’000 £’000 £’000 £’000 £’000 £’000 £’000
r Madden 33 — — — — 33 20
G Wicks 168 61 — 41 13 283 284
r nagevadia 125 50 13 33 8 229 230
K Young 20 — — — — 20 20
M Bellamy (appointed 1 august 2010) 7 — — — — 7 —
C anderson — — — — — — —
J parcell (resigned 25 november 2010) 11 — — — — 11 28
t ashley (resigned 12 october 2009) — — — — — — 6
YeAr eNDeD 30 JuNe 2011 364 111 13 74 21 583 588
Year ended 30 June 2010 367 139 13 49 20
1. Directors’ share of the year’s accounting charge.
2. other benefits consist of car allowances and private health insurance.
Long Term Incentive plans
Details of current Directors’ interests in long-term incentive plans of the Company are set out below:
at Granted exercised At exercise
1 July during during 30 June price Date of exercisable expiry
Scheme 2010 the year the year 2011 £ grant from date
G Wicks unapproved 105,000 — — 105,000 0.25 30/06/03 30/06/04 27/06/13
unapproved 70,000 — — 70,000 3.14 26/03/07 01/07/07 23/03/17
unapproved 50,000 — — 50,000 3.03 18/07/07 30/06/08 15/07/17
unapproved 50,000 — — 50,000 2.29 22/07/08 30/06/09 22/07/18
ltIp 41,826 — — 41,826 0.00 06/11/09 06/11/12 06/11/19
316,826 — — 316,826
r nagevadia eMI 4,000 — — 4,000 0.01 07/04/04 30/06/04 05/04/14
eMI 38,610 — — 38,610 1.30 10/04/06 10/04/06 07/04/16
eMI 14,000 — — 14,000 3.14 26/03/07 01/07/07 23/03/17
unapproved 56,000 — — 56,000 3.14 26/03/07 01/07/07 23/03/17
unapproved 50,000 — — 50,000 3.03 18/07/07 30/06/08 15/07/17
unapproved 50,000 — — 50,000 2.29 22/07/08 30/06/09 22/07/18
unapproved 25,000 — — 25,000 2.29 22/07/08 22/07/08 22/07/18
ltIp 34,088 — — 34,088 0.00 06/11/09 06/11/12 06/11/19
271,698 — — 271,698
r Madden unapproved 100,000 — — 100,000 1.30 10/04/06 10/04/06 07/04/16
total options 688,524 — — 688,524
t he ordinary share price ranged from £2.80 to £4.40 during the year and stood at £4.35 at the year end. t he gains made on the exercise of share options by Directors
were nil (2010: £1,305,000).
on behalf of the Board
Martin Bellamy
Chairman of the remuneration Committee
25 october 2011
directors’ remuneration report continued 11 group NBT pLC annual report 2011
t he Directors present their annual report and accounts for the year ended 30 June 2011.
principal activities
t he principal activities of the Group during the year were the provision of domain name, web-hosting, brand protection and other internet-related services.
Business review
a review of the business and future developments together with the key performance indicators of business performance is set out in the Chairman’s Statement
and the Chief executive’s review on pages 4 to 6.
results and dividends
t he results of the Group for the year are shown in the Consolidated Income Statement on page 15.
an interim dividend of 1.68 pence (2010: 1.4 pence) per ordinary share was paid on 15 april 2011. as a result of the Cash offer, no final dividend is proposed,
making the total for the year 1.68 pence (2010: 4.2 pence).
principal risks and future developments
t he Directors believe that the principal risks faced by the Group arise in the areas of its services, its technology platforms and its staff.
t he Group’s services are primarily delivered over the Internet through a complex technical infrastructure and therefore its availability and security are critical
in delivering our services. t he Group has processes, plans and safeguards in place to the extent it is reasonable or feasible. t he Internet and related technologies
continue to develop fast. Given this operating environment there may be rapid changes in the market, technology and operational methodologies. t he Group
has an ongoing programme of market and competitive review, service development and infrastructure enhancement.
t he Group operates in growing markets with varying degrees of competition in the different sectors it serves. In the corporate domain name management market,
where the Group has operations in both europe and the uS, it has a leading position in europe primarily through its high market share in a number of countries. While its
position in the uS is steadily improving, this market is home to the Group’s major corporate domain name management competitors. t he managed hosting market,
where the Group operates largely in the uK, has fragmented competition and the Group has positioned itself as a mid-market specialist provider. t he online market
is large with substantial competition and the Group differentiates its offering by combining cost effective solutions with higher levels of service.
t he Group’s services and infrastructure are supported by skilled staff, from account management and fulfilment through to technical support. t he Group is therefore
reliant upon its ability to attract, train and retain the right mix of staff.
t he Directors monitor the risks facing the Group on a regular basis.
Financial risks
Details of the Group’s financial risks together with exposures to interest rate, credit, liquidity and currency risks are contained in note 19 Financial instruments,
in the notes to the Consolidated Financial Statements.
Directors
t he Directors of the Company who served during the year to 30 June 2011 are shown below together with their interests in the shares of the Company at the year end:
At at
30 June 30 June
2011 2010
r Madden — —
G Wicks 500,000 500,000
r nagevadia 2,500 2,500
K Young 887,432 887,432
M Bellamy (appointed 1 august 2010) — —
C anderson* — —
J parcell (resigned 25 november 2010) — 575,877
* Claus anderson is a partner in nordic Venture p artners K/S, a venture capital firm, which also had a substantial shareholding in the ordinary share capital of the Company.
t he Directors’ interests in the long-term incentive plans of the Company are detailed on page 10.
In accordance with the Company’s articles of association, details of the Directors offering themselves for re-election will be set out in the notice of the next
annual General Meeting as necessary.
Directors’ and officers’ liability insurance and indemnities
t he Company has purchased insurance to cover its Directors and officers against any costs arising from defending themselves in legal proceedings taken against
them as a direct result of duties carried out on behalf of the Company.
as at the date of this report, indemnities are in force under which the Company has agreed to indemnify the Directors, to the extent permitted by law and by the
Company’s articles of association, in respect of losses arising out of, or in connection with, the execution of their powers, duties and responsibilities, as Directors
of the Company or any of its subsidiaries.
directors’ report group NBT pLC annual report 2011 12
Substantial shareholdings
at 19 october 2011, the Company had or had been notified of the following holdings of 3% or more in the ordinary share capital of the Company excluding
Directors’ interests shown on page 11:
number %
Blackrock Investment Management 3,389,273 13.0
Herald Investment Management 2,518,250 9.7
artemis Investment Management 2,402,627 9.2
nordic Venture partners K/S 1,807,268 7.0
Hargreave Hale, Stockbrokers (for discretionary clients) 1,415,708 5.5
octopus Investments 1,013,275 3.9
Investec Wealth & Investment 941,642 3.6
Ignis asset Management 905,002 3.5
employees
Group nBt offers a wide range of services to companies and relies on the knowledge and expertise of its staff. t he Company endeavours to ensure that
it consistently improves the Group’s performance by attracting and retaining the right people and by developing the skills of its staff through training and
development programmes.
performance is rewarded on merit without regard to gender, age, race, colour, religion, sexual orientation or marital status. t he Company encourages the involvement
and participation of staff in building a successful business. Communication plays a key part in creating an environment in which all staff can contribute and develop
to their full potential.
environment
t he Group acknowledges the importance of environmental matters and where possible utilises environment friendly policies in its offices such as recycling and energy
efficient practices.
Supplier payment policy
t he Group agrees terms and conditions with individual suppliers at the time orders for the services are placed. It is the Group’s policy to make payment in accordance
with those terms and conditions providing they have been fully complied with by the supplier.
t he Group’s creditor days at 30 June 2011, calculated in accordance with the requirements of the Companies act 2006, were 22 (2010: 27).
research and development
t he Group operates within the rapidly developing internet environment. t here are few, if any, proprietary systems available to meet its product requirements and as
a result the Group has developed, in-house, the systems required to meet its customers’ needs. t hese costs of research and development have been written off to the
Consolidated Income Statement as they are incurred where permitted by IaS 38 Intangible assets and not carried forward as assets in the Consolidated Statement
of Financial position.
going concern
a review of the Group’s activities, market conditions, performance in the year under review, details of its cash flows and financial position are set out in the
Chairman’s Statement and the Chief executive’s review on pages 4 to 6.
after making appropriate enquiries, the Directors have formed a judgement at the time of approving the annual accounts that there is a reasonable expectation
that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going
concern basis in preparing the annual accounts.
Annual general Meeting
In light of the recommended Cash offer from newton Bidco limited to acquire the entire issued and to be issued share capital of the Company announced
on 23 September 2011, the Company will give notice of and convene its 2011 annual General Meeting as necessary in due course.
Auditors
all of the Directors have taken all the steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the
auditors are aware of that information. t he Directors are not aware of any relevant audit information of which the auditors are unaware.
a resolution in respect of auditors will be proposed at the next annual General Meeting as necessary.
By order of the Board
raj Nagevadia
Company Secretary
25 october 2011
directors’ report continued 13 group NBT pLC annual report 2011
t he Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. under that law the Directors have elected to prepare the Group Financial
Statements in accordance with International Financial reporting Standards (IFrSs) as adopted by the european union and the Company financial statements in accordance
with united Kingdom Generally accepted accounting p ractice (united Kingdom accounting Standards and applicable law). under company law the Directors must
not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit
or loss of the Group for that period. t he Directors are also required to prepare financial statements in accordance with the rules of the london Stock exchange
for companies trading securities on aIM.
In preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and accounting estimates that are reasonable and prudent;
state whether they have been prepared in accordance with applicable accounting standards, subject to any material departures disclosed and explained
in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
t he Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with
reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements
of the Companies act 2006. t hey are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Website publication
t he Directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the
Company’s website in accordance with legislation in the united Kingdom governing the preparation and dissemination of financial statements, which may vary from
legislation in other jurisdictions. t he maintenance and integrity of the Company’s website is the responsibility of the Directors. t he Directors’ responsibility also extends
to the ongoing integrity of the financial statements contained therein.
statement of directors’ responsibilities group NBT pLC annual report 2011 14
We have audited the financial statements of Group nBt plc for the year ended 30 June 2011 which comprise the Consolidated Income Statement, the Consolidated
Statement of Comprehensive Income, the Consolidated Statement of Financial position, the Consolidated Statement of Changes in equity, the Consolidated Statement
of Cash Flows and the Company Balance Sheet and the related notes. t he financial reporting framework that has been applied in the preparation of the Group financial
statements is applicable law and International Financial reporting Standards (IFrSs) as adopted by the european union. t he financial reporting framework that has
been applied in the preparation of the parent company financial statements is applicable law and united Kingdom accounting Standards (united Kingdom
Generally accepted accounting p ractice).
t his report is made solely to the Company’s members, as a body, in accordance with sections Chapter 3 of part 16 of the Companies act 2006. our audit work has
been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose.
t o the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our
audit work, for this report, or for the opinions we have formed.
respective responsibilities of Directors and auditors
as explained more fully in the Statement of Directors’ responsibilities, the Directors are responsible for the preparation of the financial statements and for being
satisfied that they give a true and fair view. our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and
International Standards on auditing (uK and Ireland). t hose standards require us to comply with the auditing p ractices Board’s (apB’s) ethical Standards for auditors.
Scope of the audit of the financial statements
a description of the scope of an audit of financial statements is provided on the apB’s website at www.frc.org.uk/apb/scope/private.cfm.
opinion on financial statements
In our opinion:
the financial statements give a true and fair view of the state of the Group’s and the parent company’s affairs as at 30 June 2011 and of the Group’s profit
for the year then ended;
the Group financial statements have been properly prepared in accordance with IFrSs as adopted by the european union;
the parent company’s financial statements have been properly prepared in accordance with united Kingdom Generally accepted accounting p ractice; and
the financial statements have been prepared in accordance with the requirements of the Companies act 2006.
opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the
financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies act 2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited
by us;
the parent company financial statements are not in agreement with the accounting records and returns;
certain disclosures of Directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Scott McNaughton (senior statutory auditor)
For and on behalf of BDo LLp, statutory auditor
London
united Kingdom
25 october 2011
BDo llp is a limited liability partnership registered in england and Wales (with registered number oC305127).
report of the independent auditors 15 group NBT pLC annual report 2011
2011 2010
notes £’000 £’000
reveNue 3 49,459 43,921
Cost of sales 13,227 11,590
groSS proFIT 3 36,232 32,331
operating expenses 28,955 25,184
operATINg proFIT 4 7,277 7,147
Finance income 6 108 81
Finance expense 7 (147) (41)
proFIT BeFore TAxATIoN 3 7,238 7,187
taxation 8 (2,049) (1,666)
proFIT For The YeAr 5,189 5,521
eArNINgS per ShAre
Basic 10 20.04p 21.48p
Diluted 10 19.46p 20.99p
all amounts relate to continuing activities.
2011 2010
£’000 £’000
proFIT For The YeAr 5,189 5,521
oTher CoMpreheNSIve INCoMe
exchange translation differences 3,268 (1,503)
ToTAL CoMpreheNSIve INCoMe For The YeAr 8,457 4,018
t he deferred tax credits in relation to share-based payments previously shown in this statement have now been removed and is part of the Consolidated Statement
of Changes in equity (see note 1 for further details).
t he notes on pages 19 to 39 form part of these Consolidated Financial Statements.
c onsolidated income statement
For tHe Y ear enDeD 30 June 2011
c onsolidated statement of comprehensive income
For tHe Y ear enDeD 30 June 2011 group NBT pLC annual report 2011 16
2011 2010
notes £’000 £’000
ASSeTS
NoN-CurreNT ASSeTS
Goodwill 11 39,805 27,523
other intangible assets 11 6,116 1,619
property, plant and equipment 12 1,883 2,213
Deferred tax asset 15 1,412 1,084
49,216 32,439
CurreNT ASSeTS
trade and other receivables 14 7,956 5,960
Cash and cash equivalents 24 12,407 13,443
20,363 19,403
ToTAL ASSeTS 69,579 51,842
LIABILITIeS
CurreNT LIABILITIeS
Bank loan 17 (2,874) (983)
trade and other payables 16 (16,223) (12,348)
taxation (1,614) (1,530)
(20,711) (14,861)
NoN-CurreNT LIABILITIeS
Bank loan 17 (3,236) (991)
Deferred tax liability 15 (1,786) —
(5,022) (991)
ToTAL LIABILITIeS (25,733) (15,852)
NeT ASSeTS 43,846 35,990
CApITAL AND reServeS
Called up share capital 20 260 259
Share premium account 4,055 3,824
Merger reserve 12,008 12,008
other reserve 2,121 1,794
Cumulative translation reserve 5,851 2,583
profit and loss account 19,551 15,522
ToTAL equITY 43,846 35,990
t hese financial statements were approved by the Board of Directors and authorised for issue on 25 october 2011.
Signed on behalf of the Board of Directors
geoff Wicks
Chief executive officer
t he notes on pages 19 to 39 form part of these Consolidated Financial Statements.
c onsolidated statement of financial position
aS at 30 June 2011 17 group NBT pLC annual report 2011
Cumulative
Share Share Merger other translation retained
capital premium reserve reserve reserve profit total
notes £’000 £’000 £’000 £’000 £’000 £’000 £’000
YeAr eNDeD 30 JuNe 2011
Balance at 1 July 2010 259 3,824 12,008 1,794 2,583 15,522 35,990
Comprehensive income for the year — — — — 3,268 5,189 8,457
Dividends 9 — — — — — (1,160) (1,160)
Share-based payment credit — — — 142 — — 142
Deferred tax recognised on share-based payment — — — 185 — — 185
Issue of share capital 1 231 — — — — 232
BALANCe AT 30 JuNe 2011 260 4,055 12,008 2,121 5,851 19,551 43,846
Year ended 30 June 2010
Balance at 1 July 2009 254 3,536 12,008 1,467 4,086 10,880 32,231
Comprehensive income for the year — — — — (1,503) 5,521 4,018
Dividends 9 — — — — — (879) (879)
Share-based payment credit — — — 98 — — 98
Deferred tax recognised on share-based payment — — — 229 — — 229
Issue of share capital 5 288 — — — — 293
Balance at 30 June 2010 259 3,824 12,008 1,794 2,583 15,522 35,990
t he nature and purpose of each reserve is disclosed in note 20.
t he notes on pages 19 to 39 form part of these Consolidated Financial Statements.
c onsolidated statement of changes in equity
For tHe Y ear enDeD 30 June 2011 group NBT pLC annual report 2011 18
2011 2010
notes £’000 £’000
CASh FLoW FroM operATINg ACTIvITIeS
profit before taxation 7,238 7,187
Finance expense/(income) (net) 39 (40)
Depreciation and amortisation 2,777 2,487
profit on disposal of assets (44) —
Share-based payments 142 98
exchange differences (147) (324)
(Increase)/decrease in trade and other receivables (286) 919
Increase/(decrease) in trade and other payables 939 (907)
Cash generated from operations 10,658 9,420
taxation paid (1,894) (1,125)
NeT CASh INFLoW FroM operATINg ACTIvITIeS 8,764 8,295
CASh FLoW FroM INveSTINg ACTIvITIeS
Interest received 6 108 81
purchase of property, plant and equipment 12 (1,025) (1,211)
proceeds from the disposal of fixed assets 62 —
purchase of subsidiary undertakings 26 (14,170) (147)
net cash acquired with subsidiary undertaking 26 2,183 —
NeT CASh ouTFLoW FroM INveSTINg ACTIvITIeS (12,842) (1,277)
CASh FLoW FroM FINANCINg ACTIvITIeS
Interest paid 7 (147) (41)
Dividends paid 9 (1,160) (879)
long-term loan receipt/(repayments) 3,882 (983)
proceeds from issue of share capital 232 293
NeT CASh INFLoW/(ouTFLoW) FroM FINANCINg ACTIvITIeS 2,807 (1,610)
NeT (DeCreASe)/INCreASe IN CASh AND CASh equIv ALeNTS (1,271) 5,408
CASh AND CASh equIv ALeNTS AT STAr T oF YeAr 13,443 8,157
effects of exchange rate changes 235 (122)
CASh AND CASh equIv ALeNTS AT eND oF YeAr 24 12,407 13,443
t he notes on pages 19 to 39 form part of these Consolidated Financial Statements.
c onsolidated statement of cash flows
For tHe Y ear enDeD 30 June 2011 19 group NBT pLC annual report 2011
1 Accounting policies
t he accounting policies set out below, unless otherwise stated, have been applied consistently to all periods presented in these Consolidated Financial Statements.
general information
Group nBt plc (the Company) and its subsidiaries (together the Group) is a leading provider of domain names and internet-related services. operating in eight countries,
it has 330 employees.
t he Company is a public limited company incorporated and domiciled in the uK. t he address of the registered office is 3rd Floor, prospero House,
241 Borough High Street, london Se1 1Ga.
t he Company is listed on aIM.
a) Basis of preparation
t he Consolidated Financial Statements have been prepared in accordance with eu endorsed International Financial reporting Standards (IFrS) and the IFrIC
interpretations issued by the IaSB and the Companies act 2006 applicable to companies reporting under IFrS. t he Consolidated Financial Statements are
prepared under the historic cost convention as modified by share-based payments measured at fair value through the income statement.
t he principal accounting policies of the Group are set out below:
b) Basis of consolidation
t he Consolidated Financial Statements of the Group comprise the financial statements of the Company and entities controlled by the Company (its subsidiaries)
at the balance sheet date. Control is achieved where the Company has the power to govern the financial and operating policies of a subsidiary so as to obtain
benefits from its activities.
t he results of subsidiaries acquired (or disposed of) in the year are included (or excluded) in the Consolidated Income Statement from the effective date
of acquisition or up to the effective date of disposal, as appropriate.
all intra-group transactions, balances, income and expenses are eliminated on consolidation. accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the Group.
c) Business combinations
t he Group uses the acquisition method of accounting to account for business combinations in accordance with IFrS 3 (revised) Business Combinations.
t he consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests
issued by the Group. acquisition related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in
a business combination are measured initially at their fair values at the acquisition date.
t he excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity
interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill.
d) Revenue recognition
revenue is derived from the Group’s principal activities which are the provision of domain name, web-hosting, brand protection and other internet-related
services and, in general, is measured as the fair value of the consideration received or receivable, and represents amounts receivable for services provided in the
normal course of business, net of discounts, Vat and other sales related taxes. Where services are billed in advance revenue is deferred until the services have
been provided. t he Group reports its revenue by service which are described below together with the relevant revenue recognition policies applied.
Corporate domain names – services include annual or rolling contracts for management of domain name portfolios where services are billed in advance
and revenue recognised evenly over the billing period, the basis on which services are supplied; registration of domain names where services are billed on
a transactional basis and revenue recognised when the registration process is complete where the customer becomes the legal owner of the domain name
registered; other short-term domain name related advisory and administrative services where these are billed either at commencement or on completion
and revenue is recognised when these services are performed; domain name ancillary products and services where these are billed in advance and revenue
recognised evenly over the billing period, the basis on which services are supplied; and domain name acquisitions, the sales and purchases of pre-registered
domain names, where transactions are billed either in advance or in arrears with revenue, representing the net margin as these transactions are undertaken
on a brokerage basis, being recognised when the transfer of the legal owner of the domain name being transacted has completed.
Managed hosting – services encompass the provision of managed web-hosting solutions where the billing frequency is largely monthly in advance and revenue
is recognised in line with the provision of services.
partner and reseller – services which enable ISps and other intermediaries to offer their customers domain name registration services on a white-label basis
using our systems and revenue is recognised when the registration process is complete where the end customer becomes the legal owner of a domain name
with billing taking place at process completion on a transactional basis.
online – services include domain name registration services, shared hosting, email and other internet-related services. Domain names are billed on a transactional
basis and revenue is recognised when the registration process is complete with the customer becoming the legal owner of the domain name registered. t he other
services are typically billed annually in advance and revenue is recognised evenly over the billing period as these services are provided in the same manner.
Brand protection – services include monitoring the Internet for and advice on brand abuse, fraud, piracy and counterfeiting. Monitoring services are billed
in advance, ranging from monthly to annual basis, and revenue is recognised in line with performance of these services. advisory and consulting services
are billed either at commencement or on completion and revenue is recognised on delivery of these services.
notes to the consolidated financial statements For tHe Y ear enDeD 30 June 2011 notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 20
1 Accounting policies continued
general information continued
e) Goodwill
Goodwill represents the excess of the fair value of consideration over the fair value of the identifiable net assets at the date of their acquisition. Goodwill is recognised
as an asset and reviewed annually for impairment. any impairment is recognised immediately in the income statement and is not subsequently reversed. on disposal
of a subsidiary, the attributable amount of goodwill is included in the determination of the profit and loss on disposal. Goodwill is denominated in the functional
currency in which the acquired entity operates.
f) impairment of assets
Goodwill is allocated to cash-generating units for the purposes of impairment testing. t he recoverable amount of the cash-generating unit to which the goodwill
relates is tested annually for impairment or when events or changes in circumstances indicate that it might be impaired. t he carrying values of property, plant and
equipment and intangible assets other than goodwill are reviewed for impairment only when events indicate that the carrying value may be impaired.
In an impairment test, the recoverable amount of the cash-generating unit or asset is estimated to determine the extent of any impairment loss. t he recoverable
amount is the higher of fair value less costs to sell and the value-in-use to the Group. an impairment loss is recognised to the extent that the carrying value exceeds
the recoverable amount.
In determining a cash-generating unit’s or asset’s value-in-use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and risks specific to the cash-generating unit or asset that have not already been included in the
estimate of future cash flows.
g) other intangible assets
Intangible assets purchased separately, such as domain names, are capitalised at cost and amortised over their useful economic life. Intangible assets acquired
through a business combination such as customer lists and intellectual property are initially measured at fair value and amortised over their useful economic life.
amortisation of intangible assets is charged to the income statement on a straight-line basis over the estimated useful lives of each intangible asset. Intangible assets
are amortised from the date they are available for use.
t he estimated useful lives are as follows:
domain names – 20 years
technology-based assets – 5 to 7 years
customer lists – 5 to 10 years
h) Property, plant and equipment
property, plant and equipment are stated at cost less accumulated depreciation. t he cost of an item of property, plant and equipment comprises its purchase price
and any costs directly attributable to bringing the asset into use. Depreciation is calculated to write down the cost of all property, plant and equipment to their estimated
residual value over their expected useful economic life as follows:
computer equipment – 2 to 4 years
fixtures, fittings and equipment – 3 years
leasehold improvements – over the period of the lease
t he assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date. t he gain or loss arising on the disposal
or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.
i) t axation
t he tax expense represents the aggregate of the tax currently payable and movement in deferred tax. t he tax currently payable is based on taxable profit for the period.
t he Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements
and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax assets are
generally recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. t he carrying
amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled
or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which
case the deferred tax is also charged or credited directly to equity.
under the requirements of IaS 12.62(a) deferred tax credits in relation to share-based payments have been recognised directly in the Consolidated Statement
of Changes in equity rather than in the Consolidated Statement of Comprehensive Income and comparative amounts have been restated accordingly.
However, deferred tax is not provided for temporary differences that arise from initial recognition of an asset or liability in a transaction other than a business
combination that at the time of the transaction affects neither accounting nor taxable profits or loss; and on the initial recognition of goodwill.
j) Financial instruments
Financial assets and liabilities are recognised on the Group’s Consolidated Statement of Financial position when the Group becomes a party to the contractual terms
of the financial instrument. 21 group NBT pLC annual report 2011
1 Accounting policies continued
general information continued
j) Financial instruments continued
Financial assets – loans and receivables
cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and short-term deposits with an original maturity period of less than three-months.
t rade and other receivables
t rade receivables do not carry any interest and are stated at their fair value on initial recognition, and then subsequently at amortised cost as reduced by
appropriate allowances for estimated irrecoverable amounts. Impairment provisions are recognised when there is objective evidence that the Group will
be unable to collect all of the amounts due under the terms receivable.
Financial liabilities – held at amortised cost
t rade payables
t rade payables are not interest bearing and are stated at their fair value on initial recognition, and then subsequently at amortised cost.
Loans and borrowings
Bank borrowings represent interest bearing loans which are recorded at fair value on initial recognition, being proceeds received net of direct issue costs.
Finance charges are accounted for on an accruals basis and are recognised in the income statement over the term of the borrowing using the effective
interest rate method.
capital
Financial instruments issued by the Group are treated as equity if the holders have only a residual interest in the assets of the Group after the deduction of all
liabilities. t he Group’s ordinary shares are classified as equity instruments. For the purposes of the disclosures given in note 20 the Group considers its capital
to comprise its ordinary share capital, share premium and accumulated retained earnings.
k) Foreign currencies
t ransactions in foreign currencies are translated into the functional currency, Sterling, at the rate ruling on the date of the transaction. exchange differences arising
from the movement in rates between the date of transaction and the date of settlement are taken to the income statement as they arise.
assets and liabilities (including goodwill and intangible assets which are allocated to overseas income-generating units) of overseas subsidiaries are translated into
Sterling at the rate ruling on the balance sheet date. t he results of these subsidiaries are translated at an average rate of exchange for the year.
exchange gains or losses arising on the translation of the opening net assets of an overseas subsidiary, together with exchange differences arising on the use
of the average rate of exchange, are taken directly to shareholders’ equity and recognised in the cumulative translation reserve. on disposal of a foreign subsidiary,
the cumulative translation differences are recycled to the income statement and recognised as part of the gain or loss on disposal.
t he main foreign currency exchange rates used in the financial statements to consolidate the overseas subsidiaries are as follows:
Closing rate a verage rate
2011 2010 2011 2010
uS Dollar 1.60 1.51 1.59 1.58
euro 1.11 1.23 1.17 1.14
Danish Krone 8.31 9.20 8.71 8.47
l) Leases
assets held under finance leases and hire purchase contracts are capitalised at their fair value on the inception of the leases and depreciated over the shorter of the
period of the lease and the estimated useful economic life of the assets. t he finance charges are allocated over the period of the lease in proportion to the capital
amount outstanding and are charged to the income statement. operating lease rentals are charged to the income statement in equal amounts over the lease term.
m) Retirement benefit costs
t he Company makes contributions to a defined contribution plan for Directors and employees. t he amount charged to the income statement in respect of pension
costs is the contributions payable in the year.
n) Share-based payments
t he Group operates an equity-settled, share-based compensation plan together with a long t erm Incentive plan (ltIp). t he fair value of the services received
is determined by the fair value of the options and shares granted, which in turn is recognised as an employee expense with a corresponding increase in equity . t he fair
value of options and shares is measured at the grant date using the Black-Scholes valuation model taking into account the terms and conditions of grant and the
resulting fair value spread over the vesting period. non-market vesting conditions are taken into account by adjusting the number of equity instruments expected
to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options and shares that
eventually vest.
o) dividends
equity dividends are recognised when they become legally payable. Interim dividends are recognised when paid. Final dividends are recognised when approved
by the Company’s shareholders at annual General Meetings. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 22
1 Accounting policies continued
general information continued
p) Segment reporting
a business segment is a group of assets and operations whose operating results are regularly reviewed by the Group’s Board and for which discrete financial
information is available. a geographical business segment is engaged in providing services within a particular economic environment that is subject to risks
and returns that are different from those of segments operating in other economic environments.
q) Provisions
provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to settle that obligation.
provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date and are discounted to present
value where the effect is material.
r) Research and development
an internally generated intangible asset arising from the Group’s development is recognised only if all the following conditions are met:
an asset is created that can be identified;
it is probable that the asset created will generate future economic benefits; and
the development cost of the asset can be measured reliably.
Internally generated intangible assets are amortised on a straight-line basis over their useful lives. t he amortisation charge is within operating expenses
in the Consolidated Income Statement.
Where no internally generated asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.
s) Holiday pay accrual
employee benefit accruals are made in respect of holiday entitlements that have accrued to employees but have not been taken at the balance sheet date.
t) Adoption of new and revised iFRSs
during the year the Group has adopted the following new standards:
revised IFrS 3 Business Combinations (effective for accounting periods beginning on or after 1 July 2009). t his revision was endorsed by the european union (eu)
on 15 June 2009. t his revision requires prospective application and may result in acquisition costs being recognised immediately in the Consolidated Income
Statement, intangible assets being recognised even when they cannot be reliably measured and the option to gross up the balance sheet for goodwill attributable
to minority interests.
amendment to IaS 27 Consolidated and Separate Financial Statements (effective for periods beginning on or after 1 July 2009). t his amendment was endorsed by
the eu on 15 June 2009. t his amendment requires prospective application and could result in a change in differences where acquisitions or disposals of subsidiaries
are made in stages. t his could be applicable if the Company made piecemeal acquisitions or disposals in the future, which is not currently anticipated.
none of the other new standards, interpretations and amendments, also effective for the first time from 1 July 2010, have had a material effect on the financial statements.
Standards, amendments and interpretations to published standards not yet effective
Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods
beginning after 1 July 2011 and which the Group has decided not to adopt early.
IFrS 9 Financial Instruments was issued in november 2009. t his standard is the first step in the process to replace IaS 39 Financial Instruments: recognition
and measurement. IFrS 9 introduces new requirements for classifying and measuring financial assets and is likely to affect the Group’s accounting for its
financial assets. t he standard is not applicable until 1 January 2013 but is available for early adoption. However, the standard has not yet been endorsed by
the eu. t he Group is yet to assess IFrS 9’s full impact.
IaS 24 (revised) related p arty Disclosures, issued in november 2009. It supersedes IaS 24 related p arty Disclosures, issued in 2003. IaS 24 (revised)
is mandatory for periods beginning on or after 1 January 2011. earlier application, in whole or in part, is permitted. t he revised standard clarifies and simplifies
the definition of a related party and removes the requirement for government-related entities to disclose details of all transactions with the government and
other government-related entities. t he Group will apply the revised standard from 1 January 2011. When the revised standard is applied, the Group and the
parent will need to disclose any transactions between its subsidiaries and its associates. t he Group will review its list of related parties and the transactions
between them in 2011. It is, therefore, not possible at this stage to disclose the impact, if any, of the revised standard on the related party disclosures.
new standards and amendments below are generally applicable for annual periods beginning after 1 July 2011. t he impact of these standards and amendments
on the Group and the parent company’s financial reporting in the future will be assessed closer to the date of their respective effective dates unless otherwise stated.
presentation of financial statements (amendment to IaS 1). t his amendment clarifies that an entity will present an analysis of other comprehensive income for
each component of equity either in statement of changes in equity or in the notes to the financial statements. t his amendment is to be applied retrospectively.
IFrS 10 Consolidated Financial Statements. t he IFrS supersedes IaS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special
purpose entities. t his standard contains a revised definition of control and related application guidance so that a single control model can be applied to all entities.
It also contains enhanced disclosures about consolidated and unconsolidated entities to be published in a separate comprehensive disclosure standard related
to involvement with other entities. t his standard is effective for annual periods beginning on or after 1 January 2013 with permission to early adopt but is yet
subject to be endorsed by the eu. 23 group NBT pLC annual report 2011
1 Accounting policies continued
general information continued
t) Adoption of new and revised iFRSs continued
Standards, amendments and interpretations to published standards not yet effective continued:
IFrS 12 Disclosures of Interest in other entities – t his is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities,
including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. It is effective for periods on or beginning after 1 January 2013.
early adoption is permitted. t he standard has not yet been endorsed by the eu.
IFrS 13 Fair value measurement – t he standard is effective from 1 January 2013, defines fair value and sets out in a single standard a framework for measuring
fair value and requires disclosures about fair value measurements. IFrS 13 does not determine when an asset, a liability or an entity’s own equity instrument
is measured at fair value. rather, the measurement and disclosure requirements of IFrS 13 apply when another IFrS requires or permits the item to be measured
at fair value (with limited exceptions). t he standard has not been endorsed by the eu yet. early adoption is permitted.
Financial Instruments (amendments to IFrS 7). t he amendments will allow users of financial statements to improve their understanding of transfer transactions
of financial assets (for example, securitisations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets.
t he amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period.
It is subject to eu endorsement. early adoption is permitted.
none of the other changes are considered to have a material effect on the Group’s financial statements.
2 Critical accounting estimates and judgements
In preparing the Consolidated Financial Statements, the Directors have to make judgements on how to apply the Group’s accounting policies and make estimates
about the future. t he critical judgements that have been made in arriving at the amounts recognised in the Consolidated Financial Statements and the key sources
of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying value of assets and liabilities in the next financial year are
discussed below:
Acquisitions
When acquiring a business, the Directors have to make judgements and best estimates about the fair value allocation of the purchase price and seek appropriate
competent and professional advice before making any such allocations.
Determination of fair values of intangible assets acquired in business combinations
externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives. t he amortisation
expense is included within operating expenses in the Consolidated Income Statement. Intangible assets are recognised on business combinations if they are separable
from the acquired entity or give rise to other contractual/legal rights. t he amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques.
Deferred tax on business combinations
t he recognition of a deferred tax asset in respect of trading losses is based on the assessment of future profits around which there is always a degree of uncertainty .
Impairment reviews
t he Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated above. t he recoverable amounts
of cash-generating units have been determined based on value-in-use calculations. t hese calculations require the use of estimates (note 11). t he use of this
method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. actual outcomes
may vary.
Income taxes
t he Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes (note 8).
t here are transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. t he Group recognises liabilities
for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts
that were recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
useful lives of intangible assets and property, plant and equipment
Intangible assets are amortised and property, plant and equipment are depreciated over their useful lives. useful lives are based on the Directors’ estimates of the
period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in significant variations
in the carrying value and amounts charged to the income statement in specific periods.
Share-based payments
t he Group has four equity-settled share-based remuneration schemes for employees. employee services received, and the corresponding increase in equity,
are measured by reference to the fair value of the equity instruments at the date of grant, excluding the impact of any non-market vesting conditions. t he fair value
of shares and share options is estimated by using the Black-Scholes valuation model, on the date of grant based on certain assumptions. t hose assumptions are
described in note 21 and include, among others, the dividend growth rate, expected volatility, expected continued employment, expected life of the options and
number of options expected to vest. More details, including carrying values, are disclosed in note 21. t he charge recognised in future periods in respect of these
schemes will vary if changes are made in respect of the estimates for the rate of lapse of the options.
Deferred tax on share options
t he deferred tax asset on shares and share option charges is affected by the difference between the grant price of the shares and share options and the market
price of the Company’s shares at the accounting year end. If the market value of the shares at the date of exercise were to be lower than the market value at the
accounting year end, the amount of tax relief obtained would be less than anticipated in the deferred tax calculations. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 24
3 Segmental analysis
t he Group reports operating performance of the business by revenue from each of its following services: domain name services – management of corporate domain
name portfolios; managed hosting services – dedicated hosting solutions; reseller services – white-labelled domain name registration services for ISps and other
intermediaries; online services – domain names, shared hosting, email, and other internet-related services; and brand protection services – monitoring the Internet
for brand abuse, fraud, piracy and counterfeiting.
t he chief operating decision maker is the Chief executive officer, who reviews these Group results together with gross profit margin and other measures for decision
making purposes. on this basis it is considered that as the Group’s activities are operated largely through a common infrastructure and support functions its activities
constitute one operating segment. t he format set out below is used to report results internally.
2011 2010
£’000 £’000
reveNue BY ServICe
Corporate domain names 25,231 20,300
Managed hosting 7,031 6,397
reseller 8,963 8,468
online 6,099 7,084
Brand protection 2,135 1,672
49,459 43,921
Gross profit 36,232 32,331
underlying operating profit* 9,625 8,109
net finance (expense)/income (39) 40
underlying profit before tax** 9,586 8,149
restructuring costs (312) —
acquisition related expenses (398) —
Financial loss (314) —
amortisation (1,324) (962)
profit before taxation 7,238 7,187
* underlying operating profit is defined as operating profit excluding amortisation, restructuring costs, acquisition related expenses and an unexpected financial loss (see Cash flow section
of Chief executive’s review for details).
** underlying profit before tax is defined as profit before tax excluding amortisation, restructuring costs, acquisition related expenses and an unexpected financial loss (see Cash flow section
of Chief executive’s review for details).
t he assets and liabilities of the Group cannot be allocated to the above segments. For internal reporting purposes balance sheets are not split into segments.
other geographical information
t he Group operates in three main geographic areas: uK, other european countries and the uSa. revenue, profit before tax and non-current assets by origin
of geographical segment are as follows:
revenue profit before tax non-current assets
as restated
2011 2010 2011 2010 2011 2010
£’000 £’000 £’000 £’000 £’000 £’000
uK 23,045 22,438 5,263 4,664 10,688 11,280
other european countries 23,838 19,211 1,290 2,013 37,100 20,060
uSa 2,576 2,272 685 510 16 15
49,459 43,921 7,238 7,187 47,804 31,355
under the requirements of IFrS 8 deferred tax has been removed from the non-current assets analysis and comparative amounts have been restated accordingly. 25 group NBT pLC annual report 2011
4 operating profit
operating profit is stated after charging:
2011 2010
£’000 £’000
Share-based payments 142 98
research and development 663 713
Depreciation of owned assets 1,453 1,525
profit on disposal of fixed assets (44) —
other intangibles amortisation 1,324 962
operating lease rentals – land and buildings 1,155 957
– other 48 39
auditors’ remuneration – subsidiaries audit fee 136 137
– Company audit fee 15 15
– taxation services 54 63
– other services 7 4
Foreign exchange gains (36) (222)
Group restructuring – staff costs 7 —
– software integration 186 —
– legal and professional 53 —
– travel costs 66 —
t he Group restructuring costs have arisen as a direct result of the acquisition of Indom SaS.
5 Information regarding employees
Staff costs (including Directors’ emoluments) incurred in the year were as follows:
2011 2010
£’000 £’000
Wages and salaries 15,105 14,502
Social security costs 1,626 1,208
Share-based payments 142 98
pension costs 416 400
17,289 16,208
a verage number of employees during the year:
2011 2010
Number number
administrative 54 48
operational 280 239
334 287
Key management remuneration
Key management has been defined as the executive and the non-executive Directors of Group nBt plc.
2011 2010
£’000 £’000
Directors’ emoluments 496 526
Share-based payments 74 49
pension costs 13 13
583 588
emoluments of highest paid Director 283 284
Gain made on exercise of share options — 1,305
Directors’ emoluments are detailed, by Director, in the Directors’ remuneration report on page 9, and this information includes the payments made to the personal
pension scheme of the Directors. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 26
6 Finance income
2011 2010
£’000 £’000
Bank interest 89 69
other interest 19 12
108 81
7 Finance expense
2011 2010
£’000 £’000
Bank loan interest payable 133 37
other interest payable 14 4
147 41
8 Taxation
a) Analysis of tax expense
2011 2010
£’000 £’000
CurreNT TAx
Current year tax 2,410 1,439
adjustment in respect of prior periods (94) 78
total current tax expense 2,316 1,517
DeFerreD TAx
origination and reversal of temporary differences (242) 297
adjustment in respect of prior period losses (25) (148)
total deferred tax expense (267) 149
total tax expense (note 8b) 2,049 1,666
b) Tax expense reconciliation
t he tax assessed for the period is lower than the standard rate of corporation tax in the uK. t he differences are explained below:
2011 2010
£’000 £’000
profit before taxation 7,238 7,187
profit before taxation multiplied by standard rate of corporation tax in the uK of 27.75% (2010: 28%) 2,008 2,012
eFFeCTS oF:
expenses not deductible for tax purposes 67 (45)
unrecognised losses arising in the year 89 322
losses recognised in the year (54) (5)
overseas tax reliefs — (535)
Difference in overseas tax rates 58 (13)
adjustment to prior year tax charge (119) (70)
total tax expense (note 8a) 2,049 1,666 27 group NBT pLC annual report 2011
9 Dividends
2011 2010
£’000 £’000
Final paid of 2.8 pence (2010: 2.0 pence) per share – relating to previous year’s results 725 517
Interim paid of 1.68 pence (2010: 1.4 pence) per share 435 362
Dividends paid in the year 1,160 879
t he Board of Directors has proposed no final dividend as a result of the Cash offer (2010: 2.8 pence).
10 earnings per share
t he basic and diluted earnings per share for the year ended 30 June 2011 are based on the profit for the year attributable to ordinary shareholders of £5,189,000
(2010: £5,521,000) and on the weighted average number of shares of 25,896,000 (2010: 25,705,000).
an adjusted earnings per share has also been presented in addition to the earnings per share and is based on earnings adjusted to eliminate the effects of amortisation
expense, restructuring costs, acquisition related expenses and the unexpected financial loss, referred to in the cash flow section of the Chief executive’s review.
It has been calculated to allow shareholders to gain a clearer understanding of the trading performance of the Group.
t he basis of the calculation of the basic and diluted profit per share is set out below:
2011 2010
£’000 £’000
profit attributable to ordinary shareholders 5,189 5,521
amortisation of intangible assets (net of tax) 958 716
restructuring costs (net of tax) 213 —
acquisition related expenses (net of tax) 398 —
Financial loss (net of tax) 236 —
profit attributable to ordinary shareholders before amortisation, restructuring, acquisition related costs and financial loss 6,994 6,237
Weighted average and adjusted weighted average number of ordinary shares:
2011 2010
Number number
000s 000s
Shares used for basic earnings per share 25,896 25,705
effect of dilutive share options 766 599
Shares used for diluted earnings per share 26,662 26,304
earnings per share:
Basic Diluted
2011 2010 2011 2010
pence pence pence pence
earnings per share 20.04 21.48 19.46 20.99
amortisation of intangible assets (net of tax) 3.70 2.79 3.59 2.72
restructuring costs (net of tax) 0.82 — 0.80 —
acquisition related expenses (net of tax) 1.54 — 1.49 —
Financial loss (net of tax) 0.91 — 0.88 —
adjusted earnings per share 27.01 24.27 26.22 23.71
at 30 June 2011, there were nil (2010: 483,000) potentially dilutive share options which have not been included in the above calculation as they are not currently
dilutive and therefore do not affect the diluted earnings per share shown above. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 28
11 goodwill and intangible assets
Domain other
Goodwill names technology intangibles total
£’000 £’000 £’000 £’000 £’000
CoST
at 1 July 2010 27,523 31 1,188 3,533 32,275
acquisition of subsidiaries 9,563 — 1,366 4,012 14,941
Foreign exchange movements 2,719 — 155 600 3,474
AT 30 JuNe 2011 39,805 31 2,709 8,145 50,690
AMor TISATIoN
at 1 July 2010 — 7 653 2,473 3,133
provided in year — 1 359 964 1,324
Foreign exchange movements — — 52 260 312
AT 30 JuNe 2011 — 8 1,064 3,697 4,769
NeT BooK v ALue
AT 30 JuNe 2011 39,805 23 1,645 4,448 45,921
Cost
at 1 July 2009 28,598 31 1,215 3,678 33,522
adjustment to deferred consideration (note 18) (137) — — — (137)
Foreign exchange movements (938) — (27) (145) (1,110)
at 30 June 2010 27,523 31 1,188 3,533 32,275
amortisation
at 1 July 2009 — 5 466 1,843 2,314
provided in year — 2 211 749 962
Foreign exchange movements — — (24) (119) (143)
at 30 June 2010 — 7 653 2,473 3,133
net book value
at 30 June 2010 27,523 24 535 1,060 29,142
other intangibles include customer lists.
goodwill impairment tests
During the year, goodwill was reviewed for impairment in accordance with the Group’s accounting policy. Goodwill was allocated to individual cash-generating
units based on the Group’s operations and the carrying value of each unit is set out below:
2011 2010
£’000 £’000
uK 8,753 8,753
other european countries:
Group nBt a/S – Denmark 20,818 18,770
Indom SaS – France 10,234 —
39,805 27,523
t he recoverable amounts of the cash-generating units were determined from value-in-use calculations. t hese calculations were based on cash flow projections
from approved budgets and forecasts, past performance and Directors’ expectations of future performance of the relevant cash-generating units which cover
a five-year period. other key assumptions used in these calculations were the discount rate applied to future cash flows of 13% (2010: 13%) and a future perpetuity
rate of 3% (2010: 3%). as a result of these tests, no impairment provisions are considered necessary. 29 group NBT pLC annual report 2011
12 property, plant and equipment
Fixtures,
Computer fittings and leasehold
equipment equipment improvements total
£’000 £’000 £’000 £’000
CoST
at 1 July 2010 9,983 792 418 11,193
acquisition of subsidiaries — 299 — 299
additions 947 13 65 1,025
Disposals (485) (104) — (589)
exchange differences 48 (12) 7 43
AT 30 JuNe 2011 10,493 988 490 11,971
DepreCIATIoN
at 1 July 2010 8,009 707 264 8,980
acquisition of subsidiaries — 200 — 200
Disposals (468) (103) — (571)
provided in year 1,294 74 85 1,453
exchange differences 31 (13) 8 26
AT 30 JuNe 2011 8,866 865 357 10,088
NeT BooK v ALue
AT 30 JuNe 2011 1,627 123 133 1,883
Cost
at 1 July 2009 7,599 2,031 410 10,040
additions 1,181 20 10 1,211
re-allocation 1,255 (1,255) — —
exchange differences (52) (4) (2) (58)
at 30 June 2010 9,983 792 418 11,193
Depreciation
at 1 July 2009 6,322 970 216 7,508
provided in year 1,383 92 50 1,525
re-allocation 351 (351) — —
exchange differences (47) (4) (2) (53)
at 30 June 2010 8,009 707 264 8,980
net book value
at 30 June 2010 1,974 85 154 2,213
t he re-allocation of fixed assets in the year to 30 June 2010 was to re-align the type of fixed asset to the appropriate category. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 30
13 Investments
all subsidiaries have been included in the consolidation. Details of the principal subsidiary undertakings at 30 June 2011 are as follows:
Country of proportion
incorporation of voting
and operation equity held
netBenefit (uK) limited uK 100%
netnames limited* uK 100%
easily limited uK 100%
netnames Inc.* uSa 100%
eurl Group nBt France France 100%
Group nBt a/S Denmark 100%
ascio technologies Inc.* uSa 100%
ascio technologies GmbH* Germany 100%
Speednames aB* Sweden 100%
Speednames GmbH* Germany 100%
Speednames aS* norway 100%
Speednames GmbH* Switzerland 100%
Speednames technology Holding apS* Denmark 100%
Speednames a/S* Denmark 100%
envisional limited* uK 100%
Indom SaS* France 100%
* t hese investments are not held directly by the ultimate holding company.
all of the above companies are involved in the provision of domain name, hosting, brand protection or other internet related services.
14 Trade and other receivables
2011 2010
£’000 £’000
trade receivables 4,666 3,170
other receivables 382 299
prepayments and accrued income 2,908 2,491
7,956 5,960
all amounts shown under receivables fall due for payment within one year. t he fair values of trade and other receivables are the same as the book values as credit risk
has been addressed as part of impairment provisioning and, due to the short-term nature of the amounts receivable, they are not subject to other ongoing fluctuations
in market rates. 31 group NBT pLC annual report 2011
15 Deferred tax
Deferred tax has been calculated at 26% (2010: 28%) in respect of uK companies and at the appropriate rate for foreign subsidiary undertakings.
t he Group only recognises deferred tax assets to the extent that future taxable profits will be available to allow all or part of the asset to be recovered.
t he movement in the deferred tax account is shown below:
2011 2010
£’000 £’000
ASSeTS
at 1 July 2010 1,084 1,011
prior period adjustment 25 148
Movements taken to reserves 185 229
Foreign exchange movements 3 (7)
origination and reversal of temporary differences 115 (297)
AT 30 JuNe 2011 1,412 1,084
t his amount is represented by:
excess depreciation over capital allowances 587 478
Short-term temporary differences 194 234
Intangible assets (194) (385)
tax deductible goodwill 212 354
unrelieved trading losses 216 212
Share option relief 397 191
AT 30 JuNe 2011 1,412 1,084
Deferred tax assets and liabilities have been netted off as the Directors believe the unwinding of the deferred tax liability to be at the same time and in the same
jurisdiction as the deferred tax assets.
t he Group had potential deferred tax assets that were not recognised at 30 June 2011 as the timing of the relief could not be assessed with sufficient certainty
and a proportion of the tax losses have yet to be agreed with the appropriate revenue authority. t he unrecognised amounts shown below are the gross temporary
differences, not their value in tax terms.
2011 2010
£’000 £’000
excess depreciation over capital allowances 991 1,016
Short-term timing differences 258 337
unrelieved trading losses 10,232 9,329
11,481 10,682
Deferred tax liability
2011 2010
£’000 £’000
LIABILITIeS
at 1 July 2010 — —
arising in respect of intangible assets recognised on acquisitions (1,793) —
Foreign exchange movements (120) —
origination and reversal of temporary differences 127 —
AT 30 JuNe 2011 (1,786) — notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 32
15 Deferred tax continued
Deferred tax (credited)/charged to the Consolidated Income Statement
2011 2010
£’000 £’000
excess depreciation over capital allowances (109) (82)
Short-term temporary differences 40 103
unrelieved trading losses 37 (107)
tax deductible goodwill 125 128
Intangible assets (366) (246)
Share option relief 6 353
(267) 149
16 Trade and other payables
2011 2010
£’000 £’000
trade payables 1,348 1,384
other taxation and social security taxes 2,049 1,423
other payables 1,106 616
accruals and deferred income 11,720 8,925
16,223 12,348
Settlement of trade and other payables is in accordance with our terms of trade established with our suppliers. t he fair values of trade and other payables are the
same as the book values and, due to the short-term nature of the amounts payable, they are not subject to ongoing fluctuations in market rates.
17 Loans and borrowings
2011 2010
£’000 £’000
CurreNT : secured bank loan 2,874 983
NoN-CurreNT : secured bank loan 3,236 991
6,110 1,974
Bank loan
on 16 January 2007, a five-year term bank loan of £5,000,000 was arranged and drawn down in connection with the acquisition of Group nBt a/S. on 14 December 2010,
a three-year term bank loan of £4,500,000 was arranged and drawn down in connection with the acquisition of Indom SaS. t hese loans bear interest based on lIBor
which for the year was at an average rate of 3.27% (2010: 1.60%) and are secured by a fixed and floating charge over the Group’s assets and will be repaid by equal
amounts over the loan term. t he maturity of the bank loans are shown in note 19(iii).
In the above table, loans are stated net of unamortised issue costs of £71,800 (2010: £26,208). t he Group has charged to the Consolidated Income Statement issue
costs of £33,250 (2010: £17,000) in respect of these facilities. t hese costs are allocated to the Consolidated Income Statement over the term of the facility at a constant
rate on the carrying amount.
18 provision
t he provision relates to a deferred contingent consideration arising in connection with the acquisition of envisional Solutions limited on 10 July 2007.
2011 2010
£’000 £’000
Balance 1 July 2010 — 284
amounts paid — (147)
adjustment to deferred consideration — (137)
BALANCe AT 30 JuNe 2011 — —
of the above amount which was based on achieving revenue targets, £147,000 has been earned and was paid in March 2010. t his was determined to be the final
settlement of deferred contingent consideration in relation to the acquisition of envisional Solutions limited, therefore the remaining provision relating to the deferred
contingent consideration was released during the year to 30 June 2010. 33 group NBT pLC annual report 2011
19 Financial instruments
t his note describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them.
t here have been no substantive changes in the Group’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks
or the methods used to measure them from previous periods unless otherwise stated in this note.
t he Group’s financial instruments at 30 June 2011 comprised trade and other receivables; cash and cash equivalents; loans and borrowings; and trade
and other payables.
Fair value of financial instruments
all the Group’s financial instruments are carried at amortised cost.
t he Group believes that there is no material difference between the book and fair value of its financial instruments, in the current or prior year, due to the
instruments bearing interest at floating rates or being of short-term nature.
general objectives, policies and procedures
t he Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, whilst retaining ultimate responsibility
for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the
executive Directors and senior management.
t he overall objective of the Board is to set policies that seek to reduce risk as far as possible, without unduly affecting the Group’s competitiveness and flexibility.
i) credit risk
Credit risk refers to the possibility that a financial loss will occur as a result of a customer’s inability to meet its financial obligations.
Credit risk arises principally from the Group’s trade and other receivables. potential customers are subjected to credit verification procedures before credit terms
are granted. t he quality of existing debt which has not been provided for is considered to be collectable and procedures are in place to monitor trade receivables
on an ongoing basis to minimise exposure to bad debts. t rade receivables are only written off once all methods of collection have been exhausted.
t he maximum exposure to credit risk is the trade receivable balance at the year end. t he Group has no significant exposure to large or key customers.
loans and receivables are summarised as follows:
t rade receivables Cash and cash equivalents
2011 2010 2011 2010
£’000 £’000 £’000 £’000
up to 30 days 3,303 1,870 12,407 13,443
past due but not impaired:
30 to 90 days 1,359 1,179 — —
More than 90 days 1,019 800 — —
Gross 5,681 3,849 12,407 13,443
less: allowance for impairment (1,015) (679) — —
net 4,666 3,170 12,407 13,443
Movements on the group provision for impairment of trade receivables are as follows:
2011 2010
£’000 £’000
opening balance 679 770
acquisition of subsidiary 335 —
Increase in provisions 456 39
Written-off amounts (455) (130)
Closing balance 1,015 679
ii) Market risk
Market risk refers to fluctuations in interest rates and exchange rates.
a) interest risk
t he Group analyses the interest rate exposure on a quarterly basis and analyses the sensitivity of the net result for the year to a reasonable possible change in interest
rates of +1% and -1%. t he impact on the income and net assets of a 1% change would be up to £63,000 (2010: £112,000). t he gain or loss potential is then compared
to the limits determined by the Directors. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 34
19 Financial instruments continued
general objectives, policies and procedures continued
ii) Market risk continued
b) currency risk
t he Group has overseas subsidiaries, which operate in Continental europe and the uSa. t heir activities and net assets are denominated in the functional currencies
of the operating units. t he Group’s principal exposure to exchange rate fluctuations arises on translation of the overseas net assets and results into Sterling for accounting
purposes. In addition the Group as a whole is exposed to transactions which give rise to foreign exchange risk. t he Group reviews its exposure on an ongoing basis.
t he foreign currency monetary assets and liabilities are as follows:
other
european
Sterling uS Dollar euro currencies total
£’000 £’000 £’000 £’000 £’000
AS AT 30 JuNe 2011
t rade and other receivables 1,263 344 2,740 701 5,048
Cash and cash equivalents 5,180 699 4,018 2,510 12,407
trade and other payables (3,535) (1,775) (1,972) (2,597) (9,879)
Bank loans (5,928) — (182) — (6,110)
(3,020) (732) 4,604 614 1,466
as at 30 June 2010
t rade and other receivables 1,623 572 745 529 3,469
Cash and cash equivalents 5,940 240 1,799 5,464 13,443
trade and other payables (3,437) (1,911) (1,081) (2,052) (8,481)
Bank loans (1,974) — — — (1,974)
2,152 (1,099) 1,463 3,941 6,457
t he Group’s currency exposures are in part minimised as natural hedging occurs through costs and revenues incurred in the same currency. t he exposures
that arise give rise to net currency gains and losses which are recognised in the Consolidated Income Statement. Such exposures reflect the monetary assets
and liabilities of the Group that are not denominated in the operating or functional currency of the operating unit involved. at 30 June 2011 and 30 June 2010,
these exposures are immaterial to the Group.
If exchange rates had moved by +10% or -10% over and above the rates at the year end, the change in monetary assets and liabilities would be £449,000 (2010: £430,000).
iii) Liquidity risk
liquidity risk is the risk that the Group is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when
they are withdrawn.
t he Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably, by the
use of medium-term and long-term facilities. at the balance sheet date all borrowing facilities were held with the Bank of Scotland. t he Group believes that there
is a low likelihood on there being an immediate call on its liabilities.
t he table below analyses the Group’s financial liabilities by remaining contractual maturities, at the balance sheet date, and financial assets which mitigate liquidity risk.
t he amounts disclosed in the table are the contractual undiscounted cash flows.
up to 3 3 to 12 1 to 5
months months years total
£’000 £’000 £’000 £’000
AT 30 JuNe 2011
trade and other receivables 4,903 114 31 5,048
Cash and cash equivalents 12,407 — — 12,407
trade and other payables (5,382) (3,957) (540) (9,879)
Bank loans (1,419) (1,455) (3,236) (6,110)
loan interest (12) (137) (48) (197)
10,497 (5,435) (3,793) 1,269
at 30 June 2010
trade and other receivables 3,428 41 — 3,469
Cash and cash equivalents 13,443 — — 13,443
trade and other payables (4,861) (3,037) (583) (8,481)
Bank loans (492) (491) (991) (1,974)
loan interest (1) (19) (5) (25)
11,517 (3,506) (1,579) 6,432 35 group NBT pLC annual report 2011
19 Financial instruments continued
general objectives, policies and procedures continued
iv) capital
as described in note 1j, the Group considers capital to comprise its ordinary share capital, share premium and accumulated retained earnings. In managing its capital,
the Group’s primary objective is to ensure its continued ability to provide a consistent return for its equity shareholders through a combination of capital growth and
distributions. t he Group considers the appropriate type of funding according to its requirements.
20 Called up share capital
2011 2010 2011 2010
Number number £’000 £’000
AuThorISeD orDINAr Y ShAreS oF 1 peNCe eACh
at 1 July 2010 and 30 June 2011 40,000,000 40,000,000 400 400
ALLoTTeD, CALLeD up AND FuLLY p AID orDINAr Y ShAreS oF 1 peNCe eACh
at 1 July 2010 25,881,360 25,350,860 259 254
Share options exercised 102,000 530,500 1 5
at 30 June 2011 25,983,360 25,881,360 260 259
During the year, 102,000 shares (2010: 530,500) were issued following the exercise of share options at exercise prices ranging from £0.01 to £2.29 (2010: £0.01
to £2.75), for a total consideration of £232,300 (2010: £293,065). all shares issued during the year have the same rights, preferences and restrictions as those
relating to the ordinary shares still in issue.
reserves
t he following describes the nature and purpose of each reserve within capital and reserves:
reserve Description and purpose
Share capital amount subscribed for share capital at nominal value
Share premium amount subscribed for share capital in excess of nominal value
Merger reserve t he premium on shares issued where the Company has taken advantage of the merger relief provisions
on the acquisition of subsidiaries
other reserve amounts arising from share-based payments charge on employee share options and in respect
of options issued in connection with acquisitions
Currency translation Gains and losses arising on retranslating the net assets of overseas operations into Sterling
retained profit Cumulative net gains and losses recognised in the Consolidated Income Statement
21 Share-based payments
t he Group has a number of employee schemes as shown below. as at the date of transition to IFrS all options granted after 7 november 2002 had vested
and therefore were not required to be accounted for in accordance with IFrS 2 Share-based payments.
t he Group operates an enterprise Management Incentive plan (eMI), an Inland revenue approved Scheme, an unapproved Scheme and a long t erm Incentive plan (ltIp).
t he eMI plan is a HM revenue & Customs approved discretionary director and employee share option scheme. all options under this scheme have vested
and no grants have been made since March 2007.
t he unapproved Scheme exists for grants to Directors and key management where the value of the options granted is in excess of the eMI scheme limits or where
options cannot be granted under the eMI scheme. t here are no performance conditions attached to the grant of options save for the vesting periods.
t he Group has no options outstanding under an HM revenue & Customs approved Scheme. no grants have been made under this scheme since September 2000.
t he details of outstanding share options over ordinary shares of the parent company are set out below. all option agreements are for a ten-year period. all of the
options listed below had vested and were exercisable by 30 June 2011.
t he ltIp has been issued to certain Directors and senior employees. t he ltIp awards of ordinary shares of 1 pence each have a vesting period of three years from
grant and will be released to the participants at the end of the vesting period for nil consideration, subject to their continued employment and to the achievement
of performance targets related to growth in the Group’s earnings per share. notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 36
21 Share-based payments continued
enterprise Management Incentive plan
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
22 august 2003 0.01 2,500 — 2,500 — — —
7 april 2004 0.01 6,500 — 2,500 — 4,000 4,000
10 april 2006 1.30 38,610 — — — 38,610 38,610
26 March 2007 3.14 62,000 — — 18,000 44,000 44,000
109,610 — 5,000 18,000 86,610 86,610
Weighted average exercise price (£)
2011: 2.23 — 0.01 3.14 2.17 2.17
2010: 0.63 — 0.25 — 2.23 2.23
t he weighted average share price at the date of exercise for the options exercised was £3.99 (2010: £3.14). t he total charge for the year relating to the scheme was
nil (2010: nil).
unapproved Scheme
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
30 June 2003 0.25 105,000 — — — 105,000 105,000
10 april 2006 1.30 100,000 — — — 100,000 100,000
26 March 2007 3.14 218,000 — — 52,000 166,000 166,000
18 July 2007 3.03 200,000 — — 50,000 150,000 150,000
22 July 2008 2.29 275,000 — 75,000 — 200,000 200,000
898,000 — 75,000 102,000 721,000 721,000
Weighted average exercise price (£)
2011: 2.31 — 2.29 3.08 2.20 2.20
2010: 2.31 — 2.29 — 2.31 2.31
t he weighted average share price at the date of exercise for the options exercised was £4.10 (2010: £2.94). t he total charge for the year relating to the scheme was
nil (2010: nil).
Approved Scheme
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
18 September 2000 4.55 2,708 — — 2,708 — —
Long Term Incentive plan
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
6 november 2009 — 150,775 — — 3,368 147,407 —
t he total charge for the year relating to the plan was £142,000 (2010: £98,000). 37 group NBT pLC annual report 2011
21 Share-based payments continued
Long Term Incentive plan continued
t he fair value of the options granted under the unapproved scheme during the current and prior year was calculated using the Black-Scholes model as follows:
options issued in year
2011 2010
Share price — —
expected life (years) — —
Strike price — —
Volatility — —
Dividend yield — —
risk free interest rate — —
Fair value of each option at measurement date — —
t he volatility assumption is based upon a statistical analysis of daily share prices over a period of between two and three years. t he expected life of options is based
on historical data and is not necessarily indicative of exercise patterns that may occur.
Directors’ share options are set out in the Directors’ remuneration report and total 612,610 (2010: 612,610).
t he fair value of the ltIp s awarded during the current year was calculated using the Black-Scholes model as follows:
ltIp s awarded in year
2011 2010
Share price — £3.04
expected life (years) — 3.00
Strike price — £0.00
Volatility — n/a
Dividend yield — 1.2%
risk free interest rate — n/a
Fair value of each option at measurement date — £2.93
Directors’ shares are set out in the Directors’ remuneration report and total 75,914 (2010: 75,914).
other share-based payments
t he Group committed to grant 1,000,000 options at an exercise price of £2.75 per share, vesting immediately and exercisable over a five-year term, on 16 January 2007
as part of the consideration in connection with the acquisition of Group nBt a/S. t he total fair value of these options, £423,000, was calculated using the Black-Scholes
model and was included as part of the cost of investment. at 30 June 2011, 882,000 (2010: 918,000) options were in existence. During the year 22,000 (2010: 24,000)
options were exercised at £2.75 (2010: £2.75) with a total consideration of £60,500 (2010: £66,000). a further 14,000 (2010: 2,000) options lapsed during the year.
22 operating lease commitments
at 30 June 2011 the Group had the following operating lease commitments:
2011 2010
£’000 £’000
LAND AND BuILDINgS
In one year or less 1,377 985
Between one and five years 3,298 1,654
4,675 2,639
oTher
In one year or less 31 24
Between one and five years 15 11
46 35 notes to the consolidated financial statements ContInueD
group NBT pLC annual report 2011 38
23 Contingent liabilities
at 30 June 2011, the Group had contingent liabilities in respect of the following:
standby letters of credit and credit guarantees to domain name registries of £9,000 (2010: £46,000); and
bank guarantee covering deductions of tax for employees in norway of £29,000 (2010: £26,000).
24 Cash and cash equivalents
Cash Cash on
available treasury
on demand deposit total
£’000 £’000 £’000
at 1 July 2010 13,242 201 13,443
Cash flow (4,934) 3,898 (1,036)
AT 30 JuNe 2011 8,308 4,099 12,407
Cash on treasury deposit is held for periods up to six weeks.
25 related parties
all transactions with subsidiary undertakings have been eliminated on consolidation. t here are no transactions with external related parties. Key management personnel
remuneration is disclosed in note 5.
26 Acquisition during the period
on 14 December 2010 the Group acquired 100% of the voting share capital Indom SaS (formerly Indom Sa) for a cash consideration of £14,170,000 (¬16,882,000).
Indom SaS had £2,183,000 (¬2,600,000) of net cash balances at acquisition. t he consideration paid is subject to agreement on the working capital position prior to the
acquisition and could result in a reduction of the cash consideration paid of up to £630,000 (¬700,000). as these discussions are ongoing no adjustment has been
made to the fair value of the consideration paid.
Indom is based in paris and is a provider of domain name management services in France. It provides services similar to Group nBt’s netnames p latinum Service and
has a customer list comprising many of France’s largest companies including half of the CaC 40. Indom was formed in 1999 and works exclusively in the French market.
Indom provides scale in an important part of the european market and helps cement our position in this market.
t he details of the fair value of the assets and liabilities acquired, purchase consideration and the goodwill arising at the date of acquisition, all of which were translated
to Sterling from euro at an exchange rate of £1/¬1.1914, are set out below:
Book value of Fair value
assets acquired adjustments Fair value
£’000 £’000 £’000
Intangible fixed assets 972 4,406 5,378
tangible fixed assets 99 — 99
Current assets 1,710 — 1,710
Cash at bank 2,183 — 2,183
Current liabilities (2,857) — (2,857)
long-term liabilities (113) — (113)
Deferred tax — (1,793) (1,793)
1,994 2,613 4,607
Goodwill 9,563
CoNSIDerATIoN 14,170
Satisfied by: cash consideration 14,170
effects on Group cash flow:
Cash consideration 14,170
Cash balances on acquisition (2,183)
NeT CASh ouTFLoW 11,987
t he fair value adjustment is in respect of intangible assets acquired and resulted in the following assets being recognised: customer lists valued at £3,977,000,
technology valued at £1,366,000 and non-compete agreements valued at £35,000.
Goodwill represents the Indom SaS’ position in the French corporate domain name market and the expected revenue and costs synergies arising from combining
the French business within the enlarged Group. t he goodwill recognised is not deductible for tax purposes.
Current assets at acquisition included trade receivables with a book and fair value of £1,572,000 representing contractual receivables of £1,907,000. Whilst every
effort will be made to collect all contractual receivables, it is estimated that based on current information £335,000 is unlikely to be recovered.
t ransaction costs of £398,000 were incurred, comprising mainly of professional fees, which have been charged to the Consolidated Income Statement within
operating expenses. 39 group NBT pLC annual report 2011
26 Acquisition during the period continued
t he results of Indom SaS for the post acquisition period to 30 June 2011 together with the last full year’s unaudited results are set out below:
15 Dec
2010 unaudited
to Year ended
30 June 31 Dec
2011 2010
£’000 £’000
revenue 3,764 6,589
Gross profit 3,059 5,289
underlying*** operating profit 688 1,023
net finance income 23 38
underlying*** profit before tax 711 1,061
restructuring costs (186) —
employment termination settlement — (302)
Doubtful debt provision — (344)
Deferred income adjustment relating to prior years (net of tax) — (684)
profit/(loss) before tax and amortisation per local Gaap statutory accounts 525 (269)
*** t he underlying profit measures exclude:
amortisation of capitalised software in the local entity’s financial statements;
restructuring costs relating to It expenditure in connection with systems integration and the cost of abandoning existing projects;
employment termination costs;
one-off increase in provisions for doubtful debts; and
one-off change from correction in revenue recognition accounting policy.
Had Indom SaS’ results been included in the Group results from July 2010, Group revenue would have increased by approximately £2,872,000 and Group
underlying*** profit before tax by £483,000.
27 post balance sheet events
on 23 September 2011 a recommended Cash offer was made for the entire existing issued and to be issued ordinary share capital of Group nBt plc at a price
of 550 pence per share. t he offer was made by newton Bidco limited, an investment vehicle owned indirectly by certain funds managed by HgCapital llp , and
is to be to be effected by means of a Scheme of arrangement under p art 26 of the Companies act 2006. t he Cash offer will be put to Group nBt plc’s shareholders
at the forthcoming court and general meetings. group NBT pLC annual report 2011 40
company balance sheet
aS a t 30 June 2011
2011 2010
notes £’000 £’000
FIxeD ASSeTS
tangible assets 6 724 1,072
Investments 7 35,165 26,779
35,889 27,851
CurreNT ASSeTS
Debtors 8 13,524 2,184
Cash at bank and in hand 5,561 6,568
19,085 8,752
CreDITorS: AMouNTS FALLINg Due WIThIN oNe YeAr 10 (23,375) (13,070)
NeT CurreNT LIABILITIeS (4,290) (4,318)
ToTAL ASSeTS LeSS CurreNT LIABILITIeS 31,599 23,533
CreDITorS: AMouNTS FALLINg Due AFTer More ThAN oNe YeAr 11 (3,175) (991)
NeT ASSeTS 28,424 22,542
CApITAL AND reServeS
Called up share capital 13 260 259
Share premium account 15 4,055 3,824
Merger reserve 15 12,098 12,098
other reserve 15 1,266 1,124
profit and loss account 15 10,745 5,237
ShArehoLDerS’ FuNDS 16 28,424 22,542
t hese financial statements were approved by the Board of Directors and authorised for issue on 25 october 2011.
Signed on behalf of the Board of Directors
geoff Wicks
Chief executive officer
t he notes on pages 41 to 48 form part of these Financial Statements. 41 group NBT pLC annual report 2011
1 Accounting policies
Basis of preparation
t hese Financial Statements present financial information for Group nBt plc as a separate entity, and have been prepared in accordance with the historical cost
convention, the Companies act 2006 and united Kingdom accounting Standards (uK Generally accepted accounting p ractice). t he Company’s Consolidated
Financial Statements, prepared in accordance with IFrSs as adopted by the european union, are separately presented. t he principal accounting policies adopted
in these Company Financial Statements are set out below and, unless otherwise indicated, have been consistently applied for all periods presented.
In accordance with FrS 18 accounting p olicies, the Directors have reviewed the accounting policies of the Company as set out below and consider them to be appropriate.
t he principal accounting policies are:
Share-based payments
When shares and share options are granted to employees a charge is made to the profit and loss account and a reserve created in capital and reserves to record the
fair value of the awards at the date of grant in accordance with FrS 20 Share-Based p ayment. t his charge is spread over the vesting period. When shares and share
options are granted to employees of subsidiary companies, the fair value of the awards is treated as a capital contribution, increasing the cost of the investment and
spread over the period of performance relating to the grant. t he corresponding entry is made in reserves.
revenue
revenue is the total amount receivable by the Company for management and other services provided to other Group companies, excluding V at , and is recognised
on performance of these services.
Tangible fixed assets
Depreciation is provided on tangible fixed assets at the rates calculated to write off the cost of each asset evenly over its expected useful life as follows:
computer equipment – 2 to 4 years
fixtures, fittings and equipment – 3 years
leasehold improvements – over the period of the lease
Investments
Investments held as fixed assets are stated at cost less any provision for impairment in value. Where applicable, the Company takes advantage of merger relief,
recording the investment in the Company’s balance sheet at the fair value of the shares issued, with any premium included within the merger reserve.
Impairment of fixed assets
t he need for any fixed asset impairment write-down is assessed by comparison of the carrying value of the asset against the higher of its net realisable value
and value-in-use.
pension costs
Contributions to the Company personal pension scheme are charged to the profit and loss account in the period in which they become payable. t he Company
does not operate any defined benefit pension plans.
Dividend income
Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.
Deferred taxation
Deferred tax is recognised in respect of all timing differences that have originated but not reversed by the balance sheet date except the recognition of deferred tax is
limited to the extent that the Company anticipates to make sufficient taxable profits in the future to absorb the reversal of underlying timing differences. Deferred tax
liabilities and assets are not discounted.
equity dividends
Final dividends are recognised in the Company’s financial statements in the period in which the dividends are approved by shareholders. Interim equity dividends
are recognised in the period they are paid.
2 result for the financial year
t he Company has taken advantage of Section 408 of the Companies act 2006 and has not included its own profit and loss account in these financial statements.
t he Company profit for the year ended 30 June 2011 under uK Gaap was £6,668,000 (2010: profit £181,000).
Fees paid to BDo llp and its associates for audit and other services to the Company itself are not disclosed in the individual accounts of Group nBt plc because
the Company’s consolidated accounts are required to disclose such fees on a consolidated basis.
notes to the company financial statements For tHe Y ear enDeD 30 June 2011 notes to the company financial statements ContInueD
group NBT pLC annual report 2011 42
3 Information regarding employees
Staff costs (including Directors’ emoluments) incurred in the year were as follows:
2011 2010
£’000 £’000
Wages and salaries 7,062 6,821
Social security costs 761 753
Share-based payments 142 98
pension costs 120 113
8,085 7,785
Staff costs for the uK based employees, except those for employed by envisional limited, are shown above. appropriate recharges are made to the uK subsidiary
undertakings to reflect staff costs incurred by those undertakings.
4 Directors
t he remuneration of Directors is set out below:
2011 2010
£’000 £’000
Directors’ emoluments 496 526
Share-based payments 74 49
pension costs 13 13
583 588
emoluments of highest paid Director 283 284
Gain made on exercise of share options — 1,305
Directors’ emoluments are detailed, by Director, in the Directors’ remuneration report on page 9 and this information includes the payments made to the personal
pension scheme of the Directors.
5 Dividends
2011 2010
£’000 £’000
Final paid of 2.8 pence (2010: 2.0 pence) per share – relating to previous year’s results 725 517
Interim paid of 1.68 pence (2010: 1.4 pence) per share 435 362
Dividends paid in the year 1,160 879
t he Board of Directors has proposed no final dividend as a result of the Cash offer (2010: 2.8 pence).
6 Tangible fixed assets
Fixtures,
fittings
Computer and leasehold
equipment equipment improvements total
£’000 £’000 £’000 £’000
CoST
at 1 July 2010 2,326 300 152 2,778
additions 144 2 65 211
AT 30 JuNe 2011 2,470 302 217 2,989
DepreCIATIoN
at 1 July 2010 1,341 275 90 1,706
provided during year 473 20 66 559
AT 30 JuNe 2011 1,814 295 156 2,265
NeT BooK v ALue
AT 30 JuNe 2011 656 7 61 724
at 30 June 2010 985 25 62 1,072 43 group NBT pLC annual report 2011
7 Investments
Shares in
subsidiary
undertakings
£’000
CoST
at 1 July 2010 47,323
acquisition of subsidiary 8,386
AT 30 JuNe 2011 55,709
provISIoN
AT 1 JuLY 2010 AND 30 JuNe 2011 20,544
NeT BooK v ALue
AT 30 JuNe 2011 35,165
at 30 June 2010 26,779
Details of the principal subsidiary undertakings at 30 June 2011 are as follows:
Country of proportion
incorporation of voting
and operation equity held
netBenefit (uK) limited uK 100%
netnames limited* uK 100%
easily limited uK 100%
netnames Inc.* uSa 100%
eurl Group nBt France France 100%
Group nBt a/S Denmark 100%
ascio technologies Inc.* uSa 100%
ascio technologies GmbH* Germany 100%
Speednames aB* Sweden 100%
Speednames GmbH* Germany 100%
Speednames aS* norway 100%
Speednames GmbH* Switzerland 100%
Speednames technology Holding apS* Denmark 100%
Speednames a/S* Denmark 100%
envisional limited* uK 100%
Indom SaS* France 100%
* t hese investments are not held directly by the ultimate holding company.
all of the above companies are involved in the provision of domain name, hosting, brand protection or other internet related services.
8 Debtors: amounts falling due within one year
2011 2010
£’000 £’000
amounts owed by Group undertakings 12,827 1,418
Deferred tax asset (note 9) 101 63
other receivables 316 409
prepayments and accrued income 280 294
13,524 2,184
t he carrying amount of trade and other receivables approximates to their fair value. all amounts shown under receivables fall due for payment within one year. notes to the company financial statements ContInueD
group NBT pLC annual report 2011 44
9 Deferred tax asset
t he Company has recognised deferred tax assets to the extent that they are expected to be relieved by future taxable profits. t he assessment of the recognised
deferred tax assets has been made with reference to all available evidence including budgets and forecasts. t he recognised deferred tax assets are as follows:
2011 2010
£’000 £’000
at 1 July 2010 63 52
prior period adjustment 27 18
Charge/(credit) to profit and loss account 11 (7)
AT 30 JuNe 2011 101 63
t his amount is represented by:
excess depreciation over capital allowances 98 55
Short-term timing differences 3 8
AT 30 JuNe 2011 101 63
t he Company had potential deferred tax assets of £228,000 (2010: £206,000) that were not recognised at 30 June 2011 as the timing of the relief could not be
assessed with sufficient certainty and a proportion of the tax losses has yet to be agreed with the uK revenue authority:
2011 2010
£’000 £’000
Short-term timing differences 219 197
unrelieved trading losses 8 9
227 206
10 Creditors: amounts falling due within one year
2011 2010
£’000 £’000
Bank loan 2,753 983
trade payables 169 328
amounts owed to Group undertakings 18,611 10,435
other taxation and social security 369 300
other creditors 300 255
accruals and deferred income 1,173 769
23,375 13,070
t he carrying amount of trade and other payables approximates to their fair value. Settlement of trade and other payables is in accordance with our terms of trade
established with our suppliers.
11 Creditors: amounts falling due after more than a year
2011 2010
£’000 £’000
Bank loan 3,175 991
on 16 January 2007, a five-year term bank loan of £5,000,000 was arranged for the acquisition of Group nBt a/S. t he loan is secured by a fixed and floating charge
over the Group’s assets and will be repaid by equal amounts over the loan term.
on 14 December 2010, a three-year term bank loan of £4,500,000 was arranged for the acquisition of Indom SaS. t he loan is secured by a fixed and floating charge
over the Group’s assets and will be repaid by equal amounts over the loan term. 45 group NBT pLC annual report 2011
12 provisions
Deferred contingent consideration:
2011 2010
£’000 £’000
at 1 July 2010 — 284
amounts paid on acquisition of subsidiary — (147)
adjustment to deferred consideration — (137)
AT 30 JuNe 2011 — —
of the above amount which was based on achieving revenue targets, £147,000 has been earned and was paid in March 2010. t his was determined to be the final
settlement of deferred contingent consideration in relation to the acquisition of envisional Solutions limited, therefore the remaining provision relating to the deferred
contingent consideration was released during the year to 30 June 2010.
13 Called up share capital
2011 2010 2011 2010
Number number £’000 £’000
ALLoTTeD, CALLeD up AND FuLLY p AID orDINAr Y ShAreS oF 1 peNCe eACh
at 1 July 2010 25,881,360 25,350,860 259 254
Share options exercised 102,000 530,500 1 5
AT 30 JuNe 2011 25,983,360 25,881,360 260 259
During the year, 102,000 shares (2010: 530,500) were issued following the exercise of share options at exercise prices ranging from £0.01 to £2.29 (2010: £0.01
to £2.75), for a total consideration of £232,300 (2010: £293,065).
14 Share-based payments
t he Company has a number of employee schemes as shown below and options were granted both before and after 7 november 2002, the applicable date from
which FrS 20 Share-based payments became effective. as at 30 June 2005 all options granted after 7 november 2002 had vested and therefore were not required
to be accounted for in accordance with FrS 20.
t he Company operates an enterprise Management Incentive plan (eMI), an Inland revenue approved Scheme, an unapproved Scheme and a long t erm
Incentive plan (ltIp).
t he eMI plan is a HM revenue & Customs approved discretionary director and employee share option scheme. all options under this scheme have vested and no
grants have been made since March 2007.
t he unapproved Scheme exists for grants to Directors and key management where the value of the options granted is in excess of the eMI scheme limits or where
options cannot be granted under the eMI scheme. t here are no performance conditions attached to the grant of options save for the vesting periods.
t he Company has no options outstanding under an HM revenue & Customs approved Scheme. no grants have been made under this scheme since September 2000.
t he details of outstanding share options over ordinary shares of the parent company are set out below. all option agreements are for a ten-year period. all of the options
listed below had vested and were exercisable by 30 June 2011.
t he ltIp has been issued to certain Directors and senior employees. t he ltIp awards of ordinary shares of 1 pence each have a vesting period of three years from
grant and will be released to the participants at the end of the vesting period for nil consideration, subject to their continued employment and to the achievement
of performance targets related to growth in the Group’s earnings per share.
enterprise Management Incentive plan
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
22 august 2003 0.01 2,500 — 2,500 — — —
7 april 2004 0.01 6,500 — 2,500 — 4,000 4,000
10 april 2006 1.30 38,610 — — — 38,610 38,610
26 March 2007 3.14 62,000 — — 18,000 44,000 44,000
109,610 — 5,000 18,000 86,610 86,610
Weighted average exercise price (£)
2011: 2.23 — 0.01 3.14 2.17 2.17
2010: 0.63 — 0.25 — 2.23 2.23
t he weighted average share price at the date of exercise for the options exercised was £3.99 (2010: £3.14). t he total charge for the year relating to the scheme
was nil (2010: nil). notes to the company financial statements ContInueD
group NBT pLC annual report 2011 46
14 Share-based payments continued
unapproved Scheme
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
30 June 2003 0.25 105,000 — — — 105,000 105,000
10 april 2006 1.30 100,000 — — — 100,000 100,000
26 March 2007 3.14 218,000 — — 52,000 166,000 166,000
18 July 2007 3.03 200,000 — — 50,000 150,000 150,000
22 July 2008 2.29 275,000 — 75,000 — 200,000 200,000
898,000 — 75,000 102,000 721,000 721,000
Weighted average exercise price (£)
2011: 2.31 — 2.29 3.08 2.20 2.20
2010: 2.31 — 2.29 — 2.31 2.31
t he weighted average share price at the date of exercise for the options exercised was £4.10 (2010: £2.94). t he total charge for the year relating to the scheme
was nil (2010: nil).
Approved Scheme
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
18 September 2000 4.55 2,708 — — 2,708 — —
Long Term Incentive plan
at At At
exercise 1 July 30 June 30 June
price 2010 2011 2011
Date granted £ outstanding Granted exercised lapsed outstanding exercisable
6 november 2009 — 150,775 — — 3,368 147,407 —
t he total charge for the year relating to the plan was £142,000 (2010: £98,000).
t he fair value of the options granted under the unapproved scheme during the current and prior year was calculated using the Black-Scholes model as follows:
options issued in year
2011 2010
Share price — —
expected life (years) — —
Strike price — —
Volatility — —
Dividend yield — —
risk free interest rate — —
Fair value of each option at measurement date — —
t he volatility assumption is based upon a statistical analysis of daily share prices over a period of between two and three years. t he expected life of options is based
on historical data and is not necessarily indicative of exercise patterns that may occur.
Directors’ share options are set out in the Directors’ remuneration report and total 612,610 (2010: 612,610). 47 group NBT pLC annual report 2011
14 Share-based payments continued
Long Term Incentive plan continued
t he fair value of the ltIp s awarded in the current year was calculated using the Black-Scholes model as follows:
ltIp s awarded in year
2011 2010
Share price — £3.04
expected life (years) — 3.00
Strike price — £0.00
Volatility — n/a
Dividend yield — 1.2%
risk free interest rate — n/a
Fair value of each option at measurement date — £2.93
Directors’ shares are set out in the Directors’ remuneration report and total 75,914 (2010: 75,914).
other share-based payments
t he Company committed to grant 1,000,000 options at an exercise price of £2.75 per share, vesting immediately and exercisable over a five-year term, on
16 January 2007 as part of the consideration in connection with the acquisition of Group nBt a/S. t he total fair value of these options, £423,000, was calculated
using the Black-Scholes model and was included as part of the cost of investment. at 30 June 2011, 882,000 (2010: 918,000) options were in existence. During the
year 22,000 (2010: 24,000) options were exercised at £2.75 (2010: £2.75) with a total consideration of £60,500 (2010: £66,000). a further 14,000 (2010: 2,000)
options lapsed during the year.
15 Statement of movements on reserves
Share Share Merger other p rofit and loss
capital premium reserve reserve account
£’000 £’000 £’000 £’000 £’000
at 1 July 2010 259 3,824 12,098 1,124 5,237
Issue of shares 1 231 — — —
FrS 20 Share-based payment charge — — — 142 —
Dividends — — — — (1,160)
retained profit for the financial year — — — — 6,668
AT 30 JuNe 2011 260 4,055 12,098 1,266 10,745
16 reconciliation of movements in shareholders’ funds
2011 2010
£’000 £’000
retained profit for the financial year 6,668 181
Dividends (1,160) (815)
5,508 (634)
new share capital subscribed 1 5
Share premium on issued shares 231 288
FrS 20 Share-based payment charge 142 98
net increase/(decrease) to shareholders’ funds 5,882 (243)
opening shareholders’ funds 22,542 22,785
Closing shareholders’ funds 28,424 22,542 notes to the company financial statements ContInueD
group NBT pLC annual report 2011 48
17 operating lease commitments
at 30 June 2011 the Company was committed to making the following minimum payments during the next financial year in respect of operating leases:
Land and buildings
operating leases which expire:
2011 2010
£’000 £’000
In two to five years 376 376
18 related parties
t he Company has taken advantage of FrS 8 related p arty Disclosures in not disclosing transactions with Group undertakings as 100% of its shares are controlled
within the Group which is headed by Group nBt plc. t here are no transactions with external related parties.
19 post balance sheet events
on 23 September 2011 a recommended Cash offer was made for the entire existing issued and to be issued ordinary share capital of Group nBt plc at a price
of 550 pence per share. t he offer was made by newton Bidco limited, an investment vehicle owned indirectly by certain funds managed by HgCapital llp , and is
to be to be effected by means of a Scheme of arrangement under p art 26 of the Companies act 2006. t he Cash offer will be put to Group nBt plc’s shareholders
at the forthcoming court and general meetings. officers and advisers
Directors
Richard Madden
Non-executive Chairman
Geoff Wicks
Chief Executive Officer
Raj Nagevadia
Finance Director
Keith Young
Non-executive
Claus Andersen
Non-executive
Martin Bellamy
Non-executive
Secretary
Raj Nagevadia
Registered and head office
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241 Borough High Street
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Company number
3709856
Registrars
Capita Registrars Limited
Northern House
Woodsome Park
Fenay Bridge
Huddersfield
West Yorkshire HD8 0LA
Bankers
Bank of Scotland plc
25 Gresham Street
London EC2V 7HN
Solicitors
Boodle Hatfield
89 New Bond Street
London W1S 1DA
Financial advisers
Numis Securities Limited
10 Paternoster Square
London EC4M 7LT
Stockbrokers
Numis Securities Limited
10 Paternoster Square
London EC4M 7LT
Auditors
BDO LLP
55 Baker Street
London W1U 7EU
GrouP nbt offices
United Kingdom
London
3rd Floor
Prospero House
241 Borough High Street
London SE1 1GA
Cambridge
Betjeman House
104 Hills Road
Cambridge CB2 1LQ
Sweden
Master Samuelsgatan 60
8th floor
Stockholm 111 21
USA
13th Floor
55 Broad Street
New York NY 10004–3715
France
Nice
Green Side BP 296
400 Avenue Roumanille
06906 Sophia Antipolis Cedex
Paris
124–126, rue de Provence
75008 Paris
Germany
4. OG, Nord
Landshuter Allee 12–14
80637 München
Denmark
Arne Jacobsens Allé 15
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Denmark
Norway
C J Hambros Plass 2c
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Tel: +44 (0) 207 015 9200
Fax: +44 (0) 870 458 9506
visit us online at www.groupnbt.com ### summary: |
Volga Gas plc
Annual Report
and Accounts 2015
Volga Gas plc Annual Report and Accounts 2015 Introduction
Volga Gas plc is an
independent oil and gas
exploration and production
company focused on the Volga
Region of Russia. It has 100%
interests in four oil and gas
exploration and production
licences in the Saratov and
Volgograd regions.
Contents Introduction
01 Overview of 2015
02 Volga at a Glance
Strategic Report
04 Chairman’s Statement
06 Chief Executive’s Report
08 Operational Review
10 Financial Review
12 Principal Risks and Uncertainties
Corporate Governance
14 Board of Directors
16 Corporate Governance Statement
18 Report of the Directors
21 Directors’ Remuneration Report
Financial Statements
23 Independent Auditor’s Report
24 Group Income Statement
24 Group Statement of
Comprehensive Income
25 Group Balance Sheet
26 Group Cash Flow Statements
27 Company Balance Sheet
28 Company Cash flow Statements
29 Group and Company Statements of
Changes in Shareholders’ Equity
30 Notes to the IFRS Consolidated
Financial Statements
Notice of Meeting and Other Items
46 Notice of Meeting
48 Glossary of Technical Terms
IBC Corporate Directory 01 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Overview of 201 5
• Concluded successful
development drilling
operations on the
VM field
• Increased throughput
of gas at the processing
plant by 50% in
December 2015
• Development of
export channels
for condensate
• Maintained positive net
cash balances and
remained debt free
Overview Development drilling on the VM field
– Completed drilling operations on VM#3
and VM#4 wells.
– Estimated productive capacity of both
wells in excess of expectations.
– Sufficient to sustain planned plateau of
1 million cubic metres per day of total
production.
Increased throughput at the Dobrinskoye
gas processing plant
– 50% increase in output to 750,000 cubic
metres per day achieved in December
2015.
– Plans for further increase after
construction of amine based gas
sweetening plant.
Development of export routes for
condensate
– During 2015 there were periods when
the local domestic market was unable
to take our condensate production.
– Export routes developed to provide
additional commercial flexibility to
the business.
Net cash position remained positive
throughout 2015
– Capital expenditure managed to
remain maintain positive cash
balances through the year.
– Reduced revenue and cash
generation with weak oil prices and
devaluation of the Ruble.
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 02 Volga Gas plc | Annual Report and Accounts 201 5
Black Sea
Moscow
Russia
Ukraine
Belarus
Vostochny
Makaroyskoye
Karpensky
Urozhainoye-2
Dobrinskoye
Strategic Report
Volga at a Glance
Our assets are located in an established oil and
gas province. The area benefits from the existing
rail, road and pipeline infrastructure and proximity
to Russia’s main energy markets. 03 Volga Gas plc | Annual Report and Accounts 201 5
Dobrinskoye gas processing plant
2015 Progress
Completed various minor upgrades
mandated by regulatory authorities.
Increased throughput to 750,000 cubic
metres (26.5 million cubic feet) per day.
2016 Objectives
Improve cost efficiency of the current plant
operations. Progress plans for conversion to
amine based gas sweetening and for
eventual increase in throughput to one
million cubic metres (35.3 million cubic feet)
per day.
Vostochny Makarovskoye (“VM”) gas/condensate field
2015 Progress
Commenced drilling operations on the
VM#3 and VM#4 wells. Both wells with
estimated productivity in excess of plan.
VM#4 brought on line in December 2015.
2016 Objectives
Complete tie-back of well VM#3, planned
workover on VM#2.
Dobrinskoye gas/condensate field
2015 Progress
Managed production from the two
existing wells.
2016 Objectives
Continue to maintain production from the
two existing wells to maximise long-term
extraction of gas and condensate.
Uzenskoye and Sobolevskoye oil fields
2015 Progress
Managed Uzenskoye production for the
seventh year but with continued decline.
Attempted sidetrack drilling on VM#8 and
Sobolevskoye wells but without success.
2016 Objectives
Maintain production profile and seek to
maximise extraction of oil from existing
wells. Finalising plans for development of
undeveloped shallower reservoir in Uzen.
Commercial
2015 Progress
Commenced exports of condensate to
broaden the commercial options of the
business in light of market difficulties
experienced earlier in 2015.
2016 Objectives
Seek to improve the cost-effectiveness of
exports and develop further export
channels.
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 04 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Chairman’s Statement
Mikhail Ivanov
Chairman
Dear Shareholder,
As anticipated by my predecessor in the
2014 Annual Report, 2015 was a challenging
year for the oil and gas industry worldwide,
for Russia, and no less challenging for Volga
Gas. The collapse in oil prices and in the
value of the Russian Ruble had significant
impact on the financial statements and the
performance of the Company as reported in
US Dollars. Furthermore, changes to the
production tax formulae that came into
effect in 2015 meant that a greater
proportion of gross revenue was paid out in
taxes than in previous years.
However, on an operational level, the results
of 2015 were satisfactory. The development
drilling on the Vostochny Makarovskoye
(“VM”) field was successfully concluded
during the year, which will enable this field,
the Group’s principal producing asset, to
reach and sustain the planned plateau
production rate of one million cubic metres
per day of gas plus associated condensate.
With production from the first of the two
new wells coming only in December 2015,
this drilling activity did not make a
significant contribution to the production
for the full year. However, during mid
December 2015, new production from the
VM#4 well enabled total output from the
VM and Dobrinskoye fields to reach the
intermediate target rate of 750,000 cubic
metres per day of gas plus 180 tonnes per
day of condensate, in total approximately
5,700 barrels of oil equivalent per day. This
production is the core of stable production
which provides the main cash generation
engine for the Group.
The next strategic development to be
undertaken is the further enhancement of
the existing gas processing facilities, first to
introduce a more efficient process for the
sweetening of the gas and secondly to
capture for sale the liquid petroleum gases
(“LPG”) that are currently vented and flared.
The former is intended to achieve significant
cost savings and enable higher production
rates of over one million cubic metres per
day of gas, while the latter will provide an
additional and potentially highly profitable
product stream.
Meanwhile, however, the Group continues
to face a number of significant challenges,
not the least of which is the general
economic situation in Russia, where the
dramatic fall in international oil prices has
had a significant impact on the domestic
economy as well as on the profitability and
cash generation from our production.
While the Group remains in a healthy
financial position with positive net cash
balances, the Board has made the strategic
decision to preserve liquidity and to reduce
capital expenditures to a minimal level. This
means that the strategic investments
outlined earlier will need to be deferred
until cash generation recovers to a
sustainably higher level than currently being
experienced or acceptable external finance,
consistent with a prudent financial strategy,
can be arranged.
Volga Gas continues to benefit from low
operating costs and, with its fields based
close to market, is able to operate
profitability even with significantly reduced
oil and gas prices. During 2015 there were
periods when local market conditions
made it difficult to sell our condensate
production and during these periods, gas
and condensate production had to be
suspended. Towards the end of 2015, the
Group developed channels for exporting
condensate and consequently there are
alternatives, albeit less economically
attractive, to sales solely into the local
domestic market.
The Group holds significant proven reserves
in its three principal fields. These reserves
form the basis of sustainable production
with growth potential in the near term.
These assets provide a platform for the
Group to grow in the future, both through
successful exploration and by selective
value accretive acquisitions. The Board
believes that Volga Gas has a strong asset
base and the financial and operational
capability to develop and extend these
assets to provide long-term value growth
for our shareholders.
Finally, I would like to pay tribute to my
predecessor as Chairman, Aleksey Kalinin,
for his leadership of the Company since its
foundation and appreciation for his
continued service as a non-executive
director. I also welcome my successor as
Chief Executive Officer, Andrey Zozulya,
who assumed that position in May 2015.
He has had to take up his responsibilities
at a very challenging time in our industry
and has the full support and confidence of
the Board as he manages the future
development of the business.
Mikhail Ivanov
Chairman Volga Gas plc | Annual Report and Accounts 201 5 05
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 06 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Chief Executive’s Report
As the Chairman has noted, Volga Gas faced
significant challenges during 2015, with
market factors constraining gas and
condensate production during the first half
of the year, declines in production from the
mature oil wells, dramatic reductions in
international oil prices and higher rates of
production taxes. Each of these factors has
had an impact on the financial performance
of the Group.
There was, however, continued operational
progress during the year. Development
drilling on our main field, Vostochny
Makarovskoye (“VM”) was successfully
concluded and towards the end of 2015, we
increased the rate of production from the
VM and Dobrinskoye fields by 50%.
However, this late lift in production did not
make a material contribution to the Group’s
full year’s average daily production which
was severely impacted by lower production
earlier in the year.
Another factor in the Group’s overall
production in 2015 was the continuing
decline in oil production from the mature
Uzenskoye field. However, Volga Gas
had made very good returns from these
assets and management has identified
opportunities to revive oil production both
by further development of proven reserves
and by exploration for new reserves. As part
of this strategy, a number of operations
were carried out during 2015, as detailed in
the Operational Review, on pages 08 and 09.
Unfortunately, these did not result in
immediate success, but I am optimistic that
the strategy will yield significant levels of oil
production in the future.
Andrey Zozulya
Chief Executive Officer
Summary and Outlook
– Upstream development of VM gas field is effectively
completed
– New wells (VM#3, VM#4) expected to enable 100% increase in production
capacity
– Field output has increased by 50%, fully utilising the current effective
operational capacity of the gas plant of 750 mcm/d (26.5 mmcf/d)
– Gas Processing Plant
– Effective available capacity is 750–1,000 mmcm/d (26.3–35.3 mmcf/d)
– Seeking to improve operational efficiency in the current plant
– Aim to upgrade to amine-based sweetening to enable significant cost savings
and full 35.3 mmcf/d capacity utilisation
– Longer term plan to install LPG capture => further significant increase in
revenues and in profit margin expected
– Finance
– Strong position at start of 2015 enabled Volga Gas to complete development
and remain net cash positive
– Well placed to benefit from recovery in oil prices/Russian Rouble
– Considering raising moderate levels of debt to fund incremental capex on
gas plant upgrade
– Current trading and outlook
– Production during 1Q 2016 averaged 5,550 boepd, current run rate of over
6,000 boepd
– Exports of condensate have enabled production to be maintained at full
operational levels
– Financial performance in US$ driven by oil prices, RUR rates and Mineral
Extraction Taxes
– Operating costs and G&A primarily RUR denominated 07 Volga Gas plc | Annual Report and Accounts 201 5
Following my appointment as Chief
Executive on 5 May 2015, I decided it would
be most effective if I were to be based close
to the operations in the city of Saratov,
rather than in Moscow. Since then, I have
initiated a restructuring of the operational
teams with the aim of improving the
effectiveness of our operational capabilities.
In addition, following an incident that led to
a loss of funds from certain of our bank
accounts, detailed below, I decided to
improve the online security and make
changes to the financial management in
the operating companies. I believe that
with these changes implemented, the
Group is well placed to develop successfully
in the future.
2016 objectives and medium-term
strategy
Having successfully completed the drilling
of the VM#3 and VM#4 wells, the VM field is
now effectively fully developed and is
expected to be able to deliver sufficient
production to maintain a production plateau
of 1 million m
3
per day (35.3 million cubic
feet per day – “mmcf/d”). However, based on
its current configuration, we believe the gas
processing plant is capable of sustaining
production at a rate of 750,000 m
3
per day
(26.5 mmcf/d). Following extensive technical
evaluation and consideration of alternatives,
it has been decided that the most effective
solution for the longer term is to re-
configure the gas plant to utilise an amine
based gas sweetening process. We believe
that this can be achieved with a modest
investment, recently estimated at
approximately US$8 million. If successful,
this would significantly reduce the costs of
chemicals consumed in gas processing and
allow the gas plant to process the targeted
1 million m
3
per day (35.3 mmcf/d) of gas. A
more ambitious plan, to install equipment to
capture and sell liquid petroleum gases
(“LPG”), would be a follow-on project which
could add a valuable further income stream.
Meanwhile, however, the Board of Volga
Gas has decided to preserve the financial
strength of the Group and defer capital
expenditures while oil prices remain at
very low levels. For the time being,
capital expenditure will be limited to
completing payments for ongoing
projects and necessary items to maintain
producing assets.
A new commercial initiative that has been
implemented is the development of a
channel for exports of our condensate
production. A small number of cargoes were
exported in November and December 2015.
It is our aim to provide a viable alternative
for sales in the event that the local domestic
market for condensate closes, as it did
during a number of weeks in 2015.
Finance
In spite of the challenges mentioned above,
the Group managed to maintain positive net
cash flow from operations, although as a
result of the capital expenditure incurred
during 2015, there was a net cash outflow of
US$9.0 million. This includes a sum
equivalent to approximately US$0.7 million
lost from certain Group bank accounts as a
result of unauthorised transfers in an
apparent cyberattack. The Group remained
in a net cash position and the closing cash
balance at 31 December 2015 was US$6.8
million with no debt.
Further development and exploration
expenditures in 2016 and beyond have been
deferred until the Board is confident that
these can be funded from operating cash
flow. In addition, the Group may consider a
moderate level of borrowing to be
appropriate to fund significant value
accretive investments such as the upgrade
to amine processing at the gas plant.
Current trading and outlook
During January and February 2016,
Group production averaged 5,632 barrels
of oil equivalent per day, in line with
management’s plan. The gas plant is
consistently operating at planned capacity
of 750,000 m
3
per day, with condensate
output running at over 1,700 barrels per day,
the majority of which is being sold to export
markets. International oil prices have
recovered from the low levels seen in
January, as has the Ruble. Oil production is
now a minor part of the Group’s output and
has suffered moderate disruption as the
mild winter caused difficulties in
transportation of oil sales.
In the current environment, and at current
production rates, management expects the
Group’s financial performance in 2016 to
improve on that of 2015. Meanwhile, new
capital expenditure commitments have
been reduced to minimal levels – below
US$1.5 million.
Andrey Zozulya
Chief Executive Officer
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 08 Volga Gas plc | Annual Report and Accounts 201 5
contracted Eurasia Drilling to complete this
well and to drill a sidetrack to the VM#4
well, and a new rig was mobilised during
February 2015.
The initial operation was on VM#4, a well
that was originally drilled in 2008-2009 but
which intersected a low permeability zone in
the target horizon. A productive target was
identified with a bottom-hole location
approximately 500 metres from the original
well. By May 2015, drilling on the VM#4
sidetrack was concluded, the deviated well
section having intersected a total reservoir of
40 metres. Based on flow testing,
management estimated that this well could
be the most productive on the VM field,
being capable of sustaining a flow rate of up
to 350 mcm/d (12.4 mmcf/d). The tie back of
this well was undertaken and in December
2015 the well was put in production. After a
short build-up, by 16 December 2015, the
combined daily output of gas from four wells,
VM#1, VM#2, VM#4 and Dobrinskoye #22,
produced 755,000 m
3
per day of sales gas.
On conclusion of the drilling on VM#4, the rig
was mobilised to the VM#3 location and in
August 2015, the well reached the planned
target depth. In this well, the top of the
reservoir section was found higher than
anticipated and total pay of close to 100
metres was logged. In addition, the well
was drilled deeper than the original plan,
and a high specification logging operation
undertaken to gather data that may be used
for future development of the field.
Given the strong flow rates from VM#4, and
that current well capacity is sufficient to fully
utilise available plant capacity, the tie-back
of the VM#3 well has been deferred to the
springtime of 2016, when the operations can
be concluded more conveniently.
Based on this successful drilling and with
continuing management of the existing well
stock including, as appropriate, acid wash
treatments, it seems likely that no further
drilling will be required to produce the VM
field at the target plateau rate of 1.0
mmcm/d (35.3 mmcf/d).
Gas processing plant
Since December 2015, the Dobrinskoye gas
processing plant has been consistently
operating at rates of over 750,000 m
3
per
day (26.5 million cubic feet per day), a 50%
increase above the normal operating rates
achieved in 2014 and most of 2015. While
produced simultaneously from the wells and
once the storage capacity at the gas plant is
full, it is necessary to cease production.) In
addition, during July, Gazprom was
undertaking extensive maintenance to the
local gas pipeline network and for this
period, there were limitations to the volume
of gas that could be accepted in the
pipeline. For these reasons production
during 2015 averaged 12.5 mmcf/d of gas
and 784 bpd of condensate (2014: 15.5
mmcf/d of gas and 966 bpd of condensate).
Gas continues to be sold to Trans Nafta under
contract at a fixed Ruble contract gas sales
price. The Ruble price increased from RUR
3,887 per thousand cubic metres (“mcm”) to
RUR 4,201 per mcm in July 2015. However,
with the devaluation of the Ruble during
2015, the US Dollar equivalent of the price
declined further during 2015. Historically,
condensate was sold entirely into the local
domestic market. However, with the periods
of low domestic demand which impacted
our business during 2015, it was decided to
develop new commercial channels for
exporting condensate. During November and
December 2015, a number of cargoes of
condensate were sold to export customers in
the Baltic region. While realisations were less
than we would normally achieve in the
domestic market, exports provide a viable
alternative sales route for our production.
We continue to work on these sales and on
improving the realisations.
The average gas sales price for 2015 was
the equivalent of US$1.51 per thousand
cubic feet, net of VAT (2014: US$2.15).
During 2015 the average condensate sales
price was US$23.89 per barrel (2014:
US$45.07 per barrel).
Average unit production costs on the
gas-condensate fields declined to US$5.06
per boe in 2015 (2014: US$6.49). The decline
in the Ruble, in which effectively all the costs
are denominated, partly offset higher costs
associated with chemicals consumed in gas
processing and higher costs of waste disposal
as well as other inflationary cost increases.
During 2015, the main development activity
was the drilling of the VM#3 and VM#4
production wells. The VM#3 well had
commenced drilling in 2014, however, the
local drilling contractor was unable to
overcome mechanical difficulties and the
operations were suspended after various
attempts. Subsequently, the Group
Operations overview
The overall level of production in 2015, at
3,278 boepd, was 23% below the 4,244
boepd achieved in 2014. The principal
reason for this was that in periods during
January, February, and again in May and
June 2015, the local market for our
condensate was effectively closed and
production of gas and condensate had to
be suspended for a period of close to six
weeks. In addition, we experienced
continued declines in oil production
from the mature Uzen field.
However, in the periods when the
condensate market was functioning
normally, production from the VM and
Dobrinskoye fields was exactly as planned.
Furthermore with the successful completion
of the drilling operations on the VM#3 and
VM#4 wells, the production capacity on
the VM field increased significantly and,
in December 2015, the VM#4 well was
brought into production, leading to an
immediate increase of 50% in gas and
condensate production.
As a consequence of the lower production
in 2015, significantly lower oil prices and
the devaluation of the Ruble, revenues
were down by 56% in US Dollar terms.
The increase in formula rates of Mineral
Extraction Taxes put further pressure on
EBITDA which, although still positive, was
down by 94% compared to the 2014 level.
Full details are discussed in the Financial
Review on page 10.
Gas/condensate production
The Dobrinskoye and VM fields are managed
as a single business unit. Production from the
fields is processed at the gas plant located
next to the Dobrinskoye field, extracting the
condensate and processing the gas to
pipeline standards before input into
Gazprom’s regional pipeline system via an
inlet located at the plant. Since November
2013, production has normally been running
at levels that reflect the capacity of the
existing wells in the two fields, that is
approximately 500,000 m
3
per day (17.8
mmcf/d) of gas and 120 tonnes per day (1,050
barrels per day(“bpd”)) of condensate.
During January and February 2015, and
again during May and June 2015, production
of gas and condensate had to be
temporarily suspended since it was not
possible to sell the condensate produced in
the local market. (Gas and condensate are
Strategic Report
Operational Review 09 Volga Gas plc | Annual Report and Accounts 201 5
the physical process plant and pipelines
were designed to operate at 1 million m
3
per day, the need to dispose of bulky spent
chemicals used in gas sweetening is the
principal constraint on the operations.
During 2015, a number of technical and
feasibility studies were conducted, including
consideration of alternative sweetening
chemical processes and a more ambitious
project to simultaneously install amine
sweetening and LPG extraction. Given the
financial constraints, it was decided that
these investments should be deferred until
a significant recovery in cash generation
could be confidently expected.
Oil production
Having completed its seventh year of full
time production, the Yuzhny Uzenskoye oil
field is the Group’s longest established field.
It continues to produce under natural
reservoir pressure drive although water cut
has risen. As the oil has been produced, the
oil-water contact in the reservoir has risen
and since the start of 2013, wells at the edge
of the field have exhibited some water cut
and were shut in. As a consequence, oil
production from the field has been managed
at anticipated declining production rates.
During 2015, a sidetrack from the currently
non-producing Uzen #8 well was drilled with
the intention of producing oil from a
potentially bypassed “attic” in the Aptian
reservoir. Unfortunately this operation was
not successful owing to mechanical
difficulties, although at the equivalent of
US$0.4 million, the cost was modest.
There remain significant proved undeveloped
reserves in the shallower Albian reservoir.
Following a technical study carried out during
2015, it appears that a viable development
plan for this reservoir would be to drill two
horizontal production wells. The cost of each
of these wells is currently estimated to be
US$2.0 million and would expect to develop
over 2 million barrels of reserves at a capital
cost of $4.00 per barrel of reserves. Along
with other discretionary capital expenditure,
however, this investment has been
temporarily deferred.
Also during 2015, a sidetrack to the
Sobolevskaya-11 well on the Urozhainoye-2
licence was drilled. This well, which was
originally drilled by a previous licencee, had
been produced by Volga Gas during 2013
and 2014 but was depleted. The sidetrack
was intended to access a potential small
undeveloped oil reserve. Mechanical
difficulties with the drilling prevented this
sidetrack from reaching the intended target
and the operations have been suspended.
Further operations on this have been
deferred pending evaluation.
The Group’s oil production, whilst of modest
scale, has been very profitable for the Group
and a useful contributor of cash flow.
Exploration
The Group has identified a number of
exploration targets in the Karpenskiy
Licence Area at shallow horizons of between
1,000 and 2,000 metres depth. These
provide low cost opportunities to add
potentially material oil reserves.
During December 2015, an exploration well
was drilled on one of these targets, the
Yuzhno Mironovskaya prospect. This well
was drilled to a total vertical depth of 940
metres within a time of 21 days, a record
drilling rate for the Group. After running
logs, the principal and secondary target
zones in the Cretaceous post-salt Albian and
Aptian formations were found to be water
bearing and the well was plugged and
abandoned. With the efficient well drilling,
the total cost of this well was limited to
approximately US$0.6 million.
The Group has fulfilled all its licence
commitments on the Karpenskiy Licence
Area and further drilling in the area is
discretionary. Nevertheless future
development of the oil potential in the
Group’s licences is a key element of
management’s medium-term strategy.
Oil, gas and condensate reserves as
of 1 January 2016
During 2012, an independent evaluation of
the Group’s oil, gas and condensate reserves
was conducted by Miller and Lents Ltd.
The independent assessment of the
reserves and net present value of future net
revenue (“NPV”) attributable to the Group’s
three principal fields, Dobrinskoye,
Vostochny Makarovskoye and Uzenskoye, as
at 1 August 2012, was prepared in
accordance with reserve definitions set by
the Oil and Gas Reserves Committee of the
Society of Petroleum Engineers (“SPE”).
The above table shows the Proven and
Probable reserves as evaluated by Miller &
Lents as at 1 August 2012, adjusted by
management for subsequent production.
Andrey Zozulya
Chief Executive Officer
Oil, gas and condensate reserves
Oil &
condensate
(mmbbl)
Gas
(bcf)
Total
(mmboe)
As at 31 December 2014
Proved reserves 13.428 147.1 37.894
Proved plus probable reserves 14.732 158.0 41.020
Production: 1 January – 31 December 2015 0.439 4.5 1.196
As at 31 December 2015
Proved reserves 12.989 142.6 36.698
Proved plus probable reserves 14.293 153.5 39.824
Notes:
1. There has been no external reassessment of reserves
subsequent to the Miller and Lents reserve study of
2012.
2. The above reserve estimates, prepared in accordance
with reserve definitions prepared by the Oil and Gas
Reserves Committee of the SPE, have been reviewed
and verified by Mr Andrey Zozulya, Director and Chief
Executive Officer of Volga Gas plc, for the purposes
of the Guidance Note for Mining, Oil and Gas
companies issued by the London Stock Exchange in
June 2009. Mr Zozulya holds a degree in Geophysics
and Engineering from the Groznensky Oil & Gas
Institute and is a member of the Society of Petroleum
Engineers.
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Financial
Statements 10 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Financial Review
and producing assets (2014: US$ 5.6 million)
and US$0.6 million was incurred on
exploration (2014: nil). The most significant
components of the capital expenditure in
2015 relate to successful drilling on the VM
field with additional sums on unsuccessful
drilling on the Uzenskoye and Sobolevskoye
fields and on the Yuzhny Mironovskaya
exploration prospect. The unsuccessful
expenditure has been expensed.
Balance sheet and financing
As at 31 December 2015, the Group held
cash and bank deposits of US$6.8 million
(2014: US$15.8 million) with no debt. All
of the Group’s cash balances are held in
bank accounts in the UK and Russia and
the majority of the Group’s cash is held in
US Dollars.
As at 31 December 2015, the Group’s
intangible assets decreased to US$2.9
million (2014: US$3.7 million). Property,
plant and equipment, decreased to US$48.3
million (2014: US$57.8 million), primarily
reflecting the impact of foreign exchange
adjustments. The carrying value of the
Group’s assets relating to its main cash
generating units have been subject to
impairment testing. The result of the
impairment tests, including sensitivity
analysis around the central economic
assumptions as detailed in Note 4(b) to the
Accounts, showed no requirement for
impairment, although as noted above there
were impairments and write-offs relating to
unsuccessful operations.
On 9 July 2014 the capital reduction
approved by shareholders at the Company’s
Annual General Meeting on 6 June 2014
became effective following confirmation
by the High Court, the filing of the Court
Order and a Statement of Capital with
Companies House and the fulfilment of
certain minor undertakings given to the
Court. As a result, the Share Premium
Account of the Company, amounting to
US$165.9 million, was cancelled and the
equivalent sum credited to the Company’s
Profit and Loss Account, thereby creating
distributable reserves.
For the year ending 31 December 2015, the
Group recorded a currency retranslation
expense of US$15.3 million (2014: US$49.0
million) in its Other comprehensive income,
relating to the devaluation of the Ruble
against the US Dollar.
asset impairment expenses, mainly arising
from unsuccessful drilling activities, of
US$3.0 million (2014: nil) the Group
recorded an operating loss for 2015 of
US$5.0 million (2014: operating profit of
US$12.8 million).
Including net interest income of US$0.1
million (2014: US$0.2 million) and other
net gains of US$0.3 million (2014: US$3.3
million) the Group recognised a loss before
tax of US$4.6 million (2014: profit before tax
of US$16.3 million) and reported net loss
after tax of US$4.1 million (2014: net profit
after tax of US$13.1 million) after a deferred
tax credit of US$0.6 million (2014: deferred
tax charge of US$3.2 million).
Included in Other gains and losses in 2015
was a foreign exchange gain of US$1.0
million arising from US Dollar cash balances
held by Russian subsidiaries which have the
Ruble as functional currency (2014: US$3.3
million loss on foreign exchange) and a loss
of approximately US$0.7 million equivalent
arising from unauthorised withdrawals from
bank accounts held by the Group’s Russian
operating subsidiaries (2014: nil).
Cash flow
Group cash flow from operating activities
was US$1.2 million (2014: US$16.2 million).
Net working capital movements contributed
cash inflow of US$0.8 million in 2015 (2014:
US$0.6 million). With higher capital
expenditures in 2015, the net outflow from
investing activities was US$8.7 million (2014:
US$5.5 million). Net cash outflow from
financing activities was US$1.0 million (2014:
outflow of US$3.0 million), in both cases
related to payment of equity dividends.
Dividend
In July 2014, the Board announced
the adoption of a policy to distribute
approximately 50% of consolidated
net profit after tax as a cash dividend.
Dividends of US$0.05 per ordinary share
were declared in respect of the year
ended 31 December 2014. In light of the
material reduction in the oil price, adverse
financial conditions prevailing in Russia
and the losses incurred, the Board is not
recommending a dividend in respect of
the year ended 31 December 2015.
Capital expenditure
During 2015 capital expenditure of US$10.4
million was incurred (2014: US$5.6 million),
of which US$9.8 million was on development
Results for the year
In 2015, the Group generated US$17.8
million in turnover (2014: US$39.4 million)
from the sale of 438,910 barrels of crude oil
and condensate (2014: 603,950 barrels) and
4,545 million cubic feet of natural gas (2014:
5,671 million cubic feet).
The average price realised for liquids
was the equivalent of US$25.16 per barrel
(2014: US$45.07 per barrel). Oil and
condensate sales were primarily made into
the domestic market during the period,
although during November and December
2015 approximately 12,000 barrels of
condensate, a little less than 2% of the total
liquids sales, were exported to customers in
Lithuania (2014: nil). Our oil and condensate
sales prices in the domestic market reflect
international prices after adjusting for
export taxes and transportation costs.
The gas sales price during 2015 averaged
US$1.49 per thousand cubic feet (2014:
US$2.15 per thousand cubic feet), the
fall being entirely attributable to the
devaluation of the Ruble. The sales price of
gas in Rubles increased by 8.1% in July 2015
(9.5% in July 2014). Production activities
generated a gross profit of US$2.2 million in
2015 (2014: US$16.9 million).
In 2015, the total cost of production
decreased to US$7.4 million (2014: US$9.5
million), primarily reflecting the effect of
devaluation on our predominantly Ruble
denominated costs. Production based taxes
were US$5.9 million (2014: US$8.3 million)
reflecting lower volumes and the impact of
lower oil prices and Ruble exchange rates
on Mineral Extraction Tax (“MET”) rates.
However, with formula changes coming into
effect on 1 January 2015, MET paid in 2015
represented 35% of revenues (2014: 21.2%
of revenues).
Operating and administrative expenses
in 2015 were US$3.4 million (2014:
US$4.2 million).
The Group experienced a significant
reduction in EBITDA (defined as operating
profit before non-cash charges, including
exploration expense, depletion and
depreciation) to US$0.9 million (2014:
US$17.4 million) as a result of the lower
revenues partly offset by lower expenses.
After incurring exploration and evaluation
expenses of US$0.6 million (2014: nil) on
unsuccessful exploration drilling and other 11 Volga Gas plc | Annual Report and Accounts 201 5
The Group’s committed capital expenditures
are less than expected cash flow from
operations and cash-on-hand and such
expenditures can be managed in light of the
sharp reduction in international oil prices
and the devaluation of the Ruble. The Group
may consider additional debt facilities to
fund the longer-term development of its
existing licences and operational facilities
as appropriate.
The Group’s financial statements are
presented on a going concern basis, as
outlined in note 2.1 to the Accounts.
Tony Alves
Chief Financial Officer
Five year financial and operational summary
Sales volumes 2015 2014 2013 2012 2011
Oil & condensate (barrels) 438,910 603,950 547,257 529,501 546,817
Gas (mcf) 4,545 5,671 3,128 1,193 1,348
Total (boe) 1,196,410 1,549,117 1,068,585 728,334 771,479
Operating Results (US$ 000) 2015 2014 2013 2012 2011
Oil and condensate sales 11,041 27,220 26,067 25,526 25,425
Gas sales 6,786 12,203 8,554 2,769 3,146
Revenue 17,827 39,423 34,621 28,295 28,571
Production costs (6,016) (7,805) (5,946) (3,776) (3,126)
Production based taxes (5,877) (8,344) (8,095) (8,951) (9,537)
Depletion, depreciation and other (2,369) (4,656) (2,611) (2,280) (2,641)
Other (1,327) (1,709) (1,799) (1,562) (991)
Cost of sales (15,589) (22,514) (18,451) (16,569) (16,295)
Gross profit 2,238 16,909 16,170 11,726 12,276
Selling expenses (319) – – – –
Exploration expense (635) – (2,519) (8,475) (200)
Write-off of development assets (2,950) – (1,439) (188) (5,612)
Operating, administrative & other expenses (3,377) (4,157) (4,029) (8,969) (5,991)
Operating profit/(loss) (5,043) 12,752 8,183 (5,906) 473
Net realisation 2015 2014 2013 2012 2011
Oil & condensate (US$/barrel) 25.16 45.07 47.63 48.21 46.50
Gas (US$/mcf) 1.49 2.15 2.73 2.32 2.33
Operating data (US$/boe) 2015 2014 2013 2012 2011
Production and selling costs 5.29 5.04 5.56 5.18 4.05
Production based taxes 4.91 5.39 7.58 12.29 12.36
Depletion, depreciation and other 1.98 3.01 2.44 3.13 3.42
EBITDA calculation (US$ 000) 2015 2014 2013 2012 2011
Operating profit/(loss) (5,043) 12,752 8,183 (5,906) 473
Exploration expense 635 – 2,519 8,475 200
DD&A and other non-cash expense 5,319 4,656 4,050 5,413 8,253
EBITDA 911 17,408 14,752 7,982 8,926
EBITDA per boe 0.76 11.24 13.81 10.96 11.57
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Statements 12 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Principal Risks and Uncertainties
The Group is subject to stringent
environmental laws in Russia with regards to
its oil and gas operations. Failure to comply
with such laws and regulations could subject
the Group to material administrative, civil,
or criminal penalties or other liabilities.
Additionally, compliance with these laws
may, from time to time, result in increased
costs to the Group’s operations, impact
production, or increase the costs of
potential acquisitions.
The Group liaises closely with the Federal
Service of Environmental, Technological
and Nuclear Resources of the Saratov
and Volgograd Oblasts on potential
environmental impact of its operations and
conducts environmental studies both as
required by, and in addition to, its licence
obligations to mitigate any specific risk. The
Group’s operations are regularly subject to
independent environmental audit.
The Group did not incur any material costs
relating to the compliance with
environmental laws during the period.
Risk of operating oil and gas properties
The oil and gas business involves certain
operating hazards, such as well blowouts,
cratering, explosions, uncontrollable flows
of oil, gas or well fluids, fires, pollution and
releases of toxic substances. Any of these
operating hazards could cause serious
injuries, fatalities, or property damage,
which could expose the Group to liabilities.
The settlement of these liabilities could
materially impact the funds available for the
exploration and development of the Group’s
oil and gas properties. The Group maintains
insurance against many potential losses and
liabilities arising from its operations in
accordance with customary industry
practices, but the Group’s insurance
coverage cannot protect it against all
operational risks.
Foreign currency risk
The Group’s capital expenditures and
operating costs are predominantly in
Russian Rubles (“RUR”) while a minority of
administrative costs are in US Dollars, Euros
and Pounds Sterling. Revenues are
predominantly received in RUR so the
operating profitability is not materially
exposed to moderate short-term exchange
rate movements. The functional currency of
the Group’s operating subsidiaries is the
RUR and the Group’s assets and liabilities
are predominantly RUR denominated. As
of insufficient demand for the Group’s gas is
considered low. Gas sales have generally
been conducted as expected, subject to
occasional constraints during pipeline
maintenance operations. However, the
Group is studying the feasibility of
construction of a separate pipeline to
connect with a facility owned by a nearby
upstream operator.
Oil and gas production taxes
The Group’s sales generated from oil
and gas production are subject to Mineral
Extraction Taxes, which form a material
proportion of the total costs of sales.
The rates of these taxes are subject to
changes by the Russian government.
Changes to rates which come into effect
during 2015 materially increased the rates
on crude oil, condensate and natural gas.
With oil prices at low levels and Russian
Government budgets under pressure, there
are risks of further adverse changes to
production taxes.
Exploration and reserve risks
Whilst the Group will seek to apply the latest
technology to assess exploration licences,
the exploration for, and development of,
hydrocarbons is speculative and involves a
high degree of risk. These risks include the
uncertainty that the Group will discover
sufficient commercially exploitable oil or gas
resources in unproven areas of its licences.
Unsuccessful exploration efforts may result
in impairment to the balance sheet value of
exploration assets.
During 2012, the Group commissioned a
reserve evaluation based on reporting
standards set by the Society of Petroleum
Engineers. If the actual results of producing
the Group’s fields are significantly different
to expectations, there may be changes in
the future estimates of reserves. These may
impact the balance sheet carrying values of
the Group’s Intangible Assets and the
Group’s Property, Plant and Equipment.
Environmental risk
The oil and gas industry is subject to
environmental hazards, such as oil spills, gas
leaks, ruptures and discharges of petroleum
products and hazardous substances. These
environmental hazards could expose the
Group to material liabilities for property
damages, personal injuries, or other
environmental harm, including costs
of investigating and remediating
contaminated properties.
The Group is subject to various risks relating
to political, economic, legal, social, industry,
business and financial conditions.
The following risk factors, which are not
exhaustive, are particularly relevant to the
Group’s business activities:
Volatility of oil prices
The supply, demand and prices for oil are
influenced by factors beyond the Group’s
control. These factors include global and
regional demand and supply, exchange rates,
interest and inflation rates and political
events. A significant prolonged decline in oil
and gas prices could impact the profitability
of the Group’s activities. Additionally, the
Group’s production is predominantly sold in
the domestic Russian markets which are
influenced by domestic supply and demand
factors, the level of Russian export taxes and
regional transportation costs.
All of the Group’s revenues and cash
flows come from the sale of oil, gas and
condensate. If sales prices should fall below
and remain below the Group’s cost of
production for any sustained period, the
Group may experience losses and may be
forced to curtail or suspend some or all of
the Group’s production, at the time such
conditions exist. In addition, the Group would
also have to assess the economic impact of
low oil and gas prices on its ability to recover
any losses the Group may incur during that
period and on the Group’s ability to maintain
adequate reserves.
The Group does not currently hedge its crude
oil production to reduce its exposure to oil
price volatility as the structure of taxes
applied to oil and condensate production in
Russia effectively reduce the exposure to
international market prices for oil.
Market risks
The Group’s revenues generated from oil and
condensate production have typically been
from sales to local domestic customers.
There have been periods when the local
market has been unable to purchase
condensate, causing temporary suspension
of production and loss of revenues. The
Group has developed arrangements to sell oil
and condensate into regional export markets
to mitigate this risk. Gas sales are made, via
an intermediary, into the domestic market via
the Gazprom pipeline network. The region
in which the Group operates is reliant on
external gas supplies. Consequently the risk 13 Volga Gas plc | Annual Report and Accounts 201 5
the Group’s presentational currency is the
US Dollar, the significant devaluation of
the RUR against the US Dollar negatively
impacts the Group’s financial statements.
Business in Russia
Amongst the risks that face the Group in
conducting business and operations in
Russia are:
– Economic instability, including in other
countries or the global economy that
could lead to consequences such as
hyperinflation, currency fluctuations and
a decline in per capita income in the
Russian economy.
– Governmental and political instability
that could disrupt, delay or curtail
economic and regulatory reform,
increase centralised authority or result
in nationalisations.
– Social instability from any ethnic,
religious, historical or other divisions that
could lead to a rise in nationalism, social
and political disturbances or conflict.
– Uncertainties in the developing legal and
regulatory environment, including, but
not limited to, conflicting laws, decrees
and regulations applicable to the oil and
gas industry and foreign investment.
– Unlawful or arbitrary action against the
Group and its interests by the regulatory
authorities, including the suspension or
revocation of their oil or gas contracts,
licences or permits or preferential
treatment of their competitors.
– Lack of independence and experience of
the judiciary, difficulty in enforcing court
or arbitration decisions and governmental
discretion in enforcing claims.
– Unexpected changes to the federal and
local tax systems.
– Laws restricting foreign investment in
the oil and gas industry.
Legal systems
Russia, and other countries in which the
Group may transact business in the future,
have or may have legal systems that are less
well developed than those in the United
Kingdom. This could result in risks such as:
– Potential difficulties in obtaining
effective legal redress in the court of
such jurisdictions, whether in respect of
a breach of contract, law or regulation,
including an ownership dispute.
– A higher degree of discretion on the part
of governmental authorities.
– The lack of judicial or administrative
guidance on interpreting applicable rules
and regulations.
– Inconsistencies or conflicts between and
within various laws, regulations, decrees,
orders and resolutions.
– Relative inexperience of the judiciary and
courts in such matters.
In certain jurisdictions, the commitment of
local business people, government officials
and agencies and the judicial system to abide
by legal requirements and negotiated
agreements may be more uncertain, creating
particular concerns with respect to licences
and agreements for business. These may be
susceptible to revision or cancellation and
legal redress may be uncertain or delayed.
There can be no assurance that joint
ventures, licences, licence applications or
other legal arrangements will not be
adversely affected by the jurisdictions in
which the Group operates.
Liquidity risk
At 31 December 2015 the Group had US$6.8
million of cash and cash equivalents of which
US$2.0 million was held in bank accounts in
Russia. The Group intends to fund its ongoing
operations and development activities from
its cash resources and cash generated by its
established operations. At 31 December 2015
the Group has budgeted capital expenditures
of less than US$1 million primarily for the
continuing development of gas and
condensate production and approximately
US$1.5 million of accounts payable relating to
capital expenditures incurred in the year
ended 31 December 2015. The Board
considers that the Group will have sufficient
liquidity to meet its obligations. All current
and planned capital expenditures are
discretionary and may be deferred or
cancelled in the light of the Group’s cash
generation and liquidity position.
Through its ordinary course activities, the
Group is exposed to legal, operational and
development risk that could delay growth in
its cash generation from operations or may
require additional capital investment that
could place increased burden on the Group’s
available financial resources.
The Group is also exposed to fraudulent
transfers of funds from its bank accounts.
During the year ended 31 December
2015, the Group enhanced its protections
and procedures after suffering such
fraudulent transfers.
Capital risk
The Group manages capital to ensure that it
is able to continue as a going concern whilst
maximising the return to shareholders. The
Group is not subject to any externally
imposed capital requirements. The Board
regularly monitors the future capital
requirements of the Group, particularly
in respect of its ongoing development
programme. Management expects that
the cash generated by the operating fields
will be sufficient to sustain the Group’s
operations and committed capital
investment for the foreseeable future and
has a policy of maintaining a minimum level
of liquidity to cover forward obligations.
Further short-term debt facilities may be
arranged to provide financial headroom
for future development activities.
Tony Alves
Chief Financial Officer
S t r a te gic
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Governance
Financial
Statements 14 Volga Gas plc | Annual Report and Accounts 201 5
Board of Directors
Corporate Governance
Mikhail Ivanov Non-Executive Chairman
Mr Ivanov was Chief Executive Officer of the Company from its foundation until 5 May 2015.
Mr Ivanov was also a Partner and Director of Oil and Gas Projects at Baring Vostok Capital
Partners. He has a long history of involvement in the oil sector. He worked for over ten
years at Schlumberger, the international oil services company, where he served as head of
its Iran operations and was responsible for business development in Russia. Prior to joining
Shlumberger, he founded and headed two companies that focused on oil production and
service. Mr Ivanov holds an MS degree in Geophysics from Novosibirsk State University and
an MBA from the Kellogg School of Management of Northwestern University. He is an
elected member of the Society of Petroleum Engineers.
Appointed to the Board: 25 July 2006
Appointed as Chairman: 5 June 2015
Committee membership: n/a
Andrey Zozulya Chief Executive Officer, Executive Director
Mr Zozulya is a Russian citizen and has over 20 years’ experience in the oil sector in Russia
both with major oil and oil service companies, including over ten years with Schlumberger.
He also has experience of operating in the Saratov region in which Volga Gas’ operations
are based. He has a degree in Geophysics and Engineering from the Groznensky Oil & Gas
Institute and is a member of the Society of Petroleum Engineers.
Appointed to the Board: 5 May 2015
Committee membership: n/a
Antonio Alves Chief Financial Officer, Executive Director
Mr Alves has had experience with the independent oil and gas industry for over 20 years
as one of the leading equity analysts covering the sector. Prior to joining Volga Gas, he was
head of oil and gas research for KBC Peel Hunt and was closely involved with the Company’s
2007 IPO. He previously held positions with Investec Securities, The Bell Group International
and Schroders. He read Mathematics at Cambridge University between 1977 and 1983 both
as an undergraduate and a post-graduate research student.
Appointed to the Board: 28 January 2009
Committee membership: n/a
Michael Calvey Non-Executive Director
Mr Calvey is a Senior Partner of Baring Vostok Capital Partners and a Director of Baring
Private Equity International and is on the Boards of several of Baring Vostok’s portfolio
companies. He began working in Moscow in 1994 as one of the members of the consulting
committee of the First NIS Regional Fund. He is a member of the investment committees of
three Baring Vostok funds. He is also a member of the Investment Committees of the Baring
Asia and Baring India funds. Before 1994, Mr Calvey lived in London and New York, where he
worked at the European Bank for Reconstruction and Development (“EBRD”) and Salomon
Brothers. At EBRD he was responsible for investments in the energy sector of Central and
Eastern Europe. At Salomon Brothers Mr Calvey worked on mergers and acquisitions and
capital market projects in the oil and gas sector. He is a member of the Boards of the
Atlantic Council and the Emerging Markets Private Equity Association.
Appointed to the Board: 29 September 2006
Committee membership: : Audit, Nomination 15 Volga Gas plc | Annual Report and Accounts 201 5
Stephen Ogden Non-Executive Director
Mr Ogden is a Non-Executive Director of the West African shopping mall operator
Persianas. He was previously a Non-Executive Director of United Confectioneries
(Russia), Heineken Russia and Metropolis Media (former Yugoslavia). Mr Ogden was Chief
Financial Officer of the Bochkarev Brewery in St Petersburg from 1997 to 2002. Prior to
becoming Chief Financial Officer of Bochkarev, Mr Ogden was an auditor with KPMG and
PricewaterhouseCoopers, and Financial Controller of CS First Boston (Moscow). Mr Ogden
has a joint honours degree in economics & politics from Durham University, England, and is
a qualified British chartered accountant (“FCA”).
Appointed to the Board: 14 March 2007
Committee membership: Audit, Nomination, Remuneration
Aleksey Kalinin Non-Executive Director
Mr Kalinin served as Chairman of the Board from 14 March 2007 until 5 June 2015,
remaining as a Non-Executive Director. Mr Kalinin is a Senior Partner of Baring Vostok
Capital Partners. He joined Baring Vostok in 1999 from Alfa Capital, where he served for six
years as the Director of the Department for Direct Investments. Aleksey represents the
interests of Baring Vostok’s funds on the Board of Directors of a wide range of portfolio
companies. He has a doctorate from the Moscow Power Engineering Institute, where he
conducted scientific research, lectured for 12 years and served as the Director of the Youth
Center for Scientific and Technical Creativity.
Appointed to the Board: 29 September 2006
Committee membership: Remuneration
Vladimir Koshcheev Non-Executive Director
Mr Koshcheev currently acts as President of Joint Stock Company “NPO POG”. Until 2009
he was President of Pervaya Investizionno–Stroitelnaya Company LLC, Spinaker LLC. He has
been Chairman of CJSC AKSM since 2002. Mr Koshcheev was President of Privolzhskaya
Neftyanaya Company LLC between 2003 and 2005 and was previously a shareholder in and
acted as President of Vesla. Mr Koshcheev received a specialist diploma from Moscow State
Technical University in 1978 and he is a member of the Russian Academy of Natural Sciences.
Appointed to the Board: 29 September 2006
Committee membership: n/a
Ronald Freeman Non-Executive Director
Mr Freeman is a member of the Executive Committee of the Atlantic Council of the United
States (Washington DC), and a past independent director on the boards of Sberbank,
Severstal, and Troika Dialog. From 1973 to 1991 and from 1997 until his retirement from
Citigroup as co-head of European Investment Banking in 2000, he was an investment
banker specialising in financing and mergers and acquisition for companies in the oil and
gas industry with Salomon Brothers, now a unit of Citigroup. From 1991 to 1997, he was
head of the Banking Department of the European Bank for Reconstruction and
Development (London).
Appointed to the Board: 14 March 2007
Committee membership: Audit, Nomination, Remuneration
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 16 Volga Gas plc | Annual Report and Accounts 201 5
Corporate Governance Statement
Corporate Governance
Introduction
The Board’s overriding objective is to ensure
that the Group delivers long-term capital
appreciation for its shareholders.
Compliance
As Volga Gas plc is quoted on the AIM
market of the London Stock Exchange,
it is neither required to comply with the
2014 UK Corporate Governance Code that
was published by the Financial Reporting
Council (the “Code”) nor issue a statement
of compliance with it. Nevertheless, the
Board fully supports the principles set
out in the Code and seeks to follow
these as best practice wherever this is
appropriate having regard to the size of
the Company, the resources available to it
and the interpretation of the Code in the
Quoted Companies Alliance Corporate
Governance Code for Small and Mid-sized
Quoted Companies.
Details are provided below of how the
Company applies the elements of the Code
that are deemed appropriate.
Board of directors
Role of the Board
The Board’s role is to provide leadership to
the Group within a framework of prudent
and effective controls which enables risk to
be assessed and managed. The Board sets
the Group’s strategic aims and ensures that
the necessary financial and human
resources are in place for the Group to meet
its objectives, and reviews management’s
performance in meeting these objectives.
The Board sets and monitors the Group’s
values and standards and ensures that the
Group’s obligations to shareholders and
other stakeholders are understood and met.
The Board has a formal schedule of matters
reserved for its approval, including:
– Strategic and policy considerations
– Annual budget, including capital
expenditure
– Interim and final financial statements
– Dividend policy, share buy-backs or other
distributions
– Management structure and
appointments
– Mergers, acquisitions, disposals
– Capital raising
– Significant changes in accounting policies
– Appointment or removal of directors or
the company secretary
Board composition
The Board currently comprises two
executive directors and six non-executive
directors, of whom three are deemed to be
independent and three non-independent:
– Mikhail Ivanov – Non-Executive Chairman
– Andrey Zozulya – Executive Director and
CEO
– Tony Alves – Executive Director, CFO and
Company Secretary
– Michael Calvey – Non-Executive
– Ronald Freeman – Independent Non-
Executive
– Aleksey Kalinin – Non-Executive
– Vladimir Koshcheev – Independent
Non-Executive
– Stephen Ogden – Independent Non-
Executive
There is a clear division of responsibilities
between the executive and non-executive
directors.
Board balance and independence
The Board recognises that Messrs Kalinin and
Calvey are not independent by virtue of their
direct management responsibilities for the
limited partnerships comprising Baring
Vostok Private Equity Funds III and IV, the
Company’s controlling shareholder
(”Controlling Shareholder”). However, in light
of the value, experience and contacts which
they afford to the Company at this stage of
its development and by virtue of the
Relationship Agreement, which, inter alia,
ensures that the Controlling Shareholder
does not exercise undue influence over the
Company or prevent it from acting
independently of the Controlling
Shareholder, the Board believes that the
continued presence of Messrs Kalinin and
Calvey on the Board is beneficial for the
Company. Mr Kalinin also serves as Chairman
of the Board and was not considered to be
independent on his appointment.
Notwithstanding under the provisions of
the 2014 UK Corporate Governance Code as
a Smaller Company the Company meets the
requirements to have at least two
independent non-executives on the Board.
All directors are permitted access to
independent professional advice in the
course of execution of their duties, at the
Company’s expense.
The Board has established the following
committees:
Audit Committee
The Audit Committee was established in
March 2007 and comprises three directors:
Mr Ogden – Chairman
Mr Freeman
Mr Calvey
The Audit Committee is responsible for
selecting the Group’s independent auditors,
pre-approving all audit and non-audit related
services, reviewing with management and
the independent auditors the Group’s
financial statements, significant accounting
and financial policies and practices, audit
scope and adequacy of internal audit and
control systems. The Audit Committee keeps
the independence and objectivity of the
auditor under review and a formal statement
of independence is received from the
external auditor each year. The audit
committee meets at least twice each year.
Remuneration Committee
The Remuneration Committee was also
established in March 2007 and comprises
three directors:
Mr Freeman – Chairman
Mr Ogden
Mr Kalinin
The Remuneration Committee is responsible
for reviewing the performance of the
directors and for determining compensation
of the Company’s key employees, including
the chief executive officer, chief financial
officer, and other key personnel as may
be determined from time to time by
the Remuneration Committee. The
Remuneration Committee meets at
least twice each year.
The Directors’ Remuneration Report is set
out on pages 21 and 22.
Nomination Committee
The Nomination Committee was established
in March 2007 and comprises three
directors:
Mr Freeman – Chairman
Mr Ogden
Mr Calvey 17 Volga Gas plc | Annual Report and Accounts 201 5
The Nomination Committee is responsible
for reviewing the structure, size and
composition of the Board, making
recommendations to the Board concerning
plans for succession for both executive and
non-executive directors including the Chief
Executive and other senior management,
preparing a description of the role and
capabilities required for a particular
appointment and identifying and
nominating candidates to fill Board
positions as and when they arise.
Board meetings
The Board met four times during the year
ended 31 December 2015 (2014: four times)
with the following attendance:
2015 2014
Mikhail Ivanov 4 4
Andrey Zozulya
(attended all
meetings since
appointment) 2 –
Tony Alves 4 4
Michael Calvey 4 4
Ronald Freeman 4 3
Aleksey Kalinin 4 4
Vladimir Koshcheev 4 3
Stephen Ogden 4 4
Indemnification of directors
In accordance with the Company’s Articles
of Association and to the extent permitted
by the law of England and Wales, directors
are granted an indemnity from the Company
in respect of liabilities incurred as a result
of their office. In respect of those matters
for which the directors may not be
indemnified, the Company maintained a
directors’ and officers’ liability insurance
policy throughout the financial year. This
policy has been renewed for the next
financial year.
Re-election of directors
The Company requires that all directors
stand for re-election at intervals of no more
than three years. Accordingly Messrs
Freeman, Kalinin and Ogden will retire at
the forthcoming AGM and will seek
re-election by shareholders.
Internal controls
The directors acknowledge their
responsibility for the system of internal
controls for the Group and for reviewing its
effectiveness. Any system of internal
control can only provide reasonable, and not
absolute, assurance that material financial
irregularities will be detected or that the
risk of failure to achieve business objectives
is eliminated.
The Group’s risk and controls framework
covers all material risks and controls
including those of an operational, financial,
and compliance nature. Internal control
procedures consist, inter alia, of formal
delegations of expenditure authority by the
Board to executive management, and
controls relating to key stages of
transactions including supplier approval,
contract signature, and payment release.
In response to an unauthorised withdrawal
of cash from Group bank accounts in an
apparent cyberattack, management
performed a remediation and improvement
of internal controls around the Group’s cash
handling procedures and security, including
IT control processes.
The directors consider that the frequency
of Board meetings and level of detail
presented to the Board for its consideration
in relation to the operations of the Group
provide an appropriate process to identify,
evaluate and manage significant risks
relevant to its operations on a continuous
basis, and this process is considered to be in
accordance with the revised guidance on
internal control published in October 2005
(‘Turnbull Guidance’).
In addition to formal Board meetings,
management prepare detailed financial
and operational reports on a monthly basis
which is disseminated and discussed within
the Board.
Investor relations
The Company places considerable
importance on communication with
shareholders and engages them on a wide
range of issues. The Group has an ongoing
programme of dialogue and meetings
between the executive directors and
institutional investors, fund managers and
analysts. At these meetings a wide range
of relevant issues including strategy,
performance, management and governance
are discussed within the constraints of the
information already made public.
The Company is equally interested in the
views and concerns of private shareholders
and to this end ensures that the executive
directors present the Company at forums
where private investors are present.
Shareholders have the opportunity to meet
and question the Board at the Annual
General Meeting which will be held on
10 June 2016, at which the Chairman, the
Chairman of the Audit Committee and all
executive directors are expected to be
available. The notice of the AGM is posted
to all shareholders at least 21 working days
before the meeting. Financial and other
information is available on the Company’s
website (www.volgagas.com).
By order of the Board
Tony Alves
Company Secretary
31 March 2016
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 18 Volga Gas plc | Annual Report and Accounts 201 5
Report of the Directors
Corporate Governance
The directors present their report together
with the Group’s audited consolidated
financial statements for the period from
1 January 2015 to 31 December 2015.
Results and dividend
The Group’s results are set out on pages 23
to 28 and show net loss of US$4.1 million for
the year ended 31 December 2015 (2014:
net profit of US$13.1 million). On 10 June
2015 the Company paid a final dividend of
US$0.0125 per ordinary share in respect of
the year ended 31 December 2014. The
directors do not propose to pay a dividend
in respect of the year ended 31 December
2015 (2014: $0.05 per ordinary share).
Principal activities, business review
and future developments
Volga Gas is a public limited company
registered in England and Wales with
registered number 5886534, was
incorporated in the United Kingdom on 25
July 2006 and admitted to trading on the
AIM market of the London Stock Exchange
on 25 April 2007. Volga Gas operates
primarily through subsidiary companies as
set out in Note 2.2 to the accounts. The
principal activity of the Group is the
exploration, development and production
of its gas, condensate and oil fields in the
Volga Region of European Russia. During
the year, the Group owned 100% interests in
four licence areas in the Saratov and
Volgograd regions: Karpenskiy, Vostochny-
Makarovskoye, Dobrinskoye, and
Urozhainoye-2.
The Group’s business strategy is to maximise
the economics of production from the
Vostochny Makarovskoye, Dobrinskoye
and Uzenskoye fields and to explore the
potentially prospective structures on the
Group’s licence areas. The Group also
evaluates acquisition opportunities as part
of its overall strategy of growing value for
its shareholders.
Highlights of the Group’s activities for the
period ended 31 December 2015 are:
– Successful development drilling
concluded on the Vostochny
Marakovskoye (“VM”) field.
– Significant increase in production from
the field achieved in December 2015.
– Establishment of export channels for
condensate sales.
The Group’s activities are described in
greater detail in the Chief Executive’s
Report on page 6 and in the Operational
Review on pages 8 and 9. The principal risks
associated with the Group’s activities are set
out in the Risks and Uncertainties section in
pages 12 and 13.
Key performance indicators
Given the nature of the business and that
the Group has only three operating fields,
the directors are of the opinion that further
analysis using KPIs is not appropriate for
an understanding of the development,
performance or position of our business at
this time. The directors are of the opinion
that the Operational Review on pages 8
and 9 provides the relevant information.
Going concern
Having made appropriate enquiries and
having examined the major areas that could
affect the Group’s financial position, the
directors are satisfied that the Group has
adequate resources to continue in operation
for the foreseeable future. Accordingly they
consider it appropriate to adopt the going
concern basis in preparing the financial
statements as described in note 2.1.
Directors
The directors who served during the year
were:
Aleksey Kalinin, Chairman – Non-Executive
Mikhail Ivanov, Chief Executive Officer –
Chairman
Michael Calvey, Non-Executive
Tony Alves, Chief Financial Officer
Ronald Freeman, Non-Executive
Vladimir Koshcheev, Non-Executive
Stephen Ogden, Non-Executive
Andrey Zozulya, Chief Executive Officer
On 5 May 2015, Mr Zozulya was appointed as
a director and as Chief Executive Officer. At
the Annual General Meeting on 5 June 2015,
Mr Kalinin relinquished Chairmanship of the
Company and Mr Ivanov was appointed as
Chairman. Messrs Calvey, Ivanov and
Koshcheev will retire by rotation and offer
themselves for re-election in accordance
with the Company’s Articles of Association.
Directors’ interests
The directors serving during the year had
the following beneficial interests in the
shares of the Company:
Ordinary shares of 1p each
31 December
2015
31 December
2014
Mikhail Ivanov 1,000,000 1,000,000
Andrey Zozulya – –
Tony Alves 25,000 25,000
Michael Calvey
1
– –
Ronald Freeman 55,000 55,000
Aleksey Kalinin
1
– –
Vladimir
Koshcheev 419,210 419,210
Stephen Ogden 205,000 205,000
1 Mr Calvey and Mr Kalinin are Co-Managing Partners
of Baring Vostok Capital Partners Limited, a related
party to Baring Vostok Nominees Limited and Dehus
Dolmen Nominees Limited. As such Mr Calvey and Mr
Kalinin have an indirect beneficial interest in the
Company.
Substantial shareholders
On 31 March 2016 the following parties had
notifiable interests of 3% or greater in the
nominal value of the Company’s issued 1p
ordinary shares:
Number of
shares Percentage
Baring Vostok
Nominees Ltd
1
39,620,000 48.90
Dehus Dolmen
Nominees Ltd
2
7,906,889 9.76
Mr. Nicholas
Mathys 4,938,000 6.09
Quorum Fund Ltd 4,841,961 5.98
BNP Paribas
Investment
Partners S.A. 3,336,860 4.12
BlackRock
Investment
Management
(UK) Limited 3,094,791 3.82
JP Morgan Asset
Management
(UK) Limited 2,761,720 3.41
1 Baring Vostok Nominees Ltd is a nominee vehicle
which holds the interests of the limited partnerships
which comprise Baring Vostok Private Equity Fund III.
2 Dehus Dolmen Nominees Ltd is a nominee vehicle
which holds the interests of the limited partnerships
which comprise Baring Vostok Private Equity Fund IV. 19 Volga Gas plc | Annual Report and Accounts 201 5
Options granted
An Executive Share Option Plan was adopted
by the Company in July 2008 following which
options over a total of 1,706,196 shares were
granted to Mikhail Ivanov and to Tony Alves.
During 2015 no further options (2014: nil)
were eligible for vesting. The details of
these option grants are disclosed in the
Remuneration Report below.
Interests in contracts
There were no contracts or arrangements
during the period in which a director of the
Company was materially interested and
which were significant in relation to the
business of the Group.
Creditors payment policy and practice
The Group aims to pay all its creditors
promptly. For trade creditors it is the
Group’s policy to:
(i) agree the terms of the payment at the
start of the business with that supplier;
(ii) ensure that suppliers are aware of the
terms of the payment; and
(iii)pay in accordance with contractual and
other obligations
Political and charitable contributions
No political or charitable contributions were
made in the year (2014: nil).
Employment policies
The Group is committed to pursuing an
equal opportunities employment policy,
covering recruitment and selection, training,
development, appraisal and promotion.
The Group recognises the diversity of
its employees, its customers, and the
community at large and seeks to use
employees’ talents to the fullest. This
approach extends to the fair treatment of
people with disabilities, in relation to their
recruitment, training and development. Full
consideration is given to staff members who
become disabled during employment.
Employee communication
The Group is committed to effective
communications, which it maintains through
regular information releases and staff
briefings. Formal communications with
employees take place through these
channels. With respect to the Group’s
operations in Russia and the recruitment
of Russian employees, announcements,
contracts, interviews and advertisements
are conducted in the English and Russian
languages, as applicable.
Health, safety and the environment
The Group’s policy and practice is to comply
with health, safety and environmental
regulations and requirements of the
countries in which it operates, to protect
its employees, contractors, assets and
the environment.
The Group closely monitors its environmental
obligations under the terms of its licence
agreements. In particular, portions of the
Karpenskiy Licence Area are located in the
Saratovskiy Federal Nature Reserve and
Tulipannaya Steppe Natural Sanctuary, which
are protected by Russian environmental law.
In accordance with Russian environmental
law, all economic activity within the
protected area is approved by the Russian
government. The Group has ensured that all
its activities minimise the impact on this
sensitive environment.
UK Bribery Act
The Company has adopted Anti-Corruption
and Anti-Bribery Policies and a framework
of adequate procedures for managing the
Volga Gas Group’s responsibilities in relation
to the UK Bribery Act 2010.
Share capital
The Company has authorised ordinary share
capital of 330,720,100 shares of 1p each.
Under a special resolution by the
shareholders of the Company on 5 June
2015 the directors have authority to allot
shares up to an aggregate nominal value of
£1,000,000 of which £150,000 could be
issued non pre-emptively, in accordance
with sections 570 and 573 of the Companies
Act 2006. This authority will expire the
earlier of (i) 15 months from the passing of
the Resolution, or (ii) the conclusion of the
Annual General Meeting of the Company to
be held in 2016.
Capital risk management
The Group’s objectives when managing the
balance of equity and debt capital are (a) to
safeguard the Group’s ability to continue
as a going concern, (b) provide returns
for shareholders and benefits for other
stakeholders and (c) to maintain an optimal
capital structure to reduce the cost of
capital. In order to maintain or adjust the
capital structure, the Group may adjust the
amount of dividends paid to shareholders,
return capital to shareholders, issue new
shares or sell assets to reduce debt. To date
the Group has been funded entirely by
equity capital other than a US$10 million
facility that was drawn in 2012 and repaid
in full in 2013.
Corporate Governance
The Company’s statement on Corporate
Governance can be found in the Corporate
Governance Statement on pages 16 and 17
of these financial statements and form part
of this report by reference.
Statement of disclosure of information
to auditor
As at the date of this report the serving
directors confirm that;
– so far as the directors are aware, there is
no relevant audit information of which
the Company’s auditor is unaware; and
– they have taken all steps that they ought
to have taken as directors in order to
make themselves aware of any relevant
audit information and to establish that
the Company’s auditor is aware of that
information.
Auditor
The Group’s auditor, KPMG LLP has indicated
its willingness to continue in office and a
resolution concerning its reappointment
will be proposed at the next Annual
General Meeting.
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 20 Volga Gas plc | Annual Report and Accounts 201 5
Statement of Directors’ responsibilities
in respect of the Annual Report,
Strategic Report, Directors’ Report and
the Financial Statements
The directors are responsible for preparing
the Annual Report, Strategic Report and
the Directors’ Report and the financial
statements in accordance with applicable
law and regulations.
Company law requires the directors to
prepare Group and Parent Company
financial statements for each financial year.
As required by the AIM Rules for Companies
of the London Stock Exchange they are
required to prepare the Group financial
statements in accordance with IFRSs as
adopted by the EU and applicable law
and have elected to prepare the Parent
Company financial statements on the
same basis.
Under company law the directors must not
approve the financial statements unless
they are satisfied that they give a true and
fair view of the state of affairs of the Group
and Parent Company and of their profit or
loss for that period. In preparing each of the
Group and Parent Company financial
statements, the directors are required to:
– select suitable accounting policies and
then apply them consistently;
– make judgements and estimates that are
reasonable and prudent;
– state whether they have been prepared
in accordance with IFRSs as adopted by
the EU; and
– prepare the financial statements on the
going concern basis unless it is
inappropriate to presume that the Group
and the Parent Company will continue
in business.
The directors are responsible for keeping
adequate accounting records that are
sufficient to show and explain the Parent
Company’s transactions and disclose with
reasonable accuracy at any time the
financial position of the Parent Company
and enable them to ensure that its financial
statements comply with the Companies
Act 2006. They have general responsibility
for taking such steps as are reasonably
open to them to safeguard the assets of the
Group and to prevent and detect fraud and
other irregularities.
The directors are responsible for the
maintenance and integrity of the corporate
and financial information included on
the Company’s website. Legislation in
the UK governing the preparation and
dissemination of financial statements may
differ from legislation in other jurisdictions.
Electronic communications
The maintenance and integrity of the Volga
Gas plc website (www.volgagas.com) is the
responsibility of the directors; the work
carried out by the auditor does not involve
consideration of these matters and
accordingly, the auditor accepts no
responsibility for any changes that may have
occurred to the financial statements since
they were initially presented on the website.
The Company’s website is maintained in
compliance with Rule 26 of the AIM Rules
for Companies.
Legislation in the United Kingdom
governing the preparation and
dissemination of financial statements may
differ from legislation in other jurisdictions.
On behalf of the Board
Tony Alves
Chief Financial Officer
31 March 2016
Report of the Directors continued
Corporate Governance 21 Volga Gas plc | Annual Report and Accounts 201 5
Directors’ Remuneration Report
In common with the Board’s commitment
to compliance with the appropriate aspects
of the 2014 UK Corporate Governance Code,
the Company has adopted the Principles of
Good Governance relating to directors’
remuneration. The Company discloses
certain information relating to directors’
remuneration in this report, which is
not audited.
Remuneration Committee
The Company established a Remuneration
Committee in April 2007, as set out in the
Corporate Governance statement on
page 16.
The Remuneration Committee advises the
Board on Group compensation policy as it
relates to executive directors and other key
members of management, and may obtain
advice from independent remuneration
consultants appointed by the Company.
The Remuneration Committee comprises
Ronald Freeman (Chairman), Stephen
Ogden and Aleksey Kalinin, who are all
non-executive directors. Executive directors
may be invited to attend meetings of the
Remuneration Committee but do not vote on
their own remuneration or incentives. The
Remuneration Committee meets as required.
Remuneration policy
The Company’s policy is to maintain levels of
compensation for the Group that are
comparable and competitive with peer
group companies, so as to attract and retain
individuals of the highest calibre, by
rewarding them as appropriate for their
contribution to the Group’s performance.
Executive directors’ employment
agreement and terms of appointment
The terms of each executive director’s
appointment are set out in their service
agreements. Each executive director
agreement is based on similar terms, with
no fixed duration. Each service agreement
sets out details of basic salary and share
options as applicable.
All executive director employment
agreements can be terminated either by the
director concerned or by the Company on
giving six months’ notice during the first 24
months of service and thereafter by giving
three months’ notice.
The executive directors do not participate
in any Group pension scheme and their
remuneration is not pensionable. The
executive directors are eligible for
payment of cash bonuses and participation
in any share-based incentive plan the
Board implements.
Basic salaries
The basic salary of each executive director
is established by reference to their
responsibilities and individual performance.
Non-executive directors’ terms,
conditions and fees
The non-executive directors have been
engaged under the terms of their letters
of appointment. These engagements are
for two years and can be terminated
upon one month’s notice by either party.
Reappointment is subject to the Company’s
Articles of Association which provide that
one third of the directors shall be required
to retire each year.
Fees
The fees paid to non-executive directors
are determined by the Board and reviewed
periodically to reflect current rates and
practice commensurate with the size of the
Company and their roles.
The remuneration of the non-executive
directors is a matter for the chairman of
the Board and the Chief Executive Officer.
In the event of the appointment of an
independent non-executive chairman his
remuneration would be a matter for the
chairman of the Remuneration Committee
and the Chief Executive Officer.
Audited information – Directors’ detailed emoluments
Salary
US$ 000
Pension
Contribution
US$ 000
Share Based
Compensation
US$ 000
Fees
US$ 000
Aggregate
Remuneration
for the Year
31 December
2015
US$ 000
Aggregate
Remuneration
for the Year
31 December
2014
US$ 000
Executive directors
M. Ivanov 165 – – 70 235 400
A. Zozulya 130 – – – 130 –
A. Alves 300 – – – 300 310
Non-executive
M. Calvey – – – – – –
R. Freeman – – – 50 50 50
A. Kalinin – – – – – –
V. Koshcheev – – – – – –
S. Ogden – – – 50 50 50
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Directors’ interests in the share capital
of the Company
The directors’ interests in the share capital
of the Company are disclosed in the Report
of the Directors on page 18. There has been
no change in the interest of any director
between 1 January 2016 and the date of
this report.
Directors’ share options
The Company adopted an Executive Share
Option Plan (“ESOP”) on 14 July 2008, which
was subsequently amended on 17 December
2008. Under the terms of this Plan, up to a
maximum of 2,843,661 shares (equivalent to
approximately 5% of the then issued share
capital) may be allocated and subject to
performance criteria and vesting periods as
specified by the Remuneration Committee.
During 2008, the Company granted
options to acquire 1,137,464 ordinary shares
to Mikhail Ivanov under the terms of the
ESOP. The options may be exercised at a
price of 405p per share and vest in equal
portions on May 2010, 2011 and 2012 and
will remain outstanding until May 2017.
On 17 December 2008, Tony Alves was
granted options to acquire up to 568,732
ordinary shares in the Company at an
exercise price of 100p per share. The
options vested over a period of up to
four years subject to the satisfaction of
performance conditions related to the
market price of the Company’s shares. The
vested options will remain exercisable until
eight years from the date of grant. During
2015, options over no further shares
became eligible for vesting (2014: nil).
By order of the Board
Tony Alves
Company Secretary
31 March 2016
Directors’ Remuneration Report continued
Corporate Governance 23 Volga Gas plc | Annual Report and Accounts 201 5
Independent Auditor’s Report
to the Members of Volga Gas plc
We have audited the financial statements of Volga Gas plc for the year ended 31 December 2015 which comprise the Group Income
Statement, the Group Statement of Comprehensive Income, the Group and Parent Company Balance Sheets, the Group and Parent
Company Cash Flow Statements, the Group and Parent Company Statements of Changes in Equity and the related notes. The financial
reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (“IFRSs”)
as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the
Companies Act 2006.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page 19 the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on,
the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at
www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion:
– the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2015
and of the Group’s loss for the year then ended;
– the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
– the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in
accordance with the provisions of the Companies Act 2006; and
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group
financial statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial
statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
– adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from
branches not visited by us; or
– the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with
the accounting records and returns; or
– certain disclosures of directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our audit.
Adrian Wilcox (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
1 April 2016
The accompanying notes on pages 30 to 45 are an integral part of these financial statements.
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Group Income Statement
(presented in US$ 000)
Financial Statements
Year ended 31 December Notes 2015 2014
Continuing operations
Revenue 17,827 39,423
Cost of sales 5 (15,589) (22,514)
Gross profit 2,238 16,909
Selling expenses 5 (319) –
Operating and administrative expenses 5 (3,377) (4,157)
Exploration and evaluation expense 5(b) (635) –
Write off of development assets 5(c) (2,950) –
Operating (loss)/profit (5,043) 12,752
Interest income 6 117 245
Interest expense – –
Other gains and losses – net 7 306 3,290
(Loss)/profit for the year before tax (4,620) 16,287
Deferred income tax 8 559 (3,229)
Current income tax 8 (3) –
(Loss)/profit for the year before non-controlling interests (4,064) 13,058
Attributable to:
The owners of the Parent Company (4,064) 13,058
Basic and diluted (loss)/profit per share (in US Dollars) 9 (0.05) 0.16
Weighted average number of shares outstanding 81,017,800 81,017,800
The Company has elected to take the exemption under section 408 of the Companies Act 2006 to not present the Parent Company income
statement. The loss for the Parent Company for the year was US$ 102,956,000 (2014: US$1,472,000) after an impairment charge on
investments in subsidiaries of US$101,759,000 (2014: nil).
Group Statement of Comprehensive Income
(presented in US$ 000)
Year ended 31 December Notes 2015 2014
(Loss)/profit for the year attributable to equity shareholders of the Company (4,064) 13,058
Other comprehensive income items that may be reclassified to profit and loss:
Currency translation differences (15,301) (48,955)
Total comprehensive (expense) for the year (19,365) (35,897)
Attributable to:
The owners of the Parent Company (19,365) (35,897) 25 Volga Gas plc | Annual Report and Accounts 201 5
Group Balance Sheet
(presented in US$ 000)
At 31 December Notes 2015 2014
Assets
Non-current assets
Intangible assets 10 2,867 3,746
Property, plant and equipment 11 48,290 57,819
Other non-current assets 12 155 68
Deferred tax assets 8 1,098 706
Total non-current assets 52,410 62,339
Current assets
Cash and cash equivalents 13 6,769 15,767
Inventories 14 1,067 1,099
Other receivables 15 1,449 918
Total current assets 9,285 17,784
Total assets 61,695 80,123
Equity and liabilities
Equity
Share capital 16 1,485 1,485
Share premium (net of issue costs) 16 – –
Other reserves 17 (86,117) (70,816)
Accumulated profits/(losses) 140,037 145,114
Equity attributable to the shareholders of the parent 55,405 75,783
Non-current liabilities
Asset retirement obligation 146 189
Deferred tax liabilities 1,995 2,478
Total non-current liabilities 2,141 2,667
Current liabilities
Trade and other payables 19 4,149 1,673
Total current liabilities 4,149 1,673
Total equity and liabilities 61,695 80,123
Approved by the Board of Directors on 31 March 2016 and signed on its behalf by
Tony Alves
Chief Financial Officer
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Group Cash Flow Statements
(presented in US$ 000)
Financial Statements
Year ended 31 December Notes 2015 2014
(Loss)/profit for the year before tax (4,620) 16,287
Adjustments to (loss)/profit before tax:
Depreciation 2,369 4,683
E & E expense 635 –
Write off of development assets 2,950 –
Other non-cash expenses – –
Foreign exchange differences (942) (5,297)
Operating cash flow prior to working capital 392 15,673
Working capital changes
(Increase)/decrease in trade and other receivables (1,144) 1,621
Increase/(decrease) in payables 1,893 (971)
Decrease/(increase) in inventory 22 (77)
Cash flow from operations 1,163 16,246
Income tax paid (3) –
Net cash flow generated from operating activities 1,160 16,246
Cash flows from investing activities
Expenditure on exploration and evaluation 10 (554) –
Purchase of property, plant and equipment 11 (8,117) (5,520)
Net cash used in investing activities (8,671) (5,520)
Cash flows from financing activities
Equity dividends paid (1,013) (3,038)
Net cash outflow from financing activities (1,013) (3,038)
Effect of exchange rate changes on cash and cash equivalents (474) (2)
Net increase/(decrease) in cash and cash equivalents (8,998) 7,686
Cash and cash equivalents at beginning of the year 13 15,767 8,081
Cash and cash equivalents at end of the year 13 6,769 15,767
The accompanying notes on pages 30 to 45 are an integral part of these financial statements. 27 Volga Gas plc | Annual Report and Accounts 201 5
Company Balance Sheet
(presented in US$ 000)
Company registration number: 05886534
At 31 December Notes 2015 2014
Assets
Non-current assets
Investments 20 50,475 152,234
Intercompany receivables 22 4,735 4,606
Total non-current assets 55,210 156,840
Current assets
Cash and cash equivalents 13 4,529 6,786
Other receivables 15 22 31
Total current assets 4,551 6,817
Total assets 59,761 163,657
Equity and liabilities
Equity
Share capital 16 1,485 1,485
Share premium (net of issue costs) 16 – –
Share grant expense reserve 17 5,233 5,233
Accumulated profit/(loss) 18 51,597 155,566
Total equity 58,315 162,284
Current liabilities
Intercompany payables 1,357 1,357
Trade and other payables 19 89 16
Total current liabilities 1,446 1,373
Total equity and liabilities 9,761 163,657
Approved by the Board of Directors on 31 March 2016 and signed on its behalf by
Tony Alves
Chief Financial Officer
The accompanying notes on pages 30 to 45 are an integral part of these financial statements.
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Company Cash Flow Statements
(presented in US$ 000)
Financial Statements
Year ended 31 December Notes 2015 2014
Loss for the period before tax (102,956) (1,472)
Adjustments to loss before tax:
Impairment expense 101,759 –
Operating cash flow prior to working capital (1,197) (1,472)
Working capital changes
(Increase)/decrease in receivables (118) (2)
Increase/(decrease) in payables 71 6
Cash flow from operations (1,244) (1,468)
Income tax paid – –
Net cash flow generated from operating activities (1,244) (1,468)
Cash flows from investing activities
Decrease in intercompany receivables – 11,091
Net cash from investing activities – 11,091
Cash flows from financing activities
Equity dividends paid (1,013) (3,038)
Net cash used in financing activities (1,013) (3,038)
Effect of exchange rate changes on cash and cash equivalents – –
Net (decrease)/increase in cash and cash equivalents (2,257) 6,585
Cash and cash equivalents at the beginning of the year 6,786 201
Cash and cash equivalents at end of the year 4,529 6,786
The accompanying notes on pages 30 to 45 are an integral part of these financial statements. 29 Volga Gas plc | Annual Report and Accounts 201 5
Group Statement of Changes in Shareholders’ Equity
(presented in US$ 000)
Notes
Share
Capital
Share
Premium
Currency
Translation
Reserves
Share Grant
Reserve
Accumulated
Profit/(Loss) Total Equity
Opening equity at 1 January 2015 1,485 – (76,049) 5,233 145,114 75,783
Loss for the year – – – – (4,064) (4,064)
Transactions with owners
Equity dividends paid – – – – (1,013) (1,013)
Total transactions with owners – – – – (1,013) (1,013)
Currency translation differences – – (15,301) – – (15,301)
Total comprehensive income – – (15,301) – (4,064) (19,365)
Closing equity at 31 December 2015 1,485 – (91,350) 5,233 140,037 55,405
Opening equity at 1 January 2014 1,485 165,873 (27,094) 5,233 (30,779) 114,718
Profit for the year – – – – 13,058 13,058
Transactions with owners
Equity dividends paid – – – – (3,038) (3,038)
Cancellation of share premium account 16 – (165,873) – – 165,873 –
Total transactions with owners – (165,873) – – 162,835 (3,038)
Currency translation differences – – (48,955) – – (48,955)
Total comprehensive income – – (48,955) – 13,058 (35,897)
Closing equity at 31 December 2014 1,485 – (76,049) 5,233 145,114 75,783
Company Statement of Changes in Shareholders’ Equity
(presented in US$ 000)
Notes
Share
Capital
Share
Premium
Share Grant
Reserve
Accumulated
Profit/(loss) Total Equity
Opening equity at 1 January 2015 1,485 – 5,233 155,566 162,284
Loss for the year – – – (102,956) (102,956)
Equity dividends paid – – – (1,013) (1,013)
Closing equity at 31 December 2015 1,485 – 5,233 51,597 58,315
Opening equity at 1 January 2014 1,485 165,873 5,233 (5,797) 166,794
Loss for the year – – – (1,472) (1,472)
Equity dividends paid – – – (3,038) (3,038)
Cancellation of share premium account 16 – (165,873) – 165,873 –
Closing equity at 31 December 2014 1,485 – 5,233 155,566 162,284
The accompanying notes on pages 30 to 45 are an integral part of these financial statements.
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Notes to the IFRS Consolidated Financial Statements
For the year ended 31 December 201 5
(presented in US$ 000)
Financial Statements
1. General information
Volga Gas plc (the “Company” or “Volga”) is a public limited company registered in England and Wales with registered number 5886534. The
Company was incorporated on 25 July 2006. The principal activities of the Company and its subsidiaries (the “Group”) are the acquisition,
exploration and development of hydrocarbon assets and production of hydrocarbons in the Volga Region of the Russian Federation. Its
registered office is 40 Dukes Place London EC3A 7NH. The Company’s shares are admitted to trading on the AIM market of the London
Stock Exchange.
These Group consolidated financial statements were authorised for issue by the Board of Directors on 31 March 2016.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies
have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of preparation
Both the Parent Company financial statements and the Group financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRSs”), as adopted by the European Union (“EU”), International Financial Reporting Interpretations
Committee (“IFRIC”) interpretations, and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial
statements have been prepared under the historical cost convention and in accordance with applicable accounting standards.
The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed
in note 4.
No income statement is presented for Volga Gas plc as permitted by Section 408 of the Companies Act 2006.
The Group’s business activities, together with the factors likely to affect its future development, performance and position set out in the
Strategic Report in pages 4 to 13; the financial position of the Group, its cash flows, liquidity position and borrowing facilities are described
in the Financial Review on pages 8 to 9. In addition, the Group’s objectives, policies and processes for measuring capital, financial risk
management objectives, details of financial instruments and exposure to credit and liquidity risks are described in note 3. Having reviewed
the future cash flow forecasts of the Group, the directors have concluded that the Group will continue to have access to sufficient funds in
order to meet its obligations as they fall due for at least the foreseeable future and thus continue to adopt the going concern basis of
accounting in preparing the annual financial statements.
Disclosure of impact of new and future accounting standards
(a) New and amended standards and interpretations:
There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on 1 January 2015 that have a
material impact on the Group.
In accordance with the transitional provisions of IFRS 10, the Group reassessed the control conclusion for its investees at 1 January 2015. No
modifications of previous conclusions about control regarding the Group’s investees were required.
(b) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the
Group. The following new standards, amendments to standards and interpretations have been issued, but are not effective for the
financial year beginning 1 January 2015 and have not been early adopted:
– IFRS 9: Financial Instruments
– IFRS 15: Revenue from Contracts with Customers
– IFRS 16: Leases
The Group is yet to assess the full impact of these new standards and amendments but does not expect them to have a material impact on
the financial statements, with the main effect being the requirement for additional disclosures.
2.2 Consolidation
(a) Subsidiaries
The consolidated financial statements include the financial statements of the Company and its subsidiaries. Subsidiaries are entities
controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the
entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration
potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The
financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the
date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests
even if doing so causes the non-controlling interests to have a deficit balance.
Investments in subsidiaries are accounted for at cost less impairment. Cost is adjusted to reflect changes in consideration arising from
contingent consideration amendments. Cost also includes direct attributable costs of investment.
Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are
also eliminated unless the cost cannot be recovered. 31 Volga Gas plc | Annual Report and Accounts 201 5
2. Summary of significant accounting policies continued
The Company and its subsidiaries outside the Russian Federation maintain their financial statements in accordance with IFRSs as adopted by the
EU. The Russian subsidiaries of the Group maintain their statutory accounting records in accordance with the Regulations on Accounting and
Reporting of the Russian Federation. The consolidated financial statements are based on these statutory accounting records, appropriately
adjusted and reclassified for fair presentation in accordance with International Financial Reporting Standards as adopted by the EU.
A list of the Company’s subsidiaries is provided in Note 20.
2.3 Segment reporting
Segmental reporting follows the Group’s internal reporting structure.
Operating segments are defined as components of the Group where separate financial information is available and reported regularly to
the chief operating decision maker (“CODM”), which is determined to be the Board of Directors of the Company. The Board of Directors
decides how to allocate resources and assesses operational and financial performance using the information provided.
The CODM receives monthly IFRS based financial information for the Group and its development and production entities. There were three
development and production entities during both 2013 and 2014. Management has determined that the operations of these production
and development entities are sufficiently homogenous (all are concerned with upstream oil and gas development and production activities)
for these to be aggregated for the purpose of IFRS 8, “Operating Segments”. The Group has other entities that engage as either head office
or in a corporate capacity or as holding companies. Management has concluded that due to application of the aggregation criteria that
separate financial information for segments is not required.
No geographic segmental information is presented as all of the companies operating activities are based in the Russian Federation.
Management has determined therefore that the operations of the Group comprise one class of business, being oil and gas exploration,
development and production and the Group operates in only one geographic area – the Russian Federation.
The Group’s gas sales, representing a substantial proportion of revenues are made to a single customer. Details are provided in Note 3.1 (b).
2.4 Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic
environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in US Dollars,
which is the Company’s functional and the Group’s presentation currency.
The functional currency of the Group’s subsidiaries that are incorporated in the Russian Federation is the Russian Rouble (“RUR”). It is the
Management’s view that the RUR best reflects the financial results of its Cyprus subsidiaries because they are dependent on entities based
in Russia that operate in an RUR environment in order to recover their investments. As a result, the functional currency of the subsidiaries
continues to be the RUR.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end
exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
Foreign exchange gains and losses that relate to cash and cash equivalents, borrowings and other foreign exchange gains and losses are
presented in the income statement within “Other gains and losses”.
(c) Group companies
The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a
functional currency different from the presentation currency are translated into the presentation currency as follows:
(i) assets and liabilities for each balance sheet item presented are translated at the closing rate at the date of that balance sheet;
(ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are
translated at the rate on the dates of the transactions); and
(iii) all resulting exchange differences are recognised in other comprehensive income.
The major exchange rates used for the revaluation of the closing balance sheet at 31 December 2015 were:
– GBP 1.517: US$ (2014: 1. 5532)
– EUR 1.091: US$ (2014: 1. 2148)
– US$ 1:72.883 RUR. (2014: 56.258)
2.5 Oil and gas assets
The Company and its subsidiaries apply the successful efforts method of accounting for Exploration and Evaluation (“E&E”) costs, in
accordance with IFRS 6 “Exploration for and Evaluation of Mineral Resources”. Costs are accumulated on a field-by-field basis.
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2. Summary of significant accounting policies continued
Capital expenditure is recognised as property, plant and equipment or intangible assets in the financial statements according to the nature
of the expenditure and the stage of development of the associated field, i.e. exploration, development, production.
(a) Exploration and evaluation assets
Costs directly associated with an exploration well, including certain geological and geophysical costs, and exploration and property
leasehold acquisition costs, are capitalised as intangible assets until the determination of reserves is evaluated. If it is determined that a
commercial discovery has not been achieved, these costs are charged to expense after the conclusion of appraisal activities. Exploration
costs such as geological and geophysical that are not directly related to an exploration well are expensed as incurred.
Once commercial reserves are found, exploration and evaluation assets are tested for impairment and transferred to development assets.
No depreciation or amortisation is charged during the exploration and evaluation phase.
(b) Development assets
Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of
development wells into commercially proven reserves, is capitalised within property, plant and equipment. When development is
completed on a specific field, it is transferred to producing assets as part of property, plant and equipment. No depreciation or amortisation
is charged during the development phase.
(c) Oil and gas production assets
Production assets are accumulated generally on a field by field basis and represent the cost of developing the commercial reserves
discovered and bringing them into production together with E&E expenditures incurred in finding commercial reserves and transferred
from the intangible E&E assets as described above.
The cost of production assets also includes the cost of acquisitions and purchases of such assets, directly attributable overheads, finance
costs capitalised and the cost of recognising provisions for future restoration and decommissioning.
Where major and identifiable parts of the production assets have different useful lives, they are accounted for as separate items of
property, plant and equipment. Costs of minor repairs and maintenance are expensed as incurred.
(d) Depreciation/amortisation
Oil and gas properties are depreciated or amortised using the unit-of-production method. Unit-of-production rates are based on proved and
probable reserves, which are oil, gas and other mineral reserves estimated to be recovered from existing facilities using current operating
methods. Oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales
transaction points at the outlet valve on the field storage tank.
(e) Impairment – exploration and evaluation assets
Exploration and evaluation assets are tested for impairment prior to reclassification to development tangible assets, or whenever facts and
circumstances indicate that an impairment condition may exist. An impairment loss is recognised for the amount by which the exploration
and evaluation assets’ carrying amount exceeds their recoverable amount. The recoverable amount is the higher of the exploration and
evaluation assets’ fair value less costs to sell and their value in use. For the purposes of assessing impairment, the exploration and
evaluation assets subject to testing are grouped with existing cash-generating units of production fields that are located in the same
geographical region.
(f) Impairment – proved oil and gas production properties
Proven oil and gas properties are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. The cash generating unit applied for
impairment test purposes is generally the field, except that a number of field interests may be grouped together where the cash flows of
each field are interdependent, for instance where surface infrastructure is used by one or more field in order to process production for sale.
(g) Decommissioning
Provision is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such provision represents
the estimated discounted liability (the discount rate used currently being at 10% per annum) for costs which are expected to be incurred in
removing production facilities and site restoration at the end of the producing life of each field. A corresponding item of property, plant
and equipment is also created at an amount equal to the provision. This is subsequently depreciated as part of the capital costs of the
production facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the cash
flow or the current estimate of the discount rate used are reflected as an adjustment to the provision and the property, plant and
equipment. The unwinding of the discount is recognised as a finance cost.
2.6 Other business and corporate assets
Property, plant and equipment not associated with exploration and production activities are carried at cost less accumulated depreciation.
These assets are also evaluated for impairment when circumstances dictate.
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 33 Volga Gas plc | Annual Report and Accounts 201 5
2. Summary of significant accounting policies continued
Land is not depreciated. Depreciation of other assets is calculated on a straight line basis as follows:
Machinery and equipment 6–10 years
Office equipment in excess of US$5,000 3–4 years
Vehicles and other 2–7 years
2.7 Financial assets
The Group classifies its financial assets in the following categories:
(a) Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial assets held for trading. This category comprises derivatives unless they are
effective hedging instruments. The Group had no financial assets in this class as at 31 December 2015 or 31 December 2014.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This
category comprises trade and other receivables, term bank deposits and cash and cash equivalents in balance sheet.
2.8 Inventories
Crude oil inventories are stated at the lower of cost of production and net realisable value. Materials and supplies inventories are recorded
at average cost and are carried at amounts which do not exceed the expected recoverable amount from use in the normal course of
business. Cost comprises direct materials and, where applicable, direct labour plus attributable overheads based on a normal level of
activity and other costs associated in bringing inventories to their present location and condition.
2.9 Trade and other receivables
Trade and other receivables are recorded initially at fair value and subsequently measured at amortised cost using the effective interest
method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that
the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the
difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective
interest rate.
2.10 Cash and cash equivalents
Cash and cash equivalents include cash in hand, and deposits held at call with banks.
2.11 Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
2.12 Trade payables
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
2.13 Current and deferred income tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it
relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other
comprehensive income or directly in equity, respectively.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period
in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions
taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where
appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it
arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction
affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted
or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is
realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the
temporary differences can be utilised.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax
liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either
the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
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2. Summary of significant accounting policies continued
2.14 Employee benefits
(a) Share-based compensation
The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to
be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any
non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in
assumptions about the number of options that are expected to vest. The option plan currently in place for certain of the directors is an
equity settled share option plan.
The Company measures the equity instruments granted to employees at the fair value at grant date. The fair value of fully-vested shares is
expensed immediately. The fair value of shares with vesting requirements is estimated using the Black-Scholes option pricing model. This
value is recognised as an expense over the vesting period on a straight-line basis. The estimate is revised, as necessary, if subsequent
information indicates that the number of equity instruments expected to vest differs from previous estimates.
(b) Social obligations
Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave, sick leave and bonuses
are accrued in the year in which the associated services are rendered by the employees of the Group.
2.15 Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of oil and gas in the ordinary course of the Group’s
activities. Revenue is shown net of value added tax, returns, rebates and discounts and after eliminating sales within the Group. Revenue
from the sale of oil or gas is recognised when the oil/gas is delivered to customers and title has transferred. In 2015 and 2014 , the Group’s
revenue related to sales of crude oil and condensate collected directly by or delivered to customers and gas sales made at the entry to the
gas distribution system.
2.16 Prepayments
Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods or services relating
to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as
non-current upon initial recognition. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has
obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Group. Other
prepayments are written off to profit or loss when the goods or services relating to the prepayments are received. If there is an indication
that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down
accordingly and a corresponding impairment loss is recognised in profit or loss for the year.
2.19 Provisions
Provisions for environmental restoration, restructuring costs and legal claims are recognised when: the Group has a present legal or
constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the
amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments.
Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering
the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the
same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that
reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to
passage of time is recognised as interest expense.
3. Financial risk management
3.1 Financial risk factors
The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk, and cash flow interest
rate risk), credit risk, and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets
and seeks to minimise potential adverse effects on the Group’s financial performance.
(a) Market risk
(i) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from currency exposures, primarily with respect to the RUR. Foreign exchange risk
arises from future commercial transactions, recognised assets and liabilities.
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 35 Volga Gas plc | Annual Report and Accounts 201 5
3. Financial risk management continued
At 31 December 2015, if the US Dollar had weakened/strengthened by 5% against the RUR with all other variables held constant, post-tax
profit for the year would have been US$56,000 (2014: US$289,000) higher/lower, mainly as a result of foreign exchange gains/losses on
translation of RUR denominated trade payables and financial assets. At 31 December 2015, if the US Dollar had weakened/strengthened by
5% against the Euro (“EUR”) with all other variables held constant, post-tax profit for the year would have been US$1,000 (2014: US$1,000)
higher/lower, mainly as a result of foreign exchange gains/losses on translation of EUR denominated interest charges and financial liabilities.
At 31 December 2015, if the US dollar had weakened/strengthened by 5% against the Pound Sterling (“GBP”) with all other variables held
constant, post-tax profit for the year would have been US$3,000 (2014: US$15,000) higher/lower, mainly as a result of foreign exchange
gains/losses on translation of GBP denominated trade payables and financial assets.
If the US Dollar had weakened/strengthened by 5% against the RUR with all other variables held constant, shareholders equity would have
been US$2.3 million (2014: US$2.9 million) higher/lower, as a result of translation of RUR denominated assets. The sensitivity of
shareholders equity to changes in the exchange rates between US dollar against GBP or EUR is immaterial.
The following table shows the currency structure of financial assets and liabilities:
At 31 December 2015
Rubles
US$ 000
US Dollars
US$ 000
Euros
US$ 000
Sterling
US$ 000
Total
US$ 000
Financial assets
Cash and cash equivalents 1,089 5,622 14 44 6,769
Total financial assets 1,089 5,622 14 44 6,769
Financial liabilities (before provision for UK taxes) 3,217 – – – 3,217
At 31 December 2014
Rubles
US$ 000
US Dollars
US$ 000
Euros
US$ 000
Sterling
US$ 000
Total
US$ 000
Financial assets
Cash and cash equivalents 3,167 12,405 15 180 15,767
Total financial assets 3,167 12,405 15 180 15,767
Financial liabilities (before provision for UK taxes) 1,149 – – – 1,149
Group companies utilised short-term foreign exchange forward contracts in 2014 to effect sales of RUR against USD. No forward foreign
exchange contracts were used in 2015.
(ii) Price risk
The Group is not exposed to price risk as it does not hold financial instruments of which the fair values or future cash flows will be affected
by changes in market prices. The Group is not directly exposed to the levels of international marker prices of crude oil or oil products,
although these clearly influence the prices at which it sells its oil and condensate. Mineral Extraction Taxes (“MET”) are calculated by
reference to Urals oil prices and are therefore directly influenced by this. Taking into account the marginal rates of export taxes and MET,
management estimates that if international oil prices had been US$5 per barrel higher or lower and all other variables been unchanged, the
Group’s profit before tax would have been US$1.2 million higher or lower (2014: $1.7 million).
(iii) Cash flow and fair value interest rate risk
As the Group currently has no significant interest-bearing assets and liabilities, the Group’s income and operating cash flows are
substantially independent of changes in market interest rates.
(b) Credit risk
The Group’s maximum credit risk exposure is the fair value of each class of assets, presented in note 3.1(a)(i) of US$6,769,000 and
US$15,767,000 at 31 December 2015 and 2014 respectively.
The Group’s principal financial asset is cash and credit risk arises from cash and cash equivalents and deposits with banks and financial
institutions. It is the Group’s policy to monitor the financial standing of these assets on an ongoing basis. Bank balances are held with
reputable and established financial institutions.
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3. Financial risk management continued
The Group’s oil and condensate sales are normally undertaken on a prepaid basis and accordingly the Group has no trade receivables and
consequently no credit risk associated with the related trade receivables. Gas sales accounting for 38.4% of Group revenues in 2015 (2014:
31.0%) are made to OOO Trans Nafta. As at 31 December 2015 there were trade receivables of US$1.0 million (31 December 2014: US$0.6
million) relating to gas sales. As at 31 December 2015 there was no provision for bad debts (2014: nil).
Rating of financial institution (S&P)
31 December
2015
31 December
2014
A+ 4,794 7,123
BBB+ 1,579 4,971
BBB- 202 3,615
Other 194 58
Total bank balance 6,769 15,767
(c) Liquidity risk
Cash flow forecasting is performed by Group finance. Group finance monitors rolling forecasts of the Group’s liquidity requirements to
ensure it has sufficient cash to meet operational needs. The Group believes it has sufficient liquidity headroom to fund its currently planned
exploration and development activities.
The Group expects to fund its capital investments, as well as its administrative and operating expenses, through 2016 using a combination
of cash generated from its oil and gas production activities, existing working capital and, when appropriate, medium-term bank borrowings.
If the Group is unsuccessful in generating enough liquidity to fund its expenditures, the Group’s ability to execute its long-term growth
strategy could be significantly affected. The Group may need to raise additional equity or debt finance as appropriate to fund investments
beyond its current commitments.
(d) Capital risk
The Group manages capital to ensure that it is able to continue as a going concern whilst maximising the return to shareholders. The Group
is not subject to any externally imposed capital requirements. The Board regularly monitors the future capital requirements of the Group,
particularly in respect of its ongoing development programme. Management expects that the cash generated by the operating fields will
be sufficient to sustain the Group’s operations and future capital investment for the foreseeable future. Further short-term debt facilities
may be arranged to provide financial headroom for future development activities.
3.2 Fair value estimation
Effective 1 January 2009, the Group adopted the amendment to IFRS 7 for financial instruments that are measured in the balance sheet at
fair value. This requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:
– Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
– Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices) (level 2).
– Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
The Group has no financial assets and liabilities that are required to be measured at fair value.
4. Critical accounting estimates and judgements
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the
related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year are discussed below.
(a) Carrying value of fixed assets, intangible assets and impairment
Fixed assets and intangible assets are assessed for impairment when events and circumstances indicate that an impairment condition may
exist. The carrying value of fixed assets and intangible assets are evaluated by reference to their value in use and primarily looks to the
present value of management’s best estimate of the cash flows expected to be generated from the asset. In identifying cash flows
management firstly determine the cash generating unit or group of assets that give rise to the cash flows. The cash generating unit (“CGU”)
is the lowest level of asset at which independent cash flows can be generated. For this purpose the directors consider the Group to have
two CGUs: the VM and Dobrinskoye fields with the Dobrinskoye gas processing plant are treated as a single CGU, and the Uzen oil field is a
separate CGU.
The estimation of forecast cash flows involves the application of a number of significant judgements and estimates to a number of variables
including production volumes, commodity prices, operating costs, capital investment, hydrocarbon reserves estimates, inflation and
discount rates. Key assumptions and estimates in the impairment models relate to: commodity prices that are based on forward curves for
two years and the long-term corporate economic assumptions which include a long term oil price of US$50 per barrel. The models utilised
are based on the remaining reserves in the Proved category and future production profiles based on established field development plans.
Cost assumptions are based on current experience and expectations, and levels of export and mineral extraction taxes reflect rates set by
current legislation. A discount rate of 15% per annum is utilised in the models.
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 37 Volga Gas plc | Annual Report and Accounts 201 5
4. Critical accounting estimates and judgements continued
As at 31 December 2015, the Group’s impairment testing of the property, plant and equipment related to each CGU indicated that no
impairment was required. Variation in the long term oil price assumption to US$10 per barrel below the US$50 per barrel central
assumption, yielded net present values in excess of carrying value for each CGU. However, following unsuccessful operations on certain
non-producing wells during 2015, management decided to write-off assets associated with these specific operations. This is further
detailed in Note 5(c).
(b) Estimation of oil and gas reserves
Estimates of oil and gas reserves are inherently subjective and subject to periodic revision. In addition, the results of drilling and other
exploration or development activity will often provide additional information regarding the Group’s reserve base that may result in
increases or decreases to reserve volumes. Such revisions to reserves can be significant and are not predictable with any degree of
certainty. Management considers the estimation of reserves to represent a significant judgement in the context of the financial statements
as reserve volumes are used as the basis for assessing the useful life of oil and gas assets, applying depreciation to oil and gas assets and in
assessing the carrying value of oil and gas assets. Decreases in reserve estimates can lead to significant impairment of oil and gas assets
where revisions (positive or negative) can have a significant effect on depreciation rates from period to period. Management have
considered the sensitivity of this key assumption and in order for an impairment issue to present itself to the Group, reserve estimates
would need to reduce by more than 25%.
An independent assessment of the reserves and net present value of future net revenue (“NPV”) attributable to the Group’s three principal
fields, Dobrinskoye, Vostochny Makarovskoye and Uzenskoye, as at 1 August 2012, was prepared in accordance with reserve definitions set
by the Oil and Gas Reserves Committee of the Society of Petroleum Engineers (“SPE”).
(c) Income taxes
Significant judgement is frequently required in estimating provisions for deferred taxes. This process involves an assessment of temporary
differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the balance sheet.
5. Cost of sales and administrative expenses – Group
Cost of sales and administrative expenses are as follows:
Year ended 31 December
2015
US$ 000
2014
US$ 000
Production expenses 7,367 9,530
Mineral extraction taxes 5,877 8,344
Depletion, depreciation and amortisation 2,345 4,640
Cost of Sales 15,589 22,514
Total expenses are analysed as follows:
Year ended 31 December
2015
US$ 000
2014
US$ 000
Export sales related expenses 319 –
Field operating expenses 6,016 7,805
Mineral extraction tax 5,876 8,344
Depreciation & amortisation (a) 2,369 4,656
Exploration & evaluation (b) 635 –
Write off of development assets (c) 2,950 –
Salaries & staff benefits (d) 2,471 2,896
Directors’ emoluments and other benefits (e) 765 810
Audit fees (f) 203 201
Taxes other than payroll and mineral extraction 44 82
Legal & consulting 480 907
Fines and penalties – 99
Other 742 871
Total 22,870 26,671
(a) Depreciation: Substantially all depreciation relates to oil and gas assets and is included within cost of sales.
(b) Exploration and evaluation: The principal component was the write-off of costs relating to the Yuzhny Mironovskaya prospect on which an
unsuccessful well was drilled during the year ended 31 December 2015.
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5. Cost of sales and administrative expenses – Group continued
(c) Write-off of development assets: In the year ended 31 December 2015, the principal sources of the write-off of development assets were
impairment of the carrying value of the Sobolevskoye field, the Urozhainoye-2 licence area in which it is located and the cost of the
attempted sidetrack to the Sobolevskoye-11 well. There were also charges relating to unsuccessful operations on well in the Uzen field
and other minor asset write-offs.
(d) The average monthly number of employees (including executive directors) employed by the Group was:
Year ended 31 December 2015 2014
Exploration and production 149 141
Administration and support 42 23
Total 191 164
Their aggregate remuneration (excluding executive directors) comprised:
2015
US$ 000
2014
US$ 000
Wages and salaries 1,859 2,083
Payroll taxes & social contribution 577 761
Staff benefits 35 52
Total 2,471 2,896
The average monthly number of employees employed by the Company was:
Year ended 31 December 2015 2014
Chief Executive and Chief Financial Officers 2 2
Only directors are employed by the Company.
(e) Directors’ emoluments and other benefits: Directors’ emoluments comprised salaries of US$595,000 (2014: US$688,000), pension
contributions of nil (2014: US$21,000) and non-executive directors’ fees of US$170,000 (2014: US$100,000). There were no share grant
expenses in 2015 (2014: nil).
(f) Audit Fees – Group and Company: Disclosure of the fees paid to the Company’s auditor and its associates is given in Note 21.
6. Finance income – Group
Finance income comprises interest earned during the period on cash balances with different banks (note 13).
7. Other gains and losses – Group
Year ended 31 December
2015
US$ 000
2014
US$ 000
Foreign exchange gain 942 3,263
Loss from unauthorised bank transfers (727) –
Other gains 91 27
Total other gains and losses 306 3,290
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 39 Volga Gas plc | Annual Report and Accounts 201 5
8. Current and deferred income tax – Group
Year ended 31 December
2015
US$ 000
2014
US$ 000
Current tax:
Current income tax (3) –
Adjustments to tax charge in respect of prior periods – –
Total current tax (3) –
Deferred tax:
Adjustments to tax charge in respect of prior periods – –
Origination and reversal of timing differences 559 (3,229)
Total deferred tax 559 (3,229)
Total tax credit/(charge) 556 (3,229)
The tax charge in the Group income statement differs from the theoretical amount that would arise using the weighted average tax rate
applicable to profits of the consolidated entities as follows:
Year ended 31 December
2015
US$ 000
2014
US$ 000
(Loss)/profit before income tax (4,620) 16,287
Tax calculated at domestic tax rates applicable to (profits)/losses in the respective countries 1,038 (3,104)
Tax effect of items which are not deductible or assessable for taxation purposes:
Non-deductible expenses (450) (287)
Other tax adjustments (32) 162
Income tax credit/(charge) 556 (3,229)
The weighted average applicable tax rate was 22.5% (2014: 19.1%).
Deferred taxation is attributable to the temporary differences that exist between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. The tax effects of temporary differences that give rise to deferred taxation are
presented below:
31 December
2015
US$ 000
Differences
recognised
in other
comprehensive
income
US$ 000
31 December
2014
US$ 000
Differences
recognised
US$ 000
31 December
2013
US$ 000
Tax effects of taxable temporary differences:
Exploration and production assets (2,724) 1,173 (3,897) 2,848 (6,745)
Property, plant & equipment (1,039) 447 (1,486) 1,085 (2,571)
Total (3,763) 1,620 (5,383) 3,933 (9,316)
Tax effect of deductible temporary differences:
Tax losses carry forward 2,866 (745) 3,611 (6,542) 10,153
Trade and other receivables – – – 87 (87)
Property, plant and equipment – – – – –
Total 2,866 (745) 3,611 (6,455) 10,066
Net tax effect of temporary differences (897) 875 (1,772) (2,522) 750
Deferred income tax assets are recognised for tax loss carry forwards to the extent that the realisation of the related tax benefit through
the future taxable profits is probable. As at 31 December 2015, deferred income tax assets of US$1,098,000 (2014: US$706,000) and
deferred tax liabilities of US$1,995,000 (2014: US$2,478,000) have been recognised. Tax losses in respect of Cyprus and the UK do not
expire. The Group has not recognised a deferred tax asset of US$1,950,000 in respect of tax losses and other short-term timing differences
in the UK (2014: US$1,711,000).
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9. Basic and diluted profit per share – Group
Profit per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of
ordinary and diluted shares in issue during the year.
Year ended 31 December 2015 2014
Net (loss)/profit attributable to equity shareholders (US$ per share) (0.050) 0.161
Diluted net profit attributable to equity shareholders (0.050) 0.161
Net (loss)/profit attributable to equity shareholders (US$ 000) (4,064) 13,058
Basic weighted number of shares 81,017,800 81,017,800
Dilutive share options outstanding – 195,503
Diluted number of shares 81,017,800 81,213,303
As at 31 December 2015 1,332,967 options were excluded from the weighted average diluted number of shares calculation because their
effect would have been anti-dilutive (2014: 1,137,464). The average market value of the Company’s shares for the purpose of calculating the
dilutive effect of share options was based on quoted market prices for the year during which the options were outstanding.
10. Intangible assets – Group
Intangible assets represent exploration and evaluation assets such as licences, studies and exploratory drilling, which are stated at historical
cost, less any impairment charges or write-offs.
Note
Work in
progress:
exploration
and
evaluation
Exploration
and
evaluation Total
At 1 January 2015 151 3,595 3,746
Additions – 606 606
Write offs and impairments 5(b) – (635) (635)
Transfers – – –
At 31 December 2015 151 3,566 3,717
Exchange adjustments (34) (816) (850)
At 31 December 2015 117 2,750 2,867
Work in
progress:
exploration
and
evaluation
Exploration
and
evaluation Total
At 1 January 2014 258 6,180 6,438
Additions – – –
Impairments – – –
Transfers – – –
At 31 December 2014 258 6,180 6,438
Exchange adjustments (107) (2,585) (2,692)
At 31 December 2014 151 3,595 3,746
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 41 Volga Gas plc | Annual Report and Accounts 201 5
11. Property, plant and equipment – Group
Movements in property, plant and equipment, for the years ended 31 December 2015 and 2014 are as follows:
Cost
Development
assets
US$ 000
Land &
buildings
US$ 000
Producing
assets
US$ 000
Other
US$ 000
Total
US$ 000
At 1 January 2015 8,523 842 57,944 701 68,010
Additions 378 – 9,422 – 9,800
Write-offs and impairments (673) – (2,338) (51) (3,062)
Transfers (6,181) – 6,181 – –
At 31 December 2015 2,047 842 71,209 650 74,748
Accumulated depreciation
At 1 January 2015 – – (9,589) (599) (10,188)
Adjustment for assets written off – – 10 51 61
Depreciation – – (2,384) (66) (2,450)
At 31 December 2015 – – (11,963) (614) (12,577)
Exchange adjustments (910) (192) (12,766) (13) (13,881)
NBV at 31 December 2015 1,137 650 46,480 23 48,290
Cost
Development
assets
US$ 000
Land &
buildings
US$ 000
Producing
assets
US$ 000
Other
US$ 000
Total
US$ 000
At 1 January 2014 9,170 1,446 98,439 784 109,839
Additions 5,547 – 82 – 5,629
Transfers (901) – 901 – –
At 31 December 2014 13,816 1,446 99,422 784 115,468
Accumulated depreciation
At 1 January 2014 – – (11,017) (551) (11,568)
Depreciation – – (4,635) (49) (4,684)
At 31 December 2014 – – (15,652) (600) (16,252)
Exchange adjustments (5,293) (604) (35,418) (82) (41,397)
NBV at 31 December 2014 8,523 842 48,353 102 57,819
12. Non-current assets – Group
As at 31 December
2015
US$ 000
2014
US$ 000
VAT recoverable 152 24
Other non-current assets 3 44
Total other non-current assets 155 68
Management believes that it may not be able to recover all VAT specific to contractors’ payments within the 12 months of the balance sheet
date. Therefore this VAT is classified as a non-current asset.
13. Term deposits, cash and cash equivalents – Group and Company
Group Company
At 31 December
2015
US$ 000
2014
US$ 000
2015
US$ 000
2014
US$ 000
Cash at bank and on hand 6,769 15,767 4,529 6,786
Short term bank deposits – – – –
Total cash and cash equivalents 6,769 15,767 4,529 6,786
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Statements 42 Volga Gas plc | Annual Report and Accounts 201 5
13. Term deposits, cash and cash equivalents – Group and Company continued
An analysis of Group deposits, cash and cash equivalents by bank and currency is presented in the table below:
Group Company
At 31 December
Bank Currency
2015
US$ 000
2014
US$ 000
2015
US$ 000
2014
US$ 000
United Kingdom
Barclays Bank PLC USD 4,750 6,943 4,485 6,606
Barclays Bank PLC GBP 44 180 44 180
Russian Federation
Unicreditbank RUR 70 123 – –
Unicreditbank USD 195 3,492 – –
ZAO Raiffeisenbank RUR 825 2,986 – –
ZAO Raiffeisenbank USD 740 1,970 – –
ZAO Raiffeisenbank EUR 132 15 – –
Other banks and cash on hand RUR 13 58 – –
Total cash and cash equivalents 6,769 15,767 4,529 6,786
14. Inventories – Group
At 31 December
2015
US$ 000
2014
US$ 000
Production consumables and spare parts 704 1,060
Crude oil inventory 363 39
Total inventories 1,067 1,099
15. Other receivables – Group
Group Company
At 31 December
2015
US$ 000
2014
US$ 000
2015
US$ 000
2014
US$ 000
VAT receivable 80 81 22 31
Prepayments 298 202 – –
Trade receivables 987 579 – –
Other accounts receivable 84 56 – –
Total other receivables 1,449 918 22 31
Prepayments are to contractors and relate to initial advances made in respect of drilling, construction and other projects. Trade receivables
relate to sales of gas and condensate. The receivables were settled on schedule subsequent to the balance sheet date.
16. Share capital and share premium – Group
The following summarises the movement in the share capital and share premium of the Company for the years ended 2014 and 2015.
Number of
shares
Share capital
US$ 000
Share
premium
US$ 000
At 1 January 2015 81,017,800 1,485 –
Issues of shares – – –
At 31 December 2015 81,017,800 1,485 –
Number of
shares
Share capital
US$ 000
Share
premium
US$ 000
At 1 January 2014 81,017,800 1,485 165,873
Cancellation of share premium (165,873)
Issues of shares – – –
At 31 December 2014 81,017,800 1,485 –
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 43 Volga Gas plc | Annual Report and Accounts 201 5
16. Share capital and share premium – Group continued
On 9 July 2014 the capital reduction approved by shareholders at the Company’s Annual General Meeting on 6 June 2014 became effective
following confirmation by the High Court, the filing of the Court Order and a Statement of Capital with Companies House and the fulfilment of
certain minor undertakings given to the Court. As a result, the Share Premium Account of the Company, amounting to US$165.9 million, was
cancelled and the equivalent sum credited to the Company’s Profit and Loss Account, thereby creating distributable reserves.
The total number of authorised ordinary shares is 330,720,100 (2014: 330,720,100) with a par value of £ 0.01 per share (2014: £ 0.01 per share).
Share-based compensation
Share options and other share-based awards have been granted to certain directors. There were no shares issued to directors under such
schemes during 2015 (2014: nil).
2008 Executive Share Option Plan
On 15 July 2008 the Group announced a new Executive Share Option Plan (“ESOP”). During 2008, the Company granted options to acquire
1,137,464 ordinary shares to Mikhail Ivanov under the terms of the ESOP. The options may be exercised at a price of 405p per share and
vested in equal portions on May 2010, 2011 and 2012 and will remain outstanding until May 2017. In January 2009, the Company granted
568,732 share options to Tony Alves under the ESOP. A total of 195,503 share options vested in eight semi-annual tranches over a period of
four years under conditions related to the Company’s share price. The options have an exercise price of £1.00. As of 17 December 2012 no
further options were eligible for vesting. There were no share grant expenses in 2015 (2014: nil).
The fair value of share options outstanding as at 31 December 2015 is measured by use of the Black-Scholes pricing model with the
following assumptions:
Year ended 31 December 2015
2008 Executive Share
Option Plan
Share price 29.5p
Exercise price 100.0p – 405.0p
Expected volatility 43.5%
Expected life 1-2 years
Risk free rate 0.5%
17. Other reserves – Group
At 31 December
2015
US$ 000
2014
US$ 000
Currency translation reserves (91,350) (76,049)
Share grant reserve 5,233 5,233
Total other reserves (86,117) (70,816)
18. Accumulated profit/(loss) – Group and Company
Group Company
At 31 December
2015
US$ 000
2014
US$ 000
2015
US$ 000
2014
US$ 000
Retained profits/(losses) 145,114 (30,779) 155,566 (5,797)
Profit/(loss) for the year (4,064) 13,058 (102,956) (1,472)
Equity dividends paid (1,013) (3,038) (1,013) (3,038)
Cancellation of share premium – 165,873 – 165,873
Accumulated profit/(loss) 140,037 145,114 51,597 155,566
19. Trade and other payables
Group Company
At 31 December
2015
US$ 000
2014
US$ 000
2015
US$ 000
2014
US$ 000
Trade payables 2,467 268 89 16
Taxes other than profit tax 750 881 – –
Customer advances 932 524 – –
Total 4,149 1,673 89 16
The maturity of the Group’s and the Company’s financial liabilities are all between 0 to 3 months.
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20. Investments – Company
Investments in subsidiaries, comprising ordinary share capital, are accounted for at cost. The Company’s subsidiaries are as follows:
Name Jurisdiction Nature of operations % Owned From
Woodhurst Holdings Ltd. Cyprus Intermediate Holding Company 100% October 2005
Pre-Caspian Gas Company Russia Oil & gas exploration and production 100% May 2006
Gaznefteservice Russia Oil & gas exploration and production 100% September 2006
Shropak Investments Ltd Cyprus Dormant 100% June 2007
Volga Gas (Cyprus) Ltd. Cyprus Intermediate Holding Company 100% August 2007
Gazservice Russia Special purpose entity 99% October 2008
Volga Gas Finance Ltd. UK Intermediate Holding Company 100% March 2010
To avoid certain legal restrictions on land ownership in October 2008 Pre-Caspian Gas Company acquired a 99% shareholding in ZAO
Gazservice. Subsequently, Pre-Caspian Gas Company sold an unimproved plot of land to ZAO Gazservice at cost basis.
Company
31 December
2014
US$ 000
Additions
US$ 000
Impairment
US$ 000
31 December
2015
US$ 000
Investments in Woodhurst Holdings 150,683 – (101,759) 48,924
Investments in Volga Gas (Cyprus) 1,551 – – 1,551
Total investments 152,234 – (101,759) 50,475
The Company funds its activities in the Russian Federation via Woodhurst Holdings (“Woodhurst”), the Company’s Cyprus registered
subsidiary. The directors considered that, as a result of the long term depreciation of the Ruble, the value of the Company’s investment
in Woodhurst was impaired. The reduced valuation of the investment is aligned with the value of shareholders’ equity in Woodhurst as at
31 December 2015.
21. Audit fees – Group and Company
During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditor and associates:
Year ended 31 December
2015
US$ 000
2014
US$ 000
Fees payable to Company’s auditor for the audit of Parent Company and consolidated financial statements 183 177
– Audit of the Company’s subsidiaries pursuant to legislation 20 24
– Audit-related assurance services 32 31
– Other services pursuant to legislation 3 27
Total 238 259
22. Related Party Transactions – Group and Company
The Group is controlled by Baring Vostok Private Equity Funds III and IV, which respectively own 48.9% and 9.76% (in aggregate 58.66%) of
the Company’s shares. The Baring Vostok Private Equity Funds exercise their control through a number of nominee holding companies. The
remaining 41.34% of the shares are widely held.
The following transactions concerning purchases of goods and services were carried out by the Group with related parties:
Related party Relationship Nature of transactions
Year ended 31 December
2015 2014
Baring Vostok Cyprus Limited Affiliated with controlling shareholder Rent, services – 5
Year-end balances arising from transactions with related parties:
Due to related parties
31 December
2015 US$ 000
31 December
2014 US$ 000
Baring Vostok (Cyprus) Limited 12 12
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 45 Volga Gas plc | Annual Report and Accounts 201 5
22. Related Party Transactions – Group and Company continued
All transactions with related parties were made on commercial basis.
The following transactions were carried out between the Company and its wholly-owned subsidiaries:
Group Company Relationship Nature of transactions
Year ended 31 December
2015 2014
Woodhurst Holdings Limited 100% directly-owned subsidiary Reduction of receivables due – 11,092
Year-end balances arising from transactions with subsidiaries
31 December
2015 US$ 000
31 December
2014 US$ 000
Accounts receivable from subsidiaries
Woodhurst Holdings Limited 4,735 4,606
Accounts payable to subsidiaries
Woodhurst Holdings Limited 1,357 1,357
Key management
Key management of the Company is considered to be the directors. Details of key management compensation are presented in the
Directors’ Remuneration Report and in note 5(d) above.
23. Contingencies and Commitments
23.1 Capital commitments
As of the balance sheet date all material licence commitments have been met.
23.2 Taxation
Russian tax, currency and customs legislation is subject to varying interpretations and changes which can occur frequently. Management’s
interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and
federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in
their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in
the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to
review by the authorities in respect of taxes for three calendar years preceding the year of review, but under certain circumstances, reviews
may cover longer periods.
At 31 December 2015, management believes that its interpretation of the relevant legislation is appropriate and the Group’s tax, currency
and customs positions will be sustained.
23.3 Restoration, rehabilitation, and environmental costs
The Group operates in the upstream oil industry in the Russian Federation and its activities may have an impact on the environment. The
enforcement of environmental regulations in the Russian Federation is evolving and the enforcement posture of government authorities is
continually being reconsidered. The Group periodically evaluates its obligation related thereto. The outcome of environmental liabilities
under proposed or future legislation, or as a result of stricter interpretation and enforcement of existing legislation, cannot reasonably be
estimated at present, but could be material.
Under the current levels of enforcement of existing legislation, management believes there are no significant liabilities in addition to
amounts which are already accrued and which would have a material adverse effect on the financial position of the Group.
23.4 Oilfield licences
The Group is subject to periodic reviews of its activities by governmental authorities with respect to the requirements of its oilfield licences.
Management of the Group correspond with governmental authorities to agree on remedial actions, if necessary, to resolve any findings
resulting from these reviews. Failure to comply with the terms of a licence could result in fines, penalties, licence limitation, suspension or
revocation. The Group’s management believes any issues of non-compliance would be resolved through negotiations or corrective actions
without any materially adverse effect on the financial position or the operating results of the Group.
The principal licences of the Group and their expiry dates are:
Field Licence holder
Licence
expiry date
Karpenskiy OOO Pre-Caspian Gas Company 2021
Urozhainoye-2 OOO Pre-Caspian Gas Company 2032
Vostochny-Makarovskoye OOO Gaznefteservice 2026
Dobrinskoye OOO Gaznefteservice 2026
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Notice is hereby given that the Annual General Meeting (the “AGM”) of Volga Gas plc (the “Company”) will be held at the London office of
Baring Vostok at 2nd Floor, 25 Old Burlington Street, London W1S 3AN on 10 June 2016 at 10.00 a.m. for the following purposes:
Ordinary Resolutions
1. To receive and adopt the Company’s accounts for the year ended 31 December 2015 and the Directors’ Report.
2. To reappoint Ronald Freeman, who retires by rotation, as a director.
3. To reappoint Aleksey Kalinin, who retires by rotation, as a director.
4. To reappoint Stephen Ogden, who retires by rotation, as a director.
5. To reappoint KPMG LLP as auditor of the Company until the conclusion of the next general meeting at which accounts are laid before the
members of the Company.
6. To authorise the directors to determine the remuneration of the auditor of the Company.
7. That the directors be and they are hereby generally and unconditionally empowered to exercise all the powers of the Company to allot
shares in the Company and/or to grant rights to subscribe for or to convert any security for shares in the Company (together “Relevant
Securities”) up to a maximum aggregate nominal amount of £500,000 to such persons and at such times and on such terms as they think
proper, provided that this authority shall expire the earlier of (i) 15 months from the passing of this resolution, or (ii) the conclusion of
the AGM of the Company to be held in 2017 (unless renewed, varied or revoked by the Company prior to or on such date), save that this
authority shall allow the Company to make offers or agreements before the expiry of such authority which would or might require
Relevant Securities to be allotted after such expiry and the directors shall be entitled to allot Relevant Securities pursuant to any such
offer or agreement as if this authority had not expired; and all unexercised authorities previously granted to the directors to allot
Relevant Securities be and are hereby revoked.
Special Resolutions
8. That the directors be and they are hereby empowered pursuant to Sections 570 and 573 of the Companies Act 2006 (the “Act”) to allot
equity securities (as defined in Section 560 of the Act) for cash; pursuant to the authority conferred by Resolution 7 set out in this Notice
convening the AGM (the “Notice”) as if Section 561 of that Act did not apply to any such allotment, provided that this power shall be
limited to:
(a) the allotment of equity securities in connection with a rights issue, open offer or other offer of securities in favour of the holders of
ordinary shares on the register of members at such record date(s) as the directors may determine where the equity securities
respectively attributable to the interests of the ordinary shareholders are proportionate (as nearly as may be) to the respective
numbers of ordinary shares held by them on any such record date(s), subject to such exclusions or other arrangements as the
directors may deem necessary or expedient to deal with fractional entitlements or legal or practical problems arising under the laws
of any overseas territory or the requirements of any regulatory body or stock exchange or by virtue of shares being represented by
depositary receipts or any other matter; and
(b) the allotment (otherwise than pursuant to sub-paragraph (a) above) to any person or persons of equity securities up to an aggregate
nominal amount of £100,000.
And the power conferred hereby shall expire upon the expiry of the general authority conferred by resolution 7 set out in this Notice (unless
renewed, varied or revoked by the Company prior to or on such date), save that the Company shall be entitled to make offers or agreements
before the expiry of such power which would or might require equity securities to be allotted after such expiry and the directors shall be
entitled to allot equity securities pursuant to any such offer or agreement as if the power conferred hereby had not expired.
9. That the Company be generally and unconditionally authorised for the purposes of section 701 of the Act, to make market purchases
(within the meaning of section 693 of the Act) of fully-paid ordinary shares of 1p each (“Shares”) on such terms and in such manner as the
directors of the Company may decide provided that:
(i) the maximum number of Shares that may be purchased by the Company pursuant to this authority is 12,144,000 (representing
approximately 14.99% of the Company’s issued ordinary share capital at the date of this Notice;
(ii) the minimum price (exclusive of expenses) which may be paid for any such Shares shall not be less than the nominal value of that
Share at the time of purchase;
(iii) the maximum price (exclusive of expenses) which may be paid for any Shares purchased pursuant to this authority is an amount equal
to the higher of (a) an amount equal to 105% of the average of the middle market prices shown in the quotations for the Company’s
Shares in the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which that Share
is contracted to be purchased; and (b) an amount equal to the higher of the price of the last independent trade of an ordinary share
and the highest current independent bid for an ordinary share as derived from the London Stock Exchange; and
(iv) unless previously varied, revoked or renewed, the authority conferred by this resolution shall expire on the earlier of 30 June 2017 or
at the end of the next annual general meeting of the Company to be held in 2017, but the Company may make a contract to purchase
Shares under this authority before its expiry which will or may be completed wholly or partly after the expiry of this authority, and
may complete such a purchase as if this authority had not expired.
Registered Office: BY ORDER OF THE BOARD
40 Dukes Place Tony Alves
London Company Secretary
EC3A 7NH 31 March 2016
Notice of Meeting 47 Volga Gas plc | Annual Report and Accounts 201 5
Notes:
1. Resolutions 1-7 are ordinary resolutions. For these resolutions to be passed, a simple majority of the votes cast at the Company’s AGM must be in favour of the resolutions.
Resolutions 8 and 9 are special resolutions. For these resolutions to be passed, at least three-quarters of the votes cast at the AGM must be in favour of the resolution.
2. Share buy-back (Resolution 9). The purpose of Resolution 9 is to permit the Company to purchase its own shares in the market under the terms described therein. Shares so
purchased would be cancelled and the issued share capital of the Company accordingly reduced.
3. Only those members entered on the register of members of the Company at 6.00 p.m. on 8 June 2016 or, in the event that this meeting is adjourned, in the register of members
as at 6.00 p.m. on the day two days before the date of any adjourned meeting, shall be entitled to attend and vote at the meeting in respect of the number of ordinary shares
registered in their names at that time. Changes to the entries on the register of members after 6.00 p.m. on 8 June 2016 or, in the event that this meeting is adjourned, in the
register of members after 6.00 p.m. on the day two days before the date of the adjourned meeting, shall be disregarded in determining the rights of any person to attend or
vote at the meeting.
4. A member entitled to attend, speak and vote at the meeting convened by the notice set out above is entitled to appoint a proxy to attend, speak and, on a poll, to vote in his
place. To appoint more than one proxy you may photocopy this form. Please indicate the proxy holder’s name and the number of shares in relation to which they are authorised
to act as your proxy (which, in aggregate, should not exceed the number of shares held by you). Please also indicate if the proxy instruction is one of multiple instructions being
given. All forms must be signed and should be returned together in the same envelope.
5. A form of proxy is enclosed. To be effective, it must be deposited at the office of the Company’s registrars (Capita Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent
BR3 4TU) so as to be received not later than 48 hours before the time appointed for holding the AGM. Completion of the proxy does not preclude a member from subsequently
attending and voting at the meeting in person if he or she so wishes.
6. To change your proxy instructions simply submit a new proxy appointment using the methods set out in notes 3 and 4 above. Note that the cut-off time (in note 3 above) for
receipt of proxy appointments also apply in relation to amended instructions; any amended proxy appointment received after the relevant cut-off time will be disregarded.
Where you have appointed a proxy using the hard-copy proxy form and would like to change the instructions using another hard-copy proxy form, please contact the Company’s
registrars. If you submit more than one valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will take precedence.
7. In order to revoke a proxy instruction you will need to inform the Company using one of the following methods:
(a) by sending a signed hard copy notice clearly stating your intention to revoke your proxy appointment to the Company’s registered office address. In the case of a member
which is a company, the revocation notice must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any
power of attorney or any other authority under which the revocation notice is signed (or duly a certificated copy of such power of authority) must be included with the
revocation notice; or
(b) by sending an email to [email protected].
In either case, the revocation notice must be received by the Company’s registrars no later than the cut-off time set out in note 3 above.
8. The register of interests of the directors and their families in the share capital of the Company and copies of contracts of service of directors with the Company or with any of its
subsidiary undertakings will be available for inspection at the registered office of the Company during normal business hours (Saturdays and public holidays excepted) from the
date of this notice until the conclusion of the AGM.
9. To appoint a proxy or to give or amend an instruction to a previously appointed proxy via the CREST system, the CREST message must be received by the issuer’s agent RA10 no
later than 48 hours before the meeting date. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the
CREST Applications Host) from which the issuer’s agent is able to retrieve the message. After this time any change of instructions to a proxy appointed through CREST should
be communicated to the proxy by other means. CREST Personal Members or other CREST sponsored members, and those CREST Members who have appointed voting service
provider(s) should contact their CREST sponsor or voting service provider(s) for assistance with appointing proxies via CREST. For further information on CREST procedures,
limitations and system timings please refer to the CREST Manual. We may treat as invalid a proxy appointment sent by CREST in the circumstances set out in Regulation 35(5) (a)
of the Uncertificated Securities Regulations 2001. In any case your proxy form must be received by the Company’s registrars no later than 48 hours before the meeting date.
10. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided they do not do so
in relation to the same shares.
11. Under section 319A of the 2006 Act, the Company must cause to be answered any question relating to the business being dealt with at the Annual General Meeting put by a
member attending the meeting unless answering the question would interfere unduly with the preparation for the meeting or involve the disclosure of confidential
information, or the answer has already been given on a website in the form of an answer to a question, or it is undesirable in the interests of the Company or the good order of
the meeting that the question be answered.
Members who have any queries about the Annual General Meeting should contact the Company Secretary by email on [email protected]. Members may not use any electronic
address or fax number provided in this notice or in any related documents (including the Form of Proxy) to communicate with the Company for any purpose other than those
expressly stated.
12. Information regarding the Annual General Meeting, including information required by section 311A of the 2006 Act, and a copy of this notice of Annual General Meeting is
available from www.volgagas.com.
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Glossary of T echnical T erms
2-D seismic geophysical data that depicts the subsurface strata in two dimensions.
3-D seismic geophysical data that depict the subsurface strata in three dimensions. 3-D seismic typically provides a more detailed and accurate interpretation of
the subsurface strata than 2-D seismic.
abandonment application of a cement plug to close a well and welding of a steel plate to the top of the well; the well is then plugged and abandoned.
bbl the standard barrel of crude oil or other petroleum product is 42 US gallons (approximately 159 litres).
bcf billion cubic feet.
bcm billion cubic metres.
best estimate the term “best estimate” is used here as a generic expression for the estimate considered to be the closest to the quantity that will actually be
recovered from the accumulation between the date of the estimate and the time of abandonment.
boe barrels of oil equivalent, being for natural gas the energy equivalent on one barrel of oil. The usual ratio is to equate 6,000 cubic feet to one barrel of
oil equivalent.
condensate liquid hydrocarbons associated with the production from a primarily natural gas reservoir.
field means an area consisting of either a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural
feature and/or stratigraphic condition.
gas natural gas.
gas processing facilities together with the laboratory, gathering pipelines and storage facilities (if any), a plant comprising one or more units such that after conditioning the
gas will be of pipeline quality as, specified by Gazprom, such units may include dehydration, sweetening and separation of natural gas liquids.
gas-water contact bounding surface in a reservoir above which predominantly gas occurs and below which predominantly water occurs.
hydrocarbons compounds formed from the elements hydrogen (H) and carbon (C) and existing in solid, liquid or gaseous forms.
Kungurian Salt a layer of salt laid down during the lower Permian age which occurs in the Northern Caspian Petroleum Province.
licence area the particular subsoil plot specified in the subsoil licence issued by the applicable Russian federal authority, which the licence holder has the right to
use for the purpose and on the terms specified in the subsoil licence. A licence area may contain one or more fields or may encompass only a portion of
a field.
mcm thousand cubic metres.
mmbbls million barrels.
mmBOE million barrels of oil equivalent.
natural gas hydrocarbons that are gaseous at one atmosphere of pressure at 20°C. It can be divided into lean gas, primarily methane but often containing some
ethane and smaller quantities of heavier hydrocarbons (also called sales gas) and wet gas, primarily ethane, propane and butane as well as smaller
amounts of heavier hydrocarbons; partially liquid under atmospheric pressure.
petroleum naturally occurring liquids and gases which are predominantly comprised of hydrocarbon compounds.
possible reserves are those unproven reserves that, on the available evidence and taking into account technical and economic factors, have a 10% chance of
being produced.
probable reserves are those reserves in which hydrocarbons have been located within the geological structure with a lesser degree of certainty because fewer wells have
been drilled and/or certain operational tests have not been conducted. Probable reserves are those reserves that, on the available evidence and taking
into account technical and economic factors, have a better than 50% chance of being produced.
prospective resources are those quantities of hydrocarbons which are estimated, on a given date, to be potentially recoverable from undiscovered accumulations.
proved plus probable
reserves
sum of the proved reserves and the probable reserves calculated in accordance with SPE standards.
proved reserves include reserves that are confirmed with a high degree of certainty through an analysis of development history and/or volume method analysis of the
relevant geological and engineering data. Proved reserves are those that, based on the available evidence and taking into account technical and
economic factors, have a better than 90% chance of being produced.
reserves quantities of petroleum which are anticipated to be commercially recoverable from known accumulations from a given date forward.
reservoir a porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by
impermeable rock or water barriers and is separate from other reservoirs.
risk factor for contingent resources means the estimated chance, or probability, that the volumes will be commercially extracted; for prospective resources
means the chance or probability of discovering hydrocarbons in sufficient quantity for them to be tested to the surface, this, then, is the chance or
probability of the prospective resource maturing into a contingent resource.
SPE standards reserves definitions consistent with those approved in March 2007 by the Society of Petroleum Engineers and the World Petroleum Congresses.
sub-salt below the Kungurian salt layer.
supra-salt above the Kungurian salt layer. Corporate Directory
Registered Office
40 Dukes Place
London EC3A 7NH
United Kingdom
Company Secretary
Tony Alves
of the registered office
Nominated Adviser and Broker
Stifel Nicolaus Europe Limited
150 Cheapside
London EC2V 6ET
United Kingdom
Auditor
KPMG LLP
15 Canada Square
London E14 5GL
United Kingdom
Lawyers and Solicitors to the Company as to English and Russian Law
As to English law:
Akin Gump Strauss Hauer & Feld
8th Floor, Ten Bishops Square
London E1 6EG
United Kingdom
As to Russian law:
Akin Gump Strauss Hauer & Feld LLP
Geneva House 7 Petrovka Street
Moscow 107031
Russian Federation
Registrar
Capita Registrars
34 Beckenham Road, Beckenham
Kent BR3 4TU
United Kingdom
Corporate Communications/PR
FTI Consulting
200 Aldersgate, Aldersgate Street
London EC1A 4HD
United Kingdom Volga Gas plc Annual Report and Accounts 2015
Volga Gas plc
40 Dukes Place
London
EC3A 7NH
www.volgagas.com | 06 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Chief Executive’s Report
As the Chairman has noted, Volga Gas faced
significant challenges during 2015, with
market factors constraining gas and
condensate production during the first half
of the year, declines in production from the
mature oil wells, dramatic reductions in
international oil prices and higher rates of
production taxes. Each of these factors has
had an impact on the financial performance
of the Group.
There was, however, continued operational
progress during the year. Development
drilling on our main field, Vostochny
Makarovskoye (“VM”) was successfully
concluded and towards the end of 2015, we
increased the rate of production from the
VM and Dobrinskoye fields by 50%.
However, this late lift in production did not
make a material contribution to the Group’s
full year’s average daily production which
was severely impacted by lower production
earlier in the year.
Another factor in the Group’s overall
production in 2015 was the continuing
decline in oil production from the mature
Uzenskoye field. However, Volga Gas
had made very good returns from these
assets and management has identified
opportunities to revive oil production both
by further development of proven reserves
and by exploration for new reserves. As part
of this strategy, a number of operations
were carried out during 2015, as detailed in
the Operational Review, on pages 08 and 09.
Unfortunately, these did not result in
immediate success, but I am optimistic that
the strategy will yield significant levels of oil
production in the future.
Andrey Zozulya
Chief Executive Officer
Summary and Outlook
– Upstream development of VM gas field is effectively
completed
– New wells (VM#3, VM#4) expected to enable 100% increase in production
capacity
– Field output has increased by 50%, fully utilising the current effective
operational capacity of the gas plant of 750 mcm/d (26.5 mmcf/d)
– Gas Processing Plant
– Effective available capacity is 750–1,000 mmcm/d (26.3–35.3 mmcf/d)
– Seeking to improve operational efficiency in the current plant
– Aim to upgrade to amine-based sweetening to enable significant cost savings
and full 35.3 mmcf/d capacity utilisation
– Longer term plan to install LPG capture => further significant increase in
revenues and in profit margin expected
– Finance
– Strong position at start of 2015 enabled Volga Gas to complete development
and remain net cash positive
– Well placed to benefit from recovery in oil prices/Russian Rouble
– Considering raising moderate levels of debt to fund incremental capex on
gas plant upgrade
– Current trading and outlook
– Production during 1Q 2016 averaged 5,550 boepd, current run rate of over
6,000 boepd
– Exports of condensate have enabled production to be maintained at full
operational levels
– Financial performance in US$ driven by oil prices, RUR rates and Mineral
Extraction Taxes
– Operating costs and G&A primarily RUR denominated 07 Volga Gas plc | Annual Report and Accounts 201 5
Following my appointment as Chief
Executive on 5 May 2015, I decided it would
be most effective if I were to be based close
to the operations in the city of Saratov,
rather than in Moscow. Since then, I have
initiated a restructuring of the operational
teams with the aim of improving the
effectiveness of our operational capabilities.
In addition, following an incident that led to
a loss of funds from certain of our bank
accounts, detailed below, I decided to
improve the online security and make
changes to the financial management in
the operating companies. I believe that
with these changes implemented, the
Group is well placed to develop successfully
in the future.
2016 objectives and medium-term
strategy
Having successfully completed the drilling
of the VM#3 and VM#4 wells, the VM field is
now effectively fully developed and is
expected to be able to deliver sufficient
production to maintain a production plateau
of 1 million m
3
per day (35.3 million cubic
feet per day – “mmcf/d”). However, based on
its current configuration, we believe the gas
processing plant is capable of sustaining
production at a rate of 750,000 m
3
per day
(26.5 mmcf/d). Following extensive technical
evaluation and consideration of alternatives,
it has been decided that the most effective
solution for the longer term is to re-
configure the gas plant to utilise an amine
based gas sweetening process. We believe
that this can be achieved with a modest
investment, recently estimated at
approximately US$8 million. If successful,
this would significantly reduce the costs of
chemicals consumed in gas processing and
allow the gas plant to process the targeted
1 million m
3
per day (35.3 mmcf/d) of gas. A
more ambitious plan, to install equipment to
capture and sell liquid petroleum gases
(“LPG”), would be a follow-on project which
could add a valuable further income stream.
Meanwhile, however, the Board of Volga
Gas has decided to preserve the financial
strength of the Group and defer capital
expenditures while oil prices remain at
very low levels. For the time being,
capital expenditure will be limited to
completing payments for ongoing
projects and necessary items to maintain
producing assets.
A new commercial initiative that has been
implemented is the development of a
channel for exports of our condensate
production. A small number of cargoes were
exported in November and December 2015.
It is our aim to provide a viable alternative
for sales in the event that the local domestic
market for condensate closes, as it did
during a number of weeks in 2015.
Finance
In spite of the challenges mentioned above,
the Group managed to maintain positive net
cash flow from operations, although as a
result of the capital expenditure incurred
during 2015, there was a net cash outflow of
US$9.0 million. This includes a sum
equivalent to approximately US$0.7 million
lost from certain Group bank accounts as a
result of unauthorised transfers in an
apparent cyberattack. The Group remained
in a net cash position and the closing cash
balance at 31 December 2015 was US$6.8
million with no debt.
Further development and exploration
expenditures in 2016 and beyond have been
deferred until the Board is confident that
these can be funded from operating cash
flow. In addition, the Group may consider a
moderate level of borrowing to be
appropriate to fund significant value
accretive investments such as the upgrade
to amine processing at the gas plant.
Current trading and outlook
During January and February 2016,
Group production averaged 5,632 barrels
of oil equivalent per day, in line with
management’s plan. The gas plant is
consistently operating at planned capacity
of 750,000 m
3
per day, with condensate
output running at over 1,700 barrels per day,
the majority of which is being sold to export
markets. International oil prices have
recovered from the low levels seen in
January, as has the Ruble. Oil production is
now a minor part of the Group’s output and
has suffered moderate disruption as the
mild winter caused difficulties in
transportation of oil sales.
In the current environment, and at current
production rates, management expects the
Group’s financial performance in 2016 to
improve on that of 2015. Meanwhile, new
capital expenditure commitments have
been reduced to minimal levels – below
US$1.5 million.
Andrey Zozulya
Chief Executive Officer
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements | 02 Volga Gas plc | Annual Report and Accounts 201 5
Black Sea
Moscow
Russia
Ukraine
Belarus
Vostochny
Makaroyskoye
Karpensky
Urozhainoye-2
Dobrinskoye
Strategic Report
Volga at a Glance
Our assets are located in an established oil and
gas province. The area benefits from the existing
rail, road and pipeline infrastructure and proximity
to Russia’s main energy markets. 03 Volga Gas plc | Annual Report and Accounts 201 5
Dobrinskoye gas processing plant
2015 Progress
Completed various minor upgrades
mandated by regulatory authorities.
Increased throughput to 750,000 cubic
metres (26.5 million cubic feet) per day.
2016 Objectives
Improve cost efficiency of the current plant
operations. Progress plans for conversion to
amine based gas sweetening and for
eventual increase in throughput to one
million cubic metres (35.3 million cubic feet)
per day.
Vostochny Makarovskoye (“VM”) gas/condensate field
2015 Progress
Commenced drilling operations on the
VM#3 and VM#4 wells. Both wells with
estimated productivity in excess of plan.
VM#4 brought on line in December 2015.
2016 Objectives
Complete tie-back of well VM#3, planned
workover on VM#2.
Dobrinskoye gas/condensate field
2015 Progress
Managed production from the two
existing wells.
2016 Objectives
Continue to maintain production from the
two existing wells to maximise long-term
extraction of gas and condensate.
Uzenskoye and Sobolevskoye oil fields
2015 Progress
Managed Uzenskoye production for the
seventh year but with continued decline.
Attempted sidetrack drilling on VM#8 and
Sobolevskoye wells but without success.
2016 Objectives
Maintain production profile and seek to
maximise extraction of oil from existing
wells. Finalising plans for development of
undeveloped shallower reservoir in Uzen.
Commercial
2015 Progress
Commenced exports of condensate to
broaden the commercial options of the
business in light of market difficulties
experienced earlier in 2015.
2016 Objectives
Seek to improve the cost-effectiveness of
exports and develop further export
channels.
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements | 04 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Chairman’s Statement
Mikhail Ivanov
Chairman
Dear Shareholder,
As anticipated by my predecessor in the
2014 Annual Report, 2015 was a challenging
year for the oil and gas industry worldwide,
for Russia, and no less challenging for Volga
Gas. The collapse in oil prices and in the
value of the Russian Ruble had significant
impact on the financial statements and the
performance of the Company as reported in
US Dollars. Furthermore, changes to the
production tax formulae that came into
effect in 2015 meant that a greater
proportion of gross revenue was paid out in
taxes than in previous years.
However, on an operational level, the results
of 2015 were satisfactory. The development
drilling on the Vostochny Makarovskoye
(“VM”) field was successfully concluded
during the year, which will enable this field,
the Group’s principal producing asset, to
reach and sustain the planned plateau
production rate of one million cubic metres
per day of gas plus associated condensate.
With production from the first of the two
new wells coming only in December 2015,
this drilling activity did not make a
significant contribution to the production
for the full year. However, during mid
December 2015, new production from the
VM#4 well enabled total output from the
VM and Dobrinskoye fields to reach the
intermediate target rate of 750,000 cubic
metres per day of gas plus 180 tonnes per
day of condensate, in total approximately
5,700 barrels of oil equivalent per day. This
production is the core of stable production
which provides the main cash generation
engine for the Group.
The next strategic development to be
undertaken is the further enhancement of
the existing gas processing facilities, first to
introduce a more efficient process for the
sweetening of the gas and secondly to
capture for sale the liquid petroleum gases
(“LPG”) that are currently vented and flared.
The former is intended to achieve significant
cost savings and enable higher production
rates of over one million cubic metres per
day of gas, while the latter will provide an
additional and potentially highly profitable
product stream.
Meanwhile, however, the Group continues
to face a number of significant challenges,
not the least of which is the general
economic situation in Russia, where the
dramatic fall in international oil prices has
had a significant impact on the domestic
economy as well as on the profitability and
cash generation from our production.
While the Group remains in a healthy
financial position with positive net cash
balances, the Board has made the strategic
decision to preserve liquidity and to reduce
capital expenditures to a minimal level. This
means that the strategic investments
outlined earlier will need to be deferred
until cash generation recovers to a
sustainably higher level than currently being
experienced or acceptable external finance,
consistent with a prudent financial strategy,
can be arranged.
Volga Gas continues to benefit from low
operating costs and, with its fields based
close to market, is able to operate
profitability even with significantly reduced
oil and gas prices. During 2015 there were
periods when local market conditions
made it difficult to sell our condensate
production and during these periods, gas
and condensate production had to be
suspended. Towards the end of 2015, the
Group developed channels for exporting
condensate and consequently there are
alternatives, albeit less economically
attractive, to sales solely into the local
domestic market.
The Group holds significant proven reserves
in its three principal fields. These reserves
form the basis of sustainable production
with growth potential in the near term.
These assets provide a platform for the
Group to grow in the future, both through
successful exploration and by selective
value accretive acquisitions. The Board
believes that Volga Gas has a strong asset
base and the financial and operational
capability to develop and extend these
assets to provide long-term value growth
for our shareholders.
Finally, I would like to pay tribute to my
predecessor as Chairman, Aleksey Kalinin,
for his leadership of the Company since its
foundation and appreciation for his
continued service as a non-executive
director. I also welcome my successor as
Chief Executive Officer, Andrey Zozulya,
who assumed that position in May 2015.
He has had to take up his responsibilities
at a very challenging time in our industry
and has the full support and confidence of
the Board as he manages the future
development of the business.
Mikhail Ivanov
Chairman Volga Gas plc | Annual Report and Accounts 201 5 05
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input Volga Gas plc
Annual Report
and Accounts 2015
Volga Gas plc Annual Report and Accounts 2015 Introduction
Volga Gas plc is an
independent oil and gas
exploration and production
company focused on the Volga
Region of Russia. It has 100%
interests in four oil and gas
exploration and production
licences in the Saratov and
Volgograd regions.
Contents Introduction
01 Overview of 2015
02 Volga at a Glance
Strategic Report
04 Chairman’s Statement
06 Chief Executive’s Report
08 Operational Review
10 Financial Review
12 Principal Risks and Uncertainties
Corporate Governance
14 Board of Directors
16 Corporate Governance Statement
18 Report of the Directors
21 Directors’ Remuneration Report
Financial Statements
23 Independent Auditor’s Report
24 Group Income Statement
24 Group Statement of
Comprehensive Income
25 Group Balance Sheet
26 Group Cash Flow Statements
27 Company Balance Sheet
28 Company Cash flow Statements
29 Group and Company Statements of
Changes in Shareholders’ Equity
30 Notes to the IFRS Consolidated
Financial Statements
Notice of Meeting and Other Items
46 Notice of Meeting
48 Glossary of Technical Terms
IBC Corporate Directory 01 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Overview of 201 5
• Concluded successful
development drilling
operations on the
VM field
• Increased throughput
of gas at the processing
plant by 50% in
December 2015
• Development of
export channels
for condensate
• Maintained positive net
cash balances and
remained debt free
Overview Development drilling on the VM field
– Completed drilling operations on VM#3
and VM#4 wells.
– Estimated productive capacity of both
wells in excess of expectations.
– Sufficient to sustain planned plateau of
1 million cubic metres per day of total
production.
Increased throughput at the Dobrinskoye
gas processing plant
– 50% increase in output to 750,000 cubic
metres per day achieved in December
2015.
– Plans for further increase after
construction of amine based gas
sweetening plant.
Development of export routes for
condensate
– During 2015 there were periods when
the local domestic market was unable
to take our condensate production.
– Export routes developed to provide
additional commercial flexibility to
the business.
Net cash position remained positive
throughout 2015
– Capital expenditure managed to
remain maintain positive cash
balances through the year.
– Reduced revenue and cash
generation with weak oil prices and
devaluation of the Ruble.
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 02 Volga Gas plc | Annual Report and Accounts 201 5
Black Sea
Moscow
Russia
Ukraine
Belarus
Vostochny
Makaroyskoye
Karpensky
Urozhainoye-2
Dobrinskoye
Strategic Report
Volga at a Glance
Our assets are located in an established oil and
gas province. The area benefits from the existing
rail, road and pipeline infrastructure and proximity
to Russia’s main energy markets. 03 Volga Gas plc | Annual Report and Accounts 201 5
Dobrinskoye gas processing plant
2015 Progress
Completed various minor upgrades
mandated by regulatory authorities.
Increased throughput to 750,000 cubic
metres (26.5 million cubic feet) per day.
2016 Objectives
Improve cost efficiency of the current plant
operations. Progress plans for conversion to
amine based gas sweetening and for
eventual increase in throughput to one
million cubic metres (35.3 million cubic feet)
per day.
Vostochny Makarovskoye (“VM”) gas/condensate field
2015 Progress
Commenced drilling operations on the
VM#3 and VM#4 wells. Both wells with
estimated productivity in excess of plan.
VM#4 brought on line in December 2015.
2016 Objectives
Complete tie-back of well VM#3, planned
workover on VM#2.
Dobrinskoye gas/condensate field
2015 Progress
Managed production from the two
existing wells.
2016 Objectives
Continue to maintain production from the
two existing wells to maximise long-term
extraction of gas and condensate.
Uzenskoye and Sobolevskoye oil fields
2015 Progress
Managed Uzenskoye production for the
seventh year but with continued decline.
Attempted sidetrack drilling on VM#8 and
Sobolevskoye wells but without success.
2016 Objectives
Maintain production profile and seek to
maximise extraction of oil from existing
wells. Finalising plans for development of
undeveloped shallower reservoir in Uzen.
Commercial
2015 Progress
Commenced exports of condensate to
broaden the commercial options of the
business in light of market difficulties
experienced earlier in 2015.
2016 Objectives
Seek to improve the cost-effectiveness of
exports and develop further export
channels.
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 04 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Chairman’s Statement
Mikhail Ivanov
Chairman
Dear Shareholder,
As anticipated by my predecessor in the
2014 Annual Report, 2015 was a challenging
year for the oil and gas industry worldwide,
for Russia, and no less challenging for Volga
Gas. The collapse in oil prices and in the
value of the Russian Ruble had significant
impact on the financial statements and the
performance of the Company as reported in
US Dollars. Furthermore, changes to the
production tax formulae that came into
effect in 2015 meant that a greater
proportion of gross revenue was paid out in
taxes than in previous years.
However, on an operational level, the results
of 2015 were satisfactory. The development
drilling on the Vostochny Makarovskoye
(“VM”) field was successfully concluded
during the year, which will enable this field,
the Group’s principal producing asset, to
reach and sustain the planned plateau
production rate of one million cubic metres
per day of gas plus associated condensate.
With production from the first of the two
new wells coming only in December 2015,
this drilling activity did not make a
significant contribution to the production
for the full year. However, during mid
December 2015, new production from the
VM#4 well enabled total output from the
VM and Dobrinskoye fields to reach the
intermediate target rate of 750,000 cubic
metres per day of gas plus 180 tonnes per
day of condensate, in total approximately
5,700 barrels of oil equivalent per day. This
production is the core of stable production
which provides the main cash generation
engine for the Group.
The next strategic development to be
undertaken is the further enhancement of
the existing gas processing facilities, first to
introduce a more efficient process for the
sweetening of the gas and secondly to
capture for sale the liquid petroleum gases
(“LPG”) that are currently vented and flared.
The former is intended to achieve significant
cost savings and enable higher production
rates of over one million cubic metres per
day of gas, while the latter will provide an
additional and potentially highly profitable
product stream.
Meanwhile, however, the Group continues
to face a number of significant challenges,
not the least of which is the general
economic situation in Russia, where the
dramatic fall in international oil prices has
had a significant impact on the domestic
economy as well as on the profitability and
cash generation from our production.
While the Group remains in a healthy
financial position with positive net cash
balances, the Board has made the strategic
decision to preserve liquidity and to reduce
capital expenditures to a minimal level. This
means that the strategic investments
outlined earlier will need to be deferred
until cash generation recovers to a
sustainably higher level than currently being
experienced or acceptable external finance,
consistent with a prudent financial strategy,
can be arranged.
Volga Gas continues to benefit from low
operating costs and, with its fields based
close to market, is able to operate
profitability even with significantly reduced
oil and gas prices. During 2015 there were
periods when local market conditions
made it difficult to sell our condensate
production and during these periods, gas
and condensate production had to be
suspended. Towards the end of 2015, the
Group developed channels for exporting
condensate and consequently there are
alternatives, albeit less economically
attractive, to sales solely into the local
domestic market.
The Group holds significant proven reserves
in its three principal fields. These reserves
form the basis of sustainable production
with growth potential in the near term.
These assets provide a platform for the
Group to grow in the future, both through
successful exploration and by selective
value accretive acquisitions. The Board
believes that Volga Gas has a strong asset
base and the financial and operational
capability to develop and extend these
assets to provide long-term value growth
for our shareholders.
Finally, I would like to pay tribute to my
predecessor as Chairman, Aleksey Kalinin,
for his leadership of the Company since its
foundation and appreciation for his
continued service as a non-executive
director. I also welcome my successor as
Chief Executive Officer, Andrey Zozulya,
who assumed that position in May 2015.
He has had to take up his responsibilities
at a very challenging time in our industry
and has the full support and confidence of
the Board as he manages the future
development of the business.
Mikhail Ivanov
Chairman Volga Gas plc | Annual Report and Accounts 201 5 05
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 06 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Chief Executive’s Report
As the Chairman has noted, Volga Gas faced
significant challenges during 2015, with
market factors constraining gas and
condensate production during the first half
of the year, declines in production from the
mature oil wells, dramatic reductions in
international oil prices and higher rates of
production taxes. Each of these factors has
had an impact on the financial performance
of the Group.
There was, however, continued operational
progress during the year. Development
drilling on our main field, Vostochny
Makarovskoye (“VM”) was successfully
concluded and towards the end of 2015, we
increased the rate of production from the
VM and Dobrinskoye fields by 50%.
However, this late lift in production did not
make a material contribution to the Group’s
full year’s average daily production which
was severely impacted by lower production
earlier in the year.
Another factor in the Group’s overall
production in 2015 was the continuing
decline in oil production from the mature
Uzenskoye field. However, Volga Gas
had made very good returns from these
assets and management has identified
opportunities to revive oil production both
by further development of proven reserves
and by exploration for new reserves. As part
of this strategy, a number of operations
were carried out during 2015, as detailed in
the Operational Review, on pages 08 and 09.
Unfortunately, these did not result in
immediate success, but I am optimistic that
the strategy will yield significant levels of oil
production in the future.
Andrey Zozulya
Chief Executive Officer
Summary and Outlook
– Upstream development of VM gas field is effectively
completed
– New wells (VM#3, VM#4) expected to enable 100% increase in production
capacity
– Field output has increased by 50%, fully utilising the current effective
operational capacity of the gas plant of 750 mcm/d (26.5 mmcf/d)
– Gas Processing Plant
– Effective available capacity is 750–1,000 mmcm/d (26.3–35.3 mmcf/d)
– Seeking to improve operational efficiency in the current plant
– Aim to upgrade to amine-based sweetening to enable significant cost savings
and full 35.3 mmcf/d capacity utilisation
– Longer term plan to install LPG capture => further significant increase in
revenues and in profit margin expected
– Finance
– Strong position at start of 2015 enabled Volga Gas to complete development
and remain net cash positive
– Well placed to benefit from recovery in oil prices/Russian Rouble
– Considering raising moderate levels of debt to fund incremental capex on
gas plant upgrade
– Current trading and outlook
– Production during 1Q 2016 averaged 5,550 boepd, current run rate of over
6,000 boepd
– Exports of condensate have enabled production to be maintained at full
operational levels
– Financial performance in US$ driven by oil prices, RUR rates and Mineral
Extraction Taxes
– Operating costs and G&A primarily RUR denominated 07 Volga Gas plc | Annual Report and Accounts 201 5
Following my appointment as Chief
Executive on 5 May 2015, I decided it would
be most effective if I were to be based close
to the operations in the city of Saratov,
rather than in Moscow. Since then, I have
initiated a restructuring of the operational
teams with the aim of improving the
effectiveness of our operational capabilities.
In addition, following an incident that led to
a loss of funds from certain of our bank
accounts, detailed below, I decided to
improve the online security and make
changes to the financial management in
the operating companies. I believe that
with these changes implemented, the
Group is well placed to develop successfully
in the future.
2016 objectives and medium-term
strategy
Having successfully completed the drilling
of the VM#3 and VM#4 wells, the VM field is
now effectively fully developed and is
expected to be able to deliver sufficient
production to maintain a production plateau
of 1 million m
3
per day (35.3 million cubic
feet per day – “mmcf/d”). However, based on
its current configuration, we believe the gas
processing plant is capable of sustaining
production at a rate of 750,000 m
3
per day
(26.5 mmcf/d). Following extensive technical
evaluation and consideration of alternatives,
it has been decided that the most effective
solution for the longer term is to re-
configure the gas plant to utilise an amine
based gas sweetening process. We believe
that this can be achieved with a modest
investment, recently estimated at
approximately US$8 million. If successful,
this would significantly reduce the costs of
chemicals consumed in gas processing and
allow the gas plant to process the targeted
1 million m
3
per day (35.3 mmcf/d) of gas. A
more ambitious plan, to install equipment to
capture and sell liquid petroleum gases
(“LPG”), would be a follow-on project which
could add a valuable further income stream.
Meanwhile, however, the Board of Volga
Gas has decided to preserve the financial
strength of the Group and defer capital
expenditures while oil prices remain at
very low levels. For the time being,
capital expenditure will be limited to
completing payments for ongoing
projects and necessary items to maintain
producing assets.
A new commercial initiative that has been
implemented is the development of a
channel for exports of our condensate
production. A small number of cargoes were
exported in November and December 2015.
It is our aim to provide a viable alternative
for sales in the event that the local domestic
market for condensate closes, as it did
during a number of weeks in 2015.
Finance
In spite of the challenges mentioned above,
the Group managed to maintain positive net
cash flow from operations, although as a
result of the capital expenditure incurred
during 2015, there was a net cash outflow of
US$9.0 million. This includes a sum
equivalent to approximately US$0.7 million
lost from certain Group bank accounts as a
result of unauthorised transfers in an
apparent cyberattack. The Group remained
in a net cash position and the closing cash
balance at 31 December 2015 was US$6.8
million with no debt.
Further development and exploration
expenditures in 2016 and beyond have been
deferred until the Board is confident that
these can be funded from operating cash
flow. In addition, the Group may consider a
moderate level of borrowing to be
appropriate to fund significant value
accretive investments such as the upgrade
to amine processing at the gas plant.
Current trading and outlook
During January and February 2016,
Group production averaged 5,632 barrels
of oil equivalent per day, in line with
management’s plan. The gas plant is
consistently operating at planned capacity
of 750,000 m
3
per day, with condensate
output running at over 1,700 barrels per day,
the majority of which is being sold to export
markets. International oil prices have
recovered from the low levels seen in
January, as has the Ruble. Oil production is
now a minor part of the Group’s output and
has suffered moderate disruption as the
mild winter caused difficulties in
transportation of oil sales.
In the current environment, and at current
production rates, management expects the
Group’s financial performance in 2016 to
improve on that of 2015. Meanwhile, new
capital expenditure commitments have
been reduced to minimal levels – below
US$1.5 million.
Andrey Zozulya
Chief Executive Officer
S t r a te gic
Report
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Financial
Statements 08 Volga Gas plc | Annual Report and Accounts 201 5
contracted Eurasia Drilling to complete this
well and to drill a sidetrack to the VM#4
well, and a new rig was mobilised during
February 2015.
The initial operation was on VM#4, a well
that was originally drilled in 2008-2009 but
which intersected a low permeability zone in
the target horizon. A productive target was
identified with a bottom-hole location
approximately 500 metres from the original
well. By May 2015, drilling on the VM#4
sidetrack was concluded, the deviated well
section having intersected a total reservoir of
40 metres. Based on flow testing,
management estimated that this well could
be the most productive on the VM field,
being capable of sustaining a flow rate of up
to 350 mcm/d (12.4 mmcf/d). The tie back of
this well was undertaken and in December
2015 the well was put in production. After a
short build-up, by 16 December 2015, the
combined daily output of gas from four wells,
VM#1, VM#2, VM#4 and Dobrinskoye #22,
produced 755,000 m
3
per day of sales gas.
On conclusion of the drilling on VM#4, the rig
was mobilised to the VM#3 location and in
August 2015, the well reached the planned
target depth. In this well, the top of the
reservoir section was found higher than
anticipated and total pay of close to 100
metres was logged. In addition, the well
was drilled deeper than the original plan,
and a high specification logging operation
undertaken to gather data that may be used
for future development of the field.
Given the strong flow rates from VM#4, and
that current well capacity is sufficient to fully
utilise available plant capacity, the tie-back
of the VM#3 well has been deferred to the
springtime of 2016, when the operations can
be concluded more conveniently.
Based on this successful drilling and with
continuing management of the existing well
stock including, as appropriate, acid wash
treatments, it seems likely that no further
drilling will be required to produce the VM
field at the target plateau rate of 1.0
mmcm/d (35.3 mmcf/d).
Gas processing plant
Since December 2015, the Dobrinskoye gas
processing plant has been consistently
operating at rates of over 750,000 m
3
per
day (26.5 million cubic feet per day), a 50%
increase above the normal operating rates
achieved in 2014 and most of 2015. While
produced simultaneously from the wells and
once the storage capacity at the gas plant is
full, it is necessary to cease production.) In
addition, during July, Gazprom was
undertaking extensive maintenance to the
local gas pipeline network and for this
period, there were limitations to the volume
of gas that could be accepted in the
pipeline. For these reasons production
during 2015 averaged 12.5 mmcf/d of gas
and 784 bpd of condensate (2014: 15.5
mmcf/d of gas and 966 bpd of condensate).
Gas continues to be sold to Trans Nafta under
contract at a fixed Ruble contract gas sales
price. The Ruble price increased from RUR
3,887 per thousand cubic metres (“mcm”) to
RUR 4,201 per mcm in July 2015. However,
with the devaluation of the Ruble during
2015, the US Dollar equivalent of the price
declined further during 2015. Historically,
condensate was sold entirely into the local
domestic market. However, with the periods
of low domestic demand which impacted
our business during 2015, it was decided to
develop new commercial channels for
exporting condensate. During November and
December 2015, a number of cargoes of
condensate were sold to export customers in
the Baltic region. While realisations were less
than we would normally achieve in the
domestic market, exports provide a viable
alternative sales route for our production.
We continue to work on these sales and on
improving the realisations.
The average gas sales price for 2015 was
the equivalent of US$1.51 per thousand
cubic feet, net of VAT (2014: US$2.15).
During 2015 the average condensate sales
price was US$23.89 per barrel (2014:
US$45.07 per barrel).
Average unit production costs on the
gas-condensate fields declined to US$5.06
per boe in 2015 (2014: US$6.49). The decline
in the Ruble, in which effectively all the costs
are denominated, partly offset higher costs
associated with chemicals consumed in gas
processing and higher costs of waste disposal
as well as other inflationary cost increases.
During 2015, the main development activity
was the drilling of the VM#3 and VM#4
production wells. The VM#3 well had
commenced drilling in 2014, however, the
local drilling contractor was unable to
overcome mechanical difficulties and the
operations were suspended after various
attempts. Subsequently, the Group
Operations overview
The overall level of production in 2015, at
3,278 boepd, was 23% below the 4,244
boepd achieved in 2014. The principal
reason for this was that in periods during
January, February, and again in May and
June 2015, the local market for our
condensate was effectively closed and
production of gas and condensate had to
be suspended for a period of close to six
weeks. In addition, we experienced
continued declines in oil production
from the mature Uzen field.
However, in the periods when the
condensate market was functioning
normally, production from the VM and
Dobrinskoye fields was exactly as planned.
Furthermore with the successful completion
of the drilling operations on the VM#3 and
VM#4 wells, the production capacity on
the VM field increased significantly and,
in December 2015, the VM#4 well was
brought into production, leading to an
immediate increase of 50% in gas and
condensate production.
As a consequence of the lower production
in 2015, significantly lower oil prices and
the devaluation of the Ruble, revenues
were down by 56% in US Dollar terms.
The increase in formula rates of Mineral
Extraction Taxes put further pressure on
EBITDA which, although still positive, was
down by 94% compared to the 2014 level.
Full details are discussed in the Financial
Review on page 10.
Gas/condensate production
The Dobrinskoye and VM fields are managed
as a single business unit. Production from the
fields is processed at the gas plant located
next to the Dobrinskoye field, extracting the
condensate and processing the gas to
pipeline standards before input into
Gazprom’s regional pipeline system via an
inlet located at the plant. Since November
2013, production has normally been running
at levels that reflect the capacity of the
existing wells in the two fields, that is
approximately 500,000 m
3
per day (17.8
mmcf/d) of gas and 120 tonnes per day (1,050
barrels per day(“bpd”)) of condensate.
During January and February 2015, and
again during May and June 2015, production
of gas and condensate had to be
temporarily suspended since it was not
possible to sell the condensate produced in
the local market. (Gas and condensate are
Strategic Report
Operational Review 09 Volga Gas plc | Annual Report and Accounts 201 5
the physical process plant and pipelines
were designed to operate at 1 million m
3
per day, the need to dispose of bulky spent
chemicals used in gas sweetening is the
principal constraint on the operations.
During 2015, a number of technical and
feasibility studies were conducted, including
consideration of alternative sweetening
chemical processes and a more ambitious
project to simultaneously install amine
sweetening and LPG extraction. Given the
financial constraints, it was decided that
these investments should be deferred until
a significant recovery in cash generation
could be confidently expected.
Oil production
Having completed its seventh year of full
time production, the Yuzhny Uzenskoye oil
field is the Group’s longest established field.
It continues to produce under natural
reservoir pressure drive although water cut
has risen. As the oil has been produced, the
oil-water contact in the reservoir has risen
and since the start of 2013, wells at the edge
of the field have exhibited some water cut
and were shut in. As a consequence, oil
production from the field has been managed
at anticipated declining production rates.
During 2015, a sidetrack from the currently
non-producing Uzen #8 well was drilled with
the intention of producing oil from a
potentially bypassed “attic” in the Aptian
reservoir. Unfortunately this operation was
not successful owing to mechanical
difficulties, although at the equivalent of
US$0.4 million, the cost was modest.
There remain significant proved undeveloped
reserves in the shallower Albian reservoir.
Following a technical study carried out during
2015, it appears that a viable development
plan for this reservoir would be to drill two
horizontal production wells. The cost of each
of these wells is currently estimated to be
US$2.0 million and would expect to develop
over 2 million barrels of reserves at a capital
cost of $4.00 per barrel of reserves. Along
with other discretionary capital expenditure,
however, this investment has been
temporarily deferred.
Also during 2015, a sidetrack to the
Sobolevskaya-11 well on the Urozhainoye-2
licence was drilled. This well, which was
originally drilled by a previous licencee, had
been produced by Volga Gas during 2013
and 2014 but was depleted. The sidetrack
was intended to access a potential small
undeveloped oil reserve. Mechanical
difficulties with the drilling prevented this
sidetrack from reaching the intended target
and the operations have been suspended.
Further operations on this have been
deferred pending evaluation.
The Group’s oil production, whilst of modest
scale, has been very profitable for the Group
and a useful contributor of cash flow.
Exploration
The Group has identified a number of
exploration targets in the Karpenskiy
Licence Area at shallow horizons of between
1,000 and 2,000 metres depth. These
provide low cost opportunities to add
potentially material oil reserves.
During December 2015, an exploration well
was drilled on one of these targets, the
Yuzhno Mironovskaya prospect. This well
was drilled to a total vertical depth of 940
metres within a time of 21 days, a record
drilling rate for the Group. After running
logs, the principal and secondary target
zones in the Cretaceous post-salt Albian and
Aptian formations were found to be water
bearing and the well was plugged and
abandoned. With the efficient well drilling,
the total cost of this well was limited to
approximately US$0.6 million.
The Group has fulfilled all its licence
commitments on the Karpenskiy Licence
Area and further drilling in the area is
discretionary. Nevertheless future
development of the oil potential in the
Group’s licences is a key element of
management’s medium-term strategy.
Oil, gas and condensate reserves as
of 1 January 2016
During 2012, an independent evaluation of
the Group’s oil, gas and condensate reserves
was conducted by Miller and Lents Ltd.
The independent assessment of the
reserves and net present value of future net
revenue (“NPV”) attributable to the Group’s
three principal fields, Dobrinskoye,
Vostochny Makarovskoye and Uzenskoye, as
at 1 August 2012, was prepared in
accordance with reserve definitions set by
the Oil and Gas Reserves Committee of the
Society of Petroleum Engineers (“SPE”).
The above table shows the Proven and
Probable reserves as evaluated by Miller &
Lents as at 1 August 2012, adjusted by
management for subsequent production.
Andrey Zozulya
Chief Executive Officer
Oil, gas and condensate reserves
Oil &
condensate
(mmbbl)
Gas
(bcf)
Total
(mmboe)
As at 31 December 2014
Proved reserves 13.428 147.1 37.894
Proved plus probable reserves 14.732 158.0 41.020
Production: 1 January – 31 December 2015 0.439 4.5 1.196
As at 31 December 2015
Proved reserves 12.989 142.6 36.698
Proved plus probable reserves 14.293 153.5 39.824
Notes:
1. There has been no external reassessment of reserves
subsequent to the Miller and Lents reserve study of
2012.
2. The above reserve estimates, prepared in accordance
with reserve definitions prepared by the Oil and Gas
Reserves Committee of the SPE, have been reviewed
and verified by Mr Andrey Zozulya, Director and Chief
Executive Officer of Volga Gas plc, for the purposes
of the Guidance Note for Mining, Oil and Gas
companies issued by the London Stock Exchange in
June 2009. Mr Zozulya holds a degree in Geophysics
and Engineering from the Groznensky Oil & Gas
Institute and is a member of the Society of Petroleum
Engineers.
S t r a te gic
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Financial
Statements 10 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Financial Review
and producing assets (2014: US$ 5.6 million)
and US$0.6 million was incurred on
exploration (2014: nil). The most significant
components of the capital expenditure in
2015 relate to successful drilling on the VM
field with additional sums on unsuccessful
drilling on the Uzenskoye and Sobolevskoye
fields and on the Yuzhny Mironovskaya
exploration prospect. The unsuccessful
expenditure has been expensed.
Balance sheet and financing
As at 31 December 2015, the Group held
cash and bank deposits of US$6.8 million
(2014: US$15.8 million) with no debt. All
of the Group’s cash balances are held in
bank accounts in the UK and Russia and
the majority of the Group’s cash is held in
US Dollars.
As at 31 December 2015, the Group’s
intangible assets decreased to US$2.9
million (2014: US$3.7 million). Property,
plant and equipment, decreased to US$48.3
million (2014: US$57.8 million), primarily
reflecting the impact of foreign exchange
adjustments. The carrying value of the
Group’s assets relating to its main cash
generating units have been subject to
impairment testing. The result of the
impairment tests, including sensitivity
analysis around the central economic
assumptions as detailed in Note 4(b) to the
Accounts, showed no requirement for
impairment, although as noted above there
were impairments and write-offs relating to
unsuccessful operations.
On 9 July 2014 the capital reduction
approved by shareholders at the Company’s
Annual General Meeting on 6 June 2014
became effective following confirmation
by the High Court, the filing of the Court
Order and a Statement of Capital with
Companies House and the fulfilment of
certain minor undertakings given to the
Court. As a result, the Share Premium
Account of the Company, amounting to
US$165.9 million, was cancelled and the
equivalent sum credited to the Company’s
Profit and Loss Account, thereby creating
distributable reserves.
For the year ending 31 December 2015, the
Group recorded a currency retranslation
expense of US$15.3 million (2014: US$49.0
million) in its Other comprehensive income,
relating to the devaluation of the Ruble
against the US Dollar.
asset impairment expenses, mainly arising
from unsuccessful drilling activities, of
US$3.0 million (2014: nil) the Group
recorded an operating loss for 2015 of
US$5.0 million (2014: operating profit of
US$12.8 million).
Including net interest income of US$0.1
million (2014: US$0.2 million) and other
net gains of US$0.3 million (2014: US$3.3
million) the Group recognised a loss before
tax of US$4.6 million (2014: profit before tax
of US$16.3 million) and reported net loss
after tax of US$4.1 million (2014: net profit
after tax of US$13.1 million) after a deferred
tax credit of US$0.6 million (2014: deferred
tax charge of US$3.2 million).
Included in Other gains and losses in 2015
was a foreign exchange gain of US$1.0
million arising from US Dollar cash balances
held by Russian subsidiaries which have the
Ruble as functional currency (2014: US$3.3
million loss on foreign exchange) and a loss
of approximately US$0.7 million equivalent
arising from unauthorised withdrawals from
bank accounts held by the Group’s Russian
operating subsidiaries (2014: nil).
Cash flow
Group cash flow from operating activities
was US$1.2 million (2014: US$16.2 million).
Net working capital movements contributed
cash inflow of US$0.8 million in 2015 (2014:
US$0.6 million). With higher capital
expenditures in 2015, the net outflow from
investing activities was US$8.7 million (2014:
US$5.5 million). Net cash outflow from
financing activities was US$1.0 million (2014:
outflow of US$3.0 million), in both cases
related to payment of equity dividends.
Dividend
In July 2014, the Board announced
the adoption of a policy to distribute
approximately 50% of consolidated
net profit after tax as a cash dividend.
Dividends of US$0.05 per ordinary share
were declared in respect of the year
ended 31 December 2014. In light of the
material reduction in the oil price, adverse
financial conditions prevailing in Russia
and the losses incurred, the Board is not
recommending a dividend in respect of
the year ended 31 December 2015.
Capital expenditure
During 2015 capital expenditure of US$10.4
million was incurred (2014: US$5.6 million),
of which US$9.8 million was on development
Results for the year
In 2015, the Group generated US$17.8
million in turnover (2014: US$39.4 million)
from the sale of 438,910 barrels of crude oil
and condensate (2014: 603,950 barrels) and
4,545 million cubic feet of natural gas (2014:
5,671 million cubic feet).
The average price realised for liquids
was the equivalent of US$25.16 per barrel
(2014: US$45.07 per barrel). Oil and
condensate sales were primarily made into
the domestic market during the period,
although during November and December
2015 approximately 12,000 barrels of
condensate, a little less than 2% of the total
liquids sales, were exported to customers in
Lithuania (2014: nil). Our oil and condensate
sales prices in the domestic market reflect
international prices after adjusting for
export taxes and transportation costs.
The gas sales price during 2015 averaged
US$1.49 per thousand cubic feet (2014:
US$2.15 per thousand cubic feet), the
fall being entirely attributable to the
devaluation of the Ruble. The sales price of
gas in Rubles increased by 8.1% in July 2015
(9.5% in July 2014). Production activities
generated a gross profit of US$2.2 million in
2015 (2014: US$16.9 million).
In 2015, the total cost of production
decreased to US$7.4 million (2014: US$9.5
million), primarily reflecting the effect of
devaluation on our predominantly Ruble
denominated costs. Production based taxes
were US$5.9 million (2014: US$8.3 million)
reflecting lower volumes and the impact of
lower oil prices and Ruble exchange rates
on Mineral Extraction Tax (“MET”) rates.
However, with formula changes coming into
effect on 1 January 2015, MET paid in 2015
represented 35% of revenues (2014: 21.2%
of revenues).
Operating and administrative expenses
in 2015 were US$3.4 million (2014:
US$4.2 million).
The Group experienced a significant
reduction in EBITDA (defined as operating
profit before non-cash charges, including
exploration expense, depletion and
depreciation) to US$0.9 million (2014:
US$17.4 million) as a result of the lower
revenues partly offset by lower expenses.
After incurring exploration and evaluation
expenses of US$0.6 million (2014: nil) on
unsuccessful exploration drilling and other 11 Volga Gas plc | Annual Report and Accounts 201 5
The Group’s committed capital expenditures
are less than expected cash flow from
operations and cash-on-hand and such
expenditures can be managed in light of the
sharp reduction in international oil prices
and the devaluation of the Ruble. The Group
may consider additional debt facilities to
fund the longer-term development of its
existing licences and operational facilities
as appropriate.
The Group’s financial statements are
presented on a going concern basis, as
outlined in note 2.1 to the Accounts.
Tony Alves
Chief Financial Officer
Five year financial and operational summary
Sales volumes 2015 2014 2013 2012 2011
Oil & condensate (barrels) 438,910 603,950 547,257 529,501 546,817
Gas (mcf) 4,545 5,671 3,128 1,193 1,348
Total (boe) 1,196,410 1,549,117 1,068,585 728,334 771,479
Operating Results (US$ 000) 2015 2014 2013 2012 2011
Oil and condensate sales 11,041 27,220 26,067 25,526 25,425
Gas sales 6,786 12,203 8,554 2,769 3,146
Revenue 17,827 39,423 34,621 28,295 28,571
Production costs (6,016) (7,805) (5,946) (3,776) (3,126)
Production based taxes (5,877) (8,344) (8,095) (8,951) (9,537)
Depletion, depreciation and other (2,369) (4,656) (2,611) (2,280) (2,641)
Other (1,327) (1,709) (1,799) (1,562) (991)
Cost of sales (15,589) (22,514) (18,451) (16,569) (16,295)
Gross profit 2,238 16,909 16,170 11,726 12,276
Selling expenses (319) – – – –
Exploration expense (635) – (2,519) (8,475) (200)
Write-off of development assets (2,950) – (1,439) (188) (5,612)
Operating, administrative & other expenses (3,377) (4,157) (4,029) (8,969) (5,991)
Operating profit/(loss) (5,043) 12,752 8,183 (5,906) 473
Net realisation 2015 2014 2013 2012 2011
Oil & condensate (US$/barrel) 25.16 45.07 47.63 48.21 46.50
Gas (US$/mcf) 1.49 2.15 2.73 2.32 2.33
Operating data (US$/boe) 2015 2014 2013 2012 2011
Production and selling costs 5.29 5.04 5.56 5.18 4.05
Production based taxes 4.91 5.39 7.58 12.29 12.36
Depletion, depreciation and other 1.98 3.01 2.44 3.13 3.42
EBITDA calculation (US$ 000) 2015 2014 2013 2012 2011
Operating profit/(loss) (5,043) 12,752 8,183 (5,906) 473
Exploration expense 635 – 2,519 8,475 200
DD&A and other non-cash expense 5,319 4,656 4,050 5,413 8,253
EBITDA 911 17,408 14,752 7,982 8,926
EBITDA per boe 0.76 11.24 13.81 10.96 11.57
S t r a te gic
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Governance
Financial
Statements 12 Volga Gas plc | Annual Report and Accounts 201 5
Strategic Report
Principal Risks and Uncertainties
The Group is subject to stringent
environmental laws in Russia with regards to
its oil and gas operations. Failure to comply
with such laws and regulations could subject
the Group to material administrative, civil,
or criminal penalties or other liabilities.
Additionally, compliance with these laws
may, from time to time, result in increased
costs to the Group’s operations, impact
production, or increase the costs of
potential acquisitions.
The Group liaises closely with the Federal
Service of Environmental, Technological
and Nuclear Resources of the Saratov
and Volgograd Oblasts on potential
environmental impact of its operations and
conducts environmental studies both as
required by, and in addition to, its licence
obligations to mitigate any specific risk. The
Group’s operations are regularly subject to
independent environmental audit.
The Group did not incur any material costs
relating to the compliance with
environmental laws during the period.
Risk of operating oil and gas properties
The oil and gas business involves certain
operating hazards, such as well blowouts,
cratering, explosions, uncontrollable flows
of oil, gas or well fluids, fires, pollution and
releases of toxic substances. Any of these
operating hazards could cause serious
injuries, fatalities, or property damage,
which could expose the Group to liabilities.
The settlement of these liabilities could
materially impact the funds available for the
exploration and development of the Group’s
oil and gas properties. The Group maintains
insurance against many potential losses and
liabilities arising from its operations in
accordance with customary industry
practices, but the Group’s insurance
coverage cannot protect it against all
operational risks.
Foreign currency risk
The Group’s capital expenditures and
operating costs are predominantly in
Russian Rubles (“RUR”) while a minority of
administrative costs are in US Dollars, Euros
and Pounds Sterling. Revenues are
predominantly received in RUR so the
operating profitability is not materially
exposed to moderate short-term exchange
rate movements. The functional currency of
the Group’s operating subsidiaries is the
RUR and the Group’s assets and liabilities
are predominantly RUR denominated. As
of insufficient demand for the Group’s gas is
considered low. Gas sales have generally
been conducted as expected, subject to
occasional constraints during pipeline
maintenance operations. However, the
Group is studying the feasibility of
construction of a separate pipeline to
connect with a facility owned by a nearby
upstream operator.
Oil and gas production taxes
The Group’s sales generated from oil
and gas production are subject to Mineral
Extraction Taxes, which form a material
proportion of the total costs of sales.
The rates of these taxes are subject to
changes by the Russian government.
Changes to rates which come into effect
during 2015 materially increased the rates
on crude oil, condensate and natural gas.
With oil prices at low levels and Russian
Government budgets under pressure, there
are risks of further adverse changes to
production taxes.
Exploration and reserve risks
Whilst the Group will seek to apply the latest
technology to assess exploration licences,
the exploration for, and development of,
hydrocarbons is speculative and involves a
high degree of risk. These risks include the
uncertainty that the Group will discover
sufficient commercially exploitable oil or gas
resources in unproven areas of its licences.
Unsuccessful exploration efforts may result
in impairment to the balance sheet value of
exploration assets.
During 2012, the Group commissioned a
reserve evaluation based on reporting
standards set by the Society of Petroleum
Engineers. If the actual results of producing
the Group’s fields are significantly different
to expectations, there may be changes in
the future estimates of reserves. These may
impact the balance sheet carrying values of
the Group’s Intangible Assets and the
Group’s Property, Plant and Equipment.
Environmental risk
The oil and gas industry is subject to
environmental hazards, such as oil spills, gas
leaks, ruptures and discharges of petroleum
products and hazardous substances. These
environmental hazards could expose the
Group to material liabilities for property
damages, personal injuries, or other
environmental harm, including costs
of investigating and remediating
contaminated properties.
The Group is subject to various risks relating
to political, economic, legal, social, industry,
business and financial conditions.
The following risk factors, which are not
exhaustive, are particularly relevant to the
Group’s business activities:
Volatility of oil prices
The supply, demand and prices for oil are
influenced by factors beyond the Group’s
control. These factors include global and
regional demand and supply, exchange rates,
interest and inflation rates and political
events. A significant prolonged decline in oil
and gas prices could impact the profitability
of the Group’s activities. Additionally, the
Group’s production is predominantly sold in
the domestic Russian markets which are
influenced by domestic supply and demand
factors, the level of Russian export taxes and
regional transportation costs.
All of the Group’s revenues and cash
flows come from the sale of oil, gas and
condensate. If sales prices should fall below
and remain below the Group’s cost of
production for any sustained period, the
Group may experience losses and may be
forced to curtail or suspend some or all of
the Group’s production, at the time such
conditions exist. In addition, the Group would
also have to assess the economic impact of
low oil and gas prices on its ability to recover
any losses the Group may incur during that
period and on the Group’s ability to maintain
adequate reserves.
The Group does not currently hedge its crude
oil production to reduce its exposure to oil
price volatility as the structure of taxes
applied to oil and condensate production in
Russia effectively reduce the exposure to
international market prices for oil.
Market risks
The Group’s revenues generated from oil and
condensate production have typically been
from sales to local domestic customers.
There have been periods when the local
market has been unable to purchase
condensate, causing temporary suspension
of production and loss of revenues. The
Group has developed arrangements to sell oil
and condensate into regional export markets
to mitigate this risk. Gas sales are made, via
an intermediary, into the domestic market via
the Gazprom pipeline network. The region
in which the Group operates is reliant on
external gas supplies. Consequently the risk 13 Volga Gas plc | Annual Report and Accounts 201 5
the Group’s presentational currency is the
US Dollar, the significant devaluation of
the RUR against the US Dollar negatively
impacts the Group’s financial statements.
Business in Russia
Amongst the risks that face the Group in
conducting business and operations in
Russia are:
– Economic instability, including in other
countries or the global economy that
could lead to consequences such as
hyperinflation, currency fluctuations and
a decline in per capita income in the
Russian economy.
– Governmental and political instability
that could disrupt, delay or curtail
economic and regulatory reform,
increase centralised authority or result
in nationalisations.
– Social instability from any ethnic,
religious, historical or other divisions that
could lead to a rise in nationalism, social
and political disturbances or conflict.
– Uncertainties in the developing legal and
regulatory environment, including, but
not limited to, conflicting laws, decrees
and regulations applicable to the oil and
gas industry and foreign investment.
– Unlawful or arbitrary action against the
Group and its interests by the regulatory
authorities, including the suspension or
revocation of their oil or gas contracts,
licences or permits or preferential
treatment of their competitors.
– Lack of independence and experience of
the judiciary, difficulty in enforcing court
or arbitration decisions and governmental
discretion in enforcing claims.
– Unexpected changes to the federal and
local tax systems.
– Laws restricting foreign investment in
the oil and gas industry.
Legal systems
Russia, and other countries in which the
Group may transact business in the future,
have or may have legal systems that are less
well developed than those in the United
Kingdom. This could result in risks such as:
– Potential difficulties in obtaining
effective legal redress in the court of
such jurisdictions, whether in respect of
a breach of contract, law or regulation,
including an ownership dispute.
– A higher degree of discretion on the part
of governmental authorities.
– The lack of judicial or administrative
guidance on interpreting applicable rules
and regulations.
– Inconsistencies or conflicts between and
within various laws, regulations, decrees,
orders and resolutions.
– Relative inexperience of the judiciary and
courts in such matters.
In certain jurisdictions, the commitment of
local business people, government officials
and agencies and the judicial system to abide
by legal requirements and negotiated
agreements may be more uncertain, creating
particular concerns with respect to licences
and agreements for business. These may be
susceptible to revision or cancellation and
legal redress may be uncertain or delayed.
There can be no assurance that joint
ventures, licences, licence applications or
other legal arrangements will not be
adversely affected by the jurisdictions in
which the Group operates.
Liquidity risk
At 31 December 2015 the Group had US$6.8
million of cash and cash equivalents of which
US$2.0 million was held in bank accounts in
Russia. The Group intends to fund its ongoing
operations and development activities from
its cash resources and cash generated by its
established operations. At 31 December 2015
the Group has budgeted capital expenditures
of less than US$1 million primarily for the
continuing development of gas and
condensate production and approximately
US$1.5 million of accounts payable relating to
capital expenditures incurred in the year
ended 31 December 2015. The Board
considers that the Group will have sufficient
liquidity to meet its obligations. All current
and planned capital expenditures are
discretionary and may be deferred or
cancelled in the light of the Group’s cash
generation and liquidity position.
Through its ordinary course activities, the
Group is exposed to legal, operational and
development risk that could delay growth in
its cash generation from operations or may
require additional capital investment that
could place increased burden on the Group’s
available financial resources.
The Group is also exposed to fraudulent
transfers of funds from its bank accounts.
During the year ended 31 December
2015, the Group enhanced its protections
and procedures after suffering such
fraudulent transfers.
Capital risk
The Group manages capital to ensure that it
is able to continue as a going concern whilst
maximising the return to shareholders. The
Group is not subject to any externally
imposed capital requirements. The Board
regularly monitors the future capital
requirements of the Group, particularly
in respect of its ongoing development
programme. Management expects that
the cash generated by the operating fields
will be sufficient to sustain the Group’s
operations and committed capital
investment for the foreseeable future and
has a policy of maintaining a minimum level
of liquidity to cover forward obligations.
Further short-term debt facilities may be
arranged to provide financial headroom
for future development activities.
Tony Alves
Chief Financial Officer
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 14 Volga Gas plc | Annual Report and Accounts 201 5
Board of Directors
Corporate Governance
Mikhail Ivanov Non-Executive Chairman
Mr Ivanov was Chief Executive Officer of the Company from its foundation until 5 May 2015.
Mr Ivanov was also a Partner and Director of Oil and Gas Projects at Baring Vostok Capital
Partners. He has a long history of involvement in the oil sector. He worked for over ten
years at Schlumberger, the international oil services company, where he served as head of
its Iran operations and was responsible for business development in Russia. Prior to joining
Shlumberger, he founded and headed two companies that focused on oil production and
service. Mr Ivanov holds an MS degree in Geophysics from Novosibirsk State University and
an MBA from the Kellogg School of Management of Northwestern University. He is an
elected member of the Society of Petroleum Engineers.
Appointed to the Board: 25 July 2006
Appointed as Chairman: 5 June 2015
Committee membership: n/a
Andrey Zozulya Chief Executive Officer, Executive Director
Mr Zozulya is a Russian citizen and has over 20 years’ experience in the oil sector in Russia
both with major oil and oil service companies, including over ten years with Schlumberger.
He also has experience of operating in the Saratov region in which Volga Gas’ operations
are based. He has a degree in Geophysics and Engineering from the Groznensky Oil & Gas
Institute and is a member of the Society of Petroleum Engineers.
Appointed to the Board: 5 May 2015
Committee membership: n/a
Antonio Alves Chief Financial Officer, Executive Director
Mr Alves has had experience with the independent oil and gas industry for over 20 years
as one of the leading equity analysts covering the sector. Prior to joining Volga Gas, he was
head of oil and gas research for KBC Peel Hunt and was closely involved with the Company’s
2007 IPO. He previously held positions with Investec Securities, The Bell Group International
and Schroders. He read Mathematics at Cambridge University between 1977 and 1983 both
as an undergraduate and a post-graduate research student.
Appointed to the Board: 28 January 2009
Committee membership: n/a
Michael Calvey Non-Executive Director
Mr Calvey is a Senior Partner of Baring Vostok Capital Partners and a Director of Baring
Private Equity International and is on the Boards of several of Baring Vostok’s portfolio
companies. He began working in Moscow in 1994 as one of the members of the consulting
committee of the First NIS Regional Fund. He is a member of the investment committees of
three Baring Vostok funds. He is also a member of the Investment Committees of the Baring
Asia and Baring India funds. Before 1994, Mr Calvey lived in London and New York, where he
worked at the European Bank for Reconstruction and Development (“EBRD”) and Salomon
Brothers. At EBRD he was responsible for investments in the energy sector of Central and
Eastern Europe. At Salomon Brothers Mr Calvey worked on mergers and acquisitions and
capital market projects in the oil and gas sector. He is a member of the Boards of the
Atlantic Council and the Emerging Markets Private Equity Association.
Appointed to the Board: 29 September 2006
Committee membership: : Audit, Nomination 15 Volga Gas plc | Annual Report and Accounts 201 5
Stephen Ogden Non-Executive Director
Mr Ogden is a Non-Executive Director of the West African shopping mall operator
Persianas. He was previously a Non-Executive Director of United Confectioneries
(Russia), Heineken Russia and Metropolis Media (former Yugoslavia). Mr Ogden was Chief
Financial Officer of the Bochkarev Brewery in St Petersburg from 1997 to 2002. Prior to
becoming Chief Financial Officer of Bochkarev, Mr Ogden was an auditor with KPMG and
PricewaterhouseCoopers, and Financial Controller of CS First Boston (Moscow). Mr Ogden
has a joint honours degree in economics & politics from Durham University, England, and is
a qualified British chartered accountant (“FCA”).
Appointed to the Board: 14 March 2007
Committee membership: Audit, Nomination, Remuneration
Aleksey Kalinin Non-Executive Director
Mr Kalinin served as Chairman of the Board from 14 March 2007 until 5 June 2015,
remaining as a Non-Executive Director. Mr Kalinin is a Senior Partner of Baring Vostok
Capital Partners. He joined Baring Vostok in 1999 from Alfa Capital, where he served for six
years as the Director of the Department for Direct Investments. Aleksey represents the
interests of Baring Vostok’s funds on the Board of Directors of a wide range of portfolio
companies. He has a doctorate from the Moscow Power Engineering Institute, where he
conducted scientific research, lectured for 12 years and served as the Director of the Youth
Center for Scientific and Technical Creativity.
Appointed to the Board: 29 September 2006
Committee membership: Remuneration
Vladimir Koshcheev Non-Executive Director
Mr Koshcheev currently acts as President of Joint Stock Company “NPO POG”. Until 2009
he was President of Pervaya Investizionno–Stroitelnaya Company LLC, Spinaker LLC. He has
been Chairman of CJSC AKSM since 2002. Mr Koshcheev was President of Privolzhskaya
Neftyanaya Company LLC between 2003 and 2005 and was previously a shareholder in and
acted as President of Vesla. Mr Koshcheev received a specialist diploma from Moscow State
Technical University in 1978 and he is a member of the Russian Academy of Natural Sciences.
Appointed to the Board: 29 September 2006
Committee membership: n/a
Ronald Freeman Non-Executive Director
Mr Freeman is a member of the Executive Committee of the Atlantic Council of the United
States (Washington DC), and a past independent director on the boards of Sberbank,
Severstal, and Troika Dialog. From 1973 to 1991 and from 1997 until his retirement from
Citigroup as co-head of European Investment Banking in 2000, he was an investment
banker specialising in financing and mergers and acquisition for companies in the oil and
gas industry with Salomon Brothers, now a unit of Citigroup. From 1991 to 1997, he was
head of the Banking Department of the European Bank for Reconstruction and
Development (London).
Appointed to the Board: 14 March 2007
Committee membership: Audit, Nomination, Remuneration
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 16 Volga Gas plc | Annual Report and Accounts 201 5
Corporate Governance Statement
Corporate Governance
Introduction
The Board’s overriding objective is to ensure
that the Group delivers long-term capital
appreciation for its shareholders.
Compliance
As Volga Gas plc is quoted on the AIM
market of the London Stock Exchange,
it is neither required to comply with the
2014 UK Corporate Governance Code that
was published by the Financial Reporting
Council (the “Code”) nor issue a statement
of compliance with it. Nevertheless, the
Board fully supports the principles set
out in the Code and seeks to follow
these as best practice wherever this is
appropriate having regard to the size of
the Company, the resources available to it
and the interpretation of the Code in the
Quoted Companies Alliance Corporate
Governance Code for Small and Mid-sized
Quoted Companies.
Details are provided below of how the
Company applies the elements of the Code
that are deemed appropriate.
Board of directors
Role of the Board
The Board’s role is to provide leadership to
the Group within a framework of prudent
and effective controls which enables risk to
be assessed and managed. The Board sets
the Group’s strategic aims and ensures that
the necessary financial and human
resources are in place for the Group to meet
its objectives, and reviews management’s
performance in meeting these objectives.
The Board sets and monitors the Group’s
values and standards and ensures that the
Group’s obligations to shareholders and
other stakeholders are understood and met.
The Board has a formal schedule of matters
reserved for its approval, including:
– Strategic and policy considerations
– Annual budget, including capital
expenditure
– Interim and final financial statements
– Dividend policy, share buy-backs or other
distributions
– Management structure and
appointments
– Mergers, acquisitions, disposals
– Capital raising
– Significant changes in accounting policies
– Appointment or removal of directors or
the company secretary
Board composition
The Board currently comprises two
executive directors and six non-executive
directors, of whom three are deemed to be
independent and three non-independent:
– Mikhail Ivanov – Non-Executive Chairman
– Andrey Zozulya – Executive Director and
CEO
– Tony Alves – Executive Director, CFO and
Company Secretary
– Michael Calvey – Non-Executive
– Ronald Freeman – Independent Non-
Executive
– Aleksey Kalinin – Non-Executive
– Vladimir Koshcheev – Independent
Non-Executive
– Stephen Ogden – Independent Non-
Executive
There is a clear division of responsibilities
between the executive and non-executive
directors.
Board balance and independence
The Board recognises that Messrs Kalinin and
Calvey are not independent by virtue of their
direct management responsibilities for the
limited partnerships comprising Baring
Vostok Private Equity Funds III and IV, the
Company’s controlling shareholder
(”Controlling Shareholder”). However, in light
of the value, experience and contacts which
they afford to the Company at this stage of
its development and by virtue of the
Relationship Agreement, which, inter alia,
ensures that the Controlling Shareholder
does not exercise undue influence over the
Company or prevent it from acting
independently of the Controlling
Shareholder, the Board believes that the
continued presence of Messrs Kalinin and
Calvey on the Board is beneficial for the
Company. Mr Kalinin also serves as Chairman
of the Board and was not considered to be
independent on his appointment.
Notwithstanding under the provisions of
the 2014 UK Corporate Governance Code as
a Smaller Company the Company meets the
requirements to have at least two
independent non-executives on the Board.
All directors are permitted access to
independent professional advice in the
course of execution of their duties, at the
Company’s expense.
The Board has established the following
committees:
Audit Committee
The Audit Committee was established in
March 2007 and comprises three directors:
Mr Ogden – Chairman
Mr Freeman
Mr Calvey
The Audit Committee is responsible for
selecting the Group’s independent auditors,
pre-approving all audit and non-audit related
services, reviewing with management and
the independent auditors the Group’s
financial statements, significant accounting
and financial policies and practices, audit
scope and adequacy of internal audit and
control systems. The Audit Committee keeps
the independence and objectivity of the
auditor under review and a formal statement
of independence is received from the
external auditor each year. The audit
committee meets at least twice each year.
Remuneration Committee
The Remuneration Committee was also
established in March 2007 and comprises
three directors:
Mr Freeman – Chairman
Mr Ogden
Mr Kalinin
The Remuneration Committee is responsible
for reviewing the performance of the
directors and for determining compensation
of the Company’s key employees, including
the chief executive officer, chief financial
officer, and other key personnel as may
be determined from time to time by
the Remuneration Committee. The
Remuneration Committee meets at
least twice each year.
The Directors’ Remuneration Report is set
out on pages 21 and 22.
Nomination Committee
The Nomination Committee was established
in March 2007 and comprises three
directors:
Mr Freeman – Chairman
Mr Ogden
Mr Calvey 17 Volga Gas plc | Annual Report and Accounts 201 5
The Nomination Committee is responsible
for reviewing the structure, size and
composition of the Board, making
recommendations to the Board concerning
plans for succession for both executive and
non-executive directors including the Chief
Executive and other senior management,
preparing a description of the role and
capabilities required for a particular
appointment and identifying and
nominating candidates to fill Board
positions as and when they arise.
Board meetings
The Board met four times during the year
ended 31 December 2015 (2014: four times)
with the following attendance:
2015 2014
Mikhail Ivanov 4 4
Andrey Zozulya
(attended all
meetings since
appointment) 2 –
Tony Alves 4 4
Michael Calvey 4 4
Ronald Freeman 4 3
Aleksey Kalinin 4 4
Vladimir Koshcheev 4 3
Stephen Ogden 4 4
Indemnification of directors
In accordance with the Company’s Articles
of Association and to the extent permitted
by the law of England and Wales, directors
are granted an indemnity from the Company
in respect of liabilities incurred as a result
of their office. In respect of those matters
for which the directors may not be
indemnified, the Company maintained a
directors’ and officers’ liability insurance
policy throughout the financial year. This
policy has been renewed for the next
financial year.
Re-election of directors
The Company requires that all directors
stand for re-election at intervals of no more
than three years. Accordingly Messrs
Freeman, Kalinin and Ogden will retire at
the forthcoming AGM and will seek
re-election by shareholders.
Internal controls
The directors acknowledge their
responsibility for the system of internal
controls for the Group and for reviewing its
effectiveness. Any system of internal
control can only provide reasonable, and not
absolute, assurance that material financial
irregularities will be detected or that the
risk of failure to achieve business objectives
is eliminated.
The Group’s risk and controls framework
covers all material risks and controls
including those of an operational, financial,
and compliance nature. Internal control
procedures consist, inter alia, of formal
delegations of expenditure authority by the
Board to executive management, and
controls relating to key stages of
transactions including supplier approval,
contract signature, and payment release.
In response to an unauthorised withdrawal
of cash from Group bank accounts in an
apparent cyberattack, management
performed a remediation and improvement
of internal controls around the Group’s cash
handling procedures and security, including
IT control processes.
The directors consider that the frequency
of Board meetings and level of detail
presented to the Board for its consideration
in relation to the operations of the Group
provide an appropriate process to identify,
evaluate and manage significant risks
relevant to its operations on a continuous
basis, and this process is considered to be in
accordance with the revised guidance on
internal control published in October 2005
(‘Turnbull Guidance’).
In addition to formal Board meetings,
management prepare detailed financial
and operational reports on a monthly basis
which is disseminated and discussed within
the Board.
Investor relations
The Company places considerable
importance on communication with
shareholders and engages them on a wide
range of issues. The Group has an ongoing
programme of dialogue and meetings
between the executive directors and
institutional investors, fund managers and
analysts. At these meetings a wide range
of relevant issues including strategy,
performance, management and governance
are discussed within the constraints of the
information already made public.
The Company is equally interested in the
views and concerns of private shareholders
and to this end ensures that the executive
directors present the Company at forums
where private investors are present.
Shareholders have the opportunity to meet
and question the Board at the Annual
General Meeting which will be held on
10 June 2016, at which the Chairman, the
Chairman of the Audit Committee and all
executive directors are expected to be
available. The notice of the AGM is posted
to all shareholders at least 21 working days
before the meeting. Financial and other
information is available on the Company’s
website (www.volgagas.com).
By order of the Board
Tony Alves
Company Secretary
31 March 2016
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 18 Volga Gas plc | Annual Report and Accounts 201 5
Report of the Directors
Corporate Governance
The directors present their report together
with the Group’s audited consolidated
financial statements for the period from
1 January 2015 to 31 December 2015.
Results and dividend
The Group’s results are set out on pages 23
to 28 and show net loss of US$4.1 million for
the year ended 31 December 2015 (2014:
net profit of US$13.1 million). On 10 June
2015 the Company paid a final dividend of
US$0.0125 per ordinary share in respect of
the year ended 31 December 2014. The
directors do not propose to pay a dividend
in respect of the year ended 31 December
2015 (2014: $0.05 per ordinary share).
Principal activities, business review
and future developments
Volga Gas is a public limited company
registered in England and Wales with
registered number 5886534, was
incorporated in the United Kingdom on 25
July 2006 and admitted to trading on the
AIM market of the London Stock Exchange
on 25 April 2007. Volga Gas operates
primarily through subsidiary companies as
set out in Note 2.2 to the accounts. The
principal activity of the Group is the
exploration, development and production
of its gas, condensate and oil fields in the
Volga Region of European Russia. During
the year, the Group owned 100% interests in
four licence areas in the Saratov and
Volgograd regions: Karpenskiy, Vostochny-
Makarovskoye, Dobrinskoye, and
Urozhainoye-2.
The Group’s business strategy is to maximise
the economics of production from the
Vostochny Makarovskoye, Dobrinskoye
and Uzenskoye fields and to explore the
potentially prospective structures on the
Group’s licence areas. The Group also
evaluates acquisition opportunities as part
of its overall strategy of growing value for
its shareholders.
Highlights of the Group’s activities for the
period ended 31 December 2015 are:
– Successful development drilling
concluded on the Vostochny
Marakovskoye (“VM”) field.
– Significant increase in production from
the field achieved in December 2015.
– Establishment of export channels for
condensate sales.
The Group’s activities are described in
greater detail in the Chief Executive’s
Report on page 6 and in the Operational
Review on pages 8 and 9. The principal risks
associated with the Group’s activities are set
out in the Risks and Uncertainties section in
pages 12 and 13.
Key performance indicators
Given the nature of the business and that
the Group has only three operating fields,
the directors are of the opinion that further
analysis using KPIs is not appropriate for
an understanding of the development,
performance or position of our business at
this time. The directors are of the opinion
that the Operational Review on pages 8
and 9 provides the relevant information.
Going concern
Having made appropriate enquiries and
having examined the major areas that could
affect the Group’s financial position, the
directors are satisfied that the Group has
adequate resources to continue in operation
for the foreseeable future. Accordingly they
consider it appropriate to adopt the going
concern basis in preparing the financial
statements as described in note 2.1.
Directors
The directors who served during the year
were:
Aleksey Kalinin, Chairman – Non-Executive
Mikhail Ivanov, Chief Executive Officer –
Chairman
Michael Calvey, Non-Executive
Tony Alves, Chief Financial Officer
Ronald Freeman, Non-Executive
Vladimir Koshcheev, Non-Executive
Stephen Ogden, Non-Executive
Andrey Zozulya, Chief Executive Officer
On 5 May 2015, Mr Zozulya was appointed as
a director and as Chief Executive Officer. At
the Annual General Meeting on 5 June 2015,
Mr Kalinin relinquished Chairmanship of the
Company and Mr Ivanov was appointed as
Chairman. Messrs Calvey, Ivanov and
Koshcheev will retire by rotation and offer
themselves for re-election in accordance
with the Company’s Articles of Association.
Directors’ interests
The directors serving during the year had
the following beneficial interests in the
shares of the Company:
Ordinary shares of 1p each
31 December
2015
31 December
2014
Mikhail Ivanov 1,000,000 1,000,000
Andrey Zozulya – –
Tony Alves 25,000 25,000
Michael Calvey
1
– –
Ronald Freeman 55,000 55,000
Aleksey Kalinin
1
– –
Vladimir
Koshcheev 419,210 419,210
Stephen Ogden 205,000 205,000
1 Mr Calvey and Mr Kalinin are Co-Managing Partners
of Baring Vostok Capital Partners Limited, a related
party to Baring Vostok Nominees Limited and Dehus
Dolmen Nominees Limited. As such Mr Calvey and Mr
Kalinin have an indirect beneficial interest in the
Company.
Substantial shareholders
On 31 March 2016 the following parties had
notifiable interests of 3% or greater in the
nominal value of the Company’s issued 1p
ordinary shares:
Number of
shares Percentage
Baring Vostok
Nominees Ltd
1
39,620,000 48.90
Dehus Dolmen
Nominees Ltd
2
7,906,889 9.76
Mr. Nicholas
Mathys 4,938,000 6.09
Quorum Fund Ltd 4,841,961 5.98
BNP Paribas
Investment
Partners S.A. 3,336,860 4.12
BlackRock
Investment
Management
(UK) Limited 3,094,791 3.82
JP Morgan Asset
Management
(UK) Limited 2,761,720 3.41
1 Baring Vostok Nominees Ltd is a nominee vehicle
which holds the interests of the limited partnerships
which comprise Baring Vostok Private Equity Fund III.
2 Dehus Dolmen Nominees Ltd is a nominee vehicle
which holds the interests of the limited partnerships
which comprise Baring Vostok Private Equity Fund IV. 19 Volga Gas plc | Annual Report and Accounts 201 5
Options granted
An Executive Share Option Plan was adopted
by the Company in July 2008 following which
options over a total of 1,706,196 shares were
granted to Mikhail Ivanov and to Tony Alves.
During 2015 no further options (2014: nil)
were eligible for vesting. The details of
these option grants are disclosed in the
Remuneration Report below.
Interests in contracts
There were no contracts or arrangements
during the period in which a director of the
Company was materially interested and
which were significant in relation to the
business of the Group.
Creditors payment policy and practice
The Group aims to pay all its creditors
promptly. For trade creditors it is the
Group’s policy to:
(i) agree the terms of the payment at the
start of the business with that supplier;
(ii) ensure that suppliers are aware of the
terms of the payment; and
(iii)pay in accordance with contractual and
other obligations
Political and charitable contributions
No political or charitable contributions were
made in the year (2014: nil).
Employment policies
The Group is committed to pursuing an
equal opportunities employment policy,
covering recruitment and selection, training,
development, appraisal and promotion.
The Group recognises the diversity of
its employees, its customers, and the
community at large and seeks to use
employees’ talents to the fullest. This
approach extends to the fair treatment of
people with disabilities, in relation to their
recruitment, training and development. Full
consideration is given to staff members who
become disabled during employment.
Employee communication
The Group is committed to effective
communications, which it maintains through
regular information releases and staff
briefings. Formal communications with
employees take place through these
channels. With respect to the Group’s
operations in Russia and the recruitment
of Russian employees, announcements,
contracts, interviews and advertisements
are conducted in the English and Russian
languages, as applicable.
Health, safety and the environment
The Group’s policy and practice is to comply
with health, safety and environmental
regulations and requirements of the
countries in which it operates, to protect
its employees, contractors, assets and
the environment.
The Group closely monitors its environmental
obligations under the terms of its licence
agreements. In particular, portions of the
Karpenskiy Licence Area are located in the
Saratovskiy Federal Nature Reserve and
Tulipannaya Steppe Natural Sanctuary, which
are protected by Russian environmental law.
In accordance with Russian environmental
law, all economic activity within the
protected area is approved by the Russian
government. The Group has ensured that all
its activities minimise the impact on this
sensitive environment.
UK Bribery Act
The Company has adopted Anti-Corruption
and Anti-Bribery Policies and a framework
of adequate procedures for managing the
Volga Gas Group’s responsibilities in relation
to the UK Bribery Act 2010.
Share capital
The Company has authorised ordinary share
capital of 330,720,100 shares of 1p each.
Under a special resolution by the
shareholders of the Company on 5 June
2015 the directors have authority to allot
shares up to an aggregate nominal value of
£1,000,000 of which £150,000 could be
issued non pre-emptively, in accordance
with sections 570 and 573 of the Companies
Act 2006. This authority will expire the
earlier of (i) 15 months from the passing of
the Resolution, or (ii) the conclusion of the
Annual General Meeting of the Company to
be held in 2016.
Capital risk management
The Group’s objectives when managing the
balance of equity and debt capital are (a) to
safeguard the Group’s ability to continue
as a going concern, (b) provide returns
for shareholders and benefits for other
stakeholders and (c) to maintain an optimal
capital structure to reduce the cost of
capital. In order to maintain or adjust the
capital structure, the Group may adjust the
amount of dividends paid to shareholders,
return capital to shareholders, issue new
shares or sell assets to reduce debt. To date
the Group has been funded entirely by
equity capital other than a US$10 million
facility that was drawn in 2012 and repaid
in full in 2013.
Corporate Governance
The Company’s statement on Corporate
Governance can be found in the Corporate
Governance Statement on pages 16 and 17
of these financial statements and form part
of this report by reference.
Statement of disclosure of information
to auditor
As at the date of this report the serving
directors confirm that;
– so far as the directors are aware, there is
no relevant audit information of which
the Company’s auditor is unaware; and
– they have taken all steps that they ought
to have taken as directors in order to
make themselves aware of any relevant
audit information and to establish that
the Company’s auditor is aware of that
information.
Auditor
The Group’s auditor, KPMG LLP has indicated
its willingness to continue in office and a
resolution concerning its reappointment
will be proposed at the next Annual
General Meeting.
S t r a te gic
Report
C or p ora t e
Governance
Financial
Statements 20 Volga Gas plc | Annual Report and Accounts 201 5
Statement of Directors’ responsibilities
in respect of the Annual Report,
Strategic Report, Directors’ Report and
the Financial Statements
The directors are responsible for preparing
the Annual Report, Strategic Report and
the Directors’ Report and the financial
statements in accordance with applicable
law and regulations.
Company law requires the directors to
prepare Group and Parent Company
financial statements for each financial year.
As required by the AIM Rules for Companies
of the London Stock Exchange they are
required to prepare the Group financial
statements in accordance with IFRSs as
adopted by the EU and applicable law
and have elected to prepare the Parent
Company financial statements on the
same basis.
Under company law the directors must not
approve the financial statements unless
they are satisfied that they give a true and
fair view of the state of affairs of the Group
and Parent Company and of their profit or
loss for that period. In preparing each of the
Group and Parent Company financial
statements, the directors are required to:
– select suitable accounting policies and
then apply them consistently;
– make judgements and estimates that are
reasonable and prudent;
– state whether they have been prepared
in accordance with IFRSs as adopted by
the EU; and
– prepare the financial statements on the
going concern basis unless it is
inappropriate to presume that the Group
and the Parent Company will continue
in business.
The directors are responsible for keeping
adequate accounting records that are
sufficient to show and explain the Parent
Company’s transactions and disclose with
reasonable accuracy at any time the
financial position of the Parent Company
and enable them to ensure that its financial
statements comply with the Companies
Act 2006. They have general responsibility
for taking such steps as are reasonably
open to them to safeguard the assets of the
Group and to prevent and detect fraud and
other irregularities.
The directors are responsible for the
maintenance and integrity of the corporate
and financial information included on
the Company’s website. Legislation in
the UK governing the preparation and
dissemination of financial statements may
differ from legislation in other jurisdictions.
Electronic communications
The maintenance and integrity of the Volga
Gas plc website (www.volgagas.com) is the
responsibility of the directors; the work
carried out by the auditor does not involve
consideration of these matters and
accordingly, the auditor accepts no
responsibility for any changes that may have
occurred to the financial statements since
they were initially presented on the website.
The Company’s website is maintained in
compliance with Rule 26 of the AIM Rules
for Companies.
Legislation in the United Kingdom
governing the preparation and
dissemination of financial statements may
differ from legislation in other jurisdictions.
On behalf of the Board
Tony Alves
Chief Financial Officer
31 March 2016
Report of the Directors continued
Corporate Governance 21 Volga Gas plc | Annual Report and Accounts 201 5
Directors’ Remuneration Report
In common with the Board’s commitment
to compliance with the appropriate aspects
of the 2014 UK Corporate Governance Code,
the Company has adopted the Principles of
Good Governance relating to directors’
remuneration. The Company discloses
certain information relating to directors’
remuneration in this report, which is
not audited.
Remuneration Committee
The Company established a Remuneration
Committee in April 2007, as set out in the
Corporate Governance statement on
page 16.
The Remuneration Committee advises the
Board on Group compensation policy as it
relates to executive directors and other key
members of management, and may obtain
advice from independent remuneration
consultants appointed by the Company.
The Remuneration Committee comprises
Ronald Freeman (Chairman), Stephen
Ogden and Aleksey Kalinin, who are all
non-executive directors. Executive directors
may be invited to attend meetings of the
Remuneration Committee but do not vote on
their own remuneration or incentives. The
Remuneration Committee meets as required.
Remuneration policy
The Company’s policy is to maintain levels of
compensation for the Group that are
comparable and competitive with peer
group companies, so as to attract and retain
individuals of the highest calibre, by
rewarding them as appropriate for their
contribution to the Group’s performance.
Executive directors’ employment
agreement and terms of appointment
The terms of each executive director’s
appointment are set out in their service
agreements. Each executive director
agreement is based on similar terms, with
no fixed duration. Each service agreement
sets out details of basic salary and share
options as applicable.
All executive director employment
agreements can be terminated either by the
director concerned or by the Company on
giving six months’ notice during the first 24
months of service and thereafter by giving
three months’ notice.
The executive directors do not participate
in any Group pension scheme and their
remuneration is not pensionable. The
executive directors are eligible for
payment of cash bonuses and participation
in any share-based incentive plan the
Board implements.
Basic salaries
The basic salary of each executive director
is established by reference to their
responsibilities and individual performance.
Non-executive directors’ terms,
conditions and fees
The non-executive directors have been
engaged under the terms of their letters
of appointment. These engagements are
for two years and can be terminated
upon one month’s notice by either party.
Reappointment is subject to the Company’s
Articles of Association which provide that
one third of the directors shall be required
to retire each year.
Fees
The fees paid to non-executive directors
are determined by the Board and reviewed
periodically to reflect current rates and
practice commensurate with the size of the
Company and their roles.
The remuneration of the non-executive
directors is a matter for the chairman of
the Board and the Chief Executive Officer.
In the event of the appointment of an
independent non-executive chairman his
remuneration would be a matter for the
chairman of the Remuneration Committee
and the Chief Executive Officer.
Audited information – Directors’ detailed emoluments
Salary
US$ 000
Pension
Contribution
US$ 000
Share Based
Compensation
US$ 000
Fees
US$ 000
Aggregate
Remuneration
for the Year
31 December
2015
US$ 000
Aggregate
Remuneration
for the Year
31 December
2014
US$ 000
Executive directors
M. Ivanov 165 – – 70 235 400
A. Zozulya 130 – – – 130 –
A. Alves 300 – – – 300 310
Non-executive
M. Calvey – – – – – –
R. Freeman – – – 50 50 50
A. Kalinin – – – – – –
V. Koshcheev – – – – – –
S. Ogden – – – 50 50 50
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Directors’ interests in the share capital
of the Company
The directors’ interests in the share capital
of the Company are disclosed in the Report
of the Directors on page 18. There has been
no change in the interest of any director
between 1 January 2016 and the date of
this report.
Directors’ share options
The Company adopted an Executive Share
Option Plan (“ESOP”) on 14 July 2008, which
was subsequently amended on 17 December
2008. Under the terms of this Plan, up to a
maximum of 2,843,661 shares (equivalent to
approximately 5% of the then issued share
capital) may be allocated and subject to
performance criteria and vesting periods as
specified by the Remuneration Committee.
During 2008, the Company granted
options to acquire 1,137,464 ordinary shares
to Mikhail Ivanov under the terms of the
ESOP. The options may be exercised at a
price of 405p per share and vest in equal
portions on May 2010, 2011 and 2012 and
will remain outstanding until May 2017.
On 17 December 2008, Tony Alves was
granted options to acquire up to 568,732
ordinary shares in the Company at an
exercise price of 100p per share. The
options vested over a period of up to
four years subject to the satisfaction of
performance conditions related to the
market price of the Company’s shares. The
vested options will remain exercisable until
eight years from the date of grant. During
2015, options over no further shares
became eligible for vesting (2014: nil).
By order of the Board
Tony Alves
Company Secretary
31 March 2016
Directors’ Remuneration Report continued
Corporate Governance 23 Volga Gas plc | Annual Report and Accounts 201 5
Independent Auditor’s Report
to the Members of Volga Gas plc
We have audited the financial statements of Volga Gas plc for the year ended 31 December 2015 which comprise the Group Income
Statement, the Group Statement of Comprehensive Income, the Group and Parent Company Balance Sheets, the Group and Parent
Company Cash Flow Statements, the Group and Parent Company Statements of Changes in Equity and the related notes. The financial
reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (“IFRSs”)
as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the
Companies Act 2006.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page 19 the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on,
the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at
www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion:
– the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2015
and of the Group’s loss for the year then ended;
– the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
– the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in
accordance with the provisions of the Companies Act 2006; and
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group
financial statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial
statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
– adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from
branches not visited by us; or
– the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with
the accounting records and returns; or
– certain disclosures of directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our audit.
Adrian Wilcox (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
1 April 2016
The accompanying notes on pages 30 to 45 are an integral part of these financial statements.
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Group Income Statement
(presented in US$ 000)
Financial Statements
Year ended 31 December Notes 2015 2014
Continuing operations
Revenue 17,827 39,423
Cost of sales 5 (15,589) (22,514)
Gross profit 2,238 16,909
Selling expenses 5 (319) –
Operating and administrative expenses 5 (3,377) (4,157)
Exploration and evaluation expense 5(b) (635) –
Write off of development assets 5(c) (2,950) –
Operating (loss)/profit (5,043) 12,752
Interest income 6 117 245
Interest expense – –
Other gains and losses – net 7 306 3,290
(Loss)/profit for the year before tax (4,620) 16,287
Deferred income tax 8 559 (3,229)
Current income tax 8 (3) –
(Loss)/profit for the year before non-controlling interests (4,064) 13,058
Attributable to:
The owners of the Parent Company (4,064) 13,058
Basic and diluted (loss)/profit per share (in US Dollars) 9 (0.05) 0.16
Weighted average number of shares outstanding 81,017,800 81,017,800
The Company has elected to take the exemption under section 408 of the Companies Act 2006 to not present the Parent Company income
statement. The loss for the Parent Company for the year was US$ 102,956,000 (2014: US$1,472,000) after an impairment charge on
investments in subsidiaries of US$101,759,000 (2014: nil).
Group Statement of Comprehensive Income
(presented in US$ 000)
Year ended 31 December Notes 2015 2014
(Loss)/profit for the year attributable to equity shareholders of the Company (4,064) 13,058
Other comprehensive income items that may be reclassified to profit and loss:
Currency translation differences (15,301) (48,955)
Total comprehensive (expense) for the year (19,365) (35,897)
Attributable to:
The owners of the Parent Company (19,365) (35,897) 25 Volga Gas plc | Annual Report and Accounts 201 5
Group Balance Sheet
(presented in US$ 000)
At 31 December Notes 2015 2014
Assets
Non-current assets
Intangible assets 10 2,867 3,746
Property, plant and equipment 11 48,290 57,819
Other non-current assets 12 155 68
Deferred tax assets 8 1,098 706
Total non-current assets 52,410 62,339
Current assets
Cash and cash equivalents 13 6,769 15,767
Inventories 14 1,067 1,099
Other receivables 15 1,449 918
Total current assets 9,285 17,784
Total assets 61,695 80,123
Equity and liabilities
Equity
Share capital 16 1,485 1,485
Share premium (net of issue costs) 16 – –
Other reserves 17 (86,117) (70,816)
Accumulated profits/(losses) 140,037 145,114
Equity attributable to the shareholders of the parent 55,405 75,783
Non-current liabilities
Asset retirement obligation 146 189
Deferred tax liabilities 1,995 2,478
Total non-current liabilities 2,141 2,667
Current liabilities
Trade and other payables 19 4,149 1,673
Total current liabilities 4,149 1,673
Total equity and liabilities 61,695 80,123
Approved by the Board of Directors on 31 March 2016 and signed on its behalf by
Tony Alves
Chief Financial Officer
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Group Cash Flow Statements
(presented in US$ 000)
Financial Statements
Year ended 31 December Notes 2015 2014
(Loss)/profit for the year before tax (4,620) 16,287
Adjustments to (loss)/profit before tax:
Depreciation 2,369 4,683
E & E expense 635 –
Write off of development assets 2,950 –
Other non-cash expenses – –
Foreign exchange differences (942) (5,297)
Operating cash flow prior to working capital 392 15,673
Working capital changes
(Increase)/decrease in trade and other receivables (1,144) 1,621
Increase/(decrease) in payables 1,893 (971)
Decrease/(increase) in inventory 22 (77)
Cash flow from operations 1,163 16,246
Income tax paid (3) –
Net cash flow generated from operating activities 1,160 16,246
Cash flows from investing activities
Expenditure on exploration and evaluation 10 (554) –
Purchase of property, plant and equipment 11 (8,117) (5,520)
Net cash used in investing activities (8,671) (5,520)
Cash flows from financing activities
Equity dividends paid (1,013) (3,038)
Net cash outflow from financing activities (1,013) (3,038)
Effect of exchange rate changes on cash and cash equivalents (474) (2)
Net increase/(decrease) in cash and cash equivalents (8,998) 7,686
Cash and cash equivalents at beginning of the year 13 15,767 8,081
Cash and cash equivalents at end of the year 13 6,769 15,767
The accompanying notes on pages 30 to 45 are an integral part of these financial statements. 27 Volga Gas plc | Annual Report and Accounts 201 5
Company Balance Sheet
(presented in US$ 000)
Company registration number: 05886534
At 31 December Notes 2015 2014
Assets
Non-current assets
Investments 20 50,475 152,234
Intercompany receivables 22 4,735 4,606
Total non-current assets 55,210 156,840
Current assets
Cash and cash equivalents 13 4,529 6,786
Other receivables 15 22 31
Total current assets 4,551 6,817
Total assets 59,761 163,657
Equity and liabilities
Equity
Share capital 16 1,485 1,485
Share premium (net of issue costs) 16 – –
Share grant expense reserve 17 5,233 5,233
Accumulated profit/(loss) 18 51,597 155,566
Total equity 58,315 162,284
Current liabilities
Intercompany payables 1,357 1,357
Trade and other payables 19 89 16
Total current liabilities 1,446 1,373
Total equity and liabilities 9,761 163,657
Approved by the Board of Directors on 31 March 2016 and signed on its behalf by
Tony Alves
Chief Financial Officer
The accompanying notes on pages 30 to 45 are an integral part of these financial statements.
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Company Cash Flow Statements
(presented in US$ 000)
Financial Statements
Year ended 31 December Notes 2015 2014
Loss for the period before tax (102,956) (1,472)
Adjustments to loss before tax:
Impairment expense 101,759 –
Operating cash flow prior to working capital (1,197) (1,472)
Working capital changes
(Increase)/decrease in receivables (118) (2)
Increase/(decrease) in payables 71 6
Cash flow from operations (1,244) (1,468)
Income tax paid – –
Net cash flow generated from operating activities (1,244) (1,468)
Cash flows from investing activities
Decrease in intercompany receivables – 11,091
Net cash from investing activities – 11,091
Cash flows from financing activities
Equity dividends paid (1,013) (3,038)
Net cash used in financing activities (1,013) (3,038)
Effect of exchange rate changes on cash and cash equivalents – –
Net (decrease)/increase in cash and cash equivalents (2,257) 6,585
Cash and cash equivalents at the beginning of the year 6,786 201
Cash and cash equivalents at end of the year 4,529 6,786
The accompanying notes on pages 30 to 45 are an integral part of these financial statements. 29 Volga Gas plc | Annual Report and Accounts 201 5
Group Statement of Changes in Shareholders’ Equity
(presented in US$ 000)
Notes
Share
Capital
Share
Premium
Currency
Translation
Reserves
Share Grant
Reserve
Accumulated
Profit/(Loss) Total Equity
Opening equity at 1 January 2015 1,485 – (76,049) 5,233 145,114 75,783
Loss for the year – – – – (4,064) (4,064)
Transactions with owners
Equity dividends paid – – – – (1,013) (1,013)
Total transactions with owners – – – – (1,013) (1,013)
Currency translation differences – – (15,301) – – (15,301)
Total comprehensive income – – (15,301) – (4,064) (19,365)
Closing equity at 31 December 2015 1,485 – (91,350) 5,233 140,037 55,405
Opening equity at 1 January 2014 1,485 165,873 (27,094) 5,233 (30,779) 114,718
Profit for the year – – – – 13,058 13,058
Transactions with owners
Equity dividends paid – – – – (3,038) (3,038)
Cancellation of share premium account 16 – (165,873) – – 165,873 –
Total transactions with owners – (165,873) – – 162,835 (3,038)
Currency translation differences – – (48,955) – – (48,955)
Total comprehensive income – – (48,955) – 13,058 (35,897)
Closing equity at 31 December 2014 1,485 – (76,049) 5,233 145,114 75,783
Company Statement of Changes in Shareholders’ Equity
(presented in US$ 000)
Notes
Share
Capital
Share
Premium
Share Grant
Reserve
Accumulated
Profit/(loss) Total Equity
Opening equity at 1 January 2015 1,485 – 5,233 155,566 162,284
Loss for the year – – – (102,956) (102,956)
Equity dividends paid – – – (1,013) (1,013)
Closing equity at 31 December 2015 1,485 – 5,233 51,597 58,315
Opening equity at 1 January 2014 1,485 165,873 5,233 (5,797) 166,794
Loss for the year – – – (1,472) (1,472)
Equity dividends paid – – – (3,038) (3,038)
Cancellation of share premium account 16 – (165,873) – 165,873 –
Closing equity at 31 December 2014 1,485 – 5,233 155,566 162,284
The accompanying notes on pages 30 to 45 are an integral part of these financial statements.
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Notes to the IFRS Consolidated Financial Statements
For the year ended 31 December 201 5
(presented in US$ 000)
Financial Statements
1. General information
Volga Gas plc (the “Company” or “Volga”) is a public limited company registered in England and Wales with registered number 5886534. The
Company was incorporated on 25 July 2006. The principal activities of the Company and its subsidiaries (the “Group”) are the acquisition,
exploration and development of hydrocarbon assets and production of hydrocarbons in the Volga Region of the Russian Federation. Its
registered office is 40 Dukes Place London EC3A 7NH. The Company’s shares are admitted to trading on the AIM market of the London
Stock Exchange.
These Group consolidated financial statements were authorised for issue by the Board of Directors on 31 March 2016.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies
have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of preparation
Both the Parent Company financial statements and the Group financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRSs”), as adopted by the European Union (“EU”), International Financial Reporting Interpretations
Committee (“IFRIC”) interpretations, and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial
statements have been prepared under the historical cost convention and in accordance with applicable accounting standards.
The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of
judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed
in note 4.
No income statement is presented for Volga Gas plc as permitted by Section 408 of the Companies Act 2006.
The Group’s business activities, together with the factors likely to affect its future development, performance and position set out in the
Strategic Report in pages 4 to 13; the financial position of the Group, its cash flows, liquidity position and borrowing facilities are described
in the Financial Review on pages 8 to 9. In addition, the Group’s objectives, policies and processes for measuring capital, financial risk
management objectives, details of financial instruments and exposure to credit and liquidity risks are described in note 3. Having reviewed
the future cash flow forecasts of the Group, the directors have concluded that the Group will continue to have access to sufficient funds in
order to meet its obligations as they fall due for at least the foreseeable future and thus continue to adopt the going concern basis of
accounting in preparing the annual financial statements.
Disclosure of impact of new and future accounting standards
(a) New and amended standards and interpretations:
There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on 1 January 2015 that have a
material impact on the Group.
In accordance with the transitional provisions of IFRS 10, the Group reassessed the control conclusion for its investees at 1 January 2015. No
modifications of previous conclusions about control regarding the Group’s investees were required.
(b) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the
Group. The following new standards, amendments to standards and interpretations have been issued, but are not effective for the
financial year beginning 1 January 2015 and have not been early adopted:
– IFRS 9: Financial Instruments
– IFRS 15: Revenue from Contracts with Customers
– IFRS 16: Leases
The Group is yet to assess the full impact of these new standards and amendments but does not expect them to have a material impact on
the financial statements, with the main effect being the requirement for additional disclosures.
2.2 Consolidation
(a) Subsidiaries
The consolidated financial statements include the financial statements of the Company and its subsidiaries. Subsidiaries are entities
controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the
entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration
potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The
financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the
date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests
even if doing so causes the non-controlling interests to have a deficit balance.
Investments in subsidiaries are accounted for at cost less impairment. Cost is adjusted to reflect changes in consideration arising from
contingent consideration amendments. Cost also includes direct attributable costs of investment.
Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are
also eliminated unless the cost cannot be recovered. 31 Volga Gas plc | Annual Report and Accounts 201 5
2. Summary of significant accounting policies continued
The Company and its subsidiaries outside the Russian Federation maintain their financial statements in accordance with IFRSs as adopted by the
EU. The Russian subsidiaries of the Group maintain their statutory accounting records in accordance with the Regulations on Accounting and
Reporting of the Russian Federation. The consolidated financial statements are based on these statutory accounting records, appropriately
adjusted and reclassified for fair presentation in accordance with International Financial Reporting Standards as adopted by the EU.
A list of the Company’s subsidiaries is provided in Note 20.
2.3 Segment reporting
Segmental reporting follows the Group’s internal reporting structure.
Operating segments are defined as components of the Group where separate financial information is available and reported regularly to
the chief operating decision maker (“CODM”), which is determined to be the Board of Directors of the Company. The Board of Directors
decides how to allocate resources and assesses operational and financial performance using the information provided.
The CODM receives monthly IFRS based financial information for the Group and its development and production entities. There were three
development and production entities during both 2013 and 2014. Management has determined that the operations of these production
and development entities are sufficiently homogenous (all are concerned with upstream oil and gas development and production activities)
for these to be aggregated for the purpose of IFRS 8, “Operating Segments”. The Group has other entities that engage as either head office
or in a corporate capacity or as holding companies. Management has concluded that due to application of the aggregation criteria that
separate financial information for segments is not required.
No geographic segmental information is presented as all of the companies operating activities are based in the Russian Federation.
Management has determined therefore that the operations of the Group comprise one class of business, being oil and gas exploration,
development and production and the Group operates in only one geographic area – the Russian Federation.
The Group’s gas sales, representing a substantial proportion of revenues are made to a single customer. Details are provided in Note 3.1 (b).
2.4 Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic
environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in US Dollars,
which is the Company’s functional and the Group’s presentation currency.
The functional currency of the Group’s subsidiaries that are incorporated in the Russian Federation is the Russian Rouble (“RUR”). It is the
Management’s view that the RUR best reflects the financial results of its Cyprus subsidiaries because they are dependent on entities based
in Russia that operate in an RUR environment in order to recover their investments. As a result, the functional currency of the subsidiaries
continues to be the RUR.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end
exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
Foreign exchange gains and losses that relate to cash and cash equivalents, borrowings and other foreign exchange gains and losses are
presented in the income statement within “Other gains and losses”.
(c) Group companies
The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a
functional currency different from the presentation currency are translated into the presentation currency as follows:
(i) assets and liabilities for each balance sheet item presented are translated at the closing rate at the date of that balance sheet;
(ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are
translated at the rate on the dates of the transactions); and
(iii) all resulting exchange differences are recognised in other comprehensive income.
The major exchange rates used for the revaluation of the closing balance sheet at 31 December 2015 were:
– GBP 1.517: US$ (2014: 1. 5532)
– EUR 1.091: US$ (2014: 1. 2148)
– US$ 1:72.883 RUR. (2014: 56.258)
2.5 Oil and gas assets
The Company and its subsidiaries apply the successful efforts method of accounting for Exploration and Evaluation (“E&E”) costs, in
accordance with IFRS 6 “Exploration for and Evaluation of Mineral Resources”. Costs are accumulated on a field-by-field basis.
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2. Summary of significant accounting policies continued
Capital expenditure is recognised as property, plant and equipment or intangible assets in the financial statements according to the nature
of the expenditure and the stage of development of the associated field, i.e. exploration, development, production.
(a) Exploration and evaluation assets
Costs directly associated with an exploration well, including certain geological and geophysical costs, and exploration and property
leasehold acquisition costs, are capitalised as intangible assets until the determination of reserves is evaluated. If it is determined that a
commercial discovery has not been achieved, these costs are charged to expense after the conclusion of appraisal activities. Exploration
costs such as geological and geophysical that are not directly related to an exploration well are expensed as incurred.
Once commercial reserves are found, exploration and evaluation assets are tested for impairment and transferred to development assets.
No depreciation or amortisation is charged during the exploration and evaluation phase.
(b) Development assets
Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of
development wells into commercially proven reserves, is capitalised within property, plant and equipment. When development is
completed on a specific field, it is transferred to producing assets as part of property, plant and equipment. No depreciation or amortisation
is charged during the development phase.
(c) Oil and gas production assets
Production assets are accumulated generally on a field by field basis and represent the cost of developing the commercial reserves
discovered and bringing them into production together with E&E expenditures incurred in finding commercial reserves and transferred
from the intangible E&E assets as described above.
The cost of production assets also includes the cost of acquisitions and purchases of such assets, directly attributable overheads, finance
costs capitalised and the cost of recognising provisions for future restoration and decommissioning.
Where major and identifiable parts of the production assets have different useful lives, they are accounted for as separate items of
property, plant and equipment. Costs of minor repairs and maintenance are expensed as incurred.
(d) Depreciation/amortisation
Oil and gas properties are depreciated or amortised using the unit-of-production method. Unit-of-production rates are based on proved and
probable reserves, which are oil, gas and other mineral reserves estimated to be recovered from existing facilities using current operating
methods. Oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales
transaction points at the outlet valve on the field storage tank.
(e) Impairment – exploration and evaluation assets
Exploration and evaluation assets are tested for impairment prior to reclassification to development tangible assets, or whenever facts and
circumstances indicate that an impairment condition may exist. An impairment loss is recognised for the amount by which the exploration
and evaluation assets’ carrying amount exceeds their recoverable amount. The recoverable amount is the higher of the exploration and
evaluation assets’ fair value less costs to sell and their value in use. For the purposes of assessing impairment, the exploration and
evaluation assets subject to testing are grouped with existing cash-generating units of production fields that are located in the same
geographical region.
(f) Impairment – proved oil and gas production properties
Proven oil and gas properties are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. The cash generating unit applied for
impairment test purposes is generally the field, except that a number of field interests may be grouped together where the cash flows of
each field are interdependent, for instance where surface infrastructure is used by one or more field in order to process production for sale.
(g) Decommissioning
Provision is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such provision represents
the estimated discounted liability (the discount rate used currently being at 10% per annum) for costs which are expected to be incurred in
removing production facilities and site restoration at the end of the producing life of each field. A corresponding item of property, plant
and equipment is also created at an amount equal to the provision. This is subsequently depreciated as part of the capital costs of the
production facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the cash
flow or the current estimate of the discount rate used are reflected as an adjustment to the provision and the property, plant and
equipment. The unwinding of the discount is recognised as a finance cost.
2.6 Other business and corporate assets
Property, plant and equipment not associated with exploration and production activities are carried at cost less accumulated depreciation.
These assets are also evaluated for impairment when circumstances dictate.
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 33 Volga Gas plc | Annual Report and Accounts 201 5
2. Summary of significant accounting policies continued
Land is not depreciated. Depreciation of other assets is calculated on a straight line basis as follows:
Machinery and equipment 6–10 years
Office equipment in excess of US$5,000 3–4 years
Vehicles and other 2–7 years
2.7 Financial assets
The Group classifies its financial assets in the following categories:
(a) Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial assets held for trading. This category comprises derivatives unless they are
effective hedging instruments. The Group had no financial assets in this class as at 31 December 2015 or 31 December 2014.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This
category comprises trade and other receivables, term bank deposits and cash and cash equivalents in balance sheet.
2.8 Inventories
Crude oil inventories are stated at the lower of cost of production and net realisable value. Materials and supplies inventories are recorded
at average cost and are carried at amounts which do not exceed the expected recoverable amount from use in the normal course of
business. Cost comprises direct materials and, where applicable, direct labour plus attributable overheads based on a normal level of
activity and other costs associated in bringing inventories to their present location and condition.
2.9 Trade and other receivables
Trade and other receivables are recorded initially at fair value and subsequently measured at amortised cost using the effective interest
method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that
the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the
difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective
interest rate.
2.10 Cash and cash equivalents
Cash and cash equivalents include cash in hand, and deposits held at call with banks.
2.11 Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
2.12 Trade payables
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
2.13 Current and deferred income tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it
relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other
comprehensive income or directly in equity, respectively.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period
in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions
taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where
appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it
arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction
affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted
or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is
realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the
temporary differences can be utilised.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax
liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either
the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
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2. Summary of significant accounting policies continued
2.14 Employee benefits
(a) Share-based compensation
The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to
be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any
non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in
assumptions about the number of options that are expected to vest. The option plan currently in place for certain of the directors is an
equity settled share option plan.
The Company measures the equity instruments granted to employees at the fair value at grant date. The fair value of fully-vested shares is
expensed immediately. The fair value of shares with vesting requirements is estimated using the Black-Scholes option pricing model. This
value is recognised as an expense over the vesting period on a straight-line basis. The estimate is revised, as necessary, if subsequent
information indicates that the number of equity instruments expected to vest differs from previous estimates.
(b) Social obligations
Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave, sick leave and bonuses
are accrued in the year in which the associated services are rendered by the employees of the Group.
2.15 Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of oil and gas in the ordinary course of the Group’s
activities. Revenue is shown net of value added tax, returns, rebates and discounts and after eliminating sales within the Group. Revenue
from the sale of oil or gas is recognised when the oil/gas is delivered to customers and title has transferred. In 2015 and 2014 , the Group’s
revenue related to sales of crude oil and condensate collected directly by or delivered to customers and gas sales made at the entry to the
gas distribution system.
2.16 Prepayments
Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods or services relating
to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as
non-current upon initial recognition. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has
obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Group. Other
prepayments are written off to profit or loss when the goods or services relating to the prepayments are received. If there is an indication
that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down
accordingly and a corresponding impairment loss is recognised in profit or loss for the year.
2.19 Provisions
Provisions for environmental restoration, restructuring costs and legal claims are recognised when: the Group has a present legal or
constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the
amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments.
Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering
the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the
same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that
reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to
passage of time is recognised as interest expense.
3. Financial risk management
3.1 Financial risk factors
The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk, and cash flow interest
rate risk), credit risk, and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets
and seeks to minimise potential adverse effects on the Group’s financial performance.
(a) Market risk
(i) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from currency exposures, primarily with respect to the RUR. Foreign exchange risk
arises from future commercial transactions, recognised assets and liabilities.
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 35 Volga Gas plc | Annual Report and Accounts 201 5
3. Financial risk management continued
At 31 December 2015, if the US Dollar had weakened/strengthened by 5% against the RUR with all other variables held constant, post-tax
profit for the year would have been US$56,000 (2014: US$289,000) higher/lower, mainly as a result of foreign exchange gains/losses on
translation of RUR denominated trade payables and financial assets. At 31 December 2015, if the US Dollar had weakened/strengthened by
5% against the Euro (“EUR”) with all other variables held constant, post-tax profit for the year would have been US$1,000 (2014: US$1,000)
higher/lower, mainly as a result of foreign exchange gains/losses on translation of EUR denominated interest charges and financial liabilities.
At 31 December 2015, if the US dollar had weakened/strengthened by 5% against the Pound Sterling (“GBP”) with all other variables held
constant, post-tax profit for the year would have been US$3,000 (2014: US$15,000) higher/lower, mainly as a result of foreign exchange
gains/losses on translation of GBP denominated trade payables and financial assets.
If the US Dollar had weakened/strengthened by 5% against the RUR with all other variables held constant, shareholders equity would have
been US$2.3 million (2014: US$2.9 million) higher/lower, as a result of translation of RUR denominated assets. The sensitivity of
shareholders equity to changes in the exchange rates between US dollar against GBP or EUR is immaterial.
The following table shows the currency structure of financial assets and liabilities:
At 31 December 2015
Rubles
US$ 000
US Dollars
US$ 000
Euros
US$ 000
Sterling
US$ 000
Total
US$ 000
Financial assets
Cash and cash equivalents 1,089 5,622 14 44 6,769
Total financial assets 1,089 5,622 14 44 6,769
Financial liabilities (before provision for UK taxes) 3,217 – – – 3,217
At 31 December 2014
Rubles
US$ 000
US Dollars
US$ 000
Euros
US$ 000
Sterling
US$ 000
Total
US$ 000
Financial assets
Cash and cash equivalents 3,167 12,405 15 180 15,767
Total financial assets 3,167 12,405 15 180 15,767
Financial liabilities (before provision for UK taxes) 1,149 – – – 1,149
Group companies utilised short-term foreign exchange forward contracts in 2014 to effect sales of RUR against USD. No forward foreign
exchange contracts were used in 2015.
(ii) Price risk
The Group is not exposed to price risk as it does not hold financial instruments of which the fair values or future cash flows will be affected
by changes in market prices. The Group is not directly exposed to the levels of international marker prices of crude oil or oil products,
although these clearly influence the prices at which it sells its oil and condensate. Mineral Extraction Taxes (“MET”) are calculated by
reference to Urals oil prices and are therefore directly influenced by this. Taking into account the marginal rates of export taxes and MET,
management estimates that if international oil prices had been US$5 per barrel higher or lower and all other variables been unchanged, the
Group’s profit before tax would have been US$1.2 million higher or lower (2014: $1.7 million).
(iii) Cash flow and fair value interest rate risk
As the Group currently has no significant interest-bearing assets and liabilities, the Group’s income and operating cash flows are
substantially independent of changes in market interest rates.
(b) Credit risk
The Group’s maximum credit risk exposure is the fair value of each class of assets, presented in note 3.1(a)(i) of US$6,769,000 and
US$15,767,000 at 31 December 2015 and 2014 respectively.
The Group’s principal financial asset is cash and credit risk arises from cash and cash equivalents and deposits with banks and financial
institutions. It is the Group’s policy to monitor the financial standing of these assets on an ongoing basis. Bank balances are held with
reputable and established financial institutions.
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3. Financial risk management continued
The Group’s oil and condensate sales are normally undertaken on a prepaid basis and accordingly the Group has no trade receivables and
consequently no credit risk associated with the related trade receivables. Gas sales accounting for 38.4% of Group revenues in 2015 (2014:
31.0%) are made to OOO Trans Nafta. As at 31 December 2015 there were trade receivables of US$1.0 million (31 December 2014: US$0.6
million) relating to gas sales. As at 31 December 2015 there was no provision for bad debts (2014: nil).
Rating of financial institution (S&P)
31 December
2015
31 December
2014
A+ 4,794 7,123
BBB+ 1,579 4,971
BBB- 202 3,615
Other 194 58
Total bank balance 6,769 15,767
(c) Liquidity risk
Cash flow forecasting is performed by Group finance. Group finance monitors rolling forecasts of the Group’s liquidity requirements to
ensure it has sufficient cash to meet operational needs. The Group believes it has sufficient liquidity headroom to fund its currently planned
exploration and development activities.
The Group expects to fund its capital investments, as well as its administrative and operating expenses, through 2016 using a combination
of cash generated from its oil and gas production activities, existing working capital and, when appropriate, medium-term bank borrowings.
If the Group is unsuccessful in generating enough liquidity to fund its expenditures, the Group’s ability to execute its long-term growth
strategy could be significantly affected. The Group may need to raise additional equity or debt finance as appropriate to fund investments
beyond its current commitments.
(d) Capital risk
The Group manages capital to ensure that it is able to continue as a going concern whilst maximising the return to shareholders. The Group
is not subject to any externally imposed capital requirements. The Board regularly monitors the future capital requirements of the Group,
particularly in respect of its ongoing development programme. Management expects that the cash generated by the operating fields will
be sufficient to sustain the Group’s operations and future capital investment for the foreseeable future. Further short-term debt facilities
may be arranged to provide financial headroom for future development activities.
3.2 Fair value estimation
Effective 1 January 2009, the Group adopted the amendment to IFRS 7 for financial instruments that are measured in the balance sheet at
fair value. This requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:
– Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
– Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices) (level 2).
– Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
The Group has no financial assets and liabilities that are required to be measured at fair value.
4. Critical accounting estimates and judgements
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the
related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year are discussed below.
(a) Carrying value of fixed assets, intangible assets and impairment
Fixed assets and intangible assets are assessed for impairment when events and circumstances indicate that an impairment condition may
exist. The carrying value of fixed assets and intangible assets are evaluated by reference to their value in use and primarily looks to the
present value of management’s best estimate of the cash flows expected to be generated from the asset. In identifying cash flows
management firstly determine the cash generating unit or group of assets that give rise to the cash flows. The cash generating unit (“CGU”)
is the lowest level of asset at which independent cash flows can be generated. For this purpose the directors consider the Group to have
two CGUs: the VM and Dobrinskoye fields with the Dobrinskoye gas processing plant are treated as a single CGU, and the Uzen oil field is a
separate CGU.
The estimation of forecast cash flows involves the application of a number of significant judgements and estimates to a number of variables
including production volumes, commodity prices, operating costs, capital investment, hydrocarbon reserves estimates, inflation and
discount rates. Key assumptions and estimates in the impairment models relate to: commodity prices that are based on forward curves for
two years and the long-term corporate economic assumptions which include a long term oil price of US$50 per barrel. The models utilised
are based on the remaining reserves in the Proved category and future production profiles based on established field development plans.
Cost assumptions are based on current experience and expectations, and levels of export and mineral extraction taxes reflect rates set by
current legislation. A discount rate of 15% per annum is utilised in the models.
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 37 Volga Gas plc | Annual Report and Accounts 201 5
4. Critical accounting estimates and judgements continued
As at 31 December 2015, the Group’s impairment testing of the property, plant and equipment related to each CGU indicated that no
impairment was required. Variation in the long term oil price assumption to US$10 per barrel below the US$50 per barrel central
assumption, yielded net present values in excess of carrying value for each CGU. However, following unsuccessful operations on certain
non-producing wells during 2015, management decided to write-off assets associated with these specific operations. This is further
detailed in Note 5(c).
(b) Estimation of oil and gas reserves
Estimates of oil and gas reserves are inherently subjective and subject to periodic revision. In addition, the results of drilling and other
exploration or development activity will often provide additional information regarding the Group’s reserve base that may result in
increases or decreases to reserve volumes. Such revisions to reserves can be significant and are not predictable with any degree of
certainty. Management considers the estimation of reserves to represent a significant judgement in the context of the financial statements
as reserve volumes are used as the basis for assessing the useful life of oil and gas assets, applying depreciation to oil and gas assets and in
assessing the carrying value of oil and gas assets. Decreases in reserve estimates can lead to significant impairment of oil and gas assets
where revisions (positive or negative) can have a significant effect on depreciation rates from period to period. Management have
considered the sensitivity of this key assumption and in order for an impairment issue to present itself to the Group, reserve estimates
would need to reduce by more than 25%.
An independent assessment of the reserves and net present value of future net revenue (“NPV”) attributable to the Group’s three principal
fields, Dobrinskoye, Vostochny Makarovskoye and Uzenskoye, as at 1 August 2012, was prepared in accordance with reserve definitions set
by the Oil and Gas Reserves Committee of the Society of Petroleum Engineers (“SPE”).
(c) Income taxes
Significant judgement is frequently required in estimating provisions for deferred taxes. This process involves an assessment of temporary
differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the balance sheet.
5. Cost of sales and administrative expenses – Group
Cost of sales and administrative expenses are as follows:
Year ended 31 December
2015
US$ 000
2014
US$ 000
Production expenses 7,367 9,530
Mineral extraction taxes 5,877 8,344
Depletion, depreciation and amortisation 2,345 4,640
Cost of Sales 15,589 22,514
Total expenses are analysed as follows:
Year ended 31 December
2015
US$ 000
2014
US$ 000
Export sales related expenses 319 –
Field operating expenses 6,016 7,805
Mineral extraction tax 5,876 8,344
Depreciation & amortisation (a) 2,369 4,656
Exploration & evaluation (b) 635 –
Write off of development assets (c) 2,950 –
Salaries & staff benefits (d) 2,471 2,896
Directors’ emoluments and other benefits (e) 765 810
Audit fees (f) 203 201
Taxes other than payroll and mineral extraction 44 82
Legal & consulting 480 907
Fines and penalties – 99
Other 742 871
Total 22,870 26,671
(a) Depreciation: Substantially all depreciation relates to oil and gas assets and is included within cost of sales.
(b) Exploration and evaluation: The principal component was the write-off of costs relating to the Yuzhny Mironovskaya prospect on which an
unsuccessful well was drilled during the year ended 31 December 2015.
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5. Cost of sales and administrative expenses – Group continued
(c) Write-off of development assets: In the year ended 31 December 2015, the principal sources of the write-off of development assets were
impairment of the carrying value of the Sobolevskoye field, the Urozhainoye-2 licence area in which it is located and the cost of the
attempted sidetrack to the Sobolevskoye-11 well. There were also charges relating to unsuccessful operations on well in the Uzen field
and other minor asset write-offs.
(d) The average monthly number of employees (including executive directors) employed by the Group was:
Year ended 31 December 2015 2014
Exploration and production 149 141
Administration and support 42 23
Total 191 164
Their aggregate remuneration (excluding executive directors) comprised:
2015
US$ 000
2014
US$ 000
Wages and salaries 1,859 2,083
Payroll taxes & social contribution 577 761
Staff benefits 35 52
Total 2,471 2,896
The average monthly number of employees employed by the Company was:
Year ended 31 December 2015 2014
Chief Executive and Chief Financial Officers 2 2
Only directors are employed by the Company.
(e) Directors’ emoluments and other benefits: Directors’ emoluments comprised salaries of US$595,000 (2014: US$688,000), pension
contributions of nil (2014: US$21,000) and non-executive directors’ fees of US$170,000 (2014: US$100,000). There were no share grant
expenses in 2015 (2014: nil).
(f) Audit Fees – Group and Company: Disclosure of the fees paid to the Company’s auditor and its associates is given in Note 21.
6. Finance income – Group
Finance income comprises interest earned during the period on cash balances with different banks (note 13).
7. Other gains and losses – Group
Year ended 31 December
2015
US$ 000
2014
US$ 000
Foreign exchange gain 942 3,263
Loss from unauthorised bank transfers (727) –
Other gains 91 27
Total other gains and losses 306 3,290
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 39 Volga Gas plc | Annual Report and Accounts 201 5
8. Current and deferred income tax – Group
Year ended 31 December
2015
US$ 000
2014
US$ 000
Current tax:
Current income tax (3) –
Adjustments to tax charge in respect of prior periods – –
Total current tax (3) –
Deferred tax:
Adjustments to tax charge in respect of prior periods – –
Origination and reversal of timing differences 559 (3,229)
Total deferred tax 559 (3,229)
Total tax credit/(charge) 556 (3,229)
The tax charge in the Group income statement differs from the theoretical amount that would arise using the weighted average tax rate
applicable to profits of the consolidated entities as follows:
Year ended 31 December
2015
US$ 000
2014
US$ 000
(Loss)/profit before income tax (4,620) 16,287
Tax calculated at domestic tax rates applicable to (profits)/losses in the respective countries 1,038 (3,104)
Tax effect of items which are not deductible or assessable for taxation purposes:
Non-deductible expenses (450) (287)
Other tax adjustments (32) 162
Income tax credit/(charge) 556 (3,229)
The weighted average applicable tax rate was 22.5% (2014: 19.1%).
Deferred taxation is attributable to the temporary differences that exist between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. The tax effects of temporary differences that give rise to deferred taxation are
presented below:
31 December
2015
US$ 000
Differences
recognised
in other
comprehensive
income
US$ 000
31 December
2014
US$ 000
Differences
recognised
US$ 000
31 December
2013
US$ 000
Tax effects of taxable temporary differences:
Exploration and production assets (2,724) 1,173 (3,897) 2,848 (6,745)
Property, plant & equipment (1,039) 447 (1,486) 1,085 (2,571)
Total (3,763) 1,620 (5,383) 3,933 (9,316)
Tax effect of deductible temporary differences:
Tax losses carry forward 2,866 (745) 3,611 (6,542) 10,153
Trade and other receivables – – – 87 (87)
Property, plant and equipment – – – – –
Total 2,866 (745) 3,611 (6,455) 10,066
Net tax effect of temporary differences (897) 875 (1,772) (2,522) 750
Deferred income tax assets are recognised for tax loss carry forwards to the extent that the realisation of the related tax benefit through
the future taxable profits is probable. As at 31 December 2015, deferred income tax assets of US$1,098,000 (2014: US$706,000) and
deferred tax liabilities of US$1,995,000 (2014: US$2,478,000) have been recognised. Tax losses in respect of Cyprus and the UK do not
expire. The Group has not recognised a deferred tax asset of US$1,950,000 in respect of tax losses and other short-term timing differences
in the UK (2014: US$1,711,000).
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9. Basic and diluted profit per share – Group
Profit per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of
ordinary and diluted shares in issue during the year.
Year ended 31 December 2015 2014
Net (loss)/profit attributable to equity shareholders (US$ per share) (0.050) 0.161
Diluted net profit attributable to equity shareholders (0.050) 0.161
Net (loss)/profit attributable to equity shareholders (US$ 000) (4,064) 13,058
Basic weighted number of shares 81,017,800 81,017,800
Dilutive share options outstanding – 195,503
Diluted number of shares 81,017,800 81,213,303
As at 31 December 2015 1,332,967 options were excluded from the weighted average diluted number of shares calculation because their
effect would have been anti-dilutive (2014: 1,137,464). The average market value of the Company’s shares for the purpose of calculating the
dilutive effect of share options was based on quoted market prices for the year during which the options were outstanding.
10. Intangible assets – Group
Intangible assets represent exploration and evaluation assets such as licences, studies and exploratory drilling, which are stated at historical
cost, less any impairment charges or write-offs.
Note
Work in
progress:
exploration
and
evaluation
Exploration
and
evaluation Total
At 1 January 2015 151 3,595 3,746
Additions – 606 606
Write offs and impairments 5(b) – (635) (635)
Transfers – – –
At 31 December 2015 151 3,566 3,717
Exchange adjustments (34) (816) (850)
At 31 December 2015 117 2,750 2,867
Work in
progress:
exploration
and
evaluation
Exploration
and
evaluation Total
At 1 January 2014 258 6,180 6,438
Additions – – –
Impairments – – –
Transfers – – –
At 31 December 2014 258 6,180 6,438
Exchange adjustments (107) (2,585) (2,692)
At 31 December 2014 151 3,595 3,746
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 41 Volga Gas plc | Annual Report and Accounts 201 5
11. Property, plant and equipment – Group
Movements in property, plant and equipment, for the years ended 31 December 2015 and 2014 are as follows:
Cost
Development
assets
US$ 000
Land &
buildings
US$ 000
Producing
assets
US$ 000
Other
US$ 000
Total
US$ 000
At 1 January 2015 8,523 842 57,944 701 68,010
Additions 378 – 9,422 – 9,800
Write-offs and impairments (673) – (2,338) (51) (3,062)
Transfers (6,181) – 6,181 – –
At 31 December 2015 2,047 842 71,209 650 74,748
Accumulated depreciation
At 1 January 2015 – – (9,589) (599) (10,188)
Adjustment for assets written off – – 10 51 61
Depreciation – – (2,384) (66) (2,450)
At 31 December 2015 – – (11,963) (614) (12,577)
Exchange adjustments (910) (192) (12,766) (13) (13,881)
NBV at 31 December 2015 1,137 650 46,480 23 48,290
Cost
Development
assets
US$ 000
Land &
buildings
US$ 000
Producing
assets
US$ 000
Other
US$ 000
Total
US$ 000
At 1 January 2014 9,170 1,446 98,439 784 109,839
Additions 5,547 – 82 – 5,629
Transfers (901) – 901 – –
At 31 December 2014 13,816 1,446 99,422 784 115,468
Accumulated depreciation
At 1 January 2014 – – (11,017) (551) (11,568)
Depreciation – – (4,635) (49) (4,684)
At 31 December 2014 – – (15,652) (600) (16,252)
Exchange adjustments (5,293) (604) (35,418) (82) (41,397)
NBV at 31 December 2014 8,523 842 48,353 102 57,819
12. Non-current assets – Group
As at 31 December
2015
US$ 000
2014
US$ 000
VAT recoverable 152 24
Other non-current assets 3 44
Total other non-current assets 155 68
Management believes that it may not be able to recover all VAT specific to contractors’ payments within the 12 months of the balance sheet
date. Therefore this VAT is classified as a non-current asset.
13. Term deposits, cash and cash equivalents – Group and Company
Group Company
At 31 December
2015
US$ 000
2014
US$ 000
2015
US$ 000
2014
US$ 000
Cash at bank and on hand 6,769 15,767 4,529 6,786
Short term bank deposits – – – –
Total cash and cash equivalents 6,769 15,767 4,529 6,786
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13. Term deposits, cash and cash equivalents – Group and Company continued
An analysis of Group deposits, cash and cash equivalents by bank and currency is presented in the table below:
Group Company
At 31 December
Bank Currency
2015
US$ 000
2014
US$ 000
2015
US$ 000
2014
US$ 000
United Kingdom
Barclays Bank PLC USD 4,750 6,943 4,485 6,606
Barclays Bank PLC GBP 44 180 44 180
Russian Federation
Unicreditbank RUR 70 123 – –
Unicreditbank USD 195 3,492 – –
ZAO Raiffeisenbank RUR 825 2,986 – –
ZAO Raiffeisenbank USD 740 1,970 – –
ZAO Raiffeisenbank EUR 132 15 – –
Other banks and cash on hand RUR 13 58 – –
Total cash and cash equivalents 6,769 15,767 4,529 6,786
14. Inventories – Group
At 31 December
2015
US$ 000
2014
US$ 000
Production consumables and spare parts 704 1,060
Crude oil inventory 363 39
Total inventories 1,067 1,099
15. Other receivables – Group
Group Company
At 31 December
2015
US$ 000
2014
US$ 000
2015
US$ 000
2014
US$ 000
VAT receivable 80 81 22 31
Prepayments 298 202 – –
Trade receivables 987 579 – –
Other accounts receivable 84 56 – –
Total other receivables 1,449 918 22 31
Prepayments are to contractors and relate to initial advances made in respect of drilling, construction and other projects. Trade receivables
relate to sales of gas and condensate. The receivables were settled on schedule subsequent to the balance sheet date.
16. Share capital and share premium – Group
The following summarises the movement in the share capital and share premium of the Company for the years ended 2014 and 2015.
Number of
shares
Share capital
US$ 000
Share
premium
US$ 000
At 1 January 2015 81,017,800 1,485 –
Issues of shares – – –
At 31 December 2015 81,017,800 1,485 –
Number of
shares
Share capital
US$ 000
Share
premium
US$ 000
At 1 January 2014 81,017,800 1,485 165,873
Cancellation of share premium (165,873)
Issues of shares – – –
At 31 December 2014 81,017,800 1,485 –
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 43 Volga Gas plc | Annual Report and Accounts 201 5
16. Share capital and share premium – Group continued
On 9 July 2014 the capital reduction approved by shareholders at the Company’s Annual General Meeting on 6 June 2014 became effective
following confirmation by the High Court, the filing of the Court Order and a Statement of Capital with Companies House and the fulfilment of
certain minor undertakings given to the Court. As a result, the Share Premium Account of the Company, amounting to US$165.9 million, was
cancelled and the equivalent sum credited to the Company’s Profit and Loss Account, thereby creating distributable reserves.
The total number of authorised ordinary shares is 330,720,100 (2014: 330,720,100) with a par value of £ 0.01 per share (2014: £ 0.01 per share).
Share-based compensation
Share options and other share-based awards have been granted to certain directors. There were no shares issued to directors under such
schemes during 2015 (2014: nil).
2008 Executive Share Option Plan
On 15 July 2008 the Group announced a new Executive Share Option Plan (“ESOP”). During 2008, the Company granted options to acquire
1,137,464 ordinary shares to Mikhail Ivanov under the terms of the ESOP. The options may be exercised at a price of 405p per share and
vested in equal portions on May 2010, 2011 and 2012 and will remain outstanding until May 2017. In January 2009, the Company granted
568,732 share options to Tony Alves under the ESOP. A total of 195,503 share options vested in eight semi-annual tranches over a period of
four years under conditions related to the Company’s share price. The options have an exercise price of £1.00. As of 17 December 2012 no
further options were eligible for vesting. There were no share grant expenses in 2015 (2014: nil).
The fair value of share options outstanding as at 31 December 2015 is measured by use of the Black-Scholes pricing model with the
following assumptions:
Year ended 31 December 2015
2008 Executive Share
Option Plan
Share price 29.5p
Exercise price 100.0p – 405.0p
Expected volatility 43.5%
Expected life 1-2 years
Risk free rate 0.5%
17. Other reserves – Group
At 31 December
2015
US$ 000
2014
US$ 000
Currency translation reserves (91,350) (76,049)
Share grant reserve 5,233 5,233
Total other reserves (86,117) (70,816)
18. Accumulated profit/(loss) – Group and Company
Group Company
At 31 December
2015
US$ 000
2014
US$ 000
2015
US$ 000
2014
US$ 000
Retained profits/(losses) 145,114 (30,779) 155,566 (5,797)
Profit/(loss) for the year (4,064) 13,058 (102,956) (1,472)
Equity dividends paid (1,013) (3,038) (1,013) (3,038)
Cancellation of share premium – 165,873 – 165,873
Accumulated profit/(loss) 140,037 145,114 51,597 155,566
19. Trade and other payables
Group Company
At 31 December
2015
US$ 000
2014
US$ 000
2015
US$ 000
2014
US$ 000
Trade payables 2,467 268 89 16
Taxes other than profit tax 750 881 – –
Customer advances 932 524 – –
Total 4,149 1,673 89 16
The maturity of the Group’s and the Company’s financial liabilities are all between 0 to 3 months.
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20. Investments – Company
Investments in subsidiaries, comprising ordinary share capital, are accounted for at cost. The Company’s subsidiaries are as follows:
Name Jurisdiction Nature of operations % Owned From
Woodhurst Holdings Ltd. Cyprus Intermediate Holding Company 100% October 2005
Pre-Caspian Gas Company Russia Oil & gas exploration and production 100% May 2006
Gaznefteservice Russia Oil & gas exploration and production 100% September 2006
Shropak Investments Ltd Cyprus Dormant 100% June 2007
Volga Gas (Cyprus) Ltd. Cyprus Intermediate Holding Company 100% August 2007
Gazservice Russia Special purpose entity 99% October 2008
Volga Gas Finance Ltd. UK Intermediate Holding Company 100% March 2010
To avoid certain legal restrictions on land ownership in October 2008 Pre-Caspian Gas Company acquired a 99% shareholding in ZAO
Gazservice. Subsequently, Pre-Caspian Gas Company sold an unimproved plot of land to ZAO Gazservice at cost basis.
Company
31 December
2014
US$ 000
Additions
US$ 000
Impairment
US$ 000
31 December
2015
US$ 000
Investments in Woodhurst Holdings 150,683 – (101,759) 48,924
Investments in Volga Gas (Cyprus) 1,551 – – 1,551
Total investments 152,234 – (101,759) 50,475
The Company funds its activities in the Russian Federation via Woodhurst Holdings (“Woodhurst”), the Company’s Cyprus registered
subsidiary. The directors considered that, as a result of the long term depreciation of the Ruble, the value of the Company’s investment
in Woodhurst was impaired. The reduced valuation of the investment is aligned with the value of shareholders’ equity in Woodhurst as at
31 December 2015.
21. Audit fees – Group and Company
During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditor and associates:
Year ended 31 December
2015
US$ 000
2014
US$ 000
Fees payable to Company’s auditor for the audit of Parent Company and consolidated financial statements 183 177
– Audit of the Company’s subsidiaries pursuant to legislation 20 24
– Audit-related assurance services 32 31
– Other services pursuant to legislation 3 27
Total 238 259
22. Related Party Transactions – Group and Company
The Group is controlled by Baring Vostok Private Equity Funds III and IV, which respectively own 48.9% and 9.76% (in aggregate 58.66%) of
the Company’s shares. The Baring Vostok Private Equity Funds exercise their control through a number of nominee holding companies. The
remaining 41.34% of the shares are widely held.
The following transactions concerning purchases of goods and services were carried out by the Group with related parties:
Related party Relationship Nature of transactions
Year ended 31 December
2015 2014
Baring Vostok Cyprus Limited Affiliated with controlling shareholder Rent, services – 5
Year-end balances arising from transactions with related parties:
Due to related parties
31 December
2015 US$ 000
31 December
2014 US$ 000
Baring Vostok (Cyprus) Limited 12 12
Notes to the IFRS Consolidated Financial Statements
continued
Financial Statements 45 Volga Gas plc | Annual Report and Accounts 201 5
22. Related Party Transactions – Group and Company continued
All transactions with related parties were made on commercial basis.
The following transactions were carried out between the Company and its wholly-owned subsidiaries:
Group Company Relationship Nature of transactions
Year ended 31 December
2015 2014
Woodhurst Holdings Limited 100% directly-owned subsidiary Reduction of receivables due – 11,092
Year-end balances arising from transactions with subsidiaries
31 December
2015 US$ 000
31 December
2014 US$ 000
Accounts receivable from subsidiaries
Woodhurst Holdings Limited 4,735 4,606
Accounts payable to subsidiaries
Woodhurst Holdings Limited 1,357 1,357
Key management
Key management of the Company is considered to be the directors. Details of key management compensation are presented in the
Directors’ Remuneration Report and in note 5(d) above.
23. Contingencies and Commitments
23.1 Capital commitments
As of the balance sheet date all material licence commitments have been met.
23.2 Taxation
Russian tax, currency and customs legislation is subject to varying interpretations and changes which can occur frequently. Management’s
interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and
federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in
their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in
the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to
review by the authorities in respect of taxes for three calendar years preceding the year of review, but under certain circumstances, reviews
may cover longer periods.
At 31 December 2015, management believes that its interpretation of the relevant legislation is appropriate and the Group’s tax, currency
and customs positions will be sustained.
23.3 Restoration, rehabilitation, and environmental costs
The Group operates in the upstream oil industry in the Russian Federation and its activities may have an impact on the environment. The
enforcement of environmental regulations in the Russian Federation is evolving and the enforcement posture of government authorities is
continually being reconsidered. The Group periodically evaluates its obligation related thereto. The outcome of environmental liabilities
under proposed or future legislation, or as a result of stricter interpretation and enforcement of existing legislation, cannot reasonably be
estimated at present, but could be material.
Under the current levels of enforcement of existing legislation, management believes there are no significant liabilities in addition to
amounts which are already accrued and which would have a material adverse effect on the financial position of the Group.
23.4 Oilfield licences
The Group is subject to periodic reviews of its activities by governmental authorities with respect to the requirements of its oilfield licences.
Management of the Group correspond with governmental authorities to agree on remedial actions, if necessary, to resolve any findings
resulting from these reviews. Failure to comply with the terms of a licence could result in fines, penalties, licence limitation, suspension or
revocation. The Group’s management believes any issues of non-compliance would be resolved through negotiations or corrective actions
without any materially adverse effect on the financial position or the operating results of the Group.
The principal licences of the Group and their expiry dates are:
Field Licence holder
Licence
expiry date
Karpenskiy OOO Pre-Caspian Gas Company 2021
Urozhainoye-2 OOO Pre-Caspian Gas Company 2032
Vostochny-Makarovskoye OOO Gaznefteservice 2026
Dobrinskoye OOO Gaznefteservice 2026
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Notice is hereby given that the Annual General Meeting (the “AGM”) of Volga Gas plc (the “Company”) will be held at the London office of
Baring Vostok at 2nd Floor, 25 Old Burlington Street, London W1S 3AN on 10 June 2016 at 10.00 a.m. for the following purposes:
Ordinary Resolutions
1. To receive and adopt the Company’s accounts for the year ended 31 December 2015 and the Directors’ Report.
2. To reappoint Ronald Freeman, who retires by rotation, as a director.
3. To reappoint Aleksey Kalinin, who retires by rotation, as a director.
4. To reappoint Stephen Ogden, who retires by rotation, as a director.
5. To reappoint KPMG LLP as auditor of the Company until the conclusion of the next general meeting at which accounts are laid before the
members of the Company.
6. To authorise the directors to determine the remuneration of the auditor of the Company.
7. That the directors be and they are hereby generally and unconditionally empowered to exercise all the powers of the Company to allot
shares in the Company and/or to grant rights to subscribe for or to convert any security for shares in the Company (together “Relevant
Securities”) up to a maximum aggregate nominal amount of £500,000 to such persons and at such times and on such terms as they think
proper, provided that this authority shall expire the earlier of (i) 15 months from the passing of this resolution, or (ii) the conclusion of
the AGM of the Company to be held in 2017 (unless renewed, varied or revoked by the Company prior to or on such date), save that this
authority shall allow the Company to make offers or agreements before the expiry of such authority which would or might require
Relevant Securities to be allotted after such expiry and the directors shall be entitled to allot Relevant Securities pursuant to any such
offer or agreement as if this authority had not expired; and all unexercised authorities previously granted to the directors to allot
Relevant Securities be and are hereby revoked.
Special Resolutions
8. That the directors be and they are hereby empowered pursuant to Sections 570 and 573 of the Companies Act 2006 (the “Act”) to allot
equity securities (as defined in Section 560 of the Act) for cash; pursuant to the authority conferred by Resolution 7 set out in this Notice
convening the AGM (the “Notice”) as if Section 561 of that Act did not apply to any such allotment, provided that this power shall be
limited to:
(a) the allotment of equity securities in connection with a rights issue, open offer or other offer of securities in favour of the holders of
ordinary shares on the register of members at such record date(s) as the directors may determine where the equity securities
respectively attributable to the interests of the ordinary shareholders are proportionate (as nearly as may be) to the respective
numbers of ordinary shares held by them on any such record date(s), subject to such exclusions or other arrangements as the
directors may deem necessary or expedient to deal with fractional entitlements or legal or practical problems arising under the laws
of any overseas territory or the requirements of any regulatory body or stock exchange or by virtue of shares being represented by
depositary receipts or any other matter; and
(b) the allotment (otherwise than pursuant to sub-paragraph (a) above) to any person or persons of equity securities up to an aggregate
nominal amount of £100,000.
And the power conferred hereby shall expire upon the expiry of the general authority conferred by resolution 7 set out in this Notice (unless
renewed, varied or revoked by the Company prior to or on such date), save that the Company shall be entitled to make offers or agreements
before the expiry of such power which would or might require equity securities to be allotted after such expiry and the directors shall be
entitled to allot equity securities pursuant to any such offer or agreement as if the power conferred hereby had not expired.
9. That the Company be generally and unconditionally authorised for the purposes of section 701 of the Act, to make market purchases
(within the meaning of section 693 of the Act) of fully-paid ordinary shares of 1p each (“Shares”) on such terms and in such manner as the
directors of the Company may decide provided that:
(i) the maximum number of Shares that may be purchased by the Company pursuant to this authority is 12,144,000 (representing
approximately 14.99% of the Company’s issued ordinary share capital at the date of this Notice;
(ii) the minimum price (exclusive of expenses) which may be paid for any such Shares shall not be less than the nominal value of that
Share at the time of purchase;
(iii) the maximum price (exclusive of expenses) which may be paid for any Shares purchased pursuant to this authority is an amount equal
to the higher of (a) an amount equal to 105% of the average of the middle market prices shown in the quotations for the Company’s
Shares in the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which that Share
is contracted to be purchased; and (b) an amount equal to the higher of the price of the last independent trade of an ordinary share
and the highest current independent bid for an ordinary share as derived from the London Stock Exchange; and
(iv) unless previously varied, revoked or renewed, the authority conferred by this resolution shall expire on the earlier of 30 June 2017 or
at the end of the next annual general meeting of the Company to be held in 2017, but the Company may make a contract to purchase
Shares under this authority before its expiry which will or may be completed wholly or partly after the expiry of this authority, and
may complete such a purchase as if this authority had not expired.
Registered Office: BY ORDER OF THE BOARD
40 Dukes Place Tony Alves
London Company Secretary
EC3A 7NH 31 March 2016
Notice of Meeting 47 Volga Gas plc | Annual Report and Accounts 201 5
Notes:
1. Resolutions 1-7 are ordinary resolutions. For these resolutions to be passed, a simple majority of the votes cast at the Company’s AGM must be in favour of the resolutions.
Resolutions 8 and 9 are special resolutions. For these resolutions to be passed, at least three-quarters of the votes cast at the AGM must be in favour of the resolution.
2. Share buy-back (Resolution 9). The purpose of Resolution 9 is to permit the Company to purchase its own shares in the market under the terms described therein. Shares so
purchased would be cancelled and the issued share capital of the Company accordingly reduced.
3. Only those members entered on the register of members of the Company at 6.00 p.m. on 8 June 2016 or, in the event that this meeting is adjourned, in the register of members
as at 6.00 p.m. on the day two days before the date of any adjourned meeting, shall be entitled to attend and vote at the meeting in respect of the number of ordinary shares
registered in their names at that time. Changes to the entries on the register of members after 6.00 p.m. on 8 June 2016 or, in the event that this meeting is adjourned, in the
register of members after 6.00 p.m. on the day two days before the date of the adjourned meeting, shall be disregarded in determining the rights of any person to attend or
vote at the meeting.
4. A member entitled to attend, speak and vote at the meeting convened by the notice set out above is entitled to appoint a proxy to attend, speak and, on a poll, to vote in his
place. To appoint more than one proxy you may photocopy this form. Please indicate the proxy holder’s name and the number of shares in relation to which they are authorised
to act as your proxy (which, in aggregate, should not exceed the number of shares held by you). Please also indicate if the proxy instruction is one of multiple instructions being
given. All forms must be signed and should be returned together in the same envelope.
5. A form of proxy is enclosed. To be effective, it must be deposited at the office of the Company’s registrars (Capita Asset Services, PXS, 34 Beckenham Road, Beckenham, Kent
BR3 4TU) so as to be received not later than 48 hours before the time appointed for holding the AGM. Completion of the proxy does not preclude a member from subsequently
attending and voting at the meeting in person if he or she so wishes.
6. To change your proxy instructions simply submit a new proxy appointment using the methods set out in notes 3 and 4 above. Note that the cut-off time (in note 3 above) for
receipt of proxy appointments also apply in relation to amended instructions; any amended proxy appointment received after the relevant cut-off time will be disregarded.
Where you have appointed a proxy using the hard-copy proxy form and would like to change the instructions using another hard-copy proxy form, please contact the Company’s
registrars. If you submit more than one valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will take precedence.
7. In order to revoke a proxy instruction you will need to inform the Company using one of the following methods:
(a) by sending a signed hard copy notice clearly stating your intention to revoke your proxy appointment to the Company’s registered office address. In the case of a member
which is a company, the revocation notice must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any
power of attorney or any other authority under which the revocation notice is signed (or duly a certificated copy of such power of authority) must be included with the
revocation notice; or
(b) by sending an email to [email protected].
In either case, the revocation notice must be received by the Company’s registrars no later than the cut-off time set out in note 3 above.
8. The register of interests of the directors and their families in the share capital of the Company and copies of contracts of service of directors with the Company or with any of its
subsidiary undertakings will be available for inspection at the registered office of the Company during normal business hours (Saturdays and public holidays excepted) from the
date of this notice until the conclusion of the AGM.
9. To appoint a proxy or to give or amend an instruction to a previously appointed proxy via the CREST system, the CREST message must be received by the issuer’s agent RA10 no
later than 48 hours before the meeting date. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the
CREST Applications Host) from which the issuer’s agent is able to retrieve the message. After this time any change of instructions to a proxy appointed through CREST should
be communicated to the proxy by other means. CREST Personal Members or other CREST sponsored members, and those CREST Members who have appointed voting service
provider(s) should contact their CREST sponsor or voting service provider(s) for assistance with appointing proxies via CREST. For further information on CREST procedures,
limitations and system timings please refer to the CREST Manual. We may treat as invalid a proxy appointment sent by CREST in the circumstances set out in Regulation 35(5) (a)
of the Uncertificated Securities Regulations 2001. In any case your proxy form must be received by the Company’s registrars no later than 48 hours before the meeting date.
10. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided they do not do so
in relation to the same shares.
11. Under section 319A of the 2006 Act, the Company must cause to be answered any question relating to the business being dealt with at the Annual General Meeting put by a
member attending the meeting unless answering the question would interfere unduly with the preparation for the meeting or involve the disclosure of confidential
information, or the answer has already been given on a website in the form of an answer to a question, or it is undesirable in the interests of the Company or the good order of
the meeting that the question be answered.
Members who have any queries about the Annual General Meeting should contact the Company Secretary by email on [email protected]. Members may not use any electronic
address or fax number provided in this notice or in any related documents (including the Form of Proxy) to communicate with the Company for any purpose other than those
expressly stated.
12. Information regarding the Annual General Meeting, including information required by section 311A of the 2006 Act, and a copy of this notice of Annual General Meeting is
available from www.volgagas.com.
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Statements 48 Volga Gas plc | Annual Report and Accounts 201 5
Glossary of T echnical T erms
2-D seismic geophysical data that depicts the subsurface strata in two dimensions.
3-D seismic geophysical data that depict the subsurface strata in three dimensions. 3-D seismic typically provides a more detailed and accurate interpretation of
the subsurface strata than 2-D seismic.
abandonment application of a cement plug to close a well and welding of a steel plate to the top of the well; the well is then plugged and abandoned.
bbl the standard barrel of crude oil or other petroleum product is 42 US gallons (approximately 159 litres).
bcf billion cubic feet.
bcm billion cubic metres.
best estimate the term “best estimate” is used here as a generic expression for the estimate considered to be the closest to the quantity that will actually be
recovered from the accumulation between the date of the estimate and the time of abandonment.
boe barrels of oil equivalent, being for natural gas the energy equivalent on one barrel of oil. The usual ratio is to equate 6,000 cubic feet to one barrel of
oil equivalent.
condensate liquid hydrocarbons associated with the production from a primarily natural gas reservoir.
field means an area consisting of either a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural
feature and/or stratigraphic condition.
gas natural gas.
gas processing facilities together with the laboratory, gathering pipelines and storage facilities (if any), a plant comprising one or more units such that after conditioning the
gas will be of pipeline quality as, specified by Gazprom, such units may include dehydration, sweetening and separation of natural gas liquids.
gas-water contact bounding surface in a reservoir above which predominantly gas occurs and below which predominantly water occurs.
hydrocarbons compounds formed from the elements hydrogen (H) and carbon (C) and existing in solid, liquid or gaseous forms.
Kungurian Salt a layer of salt laid down during the lower Permian age which occurs in the Northern Caspian Petroleum Province.
licence area the particular subsoil plot specified in the subsoil licence issued by the applicable Russian federal authority, which the licence holder has the right to
use for the purpose and on the terms specified in the subsoil licence. A licence area may contain one or more fields or may encompass only a portion of
a field.
mcm thousand cubic metres.
mmbbls million barrels.
mmBOE million barrels of oil equivalent.
natural gas hydrocarbons that are gaseous at one atmosphere of pressure at 20°C. It can be divided into lean gas, primarily methane but often containing some
ethane and smaller quantities of heavier hydrocarbons (also called sales gas) and wet gas, primarily ethane, propane and butane as well as smaller
amounts of heavier hydrocarbons; partially liquid under atmospheric pressure.
petroleum naturally occurring liquids and gases which are predominantly comprised of hydrocarbon compounds.
possible reserves are those unproven reserves that, on the available evidence and taking into account technical and economic factors, have a 10% chance of
being produced.
probable reserves are those reserves in which hydrocarbons have been located within the geological structure with a lesser degree of certainty because fewer wells have
been drilled and/or certain operational tests have not been conducted. Probable reserves are those reserves that, on the available evidence and taking
into account technical and economic factors, have a better than 50% chance of being produced.
prospective resources are those quantities of hydrocarbons which are estimated, on a given date, to be potentially recoverable from undiscovered accumulations.
proved plus probable
reserves
sum of the proved reserves and the probable reserves calculated in accordance with SPE standards.
proved reserves include reserves that are confirmed with a high degree of certainty through an analysis of development history and/or volume method analysis of the
relevant geological and engineering data. Proved reserves are those that, based on the available evidence and taking into account technical and
economic factors, have a better than 90% chance of being produced.
reserves quantities of petroleum which are anticipated to be commercially recoverable from known accumulations from a given date forward.
reservoir a porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by
impermeable rock or water barriers and is separate from other reservoirs.
risk factor for contingent resources means the estimated chance, or probability, that the volumes will be commercially extracted; for prospective resources
means the chance or probability of discovering hydrocarbons in sufficient quantity for them to be tested to the surface, this, then, is the chance or
probability of the prospective resource maturing into a contingent resource.
SPE standards reserves definitions consistent with those approved in March 2007 by the Society of Petroleum Engineers and the World Petroleum Congresses.
sub-salt below the Kungurian salt layer.
supra-salt above the Kungurian salt layer. Corporate Directory
Registered Office
40 Dukes Place
London EC3A 7NH
United Kingdom
Company Secretary
Tony Alves
of the registered office
Nominated Adviser and Broker
Stifel Nicolaus Europe Limited
150 Cheapside
London EC2V 6ET
United Kingdom
Auditor
KPMG LLP
15 Canada Square
London E14 5GL
United Kingdom
Lawyers and Solicitors to the Company as to English and Russian Law
As to English law:
Akin Gump Strauss Hauer & Feld
8th Floor, Ten Bishops Square
London E1 6EG
United Kingdom
As to Russian law:
Akin Gump Strauss Hauer & Feld LLP
Geneva House 7 Petrovka Street
Moscow 107031
Russian Federation
Registrar
Capita Registrars
34 Beckenham Road, Beckenham
Kent BR3 4TU
United Kingdom
Corporate Communications/PR
FTI Consulting
200 Aldersgate, Aldersgate Street
London EC1A 4HD
United Kingdom Volga Gas plc Annual Report and Accounts 2015
Volga Gas plc
40 Dukes Place
London
EC3A 7NH
www.volgagas.com ### summary: |
Flomerics Group PLC
Annual Report 2007
INVESTING IN OUR FUTURE
DELIVERING OUR POTENTIAL 02 Financial highlights
03 Chairman’s statement
04 Chief Executive’s review
06 Delivering our potential through exploiting
market opportunities
08 Delivering our potential through leveraging our
global brand and international sales presence
10 Electronics Cooling
12 Mechanical Design
14 Business review
16 Board of Directors
17 Corporate governance statement
19 Directors’ remuneration report
21 Directors’ report
23 Statement of Directors’ responsibilities
24 Independent auditors’ report to the shareholders
of Flomerics Group PLC
25 Consolidated income statement
26 Consolidated statement of changes in equity
27 Consolidated balance sheet
28 Consolidated cash flow statement
29 Notes to the consolidated financial statements
64 Company balance sheet
65 Notes to the Company financial statements
68 Information for shareholders Flomerics Group PLC Annual Report 2007 1
The market addressed by Flomerics’ products continues to expand due to the ever
increasing industrial demands of design and function.
Our products and services enable designers and engineers to predict the flow of liquids
and gases and heat transfer in engineering designs of a diverse nature:
– electronic systems
– valves, pumps and pipes
– buildings including airport terminals, data centres and atriums
– vehicles such as cars, trains and aircraft
– engines
– heating, ventilating and cooling systems including fans and heat exchangers
– marine design
– lighting, including both conventional and LED systems
Within electronics our tools provide great value to our customers by allowing design
engineers to understand and optimise the thermal properties of chips and packages
through innovative software simulation and specialist test equipment.
We continue to drive improvements in software performance and breadth of
application for the benefit of our customers and to increase shareholder value.
INVESTING IN OUR FUTURE
DELIVERING OUR POTENTIAL FINANCIAL HIGHLIGHTS
+27%
CASH
£3.0m (2007)
£2.3m (2006)
+1 4%
DIVIDEND PER SHARE
1.6p (2007)
1.4p (2006)
TURNOVER BY REGION
1 Asia: £3.67m +35%
2 Europe: £7 .45m +25%
3 US: £5.15m -7%
1
3
2
TURNOVER
£16.3m (2007)
£14.2m (2006)
+1 4%
ADJUSTED PROFIT BEFORE TAX
£1.3m (2007)
£1.5m (2006)
-1 7%
2 Flomerics Group PLC Annual Report 2007 CHAIRMAN’S STATEMENT
During 2007 there was good progress with the strategic
repositioning of Flomerics following the acquisition of NIKA GmbH
(“NIKA”) in July 2006. Flomerics is continuing to maintain a strong
competitive position in its original field, the application of fluid flow
simulation to electronics cooling, where it is a world leader. It now
addresses this specialist market both by its original product,
FLOTHERM, and by the EFD product range acquired from NIKA. At
the same time the Company is taking advantage of EFD to address
much wider applications of fluid flow simulation and hence a much
larger market. The electromagnetics simulation business (“the EM
business”) was disposed of in January 2008 so that Flomerics can
have greater focus on fluid flow simulation.
Good progress was made with integrating the FLOMERICS and
NIKA technologies and increasing the sales team to implement the
new strategy. The Company is still at an early stage in building the
EFD business outside of its original markets, but the strong growth
in sales of the product has demonstrated the significant benefits
that the investments can bring to future periods.
Results
Total revenues for the year ended 31 December 2007 were up by
14% at £16.3m (2006: £14.2m). If revenues from the discontinued
EM business are excluded, revenues were up by 18% to £14.6m
(2006: £12.4m).
Profit before tax, amortisation of intangible assets (excluding
software and R&D capitalisation), goodwill impairment, share-based
payments and exceptionals (“adjusted PBT”) was £1.3m (2006:
£1.5m) reflecting the investments made during the year. There were
no exceptional items in 2007 (2006: £222,000). The unadjusted loss
Flomerics Group PLC Annual Report 2007 3
FLOMERICS IS CONTINUING TO MAINTAIN
A STRONG COMPETITIVE POSITION IN ITS
ORIGINAL FIELD, THE APPLICATION OF
FLUID FLOW SIMULATION TO ELECTRONICS
COOLING, WHERE IT IS A WORLD LEADER.
“TOTAL REVENUES FOR THE YEAR ENDED
31 DECEMBER 2007 WERE UP BY 14%
AT £16.3M.”
for the year was £1.90m (2006: £0.80m profit) and Basic loss per
share was 8.81p (2006: earnings per share: 4.45p)
Cash generated from operations was £1.9m (2006: £0.9m).
Cash balances for the Group at 31 December 2007 were £2.97m
(2006: £2.34m). After the year end £1.6m cash was received from
the disposal of the EM Business. As at 31 March 2008 cash
balances were in excess of £5.5m.
Dividend
The board is pleased with the progress being made and is proposing
that the dividend should be increased by 14% to 1.6p per share
(2006: 1.4p). Subject to approval at the Annual General Meeting,
the dividend will be paid on 3 June 2008 to shareholders on the
register at 9 May 2008.
Regional performance
In Europe and Asia-Pacific there was good revenue growth of 25%
and 35%, respectively, compared to 2006. In the US, revenue fell
slightly as a result of the loss of some key sales staff, but we now
have a full team in place to implement the new strategy there. The
breakdown of turnover by region was: Europe 45.8%, Asia Pacific
21.5% and US 31.7%.
Impairment of intangible assets
The main impact of IFRS on the 2007 accounts was that the
acquisition of NIKA has been restated under IFRS 3 and a value
attributed to the intangible assets acquired (such as customer lists
and technology) with the balance deemed to be goodwill. These
intangible assets have been amortised over an appropriate period
and the residual goodwill arising was subject to an impairment
review. After this review goodwill was written down by £2.22m
resulting in a total charge to the P&L of £3.1m in respect of
these two items.
Disposal
On 20 December 2007 the Board announced the disposal of the
Group’s electromagnetics business to CST GmbH for a consideration
of £1.6m. The sale was completed on 31 January 2008 and the
gain on disposal will be recognised in 2008. The proceeds will be
used to enhance the Company’s position for future growth in
its core business areas.
Outlook
There is the opportunity for sales of the EFD product range to
continue growing strongly and to make an increasingly significant
contribution to the business. Investments in sales and marketing
during 2007 have placed the Company in an excellent position
to take advantage of the wider market opportunity for the EFD
products whilst maintaining Flomerics’ leading position in the field
of electronics cooling. As a result, the Directors are excited about
the future and confident that the investments will start to deliver
a significant increase in shareholder value.
David Mann, Chairman
28 April 2008 CHIEF EXECUTIVE’S REVIEW
“FLOMERICS CELEBRATES ITS 20TH
ANNIVERSARY AS AN INDEPENDENT
COMPANY IN 2008, PLACING IT FIRMLY
INTO A RARE AND ELITE GROUP OF
COMPANIES THAT HAVE PROSPERED
FOR SUCH A LONG PERIOD.“
2007 was a year of investment for Flomerics: investment in
expanding our sales and support teams to drive sales of the EFD
products acquired in 2006 (as part of the NIKA GmbH acquisition);
investment in marketing to begin to build the ‘EFD’ brand in North
America and in Europe outside of its original markets and investment
in collaboration of our development operations in London, Moscow
and India. Much was accomplished during the year which has put
us into a strong position to build sales and take advantage of the
synergies between our various products and technologies in 2008
and beyond.
Investment in Sales
The early part of 2007 saw our Regional Sales Directors active in
expanding their teams to take advantage of the opportunity to
sell the EFD products in territories where NIKA had not previously
invested. The main focus for this was in the USA, France and the
UK. Finding the right people and organising the expanded teams to
give the best coverage of the geography and the opportunities took
longer than we had anticipated. However we finished the year with
a full complement of sales people and the engineers to support
their activities. Alongside the recruitment exercise we were active
in making sure that all our engineers were trained in our full suite
of Computational Fluid Dynamics (CFD) products (EFD, FLOTHERM
and FLOVENT).
Investment in Marketing
Following the disposal of the EM Business the Group is now focused
on the CFD market. This broadly divides into two sub-markets:
– Electronics Cooling (covered by our FLOTHERM, EFD and
MicReD products)
– Mechanical Design (covered by our EFD and FLOVENT products)
A market survey carried out in 2007 confirmed once again that
Flomerics’ flagship product, FLOTHERM, remains the clear market
leader in thermal analysis of electronic equipment. At the same
time, the EFD products, which have enjoyed great success in central
Europe and in Japan but at the time of the acquisition by Flomerics
were little known outside of these territories, have seen a significant
increase in brand awareness in both North America and other parts
of Europe.
The relationships with our mechanical CAD (Computer Aided
Design) partners, in particular SolidWorks and PTC, continued and
in the case of SolidWorks saw the release of a new product called
FloXpress. FloXpress is a new flow simulation product that is fully
embedded within SolidWorks®2008 3D CAD software and is
available free of charge to all SolidWorks®2008 users. It is a cut-
down version of the popular COSMOSFloWorks product – also
developed by Flomerics – that enables engineers and designers
to simulate complex, 3D fluid flow and heat transfer processes via
a simple, wizard-driven user interface inside the SolidWorks user
environment. The release of this product means a big increase in the
number of mechanical engineers able to access this remarkable
MUCH WAS ACCOMPLISHED DURING THE
YEAR WHICH HAS PUT US INTO A STRONG
POSITION TO BUILD SALES AND TAKE
ADVANTAGE OF THE SYNERGIES BETWEEN
OUR VARIOUS PRODUCTS AND
TECHNOLOGIES IN 2008 AND BEYOND.
4 Flomerics Group PLC Annual Report 2007 “THE INVESTMENTS MADE IN 2007 AND THE
INCREASED FOCUS ON OUR CORE CFD
BUSINESS WILL ALLOW US TO FOCUS ON
DELIVERING RESULTS IN 2008.”
Flomerics Group PLC Annual Report 2007 5
technology and this is expected to increase demand for Flomerics’
software products in the future.
Building familiarity with our products among young engineers and
students continues to be an important part of our marketing effort,
and 2007 saw a significant increase in the use of EFD by universities
and research institutes around the world.
Many of Flomerics’ customers are delighted to share their positive
experiences of using our products, and we continue to publish these
success stories to assist our sales efforts and provide strong editorial
for engineering publications and web portals around the world.
During 2007 we published a record number of success stories which
generated a good response, increased our web site traffic to record
levels and led to an increased number of requests for software
demonstrations – especially for the EFD products.
Research and Development
During 2007 we began the first phase of our plans to make better
use of the considerable expertise and technology managed and
developed in our development centres in the UK, Russia, India and
Hungary. The first evidence of this was the release of an electronics
specific module to be used alongside the EFD products. The EFD
products were already making inroads into certain electronics
applications but the introduction of this new product which saw
the UK based FLOTHERM and Moscow based EFD teams working
closely together, further enhances the dominant position that
Flomerics has long held in the thermal design of electronics.
Disposal of Electromagnetics Business
In December 2007 we announced the divestment of our
electromagnetics line of business (“the EM Business”) for £1.6m,
in order to increase our focus on areas where the Group has much
better opportunities for growth. This disposal was completed on
31 January 2008.
Since entering the electromagnetics simulation market in 1999,
Flomerics built up the usage of its products around the world.
However, with only a small share of the market the Directors
concluded that it would be difficult on our own to achieve a strong
competitive position in this field. The sale of the EM Business to
CST GmbH, a company that specialises in electromagnetics
simulation, signals the beginning of a strategic relationship
providing best-in-class solutions to customers requiring
understanding of both CFD and EM problems.
Finance Director
In December, we announced the appointment of a new Finance
Director. Keith Butcher joined Flomerics from DataCash Group plc
where he became Finance Director in 2002. During his time with
DataCash he played an important role as part of the management
team overseeing a substantial growth in the Company’s market
capitalisation. Keith’s considerable experience is already having
a positive impact on the running of the Company.
2007 Achievements
Despite difficult trading conditions in some territories we saw good
growth in billings in most areas of our business.
Regionally, Europe (+25%) and Asia-Pacific (+35%) saw good
revenue growth in 2007, with a particularly strong performance in
China and South-East Asia where we expect the opportunity to
continue to grow. US revenues fell slightly as we were impacted by
the loss of a number of key sales staff, however we now have a full
team in place. Turnover by region was: Europe 45.8% (2006: 42%),
Asia Pacific 21.5% (2006:19%) and US 31.7% (2006:39%).
Sales of the EFD products grew strongly and FLOVENT continued
the strong growth from last year.
Flomerics’ business is made up of new licence sales and recurring
revenues from existing customers who each year will renew their
commitment with us for a further year of maintenance or to extend
an existing lease arrangement. Particularly encouraging in 2007
was the growth in new business which saw an improving trend
throughout the year as the investments made in the sales teams
and in marketing started to have an impact.
Flomerics 20th Anniversary
Flomerics celebrates its 20th anniversary as an independent
company in 2008, placing it firmly into a rare and elite group of
engineering software companies that have prospered for such
a long period. This landmark is a testimony to the Company’s high-
integrity, people-oriented culture and its core concept of delivering
engineering simulation software for use by designers and engineers
rather than just full-time analysts and specialists. Flomerics has
reached an age that puts it among the most established companies
involved in computer aided engineering, and has just completed
a record-breaking fiscal year where it has achieved a new high in
revenue and seen its worldwide customer base grow to over 2,500
sites and over 7,000 individuals.
The Future
The last three years have seen many changes at Flomerics. In
addition to the incorporation of the former NIKA team, we have
changed almost half of our senior management team and by doing
so added a significant level of sales management experience. We
have made two acquisitions (MicReD and NIKA) and disposed of
our electromagnetics business. These changes together with the
investments made in 2007 and the increased focus on our core
CFD business will allow us to focus on delivering results in 2008.
We have had a very positive start to trading in 2008 and I believe
this demonstrates that the results of our hard work are beginning
to show through.
Gary Carter, Chief Executive
28 April 2008 DELIVERING OUR POTENTIAL
THROUGH EXPLOITING
MARKET OPPORTUNITIES
The addition of the EFD range of products has greatly expanded the
range of potential applications already addressed by our established
FLOTHERM and FLOVENT products. The market for general-purpose
fluid flow simulation tools is far larger than that for electronics cooling.
By expanding into these application areas we have considerably
increased the addressable market for our products.
Increasingly complex designs and competition for innovative and
efficient products is driving our customers to increasingly rely on
virtual prototypes built on a computer. This enables them to verify
the suitability and performance of a design before committing to
physical tests or manufacture.
We continue to evaluate new tools to add to our products in order to
improve our competitive advantage whilst allowing our customers to
maintain leadership in their fields.
6 Flomerics Group PLC Annual Report 2007 General-purpose
Computational Fluid Dynamics
Market – c£250m+
estimated growth 15%
Electronics Cooling
Market – c£45m+
estimated growth 10-15%
Flomerics
£16m
Flomerics Group PLC Annual Report 2007 7 8 Flomerics Group PLC Annual Report 2007
DELIVERING OUR POTENTIAL
THROUGH LEVERAGING
OUR GLOBAL BRAND AND
INTERNATIONAL SALES PRESENCE
Flomerics has a long-established market leadership and respected global
reputation in the field of electronics cooling. The last year has seen
a big investment in using this brand to continue to build the global
market for our recently-introduced EFD products. Through the efforts
of our global marketing and sales teams we are quickly establishing
a reputation for being an innovative supplier of fluid flow simulation
tools across a wide range of industries.
Our global sales and engineering organisation enables us to reach
all the main markets for our tools around the world. Their depth
of knowledge of our customers’ needs together with our range of
possible solutions gives us a respected and valued role as part of
their design processes.
We will continue to expand our global presence to take advantage
of business opportunities as they arise, enabling us to expand our
global brand and to offer our customers the class of service which
drives our success.
Communications
3 Com
Alcatel
Cisco
JDS Uniphase
Lucent Technologies
Marconi
Motorola
NEC
Nokia
Nortel
Computers
Apple
Casio
Dell
HP
IBM
Sony
Sun Microsystems
Toshiba
Office
Black & Decker
Blaupunkt
Bosch-Siemens
Grohe
Miele
Océ
Philips
Samsung
Sanyo
Defence
Airbus
BAE Systems
Bell Helicopter
General Dynamics
Lockheed Martin
Raytheon
US Army
NASA Ames
Semiconductors
Agilent
AMD
Infineon
Intel
Motorola
Philips
Semiconductor
ST Microelectronics
Texas Instruments
Transportation
Alstom Transport
Delphi Delco
Ford
Magneti Marelli
Robert Bosch
Siemens Automotive
Toyota Auto Body
Honda Flomerics Group PLC Annual Report 2007 9
Europe
France
Hungary
Germany
Italy
Russia
Sweden
United Kingdom
Spain
USA
San José
Boston
Austin
Rest of the World
China
Japan
India
Israel
Singapore
South Korea
Taiwan
South Africa
Sales Offices
Sales Agents
R&D Operations
US
32%
£5.15m
Global office network
Revenues by geography
Europe
46%
£7.45m
Asia
23%
£3.67m DELIVERING OUR POTENTIAL
ELECTRONICS COOLING
Electronics Cooling is the largest part of our business. Flomerics is
the provider of software tools used by electrical and mechanical
engineers to analyse temperatures in the design of circuit boards
and complete electronic systems. Our client list includes virtually
every major electronics company in the world.
Flomerics’ software enables design engineers to solve thermal
management problems quickly, accurately and cost-effectively.
As a result, our customers save time and money during design
and test cycles and accelerate time to market for their products.
Flomerics’ software tools and solutions for Electronics Cooling
are based around our world-leading FLOTHERM product, the EFD
product set and the MicReD portfolio of products.
FLOTHERM is the undisputed worldwide market-leading tool for
the thermal analysis of electronic equipment such as computers,
telecommunications equipment, control systems for the military
and even domestic hi-fi equipment. Heat affects the reliability and
lifetime of almost every type of electronic equipment. As products
develop, processing speeds increase, functionality grows and the
equipment gets smaller and more compact, so that thermal
problems intensify. FLOTHERM applies Computational Fluid
Dynamics (CFD) methods to predict airflow and temperatures
throughout electronic equipment. This enables engineers to identify
the source of any over-heating within the component or product
and devise the most effective design solutions.
FLO/PCB is a software tool for accelerating the conceptual design of
high-density printed-circuit boards. FLO/PCB improves communication
and collaboration between product marketing, electrical and
mechanical engineers, and enables them to address layout and
thermal issues as the functional specification is being defined.
ThermPaq is a new product that automates the thermal
characterisation of IC packages.
EFD is a software tool ideally suited to customers whose applications
do not demand the level of specialisation provided within
FLOTHERM. This has helped widen the range of customers who
can now benefit from Flomerics’ product set.
MicReD’s product set focuses on the thermal characterisation
of integrated circuit packages, MEMs, LEDs and printed
circuit boards.
10 Flomerics Group PLC Annual Report 2007
CLIENT: ANTARES ADVANCED TEST TECHNOLOGIES
PRODUCT: FLOTHERM
Background
An Antares customer that produces semiconductors for
military and space applications asked Antares to provide
a burn-in test system that could simultaneously handle
a wide range of products. In order to handle these products,
each socket would need to be capable of sensing the
temperature of the device, and either heating or cooling
the device to keep it at the proper burn-in temperature
which may be either above or below ambient temperature.
Solution
Flomerics’ FLOTHERM thermal simulation software enabled
the customer to test several types of devices simultaneously
at a wide range of temperatures both above and below
ambient. It enabled Antares to accurately predict the thermal
resistance of each design iteration without having to build
and test the prototype. The ability to quickly simulate
thermal performance made it possible to evaluate a large
number of different design concepts in a short space of time.
“I could easily identify thermal blockages by looking for
changes in temperature across a relatively small area, so
I was able to concentrate on reducing thermal resistance
in these areas.” Trevor Moody, Thermal and Mechanical
Engineer, Antares – FLOTHERM is the worldwide market-leading
software tool for the thermal analysis of
electronic equipment
– Clients include virtually every major electronics
company in the world
– The EFD family of products provides the user
with the ability to simulate fluid flow directly
across a wide range of applications and from
within the users design environment
Flomerics Group PLC Annual Report 2007 11 12 Flomerics Group PLC Annual Report 2007
DELIVERING OUR POTENTIAL
MECHANICAL DESIGN
Flomerics’ Engineering Fluid Dynamics (EFD) product family
is a new breed of software tools that apply the principles of
Computational Fluid Dynamics (CFD). These enable mechanical
design engineers to analyse complex fluid flow and heat transfer
processes and to optimise design across a wide range of products
and industries.
The Flomerics EFD product family is tightly integrated with leading
3D mechanical computer-aided design (MCAD) software such
as Pro/ENGINEER®, CATIA V5 and SolidWorks™. In the case
of SolidWorks™, the product is sold under the brand name
COSMOSFloWorks® through the SolidWorks™ sales channel.
The EFD family of products is our fully-featured general-purpose
3D fluid flow and heat transfer analysis software that has been
developed for design engineers. ‘EFD’ stands for Engineering Fluid
Dynamics and the software we have developed is significantly
different from traditional Computational Fluid Dynamics (CFD). The
key advantage of EFD over CFD is that EFD speaks the language of
engineers. EFD eliminates the complexities of engineering design,
enabling engineers to work more quickly, accurately and
productively. The EFD family, unlike FLOTHERM and FLOVENT, is not
specific to one industry sector and can therefore be sold to a much
broader range of customers.
FLOVENT is a powerful CFD software tool that predicts 3D airflow,
heat transfer and contamination distribution in and around
buildings of all types and sizes.
FLOVENT provides a fast and easy-to-use menu system designed
specifically for the optimisation of heating, ventilating and
air-conditioning (HVAC) systems. Applications span datacentres
and IT rooms, auditoriums, shopping malls, office buildings,
underground car parks, passenger vehicles and airport terminals.
Air quality and contaminant control applications include
laboratories, research facilities and hospitals.
FLOVENT uses the same software structure and analysis engine
as FLOTHERM, our market-leading product. However, the user
interface within FLOVENT has been specifically tailored to suit the
building design industry.
With our EFD products set, Flomerics has successfully extended its
range of solutions and applications beyond electronics to address
a market sector that is worth some £200m per year worldwide.
CLIENT: SHAW AERO DEVICES, USA
PRODUCT: EFD.LAB
Background
Shaw Aero Devices designs, develops and manufactures
a wide range of products in the areas of fuel, oil and
water/waste systems and components. Shaw’s customer was
interested in purchasing a large quantity of a solenoid valve
similar to one of their standard products for an unmanned
aerial vehicle. The customer specified a pressure drop of 0.75
pounds per square inch (psi) at a flow rate of 4.45 gallons per
minute while Shaw’s standard valve measured out at 6.09 psi.
Solution
In the past, this would have required building and testing
a series of designs in an effort to eliminate constrictions with
no guarantee of success. EFD.LAB reduced the time required
to simulate flow by analysing the model and automatically
identifying fluid and solid regions without user interaction.
Shaw were able to run a series of simulations and design
iterations, until they achieved the acceptable pressure level.
“CFD simulation dramatically reduced the time needed to
meet our customer’s demanding specifications. We moved
from the beginning of the project to the development
of an acceptable software prototype in only one day.”
Rob Preble, Project Engineer, Shaw Aero Devices, Inc Flomerics Group PLC Annual Report 2007 13
– Flomerics’ EFD solutions provide significant
advantages over conventional CFD products
– EFD eliminates the complexities of engineering
design, enabling engineers to work more
quickly, accurately and productively
– The EFD family widens our marketplace
by appealing to less specialised users with
a much broader range of applications.
– FLOVENT is the industry-leading product
focused on the HVAC market Group Financial Performance
Turnover for 2007 increased by 14% to a record £16.3m. Excluding
revenues from the Electromagnetic business (“the EM Business”)
revenues increased by 18% to £14.6m (2006: £12.4m).
Profit before tax, amortisation of intangible assets, goodwill
impairment, share-based payments and exceptionals (“adjusted
PBT”) was £1.3m (2006: £1.5m). The charge for the year for share-
based payments was £116,000 (2006; £97,000). There were no
exceptional items in 2007 (2006: £222,000). The unadjusted loss
for the year was £1.90m (2006: £0.80m profit) and Basic loss per
share was 8.81p (2006: earnings per share: 4.45p).
The goodwill impairment charge of £2.22m (2006: £nil) and
intangible amortisation charge of £684,000 (2006: £338,000) relate
to the acquisition of NIKA GmbH in July 2006. The impairment of the
NIKA carrying value resulted from a slower than anticipated growth in
sales of the NIKA products in 2007 and a prudent was view taken.
However the directors are encouraged by the start in 2008.
Costs
Cost of sales, which comprise royalties paid to third-party licensors
and manufacturing costs of the Group’s hardware products for the
full year, amounted to 4.4% of revenue (2006: 3.8%).
Research and development (R&D) costs have increased, mainly
because the cost of the NIKA development team in Moscow was
only included in the 2006 results from 1st July, but also reflecting
general wage inflation. Staff numbers in our teams in Moscow, the
UK and India however, have remained broadly similar since the
acquisition of NIKA. R&D costs accounted for 20.5% of Group
revenue in the period (2006: 20.4%).
Staff related costs are the Group’s biggest expense. These increased
to £9.5m from £7.6m while the average number of staff increased
from 191 to 242 reflecting the acquisition of NIKA. At the end of
the year the Group employed 229 people.
Disposal of the EM business
In December 2007 agreement was reached to dispose of the
electromagnetics part of the business (“the EM Business) for £1.6m.
Completion was on 31 January 2008 and we have since received
the proceeds from the purchaser. As a result the EM revenues have
been separately shown as discontinued operations and only costs
directly attributable to the EM business have been shown in this
column. General overheads and management costs are not allowed
to be attributed to this discontinued operations.
Cashflow and Financing
Cash balances at the end of 2007 were £2.97m (2006: £2.34m).
Cash generated from operating activities was £1.6m
(2006: £545,000). Debtors were £0.7m higher than they were
at the end of 2006 at £6.1m, in line with revenue growth.
Major non-operating cashflows included capital expenditure of
£386,000 (2006:£547,000); and a dividend paid of £299,000
(2006: £195,000). The net increase in cash was £0.6m.
BUSINESS REVIEW
“TURNOVER FOR 2007 INCREASED BY
14% TO A RECORD £16.3M. EXCLUDING
REVENUES FROM THE ELECTROMAGNETIC
BUSINESS REVENUES INCREASED BY 18%
TO £14.6M.”
14 Flomerics Group PLC Annual Report 2007 Flomerics Group PLC Annual Report 2007 15
The Group has borrowings of £305,000 which relates to the
mortgage on a freehold property that is being repaid over ten
years. There are no other borrowings.
Trade debtors at the end of 2007 were £5.3m (2006: £4.8m).
Debtor days at 31 December 2007 were 74 (2006: 72 days).
Share Capital
During the year 300,146 shares were issued to employees exercising
share options and as part of the acquisition of MicReD, taking total
shares in issue to 21,631,516 at 31st December 2007.
As part of the completion terms relating to the acquisition of NIKA
GmbH in 2006 1,265,000 shares were issued in March 2008 to the
vendors of NIKA GmbH.
Deferred Consideration
Under the terms of the acquisition of MicReD, deferred
consideration was due depending on the results in 2005 and 2006.
Following the performance in those years, the final instalment of
the deferred consideration of €380,000 was paid out during the
period and 209,000 Flomerics shares were issued.
Under the terms of the acquisition of NIKA GmbH, no deferred
consideration is due to be paid.
Impact of adoption of IFRS
The Group adopted International Financial Reporting Standards
(IFRS) with effect from 1 January 2006. The 2006 results were
restated under IFRS and announced to the market along with
our last interim results.
The main impact of IFRS on the 2007 accounts were that the
acquisition of NIKA has been restated under IFRS 3 and a value
attributed to the intangible assets acquired (such as customer lists
and technology) with the balance deemed to be goodwill. These
intangible assets have been amortised over an appropriate period
and the goodwill arising was subject to an impairment review. After
this review, goodwill was written down by £2.22m, resulting in
a total charge to the P&L in the year relating to intangible assets
and goodwill of £3.1m.
The other significant change under IFRS was the treatment of
research and development costs. Under IAS 38, if certain criteria are
satisfied the development costs must be capitalised and amortised
over the anticipated period that benefits are expected. The impact
of this in the 2007 accounts was £233,000 and the carrying value
on the Balance Sheet at the year end was £336,000.
Business risk
The principal risks facing the Group and discussed by the Board
relate broadly to the Group’s technology, the competitive
environment and managing a diverse range of products. These
are addressed by the Risk Committee, which meets on a regular
basis as outlined in the Corporate Governance section of the
Directors Report. During 2007 risks assessed included the loss of
key employees and the risk of the EM business not having critical
mass to compete in the market place. As a result of this assessment
the EM business was disposed of in January 2008 as detailed in
this report.
Interest rate risk
The Group is cash positive and places its balances on short-term
deposits with highly regarded financial institutions. Changes in
interest rates will affect the return on cash balances. The Group
does not hold or issue derivative financial instruments.
Liquidity risk
The Group is cash positive and has a policy of ensuring sufficient
funds are always available for its operating activities. While the need
for borrowing facilities are not required at present, the Board
continually monitors the Group’s cash requirements.
Foreign currency exchange risk
The majority of cash at bank is held in Sterling, Euro and US dollar
accounts however we also maintain modest balances in other
currencies. There are also trade balances and investments in these
currencies. The Group’s foreign exchange risk is hedged by way of
forward exchange contracts where appropriate and any resulting
gains or losses are recognised in the profit and loss account.
Credit risk
The Group has a small exposure to credit risk from credit sales. It is
the Group’s policy to assess the credit risk of new customers before
entering into contracts. Historically, bad debts across the Group
have been very low.
Shareholder information
The Group’s website at www.flomerics.com contains a wide range
of information about our activities and visitors can download copies
of the Report and Accounts as well as customer testimonials and
product demonstrations.
Keith Butcher, Finance Director
28 April 2008
03* £0.5m
04* £0.8m
05* £1.1m
06 £1.5m
07 £1.3m
Adjusted Profit before tax (£m)
03 £10.2
04 £10.2
05 £11.4
06 £14.2
07 £16.3
Turnover (£m)
* Profit under UK GAAP . 16 Flomerics Group PLC Annual Report 2007
BOARD OF DIRECTORS
Gary Carter
Gary Carter, aged 48, is the Chief Executive.
He read Mathematics at Leeds University
followed by a PhD in Computational Fluid
Dynamics. Following industry experience
with the aero-engine division of Rolls-Royce,
he moved into the world of engineering
simulation software where he spent
seventeen years working with Aveva, PDA
Engineering, MSC.Software and most
recently ANSYS in various development,
support, sales and marketing roles
culminating in his appointment as European
Vice President for ANSYS. He joined
Flomerics in January 2005.
David Mann
David Mann, aged 63, is the Non-Executive
Chairman. He read Theoretical Physics at
Cambridge University and worked for
Logica plc from 1969 to 1994, where he
became Chief Executive and then Deputy
Chairman. He is currently Chairman of Velti
plc (quoted on AIM), Deputy Chairman of
Charteris plc (AIM) and Senior Independent
Non-Executive Director of Aveva Group plc
(Official List). He is a Past President of the
British Computer Society and a Past Master
of the Information Technologists’ Company
in the City of London.
Peter Teague
Peter Teague, aged 53, is a Non-Executive
Director. He read Mathematics at London
University (Imperial College) and qualified
as a Chartered Accountant with KPMG in
London. Following experience in industry
and commerce with AT&T in a number of
positions, including Vice President and Chief
Financial Officer, AT&T UK, and with BBC
Worldwide as Finance & IT Director and
Managing Director, UK Region, he now
pursues a plural career. Peter is on the
board of a number of companies and
chairs the Audit Committee at Ofcom.
Tom Rowbotham
Tom Rowbotham, aged 66, is the
Non-Executive Deputy Chairman. He has
a PhD in the Transmission Line Modelling
(TLM) method of electromagnetic analysis
from Nottingham University. He was a
founder of Kimberley Communications
Consultants Ltd, and was Chairman when
it merged with Flomerics Group PLC in
1999. He has been Director of BT’s R&D
Laboratories. He is currently a Venture
Partner at Vesbridge Partners, Boston.
He is also on the boards of a number
of companies in the UK and USA.
Keith Butcher
Keith Butcher, aged 45, is the Finance
Director and Company Secretary. He read
Management Science at Warwick University
and qualified as a Chartered Accountant
with KPMG. Before joining Flomerics in
January 2008 he was Finance Director
of DataCash Group plc where during his
tenure the market capitalisation grew from
£8m to £300m. He previously worked for
PricewaterhouseCoopers and Diagonal plc. CORPORATE GOVERNANCE STATEMENT
Flomerics Group PLC Annual Report 2007 17
The Board of Directors is accountable to shareholders for the good corporate governance of the Group. The principles of corporate
governance are set out in the Financial Reporting Council’s revised Combined Code on corporate governance issued in 2006. Under
the rules of the Alternative Investment Market (AIM) the Company is not required to comply with the Code and the Board considers
that the size of the Group does not warrant compliance with all of the Code’s requirements. This statement sets out how the
principles of the Code that the Directors consider are relevant to Flomerics Group PLC are applied.
Board of Directors
The Non-Executive Chairman of the Company is David Mann. Gary Carter was appointed as Chief Executive in 2005. Tom
Rowbotham as the Non-Executive Deputy Chairman is the senior independent Non-Executive Director. Tim Morris stepped down
from the Board on 24 January 2007 and was replaced by Peter Teague as Chairman of the Audit Committee. Chris Ogle stepped
down as Finance Director on 31 December 2007 and was replaced by Keith Butcher. Wolfgang Biedermann, non-Executive Director,
stepped down from the Board on 15 April 2008.
The Board now comprises two Executive Directors (Chief Executive and Finance Director) and three Non-Executive Directors. For the
size of the Group, it is considered that this gives the necessary mix of industry specific and broad business experience necessary for
the effective governance of the Group. The Board meets regularly, normally on a monthly basis, and is particularly concerned with
the Group’s strategy.
The Group has a senior management team which is responsible for the day to day management of the Group. This is comprised of
the Chief Executive, the Finance Director, the Chief Technology Officer, Regional Directors for the US, Europe and Asia Pacific, the
Director of Marketing, Director of Software Development UK and India, Director of Software Development Moscow, and the
Product Director.
The Board met twelve times during the year, excluding ad hoc meetings convened to deal with procedural matters.
Board Meetings Audit Committee
Remuneration
Committee
Nominations
Committee Risk Committee
Director
No. of
possible
attendances
No.
attended
No. of
possible
attendances
No.
attended
No. of
possible
attendances
No.
attended
No. of
possible
attendances
No.
attended
No. of
possible
attendances
No.
attended
Chairman
D Mann 12 11225 5 11 n/a n/a
Executive Directors
G Carter 12 12225 5 11 n/a n/a
C Ogle* 12 12 2 2 n/a n/a n/a n/a 3 3
Non-Executive
Directors
T Morris** 1 1 n/a n/a n/a n/a n/a n/a n/a n/a
T Rowbotham 12 12225 5 1133
W Biedermann 12 10 n/a n/a n/a n/a n/a n/a n/a n/a
P Teague** 11 11 2 2 n/a n/a n/a n/a 3 3
* Chris Ogle resigned on 31 December 2007 and was replaced by Keith Butcher.
** Tim Morris resigned on 27 January 2007 and was replaced by Peter Teague.
Audit Committee
For the period under review, the Audit Committee comprised Peter Teague (Chairman) and David Mann with Gary Carter, Chris Ogle
and the external auditors generally in attendance. Peter Teague replaced Tim Morris on 24 January 2007 and Tom Rowbotham
stepped down from the Committee at the same time because it was felt that for the size of the company two independent Directors
is sufficient. The remit of the Committee is to ensure the continued operation of good financial practices throughout the Group;
to monitor that controls are in force to ensure the integrity of financial information; to review the interim statement and annual
financial statements; and to provide a line of communication between the Board and the external auditors. The Audit Committee
normally meets two times a year.
Remuneration Committee
A separate report on remuneration including the composition and remit of the Committee has been included on page 19. CORPORATE GOVERNANCE STATEMENT
18 Flomerics Group PLC Annual Report 2007
Risk Committee
The Risk Committee is chaired by the Non-Executive Deputy Chairman, Tom Rowbotham, and for the period under review comprised
Chris Ogle, the Finance Director, Ian Clark, the Product Manager for the company’s major product, FLOTHERM, and Andrew Manning,
the Director of Engineering Services for Flomerics, Inc. During 2007, the Committee was rationalised to comprise: Tom Rowbotham
as Chairman, Peter Teague and Chris Ogle. Keith Butcher replaced Chris Ogle in 2008.
This Committee was set up in 2000 in response to a recommendation of the Turnbull Report, which offered guidance to Directors on
complying with the internal control requirements of the Combined Code.
The role of the Committee is to identify the risks facing the business, to quantify their impact, and to ensure that they are managed
within acceptable levels.
During 2007, the Committee reviewed the current status of the management of major risks to the business, and the impact of the
actions that the executives had taken.
The highest priority risks were chosen after discussion with all the executives and the Board. The executives then drew up an action
plan to address each risk.
One senior executive was assigned responsibility for each risk in order to assure its continuous relevance, that actions were carried
out to plan, and that quarterly progress reports were produced. The Risk Committee reviewed these reports and informed the Board
about progress, while feeding back comments to the executives.
The Committee is satisfied that in every case the executives had taken the task of managing the risk programme very seriously and
the Risk Committee concludes that the actions taken during 2007 have resulted in significantly reduced risks for the business.
The principal risks facing the Group and discussed by the Board relate to the Group’s technology, the competitive environment and
managing a diverse range of products.
Nomination Committee
The Nomination Committee comprises David Mann, Tom Rowbotham and Gary Carter. It is chaired by David Mann, except when
matters concerning the Chairmanship are being discussed.
The Committee is responsible for reviewing the structure, size and composition of the Board, identifying suitable candidates for the
approval of the Board when vacancies arise and ensuring effective Board succession planning.
Peter Teague was appointed to the Board in January 2007 as a Non-Executive Director, replacing Tim Morris as Chairman of the
Audit Committee.
Keith Butcher was appointed to the Board in January 2008 as an Executive Director, replacing Chris Ogle as Finance Director.
Internal financial control
The Board is ultimately responsible for the Group’s system of internal financial control and for reviewing its effectiveness. This is
achieved through the following means:
The Group maintains a comprehensive process of financial reporting. The annual budget is reviewed and approved by the Board
before being formally adopted. The Board receives financial reports of the Group’s performance compared to the budget and prior
years with explanations of significant variances. In addition, monthly reforecasts and cash flow forecasts are presented to the Board.
A thorough recruitment process ensures, as far as possible, that its employees hold principles of the highest integrity. This is an
essential part of the Group’s culture.
The effectiveness of the Group’s internal financial control is the responsibility of the Audit Committee and, to the extent that they
are perceived to be a risk, of the Risk Committee. The maintenance and constant improvement of these controls is the responsibility
of the Finance Director. The external auditors review the internal financial controls relevant to expressing their audit opinion and
report to the Audit Committee on their findings where appropriate.
The existence of internal controls cannot entirely eliminate risk and no absolute assurance against loss to the Group can be made.
Going concern
The Board reports as to whether it is appropriate for the financial statements to be prepared on a going concern basis.
The Group’s finances are currently sound and the net funding position is positive. Looking beyond the annual budget, the product
roadmap and financial plans for the Group are reviewed and updated annually. On this basis, the Board continues to adopt the
going concern basis in preparing the financial statements. DIRECTORS’ REMUNERATION REPORT
Flomerics Group PLC Annual Report 2007 19
Remuneration Committee
The Remuneration Committee (“the Committee”) is chaired by David Mann and comprises David Mann (as Chairman) and
Tom Rowbotham. The Chief Executive is normally in attendance, except when his own remuneration is being discussed.
The principal function of the Committee is to set the remuneration and other benefits of the Executive Directors and senior
managers including pension contributions, share options and bonus payments. The Committee also approves the overall salary
increase made across the Group as recommended by the Chief Executive and it oversees all bonus and share option schemes.
The policy of the Committee is to pay remuneration comparable to other peer companies, within the limits of what can be afforded.
Bonus payments
The Committee oversees a bonus system for the senior management team which is reviewed annually. The intention of the scheme is
to ensure that the Executive Directors are strongly incentivised to exceed budget performance. 50% of the potential bonus payment
is directly related to the financial performance of either the entire Group or, where relevant, the area under their responsibility.
The other 50% is paid at the discretion of the Committee and is based on their individual performance.
During 2007, the Executive Directors and other senior managers, excluding the Chief Executive could earn up to a maximum of 50%
of their basic salary as a bonus. The Chief Executive could earn up to a maximum of 60% of his basic salary as a bonus. For 2007 the
profit for the Group was at a level whereby any bonuses paid to the senior management were entirely discretionary.
The Group also runs a scheme for employees whereby a portion of the Group’s pre-tax profit is set aside to be distributed amongst
the Group’s employees. For the year ended 31 December 2007, none of the Group’s profits have been set aside in this way.
Share Options
The Committee recognises that share options can play an important part in aligning the interests of shareholders, Directors and
staff. Share options that are granted have performance conditions attached, which ensure that the options only vest if those
conditions are met.
Directors’ Service Contracts
Executive Directors have “rolling” service contracts. The Chief Executive’s contract is terminable by either party giving twelve
months’ notice. In the case of all other Executive Directors the notice period is six months.
Non-Executive Directors do not have service contracts. Letters of agreement are in place dated 7 November 1995 for David Mann,
28 July 1999 for Tom Rowbotham and 6 February 2007 for Peter Teague. In each case, the arrangement is terminable with three
months’ notice.
Remuneration of Non-Executive Directors
Fees paid to Non-Executive Directors are detailed on page 20. The intention is to pay fees that are comparable with those paid by
companies of similar size and complexity. The remuneration of the Non-Executive Directors is proposed by the Chief Executive and
the Finance Director and approved by the Board. DIRECTORS’ REMUNERATION REPORT
20 Flomerics Group PLC Annual Report 2007
Directors’ Remuneration
Emoluments paid to Directors in the year comprised:
Salaries/
fees
£’000
Bonus
£’000
Benefits
£’000
Total
2007
£’000
Total
2006
£’000
D W Mann 30 – – 30 28
G C Carter 142 – 1 143 213
C J R Ogle* 124 20 1 145 127
T R Rowbotham 21 – – 21 19
P R Teague 17 – – 17 –
T R T Morris** 2 – – 2 13
336 20 2 358 400
Pension contributions
The Group made contributions under the Company Group Personal Pension Plan, a defined contribution scheme, as follows:
2007
£’000
2006
£’000
G C Carter 11 10
C J R Ogle* 10 9
21 19
Directors’ interests in Share Options
Share options have been granted to the following Directors under the Company’s Share option scheme:
No. of shares under option
At
31 December
2006
Issued
in year
Lapsed
in year
At
31 December
2007
Exercise
Price
Exercise
date
G C Carter 100,000 – – 100,000 70.0 2008-2015
G C Carter 100,000 – – 100,000 87.5 2008-2015
G C Carter – 100,000 – 100,000 86.0 2010-2017
C J R Ogle* 100,000 – – 100,000 54.5 2002-2009
C J R Ogle* 8,750 – – 8,750 84.0 2005-2012
C J R Ogle* 12,500 – – 12,500 51.0 2006-2013
C J R Ogle* 45,000 – – 45,000 61.5 2007-2014
C J R Ogle* 35,000 – – 35,000 70.0 2008-2015
C J R Ogle* 50,000 – – 50,000 98.5 2009-2016
* Resigned 31 December 2007.
** Resigned 27 January 2007.
DIRECTORS’ REPORT
Flomerics Group PLC Annual Report 2007 21
The Directors present their annual report on the affairs of the Group, together with the financial statements and auditors’ report,
for the year ended 31 December 2007.
Results and dividends
The consolidated income statement is set out on page 25 and shows the profit for the year.
The Directors recommend the payment of a dividend of 1.6p (2006: 1.4p) per ordinary share.
The consolidated loss for the year amounted to £1,896,000 (2006: profit £804,000).
Principal activities, trading review and future developments
The principal activities of the Group are the provision of virtual prototyping software. A review of the development of the business
during the year, that fulfils the requirements of the ‘Enhanced Business Review’, is given in the Chairman’s Statement on page 3 in
paragraphs headed ‘Results’ and ‘Regional performance’ and the KPIs are outlined in the Business Review on page 14. The
Chairman’s Statement also includes reference to the Group’s future prospects. An indication of the Group’s activities in research and
development is given in the Chief Executive’s review on pages 4 and 5.
Areas of operation
The Group’s headquarters and primary centre for research and development is in the United Kingdom. The Group also has research
and development centres in India and Russia. The Group also has sales and support offices in the United States of America, France,
Germany, Italy, China, Singapore, Sweden, Japan and India.
Financial instruments
The Group’s policy in respect of financial instruments is set out in note 31.
Political and charitable contributions
During 2007, the Group contributed a total of £50 (2006 – £1,864) to support local charities. The Group made no political donations.
Directors and their interests
The Directors of the Company during the year were
D W Mann Non-Executive Chairman
G C Carter Chief Executive
C J R Ogle Finance Director (resigned 31 December 2007)
T R Rowbotham Non-Executive Deputy Chairman
T R T Morris Non-Executive Director (resigned 24 January 2007)
W Biedermann Non-Executive Director (resigned 15 April 2008)
P R Teague Audit Committee Chairman (appointed 24 January 2007)
Subsequent to the year end Keith Butcher was appointed to the Board as Finance Director.
Details of Directors’ remuneration and Directors’ share options are given in the Report on Remuneration on page 20.
The Directors who held office at the end of the financial year had the following interests in the ordinary shares of the Company
as recorded in the register of Directors’ share and debenture interests:
At 31
December
2007
Ordinary
shares
No.
At 1
January
2007
Ordinary
shares
No.
D W Mann 167,195 167,195
D W Mann – non-beneficial 45,000 45,000
G C Carter 30,000 30,000
C J R Ogle* 22,500 22,500
T R Rowbotham 361,236 361,326
W Biedermann** – –
P R Teague – –
* Chris Ogle resigned as a Director on 31 December 2007.
** W Biedermann (resigned 15 April 2008), was a principal of Pricap Venture Partners AG until 30 June 2007. Pricap Venture Partners AG had
a significant shareholding in the Company throughout 2007. On 14 March 2008 they sold their entire shareholding.
Keith Butcher was appointed as a Director on 2 January 2008 and as at 28 April 2008 holds 100,000 shares.
There were no other changes in the Directors’ shareholdings between 31 December 2007 and 28 April 2008. DIRECTORS’ REPORT
22 Flomerics Group PLC Annual Report 2007
Directors’ share options
Details of Directors’ share options are provided in the Directors’ remuneration report on page 20.
Directors’ indemnities
The Company has made qualifying third party indemnity provisions for the benefit of its Directors which were made during the year
and remain in force at the date of this report.
Supplier payment policy
The Company’s policy, which is also applied by the Group, is to settle terms of payment with suppliers when agreeing the terms
of each transaction, ensures that suppliers are made aware of the terms of payment and abide by the terms of payment. Trade
creditors of the Group at 31 December 2007 were equivalent to 27 (2006 – 39) days’ purchases, based on the average daily amount
invoiced by suppliers during the year.
Significant shareholdings
As at 28 April 2008, notification had been received that the following were interested in more than 3% of the Company’s ordinary
share capital:
Number of
ordinary
shares
Percentage
of issued
ordinary
share
capital
Mentor Graphics Corporation 6,541,175 28.77
Kozo Keikaku Engineering 1,099,597 5.11
D G Tatchell 1,332,800 5.86
Disabled employees
Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant
concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment with the
Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and
promotion of disabled persons should, as far as possible, be identical to that of other employees.
Employee consultation
The Group places considerable value on the involvement of its employees and has continued to keep them informed on matters
affecting them as employees and on the various factors affecting the performance of the Group. This is achieved through formal
and informal meetings, the Company magazine and a special edition for employees of the annual financial statements. Employee
representatives are consulted regularly on a wide range of matters affecting their current and future interests.
Post balance sheet events
On 20 December 2007 the Board announced the disposal of the EM Business to CST GmbH for a consideration of £1.6m. The sale
was completed on 31 January 2008 and the gain on disposal will be recognised in 2008. Final payment was received in April 2008.
As part of the completion terms relating to the acquisition of NIKA GmbH in 2006 1,100,724 shares were issued in March 2008
to the vendors of NIKA GmbH.
Independent auditors
Each of the persons who is a Director at the date of approval of this annual report confirms that:
• so far as the Director is aware, there is no relevant audit information of which the company’s auditors are unaware; and
• the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any
relevant audit information and to establish that the Company’s auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985.
BDO Stoy Hayward LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them
will be proposed at the forthcoming Annual General Meeting.
By order of the Board
Keith Butcher
Secretary
28 April 2008
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
Flomerics Group PLC Annual Report 2007 23
Directors’ responsibilities
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the
financial position of the Group, for safeguarding the assets of the Company, for taking reasonable steps for the prevention and
detection of fraud and other irregularities and for the preparation of a Directors’ Report which complies with the requirements
of the Companies Act 1985.
The Directors are responsible for preparing the annual report and the financial statements in accordance with the Companies Act
1985. The Directors are also required to prepare financial statements for the Group in accordance with International Financial
Reporting Standards as adopted by the European Union (IFRSs) and the rules of the London Stock Exchange for companies trading
securities on the Alternative Investment Market. The Directors have chosen to prepare financial statements for the Company in
accordance with UK Generally Accepted Accounting Practice.
Group financial statements
International Accounting Standard 1 requires that financial statements present fairly for each financial year the Group’s financial
position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events
and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the
International Accounting Standards Board’s ‘Framework for the preparation and presentation of financial statements’. In virtually
all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. A fair presentation also requires the
Directors to:
• consistently select and apply appropriate accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable
information; and
• provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to
understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial
performance.
Parent company financial statements
Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the
state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements,
the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will
continue in business.
• make judgements and estimates that are reasonable and prudent; and
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and
explained in the financial statements.
Financial statements are published on the Group’s website in accordance with legislation in the United Kingdom governing the
preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance
and integrity of the Group’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing
integrity of the financial statements contained therein.
The maintenance and integrity of Flomerics Group PLC’s website is the responsibility of the Directors. The work carried out by the
auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that
may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom
governing the preparation and dissemination of the financial statements may differ in other jurisdictions. INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF FLOMERICS GROUP PLC
24 Flomerics Group PLC Annual Report 2007
We have audited the Group and parent Company financial statements (the “financial statements”) of Flomerics Group PLC for the
year ended 31 December 2007 which comprise the consolidated income statement, the consolidated statement of changes in equity,
the consolidated balance sheet, the consolidated cash flow statement, the related notes 1 to 34 and the Company balance sheet and
related notes A to K. These Group financial statements have been prepared under the accounting policies set out therein.
Respective responsibilities of Directors and auditors
The Directors’ responsibilities for preparing the annual report and Group financial statements in accordance with applicable law
and International Financial Reporting Standards (IFRSs) as adopted by the European Union and for preparing the parent Company
financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice) are set out in the statement of Directors’ responsibilities.
Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and have been properly prepared
in accordance with the Companies Act 1985 and whether the information given in the Directors’ report is consistent with those
financial statements. We also report to you if, in our opinion, the Company has not kept proper accounting records, if we have
not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’
remuneration and other transactions is not disclosed.
We read other information contained in the annual report, and consider whether it is consistent with the audited financial
statements. This other information comprises only the Chairman’s statement, the Chief Executive’s Review, the business review
and the Directors’ report. We consider the implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.
Our report has been prepared pursuant to the requirements of the Companies Act 1985 and for no other purpose. No person is
entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of
the Companies Act 1985 or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept
responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices
Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial
statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order
to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement,
whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the
presentation of information in the financial statements.
Opinion
In our opinion:
• the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the
state of the Group’s affairs as at 31 December 2007 and of its loss for the year then ended;
• the parent Company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted
Accounting Practice, of the state of the parent Company’s affairs as at 31 December 2007;
• the financial statements have been properly prepared in accordance with the Companies Act 1985; and
• the information given in the Directors’ Report is consistent with the Group financial statements.
BDO Stoy Hayward LLP
Chartered Accountants and Registered Auditors
London, United Kingdom
28 April 2008 CONSOLIDATED INCOME STATEMENT
Year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 25
Note
Continuing
operations
2007
£’000
Dis-
continued
operations
2007
£’000
Year
ended
2007
£’000
Continuing
operations
2006
£’000
Dis-
continued
operations
2006
£’000
Year
ended
2006
£’000
Revenue 14,647 1,623 16,270 12,433 1,788 14,221
Cost of sales (699) (31) (730) (519) (31) (550)
Gross profit 13,948 1,592 15,540 11,914 1,757 13,671
Other operating income 61 – 61 61 – 61
Impairment of goodwill (2,223) – (2,223) – – –
Other administrative expenses (13,845) (1,336) (15,181) (11,314) (1,279) (12,593)
Exceptional expenses – – – (222) – (222)
Total administrative expenses (16,068) (1,336) (17,404) (11,536) (1,279) (12,815)
Operating (loss)/profit 5 (2,059) 256 (1,803) 439 478 917
Finance income 7 66 – 66 101 – 101
Finance costs 8 (25) – (25) (164) – (164)
(Loss)/profit before tax (2,018) 256 (1,762) 376 478 854
Tax 9 (57) (77) (134) 93 (143) (50)
(Loss)/profit for the year (2,075) 179 (1,896) 469 335 804
(Loss)/earnings per share Note
2007
Pence
2006
Pence
From continuing operations:
Basic 12 (9.65) 2.59
Diluted 12 (9.65) 2.04
From continuing and discontinued operations:
Basic 12 (8.81) 4.45
Diluted 12 (8.81) 3.50
The notes on pages 29 to 63 form part of these financial statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2007
26 Flomerics Group PLC Annual Report 2007
Note
Year
ended
2007
£’000
Year
ended
2006
£’000
Balance at start of year 14,843 6,853
(Loss)/profit for the year (1,896) 804
Currency translation movement 1,018 (302)
Deferred tax on currency translation movement 21 (112) 16
Net income/(expense) recognised directly in equity 906 (286)
Total recognised income and expense for the year (990) 518
Dividends paid 11 (299) (195)
Share based payment 27 116 97
Issue of new shares 23, 24 43 7,603
Movements in merger reserve 24 145 –
Movements in share to be issued reserve 24 – (33)
Balance at end of year 13,858 14,843 CONSOLIDATED BALANCE SHEET
31 December 2007
Flomerics Group PLC Annual Report 2007 27
Note
2007
£’000
2006
£’000
Non-current assets
Property, plant and equipment 15 542 520
Investment property 16 – 1,189
Goodwill 13 5,706 7,554
Intangible assets 14 3,902 4,141
Deferred tax asset 21 253 423
Total non-current assets 10,403 13,827
Current assets
Inventories 18 110 33
Trade and other receivables 19 6,149 5,467
Cash and cash equivalents 19 2,971 2,339
Non current assets held for sale 31 1,492 –
Total current assets 10,722 7,839
Total assets 21,125 21,666
Current liabilities
Bank overdrafts and loans 20 (76) (71)
Trade and other payables 22 (5,847) (5,217)
Current tax liabilities (23) (14)
Total current liabilities (5,946) (5,302)
Non-current liabilities
Bank loans 20 (229) (305)
Deferred tax liabilities 21 (1,092) (1,216)
Total non current liabilities (1,321) (1,521)
Total liabilities (7,267) (6,823)
Total net assets 13,858 14,843
Equity
Share capital 23 216 213
Share premium account 24 1,775 1,735
Shares to be issued 24 1,112 1,112
Merger reserve 24 7,330 7,185
Translation reserves 24 716 (302)
Retained earnings 24 2,709 4,900
Total equity 13,858 14,843
The financial statements were approved by the Board of Directors and authorised for issue on 28 April 2008.
They were signed on its behalf by:
G C Carter K Butcher
Director Director CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2007
28 Flomerics Group PLC Annual Report 2007
Year
ended
2007
£’000
Year
ended
2006
£’000
Profit for the year (1,896) 804
Adjustments for:
Finance income (66) (101)
Finance costs 25 164
Income tax expense/(income) 134 50
Depreciation of property, plant and equipment 291 240
Depreciation of investment property 14 14
Amortisation of intangible assets 901 577
Impairment of goodwill 2,223 –
Share-based payment expense 901 97
Loss on disposal of property, plant and equipment – 2
Operating cash flows before movements in working capital 1,742 1,847
(Increase)/decrease in inventories (77) 30
(Increase) in receivables (682) (1,081)
Increase in payables 921 89
Cash generated by operations 1,904 885
Income taxes paid (191) (176)
Interest paid (25) (164)
Net cash from operating activities 1,688 545
Cash flows from investing activities:
Interest received 66 101
Proceeds on disposal of property, plant and equipment 24 5
Purchases of property, plant and equipment (333) 306
Purchase of intangibles (313) (312)
Acquisition of subsidiary (net of cash acquired) – (1,418)
Deferred consideration on acquisition of subsidiary (259) –
Net cash used in investing activities (815) (1,930)
Cash flows from financing activities:
Proceeds from issue of shares 38 –
Dividends paid (299) (195)
Repayment of loans (71) (68)
Net cash used in financing activities (332) (263)
Net increase/(decrease) in cash and cash equivalents 541 (1,648)
Cash and cash equivalents at the start of the year 2,339 4,081
Effect of foreign exchange rate changes 91 (94)
Cash and cash equivalents at end of year 2,971 2,339
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 29
1 General information
Flomerics Group PLC is a Company incorporated in the United Kingdom under the Companies Act 1985. The address of the
registered office is 81 Bridge Road, Hampton Court, Surrey, KT8 9HH. The nature of the Group’s operations and its principal activities
are set out in note 4 and in the Business review on pages 14 to 15.
The Directors have chosen to present these financial statements in the functional currency of the primary economic environment in
which the Group operates which is Pounds Sterling. Foreign operations are included in accordance with the policies set out in note 2.
At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied
in these financial statements were in issue but not yet effective:
IAS 1 Presentation of financial statements (revised)
IAS 23 Borrowing costs (revised)
IAS 27 Consolidated and separate Financial Statements (revised)
IFRS 3 Business Combinations (revised)
IFRS 8 Operating segments
IFRIC 12 Service concession arrangements
IFRIC 13 Customer loyalty programmes
IFRIC 14 IAS 19 – The limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction.
The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on
the financial statements of the Group except for any additional disclosures that may be required arising when IFRS 8 comes into
effect for periods commencing on or after 1 January 2009.
2 Significant accounting policies
Basis of accounting
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). The financial
statements have also been prepared in accordance with IFRSs adopted by the European Union and therefore the Group financial
statements comply with Article 4 of the EU IAS Regulation.
The principal accounting policies adopted are set out below.
First time adoption
The Group has adopted IFRS from 1 January 2006 (‘the date of transition’); please refer to note 34 for details of the transition.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company
(its subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial
and operating policies of an investee entity so as to obtain benefits from its activities. The Group income statement includes the
results of subsidiaries acquired or disposed of during the year from the effective date of acquisition or up to the effective date of
disposal, as appropriate.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line
with those used by the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Business combinations
The acquisition of subsidiaries or trade and assets, is accounted for using the purchase method. The cost of the acquisition is
measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity
instruments issued or to be issued, by the Group in exchange for control of the acquiree, plus any costs directly attributable to the
business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition
under IFRS 3 are recognised at their fair value at the acquisition date.
Goodwill arising on acquisition is recognised as an asset and initially measured at cost and is accounted for according to the
policy below.
The Group has taken the exemption conferred in IFRS 1, “First-time Adoption of International Financial Reporting Standards”, not
to restate business combinations prior to the transition date of 1 January 2006 under IFRS 3.
Property, plant and equipment
Property, plant and equipment is stated at cost or deemed cost less accumulated depreciation and any impairment in value. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
30 Flomerics Group PLC Annual Report 2007
2 Significant accounting policies continued
Depreciation
Depreciation is provided on all property, plant and equipment, other than freehold land, at rates calculated to write off the cost,
less estimated residual value based on prices prevailing at the date of acquisition, of each asset evenly over its expected useful life,
as follows:
– Computer hardware 20 – 33% per annum
– Fixtures and fittings 20 – 33% per annum
The carrying values of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate the
carrying value may not be recoverable.
The asset’s residual values, useful lives and methods are reviewed, and adjusted if appropriate, at each financial year end.
Investment property
Investment property, which is properly held to earn rentals is stated at its historic cost as the Group elected, under the transitional
arrangements available under IFRS 1, to use the previous carrying value under UK GAAP as deemed cost in transition. The investment
property is depreciated on a straightline basis of 2% per annum, however the land on which it is situated is not depreciated.
This property has been reclassified in the year to assets held for sale and is currently held on the books at market value less costs to sell.
Goodwill
Goodwill represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets,
intangible fixed assets and liabilities of a subsidiary, or acquired sole trade business at the date of acquisition. Goodwill is initially
recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is
recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in the Group income
statement and is not subsequently reversed.
For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from
the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually,
or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit
is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill
allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.
An impairment loss recognised for goodwill is not reversed in a subsequent period.
On disposal of a subsidiary the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject
to being tested for impairment at that date and subsequently as required by the provisions of IAS 36 “impairment of assets”.
Intangible assets
Intangible assets with a finite useful life are carried at cost less amortisation and any impairment losses. Intangible assets represent
items which have been separately identified under IFRS 3 arising in business combinations, or meet the recognition criteria of
IAS 38, “Intangible Assets”. These assets comprise of customer relationships, contract based asset, completed technology and
non competition agreements.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether
there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount
of the asset is estimated in order to determine the extent of the impairment loss (if any).
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value
of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount
of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in the income statement
as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as
a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would
have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an
impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the
reversal of the impairment loss is treated as a revaluation increase. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 31
2 Significant accounting policies continued
Amortisation of intangible assets acquired in a business combination is calculated over the following periods on a straight line basis:
Customer relationships – 10% per annum
Contract based assets – 50% per annum
Completed technology – over a useful life of 7 years
Non-competition agreement – 25% per annum
Amortisation of other intangible assets (computer software) is calculated using the straight-line method to allocate the cost of the
asset less its assessed realisable value over its estimated useful life, which equates to 33% to 50% per annum.
Impairment of financial assets
Determining whether a provision is required against trade receivables requires management to make a judgment of the likely
proportion of receivables that will not be recovered. In order to establish a reasonable provisioning level, therefore, the Directors
use historical trends in order to predict likely irrecoverable receivables at any point in time. When an event occurs which makes it
more likely than not that a debt will not be recovered, provision is made accordingly. For further discussion on trade and other
receivables refer to note 19 to the accounts.
Internally-generated intangible assets – research and development expenditure
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
Any internally-generated intangible asset arising from the Group’s development projects are recognised only if all of the following
conditions are met:
• The technical feasibility of completing the intangible asset so that it will be available for use or sale.
• The intention to complete the intangible asset and use or sell it.
• The ability to use or sell the intangible asset.
• How the intangible asset will generate probable future economic benefits. Among other things, the Group can demonstrate
the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally,
the usefulness of the intangible asset.
• The availability of adequate technical, financial and other resources to complete the development and to use or sell the
intangible asset.
• Its ability to measure reliably the expenditure attributable to the intangible asset during its development.
Internally-generated intangible assets are amortised on a straight-line basis over their useful lives of three years. Where no
internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in
which it is incurred.
Financial instruments
Financial assets and financial liabilities are recognised on the Group’s balance sheet at fair value when the Group becomes a party
to the contractual provisions of the instrument.
Trade receivables
Trade receivables represent amounts due from customers in the normal course of business. All amounts are initially stated at their
fair value and are subsequently carried at amortised costs, less provision for impairment.
Cash and cash equivalents
Cash and cash equivalents include cash at hand and deposits held at call with banks with original maturities of three months or less.
Financial liabilities and equity instruments
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.
An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Bank Borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges are
accounted for on an accruals basis in the income statement using the effective interest rate method and are added to the carrying
amount of the instrument to the extent that they are not settled in the period in which they arise.
Trade payables
Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest
rate method.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Derivative financial instruments
The Group’s activities expose it primarily to the financial risks of changes in foreign exchange rates. The Group occasionally
uses forward exchange contracts to hedge these exposures. The Group does not use derivative financial instruments for
speculative purposes.
The Group has elected not to adopt the hedge accounting provisions of IAS 39. Derivative financial instruments are initially
measured at fair value on the date that the contract is entered into and subsequently re-measured to fair value at each reporting
date. The gains and losses on re-measurement are taken to the income statement and reported in administrative expenses. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
32 Flomerics Group PLC Annual Report 2007
2 Significant accounting policies continued
Dividends
Final equity dividends are recognised when they are approved at a general meeting of the Company. No Interim dividends are paid.
Inventories
Inventories are stated at the lower of cost and net realisable value. Net realisable value represents the estimated selling price less all
estimated costs of completion and costs to be incurred in marketing, selling and distribution.
Where necessary an allowance is made for obsolete, slow moving and damaged inventories.
Employee share incentive plans
The Group issues equity-settled share-based payments to certain employees (including Directors). These payments are measured at
fair value at the date of grant by use of the Black-Scholes pricing model. This fair value cost of equity-settled awards is recognised on
a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the
effect of any non market-based vesting conditions. The expected life used in the model has been adjusted, based on management’s
best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. A corresponding credit is
recorded in equity in the share option account.
Leases
Leases taken by the Group are assessed individually as to whether they are finance leases or operating leases. Leases are classified as
finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other
leases are classified as operating leases.
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases.
Operating lease rental payments are recognised as an expense in the income statement on a straight-line basis over the lease term.
The benefit of lease incentives is spread over the term of the lease.
The Group currently has no material finance leases.
Taxation
The tax expense represents the sum of the current tax and deferred tax charges.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items
that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in
the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the
balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets
are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of
goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that
affects neither the tax profit nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in
which case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax
liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax
assets and liabilities on a net basis.
Share capital and share premium
There is one class of shares. When new shares are issued, they are recorded in share capital at their par value. The excess of the issue
price over the par value is recorded in the share premium reserve.
Incremental external costs directly attributable to the issue of new shares (other than in connection with a business combination) are
recorded in equity as a deduction, net of tax, to the share premium reserve. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 33
2 Significant accounting policies continued
Revenue recognition
Revenue represents the amounts receivable, net of sales taxes, on the provision of the Group’s software, maintenance, consultancy,
and other services such as training and hardware. When a sale is made to a customer of the Group’s software, the price normally
includes the provision of maintenance (for a perpetual licence this is only for the first year). The maintenance element is deferred
and is recognised over the period that the maintenance is provided. Appropriate amounts attributable to maintenance are deferred
for each type of licence.
The licence element of the sale is recognised as income when the following conditions have been satisfied:
1) The software has been provided to the customer in a form that enables the customer to utilise it;
2) There is a contractual relationship between the customer and the Group;
3) The ongoing obligations of the Group to the customer, aside from the maintenance, are minimal; and
4) The amount payable by the customer is determinable and there is a reasonable expectation of payment.
Revenue on the sale of hardware products is recognised when the risks and rewards of ownership have passed to the customer and
the Group’s work is substantially complete, which is usually upon delivery to the customer or his agent.
Retirement benefit costs
The Group operates defined contribution pension schemes. The amount charged to the income statement in respect of pension costs
and other post-retirement benefits is the contributions payable in the year.
Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments
in the balance sheet.
Operating profit
Operating profit is stated before finance income and finance costs.
Foreign exchange
The individual financial statements of each Group Company are presented in the currency of the primary economic environment in
which it operates (its functional currency). For the purpose of the consolidated financial statements, the result and the financial
position of each Group Company are expressed in pounds sterling, which is the functional currency of the Company, and the
presentation currency for the consolidated financial statements.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit
or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in
profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and
losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised
directly in equity.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are
transitioned at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange
relates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date
of transactions are used. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation
reserve. Such translation differences are recognised as income or an expenses in the period in which the operations is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign
entity and translated at the closing rate. The Group has elected to treat goodwill and fair value adjustments arising on acquisitions
before the date of transition to IFRS as sterling denominated assets and liabilities.
Non-current assets held for sale
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less
costs to sell.
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale
transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the
asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which
should be expected to qualify for recognition as a completed sale within one year from the date of classification. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
34 Flomerics Group PLC Annual Report 2007
3 Critical accounting judgements and key sources of estimation uncertainty
Critical judgments in applying the Group’s accounting policies
In the application of the Group’s accounting policies, which are described in note 2, the Directors are required to make judgments,
estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual
results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Key sources of estimation uncertainty
The following are the critical judgments that that the Directors have made in the process of applying the Group’s accounting policies
that have the most significant effect on the amounts recognized in the financial statements.
Capitalisation of internal research and development costs
In order to comply with the Group’s accounting policy relating to internally generated intangible assets (research and development
expenditure), the Directors are required to assess the fair value of the costs incurred on the Group’s development projects that are
allowed to be capitalized. The vast majority of these costs are salary related, representing the costs of the employees conducting the
research and development. In order to measure the costs that should be capitalized, the Directors conduct an exercise whereby they
estimate the proportion of each employee’s working hours that have been spent on qualifying research and development projects.
The Directors are then able to determine that this proportion of each employee’s salary is capital in nature, and is therefore accounted
for accordingly. The Directors are of the opinion that as a number of people are working on such projects at any time, and that they
can reliably assess the amount of time that is being spent by each individual on qualifying capital research, that this is a reasonably
accurate estimation technique. The total value of internal costs capitalized as intangible assets related to research and development
at the balance sheet date was £336,000 (2006 – £103,000).
Impairment of goodwill
Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which
goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise
from the cash-generating units and a suitable discount rate in order to calculate present value. Actual events may vary materially from
management expectation.
Following the impairment review the carrying value of goodwill for NIKA GmbH was impaired in the year by £2,223,000. The
Directors consider the impairment to be appropriate to reflect the slower than initially anticipated sales growth of the products
purchased with NIKA GmbH.
Deferred revenue policy
In establishing the Group’s deferred revenue policy the Directors have used their judgement to determine what proportion of
a licence sale relates to the licence and what proportion relates to the ongoing maintenance of that licence. The Directors have
based their judgement on the proportion of the list price of a licence with maintenance compared to the list price of the
maintenance only. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 35
4 Business and geographical segments
Business segments
For management purposes, the Group is currently organised into one operating division and it is on this basis that the Group reports
its primary segment information.
The principal activities of the Group’s operating division is the provision of virtual prototyping software and other related services.
The Group was also previously involved in electromagnetic virtual prototyping. This operation was discontinued during the period,
in accordance with IFRS 5. Please refer to note 10 for further details.
Segment information about these businesses is presented below:
2007
Software
sales
2007
£’000
Discontinued
operations
2007
£’000
Consolidated
2007
£’000
Revenue
External sales 14,647 1,623 16,270
Total revenue 14,647 1,623 16,270
Result
Segment result (2,059) 256
Operating loss (1,803)
Finance income 66
Finance costs (25)
Loss before tax (1,762)
Tax (134)
Loss after tax (1,896)
2006
Software
sales
2006
£’000
Discontinued
operations
2006
£’000
Consolidated
2006
£’000
Revenue
External sales 12,433 1,788 14,221
Total revenue 12,433 1,788 14,221
Result
Segment result 439 478
Operating profit 917
Finance income 101
Finance costs (164)
Profit before tax 854
Tax (50)
Profit after tax 804
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
36 Flomerics Group PLC Annual Report 2007
4 Business and geographical segments continued
Geographical segments
The Group’s operations are located in the United States of America, Europe and the Far East.
The following table provides an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods/services:
Sales revenue by
geographical market
2007
£’000
2006
£’000
United States of America 5,150 5,563
Europe 7,450 5,946
Far East 3,670 2,712
16,270 14,221
Revenue from the Group’s discontinued operations was derived as follows: United States of America (2007: £586,000, 2006: £832,000),
Europe (2007: £602,000, 2006: £477,000) and the Far East (2007: £435,000, 2006: £478,000).
The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment and
intangible assets, analysed by the geographical area in which the assets are located:
Carrying amount of
segment assets
Additions to property,
plant and equipment
and intangible assets
2007
£’000
2006
£’000
2007
£’000
2006
£’000
United States of America 2,781 2,677 13 68
Europe 17,201 17,843 594 529
Far East 1,143 1,008 39 21
21,125 21,528 646 618
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 37
5 Operating profit
2007
£’000
2006
£’000
Operating profit for the year has been arrived at after charging/(crediting):
Research and development costs 3,071 2,878
Depreciation of property, plant and equipment 291 240
Depreciation of investment property 12 12
Amortisation of intangible assets, other than development costs 874 471
Amortisation of internally-generated intangible assets included in other operating expenses 27 106
Staff costs (see note 6) 9,541 7,645
Exceptional costs in the prior year related to £112,000 exceptional staff costs and £110,000 exceptional restructuring costs.
The analysis of auditors’ remuneration is as follows:
2007
£’000
2006
£’000
Fees payable to the Company’s auditors for the audit of the Company’s annual accounts 25 25
Fees payable to the Company’s auditors and their associates for other services to the Group
– The audit of the Company’s subsidiaries pursuant to legislation 160 70
Total audit fees 185 95
Other services pursuant to legislation
– Tax services 43 26
– Acquisition of NIKA – 10
– IFRS 10 6
– Other services – 3
Total non-audit fees 53 45
Fees payable to BDO Stoy Hayward LLP and their associates for non-audit services to the Company are not required to be disclosed
because the consolidated financial statements are required to disclose such fees on a consolidated basis.
6 Staff costs
The average monthly number of employees (including Executive Directors) was:
2007
Number
2006
Number
Sales and marketing 63 52
Technical staff 146 109
Administration 33 30
242 191
£’000 £’000
Their aggregate remuneration comprised:
Wages and salaries 8,030 6,447
Social security costs 1,014 842
Other pension costs 497 356
9,541 7,645
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
38 Flomerics Group PLC Annual Report 2007
7 Finance income
2007
£’000
2006
£’000
Interest on bank deposits 50 101
Foreign exchange gains 16 –
66 101
8 Finance costs
2007
£’000
2006
£’000
Interest on bank overdrafts and loans 25 26
Foreign exchange losses – 138
25 164
9 Tax
2007
£’000
2006
£’000
Current income tax:
Current year 183 175
Adjustment to prior period 17 (15)
Total current income tax 200 160
Deferred tax (note 21):
Original and reversal of temporary differences (73) (110)
Effect of change in tax rate 7 –
Total deferred tax (66) (110)
Total tax charge in the income statement 134 50
UK Corporation tax is calculated at 30% (2006:30%) of the estimated assessable profit for the year.
Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
Reconciliation of continuing and discontinued operations:
2007
£’000
2006
£’000
Continuing operations:
Current tax 123 17
Deferred tax (66) (110)
57 (93)
Discontinued operations:
Current tax 77 143
Total 134 50
2007
£’000
2006
£’000
Tax relating to items (credited)/charged to equity:
Deferred tax on currency translation movements 112 (16)
112 (16)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 39
9 Tax continued
The charge for the year can be reconciled to the profit per the income statement as follows:
2007
£’000
2007
%
2006
£’000
2006
%
Profit before tax:
Continuing operations (2,018) 376
Discontinued operation 256 478
(1,762) 854
Tax at the UK corporation tax rate of 30% (2006 30%) (529) 30 257 30
Tax effect of expenses that are not deductible in determining taxable profit 53 (3) 48 5
Tax effect of impairment of goodwill 667 (38) 50 6
Tax effect of unrelieved current year losses 161 (9) – –
Effect of different tax rates of subsidiaries operating in other jurisdictions (29) 2 (34) (4)
Tax effect of non-taxable income – – (15) (1)
Tax effect of utilisation of tax losses not previously recognised – – (76) (8)
Effect of change in UK tax rate as deferred tax 7 – – –
Over/(under) provision of tax in prior years 17 1 (14) (2)
Tax effect of enhanced deduction for UK research and development cost (199) 11 (194) (23)
Utilisation of bought forward credit in respect of overseas taxation (14) – – –
Tax effect of unrelieved overseas tax – – 28 3
Tax expense and effective tax rate for the year 134 (8) 50 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
40 Flomerics Group PLC Annual Report 2007
10 Discontinued operations
On 20 December 2007, the Group entered into a sale agreement to dispose of the electromagnetics division, which carried out all of
the Group’s electromagnetic virtual prototyping operations. The disposal completed on 31 January 2008, on which date control of
the division passed to the acquirer.
The results of the discontinued operations, which have been included in the consolidated income statement, were as follows:
2007
£’000
2006
£’000
Revenue 1,623 1,787
Expenses other than finance costs (1,367) (1,309)
Profit before taxation 256 478
Tax expense (77) (143)
Profit/(loss) for the year 179 335
During the year, the electromagnetics division contributed £179,000 (2006: £335,000) to the Group’s net operating cash flows, and
made no payments in respect of investing activities or financing activities (2006: £nil).
The effect of discontinued operations on segment results is disclosed in note 4.
The major classes of assets and liabilities of the electromagnetics division are as follows:
2007
£’000
Goodwill and other intangible assets 296
Property, plant and equipment 19
Total assets of division being net assets of disposal group 315
Please refer to note 31 for further details in this respect.
In addition to the disposal of the electromagnetics division referred to above, during 2007 the management were actively marketing
the Group’s investment property. As such at the balance sheet date the property has been reclassified from investment property to
assets held for sale, as can be seen in note 16 to the financial statements.
The assets and liabilities comprising the operations as classified as held for sale in respect of the investment property are as follows:
2007
£’000
Investment property 1,177
Total assets classified as held for sale 1,177
Mortgage on freehold property 305
Total liabilities associated with assets classified as held for sale 305
Net assets of disposal group 872
Please refer to note 31 for further details in this respect.
11 Dividends
Year
ended
2007
£’000
Year
ended
2006
£’000
Amounts recognised as distributions to equity holders in the period:
Dividends paid of 1.4p (2006: 1.3p) per share. 299 195
Proposed final dividend for the year ended 31 December 2007 of 1.6p (2006: 1.4p) per share 364 299
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as
a liability in these financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 41
12 Earnings per share
From continuing and discontinued operations:
Year
ended
2007
pence
Year
ended
2006
pence
(Loss)/earnings per share:
Basic (8.81) 4.45
Diluted (8.81) 3.50
We have excluded 1,328,000 shares (2006 – 4,905,000) from the diluted earnings per share on the basis that they are anti-dilutive.
The calculation of the basic and diluted earnings per share is based on the following data:
Earnings £’000 £’000
(Loss)/earnings for the purposes of basic earnings per share being net profit
attributable to equity holders of the parent (1,896) 804
Number of shares
No.
‘000
No.
‘000
Weighted average number of ordinary shares for the purposes of basic earnings per share 21,511 18,063
Effect of dilutive potential ordinary shares:
Share options 1,328 4,905
Weighted average number of ordinary shares for the purposes of diluted earnings per share 22,839 22,968
From continuing operations
Year
ended
2007
£’000
Year
ended
2006
£’000
Net profit attributable to equity holders of the parent (1,896) 804
Adjustments to exclude profit for the period from discontinued operations (179) (335)
(Loss)/earnings from continuing operations for the purpose of basic and diluted
earnings per share excluding discontinued operations (2,075) 469
The denominators used are the same as those detailed above for both basic and diluted earnings per share from continuing and
discontinued operations.
From continuing operations
Year
ended
2007
pence
Year
ended
2006
pence
(Loss)/earnings per share:
Basic (9.65) 2.59
Diluted (9.65) 2.04
From discontinued operations
Year
ended
2007
pence
Year
ended
2006
pence
Earnings per share:
Basic 0.83 1.85
Diluted 0.78 1.46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
42 Flomerics Group PLC Annual Report 2007
13 Goodwill
£’000
Cost
At 1 January 2006 1,353
Exchange differences (99)
Recognised on acquisition of a subsidiary 6,370
Other changes (70)
At 1 January 2007 7,554
Exchange differences 554
Reclassified as held for sale (294)
Other changes 115
At 31 December 2007 7,929
Accumulated impairment losses
At 1 January 2006 and 1 January 2007 –
Impairment charge in the year 2,223
At 31 December 2007 2,223
Carrying amount
At 31 December 2007 5,706
At 31 December 2006 7,554
Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to
benefit from that business combination. Before recognition of impairment losses, the carrying amount of goodwill had been
allocated as follows:
2007
£’000
2006
£’000
NIKA GmbH 4,602 6,271
Microelectronics Research and Development Limited (“MicReD”) 1,104 989
Kimberly Communications Consultants Limited – 294
5,706 7,554
The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.
The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use
calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the
period. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money
and the risks specific to the CGUs. The growth rates are based on industry growth forecasts. Changes in selling prices and direct costs
are based on past practices and expectations of future changes in the market.
The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next
five years and extrapolates cash flows for the following five years based on an estimated growth rate of zero%. This rate does
not exceed the average long-term growth rate for the relevant markets.
The rate used to discount the forecast pre-tax cash flows is 22.86%.
Goodwill for NIKA GmbH has been retranslated at year end as the underlying goodwill is in Euros.
Following the impairment review the carrying value of goodwill for NIKA GmbH was impaired by £2,223,000. The Directors
consider the impairment to be appropriate to reflect the slower than initially anticipated sales growth of the products
purchased with NIKA GmbH.
Goodwill for Microelectronics Research and Development Limited has increased from the previous year as a result of the year 2 earn
out consideration being in excess of amounts accrued for at the last reporting date. The directors have carried out an impairment
review of the carrying value of goodwill for Microelectronics Research and Development Ltd and do not consider any impairment to
be appropriate.
Goodwill for Kimberly Communications Consultants Limited has been reclassified in the year as detailed in note 31. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 43
14 Other intangible assets
Customer
relationship
£’000
Contract
leased
intangible
£’000
Completed
technology
£’000
Non-
competition
agreement
£’000
Development
cost
£’000
Software
£’000
Total
£’000
Cost
At 1 January 2006 – – – – 132 344 476
Additions – – – – 77 235 312
Disposals – – – – – (4) (4)
Acquired on acquisition
of a subsidiary 230 236 3,647 92 – – 4,205
Foreign exchange adjustment (4) (4) (59) (1) – (12) (80)
At 1 January 2007 226 232 3,588 91 209 563 4,909
Additions – – – – 260 53 313
Disposals – – – – – (6) (6)
Reclassified as held for sale – – – – – (4) (4)
Foreign exchange adjustment 22 21 336 8 – 2 389
At 31 December 2007 248 253 3,924 99 469 608 5,601
Amortisation
At 1 January 2006 – – – – – 209 209
Charge for the year 11 58 256 11 106 135 577
Disposals – – – – – (4) (4)
Foreign exchange adjustment – – (3) – – (11) (14)
At 1 January 2007 11 58 253 11 106 329 768
Charge for the year 25 127 561 25 27 136 901
Disposals – – – – – (6) (6)
Reclassified as held for sale – – – – – (2) (2)
Foreign exchange adjustment 2 5 27 1 – 3 38
At 31 December 2007 38 190 841 37 133 460 1,699
Carrying amount
At 31 December 2007 210 63 3,083 62 336 148 3,902
At 31 December 2006 215 174 3,335 80 103 234 4,141
The amortisation period for development costs incurred on the Group’s development is 3 years. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
44 Flomerics Group PLC Annual Report 2007
15 Property, plant and equipment
Computer
hardware
£’000
Fixtures
and
fittings
£’000
Total
£’000
Cost
At 1 January 2006 806 370 1,176
Additions 256 50 306
Acquisition of subsidiary 31 56 87
Exchange differences (44) (32) (76)
Disposals (45) (37) (82)
At 1 January 2007 1,004 407 1,411
Additions 257 76 333
Exchange differences 20 23 43
Disposals (57) (1) (58)
Reclassified as held for sale (64) – (64)
At 31 December 2007 1,160 505 1,665
Accumulated depreciation and impairment
At 1 January 2006 521 265 786
Charge for the year 185 55 240
Exchange differences (34) (26) (60)
Eliminated on disposals (38) (37) (75)
At 1 January 2007 634 257 891
Charge for the year 225 66 291
Exchange differences 8 12 20
Eliminated on disposals (33) (1) (34)
On assets reclassified as held for sale (45) – (45)
At 31 December 2007 789 334 1,123
Carrying amount
At 31 December 2007 371 171 542
At 31 December 2006 370 150 520
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 45
16 Investment property
Investment
property
£’000
Cost
At 1 January 2006 and 1 January 2007 1,232
Transfer to assets held for sale (1,232)
At 31 December 2007 –
Accumulated depreciation and impairment
At 1 January 2006 31
Charge for the year 12
At 1 January 2007 43
Charge for the year 12
Transfer to assets held for sale (55)
At 31 December 2007 –
Carrying amount
At 31 December 2007 –
At 31 December 2006 1,189
17 Subsidiaries
A list of the significant investments in subsidiaries, including the name, country of incorporation, proportion of ownership interest is
given in note C to the Company’s separate financial statements.
18 Inventories
2007
£’000
2006
£’000
Finished goods 110 33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
46 Flomerics Group PLC Annual Report 2007
19 Other financial assets
Trade and other receivables
2007
£’000
2006
£’000
Amount receivable for the sale of goods 5,361 4,812
Allowance for doubtful debts (72) (24)
5,289 4,788
Other debtors 240 292
Prepayments 620 387
6,149 5,467
Trade receivables
2007
£’000
2006
£’000
Net of allowances are held in the following currencies:
Sterling 1,180 1,045
Euro 2,193 1,589
US dollar 1,207 1,416
Other 709 738
5,289 4,788
Before accepting any new customer, the Group uses a credit approval process to assess the potential customer’s credit quality and
defines credit limits by customer.
Included in the Group’s trade receivable balance are debtors with a carrying amount of £764,000 (2006: £1,044,000) which are
past due at the reporting date. The Group does not hold any collateral over these balances. The average age of these receivables
is 74 days (2006: 72 days).
Ageing of past due but not impaired receivables.
2007
£’000
2006
£’000
30-60 days 174 421
60-90 days 233 284
90-120 days 357 339
Total 764 1,044
Movement in the allowance for doubtful debts.
2007
£’000
2006
£’000
Balance at the beginning of the period 24 62
Increase/(decrease) in provision 48 (38)
Balance at the end of the period 72 24
In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable
from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer
base being large and unrelated. On the basis that the customers of the Group consist of blue chip companies, large electronics
manufacturers and educational institutions the credit quality of the trade receivables are considered to be good. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 47
19 Other financial assets continued
Ageing of impaired trade receivables
2007
£’000
2006
£’000
120+ days 72 24
Total 72 24
The Directors consider that the carrying amount of trade and other receivables approximates their fair value.
Cash and cash equivalents
2007
£’000
2006
£’000
Cash and cash equivalents 2,971 2,339
Cash and cash equivalents are held in the following currencies;
2007
£’000
2006
£’000
Sterling 656 167
US dollar 1,418 1,376
Euro 481 446
Other 416 350
Total 2,971 2,339
Cash and cash equivalents comprise cash held by the Group and short–term bank deposits with an original maturity of three months
or less. The carrying amount of these assets approximates their fair value. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
48 Flomerics Group PLC Annual Report 2007
20 Bank overdrafts and loans
2007
£’000
2006
£’000
Bank loans 305 376
305 376
The borrowings are repayable as follows:
On demand or within one year 76 71
In the second year 81 76
In the third to fifth years inclusive 148 229
305 376
Less: Amount due for settlement within 12 months (shown under current liabilities) 76 71
Amount due for settlement after 12 months 229 305
The above loan is denominated in sterling and is secured against the property that is included in the assets held for sale, (note 34).
2007
%
2006
%
The weighted average interest rates paid were as follows:
Bank loans 7.04 6.09
The Directors estimate the fair value of the Group’s borrowings as follows:
2007
£’000
2006
£’000
Bank loans 305 376
The Group has principal bank loan of £305,000 (2006: £376,000). The loan was taken out on 14 September 2001. Repayments
commenced on 01 October 2001 and will continue until 01 September 2011. The loan is secured by a charge over certain of the
Group’s properties dated 14 September 2011. The loan carries interest rate at 1.25% above LIBOR.
At 31 December 2007 and 31 December 2006, the Group had no undrawn committed borrowing facilities. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 49
21 Deferred tax
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current
and prior reporting period.
Accelerated
tax
depreciation
£’000
Deferred
development
costs
£’000
NIKA
intangibles
£’000
Share based
payment
£’000
Temporary
differences
£’000
Total
£’000
At 1 January 2006 428 (40) – 14 18 420
Credit/(charge) to income (4) 9 107 (7) 5 110
Recognised on acquisition – – (1,339) – – (1,339)
Exchange differences – – 16 – – 16
At 1 January 2007 424 (31) (1,216) 7 23 (793)
Credit/(charge) to income (82) (65) 236 (7) (9) 73
Exchange differences – – (112) – – (112)
Effect of change in tax rate –
– income statement (8) 2 – – (1) (7)
As 31 December 2007 334 (94) (1,092) – 13 (839)
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset)
for financial reporting purposes:
2007
£’000
2006
£’000
Deferred tax liabilities (1,092) (1,216)
Deferred tax assets 253 423
(839) (793)
At the balance sheet date, the Group has unused tax losses of £6.5m (2006: £5.5m) available for offset against future profits. No
deferred tax asset has been recognised in respect of these losses due to the unpredictability of future profit streams. The losses may
be carried forward indefinitely, subject to certain conditions.
22 Other financial liabilities
Trade and other payables
2007
£’000
2006
£’000
Trade creditors and accruals 5,847 5,217
Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit
period taken for trade purchases is 27 days.
The Directors consider that the carrying amount of trade payables approximates to their fair value.
23 Share capital
2007
£’000
2006
£’000
Authorised:
40,000,000 ordinary shares of 1p each 400 400
Issued and fully paid:
21,631,516 ordinary shares of 1p each (2006 – 21,331,370 ordinary shares of 1p each) 216 213
The Company has one class of ordinary shares which carry no right to fixed income. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
50 Flomerics Group PLC Annual Report 2007
24 Reserves
Note
Share
premium
reserve
£’000
Shares to
be issued
£’000
Merger
reserve
£’000
Translation
reserves
£’000
Retained
earnings
£’000
Total
equity
2007
£’000
Balance at 1 January 2007 1,735 1,112 7,185 (302) 4,900 14,630
Profit for the year – – – – (1,896) (1,896)
Dividends paid – – – – (299) (299)
Currency translation movements – – – 1,018 – 1,018
Deferred tax on currency translation movements – – – – (112) (112)
Share based payment – – – – 116 116
Issue of new shares 40 – 145 – – 185
Balance at 31 December 2007 1,775 1,112 7,330 716 2,709 13,642
Note
Share
premium
reserve
£’000
Shares to
be issued
£’000
Merger
reserve
£’000
Translation
reserves
£’000
Retained
earnings
£’000
Total
equity
2006
£’000
Balance at 1 January 2006 1,602 33 892 – 4,178 6,705
Profit for the year – – – – 804 804
Dividends paid – – – – (195) (195)
Currency translation movements – – – (302) – (302)
Deferred tax on currency translation movements – – – – 16 16
Share based payment – – – – 97 97
Issue of new shares 133 1,112 6,293 – – 7,538
Acquisition of MicReD – shares to be
issued adjustment – (33) – – – (33)
Balance at 31 December 2006 1,735 1,112 7,185 (302) 4,900 14,630
Share premium reserve can be defined as amount subscribed for share capital in excess of nominal value.
Merger reserve can be defined as amounts recognised as a result of claiming merger relief following the issue of shares of the Group
as consideration for an acquisition.
Translation reserves can be defined as the gains and losses on retranslating the net assets of overseas operations into sterling.
Retained earnings can be defined as the cumulative net gains and losses recognised in the consolidated income statement.
25 Contingent liabilities
During the reporting period, an employee of the Group instigated proceedings against it for alleged breaches in employment
arrangements.
The Group’s lawyers have advised that they do not consider that the suit has merit and they have recommended that it be contested.
No provision has been made in these financial statements as the Group’s management do not consider that there is any probable loss. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 51
26 Operating lease arrangements
The Group as lessee
2007
£’000
2006
£’000
Minimum lease payments under operating leases recognised as an expense in the year 591 435
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:
2007
£’000
2006
£’000
Within one year 111 91
In the second to fifth years inclusive 447 328
After five years 154 154
712 573
Operating lease payments represent rentals payable by the Group for certain of its office properties. Leases are negotiated for an
average term of 5 years and rentals are fixed for an average of 5 years.
The Group as lessor
Property rental income earned during the year was £61,000 (2006: £61,000). The property is expected to generate rental yields of
5% on an ongoing basis. The property has a committed tenant for next 3 years.
At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments:
2007
£’000
2006
£’000
Within one year – 61
In the second to fifth years inclusive 75 –
After five years – –
75 61
The property on which the above income relates is currently held for sale, and if sold, the Company will not receive future
lease payments. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
52 Flomerics Group PLC Annual Report 2007
27 Share based payments
Equity settled share option scheme
In the past the Company has granted share options to employees and Directors through an Executive Share Option Scheme (‘ESOS’)
and an Enterprise Management Incentive (EMI) Scheme. Under these schemes options are granted at an exercise price equal to the
mid-market price as at the end of the day immediately preceding the grant and as shown in the Financial Times newspaper. The
exercise of options for all options granted during the period under review and for most options granted historically is subject to
a performance criterion being satisfied. The vesting period is three years. If the options remain unexercised after a period of ten
years from the date of grant the options expire. The options are forfeited if the employee leaves the Group before the options vest.
In 2006 the shareholders gave permission for the ESOS to be replaced by a new scheme, the main difference being that under the
new scheme options may be granted at nominal or nil cost. For the period under review options were granted under the new plan.
IFRS2 (Share based payment)
In accordance with IFRS2 the Group has elected not to apply IFRS2 to options granted on or before 7 November 2002 or to options
which had vested by 1 January 2006.
Details of the share options outstanding during the year for options issued since 7 November 2002 are as follows:
2007 2006
Number of
shares
options
Weighted
average
exercise
price (in £)
Number of
share
options
Weighted
average
exercise
price (in £)
Outstanding at beginning of period 1,386,495 0.73 1,186,049 0.68
Granted during the period 346,900 0.86 240,000 0.98
Forfeited during the period (55,431) 0.73 (37,734) 0.61
Exercised during the period (37,861) 0.61 (1,820) 0.455
Outstanding at the end of the period 1,640,103 0.76 1,386,495 0.73
Exercisable at the end of the period 486,203 0.61 158,690 0.59
The weighted average share price at the date of exercise for share options granted during the period was 91p (2006: 86p). The
options outstanding at the 31 December 2007 had a weighted average remaining contractual life of 7.58 years (2006: 8.10 years).
In 2007 share options were granted on 3 May. The estimated fair value of the options granted on that date is £65,000 (2006: £65,000).
For the period ending 31 December 2007 the Group has recognised a total expense of £116,000 (2006: £97,000) related to equity-
settled share-based payment transactions.
The estimated fair values for determining this charge were calculated using the Black-Scholes option pricing model. This produces
a fair value for each grant of options made and the fair value is then charged over the vesting period, which is three years. For this
reason the charge for 2007 is determined by any grants made in our case since 12 March 2004. The inputs into the model at each
grant date since then were as follows:
Date of Grant
12 March
2004
11 June
2004
30 July
2004
3 May
2005
28 July
2005
25
November
2005
7 March
2006
3 May
2007
Share price on date of grant 0.81 0.62 0.60 0.68 0.75 0.85 0.99 0.86
Exercise Price 0.80 0.62 0.60 0.70 0.76 0.88 0.99 0.86
Expected volatility 66.3% 66.2% 66.2% 65.5% 64.7% 63.5% 61.9% 54.1%
Expected life (years) 6 6 6 6 6 6 6 6
Risk-free Rate 4.5% 5.2% 5.1% 4.5% 4.2% 4.2% 4.3% 5.4%
Expected dividend yield 1.2% 1.6% 1.7% 1.6% 1.5% 1.3% 1.3% 1.6%
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 53
27 Share based payments continued
Assumptions in calculating fair value
The expected volatility was determined by calculating the historical volatility of the Company’s share price over the six years
preceding the grant of the option. Six years was selected as this is the expected term of the options.
The risk free rate is the rate of interest obtainable from government securities (i.e. Gilts in the UK) over the expected life of
the option.
The expect dividend yield is based on the historic dividend yield – i.e. dividends paid in the twelve months prior to grant calculated
as a percentage of the share price on the date of grant.
The exercise of the share options granted are subject to performance criteria being met. In some cases this is a fixed three year
period, in others it has been any three year period from the date of grant until maturity.
In addition the number of share options has been adjusted by the expected rate of staff turnover where the share option would
be forfeited in the event an employee left before the vesting date. A staff turn-over rate of 9% per year has been assumed for
employees and 3.3% for Directors.
Share options granted prior to 7 November 2002
The movements during the year are as follows:
Period of options
As at
1 January
2007
Exercised
during the
year
Lapsed
during the
year
As at 31
December
2007
Option
Price £
13 April 1999 to 12 April 2009 50,000 50,000 – – 0.40
4 October 1999 to 3 October 2009 100,000 – – 100,000 0.54
24 April 2002 to 23 April 2012 35,000 – – 35,000 0.84
1 August 2002 to 31 July 2012 74,000 2,500 8,500 63,000 0.53
11 September 2002 to 10 September 2012 15,481 785 1,915 12,781 0.475
28 Retirement benefit schemes
Defined contribution schemes
The Group operates defined contribution pension schemes. The pension charge for the year represents contributions payable to the
Group to the schemes and amounted to £497,000 (2006: £356,000).
At 31 December 2007, contributions amounting to £147,000 (2006: £58,000) were payable and included in trade and other payables.
29 Financial instruments
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the
return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt,
which includes the borrowings disclosed in note 20, cash and cash equivalents and equity attributable to equity holders of the
parent, comprising issued capital, reserves and retained earnings as disclosed in note 24.
Gearing ratio
The Group does not regularly review its gearing ratio as its debt, being defined as long and short term borrowings, is limited to
a mortgage against its investment property. This asset is classified as held for resale at the balance sheet date and, once disposed of,
the Group will no longer have any debt.
Externally imposed capital requirement
The Group is not subject to externally imposed capital requirements.
Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement
and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity
instrument are disclosed in note 2 to the financial statements. Further details on critical accounting judgments and estimation
uncertainty are detailed in note 3. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
54 Flomerics Group PLC Annual Report 2007
29 Financial instruments continued
Categories of financial instruments
Carrying value
2007
£’000
2006
£’000
Financial assets
Loans and receivables:
– Trade receivables 5,289 4,788
– Other assets 240 292
– Cash and cash equivalents 2,971 2,339
8,500 7,419
Financial liabilities
Financial liabilities at amortised cost:
– Trade payables 5,847 5,217
– Borrowings due within one year 76 71
– Borrowings due after one year 229 305
6,152 5,593
The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously
monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. As part of this
monitoring the Group ensures that the financial liabilities due to be paid can be met by existing cash and cash equivalents.
Financial risk management objectives
The Group monitors and manages the financial risks relating to the financial instruments held. The principal risks include currency
risk (on financial assets and trade payables), credit risk (on financial assets) and interest rate risk (on financial assets and borrowings).
These risks are discussed in further detail below.
By virtue of the nature of the Group’s operations, it is generally not exposed to price risk and, for reasons documented in ‘Gearing
ratio’ above, it is also not exposed greatly to liquidity risk.
It is not Group policy to trade in financial instruments.
Market risk
The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The
Group does, at times, use forward foreign exchange contracts to hedge exchange rate risk, however their use is considered on a case
by case basis.
The Group does not prepare a value-at-risk (VaR) analysis of the market risk exposures faced by the Group. Therefore, in accordance
with IFRS 7, sensitivity analysis of each type of market risk is presented below.
Foreign currency risk management
The Group undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise.
Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts.
The carrying amounts of the Group’s material foreign currency denominated monetary assets and monetary liabilities at the
reporting date are as follows:
Liabilities Assets
2007
£’000
2006
£’000
2007
£’000
2006
£’000
Euro (399) (465) 2,674 2,035
US Dollar (388) (407) 2,625 2,792
Swedish Krona * * 412 291
Indian Rupee * * 206 219
Japanese Yen * * 217 172
Singapore Dollar * * 141 87
Hungarian Florin * * 110 321
Chinese Yuan – – 51 –
* Liabilities in these currencies are deemed immaterial hence no analysis has been presented NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 55
29 Financial instruments continued
Foreign currency sensitivity analysis
The following table details the Group’s sensitivity to a 10% increase and decrease in Sterling against the relevant foreign currencies. The
sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period
end for a 10% change in foreign currency rates. A positive number below indicates an increase in profit and other equity where Sterling
strengthens 10% against the relevant currency. For a 10% weakening of Sterling against the relevant currency, there would be an equal
and opposite impact on the profit and other equity, and the balances below would be negative. The sensitivities below are based on the
exchange rates at the balance sheet used to convert the asset or liability to sterling. The Group seeks to match its foreign currency assets
and cash flows to hedge exposures. Therefore, the rate of exchange at the balance sheet date represents the best method of evaluating
foreign currency exchange rates and losses arising on the Group’s financial assets and liabilities.
Profit and loss impact
2007
£’000
2006
£’000
Euro 207 143
US Dollar 203 217
Swedish Krona 10 29
Indian Rupee 19 20
Japanese Yen 20 16
Singapore Dollar 37 26
Hungarian Florin 13 8
Chinese Yuan 5 –
There are no material foreign exchange differences arising on the retranslation of financial costs and liabilities accordingly, no
analysis of the sensitivities is presented. The fluctuations from 2006 are as a result of changes in the Group’s working capital at
the respective balance sheet dates.
In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year end exposure
is higher than in the year. This is due to the high sales volume that takes place in the months leading up to the year end and as a
result the year end debtors held in foreign currency are higher than during the year.
Interest rate risk management
The Group is exposed to interest rate risk as the Group has a mortgage linked to LIBOR, and earns interest on cash deposited at
banks on a variable rate of interest. Given the relatively low amounts of interest paid and received by the Group, neither interest
rate swaps contracts nor forward interest rate contracts are used to hedge any risks arising.
No sensitivity analyses have been presented on the basis that modest changes in interest rates (deemed to be a 0.5% increase or
decrease) do not have a material impact on the Group.
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.
The Group faces exposure to credit risk on its trade receivables and cash equivalents.
The risk of financial loss arising from defaults on trade receivables is mitigated by the Group using a credit approval process to assess
the potential customers’ credit quality and also establishes credit limits by customer. The limits and credit scores attributed to
customers is reviewed bi-annually however, the sales ledger is reviewed at least monthly to ensure all receivables are recoverable.
Please refer to note 19 for further details on trade receivables, including analyses of bad debts, ageing and profile by currency.
In terms of trade receivables, the Group does not have any significant credit risk exposure to any single counterparty or any group of
counterparties having similar characteristics. The Group defines counterparties as having similar characteristics if they are connected
entities. Concentration of credit did not exceed 5% of gross monetary assets at any time during the year. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
56 Flomerics Group PLC Annual Report 2007
29 Financial instruments continued
The Group believes the credit risk on liquid funds, being cash and cash equivalents, to be limited because the counterparties
are banks with high-credit ratings assigned by international credit-rating agencies. However, the concentration of credit risk by
counterparty does exceed 10% of the overall cash and cash equivalents balance (being £298,000 for 2007 and £234,000 for 2006)
in some cases. Given the recent “credit crunch” the table below shows the balance of counterparties at the balance sheet date in
excess of 10% of the overall balance, together with the Standard and Poor’s credit rating symbols.
2007 2006
Counterparty Location Rating
% of
overall
cash and
cash
equivalents
£’000
Carrying
amount
£’000
% of
overall
cash and
cash
equivalents
£’000
Carrying
amount
£’000
Barclays Bank plc UK AA 30.8% 915 23% 539
Anglo Irish Bank plc UK A – – 19.7% 461
Bank of America US AA 25.7% 764 24.1% 564
Naspa Bank GM A 9.5% 282 – –
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk
management framework for the management of the Group’s short, medium and long-term funding and liquidity management
requirements. At the balance sheet date, liquidity risk is considered to be low given the fact borrowings are limited to a mortgage
secured against the Group’s investment property and cash and cash equivalents are thought to be at acceptable levels.
30 Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are
not disclosed in this note.
Wolfgang Biedermann, Non-Executive Director, was the principal of Pricap Venture Partners AG (“Pricap”) until 30 June 2007 when
he resigned to join another company. He retains a 20% shareholding in Pricap but holds no executive position. On 15 April 2008 he
resigned as a Director of Flomerics Group PLC.
Pricap was the largest shareholder in Flomerics in 2007. On 14 March 2008 Pricap sold their entire shareholding to Mentor
Graphics Corporation.
In 2006 an indemnity was made by the Group to Gary Carter which related to certain legal expenses and a settlement in respect
of certain agreements with his former employer. The total value during the year was £72,000.
Remuneration of key management personnel
The Group considers its Directors to be the key management personnel of the Group, as defined in IAS 24. Please refer to the
Directors’ Remuneration Report on page 20. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 57
31 Assets held for sale
Electro-
magnetics
division
£’000
Investment
property
£’000
Total
£’000
At 1 January 2006 and 1 January 2007 – – –
Goodwill 294 – 294
Other intangible assets 2 – 2
Property, plant and equipment (at fair value) 19 1,177 1,196
At 31 December 2007 315 1,177 1,492
Investment
property
£’000
Total
£’000
Cost
At 1 January 2006 and 1 January 2007 – –
Transfer from Investment property 1,232 1,232
At 31 December 2007 1,232 1,232
Accumulated depreciation
At 1 January 2006 and 1 January 2007 – –
Transfer from Investment property 55 55
At 31 December 2007 55 55
Carrying amount
At 31 December 2007 1,177 1,177
At 31 December 2006 – –
The fair value of the property held for resale at 31 December 2007 of £1,177,000 (2006: £nil) has been arrived at based on the price
the property has been marketed at by Main Allen, (Surveyors), less cost to sell. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
58 Flomerics Group PLC Annual Report 2007
32 Acquisition in prior period
On 6 July 2006, the Group acquired the entire share capital of NIKA GmbH for initial consideration of £8.8m settled thorough
a combination of shares and cash as shown below. No further consideration will become payable.
Fair value of assets acquired
Fair value
of assets
£’000 £’000
Software and Intangibles 9
Tangible fixed assets 87
Stock 4
Debtors and prepayments 437
Cash 56
Creditors and accruals (1,052)
(459)
Consideration paid
Shares issued 6,356
Shares to be issued but held in escrow 1,112
Cash 1,011
Acquisition costs 298
8,777
Identifiable intangible assets (note 14) (4,205)
Deferred tax liability (note 21) 1,339
Currency movements (99)
Goodwill (note 14) 6,271
NIKA GbmH and its subsidiaries made a loss of £315,000 for the period from 1 January to 5 July 2006 (‘NIKA Pre-acquisition’).
33 Post balance sheet events
On 20 December 2007 the Board announced the disposal of its electromagnetics business to CST GmbH for a consideration of £1.6m.
The sale was completed on 31 January 2008 and the gain on disposal will be recognised in 2008. Final payment was received in
April 2008.
As part of the completion terms relating to the acquisition of NIKA GmbH in 2006 1,100,724 shares were issued on in March 2008
to the Vendors of NIKA GmbH.
34 Transition to IFRS
The following pages set out reconciliations of the UK GAAP balance sheet at 1 January 2006 and 31 December 2006 and the income
statements for the period 31 December 2006.
The principal accounting policy changes from UK GAAP that have had an impact on the balance sheet or income statement are set
out as follows:
IFRS1 First time adoption of IFRS
IFRS 1 permits a number of first adoption exemptions and the Group has elected to take those relating to business combinations, fair
value or revaluation as deemed cost and cumulative translation differences.
These are explained in more detail below:
Business combinations: The Group has elected not to apply IFRS3, Business Combinations, retrospectively to combinations that take
place prior to the transition date. Accordingly, the carrying value of goodwill recorded under UK GAAP has been fixed at the date
of transition as deemed cost and will no longer be amortised.
Fair value or revaluations as deemed cost: described in the IFRS accounting policies, the Group has elected to adopt the cost model
available under IAS 40, Investment Property. Accordingly, the net book value of the property at the date of transition will be
deemed as cost under IFRS.
Cumulative translation differences: Under IAS 21, some translation differences are required to be initially recognised as a separate
component of equity that is only recognised in the income statement on the disposal of that foreign operation. The Group has
elected not to comply with this requirement for cumulative translation differences that existed at the date of transition and
accordingly, the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition.
The Group has also elected to treat goodwill and fair value adjustments arising on acquisitions prior to 1 January 2006 as sterling
denominated assets and liabilities. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 59
34 Transition to IFRS continued
IAS 12 Income Taxes
General
IAS 12 takes a balance sheet approach to deferred tax whereby deferred tax is recognised in the balance sheet by applying the
appropriate tax rate to the temporary differences arising between the carrying value of the assets and liabilities and their tax base.
This contrasts with UK GAAP (FRS 19) which considered timing differences arising in the profit and loss account.
Where the IFRS adjustments discussed in this document create a difference between the carrying amount of an asset or liability and
the related tax base, and there are no initial recognition exemptions available under IAS 12, the Group has recorded a deferred tax
liability or asset as required. The following table demonstrates how the asset and liabilities have arisen:
Deferred
tax asset/
(liability)
£’000
At date of transition:
IAS 38 – capitalisation of research and development (40)
Asset arising on fixed asset temporary differences 428
Asset arising on short term temporary differences 18
Asset arising on share based payment 14
Net deferred tax asset 420
At 31 December 2006:
IAS 38 – capitalisation of research and development (31)
Asset arising on fixed asset temporary differences 424
Asset arising on short term temporary differences 23
Asset arising on share based payment 7
423
Liability arising on NIKA intangibles at the date of acquisition (1,339)
Deferred tax on business combinations
IAS 12 requires that deferred tax is provided in full on differences between the carrying value of assets and liabilities acquired in
a business combination and the related tax base, regardless of whether the business combination is accounted for under IFRS 3.
In the specific case of business combinations, the initial recognition exemption available under IAS 12 not to recognise deferred
tax on transactions which at the time of the transaction do not affect accounting profit or taxable profit is not available.
The Group acquired NIKA GmbH (NIKA), in July 2006 in a transaction which was a business combination as defined by IFRS 3,
“Business combinations”. NIKA had at that date certain assets which did not qualify for tax deduction (non qualifying assets). Under
UK GAAP these non qualifying assets do not result in a timing difference on which deferred tax is provided. Additionally, under IAS
12, in the normal course of events, the initial recognition exemption referred to above is available on these non qualifying assets.
Accordingly, the Group has provided for deferred tax on the full difference between the carrying amount of the NIKA intangibles
assets acquired by the Group in July 2006 and their tax base of £nil. The impact of this change for the Group has been an increase to
goodwill in the period to 31 December 2006 of £1,339,000 and a corresponding deferred tax provision of £1,339,000. There was no
impact on the income statement as a result of this change.
IAS 19 Employee Benefits
Holiday pay accrual
IAS 19 requires an accrual to be made for earned but unpaid holiday pay. The Group’s holiday year runs from January to December
and holiday carryover is permitted. Accordingly, the requirement to record a holiday pay accrual has impacted negatively, the
opening balance sheet as at 1 January 2006 by £79,000 and the 31 December 2006 balance sheet by £97,000, with the income
statements for each period incurring a charge by the corresponding movement.
Furthermore, an additional fair value adjustment of £68,000 in respect of holiday pay accruals was made as part of the NIKA
acquisition and this has increased goodwill by an equal amount.
IAS 21 The effect of changes in foreign exchange
Under IAS 21, it is necessary to present foreign exchange differences arising from the retranslation of overseas subsidiaries into the
presentation currency of the Group from the transition date as a separate reserve in equity. Accordingly, such movements have been
reclassified for the year ended 31 December.
Also, goodwill and fair value adjustments arising on acquisitions of a foreign entity are treated as assets and liabilities of that foreign
entity and translated at the closing rate. As a result of this change, net assets at 31 December 2006 have been reduced by £162,000. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
60 Flomerics Group PLC Annual Report 2007
34 Transition to IFRS continued
IAS 38 Intangible Assets
Capitalised software
Under UK GAAP, all capitalised software development costs are included within tangible fixed assets. IAS 38 requires that where
such costs are not an integral part of the associated hardware, they should be classified as intangible assets. Accordingly, certain
items of property, plant and equipment have been reclassified to intangible assets at each reference date where they are items
of software that meet the recognition criteria of IAS 38.
There is no net impact on the income statement as a result of this reclassification, however, there has been a reclassification of the
amounts recorded as depreciation on these assets to amortisation charges. The impact on the balance sheets at 1 January 2006 has
been an increase in Intangible Assets and a matching decrease in property, plant and equipment of £135,000. Software had already
been reclassified as an intangible asset in the 31 December 2006 financial statements and hence no adjustment has arisen.
Intangible assets amortisation
The Group has recognised additional intangible assets under IFRS 3 “Business Combinations”, as discussed below. IAS 38 requires
that amortisation is provided where an intangible asset has a finite life. The adjustment arising from this is discussed below in IFRS 3
“Business Combinations”.
Research and development expenditure
Under UK GAAP, the Group took the option available under SSAP 13 to write off all expenditure as incurred. Under IAS 38 it is
obligatory to capitalise when all of the criteria specified by the standard are met. Following a review of the research and development
projects being conducted by the Group, the capitalisation of the qualifying expenditure has resulted in an increase in intangible
assets at 1 January 2006 of £132,000 and £103,000 at 31 December 2006 with a corresponding reduction of administrative expenses
in the income statement.
Internally generated intangible assets are amortised on a straight line basis over their useful lives of three years.
IAS 39 Financial Instruments: Recognition and Measurement
Forward exchange contract fair value
IAS 39 requires all derivatives, including forward exchange contracts, to be initially recognised and subsequently re-measured at
fair value. The Group had open forward foreign exchange contracts in place at 1 January 2006. The Group had not adopted the
hedging provisions of IAS 39 at this time and accordingly, changes in fair value are taken to the income statement in the period
in which they arise.
The impact of this change for the Group has been a reduction in net assets of £29,000 in the opening balance sheet at 1 January 2006.
IAS 40 Investment Property
On reviewing the Group’s UK GAAP accounting policies against IFRS, it was noted that the characteristics of a building owned by
the Group meant it would more appropriately be classified as an investment property. The Group have chosen to adopt the cost
measurement accounting policy as allowed by IAS 40 as a result. This new policy has had no impact in the income statement but
does cause a reclassification in the balance sheet of £1,201,000 within non-current assets; the amounts for subsequent periods is
reduced by the depreciation charge for that period.
IFRS 3 Business Combinations
Business combinations: Reversal of goodwill amortisation
Under UK GAAP, the Company recognised goodwill as the difference between the fair value of assets and liabilities acquired and
the fair value of consideration paid on all acquisitions of trade and assets and subsidiary companies. Goodwill was amortised over
its useful economic life, generally being 20 years.
IFRS 3 prohibits the amortisation of goodwill. The standard requires goodwill to be carried at cost with impairment reviews both
annually and when there are indications that the carrying value may not be recoverable.
Accordingly, amortisation charged in the financial year ended 31 December 2006 has been reversed, increasing operating profit by
£644,000 for the year to 31 December 2006. Additionally, the accumulated amortisation at the transition date has been eliminated
against the cost of goodwill. Further adjustments have been made to the goodwill balance resulting from the application of IFRS 3
to business combinations after the transition date as detailed below.
Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in
the Group income statement and is not subsequently reversed. In accordance with IFRS 1 and IAS 36, an impairment review on all
assets was duly carried out at the transition date and subsequently in December 2006 and no impairment loss was identified.
Business combinations: Intangible assets
As accorded by the transitional arrangements of IFRS 1, the Group has chosen to apply IFRS 3 prospectively from the date of
transition (1 January 2006) and not to restate previous business combinations.
For qualifying business combinations, goodwill under IFRS 3 represents the excess of consideration over the fair values of acquired
assets (including any separately identifiable and measurable intangible assets), liabilities and contingent liabilities. As noted above,
the Group has not applied IFRS 3 to business combinations prior to the transition date of 1 January 2006. In the period subsequent
to 1 January 2006, the Group acquired NIKA in July 2006. The Group has assessed this business combination under IFRS 3 and
identified intangible assets relating to recurring customer relationships, a non-competition agreement, a contract based asset and
completed technology which have been reclassified from goodwill to intangible assets. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 61
34 Transition to IFRS continued
Business combinations: Intangible assets continued
As required under IAS 38, these intangible assets are amortised over their finite lives (considered to be between 4 and 10 years) and
subject to impairment reviews annually and before the end of the accounting period in which they were acquired.
The impact of this change for the Group has been a reduction to goodwill of £4,451,000 and a corresponding increase in other
intangible assets in the year to December 2006. The resulting amortisation charge arising on this reclassification is £338,000 with
a corresponding reduction in intangible assets.
The balance sheet reconciliations at 1 January 2006 (date of transition to IFRS) and at 31 December 2006 (date of last UK GAAP
financial statements) and the reconciliation of profit for 2006, as required by IFRS 1 are shown below:
1. Balance sheet reconciliation at 1 January 2006
UK GAAP
(IFRS
format)
£’000
IAS 12
Income
taxes
£’000
IAS 19
Holiday
pay accrual
£’000
IAS 38
Reclassifi-
cation of
software
£’000
IAS 38
Capitalis-
ation of
develop-
ment costs
£’000
IAS 39
Loss on
forward
exchange
contract
£’000
IAS40
Reclassifi-
cation of
investment
properties
£’000
IFRS
£’000
Non-current assets
Goodwill 1,353 – – – – – – 1,353
Other intangible assets – – – 135 132 – – 267
Property, plant and equipment 1,726 – – (135) – – (1,201) 390
Investment property – – – – – – 1,201 1,201
Deferred tax asset – 420 – – – – – 420
3,079 420 – – 132 – – 3,631
Current assets
Inventories 59 – – – – – – 59
Trade and other receivables 3,953 – – – – – – 3,953
Cash and cash equivalents 4,081 – – – – – – 4,081
8,093 – – – – – – 8,093
Total assets 11,172 420 – – 132 – – 11,724
Current liabilities
Trade and other payables (4,289) – (79) – – – – (4,368)
Current tax liability (30) – – – – – – (30)
Bank overdraft and loan (67) – – – – – – (67)
Derivative financial liability – – – – – (29) – (29)
(4,386) – (79) – – (29) – (4,494)
Non-current liabilities
Bank loans (377) – – – – – – (377)
Total liabilities (4,763) – (79) – – (29) – (4,871)
Net assets 6,409 420 (79) – 132 (29) – 6,853
Equity
Share capital 148 – – – – – – 148
Shares to be issued 33 – – – – – – 33
Share premium reserve 1,602 – – – – – – 1,602
Merger reserve 892 – – – – – – 892
Retained earnings 3,734 420 (79) – 132 (29) – 4,178
Currency translation – – – – – – – –
6,409 420 (79) – 132 (29) – 6,853 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
62 Flomerics Group PLC Annual Report 2007
34 Transition to IFRS continued
2. Balance sheet reconciliation at 31 December 2006
UK GAAP
(IFRS
format)
£’000
IAS 12
Income
taxes
£’000
IAS 19
Holiday
pay accrual
£’000
IAS 21
Currency
translation
difference
£’000
IAS 38
Capitalis-
ation of
develop-
ment costs,
net of
amortis-
ation
£’000
IAS 38
Amortis-
ation of
other
intangibles
identified
in NIKA
acquisition
£’000
IAS 40
Reclassifi-
cation of
investment
property
£’000
IFRS3
Reclassifi-
cation of
intangibles
identified
in NIKA
acquisition
£’000
IFRS3
Add
back of
goodwill
amortis-
ation
£’000
IFRS
£’000
Non-current assets
Goodwill 9,807 1,339 68 (99) – – – (4,205) 644 7,554
Other intangible
assets 234 – – (63) 103 (338) – 4,205 – 4,141
Property, plant
and equipment 1,709 – – – – – (1,189) – – 520
Investment
property – – – – – – 1,189 – – 1,189
Deferred tax asset – 423 – – – – – – – 423
11,750 1,762 68 (162) 103 (338) – – 644 13,827
Current assets
Inventories 33 – – – – – – 33
Trade and other
receivables 5,467 – – – – – – – – 5,467
Cash and cash
equivalents 2,339 – – – – – – – – 2,339
7,839 – – – – – – – – 7,839
Total assets 19,589 1,762 68 (162) 103 (338) – – 644 21,666
Current liabilities
Trade and other
payables (5,120) – (97) – – – – – – (5,217)
Current tax
liability (14) – – – – – – – – (14)
Bank overdraft
and loan (71) – – – – – – – – (71)
(5,205) – (97) – – – – – – (5,302)
Non-current
liabilities –
Bank loans (305) – – – – – – – – (305)
Deferred tax
liability – (1,216) – – – – – – – (1,216)
(305) (1.216) – – – – – – – (1,521)
Total liabilities (5,510) (1,216) (97) – – – – – – (6,823)
Net assets 14,079 546 (29) (162) 103 (338) – – 644 14,843 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 63
34 Transition to IFRS continued
2. Balance sheet reconciliation at 31 December 2006 continued
UK GAAP
(IFRS
format)
£’000
IAS 12
Income
taxes
£’000
IAS 19
Holiday
pay accrual
£’000
IAS 21
Currency
translation
difference
£’000
IAS 38
Capitalis-
ation of
develop-
ment costs,
net of
amortis-
ation
£’000
IAS 38
Amortis-
ation of
other
intangibles
identified
in NIKA
acquisition
£’000
IAS 40
Reclassifi-
cation of
investment
property
£’000
IFRS3
Reclassifi-
cation of
intangibles
identified
in NIKA
acquisition
£’000
IFRS3
Add
back of
goodwill
amortis-
ation
£’000
IFRS
£’000
Equity
Share capital 213 – – – – – – – – 213
Shares to be issued 1,112 – – – – – – – – 1,112
Share premium
reserve 1,735 – – – – – – – – 1,735
Merger reserve 7,185 – – – – – – – – 7,185
Retained earnings 3,834 546 (29) 140 103 (338) – – 644 4,900
Currency
translation – – – (302) – – – – – (302)
14,079 546 (29) (162) 103 (338) – – 644 14,843
3. Income statement reconciliation for the year to 31 December 2006
UK GAAP
£’000
IAS 12
Income
taxes
£’000
IAS 19
Holiday
pay accrual
£’000
IFRS 38
Capitalis-
ation of
develop-
ment
expendi-
ture net of
amortis-
ation
£’000
IAS 38
Amortis-
ation of
intangible
fixed
assets
£’000
IAS 39
Add back
of loss on
exchange
contract
£’000
IFRS 3
Write
back of
goodwill
amortis-
ation
£’000
IFRS
£’000
Continuing operations
Revenue 14,221 – – – – – – 14,221
Cost of sales (550) – – – – – – (550)
Gross profit 13,671 – – – – – – 13,671
Administrative expenses (13,171) – 50 (29) (338) 29 644 (12,815)
Other operating income 61 – – – – – 61
Operating profit 561 – 50 (29) (338) 29 644 917
Investment revenues 101 – – – – – – 101
Finance costs (164) – – – – – – (164)
Profit before tax 498 – 50 (29) (338) 29 644 854
Tax (160) 110 – – – – – (50)
Profit for the period 338 110 50 (29) (338) 29 644 804 COMPANY BALANCE SHEET
Flomerics Group PLC
31 December 2007
64 Flomerics Group PLC Annual Report 2007
Notes
2007
£’000
2006*
£’000
Fixed assets
Investments C 4,620 4,535
Current assets
Debtors D 2 2
Cash at bank and in hand – 1
2 3
Creditors: Amounts falling due within one year E (1,128) (1,079)
Net current assets (1,126) (1,076)
Net assets 3,494 3,459
Capital and reserves
Called-up share capital F, G 216 213
Shares to be issued G 1,112 1,112
Share premium account G 1,643 1,603
Profit and loss account G 523 531
Shareholders’ funds G 3,494 3,459
* amounts restated see note K.
The financial statements were approved by the Board of Directors on 28 April 2008 and signed on its behalf by:
G C Carter K Butcher
Director Director NOTES TO THE COMPANY FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 65
A Significant accounting policies
Basis of accounting
The separate financial statements of the Company are presented as required by the Companies Act 1985. They have been prepared
under the historical cost convention and in accordance with applicable United Kingdom Accounting Standards and law.
The principal accounting policies are summarised below. They have all been applied consistently throughout the year and the
preceding year.
Investments
Fixed asset investments in subsidiaries are shown at cost less provision for impairment.
For investments in subsidiaries acquired for consideration, including the issue of shares, cost is measured by reference to the nominal
value only of the shares issued. Any premium is ignored. The figure in the prior year did not ignore this premium and as such has
been restated by £132,000.
In addition the 2006 opening balance has been restated by £65,000 for the share based payment made in 2005.
Taxation
Current taxation is provided at amounts expected to be paid or recovered using tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
Deferred taxation is provided in full on timing differences which result in an obligation at the balance sheet date to pay more tax,
or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing
differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in
which they are included in financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely
than not that they will be recovered. Deferred tax assets and liabilities are not discounted.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.
An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Equity instruments issued are recorded at the proceeds received, net of direct issue costs.
B Loss for the financial year
As permitted by section 230 of the Companies Act 1985 the Company has elected not to present its own profit and loss account for
the year. The Company reported a loss after tax for the financial year ended 31 December 2007 of £8,000 (2006: profit £538,000).
The auditors’ remuneration for audit and other services is disclosed in note 5 to the consolidated financial statements.
All of the employees of the Company are remunerated through a subsidiary, Flomerics Limited.
C Fixed asset investments
2007
£’000
2006*
£’000
Subsidiaries 4,620 4,535
The Company has investments in the following subsidiaries and associates which principally affected the profits or net assets of
the Group.
Name
Country of incorporation
or registration
Flomerics Limited England and Wales
Flomerics, Inc. USA
Kimberley Communications Consultants Limited England and Wales
Flomerics Asia Limited Hong Kong
Flomerics Nordic AB Sweden
Flomerics S.E. Asia Pte Limited Singapore
Flomerics India Private Limited India
Microelectronics Research & Development Ltd (MicReD) Hungary
NIKA GmbH Germany
NIKA Software OOO Russia
NIKA France SARL France
All companies are wholly owned (the holdings in Flomerics, Inc., NIKA Software OOO and NIKA France SARL are indirectly held).
* amounts restated see note K. NOTES TO THE COMPANY FINANCIAL STATEMENTS
for the year ended 31 December 2007
66 Flomerics Group PLC Annual Report 2007
C Fixed asset investments continued
Subsidiaries
£’000
Cost
At 1 January 2007* 4,535
Additions – adjustment for Year 2 earnout 114
Additions – Flomerics Limited – Share option granted to subsidiary employees 116
Merger relief taken (145)
At 31 December 2007 4,620
* amounts restated see note K.
D Debtors
2007
£’000
2006
£’000
Amounts owed by subsidiary undertakings – –
Prepayments and accrued income 2 2
2 2
E Creditors: Amounts falling due within one year
2007
£’000
2006
£’000
Amounts due to subsidiary undertakings 1,128 787
Accruals and deferred income – 292
1,128 1,079
F Called-up share capital
2007
Number
2007
£’000
2006
Number
2006
£’000
Authorised:
Ordinary shares of 1p each 40,000,000 400 40,000,000 400
Allotted, called up and fully paid:
Ordinary shares of 1p each 21,631,516 216 21,331,370 213
G Combined reconciliation of movements in shareholders’ funds and statement of movements on reserves
Share
capital
£’000
Shares to
be issued
£’000
Share
premium
account
£’000
Profit
and loss
account
£’000
Total
£’000
At 1 January 2007* 213 1,112 1,603 531 3,459
Issue of share capital 3 – 40 – 43
Profit for the financial year – – – (8) (8)
At 31 December 2007 216 1,112 1,643 523 3,494
* amounts restated see note K. NOTES TO THE COMPANY FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 67
H Related party transactions
The Company has taken advantage of the exemption under FRS 8 ‘Related party disclosures’ not to disclose details of intra-group
transactions or balances with Group companies which are eliminated on consolidation in the consolidated accounts of Flomerics
Group PLC. Transactions with Directors are disclosed in the Directors’ Report and note 30 of the consolidated financial statements
of Flomerics Group PLC.
I Ultimate controlling party
Flomerics Group PLC is incorporated and registered in England and Wales and heads the largest group for which consolidated
financial statements are prepared.
J Events after the balance sheet date
On 20 December 2007 the Board announced the disposal of the EM Business to CST GmbH for a consideration of £1.6m. The sale
was completed on 31 January 2008 and the gain on disposal will be recognised in 2008. Final payment was received in April 2008.
As part of the completion terms relating to the acquisition of NIKA GmbH in 2006 1,100,724 shares were issued on in March 2008
to the vendors of NIKA GmbH.
K Prior year adjustment
Investments in subsidiaries has been restated for 2006 to reflect to remove the premium that previously report in respect of shares
issued as part of the consideration of the acquisition of a subsidiary. The impact of this adjustment was to reduce investments by
£132,000 and reduce the share premium reserve by £132,000.
In addition the 2006 opening balance has been restated by £65,000 for the share based payment made in 2005. The impact of this
adjustment was to increase investments by £65,000 and increase the profit and loss reserve by £65,000.
INFORMATION FOR SHAREHOLDERS
68 Flomerics Group PLC Annual Report 2007
Share Price
The mid-market share price of the shares at 31 December was as follows:
2007 2006 2005 2004 2003
Ordinary 1p shares 55.0p 89.5p 87.0p 66.5p 60.5p
Dividends
Ordinary shareholders have received the following dividends in respect of each financial year:
2007 2006 2005 2004 2003
Final dividend per share (proposed) 1.6p 1.4p 1.3p 1.1p 1.0p
Dividend
The 2007 dividend will be paid on 3 June 2008 to shareholders on the register at close of business on 9 May 2008.
Investor Relations
Our Corporate Website at www.flomerics.com has a comprehensive Investor Relations Section. It gives the share price updated every
15 minutes along with graphs, share volumes and other investor information. It is also possible to download the Annual Reports
from the website going back to 1999.
The Company is keen to maintain a dialogue with shareholders. In 2001, the Company’s efforts were recognised with the award of
Best Communications at the prestigious AIM Awards.
In 2003, the Company was one of four companies nominated for the AIM Award for Best Technology.
We like to hear from our shareholders and, other than during close periods, both Gary Carter and Keith Butcher are pleased to
receive calls or respond to emails ([email protected] and [email protected]).
Website
www.flomerics.com
Secretary and registered office
Keith Butcher,
81 Bridge Road, Hampton Court,
Surrey, KT8 9HH.
Company number
3109660
Advisers
Auditors
BDO Stoy Hayward LLP, 55 Baker Street,
London, W1U 3LL.
Principal bankers
Barclays Bank Plc, P O Box 729,
Eagle Point, 1 Capability Green,
Luton, LU1 3US.
Registrars
Capita IRG Plc, The Registry,
34 Beckenham Road, Beckenham,
Kent, BR3 4TU.
Nominated Adviser and Broker
Oriel Securities Limited, 125 Wood Street,
London, EC2V 7AN. design by www.luminous.co.uk
print by www.corporateink.co.uk Flomerics Group PLC
81 Bridge Road
Hampton Court
Surrey KT8 9HH
United Kingdom
Tel +44 (20) 8487 3000
Fax +44 (20) 8487 3001 | CHIEF EXECUTIVE’S REVIEW
“FLOMERICS CELEBRATES ITS 20TH
ANNIVERSARY AS AN INDEPENDENT
COMPANY IN 2008, PLACING IT FIRMLY
INTO A RARE AND ELITE GROUP OF
COMPANIES THAT HAVE PROSPERED
FOR SUCH A LONG PERIOD.“
2007 was a year of investment for Flomerics: investment in
expanding our sales and support teams to drive sales of the EFD
products acquired in 2006 (as part of the NIKA GmbH acquisition);
investment in marketing to begin to build the ‘EFD’ brand in North
America and in Europe outside of its original markets and investment
in collaboration of our development operations in London, Moscow
and India. Much was accomplished during the year which has put
us into a strong position to build sales and take advantage of the
synergies between our various products and technologies in 2008
and beyond.
Investment in Sales
The early part of 2007 saw our Regional Sales Directors active in
expanding their teams to take advantage of the opportunity to
sell the EFD products in territories where NIKA had not previously
invested. The main focus for this was in the USA, France and the
UK. Finding the right people and organising the expanded teams to
give the best coverage of the geography and the opportunities took
longer than we had anticipated. However we finished the year with
a full complement of sales people and the engineers to support
their activities. Alongside the recruitment exercise we were active
in making sure that all our engineers were trained in our full suite
of Computational Fluid Dynamics (CFD) products (EFD, FLOTHERM
and FLOVENT).
Investment in Marketing
Following the disposal of the EM Business the Group is now focused
on the CFD market. This broadly divides into two sub-markets:
– Electronics Cooling (covered by our FLOTHERM, EFD and
MicReD products)
– Mechanical Design (covered by our EFD and FLOVENT products)
A market survey carried out in 2007 confirmed once again that
Flomerics’ flagship product, FLOTHERM, remains the clear market
leader in thermal analysis of electronic equipment. At the same
time, the EFD products, which have enjoyed great success in central
Europe and in Japan but at the time of the acquisition by Flomerics
were little known outside of these territories, have seen a significant
increase in brand awareness in both North America and other parts
of Europe.
The relationships with our mechanical CAD (Computer Aided
Design) partners, in particular SolidWorks and PTC, continued and
in the case of SolidWorks saw the release of a new product called
FloXpress. FloXpress is a new flow simulation product that is fully
embedded within SolidWorks®2008 3D CAD software and is
available free of charge to all SolidWorks®2008 users. It is a cut-
down version of the popular COSMOSFloWorks product – also
developed by Flomerics – that enables engineers and designers
to simulate complex, 3D fluid flow and heat transfer processes via
a simple, wizard-driven user interface inside the SolidWorks user
environment. The release of this product means a big increase in the
number of mechanical engineers able to access this remarkable
MUCH WAS ACCOMPLISHED DURING THE
YEAR WHICH HAS PUT US INTO A STRONG
POSITION TO BUILD SALES AND TAKE
ADVANTAGE OF THE SYNERGIES BETWEEN
OUR VARIOUS PRODUCTS AND
TECHNOLOGIES IN 2008 AND BEYOND.
4 Flomerics Group PLC Annual Report 2007 “THE INVESTMENTS MADE IN 2007 AND THE
INCREASED FOCUS ON OUR CORE CFD
BUSINESS WILL ALLOW US TO FOCUS ON
DELIVERING RESULTS IN 2008.”
Flomerics Group PLC Annual Report 2007 5
technology and this is expected to increase demand for Flomerics’
software products in the future.
Building familiarity with our products among young engineers and
students continues to be an important part of our marketing effort,
and 2007 saw a significant increase in the use of EFD by universities
and research institutes around the world.
Many of Flomerics’ customers are delighted to share their positive
experiences of using our products, and we continue to publish these
success stories to assist our sales efforts and provide strong editorial
for engineering publications and web portals around the world.
During 2007 we published a record number of success stories which
generated a good response, increased our web site traffic to record
levels and led to an increased number of requests for software
demonstrations – especially for the EFD products.
Research and Development
During 2007 we began the first phase of our plans to make better
use of the considerable expertise and technology managed and
developed in our development centres in the UK, Russia, India and
Hungary. The first evidence of this was the release of an electronics
specific module to be used alongside the EFD products. The EFD
products were already making inroads into certain electronics
applications but the introduction of this new product which saw
the UK based FLOTHERM and Moscow based EFD teams working
closely together, further enhances the dominant position that
Flomerics has long held in the thermal design of electronics.
Disposal of Electromagnetics Business
In December 2007 we announced the divestment of our
electromagnetics line of business (“the EM Business”) for £1.6m,
in order to increase our focus on areas where the Group has much
better opportunities for growth. This disposal was completed on
31 January 2008.
Since entering the electromagnetics simulation market in 1999,
Flomerics built up the usage of its products around the world.
However, with only a small share of the market the Directors
concluded that it would be difficult on our own to achieve a strong
competitive position in this field. The sale of the EM Business to
CST GmbH, a company that specialises in electromagnetics
simulation, signals the beginning of a strategic relationship
providing best-in-class solutions to customers requiring
understanding of both CFD and EM problems.
Finance Director
In December, we announced the appointment of a new Finance
Director. Keith Butcher joined Flomerics from DataCash Group plc
where he became Finance Director in 2002. During his time with
DataCash he played an important role as part of the management
team overseeing a substantial growth in the Company’s market
capitalisation. Keith’s considerable experience is already having
a positive impact on the running of the Company.
2007 Achievements
Despite difficult trading conditions in some territories we saw good
growth in billings in most areas of our business.
Regionally, Europe (+25%) and Asia-Pacific (+35%) saw good
revenue growth in 2007, with a particularly strong performance in
China and South-East Asia where we expect the opportunity to
continue to grow. US revenues fell slightly as we were impacted by
the loss of a number of key sales staff, however we now have a full
team in place. Turnover by region was: Europe 45.8% (2006: 42%),
Asia Pacific 21.5% (2006:19%) and US 31.7% (2006:39%).
Sales of the EFD products grew strongly and FLOVENT continued
the strong growth from last year.
Flomerics’ business is made up of new licence sales and recurring
revenues from existing customers who each year will renew their
commitment with us for a further year of maintenance or to extend
an existing lease arrangement. Particularly encouraging in 2007
was the growth in new business which saw an improving trend
throughout the year as the investments made in the sales teams
and in marketing started to have an impact.
Flomerics 20th Anniversary
Flomerics celebrates its 20th anniversary as an independent
company in 2008, placing it firmly into a rare and elite group of
engineering software companies that have prospered for such
a long period. This landmark is a testimony to the Company’s high-
integrity, people-oriented culture and its core concept of delivering
engineering simulation software for use by designers and engineers
rather than just full-time analysts and specialists. Flomerics has
reached an age that puts it among the most established companies
involved in computer aided engineering, and has just completed
a record-breaking fiscal year where it has achieved a new high in
revenue and seen its worldwide customer base grow to over 2,500
sites and over 7,000 individuals.
The Future
The last three years have seen many changes at Flomerics. In
addition to the incorporation of the former NIKA team, we have
changed almost half of our senior management team and by doing
so added a significant level of sales management experience. We
have made two acquisitions (MicReD and NIKA) and disposed of
our electromagnetics business. These changes together with the
investments made in 2007 and the increased focus on our core
CFD business will allow us to focus on delivering results in 2008.
We have had a very positive start to trading in 2008 and I believe
this demonstrates that the results of our hard work are beginning
to show through.
Gary Carter, Chief Executive
28 April 2008 | FINANCIAL HIGHLIGHTS
+27%
CASH
£3.0m (2007)
£2.3m (2006)
+1 4%
DIVIDEND PER SHARE
1.6p (2007)
1.4p (2006)
TURNOVER BY REGION
1 Asia: £3.67m +35%
2 Europe: £7 .45m +25%
3 US: £5.15m -7%
1
3
2
TURNOVER
£16.3m (2007)
£14.2m (2006)
+1 4%
ADJUSTED PROFIT BEFORE TAX
£1.3m (2007)
£1.5m (2006)
-1 7%
2 Flomerics Group PLC Annual Report 2007 | CHAIRMAN’S STATEMENT
During 2007 there was good progress with the strategic
repositioning of Flomerics following the acquisition of NIKA GmbH
(“NIKA”) in July 2006. Flomerics is continuing to maintain a strong
competitive position in its original field, the application of fluid flow
simulation to electronics cooling, where it is a world leader. It now
addresses this specialist market both by its original product,
FLOTHERM, and by the EFD product range acquired from NIKA. At
the same time the Company is taking advantage of EFD to address
much wider applications of fluid flow simulation and hence a much
larger market. The electromagnetics simulation business (“the EM
business”) was disposed of in January 2008 so that Flomerics can
have greater focus on fluid flow simulation.
Good progress was made with integrating the FLOMERICS and
NIKA technologies and increasing the sales team to implement the
new strategy. The Company is still at an early stage in building the
EFD business outside of its original markets, but the strong growth
in sales of the product has demonstrated the significant benefits
that the investments can bring to future periods.
Results
Total revenues for the year ended 31 December 2007 were up by
14% at £16.3m (2006: £14.2m). If revenues from the discontinued
EM business are excluded, revenues were up by 18% to £14.6m
(2006: £12.4m).
Profit before tax, amortisation of intangible assets (excluding
software and R&D capitalisation), goodwill impairment, share-based
payments and exceptionals (“adjusted PBT”) was £1.3m (2006:
£1.5m) reflecting the investments made during the year. There were
no exceptional items in 2007 (2006: £222,000). The unadjusted loss
Flomerics Group PLC Annual Report 2007 3
FLOMERICS IS CONTINUING TO MAINTAIN
A STRONG COMPETITIVE POSITION IN ITS
ORIGINAL FIELD, THE APPLICATION OF
FLUID FLOW SIMULATION TO ELECTRONICS
COOLING, WHERE IT IS A WORLD LEADER.
“TOTAL REVENUES FOR THE YEAR ENDED
31 DECEMBER 2007 WERE UP BY 14%
AT £16.3M.”
for the year was £1.90m (2006: £0.80m profit) and Basic loss per
share was 8.81p (2006: earnings per share: 4.45p)
Cash generated from operations was £1.9m (2006: £0.9m).
Cash balances for the Group at 31 December 2007 were £2.97m
(2006: £2.34m). After the year end £1.6m cash was received from
the disposal of the EM Business. As at 31 March 2008 cash
balances were in excess of £5.5m.
Dividend
The board is pleased with the progress being made and is proposing
that the dividend should be increased by 14% to 1.6p per share
(2006: 1.4p). Subject to approval at the Annual General Meeting,
the dividend will be paid on 3 June 2008 to shareholders on the
register at 9 May 2008.
Regional performance
In Europe and Asia-Pacific there was good revenue growth of 25%
and 35%, respectively, compared to 2006. In the US, revenue fell
slightly as a result of the loss of some key sales staff, but we now
have a full team in place to implement the new strategy there. The
breakdown of turnover by region was: Europe 45.8%, Asia Pacific
21.5% and US 31.7%.
Impairment of intangible assets
The main impact of IFRS on the 2007 accounts was that the
acquisition of NIKA has been restated under IFRS 3 and a value
attributed to the intangible assets acquired (such as customer lists
and technology) with the balance deemed to be goodwill. These
intangible assets have been amortised over an appropriate period
and the residual goodwill arising was subject to an impairment
review. After this review goodwill was written down by £2.22m
resulting in a total charge to the P&L of £3.1m in respect of
these two items.
Disposal
On 20 December 2007 the Board announced the disposal of the
Group’s electromagnetics business to CST GmbH for a consideration
of £1.6m. The sale was completed on 31 January 2008 and the
gain on disposal will be recognised in 2008. The proceeds will be
used to enhance the Company’s position for future growth in
its core business areas.
Outlook
There is the opportunity for sales of the EFD product range to
continue growing strongly and to make an increasingly significant
contribution to the business. Investments in sales and marketing
during 2007 have placed the Company in an excellent position
to take advantage of the wider market opportunity for the EFD
products whilst maintaining Flomerics’ leading position in the field
of electronics cooling. As a result, the Directors are excited about
the future and confident that the investments will start to deliver
a significant increase in shareholder value.
David Mann, Chairman
28 April 2008 | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input Flomerics Group PLC
Annual Report 2007
INVESTING IN OUR FUTURE
DELIVERING OUR POTENTIAL 02 Financial highlights
03 Chairman’s statement
04 Chief Executive’s review
06 Delivering our potential through exploiting
market opportunities
08 Delivering our potential through leveraging our
global brand and international sales presence
10 Electronics Cooling
12 Mechanical Design
14 Business review
16 Board of Directors
17 Corporate governance statement
19 Directors’ remuneration report
21 Directors’ report
23 Statement of Directors’ responsibilities
24 Independent auditors’ report to the shareholders
of Flomerics Group PLC
25 Consolidated income statement
26 Consolidated statement of changes in equity
27 Consolidated balance sheet
28 Consolidated cash flow statement
29 Notes to the consolidated financial statements
64 Company balance sheet
65 Notes to the Company financial statements
68 Information for shareholders Flomerics Group PLC Annual Report 2007 1
The market addressed by Flomerics’ products continues to expand due to the ever
increasing industrial demands of design and function.
Our products and services enable designers and engineers to predict the flow of liquids
and gases and heat transfer in engineering designs of a diverse nature:
– electronic systems
– valves, pumps and pipes
– buildings including airport terminals, data centres and atriums
– vehicles such as cars, trains and aircraft
– engines
– heating, ventilating and cooling systems including fans and heat exchangers
– marine design
– lighting, including both conventional and LED systems
Within electronics our tools provide great value to our customers by allowing design
engineers to understand and optimise the thermal properties of chips and packages
through innovative software simulation and specialist test equipment.
We continue to drive improvements in software performance and breadth of
application for the benefit of our customers and to increase shareholder value.
INVESTING IN OUR FUTURE
DELIVERING OUR POTENTIAL FINANCIAL HIGHLIGHTS
+27%
CASH
£3.0m (2007)
£2.3m (2006)
+1 4%
DIVIDEND PER SHARE
1.6p (2007)
1.4p (2006)
TURNOVER BY REGION
1 Asia: £3.67m +35%
2 Europe: £7 .45m +25%
3 US: £5.15m -7%
1
3
2
TURNOVER
£16.3m (2007)
£14.2m (2006)
+1 4%
ADJUSTED PROFIT BEFORE TAX
£1.3m (2007)
£1.5m (2006)
-1 7%
2 Flomerics Group PLC Annual Report 2007 CHAIRMAN’S STATEMENT
During 2007 there was good progress with the strategic
repositioning of Flomerics following the acquisition of NIKA GmbH
(“NIKA”) in July 2006. Flomerics is continuing to maintain a strong
competitive position in its original field, the application of fluid flow
simulation to electronics cooling, where it is a world leader. It now
addresses this specialist market both by its original product,
FLOTHERM, and by the EFD product range acquired from NIKA. At
the same time the Company is taking advantage of EFD to address
much wider applications of fluid flow simulation and hence a much
larger market. The electromagnetics simulation business (“the EM
business”) was disposed of in January 2008 so that Flomerics can
have greater focus on fluid flow simulation.
Good progress was made with integrating the FLOMERICS and
NIKA technologies and increasing the sales team to implement the
new strategy. The Company is still at an early stage in building the
EFD business outside of its original markets, but the strong growth
in sales of the product has demonstrated the significant benefits
that the investments can bring to future periods.
Results
Total revenues for the year ended 31 December 2007 were up by
14% at £16.3m (2006: £14.2m). If revenues from the discontinued
EM business are excluded, revenues were up by 18% to £14.6m
(2006: £12.4m).
Profit before tax, amortisation of intangible assets (excluding
software and R&D capitalisation), goodwill impairment, share-based
payments and exceptionals (“adjusted PBT”) was £1.3m (2006:
£1.5m) reflecting the investments made during the year. There were
no exceptional items in 2007 (2006: £222,000). The unadjusted loss
Flomerics Group PLC Annual Report 2007 3
FLOMERICS IS CONTINUING TO MAINTAIN
A STRONG COMPETITIVE POSITION IN ITS
ORIGINAL FIELD, THE APPLICATION OF
FLUID FLOW SIMULATION TO ELECTRONICS
COOLING, WHERE IT IS A WORLD LEADER.
“TOTAL REVENUES FOR THE YEAR ENDED
31 DECEMBER 2007 WERE UP BY 14%
AT £16.3M.”
for the year was £1.90m (2006: £0.80m profit) and Basic loss per
share was 8.81p (2006: earnings per share: 4.45p)
Cash generated from operations was £1.9m (2006: £0.9m).
Cash balances for the Group at 31 December 2007 were £2.97m
(2006: £2.34m). After the year end £1.6m cash was received from
the disposal of the EM Business. As at 31 March 2008 cash
balances were in excess of £5.5m.
Dividend
The board is pleased with the progress being made and is proposing
that the dividend should be increased by 14% to 1.6p per share
(2006: 1.4p). Subject to approval at the Annual General Meeting,
the dividend will be paid on 3 June 2008 to shareholders on the
register at 9 May 2008.
Regional performance
In Europe and Asia-Pacific there was good revenue growth of 25%
and 35%, respectively, compared to 2006. In the US, revenue fell
slightly as a result of the loss of some key sales staff, but we now
have a full team in place to implement the new strategy there. The
breakdown of turnover by region was: Europe 45.8%, Asia Pacific
21.5% and US 31.7%.
Impairment of intangible assets
The main impact of IFRS on the 2007 accounts was that the
acquisition of NIKA has been restated under IFRS 3 and a value
attributed to the intangible assets acquired (such as customer lists
and technology) with the balance deemed to be goodwill. These
intangible assets have been amortised over an appropriate period
and the residual goodwill arising was subject to an impairment
review. After this review goodwill was written down by £2.22m
resulting in a total charge to the P&L of £3.1m in respect of
these two items.
Disposal
On 20 December 2007 the Board announced the disposal of the
Group’s electromagnetics business to CST GmbH for a consideration
of £1.6m. The sale was completed on 31 January 2008 and the
gain on disposal will be recognised in 2008. The proceeds will be
used to enhance the Company’s position for future growth in
its core business areas.
Outlook
There is the opportunity for sales of the EFD product range to
continue growing strongly and to make an increasingly significant
contribution to the business. Investments in sales and marketing
during 2007 have placed the Company in an excellent position
to take advantage of the wider market opportunity for the EFD
products whilst maintaining Flomerics’ leading position in the field
of electronics cooling. As a result, the Directors are excited about
the future and confident that the investments will start to deliver
a significant increase in shareholder value.
David Mann, Chairman
28 April 2008 CHIEF EXECUTIVE’S REVIEW
“FLOMERICS CELEBRATES ITS 20TH
ANNIVERSARY AS AN INDEPENDENT
COMPANY IN 2008, PLACING IT FIRMLY
INTO A RARE AND ELITE GROUP OF
COMPANIES THAT HAVE PROSPERED
FOR SUCH A LONG PERIOD.“
2007 was a year of investment for Flomerics: investment in
expanding our sales and support teams to drive sales of the EFD
products acquired in 2006 (as part of the NIKA GmbH acquisition);
investment in marketing to begin to build the ‘EFD’ brand in North
America and in Europe outside of its original markets and investment
in collaboration of our development operations in London, Moscow
and India. Much was accomplished during the year which has put
us into a strong position to build sales and take advantage of the
synergies between our various products and technologies in 2008
and beyond.
Investment in Sales
The early part of 2007 saw our Regional Sales Directors active in
expanding their teams to take advantage of the opportunity to
sell the EFD products in territories where NIKA had not previously
invested. The main focus for this was in the USA, France and the
UK. Finding the right people and organising the expanded teams to
give the best coverage of the geography and the opportunities took
longer than we had anticipated. However we finished the year with
a full complement of sales people and the engineers to support
their activities. Alongside the recruitment exercise we were active
in making sure that all our engineers were trained in our full suite
of Computational Fluid Dynamics (CFD) products (EFD, FLOTHERM
and FLOVENT).
Investment in Marketing
Following the disposal of the EM Business the Group is now focused
on the CFD market. This broadly divides into two sub-markets:
– Electronics Cooling (covered by our FLOTHERM, EFD and
MicReD products)
– Mechanical Design (covered by our EFD and FLOVENT products)
A market survey carried out in 2007 confirmed once again that
Flomerics’ flagship product, FLOTHERM, remains the clear market
leader in thermal analysis of electronic equipment. At the same
time, the EFD products, which have enjoyed great success in central
Europe and in Japan but at the time of the acquisition by Flomerics
were little known outside of these territories, have seen a significant
increase in brand awareness in both North America and other parts
of Europe.
The relationships with our mechanical CAD (Computer Aided
Design) partners, in particular SolidWorks and PTC, continued and
in the case of SolidWorks saw the release of a new product called
FloXpress. FloXpress is a new flow simulation product that is fully
embedded within SolidWorks®2008 3D CAD software and is
available free of charge to all SolidWorks®2008 users. It is a cut-
down version of the popular COSMOSFloWorks product – also
developed by Flomerics – that enables engineers and designers
to simulate complex, 3D fluid flow and heat transfer processes via
a simple, wizard-driven user interface inside the SolidWorks user
environment. The release of this product means a big increase in the
number of mechanical engineers able to access this remarkable
MUCH WAS ACCOMPLISHED DURING THE
YEAR WHICH HAS PUT US INTO A STRONG
POSITION TO BUILD SALES AND TAKE
ADVANTAGE OF THE SYNERGIES BETWEEN
OUR VARIOUS PRODUCTS AND
TECHNOLOGIES IN 2008 AND BEYOND.
4 Flomerics Group PLC Annual Report 2007 “THE INVESTMENTS MADE IN 2007 AND THE
INCREASED FOCUS ON OUR CORE CFD
BUSINESS WILL ALLOW US TO FOCUS ON
DELIVERING RESULTS IN 2008.”
Flomerics Group PLC Annual Report 2007 5
technology and this is expected to increase demand for Flomerics’
software products in the future.
Building familiarity with our products among young engineers and
students continues to be an important part of our marketing effort,
and 2007 saw a significant increase in the use of EFD by universities
and research institutes around the world.
Many of Flomerics’ customers are delighted to share their positive
experiences of using our products, and we continue to publish these
success stories to assist our sales efforts and provide strong editorial
for engineering publications and web portals around the world.
During 2007 we published a record number of success stories which
generated a good response, increased our web site traffic to record
levels and led to an increased number of requests for software
demonstrations – especially for the EFD products.
Research and Development
During 2007 we began the first phase of our plans to make better
use of the considerable expertise and technology managed and
developed in our development centres in the UK, Russia, India and
Hungary. The first evidence of this was the release of an electronics
specific module to be used alongside the EFD products. The EFD
products were already making inroads into certain electronics
applications but the introduction of this new product which saw
the UK based FLOTHERM and Moscow based EFD teams working
closely together, further enhances the dominant position that
Flomerics has long held in the thermal design of electronics.
Disposal of Electromagnetics Business
In December 2007 we announced the divestment of our
electromagnetics line of business (“the EM Business”) for £1.6m,
in order to increase our focus on areas where the Group has much
better opportunities for growth. This disposal was completed on
31 January 2008.
Since entering the electromagnetics simulation market in 1999,
Flomerics built up the usage of its products around the world.
However, with only a small share of the market the Directors
concluded that it would be difficult on our own to achieve a strong
competitive position in this field. The sale of the EM Business to
CST GmbH, a company that specialises in electromagnetics
simulation, signals the beginning of a strategic relationship
providing best-in-class solutions to customers requiring
understanding of both CFD and EM problems.
Finance Director
In December, we announced the appointment of a new Finance
Director. Keith Butcher joined Flomerics from DataCash Group plc
where he became Finance Director in 2002. During his time with
DataCash he played an important role as part of the management
team overseeing a substantial growth in the Company’s market
capitalisation. Keith’s considerable experience is already having
a positive impact on the running of the Company.
2007 Achievements
Despite difficult trading conditions in some territories we saw good
growth in billings in most areas of our business.
Regionally, Europe (+25%) and Asia-Pacific (+35%) saw good
revenue growth in 2007, with a particularly strong performance in
China and South-East Asia where we expect the opportunity to
continue to grow. US revenues fell slightly as we were impacted by
the loss of a number of key sales staff, however we now have a full
team in place. Turnover by region was: Europe 45.8% (2006: 42%),
Asia Pacific 21.5% (2006:19%) and US 31.7% (2006:39%).
Sales of the EFD products grew strongly and FLOVENT continued
the strong growth from last year.
Flomerics’ business is made up of new licence sales and recurring
revenues from existing customers who each year will renew their
commitment with us for a further year of maintenance or to extend
an existing lease arrangement. Particularly encouraging in 2007
was the growth in new business which saw an improving trend
throughout the year as the investments made in the sales teams
and in marketing started to have an impact.
Flomerics 20th Anniversary
Flomerics celebrates its 20th anniversary as an independent
company in 2008, placing it firmly into a rare and elite group of
engineering software companies that have prospered for such
a long period. This landmark is a testimony to the Company’s high-
integrity, people-oriented culture and its core concept of delivering
engineering simulation software for use by designers and engineers
rather than just full-time analysts and specialists. Flomerics has
reached an age that puts it among the most established companies
involved in computer aided engineering, and has just completed
a record-breaking fiscal year where it has achieved a new high in
revenue and seen its worldwide customer base grow to over 2,500
sites and over 7,000 individuals.
The Future
The last three years have seen many changes at Flomerics. In
addition to the incorporation of the former NIKA team, we have
changed almost half of our senior management team and by doing
so added a significant level of sales management experience. We
have made two acquisitions (MicReD and NIKA) and disposed of
our electromagnetics business. These changes together with the
investments made in 2007 and the increased focus on our core
CFD business will allow us to focus on delivering results in 2008.
We have had a very positive start to trading in 2008 and I believe
this demonstrates that the results of our hard work are beginning
to show through.
Gary Carter, Chief Executive
28 April 2008 DELIVERING OUR POTENTIAL
THROUGH EXPLOITING
MARKET OPPORTUNITIES
The addition of the EFD range of products has greatly expanded the
range of potential applications already addressed by our established
FLOTHERM and FLOVENT products. The market for general-purpose
fluid flow simulation tools is far larger than that for electronics cooling.
By expanding into these application areas we have considerably
increased the addressable market for our products.
Increasingly complex designs and competition for innovative and
efficient products is driving our customers to increasingly rely on
virtual prototypes built on a computer. This enables them to verify
the suitability and performance of a design before committing to
physical tests or manufacture.
We continue to evaluate new tools to add to our products in order to
improve our competitive advantage whilst allowing our customers to
maintain leadership in their fields.
6 Flomerics Group PLC Annual Report 2007 General-purpose
Computational Fluid Dynamics
Market – c£250m+
estimated growth 15%
Electronics Cooling
Market – c£45m+
estimated growth 10-15%
Flomerics
£16m
Flomerics Group PLC Annual Report 2007 7 8 Flomerics Group PLC Annual Report 2007
DELIVERING OUR POTENTIAL
THROUGH LEVERAGING
OUR GLOBAL BRAND AND
INTERNATIONAL SALES PRESENCE
Flomerics has a long-established market leadership and respected global
reputation in the field of electronics cooling. The last year has seen
a big investment in using this brand to continue to build the global
market for our recently-introduced EFD products. Through the efforts
of our global marketing and sales teams we are quickly establishing
a reputation for being an innovative supplier of fluid flow simulation
tools across a wide range of industries.
Our global sales and engineering organisation enables us to reach
all the main markets for our tools around the world. Their depth
of knowledge of our customers’ needs together with our range of
possible solutions gives us a respected and valued role as part of
their design processes.
We will continue to expand our global presence to take advantage
of business opportunities as they arise, enabling us to expand our
global brand and to offer our customers the class of service which
drives our success.
Communications
3 Com
Alcatel
Cisco
JDS Uniphase
Lucent Technologies
Marconi
Motorola
NEC
Nokia
Nortel
Computers
Apple
Casio
Dell
HP
IBM
Sony
Sun Microsystems
Toshiba
Office
Black & Decker
Blaupunkt
Bosch-Siemens
Grohe
Miele
Océ
Philips
Samsung
Sanyo
Defence
Airbus
BAE Systems
Bell Helicopter
General Dynamics
Lockheed Martin
Raytheon
US Army
NASA Ames
Semiconductors
Agilent
AMD
Infineon
Intel
Motorola
Philips
Semiconductor
ST Microelectronics
Texas Instruments
Transportation
Alstom Transport
Delphi Delco
Ford
Magneti Marelli
Robert Bosch
Siemens Automotive
Toyota Auto Body
Honda Flomerics Group PLC Annual Report 2007 9
Europe
France
Hungary
Germany
Italy
Russia
Sweden
United Kingdom
Spain
USA
San José
Boston
Austin
Rest of the World
China
Japan
India
Israel
Singapore
South Korea
Taiwan
South Africa
Sales Offices
Sales Agents
R&D Operations
US
32%
£5.15m
Global office network
Revenues by geography
Europe
46%
£7.45m
Asia
23%
£3.67m DELIVERING OUR POTENTIAL
ELECTRONICS COOLING
Electronics Cooling is the largest part of our business. Flomerics is
the provider of software tools used by electrical and mechanical
engineers to analyse temperatures in the design of circuit boards
and complete electronic systems. Our client list includes virtually
every major electronics company in the world.
Flomerics’ software enables design engineers to solve thermal
management problems quickly, accurately and cost-effectively.
As a result, our customers save time and money during design
and test cycles and accelerate time to market for their products.
Flomerics’ software tools and solutions for Electronics Cooling
are based around our world-leading FLOTHERM product, the EFD
product set and the MicReD portfolio of products.
FLOTHERM is the undisputed worldwide market-leading tool for
the thermal analysis of electronic equipment such as computers,
telecommunications equipment, control systems for the military
and even domestic hi-fi equipment. Heat affects the reliability and
lifetime of almost every type of electronic equipment. As products
develop, processing speeds increase, functionality grows and the
equipment gets smaller and more compact, so that thermal
problems intensify. FLOTHERM applies Computational Fluid
Dynamics (CFD) methods to predict airflow and temperatures
throughout electronic equipment. This enables engineers to identify
the source of any over-heating within the component or product
and devise the most effective design solutions.
FLO/PCB is a software tool for accelerating the conceptual design of
high-density printed-circuit boards. FLO/PCB improves communication
and collaboration between product marketing, electrical and
mechanical engineers, and enables them to address layout and
thermal issues as the functional specification is being defined.
ThermPaq is a new product that automates the thermal
characterisation of IC packages.
EFD is a software tool ideally suited to customers whose applications
do not demand the level of specialisation provided within
FLOTHERM. This has helped widen the range of customers who
can now benefit from Flomerics’ product set.
MicReD’s product set focuses on the thermal characterisation
of integrated circuit packages, MEMs, LEDs and printed
circuit boards.
10 Flomerics Group PLC Annual Report 2007
CLIENT: ANTARES ADVANCED TEST TECHNOLOGIES
PRODUCT: FLOTHERM
Background
An Antares customer that produces semiconductors for
military and space applications asked Antares to provide
a burn-in test system that could simultaneously handle
a wide range of products. In order to handle these products,
each socket would need to be capable of sensing the
temperature of the device, and either heating or cooling
the device to keep it at the proper burn-in temperature
which may be either above or below ambient temperature.
Solution
Flomerics’ FLOTHERM thermal simulation software enabled
the customer to test several types of devices simultaneously
at a wide range of temperatures both above and below
ambient. It enabled Antares to accurately predict the thermal
resistance of each design iteration without having to build
and test the prototype. The ability to quickly simulate
thermal performance made it possible to evaluate a large
number of different design concepts in a short space of time.
“I could easily identify thermal blockages by looking for
changes in temperature across a relatively small area, so
I was able to concentrate on reducing thermal resistance
in these areas.” Trevor Moody, Thermal and Mechanical
Engineer, Antares – FLOTHERM is the worldwide market-leading
software tool for the thermal analysis of
electronic equipment
– Clients include virtually every major electronics
company in the world
– The EFD family of products provides the user
with the ability to simulate fluid flow directly
across a wide range of applications and from
within the users design environment
Flomerics Group PLC Annual Report 2007 11 12 Flomerics Group PLC Annual Report 2007
DELIVERING OUR POTENTIAL
MECHANICAL DESIGN
Flomerics’ Engineering Fluid Dynamics (EFD) product family
is a new breed of software tools that apply the principles of
Computational Fluid Dynamics (CFD). These enable mechanical
design engineers to analyse complex fluid flow and heat transfer
processes and to optimise design across a wide range of products
and industries.
The Flomerics EFD product family is tightly integrated with leading
3D mechanical computer-aided design (MCAD) software such
as Pro/ENGINEER®, CATIA V5 and SolidWorks™. In the case
of SolidWorks™, the product is sold under the brand name
COSMOSFloWorks® through the SolidWorks™ sales channel.
The EFD family of products is our fully-featured general-purpose
3D fluid flow and heat transfer analysis software that has been
developed for design engineers. ‘EFD’ stands for Engineering Fluid
Dynamics and the software we have developed is significantly
different from traditional Computational Fluid Dynamics (CFD). The
key advantage of EFD over CFD is that EFD speaks the language of
engineers. EFD eliminates the complexities of engineering design,
enabling engineers to work more quickly, accurately and
productively. The EFD family, unlike FLOTHERM and FLOVENT, is not
specific to one industry sector and can therefore be sold to a much
broader range of customers.
FLOVENT is a powerful CFD software tool that predicts 3D airflow,
heat transfer and contamination distribution in and around
buildings of all types and sizes.
FLOVENT provides a fast and easy-to-use menu system designed
specifically for the optimisation of heating, ventilating and
air-conditioning (HVAC) systems. Applications span datacentres
and IT rooms, auditoriums, shopping malls, office buildings,
underground car parks, passenger vehicles and airport terminals.
Air quality and contaminant control applications include
laboratories, research facilities and hospitals.
FLOVENT uses the same software structure and analysis engine
as FLOTHERM, our market-leading product. However, the user
interface within FLOVENT has been specifically tailored to suit the
building design industry.
With our EFD products set, Flomerics has successfully extended its
range of solutions and applications beyond electronics to address
a market sector that is worth some £200m per year worldwide.
CLIENT: SHAW AERO DEVICES, USA
PRODUCT: EFD.LAB
Background
Shaw Aero Devices designs, develops and manufactures
a wide range of products in the areas of fuel, oil and
water/waste systems and components. Shaw’s customer was
interested in purchasing a large quantity of a solenoid valve
similar to one of their standard products for an unmanned
aerial vehicle. The customer specified a pressure drop of 0.75
pounds per square inch (psi) at a flow rate of 4.45 gallons per
minute while Shaw’s standard valve measured out at 6.09 psi.
Solution
In the past, this would have required building and testing
a series of designs in an effort to eliminate constrictions with
no guarantee of success. EFD.LAB reduced the time required
to simulate flow by analysing the model and automatically
identifying fluid and solid regions without user interaction.
Shaw were able to run a series of simulations and design
iterations, until they achieved the acceptable pressure level.
“CFD simulation dramatically reduced the time needed to
meet our customer’s demanding specifications. We moved
from the beginning of the project to the development
of an acceptable software prototype in only one day.”
Rob Preble, Project Engineer, Shaw Aero Devices, Inc Flomerics Group PLC Annual Report 2007 13
– Flomerics’ EFD solutions provide significant
advantages over conventional CFD products
– EFD eliminates the complexities of engineering
design, enabling engineers to work more
quickly, accurately and productively
– The EFD family widens our marketplace
by appealing to less specialised users with
a much broader range of applications.
– FLOVENT is the industry-leading product
focused on the HVAC market Group Financial Performance
Turnover for 2007 increased by 14% to a record £16.3m. Excluding
revenues from the Electromagnetic business (“the EM Business”)
revenues increased by 18% to £14.6m (2006: £12.4m).
Profit before tax, amortisation of intangible assets, goodwill
impairment, share-based payments and exceptionals (“adjusted
PBT”) was £1.3m (2006: £1.5m). The charge for the year for share-
based payments was £116,000 (2006; £97,000). There were no
exceptional items in 2007 (2006: £222,000). The unadjusted loss
for the year was £1.90m (2006: £0.80m profit) and Basic loss per
share was 8.81p (2006: earnings per share: 4.45p).
The goodwill impairment charge of £2.22m (2006: £nil) and
intangible amortisation charge of £684,000 (2006: £338,000) relate
to the acquisition of NIKA GmbH in July 2006. The impairment of the
NIKA carrying value resulted from a slower than anticipated growth in
sales of the NIKA products in 2007 and a prudent was view taken.
However the directors are encouraged by the start in 2008.
Costs
Cost of sales, which comprise royalties paid to third-party licensors
and manufacturing costs of the Group’s hardware products for the
full year, amounted to 4.4% of revenue (2006: 3.8%).
Research and development (R&D) costs have increased, mainly
because the cost of the NIKA development team in Moscow was
only included in the 2006 results from 1st July, but also reflecting
general wage inflation. Staff numbers in our teams in Moscow, the
UK and India however, have remained broadly similar since the
acquisition of NIKA. R&D costs accounted for 20.5% of Group
revenue in the period (2006: 20.4%).
Staff related costs are the Group’s biggest expense. These increased
to £9.5m from £7.6m while the average number of staff increased
from 191 to 242 reflecting the acquisition of NIKA. At the end of
the year the Group employed 229 people.
Disposal of the EM business
In December 2007 agreement was reached to dispose of the
electromagnetics part of the business (“the EM Business) for £1.6m.
Completion was on 31 January 2008 and we have since received
the proceeds from the purchaser. As a result the EM revenues have
been separately shown as discontinued operations and only costs
directly attributable to the EM business have been shown in this
column. General overheads and management costs are not allowed
to be attributed to this discontinued operations.
Cashflow and Financing
Cash balances at the end of 2007 were £2.97m (2006: £2.34m).
Cash generated from operating activities was £1.6m
(2006: £545,000). Debtors were £0.7m higher than they were
at the end of 2006 at £6.1m, in line with revenue growth.
Major non-operating cashflows included capital expenditure of
£386,000 (2006:£547,000); and a dividend paid of £299,000
(2006: £195,000). The net increase in cash was £0.6m.
BUSINESS REVIEW
“TURNOVER FOR 2007 INCREASED BY
14% TO A RECORD £16.3M. EXCLUDING
REVENUES FROM THE ELECTROMAGNETIC
BUSINESS REVENUES INCREASED BY 18%
TO £14.6M.”
14 Flomerics Group PLC Annual Report 2007 Flomerics Group PLC Annual Report 2007 15
The Group has borrowings of £305,000 which relates to the
mortgage on a freehold property that is being repaid over ten
years. There are no other borrowings.
Trade debtors at the end of 2007 were £5.3m (2006: £4.8m).
Debtor days at 31 December 2007 were 74 (2006: 72 days).
Share Capital
During the year 300,146 shares were issued to employees exercising
share options and as part of the acquisition of MicReD, taking total
shares in issue to 21,631,516 at 31st December 2007.
As part of the completion terms relating to the acquisition of NIKA
GmbH in 2006 1,265,000 shares were issued in March 2008 to the
vendors of NIKA GmbH.
Deferred Consideration
Under the terms of the acquisition of MicReD, deferred
consideration was due depending on the results in 2005 and 2006.
Following the performance in those years, the final instalment of
the deferred consideration of €380,000 was paid out during the
period and 209,000 Flomerics shares were issued.
Under the terms of the acquisition of NIKA GmbH, no deferred
consideration is due to be paid.
Impact of adoption of IFRS
The Group adopted International Financial Reporting Standards
(IFRS) with effect from 1 January 2006. The 2006 results were
restated under IFRS and announced to the market along with
our last interim results.
The main impact of IFRS on the 2007 accounts were that the
acquisition of NIKA has been restated under IFRS 3 and a value
attributed to the intangible assets acquired (such as customer lists
and technology) with the balance deemed to be goodwill. These
intangible assets have been amortised over an appropriate period
and the goodwill arising was subject to an impairment review. After
this review, goodwill was written down by £2.22m, resulting in
a total charge to the P&L in the year relating to intangible assets
and goodwill of £3.1m.
The other significant change under IFRS was the treatment of
research and development costs. Under IAS 38, if certain criteria are
satisfied the development costs must be capitalised and amortised
over the anticipated period that benefits are expected. The impact
of this in the 2007 accounts was £233,000 and the carrying value
on the Balance Sheet at the year end was £336,000.
Business risk
The principal risks facing the Group and discussed by the Board
relate broadly to the Group’s technology, the competitive
environment and managing a diverse range of products. These
are addressed by the Risk Committee, which meets on a regular
basis as outlined in the Corporate Governance section of the
Directors Report. During 2007 risks assessed included the loss of
key employees and the risk of the EM business not having critical
mass to compete in the market place. As a result of this assessment
the EM business was disposed of in January 2008 as detailed in
this report.
Interest rate risk
The Group is cash positive and places its balances on short-term
deposits with highly regarded financial institutions. Changes in
interest rates will affect the return on cash balances. The Group
does not hold or issue derivative financial instruments.
Liquidity risk
The Group is cash positive and has a policy of ensuring sufficient
funds are always available for its operating activities. While the need
for borrowing facilities are not required at present, the Board
continually monitors the Group’s cash requirements.
Foreign currency exchange risk
The majority of cash at bank is held in Sterling, Euro and US dollar
accounts however we also maintain modest balances in other
currencies. There are also trade balances and investments in these
currencies. The Group’s foreign exchange risk is hedged by way of
forward exchange contracts where appropriate and any resulting
gains or losses are recognised in the profit and loss account.
Credit risk
The Group has a small exposure to credit risk from credit sales. It is
the Group’s policy to assess the credit risk of new customers before
entering into contracts. Historically, bad debts across the Group
have been very low.
Shareholder information
The Group’s website at www.flomerics.com contains a wide range
of information about our activities and visitors can download copies
of the Report and Accounts as well as customer testimonials and
product demonstrations.
Keith Butcher, Finance Director
28 April 2008
03* £0.5m
04* £0.8m
05* £1.1m
06 £1.5m
07 £1.3m
Adjusted Profit before tax (£m)
03 £10.2
04 £10.2
05 £11.4
06 £14.2
07 £16.3
Turnover (£m)
* Profit under UK GAAP . 16 Flomerics Group PLC Annual Report 2007
BOARD OF DIRECTORS
Gary Carter
Gary Carter, aged 48, is the Chief Executive.
He read Mathematics at Leeds University
followed by a PhD in Computational Fluid
Dynamics. Following industry experience
with the aero-engine division of Rolls-Royce,
he moved into the world of engineering
simulation software where he spent
seventeen years working with Aveva, PDA
Engineering, MSC.Software and most
recently ANSYS in various development,
support, sales and marketing roles
culminating in his appointment as European
Vice President for ANSYS. He joined
Flomerics in January 2005.
David Mann
David Mann, aged 63, is the Non-Executive
Chairman. He read Theoretical Physics at
Cambridge University and worked for
Logica plc from 1969 to 1994, where he
became Chief Executive and then Deputy
Chairman. He is currently Chairman of Velti
plc (quoted on AIM), Deputy Chairman of
Charteris plc (AIM) and Senior Independent
Non-Executive Director of Aveva Group plc
(Official List). He is a Past President of the
British Computer Society and a Past Master
of the Information Technologists’ Company
in the City of London.
Peter Teague
Peter Teague, aged 53, is a Non-Executive
Director. He read Mathematics at London
University (Imperial College) and qualified
as a Chartered Accountant with KPMG in
London. Following experience in industry
and commerce with AT&T in a number of
positions, including Vice President and Chief
Financial Officer, AT&T UK, and with BBC
Worldwide as Finance & IT Director and
Managing Director, UK Region, he now
pursues a plural career. Peter is on the
board of a number of companies and
chairs the Audit Committee at Ofcom.
Tom Rowbotham
Tom Rowbotham, aged 66, is the
Non-Executive Deputy Chairman. He has
a PhD in the Transmission Line Modelling
(TLM) method of electromagnetic analysis
from Nottingham University. He was a
founder of Kimberley Communications
Consultants Ltd, and was Chairman when
it merged with Flomerics Group PLC in
1999. He has been Director of BT’s R&D
Laboratories. He is currently a Venture
Partner at Vesbridge Partners, Boston.
He is also on the boards of a number
of companies in the UK and USA.
Keith Butcher
Keith Butcher, aged 45, is the Finance
Director and Company Secretary. He read
Management Science at Warwick University
and qualified as a Chartered Accountant
with KPMG. Before joining Flomerics in
January 2008 he was Finance Director
of DataCash Group plc where during his
tenure the market capitalisation grew from
£8m to £300m. He previously worked for
PricewaterhouseCoopers and Diagonal plc. CORPORATE GOVERNANCE STATEMENT
Flomerics Group PLC Annual Report 2007 17
The Board of Directors is accountable to shareholders for the good corporate governance of the Group. The principles of corporate
governance are set out in the Financial Reporting Council’s revised Combined Code on corporate governance issued in 2006. Under
the rules of the Alternative Investment Market (AIM) the Company is not required to comply with the Code and the Board considers
that the size of the Group does not warrant compliance with all of the Code’s requirements. This statement sets out how the
principles of the Code that the Directors consider are relevant to Flomerics Group PLC are applied.
Board of Directors
The Non-Executive Chairman of the Company is David Mann. Gary Carter was appointed as Chief Executive in 2005. Tom
Rowbotham as the Non-Executive Deputy Chairman is the senior independent Non-Executive Director. Tim Morris stepped down
from the Board on 24 January 2007 and was replaced by Peter Teague as Chairman of the Audit Committee. Chris Ogle stepped
down as Finance Director on 31 December 2007 and was replaced by Keith Butcher. Wolfgang Biedermann, non-Executive Director,
stepped down from the Board on 15 April 2008.
The Board now comprises two Executive Directors (Chief Executive and Finance Director) and three Non-Executive Directors. For the
size of the Group, it is considered that this gives the necessary mix of industry specific and broad business experience necessary for
the effective governance of the Group. The Board meets regularly, normally on a monthly basis, and is particularly concerned with
the Group’s strategy.
The Group has a senior management team which is responsible for the day to day management of the Group. This is comprised of
the Chief Executive, the Finance Director, the Chief Technology Officer, Regional Directors for the US, Europe and Asia Pacific, the
Director of Marketing, Director of Software Development UK and India, Director of Software Development Moscow, and the
Product Director.
The Board met twelve times during the year, excluding ad hoc meetings convened to deal with procedural matters.
Board Meetings Audit Committee
Remuneration
Committee
Nominations
Committee Risk Committee
Director
No. of
possible
attendances
No.
attended
No. of
possible
attendances
No.
attended
No. of
possible
attendances
No.
attended
No. of
possible
attendances
No.
attended
No. of
possible
attendances
No.
attended
Chairman
D Mann 12 11225 5 11 n/a n/a
Executive Directors
G Carter 12 12225 5 11 n/a n/a
C Ogle* 12 12 2 2 n/a n/a n/a n/a 3 3
Non-Executive
Directors
T Morris** 1 1 n/a n/a n/a n/a n/a n/a n/a n/a
T Rowbotham 12 12225 5 1133
W Biedermann 12 10 n/a n/a n/a n/a n/a n/a n/a n/a
P Teague** 11 11 2 2 n/a n/a n/a n/a 3 3
* Chris Ogle resigned on 31 December 2007 and was replaced by Keith Butcher.
** Tim Morris resigned on 27 January 2007 and was replaced by Peter Teague.
Audit Committee
For the period under review, the Audit Committee comprised Peter Teague (Chairman) and David Mann with Gary Carter, Chris Ogle
and the external auditors generally in attendance. Peter Teague replaced Tim Morris on 24 January 2007 and Tom Rowbotham
stepped down from the Committee at the same time because it was felt that for the size of the company two independent Directors
is sufficient. The remit of the Committee is to ensure the continued operation of good financial practices throughout the Group;
to monitor that controls are in force to ensure the integrity of financial information; to review the interim statement and annual
financial statements; and to provide a line of communication between the Board and the external auditors. The Audit Committee
normally meets two times a year.
Remuneration Committee
A separate report on remuneration including the composition and remit of the Committee has been included on page 19. CORPORATE GOVERNANCE STATEMENT
18 Flomerics Group PLC Annual Report 2007
Risk Committee
The Risk Committee is chaired by the Non-Executive Deputy Chairman, Tom Rowbotham, and for the period under review comprised
Chris Ogle, the Finance Director, Ian Clark, the Product Manager for the company’s major product, FLOTHERM, and Andrew Manning,
the Director of Engineering Services for Flomerics, Inc. During 2007, the Committee was rationalised to comprise: Tom Rowbotham
as Chairman, Peter Teague and Chris Ogle. Keith Butcher replaced Chris Ogle in 2008.
This Committee was set up in 2000 in response to a recommendation of the Turnbull Report, which offered guidance to Directors on
complying with the internal control requirements of the Combined Code.
The role of the Committee is to identify the risks facing the business, to quantify their impact, and to ensure that they are managed
within acceptable levels.
During 2007, the Committee reviewed the current status of the management of major risks to the business, and the impact of the
actions that the executives had taken.
The highest priority risks were chosen after discussion with all the executives and the Board. The executives then drew up an action
plan to address each risk.
One senior executive was assigned responsibility for each risk in order to assure its continuous relevance, that actions were carried
out to plan, and that quarterly progress reports were produced. The Risk Committee reviewed these reports and informed the Board
about progress, while feeding back comments to the executives.
The Committee is satisfied that in every case the executives had taken the task of managing the risk programme very seriously and
the Risk Committee concludes that the actions taken during 2007 have resulted in significantly reduced risks for the business.
The principal risks facing the Group and discussed by the Board relate to the Group’s technology, the competitive environment and
managing a diverse range of products.
Nomination Committee
The Nomination Committee comprises David Mann, Tom Rowbotham and Gary Carter. It is chaired by David Mann, except when
matters concerning the Chairmanship are being discussed.
The Committee is responsible for reviewing the structure, size and composition of the Board, identifying suitable candidates for the
approval of the Board when vacancies arise and ensuring effective Board succession planning.
Peter Teague was appointed to the Board in January 2007 as a Non-Executive Director, replacing Tim Morris as Chairman of the
Audit Committee.
Keith Butcher was appointed to the Board in January 2008 as an Executive Director, replacing Chris Ogle as Finance Director.
Internal financial control
The Board is ultimately responsible for the Group’s system of internal financial control and for reviewing its effectiveness. This is
achieved through the following means:
The Group maintains a comprehensive process of financial reporting. The annual budget is reviewed and approved by the Board
before being formally adopted. The Board receives financial reports of the Group’s performance compared to the budget and prior
years with explanations of significant variances. In addition, monthly reforecasts and cash flow forecasts are presented to the Board.
A thorough recruitment process ensures, as far as possible, that its employees hold principles of the highest integrity. This is an
essential part of the Group’s culture.
The effectiveness of the Group’s internal financial control is the responsibility of the Audit Committee and, to the extent that they
are perceived to be a risk, of the Risk Committee. The maintenance and constant improvement of these controls is the responsibility
of the Finance Director. The external auditors review the internal financial controls relevant to expressing their audit opinion and
report to the Audit Committee on their findings where appropriate.
The existence of internal controls cannot entirely eliminate risk and no absolute assurance against loss to the Group can be made.
Going concern
The Board reports as to whether it is appropriate for the financial statements to be prepared on a going concern basis.
The Group’s finances are currently sound and the net funding position is positive. Looking beyond the annual budget, the product
roadmap and financial plans for the Group are reviewed and updated annually. On this basis, the Board continues to adopt the
going concern basis in preparing the financial statements. DIRECTORS’ REMUNERATION REPORT
Flomerics Group PLC Annual Report 2007 19
Remuneration Committee
The Remuneration Committee (“the Committee”) is chaired by David Mann and comprises David Mann (as Chairman) and
Tom Rowbotham. The Chief Executive is normally in attendance, except when his own remuneration is being discussed.
The principal function of the Committee is to set the remuneration and other benefits of the Executive Directors and senior
managers including pension contributions, share options and bonus payments. The Committee also approves the overall salary
increase made across the Group as recommended by the Chief Executive and it oversees all bonus and share option schemes.
The policy of the Committee is to pay remuneration comparable to other peer companies, within the limits of what can be afforded.
Bonus payments
The Committee oversees a bonus system for the senior management team which is reviewed annually. The intention of the scheme is
to ensure that the Executive Directors are strongly incentivised to exceed budget performance. 50% of the potential bonus payment
is directly related to the financial performance of either the entire Group or, where relevant, the area under their responsibility.
The other 50% is paid at the discretion of the Committee and is based on their individual performance.
During 2007, the Executive Directors and other senior managers, excluding the Chief Executive could earn up to a maximum of 50%
of their basic salary as a bonus. The Chief Executive could earn up to a maximum of 60% of his basic salary as a bonus. For 2007 the
profit for the Group was at a level whereby any bonuses paid to the senior management were entirely discretionary.
The Group also runs a scheme for employees whereby a portion of the Group’s pre-tax profit is set aside to be distributed amongst
the Group’s employees. For the year ended 31 December 2007, none of the Group’s profits have been set aside in this way.
Share Options
The Committee recognises that share options can play an important part in aligning the interests of shareholders, Directors and
staff. Share options that are granted have performance conditions attached, which ensure that the options only vest if those
conditions are met.
Directors’ Service Contracts
Executive Directors have “rolling” service contracts. The Chief Executive’s contract is terminable by either party giving twelve
months’ notice. In the case of all other Executive Directors the notice period is six months.
Non-Executive Directors do not have service contracts. Letters of agreement are in place dated 7 November 1995 for David Mann,
28 July 1999 for Tom Rowbotham and 6 February 2007 for Peter Teague. In each case, the arrangement is terminable with three
months’ notice.
Remuneration of Non-Executive Directors
Fees paid to Non-Executive Directors are detailed on page 20. The intention is to pay fees that are comparable with those paid by
companies of similar size and complexity. The remuneration of the Non-Executive Directors is proposed by the Chief Executive and
the Finance Director and approved by the Board. DIRECTORS’ REMUNERATION REPORT
20 Flomerics Group PLC Annual Report 2007
Directors’ Remuneration
Emoluments paid to Directors in the year comprised:
Salaries/
fees
£’000
Bonus
£’000
Benefits
£’000
Total
2007
£’000
Total
2006
£’000
D W Mann 30 – – 30 28
G C Carter 142 – 1 143 213
C J R Ogle* 124 20 1 145 127
T R Rowbotham 21 – – 21 19
P R Teague 17 – – 17 –
T R T Morris** 2 – – 2 13
336 20 2 358 400
Pension contributions
The Group made contributions under the Company Group Personal Pension Plan, a defined contribution scheme, as follows:
2007
£’000
2006
£’000
G C Carter 11 10
C J R Ogle* 10 9
21 19
Directors’ interests in Share Options
Share options have been granted to the following Directors under the Company’s Share option scheme:
No. of shares under option
At
31 December
2006
Issued
in year
Lapsed
in year
At
31 December
2007
Exercise
Price
Exercise
date
G C Carter 100,000 – – 100,000 70.0 2008-2015
G C Carter 100,000 – – 100,000 87.5 2008-2015
G C Carter – 100,000 – 100,000 86.0 2010-2017
C J R Ogle* 100,000 – – 100,000 54.5 2002-2009
C J R Ogle* 8,750 – – 8,750 84.0 2005-2012
C J R Ogle* 12,500 – – 12,500 51.0 2006-2013
C J R Ogle* 45,000 – – 45,000 61.5 2007-2014
C J R Ogle* 35,000 – – 35,000 70.0 2008-2015
C J R Ogle* 50,000 – – 50,000 98.5 2009-2016
* Resigned 31 December 2007.
** Resigned 27 January 2007.
DIRECTORS’ REPORT
Flomerics Group PLC Annual Report 2007 21
The Directors present their annual report on the affairs of the Group, together with the financial statements and auditors’ report,
for the year ended 31 December 2007.
Results and dividends
The consolidated income statement is set out on page 25 and shows the profit for the year.
The Directors recommend the payment of a dividend of 1.6p (2006: 1.4p) per ordinary share.
The consolidated loss for the year amounted to £1,896,000 (2006: profit £804,000).
Principal activities, trading review and future developments
The principal activities of the Group are the provision of virtual prototyping software. A review of the development of the business
during the year, that fulfils the requirements of the ‘Enhanced Business Review’, is given in the Chairman’s Statement on page 3 in
paragraphs headed ‘Results’ and ‘Regional performance’ and the KPIs are outlined in the Business Review on page 14. The
Chairman’s Statement also includes reference to the Group’s future prospects. An indication of the Group’s activities in research and
development is given in the Chief Executive’s review on pages 4 and 5.
Areas of operation
The Group’s headquarters and primary centre for research and development is in the United Kingdom. The Group also has research
and development centres in India and Russia. The Group also has sales and support offices in the United States of America, France,
Germany, Italy, China, Singapore, Sweden, Japan and India.
Financial instruments
The Group’s policy in respect of financial instruments is set out in note 31.
Political and charitable contributions
During 2007, the Group contributed a total of £50 (2006 – £1,864) to support local charities. The Group made no political donations.
Directors and their interests
The Directors of the Company during the year were
D W Mann Non-Executive Chairman
G C Carter Chief Executive
C J R Ogle Finance Director (resigned 31 December 2007)
T R Rowbotham Non-Executive Deputy Chairman
T R T Morris Non-Executive Director (resigned 24 January 2007)
W Biedermann Non-Executive Director (resigned 15 April 2008)
P R Teague Audit Committee Chairman (appointed 24 January 2007)
Subsequent to the year end Keith Butcher was appointed to the Board as Finance Director.
Details of Directors’ remuneration and Directors’ share options are given in the Report on Remuneration on page 20.
The Directors who held office at the end of the financial year had the following interests in the ordinary shares of the Company
as recorded in the register of Directors’ share and debenture interests:
At 31
December
2007
Ordinary
shares
No.
At 1
January
2007
Ordinary
shares
No.
D W Mann 167,195 167,195
D W Mann – non-beneficial 45,000 45,000
G C Carter 30,000 30,000
C J R Ogle* 22,500 22,500
T R Rowbotham 361,236 361,326
W Biedermann** – –
P R Teague – –
* Chris Ogle resigned as a Director on 31 December 2007.
** W Biedermann (resigned 15 April 2008), was a principal of Pricap Venture Partners AG until 30 June 2007. Pricap Venture Partners AG had
a significant shareholding in the Company throughout 2007. On 14 March 2008 they sold their entire shareholding.
Keith Butcher was appointed as a Director on 2 January 2008 and as at 28 April 2008 holds 100,000 shares.
There were no other changes in the Directors’ shareholdings between 31 December 2007 and 28 April 2008. DIRECTORS’ REPORT
22 Flomerics Group PLC Annual Report 2007
Directors’ share options
Details of Directors’ share options are provided in the Directors’ remuneration report on page 20.
Directors’ indemnities
The Company has made qualifying third party indemnity provisions for the benefit of its Directors which were made during the year
and remain in force at the date of this report.
Supplier payment policy
The Company’s policy, which is also applied by the Group, is to settle terms of payment with suppliers when agreeing the terms
of each transaction, ensures that suppliers are made aware of the terms of payment and abide by the terms of payment. Trade
creditors of the Group at 31 December 2007 were equivalent to 27 (2006 – 39) days’ purchases, based on the average daily amount
invoiced by suppliers during the year.
Significant shareholdings
As at 28 April 2008, notification had been received that the following were interested in more than 3% of the Company’s ordinary
share capital:
Number of
ordinary
shares
Percentage
of issued
ordinary
share
capital
Mentor Graphics Corporation 6,541,175 28.77
Kozo Keikaku Engineering 1,099,597 5.11
D G Tatchell 1,332,800 5.86
Disabled employees
Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant
concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment with the
Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and
promotion of disabled persons should, as far as possible, be identical to that of other employees.
Employee consultation
The Group places considerable value on the involvement of its employees and has continued to keep them informed on matters
affecting them as employees and on the various factors affecting the performance of the Group. This is achieved through formal
and informal meetings, the Company magazine and a special edition for employees of the annual financial statements. Employee
representatives are consulted regularly on a wide range of matters affecting their current and future interests.
Post balance sheet events
On 20 December 2007 the Board announced the disposal of the EM Business to CST GmbH for a consideration of £1.6m. The sale
was completed on 31 January 2008 and the gain on disposal will be recognised in 2008. Final payment was received in April 2008.
As part of the completion terms relating to the acquisition of NIKA GmbH in 2006 1,100,724 shares were issued in March 2008
to the vendors of NIKA GmbH.
Independent auditors
Each of the persons who is a Director at the date of approval of this annual report confirms that:
• so far as the Director is aware, there is no relevant audit information of which the company’s auditors are unaware; and
• the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any
relevant audit information and to establish that the Company’s auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985.
BDO Stoy Hayward LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them
will be proposed at the forthcoming Annual General Meeting.
By order of the Board
Keith Butcher
Secretary
28 April 2008
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
Flomerics Group PLC Annual Report 2007 23
Directors’ responsibilities
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the
financial position of the Group, for safeguarding the assets of the Company, for taking reasonable steps for the prevention and
detection of fraud and other irregularities and for the preparation of a Directors’ Report which complies with the requirements
of the Companies Act 1985.
The Directors are responsible for preparing the annual report and the financial statements in accordance with the Companies Act
1985. The Directors are also required to prepare financial statements for the Group in accordance with International Financial
Reporting Standards as adopted by the European Union (IFRSs) and the rules of the London Stock Exchange for companies trading
securities on the Alternative Investment Market. The Directors have chosen to prepare financial statements for the Company in
accordance with UK Generally Accepted Accounting Practice.
Group financial statements
International Accounting Standard 1 requires that financial statements present fairly for each financial year the Group’s financial
position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events
and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the
International Accounting Standards Board’s ‘Framework for the preparation and presentation of financial statements’. In virtually
all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. A fair presentation also requires the
Directors to:
• consistently select and apply appropriate accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable
information; and
• provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to
understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial
performance.
Parent company financial statements
Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the
state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements,
the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will
continue in business.
• make judgements and estimates that are reasonable and prudent; and
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and
explained in the financial statements.
Financial statements are published on the Group’s website in accordance with legislation in the United Kingdom governing the
preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance
and integrity of the Group’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing
integrity of the financial statements contained therein.
The maintenance and integrity of Flomerics Group PLC’s website is the responsibility of the Directors. The work carried out by the
auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that
may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom
governing the preparation and dissemination of the financial statements may differ in other jurisdictions. INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF FLOMERICS GROUP PLC
24 Flomerics Group PLC Annual Report 2007
We have audited the Group and parent Company financial statements (the “financial statements”) of Flomerics Group PLC for the
year ended 31 December 2007 which comprise the consolidated income statement, the consolidated statement of changes in equity,
the consolidated balance sheet, the consolidated cash flow statement, the related notes 1 to 34 and the Company balance sheet and
related notes A to K. These Group financial statements have been prepared under the accounting policies set out therein.
Respective responsibilities of Directors and auditors
The Directors’ responsibilities for preparing the annual report and Group financial statements in accordance with applicable law
and International Financial Reporting Standards (IFRSs) as adopted by the European Union and for preparing the parent Company
financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice) are set out in the statement of Directors’ responsibilities.
Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and have been properly prepared
in accordance with the Companies Act 1985 and whether the information given in the Directors’ report is consistent with those
financial statements. We also report to you if, in our opinion, the Company has not kept proper accounting records, if we have
not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’
remuneration and other transactions is not disclosed.
We read other information contained in the annual report, and consider whether it is consistent with the audited financial
statements. This other information comprises only the Chairman’s statement, the Chief Executive’s Review, the business review
and the Directors’ report. We consider the implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.
Our report has been prepared pursuant to the requirements of the Companies Act 1985 and for no other purpose. No person is
entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of
the Companies Act 1985 or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept
responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices
Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial
statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order
to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement,
whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the
presentation of information in the financial statements.
Opinion
In our opinion:
• the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the
state of the Group’s affairs as at 31 December 2007 and of its loss for the year then ended;
• the parent Company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted
Accounting Practice, of the state of the parent Company’s affairs as at 31 December 2007;
• the financial statements have been properly prepared in accordance with the Companies Act 1985; and
• the information given in the Directors’ Report is consistent with the Group financial statements.
BDO Stoy Hayward LLP
Chartered Accountants and Registered Auditors
London, United Kingdom
28 April 2008 CONSOLIDATED INCOME STATEMENT
Year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 25
Note
Continuing
operations
2007
£’000
Dis-
continued
operations
2007
£’000
Year
ended
2007
£’000
Continuing
operations
2006
£’000
Dis-
continued
operations
2006
£’000
Year
ended
2006
£’000
Revenue 14,647 1,623 16,270 12,433 1,788 14,221
Cost of sales (699) (31) (730) (519) (31) (550)
Gross profit 13,948 1,592 15,540 11,914 1,757 13,671
Other operating income 61 – 61 61 – 61
Impairment of goodwill (2,223) – (2,223) – – –
Other administrative expenses (13,845) (1,336) (15,181) (11,314) (1,279) (12,593)
Exceptional expenses – – – (222) – (222)
Total administrative expenses (16,068) (1,336) (17,404) (11,536) (1,279) (12,815)
Operating (loss)/profit 5 (2,059) 256 (1,803) 439 478 917
Finance income 7 66 – 66 101 – 101
Finance costs 8 (25) – (25) (164) – (164)
(Loss)/profit before tax (2,018) 256 (1,762) 376 478 854
Tax 9 (57) (77) (134) 93 (143) (50)
(Loss)/profit for the year (2,075) 179 (1,896) 469 335 804
(Loss)/earnings per share Note
2007
Pence
2006
Pence
From continuing operations:
Basic 12 (9.65) 2.59
Diluted 12 (9.65) 2.04
From continuing and discontinued operations:
Basic 12 (8.81) 4.45
Diluted 12 (8.81) 3.50
The notes on pages 29 to 63 form part of these financial statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2007
26 Flomerics Group PLC Annual Report 2007
Note
Year
ended
2007
£’000
Year
ended
2006
£’000
Balance at start of year 14,843 6,853
(Loss)/profit for the year (1,896) 804
Currency translation movement 1,018 (302)
Deferred tax on currency translation movement 21 (112) 16
Net income/(expense) recognised directly in equity 906 (286)
Total recognised income and expense for the year (990) 518
Dividends paid 11 (299) (195)
Share based payment 27 116 97
Issue of new shares 23, 24 43 7,603
Movements in merger reserve 24 145 –
Movements in share to be issued reserve 24 – (33)
Balance at end of year 13,858 14,843 CONSOLIDATED BALANCE SHEET
31 December 2007
Flomerics Group PLC Annual Report 2007 27
Note
2007
£’000
2006
£’000
Non-current assets
Property, plant and equipment 15 542 520
Investment property 16 – 1,189
Goodwill 13 5,706 7,554
Intangible assets 14 3,902 4,141
Deferred tax asset 21 253 423
Total non-current assets 10,403 13,827
Current assets
Inventories 18 110 33
Trade and other receivables 19 6,149 5,467
Cash and cash equivalents 19 2,971 2,339
Non current assets held for sale 31 1,492 –
Total current assets 10,722 7,839
Total assets 21,125 21,666
Current liabilities
Bank overdrafts and loans 20 (76) (71)
Trade and other payables 22 (5,847) (5,217)
Current tax liabilities (23) (14)
Total current liabilities (5,946) (5,302)
Non-current liabilities
Bank loans 20 (229) (305)
Deferred tax liabilities 21 (1,092) (1,216)
Total non current liabilities (1,321) (1,521)
Total liabilities (7,267) (6,823)
Total net assets 13,858 14,843
Equity
Share capital 23 216 213
Share premium account 24 1,775 1,735
Shares to be issued 24 1,112 1,112
Merger reserve 24 7,330 7,185
Translation reserves 24 716 (302)
Retained earnings 24 2,709 4,900
Total equity 13,858 14,843
The financial statements were approved by the Board of Directors and authorised for issue on 28 April 2008.
They were signed on its behalf by:
G C Carter K Butcher
Director Director CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2007
28 Flomerics Group PLC Annual Report 2007
Year
ended
2007
£’000
Year
ended
2006
£’000
Profit for the year (1,896) 804
Adjustments for:
Finance income (66) (101)
Finance costs 25 164
Income tax expense/(income) 134 50
Depreciation of property, plant and equipment 291 240
Depreciation of investment property 14 14
Amortisation of intangible assets 901 577
Impairment of goodwill 2,223 –
Share-based payment expense 901 97
Loss on disposal of property, plant and equipment – 2
Operating cash flows before movements in working capital 1,742 1,847
(Increase)/decrease in inventories (77) 30
(Increase) in receivables (682) (1,081)
Increase in payables 921 89
Cash generated by operations 1,904 885
Income taxes paid (191) (176)
Interest paid (25) (164)
Net cash from operating activities 1,688 545
Cash flows from investing activities:
Interest received 66 101
Proceeds on disposal of property, plant and equipment 24 5
Purchases of property, plant and equipment (333) 306
Purchase of intangibles (313) (312)
Acquisition of subsidiary (net of cash acquired) – (1,418)
Deferred consideration on acquisition of subsidiary (259) –
Net cash used in investing activities (815) (1,930)
Cash flows from financing activities:
Proceeds from issue of shares 38 –
Dividends paid (299) (195)
Repayment of loans (71) (68)
Net cash used in financing activities (332) (263)
Net increase/(decrease) in cash and cash equivalents 541 (1,648)
Cash and cash equivalents at the start of the year 2,339 4,081
Effect of foreign exchange rate changes 91 (94)
Cash and cash equivalents at end of year 2,971 2,339
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 29
1 General information
Flomerics Group PLC is a Company incorporated in the United Kingdom under the Companies Act 1985. The address of the
registered office is 81 Bridge Road, Hampton Court, Surrey, KT8 9HH. The nature of the Group’s operations and its principal activities
are set out in note 4 and in the Business review on pages 14 to 15.
The Directors have chosen to present these financial statements in the functional currency of the primary economic environment in
which the Group operates which is Pounds Sterling. Foreign operations are included in accordance with the policies set out in note 2.
At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied
in these financial statements were in issue but not yet effective:
IAS 1 Presentation of financial statements (revised)
IAS 23 Borrowing costs (revised)
IAS 27 Consolidated and separate Financial Statements (revised)
IFRS 3 Business Combinations (revised)
IFRS 8 Operating segments
IFRIC 12 Service concession arrangements
IFRIC 13 Customer loyalty programmes
IFRIC 14 IAS 19 – The limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction.
The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on
the financial statements of the Group except for any additional disclosures that may be required arising when IFRS 8 comes into
effect for periods commencing on or after 1 January 2009.
2 Significant accounting policies
Basis of accounting
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). The financial
statements have also been prepared in accordance with IFRSs adopted by the European Union and therefore the Group financial
statements comply with Article 4 of the EU IAS Regulation.
The principal accounting policies adopted are set out below.
First time adoption
The Group has adopted IFRS from 1 January 2006 (‘the date of transition’); please refer to note 34 for details of the transition.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company
(its subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial
and operating policies of an investee entity so as to obtain benefits from its activities. The Group income statement includes the
results of subsidiaries acquired or disposed of during the year from the effective date of acquisition or up to the effective date of
disposal, as appropriate.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line
with those used by the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Business combinations
The acquisition of subsidiaries or trade and assets, is accounted for using the purchase method. The cost of the acquisition is
measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity
instruments issued or to be issued, by the Group in exchange for control of the acquiree, plus any costs directly attributable to the
business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition
under IFRS 3 are recognised at their fair value at the acquisition date.
Goodwill arising on acquisition is recognised as an asset and initially measured at cost and is accounted for according to the
policy below.
The Group has taken the exemption conferred in IFRS 1, “First-time Adoption of International Financial Reporting Standards”, not
to restate business combinations prior to the transition date of 1 January 2006 under IFRS 3.
Property, plant and equipment
Property, plant and equipment is stated at cost or deemed cost less accumulated depreciation and any impairment in value. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
30 Flomerics Group PLC Annual Report 2007
2 Significant accounting policies continued
Depreciation
Depreciation is provided on all property, plant and equipment, other than freehold land, at rates calculated to write off the cost,
less estimated residual value based on prices prevailing at the date of acquisition, of each asset evenly over its expected useful life,
as follows:
– Computer hardware 20 – 33% per annum
– Fixtures and fittings 20 – 33% per annum
The carrying values of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate the
carrying value may not be recoverable.
The asset’s residual values, useful lives and methods are reviewed, and adjusted if appropriate, at each financial year end.
Investment property
Investment property, which is properly held to earn rentals is stated at its historic cost as the Group elected, under the transitional
arrangements available under IFRS 1, to use the previous carrying value under UK GAAP as deemed cost in transition. The investment
property is depreciated on a straightline basis of 2% per annum, however the land on which it is situated is not depreciated.
This property has been reclassified in the year to assets held for sale and is currently held on the books at market value less costs to sell.
Goodwill
Goodwill represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets,
intangible fixed assets and liabilities of a subsidiary, or acquired sole trade business at the date of acquisition. Goodwill is initially
recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is
recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in the Group income
statement and is not subsequently reversed.
For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from
the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually,
or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit
is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill
allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.
An impairment loss recognised for goodwill is not reversed in a subsequent period.
On disposal of a subsidiary the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject
to being tested for impairment at that date and subsequently as required by the provisions of IAS 36 “impairment of assets”.
Intangible assets
Intangible assets with a finite useful life are carried at cost less amortisation and any impairment losses. Intangible assets represent
items which have been separately identified under IFRS 3 arising in business combinations, or meet the recognition criteria of
IAS 38, “Intangible Assets”. These assets comprise of customer relationships, contract based asset, completed technology and
non competition agreements.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether
there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount
of the asset is estimated in order to determine the extent of the impairment loss (if any).
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value
of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount
of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in the income statement
as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as
a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would
have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an
impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the
reversal of the impairment loss is treated as a revaluation increase. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 31
2 Significant accounting policies continued
Amortisation of intangible assets acquired in a business combination is calculated over the following periods on a straight line basis:
Customer relationships – 10% per annum
Contract based assets – 50% per annum
Completed technology – over a useful life of 7 years
Non-competition agreement – 25% per annum
Amortisation of other intangible assets (computer software) is calculated using the straight-line method to allocate the cost of the
asset less its assessed realisable value over its estimated useful life, which equates to 33% to 50% per annum.
Impairment of financial assets
Determining whether a provision is required against trade receivables requires management to make a judgment of the likely
proportion of receivables that will not be recovered. In order to establish a reasonable provisioning level, therefore, the Directors
use historical trends in order to predict likely irrecoverable receivables at any point in time. When an event occurs which makes it
more likely than not that a debt will not be recovered, provision is made accordingly. For further discussion on trade and other
receivables refer to note 19 to the accounts.
Internally-generated intangible assets – research and development expenditure
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
Any internally-generated intangible asset arising from the Group’s development projects are recognised only if all of the following
conditions are met:
• The technical feasibility of completing the intangible asset so that it will be available for use or sale.
• The intention to complete the intangible asset and use or sell it.
• The ability to use or sell the intangible asset.
• How the intangible asset will generate probable future economic benefits. Among other things, the Group can demonstrate
the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally,
the usefulness of the intangible asset.
• The availability of adequate technical, financial and other resources to complete the development and to use or sell the
intangible asset.
• Its ability to measure reliably the expenditure attributable to the intangible asset during its development.
Internally-generated intangible assets are amortised on a straight-line basis over their useful lives of three years. Where no
internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in
which it is incurred.
Financial instruments
Financial assets and financial liabilities are recognised on the Group’s balance sheet at fair value when the Group becomes a party
to the contractual provisions of the instrument.
Trade receivables
Trade receivables represent amounts due from customers in the normal course of business. All amounts are initially stated at their
fair value and are subsequently carried at amortised costs, less provision for impairment.
Cash and cash equivalents
Cash and cash equivalents include cash at hand and deposits held at call with banks with original maturities of three months or less.
Financial liabilities and equity instruments
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.
An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Bank Borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges are
accounted for on an accruals basis in the income statement using the effective interest rate method and are added to the carrying
amount of the instrument to the extent that they are not settled in the period in which they arise.
Trade payables
Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest
rate method.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Derivative financial instruments
The Group’s activities expose it primarily to the financial risks of changes in foreign exchange rates. The Group occasionally
uses forward exchange contracts to hedge these exposures. The Group does not use derivative financial instruments for
speculative purposes.
The Group has elected not to adopt the hedge accounting provisions of IAS 39. Derivative financial instruments are initially
measured at fair value on the date that the contract is entered into and subsequently re-measured to fair value at each reporting
date. The gains and losses on re-measurement are taken to the income statement and reported in administrative expenses. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
32 Flomerics Group PLC Annual Report 2007
2 Significant accounting policies continued
Dividends
Final equity dividends are recognised when they are approved at a general meeting of the Company. No Interim dividends are paid.
Inventories
Inventories are stated at the lower of cost and net realisable value. Net realisable value represents the estimated selling price less all
estimated costs of completion and costs to be incurred in marketing, selling and distribution.
Where necessary an allowance is made for obsolete, slow moving and damaged inventories.
Employee share incentive plans
The Group issues equity-settled share-based payments to certain employees (including Directors). These payments are measured at
fair value at the date of grant by use of the Black-Scholes pricing model. This fair value cost of equity-settled awards is recognised on
a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the
effect of any non market-based vesting conditions. The expected life used in the model has been adjusted, based on management’s
best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. A corresponding credit is
recorded in equity in the share option account.
Leases
Leases taken by the Group are assessed individually as to whether they are finance leases or operating leases. Leases are classified as
finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other
leases are classified as operating leases.
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases.
Operating lease rental payments are recognised as an expense in the income statement on a straight-line basis over the lease term.
The benefit of lease incentives is spread over the term of the lease.
The Group currently has no material finance leases.
Taxation
The tax expense represents the sum of the current tax and deferred tax charges.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items
that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in
the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the
balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets
are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of
goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that
affects neither the tax profit nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in
which case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax
liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax
assets and liabilities on a net basis.
Share capital and share premium
There is one class of shares. When new shares are issued, they are recorded in share capital at their par value. The excess of the issue
price over the par value is recorded in the share premium reserve.
Incremental external costs directly attributable to the issue of new shares (other than in connection with a business combination) are
recorded in equity as a deduction, net of tax, to the share premium reserve. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 33
2 Significant accounting policies continued
Revenue recognition
Revenue represents the amounts receivable, net of sales taxes, on the provision of the Group’s software, maintenance, consultancy,
and other services such as training and hardware. When a sale is made to a customer of the Group’s software, the price normally
includes the provision of maintenance (for a perpetual licence this is only for the first year). The maintenance element is deferred
and is recognised over the period that the maintenance is provided. Appropriate amounts attributable to maintenance are deferred
for each type of licence.
The licence element of the sale is recognised as income when the following conditions have been satisfied:
1) The software has been provided to the customer in a form that enables the customer to utilise it;
2) There is a contractual relationship between the customer and the Group;
3) The ongoing obligations of the Group to the customer, aside from the maintenance, are minimal; and
4) The amount payable by the customer is determinable and there is a reasonable expectation of payment.
Revenue on the sale of hardware products is recognised when the risks and rewards of ownership have passed to the customer and
the Group’s work is substantially complete, which is usually upon delivery to the customer or his agent.
Retirement benefit costs
The Group operates defined contribution pension schemes. The amount charged to the income statement in respect of pension costs
and other post-retirement benefits is the contributions payable in the year.
Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments
in the balance sheet.
Operating profit
Operating profit is stated before finance income and finance costs.
Foreign exchange
The individual financial statements of each Group Company are presented in the currency of the primary economic environment in
which it operates (its functional currency). For the purpose of the consolidated financial statements, the result and the financial
position of each Group Company are expressed in pounds sterling, which is the functional currency of the Company, and the
presentation currency for the consolidated financial statements.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit
or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in
profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and
losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised
directly in equity.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are
transitioned at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange
relates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date
of transactions are used. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation
reserve. Such translation differences are recognised as income or an expenses in the period in which the operations is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign
entity and translated at the closing rate. The Group has elected to treat goodwill and fair value adjustments arising on acquisitions
before the date of transition to IFRS as sterling denominated assets and liabilities.
Non-current assets held for sale
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less
costs to sell.
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale
transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the
asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which
should be expected to qualify for recognition as a completed sale within one year from the date of classification. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
34 Flomerics Group PLC Annual Report 2007
3 Critical accounting judgements and key sources of estimation uncertainty
Critical judgments in applying the Group’s accounting policies
In the application of the Group’s accounting policies, which are described in note 2, the Directors are required to make judgments,
estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual
results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Key sources of estimation uncertainty
The following are the critical judgments that that the Directors have made in the process of applying the Group’s accounting policies
that have the most significant effect on the amounts recognized in the financial statements.
Capitalisation of internal research and development costs
In order to comply with the Group’s accounting policy relating to internally generated intangible assets (research and development
expenditure), the Directors are required to assess the fair value of the costs incurred on the Group’s development projects that are
allowed to be capitalized. The vast majority of these costs are salary related, representing the costs of the employees conducting the
research and development. In order to measure the costs that should be capitalized, the Directors conduct an exercise whereby they
estimate the proportion of each employee’s working hours that have been spent on qualifying research and development projects.
The Directors are then able to determine that this proportion of each employee’s salary is capital in nature, and is therefore accounted
for accordingly. The Directors are of the opinion that as a number of people are working on such projects at any time, and that they
can reliably assess the amount of time that is being spent by each individual on qualifying capital research, that this is a reasonably
accurate estimation technique. The total value of internal costs capitalized as intangible assets related to research and development
at the balance sheet date was £336,000 (2006 – £103,000).
Impairment of goodwill
Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which
goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise
from the cash-generating units and a suitable discount rate in order to calculate present value. Actual events may vary materially from
management expectation.
Following the impairment review the carrying value of goodwill for NIKA GmbH was impaired in the year by £2,223,000. The
Directors consider the impairment to be appropriate to reflect the slower than initially anticipated sales growth of the products
purchased with NIKA GmbH.
Deferred revenue policy
In establishing the Group’s deferred revenue policy the Directors have used their judgement to determine what proportion of
a licence sale relates to the licence and what proportion relates to the ongoing maintenance of that licence. The Directors have
based their judgement on the proportion of the list price of a licence with maintenance compared to the list price of the
maintenance only. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 35
4 Business and geographical segments
Business segments
For management purposes, the Group is currently organised into one operating division and it is on this basis that the Group reports
its primary segment information.
The principal activities of the Group’s operating division is the provision of virtual prototyping software and other related services.
The Group was also previously involved in electromagnetic virtual prototyping. This operation was discontinued during the period,
in accordance with IFRS 5. Please refer to note 10 for further details.
Segment information about these businesses is presented below:
2007
Software
sales
2007
£’000
Discontinued
operations
2007
£’000
Consolidated
2007
£’000
Revenue
External sales 14,647 1,623 16,270
Total revenue 14,647 1,623 16,270
Result
Segment result (2,059) 256
Operating loss (1,803)
Finance income 66
Finance costs (25)
Loss before tax (1,762)
Tax (134)
Loss after tax (1,896)
2006
Software
sales
2006
£’000
Discontinued
operations
2006
£’000
Consolidated
2006
£’000
Revenue
External sales 12,433 1,788 14,221
Total revenue 12,433 1,788 14,221
Result
Segment result 439 478
Operating profit 917
Finance income 101
Finance costs (164)
Profit before tax 854
Tax (50)
Profit after tax 804
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
36 Flomerics Group PLC Annual Report 2007
4 Business and geographical segments continued
Geographical segments
The Group’s operations are located in the United States of America, Europe and the Far East.
The following table provides an analysis of the Group’s sales by geographical market, irrespective of the origin of the goods/services:
Sales revenue by
geographical market
2007
£’000
2006
£’000
United States of America 5,150 5,563
Europe 7,450 5,946
Far East 3,670 2,712
16,270 14,221
Revenue from the Group’s discontinued operations was derived as follows: United States of America (2007: £586,000, 2006: £832,000),
Europe (2007: £602,000, 2006: £477,000) and the Far East (2007: £435,000, 2006: £478,000).
The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment and
intangible assets, analysed by the geographical area in which the assets are located:
Carrying amount of
segment assets
Additions to property,
plant and equipment
and intangible assets
2007
£’000
2006
£’000
2007
£’000
2006
£’000
United States of America 2,781 2,677 13 68
Europe 17,201 17,843 594 529
Far East 1,143 1,008 39 21
21,125 21,528 646 618
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 37
5 Operating profit
2007
£’000
2006
£’000
Operating profit for the year has been arrived at after charging/(crediting):
Research and development costs 3,071 2,878
Depreciation of property, plant and equipment 291 240
Depreciation of investment property 12 12
Amortisation of intangible assets, other than development costs 874 471
Amortisation of internally-generated intangible assets included in other operating expenses 27 106
Staff costs (see note 6) 9,541 7,645
Exceptional costs in the prior year related to £112,000 exceptional staff costs and £110,000 exceptional restructuring costs.
The analysis of auditors’ remuneration is as follows:
2007
£’000
2006
£’000
Fees payable to the Company’s auditors for the audit of the Company’s annual accounts 25 25
Fees payable to the Company’s auditors and their associates for other services to the Group
– The audit of the Company’s subsidiaries pursuant to legislation 160 70
Total audit fees 185 95
Other services pursuant to legislation
– Tax services 43 26
– Acquisition of NIKA – 10
– IFRS 10 6
– Other services – 3
Total non-audit fees 53 45
Fees payable to BDO Stoy Hayward LLP and their associates for non-audit services to the Company are not required to be disclosed
because the consolidated financial statements are required to disclose such fees on a consolidated basis.
6 Staff costs
The average monthly number of employees (including Executive Directors) was:
2007
Number
2006
Number
Sales and marketing 63 52
Technical staff 146 109
Administration 33 30
242 191
£’000 £’000
Their aggregate remuneration comprised:
Wages and salaries 8,030 6,447
Social security costs 1,014 842
Other pension costs 497 356
9,541 7,645
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
38 Flomerics Group PLC Annual Report 2007
7 Finance income
2007
£’000
2006
£’000
Interest on bank deposits 50 101
Foreign exchange gains 16 –
66 101
8 Finance costs
2007
£’000
2006
£’000
Interest on bank overdrafts and loans 25 26
Foreign exchange losses – 138
25 164
9 Tax
2007
£’000
2006
£’000
Current income tax:
Current year 183 175
Adjustment to prior period 17 (15)
Total current income tax 200 160
Deferred tax (note 21):
Original and reversal of temporary differences (73) (110)
Effect of change in tax rate 7 –
Total deferred tax (66) (110)
Total tax charge in the income statement 134 50
UK Corporation tax is calculated at 30% (2006:30%) of the estimated assessable profit for the year.
Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
Reconciliation of continuing and discontinued operations:
2007
£’000
2006
£’000
Continuing operations:
Current tax 123 17
Deferred tax (66) (110)
57 (93)
Discontinued operations:
Current tax 77 143
Total 134 50
2007
£’000
2006
£’000
Tax relating to items (credited)/charged to equity:
Deferred tax on currency translation movements 112 (16)
112 (16)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 39
9 Tax continued
The charge for the year can be reconciled to the profit per the income statement as follows:
2007
£’000
2007
%
2006
£’000
2006
%
Profit before tax:
Continuing operations (2,018) 376
Discontinued operation 256 478
(1,762) 854
Tax at the UK corporation tax rate of 30% (2006 30%) (529) 30 257 30
Tax effect of expenses that are not deductible in determining taxable profit 53 (3) 48 5
Tax effect of impairment of goodwill 667 (38) 50 6
Tax effect of unrelieved current year losses 161 (9) – –
Effect of different tax rates of subsidiaries operating in other jurisdictions (29) 2 (34) (4)
Tax effect of non-taxable income – – (15) (1)
Tax effect of utilisation of tax losses not previously recognised – – (76) (8)
Effect of change in UK tax rate as deferred tax 7 – – –
Over/(under) provision of tax in prior years 17 1 (14) (2)
Tax effect of enhanced deduction for UK research and development cost (199) 11 (194) (23)
Utilisation of bought forward credit in respect of overseas taxation (14) – – –
Tax effect of unrelieved overseas tax – – 28 3
Tax expense and effective tax rate for the year 134 (8) 50 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
40 Flomerics Group PLC Annual Report 2007
10 Discontinued operations
On 20 December 2007, the Group entered into a sale agreement to dispose of the electromagnetics division, which carried out all of
the Group’s electromagnetic virtual prototyping operations. The disposal completed on 31 January 2008, on which date control of
the division passed to the acquirer.
The results of the discontinued operations, which have been included in the consolidated income statement, were as follows:
2007
£’000
2006
£’000
Revenue 1,623 1,787
Expenses other than finance costs (1,367) (1,309)
Profit before taxation 256 478
Tax expense (77) (143)
Profit/(loss) for the year 179 335
During the year, the electromagnetics division contributed £179,000 (2006: £335,000) to the Group’s net operating cash flows, and
made no payments in respect of investing activities or financing activities (2006: £nil).
The effect of discontinued operations on segment results is disclosed in note 4.
The major classes of assets and liabilities of the electromagnetics division are as follows:
2007
£’000
Goodwill and other intangible assets 296
Property, plant and equipment 19
Total assets of division being net assets of disposal group 315
Please refer to note 31 for further details in this respect.
In addition to the disposal of the electromagnetics division referred to above, during 2007 the management were actively marketing
the Group’s investment property. As such at the balance sheet date the property has been reclassified from investment property to
assets held for sale, as can be seen in note 16 to the financial statements.
The assets and liabilities comprising the operations as classified as held for sale in respect of the investment property are as follows:
2007
£’000
Investment property 1,177
Total assets classified as held for sale 1,177
Mortgage on freehold property 305
Total liabilities associated with assets classified as held for sale 305
Net assets of disposal group 872
Please refer to note 31 for further details in this respect.
11 Dividends
Year
ended
2007
£’000
Year
ended
2006
£’000
Amounts recognised as distributions to equity holders in the period:
Dividends paid of 1.4p (2006: 1.3p) per share. 299 195
Proposed final dividend for the year ended 31 December 2007 of 1.6p (2006: 1.4p) per share 364 299
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as
a liability in these financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 41
12 Earnings per share
From continuing and discontinued operations:
Year
ended
2007
pence
Year
ended
2006
pence
(Loss)/earnings per share:
Basic (8.81) 4.45
Diluted (8.81) 3.50
We have excluded 1,328,000 shares (2006 – 4,905,000) from the diluted earnings per share on the basis that they are anti-dilutive.
The calculation of the basic and diluted earnings per share is based on the following data:
Earnings £’000 £’000
(Loss)/earnings for the purposes of basic earnings per share being net profit
attributable to equity holders of the parent (1,896) 804
Number of shares
No.
‘000
No.
‘000
Weighted average number of ordinary shares for the purposes of basic earnings per share 21,511 18,063
Effect of dilutive potential ordinary shares:
Share options 1,328 4,905
Weighted average number of ordinary shares for the purposes of diluted earnings per share 22,839 22,968
From continuing operations
Year
ended
2007
£’000
Year
ended
2006
£’000
Net profit attributable to equity holders of the parent (1,896) 804
Adjustments to exclude profit for the period from discontinued operations (179) (335)
(Loss)/earnings from continuing operations for the purpose of basic and diluted
earnings per share excluding discontinued operations (2,075) 469
The denominators used are the same as those detailed above for both basic and diluted earnings per share from continuing and
discontinued operations.
From continuing operations
Year
ended
2007
pence
Year
ended
2006
pence
(Loss)/earnings per share:
Basic (9.65) 2.59
Diluted (9.65) 2.04
From discontinued operations
Year
ended
2007
pence
Year
ended
2006
pence
Earnings per share:
Basic 0.83 1.85
Diluted 0.78 1.46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
42 Flomerics Group PLC Annual Report 2007
13 Goodwill
£’000
Cost
At 1 January 2006 1,353
Exchange differences (99)
Recognised on acquisition of a subsidiary 6,370
Other changes (70)
At 1 January 2007 7,554
Exchange differences 554
Reclassified as held for sale (294)
Other changes 115
At 31 December 2007 7,929
Accumulated impairment losses
At 1 January 2006 and 1 January 2007 –
Impairment charge in the year 2,223
At 31 December 2007 2,223
Carrying amount
At 31 December 2007 5,706
At 31 December 2006 7,554
Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to
benefit from that business combination. Before recognition of impairment losses, the carrying amount of goodwill had been
allocated as follows:
2007
£’000
2006
£’000
NIKA GmbH 4,602 6,271
Microelectronics Research and Development Limited (“MicReD”) 1,104 989
Kimberly Communications Consultants Limited – 294
5,706 7,554
The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.
The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use
calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the
period. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money
and the risks specific to the CGUs. The growth rates are based on industry growth forecasts. Changes in selling prices and direct costs
are based on past practices and expectations of future changes in the market.
The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next
five years and extrapolates cash flows for the following five years based on an estimated growth rate of zero%. This rate does
not exceed the average long-term growth rate for the relevant markets.
The rate used to discount the forecast pre-tax cash flows is 22.86%.
Goodwill for NIKA GmbH has been retranslated at year end as the underlying goodwill is in Euros.
Following the impairment review the carrying value of goodwill for NIKA GmbH was impaired by £2,223,000. The Directors
consider the impairment to be appropriate to reflect the slower than initially anticipated sales growth of the products
purchased with NIKA GmbH.
Goodwill for Microelectronics Research and Development Limited has increased from the previous year as a result of the year 2 earn
out consideration being in excess of amounts accrued for at the last reporting date. The directors have carried out an impairment
review of the carrying value of goodwill for Microelectronics Research and Development Ltd and do not consider any impairment to
be appropriate.
Goodwill for Kimberly Communications Consultants Limited has been reclassified in the year as detailed in note 31. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 43
14 Other intangible assets
Customer
relationship
£’000
Contract
leased
intangible
£’000
Completed
technology
£’000
Non-
competition
agreement
£’000
Development
cost
£’000
Software
£’000
Total
£’000
Cost
At 1 January 2006 – – – – 132 344 476
Additions – – – – 77 235 312
Disposals – – – – – (4) (4)
Acquired on acquisition
of a subsidiary 230 236 3,647 92 – – 4,205
Foreign exchange adjustment (4) (4) (59) (1) – (12) (80)
At 1 January 2007 226 232 3,588 91 209 563 4,909
Additions – – – – 260 53 313
Disposals – – – – – (6) (6)
Reclassified as held for sale – – – – – (4) (4)
Foreign exchange adjustment 22 21 336 8 – 2 389
At 31 December 2007 248 253 3,924 99 469 608 5,601
Amortisation
At 1 January 2006 – – – – – 209 209
Charge for the year 11 58 256 11 106 135 577
Disposals – – – – – (4) (4)
Foreign exchange adjustment – – (3) – – (11) (14)
At 1 January 2007 11 58 253 11 106 329 768
Charge for the year 25 127 561 25 27 136 901
Disposals – – – – – (6) (6)
Reclassified as held for sale – – – – – (2) (2)
Foreign exchange adjustment 2 5 27 1 – 3 38
At 31 December 2007 38 190 841 37 133 460 1,699
Carrying amount
At 31 December 2007 210 63 3,083 62 336 148 3,902
At 31 December 2006 215 174 3,335 80 103 234 4,141
The amortisation period for development costs incurred on the Group’s development is 3 years. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
44 Flomerics Group PLC Annual Report 2007
15 Property, plant and equipment
Computer
hardware
£’000
Fixtures
and
fittings
£’000
Total
£’000
Cost
At 1 January 2006 806 370 1,176
Additions 256 50 306
Acquisition of subsidiary 31 56 87
Exchange differences (44) (32) (76)
Disposals (45) (37) (82)
At 1 January 2007 1,004 407 1,411
Additions 257 76 333
Exchange differences 20 23 43
Disposals (57) (1) (58)
Reclassified as held for sale (64) – (64)
At 31 December 2007 1,160 505 1,665
Accumulated depreciation and impairment
At 1 January 2006 521 265 786
Charge for the year 185 55 240
Exchange differences (34) (26) (60)
Eliminated on disposals (38) (37) (75)
At 1 January 2007 634 257 891
Charge for the year 225 66 291
Exchange differences 8 12 20
Eliminated on disposals (33) (1) (34)
On assets reclassified as held for sale (45) – (45)
At 31 December 2007 789 334 1,123
Carrying amount
At 31 December 2007 371 171 542
At 31 December 2006 370 150 520
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 45
16 Investment property
Investment
property
£’000
Cost
At 1 January 2006 and 1 January 2007 1,232
Transfer to assets held for sale (1,232)
At 31 December 2007 –
Accumulated depreciation and impairment
At 1 January 2006 31
Charge for the year 12
At 1 January 2007 43
Charge for the year 12
Transfer to assets held for sale (55)
At 31 December 2007 –
Carrying amount
At 31 December 2007 –
At 31 December 2006 1,189
17 Subsidiaries
A list of the significant investments in subsidiaries, including the name, country of incorporation, proportion of ownership interest is
given in note C to the Company’s separate financial statements.
18 Inventories
2007
£’000
2006
£’000
Finished goods 110 33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
46 Flomerics Group PLC Annual Report 2007
19 Other financial assets
Trade and other receivables
2007
£’000
2006
£’000
Amount receivable for the sale of goods 5,361 4,812
Allowance for doubtful debts (72) (24)
5,289 4,788
Other debtors 240 292
Prepayments 620 387
6,149 5,467
Trade receivables
2007
£’000
2006
£’000
Net of allowances are held in the following currencies:
Sterling 1,180 1,045
Euro 2,193 1,589
US dollar 1,207 1,416
Other 709 738
5,289 4,788
Before accepting any new customer, the Group uses a credit approval process to assess the potential customer’s credit quality and
defines credit limits by customer.
Included in the Group’s trade receivable balance are debtors with a carrying amount of £764,000 (2006: £1,044,000) which are
past due at the reporting date. The Group does not hold any collateral over these balances. The average age of these receivables
is 74 days (2006: 72 days).
Ageing of past due but not impaired receivables.
2007
£’000
2006
£’000
30-60 days 174 421
60-90 days 233 284
90-120 days 357 339
Total 764 1,044
Movement in the allowance for doubtful debts.
2007
£’000
2006
£’000
Balance at the beginning of the period 24 62
Increase/(decrease) in provision 48 (38)
Balance at the end of the period 72 24
In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable
from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer
base being large and unrelated. On the basis that the customers of the Group consist of blue chip companies, large electronics
manufacturers and educational institutions the credit quality of the trade receivables are considered to be good. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 47
19 Other financial assets continued
Ageing of impaired trade receivables
2007
£’000
2006
£’000
120+ days 72 24
Total 72 24
The Directors consider that the carrying amount of trade and other receivables approximates their fair value.
Cash and cash equivalents
2007
£’000
2006
£’000
Cash and cash equivalents 2,971 2,339
Cash and cash equivalents are held in the following currencies;
2007
£’000
2006
£’000
Sterling 656 167
US dollar 1,418 1,376
Euro 481 446
Other 416 350
Total 2,971 2,339
Cash and cash equivalents comprise cash held by the Group and short–term bank deposits with an original maturity of three months
or less. The carrying amount of these assets approximates their fair value. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
48 Flomerics Group PLC Annual Report 2007
20 Bank overdrafts and loans
2007
£’000
2006
£’000
Bank loans 305 376
305 376
The borrowings are repayable as follows:
On demand or within one year 76 71
In the second year 81 76
In the third to fifth years inclusive 148 229
305 376
Less: Amount due for settlement within 12 months (shown under current liabilities) 76 71
Amount due for settlement after 12 months 229 305
The above loan is denominated in sterling and is secured against the property that is included in the assets held for sale, (note 34).
2007
%
2006
%
The weighted average interest rates paid were as follows:
Bank loans 7.04 6.09
The Directors estimate the fair value of the Group’s borrowings as follows:
2007
£’000
2006
£’000
Bank loans 305 376
The Group has principal bank loan of £305,000 (2006: £376,000). The loan was taken out on 14 September 2001. Repayments
commenced on 01 October 2001 and will continue until 01 September 2011. The loan is secured by a charge over certain of the
Group’s properties dated 14 September 2011. The loan carries interest rate at 1.25% above LIBOR.
At 31 December 2007 and 31 December 2006, the Group had no undrawn committed borrowing facilities. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 49
21 Deferred tax
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current
and prior reporting period.
Accelerated
tax
depreciation
£’000
Deferred
development
costs
£’000
NIKA
intangibles
£’000
Share based
payment
£’000
Temporary
differences
£’000
Total
£’000
At 1 January 2006 428 (40) – 14 18 420
Credit/(charge) to income (4) 9 107 (7) 5 110
Recognised on acquisition – – (1,339) – – (1,339)
Exchange differences – – 16 – – 16
At 1 January 2007 424 (31) (1,216) 7 23 (793)
Credit/(charge) to income (82) (65) 236 (7) (9) 73
Exchange differences – – (112) – – (112)
Effect of change in tax rate –
– income statement (8) 2 – – (1) (7)
As 31 December 2007 334 (94) (1,092) – 13 (839)
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset)
for financial reporting purposes:
2007
£’000
2006
£’000
Deferred tax liabilities (1,092) (1,216)
Deferred tax assets 253 423
(839) (793)
At the balance sheet date, the Group has unused tax losses of £6.5m (2006: £5.5m) available for offset against future profits. No
deferred tax asset has been recognised in respect of these losses due to the unpredictability of future profit streams. The losses may
be carried forward indefinitely, subject to certain conditions.
22 Other financial liabilities
Trade and other payables
2007
£’000
2006
£’000
Trade creditors and accruals 5,847 5,217
Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit
period taken for trade purchases is 27 days.
The Directors consider that the carrying amount of trade payables approximates to their fair value.
23 Share capital
2007
£’000
2006
£’000
Authorised:
40,000,000 ordinary shares of 1p each 400 400
Issued and fully paid:
21,631,516 ordinary shares of 1p each (2006 – 21,331,370 ordinary shares of 1p each) 216 213
The Company has one class of ordinary shares which carry no right to fixed income. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
50 Flomerics Group PLC Annual Report 2007
24 Reserves
Note
Share
premium
reserve
£’000
Shares to
be issued
£’000
Merger
reserve
£’000
Translation
reserves
£’000
Retained
earnings
£’000
Total
equity
2007
£’000
Balance at 1 January 2007 1,735 1,112 7,185 (302) 4,900 14,630
Profit for the year – – – – (1,896) (1,896)
Dividends paid – – – – (299) (299)
Currency translation movements – – – 1,018 – 1,018
Deferred tax on currency translation movements – – – – (112) (112)
Share based payment – – – – 116 116
Issue of new shares 40 – 145 – – 185
Balance at 31 December 2007 1,775 1,112 7,330 716 2,709 13,642
Note
Share
premium
reserve
£’000
Shares to
be issued
£’000
Merger
reserve
£’000
Translation
reserves
£’000
Retained
earnings
£’000
Total
equity
2006
£’000
Balance at 1 January 2006 1,602 33 892 – 4,178 6,705
Profit for the year – – – – 804 804
Dividends paid – – – – (195) (195)
Currency translation movements – – – (302) – (302)
Deferred tax on currency translation movements – – – – 16 16
Share based payment – – – – 97 97
Issue of new shares 133 1,112 6,293 – – 7,538
Acquisition of MicReD – shares to be
issued adjustment – (33) – – – (33)
Balance at 31 December 2006 1,735 1,112 7,185 (302) 4,900 14,630
Share premium reserve can be defined as amount subscribed for share capital in excess of nominal value.
Merger reserve can be defined as amounts recognised as a result of claiming merger relief following the issue of shares of the Group
as consideration for an acquisition.
Translation reserves can be defined as the gains and losses on retranslating the net assets of overseas operations into sterling.
Retained earnings can be defined as the cumulative net gains and losses recognised in the consolidated income statement.
25 Contingent liabilities
During the reporting period, an employee of the Group instigated proceedings against it for alleged breaches in employment
arrangements.
The Group’s lawyers have advised that they do not consider that the suit has merit and they have recommended that it be contested.
No provision has been made in these financial statements as the Group’s management do not consider that there is any probable loss. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 51
26 Operating lease arrangements
The Group as lessee
2007
£’000
2006
£’000
Minimum lease payments under operating leases recognised as an expense in the year 591 435
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:
2007
£’000
2006
£’000
Within one year 111 91
In the second to fifth years inclusive 447 328
After five years 154 154
712 573
Operating lease payments represent rentals payable by the Group for certain of its office properties. Leases are negotiated for an
average term of 5 years and rentals are fixed for an average of 5 years.
The Group as lessor
Property rental income earned during the year was £61,000 (2006: £61,000). The property is expected to generate rental yields of
5% on an ongoing basis. The property has a committed tenant for next 3 years.
At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments:
2007
£’000
2006
£’000
Within one year – 61
In the second to fifth years inclusive 75 –
After five years – –
75 61
The property on which the above income relates is currently held for sale, and if sold, the Company will not receive future
lease payments. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
52 Flomerics Group PLC Annual Report 2007
27 Share based payments
Equity settled share option scheme
In the past the Company has granted share options to employees and Directors through an Executive Share Option Scheme (‘ESOS’)
and an Enterprise Management Incentive (EMI) Scheme. Under these schemes options are granted at an exercise price equal to the
mid-market price as at the end of the day immediately preceding the grant and as shown in the Financial Times newspaper. The
exercise of options for all options granted during the period under review and for most options granted historically is subject to
a performance criterion being satisfied. The vesting period is three years. If the options remain unexercised after a period of ten
years from the date of grant the options expire. The options are forfeited if the employee leaves the Group before the options vest.
In 2006 the shareholders gave permission for the ESOS to be replaced by a new scheme, the main difference being that under the
new scheme options may be granted at nominal or nil cost. For the period under review options were granted under the new plan.
IFRS2 (Share based payment)
In accordance with IFRS2 the Group has elected not to apply IFRS2 to options granted on or before 7 November 2002 or to options
which had vested by 1 January 2006.
Details of the share options outstanding during the year for options issued since 7 November 2002 are as follows:
2007 2006
Number of
shares
options
Weighted
average
exercise
price (in £)
Number of
share
options
Weighted
average
exercise
price (in £)
Outstanding at beginning of period 1,386,495 0.73 1,186,049 0.68
Granted during the period 346,900 0.86 240,000 0.98
Forfeited during the period (55,431) 0.73 (37,734) 0.61
Exercised during the period (37,861) 0.61 (1,820) 0.455
Outstanding at the end of the period 1,640,103 0.76 1,386,495 0.73
Exercisable at the end of the period 486,203 0.61 158,690 0.59
The weighted average share price at the date of exercise for share options granted during the period was 91p (2006: 86p). The
options outstanding at the 31 December 2007 had a weighted average remaining contractual life of 7.58 years (2006: 8.10 years).
In 2007 share options were granted on 3 May. The estimated fair value of the options granted on that date is £65,000 (2006: £65,000).
For the period ending 31 December 2007 the Group has recognised a total expense of £116,000 (2006: £97,000) related to equity-
settled share-based payment transactions.
The estimated fair values for determining this charge were calculated using the Black-Scholes option pricing model. This produces
a fair value for each grant of options made and the fair value is then charged over the vesting period, which is three years. For this
reason the charge for 2007 is determined by any grants made in our case since 12 March 2004. The inputs into the model at each
grant date since then were as follows:
Date of Grant
12 March
2004
11 June
2004
30 July
2004
3 May
2005
28 July
2005
25
November
2005
7 March
2006
3 May
2007
Share price on date of grant 0.81 0.62 0.60 0.68 0.75 0.85 0.99 0.86
Exercise Price 0.80 0.62 0.60 0.70 0.76 0.88 0.99 0.86
Expected volatility 66.3% 66.2% 66.2% 65.5% 64.7% 63.5% 61.9% 54.1%
Expected life (years) 6 6 6 6 6 6 6 6
Risk-free Rate 4.5% 5.2% 5.1% 4.5% 4.2% 4.2% 4.3% 5.4%
Expected dividend yield 1.2% 1.6% 1.7% 1.6% 1.5% 1.3% 1.3% 1.6%
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 53
27 Share based payments continued
Assumptions in calculating fair value
The expected volatility was determined by calculating the historical volatility of the Company’s share price over the six years
preceding the grant of the option. Six years was selected as this is the expected term of the options.
The risk free rate is the rate of interest obtainable from government securities (i.e. Gilts in the UK) over the expected life of
the option.
The expect dividend yield is based on the historic dividend yield – i.e. dividends paid in the twelve months prior to grant calculated
as a percentage of the share price on the date of grant.
The exercise of the share options granted are subject to performance criteria being met. In some cases this is a fixed three year
period, in others it has been any three year period from the date of grant until maturity.
In addition the number of share options has been adjusted by the expected rate of staff turnover where the share option would
be forfeited in the event an employee left before the vesting date. A staff turn-over rate of 9% per year has been assumed for
employees and 3.3% for Directors.
Share options granted prior to 7 November 2002
The movements during the year are as follows:
Period of options
As at
1 January
2007
Exercised
during the
year
Lapsed
during the
year
As at 31
December
2007
Option
Price £
13 April 1999 to 12 April 2009 50,000 50,000 – – 0.40
4 October 1999 to 3 October 2009 100,000 – – 100,000 0.54
24 April 2002 to 23 April 2012 35,000 – – 35,000 0.84
1 August 2002 to 31 July 2012 74,000 2,500 8,500 63,000 0.53
11 September 2002 to 10 September 2012 15,481 785 1,915 12,781 0.475
28 Retirement benefit schemes
Defined contribution schemes
The Group operates defined contribution pension schemes. The pension charge for the year represents contributions payable to the
Group to the schemes and amounted to £497,000 (2006: £356,000).
At 31 December 2007, contributions amounting to £147,000 (2006: £58,000) were payable and included in trade and other payables.
29 Financial instruments
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the
return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt,
which includes the borrowings disclosed in note 20, cash and cash equivalents and equity attributable to equity holders of the
parent, comprising issued capital, reserves and retained earnings as disclosed in note 24.
Gearing ratio
The Group does not regularly review its gearing ratio as its debt, being defined as long and short term borrowings, is limited to
a mortgage against its investment property. This asset is classified as held for resale at the balance sheet date and, once disposed of,
the Group will no longer have any debt.
Externally imposed capital requirement
The Group is not subject to externally imposed capital requirements.
Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement
and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity
instrument are disclosed in note 2 to the financial statements. Further details on critical accounting judgments and estimation
uncertainty are detailed in note 3. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
54 Flomerics Group PLC Annual Report 2007
29 Financial instruments continued
Categories of financial instruments
Carrying value
2007
£’000
2006
£’000
Financial assets
Loans and receivables:
– Trade receivables 5,289 4,788
– Other assets 240 292
– Cash and cash equivalents 2,971 2,339
8,500 7,419
Financial liabilities
Financial liabilities at amortised cost:
– Trade payables 5,847 5,217
– Borrowings due within one year 76 71
– Borrowings due after one year 229 305
6,152 5,593
The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously
monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. As part of this
monitoring the Group ensures that the financial liabilities due to be paid can be met by existing cash and cash equivalents.
Financial risk management objectives
The Group monitors and manages the financial risks relating to the financial instruments held. The principal risks include currency
risk (on financial assets and trade payables), credit risk (on financial assets) and interest rate risk (on financial assets and borrowings).
These risks are discussed in further detail below.
By virtue of the nature of the Group’s operations, it is generally not exposed to price risk and, for reasons documented in ‘Gearing
ratio’ above, it is also not exposed greatly to liquidity risk.
It is not Group policy to trade in financial instruments.
Market risk
The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The
Group does, at times, use forward foreign exchange contracts to hedge exchange rate risk, however their use is considered on a case
by case basis.
The Group does not prepare a value-at-risk (VaR) analysis of the market risk exposures faced by the Group. Therefore, in accordance
with IFRS 7, sensitivity analysis of each type of market risk is presented below.
Foreign currency risk management
The Group undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise.
Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts.
The carrying amounts of the Group’s material foreign currency denominated monetary assets and monetary liabilities at the
reporting date are as follows:
Liabilities Assets
2007
£’000
2006
£’000
2007
£’000
2006
£’000
Euro (399) (465) 2,674 2,035
US Dollar (388) (407) 2,625 2,792
Swedish Krona * * 412 291
Indian Rupee * * 206 219
Japanese Yen * * 217 172
Singapore Dollar * * 141 87
Hungarian Florin * * 110 321
Chinese Yuan – – 51 –
* Liabilities in these currencies are deemed immaterial hence no analysis has been presented NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 55
29 Financial instruments continued
Foreign currency sensitivity analysis
The following table details the Group’s sensitivity to a 10% increase and decrease in Sterling against the relevant foreign currencies. The
sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period
end for a 10% change in foreign currency rates. A positive number below indicates an increase in profit and other equity where Sterling
strengthens 10% against the relevant currency. For a 10% weakening of Sterling against the relevant currency, there would be an equal
and opposite impact on the profit and other equity, and the balances below would be negative. The sensitivities below are based on the
exchange rates at the balance sheet used to convert the asset or liability to sterling. The Group seeks to match its foreign currency assets
and cash flows to hedge exposures. Therefore, the rate of exchange at the balance sheet date represents the best method of evaluating
foreign currency exchange rates and losses arising on the Group’s financial assets and liabilities.
Profit and loss impact
2007
£’000
2006
£’000
Euro 207 143
US Dollar 203 217
Swedish Krona 10 29
Indian Rupee 19 20
Japanese Yen 20 16
Singapore Dollar 37 26
Hungarian Florin 13 8
Chinese Yuan 5 –
There are no material foreign exchange differences arising on the retranslation of financial costs and liabilities accordingly, no
analysis of the sensitivities is presented. The fluctuations from 2006 are as a result of changes in the Group’s working capital at
the respective balance sheet dates.
In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year end exposure
is higher than in the year. This is due to the high sales volume that takes place in the months leading up to the year end and as a
result the year end debtors held in foreign currency are higher than during the year.
Interest rate risk management
The Group is exposed to interest rate risk as the Group has a mortgage linked to LIBOR, and earns interest on cash deposited at
banks on a variable rate of interest. Given the relatively low amounts of interest paid and received by the Group, neither interest
rate swaps contracts nor forward interest rate contracts are used to hedge any risks arising.
No sensitivity analyses have been presented on the basis that modest changes in interest rates (deemed to be a 0.5% increase or
decrease) do not have a material impact on the Group.
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.
The Group faces exposure to credit risk on its trade receivables and cash equivalents.
The risk of financial loss arising from defaults on trade receivables is mitigated by the Group using a credit approval process to assess
the potential customers’ credit quality and also establishes credit limits by customer. The limits and credit scores attributed to
customers is reviewed bi-annually however, the sales ledger is reviewed at least monthly to ensure all receivables are recoverable.
Please refer to note 19 for further details on trade receivables, including analyses of bad debts, ageing and profile by currency.
In terms of trade receivables, the Group does not have any significant credit risk exposure to any single counterparty or any group of
counterparties having similar characteristics. The Group defines counterparties as having similar characteristics if they are connected
entities. Concentration of credit did not exceed 5% of gross monetary assets at any time during the year. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
56 Flomerics Group PLC Annual Report 2007
29 Financial instruments continued
The Group believes the credit risk on liquid funds, being cash and cash equivalents, to be limited because the counterparties
are banks with high-credit ratings assigned by international credit-rating agencies. However, the concentration of credit risk by
counterparty does exceed 10% of the overall cash and cash equivalents balance (being £298,000 for 2007 and £234,000 for 2006)
in some cases. Given the recent “credit crunch” the table below shows the balance of counterparties at the balance sheet date in
excess of 10% of the overall balance, together with the Standard and Poor’s credit rating symbols.
2007 2006
Counterparty Location Rating
% of
overall
cash and
cash
equivalents
£’000
Carrying
amount
£’000
% of
overall
cash and
cash
equivalents
£’000
Carrying
amount
£’000
Barclays Bank plc UK AA 30.8% 915 23% 539
Anglo Irish Bank plc UK A – – 19.7% 461
Bank of America US AA 25.7% 764 24.1% 564
Naspa Bank GM A 9.5% 282 – –
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk
management framework for the management of the Group’s short, medium and long-term funding and liquidity management
requirements. At the balance sheet date, liquidity risk is considered to be low given the fact borrowings are limited to a mortgage
secured against the Group’s investment property and cash and cash equivalents are thought to be at acceptable levels.
30 Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are
not disclosed in this note.
Wolfgang Biedermann, Non-Executive Director, was the principal of Pricap Venture Partners AG (“Pricap”) until 30 June 2007 when
he resigned to join another company. He retains a 20% shareholding in Pricap but holds no executive position. On 15 April 2008 he
resigned as a Director of Flomerics Group PLC.
Pricap was the largest shareholder in Flomerics in 2007. On 14 March 2008 Pricap sold their entire shareholding to Mentor
Graphics Corporation.
In 2006 an indemnity was made by the Group to Gary Carter which related to certain legal expenses and a settlement in respect
of certain agreements with his former employer. The total value during the year was £72,000.
Remuneration of key management personnel
The Group considers its Directors to be the key management personnel of the Group, as defined in IAS 24. Please refer to the
Directors’ Remuneration Report on page 20. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 57
31 Assets held for sale
Electro-
magnetics
division
£’000
Investment
property
£’000
Total
£’000
At 1 January 2006 and 1 January 2007 – – –
Goodwill 294 – 294
Other intangible assets 2 – 2
Property, plant and equipment (at fair value) 19 1,177 1,196
At 31 December 2007 315 1,177 1,492
Investment
property
£’000
Total
£’000
Cost
At 1 January 2006 and 1 January 2007 – –
Transfer from Investment property 1,232 1,232
At 31 December 2007 1,232 1,232
Accumulated depreciation
At 1 January 2006 and 1 January 2007 – –
Transfer from Investment property 55 55
At 31 December 2007 55 55
Carrying amount
At 31 December 2007 1,177 1,177
At 31 December 2006 – –
The fair value of the property held for resale at 31 December 2007 of £1,177,000 (2006: £nil) has been arrived at based on the price
the property has been marketed at by Main Allen, (Surveyors), less cost to sell. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
58 Flomerics Group PLC Annual Report 2007
32 Acquisition in prior period
On 6 July 2006, the Group acquired the entire share capital of NIKA GmbH for initial consideration of £8.8m settled thorough
a combination of shares and cash as shown below. No further consideration will become payable.
Fair value of assets acquired
Fair value
of assets
£’000 £’000
Software and Intangibles 9
Tangible fixed assets 87
Stock 4
Debtors and prepayments 437
Cash 56
Creditors and accruals (1,052)
(459)
Consideration paid
Shares issued 6,356
Shares to be issued but held in escrow 1,112
Cash 1,011
Acquisition costs 298
8,777
Identifiable intangible assets (note 14) (4,205)
Deferred tax liability (note 21) 1,339
Currency movements (99)
Goodwill (note 14) 6,271
NIKA GbmH and its subsidiaries made a loss of £315,000 for the period from 1 January to 5 July 2006 (‘NIKA Pre-acquisition’).
33 Post balance sheet events
On 20 December 2007 the Board announced the disposal of its electromagnetics business to CST GmbH for a consideration of £1.6m.
The sale was completed on 31 January 2008 and the gain on disposal will be recognised in 2008. Final payment was received in
April 2008.
As part of the completion terms relating to the acquisition of NIKA GmbH in 2006 1,100,724 shares were issued on in March 2008
to the Vendors of NIKA GmbH.
34 Transition to IFRS
The following pages set out reconciliations of the UK GAAP balance sheet at 1 January 2006 and 31 December 2006 and the income
statements for the period 31 December 2006.
The principal accounting policy changes from UK GAAP that have had an impact on the balance sheet or income statement are set
out as follows:
IFRS1 First time adoption of IFRS
IFRS 1 permits a number of first adoption exemptions and the Group has elected to take those relating to business combinations, fair
value or revaluation as deemed cost and cumulative translation differences.
These are explained in more detail below:
Business combinations: The Group has elected not to apply IFRS3, Business Combinations, retrospectively to combinations that take
place prior to the transition date. Accordingly, the carrying value of goodwill recorded under UK GAAP has been fixed at the date
of transition as deemed cost and will no longer be amortised.
Fair value or revaluations as deemed cost: described in the IFRS accounting policies, the Group has elected to adopt the cost model
available under IAS 40, Investment Property. Accordingly, the net book value of the property at the date of transition will be
deemed as cost under IFRS.
Cumulative translation differences: Under IAS 21, some translation differences are required to be initially recognised as a separate
component of equity that is only recognised in the income statement on the disposal of that foreign operation. The Group has
elected not to comply with this requirement for cumulative translation differences that existed at the date of transition and
accordingly, the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition.
The Group has also elected to treat goodwill and fair value adjustments arising on acquisitions prior to 1 January 2006 as sterling
denominated assets and liabilities. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 59
34 Transition to IFRS continued
IAS 12 Income Taxes
General
IAS 12 takes a balance sheet approach to deferred tax whereby deferred tax is recognised in the balance sheet by applying the
appropriate tax rate to the temporary differences arising between the carrying value of the assets and liabilities and their tax base.
This contrasts with UK GAAP (FRS 19) which considered timing differences arising in the profit and loss account.
Where the IFRS adjustments discussed in this document create a difference between the carrying amount of an asset or liability and
the related tax base, and there are no initial recognition exemptions available under IAS 12, the Group has recorded a deferred tax
liability or asset as required. The following table demonstrates how the asset and liabilities have arisen:
Deferred
tax asset/
(liability)
£’000
At date of transition:
IAS 38 – capitalisation of research and development (40)
Asset arising on fixed asset temporary differences 428
Asset arising on short term temporary differences 18
Asset arising on share based payment 14
Net deferred tax asset 420
At 31 December 2006:
IAS 38 – capitalisation of research and development (31)
Asset arising on fixed asset temporary differences 424
Asset arising on short term temporary differences 23
Asset arising on share based payment 7
423
Liability arising on NIKA intangibles at the date of acquisition (1,339)
Deferred tax on business combinations
IAS 12 requires that deferred tax is provided in full on differences between the carrying value of assets and liabilities acquired in
a business combination and the related tax base, regardless of whether the business combination is accounted for under IFRS 3.
In the specific case of business combinations, the initial recognition exemption available under IAS 12 not to recognise deferred
tax on transactions which at the time of the transaction do not affect accounting profit or taxable profit is not available.
The Group acquired NIKA GmbH (NIKA), in July 2006 in a transaction which was a business combination as defined by IFRS 3,
“Business combinations”. NIKA had at that date certain assets which did not qualify for tax deduction (non qualifying assets). Under
UK GAAP these non qualifying assets do not result in a timing difference on which deferred tax is provided. Additionally, under IAS
12, in the normal course of events, the initial recognition exemption referred to above is available on these non qualifying assets.
Accordingly, the Group has provided for deferred tax on the full difference between the carrying amount of the NIKA intangibles
assets acquired by the Group in July 2006 and their tax base of £nil. The impact of this change for the Group has been an increase to
goodwill in the period to 31 December 2006 of £1,339,000 and a corresponding deferred tax provision of £1,339,000. There was no
impact on the income statement as a result of this change.
IAS 19 Employee Benefits
Holiday pay accrual
IAS 19 requires an accrual to be made for earned but unpaid holiday pay. The Group’s holiday year runs from January to December
and holiday carryover is permitted. Accordingly, the requirement to record a holiday pay accrual has impacted negatively, the
opening balance sheet as at 1 January 2006 by £79,000 and the 31 December 2006 balance sheet by £97,000, with the income
statements for each period incurring a charge by the corresponding movement.
Furthermore, an additional fair value adjustment of £68,000 in respect of holiday pay accruals was made as part of the NIKA
acquisition and this has increased goodwill by an equal amount.
IAS 21 The effect of changes in foreign exchange
Under IAS 21, it is necessary to present foreign exchange differences arising from the retranslation of overseas subsidiaries into the
presentation currency of the Group from the transition date as a separate reserve in equity. Accordingly, such movements have been
reclassified for the year ended 31 December.
Also, goodwill and fair value adjustments arising on acquisitions of a foreign entity are treated as assets and liabilities of that foreign
entity and translated at the closing rate. As a result of this change, net assets at 31 December 2006 have been reduced by £162,000. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
60 Flomerics Group PLC Annual Report 2007
34 Transition to IFRS continued
IAS 38 Intangible Assets
Capitalised software
Under UK GAAP, all capitalised software development costs are included within tangible fixed assets. IAS 38 requires that where
such costs are not an integral part of the associated hardware, they should be classified as intangible assets. Accordingly, certain
items of property, plant and equipment have been reclassified to intangible assets at each reference date where they are items
of software that meet the recognition criteria of IAS 38.
There is no net impact on the income statement as a result of this reclassification, however, there has been a reclassification of the
amounts recorded as depreciation on these assets to amortisation charges. The impact on the balance sheets at 1 January 2006 has
been an increase in Intangible Assets and a matching decrease in property, plant and equipment of £135,000. Software had already
been reclassified as an intangible asset in the 31 December 2006 financial statements and hence no adjustment has arisen.
Intangible assets amortisation
The Group has recognised additional intangible assets under IFRS 3 “Business Combinations”, as discussed below. IAS 38 requires
that amortisation is provided where an intangible asset has a finite life. The adjustment arising from this is discussed below in IFRS 3
“Business Combinations”.
Research and development expenditure
Under UK GAAP, the Group took the option available under SSAP 13 to write off all expenditure as incurred. Under IAS 38 it is
obligatory to capitalise when all of the criteria specified by the standard are met. Following a review of the research and development
projects being conducted by the Group, the capitalisation of the qualifying expenditure has resulted in an increase in intangible
assets at 1 January 2006 of £132,000 and £103,000 at 31 December 2006 with a corresponding reduction of administrative expenses
in the income statement.
Internally generated intangible assets are amortised on a straight line basis over their useful lives of three years.
IAS 39 Financial Instruments: Recognition and Measurement
Forward exchange contract fair value
IAS 39 requires all derivatives, including forward exchange contracts, to be initially recognised and subsequently re-measured at
fair value. The Group had open forward foreign exchange contracts in place at 1 January 2006. The Group had not adopted the
hedging provisions of IAS 39 at this time and accordingly, changes in fair value are taken to the income statement in the period
in which they arise.
The impact of this change for the Group has been a reduction in net assets of £29,000 in the opening balance sheet at 1 January 2006.
IAS 40 Investment Property
On reviewing the Group’s UK GAAP accounting policies against IFRS, it was noted that the characteristics of a building owned by
the Group meant it would more appropriately be classified as an investment property. The Group have chosen to adopt the cost
measurement accounting policy as allowed by IAS 40 as a result. This new policy has had no impact in the income statement but
does cause a reclassification in the balance sheet of £1,201,000 within non-current assets; the amounts for subsequent periods is
reduced by the depreciation charge for that period.
IFRS 3 Business Combinations
Business combinations: Reversal of goodwill amortisation
Under UK GAAP, the Company recognised goodwill as the difference between the fair value of assets and liabilities acquired and
the fair value of consideration paid on all acquisitions of trade and assets and subsidiary companies. Goodwill was amortised over
its useful economic life, generally being 20 years.
IFRS 3 prohibits the amortisation of goodwill. The standard requires goodwill to be carried at cost with impairment reviews both
annually and when there are indications that the carrying value may not be recoverable.
Accordingly, amortisation charged in the financial year ended 31 December 2006 has been reversed, increasing operating profit by
£644,000 for the year to 31 December 2006. Additionally, the accumulated amortisation at the transition date has been eliminated
against the cost of goodwill. Further adjustments have been made to the goodwill balance resulting from the application of IFRS 3
to business combinations after the transition date as detailed below.
Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in
the Group income statement and is not subsequently reversed. In accordance with IFRS 1 and IAS 36, an impairment review on all
assets was duly carried out at the transition date and subsequently in December 2006 and no impairment loss was identified.
Business combinations: Intangible assets
As accorded by the transitional arrangements of IFRS 1, the Group has chosen to apply IFRS 3 prospectively from the date of
transition (1 January 2006) and not to restate previous business combinations.
For qualifying business combinations, goodwill under IFRS 3 represents the excess of consideration over the fair values of acquired
assets (including any separately identifiable and measurable intangible assets), liabilities and contingent liabilities. As noted above,
the Group has not applied IFRS 3 to business combinations prior to the transition date of 1 January 2006. In the period subsequent
to 1 January 2006, the Group acquired NIKA in July 2006. The Group has assessed this business combination under IFRS 3 and
identified intangible assets relating to recurring customer relationships, a non-competition agreement, a contract based asset and
completed technology which have been reclassified from goodwill to intangible assets. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 61
34 Transition to IFRS continued
Business combinations: Intangible assets continued
As required under IAS 38, these intangible assets are amortised over their finite lives (considered to be between 4 and 10 years) and
subject to impairment reviews annually and before the end of the accounting period in which they were acquired.
The impact of this change for the Group has been a reduction to goodwill of £4,451,000 and a corresponding increase in other
intangible assets in the year to December 2006. The resulting amortisation charge arising on this reclassification is £338,000 with
a corresponding reduction in intangible assets.
The balance sheet reconciliations at 1 January 2006 (date of transition to IFRS) and at 31 December 2006 (date of last UK GAAP
financial statements) and the reconciliation of profit for 2006, as required by IFRS 1 are shown below:
1. Balance sheet reconciliation at 1 January 2006
UK GAAP
(IFRS
format)
£’000
IAS 12
Income
taxes
£’000
IAS 19
Holiday
pay accrual
£’000
IAS 38
Reclassifi-
cation of
software
£’000
IAS 38
Capitalis-
ation of
develop-
ment costs
£’000
IAS 39
Loss on
forward
exchange
contract
£’000
IAS40
Reclassifi-
cation of
investment
properties
£’000
IFRS
£’000
Non-current assets
Goodwill 1,353 – – – – – – 1,353
Other intangible assets – – – 135 132 – – 267
Property, plant and equipment 1,726 – – (135) – – (1,201) 390
Investment property – – – – – – 1,201 1,201
Deferred tax asset – 420 – – – – – 420
3,079 420 – – 132 – – 3,631
Current assets
Inventories 59 – – – – – – 59
Trade and other receivables 3,953 – – – – – – 3,953
Cash and cash equivalents 4,081 – – – – – – 4,081
8,093 – – – – – – 8,093
Total assets 11,172 420 – – 132 – – 11,724
Current liabilities
Trade and other payables (4,289) – (79) – – – – (4,368)
Current tax liability (30) – – – – – – (30)
Bank overdraft and loan (67) – – – – – – (67)
Derivative financial liability – – – – – (29) – (29)
(4,386) – (79) – – (29) – (4,494)
Non-current liabilities
Bank loans (377) – – – – – – (377)
Total liabilities (4,763) – (79) – – (29) – (4,871)
Net assets 6,409 420 (79) – 132 (29) – 6,853
Equity
Share capital 148 – – – – – – 148
Shares to be issued 33 – – – – – – 33
Share premium reserve 1,602 – – – – – – 1,602
Merger reserve 892 – – – – – – 892
Retained earnings 3,734 420 (79) – 132 (29) – 4,178
Currency translation – – – – – – – –
6,409 420 (79) – 132 (29) – 6,853 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
62 Flomerics Group PLC Annual Report 2007
34 Transition to IFRS continued
2. Balance sheet reconciliation at 31 December 2006
UK GAAP
(IFRS
format)
£’000
IAS 12
Income
taxes
£’000
IAS 19
Holiday
pay accrual
£’000
IAS 21
Currency
translation
difference
£’000
IAS 38
Capitalis-
ation of
develop-
ment costs,
net of
amortis-
ation
£’000
IAS 38
Amortis-
ation of
other
intangibles
identified
in NIKA
acquisition
£’000
IAS 40
Reclassifi-
cation of
investment
property
£’000
IFRS3
Reclassifi-
cation of
intangibles
identified
in NIKA
acquisition
£’000
IFRS3
Add
back of
goodwill
amortis-
ation
£’000
IFRS
£’000
Non-current assets
Goodwill 9,807 1,339 68 (99) – – – (4,205) 644 7,554
Other intangible
assets 234 – – (63) 103 (338) – 4,205 – 4,141
Property, plant
and equipment 1,709 – – – – – (1,189) – – 520
Investment
property – – – – – – 1,189 – – 1,189
Deferred tax asset – 423 – – – – – – – 423
11,750 1,762 68 (162) 103 (338) – – 644 13,827
Current assets
Inventories 33 – – – – – – 33
Trade and other
receivables 5,467 – – – – – – – – 5,467
Cash and cash
equivalents 2,339 – – – – – – – – 2,339
7,839 – – – – – – – – 7,839
Total assets 19,589 1,762 68 (162) 103 (338) – – 644 21,666
Current liabilities
Trade and other
payables (5,120) – (97) – – – – – – (5,217)
Current tax
liability (14) – – – – – – – – (14)
Bank overdraft
and loan (71) – – – – – – – – (71)
(5,205) – (97) – – – – – – (5,302)
Non-current
liabilities –
Bank loans (305) – – – – – – – – (305)
Deferred tax
liability – (1,216) – – – – – – – (1,216)
(305) (1.216) – – – – – – – (1,521)
Total liabilities (5,510) (1,216) (97) – – – – – – (6,823)
Net assets 14,079 546 (29) (162) 103 (338) – – 644 14,843 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 63
34 Transition to IFRS continued
2. Balance sheet reconciliation at 31 December 2006 continued
UK GAAP
(IFRS
format)
£’000
IAS 12
Income
taxes
£’000
IAS 19
Holiday
pay accrual
£’000
IAS 21
Currency
translation
difference
£’000
IAS 38
Capitalis-
ation of
develop-
ment costs,
net of
amortis-
ation
£’000
IAS 38
Amortis-
ation of
other
intangibles
identified
in NIKA
acquisition
£’000
IAS 40
Reclassifi-
cation of
investment
property
£’000
IFRS3
Reclassifi-
cation of
intangibles
identified
in NIKA
acquisition
£’000
IFRS3
Add
back of
goodwill
amortis-
ation
£’000
IFRS
£’000
Equity
Share capital 213 – – – – – – – – 213
Shares to be issued 1,112 – – – – – – – – 1,112
Share premium
reserve 1,735 – – – – – – – – 1,735
Merger reserve 7,185 – – – – – – – – 7,185
Retained earnings 3,834 546 (29) 140 103 (338) – – 644 4,900
Currency
translation – – – (302) – – – – – (302)
14,079 546 (29) (162) 103 (338) – – 644 14,843
3. Income statement reconciliation for the year to 31 December 2006
UK GAAP
£’000
IAS 12
Income
taxes
£’000
IAS 19
Holiday
pay accrual
£’000
IFRS 38
Capitalis-
ation of
develop-
ment
expendi-
ture net of
amortis-
ation
£’000
IAS 38
Amortis-
ation of
intangible
fixed
assets
£’000
IAS 39
Add back
of loss on
exchange
contract
£’000
IFRS 3
Write
back of
goodwill
amortis-
ation
£’000
IFRS
£’000
Continuing operations
Revenue 14,221 – – – – – – 14,221
Cost of sales (550) – – – – – – (550)
Gross profit 13,671 – – – – – – 13,671
Administrative expenses (13,171) – 50 (29) (338) 29 644 (12,815)
Other operating income 61 – – – – – 61
Operating profit 561 – 50 (29) (338) 29 644 917
Investment revenues 101 – – – – – – 101
Finance costs (164) – – – – – – (164)
Profit before tax 498 – 50 (29) (338) 29 644 854
Tax (160) 110 – – – – – (50)
Profit for the period 338 110 50 (29) (338) 29 644 804 COMPANY BALANCE SHEET
Flomerics Group PLC
31 December 2007
64 Flomerics Group PLC Annual Report 2007
Notes
2007
£’000
2006*
£’000
Fixed assets
Investments C 4,620 4,535
Current assets
Debtors D 2 2
Cash at bank and in hand – 1
2 3
Creditors: Amounts falling due within one year E (1,128) (1,079)
Net current assets (1,126) (1,076)
Net assets 3,494 3,459
Capital and reserves
Called-up share capital F, G 216 213
Shares to be issued G 1,112 1,112
Share premium account G 1,643 1,603
Profit and loss account G 523 531
Shareholders’ funds G 3,494 3,459
* amounts restated see note K.
The financial statements were approved by the Board of Directors on 28 April 2008 and signed on its behalf by:
G C Carter K Butcher
Director Director NOTES TO THE COMPANY FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 65
A Significant accounting policies
Basis of accounting
The separate financial statements of the Company are presented as required by the Companies Act 1985. They have been prepared
under the historical cost convention and in accordance with applicable United Kingdom Accounting Standards and law.
The principal accounting policies are summarised below. They have all been applied consistently throughout the year and the
preceding year.
Investments
Fixed asset investments in subsidiaries are shown at cost less provision for impairment.
For investments in subsidiaries acquired for consideration, including the issue of shares, cost is measured by reference to the nominal
value only of the shares issued. Any premium is ignored. The figure in the prior year did not ignore this premium and as such has
been restated by £132,000.
In addition the 2006 opening balance has been restated by £65,000 for the share based payment made in 2005.
Taxation
Current taxation is provided at amounts expected to be paid or recovered using tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
Deferred taxation is provided in full on timing differences which result in an obligation at the balance sheet date to pay more tax,
or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing
differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in
which they are included in financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely
than not that they will be recovered. Deferred tax assets and liabilities are not discounted.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.
An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Equity instruments issued are recorded at the proceeds received, net of direct issue costs.
B Loss for the financial year
As permitted by section 230 of the Companies Act 1985 the Company has elected not to present its own profit and loss account for
the year. The Company reported a loss after tax for the financial year ended 31 December 2007 of £8,000 (2006: profit £538,000).
The auditors’ remuneration for audit and other services is disclosed in note 5 to the consolidated financial statements.
All of the employees of the Company are remunerated through a subsidiary, Flomerics Limited.
C Fixed asset investments
2007
£’000
2006*
£’000
Subsidiaries 4,620 4,535
The Company has investments in the following subsidiaries and associates which principally affected the profits or net assets of
the Group.
Name
Country of incorporation
or registration
Flomerics Limited England and Wales
Flomerics, Inc. USA
Kimberley Communications Consultants Limited England and Wales
Flomerics Asia Limited Hong Kong
Flomerics Nordic AB Sweden
Flomerics S.E. Asia Pte Limited Singapore
Flomerics India Private Limited India
Microelectronics Research & Development Ltd (MicReD) Hungary
NIKA GmbH Germany
NIKA Software OOO Russia
NIKA France SARL France
All companies are wholly owned (the holdings in Flomerics, Inc., NIKA Software OOO and NIKA France SARL are indirectly held).
* amounts restated see note K. NOTES TO THE COMPANY FINANCIAL STATEMENTS
for the year ended 31 December 2007
66 Flomerics Group PLC Annual Report 2007
C Fixed asset investments continued
Subsidiaries
£’000
Cost
At 1 January 2007* 4,535
Additions – adjustment for Year 2 earnout 114
Additions – Flomerics Limited – Share option granted to subsidiary employees 116
Merger relief taken (145)
At 31 December 2007 4,620
* amounts restated see note K.
D Debtors
2007
£’000
2006
£’000
Amounts owed by subsidiary undertakings – –
Prepayments and accrued income 2 2
2 2
E Creditors: Amounts falling due within one year
2007
£’000
2006
£’000
Amounts due to subsidiary undertakings 1,128 787
Accruals and deferred income – 292
1,128 1,079
F Called-up share capital
2007
Number
2007
£’000
2006
Number
2006
£’000
Authorised:
Ordinary shares of 1p each 40,000,000 400 40,000,000 400
Allotted, called up and fully paid:
Ordinary shares of 1p each 21,631,516 216 21,331,370 213
G Combined reconciliation of movements in shareholders’ funds and statement of movements on reserves
Share
capital
£’000
Shares to
be issued
£’000
Share
premium
account
£’000
Profit
and loss
account
£’000
Total
£’000
At 1 January 2007* 213 1,112 1,603 531 3,459
Issue of share capital 3 – 40 – 43
Profit for the financial year – – – (8) (8)
At 31 December 2007 216 1,112 1,643 523 3,494
* amounts restated see note K. NOTES TO THE COMPANY FINANCIAL STATEMENTS
for the year ended 31 December 2007
Flomerics Group PLC Annual Report 2007 67
H Related party transactions
The Company has taken advantage of the exemption under FRS 8 ‘Related party disclosures’ not to disclose details of intra-group
transactions or balances with Group companies which are eliminated on consolidation in the consolidated accounts of Flomerics
Group PLC. Transactions with Directors are disclosed in the Directors’ Report and note 30 of the consolidated financial statements
of Flomerics Group PLC.
I Ultimate controlling party
Flomerics Group PLC is incorporated and registered in England and Wales and heads the largest group for which consolidated
financial statements are prepared.
J Events after the balance sheet date
On 20 December 2007 the Board announced the disposal of the EM Business to CST GmbH for a consideration of £1.6m. The sale
was completed on 31 January 2008 and the gain on disposal will be recognised in 2008. Final payment was received in April 2008.
As part of the completion terms relating to the acquisition of NIKA GmbH in 2006 1,100,724 shares were issued on in March 2008
to the vendors of NIKA GmbH.
K Prior year adjustment
Investments in subsidiaries has been restated for 2006 to reflect to remove the premium that previously report in respect of shares
issued as part of the consideration of the acquisition of a subsidiary. The impact of this adjustment was to reduce investments by
£132,000 and reduce the share premium reserve by £132,000.
In addition the 2006 opening balance has been restated by £65,000 for the share based payment made in 2005. The impact of this
adjustment was to increase investments by £65,000 and increase the profit and loss reserve by £65,000.
INFORMATION FOR SHAREHOLDERS
68 Flomerics Group PLC Annual Report 2007
Share Price
The mid-market share price of the shares at 31 December was as follows:
2007 2006 2005 2004 2003
Ordinary 1p shares 55.0p 89.5p 87.0p 66.5p 60.5p
Dividends
Ordinary shareholders have received the following dividends in respect of each financial year:
2007 2006 2005 2004 2003
Final dividend per share (proposed) 1.6p 1.4p 1.3p 1.1p 1.0p
Dividend
The 2007 dividend will be paid on 3 June 2008 to shareholders on the register at close of business on 9 May 2008.
Investor Relations
Our Corporate Website at www.flomerics.com has a comprehensive Investor Relations Section. It gives the share price updated every
15 minutes along with graphs, share volumes and other investor information. It is also possible to download the Annual Reports
from the website going back to 1999.
The Company is keen to maintain a dialogue with shareholders. In 2001, the Company’s efforts were recognised with the award of
Best Communications at the prestigious AIM Awards.
In 2003, the Company was one of four companies nominated for the AIM Award for Best Technology.
We like to hear from our shareholders and, other than during close periods, both Gary Carter and Keith Butcher are pleased to
receive calls or respond to emails ([email protected] and [email protected]).
Website
www.flomerics.com
Secretary and registered office
Keith Butcher,
81 Bridge Road, Hampton Court,
Surrey, KT8 9HH.
Company number
3109660
Advisers
Auditors
BDO Stoy Hayward LLP, 55 Baker Street,
London, W1U 3LL.
Principal bankers
Barclays Bank Plc, P O Box 729,
Eagle Point, 1 Capability Green,
Luton, LU1 3US.
Registrars
Capita IRG Plc, The Registry,
34 Beckenham Road, Beckenham,
Kent, BR3 4TU.
Nominated Adviser and Broker
Oriel Securities Limited, 125 Wood Street,
London, EC2V 7AN. design by www.luminous.co.uk
print by www.corporateink.co.uk Flomerics Group PLC
81 Bridge Road
Hampton Court
Surrey KT8 9HH
United Kingdom
Tel +44 (20) 8487 3000
Fax +44 (20) 8487 3001 ### summary: |
oncateno plc oncateno plc
Concateno plc Annual Report and Accounts 2008
Annual Report and Accounts 2008
Concateno plc
10 Buckingham Street
London
WC2N 6DF
T +44 20 7004 2800
F +44 20 7004 2801
E [email protected]
www.concateno.com
Linking it all together Contents
01 Highlights
02 Group overview – our products and services
04 Group overview – our geographical reach
06 Group overview – the markets we operate in
08 Chairman’s Statement
10 Chief Executive Officer’s Review
13 Financial Review
16 Board of Directors
17 Financial Statements index
18 Directors’ Report
21 Corporate Governance Report
24 Directors’ Remuneration Report
26 Statement of Directors’ Responsibilities
27 Independent Auditors’ Report
28 Consolidated Income Statement
28 Consolidated Statement of Recognised Income
and Expense
29 Consolidated Balance Sheet
30 Consolidated Cash Flow Statement
31 Notes to the Consolidated Financial Statements
61 Company Balance Sheet
62 Notes to the Company Balance Sheet
65 Advisers
Concateno is a global provider of drug and alcohol testing
and related services as well as a manufacturer of clinical
diagnostic products.
Drug and Alcohol abuse is a growing problem in society.
Concateno is at the forefront of this issue, working with
governments, employers and healthcare and law
professionals to help reduce the impact of this problem.
Our expertise is unmatched and our staff are passionate
about working with clients to identify the best possible
solutions for them.
Following the successful integration of our subsidiary
businesses, Concateno can now provide the optimal type
of drug testing in any biological sample.
Building on our expertise in Europe the Company is now
poised to both expand geographically and to develop new
market sectors.
Cozart
®
DDS: the Group’s leading oral fluid testing
device, field proven with police forces and
employers internationally.
Advisers >
Registered Office
Concateno plc
10 Buckingham Street
London
WC2N 6DF
Registered Number
05396234 England and Wales
Nominated Adviser and Broker
Collins Stewart (Europe) Limited
9th Floor
88 Wood Street
London
EC2V 7QR
Joint Brokers
SingerCapital Markets Limited
One Hanover Street
London
W1S 1AX
Evolution Securities Limited
100 Wood Street
London EC2V 7AN
Solicitors to the Company
Jones Day
21 Tudor Street
London
EC4A 0DJ
Auditors
KPMG Audit Plc
1 Forest Gate
Brighton Road
Crawley
RH11 9PT
Principal Bankers
Barclays Bank plc
Head Office Branch
1 Churchill Place
London
E14 5HP
Public Relations Advisers
Financial Dynamics
Holborn Gate
26 Southampton Buildings
London
WC2A 1PB
Company Secretary
Rowena Nixon
10 Buckingham Street
London
WC2N 6DF
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Patent Agents
Marks and Clerk
4220 Nash Court
Oxford Business Park South
Oxford OX4 2RU 01
Concateno plc
Annual Report and Accounts 2008
Financial highlights Corporate highlights
£4 7.5
m
Revenue
(2007: £26.1m)
14
%
Increase in unaudited pro forma
1
revenue
2008: £47.5m (2007: £41.8m)
54
%
Increase in unaudited pro forma
1
adjusted EBITDA
2
2008: £12.3m (2007: £8.0m)
£4.2
m
Operating profit
(2007: £2.0m)
1 Pro forma results (unaudited) are annualised results as if all business combinations
were in place on 1 January each year.
2 See EBITDA reconciliation in Financial Review.
Concateno established as the European >
market leader in the provision of drug and
alcohol testing services
£3.3m annualised operational synergies >
achieved earlier than plan
International networks of 90 distributors >
and 500 sample collectors giving the
Group a unique global footprint
Three specialist UKAS accredited >
laboratories and two state-of-the-art
manufacturing facilities
Unique ‘one-stop-shop’ offering a high >
quality service for the management of
Drugs of Abuse testing
Restructuring of the sales and marketing >
functions to target ‘vertical’ customer
markets. Successful adoption of model in
the UK now being rolled out internationally
Winner of the 2008 Queens Award for >
Enterprise in Innovation
Renewal of the Home Office ‘Drug >
Intervention Programme’ contract for up to
three years
Our highlights > Concateno plc
Annual Report and Accounts 2008 02
Group overview >
Our products and services
Concateno is Europe’s most focused drug
and alcohol testing facility. This is reflected in:
The consultative sales and marketing >
divisional structure, providing expert
market knowledge across diverse
market sectors.
The delivery of products and services >
from the group’s specialist manufacturers,
laboratories and distributors.
Innovations
Concateno’s New Product Development
integrates the Company’s unique knowledge
specialisms through a rigorously structured
and market centred process. New
innovations to date include:
Employee Assistance Programmes >
offering expert advice and specialist
counselling and support.
Non-invasive S-PMA testing detecting >
benzene at or below current health
standards.
DDS-U – a rapid urine test with >
built-in reader.
EtG hair test – test detecting >
the metabolite of alcohol
produced in the body.
integrated
solutions >
Cozart
®
DDS – Concateno’s
enhanced on-site saliva
drug detection system
> Used extensively by police
forces, drug treatment centres and
healthcare professionals
> Sample collection in less than one minute
> Digital analysis of test cartridge
> Multiple printouts of results
Drug Solids Testing
> Used internationally by Customs and
Border Control Agencies
> Able to detect drugs at parts per million
> Results in two minutes
Pro forma revenue
growth
2007>2008
13
% 03
Concateno plc
Annual Report and Accounts 2008
1 2
3
Point-of-Care
testing
Laboratory
based
testing
Laboratory
products
Key features:
> Used on location
> Results in minutes
> Oral fluid and urine matrices for drug testing
> Oral fluid and breath testing for alcohol
> Environmental detection of drugs in powders, tablets,
resins, liquids and surfaces
Key features:
> All laboratories UKAS accredited to ISO 17025
> Capability to test any sample type:
hair, urine, sweat, oral fluid, blood
> Legally defensible results
> Global collections network
Key features:
> Comprehensive range of diagnostic
tests and reagents to the global clinical
diagnostics market
> Manufactured at Concateno’s accredited and
purpose built facilities in the UK and Spain
> Over 30 years experience of producing clinical
diagnostic kits
> Products sold into over 100 countries
> Complementary line of instrumentation
Cozart
®
DDS – Concateno’s
enhanced on-site saliva
drug detection system
> Used extensively by police
forces, drug treatment centres and
healthcare professionals
> Sample collection in less than one minute
> Digital analysis of test cartridge
> Multiple printouts of results
Oral fluid
> Non invasive sample collection
> Testing for recent use
> Onsite and laboratory testing
Urine
> Good indicator of usage over several days
> Well established and understood method
> Onsite and laboratory testing
Hair
> Non invasive sample collection
> Testing for longer term use
> Limited opportunity for sample adulteration
Pro forma revenue
growth
2007>2008
Pro forma revenue
growth
2007>2008
Concateno branded urine point
of care tests
> The only brand used by HM Prison Service
voluntary testing
15
%
13
% Concateno plc
Annual Report and Accounts 2008 04
UK = £28.3m (2007: £18.2m)
Continential Europe = £10.7m
(2007: £5.0m)
Rest of World = £8.4m
(2007: £2.9m)
Group overview >
Our geographic reach
Integrating our global services
Through its acquisitions, Concateno
has created a wide footprint of offices,
distribution partners and sample
collection officers. These resources
are a powerful base from which to grow
revenues rapidly and cost effectively.
Our aim is to replicate the success of
our UK business internationally with initial
emphasis on our own offices in Scandinavia,
Italy and Spain. In addition, we are focused
on increasing sales of our POCT products
through existing distribution partners
particularly in Australia and Europe.
We are also successfully recruiting
new local channels for other territories,
building first on our worldwide and long
established partners that distribute our
laboratory products.
Geographic reach
North Africa >
Served by our local partner
Santé Lab (Algeria)
South America >
Served by a number of distributors,
including Labcenter in Mexico.
We have recently hired a local
country manager to develop this
market further.
Our locations
Argentina, Australia, Austria, Bahrain, Belgium, Brazil, Canada, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece,
Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kuwait,
Liechtenstein, Luxembourg, Maldives, Mexico, Netherlands, New
Zealand, North America, Norway, Pakistan, Peru, Philippines, Poland,
Portugal, Qatar, Romania, Russia, Serbia, Seychelles, Sierra Leone,
Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka,
Sweden, Switzerland, Taiwan, Thailand, Tunisia, Turkey, Ukraine, United
Arab Emirates, United Kingdom, United States, Venezuela, Vietnam.
connecting
sectors >
> 2008 revenue by geography 05
Concateno plc
Annual Report and Accounts 2008
United Kingdom >
Concateno is the number one supplier in this
diverse and growing market. Through its long
established contracts with government
agencies our experience and credibility in all
types of drug and alcohol testing is
unmatched. Equally, we are the largest and
most experienced provider of workplace
testing and associated support services.
EMEA >
The business enjoys a strong presence in
the Middle East through its contracts with,
amongst others, Emirates Airlines. In
addition it has developed strong distribution
partners in the wider region, for example,
Pera Medikal, an important and growing
distributor in the Turkish market.
Italy >
Our office continues to show
strong year-on-year revenue growth.
Following a change in workplace
legislation we were able to produce
a fully compliant product immediately
for which early sales and customer
feedback is excellent.
South America >
Served by a number of distributors,
including Labcenter in Mexico.
We have recently hired a local
country manager to develop this
market further.
Spain >
Our Spanish Manufacturing and Sales Offices
has proven expertise in the research and
development of in vitro clinical diagnostic
reagents with over 30 years experience of
producing the clinical diagnostic kits with
products sold into over 100 countries.
Scandinavia >
Following integration of all
our business interests in this
market our local office is
successfully expanding out
of its niche healthcare market
to become the leading player
in the region.
Australia >
Concateno has a strong presence in this
dynamic and pioneering market having worked
with all State Police Forces to develop the
roadside drug testing market. We continue to
see sales growth as rollout continues, as well
as diversification into other market sectors.
Collection facilities
Sales offices
Distribution offices
Case study
Ireland: Concateno joins up with the Irish >
Defence Forces
Concateno won a two-year, €60,000 contract with Ireland’s Defence
Forces to carry out random drug testing on its troops serving at home
and abroad.
Detecting drugs of abuse including heroin and crack/cocaine, among
others, the programme, delivered through Concateno’s specialist
workplace division, will test 10% of the Defence Forces personnel
annually. Providing diagnostic equipment, resources and training
services to test the troops on site, usually within barracks, is a primary
screening procedure to detect drug abuse.
‘Consumption of illegal drugs is simply incompatible with service life
and our random drugs testing programme ensures that we have a
strong deterrent and to identify those abusing drugs. In the last five
years we have tested 7,000 personnel and will continue to do so,
at home and overseas,’ said Commandant Gavin Young, Defence
Forces spokesman.
The contract also provides Defence Forces with a rapid response
collection capability: skilled Concateno officers are on call to attend
when ‘for cause’ tests are required – even if these are on overseas
postings, such as earlier this year when trained sample collection
officers donned flak jackets on a visit to soldiers stationed in Kosovo.
An initial test is made using Concateno’s point-of-care rapid-testing
cups, which allow urine samples to be taken and tested quickly and
efficiently, offering an immediate indication of a potential positive
result for drug abuse. The simplicity and speed of the process means
troops can be tested with the minimum disruption to their duties. Concateno plc
Annual Report and Accounts 2008 06
Group overview >
The markets we operate in
Key drivers for our market include:
Growing social concern over >
substance misuse.
Wider awareness of the link between >
drug use and crime.
Increased investment in ‘harm reduction’ >
and treatment.
Greater acceptance of workplace >
drug testing programmes.
Our Opportunity:
International access to previously >
unaddressed markets.
Product innovation and increased R&D. >
Cross selling into existing clients. >
Scale, experience and credibility. >
Our sectors
> realising
synergies
Workplace
Helping organisations manage
the risk that drug and alcohol
misuse can bring by developing
Drug and Alcohol policies;
providing staff and management
education and training courses;
supplying Employee Assistance
Programmes and rehabilitation
services; devising optimal
testing services.
Pre-employment and
in-employment testing.
Maritime
Concateno is the largest and
most experienced provider to
the global Maritime industry,
running fleet-wide random
testing programmes. Its
international network of sample
collection officers ensures that
testing can be carried out in any
port around the globe.
07
Concateno plc
Annual Report and Accounts 2008
Criminal Justice
Concateno is the most
experienced provider of Drug
Testing services to the UK
Government through its work
within Her Majesty’s Prison
Service and the Home Office
Drug Intervention Programme.
Laboratory Products
Concateno develops and
manufactures a broad range of
clinical diagnostic products in
liquid reagent and microplate
format. It also supplies a range
of clinical analysers and
laboratory instruments available
through a long-established
international distribution network
that spans 80 countries.
Medico-Legal
Concateno has the most expert
laboratory devoted to analysis of
hair. Over 4,000 law firms
currently use Concateno’s
Trichotest along with over 85%
of UK Police Forces.
Healthcare
The treatment and rehabilitation
of individuals affected by
substance misuse is becoming
more important for Governments
and policy makers. Concateno
has developed a full range of
drug and alcohol testing services
to meet the unique requirements
of this market. Concateno plc
Annual Report and Accounts 2008 08
Chairman’s Statement >
Keith Tozzi
Chairman
> looking
forward
‘Concateno has enhanced its market
leading position by substantially
increasing revenues and margins
whilst maintaining high levels of
customer service and retention.’
14
%
Increase in unaudited pro forma
1
adjusted revenue
2008: £47.5m (2007: £41.8m)
£4 7.5
m
Revenue
(2007: £26.1m) 09
Concateno plc
Annual Report and Accounts 2008
I am delighted to report Concateno’s financial results for the year
ended 31 December 2008. Following a series of acquisitions of drugs
of abuse testing businesses the previous year, during 2008 we have
transformed Concateno from a group of seven separate businesses
into the integrated European market leader.
Each constituent acquisition was an expert in its field, whether it be in
the testing of a particular matrix (such as hair or oral fluid), through
unique networks (such as Spinreact’s distributors or Medscreen’s
global collection operation), or technical expertise (such as
TrichoTech’s award winning hair testing methodologies, or Cozart’s
state-of-the-art Point-of-Care devices). By integrating these
businesses, we are now able to offer all this expertise to all our clients.
The success of this strategy in 2008 has been borne out by high
customer retention, new contract wins, and growing cross-selling of
products and services in both the UK and increasingly in
overseas markets.
Sales in the year to 31 December 2008 were £47.5m (2007: £26.1m)
and earnings before share-based payments, non-recurring items,
interest, tax, depreciation and amortisation (‘EBITDA’) were £12.3m
(2007: £6.2m
2
). Group profit before interest and tax was £4.2m (2007:
£2.0m) and adjusted basic earnings per share increased to 6.34p
from 5.29p in 2007. Further details are provided in the Financial
Review on pages 13 to 15.
Operational Leverage
We stated at the time of the acquisition of Cozart in October 2007 that
we would seek to achieve annualised operational synergies of £3m by
the end of 2008, and as I confirmed in my Interim report in September
2008, we actually achieved total synergies of £3.3m, that are 10%
above our target and earlier than planned. With the integration phase
now effectively complete we are focusing on leveraging operational
synergies, by servicing existing and new customers through our current
infrastructure. We are investing in our core sales, laboratory and finance
business systems and undertaking further procurement reviews.
Our focus is on maximising value from our existing asset base
through organic growth and driving international opportunities,
extending the model that we have successfully implemented in the
UK to Europe and other territories. Our strategy for international
development is fourfold:
to drive organic growth from our existing operations; •
to extend the ‘Concateno Model’ into territories where we have a •
direct presence (such as Sweden and Italy);
to leverage the current ninety distribution relationships and global •
support network that we have around the world to selectively
target specific markets and territories that are ready to develop
drug testing (i.e. through regulatory change); and
to make selective in-fill acquisitions in international territories to •
accelerate growth.
Market dynamics
Each of our markets shows differing dynamics:
Criminal Justice • – moderate growth and higher margins in the UK
underpinned by long term government contracts. Encouraging
signs of international growth
Workplace • – an expanding pipeline of opportunities and customer
conversions as regulation and best practice amongst employers is
extended. We have a very low level of exposure to the pre-
employment market
Maritime • – continued growth in sales aided by new products and
sales. The regulated oil and chemical tanker market in which we
predominantly operate remains robust
Medico-Legal • – rapid adoption of hair testing in the UK Courts
system has seen dramatic growth in our business. Exciting
international opportunities exist in this field in which we are
world leaders
Healthcare • – capped UK budgets have meant only limited growth,
albeit with opportunities to develop access to budgets in disease
prevention and the wider health service
Lab Products • – Spinreact continues to leverage its niche position
in this large market. There are exciting opportunities in many
developing economies
Our staff
I would like to thank all our staff for their continued hard work during
2008 and for helping us make Concateno the industry leader in the
European Drugs of Abuse testing sector.
Offer update
On 8 July 2008, following press speculation, we confirmed that we
had received a number of expressions of interest in Concateno and
that we had appointed UBS Investment Bank as financial adviser to
help the Board consider a range of options for enhancing shareholder
value, including a possible sale of the Group. Since that time, we have
been in an ‘Offer Period’. The Company is now at an advanced stage
in that process and expects to be able to announce its conclusion in
the relative short term.
Current Trading and Outlook
Despite the difficult wider macro-economic environment we have
been encouraged by the trading performance of the Group in the year
to date. We have good visibility over revenues, with approximately half
of our sales generated from the public sector and an additional
quarter from highly regulated private sector customers.
The Board believes that the Company is successfully delivering on its
strategy and looks forward to 2009 with confidence.
Annual General Meeting
The Annual General Meeting of the Company is to be held on 14 May
2009. The notice convening the AGM accompanies this report.
Keith Tozzi
Chairman
30 March 2009
1 Pro forma results (unaudited) are annualised results as if all business combinations
were in place on 1 January each year.
2 See EBITDA reconciliation in Financial Review.
UK: Workplace testing – BBC uses Concateno’s reference data >
Over the 2008 August Bank Holiday weekend, six BBC TV and radio programmes referred to
Concateno’s workplace drugs and alcohol data for news and commentary. The broadcasts,
including the top-rated BBC Radio 5’s Drive, Radio 4’s Today and BBC TV’s Working Lunch
programmes, highlighted statistics indicating that drug and alcohol tests in the UK had risen by
nearly a fifth in the first half of the year, with employers requesting over 100,000 workplace tests.
As Europe’s largest provider of drug and alcohol testing solutions, conducting over 8 million
tests annually, Concateno has the most extensive reference database to draw upon, enabling
drug misuse trends to be monitored, helping support employers, government and healthcare
leaders in formulating their drug and alcohol policies.
Case study Concateno plc
Annual Report and Accounts 2008 10
Chief Executive >
Officer’s Review
Fiona Begley
Chief Executive Officer
40
%
Sales generated from outside the UK
(2007: 30%)
£3.3
m
Annualised operational synergies achieved earlier than plan
> enabling
growth
‘Having integrated the businesses in
2008 our focus turns to international
growth and leveraging the resources
of our UK centres of excellence.’ 11
Concateno plc
Annual Report and Accounts 2008
Restructuring and Margin Improvement
At the end of 2007, Concateno consisted of seven separate acquired
entities, operating under their own brands and methodologies. During
2008 we have integrated those businesses and rolled out a common
Group wide approach to sales, sample collection, laboratory
processing, training and quality assurance.
Integration
A review of the integration projects and synergies achieved was set
out in the 2008 Interim Report and Accounts. A number of sites were
rationalised during the year, including:
migration of the Warrington oral-fluid testing laboratory to •
Abingdon (completed May);
closure of the CPL International site in Liverpool with the migration •
of the workflow to Cardiff and Canary Wharf (completed June);
closure of the Paddington office with the migration of the workflow •
to Canary Wharf (completed July);
closure of the Gothenburg office in Sweden with the migration of •
the workflow to Canary Wharf (completed July); and
closure of the Wakefield office with migration of the workflow to •
Canary Wharf (completed January 2009).
The result is that we now have three Centres of Excellence in the UK:
Abingdon – oral-fluid testing, Cozart POC (‘Point-of-Care’) device •
manufacture and R&D.
Cardiff – hair testing. •
Canary Wharf – urine testing. •
as well as our laboratory product manufacturing site in Girona, Spain
and sales offices in Stockholm, Barcelona and Rome.
The resulting annualised synergies are £3.3 million.
Sales and Marketing
At the beginning of 2008, we restructured the sales and marketing
functions of the various businesses to address ‘vertical’ markets in
order that the specific needs of customer groups would be better
targeted, product and service offerings tailored to their requirements
and best practice rolled out to other clients. This approach has been
well received by customers.
Highlights in 2008 included:
The renewal of the Drug Intervention Programme (‘DIP’) with the •
Home Office in July 2008, which included upgrading their installed
base of Cozart POC devices to the higher margin Cozart
®
DDS
variant. Contracts with the Home Office now have an annual value
of ~£3.4m.
Increased uptake of hair-testing in the medico-legal sector. •
TrichoTech, the Group’s hair-testing specialist operation based in
Cardiff, is the leader in this field. Hair testing benefits from being
able to detect drug misuse in the previous months rather than just
days and is therefore of particular value in family law. TrichoTech
also offers an expert witness statement service. Year-on-year
revenue growth in this market sector was more than 40%.
Criminal
Justice Workplace Maritime
Medico-
Legal Healthcare
Lab
Products
Summary
of product/
service
provided.
Products
and services
to support
drug-testing
in prisons,
police
custody
suites and
at the
roadside.
Provision of
pre- and
in-employment
drug testing for
regulated and
safety-critical
industries.
Provision of
fully
managed
drug-testing
services to
merchant
vessels.
Hair testing
to support
court cases
around family
law and child
protection.
Pre- and
in-
employment
hair testing.
Provision of
drug-testing
services
to support
non-
custodial
court
orders and
prisoners
on probation
Supply of
reagents
and
analysers to
distributors
principally
for use by
hospital and
clinical
laboratories.
Example
customers
– HM Prison
Service,
– Home
Office,
– State of
Victoria
Police
– Laing
O’Rourke
– TFL
– United
Biscuits
Fleet
management
companies,
e.g. V Ships,
and direct to
ship owners
worldwide.
Individual
law firms
and social
services
covering both
private and
public cases.
Drug Actions
Teams and
Private
Healthcare
organisations.
– Santé Lab
(Algeria).
– Labcenter
(South
America)
– Chronolab
Systems
(Spain)
Tender win to provide the NHS with a full range of DoA products •
and services from our expanded portfolio.
Roll-out of dried blood spot testing methodology for blood borne •
viruses (‘BBV’) to healthcare clients, particularly in the drug
treatment services where harm reduction is part of their remit.
BBVs, including Hepatitis C and HIV, are prevalent amongst
drug users.
New Workplace contract wins including Defence Forces Ireland, •
First Group, Greater Manchester Police and Irish Rail. Additional
contracts in 2009 include Scottish Police, Bovis Lend Lease and
Speedy Hire.
Adoption of Cozart POC devices by HM Revenue & Customs to •
help in the fight against drug-trafficking.
Successful roll-out of testing for benzene, a major carcinogen and •
component of many maritime cargoes, to the Group’s installed
maritime client base.
These contract wins, and others, combined with high customer
retention rates have meant that we have seen year-on-year growth in
all vertical sectors during 2008.
Lab
Products
Criminal Work- Medico- Health- & Intl
£’m Justice place Maritime Legal care distributors Total
2007
(Pro forma) 6.9 4.8 5.9 3.6 10.7 9.9 41.8
2008 7.6 5.5 6.4 5.2 11.0 11.8 47.5
% Change 10% 13% 9% 44% 3% 19% 14%
Following the successful adoption of the ‘Concateno Model’ in the
UK, we have started to roll-out the same model across Europe,
offering a comprehensive DoA product and service offering. Initial
successes have included:
Roll-out of hair testing to the Spanish market. •
Rapid Development of a urine variant of the DDS product to meet •
recent Italian workplace legislation (see below).
Distribution of POC products to Swedish Customs Service. •
We see growth coming from a number of areas:
Growth in existing markets driven by increased acceptance of •
regulation, growing prevalence of drug misuse and recognition by
employers and government bodies of the benefits of structured
testing programmes and associated support services.
New product and service offerings to current and new customers •
in the DoA arena (e.g. DDS-U, BBV, Benzene).
Expansion into new markets, either through geographical •
expansion, or by leveraging off current relationships by offering
new products and services.
Excellence of Service
The Group has focused on ensuring that the highest standards are
met at all times, illustrated by the fact that our Cardiff laboratory won
the Queens Award for Enterprise in Innovation. Quality Assurance
Managers are based at each of our laboratories to ensure that
standards are rigorously applied and all Account Managers have
been trained on the Group’s products and our expert toxicologists
ensure that up-to-date advice and results of a consistent standard are
given regardless of where our clients are in the world. We have also
increased resources in our Customer Services department to ensure
that customer queries are answered expeditiously and that we are
pro-active in anticipating customer needs.
All of our locations are covered by third party accreditation and/
or certification.
ISO 17025 ISO 9001
Testing and ISO 13485 Quality
Calibration Medical Management
Laboratories Devices System
Abingdon Yes Yes Yes
Canary Wharf Yes NA Yes
Cardiff Yes NA NA
Spain NA Yes Yes Concateno plc
Annual Report and Accounts 2008 12
Chief Executive Officer’s Review continued >
Further developments in 2009
Additional work will be undertaken during 2009 to integrate the
businesses further including:
An ongoing procurement review to rationalise our product offering •
and reduce costs including the development of a centralised
warehousing and stock control system.
Integrated ‘New Product Development’ process leveraging •
innovation and expertise across the wider group; forthcoming
products include the next generation of oral fluid sample collector.
Progressing the development of the UK’s information management •
systems including the Laboratory Information Management
Systems (‘LIMS’), Customer Relationship Management tools, and
finance systems.
Roll-out of a ‘Training Academy’ to develop our key staff. •
We continue to invest in the businesses, with the latest laboratory
testing equipment being maintained, so that we can meet the
increased demands of our customers, test for a wider range of drugs
of abuse and provide more detailed analysis to our clients.
We also continue to develop new products and services. The benzene
and EtG tests announced in our last annual report have been
successfully rolled out and in 2009 we are supplementing this with an
emergency benzene test kit in case of an accident on site or at sea.
Following a change in legislation in Italy, we were able to develop a
urine Point-of-Care device to provide a quantifiable reading. We
brought this product to market within three months and we are
already seeing encouraging sales in the first quarter of 2009.
We have a pipeline of new products and services which we are
currently developing and will roll-out over the forthcoming months
and years.
We also continue to explore ways to make the sample collection
process easier and more efficient. We have rolled-out a training
programme to all our collectors around the world and reviewed the
Quality Assurance process to ensure that standards of collection are
consistently high and the integrity of the ‘chain-of-custody’ is
maintained. We offer a 24/7 collection service. Our TrichoTech
operation is also trialling ‘walk-in centres’ in Liverpool and
Manchester.
The Group continues to develop the next generation of handheld
drug testing devices in conjunction with Philips, and both companies
announced the successful launch of the Magnotech technology at the
Medica conference in Dusseldorf in November 2008. Development
and commercialisation of the device is ongoing and launch is due in
the second half of 2009.
By understanding and anticipating our customers’ needs and
demanding exceptional quality in the products and services that we
offer we feel that we are well positioned to benefit from the growing
Drugs of Abuse testing market in 2009 and beyond.
Fiona Begley
Chief Executive Officer
30 March 2009
Case study
Concateno and Phillips share a commitment to >
help reduce the impact of drug abuse
With drug abuse a growing issue in today’s society, Concateno and
Philips share a commitment to working with government, employers,
healthcare and law professionals to help reduce the impact of this
problem. Since 2006 the two organisations have been developing an
innovative handheld drugs of abuse detection device. The new
solution will be launched to selected customers in 2009 and brings
together Concateno’s expertise in the field of immunoassay
development with Philips’ revolutionary ‘Magnotech’ technology.
‘The Concateno-Philips drug screening test will be the first product
that features Philips’ Magnotech technology, a new biosensor
technology that uses magnetic nanoparticles to measure low
concentrations of target molecules in blood and saliva.’ said Marcel
van Kasteel, VP of Philips and CEO of Philips Handheld
Immunoassays. ‘This first collaboration is a means of demonstrating
the excellence and robustness of the new technology with a company
that is synonymous with road-side testing and is already working
closely with government departments and police forces. It will be the
catalyst for them to grow and expand their European and global
markets. Magnotech delivers them a highly accurate result in less
than two minutes from a saliva sample,’ added Mr. van Kasteel. 13
Concateno plc
Annual Report and Accounts 2008
Financial Review >
Neil Elton
Finance Director
‘In 2008 Concateno has combined
strong revenue growth and margin
improvements with solid cash
conversion. The completed
integration projects in 2008 will
act as a good foundation for further
operational leverage in 2009.’
Overview
Results for the Group are stated for the year ending 31 December
2008 with comparatives for the year ended 2007.
Sales in the year to 31 December 2008 were £47.5m (2007: £26.1m).
Earnings before share-based payments, non-recurring items, interest,
tax, depreciation and amortisation EBITDA were £12.3m (2007:
£6.2m) representing an increase in margin from 23.8% to 25.9%. After
charging depreciation of £1.3m (2007: £0.6m) EBITA was £11.0m
(2007: £5.6m). Loss after tax for the year was £0.4m (2007: profit of
£0.7m) following non-recurring charges in the year of £3.0m (2007:
£0.8m) and exceptional finance costs of £1.5m (2007: £nil). A tax
credit of £0.2m (2007: credit of £0.3m) was recognised in the year
(representing an effective tax rate of 28% for the group).
There were no material acquisitions or disposals during 2008,
but a number of acquisitions throughout 2007. In order to aid
shareholders’ understanding of year-on-year performance we have
included aggregated unaudited pro forma numbers to show how the
business would have performed had all the acquisitions occurred on
1 January 2007.
Divisional Performance
Year ended
31 December
Unaudited
2007
£m 2008 Pro forma
1
2007 to 2008 % change
Revenue:
Laboratory Services 24.1 21.3 2.8 13.1%
Point of Care 12.9 11.4 1.5 13.2%
Laboratory Products 10.5 9.1 1.4 15.4%
Total 47.5 41.8 5.7 13.6%
EBITDA:
Laboratory Services 9.4 6.3 3.1 49.2%
Point of Care 3.8 2.4 1.4 58.3%
Laboratory Products 1.3 0.9 0.4 44.4%
Central (2.2) (1.6) (0.6) 37.5%
Total 12.3 8.0 4.3 53.5%
Margin 25.8% 19.2% 6.6%
1 Pro forma results (unaudited) are annualised results as if all business combinations
were in place on 1 January each year.
> delivering
efficiency Concateno plc
Annual Report and Accounts 2008 14
Financial Review continued >
Like-for-like performance
Approximately 63% (2007: 63%) of the Group’s sales are undertaken
in Pounds Sterling with the balance of the Group’s sales settled
predominantly in US Dollars and Euros. With the depreciation of
Pounds Sterling, particularly in the second half of 2008, the results
reported by the Group have been affected by the fluctuation in these
exchange rates. The table below restates the proforma results for the
Group for 2007, based on the exchange rates, experienced during
2008 so that the results for the two years may be compared on a
like-for-like basis. The main currencies and rates used are
US$1.86:£1, €1.26:£1 and SEK12.10:£1.
Like-for-like Divisional Performance
Year ended
31 December 2007
Unaudited Adjusted Adjusted
£m 2008 Pro forma
1
2007 to 2008 % change
Sales 47.5 43.7 3.8 8.8%
Gross Profit 27.5 25.0 2.5 10.0%
Margin 57.8% 57.2% 0.6%
EBITDA 12.3 8.3 4.0 48.6%
Margin 25.8% 18.9% 6.9%
1 Pro forma results (unaudited) are annualised results as if all business combinations
were in place on 1 January each year.
This shows that like-for-like proforma revenue growth in 2008 was
£3.8m (8.8%) compared with reported proforma growth of £5.7m
(13.6%) and like-for-like growth in proforma EBITDA was £4.0m
(48.6%) compared with reported growth of £4.3m (53.5%).
Because the Group has similar foreign currency payment obligations
as it does foreign currency receipts the Group is reasonably internally
hedged to foreign currency fluctuations. The Group does not have any
foreign currency hedges in place, but keeps this under regular review.
Interest and tax
Net finance costs in the year totalled £4.8m (2007: £1.7m). This
included an exceptional finance charge of £1.5m, discussed below.
The effective tax rate for the full year was 27.9%. The comparable
underlying tax rate for the prior year was 26.8%.
EPS
Basic earnings/(loss) per share (‘EPS’) for the year was (0.43p) (2007:
1.05p), the decrease on 2007 being primarily due to the investment
made during the year in restructuring and integration projects (see
non-recurring items for more detail below) and an exceptional charge
in respect of an interest hedge. Adjusted basic EPS
2
for the year was
6.34p (2007: 5.29p), representing a 20% increase.
Cash and financing
Net borrowings at 31 December 2008 were £25.7m (2007: £36.0m).
These comprised current loans, borrowings and overdrafts of £28.1m
(2007: £5.6m), non-current loans and borrowings of £0.3m (2007:
£33.7m, including £8.3m Convertible loan which was converted
during 2008), cash of £4.3m (2007: £3.9m) and net derivative financial
instruments of £1.6m (2007: £0.6m).
All term loan debts are disclosed as current liabilities because the
existing term loan that, after unamortised debt issue costs, totalled
£24.7m at 31 December 2008 (2007: £28.2m) is due to be repaid in
full on 31 December 2009. As at 30 March 2009, the Group has not
put in place refinancing beyond the end of 2009. If the Company were
not able to refinance the term loan debt before the end of the year,
this may result in a going concern risk. The Board has considered this
risk but believes that, despite the difficult financial markets, it is in a
good position to refinance. The Board is taking the following actions:
Case study
UK Government awards Concateno oral >
screening contract
The processing of arrestees in police detention has been improved by
using a quicker, simpler testing device. In a two-year, £4.5 million
Home Office contract awarded in July 2008, Concateno provides
police in England and Wales with a new device to detect heroin and
cocaine/crack in the oral fluid of arrestees.
The police conduct in the region of 220,000 such tests each year
using Concateno’s drug detection system Cozart
®
DDS to provide a
simple, quick answer; as a result approximately 4,000 drug misusers
are referred to treatment every month. Recorded crime figures show
that acquisitive crime has fallen by more than a fifth since the
programme started.
As part of the government’s DIP, the tests are a key part of the
national strategy for tackling drugs and reducing crime. Currently, in
areas where drug testing is in operation, anyone arrested for trigger
offences such as burglary and robbery is tested to find out if they
have taken heroin or cocaine. Those who test positive are required to
attend an assessment of their drug dependency and related needs. 15
Concateno plc
Annual Report and Accounts 2008
■ Laboratory Services 50.7%
■ Point-of-care 27.1%
■ Laboratory Products 22.2%
■ UK 59.7%
■ Continental Europe 22.6%%
■ Rest of World 17.7%%
It is in discussions with a number of banks whose Credit •
Committees have agreed in principle to provide re-financing in full
either individually or in partnership.
The Group is in advanced stages of negotiation with the banks •
who have undertaken extensive due diligence.
The Group has demonstrated strong financial performance and •
cash generation and has complied and continues to comply with
all its covenant obligations.
The Group is comparatively lowly geared at less than two •
times EBITDA.
The Company will look to confirm refinancing as soon as it comes out
of the current Offer period and well in advance of the end of 2009.
The current term loan is subject to interest based on one month
LIBOR, until 30 June 2009 and three month LIBOR between 1 July
and 31 December 2009. The Company has in place an interest rate
hedge facility adopted in November 2007 over 75% of the scheduled
bank loan balances until December 2014. The effect of the hedge is
to cap interest rates payable on that portion of the bank debt at 6.5%.
Should LIBOR fall below 3.73% (LIBOR was 2.05% at 28 February
2009) a strike rate of 5.75% is payable. The net fair value of this
derivative financial instrument at 31 December 2008 was £1.5m
(2007: £0.2m) all of which has been charged to the Income Statement
as an exceptional finance charge in 2008 (2007: £0.2m charged to the
hedging reserve). Further details are given in Note 16.
The balance of the loans and borrowings comprise finance lease
commitments of £0.2m (2007: £0.4m) and zero interest-bearing loans
granted to fund R&D in Spain of £0.5m (2007: £0.5m).
The Company issued 10,840,292 ordinary shares during the year. Of
this 10,587,355 shares were issued in settlement of a Convertible
Loan in November 2008. The original loan of £8.7m was issued at the
time of the acquisition of Cozart in October 2007 and attracted
interest at a rate of 12.5% per annum.
The balance of shares issued in the year related to the exercise of
employee share options and settlement of a deferred consideration
payment falling due to the former owners of Nemesis Scientific Ltd
(acquired by the Cozart group in March 2007).
Non-recurring and exceptional items
Non-recurring charges and exceptional items in the year were £4.5m
(2007: £0.8m) and comprised:
Charges related to the integration projects undertaken in 2008 of •
£1.7m (2007: £0.4m).
A provision for onerous leases on vacated premises of £0.4m •
(2007: £nil).
Charges related to the impairment of assets of £0.2m (2007: £nil). •
Other non-routine professional costs of £0.7m (2007: £0.4m). •
Exceptional finance charges related to change in designation of •
interest rate hedging instrument of £1.5m (2007: £nil)
Further details are provided in Notes 3 and 7.
Dividends
The Board is not recommending a dividend for the year to 31
December 2008 (2007: £nil). It is the Board’s policy that dividends will
be paid, subject to availability of distributable reserves, when it is
appropriate and prudent to do so. The main focus of the Company
continues to be delivering capital growth for shareholders.
KPIs
The Group uses a wide variety of performance indicators in the
tracking and management of the business. Financial key performance
indicators (‘KPIs’) relate to revenue growth, EBITDA margins and
> 2008 revenue by division > 2008 revenue by geography
growth as well as operating cash flow and free cash flow targets (free
cash flow being cash flow after working capital movements,
exceptional items, tax and capital expenditure but before interest and
debt principal repayments). Other financial and operational KPIs used
by each of the business units are tailored to those entities and include
revenue forecast ‘gap’ analysis, quote tracking, sample turnaround
times and customer feedback.
These KPIs are recorded on a regular basis, used within the
businesses throughout the year, and reported to the Board on a
monthly basis in order that they can assess the performance of the
Group and underlying business units.
Neil Elton
Finance Director
30 March 2009
2 Adjusted EPS excludes the after tax impact of intangibles amortisation, £2.6m
(2007: £1.6m), non-recurring items, £3.4m (2007: £0.7m) and share-based payments,
£0.6m (2007: £0.4m).
Reconciliation from Operating Profit to EBITDA
Year ended
31 December
Unaudited
2007
2008 2007 Pro forma
£m Note Actual Actual (unaudited)
Operating Profit 4.2 2.0 0.8
Reverse impact of:
Depreciation 4 1.3 0.6 1.1
Amortisation 4 4.0 2.4 2.7
Non-recurring items 3 3.0 0.8 3.0
Foreign exchange
gains 4 (0.8) – (0.1)
Share-based
payments 24 0.6 0.4 0.5
EBITDA 12.3 6.2 8.0 Concateno plc
Annual Report and Accounts 2008 16
Board of Directors >
1. Dr Christopher Hand
Non-Executive Director
Chris has a DPhil from the Faculty of Medicine, University of Oxford; a
BSc in Applied Biochemistry from Brunel University and is a
Chartered Chemist and Member of the Royal Society of Chemistry.
Chris founded Cozart Bioscience Ltd in 1993 and was Chief
Executive of Cozart plc following its listing onto AIM in 2004, until
October 2007 when the Company was acquired by Concateno plc.
During this time the Company won three SMART awards from the
Department of Trade and Industry, won Millennium Product Status for
its ground breaking Cozart
®
RapiScan system and acquired
companies in Sweden, Spain and the UK.
Prior to founding Cozart, Chris was Director of Research for the
European base of the medical diagnostics company DPC (now part of
Siemens Healthcare Solutions). Chris is currently a Director of
Abingdon Health Ltd.
2. Fiona Begley
Chief Executive Officer
Fiona holds a Bachelor of Science in Biochemistry from the National
University of Ireland, Galway and an MBA from Henley Management
College. Fiona joined Medscreen in 1996 as Sales and Marketing
Manager. She was appointed General Manager in 1998, Managing
Director in 2000 and led the management buy-out from PharmChem
in 2002. Concateno plc acquired Medscreen as its platform
acquisition in 2006.
From 1992 to 1995, Fiona held management roles for Syva UK and
Behring Diagnostics UK with a focus on business development and
marketing in the diagnostics industry. Prior to 1992 Fiona was a
product manager and biochemist in the pharmaceuticals and
biotechnology sector.
3. James Corsellis
Non-Executive Director
James has a BA (Hons) from London University and is currently
Managing Partner at Marwyn Investment Management. Over the past
two years at Marwyn, James has undertaken over 50 transactions
raising in excess of £1bn in acquisition funding for Marwyn backed
management teams and special purpose acquisition vehicles.
James is currently a Director of Aldgate Capital plc, Drury Lane
Capital plc, Entertainment One Ltd, Marwyn Value Investors, is
currently Deputy Chairman of Catalina Holdings Ltd and was
previously Chief Executive Officer of icollector plc.
4. Neil Elton
Finance Director
Neil qualified as a Chartered Accountant with Arthur Andersen. He
was a consultant to Mecom from 2000 (one of Europe’s largest
newspaper publishers), joining the Board as Finance Director in
March 2005, when the Company listed on AIM, until June 2006.
Prior to Mecom, Neil was Group Finance Manager at Huntsworth plc,
the international PR group, with oversight of their financial PR and
healthcare divisions. Before that, he was Finance Director of MirrorTel,
Mirror Group plc’s television and audiotex division, and financial
co-ordinator of the integration with Trinity International plc following
their merger in 1999 to form Trinity Mirror plc.
5. Vin Murria
Non-Executive Director
Vin has over 20 years’ experience of working for Venture Capital,
Private Equity and publicly listed companies focused on the software
sector. During this time, Vin has held a number of senior positions,
including Chief Executive Officer of Computer Software Group plc,
which she took private in May 2007. The company merged with
IRIS in July 2007 and was subsequently exited to Hellman Friedman
for $1bn.
Vin is a Partner at Elderstreet Capital, and prior to this was European
Chief Operating Officer for Kewill Systems Plc and Chairman of Leeds
Group Plc. She is the Chief Executive Officer of Advanced Computer
Software plc, and remains Chair of BSG plc, Innovise Plc and is a
Non-Executive Director at the Fredricks Charitable Foundation.
6. Keith Tozzi
Executive Chairman
Keith has wide experience at board level in creating and developing
successful businesses. He was Group Technical Director (one of
three Executive Directors) of Southern Water plc from 1992–1996.
From 1996–2000, he was Chief Executive of the British Standards
Institution (a London based Independent Royal Charter Company)
where he grew turnover to over £200m and acquired businesses
in the UK, South America and Eastern Europe to leverage the brand.
From 2000–2003, he was Group Chief Executive of Swan Group plc
(owner of Mid Kent Water) and led a management buy-out backed
by WestLB.
Most recently, Keith was Chairman of Inspicio plc, an AIM-listed
testing and inspection company that was listed as a special purpose
vehicle in April 2005 and sold for £264.3m in January 2008.
1
6 3 4
2 5 Concateno plc
Annual Report and Accounts 2008 17
Financial Statements Index >
In this section
18 Directors’ Report
21 Corporate Governance Report
24 Directors’ Remuneration Report
26 Statement of Directors’ Responsibilities
27 Independent Auditors’ Report
28 Consolidated Income Statement
28 Consolidated Statement of Recognised Income and Expense
29 Consolidated Balance Sheet
30 Consolidated Cash Flow Statement
31 Notes to the Consolidated Financial Statements
61 Company Balance Sheet
62 Notes to the Company Balance Sheet
65 Advisers Concateno plc
Annual Report and Accounts 2008 18
Directors’ Report >
For the year ended 31 December 2008
The Directors present their report and the audited financial statements for the year ended 31 December 2008.
Business Review
The Company is required by the Companies Act to include a business review in this report. The Directors’ Report contains a fair review of the
business and a description of the principal risks and uncertainties facing the Group. A review of the business strategy and a commentary on the
performance of the business is set out in the Chairman’s Statement, the Chief Executive’s Review and the Financial Review on pages 8 to 15.
A discussion of key performance indicators is included within the Financial Review on pages 13 to 15.
The Directors’ Report is prepared for the members of the Company and should not be relied upon by any other party or for any other purpose.
Where the Directors’ Report (including the Chairman’s Statement, the Chief Executive’s Review and the Financial Review) contains forward-
looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of this
report. Consequently such statements should be treated with caution due to the inherent uncertainties, including both economic and business
risk factors, underlying such forward-looking statements or information.
Principal activities
The principal activity of the Group is the development, manufacture and sale of medical diagnostic tests and services, predominantly those
used for the detection of alcohol and drugs of abuse.
The principal activity of the Company is that of a holding Company. The subsidiary undertakings principally affecting the profits or net assets of
the Group in the year are listed in Note 28 to the financial statements.
Going concern
After making enquiries the Directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable
expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors
continue to adopt the going concern basis in preparing the financial statements.
The Company is currently in the process of negotiating a refinancing package. Further details are included in the Financial Review on pages 13
to 15.
Results and dividends
The audited financial statements are set out on pages 18 to 63. The Group made a loss after taxation for the year ended 31 December 2008 of
£424,000 (2007: profit of £665,000).
The Directors do not recommend the payment of a dividend for the period (2007: £nil).
Directors and their interests
The Directors who held office during the year are detailed below.
K Tozzi Chairman
F Begley Chief Executive Officer
N Elton Finance Director
J Corsellis Non-Executive Director
V Murria Non-Executive Director
C Hand Non-Executive Director
K Tozzi and F Begley retire by rotation in accordance with the Articles of Association and, being eligible, offer themselves for re-election.
The Directors’ beneficial interests in the ordinary shares of 10p each (‘ordinary shares’) of the Company, were as follows:
Ordinary Ordinary
shares of 10p shares of 10p
31 December 31 December
2008 2007
K Tozzi 143,000 100,000
F Begley 981,777 941,1 77
N Elton – –
J Corsellis 58,824 58,824
V Murria 155,000 –
C Hand 1,369,013 1,369,013
Details of the Directors’ share options and service contracts are shown in the Directors’ Remuneration Report on pages 24 and 25.
Biographical details of the Directors are given on page 16. 19
Concateno plc
Annual Report and Accounts 2008
Substantial shareholdings
The Directors are aware of the following who have an interest in 3% or more of the Company as at 17 March 2009:
Ordinary
shares of 10p %
Marwyn Investment Management LLP
1
29,174,852 27.49
Fidelity (Institutional Group) 6,682,899 6.30
Powe Capital Management, LLP 4,808,669 4.53
Knox D’Arcy Investment Management Limited 3,609,913 3.40
Aviva Investors Global Services Limited 3,562,002 3.36
Schroder Investment Management Ltd. (SIM) 3,443,590 3.24
HSBC Investment Bank (MM) 3,260,700 3.07
1 Marwyn Investment Management LLP is the Investment Manager for both Marwyn Neptune Fund LP and Marwyn Ventures 1 LP, which hold 28,899,852 and 275,000 Concateno plc
shares respectively.
Group research and development activities
The total research and development activities undertaken by the Group amounted to £1,507,000 (2007: £306,000). All research and non-
qualifying development costs were written off during the year in which they were incurred. During the year £1,125,000 (2007: £247,000) of
development expenditure was capitalised in line with the accounting policy set out in Note 1 to the financial statements.
Charitable and political contributions
During the year the Group made charitable donations of £6,578 (2007: £1,731) to charities serving the communities in which the Group
operates. No political donations were made during the year.
Supplier payment policy
It is the Group’s policy to settle debts with its creditors on a timely basis, taking into consideration the terms and conditions offered by each
supplier. At 31 December 2008, the number of creditor days outstanding for the Group was 56 days (2007: 36 days).
The Group does not follow a standard code or payment practice.
Risks relating to the business of Concateno
Internal Controls
The Directors are responsible for the Group’s system of internal control and for reviewing its effectiveness whilst the role of management is to
implement Board policies on risk management and control. It should be recognised that the Group’s system of internal control is designed to
manage, rather than eliminate, the risk of failure to achieve the Group’s business objectives and can only provide reasonable, and not absolute,
assurance against material misstatement or loss.
The Group is currently developing the risk management process, to embed it in normal management, and the governance process. These
controls include, but are not limited to, the annual strategic planning and budgeting process, a clearly defined organisational structure with
authorisation limits, reviews by senior management of monthly financial and operating information including comparisons with budgets, monthly
treasury and cash flow reports and forecasts to the main Board and rules preventing speculation in derivatives.
The Board does not believe it is currently appropriate to establish a separate, independent internal audit function given the size of the Group.
However, it undertakes reviews of internal controls on a regular basis and a Risk Review Committee was set up in 2008 to assist with this
process.
Continued market growth
The Company is reliant upon growth in the drug and alcohol testing market within the UK and Rest of the World in order to increase trading
volumes. The dependence upon governmental and industrial testing requirements and the growth of these requirements is a risk that the
Company cannot directly control, but can mitigate by entering new markets. The failure of such market growth to continue could have a material
adverse impact on the Group’s business, financial condition, trading performance and prospects.
In the current economic climate, the Company faces additional pressures. However, with government-funded and regulated markets,
management feel that this risk is somewhat mitigated.
Dependence upon key executives and personnel
The Company has several key executives and senior personnel, who are of considerable worth to the Company in terms of their market
knowledge, strategic importance, and intellectual property value. In order to ensure minimal risk to the Company, key person insurances and
contractual obligations are in place to minimise the impact of loss of any of these persons. The loss of any member of the Group’s senior
operational management could harm or delay the business whilst management time is directed to finding suitable replacements or if no suitable
replacement is available to the Group. In either case this could have a material adverse effect on the future of the Group’s business. Whilst the
Group has entered into service agreements with these key personnel, the retention of their services cannot be guaranteed.
Investment Strategy
There can be no certainty that the Group will be able to successfully implement its strategy as set out in the Chairman’s statement. The ability
of the Group to implement its strategy in a competitive market requires effective planning and management control systems. The Group’s future
growth will depend on its ability to expand and improve operational, financial and management information and control systems in line with the
Group’s growth. Failure to do so could have an adverse effect on the Group’s business and financial condition. Concateno plc
Annual Report and Accounts 2008 20
Law and regulation
The Company operates its normal business activities within relevant legal and regulatory compliance listings. These risks include industry
legislation, regulatory control and health and safety compliance. The Company operates over international boundaries that entail the risk of
litigation and governmental non-compliance with regulatory requirements. These risks are minimised primarily by contractual obligations with
stakeholders (e.g. customers and suppliers) and by compliance within reasonable operating activities.
The drugs of abuse testing market, being the Group’s core market area, is subject to a large number of laws and regulations. The Group’s
success in the future will be dependent on the legislative framework in which it operates and the Directors have no influence over such matters.
Existing and future legislation, regulation and actions could cause additional expense, capital expenditure, restrictions and delays in the
activities of the Group, the extent of which cannot be predicted. No assurance can be given that the new laws, rules and regulations will not be
enacted or existing laws, rules and regulations will not be applied in a manner which could limit or curtail certain of the Group’s services.
Dependence on key customers
The Company has the risk of dependence upon key customers. This risk is mitigated by developing a close relationship with clients and entering
into contracts where possible. Given the increased scale of the Group the dependence on any one client has been significantly reduced during
the year. Where there is risk remaining and insufficient evidence of collectability of debts from customers, an allowance for impairment is made.
Price risk
The Group has no significant exposure to securities price risk as it holds no listed equity investments.
Financial Risk Management
The Board considers that the main risks arising from the Group’s financial instruments are currency risk, credit risk, interest rate risk, liquidity
risk and covenant risk. The use of financial derivatives is governed by the Group’s policies approved by the Board of Directors. The Group does
not use derivative financial instruments for speculative purposes.
(i) Currency risk
The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates. The Group uses foreign exchange
forward contracts, where cost effective to do so, and otherwise uses natural hedging methods where possible to minimise exposure in this area.
(ii) Credit risk
The Group’s principal financial assets are bank balances and cash, trade and other debtors.
The Group’s credit risk is primarily attributable to its trade debtors. The amounts presented in the balance sheet are net of allowances for
doubtful debtors. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence
of a reduction in the recoverability of the cash flows. The Group has no significant concentration of credit risk, with exposure spread over a
large number of counterparties and customers.
(iii) Interest rate risk and liquidity risk
In order to maintain liquidity to ensure that sufficient funds are available for ongoing operations and future developments, the Group uses a
mixture of long-term and short-term debt finance. The Group’s policy throughout the year has been to minimise risk by placing funds in low risk
cash deposits but also to maximise the return on funds placed on deposit.
The Group is currently undergoing refinancing negotiations. See Financial Review for details.
(iv) Covenant Risk
The Group must comply with a number of financial covenants as part of the term loan facilities. The Group regularly monitors actual and
forecast compliance with these covenants and makes regular reports to the banks.
Further details are provided in Note 19 of the Financial Statements.
Annual General Meeting
The Annual General Meeting will be held at the offices of Collins Stewart, London on 14 May 2009 commencing at 10am.
Auditors
Each of the persons who is a Director at the date of approval of this report confirms that:
(1) so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and
(2) the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information
and to establish that the Company’s auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985.
In accordance with Section 384 of the Companies Act 1985, a resolution for the re-appointment of KPMG Audit Plc as auditors of the Company
is to be proposed at the forthcoming Annual General Meeting.
By order of the Board
Rowena Nixon
Company Secretary
30 March 2009
Directors’ Report > continued
For the year ended 31 December 2008 21
Concateno plc
Annual Report and Accounts 2008
Corporate Governance Report >
For the year ended 31 December 2008
AIM listed companies are not required to comply with the disclosure requirements of the New Combined Code on Corporate Governance.
However, the Board supports the principles contained in the New Combined Code and is committed to applying the principles set out therein
where they are appropriate, given the Company’s size. The following provides information on how these principles have been applied but does
not constitute full compliance with the New Combined Code.
Board of Directors
The Company is controlled by the Board of Directors which comprises three Executive and three Non-Executive Directors.
The Board is responsible to shareholders for the proper management of the Group and meets formally at least every two months to set the
overall direction and strategy of the Group, to review financial and operating performance and to advise on senior management appointments.
Financial policy and budgets, including capital expenditure, are approved and monitored by the Board. All key operational decisions are subject
to Board approval. The Company Secretary is responsible for ensuring that Board procedures are followed and that applicable rules and
regulations are complied with.
Different Directors hold the roles of Chairman and Chief Executive and there is a clear division of responsibilities between them. Individual
Directors possess a wide variety of skills and experience; biographical details of the Directors are set out on page 16.
The Non-Executive Directors are considered by the Board to be independent of management. The Board considers that the Non-Executive
Directors are of sufficient calibre and number to bring the strength of independence to the Board. The terms and conditions of appointment of
Non-Executive Directors are available on request.
The Board believes that given its size and constitution it is not appropriate to specify a ‘senior’ Non-Executive Director.
During the year, there have been 10 main Board meetings. The schedule on the following page gives attendance and non-attendance by Board
members for meetings throughout the year.
All Board members receive monthly management accounts and regular management reports enabling them to review the Group’s performance
against agreed objectives. Regular reports and papers are circulated to Directors in a timely manner in preparation for Board and Committee
meetings. This information includes that specifically requested by the Non-Executive Directors from time to time.
Board evaluation
The Board is mindful of the requirement to undertake an annual evaluation of its performance and that of its committees and individual
Directors. It is the intention of the Board to adopt the following procedures in order to conduct performance evaluation.
The performance of the Board, its committees, the Executive Directors and Non-Executive Directors will be evaluated by the Chairman on an
ongoing basis.
Re-election
Directors are subject to election by shareholders at the first opportunity after their appointment and a third are subject to re-election at each
Annual General Meeting.
Committees of the Board
Audit Committee
The Audit Committee comprises two Non-Executive Directors; Dr C Hand (Chairman) and J Corsellis. It overviews the monitoring of the Group’s
internal controls, accounting policies and financial reporting and provides a forum through which the external auditors report. It also reviews the
scope and results of the external audit and the independence and objectivity of the auditors and makes recommendations to the Board on
issues surrounding their remuneration, appointment, resignation or removal. The Board is satisfied that the Audit Committee has sufficient
financial knowledge and experience. The Audit Committee should meet at least twice a year with the external auditors.
During the year there have been three Audit Committee meetings. The meetings were attended by both Committee members.
Terms of reference for the Audit Committee are available on request. These include definition of its role and the authority delegated to it by
the Board.
Remuneration Committee
The Remuneration Committee comprises two Non-Executive Directors, J Corsellis (Chairman) and V Murria. The Committee reviews, inter alia,
the performance of the Executive Directors and sets the scale and structure of their remuneration and the basis of their service agreements with
due regard to the interests of the shareholders. The Remuneration Committee also makes recommendations to the Executive Directors
concerning the allocation of share options to employees. The Committee should meet at least twice a year.
During the year, there have been two Remuneration Committee meetings. The meetings were attended by both Committee members at the time.
It is a policy of the Remuneration Committee that no individual participates in discussions or decisions concerning his own remuneration.
Terms of reference for the Remuneration Committee explain its role and the authority delegated to it by the Board. These are available on request. Concateno plc
Annual Report and Accounts 2008 22
The Directors’ Remuneration Report is set out on pages 24 and 25.
A summary of meeting attendances by the Board of Directors and its Committees is given below.
Main Audit Remuneration
Board Committee Committee AGM
Executive Directors
K Tozzi 10/10 – – 1/1
F Begley 10/10 – – 1/1
N Elton 10/10 – – 1/1
Non-Executive Directors
J Corsellis 8/10 3/3 2/2 1/1
C Hand 10/10 3/3 – 1/1
V Murria 10/10 – 2/2 1/1
Internal control
The Directors have overall responsibility for ensuring that the Group maintains a system of internal control to provide them with reasonable
assurance that the assets of the Group are safeguarded and that the shareholders’ investments are protected. The system includes internal
controls covering financial, operational and compliance areas, and risk management. There are limitations in any system of internal control,
which can provide reasonable but not absolute assurance with respect to the preparation of financial information, the safeguarding of assets
and the possibility of material misstatement or loss.
The Board has considered and reviewed the effectiveness of the system of internal control. An assessment of the major risk areas for the
business and methods used to monitor and control them was also considered. During the year under review, a number of key controls have
been improved and integrated across the business. In addition to financial risk, the review covered operational, commercial, environmental,
regulatory, and research and development risks. The risk review is an ongoing process with regular review by the Board at least annually.
The key procedures designed to provide an effective system of internal control that have operated throughout the year and up to the date of the
sign-off of this report are described below:
Control environment
The Group has a clearly defined organisational structure. Managers of operating units assume responsibility for, and exercise a high degree of
autonomy in, running day-to-day trading activities. Employees are required to follow clearly laid out internal procedures and policies appropriate
to the business and their position within the business.
Risk management
The Group employs Directors and senior executives with the appropriate knowledge and experience for the Company. A formal risk
management review is performed annually as part of the process of determining the Group’s system of internal controls and risk
mitigation procedures.
Risk procedures are carried out via the centralised Quality Assurance system. Each business within the Group currently holds separate
certification and/or accreditation:
ISO 13485 – Medical Devices: •
o Cozart.
o Spinreact.
ISO9001 – Quality Management System: •
o Medscreen.
o Euromed.
o Spinreact.
o Cozart.
Cozart ISO 17025 – Testing and Calibration Laboratories: •
o Medscreen.
o Altrix.
o TrichoTech.
o Cozart.
There is a dedicated Quality Manager at each site responsible for the day-to-day activities required to maintain certification/accreditation, and
to report and escalate any issues that are identified. This provides an early warning system and ensures swift and effective corrective and
preventative action.
The Group Quality Manager, based at Abingdon, oversees all activities and produces a weekly and monthly report for the Chief Operating
Officer. These reports are discussed monthly at the Group Operational Executive and a monthly report is sent to the main Board. A single
Quality System continues to be implemented ensuring that best practice is migrated across the Group.
Corporate Governance Report > continued
For the year ended 31 December 2008 23
Concateno plc
Annual Report and Accounts 2008
Financial information
The Group prepares detailed budgets and cash flow projections, which are approved annually by the Board and updated regularly throughout
the year. Detailed management accounts and working capital cash flow projections are prepared on a monthly basis and compared to budgets
and projections to identify any significant variances.
Management of liquid resources
The Board is risk adverse when investing the Group’s surplus cash funds. The Executive Directors monitor the Group’s cash position on a
weekly basis. The Group’s treasury management policy is reviewed annually and sets out strict procedures and limits on how surplus funds
are invested.
Internal audit
The Board has considered it inappropriate to establish a formal internal audit function during the year, given the size of the Group. Although
there has been no formal internal audit function, financial reviews have been performed between Group companies on a regular basis and work
is under way to formalise this process more over the coming year.
Relations with shareholders
The Board attaches great importance to effective communication with both institutional and private shareholders. In fulfilment of the Chairman’s
obligations under the new Combined Code, the Chairman gives feedback to the Board on issues raised with him by major shareholders.
Regular communication is maintained with all shareholders through Company announcements, the Annual Report and Financial Statements,
Preliminary Results and the Interim Report.
All shareholders are sent copies of the Interim and Annual Reports and are given notice to enable them to attend the Company’s Annual
General Meeting and any Extraordinary General Meeting. Shareholders whose shares are held by nominees may receive the information on
request. The Annual General Meeting is normally attended by all Directors, and shareholders are invited to ask questions during the meeting
and to meet with Directors after formal proceedings.
In addition, the Company operates a website: www.concateno.com. It contains information on the Group and its activities, press releases and
regulatory announcements, Annual Financial Statements and Interim Statements, and details of the Company’s share price. Concateno plc
Annual Report and Accounts 2008 24
Directors’ Remuneration Report >
For the year ended 31 December 2008
The following information has been provided in accordance with best practice even though it is not all a requirement of the AIM Rules of the
London Stock Exchange. The information presented in the Directors’ Remuneration Report is unaudited unless otherwise stated.
Remuneration policy
The Remuneration Committee currently comprises two Non-Executive Directors; J Corsellis and V Murria. The Chairman and other senior
executives attend meetings from time to time at the invitation of the Committee. Remuneration levels are set in order to attract high calibre
recruits and to retain and motivate those Directors and employees once they have joined the Group.
Remuneration package for Executive Directors
The individual components of the remuneration package offered to Executive Directors are as follows:
(i) Basic salary
Basic salaries are reviewed on a regular basis. The review process is undertaken by having regard to the development of the Group and the
contribution that individuals will continue to make. Consideration is also given to the need to retain and motivate individuals and information on
the salary levels in comparable organisations.
(ii) Annual performance incentives
Annual performance incentives in the form of cash bonus payments are reviewed on an annual basis and are designed to reward Executive
Directors for exceptional performance.
(iii) Pension and other benefits
The Company makes contracted contribution into personal pension schemes for the Executive Directors.
Other benefits provided to Executive Directors are life assurance and private medical insurance.
(iv) Share options
Options granted to employees under the Company’s Enterprise Management Incentive (‘EMI’) or Employee Benefit Trust Incentive Scheme are
recommended by the Executive Directors and approved by the Remuneration Committee.
Executive Directors are awarded share options at the discretion of the Remuneration Committee. Share options are granted at the closing
mid-market value of the Company’s ordinary shares on the day prior to grant, or where the Remuneration Committee consider that the share
options are issued further to an acquisition event they are granted at the share price pertaining to that acquisition event.
Remuneration policy for Non-Executive Directors
The remuneration of the Non-Executive Directors is determined by the Board as a whole, based on a review of current practices in
other companies.
The Non-Executive Directors have service agreements which are reviewed by the Board annually.
Audited information
Directors’ remuneration
The Directors received the following remuneration during the year:
Salary Taxable Pension Total Total
and fees Bonus benefits contributions 2008 2007
Name of Director £ £ £ £ £ £
Executive
K Tozzi 123,917 15,000 7 ,987 11,500 158,404 667,306
F Begley 218,729 25,000 5,770 37 ,923 287,422 743,590
N Elton 145,500 15,000 4,249 13,667 178,416 65,309
Non-Executive
J Corsellis 10,000 – – – 10,000 14,671
V Murria 35,000 – – – 35,000 8,750
C Hand
1
76,500 – – – 76,500 16,666
609,646 55,000 18,006 63,090 745,742 1,516,292
1 C Hand received £35,000 (2007: £5,000) for Non-Executive duties and £41,500 (2007: £11,666) for work in relation to the collaboration with Philips. 25
Concateno plc
Annual Report and Accounts 2008
40
60
80
100
120
140
02/01/08
02/02/08
02/03/08
02/04/08
02/05/08
02/06/08
02/07/08
02/08/08
02/09/08
02/10/08
02/11/08
02/12/08
02/01/09
02/02/09
02/03/09
Concateno
FTSE All Small
FTSE Support Services
Directors’ share options
Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares in the Company granted
to or held by the Directors under the EMI Share Option Scheme. Details of the options are as follows (see Note 24 of the accounts for
performance conditions):
At Options Options Options At
1 January granted exercised lapsed 31 December Exercise Exercise Expiry
Name of Director Class 2008 Number Number Number 2008 price (p) date date
Executive
K Tozzi A 50,000 – – – 50,000 85.0 07/11/2009 07/11/2016
B 49,999 – – – 49,999 85.0 07/11/2009 07/11/2016
F Begley A 50,000 – – – 50,000 85.0 07/11/2009 07/11/2016
B 49,999 – – – 49,999 85.0 07/11/2009 07/11/2016
N Elton C – 38,461 – – 38,461 130.0 21/01/2011 20/01/2018
D – 38,462 – – 38,462 130.0 21/01/2011 20/01/2018
Non-Executive
J Corsellis – – – – –
V Murria – – – – –
C Hand – – – – –
Employee Benefit Trust
Aggregate emoluments disclosed above do not include any amounts for the value of Employee Benefit Trust Incentive Scheme (‘EBT’) ordinary
shares in the Company granted to SG Hambros Trust Company (Channel Islands) Limited. SG Hambros Trust Company (Channel Islands)
Limited, as trustee of a trust of which the Directors and certain of their relatives are potential beneficiaries, hold the following options and
ordinary shares (see Note 24 to the accounts for performance conditions):
Options/ Options/ Options/
At shares shares shares At
1 January granted exercised lapsed 31 December Exercise Exercise Expiry
Scheme Class 2008 Number Number Number 2008 price (p) date date
EBT Share Option Scheme A 700,000 – – – 700,000 86.0 07/11/2009 07/11/2016
EBT Share Option Scheme B 700,002 – – – 700,002 86.0 07/11/2009 07/11/2013
EBT Share Option Scheme E – 711,538 – – 711,538 142.0 12/06/201 1 12/06/2015
EBT Share Option Scheme F – 711,539 – – 711,539 142.0 12/06/201 1 12/06/2015
EBT Share Scheme 2,980,047 – – – 2,980,047 N/A N/A N/A
Directors’ shareholdings
The Directors who served during the period, together with their beneficial interests in the shares of the Company, are detailed in the Directors’
Report on pages 18 to 20.
Performance graph
The graph below shows a comparison between the Company’s total shareholder return performance compared with FTSE AIM All Share and
Support Service sectors of the London Stock Exchange. The graph covers the period from 1 January 2008 to 19 March 2009. The Directors
have selected the Support Services sector as a comparison as they believe that the constituent companies most closely reflect the nature and
operations of Concateno.
The market price of the Company’s shares as at 31 December 2008 was 93.5p and the range during the period between 1 January 2008 and
31 December 2008 was 85.3p–170.30p.
By order of the Board
Keith Tozzi
Chairman
30 March 2009 Concateno plc
Annual Report and Accounts 2008 26
Statement of Directors’ Responsibilities in respect of the Annual Report >
and the Financial Statements
For the year ended 31 December 2008
The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements, in accordance with
applicable law and regulations.
Company law requires the Directors to prepare Group and parent company financial statements for each financial year. As required by the AIM
Rules of the London Stock Exchange, they are required to prepare the Group Financial Statements in accordance with International Financial
Reporting Standards (‘IFRSs’) as adopted by the EU and applicable law and have elected to prepare the parent company financial statements
in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).
The Group Financial Statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and the
performance of the Group; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that
Act to financial statements giving a true and fair view are references to their achieving a fair presentation.
The parent company financial statements are required by law to give a true and fair view of the state of affairs of the parent company.
In preparing each of the Group and parent company financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently; •
make judgements and estimates that are reasonable and prudent; •
for the Group Financial Statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; •
for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material •
departures disclosed and explained in the parent company financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company •
will continue in business.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of
the parent company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general
responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and
other irregularities.
The Directors have decided to prepare voluntarily a Directors’ Remuneration Report in accordance with Schedule 7A to the Companies Act
1985, as if those requirements were to apply to the Company. The Directors have also decided to prepare voluntarily a Corporate Governance
Statement as if the Company were required to comply with the Listing Rules of the Financial Services Authority in relation to those matters.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
By order of the Board
Fiona Begley
Chief Executive Officer
30 March 2009 27
Concateno plc
Annual Report and Accounts 2008
To the members of Concateno plc
We have audited the group and parent company financial statements (the ‘financial statements’) of Concateno plc for the year ended 31
December 2008 which comprise the Consolidated Income Statement, the Consolidated and Parent Company Balance Sheets, the
Consolidated Cash Flow Statement, the Consolidated Statement of Recognised Income and Expense and the related notes. These financial
statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’
Remuneration Report that is being described as audited.
This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work
has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report
and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company
and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditors
The Directors’ are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable law and
International Financial Reporting Standards (‘IFRSs’) as adopted by the EU, and for preparing the parent company financial statements in
accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the Statement of
Directors’ Responsibilities on page 26.
Our responsibility is to audit the financial statements in accordance with relevant and regulatory requirements and International Standard on
Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part
of the Directors’ Remuneration Report to be audited give a true and fair view and whether the financial statements have been properly prepared
in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors’ Report is
consistent with the financial statements. The information given in the Directors’ Report includes that specific information presented in the
Chairman’s Statement, Chief Executive’s Review and Financial Review that is cross referred from the Business Review section of the
Directors’ Report.
In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information
and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is
not disclosed.
We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We
consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial
statements. Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’
Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the
preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be
audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the
overall adequacy of the presentation of information in the financial statements.
Opinion
In our opinion:
the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the group’s affairs as at •
31 December 2008 and of its loss for the year then ended;
the parent company financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state •
of the parent company’s affairs as at 31 December 2008;
the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the •
Companies Act 1985, and;
the information given in the Directors’ Report is consistent with the financial statements. •
KPMG Audit Plc
1 Forest Gate
Brighton Road
Crawley
RH11 9PT
Registered Auditor
30 March 2009
Independent Auditors’ Report >
For the year ended 31 December 2008 Concateno plc
Annual Report and Accounts 2008 28
Consolidated Income Statement >
For the year ended 31 December 2008
Consolidated Statement of Recognised Income and Expense >
For the year ended 31 December 2008
Year ended Year ended
31 December 31 December
2008 2007
Notes £’000 £’000 £’000 £’000
Revenue 2 47,474 26,064
Cost of sales (20,024) (10,617)
Gross profit 27,450 15,447
Administrative expenses before the following items: (16,003) (10,055)
Non-recurring administrative expenses 3 (3,002) (785)
Share-based payments (555) (439)
Amortisation of business combination intangible assets 11 (3,659) (2,193)
Total administrative expenses (23,219) (13,472)
Operating profit 4 4,231 1,975
Finance income 7 76 380
Finance expenses 7 (3,366) (2,032)
Exceptional charge in respect of interest hedge 7 (1,533) –
Net fi nance costs (4,823) (1,652)
Profit/(loss) before taxation (592) 323
Taxation 8 168 342
Profit/(loss) for the period attributable to equity shareholders of the Company (424) 665
Earnings/(loss) per share 9
Basic (pence per share) (0.43)p 1.05p
Diluted (pence per share) (0.43)p 1.04p
The consolidated income statement has been prepared on the basis that all operations are continuing operations.
The accompanying notes are an integral part of the consolidated financial statements.
Year ended Year ended
31 December 31 December
2008 2007
Notes £’000 £’000
Foreign currency translation differences for foreign operations 22 2,162 298
Changes in fair value of effective cash flow hedges 16 184 (184)
Income and expense recognised directly in equity 2,346 114
Profit/(loss) for the period (424) 665
Total recognised income and expense for the period attributable to equity shareholders of the Company 1,922 779 29
Concateno plc
Annual Report and Accounts 2008
Consolidated Balance Sheet >
As at 31 December 2008
As at As at
31 December 31 December
2008 2007
Notes £’000 £’000
Assets
Non-current assets
Goodwill 11 98,335 97,938
Other intangible assets 11 43,426 46,183
Property, plant and equipment 12 3,691 3,410
Deferred tax assets 13 1,081 858
146,533 148,389
Current assets
Inventories 14 4,935 3,855
Current tax assets 204 1 74
Trade and other receivables 15 14,712 11,819
Derivative fi nancial instruments 16 – 3
Cash and cash equivalents 17 4,292 3,888
24,143 19,739
Total assets 170,676 168,128
Liabilities
Current liabilities
Bank overdrafts 17 2,965 1,685
Loans and borrowings 18 25,110 3,931
Derivative element of convertible loan 18 – 417
Derivative fi nancial instruments 16 1,612 184
Current tax liabilities 1,438 1,281
Trade and other payables 20 9,729 8,892
Provisions 21 1,120 1,541
41,974 1 7,931
Non-current liabilities
Loans and borrowings 18 326 33,651
Provisions 21 774 729
Deferred tax liabilities 13 11,582 12,629
12,682 47,009
Total liabilities 54,656 64,940
Shareholders’ equity attributable to equity
Shareholders of the Company
Share capital 22 10,614 9,530
Share premium account 22 99,146 89,875
Other reserves 22 10,304 7,958
Retained earnings 22 (4,044) (4,1 75)
Total shareholders’ equity attributable to equity shareholders of the Company 116,020 103,188
Total shareholders’ equity and liabilities 170,676 168,128
The financial statements were approved by the Board of Directors and authorised for issue on 30 March 2009. They were signed on its behalf by:
Fiona Begley Neil Elton
Chief Executive Officer Finance Director
30 March 2009 30 March 2009
The accompanying notes are an integral part of the consolidated financial statements. Concateno plc
Annual Report and Accounts 2008 30
Consolidated Cash Flow Statement >
For the year ended 31 December 2008
Year ended Year ended
31 December 31 December
2008 2007
Note £’000 £’000
Cash flows from operating activities
Profit/(loss) for the period (424) 665
Depreciation and other non-cash items:
Depreciation 1,238 569
Amortisation of intangible assets and loan issue costs 4,050 2,395
Impairment losses on intangible assets 71 –
Impairment losses on property, plant and equipment 90 –
Share-based payments 555 439
Loss on disposal of property, plant and equipment – (15)
Net fi nance costs 4,823 1,652
Taxation (168) (342)
10,235 5,363
Increase in trade and other receivables (1,657) (247)
Increase in inventories (156) (262)
Increase in trade and other payables 214 227
Cash generated from operations 8,636 5,081
Tax (paid)/received, net (979) (33)
Net cash flows from operating activities 7,657 5,048
Cash flows from investing activities
Acquisitions of businesses (net of cash acquired) (219) (101,613)
Purchase of property, plant and equipment (1,771) (569)
Development expenditure (1,129) (248)
Net cash flows from investing activities (3,119) (102,430)
Cash flows from financing activities
Net proceeds from issue of share capital – 71,454
Proceeds from exercise of share options 85 136
Proceeds from borrowings – 29,722
Repayment of borrowings (net of debt issue costs) (3,878) (1,250)
Interest received 75 133
Interest paid (2,330) (1,264)
Net cash flow from financing activities (6,048) 98,931
Increase/(decrease) in cash and cash equivalents for the period (1,510) 1,549
Cash and cash equivalents at start of period 2,203 654
Effect of foreign exchange fluctuations on cash held 634 –
Cash and cash equivalents at end of period 17 1,327 2,203
The accompanying notes are an integral part of the consolidated financial statements. 31
Concateno plc
Annual Report and Accounts 2008
Notes to the Consolidated Financial Statements >
For the year ended 31 December 2008
1 Accounting policies
Concateno plc (the ‘Company’) is a company domiciled in the United Kingdom. The consolidated financial statements of the Company as at
and for the year ended 31 December 2008 comprise the Company and its subsidiaries (together referred to as the ‘Group’ or ‘Concateno’).
(a) Statement of compliance
The Group Financial Statements have been prepared and approved by the Directors in accordance with International Financial Reporting
Standards as adopted by the EU (‘Adopted IFRSs’). The Company has elected to prepare its parent company financial statements in
accordance with UK GAAP; these are presented on pages 61 to 64.
(b) Basis of preparation
Notwithstanding the Group’s net current liabilities of £17.8m as at 31 December 2008, the financial statements have been prepared on a Going
Concern basis, which assumes that the Group will continue in operational existence for the foreseeable future, which the Directors believe is
appropriate for the following reasons.
The Group term loan of £25.0m at 31 December 2008 is included within current liabilities as it is due to be repaid in full on 31 December 2009.
As at 30 March 2009, the Group had not finalised the refinancing of that loan beyond the end of 2009.
However, the Directors have taken the following actions to support the basis of preparation:
Held discussions with a number of banks whose Credit Committees have agreed in principle to provide re-financing in full either individually •
or in partnership. These banks have undertaken extensive due diligence.
Prepared projections for the results and cash flows of the Group for the next three years. These projections indicate that the Group will •
continue to operate within the current agreed facilities covenants and the facilities and any covenants which the Directors expect to agree
when the Group comes out of the current offer period. The Directors have considered the assumptions made and consider the forecasts to
be reasonable and realistic.
The financial statements do not include any adjustments that would result from the going concern basis of preparation being inappropriate.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated
financial statements. These accounting policies are set out below and have been applied consistently throughout all periods. In these financial
statements the following Adopted IFRSs are effective for the first time. Unless stated otherwise, they have not had a material effect on the
financial statements:
IFRS 7 ‘Financial Instruments: Disclosures’ and the related amendment to IAS 1 ‘Presentation of Financial Statements’ in relation to capital •
disclosures
IFRIC 8 ‘Scope of IFRS 2 Share-based Payment’. •
IFRIC 9 ‘Reassessment of Embedded Derivatives’. •
IFRIC 10 ‘Interim Financial Reporting and Impairment’. •
IFRIC 11 ‘IFRS 2 – Group and Treasury Share Transactions’. •
(c) Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except that derivative financial instruments are stated at
fair value.
(d) Functional and presentational currency
The consolidated financial statements are presented in Pounds Sterling, which is the Company’s functional currency. All financial information
presented in Pounds Sterling has been rounded to the nearest one thousand.
(e) Basis of judgement
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in
which the estimate is revised and in any future periods affected.
In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the
most significant effect on the amount recognised in the financial statements are described in the following notes:
Note 11 – Carrying amount of intangible assets and measurement of the recoverable amounts of cash generating units. Many intangible •
assets have been valued using management’s best estimate of future cashflows expected to arise.
Note 11 – The Group invests in the development of future products and material enhancement of existing products in accordance with the •
accounting policy. The assessment as to whether each element of this expenditure will be technically feasible, generate future economic
benefit or the period over which to amortise the expenditure is a matter of judgement. The carrying value of product development capitalised
and the amounts capitalised and amortised in the year are detailed in Note 11.
Note 13 – Utilisation of tax losses. The proportion of deferred tax assets recognised is a result of management’s best estimate of future •
profit streams. Concateno plc
Annual Report and Accounts 2008 32
1 Accounting policies continued
Note 15 – Trade receivables provision. The value of provision made against bad or doubtful debts follows detailed customer-by-customer •
review by management. The final provision arrived upon is a result of management’s best estimate of future recoverability and therefore
involves a degree of judgement.
Note 21 – Provisions and contingencies. The value of provisions recognised in relation to ongoing enquiries is based on management’s best •
estimate of total costs still to be incurred. Judgement is also involved in assessing the amount of deferred and contingent consideration to
be recorded; amounts recognised are based on management’s assessment of the likelihood of warranties impacting final payments and
expectation in relation to future performance conditions being met.
(f) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and
operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are
exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements
from the date that control commences until the date that control ceases.
The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Applicable
trading and market conditions have been considered in this process in order to ensure that the policies are still appropriate to that
subsidiary’s situation.
(ii) Transactions eliminated on consolidation
Intra-group balances, and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in
preparing the consolidated financial statements.
(g) Foreign currency
(i) Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the foreign exchange rate ruling at
the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Pounds
Sterling at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in profit or loss.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at
the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to
Pounds Sterling at foreign exchange rates ruling at the dates the fair value was determined.
(ii) Group companies
The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional
currency different from the presentation currency are translated into the presentation currency as follows:
assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; and •
income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable •
approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at
the dates of the transactions).
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
Foreign currency differences are recognised directly in equity. Since 1 April 2006, the Group’s date of transition to IFRSs, such differences have
been recognised in the foreign currency translation reserve. When a foreign operation is disposed of, in part or in full, the relevant amount in this
reserve is transferred to profit or loss.
(h) Non-derivative financial instruments
Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents
(see Note (o) below), loans and borrowings, and trade and other payables.
Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly
attributable transaction costs, except as described below. Subsequent to initial recognition non-derivative financial instruments are measured
as described below.
A financial instrument is recognised if the Group becomes a party to the contractual provisions of the instrument. Financial assets are
derecognised if the Group’s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to
another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets
are accounted for at trade date, i.e., the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if
the Group’s obligations specified in the contract expire or are discharged or cancelled.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 33
Concateno plc
Annual Report and Accounts 2008
1 Accounting policies continued
(i) Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational,
financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for
trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial
instruments are initially recognised at fair value of which the best estimate can be initial cost. The gain or loss on re-measurement to fair value is
recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss
depends on the nature of the item being hedged. The fair value of interest rate swaps is the estimated amount that the Group would receive or
pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap
counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of
the quoted forward price.
(i) Cash flow hedges
When a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly
probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When
the forecasted transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or the forecast transaction for
a non-financial asset or non-financial liability the associated cumulative gain or loss is removed from equity and included in the initial cost or
other carrying amount of the non-financial asset or liability. If a hedge of a forecasted transaction subsequently results in the recognition of a
financial asset or a financial liability, then the associated gains and losses that were recognised directly in equity are reclassified into profit or
loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss (i.e. when interest income or
expense is recognised).
For cash flow hedges, other than those covered by the preceding two policy statements, the associated cumulative gain or loss is removed
from equity and recognised in profit or loss in the same period or periods during which the hedged forecast transaction affects profit or loss.
The ineffective part of any gain or loss is recognised immediately in profit or loss.
When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the
hedged forecast transaction still is expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in
accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, then the
cumulative unrealised gain or loss recognised in equity is recognised immediately in profit or loss.
(ii) Hedge of monetary assets and liabilities
When a derivative financial instrument is used as an economic hedge of the foreign exchange exposure of a recognised monetary asset or liability,
hedge accounting is not applied and any gain or loss on the hedging instrument is recognised as part of foreign currency gains and losses.
(j) Compound financial instruments
The Group had Convertible loan notes which are regarded as compound financial instruments, consisting of a liability component and a
derivative component. At the date of issue, the fair value of the liability component is established using an estimate for a similar non-convertible
debt. The difference between the proceeds of issue of the convertible debt and the fair value assigned to the debt component, representing the
embedded option to convert the debt, is included as a separate component of liabilities (‘derivative element of convertible loan’) unless it fully
meets the definition of equity (in which case, it is charged directly in equity),
Any issue costs are apportioned between the liability and derivative components of the convertible loan notes based on the relative carrying
amounts at the date of issue. The portion relating to the derivative component is not re-measured subsequent to initial recognition.
The interest expense on the debt component consists of the coupon rate and the element of the derivative component proportionate to the
debt component outstanding. This latter part is added to the carrying amount of the convertible loan notes.
(k) Property, plant and equipment
(i) Owned assets
Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see accounting
policy q). When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate
items of property, plant and equipment.
(ii) Leased assets
Leases in terms of which the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases.
(iii) Subsequent costs
The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that
cost is incurred if it is probable that the future economic benefits embodied within the item will flow to the Group and the cost of the item can be
measured reliably. All other costs are recognised in profit or loss as an expense as incurred. Concateno plc
Annual Report and Accounts 2008 34
1 Accounting policies continued
(iv) Depreciation
Depreciation is charged to profit or loss 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:
Leasehold buildings – over the remaining life of the lease •
Plant and equipment – 3–10 years •
The residual value, depreciation method and useful lives are reassessed annually.
(l) Intangible assets
(i) Goodwill
All business combinations are accounted for by applying the purchase method. Goodwill has been recognised in acquisitions of subsidiaries.
Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is no longer amortised
but is tested annually for impairment (see accounting policy q).
(ii) Research and development
Expenditure on research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is
recognised in profit or loss as an expense as incurred.
Development activities involve a plan or design for the production of new or substantially improved products and processes. Development
expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible,
future economic benefits are probable, and the Group intends, and has sufficient resources, to complete development and to use or sell the
asset. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of direct overheads. Other
development expenditure is recognised in the income statement as an expense as incurred.
Capitalised development expenditure is stated at cost less accumulated amortisation (see below) and impairment losses (see accounting
policy q).
(iii) Other intangible assets
Intangible assets other than goodwill that are acquired by the Group are stated at cost less accumulated amortisation (see below) and
impairment losses (see accounting policy q). Other intangible assets include customer relationships and brands. Expenditure on internally
generated goodwill and brands is recognised in profit or loss as an expense as incurred.
(iv) Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the
specific asset to which it relates. All other expenditure is expensed as incurred.
(v) Amortisation
Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets once they are available for
use. Goodwill with an indefinite useful life is tested systematically for impairment at each annual balance sheet date. The estimated useful lives
of intangible assets are as follows:
Customer relationships – 7–20 years •
Customer contracts – 7–10 years •
Commercial agreements – 10–12 years •
Patents and trademarks – 10–20 years •
Capitalised development costs – 3–5 years •
(m) Trade and other receivables
Trade and other receivables are initially measured on the basis of their fair value. Subsequently they will be carried at amortised cost using the
effective interest method less any impairment losses (see accounting policy q).
(n) Inventories
Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of
business, less the estimated costs of completion and selling expenses.
(o) Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Any bank overdrafts that
are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash
equivalents for the purpose of the statement of cash flows.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 35
Concateno plc
Annual Report and Accounts 2008
1 Accounting policies continued
(p) Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that
an outflow of resources will be required to settle the obligations; and, the amount can be reasonably estimated. Provisions are split between
current and non-current liabilities, where appropriate, provisions are calculated by discounting the expected future cash flows at a pre-tax rate
that reflects market assessments of the time value of money and the risks specific to the liability.
(q) Impairment (excluding inventories and deferred tax assets)
The carrying amounts of the Group’s assets are reviewed at each balance sheet date to determine whether there is any indication of
impairment. If any such indication exists, the asset’s recoverable amount is estimated.
For goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is
estimated at each balance sheet date.
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.
Impairment losses are recognised in the income statement.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to
cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash generating unit is the
smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups
of assets.
At the date of transition to Adopted IFRSs, no business combinations had been effected and the Company held no intangible assets or assets
which had an indefinite useful life.
When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that
the asset is impaired, the cumulative loss that had been recognised directly in equity is recognised in profit or loss even though the financial
asset has not been derecognised. The amount of the cumulative loss that is recognised in profit or loss is the difference between the
acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss.
(i) Calculation of recoverable amount
The recoverable amount of the Group’s receivables carried at amortised cost are calculated as the present value of estimated future cash flows,
discounted at the original effective interest rate (i.e., the effective interest rate computed at initial recognition of these financial assets).
Receivables with a short duration are not discounted.
The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future
cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is
determined for the cash-generating unit to which the asset belongs.
(ii) Reversals of impairment
An impairment loss in respect of a receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be
related objectively to an event occurring after the impairment loss was recognised.
An impairment loss in respect of goodwill is not reversed.
In respect of other assets, an impairment loss is reversed when there is an indication that the impairment loss may no longer exist and there has
been a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been
determined, net of depreciation or amortisation, if no impairment loss had been recognised.
(r) Non-recurring items
The Group presents as non-recurring items on the face of the income statement those material items of income and expenditure which
because of their nature and/or expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to
understand the elements of financial performance in the period, so as to facilitate comparison with prior periods. Concateno plc
Annual Report and Accounts 2008 36
1 Accounting policies continued
(s) Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-
bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in profit or loss over
the period of the borrowings on an effective interest basis.
(t) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a
substantial period of time to get ready for their intended use of sale, are added to the cost of those assets, until such time as the assets are
substantially ready for their intended use or sale.
All other borrowing costs are recognised in the income statement in the period in which they are incurred.
(u) Employee benefits
(i) Defined contribution plans
Obligations for contributions to defined contribution pension plans are recognised as an expense in profit or loss as incurred.
(ii) Share-based payment transactions
The share option programme allows Group employees to acquire shares of the Company. 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 a binomial lattice 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 only due to share prices not achieving the threshold for vesting.
(v) Revenue
(i) Goods sold
Revenue represents the amounts receivable for goods provided less trade discounts, returns and allowances, VAT and other sales
related taxes.
The Group records transactions as sales when the significant risks and rewards have been transferred to the buyer in accordance with the
terms of trade. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated costs or
the possible return of goods.
Transfer of risks and rewards vary depending on the individual terms of the contract of sale. For the majority of ‘Point-of-Care testing’ and
‘Laboratory Product’ sales, transfer usually occurs when the product is received at the customer’s site; however, for some international
shipments, transfer occurs upon loading goods onto the relevant carrier.
A bill and hold arrangement is in place with one UK customer for whom the Group stores the customers finished product, on their request, and
arranges delivery as and when they require it. Revenue is recognised when substantially all the risks and rewards of ownership have been
transferred to the buyer, even though it has not all been dispatched to the customer’s site(s).
Income received in advance of the provision of goods is held in deferred income within the balance sheet until those goods have
been delivered.
(ii) Services rendered
The Group provides services chiefly in respect of its ‘Laboratory Services’ division. Revenue represents the amounts receivable for services
provided less trade discounts, returns and allowances, VAT and other sales related taxes.
The Group records transactions as sales when the performance of services has taken place in accordance with the terms of trade. No revenue
is recognised if there are significant uncertainties regarding recovery of the consideration due or associated costs.
Income received in advance of the provision of services is held in deferred income within the balance sheet until those services have
been provided.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 37
Concateno plc
Annual Report and Accounts 2008
1 Accounting policies continued
(w) Expenses
(i) Operating lease payments
Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives
received are recognised in the income statement as an integral part of the total lease expense.
(ii) Finance lease payments
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is
allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
(iii) Finance costs
Financing costs comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds
invested foreign exchange gains and losses, and gains and losses on hedging instruments that are recognised in profit or loss.
Interest income is recognised in profit or loss as it accrues, using the effective interest method. The interest expense component of finance
lease payments is recognised in the income statement using the effective interest rate method.
(x) Income tax
Income tax comprises current and deferred tax. Income 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 using the balance sheet liability method, providing for 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: initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination that
affect neither accounting nor taxable profit, 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. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
(y) Adopted IFRSs not yet applied
At the date of authorisation of these financial statements, the following standards and interpretations which have not been applied in these
financial statements were in issue but not yet effective:
IFRS 8 Operating segments. •
IFRS 2 Amendment – Share-based Payment: Vesting Conditions and Cancellations. •
IFRS 3 Amendment – Business Combinations. •
IAS 1 Amendment – Presentation of Financial Statements. •
IAS 23 Amendment – Borrowing costs. •
IAS 27 Amendment – Consolidated and Separate Financial Statements. •
IAS 32 Amendment – Financial Instruments: Presentation. •
IFRIC 12 Service Concession Arrangement. •
IFRIC 13 Customer Loyalty Programmes. •
IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction. •
The Directors do not anticipate that the adoption of any of the above standards or interpretations will have a material impact on the Group’s
accounts in the period of initial application. However, there may be amendments to these disclosures following completion of the internal review
exercise currently under way in respect of IFRS 8 ‘Operating segments’.
2 Segmental information
A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in
providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are
different from those of other segments. The primary format, business segments, is based on the Group’s management and internal reporting
structure. Inter-segment pricing is determined on an arm’s length basis.
Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable
basis. Unallocated items comprise mainly loans and borrowings and related expenses, corporate assets and head office expenses, and income
tax assets and liabilities. Concateno plc
Annual Report and Accounts 2008 38
2 Segmental information continued
Business segments
The Group comprises the following main business segments:
Laboratory services. •
Point-of-Care testing products. •
Laboratory products. •
Other revenues include training and consultancy work performed for workplace customers. These revenues have been allocated to ‘Point-of-
Care’ and ‘Laboratory services’ in proportion to other work performed for these particular customers.
Results, split by business segment, are presented below.
Laboratory Services Point-of-Care Laboratory Products Eliminations Consolidated
2008 2007 2008 2007 2008 2007 2008 2007 2008 2007
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’00
Total external revenues 24,064 19,080 12,878 4,470 10,532 2,514 – – 47,474 26,064
Inter segment revenues 700 342 1,493 396 105 11 (2,298) (749) – -
Total segment revenues 24,764 19,422 14,371 4,866 10,637 2,525 (2,298) (749) 47,474 26,064
Segment result, before
non-recurring items 6,415 3,1 7 4 2,216 502 1,272 139 – – 9,903 3,815
Non-recurring items (1,546) (568) (471) (20) (99) – – – (2,116) (588)
Segment result, after
non-recurring items 4,869 2,606 1,745 482 1,173 139 – – 7,787 3,227
Unallocated (including
non-recurring) expenses (3,556) (1,252)
Results from operating
activities 4,231 1,975
Net finance costs
(including exceptional
fi nance costs) (4,823) (1,652)
Income tax credit 168 342
Profit/(loss) for the period (424) 665
Non-recurring and
exceptional items 4,535 785
Profit/(loss) for the
period before
non-recurring and
exceptional items 4,111 1,450
Segment assets 84,001 80,705 65,864 59,440 20,477 26,383 – – 170,342 166,528
Unallocated assets 334 1,600
Total assets 170,676 168,128
Segment liabilities 13,263 11,264 8,524 8,166 3,790 4,434 – – 25,577 23,864
Unallocated liabilities 29,079 41,076
Total liabilities 54,656 64,940
Property, plant and
equipment (‘PPE’)
expenditure 1,302 385 267 65 82 10 – – 1,651 460
Unallocated PPE expenditure 3 109
Total PPE capital expenditure 1,654 569
Depreciation 531 464 488 81 206 19 – – 1,225 564
Unallocated depreciation 13 5
Total Depreciation 1,238 569
Amortisation of
intangible assets 1,725 1,478 1,665 640 430 115 – – 3,820 2,233
Intangible asset additions, by business segment, are disclosed in Note 11.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 39
Concateno plc
Annual Report and Accounts 2008
2 Segmental information continued
Geographical segments
The Group’s business segments are managed on a worldwide basis, but operate in two principal geographical areas; the United Kingdom and
Continental Europe (defined here as all European countries apart from the United Kingdom). Continental Europe production facilities/sales
offices are located in Spain (predominantly operating in the Laboratory Products business segment), Sweden (Laboratory Services and
Point-of-care testing products) and Italy (Point-of-care testing products).
In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. This is split
between the United Kingdom, Continental Europe and ‘Rest of World’. Within ‘Rest of World’ are a high proportion of customers who are based in
South America. Segment assets and capital expenditure are based on the geographical location of the assets.
United Kingdom Continental Europe Rest of World Consolidated
2008 2007 2008 2007 2008 2007 2008 2007
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Revenue from external customers 28,331 18,201 10,723 4,982 8,420 2,881 47,474 26,064
Segment assets 154,768 149,804 15,908 18,324 – – 170,676 168,128
Capital expenditure 1,564 506 90 63 – – 1,654 569
3 Non-recurring items
2008 2007
£’000 £’000
Restructuring: Employee costs 1,290 375
Restructuring: Consultancy costs 247 –
Restructuring: Onerous rent 445 –
Restructuring: Other operating costs 197 24
Legal and advisory 662 386
Impairment charge 161 –
3,002 785
Restructuring
Following the various acquisitions during 2007, the Company reviewed the operating structure of the business, as a result of which £1,290,000
(2007: £375,000) was incurred in redundancy and employee integration costs, £247,000 in consultancy, recruitment agency and advisory fees
(2007: £nil) and £197,000 (2007: £24,000) on other one-off restructuring costs associated with the rationalisation of the Group’s laboratories and
restructuring of the sales and marketing structure.
Following the closure of a number of sites across the Group, the delay in sub-letting a number of premises has led to onerous rental costs of
£445,000 (2007: £nil) being incurred. This includes an onerous lease provision of £382,000 held as at 31 December 2008.
Legal and advisory
The non-recurring legal and advisory costs relate to non-routine professional costs incurred during the period:
£25,000 of costs relate to one legal case which is on-going. This provision represents the excess insurance costs to be paid should the case
proceed. In 2007, £20,000 of unrecoverable costs were incurred in relation to two legal cases involving former Group employees. In neither
case were charges upheld against the Group.
£75,000 (2007: £169,000) relates to costs and advisory fees relating to tax enquiries by HMRC that are non-recurring in nature. £285,000
(2007: £nil) was incurred in relation to one-off bank fees. In 2007, £54,000 related to external advice given in relation to the transition to
International Financial Reporting Standards and the review of that advice.
£277,000 (2007: £143,000) relates to charges incurred on completed acquisitions that have not been included as part of the cost of acquisition,
or to fees incurred relating to exploratory work on acquisitions that were not progressed during the year, or to fees in relation to the on-going
strategic review process announced in July 2008.
Impairment charge
Following an impairment review, the value of one particular intangible asset acquired as part of the Cozart acquisition was found to be impaired
as at 31 December 2008. One particular customer contract with a carrying value of £71,000 was written-off in the period as a result (2007: £nil).
Following a revaluation of a property owned by the Group, the carrying value of the property was written down by £90,000 as at the end of
2008 (2007: £nil) Concateno plc
Annual Report and Accounts 2008 40
4 Operating profit
Profit for the year has been arrived at after charging/(crediting):
2008 2007
£’000 £’000
Net foreign exchange gains (815) (85)
Research and development costs 382 59
Depreciation of property, plant and equipment 1,283 757
Amortisation of
– capitalised development costs 161 40
– other intangible assets 3,659 2,193
– debt issue costs 230 162
Loss on disposal of fixed assets – 16
Restructuring costs (included in ‘non-recurring costs’, see Note 3) 2,179 399
(Decrease)/Increase in provisions (see Note 21) (376) 2,270
Staff costs (see Note 6) 11,639 7,533
5 Auditors remuneration
The analysis of auditors’ remuneration is as follows:
2008 2007
£’000 £’000
Audit of these financial statements 50 82
Audit of financial statements of subsidiaries pursuant to legislation 134 148
Other services relating to taxation 140 61
Services relating to corporate finance transactions entered into or proposed
to be entered into by or on behalf of the Company of the Group 85 443
Other services 8 7
417 741
Amounts paid to the Company’s auditor in respect of services to the Company, other than the audit of the Company’s financial statements,
have not been disclosed as the information is required instead to be disclosed on a consolidated basis.
6 Staff costs and numbers
The average monthly number of employees (including Directors) for the Group during the year, analysed by category, was:
2008 2007
Number Number
Production and development 88 27
Laboratory services 83 66
Sales, marketing and distribution 49 39
Administration 118 70
338 202
Their aggregate remuneration comprised:
2008 2007
£’000 £’000
Wages and salaries 9,366 6,305
Share based payments 555 439
Social security costs 1,283 612
Other pension costs 435 177
11,639 7,533
Details regarding Director’s Remuneration is included within the Director’s Remuneration Report on pages 24 to 25.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 41
Concateno plc
Annual Report and Accounts 2008
7 Finance income and expense
2008 2007
£’000 £’000
Interest income 76 377
Interest expense on bank loans and overdrafts (3,259) (2,007)
Ineffective portion of change in fair value of cashflow hedges (82) 3
Finance charges in respect of finance leases and hire purchase contracts (25) (25)
(3,290) (1,652)
Exceptional charge in respect of interest hedge (1,533) –
(4,823) (1,652)
A charge of £1,533,000 (2007: £nil) has been recognised in respect of the fair valuation of a derivative financial instrument previously designated
as an effective hedge. This total charge comprises £184,000 previously recognised in equity and £1,349,000 current year change in fair value.
Under IAS 39, effectiveness testing is undertaken to ascertain whether changes in the fair value of the hedged item are offset by changes in the
fair value of the hedging instrument within a range of 80–125%. The interest rate hedge, details of which are set out in Note 19, as at 31
December 2008 is outside this range and therefore the full charge has been recognised in the Income Statement.
8 Taxation
Recognised in the Income Statement:
2008 2007
£’000 £’000
Current tax:
UK current year tax expense 951 439
Foreign current year tax expense 331 60
Adjustment in respect of prior periods (179) (351)
1,103 148
Deferred tax:
Origination and reversal of temporary timing differences (1,053) (251)
Adjustment due to 2008 rate change – (239)
Adjustment in respect of previous periods (218) –
(1,271) (490)
Total tax in the income statement (168) (342)
Reconciliation of effective tax rate:
The tax charge for the period is lower than the standard rate of corporation tax in the UK (28.5%). The differences are explained below:
Profi t/(loss) before tax (592) 323
Tax using the UK corporation tax rate of 28.5% (2007: 30%) (169) 97
Non-deductible expenses 459 240
R&D tax relief (145) (82)
Prior period adjustments (396) (351)
Tax losses carried forward 124 4
Other tax reliefs – (20)
(Lower)/Higher tax rate on overseas earnings (41) 9
Adjustment due to 2008 rate change – (239)
Total tax in the income statement (168) (342)
Income tax recognised directly in equity:
Relating to share-based payments – 13
Total tax recognised directly in equity – 13 Concateno plc
Annual Report and Accounts 2008 42
9 Earnings/(loss) per share
Earnings/(loss) per share is calculated by dividing the profit/(loss) attributable to ordinary shareholders by the weighted average number of
ordinary shares held during the year.
An adjusted earnings per share figure is also presented below in order to aid users understanding of underlying business performance. This is
calculated by adjusting the profit/(loss) for the year for the post-tax effect of certain items which, the Directors believe, will allow shareholders to
better understand the elements of financial performance in the period, so as to facilitate comparison with prior periods.
Basic Basic
and diluted and diluted
2008 2007
Notes £’000 £’000
For basic and diluted earnings/(loss) per share
Profit/(loss) for the year (424) 665
For adjusted earnings per share
add back intangibles amortisation (post-tax) 11 2,634 1,579
add back non-recurring and exceptional costs (post-tax) 3 3,444 736
add back share-based payments (post-tax) 22 555 357
Adjusted profit for the year 6,209 3,337
Weighted average number of ordinary shares
For basic earnings/(loss) per share 98,054,022 63,020,125
Exercise of share options –
1
912,274
Exercise of warrants –
1
187,309
For diluted earnings/(loss) per share 98,054,022 64,119,708
Basic earnings/(loss) per share (pence per share) (0.43p) 1.05p
Diluted earnings/(loss) per share (pence per share) (0.43p) 1.04p
Reconciliation to adjusted earnings per share: Basic
Impact of intangibles amortisation 2.69p 2.50p
Impact of non-recurring and exceptional costs 3.51p 1.1 7p
Impact of share-based payments 0.57p 0.57p
Adjusted basic earnings per share (pence per share) 6.34p 5.29p
Reconciliation to adjusted earnings per share: Diluted
1
Impact of intangibles amortisation 2.66p 2.45p
Impact of non-recurring and exceptional costs 3.47p 1.15p
Impact of share-based payments 0.56p 0.56p
Adjusted diluted earnings per share (pence per share) 6.26p 5.20p
1 In 2008, the dilutive impact of options over 1,081,702 shares would have formed part of the dilutive calculation but were not included because of the loss-making position of the
Company. However, the dilutive impact of these options (comprising 822,108 share options and 259,594 warrants) still impacts the adjusted dilutive calculation, due to the adjusted
profit-making position of the Company.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 43
Concateno plc
Annual Report and Accounts 2008
10 Acquisitions
During 2007, the Company acquired six companies. Details of finalised fair values in relation to each business combination are presented in
note (i) to (vi) below.
(i) Acquisition of Altrix Healthcare plc
On 5 February 2007, the Group acquired all the shares in Altrix Healthcare plc (‘Altrix’), based in Warrington, at fair value for £14,846,527 in cash
(including acquisition costs and payment for cash acquired). The Company specialises in the provision of drug testing solutions.
From the date of acquisition, Altrix contributed £131,000 of profit after tax to the Group in 2007.
The finalised fair value of net assets acquired was as follows:
Altrix Altrix
Altrix fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 455 – 455
Intangible assets – 5,045 5,045
Inventories 302 – 302
Trade and other receivables 2,101 – 2,101
Cash and cash equivalents 2,434 – 2,434
Trade and other payables (1,479) (6) (1,485)
Deferred tax – (1,514) (1,514)
Net identifiable assets and liabilities 3,813 3,525 7,338
Goodwill on acquisition 7,509
Total purchase cost 14,847
Being: Consideration paid in cash 13,615
Cash paid for acquisition expenses 1,232
14,847
Cash acquired (2,434)
Net cash outflow in respect of purchase 12,413
Acquisition expenses include £300,000 completion bonus paid to Directors.
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£5,045,000), a holiday
accrual at the date of acquisition (£6,000), and recognition of the deferred tax liability relating to intangible assets acquired (£1,514,000).
See Note 11 for details of intangible assets identified on acquisition. The remaining goodwill is chiefly attributable to the value of the customer
base and non-contractual customer relationships which do not fulfil the intangible assets recognition criteria under IFRSs, the profitability of the
business and the significant synergies expected to arise after acquisition.
(ii) Acquisition of TrichoTech Limited
On 31 January 2007, the Group acquired all the shares in TrichoTech Limited (‘TrichoTech’), based in Cardiff, at fair value for £1,337,000 in cash
(including acquisition costs), £1,062,500 in shares and £9,012,500 in loan notes. The Company provides laboratory-based hair testing services
for recreational drug abuse.
From the date of acquisition, TrichoTech contributed £491,000 of profit after tax to the Group in 2007. Concateno plc
Annual Report and Accounts 2008 44
10 Acquisitions continued
The finalised fair value of net assets acquired was as follows:
TrichoTech TrichoTech
TrichoTech fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 577 – 577
Intangible assets – 3,300 3,300
Inventories 39 – 39
Trade and other receivables 698 – 698
Cash and cash equivalents 250 – 250
Interest-bearing loans and borrowings (309) – (309)
Trade and other payables (915) (4) (919)
Deferred tax (23) (990) (1,013)
Net identifiable assets and liabilities 317 2,306 2,623
Goodwill on acquisition 8,789
Total purchase cost 11,412
Consideration paid in shares (817,308 shares at 130p) (1,063)
Consideration paid on loan notes (9,012)
Payments in cash 1,337
Being: Consideration paid in cash 673
Cash paid for acquisition expenses 664
1,337
Cash acquired (249)
Net cash outflow in respect of purchase 1,088
Acquisition expenses include £150,000 completion bonus paid to Directors.
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£3,300,000), a holiday
accrual at the date of acquisition (£4,000), and recognition of the deferred tax liability relating to intangible assets acquired (£990,000).
The loan notes were redeemed in December 2007 (£9,012,000).
See Note 11 for details of intangible assets identified on acquisition. The remaining goodwill is chiefly attributable to the profitability of the
business, the assembled workforce, its market-leading position in the field of hair testing and the significant synergies expected to arise
after acquisition.
(iii) Acquisition of Euromed Limited
On 30 March 2007, the Group acquired all the shares in Euromed Limited (‘Euromed’), based in London, at fair value for £8,758,000 in cash
(including acquisition costs) and £3,750,000 in shares. The Company provides Point-of-Care testing devices for the detection of drugs of abuse
primarily in the criminal justice and rehabilitation sectors.
From the date of acquisition, Euromed contributed £277,000 of profit after tax to the Group in 2007.
The finalised fair value of net assets acquired was as follows:
Euromed Euromed
Euromed fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 12 – 12
Intangible assets – 6,138 6,138
Inventories 597 (417) 180
Trade and other receivables 572 – 572
Cash and cash equivalents 152 – 152
Trade and other payables (585) – (585)
Deferred tax – (1,842) (1,842)
Net identifiable assets and liabilities 748 3,879 4,627
Goodwill on acquisition 7,881
Total purchase cost 12,508
Consideration paid in shares (2,586,207 shares at 145p) (3,750)
Payments in cash 8,758
Being: Consideration paid in cash 7 ,750
Cash paid for acquisition expenses 1,008
8,758
Cash acquired (152)
Net cash outflow in respect of purchase 8,606
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 45
Concateno plc
Annual Report and Accounts 2008
10 Acquisitions continued
Acquisition expenses include £250,000 completion bonus paid to Directors.
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£6,138,000) an
opening provision for the revaluation of stock (£422,000), an amendment to the valuation of stock to bring Euromed in line with Group policy
relating to the absorption of relevant overheads in the closing value of stock held (£5,000) and an opening provision for recognition of deferred
taxation on intangible assets acquired (£1,842,000).
See Note 11 for details of intangible assets identified on acquisition. The remaining goodwill is chiefly attributable to the profitability of the
business, the assembled workforce and the significant synergies expected to arise after acquisition.
(iv) Acquisition of Marconova AB
On 22 May 2007, the Group acquired all the shares in Marconova AB (‘Marconova’), based in Goteborg, Sweden, at fair value for £425,000 in
cash and £1,000,000 in shares. The Company is a specialist in drug and alcohol testing in the international maritime sector and the Swedish
workplace market.
From the date of acquisition, Marconova contributed £121,000 of loss after tax to the Group in 2007.
The finalised fair value of net assets acquired was as follows:
Marconova Marconova
Marconova fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 19 – 19
Intangible assets – 150 150
Purchased goodwill 804 (804) –
Inventories 10 – 10
Trade and other receivables 84 – 84
Trade and other payables (987) – (987)
Deferred tax – (45) (45)
Net identifiable assets and liabilities (70) (699) (769)
Goodwill on acquisition 2,194
Total purchase cost 1,425
Consideration paid in shares (557,725 shares at 179.3p) (1,000)
Payments in cash 425
Being: Consideration paid in cash 376
Cash paid for acquisition expenses 49
425
Cash acquired –
Net cash outflow in respect of purchase 425
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£150,000), the
write-down of own-company goodwill (£804,000) and recognition of the deferred tax liability relating to intangible assets acquired (£45,000).
See Note 11 for details of intangible assets identified on acquisition. The remaining goodwill is chiefly attributable to the value of the customer-
base and non-contractual customer relationships which do not fulfil the intangible assets recognition criteria under IFRSs and the significant
synergies expected to arise after acquisition. Concateno plc
Annual Report and Accounts 2008 46
10 Acquisitions continued
(v) Acquisition of CPL International Services Limited
On 13 July 2007, the Group acquired all the shares in CPL International Services Limited (‘CPL ’), based in Liverpool, at fair value for £795,000 in
cash and £84,000 in shares. The Company provides drug testing services in the medico-legal and international maritime sectors.
From the date of acquisition, CPL contributed £28,000 of profit after tax to the Group in 2007.
The finalised fair value of net assets acquired was as follows:
CPL CPL
CPL fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 282 – 282
Intangible assets – 158 158
Inventories 2 – 2
Trade and other receivables 107 16 123
Cash and cash equivalents 14 – 14
Trade and other payables (37) – (37)
Deferred tax – (44) (44)
Net identifiable assets and liabilities 368 130 498
Goodwill on acquisition 381
Total purchase cost 879
Consideration paid in shares (50,150 shares at 167.5p) (84)
Payments in cash 795
Being: Consideration paid in cash 659
Cash paid for acquisition expenses 136
795
Cash acquired (14)
Net cash outflow in respect of purchase 781
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£158,000), and
recognition of the deferred tax liability relating to intangible assets acquired (£44,000).
See Note 11 for details of intangible assets identified on acquisition. The goodwill is chiefly attributable to the profitability of the business and the
significant synergies expected to arise after acquisition.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 47
Concateno plc
Annual Report and Accounts 2008
10 Acquisitions continued
(vi) Acquisition of Cozart plc
On 4 October 2007, the Group acquired all the shares (issued and to be issued) in Cozart plc (‘Cozart’), based in Abingdon, at fair value for
£67,413,000 in cash (including acquisition costs) and £1,778,000 in shares. The Company is a specialist in the field of drugs-of-abuse testing
with a portfolio of Laboratory services, Point-of-Care products and Laboratory products to offer its customers (who include those in the
workplace, medical and criminal justice markets worldwide).
From the date of acquisition, Cozart contributed £376,000 of profit after tax to the Group in 2007.
The finalised fair value of net assets acquired was as follows:
Cozart Cozart
Cozart fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 1,912 – 1,912
Capitalised development costs 1,212 – 1,212
Intangible assets acquired – 22,468 22,468
Inventories 2,895 – 2,895
Trade and other receivables 7 ,089 (65) 7 ,024
Cash and cash equivalents 2,826 – 2,826
Deferred tax asset 581 – 581
Trade and other payables (6,942) (151) (7 ,093)
Loans and borrowings (3,825) – (3,825)
Deferred tax liability – (6,290) (6,290)
Net identifiable assets and liabilities 5,748 15,962 21,710
Goodwill on acquisition 47,481
Total purchase cost 69,191
Consideration paid in shares (1,369,013 shares at 130p) (1,778)
Payments in cash 67,413
Being: Consideration paid in cash 64,863
Cash paid for acquisition expenses 2,550
67,413
Cash acquired (2,826)
Net cash outflow in respect of purchase 64,587
Acquisition expenses include £350,000 completion bonus paid to Directors.
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£22,468,000), a
holiday-pay accrual at the date of acquisition (£21,000), increased bad debt provision at the date of acquisition (£65,000), an adjustment to the
valuation of a deferred consideration provision at the date of acquisition (£130,000) and recognition of the deferred tax liability relating to
intangible assets acquired (£6,290,000).
See Note 11 for details of intangible assets identified on acquisition. The remaining value of goodwill relates to other intangible assets not
identified under IFRS 3 chiefly being the following;
The value of the customer-base and non-contractual customer relationships which do not fulfil the intangible assets recognition criteria •
under IFRS 3.
Strategic premium, geographical positioning, market share and market leadership associated with the business. •
The contribution of the assembled workforce. •
Benefits derived from economies of scale. • Concateno plc
Annual Report and Accounts 2008 48
11 Goodwill and other intangible fixed assets
Development Customer Customer Commercial Patents and
Goodwill costs relationships contracts agreements trade marks Total
£’000 £’000 £’000 £’000 £’000 £’000 £’000
Cost
At 1 January 2007 23,440 – 5,793 – – 4,035 33,268
Acquisitions through
business combinations 74,498 1,212 12,219 714 6,469 17 ,860 112,972
Other additions 247 247
At 31 December 2007 and 1 January 2008 97,938 1,459 18,012 714 6,469 21,895 146,487
Adjustments to fair value of prior year acquisitions 397 – – – – – 397
Additions – 1,125 – – – 9 1,134
At 31 December 2008 98,335 2,584 18,012 714 6,469 21,904 148,018
Amortisation
At 1 January 2007 – – 56 – – 77 133
Amortisation for the year – 40 962 21 139 1,071 2,233
At 31 December 2007 and 1 January 2008 – 40 1,018 21 139 1,148 2,366
Amortisation for the year – 161 1,361 84 555 1,659 3,820
Impairment – – 71 – – – 71
At 31 December 2008 – 201 2,450 105 694 2,807 6,257
Carrying amounts
At 1 January 2007 23,440 – 5,737 – – 3,958 33,135
At 31 December 2007 and 1 January 2008 97 ,938 1,419 16,994 693 6,330 20,747 144,121
At 31 December 2008 98,335 2,383 15,562 609 5,775 19,097 141,761
Impairment testing for cash-generating units containing goodwill
Goodwill arising on a business combination is allocated at acquisition to the cash generating units (‘CGUs’) that are acquired and is
denominated in the functional currency of the CGU.
The Group reviews and tests goodwill for impairment on an annual basis, on 31 December each year, or more frequently in the event that there
are any indications that it may have been impaired.
The Group compares the carrying amount and the recoverable amount in its testing for impairment. The recoverable amount of the CGU is
determined from value-in-use calculations. These calculations include assumptions in respect of forecast selling prices, forecast raw material
and other direct costs, forecast exchange rates affecting the currencies in which transactions of the CGU are made, revenue growth rates and
the discount rate. Each of these assumptions is included in the detailed plans prepared by management which support the impairment review.
The calculations are based on the actual operating results and the most recent budget and forecast business plan for the three years ending 31
December 2011. A further 14 years of projected cash flows are incorporated using an estimated annual growth rate and a terminal value is used
thereafter, where appropriate, which reflects management’s assessment of the long-term average growth rate for the Group’s products and
services and the geographies it currently operates in and plans to operate in. This internal work was benchmarked against external market
analysis recently carried out which gave additional third-party verification for management’s growth assumptions.
Management estimate discount rates by reference to current market assessments of the time value of money adjusted by the specific risks of
the CGU being measured. The discount rates used were also amended according to the conditions relating to each specific business unit
operating within that CGU, where relevant. This particularly impacts the Point-of-Care CGU which includes forecast cashflows associated with a
range of technologies, some of which are less proven in the market than others, and hence have a higher risk-factor associated with them (as
well as a higher growth rate in the early years post-launch).
Growth rates from year four and discount rates applied, by CGU, are summarised in the table below. Within each CGU, the Group offers a
range of products and services. The growth rates disclosed include the highest and lowest growth rates forecast within each unit. Volume and
pricing assumptions made are a reflection of the latest market-data available and include an increased geographical spread, particularly with
regard to new products being launched in the Point-of-Care testing CGU. As mentioned above, this also has been considered in the discount-
rate applied to these particular cashflows. Changes to selling prices, raw materials, and other direct costs are based on past experience and
management expectations of future market changes.
Laboratory Point-of-Care Laboratory
Services Testing Products
Growth rate: From year 4: 2008 8 to 0% 10 to 4% 6 to 3%
From year 4: 2007 8 to 2% 11 to 4% 6 to 0%
Discount rate (pre-tax): 2008 15.4% 15.4%/25.7% 16.8%
2007 15.6% 15.0%–16.3% 16.0%
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 49
Concateno plc
Annual Report and Accounts 2008
11 Goodwill and other intangible fixed assets continued
Whilst management is confident that its assumptions are appropriate in light of circumstances at the time of review, it is possible that
circumstances may change. With the exception of the Laboratory Products CGU, the recoverable amounts calculated on the above basis
significantly exceed the carrying values of the cash generating units that includes goodwill and working capital to the extent that the
assumptions made would need to change by a significant amount to eliminate the surplus. For the Laboratory Products CGU, an increase of
2% in the post-tax discount rate would lead to an impairment of £1,027,000. However, management are satisfied that both the growth rates and
discount rates assumed in this sector are not aggressive and therefore sufficient headroom exists.
The Goodwill by CGUs comprises:
2008 2007
£’000 £’000
Laboratory services 48,798 48,699
Point-of-Care testing 36,631 36,425
Laboratory products 12,906 12,814
98,335 97,938
Recoverability of development costs
There are two development projects which make up the ‘development costs’ intangible asset; the Cozart
®
DDS system and the Cozart-Philips
system development project.
The Cozart
®
DDS system was launched in July 2006 and has been amortised since the commencement of commercial production at that time.
There have been no indications that the current carrying value of this asset is impaired.
The Cozart-Philips development project is on-going and commercial production has not yet begun. Accordingly, no amortisation has yet been
charged. The carrying amount of this intangible asset is supported by the future cash flows which are forecast to be generated from sale of this
product when it is launched. Forecast cashflows from the point of launch of the product are such that the current carrying value of this asset is
fully supportable.
The Cozart-Philips project does not meet the definition of a Joint Venture, according to the terms set out in IAS 31, and has therefore not been
accounted for as such.
Intangible assets acquired as a result of acquisitions
Intangible assets acquired as a result of the acquisitions detailed in Note 10 are summarised below:
Customer Customer Commercial Patents and
relationships contracts agreements trademarks Total
£’000 £’000 £’000 £’000 £’000
Laboratory services 10,763 – – 10,320 21,083
Point-of-Care testing 5,243 714 6,469 9,448 21,874
Laboratory products 2,006 – – 2,127 4,133
18,012 714 6,469 21,895 47,090
Impairment loss (71)
Cumulative Amortisation (including impact of any impairment) (5,985)
Net book value at 31 December 2008 41,034
Intangible assets acquired are allocated at acquisition to the CGUs that are acquired and are denominated in the functional currency of
the CGU.
The carrying amount of each asset is reviewed at least annually to ensure there are no indications of impairment. An impairment loss would be
recognised whenever the carrying amount of the asset or its CGU exceeds its recoverable amount. One asset was found to be impaired due to
the loss of a contract in the year to 31 December 2008, accordingly, £71,000 impairment losses (cost of £87,000, amortisation impact £16,000)
have been recognised. Concateno plc
Annual Report and Accounts 2008 50
12 Property, plant and equipment
Land and Plant and
buildings machinery Total
£’000 £’000 £’000
Cost
At 1 January 2007 15 376 391
Acquisitions through business combinations 602 2,645 3,247
Other additions 71 498 569
Disposals (2) (202) (204)
At 31 December 2007 and 1 January 2008 686 3,317 4,003
Acquisitions through business combinations – – –
Other additions 224 1,430 1,654
Disposals – (45) (45)
At 31 December 2008 910 4,702 5,612
Depreciation
At 1 January 2007 1 23 24
Depreciation for the year 146 611 757
Disposals – (188) (188)
At 31 December 2007 and 1 January 2008 147 446 593
Depreciation for the year 52 1,231 1,283
Impairment loss 90 – 90
Disposals – (45) (45)
At 31 December 2008 289 1,632 1,921
Carrying amounts
At 1 January 2007 14 353 367
At 31 December 2007 and 1 January 2008 539 2,871 3,410
At 31 December 2008 621 3,070 3,691
Impairment
An impairment loss of £90,000 was recognised during the year following building-revaluation carried out. See Note 3.
Leased plant and machinery
Included in the above table are assets held under finance leases as follows:
2008 2007
£’000 £’000
Plant and machinery
Carrying value 270 490
Depreciation 95 95
Motor vehicles
Carrying value 2 10
Depreciation 1 2
Security
At 31 December 2008 UK and Spanish-based fixed assets of the Group with a carrying amount of £25,001,000 (2007: £28,750,000) are subject
to a registered debenture to secure the term loan (see Note 18).
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 51
Concateno plc
Annual Report and Accounts 2008
13 Deferred tax assets and liabilities
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Assets Liabilities Net
2008 2007 2008 2007 2008 2007
£’000 £’000 £’000 £’000 £’000 £’000
Property, plant and equipment (339) (193) 145 96 (194) (97)
Intangible assets – – 11,437 12,533 11,437 12,533
Share-based payments (33) (104) – – (33) (104)
Other temporary differences 20 (96) – – 20 (96)
Derivative contracts (429) – (429) –
Tax loss carry forwards (300) (465) – – (300) (465)
Tax (assets)/liabilities (1,081) (858) 11,582 12,629 10,501 11,771
Movements in temporary differences have been as follows:
Balance Impact Acquired in Balance
1 January Recognised of 2008 Recognised business 31 December
2007 in income rate change in equity combinations 2007
£’000 £’000 £’000 £’000 £’000 £’000
Property, plant and equipment – (114) – – 17 (97)
Intangible assets 2,715 (614) (293) – 10,725 12,533
Share-based payments (10) (82) 1 (13) – (104)
Other temporary differences – (18) – – (78) (96)
Tax loss carry forwards – 577 53 – (1,095) (465)
2,705 (251) (239) (13) 9,569 11,771
Balance Balance
1 January Recognised Recognised Prior year 31 December
2008 in income in equity adjustments 2008
£’000 £’000 £’000 £’000 £’000
Property, plant and equipment – asset (192) 9 – (155) (338)
Property, plant and equipment – liability 95 49 144
Intangible assets 12,533 (1,013) – (83) 11,437
Share-based payments (104) 71 – (33)
Other temporary difference (96) (40) – 156 20
Derivative contracts – (429) – – (429)
Tax loss carry forwards (465) 300 – (135) (300)
11,771 (1,053) – (217) 10,501
At the balance sheet date, the Group has unutilised gross tax losses of approximately £4,720,953 (2007: £4,988,736) potentially available for
offset against future taxable profits. A deferred tax asset of £300,412 (2007: £465,104) has been recognised in respect of £1,072,899 (2007:
£1,661,086) of gross trading losses. No deferred tax asset has been recognised in respect of the remaining £3,648,054 (2007: £3,327,650) of
gross losses, as these are not expected to be recovered in the foreseeable future. Concateno plc
Annual Report and Accounts 2008 52
14 Inventories
2008 2007
£’000 £’000
Raw materials and consumables 2,839 2,217
Finished goods and goods for resale 2,159 1,728
Less: provisions against obsolete and excess stock (63) (90)
4,935 3,855
15 Trade and other receivables
2008 2007
£’000 £’000
Trade receivables 12,876 9,577
Other debtors, prepayments and accrued income 1,836 2,242
14,712 11,819
For detail regarding the deferred tax asset, see Note 13.
At 31 December 2008 trade receivables are shown net of allowances for doubtful debts of £1,165,000 (2007: £800,000). The majority of this
provision has been made in relation to trading with non-UK Laboratory-services customers (this division having been acquired towards the end
of 2007) based on experience of customer’s payment track-record. The Group monitors debtor payment profiles closely and credit policies are
in place which aim to reduce the Group’s exposure.
Receivables denominated in currencies other than the functional currency comprise £2,734,000 of trade receivables denominated in US Dollars
(2007: £1,748,000) and £404,000 of trade receivables denominated in Euros (2007: £679,000), £44,000 (2007: £nil) denominated in Swedish
Krona and £25,000 (2007: £nil) denominated in Australian Dollars.
16 Derivative financial instruments
Current Non-current
2008 2007 2008 2007
£’000 £’000 £’000 £’000
Derivatives that are designated and effective as hedging instruments carried at fair value
Interest rate swaps – (184) – –
Derivatives that are held at fair value through profit or loss (or designated as such)
Forward foreign currency contracts – 3 – –
Interest rate swaps (1,612)
(1,612) (181) – –
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to
hedge transactions that have not yet occurred. £184,000 has been credited to the hedging reserve following re-designation of a previously
effective hedge out of equity in the period. This charge (£184,000) together with the change in fair value in respect of this particular interest
swap during the year (£1,349,000) has been recognised in the income statement for the year ended 31 December 2008 as an exceptional item.
A charge of £82,000 has also been recognised in the income statement for the year ended 31 December 2008 in respect of another derivative
not designated as being held at fair value through profit or loss (recognised as a finance cost).
Further details of derivative financial instruments are provided in Note 19.
17 Cash and cash equivalents
2008 2007
£’000 £’000
Cash and cash equivalents 4,292 3,888
Bank overdrafts (2,965) (1,685)
Cash and cash equivalents in the statement of cash flows 1,327 2,203
Cash and cash equivalents comprise bank deposits and cash in hand.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 53
Concateno plc
Annual Report and Accounts 2008
18 Loans and borrowings
This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about
the Group’s exposure to interest rate, liquidity, and foreign currency risk, see Note 19.
2008 2007
£’000 £’000
Current liabilities
Current portion of secured bank loans 24,737 3,521
Current portion of other unsecured loans 273 197
Current portion of finance lease liabilities 100 213
25,110 3,931
Non-current liabilities
Secured bank loans – 24,737
Convertible loans – 8,343
Other loans 221 352
Finance lease liabilities 105 219
326 33,651
25,436 37,582
Debt costs arising on arranging the debt facilities are being amortised over the life of the loans to which they relate. As at 31 December 2008,
the unamortised element amounted to £263,000 (2007: £492,000). The balances disclosed above are net of these unamortised debt costs.
In addition to the 2007 amounts disclosed above, the derivative element of a convertible financial loan instrument was valued at £417,102 at the
date of issue. This derivative element did not fully meet the definition of a component of equity and was therefore held as a current liability on
the Balance Sheet at the time the loan was in place. This loan was converted during 2008. The carrying value of the loan to which it related is
therefore £nil as at 31 December 2008 (2007: £8,343,000).
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
31 December 2008 31 December 2007
Nominal Face Carrying Face Carrying
Interest rate Year of Value amount value amount
Currency % maturity £’000 £’000 £’000 £’000
Secured bank loan GBP 6.21
1
2008 – – 3,750 3,521
2009 25,001 24,737 25,000 24,737
Convertible loan GBP 12.5 2009 – – 8,720 8,343
Unsecured other loan Euro 0 2008 – – 109 109
2009 273 273 380 380
2010–2012 221 221 60 60
Finance lease liabilities GBP 5.8–8 2009–2012 226 205 432 432
25,721 25,436 38,45 1 37,582
1 The effective interest rate changes with the underlying LIBOR rate (being set as three month LIBOR + 3% margin), but is correct as at 31 December 2008. See Note 19 for
further details.
The bank loans are secured over the assets of the holding company and all subsidiaries and security be created over shares or quotes in the
capital of all companies that fall within the Concateno Group with a carrying amount of £25.0m (2007: £28.8m).
The Group is subject to quarterly covenant reviews by the bank in connection with its secured bank loan. The covenants reviewed are in
respect of gross leverage, interest cover, cashflow cover and capital expenditure. There were no breaches during 2008 and no breaches
forecast in 2009.
The secured bank loan is disclosed as falling due within one year even though refinancing negotiations are currently under way.
The secured bank loan is repayable in tranches. Repayment dates, as they currently stand, and amounts to be repaid (at face value) are
summarised below:
Tranche A Tranche B Tranche C Tranche D Total
Repayment Date £’000 £’000 £’000 £’000 £’000
31 Mar 09 500 167 167 625 1,459
30 Jun 09 500 167 167 625 1,459
30 Sep 09 500 167 167 625 1,459
31 Dec 09 5,250 1,750 1,750 11,874 20,624
6,750 2,251 2,251 13,749 25,001
See Financial Review on pages 13 to 15 for further detail on term loan refinancing. Concateno plc
Annual Report and Accounts 2008 54
18 Loans and borrowings continued
Finance lease liabilities
Finance lease liabilities are payable as follows:
Minimum Minimum
lease lease
payments Interest Principal payments Interest Principal
2008 2008 2008 2007 2007 2007
£’000 £’000 £’000 £’000 £’000 £’000
Less than one year 112 12 100 213 24 189
Between one and five years 114 9 105 219 21 198
More than five years – – – – – –
226 21 205 432 45 387
19 Financial instruments
The Group’s principal financial instruments comprise bank loans, convertible loan instruments, cash and short-term deposits, the main purpose
of which is to provide finance for the Group’s operations. The Group has other financial assets and liabilities such as trade receivables and trade
payables, which arise directly from its operations. The Group also enters into derivative transactions, including principally interest rates collars
and forward currency contracts.
The Group’s policies relating to financial risk management are set out in the Directors’ Report on page 20.
Credit risk
Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The Group operates a credit review
process for all potential customers on a case-by-case basis and reviews the aging of debts on a regular basis with reports reviewed by the
Board on a monthly basis.
The Group limits its exposure to credit risk by only investing in liquid securities and only with counterparties with AAA credit rating. The Group
does not require collateral in respect of financial assets.
At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the
carrying amount of each financial asset, including derivatives in the balance sheet.
Interest rate risk
The Group’s interest rate risk relates primarily to the Group’s long-term debt obligations with a floating interest rate. The Group’s policy is to
reduce the interest rate risk by entering into interest rate hedges on at least 70% of its variable rate interest borrowings.
During 2007 the Group entered into an interest rate hedge that caps the variable rate of interest payable on 75% of the Group’s Term loans to
LIBOR at 6.5%, with a floor set at 3.73%. If LIBOR falls below 3.73% in any calendar quarter a strike rate of 5.75% is payable on the hedged
borrowings in that quarter. The interest rate hedge expires on 31 December 2014 and reduces during that period to match 75% of the
scheduled underlying bank debt outstanding at each calendar quarter end. Payments of the interest rate hedges have been set up in order to
match the dates on which the interest payments on the underlying borrowings are due for payment.
Note 18 summarises the nature of the Group’s exposure to underlying fixed rate and variable borrowings. The table below shows the value of
interest rate hedges on the underlying variable rate borrowings at the end of each financial year.
Value of hedge
£’000
31 December 2008 18,750
31 December 2009 14,905
31 December 2010 12,655
31 December 2011 10,406
31 December 2012 8,155
31 December 2013 5,905
31 December 2014 –
In May 2008 the Group entered into an interest rate swap instrument over £20m of the Barclays Term loan facility to run from 30 June 2008 to
30 June 2009. The effect of this instrument was to enter into a basis swap to pay interest on the £20m on one-month LIBOR rather than
three-month LIBOR. The benefit of this was to reduce the interest charge over the period by approximately 9 basis points.
Based on the gross interest bearing debt and interest rate derivatives existing at 31 December 2008, a parallel upward shift in yield curves of
1% would reduce the Group’s annualised loss before tax by £282,000.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 55
Concateno plc
Annual Report and Accounts 2008
19 Financial instruments continued
Liquidity risk
The Group aims to mitigate liquidity risk by managing the cash generation of its operations. The Group’s liquidity risk arises from timing
differences between cash inflows and outflows. The Group manages these risks through a centralised treasury function and through committed
credit facilities.
At 31 December the Group had in place a committed credit facility in place of £2m for working capital purposes. This facility was not utilised at
31 December 2008.
Foreign currency risk
The Group is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than the
respective functional currencies of Group entities. The currencies giving rise to this risk are primarily Euros and US Dollars.
The Group reviews its exposure to foreign currency risk in respect of forecast sales and purchases over the medium term. The Group is in the
main internally hedged in respect of inflows and outflows of US Dollars and Euros.
The Group had no foreign exchange hedge instruments in place at 31 December 2008.
Forecast transactions
The Group classifies its forward exchange contracts and hedging forecast transactions as cash flow hedges. The net fair value of forward
exchange contract at 31 December 2008 was £(1,612,000) (2007: £(181,000)), comprising assets of £nil (2007: £3,000) and liabilities of
£1,612,000 (2007: £184,000).
20 Trade and other payables
2008 2007
£’000 £’000
Trade payables 4,734 3,994
Non trade payables 1,778 1,404
Accruals and deferred income 3,217 3,494
9,729 8,892
Payables denominated in currencies other than the functional currency comprise £1,076,000 of trade payables denominated in US Dollars
(2007: £576,000), £83,000 trade payables in Euros (2007: £42,000), £84,000 in Japanese Yen (2007: £10,000) and £nil in Swedish Krona (2007:
£5,000).
21 Provisions for liabilities and charges
Deferred &
Rental Onerous Legal Redundancy contingent
provision Lease & Advisory provision consideration Total
£’000 £’000 £’000 £’000 £’000 £’000
Balance at 1 January 2007 – – – – – –
Acquired in a business combination 705 – 165 – 1,425 2,295
Provisions used during the period (25) – – – – (25)
At 31 December 2007 and 1 January 2008 680 – 165 – 1,425 2,270
Provisions made during the period – 445 563 129 – 1,137
Provisions used during the period (101) (63) – – (1,349) (1,513)
At 31 December 2008 579 382 728 129 76 1,894
Current 101 86 728 129 76 1,120
Non-current 478 296 – – – 774
At 31 December 2008 579 382 728 129 76 1,894
Rental provision
On the acquisition of Cozart plc, a provision for £705,000 was made in respect of the spreading of rental costs on one of the Group’s buildings.
This provision will be released over the remaining life of the building’s operating lease (until 2014).
Onerous lease provision
As part of the integration exercise undertaken during the year, the Group vacated a number of properties. A provision of £382,000 (2007: £nil)
has therefore been made for the remaining duration of the lease agreement in relation to the portion of this property which remains unused and
un-let (£41,000 until 2011 with the remainder until 2014).
Legal and Advisory
A provision of £728,000 (2007: £165,000) has been made for the best estimate of costs and advisory costs expected to be incurred in relation
to various enquiries which had not been concluded at the year-end.
Redundancy provision
Five redundancies were announced prior to the end of 2008 as a result of site closure and team restructuring in the UK. A provision of £129,000
(2007: £nil) has been booked in relation to the cost of these redundancies. Concateno plc
Annual Report and Accounts 2008 56
21 Provisions for liabilities and charges continued
Deferred consideration
In 2007, £1,025,000 was provided for in relation to deferred consideration which is payable to the vendors of Spinreact SA in September 2008.
This was settled in the period. Spinreact is a subsidiary of Cozart plc who Concateno acquired during 2007.
Contingent consideration
£76,000 (2007: £400,000) is expected to become payable to the vendors of Nemesis Scientific Limited in March 2008. There are performance
conditions attached to the award of this deferred consideration. Management believe that these performance conditions will be met and,
therefore, that the whole of the deferred consideration will fall due.
22 Capital and reserves
Share
Share premium Hedging Merger Translation Retained
capital account reserve reserve reserve earnings Total
£’000 £’000 £’000 £’000 £’000 £’000 £’000
Balance at 1 January 2007 2,794 20,008 – 706 – (1,252) 22,256
Issue of ordinary shares 6,722 73,233 – 7 ,138 – (4,381) 82,712
Cost of share issue – (3,488) – – – – (3,488)
Exercise of share options 14 122 – – – – 136
Share-based payment in respect of employee options – – – – – 439 439
Share-based payment in respect of third-party warrant – – – – – 354 354
Total recognised income and expense – – (184) – 298 665 779
At 31 December 2007 and 1 January 2008 9,530 89,875 (184) 7,844 298 (4,175) 103,188
Issue of ordinary shares 15 185 – – – – 200
Conversion of loan 1,059 9,011 – – – – 10,070
Exercise of share options 10 75 – – – – 85
Share-based payments in respect of employee options – – – – – 555 555
Total recognised income and expense – – 184 – 2,162 (424) 1,922
At 31 December 2008 10,614 99,146 – 7,844 2,460 (4,044) 116,020
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to
hedge transactions that have not yet occurred.
Merger reserve
The merger reserve contains the premium on shares issued as consideration for business combinations during the period.
Translation reserve
The translations reserve comprises all foreign currency differences arising from the translation of the financial statement of foreign operations.
2008 2007
£’000 £’000
Authorised share capital
150,050,000 ordinary shares of £0.10 each (2007: 150,050,000 shares) 15,005 15,005
Allotted, called up and fully paid
106,139,707 ordinary shares of £0.10 each (2007: 95,299,415 shares) 10,614 9,530
During the year the following ordinary shares of £0.10 were issued by the Company in respect of share options:
Total nominal Total share Total
Number of value premium consideration
shares £’000 £’000 £’000
Exercise of share options 102,277 10 75 85
23 Employee benefits
Defined contribution plans
The Group operates defined contribution retirement benefit plans for all qualifying employees. The assets of the scheme are held separately
from those of the Group. Contributions of £48,000 (2007: £15,000) were outstanding at the end of the year. The charge to the income statement
representing the contribution payable by the Group was £381,000 (2007: £177,000).
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 57
Concateno plc
Annual Report and Accounts 2008
24 Share options and warrants
Share options
The Group operates an Enterprise Management Incentive (‘EMI’) share option scheme and an Employee Benefit Trust Incentive Scheme (‘EBT’)
as a means of encouraging ownership and aligning interests of staff and external shareholders. Share options are granted at the discretion of
the Remuneration Committee taking into account the need to motivate, retain and recruit high calibre employees. Share options are granted at
the closing mid-market value of the Company’s ordinary shares on the day prior to grant, or where the Remuneration Committee consider that
the share options are issued further to an acquisition event they are granted at the share price pertaining to that acquisition event.
Options have been granted over £0.10 ordinary shares as follows:
EMI EBT
Number Number
At 31 December 2007 1,137 ,250 2,537 ,759
Granted during the year 622,116 2,352,884
Exercised during the year ` (68,027) –
Lapsed during the year (204,081) (659,864)
At 31 December 2008 1,487,258 4,230,779
As at 31 December 2008, the outstanding share options, which include the share options granted to Directors as stated in the Directors’
Remuneration Report, are shown below.
At At
1 January Options Options Options 31 Dec
2008 granted exercised lapsed 2008 Date Exercise Exercise Expiry
Class Number Number Number Number Number granted price (p) date date
Enterprise Management Incentive share option (10p ordinary shares):
A 262,498 – – – 262,498 07/11/2006 85 07/11/2009 07/11/2016
B 262,498 – – – 262,498 07/11/2006 85 07/11/2009 07/11/2016
C 306,127 – 34,014 102,042 170,071 05/04/2007 100–145 05/04/2010 05/04/2017
C – 299,805 – – 299,805 21/01/2008 130 21/01/201 1 21/01/2018
C – 11,250 – – 11,250 12/06/2008 130 12/06/201 1 12/06/2018
D 306,127 – 34,013 102,039 170,075 05/04/2007 100–145 05/04/2010 05/04/2017
D – 299,811 – – 299,811 21/01/2008 130 21/01/201 1 21/01/2018
D – 11,250 – – 11,250 12/06/2008 130 12/06/2011 11/06/2018
Total 1,137 ,250 622,116 68,027 204,081 1,487,258
Options issued to SG Hambros Trust Company (Channel Islands) Limited, as trustee of a trust of which employees and certain of their
relatives are potential beneficiaries, holds the following options under the Employee Benefit Trust Incentive Scheme:
A 900,000 – – – 900,000 06/11/2006 86 06/11/2009 06/11/2016
B 900,002 – – – 900,002 06/11/2006 86 06/11/2009 06/11/2013
C 368,879 – – 279,931 88,948 05/04/2007 147 05/04/2010 05/04/2014
D 368,878 – - 279,933 88,945 05/04/2007 147 05/04/2010 05/04/2014
E – 1,176,442 – 50,000 1,126,442 12/06/2008 142 12/06/201 1 12/06/2015
F – 1,176,442 – 50,000 1,126,442 12/06/2008 142 12/06/201 1 12/06/2015
2,537 ,759 2,352,884 – 659,864 4,230,779
The weighted average share price at the date of exercise for options exercised during the year was 146p (2007: 120p).
There are certain performance criteria to be met before share options are exercisable:
EMI Option classes A, C and E are exercisable after holders satisfy a period of three years continuous service from the date of the grant of
the option.
EMI Option class B and EBT Class B options are exercisable after holders or employees beneficiaries satisfy a period of three years continuous
service, subject to the 30 day average mid market share price of an ordinary share being equal to, or greater than, 133% of the placing price of
shares at 6 November (acquisition of Medscreen) and before the tenth anniversary of that date. The placing price of shares on 6 November
2006 was 85p.
EMI Class D, EBT Class D and EBT Class F options are exercisable after holders satisfy a period of three years continuous service, subject to
the 30 day average mid market share price of an ordinary share being equal to, or greater than, 200p at any time during the exercise period.
The shares issued to the Employee Benefit Trust will be held on the following terms:
In the event that there is a Change of Control, as defined in the Share Plan and generally subject to the Rules of the Plan as to Vesting and
when Shares Vest, prior to the seventh anniversary of the date of Acquisition of the Shares, the Shares shall Vest as follows:
(i) If the Exit Price is £2.75 or more the Shares shall Vest in full;
(ii) If the Exit Price is £2.50 or more but less than £2.75 the Shares shall Vest as to three-quarters;
(iii) If the Exit Price is £2.25 or more but less than £2.50 the Shares shall Vest as to half;
(iv) If the Exit Price is below £2.25 then no Shares shall Vest.
The above conditions are based on the performance of a Share price at a Change of Control and shall constitute the Performance Condition. Concateno plc
Annual Report and Accounts 2008 58
24 Share options and warrants continued
The Exit Price is the value per share to be obtained by a holder as a result of the Change of Control and as calculated by the Directors of the
Company and communicated to the Trustee. The Trustee shall be entitled to rely on the Director’s Exit Price. In the event there is a
reorganisation etc. involving the Company which, in the opinion of the Directors, renders the hurdle Exit Prices of £2.25, £2.50 and £2.75
inappropriate for the purposes of Vesting, then the Directors shall fairly adjust the hurdle Exit Prices so that the Performance Condition, in terms
of achievability, remains constant.
EMI and EBT Option assumptions
The options pricing model used was the binomial model. The inputs to this model were:
Vesting period (years) 3.0
Expected volatility 30%
Option life (years) 7
Expected life (years) 3
Risk free rate 5.25%/4.60%
Expected dividends expressed as dividend yield 0%
Options issued to employees under EMI Scheme
Share price Exercise Shares Vesting Expected
Grant at grant price at Number of under option Fair period share price Expected Risk-free
Class date date (p) grant date (p) employees at grant value (p) (years) volatility (%) life rate (%)
A 07/11/2006 85.0 85.0 9 262,498 28.2 3.00 30 3 5.25
B 07/11/2006 85.0 85.0 9 262,498 28.2 3.00 30 3 5.25
C – Altrix Tranche 05/04/2007 147.0 100.0 2 68,027 64.2 3.00 30 3 4.60
C – TrichoTech Tranche 05/04/2007 147.0 130.0 3 102,043 42.6 3.00 30 3 4.60
C – Euromed Tranche 05/04/2007 147.0 145.0 4 136,057 42.2 3.00 30 3 4.60
C – Cozart Tranche 21/01/2008 115.5 130.0 10 299,805 26.0 3.00 30 3 4.53
C – Cozart Tranche 12/06/2008 147.5 130.0 3 11,250 49.9 3.00 30 3 5.06
D – Altrix Tranche 05/04/2007 147.0 100.0 2 68,027 64.2 3.00 30 3 4.60
D – TrichoTech Tranche 05/04/2007 147.0 130.0 3 102,043 42.6 3.00 30 3 4.60
D – Euromed Tranche 05/04/2007 147.0 145.0 4 136,057 42.2 3.00 30 3 4.60
D – Cozart Tranche 05/04/2007 115.5 130.0 10 299,811 26.0 3.00 30 3 4.53
D – Cozart Tranche 05/04/2007 147.5 130.0 3 11,250 49.9 3.00 30 3 5.06
Options issued to SG Hambros Trust Company (Channel Islands) Limited, as trustee of a trust of which employees and certain of their
relatives are potential beneficiaries, holds the following options under EBT Scheme
Share price Exercise Shares Vesting Expected
Grant at grant price at Number of under option Fair period share price Expected Risk-free
Class date date (p) grant date (p) employees at grant value (p) (years) volatility (%) life rate (%)
A 06/11/2006 86.0 86.0 4 900,000 28.7 3.00 30 3 5.25
B 06/11/2006 86.0 86.0 4 900,002 28.2 3.00 30 3 5.25
C 05/04/2007 147.0 147.0 9 368,879 41.4 3.00 30 3 4.60
D 05/04/2007 147.0 147.0 9 368,878 41.4 3.00 30 3 4.60
E 12/06/2008 142.0 142.0 15 1,176,442 44.7 3.00 30 3 5.06
F 12/06/2008 142.0 142.0 15 1,176,442 44.7 3.00 30 3 5.06
The Group recognised total expenses of £555,000 (2007: £439,000) related to equity-settled share-based payment transactions during
the year.
Warrants
Under a warrant instrument dated 26 October 2006 Marwyn Neptune Fund is entitled to subscribe for 1,397,059 shares in Concateno. The
exercise price of the warrants is 85p, the placing price at the time of the Medscreen acquisition.
The first 50% of the Marwyn Warrant is exercisable at any time after the date of grant subject to the mid market price of an ordinary share of
Concateno being equal to or greater than 125% of the Medscreen Placing Price at any date after 6 November 2006. Accordingly these warrants
became exercisable on 15 December 2006.
The second 50% of the Marwyn Warrant will be exercisable at any time after the date of grant subject to the mid market price of an ordinary
share of Concateno being equal to or greater than 150% of the Medscreen Placing Price at any date after 6 November 2006. Accordingly these
warrants became exercisable on 11 January 2007.
The Marwyn Warrant is also exercisable on a takeover offer being made for the whole of the issued share capital of Concateno (or a general
offer in respect of one class of Concateno`s shares is made) and control of Concateno is thereby obtained. The Marwyn Warrant is freely
transferable by Marwyn Neptune Fund and is unlisted.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 59
Concateno plc
Annual Report and Accounts 2008
24 Share options and warrants continued
In the event of any variation in the share capital of Concateno, auditors can be instructed to determine what adjustment, if any, should be made
to the number and nominal value of the shares subject to the warrant and/or the exercise price as fairly reflects that change in Concateno’s
share capital.
Warrant option valuation assumptions
The options pricing model used was the binomial model. The inputs to this model were:
Vesting period (years) 1.0
Expected volatility 30%
Option life (years) 7
Expected life (years) 3
Risk free rate 5.25%
Expected dividends expressed as dividend yield 0%
25 Operating leases
Total lease commitments under non-cancellable operating leases are as follows:
2008 2007
Land and Plant and Land and Plant and
buildings equipment buildings equipment
£’000 £’000 £’000 £’000
Less than one year 959 94 1,001 89
Between one and five years 3,725 218 3,722 264
More than five years 713 – 1,625 –
5,397 312 6,348 353
The Group leases a number of warehouse and factory facilities under operating leases. The leases run for an average of three years with the
longest lease running until 2014.
Three operating companies within the Group have operating leases in place for items of plant and equipment. This equipment is used in the
three main laboratories across the UK and production facilities in Abingdon.
During the year ended 31 December 2008, £1,128,000 (2007: £271,000) was recognised as an expense in the income statement in respect of
operating leases.
26 Capital commitments and contingencies
Capital commitments had been made in respect of laboratory services equipment for the Cardiff site (£200,000).
There are no contingencies to note.
27 Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed
in this note.
Marwyn Partners Ltd, Marwyn Investment Management LLP and Marwyn Capital LLP were deemed to be related parties of Concateno plc
during 2007 by virtue of a common Director, J Corsellis. Marwyn 10 Buckingham Street LLP is deemed to be a related party by virtue of two
common partners, K Tozzi and J Corsellis.
2008 2007
Amounts Amounts
Provision of due to Provision of due to
goods and related goods and related
services parties services parties
£ £ £ £
Marwyn Partners Ltd – – 5,000 –
Marwyn Capital LLP 189,996 15,498 1,846,000 32,000
Marwyn 10 Buckingham Street LLP 79,992 120,958 98,442 13,000
269,988 136,456 1,949,442 45,000
The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received.
The Group has a corporate advisory agreement with Marwyn Capital LLP. Under the terms of the appointment, Marwyn Capital LLP provided
general strategic and corporate financial services to the Group for a fixed monthly fee of £15,000 plus expenses. This agreement was
terminated on 31 May 2008. Subsequent to the termination of this agreement, Concateno entered into an appointment with Marwyn Capital
LLP to provide strategic and financial advice for the strategic review of the business on 1 June 2008. The Group also has an arrangement
with Marwyn 10 Buckingham Street LLP for the provision of accommodation and associated back office support services for a fee of Concateno plc
Annual Report and Accounts 2008 60
27 Related party transactions continued
£6,666 per month. J Corsellis is a Director of the named Marwyn entities and a Non-Executive Director of Concateno. In relation to the possible
sale of Concateno plc, J Corsellis, V Bolger and C Hall, all employees of Marwyn Investment Management LLP, have a Chinese wall in place
with other employees of Marwyn Investment Management LLP, whereby they will not disclose details of the transaction to other employees.
Marwyn Neptune Fund LP and Marwyn Ventures 1 LP, shareholders in the Company, are managed on an arms length basis by Marwyn
Investment Management LLP. Marwyn Neptune Fund and Marwyn Ventures 1 LP (a fund managed by Marwyn Investment Management LLP)
held a total of 29,174,852 ordinary shares in the Company as at 17 March 2009. Under the terms of an instrument dated 1 November 2006
Marwyn Neptune Fund was granted a warrant to subscribe for 1,397,058 new ordinary shares in the Company at 85p (the ‘Marwyn Warrant’).
C Hand is engaged by the Group as a Non-Executive Director under the terms of a letter of appointment. Under the terms of the same letter of
appointment he is entitled to remuneration of £1,000 per working day for any special project work agreed in relation to the Philips collaboration.
In 2008, he received remuneration of £41,500 (2007: £11,666) for special project work. In February 2009, C Hand entered into an agreement
with the Company to provide all special project work through Abingdon Health Ltd, a company of which C Hand is a Director and
major shareholder.
V Murria has a related party holding of 100,000 ordinary shares as part of a pension fund through her spouse.
V Murria is also a related party through Marwyn Investment Management LLP through the investment by Marwyn Neptune Fund in Advanced
Computer Software plc of which V Murria is the Chief Executive Officer.
Concateno plc entered into a lease on 10 Buckingham Street, London which is a property owned by Marwyn 10 Buckingham Street LLP, of
which K Tozzi and J Corsellis are partners.
There were no other transactions or contracts with related parties.
Transactions with the Directors of the Company are disclosed in the Remuneration Report on pages 24 to 25.
28 Group entities
Details of the subsidiary companies of Concateno plc, all of which have been consolidated as at 31 December 2008, are as follows:
Percentage of
equity shares held (%)
Subsidiary undertaking Country of incorporation Principal activity 2008 2007
Medscreen Holding Limited
1
United Kingdom Holding company 100 100
Medscreen Limited United Kingdom Sale of medical diagnostic services 100 100
Altrix Healthcare Limited
1
United Kingdom Sale of medical diagnostic products and services 100 100
TrichoTech Limited
1
United Kingdom Sale of medical diagnostic services 100 100
Euromed Limited
1
United Kingdom Sale of medical diagnostic products 100 100
Marconova AB
1
Sweden Sale of medical diagnostic services 100 100
CPL International Services Limited
1
United Kingdom Sale of medical diagnostic services 100 100
Cozart Limited
1
United Kingdom Holding company 100 100
Cozart Bioscience Limited United Kingdom Manufacture, sale and development of
medical diagnostic products and services 100 100
Cozart Italia srl Italy Sale of medical diagnostic products and services 100 100
Cozart Bioscience Inc. United States of America Dormant 100 100
Medib Skandinavien AB Sweden Dormant 100 100
Spinreact SA Spain Manufacture, sale and development of
medical diagnostic products and services 100 100
Cozart International sarl France Sale of medical diagnostic products and services 100 100
HL Scandinavia AB Sweden Sale of medical diagnostic products and services 100 100
Nemesis Scientific Limited United Kingdom Sale of medical diagnostic products and services 100 100
Concateno Australia Pty Australia Dormant 100 N/A
1 Held directly by Concateno plc.
29 Subsequent events
There are no subsequent events to note.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 61
Concateno plc
Annual Report and Accounts 2008
Company Balance Sheet >
As at 31 December 2008
2008 2007
Notes £’000 £’000
Fixed assets
Investments (C3) 136,311 135,033
Intangible assets (C4) 8 –
Tangible assets (C5) 94 104
136,413 135,137
Current assets
Debtors (C6) 6,191 8,755
Cash at bank and in hand 88 691
6,279 9,446
Creditors: amounts falling due within one year (C7) (34,880) (12,505)
Net current liabilities (28,601) (3,059)
Total assets less current liabilities 107,812 132,078
Creditors: amounts falling due after more than one year (C7) – (33,458)
Net assets 107,812 98,620
Capital and reserves
Called up share capital (C8) 10,614 9,530
Share premium account (C9) 99,146 89,875
Merger Reserve (C9) 7,844 7,844
Profit and loss account (C9) (9,792) (8,629)
Equity shareholders’ funds 107,812 98,620
The financial statements were approved by the Board of Directors and authorised for issue on 30 March 2009. They were signed on its
behalf by:
Fiona Begley Neil Elton
Chief Executive Officer Finance Director
30 March 2009 30 March 2009
The accompanying notes are an integral part of this balance sheet. Concateno plc
Annual Report and Accounts 2008 62
Notes to the Company Balance Sheet >
C1 Accounting policies
Basis of Preparation
The separate financial statements of the Company are presented as required by the Companies Act 1985. They have been prepared under the
historical cost convention and in accordance with applicable United Kingdom Accounting Standards and law.
The Company took advantage of the exemption in s230 of the Companies Act 1985 not to present its individual profit and loss account and
related notes that form part of these approved financial statements.
The principal accounting policies are summarised below and as part of the notes to the Company Balance Sheet. They have all been applied
consistently throughout the year and the preceding year.
Investments
Fixed Asset Investments in subsidiaries are shown at cost less any provision for impairment.
For investments in subsidiaries acquired for consideration, including the issue of shares qualifying for merger relief, cost is measured by
reference to the nominal value only of the shares issued.
Debt issue costs
In accordance with FRS 25 the separately identifiable costs on the issue of debt instruments are capitalised and disclosed within creditors as a
deduction from the related debt. Issue costs are amortised over the life of the debt instruments to which they relate and the associated charge
to the profit and loss account is included as an interest expense.
Pension costs
The Company operates defined contribution pension schemes. The amount charged against profits represents the contributions payable to the
scheme in respect of the account period. The assets of the schemes are held separately from those of the Company.
Taxation
The charge for taxation is based on the result for the year and takes into account taxation deferred because of timing differences between the
treatment of certain items for taxation and accounting purposes. 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 FRS 19.
Employee share schemes
The fair value of options granted is recognised as an expense together with corresponding increase in equity. The fair value is recognised at
grant date and spread over the period employees become unconditionally entitled to the option. Fair value is based on market value using a
binomial option-pricing model. Non market vesting conditions are included in the assumption concerning the number of options that are
expected to become exercisable. At each balance sheet date, the Company revises its estimate of the number of options that are expected to
vest for changes in non-market conditions.
Foreign currencies
The functional currency of the Company is Pounds Sterling. Transactions denominated in foreign currencies are translated into Pounds Sterling
at the rate of exchange on the day the transaction occurs. Monetary assets and liability, which are denominated in a foreign currency, are
translated at the rate of exchange ruling at the balance sheet date, and the gains and losses on translation are included in the profit and loss
account.
C2 Staff numbers and costs
The average monthly number of employees (including Directors) for the Group during the year, analysed by category, was:
2008 2007
Number Number
Finance and Administration 10 5
At the end of the year there were nine members of staff in Concateno plc.
Their aggregate remuneration comprised:
2008 2007
£’000 £’000
Wages and salaries 948 1,825
Share based payments 235 149
Social security costs 123 178
Other pension costs 121 76
1,427 2,228 63
Concateno plc
Annual Report and Accounts 2008
C3 Investments
The Company has investments in the following subsidiaries which principally affected the profits or net assets of the Group:
Please see Note 28 for a complete listing of subsidiaries and holdings.
Cost £’000
At 1 January 2008 135,033
Additions 1,278
At 31 December 2008 136,311
C4 Intangible assets
Total
£’000
Cost
At 1 January 2008 –
Additions 8
At 31 December 2008 8
Amortisation
At 1 January 2008 –
Amortisation for the year –
At 31 December 2008 –
Carrying amounts
At 1 January 2008 8
At 31 December 2008 8
C5 Tangible assets
Plant and
machinery Total
£’000 £’000
Cost
At 1 January 2008 109 109
Additions 3 3
At 31 December 2008 112 112
Depreciation
At 1 January 2008 5 5
Depreciation for the year 13 13
At 31 December 2008 18 18
Carrying amounts
At 1 January 2008 104 104
At 31 December 2008 94 94
C6 Debtors
2008 2007
£’000 £’000
Amounts owed by Group undertakings 5,857 7,967
Other debtors, prepayments and accrued income 269 627
Deferred tax asset 65 161
6,191 8,755
C7 Creditors
Creditors: amounts falling due within one year
2008 2007
£’000 £’000
Bank loans and overdrafts 27,701 5,206
Trade creditors 262 1,142
Amounts owed to Group undertakings 6,408 5,464
Accruals and deferred income 509 693
34,880 12,505 Concateno plc
Annual Report and Accounts 2008 64
C7 Creditors continued
Creditors: amounts falling due after more than one year
2008 2007
£’000 £’000
Bank loans – 24,738
Other loans* – 8,720
– 33,458
Debt costs arising on arranging the bank loans above are being amortised over the life of the loans to which they relate. As at 31 December
2008, the unamortised element amounted to £263,000 (2007: £492,000). The balances disclosed above are net of these unamortised
debt costs.
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
31 December 2008 31 December 2007
Nominal Face Carrying Face Carrying
interest rate Year of Value amount value amount
Currency % maturity £’000 £’000 £’000 £’000
Secured bank loan GBP 6.21* 2008 – – 3,750 3,521
2009 25,001 24,737 25,000 24,738
Convertible loan GBP 12.5 2009 – – 8,720 8,720
25,001 24,737 37,470 36,979
* The effective interest rate changes with the underlying LIBOR rate (being set as three month LIBOR + 3% margin), but is correct as at 31 December 2008. See Note 19 for
further details.
The bank loans are secured over the assets of the holding company and all subsidiaries and security be created over shares or quotes in the
capital of all companies that fall within the Concateno Group with a carrying amount of £25.0m (2007: £28.8m).
The secured bank loan is disclosed as falling due within one year even though refinancing negotiations are currently underway. The full
repayment profile, by tranche, of the secured bank loan is detailed in Note 18 to the Consolidated Group accounts.
See Financial Review on pages 13 to 15 for further detail on term loan refinancing.
C8 Called-up share capital
2008 2007
£’000 £’000
Authorised share capital:
150,050,000 ordinary shares of £0.10 each (2007: 150,050,000 shares) 15,005 15,005
Allotted, called up and fully paid
106,139,707 ordinary shares of £0.10 each (2007: 95,299,415 shares) 10,614 9,530
C9 Reserves
Share Profi t
Premium Merger and Loss
Account Reserve Account Total
£’000 £’000 £’000 £’000
Balance at 1 January 2008 89,875 7 ,844 (8,629) 89,090
Premium arising on issue of ordinary shares 185 – – 185
Conversion of loans 9,011 – – 9,011
Exercise of share options 75 – – 75
Dividends receivable – – 3,580 3,580
Share-based payment regarding employee options – – 253 253
Loss for the financial year – – (4,996) (4,996)
At 31 December 2008 99,146 7,844 (9,792) 97,198
Notes to the Company Balance Sheet > continued Contents
01 Highlights
02 Group overview – our products and services
04 Group overview – our geographical reach
06 Group overview – the markets we operate in
08 Chairman’s Statement
10 Chief Executive Officer’s Review
13 Financial Review
16 Board of Directors
17 Financial Statements index
18 Directors’ Report
21 Corporate Governance Report
24 Directors’ Remuneration Report
26 Statement of Directors’ Responsibilities
27 Independent Auditors’ Report
28 Consolidated Income Statement
28 Consolidated Statement of Recognised Income
and Expense
29 Consolidated Balance Sheet
30 Consolidated Cash Flow Statement
31 Notes to the Consolidated Financial Statements
61 Company Balance Sheet
62 Notes to the Company Balance Sheet
65 Advisers
Concateno is a global provider of drug and alcohol testing
and related services as well as a manufacturer of clinical
diagnostic products.
Drug and Alcohol abuse is a growing problem in society.
Concateno is at the forefront of this issue, working with
governments, employers and healthcare and law
professionals to help reduce the impact of this problem.
Our expertise is unmatched and our staff are passionate
about working with clients to identify the best possible
solutions for them.
Following the successful integration of our subsidiary
businesses, Concateno can now provide the optimal type
of drug testing in any biological sample.
Building on our expertise in Europe the Company is now
poised to both expand geographically and to develop new
market sectors.
Cozart
®
DDS: the Group’s leading oral fluid testing
device, field proven with police forces and
employers internationally.
Advisers >
Registered Office
Concateno plc
10 Buckingham Street
London
WC2N 6DF
Registered Number
05396234 England and Wales
Nominated Adviser and Broker
Collins Stewart (Europe) Limited
9th Floor
88 Wood Street
London
EC2V 7QR
Joint Brokers
SingerCapital Markets Limited
One Hanover Street
London
W1S 1AX
Evolution Securities Limited
100 Wood Street
London EC2V 7AN
Solicitors to the Company
Jones Day
21 Tudor Street
London
EC4A 0DJ
Auditors
KPMG Audit Plc
1 Forest Gate
Brighton Road
Crawley
RH11 9PT
Principal Bankers
Barclays Bank plc
Head Office Branch
1 Churchill Place
London
E14 5HP
Public Relations Advisers
Financial Dynamics
Holborn Gate
26 Southampton Buildings
London
WC2A 1PB
Company Secretary
Rowena Nixon
10 Buckingham Street
London
WC2N 6DF
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Patent Agents
Marks and Clerk
4220 Nash Court
Oxford Business Park South
Oxford OX4 2RU oncateno plc oncateno plc
Concateno plc Annual Report and Accounts 2008
Annual Report and Accounts 2008
Concateno plc
10 Buckingham Street
London
WC2N 6DF
T +44 20 7004 2800
F +44 20 7004 2801
E [email protected]
www.concateno.com
Linking it all together | Concateno plc
Annual Report and Accounts 2008 10
Chief Executive >
Officer’s Review
Fiona Begley
Chief Executive Officer
40
%
Sales generated from outside the UK
(2007: 30%)
£3.3
m
Annualised operational synergies achieved earlier than plan
> enabling
growth
‘Having integrated the businesses in
2008 our focus turns to international
growth and leveraging the resources
of our UK centres of excellence.’ 11
Concateno plc
Annual Report and Accounts 2008
Restructuring and Margin Improvement
At the end of 2007, Concateno consisted of seven separate acquired
entities, operating under their own brands and methodologies. During
2008 we have integrated those businesses and rolled out a common
Group wide approach to sales, sample collection, laboratory
processing, training and quality assurance.
Integration
A review of the integration projects and synergies achieved was set
out in the 2008 Interim Report and Accounts. A number of sites were
rationalised during the year, including:
migration of the Warrington oral-fluid testing laboratory to •
Abingdon (completed May);
closure of the CPL International site in Liverpool with the migration •
of the workflow to Cardiff and Canary Wharf (completed June);
closure of the Paddington office with the migration of the workflow •
to Canary Wharf (completed July);
closure of the Gothenburg office in Sweden with the migration of •
the workflow to Canary Wharf (completed July); and
closure of the Wakefield office with migration of the workflow to •
Canary Wharf (completed January 2009).
The result is that we now have three Centres of Excellence in the UK:
Abingdon – oral-fluid testing, Cozart POC (‘Point-of-Care’) device •
manufacture and R&D.
Cardiff – hair testing. •
Canary Wharf – urine testing. •
as well as our laboratory product manufacturing site in Girona, Spain
and sales offices in Stockholm, Barcelona and Rome.
The resulting annualised synergies are £3.3 million.
Sales and Marketing
At the beginning of 2008, we restructured the sales and marketing
functions of the various businesses to address ‘vertical’ markets in
order that the specific needs of customer groups would be better
targeted, product and service offerings tailored to their requirements
and best practice rolled out to other clients. This approach has been
well received by customers.
Highlights in 2008 included:
The renewal of the Drug Intervention Programme (‘DIP’) with the •
Home Office in July 2008, which included upgrading their installed
base of Cozart POC devices to the higher margin Cozart
®
DDS
variant. Contracts with the Home Office now have an annual value
of ~£3.4m.
Increased uptake of hair-testing in the medico-legal sector. •
TrichoTech, the Group’s hair-testing specialist operation based in
Cardiff, is the leader in this field. Hair testing benefits from being
able to detect drug misuse in the previous months rather than just
days and is therefore of particular value in family law. TrichoTech
also offers an expert witness statement service. Year-on-year
revenue growth in this market sector was more than 40%.
Criminal
Justice Workplace Maritime
Medico-
Legal Healthcare
Lab
Products
Summary
of product/
service
provided.
Products
and services
to support
drug-testing
in prisons,
police
custody
suites and
at the
roadside.
Provision of
pre- and
in-employment
drug testing for
regulated and
safety-critical
industries.
Provision of
fully
managed
drug-testing
services to
merchant
vessels.
Hair testing
to support
court cases
around family
law and child
protection.
Pre- and
in-
employment
hair testing.
Provision of
drug-testing
services
to support
non-
custodial
court
orders and
prisoners
on probation
Supply of
reagents
and
analysers to
distributors
principally
for use by
hospital and
clinical
laboratories.
Example
customers
– HM Prison
Service,
– Home
Office,
– State of
Victoria
Police
– Laing
O’Rourke
– TFL
– United
Biscuits
Fleet
management
companies,
e.g. V Ships,
and direct to
ship owners
worldwide.
Individual
law firms
and social
services
covering both
private and
public cases.
Drug Actions
Teams and
Private
Healthcare
organisations.
– Santé Lab
(Algeria).
– Labcenter
(South
America)
– Chronolab
Systems
(Spain)
Tender win to provide the NHS with a full range of DoA products •
and services from our expanded portfolio.
Roll-out of dried blood spot testing methodology for blood borne •
viruses (‘BBV’) to healthcare clients, particularly in the drug
treatment services where harm reduction is part of their remit.
BBVs, including Hepatitis C and HIV, are prevalent amongst
drug users.
New Workplace contract wins including Defence Forces Ireland, •
First Group, Greater Manchester Police and Irish Rail. Additional
contracts in 2009 include Scottish Police, Bovis Lend Lease and
Speedy Hire.
Adoption of Cozart POC devices by HM Revenue & Customs to •
help in the fight against drug-trafficking.
Successful roll-out of testing for benzene, a major carcinogen and •
component of many maritime cargoes, to the Group’s installed
maritime client base.
These contract wins, and others, combined with high customer
retention rates have meant that we have seen year-on-year growth in
all vertical sectors during 2008.
Lab
Products
Criminal Work- Medico- Health- & Intl
£’m Justice place Maritime Legal care distributors Total
2007
(Pro forma) 6.9 4.8 5.9 3.6 10.7 9.9 41.8
2008 7.6 5.5 6.4 5.2 11.0 11.8 47.5
% Change 10% 13% 9% 44% 3% 19% 14%
Following the successful adoption of the ‘Concateno Model’ in the
UK, we have started to roll-out the same model across Europe,
offering a comprehensive DoA product and service offering. Initial
successes have included:
Roll-out of hair testing to the Spanish market. •
Rapid Development of a urine variant of the DDS product to meet •
recent Italian workplace legislation (see below).
Distribution of POC products to Swedish Customs Service. •
We see growth coming from a number of areas:
Growth in existing markets driven by increased acceptance of •
regulation, growing prevalence of drug misuse and recognition by
employers and government bodies of the benefits of structured
testing programmes and associated support services.
New product and service offerings to current and new customers •
in the DoA arena (e.g. DDS-U, BBV, Benzene).
Expansion into new markets, either through geographical •
expansion, or by leveraging off current relationships by offering
new products and services.
Excellence of Service
The Group has focused on ensuring that the highest standards are
met at all times, illustrated by the fact that our Cardiff laboratory won
the Queens Award for Enterprise in Innovation. Quality Assurance
Managers are based at each of our laboratories to ensure that
standards are rigorously applied and all Account Managers have
been trained on the Group’s products and our expert toxicologists
ensure that up-to-date advice and results of a consistent standard are
given regardless of where our clients are in the world. We have also
increased resources in our Customer Services department to ensure
that customer queries are answered expeditiously and that we are
pro-active in anticipating customer needs.
All of our locations are covered by third party accreditation and/
or certification.
ISO 17025 ISO 9001
Testing and ISO 13485 Quality
Calibration Medical Management
Laboratories Devices System
Abingdon Yes Yes Yes
Canary Wharf Yes NA Yes
Cardiff Yes NA NA
Spain NA Yes Yes Concateno plc
Annual Report and Accounts 2008 12
Chief Executive Officer’s Review continued >
Further developments in 2009
Additional work will be undertaken during 2009 to integrate the
businesses further including:
An ongoing procurement review to rationalise our product offering •
and reduce costs including the development of a centralised
warehousing and stock control system.
Integrated ‘New Product Development’ process leveraging •
innovation and expertise across the wider group; forthcoming
products include the next generation of oral fluid sample collector.
Progressing the development of the UK’s information management •
systems including the Laboratory Information Management
Systems (‘LIMS’), Customer Relationship Management tools, and
finance systems.
Roll-out of a ‘Training Academy’ to develop our key staff. •
We continue to invest in the businesses, with the latest laboratory
testing equipment being maintained, so that we can meet the
increased demands of our customers, test for a wider range of drugs
of abuse and provide more detailed analysis to our clients.
We also continue to develop new products and services. The benzene
and EtG tests announced in our last annual report have been
successfully rolled out and in 2009 we are supplementing this with an
emergency benzene test kit in case of an accident on site or at sea.
Following a change in legislation in Italy, we were able to develop a
urine Point-of-Care device to provide a quantifiable reading. We
brought this product to market within three months and we are
already seeing encouraging sales in the first quarter of 2009.
We have a pipeline of new products and services which we are
currently developing and will roll-out over the forthcoming months
and years.
We also continue to explore ways to make the sample collection
process easier and more efficient. We have rolled-out a training
programme to all our collectors around the world and reviewed the
Quality Assurance process to ensure that standards of collection are
consistently high and the integrity of the ‘chain-of-custody’ is
maintained. We offer a 24/7 collection service. Our TrichoTech
operation is also trialling ‘walk-in centres’ in Liverpool and
Manchester.
The Group continues to develop the next generation of handheld
drug testing devices in conjunction with Philips, and both companies
announced the successful launch of the Magnotech technology at the
Medica conference in Dusseldorf in November 2008. Development
and commercialisation of the device is ongoing and launch is due in
the second half of 2009.
By understanding and anticipating our customers’ needs and
demanding exceptional quality in the products and services that we
offer we feel that we are well positioned to benefit from the growing
Drugs of Abuse testing market in 2009 and beyond.
Fiona Begley
Chief Executive Officer
30 March 2009
Case study
Concateno and Phillips share a commitment to >
help reduce the impact of drug abuse
With drug abuse a growing issue in today’s society, Concateno and
Philips share a commitment to working with government, employers,
healthcare and law professionals to help reduce the impact of this
problem. Since 2006 the two organisations have been developing an
innovative handheld drugs of abuse detection device. The new
solution will be launched to selected customers in 2009 and brings
together Concateno’s expertise in the field of immunoassay
development with Philips’ revolutionary ‘Magnotech’ technology.
‘The Concateno-Philips drug screening test will be the first product
that features Philips’ Magnotech technology, a new biosensor
technology that uses magnetic nanoparticles to measure low
concentrations of target molecules in blood and saliva.’ said Marcel
van Kasteel, VP of Philips and CEO of Philips Handheld
Immunoassays. ‘This first collaboration is a means of demonstrating
the excellence and robustness of the new technology with a company
that is synonymous with road-side testing and is already working
closely with government departments and police forces. It will be the
catalyst for them to grow and expand their European and global
markets. Magnotech delivers them a highly accurate result in less
than two minutes from a saliva sample,’ added Mr. van Kasteel. | 01
Concateno plc
Annual Report and Accounts 2008
Financial highlights Corporate highlights
£4 7.5
m
Revenue
(2007: £26.1m)
14
%
Increase in unaudited pro forma
1
revenue
2008: £47.5m (2007: £41.8m)
54
%
Increase in unaudited pro forma
1
adjusted EBITDA
2
2008: £12.3m (2007: £8.0m)
£4.2
m
Operating profit
(2007: £2.0m)
1 Pro forma results (unaudited) are annualised results as if all business combinations
were in place on 1 January each year.
2 See EBITDA reconciliation in Financial Review.
Concateno established as the European >
market leader in the provision of drug and
alcohol testing services
£3.3m annualised operational synergies >
achieved earlier than plan
International networks of 90 distributors >
and 500 sample collectors giving the
Group a unique global footprint
Three specialist UKAS accredited >
laboratories and two state-of-the-art
manufacturing facilities
Unique ‘one-stop-shop’ offering a high >
quality service for the management of
Drugs of Abuse testing
Restructuring of the sales and marketing >
functions to target ‘vertical’ customer
markets. Successful adoption of model in
the UK now being rolled out internationally
Winner of the 2008 Queens Award for >
Enterprise in Innovation
Renewal of the Home Office ‘Drug >
Intervention Programme’ contract for up to
three years
Our highlights > | Concateno plc
Annual Report and Accounts 2008 08
Chairman’s Statement >
Keith Tozzi
Chairman
> looking
forward
‘Concateno has enhanced its market
leading position by substantially
increasing revenues and margins
whilst maintaining high levels of
customer service and retention.’
14
%
Increase in unaudited pro forma
1
adjusted revenue
2008: £47.5m (2007: £41.8m)
£4 7.5
m
Revenue
(2007: £26.1m) 09
Concateno plc
Annual Report and Accounts 2008
I am delighted to report Concateno’s financial results for the year
ended 31 December 2008. Following a series of acquisitions of drugs
of abuse testing businesses the previous year, during 2008 we have
transformed Concateno from a group of seven separate businesses
into the integrated European market leader.
Each constituent acquisition was an expert in its field, whether it be in
the testing of a particular matrix (such as hair or oral fluid), through
unique networks (such as Spinreact’s distributors or Medscreen’s
global collection operation), or technical expertise (such as
TrichoTech’s award winning hair testing methodologies, or Cozart’s
state-of-the-art Point-of-Care devices). By integrating these
businesses, we are now able to offer all this expertise to all our clients.
The success of this strategy in 2008 has been borne out by high
customer retention, new contract wins, and growing cross-selling of
products and services in both the UK and increasingly in
overseas markets.
Sales in the year to 31 December 2008 were £47.5m (2007: £26.1m)
and earnings before share-based payments, non-recurring items,
interest, tax, depreciation and amortisation (‘EBITDA’) were £12.3m
(2007: £6.2m
2
). Group profit before interest and tax was £4.2m (2007:
£2.0m) and adjusted basic earnings per share increased to 6.34p
from 5.29p in 2007. Further details are provided in the Financial
Review on pages 13 to 15.
Operational Leverage
We stated at the time of the acquisition of Cozart in October 2007 that
we would seek to achieve annualised operational synergies of £3m by
the end of 2008, and as I confirmed in my Interim report in September
2008, we actually achieved total synergies of £3.3m, that are 10%
above our target and earlier than planned. With the integration phase
now effectively complete we are focusing on leveraging operational
synergies, by servicing existing and new customers through our current
infrastructure. We are investing in our core sales, laboratory and finance
business systems and undertaking further procurement reviews.
Our focus is on maximising value from our existing asset base
through organic growth and driving international opportunities,
extending the model that we have successfully implemented in the
UK to Europe and other territories. Our strategy for international
development is fourfold:
to drive organic growth from our existing operations; •
to extend the ‘Concateno Model’ into territories where we have a •
direct presence (such as Sweden and Italy);
to leverage the current ninety distribution relationships and global •
support network that we have around the world to selectively
target specific markets and territories that are ready to develop
drug testing (i.e. through regulatory change); and
to make selective in-fill acquisitions in international territories to •
accelerate growth.
Market dynamics
Each of our markets shows differing dynamics:
Criminal Justice • – moderate growth and higher margins in the UK
underpinned by long term government contracts. Encouraging
signs of international growth
Workplace • – an expanding pipeline of opportunities and customer
conversions as regulation and best practice amongst employers is
extended. We have a very low level of exposure to the pre-
employment market
Maritime • – continued growth in sales aided by new products and
sales. The regulated oil and chemical tanker market in which we
predominantly operate remains robust
Medico-Legal • – rapid adoption of hair testing in the UK Courts
system has seen dramatic growth in our business. Exciting
international opportunities exist in this field in which we are
world leaders
Healthcare • – capped UK budgets have meant only limited growth,
albeit with opportunities to develop access to budgets in disease
prevention and the wider health service
Lab Products • – Spinreact continues to leverage its niche position
in this large market. There are exciting opportunities in many
developing economies
Our staff
I would like to thank all our staff for their continued hard work during
2008 and for helping us make Concateno the industry leader in the
European Drugs of Abuse testing sector.
Offer update
On 8 July 2008, following press speculation, we confirmed that we
had received a number of expressions of interest in Concateno and
that we had appointed UBS Investment Bank as financial adviser to
help the Board consider a range of options for enhancing shareholder
value, including a possible sale of the Group. Since that time, we have
been in an ‘Offer Period’. The Company is now at an advanced stage
in that process and expects to be able to announce its conclusion in
the relative short term.
Current Trading and Outlook
Despite the difficult wider macro-economic environment we have
been encouraged by the trading performance of the Group in the year
to date. We have good visibility over revenues, with approximately half
of our sales generated from the public sector and an additional
quarter from highly regulated private sector customers.
The Board believes that the Company is successfully delivering on its
strategy and looks forward to 2009 with confidence.
Annual General Meeting
The Annual General Meeting of the Company is to be held on 14 May
2009. The notice convening the AGM accompanies this report.
Keith Tozzi
Chairman
30 March 2009
1 Pro forma results (unaudited) are annualised results as if all business combinations
were in place on 1 January each year.
2 See EBITDA reconciliation in Financial Review.
UK: Workplace testing – BBC uses Concateno’s reference data >
Over the 2008 August Bank Holiday weekend, six BBC TV and radio programmes referred to
Concateno’s workplace drugs and alcohol data for news and commentary. The broadcasts,
including the top-rated BBC Radio 5’s Drive, Radio 4’s Today and BBC TV’s Working Lunch
programmes, highlighted statistics indicating that drug and alcohol tests in the UK had risen by
nearly a fifth in the first half of the year, with employers requesting over 100,000 workplace tests.
As Europe’s largest provider of drug and alcohol testing solutions, conducting over 8 million
tests annually, Concateno has the most extensive reference database to draw upon, enabling
drug misuse trends to be monitored, helping support employers, government and healthcare
leaders in formulating their drug and alcohol policies.
Case study | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input oncateno plc oncateno plc
Concateno plc Annual Report and Accounts 2008
Annual Report and Accounts 2008
Concateno plc
10 Buckingham Street
London
WC2N 6DF
T +44 20 7004 2800
F +44 20 7004 2801
E [email protected]
www.concateno.com
Linking it all together Contents
01 Highlights
02 Group overview – our products and services
04 Group overview – our geographical reach
06 Group overview – the markets we operate in
08 Chairman’s Statement
10 Chief Executive Officer’s Review
13 Financial Review
16 Board of Directors
17 Financial Statements index
18 Directors’ Report
21 Corporate Governance Report
24 Directors’ Remuneration Report
26 Statement of Directors’ Responsibilities
27 Independent Auditors’ Report
28 Consolidated Income Statement
28 Consolidated Statement of Recognised Income
and Expense
29 Consolidated Balance Sheet
30 Consolidated Cash Flow Statement
31 Notes to the Consolidated Financial Statements
61 Company Balance Sheet
62 Notes to the Company Balance Sheet
65 Advisers
Concateno is a global provider of drug and alcohol testing
and related services as well as a manufacturer of clinical
diagnostic products.
Drug and Alcohol abuse is a growing problem in society.
Concateno is at the forefront of this issue, working with
governments, employers and healthcare and law
professionals to help reduce the impact of this problem.
Our expertise is unmatched and our staff are passionate
about working with clients to identify the best possible
solutions for them.
Following the successful integration of our subsidiary
businesses, Concateno can now provide the optimal type
of drug testing in any biological sample.
Building on our expertise in Europe the Company is now
poised to both expand geographically and to develop new
market sectors.
Cozart
®
DDS: the Group’s leading oral fluid testing
device, field proven with police forces and
employers internationally.
Advisers >
Registered Office
Concateno plc
10 Buckingham Street
London
WC2N 6DF
Registered Number
05396234 England and Wales
Nominated Adviser and Broker
Collins Stewart (Europe) Limited
9th Floor
88 Wood Street
London
EC2V 7QR
Joint Brokers
SingerCapital Markets Limited
One Hanover Street
London
W1S 1AX
Evolution Securities Limited
100 Wood Street
London EC2V 7AN
Solicitors to the Company
Jones Day
21 Tudor Street
London
EC4A 0DJ
Auditors
KPMG Audit Plc
1 Forest Gate
Brighton Road
Crawley
RH11 9PT
Principal Bankers
Barclays Bank plc
Head Office Branch
1 Churchill Place
London
E14 5HP
Public Relations Advisers
Financial Dynamics
Holborn Gate
26 Southampton Buildings
London
WC2A 1PB
Company Secretary
Rowena Nixon
10 Buckingham Street
London
WC2N 6DF
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Patent Agents
Marks and Clerk
4220 Nash Court
Oxford Business Park South
Oxford OX4 2RU 01
Concateno plc
Annual Report and Accounts 2008
Financial highlights Corporate highlights
£4 7.5
m
Revenue
(2007: £26.1m)
14
%
Increase in unaudited pro forma
1
revenue
2008: £47.5m (2007: £41.8m)
54
%
Increase in unaudited pro forma
1
adjusted EBITDA
2
2008: £12.3m (2007: £8.0m)
£4.2
m
Operating profit
(2007: £2.0m)
1 Pro forma results (unaudited) are annualised results as if all business combinations
were in place on 1 January each year.
2 See EBITDA reconciliation in Financial Review.
Concateno established as the European >
market leader in the provision of drug and
alcohol testing services
£3.3m annualised operational synergies >
achieved earlier than plan
International networks of 90 distributors >
and 500 sample collectors giving the
Group a unique global footprint
Three specialist UKAS accredited >
laboratories and two state-of-the-art
manufacturing facilities
Unique ‘one-stop-shop’ offering a high >
quality service for the management of
Drugs of Abuse testing
Restructuring of the sales and marketing >
functions to target ‘vertical’ customer
markets. Successful adoption of model in
the UK now being rolled out internationally
Winner of the 2008 Queens Award for >
Enterprise in Innovation
Renewal of the Home Office ‘Drug >
Intervention Programme’ contract for up to
three years
Our highlights > Concateno plc
Annual Report and Accounts 2008 02
Group overview >
Our products and services
Concateno is Europe’s most focused drug
and alcohol testing facility. This is reflected in:
The consultative sales and marketing >
divisional structure, providing expert
market knowledge across diverse
market sectors.
The delivery of products and services >
from the group’s specialist manufacturers,
laboratories and distributors.
Innovations
Concateno’s New Product Development
integrates the Company’s unique knowledge
specialisms through a rigorously structured
and market centred process. New
innovations to date include:
Employee Assistance Programmes >
offering expert advice and specialist
counselling and support.
Non-invasive S-PMA testing detecting >
benzene at or below current health
standards.
DDS-U – a rapid urine test with >
built-in reader.
EtG hair test – test detecting >
the metabolite of alcohol
produced in the body.
integrated
solutions >
Cozart
®
DDS – Concateno’s
enhanced on-site saliva
drug detection system
> Used extensively by police
forces, drug treatment centres and
healthcare professionals
> Sample collection in less than one minute
> Digital analysis of test cartridge
> Multiple printouts of results
Drug Solids Testing
> Used internationally by Customs and
Border Control Agencies
> Able to detect drugs at parts per million
> Results in two minutes
Pro forma revenue
growth
2007>2008
13
% 03
Concateno plc
Annual Report and Accounts 2008
1 2
3
Point-of-Care
testing
Laboratory
based
testing
Laboratory
products
Key features:
> Used on location
> Results in minutes
> Oral fluid and urine matrices for drug testing
> Oral fluid and breath testing for alcohol
> Environmental detection of drugs in powders, tablets,
resins, liquids and surfaces
Key features:
> All laboratories UKAS accredited to ISO 17025
> Capability to test any sample type:
hair, urine, sweat, oral fluid, blood
> Legally defensible results
> Global collections network
Key features:
> Comprehensive range of diagnostic
tests and reagents to the global clinical
diagnostics market
> Manufactured at Concateno’s accredited and
purpose built facilities in the UK and Spain
> Over 30 years experience of producing clinical
diagnostic kits
> Products sold into over 100 countries
> Complementary line of instrumentation
Cozart
®
DDS – Concateno’s
enhanced on-site saliva
drug detection system
> Used extensively by police
forces, drug treatment centres and
healthcare professionals
> Sample collection in less than one minute
> Digital analysis of test cartridge
> Multiple printouts of results
Oral fluid
> Non invasive sample collection
> Testing for recent use
> Onsite and laboratory testing
Urine
> Good indicator of usage over several days
> Well established and understood method
> Onsite and laboratory testing
Hair
> Non invasive sample collection
> Testing for longer term use
> Limited opportunity for sample adulteration
Pro forma revenue
growth
2007>2008
Pro forma revenue
growth
2007>2008
Concateno branded urine point
of care tests
> The only brand used by HM Prison Service
voluntary testing
15
%
13
% Concateno plc
Annual Report and Accounts 2008 04
UK = £28.3m (2007: £18.2m)
Continential Europe = £10.7m
(2007: £5.0m)
Rest of World = £8.4m
(2007: £2.9m)
Group overview >
Our geographic reach
Integrating our global services
Through its acquisitions, Concateno
has created a wide footprint of offices,
distribution partners and sample
collection officers. These resources
are a powerful base from which to grow
revenues rapidly and cost effectively.
Our aim is to replicate the success of
our UK business internationally with initial
emphasis on our own offices in Scandinavia,
Italy and Spain. In addition, we are focused
on increasing sales of our POCT products
through existing distribution partners
particularly in Australia and Europe.
We are also successfully recruiting
new local channels for other territories,
building first on our worldwide and long
established partners that distribute our
laboratory products.
Geographic reach
North Africa >
Served by our local partner
Santé Lab (Algeria)
South America >
Served by a number of distributors,
including Labcenter in Mexico.
We have recently hired a local
country manager to develop this
market further.
Our locations
Argentina, Australia, Austria, Bahrain, Belgium, Brazil, Canada, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece,
Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kuwait,
Liechtenstein, Luxembourg, Maldives, Mexico, Netherlands, New
Zealand, North America, Norway, Pakistan, Peru, Philippines, Poland,
Portugal, Qatar, Romania, Russia, Serbia, Seychelles, Sierra Leone,
Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka,
Sweden, Switzerland, Taiwan, Thailand, Tunisia, Turkey, Ukraine, United
Arab Emirates, United Kingdom, United States, Venezuela, Vietnam.
connecting
sectors >
> 2008 revenue by geography 05
Concateno plc
Annual Report and Accounts 2008
United Kingdom >
Concateno is the number one supplier in this
diverse and growing market. Through its long
established contracts with government
agencies our experience and credibility in all
types of drug and alcohol testing is
unmatched. Equally, we are the largest and
most experienced provider of workplace
testing and associated support services.
EMEA >
The business enjoys a strong presence in
the Middle East through its contracts with,
amongst others, Emirates Airlines. In
addition it has developed strong distribution
partners in the wider region, for example,
Pera Medikal, an important and growing
distributor in the Turkish market.
Italy >
Our office continues to show
strong year-on-year revenue growth.
Following a change in workplace
legislation we were able to produce
a fully compliant product immediately
for which early sales and customer
feedback is excellent.
South America >
Served by a number of distributors,
including Labcenter in Mexico.
We have recently hired a local
country manager to develop this
market further.
Spain >
Our Spanish Manufacturing and Sales Offices
has proven expertise in the research and
development of in vitro clinical diagnostic
reagents with over 30 years experience of
producing the clinical diagnostic kits with
products sold into over 100 countries.
Scandinavia >
Following integration of all
our business interests in this
market our local office is
successfully expanding out
of its niche healthcare market
to become the leading player
in the region.
Australia >
Concateno has a strong presence in this
dynamic and pioneering market having worked
with all State Police Forces to develop the
roadside drug testing market. We continue to
see sales growth as rollout continues, as well
as diversification into other market sectors.
Collection facilities
Sales offices
Distribution offices
Case study
Ireland: Concateno joins up with the Irish >
Defence Forces
Concateno won a two-year, €60,000 contract with Ireland’s Defence
Forces to carry out random drug testing on its troops serving at home
and abroad.
Detecting drugs of abuse including heroin and crack/cocaine, among
others, the programme, delivered through Concateno’s specialist
workplace division, will test 10% of the Defence Forces personnel
annually. Providing diagnostic equipment, resources and training
services to test the troops on site, usually within barracks, is a primary
screening procedure to detect drug abuse.
‘Consumption of illegal drugs is simply incompatible with service life
and our random drugs testing programme ensures that we have a
strong deterrent and to identify those abusing drugs. In the last five
years we have tested 7,000 personnel and will continue to do so,
at home and overseas,’ said Commandant Gavin Young, Defence
Forces spokesman.
The contract also provides Defence Forces with a rapid response
collection capability: skilled Concateno officers are on call to attend
when ‘for cause’ tests are required – even if these are on overseas
postings, such as earlier this year when trained sample collection
officers donned flak jackets on a visit to soldiers stationed in Kosovo.
An initial test is made using Concateno’s point-of-care rapid-testing
cups, which allow urine samples to be taken and tested quickly and
efficiently, offering an immediate indication of a potential positive
result for drug abuse. The simplicity and speed of the process means
troops can be tested with the minimum disruption to their duties. Concateno plc
Annual Report and Accounts 2008 06
Group overview >
The markets we operate in
Key drivers for our market include:
Growing social concern over >
substance misuse.
Wider awareness of the link between >
drug use and crime.
Increased investment in ‘harm reduction’ >
and treatment.
Greater acceptance of workplace >
drug testing programmes.
Our Opportunity:
International access to previously >
unaddressed markets.
Product innovation and increased R&D. >
Cross selling into existing clients. >
Scale, experience and credibility. >
Our sectors
> realising
synergies
Workplace
Helping organisations manage
the risk that drug and alcohol
misuse can bring by developing
Drug and Alcohol policies;
providing staff and management
education and training courses;
supplying Employee Assistance
Programmes and rehabilitation
services; devising optimal
testing services.
Pre-employment and
in-employment testing.
Maritime
Concateno is the largest and
most experienced provider to
the global Maritime industry,
running fleet-wide random
testing programmes. Its
international network of sample
collection officers ensures that
testing can be carried out in any
port around the globe.
07
Concateno plc
Annual Report and Accounts 2008
Criminal Justice
Concateno is the most
experienced provider of Drug
Testing services to the UK
Government through its work
within Her Majesty’s Prison
Service and the Home Office
Drug Intervention Programme.
Laboratory Products
Concateno develops and
manufactures a broad range of
clinical diagnostic products in
liquid reagent and microplate
format. It also supplies a range
of clinical analysers and
laboratory instruments available
through a long-established
international distribution network
that spans 80 countries.
Medico-Legal
Concateno has the most expert
laboratory devoted to analysis of
hair. Over 4,000 law firms
currently use Concateno’s
Trichotest along with over 85%
of UK Police Forces.
Healthcare
The treatment and rehabilitation
of individuals affected by
substance misuse is becoming
more important for Governments
and policy makers. Concateno
has developed a full range of
drug and alcohol testing services
to meet the unique requirements
of this market. Concateno plc
Annual Report and Accounts 2008 08
Chairman’s Statement >
Keith Tozzi
Chairman
> looking
forward
‘Concateno has enhanced its market
leading position by substantially
increasing revenues and margins
whilst maintaining high levels of
customer service and retention.’
14
%
Increase in unaudited pro forma
1
adjusted revenue
2008: £47.5m (2007: £41.8m)
£4 7.5
m
Revenue
(2007: £26.1m) 09
Concateno plc
Annual Report and Accounts 2008
I am delighted to report Concateno’s financial results for the year
ended 31 December 2008. Following a series of acquisitions of drugs
of abuse testing businesses the previous year, during 2008 we have
transformed Concateno from a group of seven separate businesses
into the integrated European market leader.
Each constituent acquisition was an expert in its field, whether it be in
the testing of a particular matrix (such as hair or oral fluid), through
unique networks (such as Spinreact’s distributors or Medscreen’s
global collection operation), or technical expertise (such as
TrichoTech’s award winning hair testing methodologies, or Cozart’s
state-of-the-art Point-of-Care devices). By integrating these
businesses, we are now able to offer all this expertise to all our clients.
The success of this strategy in 2008 has been borne out by high
customer retention, new contract wins, and growing cross-selling of
products and services in both the UK and increasingly in
overseas markets.
Sales in the year to 31 December 2008 were £47.5m (2007: £26.1m)
and earnings before share-based payments, non-recurring items,
interest, tax, depreciation and amortisation (‘EBITDA’) were £12.3m
(2007: £6.2m
2
). Group profit before interest and tax was £4.2m (2007:
£2.0m) and adjusted basic earnings per share increased to 6.34p
from 5.29p in 2007. Further details are provided in the Financial
Review on pages 13 to 15.
Operational Leverage
We stated at the time of the acquisition of Cozart in October 2007 that
we would seek to achieve annualised operational synergies of £3m by
the end of 2008, and as I confirmed in my Interim report in September
2008, we actually achieved total synergies of £3.3m, that are 10%
above our target and earlier than planned. With the integration phase
now effectively complete we are focusing on leveraging operational
synergies, by servicing existing and new customers through our current
infrastructure. We are investing in our core sales, laboratory and finance
business systems and undertaking further procurement reviews.
Our focus is on maximising value from our existing asset base
through organic growth and driving international opportunities,
extending the model that we have successfully implemented in the
UK to Europe and other territories. Our strategy for international
development is fourfold:
to drive organic growth from our existing operations; •
to extend the ‘Concateno Model’ into territories where we have a •
direct presence (such as Sweden and Italy);
to leverage the current ninety distribution relationships and global •
support network that we have around the world to selectively
target specific markets and territories that are ready to develop
drug testing (i.e. through regulatory change); and
to make selective in-fill acquisitions in international territories to •
accelerate growth.
Market dynamics
Each of our markets shows differing dynamics:
Criminal Justice • – moderate growth and higher margins in the UK
underpinned by long term government contracts. Encouraging
signs of international growth
Workplace • – an expanding pipeline of opportunities and customer
conversions as regulation and best practice amongst employers is
extended. We have a very low level of exposure to the pre-
employment market
Maritime • – continued growth in sales aided by new products and
sales. The regulated oil and chemical tanker market in which we
predominantly operate remains robust
Medico-Legal • – rapid adoption of hair testing in the UK Courts
system has seen dramatic growth in our business. Exciting
international opportunities exist in this field in which we are
world leaders
Healthcare • – capped UK budgets have meant only limited growth,
albeit with opportunities to develop access to budgets in disease
prevention and the wider health service
Lab Products • – Spinreact continues to leverage its niche position
in this large market. There are exciting opportunities in many
developing economies
Our staff
I would like to thank all our staff for their continued hard work during
2008 and for helping us make Concateno the industry leader in the
European Drugs of Abuse testing sector.
Offer update
On 8 July 2008, following press speculation, we confirmed that we
had received a number of expressions of interest in Concateno and
that we had appointed UBS Investment Bank as financial adviser to
help the Board consider a range of options for enhancing shareholder
value, including a possible sale of the Group. Since that time, we have
been in an ‘Offer Period’. The Company is now at an advanced stage
in that process and expects to be able to announce its conclusion in
the relative short term.
Current Trading and Outlook
Despite the difficult wider macro-economic environment we have
been encouraged by the trading performance of the Group in the year
to date. We have good visibility over revenues, with approximately half
of our sales generated from the public sector and an additional
quarter from highly regulated private sector customers.
The Board believes that the Company is successfully delivering on its
strategy and looks forward to 2009 with confidence.
Annual General Meeting
The Annual General Meeting of the Company is to be held on 14 May
2009. The notice convening the AGM accompanies this report.
Keith Tozzi
Chairman
30 March 2009
1 Pro forma results (unaudited) are annualised results as if all business combinations
were in place on 1 January each year.
2 See EBITDA reconciliation in Financial Review.
UK: Workplace testing – BBC uses Concateno’s reference data >
Over the 2008 August Bank Holiday weekend, six BBC TV and radio programmes referred to
Concateno’s workplace drugs and alcohol data for news and commentary. The broadcasts,
including the top-rated BBC Radio 5’s Drive, Radio 4’s Today and BBC TV’s Working Lunch
programmes, highlighted statistics indicating that drug and alcohol tests in the UK had risen by
nearly a fifth in the first half of the year, with employers requesting over 100,000 workplace tests.
As Europe’s largest provider of drug and alcohol testing solutions, conducting over 8 million
tests annually, Concateno has the most extensive reference database to draw upon, enabling
drug misuse trends to be monitored, helping support employers, government and healthcare
leaders in formulating their drug and alcohol policies.
Case study Concateno plc
Annual Report and Accounts 2008 10
Chief Executive >
Officer’s Review
Fiona Begley
Chief Executive Officer
40
%
Sales generated from outside the UK
(2007: 30%)
£3.3
m
Annualised operational synergies achieved earlier than plan
> enabling
growth
‘Having integrated the businesses in
2008 our focus turns to international
growth and leveraging the resources
of our UK centres of excellence.’ 11
Concateno plc
Annual Report and Accounts 2008
Restructuring and Margin Improvement
At the end of 2007, Concateno consisted of seven separate acquired
entities, operating under their own brands and methodologies. During
2008 we have integrated those businesses and rolled out a common
Group wide approach to sales, sample collection, laboratory
processing, training and quality assurance.
Integration
A review of the integration projects and synergies achieved was set
out in the 2008 Interim Report and Accounts. A number of sites were
rationalised during the year, including:
migration of the Warrington oral-fluid testing laboratory to •
Abingdon (completed May);
closure of the CPL International site in Liverpool with the migration •
of the workflow to Cardiff and Canary Wharf (completed June);
closure of the Paddington office with the migration of the workflow •
to Canary Wharf (completed July);
closure of the Gothenburg office in Sweden with the migration of •
the workflow to Canary Wharf (completed July); and
closure of the Wakefield office with migration of the workflow to •
Canary Wharf (completed January 2009).
The result is that we now have three Centres of Excellence in the UK:
Abingdon – oral-fluid testing, Cozart POC (‘Point-of-Care’) device •
manufacture and R&D.
Cardiff – hair testing. •
Canary Wharf – urine testing. •
as well as our laboratory product manufacturing site in Girona, Spain
and sales offices in Stockholm, Barcelona and Rome.
The resulting annualised synergies are £3.3 million.
Sales and Marketing
At the beginning of 2008, we restructured the sales and marketing
functions of the various businesses to address ‘vertical’ markets in
order that the specific needs of customer groups would be better
targeted, product and service offerings tailored to their requirements
and best practice rolled out to other clients. This approach has been
well received by customers.
Highlights in 2008 included:
The renewal of the Drug Intervention Programme (‘DIP’) with the •
Home Office in July 2008, which included upgrading their installed
base of Cozart POC devices to the higher margin Cozart
®
DDS
variant. Contracts with the Home Office now have an annual value
of ~£3.4m.
Increased uptake of hair-testing in the medico-legal sector. •
TrichoTech, the Group’s hair-testing specialist operation based in
Cardiff, is the leader in this field. Hair testing benefits from being
able to detect drug misuse in the previous months rather than just
days and is therefore of particular value in family law. TrichoTech
also offers an expert witness statement service. Year-on-year
revenue growth in this market sector was more than 40%.
Criminal
Justice Workplace Maritime
Medico-
Legal Healthcare
Lab
Products
Summary
of product/
service
provided.
Products
and services
to support
drug-testing
in prisons,
police
custody
suites and
at the
roadside.
Provision of
pre- and
in-employment
drug testing for
regulated and
safety-critical
industries.
Provision of
fully
managed
drug-testing
services to
merchant
vessels.
Hair testing
to support
court cases
around family
law and child
protection.
Pre- and
in-
employment
hair testing.
Provision of
drug-testing
services
to support
non-
custodial
court
orders and
prisoners
on probation
Supply of
reagents
and
analysers to
distributors
principally
for use by
hospital and
clinical
laboratories.
Example
customers
– HM Prison
Service,
– Home
Office,
– State of
Victoria
Police
– Laing
O’Rourke
– TFL
– United
Biscuits
Fleet
management
companies,
e.g. V Ships,
and direct to
ship owners
worldwide.
Individual
law firms
and social
services
covering both
private and
public cases.
Drug Actions
Teams and
Private
Healthcare
organisations.
– Santé Lab
(Algeria).
– Labcenter
(South
America)
– Chronolab
Systems
(Spain)
Tender win to provide the NHS with a full range of DoA products •
and services from our expanded portfolio.
Roll-out of dried blood spot testing methodology for blood borne •
viruses (‘BBV’) to healthcare clients, particularly in the drug
treatment services where harm reduction is part of their remit.
BBVs, including Hepatitis C and HIV, are prevalent amongst
drug users.
New Workplace contract wins including Defence Forces Ireland, •
First Group, Greater Manchester Police and Irish Rail. Additional
contracts in 2009 include Scottish Police, Bovis Lend Lease and
Speedy Hire.
Adoption of Cozart POC devices by HM Revenue & Customs to •
help in the fight against drug-trafficking.
Successful roll-out of testing for benzene, a major carcinogen and •
component of many maritime cargoes, to the Group’s installed
maritime client base.
These contract wins, and others, combined with high customer
retention rates have meant that we have seen year-on-year growth in
all vertical sectors during 2008.
Lab
Products
Criminal Work- Medico- Health- & Intl
£’m Justice place Maritime Legal care distributors Total
2007
(Pro forma) 6.9 4.8 5.9 3.6 10.7 9.9 41.8
2008 7.6 5.5 6.4 5.2 11.0 11.8 47.5
% Change 10% 13% 9% 44% 3% 19% 14%
Following the successful adoption of the ‘Concateno Model’ in the
UK, we have started to roll-out the same model across Europe,
offering a comprehensive DoA product and service offering. Initial
successes have included:
Roll-out of hair testing to the Spanish market. •
Rapid Development of a urine variant of the DDS product to meet •
recent Italian workplace legislation (see below).
Distribution of POC products to Swedish Customs Service. •
We see growth coming from a number of areas:
Growth in existing markets driven by increased acceptance of •
regulation, growing prevalence of drug misuse and recognition by
employers and government bodies of the benefits of structured
testing programmes and associated support services.
New product and service offerings to current and new customers •
in the DoA arena (e.g. DDS-U, BBV, Benzene).
Expansion into new markets, either through geographical •
expansion, or by leveraging off current relationships by offering
new products and services.
Excellence of Service
The Group has focused on ensuring that the highest standards are
met at all times, illustrated by the fact that our Cardiff laboratory won
the Queens Award for Enterprise in Innovation. Quality Assurance
Managers are based at each of our laboratories to ensure that
standards are rigorously applied and all Account Managers have
been trained on the Group’s products and our expert toxicologists
ensure that up-to-date advice and results of a consistent standard are
given regardless of where our clients are in the world. We have also
increased resources in our Customer Services department to ensure
that customer queries are answered expeditiously and that we are
pro-active in anticipating customer needs.
All of our locations are covered by third party accreditation and/
or certification.
ISO 17025 ISO 9001
Testing and ISO 13485 Quality
Calibration Medical Management
Laboratories Devices System
Abingdon Yes Yes Yes
Canary Wharf Yes NA Yes
Cardiff Yes NA NA
Spain NA Yes Yes Concateno plc
Annual Report and Accounts 2008 12
Chief Executive Officer’s Review continued >
Further developments in 2009
Additional work will be undertaken during 2009 to integrate the
businesses further including:
An ongoing procurement review to rationalise our product offering •
and reduce costs including the development of a centralised
warehousing and stock control system.
Integrated ‘New Product Development’ process leveraging •
innovation and expertise across the wider group; forthcoming
products include the next generation of oral fluid sample collector.
Progressing the development of the UK’s information management •
systems including the Laboratory Information Management
Systems (‘LIMS’), Customer Relationship Management tools, and
finance systems.
Roll-out of a ‘Training Academy’ to develop our key staff. •
We continue to invest in the businesses, with the latest laboratory
testing equipment being maintained, so that we can meet the
increased demands of our customers, test for a wider range of drugs
of abuse and provide more detailed analysis to our clients.
We also continue to develop new products and services. The benzene
and EtG tests announced in our last annual report have been
successfully rolled out and in 2009 we are supplementing this with an
emergency benzene test kit in case of an accident on site or at sea.
Following a change in legislation in Italy, we were able to develop a
urine Point-of-Care device to provide a quantifiable reading. We
brought this product to market within three months and we are
already seeing encouraging sales in the first quarter of 2009.
We have a pipeline of new products and services which we are
currently developing and will roll-out over the forthcoming months
and years.
We also continue to explore ways to make the sample collection
process easier and more efficient. We have rolled-out a training
programme to all our collectors around the world and reviewed the
Quality Assurance process to ensure that standards of collection are
consistently high and the integrity of the ‘chain-of-custody’ is
maintained. We offer a 24/7 collection service. Our TrichoTech
operation is also trialling ‘walk-in centres’ in Liverpool and
Manchester.
The Group continues to develop the next generation of handheld
drug testing devices in conjunction with Philips, and both companies
announced the successful launch of the Magnotech technology at the
Medica conference in Dusseldorf in November 2008. Development
and commercialisation of the device is ongoing and launch is due in
the second half of 2009.
By understanding and anticipating our customers’ needs and
demanding exceptional quality in the products and services that we
offer we feel that we are well positioned to benefit from the growing
Drugs of Abuse testing market in 2009 and beyond.
Fiona Begley
Chief Executive Officer
30 March 2009
Case study
Concateno and Phillips share a commitment to >
help reduce the impact of drug abuse
With drug abuse a growing issue in today’s society, Concateno and
Philips share a commitment to working with government, employers,
healthcare and law professionals to help reduce the impact of this
problem. Since 2006 the two organisations have been developing an
innovative handheld drugs of abuse detection device. The new
solution will be launched to selected customers in 2009 and brings
together Concateno’s expertise in the field of immunoassay
development with Philips’ revolutionary ‘Magnotech’ technology.
‘The Concateno-Philips drug screening test will be the first product
that features Philips’ Magnotech technology, a new biosensor
technology that uses magnetic nanoparticles to measure low
concentrations of target molecules in blood and saliva.’ said Marcel
van Kasteel, VP of Philips and CEO of Philips Handheld
Immunoassays. ‘This first collaboration is a means of demonstrating
the excellence and robustness of the new technology with a company
that is synonymous with road-side testing and is already working
closely with government departments and police forces. It will be the
catalyst for them to grow and expand their European and global
markets. Magnotech delivers them a highly accurate result in less
than two minutes from a saliva sample,’ added Mr. van Kasteel. 13
Concateno plc
Annual Report and Accounts 2008
Financial Review >
Neil Elton
Finance Director
‘In 2008 Concateno has combined
strong revenue growth and margin
improvements with solid cash
conversion. The completed
integration projects in 2008 will
act as a good foundation for further
operational leverage in 2009.’
Overview
Results for the Group are stated for the year ending 31 December
2008 with comparatives for the year ended 2007.
Sales in the year to 31 December 2008 were £47.5m (2007: £26.1m).
Earnings before share-based payments, non-recurring items, interest,
tax, depreciation and amortisation EBITDA were £12.3m (2007:
£6.2m) representing an increase in margin from 23.8% to 25.9%. After
charging depreciation of £1.3m (2007: £0.6m) EBITA was £11.0m
(2007: £5.6m). Loss after tax for the year was £0.4m (2007: profit of
£0.7m) following non-recurring charges in the year of £3.0m (2007:
£0.8m) and exceptional finance costs of £1.5m (2007: £nil). A tax
credit of £0.2m (2007: credit of £0.3m) was recognised in the year
(representing an effective tax rate of 28% for the group).
There were no material acquisitions or disposals during 2008,
but a number of acquisitions throughout 2007. In order to aid
shareholders’ understanding of year-on-year performance we have
included aggregated unaudited pro forma numbers to show how the
business would have performed had all the acquisitions occurred on
1 January 2007.
Divisional Performance
Year ended
31 December
Unaudited
2007
£m 2008 Pro forma
1
2007 to 2008 % change
Revenue:
Laboratory Services 24.1 21.3 2.8 13.1%
Point of Care 12.9 11.4 1.5 13.2%
Laboratory Products 10.5 9.1 1.4 15.4%
Total 47.5 41.8 5.7 13.6%
EBITDA:
Laboratory Services 9.4 6.3 3.1 49.2%
Point of Care 3.8 2.4 1.4 58.3%
Laboratory Products 1.3 0.9 0.4 44.4%
Central (2.2) (1.6) (0.6) 37.5%
Total 12.3 8.0 4.3 53.5%
Margin 25.8% 19.2% 6.6%
1 Pro forma results (unaudited) are annualised results as if all business combinations
were in place on 1 January each year.
> delivering
efficiency Concateno plc
Annual Report and Accounts 2008 14
Financial Review continued >
Like-for-like performance
Approximately 63% (2007: 63%) of the Group’s sales are undertaken
in Pounds Sterling with the balance of the Group’s sales settled
predominantly in US Dollars and Euros. With the depreciation of
Pounds Sterling, particularly in the second half of 2008, the results
reported by the Group have been affected by the fluctuation in these
exchange rates. The table below restates the proforma results for the
Group for 2007, based on the exchange rates, experienced during
2008 so that the results for the two years may be compared on a
like-for-like basis. The main currencies and rates used are
US$1.86:£1, €1.26:£1 and SEK12.10:£1.
Like-for-like Divisional Performance
Year ended
31 December 2007
Unaudited Adjusted Adjusted
£m 2008 Pro forma
1
2007 to 2008 % change
Sales 47.5 43.7 3.8 8.8%
Gross Profit 27.5 25.0 2.5 10.0%
Margin 57.8% 57.2% 0.6%
EBITDA 12.3 8.3 4.0 48.6%
Margin 25.8% 18.9% 6.9%
1 Pro forma results (unaudited) are annualised results as if all business combinations
were in place on 1 January each year.
This shows that like-for-like proforma revenue growth in 2008 was
£3.8m (8.8%) compared with reported proforma growth of £5.7m
(13.6%) and like-for-like growth in proforma EBITDA was £4.0m
(48.6%) compared with reported growth of £4.3m (53.5%).
Because the Group has similar foreign currency payment obligations
as it does foreign currency receipts the Group is reasonably internally
hedged to foreign currency fluctuations. The Group does not have any
foreign currency hedges in place, but keeps this under regular review.
Interest and tax
Net finance costs in the year totalled £4.8m (2007: £1.7m). This
included an exceptional finance charge of £1.5m, discussed below.
The effective tax rate for the full year was 27.9%. The comparable
underlying tax rate for the prior year was 26.8%.
EPS
Basic earnings/(loss) per share (‘EPS’) for the year was (0.43p) (2007:
1.05p), the decrease on 2007 being primarily due to the investment
made during the year in restructuring and integration projects (see
non-recurring items for more detail below) and an exceptional charge
in respect of an interest hedge. Adjusted basic EPS
2
for the year was
6.34p (2007: 5.29p), representing a 20% increase.
Cash and financing
Net borrowings at 31 December 2008 were £25.7m (2007: £36.0m).
These comprised current loans, borrowings and overdrafts of £28.1m
(2007: £5.6m), non-current loans and borrowings of £0.3m (2007:
£33.7m, including £8.3m Convertible loan which was converted
during 2008), cash of £4.3m (2007: £3.9m) and net derivative financial
instruments of £1.6m (2007: £0.6m).
All term loan debts are disclosed as current liabilities because the
existing term loan that, after unamortised debt issue costs, totalled
£24.7m at 31 December 2008 (2007: £28.2m) is due to be repaid in
full on 31 December 2009. As at 30 March 2009, the Group has not
put in place refinancing beyond the end of 2009. If the Company were
not able to refinance the term loan debt before the end of the year,
this may result in a going concern risk. The Board has considered this
risk but believes that, despite the difficult financial markets, it is in a
good position to refinance. The Board is taking the following actions:
Case study
UK Government awards Concateno oral >
screening contract
The processing of arrestees in police detention has been improved by
using a quicker, simpler testing device. In a two-year, £4.5 million
Home Office contract awarded in July 2008, Concateno provides
police in England and Wales with a new device to detect heroin and
cocaine/crack in the oral fluid of arrestees.
The police conduct in the region of 220,000 such tests each year
using Concateno’s drug detection system Cozart
®
DDS to provide a
simple, quick answer; as a result approximately 4,000 drug misusers
are referred to treatment every month. Recorded crime figures show
that acquisitive crime has fallen by more than a fifth since the
programme started.
As part of the government’s DIP, the tests are a key part of the
national strategy for tackling drugs and reducing crime. Currently, in
areas where drug testing is in operation, anyone arrested for trigger
offences such as burglary and robbery is tested to find out if they
have taken heroin or cocaine. Those who test positive are required to
attend an assessment of their drug dependency and related needs. 15
Concateno plc
Annual Report and Accounts 2008
■ Laboratory Services 50.7%
■ Point-of-care 27.1%
■ Laboratory Products 22.2%
■ UK 59.7%
■ Continental Europe 22.6%%
■ Rest of World 17.7%%
It is in discussions with a number of banks whose Credit •
Committees have agreed in principle to provide re-financing in full
either individually or in partnership.
The Group is in advanced stages of negotiation with the banks •
who have undertaken extensive due diligence.
The Group has demonstrated strong financial performance and •
cash generation and has complied and continues to comply with
all its covenant obligations.
The Group is comparatively lowly geared at less than two •
times EBITDA.
The Company will look to confirm refinancing as soon as it comes out
of the current Offer period and well in advance of the end of 2009.
The current term loan is subject to interest based on one month
LIBOR, until 30 June 2009 and three month LIBOR between 1 July
and 31 December 2009. The Company has in place an interest rate
hedge facility adopted in November 2007 over 75% of the scheduled
bank loan balances until December 2014. The effect of the hedge is
to cap interest rates payable on that portion of the bank debt at 6.5%.
Should LIBOR fall below 3.73% (LIBOR was 2.05% at 28 February
2009) a strike rate of 5.75% is payable. The net fair value of this
derivative financial instrument at 31 December 2008 was £1.5m
(2007: £0.2m) all of which has been charged to the Income Statement
as an exceptional finance charge in 2008 (2007: £0.2m charged to the
hedging reserve). Further details are given in Note 16.
The balance of the loans and borrowings comprise finance lease
commitments of £0.2m (2007: £0.4m) and zero interest-bearing loans
granted to fund R&D in Spain of £0.5m (2007: £0.5m).
The Company issued 10,840,292 ordinary shares during the year. Of
this 10,587,355 shares were issued in settlement of a Convertible
Loan in November 2008. The original loan of £8.7m was issued at the
time of the acquisition of Cozart in October 2007 and attracted
interest at a rate of 12.5% per annum.
The balance of shares issued in the year related to the exercise of
employee share options and settlement of a deferred consideration
payment falling due to the former owners of Nemesis Scientific Ltd
(acquired by the Cozart group in March 2007).
Non-recurring and exceptional items
Non-recurring charges and exceptional items in the year were £4.5m
(2007: £0.8m) and comprised:
Charges related to the integration projects undertaken in 2008 of •
£1.7m (2007: £0.4m).
A provision for onerous leases on vacated premises of £0.4m •
(2007: £nil).
Charges related to the impairment of assets of £0.2m (2007: £nil). •
Other non-routine professional costs of £0.7m (2007: £0.4m). •
Exceptional finance charges related to change in designation of •
interest rate hedging instrument of £1.5m (2007: £nil)
Further details are provided in Notes 3 and 7.
Dividends
The Board is not recommending a dividend for the year to 31
December 2008 (2007: £nil). It is the Board’s policy that dividends will
be paid, subject to availability of distributable reserves, when it is
appropriate and prudent to do so. The main focus of the Company
continues to be delivering capital growth for shareholders.
KPIs
The Group uses a wide variety of performance indicators in the
tracking and management of the business. Financial key performance
indicators (‘KPIs’) relate to revenue growth, EBITDA margins and
> 2008 revenue by division > 2008 revenue by geography
growth as well as operating cash flow and free cash flow targets (free
cash flow being cash flow after working capital movements,
exceptional items, tax and capital expenditure but before interest and
debt principal repayments). Other financial and operational KPIs used
by each of the business units are tailored to those entities and include
revenue forecast ‘gap’ analysis, quote tracking, sample turnaround
times and customer feedback.
These KPIs are recorded on a regular basis, used within the
businesses throughout the year, and reported to the Board on a
monthly basis in order that they can assess the performance of the
Group and underlying business units.
Neil Elton
Finance Director
30 March 2009
2 Adjusted EPS excludes the after tax impact of intangibles amortisation, £2.6m
(2007: £1.6m), non-recurring items, £3.4m (2007: £0.7m) and share-based payments,
£0.6m (2007: £0.4m).
Reconciliation from Operating Profit to EBITDA
Year ended
31 December
Unaudited
2007
2008 2007 Pro forma
£m Note Actual Actual (unaudited)
Operating Profit 4.2 2.0 0.8
Reverse impact of:
Depreciation 4 1.3 0.6 1.1
Amortisation 4 4.0 2.4 2.7
Non-recurring items 3 3.0 0.8 3.0
Foreign exchange
gains 4 (0.8) – (0.1)
Share-based
payments 24 0.6 0.4 0.5
EBITDA 12.3 6.2 8.0 Concateno plc
Annual Report and Accounts 2008 16
Board of Directors >
1. Dr Christopher Hand
Non-Executive Director
Chris has a DPhil from the Faculty of Medicine, University of Oxford; a
BSc in Applied Biochemistry from Brunel University and is a
Chartered Chemist and Member of the Royal Society of Chemistry.
Chris founded Cozart Bioscience Ltd in 1993 and was Chief
Executive of Cozart plc following its listing onto AIM in 2004, until
October 2007 when the Company was acquired by Concateno plc.
During this time the Company won three SMART awards from the
Department of Trade and Industry, won Millennium Product Status for
its ground breaking Cozart
®
RapiScan system and acquired
companies in Sweden, Spain and the UK.
Prior to founding Cozart, Chris was Director of Research for the
European base of the medical diagnostics company DPC (now part of
Siemens Healthcare Solutions). Chris is currently a Director of
Abingdon Health Ltd.
2. Fiona Begley
Chief Executive Officer
Fiona holds a Bachelor of Science in Biochemistry from the National
University of Ireland, Galway and an MBA from Henley Management
College. Fiona joined Medscreen in 1996 as Sales and Marketing
Manager. She was appointed General Manager in 1998, Managing
Director in 2000 and led the management buy-out from PharmChem
in 2002. Concateno plc acquired Medscreen as its platform
acquisition in 2006.
From 1992 to 1995, Fiona held management roles for Syva UK and
Behring Diagnostics UK with a focus on business development and
marketing in the diagnostics industry. Prior to 1992 Fiona was a
product manager and biochemist in the pharmaceuticals and
biotechnology sector.
3. James Corsellis
Non-Executive Director
James has a BA (Hons) from London University and is currently
Managing Partner at Marwyn Investment Management. Over the past
two years at Marwyn, James has undertaken over 50 transactions
raising in excess of £1bn in acquisition funding for Marwyn backed
management teams and special purpose acquisition vehicles.
James is currently a Director of Aldgate Capital plc, Drury Lane
Capital plc, Entertainment One Ltd, Marwyn Value Investors, is
currently Deputy Chairman of Catalina Holdings Ltd and was
previously Chief Executive Officer of icollector plc.
4. Neil Elton
Finance Director
Neil qualified as a Chartered Accountant with Arthur Andersen. He
was a consultant to Mecom from 2000 (one of Europe’s largest
newspaper publishers), joining the Board as Finance Director in
March 2005, when the Company listed on AIM, until June 2006.
Prior to Mecom, Neil was Group Finance Manager at Huntsworth plc,
the international PR group, with oversight of their financial PR and
healthcare divisions. Before that, he was Finance Director of MirrorTel,
Mirror Group plc’s television and audiotex division, and financial
co-ordinator of the integration with Trinity International plc following
their merger in 1999 to form Trinity Mirror plc.
5. Vin Murria
Non-Executive Director
Vin has over 20 years’ experience of working for Venture Capital,
Private Equity and publicly listed companies focused on the software
sector. During this time, Vin has held a number of senior positions,
including Chief Executive Officer of Computer Software Group plc,
which she took private in May 2007. The company merged with
IRIS in July 2007 and was subsequently exited to Hellman Friedman
for $1bn.
Vin is a Partner at Elderstreet Capital, and prior to this was European
Chief Operating Officer for Kewill Systems Plc and Chairman of Leeds
Group Plc. She is the Chief Executive Officer of Advanced Computer
Software plc, and remains Chair of BSG plc, Innovise Plc and is a
Non-Executive Director at the Fredricks Charitable Foundation.
6. Keith Tozzi
Executive Chairman
Keith has wide experience at board level in creating and developing
successful businesses. He was Group Technical Director (one of
three Executive Directors) of Southern Water plc from 1992–1996.
From 1996–2000, he was Chief Executive of the British Standards
Institution (a London based Independent Royal Charter Company)
where he grew turnover to over £200m and acquired businesses
in the UK, South America and Eastern Europe to leverage the brand.
From 2000–2003, he was Group Chief Executive of Swan Group plc
(owner of Mid Kent Water) and led a management buy-out backed
by WestLB.
Most recently, Keith was Chairman of Inspicio plc, an AIM-listed
testing and inspection company that was listed as a special purpose
vehicle in April 2005 and sold for £264.3m in January 2008.
1
6 3 4
2 5 Concateno plc
Annual Report and Accounts 2008 17
Financial Statements Index >
In this section
18 Directors’ Report
21 Corporate Governance Report
24 Directors’ Remuneration Report
26 Statement of Directors’ Responsibilities
27 Independent Auditors’ Report
28 Consolidated Income Statement
28 Consolidated Statement of Recognised Income and Expense
29 Consolidated Balance Sheet
30 Consolidated Cash Flow Statement
31 Notes to the Consolidated Financial Statements
61 Company Balance Sheet
62 Notes to the Company Balance Sheet
65 Advisers Concateno plc
Annual Report and Accounts 2008 18
Directors’ Report >
For the year ended 31 December 2008
The Directors present their report and the audited financial statements for the year ended 31 December 2008.
Business Review
The Company is required by the Companies Act to include a business review in this report. The Directors’ Report contains a fair review of the
business and a description of the principal risks and uncertainties facing the Group. A review of the business strategy and a commentary on the
performance of the business is set out in the Chairman’s Statement, the Chief Executive’s Review and the Financial Review on pages 8 to 15.
A discussion of key performance indicators is included within the Financial Review on pages 13 to 15.
The Directors’ Report is prepared for the members of the Company and should not be relied upon by any other party or for any other purpose.
Where the Directors’ Report (including the Chairman’s Statement, the Chief Executive’s Review and the Financial Review) contains forward-
looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of this
report. Consequently such statements should be treated with caution due to the inherent uncertainties, including both economic and business
risk factors, underlying such forward-looking statements or information.
Principal activities
The principal activity of the Group is the development, manufacture and sale of medical diagnostic tests and services, predominantly those
used for the detection of alcohol and drugs of abuse.
The principal activity of the Company is that of a holding Company. The subsidiary undertakings principally affecting the profits or net assets of
the Group in the year are listed in Note 28 to the financial statements.
Going concern
After making enquiries the Directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable
expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors
continue to adopt the going concern basis in preparing the financial statements.
The Company is currently in the process of negotiating a refinancing package. Further details are included in the Financial Review on pages 13
to 15.
Results and dividends
The audited financial statements are set out on pages 18 to 63. The Group made a loss after taxation for the year ended 31 December 2008 of
£424,000 (2007: profit of £665,000).
The Directors do not recommend the payment of a dividend for the period (2007: £nil).
Directors and their interests
The Directors who held office during the year are detailed below.
K Tozzi Chairman
F Begley Chief Executive Officer
N Elton Finance Director
J Corsellis Non-Executive Director
V Murria Non-Executive Director
C Hand Non-Executive Director
K Tozzi and F Begley retire by rotation in accordance with the Articles of Association and, being eligible, offer themselves for re-election.
The Directors’ beneficial interests in the ordinary shares of 10p each (‘ordinary shares’) of the Company, were as follows:
Ordinary Ordinary
shares of 10p shares of 10p
31 December 31 December
2008 2007
K Tozzi 143,000 100,000
F Begley 981,777 941,1 77
N Elton – –
J Corsellis 58,824 58,824
V Murria 155,000 –
C Hand 1,369,013 1,369,013
Details of the Directors’ share options and service contracts are shown in the Directors’ Remuneration Report on pages 24 and 25.
Biographical details of the Directors are given on page 16. 19
Concateno plc
Annual Report and Accounts 2008
Substantial shareholdings
The Directors are aware of the following who have an interest in 3% or more of the Company as at 17 March 2009:
Ordinary
shares of 10p %
Marwyn Investment Management LLP
1
29,174,852 27.49
Fidelity (Institutional Group) 6,682,899 6.30
Powe Capital Management, LLP 4,808,669 4.53
Knox D’Arcy Investment Management Limited 3,609,913 3.40
Aviva Investors Global Services Limited 3,562,002 3.36
Schroder Investment Management Ltd. (SIM) 3,443,590 3.24
HSBC Investment Bank (MM) 3,260,700 3.07
1 Marwyn Investment Management LLP is the Investment Manager for both Marwyn Neptune Fund LP and Marwyn Ventures 1 LP, which hold 28,899,852 and 275,000 Concateno plc
shares respectively.
Group research and development activities
The total research and development activities undertaken by the Group amounted to £1,507,000 (2007: £306,000). All research and non-
qualifying development costs were written off during the year in which they were incurred. During the year £1,125,000 (2007: £247,000) of
development expenditure was capitalised in line with the accounting policy set out in Note 1 to the financial statements.
Charitable and political contributions
During the year the Group made charitable donations of £6,578 (2007: £1,731) to charities serving the communities in which the Group
operates. No political donations were made during the year.
Supplier payment policy
It is the Group’s policy to settle debts with its creditors on a timely basis, taking into consideration the terms and conditions offered by each
supplier. At 31 December 2008, the number of creditor days outstanding for the Group was 56 days (2007: 36 days).
The Group does not follow a standard code or payment practice.
Risks relating to the business of Concateno
Internal Controls
The Directors are responsible for the Group’s system of internal control and for reviewing its effectiveness whilst the role of management is to
implement Board policies on risk management and control. It should be recognised that the Group’s system of internal control is designed to
manage, rather than eliminate, the risk of failure to achieve the Group’s business objectives and can only provide reasonable, and not absolute,
assurance against material misstatement or loss.
The Group is currently developing the risk management process, to embed it in normal management, and the governance process. These
controls include, but are not limited to, the annual strategic planning and budgeting process, a clearly defined organisational structure with
authorisation limits, reviews by senior management of monthly financial and operating information including comparisons with budgets, monthly
treasury and cash flow reports and forecasts to the main Board and rules preventing speculation in derivatives.
The Board does not believe it is currently appropriate to establish a separate, independent internal audit function given the size of the Group.
However, it undertakes reviews of internal controls on a regular basis and a Risk Review Committee was set up in 2008 to assist with this
process.
Continued market growth
The Company is reliant upon growth in the drug and alcohol testing market within the UK and Rest of the World in order to increase trading
volumes. The dependence upon governmental and industrial testing requirements and the growth of these requirements is a risk that the
Company cannot directly control, but can mitigate by entering new markets. The failure of such market growth to continue could have a material
adverse impact on the Group’s business, financial condition, trading performance and prospects.
In the current economic climate, the Company faces additional pressures. However, with government-funded and regulated markets,
management feel that this risk is somewhat mitigated.
Dependence upon key executives and personnel
The Company has several key executives and senior personnel, who are of considerable worth to the Company in terms of their market
knowledge, strategic importance, and intellectual property value. In order to ensure minimal risk to the Company, key person insurances and
contractual obligations are in place to minimise the impact of loss of any of these persons. The loss of any member of the Group’s senior
operational management could harm or delay the business whilst management time is directed to finding suitable replacements or if no suitable
replacement is available to the Group. In either case this could have a material adverse effect on the future of the Group’s business. Whilst the
Group has entered into service agreements with these key personnel, the retention of their services cannot be guaranteed.
Investment Strategy
There can be no certainty that the Group will be able to successfully implement its strategy as set out in the Chairman’s statement. The ability
of the Group to implement its strategy in a competitive market requires effective planning and management control systems. The Group’s future
growth will depend on its ability to expand and improve operational, financial and management information and control systems in line with the
Group’s growth. Failure to do so could have an adverse effect on the Group’s business and financial condition. Concateno plc
Annual Report and Accounts 2008 20
Law and regulation
The Company operates its normal business activities within relevant legal and regulatory compliance listings. These risks include industry
legislation, regulatory control and health and safety compliance. The Company operates over international boundaries that entail the risk of
litigation and governmental non-compliance with regulatory requirements. These risks are minimised primarily by contractual obligations with
stakeholders (e.g. customers and suppliers) and by compliance within reasonable operating activities.
The drugs of abuse testing market, being the Group’s core market area, is subject to a large number of laws and regulations. The Group’s
success in the future will be dependent on the legislative framework in which it operates and the Directors have no influence over such matters.
Existing and future legislation, regulation and actions could cause additional expense, capital expenditure, restrictions and delays in the
activities of the Group, the extent of which cannot be predicted. No assurance can be given that the new laws, rules and regulations will not be
enacted or existing laws, rules and regulations will not be applied in a manner which could limit or curtail certain of the Group’s services.
Dependence on key customers
The Company has the risk of dependence upon key customers. This risk is mitigated by developing a close relationship with clients and entering
into contracts where possible. Given the increased scale of the Group the dependence on any one client has been significantly reduced during
the year. Where there is risk remaining and insufficient evidence of collectability of debts from customers, an allowance for impairment is made.
Price risk
The Group has no significant exposure to securities price risk as it holds no listed equity investments.
Financial Risk Management
The Board considers that the main risks arising from the Group’s financial instruments are currency risk, credit risk, interest rate risk, liquidity
risk and covenant risk. The use of financial derivatives is governed by the Group’s policies approved by the Board of Directors. The Group does
not use derivative financial instruments for speculative purposes.
(i) Currency risk
The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates. The Group uses foreign exchange
forward contracts, where cost effective to do so, and otherwise uses natural hedging methods where possible to minimise exposure in this area.
(ii) Credit risk
The Group’s principal financial assets are bank balances and cash, trade and other debtors.
The Group’s credit risk is primarily attributable to its trade debtors. The amounts presented in the balance sheet are net of allowances for
doubtful debtors. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence
of a reduction in the recoverability of the cash flows. The Group has no significant concentration of credit risk, with exposure spread over a
large number of counterparties and customers.
(iii) Interest rate risk and liquidity risk
In order to maintain liquidity to ensure that sufficient funds are available for ongoing operations and future developments, the Group uses a
mixture of long-term and short-term debt finance. The Group’s policy throughout the year has been to minimise risk by placing funds in low risk
cash deposits but also to maximise the return on funds placed on deposit.
The Group is currently undergoing refinancing negotiations. See Financial Review for details.
(iv) Covenant Risk
The Group must comply with a number of financial covenants as part of the term loan facilities. The Group regularly monitors actual and
forecast compliance with these covenants and makes regular reports to the banks.
Further details are provided in Note 19 of the Financial Statements.
Annual General Meeting
The Annual General Meeting will be held at the offices of Collins Stewart, London on 14 May 2009 commencing at 10am.
Auditors
Each of the persons who is a Director at the date of approval of this report confirms that:
(1) so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and
(2) the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information
and to establish that the Company’s auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985.
In accordance with Section 384 of the Companies Act 1985, a resolution for the re-appointment of KPMG Audit Plc as auditors of the Company
is to be proposed at the forthcoming Annual General Meeting.
By order of the Board
Rowena Nixon
Company Secretary
30 March 2009
Directors’ Report > continued
For the year ended 31 December 2008 21
Concateno plc
Annual Report and Accounts 2008
Corporate Governance Report >
For the year ended 31 December 2008
AIM listed companies are not required to comply with the disclosure requirements of the New Combined Code on Corporate Governance.
However, the Board supports the principles contained in the New Combined Code and is committed to applying the principles set out therein
where they are appropriate, given the Company’s size. The following provides information on how these principles have been applied but does
not constitute full compliance with the New Combined Code.
Board of Directors
The Company is controlled by the Board of Directors which comprises three Executive and three Non-Executive Directors.
The Board is responsible to shareholders for the proper management of the Group and meets formally at least every two months to set the
overall direction and strategy of the Group, to review financial and operating performance and to advise on senior management appointments.
Financial policy and budgets, including capital expenditure, are approved and monitored by the Board. All key operational decisions are subject
to Board approval. The Company Secretary is responsible for ensuring that Board procedures are followed and that applicable rules and
regulations are complied with.
Different Directors hold the roles of Chairman and Chief Executive and there is a clear division of responsibilities between them. Individual
Directors possess a wide variety of skills and experience; biographical details of the Directors are set out on page 16.
The Non-Executive Directors are considered by the Board to be independent of management. The Board considers that the Non-Executive
Directors are of sufficient calibre and number to bring the strength of independence to the Board. The terms and conditions of appointment of
Non-Executive Directors are available on request.
The Board believes that given its size and constitution it is not appropriate to specify a ‘senior’ Non-Executive Director.
During the year, there have been 10 main Board meetings. The schedule on the following page gives attendance and non-attendance by Board
members for meetings throughout the year.
All Board members receive monthly management accounts and regular management reports enabling them to review the Group’s performance
against agreed objectives. Regular reports and papers are circulated to Directors in a timely manner in preparation for Board and Committee
meetings. This information includes that specifically requested by the Non-Executive Directors from time to time.
Board evaluation
The Board is mindful of the requirement to undertake an annual evaluation of its performance and that of its committees and individual
Directors. It is the intention of the Board to adopt the following procedures in order to conduct performance evaluation.
The performance of the Board, its committees, the Executive Directors and Non-Executive Directors will be evaluated by the Chairman on an
ongoing basis.
Re-election
Directors are subject to election by shareholders at the first opportunity after their appointment and a third are subject to re-election at each
Annual General Meeting.
Committees of the Board
Audit Committee
The Audit Committee comprises two Non-Executive Directors; Dr C Hand (Chairman) and J Corsellis. It overviews the monitoring of the Group’s
internal controls, accounting policies and financial reporting and provides a forum through which the external auditors report. It also reviews the
scope and results of the external audit and the independence and objectivity of the auditors and makes recommendations to the Board on
issues surrounding their remuneration, appointment, resignation or removal. The Board is satisfied that the Audit Committee has sufficient
financial knowledge and experience. The Audit Committee should meet at least twice a year with the external auditors.
During the year there have been three Audit Committee meetings. The meetings were attended by both Committee members.
Terms of reference for the Audit Committee are available on request. These include definition of its role and the authority delegated to it by
the Board.
Remuneration Committee
The Remuneration Committee comprises two Non-Executive Directors, J Corsellis (Chairman) and V Murria. The Committee reviews, inter alia,
the performance of the Executive Directors and sets the scale and structure of their remuneration and the basis of their service agreements with
due regard to the interests of the shareholders. The Remuneration Committee also makes recommendations to the Executive Directors
concerning the allocation of share options to employees. The Committee should meet at least twice a year.
During the year, there have been two Remuneration Committee meetings. The meetings were attended by both Committee members at the time.
It is a policy of the Remuneration Committee that no individual participates in discussions or decisions concerning his own remuneration.
Terms of reference for the Remuneration Committee explain its role and the authority delegated to it by the Board. These are available on request. Concateno plc
Annual Report and Accounts 2008 22
The Directors’ Remuneration Report is set out on pages 24 and 25.
A summary of meeting attendances by the Board of Directors and its Committees is given below.
Main Audit Remuneration
Board Committee Committee AGM
Executive Directors
K Tozzi 10/10 – – 1/1
F Begley 10/10 – – 1/1
N Elton 10/10 – – 1/1
Non-Executive Directors
J Corsellis 8/10 3/3 2/2 1/1
C Hand 10/10 3/3 – 1/1
V Murria 10/10 – 2/2 1/1
Internal control
The Directors have overall responsibility for ensuring that the Group maintains a system of internal control to provide them with reasonable
assurance that the assets of the Group are safeguarded and that the shareholders’ investments are protected. The system includes internal
controls covering financial, operational and compliance areas, and risk management. There are limitations in any system of internal control,
which can provide reasonable but not absolute assurance with respect to the preparation of financial information, the safeguarding of assets
and the possibility of material misstatement or loss.
The Board has considered and reviewed the effectiveness of the system of internal control. An assessment of the major risk areas for the
business and methods used to monitor and control them was also considered. During the year under review, a number of key controls have
been improved and integrated across the business. In addition to financial risk, the review covered operational, commercial, environmental,
regulatory, and research and development risks. The risk review is an ongoing process with regular review by the Board at least annually.
The key procedures designed to provide an effective system of internal control that have operated throughout the year and up to the date of the
sign-off of this report are described below:
Control environment
The Group has a clearly defined organisational structure. Managers of operating units assume responsibility for, and exercise a high degree of
autonomy in, running day-to-day trading activities. Employees are required to follow clearly laid out internal procedures and policies appropriate
to the business and their position within the business.
Risk management
The Group employs Directors and senior executives with the appropriate knowledge and experience for the Company. A formal risk
management review is performed annually as part of the process of determining the Group’s system of internal controls and risk
mitigation procedures.
Risk procedures are carried out via the centralised Quality Assurance system. Each business within the Group currently holds separate
certification and/or accreditation:
ISO 13485 – Medical Devices: •
o Cozart.
o Spinreact.
ISO9001 – Quality Management System: •
o Medscreen.
o Euromed.
o Spinreact.
o Cozart.
Cozart ISO 17025 – Testing and Calibration Laboratories: •
o Medscreen.
o Altrix.
o TrichoTech.
o Cozart.
There is a dedicated Quality Manager at each site responsible for the day-to-day activities required to maintain certification/accreditation, and
to report and escalate any issues that are identified. This provides an early warning system and ensures swift and effective corrective and
preventative action.
The Group Quality Manager, based at Abingdon, oversees all activities and produces a weekly and monthly report for the Chief Operating
Officer. These reports are discussed monthly at the Group Operational Executive and a monthly report is sent to the main Board. A single
Quality System continues to be implemented ensuring that best practice is migrated across the Group.
Corporate Governance Report > continued
For the year ended 31 December 2008 23
Concateno plc
Annual Report and Accounts 2008
Financial information
The Group prepares detailed budgets and cash flow projections, which are approved annually by the Board and updated regularly throughout
the year. Detailed management accounts and working capital cash flow projections are prepared on a monthly basis and compared to budgets
and projections to identify any significant variances.
Management of liquid resources
The Board is risk adverse when investing the Group’s surplus cash funds. The Executive Directors monitor the Group’s cash position on a
weekly basis. The Group’s treasury management policy is reviewed annually and sets out strict procedures and limits on how surplus funds
are invested.
Internal audit
The Board has considered it inappropriate to establish a formal internal audit function during the year, given the size of the Group. Although
there has been no formal internal audit function, financial reviews have been performed between Group companies on a regular basis and work
is under way to formalise this process more over the coming year.
Relations with shareholders
The Board attaches great importance to effective communication with both institutional and private shareholders. In fulfilment of the Chairman’s
obligations under the new Combined Code, the Chairman gives feedback to the Board on issues raised with him by major shareholders.
Regular communication is maintained with all shareholders through Company announcements, the Annual Report and Financial Statements,
Preliminary Results and the Interim Report.
All shareholders are sent copies of the Interim and Annual Reports and are given notice to enable them to attend the Company’s Annual
General Meeting and any Extraordinary General Meeting. Shareholders whose shares are held by nominees may receive the information on
request. The Annual General Meeting is normally attended by all Directors, and shareholders are invited to ask questions during the meeting
and to meet with Directors after formal proceedings.
In addition, the Company operates a website: www.concateno.com. It contains information on the Group and its activities, press releases and
regulatory announcements, Annual Financial Statements and Interim Statements, and details of the Company’s share price. Concateno plc
Annual Report and Accounts 2008 24
Directors’ Remuneration Report >
For the year ended 31 December 2008
The following information has been provided in accordance with best practice even though it is not all a requirement of the AIM Rules of the
London Stock Exchange. The information presented in the Directors’ Remuneration Report is unaudited unless otherwise stated.
Remuneration policy
The Remuneration Committee currently comprises two Non-Executive Directors; J Corsellis and V Murria. The Chairman and other senior
executives attend meetings from time to time at the invitation of the Committee. Remuneration levels are set in order to attract high calibre
recruits and to retain and motivate those Directors and employees once they have joined the Group.
Remuneration package for Executive Directors
The individual components of the remuneration package offered to Executive Directors are as follows:
(i) Basic salary
Basic salaries are reviewed on a regular basis. The review process is undertaken by having regard to the development of the Group and the
contribution that individuals will continue to make. Consideration is also given to the need to retain and motivate individuals and information on
the salary levels in comparable organisations.
(ii) Annual performance incentives
Annual performance incentives in the form of cash bonus payments are reviewed on an annual basis and are designed to reward Executive
Directors for exceptional performance.
(iii) Pension and other benefits
The Company makes contracted contribution into personal pension schemes for the Executive Directors.
Other benefits provided to Executive Directors are life assurance and private medical insurance.
(iv) Share options
Options granted to employees under the Company’s Enterprise Management Incentive (‘EMI’) or Employee Benefit Trust Incentive Scheme are
recommended by the Executive Directors and approved by the Remuneration Committee.
Executive Directors are awarded share options at the discretion of the Remuneration Committee. Share options are granted at the closing
mid-market value of the Company’s ordinary shares on the day prior to grant, or where the Remuneration Committee consider that the share
options are issued further to an acquisition event they are granted at the share price pertaining to that acquisition event.
Remuneration policy for Non-Executive Directors
The remuneration of the Non-Executive Directors is determined by the Board as a whole, based on a review of current practices in
other companies.
The Non-Executive Directors have service agreements which are reviewed by the Board annually.
Audited information
Directors’ remuneration
The Directors received the following remuneration during the year:
Salary Taxable Pension Total Total
and fees Bonus benefits contributions 2008 2007
Name of Director £ £ £ £ £ £
Executive
K Tozzi 123,917 15,000 7 ,987 11,500 158,404 667,306
F Begley 218,729 25,000 5,770 37 ,923 287,422 743,590
N Elton 145,500 15,000 4,249 13,667 178,416 65,309
Non-Executive
J Corsellis 10,000 – – – 10,000 14,671
V Murria 35,000 – – – 35,000 8,750
C Hand
1
76,500 – – – 76,500 16,666
609,646 55,000 18,006 63,090 745,742 1,516,292
1 C Hand received £35,000 (2007: £5,000) for Non-Executive duties and £41,500 (2007: £11,666) for work in relation to the collaboration with Philips. 25
Concateno plc
Annual Report and Accounts 2008
40
60
80
100
120
140
02/01/08
02/02/08
02/03/08
02/04/08
02/05/08
02/06/08
02/07/08
02/08/08
02/09/08
02/10/08
02/11/08
02/12/08
02/01/09
02/02/09
02/03/09
Concateno
FTSE All Small
FTSE Support Services
Directors’ share options
Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares in the Company granted
to or held by the Directors under the EMI Share Option Scheme. Details of the options are as follows (see Note 24 of the accounts for
performance conditions):
At Options Options Options At
1 January granted exercised lapsed 31 December Exercise Exercise Expiry
Name of Director Class 2008 Number Number Number 2008 price (p) date date
Executive
K Tozzi A 50,000 – – – 50,000 85.0 07/11/2009 07/11/2016
B 49,999 – – – 49,999 85.0 07/11/2009 07/11/2016
F Begley A 50,000 – – – 50,000 85.0 07/11/2009 07/11/2016
B 49,999 – – – 49,999 85.0 07/11/2009 07/11/2016
N Elton C – 38,461 – – 38,461 130.0 21/01/2011 20/01/2018
D – 38,462 – – 38,462 130.0 21/01/2011 20/01/2018
Non-Executive
J Corsellis – – – – –
V Murria – – – – –
C Hand – – – – –
Employee Benefit Trust
Aggregate emoluments disclosed above do not include any amounts for the value of Employee Benefit Trust Incentive Scheme (‘EBT’) ordinary
shares in the Company granted to SG Hambros Trust Company (Channel Islands) Limited. SG Hambros Trust Company (Channel Islands)
Limited, as trustee of a trust of which the Directors and certain of their relatives are potential beneficiaries, hold the following options and
ordinary shares (see Note 24 to the accounts for performance conditions):
Options/ Options/ Options/
At shares shares shares At
1 January granted exercised lapsed 31 December Exercise Exercise Expiry
Scheme Class 2008 Number Number Number 2008 price (p) date date
EBT Share Option Scheme A 700,000 – – – 700,000 86.0 07/11/2009 07/11/2016
EBT Share Option Scheme B 700,002 – – – 700,002 86.0 07/11/2009 07/11/2013
EBT Share Option Scheme E – 711,538 – – 711,538 142.0 12/06/201 1 12/06/2015
EBT Share Option Scheme F – 711,539 – – 711,539 142.0 12/06/201 1 12/06/2015
EBT Share Scheme 2,980,047 – – – 2,980,047 N/A N/A N/A
Directors’ shareholdings
The Directors who served during the period, together with their beneficial interests in the shares of the Company, are detailed in the Directors’
Report on pages 18 to 20.
Performance graph
The graph below shows a comparison between the Company’s total shareholder return performance compared with FTSE AIM All Share and
Support Service sectors of the London Stock Exchange. The graph covers the period from 1 January 2008 to 19 March 2009. The Directors
have selected the Support Services sector as a comparison as they believe that the constituent companies most closely reflect the nature and
operations of Concateno.
The market price of the Company’s shares as at 31 December 2008 was 93.5p and the range during the period between 1 January 2008 and
31 December 2008 was 85.3p–170.30p.
By order of the Board
Keith Tozzi
Chairman
30 March 2009 Concateno plc
Annual Report and Accounts 2008 26
Statement of Directors’ Responsibilities in respect of the Annual Report >
and the Financial Statements
For the year ended 31 December 2008
The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements, in accordance with
applicable law and regulations.
Company law requires the Directors to prepare Group and parent company financial statements for each financial year. As required by the AIM
Rules of the London Stock Exchange, they are required to prepare the Group Financial Statements in accordance with International Financial
Reporting Standards (‘IFRSs’) as adopted by the EU and applicable law and have elected to prepare the parent company financial statements
in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).
The Group Financial Statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and the
performance of the Group; the Companies Act 1985 provides in relation to such financial statements that references in the relevant part of that
Act to financial statements giving a true and fair view are references to their achieving a fair presentation.
The parent company financial statements are required by law to give a true and fair view of the state of affairs of the parent company.
In preparing each of the Group and parent company financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently; •
make judgements and estimates that are reasonable and prudent; •
for the Group Financial Statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; •
for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material •
departures disclosed and explained in the parent company financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company •
will continue in business.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of
the parent company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general
responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and
other irregularities.
The Directors have decided to prepare voluntarily a Directors’ Remuneration Report in accordance with Schedule 7A to the Companies Act
1985, as if those requirements were to apply to the Company. The Directors have also decided to prepare voluntarily a Corporate Governance
Statement as if the Company were required to comply with the Listing Rules of the Financial Services Authority in relation to those matters.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
By order of the Board
Fiona Begley
Chief Executive Officer
30 March 2009 27
Concateno plc
Annual Report and Accounts 2008
To the members of Concateno plc
We have audited the group and parent company financial statements (the ‘financial statements’) of Concateno plc for the year ended 31
December 2008 which comprise the Consolidated Income Statement, the Consolidated and Parent Company Balance Sheets, the
Consolidated Cash Flow Statement, the Consolidated Statement of Recognised Income and Expense and the related notes. These financial
statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’
Remuneration Report that is being described as audited.
This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work
has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report
and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company
and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditors
The Directors’ are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable law and
International Financial Reporting Standards (‘IFRSs’) as adopted by the EU, and for preparing the parent company financial statements in
accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are set out in the Statement of
Directors’ Responsibilities on page 26.
Our responsibility is to audit the financial statements in accordance with relevant and regulatory requirements and International Standard on
Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part
of the Directors’ Remuneration Report to be audited give a true and fair view and whether the financial statements have been properly prepared
in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors’ Report is
consistent with the financial statements. The information given in the Directors’ Report includes that specific information presented in the
Chairman’s Statement, Chief Executive’s Review and Financial Review that is cross referred from the Business Review section of the
Directors’ Report.
In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information
and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is
not disclosed.
We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We
consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial
statements. Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’
Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the Directors in the
preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be
audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the
overall adequacy of the presentation of information in the financial statements.
Opinion
In our opinion:
the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the group’s affairs as at •
31 December 2008 and of its loss for the year then ended;
the parent company financial statements give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the state •
of the parent company’s affairs as at 31 December 2008;
the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the •
Companies Act 1985, and;
the information given in the Directors’ Report is consistent with the financial statements. •
KPMG Audit Plc
1 Forest Gate
Brighton Road
Crawley
RH11 9PT
Registered Auditor
30 March 2009
Independent Auditors’ Report >
For the year ended 31 December 2008 Concateno plc
Annual Report and Accounts 2008 28
Consolidated Income Statement >
For the year ended 31 December 2008
Consolidated Statement of Recognised Income and Expense >
For the year ended 31 December 2008
Year ended Year ended
31 December 31 December
2008 2007
Notes £’000 £’000 £’000 £’000
Revenue 2 47,474 26,064
Cost of sales (20,024) (10,617)
Gross profit 27,450 15,447
Administrative expenses before the following items: (16,003) (10,055)
Non-recurring administrative expenses 3 (3,002) (785)
Share-based payments (555) (439)
Amortisation of business combination intangible assets 11 (3,659) (2,193)
Total administrative expenses (23,219) (13,472)
Operating profit 4 4,231 1,975
Finance income 7 76 380
Finance expenses 7 (3,366) (2,032)
Exceptional charge in respect of interest hedge 7 (1,533) –
Net fi nance costs (4,823) (1,652)
Profit/(loss) before taxation (592) 323
Taxation 8 168 342
Profit/(loss) for the period attributable to equity shareholders of the Company (424) 665
Earnings/(loss) per share 9
Basic (pence per share) (0.43)p 1.05p
Diluted (pence per share) (0.43)p 1.04p
The consolidated income statement has been prepared on the basis that all operations are continuing operations.
The accompanying notes are an integral part of the consolidated financial statements.
Year ended Year ended
31 December 31 December
2008 2007
Notes £’000 £’000
Foreign currency translation differences for foreign operations 22 2,162 298
Changes in fair value of effective cash flow hedges 16 184 (184)
Income and expense recognised directly in equity 2,346 114
Profit/(loss) for the period (424) 665
Total recognised income and expense for the period attributable to equity shareholders of the Company 1,922 779 29
Concateno plc
Annual Report and Accounts 2008
Consolidated Balance Sheet >
As at 31 December 2008
As at As at
31 December 31 December
2008 2007
Notes £’000 £’000
Assets
Non-current assets
Goodwill 11 98,335 97,938
Other intangible assets 11 43,426 46,183
Property, plant and equipment 12 3,691 3,410
Deferred tax assets 13 1,081 858
146,533 148,389
Current assets
Inventories 14 4,935 3,855
Current tax assets 204 1 74
Trade and other receivables 15 14,712 11,819
Derivative fi nancial instruments 16 – 3
Cash and cash equivalents 17 4,292 3,888
24,143 19,739
Total assets 170,676 168,128
Liabilities
Current liabilities
Bank overdrafts 17 2,965 1,685
Loans and borrowings 18 25,110 3,931
Derivative element of convertible loan 18 – 417
Derivative fi nancial instruments 16 1,612 184
Current tax liabilities 1,438 1,281
Trade and other payables 20 9,729 8,892
Provisions 21 1,120 1,541
41,974 1 7,931
Non-current liabilities
Loans and borrowings 18 326 33,651
Provisions 21 774 729
Deferred tax liabilities 13 11,582 12,629
12,682 47,009
Total liabilities 54,656 64,940
Shareholders’ equity attributable to equity
Shareholders of the Company
Share capital 22 10,614 9,530
Share premium account 22 99,146 89,875
Other reserves 22 10,304 7,958
Retained earnings 22 (4,044) (4,1 75)
Total shareholders’ equity attributable to equity shareholders of the Company 116,020 103,188
Total shareholders’ equity and liabilities 170,676 168,128
The financial statements were approved by the Board of Directors and authorised for issue on 30 March 2009. They were signed on its behalf by:
Fiona Begley Neil Elton
Chief Executive Officer Finance Director
30 March 2009 30 March 2009
The accompanying notes are an integral part of the consolidated financial statements. Concateno plc
Annual Report and Accounts 2008 30
Consolidated Cash Flow Statement >
For the year ended 31 December 2008
Year ended Year ended
31 December 31 December
2008 2007
Note £’000 £’000
Cash flows from operating activities
Profit/(loss) for the period (424) 665
Depreciation and other non-cash items:
Depreciation 1,238 569
Amortisation of intangible assets and loan issue costs 4,050 2,395
Impairment losses on intangible assets 71 –
Impairment losses on property, plant and equipment 90 –
Share-based payments 555 439
Loss on disposal of property, plant and equipment – (15)
Net fi nance costs 4,823 1,652
Taxation (168) (342)
10,235 5,363
Increase in trade and other receivables (1,657) (247)
Increase in inventories (156) (262)
Increase in trade and other payables 214 227
Cash generated from operations 8,636 5,081
Tax (paid)/received, net (979) (33)
Net cash flows from operating activities 7,657 5,048
Cash flows from investing activities
Acquisitions of businesses (net of cash acquired) (219) (101,613)
Purchase of property, plant and equipment (1,771) (569)
Development expenditure (1,129) (248)
Net cash flows from investing activities (3,119) (102,430)
Cash flows from financing activities
Net proceeds from issue of share capital – 71,454
Proceeds from exercise of share options 85 136
Proceeds from borrowings – 29,722
Repayment of borrowings (net of debt issue costs) (3,878) (1,250)
Interest received 75 133
Interest paid (2,330) (1,264)
Net cash flow from financing activities (6,048) 98,931
Increase/(decrease) in cash and cash equivalents for the period (1,510) 1,549
Cash and cash equivalents at start of period 2,203 654
Effect of foreign exchange fluctuations on cash held 634 –
Cash and cash equivalents at end of period 17 1,327 2,203
The accompanying notes are an integral part of the consolidated financial statements. 31
Concateno plc
Annual Report and Accounts 2008
Notes to the Consolidated Financial Statements >
For the year ended 31 December 2008
1 Accounting policies
Concateno plc (the ‘Company’) is a company domiciled in the United Kingdom. The consolidated financial statements of the Company as at
and for the year ended 31 December 2008 comprise the Company and its subsidiaries (together referred to as the ‘Group’ or ‘Concateno’).
(a) Statement of compliance
The Group Financial Statements have been prepared and approved by the Directors in accordance with International Financial Reporting
Standards as adopted by the EU (‘Adopted IFRSs’). The Company has elected to prepare its parent company financial statements in
accordance with UK GAAP; these are presented on pages 61 to 64.
(b) Basis of preparation
Notwithstanding the Group’s net current liabilities of £17.8m as at 31 December 2008, the financial statements have been prepared on a Going
Concern basis, which assumes that the Group will continue in operational existence for the foreseeable future, which the Directors believe is
appropriate for the following reasons.
The Group term loan of £25.0m at 31 December 2008 is included within current liabilities as it is due to be repaid in full on 31 December 2009.
As at 30 March 2009, the Group had not finalised the refinancing of that loan beyond the end of 2009.
However, the Directors have taken the following actions to support the basis of preparation:
Held discussions with a number of banks whose Credit Committees have agreed in principle to provide re-financing in full either individually •
or in partnership. These banks have undertaken extensive due diligence.
Prepared projections for the results and cash flows of the Group for the next three years. These projections indicate that the Group will •
continue to operate within the current agreed facilities covenants and the facilities and any covenants which the Directors expect to agree
when the Group comes out of the current offer period. The Directors have considered the assumptions made and consider the forecasts to
be reasonable and realistic.
The financial statements do not include any adjustments that would result from the going concern basis of preparation being inappropriate.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated
financial statements. These accounting policies are set out below and have been applied consistently throughout all periods. In these financial
statements the following Adopted IFRSs are effective for the first time. Unless stated otherwise, they have not had a material effect on the
financial statements:
IFRS 7 ‘Financial Instruments: Disclosures’ and the related amendment to IAS 1 ‘Presentation of Financial Statements’ in relation to capital •
disclosures
IFRIC 8 ‘Scope of IFRS 2 Share-based Payment’. •
IFRIC 9 ‘Reassessment of Embedded Derivatives’. •
IFRIC 10 ‘Interim Financial Reporting and Impairment’. •
IFRIC 11 ‘IFRS 2 – Group and Treasury Share Transactions’. •
(c) Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except that derivative financial instruments are stated at
fair value.
(d) Functional and presentational currency
The consolidated financial statements are presented in Pounds Sterling, which is the Company’s functional currency. All financial information
presented in Pounds Sterling has been rounded to the nearest one thousand.
(e) Basis of judgement
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in
which the estimate is revised and in any future periods affected.
In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the
most significant effect on the amount recognised in the financial statements are described in the following notes:
Note 11 – Carrying amount of intangible assets and measurement of the recoverable amounts of cash generating units. Many intangible •
assets have been valued using management’s best estimate of future cashflows expected to arise.
Note 11 – The Group invests in the development of future products and material enhancement of existing products in accordance with the •
accounting policy. The assessment as to whether each element of this expenditure will be technically feasible, generate future economic
benefit or the period over which to amortise the expenditure is a matter of judgement. The carrying value of product development capitalised
and the amounts capitalised and amortised in the year are detailed in Note 11.
Note 13 – Utilisation of tax losses. The proportion of deferred tax assets recognised is a result of management’s best estimate of future •
profit streams. Concateno plc
Annual Report and Accounts 2008 32
1 Accounting policies continued
Note 15 – Trade receivables provision. The value of provision made against bad or doubtful debts follows detailed customer-by-customer •
review by management. The final provision arrived upon is a result of management’s best estimate of future recoverability and therefore
involves a degree of judgement.
Note 21 – Provisions and contingencies. The value of provisions recognised in relation to ongoing enquiries is based on management’s best •
estimate of total costs still to be incurred. Judgement is also involved in assessing the amount of deferred and contingent consideration to
be recorded; amounts recognised are based on management’s assessment of the likelihood of warranties impacting final payments and
expectation in relation to future performance conditions being met.
(f) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and
operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are
exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements
from the date that control commences until the date that control ceases.
The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Applicable
trading and market conditions have been considered in this process in order to ensure that the policies are still appropriate to that
subsidiary’s situation.
(ii) Transactions eliminated on consolidation
Intra-group balances, and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in
preparing the consolidated financial statements.
(g) Foreign currency
(i) Foreign currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the foreign exchange rate ruling at
the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Pounds
Sterling at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in profit or loss.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at
the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to
Pounds Sterling at foreign exchange rates ruling at the dates the fair value was determined.
(ii) Group companies
The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional
currency different from the presentation currency are translated into the presentation currency as follows:
assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; and •
income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable •
approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at
the dates of the transactions).
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
Foreign currency differences are recognised directly in equity. Since 1 April 2006, the Group’s date of transition to IFRSs, such differences have
been recognised in the foreign currency translation reserve. When a foreign operation is disposed of, in part or in full, the relevant amount in this
reserve is transferred to profit or loss.
(h) Non-derivative financial instruments
Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents
(see Note (o) below), loans and borrowings, and trade and other payables.
Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly
attributable transaction costs, except as described below. Subsequent to initial recognition non-derivative financial instruments are measured
as described below.
A financial instrument is recognised if the Group becomes a party to the contractual provisions of the instrument. Financial assets are
derecognised if the Group’s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to
another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets
are accounted for at trade date, i.e., the date that the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if
the Group’s obligations specified in the contract expire or are discharged or cancelled.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 33
Concateno plc
Annual Report and Accounts 2008
1 Accounting policies continued
(i) Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational,
financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for
trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial
instruments are initially recognised at fair value of which the best estimate can be initial cost. The gain or loss on re-measurement to fair value is
recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss
depends on the nature of the item being hedged. The fair value of interest rate swaps is the estimated amount that the Group would receive or
pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap
counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of
the quoted forward price.
(i) Cash flow hedges
When a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly
probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. When
the forecasted transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or the forecast transaction for
a non-financial asset or non-financial liability the associated cumulative gain or loss is removed from equity and included in the initial cost or
other carrying amount of the non-financial asset or liability. If a hedge of a forecasted transaction subsequently results in the recognition of a
financial asset or a financial liability, then the associated gains and losses that were recognised directly in equity are reclassified into profit or
loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss (i.e. when interest income or
expense is recognised).
For cash flow hedges, other than those covered by the preceding two policy statements, the associated cumulative gain or loss is removed
from equity and recognised in profit or loss in the same period or periods during which the hedged forecast transaction affects profit or loss.
The ineffective part of any gain or loss is recognised immediately in profit or loss.
When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the
hedged forecast transaction still is expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in
accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, then the
cumulative unrealised gain or loss recognised in equity is recognised immediately in profit or loss.
(ii) Hedge of monetary assets and liabilities
When a derivative financial instrument is used as an economic hedge of the foreign exchange exposure of a recognised monetary asset or liability,
hedge accounting is not applied and any gain or loss on the hedging instrument is recognised as part of foreign currency gains and losses.
(j) Compound financial instruments
The Group had Convertible loan notes which are regarded as compound financial instruments, consisting of a liability component and a
derivative component. At the date of issue, the fair value of the liability component is established using an estimate for a similar non-convertible
debt. The difference between the proceeds of issue of the convertible debt and the fair value assigned to the debt component, representing the
embedded option to convert the debt, is included as a separate component of liabilities (‘derivative element of convertible loan’) unless it fully
meets the definition of equity (in which case, it is charged directly in equity),
Any issue costs are apportioned between the liability and derivative components of the convertible loan notes based on the relative carrying
amounts at the date of issue. The portion relating to the derivative component is not re-measured subsequent to initial recognition.
The interest expense on the debt component consists of the coupon rate and the element of the derivative component proportionate to the
debt component outstanding. This latter part is added to the carrying amount of the convertible loan notes.
(k) Property, plant and equipment
(i) Owned assets
Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see accounting
policy q). When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate
items of property, plant and equipment.
(ii) Leased assets
Leases in terms of which the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases.
(iii) Subsequent costs
The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that
cost is incurred if it is probable that the future economic benefits embodied within the item will flow to the Group and the cost of the item can be
measured reliably. All other costs are recognised in profit or loss as an expense as incurred. Concateno plc
Annual Report and Accounts 2008 34
1 Accounting policies continued
(iv) Depreciation
Depreciation is charged to profit or loss 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:
Leasehold buildings – over the remaining life of the lease •
Plant and equipment – 3–10 years •
The residual value, depreciation method and useful lives are reassessed annually.
(l) Intangible assets
(i) Goodwill
All business combinations are accounted for by applying the purchase method. Goodwill has been recognised in acquisitions of subsidiaries.
Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is no longer amortised
but is tested annually for impairment (see accounting policy q).
(ii) Research and development
Expenditure on research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is
recognised in profit or loss as an expense as incurred.
Development activities involve a plan or design for the production of new or substantially improved products and processes. Development
expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible,
future economic benefits are probable, and the Group intends, and has sufficient resources, to complete development and to use or sell the
asset. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of direct overheads. Other
development expenditure is recognised in the income statement as an expense as incurred.
Capitalised development expenditure is stated at cost less accumulated amortisation (see below) and impairment losses (see accounting
policy q).
(iii) Other intangible assets
Intangible assets other than goodwill that are acquired by the Group are stated at cost less accumulated amortisation (see below) and
impairment losses (see accounting policy q). Other intangible assets include customer relationships and brands. Expenditure on internally
generated goodwill and brands is recognised in profit or loss as an expense as incurred.
(iv) Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the
specific asset to which it relates. All other expenditure is expensed as incurred.
(v) Amortisation
Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets once they are available for
use. Goodwill with an indefinite useful life is tested systematically for impairment at each annual balance sheet date. The estimated useful lives
of intangible assets are as follows:
Customer relationships – 7–20 years •
Customer contracts – 7–10 years •
Commercial agreements – 10–12 years •
Patents and trademarks – 10–20 years •
Capitalised development costs – 3–5 years •
(m) Trade and other receivables
Trade and other receivables are initially measured on the basis of their fair value. Subsequently they will be carried at amortised cost using the
effective interest method less any impairment losses (see accounting policy q).
(n) Inventories
Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of
business, less the estimated costs of completion and selling expenses.
(o) Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Any bank overdrafts that
are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash
equivalents for the purpose of the statement of cash flows.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 35
Concateno plc
Annual Report and Accounts 2008
1 Accounting policies continued
(p) Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that
an outflow of resources will be required to settle the obligations; and, the amount can be reasonably estimated. Provisions are split between
current and non-current liabilities, where appropriate, provisions are calculated by discounting the expected future cash flows at a pre-tax rate
that reflects market assessments of the time value of money and the risks specific to the liability.
(q) Impairment (excluding inventories and deferred tax assets)
The carrying amounts of the Group’s assets are reviewed at each balance sheet date to determine whether there is any indication of
impairment. If any such indication exists, the asset’s recoverable amount is estimated.
For goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is
estimated at each balance sheet date.
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.
Impairment losses are recognised in the income statement.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to
cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash generating unit is the
smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups
of assets.
At the date of transition to Adopted IFRSs, no business combinations had been effected and the Company held no intangible assets or assets
which had an indefinite useful life.
When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that
the asset is impaired, the cumulative loss that had been recognised directly in equity is recognised in profit or loss even though the financial
asset has not been derecognised. The amount of the cumulative loss that is recognised in profit or loss is the difference between the
acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss.
(i) Calculation of recoverable amount
The recoverable amount of the Group’s receivables carried at amortised cost are calculated as the present value of estimated future cash flows,
discounted at the original effective interest rate (i.e., the effective interest rate computed at initial recognition of these financial assets).
Receivables with a short duration are not discounted.
The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future
cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of
money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is
determined for the cash-generating unit to which the asset belongs.
(ii) Reversals of impairment
An impairment loss in respect of a receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be
related objectively to an event occurring after the impairment loss was recognised.
An impairment loss in respect of goodwill is not reversed.
In respect of other assets, an impairment loss is reversed when there is an indication that the impairment loss may no longer exist and there has
been a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been
determined, net of depreciation or amortisation, if no impairment loss had been recognised.
(r) Non-recurring items
The Group presents as non-recurring items on the face of the income statement those material items of income and expenditure which
because of their nature and/or expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to
understand the elements of financial performance in the period, so as to facilitate comparison with prior periods. Concateno plc
Annual Report and Accounts 2008 36
1 Accounting policies continued
(s) Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-
bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in profit or loss over
the period of the borrowings on an effective interest basis.
(t) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a
substantial period of time to get ready for their intended use of sale, are added to the cost of those assets, until such time as the assets are
substantially ready for their intended use or sale.
All other borrowing costs are recognised in the income statement in the period in which they are incurred.
(u) Employee benefits
(i) Defined contribution plans
Obligations for contributions to defined contribution pension plans are recognised as an expense in profit or loss as incurred.
(ii) Share-based payment transactions
The share option programme allows Group employees to acquire shares of the Company. 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 a binomial lattice 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 only due to share prices not achieving the threshold for vesting.
(v) Revenue
(i) Goods sold
Revenue represents the amounts receivable for goods provided less trade discounts, returns and allowances, VAT and other sales
related taxes.
The Group records transactions as sales when the significant risks and rewards have been transferred to the buyer in accordance with the
terms of trade. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated costs or
the possible return of goods.
Transfer of risks and rewards vary depending on the individual terms of the contract of sale. For the majority of ‘Point-of-Care testing’ and
‘Laboratory Product’ sales, transfer usually occurs when the product is received at the customer’s site; however, for some international
shipments, transfer occurs upon loading goods onto the relevant carrier.
A bill and hold arrangement is in place with one UK customer for whom the Group stores the customers finished product, on their request, and
arranges delivery as and when they require it. Revenue is recognised when substantially all the risks and rewards of ownership have been
transferred to the buyer, even though it has not all been dispatched to the customer’s site(s).
Income received in advance of the provision of goods is held in deferred income within the balance sheet until those goods have
been delivered.
(ii) Services rendered
The Group provides services chiefly in respect of its ‘Laboratory Services’ division. Revenue represents the amounts receivable for services
provided less trade discounts, returns and allowances, VAT and other sales related taxes.
The Group records transactions as sales when the performance of services has taken place in accordance with the terms of trade. No revenue
is recognised if there are significant uncertainties regarding recovery of the consideration due or associated costs.
Income received in advance of the provision of services is held in deferred income within the balance sheet until those services have
been provided.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 37
Concateno plc
Annual Report and Accounts 2008
1 Accounting policies continued
(w) Expenses
(i) Operating lease payments
Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives
received are recognised in the income statement as an integral part of the total lease expense.
(ii) Finance lease payments
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is
allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
(iii) Finance costs
Financing costs comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds
invested foreign exchange gains and losses, and gains and losses on hedging instruments that are recognised in profit or loss.
Interest income is recognised in profit or loss as it accrues, using the effective interest method. The interest expense component of finance
lease payments is recognised in the income statement using the effective interest rate method.
(x) Income tax
Income tax comprises current and deferred tax. Income 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 using the balance sheet liability method, providing for 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: initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination that
affect neither accounting nor taxable profit, 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. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
(y) Adopted IFRSs not yet applied
At the date of authorisation of these financial statements, the following standards and interpretations which have not been applied in these
financial statements were in issue but not yet effective:
IFRS 8 Operating segments. •
IFRS 2 Amendment – Share-based Payment: Vesting Conditions and Cancellations. •
IFRS 3 Amendment – Business Combinations. •
IAS 1 Amendment – Presentation of Financial Statements. •
IAS 23 Amendment – Borrowing costs. •
IAS 27 Amendment – Consolidated and Separate Financial Statements. •
IAS 32 Amendment – Financial Instruments: Presentation. •
IFRIC 12 Service Concession Arrangement. •
IFRIC 13 Customer Loyalty Programmes. •
IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction. •
The Directors do not anticipate that the adoption of any of the above standards or interpretations will have a material impact on the Group’s
accounts in the period of initial application. However, there may be amendments to these disclosures following completion of the internal review
exercise currently under way in respect of IFRS 8 ‘Operating segments’.
2 Segmental information
A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in
providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are
different from those of other segments. The primary format, business segments, is based on the Group’s management and internal reporting
structure. Inter-segment pricing is determined on an arm’s length basis.
Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable
basis. Unallocated items comprise mainly loans and borrowings and related expenses, corporate assets and head office expenses, and income
tax assets and liabilities. Concateno plc
Annual Report and Accounts 2008 38
2 Segmental information continued
Business segments
The Group comprises the following main business segments:
Laboratory services. •
Point-of-Care testing products. •
Laboratory products. •
Other revenues include training and consultancy work performed for workplace customers. These revenues have been allocated to ‘Point-of-
Care’ and ‘Laboratory services’ in proportion to other work performed for these particular customers.
Results, split by business segment, are presented below.
Laboratory Services Point-of-Care Laboratory Products Eliminations Consolidated
2008 2007 2008 2007 2008 2007 2008 2007 2008 2007
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’00
Total external revenues 24,064 19,080 12,878 4,470 10,532 2,514 – – 47,474 26,064
Inter segment revenues 700 342 1,493 396 105 11 (2,298) (749) – -
Total segment revenues 24,764 19,422 14,371 4,866 10,637 2,525 (2,298) (749) 47,474 26,064
Segment result, before
non-recurring items 6,415 3,1 7 4 2,216 502 1,272 139 – – 9,903 3,815
Non-recurring items (1,546) (568) (471) (20) (99) – – – (2,116) (588)
Segment result, after
non-recurring items 4,869 2,606 1,745 482 1,173 139 – – 7,787 3,227
Unallocated (including
non-recurring) expenses (3,556) (1,252)
Results from operating
activities 4,231 1,975
Net finance costs
(including exceptional
fi nance costs) (4,823) (1,652)
Income tax credit 168 342
Profit/(loss) for the period (424) 665
Non-recurring and
exceptional items 4,535 785
Profit/(loss) for the
period before
non-recurring and
exceptional items 4,111 1,450
Segment assets 84,001 80,705 65,864 59,440 20,477 26,383 – – 170,342 166,528
Unallocated assets 334 1,600
Total assets 170,676 168,128
Segment liabilities 13,263 11,264 8,524 8,166 3,790 4,434 – – 25,577 23,864
Unallocated liabilities 29,079 41,076
Total liabilities 54,656 64,940
Property, plant and
equipment (‘PPE’)
expenditure 1,302 385 267 65 82 10 – – 1,651 460
Unallocated PPE expenditure 3 109
Total PPE capital expenditure 1,654 569
Depreciation 531 464 488 81 206 19 – – 1,225 564
Unallocated depreciation 13 5
Total Depreciation 1,238 569
Amortisation of
intangible assets 1,725 1,478 1,665 640 430 115 – – 3,820 2,233
Intangible asset additions, by business segment, are disclosed in Note 11.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 39
Concateno plc
Annual Report and Accounts 2008
2 Segmental information continued
Geographical segments
The Group’s business segments are managed on a worldwide basis, but operate in two principal geographical areas; the United Kingdom and
Continental Europe (defined here as all European countries apart from the United Kingdom). Continental Europe production facilities/sales
offices are located in Spain (predominantly operating in the Laboratory Products business segment), Sweden (Laboratory Services and
Point-of-care testing products) and Italy (Point-of-care testing products).
In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. This is split
between the United Kingdom, Continental Europe and ‘Rest of World’. Within ‘Rest of World’ are a high proportion of customers who are based in
South America. Segment assets and capital expenditure are based on the geographical location of the assets.
United Kingdom Continental Europe Rest of World Consolidated
2008 2007 2008 2007 2008 2007 2008 2007
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Revenue from external customers 28,331 18,201 10,723 4,982 8,420 2,881 47,474 26,064
Segment assets 154,768 149,804 15,908 18,324 – – 170,676 168,128
Capital expenditure 1,564 506 90 63 – – 1,654 569
3 Non-recurring items
2008 2007
£’000 £’000
Restructuring: Employee costs 1,290 375
Restructuring: Consultancy costs 247 –
Restructuring: Onerous rent 445 –
Restructuring: Other operating costs 197 24
Legal and advisory 662 386
Impairment charge 161 –
3,002 785
Restructuring
Following the various acquisitions during 2007, the Company reviewed the operating structure of the business, as a result of which £1,290,000
(2007: £375,000) was incurred in redundancy and employee integration costs, £247,000 in consultancy, recruitment agency and advisory fees
(2007: £nil) and £197,000 (2007: £24,000) on other one-off restructuring costs associated with the rationalisation of the Group’s laboratories and
restructuring of the sales and marketing structure.
Following the closure of a number of sites across the Group, the delay in sub-letting a number of premises has led to onerous rental costs of
£445,000 (2007: £nil) being incurred. This includes an onerous lease provision of £382,000 held as at 31 December 2008.
Legal and advisory
The non-recurring legal and advisory costs relate to non-routine professional costs incurred during the period:
£25,000 of costs relate to one legal case which is on-going. This provision represents the excess insurance costs to be paid should the case
proceed. In 2007, £20,000 of unrecoverable costs were incurred in relation to two legal cases involving former Group employees. In neither
case were charges upheld against the Group.
£75,000 (2007: £169,000) relates to costs and advisory fees relating to tax enquiries by HMRC that are non-recurring in nature. £285,000
(2007: £nil) was incurred in relation to one-off bank fees. In 2007, £54,000 related to external advice given in relation to the transition to
International Financial Reporting Standards and the review of that advice.
£277,000 (2007: £143,000) relates to charges incurred on completed acquisitions that have not been included as part of the cost of acquisition,
or to fees incurred relating to exploratory work on acquisitions that were not progressed during the year, or to fees in relation to the on-going
strategic review process announced in July 2008.
Impairment charge
Following an impairment review, the value of one particular intangible asset acquired as part of the Cozart acquisition was found to be impaired
as at 31 December 2008. One particular customer contract with a carrying value of £71,000 was written-off in the period as a result (2007: £nil).
Following a revaluation of a property owned by the Group, the carrying value of the property was written down by £90,000 as at the end of
2008 (2007: £nil) Concateno plc
Annual Report and Accounts 2008 40
4 Operating profit
Profit for the year has been arrived at after charging/(crediting):
2008 2007
£’000 £’000
Net foreign exchange gains (815) (85)
Research and development costs 382 59
Depreciation of property, plant and equipment 1,283 757
Amortisation of
– capitalised development costs 161 40
– other intangible assets 3,659 2,193
– debt issue costs 230 162
Loss on disposal of fixed assets – 16
Restructuring costs (included in ‘non-recurring costs’, see Note 3) 2,179 399
(Decrease)/Increase in provisions (see Note 21) (376) 2,270
Staff costs (see Note 6) 11,639 7,533
5 Auditors remuneration
The analysis of auditors’ remuneration is as follows:
2008 2007
£’000 £’000
Audit of these financial statements 50 82
Audit of financial statements of subsidiaries pursuant to legislation 134 148
Other services relating to taxation 140 61
Services relating to corporate finance transactions entered into or proposed
to be entered into by or on behalf of the Company of the Group 85 443
Other services 8 7
417 741
Amounts paid to the Company’s auditor in respect of services to the Company, other than the audit of the Company’s financial statements,
have not been disclosed as the information is required instead to be disclosed on a consolidated basis.
6 Staff costs and numbers
The average monthly number of employees (including Directors) for the Group during the year, analysed by category, was:
2008 2007
Number Number
Production and development 88 27
Laboratory services 83 66
Sales, marketing and distribution 49 39
Administration 118 70
338 202
Their aggregate remuneration comprised:
2008 2007
£’000 £’000
Wages and salaries 9,366 6,305
Share based payments 555 439
Social security costs 1,283 612
Other pension costs 435 177
11,639 7,533
Details regarding Director’s Remuneration is included within the Director’s Remuneration Report on pages 24 to 25.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 41
Concateno plc
Annual Report and Accounts 2008
7 Finance income and expense
2008 2007
£’000 £’000
Interest income 76 377
Interest expense on bank loans and overdrafts (3,259) (2,007)
Ineffective portion of change in fair value of cashflow hedges (82) 3
Finance charges in respect of finance leases and hire purchase contracts (25) (25)
(3,290) (1,652)
Exceptional charge in respect of interest hedge (1,533) –
(4,823) (1,652)
A charge of £1,533,000 (2007: £nil) has been recognised in respect of the fair valuation of a derivative financial instrument previously designated
as an effective hedge. This total charge comprises £184,000 previously recognised in equity and £1,349,000 current year change in fair value.
Under IAS 39, effectiveness testing is undertaken to ascertain whether changes in the fair value of the hedged item are offset by changes in the
fair value of the hedging instrument within a range of 80–125%. The interest rate hedge, details of which are set out in Note 19, as at 31
December 2008 is outside this range and therefore the full charge has been recognised in the Income Statement.
8 Taxation
Recognised in the Income Statement:
2008 2007
£’000 £’000
Current tax:
UK current year tax expense 951 439
Foreign current year tax expense 331 60
Adjustment in respect of prior periods (179) (351)
1,103 148
Deferred tax:
Origination and reversal of temporary timing differences (1,053) (251)
Adjustment due to 2008 rate change – (239)
Adjustment in respect of previous periods (218) –
(1,271) (490)
Total tax in the income statement (168) (342)
Reconciliation of effective tax rate:
The tax charge for the period is lower than the standard rate of corporation tax in the UK (28.5%). The differences are explained below:
Profi t/(loss) before tax (592) 323
Tax using the UK corporation tax rate of 28.5% (2007: 30%) (169) 97
Non-deductible expenses 459 240
R&D tax relief (145) (82)
Prior period adjustments (396) (351)
Tax losses carried forward 124 4
Other tax reliefs – (20)
(Lower)/Higher tax rate on overseas earnings (41) 9
Adjustment due to 2008 rate change – (239)
Total tax in the income statement (168) (342)
Income tax recognised directly in equity:
Relating to share-based payments – 13
Total tax recognised directly in equity – 13 Concateno plc
Annual Report and Accounts 2008 42
9 Earnings/(loss) per share
Earnings/(loss) per share is calculated by dividing the profit/(loss) attributable to ordinary shareholders by the weighted average number of
ordinary shares held during the year.
An adjusted earnings per share figure is also presented below in order to aid users understanding of underlying business performance. This is
calculated by adjusting the profit/(loss) for the year for the post-tax effect of certain items which, the Directors believe, will allow shareholders to
better understand the elements of financial performance in the period, so as to facilitate comparison with prior periods.
Basic Basic
and diluted and diluted
2008 2007
Notes £’000 £’000
For basic and diluted earnings/(loss) per share
Profit/(loss) for the year (424) 665
For adjusted earnings per share
add back intangibles amortisation (post-tax) 11 2,634 1,579
add back non-recurring and exceptional costs (post-tax) 3 3,444 736
add back share-based payments (post-tax) 22 555 357
Adjusted profit for the year 6,209 3,337
Weighted average number of ordinary shares
For basic earnings/(loss) per share 98,054,022 63,020,125
Exercise of share options –
1
912,274
Exercise of warrants –
1
187,309
For diluted earnings/(loss) per share 98,054,022 64,119,708
Basic earnings/(loss) per share (pence per share) (0.43p) 1.05p
Diluted earnings/(loss) per share (pence per share) (0.43p) 1.04p
Reconciliation to adjusted earnings per share: Basic
Impact of intangibles amortisation 2.69p 2.50p
Impact of non-recurring and exceptional costs 3.51p 1.1 7p
Impact of share-based payments 0.57p 0.57p
Adjusted basic earnings per share (pence per share) 6.34p 5.29p
Reconciliation to adjusted earnings per share: Diluted
1
Impact of intangibles amortisation 2.66p 2.45p
Impact of non-recurring and exceptional costs 3.47p 1.15p
Impact of share-based payments 0.56p 0.56p
Adjusted diluted earnings per share (pence per share) 6.26p 5.20p
1 In 2008, the dilutive impact of options over 1,081,702 shares would have formed part of the dilutive calculation but were not included because of the loss-making position of the
Company. However, the dilutive impact of these options (comprising 822,108 share options and 259,594 warrants) still impacts the adjusted dilutive calculation, due to the adjusted
profit-making position of the Company.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 43
Concateno plc
Annual Report and Accounts 2008
10 Acquisitions
During 2007, the Company acquired six companies. Details of finalised fair values in relation to each business combination are presented in
note (i) to (vi) below.
(i) Acquisition of Altrix Healthcare plc
On 5 February 2007, the Group acquired all the shares in Altrix Healthcare plc (‘Altrix’), based in Warrington, at fair value for £14,846,527 in cash
(including acquisition costs and payment for cash acquired). The Company specialises in the provision of drug testing solutions.
From the date of acquisition, Altrix contributed £131,000 of profit after tax to the Group in 2007.
The finalised fair value of net assets acquired was as follows:
Altrix Altrix
Altrix fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 455 – 455
Intangible assets – 5,045 5,045
Inventories 302 – 302
Trade and other receivables 2,101 – 2,101
Cash and cash equivalents 2,434 – 2,434
Trade and other payables (1,479) (6) (1,485)
Deferred tax – (1,514) (1,514)
Net identifiable assets and liabilities 3,813 3,525 7,338
Goodwill on acquisition 7,509
Total purchase cost 14,847
Being: Consideration paid in cash 13,615
Cash paid for acquisition expenses 1,232
14,847
Cash acquired (2,434)
Net cash outflow in respect of purchase 12,413
Acquisition expenses include £300,000 completion bonus paid to Directors.
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£5,045,000), a holiday
accrual at the date of acquisition (£6,000), and recognition of the deferred tax liability relating to intangible assets acquired (£1,514,000).
See Note 11 for details of intangible assets identified on acquisition. The remaining goodwill is chiefly attributable to the value of the customer
base and non-contractual customer relationships which do not fulfil the intangible assets recognition criteria under IFRSs, the profitability of the
business and the significant synergies expected to arise after acquisition.
(ii) Acquisition of TrichoTech Limited
On 31 January 2007, the Group acquired all the shares in TrichoTech Limited (‘TrichoTech’), based in Cardiff, at fair value for £1,337,000 in cash
(including acquisition costs), £1,062,500 in shares and £9,012,500 in loan notes. The Company provides laboratory-based hair testing services
for recreational drug abuse.
From the date of acquisition, TrichoTech contributed £491,000 of profit after tax to the Group in 2007. Concateno plc
Annual Report and Accounts 2008 44
10 Acquisitions continued
The finalised fair value of net assets acquired was as follows:
TrichoTech TrichoTech
TrichoTech fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 577 – 577
Intangible assets – 3,300 3,300
Inventories 39 – 39
Trade and other receivables 698 – 698
Cash and cash equivalents 250 – 250
Interest-bearing loans and borrowings (309) – (309)
Trade and other payables (915) (4) (919)
Deferred tax (23) (990) (1,013)
Net identifiable assets and liabilities 317 2,306 2,623
Goodwill on acquisition 8,789
Total purchase cost 11,412
Consideration paid in shares (817,308 shares at 130p) (1,063)
Consideration paid on loan notes (9,012)
Payments in cash 1,337
Being: Consideration paid in cash 673
Cash paid for acquisition expenses 664
1,337
Cash acquired (249)
Net cash outflow in respect of purchase 1,088
Acquisition expenses include £150,000 completion bonus paid to Directors.
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£3,300,000), a holiday
accrual at the date of acquisition (£4,000), and recognition of the deferred tax liability relating to intangible assets acquired (£990,000).
The loan notes were redeemed in December 2007 (£9,012,000).
See Note 11 for details of intangible assets identified on acquisition. The remaining goodwill is chiefly attributable to the profitability of the
business, the assembled workforce, its market-leading position in the field of hair testing and the significant synergies expected to arise
after acquisition.
(iii) Acquisition of Euromed Limited
On 30 March 2007, the Group acquired all the shares in Euromed Limited (‘Euromed’), based in London, at fair value for £8,758,000 in cash
(including acquisition costs) and £3,750,000 in shares. The Company provides Point-of-Care testing devices for the detection of drugs of abuse
primarily in the criminal justice and rehabilitation sectors.
From the date of acquisition, Euromed contributed £277,000 of profit after tax to the Group in 2007.
The finalised fair value of net assets acquired was as follows:
Euromed Euromed
Euromed fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 12 – 12
Intangible assets – 6,138 6,138
Inventories 597 (417) 180
Trade and other receivables 572 – 572
Cash and cash equivalents 152 – 152
Trade and other payables (585) – (585)
Deferred tax – (1,842) (1,842)
Net identifiable assets and liabilities 748 3,879 4,627
Goodwill on acquisition 7,881
Total purchase cost 12,508
Consideration paid in shares (2,586,207 shares at 145p) (3,750)
Payments in cash 8,758
Being: Consideration paid in cash 7 ,750
Cash paid for acquisition expenses 1,008
8,758
Cash acquired (152)
Net cash outflow in respect of purchase 8,606
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 45
Concateno plc
Annual Report and Accounts 2008
10 Acquisitions continued
Acquisition expenses include £250,000 completion bonus paid to Directors.
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£6,138,000) an
opening provision for the revaluation of stock (£422,000), an amendment to the valuation of stock to bring Euromed in line with Group policy
relating to the absorption of relevant overheads in the closing value of stock held (£5,000) and an opening provision for recognition of deferred
taxation on intangible assets acquired (£1,842,000).
See Note 11 for details of intangible assets identified on acquisition. The remaining goodwill is chiefly attributable to the profitability of the
business, the assembled workforce and the significant synergies expected to arise after acquisition.
(iv) Acquisition of Marconova AB
On 22 May 2007, the Group acquired all the shares in Marconova AB (‘Marconova’), based in Goteborg, Sweden, at fair value for £425,000 in
cash and £1,000,000 in shares. The Company is a specialist in drug and alcohol testing in the international maritime sector and the Swedish
workplace market.
From the date of acquisition, Marconova contributed £121,000 of loss after tax to the Group in 2007.
The finalised fair value of net assets acquired was as follows:
Marconova Marconova
Marconova fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 19 – 19
Intangible assets – 150 150
Purchased goodwill 804 (804) –
Inventories 10 – 10
Trade and other receivables 84 – 84
Trade and other payables (987) – (987)
Deferred tax – (45) (45)
Net identifiable assets and liabilities (70) (699) (769)
Goodwill on acquisition 2,194
Total purchase cost 1,425
Consideration paid in shares (557,725 shares at 179.3p) (1,000)
Payments in cash 425
Being: Consideration paid in cash 376
Cash paid for acquisition expenses 49
425
Cash acquired –
Net cash outflow in respect of purchase 425
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£150,000), the
write-down of own-company goodwill (£804,000) and recognition of the deferred tax liability relating to intangible assets acquired (£45,000).
See Note 11 for details of intangible assets identified on acquisition. The remaining goodwill is chiefly attributable to the value of the customer-
base and non-contractual customer relationships which do not fulfil the intangible assets recognition criteria under IFRSs and the significant
synergies expected to arise after acquisition. Concateno plc
Annual Report and Accounts 2008 46
10 Acquisitions continued
(v) Acquisition of CPL International Services Limited
On 13 July 2007, the Group acquired all the shares in CPL International Services Limited (‘CPL ’), based in Liverpool, at fair value for £795,000 in
cash and £84,000 in shares. The Company provides drug testing services in the medico-legal and international maritime sectors.
From the date of acquisition, CPL contributed £28,000 of profit after tax to the Group in 2007.
The finalised fair value of net assets acquired was as follows:
CPL CPL
CPL fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 282 – 282
Intangible assets – 158 158
Inventories 2 – 2
Trade and other receivables 107 16 123
Cash and cash equivalents 14 – 14
Trade and other payables (37) – (37)
Deferred tax – (44) (44)
Net identifiable assets and liabilities 368 130 498
Goodwill on acquisition 381
Total purchase cost 879
Consideration paid in shares (50,150 shares at 167.5p) (84)
Payments in cash 795
Being: Consideration paid in cash 659
Cash paid for acquisition expenses 136
795
Cash acquired (14)
Net cash outflow in respect of purchase 781
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£158,000), and
recognition of the deferred tax liability relating to intangible assets acquired (£44,000).
See Note 11 for details of intangible assets identified on acquisition. The goodwill is chiefly attributable to the profitability of the business and the
significant synergies expected to arise after acquisition.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 47
Concateno plc
Annual Report and Accounts 2008
10 Acquisitions continued
(vi) Acquisition of Cozart plc
On 4 October 2007, the Group acquired all the shares (issued and to be issued) in Cozart plc (‘Cozart’), based in Abingdon, at fair value for
£67,413,000 in cash (including acquisition costs) and £1,778,000 in shares. The Company is a specialist in the field of drugs-of-abuse testing
with a portfolio of Laboratory services, Point-of-Care products and Laboratory products to offer its customers (who include those in the
workplace, medical and criminal justice markets worldwide).
From the date of acquisition, Cozart contributed £376,000 of profit after tax to the Group in 2007.
The finalised fair value of net assets acquired was as follows:
Cozart Cozart
Cozart fair value fair value to
Book value adjustment the Group
£’000 £’000 £’000
Property, plant and equipment 1,912 – 1,912
Capitalised development costs 1,212 – 1,212
Intangible assets acquired – 22,468 22,468
Inventories 2,895 – 2,895
Trade and other receivables 7 ,089 (65) 7 ,024
Cash and cash equivalents 2,826 – 2,826
Deferred tax asset 581 – 581
Trade and other payables (6,942) (151) (7 ,093)
Loans and borrowings (3,825) – (3,825)
Deferred tax liability – (6,290) (6,290)
Net identifiable assets and liabilities 5,748 15,962 21,710
Goodwill on acquisition 47,481
Total purchase cost 69,191
Consideration paid in shares (1,369,013 shares at 130p) (1,778)
Payments in cash 67,413
Being: Consideration paid in cash 64,863
Cash paid for acquisition expenses 2,550
67,413
Cash acquired (2,826)
Net cash outflow in respect of purchase 64,587
Acquisition expenses include £350,000 completion bonus paid to Directors.
The fair value adjustments above relate to recognition of intangible assets acquired as part of the business combination (£22,468,000), a
holiday-pay accrual at the date of acquisition (£21,000), increased bad debt provision at the date of acquisition (£65,000), an adjustment to the
valuation of a deferred consideration provision at the date of acquisition (£130,000) and recognition of the deferred tax liability relating to
intangible assets acquired (£6,290,000).
See Note 11 for details of intangible assets identified on acquisition. The remaining value of goodwill relates to other intangible assets not
identified under IFRS 3 chiefly being the following;
The value of the customer-base and non-contractual customer relationships which do not fulfil the intangible assets recognition criteria •
under IFRS 3.
Strategic premium, geographical positioning, market share and market leadership associated with the business. •
The contribution of the assembled workforce. •
Benefits derived from economies of scale. • Concateno plc
Annual Report and Accounts 2008 48
11 Goodwill and other intangible fixed assets
Development Customer Customer Commercial Patents and
Goodwill costs relationships contracts agreements trade marks Total
£’000 £’000 £’000 £’000 £’000 £’000 £’000
Cost
At 1 January 2007 23,440 – 5,793 – – 4,035 33,268
Acquisitions through
business combinations 74,498 1,212 12,219 714 6,469 17 ,860 112,972
Other additions 247 247
At 31 December 2007 and 1 January 2008 97,938 1,459 18,012 714 6,469 21,895 146,487
Adjustments to fair value of prior year acquisitions 397 – – – – – 397
Additions – 1,125 – – – 9 1,134
At 31 December 2008 98,335 2,584 18,012 714 6,469 21,904 148,018
Amortisation
At 1 January 2007 – – 56 – – 77 133
Amortisation for the year – 40 962 21 139 1,071 2,233
At 31 December 2007 and 1 January 2008 – 40 1,018 21 139 1,148 2,366
Amortisation for the year – 161 1,361 84 555 1,659 3,820
Impairment – – 71 – – – 71
At 31 December 2008 – 201 2,450 105 694 2,807 6,257
Carrying amounts
At 1 January 2007 23,440 – 5,737 – – 3,958 33,135
At 31 December 2007 and 1 January 2008 97 ,938 1,419 16,994 693 6,330 20,747 144,121
At 31 December 2008 98,335 2,383 15,562 609 5,775 19,097 141,761
Impairment testing for cash-generating units containing goodwill
Goodwill arising on a business combination is allocated at acquisition to the cash generating units (‘CGUs’) that are acquired and is
denominated in the functional currency of the CGU.
The Group reviews and tests goodwill for impairment on an annual basis, on 31 December each year, or more frequently in the event that there
are any indications that it may have been impaired.
The Group compares the carrying amount and the recoverable amount in its testing for impairment. The recoverable amount of the CGU is
determined from value-in-use calculations. These calculations include assumptions in respect of forecast selling prices, forecast raw material
and other direct costs, forecast exchange rates affecting the currencies in which transactions of the CGU are made, revenue growth rates and
the discount rate. Each of these assumptions is included in the detailed plans prepared by management which support the impairment review.
The calculations are based on the actual operating results and the most recent budget and forecast business plan for the three years ending 31
December 2011. A further 14 years of projected cash flows are incorporated using an estimated annual growth rate and a terminal value is used
thereafter, where appropriate, which reflects management’s assessment of the long-term average growth rate for the Group’s products and
services and the geographies it currently operates in and plans to operate in. This internal work was benchmarked against external market
analysis recently carried out which gave additional third-party verification for management’s growth assumptions.
Management estimate discount rates by reference to current market assessments of the time value of money adjusted by the specific risks of
the CGU being measured. The discount rates used were also amended according to the conditions relating to each specific business unit
operating within that CGU, where relevant. This particularly impacts the Point-of-Care CGU which includes forecast cashflows associated with a
range of technologies, some of which are less proven in the market than others, and hence have a higher risk-factor associated with them (as
well as a higher growth rate in the early years post-launch).
Growth rates from year four and discount rates applied, by CGU, are summarised in the table below. Within each CGU, the Group offers a
range of products and services. The growth rates disclosed include the highest and lowest growth rates forecast within each unit. Volume and
pricing assumptions made are a reflection of the latest market-data available and include an increased geographical spread, particularly with
regard to new products being launched in the Point-of-Care testing CGU. As mentioned above, this also has been considered in the discount-
rate applied to these particular cashflows. Changes to selling prices, raw materials, and other direct costs are based on past experience and
management expectations of future market changes.
Laboratory Point-of-Care Laboratory
Services Testing Products
Growth rate: From year 4: 2008 8 to 0% 10 to 4% 6 to 3%
From year 4: 2007 8 to 2% 11 to 4% 6 to 0%
Discount rate (pre-tax): 2008 15.4% 15.4%/25.7% 16.8%
2007 15.6% 15.0%–16.3% 16.0%
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 49
Concateno plc
Annual Report and Accounts 2008
11 Goodwill and other intangible fixed assets continued
Whilst management is confident that its assumptions are appropriate in light of circumstances at the time of review, it is possible that
circumstances may change. With the exception of the Laboratory Products CGU, the recoverable amounts calculated on the above basis
significantly exceed the carrying values of the cash generating units that includes goodwill and working capital to the extent that the
assumptions made would need to change by a significant amount to eliminate the surplus. For the Laboratory Products CGU, an increase of
2% in the post-tax discount rate would lead to an impairment of £1,027,000. However, management are satisfied that both the growth rates and
discount rates assumed in this sector are not aggressive and therefore sufficient headroom exists.
The Goodwill by CGUs comprises:
2008 2007
£’000 £’000
Laboratory services 48,798 48,699
Point-of-Care testing 36,631 36,425
Laboratory products 12,906 12,814
98,335 97,938
Recoverability of development costs
There are two development projects which make up the ‘development costs’ intangible asset; the Cozart
®
DDS system and the Cozart-Philips
system development project.
The Cozart
®
DDS system was launched in July 2006 and has been amortised since the commencement of commercial production at that time.
There have been no indications that the current carrying value of this asset is impaired.
The Cozart-Philips development project is on-going and commercial production has not yet begun. Accordingly, no amortisation has yet been
charged. The carrying amount of this intangible asset is supported by the future cash flows which are forecast to be generated from sale of this
product when it is launched. Forecast cashflows from the point of launch of the product are such that the current carrying value of this asset is
fully supportable.
The Cozart-Philips project does not meet the definition of a Joint Venture, according to the terms set out in IAS 31, and has therefore not been
accounted for as such.
Intangible assets acquired as a result of acquisitions
Intangible assets acquired as a result of the acquisitions detailed in Note 10 are summarised below:
Customer Customer Commercial Patents and
relationships contracts agreements trademarks Total
£’000 £’000 £’000 £’000 £’000
Laboratory services 10,763 – – 10,320 21,083
Point-of-Care testing 5,243 714 6,469 9,448 21,874
Laboratory products 2,006 – – 2,127 4,133
18,012 714 6,469 21,895 47,090
Impairment loss (71)
Cumulative Amortisation (including impact of any impairment) (5,985)
Net book value at 31 December 2008 41,034
Intangible assets acquired are allocated at acquisition to the CGUs that are acquired and are denominated in the functional currency of
the CGU.
The carrying amount of each asset is reviewed at least annually to ensure there are no indications of impairment. An impairment loss would be
recognised whenever the carrying amount of the asset or its CGU exceeds its recoverable amount. One asset was found to be impaired due to
the loss of a contract in the year to 31 December 2008, accordingly, £71,000 impairment losses (cost of £87,000, amortisation impact £16,000)
have been recognised. Concateno plc
Annual Report and Accounts 2008 50
12 Property, plant and equipment
Land and Plant and
buildings machinery Total
£’000 £’000 £’000
Cost
At 1 January 2007 15 376 391
Acquisitions through business combinations 602 2,645 3,247
Other additions 71 498 569
Disposals (2) (202) (204)
At 31 December 2007 and 1 January 2008 686 3,317 4,003
Acquisitions through business combinations – – –
Other additions 224 1,430 1,654
Disposals – (45) (45)
At 31 December 2008 910 4,702 5,612
Depreciation
At 1 January 2007 1 23 24
Depreciation for the year 146 611 757
Disposals – (188) (188)
At 31 December 2007 and 1 January 2008 147 446 593
Depreciation for the year 52 1,231 1,283
Impairment loss 90 – 90
Disposals – (45) (45)
At 31 December 2008 289 1,632 1,921
Carrying amounts
At 1 January 2007 14 353 367
At 31 December 2007 and 1 January 2008 539 2,871 3,410
At 31 December 2008 621 3,070 3,691
Impairment
An impairment loss of £90,000 was recognised during the year following building-revaluation carried out. See Note 3.
Leased plant and machinery
Included in the above table are assets held under finance leases as follows:
2008 2007
£’000 £’000
Plant and machinery
Carrying value 270 490
Depreciation 95 95
Motor vehicles
Carrying value 2 10
Depreciation 1 2
Security
At 31 December 2008 UK and Spanish-based fixed assets of the Group with a carrying amount of £25,001,000 (2007: £28,750,000) are subject
to a registered debenture to secure the term loan (see Note 18).
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 51
Concateno plc
Annual Report and Accounts 2008
13 Deferred tax assets and liabilities
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Assets Liabilities Net
2008 2007 2008 2007 2008 2007
£’000 £’000 £’000 £’000 £’000 £’000
Property, plant and equipment (339) (193) 145 96 (194) (97)
Intangible assets – – 11,437 12,533 11,437 12,533
Share-based payments (33) (104) – – (33) (104)
Other temporary differences 20 (96) – – 20 (96)
Derivative contracts (429) – (429) –
Tax loss carry forwards (300) (465) – – (300) (465)
Tax (assets)/liabilities (1,081) (858) 11,582 12,629 10,501 11,771
Movements in temporary differences have been as follows:
Balance Impact Acquired in Balance
1 January Recognised of 2008 Recognised business 31 December
2007 in income rate change in equity combinations 2007
£’000 £’000 £’000 £’000 £’000 £’000
Property, plant and equipment – (114) – – 17 (97)
Intangible assets 2,715 (614) (293) – 10,725 12,533
Share-based payments (10) (82) 1 (13) – (104)
Other temporary differences – (18) – – (78) (96)
Tax loss carry forwards – 577 53 – (1,095) (465)
2,705 (251) (239) (13) 9,569 11,771
Balance Balance
1 January Recognised Recognised Prior year 31 December
2008 in income in equity adjustments 2008
£’000 £’000 £’000 £’000 £’000
Property, plant and equipment – asset (192) 9 – (155) (338)
Property, plant and equipment – liability 95 49 144
Intangible assets 12,533 (1,013) – (83) 11,437
Share-based payments (104) 71 – (33)
Other temporary difference (96) (40) – 156 20
Derivative contracts – (429) – – (429)
Tax loss carry forwards (465) 300 – (135) (300)
11,771 (1,053) – (217) 10,501
At the balance sheet date, the Group has unutilised gross tax losses of approximately £4,720,953 (2007: £4,988,736) potentially available for
offset against future taxable profits. A deferred tax asset of £300,412 (2007: £465,104) has been recognised in respect of £1,072,899 (2007:
£1,661,086) of gross trading losses. No deferred tax asset has been recognised in respect of the remaining £3,648,054 (2007: £3,327,650) of
gross losses, as these are not expected to be recovered in the foreseeable future. Concateno plc
Annual Report and Accounts 2008 52
14 Inventories
2008 2007
£’000 £’000
Raw materials and consumables 2,839 2,217
Finished goods and goods for resale 2,159 1,728
Less: provisions against obsolete and excess stock (63) (90)
4,935 3,855
15 Trade and other receivables
2008 2007
£’000 £’000
Trade receivables 12,876 9,577
Other debtors, prepayments and accrued income 1,836 2,242
14,712 11,819
For detail regarding the deferred tax asset, see Note 13.
At 31 December 2008 trade receivables are shown net of allowances for doubtful debts of £1,165,000 (2007: £800,000). The majority of this
provision has been made in relation to trading with non-UK Laboratory-services customers (this division having been acquired towards the end
of 2007) based on experience of customer’s payment track-record. The Group monitors debtor payment profiles closely and credit policies are
in place which aim to reduce the Group’s exposure.
Receivables denominated in currencies other than the functional currency comprise £2,734,000 of trade receivables denominated in US Dollars
(2007: £1,748,000) and £404,000 of trade receivables denominated in Euros (2007: £679,000), £44,000 (2007: £nil) denominated in Swedish
Krona and £25,000 (2007: £nil) denominated in Australian Dollars.
16 Derivative financial instruments
Current Non-current
2008 2007 2008 2007
£’000 £’000 £’000 £’000
Derivatives that are designated and effective as hedging instruments carried at fair value
Interest rate swaps – (184) – –
Derivatives that are held at fair value through profit or loss (or designated as such)
Forward foreign currency contracts – 3 – –
Interest rate swaps (1,612)
(1,612) (181) – –
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to
hedge transactions that have not yet occurred. £184,000 has been credited to the hedging reserve following re-designation of a previously
effective hedge out of equity in the period. This charge (£184,000) together with the change in fair value in respect of this particular interest
swap during the year (£1,349,000) has been recognised in the income statement for the year ended 31 December 2008 as an exceptional item.
A charge of £82,000 has also been recognised in the income statement for the year ended 31 December 2008 in respect of another derivative
not designated as being held at fair value through profit or loss (recognised as a finance cost).
Further details of derivative financial instruments are provided in Note 19.
17 Cash and cash equivalents
2008 2007
£’000 £’000
Cash and cash equivalents 4,292 3,888
Bank overdrafts (2,965) (1,685)
Cash and cash equivalents in the statement of cash flows 1,327 2,203
Cash and cash equivalents comprise bank deposits and cash in hand.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 53
Concateno plc
Annual Report and Accounts 2008
18 Loans and borrowings
This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about
the Group’s exposure to interest rate, liquidity, and foreign currency risk, see Note 19.
2008 2007
£’000 £’000
Current liabilities
Current portion of secured bank loans 24,737 3,521
Current portion of other unsecured loans 273 197
Current portion of finance lease liabilities 100 213
25,110 3,931
Non-current liabilities
Secured bank loans – 24,737
Convertible loans – 8,343
Other loans 221 352
Finance lease liabilities 105 219
326 33,651
25,436 37,582
Debt costs arising on arranging the debt facilities are being amortised over the life of the loans to which they relate. As at 31 December 2008,
the unamortised element amounted to £263,000 (2007: £492,000). The balances disclosed above are net of these unamortised debt costs.
In addition to the 2007 amounts disclosed above, the derivative element of a convertible financial loan instrument was valued at £417,102 at the
date of issue. This derivative element did not fully meet the definition of a component of equity and was therefore held as a current liability on
the Balance Sheet at the time the loan was in place. This loan was converted during 2008. The carrying value of the loan to which it related is
therefore £nil as at 31 December 2008 (2007: £8,343,000).
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
31 December 2008 31 December 2007
Nominal Face Carrying Face Carrying
Interest rate Year of Value amount value amount
Currency % maturity £’000 £’000 £’000 £’000
Secured bank loan GBP 6.21
1
2008 – – 3,750 3,521
2009 25,001 24,737 25,000 24,737
Convertible loan GBP 12.5 2009 – – 8,720 8,343
Unsecured other loan Euro 0 2008 – – 109 109
2009 273 273 380 380
2010–2012 221 221 60 60
Finance lease liabilities GBP 5.8–8 2009–2012 226 205 432 432
25,721 25,436 38,45 1 37,582
1 The effective interest rate changes with the underlying LIBOR rate (being set as three month LIBOR + 3% margin), but is correct as at 31 December 2008. See Note 19 for
further details.
The bank loans are secured over the assets of the holding company and all subsidiaries and security be created over shares or quotes in the
capital of all companies that fall within the Concateno Group with a carrying amount of £25.0m (2007: £28.8m).
The Group is subject to quarterly covenant reviews by the bank in connection with its secured bank loan. The covenants reviewed are in
respect of gross leverage, interest cover, cashflow cover and capital expenditure. There were no breaches during 2008 and no breaches
forecast in 2009.
The secured bank loan is disclosed as falling due within one year even though refinancing negotiations are currently under way.
The secured bank loan is repayable in tranches. Repayment dates, as they currently stand, and amounts to be repaid (at face value) are
summarised below:
Tranche A Tranche B Tranche C Tranche D Total
Repayment Date £’000 £’000 £’000 £’000 £’000
31 Mar 09 500 167 167 625 1,459
30 Jun 09 500 167 167 625 1,459
30 Sep 09 500 167 167 625 1,459
31 Dec 09 5,250 1,750 1,750 11,874 20,624
6,750 2,251 2,251 13,749 25,001
See Financial Review on pages 13 to 15 for further detail on term loan refinancing. Concateno plc
Annual Report and Accounts 2008 54
18 Loans and borrowings continued
Finance lease liabilities
Finance lease liabilities are payable as follows:
Minimum Minimum
lease lease
payments Interest Principal payments Interest Principal
2008 2008 2008 2007 2007 2007
£’000 £’000 £’000 £’000 £’000 £’000
Less than one year 112 12 100 213 24 189
Between one and five years 114 9 105 219 21 198
More than five years – – – – – –
226 21 205 432 45 387
19 Financial instruments
The Group’s principal financial instruments comprise bank loans, convertible loan instruments, cash and short-term deposits, the main purpose
of which is to provide finance for the Group’s operations. The Group has other financial assets and liabilities such as trade receivables and trade
payables, which arise directly from its operations. The Group also enters into derivative transactions, including principally interest rates collars
and forward currency contracts.
The Group’s policies relating to financial risk management are set out in the Directors’ Report on page 20.
Credit risk
Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The Group operates a credit review
process for all potential customers on a case-by-case basis and reviews the aging of debts on a regular basis with reports reviewed by the
Board on a monthly basis.
The Group limits its exposure to credit risk by only investing in liquid securities and only with counterparties with AAA credit rating. The Group
does not require collateral in respect of financial assets.
At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the
carrying amount of each financial asset, including derivatives in the balance sheet.
Interest rate risk
The Group’s interest rate risk relates primarily to the Group’s long-term debt obligations with a floating interest rate. The Group’s policy is to
reduce the interest rate risk by entering into interest rate hedges on at least 70% of its variable rate interest borrowings.
During 2007 the Group entered into an interest rate hedge that caps the variable rate of interest payable on 75% of the Group’s Term loans to
LIBOR at 6.5%, with a floor set at 3.73%. If LIBOR falls below 3.73% in any calendar quarter a strike rate of 5.75% is payable on the hedged
borrowings in that quarter. The interest rate hedge expires on 31 December 2014 and reduces during that period to match 75% of the
scheduled underlying bank debt outstanding at each calendar quarter end. Payments of the interest rate hedges have been set up in order to
match the dates on which the interest payments on the underlying borrowings are due for payment.
Note 18 summarises the nature of the Group’s exposure to underlying fixed rate and variable borrowings. The table below shows the value of
interest rate hedges on the underlying variable rate borrowings at the end of each financial year.
Value of hedge
£’000
31 December 2008 18,750
31 December 2009 14,905
31 December 2010 12,655
31 December 2011 10,406
31 December 2012 8,155
31 December 2013 5,905
31 December 2014 –
In May 2008 the Group entered into an interest rate swap instrument over £20m of the Barclays Term loan facility to run from 30 June 2008 to
30 June 2009. The effect of this instrument was to enter into a basis swap to pay interest on the £20m on one-month LIBOR rather than
three-month LIBOR. The benefit of this was to reduce the interest charge over the period by approximately 9 basis points.
Based on the gross interest bearing debt and interest rate derivatives existing at 31 December 2008, a parallel upward shift in yield curves of
1% would reduce the Group’s annualised loss before tax by £282,000.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 55
Concateno plc
Annual Report and Accounts 2008
19 Financial instruments continued
Liquidity risk
The Group aims to mitigate liquidity risk by managing the cash generation of its operations. The Group’s liquidity risk arises from timing
differences between cash inflows and outflows. The Group manages these risks through a centralised treasury function and through committed
credit facilities.
At 31 December the Group had in place a committed credit facility in place of £2m for working capital purposes. This facility was not utilised at
31 December 2008.
Foreign currency risk
The Group is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than the
respective functional currencies of Group entities. The currencies giving rise to this risk are primarily Euros and US Dollars.
The Group reviews its exposure to foreign currency risk in respect of forecast sales and purchases over the medium term. The Group is in the
main internally hedged in respect of inflows and outflows of US Dollars and Euros.
The Group had no foreign exchange hedge instruments in place at 31 December 2008.
Forecast transactions
The Group classifies its forward exchange contracts and hedging forecast transactions as cash flow hedges. The net fair value of forward
exchange contract at 31 December 2008 was £(1,612,000) (2007: £(181,000)), comprising assets of £nil (2007: £3,000) and liabilities of
£1,612,000 (2007: £184,000).
20 Trade and other payables
2008 2007
£’000 £’000
Trade payables 4,734 3,994
Non trade payables 1,778 1,404
Accruals and deferred income 3,217 3,494
9,729 8,892
Payables denominated in currencies other than the functional currency comprise £1,076,000 of trade payables denominated in US Dollars
(2007: £576,000), £83,000 trade payables in Euros (2007: £42,000), £84,000 in Japanese Yen (2007: £10,000) and £nil in Swedish Krona (2007:
£5,000).
21 Provisions for liabilities and charges
Deferred &
Rental Onerous Legal Redundancy contingent
provision Lease & Advisory provision consideration Total
£’000 £’000 £’000 £’000 £’000 £’000
Balance at 1 January 2007 – – – – – –
Acquired in a business combination 705 – 165 – 1,425 2,295
Provisions used during the period (25) – – – – (25)
At 31 December 2007 and 1 January 2008 680 – 165 – 1,425 2,270
Provisions made during the period – 445 563 129 – 1,137
Provisions used during the period (101) (63) – – (1,349) (1,513)
At 31 December 2008 579 382 728 129 76 1,894
Current 101 86 728 129 76 1,120
Non-current 478 296 – – – 774
At 31 December 2008 579 382 728 129 76 1,894
Rental provision
On the acquisition of Cozart plc, a provision for £705,000 was made in respect of the spreading of rental costs on one of the Group’s buildings.
This provision will be released over the remaining life of the building’s operating lease (until 2014).
Onerous lease provision
As part of the integration exercise undertaken during the year, the Group vacated a number of properties. A provision of £382,000 (2007: £nil)
has therefore been made for the remaining duration of the lease agreement in relation to the portion of this property which remains unused and
un-let (£41,000 until 2011 with the remainder until 2014).
Legal and Advisory
A provision of £728,000 (2007: £165,000) has been made for the best estimate of costs and advisory costs expected to be incurred in relation
to various enquiries which had not been concluded at the year-end.
Redundancy provision
Five redundancies were announced prior to the end of 2008 as a result of site closure and team restructuring in the UK. A provision of £129,000
(2007: £nil) has been booked in relation to the cost of these redundancies. Concateno plc
Annual Report and Accounts 2008 56
21 Provisions for liabilities and charges continued
Deferred consideration
In 2007, £1,025,000 was provided for in relation to deferred consideration which is payable to the vendors of Spinreact SA in September 2008.
This was settled in the period. Spinreact is a subsidiary of Cozart plc who Concateno acquired during 2007.
Contingent consideration
£76,000 (2007: £400,000) is expected to become payable to the vendors of Nemesis Scientific Limited in March 2008. There are performance
conditions attached to the award of this deferred consideration. Management believe that these performance conditions will be met and,
therefore, that the whole of the deferred consideration will fall due.
22 Capital and reserves
Share
Share premium Hedging Merger Translation Retained
capital account reserve reserve reserve earnings Total
£’000 £’000 £’000 £’000 £’000 £’000 £’000
Balance at 1 January 2007 2,794 20,008 – 706 – (1,252) 22,256
Issue of ordinary shares 6,722 73,233 – 7 ,138 – (4,381) 82,712
Cost of share issue – (3,488) – – – – (3,488)
Exercise of share options 14 122 – – – – 136
Share-based payment in respect of employee options – – – – – 439 439
Share-based payment in respect of third-party warrant – – – – – 354 354
Total recognised income and expense – – (184) – 298 665 779
At 31 December 2007 and 1 January 2008 9,530 89,875 (184) 7,844 298 (4,175) 103,188
Issue of ordinary shares 15 185 – – – – 200
Conversion of loan 1,059 9,011 – – – – 10,070
Exercise of share options 10 75 – – – – 85
Share-based payments in respect of employee options – – – – – 555 555
Total recognised income and expense – – 184 – 2,162 (424) 1,922
At 31 December 2008 10,614 99,146 – 7,844 2,460 (4,044) 116,020
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to
hedge transactions that have not yet occurred.
Merger reserve
The merger reserve contains the premium on shares issued as consideration for business combinations during the period.
Translation reserve
The translations reserve comprises all foreign currency differences arising from the translation of the financial statement of foreign operations.
2008 2007
£’000 £’000
Authorised share capital
150,050,000 ordinary shares of £0.10 each (2007: 150,050,000 shares) 15,005 15,005
Allotted, called up and fully paid
106,139,707 ordinary shares of £0.10 each (2007: 95,299,415 shares) 10,614 9,530
During the year the following ordinary shares of £0.10 were issued by the Company in respect of share options:
Total nominal Total share Total
Number of value premium consideration
shares £’000 £’000 £’000
Exercise of share options 102,277 10 75 85
23 Employee benefits
Defined contribution plans
The Group operates defined contribution retirement benefit plans for all qualifying employees. The assets of the scheme are held separately
from those of the Group. Contributions of £48,000 (2007: £15,000) were outstanding at the end of the year. The charge to the income statement
representing the contribution payable by the Group was £381,000 (2007: £177,000).
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 57
Concateno plc
Annual Report and Accounts 2008
24 Share options and warrants
Share options
The Group operates an Enterprise Management Incentive (‘EMI’) share option scheme and an Employee Benefit Trust Incentive Scheme (‘EBT’)
as a means of encouraging ownership and aligning interests of staff and external shareholders. Share options are granted at the discretion of
the Remuneration Committee taking into account the need to motivate, retain and recruit high calibre employees. Share options are granted at
the closing mid-market value of the Company’s ordinary shares on the day prior to grant, or where the Remuneration Committee consider that
the share options are issued further to an acquisition event they are granted at the share price pertaining to that acquisition event.
Options have been granted over £0.10 ordinary shares as follows:
EMI EBT
Number Number
At 31 December 2007 1,137 ,250 2,537 ,759
Granted during the year 622,116 2,352,884
Exercised during the year ` (68,027) –
Lapsed during the year (204,081) (659,864)
At 31 December 2008 1,487,258 4,230,779
As at 31 December 2008, the outstanding share options, which include the share options granted to Directors as stated in the Directors’
Remuneration Report, are shown below.
At At
1 January Options Options Options 31 Dec
2008 granted exercised lapsed 2008 Date Exercise Exercise Expiry
Class Number Number Number Number Number granted price (p) date date
Enterprise Management Incentive share option (10p ordinary shares):
A 262,498 – – – 262,498 07/11/2006 85 07/11/2009 07/11/2016
B 262,498 – – – 262,498 07/11/2006 85 07/11/2009 07/11/2016
C 306,127 – 34,014 102,042 170,071 05/04/2007 100–145 05/04/2010 05/04/2017
C – 299,805 – – 299,805 21/01/2008 130 21/01/201 1 21/01/2018
C – 11,250 – – 11,250 12/06/2008 130 12/06/201 1 12/06/2018
D 306,127 – 34,013 102,039 170,075 05/04/2007 100–145 05/04/2010 05/04/2017
D – 299,811 – – 299,811 21/01/2008 130 21/01/201 1 21/01/2018
D – 11,250 – – 11,250 12/06/2008 130 12/06/2011 11/06/2018
Total 1,137 ,250 622,116 68,027 204,081 1,487,258
Options issued to SG Hambros Trust Company (Channel Islands) Limited, as trustee of a trust of which employees and certain of their
relatives are potential beneficiaries, holds the following options under the Employee Benefit Trust Incentive Scheme:
A 900,000 – – – 900,000 06/11/2006 86 06/11/2009 06/11/2016
B 900,002 – – – 900,002 06/11/2006 86 06/11/2009 06/11/2013
C 368,879 – – 279,931 88,948 05/04/2007 147 05/04/2010 05/04/2014
D 368,878 – - 279,933 88,945 05/04/2007 147 05/04/2010 05/04/2014
E – 1,176,442 – 50,000 1,126,442 12/06/2008 142 12/06/201 1 12/06/2015
F – 1,176,442 – 50,000 1,126,442 12/06/2008 142 12/06/201 1 12/06/2015
2,537 ,759 2,352,884 – 659,864 4,230,779
The weighted average share price at the date of exercise for options exercised during the year was 146p (2007: 120p).
There are certain performance criteria to be met before share options are exercisable:
EMI Option classes A, C and E are exercisable after holders satisfy a period of three years continuous service from the date of the grant of
the option.
EMI Option class B and EBT Class B options are exercisable after holders or employees beneficiaries satisfy a period of three years continuous
service, subject to the 30 day average mid market share price of an ordinary share being equal to, or greater than, 133% of the placing price of
shares at 6 November (acquisition of Medscreen) and before the tenth anniversary of that date. The placing price of shares on 6 November
2006 was 85p.
EMI Class D, EBT Class D and EBT Class F options are exercisable after holders satisfy a period of three years continuous service, subject to
the 30 day average mid market share price of an ordinary share being equal to, or greater than, 200p at any time during the exercise period.
The shares issued to the Employee Benefit Trust will be held on the following terms:
In the event that there is a Change of Control, as defined in the Share Plan and generally subject to the Rules of the Plan as to Vesting and
when Shares Vest, prior to the seventh anniversary of the date of Acquisition of the Shares, the Shares shall Vest as follows:
(i) If the Exit Price is £2.75 or more the Shares shall Vest in full;
(ii) If the Exit Price is £2.50 or more but less than £2.75 the Shares shall Vest as to three-quarters;
(iii) If the Exit Price is £2.25 or more but less than £2.50 the Shares shall Vest as to half;
(iv) If the Exit Price is below £2.25 then no Shares shall Vest.
The above conditions are based on the performance of a Share price at a Change of Control and shall constitute the Performance Condition. Concateno plc
Annual Report and Accounts 2008 58
24 Share options and warrants continued
The Exit Price is the value per share to be obtained by a holder as a result of the Change of Control and as calculated by the Directors of the
Company and communicated to the Trustee. The Trustee shall be entitled to rely on the Director’s Exit Price. In the event there is a
reorganisation etc. involving the Company which, in the opinion of the Directors, renders the hurdle Exit Prices of £2.25, £2.50 and £2.75
inappropriate for the purposes of Vesting, then the Directors shall fairly adjust the hurdle Exit Prices so that the Performance Condition, in terms
of achievability, remains constant.
EMI and EBT Option assumptions
The options pricing model used was the binomial model. The inputs to this model were:
Vesting period (years) 3.0
Expected volatility 30%
Option life (years) 7
Expected life (years) 3
Risk free rate 5.25%/4.60%
Expected dividends expressed as dividend yield 0%
Options issued to employees under EMI Scheme
Share price Exercise Shares Vesting Expected
Grant at grant price at Number of under option Fair period share price Expected Risk-free
Class date date (p) grant date (p) employees at grant value (p) (years) volatility (%) life rate (%)
A 07/11/2006 85.0 85.0 9 262,498 28.2 3.00 30 3 5.25
B 07/11/2006 85.0 85.0 9 262,498 28.2 3.00 30 3 5.25
C – Altrix Tranche 05/04/2007 147.0 100.0 2 68,027 64.2 3.00 30 3 4.60
C – TrichoTech Tranche 05/04/2007 147.0 130.0 3 102,043 42.6 3.00 30 3 4.60
C – Euromed Tranche 05/04/2007 147.0 145.0 4 136,057 42.2 3.00 30 3 4.60
C – Cozart Tranche 21/01/2008 115.5 130.0 10 299,805 26.0 3.00 30 3 4.53
C – Cozart Tranche 12/06/2008 147.5 130.0 3 11,250 49.9 3.00 30 3 5.06
D – Altrix Tranche 05/04/2007 147.0 100.0 2 68,027 64.2 3.00 30 3 4.60
D – TrichoTech Tranche 05/04/2007 147.0 130.0 3 102,043 42.6 3.00 30 3 4.60
D – Euromed Tranche 05/04/2007 147.0 145.0 4 136,057 42.2 3.00 30 3 4.60
D – Cozart Tranche 05/04/2007 115.5 130.0 10 299,811 26.0 3.00 30 3 4.53
D – Cozart Tranche 05/04/2007 147.5 130.0 3 11,250 49.9 3.00 30 3 5.06
Options issued to SG Hambros Trust Company (Channel Islands) Limited, as trustee of a trust of which employees and certain of their
relatives are potential beneficiaries, holds the following options under EBT Scheme
Share price Exercise Shares Vesting Expected
Grant at grant price at Number of under option Fair period share price Expected Risk-free
Class date date (p) grant date (p) employees at grant value (p) (years) volatility (%) life rate (%)
A 06/11/2006 86.0 86.0 4 900,000 28.7 3.00 30 3 5.25
B 06/11/2006 86.0 86.0 4 900,002 28.2 3.00 30 3 5.25
C 05/04/2007 147.0 147.0 9 368,879 41.4 3.00 30 3 4.60
D 05/04/2007 147.0 147.0 9 368,878 41.4 3.00 30 3 4.60
E 12/06/2008 142.0 142.0 15 1,176,442 44.7 3.00 30 3 5.06
F 12/06/2008 142.0 142.0 15 1,176,442 44.7 3.00 30 3 5.06
The Group recognised total expenses of £555,000 (2007: £439,000) related to equity-settled share-based payment transactions during
the year.
Warrants
Under a warrant instrument dated 26 October 2006 Marwyn Neptune Fund is entitled to subscribe for 1,397,059 shares in Concateno. The
exercise price of the warrants is 85p, the placing price at the time of the Medscreen acquisition.
The first 50% of the Marwyn Warrant is exercisable at any time after the date of grant subject to the mid market price of an ordinary share of
Concateno being equal to or greater than 125% of the Medscreen Placing Price at any date after 6 November 2006. Accordingly these warrants
became exercisable on 15 December 2006.
The second 50% of the Marwyn Warrant will be exercisable at any time after the date of grant subject to the mid market price of an ordinary
share of Concateno being equal to or greater than 150% of the Medscreen Placing Price at any date after 6 November 2006. Accordingly these
warrants became exercisable on 11 January 2007.
The Marwyn Warrant is also exercisable on a takeover offer being made for the whole of the issued share capital of Concateno (or a general
offer in respect of one class of Concateno`s shares is made) and control of Concateno is thereby obtained. The Marwyn Warrant is freely
transferable by Marwyn Neptune Fund and is unlisted.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 59
Concateno plc
Annual Report and Accounts 2008
24 Share options and warrants continued
In the event of any variation in the share capital of Concateno, auditors can be instructed to determine what adjustment, if any, should be made
to the number and nominal value of the shares subject to the warrant and/or the exercise price as fairly reflects that change in Concateno’s
share capital.
Warrant option valuation assumptions
The options pricing model used was the binomial model. The inputs to this model were:
Vesting period (years) 1.0
Expected volatility 30%
Option life (years) 7
Expected life (years) 3
Risk free rate 5.25%
Expected dividends expressed as dividend yield 0%
25 Operating leases
Total lease commitments under non-cancellable operating leases are as follows:
2008 2007
Land and Plant and Land and Plant and
buildings equipment buildings equipment
£’000 £’000 £’000 £’000
Less than one year 959 94 1,001 89
Between one and five years 3,725 218 3,722 264
More than five years 713 – 1,625 –
5,397 312 6,348 353
The Group leases a number of warehouse and factory facilities under operating leases. The leases run for an average of three years with the
longest lease running until 2014.
Three operating companies within the Group have operating leases in place for items of plant and equipment. This equipment is used in the
three main laboratories across the UK and production facilities in Abingdon.
During the year ended 31 December 2008, £1,128,000 (2007: £271,000) was recognised as an expense in the income statement in respect of
operating leases.
26 Capital commitments and contingencies
Capital commitments had been made in respect of laboratory services equipment for the Cardiff site (£200,000).
There are no contingencies to note.
27 Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed
in this note.
Marwyn Partners Ltd, Marwyn Investment Management LLP and Marwyn Capital LLP were deemed to be related parties of Concateno plc
during 2007 by virtue of a common Director, J Corsellis. Marwyn 10 Buckingham Street LLP is deemed to be a related party by virtue of two
common partners, K Tozzi and J Corsellis.
2008 2007
Amounts Amounts
Provision of due to Provision of due to
goods and related goods and related
services parties services parties
£ £ £ £
Marwyn Partners Ltd – – 5,000 –
Marwyn Capital LLP 189,996 15,498 1,846,000 32,000
Marwyn 10 Buckingham Street LLP 79,992 120,958 98,442 13,000
269,988 136,456 1,949,442 45,000
The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received.
The Group has a corporate advisory agreement with Marwyn Capital LLP. Under the terms of the appointment, Marwyn Capital LLP provided
general strategic and corporate financial services to the Group for a fixed monthly fee of £15,000 plus expenses. This agreement was
terminated on 31 May 2008. Subsequent to the termination of this agreement, Concateno entered into an appointment with Marwyn Capital
LLP to provide strategic and financial advice for the strategic review of the business on 1 June 2008. The Group also has an arrangement
with Marwyn 10 Buckingham Street LLP for the provision of accommodation and associated back office support services for a fee of Concateno plc
Annual Report and Accounts 2008 60
27 Related party transactions continued
£6,666 per month. J Corsellis is a Director of the named Marwyn entities and a Non-Executive Director of Concateno. In relation to the possible
sale of Concateno plc, J Corsellis, V Bolger and C Hall, all employees of Marwyn Investment Management LLP, have a Chinese wall in place
with other employees of Marwyn Investment Management LLP, whereby they will not disclose details of the transaction to other employees.
Marwyn Neptune Fund LP and Marwyn Ventures 1 LP, shareholders in the Company, are managed on an arms length basis by Marwyn
Investment Management LLP. Marwyn Neptune Fund and Marwyn Ventures 1 LP (a fund managed by Marwyn Investment Management LLP)
held a total of 29,174,852 ordinary shares in the Company as at 17 March 2009. Under the terms of an instrument dated 1 November 2006
Marwyn Neptune Fund was granted a warrant to subscribe for 1,397,058 new ordinary shares in the Company at 85p (the ‘Marwyn Warrant’).
C Hand is engaged by the Group as a Non-Executive Director under the terms of a letter of appointment. Under the terms of the same letter of
appointment he is entitled to remuneration of £1,000 per working day for any special project work agreed in relation to the Philips collaboration.
In 2008, he received remuneration of £41,500 (2007: £11,666) for special project work. In February 2009, C Hand entered into an agreement
with the Company to provide all special project work through Abingdon Health Ltd, a company of which C Hand is a Director and
major shareholder.
V Murria has a related party holding of 100,000 ordinary shares as part of a pension fund through her spouse.
V Murria is also a related party through Marwyn Investment Management LLP through the investment by Marwyn Neptune Fund in Advanced
Computer Software plc of which V Murria is the Chief Executive Officer.
Concateno plc entered into a lease on 10 Buckingham Street, London which is a property owned by Marwyn 10 Buckingham Street LLP, of
which K Tozzi and J Corsellis are partners.
There were no other transactions or contracts with related parties.
Transactions with the Directors of the Company are disclosed in the Remuneration Report on pages 24 to 25.
28 Group entities
Details of the subsidiary companies of Concateno plc, all of which have been consolidated as at 31 December 2008, are as follows:
Percentage of
equity shares held (%)
Subsidiary undertaking Country of incorporation Principal activity 2008 2007
Medscreen Holding Limited
1
United Kingdom Holding company 100 100
Medscreen Limited United Kingdom Sale of medical diagnostic services 100 100
Altrix Healthcare Limited
1
United Kingdom Sale of medical diagnostic products and services 100 100
TrichoTech Limited
1
United Kingdom Sale of medical diagnostic services 100 100
Euromed Limited
1
United Kingdom Sale of medical diagnostic products 100 100
Marconova AB
1
Sweden Sale of medical diagnostic services 100 100
CPL International Services Limited
1
United Kingdom Sale of medical diagnostic services 100 100
Cozart Limited
1
United Kingdom Holding company 100 100
Cozart Bioscience Limited United Kingdom Manufacture, sale and development of
medical diagnostic products and services 100 100
Cozart Italia srl Italy Sale of medical diagnostic products and services 100 100
Cozart Bioscience Inc. United States of America Dormant 100 100
Medib Skandinavien AB Sweden Dormant 100 100
Spinreact SA Spain Manufacture, sale and development of
medical diagnostic products and services 100 100
Cozart International sarl France Sale of medical diagnostic products and services 100 100
HL Scandinavia AB Sweden Sale of medical diagnostic products and services 100 100
Nemesis Scientific Limited United Kingdom Sale of medical diagnostic products and services 100 100
Concateno Australia Pty Australia Dormant 100 N/A
1 Held directly by Concateno plc.
29 Subsequent events
There are no subsequent events to note.
Notes to the Consolidated Financial Statements > continued
For the year ended 31 December 2008 61
Concateno plc
Annual Report and Accounts 2008
Company Balance Sheet >
As at 31 December 2008
2008 2007
Notes £’000 £’000
Fixed assets
Investments (C3) 136,311 135,033
Intangible assets (C4) 8 –
Tangible assets (C5) 94 104
136,413 135,137
Current assets
Debtors (C6) 6,191 8,755
Cash at bank and in hand 88 691
6,279 9,446
Creditors: amounts falling due within one year (C7) (34,880) (12,505)
Net current liabilities (28,601) (3,059)
Total assets less current liabilities 107,812 132,078
Creditors: amounts falling due after more than one year (C7) – (33,458)
Net assets 107,812 98,620
Capital and reserves
Called up share capital (C8) 10,614 9,530
Share premium account (C9) 99,146 89,875
Merger Reserve (C9) 7,844 7,844
Profit and loss account (C9) (9,792) (8,629)
Equity shareholders’ funds 107,812 98,620
The financial statements were approved by the Board of Directors and authorised for issue on 30 March 2009. They were signed on its
behalf by:
Fiona Begley Neil Elton
Chief Executive Officer Finance Director
30 March 2009 30 March 2009
The accompanying notes are an integral part of this balance sheet. Concateno plc
Annual Report and Accounts 2008 62
Notes to the Company Balance Sheet >
C1 Accounting policies
Basis of Preparation
The separate financial statements of the Company are presented as required by the Companies Act 1985. They have been prepared under the
historical cost convention and in accordance with applicable United Kingdom Accounting Standards and law.
The Company took advantage of the exemption in s230 of the Companies Act 1985 not to present its individual profit and loss account and
related notes that form part of these approved financial statements.
The principal accounting policies are summarised below and as part of the notes to the Company Balance Sheet. They have all been applied
consistently throughout the year and the preceding year.
Investments
Fixed Asset Investments in subsidiaries are shown at cost less any provision for impairment.
For investments in subsidiaries acquired for consideration, including the issue of shares qualifying for merger relief, cost is measured by
reference to the nominal value only of the shares issued.
Debt issue costs
In accordance with FRS 25 the separately identifiable costs on the issue of debt instruments are capitalised and disclosed within creditors as a
deduction from the related debt. Issue costs are amortised over the life of the debt instruments to which they relate and the associated charge
to the profit and loss account is included as an interest expense.
Pension costs
The Company operates defined contribution pension schemes. The amount charged against profits represents the contributions payable to the
scheme in respect of the account period. The assets of the schemes are held separately from those of the Company.
Taxation
The charge for taxation is based on the result for the year and takes into account taxation deferred because of timing differences between the
treatment of certain items for taxation and accounting purposes. 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 FRS 19.
Employee share schemes
The fair value of options granted is recognised as an expense together with corresponding increase in equity. The fair value is recognised at
grant date and spread over the period employees become unconditionally entitled to the option. Fair value is based on market value using a
binomial option-pricing model. Non market vesting conditions are included in the assumption concerning the number of options that are
expected to become exercisable. At each balance sheet date, the Company revises its estimate of the number of options that are expected to
vest for changes in non-market conditions.
Foreign currencies
The functional currency of the Company is Pounds Sterling. Transactions denominated in foreign currencies are translated into Pounds Sterling
at the rate of exchange on the day the transaction occurs. Monetary assets and liability, which are denominated in a foreign currency, are
translated at the rate of exchange ruling at the balance sheet date, and the gains and losses on translation are included in the profit and loss
account.
C2 Staff numbers and costs
The average monthly number of employees (including Directors) for the Group during the year, analysed by category, was:
2008 2007
Number Number
Finance and Administration 10 5
At the end of the year there were nine members of staff in Concateno plc.
Their aggregate remuneration comprised:
2008 2007
£’000 £’000
Wages and salaries 948 1,825
Share based payments 235 149
Social security costs 123 178
Other pension costs 121 76
1,427 2,228 63
Concateno plc
Annual Report and Accounts 2008
C3 Investments
The Company has investments in the following subsidiaries which principally affected the profits or net assets of the Group:
Please see Note 28 for a complete listing of subsidiaries and holdings.
Cost £’000
At 1 January 2008 135,033
Additions 1,278
At 31 December 2008 136,311
C4 Intangible assets
Total
£’000
Cost
At 1 January 2008 –
Additions 8
At 31 December 2008 8
Amortisation
At 1 January 2008 –
Amortisation for the year –
At 31 December 2008 –
Carrying amounts
At 1 January 2008 8
At 31 December 2008 8
C5 Tangible assets
Plant and
machinery Total
£’000 £’000
Cost
At 1 January 2008 109 109
Additions 3 3
At 31 December 2008 112 112
Depreciation
At 1 January 2008 5 5
Depreciation for the year 13 13
At 31 December 2008 18 18
Carrying amounts
At 1 January 2008 104 104
At 31 December 2008 94 94
C6 Debtors
2008 2007
£’000 £’000
Amounts owed by Group undertakings 5,857 7,967
Other debtors, prepayments and accrued income 269 627
Deferred tax asset 65 161
6,191 8,755
C7 Creditors
Creditors: amounts falling due within one year
2008 2007
£’000 £’000
Bank loans and overdrafts 27,701 5,206
Trade creditors 262 1,142
Amounts owed to Group undertakings 6,408 5,464
Accruals and deferred income 509 693
34,880 12,505 Concateno plc
Annual Report and Accounts 2008 64
C7 Creditors continued
Creditors: amounts falling due after more than one year
2008 2007
£’000 £’000
Bank loans – 24,738
Other loans* – 8,720
– 33,458
Debt costs arising on arranging the bank loans above are being amortised over the life of the loans to which they relate. As at 31 December
2008, the unamortised element amounted to £263,000 (2007: £492,000). The balances disclosed above are net of these unamortised
debt costs.
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
31 December 2008 31 December 2007
Nominal Face Carrying Face Carrying
interest rate Year of Value amount value amount
Currency % maturity £’000 £’000 £’000 £’000
Secured bank loan GBP 6.21* 2008 – – 3,750 3,521
2009 25,001 24,737 25,000 24,738
Convertible loan GBP 12.5 2009 – – 8,720 8,720
25,001 24,737 37,470 36,979
* The effective interest rate changes with the underlying LIBOR rate (being set as three month LIBOR + 3% margin), but is correct as at 31 December 2008. See Note 19 for
further details.
The bank loans are secured over the assets of the holding company and all subsidiaries and security be created over shares or quotes in the
capital of all companies that fall within the Concateno Group with a carrying amount of £25.0m (2007: £28.8m).
The secured bank loan is disclosed as falling due within one year even though refinancing negotiations are currently underway. The full
repayment profile, by tranche, of the secured bank loan is detailed in Note 18 to the Consolidated Group accounts.
See Financial Review on pages 13 to 15 for further detail on term loan refinancing.
C8 Called-up share capital
2008 2007
£’000 £’000
Authorised share capital:
150,050,000 ordinary shares of £0.10 each (2007: 150,050,000 shares) 15,005 15,005
Allotted, called up and fully paid
106,139,707 ordinary shares of £0.10 each (2007: 95,299,415 shares) 10,614 9,530
C9 Reserves
Share Profi t
Premium Merger and Loss
Account Reserve Account Total
£’000 £’000 £’000 £’000
Balance at 1 January 2008 89,875 7 ,844 (8,629) 89,090
Premium arising on issue of ordinary shares 185 – – 185
Conversion of loans 9,011 – – 9,011
Exercise of share options 75 – – 75
Dividends receivable – – 3,580 3,580
Share-based payment regarding employee options – – 253 253
Loss for the financial year – – (4,996) (4,996)
At 31 December 2008 99,146 7,844 (9,792) 97,198
Notes to the Company Balance Sheet > continued Contents
01 Highlights
02 Group overview – our products and services
04 Group overview – our geographical reach
06 Group overview – the markets we operate in
08 Chairman’s Statement
10 Chief Executive Officer’s Review
13 Financial Review
16 Board of Directors
17 Financial Statements index
18 Directors’ Report
21 Corporate Governance Report
24 Directors’ Remuneration Report
26 Statement of Directors’ Responsibilities
27 Independent Auditors’ Report
28 Consolidated Income Statement
28 Consolidated Statement of Recognised Income
and Expense
29 Consolidated Balance Sheet
30 Consolidated Cash Flow Statement
31 Notes to the Consolidated Financial Statements
61 Company Balance Sheet
62 Notes to the Company Balance Sheet
65 Advisers
Concateno is a global provider of drug and alcohol testing
and related services as well as a manufacturer of clinical
diagnostic products.
Drug and Alcohol abuse is a growing problem in society.
Concateno is at the forefront of this issue, working with
governments, employers and healthcare and law
professionals to help reduce the impact of this problem.
Our expertise is unmatched and our staff are passionate
about working with clients to identify the best possible
solutions for them.
Following the successful integration of our subsidiary
businesses, Concateno can now provide the optimal type
of drug testing in any biological sample.
Building on our expertise in Europe the Company is now
poised to both expand geographically and to develop new
market sectors.
Cozart
®
DDS: the Group’s leading oral fluid testing
device, field proven with police forces and
employers internationally.
Advisers >
Registered Office
Concateno plc
10 Buckingham Street
London
WC2N 6DF
Registered Number
05396234 England and Wales
Nominated Adviser and Broker
Collins Stewart (Europe) Limited
9th Floor
88 Wood Street
London
EC2V 7QR
Joint Brokers
SingerCapital Markets Limited
One Hanover Street
London
W1S 1AX
Evolution Securities Limited
100 Wood Street
London EC2V 7AN
Solicitors to the Company
Jones Day
21 Tudor Street
London
EC4A 0DJ
Auditors
KPMG Audit Plc
1 Forest Gate
Brighton Road
Crawley
RH11 9PT
Principal Bankers
Barclays Bank plc
Head Office Branch
1 Churchill Place
London
E14 5HP
Public Relations Advisers
Financial Dynamics
Holborn Gate
26 Southampton Buildings
London
WC2A 1PB
Company Secretary
Rowena Nixon
10 Buckingham Street
London
WC2N 6DF
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Patent Agents
Marks and Clerk
4220 Nash Court
Oxford Business Park South
Oxford OX4 2RU oncateno plc oncateno plc
Concateno plc Annual Report and Accounts 2008
Annual Report and Accounts 2008
Concateno plc
10 Buckingham Street
London
WC2N 6DF
T +44 20 7004 2800
F +44 20 7004 2801
E [email protected]
www.concateno.com
Linking it all together ### summary: |
Omega Diagnostics Group PLC
Annual Report and
Group Financial Statements 2013 Our mission is to improve
human health and well-
being through innovative
diagnostic products and
global partnerships
Omega is focused on selling a wide range of specialist
products, primarily in the immunoassay, in vitro
diagnostics (IVD) market.
Overview
01 Highlights
02 What We Do
04 Chairman’s Statement
06 Our Markets
08 Strategy and KPIs
Business Review
10 Chief Executive’s Review
14 Segmental Review: Infectious Diseases
16 Segmental Review: Allergy and Autoimmune
16 Segmental Review: Food Intolerance
18 Financial Review
Governance
20 Board of Directors
21 Senior Management Team
22 Advisers
23 Directors’ Report
25 Directors’ Remuneration Report
27 Corporate Governance Report
29 Statement of Directors’ Responsibilities
Financial Statements
30 Independent Auditor’s Report
31 Consolidated Statement of
Comprehensive Income
31 Adjusted Profit Before Taxation
32 Consolidated Balance Sheet
33 Consolidated Statement of Changes in Equity
34 Consolidated Cash Flow Statement
35 Company Balance Sheet
36 Company Statement of Changes in Equity
37 Company Cash Flow Statement
38 Notes to the Financial Statements
61 Notice of Annual General Meeting
62 Notes to the Notice of Annual General Meeting
Contents
Our business is split
into three segments.
Read about each in
the Business Review
from page 4 onwards
Read more about our business on page 2 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
01
Overview Business Review Governance Financial Statements
Highlights
– CD4 technical transfer from the Burnet Institute
nearing completion, and grant of US patent.
– iSYS allergy program on track, with assay protocol finalised,
to launch 40 allergen test menu by Q4 in FY14.
– Strong performance from direct selling operations in India
and exclusive distribution agreement for Food Detective
®
signed with Super Religare Laboratories.
– Strong performance from Food Intolerance segment with
Food Detective
®
sales exceeding £1 million for the first time
and registration of Food Detective
®
in China.
– Appointment of Bill Rhodes as Non-executive Director.
– Successful equity placing to raise £4 million completed
and oversubscribed.
Operational highlights
Visitect
®
CD4 at actual size.
The test enables CD4+ T-cell
levels to be determined quickly
and conveniently using a
finger-prick blood sample,
enabling patients to receive
life-saving antiretroviral treatment.
Read the full
product focus
on page 15
Find out more
Find up-to-date information at
omegadiagnostics.com
Financial highlights
2012
11.3
11.1
2013
Sales (£m)
£11.3m
1%
2011
7.9
2012
7.1
7.0
2013
Gross profit (£m)
£7.1m
1%
2011
4.7
2012
0.8
1.0
2013
Adjusted PBT (£m)
£0.8m
22.5%
2011
0.7
2012
63 63
2013
Gross profit (%)
63%
no change
2011
60 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
02
What We Do
Founded in 1987 by the current CEO Andrew Shepherd, the Omega
business is focused on selling a wide range of specialist products,
primarily in the immunoassay, in vitro diagnostics (IVD) market within
three segments: Allergy and Autoimmune, Food Intolerance and
Infectious Disease.
We’re committed
to addressing global
health challenges
How we work
We identify major
health challenges...
...we form partnerships
to help find solutions... 1 2
The Company’s global reputation
stems from its beginnings as a
manufacturer of tests for a range of
infectious diseases such as syphilis,
tuberculosis, dengue fever, chagas
disease and malaria. This reputation
led to the opportunity to commercialise
a ground-breaking CD4 technology.
Partnership with Burnet Institute in
Australia resulted in Omega securing
an exclusive global licence to a unique,
simple, lateral flow point-of-care device
confirming patient CD4 count is above or
below 350 cells μl. This has the opportunity
to greatly reduce the number of patients
lost to care as a result of the length of
time between testing and treatment.
Full review on page 8 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
03
Overview Business Review Governance Financial Statements
Our global presence
...we attain global reach by developing, distributing
and selling products across three main areas: 3
Allergy and
Autoimmune
Main products:
– Allergozyme
– Allergodip
– Genesis Elisa
Food
Intolerance
Main products:
– Genarrayt
®
Microarray
– Food Detective
– Foodprint service
Infectious
Diseases
Main products:
– Immutrep Syphilis
– Micropath Bacterial tests
– Dengue Elisa
37%
Full review on page 16
See our global market
focus on page 6
Full review on page 16 Full review on page 14
Where our products are distributed
Where we have a direct presence
39% 24%
Revenue share Revenue share Revenue share 04
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Chairman’s Statement
The Group has taken a number of positive
steps, both during the financial year and
since the year-end.
Achievements during the financial year
– Pre-launch of Visitect
®
CD4 in
Washington, US and Cape Town,
South Africa.
– Commencement of direct selling
operations in India and exclusive
distribution agreement for Food
Detective
®
signed with Super Religare
Laboratories.
– Award of grant funding of up to £0.15m
from Scottish Enterprise.
– Registration of Food Detective
®
in China.
– Increase in average revenue per
Genarrayt
®
system (excluding Spain)
by 19% to £12,885.
– Food Detective
®
sales exceed £1m
for the first time.
Achievements since the year-end
– Agreement intending to appoint
Immunodiagnostic Systems Holdings plc
(“IDS”) as exclusive allergy distributor
in IDS’ core markets.
– Appointment of Bill Rhodes as
a non-executive director.
– Grant of US patent for CD4.
– Successful institutional placing raising
£4m before expenses.
Financial performance
Turnover
Turnover for the Group showed a slight
increase on the prior year at £11.26 million
(2012: £11.12 million). Our Food Intolerance
division grew turnover by 13% with continued
growth in Genarrayt
®
revenue, with France
becoming the largest market by sales.
Food Detective
®
also performed well,
exceeding the £1m sales barrier for the
first time. As reported at the half-year
stage, the Allergy and Autoimmune division,
particularly in Germany, was affected by
the weaker pollen season and Euro exchange
rate. A part recovery in the second half meant
that turnover reduced by 7% for the year.
Infectious Disease turnover was broadly
unchanged, showing a slight decline
of 1%, due mainly to a loss of revenue
(approximately £0.2 million) following
a ban of blood-based TB tests by
the Indian government.
Visitect
®
CD4 remains
a significant near-term
opportunity for the Group
and continues to attract
substantial interest from
the wider HIV/AIDS
healthcare community.
In summary
– Pre-launch of Visitect
®
CD4 in Washington, US
and Cape Town, South Africa
– Commencement of direct selling operations in
India and exclusive distribution agreement for Food
Detective
®
signed with Super Religare Laboratories
– Registration of Food Detective
®
in China
– Increase in average revenue per Genarrayt
®
system
(excluding Spain) by 19% to £12,885
– Food Detective
®
sales exceed £1m for the first time
David Evans Non-executive Chairman Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
05
Overview Business Review Governance Financial Statements
Gross profit
Gross profit amounted to £7.05 million
(2012: £7.00 million) and the gross margin
was practically unchanged at 62.6%
compared to 63.0% in the previous year.
This level of gross profit was in line with
expectation as the Food Intolerance and
Allergy/Autoimmune divisions generate
similar levels of gross profit.
Adjusted Profit before Taxation
The Group generated an adjusted profit
before tax (“adjusted PBT”) of £0.78 million
compared to £1.00 million in the previous
year. The reduction was mainly due to
two reasons; firstly, the effect of increased
costs associated with the direct subsidiary
operation in India occurring at the same
time as the loss of revenue from TB tests
referred to above; and secondly, due to
a reduced contribution from the Omega
GmbH allergy business in Germany, for
the reasons referred to above. There is
a reconciliation between adjusted PBT
and statutory PBT below the income
statement on page 31.
Taxation
The Group continues to benefit from
an enhanced level of R&D tax allowances.
Due to the increase in capitalised development
expenditure, which qualifies for the
aforementioned tax allowances, there is a
tax credit of £0.31 million in the year compared
to £0.05 million in the previous year.
Adjusted EPS
Given the tax credit situation above, the Group
achieved an adjusted profit after tax of £1.09
million (2012: £1.05 million) resulting in adjusted
earnings per share of 1.3p (2012: 1.2p).
Balance sheet
Assets
Intangible assets increased to £10.35 million
(2012: £9.14 million) reflecting the level of
capitalised development expenditure, offset by
amortisation of intangible assets. There have
been no impairment charges against goodwill
or intangible assets throughout the year.
Inventory levels increased marginally to
£1.83 million (2012: £1.69 million) and reflect
the additional need to carry inventory within
our Indian subsidiary.
Cash at the year-end reduced to £0. 16 million
(2012: £1.16 million) reflecting the level of
investment in development activity and loan
repayments collectively exceeding cash
generated from operating activities.
Liabilities
Trade and other payables increased
to £1.68 million (2012: £1.45 million).
Total borrowings and other financial liabilities
reduced to £1.35 million (2012: £1.43 million)
due mainly to repayment of loans of £0.5m
and settlement of an IDS-iSYS licence fee
instalment of £0.13 million, offset by the
creation in the year of the liability for the final
licence fee payment of £0.5 million due to IDS.
Funding
During the financial year, the Company
negotiated an increase to its overdraft facility
from £0.7 million to £1.7 million, repayable
on demand. The facility was renewed at the
beginning of May for one year, prior to the
institutional placing announced on 24 May
2013. Further to the approval of shareholders
given at the general meeting on 10 June,
the Group raised £4 million before expenses
through the issue of 23,529,412 new ordinary
shares at 17p per share. The placing was
oversubscribed and we are very grateful for
the support of existing and new shareholders
alike. The additional funds will enable us
to implement our main strategies below.
Product strategy
Visitect
®
CD4
Feedback from the global HIV/AIDS
healthcare community continues to underpin
the significance of the opportunity represented
by the Company’s Point-of-Care (“POC”)
Visitect
®
CD4 test. Subject to a successful
completion of the technology transfer from the
Burnet Institute to the Company, a large part of
the placing proceeds (see Funding above) will
be used both to scale up the manufacturing
and inventory-build of CD4 to meet the
potential demand that undoubtedly exists
for a POC product solution and to undertake
in-country field evaluations that are planned
with major organisations, active in the HIV/AIDS
arena. The early feasibility work undertaken
to develop a smartphone App reader is also
promising in scope and applicability in parts
of the world where Visitect
®
CD4 is expected
to have most impact. This remains the most
significant near-term opportunity for the Group
to achieve growth in shareholder value and is
expected to lead to a longer term strategy for
POC product opportunities in emerging and
developing world infectious diseases.
Allergy automation
The Group remains focused on launching
a panel of approximately 40 allergy tests
on the automated IDS-iSYS instrument
by the end of March 2014 and the recently
announced achievement of finalising the
assay protocol on which all remaining
development will take place, along with
the intention to appoint IDS as distributor
in their core markets of the UK, Germany,
France, the Nordic regions and the US
means we remain committed to building
a significant presence in the growing
automated allergy testing market.
Market strategy – BRIC focus
The IVD industry as a whole has seen a
slowdown in growth during 2012 as the
major European, US and Japanese markets
have experienced increased pressure on
reimbursement levels and cuts in national
health expenditure. By contrast, the emerging
markets, particularly India and China, have
continued to experience double-digit growth
rates. The Group’s decision to set up its
own subsidiary in India nearly two years ago
appears prescient against this backdrop and
is expected to achieve growth both with our
existing Food Intolerance products and the
recently launched Allergodip
®
doctor’s office
test. Both China and Brazil are top-five
markets, ranked by sales of Food Detective
®
and the relationship with HOB Biotech in
China is expected to deliver further growth
in this market.
Board and employees
I am very pleased that we have been able
to attract and appoint Bill Rhodes as a
non-executive director to the Board and
look forward to working with him, given
his knowledge and experience built up
over many years, particularly with Becton
Dickinson, as we implement our strategies
outlined above. Mike Gurner has decided
to retire and step down from the Board
with immediate effect. I would like to thank
Mike for his contribution over the many years
since the Group became a public Company
and I, on behalf of the Board, wish him all
the best in his retirement.
Outlook
More than half of Group turnover is generated
in the UK and Europe, predominantly through
the Food Intolerance and Allergy/Autoimmune
divisions. The economic uncertainty in this
region has led to a slowdown in growth in
European IVD markets and the ability to grow
our own business is not immune from the
broader landscape. In Germany in particular,
the reimbursement picture remains uncertain
and the early pollen season has once more
suffered from some of the wettest weather
seen in Northern Germany for many years.
Sales in the Middle East have also got off to
a slower start, in part, linked to the political
situation. To counter risk in these areas, we
have a strategy to focus on the emerging BRIC
markets and our success in growing revenue
in the year ahead will be dependent on
whether sales into these higher growth
territories can compensate for the pressures
being experienced in Europe and elsewhere.
Beyond the immediate term, our ability to
drive growth will be best delivered through the
successful commercialisation of the CD4 test
and automated allergy tests on the IDS-iSYS
instrument. A significant amount of progress
has been made in the past year and it is now
time to deliver on these strategies.
David Evans
Non-Executive Chairman
28 June 2013 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
06
Our Markets
Today, Omega is one of the UK’s leading companies in the fast
growing area of immunoassay and has a global presence in over
100 countries worldwide through directly controlled subsidiaries
and a strong distribution network.
We provide millions of
diagnostic tests to over
100 countries
Our global markets
North America
South/Central America Africa and Middle East Asia and Far East
UK Europe
56% 9% 3%
13% 14% 5%
Infectious Diseases
Allergy & Autoimmune
Food Intolerance
Group revenue share by geography Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
07
Overview Business Review Governance Financial Statements
The BRIC group of countries
are our strategic market focus.
We have further concentrated
our efforts on expanding our
business in these areas.
Our products can be found
globally in:
– Hospitals
– Blood banks
– Laboratories
– General practitioners
– Nutritionists
– Outreach clinics
Russia India China Brazil
– Strong growth in sales
of Food Intolerance products
– Commencement of direct
selling and exclusive distribution
agreement for Food Detective
signed with Super Religare
Laboratories
– Reduction of sales due to the
timing of contract deliveries
and introduction of competitive
automated systems
– Food Detective
®
formally
approved by the State Food
and Drug Administration
of China and first Genarrayt
®
installation
2012 2012
Brazil Russia India China Total
2012* 2012 2013 2013
103
176
285
400
247
150
118
259
Sales (£’000)
2013 2013
Performance in 2013
Our focus on BRIC markets
2011 estimated IVD market
$1.0bn
$0.3bn
$0.5bn
$2.5bn
$4.3bn
Our customers
* Note 2012 excludes blood-based
TB tests to show like-for-like with 2013. Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
08
Strategy and KPIs
Omega aims to deliver organic growth from recently acquired
products, markets and technologies. Omega will also continue
to pursue acquisition opportunities that are earnings enhancing
or strategically placed in major growth markets.
A robust strategy for
tackling worldwide
health issues
Group strategy
acquisitions
global
partnerships
significant
growth
The acquisition of the business and certain
assets of the in vitro allergy diagnostics
business of Allergopharma Joachim Ganzer
KG in December 2010 provided the Group
with access to the high value allergy
testing market.
In March 2011 the Group entered into an
exclusive Patent Licence Agreement with
a subsidiary of Immunodiagnostic Systems
Group plc (IDS) enabling Omega to develop
a range of allergy immunoassays on
IDS’s automated system (IDS-iSYS).
Combined with Omega’s experience in
assay development, this forms a strong
platform for allergy testing.
The global allergy market is currently
estimated at $0.5 billion per year with
a compound annual growth rate of 8%.
The acquisition and partnership represent
a significant opportunity for revenue
generation in this area.
+ = Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
09
Overview Business Review Governance Financial Statements
Key Performance Indicators
Sales
2013
£11.3m
+1%
£11.1m
+41%
£7.9m
+27%
£6.2m
+14%
£5.4m
+56%
2012 2011 2010 2009
£11.3m
1%
Progress made in 2013
Solid performance with margin maintained.
Strategy for 2014
Commercialise iSYS and CD4 and continue
to grow sales in India.
Gross Margin
2013
63%
–
63%
+3.4%
59.6%
+1.3%
58.3%
-3.2%
61.5%
+7.1%
2012 2011 2010 2009
63%
no change
Progress made in 2013
Margin maintained.
Strategy for 2014
Improved margin through the introduction
of new products.
Adjusted Profit Before Tax
2013
£0.8m
-22%
£1m
+36%
£736k
+25%
£589k
+8%
£540k
+81%
2012 2011 2010 2009
£0.8m
22%
Progress made in 2013
Reduced by 22% on prior year.
Strategy for 2014
Manage cost base through final development phase
of new products.
Food Intolerance – Genarrayt
®
Reagent Sales
2013
£1.84m
+18%
£1.56m
+5%
£1.49m
+80%
£720k
+44%
£547k
+35%
2012 2011 2010 2009
£1.84m
18%
Progress made in 2013
France became largest market by revenue.
Strategy for 2014
To continue to grow revenue per instrument.
Food Detective Sales
2013
£1.25m
+27%
£980k
+27%
£772k
-2%
£790k
+152%
£314k
+44%
2012 2011 2010 2009
£1.25m
27%
Progress made in 2013
Sales exceeded £1 million for the first time.
Strategy for 2014
To replicate success of top five markets. 10
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Chief Executive’s review
The Group has seen a marginal increase
in revenue for the year to £11.26 million,
slightly ahead of last year’s figure
(2012: £11.12 million).
It is pleasing to have managed to retain
profitability in turbulent economic times.
Our decision to go direct in the Indian
market has been vindicated with a strong
performance from the new team. With
Visitect
®
CD4, we have been making steady
progress, with the technology transfer process
nearing completion and the latest results
looking very encouraging. In addition, our
allergy test development programme with
the IDS-iSYS instrument has also made
good progress.
Food Intolerance
The Food Intolerance market has
continued to grow despite the obvious
pressures on consumer spending in
Europe and the segment has continued
to perform very well with sales growing
by 13% to £4.39 million for the year ended
31 March 2013 (2012: £3.90 million).
Sales of Food Detective
®
grew by
27% to £1.25 million (2012: £0.98 million)
with Poland continuing to remain as the
Group’s largest market for this product.
The number of countries where we have
now sold product has continued to increase
to 72 (2012: 68) with an increase in volumes
to 85,214 kits (2012: 60,782). The top five
markets account for just over 50% of sales
with good growth in China and Brazil which
fits with the Group’s strategic focus on
BRIC countries. Product registration in
China finally concluded in December 2012
and as a result, we expect sales in China
to increase. The signing of an exclusive
distribution agreement with Super Religare
Laboratories, India’s largest independent
laboratory chain, should also lead to
good sales growth going forward.
Sales of Genarrayt
®
reagents have
increased by 18% to £1.84 million (2012:
£1.56 million) with France overtaking Spain
to become the largest single market by
sales. Revenue per instrument (excluding
Spain) increased by 19% to £12,885
(2012: £10,783) and 11 Genarrayt
®
systems
(2012: 13 systems) were sold in the year
bringing the total global placements to
119 systems.
Sales of Foodprint
®
tests through the
CNS testing laboratory have grown to
£0.61 million (2012: £0.48 million). The
testing services for food intolerance and
The ‘game changing’ growth
potential of the Visitect
®
CD4
product is expected to make
a major impact in Global
Health markets as this test
satisfies a current unmet
clinical need.
In summary
– CD4 technology transfer nearing completion
– iSYS Allergy programme on track to launch
40 allergen test menu by end of March 2014
– Appointment of Bill Rhodes as a
Non-Executive Director
– Oversubscribed Fundraising to raise £4 million
in cash before expenses
Andrew Shepherd Chief Executive 11
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
other related tests have shown an increase
in business to £0.65 million (2012: £0.62 million).
The progress with registration of Food
Detective
®
in the United States has
continued to be slow and the FDA has
recently confirmed that they will require
either a 510(k) or PMA application to be
filed. The 510(k) route is considered to be
the more unlikely option due to the lack of
a suitable predicate device. As such, the
timeline to registration remains uncertain.
The whole business area of Food Intolerance
testing in the US is under review and other
additional routes to market are being
explored, particularly for the Genarrayt
®
laboratory testing system which we believe
has good potential and could be subject to
a less onerous regulatory environment.
Allergy and Autoimmune
This segment has seen a reduction in sales
of 7% to £4.16 million (2012: £4.48 million).
Sales for Omega Diagnostics GmbH
(‘Omega GmbH’), our German subsidiary,
fell by 7% to £3.59 million (2012: £3.86
million). As reported at the interim results,
the first half saw a weaker pollen season
due to unseasonably wet weather. A weaker
Euro also contributed to the lower result.
This segment performed better in the
second half, helped by the launch of an
Indian version of Allergodip
®
. The Company
has also launched a new liquid format of
the Allergozyme
®
product range which is
expected to contribute to Omega GmbH’s
export performance in the new financial year.
Sales of autoimmune tests reduced by 7%
to £0.57 million (2012: £0.62 million). We
previously reported that the current range
of autoimmune test kits were limited to small
labs with manual test systems. Continued
consolidation in developed country laboratory
markets mean that they require even more
automation and menu driven solutions which
has outpaced our own ability to invest in
developing revised kit formats. Therefore
the decision was taken to direct resources
to the IDS-iSYS project. However, in India,
a market dominated by many small, manual
testing laboratories with less dependency
on automated systems, we have seen an
increase in business and we expect to see
further growth in the new financial year.
Infectious Disease/Other
Sales of infectious disease products fell
slightly by 1% to £2.71 million (2012: £2.75
million). This is despite the loss of annual
sales of approximately £0.2 million in India
due to a Government ban on the import
of blood-based TB tests. The market
for the current range still remains highly
competitive but we believe that the
CD4 opportunity will be the step change
in activity and focus required to transform
this segment.
CD4
The CD4 test, branded as Visitect
®
CD4, was
pre-launched at the 19th International AIDS
Conference, AIDS 2012, in Washington DC,
US on 22-27 July 2012 and the response
to the product was extremely encouraging
with a high level of interest being shown by
various Governments, Non-Governmental
Organisations (NGOs) and large multinational
diagnostics companies. From the responses
received we believe that we are closest to
bringing a CD4 Point-of-Care test to market
amongst other groups working in this area.
This first to market advantage will add extra
impetus to the introduction of the commercial
product when it becomes available.
The project to transfer the technology from
the Burnet Institute to Omega is in its final
stages and, despite it taking longer than we
first envisaged, we are now in the process
of selecting the final, highly scalable
manufacturing protocol. Evaluation sites in
HIV Reference Laboratories in the UK, US
and India are already established as well as
a field trial site in Mozambique and other
countries through various NGOs.
Visitect
®
CD4 was also showcased at the
African Society for Laboratory Medicine
meeting in Cape Town, South Africa in
December 2012 and the response to
the product mirrored that in Washington.
This meeting also gave us the opportunity
to gain further intelligence as to the market
potential for the product. The global CD4
need is expected to grow substantially over
the next 8 years as countries scale up their
HIV/AIDS treatment programmes. The number
of tests is expected to rise from current 2012
levels of just over 30 million to nearly 60 million
tests by 2020.
The recent grant of a US Patent for the CD4
technology also underlines the strong IP
position for the test which extends the
current patent protection in South Africa
and the member states of the African
Intellectual Property Organisation, with
patents pending in many other territories.
We have also been looking to enhance the
value of our Visitect
®
CD4 product offering
by responding to requests from Key Opinion
Leaders to provide a ‘connectivity solution’ so
that results can be transmitted from rural test
sites to city-based Ministry locations. Although
the test does not need an instrument to read
the result, we have recently completed a
feasibility study in using a smartphone camera
to capture the result and then to transmit the
result to management centres. While removing
any operator subjectivity in interpreting the
results, it could also provide additional benefits
such as disease demographic studies and
supply chain logistics, a common problem
found in resource-poor countries.
Distribution network
Sales growth has been recorded in most
geographic regions of the world with the
exception of Europe which reduced by 1%
to £6.41 million (2012: £6.48 million) and the
Africa/Middle East region which dropped
by 4% to £1.56 million (2012: £1.63 million).
These reductions were more than offset by
good growth in the Asia/Far East markets
with sales rising by 9% to £1.44 million
(2012: £1.32 million) and in the North
American market by sales rising 6% to
£0.35 million (2012: £0.33 million). Sales
to South/Central America rose by 16%
to £0.51 million (2012: £0.44 million).
BRIC Strategy
In the year, we have further concentrated
our efforts on expanding our business in
the BRIC group of countries and we have
met with some success. In Brazil we
increased sales by 10% to £0.29 million
(2012: £0.26 million); in China we increased
sales by 49% to £0.18 million (2012: £0.12
million) but in Russia sales decreased by
31% to £0.10 million (2012: £0.15 million)
which was due to the timing of contract
deliveries and the introduction of
competitive automated systems.
Direct sales in India commenced at the end
of July last year and the team has achieved
an impressive sales performance which,
when aggregated with the final sales made
by the old distributor in the three months of
April-June 2012, meant total Indian sales
of approximately £0.40m for the year. This
compares to a prior year like-for-like sales
figure of approximately £0.20 million (which
excludes the TB product sales noted earlier).
Discussions have also been taking place
with other IVD companies with a view to
representing them in the Indian market
and two distribution agreements have
already been signed with others in
early stage discussions. 12
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Growth has been recorded
in most geographic regions
of the world.
“
Research and development
IDS-iSYS
During the year, our development efforts
have focussed on a core set of assays with
the first group of 10 allergens completing
optimisation. However, during that process,
certain imprecision issues were identified
with the assay protocol which, whilst taking
longer to resolve than first anticipated, have
now been resolved. This protocol will now
be used throughout the remaining
development programme and the claim
support phase with the first 10 allergens
has now commenced. The previous
problem with the sourcing of sufficient
patient serum samples has now been
resolved with enough material in stock
to undertake the optimisation and claim
support work for a further 30 allergens.
Therefore, with the reproducibility of the
chosen protocol, overall, we now anticipate
launching a panel of 40 allergens by the
end of March 2014.
In our last Annual Report we commented
on efforts to either source or develop a
multiplex testing platform for allergen
specific IgE testing. Whilst those initial tests
were encouraging, no further efforts have
been made on this project as we decided
to concentrate our development resources
on the iSYS programme.
Infectious Disease
At the same time as we licensed the
CD4 test from the Burnet Institute we also
licensed a second test technology for
a POC test for detecting active Syphilis
infection which is a major public health
problem in developing countries. Progress
with the technology transfer of this product
has not advanced due to the time, effort
and concentration being expended on CD4.
We expect to renew our efforts with this test
upon completion of the technology transfer
of the CD4 test.
Enhancing the value of our Visitect
®
CD4 product offering by
responding to requests from Key Opinion Leaders to provide a
‘mHealth solution’ so that results can be transmitted from rural
test sites to city-based ministry locations.
VISITECT
®
CD4 App
Results from remote village to Ministry of Health
Remote location
1
Download app
2
Run tests
3
VISITECT
®
CD4 Test
Chief Executive’s review continued 13
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Outlook
The new financial year presents some
challenges for the management team
in terms of market and overall economic
conditions. With new product introductions
into key markets such as India and further
growth in Food Intolerance in China and
Brazil we expect to be able to respond
positively to these challenges. The ‘game
changing’ growth potential of the Visitect
®
CD4 product is expected to make a major
impact in global health markets as this
test satisfies a current unmet clinical need.
Over the last year, we have been given
deep insight into the NGO/Aid-related business
sector which is where the Visitect
®
CD4 test
is targeted. Until now, this sector has not been
at the forefront of our commercial focus but
we are reviewing this part of our strategy with
a view to identifying other opportunities that
would fit into this sector. One such opportunity
that may exist is in the area of HIV Viral Load
testing, an area which is highly complementary
to CD4 testing.
We have been delighted at the support
received from existing shareholders and
new investors for our recent oversubscribed
fundraising and while there are challenges
in the Eurozone countries, we believe our
continued focus on new products such as
CD4 and the BRIC markets should result
in further profitable growth.
Andrew Shepherd
Chief Executive
28 June 2013
– Feasibility study completed in using a smartphone camera to capture the
result and then to transmit the result to management centres
– Feasibility work is promising in scope and applicability in parts of the world
where Visitect
®
CD4 is expected to have most impact
– Removes any operator subjectivity in interpreting results
– Additional benefits such as disease demographic studies and supply
chain logistics
– Further differentiates Omega’s product offering from the competition
Scan results
4
Sync to server
5
Global access to secure
results and data
6
mHealth technology Cloud database
www.cd4counts.com 14
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Segmental Review: Infectious Diseases
The Company is pursuing an exciting new opportunity represented
by its new Point-Of-Care (POC) Visitect
®
CD4 test. POC testing for
CD4 could transform the way that care and treatment are provided
to HIV-positive patients particularly in developing countries.
Infectious Diseases:
a change in activity
and market focus
Turnover in the Infectious Disease division
was effectively flat with sales of £2.71 million,
compared to £2.75 million in the prior year.
This result is despite the loss of TB sales in
India due to a government ban on the import
of all blood-based TB tests and which, in
the prior year, accounted for approximately
£0.2 million of the Company’s revenue.
The market for the current range still remains
highly competitive but we believe that the
CD4 opportunity will be the step change
in activity and focus required to transform
this segment. The increased level of
administration costs incurred through the
Indian subsidiary has resulted in adjusted
PBT falling to £0.17 million from £0.32 million
the year before.
The CD4 test, branded as Visitect
®
CD4, was
pre-launched at the 19th International AIDS
Conference, AIDS 2012, in Washington DC,
US on 22–27 July 2012 and the response
to the product was extremely encouraging
with a high level of interest being shown by
various governments, non-governmental
organisations (NGOs) and large multinational
diagnostics companies. From the responses
received we believe that we are closest to
bringing a CD4 Point-Of-Care test to market
amongst other groups working in this area.
The project to transfer the technology
from the Burnet Institute to Omega is in
its final stages and, despite it taking longer
than we first envisaged, we are now in the
process of selecting the final, highly scalable
manufacturing protocol. Evaluation sites
in HIV Reference Laboratories in the UK,
US and India are already established as well
as a field trial site in Mozambique and other
countries through various NGOs.
Visitect
®
CD4 was also showcased at the
African Society for Laboratory Medicine
meeting in Cape Town, South Africa in
December 2012 and the response to
the product mirrored the experience of
Washington. This meeting also gave us
the opportunity to gain further intelligence
as to the market potential for the product.
The global CD4 need is expected to grow
substantially over the next eight years as
countries scale up their HIV/AIDS treatment
programmes with the number of tests
rising from current 2012 levels of just over
30 million to nearly 60 million tests by 2020.
The recent grant of a US Patent for the
CD4 technology also underlines the strong
intellectual property position for the test
which extends the current patent protection
in South Africa and the member states of
the African Intellectual Property Organisation,
with patents pending in many other territories.
£2.71m
1%
Revenue
Main products:
– Immutrep Syphilis
– Micropath Bacterial tests
– Dengue Elisa 15
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Product focus
Visitect
®
CD4: Point-Of-Care HIV testing
HIV is a major global health challenge affecting
approximately 33 million people with five million
new cases per year, mainly in the emerging
and developing world, and is the primary
cause of disease burden in twelve countries,
including South Africa and India where we
have people present.
The Burnet Institute has developed a test that provides an
affordable solution, using a format similar to a home pregnancy test.
Implementation of the Visitect
®
CD4 will directly increase the availability,
access, scope and coverage of CD4 testing beyond the urban centres
to reach the rural majority in emerging and developing countries.
Substantially increasing the number of people with access to CD4
testing will reduce morbidity and mortality, decrease hospitalisation
and loss to treatment.
What are the challenges
presented by HIV?
How does Visitect
®
CD4
provide a solution?
Although HIV is
easy to diagnose,
identifying who
needs treatment
is difficult
Visual
results from
a finger-prick
blood sample
are achievable
in around
40 minutes
HIV primarily
affects those in
developing countries
who might not have
access to tests
CD4 is portable
and instrument-free
and therefore is easy
to access
Tests are typically
expensive – over
US$10
Low cost – at just
US$5 per test
34.2m
Potential number of CD4 tests
performed per year based on world
health organisation guideline of
two tests per annum
17.1%
Infected people in developing countries
with no access to treatment
33m
HIV-infected people globally
U
U
U
V
V 16
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Segmental Review: Allergy & Autoimmune and Food Intolerance
A competitive
automated allergy
system and the fifth
year of consecutive
growth in Food
Intolerance sales
Segmental review: Allergy
and Autoimmune
Turnover in the Allergy and Autoimmune
division fell by 7%, with sales of £4.16 million
compared to £4.48 million in the prior year.
Sales in Germany fell by 2% in constant
currency terms due to a weaker pollen
season, with a further 5% reduction due
to a weaker euro, on average throughout
the year, against sterling as compared with
the year before. Therefore, sales through
Omega GmbH were £3.59 million compared
to £3.86 million a year earlier. Sales of
autoimmune products also fell by 7%
to £0.57 million (2012: £0.62 million).
Approximately £50k of restructuring costs
related to this division and, alongside the
reduced sales, led to an adjusted loss before
tax of £20k (2012: profit of £134k). This
segment performed better in the second
half, helped by the launch of an Indian
version of Allergodip
®
. The Company has
also launched a new liquid format of the
Allergozyme
®
product range which is
expected to contribute to Omega GmbH’s
export performance in the new financial year.
Segmental review: Food Intolerance
The Food Intolerance division continued
to perform well with growth in turnover of
13% to £4.39 million (2012: £3.90 million).
Genarrayt
®
reagent sales continued to rise
across the installed instrument base with
a 19% increase in average revenue per
instrument to £12,885 in all markets
excluding Spain. A further eleven systems
were installed in the year increasing total
placements to 119. Total reagent sales grew
to £1.84 million with France becoming the
number one market, ranked by sales, ahead
of Spain. Sales of Food Detective
®
performed
strongly with an increase in turnover of 27% to
£1.25 million (2012: £0.98 million) with another
exceptional performance in Poland where
sales grew by a further £0. 1 million to
£0.3 million. The overall average price per kit
(excluding China) also increased to £22.01
from £21.64 the year before, showing a level
of resilience in a consumer market environment.
The Foodprint
®
laboratory recorded another
year of revenue growth of 26% with sales up to
£0.61 million (2012: £0.48 million). The adjusted
PBT for this division grew to £1.23 million from
£1. 14 million the year before.
£4.16m
7%
£4.39m
13%
Revenue: Allergy & Autoimmune
Revenue: Food Intolerance 17
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Product focus
IDS-iSYS: automated allergy testing
Allergy areas:
The assay protocol has been finalised on
representative allergens from the groups below.
Foods
Dust mites
Pollens
Nuts
Pets
IDS-iSYS update
Since the beginning of April 2012 (when six allergens had been
optimised), a further four allergens were optimised by the end of
November 2012, at which point, it was decided to concentrate on
finalising the assay protocol, whilst building up sufficient quantities
of patient serum samples for the next 30+ allergens to be optimised.
The assay protocol has now been finalised and sufficient stocks of
patient sera now exist. The work still to be done includes claim
support of the first group of ten allergens followed by optimisation/
claim support of the remaining allergens groups to meet the
planned target of launching a panel of 40+ tests by March 2014.
The main revenue stream will be from allergy test sales to new and
already installed analyser customer base, either directly or through
appropriate distribution channels. The fundamental change in strategy
is the amendment of the IDS licence agreement which now allows
Omega to appoint IDS as an exclusive distributor in IDS core markets
(UK, Germany, France, Nordic countries and US). This will allow
access to a pre-installed base of approximately 340 instruments
and an established service engineer’s base. This agreement with
IDS will allow accelerated market penetration.
Product focus
Genarrayt
®
food intolerance testing
The Group provides a range of diagnostic laboratory tests and
instrumentation associated with food intolerance and gut health. Based
on quantifying total IgG reactions to over 220 different foods these tests
are designed to support both health professionals and individuals who
wish to make informed decisions when managing their health.
Genarrayt
®
is a laboratory-based system developed and
manufactured by the Group, which utilises an innovative, colorimetric
microarray-based ELISA technology for the measurement of
food-specific IgG antibodies in human serum, plasma or whole blood.
The flexibility of the system permits a wide range of food panels to be
offered, including 40, 60, 120 and 200+ foods, together with vegan,
vegetarian and herbs/spices options.
Genarrayt
®
reagent sales continued to rise across the installed
instrument base with a 19% increase in average revenue per instrument
to £12,885 in all markets excluding Spain. A further eleven systems were
installed in the year increasing total global placements to 1 19.
Total reagent sales grew to £1.84 million with France becoming the
number one market, ranked by sales, ahead of Spain.
The whole business area of Food Intolerance testing in the US is
under review and other additional routes to market are being explored,
particularly for the Genarrayt
®
system which we believe has good
potential and could be subject to a less onerous regulatory environment. 18
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Financial performance
Turnover for the Group increased marginally
by 1% to £1 1.26 million (2012: £1 1. 12 million).
The Food Intolerance division increased
turnover to £4.39 million (2012: £3.90 million)
with Genarrayt
®
reagent sales per instrument
of £12,885, compared to £10,783 in the
previous year and Food Detective
®
kits
generating revenue of £1.25 million (2012:
£0.98 million). Allergy and Autoimmune
turnover fell to £4. 16 million (2012: £4.48 million)
due mainly to a weaker euro against sterling,
as compared to the prior year, but also due
to wet weather, as reported at the half-year,
affecting the pollen season resulting in fewer
patient visits to doctors. Turnover in the
Infectious Disease division reduced slightly
to £2.71 million from £2.75 million in the
year before.
Gross profit has remained fairly constant at
£7.05 million (2012: £7.0 million) and similarly,
gross margin has been maintained at 62.6%
(2012: 63.0%).
Administration costs have reduced
marginally by £22k to £4.45 million (2012:
£4.47 million). An increase of £0.15 million
relating to costs incurred in being fully
operational through Omega Dx (Asia) in
India has been offset by a reduction, mainly
relating to uncapitalised development/
technical expenditure of approximately
£0.27 million. One-off restructuring costs
of approximately £0.1 million were incurred
during the first half of the year.
Sales and marketing costs have increased
by £0.28 million to £2.30 million (2012: £2.02
million). £0.26 million of this increase reflects
a full year’s charge in the current year for four
UK-based headcount positions recruited at
varying stages in the prior year; one at Director
level, one at Business Development director
level and two product manager positions. The
remaining increase of £18k reflects additional
sales force costs incurred in India.
Adjusted profit before tax reduced by
22.5%, to £0.78 million (2012: £1.0 million).
A reconciliation between statutory profit
before tax and adjusted profit before tax is
shown at the foot of the income statement.
Taxation
There has been a significant increase in
the tax credit position resulting in a credit
of £306k (2012: £48k) in the year. Of this credit,
£16k relates to HMRC rebates and the majority,
of £290k, relates to movements in deferred tax.
The deferred tax asset has grown significantly,
mainly reflecting an increase in tax losses
carried forward as a result of enhanced tax
credits available on development expenditure.
The deferred liability has increased during the
year as a result of a timing difference arising on
capitalised development expenditure. Prior year
adjustments to the tax charge arise when there
are differences between estimated figures
chargeable to tax and final tax computations.
Our recent equity placing
to raise £4m was completed
very successfully and was
significantly over-subscribed.
In summary
– Successful equity placing to raise £4m completed
and over-subscribed
– Growth of 13% in Food Intolerance sales
– Increase in average revenue per Genarrayt
®
system (excluding Spain) by 19% to £12,885
– Food Detective sales of £1.2m
Kieron Harbinson Finance Director
Financial review 19
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Earnings per share
Adjusted profit after tax (“PAT”) of £1.08 million
(2012: £1.05 million) is arrived at by taking
adjusted profit before tax of £0.78 million
(2012: £1.0 million) plus the tax credit of
£0.30 million (2012: £48k).
Adjusted earnings per share amounted to
1.3p (2012: 1.2p) and is arrived at by taking
the adjusted PAT of £1,085k and dividing
by 85,268,960 (2012: 85,238,7 46) being the
weighted average number of shares in issue
for the year. Statutory profit for the year
amounted to £582k (2012: £527k) which
resulted in earnings per share of 0.7p
versus earnings per share of 0.6p in the
previous year.
Operational performance
Food Intolerance
The Food Intolerance division continued to
perform well with growth in turnover of 13% to
£4.39 million (2012: £3.90 million). Genarrayt
®
reagent sales continued to rise across the
installed instrument base with a 19% increase
in average revenue per instrument to £12,885
(2012: £10,783) in all markets excluding Spain.
A further 1 1 systems were installed in the year
increasing total placements to 119. Total
reagent sales grew to £1.84 million (2012:
£1.56 million) with France becoming the
number one market, ranked by sales,
ahead of Spain.
Sales of Food Detective
®
performed
strongly with an increase in turnover of
27% to £1.25 million (2012: £0.98 million)
with another exceptional performance
in Poland where sales grew by a further
£0.1 million to £0.3 million. The overall
average price per kit (excluding China)
also increased to £22.01 from £21.64 the
year before, showing a level of resilience
in a consumer market environment.
The Foodprint
®
laboratory recorded another
year of revenue growth of 26% with sales
up to £0.61 million (2012: £0.48 million).
The adjusted PBT for this division grew to
£1.23 million from £1. 14 million the year before.
Allergy and Autoimmune
Turnover in the Allergy and Autoimmune
division fell by 7%, with sales of £4.16 million
(2012: £4.48 million). Sales in Germany fell
by 2% in constant currency terms due to
a weaker pollen season, with a further 5%
reduction due to a weaker euro, on average
throughout the year, against sterling as
compared with the year before. Therefore,
sales through Omega GmbH were £3.59
million compared to £3.86 million a year
earlier. Sales of autoimmune products also
fell by 7% to £0.57 million (2012: £0.62 million).
Approximately half of the restructuring costs
referred to earlier (so approx. £50k) related
to this division and, alongside the reduced
sales, led to an adjusted loss before tax of
£20k (2012: profit of £134k).
Infectious Disease/Other
Turnover in the Infectious Disease division
was effectively flat with sales of £2.71 million,
compared to £2.75 million in the prior year.
This result is despite the loss of TB sales
in India due to a government ban on the
import of all blood-based TB tests and
which, in the prior year, accounted for
approximately £0.2 million of the Company’s
revenue. The increased level of administration
costs incurred through the Indian subsidiary
has resulted in adjusted PBT falling to £0.17
million from £0.32 million the year before.
Corporate costs
Net centralised costs include costs not
allocated to any specific division and, where
the Group makes internal arrangements
to fund divisions via intercompany loans,
interest is charged to the specific division
and the corresponding interest income is
netted off through Corporate costs. Net
centralised corporate costs for the year
of £0.60 million were in line with last year
(2012: £0.58 million).
Treasury operations
Currency management
The Group continues to transact operations
in three main currencies being sterling, euros
and US dollars. In the case of transactions
in euros and US dollars, the Group may
be exposed to fluctuations in the rates of
exchange against sterling. Where possible,
the Group operates a natural hedge by
entering into transactions of both a buying
and selling nature that limits the risk of
adverse exchange rate losses. The Company
generates a net surplus of US dollars from
its trading activities. The exchange rate
between sterling and the US dollar has
been relatively stable throughout the year
such that a translation loss of £1k (2012:
£1k) was recorded on US dollar borrowings
held throughout the first half of the year
but now repaid in full, along with a loss
on trading operations of £2k (2012: £22k)
included within Administration costs.
The Group’s net investment in and funding
of Omega GmbH is in euros, which will give
rise to foreign exchange variations from
one period to another. In the year, a foreign
exchange gain of £27k (2012: loss of £271k),
which has arisen due to a stronger euro
(as measured at year-end rates), has been
included within other comprehensive income.
Interest rate management
During the first half of the year, the Group
operated certain derivative financial
instruments for its sterling and US dollar
borrowings. In the case of its sterling loan,
the Group operated an instrument to cap
interest at 5.5% and in the case of the US
dollar loan, the Group operated instruments
to cap the interest rate based on US Libor at
5% and one to operate a floor rate on US
Libor of 2.25%. These instruments terminated
on repayment of the associated borrowings.
During the year, there was a fair value
adjustment gain through the income
statement of £1k (2012: £3k).
Cash flow and net debt
Net cash flow generated from operations
improved significantly to £1.01 million (2012:
£0.69 million), despite a reduction in operating
profit, through a more efficient handling
of working capital. The Group spent a net
£1.49 million (2012: £1.20 million) on investing
activities, of which £1.18 million (2012: £0.75
million) was on intangible assets and £0.31
million (2012: £0.45 million) was on property,
plant and equipment. Loan repayments
included the final repayments of the bank
loans taken out in 2007 and a first instalment
of £0.36 million was repaid in September 2012
on the vendor loan note. Cash balances at
the year-end amounted to £0.16 million
(2012: £1.16 million) and the net debt position
was £0.69 million (2012: £0.14 million).
Financing
Just after the year-end, the Company
renewed its £1.7 million overdraft facility
on the same terms as before and it remains
annually renewable and repayable on
demand. In June, approval was received
in General Meeting for the allotment of
23,529,412 new ordinary shares at 17p
per share which were admitted to trading
on AIM. This follows a successful equity
placing to existing and new institutional
shareholders to raise £4 million (before
expenses of approximately £0.24 million).
The placing was oversubscribed and we
are grateful for the good level of support
shown for the Group’s strategy. This leaves
the Group with a very strong cash position.
Capital management
The financial performance of the Group
is measured and monitored on a monthly
basis through a combination of management
reporting and KPIs. The Group manages its
working capital requirements to ensure it
continues to operate within the covenant limits
applicable to any borrowing facilities whilst
safeguarding the ability to continue to operate
as a going concern. The Group funds its
operations with a mixture of short and
long-term borrowings or equity as appropriate
with a view to maximising returns for
shareholders and maintaining investor, creditor
and market confidence. The use of funds for
acquisitions is closely monitored by the Board
so that existing funds are not adversely
impacted by such activity and the Board
reviews and approves an annual budget to
help ensure it has adequate facilities to meet
all its operational needs and to support future
growth in the business.
Kieron Harbinson
Group Finance Director
28 June 2013 20
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
David Evans
Non-executive Chairman
David joined Omega in 2000 as Non-executive
Chairman. He has considerable experience
within the diagnostics industry. As Financial
Director he was a key member of the team
that floated Shield Diagnostics Limited in 1993.
He became Chief Executive Officer responsible
for the merger of Shield Diagnostics Group plc
with Axis Biochemicals ASA of Norway in
1999 to create Axis-Shield plc. In addition to
his role as Non-executive Chairman of Omega,
he holds Non-executive Directorships in a
number of other companies.
Andrew Shepherd
Chief Executive
Andrew is the Founder and Chief Executive
of Omega. He has worked in the medical
diagnostics industry for 36 years. In 1986
he moved to Scotland to join Bioscot Limited
and shortly afterwards, established Omega.
He has used his technical experience and
knowledge of exporting to oversee the
significant growth of the export of Omega
products. He is an active member of a
number of relevant trade associations,
and was a member of the Bill and Melinda
Gates Foundation’s (BMGF) Global Health
Diagnostics Forum, which provided guidance
to BMGF in advising on technology and
future investments in worldwide diagnostics
programmes for developing countries.
Kieron Harbinson
Finance Director
Kieron joined Omega in August 2002 as
Finance Director. He has a broad experience
in technology and related businesses.
He started his career with Scotia Holdings
PLC in 1984 and remained with the company
for 14 years, occupying various senior finance
roles. These roles enabled him to acquire
experience in corporate acquisitions,
disposals and intellectual property matters.
In addition he gained experience in various
debt and equity transactions, and was
involved in raising over £100 million for the
company. He then joined Kymata Limited,
a start-up optoelectronics company, as
Finance Director. Over a period of 18 months,
he was involved in raising approximately
US$85 million of venture capital funding.
Jag Grewal
Sales and Marketing Director
Jag joined Omega in June 2011 as Group
Sales and Marketing Director. He has worked
in the medical diagnostics industry for 20 years
having started out as a Clinical Biochemist
in the NHS. In 1995 he joined Beckman
Instruments where he developed a career
spanning 15 years in sales and marketing
holding a variety of positions in sales, product
management and marketing management.
In 2009 he left as Northern Europe Marketing
Manager to join Serco Health where he
helped create the first joint venture within
UK pathology between Serco and Guys
and St Thomas’ Hospital. He is also past
Chairman and current treasurer of the British
In Vitro Diagnostics Association (BIVDA).
Michael Gurner (resigned 1 July 2013)
Non-executive Director
Michael led the flotation of the Company
on AIM in 2006. He qualified as a Chartered
Accountant in 1967, before embarking on
a career in merchant banking with Keyser
Ullmann, including M&A activities with the
Ryan Group of Companies and holding
senior management positions, including
Managing Director of a fully listed company,
Continuous Stationery plc, an acquisitive
business forms manufacturer between
1986 and 1991. Thereafter he focused on
turning around under-performing and ailing
businesses, in association with Postern
Executive Group Limited (“Postern”),
a leading UK turnaround specialist
which provided management teams
for troubled companies.
William Rhodes (appointed 1 May 2013)
Non-executive Director
During his fourteen year career with Becton,
Dickinson and Co., one of the world’s
leading suppliers of medical, diagnostic
and life science research products, Bill held
a number of senior leadership positions, and
until the end of 2012, was BD’s Senior
Vice President, Corporate Strategy and
Development, being responsible for BD’s
worldwide mergers and acquisitions and
corporate strategies. Previously, he was
Worldwide President of BD Biosciences,
a business segment with turnover of over
US$1.0 billion, including the provision
of flow cytometry instruments and their
associated reagents for CD4 testing used
in a wide range of laboratory settings. Prior
to working for BD, Bill held senior business
development positions with Pfizer Inc. and
Johnson and Johnson.
Board of Directors 21
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Senior Management Team
Dr Edward Valente
Group Research and
Development Director
Edward joined Omega in March 2011 as
Allergy Systems Director. He has worked in
the medical diagnostics industry for 29 years.
He started his career with Amersham
International in 1983 where he held scientific
and managerial positions in clinical diagnostics
research and development. He then joined
Shield Diagnostics in 1988 and held managerial
positions in R&D and marketing. Latterly,
he was responsible for market development
of new markers, including clinical studies, and
design and development of immunoassay
products on automated platforms for
industry majors.
Mike Gordon
Group Operations Director
Mike joined Omega in October 2011 as Group
Operations Director. He has worked in the
Medical diagnostics industry for 28 years.
He started his career with Inveresk Research
International as a Development Scientist.
He then joined Bioscot Ltd working through
its transition to Cogent Diagnostics Ltd and
onwards to Hycor Biomedical Ltd. During
this time he has held the positions of Quality
Manager, Production Director and latterly
as Production and Logistics Manager for its
last corporate owners. During this period he
was responsible for the implementation of
ISO 9001 and for successfully navigating
the company through the process of US
FDA registration and inspection.
Iain Logan
Group Financial Controller
Iain joined Omega in November 2010 as
Group Financial Controller. He qualified
as a Chartered Accountant in 2002 with
PricewaterhouseCoopers in Edinburgh.
He then worked at Murray International
Holdings Limited in the head office finance
team for three years performing a variety of
financial accounting roles. He then moved
on to Murray Capital Limited, the investment
management company of Murray International
Holdings Limited, gaining experience in
all aspects of acquisitions, disposals and
investment portfolio company analysis and
management. His current role primarily covers
responsibility for the financial reporting of
the Group and management of the Group
finance team.
Prashant Maniar
Managing Director –
Omega Dx (Asia) Pvt Limited
Prashant joined Omega Dx (Asia) in October
2011 as Managing Director. He has worked
in the diagnostics industry for 22 years.
He started his career as Production Head
in Cadila Laboratories. He then spent
15 years working for GlaxoSmithKline and
ThermoFisher Scientific in various roles
establishing their diagnostic business in India
with 14 collaborations with national and
multinational companies. In his most recent
role he established the Microbial Control
business for Lonza India. He has been
responsible for the commercial set up
of Omega Dx (Asia) Pvt Ltd and has
transitioned the Group’s business
in India from distributor to wholly
owned subsidiary.
Jamie Yexley
Site Manager –
Genesis Diagnostics Limited,
Cambridge Nutritional Sciences Limited
Jamie joined Genesis and CNS in June 1999
as a Production Laboratory Assistant. He was
promoted to Production Manager in 2005
and Operations Manager in 2009. He has
been instrumental in seeing the Company
through a sustained period of rapid growth
and change. In 2012 he moved to the role of
Site Manager. He has 20 years manufacturing
experience with 13 years specifically in the
medical diagnostics industry. Educated in
Cambridge he has spent his professional
career working in the manufacturing industry
starting in an FMCG environment. Throughout
his time with the Company he has been
responsible for ICT where he is recognised
as the Group’s foremost expert.
Karsten Brenzke
Site Manager –
Omega Diagnostics GmbH
Karsten joined Omega GmbH in November
2010 as a consultant to facilitate the acquisition
of the IVD business from Allergopharma.
He was then appointed on a permanent
basis initially as Finance Manager before
being appointed as Site Manager in May
2012. He has worked for different industry
companies in the finance control function with
his longest stay of seven years at Zeppelin
Power Systems where he gained experience
in mergers and post-merger integration. 22
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Advisers
Nominated adviser and broker
finnCap Limited
60 New Broad Street
London EC2M 1JJ
Auditors
Ernst & Young LLP
G1
5 George Square
Glasgow G2 1DY
Solicitors
Brodies LLP
15 Atholl Crescent
Edinburgh EH3 8HA
Registrar
Share Registrars Limited
Suite E
First Floor, 9 Lion and Lamb Yard
Farnham
Surrey GU9 7LL
PR
Walbrook PR Limited
4 Lombard Street
London EC3V 9HD
Country of incorporation
England & Wales
Omega Diagnostics Group PLC
Registered number: 5017761 23
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
The Directors present their Annual Report and Group financial statements for the year ended 31 March 2013.
Principal activities
The principal activity of the Company is as a holding company. The principal activity of the Group is the manufacture, development
and distribution of medical diagnostics products.
Results and dividends
The result for the year is a profit of £582,266 (2012: £526,983) which has been taken to reserves. The Directors do not propose to pay
a dividend. The results are disclosed in more detail in the Chairman’s Statement on pages 4 and 5 and the Financial Review on pages
18 and 19.
The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented
its own income statement in these financial statements. The Company profit for the year ended 31 March 2013 is £59,896 (2012: loss
of £89,416).
Business review and future development
A review of business and future development is discussed in more detail in the Chairman’s Statement, Chief Executive’s Review and
Financial Review commencing on pages 4, 10 and 18 respectively. Key performance indicators are disclosed and discussed on page 9.
Research and development
Research and development activity has increased in the year. Details of research and development activity are contained in the
Chief Executive’s Review on pages 10 to 13. Costs in the year amounted to £1,167,274 (2012: £785,390). Costs of £140,810 in relation to
research activities (2012: £486,584) were expensed through the statement of comprehensive income and costs of £1,026,464 in relation
to product development (2012: £298,806) were capitalised and included within intangible assets as detailed in Note 8.
Directors
The names of the Directors who have served the Group throughout the year are:
David Evans
Michael Gurner (resigned 1 July 2013)
Kieron Harbinson
Andrew Shepherd
Jag Grewal
William Rhodes (appointed 1 May 2013)
Biographies of all Directors serving at the year end are on page 20.
Directors’ interests
The beneficial interests of Directors who have served throughout the year are listed in the Directors’ Remuneration Report on pages 25 and 26.
There are no non-beneficial interests held by Directors. Directors’ interests in the shares of the Group between 31 March 2013 and the date
of this report have changed as certain of the Directors participated in the June 2013 fundraising. New ordinary shares purchased:
Andrew Shepherd — 41,176
Kieron Harbinson — 29,412
Michael Gurner — 147,059
Jag Grewal — 29,412
Major interests in shares
As at 11 June 2013 the following shareholders held more than 3% of the Group’s issued ordinary share capital:
Number
of 4 pence
ordinary
shares Percentage
Legal & General Investment Management 19,476,471 17 .91%
Octopus Investments Limited 9,946,870 9.15%
Mobeus Equity Partners LLP 8,333,250 7.66%
Killik & Co LLP 6,629,358 6.10%
Unicorn Asset Management 4,266,650 3.92%
Liontrust Investment Partners LLP 4,117 ,647 3.79%
JM Finn & Co 3,994,946 3.67%
Supplier payment policy
It is the Group’s policy to agree the terms of payment with its suppliers, to ensure its suppliers are made aware of those terms and to pay
in accordance with them.
Trade creditors of the Group at 31 March 2013 were equivalent to 66 days (2012: 60 days) based on the average daily amount invoiced
by suppliers during the year.
Directors’ Report 24
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Employees
The Group encourages communication with its employees and favours an environment where staff can put forward their ideas,
suggestions and concerns on any matter that involves them. The Group gives full and fair consideration to applications for employment
made by disabled people, having regard to their particular aptitudes and abilities. Where an employee becomes disabled in the course
of their employment, where possible, arrangements will be made for appropriate retraining to match their abilities with their duties.
Principal risks and uncertainties
The Board meets regularly to review operations and to discuss risk areas. The Corporate Governance Report contains details
of the Group’s system of internal control. Note 22 to the financial statements contains details of financial risks faced by the Group.
The Board considers the following to be the non-financial risks:
General economic conditions
The Group may be faced with changes in the general economic climate in each territory in which it operates that may adversely affect the
financial performance of the Group. Factors which may contribute include the level of direct and indirect competition against the Group,
industrial disruption, rate of growth of the Group’s sectors and interest rates. The Group seeks to mitigate this risk by conducting
operations on a broad geographic basis and by introducing new technologies to remain innovative.
Regulatory risk
The manufacturing, marketing and use of the Group’s products are subject to regulation by government and regulatory agencies in many
countries. Of particular importance is the requirement to obtain and maintain approval for a product from the applicable regulatory agencies
to enable the Group’s products to be marketed. Approvals can require clinical evaluation of data relating to safety, quality and efficacy
of a product. The Group seeks to mitigate regulatory risk by conducting its operations within recognised quality assurance systems and
undergoes external assessment to ensure compliance with these systems.
Acquisition risk
The success of the Group depends upon the ability of the Directors to assimilate and integrate the operations, personnel, technologies
and products of acquired companies. The Group seeks to mitigate this risk by selecting companies that meet certain selection criteria
and by conducting a detailed due diligence review.
Eurozone risk
Recent turmoil in the economic conditions in Europe increases the risk of one or more countries exiting the eurozone. This could lead to
currency devaluation in those countries which could lead to adverse economic impacts elsewhere. Approximately one third of the Group’s
revenue is derived in Germany where the euro is the functional reporting currency. The Group does not currently have operations located
in any other European country. However, in the event of a country’s exit from the eurozone, potentially higher volatility of the euro could
lead to a reduction in the reported trading results of our German operation when translated into sterling. The Group mitigates risk in
countries such as Spain and Italy, where it has trading relationships, with tighter credit control procedures and credit limits where
necessary.
Development risk
The Group is undertaking an increased level of development activity than in the past with the aim of launching new products in the future.
There is no guarantee that development activity will lead to the future launch of products. Such development activity can meet technical
hurdles that are unable to be overcome and market and competition activity can render the output from development activities as obsolete.
The Group seeks to mitigate the risk around development activities by ensuring that development programmes are planned in accordance
with recognised industry quality standards, managed by people with the requisite skills. The Company also continues to monitor industry
trends and customer needs to ensure its development targets remain relevant.
Donations
The Group made no charitable donations in the year (2012: £Nil) nor any political donations (2012: £Nil).
Auditors
The auditors, Ernst & Young LLP, have indicated their willingness to continue in office and a resolution for their re-appointment will
be proposed at the forthcoming Annual General Meeting.
Directors’ statement as to disclosure of information to auditors
The Directors who were members of the Board at the time of approving the Directors’ Report are listed on page 23. Having made
enquiries of fellow Directors and of the Company’s auditors, each of these Directors confirms that:
− to the best of each Director’s knowledge and belief, there is no information (that is, information needed by the Group’s auditors
in connection with preparing their report) of which the Group’s auditors are unaware; and
− each Director has taken all the steps a Director might reasonably be expected to have taken to be aware of relevant audit information
and to establish that the Group’s auditors are aware of that information.
By order of the Board
Kieron Harbinson
Company Secretary
28 June 2013
Directors’ Report continued 25
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
As an AIM-quoted company, the Group is not required to produce a remuneration report that satisfies all the requirements of the
Companies Act. However, the Directors are committed to providing information on an open basis and present their Remuneration Report
as follows:
Remuneration Committee
The Remuneration Committee is comprised of Michael Gurner, as Chairman, and David Evans. The committee meets as and when required
to determine and agree with the Board the policy for the remuneration of the Group’s Chief Executive, Chairman, Executive Directors and
Company Secretary. The objective of this policy shall be to ensure that members of the executive management of the Group are provided
with appropriate incentives to encourage enhanced performance and are, in a fair and reasonable manner, rewarded for their individual
contributions to the success of the Group. No Director or manager shall be involved in any decisions as to their own remuneration.
Remuneration policy
The Group’s policy is that the remuneration arrangements, including pensions, for subsequent financial years should be sufficiently
competitive to attract, retain and motivate high quality executives capable of achieving the Group’s objectives, thereby enhancing
shareholder value.
Incentive schemes/share option schemes
Andrew Shepherd was issued with an option over 600,000 ordinary shares of the Group, Kieron Harbinson was issued with an option
over 300,000 ordinary shares of the Group and Jag Grewal was issued with an option over 200,000 ordinary shares of the Group.
All of the options were granted on 5 July 2012 and were under the Company’s EMI Share Option Scheme.
Bill Rhodes is entitled to be granted an option over 2,130,406 ordinary shares of the Company at the prevailing market price at the earliest
opportunity in accordance with Rule 21 of the AIM Rules. The option will be granted under the Company’s third Unapproved Option Scheme.
Directors’ service contracts
Andrew Shepherd entered into a service contract with the Group on 23 August 2006, under which he was appointed as Chief Executive
on an annual salary of £85,000. His salary was increased to £131,250 per annum from 1 April 2009 and then further increased to £145,000
per annum from 1 April 2011. The agreement will continue until terminated by either party giving to the other not less than twelve months’
notice in writing.
Kieron Harbinson entered into a service contract with the Group on 23 August 2006, under which he was appointed as Finance Director
and Company Secretary on an annual salary of £72,500. His salary was increased to £94,500 per annum from 1 April 2009 and then further
increased to £115,000 per annum from 1 April 2011. The agreement will continue until terminated by either party giving to the other not
less than three months’ notice in writing.
David Evans was appointed a Non-executive Director of the Group on 19 September 2006 and was entitled to an annual fee of £25,000
from 1 April 2008. The agreement will continue until terminated by either party giving to the other not less than one month’s notice in writing.
Michael Gurner was appointed a Non-executive Director of the Group on 19 September 2006 and he was entitled to an annual fee of
£15,000. This fee was increased to £20,000 per annum from 1 January 2009. The agreement will continue until terminated by either party
giving to the other not less than one month’s notice in writing.
Jag Grewal entered into a service contract with the Group on 30 June 2011, under which he was appointed as an Executive Director on
an annual salary of £110,000. The agreement will continue until terminated by either party giving to the other not less than three months’
notice in writing.
Bill Rhodes was appointed a Non-executive Director of the Group on 1 May 2013 and is entitled to an annual fee of £40,000.
The agreement will continue until terminated by either party giving to the other not less than one month’s notice in writing.
Andrew Shepherd, Kieron Harbinson and Geoff Gower received bonuses in the prior year of £13,125, £9,450 and £16,000 respectively.
These were non-contractual and calculated at 10%, 10% and 20% of their basic annual salaries at 31 March 2011 based on the
financial results achieved for the year ended 31 March 2011.
Directors’ emoluments
Fees/basic Benefits Total Total
salary Bonuses in kind 2013 2012
Consolidated £££ £ £
Executive
Andrew Shepherd 145,000 — — 145,000 158,125
Kieron Harbinson 115,000 — 1,506 116,506 125,688
Jag Grewal 110,000 — — 110,000 82,500
Geoff Gower (resigned 31 March 2012) — — — — 111,516
Non-executive
David Evans 25,000 — — 25,000 25,000
Michael Gurner 20,000 — — 20,000 20,000
Directors’ Remuneration Report 26
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
The amounts paid in the year towards Directors’ pension contributions were as follows:
Directors’ pension contributions
2013 2012
£ £
Andrew Shepherd 7,250 7,250
Kieron Harbinson 5,750 5,750
Jag Grewal 5,500 —
Geoff Gower — 13,500
Directors’ interests in the 4 pence ordinary shares of Omega Diagnostics Group PLC.
31 March 31 March
2013 2012
David Evans 2,870,134 2,870, 134
Michael Gurner 271,671 246,671
Kieron Harbinson 294,150 294,150
Andrew Shepherd 2,618,030 1,955,530
Jag Grewal — —
Geoff Gower — 500,000
The Directors have no interest in the shares of subsidiary companies.
Directors’ share options
At Granted Lapsed Exercised At Option Earliest
1 April during during during 31 March price Date of exercise Expiry
2012 the year the year the year 2013 pence grant date date
David Evans 390,822 — — — 390,822 19.0p 10/12/08 10/12/09 10/12/18
Andrew Shepherd 703,480 — — — 703,480 19.0p 10/12/08 10/12/09 10/12/18
— 600,000 — — 600,000 14.5p 05/07/12 05/07/15 05/07/22
Kieron Harbinson 468,987 — — — 468,987 19.0p 10/12/08 10/12/09 10/12/18
— 300,000 — — 300,000 14.5p 05/07/12 05/07/15 05/07/22
Jag Grewal 100,000 — — — 100,000 13.25p 12/08/11 12/08/12 12/08/21
— 200,000 — — 200,000 14.5p 05/07/12 05/07/15 05/07/22
During the year Andrew Shepherd, Kieron Harbinson and Jag Grewal were issued with options under the Company’s EMI Option Scheme.
The share price at 31 March 2013 was 13.88 pence. The highest and lowest share price during the year was 18 pence and 10.5 pence respectively.
Approved by the Board
Michael Gurner
Non-executive Director
28 June 2013
Directors’ Remuneration Report continued 27
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
As an AIM-quoted company, the Group is not required to produce a corporate governance report nor comply with the requirements
of the UK Corporate Governance Code. However, the Directors are committed to providing information on an open basis and present
their Corporate Governance Report as follows:
The Board of Directors
The Board currently comprises: one Non-executive Chairman; two Non-executive Directors; and three Executive Directors, who are the
Chief Executive, the Finance Director and the Sales and Marketing Director. David Evans, Non-executive Chairman, and Michael Gurner
and Bill Rhodes, both Non-executive Directors, are considered by the Board to be independent in character and judgement. Michael Gurner
is the senior independent Non-executive Director. The Board meets at regular intervals and is responsible for setting corporate strategy,
approving the annual budget, reviewing financial performance, agreeing the renewal of and any new banking/treasury facilities and approving
major items of capital expenditure. The Board is provided with appropriate information in advance of Board meetings to enable it to discharge
its duties effectively. Bill Rhodes was appointed to the Board as a Non-executive Director on 1 May 2013.
During the financial year, the Board met on ten occasions. Of the ten meetings David Evans and Jag Grewal attended eight, Michael Gurner
attended nine and Andrew Shepherd and Kieron Harbinson attended all ten.
The Chairman has additional non-executive directorships of the following companies:
− Epistem Holdings plc
− Momentum Biosciences Limited
− Scancell Holdings plc
− EKF Diagnostics plc
−Cytox Limited
− Venn Life Sciences plc
− Diagnostic Capital Limited
− Lochglen Whisky Limited
− St Andrews Golf Art Limited
− Horizon Discovery Limited
− Spectrum Limited (Rainbow Seed Fund)
− OptiBiotix Health Limited
− Marine Biotech Limited
− Collbio Limited
− Integrated Magnetic Systems Limited
− Healthcare Opportunity Investments plc
The Audit Committee
The Audit Committee has met on two occasions during the year and once since the year end. The Committee is comprised of David Evans,
as Chairman, and Michael Gurner and has primary responsibility for monitoring the quality of internal controls, ensuring that the financial
performance of the Group is properly measured and reported on, and for reviewing reports from the Group’s auditors relating to the
Group’s accounting and financial reporting, in all cases having due regard to the interests of shareholders. The Committee shall also
review preliminary results announcements, summary financial statements, significant financial returns to regulators and any financial
information contained in certain other documents, such as announcements of a price-sensitive nature. Bill Rhodes has been appointed
to the Audit Committee and will replace Michael Gurner who is stepping down from the Board on 1 July 2013.
The Committee considers and makes recommendations to the Board, to be put to shareholders for approval at the Annual General
Meeting, in relation to the appointment, re-appointment and removal of the Group’s external auditors. The Committee also oversees the
relationship with the external auditors including approval of remuneration levels, approval of terms of engagement and assessment of their
independence and objectivity. In so doing, they take into account relevant UK professional and regulatory requirements and the relationship
with the auditors as a whole, including the provision of any non-audit services. Ernst & Young LLP have been auditors to Omega Diagnostics
Limited (ODL) since 2000 and were appointed as auditors to the Group following completion of the reverse takeover of ODL in September 2006.
The Committee has reviewed the effectiveness of the Group’s system of internal controls and has considered the need for an internal
audit function. At this stage of the Group’s size and development, the Committee has decided that an internal audit function is not required,
as the Group’s internal controls system in place is appropriate for its size. The Committee will review this position on an annual basis.
The Committee also reviews the Group’s arrangements for its employees raising concerns, in confidence, about possible wrongdoing in
financial reporting or other matters. The Committee ensures that such arrangements allow for independent investigation and follow-up action.
The Remuneration Committee
The Remuneration Committee has met on three occasions during the year. The Committee is comprised of Michael Gurner, as Chairman,
and David Evans and has primary responsibility for determining and agreeing with the Board the remuneration of the Company’s Chief Executive,
Chairman, Executive Directors, Company Secretary and such other members of the Executive management as it is designated to
consider. The remuneration of the Non-executive Directors shall be a matter for the Chairman and the Executive Directors of the Board.
No Director or manager shall be involved in any decisions regarding their own remuneration. Bill Rhodes has been appointed to the
Remuneration Committee and will replace Michael Gurner.
Corporate Governance Report 28
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Internal control
The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness throughout the year. Such a system
can only provide reasonable assurance against misstatement or loss.
The Board monitors financial controls through the setting and approval of an annual budget and the regular review of monthly
management accounts. Management accounts contain a number of indicators that are designed to reduce the possibility of misstatement
in financial statements.
Where the management of operational risk requires outside advice, this is sought from expert consultants, and the Group receives
this in the areas of employment law and health and safety management.
The Group is compliant with industry standard quality assurance measures and undergoes regular external audits to ensure that
accreditation is maintained.
Communication with shareholders
The Board recognises the importance of communication with its shareholders. The Group maintains informative websites for Omega
Diagnostics Limited, Cambridge Nutritional Sciences Limited and Omega GmbH containing information likely to be of interest to existing
and new investors. In addition, the Group retains the services of financial PR consultants, providing an additional contact point for investors.
The Board encourages shareholder participation at its Annual General Meeting, where shareholders can be updated on the Group’s
activities and plans.
Going concern
The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in
the Business Review, which runs on pages 4 to 5 and pages 10 to 13 and pages 18 and 19. The financial position of the Group, its cash
flows, liquidity position and borrowing facilities are described in the Financial Review on pages 18 and 19. In addition, Note 22 to the
financial statements includes the Group’s objectives, policies and processes for its financial risk management objectives; details of its
financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. The recent renewal of overdraft facilities as
well as the successful fundraising of £4 million means that the Group has significant financial resources together with long-term relationships
with a number of customers and suppliers across different geographic areas and industries.
As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully and fully capitalise on the
new product opportunities despite the current uncertain economic outlook.
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable
future. Accordingly, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
By order of the Board
Kieron Harbinson
Company Secretary
28 June 2013
Corporate Governance Report continued 29
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with
applicable United Kingdom law and those International Financial Reporting Standards (IFRSs) as adopted by the European Union.
The Directors are required to prepare Group and Company financial statements for each financial year end. Under company law, the
Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position of the Group
and Company, financial performance of the Group and cash flows of the Group and Company for that period. In preparing the Group
and Company financial statements, the Directors are required to:
− select suitable accounting policies in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
and then apply them consistently;
− present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
− provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand
the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance;
− state that the Group and Company has complied with IFRSs, subject to any material departures disclosed and explained in the financial
statements; and
− make judgements and estimates that are reasonable.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and Company’s
transactions and disclose, with reasonable accuracy at any time, the financial position of the Group and Company and enable them to ensure
that the Group and Company financial statements comply with the Companies Act 2006. They are also responsible for safeguarding assets
of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Statement of Directors’ Responsibilities 30
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
We have audited the financial statements of Omega Diagnostics Group PLC for the year ended 31 March 2013 which comprise the
Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity,
Consolidated Cash Flow Statement, Company Balance Sheet, Company Statement of Changes in Equity, Company Cash Flow Statement
and the related Notes 1 to 23. The financial reporting framework that has been applied in their preparation is applicable law and
International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent Company financial
statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditors
As explained more fully in the Statement of Directors’ Responsibilities on page 29, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on
the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance
that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether
the accounting policies are appropriate to the Group’s and the parent Company’s circumstances and have been consistently applied
and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation
of the financial statements. In addition we read all the financial and non-financial information in the Annual Report and Group Financial
Statements to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion:
− the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 March 2013
and of the Group’s profit for the year then ended;
− the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
− the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union
and as applied in accordance with the provisions of the Companies Act 2006; and
− the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared
is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
− adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received
from branches not visited by us; or
− the parent Company financial statements are not in agreement with the accounting records and returns; or
− certain disclosures of Directors’ remuneration specified by law are not made; or
− we have not received all the information and explanations we require for our audit.
Annie Graham (Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditors
Glasgow
28 June 2013
Independent Auditors’ Report
to the members of Omega Diagnostics Group PLC 31
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2013 2012
Note £ £
Continuing operations
Revenue 7 11,262,898 11,124,053
Cost of sales (4,209,905) (4,120,259)
Gross profit 7,052,993 7,003,794
Administration costs (4,448,646) (4,471,381)
Selling and marketing costs (2,297,702) (2,015,300)
Operating profit 7 306,645 517 ,113
Finance costs 5 (32,914) (48,542)
Finance income – interest receivable 7 2,493 10,856
Profit before taxation 276,224 479,427
Tax credit 6 306,042 47 ,556
Profit for the year 582,266 526,983
Other comprehensive income
Exchange differences on translation of foreign operations 26,970 (271,130)
Actuarial (loss)/gain on defined benefit pensions (50,439) 56,000
Tax credit 7,978 16,585
Other comprehensive income for the year (15,491) (198,545)
Total comprehensive income for the year 566,775 328,438
Earnings per share (EPS)
Basic and diluted EPS on profit for the year 21 0.7p 0.6p
2013 2012
£ £
Profit before taxation 276,224 479,427
IFRS-related discount charges (included within Finance costs) 25,046 45,225
Fair value adjustments to financial derivatives (included within Finance costs) (454) (2,981)
Amortisation of intangible assets (included within Administration costs) 406,553 415,419
Share-based payment charges (included within Administration costs) 71,193 29,716
Acquisition related costs (included within Administration costs) — 37,461
Adjusted profit before taxation 778,562 1,004,267
Earnings per share (EPS)
Adjusted EPS on profit for the year 1.3p 1.2p
Adjusted profit before taxation is derived by taking statutory profit before taxation and adding back IFRS-related discount charges,
amortisation of intangible assets, share-based payment charges, acquisition costs and fair value adjustments to financial derivatives.
This is not a primary statement.
Consolidated Statement of Comprehensive Income
for the year ended 31 March 2013
Adjusted Profit Before Taxation
for the year ended 31 March 2013 32
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2013 2012
Note £ £
ASSETS
Non-current assets
Intangibles 8 10,347,876 9,136,072
Property, plant and equipment 9 2,116,286 2,068,509
Deferred taxation 14 553,647 150,332
Retirement benefit surplus 18 31,886 85,639
13,049,695 11,440,552
Current assets
Inventories 10 1,833,887 1,689,549
Trade and other receivables 11 2,556,762 2,417,500
Income tax receivable 7,106 4,054
Cash and cash equivalents 160,693 1,159,132
4,558,448 5,270,235
Total assets 17,608,143 16,710,787
EQUITY AND LIABILITIES
Equity
Issued capital 12,977,107 12,977 ,107
Retained earnings 985,371 347,403
Total equity 13,962,478 13,324,510
Liabilities
Non-current liabilities
Long-term borrowings 12 484,472 794,389
Deferred taxation 14 609,395 503,728
Derivative financial instruments 22 — 454
Total non-current liabilities 1,093,867 1,298,571
Current liabilities
Short-term borrowings 12 367,649 509,811
Trade and other payables 13 1,684,149 1,453,018
Other financial liabilities 19 500,000 124,877
Total current liabilities 2,551,798 2,087,706
Total liabilities 3,645,665 3,386,277
Total equity and liabilities 17,608,143 16,710,787
David Evans Kieron Harbinson
Non-executive Chairman Finance Director
28 June 2013 28 June 2013
Omega Diagnostics Group PLC
Registered number: 5017761
Consolidated Balance Sheet
as at 31 March 2013 33
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Share Share Retained
capital premium earnings Total
£££ £
Balance at 31 March 2011 4,145,580 8,831,527 (10,751) 12,966,356
Profit for the year ended 31 March 2012 — — 526,983 526,983
Other comprehensive income – net exchange adjustments — — (271,130) (271,130)
Other comprehensive income – actuarial gain on defined benefit pensions — — 56,000 56,000
Other comprehensive income – tax credit — — 16,585 16,585
Total comprehensive income for the year — — 328,438 328,438
Share-based payments — — 29,716 29,716
Balance at 31 March 2012 4,145,580 8,831,527 347,403 13,324,510
Profit for the year ended 31 March 2013 — — 582,266 582,266
Other comprehensive income – net exchange adjustments — — 26,970 26,970
Other comprehensive income – actuarial loss on defined benefit pensions — — (50,439) (50,439)
Other comprehensive income – tax credit — — 7,978 7,978
Total comprehensive income for the year — — 566,775 566,775
Share-based payments — — 71,193 71,193
Balance at 31 March 2013 4,145,580 8,831,527 985,371 13,962,478
Consolidated Statement of Changes in Equity
for the year ended 31 March 2013 34
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2013 2012
Note £ £
Cash flows generated from operations
Profit for the year 582,266 526,983
Adjustments for:
Taxation (306,042) (47,556)
Finance costs 32,914 48,542
Finance income (2,493) (10,856)
Operating profit before working capital movement 306,645 517 ,113
Increase in trade and other receivables (139,262) (47,799)
Increase in inventories (144,338) (186,890)
Increase/(decrease) in trade and other payables 231,132 (37,697)
Loss/(gain) on sale of property, plant and equipment 1,010 (283)
Depreciation 9 268,699 264,710
Amortisation of intangible assets 8 406,553 415,419
Share-based payments 71,193 29,716
Taxation received/(paid) 13,321 (143,306)
Cash flow from operating activities 1,014,953 810,983
Settlement of acquisition related liability — (125,000)
Cash flow from operating activities 1,014,953 685,983
Investing activities
Finance income 2,493 10,856
Purchase of property, plant and equipment 9 (308,876) (454,179)
Purchase of intangible assets (1,185,133) (768,968)
Sale of property, plant and equipment — 13,681
Net cash used in investing activities (1,491,516) (1,198,610)
Financing activities
Finance costs (6,107) (12,563)
Loan repayments (497,377) (272,832)
Finance lease repayments (18,759) (60,030)
Net cash used in financing activities (522,243) (345,425)
Net decrease in cash and cash equivalents (998,806) (858,052)
Effects of exchange rate movements 367 (37,693)
Cash and cash equivalents at beginning of year 1,159,132 2,054,877
Cash and cash equivalents at end of year 160,693 1,159,132
Consolidated Cash Flow Statement
for the year ended 31 March 2013 35
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2013 2012
Note £ £
ASSETS
Non-current assets
Investments 20 10,928,927 10,774,918
Intangible assets 8 1,506,765 984,663
12,435,692 11,759,581
Current assets
Trade and other receivables 11 4,127,911 4,344,833
Cash and cash equivalents — 18,869
4,127,911 4,363,702
Total assets 16,563,603 16,123,283
EQUITY AND LIABILITIES
Equity
Issued capital 13,966,782 13,966,782
Retained earnings 364,028 232,939
Total equity 14,330,810 14,199,721
Liabilities
Non-current liabilities
Long-term borrowings 12 455,608 794,389
Derivative financial instruments 22 — 454
Total non-current liabilities 455,608 794,843
Current liabilities
Short-term borrowings 12 360,000 496,450
Trade and other payables 13 660,865 507,382
Other financial liabilities 19 500,000 124,887
Bank overdraft 256,320 —
Total current liabilities 1,777,185 1,128,719
Total liabilities 2,232,793 1,923,562
Total equity and liabilities 16,563,603 16,123,283
David Evans Kieron Harbinson
Non-executive Chairman Finance Director
28 June 2013 28 June 2013
Omega Diagnostics Group PLC
Registered number: 5017761
Company Balance Sheet
as at March 2013 36
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Share Share Retained
capital premium earnings Total
£££ £
Balance at 31 March 2011 4,517,862 9,448,920 292,639 14,259,421
Loss for the year ended 31 March 2012 — — (89,416) (89,416)
Total comprehensive income for the year — — (89,416) (89,416)
Share-based payments — — 29,716 29,716
Balance at 31 March 2012 4,517,862 9,448,920 232,939 14,199,721
Profit for the year ended 31 March 2013 — — 59,896 59,896
Total comprehensive income for the year — — 59,896 59,896
Share-based payments — — 71,193 71,193
Balance at 31 March 2013 4,517,862 9,448,920 364,028 14,330,810
Company Statement of Changes in Equity
for the year ended 31 March 2013 37
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2013 2012
£ £
Cash flows generated from operations
Profit/(loss) for the year 59,896 (89,416)
Adjustments for:
Taxation (13,322) 7,528
Finance costs 27,830 45,338
Finance income (74,026) (79,944)
Operating profit/(loss) before working capital movement 378 (116,494)
Decrease in trade and other receivables 216,922 605,150
Increase/(decrease) in trade and other payables 153,483 (182,630)
Taxation received/(paid) 13,321 (112,768)
Share-based payments 71,193 29,716
Net cash flow from operating activities 455,297 222,974
Investing activities
Finance income 74,026 79,944
Purchase of intangible assets (152,102) (435,000)
Investment in subsidiaries (154,009) (119,557)
Net cash used in investing activities (232,085) (474,613)
Financing activities
Finance costs (1,024) (9,362)
Loan repayments (497,377) (272,832)
Net cash used in financing activities (498,401) (282,194)
Net decrease in cash and cash equivalents (275,189) (533,833)
Cash and cash equivalents at beginning of year 18,869 552,702
(Overdraft)/cash and cash equivalents at end of year (256,320) 18,869
Company Cash Flow Statement
for the year ended 31 March 2013 38
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
1 Authorisation of financial statements
The financial statements of Omega Diagnostics Group PLC for the year ended 31 March 2013 were authorised for issue by the Board of Directors
on 28 June 2013, and the balance sheets were signed on the Board’s behalf by David Evans and Kieron Harbinson. Omega Diagnostics
Group PLC is a public limited company incorporated in England. The Company’s ordinary shares are traded on AIM.
2 Accounting policies
Basis of preparation
The accounting policies which follow set out those policies which have been applied consistently to all periods presented in these financial
statements. These financial statements are presented in sterling and have been prepared in accordance with IFRS as adopted by the EU
and applied in accordance with the provisions of the Companies Act 2006.
In relation to IFRS 8 – Operating Segments, the Group has identified the Executive Board as the chief operating decision maker with
responsibility for decisions over the allocation of resources to operating segments and for the monitoring of their performance. The Group
reports performance of the following three segments:
− Allergy and Autoimmune
− Food Intolerance
− Infectious Disease and Other
Basis of consolidation
The Group financial statements consolidate the financial statements of Omega Diagnostics Group PLC and the entities it controls
(its subsidiaries). Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its
activities and is achieved through direct or indirect ownership of voting rights. Subsidiaries are consolidated from the date of acquisition,
being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. The financial
statements of the subsidiaries used in the preparation of the consolidated financial statements are based on consistent accounting
policies. All intercompany balances and transactions, including unrealised profits arising from them, are eliminated.
Intangible assets
Goodwill
Business combinations are accounted for under IFRS 3 using the acquisition method. Goodwill represents the excess of the cost of the
business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Goodwill is
not amortised but is subject to an annual impairment review and whenever events or changes in circumstances indicate that the carrying
value may be impaired a charge is made to the income statement. After initial recognition, goodwill is stated at cost less any accumulated
impairment losses.
For the purpose of impairment testing, goodwill is allocated to the related cash-generating units monitored by management, usually
at business segment level or statutory Company level as the case may be. Where the recoverable amount of the cash-generating unit
is less than its carrying amount, including goodwill, an impairment loss is recognised in the income statement.
Other intangible assets
Intangible assets acquired as part of a business combination are recognised outside goodwill if the asset is separable or arises from contractual
or other legal rights and its fair value can be measured reliably. Following initial recognition at fair value at the acquisition date, the historic
cost model is applied, with intangible assets being carried at cost less accumulated amortisation and accumulated impairment losses.
Intangible assets with a finite life have no residual value and are amortised on a straight line basis over the expected useful lives, with
charges included in administration costs, as follows:
Technology assets – 5–20 years
Customer relationships – 5–10 years
Supply agreements – 5 years
Other intangibles – 5 years
Software – 5 years
The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable.
Research and development costs
Expenditure on research and initial feasibility work is written off through the income statement as incurred. Thereafter, expenditure on
product development which meets certain criteria is capitalised and amortised over its useful life. The stage at when it is probable that the
product will generate future economic benefits is when the following criteria have been met: technical feasibility; intention and ability to sell
the product; availability of resources to complete the development of the product; and the ability to measure the expenditure attributable
to the product. The useful life of the intangible asset is determined on a product-by-product basis, taking into consideration a number
of factors. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.
Notes to the Financial Statements
for the year ended 31 March 2013 39
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2 Accounting policies continued
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is
charged so as to write off the cost of assets to their estimated residual values over their estimated useful lives, on a straight line basis as follows:
Land and property – 33 years, straight line with no residual value
Leasehold improvements – 10 years, straight line with no residual value
Plant and machinery – 8 to 10 years, straight line with no residual value
Motor vehicles – 5 years, straight line with no residual value
The carrying values of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate the
carrying value may not be recoverable, and are written down immediately to their recoverable amount. Useful lives are reviewed annually
and, where adjustments are required, these are made prospectively.
Impairment of assets
The Group and Company assess at each reporting date whether there is an indication that an asset may be impaired. If any such indication
exists, the Group and Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an
asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset
does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount
of an asset exceeds its recoverable amount, the asset is considered to be impaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted to their net present value, using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks specific to that asset. Impairment losses on continuing
operations are recognised in the income statement in those expense categories consistent with the function of the impaired asset.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is defined as standard cost or purchase price and includes all
direct costs incurred in bringing each product to its present location and condition. Net realisable value is based on estimated selling
price less any further costs expected to be incurred prior to completion and disposal.
Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at the lower of original invoice amount and recoverable
amount. A provision for doubtful amounts is made when there is objective evidence that collection of the full amount is no longer probable.
Significant financial difficulty or significantly extended settlement periods are considered to be indicators of impairment. Normal average
payment terms vary from payment in advance to 90 days. Balances are written off when the probability of recovery is assessed as remote.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at banks and in hand and short-term deposits with an original maturity
of three months or less.
Financial instruments
Under IAS 39, financial assets, liabilities and equity instruments are classified according to the substance of the contractual arrangements
entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Financial assets are classified as either:
− financial assets at fair value through profit or loss; or
− loans and receivables.
Financial assets at fair value through profit or loss
The Group uses derivative financial instruments to reduce its exposure to fluctuations in interest rates, both in sterling and US dollars.
The Group does not hold or issue derivatives for speculative or trading purposes. Derivative financial instruments with positive fair values
are recognised as assets measured at their fair values at the balance sheet date. The fair value of interest rate contracts is determined
by reference to market values for similar instruments that have similar maturities. Changes in fair value are recognised in the income
statement included in finance costs, due to the fact that hedge accounting has not been applied.
Loans and receivables
Trade receivables that do not carry any interest and have fixed or determinable payment amounts that are not quoted in an active market
are classified as loans and receivables. Loans and receivables with a maturity of less than twelve months are included in current assets and
are measured at amortised cost using the effective interest method as reduced by appropriate allowances for estimated irrecoverable amounts.
Financial liabilities are classified as either:
− financial liabilities at fair value through profit or loss; or
− other liabilities. 40
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2 Accounting policies continued
Financial instruments continued
Financial liabilities at fair value through profit or loss
The Group uses derivative financial instruments to reduce its exposure to fluctuations in interest rates, both in sterling and US dollars.
The Group does not hold or issue derivatives for speculative or trading purposes. Derivative financial instruments with negative fair values
are recognised as liabilities measured at their fair values at the balance sheet date. The fair value of interest rate contracts is determined
by reference to market values for similar instruments that have similar maturities. Changes in fair value are recognised in the income
statement included in finance costs, due to the fact that hedge accounting has not been applied.
Other financial liabilities, whether used as part of the consideration for acquisitions which include deferred consideration or not, are designated
by the Group as financial liabilities at fair value through profit and loss. They are measured at the present value of the consideration expected
to be payable by discounting the expected future cash flows at prevailing interest rates. At initial recognition, the quantum of liability to be
recognised will depend upon management’s expectation, at that date, of the amount that would ultimately be payable. Where there is
a change in the expectation of future cash flows or interest rates, the change is reflected through the income statement.
Other liabilities
Trade payables are not interest bearing and are recognised initially at fair value and subsequently measured at amortised cost using
the effective interest method.
Bank borrowings are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
For long-term bank borrowings stated at amortised cost, transaction costs that are directly attributable to the borrowing instrument are
recognised as an interest expense over the life of the instrument.
A financial asset or liability is generally derecognised when the contract that gives rise to it is settled, sold, cancelled or expires. Where an
existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability
are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and recognition of the
new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised.
Financial assets and liabilities that are held for trading and other assets and liabilities designated as such on inception are included at fair
value through profit and loss. Financial assets and liabilities are classified as held for trading if they are acquired for sale in the short term.
Derivatives are also classified as held for trading unless they are designated as hedge instruments. Assets are carried in the balance sheet
at fair value with gains or losses recognised in the income statement.
Company’s investments in subsidiaries
The Company recognises its investments in subsidiaries at cost. The carrying value of investments is reviewed for impairment whenever
events or changes in circumstances indicate the carrying value may not be recoverable.
Presentation currency
The financial statements are presented in UK pounds sterling. Transactions in currencies other than sterling are recorded at the prevailing
rate of exchange at the date of the transaction. At each balance sheet date, monetary assets and liabilities that are denominated in foreign
currencies are retranslated at the rates prevailing on the balance sheet date.
Foreign currencies
Non-monetary assets and liabilities that are denominated in foreign currencies are translated at the rates prevailing at the date of the transaction.
Gains and losses arising on retranslation are included in the net profit or loss for the year. The trading results of the overseas subsidiaries
are translated at the average exchange rate ruling during the year, with the exchange difference between the average rates and the rates
ruling at the balance sheet date being taken to reserves. Any difference arising on the translation of the opening net investment, in the
overseas subsidiaries, and of applicable foreign currency loans are dealt with as adjustments to reserves.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and net of discounts and sales-related taxes. Sales of
goods are recognised when the significant risks and rewards of ownership are transferred to the customer. This will be when goods have
been dispatched and the collection of the related receivable is reasonably assured. Revenue relates to the sale of medical diagnostic kits.
Government grants
Government grants are recognised when it is reasonable to expect that the grants will be received and that all related conditions will be met,
usually on submission of a valid claim for payment. Government grants in respect of capital expenditure are credited to a deferred income
account and are released to the income statement over the expected useful lives of the relevant assets by equal annual instalments.
Leasing and hire purchase commitments
Assets held under finance leases and hire purchase contracts are capitalised in the balance sheet and are depreciated over the shorter
of their lease period and useful life. The corresponding lease or hire purchase obligation is capitalised in the balance sheet as a liability.
The interest element of the rental obligation is charged to the income statement over the period of the lease and represents a constant
proportion of the balance of capital repayments outstanding.
Rentals applicable to operating leases, where substantially all the benefits and risks remain with the lessor, are charged against profits
on a straight line basis over the period of the lease.
Notes to the Financial Statements continued
for the year ended 31 March 2013 41
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2 Accounting policies continued
Share-based payments
Equity-settled transactions
For equity-settled transactions, the Group measures the award by reference to the fair value at the date at which they are granted and it is
recognised as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award.
Fair value is determined using an appropriate pricing model. In valuing equity-settled transactions, no account is taken of any service and
performance (vesting conditions), other than conditions linked to the price of the shares of the Company (market conditions).
Any other conditions which are required to be met in order for an employee to become fully entitled to an award are considered to be
non-vesting conditions. Like market performance conditions, non-vesting conditions are taken into account in determining grant date fair
value. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or
non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided
that all other performance conditions are satisfied.
At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has
expired and management’s best estimate of the achievement or otherwise of vesting conditions and of the number of equity instruments
that will ultimately vest or, in the case of an instrument subject to a market or non-vesting condition, be treated as vesting as described above.
This includes any award where non-vesting conditions within the control of the Group or the employee are not met. The movement in
cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.
Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the cost
based on the original award terms continues to be recognised over the original vesting period. In addition, an expense is recognised over
the remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair value
of the original award and the fair value of the modified award, both as measured on the date of the modification. No reduction is
recognised if this difference is negative.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in
the income statement for the award is expensed immediately. Any compensation paid up to the fair value of the award at the cancellation
or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement.
Pension contributions
Contributions to personal pension plans of employees on a defined contribution basis are charged to the income statement in the year
in which they are payable.
The Group also operates two defined benefit plans in Germany, which are closed to new members. Obligations under defined benefit
plans are measured at discounted present values by actuaries, while plan assets are recorded at fair value. The operating and financing
costs of pensions are charged to the income statement in the period in which they arise and are recognised separately. The difference
between actual and expected returns on assets during the year, including changes in actuarial assumptions, are recognised in the
statement of comprehensive income.
Income taxes
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based
on tax rates and laws that are enacted or substantively enacted by the balance sheet date.
Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying
amounts in the financial statements, with the following exceptions:
− where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business
combination that at the time of the transaction affects neither accounting nor taxable profit or loss;
− in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing
of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the
foreseeable future; and
− deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which
the deductible temporary differences, carried forward tax credits or tax losses can be utilised.
Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the
related asset is realised or the liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
Income tax and deferred tax is charged or credited in other comprehensive income or directly to equity if it relates to items that are credited
or charged in other comprehensive income or directly to equity. Otherwise, income tax and deferred tax is recognised in profit or loss.
Use of estimates and judgements
The preparation of these financial statements requires management to make judgements, estimates and assumptions that affect
the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ
from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period
in which the estimate is revised and in any future periods affected.
The significant areas of estimation and uncertainty and critical judgements in applying the accounting policies that have the most
significant effect on the amounts recognised in the financial information are discussed overleaf. Further judgements, assumptions
and estimates are set out in the Group financial statements. 42
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2 Accounting policies continued
Use of estimates and judgements continued
Valuation of intangible assets
Management judgement is required to estimate the useful lives of intangible assets, having reference to future economic benefits
expected to be derived from use of the asset. Economic benefits are based on the fair values of estimated future cash flows.
Impairment of goodwill
Goodwill is tested annually for impairment. The test considers future cash flow projections of cash-generating units that give rise to the
goodwill. Where the discounted cash flows are less than the carrying value of goodwill, an impairment charge is recognised for the difference.
Further analysis of the estimates and judgements is disclosed in Note 8.
Deferred tax assets
Management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing
and level of future taxable profits together with an assessment of the effect of future tax planning strategies. The carrying value of the
deferred tax asset at 31 March 2013 is £553,647 (2012: £150,332). Further details are contained in Note 14.
New standards and interpretations not applied
IASB and IFRIC have issued the following standards and interpretations, which are considered relevant to the Group, with an effective
date after the date of these financial statements.
International Accounting Standards (IAS/IFRSs) Effective date
IAS 19 Employee Benefits (Amendment) 1 January 2013
IFRS 9 Financial Instruments 1 January 2015
IFRS 10 Consolidated Financial Statements 1 January 2014
IFRS 11 Joint Arrangements 1 January 2014
IFRS 12 Disclosure of Interests in Other Entities 1 January 2014
IFRS 13 Fair Value Measurement 1 January 2013
The above standards and interpretations will be adopted in accordance with their effective dates and have not been adopted in these
financial statements. The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact
on the Group’s financial statements in the period of initial application.
3 Adoption of new international financial reporting standards
The accounting policies adopted are consistent with those of the previous financial year.
4 Segment information
For management purposes the Group is organised into three operating divisions: Allergy and Autoimmune, Food Intolerance,
and Infectious Disease and Other.
The Allergy and Autoimmune division specialises in the research, development, production and marketing of in vitro allergy
and autoimmune tests used by doctors to diagnose patients with allergies and autoimmune diseases.
The Food Intolerance division specialises in the research, development and production of kits to aid the detection of immune reactions
to food. It also provides clinical analysis to the general public, clinics and health professionals as well as supplying the consumer Food
Detective
®
test.
The Infectious Disease division specialises in the research, development and production and marketing of kits to aid the diagnosis
of infectious diseases.
Corporate consists of centralised corporate costs which are not allocated across the three business divisions.
Inter-segment transfers or transactions are entered into under the normal commercial conditions that would be available to unrelated
third parties.
Notes to the Financial Statements continued
for the year ended 31 March 2013 43
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
4 Segment information continued
Business segment information
Infectious
Allergy and Food Disease/
Autoimmune Intolerance other Corporate Group
2013 ££££ £
Statutory presentation
Revenue 4,254,313 5,222,919 2,869,053 — 12,346,285
Inter-segment revenue (93,304) (833,232) (156,851) — (1,083,387)
Total revenue 4,161,009 4,389,687 2,712,202 — 11,262,898
Operating costs (4,391,981) (3,258,964) (2,559,475) (745,833) (10,956,253)
Operating profit/(loss) (230,972) 1,130,723 152,727 (745,833) 306,645
Net finance (costs)/income (72,362) 513 (4,868) 46,296 (30,421)
Profit/(loss) before taxation (303,334) 1,131,236 147,859 (699,537) 276,224
Adjusted profit before taxation
Profit/(loss) before taxation (303,334) 1,131,236 147,859 (699,537) 276,224
IFRS-related discount charges — — — 25,046 25,046
Fair value adjustments to financial derivatives — — — (454) (454)
Amortisation of intangible assets 282,412 98,866 25,275 — 406,553
Share-based payment charges — — — 71,193 71,193
Adjusted profit/(loss) before taxation (20,922) 1,230,102 173,134 (603,752) 778,562
Infectious
Allergy and Food Disease/
Autoimmune Intolerance other Corporate Group
2012 ££££ £
Statutory presentation
Revenue 4,488,210 4,456,689 2,762,572 — 11,707 ,471
Inter-segment revenue (11,436) (555,984) (15,998) — (583,418)
Total revenue 4,476,774 3,900,705 2,746,574 — 11,124,053
Operating costs (4,616,762) (2,863,458) (2,450,586) (676,134) (10,606,940)
Operating profit/(loss) (139,988) 1,037,247 295,988 (676,134) 517 ,113
Net finance (costs)/income (72,095) (197) — 34,606 (37,686)
Profit/(loss) before taxation (212,083) 1,037,050 295,988 (641,528) 479,427
Adjusted profit before taxation
Profit/(loss) before taxation (212,083) 1,037,050 295,988 (641,528) 479,427
IFRS-related discount charges 12,344 — — 32,881 45,225
Fair value adjustments to financial derivatives — — — (2,981) (2,981)
Amortisation of intangible assets 296,667 98,748 20,004 — 415,419
Acquisition costs 37,461 — — — 37,461
Share-based payment charges — — — 29,716 29,716
Adjusted profit/(loss) before taxation 134,389 1,135,798 315,992 (581,912) 1,004,267
The segment assets and liabilities are as follows:
Infectious
Allergy and Food Disease/
Autoimmune Intolerance other Corporate Group
2013 ££££ £
Segment assets 9,019,799 5,551,814 2,298,462 16,622 16,886,697
Unallocated assets ———— 721,446
Total assets 9,019,799 5,551,814 2,298,462 16,622 17,608,143
Segment liabilities 337,982 355,997 849,050 141,121 1,684,150
Unallocated liabilities ———— 1,961,515
Total liabilities 337,982 355,997 849,050 141,121 3,645,665 44
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
4 Segment information continued
Business segment information continued
Infectious
Allergy and Food Disease/
Autoimmune Intolerance other Corporate Group
2012 ££££ £
Segment assets 7,784,700 5,800,726 1,791,682 20,161 15,397 ,269
Unallocated assets — — — — 1,313,518
Total assets 7 ,784,700 5,800,726 1,791,682 20,161 16,710,787
Segment liabilities 259,121 306,478 618,849 268,570 1,453,018
Unallocated liabilities — — — — 1,933,259
Total liabilities 259,121 306,478 618,849 268,570 3,386,277
Unallocated assets comprise cash, income tax receivable, deferred taxation and derivative financial instruments. Unallocated liabilities comprise
interest-bearing loans, borrowings, other financial liabilities, derivative financial instruments, deferred taxation and income tax payable.
Information about major customers
No single customer accounts for 10% or more of Group revenues.
Geographical information
The Group’s geographical information is based on the location of its markets and customers. Sales to external customers disclosed in the
geographical information are based on the geographical location of its customers. The analysis of segment assets and capital expenditure
is based on the geographical location of the assets.
2013 2012
£ £
Revenues
UK 991,513 933,164
Germany 3,654,701 3,875,905
Rest of Europe 2,752,442 2,604,134
North America 348,984 327,505
South/Central America 511,968 441,347
India 399,775 401,799
Asia and Far East 1,041,788 913,494
Africa and Middle East 1,561,727 1,626,705
11,262,898 11,124,053
Property, Retirement Trade
plant and benefit and other
Intangibles equipment surplus Inventories receivables Total
2013 £££££ £
Assets
UK 7,443,646995,942 —899,494 2,073,849 11,412,931
Germany 2,900,341 1,090,479 31,886 849,865 381,648 5,254,219
India 3,889 29,865 — 84,528 101,265 219,547
Unallocated assets ————— 721,446
Total assets 10,347,876 2,116,286 31,886 1,833,887 2,556,762 17,608,143
Property, Retirement Trade
plant and benefit and other
Intangibles equipment surplus Inventories receivables Total
2012 £££££ £
Assets
UK 6,142,429 867,105 — 852,810 2,071,704 9,934,048
Germany 2,990,422 1,174,008 85,639 836,739 339,591 5,426,399
India 3,221 27,396 — — 6,205 36,822
Unallocated assets ————— 1,313,518
Total assets 9,136,072 2,068,509 85,639 1,689,549 2,417,500 16,710,787
Notes to the Financial Statements continued
for the year ended 31 March 2013 45
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
4 Segment information continued
Geographical information continued
2013 2012
£ £
Liabilities
UK 1,365,434 1,234,205
Germany 256,346 328,379
India 62,370 15,311
Unallocated liabilities 1,961,515 1,808,382
Total liabilities 3,645,665 3,386,277
Capital expenditure
UK 256,568 310,208
Germany 42,318 113,638
India 9,990 30,333
Total capital expenditure 308,876 454,179
5 Finance costs
2013 2012
Consolidated £ £
Interest payable on loans and bank overdrafts 6,471 14,862
Exchange difference on loans 927 577
Unwinding of discounts 21,732 32,880
Fair value adjustment to financial derivatives (454) (2,981)
Finance leases 4,238 3,204
32,914 48,542
6 Taxation
2013 2012
Consolidated £ £
(a) Tax credited in the income statement
Current tax – current year — —
Current tax – prior year adjustment 16,373 (18,158)
Deferred tax – current year 163,462 66,583
Deferred tax – prior year adjustment 126,207 (869)
306,042 47 ,556
(b) Tax relating to items charged or credited to other comprehensive income
Deferred tax on actuarial loss/(gain) on retirement benefit obligations 12,900 (21,393)
Deferred tax on net exchange adjustments (4,922) 37,978
Total tax credit 7,978 16,585
2013 2012
Consolidated £ £
(c) Reconciliation of total tax credit
Factors affecting the tax charge for the year:
Profit before tax 276,224 479,427
Effective rate of taxation 24% 26%
Profit before tax multiplied by the effective rate of tax 66,294 124,651
Effects of:
Expenses not deductible for tax purposes and permanent differences 21,423 6,815
Research and development tax credits (227,422) (151,954)
Tax (over)/under-provided in prior years (142,580) 19,027
Adjustment due to different overseas tax rate (9,372) (1,015)
Impact of UK rate change on deferred tax (14,385) (45,080)
Tax credit for the year (306,042) (47,556)
In his Budget speech on 20 March 2013, the Chancellor announced that the main UK corporation tax rate would be reduced from
the current rate of 24% to 20% by 2015. The rate of corporation tax reduced from 28% to 26% on 1 April 2011 and a reduction to 24%,
effective from 1 April 2012, was included in the Finance Bill that was enacted on 17 July 2012. A further reduction in the corporation
tax rate to 23%, effective from 1 April 2013, was also included in the Finance Bill.
As the reduction in the rate to 23% was enacted at the balance sheet date, this is the rate at which deferred tax has been provided.
The further rate reductions are to be incorporated within future legislative acts and so will not be substantively enacted until later
periods. The estimated impact of the proposed further rate reduction to 20% would be to reduce the deferred tax liability by £7,272. 46
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
7 Revenue and expenses
2013 2012
Consolidated £ £
Revenues
Revenue – sales of goods 11,262,898 11,124,053
Finance income 2,493 10,856
Total revenue 11,265,391 11,134,909
2013 2012
Consolidated £ £
Operating profit is stated after charging/crediting:
Material costs 3,053,462 2,978,393
Depreciation 268,699 264,710
Amortisation of intangibles 406,553 415,419
Net foreign exchange (gains)/losses (4,863) 21,722
Research and development costs 140,810 486,584
Operating lease rentals 249,931 193,822
Share-based payments 71,193 29,716
Auditors’ remuneration
Fees payable to the Company’s auditors for the audit of the annual accounts 20,000 23,300
– Local statutory audit of subsidiaries 50,000 50,000
– Local statutory audit of the parent Company 5,000 5,000
Fees payable to the Company’s auditors for other services
– Taxation 14,500 14,550
All research and development costs noted above were charged directly to administration costs in the income statement.
Staff costs
The average monthly number of employees (including Directors) was:
2013 2012
Consolidated number number
Operations 74 70
Management and administration 52 37
Employee numbers 126 107
Their aggregate remuneration comprised:
2013 2012
£ £
Wages and salaries 3,967,856 3,647,364
Social security costs 490,079 477,883
Pension costs 238,344 207,620
Share-based payments 71,193 29,716
4,767,472 4,362,583
Equity-settled share-based payments
Consolidated and Company
The share-based payment plans are described below.
EMI Option Scheme and Unapproved Option Scheme
The plans are equity-settled plans and the fair value is measured at the grant date. Under the above plans, share options are granted to
Directors and employees of the Company. The exercise price of the option is equal to the market price of the shares on the date of grant.
The options vest one year after the date of grant and are not subject to any performance criteria.
The fair value of the options is estimated at the grant date using the Black-Scholes pricing model taking into account the terms and conditions
upon which the instruments were granted.
The contractual life of each option granted is ten years and there is no cash settlement alternative.
Notes to the Financial Statements continued
for the year ended 31 March 2013 47
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
7 Revenue and expenses continued
Equity-settled share-based payments continued
Second Unapproved Option Scheme (SUOS)
The plan is an equity-settled plan and the fair value is measured at the grant date. Under the above plan, share options may be granted
to third parties for provision of services to the Company. The exercise price of the option is equal to the market price of the shares
on the date of grant. The options vest three years after the date of grant and are not subject to any performance criteria.
The fair value of the options is estimated at the grant date using the Black-Scholes pricing model taking into account the terms
and conditions upon which the instruments were granted.
The contractual life of each option granted is ten years and there is no cash settlement alternative.
Under the EMI Option Scheme 135,000 options lapsed during the year and a further 1,450,000 were granted.
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year:
2013 2013 2012 2012
number WAEP number WAEP
Outstanding 1 April 2,283,289 19.0p 1,923,289 19.0p
Granted during the year under the EMI Option Scheme 1,450,000 14.5p 450,000 12.6p
Granted during the year under the SUOS —— — —
Exercised during the year —— — —
Lapsed during the year under the EMI Option Scheme (135,000) — (90,000) —
Outstanding at 31 March 3,598,289 — 2,283,289 —
Exercisable at 31 March 2,148,289 — 1,833,289 —
The following table lists the inputs to the model used for the years ended 31 March 2013 and 31 March 2012:
EMI Option Scheme and
Unapproved Option Scheme
2013 2012
Dividend yield 0% 0%
Expected volatility 47% 52%
Risk-free interest rate 5.00% 3.42%
Weighted average remaining contractual life 7.4 6.7
Weighted average share price 14.5p 12.6p
Exercise price 14.5p 12.6p
Model used Black-Scholes Black-Scholes
The expected life of the options is based on management’s assumption of the options’ life due to the lack of any historical data on the
exercise period of these options. The assumption takes into account the experience of employees and Directors and is not necessarily
indicative of exercise patterns that may occur.
The expected volatility reflects the assumption that historical volatility over a period similar to the life of the option is indicative of future trends,
which may not necessarily be the actual outcome.
Directors’ remuneration
2013 2012
Consolidated £ £
Fees 45,000 45,000
Emoluments 371,506 477,829
416,506 522,829
Contributions to personal pension 18,500 26,500
435,006 549,329
Members of a defined contribution pension scheme at the year end 3 3
Information in respect of individual Directors’ emoluments is provided in the Directors’ Remuneration Report on pages 25 and 26. 48
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
8 Intangibles
Licences/ Supply Technology Customer Development
Goodwill software arrangements assets relationships costs Total
££££££ £
Cost
At 31 March 2011 4,745,302 1,113,492 549,248 2,147,521 1,280,349 — 9,835,912
Additions — 26,424 — 8,338 — — 34,762
Additions internally generated — — — — — 299,206 299,206
Currency translation (72,361) (3,500) (27,334) (9,054) (60,409) (400) (173,058)
At 31 March 2012 4,672,941 1,136,416 521,914 2,146,805 1,219,940 298,806 9,996,822
Additions — 570,582 — — — — 570,582
Additions internally generated — — — — — 1,026,464 1,026,464
Currency translation 11,837 1,925 4,669 1,538 10,018 4,480 34,467
At 31 March 2013 4,684,778 1,708,923 526,583 2,148,343 1,229,958 1,329,750 11,628,335
Accumulated amortisation
At 31 March 2011 — 9,989 27,438 362,473 59,441 — 459,341
Amortisation charge in the year — 37,528 108,243 132,753 136,895 — 415,419
Currency translation — (1,570) (5,202) (1,634) (5,604) — (14,010)
At 31 March 2012 — 45,947 130,479 493,592 190,732 — 860,750
Amortisation charge in the year — 44,948 101,739 130,710 129,156 — 406,553
Currency translation — 1,824 4,745 1,490 5,097 — 13,156
At 31 March 2013 — 92,719 236,963 625,792 324,985 — 1,280,459
Net book value
31 March 2013 4,684,778 1,616,204 289,620 1,522,551 904,973 1,329,750 10,347,876
31 March 2012 4,672,941 1,090,469 391,435 1,653,213 1,029,208 298,806 9,136,072
31 March 2011 4,745,302 1,103,503 521,810 1,785,048 1,220,908 — 9,376,571
Of the licenses/software balance above, £1,506,765 (2012: 984,663) is held on the balance sheet of the Company and relates to the IDS
and CD4 licenses. Additional costs of £522,102 were capitalised in the year in relation to these licenses.
Impairment testing of goodwill
The Group tests goodwill annually for impairment or more frequently if there are indicators of impairment. The carrying amount of goodwill
is indicated in the table above. The net book value of goodwill above for Genesis-CNS amounts to £3,016,892 (2012: £3,016,892), Co-Tek
£332,986 (2012: £332,986) and Omega GmbH £1,334,900 (2012: £1,323,063).
The recoverable amount of Genesis-CNS, Co-Tek and Omega GmbH has been determined based on a value in use calculation using
cash flow projections based on the actual results for the year ended 31 March 2013 and the financial budget approved by the Board covering
the period to 31 March 2014, with projected cash flows thereafter through to March 2017 based on a growth rate of 3% per annum. The key
assumptions used in the budget for Genesis-CNS are the sales projections which are predicated on the continued success of the Genarrayt
®
and Food Detective
®
assays being commercialised on an international basis and the gross margins which can be achieved from the sales of
these products. The key assumption used in the budget for Co-Tek is the growth in sales of the Company’s Micropath™ range of products
where increased volumes are dependent upon having accessed a lower manufacturing cost through the acquisition of Co-Tek itself. The
budget for Omega GmbH assumes continued organic growth in sales in the German market as well as achieving an increase in export sales
through the existing Omega international distribution network. The Omega GmbH forecast also includes revenues in years two to five from
the IDS-iSYS platform which will allow more rapid processing of higher volume tests.
In all three cases, the Company also makes assumptions in regard to having sufficient production personnel to cope with increased volumes.
The discount rate applied to cash flows is 12.5% for the Group which takes account of other risks specific to each segment such as currency
risk, geography and price risk. The discount rate is the weighted average cost of pre-tax cost of debt financing and the pre-tax cost of
equity financing. Cash flows beyond the budget period are extrapolated for Genesis-CNS, Co-Tek and Omega GmbH over the next four
years using a growth rate of 3% that equates to the current growth rate in the IVD industry. Thereafter, a nil growth rate has been assumed
for prudence. As a result, there has been no impairment to the carrying value of goodwill.
Sensitivity analysis
Base forecasts show headroom of £4.7 million above carrying value for Genesis-CNS, headroom of £410,000 above carrying value for
Co-Tek and headroom of £800,000 for Omega GmbH. Sensitivity analysis has been undertaken to assess the impact of any reasonably
possible change in key assumptions. If the growth rate were to drop from 3% to 1% this would have the effect of reducing the headroom
in Genesis-CNS by £191,000 over five years, in Co-Tek by £29,000 over five years and in Omega GmbH by £45,000 over five years.
For Genesis-CNS, the discount rate would have to increase to 48% or the growth rate would have to be a decline of 81% for the headroom
to reduce to £Nil.
For Co-Tek, the discount rate would have to increase to 55% or the growth rate would have to be a decline of 37% for the headroom
to reduce to £Nil.
For Omega GmbH, the discount rate would have to increase to 22% or the growth rate would have to be a decline of 44% for the headroom
to reduce to £Nil.
Notes to the Financial Statements continued
for the year ended 31 March 2013 49
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
9 Property, plant and equipment
Land and Leasehold Plant and Motor
property improvements machinery vehicles Total
Consolidated ££££ £
Cost
At 31 March 2011 713,332 181,625 2,169,420 75,411 3,139,788
Additions 10,281 40,953 402,945 — 454,179
Disposals — — (38,585) (22,438) (61,023)
Currency translation (35,800) (696) (28,475) (3,764) (68,735)
At 31 March 2012 687,813 221,882 2,505,305 49,209 3,464,209
Additions — 19,958 288,918 — 308,876
Disposals — — (4,907) — (4,907)
Currency translation 6,152 85 8,394 441 15,072
At 31 March 2013 693,965 241,925 2,797,710 49,650 3,783,250
Accumulated depreciation
At 31 March 2011 4,877 95,783 1,078,356 6,288 1,185,304
Charge in the year 19,513 23,055 202,253 19,889 264,710
Disposals — — (38,476) (9,199) (47,675)
Currency translation (940) (109) (4,446) (1,144) (6,639)
At 31 March 2012 23,450 118,729 1,237,687 15,834 1,395,700
Charge in the year 18,348 27,605 212,818 9,928 268,699
Disposals — — (3,897) — (3,897)
Currency translation 853 282 4,837 490 6,462
At 31 March 2013 42,651 146,616 1,451,445 26,252 1,666,964
Net book value
31 March 2013 651,314 95,309 1,346,265 23,398 2,116,286
31 March 2012 664,363 103,153 1,267,618 33,375 2,068,509
31 March 2011 708,455 85,842 1,091,064 69,123 1,954,484
The net book value of plant and machinery held under finance leases at 31 March 2013 is £24,636 (2012: £38,073).
10 Inventories
2013 2012
£ £
Raw materials 993,354 896,810
Work in progress 121,667 139,803
Finished goods and goods for resale 718,866 652,936
1,833,887 1,689,549
11 Trade and other receivables
2013 2012
Consolidated £ £
Trade receivables 2,309,765 2,237,309
Less provision for impairment of receivables (14,117) (14,117)
Trade receivables – net 2,295,648 2,223,192
Prepayments and other receivables 261,114 194,308
2,556,762 2,417,500
The Directors consider that the carrying amount of trade receivables and other receivables approximates their fair value.
2013 2012
Company £ £
Prepayments and other receivables 16,622 20,160
Due from subsidiary companies 4,111,289 4,324,673
4,127,911 4,344,833 50
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
11 Trade and other receivables continued
Analysis of trade receivables
2013 2012
Consolidated £ £
Neither impaired nor past due 1,857,402 1,543,940
Past due but not impaired 438,246 679,252
2013 2012
Company £ £
Neither impaired nor past due 4,111,289 4,324,673
Ageing of past due but not impaired trade receivables
2013 2012
£ £
Up to three months 295,148 503,826
Between three and six months 32,329 103,578
More than six months 110,769 71,848
The Directors consider that the carrying amount of trade receivables and other receivables approximates their fair value.
The credit quality of trade receivables that are neither past due nor impaired is assessed internally with reference to historical information
relating to counterparty default rates. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable
and no collateral is held as security.
12 Interest-bearing loans and borrowings and financial instruments
2013 2012
Consolidated £ £
Current
Bank loans — 136,450
Other loans 360,000 360,000
Obligations under finance leases 7,649 13,361
367,649 509,811
Non-current
Obligations under finance leases 28,864 —
Other loans 455,608 794,389
484,472 794,389
Bank loans comprised the following:
£136,450 variable rate loans 2013 (base rate + 2.0%) (2012: base rate + 2.0%) — 136,450
— 136,450
Less current instalments — (136,450)
— —
The Group uses finance leases and hire purchase contracts to acquire plant and machinery. These leases have terms of renewal but no
purchase options and escalation clauses. Renewals are at the option of the lessee. Future minimum payments under finance leases and
hire purchase contracts are as follows:
2013 2012
£ £
Future minimum payments due:
Not later than one year 10,007 13,667
After one year but not more than five years 32,524 —
42,531 13,667
Less finance charges allocated to future periods 6,018 306
Present value of minimum lease payments 36,513 13,361
The present value of minimum lease payments is analysed as follows:
Not later than one year 7,649 13,361
After one year but not more than five years 28,864 —
36,513 13,361
Notes to the Financial Statements continued
for the year ended 31 March 2013 51
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
12 Interest-bearing loans and borrowings and financial instruments continued
2013 2012
Consolidated £ £
Other loans comprise the following:
Vendor loan – 2014 (base rate) 815,608 1,154,389
815,608 1,154,389
The two Bank of Scotland term loans were repaid in full on 4 September 2012.
The term loans were secured by a floating charge over the assets of the Group. Cross-guarantees between Omega Diagnostics Group PLC,
Omega Diagnostics Limited, Genesis Diagnostics Limited and Cambridge Nutritional Sciences Limited are in place, and Omega
Diagnostics Group PLC has given the Bank of Scotland a debenture secured over the assets of the Company. Kieron Harbinson and
Andrew Shepherd also provided personal guarantees of £100,000 in support of the term loans. The security above remains in place
against the £1.7 million bank overdraft currently available to the Group.
2013 2012
Company £ £
Current
Bank loans — 136,450
Other loans 360,000 360,000
360,000 496,450
Non-current
Other loans 455,608 794,389
Bank loans comprised the following:
£136,450 variable rate loan 2013 (base rate + 2.0%) (2012: base rate + 2.0%) — 136,450
— 136,450
Less current instalments — (136,450)
— —
2013 2012
Company £ £
Other loans comprise the following:
Vendor loan – 2014 (base rate) 815,608 1,154,389
815,608 1,154,389
13 Trade and other payables
2013 2012
Consolidated £ £
Trade payables 1,231,405 962,115
Social security costs 135,292 101,118
Accruals and other payables 317,452 389,785
1,684,149 1,453,018
Trade payables and other payables comprise amounts outstanding for trade purchases and ongoing costs. The Directors consider
that the carrying amount of trade payables approximates their fair value.
2013 2012
Company £ £
Trade payables 42,527 47 ,428
Accruals and other payables 98,594 96,255
Due to subsidiary companies 519,744 363,699
660,865 507,382
Trade payables and other payables comprise amounts outstanding for trade purchases and ongoing costs. The Directors consider
that the carrying amount of trade payables approximates their fair value. 52
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
14 Deferred taxation
The deferred tax asset is made up as follows:
2013 2012
Consolidated £ £
Decelerated capital allowances 2,676 32,107
Temporary differences 46,261 9,287
Tax losses carried forward 504,710 108,938
553,647 150,332
A deferred tax asset has been recognised for the carry forward of unused tax losses to the extent that it is probable that future taxable
profits will be available against which the unused tax losses can be utilised.
The deferred tax liability is made up as follows:
2013 2012
Consolidated £ £
Fair value adjustments on acquisition 400,163 446,062
Accelerated capital allowances 49,684 36,273
Other timing differences 151,056 —
Retirement benefit obligations 8,492 21,393
609,395 503,728
15 Share capital
2013 2012
Company number number
Authorised share capital
Ordinary shares of 4 pence each 184,769,736 184,769,736
Deferred shares of 0.9 pence each 123,245,615 123,245,615
Issued and fully paid ordinary share capital
At the beginning of the year 85,216,257 85,216,257
Issued during the year — —
At the end of the year 85,216,257 85,216,257
During the year to 31 March 2013, the Company granted options over 1,450,000 ordinary shares at an exercise price of 14.5 pence per
share. The options will expire if not exercised within ten years of the date of grant.
16 Commitments and contingencies
Operating lease commitments
Future minimum rentals payable under non-cancellable operating leases are as follows:
2013 2012
Consolidated £ £
Land and buildings:
Within one year 232,124 175,119
Within two to five years 828,157 399,456
Other:
Within one year 17,777 18,703
Within two to five years 21,668 30,150
Land and buildings leases in force for Omega Diagnostics Limited premises extend to 30 June 2021. The land and buildings leases
in force for the premises of Genesis Diagnostics Limited and Cambridge Nutritional Sciences extend to March 2017.
Other leases are in force for office equipment items and extend to time periods ranging from December 2013 to June 2021. The leases
may be extended at the expiry of their term.
Performance bonds
The Group has performance bonds and guarantees in place amounting to £34,610 at 31 March 2013 (2012: £30,000).
Notes to the Financial Statements continued
for the year ended 31 March 2013 53
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
17 Related party transactions
Remuneration of key personnel
The remuneration of the key management personnel of Omega Diagnostics Group PLC is set out below in aggregate for each of the
categories specified in IAS 24 – Related Party Disclosures:
2013 2012
£ £
Short-term employee benefits 912,875 885,439
Share-based payments 45,934 8,020
Post-employment benefits 40,375 31,679
999,184 925,138
Included within short-term employee benefits are amounts paid to MBA Consultancy of £25,000 (2012: £25,000), a company controlled
by David Evans, and £20,000 (2012: £20,000) to Holdmer Associates Limited, a company controlled by Michael Gurner.
Other related party transactions
During the year there have been transactions between the parent Company, Omega Diagnostics Limited (ODL), Genesis Diagnostics Limited
(Genesis), Cambridge Nutritional Sciences (CNS), Co-Tek (South West) Limited (Co-Tek), Omega GmbH (GmbH) and Omega Dx (Asia)
largely relating to payment of fees. The amounts outstanding at the year end are as follows:
ODG ODL Genesis CNS Co-Tek GmbH Dx (Asia)
At 31 March 2013 £ £ £ £ £ £ £
Omega Diagnostics Group PLC — (1,362,530) 194,167 325,577 — (2,748,759) —
Omega Diagnostics Limited 1,362,530 — 131,508 240,498 15,424 — (59,727)
Genesis Diagnostics Limited (194,167) (131,508) — (183,891) (20,391) — (69,778)
Cambridge Nutritional
Sciences Limited (325,577) (240,498) 183,891 — — — (6,054)
Co-Tek (South West) Limited — (15,424) 20,391——— —
Omega GmbH 2,748,759————— (18,132)
Omega Dx (Asia) — 59,727 69,778 6,054 — 18,132 —
ODG ODL Genesis CNS Co-Tek GmbH
At 31 March 2012 £££££ £
Omega Diagnostics Group PLC — (1,466,926) 53,087 310,612 — (2,857,747)
Omega Diagnostics Limited 1,466,926 — (319,849) (142,722) — —
Genesis Diagnostics Limited (53,087) 319,849 — (66,098) — —
Cambridge Nutritional Sciences Limited (310,612) 142,722 66,098 — — —
Co-Tek (South West) Limited ————— —
Omega GmbH 2,857,747———— —
During the year there were transactions between the Company and its subsidiaries as follows:
2013 2012
£ £
Balance at 1 April 3,960,974 4,451,600
Charges to subsidiary companies 722,300 712,536
Transfers of cash from subsidiary companies (1,091,729) (1,203,162)
Balance at 31 March 2013 3,591,545 3,960,974
Note 12 discloses personal guarantees made by two of the Directors in support of the bank term loan.
18 Retirement benefit obligations
The Group operates pension schemes for the benefit of its UK and overseas employees.
Details of the defined contribution schemes for the Group’s employees are given below in Note (a). Details of the defined benefit schemes
for the Group’s German employees and details relating to these schemes are given below in Note (b). During the year Group accounted
for these pension schemes under IAS 19 – Employee Benefits.
a) Defined contribution schemes
The Group makes contributions to personal plans of employees on a defined contribution basis. The Group does not have ownership
of the schemes, with individual plans being arrangements between the employee and pension provider. For new hires in Germany, post
1 January 2011, the support fund (LV 1871 Unterstutzungskasse e.V) is the defined contribution scheme used. The total Group contributions
for the year amounted to £62,775 (2012: £57,713). 54
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
18 Retirement benefit obligations continued
b) Defined benefit schemes
The Deutscher Pensionsfonds AG and the LV 1871 Unterstutzungskasse e.V schemes give the rights to defined future benefits.
Of these benefits the past service component is based on years of service and salary as of 1 January 2011 and are provided by the
Deutscher Pensionsfonds AG. The remaining benefits based on years of service after 1 January 2011 as well as salary increases are
provided by the LV 1871 Unterstutzungskasse e.V scheme. These are mainly dependent on the number of earning years and salary level
at pension age. The commitments are covered through an insurance company and are compliant with the requirements of German
insurance laws. Pension costs relating to each scheme operating in Germany are charged in accordance with IAS 19 – Employee Benefits.
Formal valuations of each scheme have been carried out by Towers Watson (Reutlingen) GmbH, who are independent, professionally
qualified actuaries, on 2 May 2013 using the following assumptions:
2013 2012
Discount rate at 31 March 3.82% 5.00%
Expected return on plan assets at 31 March 3.00% 4.20%
Future salary increases 2.50% 2.50%
Future pension increases 1.75% 1.75%
Turnover rate 2.00% 2.00%
(i) The amounts recognised in the balance sheet are as follows:
2013 2012
£ £
Present value of funded obligations 1,664,439 1,358,452
Fair value of plan assets 1,696,325 1,444,091
Net asset 31,886 85,639
(ii) The amounts recognised in the income statement are as follows:
2013 2012
£ £
Current service costs 162,569 150,513
Interest on obligation 68,530 61,456
Expected return on plan assets (64,450) (51,769)
Total included in employee benefits expense 166,649 160,200
The current service costs for the year, £166,649 (2012: £160,200), have been included in administration costs.
(iii) The amounts recognised in the consolidated statement of comprehensive income are as follows:
2013 2012
£ £
Actuarial losses on defined benefit obligation (64,211) (29,087)
Actuarial gains on plan assets 13,772 85,087
Total actuarial (loss)/gain on pensions (50,439) 56,000
(iv) Changes in the present value of the defined benefit obligation are as follows:
2013 2012
£ £
Opening defined benefit obligation 1,358,452 1,174,883
Current service cost 162,569 150,513
Interest cost 68,530 61,456
Actuarial losses on plan liabilities 64,211 29,087
Exchange differences on foreign plans 10,677 (57,487)
Benefits paid — —
Closing defined benefit obligation 1,664,439 1,358,452
(v) Changes in the fair value of plan assets are as follows:
2013 2012
£ £
Opening fair value of plan assets 1,444,091 1,216,867
Expected return 64,450 51,769
Actuarial gains 13,772 85,087
Contributions by employer 162,569 149,907
Exchange differences on foreign plans 11,443 (59,539)
Benefits paid — —
Closing fair value of plan assets 1,696,325 1,444,091
Notes to the Financial Statements continued
for the year ended 31 March 2013 55
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
18 Retirement benefit obligations continued
b) Defined benefit schemes continued
(vi) The major categories of plan assets as a percentage of total plan assets are as follows:
2013 2012
Equities 15% 18%
Bonds/debt instruments 68% 71%
Cash/other 17% 11%
The asset figures above are now weighted with the underlying assets.
The Group expects to contribute £165,000 to its defined benefit pension plans in the year ending 31 March 2014.
(vii) Mortality assumptions
Assumptions regarding future mortality experience are set based on advice in accordance with published statistics and experience in Germany. In
the calculations, the mortality rate used is in accordance with Heubeck Richttafeln’s basis of calculation for group pension insurance, 2005G. Other
assumptions have been set in accordance with Heubeck Richttafeln’s basis of calculation for group pension insurance, as set out in schedule 2005G.
(viii) History of experience adjustments:
2013 2012
£ £
Defined benefit obligation 1,664,439 1,358,452
Plan assets 1,696,325 1,444,091
Surplus 31,886 85,639
Experience adjustments gains on plan liabilities (230,708) (105,486)
Experience adjustments gains on plan assets (13,772) (85,087)
IAS 19 (Revised) – Employee Benefits will become effective for the Group in the March 2014 accounts. Under IAS 19 (Revised), there will
be no impact on the net defined benefit liability. The net charge to next year’s income statement will increase by approximately £6,300
following the introduction of the concept of recognising net interest on the net defined benefit liability in place of the interest on the defined
benefit obligation and the expected return on plan assets recognised under the current standard. This increase in the net charge to next
year’s income statement would be offset by a decrease in the charge to other comprehensive income.
19 Other financial liabilities
2013
Consolidated and Company £
As at 1 April 2012 124,887
Discount unwind in year 5,113
Payment in year to IDS (130,000)
Final instalment payable in March 2014 500,000
As at 31 March 2013 500,000
At 31 March 2012 other financial liabilities comprised unconditional future commitments under the licence agreement with IDS. At 31 March 2013
the liability relates to a final payment due to IDS under the licence agreement and is payable on 28 March 2014 and is recorded on the
balance sheet now that the Group has no intention of exercising its break clause under the agreement.
20 Investments
Company
The Company’s investments in subsidiaries, which are all 100% owned, are comprised of the following:
Country of 2013 2012
incorporation £ £
Investment in Omega Diagnostics Limited UK 1,752,884 1,752,884
Investment in Genesis Diagnostics Limited UK 1,815,623 1,815,623
Investment in Cambridge Nutritional Sciences Limited UK 4,063,553 4,063,553
Investment in Co-Tek (South West) Limited UK 480,978 480,978
Investment in Bealaw (692) Limited UK 1 1
Investment in Bealaw (693) Limited UK 1 1
Investment in Omega GmbH Germany 2,542,321 2,542,321
Investment in Omega Dx (Asia) India 273,566 119,557
10,928,927 10,774,918
The further investment in the year relates to continued funding of Omega Dx (Asia).
Bealaw (692) Limited and Bealaw (693) Limited are both dormant companies that have never traded. 56
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
21 Earnings per share
Basic earnings per share is calculated by dividing net profit for the year attributable to ordinary equity holders of the Group by the weighted
average number of ordinary shares outstanding during the year.
Diluted earnings per share is calculated by dividing the net profit attributable to ordinary equity holders of the Group by the weighted
average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued
on the conversion of all the dilutive potential ordinary shares into ordinary shares. Diluting events are excluded from the calculation when
the average market price of ordinary shares is lower than the exercise price.
2013 2012
£ £
Profit attributable to equity holders of the Group 582,266 526,983
2013 2012
number number
Basic average number of shares 85,216,257 85,216,257
Share options 52,703 22,489
Diluted weighted average number of shares 85,268,960 85,238,746
Adjusted earnings per share on profit for the year
The Group presents adjusted earnings per share, which is calculated by taking adjusted profit before taxation and adding the tax credit
or deducting the tax charge in order to allow shareholders to understand better the elements of financial performance in the year,
so as to facilitate comparison with prior periods and to better assess trends in financial performance.
2013 2012
£ £
Adjusted profit before taxation 778,562 1,004,267
Tax credit 306,042 47 ,556
Adjusted profit attributable to equity holders of the Group 1,084,604 1,051,823
22 Financial instruments
The Group’s principal financial instruments comprise loans, finance leases, financial derivatives and cash. The main purpose of these financial
instruments is to manage the Group’s funding and liquidity requirements. The Group has other financial instruments, such as trade receivables
and trade payables, which arise directly from its operations. The categories of financial instruments are summarised in the following tables:
Loans and
receivables Total
Assets as per the consolidated balance sheet £ £
2013
Trade receivables 2,295,648 2,295,648
Cash and cash equivalents 160,693 160,693
2,456,341 2,456,341
Loans and
receivables Total
Assets as per the consolidated balance sheet £ £
2012
Trade receivables 2,223,192 2,223,192
Cash and cash equivalents 1,159,132 1,159,132
3,382,324 3,382,324
Notes to the Financial Statements continued
for the year ended 31 March 2013 57
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
22 Financial instruments continued
Loans and
receivables Total
Assets as per the Company balance sheet £ £
2013
Due from subsidiary companies 4,111,289 4,111,289
Cash and cash equivalents — —
4,111,289 4,111,289
Loans and
receivables Total
Assets as per the Company balance sheet £ £
2012
Due from subsidiary companies 4,324,673 4,324,673
Cash and cash equivalents 18,869 18,869
4,343,542 4,343,542
Liabilities at fair
value through Amortised
profit and loss cost Total
Liabilities as per the consolidated balance sheet ££ £
2013
Trade payables —1,231,405 1,231,405
Obligations under finance leases —36,515 36,515
Other loans (designated on initial recognition) 815,608 — 815,608
Other financial liabilities — 500,000 500,000
815,608 1,767,920 2,583,528
Liabilities at fair
value through Amortised
profit and loss cost Total
Liabilities as per the consolidated balance sheet ££ £
2012
Derivative financial instruments (held for trading) 454 — 454
Trade payables — 962,115 962,115
Obligations under finance leases —13,361 13,361
Bank loans —136,450 136,450
Other loans (designated on initial recognition) 1,154,389 — 1,154,389
Other financial liabilities —124,887 124,887
1,154,843 1,236,813 2,391,656
Liabilities at fair
value through Amortised
profit and loss cost Total
Liabilities as per the Company balance sheet ££ £
2013
Trade payables and amounts due to subsidiary companies — 562,271 562,271
Other loans (designated upon initial recognition) 815,608 — 815,608
Other financial liabilities — 500,000 500,000
815,608 1,062,271 1,877,879
Liabilities at fair
value through Amortised
profit and loss cost Total
Liabilities as per the Company balance sheet ££ £
2012
Derivative financial instruments (held for trading) 454 — 454
Trade payables and amounts due to subsidiary companies — 411,127 411,127
Bank loans —136,450 136,450
Other loans (designated upon initial recognition) 1,154,389 — 1,154,389
Other financial liabilities —124,887 124,887
1,154,843 672,464 1,827 ,307 58
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
22 Financial instruments continued
Within other loans designated at fair value through profit and loss is the vendor loan note of £1.1 million, which was issued in September 2007 .
It carries a coupon of base rate only and is repayable in three equal instalments of £360,000 in September 2012, 2013 and 2014 and a final
capital payment of £20k in September 2015. The interest is rolled up and repayable with the final capital payment. The fair value is calculated
as the future cash flows expected to result based on current estimates of interest rates. There has been no change in the year to the fair value
of the loan due to changes in credit risk. The movement in the year of £338,781 (2012: £28,154) is due to the first instalment being paid
in September 2012 (£360,000) offset by the effect of unwinding discount factors (£21,219), which is included within finance charges
in the income statement.
Financial risk management
The principal financial risks to which the Group is exposed are those relating to foreign currency, credit, liquidity and interest rate.
These risks are managed in accordance with Board-approved policies.
Foreign currency risk
The Group operates in more than one currency jurisdiction and is therefore exposed to currency risk on the retranslation of the income
statement and the balance sheet of its overseas subsidiaries from euros and rupees into its functional currency of pounds sterling.
The Company funds its subsidiaries by a mixture of equity and intercompany loan financing and these balances are subject to exchange
rate movements that can give rise to movements in equity. The Group also buys and sells goods and services in currencies other than the
functional currency, principally in euros and US dollars. The Group has US dollar and euro-denominated bank accounts and, where possible,
the Group will offset currency exposure where purchases and sales of goods and services can be made in these currencies. The Group’s
non-sterling revenues, profits, assets, liabilities and cash flows can be affected by movements in exchange rates. It is currently Group policy
not to engage in any speculative transaction of any kind but this will be monitored by the Board to determine whether it is appropriate
to use additional currency management procedures to manage risk. At 31 March 2013 (and 31 March 2012) the Group has not entered
into any hedge transactions.
The following table demonstrates the sensitivity to a possible change in currency rates on the Group’s profit before tax and equity through
the impact of sterling weakening against the US dollar, the euro and the Canadian dollar.
Effect on
Decrease profit Effect on
in currency before tax equity
rate £ £
2013
Trade and other receivables 5% 61,271 —
Trade and other payables 5% (28,400) —
Cash and cash equivalents 5% 13,002 —
Bank loans 5% — —
Net investment in overseas subsidiary 5% — 75,310
2012
Trade and other receivables 5% 52,924 —
Trade and other payables 5% (30,360) —
Cash and cash equivalents 5% 16,589 —
Bank loans 5% (4,024) —
Net investment in overseas subsidiary 5% — 98,112
An increase in currency rate of 5% would have a similar but opposite effect. The sensitivity around bank loans above represents the entire
impact on the Company’s profit before tax and equity.
Credit risk
The Group’s credit risk is primarily attributable to its trade receivables. The Group conducts its operations in many countries, so there is
no concentration of risk in any one area. In most cases, the Group grants credit without security to its customers. Creditworthiness checks
are undertaken before entering into contracts with new customers, and credit limits are set as appropriate. The Group conducts most of
its operations through distributors and is therefore able to maintain a fairly close relationship with its immediate customers. As such, the
Group monitors payment profiles of customers on a regular basis and is able to spot deteriorations in payment times. An allowance for
impairment is made that represents the potential loss in respect of individual receivables where there is an identifiable loss event which,
based on previous experience, is evidence of a reduction in the recoverability of cash flows. The amounts presented in the balance sheet
are net of allowance for doubtful receivables. An analysis of trade receivables from various regions is analysed in the following table:
2013 2012
Trade Trade
receivables receivables
£ £
UK/Europe 1,368,012 1,238,068
North America 94,783 72,395
South/Central America 110,354 103,192
Asia and Far East 302,678 320,735
Africa and Middle East 419,821 488,802
2,295,648 2,223,192
Notes to the Financial Statements continued
for the year ended 31 March 2013 59
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
22 Financial instruments continued
Financial risk management continued
Capital management
An explanation of the Group’s capital management process and objectives is set out in the Capital management section on page 19
of the Financial Review.
Liquidity risk
The Group’s objective is to maintain sufficient headroom to meet its foreseeable financing and working capital requirements. The Group
has in place drawn loan facilities and, in the case of bank loans, regularly monitors performance to ensure compliance with all covenants.
The Group also maintains a surplus balance of cash and cash equivalents to ensure flexible liquidity to meet financial liabilities as they fall due.
The table below summarises the maturity profile of the Group’s financial liabilities at 31 March 2013 based on the undiscounted cash flows
of liabilities which include both future interest and principal amounts outstanding based on the earliest date on which the Group can be
required to pay. The amounts of future interest are not included in the carrying value of financial liabilities on the balance sheet.
Less than 3 to 12 1 to 5
3 months months years Total
Consolidated £££ £
2013
Trade payables 1,231,405 — — 1,231,405
Obligations under finance leases 2,502 7,505 32,524 42,531
Vendor loan — 360,000 480,318 840,318
1,233,907 367,505 512,842 2,114,254
2012
Trade payables 962,115 — — 962,115
Obligations under finance leases 6,614 7,053 — 13,667
Bank loans 68,779 68,271 — 137 ,050
Vendor loan — 360,000 840,168 1,200,168
1,037 ,508 435,324 840,168 2,313,000
The table below summarises the maturity profile of the Company’s financial liabilities at 31 March 2013 based on the undiscounted cash
flows of liabilities based on the earliest date on which the Company can be required to pay.
Less than 3 to 12 1 to 5
3 months months years Total
Company £££ £
2013
Trade payables and amounts due to subsidiary companies 562,271 — — 562,271
Vendor loan — 360,000 480,318 840,318
562,271 360,000 480,318 1,402,589
2012
Trade payables and amounts due to subsidiary companies 411,127 — — 411,127
Bank loans 68,779 68,271 — 137 ,050
Vendor loan — 360,000 840,168 1,200,168
479,906 428,271 840,168 1,748,345
Interest rate risk
All of the Group’s borrowings are at variable rates of interest.
The following table demonstrates the sensitivity to a possible change in interest rates on the Group’s profit before tax through the impact
on floating rate borrowings and cash balances.
Effect on profit
before tax
Increase in and equity
Consolidated basis points £
2013
Cash and cash equivalents 25 1,650
Vendor loan 25 (2,300)
2012
Cash and cash equivalents 25 4,018
Bank loans – pounds sterling 25 (300)
Bank loans – US dollars 25 (382)
Vendor loan 25 (2,750) 60
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
22 Financial instruments continued
Financial risk management continued
Interest rate risk continued
The following table demonstrates the sensitivity to a possible change in interest rates on the Company’s profit before tax through the impact
on floating rate borrowings and cash balances.
Effect on profit
before tax
Increase in and equity
Company basis points £
2013
Cash and cash equivalents 25 (297)
Vendor loan 25 (2,300)
2012
Cash and cash equivalents 25 714
Bank loans – pounds sterling 25 (300)
Bank loans – US dollars 25 (382)
Vendor loan 25 (2,750)
Fair values
The carrying amount for all categories of financial assets and liabilities disclosed on the balance sheet and in the related notes to the accounts
is equal to the fair value of such assets and liabilities as at both 31 March 2013 and 31 March 2012. The monetary value attributable to
these financial assets and liabilities is the same value that has been disclosed in the related notes to the accounts.
The valuation methods used to fair value the financial assets and liabilities have been disclosed in Note 2 to the financial statements under
the heading of Financial instruments.
The carrying amount recorded in the balance sheet of each financial asset as at 31 March 2013 and 31 March 2012, including derivative
financial instruments, represents the Group’s maximum exposure to credit risk.
Derivative financial instruments
The Group uses the following hierarchy for determining and disclosing the fair value of instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly
or indirectly; and
Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable
market data.
The fair value of the financial derivatives, detailed below, have been valued using the hierarchy above and have been categorised as level 2.
2013 2012
Consolidated and Company £ £
Included in non-current assets
Interest rate instruments — —
Included in non-current liabilities
Interest rate instruments — 454
The derivative financial instruments in the prior year comprised:
a) an interest rate cap of 5.5%, the floating rate option being Bank of England daily base rate; and
b) an interest cap and floor of 5.0% and 2.25% respectively, the floating option rate being USD Libor.
The Group does not hold or issue derivatives for speculative or trading purposes.
23 Post balance sheet event
On 11 June 2013 the Group completed the placing and subscription of 23,529,412 new ordinary shares of 4 pence each with new
and existing shareholders at a price of 17 pence per new ordinary share.
Notes to the Financial Statements continued
for the year ended 31 March 2013 61
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Notice is hereby given that the Annual General Meeting of the Company will be held at Omega House, Hillfoots Business Village,
Clackmannanshire FK12 5DQ on 28 August 2013 at 11am for the following purposes:
Ordinary business
1. To receive and adopt the reports of the Directors and the auditors and the audited accounts for the year ended 31 March 2013.
2. To reappoint Ernst & Young LLP as auditors of the Company to hold office until the conclusion of the next general meeting at which
accounts are laid before the Company and that their remuneration be fixed by the Directors.
3. To re-elect Mr Andrew Shepherd as a Director of the Company.
4. To elect Mr William Rhodes as a Director of the Company.
5. That, in accordance with section 551 of the Companies Act 2006, the Directors be generally and unconditionally authorised to allot shares
in the Company or grant rights to subscribe for or convert any security into shares in the Company (“Rights”) up to an aggregate nominal
amount of £1,449,942.24 ordinary shares of 4p each (“Ordinary Shares”), provided that this authority shall, unless, renewed, varied or
revoked by the Company, expire on the conclusion of the next annual general meeting of the Company or, if earlier, on 31 October 2014
save that the Company may, before such expiry, make an offer or agreement which would or might require shares to be allotted or Rights to
be granted and the Directors may allot shares or grant Rights in pursuance of any such offer or agreement notwithstanding that the authority
conferred by this resolution has expired. This authority is in substitution for all previous authorities conferred on the Directors in accordance
with section 551 of the Companies Act 2006, but without prejudice to any allotment already made or to be made pursuant to such authority.
Special business
Resolution 6 is proposed as a special resolution.
6. That, conditional upon the passing of resolution 5 above, and in accordance with section 570 of the Companies Act the Directors
be generally empowered to allot equity securities (as defined in section 560 of the Companies Act 2006) pursuant to the authority
conferred by resolution 5 as if section 561(1) of the Companies Act 2006 did not apply to any such allotment, provided that this power
shall be limited to:
6.1 the allotment of equity securities in connection with an issue in favour of the holders of Ordinary Shares where the equity
securities respectively attributable to the interests of all holders of Ordinary Shares are proportionate (as nearly as may be) to
the respective number of Ordinary Shares held by them but subject to such exclusions or arrangements as the Directors may
deem necessary or expedient to deal with fractional entitlements arising or any legal or practical problems under the laws of
any overseas territory or the requirements of any regulatory body or stock exchange; and
6.2 the allotment of Ordinary Shares otherwise than pursuant to sub paragraph 6.1 above up to an aggregate nominal amount
of £217,491.34,
and provided that this power shall, unless renewed, varied or revoked by the Company, expire on the conclusion of the next annual
general meeting of the Company or, if earlier, 31 October 2014, save that the Company may, before such expiry, make an offer or
agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities
in pursuance of any such offer or agreement notwithstanding that the power conferred by this resolution has expired.
By order of the Board
Kieron Harbinson
Company Secretary
28 June 2013
Notice of Annual General Meeting 62
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Notes to the Notice of Annual General Meeting
Entitlement to attend and vote
1. Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001,
the Company specifies that only those members registered on the Company’s
register of members at 6pm on 26 August 2013 shall be entitled to attend and
vote at the Meeting.
Appointment of proxies
2. If you are a member of the Company at the time set out in Note 1 above, you
are entitled to appoint a proxy to exercise all or any of your rights to attend,
speak and vote at the Meeting and you should have received a proxy form with
this notice of meeting. You can only appoint a proxy using the procedures set
out in these notes and the notes to the proxy form.
3. A proxy does not need to be a member of the Company but must attend
the Meeting to represent you. Details of how to appoint the Chairman of the
Meeting or another person as your proxy using the proxy form are set out in the
notes to the proxy form. If you wish your proxy to speak on your behalf at the
Meeting you will need to appoint your own choice of proxy (not the Chairman)
and give your instructions directly to them.
4. You may appoint more than one proxy provided each proxy is appointed to
exercise rights attached to different shares. You may not appoint more than
one proxy to exercise rights attached to any one share. To appoint more than
one proxy, please contact the registrars of the Company, Share Registrars
Limited, on 01252 821 390.
5. A vote withheld is not a vote in law, which means that the vote will not be
counted in the calculation of votes for or against the resolution. If no voting
indication is given, your proxy will vote or abstain from voting at his or her
discretion. Your proxy will vote (or abstain from voting) as he or she thinks
fit in relation to any other matter which is put before the Meeting.
Appointment of proxy using hard-copy proxy form
6. The notes to the proxy form explain how to direct your proxy how to vote
on each resolution or withhold their vote.
To appoint a proxy using the proxy form, the form must be:
and Lamb Yard, Farnham, Surrey GU9 7LL or by facsimile transmission
to 01252 719 232;
[email protected];
and received by Share Registrars Limited no later than 11am on 26 August 2013.
In the case of a member which is a company, the proxy form must be executed
under its common seal or signed on its behalf by an officer of the company or
an attorney for the company.
Any power of attorney or any other authority under which the proxy form is signed
(or a duly certified copy of such power or authority) must be included with the
proxy form.
Appointment of proxy by joint members
7. In the case of joint holders, where more than one of the joint holders purports
to appoint a proxy, only the appointment submitted by the most senior holder
will be accepted. Seniority is determined by the order in which the names
of the joint holders appear in the Company’s register of members in
respect of the joint holding (the first-named being the most senior).
Changing proxy instructions
8. To change your proxy instructions simply submit a new proxy appointment
using the methods set out above. Note that the cut-off time for receipt
of proxy appointments (see above) also applies in relation to amended
instructions; any amended proxy appointment received after the relevant
cut-off time will be disregarded.
Where you have appointed a proxy using the hard-copy proxy form and would
like to change the instructions using another hard-copy proxy form, please
contact Share Registrars Limited on 01252 821 390.
If you submit more than one valid proxy appointment, the appointment received
last before the latest time for the receipt of proxies will take precedence.
Termination of proxy appointments
9. In order to revoke a proxy instruction you will need to inform the Company using
one of the following methods:
By sending a signed hard-copy notice clearly stating your intention to revoke
your proxy appointment to Share Registrars Limited at Suite E, First Floor,
9 Lion and Lamb Yard, Farnham, Surrey GU9 7LL or by facsimile transmission
to 01252 719 232. In the case of a member which is a company, the revocation
notice must be executed under its common seal or signed on its behalf by an
officer of the company or an attorney for the company. Any power of attorney
or any other authority under which the revocation notice is signed (or a duly
certified copy of such power of authority) must be included with the revocation notice.
In either case, the revocation notice must be received by Share Registrars
Limited no later than 11am on 26 August 2013.
If you attempt to revoke your proxy appointment but the revocation is received
after the time specified then, subject to the paragraph directly below, your proxy
appointment will remain valid.
Appointment of a proxy does not preclude you from attending the Meeting
and voting in person. If you have appointed a proxy and attend the Meeting
in person, your proxy appointment will automatically be terminated.
Corporate representing
10. Corporate members are referred to the guidance issued by the Institute
of Chartered Secretaries and Administrators on proxies and corporate
representatives – www.icsa.org.uk – for further details of this procedure.
Issued shares and total voting rights
11. As at the date of this Annual Report the Company’s issued voting share
capital comprised 108,745,669 ordinary shares of 4p each. Each ordinary
share carries the right to one vote at a general meeting of the Company and,
therefore, the total number of voting rights in the Company is as at the date
of this Annual Report.
Communications with the Company
12. Except as provided above, members who have general queries about the
Meeting should telephone Kieron Harbinson on +44(0)1259 763 030 (no other
methods of communication will be accepted). You may not use any electronic
address provided either in this notice of annual general meeting, or any related
documents (including the proxy form), to communicate with the Company for
any purposes other than those expressly stated.
Voting through CREST
CREST members who wish to appoint a proxy or proxies through the CREST
electronic proxy appointment service may do so for the Annual General Meeting and
any adjournment(s) thereof by using the procedures described in the CREST Manual.
CREST Personal Members or other CREST sponsored members, and those
CREST members who have appointed a voting service provider(s) should refer
to their CREST sponsor or voting service provider(s), who will be able to take the
appropriate action on their behalf.
In order for a proxy appointment or instruction made using the CREST service to
be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be
properly authenticated in accordance with CRESTCo Limited’s specifications and
must contain the information required for such instructions, as described in the
CREST Manual.
The message, regardless of whether it relates to the appointment of a proxy or
to an amendment to the instruction given to a previously appointed proxy must,
in order to be valid, be transmitted so as to be received by the issuer’s agent
(7RA36) by the latest time(s) for receipt of proxy appointments specified above.
For this purpose, the time of receipt will be taken to be the time (as determined
by the timestamp applied to the message by the CREST Applications Host) from
which the issuer’s agent is able to retrieve the message by enquiry to CREST in
the manner prescribed by CREST. After this time, any change of instructions to
proxies appointed through CREST should be communicated to the appointee
through other means.
CREST members and, where applicable, their CREST sponsors or voting service
providers should note that CRESTCo Limited does not make available special
procedures in CREST for any particular messages. Normal system timings and
limitations will therefore apply in relation to the input of CREST Proxy Instructions.
It is the responsibility of the CREST member concerned to take (or, if the CREST
member is a CREST personal member or sponsored member or has appointed
a voting service provider(s), to procure that his or her CREST sponsor or voting
service provider(s) take(s)) such action as shall be necessary to ensure that
a message is transmitted by means of CREST by any particular time. In this
connection, CREST members and, where applicable, their CREST sponsors or
voting service providers are referred, in particular, to those sections of the CREST
Manual concerning practical limitations of the CREST system and timings.
The Company may treat as invalid a CREST Proxy instruction in the circumstances
set out in Regulation 35(5) (a) of the Uncertificated Securities Regulations 2001.
Registered in England and Wales number 5017761
www.omegadiagnostics.com
Omega Diagnostics Group PLC
Omega House
Hillfoots Business Village
Alva FK12 5DQ
Scotland
United Kingdom
Tel: +44 (0)1259 763030
Fax: +44 (0)1259 761853 Omega Diagnostics Group PLC
Omega House
Hillfoots Business Village
Alva FK12 5DQ
Scotland
United Kingdom
www.omegadiagnostics.com
Tel: +44 (0)1259 763030
Fax: +44 (0)1259 761853 | 10
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Chief Executive’s review
The Group has seen a marginal increase
in revenue for the year to £11.26 million,
slightly ahead of last year’s figure
(2012: £11.12 million).
It is pleasing to have managed to retain
profitability in turbulent economic times.
Our decision to go direct in the Indian
market has been vindicated with a strong
performance from the new team. With
Visitect
®
CD4, we have been making steady
progress, with the technology transfer process
nearing completion and the latest results
looking very encouraging. In addition, our
allergy test development programme with
the IDS-iSYS instrument has also made
good progress.
Food Intolerance
The Food Intolerance market has
continued to grow despite the obvious
pressures on consumer spending in
Europe and the segment has continued
to perform very well with sales growing
by 13% to £4.39 million for the year ended
31 March 2013 (2012: £3.90 million).
Sales of Food Detective
®
grew by
27% to £1.25 million (2012: £0.98 million)
with Poland continuing to remain as the
Group’s largest market for this product.
The number of countries where we have
now sold product has continued to increase
to 72 (2012: 68) with an increase in volumes
to 85,214 kits (2012: 60,782). The top five
markets account for just over 50% of sales
with good growth in China and Brazil which
fits with the Group’s strategic focus on
BRIC countries. Product registration in
China finally concluded in December 2012
and as a result, we expect sales in China
to increase. The signing of an exclusive
distribution agreement with Super Religare
Laboratories, India’s largest independent
laboratory chain, should also lead to
good sales growth going forward.
Sales of Genarrayt
®
reagents have
increased by 18% to £1.84 million (2012:
£1.56 million) with France overtaking Spain
to become the largest single market by
sales. Revenue per instrument (excluding
Spain) increased by 19% to £12,885
(2012: £10,783) and 11 Genarrayt
®
systems
(2012: 13 systems) were sold in the year
bringing the total global placements to
119 systems.
Sales of Foodprint
®
tests through the
CNS testing laboratory have grown to
£0.61 million (2012: £0.48 million). The
testing services for food intolerance and
The ‘game changing’ growth
potential of the Visitect
®
CD4
product is expected to make
a major impact in Global
Health markets as this test
satisfies a current unmet
clinical need.
In summary
– CD4 technology transfer nearing completion
– iSYS Allergy programme on track to launch
40 allergen test menu by end of March 2014
– Appointment of Bill Rhodes as a
Non-Executive Director
– Oversubscribed Fundraising to raise £4 million
in cash before expenses
Andrew Shepherd Chief Executive 11
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
other related tests have shown an increase
in business to £0.65 million (2012: £0.62 million).
The progress with registration of Food
Detective
®
in the United States has
continued to be slow and the FDA has
recently confirmed that they will require
either a 510(k) or PMA application to be
filed. The 510(k) route is considered to be
the more unlikely option due to the lack of
a suitable predicate device. As such, the
timeline to registration remains uncertain.
The whole business area of Food Intolerance
testing in the US is under review and other
additional routes to market are being
explored, particularly for the Genarrayt
®
laboratory testing system which we believe
has good potential and could be subject to
a less onerous regulatory environment.
Allergy and Autoimmune
This segment has seen a reduction in sales
of 7% to £4.16 million (2012: £4.48 million).
Sales for Omega Diagnostics GmbH
(‘Omega GmbH’), our German subsidiary,
fell by 7% to £3.59 million (2012: £3.86
million). As reported at the interim results,
the first half saw a weaker pollen season
due to unseasonably wet weather. A weaker
Euro also contributed to the lower result.
This segment performed better in the
second half, helped by the launch of an
Indian version of Allergodip
®
. The Company
has also launched a new liquid format of
the Allergozyme
®
product range which is
expected to contribute to Omega GmbH’s
export performance in the new financial year.
Sales of autoimmune tests reduced by 7%
to £0.57 million (2012: £0.62 million). We
previously reported that the current range
of autoimmune test kits were limited to small
labs with manual test systems. Continued
consolidation in developed country laboratory
markets mean that they require even more
automation and menu driven solutions which
has outpaced our own ability to invest in
developing revised kit formats. Therefore
the decision was taken to direct resources
to the IDS-iSYS project. However, in India,
a market dominated by many small, manual
testing laboratories with less dependency
on automated systems, we have seen an
increase in business and we expect to see
further growth in the new financial year.
Infectious Disease/Other
Sales of infectious disease products fell
slightly by 1% to £2.71 million (2012: £2.75
million). This is despite the loss of annual
sales of approximately £0.2 million in India
due to a Government ban on the import
of blood-based TB tests. The market
for the current range still remains highly
competitive but we believe that the
CD4 opportunity will be the step change
in activity and focus required to transform
this segment.
CD4
The CD4 test, branded as Visitect
®
CD4, was
pre-launched at the 19th International AIDS
Conference, AIDS 2012, in Washington DC,
US on 22-27 July 2012 and the response
to the product was extremely encouraging
with a high level of interest being shown by
various Governments, Non-Governmental
Organisations (NGOs) and large multinational
diagnostics companies. From the responses
received we believe that we are closest to
bringing a CD4 Point-of-Care test to market
amongst other groups working in this area.
This first to market advantage will add extra
impetus to the introduction of the commercial
product when it becomes available.
The project to transfer the technology from
the Burnet Institute to Omega is in its final
stages and, despite it taking longer than we
first envisaged, we are now in the process
of selecting the final, highly scalable
manufacturing protocol. Evaluation sites in
HIV Reference Laboratories in the UK, US
and India are already established as well as
a field trial site in Mozambique and other
countries through various NGOs.
Visitect
®
CD4 was also showcased at the
African Society for Laboratory Medicine
meeting in Cape Town, South Africa in
December 2012 and the response to
the product mirrored that in Washington.
This meeting also gave us the opportunity
to gain further intelligence as to the market
potential for the product. The global CD4
need is expected to grow substantially over
the next 8 years as countries scale up their
HIV/AIDS treatment programmes. The number
of tests is expected to rise from current 2012
levels of just over 30 million to nearly 60 million
tests by 2020.
The recent grant of a US Patent for the CD4
technology also underlines the strong IP
position for the test which extends the
current patent protection in South Africa
and the member states of the African
Intellectual Property Organisation, with
patents pending in many other territories.
We have also been looking to enhance the
value of our Visitect
®
CD4 product offering
by responding to requests from Key Opinion
Leaders to provide a ‘connectivity solution’ so
that results can be transmitted from rural test
sites to city-based Ministry locations. Although
the test does not need an instrument to read
the result, we have recently completed a
feasibility study in using a smartphone camera
to capture the result and then to transmit the
result to management centres. While removing
any operator subjectivity in interpreting the
results, it could also provide additional benefits
such as disease demographic studies and
supply chain logistics, a common problem
found in resource-poor countries.
Distribution network
Sales growth has been recorded in most
geographic regions of the world with the
exception of Europe which reduced by 1%
to £6.41 million (2012: £6.48 million) and the
Africa/Middle East region which dropped
by 4% to £1.56 million (2012: £1.63 million).
These reductions were more than offset by
good growth in the Asia/Far East markets
with sales rising by 9% to £1.44 million
(2012: £1.32 million) and in the North
American market by sales rising 6% to
£0.35 million (2012: £0.33 million). Sales
to South/Central America rose by 16%
to £0.51 million (2012: £0.44 million).
BRIC Strategy
In the year, we have further concentrated
our efforts on expanding our business in
the BRIC group of countries and we have
met with some success. In Brazil we
increased sales by 10% to £0.29 million
(2012: £0.26 million); in China we increased
sales by 49% to £0.18 million (2012: £0.12
million) but in Russia sales decreased by
31% to £0.10 million (2012: £0.15 million)
which was due to the timing of contract
deliveries and the introduction of
competitive automated systems.
Direct sales in India commenced at the end
of July last year and the team has achieved
an impressive sales performance which,
when aggregated with the final sales made
by the old distributor in the three months of
April-June 2012, meant total Indian sales
of approximately £0.40m for the year. This
compares to a prior year like-for-like sales
figure of approximately £0.20 million (which
excludes the TB product sales noted earlier).
Discussions have also been taking place
with other IVD companies with a view to
representing them in the Indian market
and two distribution agreements have
already been signed with others in
early stage discussions. 12
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Growth has been recorded
in most geographic regions
of the world.
“
Research and development
IDS-iSYS
During the year, our development efforts
have focussed on a core set of assays with
the first group of 10 allergens completing
optimisation. However, during that process,
certain imprecision issues were identified
with the assay protocol which, whilst taking
longer to resolve than first anticipated, have
now been resolved. This protocol will now
be used throughout the remaining
development programme and the claim
support phase with the first 10 allergens
has now commenced. The previous
problem with the sourcing of sufficient
patient serum samples has now been
resolved with enough material in stock
to undertake the optimisation and claim
support work for a further 30 allergens.
Therefore, with the reproducibility of the
chosen protocol, overall, we now anticipate
launching a panel of 40 allergens by the
end of March 2014.
In our last Annual Report we commented
on efforts to either source or develop a
multiplex testing platform for allergen
specific IgE testing. Whilst those initial tests
were encouraging, no further efforts have
been made on this project as we decided
to concentrate our development resources
on the iSYS programme.
Infectious Disease
At the same time as we licensed the
CD4 test from the Burnet Institute we also
licensed a second test technology for
a POC test for detecting active Syphilis
infection which is a major public health
problem in developing countries. Progress
with the technology transfer of this product
has not advanced due to the time, effort
and concentration being expended on CD4.
We expect to renew our efforts with this test
upon completion of the technology transfer
of the CD4 test.
Enhancing the value of our Visitect
®
CD4 product offering by
responding to requests from Key Opinion Leaders to provide a
‘mHealth solution’ so that results can be transmitted from rural
test sites to city-based ministry locations.
VISITECT
®
CD4 App
Results from remote village to Ministry of Health
Remote location
1
Download app
2
Run tests
3
VISITECT
®
CD4 Test
Chief Executive’s review continued 13
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Outlook
The new financial year presents some
challenges for the management team
in terms of market and overall economic
conditions. With new product introductions
into key markets such as India and further
growth in Food Intolerance in China and
Brazil we expect to be able to respond
positively to these challenges. The ‘game
changing’ growth potential of the Visitect
®
CD4 product is expected to make a major
impact in global health markets as this
test satisfies a current unmet clinical need.
Over the last year, we have been given
deep insight into the NGO/Aid-related business
sector which is where the Visitect
®
CD4 test
is targeted. Until now, this sector has not been
at the forefront of our commercial focus but
we are reviewing this part of our strategy with
a view to identifying other opportunities that
would fit into this sector. One such opportunity
that may exist is in the area of HIV Viral Load
testing, an area which is highly complementary
to CD4 testing.
We have been delighted at the support
received from existing shareholders and
new investors for our recent oversubscribed
fundraising and while there are challenges
in the Eurozone countries, we believe our
continued focus on new products such as
CD4 and the BRIC markets should result
in further profitable growth.
Andrew Shepherd
Chief Executive
28 June 2013
– Feasibility study completed in using a smartphone camera to capture the
result and then to transmit the result to management centres
– Feasibility work is promising in scope and applicability in parts of the world
where Visitect
®
CD4 is expected to have most impact
– Removes any operator subjectivity in interpreting results
– Additional benefits such as disease demographic studies and supply
chain logistics
– Further differentiates Omega’s product offering from the competition
Scan results
4
Sync to server
5
Global access to secure
results and data
6
mHealth technology Cloud database
www.cd4counts.com | Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
01
Overview Business Review Governance Financial Statements
Highlights
– CD4 technical transfer from the Burnet Institute
nearing completion, and grant of US patent.
– iSYS allergy program on track, with assay protocol finalised,
to launch 40 allergen test menu by Q4 in FY14.
– Strong performance from direct selling operations in India
and exclusive distribution agreement for Food Detective
®
signed with Super Religare Laboratories.
– Strong performance from Food Intolerance segment with
Food Detective
®
sales exceeding £1 million for the first time
and registration of Food Detective
®
in China.
– Appointment of Bill Rhodes as Non-executive Director.
– Successful equity placing to raise £4 million completed
and oversubscribed.
Operational highlights
Visitect
®
CD4 at actual size.
The test enables CD4+ T-cell
levels to be determined quickly
and conveniently using a
finger-prick blood sample,
enabling patients to receive
life-saving antiretroviral treatment.
Read the full
product focus
on page 15
Find out more
Find up-to-date information at
omegadiagnostics.com
Financial highlights
2012
11.3
11.1
2013
Sales (£m)
£11.3m
1%
2011
7.9
2012
7.1
7.0
2013
Gross profit (£m)
£7.1m
1%
2011
4.7
2012
0.8
1.0
2013
Adjusted PBT (£m)
£0.8m
22.5%
2011
0.7
2012
63 63
2013
Gross profit (%)
63%
no change
2011
60 | 04
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Chairman’s Statement
The Group has taken a number of positive
steps, both during the financial year and
since the year-end.
Achievements during the financial year
– Pre-launch of Visitect
®
CD4 in
Washington, US and Cape Town,
South Africa.
– Commencement of direct selling
operations in India and exclusive
distribution agreement for Food
Detective
®
signed with Super Religare
Laboratories.
– Award of grant funding of up to £0.15m
from Scottish Enterprise.
– Registration of Food Detective
®
in China.
– Increase in average revenue per
Genarrayt
®
system (excluding Spain)
by 19% to £12,885.
– Food Detective
®
sales exceed £1m
for the first time.
Achievements since the year-end
– Agreement intending to appoint
Immunodiagnostic Systems Holdings plc
(“IDS”) as exclusive allergy distributor
in IDS’ core markets.
– Appointment of Bill Rhodes as
a non-executive director.
– Grant of US patent for CD4.
– Successful institutional placing raising
£4m before expenses.
Financial performance
Turnover
Turnover for the Group showed a slight
increase on the prior year at £11.26 million
(2012: £11.12 million). Our Food Intolerance
division grew turnover by 13% with continued
growth in Genarrayt
®
revenue, with France
becoming the largest market by sales.
Food Detective
®
also performed well,
exceeding the £1m sales barrier for the
first time. As reported at the half-year
stage, the Allergy and Autoimmune division,
particularly in Germany, was affected by
the weaker pollen season and Euro exchange
rate. A part recovery in the second half meant
that turnover reduced by 7% for the year.
Infectious Disease turnover was broadly
unchanged, showing a slight decline
of 1%, due mainly to a loss of revenue
(approximately £0.2 million) following
a ban of blood-based TB tests by
the Indian government.
Visitect
®
CD4 remains
a significant near-term
opportunity for the Group
and continues to attract
substantial interest from
the wider HIV/AIDS
healthcare community.
In summary
– Pre-launch of Visitect
®
CD4 in Washington, US
and Cape Town, South Africa
– Commencement of direct selling operations in
India and exclusive distribution agreement for Food
Detective
®
signed with Super Religare Laboratories
– Registration of Food Detective
®
in China
– Increase in average revenue per Genarrayt
®
system
(excluding Spain) by 19% to £12,885
– Food Detective
®
sales exceed £1m for the first time
David Evans Non-executive Chairman Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
05
Overview Business Review Governance Financial Statements
Gross profit
Gross profit amounted to £7.05 million
(2012: £7.00 million) and the gross margin
was practically unchanged at 62.6%
compared to 63.0% in the previous year.
This level of gross profit was in line with
expectation as the Food Intolerance and
Allergy/Autoimmune divisions generate
similar levels of gross profit.
Adjusted Profit before Taxation
The Group generated an adjusted profit
before tax (“adjusted PBT”) of £0.78 million
compared to £1.00 million in the previous
year. The reduction was mainly due to
two reasons; firstly, the effect of increased
costs associated with the direct subsidiary
operation in India occurring at the same
time as the loss of revenue from TB tests
referred to above; and secondly, due to
a reduced contribution from the Omega
GmbH allergy business in Germany, for
the reasons referred to above. There is
a reconciliation between adjusted PBT
and statutory PBT below the income
statement on page 31.
Taxation
The Group continues to benefit from
an enhanced level of R&D tax allowances.
Due to the increase in capitalised development
expenditure, which qualifies for the
aforementioned tax allowances, there is a
tax credit of £0.31 million in the year compared
to £0.05 million in the previous year.
Adjusted EPS
Given the tax credit situation above, the Group
achieved an adjusted profit after tax of £1.09
million (2012: £1.05 million) resulting in adjusted
earnings per share of 1.3p (2012: 1.2p).
Balance sheet
Assets
Intangible assets increased to £10.35 million
(2012: £9.14 million) reflecting the level of
capitalised development expenditure, offset by
amortisation of intangible assets. There have
been no impairment charges against goodwill
or intangible assets throughout the year.
Inventory levels increased marginally to
£1.83 million (2012: £1.69 million) and reflect
the additional need to carry inventory within
our Indian subsidiary.
Cash at the year-end reduced to £0. 16 million
(2012: £1.16 million) reflecting the level of
investment in development activity and loan
repayments collectively exceeding cash
generated from operating activities.
Liabilities
Trade and other payables increased
to £1.68 million (2012: £1.45 million).
Total borrowings and other financial liabilities
reduced to £1.35 million (2012: £1.43 million)
due mainly to repayment of loans of £0.5m
and settlement of an IDS-iSYS licence fee
instalment of £0.13 million, offset by the
creation in the year of the liability for the final
licence fee payment of £0.5 million due to IDS.
Funding
During the financial year, the Company
negotiated an increase to its overdraft facility
from £0.7 million to £1.7 million, repayable
on demand. The facility was renewed at the
beginning of May for one year, prior to the
institutional placing announced on 24 May
2013. Further to the approval of shareholders
given at the general meeting on 10 June,
the Group raised £4 million before expenses
through the issue of 23,529,412 new ordinary
shares at 17p per share. The placing was
oversubscribed and we are very grateful for
the support of existing and new shareholders
alike. The additional funds will enable us
to implement our main strategies below.
Product strategy
Visitect
®
CD4
Feedback from the global HIV/AIDS
healthcare community continues to underpin
the significance of the opportunity represented
by the Company’s Point-of-Care (“POC”)
Visitect
®
CD4 test. Subject to a successful
completion of the technology transfer from the
Burnet Institute to the Company, a large part of
the placing proceeds (see Funding above) will
be used both to scale up the manufacturing
and inventory-build of CD4 to meet the
potential demand that undoubtedly exists
for a POC product solution and to undertake
in-country field evaluations that are planned
with major organisations, active in the HIV/AIDS
arena. The early feasibility work undertaken
to develop a smartphone App reader is also
promising in scope and applicability in parts
of the world where Visitect
®
CD4 is expected
to have most impact. This remains the most
significant near-term opportunity for the Group
to achieve growth in shareholder value and is
expected to lead to a longer term strategy for
POC product opportunities in emerging and
developing world infectious diseases.
Allergy automation
The Group remains focused on launching
a panel of approximately 40 allergy tests
on the automated IDS-iSYS instrument
by the end of March 2014 and the recently
announced achievement of finalising the
assay protocol on which all remaining
development will take place, along with
the intention to appoint IDS as distributor
in their core markets of the UK, Germany,
France, the Nordic regions and the US
means we remain committed to building
a significant presence in the growing
automated allergy testing market.
Market strategy – BRIC focus
The IVD industry as a whole has seen a
slowdown in growth during 2012 as the
major European, US and Japanese markets
have experienced increased pressure on
reimbursement levels and cuts in national
health expenditure. By contrast, the emerging
markets, particularly India and China, have
continued to experience double-digit growth
rates. The Group’s decision to set up its
own subsidiary in India nearly two years ago
appears prescient against this backdrop and
is expected to achieve growth both with our
existing Food Intolerance products and the
recently launched Allergodip
®
doctor’s office
test. Both China and Brazil are top-five
markets, ranked by sales of Food Detective
®
and the relationship with HOB Biotech in
China is expected to deliver further growth
in this market.
Board and employees
I am very pleased that we have been able
to attract and appoint Bill Rhodes as a
non-executive director to the Board and
look forward to working with him, given
his knowledge and experience built up
over many years, particularly with Becton
Dickinson, as we implement our strategies
outlined above. Mike Gurner has decided
to retire and step down from the Board
with immediate effect. I would like to thank
Mike for his contribution over the many years
since the Group became a public Company
and I, on behalf of the Board, wish him all
the best in his retirement.
Outlook
More than half of Group turnover is generated
in the UK and Europe, predominantly through
the Food Intolerance and Allergy/Autoimmune
divisions. The economic uncertainty in this
region has led to a slowdown in growth in
European IVD markets and the ability to grow
our own business is not immune from the
broader landscape. In Germany in particular,
the reimbursement picture remains uncertain
and the early pollen season has once more
suffered from some of the wettest weather
seen in Northern Germany for many years.
Sales in the Middle East have also got off to
a slower start, in part, linked to the political
situation. To counter risk in these areas, we
have a strategy to focus on the emerging BRIC
markets and our success in growing revenue
in the year ahead will be dependent on
whether sales into these higher growth
territories can compensate for the pressures
being experienced in Europe and elsewhere.
Beyond the immediate term, our ability to
drive growth will be best delivered through the
successful commercialisation of the CD4 test
and automated allergy tests on the IDS-iSYS
instrument. A significant amount of progress
has been made in the past year and it is now
time to deliver on these strategies.
David Evans
Non-Executive Chairman
28 June 2013 | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input Omega Diagnostics Group PLC
Annual Report and
Group Financial Statements 2013 Our mission is to improve
human health and well-
being through innovative
diagnostic products and
global partnerships
Omega is focused on selling a wide range of specialist
products, primarily in the immunoassay, in vitro
diagnostics (IVD) market.
Overview
01 Highlights
02 What We Do
04 Chairman’s Statement
06 Our Markets
08 Strategy and KPIs
Business Review
10 Chief Executive’s Review
14 Segmental Review: Infectious Diseases
16 Segmental Review: Allergy and Autoimmune
16 Segmental Review: Food Intolerance
18 Financial Review
Governance
20 Board of Directors
21 Senior Management Team
22 Advisers
23 Directors’ Report
25 Directors’ Remuneration Report
27 Corporate Governance Report
29 Statement of Directors’ Responsibilities
Financial Statements
30 Independent Auditor’s Report
31 Consolidated Statement of
Comprehensive Income
31 Adjusted Profit Before Taxation
32 Consolidated Balance Sheet
33 Consolidated Statement of Changes in Equity
34 Consolidated Cash Flow Statement
35 Company Balance Sheet
36 Company Statement of Changes in Equity
37 Company Cash Flow Statement
38 Notes to the Financial Statements
61 Notice of Annual General Meeting
62 Notes to the Notice of Annual General Meeting
Contents
Our business is split
into three segments.
Read about each in
the Business Review
from page 4 onwards
Read more about our business on page 2 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
01
Overview Business Review Governance Financial Statements
Highlights
– CD4 technical transfer from the Burnet Institute
nearing completion, and grant of US patent.
– iSYS allergy program on track, with assay protocol finalised,
to launch 40 allergen test menu by Q4 in FY14.
– Strong performance from direct selling operations in India
and exclusive distribution agreement for Food Detective
®
signed with Super Religare Laboratories.
– Strong performance from Food Intolerance segment with
Food Detective
®
sales exceeding £1 million for the first time
and registration of Food Detective
®
in China.
– Appointment of Bill Rhodes as Non-executive Director.
– Successful equity placing to raise £4 million completed
and oversubscribed.
Operational highlights
Visitect
®
CD4 at actual size.
The test enables CD4+ T-cell
levels to be determined quickly
and conveniently using a
finger-prick blood sample,
enabling patients to receive
life-saving antiretroviral treatment.
Read the full
product focus
on page 15
Find out more
Find up-to-date information at
omegadiagnostics.com
Financial highlights
2012
11.3
11.1
2013
Sales (£m)
£11.3m
1%
2011
7.9
2012
7.1
7.0
2013
Gross profit (£m)
£7.1m
1%
2011
4.7
2012
0.8
1.0
2013
Adjusted PBT (£m)
£0.8m
22.5%
2011
0.7
2012
63 63
2013
Gross profit (%)
63%
no change
2011
60 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
02
What We Do
Founded in 1987 by the current CEO Andrew Shepherd, the Omega
business is focused on selling a wide range of specialist products,
primarily in the immunoassay, in vitro diagnostics (IVD) market within
three segments: Allergy and Autoimmune, Food Intolerance and
Infectious Disease.
We’re committed
to addressing global
health challenges
How we work
We identify major
health challenges...
...we form partnerships
to help find solutions... 1 2
The Company’s global reputation
stems from its beginnings as a
manufacturer of tests for a range of
infectious diseases such as syphilis,
tuberculosis, dengue fever, chagas
disease and malaria. This reputation
led to the opportunity to commercialise
a ground-breaking CD4 technology.
Partnership with Burnet Institute in
Australia resulted in Omega securing
an exclusive global licence to a unique,
simple, lateral flow point-of-care device
confirming patient CD4 count is above or
below 350 cells μl. This has the opportunity
to greatly reduce the number of patients
lost to care as a result of the length of
time between testing and treatment.
Full review on page 8 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
03
Overview Business Review Governance Financial Statements
Our global presence
...we attain global reach by developing, distributing
and selling products across three main areas: 3
Allergy and
Autoimmune
Main products:
– Allergozyme
– Allergodip
– Genesis Elisa
Food
Intolerance
Main products:
– Genarrayt
®
Microarray
– Food Detective
– Foodprint service
Infectious
Diseases
Main products:
– Immutrep Syphilis
– Micropath Bacterial tests
– Dengue Elisa
37%
Full review on page 16
See our global market
focus on page 6
Full review on page 16 Full review on page 14
Where our products are distributed
Where we have a direct presence
39% 24%
Revenue share Revenue share Revenue share 04
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Chairman’s Statement
The Group has taken a number of positive
steps, both during the financial year and
since the year-end.
Achievements during the financial year
– Pre-launch of Visitect
®
CD4 in
Washington, US and Cape Town,
South Africa.
– Commencement of direct selling
operations in India and exclusive
distribution agreement for Food
Detective
®
signed with Super Religare
Laboratories.
– Award of grant funding of up to £0.15m
from Scottish Enterprise.
– Registration of Food Detective
®
in China.
– Increase in average revenue per
Genarrayt
®
system (excluding Spain)
by 19% to £12,885.
– Food Detective
®
sales exceed £1m
for the first time.
Achievements since the year-end
– Agreement intending to appoint
Immunodiagnostic Systems Holdings plc
(“IDS”) as exclusive allergy distributor
in IDS’ core markets.
– Appointment of Bill Rhodes as
a non-executive director.
– Grant of US patent for CD4.
– Successful institutional placing raising
£4m before expenses.
Financial performance
Turnover
Turnover for the Group showed a slight
increase on the prior year at £11.26 million
(2012: £11.12 million). Our Food Intolerance
division grew turnover by 13% with continued
growth in Genarrayt
®
revenue, with France
becoming the largest market by sales.
Food Detective
®
also performed well,
exceeding the £1m sales barrier for the
first time. As reported at the half-year
stage, the Allergy and Autoimmune division,
particularly in Germany, was affected by
the weaker pollen season and Euro exchange
rate. A part recovery in the second half meant
that turnover reduced by 7% for the year.
Infectious Disease turnover was broadly
unchanged, showing a slight decline
of 1%, due mainly to a loss of revenue
(approximately £0.2 million) following
a ban of blood-based TB tests by
the Indian government.
Visitect
®
CD4 remains
a significant near-term
opportunity for the Group
and continues to attract
substantial interest from
the wider HIV/AIDS
healthcare community.
In summary
– Pre-launch of Visitect
®
CD4 in Washington, US
and Cape Town, South Africa
– Commencement of direct selling operations in
India and exclusive distribution agreement for Food
Detective
®
signed with Super Religare Laboratories
– Registration of Food Detective
®
in China
– Increase in average revenue per Genarrayt
®
system
(excluding Spain) by 19% to £12,885
– Food Detective
®
sales exceed £1m for the first time
David Evans Non-executive Chairman Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
05
Overview Business Review Governance Financial Statements
Gross profit
Gross profit amounted to £7.05 million
(2012: £7.00 million) and the gross margin
was practically unchanged at 62.6%
compared to 63.0% in the previous year.
This level of gross profit was in line with
expectation as the Food Intolerance and
Allergy/Autoimmune divisions generate
similar levels of gross profit.
Adjusted Profit before Taxation
The Group generated an adjusted profit
before tax (“adjusted PBT”) of £0.78 million
compared to £1.00 million in the previous
year. The reduction was mainly due to
two reasons; firstly, the effect of increased
costs associated with the direct subsidiary
operation in India occurring at the same
time as the loss of revenue from TB tests
referred to above; and secondly, due to
a reduced contribution from the Omega
GmbH allergy business in Germany, for
the reasons referred to above. There is
a reconciliation between adjusted PBT
and statutory PBT below the income
statement on page 31.
Taxation
The Group continues to benefit from
an enhanced level of R&D tax allowances.
Due to the increase in capitalised development
expenditure, which qualifies for the
aforementioned tax allowances, there is a
tax credit of £0.31 million in the year compared
to £0.05 million in the previous year.
Adjusted EPS
Given the tax credit situation above, the Group
achieved an adjusted profit after tax of £1.09
million (2012: £1.05 million) resulting in adjusted
earnings per share of 1.3p (2012: 1.2p).
Balance sheet
Assets
Intangible assets increased to £10.35 million
(2012: £9.14 million) reflecting the level of
capitalised development expenditure, offset by
amortisation of intangible assets. There have
been no impairment charges against goodwill
or intangible assets throughout the year.
Inventory levels increased marginally to
£1.83 million (2012: £1.69 million) and reflect
the additional need to carry inventory within
our Indian subsidiary.
Cash at the year-end reduced to £0. 16 million
(2012: £1.16 million) reflecting the level of
investment in development activity and loan
repayments collectively exceeding cash
generated from operating activities.
Liabilities
Trade and other payables increased
to £1.68 million (2012: £1.45 million).
Total borrowings and other financial liabilities
reduced to £1.35 million (2012: £1.43 million)
due mainly to repayment of loans of £0.5m
and settlement of an IDS-iSYS licence fee
instalment of £0.13 million, offset by the
creation in the year of the liability for the final
licence fee payment of £0.5 million due to IDS.
Funding
During the financial year, the Company
negotiated an increase to its overdraft facility
from £0.7 million to £1.7 million, repayable
on demand. The facility was renewed at the
beginning of May for one year, prior to the
institutional placing announced on 24 May
2013. Further to the approval of shareholders
given at the general meeting on 10 June,
the Group raised £4 million before expenses
through the issue of 23,529,412 new ordinary
shares at 17p per share. The placing was
oversubscribed and we are very grateful for
the support of existing and new shareholders
alike. The additional funds will enable us
to implement our main strategies below.
Product strategy
Visitect
®
CD4
Feedback from the global HIV/AIDS
healthcare community continues to underpin
the significance of the opportunity represented
by the Company’s Point-of-Care (“POC”)
Visitect
®
CD4 test. Subject to a successful
completion of the technology transfer from the
Burnet Institute to the Company, a large part of
the placing proceeds (see Funding above) will
be used both to scale up the manufacturing
and inventory-build of CD4 to meet the
potential demand that undoubtedly exists
for a POC product solution and to undertake
in-country field evaluations that are planned
with major organisations, active in the HIV/AIDS
arena. The early feasibility work undertaken
to develop a smartphone App reader is also
promising in scope and applicability in parts
of the world where Visitect
®
CD4 is expected
to have most impact. This remains the most
significant near-term opportunity for the Group
to achieve growth in shareholder value and is
expected to lead to a longer term strategy for
POC product opportunities in emerging and
developing world infectious diseases.
Allergy automation
The Group remains focused on launching
a panel of approximately 40 allergy tests
on the automated IDS-iSYS instrument
by the end of March 2014 and the recently
announced achievement of finalising the
assay protocol on which all remaining
development will take place, along with
the intention to appoint IDS as distributor
in their core markets of the UK, Germany,
France, the Nordic regions and the US
means we remain committed to building
a significant presence in the growing
automated allergy testing market.
Market strategy – BRIC focus
The IVD industry as a whole has seen a
slowdown in growth during 2012 as the
major European, US and Japanese markets
have experienced increased pressure on
reimbursement levels and cuts in national
health expenditure. By contrast, the emerging
markets, particularly India and China, have
continued to experience double-digit growth
rates. The Group’s decision to set up its
own subsidiary in India nearly two years ago
appears prescient against this backdrop and
is expected to achieve growth both with our
existing Food Intolerance products and the
recently launched Allergodip
®
doctor’s office
test. Both China and Brazil are top-five
markets, ranked by sales of Food Detective
®
and the relationship with HOB Biotech in
China is expected to deliver further growth
in this market.
Board and employees
I am very pleased that we have been able
to attract and appoint Bill Rhodes as a
non-executive director to the Board and
look forward to working with him, given
his knowledge and experience built up
over many years, particularly with Becton
Dickinson, as we implement our strategies
outlined above. Mike Gurner has decided
to retire and step down from the Board
with immediate effect. I would like to thank
Mike for his contribution over the many years
since the Group became a public Company
and I, on behalf of the Board, wish him all
the best in his retirement.
Outlook
More than half of Group turnover is generated
in the UK and Europe, predominantly through
the Food Intolerance and Allergy/Autoimmune
divisions. The economic uncertainty in this
region has led to a slowdown in growth in
European IVD markets and the ability to grow
our own business is not immune from the
broader landscape. In Germany in particular,
the reimbursement picture remains uncertain
and the early pollen season has once more
suffered from some of the wettest weather
seen in Northern Germany for many years.
Sales in the Middle East have also got off to
a slower start, in part, linked to the political
situation. To counter risk in these areas, we
have a strategy to focus on the emerging BRIC
markets and our success in growing revenue
in the year ahead will be dependent on
whether sales into these higher growth
territories can compensate for the pressures
being experienced in Europe and elsewhere.
Beyond the immediate term, our ability to
drive growth will be best delivered through the
successful commercialisation of the CD4 test
and automated allergy tests on the IDS-iSYS
instrument. A significant amount of progress
has been made in the past year and it is now
time to deliver on these strategies.
David Evans
Non-Executive Chairman
28 June 2013 Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
06
Our Markets
Today, Omega is one of the UK’s leading companies in the fast
growing area of immunoassay and has a global presence in over
100 countries worldwide through directly controlled subsidiaries
and a strong distribution network.
We provide millions of
diagnostic tests to over
100 countries
Our global markets
North America
South/Central America Africa and Middle East Asia and Far East
UK Europe
56% 9% 3%
13% 14% 5%
Infectious Diseases
Allergy & Autoimmune
Food Intolerance
Group revenue share by geography Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
07
Overview Business Review Governance Financial Statements
The BRIC group of countries
are our strategic market focus.
We have further concentrated
our efforts on expanding our
business in these areas.
Our products can be found
globally in:
– Hospitals
– Blood banks
– Laboratories
– General practitioners
– Nutritionists
– Outreach clinics
Russia India China Brazil
– Strong growth in sales
of Food Intolerance products
– Commencement of direct
selling and exclusive distribution
agreement for Food Detective
signed with Super Religare
Laboratories
– Reduction of sales due to the
timing of contract deliveries
and introduction of competitive
automated systems
– Food Detective
®
formally
approved by the State Food
and Drug Administration
of China and first Genarrayt
®
installation
2012 2012
Brazil Russia India China Total
2012* 2012 2013 2013
103
176
285
400
247
150
118
259
Sales (£’000)
2013 2013
Performance in 2013
Our focus on BRIC markets
2011 estimated IVD market
$1.0bn
$0.3bn
$0.5bn
$2.5bn
$4.3bn
Our customers
* Note 2012 excludes blood-based
TB tests to show like-for-like with 2013. Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
08
Strategy and KPIs
Omega aims to deliver organic growth from recently acquired
products, markets and technologies. Omega will also continue
to pursue acquisition opportunities that are earnings enhancing
or strategically placed in major growth markets.
A robust strategy for
tackling worldwide
health issues
Group strategy
acquisitions
global
partnerships
significant
growth
The acquisition of the business and certain
assets of the in vitro allergy diagnostics
business of Allergopharma Joachim Ganzer
KG in December 2010 provided the Group
with access to the high value allergy
testing market.
In March 2011 the Group entered into an
exclusive Patent Licence Agreement with
a subsidiary of Immunodiagnostic Systems
Group plc (IDS) enabling Omega to develop
a range of allergy immunoassays on
IDS’s automated system (IDS-iSYS).
Combined with Omega’s experience in
assay development, this forms a strong
platform for allergy testing.
The global allergy market is currently
estimated at $0.5 billion per year with
a compound annual growth rate of 8%.
The acquisition and partnership represent
a significant opportunity for revenue
generation in this area.
+ = Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
09
Overview Business Review Governance Financial Statements
Key Performance Indicators
Sales
2013
£11.3m
+1%
£11.1m
+41%
£7.9m
+27%
£6.2m
+14%
£5.4m
+56%
2012 2011 2010 2009
£11.3m
1%
Progress made in 2013
Solid performance with margin maintained.
Strategy for 2014
Commercialise iSYS and CD4 and continue
to grow sales in India.
Gross Margin
2013
63%
–
63%
+3.4%
59.6%
+1.3%
58.3%
-3.2%
61.5%
+7.1%
2012 2011 2010 2009
63%
no change
Progress made in 2013
Margin maintained.
Strategy for 2014
Improved margin through the introduction
of new products.
Adjusted Profit Before Tax
2013
£0.8m
-22%
£1m
+36%
£736k
+25%
£589k
+8%
£540k
+81%
2012 2011 2010 2009
£0.8m
22%
Progress made in 2013
Reduced by 22% on prior year.
Strategy for 2014
Manage cost base through final development phase
of new products.
Food Intolerance – Genarrayt
®
Reagent Sales
2013
£1.84m
+18%
£1.56m
+5%
£1.49m
+80%
£720k
+44%
£547k
+35%
2012 2011 2010 2009
£1.84m
18%
Progress made in 2013
France became largest market by revenue.
Strategy for 2014
To continue to grow revenue per instrument.
Food Detective Sales
2013
£1.25m
+27%
£980k
+27%
£772k
-2%
£790k
+152%
£314k
+44%
2012 2011 2010 2009
£1.25m
27%
Progress made in 2013
Sales exceeded £1 million for the first time.
Strategy for 2014
To replicate success of top five markets. 10
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Chief Executive’s review
The Group has seen a marginal increase
in revenue for the year to £11.26 million,
slightly ahead of last year’s figure
(2012: £11.12 million).
It is pleasing to have managed to retain
profitability in turbulent economic times.
Our decision to go direct in the Indian
market has been vindicated with a strong
performance from the new team. With
Visitect
®
CD4, we have been making steady
progress, with the technology transfer process
nearing completion and the latest results
looking very encouraging. In addition, our
allergy test development programme with
the IDS-iSYS instrument has also made
good progress.
Food Intolerance
The Food Intolerance market has
continued to grow despite the obvious
pressures on consumer spending in
Europe and the segment has continued
to perform very well with sales growing
by 13% to £4.39 million for the year ended
31 March 2013 (2012: £3.90 million).
Sales of Food Detective
®
grew by
27% to £1.25 million (2012: £0.98 million)
with Poland continuing to remain as the
Group’s largest market for this product.
The number of countries where we have
now sold product has continued to increase
to 72 (2012: 68) with an increase in volumes
to 85,214 kits (2012: 60,782). The top five
markets account for just over 50% of sales
with good growth in China and Brazil which
fits with the Group’s strategic focus on
BRIC countries. Product registration in
China finally concluded in December 2012
and as a result, we expect sales in China
to increase. The signing of an exclusive
distribution agreement with Super Religare
Laboratories, India’s largest independent
laboratory chain, should also lead to
good sales growth going forward.
Sales of Genarrayt
®
reagents have
increased by 18% to £1.84 million (2012:
£1.56 million) with France overtaking Spain
to become the largest single market by
sales. Revenue per instrument (excluding
Spain) increased by 19% to £12,885
(2012: £10,783) and 11 Genarrayt
®
systems
(2012: 13 systems) were sold in the year
bringing the total global placements to
119 systems.
Sales of Foodprint
®
tests through the
CNS testing laboratory have grown to
£0.61 million (2012: £0.48 million). The
testing services for food intolerance and
The ‘game changing’ growth
potential of the Visitect
®
CD4
product is expected to make
a major impact in Global
Health markets as this test
satisfies a current unmet
clinical need.
In summary
– CD4 technology transfer nearing completion
– iSYS Allergy programme on track to launch
40 allergen test menu by end of March 2014
– Appointment of Bill Rhodes as a
Non-Executive Director
– Oversubscribed Fundraising to raise £4 million
in cash before expenses
Andrew Shepherd Chief Executive 11
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
other related tests have shown an increase
in business to £0.65 million (2012: £0.62 million).
The progress with registration of Food
Detective
®
in the United States has
continued to be slow and the FDA has
recently confirmed that they will require
either a 510(k) or PMA application to be
filed. The 510(k) route is considered to be
the more unlikely option due to the lack of
a suitable predicate device. As such, the
timeline to registration remains uncertain.
The whole business area of Food Intolerance
testing in the US is under review and other
additional routes to market are being
explored, particularly for the Genarrayt
®
laboratory testing system which we believe
has good potential and could be subject to
a less onerous regulatory environment.
Allergy and Autoimmune
This segment has seen a reduction in sales
of 7% to £4.16 million (2012: £4.48 million).
Sales for Omega Diagnostics GmbH
(‘Omega GmbH’), our German subsidiary,
fell by 7% to £3.59 million (2012: £3.86
million). As reported at the interim results,
the first half saw a weaker pollen season
due to unseasonably wet weather. A weaker
Euro also contributed to the lower result.
This segment performed better in the
second half, helped by the launch of an
Indian version of Allergodip
®
. The Company
has also launched a new liquid format of
the Allergozyme
®
product range which is
expected to contribute to Omega GmbH’s
export performance in the new financial year.
Sales of autoimmune tests reduced by 7%
to £0.57 million (2012: £0.62 million). We
previously reported that the current range
of autoimmune test kits were limited to small
labs with manual test systems. Continued
consolidation in developed country laboratory
markets mean that they require even more
automation and menu driven solutions which
has outpaced our own ability to invest in
developing revised kit formats. Therefore
the decision was taken to direct resources
to the IDS-iSYS project. However, in India,
a market dominated by many small, manual
testing laboratories with less dependency
on automated systems, we have seen an
increase in business and we expect to see
further growth in the new financial year.
Infectious Disease/Other
Sales of infectious disease products fell
slightly by 1% to £2.71 million (2012: £2.75
million). This is despite the loss of annual
sales of approximately £0.2 million in India
due to a Government ban on the import
of blood-based TB tests. The market
for the current range still remains highly
competitive but we believe that the
CD4 opportunity will be the step change
in activity and focus required to transform
this segment.
CD4
The CD4 test, branded as Visitect
®
CD4, was
pre-launched at the 19th International AIDS
Conference, AIDS 2012, in Washington DC,
US on 22-27 July 2012 and the response
to the product was extremely encouraging
with a high level of interest being shown by
various Governments, Non-Governmental
Organisations (NGOs) and large multinational
diagnostics companies. From the responses
received we believe that we are closest to
bringing a CD4 Point-of-Care test to market
amongst other groups working in this area.
This first to market advantage will add extra
impetus to the introduction of the commercial
product when it becomes available.
The project to transfer the technology from
the Burnet Institute to Omega is in its final
stages and, despite it taking longer than we
first envisaged, we are now in the process
of selecting the final, highly scalable
manufacturing protocol. Evaluation sites in
HIV Reference Laboratories in the UK, US
and India are already established as well as
a field trial site in Mozambique and other
countries through various NGOs.
Visitect
®
CD4 was also showcased at the
African Society for Laboratory Medicine
meeting in Cape Town, South Africa in
December 2012 and the response to
the product mirrored that in Washington.
This meeting also gave us the opportunity
to gain further intelligence as to the market
potential for the product. The global CD4
need is expected to grow substantially over
the next 8 years as countries scale up their
HIV/AIDS treatment programmes. The number
of tests is expected to rise from current 2012
levels of just over 30 million to nearly 60 million
tests by 2020.
The recent grant of a US Patent for the CD4
technology also underlines the strong IP
position for the test which extends the
current patent protection in South Africa
and the member states of the African
Intellectual Property Organisation, with
patents pending in many other territories.
We have also been looking to enhance the
value of our Visitect
®
CD4 product offering
by responding to requests from Key Opinion
Leaders to provide a ‘connectivity solution’ so
that results can be transmitted from rural test
sites to city-based Ministry locations. Although
the test does not need an instrument to read
the result, we have recently completed a
feasibility study in using a smartphone camera
to capture the result and then to transmit the
result to management centres. While removing
any operator subjectivity in interpreting the
results, it could also provide additional benefits
such as disease demographic studies and
supply chain logistics, a common problem
found in resource-poor countries.
Distribution network
Sales growth has been recorded in most
geographic regions of the world with the
exception of Europe which reduced by 1%
to £6.41 million (2012: £6.48 million) and the
Africa/Middle East region which dropped
by 4% to £1.56 million (2012: £1.63 million).
These reductions were more than offset by
good growth in the Asia/Far East markets
with sales rising by 9% to £1.44 million
(2012: £1.32 million) and in the North
American market by sales rising 6% to
£0.35 million (2012: £0.33 million). Sales
to South/Central America rose by 16%
to £0.51 million (2012: £0.44 million).
BRIC Strategy
In the year, we have further concentrated
our efforts on expanding our business in
the BRIC group of countries and we have
met with some success. In Brazil we
increased sales by 10% to £0.29 million
(2012: £0.26 million); in China we increased
sales by 49% to £0.18 million (2012: £0.12
million) but in Russia sales decreased by
31% to £0.10 million (2012: £0.15 million)
which was due to the timing of contract
deliveries and the introduction of
competitive automated systems.
Direct sales in India commenced at the end
of July last year and the team has achieved
an impressive sales performance which,
when aggregated with the final sales made
by the old distributor in the three months of
April-June 2012, meant total Indian sales
of approximately £0.40m for the year. This
compares to a prior year like-for-like sales
figure of approximately £0.20 million (which
excludes the TB product sales noted earlier).
Discussions have also been taking place
with other IVD companies with a view to
representing them in the Indian market
and two distribution agreements have
already been signed with others in
early stage discussions. 12
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Growth has been recorded
in most geographic regions
of the world.
“
Research and development
IDS-iSYS
During the year, our development efforts
have focussed on a core set of assays with
the first group of 10 allergens completing
optimisation. However, during that process,
certain imprecision issues were identified
with the assay protocol which, whilst taking
longer to resolve than first anticipated, have
now been resolved. This protocol will now
be used throughout the remaining
development programme and the claim
support phase with the first 10 allergens
has now commenced. The previous
problem with the sourcing of sufficient
patient serum samples has now been
resolved with enough material in stock
to undertake the optimisation and claim
support work for a further 30 allergens.
Therefore, with the reproducibility of the
chosen protocol, overall, we now anticipate
launching a panel of 40 allergens by the
end of March 2014.
In our last Annual Report we commented
on efforts to either source or develop a
multiplex testing platform for allergen
specific IgE testing. Whilst those initial tests
were encouraging, no further efforts have
been made on this project as we decided
to concentrate our development resources
on the iSYS programme.
Infectious Disease
At the same time as we licensed the
CD4 test from the Burnet Institute we also
licensed a second test technology for
a POC test for detecting active Syphilis
infection which is a major public health
problem in developing countries. Progress
with the technology transfer of this product
has not advanced due to the time, effort
and concentration being expended on CD4.
We expect to renew our efforts with this test
upon completion of the technology transfer
of the CD4 test.
Enhancing the value of our Visitect
®
CD4 product offering by
responding to requests from Key Opinion Leaders to provide a
‘mHealth solution’ so that results can be transmitted from rural
test sites to city-based ministry locations.
VISITECT
®
CD4 App
Results from remote village to Ministry of Health
Remote location
1
Download app
2
Run tests
3
VISITECT
®
CD4 Test
Chief Executive’s review continued 13
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Outlook
The new financial year presents some
challenges for the management team
in terms of market and overall economic
conditions. With new product introductions
into key markets such as India and further
growth in Food Intolerance in China and
Brazil we expect to be able to respond
positively to these challenges. The ‘game
changing’ growth potential of the Visitect
®
CD4 product is expected to make a major
impact in global health markets as this
test satisfies a current unmet clinical need.
Over the last year, we have been given
deep insight into the NGO/Aid-related business
sector which is where the Visitect
®
CD4 test
is targeted. Until now, this sector has not been
at the forefront of our commercial focus but
we are reviewing this part of our strategy with
a view to identifying other opportunities that
would fit into this sector. One such opportunity
that may exist is in the area of HIV Viral Load
testing, an area which is highly complementary
to CD4 testing.
We have been delighted at the support
received from existing shareholders and
new investors for our recent oversubscribed
fundraising and while there are challenges
in the Eurozone countries, we believe our
continued focus on new products such as
CD4 and the BRIC markets should result
in further profitable growth.
Andrew Shepherd
Chief Executive
28 June 2013
– Feasibility study completed in using a smartphone camera to capture the
result and then to transmit the result to management centres
– Feasibility work is promising in scope and applicability in parts of the world
where Visitect
®
CD4 is expected to have most impact
– Removes any operator subjectivity in interpreting results
– Additional benefits such as disease demographic studies and supply
chain logistics
– Further differentiates Omega’s product offering from the competition
Scan results
4
Sync to server
5
Global access to secure
results and data
6
mHealth technology Cloud database
www.cd4counts.com 14
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Segmental Review: Infectious Diseases
The Company is pursuing an exciting new opportunity represented
by its new Point-Of-Care (POC) Visitect
®
CD4 test. POC testing for
CD4 could transform the way that care and treatment are provided
to HIV-positive patients particularly in developing countries.
Infectious Diseases:
a change in activity
and market focus
Turnover in the Infectious Disease division
was effectively flat with sales of £2.71 million,
compared to £2.75 million in the prior year.
This result is despite the loss of TB sales in
India due to a government ban on the import
of all blood-based TB tests and which, in
the prior year, accounted for approximately
£0.2 million of the Company’s revenue.
The market for the current range still remains
highly competitive but we believe that the
CD4 opportunity will be the step change
in activity and focus required to transform
this segment. The increased level of
administration costs incurred through the
Indian subsidiary has resulted in adjusted
PBT falling to £0.17 million from £0.32 million
the year before.
The CD4 test, branded as Visitect
®
CD4, was
pre-launched at the 19th International AIDS
Conference, AIDS 2012, in Washington DC,
US on 22–27 July 2012 and the response
to the product was extremely encouraging
with a high level of interest being shown by
various governments, non-governmental
organisations (NGOs) and large multinational
diagnostics companies. From the responses
received we believe that we are closest to
bringing a CD4 Point-Of-Care test to market
amongst other groups working in this area.
The project to transfer the technology
from the Burnet Institute to Omega is in
its final stages and, despite it taking longer
than we first envisaged, we are now in the
process of selecting the final, highly scalable
manufacturing protocol. Evaluation sites
in HIV Reference Laboratories in the UK,
US and India are already established as well
as a field trial site in Mozambique and other
countries through various NGOs.
Visitect
®
CD4 was also showcased at the
African Society for Laboratory Medicine
meeting in Cape Town, South Africa in
December 2012 and the response to
the product mirrored the experience of
Washington. This meeting also gave us
the opportunity to gain further intelligence
as to the market potential for the product.
The global CD4 need is expected to grow
substantially over the next eight years as
countries scale up their HIV/AIDS treatment
programmes with the number of tests
rising from current 2012 levels of just over
30 million to nearly 60 million tests by 2020.
The recent grant of a US Patent for the
CD4 technology also underlines the strong
intellectual property position for the test
which extends the current patent protection
in South Africa and the member states of
the African Intellectual Property Organisation,
with patents pending in many other territories.
£2.71m
1%
Revenue
Main products:
– Immutrep Syphilis
– Micropath Bacterial tests
– Dengue Elisa 15
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Product focus
Visitect
®
CD4: Point-Of-Care HIV testing
HIV is a major global health challenge affecting
approximately 33 million people with five million
new cases per year, mainly in the emerging
and developing world, and is the primary
cause of disease burden in twelve countries,
including South Africa and India where we
have people present.
The Burnet Institute has developed a test that provides an
affordable solution, using a format similar to a home pregnancy test.
Implementation of the Visitect
®
CD4 will directly increase the availability,
access, scope and coverage of CD4 testing beyond the urban centres
to reach the rural majority in emerging and developing countries.
Substantially increasing the number of people with access to CD4
testing will reduce morbidity and mortality, decrease hospitalisation
and loss to treatment.
What are the challenges
presented by HIV?
How does Visitect
®
CD4
provide a solution?
Although HIV is
easy to diagnose,
identifying who
needs treatment
is difficult
Visual
results from
a finger-prick
blood sample
are achievable
in around
40 minutes
HIV primarily
affects those in
developing countries
who might not have
access to tests
CD4 is portable
and instrument-free
and therefore is easy
to access
Tests are typically
expensive – over
US$10
Low cost – at just
US$5 per test
34.2m
Potential number of CD4 tests
performed per year based on world
health organisation guideline of
two tests per annum
17.1%
Infected people in developing countries
with no access to treatment
33m
HIV-infected people globally
U
U
U
V
V 16
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Segmental Review: Allergy & Autoimmune and Food Intolerance
A competitive
automated allergy
system and the fifth
year of consecutive
growth in Food
Intolerance sales
Segmental review: Allergy
and Autoimmune
Turnover in the Allergy and Autoimmune
division fell by 7%, with sales of £4.16 million
compared to £4.48 million in the prior year.
Sales in Germany fell by 2% in constant
currency terms due to a weaker pollen
season, with a further 5% reduction due
to a weaker euro, on average throughout
the year, against sterling as compared with
the year before. Therefore, sales through
Omega GmbH were £3.59 million compared
to £3.86 million a year earlier. Sales of
autoimmune products also fell by 7%
to £0.57 million (2012: £0.62 million).
Approximately £50k of restructuring costs
related to this division and, alongside the
reduced sales, led to an adjusted loss before
tax of £20k (2012: profit of £134k). This
segment performed better in the second
half, helped by the launch of an Indian
version of Allergodip
®
. The Company has
also launched a new liquid format of the
Allergozyme
®
product range which is
expected to contribute to Omega GmbH’s
export performance in the new financial year.
Segmental review: Food Intolerance
The Food Intolerance division continued
to perform well with growth in turnover of
13% to £4.39 million (2012: £3.90 million).
Genarrayt
®
reagent sales continued to rise
across the installed instrument base with
a 19% increase in average revenue per
instrument to £12,885 in all markets
excluding Spain. A further eleven systems
were installed in the year increasing total
placements to 119. Total reagent sales grew
to £1.84 million with France becoming the
number one market, ranked by sales, ahead
of Spain. Sales of Food Detective
®
performed
strongly with an increase in turnover of 27% to
£1.25 million (2012: £0.98 million) with another
exceptional performance in Poland where
sales grew by a further £0. 1 million to
£0.3 million. The overall average price per kit
(excluding China) also increased to £22.01
from £21.64 the year before, showing a level
of resilience in a consumer market environment.
The Foodprint
®
laboratory recorded another
year of revenue growth of 26% with sales up to
£0.61 million (2012: £0.48 million). The adjusted
PBT for this division grew to £1.23 million from
£1. 14 million the year before.
£4.16m
7%
£4.39m
13%
Revenue: Allergy & Autoimmune
Revenue: Food Intolerance 17
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Product focus
IDS-iSYS: automated allergy testing
Allergy areas:
The assay protocol has been finalised on
representative allergens from the groups below.
Foods
Dust mites
Pollens
Nuts
Pets
IDS-iSYS update
Since the beginning of April 2012 (when six allergens had been
optimised), a further four allergens were optimised by the end of
November 2012, at which point, it was decided to concentrate on
finalising the assay protocol, whilst building up sufficient quantities
of patient serum samples for the next 30+ allergens to be optimised.
The assay protocol has now been finalised and sufficient stocks of
patient sera now exist. The work still to be done includes claim
support of the first group of ten allergens followed by optimisation/
claim support of the remaining allergens groups to meet the
planned target of launching a panel of 40+ tests by March 2014.
The main revenue stream will be from allergy test sales to new and
already installed analyser customer base, either directly or through
appropriate distribution channels. The fundamental change in strategy
is the amendment of the IDS licence agreement which now allows
Omega to appoint IDS as an exclusive distributor in IDS core markets
(UK, Germany, France, Nordic countries and US). This will allow
access to a pre-installed base of approximately 340 instruments
and an established service engineer’s base. This agreement with
IDS will allow accelerated market penetration.
Product focus
Genarrayt
®
food intolerance testing
The Group provides a range of diagnostic laboratory tests and
instrumentation associated with food intolerance and gut health. Based
on quantifying total IgG reactions to over 220 different foods these tests
are designed to support both health professionals and individuals who
wish to make informed decisions when managing their health.
Genarrayt
®
is a laboratory-based system developed and
manufactured by the Group, which utilises an innovative, colorimetric
microarray-based ELISA technology for the measurement of
food-specific IgG antibodies in human serum, plasma or whole blood.
The flexibility of the system permits a wide range of food panels to be
offered, including 40, 60, 120 and 200+ foods, together with vegan,
vegetarian and herbs/spices options.
Genarrayt
®
reagent sales continued to rise across the installed
instrument base with a 19% increase in average revenue per instrument
to £12,885 in all markets excluding Spain. A further eleven systems were
installed in the year increasing total global placements to 1 19.
Total reagent sales grew to £1.84 million with France becoming the
number one market, ranked by sales, ahead of Spain.
The whole business area of Food Intolerance testing in the US is
under review and other additional routes to market are being explored,
particularly for the Genarrayt
®
system which we believe has good
potential and could be subject to a less onerous regulatory environment. 18
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Financial performance
Turnover for the Group increased marginally
by 1% to £1 1.26 million (2012: £1 1. 12 million).
The Food Intolerance division increased
turnover to £4.39 million (2012: £3.90 million)
with Genarrayt
®
reagent sales per instrument
of £12,885, compared to £10,783 in the
previous year and Food Detective
®
kits
generating revenue of £1.25 million (2012:
£0.98 million). Allergy and Autoimmune
turnover fell to £4. 16 million (2012: £4.48 million)
due mainly to a weaker euro against sterling,
as compared to the prior year, but also due
to wet weather, as reported at the half-year,
affecting the pollen season resulting in fewer
patient visits to doctors. Turnover in the
Infectious Disease division reduced slightly
to £2.71 million from £2.75 million in the
year before.
Gross profit has remained fairly constant at
£7.05 million (2012: £7.0 million) and similarly,
gross margin has been maintained at 62.6%
(2012: 63.0%).
Administration costs have reduced
marginally by £22k to £4.45 million (2012:
£4.47 million). An increase of £0.15 million
relating to costs incurred in being fully
operational through Omega Dx (Asia) in
India has been offset by a reduction, mainly
relating to uncapitalised development/
technical expenditure of approximately
£0.27 million. One-off restructuring costs
of approximately £0.1 million were incurred
during the first half of the year.
Sales and marketing costs have increased
by £0.28 million to £2.30 million (2012: £2.02
million). £0.26 million of this increase reflects
a full year’s charge in the current year for four
UK-based headcount positions recruited at
varying stages in the prior year; one at Director
level, one at Business Development director
level and two product manager positions. The
remaining increase of £18k reflects additional
sales force costs incurred in India.
Adjusted profit before tax reduced by
22.5%, to £0.78 million (2012: £1.0 million).
A reconciliation between statutory profit
before tax and adjusted profit before tax is
shown at the foot of the income statement.
Taxation
There has been a significant increase in
the tax credit position resulting in a credit
of £306k (2012: £48k) in the year. Of this credit,
£16k relates to HMRC rebates and the majority,
of £290k, relates to movements in deferred tax.
The deferred tax asset has grown significantly,
mainly reflecting an increase in tax losses
carried forward as a result of enhanced tax
credits available on development expenditure.
The deferred liability has increased during the
year as a result of a timing difference arising on
capitalised development expenditure. Prior year
adjustments to the tax charge arise when there
are differences between estimated figures
chargeable to tax and final tax computations.
Our recent equity placing
to raise £4m was completed
very successfully and was
significantly over-subscribed.
In summary
– Successful equity placing to raise £4m completed
and over-subscribed
– Growth of 13% in Food Intolerance sales
– Increase in average revenue per Genarrayt
®
system (excluding Spain) by 19% to £12,885
– Food Detective sales of £1.2m
Kieron Harbinson Finance Director
Financial review 19
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Earnings per share
Adjusted profit after tax (“PAT”) of £1.08 million
(2012: £1.05 million) is arrived at by taking
adjusted profit before tax of £0.78 million
(2012: £1.0 million) plus the tax credit of
£0.30 million (2012: £48k).
Adjusted earnings per share amounted to
1.3p (2012: 1.2p) and is arrived at by taking
the adjusted PAT of £1,085k and dividing
by 85,268,960 (2012: 85,238,7 46) being the
weighted average number of shares in issue
for the year. Statutory profit for the year
amounted to £582k (2012: £527k) which
resulted in earnings per share of 0.7p
versus earnings per share of 0.6p in the
previous year.
Operational performance
Food Intolerance
The Food Intolerance division continued to
perform well with growth in turnover of 13% to
£4.39 million (2012: £3.90 million). Genarrayt
®
reagent sales continued to rise across the
installed instrument base with a 19% increase
in average revenue per instrument to £12,885
(2012: £10,783) in all markets excluding Spain.
A further 1 1 systems were installed in the year
increasing total placements to 119. Total
reagent sales grew to £1.84 million (2012:
£1.56 million) with France becoming the
number one market, ranked by sales,
ahead of Spain.
Sales of Food Detective
®
performed
strongly with an increase in turnover of
27% to £1.25 million (2012: £0.98 million)
with another exceptional performance
in Poland where sales grew by a further
£0.1 million to £0.3 million. The overall
average price per kit (excluding China)
also increased to £22.01 from £21.64 the
year before, showing a level of resilience
in a consumer market environment.
The Foodprint
®
laboratory recorded another
year of revenue growth of 26% with sales
up to £0.61 million (2012: £0.48 million).
The adjusted PBT for this division grew to
£1.23 million from £1. 14 million the year before.
Allergy and Autoimmune
Turnover in the Allergy and Autoimmune
division fell by 7%, with sales of £4.16 million
(2012: £4.48 million). Sales in Germany fell
by 2% in constant currency terms due to
a weaker pollen season, with a further 5%
reduction due to a weaker euro, on average
throughout the year, against sterling as
compared with the year before. Therefore,
sales through Omega GmbH were £3.59
million compared to £3.86 million a year
earlier. Sales of autoimmune products also
fell by 7% to £0.57 million (2012: £0.62 million).
Approximately half of the restructuring costs
referred to earlier (so approx. £50k) related
to this division and, alongside the reduced
sales, led to an adjusted loss before tax of
£20k (2012: profit of £134k).
Infectious Disease/Other
Turnover in the Infectious Disease division
was effectively flat with sales of £2.71 million,
compared to £2.75 million in the prior year.
This result is despite the loss of TB sales
in India due to a government ban on the
import of all blood-based TB tests and
which, in the prior year, accounted for
approximately £0.2 million of the Company’s
revenue. The increased level of administration
costs incurred through the Indian subsidiary
has resulted in adjusted PBT falling to £0.17
million from £0.32 million the year before.
Corporate costs
Net centralised costs include costs not
allocated to any specific division and, where
the Group makes internal arrangements
to fund divisions via intercompany loans,
interest is charged to the specific division
and the corresponding interest income is
netted off through Corporate costs. Net
centralised corporate costs for the year
of £0.60 million were in line with last year
(2012: £0.58 million).
Treasury operations
Currency management
The Group continues to transact operations
in three main currencies being sterling, euros
and US dollars. In the case of transactions
in euros and US dollars, the Group may
be exposed to fluctuations in the rates of
exchange against sterling. Where possible,
the Group operates a natural hedge by
entering into transactions of both a buying
and selling nature that limits the risk of
adverse exchange rate losses. The Company
generates a net surplus of US dollars from
its trading activities. The exchange rate
between sterling and the US dollar has
been relatively stable throughout the year
such that a translation loss of £1k (2012:
£1k) was recorded on US dollar borrowings
held throughout the first half of the year
but now repaid in full, along with a loss
on trading operations of £2k (2012: £22k)
included within Administration costs.
The Group’s net investment in and funding
of Omega GmbH is in euros, which will give
rise to foreign exchange variations from
one period to another. In the year, a foreign
exchange gain of £27k (2012: loss of £271k),
which has arisen due to a stronger euro
(as measured at year-end rates), has been
included within other comprehensive income.
Interest rate management
During the first half of the year, the Group
operated certain derivative financial
instruments for its sterling and US dollar
borrowings. In the case of its sterling loan,
the Group operated an instrument to cap
interest at 5.5% and in the case of the US
dollar loan, the Group operated instruments
to cap the interest rate based on US Libor at
5% and one to operate a floor rate on US
Libor of 2.25%. These instruments terminated
on repayment of the associated borrowings.
During the year, there was a fair value
adjustment gain through the income
statement of £1k (2012: £3k).
Cash flow and net debt
Net cash flow generated from operations
improved significantly to £1.01 million (2012:
£0.69 million), despite a reduction in operating
profit, through a more efficient handling
of working capital. The Group spent a net
£1.49 million (2012: £1.20 million) on investing
activities, of which £1.18 million (2012: £0.75
million) was on intangible assets and £0.31
million (2012: £0.45 million) was on property,
plant and equipment. Loan repayments
included the final repayments of the bank
loans taken out in 2007 and a first instalment
of £0.36 million was repaid in September 2012
on the vendor loan note. Cash balances at
the year-end amounted to £0.16 million
(2012: £1.16 million) and the net debt position
was £0.69 million (2012: £0.14 million).
Financing
Just after the year-end, the Company
renewed its £1.7 million overdraft facility
on the same terms as before and it remains
annually renewable and repayable on
demand. In June, approval was received
in General Meeting for the allotment of
23,529,412 new ordinary shares at 17p
per share which were admitted to trading
on AIM. This follows a successful equity
placing to existing and new institutional
shareholders to raise £4 million (before
expenses of approximately £0.24 million).
The placing was oversubscribed and we
are grateful for the good level of support
shown for the Group’s strategy. This leaves
the Group with a very strong cash position.
Capital management
The financial performance of the Group
is measured and monitored on a monthly
basis through a combination of management
reporting and KPIs. The Group manages its
working capital requirements to ensure it
continues to operate within the covenant limits
applicable to any borrowing facilities whilst
safeguarding the ability to continue to operate
as a going concern. The Group funds its
operations with a mixture of short and
long-term borrowings or equity as appropriate
with a view to maximising returns for
shareholders and maintaining investor, creditor
and market confidence. The use of funds for
acquisitions is closely monitored by the Board
so that existing funds are not adversely
impacted by such activity and the Board
reviews and approves an annual budget to
help ensure it has adequate facilities to meet
all its operational needs and to support future
growth in the business.
Kieron Harbinson
Group Finance Director
28 June 2013 20
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
David Evans
Non-executive Chairman
David joined Omega in 2000 as Non-executive
Chairman. He has considerable experience
within the diagnostics industry. As Financial
Director he was a key member of the team
that floated Shield Diagnostics Limited in 1993.
He became Chief Executive Officer responsible
for the merger of Shield Diagnostics Group plc
with Axis Biochemicals ASA of Norway in
1999 to create Axis-Shield plc. In addition to
his role as Non-executive Chairman of Omega,
he holds Non-executive Directorships in a
number of other companies.
Andrew Shepherd
Chief Executive
Andrew is the Founder and Chief Executive
of Omega. He has worked in the medical
diagnostics industry for 36 years. In 1986
he moved to Scotland to join Bioscot Limited
and shortly afterwards, established Omega.
He has used his technical experience and
knowledge of exporting to oversee the
significant growth of the export of Omega
products. He is an active member of a
number of relevant trade associations,
and was a member of the Bill and Melinda
Gates Foundation’s (BMGF) Global Health
Diagnostics Forum, which provided guidance
to BMGF in advising on technology and
future investments in worldwide diagnostics
programmes for developing countries.
Kieron Harbinson
Finance Director
Kieron joined Omega in August 2002 as
Finance Director. He has a broad experience
in technology and related businesses.
He started his career with Scotia Holdings
PLC in 1984 and remained with the company
for 14 years, occupying various senior finance
roles. These roles enabled him to acquire
experience in corporate acquisitions,
disposals and intellectual property matters.
In addition he gained experience in various
debt and equity transactions, and was
involved in raising over £100 million for the
company. He then joined Kymata Limited,
a start-up optoelectronics company, as
Finance Director. Over a period of 18 months,
he was involved in raising approximately
US$85 million of venture capital funding.
Jag Grewal
Sales and Marketing Director
Jag joined Omega in June 2011 as Group
Sales and Marketing Director. He has worked
in the medical diagnostics industry for 20 years
having started out as a Clinical Biochemist
in the NHS. In 1995 he joined Beckman
Instruments where he developed a career
spanning 15 years in sales and marketing
holding a variety of positions in sales, product
management and marketing management.
In 2009 he left as Northern Europe Marketing
Manager to join Serco Health where he
helped create the first joint venture within
UK pathology between Serco and Guys
and St Thomas’ Hospital. He is also past
Chairman and current treasurer of the British
In Vitro Diagnostics Association (BIVDA).
Michael Gurner (resigned 1 July 2013)
Non-executive Director
Michael led the flotation of the Company
on AIM in 2006. He qualified as a Chartered
Accountant in 1967, before embarking on
a career in merchant banking with Keyser
Ullmann, including M&A activities with the
Ryan Group of Companies and holding
senior management positions, including
Managing Director of a fully listed company,
Continuous Stationery plc, an acquisitive
business forms manufacturer between
1986 and 1991. Thereafter he focused on
turning around under-performing and ailing
businesses, in association with Postern
Executive Group Limited (“Postern”),
a leading UK turnaround specialist
which provided management teams
for troubled companies.
William Rhodes (appointed 1 May 2013)
Non-executive Director
During his fourteen year career with Becton,
Dickinson and Co., one of the world’s
leading suppliers of medical, diagnostic
and life science research products, Bill held
a number of senior leadership positions, and
until the end of 2012, was BD’s Senior
Vice President, Corporate Strategy and
Development, being responsible for BD’s
worldwide mergers and acquisitions and
corporate strategies. Previously, he was
Worldwide President of BD Biosciences,
a business segment with turnover of over
US$1.0 billion, including the provision
of flow cytometry instruments and their
associated reagents for CD4 testing used
in a wide range of laboratory settings. Prior
to working for BD, Bill held senior business
development positions with Pfizer Inc. and
Johnson and Johnson.
Board of Directors 21
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Senior Management Team
Dr Edward Valente
Group Research and
Development Director
Edward joined Omega in March 2011 as
Allergy Systems Director. He has worked in
the medical diagnostics industry for 29 years.
He started his career with Amersham
International in 1983 where he held scientific
and managerial positions in clinical diagnostics
research and development. He then joined
Shield Diagnostics in 1988 and held managerial
positions in R&D and marketing. Latterly,
he was responsible for market development
of new markers, including clinical studies, and
design and development of immunoassay
products on automated platforms for
industry majors.
Mike Gordon
Group Operations Director
Mike joined Omega in October 2011 as Group
Operations Director. He has worked in the
Medical diagnostics industry for 28 years.
He started his career with Inveresk Research
International as a Development Scientist.
He then joined Bioscot Ltd working through
its transition to Cogent Diagnostics Ltd and
onwards to Hycor Biomedical Ltd. During
this time he has held the positions of Quality
Manager, Production Director and latterly
as Production and Logistics Manager for its
last corporate owners. During this period he
was responsible for the implementation of
ISO 9001 and for successfully navigating
the company through the process of US
FDA registration and inspection.
Iain Logan
Group Financial Controller
Iain joined Omega in November 2010 as
Group Financial Controller. He qualified
as a Chartered Accountant in 2002 with
PricewaterhouseCoopers in Edinburgh.
He then worked at Murray International
Holdings Limited in the head office finance
team for three years performing a variety of
financial accounting roles. He then moved
on to Murray Capital Limited, the investment
management company of Murray International
Holdings Limited, gaining experience in
all aspects of acquisitions, disposals and
investment portfolio company analysis and
management. His current role primarily covers
responsibility for the financial reporting of
the Group and management of the Group
finance team.
Prashant Maniar
Managing Director –
Omega Dx (Asia) Pvt Limited
Prashant joined Omega Dx (Asia) in October
2011 as Managing Director. He has worked
in the diagnostics industry for 22 years.
He started his career as Production Head
in Cadila Laboratories. He then spent
15 years working for GlaxoSmithKline and
ThermoFisher Scientific in various roles
establishing their diagnostic business in India
with 14 collaborations with national and
multinational companies. In his most recent
role he established the Microbial Control
business for Lonza India. He has been
responsible for the commercial set up
of Omega Dx (Asia) Pvt Ltd and has
transitioned the Group’s business
in India from distributor to wholly
owned subsidiary.
Jamie Yexley
Site Manager –
Genesis Diagnostics Limited,
Cambridge Nutritional Sciences Limited
Jamie joined Genesis and CNS in June 1999
as a Production Laboratory Assistant. He was
promoted to Production Manager in 2005
and Operations Manager in 2009. He has
been instrumental in seeing the Company
through a sustained period of rapid growth
and change. In 2012 he moved to the role of
Site Manager. He has 20 years manufacturing
experience with 13 years specifically in the
medical diagnostics industry. Educated in
Cambridge he has spent his professional
career working in the manufacturing industry
starting in an FMCG environment. Throughout
his time with the Company he has been
responsible for ICT where he is recognised
as the Group’s foremost expert.
Karsten Brenzke
Site Manager –
Omega Diagnostics GmbH
Karsten joined Omega GmbH in November
2010 as a consultant to facilitate the acquisition
of the IVD business from Allergopharma.
He was then appointed on a permanent
basis initially as Finance Manager before
being appointed as Site Manager in May
2012. He has worked for different industry
companies in the finance control function with
his longest stay of seven years at Zeppelin
Power Systems where he gained experience
in mergers and post-merger integration. 22
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Advisers
Nominated adviser and broker
finnCap Limited
60 New Broad Street
London EC2M 1JJ
Auditors
Ernst & Young LLP
G1
5 George Square
Glasgow G2 1DY
Solicitors
Brodies LLP
15 Atholl Crescent
Edinburgh EH3 8HA
Registrar
Share Registrars Limited
Suite E
First Floor, 9 Lion and Lamb Yard
Farnham
Surrey GU9 7LL
PR
Walbrook PR Limited
4 Lombard Street
London EC3V 9HD
Country of incorporation
England & Wales
Omega Diagnostics Group PLC
Registered number: 5017761 23
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
The Directors present their Annual Report and Group financial statements for the year ended 31 March 2013.
Principal activities
The principal activity of the Company is as a holding company. The principal activity of the Group is the manufacture, development
and distribution of medical diagnostics products.
Results and dividends
The result for the year is a profit of £582,266 (2012: £526,983) which has been taken to reserves. The Directors do not propose to pay
a dividend. The results are disclosed in more detail in the Chairman’s Statement on pages 4 and 5 and the Financial Review on pages
18 and 19.
The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented
its own income statement in these financial statements. The Company profit for the year ended 31 March 2013 is £59,896 (2012: loss
of £89,416).
Business review and future development
A review of business and future development is discussed in more detail in the Chairman’s Statement, Chief Executive’s Review and
Financial Review commencing on pages 4, 10 and 18 respectively. Key performance indicators are disclosed and discussed on page 9.
Research and development
Research and development activity has increased in the year. Details of research and development activity are contained in the
Chief Executive’s Review on pages 10 to 13. Costs in the year amounted to £1,167,274 (2012: £785,390). Costs of £140,810 in relation to
research activities (2012: £486,584) were expensed through the statement of comprehensive income and costs of £1,026,464 in relation
to product development (2012: £298,806) were capitalised and included within intangible assets as detailed in Note 8.
Directors
The names of the Directors who have served the Group throughout the year are:
David Evans
Michael Gurner (resigned 1 July 2013)
Kieron Harbinson
Andrew Shepherd
Jag Grewal
William Rhodes (appointed 1 May 2013)
Biographies of all Directors serving at the year end are on page 20.
Directors’ interests
The beneficial interests of Directors who have served throughout the year are listed in the Directors’ Remuneration Report on pages 25 and 26.
There are no non-beneficial interests held by Directors. Directors’ interests in the shares of the Group between 31 March 2013 and the date
of this report have changed as certain of the Directors participated in the June 2013 fundraising. New ordinary shares purchased:
Andrew Shepherd — 41,176
Kieron Harbinson — 29,412
Michael Gurner — 147,059
Jag Grewal — 29,412
Major interests in shares
As at 11 June 2013 the following shareholders held more than 3% of the Group’s issued ordinary share capital:
Number
of 4 pence
ordinary
shares Percentage
Legal & General Investment Management 19,476,471 17 .91%
Octopus Investments Limited 9,946,870 9.15%
Mobeus Equity Partners LLP 8,333,250 7.66%
Killik & Co LLP 6,629,358 6.10%
Unicorn Asset Management 4,266,650 3.92%
Liontrust Investment Partners LLP 4,117 ,647 3.79%
JM Finn & Co 3,994,946 3.67%
Supplier payment policy
It is the Group’s policy to agree the terms of payment with its suppliers, to ensure its suppliers are made aware of those terms and to pay
in accordance with them.
Trade creditors of the Group at 31 March 2013 were equivalent to 66 days (2012: 60 days) based on the average daily amount invoiced
by suppliers during the year.
Directors’ Report 24
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Employees
The Group encourages communication with its employees and favours an environment where staff can put forward their ideas,
suggestions and concerns on any matter that involves them. The Group gives full and fair consideration to applications for employment
made by disabled people, having regard to their particular aptitudes and abilities. Where an employee becomes disabled in the course
of their employment, where possible, arrangements will be made for appropriate retraining to match their abilities with their duties.
Principal risks and uncertainties
The Board meets regularly to review operations and to discuss risk areas. The Corporate Governance Report contains details
of the Group’s system of internal control. Note 22 to the financial statements contains details of financial risks faced by the Group.
The Board considers the following to be the non-financial risks:
General economic conditions
The Group may be faced with changes in the general economic climate in each territory in which it operates that may adversely affect the
financial performance of the Group. Factors which may contribute include the level of direct and indirect competition against the Group,
industrial disruption, rate of growth of the Group’s sectors and interest rates. The Group seeks to mitigate this risk by conducting
operations on a broad geographic basis and by introducing new technologies to remain innovative.
Regulatory risk
The manufacturing, marketing and use of the Group’s products are subject to regulation by government and regulatory agencies in many
countries. Of particular importance is the requirement to obtain and maintain approval for a product from the applicable regulatory agencies
to enable the Group’s products to be marketed. Approvals can require clinical evaluation of data relating to safety, quality and efficacy
of a product. The Group seeks to mitigate regulatory risk by conducting its operations within recognised quality assurance systems and
undergoes external assessment to ensure compliance with these systems.
Acquisition risk
The success of the Group depends upon the ability of the Directors to assimilate and integrate the operations, personnel, technologies
and products of acquired companies. The Group seeks to mitigate this risk by selecting companies that meet certain selection criteria
and by conducting a detailed due diligence review.
Eurozone risk
Recent turmoil in the economic conditions in Europe increases the risk of one or more countries exiting the eurozone. This could lead to
currency devaluation in those countries which could lead to adverse economic impacts elsewhere. Approximately one third of the Group’s
revenue is derived in Germany where the euro is the functional reporting currency. The Group does not currently have operations located
in any other European country. However, in the event of a country’s exit from the eurozone, potentially higher volatility of the euro could
lead to a reduction in the reported trading results of our German operation when translated into sterling. The Group mitigates risk in
countries such as Spain and Italy, where it has trading relationships, with tighter credit control procedures and credit limits where
necessary.
Development risk
The Group is undertaking an increased level of development activity than in the past with the aim of launching new products in the future.
There is no guarantee that development activity will lead to the future launch of products. Such development activity can meet technical
hurdles that are unable to be overcome and market and competition activity can render the output from development activities as obsolete.
The Group seeks to mitigate the risk around development activities by ensuring that development programmes are planned in accordance
with recognised industry quality standards, managed by people with the requisite skills. The Company also continues to monitor industry
trends and customer needs to ensure its development targets remain relevant.
Donations
The Group made no charitable donations in the year (2012: £Nil) nor any political donations (2012: £Nil).
Auditors
The auditors, Ernst & Young LLP, have indicated their willingness to continue in office and a resolution for their re-appointment will
be proposed at the forthcoming Annual General Meeting.
Directors’ statement as to disclosure of information to auditors
The Directors who were members of the Board at the time of approving the Directors’ Report are listed on page 23. Having made
enquiries of fellow Directors and of the Company’s auditors, each of these Directors confirms that:
− to the best of each Director’s knowledge and belief, there is no information (that is, information needed by the Group’s auditors
in connection with preparing their report) of which the Group’s auditors are unaware; and
− each Director has taken all the steps a Director might reasonably be expected to have taken to be aware of relevant audit information
and to establish that the Group’s auditors are aware of that information.
By order of the Board
Kieron Harbinson
Company Secretary
28 June 2013
Directors’ Report continued 25
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
As an AIM-quoted company, the Group is not required to produce a remuneration report that satisfies all the requirements of the
Companies Act. However, the Directors are committed to providing information on an open basis and present their Remuneration Report
as follows:
Remuneration Committee
The Remuneration Committee is comprised of Michael Gurner, as Chairman, and David Evans. The committee meets as and when required
to determine and agree with the Board the policy for the remuneration of the Group’s Chief Executive, Chairman, Executive Directors and
Company Secretary. The objective of this policy shall be to ensure that members of the executive management of the Group are provided
with appropriate incentives to encourage enhanced performance and are, in a fair and reasonable manner, rewarded for their individual
contributions to the success of the Group. No Director or manager shall be involved in any decisions as to their own remuneration.
Remuneration policy
The Group’s policy is that the remuneration arrangements, including pensions, for subsequent financial years should be sufficiently
competitive to attract, retain and motivate high quality executives capable of achieving the Group’s objectives, thereby enhancing
shareholder value.
Incentive schemes/share option schemes
Andrew Shepherd was issued with an option over 600,000 ordinary shares of the Group, Kieron Harbinson was issued with an option
over 300,000 ordinary shares of the Group and Jag Grewal was issued with an option over 200,000 ordinary shares of the Group.
All of the options were granted on 5 July 2012 and were under the Company’s EMI Share Option Scheme.
Bill Rhodes is entitled to be granted an option over 2,130,406 ordinary shares of the Company at the prevailing market price at the earliest
opportunity in accordance with Rule 21 of the AIM Rules. The option will be granted under the Company’s third Unapproved Option Scheme.
Directors’ service contracts
Andrew Shepherd entered into a service contract with the Group on 23 August 2006, under which he was appointed as Chief Executive
on an annual salary of £85,000. His salary was increased to £131,250 per annum from 1 April 2009 and then further increased to £145,000
per annum from 1 April 2011. The agreement will continue until terminated by either party giving to the other not less than twelve months’
notice in writing.
Kieron Harbinson entered into a service contract with the Group on 23 August 2006, under which he was appointed as Finance Director
and Company Secretary on an annual salary of £72,500. His salary was increased to £94,500 per annum from 1 April 2009 and then further
increased to £115,000 per annum from 1 April 2011. The agreement will continue until terminated by either party giving to the other not
less than three months’ notice in writing.
David Evans was appointed a Non-executive Director of the Group on 19 September 2006 and was entitled to an annual fee of £25,000
from 1 April 2008. The agreement will continue until terminated by either party giving to the other not less than one month’s notice in writing.
Michael Gurner was appointed a Non-executive Director of the Group on 19 September 2006 and he was entitled to an annual fee of
£15,000. This fee was increased to £20,000 per annum from 1 January 2009. The agreement will continue until terminated by either party
giving to the other not less than one month’s notice in writing.
Jag Grewal entered into a service contract with the Group on 30 June 2011, under which he was appointed as an Executive Director on
an annual salary of £110,000. The agreement will continue until terminated by either party giving to the other not less than three months’
notice in writing.
Bill Rhodes was appointed a Non-executive Director of the Group on 1 May 2013 and is entitled to an annual fee of £40,000.
The agreement will continue until terminated by either party giving to the other not less than one month’s notice in writing.
Andrew Shepherd, Kieron Harbinson and Geoff Gower received bonuses in the prior year of £13,125, £9,450 and £16,000 respectively.
These were non-contractual and calculated at 10%, 10% and 20% of their basic annual salaries at 31 March 2011 based on the
financial results achieved for the year ended 31 March 2011.
Directors’ emoluments
Fees/basic Benefits Total Total
salary Bonuses in kind 2013 2012
Consolidated £££ £ £
Executive
Andrew Shepherd 145,000 — — 145,000 158,125
Kieron Harbinson 115,000 — 1,506 116,506 125,688
Jag Grewal 110,000 — — 110,000 82,500
Geoff Gower (resigned 31 March 2012) — — — — 111,516
Non-executive
David Evans 25,000 — — 25,000 25,000
Michael Gurner 20,000 — — 20,000 20,000
Directors’ Remuneration Report 26
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
The amounts paid in the year towards Directors’ pension contributions were as follows:
Directors’ pension contributions
2013 2012
£ £
Andrew Shepherd 7,250 7,250
Kieron Harbinson 5,750 5,750
Jag Grewal 5,500 —
Geoff Gower — 13,500
Directors’ interests in the 4 pence ordinary shares of Omega Diagnostics Group PLC.
31 March 31 March
2013 2012
David Evans 2,870,134 2,870, 134
Michael Gurner 271,671 246,671
Kieron Harbinson 294,150 294,150
Andrew Shepherd 2,618,030 1,955,530
Jag Grewal — —
Geoff Gower — 500,000
The Directors have no interest in the shares of subsidiary companies.
Directors’ share options
At Granted Lapsed Exercised At Option Earliest
1 April during during during 31 March price Date of exercise Expiry
2012 the year the year the year 2013 pence grant date date
David Evans 390,822 — — — 390,822 19.0p 10/12/08 10/12/09 10/12/18
Andrew Shepherd 703,480 — — — 703,480 19.0p 10/12/08 10/12/09 10/12/18
— 600,000 — — 600,000 14.5p 05/07/12 05/07/15 05/07/22
Kieron Harbinson 468,987 — — — 468,987 19.0p 10/12/08 10/12/09 10/12/18
— 300,000 — — 300,000 14.5p 05/07/12 05/07/15 05/07/22
Jag Grewal 100,000 — — — 100,000 13.25p 12/08/11 12/08/12 12/08/21
— 200,000 — — 200,000 14.5p 05/07/12 05/07/15 05/07/22
During the year Andrew Shepherd, Kieron Harbinson and Jag Grewal were issued with options under the Company’s EMI Option Scheme.
The share price at 31 March 2013 was 13.88 pence. The highest and lowest share price during the year was 18 pence and 10.5 pence respectively.
Approved by the Board
Michael Gurner
Non-executive Director
28 June 2013
Directors’ Remuneration Report continued 27
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
As an AIM-quoted company, the Group is not required to produce a corporate governance report nor comply with the requirements
of the UK Corporate Governance Code. However, the Directors are committed to providing information on an open basis and present
their Corporate Governance Report as follows:
The Board of Directors
The Board currently comprises: one Non-executive Chairman; two Non-executive Directors; and three Executive Directors, who are the
Chief Executive, the Finance Director and the Sales and Marketing Director. David Evans, Non-executive Chairman, and Michael Gurner
and Bill Rhodes, both Non-executive Directors, are considered by the Board to be independent in character and judgement. Michael Gurner
is the senior independent Non-executive Director. The Board meets at regular intervals and is responsible for setting corporate strategy,
approving the annual budget, reviewing financial performance, agreeing the renewal of and any new banking/treasury facilities and approving
major items of capital expenditure. The Board is provided with appropriate information in advance of Board meetings to enable it to discharge
its duties effectively. Bill Rhodes was appointed to the Board as a Non-executive Director on 1 May 2013.
During the financial year, the Board met on ten occasions. Of the ten meetings David Evans and Jag Grewal attended eight, Michael Gurner
attended nine and Andrew Shepherd and Kieron Harbinson attended all ten.
The Chairman has additional non-executive directorships of the following companies:
− Epistem Holdings plc
− Momentum Biosciences Limited
− Scancell Holdings plc
− EKF Diagnostics plc
−Cytox Limited
− Venn Life Sciences plc
− Diagnostic Capital Limited
− Lochglen Whisky Limited
− St Andrews Golf Art Limited
− Horizon Discovery Limited
− Spectrum Limited (Rainbow Seed Fund)
− OptiBiotix Health Limited
− Marine Biotech Limited
− Collbio Limited
− Integrated Magnetic Systems Limited
− Healthcare Opportunity Investments plc
The Audit Committee
The Audit Committee has met on two occasions during the year and once since the year end. The Committee is comprised of David Evans,
as Chairman, and Michael Gurner and has primary responsibility for monitoring the quality of internal controls, ensuring that the financial
performance of the Group is properly measured and reported on, and for reviewing reports from the Group’s auditors relating to the
Group’s accounting and financial reporting, in all cases having due regard to the interests of shareholders. The Committee shall also
review preliminary results announcements, summary financial statements, significant financial returns to regulators and any financial
information contained in certain other documents, such as announcements of a price-sensitive nature. Bill Rhodes has been appointed
to the Audit Committee and will replace Michael Gurner who is stepping down from the Board on 1 July 2013.
The Committee considers and makes recommendations to the Board, to be put to shareholders for approval at the Annual General
Meeting, in relation to the appointment, re-appointment and removal of the Group’s external auditors. The Committee also oversees the
relationship with the external auditors including approval of remuneration levels, approval of terms of engagement and assessment of their
independence and objectivity. In so doing, they take into account relevant UK professional and regulatory requirements and the relationship
with the auditors as a whole, including the provision of any non-audit services. Ernst & Young LLP have been auditors to Omega Diagnostics
Limited (ODL) since 2000 and were appointed as auditors to the Group following completion of the reverse takeover of ODL in September 2006.
The Committee has reviewed the effectiveness of the Group’s system of internal controls and has considered the need for an internal
audit function. At this stage of the Group’s size and development, the Committee has decided that an internal audit function is not required,
as the Group’s internal controls system in place is appropriate for its size. The Committee will review this position on an annual basis.
The Committee also reviews the Group’s arrangements for its employees raising concerns, in confidence, about possible wrongdoing in
financial reporting or other matters. The Committee ensures that such arrangements allow for independent investigation and follow-up action.
The Remuneration Committee
The Remuneration Committee has met on three occasions during the year. The Committee is comprised of Michael Gurner, as Chairman,
and David Evans and has primary responsibility for determining and agreeing with the Board the remuneration of the Company’s Chief Executive,
Chairman, Executive Directors, Company Secretary and such other members of the Executive management as it is designated to
consider. The remuneration of the Non-executive Directors shall be a matter for the Chairman and the Executive Directors of the Board.
No Director or manager shall be involved in any decisions regarding their own remuneration. Bill Rhodes has been appointed to the
Remuneration Committee and will replace Michael Gurner.
Corporate Governance Report 28
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Internal control
The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness throughout the year. Such a system
can only provide reasonable assurance against misstatement or loss.
The Board monitors financial controls through the setting and approval of an annual budget and the regular review of monthly
management accounts. Management accounts contain a number of indicators that are designed to reduce the possibility of misstatement
in financial statements.
Where the management of operational risk requires outside advice, this is sought from expert consultants, and the Group receives
this in the areas of employment law and health and safety management.
The Group is compliant with industry standard quality assurance measures and undergoes regular external audits to ensure that
accreditation is maintained.
Communication with shareholders
The Board recognises the importance of communication with its shareholders. The Group maintains informative websites for Omega
Diagnostics Limited, Cambridge Nutritional Sciences Limited and Omega GmbH containing information likely to be of interest to existing
and new investors. In addition, the Group retains the services of financial PR consultants, providing an additional contact point for investors.
The Board encourages shareholder participation at its Annual General Meeting, where shareholders can be updated on the Group’s
activities and plans.
Going concern
The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in
the Business Review, which runs on pages 4 to 5 and pages 10 to 13 and pages 18 and 19. The financial position of the Group, its cash
flows, liquidity position and borrowing facilities are described in the Financial Review on pages 18 and 19. In addition, Note 22 to the
financial statements includes the Group’s objectives, policies and processes for its financial risk management objectives; details of its
financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. The recent renewal of overdraft facilities as
well as the successful fundraising of £4 million means that the Group has significant financial resources together with long-term relationships
with a number of customers and suppliers across different geographic areas and industries.
As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully and fully capitalise on the
new product opportunities despite the current uncertain economic outlook.
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable
future. Accordingly, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
By order of the Board
Kieron Harbinson
Company Secretary
28 June 2013
Corporate Governance Report continued 29
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
The Directors are responsible for preparing the Annual Report and the Group and Company financial statements in accordance with
applicable United Kingdom law and those International Financial Reporting Standards (IFRSs) as adopted by the European Union.
The Directors are required to prepare Group and Company financial statements for each financial year end. Under company law, the
Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position of the Group
and Company, financial performance of the Group and cash flows of the Group and Company for that period. In preparing the Group
and Company financial statements, the Directors are required to:
− select suitable accounting policies in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
and then apply them consistently;
− present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
− provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand
the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance;
− state that the Group and Company has complied with IFRSs, subject to any material departures disclosed and explained in the financial
statements; and
− make judgements and estimates that are reasonable.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and Company’s
transactions and disclose, with reasonable accuracy at any time, the financial position of the Group and Company and enable them to ensure
that the Group and Company financial statements comply with the Companies Act 2006. They are also responsible for safeguarding assets
of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Statement of Directors’ Responsibilities 30
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
We have audited the financial statements of Omega Diagnostics Group PLC for the year ended 31 March 2013 which comprise the
Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity,
Consolidated Cash Flow Statement, Company Balance Sheet, Company Statement of Changes in Equity, Company Cash Flow Statement
and the related Notes 1 to 23. The financial reporting framework that has been applied in their preparation is applicable law and
International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent Company financial
statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditors
As explained more fully in the Statement of Directors’ Responsibilities on page 29, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on
the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance
that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether
the accounting policies are appropriate to the Group’s and the parent Company’s circumstances and have been consistently applied
and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation
of the financial statements. In addition we read all the financial and non-financial information in the Annual Report and Group Financial
Statements to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion:
− the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 March 2013
and of the Group’s profit for the year then ended;
− the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
− the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union
and as applied in accordance with the provisions of the Companies Act 2006; and
− the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared
is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
− adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received
from branches not visited by us; or
− the parent Company financial statements are not in agreement with the accounting records and returns; or
− certain disclosures of Directors’ remuneration specified by law are not made; or
− we have not received all the information and explanations we require for our audit.
Annie Graham (Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditors
Glasgow
28 June 2013
Independent Auditors’ Report
to the members of Omega Diagnostics Group PLC 31
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2013 2012
Note £ £
Continuing operations
Revenue 7 11,262,898 11,124,053
Cost of sales (4,209,905) (4,120,259)
Gross profit 7,052,993 7,003,794
Administration costs (4,448,646) (4,471,381)
Selling and marketing costs (2,297,702) (2,015,300)
Operating profit 7 306,645 517 ,113
Finance costs 5 (32,914) (48,542)
Finance income – interest receivable 7 2,493 10,856
Profit before taxation 276,224 479,427
Tax credit 6 306,042 47 ,556
Profit for the year 582,266 526,983
Other comprehensive income
Exchange differences on translation of foreign operations 26,970 (271,130)
Actuarial (loss)/gain on defined benefit pensions (50,439) 56,000
Tax credit 7,978 16,585
Other comprehensive income for the year (15,491) (198,545)
Total comprehensive income for the year 566,775 328,438
Earnings per share (EPS)
Basic and diluted EPS on profit for the year 21 0.7p 0.6p
2013 2012
£ £
Profit before taxation 276,224 479,427
IFRS-related discount charges (included within Finance costs) 25,046 45,225
Fair value adjustments to financial derivatives (included within Finance costs) (454) (2,981)
Amortisation of intangible assets (included within Administration costs) 406,553 415,419
Share-based payment charges (included within Administration costs) 71,193 29,716
Acquisition related costs (included within Administration costs) — 37,461
Adjusted profit before taxation 778,562 1,004,267
Earnings per share (EPS)
Adjusted EPS on profit for the year 1.3p 1.2p
Adjusted profit before taxation is derived by taking statutory profit before taxation and adding back IFRS-related discount charges,
amortisation of intangible assets, share-based payment charges, acquisition costs and fair value adjustments to financial derivatives.
This is not a primary statement.
Consolidated Statement of Comprehensive Income
for the year ended 31 March 2013
Adjusted Profit Before Taxation
for the year ended 31 March 2013 32
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2013 2012
Note £ £
ASSETS
Non-current assets
Intangibles 8 10,347,876 9,136,072
Property, plant and equipment 9 2,116,286 2,068,509
Deferred taxation 14 553,647 150,332
Retirement benefit surplus 18 31,886 85,639
13,049,695 11,440,552
Current assets
Inventories 10 1,833,887 1,689,549
Trade and other receivables 11 2,556,762 2,417,500
Income tax receivable 7,106 4,054
Cash and cash equivalents 160,693 1,159,132
4,558,448 5,270,235
Total assets 17,608,143 16,710,787
EQUITY AND LIABILITIES
Equity
Issued capital 12,977,107 12,977 ,107
Retained earnings 985,371 347,403
Total equity 13,962,478 13,324,510
Liabilities
Non-current liabilities
Long-term borrowings 12 484,472 794,389
Deferred taxation 14 609,395 503,728
Derivative financial instruments 22 — 454
Total non-current liabilities 1,093,867 1,298,571
Current liabilities
Short-term borrowings 12 367,649 509,811
Trade and other payables 13 1,684,149 1,453,018
Other financial liabilities 19 500,000 124,877
Total current liabilities 2,551,798 2,087,706
Total liabilities 3,645,665 3,386,277
Total equity and liabilities 17,608,143 16,710,787
David Evans Kieron Harbinson
Non-executive Chairman Finance Director
28 June 2013 28 June 2013
Omega Diagnostics Group PLC
Registered number: 5017761
Consolidated Balance Sheet
as at 31 March 2013 33
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Share Share Retained
capital premium earnings Total
£££ £
Balance at 31 March 2011 4,145,580 8,831,527 (10,751) 12,966,356
Profit for the year ended 31 March 2012 — — 526,983 526,983
Other comprehensive income – net exchange adjustments — — (271,130) (271,130)
Other comprehensive income – actuarial gain on defined benefit pensions — — 56,000 56,000
Other comprehensive income – tax credit — — 16,585 16,585
Total comprehensive income for the year — — 328,438 328,438
Share-based payments — — 29,716 29,716
Balance at 31 March 2012 4,145,580 8,831,527 347,403 13,324,510
Profit for the year ended 31 March 2013 — — 582,266 582,266
Other comprehensive income – net exchange adjustments — — 26,970 26,970
Other comprehensive income – actuarial loss on defined benefit pensions — — (50,439) (50,439)
Other comprehensive income – tax credit — — 7,978 7,978
Total comprehensive income for the year — — 566,775 566,775
Share-based payments — — 71,193 71,193
Balance at 31 March 2013 4,145,580 8,831,527 985,371 13,962,478
Consolidated Statement of Changes in Equity
for the year ended 31 March 2013 34
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2013 2012
Note £ £
Cash flows generated from operations
Profit for the year 582,266 526,983
Adjustments for:
Taxation (306,042) (47,556)
Finance costs 32,914 48,542
Finance income (2,493) (10,856)
Operating profit before working capital movement 306,645 517 ,113
Increase in trade and other receivables (139,262) (47,799)
Increase in inventories (144,338) (186,890)
Increase/(decrease) in trade and other payables 231,132 (37,697)
Loss/(gain) on sale of property, plant and equipment 1,010 (283)
Depreciation 9 268,699 264,710
Amortisation of intangible assets 8 406,553 415,419
Share-based payments 71,193 29,716
Taxation received/(paid) 13,321 (143,306)
Cash flow from operating activities 1,014,953 810,983
Settlement of acquisition related liability — (125,000)
Cash flow from operating activities 1,014,953 685,983
Investing activities
Finance income 2,493 10,856
Purchase of property, plant and equipment 9 (308,876) (454,179)
Purchase of intangible assets (1,185,133) (768,968)
Sale of property, plant and equipment — 13,681
Net cash used in investing activities (1,491,516) (1,198,610)
Financing activities
Finance costs (6,107) (12,563)
Loan repayments (497,377) (272,832)
Finance lease repayments (18,759) (60,030)
Net cash used in financing activities (522,243) (345,425)
Net decrease in cash and cash equivalents (998,806) (858,052)
Effects of exchange rate movements 367 (37,693)
Cash and cash equivalents at beginning of year 1,159,132 2,054,877
Cash and cash equivalents at end of year 160,693 1,159,132
Consolidated Cash Flow Statement
for the year ended 31 March 2013 35
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2013 2012
Note £ £
ASSETS
Non-current assets
Investments 20 10,928,927 10,774,918
Intangible assets 8 1,506,765 984,663
12,435,692 11,759,581
Current assets
Trade and other receivables 11 4,127,911 4,344,833
Cash and cash equivalents — 18,869
4,127,911 4,363,702
Total assets 16,563,603 16,123,283
EQUITY AND LIABILITIES
Equity
Issued capital 13,966,782 13,966,782
Retained earnings 364,028 232,939
Total equity 14,330,810 14,199,721
Liabilities
Non-current liabilities
Long-term borrowings 12 455,608 794,389
Derivative financial instruments 22 — 454
Total non-current liabilities 455,608 794,843
Current liabilities
Short-term borrowings 12 360,000 496,450
Trade and other payables 13 660,865 507,382
Other financial liabilities 19 500,000 124,887
Bank overdraft 256,320 —
Total current liabilities 1,777,185 1,128,719
Total liabilities 2,232,793 1,923,562
Total equity and liabilities 16,563,603 16,123,283
David Evans Kieron Harbinson
Non-executive Chairman Finance Director
28 June 2013 28 June 2013
Omega Diagnostics Group PLC
Registered number: 5017761
Company Balance Sheet
as at March 2013 36
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Share Share Retained
capital premium earnings Total
£££ £
Balance at 31 March 2011 4,517,862 9,448,920 292,639 14,259,421
Loss for the year ended 31 March 2012 — — (89,416) (89,416)
Total comprehensive income for the year — — (89,416) (89,416)
Share-based payments — — 29,716 29,716
Balance at 31 March 2012 4,517,862 9,448,920 232,939 14,199,721
Profit for the year ended 31 March 2013 — — 59,896 59,896
Total comprehensive income for the year — — 59,896 59,896
Share-based payments — — 71,193 71,193
Balance at 31 March 2013 4,517,862 9,448,920 364,028 14,330,810
Company Statement of Changes in Equity
for the year ended 31 March 2013 37
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2013 2012
£ £
Cash flows generated from operations
Profit/(loss) for the year 59,896 (89,416)
Adjustments for:
Taxation (13,322) 7,528
Finance costs 27,830 45,338
Finance income (74,026) (79,944)
Operating profit/(loss) before working capital movement 378 (116,494)
Decrease in trade and other receivables 216,922 605,150
Increase/(decrease) in trade and other payables 153,483 (182,630)
Taxation received/(paid) 13,321 (112,768)
Share-based payments 71,193 29,716
Net cash flow from operating activities 455,297 222,974
Investing activities
Finance income 74,026 79,944
Purchase of intangible assets (152,102) (435,000)
Investment in subsidiaries (154,009) (119,557)
Net cash used in investing activities (232,085) (474,613)
Financing activities
Finance costs (1,024) (9,362)
Loan repayments (497,377) (272,832)
Net cash used in financing activities (498,401) (282,194)
Net decrease in cash and cash equivalents (275,189) (533,833)
Cash and cash equivalents at beginning of year 18,869 552,702
(Overdraft)/cash and cash equivalents at end of year (256,320) 18,869
Company Cash Flow Statement
for the year ended 31 March 2013 38
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
1 Authorisation of financial statements
The financial statements of Omega Diagnostics Group PLC for the year ended 31 March 2013 were authorised for issue by the Board of Directors
on 28 June 2013, and the balance sheets were signed on the Board’s behalf by David Evans and Kieron Harbinson. Omega Diagnostics
Group PLC is a public limited company incorporated in England. The Company’s ordinary shares are traded on AIM.
2 Accounting policies
Basis of preparation
The accounting policies which follow set out those policies which have been applied consistently to all periods presented in these financial
statements. These financial statements are presented in sterling and have been prepared in accordance with IFRS as adopted by the EU
and applied in accordance with the provisions of the Companies Act 2006.
In relation to IFRS 8 – Operating Segments, the Group has identified the Executive Board as the chief operating decision maker with
responsibility for decisions over the allocation of resources to operating segments and for the monitoring of their performance. The Group
reports performance of the following three segments:
− Allergy and Autoimmune
− Food Intolerance
− Infectious Disease and Other
Basis of consolidation
The Group financial statements consolidate the financial statements of Omega Diagnostics Group PLC and the entities it controls
(its subsidiaries). Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its
activities and is achieved through direct or indirect ownership of voting rights. Subsidiaries are consolidated from the date of acquisition,
being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. The financial
statements of the subsidiaries used in the preparation of the consolidated financial statements are based on consistent accounting
policies. All intercompany balances and transactions, including unrealised profits arising from them, are eliminated.
Intangible assets
Goodwill
Business combinations are accounted for under IFRS 3 using the acquisition method. Goodwill represents the excess of the cost of the
business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Goodwill is
not amortised but is subject to an annual impairment review and whenever events or changes in circumstances indicate that the carrying
value may be impaired a charge is made to the income statement. After initial recognition, goodwill is stated at cost less any accumulated
impairment losses.
For the purpose of impairment testing, goodwill is allocated to the related cash-generating units monitored by management, usually
at business segment level or statutory Company level as the case may be. Where the recoverable amount of the cash-generating unit
is less than its carrying amount, including goodwill, an impairment loss is recognised in the income statement.
Other intangible assets
Intangible assets acquired as part of a business combination are recognised outside goodwill if the asset is separable or arises from contractual
or other legal rights and its fair value can be measured reliably. Following initial recognition at fair value at the acquisition date, the historic
cost model is applied, with intangible assets being carried at cost less accumulated amortisation and accumulated impairment losses.
Intangible assets with a finite life have no residual value and are amortised on a straight line basis over the expected useful lives, with
charges included in administration costs, as follows:
Technology assets – 5–20 years
Customer relationships – 5–10 years
Supply agreements – 5 years
Other intangibles – 5 years
Software – 5 years
The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable.
Research and development costs
Expenditure on research and initial feasibility work is written off through the income statement as incurred. Thereafter, expenditure on
product development which meets certain criteria is capitalised and amortised over its useful life. The stage at when it is probable that the
product will generate future economic benefits is when the following criteria have been met: technical feasibility; intention and ability to sell
the product; availability of resources to complete the development of the product; and the ability to measure the expenditure attributable
to the product. The useful life of the intangible asset is determined on a product-by-product basis, taking into consideration a number
of factors. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.
Notes to the Financial Statements
for the year ended 31 March 2013 39
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2 Accounting policies continued
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is
charged so as to write off the cost of assets to their estimated residual values over their estimated useful lives, on a straight line basis as follows:
Land and property – 33 years, straight line with no residual value
Leasehold improvements – 10 years, straight line with no residual value
Plant and machinery – 8 to 10 years, straight line with no residual value
Motor vehicles – 5 years, straight line with no residual value
The carrying values of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate the
carrying value may not be recoverable, and are written down immediately to their recoverable amount. Useful lives are reviewed annually
and, where adjustments are required, these are made prospectively.
Impairment of assets
The Group and Company assess at each reporting date whether there is an indication that an asset may be impaired. If any such indication
exists, the Group and Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an
asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset
does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount
of an asset exceeds its recoverable amount, the asset is considered to be impaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted to their net present value, using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks specific to that asset. Impairment losses on continuing
operations are recognised in the income statement in those expense categories consistent with the function of the impaired asset.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is defined as standard cost or purchase price and includes all
direct costs incurred in bringing each product to its present location and condition. Net realisable value is based on estimated selling
price less any further costs expected to be incurred prior to completion and disposal.
Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at the lower of original invoice amount and recoverable
amount. A provision for doubtful amounts is made when there is objective evidence that collection of the full amount is no longer probable.
Significant financial difficulty or significantly extended settlement periods are considered to be indicators of impairment. Normal average
payment terms vary from payment in advance to 90 days. Balances are written off when the probability of recovery is assessed as remote.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at banks and in hand and short-term deposits with an original maturity
of three months or less.
Financial instruments
Under IAS 39, financial assets, liabilities and equity instruments are classified according to the substance of the contractual arrangements
entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Financial assets are classified as either:
− financial assets at fair value through profit or loss; or
− loans and receivables.
Financial assets at fair value through profit or loss
The Group uses derivative financial instruments to reduce its exposure to fluctuations in interest rates, both in sterling and US dollars.
The Group does not hold or issue derivatives for speculative or trading purposes. Derivative financial instruments with positive fair values
are recognised as assets measured at their fair values at the balance sheet date. The fair value of interest rate contracts is determined
by reference to market values for similar instruments that have similar maturities. Changes in fair value are recognised in the income
statement included in finance costs, due to the fact that hedge accounting has not been applied.
Loans and receivables
Trade receivables that do not carry any interest and have fixed or determinable payment amounts that are not quoted in an active market
are classified as loans and receivables. Loans and receivables with a maturity of less than twelve months are included in current assets and
are measured at amortised cost using the effective interest method as reduced by appropriate allowances for estimated irrecoverable amounts.
Financial liabilities are classified as either:
− financial liabilities at fair value through profit or loss; or
− other liabilities. 40
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2 Accounting policies continued
Financial instruments continued
Financial liabilities at fair value through profit or loss
The Group uses derivative financial instruments to reduce its exposure to fluctuations in interest rates, both in sterling and US dollars.
The Group does not hold or issue derivatives for speculative or trading purposes. Derivative financial instruments with negative fair values
are recognised as liabilities measured at their fair values at the balance sheet date. The fair value of interest rate contracts is determined
by reference to market values for similar instruments that have similar maturities. Changes in fair value are recognised in the income
statement included in finance costs, due to the fact that hedge accounting has not been applied.
Other financial liabilities, whether used as part of the consideration for acquisitions which include deferred consideration or not, are designated
by the Group as financial liabilities at fair value through profit and loss. They are measured at the present value of the consideration expected
to be payable by discounting the expected future cash flows at prevailing interest rates. At initial recognition, the quantum of liability to be
recognised will depend upon management’s expectation, at that date, of the amount that would ultimately be payable. Where there is
a change in the expectation of future cash flows or interest rates, the change is reflected through the income statement.
Other liabilities
Trade payables are not interest bearing and are recognised initially at fair value and subsequently measured at amortised cost using
the effective interest method.
Bank borrowings are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
For long-term bank borrowings stated at amortised cost, transaction costs that are directly attributable to the borrowing instrument are
recognised as an interest expense over the life of the instrument.
A financial asset or liability is generally derecognised when the contract that gives rise to it is settled, sold, cancelled or expires. Where an
existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability
are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and recognition of the
new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised.
Financial assets and liabilities that are held for trading and other assets and liabilities designated as such on inception are included at fair
value through profit and loss. Financial assets and liabilities are classified as held for trading if they are acquired for sale in the short term.
Derivatives are also classified as held for trading unless they are designated as hedge instruments. Assets are carried in the balance sheet
at fair value with gains or losses recognised in the income statement.
Company’s investments in subsidiaries
The Company recognises its investments in subsidiaries at cost. The carrying value of investments is reviewed for impairment whenever
events or changes in circumstances indicate the carrying value may not be recoverable.
Presentation currency
The financial statements are presented in UK pounds sterling. Transactions in currencies other than sterling are recorded at the prevailing
rate of exchange at the date of the transaction. At each balance sheet date, monetary assets and liabilities that are denominated in foreign
currencies are retranslated at the rates prevailing on the balance sheet date.
Foreign currencies
Non-monetary assets and liabilities that are denominated in foreign currencies are translated at the rates prevailing at the date of the transaction.
Gains and losses arising on retranslation are included in the net profit or loss for the year. The trading results of the overseas subsidiaries
are translated at the average exchange rate ruling during the year, with the exchange difference between the average rates and the rates
ruling at the balance sheet date being taken to reserves. Any difference arising on the translation of the opening net investment, in the
overseas subsidiaries, and of applicable foreign currency loans are dealt with as adjustments to reserves.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and net of discounts and sales-related taxes. Sales of
goods are recognised when the significant risks and rewards of ownership are transferred to the customer. This will be when goods have
been dispatched and the collection of the related receivable is reasonably assured. Revenue relates to the sale of medical diagnostic kits.
Government grants
Government grants are recognised when it is reasonable to expect that the grants will be received and that all related conditions will be met,
usually on submission of a valid claim for payment. Government grants in respect of capital expenditure are credited to a deferred income
account and are released to the income statement over the expected useful lives of the relevant assets by equal annual instalments.
Leasing and hire purchase commitments
Assets held under finance leases and hire purchase contracts are capitalised in the balance sheet and are depreciated over the shorter
of their lease period and useful life. The corresponding lease or hire purchase obligation is capitalised in the balance sheet as a liability.
The interest element of the rental obligation is charged to the income statement over the period of the lease and represents a constant
proportion of the balance of capital repayments outstanding.
Rentals applicable to operating leases, where substantially all the benefits and risks remain with the lessor, are charged against profits
on a straight line basis over the period of the lease.
Notes to the Financial Statements continued
for the year ended 31 March 2013 41
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2 Accounting policies continued
Share-based payments
Equity-settled transactions
For equity-settled transactions, the Group measures the award by reference to the fair value at the date at which they are granted and it is
recognised as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award.
Fair value is determined using an appropriate pricing model. In valuing equity-settled transactions, no account is taken of any service and
performance (vesting conditions), other than conditions linked to the price of the shares of the Company (market conditions).
Any other conditions which are required to be met in order for an employee to become fully entitled to an award are considered to be
non-vesting conditions. Like market performance conditions, non-vesting conditions are taken into account in determining grant date fair
value. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or
non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided
that all other performance conditions are satisfied.
At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has
expired and management’s best estimate of the achievement or otherwise of vesting conditions and of the number of equity instruments
that will ultimately vest or, in the case of an instrument subject to a market or non-vesting condition, be treated as vesting as described above.
This includes any award where non-vesting conditions within the control of the Group or the employee are not met. The movement in
cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity.
Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the cost
based on the original award terms continues to be recognised over the original vesting period. In addition, an expense is recognised over
the remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair value
of the original award and the fair value of the modified award, both as measured on the date of the modification. No reduction is
recognised if this difference is negative.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in
the income statement for the award is expensed immediately. Any compensation paid up to the fair value of the award at the cancellation
or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement.
Pension contributions
Contributions to personal pension plans of employees on a defined contribution basis are charged to the income statement in the year
in which they are payable.
The Group also operates two defined benefit plans in Germany, which are closed to new members. Obligations under defined benefit
plans are measured at discounted present values by actuaries, while plan assets are recorded at fair value. The operating and financing
costs of pensions are charged to the income statement in the period in which they arise and are recognised separately. The difference
between actual and expected returns on assets during the year, including changes in actuarial assumptions, are recognised in the
statement of comprehensive income.
Income taxes
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based
on tax rates and laws that are enacted or substantively enacted by the balance sheet date.
Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying
amounts in the financial statements, with the following exceptions:
− where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business
combination that at the time of the transaction affects neither accounting nor taxable profit or loss;
− in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing
of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the
foreseeable future; and
− deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which
the deductible temporary differences, carried forward tax credits or tax losses can be utilised.
Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the
related asset is realised or the liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
Income tax and deferred tax is charged or credited in other comprehensive income or directly to equity if it relates to items that are credited
or charged in other comprehensive income or directly to equity. Otherwise, income tax and deferred tax is recognised in profit or loss.
Use of estimates and judgements
The preparation of these financial statements requires management to make judgements, estimates and assumptions that affect
the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ
from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period
in which the estimate is revised and in any future periods affected.
The significant areas of estimation and uncertainty and critical judgements in applying the accounting policies that have the most
significant effect on the amounts recognised in the financial information are discussed overleaf. Further judgements, assumptions
and estimates are set out in the Group financial statements. 42
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
2 Accounting policies continued
Use of estimates and judgements continued
Valuation of intangible assets
Management judgement is required to estimate the useful lives of intangible assets, having reference to future economic benefits
expected to be derived from use of the asset. Economic benefits are based on the fair values of estimated future cash flows.
Impairment of goodwill
Goodwill is tested annually for impairment. The test considers future cash flow projections of cash-generating units that give rise to the
goodwill. Where the discounted cash flows are less than the carrying value of goodwill, an impairment charge is recognised for the difference.
Further analysis of the estimates and judgements is disclosed in Note 8.
Deferred tax assets
Management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing
and level of future taxable profits together with an assessment of the effect of future tax planning strategies. The carrying value of the
deferred tax asset at 31 March 2013 is £553,647 (2012: £150,332). Further details are contained in Note 14.
New standards and interpretations not applied
IASB and IFRIC have issued the following standards and interpretations, which are considered relevant to the Group, with an effective
date after the date of these financial statements.
International Accounting Standards (IAS/IFRSs) Effective date
IAS 19 Employee Benefits (Amendment) 1 January 2013
IFRS 9 Financial Instruments 1 January 2015
IFRS 10 Consolidated Financial Statements 1 January 2014
IFRS 11 Joint Arrangements 1 January 2014
IFRS 12 Disclosure of Interests in Other Entities 1 January 2014
IFRS 13 Fair Value Measurement 1 January 2013
The above standards and interpretations will be adopted in accordance with their effective dates and have not been adopted in these
financial statements. The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact
on the Group’s financial statements in the period of initial application.
3 Adoption of new international financial reporting standards
The accounting policies adopted are consistent with those of the previous financial year.
4 Segment information
For management purposes the Group is organised into three operating divisions: Allergy and Autoimmune, Food Intolerance,
and Infectious Disease and Other.
The Allergy and Autoimmune division specialises in the research, development, production and marketing of in vitro allergy
and autoimmune tests used by doctors to diagnose patients with allergies and autoimmune diseases.
The Food Intolerance division specialises in the research, development and production of kits to aid the detection of immune reactions
to food. It also provides clinical analysis to the general public, clinics and health professionals as well as supplying the consumer Food
Detective
®
test.
The Infectious Disease division specialises in the research, development and production and marketing of kits to aid the diagnosis
of infectious diseases.
Corporate consists of centralised corporate costs which are not allocated across the three business divisions.
Inter-segment transfers or transactions are entered into under the normal commercial conditions that would be available to unrelated
third parties.
Notes to the Financial Statements continued
for the year ended 31 March 2013 43
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
4 Segment information continued
Business segment information
Infectious
Allergy and Food Disease/
Autoimmune Intolerance other Corporate Group
2013 ££££ £
Statutory presentation
Revenue 4,254,313 5,222,919 2,869,053 — 12,346,285
Inter-segment revenue (93,304) (833,232) (156,851) — (1,083,387)
Total revenue 4,161,009 4,389,687 2,712,202 — 11,262,898
Operating costs (4,391,981) (3,258,964) (2,559,475) (745,833) (10,956,253)
Operating profit/(loss) (230,972) 1,130,723 152,727 (745,833) 306,645
Net finance (costs)/income (72,362) 513 (4,868) 46,296 (30,421)
Profit/(loss) before taxation (303,334) 1,131,236 147,859 (699,537) 276,224
Adjusted profit before taxation
Profit/(loss) before taxation (303,334) 1,131,236 147,859 (699,537) 276,224
IFRS-related discount charges — — — 25,046 25,046
Fair value adjustments to financial derivatives — — — (454) (454)
Amortisation of intangible assets 282,412 98,866 25,275 — 406,553
Share-based payment charges — — — 71,193 71,193
Adjusted profit/(loss) before taxation (20,922) 1,230,102 173,134 (603,752) 778,562
Infectious
Allergy and Food Disease/
Autoimmune Intolerance other Corporate Group
2012 ££££ £
Statutory presentation
Revenue 4,488,210 4,456,689 2,762,572 — 11,707 ,471
Inter-segment revenue (11,436) (555,984) (15,998) — (583,418)
Total revenue 4,476,774 3,900,705 2,746,574 — 11,124,053
Operating costs (4,616,762) (2,863,458) (2,450,586) (676,134) (10,606,940)
Operating profit/(loss) (139,988) 1,037,247 295,988 (676,134) 517 ,113
Net finance (costs)/income (72,095) (197) — 34,606 (37,686)
Profit/(loss) before taxation (212,083) 1,037,050 295,988 (641,528) 479,427
Adjusted profit before taxation
Profit/(loss) before taxation (212,083) 1,037,050 295,988 (641,528) 479,427
IFRS-related discount charges 12,344 — — 32,881 45,225
Fair value adjustments to financial derivatives — — — (2,981) (2,981)
Amortisation of intangible assets 296,667 98,748 20,004 — 415,419
Acquisition costs 37,461 — — — 37,461
Share-based payment charges — — — 29,716 29,716
Adjusted profit/(loss) before taxation 134,389 1,135,798 315,992 (581,912) 1,004,267
The segment assets and liabilities are as follows:
Infectious
Allergy and Food Disease/
Autoimmune Intolerance other Corporate Group
2013 ££££ £
Segment assets 9,019,799 5,551,814 2,298,462 16,622 16,886,697
Unallocated assets ———— 721,446
Total assets 9,019,799 5,551,814 2,298,462 16,622 17,608,143
Segment liabilities 337,982 355,997 849,050 141,121 1,684,150
Unallocated liabilities ———— 1,961,515
Total liabilities 337,982 355,997 849,050 141,121 3,645,665 44
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
4 Segment information continued
Business segment information continued
Infectious
Allergy and Food Disease/
Autoimmune Intolerance other Corporate Group
2012 ££££ £
Segment assets 7,784,700 5,800,726 1,791,682 20,161 15,397 ,269
Unallocated assets — — — — 1,313,518
Total assets 7 ,784,700 5,800,726 1,791,682 20,161 16,710,787
Segment liabilities 259,121 306,478 618,849 268,570 1,453,018
Unallocated liabilities — — — — 1,933,259
Total liabilities 259,121 306,478 618,849 268,570 3,386,277
Unallocated assets comprise cash, income tax receivable, deferred taxation and derivative financial instruments. Unallocated liabilities comprise
interest-bearing loans, borrowings, other financial liabilities, derivative financial instruments, deferred taxation and income tax payable.
Information about major customers
No single customer accounts for 10% or more of Group revenues.
Geographical information
The Group’s geographical information is based on the location of its markets and customers. Sales to external customers disclosed in the
geographical information are based on the geographical location of its customers. The analysis of segment assets and capital expenditure
is based on the geographical location of the assets.
2013 2012
£ £
Revenues
UK 991,513 933,164
Germany 3,654,701 3,875,905
Rest of Europe 2,752,442 2,604,134
North America 348,984 327,505
South/Central America 511,968 441,347
India 399,775 401,799
Asia and Far East 1,041,788 913,494
Africa and Middle East 1,561,727 1,626,705
11,262,898 11,124,053
Property, Retirement Trade
plant and benefit and other
Intangibles equipment surplus Inventories receivables Total
2013 £££££ £
Assets
UK 7,443,646995,942 —899,494 2,073,849 11,412,931
Germany 2,900,341 1,090,479 31,886 849,865 381,648 5,254,219
India 3,889 29,865 — 84,528 101,265 219,547
Unallocated assets ————— 721,446
Total assets 10,347,876 2,116,286 31,886 1,833,887 2,556,762 17,608,143
Property, Retirement Trade
plant and benefit and other
Intangibles equipment surplus Inventories receivables Total
2012 £££££ £
Assets
UK 6,142,429 867,105 — 852,810 2,071,704 9,934,048
Germany 2,990,422 1,174,008 85,639 836,739 339,591 5,426,399
India 3,221 27,396 — — 6,205 36,822
Unallocated assets ————— 1,313,518
Total assets 9,136,072 2,068,509 85,639 1,689,549 2,417,500 16,710,787
Notes to the Financial Statements continued
for the year ended 31 March 2013 45
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
4 Segment information continued
Geographical information continued
2013 2012
£ £
Liabilities
UK 1,365,434 1,234,205
Germany 256,346 328,379
India 62,370 15,311
Unallocated liabilities 1,961,515 1,808,382
Total liabilities 3,645,665 3,386,277
Capital expenditure
UK 256,568 310,208
Germany 42,318 113,638
India 9,990 30,333
Total capital expenditure 308,876 454,179
5 Finance costs
2013 2012
Consolidated £ £
Interest payable on loans and bank overdrafts 6,471 14,862
Exchange difference on loans 927 577
Unwinding of discounts 21,732 32,880
Fair value adjustment to financial derivatives (454) (2,981)
Finance leases 4,238 3,204
32,914 48,542
6 Taxation
2013 2012
Consolidated £ £
(a) Tax credited in the income statement
Current tax – current year — —
Current tax – prior year adjustment 16,373 (18,158)
Deferred tax – current year 163,462 66,583
Deferred tax – prior year adjustment 126,207 (869)
306,042 47 ,556
(b) Tax relating to items charged or credited to other comprehensive income
Deferred tax on actuarial loss/(gain) on retirement benefit obligations 12,900 (21,393)
Deferred tax on net exchange adjustments (4,922) 37,978
Total tax credit 7,978 16,585
2013 2012
Consolidated £ £
(c) Reconciliation of total tax credit
Factors affecting the tax charge for the year:
Profit before tax 276,224 479,427
Effective rate of taxation 24% 26%
Profit before tax multiplied by the effective rate of tax 66,294 124,651
Effects of:
Expenses not deductible for tax purposes and permanent differences 21,423 6,815
Research and development tax credits (227,422) (151,954)
Tax (over)/under-provided in prior years (142,580) 19,027
Adjustment due to different overseas tax rate (9,372) (1,015)
Impact of UK rate change on deferred tax (14,385) (45,080)
Tax credit for the year (306,042) (47,556)
In his Budget speech on 20 March 2013, the Chancellor announced that the main UK corporation tax rate would be reduced from
the current rate of 24% to 20% by 2015. The rate of corporation tax reduced from 28% to 26% on 1 April 2011 and a reduction to 24%,
effective from 1 April 2012, was included in the Finance Bill that was enacted on 17 July 2012. A further reduction in the corporation
tax rate to 23%, effective from 1 April 2013, was also included in the Finance Bill.
As the reduction in the rate to 23% was enacted at the balance sheet date, this is the rate at which deferred tax has been provided.
The further rate reductions are to be incorporated within future legislative acts and so will not be substantively enacted until later
periods. The estimated impact of the proposed further rate reduction to 20% would be to reduce the deferred tax liability by £7,272. 46
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
7 Revenue and expenses
2013 2012
Consolidated £ £
Revenues
Revenue – sales of goods 11,262,898 11,124,053
Finance income 2,493 10,856
Total revenue 11,265,391 11,134,909
2013 2012
Consolidated £ £
Operating profit is stated after charging/crediting:
Material costs 3,053,462 2,978,393
Depreciation 268,699 264,710
Amortisation of intangibles 406,553 415,419
Net foreign exchange (gains)/losses (4,863) 21,722
Research and development costs 140,810 486,584
Operating lease rentals 249,931 193,822
Share-based payments 71,193 29,716
Auditors’ remuneration
Fees payable to the Company’s auditors for the audit of the annual accounts 20,000 23,300
– Local statutory audit of subsidiaries 50,000 50,000
– Local statutory audit of the parent Company 5,000 5,000
Fees payable to the Company’s auditors for other services
– Taxation 14,500 14,550
All research and development costs noted above were charged directly to administration costs in the income statement.
Staff costs
The average monthly number of employees (including Directors) was:
2013 2012
Consolidated number number
Operations 74 70
Management and administration 52 37
Employee numbers 126 107
Their aggregate remuneration comprised:
2013 2012
£ £
Wages and salaries 3,967,856 3,647,364
Social security costs 490,079 477,883
Pension costs 238,344 207,620
Share-based payments 71,193 29,716
4,767,472 4,362,583
Equity-settled share-based payments
Consolidated and Company
The share-based payment plans are described below.
EMI Option Scheme and Unapproved Option Scheme
The plans are equity-settled plans and the fair value is measured at the grant date. Under the above plans, share options are granted to
Directors and employees of the Company. The exercise price of the option is equal to the market price of the shares on the date of grant.
The options vest one year after the date of grant and are not subject to any performance criteria.
The fair value of the options is estimated at the grant date using the Black-Scholes pricing model taking into account the terms and conditions
upon which the instruments were granted.
The contractual life of each option granted is ten years and there is no cash settlement alternative.
Notes to the Financial Statements continued
for the year ended 31 March 2013 47
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
7 Revenue and expenses continued
Equity-settled share-based payments continued
Second Unapproved Option Scheme (SUOS)
The plan is an equity-settled plan and the fair value is measured at the grant date. Under the above plan, share options may be granted
to third parties for provision of services to the Company. The exercise price of the option is equal to the market price of the shares
on the date of grant. The options vest three years after the date of grant and are not subject to any performance criteria.
The fair value of the options is estimated at the grant date using the Black-Scholes pricing model taking into account the terms
and conditions upon which the instruments were granted.
The contractual life of each option granted is ten years and there is no cash settlement alternative.
Under the EMI Option Scheme 135,000 options lapsed during the year and a further 1,450,000 were granted.
The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year:
2013 2013 2012 2012
number WAEP number WAEP
Outstanding 1 April 2,283,289 19.0p 1,923,289 19.0p
Granted during the year under the EMI Option Scheme 1,450,000 14.5p 450,000 12.6p
Granted during the year under the SUOS —— — —
Exercised during the year —— — —
Lapsed during the year under the EMI Option Scheme (135,000) — (90,000) —
Outstanding at 31 March 3,598,289 — 2,283,289 —
Exercisable at 31 March 2,148,289 — 1,833,289 —
The following table lists the inputs to the model used for the years ended 31 March 2013 and 31 March 2012:
EMI Option Scheme and
Unapproved Option Scheme
2013 2012
Dividend yield 0% 0%
Expected volatility 47% 52%
Risk-free interest rate 5.00% 3.42%
Weighted average remaining contractual life 7.4 6.7
Weighted average share price 14.5p 12.6p
Exercise price 14.5p 12.6p
Model used Black-Scholes Black-Scholes
The expected life of the options is based on management’s assumption of the options’ life due to the lack of any historical data on the
exercise period of these options. The assumption takes into account the experience of employees and Directors and is not necessarily
indicative of exercise patterns that may occur.
The expected volatility reflects the assumption that historical volatility over a period similar to the life of the option is indicative of future trends,
which may not necessarily be the actual outcome.
Directors’ remuneration
2013 2012
Consolidated £ £
Fees 45,000 45,000
Emoluments 371,506 477,829
416,506 522,829
Contributions to personal pension 18,500 26,500
435,006 549,329
Members of a defined contribution pension scheme at the year end 3 3
Information in respect of individual Directors’ emoluments is provided in the Directors’ Remuneration Report on pages 25 and 26. 48
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
8 Intangibles
Licences/ Supply Technology Customer Development
Goodwill software arrangements assets relationships costs Total
££££££ £
Cost
At 31 March 2011 4,745,302 1,113,492 549,248 2,147,521 1,280,349 — 9,835,912
Additions — 26,424 — 8,338 — — 34,762
Additions internally generated — — — — — 299,206 299,206
Currency translation (72,361) (3,500) (27,334) (9,054) (60,409) (400) (173,058)
At 31 March 2012 4,672,941 1,136,416 521,914 2,146,805 1,219,940 298,806 9,996,822
Additions — 570,582 — — — — 570,582
Additions internally generated — — — — — 1,026,464 1,026,464
Currency translation 11,837 1,925 4,669 1,538 10,018 4,480 34,467
At 31 March 2013 4,684,778 1,708,923 526,583 2,148,343 1,229,958 1,329,750 11,628,335
Accumulated amortisation
At 31 March 2011 — 9,989 27,438 362,473 59,441 — 459,341
Amortisation charge in the year — 37,528 108,243 132,753 136,895 — 415,419
Currency translation — (1,570) (5,202) (1,634) (5,604) — (14,010)
At 31 March 2012 — 45,947 130,479 493,592 190,732 — 860,750
Amortisation charge in the year — 44,948 101,739 130,710 129,156 — 406,553
Currency translation — 1,824 4,745 1,490 5,097 — 13,156
At 31 March 2013 — 92,719 236,963 625,792 324,985 — 1,280,459
Net book value
31 March 2013 4,684,778 1,616,204 289,620 1,522,551 904,973 1,329,750 10,347,876
31 March 2012 4,672,941 1,090,469 391,435 1,653,213 1,029,208 298,806 9,136,072
31 March 2011 4,745,302 1,103,503 521,810 1,785,048 1,220,908 — 9,376,571
Of the licenses/software balance above, £1,506,765 (2012: 984,663) is held on the balance sheet of the Company and relates to the IDS
and CD4 licenses. Additional costs of £522,102 were capitalised in the year in relation to these licenses.
Impairment testing of goodwill
The Group tests goodwill annually for impairment or more frequently if there are indicators of impairment. The carrying amount of goodwill
is indicated in the table above. The net book value of goodwill above for Genesis-CNS amounts to £3,016,892 (2012: £3,016,892), Co-Tek
£332,986 (2012: £332,986) and Omega GmbH £1,334,900 (2012: £1,323,063).
The recoverable amount of Genesis-CNS, Co-Tek and Omega GmbH has been determined based on a value in use calculation using
cash flow projections based on the actual results for the year ended 31 March 2013 and the financial budget approved by the Board covering
the period to 31 March 2014, with projected cash flows thereafter through to March 2017 based on a growth rate of 3% per annum. The key
assumptions used in the budget for Genesis-CNS are the sales projections which are predicated on the continued success of the Genarrayt
®
and Food Detective
®
assays being commercialised on an international basis and the gross margins which can be achieved from the sales of
these products. The key assumption used in the budget for Co-Tek is the growth in sales of the Company’s Micropath™ range of products
where increased volumes are dependent upon having accessed a lower manufacturing cost through the acquisition of Co-Tek itself. The
budget for Omega GmbH assumes continued organic growth in sales in the German market as well as achieving an increase in export sales
through the existing Omega international distribution network. The Omega GmbH forecast also includes revenues in years two to five from
the IDS-iSYS platform which will allow more rapid processing of higher volume tests.
In all three cases, the Company also makes assumptions in regard to having sufficient production personnel to cope with increased volumes.
The discount rate applied to cash flows is 12.5% for the Group which takes account of other risks specific to each segment such as currency
risk, geography and price risk. The discount rate is the weighted average cost of pre-tax cost of debt financing and the pre-tax cost of
equity financing. Cash flows beyond the budget period are extrapolated for Genesis-CNS, Co-Tek and Omega GmbH over the next four
years using a growth rate of 3% that equates to the current growth rate in the IVD industry. Thereafter, a nil growth rate has been assumed
for prudence. As a result, there has been no impairment to the carrying value of goodwill.
Sensitivity analysis
Base forecasts show headroom of £4.7 million above carrying value for Genesis-CNS, headroom of £410,000 above carrying value for
Co-Tek and headroom of £800,000 for Omega GmbH. Sensitivity analysis has been undertaken to assess the impact of any reasonably
possible change in key assumptions. If the growth rate were to drop from 3% to 1% this would have the effect of reducing the headroom
in Genesis-CNS by £191,000 over five years, in Co-Tek by £29,000 over five years and in Omega GmbH by £45,000 over five years.
For Genesis-CNS, the discount rate would have to increase to 48% or the growth rate would have to be a decline of 81% for the headroom
to reduce to £Nil.
For Co-Tek, the discount rate would have to increase to 55% or the growth rate would have to be a decline of 37% for the headroom
to reduce to £Nil.
For Omega GmbH, the discount rate would have to increase to 22% or the growth rate would have to be a decline of 44% for the headroom
to reduce to £Nil.
Notes to the Financial Statements continued
for the year ended 31 March 2013 49
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
9 Property, plant and equipment
Land and Leasehold Plant and Motor
property improvements machinery vehicles Total
Consolidated ££££ £
Cost
At 31 March 2011 713,332 181,625 2,169,420 75,411 3,139,788
Additions 10,281 40,953 402,945 — 454,179
Disposals — — (38,585) (22,438) (61,023)
Currency translation (35,800) (696) (28,475) (3,764) (68,735)
At 31 March 2012 687,813 221,882 2,505,305 49,209 3,464,209
Additions — 19,958 288,918 — 308,876
Disposals — — (4,907) — (4,907)
Currency translation 6,152 85 8,394 441 15,072
At 31 March 2013 693,965 241,925 2,797,710 49,650 3,783,250
Accumulated depreciation
At 31 March 2011 4,877 95,783 1,078,356 6,288 1,185,304
Charge in the year 19,513 23,055 202,253 19,889 264,710
Disposals — — (38,476) (9,199) (47,675)
Currency translation (940) (109) (4,446) (1,144) (6,639)
At 31 March 2012 23,450 118,729 1,237,687 15,834 1,395,700
Charge in the year 18,348 27,605 212,818 9,928 268,699
Disposals — — (3,897) — (3,897)
Currency translation 853 282 4,837 490 6,462
At 31 March 2013 42,651 146,616 1,451,445 26,252 1,666,964
Net book value
31 March 2013 651,314 95,309 1,346,265 23,398 2,116,286
31 March 2012 664,363 103,153 1,267,618 33,375 2,068,509
31 March 2011 708,455 85,842 1,091,064 69,123 1,954,484
The net book value of plant and machinery held under finance leases at 31 March 2013 is £24,636 (2012: £38,073).
10 Inventories
2013 2012
£ £
Raw materials 993,354 896,810
Work in progress 121,667 139,803
Finished goods and goods for resale 718,866 652,936
1,833,887 1,689,549
11 Trade and other receivables
2013 2012
Consolidated £ £
Trade receivables 2,309,765 2,237,309
Less provision for impairment of receivables (14,117) (14,117)
Trade receivables – net 2,295,648 2,223,192
Prepayments and other receivables 261,114 194,308
2,556,762 2,417,500
The Directors consider that the carrying amount of trade receivables and other receivables approximates their fair value.
2013 2012
Company £ £
Prepayments and other receivables 16,622 20,160
Due from subsidiary companies 4,111,289 4,324,673
4,127,911 4,344,833 50
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
11 Trade and other receivables continued
Analysis of trade receivables
2013 2012
Consolidated £ £
Neither impaired nor past due 1,857,402 1,543,940
Past due but not impaired 438,246 679,252
2013 2012
Company £ £
Neither impaired nor past due 4,111,289 4,324,673
Ageing of past due but not impaired trade receivables
2013 2012
£ £
Up to three months 295,148 503,826
Between three and six months 32,329 103,578
More than six months 110,769 71,848
The Directors consider that the carrying amount of trade receivables and other receivables approximates their fair value.
The credit quality of trade receivables that are neither past due nor impaired is assessed internally with reference to historical information
relating to counterparty default rates. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable
and no collateral is held as security.
12 Interest-bearing loans and borrowings and financial instruments
2013 2012
Consolidated £ £
Current
Bank loans — 136,450
Other loans 360,000 360,000
Obligations under finance leases 7,649 13,361
367,649 509,811
Non-current
Obligations under finance leases 28,864 —
Other loans 455,608 794,389
484,472 794,389
Bank loans comprised the following:
£136,450 variable rate loans 2013 (base rate + 2.0%) (2012: base rate + 2.0%) — 136,450
— 136,450
Less current instalments — (136,450)
— —
The Group uses finance leases and hire purchase contracts to acquire plant and machinery. These leases have terms of renewal but no
purchase options and escalation clauses. Renewals are at the option of the lessee. Future minimum payments under finance leases and
hire purchase contracts are as follows:
2013 2012
£ £
Future minimum payments due:
Not later than one year 10,007 13,667
After one year but not more than five years 32,524 —
42,531 13,667
Less finance charges allocated to future periods 6,018 306
Present value of minimum lease payments 36,513 13,361
The present value of minimum lease payments is analysed as follows:
Not later than one year 7,649 13,361
After one year but not more than five years 28,864 —
36,513 13,361
Notes to the Financial Statements continued
for the year ended 31 March 2013 51
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
12 Interest-bearing loans and borrowings and financial instruments continued
2013 2012
Consolidated £ £
Other loans comprise the following:
Vendor loan – 2014 (base rate) 815,608 1,154,389
815,608 1,154,389
The two Bank of Scotland term loans were repaid in full on 4 September 2012.
The term loans were secured by a floating charge over the assets of the Group. Cross-guarantees between Omega Diagnostics Group PLC,
Omega Diagnostics Limited, Genesis Diagnostics Limited and Cambridge Nutritional Sciences Limited are in place, and Omega
Diagnostics Group PLC has given the Bank of Scotland a debenture secured over the assets of the Company. Kieron Harbinson and
Andrew Shepherd also provided personal guarantees of £100,000 in support of the term loans. The security above remains in place
against the £1.7 million bank overdraft currently available to the Group.
2013 2012
Company £ £
Current
Bank loans — 136,450
Other loans 360,000 360,000
360,000 496,450
Non-current
Other loans 455,608 794,389
Bank loans comprised the following:
£136,450 variable rate loan 2013 (base rate + 2.0%) (2012: base rate + 2.0%) — 136,450
— 136,450
Less current instalments — (136,450)
— —
2013 2012
Company £ £
Other loans comprise the following:
Vendor loan – 2014 (base rate) 815,608 1,154,389
815,608 1,154,389
13 Trade and other payables
2013 2012
Consolidated £ £
Trade payables 1,231,405 962,115
Social security costs 135,292 101,118
Accruals and other payables 317,452 389,785
1,684,149 1,453,018
Trade payables and other payables comprise amounts outstanding for trade purchases and ongoing costs. The Directors consider
that the carrying amount of trade payables approximates their fair value.
2013 2012
Company £ £
Trade payables 42,527 47 ,428
Accruals and other payables 98,594 96,255
Due to subsidiary companies 519,744 363,699
660,865 507,382
Trade payables and other payables comprise amounts outstanding for trade purchases and ongoing costs. The Directors consider
that the carrying amount of trade payables approximates their fair value. 52
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
14 Deferred taxation
The deferred tax asset is made up as follows:
2013 2012
Consolidated £ £
Decelerated capital allowances 2,676 32,107
Temporary differences 46,261 9,287
Tax losses carried forward 504,710 108,938
553,647 150,332
A deferred tax asset has been recognised for the carry forward of unused tax losses to the extent that it is probable that future taxable
profits will be available against which the unused tax losses can be utilised.
The deferred tax liability is made up as follows:
2013 2012
Consolidated £ £
Fair value adjustments on acquisition 400,163 446,062
Accelerated capital allowances 49,684 36,273
Other timing differences 151,056 —
Retirement benefit obligations 8,492 21,393
609,395 503,728
15 Share capital
2013 2012
Company number number
Authorised share capital
Ordinary shares of 4 pence each 184,769,736 184,769,736
Deferred shares of 0.9 pence each 123,245,615 123,245,615
Issued and fully paid ordinary share capital
At the beginning of the year 85,216,257 85,216,257
Issued during the year — —
At the end of the year 85,216,257 85,216,257
During the year to 31 March 2013, the Company granted options over 1,450,000 ordinary shares at an exercise price of 14.5 pence per
share. The options will expire if not exercised within ten years of the date of grant.
16 Commitments and contingencies
Operating lease commitments
Future minimum rentals payable under non-cancellable operating leases are as follows:
2013 2012
Consolidated £ £
Land and buildings:
Within one year 232,124 175,119
Within two to five years 828,157 399,456
Other:
Within one year 17,777 18,703
Within two to five years 21,668 30,150
Land and buildings leases in force for Omega Diagnostics Limited premises extend to 30 June 2021. The land and buildings leases
in force for the premises of Genesis Diagnostics Limited and Cambridge Nutritional Sciences extend to March 2017.
Other leases are in force for office equipment items and extend to time periods ranging from December 2013 to June 2021. The leases
may be extended at the expiry of their term.
Performance bonds
The Group has performance bonds and guarantees in place amounting to £34,610 at 31 March 2013 (2012: £30,000).
Notes to the Financial Statements continued
for the year ended 31 March 2013 53
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
17 Related party transactions
Remuneration of key personnel
The remuneration of the key management personnel of Omega Diagnostics Group PLC is set out below in aggregate for each of the
categories specified in IAS 24 – Related Party Disclosures:
2013 2012
£ £
Short-term employee benefits 912,875 885,439
Share-based payments 45,934 8,020
Post-employment benefits 40,375 31,679
999,184 925,138
Included within short-term employee benefits are amounts paid to MBA Consultancy of £25,000 (2012: £25,000), a company controlled
by David Evans, and £20,000 (2012: £20,000) to Holdmer Associates Limited, a company controlled by Michael Gurner.
Other related party transactions
During the year there have been transactions between the parent Company, Omega Diagnostics Limited (ODL), Genesis Diagnostics Limited
(Genesis), Cambridge Nutritional Sciences (CNS), Co-Tek (South West) Limited (Co-Tek), Omega GmbH (GmbH) and Omega Dx (Asia)
largely relating to payment of fees. The amounts outstanding at the year end are as follows:
ODG ODL Genesis CNS Co-Tek GmbH Dx (Asia)
At 31 March 2013 £ £ £ £ £ £ £
Omega Diagnostics Group PLC — (1,362,530) 194,167 325,577 — (2,748,759) —
Omega Diagnostics Limited 1,362,530 — 131,508 240,498 15,424 — (59,727)
Genesis Diagnostics Limited (194,167) (131,508) — (183,891) (20,391) — (69,778)
Cambridge Nutritional
Sciences Limited (325,577) (240,498) 183,891 — — — (6,054)
Co-Tek (South West) Limited — (15,424) 20,391——— —
Omega GmbH 2,748,759————— (18,132)
Omega Dx (Asia) — 59,727 69,778 6,054 — 18,132 —
ODG ODL Genesis CNS Co-Tek GmbH
At 31 March 2012 £££££ £
Omega Diagnostics Group PLC — (1,466,926) 53,087 310,612 — (2,857,747)
Omega Diagnostics Limited 1,466,926 — (319,849) (142,722) — —
Genesis Diagnostics Limited (53,087) 319,849 — (66,098) — —
Cambridge Nutritional Sciences Limited (310,612) 142,722 66,098 — — —
Co-Tek (South West) Limited ————— —
Omega GmbH 2,857,747———— —
During the year there were transactions between the Company and its subsidiaries as follows:
2013 2012
£ £
Balance at 1 April 3,960,974 4,451,600
Charges to subsidiary companies 722,300 712,536
Transfers of cash from subsidiary companies (1,091,729) (1,203,162)
Balance at 31 March 2013 3,591,545 3,960,974
Note 12 discloses personal guarantees made by two of the Directors in support of the bank term loan.
18 Retirement benefit obligations
The Group operates pension schemes for the benefit of its UK and overseas employees.
Details of the defined contribution schemes for the Group’s employees are given below in Note (a). Details of the defined benefit schemes
for the Group’s German employees and details relating to these schemes are given below in Note (b). During the year Group accounted
for these pension schemes under IAS 19 – Employee Benefits.
a) Defined contribution schemes
The Group makes contributions to personal plans of employees on a defined contribution basis. The Group does not have ownership
of the schemes, with individual plans being arrangements between the employee and pension provider. For new hires in Germany, post
1 January 2011, the support fund (LV 1871 Unterstutzungskasse e.V) is the defined contribution scheme used. The total Group contributions
for the year amounted to £62,775 (2012: £57,713). 54
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
18 Retirement benefit obligations continued
b) Defined benefit schemes
The Deutscher Pensionsfonds AG and the LV 1871 Unterstutzungskasse e.V schemes give the rights to defined future benefits.
Of these benefits the past service component is based on years of service and salary as of 1 January 2011 and are provided by the
Deutscher Pensionsfonds AG. The remaining benefits based on years of service after 1 January 2011 as well as salary increases are
provided by the LV 1871 Unterstutzungskasse e.V scheme. These are mainly dependent on the number of earning years and salary level
at pension age. The commitments are covered through an insurance company and are compliant with the requirements of German
insurance laws. Pension costs relating to each scheme operating in Germany are charged in accordance with IAS 19 – Employee Benefits.
Formal valuations of each scheme have been carried out by Towers Watson (Reutlingen) GmbH, who are independent, professionally
qualified actuaries, on 2 May 2013 using the following assumptions:
2013 2012
Discount rate at 31 March 3.82% 5.00%
Expected return on plan assets at 31 March 3.00% 4.20%
Future salary increases 2.50% 2.50%
Future pension increases 1.75% 1.75%
Turnover rate 2.00% 2.00%
(i) The amounts recognised in the balance sheet are as follows:
2013 2012
£ £
Present value of funded obligations 1,664,439 1,358,452
Fair value of plan assets 1,696,325 1,444,091
Net asset 31,886 85,639
(ii) The amounts recognised in the income statement are as follows:
2013 2012
£ £
Current service costs 162,569 150,513
Interest on obligation 68,530 61,456
Expected return on plan assets (64,450) (51,769)
Total included in employee benefits expense 166,649 160,200
The current service costs for the year, £166,649 (2012: £160,200), have been included in administration costs.
(iii) The amounts recognised in the consolidated statement of comprehensive income are as follows:
2013 2012
£ £
Actuarial losses on defined benefit obligation (64,211) (29,087)
Actuarial gains on plan assets 13,772 85,087
Total actuarial (loss)/gain on pensions (50,439) 56,000
(iv) Changes in the present value of the defined benefit obligation are as follows:
2013 2012
£ £
Opening defined benefit obligation 1,358,452 1,174,883
Current service cost 162,569 150,513
Interest cost 68,530 61,456
Actuarial losses on plan liabilities 64,211 29,087
Exchange differences on foreign plans 10,677 (57,487)
Benefits paid — —
Closing defined benefit obligation 1,664,439 1,358,452
(v) Changes in the fair value of plan assets are as follows:
2013 2012
£ £
Opening fair value of plan assets 1,444,091 1,216,867
Expected return 64,450 51,769
Actuarial gains 13,772 85,087
Contributions by employer 162,569 149,907
Exchange differences on foreign plans 11,443 (59,539)
Benefits paid — —
Closing fair value of plan assets 1,696,325 1,444,091
Notes to the Financial Statements continued
for the year ended 31 March 2013 55
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
18 Retirement benefit obligations continued
b) Defined benefit schemes continued
(vi) The major categories of plan assets as a percentage of total plan assets are as follows:
2013 2012
Equities 15% 18%
Bonds/debt instruments 68% 71%
Cash/other 17% 11%
The asset figures above are now weighted with the underlying assets.
The Group expects to contribute £165,000 to its defined benefit pension plans in the year ending 31 March 2014.
(vii) Mortality assumptions
Assumptions regarding future mortality experience are set based on advice in accordance with published statistics and experience in Germany. In
the calculations, the mortality rate used is in accordance with Heubeck Richttafeln’s basis of calculation for group pension insurance, 2005G. Other
assumptions have been set in accordance with Heubeck Richttafeln’s basis of calculation for group pension insurance, as set out in schedule 2005G.
(viii) History of experience adjustments:
2013 2012
£ £
Defined benefit obligation 1,664,439 1,358,452
Plan assets 1,696,325 1,444,091
Surplus 31,886 85,639
Experience adjustments gains on plan liabilities (230,708) (105,486)
Experience adjustments gains on plan assets (13,772) (85,087)
IAS 19 (Revised) – Employee Benefits will become effective for the Group in the March 2014 accounts. Under IAS 19 (Revised), there will
be no impact on the net defined benefit liability. The net charge to next year’s income statement will increase by approximately £6,300
following the introduction of the concept of recognising net interest on the net defined benefit liability in place of the interest on the defined
benefit obligation and the expected return on plan assets recognised under the current standard. This increase in the net charge to next
year’s income statement would be offset by a decrease in the charge to other comprehensive income.
19 Other financial liabilities
2013
Consolidated and Company £
As at 1 April 2012 124,887
Discount unwind in year 5,113
Payment in year to IDS (130,000)
Final instalment payable in March 2014 500,000
As at 31 March 2013 500,000
At 31 March 2012 other financial liabilities comprised unconditional future commitments under the licence agreement with IDS. At 31 March 2013
the liability relates to a final payment due to IDS under the licence agreement and is payable on 28 March 2014 and is recorded on the
balance sheet now that the Group has no intention of exercising its break clause under the agreement.
20 Investments
Company
The Company’s investments in subsidiaries, which are all 100% owned, are comprised of the following:
Country of 2013 2012
incorporation £ £
Investment in Omega Diagnostics Limited UK 1,752,884 1,752,884
Investment in Genesis Diagnostics Limited UK 1,815,623 1,815,623
Investment in Cambridge Nutritional Sciences Limited UK 4,063,553 4,063,553
Investment in Co-Tek (South West) Limited UK 480,978 480,978
Investment in Bealaw (692) Limited UK 1 1
Investment in Bealaw (693) Limited UK 1 1
Investment in Omega GmbH Germany 2,542,321 2,542,321
Investment in Omega Dx (Asia) India 273,566 119,557
10,928,927 10,774,918
The further investment in the year relates to continued funding of Omega Dx (Asia).
Bealaw (692) Limited and Bealaw (693) Limited are both dormant companies that have never traded. 56
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
21 Earnings per share
Basic earnings per share is calculated by dividing net profit for the year attributable to ordinary equity holders of the Group by the weighted
average number of ordinary shares outstanding during the year.
Diluted earnings per share is calculated by dividing the net profit attributable to ordinary equity holders of the Group by the weighted
average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued
on the conversion of all the dilutive potential ordinary shares into ordinary shares. Diluting events are excluded from the calculation when
the average market price of ordinary shares is lower than the exercise price.
2013 2012
£ £
Profit attributable to equity holders of the Group 582,266 526,983
2013 2012
number number
Basic average number of shares 85,216,257 85,216,257
Share options 52,703 22,489
Diluted weighted average number of shares 85,268,960 85,238,746
Adjusted earnings per share on profit for the year
The Group presents adjusted earnings per share, which is calculated by taking adjusted profit before taxation and adding the tax credit
or deducting the tax charge in order to allow shareholders to understand better the elements of financial performance in the year,
so as to facilitate comparison with prior periods and to better assess trends in financial performance.
2013 2012
£ £
Adjusted profit before taxation 778,562 1,004,267
Tax credit 306,042 47 ,556
Adjusted profit attributable to equity holders of the Group 1,084,604 1,051,823
22 Financial instruments
The Group’s principal financial instruments comprise loans, finance leases, financial derivatives and cash. The main purpose of these financial
instruments is to manage the Group’s funding and liquidity requirements. The Group has other financial instruments, such as trade receivables
and trade payables, which arise directly from its operations. The categories of financial instruments are summarised in the following tables:
Loans and
receivables Total
Assets as per the consolidated balance sheet £ £
2013
Trade receivables 2,295,648 2,295,648
Cash and cash equivalents 160,693 160,693
2,456,341 2,456,341
Loans and
receivables Total
Assets as per the consolidated balance sheet £ £
2012
Trade receivables 2,223,192 2,223,192
Cash and cash equivalents 1,159,132 1,159,132
3,382,324 3,382,324
Notes to the Financial Statements continued
for the year ended 31 March 2013 57
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
22 Financial instruments continued
Loans and
receivables Total
Assets as per the Company balance sheet £ £
2013
Due from subsidiary companies 4,111,289 4,111,289
Cash and cash equivalents — —
4,111,289 4,111,289
Loans and
receivables Total
Assets as per the Company balance sheet £ £
2012
Due from subsidiary companies 4,324,673 4,324,673
Cash and cash equivalents 18,869 18,869
4,343,542 4,343,542
Liabilities at fair
value through Amortised
profit and loss cost Total
Liabilities as per the consolidated balance sheet ££ £
2013
Trade payables —1,231,405 1,231,405
Obligations under finance leases —36,515 36,515
Other loans (designated on initial recognition) 815,608 — 815,608
Other financial liabilities — 500,000 500,000
815,608 1,767,920 2,583,528
Liabilities at fair
value through Amortised
profit and loss cost Total
Liabilities as per the consolidated balance sheet ££ £
2012
Derivative financial instruments (held for trading) 454 — 454
Trade payables — 962,115 962,115
Obligations under finance leases —13,361 13,361
Bank loans —136,450 136,450
Other loans (designated on initial recognition) 1,154,389 — 1,154,389
Other financial liabilities —124,887 124,887
1,154,843 1,236,813 2,391,656
Liabilities at fair
value through Amortised
profit and loss cost Total
Liabilities as per the Company balance sheet ££ £
2013
Trade payables and amounts due to subsidiary companies — 562,271 562,271
Other loans (designated upon initial recognition) 815,608 — 815,608
Other financial liabilities — 500,000 500,000
815,608 1,062,271 1,877,879
Liabilities at fair
value through Amortised
profit and loss cost Total
Liabilities as per the Company balance sheet ££ £
2012
Derivative financial instruments (held for trading) 454 — 454
Trade payables and amounts due to subsidiary companies — 411,127 411,127
Bank loans —136,450 136,450
Other loans (designated upon initial recognition) 1,154,389 — 1,154,389
Other financial liabilities —124,887 124,887
1,154,843 672,464 1,827 ,307 58
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
22 Financial instruments continued
Within other loans designated at fair value through profit and loss is the vendor loan note of £1.1 million, which was issued in September 2007 .
It carries a coupon of base rate only and is repayable in three equal instalments of £360,000 in September 2012, 2013 and 2014 and a final
capital payment of £20k in September 2015. The interest is rolled up and repayable with the final capital payment. The fair value is calculated
as the future cash flows expected to result based on current estimates of interest rates. There has been no change in the year to the fair value
of the loan due to changes in credit risk. The movement in the year of £338,781 (2012: £28,154) is due to the first instalment being paid
in September 2012 (£360,000) offset by the effect of unwinding discount factors (£21,219), which is included within finance charges
in the income statement.
Financial risk management
The principal financial risks to which the Group is exposed are those relating to foreign currency, credit, liquidity and interest rate.
These risks are managed in accordance with Board-approved policies.
Foreign currency risk
The Group operates in more than one currency jurisdiction and is therefore exposed to currency risk on the retranslation of the income
statement and the balance sheet of its overseas subsidiaries from euros and rupees into its functional currency of pounds sterling.
The Company funds its subsidiaries by a mixture of equity and intercompany loan financing and these balances are subject to exchange
rate movements that can give rise to movements in equity. The Group also buys and sells goods and services in currencies other than the
functional currency, principally in euros and US dollars. The Group has US dollar and euro-denominated bank accounts and, where possible,
the Group will offset currency exposure where purchases and sales of goods and services can be made in these currencies. The Group’s
non-sterling revenues, profits, assets, liabilities and cash flows can be affected by movements in exchange rates. It is currently Group policy
not to engage in any speculative transaction of any kind but this will be monitored by the Board to determine whether it is appropriate
to use additional currency management procedures to manage risk. At 31 March 2013 (and 31 March 2012) the Group has not entered
into any hedge transactions.
The following table demonstrates the sensitivity to a possible change in currency rates on the Group’s profit before tax and equity through
the impact of sterling weakening against the US dollar, the euro and the Canadian dollar.
Effect on
Decrease profit Effect on
in currency before tax equity
rate £ £
2013
Trade and other receivables 5% 61,271 —
Trade and other payables 5% (28,400) —
Cash and cash equivalents 5% 13,002 —
Bank loans 5% — —
Net investment in overseas subsidiary 5% — 75,310
2012
Trade and other receivables 5% 52,924 —
Trade and other payables 5% (30,360) —
Cash and cash equivalents 5% 16,589 —
Bank loans 5% (4,024) —
Net investment in overseas subsidiary 5% — 98,112
An increase in currency rate of 5% would have a similar but opposite effect. The sensitivity around bank loans above represents the entire
impact on the Company’s profit before tax and equity.
Credit risk
The Group’s credit risk is primarily attributable to its trade receivables. The Group conducts its operations in many countries, so there is
no concentration of risk in any one area. In most cases, the Group grants credit without security to its customers. Creditworthiness checks
are undertaken before entering into contracts with new customers, and credit limits are set as appropriate. The Group conducts most of
its operations through distributors and is therefore able to maintain a fairly close relationship with its immediate customers. As such, the
Group monitors payment profiles of customers on a regular basis and is able to spot deteriorations in payment times. An allowance for
impairment is made that represents the potential loss in respect of individual receivables where there is an identifiable loss event which,
based on previous experience, is evidence of a reduction in the recoverability of cash flows. The amounts presented in the balance sheet
are net of allowance for doubtful receivables. An analysis of trade receivables from various regions is analysed in the following table:
2013 2012
Trade Trade
receivables receivables
£ £
UK/Europe 1,368,012 1,238,068
North America 94,783 72,395
South/Central America 110,354 103,192
Asia and Far East 302,678 320,735
Africa and Middle East 419,821 488,802
2,295,648 2,223,192
Notes to the Financial Statements continued
for the year ended 31 March 2013 59
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
22 Financial instruments continued
Financial risk management continued
Capital management
An explanation of the Group’s capital management process and objectives is set out in the Capital management section on page 19
of the Financial Review.
Liquidity risk
The Group’s objective is to maintain sufficient headroom to meet its foreseeable financing and working capital requirements. The Group
has in place drawn loan facilities and, in the case of bank loans, regularly monitors performance to ensure compliance with all covenants.
The Group also maintains a surplus balance of cash and cash equivalents to ensure flexible liquidity to meet financial liabilities as they fall due.
The table below summarises the maturity profile of the Group’s financial liabilities at 31 March 2013 based on the undiscounted cash flows
of liabilities which include both future interest and principal amounts outstanding based on the earliest date on which the Group can be
required to pay. The amounts of future interest are not included in the carrying value of financial liabilities on the balance sheet.
Less than 3 to 12 1 to 5
3 months months years Total
Consolidated £££ £
2013
Trade payables 1,231,405 — — 1,231,405
Obligations under finance leases 2,502 7,505 32,524 42,531
Vendor loan — 360,000 480,318 840,318
1,233,907 367,505 512,842 2,114,254
2012
Trade payables 962,115 — — 962,115
Obligations under finance leases 6,614 7,053 — 13,667
Bank loans 68,779 68,271 — 137 ,050
Vendor loan — 360,000 840,168 1,200,168
1,037 ,508 435,324 840,168 2,313,000
The table below summarises the maturity profile of the Company’s financial liabilities at 31 March 2013 based on the undiscounted cash
flows of liabilities based on the earliest date on which the Company can be required to pay.
Less than 3 to 12 1 to 5
3 months months years Total
Company £££ £
2013
Trade payables and amounts due to subsidiary companies 562,271 — — 562,271
Vendor loan — 360,000 480,318 840,318
562,271 360,000 480,318 1,402,589
2012
Trade payables and amounts due to subsidiary companies 411,127 — — 411,127
Bank loans 68,779 68,271 — 137 ,050
Vendor loan — 360,000 840,168 1,200,168
479,906 428,271 840,168 1,748,345
Interest rate risk
All of the Group’s borrowings are at variable rates of interest.
The following table demonstrates the sensitivity to a possible change in interest rates on the Group’s profit before tax through the impact
on floating rate borrowings and cash balances.
Effect on profit
before tax
Increase in and equity
Consolidated basis points £
2013
Cash and cash equivalents 25 1,650
Vendor loan 25 (2,300)
2012
Cash and cash equivalents 25 4,018
Bank loans – pounds sterling 25 (300)
Bank loans – US dollars 25 (382)
Vendor loan 25 (2,750) 60
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
22 Financial instruments continued
Financial risk management continued
Interest rate risk continued
The following table demonstrates the sensitivity to a possible change in interest rates on the Company’s profit before tax through the impact
on floating rate borrowings and cash balances.
Effect on profit
before tax
Increase in and equity
Company basis points £
2013
Cash and cash equivalents 25 (297)
Vendor loan 25 (2,300)
2012
Cash and cash equivalents 25 714
Bank loans – pounds sterling 25 (300)
Bank loans – US dollars 25 (382)
Vendor loan 25 (2,750)
Fair values
The carrying amount for all categories of financial assets and liabilities disclosed on the balance sheet and in the related notes to the accounts
is equal to the fair value of such assets and liabilities as at both 31 March 2013 and 31 March 2012. The monetary value attributable to
these financial assets and liabilities is the same value that has been disclosed in the related notes to the accounts.
The valuation methods used to fair value the financial assets and liabilities have been disclosed in Note 2 to the financial statements under
the heading of Financial instruments.
The carrying amount recorded in the balance sheet of each financial asset as at 31 March 2013 and 31 March 2012, including derivative
financial instruments, represents the Group’s maximum exposure to credit risk.
Derivative financial instruments
The Group uses the following hierarchy for determining and disclosing the fair value of instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly
or indirectly; and
Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable
market data.
The fair value of the financial derivatives, detailed below, have been valued using the hierarchy above and have been categorised as level 2.
2013 2012
Consolidated and Company £ £
Included in non-current assets
Interest rate instruments — —
Included in non-current liabilities
Interest rate instruments — 454
The derivative financial instruments in the prior year comprised:
a) an interest rate cap of 5.5%, the floating rate option being Bank of England daily base rate; and
b) an interest cap and floor of 5.0% and 2.25% respectively, the floating option rate being USD Libor.
The Group does not hold or issue derivatives for speculative or trading purposes.
23 Post balance sheet event
On 11 June 2013 the Group completed the placing and subscription of 23,529,412 new ordinary shares of 4 pence each with new
and existing shareholders at a price of 17 pence per new ordinary share.
Notes to the Financial Statements continued
for the year ended 31 March 2013 61
Overview Business Review Governance Financial Statements
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Notice is hereby given that the Annual General Meeting of the Company will be held at Omega House, Hillfoots Business Village,
Clackmannanshire FK12 5DQ on 28 August 2013 at 11am for the following purposes:
Ordinary business
1. To receive and adopt the reports of the Directors and the auditors and the audited accounts for the year ended 31 March 2013.
2. To reappoint Ernst & Young LLP as auditors of the Company to hold office until the conclusion of the next general meeting at which
accounts are laid before the Company and that their remuneration be fixed by the Directors.
3. To re-elect Mr Andrew Shepherd as a Director of the Company.
4. To elect Mr William Rhodes as a Director of the Company.
5. That, in accordance with section 551 of the Companies Act 2006, the Directors be generally and unconditionally authorised to allot shares
in the Company or grant rights to subscribe for or convert any security into shares in the Company (“Rights”) up to an aggregate nominal
amount of £1,449,942.24 ordinary shares of 4p each (“Ordinary Shares”), provided that this authority shall, unless, renewed, varied or
revoked by the Company, expire on the conclusion of the next annual general meeting of the Company or, if earlier, on 31 October 2014
save that the Company may, before such expiry, make an offer or agreement which would or might require shares to be allotted or Rights to
be granted and the Directors may allot shares or grant Rights in pursuance of any such offer or agreement notwithstanding that the authority
conferred by this resolution has expired. This authority is in substitution for all previous authorities conferred on the Directors in accordance
with section 551 of the Companies Act 2006, but without prejudice to any allotment already made or to be made pursuant to such authority.
Special business
Resolution 6 is proposed as a special resolution.
6. That, conditional upon the passing of resolution 5 above, and in accordance with section 570 of the Companies Act the Directors
be generally empowered to allot equity securities (as defined in section 560 of the Companies Act 2006) pursuant to the authority
conferred by resolution 5 as if section 561(1) of the Companies Act 2006 did not apply to any such allotment, provided that this power
shall be limited to:
6.1 the allotment of equity securities in connection with an issue in favour of the holders of Ordinary Shares where the equity
securities respectively attributable to the interests of all holders of Ordinary Shares are proportionate (as nearly as may be) to
the respective number of Ordinary Shares held by them but subject to such exclusions or arrangements as the Directors may
deem necessary or expedient to deal with fractional entitlements arising or any legal or practical problems under the laws of
any overseas territory or the requirements of any regulatory body or stock exchange; and
6.2 the allotment of Ordinary Shares otherwise than pursuant to sub paragraph 6.1 above up to an aggregate nominal amount
of £217,491.34,
and provided that this power shall, unless renewed, varied or revoked by the Company, expire on the conclusion of the next annual
general meeting of the Company or, if earlier, 31 October 2014, save that the Company may, before such expiry, make an offer or
agreement which would or might require equity securities to be allotted after such expiry and the Directors may allot equity securities
in pursuance of any such offer or agreement notwithstanding that the power conferred by this resolution has expired.
By order of the Board
Kieron Harbinson
Company Secretary
28 June 2013
Notice of Annual General Meeting 62
Omega Diagnostics Group PLC Annual Report and Group Financial Statements 2013
Notes to the Notice of Annual General Meeting
Entitlement to attend and vote
1. Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001,
the Company specifies that only those members registered on the Company’s
register of members at 6pm on 26 August 2013 shall be entitled to attend and
vote at the Meeting.
Appointment of proxies
2. If you are a member of the Company at the time set out in Note 1 above, you
are entitled to appoint a proxy to exercise all or any of your rights to attend,
speak and vote at the Meeting and you should have received a proxy form with
this notice of meeting. You can only appoint a proxy using the procedures set
out in these notes and the notes to the proxy form.
3. A proxy does not need to be a member of the Company but must attend
the Meeting to represent you. Details of how to appoint the Chairman of the
Meeting or another person as your proxy using the proxy form are set out in the
notes to the proxy form. If you wish your proxy to speak on your behalf at the
Meeting you will need to appoint your own choice of proxy (not the Chairman)
and give your instructions directly to them.
4. You may appoint more than one proxy provided each proxy is appointed to
exercise rights attached to different shares. You may not appoint more than
one proxy to exercise rights attached to any one share. To appoint more than
one proxy, please contact the registrars of the Company, Share Registrars
Limited, on 01252 821 390.
5. A vote withheld is not a vote in law, which means that the vote will not be
counted in the calculation of votes for or against the resolution. If no voting
indication is given, your proxy will vote or abstain from voting at his or her
discretion. Your proxy will vote (or abstain from voting) as he or she thinks
fit in relation to any other matter which is put before the Meeting.
Appointment of proxy using hard-copy proxy form
6. The notes to the proxy form explain how to direct your proxy how to vote
on each resolution or withhold their vote.
To appoint a proxy using the proxy form, the form must be:
and Lamb Yard, Farnham, Surrey GU9 7LL or by facsimile transmission
to 01252 719 232;
[email protected];
and received by Share Registrars Limited no later than 11am on 26 August 2013.
In the case of a member which is a company, the proxy form must be executed
under its common seal or signed on its behalf by an officer of the company or
an attorney for the company.
Any power of attorney or any other authority under which the proxy form is signed
(or a duly certified copy of such power or authority) must be included with the
proxy form.
Appointment of proxy by joint members
7. In the case of joint holders, where more than one of the joint holders purports
to appoint a proxy, only the appointment submitted by the most senior holder
will be accepted. Seniority is determined by the order in which the names
of the joint holders appear in the Company’s register of members in
respect of the joint holding (the first-named being the most senior).
Changing proxy instructions
8. To change your proxy instructions simply submit a new proxy appointment
using the methods set out above. Note that the cut-off time for receipt
of proxy appointments (see above) also applies in relation to amended
instructions; any amended proxy appointment received after the relevant
cut-off time will be disregarded.
Where you have appointed a proxy using the hard-copy proxy form and would
like to change the instructions using another hard-copy proxy form, please
contact Share Registrars Limited on 01252 821 390.
If you submit more than one valid proxy appointment, the appointment received
last before the latest time for the receipt of proxies will take precedence.
Termination of proxy appointments
9. In order to revoke a proxy instruction you will need to inform the Company using
one of the following methods:
By sending a signed hard-copy notice clearly stating your intention to revoke
your proxy appointment to Share Registrars Limited at Suite E, First Floor,
9 Lion and Lamb Yard, Farnham, Surrey GU9 7LL or by facsimile transmission
to 01252 719 232. In the case of a member which is a company, the revocation
notice must be executed under its common seal or signed on its behalf by an
officer of the company or an attorney for the company. Any power of attorney
or any other authority under which the revocation notice is signed (or a duly
certified copy of such power of authority) must be included with the revocation notice.
In either case, the revocation notice must be received by Share Registrars
Limited no later than 11am on 26 August 2013.
If you attempt to revoke your proxy appointment but the revocation is received
after the time specified then, subject to the paragraph directly below, your proxy
appointment will remain valid.
Appointment of a proxy does not preclude you from attending the Meeting
and voting in person. If you have appointed a proxy and attend the Meeting
in person, your proxy appointment will automatically be terminated.
Corporate representing
10. Corporate members are referred to the guidance issued by the Institute
of Chartered Secretaries and Administrators on proxies and corporate
representatives – www.icsa.org.uk – for further details of this procedure.
Issued shares and total voting rights
11. As at the date of this Annual Report the Company’s issued voting share
capital comprised 108,745,669 ordinary shares of 4p each. Each ordinary
share carries the right to one vote at a general meeting of the Company and,
therefore, the total number of voting rights in the Company is as at the date
of this Annual Report.
Communications with the Company
12. Except as provided above, members who have general queries about the
Meeting should telephone Kieron Harbinson on +44(0)1259 763 030 (no other
methods of communication will be accepted). You may not use any electronic
address provided either in this notice of annual general meeting, or any related
documents (including the proxy form), to communicate with the Company for
any purposes other than those expressly stated.
Voting through CREST
CREST members who wish to appoint a proxy or proxies through the CREST
electronic proxy appointment service may do so for the Annual General Meeting and
any adjournment(s) thereof by using the procedures described in the CREST Manual.
CREST Personal Members or other CREST sponsored members, and those
CREST members who have appointed a voting service provider(s) should refer
to their CREST sponsor or voting service provider(s), who will be able to take the
appropriate action on their behalf.
In order for a proxy appointment or instruction made using the CREST service to
be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be
properly authenticated in accordance with CRESTCo Limited’s specifications and
must contain the information required for such instructions, as described in the
CREST Manual.
The message, regardless of whether it relates to the appointment of a proxy or
to an amendment to the instruction given to a previously appointed proxy must,
in order to be valid, be transmitted so as to be received by the issuer’s agent
(7RA36) by the latest time(s) for receipt of proxy appointments specified above.
For this purpose, the time of receipt will be taken to be the time (as determined
by the timestamp applied to the message by the CREST Applications Host) from
which the issuer’s agent is able to retrieve the message by enquiry to CREST in
the manner prescribed by CREST. After this time, any change of instructions to
proxies appointed through CREST should be communicated to the appointee
through other means.
CREST members and, where applicable, their CREST sponsors or voting service
providers should note that CRESTCo Limited does not make available special
procedures in CREST for any particular messages. Normal system timings and
limitations will therefore apply in relation to the input of CREST Proxy Instructions.
It is the responsibility of the CREST member concerned to take (or, if the CREST
member is a CREST personal member or sponsored member or has appointed
a voting service provider(s), to procure that his or her CREST sponsor or voting
service provider(s) take(s)) such action as shall be necessary to ensure that
a message is transmitted by means of CREST by any particular time. In this
connection, CREST members and, where applicable, their CREST sponsors or
voting service providers are referred, in particular, to those sections of the CREST
Manual concerning practical limitations of the CREST system and timings.
The Company may treat as invalid a CREST Proxy instruction in the circumstances
set out in Regulation 35(5) (a) of the Uncertificated Securities Regulations 2001.
Registered in England and Wales number 5017761
www.omegadiagnostics.com
Omega Diagnostics Group PLC
Omega House
Hillfoots Business Village
Alva FK12 5DQ
Scotland
United Kingdom
Tel: +44 (0)1259 763030
Fax: +44 (0)1259 761853 Omega Diagnostics Group PLC
Omega House
Hillfoots Business Village
Alva FK12 5DQ
Scotland
United Kingdom
www.omegadiagnostics.com
Tel: +44 (0)1259 763030
Fax: +44 (0)1259 761853 ### summary: |
Blacks Leisure Group plc
440/450 Cob Drive, Swan Valley
Northampton NN4 9BB
T: +44 (0)1604 597000 F: +44 (0)1604 597171
Shareholder helpline: 0871 664 0300
Email: [email protected]
www.blacksleisure.co.uk
Annual Report and Accounts
for the year ended 26 February 2011
Stock Exchange Code: BSLA
Focused
on the future
Blacks Leisure Group plc Annual Report and Accounts for the year ended 26 February 2011
20321.04 10/06/2011 Proof 5 20321.04 10/06/2011 Proof 5 www.blacks.co.uk www.millets.co.uk
With a heritage dating back to 1861, Blacks
Leisure Group plc (‘Blacks Leisure’) operates in
the retail of Outdoor and Boardwear clothing and
equipment in the United Kingdom, Channel Isles
and Ireland.
Welcome to
Blacks Leisure Group plc
Blacks Leisure Group plc Annual Report and Accounts 2011
Exit from non-core Boardwear segment to be
completed by half year
New banking facilities agreed up to
November 2012
Julia Reynolds to join as new Chief Executive
Significant reduction in loss before tax to £5.3m
(2010: £43.6m) and in loss before tax and
exceptional items to £6.6m (2010: £14.4m)
New stores performing strongly
Focused on the Outdoors
20321.04 10/06/2011 Proof 5 20321.04 10/06/2011 Proof 5 20321.04 10/06/2011 Proof 5
01 Stock Exchange Code: BSLA
Group at a Glance 02
Chairman’s Statement 04
Chief Executive’s Review 08
Financial Review 10
Corporate Social Responsibility 14
Directors and Advisors 16
Corporate Governance Statement 18
Directors’ Remuneration Report 22
Directors’ Report and Business Review 26
Independent Auditors’ Report 32
Consolidated Statement of Comprehensive Income 33
Consolidated Balance Sheet 34
Consolidated Cash Flow Statement 35
Consolidated Statement of Changes in Equity 36
Notes to the Financial Statements 37
Company Balance Sheet 74
Notes to the Company Financial Statements 75
Five Year Summary 79
Contents 00 00 www.blacks.co.uk www.millets.co.uk 02
Blacks Leisure Group plc Annual Report and Accounts 2011
20321.04 10/06/2011 Proof 5
Group at a Glance
Outdoor segment Store fascias
“For the first time in many years, we were
able to open new stores and these have
performed strongly”
Neil Gillis, Chief Executive
The heritage of Blacks can be traced back
to 1861. Today, and as one of the leading
Outdoor retailers in the UK, Blacks offers
some of the most prominent and high-
quality Outdoor proprietary brands as well as
developing and selling its own-label specialist
brands such as Technicals and ALS.
Blacks
Number of stores at 26 February 2011
Total revenue for the year ended 26 February 2011
Revenue: £194.8m
■ Blacks (31.8%)
98
■ Millets (65.3%)
201
■ Freespirit (2.9%)
9
■ Blacks (42.2%)
£85.2m
■ Millets (49.3%)
£99.6m
■ Freespirit (3.5%)
£7.1m
■ Other (including
internet) (5.0%)
£10.0m
PANTONE REFERENCE 4 COLOUR REFERENCE
PANTONE 871 u C = 39 M = 42 Y = 100 K = 11
00 00 03
Our Business Our Governance Our Financials
20321.04 10/06/2011 Proof 5
Boardwear segment
Diverse geographical
presence
The Group has a strong coverage of stores in
major towns and cities across the British Isles, with
257 stores in England, 21 in Scotland, 19 in Wales,
5 in Northern Ireland and 3 in Ireland, in addition
to a store on the Isle of Man and 2 stores in the
Channel Islands.
Freespirit Millets
Revenue: £7.1m
Millets offers a range of branded goods though has
a focus on key own-label brands, including Peter
Storm and Eurohike which are amongst the UK’s
most popular Outdoor clothing and equipment
brands.
Focused upon customers with a passion for
adrenaline sports, Freespirit offers a range of
iconic casual lifestyle brands. Owing to the
continuing decline in this Boardwear market,
the Group has taken the decision to exit fully
from this segment over the coming months. 00 00 www.blacks.co.uk www.millets.co.uk 04
Blacks Leisure Group plc Annual Report and Accounts 2011
20321.04 10/06/2011 Proof 5
Chairman’s Statement
David Bernstein
“Trading conditions continued to be very
challenging throughout the period”
David Bernstein, Chairman
Overview
This has been another difficult year for both the Group and the UK
retail sector generally, with consumer confidence remaining fragile.
Despite this, action taken by the Group has resulted in the delivery
of a much reduced loss for the year.
Company Voluntary Arrangements (‘CVAs’) for the Company and
its main trading subsidiary, The Outdoor Group Limited, were
implemented in December 2009. This enabled the Group to
compromise 101 leases, including 88 trading stores which had
not been trading profitably for some time, and accordingly we
entered the financial year under review with a smaller but higher
quality store estate. This, alongside the placing of its Boardwear
subsidiary, Sandcity Limited (‘Sandcity’), into administration in
September 2009, enabled the Group to rationalise its business
and removed a tail of poorly performing stores which had, for
some years, depressed overall results.
A subsequent issue of new Ordinary Shares in May 2010, through
a Placing and Open Offer and Firm Placing, enabled the Group to
cancel its most expensive tranche of debt and to invest significant
capital, for the first time in a number of years, in the store estate.
During the financial year the Group opened 13 new or rebranded
stores, for which trading to date has been very encouraging.
The above restructuring actions reduced significantly the Group’s
presence in the Boardwear segment which has been in decline for
several years. As at the end of the financial year, the Group traded
from only 9 such stores, under the Freespirit brand. Since the end
of the year, the Group has begun to implement a plan to exit fully
from this segment and focus on the core Outdoor market. It is
intended that all remaining Freespirit stores will either be converted
to the Blacks or Millets fascias or will otherwise be closed by the
half year end.
Group results and key performance indicators
Total revenue from continuing activities of £201.9m represented
a decrease of 16.0% from the £240.5m recorded in the prior
year. Whilst the number of trading stores open as at the end of
the financial year was only slightly lower, with 308 stores at 26
February 2011 (2010: 313), the sales in the previous year
included 88 stores which closed in October and November 2009
in relation to the CVAs. After excluding the results of these 88
stores from the comparative figures, the reduction in revenue is
£8.8m or 4.2%.
Despite the net reduction in store numbers, which reflected the
closing of a number of mainly small and weakly performing sites
which were coming to the end of their lease term, the Group
opened 13 new or rebranded stores during the year. These stores
are already making a positive overall contribution to the Group
and are generally trading ahead of expectations and together now
account for around 10% of total Group revenues. These stores
are principally larger units, with the trading space to offer our
ranges more effectively, and which are benefitting from the capital
investment that has been made in ensuring these stores are fitted
out to a standard which is appropriate for our brand propositions.
In order to understand the underlying trend in trading, the Group
measures like-for-like sales which eliminates the effects of store
openings, refurbishments or closings. Like-for-like sales declined
during the year by 6.1% as commented on below.
Trading conditions continued to be very challenging throughout
the period, particularly in the first half during which adverse
economic conditions contributed to a decline in the key Outdoor
segment by 6.0%. Whilst the retail environment generally
continued to be tough throughout the second half, the business
took advantage of the particularly cold and snowy weather
conditions over the key Christmas trading period, during which
Outdoor like-for-like sales grew by some 10.2% despite being
measured against what was also a strong comparative period.
00 00 05
Our Business Our Governance Our Financials
20321.04 10/06/2011 Proof 5
Key Performance Indicators
Gross margin %
Performance:
48.7% 2011
2010 51.6%
Like-for-like sales %
Performance:
-6.1% 2011
2010 +5.4% 00 00 www.blacks.co.uk www.millets.co.uk 06
Blacks Leisure Group plc Annual Report and Accounts 2011
20321.04 10/06/2011 Proof 5
Chairman’s Statement
continued
Despite being impacted by weak consumer spending in the early
part of 2011 particularly, in common with other retailers, the strong
Winter trading performance meant that the second half recovered
some of the first half decline and the outturn for the Outdoor
segment for the full year was a reduction of 4.9%. Boardwear,
which is planned for closure in the coming months, declined by
28.5% on a like-for-like basis across the period.
The internet channel, within Outdoor, continued to grow strongly
at 44.2%. We have recently launched a new and improved web
platform for both www.blacks.co.uk and www.millets.co.uk, along
with an expanded product range. Internet sales accounted for
4.8% (2010: 2.7%) of total Group sales during the year and we are
targeting further growth in this channel during the coming year.
A gross margin of 48.7%, or 49.6% excluding the effect of
exceptional items, was achieved in the year (2010: 51.6%). Whilst
impacted by the competitive and economic climate, including the
strengthening of the US dollar, much of the loss in margin occurred
as a result of a discounting of stocks in the first half year. Many
stock orders for Spring/Summer 2010 had been placed prior to the
CVAs and order volumes were determined on the basis of a larger
store portfolio. This issue was compounded by the poor sales in the
first half and, accordingly, the business had to act decisively to clear
excess stocks and minimise the stock overhang, at the detriment of
margin, as we moved into the Autumn.
Store-related overheads have been reduced alongside the
reduction in stores. Efficiency and other cost savings have also
been driven within head office and the logistics function. These
factors have contributed to the Group recording a significant
reduction in loss before tax and exceptional items from £14.4m
to £6.6m.
Exceptional items during the year, which are discussed in more
detail in the Financial Review and within note 8, resulted in
a net credit of £1.3m (2010: net charge £29.2m). This credit
included the effect of a £5.4m release from the provision for
CVA related rates obligations owing to new tenants being found
for the associated properties, and therefore extinguishing the
ongoing liabilities, more quickly than had been anticipated. Other
exceptional charges, which largely offset this release, and a further
credit of £0.5m for proceeds accrued from the administration of
Sandcity Limited, related mainly to restructuring activity and in
particular the planned exit from the Boardwear segment.
Dividends
The Board has decided not to declare a final dividend for the year,
believing that the performance of the business does not warrant
the resultant cash outlay. We plan to resume dividend payments,
if considered appropriate, only when the business returns to a
suitable level of profitability.
“I am delighted to announce that Julia
Reynolds has accepted our offer to join
Blacks Leisure as Chief Executive”
David Bernstein, Chairman 00 00 07
Our Business Our Governance Our Financials
20321.04 10/06/2011 Proof 5
Store numbers
Board changes and appointment of Chief Executive
It was with great sadness that the Board announced the death of
Nick Samuel on 29 June 2010. Nick was a valued colleague who
made a significant contribution since joining the business as Non-
Executive Director in August 2008.
T om Knight was appointed to the Board as a Non-Executive
Director on 1 August 2010. T om is a former Executive Director of
the Company, having worked for the Group from 1987 to 2002
before leaving to subsequently join JJB Sports plc where he held
the position of Chief Executive from 2002 to 2007. The Board also
announced the appointment of Mark Hammersley as Non-Executive
Director on 20 September 2010. Mark has been Chief Executive of
Zoggs International Limited since 2003 and brings with him a strong
track record in managing major sports clothing brands.
On 10 February 2011 the Group announced that Neil Gillis
had given notice of his intention to resign from his role as Chief
Executive upon serving his six month notice period. I would like to
thank Neil for his significant contribution to the business over the
past three years and I wish him every success for the future.
Following a thorough search for a suitable successor, I am
delighted to announce that Julia Reynolds has accepted our offer
to join Blacks Leisure as Chief Executive towards the end of the
Summer. Julia is a very experienced buyer and retailer who will
join us from Figleaves.com where, as CEO, she drove a period of
significant growth and improvement in results. Prior to that, Julia
was Category Director at Tesco plc where she was responsible for
the introduction and subsequent success of the Florence & Fred
clothing range.
Corporate activity
The Company announced on 19 October 2010 that it had been
approached by several parties regarding a possible offer for the
Company or an offer to acquire certain of the trading activities
and related assets of the Group. A number of indicative proposals
were received and reviewed however, as the Board announced on
26 January 2011, none of these were considered to be sufficiently
compelling at that time to be pursued further and all these
discussions were therefore terminated.
Banking facilities
The Group has been working alongside its bankers, Bank of
Scotland plc, to extend its banking facilities which were due to
expire in December 2011. The Group today announces that it has
been successful in agreeing new revolving credit facilities with its
bankers which will now run until July 2012. The facilities will be
automatically extended to November 2012 upon the new Chief
Executive commencing employment with the Group by no later
than 30 September 2011. The extended facilities comprise a core
facility of up to £35.0m and a further new facility of £3.0m being
available during certain seasonal peaks (subject to the satisfaction
of certain conditions precedent).
Current trading and future outlook
During the new financial year so far, the Group has continued to
trade in extremely tough economic conditions. As a result, and in
common with the experiences of many other UK retailers, sales levels
in the period since the end of the financial year have been below our
expectations. Although margins have largely been preserved, there
has been an adverse impact on trading since the year end.
The Group faces a challenging year ahead in this uncertain retail
climate. Nevertheless, the Directors believe that the restructuring
activity that has been undertaken over the past few years has
given the Group a real opportunity to deliver a return to profitability
over the short to medium term. With much of this restructuring
activity now completed, the appointment of a new Chief Executive
with a specialist retail background is a significant step towards
completing this turnaround.
Finally, I would also like to recognise our hard-working and
talented staff who, despite the uncertainties of the significant
restructuring and operational changes that have taken place over
the past years, remain committed to continuing and delivering the
turnaround in the Group’s performance.
David Bernstein
Chairman
4 May 2011
26 February 27 February 28 February
2011 2010 2009
Millets 201 208 258
Blacks 98 92 115
Outdoor segment 299 300 373
Freespirit 9 13 35
O’Neill — — 12
Boardwear segment 9 13 47
Total 308 313 420 00 00 www.blacks.co.uk www.millets.co.uk 08
Blacks Leisure Group plc Annual Report and Accounts 2011
20321.04 10/06/2011 Proof 5
Chief Executive’s Review
Neil Gillis
This was the third year of the Blacks Leisure turnaround
programme, which has been conducted against a backdrop of
sharp consumer recession and intense competitive pressure.
Importantly, for the first time in many years, we were able to
open new stores in the financial year under review and these
have performed strongly. One of the principal issues the Group
has faced, and one of the driving factors behind the historic
underperformance, was the fact that the store estate had been
significantly underinvested over a number of years and many
of the stores were old sites which lacked the necessary space
to retail our full range effectively. For the first two years of the
turnaround, the Group had to withstand the rapid openings of
brand new and larger stores by our competitors, often located
close or even adjacent to our own underinvested sites, without
being able to respond with capital investment of our own.
Following the CVAs and the subsequent equity fundraising
we were able to invest in our store estate and we opened or
converted 13 new stores during this period. These now account
for around 10% of the turnover in a business with 308 stores.
Being able to choose strong sites with the required amount
of trading space, on competitive rents, has driven exceptional
performances from these new stores. These new
“Much of the significant corporate
restructuring that the business required
has now been completed”
Neil Gillis, Chief Executive 00 00 09
Our Business Our Governance Our Financials
20321.04 10/06/2011 Proof 5
New approaches
to marketing
We have continued to make improvements to the way
we present and market our fascias. This has included
new point-of-sale devices and presentations within
some of our stores as well as a number of successful
direct marketing campaigns. We were proud to
be awarded a Gold Award by the Direct Marketing
Association during the year as an endorsement of the
quality of our promotional leaflets.
stores have given us further confidence that the proposition is
effective, that the formats work and that the business can take
on any of its competitors when it is trading on equal terms. It
has also highlighted the opportunity, should cash facilities allow,
for the business in the future as many of the leases on the old,
underinvested stores approach their expiry and we could therefore
potentially replace these stores with larger, higher returning new
stores. In the first couple of months of the new financial year we
have continued with this strategy with the conversion of three of
our remaining Freespirit stores in Plymouth, Exeter and Cardiff
to the new Blacks format and these businesses have made an
encouraging start.
Following the reduction of our overhead base, the planned full
exit from the loss-making Boardwear business, the reduction in
our debt requirement over the past three years, the CVAs and the
equity fundraising, much of the significant corporate restructuring
that the business required has now been completed as part of the
turnaround plan. The next phase of the programme now needs to
be focussed on further enhancing the retail proposition across our
stores and driving improvement in margin and product
performance. For this reason I believe it is right for me to hand
over the management of the Group to an experienced retailer
who has the background and skills to complete the final phase
of the turnaround and to develop the long term prospects for the
business.
After three intense years with Blacks Leisure, I am proud of what
we have been able to achieve, in particular the fact that we have
been able to preserve a business which provides the livelihoods of
around 4,000 dedicated staff across the British Isles.
Neil Gillis
Chief Executive
4 May 2011 00 00 www.blacks.co.uk www.millets.co.uk 10
Blacks Leisure Group plc Annual Report and Accounts 2011
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Financial Review
Marc Lombardo
Trading results
The Group loss before tax and exceptional items, from continuing
operations, was £6.6m (2010: £14.4m). Whilst this reflects a
disappointing period of trading, particularly in the first half year,
it does represent a significant underlying improvement in results
following the restructuring action taken in the prior year, including the
CVAs.
The CVAs, which were effective in December 2009, removed 88
poorly performing sites from the estate. A number of additional
stores that, despite trading weakly, were not included in the CVAs
due to short remaining lease terms or other contractual reasons,
have either closed during the past year or are planned for closure
over the coming months. The closures in the current year have been
substantially mitigated by the opening of 13 new stores, which are
generally trading ahead of expectations. These actions will leave a
smaller but much improved store portfolio from which to trade going
forward. As at the end of the financial year, the Group was trading
from 308 (2010: 313) retail stores.
Further action is now planned for the coming months which will see
the Group fully exit from the Boardwear segment which has traded
at substantial losses for some time. This will be achieved through
a combination of store conversions and negotiated lease exits and
will enable the Group to focus on its core Outdoor segment. Actions
taken over the past two years, including the CVAs, have already
significantly reduced the Group’s presence in the Boardwear market
and, as at the end of the financial year, the remaining stores in this
segment comprise only 9 of the total estate of 308 stores.
Some costs of the planned exit from Boardwear have been
reflected in these financial statements, as set out in note 8, mainly
in relation to provisions for impairment of property, plant
and equipment plus net realisable value provisions
against the carrying value of Boardwear specific
inventories. Given the restructuring plan for the exit
from Boardwear was not fully committed at the
end of the financial year, in the context of IAS37
recognition criteria, provision for further costs of
this exit, such as redundancy costs
and costs of exiting leases, has
not been included within these
financial statements.
Exceptional operating items
Exceptional operating items (see note 8) amounting to a net
credit of £1.3m (2010: £26.2m net charge) were recorded in
connection with continuing operations, relating to the following
main components:
h h release of £5.4m of provisions for ongoing business rates
obligations on properties exited during the CVAs, as a result
of new tenants having been found for these sites more quickly
than anticipated, and therefore extinguishing the obligations of
the Group more quickly than had been forecast;
h h professional fees of £0.2m incurred in connection with aborted
discussions surrounding a possible offer for all or part of the
business, following the Group having received approaches
from several parties as announced on 19 October 2010;
h h restructuring related costs of £4.3m, including redundancy
costs (mainly relating to head office functions), onerous lease
provisions in respect of properties vacated, impairment of
property, plant and equipment and provisions against certain
Boardwear specific inventories; and
h h proceeds accrued of £0.5m from the administration of
Sandcity Limited, a former wholly-owned subsidiary which
operated in the Boardwear segment and which was placed
into administration in September 2009.
“Further action is planned for the coming
months which will see the Group exit fully
from the Boardwear segment”
Marc Lombardo, Finance Director 00 00 11
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New brands introduced
The product ranges have recently been improved
with the introduction of a number of new high-
quality brands to the Blacks portfolio. Our
credentials as a retailer of expert apparel and
equipment are enhanced through the new ranges
offered by Lowe Alpine, Mammut, Marmot and
Scarpa. We have also added to our lifestyle
offering, most recently with the introduction of
Animal and Weird Fish. 00 00 www.blacks.co.uk www.millets.co.uk 12
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“The Group has been successful in
agreeing to extend its facilities with
its bankers”
Marc Lombardo, Finance Director
Financial Review
continued
Goodwill
Goodwill has been subject to an impairment review and the Board
is satisfied that the carrying value is not impaired as at the balance
sheet date.
Cash flow
The net cash outflow in the year was £1.7m (2010: £8.7m). Cash
used in operations of £12.9m (2010: £2.7m) was predominantly
the result of the £13.2m movement in respect of provisions, which
included the payment of £7.3m to the compensation fund for
landlords compromised as a result of the CVAs and the settlement
of other CVA related obligations, including the ongoing rates
obligations on properties closed during the CVAs.
Working capital continues to be a focus and, whilst trade and
other payables have decreased by £6.6m, this is due in part to
timing differences around the year end. Total inventories were
£36.1m (2010: £39.0m) with stock cover at the year end being
129 days (2010: 120 days). The stock holding around the year
end is always relatively high owing to the seasonality in the
business and, in particular, the receipt of ranges ahead of the
launch of the Spring/Summer season. The timing of stock intake
over the coming year has been planned so as to reduce the
average stock holding and, consequently, to improve the efficiency
of working capital throughout the period.
The Company successfully raised a net £19.5m of new equity in
May 2010 through a Placing and Open Offer and a Firm Placing,
during which the Company issued 39,281,011 new Ordinary
Shares. This provided cash which enabled the Group to cancel
the more expensive tranche of its borrowing facility as well as to
help facilitate an acceleration in its turnaround plan, particularly
with regard to the opening of new stores.
Aided by this cash, the Group was able to open 13 new or
rebranded stores during the year, 10 of which trade as Blacks
and 3 under the Millets fascia. Since opening, sales from these
new stores have exceeded expectations and, already, these new
stores are making a strong overall contribution to the Group. In
total, £4.2m of the total capital expenditure incurred of £5.4m
(2010: £2.9m) has been in respect of the store estate, with the
balance of £1.2m relating to central systems and projects.
Financial risks and treasury policy
The key financial risks faced by the Group relate to the availability
of funds to meet the business needs and the fluctuations in
interest rates. The Group manages borrowing, liquidity, interest
rate, foreign exchange and banking relationships in accordance
with Board approved policies designed to minimise exposures.
The Group finances its operations by a combination of internally
generated cash flow and bank borrowings. Risk is controlled
by careful forecasting and monitoring to ensure the Group has
sufficient undrawn bank facilities to meet increases in projected
borrowings, and remain within financial covenants, over the 00 00 13
Our Business Our Governance Our Financials
20321.04 10/06/2011 Proof 5
forthcoming period of at least 12 months. As set out below, the
Group has been able to agree with its bankers an extension of its
existing revolving credit facility and a new revolving credit facility
which is available during certain seasonal peaks.
Foreign currencies
Transaction exposure resulting from stock purchases
denominated in foreign currencies may be hedged by forward
foreign currency contracts and currency options. The Group policy
aims to minimise exposure with the intention of protecting the
buying margin from fluctuations in the underlying value of foreign
currency.
At the year end, the Group was committed to forward exchange
contracts to buy US$17.0m (2010: US$20.5m) of currency, at an
average exchange rate of 1.575. The value of the US dollar relative
to sterling has traded during the financial year at an average rate
of 1.545 and has been as strong as 1.434. The Group has used
forward contracts successfully in managing its exchange risk over
the financial year, achieving an average effective exchange rate on
its dollar denominated stock purchases of 1.601 despite what has
been a volatile period in the currency markets.
Financial position and banking facilities
At the year end the Group’s net bank borrowings amounted to
£14.4m (2010: £12.6m), which included a drawn loan of £20.0m.
After deductions of guarantees and other ancillary facilities, an
amount of £17.2m of the banking facility was undrawn as at the
year end. The availability of cash is nonetheless a critical factor in
determining the speed at which the Directors are able to invest in
the growth of the business. Since the end of the year, the Group
has however been successful in agreeing to extend its facilities
with its bankers. This agreement provides a continued core
revolving credit facility of up to £35.0m, with a further new facility
of £3.0m available during certain seasonal peaks. This agreement,
which runs until July 2012 (and is automatically extended to
November 2012 upon the new Chief Executive commencing
employment with the Group prior to 30 September 2011), gives
the Group the stability of a longer-term financing platform from
which to embark upon the next stages in its turnaround.
Marc Lombardo
Finance Director
4 May 2011
New store openings
The Group has opened 13 new or rebranded stores
during the year, each designed to more effectively offer
our ranges in a significantly improved retail environment
for the customer. These have been successfully supported
by launch events attended by the likes of Sir Chris
Bonnington. Results from these new stores are very
encouraging with trading levels ahead of expectations. 00 00 www.blacks.co.uk www.millets.co.uk 14
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The Board recognises the importance of balancing the interests
of all its key stakeholders, including employees, Shareholders,
customers, suppliers and the communities in which it operates,
and believes that the long-term success of the Group is greatly
enhanced by valuing and developing relationships with key
stakeholders.
Employees
People are key to achieving the Group’s business objectives.
The Group has established policies for recruiting, training and
development and is committed to achieving excellent health,
safety, welfare and protection of employees and their working
environment.
The Group ensures, as far as is reasonably practicable, that a safe
and healthy workplace and working environment is provided for
all its employees to a standard which is at least as high as that
required by law. The Group’s employment policies are designed
to produce a framework within which all staff are treated in a fair
and consistent manner. They have been developed to ensure that
staff are aware of what is expected of them and what the Group,
for its part, offers in return. All employees are expected to observe
and abide by the Group’s policies and procedures which are
clearly set out in a manual available to staff in stores and also on
the Group intranet. The Group policy is one of equal opportunity in
the selection, career progression and promotion of all employees.
There are clear grievance and disciplinary procedures in place.
The Group maintains close consultation with its employees
regarding matters likely to affect their interests and is committed to
involving them in the performance and development of the Group.
It is the policy of the Group to support the employment of disabled
persons wherever practicable and to ensure as far as possible
that they participate in all career opportunities available to staff.
Suppliers
The Group purchases goods for resale from suppliers based in the
UK and direct from manufacturers around the world. The Group
endeavours to ensure that the suppliers of our goods provide
reasonable working standards for their employees and do not
contravene the employment laws of their country.
Customers
The Group aims to provide a high quality of service to all its
customers and ensure that all products are safe and fit for purpose.
The Group endeavours to provide accessibility to its different
shopping channels for all customers. The Group employs a
customer service department which is actively engaged in dealing
promptly and efficiently with customer issues and enquiries.
Health and safety
The Group recognises the importance of health and safety in the
workplace and its management is designed to improve business
performance. Practical measures, such as risk assessments, are
undertaken to ensure that the Group’s activities and products
do not pose a risk to customers, employees, contractors,
sites or equipment. Procedures are in place to enable effective
communication and consultation about health, safety and welfare
issues in order to achieve a high level of safety awareness.
Environment
The Group believes that businesses have a responsibility to
achieve good environmental practice and to continue to strive
for improvement in its environmental impact. The efficient and
effective use of resources makes sound commercial sense. In
view of this, the Group has appropriate environmental policies
and sets objectives taking due account of the business risks and
opportunities.
Community
As a multi-site retail operator, the Group’s community involvement
is generated by its stores, which contribute to their local areas
in a variety of ways. The Group supports and encourages these
activities and welcomes the opportunities they present for team-
building within the business and relationship-building with the
communities in which we operate.
Corporate Social Responsibility
“The Board believes that the long-
term success of the Group is greatly
enhanced by valuing and developing
relationships with key stakeholders” 00 00 15
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www.blacks.co.uk
www.millets.co.uk
Trading from the web channels has continued to show
consistent growth and recorded an increase of 44.2% in the
year, accounting for 4.8% (2010: 2.7%) of the total sales of
the Group. During the year, both www.blacks.co.uk and www.
millets.co.uk launched new web platforms in order to provide
an improved customer experience. The Directors have targeted
these sales channels with achieving continued strong growth
during the coming year as a result of these new platforms, the
offering of a wider product range and the planned development
of a more integrated approach to web trading, including a
‘reserve and collect’ service through the stores.
Improved web platforms 00 00 www.blacks.co.uk www.millets.co.uk 16
Blacks Leisure Group plc Annual Report and Accounts 2011
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Directors and Advisors
David A. Bernstein FCA
Non-Executive Chairman
David (67) joined the Board in 1995 and
was appointed Non-Executive Chairman in
June 2001. He has extensive experience in
the sports and leisure industry, having spent
six years as Joint Managing Director of
Pentland Group plc, five years as Chairman
of Manchester City plc, and in January
2011 was appointed to the position of
Chairman of The Football Association. He is
also Chairman of Sports and Leisure Group
Limited and Orchid Group Limited, and
Non-Executive Director of Ted Baker plc
and Wembley National Stadium Limited.
Neil D. Gillis
Chief Executive
Neil (46) joined the Board in November
2007 as Chief Executive. Prior to this
he held a number of senior positions in
consumer-facing businesses including
Chief Executive of Esporta Health Clubs
Limited from 2003 to 2007, Chairman of
Duchy Originals, Managing Director of
the Greene King plc Pub Company and
Managing Director of Linda McCartney
Foods. Neil gave notice on 10 February
2011 of his intention to resign from his
position in six months’ time under the
terms of his service contract.
Marcello A. Lombardo BA, ACMA
Finance Director
Marc (52) was appointed to the Board as
Finance Director in August 2008. Prior to this
he was Financial Planning Director of Greene
King plc where he spent ten years. Marc
has also held senior finance positions with
Scottish & Newcastle and the Daily Mail.
Mark A. Hammersley
Non-Executive Director
Mark (54) joined the Board as a Non-
Executive Director in September 2010.
He has been Chief Executive of Zoggs
International Limited (the swimwear brand
that is part of the Kendal Group) since
2003 and has a strong track record in
managing major sports clothing brands,
having run the Lowe Alpine and Tenson
brands, Speedo and Rockport.
Thomas W. Knight BA
Non-Executive Director
Tom (58) joined the Board as a Non-
Executive Director in August 2010. He is a
former Executive Director of the Company,
having worked for the Group from 1987 to
2002. Tom subsequently joined JJB Sports
plc as Chief Executive from 2002 to 2007.
He was also a Non-Executive Director of
Ultimate Leisure plc until 2006.
00 00 17
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Registered office
440/450 Cob Drive
Swan Valley
Northampton NN4 9BB
Auditors
BDO LLP
Emerald House
East Street
Epsom
Surrey KT17 1HS
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Financial public relations
Citigate Dewe Rogerson
3 London Wall Buildings
London Wall
London EC2M 5SY
Company Secretary
Mark D. Beacham, BSc, FCA
Company Number
582190
Stockbrokers
Singer Capital Markets Limited
One Hanover Street
London W1S 1YZ
Solicitors
DLA Piper UK LLP
Victoria Square House
Victoria Square
Birmingham B2 4DL
Travers Smith LLP
10 Snow Hill
London EC1A 2AL
Principal bankers
Bank of Scotland plc
PO Box 17235
Edinburgh EH11 1YH 00 00 www.blacks.co.uk www.millets.co.uk 18
Blacks Leisure Group plc Annual Report and Accounts 2011
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Corporate Governance Statement
There is a commitment to high standards of corporate governance
throughout the Group. The Board endorses the general principles
set out in the Combined Code on Corporate Governance issued
by the Financial Reporting Council in 2008 (‘the 2008 Code’) and
is accountable to the Group’s Shareholders for good governance.
In view of the size of the Group and its management structure,
not all of the detailed provisions set out in the 2008 Code have
been applied during the year. Those elements that have not
been applied are disclosed below. Following the appointment
of additional Non-Executive Directors during the year, the Board
is reviewing its corporate governance procedures, taking into
account the publication of the new UK Corporate Governance
Code which will apply to the Company for the financial year
ending 3 March 2012.
The Listing Rules require the Board to explain how corporate
governance is conducted within the Company and to report on
compliance with the provisions of the 2008 Code, the guiding
principle of which is “comply or explain”. This Corporate Governance
Statement, together with the Directors’ Remuneration Report,
explains key features of the Company’ s corporate governance
structure, how the Company applies the principles of the 2008
Code and the extent to which the Company has complied with the
provisions of the 2008 Code during the period under review.
The Board considers that the Company has complied with
the provisions of the 2008 Code throughout the year ended
26 February 2011 except as set out below.
2008 Code provision A3.2 recommends that a company outside
the FTSE 350 index should have at least two independent Non-
Executive Directors. As explained below, the Company did not
comply with this provision until 20 September 2010.
2008 Code provision A3.3 recommends that one of the independent
Non-Executive Directors should be appointed as Senior Independent
Director. As explained below, there was no such appointment
between 29 June 2010 and 29 September 2010.
2008 Code provisions A4.1, B2.1 and C3.1 recommend that
the Nominations, Remuneration and Audit Committees be
comprised solely of or have a majority of independent Non-
Executive Directors as members and that the Remuneration and
Audit Committees be chaired by an independent Non-Executive
Director. Due to its composition, the Board was unable to comply
with this recommendation until 29 September 2010.
The Board of Directors
The present Board consists of a Non-Executive Chairman
(David Bernstein), two Executive Directors (Neil Gillis and Marc
Lombardo) and two further Non-Executive Directors (Tom Knight
and Mark Hammersley). Mr Knight was appointed on 1 August
2010 and Mr Hammersley was appointed on 20 September
2010. Nick Samuel was a Non-Executive Director until his death
on 29 June 2010. The names and biographical details of the
current Board members appear within the Directors and Advisors
section of this Annual Report. These indicate the high calibre and
experience which these individuals bring to enable the Group to
be managed effectively.
Mr Bernstein has served on the Board for over nine years and
therefore does not satisfy the definition of independence set out in
the 2008 Code. Notwithstanding this, Mr Bernstein is considered
by the Board to exercise independent judgement in performing his
role. Mr Knight and Mr Hammersley are considered by the Board
to be independent of management and free of any relationship or
circumstances which could materially interfere with the exercise of
their independent judgement and to fully satisfy the 2008 Code’s
definition of independence. Mr Samuel was also considered to
fully satisfy this definition.
The Non-Executive Directors’ interests in the shares of the
Company are set out in the Directors’ Report and Business
Review. They receive a fixed fee for their services.
The Board meets ten times each year and more frequently
where business needs require. The Board has a schedule of
matters reserved for its decision which includes material capital
commitments, commencing or settling major litigation, business
acquisitions and disposals and appointments to the Board and
of the Company Secretary. All matters of an operational nature
are delegated to the Executive Directors. All Directors are given
appropriate and timely information for each Board meeting,
including reports on the current financial and trading position of
each business.
Mr Samuel was Senior Independent Director until 29 June 2010
and Mr Knight was appointed Senior Independent Director on
29 September 2010. There was no appointment between these
dates. During the year, the Chairman and Non-Executive Directors
met without the Executive Directors present and also the Non-
Executive Directors met separately without the Chairman present.
Any Director appointed is required to retire and seek election by
Shareholders at the next Annual General Meeting. Additionally,
one-third of the Directors retire by rotation each year and seek
re-election at the Annual General Meeting. The Directors required
to retire are those in office longest since their previous re-election.
Each Director is also required to retire at least every three years.
Non-Executive Directors who have served on the Board for more
than nine years are subject to annual re-election.
All Directors have access to independent professional advice if
required and at the Company’s expense. This is in addition to
the access which every Director has to the Company Secretary.
The Secretary is charged by the Board with ensuring that Board
procedures are followed.
Chairman and Chief Executive
There is a clear division of responsibilities between the roles of the
Chairman and the Chief Executive and these have been approved
by the Board. 00 00 19
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The role of the Chairman is to conduct Board meetings and
meetings of Shareholders and to ensure that all Directors are
properly briefed in order to take a full and constructive part
in Board discussions. He is responsible for evaluating the
performance of the Board, its Committees and each of the
other Directors. This includes addressing the development
needs of the Board as a whole with the view to enhancing its
overall effectiveness, and covers capability, time commitment
and individual contribution. The Non-Executive Directors are
responsible for evaluating the performance of the Chairman.
The role of the Chief Executive is to develop and lead business
strategies and processes to enable the Group to meet
Shareholder requirements. He is also responsible for dealing with
investors, Group public relations and external communications.
The role involves leading the Executive team and evaluating the
performance of the Executive Management.
Board Committees
The Board has delegated authority to three standing committees,
as set out in written terms of reference for each committee which
are available from the Company Secretary. The composition of the
Board did not permit the membership of the three committees to
comply with the provisions of the 2008 Code until 29 September
2010. Mr Samuel was a member of each of the three committees
until 29 June 2010 and Mr Knight and Mr Hammersley were
appointed to each of the three committees on 29 September
2010. The current members of each of the committees are Mr
Knight, Mr Hammersley and Mr Bernstein.
Audit Committee
The Audit Committee is chaired by Mr Knight, the previous
Chairman having been Mr Samuel. The membership of the
Committee includes Mr Bernstein, a Chartered Accountant with
relevant financial experience. The Committee meets at least three
times a year and its main duties are as follows:
h h monitoring the integrity of and reviewing the financial
statements;
h h recommending the appointment of and reviewing the
effectiveness and independence of the external Auditors;
h h reviewing the Group’s internal controls and risk management
systems;
h h reviewing the operation and effectiveness of the internal audit
function; and
h h overseeing the establishment and maintenance of good
business practices throughout the Group.
The Chief Executive, Finance Director, Head of Internal Audit
and the Group’s external Auditors were invited to and attended
meetings of the Audit Committee.
The Audit Committee keeps the scope and cost-effectiveness of
the external audit under review. The independence and objectivity
of the external Auditors are also considered on a regular basis,
with particular regard to the level of non-audit fees. The provision
of non-audit services is reviewed on a case by case basis. The
split between audit and non-audit fees appears in note 6 to the
financial statements. The non-audit fees were paid in respect
of tax advice and reports required for Shareholder information
and are not considered by the Committee to affect the Auditors’
independence or objectivity.
The Group’s external Auditors, BDO LLP , have reported to the
Audit Committee that, in their professional judgement, they are
independent within the meaning of regulatory and professional
requirements and the objectivity of the audit partner and audit staff
is not impaired. The Audit Committee has reviewed this statement
and concurs with its conclusion.
Remuneration Committee
The Remuneration Committee is chaired by Mr Hammersley,
the previous Chairman having been Mr Samuel. The Committee
meets at least twice a year to review the remuneration of the
Executive Directors. Full details of the Directors’ remuneration and
a statement of the Company’s remuneration policy are set out
in the Directors’ Remuneration Report. The Chief Executive may
attend meetings of the Committee to discuss the performance of
other Executive Directors and make proposals as necessary, but
takes no part in deliberations when his own position is discussed.
Each Executive Director abstains from any discussion or
voting at full Board meetings on Remuneration Committee
recommendations where the recommendations have a direct
bearing on their own remuneration package. The details of each
Executive Director’s individual package are set by the Committee
in line with the policy adopted by the full Board.
Nominations Committee
The Nominations Committee is chaired by Mr Bernstein.
Appointments to the Board of both Executive and Non-Executive
Directors are normally considered by this Committee, although
the recruitment of Mr Knight and Mr Hammersley were dealt with
by the Board as a whole given the Committee’s composition at
that time. When considering appointments for Non-Executive
Directors, external search consultants are used as appropriate,
together with a review of other candidates known to be available,
to ensure that a wide range of candidates are considered. The
Committee prepares a description of the role and capabilities
required for an appointment based on an evaluation of the
balance of existing skills, knowledge and experience on the
Board. This is followed by an interview process. An induction to
the Group’s business and training is provided for all Directors upon
appointment. 00 00 www.blacks.co.uk www.millets.co.uk 20
Blacks Leisure Group plc Annual Report and Accounts 2011
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Corporate Governance Statement
continued
Board and Committee attendance chart
Attendance at meetings during the financial year is shown below:
Audit Remuneration Nominations
Board Committee Committee Committee
D.A. Bernstein 11 (11) 3 (3) 4 (4) 1 (1)
N.D. Gillis 11 (11) 2 (2)* 0 (0) 0 (0)
M.A. Lombardo 11 (11) 3 (3)* 0 (0) 0 (0)
T.W. Knight 5 (5) 2 (2) 2 (2) 1 (1)
M.A. Hammersley 5 (5) 2 (2) 2 (2) 1 (1)
N.M. Samuel 0 (4) 0 (1) 0 (1) 0 (0)
Internal control and risk management
The Board of Directors is responsible for the Group’s system of
internal control that is designed to facilitate effective and efficient
operations and to ensure the quality of internal and external
reporting and compliance with applicable laws and regulations. In
devising internal controls, the Directors have regard to the nature
and extent of the risk, the likelihood of it crystallising and the cost
of controls. A system of internal controls is designed to manage
but not eliminate the risk of failure to achieve business objectives
and can only provide reasonable and not absolute assurance
against the risk of material misstatement, fraud or loss.
The Board reviews the Group’s procedures in respect of internal
control with a view to complying with ‘Internal Control: Guidance
for Directors on the Combined Code’ issued by the Institute of
Chartered Accountants in England and Wales and established
procedures to ensure compliance with the guidance. The Board
considers that there has been an ongoing process for the
identification, evaluation and management of the significant risks
faced by the Group. This process is regularly reviewed by the
Board and meets the requirements of the guidance.
The key procedures that the Directors have established to provide
effective internal controls are as follows:
Internal Audit function
The Internal Audit function carries out a programme of audits
covering the management of significant corporate and operational
risks and reports directly to the Audit Committee and works with
the Board on the effectiveness of key internal controls.
Whistle-blowing
The Group has a ‘Whistle-blowing’ procedure whereby employees
can make (on an anonymous basis if preferred) confidential
disclosures about suspected impropriety and wrong-doing. Any
matters so reported are investigated and escalated to the Audit
Committee as appropriate. Statistics on the volume and general
nature of all disclosures made are reported to the Committee on
an annual basis.
Control environment
Operational management groups meet regularly to monitor all
operational matters. Clearly defined lines of responsibility and
delegation of authority have been established in the organisational
structure. The Executive Directors participate at least monthly in
management meetings and regularly review activities.
Risk management
Management has responsibility for identifying risks to the business
and for establishing procedures to mitigate and monitor such
risks. The risk register documents the Group’s appetite for risk
and the significant risks and control strategies in each area. This is
reviewed annually and approved by the Board.
Figures in brackets denote the maximum number of meetings that each Director could have attended. Mr Samuels’ non-attendance
was due to illness. The work of the Nominations Committee was performed by the Board as a whole for part of the year.
* Attended by invitation. 00 00 21
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Financial reporting
A detailed formal budgeting process for all businesses culminates
in an annual Group budget which is approved by the Board.
Results are reported monthly against this budget and revised
forecasts for the year are prepared when appropriate.
The Board is mindful of its responsibility to present a balanced
and understandable assessment of the financial position
and prospects, both to investors and regulatory authorities.
The Annual Report, Interim Report and Interim Management
Statements are the principal means of achieving this objective. An
explanation of the responsibilities of the Directors in connection
with the financial statements is set out in the Directors’ Report and
Business Review.
Capital investment
The Group has clearly defined guidelines for capital expenditure.
These include annual budgets, detailed appraisal and review
procedures, defined levels of authority and due diligence
requirements where businesses are being acquired. Post-
investment appraisals are performed for major investments.
Internal controls assurance
The Audit Committee, on behalf of the Board, has reviewed during
the year the effectiveness of the system of internal control from
information provided by management, Internal Audit and the
Group’s external Auditors. Any system of internal control can only
provide reasonable and not absolute assurance of meeting the
internal control objectives.
This review included an assessment by the Board of the key risks
affecting the Group in the delivery of its long-term strategies.
Going concern
The Directors, having taken account of the Group’s net cash
resources and bank facilities and having made appropriate
enquiries, consider that the Company and the Group have
adequate resources to continue operations for the foreseeable
future and for this reason they continue to adopt the going
concern basis in preparing the financial statements.
Communication
The Company places a great deal of importance on
communication with its Shareholders. Shareholders have direct
access to the Company via its website and the Company
responds to numerous letters and emails from Shareholders,
suppliers and customers on a wide range of issues.
There is regular dialogue with individual institutional Shareholders
as well as general presentations after the interim and final results
announcements. All Shareholders have the opportunity to raise
questions at the Annual General Meeting when the Company also
highlights the latest key business developments. At the meeting,
the Company complies with the 2008 Code as it relates to notice,
voting, the separation of resolutions and the attendance of
committee chairmen. In line with the 2008 Code, details of proxy
voting by Shareholders are made available following the meeting. 00 00 www.blacks.co.uk www.millets.co.uk 22
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Directors’ Remuneration Report
UNAUDITED INFORMATION
The Remuneration Committee
The Remuneration Committee is composed of M.A. Hammersley (Chairman), D.A. Bernstein and T.W. Knight. The Remuneration
Committee, on behalf of the Board, makes recommendations regarding Executive Directors’ remuneration packages including bonuses,
share options and other incentive schemes.
Directors’ service contracts
Executive Directors
Compensation
Start Unexpired Notice for early
date term period termination
N.D. Gillis* 20 Nov 2007 Under notice Under notice None
M.A. Lombardo* 03 Aug 2008 Rolling 12 months None
* These are permanent rolling contracts.
N.D. Gillis gave notice on 10 February 2011 of his intention to resign from his position in six months’ time under the terms of his service
contract and, accordingly, is under notice as at the date of this report.
Non-Executive Directors
Compensation
Start Unexpired Notice for early
date term period termination
D.A. Bernstein 01 Jun 2009 1 month 6 months None
T.W. Knight 01 Aug 2010 15 months 6 months None
M.A. Hammersley 20 Sep 2010 16 months 6 months None
Group policy on Executive Directors’ remuneration
The objective of the Group’s remuneration policy is to provide
a level of remuneration which will attract, retain and motivate
Executive Directors and senior management of high quality.
Share options and longer term incentives are used as part of
the Group’s remuneration policy. The amounts involved and the
frequency of issue endeavour to keep pace with current market
practice and conditions.
In setting the Executive Directors’ remuneration the Committee
takes into account the pay and employment conditions applicable
across the Group in the reported period. In common with the fact
that there were no general pay increases for employees elsewhere
in the Group, no increases were made in the period to Directors’
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Variable Rewards
Executive Directors’ bonus scheme
Executive Directors are entitled to performance related bonuses
that are payable based, in the main, upon the profit before interest
and tax improvement of the Group, consistent with corporate
financial targets as determined by the Remuneration Committee.
The Remuneration Committee reviews performance against
targets at the end of the year and may use its discretion to adjust
measures and payments in view of operating circumstances
during the year. Bonus payments are non-pensionable and are
subject to approval by the Committee.
The achievement of the highest performance targets would entitle
the Director to the maximum bonus payable of 100% of basic
salary. The Executive Directors received no bonuses from these
arrangements in either the current or the previous financial year.
Pension
The Group made pension contributions of up to 15% of basic
salary for the Executive Directors. These contributions are paid
into the equivalent of money purchase pension schemes.
Non-Executive Directors
The remuneration of Non-Executive Directors is set by the
Executive Directors and consists of fees for their services in
connection with Board and Committee meetings and other
relevant matters.
Other matters
The fees shown in respect of D.A. Bernstein and T.W. Knight are
paid to third parties.
Share price performance
The mid-market price of each Ordinary Share on 26 February 2011 was 22.40 pence. The lowest and highest prices during the year
were 22.00 pence and 70.50 pence respectively.
The following graph shows the Company’s performance, measured by total Shareholder return, compared with the performance of the
‘FTSE Small Cap — General Retailers’ index over the last five years:
The Remuneration Committee has selected the above index as they consider it to be the most relevant for a company of Blacks’ size
and nature. This is consistent with prior years.
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Blacks Leisure FTSE UK Small Cap General Retailers 00 00 www.blacks.co.uk www.millets.co.uk 24
Blacks Leisure Group plc Annual Report and Accounts 2011
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AUDITED INFORMATION
Directors’ remuneration
An analysis of the Directors’ remuneration, excluding gains on the exercise of share options, is set out below:
Basic Variable Benefits
salary/fees rewards in kind Total Total Pension Pension
2011 2011 2011 2011 2010 2011 2010
£’000 £’000 £’000 £’000 £’000 £’000 £’000
N.D. Gillis 300 — 20 320 349 45 45
M.A. Lombardo 170 — 9 179 198 17 17
D.A. Bernstein 85 — — 85 85 — —
T.W. Knight 20 — — 20 — — —
M.A. Hammersley 16 — — 16 — — —
N.M. Samuel 9 — — 9 35 — —
C.M. Littner — — — — 15 — —
A.H. Mallett — — — — 13 — —
2011 600 — 29 629 62
2010 640 50 5 695 62
An equity-settled share-based payment charge of £275,000 (2010: £242,000) has been recorded in the statement of comprehensive
income for the year in connection with the above Directors’ share options. No Directors exercised share options during either year.
Benefits in kind relate solely to car, fuel and healthcare provisions.
C.M. Littner and A.H. Mallett resigned from the Board on 14 July 2009.
N.M. Samuel died on 29 June 2010.
T.W. Knight was appointed to the Board on 1 August 2010.
M.A. Hammersley was appointed to the Board on 20 September 2010.
Pension contributions were made in respect of two Directors (2010: two).
Turnaround Incentive Plan
On 24 November 2009, during the prior financial year, a new
performance related incentive plan, the ‘Turnaround Incentive
Plan’ was approved at a General Meeting of Shareholders. This
Scheme comprised a new share option scheme that was subject
to performance conditions regarding profitability and share price
and accordingly aligned the interests of certain Directors and
senior management with those of Shareholders.
Options were granted on 18 January 2010 under the Turnaround
Incentive Plan to certain Directors and other senior individuals
within the Group. Any options already held by those individuals as
part of other share incentive plans were surrendered and replaced
with these new options. Further options under this Scheme were
granted on 10 June 2010 to certain senior individuals within the
Group, none of which were Directors of the Company.
Directors’ Remuneration Report
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Share options granted under the Turnaround Incentive Plan are subject to market-related performance conditions based upon the
profitability of the Group (defined as earnings before interest and tax, ‘EBIT’) and the share price of Ordinary Shares. Profitability is
measured cumulatively across the two complete financial years to 3 March 2012 and the share price is to be taken as the average
closing price across July, August and September 2012. Both parameters must be satisfied for any options to vest, as set out below:
Ordinary Share % of award
Cumulative EBIT price (each) vesting
£10,000,000 60 pence 60%
£10,000,000 80 pence 80%
£10,000,000 100 pence 100%
£9,000,000 60 pence 40%
£9,000,000 80 pence 60%
£9,000,000 100 pence 80%
£8,000,000 60 pence 20%
£8,000,000 80 pence 40%
£8,000,000 100 pence 60%
On the further condition that the individual continues to be
employed by the Group (unless a ‘good leaver’) on the vesting
date, on the third anniversary of the date of grant, options will
vest to the extent that performance criteria as above are satisfied.
Vested options may then be exercised, at nil cost, from that date
up to the tenth anniversary of the date of grant and these options
will be satisfied by the transfer of shares held by an Employee
Benefit Trust.
The options vest in full and are exercisable in full if there is a
change of control of the Company which occurs at a price of 100
pence or more per Ordinary Share. If such a change of control
occurs at a price of less than 100 pence per share then the
Remuneration Committee will determine whether and to what
extent these awards will vest and become exercisable.
In the event of any variation in the share capital of the Company
(arising from any reduction of capital or sub-division or
consolidation of capital or issue of shares by way of capitalisation
of profits or reserves or by way of rights), the number of shares
subject to the options may be adjusted in such manner as the
Remuneration Committee considers fair and reasonable so as not
to disadvantage the participants under the plan as a result of such
action.
No benefits under the scheme are pensionable.
The Directors who served during the year had the following interests in the Turnaround Incentive Plan at 26 February 2011:
Dates Dates
Date of Maximum Price exercisable exercisable
grant number exercisable from to
N.D. Gillis 18 Jan 2010 971,659 0.00p 18 Jan 2013 18 Jan 2020
M.A. Lombardo 18 Jan 2010 550,607 0.00p 18 Jan 2013 18 Jan 2020
All the above options were granted during the prior financial year,
on 18 January 2010. All options previously held under other share
incentive schemes were surrendered as part of the grant of these
options under the Turnaround Incentive Plan and, accordingly, no
Directors retained any interests in any other share option schemes.
No share options, from any scheme, were exercised by Directors
during either the current or the prior financial year.
Shares granted under option schemes are granted by the
Remuneration Committee to attract, retain and motivate
participants to achieve corporate financial targets. The value of
share options granted during the year is up to 100% of basic salary
and the value of shares that will vest is subject to the achievement
of certain performance criteria as set out above.
No share options lapsed during the year, under any share
incentive schemes, in respect of Directors who held office in the
period.
Mark Hammersley
Remuneration Committee Chairman
4 May 2011 00 00 www.blacks.co.uk www.millets.co.uk 26
Blacks Leisure Group plc Annual Report and Accounts 2011
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The Directors present their Annual Report for the year ended
26 February 2011.
Principal activities
The Company is the Parent Company of a wholly owned
subsidiary primarily engaged in the retail of Outdoor clothing,
footwear and equipment.
The Group comprises two market segments; Outdoor and
Boardwear. The Outdoor segment trades under the Blacks
and Millets fascias, and Boardwear trades under the Freespirit
fascia. The trade is principally from retail stores in the British Isles
(including three stores operating through a Republic of Ireland
branch) and associated direct sale internet sites.
Products and services
The products sold by the Group are categorised as leisure goods.
The Outdoor market is typically divided into specialist products
designed to protect and perform in a specific environment and
leisure based products which are generally more widely available.
The market revolves around walking (from rambling to mountain
climbing) and camping (from family breaks to expeditions).
The Group provides merchandise for participation in running,
climbing, camping, walking, rambling, skiing, snowboarding,
mountaineering, cycling, trekking and general travel and its
products include general, outdoor inspired clothing, multi
functional footwear, rucksacks, tents and accessories.
Blacks and Millets are established retailers of Outdoor clothing,
footwear and equipment. Blacks stocks a high proportion of
proprietary branded merchandise, such as The North Face,
Berghaus, Craghoppers, Deuter, Osprey, Helly Hansen, Mammut,
Marmot, Merrell, Brasher and most recently Lowe Alpine. We have
also recently introduced Weird Fish and Animal for the start of the
forthcoming summer season.
The Millets fascia also stocks a range of branded goods such as
Hi-Tec and Regatta though has a focus on key own-label brands,
including Peter Storm and Eurohike which are amongst the UK’s
most popular Outdoor clothing and equipment brands. We also
have an extensive own-label childrens range, ‘Adventurers’.
The Freespirit stores are aimed at customers with a passion for
high adrenaline sports including water and winter sports, offering
a range of iconic brands such as Mambo, Prospect, Jack Jones,
RipCurl, Vans and Oakley. Owing to the continuing decline in this
Boardwear market, the Group has taken the decision to exit from
this segment fully over the coming months.
Results and dividends
The Group results for the year are shown in the Consolidated
Statement of Comprehensive Income.
The Directors do not recommend the payment of any dividend on
the Ordinary Shares this year (2010: £nil).
Review of the business
The review of the Group’s activities, trading results, financial
position at the year end and likely future developments, is
contained in the Chairman’s Statement, Chief Executive’s Review
and Financial Review. Other information required to be included
in the business review, including identification of key performance
indicators, principal risks and uncertainties affecting the business,
is set out below. The Group demonstrates Corporate Social
Responsibility as detailed earlier in this Annual Report.
Financial key performance indicators
The Directors and management monitor the Group’s progress against its strategic objectives and the financial performance of the
Group’s operations on a regular basis. Performance is assessed against budgets and forecasts using financial and non-financial
measures. The key performance indicators which are monitored are set out below:
Like-for-like sales growth % The traditional retail measurement of the ability to grow sales year on year. The Group measures like-for-
like sales by the comparison of sales from individual stores that were trading in both the period under
review and the previous comparative period and that had no material change that would affect the trade.
Gross margin % The Group defines gross margin % as the direct profit earned from the sale of an item, expressed as a
percentage of sales. The profit earned is after charging the cost of the goods and any related costs such
as freight charges and duty fees. It does not include the operational costs of the business.
Discussion of the above key performance indicators and the review of the business is detailed in the Chairman’s Statement within this
Annual Report.
Directors’ Report and Business Review 00 00 27
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Principal risks and uncertainties
Risk is inherent in all businesses and the Board is continually
identifying and evaluating the key business risks. Executive
Directors and operational management are responsible for the
implementation of robust processes to manage the risk to the
business. The Board takes an active role in reviewing operational
activities to ensure risk is being addressed effectively.
The key risks identified by the Board include:
Economic conditions
The economic environment has a clear impact on consumer
spending. Unemployment levels, interest rates, consumer debt
levels, availability of credit and many other factors can influence
customers’ spending decisions. This is particularly so during the
current economic environment.
The Board recognises the need to monitor economic changes in
order to react in the best interest of the Group by managing stock
orders and realigning forecasts.
Financing
The Group has been successful in agreeing banking arrangements
which provide the stability of facilities up to July 2012, with an
automatic extension to November 2012 upon the commencement
of employment of the new Chief Executive no later than
30 September 2011. The Directors, nonetheless, continue to
monitor the cash position of the Group on an ongoing basis to
ensure that the Group is operating within facilities available.
Products and services
The customer expects quality products at competitive prices. The
Group is continually developing its product ranges to strive to
meet customer expectations. The success of the Group depends
particularly upon the ability to react to the environment where
normal weather patterns are changing. Product development
and supply chain management is key in this area to ensure that,
whatever the weather, the expectations of the customer for
suitable quality products at competitive prices are met.
Competition
The Group operates in a highly competitive market. Recent
entrants are growing within the Outdoor market and competitors
continue to improve their standards. Certain sections of the
Outdoor market has also become more attractive to the very large
retailers, including supermarkets, which gives the Group a greater
challenge in terms of pricing, whilst not compromising on quality.
The Group monitors the activities of its competitors, both current
and potential, and takes appropriate action to ensure it remains
competitive on price, quality and value for money.
Suppliers and supply chain management
The Group is dependent on its supplier base to deliver quality
products, on time. The Group continually reviews the supplier
base to ensure suppliers have the ability to meet demand and
remain price competitive.
Other performance indicators used by management internally include:
Share price The market value of each Ordinary Share is taken as an indication of the ability of the Group to deliver
Shareholder returns through equity growth.
Stock availability This provides a quantified value for levels of stock availability in the business, over a specific period.
Stock cover Monitoring of the number of days of stock held at a point in time is used as a measure of working capital
efficiency.
Store openings The Group measures the number of store openings in a period, which includes both new properties and re-
openings of existing stores which have had a substantial refurbishment such as a change of trading fascia.
Return on investment The Group monitors return on investment for new developments and store refurbishments.
Customer satisfaction Results of mystery shopper and other direct customer surveys.
Staff turnover Number of employees leaving as a % of the total workforce. 00 00 www.blacks.co.uk www.millets.co.uk 28
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Warehousing and distribution
The Group regularly reviews its warehousing and related logistics
operations. The key risks identified are those in relation to
business interruption caused by physical property damage,
warehouse system breakdowns, inefficient processes and
delivery failures.
IT systems and business continuity
The Group is dependent upon the availability and integrity of key
computer systems which must record and process substantial
volumes of data in a timely and accurate manner. The Group
recognises that key systems, in particular the EPOS/till systems
and the stock management systems, will require continual
upgrades and ongoing investment, to ensure they meet the
current and future operational needs of the business.
Key personnel
The success of the Group is enhanced by the retention of key
management and personnel and on its ability to attract, motivate
and retain employees of a high calibre. Share options and longer
term incentives are used as part of their remuneration packages.
Treasury and risk management
The main financial risks to the Group relate to the availability of
funds to meet the business needs.
Foreign exchange rates are monitored and forward contracts are
used to minimise the risk of currency fluctuations. The Group’s
treasury policy allows the use of derivative financial instruments
provided they are not entered into for speculative purposes.
Capital risk management
The Group manages its capital to ensure that entities in the Group
will be able to continue as a going concern whilst seeking to
maximise the return to stakeholders through the optimisation of
the debt and equity balance.
In managing its capital, the Group’s primary objective is to
provide a consistent return for its equity Shareholders through
a combination of capital growth and, where appropriate,
distributions. In order to achieve this objective, the Group seeks
to maintain a gearing ratio that balances risks and returns at an
acceptable level and also to maintain a sufficient funding base
to enable the Group to meet its working capital and strategic
investment needs. In making decisions to adjust its capital
structure to achieve these aims, either through altering its dividend
policy, new share issues, or the reduction of debt, the Group
considers not only its short-term position but also its long-term
operational and strategic objectives.
Financial instruments
The Group’s policy on financial assets and liabilities and its interest
in financial instruments is reported in the notes to these accounts.
Contractual arrangements
There are no persons with whom the Group has contractual
arrangements which are essential to the Group’s business.
Payment policy
The Group seeks to ensure that terms of payment specified and
agreed with suppliers are not exceeded. Creditor days based on
year end trade creditors were 53 days (2010: 62 days).
The Company does not have any trade creditors and accordingly
no creditor days figure has been disclosed.
Donations
During the year the Group made charitable donations of £1,200
(2010: £nil). No political donations were made in either year.
Directors
The names of the current Directors of the Company and their
biographical details, including roles, responsibilities and significant
external commitments, are given in the Directors and Advisors
section of this Annual Report. T.W. Knight was appointed to the
Board on 1 August 2010 and M.A. Hammersley was appointed
to the Board on 20 September 2010. N.M. Samuel served on the
Board until his death on 29 June 2010. The other Directors served
on the Board throughout the year.
Details of the terms of appointment and notice period of each
of the current Directors appear in the Directors’ Remuneration
Report. The provisions of the Company’s Articles of Association
and of the Combined Code in respect of the retirement and
re-election of Directors are set out in the Corporate Governance
Statement. The Directors standing for re-election to the Board
are set out in the Notice of Annual General Meeting which will
be mailed separately to Shareholders in due course. Following
performance evaluation, the Board considers that each of the
Non-Executive Directors standing for re-election continues to
perform effectively and to demonstrate commitment to his role.
The Board is satisfied that the Chairman has sufficient time
to commit to the Company’s affairs notwithstanding his other
business commitments.
Directors’ interests in transactions
There were no material transactions in the year in which any
Director had an interest.
Indemnification of Directors
Qualifying third party indemnity provisions (as defined in Section
234 of the Companies Act 2006) are in force for Directors who
held office during the year.
Share capital
The following information is given pursuant to Section 992 of the
Companies Act 2006.
Directors’ Report and Business Review
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Movements in share capital during the year are disclosed in note
20 to the financial statements.
The Company’s share capital comprises Ordinary Shares of
1p each, Deferred Shares of 49p each and 10% cumulative
Preference Shares of £1 each. The rights and obligations
attaching to the Company’s shares are summarised below and
are set out in the Company’s Articles of Association which can be
obtained from Companies House or by writing to the Company
Secretary.
Holders of the Ordinary Shares have all the rights normally
attaching to Ordinary Shares, including rights to receive the
Company’s Annual Report, to attend and speak at General
Meetings and to appoint proxies and exercise voting rights. The
Company’s Ordinary Shares do not carry any special rights with
regard to control of the Company. There are no restrictions on
share transfers or voting. Ordinary Shares acquired through the
Company’s share schemes rank pari passu with the Company’s
Ordinary Shares in issue and have no special rights. Unless the
Board decides otherwise, an Ordinary Shareholder may not vote
at any General Meeting or class meeting or exercise any rights in
relation to shares while any amount of money relating to his shares
is outstanding.
The Deferred Shares confer no voting rights nor any rights to
participate in the profits of the Company except in very limited
circumstances. The Deferred Shares are not redeemable and are
only transferable in limited circumstances. The Company may
at any time arrange for Deferred Shares to be transferred to the
Company for an aggregate consideration of 1p and may cancel
the Deferred Shares so purchased.
The Preference Shares carry the right to receive a fixed dividend
of 10% per annum paid in priority to a dividend on any other
class of share, payable half-yearly on 30 April and 31 October.
The Preference Shares are non-redeemable. In the event of a
return of capital or on a winding-up of the Company, Preference
Shareholders are entitled to repayment of the nominal capital
paid up on their shares, a premium of 5 pence per share and any
arrears of dividend to the date of repayment in priority to any other
class of share. Preference Shares do not carry any voting rights
unless either the preference dividends are in arrears for at least six
months or there is a resolution altering the rights of the holders of
the Preference Shares, for the winding-up of the Company or for a
return of capital. In such instances, a Preference Shareholder shall
have one vote on a show of hands or, in the event of a poll, ten
votes for every Preference Share held.
There are no restrictions on the transfer of the Company’s Ordinary
and Preference Shares other than certain restrictions which may
be imposed pursuant to the Company’s Articles of Association,
certain restrictions which may from time to time be imposed by
laws and regulations (for example in relation to insider dealing),
restrictions pursuant to share dealing codes whereby Directors and
certain employees of the Company require prior approval to deal in
the Company’s shares, and where a person has been served with
a disclosure notice and has failed to provide the Company with
information concerning the interests in those shares.
Purchase of own shares
At the Company’s Annual General Meeting held on 21 July 2010
the Company was authorised to make market purchases of up to
8,405,102 Ordinary Shares (representing approximately 10% of
its issued Ordinary Share capital at that date). No such purchases
were made during the year and no shares are held in treasury as
at 26 February 2011.
Blacks Leisure Group Employee Benefit Trust
The Executive Directors of the Company, together with certain
other employees of the Group, are potential beneficiaries of the
Blacks Leisure Group plc Employee Benefit Trust (‘the Trust’) and,
as such, are deemed to be interested in any Ordinary Shares held
by the Trust. At 26 February 2011 the Trust held 344,578 (2010:
344,578) Ordinary Shares.
Power of Directors
The rules for appointment and replacement of Directors are
detailed in the Company’s Articles of Association.
Any changes to the Company’s Articles of Association must be
approved by Shareholders in accordance with legislation in force
from time to time.
The Directors have authority to issue and allot Ordinary Shares,
such authority being renewed annually at the Annual General
Meeting.
Change of control
None of the Ordinary Shares, including those held by the Trust,
carries any special voting rights with regard to control of the
Company.
The Company is not party to any significant agreements that
would take effect, alter or terminate upon a change of control of
the Company following a takeover bid.
Except as shown below, the Company does not have
any agreements with any Director or employee providing
compensation for loss of office or employment that occurs
because of a takeover bid, except for provisions in the rules of the
Company’s share schemes which may result in options granted to
employees to vest on a takeover.
An arrangement was in place whereby N.D. Gillis would receive
a payment of £500,000 in the event of a change of control of
the Company prior to 19 November 2011. This entitlement
ceased when he gave notice of his resignation from his role, as
announced on 10 February 2011. 00 00 www.blacks.co.uk www.millets.co.uk 30
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Going concern
After making due enquiries, and following the agreement of
banking facilities as detailed in the Financial Review, the Directors
have a reasonable expectation that the Group has adequate
facilities in place in order to continue operational existence for
the foreseeable future and, accordingly, they continue to adopt
the going concern basis in the preparation of these financial
statements.
Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union and have elected
to prepare the Company financial statements in accordance
with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards and applicable law).
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Company and of the
profit or loss for the Group for that period.
In preparing these financial statements, the Directors are required to:
h h select suitable accounting policies and then apply them
consistently;
h h make judgements and accounting estimates that are
reasonable and prudent;
h h state whether they have been prepared in accordance with
IFRSs as adopted by the European Union, subject to any
material departures disclosed and explained in the financial
statements;
h h prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business;
h h prepare a Directors’ Report and Directors’ Remuneration
Report which comply with the requirements of the Companies
Act 2006; and
h h provide additional disclosures when compliance with the specific
requirements of IFRSs is insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’ s financial position and financial performance.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act
2006 and, as regards the Group financial statements, Article 4 of
the IAS Regulation. They are also responsible for safeguarding the
assets of the Company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
Website publication
The Directors are responsible for ensuring the Annual Report
and the financial statements are made available on a website.
Financial statements are published on the Company’s website
in accordance with legislation in the United Kingdom governing
the preparation and dissemination of financial statements, which
may vary from legislation in other jurisdictions. The maintenance
and integrity of the Company’s website is the responsibility of the
Directors. The Directors’ responsibility also extends to the ongoing
integrity of the financial statements contained therein.
Directors’ responsibilities pursuant to DTR4
The Directors confirm to the best of their knowledge:
h h the Group financial statements have been prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs) and Article 4 of the IAS
Regulation and give a true and fair view of the assets, liabilities,
financial position and profit and loss of the Group; and
h h the Annual Report includes a fair review of the development and
performance of the business and the financial position of the
Group and the Parent Company, together with a description of
the principal risks and uncertainties that they face.
Corporate Governance Statement
The Corporate Governance Statement is presented earlier and is
incorporated in this Directors’ Report by reference.
Disclosure of information to Auditors
All the current Directors have taken all the steps that they ought to
have taken to make themselves aware of any information needed
by the Company’s Auditors for the purpose of their audit and
to establish that the Auditors are aware of that information. The
Directors are not aware of any relevant audit information of which
the Auditors are unaware.
Annual General Meeting
The Annual General Meeting of the Company will be held at 11.00
am on 27 July 2011. The notice convening the meeting and the
resolutions to be put to the meeting, together with explanatory
notes, will be sent out in a separate circular to Shareholders in
due course.
Auditors
A resolution to reappoint BDO LLP as Auditors will be proposed at
the next Annual General Meeting.
Directors’ Report and Business Review
continued 00 00 31
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Our Business Our Governance Our Financials
Substantial interests in share capital
As at 3 May 2011, the Directors had been notified of the following persons who are interested, directly or indirectly, in 3% or more of the
voting rights associated with the Ordinary Share capital of the Company:
Holding %
Gartmore Investment Limited 14,393,934 17.13
Sportsdirect.com Retail Limited 12,153,071 14.46
Standard Life Investments Limited 8,321,051 9.90
Schroders plc 8,295,328 9.87
Aviva plc 5,672,967 6.75
Pentland Group PLC 4,931,563 5.87
VF Luxembourg S.A.R.L. 3,901,386 4.64
F&C Asset Management plc 2,993,503 3.56
Polar Capital European Forager Fund Limited 2,607,750 3.10
Other than disclosed above, the Directors are not aware of any person holding, or beneficially interested in, 3% or more of the voting
rights associated with the Ordinary Share capital of the Company.
Directors’ interests
The Directors who held office at the end of the financial year had the following interests in the Ordinary Shares of the Company:
26 February 2011 27 February 2010*
Under Under
Issued option Issued option
D.A. Bernstein 300,000 — 200,000 —
N.D. Gillis 128,100 971,659 70,000 971,659
M.A. Lombardo — 550,607 — 550,607
T.W. Knight 6,801 — 6,801 —
M.A. Hammersley — — — —
* Or date of appointment if later.
The Company considers that the holding of shares by Non-Executive Directors, as shown above, aligns their interests to those of other
Shareholders and does not impact on their independence in performing their duties.
No Directors hold any beneficial interest in the shares of any of the subsidiary undertakings.
Further details of Directors’ share options are set out within the Directors’ Remuneration Report.
By order of the Board
Mark Beacham
Company Secretary
4 May 2011 00 00 www.blacks.co.uk www.millets.co.uk 32
Blacks Leisure Group plc Annual Report and Accounts 2011
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Independent Auditors’ Report to the Members of
Blacks Leisure Group plc
We have audited the financial statements of Blacks Leisure Group
plc for the year ended 26 February 2011 which comprise the
Consolidated Statement of Comprehensive Income, Consolidated
Balance Sheet, the Consolidated Statement of Cash Flows,
the Consolidated Statement of Changes in Equity, the Parent
Company Balance Sheet and the related notes. The financial
reporting framework that has been applied in the preparation of
the Group financial statements is applicable law and International
Financial Reporting Standards (IFRSs) as adopted by the
European Union. The financial reporting framework that has been
applied in preparation of the Parent Company financial statements
is applicable law and United Kingdom Accounting Standards
(United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might
state to the Company’s members those matters we are required
to state to them in an Auditor’s Report and for no other purpose.
To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and the
Company’s members as a body, for our audit work, for this report,
or for the opinions we have formed.
Respective responsibilities of Directors and Auditors
As explained more fully in the statement of Directors’
responsibilities, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give
a true and fair view. Our responsibility is to audit the financial
statements in accordance with applicable law and International
Standards on Auditing (UK and Ireland). Those standards require
us to comply with the Auditing Practices Board’s (APB’s) Ethical
Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is
provided on the APB’s website at www.frc.org.uk/apb/scope/
private.cfm.
Opinion on financial statements
In our opinion:
h h the financial statements give a true and fair view of the state
of the Group’s and the Parent Company’s affairs as at
26 February 2011 and of the Group’s loss for the year then
ended;
h h the Group financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union;
h h the Parent Company financial statements have been properly
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice; and
h h the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006; and, as
regards the Group financial statements, Article 4 of the IAS
Regulation.
Opinion on other matters prescribed by the Companies
Act 2006
In our opinion:
h h the part of the Directors’ Remuneration Report to be
audited has been properly prepared in accordance with the
Companies Act 2006; and
h h the information given in the Directors’ Report for the financial
year for which the financial statements are prepared is
consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters
where the Companies Act 2006 requires us to report to you if, in
our opinion:
h h adequate accounting records have not been kept by the
Parent Company, or returns adequate for our audit have not
been received from branches not visited by us; or
h h the Parent Company financial statements and the part of
the Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
h h certain disclosures of Directors’ remuneration specified by law
are not made; or
h h we have not received all the information and explanations we
require for our audit.
Under the Listing Rules we are required to review:
h h the Directors’ statement, set out in the Corporate Governance
Statement, in relation to going concern;
h h the part of the Corporate Governance Statement relating to
the Company’s compliance with the nine provisions of the
June 2008 Combined Code specified for our review; and
h h certain elements of the report to Shareholders by the Board
on Directors’ remuneration.
David Eagle
(senior statutory auditor)
For and on behalf of BDO LLP , statutory auditor
Epsom
United Kingdom
4 May 2011
BDO LLP is a limited liability partnership registered in England and
Wales (with registered number OC305127). 00 00 33
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Our Financials Our Governance Our Business
Consolidated Statement of Comprehensive Income
for the year ended 26 February 2011
Year ended Year ended
26 February 27 February
2011 2010
Total Total
Note £’000 £’000
Continuing operations
Revenue 4 201,933 240,517
Cost of sales (103,569) (116,440)
Gross profit 98,364 124,077
Other income 4 899 1,109
Distribution costs (93,366) (154,359)
Administrative expenses (8,390) (9,023)
Operating loss 6 (2,493) (38,196)
Operating loss excluding exceptional items (3,814) (12,037)
Exceptional items 8 1,321 (26,159)
Finance costs 9 (2,831) (5,946)
Finance costs excluding exceptional items (2,831) (2,914)
Exceptional items — (3,032)
Finance income 9 65 569
Loss before tax (5,259) (43,573)
Tax expense 10 (229) (2,486)
Tax expense excluding exceptional items (229) (190)
Tax expense on exceptional items — (2,296)
Loss for the year from continuing operations (5,488) (46,059)
Discontinued operations
Loss from discontinued operations (administration of Sandcity Limited) 35 — (3,373)
Loss for the financial year (5,488) (49,432)
Other comprehensive income/(expense)
Transferred to the carrying amount of hedged items (720) (1,256)
Tax on items transferred from equity 202 352
(Losses)/gains relating to designated cash flow hedges (221) 720
Tax on items taken directly to equity 60 (202)
Exchange differences on translation of foreign operations (155) —
Other comprehensive expense for the year, net of tax (834) (386)
Total comprehensive expense for the year attributable to equity holders of the parent (6,322) (49,818)
Loss per share (pence)
From continuing operations 11
— Basic (6.56) (108.90)
— Diluted (6.56) (108.90)
From continuing and discontinued operations 11
— Basic (6.56) (116.88)
— Diluted (6.56) (116.88) 00 00 www.blacks.co.uk www.millets.co.uk 34
Blacks Leisure Group plc Annual Report and Accounts 2011
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Consolidated Balance Sheet
as at 26 February 2011
26 February 27 February
2011 2010
Note £’000 £’000
ASSETS
Non-current assets
Property, plant and equipment 13 19,262 20,098
Goodwill 14 34,598 34,598
Other intangible assets 15 151 7
Deferred tax asset 10 485 414
Total non-current assets 54,496 55,117
Current assets
Inventories 17 36,122 38,954
Trade and other receivables 18 6,370 6,725
Derivative financial instruments 32 — 720
Cash and cash equivalents 19 655 1,010
Total current assets 43,147 47,409
TOTAL ASSETS 97,643 102,526
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Share capital 20 21,733 21,319
Share premium 21 43,395 24,333
Reserve for own shares 22 (773) (773)
Hedging reserve (161) 518
Retained earnings (30,206) (24,962)
TOTAL EQUITY 33,988 20,435
Non-current liabilities
Preference shares 20 891 891
Other payables 26 5,581 3,802
Obligations under finance leases 25 577 1,186
Long-term provisions 27 3,170 5,060
Total non-current liabilities 10,219 10,939
Current liabilities
Trade and other payables 26 33,491 41,662
Bank overdrafts 24 15,024 13,643
Obligations under finance leases 25 656 1,178
Short-term provisions 27 4,044 14,669
Derivative financial instruments 32 221 —
Total current liabilities 53,436 71,152
TOTAL LIABILITIES 63,655 82,091
TOTAL EQUITY AND LIABILITIES 97,643 102,526
The financial statements were approved by the Board and authorised for issue on 4 May 2011 and were signed on its behalf by:
Neil Gillis
Chief Executive
Marc Lombardo
Finance Director
Company Number: 582190 00 00 35
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Our Financials Our Governance Our Business
Consolidated Cash Flow Statement
for the year ended 26 February 2011
Year ended Year ended
26 February 27 February
2011 2010
Note £’000 £’000
Cash flows from operating activities
Net loss from continuing operations (5,488) (46,059)
Net loss from discontinued operations — (3,373)
Net loss from operations (5,488) (49,432)
Adjustments for:
Net finance cost 2,766 5,499
(Profit)/loss on disposal of property, plant and equipment (209) 1,050
Depreciation and amortisation 5,143 6,155
Impairment of property, plant and equipment 825 7,127
Loss on disposal of intangible assets — 54
Loss on deconsolidation of Sandcity Limited — 159
Tax expense 229 2,491
Equity-settled share-based payments expense 399 250
Release of capital receipts (6) (130)
Operating profit/(loss) before working capital changes 3,659 (26,777)
Decrease in inventories 2,822 10,062
Decrease in trade and other receivables 408 2,309
(Decrease)/increase in trade and other payables (6,569) 2,917
(Decrease)/increase in provisions (13,235) 8,787
Cash used in operations (12,915) (2,702)
Interest paid (1,984) (3,087)
Tax (paid)/received (32) 144
Net cash used in operating activities (14,931) (5,645)
Cash flows from investing activities
Purchase of property, plant and equipment (5,352) (2,945)
Purchase of intangible assets (151) —
Proceeds from disposal of property, plant and equipment 326 —
Proceeds from disposal of intangible fixed assets 75 497
Degrouping of subsidiary undertaking, net overdrafts — 38
Interest received 41 569
Net cash used in investing activities (5,061) (1,841)
Cash flows from financing activities
Proceeds from issue of share capital (2011: net of issue costs of £1,757,000) 19,476 —
Dividends on shares classified as liabilities (89) (89)
Payment of finance lease liabilities (1,131) (1,118)
Net cash generated/(used) in financing activities 18,256 (1,207)
Net decrease in cash and cash equivalents (1,736) (8,693)
Cash and cash equivalents at the beginning of the year (12,633) (3,940)
Cash and cash equivalents at the end of the year 19 (14,369) (12,633) 00 00 www.blacks.co.uk www.millets.co.uk 36
Blacks Leisure Group plc Annual Report and Accounts 2011
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Share Share Reserve for Warrants Hedging Retained
capital premium own shares reserve reserve earnings Total equity
£’000 £’000 £’000 £’000 £’000 £’000 £’000
At 1 March 2009 21,319 24,333 (773) — 904 23,188 68,971
Gains relating to designated
cash flow hedges — — — — 720 — 720
Tax on items taken directly to
equity relating to cash flow hedges — — — — (202) — (202)
Transferred to carrying amount of
hedged items on cash flow hedges — — — — (1,256) — (1,256)
Tax on items transferred from equity — — — — 352 — 352
Other comprehensive expense
for the year — — — — (386) — (386)
Loss for the year — — — — — (49,432) (49,432)
Total comprehensive expense
for the year — — — — (386) (49,432) (49,818)
Accrued equity-settled
share-based payments — — — 1,032 — 250 1,282
Transfer to retained earnings in
relation to share-based payments — — — (1,032) — 1,032 —
At 27 February 2010 21,319 24,333 (773) — 518 (24,962) 20,435
At 28 February 2010 21,319 24,333 (773) — 518 (24,962) 20,435
Losses relating to designated
cash flow hedges — — — — (221) — (221)
Tax on items taken directly to
equity relating to cash flow hedges — — — — 60 — 60
Transferred to carrying amount of
hedged items on cash flow hedges — — — — (720) — (720)
Tax on items transferred from equity — — — — 202 — 202
Exchange differences on
translation of foreign operations — — — — — (155) (155)
Other comprehensive expense
for the year — — — — (679) (155) (834)
Loss for the year — — — — — (5,488) (5,488)
Total comprehensive expense
for the year — — — — (679) (5,643) (6,322)
Issue of share capital 414 19,062 — — — — 19,476
Accrued equity-settled
share-based payments — — — — — 399 399
At 26 February 2011 21,733 43,395 (773) — (161) (30,206) 33,988
Consolidated Statement of Changes in Equity
for the year ended 26 February 2011 00 00 37
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Notes to the Financial Statements
for the year ended 26 February 2011
1 General information
Blacks Leisure Group plc is a Company incorporated in England and Wales with registered number 582190. The address of the
registered office is 440-450 Cob Drive, Swan Valley, Northampton, NN4 9BB. The nature of the Group’s operations and its principal
activities are set out in the Chairman’s Statement, the Chief Executive’s Review, the Financial Review and the Directors’ Report and
Business Review.
New accounting standards
The following new accounting standards were adopted in the year. The adoption of these standards has not had a material impact
upon the Group.
h IFRS3 Revised — Business Combinations (effective for annual periods beginning on or after 1 July 2009);
h IAS27 Amendment — Consolidated and separate financial statements (effective for annual periods beginning on or
after 1 July 2009);
h IAS39 Amendment — Financial instruments: Eligible hedged items (effective for annual periods beginning on or after
1 July 2009);
h IFRIC17 Distributions of non-cash assets to owners (effective for annual periods beginning on or after 1 July 2009);
h IFRIC18 Transfer of assets from customers (effective for annual periods beginning on or after 1 July 2009);
Improvements to IFRSs (2009)
Amendments to various standards (generally effective for annual periods beginning on or after 1 January 2010);
h IFRS2 Amendment — IFRS2 Group cash-settled share-based payment transactions (effective for annual periods
beginning on or after 1 January 2010); and
h IAS32 Amendment — Classification of rights issues (effective for annual periods beginning on or after 1 February 2010).
As at the date of authorisation of these financial statements, the following standards and interpretations, issued by the International
Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC), have not yet been
adopted by the Group. Those indicated with an asterisk have not yet been endorsed for use in the EU.
h IFRIC19 Extinguishing financial liabilities with equity instruments (effective for annual periods beginning on or after
1 July 2010);
h IAS24 Revised — Related party disclosures (effective for annual periods beginning on or after 1 January 2011);
h IFRIC14 Amendment — IFRIC14 and IAS19 — Limit on a defined benefit asset, minimum funding requirements and their
interaction (effective for annual periods beginning on or after 1 January 2011);
Improvements to IFRSs (2010)
Amendments to various standards (generally effective for annual periods beginning on or after 1 January 2011);
h IFRS7* Amendment — Disclosures — Transfers of financial assets (effective for annual periods beginning on or after
1 July 2011);
h IAS12* Amendment — Deferred tax: recovery of underlying assets (effective for annual periods beginning on or after
1 January 2012); and
h IFRS9* Amendment — Financial instruments (effective for annual periods beginning on or after 1 January 2013).
The Group does not anticipate that the adoption of these standards or interpretations will have a material impact on the
consolidated results or financial position of the Group.
2 Accounting policies
Basis of preparation
The consolidated financial statements for the 52 weeks ended 26 February 2011 have been prepared in accordance with the
accounting policies and presentation required by International Financial Reporting Standards, incorporating International Accounting
Standards (IAS) and Interpretations (collectively IFRS), as endorsed by the European Union, and therefore comply with Article 4 of
the EU IAS Regulation.
The consolidated financial statements have been prepared on a historical cost basis except for derivative financial instruments and
equity-settled share-based payments that have been measured at fair value. The consolidated financial statements are presented in
pounds sterling and all values are rounded to the nearest thousand except when otherwise indicated.
The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and
assumptions that affect the reported amount of assets and liabilities at the balance sheet date and the reported amounts of revenues
and expenses during the reporting year. These key estimates and assumptions are set out in note 3. Although these estimates are
based on management’s best knowledge of the amount, events or actions, actual results may differ from those estimates. 00 00 www.blacks.co.uk www.millets.co.uk 38
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2 Accounting policies - continued
The principal accounting policies adopted are set out below.
Basis of consolidation
The consolidated financial statements incorporate the accounts of the Company and its subsidiaries as if they formed a single entity
(‘the Group’). Intercompany transactions, balances, income and expenses between consolidated Group companies are therefore
eliminated in full on consolidation. Subsidiaries are included in the consolidation up to the date at which they cease to be controlled
by the Group, either by way of sale or other means.
Intangible assets
Goodwill
Goodwill arising on acquisition is capitalised and represents the excess of the fair value of consideration over the Group’s interest in the
fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary at the date of acquisition. Goodwill is reviewed for
impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
Goodwill arising before the transition to IFRS has been retained at the previous UK GAAP amount subject to being tested for
impairment at that date.
Internally generated intangible assets
An internally generated intangible asset arising from the Group’s development (from the development phase of an internal project)
shall be recognised if, and only if, all the conditions below, from IAS38, can be demonstrated:
h the technical feasibility of completing the intangible asset so that it will be available for use or sale;
h the intention to complete the intangible asset and use or sell it;
h the ability to use or sell the intangible asset;
h how the intangible asset will generate probable future economic benefits. Amongst other things, the Group must demonstrate
the existence of a market for the output of the intangible asset itself or, if it is to be used internally, the usefulness of the
intangible asset;
h the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible
asset; and
h the ability to measure reliably the expenditure attributable to the intangible asset during its development.
Internally generated intangible assets are amortised on a straight-line basis over their useful lives of three years. Where no asset can
be recognised, expenditure is recognised as an expense in the period in which it occurred.
Trademarks
Trademarks are measured initially at purchase cost and are amortised on a straight-line basis over their estimated useful lives of
between five and ten years.
Website development costs
Website development costs are accounted for as intangible assets where the criteria of IAS38 have been met. Intangible assets
are valued at cost and are amortised on a straight-line basis over three years unless the asset can be demonstrated to have an
indefinite life. Intangible assets with finite lives are reviewed for impairment if there is any indication that the carrying value may not
be recoverable. Intangible assets with an indefinite useful life are tested for impairment annually.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any provision for impairment in value.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:
h freehold land is not depreciated;
h freehold buildings are depreciated to their estimated residual values over periods up to fifty years;
h leasehold improvements are depreciated to their estimated residual values over the period of the associated lease or over the
asset life if shorter;
h fixtures and equipment are depreciated over four to fifteen years; and
h motor vehicles are depreciated over four to six years.
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 39
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2 Accounting policies - continued
The carrying values of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate
that their carrying value may not be recoverable. Any impairment in the value of property, plant and equipment is charged to the
statement of comprehensive income.
Profits and losses on disposal of property, plant and equipment, which reflect the difference between net selling price and the
carrying amount at the date of disposal, are recognised in the statement of comprehensive income.
Impairment of non-financial assets
The carrying values of assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If
any such indication exists, the recoverable amount of the asset is estimated. Where the asset does not generate cash flows which
are independent from other assets, the recoverable amount of the cash-generating unit to which the asset belongs is estimated.
The recoverable amount of a non-financial asset is the higher of its fair value less costs to sell and its value-in-use. Value-in-use is
the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
An impairment loss is recognised in the statement of comprehensive income whenever the carrying amount of an asset or cash-
generating unit exceeds its recoverable amount.
Goodwill is tested for impairment annually and whenever there is an indication that the asset may be impaired. Any impairment
recognised on goodwill is not reversed.
Inventories
Inventories are stated at the lower of cost and net realisable value. The cost includes all costs in bringing each product into the
business. Inventories are valued on a weighted average basis and this is not deemed to be materially different to that which would
be calculated on a ‘first in, first out’ basis. Net realisable value is defined as the estimated selling price less any direct costs of
disposal. Provision is made for obsolete, slow-moving or damaged items where appropriate.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event; it is probable
that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the
obligation.
Provisions for onerous leases are recognised for the expected lease or lease related payments that the Group will incur prior to any
assignment, sub-lease or lease expiry plus any additional costs in relation to the disposal of or exit from the lease.
Minimal structural adaptations are generally made to properties during the lease term and they are kept in a good state of repair
with general ongoing maintenance costs, including amounts to ‘make good’ wear and tear, being charged to the statement of
comprehensive income as incurred. Dilapidations costs may however be incurred towards the end of a lease for remedial works
required to bring a leased property back into the same condition as when the lease commenced. Provisions are recognised for
dilapidations when the likelihood of an outflow of economic benefits relating to amounts expected to be payable under a legal
obligation in a lease becomes more likely than not and a reliable estimate of the provision can be made. At each period end, the
Group calculates its best estimate of the expenditure it expects to incur and revises its provisions, discounting where the effect is
material. The provision is made for the likely cost of such works or a settlement with the landlord and may be determined based
upon the Directors’ own assessment or by reference to the serving of a dilapidations schedule by the landlord.
Provisions for CVA related rates obligations are recognised for all ongoing rates liabilities in respect of properties vacated under the
terms of the CVAs in the prior financial year. The provision is calculated as set out in note 3.
Foreign currency
Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they
operate (their ‘functional currency’) are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets
and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled
monetary assets and liabilities are recognised immediately in the statement of comprehensive income, except for foreign currency
borrowings qualifying as a hedge of a net investment in a foreign operation, in which case exchange differences are recognised in
other comprehensive income and accumulated in reserves. 00 00 www.blacks.co.uk www.millets.co.uk 40
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2 Accounting policies - continued
When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain
or loss shall be recognised in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised
in the statement of comprehensive income, any exchange component of that gain or loss shall be recognised in the statement of
comprehensive income.
On consolidation, the results of overseas operations are translated into sterling at rates approximating to those ruling when the
transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those
operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net
assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and
accumulated in the foreign exchange reserve.
Exchange differences recognised in the statement of comprehensive income of Group entities’ separate financial statements on
the translation of long-term monetary items forming part of the Group’s net investment in the overseas operation concerned are
reclassified to the foreign exchange reserve on consolidation.
On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that
operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or
loss on disposal.
Revenue recognition
Revenue represents goods sold to external customers, net of value added tax and less an allowance for expected returns. The
revenue arises from the sale of Outdoor and Boardwear clothing, footwear and equipment. Revenue is recognised in the statement
of comprehensive income when the significant risks and rewards of ownership have been transferred. This is generally deemed to
be at the point-of-sale for in-store sales or at the time of delivery to the end customer in the case of internet sales. Revenue from
gift vouchers and gift cards sold by the Group is only recognised upon the redemption of the gift voucher or gift card against the
purchase of goods.
Leases
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. All
other leases are classified as finance leases. Rental payments in respect of operating leases are charged against operating profit on
a straight-line basis over the period of the lease. Lease incentives are also credited over the lease term on a straight-line basis.
Assets used by the Group which have been funded through finance leases are capitalised in property, plant and equipment and the
resulting lease obligations are included in payables. The associated assets are depreciated over their useful lives and the interest
element of the rental obligations is charged to the statement of comprehensive income over the period of the lease and represents a
constant proportion of the balance of capital repayments outstanding.
Capital receipts
Capital receipts are a form of lease inducement received in cash which are credited to operating profit on a straight-line basis over
the full term of the lease.
Exceptional items
These are material items which derive from events or transactions that fall within the ordinary activities of the Group but are not
directly related to the delivery of the Group’s products to its customers and which individually or, if of a similar type, in aggregate,
merit separate presentation by virtue of their size or incidence to allow Shareholders to understand better the elements of financial
performance in the year, to facilitate comparison with prior periods and to assess underlying trends in financial performance. These
items are usually derived from one-off events or a change in assumptions made in critical accounting estimates and judgements.
Pensions and other post-employment benefits
The Group operates defined contribution schemes. The assets of the schemes are held separately from those of the relevant
companies.
Contributions to the defined contribution schemes are charged to the statement of comprehensive income in the year in which they
become payable.
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 41
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2 Accounting policies - continued
Equity-settled share-based payment transactions
Certain employees and Directors of the Group receive equity-settled remuneration in the form of equity-settled share-based payment
transactions, whereby employees render services in exchange for shares or rights over shares. The cost of equity-settled transactions
with employees is measured by reference to the fair value, determined using the Black–Scholes option pricing model, the Monte
Carlo model or the Binomial model as appropriate, at the date at which they are granted. The cost of equity-settled transactions
is recognised, together with a corresponding increase in equity, over the period in which the non-market vesting conditions are
expected to be fulfilled, ending on the relevant vesting date. The cumulative expense recognised for equity-settled transactions at
each reporting date until the vesting date reflects the extent to which the vesting period has expired and is adjusted to reflect the
Directors’ best available estimate of the number of equity instruments that will ultimately vest based upon non-market conditions.
Where the terms and conditions of options are modified before they vest, the movement in the fair value of the options, measured
immediately before and after the modification, is also charged to the statement of comprehensive income over the remaining vesting
period. New share options issued are treated as a replacement where, amongst other things, the new share options are with the
same participants as the cancelled options, the new share options are issued at a fair value that is broadly consistent with the fair
value of the cancelled options determined at the cancellation date, the issue and cancellation of the options are part of the same
arrangement (and each will only take place upon the occurrence of the other) and the commercial substance of the cancellation of
the options is that they are replaced by the issue of the new options.
The Group has taken advantage of the transitional provisions of IFRS2 in respect of equity-settled awards and has applied IFRS2
only to equity-settled awards granted after 7 November 2002 that had not vested before 1 January 2005.
Shares held by Blacks Leisure Group Employee Benefit Trusts
The Blacks Leisure Group Employee Benefit Trusts provide for the issue of shares to Group employees under certain of the share
option schemes. Shares in the Company held by such trusts are included in the balance sheet, under ‘Reserve for own shares’, at
cost as a deduction from equity.
Tax
The tax charge represents both the income tax payable, based on profits for the year, and deferred tax. Deferred tax is recognised in
full in respect of all temporary differences between the tax base of the Group’s assets and liabilities and their carrying amounts that
have originated but not been reversed by the balance sheet date. No deferred tax is recognised if the temporary difference arises
from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss. Deferred tax is recognised in respect of taxable temporary
differences associated with investments in subsidiaries except where the timing of the reversal of the temporary differences can be
controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the deductible
temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and
reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax
asset to be utilised in the near future.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or
the liability is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date.
Tax relating to items recognised directly in equity is itself recognised in equity and not in the statement of comprehensive income.
Financial instruments
Trade and other receivables
Trade receivables are recognised and carried at original invoice value less an allowance for any expected uncollectable amounts. An
estimate for doubtful debts is made when objective evidence of an impairment exists. Bad debts are written off when identified.
Cash and cash equivalents
Cash and short-term deposits recorded on the balance sheet comprise cash at bank and in hand and short-term deposits with
an original maturity of three months or less. For the purposes of the consolidated cash flow statement, cash and cash equivalents
consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. 00 00 www.blacks.co.uk www.millets.co.uk 42
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2 Accounting policies - continued
Other financial liabilities
Trade payables are recognised and carried at original invoice cost and are a short-term liability of the Group.
Preference Shares are recognised at the amount advanced where this represents fair value. Preference Shares are subsequently
accounted for at amortised cost.
Derivative financial instruments and hedge accounting
Derivative financial instruments used by the Group are stated at fair value. Hedges are classified as either fair value hedges when
they hedge the exposure to changes in the fair value of a recognised asset or liability, or cash flow hedges where they hedge
exposure to variability in cash flows that are either attributable to a particular risk associated with a recognised asset or liability or a
forecast transaction.
Gains or losses from remeasuring fair value hedges, which meet the conditions for hedge accounting, are recorded in the statement
of comprehensive income, together with the corresponding changes in the fair value of the hedged instruments attributable to the
hedged risk.
The portion of any gains or losses of cash flow hedges which meet the conditions for hedge accounting and are determined to be
effective hedges are recognised directly in equity. The gains or losses relating to the ineffective portion are recognised immediately in
the statement of comprehensive income.
When the hedged firm commitment results in the recognition of an asset or a liability then, at the time the asset or liability is
recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of
the acquisition cost or other carrying amount of the non-financial asset or liability. For all other cash flow hedges, the gains or losses
that are recognised in equity are transferred to the statement of comprehensive income in the same year in which the hedged firm
commitment affects the net results.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies
for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in
equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss
recognised in equity is transferred to the statement of comprehensive income.
For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are recognised
immediately in the statement of comprehensive income.
De-recognition of financial liabilities
Where the terms of an existing financial liability that is carried at amortised cost are renegotiated, the accounting will be determined by
the extent to which the terms of the original liability have been modified. The modified terms are deemed to be substantially different if
there has been either a substantial qualitative change in the loan terms or if the net present value of the cash flows under the modified
terms of the liability (including any fees paid and received) is at least 10% different from the net present value of the remaining cash
flows of the liability prior to the modification, both discounted at the original effective interest rate of the original liability.
If the cash flows and other terms are not substantially different, the original liability continues to be recognised and the difference
between the amortised cost of the debt instrument at the date of the modification and the present value of the new debt instrument,
discounted by the original effective interest rate, is recognised in the statement of comprehensive income in future periods through
the revised effective interest rate.
Where either the cash flow or other terms are substantially different, the exchange with the lender is accounted for as an
extinguishment of the original liability and the recognition of a new liability. Any costs or fees incurred are recognised as part of the
gain or loss on that extinguishment and do not adjust the carrying amount of the new liability.
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 43
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3 Critical accounting estimates and judgements
The preparation of consolidated financial statements under IFRS requires the Group to make estimates and assumptions that affect
the application of policies and reported amounts. Estimates and judgements are continually evaluated and are based on historical
experience and other factors including expectations of future events that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material
adjustment to the carrying amount of assets and liabilities are outlined below.
Impairment of goodwill
The Group is required to test, at least annually, whether goodwill has suffered any impairment. The recoverable amount is
determined based on value-in-use calculations. The use of this method requires the estimation of future cash flows and the choice
of a suitable discount rate in order to calculate the present value of these cash flows. Actual outcomes could vary.
Impairment of property, plant and equipment
Property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying amount
may not be recoverable. When a review for impairment is conducted, the recoverable amount is determined based on value-in-use
calculations prepared on the basis of management’s assumptions and estimates.
Depreciation of property, plant and equipment
Depreciation is provided so as to write down the assets to their residual values over their estimated useful lives as set out in note 2.
The selection of these estimated lives requires the exercise of management judgement.
Inventory valuation
Inventories are valued at the lower of weighted average cost and net realisable value. Net realisable value includes, where necessary,
provisions for slow-moving and damaged stocks. The provision represents the difference between the cost of stock and its
estimated recoverable value, based on ageing. Calculation of these provisions requires judgements to be made, which include
forecast consumer demand, the promotional, competitive and economic environment, and inventory loss trends.
Equity-settled share-based payments
The charge for equity-settled share-based payments is calculated in accordance with estimates and assumptions which are
described in note 29. The option valuation models used require highly subjective assumptions to be made including the future
volatility of the Company’s share price, expected dividend yields, risk-free interest rates and expected staff turnover. The Directors
draw upon a variety of external sources to aid them in the determination of the appropriate data to use in such calculations.
The option pricing models used are the Black–Scholes option pricing model, the Monte Carlo model and the Binomial model. These
are chosen to reflect the nature of the specific share schemes.
During the vesting period of the share options, an assessment is required of the likelihood of whether non-market performance
conditions will be met, which affects the estimate of the number of share options that will vest and hence the amount charged to the
statement of comprehensive income.
Provisions for onerous leases
If the Group vacates or plans to vacate a store or other property prior to the expiry of the related lease, it records a provision for the
expected lease or lease related payments that the Group will incur prior to any assignment or sub-lease of the property plus any
inducement that may be required, and for any expected shortfall in amounts that are anticipated to be receivable from a sub-lease.
Such a calculation requires a judgement as to the timing and duration of the expected vacancy periods and the amount and timing
of future potential sub-lease income. When making these judgements, the Directors consider a number of factors, including the
landlord, the location and condition of the property, the terms of the lease, the specific local marketplace demand and the economic
environment.
00 00 www.blacks.co.uk www.millets.co.uk 44
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Provisions for rates obligations
In line with the terms of the CVAs, the Group has a legal commitment to pay business rates on properties that it vacated under these
arrangements up until such a time as the landlord is able to re-let the site. Provision is made for the expected discounted value of
this obligation. Such a calculation requires a judgement as to the duration of the expected vacancy period. When making these
judgements the Directors consider a number of factors, including the rental value, the location and condition of the property, the
terms of the lease, the specific local marketplace demand and the economic environment.
Dilapidations
The requirement for dilapidation provisions is assessed by management on an ongoing basis following property reviews using all
the information available. Typically, dilapidation provisions are not required in the early years of a lease but may be necessary later,
when a probable outflow of economic benefits can be identified and that outflow can be reliably estimated. This may occur when the
lease is shortly due for renewal, where the Group has no intention to renew the lease or where the Group has an indication that the
landlord will not be renewing the lease. A provision will be recognised earlier if the Directors consider an obligation to have arisen.
Exceptional items
Further details on matters considered critical in relation to items presented as exceptional are given above and in note 8.
4 Revenue and other operating income
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000
Sale of goods 201,933 201,933 240,517 8,531 249,048
Other operating income 899 899 1,109 — 1,109
Other operating income consists mainly of sub-let property income.
5 Segment information
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.
The chief operating decision maker has been identified as the Board of Directors, as a collective.
The Group’s two core areas of operation are described as below:
Operation Nature of operation
Outdoor Retail of Outdoor clothing, footwear and equipment
Boardwear Retail of Boardwear clothing, footwear and equipment
Inter-segment sales between business segments are entered into on an arm’s length basis in a manner similar to transactions with
third parties.
The segmental analysis is presented including both continuing and discontinued operations. Results in the prior year which arose from
discontinued operations, which are summarised in note 35, are included within the Boardwear segment in the comparative period.
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 45
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5 Segment information - continued
Continuing Continuing
operations Total operations Total
2011 2011 2010 2010
OUTDOOR £’000 £’000 £’000 £’000
Revenue
Total revenue 194,792 194,792 223,412 223,412
Sales to external customers 194,792 194,792 223,412 223,412
Profit
Segment loss (188) (188) (6,218) (6,218)
Exceptional items:
— Impairment of property, plant and equipment (433) (433) (5,879) (5,879)
— Other exceptional operating items 3,977 3,977 (9,860) (9,860)
Operating profit/(loss) 3,356 3,356 (21,957) (21,957)
Assets and liabilities
Segment assets 94,629 94,629 96,959 96,959
Segment liabilities (44,084) (44,084) (59,024) (59,024)
Total net assets 50,545 50,545 37,935 37,935
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
BOARDWEAR £’000 £’000 £’000 £’000 £’000
Revenue
Total revenue 7,141 7,141 17,105 10,616 27,721
Inter-segment sales — — — (2,085) (2,085)
Sales to external customers 7,141 7,141 17,105 8,531 25,636
Profit
Segment loss (1,911) (1,911) (3,697) (2,601) (6,298)
Inter-segment profit on stock — — — 312 312
Exceptional items:
— Impairment of property, plant and equipment (392) (392) (450) (798) (1,248)
— Other exceptional operating items (1,222) (1,222) (3,119) (159) (3,278)
Operating loss (3,525) (3,525) (7,266) (3,246) (10,512)
Assets and liabilities
Segment assets 1,360 1,360 4,124 — 4,124
Segment liabilities (2,947) (2,947) (7,334) — (7,334)
Total net liabilities (1,587) (1,587) (3,210) — (3,210) 00 00 www.blacks.co.uk www.millets.co.uk 46
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Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
UNALLOCATED £’000 £’000 £’000 £’000 £’000
Profit
Segment loss (1,715) (1,715) (2,122) — (2,122)
Exceptional items:
— Other exceptional operating items (609) (609) (6,851) — (6,851)
Operating loss (2,324) (2,324) (8,973) — (8,973)
Net finance costs
(2010: including exceptional finance charges) (2,766) (2,766) (5,377) (122) (5,499)
Loss before tax (5,090) (5,090) (14,350) (122) (14,472)
Tax expense (229) (229) (2,486) (5) (2,491)
Loss for the financial year (5,319) (5,319) (16,836) (127) (16,963)
Assets and liabilities
Segment assets 1,654 1,654 1,443 — 1,443
Segment liabilities (16,624) (16,624) (15,733) — (15,733)
Total net liabilities (14,970) (14,970) (14,290) — (14,290)
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
GROUP £’000 £’000 £’000 £’000 £’000
Revenue
Total revenue 201,933 201,933 240,517 10,616 251,133
Inter-segment sales — — — (2,085) (2,085)
Sales to external customers 201,933 201,933 240,517 8,531 249,048
Profit
Segment loss (3,814) (3,814) (12,037) (2,601) (14,638)
Inter-segment profit on stock — — — 312 312
Exceptional items:
— Impairment of property, plant and equipment (825) (825) (6,329) (798) (7,127)
— Other exceptional operating items 2,146 2,146 (19,830) (159) (19,989)
Operating loss (2,493) (2,493) (38,196) (3,246) (41,442)
Net finance costs
(2010: including exceptional finance charges) (2,766) (2,766) (5,377) (122) (5,499)
Loss before tax (5,259) (5,259) (43,573) (3,368) (46,941)
Tax expense (229) (229) (2,486) (5) (2,491)
Loss for the financial year (5,488) (5,488) (46,059) (3,373) (49,432)
Assets and liabilities
Segment assets 97,643 97,643 102,526 — 102,526
Segment liabilities (63,655) (63,655) (82,091) — (82,091)
Total net assets 33,988 33,988 20,435 — 20,435
Notes to the Financial Statements
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6 Operating loss
Operating loss has been arrived at after charging/(crediting):
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000
Employee benefits expense (note 7) 39,091 39,091 47,187 989 48,176
Net foreign exchange gains (485) (485) (1,233) — (1,233)
Cost of inventories recognised as an expense 97,864 97,864 113,541 6,271 119,812
Write-downs of inventories recognised as an expense 6,190 6,190 4,132 — 4,132
Depreciation of property, plant and equipment:
— Owned 4,456 4,456 5,108 157 5,265
— Leased 680 680 680 — 680
Impairment of property, plant and equipment 825 825 6,329 798 7,127
(Profit)/loss on disposal of property, plant and
equipment (201) (201) 1,050 — 1,050
Amortisation of intangible assets (note 15) 7 7 210 — 210
Loss on disposal of other intangible assets — — 54 — 54
Operating lease expense:
— Plant and equipment 349 349 443 11 454
— Property (2010: excluding post closure costs
charged as exceptional items) 28,235 28,235 36,115 1,580 37,695
Auditors’ fees
Fees payable to the Company’s Auditors for the audit
of the Company’s annual accounts 54 54
Fees payable in relation to the audit of the
Company’s subsidiaries 77 81
Other services relating to tax 75 57
Other advisory and regulatory services 163 392
Total 369 584
7 Employee benefits expense
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000
Wages and salaries 36,043 36,043 43,503 922 44,425
Social security costs 2,372 2,372 3,038 67 3,105
Pension costs (note 29) 277 277 396 — 396
38,692 38,692 46,937 989 47,926
Equity-settled share-based payments expense
(note 29) 399 399 250 — 250
Total 39,091 39,091 47,187 989 48,176 00 00 www.blacks.co.uk www.millets.co.uk 48
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7 Employee benefits expense - continued
The average number of employees in the various business sectors, including Directors, was as follows:
2011 2010
Full-time Part-time Full-time Part-time
Outdoor 1,035 2,740 1,224 3,019
Boardwear 34 68 98 190
Central services 6 2 3 2
Total 1,075 2,810 1,325 3,211
2011 2010
Number Number
Full-time
— Management and administration 128 152
— Selling and distribution 947 1,173
Part-time 2,810 3,211
Total 3,885 4,536
8 Exceptional operating items
The Group has recorded a net exceptional operating credit in relation to continuing operations in the year of £1,321,000 (2010:
£26,159,000 net charge) as set out below:
2011 2010
£’000 £’000
CVA related rates obligations (5,376) 10,755
Restructuring and impairment costs 4,337 6,329
Other CVA related items — 18,420
Release of onerous lease provision — (10,153)
Professional fees 243 808
Proceeds from Sandcity administration (525) —
Total net (credit)/charge (1,321) 26,159
Year ended 27 February 2010
In anticipation of the CVAs, the carrying value of property, plant and equipment at the closing stores was impaired in full to the
extent that they would not be utilised elsewhere within the Group. This resulted in a charge in the period of £7,127,000, of which
£6,329,000 as presented above related to continuing operations. Under the terms of the CVAs, whilst certain property rentals were
passed back to landlords, the Group remained liable for certain property related obligations. Landlords of such properties were able
to claim during May and July 2010 against a compromise fund, capped at £7,250,000, which approximated to around 6 months
of rent. This was provided for in the year to 27 February 2010 and was subsequently settled in cash during the year to 26 February
2011. Further, the Group remained liable for business rates on these properties until such a time as the landlord was able to re-let
them. This resulted in a provision of £10,755,000 being created, reflecting the Directors’ best estimate at 27 February 2010 of the
likely value of this obligation.
The complex nature of the CVAs and related refinancing of the business resulted in significant levels of professional fees being
incurred or, in the case of the administering of the CVA compromise fund, being provided for. The total professional fees of
£5,930,000 were presented as exceptional operating items in respect of this.
The CVAs resulted in the closure of 88 retail stores. Costs directly associated with this included the costs of redundancies, clearing
of the premises and a write-off of certain stocks. These store closure costs totalled £3,458,000 and were presented as exceptional
operating items.
Notes to the Financial Statements
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8 Exceptional operating items - continued
Further costs in connection with the CVAs, which totalled £1,782,000, were also presented as exceptional operating items. These
included the write off of rent, rates and other prepayments (relating to the period post closure), and other store costs relating to the
period since the stores ceased trading.
As a result of the CVAs, the properties against which onerous lease provisions had previously been made were passed back to
the landlords and, accordingly, the onerous lease provision held as at that time of £10,153,000 was released and credited to
the statement of comprehensive income. Owing to the unusual nature and significant value, this, and other CVA related costs as
described below, were presented on the face of the statement of comprehensive income as exceptional items within the operating
result.
A general meeting to approve a Placing and Open Offer of Ordinary Shares was adjourned indefinitely on 24 February 2010 and
accordingly, professional fees in connection with this transaction were expensed in full at the year end, resulting in an exceptional
charge of £808,000. A new Firm Placing and Open Offer was subsequently successful in the year to 26 February 2011 and the
direct costs of which were included within share premium. The previously charged costs of £808,000 were not reversed to share
premium given they arose from a separate and aborted share issue.
Year ended 26 February 2011
As described above, a charge was recorded during the year to 27 February 2010 relating to a provision in respect of ongoing rates
obligations at properties which were closed during October and November 2009 under the CVAs. Whilst the Group was no longer
liable for rent in respect of these leases, it remained obligated to pay business rates until such a time as the landlord is able to re-let
the site. The provision at 27 February 2010 was calculated based on a store-by-store review of the expected period to re-let which
included seeking and considering advice from third parties where appropriate. The Board considers that the provision recognised at
that date was robust in that its estimation was the result of a detailed exercise that took into account all significant known factors,
including the economic environment, that were relevant at that time. During the year, the Group has been assisting landlords in
finding new tenants for these properties and the sites have been able to be re-let more quickly than had been anticipated when the
provision was initially determined. Indeed, at the end of the financial year, only 38 of the initial 101 leases remain with the Group. The
provision has therefore been reassessed and, accordingly, an amount of £5,376,000 has been released from the provision at
26 February 2011 and is recorded within exceptional operating items.
The Directors have commenced a plan to restructure certain operations, including a plan to exit fully from the Boardwear segment
during the coming months. Provisions in relation to this have only been made within these financial statements to the extent that
the criteria of IAS37 and other relevant accounting standards have been met. The exceptional charge of £4,337,000 during the year
in respect of this restructuring includes the following items; redundancy costs of £395,000 relating mainly to head office functions
where IAS37 criteria had been met, a provision of £1,107,000 for onerous lease obligations at three properties, impairment of
property, plant and equipment of £825,000, dilapidations costs of £305,000 and provisions against the carrying values of specific
Boardwear inventories of £1,705,000. Given the restructuring plan for the exit from Boardwear was not fully committed at the end
of the financial year, in the context of IAS37 recognition criteria, provision for further costs of this exit, such as redundancy and costs
of exiting leases, has not been included within these financial statements. Given the significant value of these charges, and their
nature being strategic and one-off rather than incurred in the normal course of business, these have been presented as exceptional
operating items within the statement of comprehensive income.
The Company announced on 19 October 2010 that it had been approached by several parties regarding a possible offer for the
Company or an offer to acquire certain of the trading activities and related assets of the Group. A number of indicative proposals
were received and, whilst the Board announced on 26 January 2011 that these discussions had been terminated, professional fees
were necessarily incurred relating to this process. These costs, which amount to £243,000, have been presented as exceptional
operating charges as above.
During the year, the Company has received an amount of £25,000 as part proceeds from the administration of Sandcity Limited,
a former wholly-owned subsidiary which formerly traded within the Boardwear segment and was placed into administration on
23 September 2009. All intercompany and other receivables relating to Sandcity Limited were provided for in full at 27 February
2010 as part of the loss recorded on the deconsolidation of that company, reflecting the uncertainty over any recovery. Further to
this, and based on discussions with the administrators of that company, the Directors have accrued at the year end an additional
amount of £500,000 of proceeds from this administration, reflecting the further minimum amount which they believe they can
confidently and reasonably expect to receive over the coming period. 00 00 www.blacks.co.uk www.millets.co.uk 50
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9 Finance income and costs
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000
Bank loans and overdrafts 1,935 1,935 5,051 122 5,173
Interest on obligations under finance leases 87 87 164 — 164
Unwinding of discount on provisions 720 720 642 — 642
Dividend on Preference Shares 89 89 89 — 89
Total finance cost 2,831 2,831 5,946 122 6,068
Bank interest receivable (41) (41) (569) — (569)
Unwinding of discount on deferred receivables (24) (24) — — —
Total finance income (65) (65) (569) — (569)
Net finance cost 2,766 2,766 5,377 122 5,499
Finance costs on bank loans and overdrafts in the prior period included £3,032,000 which related to the value of bank fees and
warrants upon the agreement of a new banking facility as part of the CVAs. These were presented in the prior year as exceptional
charges, within finance costs.
10 Tax expense
A reconciliation of tax expense, recognised in the consolidated statement of comprehensive income, applicable to loss before tax at
the statutory tax rate to the tax expense at the Group’s effective tax rate for the year was as follows:
2011 2010
£’000 £’000
Loss before tax from continuing operations (5,259) (43,573)
Loss before tax from discontinued operations — (3,368)
Loss before tax (5,259) (46,941)
Tax at current UK tax rate of 28% (2010: 28%) (1,473) (13,143)
Permanent differences 137 4,792
Provision not allowable for tax purposes — (2,321)
Depreciation in excess of capital allowances 1,247 3,096
Other temporary differences 1 8
Tax losses 126 7,568
Total current tax 38 —
Deferred tax
Relating to origination and reversal of temporary differences 191 2,491
Total tax expense 229 2,491
Tax relating to Sandcity Limited (discontinued operation, see note 35) — (5)
Tax expense in respect of continuing operations 229 2,486
Notes to the Financial Statements
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10 Tax expense - continued
Tax on each component of other comprehensive income is as follows:
2011 2010
£’000 £’000
Current tax
Current tax — —
Total current tax — —
Deferred tax
Tax on items transferred from equity relating to cash flow hedges 60 (202)
Tax on items taken directly to equity relating to cash flow hedges 202 352
Total deferred tax 262 150
Total income tax recognised directly in other comprehensive income 262 150
Deferred tax asset
The deferred tax asset relates to the following:
Consolidated Consolidated statement of
balance sheet comprehensive income
2011 2010 2011 2010
£’000 £’000 £’000 £’000
Short-term temporary differences 425 616 191 2,491
Revaluations of foreign exchange contracts
(cash flow hedges) to fair value 60 (202)
Net deferred tax asset 485 414
Deferred tax expense 191 2,491
The movement in the deferred tax asset is analysed as follows:
£’000
Deferred tax asset at 27 February 2010 414
Charged to the consolidated statement of comprehensive income (191)
Movement charged directly to equity in respect of foreign currency forward contracts 262
Deferred tax asset at 26 February 2011 485
The Group has capital losses arising in the UK of £6,640,000 (2010: £7,140,000) that are available indefinitely for offset against future
chargeable gains. Deferred tax assets have not been recognised in respect of these losses as they may not be used to offset taxable
trading profits elsewhere in the Group and they have arisen in subsidiaries that have been loss-making for some time.
Deferred tax on revaluations of foreign exchange contracts (cash flow hedges) to fair value is taken directly to equity.
The Directors expect to recover the recognised deferred tax asset over the foreseeable future. There are no other recognised
deferred tax assets or liabilities in the year (2010: £nil). Potential deferred tax assets in respect of tax losses, which at 26 February
2011 amount to approximately £33 million (2010: £32 million), have not been recognised. 00 00 www.blacks.co.uk www.millets.co.uk 52
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11 Loss per share
Basic loss per share is calculated by dividing the net loss for the year attributable to Ordinary Shareholders by the weighted average
number of Ordinary Shares in issue during the year.
Since the Group was loss-making in the current year there is no dilution effect of share options and warrants. The Group has
3,805,841 share options (2010: 3,982,140 and 2,131,905 warrants) over Ordinary Shares outstanding at the end of the year, that
may become dilutive.
2011 2010
Weighted average number of Ordinary Shares of 1p each for basic loss per share 83,706,441 42,293,525
Effect of dilution - share options (2010: and warrants) — —
Adjusted weighted average number of Ordinary Shares for diluted loss per share 83,706,441 42,293,525
Loss Loss per share
2011 2010 2011 2010
Continuing operations £’000 £’000 pence pence
Loss and basic loss per share (5,488) (46,059) (6.56) (108.90)
Exceptional items (1,321) 29,191 (1.58) 69.02
Tax expense/(credit) on exceptional items — 2,296 — 5.43
Loss and basic loss per share excluding exceptional items (6,809) (14,572) (8.14) (34.45)
Loss Loss per share
2011 2010 2011 2010
Discontinued operations £’000 £’000 pence pence
Loss and basic loss per share — (3,373) — (7.98)
Exceptional items — 957 — 2.26
Loss and basic loss per share excluding exceptional items — (2,416) — (5.72)
Loss Loss per share
2011 2010 2011 2010
Continuing and discontinued operations £’000 £’000 pence pence
Loss and basic loss per share (5,488) (49,432) (6.56) (116.88)
Exceptional items (1,321) 30,148 (1.58) 71.28
Tax (expense)/credit on exceptional items — 2,296 — 5.43
Loss and basic loss per share excluding exceptional items (6,809) (16,988) (8.14) (40.17)
The additional loss per share information is disclosed as the Board believes that loss per share excluding exceptional items better reflects
the underlying performance of the business and assists in providing a clearer view of the fundamental performance of the Group.
There have been no other transactions involving Ordinary Shares or potential Ordinary Shares since the reporting date and before the
completion of these financial statements.
12 Dividends paid and proposed
No dividends have been declared or paid on Ordinary Shares in respect of either the current or prior year.
Preference dividends are charged to the statement of comprehensive income as finance costs, as set out in note 9.
Notes to the Financial Statements
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13 Property, plant and equipment
Freehold land Leasehold Fixtures and Motor
and buildings improvements equipment vehicles T otal
£’000 £’000 £’000 £’000 £’000
At 1 March 2009, net of accumulated depreciation 1,300 2,620 28,616 20 32,556
Additions — (82) 3,027 — 2,945
Disposals (2,355) (3,852) (30,617) (66) (36,890)
Impairment losses — (1,172) (5,955) — (7,127)
Depreciation charge for the year (19) (1,090) (4,831) (5) (5,945)
Depreciation eliminated on disposal 2,355 3,794 29,625 66 35,840
Eliminated upon degrouping of subsidiary undertaking (1,281) — — — (1,281)
At 27 February 2010, net of accumulated depreciation — 218 19,865 15 20,098
At 28 February 2010, net of accumulated depreciation — 218 19,865 15 20,098
Additions — 335 5,017 — 5,352
Disposals — (1,943) (11,387) (53) (13,383)
Impairment losses — (2) (823) — (825)
Depreciation charge for the year — (230) (4,899) (7) (5,136)
Depreciation eliminated on disposal — 2,090 11,013 53 13,156
At 26 February 2011, net of accumulated depreciation — 468 18,786 8 19,262
At 1 March 2009
Cost 3,636 13,070 80,551 159 97,416
Accumulated depreciation (2,336) (10,450) (51,935) (139) (64,860)
Net carrying amount 1,300 2,620 28,616 20 32,556
At 27 February 2010
Cost — 9,136 52,961 93 62,190
Accumulated depreciation — (8,918) (33,096) (78) (42,092)
Net carrying amount — 218 19,865 15 20,098
At 26 February 2011
Cost — 2,777 51,342 40 54,159
Accumulated depreciation — (2,309) (32,556) (32) (34,897)
Net carrying amount — 468 18,786 8 19,262
Capital expenditure commitments for property, plant and equipment for which no provision has been made are £775,000
(2010: £981,000).
Impairment reviews of trading stores are based upon a value-in-use model being used to evaluate the expected future cash flows,
discounted at 12%, based on actual results in the past 12 months, versus their carrying values in order to determine where there
might be an indicator of impairment. Further, specific stores which are planned for closure are considered by the Directors for
impairment. The impairment charge recorded in the year amounted to £825,000 (2010: £7,127,000, of which £6,329,000 was in
respect of continuing operations). Impairment charges are presented in the consolidated statement of comprehensive income as
exceptional items within distribution costs (see note 8).
The net carrying amount includes the following assets held under hire purchase and finance leases (note 25):
2011 2010
£’000 £’000
Plant and equipment 3,392 4,072
Net carrying amount of assets held under hire purchase and finance leases 3,392 4,072 00 00 www.blacks.co.uk www.millets.co.uk 54
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14 Goodwill
Goodwill acquired through business combinations is allocated to cash-generating units (‘CGU’) identified according to business
segment.
The carrying amount of goodwill allocated by CGU is presented below:
Outdoor Boardwear
segment segment Total
Cost £’000 £’000 £’000
At 1 March 2009 34,598 1,754 36,352
At 27 February 2010 34,598 1,754 36,352
At 26 February 2011 34,598 1,754 36,352
Outdoor Boardwear
segment segment Total
Accumulated impairment losses £’000 £’000 £’000
At 1 March 2009 — (1,754) (1,754)
At 27 February 2010 — (1,754) (1,754)
At 26 February 2011 — (1,754) (1,754)
Outdoor Boardwear
segment segment Total
Net carrying amount £’000 £’000 £’000
At 1 March 2009 34,598 — 34,598
At 27 February 2010 34,598 — 34,598
At 26 February 2011 34,598 — 34,598
The Group performs an annual review of its goodwill to ensure that its carrying amount is not less than its recoverable amount. The
recoverable amount is determined with reference to the value-in-use. To estimate this, cash flow projections are based on financial
budgets prepared by management for a period of three years and extrapolated cash flow projections up to a total of 10 years, with
an estimated terminal value being applied thereafter. The Directors believe this to be justifiable given the nature of the business and
the actions and plans both in place and in progress to turnaround the performance of the business.
The discount rate applied to cash flow projections is 12% (2010: 12%), based on the Group’s weighted average cost of capital.
The projected growth rate used in extrapolation of cash flow forecasts is 3% (2010: 3%) reflecting the strategic plan of the Group to
recover negative growth rates of recent years.
Expected future cash flows are based on reasonable and supportable assumptions and represent management’s best estimate of
economic conditions existing over the projected period and reflect assumptions that are consistent with the way the discount rate
has been determined. The strategic plans of the business, in addition to strategic actions already undertaken, have been considered
when making these assumptions.
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 55
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14 Goodwill - continued
A sensitivity analysis was performed on the key assumptions used for assessing the goodwill arising in relation to the Outdoor
division as shown in the table below:
Sensitivity of forecast net cash flows:
Reduction in annual forecast net cash flows Current –10.0% –20.0%
Recoverable value (£’000) 67,791 58,876 49,962
Carrying value (£’000) 34,598 34,598 34,598
Excess of recoverable value over carrying value (£’000) 33,193 24,278 15,364
Sensitivity to discount factor, at current levels of forecast net cash flows:
Discount factor 10% 12% 14%
Recoverable value (£’000) 76,069 67,791 60,650
Carrying value (£’000) 34,598 34,598 34,598
Excess of recoverable value over carrying value (£’000) 41,471 33,193 26,052
15 Other intangible assets
The carrying amount of intangible assets by category is presented below:
Website
Trademarks development Total
£’000 £’000 £’000
At 1 March 2009 871 117 988
Additions (771) — (771)
Amortisation (100) (110) (210)
At 27 February 2010 — 7 7
Additions — 151 151
Amortisation — (7) (7)
At 26 February 2011 — 151 151
16 Principal subsidiary undertakings
Proportion of
Country of ownership
Nature of business incorporation interest
Blacks Outdoor Division Limited Holding company for The Outdoor Group Limited England 100%
The Outdoor Group Limited Outdoor and Boardwear clothing, footwear and equipment retailer England 100%
The Company holds its interest in The Outdoor Group Limited indirectly.
17 Inventories
2011 2010
£’000 £’000
Finished goods 36,122 38,954 00 00 www.blacks.co.uk www.millets.co.uk 56
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18 Trade and other receivables
2011 2010
£’000 £’000
Trade receivables 487 529
Less: allowance for doubtful debts (125) (125)
362 404
Other debtors 1,578 1,871
Corporation tax recoverable — 6
Prepayments and accrued income 4,430 4,444
Trade and other receivables 6,370 6,725
Trade receivables above are all due within one year. No interest is charged on trade receivables. Expected irrecoverable amounts are
provided for based on past default experience.
The other classes within trade and other receivables do not include impaired assets.
The Directors consider that the carrying amounts of trade and other receivables approximate to their fair values. As credit risk has
been addressed as part of impairment provisioning and, due to the short-term nature of the receivables, they are not subject to
ongoing fluctuations in market rates.
The maximum exposure to credit risk at the reporting date is represented by the carrying value of the financial assets in the
balance sheet.
Included in the Group’s trade receivable balances are receivables with a carrying amount of £87,000 (2010: £125,000) which are
past due at the reporting date but for which the Group has not provided as the amounts are still considered recoverable. The Group
does not hold any collateral over these balances.
Ageing of trade receivables:
2011 2010
£’000 £’000
Current 275 279
0–60 days past due (not impaired) 21 97
60–120 days past due (not impaired) 66 28
Over 120 days past due (impaired) 125 125
487 529
Movement in allowance for doubtful debts:
2011 2010
£’000 £’000
At beginning of year 125 1,256
Amounts charged to the statement of comprehensive income — (26)
Movement upon deconsolidation of Sandcity Limited — (1,105)
At end of year 125 125
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 57
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19 Cash and cash equivalents
2011 2010
£’000 £’000
Cash at bank and in hand 655 1,010
Cash at bank and in hand may earn interest at floating rates based on daily bank deposit rates. Short-term deposits are made for
varying periods of between one day and one month depending on the immediate cash requirements of the Group and earn interest
at the respective short-term deposit rates. The fair value of cash and cash equivalents does not materially differ from their book
values.
For the purposes of the consolidated cash flow statement, cash and cash equivalents comprise the following:
2011 2010
£’000 £’000
Cash at bank and in hand 655 1,010
Bank overdrafts (note 24) (15,024) (13,643)
(14,369) (12,633)
At 26 February 2011, the Group had available £17,184,000 (2010: £21,415,000) of undrawn committed borrowing facilities with a
floating security charge over the Group’s assets; all conditions precedent had been met.
20 Share capital
Ordinary Shares Number £’000
Allotted and fully paid:
Ordinary Shares of 1p each at 27 February 2010 42,638,103 426
Issue of share capital 41,412,916 414
Ordinary Shares of 1p each at 26 February 2011 84,051,019 840
Deferred Shares Number £’000
Allotted and fully paid:
Deferred Shares of 49p each at 27 February 2010 42,638,103 20,893
Deferred Shares of 49p each at 26 February 2011 42,638,103 20,893
Preference Shares (presented within non-current liabilities) Number £’000
10% cumulative, irredeemable, Preference Shares of £1 each, allotted and fully paid:
Preference Shares of £1 each at 27 February 2010 891,429 891
Preference Shares of £1 each at 26 February 2011 891,429 891
Ordinary Shares and Deferred Shares
On 23 April 2010, 2,131,905 warrants to acquire Ordinary Shares were exercised at nominal value and, accordingly, the Company
issued 2,131,905 Ordinary Shares. In addition to this, the Company issued a further 39,281,011 Ordinary Shares, at a subscription
price of 54p each (before deducting issue costs of £1,757,000), on 24 May 2010 under a Placing and Open Offer and a Firm
Placing.
At the end of the financial year there were outstanding options to receive allotments of 3,805,841 (2010: 3,982,140) Ordinary Shares
under the share option schemes as set out in note 29. There were no outstanding warrants (2010: 2,131,905). 00 00 www.blacks.co.uk www.millets.co.uk 58
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20 Share capital - continued
At 26 February 2011, the middle market quotation of the Ordinary Shares, as derived from the Stock Exchange Official List, was
22.40p. The highest price attained by the Ordinary Shares during the period was 70.50p and the lowest level was 22.00p.
Holders of the Ordinary Shares have all the rights normally attaching to Ordinary Shares, including rights to receive the Company’s
Annual Report, to attend and speak at general meetings and to appoint proxies and exercise voting rights. The Company’s Ordinary
Shares do not carry any special rights with regard to control of the Company. There are no restrictions on share transfers or voting.
Ordinary Shares acquired through the Company’s share schemes rank pari passu with the Company’s Ordinary Shares in issue and
have no special rights. Unless the Board decides otherwise, an Ordinary Shareholder may not vote at any general meeting or class
meeting or exercise any rights in relation to shares while any amount of money relating to his shares is outstanding.
The Deferred Shares confer no voting rights nor any rights to participate in the profits of the Company except in very limited
circumstances. The Deferred Shares are not redeemable and are only transferable in limited circumstances. The Company may at
any time arrange for Deferred Shares to be transferred to the Company for an aggregate consideration of 1p and may cancel the
Deferred Shares so purchased.
Preference Shares
The 10% cumulative non-redeemable Preference Shares confer the right to receive a fixed dividend of 10% per annum paid
in priority to any payment to any other class of share. The dividend is payable in two equal amounts on 30 April and 31 October of
each year.
In the event of a return of capital, or on a winding up of the Company, Preference Shareholders are entitled to repayment of the
nominal capital paid up on their shares, a premium of 5 pence per share and any arrears of dividends to the date of repayment in
priority to any other class of share. Preference Shares do not carry any voting rights, unless the preference dividends are in arrears
for at least six months, or there is a resolution altering the rights of the holders of Preference Shares, for the winding-up of the
Company or for a return of capital. In such instances, a Preference Shareholder shall have one vote on a show of hands, or in the
event of a poll, ten votes for every Preference Share held.
21 Share premium
£’000
At 28 February 2009 24,333
At 27 February 2010 24,333
Premium arising on issue of equity shares (note 20) 19,062
At 26 February 2011 43,395
22 Reserve for own shares
£’000
At 28 February 2009, 27 February 2010 and 26 February 2011 (773)
This reserve represents Ordinary Shares held by the Blacks Leisure Group plc Employee Benefit Trust that provides for the issue of
shares to Group employees under share incentive schemes. The number of Ordinary Shares in the Trust amounts to 344,578 (2010:
344,578) with a market value at the year end of £77,000 (2010: £177,000).
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 59
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23 Reserves
The following describes the nature and purpose of each reserve within owners’ equity:
Reserve Description and purpose
Share premium Amount subscribed for share capital in excess of nominal value.
Reserve for own shares The cost of own shares held.
Warrants reserve Fair value of Ordinary Shares to be issued under warrants.
Hedging reserve Gains and losses arising on recognising hedging instruments at fair value in a qualifying cash flow hedge.
Retained earnings Cumulative net gains and losses recognised in the statement of comprehensive income.
24 Bank overdrafts
Effective 2011 2010
interest rate % Maturity £’000 £’000
Bank overdrafts Variable On demand 15,024 13,643
Bank overdrafts are repayable on demand and are secured by fixed and floating charges over the assets of Group companies. The
average effective interest rate on bank overdrafts approximates to 4.356% (2010: 3.954%) per annum. The carrying value of the
bank overdraft is a reasonable approximation of fair value given its short-term maturity and the variable interest rates that apply.
25 Obligations under hire purchase and finance leases
Present value of
Minimum lease payments minimum lease payments
2011 2010 2011 2010
£’000 £’000 £’000 £’000
Amounts payable under hire purchase and finance leases:
— within one year 712 1,282 656 1,178
— in the second to fifth years inclusive 596 1,254 577 1,186
— after five years — — — —
1,308 2,536 1,233 2,364
Less: future finance charges (75) (172) N/A N/A
Present value of lease obligations 1,233 2,364 1,233 2,364
The present value of future payments is analysed as:
2011 2010
£’000 £’000
Current liabilities 656 1,178
Non-current liabilities 577 1,186
1,233 2,364
It is the Group’s policy to lease certain plant and equipment under hire purchase and finance leases and the Group entered into
several such lease commitments for plant and equipment relating to its premises at Swan Valley, Northampton. The weighted
average remaining term is 1.9 years with an effective borrowing rate of 5.3%. Interest rates are fixed at the contract date and the
leases are agreed on a fixed repayment basis. No material arrangements have been entered into for contingent rental payments.
The fair value of the Group’s lease obligations approximates to their present value.
The Group’s obligations under hire purchase and finance leases are secured by the lessors’ rights over the leased assets. 00 00 www.blacks.co.uk www.millets.co.uk 60
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26 Trade and other payables
2011 2010
£’000 £’000
Current liabilities
Trade payables 17,279 23,428
Other taxes and social security 5,420 1,507
Accruals 10,770 16,618
Other payables 22 109
Current trade and other payables 33,491 41,662
Non-current liabilities
Accruals 5,581 3,802
Non-current other payables 5,581 3,802
Trade payables and accruals are non-interest bearing and principally comprise amounts outstanding for trade purchases and
ongoing costs. The average credit period taken for trade purchases is 53 days (2010: 62 days).
The Directors consider that the carrying amount of trade payables approximates to their fair value as they are short-term in nature
and are therefore not subject to ongoing fluctuations in market rates.
27 Provisions
Onerous Closed Other CVA
lease Dilapidation store rates related
provision provision provision provision Total
£’000 £’000 £’000 £’000 £’000
At 1 March 2009 12,113 943 — — 13,056
Additional provision in the year — 1,045 10,755 8,000 19,800
Unwinding of discount 642 — — — 642
Utilised (386) (68) (617) — (1,071)
Released (10,153) (329) — — (10,482)
Deconsolidation of Sandcity (note 35) (2,216) — — — (2,216)
At 27 February 2010 — 1,591 10,138 8,000 19,729
At 28 February 2010 — 1,591 10,138 8,000 19,729
Additional provision in the year 1,107 842 — — 1,949
Unwinding of discount — — 720 — 720
Utilised — (309) (1,743) (7,436) (9,488)
Released — (320) (5,376) — (5,696)
At 26 February 2011 1,107 1,804 3,739 564 7,214
Current — 1,591 5,078 8,000 14,669
Non-current — — 5,060 — 5,060
At 27 February 2010 — 1,591 10,138 8,000 19,729
Current 266 1,804 1,410 564 4,044
Non-current 841 — 2,329 — 3,170
At 26 February 2011 1,107 1,804 3,739 564 7,214
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 61
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27 Provisions - continued
Ageing of non-current provisions (years in which the provision is expected to unwind):
2011 2010
£’000 £’000
In the second to fifth years inclusive 3,170 5,060
In the sixth to tenth years inclusive — —
After ten years — —
3,170 5,060
The carrying value of provisions approximates to fair value since the cash flows have, where appropriate, been discounted at an
appropriate cost of capital.
Onerous lease provision
The previously carried provision for onerous leases and other store closures at 1 March 2009 related to properties, some of which
were vacant, for which obligations were removed as part of the CVAs that were effective in December 2009 and, accordingly, the
remaining balance was released at that time given the Group was no longer obligated to rentals for those properties. Subsequently,
an additional provision has been made at 26 February 2011 for ongoing rental obligations at three additional properties, which were
not included within the CVAs, but which are now either vacant or soon to be vacant. This charge of £1,107,000 has been presented
within exceptional operating items (see note 8) on the face of the statement of comprehensive income.
Dilapidation provision
Dilapidations are provided for remedial works required to bring a leased property back into the same condition as when the lease
commenced. The Group’s accounting policy for recognising dilapidations provisions is to recognise amounts expected to be payable
under a legal obligation when the likelihood of an outflow of economic benefits becomes more likely than not and a reliable estimate
can be made. The provision is determined by reference to the serving of a dilapidations schedule upon the Group by the landlord
or based upon the Directors’ own assessment of the likely cost of such works or settlement with the landlord. During the year, an
additional £842,000 was provided, of which £305,000 relates to the Group’s planned exit from the Boardwear segment and has
accordingly been presented within exceptional operating items (see note 8).
Closed store rates provision
Under the terms of the CVAs, the Group has a commitment to pay business rates on properties that were compromised under these
arrangements up until such a time as the landlord is able to re-let the site. Provision is made for the expected value of this obligation,
discounted at a rate of 12% per annum, estimated based on the earlier of lease expiry and anticipated period to re-let. An amount of
£5,376,000 has been released from the provision during the year on account of new tenants being found for many properties, and
accordingly the Group no longer holding a liability to pay rates, more quickly than was anticipated. This release has been recorded
within exceptional operating items (see note 8).
Other CVA related provision
A provision was created during the prior year in respect of other additional costs associated with the CVAs. This included the
provision of £7,250,000 for a compromise fund for affected landlords and this amount was settled in cash during May and
July 2010.
28 Commitments and contingencies
2011 2010
Operating lease commitments £’000 £’000
Amounts charged for the year include:
— minimum lease payments recognised as an operating lease expense 28,217 37,674
— contingent rents 18 21
Contingent rents are in respect of turnover-based rent clauses, the majority ranging between 8% and 12% of turnover above a
base amount. 00 00 www.blacks.co.uk www.millets.co.uk 62
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28 Commitments and contingencies - continued
The Group leases various buildings which operate within the Outdoor and Boardwear segments. The leases are non-cancellable
operating agreements with varying terms, escalation clauses and renewal rights. The Group also has motor vehicles under non-
cancellable operating lease agreements.
Future minimum rentals payable under non-cancellable operating leases as at 26 February 2011 are as follows:
Land and Motor Land and Motor
buildings vehicles Total buildings vehicles Total
2011 2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000 £’000
Within one year 25,977 212 26,189 25,614 169 25,783
In the second to fifth years inclusive 88,460 443 88,903 87,957 43 88,000
After five years 75,301 — 75,301 84,644 — 84,644
189,738 655 190,393 198,215 212 198,427
The total future minimum sub-lease income under non-cancellable sub-leases as at 26 February 2011 is as follows:
Land and Motor Land and Motor
buildings vehicles Total buildings vehicles Total
2011 2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000 £’000
Within one year 488 — 488 563 — 563
In the second to fifth years inclusive 549 — 549 1,476 — 1,476
After five years 1,791 — 1,791 650 — 650
2,828 — 2,828 2,689 — 2,689
29 Employee benefits
Share options
The Group operates an Executive Share Option Scheme (ESOS), a Company Share Option Plan (CSOP), a Save As You Earn
Scheme (SAYE), a Share Incentive Plan (SIP) and a Turnaround Incentive Plan (TIP). There is also a Performance Share Plan (PSP)
which has no current members.
The ESOS is an unapproved discretionary employee share option scheme, with options having been granted to certain senior
employees (including Directors). No Directors hold options under this scheme as at the end of the financial year.
The CSOP is a HM Revenue & Customs approved discretionary employee share option scheme.
The SAYE was open to employees with the required minimum period of service and provided for a purchase price equal to the
market price on the date of grant, less a 20% discount. The shares can be purchased over the six-month period following the third
or fifth anniversary of the commencement date, depending on the scheme to which the employee belongs.
The SIP is a scheme introduced as a performance related incentive award for certain Directors. All remaining options under the SIP
scheme were surrendered on 18 January 2010 alongside the introduction of the TIP scheme.
The TIP scheme was approved at a meeting of Shareholders on 24 November 2009 and under this scheme a total of 3,864,465
options were granted on 18 January 2010 and a further 805,221 on 10 June 2010. The grant on 18 January 2010, being in part
a modification of existing schemes, resulted in 1,943,748 existing options from other schemes being surrendered, such that any
recipient of awards under the TIP scheme ceased to have any interests in any other share option schemes other than the SAYE.
Where these newly issued options have been deemed to be a modification of prior awards, the share-based payment charges from
these earlier awards under the old share option schemes have continued to be charged within the statement of comprehensive
income.
The TIP scheme includes options granted to certain Directors and performance criteria (which are identical for all grants under the
TIP scheme) in respect of these options are set out in the Directors’ Remuneration Report.
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 63
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29 Employee benefits - continued
A reconciliation of option movements for each of the above schemes over the year to 26 February 2011 is as follows:
Executive Share Option Scheme
2011 2010
Weighted Weighted
average average
Number exercise Number exercise
of options price (£) of options price (£)
Outstanding at the beginning of the year 41,947 1.81 699,302 1.66
Granted during the year — — 300,000 0.58
Forfeited or surrendered during the year — — (638,299) 1.46
Lapsed during the year (39,668) 1.70 (319,056) 0.99
Outstanding at the end of the year 2,279 3.67 41,947 1.81
Exercisable at the end of the year 2,279 3.67 3,799 3.67
2011 2010
Weighted
Weighted average
Weighted
Weighted average
Range of
average
remaining life
average
remaining life
exercise exercise Number exercise Number
prices price of Expected Contractual price of Expected Contractual
(£) (£) shares (years) (years) (£) shares (years) (years)
3.67 3.67 2,279 0.0 2.7 1.81 41,947 1.6 2.6
There were no options exercised in the year, therefore there is no weighted average share price at the date of exercise for the options
(2010: £nil). A total of 638,299 of the share options granted under this scheme were surrendered during the prior period as part of
the grant of options under the Turnaround Incentive Plan on 18 January 2010. Since these new awards have been accounted for
as modifications of the Executive Share Option Scheme, the statement of comprehensive income continues to record charges in
respect of the options originally granted under this scheme. The total charge recognised for the year was £22,000 (2010: £34,000).
Company Share Option Plan
2011 2010
Weighted Weighted
average average
Number exercise Number exercise
of options price (£) of options price (£)
Outstanding at the beginning of the year 11,037 3.67 35,695 3.67
Lapsed during the year (5,673) 3.67 (24,658) 3.67
Outstanding at the end of the year 5,364 3.67 11,037 3.67
Exercisable at the end of the year 5,364 3.67 11,037 3.67
2011 2010
Weighted
Weighted average
Weighted
Weighted average
Range of
average
remaining life
average
remaining life
exercise exercise Number exercise Number
prices price of Expected Contractual price of Expected Contractual
(£) (£) shares (years) (years) (£) shares (years) (years)
3.67 3.67 5,364 0.0 2.7 3.67 11,037 0.0 3.7
There were no options exercised in the year, therefore there is no weighted average share price at the date of exercise for the options
(2010: £nil). There was no charge or credit taken to the statement of comprehensive income (2010: £nil) during the year. 00 00 www.blacks.co.uk www.millets.co.uk 64
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29 Employee benefits - continued
Save as You Earn Scheme
2011 2010
Weighted Weighted
average average
Number exercise Number exercise
of options price (£) of options price (£)
Outstanding at the beginning of the year 64,691 2.53 105,917 2.44
Lapsed during the year (12,045) 3.56 (41,226) 2.29
Outstanding at the end of the year 52,646 2.29 64,691 2.53
Exercisable at the end of the year 34,151 2.19 12,045 3.56
2011 2010
Weighted
Weighted average
Weighted
Weighted average
Range of
average
remaining life
average
remaining life
exercise exercise Number exercise Number
prices price of Expected Contractual price of Expected Contractual
(£) (£) shares (years) (years) (£) shares (years) (years)
1.97-3.56 2.29 52,646 0.6 1.1 2.53 64,691 1.2 1.7
There were no options exercised in the year, therefore there is no weighted average share price at the date of exercise for the options
(2010: £nil). A charge of £14,000 was recorded in the statement of comprehensive income (2010: £44,000 credit) during the year.
Share Incentive Plan
2011 2010
Weighted Weighted
average average
Number exercise Number exercise
of options price (£) of options price (£)
Outstanding at the beginning of the year — — 1,300,000 2.15
Granted during the year — — — —
Forfeited or surrendered during the year — — (1,300,000) 2.15
Outstanding at the end of the year — — — —
Exercisable at the end of the year — — — —
2011 2010
Weighted
Weighted average
Weighted
Weighted average
Range of
average
remaining life
average
remaining life
exercise exercise Number exercise Number
prices price of Expected Contractual price of Expected Contractual
(£) (£) shares (years) (years) (£) shares (years) (years)
N/A — — N/A N/A — — N/A N/A
There were no options exercised in the year, therefore there is no weighted average share price at the date of exercise for the options
(2010: £nil). All share options granted under this scheme were surrendered as part of the grant of options under the Turnaround
Incentive Plan on 18 January 2010. Since these new awards have been accounted for as modifications of the Share Incentive Plan,
the statement of comprehensive income continues to record charges in respect of the options originally granted under this scheme.
The total charge for the year relating to the scheme was £233,000 (2010: £234,000).
Notes to the Financial Statements
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29 Employee benefits - continued
Turnaround Incentive Plan
2011 2010
Weighted Weighted
average average
Number exercise Number exercise
of options price (£) of options price (£)
Outstanding at the beginning of the year 3,864,465 0.00 — —
Forfeited or surrendered during the year (924,134) 0.00 — —
Granted during the year 805,221 0.00 3,864,465 0.00
Outstanding at the end of the year 3,745,552 0.00 3,864,465 0.00
Exercisable at the end of the year — — — —
2011 2010
Weighted
Weighted average
Weighted
Weighted average
Range of
average
remaining life
average
remaining life
exercise exercise Number exercise Number
prices price of Expected Contractual price of Expected Contractual
(£) (£) shares (years) (years) (£) shares (years) (years)
0.00 0.00 3,745,552 2.0 9.0 — 3,864,465 2.9 9.9
There were no options exercised in the year, therefore there is no weighted average share price at the date of exercise for the options
(2010: £nil). A charge of £130,000 (2010: £26,000) was recorded in the statement of comprehensive income during the year.
Equity-settled share-based payments
The total charge for the year from all share option schemes was £399,000 (2010: £250,000).
The fair value of the share options is estimated as at the date of grant using the Monte Carlo model for TIP options and the Binomial
model for SIP options and ESOS options granted after 28 February 2008. For all ESOS and CSOP options granted before 1 March
2008 and all SAYE options the Black–Scholes model is used. The following table gives the assumptions used and the fair value per
option granted during the year.
2011 2010
TIP TIP
Share price at grant date £0.54 £0.60
Exercise price £0.00 £0.00
Shares under option 805,221 3,864,465
Vesting period (years) 3.0 3.0
Expected volatility 85.0% 61.0%
Option life (years) 2.3 2.9
Expected life (years) 2.3 2.9
Risk-free rate 2.4% 1.7%
Expected dividends expressed as a dividend yield 0.0% 0.0%
Expectations of meeting performance criteria 100.0% 100.0%
Fair value per option £0.193 £0.152
The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The
expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily
be the actual outcome. The risk-free rate of return is the yield on zero-coupon UK Government bonds of a term consistent with the
assumed option life. No other features of options granted were incorporated into the measurement of fair value. 00 00 www.blacks.co.uk www.millets.co.uk 66
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Notes to the Financial Statements
for the year ended 26 February 2011
29 Employee benefits - continued
Retirement benefits
The Group operates an ongoing pension scheme, the Blacks Leisure Group Stakeholder Pension Scheme. The assets of this
scheme are held separately from those of the Group. Contributions to the scheme are charged to the statement of comprehensive
income in the period in which they arise. The charge for the year was £277,000 (2010: £396,000). The Group also makes
contributions into the Directors’ money purchase schemes as set out in the Directors’ Remuneration Report.
The Blacks Leisure Group plc Pension Scheme, an old scheme which had defined benefit members, has now effectively been
wound up. In 2007 the Company received confirmation from the Trustees that all amounts due to the scheme had been paid and
that it had no further exposure to any changes in the value of the scheme’s assets and liabilities. A full IAS19 disclosure has therefore
not been presented.
30 Related party disclosures
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and
accordingly are not disclosed in this note.
The remuneration of all key personnel is set out below. The key personnel are all either main Board members, subsidiary Board
members or regular attendees of the subsidiary Board meetings. Further information about the remuneration of individual Directors of
the Company is provided in the audited part of the Directors’ Remuneration Report.
2011 2010
£’000 £’000
Short-term employee benefits 1,703 1,743
Post-employment benefits 44 37
Termination benefits — 82
Equity-settled share-based payments 259 270
2,006 2,132
There were no material transactions in which any key personnel had a material interest.
31 Financial risk management objectives and policies
The Group’s principal financial instruments, other than derivatives, comprise bank loans and overdrafts, cash and short-term
deposits, receivables and payables. The main risks arising from the Group’s financial instruments are interest rate risk, foreign
currency risk, credit risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are
summarised below.
The main financial risks faced by the Group relate to the availability of funds to meet business needs and the risk of default by a
counterparty in a financial transaction. The Group manages borrowing, liquidity, foreign exchange and banking relationships in
accordance with Board approved policies designed to minimise exposures. The undertaking of financial transactions of a speculative
nature is not permitted.
The Group finances its operations by a combination of internally-generated cash flow and bank borrowings. The Group aims to
always have sufficient undrawn bank facilities to meet projected borrowing requirements over the coming periods. When interest
rate risk is considered significant, the Group’s policy is to fix or cap a proportion of projected net debt in order to reduce the Group’s
exposure to fluctuations in rates. The policy recognises that, in common with other UK retailers, the Group has significant liabilities
through conditional obligations to pay rent under property leases. The implicit interest rate of these liabilities is fixed in the short-term.
Transaction exposures resulting from purchases in foreign currencies may be hedged by forward foreign currency transactions.
Group policy aims to minimise any exposure with the intention of protecting the buying margin from fluctuations in the value of the
foreign currency. 00 00 67
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31 Financial risk management objectives and policies - continued
Interest rate risk
The Group has a seasonal cash flow that moves significantly over the course of each year. The Group is exposed to cash flow
interest rate risk on floating rate deposits, bank overdrafts and loans. Fixed interest rates are used for all finance lease borrowing.
Foreign currency risk
The Group’s principal foreign currency exposures arise from the purchase of overseas sourced products. Group policy allows for
but does not demand that these exposures are hedged for up to 12 months ahead in order to fix the cost in sterling. This hedging
activity may involve the use of spot and forward contracts. There were forward contracts of this nature held at year end as detailed in
note 32. The Group’s net exposure to foreign currencies is illustrated by the sensitivity analysis in note 33.
The market value of outstanding foreign exchange derivatives is reported regularly and reviewed in conjunction with percentage
cover taken by season and current market conditions in order to assess and manage the Group’s ongoing exposure.
The Group does not consider the exposure to currency movements in relation to translation of overseas assets and liabilities to be
material and, consequently, does not hedge any such exposure.
Credit risk
The Group’s credit risk is primarily attributable to its trade and other receivables. The amounts included in the balance sheet are net
of allowances for doubtful debts, which have been estimated by management based on prior experience and known factors at the
balance sheet date which may indicate that a provision is required. All customers who wish to trade on credit terms are subject to
credit verification procedures where considered appropriate.
The Group’s credit risk on liquid funds and derivatives is limited because the Group only maintains liquid funds, and only enters into
derivative transactions, with banks and financial institutions with high credit ratings.
Liquidity risk
The Group manages its cash and borrowing requirements centrally to maximise interest income and minimise interest expense,
whilst ensuring that the Group has sufficient liquid resources to meet the operating needs of its businesses.
Capital risk management
The Group monitors ‘adjusted capital’ which comprises all components of equity other than amounts recognised in equity relating
to cash flow hedges. The Group manages this with the aim of ensuring that entities in the Group will be able to continue as a going
concern while maximising the return to stakeholders through the optimisation of the debt and equity balance.
In managing its capital, the Group’s primary objective is to ensure its continued ability to provide a return for its equity Shareholders
through a combination of capital growth and, when appropriate, distributions. In order to achieve this objective, the Group seeks to
maintain a gearing ratio that balances risks and returns at an acceptable level and also to maintain a sufficient funding base to enable
the Group to meet its working capital and strategic investment needs. In making decisions to adjust its capital structure to achieve
these aims, either through altering its dividend policy, new share issues, or the reduction of debt, the Group considers not only its
short-term position but also its long-term operational and strategic objectives. 00 00 www.blacks.co.uk www.millets.co.uk 68
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32 Derivatives
The Group uses currency derivatives to forward-buy and forward-sell foreign currency in order to hedge certain future transactions
and cash flows, predominantly in relation to purchases of stocks from overseas suppliers. The Group is party to a variety of
foreign currency forward contracts in the management of the exchange rate exposures. The instruments purchased are primarily
denominated in the suppliers’ principal currency.
At the balance sheet date the total notional amount of outstanding forward foreign exchange contracts that the Group has
committed to are:
Exchange 2011 2010
rate Currency Maturity US$’000 US$’000
Bank of Scotland 1.598 US Dollar 08 Mar 2010 — 3,000
Bank of Scotland 1.597 US Dollar 12 Apr 2010 — 1,000
Bank of Scotland 1.625 US Dollar 08 Mar 2010 — 1,500
Bank of Scotland 1.625 US Dollar 07 May 2010 — 1,000
Bank of Scotland 1.624 US Dollar 07 Jun 2010 — 1,000
Bank of Scotland 1.624 US Dollar 07 Jul 2010 — 2,000
Bank of Scotland 1.623 US Dollar 09 Aug 2010 — 2,000
Bank of Scotland 1.600 US Dollar 08 Sep 2010 — 3,000
Bank of Scotland 1.600 US Dollar 08 Oct 2010 — 3,000
Bank of Scotland 1.600 US Dollar 08 Nov 2010 — 3,000
Corporate FX 1.517 US Dollar 28 Feb 2011 2,000 —
Corporate FX 1.540 US Dollar 28 Feb 2011 2,000 —
Bank of Scotland 1.584 US Dollar 01 Mar 2011 4,000 —
Bank of Scotland 1.584 US Dollar 05 Apr 2011 2,000 —
Bank of Scotland 1.583 US Dollar 03 May 2011 1,000 —
Bank of Scotland 1.596 US Dollar 01 Jun 2011 2,000 —
Bank of Scotland 1.595 US Dollar 05 Jul 2011 2,000 —
Bank of Scotland 1.594 US Dollar 02 Aug 2011 2,000 —
The fair values of level 2 currency derivatives, based on market prices at which these contracts are traded, are as follows:
2011 2010
£’000 £’000
Fair value of currency derivatives designated and effective as cash flow hedges (221) 720
Notes to the Financial Statements
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33 Financial instruments
Categories of financial instruments (excluding derivatives) comprise:
Loans and receivables
2011 2010
Financial assets £’000 £’000
Current financial assets
Trade receivables (note 18) 362 404
Cash at bank and in hand (note 19) 655 1,010
Total financial assets 1,017 1,414
As the majority of the Group’s trade receivables balance relates to customers that are public sector bodies, the risk of non-payment
tends to be low although each customer’s debt is individually analysed for the likelihood of payment.
Financial liabilities measured
at amortised cost
2011 2010
Financial liabilities £’000 £’000
Current financial liabilities
Bank overdrafts (note 24) 15,024 13,643
Obligations under hire purchase and finance leases (note 25) 656 1,178
Trade and other payables (note 26) 33,491 41,662
Short-term provisions (note 27) 4,044 14,669
Total current financial liabilities 53,215 71,152
Non-current financial liabilities
Preference Shares (note 20) 891 891
Obligations under hire purchase and finance leases (note 25) 577 1,186
Trade and other payables (note 26) 5,581 3,802
Long-term provisions (note 27) 3,170 5,060
Total non-current financial liabilities 10,219 10,939
Total financial liabilities 63,434 82,091
The fair value of hire purchase and finance leases liabilities is estimated as the present value of future cash flows, discounted
at market interest rates for homogenous lease agreements. The fair value of such leases for the year have been estimated at
£1,233,000 (2010: £2,364,000), corresponding to the balance sheet value as per note 25.
Preference Shares measured at amortised cost have a fair value of £490,000 (2010: £401,000) based upon the Preference Share
market price at the end of the financial year of 55.0p (2010: 45.0p).
Liquidity analysis
The table below analyses the Group’s financial liabilities based on the remaining period at the balance sheet date to the contractual
maturity date. The amounts disclosed in the table are the contracted undiscounted cash flows:
26 February 2011
Within One to Greater than
one year five years five years
£’000 £’000 £’000
Preference Shares 89 — 891
Bank overdrafts 15,024 — —
Obligations under hire purchase and finance leases 712 596 —
Trade and other payables 32,885 2,000 —
Provisions 4,071 3,821 —
52,781 6,417 891 00 00 www.blacks.co.uk www.millets.co.uk 70
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33 Financial instruments - continued
27 February 2010
Within One to Greater than
one year five years five years
£’000 £’000 £’000
Preference Shares 89 — 891
Bank overdrafts 13,643 — —
Obligations under hire purchase and finance leases 1,282 1,254 —
Trade and other payables 41,662 — —
Provisions 14,704 6,325 —
71,380 7,579 891
Interest rates and currency
The Directors review any requirement for interest rate hedging during the year dependent upon the level of borrowings and the
expected volatility in rates. The Group is exposed to cash flow interest rate risk on floating rate deposits, bank overdrafts and loans
which amounted to £15,024,000 (2010: £13,643,000) where interest rates are based on a fixed margin over the underlying UK
LIBOR rate. Fixed interest rates are used for all hire purchase and finance lease borrowing which at the end of the year amounted to
£1,233,000 (2010: £2,364,000).
As at the end of the year, the Group holds a committed revolving credit facility of £35.0 million (2010: £42.5 million), which is to be
used for general corporate and working capital purposes. The Group had available £17,184,000 (2010: £21,415,000) of undrawn
committed borrowing facilities with a floating security charge over the Group’s assets; all conditions precedent had been met. The
interest rate on the committed and uncommitted facilities is based on the UK LIBOR rate.
The currency and interest rate exposure of the Group’s floating rate cash balances and bank overdrafts is shown below (overdrafts
are shown as negative):
2011 2010
£’000 £’000
Cash at bank and in hand
Sterling 286 409
Euro 369 601
655 1,010
2011 2010
£’000 £’000
Bank overdrafts
Sterling (14,714) (15,966)
Euro 406 254
US dollar (699) 2,087
Hong Kong dollar (17) (18)
(15,024) (13,643)
The right of set-off within the banking facility enables certain accounts with overdrafts to be set off against accounts with a balance,
and be recorded as a net balance or overdraft in the consolidated balance sheet. This has led to some foreign currency accounts
with a positive balance to be classified as a financial liability as the above tables show.
The floating rate assets and liabilities comprise bank accounts bearing interest rates based upon the UK LIBOR rate. There are no
fixed rate financial assets.
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 71
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33 Financial instruments - continued
Sensitivity analysis
Foreign currency sensitivity analysis
The Group’s principal foreign currency exposures are to US dollar and the Euro. The table below illustrates the hypothetical sensitivity
of the Group’s reported profit and equity to a 10% increase and decrease in the US dollar and Euro exchange rates (relative to sterling)
at the year end date, assuming all other variables remain unchanged. The sensitivity of 10% represents the Directors’ assessment of a
reasonably possible change over the coming year. Positive figures represent an increase in profit or equity.
Statement of
comprehensive income Equity
2011 2010 2011 2010
£’000 £’000 £’000 £’000
Sterling strengthens by 10%
— US dollar (64) 190 (756) (692)
— Euro (265) (266) (265) (266)
Sterling weakens by 10%
— US dollar ` 78 (232) 924 846
— Euro 324 325 324 325
Year end exchange rates applied in the above analysis are 1.6074 (2010: 1.5224) for US dollars and 1.1692 (2010: 1.1154) for
Euros. Strengthening and weakening of sterling may not produce symmetrical results depending on the proportion and nature of
foreign exchange derivatives which do not qualify for hedge accounting.
Interest rate sensitivity analysis
The table below illustrates the hypothetical sensitivity of the Group’s reported profit and equity to a 1% (percentage point) increase
or decrease in interest rates, assuming all other variables were unchanged. The sensitivity rate of 1% represents the Directors’
assessment of a reasonably possible change over the coming year. Positive figures represent an increase in profit or equity.
The analysis has been prepared under the following assumptions:
h For floating rate assets and liabilities, the amount of asset or liability outstanding at the balance sheet date is assumed to have
been outstanding for the whole year; and
h Fixed rate financial instruments that are carried at amortised cost are not subject to interest rate risk for the purpose of this
analysis.
Statement of
comprehensive income Equity
2011 2010 2011 2010
£’000 £’000 £’000 £’000
Interest rate increase of 1% (144) (126) (144) (126)
Interest rate decrease of 1% 144 126 144 126 00 00 www.blacks.co.uk www.millets.co.uk 72
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34 Events after the balance sheet date
As explained in note 8, the Group plans to exit from its Boardwear segment during the coming year. The future financial effect of this
exit strategy on the Group’s financial results and position are indicated by the results of this segment for the year ended 26 February
2011 and its net liabilities at that date, which are summarised in note 5.
35 Discontinued operations — Administration of Sandcity Limited
On 23 September 2009, Richard Fleming and David Costley-Wood of KPMG LLP were appointed as administrators in respect of the
wholly owned subsidiary, Sandcity Limited. Sandcity Limited was part of the Boardwear segment and was a retailer, and previously a
wholesaler, of lifestyle and Boardwear clothing and accessories. At the point of being placed into administration, it operated from 11
stores and traded at a substantial loss.
The appointment of the administrators of Sandcity Limited resulted in an exit by the Group from approximately one-quarter of the
Boardwear stores. Further Boardwear stores, operating within The Outdoor Group Limited under the Freespirit fascia, were also
subsequently exited as part of the Company Voluntary Arrangements.
In line with the requirements of IFRS5, the results of Sandcity Limited were classified as discontinued operations. The statement of
comprehensive income for the comparative period therefore included, as results from discontinued operations, the following:
2010
£’000
Revenue 8,531
Cost of sales (6,271)
Gross profit 2,260
Distribution costs (3,960)
Administrative expenses (1,387)
Operating loss (3,087)
Operating loss excluding exceptional items (2,289)
Exceptional items (798)
Finance costs (122)
Loss on ordinary activities before tax (3,209)
Loss attributable to disposal (159)
Loss before tax (3,368)
Tax expense (5)
Loss for the period attributable to equity holders of the parent (3,373)
Other comprehensive income —
Total comprehensive expense for the year attributable to equity holders of the parent (3,373)
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 73
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35 Discontinued operations — Administration of Sandcity Limited - continued
The effect of the degrouping on the individual assets and liabilities of the Group was as shown below:
2010
£’000
Non-current assets
Property, plant and equipment 1,281
Deferred tax liability (62)
Current assets
Inventories 1,124
Trade and other receivables 1,632
Current liabilities
Trade and other payables (1,562)
Short-term provisions (1,059)
Non-current liabilities
Long-term provisions (1,157)
Net attributable assets disposed of 197
Bank overdrafts disposed of (38)
Loss attributable to disposal 159
At 26 February 2011, the Directors have recognised expected proceeds from the administration of Sandcity Limited as set out
in note 8.
The net cash flows of Sandcity Limited up until the date of disposal from the Group were as follows:
2010
£’000
Net cash flow from operations 2,151
Net cash flow from investing activities —
Net cash flow from financing activities —
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2011 2010
Note £’000 £’000
Fixed assets
Investments in subsidiary undertakings 5 54,190 54,190
Current assets
Debtors 6 25,971 20,124
Cash at bank and in hand 6 152
25,977 20,276
Creditors: amounts falling due within one year 7 (7,511) (19,684)
Net current assets 18,466 592
Total assets less current liabilities 72,656 54,782
Creditors: amounts falling due after more than one year 8 (891) (891)
Net assets 71,765 53,891
Capital and reserves
Called up share capital 9 21,733 21,319
Share premium 10 43,395 24,333
Reserve for own shares 12 (773) (773)
Profit and loss account 13 7,410 9,012
Shareholders’ funds 14 71,765 53,891
The financial statements were approved by the Board and authorised for issue on 4 May 2011 and were signed on its behalf by:
Neil Gillis
Chief Executive
Marc Lombardo
Finance Director
Company Number: 582190
Company Balance Sheet
as at 26 February 2011 00 00 75
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Notes to the Company Financial Statements
for the year ended 26 February 2011
1 Accounting policies
Basis of accounting
The separate financial statements of the Company are presented as required by the Companies Act 2006. They have been prepared
under the historical cost convention, except for the valuation of certain financial instruments, and in accordance with applicable
United Kingdom Accounting Standards.
The Company has not disclosed the requirements under FRS29 ‘Financial instruments: Disclosures’ as it has taken advantage of the
exemption to only disclose them with those of the Group in the consolidated financial statements.
The principal accounting policies are summarised below. They have all been applied consistently throughout the year and the
preceding year.
Investments
Investments in subsidiary undertakings are stated at cost less any provision for impairment.
Equity-settled share-based payments
Certain employees and Directors of the Group receive equity-settled remuneration in the form of share-based payment transactions,
whereby employees render services in exchange for shares or rights over shares. The cost of equity-settled transactions with
employees is measured by reference to the fair value, determined using the Black–Scholes option pricing model, the Monte Carlo
model or the Binomial model as appropriate, at the date at which they are granted. The cost of equity-settled transactions is
recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled,
ending on the relevant vesting date. The cumulative expense recognised for equity-settled transactions at each reporting date until
the vesting date reflects the extent to which the vesting period has expired, and is adjusted to reflect the Directors’ best available
estimate of the number of equity instruments that will ultimately vest.
Where the terms and conditions of options are modified before they vest, the movement in the fair value of the options, measured
immediately before and after the modification, is also charged to the profit and loss account over the remaining vesting period.
Guarantee contracts
Where the Company enters into financial guarantee contracts and guarantees the indebtedness of other companies within the
Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company
treats the guarantee contract as a contingent liability until such time that it becomes probable that the Company will be required to
make a payment under the guarantee.
2 Profit and loss account
As permitted by Section 408 of the Companies Act 2006 the Company has elected not to present its own profit and loss account
for the year. The loss after tax for the year recognised in the profit and loss account for the Company was £1,882,000 (2010:
£14,010,000 profit, which included dividends received from investments in subsidiaries of £19,003,000).
The Company audit fee for the year amounted to £54,000 (2010: £54,000). 00 00 www.blacks.co.uk www.millets.co.uk 76
Blacks Leisure Group plc Annual Report and Accounts 2011
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3 Employee benefits expense
2011 2010
£’000 £’000
Wages and salaries 794 771
Social security costs 83 85
Pension costs 75 78
952 934
Equity-settled shared-based payments expense 280 243
Total 1,232 1,177
The average number of persons, including Directors, employed by the Company was as follows:
2011 2010
Number Number
Full-time
— Management and administration 6 3
Part-time 2 3
Total 8 6
4 Dividends paid and proposed
No dividends have been declared or paid on Ordinary Shares in respect of either the current or prior year.
Preference dividends are charged to the profit and loss account as finance costs.
5 Investments in subsidiary undertakings
£’000
Cost
At 27 February 2010 and 26 February 2011 72,674
Provisions for impairment
At 27 February 2010 and 26 February 2011 (18,484)
Net book value at 27 February 2010 and 26 February 2011 54,190
The principal subsidiary undertakings are detailed in note 16 to the consolidated financial statements.
Notes to the Company Financial Statements
for the year ended 26 February 2011 00 00 77
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Our Financials Our Governance Our Business
6 Debtors
2011 2010
£’000 £’000
Amounts owed by Group undertakings 25,757 20,111
Prepayments and accrued income 214 13
25,971 20,124
Amounts owed by Group undertakings are repayable upon demand and are non-interest bearing.
7 Creditors: amounts falling due within one year
2011 2010
£’000 £’000
Amounts owed to Group undertakings 7,262 18,485
Accruals and deferred income 249 1,135
Other creditors — 64
7,511 19,684
Amounts owed to Group undertakings are repayable upon demand and are non-interest bearing.
8 Creditors: amounts falling due after more than one year
2011 2010
£’000 £’000
Preference Shares (see note 9) 891 891
9 Called up share capital
2011 2010
Number £’000 Number £’000
Ordinary Shares
Allotted and fully paid shares of 1p each 84,051,019 840 42,638,103 426
Deferred Shares
Allotted and fully paid shares of 49p each 42,638,103 20,893 42,638,103 20,893
Preference Shares
Allotted and fully paid 10% cumulative shares of £1 each 891,429 891 891,429 891
On 23 April 2010, 2,131,905 warrants to acquire Ordinary Shares were exercised at nominal value and, accordingly, the Company
issued 2,131,905 Ordinary Shares. In addition to this, the Company issued a further 39,281,011 Ordinary Shares, at a subscription
price of 54p each (before deducting issue costs of £1,757,000), on 24 May 2010 under a Placing and Open Offer and a Firm Placing.
Preference Shares are presented within creditors falling due after more than one year, in accordance with the requirements
of FRS25.
Rights attaching to each class of share are disclosed within the Directors’ Report and Business Review. 00 00 www.blacks.co.uk www.millets.co.uk 78
Blacks Leisure Group plc Annual Report and Accounts 2011
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10 Share premium
£’000
At 27 February 2010 24,333
Premium arising on issue of share capital (note 9) 19,062
At 26 February 2011 43,395
11 Equity-settled share-based payments
The grants and related accounting treatment adopted by the Company under FRS20 ‘Share-based Payment’, in relation to share
options, are identical to that adopted by the Group under IFRS2 ‘Share-based Payment’. For details please refer to note 29 in the
consolidated financial statements.
12 Reserve for own shares
£’000
At 27 February 2010 and 26 February 2011 (773)
This reserve represents Ordinary Shares held by the Blacks Leisure Group Employee Benefit Trust that provides for the issue of
shares to Group employees under share incentive schemes. The number of shares in the Trust amounts to 344,578 (2010: 344,578)
with a market value at the year end of £77,000 (2010: £177,000).
13 Profit and loss account
£’000
At 27 February 2010 9,012
Loss for the financial year (1,882)
Equity-settled share-based payments credit 280
At 26 February 2011 7,410
14 Shareholders’ funds
2011 2010
£’000 £’000
(Loss)/profit after taxation (1,882) 14,010
Dividends — —
Retained (loss)/profit (1,882) 14,010
Issue of share capital 19,476 —
Accrued equity-settled share-based payments 280 1,277
Net movement in Shareholders’ funds 17,874 15,287
Opening Shareholders’ funds 53,891 38,604
Closing Shareholders’ funds 71,765 53,891
15 Commitments and contingencies
Contingent liabilities
The Company guarantees the bank borrowings of subsidiary undertakings which at 26 February 2011 amounted to £15,411,000
(2010: £15,310,000).
Notes to the Company Financial Statements
for the year ended 26 February 2011 00 00 79
20321.04 10/06/2011 Proof 5
Our Financials Our Governance Our Business
2011 2010 2009 2008 2007
£’000 £’000 £’000 £’000 £’000
Results (from continuing and
discontinued operations)
Revenue 201,933 249,048 267,551 294,414 298,276
Operating (loss)/profit excluding exceptional items (3,814) (14,326) (4,465) 2,181 1,583
Exceptional items 1,321 (27,116) (7,577) (9,596) (13,936)
Operating loss (2,493) (41,442) (12,042) (7,415) (12,353)
Net finance costs (2,766) (5,499) (2,374) (1,845) (1,491)
Loss before tax (5,259) (46,941) (14,416) (9,260) (13,844)
Loss attributable to equity holders (5,488) (49,432) (14,761) (6,051) (12,624)
Assets employed
Non-current assets 54,496 55,117 70,835 78,452 79,950
Current assets 43,147 47,409 63,344 71,466 80,637
Non-current liabilities (10,219) (10,939) (17,449) (18,514) (15,092)
Current liabilities (53,436) (71,152) (47,759) (47,972) (53,607)
Net assets 33,988 20,435 68,971 83,432 91,888
Financed by
Equity 33,988 20,435 68,971 83,432 91,888
Key statistics
Pence Pence Pence Pence Pence
Loss per share — Basic (6.56) (116.88) (34.91) (14.20) (29.69)
Loss per share — Diluted (6.56) (116.88) (34.91) (14.20) (29.69)
Ordinary dividend per share 0.00 0.00 0.00 3.00 5.30
Five Year Summary 00 00 www.blacks.co.uk www.millets.co.uk 80
Blacks Leisure Group plc Annual Report and Accounts 2011
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Shareholder Notes www.blacks.co.uk www.millets.co.uk
With a heritage dating back to 1861, Blacks
Leisure Group plc (‘Blacks Leisure’) operates in
the retail of Outdoor and Boardwear clothing and
equipment in the United Kingdom, Channel Isles
and Ireland.
Welcome to
Blacks Leisure Group plc
Blacks Leisure Group plc Annual Report and Accounts 2011
Exit from non-core Boardwear segment to be
completed by half year
New banking facilities agreed up to
November 2012
Julia Reynolds to join as new Chief Executive
Significant reduction in loss before tax to £5.3m
(2010: £43.6m) and in loss before tax and
exceptional items to £6.6m (2010: £14.4m)
New stores performing strongly
Focused on the Outdoors
20321.04 10/06/2011 Proof 5 20321.04 10/06/2011 Proof 5 Blacks Leisure Group plc
440/450 Cob Drive, Swan Valley
Northampton NN4 9BB
T: +44 (0)1604 597000 F: +44 (0)1604 597171
Shareholder helpline: 0871 664 0300
Email: [email protected]
www.blacksleisure.co.uk
Annual Report and Accounts
for the year ended 26 February 2011
Stock Exchange Code: BSLA
Focused
on the future
Blacks Leisure Group plc Annual Report and Accounts for the year ended 26 February 2011
20321.04 10/06/2011 Proof 5 20321.04 10/06/2011 Proof 5 | 00 00 www.blacks.co.uk www.millets.co.uk 08
Blacks Leisure Group plc Annual Report and Accounts 2011
20321.04 10/06/2011 Proof 5
Chief Executive’s Review
Neil Gillis
This was the third year of the Blacks Leisure turnaround
programme, which has been conducted against a backdrop of
sharp consumer recession and intense competitive pressure.
Importantly, for the first time in many years, we were able to
open new stores in the financial year under review and these
have performed strongly. One of the principal issues the Group
has faced, and one of the driving factors behind the historic
underperformance, was the fact that the store estate had been
significantly underinvested over a number of years and many
of the stores were old sites which lacked the necessary space
to retail our full range effectively. For the first two years of the
turnaround, the Group had to withstand the rapid openings of
brand new and larger stores by our competitors, often located
close or even adjacent to our own underinvested sites, without
being able to respond with capital investment of our own.
Following the CVAs and the subsequent equity fundraising
we were able to invest in our store estate and we opened or
converted 13 new stores during this period. These now account
for around 10% of the turnover in a business with 308 stores.
Being able to choose strong sites with the required amount
of trading space, on competitive rents, has driven exceptional
performances from these new stores. These new
“Much of the significant corporate
restructuring that the business required
has now been completed”
Neil Gillis, Chief Executive 00 00 09
Our Business Our Governance Our Financials
20321.04 10/06/2011 Proof 5
New approaches
to marketing
We have continued to make improvements to the way
we present and market our fascias. This has included
new point-of-sale devices and presentations within
some of our stores as well as a number of successful
direct marketing campaigns. We were proud to
be awarded a Gold Award by the Direct Marketing
Association during the year as an endorsement of the
quality of our promotional leaflets.
stores have given us further confidence that the proposition is
effective, that the formats work and that the business can take
on any of its competitors when it is trading on equal terms. It
has also highlighted the opportunity, should cash facilities allow,
for the business in the future as many of the leases on the old,
underinvested stores approach their expiry and we could therefore
potentially replace these stores with larger, higher returning new
stores. In the first couple of months of the new financial year we
have continued with this strategy with the conversion of three of
our remaining Freespirit stores in Plymouth, Exeter and Cardiff
to the new Blacks format and these businesses have made an
encouraging start.
Following the reduction of our overhead base, the planned full
exit from the loss-making Boardwear business, the reduction in
our debt requirement over the past three years, the CVAs and the
equity fundraising, much of the significant corporate restructuring
that the business required has now been completed as part of the
turnaround plan. The next phase of the programme now needs to
be focussed on further enhancing the retail proposition across our
stores and driving improvement in margin and product
performance. For this reason I believe it is right for me to hand
over the management of the Group to an experienced retailer
who has the background and skills to complete the final phase
of the turnaround and to develop the long term prospects for the
business.
After three intense years with Blacks Leisure, I am proud of what
we have been able to achieve, in particular the fact that we have
been able to preserve a business which provides the livelihoods of
around 4,000 dedicated staff across the British Isles.
Neil Gillis
Chief Executive
4 May 2011 | 00 00 www.blacks.co.uk www.millets.co.uk 02
Blacks Leisure Group plc Annual Report and Accounts 2011
20321.04 10/06/2011 Proof 5
Group at a Glance
Outdoor segment Store fascias
“For the first time in many years, we were
able to open new stores and these have
performed strongly”
Neil Gillis, Chief Executive
The heritage of Blacks can be traced back
to 1861. Today, and as one of the leading
Outdoor retailers in the UK, Blacks offers
some of the most prominent and high-
quality Outdoor proprietary brands as well as
developing and selling its own-label specialist
brands such as Technicals and ALS.
Blacks
Number of stores at 26 February 2011
Total revenue for the year ended 26 February 2011
Revenue: £194.8m
■ Blacks (31.8%)
98
■ Millets (65.3%)
201
■ Freespirit (2.9%)
9
■ Blacks (42.2%)
£85.2m
■ Millets (49.3%)
£99.6m
■ Freespirit (3.5%)
£7.1m
■ Other (including
internet) (5.0%)
£10.0m
PANTONE REFERENCE 4 COLOUR REFERENCE
PANTONE 871 u C = 39 M = 42 Y = 100 K = 11
00 00 03
Our Business Our Governance Our Financials
20321.04 10/06/2011 Proof 5
Boardwear segment
Diverse geographical
presence
The Group has a strong coverage of stores in
major towns and cities across the British Isles, with
257 stores in England, 21 in Scotland, 19 in Wales,
5 in Northern Ireland and 3 in Ireland, in addition
to a store on the Isle of Man and 2 stores in the
Channel Islands.
Freespirit Millets
Revenue: £7.1m
Millets offers a range of branded goods though has
a focus on key own-label brands, including Peter
Storm and Eurohike which are amongst the UK’s
most popular Outdoor clothing and equipment
brands.
Focused upon customers with a passion for
adrenaline sports, Freespirit offers a range of
iconic casual lifestyle brands. Owing to the
continuing decline in this Boardwear market,
the Group has taken the decision to exit fully
from this segment over the coming months. | 00 00 www.blacks.co.uk www.millets.co.uk 04
Blacks Leisure Group plc Annual Report and Accounts 2011
20321.04 10/06/2011 Proof 5
Chairman’s Statement
David Bernstein
“Trading conditions continued to be very
challenging throughout the period”
David Bernstein, Chairman
Overview
This has been another difficult year for both the Group and the UK
retail sector generally, with consumer confidence remaining fragile.
Despite this, action taken by the Group has resulted in the delivery
of a much reduced loss for the year.
Company Voluntary Arrangements (‘CVAs’) for the Company and
its main trading subsidiary, The Outdoor Group Limited, were
implemented in December 2009. This enabled the Group to
compromise 101 leases, including 88 trading stores which had
not been trading profitably for some time, and accordingly we
entered the financial year under review with a smaller but higher
quality store estate. This, alongside the placing of its Boardwear
subsidiary, Sandcity Limited (‘Sandcity’), into administration in
September 2009, enabled the Group to rationalise its business
and removed a tail of poorly performing stores which had, for
some years, depressed overall results.
A subsequent issue of new Ordinary Shares in May 2010, through
a Placing and Open Offer and Firm Placing, enabled the Group to
cancel its most expensive tranche of debt and to invest significant
capital, for the first time in a number of years, in the store estate.
During the financial year the Group opened 13 new or rebranded
stores, for which trading to date has been very encouraging.
The above restructuring actions reduced significantly the Group’s
presence in the Boardwear segment which has been in decline for
several years. As at the end of the financial year, the Group traded
from only 9 such stores, under the Freespirit brand. Since the end
of the year, the Group has begun to implement a plan to exit fully
from this segment and focus on the core Outdoor market. It is
intended that all remaining Freespirit stores will either be converted
to the Blacks or Millets fascias or will otherwise be closed by the
half year end.
Group results and key performance indicators
Total revenue from continuing activities of £201.9m represented
a decrease of 16.0% from the £240.5m recorded in the prior
year. Whilst the number of trading stores open as at the end of
the financial year was only slightly lower, with 308 stores at 26
February 2011 (2010: 313), the sales in the previous year
included 88 stores which closed in October and November 2009
in relation to the CVAs. After excluding the results of these 88
stores from the comparative figures, the reduction in revenue is
£8.8m or 4.2%.
Despite the net reduction in store numbers, which reflected the
closing of a number of mainly small and weakly performing sites
which were coming to the end of their lease term, the Group
opened 13 new or rebranded stores during the year. These stores
are already making a positive overall contribution to the Group
and are generally trading ahead of expectations and together now
account for around 10% of total Group revenues. These stores
are principally larger units, with the trading space to offer our
ranges more effectively, and which are benefitting from the capital
investment that has been made in ensuring these stores are fitted
out to a standard which is appropriate for our brand propositions.
In order to understand the underlying trend in trading, the Group
measures like-for-like sales which eliminates the effects of store
openings, refurbishments or closings. Like-for-like sales declined
during the year by 6.1% as commented on below.
Trading conditions continued to be very challenging throughout
the period, particularly in the first half during which adverse
economic conditions contributed to a decline in the key Outdoor
segment by 6.0%. Whilst the retail environment generally
continued to be tough throughout the second half, the business
took advantage of the particularly cold and snowy weather
conditions over the key Christmas trading period, during which
Outdoor like-for-like sales grew by some 10.2% despite being
measured against what was also a strong comparative period.
00 00 05
Our Business Our Governance Our Financials
20321.04 10/06/2011 Proof 5
Key Performance Indicators
Gross margin %
Performance:
48.7% 2011
2010 51.6%
Like-for-like sales %
Performance:
-6.1% 2011
2010 +5.4% 00 00 www.blacks.co.uk www.millets.co.uk 06
Blacks Leisure Group plc Annual Report and Accounts 2011
20321.04 10/06/2011 Proof 5
Chairman’s Statement
continued
Despite being impacted by weak consumer spending in the early
part of 2011 particularly, in common with other retailers, the strong
Winter trading performance meant that the second half recovered
some of the first half decline and the outturn for the Outdoor
segment for the full year was a reduction of 4.9%. Boardwear,
which is planned for closure in the coming months, declined by
28.5% on a like-for-like basis across the period.
The internet channel, within Outdoor, continued to grow strongly
at 44.2%. We have recently launched a new and improved web
platform for both www.blacks.co.uk and www.millets.co.uk, along
with an expanded product range. Internet sales accounted for
4.8% (2010: 2.7%) of total Group sales during the year and we are
targeting further growth in this channel during the coming year.
A gross margin of 48.7%, or 49.6% excluding the effect of
exceptional items, was achieved in the year (2010: 51.6%). Whilst
impacted by the competitive and economic climate, including the
strengthening of the US dollar, much of the loss in margin occurred
as a result of a discounting of stocks in the first half year. Many
stock orders for Spring/Summer 2010 had been placed prior to the
CVAs and order volumes were determined on the basis of a larger
store portfolio. This issue was compounded by the poor sales in the
first half and, accordingly, the business had to act decisively to clear
excess stocks and minimise the stock overhang, at the detriment of
margin, as we moved into the Autumn.
Store-related overheads have been reduced alongside the
reduction in stores. Efficiency and other cost savings have also
been driven within head office and the logistics function. These
factors have contributed to the Group recording a significant
reduction in loss before tax and exceptional items from £14.4m
to £6.6m.
Exceptional items during the year, which are discussed in more
detail in the Financial Review and within note 8, resulted in
a net credit of £1.3m (2010: net charge £29.2m). This credit
included the effect of a £5.4m release from the provision for
CVA related rates obligations owing to new tenants being found
for the associated properties, and therefore extinguishing the
ongoing liabilities, more quickly than had been anticipated. Other
exceptional charges, which largely offset this release, and a further
credit of £0.5m for proceeds accrued from the administration of
Sandcity Limited, related mainly to restructuring activity and in
particular the planned exit from the Boardwear segment.
Dividends
The Board has decided not to declare a final dividend for the year,
believing that the performance of the business does not warrant
the resultant cash outlay. We plan to resume dividend payments,
if considered appropriate, only when the business returns to a
suitable level of profitability.
“I am delighted to announce that Julia
Reynolds has accepted our offer to join
Blacks Leisure as Chief Executive”
David Bernstein, Chairman 00 00 07
Our Business Our Governance Our Financials
20321.04 10/06/2011 Proof 5
Store numbers
Board changes and appointment of Chief Executive
It was with great sadness that the Board announced the death of
Nick Samuel on 29 June 2010. Nick was a valued colleague who
made a significant contribution since joining the business as Non-
Executive Director in August 2008.
T om Knight was appointed to the Board as a Non-Executive
Director on 1 August 2010. T om is a former Executive Director of
the Company, having worked for the Group from 1987 to 2002
before leaving to subsequently join JJB Sports plc where he held
the position of Chief Executive from 2002 to 2007. The Board also
announced the appointment of Mark Hammersley as Non-Executive
Director on 20 September 2010. Mark has been Chief Executive of
Zoggs International Limited since 2003 and brings with him a strong
track record in managing major sports clothing brands.
On 10 February 2011 the Group announced that Neil Gillis
had given notice of his intention to resign from his role as Chief
Executive upon serving his six month notice period. I would like to
thank Neil for his significant contribution to the business over the
past three years and I wish him every success for the future.
Following a thorough search for a suitable successor, I am
delighted to announce that Julia Reynolds has accepted our offer
to join Blacks Leisure as Chief Executive towards the end of the
Summer. Julia is a very experienced buyer and retailer who will
join us from Figleaves.com where, as CEO, she drove a period of
significant growth and improvement in results. Prior to that, Julia
was Category Director at Tesco plc where she was responsible for
the introduction and subsequent success of the Florence & Fred
clothing range.
Corporate activity
The Company announced on 19 October 2010 that it had been
approached by several parties regarding a possible offer for the
Company or an offer to acquire certain of the trading activities
and related assets of the Group. A number of indicative proposals
were received and reviewed however, as the Board announced on
26 January 2011, none of these were considered to be sufficiently
compelling at that time to be pursued further and all these
discussions were therefore terminated.
Banking facilities
The Group has been working alongside its bankers, Bank of
Scotland plc, to extend its banking facilities which were due to
expire in December 2011. The Group today announces that it has
been successful in agreeing new revolving credit facilities with its
bankers which will now run until July 2012. The facilities will be
automatically extended to November 2012 upon the new Chief
Executive commencing employment with the Group by no later
than 30 September 2011. The extended facilities comprise a core
facility of up to £35.0m and a further new facility of £3.0m being
available during certain seasonal peaks (subject to the satisfaction
of certain conditions precedent).
Current trading and future outlook
During the new financial year so far, the Group has continued to
trade in extremely tough economic conditions. As a result, and in
common with the experiences of many other UK retailers, sales levels
in the period since the end of the financial year have been below our
expectations. Although margins have largely been preserved, there
has been an adverse impact on trading since the year end.
The Group faces a challenging year ahead in this uncertain retail
climate. Nevertheless, the Directors believe that the restructuring
activity that has been undertaken over the past few years has
given the Group a real opportunity to deliver a return to profitability
over the short to medium term. With much of this restructuring
activity now completed, the appointment of a new Chief Executive
with a specialist retail background is a significant step towards
completing this turnaround.
Finally, I would also like to recognise our hard-working and
talented staff who, despite the uncertainties of the significant
restructuring and operational changes that have taken place over
the past years, remain committed to continuing and delivering the
turnaround in the Group’s performance.
David Bernstein
Chairman
4 May 2011
26 February 27 February 28 February
2011 2010 2009
Millets 201 208 258
Blacks 98 92 115
Outdoor segment 299 300 373
Freespirit 9 13 35
O’Neill — — 12
Boardwear segment 9 13 47
Total 308 313 420 | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input Blacks Leisure Group plc
440/450 Cob Drive, Swan Valley
Northampton NN4 9BB
T: +44 (0)1604 597000 F: +44 (0)1604 597171
Shareholder helpline: 0871 664 0300
Email: [email protected]
www.blacksleisure.co.uk
Annual Report and Accounts
for the year ended 26 February 2011
Stock Exchange Code: BSLA
Focused
on the future
Blacks Leisure Group plc Annual Report and Accounts for the year ended 26 February 2011
20321.04 10/06/2011 Proof 5 20321.04 10/06/2011 Proof 5 www.blacks.co.uk www.millets.co.uk
With a heritage dating back to 1861, Blacks
Leisure Group plc (‘Blacks Leisure’) operates in
the retail of Outdoor and Boardwear clothing and
equipment in the United Kingdom, Channel Isles
and Ireland.
Welcome to
Blacks Leisure Group plc
Blacks Leisure Group plc Annual Report and Accounts 2011
Exit from non-core Boardwear segment to be
completed by half year
New banking facilities agreed up to
November 2012
Julia Reynolds to join as new Chief Executive
Significant reduction in loss before tax to £5.3m
(2010: £43.6m) and in loss before tax and
exceptional items to £6.6m (2010: £14.4m)
New stores performing strongly
Focused on the Outdoors
20321.04 10/06/2011 Proof 5 20321.04 10/06/2011 Proof 5 20321.04 10/06/2011 Proof 5
01 Stock Exchange Code: BSLA
Group at a Glance 02
Chairman’s Statement 04
Chief Executive’s Review 08
Financial Review 10
Corporate Social Responsibility 14
Directors and Advisors 16
Corporate Governance Statement 18
Directors’ Remuneration Report 22
Directors’ Report and Business Review 26
Independent Auditors’ Report 32
Consolidated Statement of Comprehensive Income 33
Consolidated Balance Sheet 34
Consolidated Cash Flow Statement 35
Consolidated Statement of Changes in Equity 36
Notes to the Financial Statements 37
Company Balance Sheet 74
Notes to the Company Financial Statements 75
Five Year Summary 79
Contents 00 00 www.blacks.co.uk www.millets.co.uk 02
Blacks Leisure Group plc Annual Report and Accounts 2011
20321.04 10/06/2011 Proof 5
Group at a Glance
Outdoor segment Store fascias
“For the first time in many years, we were
able to open new stores and these have
performed strongly”
Neil Gillis, Chief Executive
The heritage of Blacks can be traced back
to 1861. Today, and as one of the leading
Outdoor retailers in the UK, Blacks offers
some of the most prominent and high-
quality Outdoor proprietary brands as well as
developing and selling its own-label specialist
brands such as Technicals and ALS.
Blacks
Number of stores at 26 February 2011
Total revenue for the year ended 26 February 2011
Revenue: £194.8m
■ Blacks (31.8%)
98
■ Millets (65.3%)
201
■ Freespirit (2.9%)
9
■ Blacks (42.2%)
£85.2m
■ Millets (49.3%)
£99.6m
■ Freespirit (3.5%)
£7.1m
■ Other (including
internet) (5.0%)
£10.0m
PANTONE REFERENCE 4 COLOUR REFERENCE
PANTONE 871 u C = 39 M = 42 Y = 100 K = 11
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Boardwear segment
Diverse geographical
presence
The Group has a strong coverage of stores in
major towns and cities across the British Isles, with
257 stores in England, 21 in Scotland, 19 in Wales,
5 in Northern Ireland and 3 in Ireland, in addition
to a store on the Isle of Man and 2 stores in the
Channel Islands.
Freespirit Millets
Revenue: £7.1m
Millets offers a range of branded goods though has
a focus on key own-label brands, including Peter
Storm and Eurohike which are amongst the UK’s
most popular Outdoor clothing and equipment
brands.
Focused upon customers with a passion for
adrenaline sports, Freespirit offers a range of
iconic casual lifestyle brands. Owing to the
continuing decline in this Boardwear market,
the Group has taken the decision to exit fully
from this segment over the coming months. 00 00 www.blacks.co.uk www.millets.co.uk 04
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Chairman’s Statement
David Bernstein
“Trading conditions continued to be very
challenging throughout the period”
David Bernstein, Chairman
Overview
This has been another difficult year for both the Group and the UK
retail sector generally, with consumer confidence remaining fragile.
Despite this, action taken by the Group has resulted in the delivery
of a much reduced loss for the year.
Company Voluntary Arrangements (‘CVAs’) for the Company and
its main trading subsidiary, The Outdoor Group Limited, were
implemented in December 2009. This enabled the Group to
compromise 101 leases, including 88 trading stores which had
not been trading profitably for some time, and accordingly we
entered the financial year under review with a smaller but higher
quality store estate. This, alongside the placing of its Boardwear
subsidiary, Sandcity Limited (‘Sandcity’), into administration in
September 2009, enabled the Group to rationalise its business
and removed a tail of poorly performing stores which had, for
some years, depressed overall results.
A subsequent issue of new Ordinary Shares in May 2010, through
a Placing and Open Offer and Firm Placing, enabled the Group to
cancel its most expensive tranche of debt and to invest significant
capital, for the first time in a number of years, in the store estate.
During the financial year the Group opened 13 new or rebranded
stores, for which trading to date has been very encouraging.
The above restructuring actions reduced significantly the Group’s
presence in the Boardwear segment which has been in decline for
several years. As at the end of the financial year, the Group traded
from only 9 such stores, under the Freespirit brand. Since the end
of the year, the Group has begun to implement a plan to exit fully
from this segment and focus on the core Outdoor market. It is
intended that all remaining Freespirit stores will either be converted
to the Blacks or Millets fascias or will otherwise be closed by the
half year end.
Group results and key performance indicators
Total revenue from continuing activities of £201.9m represented
a decrease of 16.0% from the £240.5m recorded in the prior
year. Whilst the number of trading stores open as at the end of
the financial year was only slightly lower, with 308 stores at 26
February 2011 (2010: 313), the sales in the previous year
included 88 stores which closed in October and November 2009
in relation to the CVAs. After excluding the results of these 88
stores from the comparative figures, the reduction in revenue is
£8.8m or 4.2%.
Despite the net reduction in store numbers, which reflected the
closing of a number of mainly small and weakly performing sites
which were coming to the end of their lease term, the Group
opened 13 new or rebranded stores during the year. These stores
are already making a positive overall contribution to the Group
and are generally trading ahead of expectations and together now
account for around 10% of total Group revenues. These stores
are principally larger units, with the trading space to offer our
ranges more effectively, and which are benefitting from the capital
investment that has been made in ensuring these stores are fitted
out to a standard which is appropriate for our brand propositions.
In order to understand the underlying trend in trading, the Group
measures like-for-like sales which eliminates the effects of store
openings, refurbishments or closings. Like-for-like sales declined
during the year by 6.1% as commented on below.
Trading conditions continued to be very challenging throughout
the period, particularly in the first half during which adverse
economic conditions contributed to a decline in the key Outdoor
segment by 6.0%. Whilst the retail environment generally
continued to be tough throughout the second half, the business
took advantage of the particularly cold and snowy weather
conditions over the key Christmas trading period, during which
Outdoor like-for-like sales grew by some 10.2% despite being
measured against what was also a strong comparative period.
00 00 05
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Key Performance Indicators
Gross margin %
Performance:
48.7% 2011
2010 51.6%
Like-for-like sales %
Performance:
-6.1% 2011
2010 +5.4% 00 00 www.blacks.co.uk www.millets.co.uk 06
Blacks Leisure Group plc Annual Report and Accounts 2011
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Chairman’s Statement
continued
Despite being impacted by weak consumer spending in the early
part of 2011 particularly, in common with other retailers, the strong
Winter trading performance meant that the second half recovered
some of the first half decline and the outturn for the Outdoor
segment for the full year was a reduction of 4.9%. Boardwear,
which is planned for closure in the coming months, declined by
28.5% on a like-for-like basis across the period.
The internet channel, within Outdoor, continued to grow strongly
at 44.2%. We have recently launched a new and improved web
platform for both www.blacks.co.uk and www.millets.co.uk, along
with an expanded product range. Internet sales accounted for
4.8% (2010: 2.7%) of total Group sales during the year and we are
targeting further growth in this channel during the coming year.
A gross margin of 48.7%, or 49.6% excluding the effect of
exceptional items, was achieved in the year (2010: 51.6%). Whilst
impacted by the competitive and economic climate, including the
strengthening of the US dollar, much of the loss in margin occurred
as a result of a discounting of stocks in the first half year. Many
stock orders for Spring/Summer 2010 had been placed prior to the
CVAs and order volumes were determined on the basis of a larger
store portfolio. This issue was compounded by the poor sales in the
first half and, accordingly, the business had to act decisively to clear
excess stocks and minimise the stock overhang, at the detriment of
margin, as we moved into the Autumn.
Store-related overheads have been reduced alongside the
reduction in stores. Efficiency and other cost savings have also
been driven within head office and the logistics function. These
factors have contributed to the Group recording a significant
reduction in loss before tax and exceptional items from £14.4m
to £6.6m.
Exceptional items during the year, which are discussed in more
detail in the Financial Review and within note 8, resulted in
a net credit of £1.3m (2010: net charge £29.2m). This credit
included the effect of a £5.4m release from the provision for
CVA related rates obligations owing to new tenants being found
for the associated properties, and therefore extinguishing the
ongoing liabilities, more quickly than had been anticipated. Other
exceptional charges, which largely offset this release, and a further
credit of £0.5m for proceeds accrued from the administration of
Sandcity Limited, related mainly to restructuring activity and in
particular the planned exit from the Boardwear segment.
Dividends
The Board has decided not to declare a final dividend for the year,
believing that the performance of the business does not warrant
the resultant cash outlay. We plan to resume dividend payments,
if considered appropriate, only when the business returns to a
suitable level of profitability.
“I am delighted to announce that Julia
Reynolds has accepted our offer to join
Blacks Leisure as Chief Executive”
David Bernstein, Chairman 00 00 07
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Store numbers
Board changes and appointment of Chief Executive
It was with great sadness that the Board announced the death of
Nick Samuel on 29 June 2010. Nick was a valued colleague who
made a significant contribution since joining the business as Non-
Executive Director in August 2008.
T om Knight was appointed to the Board as a Non-Executive
Director on 1 August 2010. T om is a former Executive Director of
the Company, having worked for the Group from 1987 to 2002
before leaving to subsequently join JJB Sports plc where he held
the position of Chief Executive from 2002 to 2007. The Board also
announced the appointment of Mark Hammersley as Non-Executive
Director on 20 September 2010. Mark has been Chief Executive of
Zoggs International Limited since 2003 and brings with him a strong
track record in managing major sports clothing brands.
On 10 February 2011 the Group announced that Neil Gillis
had given notice of his intention to resign from his role as Chief
Executive upon serving his six month notice period. I would like to
thank Neil for his significant contribution to the business over the
past three years and I wish him every success for the future.
Following a thorough search for a suitable successor, I am
delighted to announce that Julia Reynolds has accepted our offer
to join Blacks Leisure as Chief Executive towards the end of the
Summer. Julia is a very experienced buyer and retailer who will
join us from Figleaves.com where, as CEO, she drove a period of
significant growth and improvement in results. Prior to that, Julia
was Category Director at Tesco plc where she was responsible for
the introduction and subsequent success of the Florence & Fred
clothing range.
Corporate activity
The Company announced on 19 October 2010 that it had been
approached by several parties regarding a possible offer for the
Company or an offer to acquire certain of the trading activities
and related assets of the Group. A number of indicative proposals
were received and reviewed however, as the Board announced on
26 January 2011, none of these were considered to be sufficiently
compelling at that time to be pursued further and all these
discussions were therefore terminated.
Banking facilities
The Group has been working alongside its bankers, Bank of
Scotland plc, to extend its banking facilities which were due to
expire in December 2011. The Group today announces that it has
been successful in agreeing new revolving credit facilities with its
bankers which will now run until July 2012. The facilities will be
automatically extended to November 2012 upon the new Chief
Executive commencing employment with the Group by no later
than 30 September 2011. The extended facilities comprise a core
facility of up to £35.0m and a further new facility of £3.0m being
available during certain seasonal peaks (subject to the satisfaction
of certain conditions precedent).
Current trading and future outlook
During the new financial year so far, the Group has continued to
trade in extremely tough economic conditions. As a result, and in
common with the experiences of many other UK retailers, sales levels
in the period since the end of the financial year have been below our
expectations. Although margins have largely been preserved, there
has been an adverse impact on trading since the year end.
The Group faces a challenging year ahead in this uncertain retail
climate. Nevertheless, the Directors believe that the restructuring
activity that has been undertaken over the past few years has
given the Group a real opportunity to deliver a return to profitability
over the short to medium term. With much of this restructuring
activity now completed, the appointment of a new Chief Executive
with a specialist retail background is a significant step towards
completing this turnaround.
Finally, I would also like to recognise our hard-working and
talented staff who, despite the uncertainties of the significant
restructuring and operational changes that have taken place over
the past years, remain committed to continuing and delivering the
turnaround in the Group’s performance.
David Bernstein
Chairman
4 May 2011
26 February 27 February 28 February
2011 2010 2009
Millets 201 208 258
Blacks 98 92 115
Outdoor segment 299 300 373
Freespirit 9 13 35
O’Neill — — 12
Boardwear segment 9 13 47
Total 308 313 420 00 00 www.blacks.co.uk www.millets.co.uk 08
Blacks Leisure Group plc Annual Report and Accounts 2011
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Chief Executive’s Review
Neil Gillis
This was the third year of the Blacks Leisure turnaround
programme, which has been conducted against a backdrop of
sharp consumer recession and intense competitive pressure.
Importantly, for the first time in many years, we were able to
open new stores in the financial year under review and these
have performed strongly. One of the principal issues the Group
has faced, and one of the driving factors behind the historic
underperformance, was the fact that the store estate had been
significantly underinvested over a number of years and many
of the stores were old sites which lacked the necessary space
to retail our full range effectively. For the first two years of the
turnaround, the Group had to withstand the rapid openings of
brand new and larger stores by our competitors, often located
close or even adjacent to our own underinvested sites, without
being able to respond with capital investment of our own.
Following the CVAs and the subsequent equity fundraising
we were able to invest in our store estate and we opened or
converted 13 new stores during this period. These now account
for around 10% of the turnover in a business with 308 stores.
Being able to choose strong sites with the required amount
of trading space, on competitive rents, has driven exceptional
performances from these new stores. These new
“Much of the significant corporate
restructuring that the business required
has now been completed”
Neil Gillis, Chief Executive 00 00 09
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New approaches
to marketing
We have continued to make improvements to the way
we present and market our fascias. This has included
new point-of-sale devices and presentations within
some of our stores as well as a number of successful
direct marketing campaigns. We were proud to
be awarded a Gold Award by the Direct Marketing
Association during the year as an endorsement of the
quality of our promotional leaflets.
stores have given us further confidence that the proposition is
effective, that the formats work and that the business can take
on any of its competitors when it is trading on equal terms. It
has also highlighted the opportunity, should cash facilities allow,
for the business in the future as many of the leases on the old,
underinvested stores approach their expiry and we could therefore
potentially replace these stores with larger, higher returning new
stores. In the first couple of months of the new financial year we
have continued with this strategy with the conversion of three of
our remaining Freespirit stores in Plymouth, Exeter and Cardiff
to the new Blacks format and these businesses have made an
encouraging start.
Following the reduction of our overhead base, the planned full
exit from the loss-making Boardwear business, the reduction in
our debt requirement over the past three years, the CVAs and the
equity fundraising, much of the significant corporate restructuring
that the business required has now been completed as part of the
turnaround plan. The next phase of the programme now needs to
be focussed on further enhancing the retail proposition across our
stores and driving improvement in margin and product
performance. For this reason I believe it is right for me to hand
over the management of the Group to an experienced retailer
who has the background and skills to complete the final phase
of the turnaround and to develop the long term prospects for the
business.
After three intense years with Blacks Leisure, I am proud of what
we have been able to achieve, in particular the fact that we have
been able to preserve a business which provides the livelihoods of
around 4,000 dedicated staff across the British Isles.
Neil Gillis
Chief Executive
4 May 2011 00 00 www.blacks.co.uk www.millets.co.uk 10
Blacks Leisure Group plc Annual Report and Accounts 2011
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Financial Review
Marc Lombardo
Trading results
The Group loss before tax and exceptional items, from continuing
operations, was £6.6m (2010: £14.4m). Whilst this reflects a
disappointing period of trading, particularly in the first half year,
it does represent a significant underlying improvement in results
following the restructuring action taken in the prior year, including the
CVAs.
The CVAs, which were effective in December 2009, removed 88
poorly performing sites from the estate. A number of additional
stores that, despite trading weakly, were not included in the CVAs
due to short remaining lease terms or other contractual reasons,
have either closed during the past year or are planned for closure
over the coming months. The closures in the current year have been
substantially mitigated by the opening of 13 new stores, which are
generally trading ahead of expectations. These actions will leave a
smaller but much improved store portfolio from which to trade going
forward. As at the end of the financial year, the Group was trading
from 308 (2010: 313) retail stores.
Further action is now planned for the coming months which will see
the Group fully exit from the Boardwear segment which has traded
at substantial losses for some time. This will be achieved through
a combination of store conversions and negotiated lease exits and
will enable the Group to focus on its core Outdoor segment. Actions
taken over the past two years, including the CVAs, have already
significantly reduced the Group’s presence in the Boardwear market
and, as at the end of the financial year, the remaining stores in this
segment comprise only 9 of the total estate of 308 stores.
Some costs of the planned exit from Boardwear have been
reflected in these financial statements, as set out in note 8, mainly
in relation to provisions for impairment of property, plant
and equipment plus net realisable value provisions
against the carrying value of Boardwear specific
inventories. Given the restructuring plan for the exit
from Boardwear was not fully committed at the
end of the financial year, in the context of IAS37
recognition criteria, provision for further costs of
this exit, such as redundancy costs
and costs of exiting leases, has
not been included within these
financial statements.
Exceptional operating items
Exceptional operating items (see note 8) amounting to a net
credit of £1.3m (2010: £26.2m net charge) were recorded in
connection with continuing operations, relating to the following
main components:
h h release of £5.4m of provisions for ongoing business rates
obligations on properties exited during the CVAs, as a result
of new tenants having been found for these sites more quickly
than anticipated, and therefore extinguishing the obligations of
the Group more quickly than had been forecast;
h h professional fees of £0.2m incurred in connection with aborted
discussions surrounding a possible offer for all or part of the
business, following the Group having received approaches
from several parties as announced on 19 October 2010;
h h restructuring related costs of £4.3m, including redundancy
costs (mainly relating to head office functions), onerous lease
provisions in respect of properties vacated, impairment of
property, plant and equipment and provisions against certain
Boardwear specific inventories; and
h h proceeds accrued of £0.5m from the administration of
Sandcity Limited, a former wholly-owned subsidiary which
operated in the Boardwear segment and which was placed
into administration in September 2009.
“Further action is planned for the coming
months which will see the Group exit fully
from the Boardwear segment”
Marc Lombardo, Finance Director 00 00 11
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20321.04 10/06/2011 Proof 5
New brands introduced
The product ranges have recently been improved
with the introduction of a number of new high-
quality brands to the Blacks portfolio. Our
credentials as a retailer of expert apparel and
equipment are enhanced through the new ranges
offered by Lowe Alpine, Mammut, Marmot and
Scarpa. We have also added to our lifestyle
offering, most recently with the introduction of
Animal and Weird Fish. 00 00 www.blacks.co.uk www.millets.co.uk 12
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“The Group has been successful in
agreeing to extend its facilities with
its bankers”
Marc Lombardo, Finance Director
Financial Review
continued
Goodwill
Goodwill has been subject to an impairment review and the Board
is satisfied that the carrying value is not impaired as at the balance
sheet date.
Cash flow
The net cash outflow in the year was £1.7m (2010: £8.7m). Cash
used in operations of £12.9m (2010: £2.7m) was predominantly
the result of the £13.2m movement in respect of provisions, which
included the payment of £7.3m to the compensation fund for
landlords compromised as a result of the CVAs and the settlement
of other CVA related obligations, including the ongoing rates
obligations on properties closed during the CVAs.
Working capital continues to be a focus and, whilst trade and
other payables have decreased by £6.6m, this is due in part to
timing differences around the year end. Total inventories were
£36.1m (2010: £39.0m) with stock cover at the year end being
129 days (2010: 120 days). The stock holding around the year
end is always relatively high owing to the seasonality in the
business and, in particular, the receipt of ranges ahead of the
launch of the Spring/Summer season. The timing of stock intake
over the coming year has been planned so as to reduce the
average stock holding and, consequently, to improve the efficiency
of working capital throughout the period.
The Company successfully raised a net £19.5m of new equity in
May 2010 through a Placing and Open Offer and a Firm Placing,
during which the Company issued 39,281,011 new Ordinary
Shares. This provided cash which enabled the Group to cancel
the more expensive tranche of its borrowing facility as well as to
help facilitate an acceleration in its turnaround plan, particularly
with regard to the opening of new stores.
Aided by this cash, the Group was able to open 13 new or
rebranded stores during the year, 10 of which trade as Blacks
and 3 under the Millets fascia. Since opening, sales from these
new stores have exceeded expectations and, already, these new
stores are making a strong overall contribution to the Group. In
total, £4.2m of the total capital expenditure incurred of £5.4m
(2010: £2.9m) has been in respect of the store estate, with the
balance of £1.2m relating to central systems and projects.
Financial risks and treasury policy
The key financial risks faced by the Group relate to the availability
of funds to meet the business needs and the fluctuations in
interest rates. The Group manages borrowing, liquidity, interest
rate, foreign exchange and banking relationships in accordance
with Board approved policies designed to minimise exposures.
The Group finances its operations by a combination of internally
generated cash flow and bank borrowings. Risk is controlled
by careful forecasting and monitoring to ensure the Group has
sufficient undrawn bank facilities to meet increases in projected
borrowings, and remain within financial covenants, over the 00 00 13
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20321.04 10/06/2011 Proof 5
forthcoming period of at least 12 months. As set out below, the
Group has been able to agree with its bankers an extension of its
existing revolving credit facility and a new revolving credit facility
which is available during certain seasonal peaks.
Foreign currencies
Transaction exposure resulting from stock purchases
denominated in foreign currencies may be hedged by forward
foreign currency contracts and currency options. The Group policy
aims to minimise exposure with the intention of protecting the
buying margin from fluctuations in the underlying value of foreign
currency.
At the year end, the Group was committed to forward exchange
contracts to buy US$17.0m (2010: US$20.5m) of currency, at an
average exchange rate of 1.575. The value of the US dollar relative
to sterling has traded during the financial year at an average rate
of 1.545 and has been as strong as 1.434. The Group has used
forward contracts successfully in managing its exchange risk over
the financial year, achieving an average effective exchange rate on
its dollar denominated stock purchases of 1.601 despite what has
been a volatile period in the currency markets.
Financial position and banking facilities
At the year end the Group’s net bank borrowings amounted to
£14.4m (2010: £12.6m), which included a drawn loan of £20.0m.
After deductions of guarantees and other ancillary facilities, an
amount of £17.2m of the banking facility was undrawn as at the
year end. The availability of cash is nonetheless a critical factor in
determining the speed at which the Directors are able to invest in
the growth of the business. Since the end of the year, the Group
has however been successful in agreeing to extend its facilities
with its bankers. This agreement provides a continued core
revolving credit facility of up to £35.0m, with a further new facility
of £3.0m available during certain seasonal peaks. This agreement,
which runs until July 2012 (and is automatically extended to
November 2012 upon the new Chief Executive commencing
employment with the Group prior to 30 September 2011), gives
the Group the stability of a longer-term financing platform from
which to embark upon the next stages in its turnaround.
Marc Lombardo
Finance Director
4 May 2011
New store openings
The Group has opened 13 new or rebranded stores
during the year, each designed to more effectively offer
our ranges in a significantly improved retail environment
for the customer. These have been successfully supported
by launch events attended by the likes of Sir Chris
Bonnington. Results from these new stores are very
encouraging with trading levels ahead of expectations. 00 00 www.blacks.co.uk www.millets.co.uk 14
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The Board recognises the importance of balancing the interests
of all its key stakeholders, including employees, Shareholders,
customers, suppliers and the communities in which it operates,
and believes that the long-term success of the Group is greatly
enhanced by valuing and developing relationships with key
stakeholders.
Employees
People are key to achieving the Group’s business objectives.
The Group has established policies for recruiting, training and
development and is committed to achieving excellent health,
safety, welfare and protection of employees and their working
environment.
The Group ensures, as far as is reasonably practicable, that a safe
and healthy workplace and working environment is provided for
all its employees to a standard which is at least as high as that
required by law. The Group’s employment policies are designed
to produce a framework within which all staff are treated in a fair
and consistent manner. They have been developed to ensure that
staff are aware of what is expected of them and what the Group,
for its part, offers in return. All employees are expected to observe
and abide by the Group’s policies and procedures which are
clearly set out in a manual available to staff in stores and also on
the Group intranet. The Group policy is one of equal opportunity in
the selection, career progression and promotion of all employees.
There are clear grievance and disciplinary procedures in place.
The Group maintains close consultation with its employees
regarding matters likely to affect their interests and is committed to
involving them in the performance and development of the Group.
It is the policy of the Group to support the employment of disabled
persons wherever practicable and to ensure as far as possible
that they participate in all career opportunities available to staff.
Suppliers
The Group purchases goods for resale from suppliers based in the
UK and direct from manufacturers around the world. The Group
endeavours to ensure that the suppliers of our goods provide
reasonable working standards for their employees and do not
contravene the employment laws of their country.
Customers
The Group aims to provide a high quality of service to all its
customers and ensure that all products are safe and fit for purpose.
The Group endeavours to provide accessibility to its different
shopping channels for all customers. The Group employs a
customer service department which is actively engaged in dealing
promptly and efficiently with customer issues and enquiries.
Health and safety
The Group recognises the importance of health and safety in the
workplace and its management is designed to improve business
performance. Practical measures, such as risk assessments, are
undertaken to ensure that the Group’s activities and products
do not pose a risk to customers, employees, contractors,
sites or equipment. Procedures are in place to enable effective
communication and consultation about health, safety and welfare
issues in order to achieve a high level of safety awareness.
Environment
The Group believes that businesses have a responsibility to
achieve good environmental practice and to continue to strive
for improvement in its environmental impact. The efficient and
effective use of resources makes sound commercial sense. In
view of this, the Group has appropriate environmental policies
and sets objectives taking due account of the business risks and
opportunities.
Community
As a multi-site retail operator, the Group’s community involvement
is generated by its stores, which contribute to their local areas
in a variety of ways. The Group supports and encourages these
activities and welcomes the opportunities they present for team-
building within the business and relationship-building with the
communities in which we operate.
Corporate Social Responsibility
“The Board believes that the long-
term success of the Group is greatly
enhanced by valuing and developing
relationships with key stakeholders” 00 00 15
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Our Business Our Governance Our Financials
www.blacks.co.uk
www.millets.co.uk
Trading from the web channels has continued to show
consistent growth and recorded an increase of 44.2% in the
year, accounting for 4.8% (2010: 2.7%) of the total sales of
the Group. During the year, both www.blacks.co.uk and www.
millets.co.uk launched new web platforms in order to provide
an improved customer experience. The Directors have targeted
these sales channels with achieving continued strong growth
during the coming year as a result of these new platforms, the
offering of a wider product range and the planned development
of a more integrated approach to web trading, including a
‘reserve and collect’ service through the stores.
Improved web platforms 00 00 www.blacks.co.uk www.millets.co.uk 16
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Directors and Advisors
David A. Bernstein FCA
Non-Executive Chairman
David (67) joined the Board in 1995 and
was appointed Non-Executive Chairman in
June 2001. He has extensive experience in
the sports and leisure industry, having spent
six years as Joint Managing Director of
Pentland Group plc, five years as Chairman
of Manchester City plc, and in January
2011 was appointed to the position of
Chairman of The Football Association. He is
also Chairman of Sports and Leisure Group
Limited and Orchid Group Limited, and
Non-Executive Director of Ted Baker plc
and Wembley National Stadium Limited.
Neil D. Gillis
Chief Executive
Neil (46) joined the Board in November
2007 as Chief Executive. Prior to this
he held a number of senior positions in
consumer-facing businesses including
Chief Executive of Esporta Health Clubs
Limited from 2003 to 2007, Chairman of
Duchy Originals, Managing Director of
the Greene King plc Pub Company and
Managing Director of Linda McCartney
Foods. Neil gave notice on 10 February
2011 of his intention to resign from his
position in six months’ time under the
terms of his service contract.
Marcello A. Lombardo BA, ACMA
Finance Director
Marc (52) was appointed to the Board as
Finance Director in August 2008. Prior to this
he was Financial Planning Director of Greene
King plc where he spent ten years. Marc
has also held senior finance positions with
Scottish & Newcastle and the Daily Mail.
Mark A. Hammersley
Non-Executive Director
Mark (54) joined the Board as a Non-
Executive Director in September 2010.
He has been Chief Executive of Zoggs
International Limited (the swimwear brand
that is part of the Kendal Group) since
2003 and has a strong track record in
managing major sports clothing brands,
having run the Lowe Alpine and Tenson
brands, Speedo and Rockport.
Thomas W. Knight BA
Non-Executive Director
Tom (58) joined the Board as a Non-
Executive Director in August 2010. He is a
former Executive Director of the Company,
having worked for the Group from 1987 to
2002. Tom subsequently joined JJB Sports
plc as Chief Executive from 2002 to 2007.
He was also a Non-Executive Director of
Ultimate Leisure plc until 2006.
00 00 17
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Our Business Our Governance Our Financials
Registered office
440/450 Cob Drive
Swan Valley
Northampton NN4 9BB
Auditors
BDO LLP
Emerald House
East Street
Epsom
Surrey KT17 1HS
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Financial public relations
Citigate Dewe Rogerson
3 London Wall Buildings
London Wall
London EC2M 5SY
Company Secretary
Mark D. Beacham, BSc, FCA
Company Number
582190
Stockbrokers
Singer Capital Markets Limited
One Hanover Street
London W1S 1YZ
Solicitors
DLA Piper UK LLP
Victoria Square House
Victoria Square
Birmingham B2 4DL
Travers Smith LLP
10 Snow Hill
London EC1A 2AL
Principal bankers
Bank of Scotland plc
PO Box 17235
Edinburgh EH11 1YH 00 00 www.blacks.co.uk www.millets.co.uk 18
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Corporate Governance Statement
There is a commitment to high standards of corporate governance
throughout the Group. The Board endorses the general principles
set out in the Combined Code on Corporate Governance issued
by the Financial Reporting Council in 2008 (‘the 2008 Code’) and
is accountable to the Group’s Shareholders for good governance.
In view of the size of the Group and its management structure,
not all of the detailed provisions set out in the 2008 Code have
been applied during the year. Those elements that have not
been applied are disclosed below. Following the appointment
of additional Non-Executive Directors during the year, the Board
is reviewing its corporate governance procedures, taking into
account the publication of the new UK Corporate Governance
Code which will apply to the Company for the financial year
ending 3 March 2012.
The Listing Rules require the Board to explain how corporate
governance is conducted within the Company and to report on
compliance with the provisions of the 2008 Code, the guiding
principle of which is “comply or explain”. This Corporate Governance
Statement, together with the Directors’ Remuneration Report,
explains key features of the Company’ s corporate governance
structure, how the Company applies the principles of the 2008
Code and the extent to which the Company has complied with the
provisions of the 2008 Code during the period under review.
The Board considers that the Company has complied with
the provisions of the 2008 Code throughout the year ended
26 February 2011 except as set out below.
2008 Code provision A3.2 recommends that a company outside
the FTSE 350 index should have at least two independent Non-
Executive Directors. As explained below, the Company did not
comply with this provision until 20 September 2010.
2008 Code provision A3.3 recommends that one of the independent
Non-Executive Directors should be appointed as Senior Independent
Director. As explained below, there was no such appointment
between 29 June 2010 and 29 September 2010.
2008 Code provisions A4.1, B2.1 and C3.1 recommend that
the Nominations, Remuneration and Audit Committees be
comprised solely of or have a majority of independent Non-
Executive Directors as members and that the Remuneration and
Audit Committees be chaired by an independent Non-Executive
Director. Due to its composition, the Board was unable to comply
with this recommendation until 29 September 2010.
The Board of Directors
The present Board consists of a Non-Executive Chairman
(David Bernstein), two Executive Directors (Neil Gillis and Marc
Lombardo) and two further Non-Executive Directors (Tom Knight
and Mark Hammersley). Mr Knight was appointed on 1 August
2010 and Mr Hammersley was appointed on 20 September
2010. Nick Samuel was a Non-Executive Director until his death
on 29 June 2010. The names and biographical details of the
current Board members appear within the Directors and Advisors
section of this Annual Report. These indicate the high calibre and
experience which these individuals bring to enable the Group to
be managed effectively.
Mr Bernstein has served on the Board for over nine years and
therefore does not satisfy the definition of independence set out in
the 2008 Code. Notwithstanding this, Mr Bernstein is considered
by the Board to exercise independent judgement in performing his
role. Mr Knight and Mr Hammersley are considered by the Board
to be independent of management and free of any relationship or
circumstances which could materially interfere with the exercise of
their independent judgement and to fully satisfy the 2008 Code’s
definition of independence. Mr Samuel was also considered to
fully satisfy this definition.
The Non-Executive Directors’ interests in the shares of the
Company are set out in the Directors’ Report and Business
Review. They receive a fixed fee for their services.
The Board meets ten times each year and more frequently
where business needs require. The Board has a schedule of
matters reserved for its decision which includes material capital
commitments, commencing or settling major litigation, business
acquisitions and disposals and appointments to the Board and
of the Company Secretary. All matters of an operational nature
are delegated to the Executive Directors. All Directors are given
appropriate and timely information for each Board meeting,
including reports on the current financial and trading position of
each business.
Mr Samuel was Senior Independent Director until 29 June 2010
and Mr Knight was appointed Senior Independent Director on
29 September 2010. There was no appointment between these
dates. During the year, the Chairman and Non-Executive Directors
met without the Executive Directors present and also the Non-
Executive Directors met separately without the Chairman present.
Any Director appointed is required to retire and seek election by
Shareholders at the next Annual General Meeting. Additionally,
one-third of the Directors retire by rotation each year and seek
re-election at the Annual General Meeting. The Directors required
to retire are those in office longest since their previous re-election.
Each Director is also required to retire at least every three years.
Non-Executive Directors who have served on the Board for more
than nine years are subject to annual re-election.
All Directors have access to independent professional advice if
required and at the Company’s expense. This is in addition to
the access which every Director has to the Company Secretary.
The Secretary is charged by the Board with ensuring that Board
procedures are followed.
Chairman and Chief Executive
There is a clear division of responsibilities between the roles of the
Chairman and the Chief Executive and these have been approved
by the Board. 00 00 19
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The role of the Chairman is to conduct Board meetings and
meetings of Shareholders and to ensure that all Directors are
properly briefed in order to take a full and constructive part
in Board discussions. He is responsible for evaluating the
performance of the Board, its Committees and each of the
other Directors. This includes addressing the development
needs of the Board as a whole with the view to enhancing its
overall effectiveness, and covers capability, time commitment
and individual contribution. The Non-Executive Directors are
responsible for evaluating the performance of the Chairman.
The role of the Chief Executive is to develop and lead business
strategies and processes to enable the Group to meet
Shareholder requirements. He is also responsible for dealing with
investors, Group public relations and external communications.
The role involves leading the Executive team and evaluating the
performance of the Executive Management.
Board Committees
The Board has delegated authority to three standing committees,
as set out in written terms of reference for each committee which
are available from the Company Secretary. The composition of the
Board did not permit the membership of the three committees to
comply with the provisions of the 2008 Code until 29 September
2010. Mr Samuel was a member of each of the three committees
until 29 June 2010 and Mr Knight and Mr Hammersley were
appointed to each of the three committees on 29 September
2010. The current members of each of the committees are Mr
Knight, Mr Hammersley and Mr Bernstein.
Audit Committee
The Audit Committee is chaired by Mr Knight, the previous
Chairman having been Mr Samuel. The membership of the
Committee includes Mr Bernstein, a Chartered Accountant with
relevant financial experience. The Committee meets at least three
times a year and its main duties are as follows:
h h monitoring the integrity of and reviewing the financial
statements;
h h recommending the appointment of and reviewing the
effectiveness and independence of the external Auditors;
h h reviewing the Group’s internal controls and risk management
systems;
h h reviewing the operation and effectiveness of the internal audit
function; and
h h overseeing the establishment and maintenance of good
business practices throughout the Group.
The Chief Executive, Finance Director, Head of Internal Audit
and the Group’s external Auditors were invited to and attended
meetings of the Audit Committee.
The Audit Committee keeps the scope and cost-effectiveness of
the external audit under review. The independence and objectivity
of the external Auditors are also considered on a regular basis,
with particular regard to the level of non-audit fees. The provision
of non-audit services is reviewed on a case by case basis. The
split between audit and non-audit fees appears in note 6 to the
financial statements. The non-audit fees were paid in respect
of tax advice and reports required for Shareholder information
and are not considered by the Committee to affect the Auditors’
independence or objectivity.
The Group’s external Auditors, BDO LLP , have reported to the
Audit Committee that, in their professional judgement, they are
independent within the meaning of regulatory and professional
requirements and the objectivity of the audit partner and audit staff
is not impaired. The Audit Committee has reviewed this statement
and concurs with its conclusion.
Remuneration Committee
The Remuneration Committee is chaired by Mr Hammersley,
the previous Chairman having been Mr Samuel. The Committee
meets at least twice a year to review the remuneration of the
Executive Directors. Full details of the Directors’ remuneration and
a statement of the Company’s remuneration policy are set out
in the Directors’ Remuneration Report. The Chief Executive may
attend meetings of the Committee to discuss the performance of
other Executive Directors and make proposals as necessary, but
takes no part in deliberations when his own position is discussed.
Each Executive Director abstains from any discussion or
voting at full Board meetings on Remuneration Committee
recommendations where the recommendations have a direct
bearing on their own remuneration package. The details of each
Executive Director’s individual package are set by the Committee
in line with the policy adopted by the full Board.
Nominations Committee
The Nominations Committee is chaired by Mr Bernstein.
Appointments to the Board of both Executive and Non-Executive
Directors are normally considered by this Committee, although
the recruitment of Mr Knight and Mr Hammersley were dealt with
by the Board as a whole given the Committee’s composition at
that time. When considering appointments for Non-Executive
Directors, external search consultants are used as appropriate,
together with a review of other candidates known to be available,
to ensure that a wide range of candidates are considered. The
Committee prepares a description of the role and capabilities
required for an appointment based on an evaluation of the
balance of existing skills, knowledge and experience on the
Board. This is followed by an interview process. An induction to
the Group’s business and training is provided for all Directors upon
appointment. 00 00 www.blacks.co.uk www.millets.co.uk 20
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Corporate Governance Statement
continued
Board and Committee attendance chart
Attendance at meetings during the financial year is shown below:
Audit Remuneration Nominations
Board Committee Committee Committee
D.A. Bernstein 11 (11) 3 (3) 4 (4) 1 (1)
N.D. Gillis 11 (11) 2 (2)* 0 (0) 0 (0)
M.A. Lombardo 11 (11) 3 (3)* 0 (0) 0 (0)
T.W. Knight 5 (5) 2 (2) 2 (2) 1 (1)
M.A. Hammersley 5 (5) 2 (2) 2 (2) 1 (1)
N.M. Samuel 0 (4) 0 (1) 0 (1) 0 (0)
Internal control and risk management
The Board of Directors is responsible for the Group’s system of
internal control that is designed to facilitate effective and efficient
operations and to ensure the quality of internal and external
reporting and compliance with applicable laws and regulations. In
devising internal controls, the Directors have regard to the nature
and extent of the risk, the likelihood of it crystallising and the cost
of controls. A system of internal controls is designed to manage
but not eliminate the risk of failure to achieve business objectives
and can only provide reasonable and not absolute assurance
against the risk of material misstatement, fraud or loss.
The Board reviews the Group’s procedures in respect of internal
control with a view to complying with ‘Internal Control: Guidance
for Directors on the Combined Code’ issued by the Institute of
Chartered Accountants in England and Wales and established
procedures to ensure compliance with the guidance. The Board
considers that there has been an ongoing process for the
identification, evaluation and management of the significant risks
faced by the Group. This process is regularly reviewed by the
Board and meets the requirements of the guidance.
The key procedures that the Directors have established to provide
effective internal controls are as follows:
Internal Audit function
The Internal Audit function carries out a programme of audits
covering the management of significant corporate and operational
risks and reports directly to the Audit Committee and works with
the Board on the effectiveness of key internal controls.
Whistle-blowing
The Group has a ‘Whistle-blowing’ procedure whereby employees
can make (on an anonymous basis if preferred) confidential
disclosures about suspected impropriety and wrong-doing. Any
matters so reported are investigated and escalated to the Audit
Committee as appropriate. Statistics on the volume and general
nature of all disclosures made are reported to the Committee on
an annual basis.
Control environment
Operational management groups meet regularly to monitor all
operational matters. Clearly defined lines of responsibility and
delegation of authority have been established in the organisational
structure. The Executive Directors participate at least monthly in
management meetings and regularly review activities.
Risk management
Management has responsibility for identifying risks to the business
and for establishing procedures to mitigate and monitor such
risks. The risk register documents the Group’s appetite for risk
and the significant risks and control strategies in each area. This is
reviewed annually and approved by the Board.
Figures in brackets denote the maximum number of meetings that each Director could have attended. Mr Samuels’ non-attendance
was due to illness. The work of the Nominations Committee was performed by the Board as a whole for part of the year.
* Attended by invitation. 00 00 21
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Financial reporting
A detailed formal budgeting process for all businesses culminates
in an annual Group budget which is approved by the Board.
Results are reported monthly against this budget and revised
forecasts for the year are prepared when appropriate.
The Board is mindful of its responsibility to present a balanced
and understandable assessment of the financial position
and prospects, both to investors and regulatory authorities.
The Annual Report, Interim Report and Interim Management
Statements are the principal means of achieving this objective. An
explanation of the responsibilities of the Directors in connection
with the financial statements is set out in the Directors’ Report and
Business Review.
Capital investment
The Group has clearly defined guidelines for capital expenditure.
These include annual budgets, detailed appraisal and review
procedures, defined levels of authority and due diligence
requirements where businesses are being acquired. Post-
investment appraisals are performed for major investments.
Internal controls assurance
The Audit Committee, on behalf of the Board, has reviewed during
the year the effectiveness of the system of internal control from
information provided by management, Internal Audit and the
Group’s external Auditors. Any system of internal control can only
provide reasonable and not absolute assurance of meeting the
internal control objectives.
This review included an assessment by the Board of the key risks
affecting the Group in the delivery of its long-term strategies.
Going concern
The Directors, having taken account of the Group’s net cash
resources and bank facilities and having made appropriate
enquiries, consider that the Company and the Group have
adequate resources to continue operations for the foreseeable
future and for this reason they continue to adopt the going
concern basis in preparing the financial statements.
Communication
The Company places a great deal of importance on
communication with its Shareholders. Shareholders have direct
access to the Company via its website and the Company
responds to numerous letters and emails from Shareholders,
suppliers and customers on a wide range of issues.
There is regular dialogue with individual institutional Shareholders
as well as general presentations after the interim and final results
announcements. All Shareholders have the opportunity to raise
questions at the Annual General Meeting when the Company also
highlights the latest key business developments. At the meeting,
the Company complies with the 2008 Code as it relates to notice,
voting, the separation of resolutions and the attendance of
committee chairmen. In line with the 2008 Code, details of proxy
voting by Shareholders are made available following the meeting. 00 00 www.blacks.co.uk www.millets.co.uk 22
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Directors’ Remuneration Report
UNAUDITED INFORMATION
The Remuneration Committee
The Remuneration Committee is composed of M.A. Hammersley (Chairman), D.A. Bernstein and T.W. Knight. The Remuneration
Committee, on behalf of the Board, makes recommendations regarding Executive Directors’ remuneration packages including bonuses,
share options and other incentive schemes.
Directors’ service contracts
Executive Directors
Compensation
Start Unexpired Notice for early
date term period termination
N.D. Gillis* 20 Nov 2007 Under notice Under notice None
M.A. Lombardo* 03 Aug 2008 Rolling 12 months None
* These are permanent rolling contracts.
N.D. Gillis gave notice on 10 February 2011 of his intention to resign from his position in six months’ time under the terms of his service
contract and, accordingly, is under notice as at the date of this report.
Non-Executive Directors
Compensation
Start Unexpired Notice for early
date term period termination
D.A. Bernstein 01 Jun 2009 1 month 6 months None
T.W. Knight 01 Aug 2010 15 months 6 months None
M.A. Hammersley 20 Sep 2010 16 months 6 months None
Group policy on Executive Directors’ remuneration
The objective of the Group’s remuneration policy is to provide
a level of remuneration which will attract, retain and motivate
Executive Directors and senior management of high quality.
Share options and longer term incentives are used as part of
the Group’s remuneration policy. The amounts involved and the
frequency of issue endeavour to keep pace with current market
practice and conditions.
In setting the Executive Directors’ remuneration the Committee
takes into account the pay and employment conditions applicable
across the Group in the reported period. In common with the fact
that there were no general pay increases for employees elsewhere
in the Group, no increases were made in the period to Directors’
remuneration terms since the prior year. 00 00 23
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Variable Rewards
Executive Directors’ bonus scheme
Executive Directors are entitled to performance related bonuses
that are payable based, in the main, upon the profit before interest
and tax improvement of the Group, consistent with corporate
financial targets as determined by the Remuneration Committee.
The Remuneration Committee reviews performance against
targets at the end of the year and may use its discretion to adjust
measures and payments in view of operating circumstances
during the year. Bonus payments are non-pensionable and are
subject to approval by the Committee.
The achievement of the highest performance targets would entitle
the Director to the maximum bonus payable of 100% of basic
salary. The Executive Directors received no bonuses from these
arrangements in either the current or the previous financial year.
Pension
The Group made pension contributions of up to 15% of basic
salary for the Executive Directors. These contributions are paid
into the equivalent of money purchase pension schemes.
Non-Executive Directors
The remuneration of Non-Executive Directors is set by the
Executive Directors and consists of fees for their services in
connection with Board and Committee meetings and other
relevant matters.
Other matters
The fees shown in respect of D.A. Bernstein and T.W. Knight are
paid to third parties.
Share price performance
The mid-market price of each Ordinary Share on 26 February 2011 was 22.40 pence. The lowest and highest prices during the year
were 22.00 pence and 70.50 pence respectively.
The following graph shows the Company’s performance, measured by total Shareholder return, compared with the performance of the
‘FTSE Small Cap — General Retailers’ index over the last five years:
The Remuneration Committee has selected the above index as they consider it to be the most relevant for a company of Blacks’ size
and nature. This is consistent with prior years.
0
20
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60
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140
Feb
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10
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10
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10
Apr
10
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10
Dec
09
Oct
09
Aug
09
Jun
09
Apr
09
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08
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08
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Blacks Leisure FTSE UK Small Cap General Retailers 00 00 www.blacks.co.uk www.millets.co.uk 24
Blacks Leisure Group plc Annual Report and Accounts 2011
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AUDITED INFORMATION
Directors’ remuneration
An analysis of the Directors’ remuneration, excluding gains on the exercise of share options, is set out below:
Basic Variable Benefits
salary/fees rewards in kind Total Total Pension Pension
2011 2011 2011 2011 2010 2011 2010
£’000 £’000 £’000 £’000 £’000 £’000 £’000
N.D. Gillis 300 — 20 320 349 45 45
M.A. Lombardo 170 — 9 179 198 17 17
D.A. Bernstein 85 — — 85 85 — —
T.W. Knight 20 — — 20 — — —
M.A. Hammersley 16 — — 16 — — —
N.M. Samuel 9 — — 9 35 — —
C.M. Littner — — — — 15 — —
A.H. Mallett — — — — 13 — —
2011 600 — 29 629 62
2010 640 50 5 695 62
An equity-settled share-based payment charge of £275,000 (2010: £242,000) has been recorded in the statement of comprehensive
income for the year in connection with the above Directors’ share options. No Directors exercised share options during either year.
Benefits in kind relate solely to car, fuel and healthcare provisions.
C.M. Littner and A.H. Mallett resigned from the Board on 14 July 2009.
N.M. Samuel died on 29 June 2010.
T.W. Knight was appointed to the Board on 1 August 2010.
M.A. Hammersley was appointed to the Board on 20 September 2010.
Pension contributions were made in respect of two Directors (2010: two).
Turnaround Incentive Plan
On 24 November 2009, during the prior financial year, a new
performance related incentive plan, the ‘Turnaround Incentive
Plan’ was approved at a General Meeting of Shareholders. This
Scheme comprised a new share option scheme that was subject
to performance conditions regarding profitability and share price
and accordingly aligned the interests of certain Directors and
senior management with those of Shareholders.
Options were granted on 18 January 2010 under the Turnaround
Incentive Plan to certain Directors and other senior individuals
within the Group. Any options already held by those individuals as
part of other share incentive plans were surrendered and replaced
with these new options. Further options under this Scheme were
granted on 10 June 2010 to certain senior individuals within the
Group, none of which were Directors of the Company.
Directors’ Remuneration Report
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Share options granted under the Turnaround Incentive Plan are subject to market-related performance conditions based upon the
profitability of the Group (defined as earnings before interest and tax, ‘EBIT’) and the share price of Ordinary Shares. Profitability is
measured cumulatively across the two complete financial years to 3 March 2012 and the share price is to be taken as the average
closing price across July, August and September 2012. Both parameters must be satisfied for any options to vest, as set out below:
Ordinary Share % of award
Cumulative EBIT price (each) vesting
£10,000,000 60 pence 60%
£10,000,000 80 pence 80%
£10,000,000 100 pence 100%
£9,000,000 60 pence 40%
£9,000,000 80 pence 60%
£9,000,000 100 pence 80%
£8,000,000 60 pence 20%
£8,000,000 80 pence 40%
£8,000,000 100 pence 60%
On the further condition that the individual continues to be
employed by the Group (unless a ‘good leaver’) on the vesting
date, on the third anniversary of the date of grant, options will
vest to the extent that performance criteria as above are satisfied.
Vested options may then be exercised, at nil cost, from that date
up to the tenth anniversary of the date of grant and these options
will be satisfied by the transfer of shares held by an Employee
Benefit Trust.
The options vest in full and are exercisable in full if there is a
change of control of the Company which occurs at a price of 100
pence or more per Ordinary Share. If such a change of control
occurs at a price of less than 100 pence per share then the
Remuneration Committee will determine whether and to what
extent these awards will vest and become exercisable.
In the event of any variation in the share capital of the Company
(arising from any reduction of capital or sub-division or
consolidation of capital or issue of shares by way of capitalisation
of profits or reserves or by way of rights), the number of shares
subject to the options may be adjusted in such manner as the
Remuneration Committee considers fair and reasonable so as not
to disadvantage the participants under the plan as a result of such
action.
No benefits under the scheme are pensionable.
The Directors who served during the year had the following interests in the Turnaround Incentive Plan at 26 February 2011:
Dates Dates
Date of Maximum Price exercisable exercisable
grant number exercisable from to
N.D. Gillis 18 Jan 2010 971,659 0.00p 18 Jan 2013 18 Jan 2020
M.A. Lombardo 18 Jan 2010 550,607 0.00p 18 Jan 2013 18 Jan 2020
All the above options were granted during the prior financial year,
on 18 January 2010. All options previously held under other share
incentive schemes were surrendered as part of the grant of these
options under the Turnaround Incentive Plan and, accordingly, no
Directors retained any interests in any other share option schemes.
No share options, from any scheme, were exercised by Directors
during either the current or the prior financial year.
Shares granted under option schemes are granted by the
Remuneration Committee to attract, retain and motivate
participants to achieve corporate financial targets. The value of
share options granted during the year is up to 100% of basic salary
and the value of shares that will vest is subject to the achievement
of certain performance criteria as set out above.
No share options lapsed during the year, under any share
incentive schemes, in respect of Directors who held office in the
period.
Mark Hammersley
Remuneration Committee Chairman
4 May 2011 00 00 www.blacks.co.uk www.millets.co.uk 26
Blacks Leisure Group plc Annual Report and Accounts 2011
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The Directors present their Annual Report for the year ended
26 February 2011.
Principal activities
The Company is the Parent Company of a wholly owned
subsidiary primarily engaged in the retail of Outdoor clothing,
footwear and equipment.
The Group comprises two market segments; Outdoor and
Boardwear. The Outdoor segment trades under the Blacks
and Millets fascias, and Boardwear trades under the Freespirit
fascia. The trade is principally from retail stores in the British Isles
(including three stores operating through a Republic of Ireland
branch) and associated direct sale internet sites.
Products and services
The products sold by the Group are categorised as leisure goods.
The Outdoor market is typically divided into specialist products
designed to protect and perform in a specific environment and
leisure based products which are generally more widely available.
The market revolves around walking (from rambling to mountain
climbing) and camping (from family breaks to expeditions).
The Group provides merchandise for participation in running,
climbing, camping, walking, rambling, skiing, snowboarding,
mountaineering, cycling, trekking and general travel and its
products include general, outdoor inspired clothing, multi
functional footwear, rucksacks, tents and accessories.
Blacks and Millets are established retailers of Outdoor clothing,
footwear and equipment. Blacks stocks a high proportion of
proprietary branded merchandise, such as The North Face,
Berghaus, Craghoppers, Deuter, Osprey, Helly Hansen, Mammut,
Marmot, Merrell, Brasher and most recently Lowe Alpine. We have
also recently introduced Weird Fish and Animal for the start of the
forthcoming summer season.
The Millets fascia also stocks a range of branded goods such as
Hi-Tec and Regatta though has a focus on key own-label brands,
including Peter Storm and Eurohike which are amongst the UK’s
most popular Outdoor clothing and equipment brands. We also
have an extensive own-label childrens range, ‘Adventurers’.
The Freespirit stores are aimed at customers with a passion for
high adrenaline sports including water and winter sports, offering
a range of iconic brands such as Mambo, Prospect, Jack Jones,
RipCurl, Vans and Oakley. Owing to the continuing decline in this
Boardwear market, the Group has taken the decision to exit from
this segment fully over the coming months.
Results and dividends
The Group results for the year are shown in the Consolidated
Statement of Comprehensive Income.
The Directors do not recommend the payment of any dividend on
the Ordinary Shares this year (2010: £nil).
Review of the business
The review of the Group’s activities, trading results, financial
position at the year end and likely future developments, is
contained in the Chairman’s Statement, Chief Executive’s Review
and Financial Review. Other information required to be included
in the business review, including identification of key performance
indicators, principal risks and uncertainties affecting the business,
is set out below. The Group demonstrates Corporate Social
Responsibility as detailed earlier in this Annual Report.
Financial key performance indicators
The Directors and management monitor the Group’s progress against its strategic objectives and the financial performance of the
Group’s operations on a regular basis. Performance is assessed against budgets and forecasts using financial and non-financial
measures. The key performance indicators which are monitored are set out below:
Like-for-like sales growth % The traditional retail measurement of the ability to grow sales year on year. The Group measures like-for-
like sales by the comparison of sales from individual stores that were trading in both the period under
review and the previous comparative period and that had no material change that would affect the trade.
Gross margin % The Group defines gross margin % as the direct profit earned from the sale of an item, expressed as a
percentage of sales. The profit earned is after charging the cost of the goods and any related costs such
as freight charges and duty fees. It does not include the operational costs of the business.
Discussion of the above key performance indicators and the review of the business is detailed in the Chairman’s Statement within this
Annual Report.
Directors’ Report and Business Review 00 00 27
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Our Business Our Governance Our Financials
Principal risks and uncertainties
Risk is inherent in all businesses and the Board is continually
identifying and evaluating the key business risks. Executive
Directors and operational management are responsible for the
implementation of robust processes to manage the risk to the
business. The Board takes an active role in reviewing operational
activities to ensure risk is being addressed effectively.
The key risks identified by the Board include:
Economic conditions
The economic environment has a clear impact on consumer
spending. Unemployment levels, interest rates, consumer debt
levels, availability of credit and many other factors can influence
customers’ spending decisions. This is particularly so during the
current economic environment.
The Board recognises the need to monitor economic changes in
order to react in the best interest of the Group by managing stock
orders and realigning forecasts.
Financing
The Group has been successful in agreeing banking arrangements
which provide the stability of facilities up to July 2012, with an
automatic extension to November 2012 upon the commencement
of employment of the new Chief Executive no later than
30 September 2011. The Directors, nonetheless, continue to
monitor the cash position of the Group on an ongoing basis to
ensure that the Group is operating within facilities available.
Products and services
The customer expects quality products at competitive prices. The
Group is continually developing its product ranges to strive to
meet customer expectations. The success of the Group depends
particularly upon the ability to react to the environment where
normal weather patterns are changing. Product development
and supply chain management is key in this area to ensure that,
whatever the weather, the expectations of the customer for
suitable quality products at competitive prices are met.
Competition
The Group operates in a highly competitive market. Recent
entrants are growing within the Outdoor market and competitors
continue to improve their standards. Certain sections of the
Outdoor market has also become more attractive to the very large
retailers, including supermarkets, which gives the Group a greater
challenge in terms of pricing, whilst not compromising on quality.
The Group monitors the activities of its competitors, both current
and potential, and takes appropriate action to ensure it remains
competitive on price, quality and value for money.
Suppliers and supply chain management
The Group is dependent on its supplier base to deliver quality
products, on time. The Group continually reviews the supplier
base to ensure suppliers have the ability to meet demand and
remain price competitive.
Other performance indicators used by management internally include:
Share price The market value of each Ordinary Share is taken as an indication of the ability of the Group to deliver
Shareholder returns through equity growth.
Stock availability This provides a quantified value for levels of stock availability in the business, over a specific period.
Stock cover Monitoring of the number of days of stock held at a point in time is used as a measure of working capital
efficiency.
Store openings The Group measures the number of store openings in a period, which includes both new properties and re-
openings of existing stores which have had a substantial refurbishment such as a change of trading fascia.
Return on investment The Group monitors return on investment for new developments and store refurbishments.
Customer satisfaction Results of mystery shopper and other direct customer surveys.
Staff turnover Number of employees leaving as a % of the total workforce. 00 00 www.blacks.co.uk www.millets.co.uk 28
Blacks Leisure Group plc Annual Report and Accounts 2011
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Warehousing and distribution
The Group regularly reviews its warehousing and related logistics
operations. The key risks identified are those in relation to
business interruption caused by physical property damage,
warehouse system breakdowns, inefficient processes and
delivery failures.
IT systems and business continuity
The Group is dependent upon the availability and integrity of key
computer systems which must record and process substantial
volumes of data in a timely and accurate manner. The Group
recognises that key systems, in particular the EPOS/till systems
and the stock management systems, will require continual
upgrades and ongoing investment, to ensure they meet the
current and future operational needs of the business.
Key personnel
The success of the Group is enhanced by the retention of key
management and personnel and on its ability to attract, motivate
and retain employees of a high calibre. Share options and longer
term incentives are used as part of their remuneration packages.
Treasury and risk management
The main financial risks to the Group relate to the availability of
funds to meet the business needs.
Foreign exchange rates are monitored and forward contracts are
used to minimise the risk of currency fluctuations. The Group’s
treasury policy allows the use of derivative financial instruments
provided they are not entered into for speculative purposes.
Capital risk management
The Group manages its capital to ensure that entities in the Group
will be able to continue as a going concern whilst seeking to
maximise the return to stakeholders through the optimisation of
the debt and equity balance.
In managing its capital, the Group’s primary objective is to
provide a consistent return for its equity Shareholders through
a combination of capital growth and, where appropriate,
distributions. In order to achieve this objective, the Group seeks
to maintain a gearing ratio that balances risks and returns at an
acceptable level and also to maintain a sufficient funding base
to enable the Group to meet its working capital and strategic
investment needs. In making decisions to adjust its capital
structure to achieve these aims, either through altering its dividend
policy, new share issues, or the reduction of debt, the Group
considers not only its short-term position but also its long-term
operational and strategic objectives.
Financial instruments
The Group’s policy on financial assets and liabilities and its interest
in financial instruments is reported in the notes to these accounts.
Contractual arrangements
There are no persons with whom the Group has contractual
arrangements which are essential to the Group’s business.
Payment policy
The Group seeks to ensure that terms of payment specified and
agreed with suppliers are not exceeded. Creditor days based on
year end trade creditors were 53 days (2010: 62 days).
The Company does not have any trade creditors and accordingly
no creditor days figure has been disclosed.
Donations
During the year the Group made charitable donations of £1,200
(2010: £nil). No political donations were made in either year.
Directors
The names of the current Directors of the Company and their
biographical details, including roles, responsibilities and significant
external commitments, are given in the Directors and Advisors
section of this Annual Report. T.W. Knight was appointed to the
Board on 1 August 2010 and M.A. Hammersley was appointed
to the Board on 20 September 2010. N.M. Samuel served on the
Board until his death on 29 June 2010. The other Directors served
on the Board throughout the year.
Details of the terms of appointment and notice period of each
of the current Directors appear in the Directors’ Remuneration
Report. The provisions of the Company’s Articles of Association
and of the Combined Code in respect of the retirement and
re-election of Directors are set out in the Corporate Governance
Statement. The Directors standing for re-election to the Board
are set out in the Notice of Annual General Meeting which will
be mailed separately to Shareholders in due course. Following
performance evaluation, the Board considers that each of the
Non-Executive Directors standing for re-election continues to
perform effectively and to demonstrate commitment to his role.
The Board is satisfied that the Chairman has sufficient time
to commit to the Company’s affairs notwithstanding his other
business commitments.
Directors’ interests in transactions
There were no material transactions in the year in which any
Director had an interest.
Indemnification of Directors
Qualifying third party indemnity provisions (as defined in Section
234 of the Companies Act 2006) are in force for Directors who
held office during the year.
Share capital
The following information is given pursuant to Section 992 of the
Companies Act 2006.
Directors’ Report and Business Review
continued 00 00 29
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Our Business Our Governance Our Financials
Movements in share capital during the year are disclosed in note
20 to the financial statements.
The Company’s share capital comprises Ordinary Shares of
1p each, Deferred Shares of 49p each and 10% cumulative
Preference Shares of £1 each. The rights and obligations
attaching to the Company’s shares are summarised below and
are set out in the Company’s Articles of Association which can be
obtained from Companies House or by writing to the Company
Secretary.
Holders of the Ordinary Shares have all the rights normally
attaching to Ordinary Shares, including rights to receive the
Company’s Annual Report, to attend and speak at General
Meetings and to appoint proxies and exercise voting rights. The
Company’s Ordinary Shares do not carry any special rights with
regard to control of the Company. There are no restrictions on
share transfers or voting. Ordinary Shares acquired through the
Company’s share schemes rank pari passu with the Company’s
Ordinary Shares in issue and have no special rights. Unless the
Board decides otherwise, an Ordinary Shareholder may not vote
at any General Meeting or class meeting or exercise any rights in
relation to shares while any amount of money relating to his shares
is outstanding.
The Deferred Shares confer no voting rights nor any rights to
participate in the profits of the Company except in very limited
circumstances. The Deferred Shares are not redeemable and are
only transferable in limited circumstances. The Company may
at any time arrange for Deferred Shares to be transferred to the
Company for an aggregate consideration of 1p and may cancel
the Deferred Shares so purchased.
The Preference Shares carry the right to receive a fixed dividend
of 10% per annum paid in priority to a dividend on any other
class of share, payable half-yearly on 30 April and 31 October.
The Preference Shares are non-redeemable. In the event of a
return of capital or on a winding-up of the Company, Preference
Shareholders are entitled to repayment of the nominal capital
paid up on their shares, a premium of 5 pence per share and any
arrears of dividend to the date of repayment in priority to any other
class of share. Preference Shares do not carry any voting rights
unless either the preference dividends are in arrears for at least six
months or there is a resolution altering the rights of the holders of
the Preference Shares, for the winding-up of the Company or for a
return of capital. In such instances, a Preference Shareholder shall
have one vote on a show of hands or, in the event of a poll, ten
votes for every Preference Share held.
There are no restrictions on the transfer of the Company’s Ordinary
and Preference Shares other than certain restrictions which may
be imposed pursuant to the Company’s Articles of Association,
certain restrictions which may from time to time be imposed by
laws and regulations (for example in relation to insider dealing),
restrictions pursuant to share dealing codes whereby Directors and
certain employees of the Company require prior approval to deal in
the Company’s shares, and where a person has been served with
a disclosure notice and has failed to provide the Company with
information concerning the interests in those shares.
Purchase of own shares
At the Company’s Annual General Meeting held on 21 July 2010
the Company was authorised to make market purchases of up to
8,405,102 Ordinary Shares (representing approximately 10% of
its issued Ordinary Share capital at that date). No such purchases
were made during the year and no shares are held in treasury as
at 26 February 2011.
Blacks Leisure Group Employee Benefit Trust
The Executive Directors of the Company, together with certain
other employees of the Group, are potential beneficiaries of the
Blacks Leisure Group plc Employee Benefit Trust (‘the Trust’) and,
as such, are deemed to be interested in any Ordinary Shares held
by the Trust. At 26 February 2011 the Trust held 344,578 (2010:
344,578) Ordinary Shares.
Power of Directors
The rules for appointment and replacement of Directors are
detailed in the Company’s Articles of Association.
Any changes to the Company’s Articles of Association must be
approved by Shareholders in accordance with legislation in force
from time to time.
The Directors have authority to issue and allot Ordinary Shares,
such authority being renewed annually at the Annual General
Meeting.
Change of control
None of the Ordinary Shares, including those held by the Trust,
carries any special voting rights with regard to control of the
Company.
The Company is not party to any significant agreements that
would take effect, alter or terminate upon a change of control of
the Company following a takeover bid.
Except as shown below, the Company does not have
any agreements with any Director or employee providing
compensation for loss of office or employment that occurs
because of a takeover bid, except for provisions in the rules of the
Company’s share schemes which may result in options granted to
employees to vest on a takeover.
An arrangement was in place whereby N.D. Gillis would receive
a payment of £500,000 in the event of a change of control of
the Company prior to 19 November 2011. This entitlement
ceased when he gave notice of his resignation from his role, as
announced on 10 February 2011. 00 00 www.blacks.co.uk www.millets.co.uk 30
Blacks Leisure Group plc Annual Report and Accounts 2011
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Going concern
After making due enquiries, and following the agreement of
banking facilities as detailed in the Financial Review, the Directors
have a reasonable expectation that the Group has adequate
facilities in place in order to continue operational existence for
the foreseeable future and, accordingly, they continue to adopt
the going concern basis in the preparation of these financial
statements.
Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union and have elected
to prepare the Company financial statements in accordance
with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards and applicable law).
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Company and of the
profit or loss for the Group for that period.
In preparing these financial statements, the Directors are required to:
h h select suitable accounting policies and then apply them
consistently;
h h make judgements and accounting estimates that are
reasonable and prudent;
h h state whether they have been prepared in accordance with
IFRSs as adopted by the European Union, subject to any
material departures disclosed and explained in the financial
statements;
h h prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business;
h h prepare a Directors’ Report and Directors’ Remuneration
Report which comply with the requirements of the Companies
Act 2006; and
h h provide additional disclosures when compliance with the specific
requirements of IFRSs is insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’ s financial position and financial performance.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act
2006 and, as regards the Group financial statements, Article 4 of
the IAS Regulation. They are also responsible for safeguarding the
assets of the Company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
Website publication
The Directors are responsible for ensuring the Annual Report
and the financial statements are made available on a website.
Financial statements are published on the Company’s website
in accordance with legislation in the United Kingdom governing
the preparation and dissemination of financial statements, which
may vary from legislation in other jurisdictions. The maintenance
and integrity of the Company’s website is the responsibility of the
Directors. The Directors’ responsibility also extends to the ongoing
integrity of the financial statements contained therein.
Directors’ responsibilities pursuant to DTR4
The Directors confirm to the best of their knowledge:
h h the Group financial statements have been prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs) and Article 4 of the IAS
Regulation and give a true and fair view of the assets, liabilities,
financial position and profit and loss of the Group; and
h h the Annual Report includes a fair review of the development and
performance of the business and the financial position of the
Group and the Parent Company, together with a description of
the principal risks and uncertainties that they face.
Corporate Governance Statement
The Corporate Governance Statement is presented earlier and is
incorporated in this Directors’ Report by reference.
Disclosure of information to Auditors
All the current Directors have taken all the steps that they ought to
have taken to make themselves aware of any information needed
by the Company’s Auditors for the purpose of their audit and
to establish that the Auditors are aware of that information. The
Directors are not aware of any relevant audit information of which
the Auditors are unaware.
Annual General Meeting
The Annual General Meeting of the Company will be held at 11.00
am on 27 July 2011. The notice convening the meeting and the
resolutions to be put to the meeting, together with explanatory
notes, will be sent out in a separate circular to Shareholders in
due course.
Auditors
A resolution to reappoint BDO LLP as Auditors will be proposed at
the next Annual General Meeting.
Directors’ Report and Business Review
continued 00 00 31
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Our Business Our Governance Our Financials
Substantial interests in share capital
As at 3 May 2011, the Directors had been notified of the following persons who are interested, directly or indirectly, in 3% or more of the
voting rights associated with the Ordinary Share capital of the Company:
Holding %
Gartmore Investment Limited 14,393,934 17.13
Sportsdirect.com Retail Limited 12,153,071 14.46
Standard Life Investments Limited 8,321,051 9.90
Schroders plc 8,295,328 9.87
Aviva plc 5,672,967 6.75
Pentland Group PLC 4,931,563 5.87
VF Luxembourg S.A.R.L. 3,901,386 4.64
F&C Asset Management plc 2,993,503 3.56
Polar Capital European Forager Fund Limited 2,607,750 3.10
Other than disclosed above, the Directors are not aware of any person holding, or beneficially interested in, 3% or more of the voting
rights associated with the Ordinary Share capital of the Company.
Directors’ interests
The Directors who held office at the end of the financial year had the following interests in the Ordinary Shares of the Company:
26 February 2011 27 February 2010*
Under Under
Issued option Issued option
D.A. Bernstein 300,000 — 200,000 —
N.D. Gillis 128,100 971,659 70,000 971,659
M.A. Lombardo — 550,607 — 550,607
T.W. Knight 6,801 — 6,801 —
M.A. Hammersley — — — —
* Or date of appointment if later.
The Company considers that the holding of shares by Non-Executive Directors, as shown above, aligns their interests to those of other
Shareholders and does not impact on their independence in performing their duties.
No Directors hold any beneficial interest in the shares of any of the subsidiary undertakings.
Further details of Directors’ share options are set out within the Directors’ Remuneration Report.
By order of the Board
Mark Beacham
Company Secretary
4 May 2011 00 00 www.blacks.co.uk www.millets.co.uk 32
Blacks Leisure Group plc Annual Report and Accounts 2011
20321.04 10/06/2011 Proof 5
Independent Auditors’ Report to the Members of
Blacks Leisure Group plc
We have audited the financial statements of Blacks Leisure Group
plc for the year ended 26 February 2011 which comprise the
Consolidated Statement of Comprehensive Income, Consolidated
Balance Sheet, the Consolidated Statement of Cash Flows,
the Consolidated Statement of Changes in Equity, the Parent
Company Balance Sheet and the related notes. The financial
reporting framework that has been applied in the preparation of
the Group financial statements is applicable law and International
Financial Reporting Standards (IFRSs) as adopted by the
European Union. The financial reporting framework that has been
applied in preparation of the Parent Company financial statements
is applicable law and United Kingdom Accounting Standards
(United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might
state to the Company’s members those matters we are required
to state to them in an Auditor’s Report and for no other purpose.
To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and the
Company’s members as a body, for our audit work, for this report,
or for the opinions we have formed.
Respective responsibilities of Directors and Auditors
As explained more fully in the statement of Directors’
responsibilities, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give
a true and fair view. Our responsibility is to audit the financial
statements in accordance with applicable law and International
Standards on Auditing (UK and Ireland). Those standards require
us to comply with the Auditing Practices Board’s (APB’s) Ethical
Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is
provided on the APB’s website at www.frc.org.uk/apb/scope/
private.cfm.
Opinion on financial statements
In our opinion:
h h the financial statements give a true and fair view of the state
of the Group’s and the Parent Company’s affairs as at
26 February 2011 and of the Group’s loss for the year then
ended;
h h the Group financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union;
h h the Parent Company financial statements have been properly
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice; and
h h the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006; and, as
regards the Group financial statements, Article 4 of the IAS
Regulation.
Opinion on other matters prescribed by the Companies
Act 2006
In our opinion:
h h the part of the Directors’ Remuneration Report to be
audited has been properly prepared in accordance with the
Companies Act 2006; and
h h the information given in the Directors’ Report for the financial
year for which the financial statements are prepared is
consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters
where the Companies Act 2006 requires us to report to you if, in
our opinion:
h h adequate accounting records have not been kept by the
Parent Company, or returns adequate for our audit have not
been received from branches not visited by us; or
h h the Parent Company financial statements and the part of
the Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
h h certain disclosures of Directors’ remuneration specified by law
are not made; or
h h we have not received all the information and explanations we
require for our audit.
Under the Listing Rules we are required to review:
h h the Directors’ statement, set out in the Corporate Governance
Statement, in relation to going concern;
h h the part of the Corporate Governance Statement relating to
the Company’s compliance with the nine provisions of the
June 2008 Combined Code specified for our review; and
h h certain elements of the report to Shareholders by the Board
on Directors’ remuneration.
David Eagle
(senior statutory auditor)
For and on behalf of BDO LLP , statutory auditor
Epsom
United Kingdom
4 May 2011
BDO LLP is a limited liability partnership registered in England and
Wales (with registered number OC305127). 00 00 33
20321.04 10/06/2011 Proof 5
Our Financials Our Governance Our Business
Consolidated Statement of Comprehensive Income
for the year ended 26 February 2011
Year ended Year ended
26 February 27 February
2011 2010
Total Total
Note £’000 £’000
Continuing operations
Revenue 4 201,933 240,517
Cost of sales (103,569) (116,440)
Gross profit 98,364 124,077
Other income 4 899 1,109
Distribution costs (93,366) (154,359)
Administrative expenses (8,390) (9,023)
Operating loss 6 (2,493) (38,196)
Operating loss excluding exceptional items (3,814) (12,037)
Exceptional items 8 1,321 (26,159)
Finance costs 9 (2,831) (5,946)
Finance costs excluding exceptional items (2,831) (2,914)
Exceptional items — (3,032)
Finance income 9 65 569
Loss before tax (5,259) (43,573)
Tax expense 10 (229) (2,486)
Tax expense excluding exceptional items (229) (190)
Tax expense on exceptional items — (2,296)
Loss for the year from continuing operations (5,488) (46,059)
Discontinued operations
Loss from discontinued operations (administration of Sandcity Limited) 35 — (3,373)
Loss for the financial year (5,488) (49,432)
Other comprehensive income/(expense)
Transferred to the carrying amount of hedged items (720) (1,256)
Tax on items transferred from equity 202 352
(Losses)/gains relating to designated cash flow hedges (221) 720
Tax on items taken directly to equity 60 (202)
Exchange differences on translation of foreign operations (155) —
Other comprehensive expense for the year, net of tax (834) (386)
Total comprehensive expense for the year attributable to equity holders of the parent (6,322) (49,818)
Loss per share (pence)
From continuing operations 11
— Basic (6.56) (108.90)
— Diluted (6.56) (108.90)
From continuing and discontinued operations 11
— Basic (6.56) (116.88)
— Diluted (6.56) (116.88) 00 00 www.blacks.co.uk www.millets.co.uk 34
Blacks Leisure Group plc Annual Report and Accounts 2011
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Consolidated Balance Sheet
as at 26 February 2011
26 February 27 February
2011 2010
Note £’000 £’000
ASSETS
Non-current assets
Property, plant and equipment 13 19,262 20,098
Goodwill 14 34,598 34,598
Other intangible assets 15 151 7
Deferred tax asset 10 485 414
Total non-current assets 54,496 55,117
Current assets
Inventories 17 36,122 38,954
Trade and other receivables 18 6,370 6,725
Derivative financial instruments 32 — 720
Cash and cash equivalents 19 655 1,010
Total current assets 43,147 47,409
TOTAL ASSETS 97,643 102,526
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Share capital 20 21,733 21,319
Share premium 21 43,395 24,333
Reserve for own shares 22 (773) (773)
Hedging reserve (161) 518
Retained earnings (30,206) (24,962)
TOTAL EQUITY 33,988 20,435
Non-current liabilities
Preference shares 20 891 891
Other payables 26 5,581 3,802
Obligations under finance leases 25 577 1,186
Long-term provisions 27 3,170 5,060
Total non-current liabilities 10,219 10,939
Current liabilities
Trade and other payables 26 33,491 41,662
Bank overdrafts 24 15,024 13,643
Obligations under finance leases 25 656 1,178
Short-term provisions 27 4,044 14,669
Derivative financial instruments 32 221 —
Total current liabilities 53,436 71,152
TOTAL LIABILITIES 63,655 82,091
TOTAL EQUITY AND LIABILITIES 97,643 102,526
The financial statements were approved by the Board and authorised for issue on 4 May 2011 and were signed on its behalf by:
Neil Gillis
Chief Executive
Marc Lombardo
Finance Director
Company Number: 582190 00 00 35
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Our Financials Our Governance Our Business
Consolidated Cash Flow Statement
for the year ended 26 February 2011
Year ended Year ended
26 February 27 February
2011 2010
Note £’000 £’000
Cash flows from operating activities
Net loss from continuing operations (5,488) (46,059)
Net loss from discontinued operations — (3,373)
Net loss from operations (5,488) (49,432)
Adjustments for:
Net finance cost 2,766 5,499
(Profit)/loss on disposal of property, plant and equipment (209) 1,050
Depreciation and amortisation 5,143 6,155
Impairment of property, plant and equipment 825 7,127
Loss on disposal of intangible assets — 54
Loss on deconsolidation of Sandcity Limited — 159
Tax expense 229 2,491
Equity-settled share-based payments expense 399 250
Release of capital receipts (6) (130)
Operating profit/(loss) before working capital changes 3,659 (26,777)
Decrease in inventories 2,822 10,062
Decrease in trade and other receivables 408 2,309
(Decrease)/increase in trade and other payables (6,569) 2,917
(Decrease)/increase in provisions (13,235) 8,787
Cash used in operations (12,915) (2,702)
Interest paid (1,984) (3,087)
Tax (paid)/received (32) 144
Net cash used in operating activities (14,931) (5,645)
Cash flows from investing activities
Purchase of property, plant and equipment (5,352) (2,945)
Purchase of intangible assets (151) —
Proceeds from disposal of property, plant and equipment 326 —
Proceeds from disposal of intangible fixed assets 75 497
Degrouping of subsidiary undertaking, net overdrafts — 38
Interest received 41 569
Net cash used in investing activities (5,061) (1,841)
Cash flows from financing activities
Proceeds from issue of share capital (2011: net of issue costs of £1,757,000) 19,476 —
Dividends on shares classified as liabilities (89) (89)
Payment of finance lease liabilities (1,131) (1,118)
Net cash generated/(used) in financing activities 18,256 (1,207)
Net decrease in cash and cash equivalents (1,736) (8,693)
Cash and cash equivalents at the beginning of the year (12,633) (3,940)
Cash and cash equivalents at the end of the year 19 (14,369) (12,633) 00 00 www.blacks.co.uk www.millets.co.uk 36
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Share Share Reserve for Warrants Hedging Retained
capital premium own shares reserve reserve earnings Total equity
£’000 £’000 £’000 £’000 £’000 £’000 £’000
At 1 March 2009 21,319 24,333 (773) — 904 23,188 68,971
Gains relating to designated
cash flow hedges — — — — 720 — 720
Tax on items taken directly to
equity relating to cash flow hedges — — — — (202) — (202)
Transferred to carrying amount of
hedged items on cash flow hedges — — — — (1,256) — (1,256)
Tax on items transferred from equity — — — — 352 — 352
Other comprehensive expense
for the year — — — — (386) — (386)
Loss for the year — — — — — (49,432) (49,432)
Total comprehensive expense
for the year — — — — (386) (49,432) (49,818)
Accrued equity-settled
share-based payments — — — 1,032 — 250 1,282
Transfer to retained earnings in
relation to share-based payments — — — (1,032) — 1,032 —
At 27 February 2010 21,319 24,333 (773) — 518 (24,962) 20,435
At 28 February 2010 21,319 24,333 (773) — 518 (24,962) 20,435
Losses relating to designated
cash flow hedges — — — — (221) — (221)
Tax on items taken directly to
equity relating to cash flow hedges — — — — 60 — 60
Transferred to carrying amount of
hedged items on cash flow hedges — — — — (720) — (720)
Tax on items transferred from equity — — — — 202 — 202
Exchange differences on
translation of foreign operations — — — — — (155) (155)
Other comprehensive expense
for the year — — — — (679) (155) (834)
Loss for the year — — — — — (5,488) (5,488)
Total comprehensive expense
for the year — — — — (679) (5,643) (6,322)
Issue of share capital 414 19,062 — — — — 19,476
Accrued equity-settled
share-based payments — — — — — 399 399
At 26 February 2011 21,733 43,395 (773) — (161) (30,206) 33,988
Consolidated Statement of Changes in Equity
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Notes to the Financial Statements
for the year ended 26 February 2011
1 General information
Blacks Leisure Group plc is a Company incorporated in England and Wales with registered number 582190. The address of the
registered office is 440-450 Cob Drive, Swan Valley, Northampton, NN4 9BB. The nature of the Group’s operations and its principal
activities are set out in the Chairman’s Statement, the Chief Executive’s Review, the Financial Review and the Directors’ Report and
Business Review.
New accounting standards
The following new accounting standards were adopted in the year. The adoption of these standards has not had a material impact
upon the Group.
h IFRS3 Revised — Business Combinations (effective for annual periods beginning on or after 1 July 2009);
h IAS27 Amendment — Consolidated and separate financial statements (effective for annual periods beginning on or
after 1 July 2009);
h IAS39 Amendment — Financial instruments: Eligible hedged items (effective for annual periods beginning on or after
1 July 2009);
h IFRIC17 Distributions of non-cash assets to owners (effective for annual periods beginning on or after 1 July 2009);
h IFRIC18 Transfer of assets from customers (effective for annual periods beginning on or after 1 July 2009);
Improvements to IFRSs (2009)
Amendments to various standards (generally effective for annual periods beginning on or after 1 January 2010);
h IFRS2 Amendment — IFRS2 Group cash-settled share-based payment transactions (effective for annual periods
beginning on or after 1 January 2010); and
h IAS32 Amendment — Classification of rights issues (effective for annual periods beginning on or after 1 February 2010).
As at the date of authorisation of these financial statements, the following standards and interpretations, issued by the International
Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC), have not yet been
adopted by the Group. Those indicated with an asterisk have not yet been endorsed for use in the EU.
h IFRIC19 Extinguishing financial liabilities with equity instruments (effective for annual periods beginning on or after
1 July 2010);
h IAS24 Revised — Related party disclosures (effective for annual periods beginning on or after 1 January 2011);
h IFRIC14 Amendment — IFRIC14 and IAS19 — Limit on a defined benefit asset, minimum funding requirements and their
interaction (effective for annual periods beginning on or after 1 January 2011);
Improvements to IFRSs (2010)
Amendments to various standards (generally effective for annual periods beginning on or after 1 January 2011);
h IFRS7* Amendment — Disclosures — Transfers of financial assets (effective for annual periods beginning on or after
1 July 2011);
h IAS12* Amendment — Deferred tax: recovery of underlying assets (effective for annual periods beginning on or after
1 January 2012); and
h IFRS9* Amendment — Financial instruments (effective for annual periods beginning on or after 1 January 2013).
The Group does not anticipate that the adoption of these standards or interpretations will have a material impact on the
consolidated results or financial position of the Group.
2 Accounting policies
Basis of preparation
The consolidated financial statements for the 52 weeks ended 26 February 2011 have been prepared in accordance with the
accounting policies and presentation required by International Financial Reporting Standards, incorporating International Accounting
Standards (IAS) and Interpretations (collectively IFRS), as endorsed by the European Union, and therefore comply with Article 4 of
the EU IAS Regulation.
The consolidated financial statements have been prepared on a historical cost basis except for derivative financial instruments and
equity-settled share-based payments that have been measured at fair value. The consolidated financial statements are presented in
pounds sterling and all values are rounded to the nearest thousand except when otherwise indicated.
The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and
assumptions that affect the reported amount of assets and liabilities at the balance sheet date and the reported amounts of revenues
and expenses during the reporting year. These key estimates and assumptions are set out in note 3. Although these estimates are
based on management’s best knowledge of the amount, events or actions, actual results may differ from those estimates. 00 00 www.blacks.co.uk www.millets.co.uk 38
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The principal accounting policies adopted are set out below.
Basis of consolidation
The consolidated financial statements incorporate the accounts of the Company and its subsidiaries as if they formed a single entity
(‘the Group’). Intercompany transactions, balances, income and expenses between consolidated Group companies are therefore
eliminated in full on consolidation. Subsidiaries are included in the consolidation up to the date at which they cease to be controlled
by the Group, either by way of sale or other means.
Intangible assets
Goodwill
Goodwill arising on acquisition is capitalised and represents the excess of the fair value of consideration over the Group’s interest in the
fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary at the date of acquisition. Goodwill is reviewed for
impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
Goodwill arising before the transition to IFRS has been retained at the previous UK GAAP amount subject to being tested for
impairment at that date.
Internally generated intangible assets
An internally generated intangible asset arising from the Group’s development (from the development phase of an internal project)
shall be recognised if, and only if, all the conditions below, from IAS38, can be demonstrated:
h the technical feasibility of completing the intangible asset so that it will be available for use or sale;
h the intention to complete the intangible asset and use or sell it;
h the ability to use or sell the intangible asset;
h how the intangible asset will generate probable future economic benefits. Amongst other things, the Group must demonstrate
the existence of a market for the output of the intangible asset itself or, if it is to be used internally, the usefulness of the
intangible asset;
h the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible
asset; and
h the ability to measure reliably the expenditure attributable to the intangible asset during its development.
Internally generated intangible assets are amortised on a straight-line basis over their useful lives of three years. Where no asset can
be recognised, expenditure is recognised as an expense in the period in which it occurred.
Trademarks
Trademarks are measured initially at purchase cost and are amortised on a straight-line basis over their estimated useful lives of
between five and ten years.
Website development costs
Website development costs are accounted for as intangible assets where the criteria of IAS38 have been met. Intangible assets
are valued at cost and are amortised on a straight-line basis over three years unless the asset can be demonstrated to have an
indefinite life. Intangible assets with finite lives are reviewed for impairment if there is any indication that the carrying value may not
be recoverable. Intangible assets with an indefinite useful life are tested for impairment annually.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any provision for impairment in value.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:
h freehold land is not depreciated;
h freehold buildings are depreciated to their estimated residual values over periods up to fifty years;
h leasehold improvements are depreciated to their estimated residual values over the period of the associated lease or over the
asset life if shorter;
h fixtures and equipment are depreciated over four to fifteen years; and
h motor vehicles are depreciated over four to six years.
Notes to the Financial Statements
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2 Accounting policies - continued
The carrying values of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate
that their carrying value may not be recoverable. Any impairment in the value of property, plant and equipment is charged to the
statement of comprehensive income.
Profits and losses on disposal of property, plant and equipment, which reflect the difference between net selling price and the
carrying amount at the date of disposal, are recognised in the statement of comprehensive income.
Impairment of non-financial assets
The carrying values of assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If
any such indication exists, the recoverable amount of the asset is estimated. Where the asset does not generate cash flows which
are independent from other assets, the recoverable amount of the cash-generating unit to which the asset belongs is estimated.
The recoverable amount of a non-financial asset is the higher of its fair value less costs to sell and its value-in-use. Value-in-use is
the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
An impairment loss is recognised in the statement of comprehensive income whenever the carrying amount of an asset or cash-
generating unit exceeds its recoverable amount.
Goodwill is tested for impairment annually and whenever there is an indication that the asset may be impaired. Any impairment
recognised on goodwill is not reversed.
Inventories
Inventories are stated at the lower of cost and net realisable value. The cost includes all costs in bringing each product into the
business. Inventories are valued on a weighted average basis and this is not deemed to be materially different to that which would
be calculated on a ‘first in, first out’ basis. Net realisable value is defined as the estimated selling price less any direct costs of
disposal. Provision is made for obsolete, slow-moving or damaged items where appropriate.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event; it is probable
that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the
obligation.
Provisions for onerous leases are recognised for the expected lease or lease related payments that the Group will incur prior to any
assignment, sub-lease or lease expiry plus any additional costs in relation to the disposal of or exit from the lease.
Minimal structural adaptations are generally made to properties during the lease term and they are kept in a good state of repair
with general ongoing maintenance costs, including amounts to ‘make good’ wear and tear, being charged to the statement of
comprehensive income as incurred. Dilapidations costs may however be incurred towards the end of a lease for remedial works
required to bring a leased property back into the same condition as when the lease commenced. Provisions are recognised for
dilapidations when the likelihood of an outflow of economic benefits relating to amounts expected to be payable under a legal
obligation in a lease becomes more likely than not and a reliable estimate of the provision can be made. At each period end, the
Group calculates its best estimate of the expenditure it expects to incur and revises its provisions, discounting where the effect is
material. The provision is made for the likely cost of such works or a settlement with the landlord and may be determined based
upon the Directors’ own assessment or by reference to the serving of a dilapidations schedule by the landlord.
Provisions for CVA related rates obligations are recognised for all ongoing rates liabilities in respect of properties vacated under the
terms of the CVAs in the prior financial year. The provision is calculated as set out in note 3.
Foreign currency
Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they
operate (their ‘functional currency’) are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets
and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled
monetary assets and liabilities are recognised immediately in the statement of comprehensive income, except for foreign currency
borrowings qualifying as a hedge of a net investment in a foreign operation, in which case exchange differences are recognised in
other comprehensive income and accumulated in reserves. 00 00 www.blacks.co.uk www.millets.co.uk 40
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When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain
or loss shall be recognised in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised
in the statement of comprehensive income, any exchange component of that gain or loss shall be recognised in the statement of
comprehensive income.
On consolidation, the results of overseas operations are translated into sterling at rates approximating to those ruling when the
transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those
operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net
assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and
accumulated in the foreign exchange reserve.
Exchange differences recognised in the statement of comprehensive income of Group entities’ separate financial statements on
the translation of long-term monetary items forming part of the Group’s net investment in the overseas operation concerned are
reclassified to the foreign exchange reserve on consolidation.
On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that
operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or
loss on disposal.
Revenue recognition
Revenue represents goods sold to external customers, net of value added tax and less an allowance for expected returns. The
revenue arises from the sale of Outdoor and Boardwear clothing, footwear and equipment. Revenue is recognised in the statement
of comprehensive income when the significant risks and rewards of ownership have been transferred. This is generally deemed to
be at the point-of-sale for in-store sales or at the time of delivery to the end customer in the case of internet sales. Revenue from
gift vouchers and gift cards sold by the Group is only recognised upon the redemption of the gift voucher or gift card against the
purchase of goods.
Leases
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. All
other leases are classified as finance leases. Rental payments in respect of operating leases are charged against operating profit on
a straight-line basis over the period of the lease. Lease incentives are also credited over the lease term on a straight-line basis.
Assets used by the Group which have been funded through finance leases are capitalised in property, plant and equipment and the
resulting lease obligations are included in payables. The associated assets are depreciated over their useful lives and the interest
element of the rental obligations is charged to the statement of comprehensive income over the period of the lease and represents a
constant proportion of the balance of capital repayments outstanding.
Capital receipts
Capital receipts are a form of lease inducement received in cash which are credited to operating profit on a straight-line basis over
the full term of the lease.
Exceptional items
These are material items which derive from events or transactions that fall within the ordinary activities of the Group but are not
directly related to the delivery of the Group’s products to its customers and which individually or, if of a similar type, in aggregate,
merit separate presentation by virtue of their size or incidence to allow Shareholders to understand better the elements of financial
performance in the year, to facilitate comparison with prior periods and to assess underlying trends in financial performance. These
items are usually derived from one-off events or a change in assumptions made in critical accounting estimates and judgements.
Pensions and other post-employment benefits
The Group operates defined contribution schemes. The assets of the schemes are held separately from those of the relevant
companies.
Contributions to the defined contribution schemes are charged to the statement of comprehensive income in the year in which they
become payable.
Notes to the Financial Statements
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2 Accounting policies - continued
Equity-settled share-based payment transactions
Certain employees and Directors of the Group receive equity-settled remuneration in the form of equity-settled share-based payment
transactions, whereby employees render services in exchange for shares or rights over shares. The cost of equity-settled transactions
with employees is measured by reference to the fair value, determined using the Black–Scholes option pricing model, the Monte
Carlo model or the Binomial model as appropriate, at the date at which they are granted. The cost of equity-settled transactions
is recognised, together with a corresponding increase in equity, over the period in which the non-market vesting conditions are
expected to be fulfilled, ending on the relevant vesting date. The cumulative expense recognised for equity-settled transactions at
each reporting date until the vesting date reflects the extent to which the vesting period has expired and is adjusted to reflect the
Directors’ best available estimate of the number of equity instruments that will ultimately vest based upon non-market conditions.
Where the terms and conditions of options are modified before they vest, the movement in the fair value of the options, measured
immediately before and after the modification, is also charged to the statement of comprehensive income over the remaining vesting
period. New share options issued are treated as a replacement where, amongst other things, the new share options are with the
same participants as the cancelled options, the new share options are issued at a fair value that is broadly consistent with the fair
value of the cancelled options determined at the cancellation date, the issue and cancellation of the options are part of the same
arrangement (and each will only take place upon the occurrence of the other) and the commercial substance of the cancellation of
the options is that they are replaced by the issue of the new options.
The Group has taken advantage of the transitional provisions of IFRS2 in respect of equity-settled awards and has applied IFRS2
only to equity-settled awards granted after 7 November 2002 that had not vested before 1 January 2005.
Shares held by Blacks Leisure Group Employee Benefit Trusts
The Blacks Leisure Group Employee Benefit Trusts provide for the issue of shares to Group employees under certain of the share
option schemes. Shares in the Company held by such trusts are included in the balance sheet, under ‘Reserve for own shares’, at
cost as a deduction from equity.
Tax
The tax charge represents both the income tax payable, based on profits for the year, and deferred tax. Deferred tax is recognised in
full in respect of all temporary differences between the tax base of the Group’s assets and liabilities and their carrying amounts that
have originated but not been reversed by the balance sheet date. No deferred tax is recognised if the temporary difference arises
from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss. Deferred tax is recognised in respect of taxable temporary
differences associated with investments in subsidiaries except where the timing of the reversal of the temporary differences can be
controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the deductible
temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and
reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax
asset to be utilised in the near future.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or
the liability is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date.
Tax relating to items recognised directly in equity is itself recognised in equity and not in the statement of comprehensive income.
Financial instruments
Trade and other receivables
Trade receivables are recognised and carried at original invoice value less an allowance for any expected uncollectable amounts. An
estimate for doubtful debts is made when objective evidence of an impairment exists. Bad debts are written off when identified.
Cash and cash equivalents
Cash and short-term deposits recorded on the balance sheet comprise cash at bank and in hand and short-term deposits with
an original maturity of three months or less. For the purposes of the consolidated cash flow statement, cash and cash equivalents
consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. 00 00 www.blacks.co.uk www.millets.co.uk 42
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Other financial liabilities
Trade payables are recognised and carried at original invoice cost and are a short-term liability of the Group.
Preference Shares are recognised at the amount advanced where this represents fair value. Preference Shares are subsequently
accounted for at amortised cost.
Derivative financial instruments and hedge accounting
Derivative financial instruments used by the Group are stated at fair value. Hedges are classified as either fair value hedges when
they hedge the exposure to changes in the fair value of a recognised asset or liability, or cash flow hedges where they hedge
exposure to variability in cash flows that are either attributable to a particular risk associated with a recognised asset or liability or a
forecast transaction.
Gains or losses from remeasuring fair value hedges, which meet the conditions for hedge accounting, are recorded in the statement
of comprehensive income, together with the corresponding changes in the fair value of the hedged instruments attributable to the
hedged risk.
The portion of any gains or losses of cash flow hedges which meet the conditions for hedge accounting and are determined to be
effective hedges are recognised directly in equity. The gains or losses relating to the ineffective portion are recognised immediately in
the statement of comprehensive income.
When the hedged firm commitment results in the recognition of an asset or a liability then, at the time the asset or liability is
recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of
the acquisition cost or other carrying amount of the non-financial asset or liability. For all other cash flow hedges, the gains or losses
that are recognised in equity are transferred to the statement of comprehensive income in the same year in which the hedged firm
commitment affects the net results.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies
for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in
equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss
recognised in equity is transferred to the statement of comprehensive income.
For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are recognised
immediately in the statement of comprehensive income.
De-recognition of financial liabilities
Where the terms of an existing financial liability that is carried at amortised cost are renegotiated, the accounting will be determined by
the extent to which the terms of the original liability have been modified. The modified terms are deemed to be substantially different if
there has been either a substantial qualitative change in the loan terms or if the net present value of the cash flows under the modified
terms of the liability (including any fees paid and received) is at least 10% different from the net present value of the remaining cash
flows of the liability prior to the modification, both discounted at the original effective interest rate of the original liability.
If the cash flows and other terms are not substantially different, the original liability continues to be recognised and the difference
between the amortised cost of the debt instrument at the date of the modification and the present value of the new debt instrument,
discounted by the original effective interest rate, is recognised in the statement of comprehensive income in future periods through
the revised effective interest rate.
Where either the cash flow or other terms are substantially different, the exchange with the lender is accounted for as an
extinguishment of the original liability and the recognition of a new liability. Any costs or fees incurred are recognised as part of the
gain or loss on that extinguishment and do not adjust the carrying amount of the new liability.
Notes to the Financial Statements
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3 Critical accounting estimates and judgements
The preparation of consolidated financial statements under IFRS requires the Group to make estimates and assumptions that affect
the application of policies and reported amounts. Estimates and judgements are continually evaluated and are based on historical
experience and other factors including expectations of future events that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material
adjustment to the carrying amount of assets and liabilities are outlined below.
Impairment of goodwill
The Group is required to test, at least annually, whether goodwill has suffered any impairment. The recoverable amount is
determined based on value-in-use calculations. The use of this method requires the estimation of future cash flows and the choice
of a suitable discount rate in order to calculate the present value of these cash flows. Actual outcomes could vary.
Impairment of property, plant and equipment
Property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying amount
may not be recoverable. When a review for impairment is conducted, the recoverable amount is determined based on value-in-use
calculations prepared on the basis of management’s assumptions and estimates.
Depreciation of property, plant and equipment
Depreciation is provided so as to write down the assets to their residual values over their estimated useful lives as set out in note 2.
The selection of these estimated lives requires the exercise of management judgement.
Inventory valuation
Inventories are valued at the lower of weighted average cost and net realisable value. Net realisable value includes, where necessary,
provisions for slow-moving and damaged stocks. The provision represents the difference between the cost of stock and its
estimated recoverable value, based on ageing. Calculation of these provisions requires judgements to be made, which include
forecast consumer demand, the promotional, competitive and economic environment, and inventory loss trends.
Equity-settled share-based payments
The charge for equity-settled share-based payments is calculated in accordance with estimates and assumptions which are
described in note 29. The option valuation models used require highly subjective assumptions to be made including the future
volatility of the Company’s share price, expected dividend yields, risk-free interest rates and expected staff turnover. The Directors
draw upon a variety of external sources to aid them in the determination of the appropriate data to use in such calculations.
The option pricing models used are the Black–Scholes option pricing model, the Monte Carlo model and the Binomial model. These
are chosen to reflect the nature of the specific share schemes.
During the vesting period of the share options, an assessment is required of the likelihood of whether non-market performance
conditions will be met, which affects the estimate of the number of share options that will vest and hence the amount charged to the
statement of comprehensive income.
Provisions for onerous leases
If the Group vacates or plans to vacate a store or other property prior to the expiry of the related lease, it records a provision for the
expected lease or lease related payments that the Group will incur prior to any assignment or sub-lease of the property plus any
inducement that may be required, and for any expected shortfall in amounts that are anticipated to be receivable from a sub-lease.
Such a calculation requires a judgement as to the timing and duration of the expected vacancy periods and the amount and timing
of future potential sub-lease income. When making these judgements, the Directors consider a number of factors, including the
landlord, the location and condition of the property, the terms of the lease, the specific local marketplace demand and the economic
environment.
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Provisions for rates obligations
In line with the terms of the CVAs, the Group has a legal commitment to pay business rates on properties that it vacated under these
arrangements up until such a time as the landlord is able to re-let the site. Provision is made for the expected discounted value of
this obligation. Such a calculation requires a judgement as to the duration of the expected vacancy period. When making these
judgements the Directors consider a number of factors, including the rental value, the location and condition of the property, the
terms of the lease, the specific local marketplace demand and the economic environment.
Dilapidations
The requirement for dilapidation provisions is assessed by management on an ongoing basis following property reviews using all
the information available. Typically, dilapidation provisions are not required in the early years of a lease but may be necessary later,
when a probable outflow of economic benefits can be identified and that outflow can be reliably estimated. This may occur when the
lease is shortly due for renewal, where the Group has no intention to renew the lease or where the Group has an indication that the
landlord will not be renewing the lease. A provision will be recognised earlier if the Directors consider an obligation to have arisen.
Exceptional items
Further details on matters considered critical in relation to items presented as exceptional are given above and in note 8.
4 Revenue and other operating income
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000
Sale of goods 201,933 201,933 240,517 8,531 249,048
Other operating income 899 899 1,109 — 1,109
Other operating income consists mainly of sub-let property income.
5 Segment information
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.
The chief operating decision maker has been identified as the Board of Directors, as a collective.
The Group’s two core areas of operation are described as below:
Operation Nature of operation
Outdoor Retail of Outdoor clothing, footwear and equipment
Boardwear Retail of Boardwear clothing, footwear and equipment
Inter-segment sales between business segments are entered into on an arm’s length basis in a manner similar to transactions with
third parties.
The segmental analysis is presented including both continuing and discontinued operations. Results in the prior year which arose from
discontinued operations, which are summarised in note 35, are included within the Boardwear segment in the comparative period.
Notes to the Financial Statements
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5 Segment information - continued
Continuing Continuing
operations Total operations Total
2011 2011 2010 2010
OUTDOOR £’000 £’000 £’000 £’000
Revenue
Total revenue 194,792 194,792 223,412 223,412
Sales to external customers 194,792 194,792 223,412 223,412
Profit
Segment loss (188) (188) (6,218) (6,218)
Exceptional items:
— Impairment of property, plant and equipment (433) (433) (5,879) (5,879)
— Other exceptional operating items 3,977 3,977 (9,860) (9,860)
Operating profit/(loss) 3,356 3,356 (21,957) (21,957)
Assets and liabilities
Segment assets 94,629 94,629 96,959 96,959
Segment liabilities (44,084) (44,084) (59,024) (59,024)
Total net assets 50,545 50,545 37,935 37,935
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
BOARDWEAR £’000 £’000 £’000 £’000 £’000
Revenue
Total revenue 7,141 7,141 17,105 10,616 27,721
Inter-segment sales — — — (2,085) (2,085)
Sales to external customers 7,141 7,141 17,105 8,531 25,636
Profit
Segment loss (1,911) (1,911) (3,697) (2,601) (6,298)
Inter-segment profit on stock — — — 312 312
Exceptional items:
— Impairment of property, plant and equipment (392) (392) (450) (798) (1,248)
— Other exceptional operating items (1,222) (1,222) (3,119) (159) (3,278)
Operating loss (3,525) (3,525) (7,266) (3,246) (10,512)
Assets and liabilities
Segment assets 1,360 1,360 4,124 — 4,124
Segment liabilities (2,947) (2,947) (7,334) — (7,334)
Total net liabilities (1,587) (1,587) (3,210) — (3,210) 00 00 www.blacks.co.uk www.millets.co.uk 46
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5 Segment information - continued
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
UNALLOCATED £’000 £’000 £’000 £’000 £’000
Profit
Segment loss (1,715) (1,715) (2,122) — (2,122)
Exceptional items:
— Other exceptional operating items (609) (609) (6,851) — (6,851)
Operating loss (2,324) (2,324) (8,973) — (8,973)
Net finance costs
(2010: including exceptional finance charges) (2,766) (2,766) (5,377) (122) (5,499)
Loss before tax (5,090) (5,090) (14,350) (122) (14,472)
Tax expense (229) (229) (2,486) (5) (2,491)
Loss for the financial year (5,319) (5,319) (16,836) (127) (16,963)
Assets and liabilities
Segment assets 1,654 1,654 1,443 — 1,443
Segment liabilities (16,624) (16,624) (15,733) — (15,733)
Total net liabilities (14,970) (14,970) (14,290) — (14,290)
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
GROUP £’000 £’000 £’000 £’000 £’000
Revenue
Total revenue 201,933 201,933 240,517 10,616 251,133
Inter-segment sales — — — (2,085) (2,085)
Sales to external customers 201,933 201,933 240,517 8,531 249,048
Profit
Segment loss (3,814) (3,814) (12,037) (2,601) (14,638)
Inter-segment profit on stock — — — 312 312
Exceptional items:
— Impairment of property, plant and equipment (825) (825) (6,329) (798) (7,127)
— Other exceptional operating items 2,146 2,146 (19,830) (159) (19,989)
Operating loss (2,493) (2,493) (38,196) (3,246) (41,442)
Net finance costs
(2010: including exceptional finance charges) (2,766) (2,766) (5,377) (122) (5,499)
Loss before tax (5,259) (5,259) (43,573) (3,368) (46,941)
Tax expense (229) (229) (2,486) (5) (2,491)
Loss for the financial year (5,488) (5,488) (46,059) (3,373) (49,432)
Assets and liabilities
Segment assets 97,643 97,643 102,526 — 102,526
Segment liabilities (63,655) (63,655) (82,091) — (82,091)
Total net assets 33,988 33,988 20,435 — 20,435
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 47
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6 Operating loss
Operating loss has been arrived at after charging/(crediting):
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000
Employee benefits expense (note 7) 39,091 39,091 47,187 989 48,176
Net foreign exchange gains (485) (485) (1,233) — (1,233)
Cost of inventories recognised as an expense 97,864 97,864 113,541 6,271 119,812
Write-downs of inventories recognised as an expense 6,190 6,190 4,132 — 4,132
Depreciation of property, plant and equipment:
— Owned 4,456 4,456 5,108 157 5,265
— Leased 680 680 680 — 680
Impairment of property, plant and equipment 825 825 6,329 798 7,127
(Profit)/loss on disposal of property, plant and
equipment (201) (201) 1,050 — 1,050
Amortisation of intangible assets (note 15) 7 7 210 — 210
Loss on disposal of other intangible assets — — 54 — 54
Operating lease expense:
— Plant and equipment 349 349 443 11 454
— Property (2010: excluding post closure costs
charged as exceptional items) 28,235 28,235 36,115 1,580 37,695
Auditors’ fees
Fees payable to the Company’s Auditors for the audit
of the Company’s annual accounts 54 54
Fees payable in relation to the audit of the
Company’s subsidiaries 77 81
Other services relating to tax 75 57
Other advisory and regulatory services 163 392
Total 369 584
7 Employee benefits expense
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000
Wages and salaries 36,043 36,043 43,503 922 44,425
Social security costs 2,372 2,372 3,038 67 3,105
Pension costs (note 29) 277 277 396 — 396
38,692 38,692 46,937 989 47,926
Equity-settled share-based payments expense
(note 29) 399 399 250 — 250
Total 39,091 39,091 47,187 989 48,176 00 00 www.blacks.co.uk www.millets.co.uk 48
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7 Employee benefits expense - continued
The average number of employees in the various business sectors, including Directors, was as follows:
2011 2010
Full-time Part-time Full-time Part-time
Outdoor 1,035 2,740 1,224 3,019
Boardwear 34 68 98 190
Central services 6 2 3 2
Total 1,075 2,810 1,325 3,211
2011 2010
Number Number
Full-time
— Management and administration 128 152
— Selling and distribution 947 1,173
Part-time 2,810 3,211
Total 3,885 4,536
8 Exceptional operating items
The Group has recorded a net exceptional operating credit in relation to continuing operations in the year of £1,321,000 (2010:
£26,159,000 net charge) as set out below:
2011 2010
£’000 £’000
CVA related rates obligations (5,376) 10,755
Restructuring and impairment costs 4,337 6,329
Other CVA related items — 18,420
Release of onerous lease provision — (10,153)
Professional fees 243 808
Proceeds from Sandcity administration (525) —
Total net (credit)/charge (1,321) 26,159
Year ended 27 February 2010
In anticipation of the CVAs, the carrying value of property, plant and equipment at the closing stores was impaired in full to the
extent that they would not be utilised elsewhere within the Group. This resulted in a charge in the period of £7,127,000, of which
£6,329,000 as presented above related to continuing operations. Under the terms of the CVAs, whilst certain property rentals were
passed back to landlords, the Group remained liable for certain property related obligations. Landlords of such properties were able
to claim during May and July 2010 against a compromise fund, capped at £7,250,000, which approximated to around 6 months
of rent. This was provided for in the year to 27 February 2010 and was subsequently settled in cash during the year to 26 February
2011. Further, the Group remained liable for business rates on these properties until such a time as the landlord was able to re-let
them. This resulted in a provision of £10,755,000 being created, reflecting the Directors’ best estimate at 27 February 2010 of the
likely value of this obligation.
The complex nature of the CVAs and related refinancing of the business resulted in significant levels of professional fees being
incurred or, in the case of the administering of the CVA compromise fund, being provided for. The total professional fees of
£5,930,000 were presented as exceptional operating items in respect of this.
The CVAs resulted in the closure of 88 retail stores. Costs directly associated with this included the costs of redundancies, clearing
of the premises and a write-off of certain stocks. These store closure costs totalled £3,458,000 and were presented as exceptional
operating items.
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 49
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8 Exceptional operating items - continued
Further costs in connection with the CVAs, which totalled £1,782,000, were also presented as exceptional operating items. These
included the write off of rent, rates and other prepayments (relating to the period post closure), and other store costs relating to the
period since the stores ceased trading.
As a result of the CVAs, the properties against which onerous lease provisions had previously been made were passed back to
the landlords and, accordingly, the onerous lease provision held as at that time of £10,153,000 was released and credited to
the statement of comprehensive income. Owing to the unusual nature and significant value, this, and other CVA related costs as
described below, were presented on the face of the statement of comprehensive income as exceptional items within the operating
result.
A general meeting to approve a Placing and Open Offer of Ordinary Shares was adjourned indefinitely on 24 February 2010 and
accordingly, professional fees in connection with this transaction were expensed in full at the year end, resulting in an exceptional
charge of £808,000. A new Firm Placing and Open Offer was subsequently successful in the year to 26 February 2011 and the
direct costs of which were included within share premium. The previously charged costs of £808,000 were not reversed to share
premium given they arose from a separate and aborted share issue.
Year ended 26 February 2011
As described above, a charge was recorded during the year to 27 February 2010 relating to a provision in respect of ongoing rates
obligations at properties which were closed during October and November 2009 under the CVAs. Whilst the Group was no longer
liable for rent in respect of these leases, it remained obligated to pay business rates until such a time as the landlord is able to re-let
the site. The provision at 27 February 2010 was calculated based on a store-by-store review of the expected period to re-let which
included seeking and considering advice from third parties where appropriate. The Board considers that the provision recognised at
that date was robust in that its estimation was the result of a detailed exercise that took into account all significant known factors,
including the economic environment, that were relevant at that time. During the year, the Group has been assisting landlords in
finding new tenants for these properties and the sites have been able to be re-let more quickly than had been anticipated when the
provision was initially determined. Indeed, at the end of the financial year, only 38 of the initial 101 leases remain with the Group. The
provision has therefore been reassessed and, accordingly, an amount of £5,376,000 has been released from the provision at
26 February 2011 and is recorded within exceptional operating items.
The Directors have commenced a plan to restructure certain operations, including a plan to exit fully from the Boardwear segment
during the coming months. Provisions in relation to this have only been made within these financial statements to the extent that
the criteria of IAS37 and other relevant accounting standards have been met. The exceptional charge of £4,337,000 during the year
in respect of this restructuring includes the following items; redundancy costs of £395,000 relating mainly to head office functions
where IAS37 criteria had been met, a provision of £1,107,000 for onerous lease obligations at three properties, impairment of
property, plant and equipment of £825,000, dilapidations costs of £305,000 and provisions against the carrying values of specific
Boardwear inventories of £1,705,000. Given the restructuring plan for the exit from Boardwear was not fully committed at the end
of the financial year, in the context of IAS37 recognition criteria, provision for further costs of this exit, such as redundancy and costs
of exiting leases, has not been included within these financial statements. Given the significant value of these charges, and their
nature being strategic and one-off rather than incurred in the normal course of business, these have been presented as exceptional
operating items within the statement of comprehensive income.
The Company announced on 19 October 2010 that it had been approached by several parties regarding a possible offer for the
Company or an offer to acquire certain of the trading activities and related assets of the Group. A number of indicative proposals
were received and, whilst the Board announced on 26 January 2011 that these discussions had been terminated, professional fees
were necessarily incurred relating to this process. These costs, which amount to £243,000, have been presented as exceptional
operating charges as above.
During the year, the Company has received an amount of £25,000 as part proceeds from the administration of Sandcity Limited,
a former wholly-owned subsidiary which formerly traded within the Boardwear segment and was placed into administration on
23 September 2009. All intercompany and other receivables relating to Sandcity Limited were provided for in full at 27 February
2010 as part of the loss recorded on the deconsolidation of that company, reflecting the uncertainty over any recovery. Further to
this, and based on discussions with the administrators of that company, the Directors have accrued at the year end an additional
amount of £500,000 of proceeds from this administration, reflecting the further minimum amount which they believe they can
confidently and reasonably expect to receive over the coming period. 00 00 www.blacks.co.uk www.millets.co.uk 50
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9 Finance income and costs
Continuing Continuing Discontinued
operations Total operations operations Total
2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000
Bank loans and overdrafts 1,935 1,935 5,051 122 5,173
Interest on obligations under finance leases 87 87 164 — 164
Unwinding of discount on provisions 720 720 642 — 642
Dividend on Preference Shares 89 89 89 — 89
Total finance cost 2,831 2,831 5,946 122 6,068
Bank interest receivable (41) (41) (569) — (569)
Unwinding of discount on deferred receivables (24) (24) — — —
Total finance income (65) (65) (569) — (569)
Net finance cost 2,766 2,766 5,377 122 5,499
Finance costs on bank loans and overdrafts in the prior period included £3,032,000 which related to the value of bank fees and
warrants upon the agreement of a new banking facility as part of the CVAs. These were presented in the prior year as exceptional
charges, within finance costs.
10 Tax expense
A reconciliation of tax expense, recognised in the consolidated statement of comprehensive income, applicable to loss before tax at
the statutory tax rate to the tax expense at the Group’s effective tax rate for the year was as follows:
2011 2010
£’000 £’000
Loss before tax from continuing operations (5,259) (43,573)
Loss before tax from discontinued operations — (3,368)
Loss before tax (5,259) (46,941)
Tax at current UK tax rate of 28% (2010: 28%) (1,473) (13,143)
Permanent differences 137 4,792
Provision not allowable for tax purposes — (2,321)
Depreciation in excess of capital allowances 1,247 3,096
Other temporary differences 1 8
Tax losses 126 7,568
Total current tax 38 —
Deferred tax
Relating to origination and reversal of temporary differences 191 2,491
Total tax expense 229 2,491
Tax relating to Sandcity Limited (discontinued operation, see note 35) — (5)
Tax expense in respect of continuing operations 229 2,486
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 51
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10 Tax expense - continued
Tax on each component of other comprehensive income is as follows:
2011 2010
£’000 £’000
Current tax
Current tax — —
Total current tax — —
Deferred tax
Tax on items transferred from equity relating to cash flow hedges 60 (202)
Tax on items taken directly to equity relating to cash flow hedges 202 352
Total deferred tax 262 150
Total income tax recognised directly in other comprehensive income 262 150
Deferred tax asset
The deferred tax asset relates to the following:
Consolidated Consolidated statement of
balance sheet comprehensive income
2011 2010 2011 2010
£’000 £’000 £’000 £’000
Short-term temporary differences 425 616 191 2,491
Revaluations of foreign exchange contracts
(cash flow hedges) to fair value 60 (202)
Net deferred tax asset 485 414
Deferred tax expense 191 2,491
The movement in the deferred tax asset is analysed as follows:
£’000
Deferred tax asset at 27 February 2010 414
Charged to the consolidated statement of comprehensive income (191)
Movement charged directly to equity in respect of foreign currency forward contracts 262
Deferred tax asset at 26 February 2011 485
The Group has capital losses arising in the UK of £6,640,000 (2010: £7,140,000) that are available indefinitely for offset against future
chargeable gains. Deferred tax assets have not been recognised in respect of these losses as they may not be used to offset taxable
trading profits elsewhere in the Group and they have arisen in subsidiaries that have been loss-making for some time.
Deferred tax on revaluations of foreign exchange contracts (cash flow hedges) to fair value is taken directly to equity.
The Directors expect to recover the recognised deferred tax asset over the foreseeable future. There are no other recognised
deferred tax assets or liabilities in the year (2010: £nil). Potential deferred tax assets in respect of tax losses, which at 26 February
2011 amount to approximately £33 million (2010: £32 million), have not been recognised. 00 00 www.blacks.co.uk www.millets.co.uk 52
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11 Loss per share
Basic loss per share is calculated by dividing the net loss for the year attributable to Ordinary Shareholders by the weighted average
number of Ordinary Shares in issue during the year.
Since the Group was loss-making in the current year there is no dilution effect of share options and warrants. The Group has
3,805,841 share options (2010: 3,982,140 and 2,131,905 warrants) over Ordinary Shares outstanding at the end of the year, that
may become dilutive.
2011 2010
Weighted average number of Ordinary Shares of 1p each for basic loss per share 83,706,441 42,293,525
Effect of dilution - share options (2010: and warrants) — —
Adjusted weighted average number of Ordinary Shares for diluted loss per share 83,706,441 42,293,525
Loss Loss per share
2011 2010 2011 2010
Continuing operations £’000 £’000 pence pence
Loss and basic loss per share (5,488) (46,059) (6.56) (108.90)
Exceptional items (1,321) 29,191 (1.58) 69.02
Tax expense/(credit) on exceptional items — 2,296 — 5.43
Loss and basic loss per share excluding exceptional items (6,809) (14,572) (8.14) (34.45)
Loss Loss per share
2011 2010 2011 2010
Discontinued operations £’000 £’000 pence pence
Loss and basic loss per share — (3,373) — (7.98)
Exceptional items — 957 — 2.26
Loss and basic loss per share excluding exceptional items — (2,416) — (5.72)
Loss Loss per share
2011 2010 2011 2010
Continuing and discontinued operations £’000 £’000 pence pence
Loss and basic loss per share (5,488) (49,432) (6.56) (116.88)
Exceptional items (1,321) 30,148 (1.58) 71.28
Tax (expense)/credit on exceptional items — 2,296 — 5.43
Loss and basic loss per share excluding exceptional items (6,809) (16,988) (8.14) (40.17)
The additional loss per share information is disclosed as the Board believes that loss per share excluding exceptional items better reflects
the underlying performance of the business and assists in providing a clearer view of the fundamental performance of the Group.
There have been no other transactions involving Ordinary Shares or potential Ordinary Shares since the reporting date and before the
completion of these financial statements.
12 Dividends paid and proposed
No dividends have been declared or paid on Ordinary Shares in respect of either the current or prior year.
Preference dividends are charged to the statement of comprehensive income as finance costs, as set out in note 9.
Notes to the Financial Statements
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13 Property, plant and equipment
Freehold land Leasehold Fixtures and Motor
and buildings improvements equipment vehicles T otal
£’000 £’000 £’000 £’000 £’000
At 1 March 2009, net of accumulated depreciation 1,300 2,620 28,616 20 32,556
Additions — (82) 3,027 — 2,945
Disposals (2,355) (3,852) (30,617) (66) (36,890)
Impairment losses — (1,172) (5,955) — (7,127)
Depreciation charge for the year (19) (1,090) (4,831) (5) (5,945)
Depreciation eliminated on disposal 2,355 3,794 29,625 66 35,840
Eliminated upon degrouping of subsidiary undertaking (1,281) — — — (1,281)
At 27 February 2010, net of accumulated depreciation — 218 19,865 15 20,098
At 28 February 2010, net of accumulated depreciation — 218 19,865 15 20,098
Additions — 335 5,017 — 5,352
Disposals — (1,943) (11,387) (53) (13,383)
Impairment losses — (2) (823) — (825)
Depreciation charge for the year — (230) (4,899) (7) (5,136)
Depreciation eliminated on disposal — 2,090 11,013 53 13,156
At 26 February 2011, net of accumulated depreciation — 468 18,786 8 19,262
At 1 March 2009
Cost 3,636 13,070 80,551 159 97,416
Accumulated depreciation (2,336) (10,450) (51,935) (139) (64,860)
Net carrying amount 1,300 2,620 28,616 20 32,556
At 27 February 2010
Cost — 9,136 52,961 93 62,190
Accumulated depreciation — (8,918) (33,096) (78) (42,092)
Net carrying amount — 218 19,865 15 20,098
At 26 February 2011
Cost — 2,777 51,342 40 54,159
Accumulated depreciation — (2,309) (32,556) (32) (34,897)
Net carrying amount — 468 18,786 8 19,262
Capital expenditure commitments for property, plant and equipment for which no provision has been made are £775,000
(2010: £981,000).
Impairment reviews of trading stores are based upon a value-in-use model being used to evaluate the expected future cash flows,
discounted at 12%, based on actual results in the past 12 months, versus their carrying values in order to determine where there
might be an indicator of impairment. Further, specific stores which are planned for closure are considered by the Directors for
impairment. The impairment charge recorded in the year amounted to £825,000 (2010: £7,127,000, of which £6,329,000 was in
respect of continuing operations). Impairment charges are presented in the consolidated statement of comprehensive income as
exceptional items within distribution costs (see note 8).
The net carrying amount includes the following assets held under hire purchase and finance leases (note 25):
2011 2010
£’000 £’000
Plant and equipment 3,392 4,072
Net carrying amount of assets held under hire purchase and finance leases 3,392 4,072 00 00 www.blacks.co.uk www.millets.co.uk 54
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14 Goodwill
Goodwill acquired through business combinations is allocated to cash-generating units (‘CGU’) identified according to business
segment.
The carrying amount of goodwill allocated by CGU is presented below:
Outdoor Boardwear
segment segment Total
Cost £’000 £’000 £’000
At 1 March 2009 34,598 1,754 36,352
At 27 February 2010 34,598 1,754 36,352
At 26 February 2011 34,598 1,754 36,352
Outdoor Boardwear
segment segment Total
Accumulated impairment losses £’000 £’000 £’000
At 1 March 2009 — (1,754) (1,754)
At 27 February 2010 — (1,754) (1,754)
At 26 February 2011 — (1,754) (1,754)
Outdoor Boardwear
segment segment Total
Net carrying amount £’000 £’000 £’000
At 1 March 2009 34,598 — 34,598
At 27 February 2010 34,598 — 34,598
At 26 February 2011 34,598 — 34,598
The Group performs an annual review of its goodwill to ensure that its carrying amount is not less than its recoverable amount. The
recoverable amount is determined with reference to the value-in-use. To estimate this, cash flow projections are based on financial
budgets prepared by management for a period of three years and extrapolated cash flow projections up to a total of 10 years, with
an estimated terminal value being applied thereafter. The Directors believe this to be justifiable given the nature of the business and
the actions and plans both in place and in progress to turnaround the performance of the business.
The discount rate applied to cash flow projections is 12% (2010: 12%), based on the Group’s weighted average cost of capital.
The projected growth rate used in extrapolation of cash flow forecasts is 3% (2010: 3%) reflecting the strategic plan of the Group to
recover negative growth rates of recent years.
Expected future cash flows are based on reasonable and supportable assumptions and represent management’s best estimate of
economic conditions existing over the projected period and reflect assumptions that are consistent with the way the discount rate
has been determined. The strategic plans of the business, in addition to strategic actions already undertaken, have been considered
when making these assumptions.
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 55
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14 Goodwill - continued
A sensitivity analysis was performed on the key assumptions used for assessing the goodwill arising in relation to the Outdoor
division as shown in the table below:
Sensitivity of forecast net cash flows:
Reduction in annual forecast net cash flows Current –10.0% –20.0%
Recoverable value (£’000) 67,791 58,876 49,962
Carrying value (£’000) 34,598 34,598 34,598
Excess of recoverable value over carrying value (£’000) 33,193 24,278 15,364
Sensitivity to discount factor, at current levels of forecast net cash flows:
Discount factor 10% 12% 14%
Recoverable value (£’000) 76,069 67,791 60,650
Carrying value (£’000) 34,598 34,598 34,598
Excess of recoverable value over carrying value (£’000) 41,471 33,193 26,052
15 Other intangible assets
The carrying amount of intangible assets by category is presented below:
Website
Trademarks development Total
£’000 £’000 £’000
At 1 March 2009 871 117 988
Additions (771) — (771)
Amortisation (100) (110) (210)
At 27 February 2010 — 7 7
Additions — 151 151
Amortisation — (7) (7)
At 26 February 2011 — 151 151
16 Principal subsidiary undertakings
Proportion of
Country of ownership
Nature of business incorporation interest
Blacks Outdoor Division Limited Holding company for The Outdoor Group Limited England 100%
The Outdoor Group Limited Outdoor and Boardwear clothing, footwear and equipment retailer England 100%
The Company holds its interest in The Outdoor Group Limited indirectly.
17 Inventories
2011 2010
£’000 £’000
Finished goods 36,122 38,954 00 00 www.blacks.co.uk www.millets.co.uk 56
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18 Trade and other receivables
2011 2010
£’000 £’000
Trade receivables 487 529
Less: allowance for doubtful debts (125) (125)
362 404
Other debtors 1,578 1,871
Corporation tax recoverable — 6
Prepayments and accrued income 4,430 4,444
Trade and other receivables 6,370 6,725
Trade receivables above are all due within one year. No interest is charged on trade receivables. Expected irrecoverable amounts are
provided for based on past default experience.
The other classes within trade and other receivables do not include impaired assets.
The Directors consider that the carrying amounts of trade and other receivables approximate to their fair values. As credit risk has
been addressed as part of impairment provisioning and, due to the short-term nature of the receivables, they are not subject to
ongoing fluctuations in market rates.
The maximum exposure to credit risk at the reporting date is represented by the carrying value of the financial assets in the
balance sheet.
Included in the Group’s trade receivable balances are receivables with a carrying amount of £87,000 (2010: £125,000) which are
past due at the reporting date but for which the Group has not provided as the amounts are still considered recoverable. The Group
does not hold any collateral over these balances.
Ageing of trade receivables:
2011 2010
£’000 £’000
Current 275 279
0–60 days past due (not impaired) 21 97
60–120 days past due (not impaired) 66 28
Over 120 days past due (impaired) 125 125
487 529
Movement in allowance for doubtful debts:
2011 2010
£’000 £’000
At beginning of year 125 1,256
Amounts charged to the statement of comprehensive income — (26)
Movement upon deconsolidation of Sandcity Limited — (1,105)
At end of year 125 125
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 57
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19 Cash and cash equivalents
2011 2010
£’000 £’000
Cash at bank and in hand 655 1,010
Cash at bank and in hand may earn interest at floating rates based on daily bank deposit rates. Short-term deposits are made for
varying periods of between one day and one month depending on the immediate cash requirements of the Group and earn interest
at the respective short-term deposit rates. The fair value of cash and cash equivalents does not materially differ from their book
values.
For the purposes of the consolidated cash flow statement, cash and cash equivalents comprise the following:
2011 2010
£’000 £’000
Cash at bank and in hand 655 1,010
Bank overdrafts (note 24) (15,024) (13,643)
(14,369) (12,633)
At 26 February 2011, the Group had available £17,184,000 (2010: £21,415,000) of undrawn committed borrowing facilities with a
floating security charge over the Group’s assets; all conditions precedent had been met.
20 Share capital
Ordinary Shares Number £’000
Allotted and fully paid:
Ordinary Shares of 1p each at 27 February 2010 42,638,103 426
Issue of share capital 41,412,916 414
Ordinary Shares of 1p each at 26 February 2011 84,051,019 840
Deferred Shares Number £’000
Allotted and fully paid:
Deferred Shares of 49p each at 27 February 2010 42,638,103 20,893
Deferred Shares of 49p each at 26 February 2011 42,638,103 20,893
Preference Shares (presented within non-current liabilities) Number £’000
10% cumulative, irredeemable, Preference Shares of £1 each, allotted and fully paid:
Preference Shares of £1 each at 27 February 2010 891,429 891
Preference Shares of £1 each at 26 February 2011 891,429 891
Ordinary Shares and Deferred Shares
On 23 April 2010, 2,131,905 warrants to acquire Ordinary Shares were exercised at nominal value and, accordingly, the Company
issued 2,131,905 Ordinary Shares. In addition to this, the Company issued a further 39,281,011 Ordinary Shares, at a subscription
price of 54p each (before deducting issue costs of £1,757,000), on 24 May 2010 under a Placing and Open Offer and a Firm
Placing.
At the end of the financial year there were outstanding options to receive allotments of 3,805,841 (2010: 3,982,140) Ordinary Shares
under the share option schemes as set out in note 29. There were no outstanding warrants (2010: 2,131,905). 00 00 www.blacks.co.uk www.millets.co.uk 58
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20 Share capital - continued
At 26 February 2011, the middle market quotation of the Ordinary Shares, as derived from the Stock Exchange Official List, was
22.40p. The highest price attained by the Ordinary Shares during the period was 70.50p and the lowest level was 22.00p.
Holders of the Ordinary Shares have all the rights normally attaching to Ordinary Shares, including rights to receive the Company’s
Annual Report, to attend and speak at general meetings and to appoint proxies and exercise voting rights. The Company’s Ordinary
Shares do not carry any special rights with regard to control of the Company. There are no restrictions on share transfers or voting.
Ordinary Shares acquired through the Company’s share schemes rank pari passu with the Company’s Ordinary Shares in issue and
have no special rights. Unless the Board decides otherwise, an Ordinary Shareholder may not vote at any general meeting or class
meeting or exercise any rights in relation to shares while any amount of money relating to his shares is outstanding.
The Deferred Shares confer no voting rights nor any rights to participate in the profits of the Company except in very limited
circumstances. The Deferred Shares are not redeemable and are only transferable in limited circumstances. The Company may at
any time arrange for Deferred Shares to be transferred to the Company for an aggregate consideration of 1p and may cancel the
Deferred Shares so purchased.
Preference Shares
The 10% cumulative non-redeemable Preference Shares confer the right to receive a fixed dividend of 10% per annum paid
in priority to any payment to any other class of share. The dividend is payable in two equal amounts on 30 April and 31 October of
each year.
In the event of a return of capital, or on a winding up of the Company, Preference Shareholders are entitled to repayment of the
nominal capital paid up on their shares, a premium of 5 pence per share and any arrears of dividends to the date of repayment in
priority to any other class of share. Preference Shares do not carry any voting rights, unless the preference dividends are in arrears
for at least six months, or there is a resolution altering the rights of the holders of Preference Shares, for the winding-up of the
Company or for a return of capital. In such instances, a Preference Shareholder shall have one vote on a show of hands, or in the
event of a poll, ten votes for every Preference Share held.
21 Share premium
£’000
At 28 February 2009 24,333
At 27 February 2010 24,333
Premium arising on issue of equity shares (note 20) 19,062
At 26 February 2011 43,395
22 Reserve for own shares
£’000
At 28 February 2009, 27 February 2010 and 26 February 2011 (773)
This reserve represents Ordinary Shares held by the Blacks Leisure Group plc Employee Benefit Trust that provides for the issue of
shares to Group employees under share incentive schemes. The number of Ordinary Shares in the Trust amounts to 344,578 (2010:
344,578) with a market value at the year end of £77,000 (2010: £177,000).
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 59
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23 Reserves
The following describes the nature and purpose of each reserve within owners’ equity:
Reserve Description and purpose
Share premium Amount subscribed for share capital in excess of nominal value.
Reserve for own shares The cost of own shares held.
Warrants reserve Fair value of Ordinary Shares to be issued under warrants.
Hedging reserve Gains and losses arising on recognising hedging instruments at fair value in a qualifying cash flow hedge.
Retained earnings Cumulative net gains and losses recognised in the statement of comprehensive income.
24 Bank overdrafts
Effective 2011 2010
interest rate % Maturity £’000 £’000
Bank overdrafts Variable On demand 15,024 13,643
Bank overdrafts are repayable on demand and are secured by fixed and floating charges over the assets of Group companies. The
average effective interest rate on bank overdrafts approximates to 4.356% (2010: 3.954%) per annum. The carrying value of the
bank overdraft is a reasonable approximation of fair value given its short-term maturity and the variable interest rates that apply.
25 Obligations under hire purchase and finance leases
Present value of
Minimum lease payments minimum lease payments
2011 2010 2011 2010
£’000 £’000 £’000 £’000
Amounts payable under hire purchase and finance leases:
— within one year 712 1,282 656 1,178
— in the second to fifth years inclusive 596 1,254 577 1,186
— after five years — — — —
1,308 2,536 1,233 2,364
Less: future finance charges (75) (172) N/A N/A
Present value of lease obligations 1,233 2,364 1,233 2,364
The present value of future payments is analysed as:
2011 2010
£’000 £’000
Current liabilities 656 1,178
Non-current liabilities 577 1,186
1,233 2,364
It is the Group’s policy to lease certain plant and equipment under hire purchase and finance leases and the Group entered into
several such lease commitments for plant and equipment relating to its premises at Swan Valley, Northampton. The weighted
average remaining term is 1.9 years with an effective borrowing rate of 5.3%. Interest rates are fixed at the contract date and the
leases are agreed on a fixed repayment basis. No material arrangements have been entered into for contingent rental payments.
The fair value of the Group’s lease obligations approximates to their present value.
The Group’s obligations under hire purchase and finance leases are secured by the lessors’ rights over the leased assets. 00 00 www.blacks.co.uk www.millets.co.uk 60
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26 Trade and other payables
2011 2010
£’000 £’000
Current liabilities
Trade payables 17,279 23,428
Other taxes and social security 5,420 1,507
Accruals 10,770 16,618
Other payables 22 109
Current trade and other payables 33,491 41,662
Non-current liabilities
Accruals 5,581 3,802
Non-current other payables 5,581 3,802
Trade payables and accruals are non-interest bearing and principally comprise amounts outstanding for trade purchases and
ongoing costs. The average credit period taken for trade purchases is 53 days (2010: 62 days).
The Directors consider that the carrying amount of trade payables approximates to their fair value as they are short-term in nature
and are therefore not subject to ongoing fluctuations in market rates.
27 Provisions
Onerous Closed Other CVA
lease Dilapidation store rates related
provision provision provision provision Total
£’000 £’000 £’000 £’000 £’000
At 1 March 2009 12,113 943 — — 13,056
Additional provision in the year — 1,045 10,755 8,000 19,800
Unwinding of discount 642 — — — 642
Utilised (386) (68) (617) — (1,071)
Released (10,153) (329) — — (10,482)
Deconsolidation of Sandcity (note 35) (2,216) — — — (2,216)
At 27 February 2010 — 1,591 10,138 8,000 19,729
At 28 February 2010 — 1,591 10,138 8,000 19,729
Additional provision in the year 1,107 842 — — 1,949
Unwinding of discount — — 720 — 720
Utilised — (309) (1,743) (7,436) (9,488)
Released — (320) (5,376) — (5,696)
At 26 February 2011 1,107 1,804 3,739 564 7,214
Current — 1,591 5,078 8,000 14,669
Non-current — — 5,060 — 5,060
At 27 February 2010 — 1,591 10,138 8,000 19,729
Current 266 1,804 1,410 564 4,044
Non-current 841 — 2,329 — 3,170
At 26 February 2011 1,107 1,804 3,739 564 7,214
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 61
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27 Provisions - continued
Ageing of non-current provisions (years in which the provision is expected to unwind):
2011 2010
£’000 £’000
In the second to fifth years inclusive 3,170 5,060
In the sixth to tenth years inclusive — —
After ten years — —
3,170 5,060
The carrying value of provisions approximates to fair value since the cash flows have, where appropriate, been discounted at an
appropriate cost of capital.
Onerous lease provision
The previously carried provision for onerous leases and other store closures at 1 March 2009 related to properties, some of which
were vacant, for which obligations were removed as part of the CVAs that were effective in December 2009 and, accordingly, the
remaining balance was released at that time given the Group was no longer obligated to rentals for those properties. Subsequently,
an additional provision has been made at 26 February 2011 for ongoing rental obligations at three additional properties, which were
not included within the CVAs, but which are now either vacant or soon to be vacant. This charge of £1,107,000 has been presented
within exceptional operating items (see note 8) on the face of the statement of comprehensive income.
Dilapidation provision
Dilapidations are provided for remedial works required to bring a leased property back into the same condition as when the lease
commenced. The Group’s accounting policy for recognising dilapidations provisions is to recognise amounts expected to be payable
under a legal obligation when the likelihood of an outflow of economic benefits becomes more likely than not and a reliable estimate
can be made. The provision is determined by reference to the serving of a dilapidations schedule upon the Group by the landlord
or based upon the Directors’ own assessment of the likely cost of such works or settlement with the landlord. During the year, an
additional £842,000 was provided, of which £305,000 relates to the Group’s planned exit from the Boardwear segment and has
accordingly been presented within exceptional operating items (see note 8).
Closed store rates provision
Under the terms of the CVAs, the Group has a commitment to pay business rates on properties that were compromised under these
arrangements up until such a time as the landlord is able to re-let the site. Provision is made for the expected value of this obligation,
discounted at a rate of 12% per annum, estimated based on the earlier of lease expiry and anticipated period to re-let. An amount of
£5,376,000 has been released from the provision during the year on account of new tenants being found for many properties, and
accordingly the Group no longer holding a liability to pay rates, more quickly than was anticipated. This release has been recorded
within exceptional operating items (see note 8).
Other CVA related provision
A provision was created during the prior year in respect of other additional costs associated with the CVAs. This included the
provision of £7,250,000 for a compromise fund for affected landlords and this amount was settled in cash during May and
July 2010.
28 Commitments and contingencies
2011 2010
Operating lease commitments £’000 £’000
Amounts charged for the year include:
— minimum lease payments recognised as an operating lease expense 28,217 37,674
— contingent rents 18 21
Contingent rents are in respect of turnover-based rent clauses, the majority ranging between 8% and 12% of turnover above a
base amount. 00 00 www.blacks.co.uk www.millets.co.uk 62
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28 Commitments and contingencies - continued
The Group leases various buildings which operate within the Outdoor and Boardwear segments. The leases are non-cancellable
operating agreements with varying terms, escalation clauses and renewal rights. The Group also has motor vehicles under non-
cancellable operating lease agreements.
Future minimum rentals payable under non-cancellable operating leases as at 26 February 2011 are as follows:
Land and Motor Land and Motor
buildings vehicles Total buildings vehicles Total
2011 2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000 £’000
Within one year 25,977 212 26,189 25,614 169 25,783
In the second to fifth years inclusive 88,460 443 88,903 87,957 43 88,000
After five years 75,301 — 75,301 84,644 — 84,644
189,738 655 190,393 198,215 212 198,427
The total future minimum sub-lease income under non-cancellable sub-leases as at 26 February 2011 is as follows:
Land and Motor Land and Motor
buildings vehicles Total buildings vehicles Total
2011 2011 2011 2010 2010 2010
£’000 £’000 £’000 £’000 £’000 £’000
Within one year 488 — 488 563 — 563
In the second to fifth years inclusive 549 — 549 1,476 — 1,476
After five years 1,791 — 1,791 650 — 650
2,828 — 2,828 2,689 — 2,689
29 Employee benefits
Share options
The Group operates an Executive Share Option Scheme (ESOS), a Company Share Option Plan (CSOP), a Save As You Earn
Scheme (SAYE), a Share Incentive Plan (SIP) and a Turnaround Incentive Plan (TIP). There is also a Performance Share Plan (PSP)
which has no current members.
The ESOS is an unapproved discretionary employee share option scheme, with options having been granted to certain senior
employees (including Directors). No Directors hold options under this scheme as at the end of the financial year.
The CSOP is a HM Revenue & Customs approved discretionary employee share option scheme.
The SAYE was open to employees with the required minimum period of service and provided for a purchase price equal to the
market price on the date of grant, less a 20% discount. The shares can be purchased over the six-month period following the third
or fifth anniversary of the commencement date, depending on the scheme to which the employee belongs.
The SIP is a scheme introduced as a performance related incentive award for certain Directors. All remaining options under the SIP
scheme were surrendered on 18 January 2010 alongside the introduction of the TIP scheme.
The TIP scheme was approved at a meeting of Shareholders on 24 November 2009 and under this scheme a total of 3,864,465
options were granted on 18 January 2010 and a further 805,221 on 10 June 2010. The grant on 18 January 2010, being in part
a modification of existing schemes, resulted in 1,943,748 existing options from other schemes being surrendered, such that any
recipient of awards under the TIP scheme ceased to have any interests in any other share option schemes other than the SAYE.
Where these newly issued options have been deemed to be a modification of prior awards, the share-based payment charges from
these earlier awards under the old share option schemes have continued to be charged within the statement of comprehensive
income.
The TIP scheme includes options granted to certain Directors and performance criteria (which are identical for all grants under the
TIP scheme) in respect of these options are set out in the Directors’ Remuneration Report.
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 63
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29 Employee benefits - continued
A reconciliation of option movements for each of the above schemes over the year to 26 February 2011 is as follows:
Executive Share Option Scheme
2011 2010
Weighted Weighted
average average
Number exercise Number exercise
of options price (£) of options price (£)
Outstanding at the beginning of the year 41,947 1.81 699,302 1.66
Granted during the year — — 300,000 0.58
Forfeited or surrendered during the year — — (638,299) 1.46
Lapsed during the year (39,668) 1.70 (319,056) 0.99
Outstanding at the end of the year 2,279 3.67 41,947 1.81
Exercisable at the end of the year 2,279 3.67 3,799 3.67
2011 2010
Weighted
Weighted average
Weighted
Weighted average
Range of
average
remaining life
average
remaining life
exercise exercise Number exercise Number
prices price of Expected Contractual price of Expected Contractual
(£) (£) shares (years) (years) (£) shares (years) (years)
3.67 3.67 2,279 0.0 2.7 1.81 41,947 1.6 2.6
There were no options exercised in the year, therefore there is no weighted average share price at the date of exercise for the options
(2010: £nil). A total of 638,299 of the share options granted under this scheme were surrendered during the prior period as part of
the grant of options under the Turnaround Incentive Plan on 18 January 2010. Since these new awards have been accounted for
as modifications of the Executive Share Option Scheme, the statement of comprehensive income continues to record charges in
respect of the options originally granted under this scheme. The total charge recognised for the year was £22,000 (2010: £34,000).
Company Share Option Plan
2011 2010
Weighted Weighted
average average
Number exercise Number exercise
of options price (£) of options price (£)
Outstanding at the beginning of the year 11,037 3.67 35,695 3.67
Lapsed during the year (5,673) 3.67 (24,658) 3.67
Outstanding at the end of the year 5,364 3.67 11,037 3.67
Exercisable at the end of the year 5,364 3.67 11,037 3.67
2011 2010
Weighted
Weighted average
Weighted
Weighted average
Range of
average
remaining life
average
remaining life
exercise exercise Number exercise Number
prices price of Expected Contractual price of Expected Contractual
(£) (£) shares (years) (years) (£) shares (years) (years)
3.67 3.67 5,364 0.0 2.7 3.67 11,037 0.0 3.7
There were no options exercised in the year, therefore there is no weighted average share price at the date of exercise for the options
(2010: £nil). There was no charge or credit taken to the statement of comprehensive income (2010: £nil) during the year. 00 00 www.blacks.co.uk www.millets.co.uk 64
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29 Employee benefits - continued
Save as You Earn Scheme
2011 2010
Weighted Weighted
average average
Number exercise Number exercise
of options price (£) of options price (£)
Outstanding at the beginning of the year 64,691 2.53 105,917 2.44
Lapsed during the year (12,045) 3.56 (41,226) 2.29
Outstanding at the end of the year 52,646 2.29 64,691 2.53
Exercisable at the end of the year 34,151 2.19 12,045 3.56
2011 2010
Weighted
Weighted average
Weighted
Weighted average
Range of
average
remaining life
average
remaining life
exercise exercise Number exercise Number
prices price of Expected Contractual price of Expected Contractual
(£) (£) shares (years) (years) (£) shares (years) (years)
1.97-3.56 2.29 52,646 0.6 1.1 2.53 64,691 1.2 1.7
There were no options exercised in the year, therefore there is no weighted average share price at the date of exercise for the options
(2010: £nil). A charge of £14,000 was recorded in the statement of comprehensive income (2010: £44,000 credit) during the year.
Share Incentive Plan
2011 2010
Weighted Weighted
average average
Number exercise Number exercise
of options price (£) of options price (£)
Outstanding at the beginning of the year — — 1,300,000 2.15
Granted during the year — — — —
Forfeited or surrendered during the year — — (1,300,000) 2.15
Outstanding at the end of the year — — — —
Exercisable at the end of the year — — — —
2011 2010
Weighted
Weighted average
Weighted
Weighted average
Range of
average
remaining life
average
remaining life
exercise exercise Number exercise Number
prices price of Expected Contractual price of Expected Contractual
(£) (£) shares (years) (years) (£) shares (years) (years)
N/A — — N/A N/A — — N/A N/A
There were no options exercised in the year, therefore there is no weighted average share price at the date of exercise for the options
(2010: £nil). All share options granted under this scheme were surrendered as part of the grant of options under the Turnaround
Incentive Plan on 18 January 2010. Since these new awards have been accounted for as modifications of the Share Incentive Plan,
the statement of comprehensive income continues to record charges in respect of the options originally granted under this scheme.
The total charge for the year relating to the scheme was £233,000 (2010: £234,000).
Notes to the Financial Statements
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29 Employee benefits - continued
Turnaround Incentive Plan
2011 2010
Weighted Weighted
average average
Number exercise Number exercise
of options price (£) of options price (£)
Outstanding at the beginning of the year 3,864,465 0.00 — —
Forfeited or surrendered during the year (924,134) 0.00 — —
Granted during the year 805,221 0.00 3,864,465 0.00
Outstanding at the end of the year 3,745,552 0.00 3,864,465 0.00
Exercisable at the end of the year — — — —
2011 2010
Weighted
Weighted average
Weighted
Weighted average
Range of
average
remaining life
average
remaining life
exercise exercise Number exercise Number
prices price of Expected Contractual price of Expected Contractual
(£) (£) shares (years) (years) (£) shares (years) (years)
0.00 0.00 3,745,552 2.0 9.0 — 3,864,465 2.9 9.9
There were no options exercised in the year, therefore there is no weighted average share price at the date of exercise for the options
(2010: £nil). A charge of £130,000 (2010: £26,000) was recorded in the statement of comprehensive income during the year.
Equity-settled share-based payments
The total charge for the year from all share option schemes was £399,000 (2010: £250,000).
The fair value of the share options is estimated as at the date of grant using the Monte Carlo model for TIP options and the Binomial
model for SIP options and ESOS options granted after 28 February 2008. For all ESOS and CSOP options granted before 1 March
2008 and all SAYE options the Black–Scholes model is used. The following table gives the assumptions used and the fair value per
option granted during the year.
2011 2010
TIP TIP
Share price at grant date £0.54 £0.60
Exercise price £0.00 £0.00
Shares under option 805,221 3,864,465
Vesting period (years) 3.0 3.0
Expected volatility 85.0% 61.0%
Option life (years) 2.3 2.9
Expected life (years) 2.3 2.9
Risk-free rate 2.4% 1.7%
Expected dividends expressed as a dividend yield 0.0% 0.0%
Expectations of meeting performance criteria 100.0% 100.0%
Fair value per option £0.193 £0.152
The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The
expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily
be the actual outcome. The risk-free rate of return is the yield on zero-coupon UK Government bonds of a term consistent with the
assumed option life. No other features of options granted were incorporated into the measurement of fair value. 00 00 www.blacks.co.uk www.millets.co.uk 66
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Notes to the Financial Statements
for the year ended 26 February 2011
29 Employee benefits - continued
Retirement benefits
The Group operates an ongoing pension scheme, the Blacks Leisure Group Stakeholder Pension Scheme. The assets of this
scheme are held separately from those of the Group. Contributions to the scheme are charged to the statement of comprehensive
income in the period in which they arise. The charge for the year was £277,000 (2010: £396,000). The Group also makes
contributions into the Directors’ money purchase schemes as set out in the Directors’ Remuneration Report.
The Blacks Leisure Group plc Pension Scheme, an old scheme which had defined benefit members, has now effectively been
wound up. In 2007 the Company received confirmation from the Trustees that all amounts due to the scheme had been paid and
that it had no further exposure to any changes in the value of the scheme’s assets and liabilities. A full IAS19 disclosure has therefore
not been presented.
30 Related party disclosures
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and
accordingly are not disclosed in this note.
The remuneration of all key personnel is set out below. The key personnel are all either main Board members, subsidiary Board
members or regular attendees of the subsidiary Board meetings. Further information about the remuneration of individual Directors of
the Company is provided in the audited part of the Directors’ Remuneration Report.
2011 2010
£’000 £’000
Short-term employee benefits 1,703 1,743
Post-employment benefits 44 37
Termination benefits — 82
Equity-settled share-based payments 259 270
2,006 2,132
There were no material transactions in which any key personnel had a material interest.
31 Financial risk management objectives and policies
The Group’s principal financial instruments, other than derivatives, comprise bank loans and overdrafts, cash and short-term
deposits, receivables and payables. The main risks arising from the Group’s financial instruments are interest rate risk, foreign
currency risk, credit risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are
summarised below.
The main financial risks faced by the Group relate to the availability of funds to meet business needs and the risk of default by a
counterparty in a financial transaction. The Group manages borrowing, liquidity, foreign exchange and banking relationships in
accordance with Board approved policies designed to minimise exposures. The undertaking of financial transactions of a speculative
nature is not permitted.
The Group finances its operations by a combination of internally-generated cash flow and bank borrowings. The Group aims to
always have sufficient undrawn bank facilities to meet projected borrowing requirements over the coming periods. When interest
rate risk is considered significant, the Group’s policy is to fix or cap a proportion of projected net debt in order to reduce the Group’s
exposure to fluctuations in rates. The policy recognises that, in common with other UK retailers, the Group has significant liabilities
through conditional obligations to pay rent under property leases. The implicit interest rate of these liabilities is fixed in the short-term.
Transaction exposures resulting from purchases in foreign currencies may be hedged by forward foreign currency transactions.
Group policy aims to minimise any exposure with the intention of protecting the buying margin from fluctuations in the value of the
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31 Financial risk management objectives and policies - continued
Interest rate risk
The Group has a seasonal cash flow that moves significantly over the course of each year. The Group is exposed to cash flow
interest rate risk on floating rate deposits, bank overdrafts and loans. Fixed interest rates are used for all finance lease borrowing.
Foreign currency risk
The Group’s principal foreign currency exposures arise from the purchase of overseas sourced products. Group policy allows for
but does not demand that these exposures are hedged for up to 12 months ahead in order to fix the cost in sterling. This hedging
activity may involve the use of spot and forward contracts. There were forward contracts of this nature held at year end as detailed in
note 32. The Group’s net exposure to foreign currencies is illustrated by the sensitivity analysis in note 33.
The market value of outstanding foreign exchange derivatives is reported regularly and reviewed in conjunction with percentage
cover taken by season and current market conditions in order to assess and manage the Group’s ongoing exposure.
The Group does not consider the exposure to currency movements in relation to translation of overseas assets and liabilities to be
material and, consequently, does not hedge any such exposure.
Credit risk
The Group’s credit risk is primarily attributable to its trade and other receivables. The amounts included in the balance sheet are net
of allowances for doubtful debts, which have been estimated by management based on prior experience and known factors at the
balance sheet date which may indicate that a provision is required. All customers who wish to trade on credit terms are subject to
credit verification procedures where considered appropriate.
The Group’s credit risk on liquid funds and derivatives is limited because the Group only maintains liquid funds, and only enters into
derivative transactions, with banks and financial institutions with high credit ratings.
Liquidity risk
The Group manages its cash and borrowing requirements centrally to maximise interest income and minimise interest expense,
whilst ensuring that the Group has sufficient liquid resources to meet the operating needs of its businesses.
Capital risk management
The Group monitors ‘adjusted capital’ which comprises all components of equity other than amounts recognised in equity relating
to cash flow hedges. The Group manages this with the aim of ensuring that entities in the Group will be able to continue as a going
concern while maximising the return to stakeholders through the optimisation of the debt and equity balance.
In managing its capital, the Group’s primary objective is to ensure its continued ability to provide a return for its equity Shareholders
through a combination of capital growth and, when appropriate, distributions. In order to achieve this objective, the Group seeks to
maintain a gearing ratio that balances risks and returns at an acceptable level and also to maintain a sufficient funding base to enable
the Group to meet its working capital and strategic investment needs. In making decisions to adjust its capital structure to achieve
these aims, either through altering its dividend policy, new share issues, or the reduction of debt, the Group considers not only its
short-term position but also its long-term operational and strategic objectives. 00 00 www.blacks.co.uk www.millets.co.uk 68
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32 Derivatives
The Group uses currency derivatives to forward-buy and forward-sell foreign currency in order to hedge certain future transactions
and cash flows, predominantly in relation to purchases of stocks from overseas suppliers. The Group is party to a variety of
foreign currency forward contracts in the management of the exchange rate exposures. The instruments purchased are primarily
denominated in the suppliers’ principal currency.
At the balance sheet date the total notional amount of outstanding forward foreign exchange contracts that the Group has
committed to are:
Exchange 2011 2010
rate Currency Maturity US$’000 US$’000
Bank of Scotland 1.598 US Dollar 08 Mar 2010 — 3,000
Bank of Scotland 1.597 US Dollar 12 Apr 2010 — 1,000
Bank of Scotland 1.625 US Dollar 08 Mar 2010 — 1,500
Bank of Scotland 1.625 US Dollar 07 May 2010 — 1,000
Bank of Scotland 1.624 US Dollar 07 Jun 2010 — 1,000
Bank of Scotland 1.624 US Dollar 07 Jul 2010 — 2,000
Bank of Scotland 1.623 US Dollar 09 Aug 2010 — 2,000
Bank of Scotland 1.600 US Dollar 08 Sep 2010 — 3,000
Bank of Scotland 1.600 US Dollar 08 Oct 2010 — 3,000
Bank of Scotland 1.600 US Dollar 08 Nov 2010 — 3,000
Corporate FX 1.517 US Dollar 28 Feb 2011 2,000 —
Corporate FX 1.540 US Dollar 28 Feb 2011 2,000 —
Bank of Scotland 1.584 US Dollar 01 Mar 2011 4,000 —
Bank of Scotland 1.584 US Dollar 05 Apr 2011 2,000 —
Bank of Scotland 1.583 US Dollar 03 May 2011 1,000 —
Bank of Scotland 1.596 US Dollar 01 Jun 2011 2,000 —
Bank of Scotland 1.595 US Dollar 05 Jul 2011 2,000 —
Bank of Scotland 1.594 US Dollar 02 Aug 2011 2,000 —
The fair values of level 2 currency derivatives, based on market prices at which these contracts are traded, are as follows:
2011 2010
£’000 £’000
Fair value of currency derivatives designated and effective as cash flow hedges (221) 720
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 69
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Our Financials Our Governance Our Business
33 Financial instruments
Categories of financial instruments (excluding derivatives) comprise:
Loans and receivables
2011 2010
Financial assets £’000 £’000
Current financial assets
Trade receivables (note 18) 362 404
Cash at bank and in hand (note 19) 655 1,010
Total financial assets 1,017 1,414
As the majority of the Group’s trade receivables balance relates to customers that are public sector bodies, the risk of non-payment
tends to be low although each customer’s debt is individually analysed for the likelihood of payment.
Financial liabilities measured
at amortised cost
2011 2010
Financial liabilities £’000 £’000
Current financial liabilities
Bank overdrafts (note 24) 15,024 13,643
Obligations under hire purchase and finance leases (note 25) 656 1,178
Trade and other payables (note 26) 33,491 41,662
Short-term provisions (note 27) 4,044 14,669
Total current financial liabilities 53,215 71,152
Non-current financial liabilities
Preference Shares (note 20) 891 891
Obligations under hire purchase and finance leases (note 25) 577 1,186
Trade and other payables (note 26) 5,581 3,802
Long-term provisions (note 27) 3,170 5,060
Total non-current financial liabilities 10,219 10,939
Total financial liabilities 63,434 82,091
The fair value of hire purchase and finance leases liabilities is estimated as the present value of future cash flows, discounted
at market interest rates for homogenous lease agreements. The fair value of such leases for the year have been estimated at
£1,233,000 (2010: £2,364,000), corresponding to the balance sheet value as per note 25.
Preference Shares measured at amortised cost have a fair value of £490,000 (2010: £401,000) based upon the Preference Share
market price at the end of the financial year of 55.0p (2010: 45.0p).
Liquidity analysis
The table below analyses the Group’s financial liabilities based on the remaining period at the balance sheet date to the contractual
maturity date. The amounts disclosed in the table are the contracted undiscounted cash flows:
26 February 2011
Within One to Greater than
one year five years five years
£’000 £’000 £’000
Preference Shares 89 — 891
Bank overdrafts 15,024 — —
Obligations under hire purchase and finance leases 712 596 —
Trade and other payables 32,885 2,000 —
Provisions 4,071 3,821 —
52,781 6,417 891 00 00 www.blacks.co.uk www.millets.co.uk 70
Blacks Leisure Group plc Annual Report and Accounts 2011
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33 Financial instruments - continued
27 February 2010
Within One to Greater than
one year five years five years
£’000 £’000 £’000
Preference Shares 89 — 891
Bank overdrafts 13,643 — —
Obligations under hire purchase and finance leases 1,282 1,254 —
Trade and other payables 41,662 — —
Provisions 14,704 6,325 —
71,380 7,579 891
Interest rates and currency
The Directors review any requirement for interest rate hedging during the year dependent upon the level of borrowings and the
expected volatility in rates. The Group is exposed to cash flow interest rate risk on floating rate deposits, bank overdrafts and loans
which amounted to £15,024,000 (2010: £13,643,000) where interest rates are based on a fixed margin over the underlying UK
LIBOR rate. Fixed interest rates are used for all hire purchase and finance lease borrowing which at the end of the year amounted to
£1,233,000 (2010: £2,364,000).
As at the end of the year, the Group holds a committed revolving credit facility of £35.0 million (2010: £42.5 million), which is to be
used for general corporate and working capital purposes. The Group had available £17,184,000 (2010: £21,415,000) of undrawn
committed borrowing facilities with a floating security charge over the Group’s assets; all conditions precedent had been met. The
interest rate on the committed and uncommitted facilities is based on the UK LIBOR rate.
The currency and interest rate exposure of the Group’s floating rate cash balances and bank overdrafts is shown below (overdrafts
are shown as negative):
2011 2010
£’000 £’000
Cash at bank and in hand
Sterling 286 409
Euro 369 601
655 1,010
2011 2010
£’000 £’000
Bank overdrafts
Sterling (14,714) (15,966)
Euro 406 254
US dollar (699) 2,087
Hong Kong dollar (17) (18)
(15,024) (13,643)
The right of set-off within the banking facility enables certain accounts with overdrafts to be set off against accounts with a balance,
and be recorded as a net balance or overdraft in the consolidated balance sheet. This has led to some foreign currency accounts
with a positive balance to be classified as a financial liability as the above tables show.
The floating rate assets and liabilities comprise bank accounts bearing interest rates based upon the UK LIBOR rate. There are no
fixed rate financial assets.
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 71
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Our Financials Our Governance Our Business
33 Financial instruments - continued
Sensitivity analysis
Foreign currency sensitivity analysis
The Group’s principal foreign currency exposures are to US dollar and the Euro. The table below illustrates the hypothetical sensitivity
of the Group’s reported profit and equity to a 10% increase and decrease in the US dollar and Euro exchange rates (relative to sterling)
at the year end date, assuming all other variables remain unchanged. The sensitivity of 10% represents the Directors’ assessment of a
reasonably possible change over the coming year. Positive figures represent an increase in profit or equity.
Statement of
comprehensive income Equity
2011 2010 2011 2010
£’000 £’000 £’000 £’000
Sterling strengthens by 10%
— US dollar (64) 190 (756) (692)
— Euro (265) (266) (265) (266)
Sterling weakens by 10%
— US dollar ` 78 (232) 924 846
— Euro 324 325 324 325
Year end exchange rates applied in the above analysis are 1.6074 (2010: 1.5224) for US dollars and 1.1692 (2010: 1.1154) for
Euros. Strengthening and weakening of sterling may not produce symmetrical results depending on the proportion and nature of
foreign exchange derivatives which do not qualify for hedge accounting.
Interest rate sensitivity analysis
The table below illustrates the hypothetical sensitivity of the Group’s reported profit and equity to a 1% (percentage point) increase
or decrease in interest rates, assuming all other variables were unchanged. The sensitivity rate of 1% represents the Directors’
assessment of a reasonably possible change over the coming year. Positive figures represent an increase in profit or equity.
The analysis has been prepared under the following assumptions:
h For floating rate assets and liabilities, the amount of asset or liability outstanding at the balance sheet date is assumed to have
been outstanding for the whole year; and
h Fixed rate financial instruments that are carried at amortised cost are not subject to interest rate risk for the purpose of this
analysis.
Statement of
comprehensive income Equity
2011 2010 2011 2010
£’000 £’000 £’000 £’000
Interest rate increase of 1% (144) (126) (144) (126)
Interest rate decrease of 1% 144 126 144 126 00 00 www.blacks.co.uk www.millets.co.uk 72
Blacks Leisure Group plc Annual Report and Accounts 2011
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34 Events after the balance sheet date
As explained in note 8, the Group plans to exit from its Boardwear segment during the coming year. The future financial effect of this
exit strategy on the Group’s financial results and position are indicated by the results of this segment for the year ended 26 February
2011 and its net liabilities at that date, which are summarised in note 5.
35 Discontinued operations — Administration of Sandcity Limited
On 23 September 2009, Richard Fleming and David Costley-Wood of KPMG LLP were appointed as administrators in respect of the
wholly owned subsidiary, Sandcity Limited. Sandcity Limited was part of the Boardwear segment and was a retailer, and previously a
wholesaler, of lifestyle and Boardwear clothing and accessories. At the point of being placed into administration, it operated from 11
stores and traded at a substantial loss.
The appointment of the administrators of Sandcity Limited resulted in an exit by the Group from approximately one-quarter of the
Boardwear stores. Further Boardwear stores, operating within The Outdoor Group Limited under the Freespirit fascia, were also
subsequently exited as part of the Company Voluntary Arrangements.
In line with the requirements of IFRS5, the results of Sandcity Limited were classified as discontinued operations. The statement of
comprehensive income for the comparative period therefore included, as results from discontinued operations, the following:
2010
£’000
Revenue 8,531
Cost of sales (6,271)
Gross profit 2,260
Distribution costs (3,960)
Administrative expenses (1,387)
Operating loss (3,087)
Operating loss excluding exceptional items (2,289)
Exceptional items (798)
Finance costs (122)
Loss on ordinary activities before tax (3,209)
Loss attributable to disposal (159)
Loss before tax (3,368)
Tax expense (5)
Loss for the period attributable to equity holders of the parent (3,373)
Other comprehensive income —
Total comprehensive expense for the year attributable to equity holders of the parent (3,373)
Notes to the Financial Statements
for the year ended 26 February 2011 00 00 73
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Our Financials Our Governance Our Business
35 Discontinued operations — Administration of Sandcity Limited - continued
The effect of the degrouping on the individual assets and liabilities of the Group was as shown below:
2010
£’000
Non-current assets
Property, plant and equipment 1,281
Deferred tax liability (62)
Current assets
Inventories 1,124
Trade and other receivables 1,632
Current liabilities
Trade and other payables (1,562)
Short-term provisions (1,059)
Non-current liabilities
Long-term provisions (1,157)
Net attributable assets disposed of 197
Bank overdrafts disposed of (38)
Loss attributable to disposal 159
At 26 February 2011, the Directors have recognised expected proceeds from the administration of Sandcity Limited as set out
in note 8.
The net cash flows of Sandcity Limited up until the date of disposal from the Group were as follows:
2010
£’000
Net cash flow from operations 2,151
Net cash flow from investing activities —
Net cash flow from financing activities —
Net cash flow from discontinued operations 2,151 00 00 www.blacks.co.uk www.millets.co.uk 74
Blacks Leisure Group plc Annual Report and Accounts 2011
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2011 2010
Note £’000 £’000
Fixed assets
Investments in subsidiary undertakings 5 54,190 54,190
Current assets
Debtors 6 25,971 20,124
Cash at bank and in hand 6 152
25,977 20,276
Creditors: amounts falling due within one year 7 (7,511) (19,684)
Net current assets 18,466 592
Total assets less current liabilities 72,656 54,782
Creditors: amounts falling due after more than one year 8 (891) (891)
Net assets 71,765 53,891
Capital and reserves
Called up share capital 9 21,733 21,319
Share premium 10 43,395 24,333
Reserve for own shares 12 (773) (773)
Profit and loss account 13 7,410 9,012
Shareholders’ funds 14 71,765 53,891
The financial statements were approved by the Board and authorised for issue on 4 May 2011 and were signed on its behalf by:
Neil Gillis
Chief Executive
Marc Lombardo
Finance Director
Company Number: 582190
Company Balance Sheet
as at 26 February 2011 00 00 75
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Our Financials Our Governance Our Business
Notes to the Company Financial Statements
for the year ended 26 February 2011
1 Accounting policies
Basis of accounting
The separate financial statements of the Company are presented as required by the Companies Act 2006. They have been prepared
under the historical cost convention, except for the valuation of certain financial instruments, and in accordance with applicable
United Kingdom Accounting Standards.
The Company has not disclosed the requirements under FRS29 ‘Financial instruments: Disclosures’ as it has taken advantage of the
exemption to only disclose them with those of the Group in the consolidated financial statements.
The principal accounting policies are summarised below. They have all been applied consistently throughout the year and the
preceding year.
Investments
Investments in subsidiary undertakings are stated at cost less any provision for impairment.
Equity-settled share-based payments
Certain employees and Directors of the Group receive equity-settled remuneration in the form of share-based payment transactions,
whereby employees render services in exchange for shares or rights over shares. The cost of equity-settled transactions with
employees is measured by reference to the fair value, determined using the Black–Scholes option pricing model, the Monte Carlo
model or the Binomial model as appropriate, at the date at which they are granted. The cost of equity-settled transactions is
recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled,
ending on the relevant vesting date. The cumulative expense recognised for equity-settled transactions at each reporting date until
the vesting date reflects the extent to which the vesting period has expired, and is adjusted to reflect the Directors’ best available
estimate of the number of equity instruments that will ultimately vest.
Where the terms and conditions of options are modified before they vest, the movement in the fair value of the options, measured
immediately before and after the modification, is also charged to the profit and loss account over the remaining vesting period.
Guarantee contracts
Where the Company enters into financial guarantee contracts and guarantees the indebtedness of other companies within the
Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company
treats the guarantee contract as a contingent liability until such time that it becomes probable that the Company will be required to
make a payment under the guarantee.
2 Profit and loss account
As permitted by Section 408 of the Companies Act 2006 the Company has elected not to present its own profit and loss account
for the year. The loss after tax for the year recognised in the profit and loss account for the Company was £1,882,000 (2010:
£14,010,000 profit, which included dividends received from investments in subsidiaries of £19,003,000).
The Company audit fee for the year amounted to £54,000 (2010: £54,000). 00 00 www.blacks.co.uk www.millets.co.uk 76
Blacks Leisure Group plc Annual Report and Accounts 2011
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3 Employee benefits expense
2011 2010
£’000 £’000
Wages and salaries 794 771
Social security costs 83 85
Pension costs 75 78
952 934
Equity-settled shared-based payments expense 280 243
Total 1,232 1,177
The average number of persons, including Directors, employed by the Company was as follows:
2011 2010
Number Number
Full-time
— Management and administration 6 3
Part-time 2 3
Total 8 6
4 Dividends paid and proposed
No dividends have been declared or paid on Ordinary Shares in respect of either the current or prior year.
Preference dividends are charged to the profit and loss account as finance costs.
5 Investments in subsidiary undertakings
£’000
Cost
At 27 February 2010 and 26 February 2011 72,674
Provisions for impairment
At 27 February 2010 and 26 February 2011 (18,484)
Net book value at 27 February 2010 and 26 February 2011 54,190
The principal subsidiary undertakings are detailed in note 16 to the consolidated financial statements.
Notes to the Company Financial Statements
for the year ended 26 February 2011 00 00 77
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Our Financials Our Governance Our Business
6 Debtors
2011 2010
£’000 £’000
Amounts owed by Group undertakings 25,757 20,111
Prepayments and accrued income 214 13
25,971 20,124
Amounts owed by Group undertakings are repayable upon demand and are non-interest bearing.
7 Creditors: amounts falling due within one year
2011 2010
£’000 £’000
Amounts owed to Group undertakings 7,262 18,485
Accruals and deferred income 249 1,135
Other creditors — 64
7,511 19,684
Amounts owed to Group undertakings are repayable upon demand and are non-interest bearing.
8 Creditors: amounts falling due after more than one year
2011 2010
£’000 £’000
Preference Shares (see note 9) 891 891
9 Called up share capital
2011 2010
Number £’000 Number £’000
Ordinary Shares
Allotted and fully paid shares of 1p each 84,051,019 840 42,638,103 426
Deferred Shares
Allotted and fully paid shares of 49p each 42,638,103 20,893 42,638,103 20,893
Preference Shares
Allotted and fully paid 10% cumulative shares of £1 each 891,429 891 891,429 891
On 23 April 2010, 2,131,905 warrants to acquire Ordinary Shares were exercised at nominal value and, accordingly, the Company
issued 2,131,905 Ordinary Shares. In addition to this, the Company issued a further 39,281,011 Ordinary Shares, at a subscription
price of 54p each (before deducting issue costs of £1,757,000), on 24 May 2010 under a Placing and Open Offer and a Firm Placing.
Preference Shares are presented within creditors falling due after more than one year, in accordance with the requirements
of FRS25.
Rights attaching to each class of share are disclosed within the Directors’ Report and Business Review. 00 00 www.blacks.co.uk www.millets.co.uk 78
Blacks Leisure Group plc Annual Report and Accounts 2011
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10 Share premium
£’000
At 27 February 2010 24,333
Premium arising on issue of share capital (note 9) 19,062
At 26 February 2011 43,395
11 Equity-settled share-based payments
The grants and related accounting treatment adopted by the Company under FRS20 ‘Share-based Payment’, in relation to share
options, are identical to that adopted by the Group under IFRS2 ‘Share-based Payment’. For details please refer to note 29 in the
consolidated financial statements.
12 Reserve for own shares
£’000
At 27 February 2010 and 26 February 2011 (773)
This reserve represents Ordinary Shares held by the Blacks Leisure Group Employee Benefit Trust that provides for the issue of
shares to Group employees under share incentive schemes. The number of shares in the Trust amounts to 344,578 (2010: 344,578)
with a market value at the year end of £77,000 (2010: £177,000).
13 Profit and loss account
£’000
At 27 February 2010 9,012
Loss for the financial year (1,882)
Equity-settled share-based payments credit 280
At 26 February 2011 7,410
14 Shareholders’ funds
2011 2010
£’000 £’000
(Loss)/profit after taxation (1,882) 14,010
Dividends — —
Retained (loss)/profit (1,882) 14,010
Issue of share capital 19,476 —
Accrued equity-settled share-based payments 280 1,277
Net movement in Shareholders’ funds 17,874 15,287
Opening Shareholders’ funds 53,891 38,604
Closing Shareholders’ funds 71,765 53,891
15 Commitments and contingencies
Contingent liabilities
The Company guarantees the bank borrowings of subsidiary undertakings which at 26 February 2011 amounted to £15,411,000
(2010: £15,310,000).
Notes to the Company Financial Statements
for the year ended 26 February 2011 00 00 79
20321.04 10/06/2011 Proof 5
Our Financials Our Governance Our Business
2011 2010 2009 2008 2007
£’000 £’000 £’000 £’000 £’000
Results (from continuing and
discontinued operations)
Revenue 201,933 249,048 267,551 294,414 298,276
Operating (loss)/profit excluding exceptional items (3,814) (14,326) (4,465) 2,181 1,583
Exceptional items 1,321 (27,116) (7,577) (9,596) (13,936)
Operating loss (2,493) (41,442) (12,042) (7,415) (12,353)
Net finance costs (2,766) (5,499) (2,374) (1,845) (1,491)
Loss before tax (5,259) (46,941) (14,416) (9,260) (13,844)
Loss attributable to equity holders (5,488) (49,432) (14,761) (6,051) (12,624)
Assets employed
Non-current assets 54,496 55,117 70,835 78,452 79,950
Current assets 43,147 47,409 63,344 71,466 80,637
Non-current liabilities (10,219) (10,939) (17,449) (18,514) (15,092)
Current liabilities (53,436) (71,152) (47,759) (47,972) (53,607)
Net assets 33,988 20,435 68,971 83,432 91,888
Financed by
Equity 33,988 20,435 68,971 83,432 91,888
Key statistics
Pence Pence Pence Pence Pence
Loss per share — Basic (6.56) (116.88) (34.91) (14.20) (29.69)
Loss per share — Diluted (6.56) (116.88) (34.91) (14.20) (29.69)
Ordinary dividend per share 0.00 0.00 0.00 3.00 5.30
Five Year Summary 00 00 www.blacks.co.uk www.millets.co.uk 80
Blacks Leisure Group plc Annual Report and Accounts 2011
20321.04 10/06/2011 Proof 5
Shareholder Notes www.blacks.co.uk www.millets.co.uk
With a heritage dating back to 1861, Blacks
Leisure Group plc (‘Blacks Leisure’) operates in
the retail of Outdoor and Boardwear clothing and
equipment in the United Kingdom, Channel Isles
and Ireland.
Welcome to
Blacks Leisure Group plc
Blacks Leisure Group plc Annual Report and Accounts 2011
Exit from non-core Boardwear segment to be
completed by half year
New banking facilities agreed up to
November 2012
Julia Reynolds to join as new Chief Executive
Significant reduction in loss before tax to £5.3m
(2010: £43.6m) and in loss before tax and
exceptional items to £6.6m (2010: £14.4m)
New stores performing strongly
Focused on the Outdoors
20321.04 10/06/2011 Proof 5 20321.04 10/06/2011 Proof 5 Blacks Leisure Group plc
440/450 Cob Drive, Swan Valley
Northampton NN4 9BB
T: +44 (0)1604 597000 F: +44 (0)1604 597171
Shareholder helpline: 0871 664 0300
Email: [email protected]
www.blacksleisure.co.uk
Annual Report and Accounts
for the year ended 26 February 2011
Stock Exchange Code: BSLA
Focused
on the future
Blacks Leisure Group plc Annual Report and Accounts for the year ended 26 February 2011
20321.04 10/06/2011 Proof 5 20321.04 10/06/2011 Proof 5 ### summary: |
17475 13/05/2010 Proof 3
Universe Group plc
Annual Report 2009
Stock code: UNG
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Contents
01 Highlights
02 Group at a Glance
04 Chairman’s Statement
07 Chief Executive’s Report
10 Directors and Advisers
12 Directors’ Remuneration Report
14 Corporate Governance Report
15 Directors’ Report
19 Independent Auditors’ Report
20 Consolidated Statement of Comprehensive Income
20 Consolidated Statement of Recognised Income and Expense
21 Statement of Changes in Equity
22 Balance Sheets
23 Cash Flow Statements
24 Notes to the Accounts
www.universeplc.com
Universe Group plc
Established in 1991, Card Clear was admitted to the Alternative
Investment Market (AIM) in 1995, and renamed Universe Group
in January 2000.
Universe Group plc is incorporated in the UK and its main
operations are in the UK, Ireland and Portugal.
Universe Group operates through two trading subsidiaries,
HTEC Limited and Jet Set Wash Systems Limited.
get data smart
17475UNIVERSE_Cvr.indd 2 17475UNIVERSE_Cvr.indd 2 13/05/2010 14:18 13/05/2010 14:18 05
Universe Group plc
Annual Report 2009
Stock code: UNG
01
17475 11/05/2010 Proof 2
Revenue
by 12.5% to £14.5m (2008: £16.6m)
Decreases
Gross margin
to 36% (2008: 33%)
Increases
Operating profit* *
to £0.8m (2008: £0.5m)
Increases
20
19
18
17
16
15
14
13
12
11
10
2007
13.2
2006
11.3
2008
16.6
2009
14.5
Revenue
£m
*before exeptional items
1000
900
800
700
600
500
400
300
200
100
0
2007
842
2008
516
2006
656
2009
750
Operating profi t*
£’000
Highlights
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Annual Report 2009
Stock code: UNG
www.universeplc.com
17475 13/05/2010 Proof 3
Group at a Glance
Petrol Forecourt Solutions Universe Data Services
PFS provides managed services to the UK petrol
forecourt market covering:
· Point of sale equipment;
· Fuel card acceptance solutions;
· Data analytics and back office systems;
· Outdoor payment terminals; and
· Automatic number plate recognition to prevent
fuel theft.
UDS operates a PCIDSS approved data centre to an
international client base, providing:
· On-line loyalty solutions;
· Automatic number plate recognition barrier
control systems;
· Payment processing solutions; and
· Data analytics.
Petrol Forecourt Solutions
51%
Percentage of
Group Revenue
Percentage of
Group Revenue
Universe Data Services
21%
17475UNIVERSE.indd 02 17475UNIVERSE.indd 02 13/05/2010 16:28 13/05/2010 16:28 05
Universe Group plc
Annual Report 2009
Stock code: UNG
03
17475 13/05/2010 Proof 3
JetSet Manufacturing
JetSet are market leaders in vehicle washing
technology and ancillary forecourt equipment offering
state-of-the-art technology and excellent service.
JetSet offers:
· Supply and maintenance of valeting equipment;
· Revenue share managed service programmes; and
· Environmentally friendly solutions.
HTEC’S division operates from an ISO 9001 accredited
facility and offers:
· Bespoke electrics solutions to a specialised customer
base, comprising design and build capability; and
· Maintenance services for electronic payment
terminals.
Manufacturing
14%
Percentage of
Group Revenue
JetSet
14%
Percentage of
Group Revenue
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Annual Report 2009
Stock code: UNG
www.universeplc.com
17475 13/05/2010 Proof 3
Chairman’s Statement
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Universe Group plc
Annual Report 2009
Stock code: UNG
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Introduction
As reported in the interim results, 2009 has seen a period of weak
demand from our major customers and this has been a difficult
backdrop against which to continue the transition of the Group from
manufacturer to solutions provider.
Nevertheless, despite the poor economic climate, I am delighted to
be able to report that the benefits of this transition have allowed the
Group to show improved underlying profitability despite reduced
turnover. Operating profit, before exceptional items, increased by
45% in 2009 to £750,000 (2008: £516,000). EBITDA before
exceptional items grew in the same period by 53% to £1,845,000
(2008: £1,208,000).
Exceptional items totalling £1,005,000 were incurred during the year
mainly as a result of further restructuring of the Group. These costs
contributed to an overall loss before taxation of £599,000 (2008:
loss of £484,000).
The highlight of the year was undoubtedly the signing of an
enhanced contract with Wm Morrison Supermarkets plc. Morrisons
is a long-established and valued customer of the Group and we are
delighted to extend that relationship into the foreseeable future.
Results
The impact of weak demand saw Group turnover fall by 12.5%
compared to the prior year. This is a larger fall than reported at the
half year, but was expected given the strength of demand
experienced in late 2008. Turnover in the second half was slightly
less than reported in the first half (3% down) but operating
profitability was higher in the second half, as a result of the cost
reductions implemented earlier in the year.
With an improvement in the sales mix, gross margin percentage
increased to 35.9% from 32.6% in the prior year, reflecting the
benefits of the move from manufacturing to services and the
consequent restructuring of the business. Savings in our operational
cost base have been made and Group headcount has been
reduced by 17% during the course of the year, resulting in a
reduction in staff costs of 19%. It is also worthy of note that two
of the Group’s four segments actually grew their turnover during
the year.
Operating profit, before exceptional items, represents a 5.1%
operating margin, compared to 3.1% in 2008. The 9% reduction in
administrative costs was a significant component of this
improvement.
During the year we incurred significant restructuring costs of
£801,000 (2008: £534,000), as we continued the transition from
manufacturing to solutions provider. Incurring these costs enables
the Group to proceed with a much reduced cost base and
enhanced operational gearing. As the wider business community
recovers confidence and normal levels of capital expenditure
resume, the Board anticipates that this reduced cost base should
allow the Group to benefit from a recovery in demand for our
products and services. We continue to pay close attention to our cost
base, although we would not expect further exceptional costs of the
scale reported here in the foreseeable future.
Approach by Brulines Group plc
The approach by Brulines Group plc was a significant event during
the year. Whilst we remain in an offer period there is no agreement
for Brulines to undertake any due diligence on the Company.
However, it is also worth noting the impact on trading that an
approach of this sort can have. The requirement to obtain Brulines’
consent resulted in a frustrating and unavoidable delay in signing
the Morrisons’ contract. This delay impacted 2009’s results, and in
addition significant costs were incurred primarily relating to
increased advisers’ fees.
The approach from Brulines continues to be a significant distraction
for the management team whose main focus has to be guiding the
Group through these difficult economic conditions. It is worth
repeating here that the Directors remain committed to delivering
value to all of the Group’s shareholders.
Annual General Meeting
At the 2009 Annual General Meeting a proposed resolution to allow
the Group to issue share options or to raise funds via a placing did
not receive sufficient shareholder support. After significant changes
to the management team over the last two years the Group is
unable to align the team’s interests with those of its shareholders, a
situation which the Board does not believe is satisfactory. In addition,
the Group’s ability to raise funds if necessary via a placing is equally
important. Obtaining additional debt finance currently is both
expensive and difficult, and without recourse to potential sources of
equity funding the Group runs the risk of missing out on
opportunities that may arise.
For these reasons, enabling resolutions will be proposed at the
forthcoming AGM and I would urge all shareholders to vote in
favour.
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Annual Report 2009
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Board of Directors
After 23 years of outstanding service, both in an Executive and a
Non-Executive capacity, Barrie Brinkman has decided to stand down
as a Director at the conclusion of the 2010 Annual General Meeting.
I thank Barrie for his contribution over the years.
Dividend
Whilst we continue to focus on delivering growth in profits, the
availability of funding to deliver such growth impacted results in
2009. The receipt of £1 million of further funding from our bank late
in the year should not disguise the difficulties of obtaining finance
during 2009. The existing credit facilities require significant capital
repayments during 2010, and consequently we do not recommend
paying a dividend for the year. We will continue to review the
position regarding future dividend payments as the Group
progresses.
Outlook and Prospects
Being able to report an increase in underlying profitability, despite a
reduction in turnover, shows the progress that has been made.
However, the challenge for 2010 is to return the Group to a position
of turnover growth whilst maintaining that increased underlying
profitability. Progress in winning new business is being made in all
four divisions of the Group and coupled with the restructuring that
has already occurred, turnover growth would provide the Group
with a firm foundation for future enhanced profitability.
John Scholes
Chairman
28th April 2010
Chairman’s Statement continued
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Chief Executive’s Report
In the face of the most severe global economic downturn in recent
years the focus for 2009 was necessarily improving profitability, cash
flow and developing recurring revenue streams. Growth was
inevitably affected by capital expenditure freezes within much of our
customer base as well as by the continuing squeeze on available
debt finance. Underlying operational profitability before exceptional
items improved as a result of tough cost reductions. These actions
will continue to improve profitability and cash flow and will ensure
that full advantage can be taken in any future economic upturn.
Financial Performance Review and Key Performance Indicators
The Group recorded an overall loss before taxation of £599,000
(2008: loss of £484,000) which was significantly impacted by
£1,005,000 of exceptional items. This mostly related to £801,000 of
restructuring costs reflecting cost-cutting programmes in our
manufacturing operation, and the closure of our Spanish office.
Whilst an increasing loss is disappointing, the exceptional costs
incurred were necessary to allow the Group to meet the twin
challenges of a business in transition and a difficult economic
environment. Levels of cost remain under review at all times;
however, the main foreseeable restructuring costs have now been
incurred.
The early action taken on cost reduction reduced overhead costs by
9% to £4,454,000 (2008: £4,882,000) and provided the platform for
a 45% increase in operating profit, before exceptional items, to
£750,000 (2008: £516,000). This was against the disappointment of
a revenue decrease of 12.5% resulting from the economic recession.
Despite this, gross margins grew to 35.9% from 32.6% in the prior
year. Operating margin, before exceptional items, rose to 5.1% from
3.1% in 2008 and is moving towards our goal of exceeding 10%.
Profit before tax and exceptional items increased by 149% to
£406,000 (2008: £163,000).
The 53% growth in EBITDA (as calculated in note 2) from £1,208,000
to £1,845,000 demonstrates that progress continues to be made in
improving operational cash generation. Investment in fixed assets
over the last two years has changed the Group’s cost structure,
increasing the total depreciation and amortisation charge by
£403,000 from the prior year. Whilst investment will continue, the
asset base is now in place that will allow the Group to deliver
growth.
The Board will continue to monitor revenue change, operating profit,
cash generation and customer satisfaction as key performance
indicators. Service excellence has become an essential element in
customer relationships with demands for improved service level
agreement (SLA) targets being widespread. Overall SLAs for 2009
were 94% (2008: 96%) which are above contractual requirements.
Contracted service revenues are a key element of PFS sales and
requests from an increasing number of customers are being made
for a 24/7 service.
Universe Data Systems (UDS)
The segmental reporting breakdown shows an increase in revenue
of 63% for the year to £3,086,000 (2008: £1,885,000) which in turn
drove segmental profit to £959,000 (2008: loss of £69,000).
During the later part of 2008 UDS began the roll-out of what is
believed to be the largest and only truly global real time loyalty
scheme. Early 2009 saw the web based system go live in four
European countries with licence arrangements for more to come on
stream in future periods. In excess of 100 million transactions have
been processed by our data centre for the first year and significant
ongoing revenue streams will accrue from the initial five year
agreement.
Currently the PCIDSS approved data centre handles £8 billion worth
of transactions per year and has loyalty schemes with up to 14
million members operating in a real time environment. HTEC
provides Mission Critical Services to two of the UK’s supermarket
groups and four of the major oil companies, either in the UK or
Europe.
Progress has been made during the year to establish UDS outside
the petrol and oil industry. Partnerships and alliances with market
specialists are continuing to introduce exciting new opportunities as
UDS is positioned as a data handling platform in the extended
loyalty and customer relationship management (CRM) space.
Long sales cycles remain a feature of loyalty systems projects but a
growing number of interesting opportunities are now presenting
themselves, which indicate strong future potential based on a
recurring revenue model. The SaaS (software as a service) model of
operation gives increasing benefits to both customer and supplier
as utilisation of capacity increases.
During the year, development was completed on the automatic
number plate recognition software (ANPR) range enabling
agreements to be signed with five channel partners in the latter part
of 2009. The HTEC data centre can hold and process data with
reference to a central database for partners dependent on the
application. The rapidly increasing market for surveillance and
security products will provide a growing sales channel for future
years. The ANPR product range now includes forecourt drive off
control, car park barrier control, visitor systems and a central on-line
warning list database.
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Chief Executive’s Report continued
Petrol Forecourt Systems (PFS)
The PFS business segment produced £1,644,000 (2008: £2,486,000)
of profit and remains the Group’s largest and most profitable
segment despite a 25% fall in turnover. Prior year sales and profit
benefited from a major supermarket payment terminal roll-out but
excluding that, underlying sales were up 15% compared to 2008.
Recurring contract business is in excess of 70% of turnover for this
segment.
The core solutions of the PFS business relate to the supply of point of
sale (POS) payment systems and wet stock management reporting.
HTEC has occupied a prominent position in the UK forecourt
managed services market for a number of years and its systems
currently run the petrol forecourts of two major supermarket chains
and over 33% of all UK forecourts have HTEC equipment on them.
Development of the software continues in order to improve
functionality for the growing convenience store market, and to allow
easier integration with other third party products.
HTEC has a wide range of end to end approvals to handle bank and
fuel payment cards and will continue to be a market leader for this
type of payment processing. HTEC’s payment terminals are
recognised as some of the most secure within the industry, meeting
the challenges posed constantly from card fraud criminals.
Investment in the next generation payment terminal which will begin
roll-out in 2010 has been carefully controlled to give a rapid payback
to the Group.
Disappointingly, 2010 saw a fall in turnover as customers cut back
on new project spending. I can however report that we renewed a
significant long-term contract with Morrisons for enhanced services
supporting its store IT replacement project.
New outdoor payment terminal roll-outs were particularly badly
affected last year as capital expenditure plans were put on hold.
This product is however now opening up new markets related to
airfields, marinas and commercial truck stops.
Manufacturing (CEM)
The traditional core business of HTEC, subcontract design and
manufacture, has over a number of years been in decline.
Continued monitoring showed that although it was loss making at
the pre-tax level, it did have a positive contribution to fixed
overheads so an immediate disposal was ruled out as impractical
because of the requirement to supply components for other
segments of the Group.
Revenue continued to decline in 2009 to £2,056,000 (2008:
£3,263,000). Whilst the cost base was significantly reduced to
ensure a positive contribution to fixed overheads, a loss at the
operating profit level was recorded of £97,000 (2008: loss
£120,000). Encouragingly the economic challenges last year have
actually benefited this part of the business and new customers are
creating welcome opportunities early in 2010.
JetSet
The financial crisis which began in 2008 continued to seriously affect
the JetSet business. The market became increasingly tough as
capital expenditure was cut back and asset finance to support
machine placement was still both difficult to obtain and
unreasonably expensive. Despite the conditions, turnover increased
by 31% to £1,933,000 (2008: £1,475,000). However, due to having to
operate the production facility in Bedford at below capacity,
operating losses increased to £241,000 (2008: loss of £181,000),
particularly weighted to the earlier part of the year.
By Q4 of 2009 JetSet was EBITDA positive and, with an improved
trading environment, has a high expectation of achieving regular
and sustainable profitable trading. Visibility of potential prestigious
future contracts with existing Group customers demonstrates that
the business has growth potential assuming new asset funding
avenues are available.
The concept of revenue share from equipment owned by JetSet and
sited on the customers’ premises has already resulted in the
winning of contracts from customers such as ASDA, Co-op and BP,
clearly demonstrating the cross selling opportunity from other
Universe business units.
Prior year adjustment in respect of Goodwill
The introduction of IFRS8 on Segmental Reporting has required the
Group to allocate the historic goodwill associated with the HTEC
subsidiary (£17.3 million) across the operating segments contained
within HTEC. A significant proportion of this goodwill (£6.3 million)
has necessarily been allocated to the historic Manufacturing
segment. The requirement to allocate goodwill to the segments is a
change of accounting policy and consequently must be applied
retrospectively, resulting in the allocation being made as at
1st January 2007. Cash flow forecasts for the segment, at that time,
would not support the carrying value of the goodwill allocated to
Manufacturing and consequently an impairment provision of £5.1
million would have been required had impairment been measured
on a segmental basis in 2007. Consequently, a £5.1 million provision
has been booked in 2009 and treated as a prior year adjustment.
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Balance Sheet, Cash Flow, Banking Facilities and Going Concern
During 2009 the priority has been to generate cash and to improve
the debt repayment profile of the Group’s borrowings. By the year
end net borrowings (debt less cash) had dropped from £3.2 million
to £2.5 million, and the repayment profile had improved significantly,
with 73% of net borrowings due in more than one year (2008: 45%).
Debt repayment will remain a significant drain on the Group’s cash
flow in 2010, with scheduled repayments due of £858,000, but this
debt repayment burden is scheduled to drop significantly in 2011.
Overall the Group generated £1.1 million of cash during the period.
Clearly the negotiation of a new long-term loan from our bankers
was a significant part of that, but in reality most of these proceeds
served to refresh facilities that have been paid down over the last
two years on an accelerated schedule. Net proceeds from financing
activities were £371,000, with the balance of the cash arising from
£1.4 million generated by the operation, net of the £707,000
invested into software product development and an expansion of
the JetSet revenue share estate.
During the year the Group breached one of its banking covenants, in
respect of the net worth of the Group which has been significantly
impacted by the goodwill impairment referred to above. All other
covenants were met, and the breach has been subsequently waived
by HBOS. HBOS has also agreed to remove covenants from both
loans going forward, and compliance with the loan terms now rests
on the ability to repay loan instalments as they fall due. The Directors
have reviewed financial forecasts for the business covering the 12
months from the date of this report and are confident that the
repayment schedule will be satisfied and that the Group will be able
to operate within its current banking facilities. As a result, the
Directors have continued to adopt the going concern basis in
preparing the financial statements.
Outlook
The strategy of the management team is to grow and transform the
Group from lower margin product sale and manufacturing activity to
a software and services business with associated recurring revenue
targeted at tier 1 businesses. Dealing with the burdensome debt
structure, limited funding for investment and an inappropriate
operational structure has been a difficult task. Restructuring
write-offs have been higher than expected and new product
development has been hindered by ongoing support requirements
from legacy products.
2010 sees us go into a year where the cost structure has been
significantly improved by the actions taken in 2008/9, new products
have been added to the portfolio and the economy is emerging
from a deep recession. The Group is now better placed to deliver
growth and profitability. 2010 will see further debt reduction and by
the end of this year our debt repayment profile will have improved
significantly.
The sales pipeline for UDS continues to grow and strategic
partnerships within the loyalty/CRM field are beginning to generate
significant new opportunities. The PFS business is maintaining its
market leading position and is seeing growth opportunities from its
major customers. JetSet has the potential to move into profit this year
and reach critical mass for equipment placements.
Paul Cooper
Chief Executive Officer
28th April 2010
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Directors and Advisers
Non-Executive Chairman
John Scholes
John Scholes is Chairman and Chief Executive of The Catalyst
Group International Limited, a privately owned business providing
corporate development advisory services to companies across
the technology industry from its offices in the UK, USA, France and
Germany. John has been closely involved in advising the boards of
many businesses in the last ten years.
Executive Directors
Paul Cooper — Chief Executive Officer
Paul Cooper became Chief Executive on 1st January 2007 having
previously been appointed a Non-Executive Director on
8th September 2006. Paul qualified as a chartered accountant with
Deloitte before taking up Finance Director roles in industry. Much
of his business career has been spent in high tech manufacturing
companies including as European Head of Eltron International
Limited and Comtec Information Systems Limited. As Group
Managing Director of Blazepoint Group plc from June 2000 to
March 2003, he led the company’s AIM flotation.
Bob Smeeton — Finance Director
Bob Smeeton joined Universe in June 2008 as the finance director
of HTEC Limited, the Company’s principal operating subsidiary.
Bob, who qualified as a chartered accountant whilst at Price
Waterhouse, was previously at OpSec Security Group PLC, an AIM
quoted company, latterly as its European Finance Director. He was
appointed Group Finance Director on 1st January 2009.
Non-Executive Directors
Barrie Brinkman
Barrie Brinkman joined the board of HTEC in 1987 and has over
30 years of electronics and software design experience with a
number of companies including City Business Products Limited, a
subsidiary of British Telecommunications plc. He joined the Universe
Group Board in February 1998 following the Company’s acquisition
of HTEC.
Malcolm Coster
Malcolm Coster joined the Universe Group Board in August
2007 and is an experienced businessman who has held senior
international positions in the Management Consultancy and
Information Technology industries. Malcolm is an experienced
Chairman, Board Member and Non-Executive Director of several
well-known public companies. Other current positions include
Chairman of DMW Group, a technology consultancy specialising in
large-scale project and programme management.
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Directors
J R Scholes (Chairman)
P Cooper
B L Brinkman
M Coster
R J Smeeton
Secretary
E M Paul
Registered office
Southampton International Park
George Curl Way
Southampton
Hants
SO18 2RX
Website
http://www.universeplc.com
Nominated adviser
Arbuthnot Securities Limited
Arbuthnot House
20 Ropemaker Street
London
EC2Y 9AR
Solicitors
Blake Lapthorn
New Kings Court
Tollgate
Chandlers Ford
Eastleigh
SO53 3LG
Bankers
Bank of Scotland
144/148 High Street
Southampton
SO14 2JF
Registrars
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield
HD8 0LA
Registered number
02639726
Auditors
Deloitte LLP
Southampton, United Kingdom
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Directors’ Remuneration Report
The Company is not required to comply with Schedule 8 of the
Companies Act 2006 or the Listing Rules of the Financial Services
Authority as its shares are traded on AIM; the following disclosures
are therefore made on a voluntary basis.
UNAUDITED INFORMATION
The Remuneration Committee
The Remuneration Committee consists of the Non-Executive
Directors of the Company. The role of the Committee is to determine,
on behalf of the Board, the Company’s policy on Executive Directors’
and other senior employees’ remuneration, within set written terms
of reference approved by the Board. The remuneration of the
Non-Executive Directors is approved by the Board of Directors. As
Chairman of the Committee, I have been asked by the Board to
report to you on all remuneration matters on its behalf.
Remuneration Policy
The remuneration policy of the Company is:
l
to provide a suitable remuneration package to attract, motivate
and retain Executive Directors who will run the Company
successfully;
l to formulate a package that will include a significant proportion
of performance related pay and to align the Directors’ personal
interests to those of the shareholders; and
l to ensure that all long-term incentive schemes for the Directors
are approved by the shareholders.
Other than as disclosed at note 30 and as shareholders, none of the
Committee has any personal financial interest, conflicts of interest
arising from cross-directorships or day-to-day involvement in
running the business. The Committee makes recommendations to
the Board. No Director plays a part in any discussion about their
own remuneration. The Remuneration Committee members are
expected to draw on their experience to judge where to position the
Company, relative to other companies’ and other groups’ rates of
pay, when considering remuneration packages for Executives. The
committee may use outside professional advice if they consider it
necessary. No such advice has been sought during the year or the
preceding year.
Benefits in kind include the provision of medical insurance premiums
and a car or car allowance. Two Executive Directors participate in the
Company’s pension plan. The pension contributions represent the
Company’s contribution to defined contribution pension plans.
Bonuses and benefits in kind are not pensionable.
All of the Executive Directors have service contracts, which provide
for notice periods of no more than one year. All the Non-Executive
Directors have service contracts, which provide for notice periods of
three months.
The Remuneration Committee recognises the importance of
appropriate incentive arrangements in assisting with the
recruitment and retention of senior Executives. The Remuneration
Committee believes that share-based incentives align the interests
of employees with those of shareholders but recognises that
options to acquire shares at their market value on the date of grant
are not always the most appropriate way to achieve this.
An EMI option scheme was set up on 27 June 2007 for the Executive
Directors of Universe Group plc and an unapproved option scheme
was set up for the Non-Executive Chairman of Universe Group plc
on 27 June 2007. These options will lapse if a) the Directors leave
employment for any reason other than a ‘Good Reason’ as defined
within the schemes and b) at the end of the tenth anniversary of the
Date of Grant.
The Group also operates a Long Term Incentive Plan (‘LTIP’) for
employees (including certain Executive Directors) selected by the
Board (but taking account of the recommendations of the
Remuneration Committee). The LTIP operates by issuing matching
shares in respect of qualifying share purchases by certain Directors
and employees. No such shares were issued during 2009.
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Directors’ Detailed Emoluments
Salary
& fees Benefits Bonus Pension 2009 2008
£’000 £’000 £’000 £’000 £’000 £’000
Executives
P Cooper 120 5 — 11 136 137
R J Smeeton (appointed 1st January 2009) 80 7 — 8 95 —
E M Paul (resigned 1st January 2009) — — — — — 95
Non-Executives
J R Scholes 32 — — — 32 32
B L Brinkman 20 — — — 20 20
M Coster 25 — — — 25 25
277 12 — 19 308 309
As disclosed in note 30, two Directors, John Scholes and Malcolm Coster, earned interest on loans provided to HTEC Limited and Jet Set Wash
Systems Limited, two of the Group’s subsidiaries.
Directors’ Share Options
Details of share options held by Directors over the ordinary shares of the Company are set out below. The Remuneration Committee
considers and recommends all new long-term incentive arrangements for the Executive Directors and other employees.
The market price of the Company‘s shares at the end of the financial year was 4.125 per 5p share (2008: 2.25p per 5p share) and the range
of market prices during the year was between 1.875p and 5.625p.
At 1 Jan At 31 Dec Exercise
Scheme 2009 Granted Exercised Lapsed 2009 price
J R Scholes Unapproved 1,250,000 — — — 1,250,000 8p
P Cooper EMI 1,250,000 — — — 1,250,000 8p
2,500,000 — — — 2,500,000
Directors’ share options are exercisable from the date of grant, being 27 June 2007, and expire ten years from the date of grant.
Interests in Shares
Interests in shares have been disclosed in the Directors’ Report on page 17.
On behalf of the Board
J Scholes
Chairman of the Remuneration Committee
28 April 2010
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Corporate Governance Report
The Board is accountable to the Company’s shareholders for good
governance and this statement describes how the principles of good
corporate governance are applied by the Company.
The Company is not required to comply with Schedule 8 of the
Companies Act 2006 or the Listing Rules of the Financial Services
Authority as its shares are traded on AIM; the following disclosures
are therefore made on a voluntary basis.
The Group does voluntarily comply with many of the requirements of
the Combined Code as described in this statement and the
Directors’ Remuneration Report and consequently, this report is
intended to highlight the key areas in which the Group complies with
the code but does not serve as report into the Group’s compliance
with the whole code.
The Board
As at the date of signing of these accounts, the Board comprises two
Executive Directors and three Non-Executive Directors.
The Board meets formally at least ten times a year and full
information is given to the Directors to enable the Board to function
effectively and to allow the Directors properly to fulfil their
responsibilities. Board papers are usually distributed four days in
advance of meetings and decisions may be deferred if Directors
require further information to be made available to them. The
Company Secretary is responsible to the Board for the timeliness of
the information provided to it.
Board Committees
In furtherance of the principles of Corporate Governance the Board
has appointed the following Committees, each of which has formal
terms of reference. The membership of the Committees is shown
below.
Audit Committee
The Audit Committee, comprising the Non-Executives, is chaired by
John Scholes and meets two or three times a year with the Executive
Directors and representatives of the Auditors in attendance as
required. The Committee assists the Board in the discharge of its
duties concerning the announcements of results and the Annual
Report and Accounts and the maintenance of proper internal
controls; it reviews the Auditors’ findings and considers Group
accounting policies and the compliance of those policies with
applicable legal and accounting standards.
Remuneration Committee
The Remuneration Committee, comprising the Non-Executive
Directors under the Chairmanship of John Scholes, sets the Group’s
overall remuneration policy. It determines, on behalf of the Board,
the remuneration and other benefits of the Executive Directors. It
meets on a regular basis, usually twice a year and additionally
whenever required. The Directors’ Remuneration Report is set out on
pages 12 and 13.
Internal Controls
The Directors are responsible for the Group’s system of internal
control. However, such a system is designed to manage, rather than
eliminate the risk of failure to achieve business objectives and can
provide only reasonable and not absolute assurance against
misstatement or loss. The Directors have put in place an
organisational structure and framework of controls which is
periodically reviewed for its effectiveness. The key financial
procedures within the Group’s system of internal control are as
follows:
l There is a comprehensive budgeting system with the annual
budget being approved by the Board. Actual results and
updated forecasts are prepared regularly and compared
against budget;
l The annual capital investment budget is approved by the Board
together with significant individual items prior to commitment;
and
l Significant treasury items are reserved for the Board.
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Directors’ Report
The Directors present their report and the audited accounts for the
year ended 31 December 2009.
Principal Activities
The principal activity of the Company is as a holding company, with
two main trading subsidiaries, HTEC Limited (‘HTEC’) and Jet Set
Wash Systems Limited (‘JetSet’). HTEC is engaged in the provision of
managed services, payment and loyalty systems for the Petrol
Forecourt and Retail sector. JetSet was established in late 2007,
focusing on the provision of car wash and valeting services.
Result for the Year
For 2009 there was an operating profit before exceptional items of
£750,000 (2008: £516,000). The Company’s loss for the year after
interest and exceptional items, but before taxation, was £599,000
(2008: £484,000 loss).
Business Review
A review of business in 2009 is included in the Chief Executive’s
Report on pages 7 to 9.
Key performance indicators (‘KPIs’)
There are three main KPIs that management monitor within the
Group:
l The order inflow at HTEC and JetSet each day to ensure that
annual sales forecasts are on schedule.
l Detailed cost of sales documents, which are prepared each
month in order that forecast product margins are achieved.
l Performance against contracted service level agreements.
The performance against these KPIs is discussed in the Chief
Executive’s Report on page 7.
Principal risks and uncertainties facing the Company
During 2009 the market for petrol forecourt equipment declined as
capital programmes were put on hold. However, the market for
recurring repairs and maintenance services remains steady. The
Group has been adversely impacted by the availability of asset
based lending necessary to fund the expansion of its JetSet
operations. Whilst these funding restrictions persist the expansion of
JetSet is likely to be slower than would be possible in more normal
credit markets.
A discussion of the market, liquidity and credit risks in relation to
financial instruments held within the Group takes place in note 20.
Going Concern
UK Company Law requires directors to consider whether it is
appropriate to prepare the financial statements on the basis the
Company and Group are going concerns. Throughout the financial
statements there are various disclosures relating to going concern.
This Directors’ report summarises the key themes and references
those areas where greater disclosure is given.
The Group has good visibility of recurring revenues, which make up
a significant proportion of annual revenues. However, the Group
does still have some exposure to current economic conditions which
have the potential to impact annual revenues. The Directors have
therefore prepared downside sensitised forecasts for the current
and following years and have continued to implement cost
reductions programme in order to improve operational gearing.
The Group’s main sources of finance are bank loans, finance leases
and invoice discounting. The year end amounts outstanding on each
are discussed within note 18. In addition to this, the Group has a
£0.1 million overdraft facility that is currently not in use. The bank
loans have several covenants attached that, if breached, give the
lender the option to immediately recall the funding. During the year
the Group breached one of the covenants associated with one of the
loans on one occasion. This breach was waived by the lender.
Further details of the breach are discussed within note 18 to the
financial statements. Subsequent to the year end, the bank has
agreed to remove all financial covenants associated with both
loans.
The downside sensitised forecasts have been reviewed by the
Directors to ensure that the profit and cash generation derived from
these forecasts are sufficient to ensure that the existing bank
facilities are sufficient to meet the Group’s requirements. This is
discussed further within liquidity risk in note 20 and is the key factor
in relation to going concern.
As a result of this review, the Directors are of the opinion that the
Company and Group have adequate resources to continue in
operational existence for the foreseeable future, and have continued
to adopt the going concern basis in preparing the financial
statements.
Financial instruments
Information about the use of financial instruments by the Company
and its subsidiaries, and the Group’s financial risk management
policies is given in note 20.
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Environment
The Company’s policy with regard to the environment is to ensure
that the Group’s operational subsidiaries understand and effectively
manage the actual and potential environmental impact of their
activities. Operations are conducted such that they comply with all
the legal requirements relating to the environments in which they
operate. During the period covered by this report no Group company
has incurred any fines or penalties or been investigated for any
breach of environment regulations.
It is Company policy to continually carry out research and
development on new products and processes to minimise the
impact of its operations on the environment.
Employees
The quality and commitment of the Group’s employees has played a
major role in the success of HTEC and JetSet over the years. This has
been demonstrated in many ways, including improvements in
customer satisfaction, the development of new product lines and the
flexibility employees have shown in adapting to changing business
requirements and new ways of working. Employee turnover remains
below the 10% target set by the Executive Directors.
Research and development
The Company has a continuing commitment to a high level of
research and development. During the year expenditure on research
and development of £937,000 (2008: £967,000) was charged to the
Consolidated Statement of Comprehensive Income. In addition,
development costs of £327,000 (2008: £569,000) were capitalised.
Research and development in the year concentrated on the further
development of the online loyalty and back-office products.
Dividends
The Directors do not propose the payment of a dividend (2008: £nil).
Supplier payment policy
The Group’s policy is to settle terms of payment with suppliers when
agreeing the terms of each transaction, ensure that suppliers are
made aware of the terms of payment and abide by the terms of
payment.
Trade creditors were equivalent to 66 (2008: 62) days’ purchases,
based on the average daily amount invoiced by suppliers during
the year.
Capital structure
Details of the authorised and issued share capital, together with
details of the movements in the Company’s issued share capital
during the year, are shown in note 22. The Company has one class
of ordinary shares which carry no right to fixed income. Each share
carries the right to one vote at general meetings of the Company.
There are no specific restrictions on the size of a holding nor on the
transfer of shares, which are both governed by the general
provisions of the Articles of Association and prevailing legislation.
The Directors are not aware of any agreements between holders of
the Company’s shares that may result in restrictions on the transfer
of securities or on voting rights.
Details of employee share schemes are set out in note 28 and no
person has any special rights of control over the Company’s share
capital and all issued shares are fully paid
Directors’ indemnities
The Company has made qualifying third party indemnity provisions
for the benefit of its Directors. These provisions remain in force at the
date of this report.
Annual General Meeting
The resolutions to be processed at the Annual General Meeting to be
held on 28 June 2010, together with explanatory notes, appear in the
separate Notice of Annual General Meeting sent to all shareholders.
Substantial shareholdings
As at 15 April 2010 the Company had been notified of the following
substantial holdings in the ordinary share capital of the Company.
% of
No. of voting rights
ordinary and issued
Shareholder shares share capital
Ennismore Fund Management 18,217,122 15.9
Brulines Group plc 13,209,754 11.5
Barclays Wealth 7,572,073 6.6
Rathbone 6,138,595 5.4
J R Scholes 5,691,960 5.0
Directors’ Report continued
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Directors
The Directors who served throughout the year and to the date of
approval of the financial statements were as follows:
J R Scholes (Chairman)
P Cooper
B L Brinkman
M Coster
R J Smeeton
Those Directors serving at the end of the year, or date of this report,
had an interest in the ordinary share capital of the Company at
31 December as follows:
Ordinary shares of 5p each
2009 2008
No. No.
J R Scholes 5,691,960 5,691,960
P Cooper 500,000 388,460
B L Brinkman 886,147 886,147
M Coster 500,000 500,000
R J Smeeton 79,160 79,160
The Directors had no other disclosable interest under the Companies
Act 2006 in the shares of the Company or of any other Group
company.
Details of the Directors’ share options are provided in the Director’s
Remuneration Report on page 13.
Barrie Brinkman has indicated that he will be resigning at the
forthcoming Annual General Meeting.
Statement of Directors’ responsibilities for
the fi nancial statements
The Directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union and Article 4 of the
IAS Regulation and have also chosen to prepare the Parent
Company financial statements under IFRSs as adopted by the EU.
Under company law the Directors must not approve the accounts
unless they are satisfied that they give a true and fair view of the
state of affairs of the Company and of the profit or loss of the
Company for that period.
In preparing these financial statements, International Accounting
Standard 1 requires that Directors:
l properly select and apply accounting policies;
l present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
l
provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events
and conditions on the entity’s financial position and financial
performance; and
l make an assessment of the Company’s ability to continue as a
going concern.
The Directors are responsible for keeping proper accounting
records that disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
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Responsibility statement
We confirm that to the best of our knowledge:
l
the financial statements, prepared in accordance with
International Financial Reporting Standards, give a true and fair
view of the assets, liabilities, financial position and profit or loss
of the Company and the undertakings included in the
consolidation taken as a whole; and
l the management report, which is incorporated into the Directors’
report, includes a fair review of the development and
performance of the business and the position of the Company
and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that they face.
Disclosure of information to Auditors
At the date of making this report each of the Company’s Directors, as
set out on page 17, confirm the following:
l so far as each Director is aware, there is no relevant information
needed by the Company’s Auditors in connection with preparing
their report of which the Company’s Auditors are unaware; and
l each Director has taken all steps that he ought to have taken as
a Director in order to make himself aware of any relevant
information needed by the Company’s Auditors in connection
with preparing their report and to establish that the Company’s
Auditors are aware of that information.
This confirmation is given and should be interpreted in accordance
with the provisions of s418 of the Companies Act 2006.
Auditors
A resolution to reappoint Deloitte LLP will be proposed at the
forthcoming Annual General Meeting.
Approval
The report of the Directors was approved by the Board on 28th April
2010 and signed on its behalf by:
P Cooper
Director
Directors’ Report continued
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Independent Auditors’ Report
to the Members of Universe Group plc
We have audited the Group and Parent Company financial
statements (‘the financial statements’) of Universe Group plc for the
year ended 31st December 2009 which comprise the consolidated
statement of comprehensive income, the consolidated statement of
recognised income and expense, the Group and Company
statement of changes in equity, the consolidated and Company
balance sheets, the consolidated and Company cash flow
statements and the related notes 1 to 31. These financial statements
have been prepared under the accounting policies set out therein.
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company’s members those matters we are required to state to them
in an Auditors’ report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company’s members, as a
body, for our audit work, for this report, or for the opinions we have
formed.
Respective responsibilities of Directors and Auditors
As explained more fully in the Directors’ Responsibilities Statement,
the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit the financial statements in accordance
with applicable law and International Standards on Auditing (UK
and Ireland). Those standards require us to comply with the Auditing
Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the fi nancial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to
the Group’s and the Parent Company’s circumstances and have
been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the
Directors; and the overall presentation of the financial statements.
Opinion on fi nancial statements
In our opinion:
l the financial statements give a true and fair view of the state
of the Group’s and the Parent Company’s affairs as at
31st December 2009 and of the Group’s and the Parent
Company’s loss for the year then ended;
l the financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union; and
l the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
l
the information given in the Directors’ Report for the financial
year for which the financial statements are prepared is
consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in
our opinion:
l adequate accounting records have not been kept by the Parent
Company, or returns adequate for our audit have not been
received from branches not visited by us; or
l the Parent Company financial statements are not in agreement
with the accounting records and returns; or
l certain disclosures of Directors’ remuneration specified by law
are not made; or
l we have not received all the information and explanations we
require for our audit.
Andrew Gordon (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditors, Southampton,
United Kingdom
28th April 2010
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Consolidated Statement of Comprehensive Income
year ended 31st December 2009
Before
Before exceptional
exceptional Exceptional items Exceptional Total
items items Total 2008 items 2008
2009 2009 2009 as restated 2008 as restated
Notes £’000 £’000 £’000 £’000 £’000 £‘000
Continuing operations
Revenue 2, 3, 4 14,493 — 14,493 16,556 — 16,556
Cost of sales (9,289) — (9,289) (11,158) — (11,158)
Gross profit 5,204 — 5,204 5,398 — 5,398
Administrative expenses 2, 5 (4,454) (900) (5,354) (4,882) (627) (5,509)
Operating profit/(loss) 2 750 (900) (150) 516 (627) (111)
Finance costs 5, 6 (344) (105) (449) (353) (20) (373)
Profit/(loss) before taxation 406 (1,005) (599) 163 (647) (484)
Taxation 8 99 139
Loss for the year attributable
to equity shareholders 7 (500) (345)
Pence Pence
Loss per share
Basic and diluted 9 (0.44) (0.30)
The prior period adjustment is explained in note 31. The 2008 restatement in the statement of comprehensive income relates only to the
reallocation of costs between cost of sales and administrative expenses.
The loss relating to the parent for the year was £431,000 (2008: £225,000).
Consolidated Statement of
Recognised Income and Expense
year ended 31 December 2009
2009 2008
Total Total
£‘000 £‘000
Exchange differences on translation of foreign operations (3) (35)
Net expense recognised directly in equity (3) (35)
Loss for the year (500) (345)
Recognised income and expense relating to the year attributable to equity shareholders (503) (380)
Prior year restatement (see note 31) (5,100)
Total recognised income and expense recognised in the year attributable to equity shareholders (5,603)
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Statement of Changes in Equity
year ended 31st December 2009
Profit
Merger and loss
Share Equity Share reserve on Translation account Total
capital reserve premium acquisition reserve deficit equity
Group £’000 £’000 £’000 £’000 £’000 £’000 £’000
At 1 January 2008 as previously
reported 5,747 110 10,753 8,603 (181) (5,501) 19,531
Prior period adjustment (see note 31) — — — — — (5,100) (5,100)
Reserves transfer — — — (5,100) — 5,100 —
At 1 January 2008 as restated 5,747 110 10,753 3,503 (181) (5,501) 14,431
Loss for the year attributable to
equity shareholders — — — — — (345) (345)
Translation differences — — — — (35) — (35)
Share adjustment (see note 22) (12) — — — — — (12)
At 1 January 2009 5,735 110 10,753 3,503 (216) (5,846) 14,039
Loss for the year attributable to
equity shareholders — — — — — (500) (500)
Translation difference — — — — (3) — (3)
At 31 December 2009 5,735 110 10,753 3,503 (219) (6,346) 13,536
The transfer of £5.1 million from the profit and loss reserve to the merger reserve relates to the impairment of the goodwill that was created on
the acquisition of HTEC Limited on which the merger reserve was created.
Profit
Merger and loss
Share Equity Share reserve on account Total
capital reserve premium acquisition deficit equity
Company £’000 £’000 £’000 £’000 £’000 £’000
At 1 January 2008 5,747 110 10,753 476 (1,397) 15,689
Loss for the year attributable to
equity shareholders — — — — (225) (225)
Share adjustment (see note 22) (12) — — — — (12)
At 1 January 2009 5,735 110 10,753 476 (1,622) 15,452
Loss for the year attributable to
equity shareholders — — — — (431) (431)
At 31 December 2009 5,735 110 10,753 476 (2,053) 15,021
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Balance Sheets
as at 31st December 2009
Group Company
2008 2007
2009 as restated as restated 2009 2008
Notes £’000 £’000 £’000 £’000 £’000
Non-current assets
Goodwill 10 12,612 12,612 12,150 — —
Development costs 11 1,007 1,113 800 — —
Property, plant and equipment 12 2,805 3,093 2,170 — —
Investments 13 — — — 17,867 17,117
16,424 16,818 15,120 17,867 17,117
Current assets
Inventories 14 1,269 1,647 1,768 — —
Trade and other receivables 15 3,060 3,061 2,720 380 148
Cash and cash equivalents 15 1,145 70 93 12 —
5,474 4,778 4,581 392 148
Total assets 21,898 21,596 19,701 18,259 17,265
Current liabilities
Trade and other payables 16 (4,421) (4,008) (3,119) (254) (167)
Current tax liabilities 17 (335) (315) (373) — —
Short-term borrowings 18 (2,218) (1,951) (888) (760) (526)
(6,974) (6,274) (4,380) (1,014) (693)
Non-current liabilities
Medium-term borrowings 18 (1,388) (1,283) (890) (1,000) (760)
Other liabilities 19 — — — (1,224) (360)
(1,388) (1,283) (890) (2,224) (1,120)
Total liabilities (8,362) (7,557) (5,270) (3,238) (1,813)
Net assets 13,536 14,039 14,431 15,021 15,452
Equity
Share capital 22 5,735 5,735 5,747 5,735 5,735
Equity reserve 28 110 110 110 110 110
Share premium 10,753 10,753 10,753 10,753 10,753
Other reserves 3,503 3,503 3,503 476 476
Translation reserve (219) (216) (181) — —
Profit and loss account deficit (6,346) (5,846) (5,501) (2,053) (1,622)
Total equity attributable to equity
shareholders 13,536 14,039 14,431 15,021 15,452
The prior period adjustment is explained in note 31.
The financial statements were approved by the Board of Directors and authorised for issue on 28th April 2010. They were signed on its
behalf by:
P Cooper
Director
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Cash Flow Statements
year ended 31st December 2009
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Cash flows from operating activities:
Operating loss
— Continuing operations (150) (111) (92) (86)
Depreciation and amortisation 1,095 692 — —
Profit on sale of fixed assets (14) — — —
Impairments 20 10 — —
951 591 (92) (86)
Movement in working capital:
Decrease in inventories 379 208 — —
(Increase)/decrease in receivables (52) (150) (232) 677
Increase/(decrease) in payables 414 533 201 (761)
Interest paid including exceptional finance costs (429) (353) (339) (139)
Tax received/(paid) 148 (3) — —
Net cash inflow/(outflow) from operating activities 1,411 826 (462) (309)
Cash flows from investing activities:
Acquisition of subsidiary undertakings — (388) — —
Purchase of plant, property and equipment (397) (1,198) — —
Expenditure on product development (327) (569) — —
Proceeds from sale of fixed assets 17 — — —
Net cash outflow from investing activities (707) (2,155) — —
Cash flow from financing activities:
Repayments of obligations under finance leases (437) (439) — —
Repayment of borrowings (765) (1,389) (668) (1,344)
New loans raised 1,573 3,134 1,150 1,600
Net cash inflow from financing 371 1,306 482 256
Increase/(decrease) in cash and cash equivalents 1,075 (23) 20 (53)
Cash and cash equivalents at beginning of year 70 93 (8) 45
Cash and cash equivalents at end of year 1,145 70 12 (8)
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Notes to the Accounts
year ended 31st December 2009
1. Significant Accounting Policies
General information
Universe Group plc is a company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered office is
given on page 11. The nature of the Group’s operations and its principal activities are set out on page 15.
In the current year, the following new and revised Standards and Interpretations have been adopted and have affected the amounts reported
in these financial statements.
Standards affecting the calculation of income or expenses:
IAS23 IAS23 is a standard that deals with the capitalisation of borrowing costs in respect of capital projects. The Group has
capitalised £13,000 of borrowing costs associated with its software development projects. No amounts have been
identified for previous periods and consequently the financial statements have not been restated for the introduction of
this standard.
Standards affecting presentation and disclosure:
IFRS8 IFRS8 is a disclosure Standard that has required further disclosure relating to the Group’s segments and which
required the allocation of Goodwill amongst the Group’s reporting segments (see note 4).
Amendments to IFRS7 The amendments to IFRS7 expand the disclosures required in respect of fair value measurements and liquidity risk.
The Group has elected not to provide comparative information for these expanded disclosures in the current year in
accordance with the transitional reliefs offered in these amendments.
At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these
financial statements were in issue but not yet effective:
IFRS1 (amended) Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate
IFRS3 (revised 2008) Business Combinations
IAS27 (revised 2008) Consolidated and Separate Financial Statements
IAS28 (revised 2008) Investment in Associates
IFRIC17 Distributions of Non-cash Assets to Owners
The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the
financial statements of the Group except for treatment of acquisitions of subsidiaries and associates when IFRS3 (revised 2008), IAS27
(revised 2008) and IAS28 (revised 2009) come into effect for business combinations for which the acquisition date is on or after the beginning
of the first annual period beginning on or after 1 July 2009.
Basis of accounting
The financial statements have been prepared under the historical cost convention and in accordance with applicable International Financial
Reporting Standards (IFRS) as adopted for use in the EU and as applied in accordance with the Companies Act 2006.
A summary of the more significant accounting policies, which have been applied consistently, is set out below.
As permitted by section 408 of the Companies Act 2006, the income statement of the Parent Company has not been separately presented in
the financial statements. The Parent Company’s result for the year is disclosed in the Company statement of changes in equity on page 21.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its
subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and
operating policies of an investee entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date
of acquisition or up to the effective date of disposal, as appropriate.
All intra-Group transactions, balances, income and expenses are eliminated on consolidation.
Going concern
The Directors have undertaken a detailed review of the financial position and financial forecasts of the Group as explained in the Directors’
Report on page 15 and on the basis of this review have continued to adopt the going concern basis in preparing the financial statements.
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1. Significant Accounting Policies continued
Goodwill
Goodwill arising on acquisition represents the excess of the fair value of the consideration given, plus associated costs, for a business, over
the fair value of the net assets acquired after accounting for identifiable intangible assets. Goodwill is initially recognised as an asset at cost
and is subsequently measured at cost less any accumulated impairment losses.
Goodwill arising on acquisition is capitalised. In respect of acquisitions prior to 1 January 2004, goodwill is included at the amount recorded
previously under UK GAAP.
In accordance with IFRS3 ‘Business Combinations’ goodwill is not amortised.
For the purpose of impairment testing, goodwill is allocated to operating segments, which are tested for impairment annually or more
frequently if impairment indicators are found. If the recoverable amount is found to be less than the carrying value, impairment is allocated
first to goodwill and then pro rata to other assets in the cash-generating unit.
Prior period restatement
The introduction of IFRS8 on Segmental Reporting has required the Group to allocate the historical goodwill associated with the HTEC
subsidiary (£17.3 million) across the operating segments contained with HTEC. Under the previous standard, IAS14 ‘Segmental Reporting’, the
Group allocated the goodwill to the entire HTEC segment. The requirement to allocate goodwill to the segments is a change of accounting
policy and consequently must be applied retrospectively resulting in the allocation being made as at 1st January 2007. Consequently, a
review of impairment was required to be undertaken for each segment and this gave rise to an impairment of goodwill within the CEM
operating segment. Please see note 31 for details of the adjustment and the impact on the relevant financial statement captions.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any
indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated
in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from
other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with
an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and
the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the
asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless
the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been
determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is
recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment
loss is treated as a revaluation increase.
Borrowing costs
Borrowing costs attributable to capital projects are capitalised during the development phase of the project. Loan issue costs are accounted
for on an accrual basis in the statement of comprehensive income and expense, and are added to the carrying amount of the instrument to
the extent that they are not settled in the period in which they arise.
Operating profit/(loss)
Operating profit/(loss) is stated after charging restructuring and other exceptional costs but before investment income and finance costs.
Exceptional Items
Costs are treated as exceptional costs when they are associated with normal activities, are of a non-recurring nature and/or are of an
exceptional magnitude that if they were not shown separately the accounts would not present a true and fair view. Management track the
performance of the business excluding these items.
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1. Significant Accounting Policies continued
Leasing
Where assets are acquired under finance leases (including hire purchase contracts), which confer rights and obligations similar to those
attached to owned assets, the amount representing the outright purchase price of such assets is included in property, plant and equipment.
Depreciation is provided in accordance with the accounting policy below. The capital element of future finance lease payments is included in
creditors and the interest element is charged to the statement of comprehensive income and expense over the period of the lease in
proportion to the capital element outstanding.
Expenditure on operating leases is charged to the statement of comprehensive income and expense on a straight-line basis.
Foreign currencies
The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it
operates (its functional currency). For the purposes of the consolidated financial statements, the results and financial position of each Group
company are expressed in pound sterling, which is the functional currency of the Company and the presentation currency for the
consolidated financial statements.
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 and
losses on translation are included in the statement of comprehensive income and expense.
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 transactions are taken to
reserves.
Pension costs
The Group operates a defined contribution scheme. The assets of the scheme are held separately from those of the Group in an
independently administered fund. The pension costs charged represent contributions payable by the Group to the fund together with the
administration charge of the fund. In addition, the Group continues to contribute to personal pension plans for certain employees.
Taxation
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the statement of
comprehensive income and expense because it excludes items of income and expense that are taxable or deductible in other years and it
further excludes items that are never taxable or deductible. The Group’s liability for tax is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the
financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance
sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are
recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be
utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or the initial
recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the
accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investment in subsidiaries and associates, and interests in
joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable
that sufficient tax profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on
tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited in the
income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in
equity.
Deferred tax assets and liabilities are offset when there is legally enforceable right to set off current tax assets against current tax liabilities
and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities
on a net basis.
Notes to the Accounts continued
year ended 31st December 2009
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1. Significant Accounting Policies continued
Property, plant and equipment
The cost of property, plant and equipment is their purchase price, together with any incidental costs of acquisition.
Depreciation is charged so as to write off the cost of property, plant and equipment less residual value, on a straight-line basis over the
expected useful lives of the assets concerned.
The principal annual rates used for this purpose are:
Computer and office equipment 25%
Operational equipment 14 – 33%
Leasehold improvements Over the lease term subject to maximum of 20 years
Assets under finance leases are depreciated over useful economic life on the same basis as owned assets or, where shorter, over the term of
the relevant lease.
Non-current assets held for sale
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs
to sell.
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction
rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group)
is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for
recognition as a completed sale within one year from the date of classification.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services
in the normal course of business, net of discounts, VAT and other sales related taxes.
Sales of goods are recognised when goods are delivered and title has passed. Revenues from service contracts are recognised evenly over
the contractual period.
Where sales of goods and services involve the provision of multiple elements such as licence fees, installation fees and maintenance fees,
the appropriate revenue recognition convention is then applied to each element. The consideration allocated to each element is measured
by reference to their fair value.
Development expenditure
Development expenditure relating to specific projects intended for commercial exploitation is capitalised as an intangible fixed asset where
the following conditions are met:
l
an identifiable asset is being created;
l it is probable that the asset created will generate future economic benefits; and
l the development cost of the asset can be measured reliably.
Such expenditure is amortised over the period during which the benefits of the project are expected to arise. Expenditure on research
activities is recognised as an expense in the period in which it is incurred.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs
and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the
weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be
incurred in marketing, selling and distribution.
Financial instruments
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual
provisions of the instrument.
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1. Significant Accounting Policies continued
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily
convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
Trade payables
Trade payables are not interest-bearing and are stated at their nominal value.
Borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including
premiums payable on settlement or redemption and direct issue costs, are accounted for on an accrual basis in the statement of
comprehensive income and expense, and are added to the carrying amount of the instrument to the extent that they are not settled in the
period in which they arise. Borrowing costs associated with capital projects are capitalised during the development phase of the project.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Trade receivables
Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated
irrecoverable amounts.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity
instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Share-based payment
The Group has applied the requirements of IFRS2 ‘Share-based Payments’. In accordance with the transitional provisions, IFRS2 has been
applied to all grants of equity instruments after 7 November 2002 that were unvested at 1st January 2005.
The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair
value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the
equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares
that will eventually vest and adjusted for the effect of non market-based vesting conditions.
Fair value is measured by use of the Black–Scholes model. The expected life used in the model has been adjusted, based on management’s
best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
Critical estimates and judgements
In the process of applying the Group’s accounting policies, which are described above, management has made the following judgements
and estimations about the future that have the most significant effect on the amounts recognised in the financial statements. The estimates
and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current
and future periods.
Impairment of goodwill
The carrying value of goodwill at the year end is £12.6 million (2008 as restated: £12.6 million). An annual impairment review is required
under IAS36 ‘Impairments of Assets’ involving judgement of the future cash flows for cash-generating units and the discount rates applied to
future cash flows in order to calculate present value. Management prepare such cash flow forecasts derived from the most recent budgets
approved by the Board.
The introduction of IFRS8 resulted in the Group allocating goodwill amongst its operating segments as explained in note 31. The key risk and
judgement for the Group relates to the impairment of the goodwill allocated.
Recoverability of capitalised development costs
The capitalisation of development expenditure is a requirement of IAS38 ‘Intangible Assets’. All capitalised and ongoing projects are
reviewed regularly to ensure they meet the criteria for capitalisation. The key judgements required by management are the judgement of the
capitalisation of development expenditure and whether it meets the criteria defined within IAS38 ‘Intangible Assets’ and the potential
impairment of the intangible assets once capitalised.
Notes to the Accounts continued
year ended 31st December 2009
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2. Operating Profit and EBITDA Before Exceptional Items
2008
2009 as restated
£’000 £’000
Revenue 14,493 16,556
Cost of sales (9,289) (11,158)
Gross profit 5,204 5,398
Administrative expenses (4,454) (4,882)
Exceptional items (900) (627)
Operating loss (150) (111)
Add back: exceptional items 900 627
Operating profit before exceptional items 750 516
Add back:
Depreciation 662 436
Amortisation 433 256
EBITDA before exceptional items 1,845 1,208
3. Revenue Analysis
Revenue consists of £2,814,000 from sales of hardware and software products and £11,679,000 from the provision of services (2008:
£8,587,000 sale of hardware and software products, £7,969,000 provision of services).
The geographical region analysis of income by origin is as follows:
2009 2008
£’000 £’000
United Kingdom 10,608 14,732
Europe 3,885 1,824
14,493 16,556
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4. Business and Geographical Segments
The Group has adopted IFRS8 Operating Segments in the year and applied this retrospectively across all reportable periods. IFRS8 requires
operating segments to be identified on the basis of internal reports about the components of the Group that are regularly reviewed by the
Chief Executive in order to allocate resources to the segments and to assess their performance. The introduction of IFRS8 has not resulted in the
Group making changes to its reporting of segmented performance other than a recategorisation of software support costs between
administrative expenses and cost of sales as detailed in note 31. The business segments recognised in the prior year complied fully with the
definition of business segments included within IFRS8.
The Group has four business segments operating within HTEC Limited and Jet Set Wash Systems Limited. All material operations are in the UK.
HTEC Limited is currently organised into three trading divisions: Universe Data Services (UDS), Manufacturing and Petrol Forecourt Solutions
(PFS). Further information is presented below on a divisional basis.
UDS Manufacturing PFS JetSet Total
2009 2009 2009 2009 2009
£’000 £’000 £’000 £’000 £’000
Revenue — all external 3,086 2,056 7,418 1,933 14,493
Gross profit 1,650 278 2,764 512 5,204
Segment expenses (691) (375) (1,120) (753) (2,939)
Segmental result 959 (97) 1,644 (241) 2,265
Unallocated central and corporate
expenses (1,515)
Operating profit before exceptional
items 750
Exceptional items (see note 5) (1,005)
Finance costs (344)
Taxation 99
Loss for the year (500)
UDS Manufacturing PFS Total
2008 2008 2008 JetSet 2008
as restated as restated as restated 2008 as restated
£’000 £’000 £’000 £’000 £’000
Revenue — all external 1,885 3,263 9,933 1,475 16,556
Gross profit 638 501 3,556 703 5,398
Segment expenses (707) (621) (1,070) (884) (3,282)
Segment result (69) (120) 2,486 (181) 2,116
Unallocated central and corporate
expenses (1,600)
Operating profit before exceptional
items 516
Exceptional items (627)
Finance costs (373)
Taxation 139
Loss for the year (345)
The prior period adjustment is explained at note 31.
It is not currently possible to present assets and liabilities on a segment basis; accordingly, this information is presented in respect of
operational subsidiaries.
Notes to the Accounts continued
year ended 31st December 2009
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4. Business and Geographical Segments continued
HTEC JetSet Head Office Total
2009 2009 2009 2009
£’000 £’000 £’000 £’000
Total assets 19,869 1,886 143 21,898
Total liabilities (5,038) (1,310) (2,014) (8,362)
Net book amount 14,831 576 (1,871) 13,536
Other information:
Depreciation and amortisation 898 197 — 1,095
Impairment of assets — 20 — 20
Capital expenditure:
Tangible assets 101 296 — 397
Intangible assets 327 — — 327
Total 428 296 — 724
HTEC Total
2008 JetSet Head Office 2008
as restated 2008 2008 as restated
£’000 £’000 £’000 £’000
Total assets 19,392 2,063 141 21,596
Total liabilities (4,746) (1,366) (1,445) (7,557)
Net book amount 14,646 697 (1,304) 14,039
Other information:
Depreciation and amortisation 616 76 — 692
Impairment of assets 10 — — 10
Capital expenditure:
Tangible assets 420 959 — 1,379
Intangible assets 569 462 — 1,031
Total 989 1,421 — 2,410
Information about major customers
Included in revenues arising from the PFS segment are revenues of approximately £2.4 million (2008: £4.2 million) which arose from sales
to the segments largest customer. Included in revenues arising from the UDS segment are revenues of approximately £3.1 million (2008: £0.6
million) which arose from sales to the segments largest customer.
5. Exceptional items
2009 2008
£’000 £’000
Administrative expenses
Group restructuring costs* 801 534
Stock write-off as a result of EU legislation — 93
Advisor fees in respect of Brulines approach 99 —
900 627
* Consisting mainly of redundancy costs and the closure of the Spanish office.
Finance costs
Refinancing costs 85 —
Interest on tax provision 20 20
105 20
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6. Finance Costs
2009 2008
£’000 £’000
Interest payable on bank loans and overdrafts 177 242
Interest payable on finance leases 92 78
Other interest 75 33
Exceptional finance costs (see note 5) 105 20
449 373
7. Loss for the Year
This is stated after charging/(crediting):
2009 2008
£’000 £’000
Cost of inventory recognised as expense 1,602 3,680
Staff costs (see note 23) (excluding redundancy costs) 6,539 8,078
Foreign exchange losses/(gains) 4 (49)
Depreciation and amortisation
— Development costs 433 256
— Tangible, owned 362 409
— Tangible, subject to finance lease 300 27
Profit on disposal of fixed assets (14) —
Research expenditure 937 967
Auditors’ remuneration (see below) 78 83
Operating lease charges — plant and machinery 406 478
Operating lease charges — property 506 515
Exceptional items (see note 5) 1,005 647
The analysis of the Auditors’ remuneration is as follows:
2009 2008
£’000 £’000
Fees payable to the Company’s Auditors for the audit of the Company’s annual accounts 25 25
The audit of the Company’s subsidiaries pursuant to legislation 35 45
Total audit fees 60 70
Other fees pursuant to legislation:
Tax compliance 10 10
Tax advisory 8 3
Total non-audit fees 18 13
Notes to the Accounts continued
year ended 31st December 2009
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8. Tax on Loss on Ordinary Activities
2009 2008
£’000 £’000
Continuing operations
Current tax:
Current year (15) 1
Adjustments to tax charge in respect of previous periods (84) (166)
(99) (165)
Deferred tax (note 21):
Prior year — 26
Total tax credit (99) (139)
Corporation tax is calculated at 28% (2008: 28.5%) of the estimated assessable profit for the year. Taxation for other jurisdictions is
calculated at the rates prevailing in the respective jurisdictions.
The credit for the year can be reconciled to the loss per the income statement as follows:
2009 2008
£’000 £’000
Loss before tax (599) (484)
Tax credit at the UK corporation tax rate of 28% (2008: 28.5%) (168) (138)
Tax effect:
Expenses not deductible in determining taxable profit 75 31
Enhanced R&D tax relief (34) (89)
Pre-acquisition losses — (21)
Capital allowances less than/(in excess of) depreciation 68 (6)
Unrelieved tax losses carried forward 44 224
Adjustments to tax charge in respect of previous periods (84) (140)
Tax credit for the current period (99) (139)
9. Loss Per Share
The calculation of the basic and diluted loss per share is based on the following data:
2009 2008
£’000 £’000
Loss for the purposes of basic and diluted earnings per share being net loss attributable
to equity holders of the parent (500) (345)
2009 2008
Number Number
’000 ’000
Number of shares
Weighted average number of ordinary shares for the purposes of basic loss per share 114,705 114,705
Weighted average number of ordinary shares for the purposes of diluted loss per share 114,705 114,705
2009 2008
pence pence
Loss per share
Basic and diluted loss per share (0.44) (0.30)
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10. Goodwill
2008
HTEC JetSet 2009 Total
Group Group Total as restated
£’000 £’000 £’000 £’000
Cost at 1 January 2009 as previously reported 17,250 462 17,712 17,250
Prior period adjustment (5,100) — (5,100) (5,100)
Cost at 1 January 2009 as restated 12,150 462 12,612 12,150
Additions — — — 462
Carrying amount at 31 December 2009 12,150 462 12,612 12,612
As stated in note 1 the goodwill has been tested for impairment in accordance with IAS36 by discounting estimated future cash flows.
The recoverable amounts of each of the CGUs are determined from value in use calculations. The key assumptions for the value in use
calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period.
Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks
specific to the CGUs. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.
Following adoption of IFRS8, the goodwill relating to the HTEC acquisition was required to be allocated to all operational segments within HTEC
whereas under IAS14 the Group previously allocated this to the HTEC entity. Consequently, the Group allocated goodwill across the three HTEC
segments and undertook impairment reviews at each reported balance sheet date based on the new allocation. As explained in notes 1 and
31 the prior period adjustment at 31st December 2007 therefore arose from this change in accounting policy. The carrying values of goodwill in
the HTEC segments are disclosed at note 31.
The Group tests for impairment by preparing cash flow forecasts derived from the most recent financial budgets approved by the Board. The future
cash flows used are those anticipated in the budget for 2010 with 3% profit growth assumed for the PFS, UDS and JetSet segments for the following
five years and no growth thereafter. The current growth rates used reflect anticipated future turnover growth; however, the Group has conducted
sensitivity analysis on the impairment tests of these segments carrying values. For these segments, the growth rate could reduce to zero percentage
points after the 2009 budget and this would still result in the carrying value being in excess of its recoverable amount. For the JetSet CGU a reduction
in the anticipated cash flows of 50 percentage points would result in the carrying value being reduced to its recoverable amount.
The Board has concluded that no impairment of goodwill is required for the PFS, UDS and JetSet operating segments.
For the manufacturing segment the implementation of IFRS8 resulted in £1.2 million of goodwill being allocated to the segment after booking an
impairment provision as explained at note 31. The future cash flows used to test for impairment in the manufacturing segment are these anticipated
in the budget for 2010 with no profit anticipated thereafter. The growth rates used reflect the current difficult economic conditions for manufacturing.
The Board has concluded that no further impairment of goodwill is required in the manufacturing segment.
The risk adjusted rate used to discount each of the CGU cash flow forecasts is 12.5% (2008: 12.5%).
11. Development Costs
2009 2008
£’000 £’000
Group
Cost
At 1 January 5,603 5,034
Additions 327 569
At 31st December 5,930 5,603
Amortisation
At 1 January 4,490 4,234
Charge for the year 433 256
At 31 December 4,923 4,490
Carrying amount
At 31 December 1,007 1,113
Development costs are tested for impairment annually and are amortised over the period during which the benefits of the development
projects are expected to arise.
Notes to the Accounts continued
year ended 31st December 2009
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12. Property, Plant and Equipment
Leasehold Plant and
Improvements Equipment Total
Group £’000 £’000 £’000
Year ended 31 December 2009
Cost
At 1 January 2009 1,085 5,487 6,572
Additions 20 377 397
Disposals — (248) (248)
At 31 December 2009 1,105 5,616 6,721
Depreciation
At 1 January 2009 383 3,096 3,479
Charge for the year 57 605 662
Impairments — 20 20
Disposals — (245) (245)
At 31 December 2009 440 3,476 3,916
Net book value
At 31 December 2009 665 2,140 2,805
At 31 December 2008 702 2,391 3,093
Year ended 31st December 2008
Cost
At 1 January 2008 1,058 4,159 5,217
Additions 27 1,181 1,208
Acquired upon acquisition — 171 171
Disposals — (24) (24)
At 31 December 2008 1,085 5,487 6,572
Depreciation
At 1 January 2008 327 2,720 3,047
Charge for the year 56 380 436
Impairments — 10 10
Disposals — (14) (14)
At 31 December 2008 383 3,096 3,479
Net book value
At 31 December 2008 702 2,391 3,093
At 31 December 2007 731 1,439 2,170
The impairment loss on plant and equipment of £20,000 is due to the closure of JetSet’s Scottish office.
The net book value of plant and equipment includes £1,017,000 (2008: £1,185,000) in respect of assets held under finance leases. The
depreciation charged on these assets during the year was £300,000 (2008: £26,000).
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13. Investments
2009 2008
Company £’000 £’000
Investments in subsidiary undertakings at 1st January 2009 17,117 17,117
Further investment into Jet Set Wash Systems Limited 750 —
At 31st December 2009 17,867 17,117
The investment in Jet Set Wash Systems Limited relates to the capitalisation of existing intercompany indebtedness and was a non-cash
transaction.
For details of principal subsidiaries see note 29.
14. Inventories
2009 2008
Group £’000 £’000
Raw materials 870 1,132
Work in progress 399 505
Finished goods — 10
1,269 1,647
There are no significant differences between the replacement costs (shown above) and the fair values.
15. Other Financial Assets
Trade and other receivables
2009 2008
Group £’000 £’000
Trade receivables 2,230 2,126
Other debtors 50 100
Prepayments and accrued income 740 745
Corporation tax receivable 40 90
3,060 3,061
2009 2008
Company £’000 £’000
Amounts owed from Group undertakings 249 —
Other debtors 50 100
Prepayments and accrued income 81 48
380 148
The average credit period taken on sales of goods and services is 41 days (2008: 46 days). No interest is charged on the receivables. Before
accepting any new customer, the Group uses an external credit scoring system to assess the potential customer’s credit quality and defines
credit limits by customer. Of the trade receivables balance at the end of the year, £757,225 (2008: £679,000) is due from the Group’s largest
customer.
Included in the Group’s trade receivable balance are debtors with a carrying value amount of £590,000 (2008: £669,000) which are past due
at the reporting date for which the Group has not made any provision as there has not been a significant change in credit quality and the
amounts are still considered recoverable. The Group does not hold collateral over these balances. Ageing of past due but not impaired
receivables is 30–60 days £455,000 (2008: £543,000), 60–90 days £34,000 (2008: £70,000) and 90 days and over £101,000 (2008: £56,000).
In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable from the
date the credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large
and unrelated. Accordingly, the Directors believe that no bad debt provision is required (2008: £nil).
Notes to the Accounts continued
year ended 31st December 2009
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15. Other Financial Assets continued
Cash and cash equivalents
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Cash and cash equivalents 1,145 70 12 —
Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less. The carrying value
of these assets is approximately equal to their fair value.
16. Trade and Other Payables
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Trade creditors 1,266 1,434 122 71
Other creditors 39 156 39 40
Accruals and deferred income 2,296 1,378 93 56
Other taxation 820 1,040 — —
4,421 4,008 254 167
Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period
taken for trade purchases is 66 days (2008: 62 days).
The Directors consider that the carrying amount of trade payables approximates to their fair value.
17. Current Tax Liabilities
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Corporation tax 335 315 — —
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18. Borrowings
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Unsecured — at amortised cost
Current
Bank overdrafts — — — 8
Directors and management loans (iv) 229 275 — —
Secured — at amortised cost
Current
Bank loans (i) 760 540 760 518
Finance lease liabilities (ii) 324 350 — —
Invoice discounting (iii) 905 786 — —
Non-current
Bank loans (i) 1,000 760 1,000 760
Finance lease liabilities (ii) 388 523 — —
3,606 3,234 1,760 1,286
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
The borrowings are repayable as follows:
On demand or within one year 2,218 1,951 760 526
In the second to fifth years inclusive 1,388 1,283 1,000 760
3,606 3,234 1,760 1,286
(i) Bank loans consist of two separate term loans. They are secured by a first charge over all undertakings and assets of the Group. The
weighted average interest rate paid in 2009 was 9.84% (2008: 8.76%). The original term loan bears interest based on a fixed rate of
5.33% plus a risk margin of 3.35%. At 31 December 2009 £760,000 was drawn on this loan and is being repaid on a monthly basis with
final payment due in April 2011. The second loan, of £1,000,000, was drawn during the year and bears interest at 10% over HBOS bank
rate. This loan is repayable in 60 instalments commencing in April 2011.
At the year end the Group was in breach of the net worth covenant attached to the original term loan. This breach has been waived
subsequent to the year end, but in accordance with IAS1 the amount outstanding on the loan is shown as current. The amount of the loan
consequently shown as current but actually to be paid in 2011 is £242,000.
(ii) Finance lease liabilities are secured by the assets leased. The average lease term is five years. For the year ended 31 December 2009, the
average effective borrowing rate was 7.9% (2008: 8.8%). Interest rates are fixed at the contract date. All leases are on a fixed repayment
basis and no arrangements have been entered into for contingent rental payments.
(iii) The invoice discounting facility is secured on the trade receivables of HTEC Limited and bears interest at an effective rate of 6% (2008: 6%).
(iv) The Directors and management loans are unsecured and bear interest at 15% (2008: 15%).
All borrowings are denominated in sterling.
The Directors consider that the carrying amount of the bank loans and finance lease obligations approximates to their fair value.
At 31 December 2009, the Group had available £100,000 (2008: £310,700) of undrawn committed borrowing facilities in respect of which all
conditions precedent had been met.
The bank overdraft and bank loans are secured by a debenture over the assets of the Group and are subject to certain covenants in respect
of interest cover, cash flow cover and net asset value.
Notes to the Accounts continued
year ended 31st December 2009
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19. Other Liabilities
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Amounts owed to Group undertakings — — 1,224 360
20. Financial Instruments
Capital risk management
The Group manages its capital to ensure that entities within the Group will be able to continue as going concerns while maximising the return
to stakeholders through the optimisation of the debt and equity balance.
The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 18, cash and cash equivalents, and equity
attributable to shareholders of the parent, comprising issued share capital, reserves and retained earnings as disclosed on page 21.
Gearing ratio
The Group regularly reviews the capital structure. As part of this review, it considers the cost of capital and the risks associated with each
class of capital.
The gearing ratio at the year end is as follows:
2008
2009 as restated
£’000 £’000
Debt* 3,606 3,234
Cash and cash equivalents (1,145) (70)
Net debt 2,461 3,164
Equity
†
13,536 14,039
Net debt to equity ratio 18.2% 22.5%
* Debt is defined as medium and short-term borrowings, as detailed in note 18.
†
Equity includes all capital and reserves of the Group attributable to equity holders of the parent.
Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the
basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are
disclosed in note 1 to the financial statements.
Categories of financial instruments
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Financial assets:
At amortised cost:
Cash 1,145 70 12 —
Trade receivables 2,230 2,126 — —
3,375 2,196 12 —
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20. Financial Instruments continued
Categories of financial instruments
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Financial liabilities:
At amortised cost:
Bank overdrafts — — — 8
Trade payables 1,266 1,434 122 71
Invoice discounting loan 905 786 — —
Bank loans 1,760 1,300 1,760 1,278
Directors and management loans 229 275 — —
Finance lease obligations 712 873 — —
4,872 4,668 1,882 1,357
The revised IFRS7 requires that an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped
into Levels 1 to 3 based on the degree to which the fair value is observable, is given. The levels are as follows:
l Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
l Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
l Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not
based on observable market data (unobservable inputs).
The Group’s financial instruments, recognised at fair value, all fall into the Level 1 categorisation.
Financial risk management objectives
The Group’s operations expose it to a variety of risks including the effect of changes in interest rates on debt, credit risk and liquidity risk. In
2009 the Group did not have significant risk on foreign currency.
Neither the Company nor the Group has material exposures in any of the areas identified above and consequently they do not use derivative
instruments to manage these exposures.
Market risk
The activities of the Company and Group primarily expose them to the financial risks of changes in interest rates (see below). The Group does
transact business in euros and US dollars but at approximately 10% of turnover the exchange risk is small.
Interest rate management
The Company and the Group are exposed to interest rate risk as entities in the Group borrow funds at floating interest rates. The Group
continually reviews the appropriateness of fixing interest rates on its borrowings.
The Company and the Group’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk
management section of this note.
Interest rate sensitivity
The sensitivity analysis below has been determined based on the exposure to interest on the financial instrument balances at the reporting
date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period.
At the reporting date, if interest rates had been 1% higher/lower and all other variables were held constant, the Group and Company’s net
loss and equity reserves for the year ended 31 December 2009 would increase/decrease by £11,000 (2008: £8,000). This is mainly
attributable to the Group and Company’s exposure to interest rates on its variable rate borrowings. A 1% movement in basis points has been
used as this provides a benchmark against which to measure any future interest rate movements.
Notes to the Accounts continued
year ended 31st December 2009
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20. Financial Instruments continued
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group’s
policy is to only deal with creditworthy counterparties, carrying out background checks before any new accounts are opened so as to mitigate
the risk of financial loss from defaults. The Group’s exposure and the credit ratings of its counterparties are monitored regularly with no
significant concentration of credit risk with a single counterparty. Credit exposure is controlled by counterparty limits that are reviewed and
approved by senior management as and when necessary, but at a minimum annually.
The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the Group’s
maximum exposure to credit risk.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of Directors, which reviews and manages the Group’s short and
medium-term funding and liquidity requirements on a regular basis. The Group manages liquidity risk by maintaining adequate reserves,
banking facilities and reserve borrowing facilities by regularly monitoring forecast and actual cash flows whilst attempting to match the
maturity profiles of financial assets and liabilities.
As noted within the Directors’ Report on page 15, there were breaches of the loan covenant during the year that were waived by the bank.
One of the key liquidity risks is to ensure ongoing compliance with banking covenants. Subsequent to the year end the bank have removed all
covenants from the loan facilities.
The following table details the Company and the Group’s remaining contractual maturity for its non-derivative financial liabilities. The table has
been drawn up based on the undiscounted contractual maturities of the financial liabilities including interest that will accrue to those liabilities.
Weighted
average Less More
effective than 1 to 6 6 months 1 to than
Group rate 1 month months to 1 year 3 years 3 years Total
2009 % £’000 £’000 £’000 £’000 £’000 £’000
Non-interest bearing:
Trade payables — 983 283 — — — 1,266
Fixed interest:
Finance leases 7.9 30 170 167 402 — 769
Bank loan (see below) 9.7 836 — — — — 836
Directors’ loans 15.0 — 29 — 260 — 289
Variable interest:
Invoice discounting 6.0 910 — — — — 910
Bank loan 10.5 9 45 54 433 956 1,497
2,768 527 221 1,095 956 5,567
Weighted
average Less More
effective than 1 to 6 6 months 1 to than
rate 1 month months to 1 year 3 years 3 years Total
2008 % £’000 £’000 £’000 £’000 £’000 £’000
Non-interest bearing:
Trade payables — 1,240 194 — — — 1,434
Fixed interest:
Finance leases 8.8 44 200 137 592 — 973
Bank loan 8.8 46 237 294 870 — 1,447
Directors’ loans 15.0 — 86 220 — — 306
Variable interest:
Invoice discounting 6.0 790 — — — — 790
2,120 717 651 1,462 — 4,950
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20. Financial Instruments continued
Weighted
average Less More
effective than 1 to 6 6 months 1 to than
Company rate 1 month months to 1 year 3 years 3 years Total
2009 % £’000 £’000 £’000 £’000 £’000 £’000
Non-interest bearing:
Trade payables — 122 — — — — 122
Fixed interest:
Bank loan (see below) 9.68 836 — — — — 836
Variable interest:
Bank loan 10.5 9 45 54 433 956 1,497
967 45 54 433 956 2,455
Weighted
average Less More
effective than 1 to 6 6 months 1 to than
rate 1 month months to 1 year 3 years 3 years Total
2008 % £’000 £’000 £’000 £’000 £’000 £’000
Non-interest bearing:
Trade payables — 40 31 — — — 71
Variable interest:
Bank loan 8.8 45 232 276 860 — 1,413
85 263 276 860 — 1,484
Group and Company
At 31 December 2009 the Group was in technical breach of one covenant associated with the fixed interest bank loan. Accordingly, the whole
amount outstanding has been shown within amounts due in less than one month. As the breach has been waived subsequent to the year
end the actual repayment profile of this loan including interest is:
£’000
Due in less than one month 49
Due in 1 to 6 months 251
Due in 6 months to 1 year 265
Due in 1 to 3 years 271
836
Notes to the Accounts continued
year ended 31st December 2009
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20. Financial Instruments continued
The following table details the Group’s and the Company’s expected maturity for its non-derivative financial assets. The table has been drawn
up based on the undiscounted contractual maturities of the financial assets excluding interest that will be earned on those assets except
where the Company or Group anticipates that the cash flow will occur in a different period.
Weighted
average Less
effective than 1 to 6 6 months 1 to
Group rate 1 month months to 1 year 3 years Total
2009 % £’000 £’000 £’000 £’000 £’000
Variable interest:
Cash 1.0 1,145 — — — 1,145
Non-interest bearing:
Trade receivables — 1,545 685 — — 2,230
2,690 685 — — 3,375
Weighted
average Less
effective than 1 to 6 6 months 1 to
rate 1 month months to 1 year 3 years Total
2008 % £’000 £’000 £’000 £’000 £’000
Variable interest:
Cash 1.0 70 — — — 70
Non-interest bearing:
Trade receivables — 668 1,458 — — 2,126
738 1,458 — — 2,196
Weighted
average Less
effective than 1 to 6 6 months 1 to
Company rate 1 month months to 1 year 3 years Total
2009 % £’000 £’000 £’000 £’000 £’000
Cash 1.0 12 — — — 12
Weighted
average Less
effective than 1 to 6 6 months 1 to
rate 1 month months to 1 year 3 years Total
2008 % £’000 £’000 £’000 £’000 £’000
Cash 1.0 — — — — —
The fair value of the Group‘s financial assets and liabilities is not materially different from the carrying values in the balance sheet.
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21. Deferred Tax
The movement on the net provision for deferred taxation is as follows:
2009 2008
£’000 £’000
Net provision at 1st January — (26)
Credit to income statement — 26
At 31st December — —
At the year end £166,000 (2008: £87,000) of fixed asset timing differences have not been recognised as a deferred tax asset.
At the balance sheet date, the Group has unutilised tax losses of £2,600,000 (2008: £2,082,000) available for offset against future profits. A
deferred tax asset has not been recognised in respect of these losses due to the uncertainty of future profits.
22. Called Up Share Capital
2009 2008
Group and Company £’000 £’000
Authorised
155,000,000 ordinary shares at 5p each (2008: 155,000,000) 7,750 7,750
Allotted, called up and fully paid:
114,704,539 ordinary shares of 5p each (2008:114,704,539) 5,735 5,735
The Company has one class of ordinary shares which carry no right to fixed income.
In 2007 closing share capital was overstated by £12,376 (247,516 ordinary shares of 5p each) in respect of matching shares acquired to
satisfy obligations of the LTIP scheme. This error was corrected in 2008.
Allotments for cash made in 2009
No allotments of shares for cash were made in 2009 (2008: none).
Share options
No share options were awarded to Directors in 2009 (2008: none).
Long Term Investment Plan (‘LTIP’)
No shares were awarded as matching shares under the LTIP in 2009 (2008: none).
Notes to the Accounts continued
year ended 31st December 2009
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23. Employees and Directors
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Wages and salaries 5,757 7,183 140 140
Social security costs 578 750 14 14
Pension costs 204 145 11 11
Redundancy costs (see note 5) 511 534 — —
7,050 8,612 165 165
2009 2008 2009 2008
No. No. No. No.
The average number of people (including Executive Directors)
employed during the year:
HTEC 174 209 — —
JetSet 29 35 — —
Head Office 3 3 2 2
206 247 2 2
2009 2008
Emoluments paid to the highest paid Director were as follows: £’000 £’000
Aggregate emoluments 125 126
Company pension contribution to money purchase schemes 11 11
136 137
There were two Directors (2008: two) to whom retirement benefits accrued under money purchase schemes during the year.
Further details of the Directors’ remuneration are included in the Directors’ Remuneration Report on pages 12 and 13.
24. Pension Commitments
The Group operates a defined contribution scheme. The assets of the scheme are held separately from these of the Group in funds under the
control of investment managers. The pension costs charged represent contributions payable by the Group to the fund amounting to £203,901
(2008: £145,493), together with the administration charge of the fund. In addition, the Group continues to contribute to personal pension plans
for certain of its employees. As at 31st December 2009 contributions of £46,000 (2008: £41,000) due in respect of the current reporting period
had not been paid over to the scheme.
25. Operating Lease Commitments
At 31st December 2009 the Group has lease agreements in respect of properties, vehicles, plant and equipment, for which payments extend
over a number of years.
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating
leases, which fall due as follows:
2009 2008
Plant and Plant and
Property Machinery Total Property Machinery Total
£’000 £’000 £’000 £’000 £’000 £’000
Within 1 year 420 180 600 511 211 722
Between 2 to 5 years 1,636 52 1,688 1,636 203 1,839
After 5 years 3,988 — 3,988 716 — 716
Total 6,044 232 6,276 2,863 414 3,277
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26. Contingent Liabilities
The Group has given a duty deferment guarantee to HMRC of £5,000 (2008: £5,000).
27. Capital and Other Financial Commitments
As at 31st December 2009 the Group had not entered into any contracts for future capital expenditure (2008: nil).
28. Share-based Payments
Summary of share option schemes in operation during the year
The Directors’ Remuneration Report on page 13 describes the plans to which IFRS2 applies. In summary, the Group operated the following
plans during the period:
l Enterprise Management Incentive (‘EMI’) Plan
l Discretionary Unapproved Share Option Plan
l The Group recognised a total expense of £nil in 2009 (2008: £nil).
Equity-settled share option schemes
The exercise price of options granted under the EMI and unapproved share option plans was set at the market value at the date of grant, that
is the price which equates to the closing middle market quotation for the shares on AIM on the date of grant. Consequently, no table of
assumptions is shown below.
The options are not subject to any performance conditions and vested immediately upon grant. Where options remain unexercised after a
period of ten years from the date of grant the options expire. Moreover, the options will lapse in the case of termination of employment,
subject to the good leaver provisions or the Remuneration Committee exercising its discretion to permit options to be exercised.
The total number of shares under option is as follows:
Weighted
Number of average
share options exercise price
Unapproved share options No. £
Outstanding at beginning of period 1,250,000 0.08
Granted during the period — —
Forfeited during the period — —
Exercised during the period — —
Outstanding at the end of the period 1,250,000 0.08
Exercisable at the end of the period 1,250,000 0.08
Options granted under the plan vest immediately. All acquisitions under the plan are equity-settled.
Weighted
Number of average
share options exercise price
EMI No. £
Outstanding at beginning of period 2,500,000 0.08
Granted during the period — —
Forfeited during the period — —
Exercised during the period — —
Outstanding at the end of the period 2,500,000 0.08
Exercisable at the end of the period 2,500,000 0.08
Options granted under the plan vest immediately. All acquisitions under the plan are equity-settled.
Notes to the Accounts continued
year ended 31st December 2009
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29. Principal Subsidiaries and Joint Ventures
Place and Date Issued and Fully Paid
Name of Incorporation Share Capital Percentage Held Business
HTEC Group Limited England and Wales Ordinary £1 100% held Holding company
HTEC Limited* England and Wales Ordinary 1p 100% held Manufacture and development
Convertible redeemable of payment and information
preference £1 systems
High Technology* Spain Ordinary e6 100 % held Dormant
Electronic Clearance SL
HTEC Limited* Portugal Branch, no share capital 100% held Management of information
systems
Jet Set Wash Systems Limited England and Wales Ordinary £1 100% held Manufacture and retail of
forecourt valeting equipment
WSF Services Limited* Scotland Ordinary £1 100% held Dormant
Prepaid Card Management England and Wales A / B shares £0.01 50% held Provision of prepaid
Limited* cash card services
* Investments held in a subsidiary company.
All the above companies are included in the consolidated Group results.
30. Related Parties
T ransactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. Transactions
between the Company and its subsidiaries are disclosed below.
During the year, the Company entered into the following transactions with its subsidiaries, which are related parties:
Amounts recharged to subsidiaries
2009 2008
£’000 £’000
HTEC Limited 396 396
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30. Related Parties continued
Loans from two Directors, totalling £200,000 (2008: £275,000) at the year end, were provided to assist with growth of the newly acquired
subsidiary, Jet Set Wash Systems Limited. Amounts owing at the balance sheet date were as follows:
Capital Interest Interest
outstanding at paid accrued at
31 December during 31 December
2009 the year 2009
£’000 £’000 £’000
J R Scholes 100 25 4
M Coster 100 21 4
200 46 8
Interest paid on the Director loans during the year included £20,000 accrued from the prior year.
Loan repayment is conditional upon the agreement of the Company’s bankers.
Loans from two Directors and two members of the Management team, totalling £29,000 (2008: £nil) at the year end, were provided to assist
with the matched funding requirement of a short-term loan taken out during the year. This short-term loan was repaid prior to the year end,
and consequently the loans provided by the Director and management are now repayable. Amounts owing to Directors at the balance sheet
date were as follows:
Capital Interest Interest
outstanding at paid accrued at
31 December during 31 December
2009 the year 2009
£’000 £’000 £’000
P Cooper 7 — —
R J Smeeton 7 — —
14 — —
The loans are repayable during 2010.
Remuneration of key personnel
Details of the remuneration of the Directors, who are the key management personnel of the Group, is provided in aggregate for each of the
categories specified in IAS24 ‘Related Party Disclosures’ in the Directors’ Remuneration Report on page 13.
Notes to the Accounts continued
year ended 31st December 2009
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31. Prior Year Adjustments
(1) Goodwill
The Group has restated the carrying value of goodwill associated with the HTEC subsidiary. This is as a result of the adoption of IFRS8 which
requires goodwill to be allocated to operating segments.
The transitional provisions of IFRS8 permitted the allocation of goodwill as at 1st January 2007, the date at which the Group introduced
segmental reporting of the three segments currently recognised within the HTEC subsidiary.
Goodwill has been allocated based upon value in use calculations for the three segments reflecting their operational cash flows in 2007.
The results of this exercise are to allocate goodwill and the subsequent impairment across the segments as follows:
PFSManufacturing UDS Total
£’000 £’000 £’000 £’000
At 31 December 2007 9,228 6,334 1,688 17,250
Impairment — (5,100) — (5,100)
Carrying value at 31 December 2007 9,228 1,234 1,688 12,150
Impairment testing of these balances indicates that a £5.1 million write-off of goodwill in the manufacturing segment would have been
required as at 31st December 2007, and this has been booked as a prior year period adjustment to the closing reserves at 31st December
2007. Consequently, the balance sheet at 31st December 2007 on page 22 has been restated as it arises from the adoption of a new
accounting standard. This gives rise to the restatement of previous year’s net assets as follows:
Goodwill and
profit and loss
reserve
£’000
Adjustment to opening net assets at 1 January 2008 and January 2009 (5,100)
(2) Categorisation of costs
The introduction of IFRS8 Segmental Reporting led to a review of cost classifications. Consequently, the Group will now recognise the cost of its
software engineering department as a component of cost of sales. In previous years these costs have been included within administrative
expenses and the comparative information for the year ended 31st December 2008 has been restated to reflect this revised treatment. This
gives rise to the restatement of prior year cost of sales and administrative expenses as follows:
Before Exceptional 2008
exceptional items items Total
£’000 £’000 £’000
(Increase) in cost of sales (970) — (970)
Decrease in administrative expenses 970 — 970
05
Universe Group plc
Annual Report 2009
Stock code: UNG
49
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Universe Group plc
Southampton International Park
George Curl Way
Southampton
Hampshire
SO18 2RX
United Kingdom
www.universeplc.com
t: +44 (0)23 8068 9510
f: +44 (0)23 8068 9201
Universe Group plc is Registered in England.
Registered No. 2639726
17475UNIVERSE_Cvr.indd 4 17475UNIVERSE_Cvr.indd 4 13/05/2010 14:18 13/05/2010 14:18 | 05
Universe Group plc
Annual Report 2009
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07
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Chief Executive’s Report
In the face of the most severe global economic downturn in recent
years the focus for 2009 was necessarily improving profitability, cash
flow and developing recurring revenue streams. Growth was
inevitably affected by capital expenditure freezes within much of our
customer base as well as by the continuing squeeze on available
debt finance. Underlying operational profitability before exceptional
items improved as a result of tough cost reductions. These actions
will continue to improve profitability and cash flow and will ensure
that full advantage can be taken in any future economic upturn.
Financial Performance Review and Key Performance Indicators
The Group recorded an overall loss before taxation of £599,000
(2008: loss of £484,000) which was significantly impacted by
£1,005,000 of exceptional items. This mostly related to £801,000 of
restructuring costs reflecting cost-cutting programmes in our
manufacturing operation, and the closure of our Spanish office.
Whilst an increasing loss is disappointing, the exceptional costs
incurred were necessary to allow the Group to meet the twin
challenges of a business in transition and a difficult economic
environment. Levels of cost remain under review at all times;
however, the main foreseeable restructuring costs have now been
incurred.
The early action taken on cost reduction reduced overhead costs by
9% to £4,454,000 (2008: £4,882,000) and provided the platform for
a 45% increase in operating profit, before exceptional items, to
£750,000 (2008: £516,000). This was against the disappointment of
a revenue decrease of 12.5% resulting from the economic recession.
Despite this, gross margins grew to 35.9% from 32.6% in the prior
year. Operating margin, before exceptional items, rose to 5.1% from
3.1% in 2008 and is moving towards our goal of exceeding 10%.
Profit before tax and exceptional items increased by 149% to
£406,000 (2008: £163,000).
The 53% growth in EBITDA (as calculated in note 2) from £1,208,000
to £1,845,000 demonstrates that progress continues to be made in
improving operational cash generation. Investment in fixed assets
over the last two years has changed the Group’s cost structure,
increasing the total depreciation and amortisation charge by
£403,000 from the prior year. Whilst investment will continue, the
asset base is now in place that will allow the Group to deliver
growth.
The Board will continue to monitor revenue change, operating profit,
cash generation and customer satisfaction as key performance
indicators. Service excellence has become an essential element in
customer relationships with demands for improved service level
agreement (SLA) targets being widespread. Overall SLAs for 2009
were 94% (2008: 96%) which are above contractual requirements.
Contracted service revenues are a key element of PFS sales and
requests from an increasing number of customers are being made
for a 24/7 service.
Universe Data Systems (UDS)
The segmental reporting breakdown shows an increase in revenue
of 63% for the year to £3,086,000 (2008: £1,885,000) which in turn
drove segmental profit to £959,000 (2008: loss of £69,000).
During the later part of 2008 UDS began the roll-out of what is
believed to be the largest and only truly global real time loyalty
scheme. Early 2009 saw the web based system go live in four
European countries with licence arrangements for more to come on
stream in future periods. In excess of 100 million transactions have
been processed by our data centre for the first year and significant
ongoing revenue streams will accrue from the initial five year
agreement.
Currently the PCIDSS approved data centre handles £8 billion worth
of transactions per year and has loyalty schemes with up to 14
million members operating in a real time environment. HTEC
provides Mission Critical Services to two of the UK’s supermarket
groups and four of the major oil companies, either in the UK or
Europe.
Progress has been made during the year to establish UDS outside
the petrol and oil industry. Partnerships and alliances with market
specialists are continuing to introduce exciting new opportunities as
UDS is positioned as a data handling platform in the extended
loyalty and customer relationship management (CRM) space.
Long sales cycles remain a feature of loyalty systems projects but a
growing number of interesting opportunities are now presenting
themselves, which indicate strong future potential based on a
recurring revenue model. The SaaS (software as a service) model of
operation gives increasing benefits to both customer and supplier
as utilisation of capacity increases.
During the year, development was completed on the automatic
number plate recognition software (ANPR) range enabling
agreements to be signed with five channel partners in the latter part
of 2009. The HTEC data centre can hold and process data with
reference to a central database for partners dependent on the
application. The rapidly increasing market for surveillance and
security products will provide a growing sales channel for future
years. The ANPR product range now includes forecourt drive off
control, car park barrier control, visitor systems and a central on-line
warning list database.
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Annual Report 2009
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Chief Executive’s Report continued
Petrol Forecourt Systems (PFS)
The PFS business segment produced £1,644,000 (2008: £2,486,000)
of profit and remains the Group’s largest and most profitable
segment despite a 25% fall in turnover. Prior year sales and profit
benefited from a major supermarket payment terminal roll-out but
excluding that, underlying sales were up 15% compared to 2008.
Recurring contract business is in excess of 70% of turnover for this
segment.
The core solutions of the PFS business relate to the supply of point of
sale (POS) payment systems and wet stock management reporting.
HTEC has occupied a prominent position in the UK forecourt
managed services market for a number of years and its systems
currently run the petrol forecourts of two major supermarket chains
and over 33% of all UK forecourts have HTEC equipment on them.
Development of the software continues in order to improve
functionality for the growing convenience store market, and to allow
easier integration with other third party products.
HTEC has a wide range of end to end approvals to handle bank and
fuel payment cards and will continue to be a market leader for this
type of payment processing. HTEC’s payment terminals are
recognised as some of the most secure within the industry, meeting
the challenges posed constantly from card fraud criminals.
Investment in the next generation payment terminal which will begin
roll-out in 2010 has been carefully controlled to give a rapid payback
to the Group.
Disappointingly, 2010 saw a fall in turnover as customers cut back
on new project spending. I can however report that we renewed a
significant long-term contract with Morrisons for enhanced services
supporting its store IT replacement project.
New outdoor payment terminal roll-outs were particularly badly
affected last year as capital expenditure plans were put on hold.
This product is however now opening up new markets related to
airfields, marinas and commercial truck stops.
Manufacturing (CEM)
The traditional core business of HTEC, subcontract design and
manufacture, has over a number of years been in decline.
Continued monitoring showed that although it was loss making at
the pre-tax level, it did have a positive contribution to fixed
overheads so an immediate disposal was ruled out as impractical
because of the requirement to supply components for other
segments of the Group.
Revenue continued to decline in 2009 to £2,056,000 (2008:
£3,263,000). Whilst the cost base was significantly reduced to
ensure a positive contribution to fixed overheads, a loss at the
operating profit level was recorded of £97,000 (2008: loss
£120,000). Encouragingly the economic challenges last year have
actually benefited this part of the business and new customers are
creating welcome opportunities early in 2010.
JetSet
The financial crisis which began in 2008 continued to seriously affect
the JetSet business. The market became increasingly tough as
capital expenditure was cut back and asset finance to support
machine placement was still both difficult to obtain and
unreasonably expensive. Despite the conditions, turnover increased
by 31% to £1,933,000 (2008: £1,475,000). However, due to having to
operate the production facility in Bedford at below capacity,
operating losses increased to £241,000 (2008: loss of £181,000),
particularly weighted to the earlier part of the year.
By Q4 of 2009 JetSet was EBITDA positive and, with an improved
trading environment, has a high expectation of achieving regular
and sustainable profitable trading. Visibility of potential prestigious
future contracts with existing Group customers demonstrates that
the business has growth potential assuming new asset funding
avenues are available.
The concept of revenue share from equipment owned by JetSet and
sited on the customers’ premises has already resulted in the
winning of contracts from customers such as ASDA, Co-op and BP,
clearly demonstrating the cross selling opportunity from other
Universe business units.
Prior year adjustment in respect of Goodwill
The introduction of IFRS8 on Segmental Reporting has required the
Group to allocate the historic goodwill associated with the HTEC
subsidiary (£17.3 million) across the operating segments contained
within HTEC. A significant proportion of this goodwill (£6.3 million)
has necessarily been allocated to the historic Manufacturing
segment. The requirement to allocate goodwill to the segments is a
change of accounting policy and consequently must be applied
retrospectively, resulting in the allocation being made as at
1st January 2007. Cash flow forecasts for the segment, at that time,
would not support the carrying value of the goodwill allocated to
Manufacturing and consequently an impairment provision of £5.1
million would have been required had impairment been measured
on a segmental basis in 2007. Consequently, a £5.1 million provision
has been booked in 2009 and treated as a prior year adjustment.
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Annual Report 2009
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09
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Balance Sheet, Cash Flow, Banking Facilities and Going Concern
During 2009 the priority has been to generate cash and to improve
the debt repayment profile of the Group’s borrowings. By the year
end net borrowings (debt less cash) had dropped from £3.2 million
to £2.5 million, and the repayment profile had improved significantly,
with 73% of net borrowings due in more than one year (2008: 45%).
Debt repayment will remain a significant drain on the Group’s cash
flow in 2010, with scheduled repayments due of £858,000, but this
debt repayment burden is scheduled to drop significantly in 2011.
Overall the Group generated £1.1 million of cash during the period.
Clearly the negotiation of a new long-term loan from our bankers
was a significant part of that, but in reality most of these proceeds
served to refresh facilities that have been paid down over the last
two years on an accelerated schedule. Net proceeds from financing
activities were £371,000, with the balance of the cash arising from
£1.4 million generated by the operation, net of the £707,000
invested into software product development and an expansion of
the JetSet revenue share estate.
During the year the Group breached one of its banking covenants, in
respect of the net worth of the Group which has been significantly
impacted by the goodwill impairment referred to above. All other
covenants were met, and the breach has been subsequently waived
by HBOS. HBOS has also agreed to remove covenants from both
loans going forward, and compliance with the loan terms now rests
on the ability to repay loan instalments as they fall due. The Directors
have reviewed financial forecasts for the business covering the 12
months from the date of this report and are confident that the
repayment schedule will be satisfied and that the Group will be able
to operate within its current banking facilities. As a result, the
Directors have continued to adopt the going concern basis in
preparing the financial statements.
Outlook
The strategy of the management team is to grow and transform the
Group from lower margin product sale and manufacturing activity to
a software and services business with associated recurring revenue
targeted at tier 1 businesses. Dealing with the burdensome debt
structure, limited funding for investment and an inappropriate
operational structure has been a difficult task. Restructuring
write-offs have been higher than expected and new product
development has been hindered by ongoing support requirements
from legacy products.
2010 sees us go into a year where the cost structure has been
significantly improved by the actions taken in 2008/9, new products
have been added to the portfolio and the economy is emerging
from a deep recession. The Group is now better placed to deliver
growth and profitability. 2010 will see further debt reduction and by
the end of this year our debt repayment profile will have improved
significantly.
The sales pipeline for UDS continues to grow and strategic
partnerships within the loyalty/CRM field are beginning to generate
significant new opportunities. The PFS business is maintaining its
market leading position and is seeing growth opportunities from its
major customers. JetSet has the potential to move into profit this year
and reach critical mass for equipment placements.
Paul Cooper
Chief Executive Officer
28th April 2010
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Annual Report 2009
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01
17475 11/05/2010 Proof 2
Revenue
by 12.5% to £14.5m (2008: £16.6m)
Decreases
Gross margin
to 36% (2008: 33%)
Increases
Operating profit* *
to £0.8m (2008: £0.5m)
Increases
20
19
18
17
16
15
14
13
12
11
10
2007
13.2
2006
11.3
2008
16.6
2009
14.5
Revenue
£m
*before exeptional items
1000
900
800
700
600
500
400
300
200
100
0
2007
842
2008
516
2006
656
2009
750
Operating profi t*
£’000
Highlights
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Annual Report 2009
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Chairman’s Statement
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Introduction
As reported in the interim results, 2009 has seen a period of weak
demand from our major customers and this has been a difficult
backdrop against which to continue the transition of the Group from
manufacturer to solutions provider.
Nevertheless, despite the poor economic climate, I am delighted to
be able to report that the benefits of this transition have allowed the
Group to show improved underlying profitability despite reduced
turnover. Operating profit, before exceptional items, increased by
45% in 2009 to £750,000 (2008: £516,000). EBITDA before
exceptional items grew in the same period by 53% to £1,845,000
(2008: £1,208,000).
Exceptional items totalling £1,005,000 were incurred during the year
mainly as a result of further restructuring of the Group. These costs
contributed to an overall loss before taxation of £599,000 (2008:
loss of £484,000).
The highlight of the year was undoubtedly the signing of an
enhanced contract with Wm Morrison Supermarkets plc. Morrisons
is a long-established and valued customer of the Group and we are
delighted to extend that relationship into the foreseeable future.
Results
The impact of weak demand saw Group turnover fall by 12.5%
compared to the prior year. This is a larger fall than reported at the
half year, but was expected given the strength of demand
experienced in late 2008. Turnover in the second half was slightly
less than reported in the first half (3% down) but operating
profitability was higher in the second half, as a result of the cost
reductions implemented earlier in the year.
With an improvement in the sales mix, gross margin percentage
increased to 35.9% from 32.6% in the prior year, reflecting the
benefits of the move from manufacturing to services and the
consequent restructuring of the business. Savings in our operational
cost base have been made and Group headcount has been
reduced by 17% during the course of the year, resulting in a
reduction in staff costs of 19%. It is also worthy of note that two
of the Group’s four segments actually grew their turnover during
the year.
Operating profit, before exceptional items, represents a 5.1%
operating margin, compared to 3.1% in 2008. The 9% reduction in
administrative costs was a significant component of this
improvement.
During the year we incurred significant restructuring costs of
£801,000 (2008: £534,000), as we continued the transition from
manufacturing to solutions provider. Incurring these costs enables
the Group to proceed with a much reduced cost base and
enhanced operational gearing. As the wider business community
recovers confidence and normal levels of capital expenditure
resume, the Board anticipates that this reduced cost base should
allow the Group to benefit from a recovery in demand for our
products and services. We continue to pay close attention to our cost
base, although we would not expect further exceptional costs of the
scale reported here in the foreseeable future.
Approach by Brulines Group plc
The approach by Brulines Group plc was a significant event during
the year. Whilst we remain in an offer period there is no agreement
for Brulines to undertake any due diligence on the Company.
However, it is also worth noting the impact on trading that an
approach of this sort can have. The requirement to obtain Brulines’
consent resulted in a frustrating and unavoidable delay in signing
the Morrisons’ contract. This delay impacted 2009’s results, and in
addition significant costs were incurred primarily relating to
increased advisers’ fees.
The approach from Brulines continues to be a significant distraction
for the management team whose main focus has to be guiding the
Group through these difficult economic conditions. It is worth
repeating here that the Directors remain committed to delivering
value to all of the Group’s shareholders.
Annual General Meeting
At the 2009 Annual General Meeting a proposed resolution to allow
the Group to issue share options or to raise funds via a placing did
not receive sufficient shareholder support. After significant changes
to the management team over the last two years the Group is
unable to align the team’s interests with those of its shareholders, a
situation which the Board does not believe is satisfactory. In addition,
the Group’s ability to raise funds if necessary via a placing is equally
important. Obtaining additional debt finance currently is both
expensive and difficult, and without recourse to potential sources of
equity funding the Group runs the risk of missing out on
opportunities that may arise.
For these reasons, enabling resolutions will be proposed at the
forthcoming AGM and I would urge all shareholders to vote in
favour.
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Board of Directors
After 23 years of outstanding service, both in an Executive and a
Non-Executive capacity, Barrie Brinkman has decided to stand down
as a Director at the conclusion of the 2010 Annual General Meeting.
I thank Barrie for his contribution over the years.
Dividend
Whilst we continue to focus on delivering growth in profits, the
availability of funding to deliver such growth impacted results in
2009. The receipt of £1 million of further funding from our bank late
in the year should not disguise the difficulties of obtaining finance
during 2009. The existing credit facilities require significant capital
repayments during 2010, and consequently we do not recommend
paying a dividend for the year. We will continue to review the
position regarding future dividend payments as the Group
progresses.
Outlook and Prospects
Being able to report an increase in underlying profitability, despite a
reduction in turnover, shows the progress that has been made.
However, the challenge for 2010 is to return the Group to a position
of turnover growth whilst maintaining that increased underlying
profitability. Progress in winning new business is being made in all
four divisions of the Group and coupled with the restructuring that
has already occurred, turnover growth would provide the Group
with a firm foundation for future enhanced profitability.
John Scholes
Chairman
28th April 2010
Chairman’s Statement continued
17475UNIVERSE.indd 06 17475UNIVERSE.indd 06 13/05/2010 16:29 13/05/2010 16:29 | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input 17475 13/05/2010 Proof 3
Universe Group plc
Annual Report 2009
Stock code: UNG
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Contents
01 Highlights
02 Group at a Glance
04 Chairman’s Statement
07 Chief Executive’s Report
10 Directors and Advisers
12 Directors’ Remuneration Report
14 Corporate Governance Report
15 Directors’ Report
19 Independent Auditors’ Report
20 Consolidated Statement of Comprehensive Income
20 Consolidated Statement of Recognised Income and Expense
21 Statement of Changes in Equity
22 Balance Sheets
23 Cash Flow Statements
24 Notes to the Accounts
www.universeplc.com
Universe Group plc
Established in 1991, Card Clear was admitted to the Alternative
Investment Market (AIM) in 1995, and renamed Universe Group
in January 2000.
Universe Group plc is incorporated in the UK and its main
operations are in the UK, Ireland and Portugal.
Universe Group operates through two trading subsidiaries,
HTEC Limited and Jet Set Wash Systems Limited.
get data smart
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Universe Group plc
Annual Report 2009
Stock code: UNG
01
17475 11/05/2010 Proof 2
Revenue
by 12.5% to £14.5m (2008: £16.6m)
Decreases
Gross margin
to 36% (2008: 33%)
Increases
Operating profit* *
to £0.8m (2008: £0.5m)
Increases
20
19
18
17
16
15
14
13
12
11
10
2007
13.2
2006
11.3
2008
16.6
2009
14.5
Revenue
£m
*before exeptional items
1000
900
800
700
600
500
400
300
200
100
0
2007
842
2008
516
2006
656
2009
750
Operating profi t*
£’000
Highlights
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Annual Report 2009
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Group at a Glance
Petrol Forecourt Solutions Universe Data Services
PFS provides managed services to the UK petrol
forecourt market covering:
· Point of sale equipment;
· Fuel card acceptance solutions;
· Data analytics and back office systems;
· Outdoor payment terminals; and
· Automatic number plate recognition to prevent
fuel theft.
UDS operates a PCIDSS approved data centre to an
international client base, providing:
· On-line loyalty solutions;
· Automatic number plate recognition barrier
control systems;
· Payment processing solutions; and
· Data analytics.
Petrol Forecourt Solutions
51%
Percentage of
Group Revenue
Percentage of
Group Revenue
Universe Data Services
21%
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Annual Report 2009
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JetSet Manufacturing
JetSet are market leaders in vehicle washing
technology and ancillary forecourt equipment offering
state-of-the-art technology and excellent service.
JetSet offers:
· Supply and maintenance of valeting equipment;
· Revenue share managed service programmes; and
· Environmentally friendly solutions.
HTEC’S division operates from an ISO 9001 accredited
facility and offers:
· Bespoke electrics solutions to a specialised customer
base, comprising design and build capability; and
· Maintenance services for electronic payment
terminals.
Manufacturing
14%
Percentage of
Group Revenue
JetSet
14%
Percentage of
Group Revenue
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Chairman’s Statement
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Introduction
As reported in the interim results, 2009 has seen a period of weak
demand from our major customers and this has been a difficult
backdrop against which to continue the transition of the Group from
manufacturer to solutions provider.
Nevertheless, despite the poor economic climate, I am delighted to
be able to report that the benefits of this transition have allowed the
Group to show improved underlying profitability despite reduced
turnover. Operating profit, before exceptional items, increased by
45% in 2009 to £750,000 (2008: £516,000). EBITDA before
exceptional items grew in the same period by 53% to £1,845,000
(2008: £1,208,000).
Exceptional items totalling £1,005,000 were incurred during the year
mainly as a result of further restructuring of the Group. These costs
contributed to an overall loss before taxation of £599,000 (2008:
loss of £484,000).
The highlight of the year was undoubtedly the signing of an
enhanced contract with Wm Morrison Supermarkets plc. Morrisons
is a long-established and valued customer of the Group and we are
delighted to extend that relationship into the foreseeable future.
Results
The impact of weak demand saw Group turnover fall by 12.5%
compared to the prior year. This is a larger fall than reported at the
half year, but was expected given the strength of demand
experienced in late 2008. Turnover in the second half was slightly
less than reported in the first half (3% down) but operating
profitability was higher in the second half, as a result of the cost
reductions implemented earlier in the year.
With an improvement in the sales mix, gross margin percentage
increased to 35.9% from 32.6% in the prior year, reflecting the
benefits of the move from manufacturing to services and the
consequent restructuring of the business. Savings in our operational
cost base have been made and Group headcount has been
reduced by 17% during the course of the year, resulting in a
reduction in staff costs of 19%. It is also worthy of note that two
of the Group’s four segments actually grew their turnover during
the year.
Operating profit, before exceptional items, represents a 5.1%
operating margin, compared to 3.1% in 2008. The 9% reduction in
administrative costs was a significant component of this
improvement.
During the year we incurred significant restructuring costs of
£801,000 (2008: £534,000), as we continued the transition from
manufacturing to solutions provider. Incurring these costs enables
the Group to proceed with a much reduced cost base and
enhanced operational gearing. As the wider business community
recovers confidence and normal levels of capital expenditure
resume, the Board anticipates that this reduced cost base should
allow the Group to benefit from a recovery in demand for our
products and services. We continue to pay close attention to our cost
base, although we would not expect further exceptional costs of the
scale reported here in the foreseeable future.
Approach by Brulines Group plc
The approach by Brulines Group plc was a significant event during
the year. Whilst we remain in an offer period there is no agreement
for Brulines to undertake any due diligence on the Company.
However, it is also worth noting the impact on trading that an
approach of this sort can have. The requirement to obtain Brulines’
consent resulted in a frustrating and unavoidable delay in signing
the Morrisons’ contract. This delay impacted 2009’s results, and in
addition significant costs were incurred primarily relating to
increased advisers’ fees.
The approach from Brulines continues to be a significant distraction
for the management team whose main focus has to be guiding the
Group through these difficult economic conditions. It is worth
repeating here that the Directors remain committed to delivering
value to all of the Group’s shareholders.
Annual General Meeting
At the 2009 Annual General Meeting a proposed resolution to allow
the Group to issue share options or to raise funds via a placing did
not receive sufficient shareholder support. After significant changes
to the management team over the last two years the Group is
unable to align the team’s interests with those of its shareholders, a
situation which the Board does not believe is satisfactory. In addition,
the Group’s ability to raise funds if necessary via a placing is equally
important. Obtaining additional debt finance currently is both
expensive and difficult, and without recourse to potential sources of
equity funding the Group runs the risk of missing out on
opportunities that may arise.
For these reasons, enabling resolutions will be proposed at the
forthcoming AGM and I would urge all shareholders to vote in
favour.
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Board of Directors
After 23 years of outstanding service, both in an Executive and a
Non-Executive capacity, Barrie Brinkman has decided to stand down
as a Director at the conclusion of the 2010 Annual General Meeting.
I thank Barrie for his contribution over the years.
Dividend
Whilst we continue to focus on delivering growth in profits, the
availability of funding to deliver such growth impacted results in
2009. The receipt of £1 million of further funding from our bank late
in the year should not disguise the difficulties of obtaining finance
during 2009. The existing credit facilities require significant capital
repayments during 2010, and consequently we do not recommend
paying a dividend for the year. We will continue to review the
position regarding future dividend payments as the Group
progresses.
Outlook and Prospects
Being able to report an increase in underlying profitability, despite a
reduction in turnover, shows the progress that has been made.
However, the challenge for 2010 is to return the Group to a position
of turnover growth whilst maintaining that increased underlying
profitability. Progress in winning new business is being made in all
four divisions of the Group and coupled with the restructuring that
has already occurred, turnover growth would provide the Group
with a firm foundation for future enhanced profitability.
John Scholes
Chairman
28th April 2010
Chairman’s Statement continued
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Chief Executive’s Report
In the face of the most severe global economic downturn in recent
years the focus for 2009 was necessarily improving profitability, cash
flow and developing recurring revenue streams. Growth was
inevitably affected by capital expenditure freezes within much of our
customer base as well as by the continuing squeeze on available
debt finance. Underlying operational profitability before exceptional
items improved as a result of tough cost reductions. These actions
will continue to improve profitability and cash flow and will ensure
that full advantage can be taken in any future economic upturn.
Financial Performance Review and Key Performance Indicators
The Group recorded an overall loss before taxation of £599,000
(2008: loss of £484,000) which was significantly impacted by
£1,005,000 of exceptional items. This mostly related to £801,000 of
restructuring costs reflecting cost-cutting programmes in our
manufacturing operation, and the closure of our Spanish office.
Whilst an increasing loss is disappointing, the exceptional costs
incurred were necessary to allow the Group to meet the twin
challenges of a business in transition and a difficult economic
environment. Levels of cost remain under review at all times;
however, the main foreseeable restructuring costs have now been
incurred.
The early action taken on cost reduction reduced overhead costs by
9% to £4,454,000 (2008: £4,882,000) and provided the platform for
a 45% increase in operating profit, before exceptional items, to
£750,000 (2008: £516,000). This was against the disappointment of
a revenue decrease of 12.5% resulting from the economic recession.
Despite this, gross margins grew to 35.9% from 32.6% in the prior
year. Operating margin, before exceptional items, rose to 5.1% from
3.1% in 2008 and is moving towards our goal of exceeding 10%.
Profit before tax and exceptional items increased by 149% to
£406,000 (2008: £163,000).
The 53% growth in EBITDA (as calculated in note 2) from £1,208,000
to £1,845,000 demonstrates that progress continues to be made in
improving operational cash generation. Investment in fixed assets
over the last two years has changed the Group’s cost structure,
increasing the total depreciation and amortisation charge by
£403,000 from the prior year. Whilst investment will continue, the
asset base is now in place that will allow the Group to deliver
growth.
The Board will continue to monitor revenue change, operating profit,
cash generation and customer satisfaction as key performance
indicators. Service excellence has become an essential element in
customer relationships with demands for improved service level
agreement (SLA) targets being widespread. Overall SLAs for 2009
were 94% (2008: 96%) which are above contractual requirements.
Contracted service revenues are a key element of PFS sales and
requests from an increasing number of customers are being made
for a 24/7 service.
Universe Data Systems (UDS)
The segmental reporting breakdown shows an increase in revenue
of 63% for the year to £3,086,000 (2008: £1,885,000) which in turn
drove segmental profit to £959,000 (2008: loss of £69,000).
During the later part of 2008 UDS began the roll-out of what is
believed to be the largest and only truly global real time loyalty
scheme. Early 2009 saw the web based system go live in four
European countries with licence arrangements for more to come on
stream in future periods. In excess of 100 million transactions have
been processed by our data centre for the first year and significant
ongoing revenue streams will accrue from the initial five year
agreement.
Currently the PCIDSS approved data centre handles £8 billion worth
of transactions per year and has loyalty schemes with up to 14
million members operating in a real time environment. HTEC
provides Mission Critical Services to two of the UK’s supermarket
groups and four of the major oil companies, either in the UK or
Europe.
Progress has been made during the year to establish UDS outside
the petrol and oil industry. Partnerships and alliances with market
specialists are continuing to introduce exciting new opportunities as
UDS is positioned as a data handling platform in the extended
loyalty and customer relationship management (CRM) space.
Long sales cycles remain a feature of loyalty systems projects but a
growing number of interesting opportunities are now presenting
themselves, which indicate strong future potential based on a
recurring revenue model. The SaaS (software as a service) model of
operation gives increasing benefits to both customer and supplier
as utilisation of capacity increases.
During the year, development was completed on the automatic
number plate recognition software (ANPR) range enabling
agreements to be signed with five channel partners in the latter part
of 2009. The HTEC data centre can hold and process data with
reference to a central database for partners dependent on the
application. The rapidly increasing market for surveillance and
security products will provide a growing sales channel for future
years. The ANPR product range now includes forecourt drive off
control, car park barrier control, visitor systems and a central on-line
warning list database.
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Chief Executive’s Report continued
Petrol Forecourt Systems (PFS)
The PFS business segment produced £1,644,000 (2008: £2,486,000)
of profit and remains the Group’s largest and most profitable
segment despite a 25% fall in turnover. Prior year sales and profit
benefited from a major supermarket payment terminal roll-out but
excluding that, underlying sales were up 15% compared to 2008.
Recurring contract business is in excess of 70% of turnover for this
segment.
The core solutions of the PFS business relate to the supply of point of
sale (POS) payment systems and wet stock management reporting.
HTEC has occupied a prominent position in the UK forecourt
managed services market for a number of years and its systems
currently run the petrol forecourts of two major supermarket chains
and over 33% of all UK forecourts have HTEC equipment on them.
Development of the software continues in order to improve
functionality for the growing convenience store market, and to allow
easier integration with other third party products.
HTEC has a wide range of end to end approvals to handle bank and
fuel payment cards and will continue to be a market leader for this
type of payment processing. HTEC’s payment terminals are
recognised as some of the most secure within the industry, meeting
the challenges posed constantly from card fraud criminals.
Investment in the next generation payment terminal which will begin
roll-out in 2010 has been carefully controlled to give a rapid payback
to the Group.
Disappointingly, 2010 saw a fall in turnover as customers cut back
on new project spending. I can however report that we renewed a
significant long-term contract with Morrisons for enhanced services
supporting its store IT replacement project.
New outdoor payment terminal roll-outs were particularly badly
affected last year as capital expenditure plans were put on hold.
This product is however now opening up new markets related to
airfields, marinas and commercial truck stops.
Manufacturing (CEM)
The traditional core business of HTEC, subcontract design and
manufacture, has over a number of years been in decline.
Continued monitoring showed that although it was loss making at
the pre-tax level, it did have a positive contribution to fixed
overheads so an immediate disposal was ruled out as impractical
because of the requirement to supply components for other
segments of the Group.
Revenue continued to decline in 2009 to £2,056,000 (2008:
£3,263,000). Whilst the cost base was significantly reduced to
ensure a positive contribution to fixed overheads, a loss at the
operating profit level was recorded of £97,000 (2008: loss
£120,000). Encouragingly the economic challenges last year have
actually benefited this part of the business and new customers are
creating welcome opportunities early in 2010.
JetSet
The financial crisis which began in 2008 continued to seriously affect
the JetSet business. The market became increasingly tough as
capital expenditure was cut back and asset finance to support
machine placement was still both difficult to obtain and
unreasonably expensive. Despite the conditions, turnover increased
by 31% to £1,933,000 (2008: £1,475,000). However, due to having to
operate the production facility in Bedford at below capacity,
operating losses increased to £241,000 (2008: loss of £181,000),
particularly weighted to the earlier part of the year.
By Q4 of 2009 JetSet was EBITDA positive and, with an improved
trading environment, has a high expectation of achieving regular
and sustainable profitable trading. Visibility of potential prestigious
future contracts with existing Group customers demonstrates that
the business has growth potential assuming new asset funding
avenues are available.
The concept of revenue share from equipment owned by JetSet and
sited on the customers’ premises has already resulted in the
winning of contracts from customers such as ASDA, Co-op and BP,
clearly demonstrating the cross selling opportunity from other
Universe business units.
Prior year adjustment in respect of Goodwill
The introduction of IFRS8 on Segmental Reporting has required the
Group to allocate the historic goodwill associated with the HTEC
subsidiary (£17.3 million) across the operating segments contained
within HTEC. A significant proportion of this goodwill (£6.3 million)
has necessarily been allocated to the historic Manufacturing
segment. The requirement to allocate goodwill to the segments is a
change of accounting policy and consequently must be applied
retrospectively, resulting in the allocation being made as at
1st January 2007. Cash flow forecasts for the segment, at that time,
would not support the carrying value of the goodwill allocated to
Manufacturing and consequently an impairment provision of £5.1
million would have been required had impairment been measured
on a segmental basis in 2007. Consequently, a £5.1 million provision
has been booked in 2009 and treated as a prior year adjustment.
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Balance Sheet, Cash Flow, Banking Facilities and Going Concern
During 2009 the priority has been to generate cash and to improve
the debt repayment profile of the Group’s borrowings. By the year
end net borrowings (debt less cash) had dropped from £3.2 million
to £2.5 million, and the repayment profile had improved significantly,
with 73% of net borrowings due in more than one year (2008: 45%).
Debt repayment will remain a significant drain on the Group’s cash
flow in 2010, with scheduled repayments due of £858,000, but this
debt repayment burden is scheduled to drop significantly in 2011.
Overall the Group generated £1.1 million of cash during the period.
Clearly the negotiation of a new long-term loan from our bankers
was a significant part of that, but in reality most of these proceeds
served to refresh facilities that have been paid down over the last
two years on an accelerated schedule. Net proceeds from financing
activities were £371,000, with the balance of the cash arising from
£1.4 million generated by the operation, net of the £707,000
invested into software product development and an expansion of
the JetSet revenue share estate.
During the year the Group breached one of its banking covenants, in
respect of the net worth of the Group which has been significantly
impacted by the goodwill impairment referred to above. All other
covenants were met, and the breach has been subsequently waived
by HBOS. HBOS has also agreed to remove covenants from both
loans going forward, and compliance with the loan terms now rests
on the ability to repay loan instalments as they fall due. The Directors
have reviewed financial forecasts for the business covering the 12
months from the date of this report and are confident that the
repayment schedule will be satisfied and that the Group will be able
to operate within its current banking facilities. As a result, the
Directors have continued to adopt the going concern basis in
preparing the financial statements.
Outlook
The strategy of the management team is to grow and transform the
Group from lower margin product sale and manufacturing activity to
a software and services business with associated recurring revenue
targeted at tier 1 businesses. Dealing with the burdensome debt
structure, limited funding for investment and an inappropriate
operational structure has been a difficult task. Restructuring
write-offs have been higher than expected and new product
development has been hindered by ongoing support requirements
from legacy products.
2010 sees us go into a year where the cost structure has been
significantly improved by the actions taken in 2008/9, new products
have been added to the portfolio and the economy is emerging
from a deep recession. The Group is now better placed to deliver
growth and profitability. 2010 will see further debt reduction and by
the end of this year our debt repayment profile will have improved
significantly.
The sales pipeline for UDS continues to grow and strategic
partnerships within the loyalty/CRM field are beginning to generate
significant new opportunities. The PFS business is maintaining its
market leading position and is seeing growth opportunities from its
major customers. JetSet has the potential to move into profit this year
and reach critical mass for equipment placements.
Paul Cooper
Chief Executive Officer
28th April 2010
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Directors and Advisers
Non-Executive Chairman
John Scholes
John Scholes is Chairman and Chief Executive of The Catalyst
Group International Limited, a privately owned business providing
corporate development advisory services to companies across
the technology industry from its offices in the UK, USA, France and
Germany. John has been closely involved in advising the boards of
many businesses in the last ten years.
Executive Directors
Paul Cooper — Chief Executive Officer
Paul Cooper became Chief Executive on 1st January 2007 having
previously been appointed a Non-Executive Director on
8th September 2006. Paul qualified as a chartered accountant with
Deloitte before taking up Finance Director roles in industry. Much
of his business career has been spent in high tech manufacturing
companies including as European Head of Eltron International
Limited and Comtec Information Systems Limited. As Group
Managing Director of Blazepoint Group plc from June 2000 to
March 2003, he led the company’s AIM flotation.
Bob Smeeton — Finance Director
Bob Smeeton joined Universe in June 2008 as the finance director
of HTEC Limited, the Company’s principal operating subsidiary.
Bob, who qualified as a chartered accountant whilst at Price
Waterhouse, was previously at OpSec Security Group PLC, an AIM
quoted company, latterly as its European Finance Director. He was
appointed Group Finance Director on 1st January 2009.
Non-Executive Directors
Barrie Brinkman
Barrie Brinkman joined the board of HTEC in 1987 and has over
30 years of electronics and software design experience with a
number of companies including City Business Products Limited, a
subsidiary of British Telecommunications plc. He joined the Universe
Group Board in February 1998 following the Company’s acquisition
of HTEC.
Malcolm Coster
Malcolm Coster joined the Universe Group Board in August
2007 and is an experienced businessman who has held senior
international positions in the Management Consultancy and
Information Technology industries. Malcolm is an experienced
Chairman, Board Member and Non-Executive Director of several
well-known public companies. Other current positions include
Chairman of DMW Group, a technology consultancy specialising in
large-scale project and programme management.
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Directors
J R Scholes (Chairman)
P Cooper
B L Brinkman
M Coster
R J Smeeton
Secretary
E M Paul
Registered office
Southampton International Park
George Curl Way
Southampton
Hants
SO18 2RX
Website
http://www.universeplc.com
Nominated adviser
Arbuthnot Securities Limited
Arbuthnot House
20 Ropemaker Street
London
EC2Y 9AR
Solicitors
Blake Lapthorn
New Kings Court
Tollgate
Chandlers Ford
Eastleigh
SO53 3LG
Bankers
Bank of Scotland
144/148 High Street
Southampton
SO14 2JF
Registrars
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield
HD8 0LA
Registered number
02639726
Auditors
Deloitte LLP
Southampton, United Kingdom
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Directors’ Remuneration Report
The Company is not required to comply with Schedule 8 of the
Companies Act 2006 or the Listing Rules of the Financial Services
Authority as its shares are traded on AIM; the following disclosures
are therefore made on a voluntary basis.
UNAUDITED INFORMATION
The Remuneration Committee
The Remuneration Committee consists of the Non-Executive
Directors of the Company. The role of the Committee is to determine,
on behalf of the Board, the Company’s policy on Executive Directors’
and other senior employees’ remuneration, within set written terms
of reference approved by the Board. The remuneration of the
Non-Executive Directors is approved by the Board of Directors. As
Chairman of the Committee, I have been asked by the Board to
report to you on all remuneration matters on its behalf.
Remuneration Policy
The remuneration policy of the Company is:
l
to provide a suitable remuneration package to attract, motivate
and retain Executive Directors who will run the Company
successfully;
l to formulate a package that will include a significant proportion
of performance related pay and to align the Directors’ personal
interests to those of the shareholders; and
l to ensure that all long-term incentive schemes for the Directors
are approved by the shareholders.
Other than as disclosed at note 30 and as shareholders, none of the
Committee has any personal financial interest, conflicts of interest
arising from cross-directorships or day-to-day involvement in
running the business. The Committee makes recommendations to
the Board. No Director plays a part in any discussion about their
own remuneration. The Remuneration Committee members are
expected to draw on their experience to judge where to position the
Company, relative to other companies’ and other groups’ rates of
pay, when considering remuneration packages for Executives. The
committee may use outside professional advice if they consider it
necessary. No such advice has been sought during the year or the
preceding year.
Benefits in kind include the provision of medical insurance premiums
and a car or car allowance. Two Executive Directors participate in the
Company’s pension plan. The pension contributions represent the
Company’s contribution to defined contribution pension plans.
Bonuses and benefits in kind are not pensionable.
All of the Executive Directors have service contracts, which provide
for notice periods of no more than one year. All the Non-Executive
Directors have service contracts, which provide for notice periods of
three months.
The Remuneration Committee recognises the importance of
appropriate incentive arrangements in assisting with the
recruitment and retention of senior Executives. The Remuneration
Committee believes that share-based incentives align the interests
of employees with those of shareholders but recognises that
options to acquire shares at their market value on the date of grant
are not always the most appropriate way to achieve this.
An EMI option scheme was set up on 27 June 2007 for the Executive
Directors of Universe Group plc and an unapproved option scheme
was set up for the Non-Executive Chairman of Universe Group plc
on 27 June 2007. These options will lapse if a) the Directors leave
employment for any reason other than a ‘Good Reason’ as defined
within the schemes and b) at the end of the tenth anniversary of the
Date of Grant.
The Group also operates a Long Term Incentive Plan (‘LTIP’) for
employees (including certain Executive Directors) selected by the
Board (but taking account of the recommendations of the
Remuneration Committee). The LTIP operates by issuing matching
shares in respect of qualifying share purchases by certain Directors
and employees. No such shares were issued during 2009.
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Directors’ Detailed Emoluments
Salary
& fees Benefits Bonus Pension 2009 2008
£’000 £’000 £’000 £’000 £’000 £’000
Executives
P Cooper 120 5 — 11 136 137
R J Smeeton (appointed 1st January 2009) 80 7 — 8 95 —
E M Paul (resigned 1st January 2009) — — — — — 95
Non-Executives
J R Scholes 32 — — — 32 32
B L Brinkman 20 — — — 20 20
M Coster 25 — — — 25 25
277 12 — 19 308 309
As disclosed in note 30, two Directors, John Scholes and Malcolm Coster, earned interest on loans provided to HTEC Limited and Jet Set Wash
Systems Limited, two of the Group’s subsidiaries.
Directors’ Share Options
Details of share options held by Directors over the ordinary shares of the Company are set out below. The Remuneration Committee
considers and recommends all new long-term incentive arrangements for the Executive Directors and other employees.
The market price of the Company‘s shares at the end of the financial year was 4.125 per 5p share (2008: 2.25p per 5p share) and the range
of market prices during the year was between 1.875p and 5.625p.
At 1 Jan At 31 Dec Exercise
Scheme 2009 Granted Exercised Lapsed 2009 price
J R Scholes Unapproved 1,250,000 — — — 1,250,000 8p
P Cooper EMI 1,250,000 — — — 1,250,000 8p
2,500,000 — — — 2,500,000
Directors’ share options are exercisable from the date of grant, being 27 June 2007, and expire ten years from the date of grant.
Interests in Shares
Interests in shares have been disclosed in the Directors’ Report on page 17.
On behalf of the Board
J Scholes
Chairman of the Remuneration Committee
28 April 2010
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Corporate Governance Report
The Board is accountable to the Company’s shareholders for good
governance and this statement describes how the principles of good
corporate governance are applied by the Company.
The Company is not required to comply with Schedule 8 of the
Companies Act 2006 or the Listing Rules of the Financial Services
Authority as its shares are traded on AIM; the following disclosures
are therefore made on a voluntary basis.
The Group does voluntarily comply with many of the requirements of
the Combined Code as described in this statement and the
Directors’ Remuneration Report and consequently, this report is
intended to highlight the key areas in which the Group complies with
the code but does not serve as report into the Group’s compliance
with the whole code.
The Board
As at the date of signing of these accounts, the Board comprises two
Executive Directors and three Non-Executive Directors.
The Board meets formally at least ten times a year and full
information is given to the Directors to enable the Board to function
effectively and to allow the Directors properly to fulfil their
responsibilities. Board papers are usually distributed four days in
advance of meetings and decisions may be deferred if Directors
require further information to be made available to them. The
Company Secretary is responsible to the Board for the timeliness of
the information provided to it.
Board Committees
In furtherance of the principles of Corporate Governance the Board
has appointed the following Committees, each of which has formal
terms of reference. The membership of the Committees is shown
below.
Audit Committee
The Audit Committee, comprising the Non-Executives, is chaired by
John Scholes and meets two or three times a year with the Executive
Directors and representatives of the Auditors in attendance as
required. The Committee assists the Board in the discharge of its
duties concerning the announcements of results and the Annual
Report and Accounts and the maintenance of proper internal
controls; it reviews the Auditors’ findings and considers Group
accounting policies and the compliance of those policies with
applicable legal and accounting standards.
Remuneration Committee
The Remuneration Committee, comprising the Non-Executive
Directors under the Chairmanship of John Scholes, sets the Group’s
overall remuneration policy. It determines, on behalf of the Board,
the remuneration and other benefits of the Executive Directors. It
meets on a regular basis, usually twice a year and additionally
whenever required. The Directors’ Remuneration Report is set out on
pages 12 and 13.
Internal Controls
The Directors are responsible for the Group’s system of internal
control. However, such a system is designed to manage, rather than
eliminate the risk of failure to achieve business objectives and can
provide only reasonable and not absolute assurance against
misstatement or loss. The Directors have put in place an
organisational structure and framework of controls which is
periodically reviewed for its effectiveness. The key financial
procedures within the Group’s system of internal control are as
follows:
l There is a comprehensive budgeting system with the annual
budget being approved by the Board. Actual results and
updated forecasts are prepared regularly and compared
against budget;
l The annual capital investment budget is approved by the Board
together with significant individual items prior to commitment;
and
l Significant treasury items are reserved for the Board.
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Directors’ Report
The Directors present their report and the audited accounts for the
year ended 31 December 2009.
Principal Activities
The principal activity of the Company is as a holding company, with
two main trading subsidiaries, HTEC Limited (‘HTEC’) and Jet Set
Wash Systems Limited (‘JetSet’). HTEC is engaged in the provision of
managed services, payment and loyalty systems for the Petrol
Forecourt and Retail sector. JetSet was established in late 2007,
focusing on the provision of car wash and valeting services.
Result for the Year
For 2009 there was an operating profit before exceptional items of
£750,000 (2008: £516,000). The Company’s loss for the year after
interest and exceptional items, but before taxation, was £599,000
(2008: £484,000 loss).
Business Review
A review of business in 2009 is included in the Chief Executive’s
Report on pages 7 to 9.
Key performance indicators (‘KPIs’)
There are three main KPIs that management monitor within the
Group:
l The order inflow at HTEC and JetSet each day to ensure that
annual sales forecasts are on schedule.
l Detailed cost of sales documents, which are prepared each
month in order that forecast product margins are achieved.
l Performance against contracted service level agreements.
The performance against these KPIs is discussed in the Chief
Executive’s Report on page 7.
Principal risks and uncertainties facing the Company
During 2009 the market for petrol forecourt equipment declined as
capital programmes were put on hold. However, the market for
recurring repairs and maintenance services remains steady. The
Group has been adversely impacted by the availability of asset
based lending necessary to fund the expansion of its JetSet
operations. Whilst these funding restrictions persist the expansion of
JetSet is likely to be slower than would be possible in more normal
credit markets.
A discussion of the market, liquidity and credit risks in relation to
financial instruments held within the Group takes place in note 20.
Going Concern
UK Company Law requires directors to consider whether it is
appropriate to prepare the financial statements on the basis the
Company and Group are going concerns. Throughout the financial
statements there are various disclosures relating to going concern.
This Directors’ report summarises the key themes and references
those areas where greater disclosure is given.
The Group has good visibility of recurring revenues, which make up
a significant proportion of annual revenues. However, the Group
does still have some exposure to current economic conditions which
have the potential to impact annual revenues. The Directors have
therefore prepared downside sensitised forecasts for the current
and following years and have continued to implement cost
reductions programme in order to improve operational gearing.
The Group’s main sources of finance are bank loans, finance leases
and invoice discounting. The year end amounts outstanding on each
are discussed within note 18. In addition to this, the Group has a
£0.1 million overdraft facility that is currently not in use. The bank
loans have several covenants attached that, if breached, give the
lender the option to immediately recall the funding. During the year
the Group breached one of the covenants associated with one of the
loans on one occasion. This breach was waived by the lender.
Further details of the breach are discussed within note 18 to the
financial statements. Subsequent to the year end, the bank has
agreed to remove all financial covenants associated with both
loans.
The downside sensitised forecasts have been reviewed by the
Directors to ensure that the profit and cash generation derived from
these forecasts are sufficient to ensure that the existing bank
facilities are sufficient to meet the Group’s requirements. This is
discussed further within liquidity risk in note 20 and is the key factor
in relation to going concern.
As a result of this review, the Directors are of the opinion that the
Company and Group have adequate resources to continue in
operational existence for the foreseeable future, and have continued
to adopt the going concern basis in preparing the financial
statements.
Financial instruments
Information about the use of financial instruments by the Company
and its subsidiaries, and the Group’s financial risk management
policies is given in note 20.
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Environment
The Company’s policy with regard to the environment is to ensure
that the Group’s operational subsidiaries understand and effectively
manage the actual and potential environmental impact of their
activities. Operations are conducted such that they comply with all
the legal requirements relating to the environments in which they
operate. During the period covered by this report no Group company
has incurred any fines or penalties or been investigated for any
breach of environment regulations.
It is Company policy to continually carry out research and
development on new products and processes to minimise the
impact of its operations on the environment.
Employees
The quality and commitment of the Group’s employees has played a
major role in the success of HTEC and JetSet over the years. This has
been demonstrated in many ways, including improvements in
customer satisfaction, the development of new product lines and the
flexibility employees have shown in adapting to changing business
requirements and new ways of working. Employee turnover remains
below the 10% target set by the Executive Directors.
Research and development
The Company has a continuing commitment to a high level of
research and development. During the year expenditure on research
and development of £937,000 (2008: £967,000) was charged to the
Consolidated Statement of Comprehensive Income. In addition,
development costs of £327,000 (2008: £569,000) were capitalised.
Research and development in the year concentrated on the further
development of the online loyalty and back-office products.
Dividends
The Directors do not propose the payment of a dividend (2008: £nil).
Supplier payment policy
The Group’s policy is to settle terms of payment with suppliers when
agreeing the terms of each transaction, ensure that suppliers are
made aware of the terms of payment and abide by the terms of
payment.
Trade creditors were equivalent to 66 (2008: 62) days’ purchases,
based on the average daily amount invoiced by suppliers during
the year.
Capital structure
Details of the authorised and issued share capital, together with
details of the movements in the Company’s issued share capital
during the year, are shown in note 22. The Company has one class
of ordinary shares which carry no right to fixed income. Each share
carries the right to one vote at general meetings of the Company.
There are no specific restrictions on the size of a holding nor on the
transfer of shares, which are both governed by the general
provisions of the Articles of Association and prevailing legislation.
The Directors are not aware of any agreements between holders of
the Company’s shares that may result in restrictions on the transfer
of securities or on voting rights.
Details of employee share schemes are set out in note 28 and no
person has any special rights of control over the Company’s share
capital and all issued shares are fully paid
Directors’ indemnities
The Company has made qualifying third party indemnity provisions
for the benefit of its Directors. These provisions remain in force at the
date of this report.
Annual General Meeting
The resolutions to be processed at the Annual General Meeting to be
held on 28 June 2010, together with explanatory notes, appear in the
separate Notice of Annual General Meeting sent to all shareholders.
Substantial shareholdings
As at 15 April 2010 the Company had been notified of the following
substantial holdings in the ordinary share capital of the Company.
% of
No. of voting rights
ordinary and issued
Shareholder shares share capital
Ennismore Fund Management 18,217,122 15.9
Brulines Group plc 13,209,754 11.5
Barclays Wealth 7,572,073 6.6
Rathbone 6,138,595 5.4
J R Scholes 5,691,960 5.0
Directors’ Report continued
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Directors
The Directors who served throughout the year and to the date of
approval of the financial statements were as follows:
J R Scholes (Chairman)
P Cooper
B L Brinkman
M Coster
R J Smeeton
Those Directors serving at the end of the year, or date of this report,
had an interest in the ordinary share capital of the Company at
31 December as follows:
Ordinary shares of 5p each
2009 2008
No. No.
J R Scholes 5,691,960 5,691,960
P Cooper 500,000 388,460
B L Brinkman 886,147 886,147
M Coster 500,000 500,000
R J Smeeton 79,160 79,160
The Directors had no other disclosable interest under the Companies
Act 2006 in the shares of the Company or of any other Group
company.
Details of the Directors’ share options are provided in the Director’s
Remuneration Report on page 13.
Barrie Brinkman has indicated that he will be resigning at the
forthcoming Annual General Meeting.
Statement of Directors’ responsibilities for
the fi nancial statements
The Directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union and Article 4 of the
IAS Regulation and have also chosen to prepare the Parent
Company financial statements under IFRSs as adopted by the EU.
Under company law the Directors must not approve the accounts
unless they are satisfied that they give a true and fair view of the
state of affairs of the Company and of the profit or loss of the
Company for that period.
In preparing these financial statements, International Accounting
Standard 1 requires that Directors:
l properly select and apply accounting policies;
l present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
l
provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events
and conditions on the entity’s financial position and financial
performance; and
l make an assessment of the Company’s ability to continue as a
going concern.
The Directors are responsible for keeping proper accounting
records that disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
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Responsibility statement
We confirm that to the best of our knowledge:
l
the financial statements, prepared in accordance with
International Financial Reporting Standards, give a true and fair
view of the assets, liabilities, financial position and profit or loss
of the Company and the undertakings included in the
consolidation taken as a whole; and
l the management report, which is incorporated into the Directors’
report, includes a fair review of the development and
performance of the business and the position of the Company
and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that they face.
Disclosure of information to Auditors
At the date of making this report each of the Company’s Directors, as
set out on page 17, confirm the following:
l so far as each Director is aware, there is no relevant information
needed by the Company’s Auditors in connection with preparing
their report of which the Company’s Auditors are unaware; and
l each Director has taken all steps that he ought to have taken as
a Director in order to make himself aware of any relevant
information needed by the Company’s Auditors in connection
with preparing their report and to establish that the Company’s
Auditors are aware of that information.
This confirmation is given and should be interpreted in accordance
with the provisions of s418 of the Companies Act 2006.
Auditors
A resolution to reappoint Deloitte LLP will be proposed at the
forthcoming Annual General Meeting.
Approval
The report of the Directors was approved by the Board on 28th April
2010 and signed on its behalf by:
P Cooper
Director
Directors’ Report continued
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Independent Auditors’ Report
to the Members of Universe Group plc
We have audited the Group and Parent Company financial
statements (‘the financial statements’) of Universe Group plc for the
year ended 31st December 2009 which comprise the consolidated
statement of comprehensive income, the consolidated statement of
recognised income and expense, the Group and Company
statement of changes in equity, the consolidated and Company
balance sheets, the consolidated and Company cash flow
statements and the related notes 1 to 31. These financial statements
have been prepared under the accounting policies set out therein.
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company’s members those matters we are required to state to them
in an Auditors’ report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company’s members, as a
body, for our audit work, for this report, or for the opinions we have
formed.
Respective responsibilities of Directors and Auditors
As explained more fully in the Directors’ Responsibilities Statement,
the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit the financial statements in accordance
with applicable law and International Standards on Auditing (UK
and Ireland). Those standards require us to comply with the Auditing
Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the fi nancial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to
the Group’s and the Parent Company’s circumstances and have
been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the
Directors; and the overall presentation of the financial statements.
Opinion on fi nancial statements
In our opinion:
l the financial statements give a true and fair view of the state
of the Group’s and the Parent Company’s affairs as at
31st December 2009 and of the Group’s and the Parent
Company’s loss for the year then ended;
l the financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union; and
l the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
l
the information given in the Directors’ Report for the financial
year for which the financial statements are prepared is
consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in
our opinion:
l adequate accounting records have not been kept by the Parent
Company, or returns adequate for our audit have not been
received from branches not visited by us; or
l the Parent Company financial statements are not in agreement
with the accounting records and returns; or
l certain disclosures of Directors’ remuneration specified by law
are not made; or
l we have not received all the information and explanations we
require for our audit.
Andrew Gordon (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditors, Southampton,
United Kingdom
28th April 2010
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Consolidated Statement of Comprehensive Income
year ended 31st December 2009
Before
Before exceptional
exceptional Exceptional items Exceptional Total
items items Total 2008 items 2008
2009 2009 2009 as restated 2008 as restated
Notes £’000 £’000 £’000 £’000 £’000 £‘000
Continuing operations
Revenue 2, 3, 4 14,493 — 14,493 16,556 — 16,556
Cost of sales (9,289) — (9,289) (11,158) — (11,158)
Gross profit 5,204 — 5,204 5,398 — 5,398
Administrative expenses 2, 5 (4,454) (900) (5,354) (4,882) (627) (5,509)
Operating profit/(loss) 2 750 (900) (150) 516 (627) (111)
Finance costs 5, 6 (344) (105) (449) (353) (20) (373)
Profit/(loss) before taxation 406 (1,005) (599) 163 (647) (484)
Taxation 8 99 139
Loss for the year attributable
to equity shareholders 7 (500) (345)
Pence Pence
Loss per share
Basic and diluted 9 (0.44) (0.30)
The prior period adjustment is explained in note 31. The 2008 restatement in the statement of comprehensive income relates only to the
reallocation of costs between cost of sales and administrative expenses.
The loss relating to the parent for the year was £431,000 (2008: £225,000).
Consolidated Statement of
Recognised Income and Expense
year ended 31 December 2009
2009 2008
Total Total
£‘000 £‘000
Exchange differences on translation of foreign operations (3) (35)
Net expense recognised directly in equity (3) (35)
Loss for the year (500) (345)
Recognised income and expense relating to the year attributable to equity shareholders (503) (380)
Prior year restatement (see note 31) (5,100)
Total recognised income and expense recognised in the year attributable to equity shareholders (5,603)
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Statement of Changes in Equity
year ended 31st December 2009
Profit
Merger and loss
Share Equity Share reserve on Translation account Total
capital reserve premium acquisition reserve deficit equity
Group £’000 £’000 £’000 £’000 £’000 £’000 £’000
At 1 January 2008 as previously
reported 5,747 110 10,753 8,603 (181) (5,501) 19,531
Prior period adjustment (see note 31) — — — — — (5,100) (5,100)
Reserves transfer — — — (5,100) — 5,100 —
At 1 January 2008 as restated 5,747 110 10,753 3,503 (181) (5,501) 14,431
Loss for the year attributable to
equity shareholders — — — — — (345) (345)
Translation differences — — — — (35) — (35)
Share adjustment (see note 22) (12) — — — — — (12)
At 1 January 2009 5,735 110 10,753 3,503 (216) (5,846) 14,039
Loss for the year attributable to
equity shareholders — — — — — (500) (500)
Translation difference — — — — (3) — (3)
At 31 December 2009 5,735 110 10,753 3,503 (219) (6,346) 13,536
The transfer of £5.1 million from the profit and loss reserve to the merger reserve relates to the impairment of the goodwill that was created on
the acquisition of HTEC Limited on which the merger reserve was created.
Profit
Merger and loss
Share Equity Share reserve on account Total
capital reserve premium acquisition deficit equity
Company £’000 £’000 £’000 £’000 £’000 £’000
At 1 January 2008 5,747 110 10,753 476 (1,397) 15,689
Loss for the year attributable to
equity shareholders — — — — (225) (225)
Share adjustment (see note 22) (12) — — — — (12)
At 1 January 2009 5,735 110 10,753 476 (1,622) 15,452
Loss for the year attributable to
equity shareholders — — — — (431) (431)
At 31 December 2009 5,735 110 10,753 476 (2,053) 15,021
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Balance Sheets
as at 31st December 2009
Group Company
2008 2007
2009 as restated as restated 2009 2008
Notes £’000 £’000 £’000 £’000 £’000
Non-current assets
Goodwill 10 12,612 12,612 12,150 — —
Development costs 11 1,007 1,113 800 — —
Property, plant and equipment 12 2,805 3,093 2,170 — —
Investments 13 — — — 17,867 17,117
16,424 16,818 15,120 17,867 17,117
Current assets
Inventories 14 1,269 1,647 1,768 — —
Trade and other receivables 15 3,060 3,061 2,720 380 148
Cash and cash equivalents 15 1,145 70 93 12 —
5,474 4,778 4,581 392 148
Total assets 21,898 21,596 19,701 18,259 17,265
Current liabilities
Trade and other payables 16 (4,421) (4,008) (3,119) (254) (167)
Current tax liabilities 17 (335) (315) (373) — —
Short-term borrowings 18 (2,218) (1,951) (888) (760) (526)
(6,974) (6,274) (4,380) (1,014) (693)
Non-current liabilities
Medium-term borrowings 18 (1,388) (1,283) (890) (1,000) (760)
Other liabilities 19 — — — (1,224) (360)
(1,388) (1,283) (890) (2,224) (1,120)
Total liabilities (8,362) (7,557) (5,270) (3,238) (1,813)
Net assets 13,536 14,039 14,431 15,021 15,452
Equity
Share capital 22 5,735 5,735 5,747 5,735 5,735
Equity reserve 28 110 110 110 110 110
Share premium 10,753 10,753 10,753 10,753 10,753
Other reserves 3,503 3,503 3,503 476 476
Translation reserve (219) (216) (181) — —
Profit and loss account deficit (6,346) (5,846) (5,501) (2,053) (1,622)
Total equity attributable to equity
shareholders 13,536 14,039 14,431 15,021 15,452
The prior period adjustment is explained in note 31.
The financial statements were approved by the Board of Directors and authorised for issue on 28th April 2010. They were signed on its
behalf by:
P Cooper
Director
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Cash Flow Statements
year ended 31st December 2009
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Cash flows from operating activities:
Operating loss
— Continuing operations (150) (111) (92) (86)
Depreciation and amortisation 1,095 692 — —
Profit on sale of fixed assets (14) — — —
Impairments 20 10 — —
951 591 (92) (86)
Movement in working capital:
Decrease in inventories 379 208 — —
(Increase)/decrease in receivables (52) (150) (232) 677
Increase/(decrease) in payables 414 533 201 (761)
Interest paid including exceptional finance costs (429) (353) (339) (139)
Tax received/(paid) 148 (3) — —
Net cash inflow/(outflow) from operating activities 1,411 826 (462) (309)
Cash flows from investing activities:
Acquisition of subsidiary undertakings — (388) — —
Purchase of plant, property and equipment (397) (1,198) — —
Expenditure on product development (327) (569) — —
Proceeds from sale of fixed assets 17 — — —
Net cash outflow from investing activities (707) (2,155) — —
Cash flow from financing activities:
Repayments of obligations under finance leases (437) (439) — —
Repayment of borrowings (765) (1,389) (668) (1,344)
New loans raised 1,573 3,134 1,150 1,600
Net cash inflow from financing 371 1,306 482 256
Increase/(decrease) in cash and cash equivalents 1,075 (23) 20 (53)
Cash and cash equivalents at beginning of year 70 93 (8) 45
Cash and cash equivalents at end of year 1,145 70 12 (8)
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Notes to the Accounts
year ended 31st December 2009
1. Significant Accounting Policies
General information
Universe Group plc is a company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered office is
given on page 11. The nature of the Group’s operations and its principal activities are set out on page 15.
In the current year, the following new and revised Standards and Interpretations have been adopted and have affected the amounts reported
in these financial statements.
Standards affecting the calculation of income or expenses:
IAS23 IAS23 is a standard that deals with the capitalisation of borrowing costs in respect of capital projects. The Group has
capitalised £13,000 of borrowing costs associated with its software development projects. No amounts have been
identified for previous periods and consequently the financial statements have not been restated for the introduction of
this standard.
Standards affecting presentation and disclosure:
IFRS8 IFRS8 is a disclosure Standard that has required further disclosure relating to the Group’s segments and which
required the allocation of Goodwill amongst the Group’s reporting segments (see note 4).
Amendments to IFRS7 The amendments to IFRS7 expand the disclosures required in respect of fair value measurements and liquidity risk.
The Group has elected not to provide comparative information for these expanded disclosures in the current year in
accordance with the transitional reliefs offered in these amendments.
At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these
financial statements were in issue but not yet effective:
IFRS1 (amended) Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate
IFRS3 (revised 2008) Business Combinations
IAS27 (revised 2008) Consolidated and Separate Financial Statements
IAS28 (revised 2008) Investment in Associates
IFRIC17 Distributions of Non-cash Assets to Owners
The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the
financial statements of the Group except for treatment of acquisitions of subsidiaries and associates when IFRS3 (revised 2008), IAS27
(revised 2008) and IAS28 (revised 2009) come into effect for business combinations for which the acquisition date is on or after the beginning
of the first annual period beginning on or after 1 July 2009.
Basis of accounting
The financial statements have been prepared under the historical cost convention and in accordance with applicable International Financial
Reporting Standards (IFRS) as adopted for use in the EU and as applied in accordance with the Companies Act 2006.
A summary of the more significant accounting policies, which have been applied consistently, is set out below.
As permitted by section 408 of the Companies Act 2006, the income statement of the Parent Company has not been separately presented in
the financial statements. The Parent Company’s result for the year is disclosed in the Company statement of changes in equity on page 21.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its
subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and
operating policies of an investee entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date
of acquisition or up to the effective date of disposal, as appropriate.
All intra-Group transactions, balances, income and expenses are eliminated on consolidation.
Going concern
The Directors have undertaken a detailed review of the financial position and financial forecasts of the Group as explained in the Directors’
Report on page 15 and on the basis of this review have continued to adopt the going concern basis in preparing the financial statements.
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1. Significant Accounting Policies continued
Goodwill
Goodwill arising on acquisition represents the excess of the fair value of the consideration given, plus associated costs, for a business, over
the fair value of the net assets acquired after accounting for identifiable intangible assets. Goodwill is initially recognised as an asset at cost
and is subsequently measured at cost less any accumulated impairment losses.
Goodwill arising on acquisition is capitalised. In respect of acquisitions prior to 1 January 2004, goodwill is included at the amount recorded
previously under UK GAAP.
In accordance with IFRS3 ‘Business Combinations’ goodwill is not amortised.
For the purpose of impairment testing, goodwill is allocated to operating segments, which are tested for impairment annually or more
frequently if impairment indicators are found. If the recoverable amount is found to be less than the carrying value, impairment is allocated
first to goodwill and then pro rata to other assets in the cash-generating unit.
Prior period restatement
The introduction of IFRS8 on Segmental Reporting has required the Group to allocate the historical goodwill associated with the HTEC
subsidiary (£17.3 million) across the operating segments contained with HTEC. Under the previous standard, IAS14 ‘Segmental Reporting’, the
Group allocated the goodwill to the entire HTEC segment. The requirement to allocate goodwill to the segments is a change of accounting
policy and consequently must be applied retrospectively resulting in the allocation being made as at 1st January 2007. Consequently, a
review of impairment was required to be undertaken for each segment and this gave rise to an impairment of goodwill within the CEM
operating segment. Please see note 31 for details of the adjustment and the impact on the relevant financial statement captions.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any
indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated
in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from
other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with
an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and
the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the
asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless
the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been
determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is
recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment
loss is treated as a revaluation increase.
Borrowing costs
Borrowing costs attributable to capital projects are capitalised during the development phase of the project. Loan issue costs are accounted
for on an accrual basis in the statement of comprehensive income and expense, and are added to the carrying amount of the instrument to
the extent that they are not settled in the period in which they arise.
Operating profit/(loss)
Operating profit/(loss) is stated after charging restructuring and other exceptional costs but before investment income and finance costs.
Exceptional Items
Costs are treated as exceptional costs when they are associated with normal activities, are of a non-recurring nature and/or are of an
exceptional magnitude that if they were not shown separately the accounts would not present a true and fair view. Management track the
performance of the business excluding these items.
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1. Significant Accounting Policies continued
Leasing
Where assets are acquired under finance leases (including hire purchase contracts), which confer rights and obligations similar to those
attached to owned assets, the amount representing the outright purchase price of such assets is included in property, plant and equipment.
Depreciation is provided in accordance with the accounting policy below. The capital element of future finance lease payments is included in
creditors and the interest element is charged to the statement of comprehensive income and expense over the period of the lease in
proportion to the capital element outstanding.
Expenditure on operating leases is charged to the statement of comprehensive income and expense on a straight-line basis.
Foreign currencies
The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it
operates (its functional currency). For the purposes of the consolidated financial statements, the results and financial position of each Group
company are expressed in pound sterling, which is the functional currency of the Company and the presentation currency for the
consolidated financial statements.
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 and
losses on translation are included in the statement of comprehensive income and expense.
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 transactions are taken to
reserves.
Pension costs
The Group operates a defined contribution scheme. The assets of the scheme are held separately from those of the Group in an
independently administered fund. The pension costs charged represent contributions payable by the Group to the fund together with the
administration charge of the fund. In addition, the Group continues to contribute to personal pension plans for certain employees.
Taxation
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the statement of
comprehensive income and expense because it excludes items of income and expense that are taxable or deductible in other years and it
further excludes items that are never taxable or deductible. The Group’s liability for tax is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the
financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance
sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are
recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be
utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or the initial
recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the
accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investment in subsidiaries and associates, and interests in
joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable
that sufficient tax profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on
tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited in the
income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in
equity.
Deferred tax assets and liabilities are offset when there is legally enforceable right to set off current tax assets against current tax liabilities
and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities
on a net basis.
Notes to the Accounts continued
year ended 31st December 2009
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1. Significant Accounting Policies continued
Property, plant and equipment
The cost of property, plant and equipment is their purchase price, together with any incidental costs of acquisition.
Depreciation is charged so as to write off the cost of property, plant and equipment less residual value, on a straight-line basis over the
expected useful lives of the assets concerned.
The principal annual rates used for this purpose are:
Computer and office equipment 25%
Operational equipment 14 – 33%
Leasehold improvements Over the lease term subject to maximum of 20 years
Assets under finance leases are depreciated over useful economic life on the same basis as owned assets or, where shorter, over the term of
the relevant lease.
Non-current assets held for sale
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs
to sell.
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction
rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group)
is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for
recognition as a completed sale within one year from the date of classification.
Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services
in the normal course of business, net of discounts, VAT and other sales related taxes.
Sales of goods are recognised when goods are delivered and title has passed. Revenues from service contracts are recognised evenly over
the contractual period.
Where sales of goods and services involve the provision of multiple elements such as licence fees, installation fees and maintenance fees,
the appropriate revenue recognition convention is then applied to each element. The consideration allocated to each element is measured
by reference to their fair value.
Development expenditure
Development expenditure relating to specific projects intended for commercial exploitation is capitalised as an intangible fixed asset where
the following conditions are met:
l
an identifiable asset is being created;
l it is probable that the asset created will generate future economic benefits; and
l the development cost of the asset can be measured reliably.
Such expenditure is amortised over the period during which the benefits of the project are expected to arise. Expenditure on research
activities is recognised as an expense in the period in which it is incurred.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs
and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the
weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be
incurred in marketing, selling and distribution.
Financial instruments
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual
provisions of the instrument.
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1. Significant Accounting Policies continued
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily
convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
Trade payables
Trade payables are not interest-bearing and are stated at their nominal value.
Borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including
premiums payable on settlement or redemption and direct issue costs, are accounted for on an accrual basis in the statement of
comprehensive income and expense, and are added to the carrying amount of the instrument to the extent that they are not settled in the
period in which they arise. Borrowing costs associated with capital projects are capitalised during the development phase of the project.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Trade receivables
Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated
irrecoverable amounts.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity
instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Share-based payment
The Group has applied the requirements of IFRS2 ‘Share-based Payments’. In accordance with the transitional provisions, IFRS2 has been
applied to all grants of equity instruments after 7 November 2002 that were unvested at 1st January 2005.
The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair
value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the
equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares
that will eventually vest and adjusted for the effect of non market-based vesting conditions.
Fair value is measured by use of the Black–Scholes model. The expected life used in the model has been adjusted, based on management’s
best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
Critical estimates and judgements
In the process of applying the Group’s accounting policies, which are described above, management has made the following judgements
and estimations about the future that have the most significant effect on the amounts recognised in the financial statements. The estimates
and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current
and future periods.
Impairment of goodwill
The carrying value of goodwill at the year end is £12.6 million (2008 as restated: £12.6 million). An annual impairment review is required
under IAS36 ‘Impairments of Assets’ involving judgement of the future cash flows for cash-generating units and the discount rates applied to
future cash flows in order to calculate present value. Management prepare such cash flow forecasts derived from the most recent budgets
approved by the Board.
The introduction of IFRS8 resulted in the Group allocating goodwill amongst its operating segments as explained in note 31. The key risk and
judgement for the Group relates to the impairment of the goodwill allocated.
Recoverability of capitalised development costs
The capitalisation of development expenditure is a requirement of IAS38 ‘Intangible Assets’. All capitalised and ongoing projects are
reviewed regularly to ensure they meet the criteria for capitalisation. The key judgements required by management are the judgement of the
capitalisation of development expenditure and whether it meets the criteria defined within IAS38 ‘Intangible Assets’ and the potential
impairment of the intangible assets once capitalised.
Notes to the Accounts continued
year ended 31st December 2009
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2. Operating Profit and EBITDA Before Exceptional Items
2008
2009 as restated
£’000 £’000
Revenue 14,493 16,556
Cost of sales (9,289) (11,158)
Gross profit 5,204 5,398
Administrative expenses (4,454) (4,882)
Exceptional items (900) (627)
Operating loss (150) (111)
Add back: exceptional items 900 627
Operating profit before exceptional items 750 516
Add back:
Depreciation 662 436
Amortisation 433 256
EBITDA before exceptional items 1,845 1,208
3. Revenue Analysis
Revenue consists of £2,814,000 from sales of hardware and software products and £11,679,000 from the provision of services (2008:
£8,587,000 sale of hardware and software products, £7,969,000 provision of services).
The geographical region analysis of income by origin is as follows:
2009 2008
£’000 £’000
United Kingdom 10,608 14,732
Europe 3,885 1,824
14,493 16,556
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4. Business and Geographical Segments
The Group has adopted IFRS8 Operating Segments in the year and applied this retrospectively across all reportable periods. IFRS8 requires
operating segments to be identified on the basis of internal reports about the components of the Group that are regularly reviewed by the
Chief Executive in order to allocate resources to the segments and to assess their performance. The introduction of IFRS8 has not resulted in the
Group making changes to its reporting of segmented performance other than a recategorisation of software support costs between
administrative expenses and cost of sales as detailed in note 31. The business segments recognised in the prior year complied fully with the
definition of business segments included within IFRS8.
The Group has four business segments operating within HTEC Limited and Jet Set Wash Systems Limited. All material operations are in the UK.
HTEC Limited is currently organised into three trading divisions: Universe Data Services (UDS), Manufacturing and Petrol Forecourt Solutions
(PFS). Further information is presented below on a divisional basis.
UDS Manufacturing PFS JetSet Total
2009 2009 2009 2009 2009
£’000 £’000 £’000 £’000 £’000
Revenue — all external 3,086 2,056 7,418 1,933 14,493
Gross profit 1,650 278 2,764 512 5,204
Segment expenses (691) (375) (1,120) (753) (2,939)
Segmental result 959 (97) 1,644 (241) 2,265
Unallocated central and corporate
expenses (1,515)
Operating profit before exceptional
items 750
Exceptional items (see note 5) (1,005)
Finance costs (344)
Taxation 99
Loss for the year (500)
UDS Manufacturing PFS Total
2008 2008 2008 JetSet 2008
as restated as restated as restated 2008 as restated
£’000 £’000 £’000 £’000 £’000
Revenue — all external 1,885 3,263 9,933 1,475 16,556
Gross profit 638 501 3,556 703 5,398
Segment expenses (707) (621) (1,070) (884) (3,282)
Segment result (69) (120) 2,486 (181) 2,116
Unallocated central and corporate
expenses (1,600)
Operating profit before exceptional
items 516
Exceptional items (627)
Finance costs (373)
Taxation 139
Loss for the year (345)
The prior period adjustment is explained at note 31.
It is not currently possible to present assets and liabilities on a segment basis; accordingly, this information is presented in respect of
operational subsidiaries.
Notes to the Accounts continued
year ended 31st December 2009
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4. Business and Geographical Segments continued
HTEC JetSet Head Office Total
2009 2009 2009 2009
£’000 £’000 £’000 £’000
Total assets 19,869 1,886 143 21,898
Total liabilities (5,038) (1,310) (2,014) (8,362)
Net book amount 14,831 576 (1,871) 13,536
Other information:
Depreciation and amortisation 898 197 — 1,095
Impairment of assets — 20 — 20
Capital expenditure:
Tangible assets 101 296 — 397
Intangible assets 327 — — 327
Total 428 296 — 724
HTEC Total
2008 JetSet Head Office 2008
as restated 2008 2008 as restated
£’000 £’000 £’000 £’000
Total assets 19,392 2,063 141 21,596
Total liabilities (4,746) (1,366) (1,445) (7,557)
Net book amount 14,646 697 (1,304) 14,039
Other information:
Depreciation and amortisation 616 76 — 692
Impairment of assets 10 — — 10
Capital expenditure:
Tangible assets 420 959 — 1,379
Intangible assets 569 462 — 1,031
Total 989 1,421 — 2,410
Information about major customers
Included in revenues arising from the PFS segment are revenues of approximately £2.4 million (2008: £4.2 million) which arose from sales
to the segments largest customer. Included in revenues arising from the UDS segment are revenues of approximately £3.1 million (2008: £0.6
million) which arose from sales to the segments largest customer.
5. Exceptional items
2009 2008
£’000 £’000
Administrative expenses
Group restructuring costs* 801 534
Stock write-off as a result of EU legislation — 93
Advisor fees in respect of Brulines approach 99 —
900 627
* Consisting mainly of redundancy costs and the closure of the Spanish office.
Finance costs
Refinancing costs 85 —
Interest on tax provision 20 20
105 20
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6. Finance Costs
2009 2008
£’000 £’000
Interest payable on bank loans and overdrafts 177 242
Interest payable on finance leases 92 78
Other interest 75 33
Exceptional finance costs (see note 5) 105 20
449 373
7. Loss for the Year
This is stated after charging/(crediting):
2009 2008
£’000 £’000
Cost of inventory recognised as expense 1,602 3,680
Staff costs (see note 23) (excluding redundancy costs) 6,539 8,078
Foreign exchange losses/(gains) 4 (49)
Depreciation and amortisation
— Development costs 433 256
— Tangible, owned 362 409
— Tangible, subject to finance lease 300 27
Profit on disposal of fixed assets (14) —
Research expenditure 937 967
Auditors’ remuneration (see below) 78 83
Operating lease charges — plant and machinery 406 478
Operating lease charges — property 506 515
Exceptional items (see note 5) 1,005 647
The analysis of the Auditors’ remuneration is as follows:
2009 2008
£’000 £’000
Fees payable to the Company’s Auditors for the audit of the Company’s annual accounts 25 25
The audit of the Company’s subsidiaries pursuant to legislation 35 45
Total audit fees 60 70
Other fees pursuant to legislation:
Tax compliance 10 10
Tax advisory 8 3
Total non-audit fees 18 13
Notes to the Accounts continued
year ended 31st December 2009
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8. Tax on Loss on Ordinary Activities
2009 2008
£’000 £’000
Continuing operations
Current tax:
Current year (15) 1
Adjustments to tax charge in respect of previous periods (84) (166)
(99) (165)
Deferred tax (note 21):
Prior year — 26
Total tax credit (99) (139)
Corporation tax is calculated at 28% (2008: 28.5%) of the estimated assessable profit for the year. Taxation for other jurisdictions is
calculated at the rates prevailing in the respective jurisdictions.
The credit for the year can be reconciled to the loss per the income statement as follows:
2009 2008
£’000 £’000
Loss before tax (599) (484)
Tax credit at the UK corporation tax rate of 28% (2008: 28.5%) (168) (138)
Tax effect:
Expenses not deductible in determining taxable profit 75 31
Enhanced R&D tax relief (34) (89)
Pre-acquisition losses — (21)
Capital allowances less than/(in excess of) depreciation 68 (6)
Unrelieved tax losses carried forward 44 224
Adjustments to tax charge in respect of previous periods (84) (140)
Tax credit for the current period (99) (139)
9. Loss Per Share
The calculation of the basic and diluted loss per share is based on the following data:
2009 2008
£’000 £’000
Loss for the purposes of basic and diluted earnings per share being net loss attributable
to equity holders of the parent (500) (345)
2009 2008
Number Number
’000 ’000
Number of shares
Weighted average number of ordinary shares for the purposes of basic loss per share 114,705 114,705
Weighted average number of ordinary shares for the purposes of diluted loss per share 114,705 114,705
2009 2008
pence pence
Loss per share
Basic and diluted loss per share (0.44) (0.30)
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10. Goodwill
2008
HTEC JetSet 2009 Total
Group Group Total as restated
£’000 £’000 £’000 £’000
Cost at 1 January 2009 as previously reported 17,250 462 17,712 17,250
Prior period adjustment (5,100) — (5,100) (5,100)
Cost at 1 January 2009 as restated 12,150 462 12,612 12,150
Additions — — — 462
Carrying amount at 31 December 2009 12,150 462 12,612 12,612
As stated in note 1 the goodwill has been tested for impairment in accordance with IAS36 by discounting estimated future cash flows.
The recoverable amounts of each of the CGUs are determined from value in use calculations. The key assumptions for the value in use
calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period.
Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks
specific to the CGUs. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.
Following adoption of IFRS8, the goodwill relating to the HTEC acquisition was required to be allocated to all operational segments within HTEC
whereas under IAS14 the Group previously allocated this to the HTEC entity. Consequently, the Group allocated goodwill across the three HTEC
segments and undertook impairment reviews at each reported balance sheet date based on the new allocation. As explained in notes 1 and
31 the prior period adjustment at 31st December 2007 therefore arose from this change in accounting policy. The carrying values of goodwill in
the HTEC segments are disclosed at note 31.
The Group tests for impairment by preparing cash flow forecasts derived from the most recent financial budgets approved by the Board. The future
cash flows used are those anticipated in the budget for 2010 with 3% profit growth assumed for the PFS, UDS and JetSet segments for the following
five years and no growth thereafter. The current growth rates used reflect anticipated future turnover growth; however, the Group has conducted
sensitivity analysis on the impairment tests of these segments carrying values. For these segments, the growth rate could reduce to zero percentage
points after the 2009 budget and this would still result in the carrying value being in excess of its recoverable amount. For the JetSet CGU a reduction
in the anticipated cash flows of 50 percentage points would result in the carrying value being reduced to its recoverable amount.
The Board has concluded that no impairment of goodwill is required for the PFS, UDS and JetSet operating segments.
For the manufacturing segment the implementation of IFRS8 resulted in £1.2 million of goodwill being allocated to the segment after booking an
impairment provision as explained at note 31. The future cash flows used to test for impairment in the manufacturing segment are these anticipated
in the budget for 2010 with no profit anticipated thereafter. The growth rates used reflect the current difficult economic conditions for manufacturing.
The Board has concluded that no further impairment of goodwill is required in the manufacturing segment.
The risk adjusted rate used to discount each of the CGU cash flow forecasts is 12.5% (2008: 12.5%).
11. Development Costs
2009 2008
£’000 £’000
Group
Cost
At 1 January 5,603 5,034
Additions 327 569
At 31st December 5,930 5,603
Amortisation
At 1 January 4,490 4,234
Charge for the year 433 256
At 31 December 4,923 4,490
Carrying amount
At 31 December 1,007 1,113
Development costs are tested for impairment annually and are amortised over the period during which the benefits of the development
projects are expected to arise.
Notes to the Accounts continued
year ended 31st December 2009
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12. Property, Plant and Equipment
Leasehold Plant and
Improvements Equipment Total
Group £’000 £’000 £’000
Year ended 31 December 2009
Cost
At 1 January 2009 1,085 5,487 6,572
Additions 20 377 397
Disposals — (248) (248)
At 31 December 2009 1,105 5,616 6,721
Depreciation
At 1 January 2009 383 3,096 3,479
Charge for the year 57 605 662
Impairments — 20 20
Disposals — (245) (245)
At 31 December 2009 440 3,476 3,916
Net book value
At 31 December 2009 665 2,140 2,805
At 31 December 2008 702 2,391 3,093
Year ended 31st December 2008
Cost
At 1 January 2008 1,058 4,159 5,217
Additions 27 1,181 1,208
Acquired upon acquisition — 171 171
Disposals — (24) (24)
At 31 December 2008 1,085 5,487 6,572
Depreciation
At 1 January 2008 327 2,720 3,047
Charge for the year 56 380 436
Impairments — 10 10
Disposals — (14) (14)
At 31 December 2008 383 3,096 3,479
Net book value
At 31 December 2008 702 2,391 3,093
At 31 December 2007 731 1,439 2,170
The impairment loss on plant and equipment of £20,000 is due to the closure of JetSet’s Scottish office.
The net book value of plant and equipment includes £1,017,000 (2008: £1,185,000) in respect of assets held under finance leases. The
depreciation charged on these assets during the year was £300,000 (2008: £26,000).
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13. Investments
2009 2008
Company £’000 £’000
Investments in subsidiary undertakings at 1st January 2009 17,117 17,117
Further investment into Jet Set Wash Systems Limited 750 —
At 31st December 2009 17,867 17,117
The investment in Jet Set Wash Systems Limited relates to the capitalisation of existing intercompany indebtedness and was a non-cash
transaction.
For details of principal subsidiaries see note 29.
14. Inventories
2009 2008
Group £’000 £’000
Raw materials 870 1,132
Work in progress 399 505
Finished goods — 10
1,269 1,647
There are no significant differences between the replacement costs (shown above) and the fair values.
15. Other Financial Assets
Trade and other receivables
2009 2008
Group £’000 £’000
Trade receivables 2,230 2,126
Other debtors 50 100
Prepayments and accrued income 740 745
Corporation tax receivable 40 90
3,060 3,061
2009 2008
Company £’000 £’000
Amounts owed from Group undertakings 249 —
Other debtors 50 100
Prepayments and accrued income 81 48
380 148
The average credit period taken on sales of goods and services is 41 days (2008: 46 days). No interest is charged on the receivables. Before
accepting any new customer, the Group uses an external credit scoring system to assess the potential customer’s credit quality and defines
credit limits by customer. Of the trade receivables balance at the end of the year, £757,225 (2008: £679,000) is due from the Group’s largest
customer.
Included in the Group’s trade receivable balance are debtors with a carrying value amount of £590,000 (2008: £669,000) which are past due
at the reporting date for which the Group has not made any provision as there has not been a significant change in credit quality and the
amounts are still considered recoverable. The Group does not hold collateral over these balances. Ageing of past due but not impaired
receivables is 30–60 days £455,000 (2008: £543,000), 60–90 days £34,000 (2008: £70,000) and 90 days and over £101,000 (2008: £56,000).
In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable from the
date the credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large
and unrelated. Accordingly, the Directors believe that no bad debt provision is required (2008: £nil).
Notes to the Accounts continued
year ended 31st December 2009
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15. Other Financial Assets continued
Cash and cash equivalents
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Cash and cash equivalents 1,145 70 12 —
Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less. The carrying value
of these assets is approximately equal to their fair value.
16. Trade and Other Payables
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Trade creditors 1,266 1,434 122 71
Other creditors 39 156 39 40
Accruals and deferred income 2,296 1,378 93 56
Other taxation 820 1,040 — —
4,421 4,008 254 167
Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period
taken for trade purchases is 66 days (2008: 62 days).
The Directors consider that the carrying amount of trade payables approximates to their fair value.
17. Current Tax Liabilities
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Corporation tax 335 315 — —
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18. Borrowings
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Unsecured — at amortised cost
Current
Bank overdrafts — — — 8
Directors and management loans (iv) 229 275 — —
Secured — at amortised cost
Current
Bank loans (i) 760 540 760 518
Finance lease liabilities (ii) 324 350 — —
Invoice discounting (iii) 905 786 — —
Non-current
Bank loans (i) 1,000 760 1,000 760
Finance lease liabilities (ii) 388 523 — —
3,606 3,234 1,760 1,286
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
The borrowings are repayable as follows:
On demand or within one year 2,218 1,951 760 526
In the second to fifth years inclusive 1,388 1,283 1,000 760
3,606 3,234 1,760 1,286
(i) Bank loans consist of two separate term loans. They are secured by a first charge over all undertakings and assets of the Group. The
weighted average interest rate paid in 2009 was 9.84% (2008: 8.76%). The original term loan bears interest based on a fixed rate of
5.33% plus a risk margin of 3.35%. At 31 December 2009 £760,000 was drawn on this loan and is being repaid on a monthly basis with
final payment due in April 2011. The second loan, of £1,000,000, was drawn during the year and bears interest at 10% over HBOS bank
rate. This loan is repayable in 60 instalments commencing in April 2011.
At the year end the Group was in breach of the net worth covenant attached to the original term loan. This breach has been waived
subsequent to the year end, but in accordance with IAS1 the amount outstanding on the loan is shown as current. The amount of the loan
consequently shown as current but actually to be paid in 2011 is £242,000.
(ii) Finance lease liabilities are secured by the assets leased. The average lease term is five years. For the year ended 31 December 2009, the
average effective borrowing rate was 7.9% (2008: 8.8%). Interest rates are fixed at the contract date. All leases are on a fixed repayment
basis and no arrangements have been entered into for contingent rental payments.
(iii) The invoice discounting facility is secured on the trade receivables of HTEC Limited and bears interest at an effective rate of 6% (2008: 6%).
(iv) The Directors and management loans are unsecured and bear interest at 15% (2008: 15%).
All borrowings are denominated in sterling.
The Directors consider that the carrying amount of the bank loans and finance lease obligations approximates to their fair value.
At 31 December 2009, the Group had available £100,000 (2008: £310,700) of undrawn committed borrowing facilities in respect of which all
conditions precedent had been met.
The bank overdraft and bank loans are secured by a debenture over the assets of the Group and are subject to certain covenants in respect
of interest cover, cash flow cover and net asset value.
Notes to the Accounts continued
year ended 31st December 2009
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19. Other Liabilities
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Amounts owed to Group undertakings — — 1,224 360
20. Financial Instruments
Capital risk management
The Group manages its capital to ensure that entities within the Group will be able to continue as going concerns while maximising the return
to stakeholders through the optimisation of the debt and equity balance.
The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 18, cash and cash equivalents, and equity
attributable to shareholders of the parent, comprising issued share capital, reserves and retained earnings as disclosed on page 21.
Gearing ratio
The Group regularly reviews the capital structure. As part of this review, it considers the cost of capital and the risks associated with each
class of capital.
The gearing ratio at the year end is as follows:
2008
2009 as restated
£’000 £’000
Debt* 3,606 3,234
Cash and cash equivalents (1,145) (70)
Net debt 2,461 3,164
Equity
†
13,536 14,039
Net debt to equity ratio 18.2% 22.5%
* Debt is defined as medium and short-term borrowings, as detailed in note 18.
†
Equity includes all capital and reserves of the Group attributable to equity holders of the parent.
Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the
basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are
disclosed in note 1 to the financial statements.
Categories of financial instruments
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Financial assets:
At amortised cost:
Cash 1,145 70 12 —
Trade receivables 2,230 2,126 — —
3,375 2,196 12 —
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20. Financial Instruments continued
Categories of financial instruments
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Financial liabilities:
At amortised cost:
Bank overdrafts — — — 8
Trade payables 1,266 1,434 122 71
Invoice discounting loan 905 786 — —
Bank loans 1,760 1,300 1,760 1,278
Directors and management loans 229 275 — —
Finance lease obligations 712 873 — —
4,872 4,668 1,882 1,357
The revised IFRS7 requires that an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped
into Levels 1 to 3 based on the degree to which the fair value is observable, is given. The levels are as follows:
l Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
l Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
l Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not
based on observable market data (unobservable inputs).
The Group’s financial instruments, recognised at fair value, all fall into the Level 1 categorisation.
Financial risk management objectives
The Group’s operations expose it to a variety of risks including the effect of changes in interest rates on debt, credit risk and liquidity risk. In
2009 the Group did not have significant risk on foreign currency.
Neither the Company nor the Group has material exposures in any of the areas identified above and consequently they do not use derivative
instruments to manage these exposures.
Market risk
The activities of the Company and Group primarily expose them to the financial risks of changes in interest rates (see below). The Group does
transact business in euros and US dollars but at approximately 10% of turnover the exchange risk is small.
Interest rate management
The Company and the Group are exposed to interest rate risk as entities in the Group borrow funds at floating interest rates. The Group
continually reviews the appropriateness of fixing interest rates on its borrowings.
The Company and the Group’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk
management section of this note.
Interest rate sensitivity
The sensitivity analysis below has been determined based on the exposure to interest on the financial instrument balances at the reporting
date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period.
At the reporting date, if interest rates had been 1% higher/lower and all other variables were held constant, the Group and Company’s net
loss and equity reserves for the year ended 31 December 2009 would increase/decrease by £11,000 (2008: £8,000). This is mainly
attributable to the Group and Company’s exposure to interest rates on its variable rate borrowings. A 1% movement in basis points has been
used as this provides a benchmark against which to measure any future interest rate movements.
Notes to the Accounts continued
year ended 31st December 2009
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20. Financial Instruments continued
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group’s
policy is to only deal with creditworthy counterparties, carrying out background checks before any new accounts are opened so as to mitigate
the risk of financial loss from defaults. The Group’s exposure and the credit ratings of its counterparties are monitored regularly with no
significant concentration of credit risk with a single counterparty. Credit exposure is controlled by counterparty limits that are reviewed and
approved by senior management as and when necessary, but at a minimum annually.
The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the Group’s
maximum exposure to credit risk.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of Directors, which reviews and manages the Group’s short and
medium-term funding and liquidity requirements on a regular basis. The Group manages liquidity risk by maintaining adequate reserves,
banking facilities and reserve borrowing facilities by regularly monitoring forecast and actual cash flows whilst attempting to match the
maturity profiles of financial assets and liabilities.
As noted within the Directors’ Report on page 15, there were breaches of the loan covenant during the year that were waived by the bank.
One of the key liquidity risks is to ensure ongoing compliance with banking covenants. Subsequent to the year end the bank have removed all
covenants from the loan facilities.
The following table details the Company and the Group’s remaining contractual maturity for its non-derivative financial liabilities. The table has
been drawn up based on the undiscounted contractual maturities of the financial liabilities including interest that will accrue to those liabilities.
Weighted
average Less More
effective than 1 to 6 6 months 1 to than
Group rate 1 month months to 1 year 3 years 3 years Total
2009 % £’000 £’000 £’000 £’000 £’000 £’000
Non-interest bearing:
Trade payables — 983 283 — — — 1,266
Fixed interest:
Finance leases 7.9 30 170 167 402 — 769
Bank loan (see below) 9.7 836 — — — — 836
Directors’ loans 15.0 — 29 — 260 — 289
Variable interest:
Invoice discounting 6.0 910 — — — — 910
Bank loan 10.5 9 45 54 433 956 1,497
2,768 527 221 1,095 956 5,567
Weighted
average Less More
effective than 1 to 6 6 months 1 to than
rate 1 month months to 1 year 3 years 3 years Total
2008 % £’000 £’000 £’000 £’000 £’000 £’000
Non-interest bearing:
Trade payables — 1,240 194 — — — 1,434
Fixed interest:
Finance leases 8.8 44 200 137 592 — 973
Bank loan 8.8 46 237 294 870 — 1,447
Directors’ loans 15.0 — 86 220 — — 306
Variable interest:
Invoice discounting 6.0 790 — — — — 790
2,120 717 651 1,462 — 4,950
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20. Financial Instruments continued
Weighted
average Less More
effective than 1 to 6 6 months 1 to than
Company rate 1 month months to 1 year 3 years 3 years Total
2009 % £’000 £’000 £’000 £’000 £’000 £’000
Non-interest bearing:
Trade payables — 122 — — — — 122
Fixed interest:
Bank loan (see below) 9.68 836 — — — — 836
Variable interest:
Bank loan 10.5 9 45 54 433 956 1,497
967 45 54 433 956 2,455
Weighted
average Less More
effective than 1 to 6 6 months 1 to than
rate 1 month months to 1 year 3 years 3 years Total
2008 % £’000 £’000 £’000 £’000 £’000 £’000
Non-interest bearing:
Trade payables — 40 31 — — — 71
Variable interest:
Bank loan 8.8 45 232 276 860 — 1,413
85 263 276 860 — 1,484
Group and Company
At 31 December 2009 the Group was in technical breach of one covenant associated with the fixed interest bank loan. Accordingly, the whole
amount outstanding has been shown within amounts due in less than one month. As the breach has been waived subsequent to the year
end the actual repayment profile of this loan including interest is:
£’000
Due in less than one month 49
Due in 1 to 6 months 251
Due in 6 months to 1 year 265
Due in 1 to 3 years 271
836
Notes to the Accounts continued
year ended 31st December 2009
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20. Financial Instruments continued
The following table details the Group’s and the Company’s expected maturity for its non-derivative financial assets. The table has been drawn
up based on the undiscounted contractual maturities of the financial assets excluding interest that will be earned on those assets except
where the Company or Group anticipates that the cash flow will occur in a different period.
Weighted
average Less
effective than 1 to 6 6 months 1 to
Group rate 1 month months to 1 year 3 years Total
2009 % £’000 £’000 £’000 £’000 £’000
Variable interest:
Cash 1.0 1,145 — — — 1,145
Non-interest bearing:
Trade receivables — 1,545 685 — — 2,230
2,690 685 — — 3,375
Weighted
average Less
effective than 1 to 6 6 months 1 to
rate 1 month months to 1 year 3 years Total
2008 % £’000 £’000 £’000 £’000 £’000
Variable interest:
Cash 1.0 70 — — — 70
Non-interest bearing:
Trade receivables — 668 1,458 — — 2,126
738 1,458 — — 2,196
Weighted
average Less
effective than 1 to 6 6 months 1 to
Company rate 1 month months to 1 year 3 years Total
2009 % £’000 £’000 £’000 £’000 £’000
Cash 1.0 12 — — — 12
Weighted
average Less
effective than 1 to 6 6 months 1 to
rate 1 month months to 1 year 3 years Total
2008 % £’000 £’000 £’000 £’000 £’000
Cash 1.0 — — — — —
The fair value of the Group‘s financial assets and liabilities is not materially different from the carrying values in the balance sheet.
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21. Deferred Tax
The movement on the net provision for deferred taxation is as follows:
2009 2008
£’000 £’000
Net provision at 1st January — (26)
Credit to income statement — 26
At 31st December — —
At the year end £166,000 (2008: £87,000) of fixed asset timing differences have not been recognised as a deferred tax asset.
At the balance sheet date, the Group has unutilised tax losses of £2,600,000 (2008: £2,082,000) available for offset against future profits. A
deferred tax asset has not been recognised in respect of these losses due to the uncertainty of future profits.
22. Called Up Share Capital
2009 2008
Group and Company £’000 £’000
Authorised
155,000,000 ordinary shares at 5p each (2008: 155,000,000) 7,750 7,750
Allotted, called up and fully paid:
114,704,539 ordinary shares of 5p each (2008:114,704,539) 5,735 5,735
The Company has one class of ordinary shares which carry no right to fixed income.
In 2007 closing share capital was overstated by £12,376 (247,516 ordinary shares of 5p each) in respect of matching shares acquired to
satisfy obligations of the LTIP scheme. This error was corrected in 2008.
Allotments for cash made in 2009
No allotments of shares for cash were made in 2009 (2008: none).
Share options
No share options were awarded to Directors in 2009 (2008: none).
Long Term Investment Plan (‘LTIP’)
No shares were awarded as matching shares under the LTIP in 2009 (2008: none).
Notes to the Accounts continued
year ended 31st December 2009
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23. Employees and Directors
Group Company
2009 2008 2009 2008
£’000 £’000 £’000 £’000
Wages and salaries 5,757 7,183 140 140
Social security costs 578 750 14 14
Pension costs 204 145 11 11
Redundancy costs (see note 5) 511 534 — —
7,050 8,612 165 165
2009 2008 2009 2008
No. No. No. No.
The average number of people (including Executive Directors)
employed during the year:
HTEC 174 209 — —
JetSet 29 35 — —
Head Office 3 3 2 2
206 247 2 2
2009 2008
Emoluments paid to the highest paid Director were as follows: £’000 £’000
Aggregate emoluments 125 126
Company pension contribution to money purchase schemes 11 11
136 137
There were two Directors (2008: two) to whom retirement benefits accrued under money purchase schemes during the year.
Further details of the Directors’ remuneration are included in the Directors’ Remuneration Report on pages 12 and 13.
24. Pension Commitments
The Group operates a defined contribution scheme. The assets of the scheme are held separately from these of the Group in funds under the
control of investment managers. The pension costs charged represent contributions payable by the Group to the fund amounting to £203,901
(2008: £145,493), together with the administration charge of the fund. In addition, the Group continues to contribute to personal pension plans
for certain of its employees. As at 31st December 2009 contributions of £46,000 (2008: £41,000) due in respect of the current reporting period
had not been paid over to the scheme.
25. Operating Lease Commitments
At 31st December 2009 the Group has lease agreements in respect of properties, vehicles, plant and equipment, for which payments extend
over a number of years.
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating
leases, which fall due as follows:
2009 2008
Plant and Plant and
Property Machinery Total Property Machinery Total
£’000 £’000 £’000 £’000 £’000 £’000
Within 1 year 420 180 600 511 211 722
Between 2 to 5 years 1,636 52 1,688 1,636 203 1,839
After 5 years 3,988 — 3,988 716 — 716
Total 6,044 232 6,276 2,863 414 3,277
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26. Contingent Liabilities
The Group has given a duty deferment guarantee to HMRC of £5,000 (2008: £5,000).
27. Capital and Other Financial Commitments
As at 31st December 2009 the Group had not entered into any contracts for future capital expenditure (2008: nil).
28. Share-based Payments
Summary of share option schemes in operation during the year
The Directors’ Remuneration Report on page 13 describes the plans to which IFRS2 applies. In summary, the Group operated the following
plans during the period:
l Enterprise Management Incentive (‘EMI’) Plan
l Discretionary Unapproved Share Option Plan
l The Group recognised a total expense of £nil in 2009 (2008: £nil).
Equity-settled share option schemes
The exercise price of options granted under the EMI and unapproved share option plans was set at the market value at the date of grant, that
is the price which equates to the closing middle market quotation for the shares on AIM on the date of grant. Consequently, no table of
assumptions is shown below.
The options are not subject to any performance conditions and vested immediately upon grant. Where options remain unexercised after a
period of ten years from the date of grant the options expire. Moreover, the options will lapse in the case of termination of employment,
subject to the good leaver provisions or the Remuneration Committee exercising its discretion to permit options to be exercised.
The total number of shares under option is as follows:
Weighted
Number of average
share options exercise price
Unapproved share options No. £
Outstanding at beginning of period 1,250,000 0.08
Granted during the period — —
Forfeited during the period — —
Exercised during the period — —
Outstanding at the end of the period 1,250,000 0.08
Exercisable at the end of the period 1,250,000 0.08
Options granted under the plan vest immediately. All acquisitions under the plan are equity-settled.
Weighted
Number of average
share options exercise price
EMI No. £
Outstanding at beginning of period 2,500,000 0.08
Granted during the period — —
Forfeited during the period — —
Exercised during the period — —
Outstanding at the end of the period 2,500,000 0.08
Exercisable at the end of the period 2,500,000 0.08
Options granted under the plan vest immediately. All acquisitions under the plan are equity-settled.
Notes to the Accounts continued
year ended 31st December 2009
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29. Principal Subsidiaries and Joint Ventures
Place and Date Issued and Fully Paid
Name of Incorporation Share Capital Percentage Held Business
HTEC Group Limited England and Wales Ordinary £1 100% held Holding company
HTEC Limited* England and Wales Ordinary 1p 100% held Manufacture and development
Convertible redeemable of payment and information
preference £1 systems
High Technology* Spain Ordinary e6 100 % held Dormant
Electronic Clearance SL
HTEC Limited* Portugal Branch, no share capital 100% held Management of information
systems
Jet Set Wash Systems Limited England and Wales Ordinary £1 100% held Manufacture and retail of
forecourt valeting equipment
WSF Services Limited* Scotland Ordinary £1 100% held Dormant
Prepaid Card Management England and Wales A / B shares £0.01 50% held Provision of prepaid
Limited* cash card services
* Investments held in a subsidiary company.
All the above companies are included in the consolidated Group results.
30. Related Parties
T ransactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. Transactions
between the Company and its subsidiaries are disclosed below.
During the year, the Company entered into the following transactions with its subsidiaries, which are related parties:
Amounts recharged to subsidiaries
2009 2008
£’000 £’000
HTEC Limited 396 396
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30. Related Parties continued
Loans from two Directors, totalling £200,000 (2008: £275,000) at the year end, were provided to assist with growth of the newly acquired
subsidiary, Jet Set Wash Systems Limited. Amounts owing at the balance sheet date were as follows:
Capital Interest Interest
outstanding at paid accrued at
31 December during 31 December
2009 the year 2009
£’000 £’000 £’000
J R Scholes 100 25 4
M Coster 100 21 4
200 46 8
Interest paid on the Director loans during the year included £20,000 accrued from the prior year.
Loan repayment is conditional upon the agreement of the Company’s bankers.
Loans from two Directors and two members of the Management team, totalling £29,000 (2008: £nil) at the year end, were provided to assist
with the matched funding requirement of a short-term loan taken out during the year. This short-term loan was repaid prior to the year end,
and consequently the loans provided by the Director and management are now repayable. Amounts owing to Directors at the balance sheet
date were as follows:
Capital Interest Interest
outstanding at paid accrued at
31 December during 31 December
2009 the year 2009
£’000 £’000 £’000
P Cooper 7 — —
R J Smeeton 7 — —
14 — —
The loans are repayable during 2010.
Remuneration of key personnel
Details of the remuneration of the Directors, who are the key management personnel of the Group, is provided in aggregate for each of the
categories specified in IAS24 ‘Related Party Disclosures’ in the Directors’ Remuneration Report on page 13.
Notes to the Accounts continued
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31. Prior Year Adjustments
(1) Goodwill
The Group has restated the carrying value of goodwill associated with the HTEC subsidiary. This is as a result of the adoption of IFRS8 which
requires goodwill to be allocated to operating segments.
The transitional provisions of IFRS8 permitted the allocation of goodwill as at 1st January 2007, the date at which the Group introduced
segmental reporting of the three segments currently recognised within the HTEC subsidiary.
Goodwill has been allocated based upon value in use calculations for the three segments reflecting their operational cash flows in 2007.
The results of this exercise are to allocate goodwill and the subsequent impairment across the segments as follows:
PFSManufacturing UDS Total
£’000 £’000 £’000 £’000
At 31 December 2007 9,228 6,334 1,688 17,250
Impairment — (5,100) — (5,100)
Carrying value at 31 December 2007 9,228 1,234 1,688 12,150
Impairment testing of these balances indicates that a £5.1 million write-off of goodwill in the manufacturing segment would have been
required as at 31st December 2007, and this has been booked as a prior year period adjustment to the closing reserves at 31st December
2007. Consequently, the balance sheet at 31st December 2007 on page 22 has been restated as it arises from the adoption of a new
accounting standard. This gives rise to the restatement of previous year’s net assets as follows:
Goodwill and
profit and loss
reserve
£’000
Adjustment to opening net assets at 1 January 2008 and January 2009 (5,100)
(2) Categorisation of costs
The introduction of IFRS8 Segmental Reporting led to a review of cost classifications. Consequently, the Group will now recognise the cost of its
software engineering department as a component of cost of sales. In previous years these costs have been included within administrative
expenses and the comparative information for the year ended 31st December 2008 has been restated to reflect this revised treatment. This
gives rise to the restatement of prior year cost of sales and administrative expenses as follows:
Before Exceptional 2008
exceptional items items Total
£’000 £’000 £’000
(Increase) in cost of sales (970) — (970)
Decrease in administrative expenses 970 — 970
05
Universe Group plc
Annual Report 2009
Stock code: UNG
49
17475UNIVERSE_Cvr.indd 3 17475UNIVERSE_Cvr.indd 3 13/05/2010 14:18 13/05/2010 14:18 17475 13/05/2010 Proof 3
Universe Group plc
Southampton International Park
George Curl Way
Southampton
Hampshire
SO18 2RX
United Kingdom
www.universeplc.com
t: +44 (0)23 8068 9510
f: +44 (0)23 8068 9201
Universe Group plc is Registered in England.
Registered No. 2639726
17475UNIVERSE_Cvr.indd 4 17475UNIVERSE_Cvr.indd 4 13/05/2010 14:18 13/05/2010 14:18 ### summary: |
Impax Asset Management Group plc
Annual Report and Accounts 2012 Impax Asset Management Group plc is a leading
investment manager dedicated to investing in the
opportunities created by the scarcity of natural
resources and the growing demand for cleaner , more
efficient products and services, through both listed
and private equity strategies.
We manage £1.8 billion for institutional and high net worth investors globally, and are committed
to providing strong, long-term risk-adjusted returns. The Company’s investment team numbers
28 professionals, with an average of 18 years’ relevant experience.
Our listed equity funds seek out mis-priced companies that are set to benefit from the long-term
trends of changing demographics, rising consumption, limited natural resources and urbanisation.
Investment is focused on a small number of deeply researched strategies in energy, water, waste,
food and agriculture and related markets.
Impax’s private equity infrastructure funds invest in power generation assets in the renewable
energy sector.
Impax is a thought leader in defining the environmental and resource efficiency markets, for example
through a partnership with FTSE to develop and manage the classification system underpinning the
FTSE Environmental Markets Index Series.
Contents
1 Highlights 2012
Impax – Key Facts
2 Chairman’s Statement
4 Chief Executive’s Report
7 Overview of Our Resource
Efficiency Markets
8 Directors
9 Senior Personnel
10 Directors’ Report
12 Statement of Directors’ Responsibilities
in Respect of the Directors’ Report
and the Financial Statements
13 Corporate Governance Report
15 Key Risks
16 Remuneration Report
18 Independent Auditor’s Report
19 Consolidated Statement
of Comprehensive Income
20 Consolidated Statement
of Financial Position
21 Consolidated Statement
of Changes in Equity
22 Consolidated Cash Flow Statement
23 Notes to the Financial Statements
42 Company Statement
of Financial Position
43 Company Statement
of Changes in Equity
44 Company Cash Flow Statement
Officers and Advisers Impax Asset Management Group plc Annual Report and Accounts 2012
1
Highlights
Highlights 2012
Key facts 2012
> Attractive investment themes
– Rapidly growing markets
– Large population of dynamic
companies
– Market complexity leads to
mis-pricing
> Experienced team
– 56 people, including 28 specialist
investment professionals
– No changes to senior investment
team since inception
– Significant staff share ownership
> Extensive distribution networks
– In-house and committed third party
distributors
– Access to over 20 markets
> Stable investor base
– 95% of investors in “Impax label”
funds are institutional
> Scalable business model
– High capacity investment strategies
– Proven investment processes
– Established infrastructure
> Financial performance
– Revenue £18.6 million
– Operating earnings £4.6 million
1
– Loss before tax of £4.7 million
2
– Assets under management £1.83 billion
– Diluted earnings per share 2.57 pence (adjusted)
3
– Cash reserves of £19.3 million
– Proposed dividend 0.75 pence per share
> Investment performance
– Principal listed equity strategies beat their environmental comparator indices
– Water strategy grew by 19.2%
4
– Investee companies of the Private Equity funds continued to perform well
>Expansion
– Expansion of stock coverage to include Food & Agriculture sectors (fund to
launch 1 December 2012)
– Opening of an office in New York City and appointment of a Head of Institutional
Sales and Client Service in the United States
1
revenue less operating costs excluding £8.7 million charge due to share incentive schemes
2
includes £8.7 million charges associated with the Company’s historical share-based incentive schemes
3
adjusted to exclude the IFRS2 charge for share schemes satisfied by primary shares
4
net asset value per share from 1 October 2011 to 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
2
Chairman’s Statement
For the Year Ended 30 September 2012
The drivers behind resource efficiency and
environmental markets have once again
strengthened, further underpinning the
attractiveness of the investment area in
which Impax operates.
Sector overview
> Drivers of resource scarcity are
fundamental and are creating
unprecedented opportunities for
long-term investors
> Underlying markets growing rapidly
> Our investment universe now numbers
some 2,000 stocks with a combined
market capitalisation in excess of
£4.25 trillion
> Companies often mis-priced as
investors misunderstand technology
change and the impact of regulations
> Successful investing requires a deep
understanding of the industries in which
these companies operate, including the
entire value chain
1
revenue less operating costs excluding £8.7 million
(2011: £5.4 million) charge due to share incentive
schemes
2
adjusted to exclude the IFRS2 charge for share
schemes satisfied by primary shares
Keith Falconer
Chairman
Over the past 12 months, the prospects
for equity investors have remained
uncertain as growth in the global
economy has been elusive and problems
in the Eurozone intractable. In spite of
these headwinds, Impax has delivered
a robust performance and has continued
to invest in order to position the business
for further growth.
During the Company’s financial year from
1 October 2011 to 30 September 2012
(the “Period”), assets under discretionary
and advisory management (“AUM”)
initially rose from £1.90 billion to £2.03
billion at the end of the first half, before
falling back to £1.83 billion. Since the
end of the Period, equity markets have
weakened further and AUM declined
slightly, reaching £1.80 billion on
31 October 2012.
Notwithstanding sustained equity market
volatility, the drivers behind resource
efficiency and environmental markets
have once again strengthened, further
underpinning the attractiveness of the
investment areas in which Impax
operates. For example, acute drought in
the United States and the recent impact
of Hurricane Sandy have raised the
likelihood that a re-elected President
Obama will promote additional investment
in clean energy and water infrastructure,
while across the planet there has been a
notable increase in evidence pointing to
faster than expected climate change, for
example the steep decline in the summer
coverage of sea ice in the Arctic Ocean
compared to previous years.
Institutional investors are increasingly
interested in analysing the risks and
opportunities arising from these changes,
providing us with further opportunity for
dialogue and, we believe, the potential for
increased commitment of capital to our
funds and accounts. Accordingly, we
have continued to invest incrementally in
our capabilities, particularly in the areas
of client service in the United States
and the development of investment
management expertise across the food
and agriculture sectors.
Results for the year and
proposed dividend
Revenue to 30 September 2012 was
£18.6 million (2011: £20.9 million).
Operating earnings
1
for the year were
£4.6 million (2011: £6.2 million) and the
associated operating margin was 24 per
cent (2011: 30 per cent). The decrease in
revenue and profits compared to the
corresponding 2011 financial year reflect
a combination of lower average AUM for
the year and a moderately higher fixed
cost base arising from the investment we
have made in further strengthening the
Company’s platform to prepare for further
growth. Profit before tax (“PBT”) for the
Period was a loss of £4.7 million (2011:
profit of £1.7 million). PBT was impacted
by £8.7 million (2011: £5.4 million) of
charges associated with the Company’s
historical share-based incentive schemes.
£1.0 million of this charge is directly offset
by a corresponding tax gain. PBT also
included fair value losses of £0.7 million
arising primarily from the Company’s
investments into the Impax Green
Markets Fund which we have set up in
the United States for domestic investors,
and our first private equity fund, in part
due to the strengthening of Sterling
against the Euro and the Dollar.
The Board regards the most relevant
measure of the year’s earnings to be
diluted earnings per share (“EPS”). On
this basis diluted EPS for the year was
2.57 pence (adjusted
2
), including Impax Asset Management Group plc Annual Report and Accounts 2012
3
Highlights Chairman’s Statement
08
09
10
11
12
11.39
10.39
15.34
20.93
18.62
Revenue
£ million
08
09
10
11
12
4.15
2.88
3.83
6.24
4.55
Operating Earnings
£ million
08
09
10
11
12
3.07
2.58
3.49
3.74
2.57
Earnings per share
(diluted adjusted)
pence
08
09
10
11
12
0.35
0.40
0.60
0.70
0.75
Dividend
pence
08
09
10
11
12
1.09
1.26
1.82
1.90
1.83
AUM
£ billion
0.42 pence due to the fair value losses.
For 2011, diluted EPS was 3.74 pence
(adjusted
2
). Diluted EPS before adjustment
was (4.32) pence in 2012 and 0.93 pence
in 2011.
The Group’s balance sheet strengthened
during the year with continued cash
generation from operating activities. At
the end of the financial year, shareholders’
equity had increased to £22.6 million
(2011: £21.5 million) and cash reserves
held by operating entities of the Group
were £19.3 million (2011: £20.0 million).
The slight decrease in cash included the
impact of the Company’s US$5 million
seed investment into the Impax Green
Markets Fund. Current asset investments
held at the year-end were £8.7 million
(2011: £3.9 million). The Group remained
debt-free throughout the Period.
In light of the Company’s sustained strong
cash flow and progressive dividend policy,
the Board recommends an increased
dividend of 0.75 pence per share (2011:
0.70 pence per share). The dividend
proposal will be submitted for formal
approval by shareholders at the
forthcoming Annual General Meeting
on 13 February 2013. If approved,
the dividend will be paid on or around
20 February 2013. The record date for
the payment of the proposed dividend will
be 25 January 2013 and the ex-dividend
date will be 23 January 2013. In line with
the Company’s stated policy, the Board
does not currently intend to recommend
the payment of interim dividends.
Remuneration
In accordance with the Company’s
updated remuneration policy (which was
described in the 2011 Annual Report),
during the Period the Board confirmed the
grant of five million Employee Share Option
Plan (“ESOP”) options to management
and staff in respect of their performance
for the financial year ended 30 September
2011. The strike price was set at 49.6
pence and the options will vest on
31 December 2014.
Share Buy-backs and Share Issuance
During the Period the Board commenced
the buy-back of the Company’s shares
into Treasury, with the aim of reducing the
requirement to issue new shares to
satisfy the exercise of options awarded
under the ESOP . To date, 3.5 million
shares have been purchased since the
start of the buy-back programme, and
the Company expects further purchases
to be made from time to time while
continuing to evaluate attractive alternative
uses of the Company’s cash resources.
Separately, in accordance with the
approval given by Shareholders in January
2008, the Company plans shortly to issue
12.2 million shares which will be available
to satisfy exercises of vested option
schemes, taking the total shares in issue
to 127.7 million.
Prospects
Since the end of the Period we have
seen a clear outcome in the US elections
and evidence of a smooth leadership
transition in China, but on-going macro-
economic problems in the Eurozone.
Against this complex backdrop, equity
markets appear once again to be
factoring in a significant risk of
disappointment in corporate earnings
and outlook statements, and the potential
for increased allocations to equities by
institutional investors is unclear.
Nevertheless, as the case for active
investment in resource efficiency and
environmental markets becomes
more compelling and better understood
by investors, demand for specialist
investment management expertise should
continue to broaden and deepen. The
Impax team has been successfully
managing investment portfolios targeting
these markets for more than 14 years
and has a track record of planning for
and delivering growth across a range
of market circumstances. I am therefore
confident that the Company is well
positioned for further increase in
shareholder value as conditions improve.
J Keith R Falconer
28 November 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
4
Chief Executive’s Report
For the Year Ended 30 September 2012
We continue to focus on delivering solid
investment performance for our clients while
carefully extending our research coverage
and distribution channels.
Ian Simm
Chief Executive
Table 1: Assets under management and fund flows
£ million
AUM
1 Oct
2011 H1 H2
AUM
30 Sept
2012
“Impax-Label” listed equity products 712 – – 637
Inflows – 23 8 –
Outflows – (76) (52) –
Market movements & currency – 85 (63) –
Third party listed equity funds & accounts 792 – – 829
Inflows –7141 –
Outflows – (85) (66) –
Market movements & currency – 122 (46) –
Private Equity 392 (13) (17) 362
Total 1,896 127 (195) 1,828
During a financial year in which economic
confidence has swung between apparent
complacency and despair, the Impax
management team has continued to focus
on the core business of managing
portfolios of listed and private securities
on behalf of institutional investors, while
investing selectively in expanding the
Company’s capabilities.
Sector developments
For many years, at the time of writing
each semi-annual Impax report, a review
of recent developments in the sectors
in which the Company is investing has
produced a wealth of evidence of
strengthening market fundamentals:
this report is no different. Nevertheless,
investor confidence in some of these
sectors, for example solar panel
manufacturing, remains weak, and sector
benchmarks have underperformed
generic indices during 2012. Since the
interim statement, when I summarised
new policies to address climate change
and improve energy efficiency in several
countries, further capital expenditure on
water management and treatment in China
and additional regulations to curb pollution
in the United States, there have been
several notable announcements.
Probably most intriguing was the
reaffirmation that, in the light of the
Fukushima disaster in Japan, Germany is
committed to a full shutdown of all nuclear
power stations by 2022. This will require
an investment of at least €300 billion in
renewable energy, energy efficiency and
grid strengthening, and has been the
principal driver of sharp falls in the share
prices of the country’s principal power
utilities E.ON and RWE, which are unlikely
to receive full compensation for the
premature shutdown of their nuclear
assets. Meanwhile, Japan’s new energy
policy continues to evolve, with latest
estimates suggesting a cumulative
investment of US$1.5 trillion in renewables
and energy efficiency over the next
20 years.
Demand for energy efficient products
and services and for renewable energy
continued to expand in most European
countries. Although prospects for
renewable energy in the UK were called
into question by some vocal politicians,
this sector once again grew rapidly as
most countries sought to encourage lower
carbon power generation capacity.
In August, the Obama administration
raised the automotive manufacturers’
average fuel efficiency standard from
35.5 miles per gallon by 2016 to 54.5 miles
per gallon by 2025; in spite of Republican
objections, this was widely endorsed by
the manufacturers themselves, who
appreciated the policy certainty over a
time frame that allows them to manage
their product development.
It is likely that the regulatory framework
in the United States, which underpins
other sectors in which Impax invests,
will continue to strengthen in Obama’s
second term. The President has already
announced that addressing climate
change is a priority, while analysts are also
pointing to the potential for tighter rules
governing water abstraction in drought-
prone areas, investment in flood defence
and several initiatives related to higher
energy efficiency.
Impax’s target markets
The weakness of environmental stocks is
illustrated by the performance of the FTSE
Environmental Opportunities All Share
Index, which returned 3.4 per cent (net,
total return) between 1 January 2012
and 30 September 2012, compared to
the MSCI World Index which was up
8.8 per cent (net, total return) over the
same period.
During 2012, taking into account feedback
from a range of our clients and prospective
investors, we have slightly broadened
the definition of Impax’s target markets
to encompass “resource efficiency”,
comprising environmental markets and the
wider food and agriculture value chain.
Companies providing products and
services in the food and agriculture
sectors have many similar characteristics
to those in alternative energy, water and
waste management, particularly growth Impax Asset Management Group plc Annual Report and Accounts 2012
5
Chief Executive’s Report
linked to the rising demands of an
expanding population, limited resources
and broad evidence of mis-pricing as a
result of rapidly changing technology,
regulations and market structure.
This initiative is resonant with a number
of high profile studies examining the
implications for investors of the themes in
which Impax has expertise. In November
2011, McKinsey & Company published
“Resource Revolution: Meeting the world’s
energy, materials, food and water needs”,
an in-depth study of a range of new
market opportunities. Subsequently, in
August 2012, Towers Watson published
“Sustainability in Investment” which
pointed to a potential transformation in
the investment landscape arising from
emerging drivers including “resource
scarcity and climate change”.
We are excited about the potential for
offering additional investment services and
products in the broader resource efficiency
area. As reported in the interims, during
2012 we have recruited two experienced
investment professionals focused on global
food and agriculture and, on 1 December
2012, following test marketing, plan to
launch the Impax Food and Agriculture
Fund under the existing Impax Funds
(Ireland) plc platform with £2 million of seed
capital from the Company; this fund will be
marketed primarily to UK investors.
Assets under management
and fund flows
During the Period, Listed Equity funds that
we manage or advise had net outflows
of £136 million comprising £97 million
from “Impax-Label funds” and £39 million
from Third Party Funds and Accounts.
Gross inflows across all strategies were
£143 million and performance contributed
£97 million. However, this was offset by
outflows of £279 million. We believe that
the net outflows are broadly attributable
to weakness of environmental stocks
relative to global equities, particularly over
the past 18 months, and to investor
nervousness over the prospects for equity
markets in general.
We saw continued progress in building
our franchise in the United States. The
Pax World Global Green Fund (recently
renamed the Pax World Global
Environmental Fund), which we sub-advise,
attracted net inflows over the Period
expanding to US$52 million at the end of
the Period. As previously announced, in
December 201 1 we established Impax
Green Markets Fund, a Delaware-based
private fund, as a wrapper for our
Specialists strategy.
Following the completion of fund raising
for our second private equity fund in
September 2011, there were no additional
flows in this division during the Period.
However, AUM (in Sterling) declined due
to the impact of the weakening Euro.
Investment Performance
Listed Equity
During the Period our listed equity
strategies generally beat their comparator
indices of environmental stocks, but some
have trailed global indices.
We were particularly pleased by our
Water strategy which sustained its out-
performance over the Period, returning
19.2 per cent (total return, GBP) compared
to 17 .3 per cent (net return, GBP) for the
MSCI World Index. The strategy now has
a strong three year track record, making it
the best performing fund in its peer group
over this timeframe: since inception on
1 January 2008 to 30 September 2012,
this strategy was up 77 .5 per cent (total
return, GBP) while the MSCI World Index
was up 52.1 per cent (net return, GBP).
Our Specialists strategy, which invests
in small and mid-cap stocks, returned
6.7 per cent (total return, GBP) over the
Period compared to minus 0.8 per cent
(total return, GBP) for the corresponding
period for the FTSE ET50 Index which is
representative of the universe of small and
mid-cap environmental stocks. Over the
ten years to 30 September 2012, our
Specialists strategy has returned 162 per
cent (total return, GBP) while the FTSE
ET50 Index declined 61.5 per cent (total
return, GBP) and the MSCI World Index
was up 111 per cent (net return, GBP).
Our Leaders strategy, which invests in
both small-cap stocks as well as larger,
more diversified companies across the
environmental markets universe, returned
16.8 per cent over the Period (total return,
GBP). From inception on 3 March 2008
to 30 September 2012, this strategy
returned 24.9 per cent (total return, GBP)
while the MSCI World Index was up 23.4
per cent (net return, GBP) and the FTSE
Range of investment
strategies
AUM (£m)
(as at 30 September 2012)
Environmental
Specialists
Environmental
Leaders
Asia-Pacific
Water
Private Equity
759
276
205
226
362
Private Equity
North America
Asia-Pacific
Other Europe
UK/Ireland
36
58
626
746
362
AUM by geographic region
(client domicile)
(as at 30 September 2012)
Stable, diverse, client base
“Impax-Label” funds
(as at 30 September 2012)
637
241
588
362
Impax-Label Funds
Segregated accounts
White Label Funds
Private Equity Impax Asset Management Group plc Annual Report and Accounts 2012
6
Environmental Opportunities All Share
Index gained 16.5 per cent (total
return, GBP).
Private Equity
Our private equity business made solid
progress during the Period.
The power generation projects owned by
our first fund, Impax New Energy Investors
LP (“Fund I”), which has €125 million of
commitments, have continued to beat their
budgets, and in June the Fund was able to
make a further distribution to investors. As
previously reported, we will seek a full exit
from this fund when market conditions are
supportive; to this end, we are following
closely the development of regulations
affecting the energy sector in Spain, where
the majority of Fund I’s residual assets
are located.
Meanwhile, our team has continued to
deploy the €330 million of capital in Fund
II, focusing on investing to fund the
construction of onshore wind and solar
PV assets in the European Union and,
potentially, North America. During the
Period, Fund II purchased 109MW of
French and Polish wind assets, an Italian
solar PV investment and a 28MW wind
park in Germany; currently approximately
40 per cent of Fund II is invested or
committed for investment.
Distribution
As set out in previous statements, our
distribution strategy focuses on building
relationships with institutional investors
around the world, offering both direct
investment management expertise as
well as the sub-management of funds
established by third parties.
In the UK, our core market, from where
41 per cent of our AUM originates, we
have continued to build relationships with
new institutional investors and have begun
a systematic outreach programme to
family offices where Impax has historically
been under-represented. In consultation
with the Board of Impax Environmental
Markets plc, an investment trust with
ca. £327 million of net assets (as at
30 September 2012) and our largest client,
we have established a dedicated microsite
(www.impaxenvironmentalmarkets.co.uk)
to provide investors with more detailed
fund-specific information.
For many clients elsewhere in Europe, as
well as in Asia and Australia, we continue to
work closely with BNP Paribas Investment
Partners (“BNPP IP”) to improve the sales
prospects for several funds that we
sub-manage. Early next month, two of the
funds that follow the Leaders strategy will
merge and will also absorb a third fund,
creating a vehicle with ca. €120 million of
AUM, a size which should widen the fund’s
appeal to a wide group of investors. In
addition, we are particularly pleased that
BNPP IP has decided to extend the
marketing and sales of the BNP Paribas
Aqua fund which wraps our Water strategy,
beyond its established base in France to
cover most of Europe.
Our direct sales strategy in the US market
is to leverage our positive consultant
ratings in a small number of focused
channels covering endowments,
foundations and family offices, while also
nurturing third party relationships. To this
end, we recently recruited a Head of
Institutional Sales and Client Service who
has over 25 years’ experience of selling to
top tier institutions and who is based in a
new Impax office in New York City.
We were delighted to win three prestigious
asset management awards in 2012. In
May, Impax was named as the winner of
the “Sustainable, responsible, ethical
investment award” at the Financial Times
Business Pension and Investment
Provider 2012 Awards. In October, we
were recognised as “Impact Investor of
the Year” by The Asset in Hong Kong,
and in November as “Best Fund
Management Group” by Investment
Week at their Climate Change & Ethical
Investment Awards.
Infrastructure and support
In addition to satisfying client expectations
on operational matters, the regulatory
environment in which investment
management firms operate is becoming
increasingly complex, and it is essential
that we sustain an effective Support Team
across our offices in London, Hong Kong
and the United States.
In recent years we have consciously
invested in operations, IT, finance, legal,
compliance and HR capabilities in order
to establish a scalable platform for growth.
In principle, we are now adequately
resourced in these areas and can manage
a significant volume of additional assets on
this base. At the time of writing, alongside
other investment managers, we are
working with our clients to ensure
appropriate compliance with the emerging
requirements of the European Union’s
Alternative Investment Fund Managers
Directive, and are also closely monitoring
the implications of regulatory developments
in the other markets in which we operate.
The hiring of our food and agriculture
team, our Head of Distribution (who joined
on 1 October 2011) and our new Head of
Institutional Sales in the United States have
contributed to a headcount increase: at
the end of the Period our total headcount
was 56.5 full time equivalent staff, up from
50.4 at the start of the Period.
Outlook
Investors who had committed capital to
equity markets at the start of 2012 and are
only now reviewing the result should be
pleasantly surprised by the profit they have
made, but may also be concerned about
the level of volatility of their portfolio today.
In particular, rising political instability in the
Eurozone and the pending US “fiscal cliff”
have the potential to de-rail confidence
and, indirectly, erode corporate profitability.
Nevertheless, the outlook for resource
efficiency and environmental markets is
gradually improving and most sectors
have rallied in the last quarter, in some
cases out-performing generic indices.
After a sustained period in which
corporate earnings expectations have
been downgraded, results for many of our
holdings now appear to be improving,
while a recent increase in M&A activity
may prove positive for sentiment over the
coming months.
Given our mandates, Impax has delivered
solid investment performance in the year
despite the fragile nature of global
markets. We remain committed to our
core strategies and as we build on recent
investments, we are confident in our ability
to deliver robust returns for shareholders
when global economic confidence returns.
Ian R Simm
28 November 2012
Chief Executive’s Report continued Impax Asset Management Group plc Annual Report and Accounts 2012
7
Markets & Technology
Overview of Our Resource Efficiency Markets
Impax invests in sectors where the need
to make efficient use of scarce resources
and mitigate negative environmental
effects is creating a broad range of
long-term growth opportunities.
Alternative Energy
Energy
Energy Efficiency
Global demand for energy continues to
grow and energy prices for most of the
world’s population look set to rise. Over
the next two decades, annual investment
in the energy sector is expected to
average US$1.5 trillion, of which 50% will
be in the electrical power sector. By 2035
it is estimated that China will consume
70% more energy in total than the USA;
yet per capita consumption will still only
be 50% of US levels. The increasing cost
of energy in many countries provides
a strong incentive to use sources as
efficiently as possible and to develop new
sources and methods of generation.
We categorise Energy investment
opportunities into two sectors:
Energy Efficiency which is focused on
services and technologies to minimise
energy wastage. The investment universe
in this sector includes companies in
power generation and storage, industrials,
buildings and transport. Alternative
Energy includes the independent power
producers, solar, wind, biofuels and
equipment companies.
We identify interesting investment
opportunities arising from the effective
roll-out of proven technologies in
established but expanding markets, for
example insulation materials. We are also
seeing rapid substitution by relatively
new technologies, such as light-emitting
diodes (LEDs) in conventional lighting,
and brisk growth in a number of new
markets, for example in smart meters.
Energy efficiency is the largest sub-sector
in which we invest, both in terms of portfolio
weighting and our investable universe.
We invest in both the providers of
alternative energy technologies, the
operators of energy assets and in
companies active across the entire
value chain.
Pollution Control
Water
Infrastructure & Technologies
The global market for water products and
services is currently estimated to be worth
some US$500bn. The United Nations
predicts that two-thirds of the world’s
population will be ‘water stressed’ by
2050, with over 2 billion people living in
countries facing water scarcity. The
cleaning up and recycling or disposal of
waste water is also proving a major
worldwide challenge. We see the growing
imbalance between supply and demand
for water as being underpinned by four key
factors: population growth, ageing
infrastructure, regulation and an increasing
incidence of extreme weather events.
We divide the Water sector into
Infrastructure & Technologies which
includes both the treatment and equipment
companies as well as utilities; and Pollution
Control which covers companies involved
in emissions abatement and the supply of
testing equipment.
We invest in opportunities across the
entire water value chain. In infrastructure
we see steady demand for pumps,
pipes and valves in developed countries
and much higher rates of growth for
these products in developing regions.
Companies active in water re-use,
conservation and irrigation equipment
markets are particularly attractive. In
water treatment we see a wide array of
opportunities in physical and chemical
water treatments, filtration, membrane
technology and desalination as well as
pollution monitoring and testing. Our
portfolios generally have exposure to
companies with early stage, late cycle
and defensive business models.
Environmental Support Services
Waste
Waste Management & Technologies
Waste management companies are
involved in the handling and disposal of
both general and hazardous waste from
individuals and industry as well as the
associated technologies for the sorting
and processing of materials. Recycling
and reuse of materials is now estimated
to be a US$200bn market, driven by the
increasing scarcity and cost of the
primary materials.
We categorise this sector into Waste
Management & Technologies;
comprising technology equipment
companies, recycling and processing, and
companies involved in the handling and
disposal of hazardous and general waste;
and Environmental Support Services
which includes environmental consultants
and the trading of environmental assets
such as pollution permits.
We invest across the waste sector in
general waste management, in hazardous
waste management which is attractive
as it is a defensive, non-cyclical market,
in the more cyclical recycling companies
particularly those active in rapidly growing
developing markets, and also in companies
supplying innovative waste technologies.
Agriculture
Food & Agriculture
Food
The global population is estimated to
reach 9 billion by 2050 which will mean an
additional 80 million people to feed each
year. To achieve this, food production must
rise by 70%, necessitating a significant
increase in the area of agricultural land and
substantial increases in the use of energy
and water. The key drivers for change are
the shifts in global demand, environmental
regulations and technological innovations.
We sub-divide our Food sector into
basic foods, packaging and food safety,
packaged food and ingredients, beverages,
distribution and commercial services and
diversified food and agriculture companies.
Under Agriculture we include companies
involved in agricultural inputs (such as
fertiliser, pesticides, animal feeds and
animal health products), machinery and
equipment, growers and processors and
agricultural logistics companies which are
involved in haulage, shipping and upstream
supply-chain solutions to the sector.
We invest in companies that are exploiting
inefficiencies arising from the revolution
in global supply-chains and new
opportunities to supply ancillary goods
and services. Impax Asset Management Group plc Annual Report and Accounts 2012
8
Directors
Keith Falconer
Chairman
Keith Falconer, is Chairman of Impax Asset
Management Group plc. He joined the
Group in January 2004. After qualifying as
a Chartered Accountant in 1979, he joined
Martin Currie the independent Edinburgh
based investment firm. The first part of his
career was spent managing portfolios on
behalf of institutional clients. Subsequently, he
became the Managing Director of Sales and
Marketing. He retired from Martin Currie at the
end of 2003 and is now also Chairman of
Aberdeen New Thai Investment Trust plc and
a number of other companies.
Peter Gibbs
Non-Executive Director
Peter Gibbs, is a Non-Executive Director of
Impax Asset Management Group plc. Peter
has spent his career in the asset management
industry at Bankers Trust, Mercury Asset
Management and Merrill Lynch Investment
Management. He is currently a Non-Executive
Director of United Kingdom Investment Ltd,
Friends Life Group plc, the Merrill Lynch UK
Pension Plan and Intermediate Captital
Group plc.
Ian Simm
Chief Executive
Ian Simm, is the Founder and Chief Executive
of Impax Asset Management Group plc.
Ian has been responsible for building IAM
since launch in 1998, particularly the firm’s
listed equity and infrastructure teams and
investment products. In addition to his
role as Chief Executive, Ian heads the firm’s
investment committees. Prior to Impax, Ian
was an engagement manager at McKinsey
& Company in the Netherlands where he led
teams to provide advice to clients in a range of
environmentally sensitive industries. He has a
first class honours degree in physics from
Cambridge University and a Master’s in Public
Administration from Harvard University.
Vince O’Brien
Non-Executive Director
Vincent O’Brien, is a Non-Executive Director of
Impax Asset Management Group plc. He is
currently a Director of Montagu Private Equity
and has worked in the private equity industry
for over 20 years. Originally qualifying as a
Chartered Accountant with Coopers and
Lybrand he joined Montagu Private Equity in
1993. Vince is a former Chairman of the BVCA
and served on its Council for seven years.
Guy de Froment
Non-Executive Director
Guy de Froment, is a Non-Executive Director
of Impax Asset Management Group plc. He
was previously Vice Chairman of BNP Paribas
Asset Management and joint CEO responsible
for Sales and Marketing. From 1997 to 2000,
he held the position of Chairman and CEO
of Paribas Asset Management. Prior to that
he worked for Barclays as Head of Continental
European Asset Management, having
previously spent 24 years in the Indosuez
Group during which time he was Chief
Executive of W. I. Carr and CEO of Indosuez
Asset Management.
Mark White
Non-Executive Director
Mark White, is a Non-Executive Director of
Impax Asset Management Group plc. He is
the CEO of LGT Capital Partners (UK) Ltd
following LGT Capital Partners’ acquisition of
KGR Capital. From 2001 to 2005, he was
Chief Executive Officer of JP Morgan Fleming
Asset Management (UK) Ltd. Prior to that,
he was CEO of Jardine Fleming Asset
Management in Hong Kong and CEO of
Chase Fleming Asset Management (UK) Ltd in
London. He is also a Non-Executive Director
of EB Asia Absolute Return Fund and F&C
Global Smaller Companies plc. Impax Asset Management Group plc Annual Report and Accounts 2012
9
Senior Personnel
Senior Personnel
Ominder Dhillon
Ominder Dhillon, is Head of Distribution for
Impax. Ominder joined Impax in October 2011
from Fidelity International where he was
Head of UK Institutional Distribution for three
years. Ominder previously spent nine years as
Director of Institutional Sales at Scottish
Widows Investment Partnership and, prior
to that, nine years at John Morrell & Associates
and Johnson Fry plc (later acquired by
Legg Mason).
Kaye Forrest
Kaye Forrest, joined Impax in May 2011,
on a part-time basis, as Director of Human
Resources. She has over 20 years’ HR
experience and expertise in coaching, talent
management, organisational development and
business transformation. Kaye previously held
the role of HR Director at Legal and General
and Sensormatic Ltd before setting up her
own consultancy business in 2007. She has
an MA in International HRM and is a Fellow
of the Chartered Institute of Personnel
and Development.
Bruce Jenkyn-Jones
Bruce Jenkyn-Jones, is a Director of IAM
and Managing Director for the Listed Equity
business. He has 19 years’ experience
working in environmental markets. Prior to
joining Impax in 1999 he was a utilities analyst
with BT Alex Brown and before that a senior
consultant at Environmental Resources
Management Ltd. Bruce is a graduate of
Oxford University and has a Master’s in
Environmental Technology from Imperial
College and an MBA from IESE (Barcelona).
Charlie Ridge
Charlie Ridge, is a Director of IAM and Chief
Financial Officer of Impax Asset Management
Group plc. Charlie has 25 years’ experience
working in financial services. Charlie joined
Impax from Deutsche Bank, where he was a
Managing Director within the Finance Division.
Prior to this he was UK Asset and Wealth
Management Chief Financial Officer, having
previously used his technical expertise in
financial and market risk related roles for the
Global Markets Division. Charlie has a degree
in Engineering Science from Durham
University and qualified as a Chartered
Accountant at Ernst & Young.
Peter Rossbach
Peter Rossbach, is a Director of IAM and
Managing Director for the Private Equity team
that manages Impax New Energy Investors
and Impax New Energy Investors II. From 1997
to 2000, he was Senior Investment Officer at
AMI Asset Management. Before AMI, he held
positions as Senior Investment Adviser to
EBRD, Vice President of Project Finance at
Mitsui Bank in New York, within the energy
project finance teams at Catalyst Energy,
Lowrey Lazard and at Standard and Poor’s
utility debt ratings services. Peter holds a
Bachelor’s degree and a Master’s in Public
Policy from Harvard University. Impax Asset Management Group plc Annual Report and Accounts 2012
10
Directors’ Report
For the Year Ended 30 September 2012
The Directors present their Report and the financial statements
for the year ended 30 September 2012.
Principal activities
The principal activity of the Group during the year was the
provision of investment services to funds specialising in the
environmental markets sector. The Group’s activities are both
authorised and regulated by the Financial Services Authority.
The principal activity of the Company was that of a holding
company.
Review of business
The review of the Group’s business is contained in the
Chairman’s Statement and Chief Executive’s Report on pages 2
to 6 which are incorporated into this report by reference. The
Corporate Governance Statement, set out on pages 13 to 14,
forms part of this report.
The Directors consider Assets Under Management (“AUM”),
revenue and profitability to be the key performance indicators
of the Group. AUM fell from £1,896m at 30 September 2011
to £1,828m at 30 September 2012. Revenue for the year was
£18,621,000 (2011: £20,931,000) and loss before tax was
£4,735,000 (2011: profit of £1,718,000).
Dividends
The Directors propose a dividend of 0.75 pence per share
(totalling £825,000) for the year ended 30 September 2012
(2011: 0.70p per share, totalling £759,000). The dividend will be
submitted for formal approval at the Annual General Meeting.
These financial statements do not reflect this dividend payable,
which will be accounted for in shareholders’ equity as
an appropriation of retained earnings in the year ended
30 September 2013.
The dividend for the year ended 30 September 2011 was paid
on 6 February 2012, being 0.70p per share. The trustees of
the Employee Benefit Trust waived their rights to part of this
dividend, leading to a total dividend payment of £759,000. This
payment is reflected in the Statements of Changes in Equity.
Directors and their interests in shares
The Directors of the Company during the year and at the date
of this report are set out below. The Directors’ interests and
those of their connected persons in the ordinary shares of the
Company, all of which are beneficial, at 30 September 2012
and 30 September 2011 were:
30 September
2012
30 September
2011
J Keith R Falconer
1
10,489,290 10,489,290
Ian R Simm
1
9,486,261 5,486,261
Peter J Gibbs 200,000 200,000
Mark B E White 300,000 300,000
Vince O’Brien 110,000 110,000
Guy de Froment – –
1
includes vested shares within sub-funds of the Impax Group Employee Benefit Trust
(‘EBT’) from which the individual may benefit
There have been no changes to the above holdings since 30
September 2012.
Ian Simm has a 5.88% interest in the capital of Impax Carried
Interest Partner LP, and a 5% interest in the capital of Impax
Carried Interest Partner II LP, entities in which the Company
holds an investment.
Ian Simm has also been granted options to acquire a further
450,000 ordinary shares at a strike price of 49.6p. These will
vest subject to his continued employment by the Group on
31 December 2014.
Substantial share interests
The following interests in three per cent or more of the issued
ordinary share capital excluding Treasury shares have been
notified to the Company as at 28 November 2012:
Number Percentage
BNP Paribas Investment Partners 32,220,000 29.1
J Keith R Falconer
2
10,489,290 9.5
Ian R Simm
2
9,486,261 8.6
Rathbone Investment Managers 7,092,080 6.4
DIAM Company 5,474,955 4.9
UBS Private Banking nominees 4,516,050 4.1
Bruce Jenkyn-Jones
2
3,750,000 3.4
2
includes vested shares within sub-funds of the EBT from which the individual
may benefit
In addition the EBT has a legal interest in a further 16,228,781
shares which have transferred to sub funds from which
individuals may benefit and holds 1,888,273 shares directly. Impax Asset Management Group plc Annual Report and Accounts 2012
11
Directors Report
Share management
Options over 15.3 million of the Company’s shares vested on
1 October 2012 and option holders will be able to exercise these
options following the announcement of these financial results
on 29 November 2012. All incentivisation schemes prior to the
ESOP have now fully vested. If approved by the Board, and
subject to the discretion of the trustee, 12.2 million shares will
be issued to the Impax Asset Management Group plc Employee
Benefit Trust 2012 (“2012 EBT”), which will also purchase 4.7
million shares from the Company being the entire current holding
of Treasury Shares. The share subscription and purchase will be
funded by a loan of £10 million which has been granted by the
Company to the 2012 EBT on commercial terms and will have
been drawn down prior to any acquisition of shares (or right to
acquire shares) by the trustee and which has no net effect on
the Group’s financial position.
The 2012 EBT is expected to conduct future market purchases
of the Company’s shares, reducing the requirement for the
Company to hold Treasury shares to satisfy option exercises.
Future option exercises will primarily be satisfied by the 2012 EBT.
People
Through our robust people management policies we aim to
attract and develop the best people. Our performance
management processes comprise a twice yearly performance
appraisal against agreed objectives and our core values. Output
from this performance process is used to inform decisions on
remuneration, career development and progression.
As part of creating a high-performance organisation, we
encourage all of our employees to fulfil their potential. We
provide our employees with access to a range of training and
development opportunities that are relevant to our business.
Environmental policy
The Group attaches great importance to its environmental
performance. In addition to ensuring that it is making the most
of commercial opportunities within the environmental markets
sector, the Group is committed to maintaining and improving
the sustainability of its working practices.
The Group is focused on minimising environmental impact in
three areas of its operations:
> Energy consumption: the Group has an energy efficiency
policy covering inter-alia lighting, heating and computers;
> Travel: the Group encourages staff to minimise travel and to
select public transport where appropriate and has a cycle
scheme; and
> Paper and materials use: the Group has a system to recover
office paper and encourages staff to avoid wastage of other
materials.
During the year we were awarded a Bronze Ska rating for the fit
out of our new office premises. Ska Ratings is an environmental
assessment method developed by RICS which rates the
environmental performance of a fit-out.
Corporate social responsibility
The Group, either directly or through individual members of staff
aims to support a number of charities or other non-profit making
organisations by contributing funds or volunteering services. The
Group seeks to focus such activity on areas directly relating to or
having an impact on the environment.
The following are ways the Company seeks to achieve this aim:
> Giving to Charity – the company operates a Give as You Earn
Scheme;
> Employee Volunteering – wherever possible we look for
opportunities to give employees a chance to make a positive
impact in the community; and
> Community and Industry Involvement – where an employee
has the opportunity to give some time to a local organisation
or a trade body the Company will give due consideration to
such requests.
Statement of disclosure to auditor
Each of the persons who are a Director at the date of approval
of this Annual Report confirms that:
(a) so far as the Director is aware, there is no relevant audit
information of which the Group’s auditors are unaware, and
(b) the Director has taken all the steps that he ought to have
taken as a Director in order to make himself aware of any
relevant audit information and to establish that the Group’s
auditor are aware of that information.
In accordance with section 489 (2) of the Companies Act 2006,
a resolution proposing that the Company’s auditor, KPMG Audit
Plc, be re-appointed will be put to the Annual General Meeting.
Creditor payment policy
The Group seeks to maintain good terms with all of its trading
partners. In particular, it is the Group’s policy to agree appropriate
terms and conditions for its transactions with suppliers and,
provided the supplier has complied with its obligations, to
abide by the terms of payment agreed. Trade creditor days
of the Group for the year ended 30 September 2012 were
30 (2011: 15).
By order of the Board
Zack Wilson
Company Secretary
28 November 2012
Registered office:
Norfolk House
31 St James’s Square
London SW1Y 4JR Impax Asset Management Group plc Annual Report and Accounts 2012
12
Statement of Directors’ Responsibilities
in Respect of the Directors’ Report and the Financial Statements
The Directors are responsible for preparing the Directors’ Report
and the financial statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare Group and
Parent Company financial statements for each financial year.
As required by the AIM Rules of the London Stock Exchange
they are required to prepare the Group financial statements
in accordance with IFRS as adopted by the EU and applicable
law and have elected to prepare the Parent Company financial
statements on the same basis.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Parent Company
and of their profit or loss for that period. In preparing each of the
Group and Parent Company financial statements, the Directors
are required to:
> select suitable accounting policies and then apply them
consistently;
> make judgments and estimates that are reasonable and
prudent;
> state whether they have been prepared in accordance with
IFRS as adopted by the EU; and
> prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
Parent Company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Parent Company and
enable them to ensure that its financial statements comply with
the Companies Act 2006. They have general responsibility for
taking such steps as are reasonably open to them to safeguard
the assets of the Group and to prevent and detect fraud and
other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on
the Company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Impax Asset Management Group plc Annual Report and Accounts 2012
13
Corporate Governance
Corporate Governance Report
For the Year Ended 30 September 2012
The Group is committed to maintaining good standards of
Corporate Governance. As an AIM quoted company, compliance
with the Finance Reporting Council’s UK Corporate Governance
Code (‘the Code’) is not mandatory. However the Board of
Directors (‘the Board’) seeks to comply with the principles of the
Code in so far as appropriate to the Group’s size and complexity.
This report describes how the Group has applied the principles
throughout the year.
The Board of Directors
The Board has overall responsibility for the Group. The Board
provides strategic direction to the executive management,
monitoring the Group’s operating and financial results, reviewing
management performance, overseeing the adequacy of risk
management and internal controls and ensuring the Company’s
obligations to its shareholders are met.
The Board has consisted of a Non-Executive Chairman, four
Non-Executive Directors and the Chief Executive during the
period. Details of the current Board members are given on page
8 of this report. Throughout the year the position of Chairman
and Chief Executive were held by separate individuals. There is a
clear division of responsibilities between the Chairman and Chief
Executive. The Board has appointed one of the Non-Executive
Directors (Peter Gibbs) to act as the Senior Independent
Director. The Board considers that three of the Non-Executive
Directors (Peter Gibbs, Mark White and Vince O’Brien) are
independent as envisaged by the Code. Guy de Froment is not
considered to be independent as he represents a significant
shareholder. The Chairman is also not considered to be
independent by nature of his significant shareholding and past
service to the Group. The Non-Executive Directors and
Chairman all have or have had senior executive experience and
offer insightful judgement on Board matters. The Non-Executive
Directors do not participate in any bonus schemes or share
ownership schemes and their appointments are non-
pensionable. There is a rigorous procedure to appoint new
Directors to the Board which is led by the Chairman. At
appropriate times the Board considers the balance of skills,
experience, independence and knowledge of the Group on the
Board and its diversity, including gender, how the board works
as a unit and other factors relevant to its effectiveness
The Board meets regularly throughout the year. It met six times
in the year ended 30 September 2012 to consider strategic
development and to review trading results and operational and
business issues. It has a formal agenda of items for consideration
at each meeting but also convenes at additional times when
required. Operational decisions are delegated to the executive
directors and senior management.
All Directors receive detailed Board papers and reports one
week prior to the regular Board meetings and have unlimited
access to the advice and services of senior management should
further information be required. There is provision for Board
members to solicit professional advice on Board matters at the
Company’s expense.
The Board has carried out a formal evaluation of its own
performance and individual Directors which was led by
the Chairman. The Board also completed an evaluation of
the Chairman’s performance which was led by the Senior
Independent Director. The evaluations confirmed a high rating
for performance.
All Directors are subject to reappointment by shareholders at
the first opportunity after their appointment and thereafter at
intervals of no more than three years.
As permitted by the Company’s Articles of Association, the
Company has maintained Qualifying Third-Party Indemnity
Provisions (as defined under relevant legislation) for the benefit
of the Company’s Directors throughout the period.
Board committees
The Board is assisted by two standing committees of the Board
which report to it on a regular basis. These committees have
clearly defined terms of reference.
Audit and Risk Committee
The Audit and Risk Committee is comprised of the following
Non-Executive Directors: Mark White (Chairman), Peter Gibbs,
Guy de Froment and Vince O’Brien. The Committee has met
four times in the year.
The Committee’s responsibilities include:
> monitoring the integrity of the financial statements and formal
announcements relating to the Company’s and Group’s
financial performance;
> reviewing the Group’s risk management processes and risk
reports;
> monitoring of the internal financial control procedures;
> making recommendations to the Board in relation to the
appointment, re-appointment and removal of the external
auditors and to approve the remuneration and terms of
engagement of the external auditors;
> the implementation of new accounting standards and
policies;
> reviewing arrangements by which staff of the Company may,
in confidence, raise concerns about possible improprieties in
financial reporting or other matters;
> reviewing and monitoring the external auditors’ independence
and objectivity and the effectiveness of the audit process;
> ensuring the objectivity and independence of the external
auditor by acting as primary contact with the external
auditors, meeting the external auditors without the presence
of management where considered necessary and receiving
all reports directly from the external auditors; and
> reporting to the Board on how it has discharged its
responsibilities.
Details of fees paid to the Company’s auditor are shown in
note 2 to the financial statements. In the opinion of the Board,
none of the non-audit services provided caused any concern
as to the auditor’s independence or objectivity. To ensure that
the independence and objectivity of the auditor is maintained,
the Committee monitors the scope of all work performed. Impax Asset Management Group plc Annual Report and Accounts 2012
14
Remuneration Committee
The Remuneration Committee is comprised of the four Non-
Executive Directors: Peter Gibbs (Chairman), Mark White, Guy
de Froment and Vince O’Brien. The Committee has met two
times this year.
The purpose of the Remuneration Committee is to ensure that
the Chief Executive and other senior employees are fairly
rewarded for their individual contribution to the overall
performance of the Group and that remuneration packages
provided do not promote undue risk taking. The Remuneration
Committee responds to this requirement in the way that meets
the best interest of shareholders. Further details regarding the
remuneration policy and payments made can be found in the
Remuneration Report on page 16-17.
Internal control
The Board has overall responsibility for the Group’s system of
internal controls including financial, operational, compliance and
risk management controls.
The Group’s fund management activities are regulated by the
Financial Services Authority, the US Securities and Exchange
Commission and in respect of its Hong Kong activities, the
Securities and Futures Commission. The Board has adopted
procedures and controls designed to ensure its obligations are met.
Details of the key risks facing the group and internal controls
acting to control or mitigate the risks are set out on page 15.
The Audit Committee and Board has concluded that there is
no need for an internal audit function given the Group’s existing
system of internal controls. This position will continue to be
reviewed.
Dialogue with institutional shareholders
The Company reports formally to shareholders at the half-year
and year end. At the Annual General Meeting of the Company,
a presentation is given and Directors are available to take
questions, both formally during the meeting, and informally after
the meeting. The Chairman, Chief Executive and Senior
Independent Director are available for dialogue with major
shareholders on the Company’s plans and objectives and from
time to time will meet with them.
Corporate Governance Report continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
15
Corporate Governance
The principal risks that the Group faces are described below.
Further information on financial risk is given in note 19 to the
financial statements. The Chief Financial Officer is responsible
for maintaining a risk register and for an on-going program to
monitor internal controls and processes put in place to control
or mitigate the risks identified. This includes reporting to the
Group’s Audit and Risk Committee on a quarterly basis.
Market risk
The Group’s Listed Equity business charges management fees
based on assets under management and accordingly its
revenue is exposed to market risk. The Group has chosen not to
hedge this risk.
The Group seeds investments in its own Listed Equity funds in
order to build a track record to market those funds more
effectively and is therefore directly exposed to the market
performance of the funds. The Group attempts to mitigate this
risk through the use of hedging instruments where appropriate
and intends to divest from these investments as commercial
and market conditions allow.
The Group also invests in its own private equity funds and is
therefore exposed to the performance of these funds.
Currency risk
A significant amount of the Group’s income is based on
assets denominated in foreign currencies. For the year ended
30 September 2012 and on an on-going basis the Group’s
strategy has been to put in place hedges, in the form of forward
rate contracts, where there was sufficient predictability over the
income to allow for an effective and efficient hedge. Otherwise
the Group converts foreign currency income to Sterling as soon
as practically possible after receipt.
The amount of the Group’s expenses denominated in foreign
currencies is not significant.
A proportion of the Group’s assets and liabilities are denominated
in foreign currency. The Group also owns a small number of minor
subsidiaries denominated in foreign currency.
Liquidity and cash flow risk
The Group’s approach to managing liquidity risk is to ensure that
it has sufficient cash on hand to meet liabilities when due under
both normal and stressed conditions and to satisfy regulatory
requirements. The Group produces cash flow forecasts covering
a twelve month period. The Group’s management and Board
review these forecasts. As shown in the note 19 to the financial
statements the group has significant cash reserves.
The Group is also exposed to the risk of default of counterparties
including banks and other institutions holding the Group’s
cash reserves. The Group seeks to manage this risk by only
depositing cash in institutions with high credit ratings and
by spreading cash holdings across at least 4 institutions.
Interest rate risk
The Group has interest bearing assets including cash balances
that earn interest at a floating rate. Interest rate fluctuations do
not have a significant impact on the Group.
Financial regulations
The Group’s operations are subject to financial regulations
including minimum capital requirements and compliance
procedures in each of the jurisdictions in which it operates.
The Group seeks to manage the risks associated with these
regulations by ensuring close monitoring of compliance with
the regulations and by tracking proposed changes and reacting
immediately when changes are required. The Group has a
dedicated Compliance Officer.
Key clients
The loss of a client or a significant investor in a large fund could
damage the financial position of the Group. The Group seeks to
manages this risk by maintaining regular contact with clients and
fund investors and by attempting to diversify earnings streams
so that it is less susceptible to such events.
Key employees
The success of the Group depends on the support and
experience of its key employees and in particular senior managers
and fund managers. The loss of key employees could have a
material adverse effect on its result or operations. The Group
seeks to manage this risk by offering competitive remuneration
packages, including share schemes and carried interest in
private equity funds, and by creating a supportive and enjoyable
working environment. During the year the Group retained all of
its key employees.
Operational risks
The Group has established a control framework so that the risk
of financial loss to the Group through operational failure is
minimised. As part of this the Group has obtained full ‘ISAE
3402’ (formerly known as SAS 70) certification, for the twelve
months ended 30 September 2012, of its Listed Equity business.
Furthermore, the Group has put in place measures to minimise
and manage possible risks of disruption to its business and
to ensure the safety of its staff. This plan has been put in place
to manage its strategic and operational business risks during
emergencies and is aimed at bringing together particular
responses such as IT disaster recovery, contingency plans,
off-site storage of records, data back-up and recovery
procedures, evacuation procedures and customer/staff
communications.
The Group has comprehensive insurance cover which is
reviewed each year prior to policy renewal.
Key Risks Impax Asset Management Group plc Annual Report and Accounts 2012
16
Remuneration Report
For the Year Ended 30 September 2012
Policy on chief executive and senior employees’
remuneration
The remuneration and terms and conditions of service of
the Directors and senior employees are determined by the
Board, based on recommendations made by the
Remuneration Committee.
For the year ended 30 September 2012 there are potentially
four main elements of the remuneration packages for the
Chief Executive and senior employees.
(i) Basic salary and benefits in kind
Basic salaries are recommended to the Board by the
Remuneration Committee taking into account the performance
of the individual and the rate for similar positions in comparable
companies. Benefits in kind include income protection, critical
illness insurance, life assurance and private medical insurance.
(ii) Variable remuneration
Variable Remuneration consists of a cash bonus and share-
based payments. Aggregate Variable Remuneration across the
Group will typically be capped at 45 per cent of earnings before
Variable Remuneration, interest and taxes; as the Group’s
profitability increases, this percentage is likely to fall in line with
market norms.
(a) Cash bonus
The cash bonus is determined based on the profitability of the
relevant area where the employee works and on the individual’s
personal performance.
(b) Share-based payment awards
As reported in the 2011 Annual Report for the years ended
30 September 2011 to 30 September 2014 the Board has
approved an Employee Share Option Plan (‘ESOP’) under which
the Chief Executive and senior employees are eligible to receive
up to 14 million share options over a four year period. The options
will have an exercise price set at a 10% premium to the average
share price of the 30 business days following the announcement
of results for the respective year. 5 million option awards were
made in respect of the year ended 30 September 2011. Option
awards in respect of the year ended 30 September 2012 have
been approved by the Board and will be communicated to
employees shortly after the date of this report.
The Chief Executive and other employees also continue to
benefit from share-based payment awards made under the
previous share-based incentive plan (the EIA Extension) as more
fully described in note 3 to the financial statements. These
awards vested on 30 September 2012.
(iii) Pensions
The Group pays a defined contribution to the pension schemes
of certain employees. The individual pension schemes are
private and their assets are held separately from those of
the Group.
In addition the Chief Executive and certain senior employees
have been awarded interests in the Impax Carried Interest
Partner LP and Impax Carried Interest Partner II LP . These
partnerships will receive payments from the Group’s private
equity funds depending on the fund’s performance. No such
payments were made during the year. The amounts will be
accounted for at the point they become payable. Impax Asset Management Group plc Annual Report and Accounts 2012
17
Remuneration
Directors remuneration during the year
Details of each Director’s remuneration are shown below.
Fees/
salary
£
Benefits in
kind
£
Pension
£
Bonus
£
2012
Total
£
2011
Total
£
J Keith R Falconer 65,000 – – – 65,000 65,000
Ian R Simm 211,538 6,022 5,250 234,000 456,810 667,908
Peter J Gibbs 30,000 – – – 30,000 30,000
Mark B E White 30,000 – – – 30,000 30,000
Guy de Froment 30,000 – – – 30,000 30,000
Vince O’Brien 30,000 – – – 30,000 30,000
396,538 6,022 5,250 234,000 641,810 852,908
On 30 September 2012 4,000,000 Ordinary Shares of the
Company, which were allocated to a sub fund of the Impax
Employee Benefit Trust of which Ian Simm and his family are
beneficiaries, ceased to be subject to the risk of revocation
arising from Ian Simm ceasing to be employed by the Company.
Based on the quoted share price of 38p on 30 September 2012
these shares had a value of £1,520,000.
During the year Ian Simm was granted 450,000 options over the
Company’s shares under the 2011 Employee Share Option Plan.
These options vest subject to him remaining employed on 31
December 2014 and have an exercise price of 49.6p.
The above disclosure does not include options that may be
awarded to Ian Simm pursuant to the 2012 Employee Share
Option Plan in respect of his service for the year ended 30
September 2012.
Service contracts
The Chief Executive is employed under a contract requiring one
year’s notice from either party. The Chairman and Non-Executive
Directors each receive payments under appointment letters which
are terminable by up to six months’ notice from either party.
Policy on non-executive directors’ remuneration
The Chairman and Non-Executive Directors each receive a
fee for their services. The fee is approved by the Board, mindful
of the individual’s time commitment and responsibilities
and of current market rates for comparable organisations
and appointments. The Non-Executive Directors and the
Chairman are reimbursed for their travelling and other minor
expenses incurred.
By Order of the Board
Peter Gibbs
Chairman, Remuneration Committee
28 November 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
18
Independent auditor’s report to the members of
Impax Asset Management Group plc
We have audited the financial statements of Impax Asset
Management Group Plc for the year ended 30th September
2012 set out on pages 19 to 50. The financial reporting
framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the EU and, as regards the parent
company financial statements, as applied in accordance with
the provisions of the Companies Act 2006.
This report is made solely to the company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the Companies
Act 2006. Our audit work has been undertaken so that we might
state to the company’s members those matters we are required
to state to them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the company and
the company’s members, as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities
Statement set out on page 12, the directors are responsible for
the preparation of the financial statements and for being satisfied
that they give a true and fair view. Our responsibility is to
audit, and express an opinion on, the financial statements in
accordance with applicable law and International Standards on
Auditing (UK and Ireland). Those standards require us to comply
with the Auditing Practices Board’s (APB’s) Ethical Standards
for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is
provided on the APB’s website at www.frc.org.uk/apb/scope/
private.cfm.
Opinion on financial statements
In our opinion:
> the financial statements give a true and fair view of the state
of the group’s and of the parent company’s affairs as at
30th September 2012 and of the group’s loss for the year
then ended;
> the group financial statements have been properly prepared
in accordance with IFRSs as adopted by the EU;
> the parent company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU
and as applied in accordance with the provisions of the
Companies Act 2006; and
> the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies
Act 2006
In our opinion the information given in the Directors’ Report for
the financial year for which the financial statements are prepared
is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters
where the Companies Act 2006 requires us to report to you if, in
our opinion:
> adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have not
been received from branches not visited by us; or
> the parent company financial statements are not in
agreement with the accounting records and returns; or
> certain disclosures of directors’ remuneration specified by law
are not made; or
> we have not received all the information and explanations we
require for our audit.
J M Mills (senior statutory auditor)
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
28 November 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
19
Financial Statements
Consolidated Statement of Comprehensive Income
For the Year Ended 30 September 2012
Notes
2012
£000
2011
£000
Revenue 1 18,621 20,931
Operating costs 2 (14,068) (14,696)
Share-based payment charge for EIA extension scheme 3 (7,757) (3,647)
Exceptional long-term incentive scheme NIC charge 3 112 (1,090)
Other long-term incentive scheme related charges 3 (1,091) (619)
Fair value (loss)/gain on investments (722) 785
Change in third party interest in consolidated fund (25) (117)
Investment income 5 195 171
(Loss)/Profit before taxation (4,735) 1,718
Taxation 6 86 (652)
(Loss)/Profit for the year (4,649) 1,066
Other comprehensive income
Tax benefit on long-term incentive schemes 178 46
(Decrease)/Increase in value of cashflow hedges (210) 213
Tax on change in value of cashflow hedges 54 (55)
Exchange differences on translation of foreign operations (271) 20
Exchange differences on translation of foreign 124 –
operations attributable to third party interests
Total other comprehensive income (125) 224
Total comprehensive income for the period attributable to
equity holders of the Parent Company (4,744) 1,290
Basic earnings per share 7 (4.32)p 0.98p
Diluted earnings per share 7 (4.32)p 0.93p
The statement has been prepared on the basis that all operations are continuing operations.
The notes on pages 23 to 41 form part of these financial statements. Impax Asset Management Group plc Annual Report and Accounts 2012
20
Consolidated Statement of Financial Position
As at 30 September 2012
2012 2011
Notes £000 £000 £000 £000
Assets
Goodwill 9 1,629 1,629
Intangible assets 146 39
Property, plant and equipment 10 703 491
Investments 17 18
Total non-current assets 2,495 2,177
Trade and other receivables 11 2,814 3,173
Derivative asset 3 213
Investments 12 8,710 3,930
Current tax asset 25 47
Margin account 156
Cash invested in money market funds and long-term deposit accounts 13 14,094 8,546
long-term deposit accounts
Cash and cash equivalents 13 5,577 12,870
Total current assets 31,379 28,779
Total assets 33,874 30,956
Equity and Liabilities
Ordinary shares 16 1,156 1,156
Share premium 78 78
Exchange translation reserve (283) (136)
Own shares 17 (19) (59)
Treasury shares 17 (1,932) (453)
Hedging reserve 2 158
Retained earnings 23,567 20,756
Total equity 22,569 21,500
Trade and other payables 14 7,364 7,858
Third party interest in consolidated fund 15 2,682
Current tax liability 46 12
Total current liabilities 10,092 7,870
Deferred tax liability 6 1,213 1,586
Total non-current liabilities 1,213 1,586
Total equity and liabilities 33,874 30,956
Authorised for issue and approved by the Board on 28 November 2012. The notes on pages 23 to 41 form part of these financial
statements.
Ian R Simm
Chief Executive Impax Asset Management Group plc Annual Report and Accounts 2012
21
Financial Statements
Consolidated Statement of Changes in Equity
For the Year Ended 30 September 2012
Note
Share
capital
£000
Share
premium
£000
Exchange
translation
reserve
£000
Own shares
£000
Treasury
shares
£000
Hedging
reserve
£000
Retained
earnings
£000
Total
Equity
£000
Balance at 1 October 2010 1,156 78 (156) (59) (453) – 16,337 16,903
Dividends paid –––––– (651) (651)
Long-term incentive scheme
charge – – – – – – 3,958 3,958
Tax benefit on long-term incentive
schemes – ––––– 46 46
Cash flow hedge – –––– 213 – 213
Tax benefit on cash flow hedge – – – – – (55) – (55)
Exchange differences on
translation of foreign operations – – 20 – – – – 20
Profit for the year – – – – – – 1,066 1,066
Balance at 30 September 2011 1,156 78 (136) (59) (453) 158 20,756 21,500
Dividends paid 8 – – – – – – (759) (759)
Share buy-back 17 – – – – (1,479) – – (1,479)
Long-term incentive scheme
charge – – – – – – 8,081 8,081
Tax benefit on long-term incentive
schemes – – – – – – 178 178
Cash flow hedge – – – – – (210) – (210)
Tax benefit on cash flow hedge – – – – – 54 – 54
Exchange differences on
translation of foreign operations – – (271) – – – – (271)
Exchange differences on
translation of foreign operations
attributable to 3rd party interests – – 124 – – – – 124
Share awards – – – 40 – – (40) –
(Loss) for the year – – – – – – (4,649) (4,649)
Balance at 30 September 2012 1,156 78 (283) (19) (1,932) 2 23,567 22,569
The notes on pages 23 to 41 form part of these financial statements. Impax Asset Management Group plc Annual Report and Accounts 2012
22
Consolidated Cash Flow Statement
For the Year Ended 30 September 2012
Note
2012
£000
2011
£000
Operating Activities:
(Loss)/Profit before taxation (4,735) 1,718
Adjustments for:
Investment income (195) (171)
Depreciation of property, plant and equipment 308 243
Amortisation of intangible assets 59 53
Fair value losses/(gains) 722 (785)
Share-based payment 8,081 3,958
Exceptional long-term incentive scheme NIC charge (112) 1,054
Other long-term incentive scheme related charges 1,091 619
Change in third party interest in consolidated fund 25 117
Operating cash flows before movement in working capital 5,244 6,806
Decrease in receivables 357 741
(Increase) in margin account (156) –
(Decrease) in payables (1,441) (931)
Cash generated from operations 4,004 6,616
Corporation tax refunded 2 162
Net cash generated from operating activities 4,006 6,778
Investing activities:
Investment income received 196 77
Settlement of loans receivable – 2,337
Settlement of investment related hedges (388) –
Proceeds on sale/redemption of investments 28 426
Purchase of investments held by the consolidated funds (7,336) –
Sale of investments held by the consolidated funds 1,797 3,489
Purchase of investments (355) (53)
Purchase of intangible assets (167) (16)
Purchase of property, plant and equipment (523) (437)
Net cash (used in)/generated from investing activities (6,748) 5,823
Financing activities:
Dividends paid (759) (651)
Treasury shares acquired (1,023) –
Increase in cash held in money market funds and long-term deposit accounts (5,548) (6,028)
Investment by third party into consolidated fund 2,781 –
Redemption of preference shares issued by the consolidated fund – (1,623)
Net cash (used in) financing activities (4,549) (8,302)
Net (decrease)/increase in cash and cash equivalents (7,291) 4,299
Cash and cash equivalents at beginning of year 12,870 8,563
Effect of foreign exchange rate changes (2) 8
Cash and cash equivalents at end of year 13 5,577 12,870 Impax Asset Management Group plc Annual Report and Accounts 2012
23
Financial Statements
Notes to the Financial Statements
For the Year Ended 30 September 2012
1 Analysis of revenue and assets
The Group has two reportable segments: “Listed Equity” and “Private Equity”. The results of these segments have been aggregated
into a single reportable segment for the purposes of these financial statements because they have characteristics so similar that they
can be expected to have essentially the same future prospects. These segments have common investors, operate under the same
regulatory regimes and their distribution channels are substantially the same. Additionally management allocates the resources of the
Group as though there is one operating unit.
Analysis of revenue by type of service:
2012
£000
2011
£000
Investment management 17,565 20,311
Transaction fees 800 192
Advisory fees 256 428
18,621 20,931
Analysis of revenue by the location of customers:
2012
£000
2011
£000
UK 13,008 14,532
Rest of the world 5,613 6,399
18,621 20,931
Analysis of ‘Rest of the world’ customer location:
2012
£000
2011
£000
Ireland 1,361 2,125
France 974 2,448
Luxembourg 1,229 282
Netherlands 744 844
Other 1,305 700
5,613 6,399
Revenue from three of the Group’s customers individually represented more than 10% of Group revenue (2011: two), equating to
£2,176,000, £3,290,000 and £6,355,000 (2011: £3,878,000 and £5,333,000).
Revenue includes £18,365,000 (2011: £20,660,000) from related parties.
All material non-current assets, excluding deferred tax assets and financial instruments, are located in the UK.
2 Operating costs
2012
£000
2011
£000
Wages and salaries, social security and pension costs and variable bonuses (see note 4) 8,736 9,214
2009 Share option plan share-based payment charge (see note 3) 179 179
Employee share option plan share-based payment charge (see note 3) 145 132
Other staff costs including contractors and Non-Executive Directors’ fees 910 668
Depreciation of property, plant and equipment (see note 10) 308 243
Amortisation of intangible assets 59 53
Auditor’s remuneration – subsidiary undertakings audit fees 43 43
Auditor’s remuneration – parent company audit fees 45 45
Auditor’s remuneration – tax compliance 14 14
Auditor’s remuneration – other 38 92
Premises related 972 519
Travel 328 277
Information technology and communication 726 704
Other costs 1,565 2,513
14,068 14,696 Impax Asset Management Group plc Annual Report and Accounts 2012
24
3 Share-based payment charges and other long-term incentive scheme charges
Share-based payment charges
Employee Incentive Arrangement (Extension Scheme) (“EIA Extension”)
Under this scheme, share-based payment awards were granted in April 2011 to employees when the Trustee of the Impax Group
Employee Benefit Trust 2004 (“the EBT”) agreed to allocate four million ordinary shares to a sub-fund of the EBT of which Ian Simm,
the Company’s Chief Executive, and his family are beneficiaries and when 14.05 million Long-term Incentive Plan (“LTIP”) options
were awarded to other employees.
The awards allocated to the EBT sub-fund for Ian Simm and his family ceased to be subject to revocation due to Ian Simm’s
continued employment by the Company on 30 September 2012.
LTIP options have a 1p or nil exercise price and vest to individuals remaining employed on 30 September 2012. They are exercisable
over a period from 1 October 2012 to 31 December 2020.
The Group accrues for the International Financial Reporting Standard (“IFRS”) 2 Share-Based Payment charge for shares allocated
under the EBT and LTIP options from the date of grant, to the date of vesting. This charge, which totalled £7 ,757 ,000 for the year
(2011: £3,647,000) is excluded from the Group’s definition of adjusted earnings as explained in note 7. The awards granted were
valued at a weighted average price of 64p using the Black Scholes Merton model with the following inputs:
Weighted average share price on grant 68p
Exercise price 1p/0p
Expected volatility 35%
Weighted average option life 5.2yrs
Expected dividend rate 1.00%
Risk free interest rate 1.68%
The expected volatility was determined by reviewing the historical volatility of the Company and that of comparator companies.
The awards made to Ian Simm and his family were valued at 68p using the same model and assumptions as described above except
that the option life was 1.5 years.
2009 Share Option Plan
In December 2009 1,240,000 zero exercise price options over the Company’s shares were granted to certain employees. The awards
vested on 30 September 2012 subject to the continued employment of the participant. The charge for the year in relation to this
scheme is offset by an equal reduction in the total cash bonus pool paid to employees.
2011 Employee Share Option Plan
In November 2011, the Board approved the grant of 5,000,000 options over the Company’s shares to certain employees in respect of
services provided from 1 October 2010. The strike price of the options was set at a 10% premium to the average market price of the
Company’s shares for the 30 business days following the announcement of the results for the year ended 30 September 2011 being
49.6p. The options do not have performance conditions but do have a time vesting condition such that the options vest subject to
continued employment on 31 December 2014. The options granted were valued at a price of 9.1p using the Black Scholes Merton
model. The charge for the year in relation to this scheme is offset by an equal reduction in the total cash bonus pool paid to employees.
2012 Employee Share Option Plan
In November 2012, the Board approved the grant of 3,000,000 options over the Company’s shares to certain employees in respect
of services provided from 1 October 2011. The strike price of the options will be set at a 10% premium to the average market price of
the Company’s shares for the 30 business days following the announcement of the results for the year ended 30 September 2012.
The options will not have performance conditions but will have a time vesting condition such that the options vest subject to
continued employment on 31 December 2015. The options granted were valued at a price of 7.8p using the Black Scholes Merton
model. The charge for the year in relation to this scheme is offset by an equal reduction in the total cash bonus pool paid to
employees. The employees will be notified of the key terms and conditions of these awards shortly after the announcement of
results for the year ended 30 September 2012.
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
25
Financial Statements
3 Share-based payment charges and other long-term incentive scheme charges continued
An analysis of the options over the Company’s shares is provided below.
2012
Number of options
Weighted
average
exercise
price
p
Options outstanding at the start of the year 15,186,940 0.8
Options granted during the year
1
5,108,000 48.6
Options forfeited during the year – NA
Options exercised during the year – NA
Options expired during the year – NA
Options outstanding at the end of the year 20,294,940 12.8
Options exercisable at the end of the year 11,779,940 0.8
1
as noted above a further 3,000,000 options were approved for grant in November 2012
For the options outstanding at the end of the period the exercise prices were either nil, 1p or 49.6p and the weighted average
remaining contractual life was 5.97 years.
The total expense recognised for the year arising from share-based payment transactions was £8,081,000 (2011: £3,958,000).
Exceptional long-term incentive scheme NIC charge
The Statement of Comprehensive Income for the year ended 30 September 2011 includes an exceptional charge of £1,090,000 in
respect of Employer’s National Insurance Contributions (“NIC”) in connection with the Group’s Employee Incentive Arrangement (“EIA
Original Scheme”). The Statement of Comprehensive Income for the year ended 30 September 2012 includes a credit of £112,000 in
respect of adjustments to the charge made arising from fluctuations in the Company’s share price.
Under the EIA Original Scheme, a total of 16,777 ,045 shares were allocated to sub-funds for the benefit of employees and their
families under the EBT. These shares ceased to be subject to the risk of revocation for the employee ceasing employment on
30 September 2007 , 2008 and 2009. The Group recorded an IFRS 2 Share-Based Payment charge in the periods to 30 September
2009 in respect of these awards. During the year ended 31 December 2011, the Government made various changes to taxation of
awards delivered and yet to be delivered under employee benefit trusts. In light of these changes the Group now expects that some
or all of the EBT beneficiaries will, at some stage, request the EBT Trustee, at its discretion to transfer Impax ordinary shares or
other assets held in the name of employees and their families from the EBT to one or more of the beneficiaries whereupon the Group
would be required to pay Employer’s NIC on the value of the shares or other assets removed. In line with the requirements of IFRS
the Group has provided for these future payments. Given its one-off nature and size, the charge and any subsequent amendment to
it are classified as exceptional.
If and when the EBT Trustee agrees to transfer assets held in the EBT to beneficiaries and if the assets transferred are in the form of
the Company’s ordinary shares, the Group also expects to be eligible for a corporation tax deduction equal to the value of those
ordinary shares. Where the Trustee has transferred ordinary shares out of the Trust during the year, the benefit of the tax deduction
has been recognised in these financial statements. If the amount of the tax deduction exceeds the cumulative share-based payment
expense the excess of the associated tax benefit is recognised in Other Comprehensive Income. Any amount included in Other
Comprehensive Income is included in the Group’s definition of adjusted earnings as explained in note 7. During the year the
Trustee transferred 2,850,000 shares out of the EBT giving rise to a total tax benefit of £335,000 (2011: £60,000) with £157 ,000
(2011: £15,000) recorded in loss for the period and £178,000 (2011: £46,000) in Other Comprehensive Income. At the date of this
report 12,228,781 shares awarded under the EIA Original Scheme remained in the EBT.
Other long-term incentive scheme related charges
2012
£000
2011
£000
EIA Extension NIC Charge 548 333
Additional payments 543 286
1,091 619
EIA Extension NIC charge
The Group accrues for the Employer’s NIC payable in respect of the EIA Extension over the same period as the related share-based
payment charge. The amount accrued will vary according to the price of the underlying shares. Impax Asset Management Group plc Annual Report and Accounts 2012
26
3 Share-based payment charges and other long-term incentive scheme charges continued
Additional payments
Individuals receiving LTIP Options are eligible for a retention payment payable after the end of the financial year in which each
employee exercises his or her LTIP Options. The payment will be equal to the corporation tax benefit realised by the Group on the
exercise of the LTIP options minus the amount of the Employer’s NIC suffered by the Group on the exercise of the LTIP options.
The Group accrues for this payment over the same period as the related share-based payment charge.
The Group has also accrued for payments totalling £203,000 to individuals to whom the Trustee of the EBT distributed Impax shares
during the year ended 30 September 2012.
4 Employment Costs
2012
£000
2011
£000
Wages, salaries and variable bonuses 7,014 7,609
Social security costs 880 889
Pensions 842 716
8,736 9,214
The Group contributes to private pension schemes. The assets of the schemes are held separately from those of the Group in
independently administered funds. The pension cost represents contributions payable by the Group to the funds. Contributions
totalling £669,000 (2011: £469,000) were payable to the funds at the year end and are included in trade and other payables.
The average number of persons (excluding Non-Executive Directors and including temporary staff), employed during the year was 55
(2011: 48).
2012
No.
2011
No.
Listed Equity 30 25
Private Equity 12 11
Group 13 12
55 48
Details related to emoluments paid to Directors and Directors rights to share awards are included in the Remuneration Report.
Key management personnel are defined as members of the Board and/or the Executive Committee. The remuneration of key
management personnel during the year was £2,050,400 with £4,577 ,920 of share-based payments (2011: £2,566,194 with £2,117 ,971
of share-based payments).
5 Investment Income
2012
£000
2011
£000
Bank interest 123 77
Other investment income 72 94
195 171
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
27
Financial Statements
6 Taxation
2012
£000
2011
£000
(a) Analysis of charge for the year
Current tax expense:
UK corporation tax 178 46
Foreign taxes 30 11
Adjustment in respect of prior years 25 (131)
Total current tax 233 (74)
Deferred tax (credit)/expense:
Credit/(Charge) for the year (427) 819
Adjustment in respect of prior years 108 (93)
Total deferred tax (319) 726
Total income tax (credit)/expense (86) 652
(b) Factors affecting the tax charge for the year
The tax assessment for the period is higher than the average rate of corporation tax in the UK of 25% (2011: higher). The differences
are explained below:
2012
£000
2011
£000
(Loss)/Profit before tax (4,735) 1,718
Effective tax (credit)/charge at 25% (2011: 27%) (1,184) 464
Effects of:
Non-deductible expenses and charges 1,262 610
Non-taxable income (35) –
Tax effect of previously unrecognised tax losses (132) (45)
Adjustment in respect of previous years 132 (224)
Effect of higher tax rates in foreign jurisdictions 4 4
Change in UK tax rates (133) (157)
Total income tax (credit)/expense (86) 652
(c) Deferred Tax
The deferred tax (liability) included in the Consolidated Statement of Financial Position is as follows:
Accelerated
capital
allowances
Other
temporary
differences
£000
Excess
management
charges
£000
Income not
yet taxable
£000
Share-based
payment
scheme
£000
Total
£000
As at 1 October 2010 6 64 196 (1,110) 39 (805)
Charge to equity – 55 – – – 55
Charge/(credit) to the income statement (9) (135) 196 1,178 (504) 726
As at 30 September 2011 15 144 – (2,288) 543 (1,586)
(Credit) to equity – (54) – – – (54)
Charge/(credit) to the income statement 24 (8) – 357 (692) (319)
As at 30 September 2012 (9) 206 – (2,645) 1,235 (1,213)
As described in note 3, if and when the EBT Trustee agrees to transfer assets held in the EBT to beneficiaries and if the assets
transferred are in the form of the Company’s ordinary shares, the Group expects to be eligible for a corporation tax deduction equal
to the value of those ordinary shares. The Group has not recognised a deferred tax asset in respect of these amounts which totals
£1,417 ,000. The Group also has unrecognised capital losses of £1,267 ,000 (2011: £1,498,000). Impax Asset Management Group plc Annual Report and Accounts 2012
28
7 Earnings and earnings per share
Adjusted earnings
In order to better reflect the underlying economic performance of the Group, an adjusted earnings has been calculated.
The adjustment i) excludes the IFRS 2 Share-Based Payment charge in respect of schemes where shares awarded are satisifed
by the issue of new shares (EIA Original and EIA Extension Schemes), and ii) includes the tax benefit recognised in other
comprehensive income in respect of transfers out of the EBT and the exercising of options over the Company’s shares.
2012
£000
2011
£000
Earnings (4,649) 1,066
Share-based payment charge (see note 3) 7,757 3,647
Tax benefit on long-term incentive scheme included in other comprehensive income 178 46
Adjusted earnings 3,286 4,759
The earnings per share on an IFRS and adjusted basis are as shown below.
Adjusted earnings per share
Adjusted
earnings
for the year
£000
No. of
shares
(weighted
average)
£000
Earnings
per share
2012
Basic adjusted 3,286 107,609 3.05p
Diluted adjusted 3,286 127,748 2.57p
2011
Basic adjusted 4,759 108,454 4.39p
Diluted adjusted 4,759 127,356 3.74p
The number of ordinary shares for the purposes of adjusted diluted earnings per share includes all shares awarded under the EIA
Extension and reconciles to the number of ordinary shares used in the calculation of basic adjusted earnings per share as follows:
2012
‘000
2011
‘000
Weighted average number of ordinary shares used in the calculation of basic adjusted earnings per share 107,609 108,454
Weighted average number of treasury and own shares intended to be used to satisfy outstanding share awards 7,973 7,128
Shares in issue 115,582 115,582
Shares intended to be issued to satisfy outstanding share awards 12,166 11,774
Weighted average number of ordinary shares used in the calculation of diluted adjusted earnings per share 127,748 127,356
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
29
Financial Statements
7 Earnings and earnings per share continued
IFRS earnings per share
Earnings
for the year
£000
No. of
shares
(weighted
average)
£000
Earnings
per share
2012
Basic (4,649) 107,609 (4.32)p
Diluted (4,649) 107,609 (4.32)p
2011
Basic 1,066 108,454 0.98p
Diluted 1,066 114,433 0.93p
The weighted average number of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average
number of ordinary shares used in the calculation of basic earnings per share as follows:
2012
‘000
2011
‘000
Weighted average number of ordinary shares used in the calculation of basic earnings per share 107,609 108,454
Additional dilutive shares re share schemes –
1
19,187
Adjustment to reflect future service from employees receiving awards – (13,208)
Weighted average number of ordinary shares used in the calculation of diluted earnings per share 107,609 114,433
1
since there is a loss after tax for the period there are no dilutive shares
8 Dividend
The Directors propose a dividend of 0.75p per share for the year ended 30 September 2012 (2011: 0.70p per share). The dividend will
be submitted for formal approval at the Annual General Meeting to be held on 13 February 2013. These financial statements do not
reflect this dividend payable, which will be accounted for in shareholders’ equity as an appropriation of retained earnings in the year
ended 30 September 2013.
The dividend for the year ended 30 September 2011 was paid on 6 February 2012, being 0.70p per share. The Trustees of the EBT
waived their rights to part of this dividend, leading to a total dividend payment of £759,000. This payment is reflected in the Statement
of Changes in Equity.
9 Goodwill
Goodwill
£000
Cost
At 1 October 2010, 30 September 2011 and 2012 1,629
Goodwill arose on the acquisition of Impax Capital Limited on 18 June 2001.
The Group tests goodwill for impairment annually or more frequently if there are indications that goodwill may be impaired.
The Group has determined the recoverable amount of its cash-generating units (“CGUs”) by calculating their value in use using a
discounted cash flow model. The cash flow forecasts were derived from the Group budget for the year ended 30 September 2013
and thereafter using a conservative growth rate of 2%. The key assumptions used to calculate the cash flows in the budget were
expected fund flows (based on an aggregation of flows by product) and a post tax discount rate of 10.5%. The discount rate was
derived from the Group’s weighted average cost of capital (“WACC”) which we consider is reflective of a market participants
discount rate.
Consistent with the fact that the goodwill arose in respect of an acquisition made in 2001, there is significant headroom before an
impairment would be required. As an indication, if the discount rate was increased by 3% there would be no impairment charge. Impax Asset Management Group plc Annual Report and Accounts 2012
30
10 Property, plant and equipment
Leasehold
improvements
£000
Fixtures,
fittings and
equipment
£000
Total
£000
Cost
As at 1 October 2010 460 422 882
Additions 297 140 437
Disposals – (29) (29)
As at 30 September 2011 757 533 1,290
Additions 373 150 523
Disposals (468) (176) (644)
As at 30 September 2012 662 507 1,169
Accumulated Depreciation
As at 1 October 2010 345 240 585
Charge for the year 147 96 243
Disposals – (29) (29)
As at 30 September 2011 492 307 799
Charge for the year 183 125 308
Disposals (516) (125) (641)
As at 30 September 2012 159 307 466
Net book value
As at 30 September 2012 503 200 703
As at 30 September 2011 265 226 491
As at 30 September 2010 115 182 297
11 Trade and other receivables
2012
£000
2011
£000
Trade receivables 486 904
Taxation and other social security – 69
Other receivables 176 79
Prepayments and accrued income 2,152 2,121
2,814 3,173
An analysis of the aging of Group trade receivables is provided below:
2012
£000
2011
£000
Not past due 287 749
Past due but not impaired:
31-60 days 199 12
61-90 days – 69
More than 90 days – 74
486 904
All outstanding amounts listed above have been received at the date of this report. There was no significant concentration of fees
owed by an individual client. There were no amounts that were impaired at reporting date.
A total of £1,863,000 trade and other receivables were due from related parties (2011: £2,669,000).
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
31
Financial Statements
12 Current asset investments
Unlisted
investments
£000
Listed
investments
£000
Total
£000
At 1 October 2010 2,481 4,526 7,007
Additions 54 – 54
Fair value movements 679 106 785
Repayments/disposals (95) (3,821) (3,916)
At 30 September 2011 3,119 811 3,930
Additions 355 6,795 7,150
Fair value movements (419) 148 (271)
Repayments/disposals (28) (1,797) (1,825)
Exchange differences – (274) (274)
At 30 September 2012 3,027 5,683 8,710
Listed investments
Listed investments held at 30 September 2012 include those held by the consolidated subsidiary Impax Green Markets Fund LP
(“IGMF”) and at 30 September 2011 by the Impax Absolute Return Fund (“IARF”). These listed investments are recorded at market
value using quoted market prices that are available at the Statement of Financial Position date. The quoted market price is the current
bid price.
Impax Green Markets Fund (“IGMF”)
In December 2011 the Group launched IGMF and invested, from its cash reserves, $5,000,000 into the fund. IGMF invests in listed
equities using the Group’s Environmental Specialists Strategy. The Group’s investment represented 53.8 per cent of the IGMF’s net
asset value (“NAV”) from the date of launch to 30 September 2012 and accordingly IGMF has been consolidated throughout this
period, with its underlying investments classified as listed investments in the table above.
Impax Absolute Return Fund (“IARF”)
On 21 May 2007 , the Company made an investment of €2,200,000 (£1,507 ,000) in IARF. This fund was managed by a subsidiary of
the Company. The investment took the form of a subscription of 22,000 Euro Class A shares in the IARF, at €100 per share. During
the year ended 30 September 2010, the shares were redenominated as sterling shares. During the year ended 30 September 2011
the fund Directors made the decision to close the fund to external investors and accordingly redeemed their preference shares. The
fund’s trading activity ceased during the year ended 30 September 2012 and the Group’s seed capital has been redeemed at a profit
of £190,000.
Unlisted investments
The unlisted investments principally represent the Company’s investment in Impax New Energy Investors LP and Impax New Energy
Investors II LP (“INEI” and “INEI II”). Further details of the Group’s commitments to these partnerships are disclosed in note 18.
The unlisted investments include £2,665,000 in related parties of the Group (2011: £2,797 ,000) Impax Asset Management Group plc Annual Report and Accounts 2012
32
13 Cash and cash equivalents and cash invested in money market funds and long-term deposit accounts
In order to mitigate bank default risk and to access favourable interest rates the Group invests part of its surplus cash in money market
funds and long-term deposits. The Group can redeem investments in the former within 24 hours; long-term deposits range between
six to twelve months. The Group considers its total cash reserves to be the total of its cash at bank and in hand held by operating
entities of the Group, and cash invested in money market funds and long-term deposit accounts. Amounts held are shown below.
Cash reserves:
2012
£000
2011
£000
Cash and cash equivalents 5,577 12,870
Cash invested in money market funds and long-term deposit accounts 14,094 8,546
19,671 21,416
For the purposes of the cash flow statement, cash and cash equivalents includes the following:
2012
£000
2011
£000
Cash at bank and in hand
– Held by operating entities of the Group 5,240 11,499
– Held by the consolidated funds 337 1,371
5,577 12,870
14 Trade and other payables
2012
£000
2011
£000
Trade payables 94 142
Taxation and other social security 2,591 643
Financial liabilities held for trading – 541
Other payables 553 121
Accruals and deferred income 4,126 6,411
7,364 7,858
The financial instruments held for trading relate to Listed Equity investments which were sold short by the IARF during the year ended
30 September 2011.
Trade payables includes £nil owed to related parties of the Group (2011: £22,000)
15 Third party interest in consolidated fund
2012
£000
2011
£000
At fair value 2,682 –
Third party interest is representative of the net assets of IGMF which are not attributable to the Group. As described in note 12, IGMF
is a subsidiary of the Group and its net assets and operating results are consolidated into the Group’s results at year end. The
Group’s interest in the subsidiary is 53.8% at 30 September 2012 (2011: nil).
16 Ordinary shares
2012
£000
2011
£000
Allotted and fully paid
115,582,431 ordinary shares of 1p each 1,156 1,156
17 Own shares and treasury shares
On 30 September 2012 the employment conditions for Ian Simm in respect of the 4,000,000 shares held in sub-trusts of the EBT for
him and his beneficiaries were met. Accordingly the value of Own Shares held reduced by £40,000.
During the period ended 30 September 2012, the Company purchased 3,459,000 of its own shares at an average price of 42 pence.
Total shares held in Treasury at 30 September 2012 were 4,699,000 (2011: 1,240,000).
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
33
Financial Statements
18 Financial commitments
The Group has committed to invest up to €3,756,000 into Impax New Energy Investors LP . At 30 September 2012 the outstanding
commitment was €1,014,000 (2011: €1,011,000) which could be called on in the period to 19 August 2015.
The Group has committed to invest up to €3,298,000 into Impax New Energy Investors II LP . At 30 September 2012 the outstanding
commitment was €2,782,000 (2011: €3,187 ,000) which could be called on in the period to 22 March 2020.
At 30 September 2012 the Group had commitments under non-cancellable operating leases as follows:
Offices Other
2012
£000
2011
£000
2012
£000
2011
£000
Within one year 440 483 15 15
Between one and two years 440 440 14 29
Between two and five years 541 985 1 –
1,421 1,908 30 44
19 Financial risk management
Risk management is integral to the business of the Group. There are systems of controls in place to create an acceptable balance
between the potential cost should such a risk occur and the cost of managing those risks. Management continually monitors the
Group’s risk management process to ensure that an appropriate balance between risk and control is achieved. This section provides
details of the Group’s exposure to financial risks and describes the methods used by management to control such risk.
The Group’s financial instruments comprise cash and various items, such as loans receivable, current asset investments, derivative
instruments, trade receivables and trade payables that arise directly from its operations.
Credit risk
Credit risk is the potential financial loss resulting from the failure of a counterparty to settle their financial and contractual obligations
to the Group, as and when they fall due. The Group’s maximum exposure to credit risk is represented by the carrying value of its
financial assets.
The Group’s primary exposure to credit risk relates to its cash and cash equivalents and cash in money market funds and long-term
deposits that are placed with regulated financial institutions. At the balance sheet date, the credit risk regarding cash balances of the
operating entities of the Group was spread by holding part of the balance with RBS (Standard & Poor’s credit rating A-1), part with
Lloyds (Standard & Poor’s credit rating A-1) and the remainder in money market funds managed by Blackrock and Goldman Sachs
(Standard & Poor’s credit rating of AAA).
The Group is exposed to credit risk on trade receivables, representing investment management fees due. An analysis of the aging of
these is provided in note 11.
Foreign exchange risk
Foreign exchange risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in
foreign exchange rates. A significant amount of the Group’s income is denominated in GBP, EUR and USD. The Group’s foreign
exchange risk arises from income received in these currencies, together with a limited amount of exposure to expenses in foreign
currencies.
The strategy of the Group for the year ended 30 September 2012 has been to convert earned income back to sterling and to use
hedges where there is sufficient predictability over inflows to allow for an effective and efficient hedge. At the year end the Group had
outstanding forward rate foreign currency contracts to sell Euro and buy sterling. These have been designated as cashflow hedges
against Euro income and recognised in profit in October 2012 and January 2013. The fair value of these instruments at 30 September
2012 was £3,000 which is recognised in equity. £409,000 was reclassified from equity to the income statement during the year on
maturity of the hedges. Impax Asset Management Group plc Annual Report and Accounts 2012
34
19 Financial risk management continued
Foreign exchange risk continued
The Group’s exposure to foreign exchange rate risk at 30 September 2012 was:
EUR/GBP
£000
USD/GBP
£000
Other/GBP
£000
EUR/USD
£000
Other/USD
£000
Assets
Non current asset investments 17 – – – –
Current asset investments 2,665 364 – 1,115
1
2,250
1
Trade and other receivables 785 59 135 – –
Cash and cash equivalents 52 248 1 – –
3,519 671 136 1,115 2,250
1
these amounts relate only to the consolidation fund and do not take account of any offsetting benefit or charge from the market value hedges held (see below)
Liabilities
Trade and other payables 7 36 25 – –
Third party interest in consolidated funds – – – 515 1,040
7 36 25 515 1,040
Net exposure 3,512 635 111 600 1,210
The Group’s exposure to foreign exchange rate risk at 30 September 2011 was:
EUR/GBP
£000
USD/GBP
£000
Other/GBP
£000
EUR/USD
£000
Other/USD
£000
Assets
Non current asset investments 18 – – – –
Current asset investments 2,797 323 272 179
Trade and other receivables 1,041 559 253 – –
Cash and cash equivalents 31 19 – – –
3,887 901 253 272 179
Liabilities
Trade and other payables – 550 – – 226
– 550 – – 226
Net exposure 3,887 351 253 272 (47)
The following table demonstrates the estimated impact on Group post-tax profit and net assets caused by a 5% movement in the
exchange rate used to revalue significant foreign assets and liabilities, assuming all other variables are held constant. Post-tax profit
will either increase or (decrease) as shown.
Post-tax profit
2012
£000
2011
£000
Translation of significant foreign assets and liabilities
GBP strengthens against the USD, up 5% (24) (13)
GBP weakens against the USD, down 5% 24 13
GBP strengthens against the EUR, up 5% (133) (144)
GBP weakens against the EUR, down 5% 133 144
Liquidity risk and regulatory capital requirements
Liquidity risk is the risk that the Group does not have sufficient financial resources to meets its obligations when they fall due or will
have to do so at a cost. The Group monitors its liquidity risk using cash flow forecasts taking into account the commitments made to
its private equity funds (see note 18) and the cash required to meet the Group’s investment plans and its regulatory capital requirements.
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
35
Financial Statements
19 Financial risk management continued
Liquidity risk and regulatory capital requirements continued
The Group considers its share capital, share premium and retained earnings to constitute its total capital. These are shown in the
Statement of Changes in Equity. Certain companies of the Group are regulated and must maintain liquid capital resources to comply
with the capital requirements of the Financial Services Authority (“the FSA”). Throughout the period the companies have significantly
exceeded these requirements. The policy of the Group is to retain sufficient capital to enable it to meet its growth objectives and
to satisfy regulatory requirements. The Group has no borrowings but may seek to borrow cash if sufficiently attractive business
opportunities arise which cannot be met from internal resources. The Company has no plans to raise additional equity and is currently
buying back shares to enable it to meet commitments under its Employee Share Ownership Plan.
At 30 September 2012, the Group had cash and cash equivalents and cash in money market funds and long-term deposit accounts
of £19,671,000. This is £12,307 ,000 in excess of trade and other payables. The Group in addition had other current assets of
£11,708,000.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market
interest rates.
The Group is exposed to interest rate risk on its interest-bearing assets, specifically cash balances that earn interest at a floating rate.
The average interest rate on the cash balances during the year was 0.6% (2011: 0.6%).
A 0.5% increase in interest rates would have increased group profit after tax by £92,000 (2011: £57 ,000). An equal change in the
opposite direction would have decreased profit after tax by £92,000 (2011: £57 ,000).
Market risk
The significant holding at 30 September 2012 that is exposed to equity market price risk is the Group’s investment in the IGMF fund.
The Group has attempted to hedge against the risk of market falls by the use of derivative contracts. The derivative contracts consists
of short positions against a global equity index and are arranged through BNP Paribas, a related party. Any outstanding amounts on
the short positions are settled daily.
The significant holdings at 30 September 2011 exposed to equity market price risk were the Group’s holdings in IARF.
As noted in note 12, the investment in the unlisted Private Equity funds are recorded at fair value, with fair value being calculated using
the discounted cashflow method. The key assumptions for this valuation were the discount rate and the inflation rate. The discount
rate was determined by reference to market transactions for equivalent assets. The inflation rate was determined based on historical
data. A rise of 1% in the discount rate applied to cashflows would result in a decrease in profit from operations and net assets of
£248,000. A 1% reduction in the discount rate would result in a corresponding increase of £295,000 in profit from operations and net
assets. A rise of 0.5% in the inflation rate applied in the calculations would increase profit from operations and net assets by £215,000.
A fall of 0.5% in the inflation rate would decrease profit from operation and net assets by £202,000.
Fair values of financial assets and liabilities
The Directors consider there to be no difference between the carrying value of the Group’s financial assets and liabilities and their
fair value.
The hierarchical classification of financial assets and liabilities measured at fair value are as follows:
30 September 2012
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Current investments 5,681 – 3,029 8,710
Third party interest in consolidated Funds (2,682) – – (2,682)
There were no movements between any of the levels in the year.
30 September 2011
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Current investments 810 – 3,120 3,930
Trade and other payables (541) – – (541) Impax Asset Management Group plc Annual Report and Accounts 2012
36
19 Financial risk management continued
Financial assets and liabilities by category
30 September 2012
Available
for sale
£000
1
FVTPL –
designated
on initial
recognition
£000
1
FVTPL –
Held for
trading
£000
Loans and
receivables
£000
Financial
liabilities
measured at
amortised
cost
£000
Financial assets
Cash and cash equivalents – – – 5,577 –
Cash held in money market funds and long-term deposits – – – 14,094 –
Trade and other receivables – – – 662 –
Investments 17 3,029 5,681 –
Total financial assets 17 3,029 5,681 20,333 –
Financial liabilities
Trade and other payables – – – – 647
Third party interest in consolidated funds –––– 2,682
Total financial liabilities – – – – 3,329
1
FVTPL = Fair value through profit and loss
30 September 2011
Available
for sale
£000
*FVTPL –
designated
on initial
recognition
£000
*FVTPL
– Held for
trading
£000
Loans and
receivables
£000
Financial
liabilities
measured at
amortised
cost
£000
Financial assets
Cash and cash equivalents – – – 12,870 –
Cash held in money market funds – – – 8,546 –
Trade and other receivables – – – 983 –
Investments 18 3,120 810 – –
Total financial assets 18 3,120 810 22,399 –
Financial liabilities
Trade and other payables – – 541 – 263
Total financial liabilities – – 541 – 263
20 Ultimate controlling party
The Group has no ultimate controlling party.
21 Related party transactions
Impax New Energy Investors LP, Impax New Energy Investors II LP, Impax New Energy Investors II-B LP, Impax New Energy Investors
SCA, Impax Carried Interest Partners LP and Impax Carried Interest Partners II LP are related parties of the Group by virtue of
subsidiaries being the General Partners to these funds.
BNP Paribas Investment Partners is a related party of the Group by virtue of owning a 29.1% equity holding.
Other funds managed by subsidiaries of the group are also related parties by virtue of its management contracts.
Transactions with related parties have been included in the relevant notes where appropriate.
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
37
Financial Statements
22 Accounting policies
Presentation of Financial Statements
Impax Asset Management Group plc is a public limited company that is incorporated and domiciled in the United Kingdom, and is
listed on the Alternative Investment Market (“AIM”). The address of the registered office is given on the last page of these financial
statements. The nature of the Group’s operations and its principal activities are set out in the Directors’ Report on pages 10 to 11.
Basis of accounting
The financial statements have been prepared in accordance with International Financial Reporting Standards adopted for use by
the European Union.
The Directors have, at the time of approving the financial statements, a reasonable expectation that the Group has adequate
resources to continue in operational existence for the foreseeable future and have concluded that it is appropriate to adopt the
going concern basis in preparing the financial statements of the Group.
The financial statements have been prepared under the historical cost convention, with the exception of the revaluation of certain
investments and derivatives being measured at fair value.
The Group and Company adopted the following new standards in the year:
> IFRS 7 Financial Instruments: Disclosures (Amendment): Part of IASB’s annual improvement project published in May 2010, the
amendment reduced the volume of disclosures regarding collateral held and clarified requirements when carrying amounts of
financial assets do not reflect the maximum exposure to credit risk. A further amendment clarified that an entity may present an
analysis of each component of other comprehensive income whether in the statement of changes in equity or in the notes to the
financial statements.
> IAS 24 Related Party Disclosures (Amendment): This amendment clarified the definition of a related party to simplify the
identification of related party relationships.
The following new standards and amendments issued are effective from 1 January 2013 unless stated otherwise and have not been
early adopted:
> Amendment to IAS 1 Presentation of Items of Other Comprehensive Income changes the grouping of items presented in the other
comprehensive income based on whether they will be reclassified to profit or loss in future or not. Effective from 1 July 2012;
> Amendment to IAS 32 Financial instruments: Presentation (Effective from 1 January 2014) provides additional guidance for
offsetting financial assets and liabilities while amendments to IFRS 7 Financial instruments: Disclosures set out the corresponding
new disclosure requirements;
> IAS 19 Employee Benefits (Revised) primarily results in changes to the measurement, recognition and disclosure of post-
employment benefit plans and termination costs;
> IAS 27 Separate Financial Statements (Revised) and IAS 28 Investments in Associates and Joint Ventures (Revised) are revised
accordingly as they are largely replaced by IFRS 10 and 11, respectively;
> IFRS 9 Financial Instruments: Classification and Measurement replaces the current models for classification and measurement
of financial instruments. Financial assets are to be classified into two measurement categories: those measured as at fair value
and those measured at amortised cost. Classification depends on an entity’s business model and the contractual cash flow
characteristics of the instrument. Financial liabilities are not affected by the changes. Effective from 1 January 2015;
> IFRS 10 Consolidated Financial Statements revises the concept of control to relate it to whether an investor has exercisable power
over an investee and consequently has exposure or rights to variable returns. Consolidation procedures remain unchanged;
> IFRS 11 Joint Arrangements requires joint ventures to be accounted for using the equity accounting method while joint operations
are accounted for based on the rights and obligations of each party in the arrangement;
> IFRS 12 Disclosure of Interests in Other Entities consolidates and enhances disclosure requirements relating to interests of an
entity in other entities;
> IFRS 13 Fair Value Measurement provides guidance on how to measure fair value where fair value is required or permitted under
IFRS and enhances disclosures requirements.
IAS 27 (Revised) and IFRSs 9 to 13 are subject to endorsement by the European Union.
Adoption of IFRS 9, 10, 11, 12 and 13 could have a significant effect on the Group’s financial statements, the impact of which is still
being considered by management. Impax Asset Management Group plc Annual Report and Accounts 2012
38
22 Accounting policies continued
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the
Company (its subsidiaries) made up to 30 September each year. Control is achieved where the Company has the power to govern
the financial and operating policies of a subsidiary so as to obtain benefits from its activities.
Subsidiaries are accounted for using the acquisition method of accounting whereby the Group’s results include the results of the
acquired business from the date of acquisition until the date of disposal.
All intra-Group transactions and balances are eliminated in full on consolidation.
Investments in funds in which the Group has more than 50% of the share of the net assets are consolidated from the date that control
is gained until the date that control is lost due to dilution or sale of the fund holding. The Group’s investment holding instrument in its
consolidated fund is classified as a liability in the fund’s own financial statements. This is on the basis that the instruments may be
redeemed by the Investor at any time, or subject to a notice period, such that the fund is required to utilise its assets to buy out the
Investor’s share and thereby reduce the net assets of the fund; such an investment is classified as a puttable interest under IFRS and
recorded as a liability (equal to the fair value of the fund’s assets and other liabilities). Upon consolidation the proportion of the fund
attributable to the non-controlling interest is classified as a current liability and shown as ‘Third party interest in consolidated fund’ in
the Statement of Financial Position and the corresponding profit/loss attributable to the non-controlling interest as a ‘Change in third
party interest in consolidated funds’.
In instances where the Group acts as the Manager and General Partner of a fund in a Limited Partnership structure, the Group only
receives compensation for its performance as Manager which is on market terms. Accordingly the Group does not consolidate these
funds as it receives no ownership benefits.
The Company includes the assets and liabilities of the EBT within its Statement of Financial Position. In the event of the winding up of
the Company, neither the shareholders nor the creditors would be entitled to the assets of the EBT.
Investments in associates
An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint
venture. The Group, in common with industry standard practice, seeds new funds with its own resources in order to establish a track
record so that the funds may then be marketed to external investors. As new investors join the fund the Group’s interest will dilute and
ultimately the Group may divest entirely as commercial considerations allow. Investments in associates that are held by the Group are
carried in the Statement of Financial Position at fair value, a treatment permitted by IAS 28 Investment in Associates. IAS 28 allows
investments held by venture capital and similar organisations to be excluded from the scope of the standard, provided that those
investments upon initial recognition are designated as fair value through profit or loss or held for trading and accounted for in
accordance with IAS 39 Financial Instruments: Recognition and Measurement, with changes in fair value recognised in profit or loss
in the period of change.
Revenue recognition
Revenue represents sales to external customers at invoiced amounts less value added tax or local taxes. Revenue is recognised in
the Statement of Comprehensive Income as follows.
(a) Investment management, administration and advisory fees contractually receivable are recognised in the period in which the work
is performed and the respective fees are earned. Performance fees arising upon the achievement of specified targets are
recognised at the respective fund’s period end, when such performance fees are confirmed as receivable.
(b) Interest income is accrued on a time basis, by reference to the principal outstanding and the interest rate applicable.
Other investment income, including dividends, is recognised when the right to receive payment is established.
Leases
All leases are operating leases. Rentals payable are charged to the Income Statement on a straight-line basis over the lease term.
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
39
Financial Statements
22 Accounting policies continued
Long-term incentive scheme charge
The fair value of employee services received in exchange for the grant of shares or share options is recognised as an expense. The
fair value of the shares and share options awarded is determined at the date the employee is deemed to be fully aware of their potential
entitlement and all conditions of vesting (termed the ‘grant date’). The expense is charged over the period starting when the employee
commenced the relevant services (termed ‘the service commencement date’) to the vesting date. In instances where the grant date
occurs after the date of signing these financial statements the fair value is initially estimated by assuming that the grant date is the
reporting date.
Pensions
The Group and Company operate defined contribution personal pension schemes for employees. The assets of the schemes are
held separately from those of the Group and Company in independently administered funds. Payments made in relation to the
schemes are charged as an employee benefit expense to the Statement of Comprehensive Income when they are due.
Taxation
Current tax is based on taxable profits for the year after all potential reliefs available have been utilised. Taxable profits differ from
‘profit before tax’ as reported in the Statement of Comprehensive Income because it excludes items that are taxable or deductible in
other years and items that are not taxable or deductible in the current year. The Group’s liability for current tax is calculated using tax
rates that have been enacted or substantively enacted at the Statement of Financial Position date. In the United Kingdom tax
deductions are available in respect of the award of the Company’s shares. In instances where the tax deduction is greater than the
associated share-based payment charge due to differences in the Company’s share price that amount, tax effected, is recognised in
other comprehensive income.
Deferred tax is provided in full in respect of taxation deferred by temporary differences between the treatment of certain items for
taxation and accounting purposes. Deferred tax assets are not recognised to the extent that their recoverability is uncertain.
The carrying amounts of deferred tax assets are reviewed at each Statement of Financial Position date and regarded as recoverable
and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be
suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability or the asset is realised.
Goodwill
Goodwill arising on consolidation represents the excess of the cost of acquisition over the fair value of the identifiable assets, liabilities
and contingent liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is recognised as an
asset and is tested for impairment annually, or on such occasions that events or changes in circumstances indicate that its value
might be impaired.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Positive goodwill arising on acquisitions before the date of the transition to IFRS has been retained at the previous UK GAAP amount
and is tested for impairment annually.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses.
Depreciation is provided on a straight-line basis over the estimated useful lives shown below:
> Leasehold improvements life of the lease
> Fixtures, fittings and equipment three years
Intangible fixed assets - software licences
Purchased licences are stated at cost less accumulated depreciation and any accumulated impairment losses and associated
implementation costs.
Amortisation is provided on a straight-line basis over the life of the licence up to a maximum of three years. Impax Asset Management Group plc Annual Report and Accounts 2012
40
22 Accounting policies continued
Impairment of assets
At the Statement of Financial Position date, the Group reviews the carrying amount of assets to determine whether there is any
indication that those assets have suffered an impairment loss or if events or changes in circumstances indicate that the carrying value
may not be recoverable. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the
extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group
estimates the recoverable amount of the cash-generating unit to which the asset belongs.
If the recoverable amount of an asset is estimated to be less than its carrying amount, the impairment loss is recognised as an expense.
When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been
determined had no impairment loss been recognised for the asset. A reversal of an impairment loss is recognised as income
immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as
a revaluation increase. Impairment losses relating to goodwill are not reversed.
Current asset investments
Current asset investments are categorised as financial assets at fair value through profit or loss and are designated at fair value
through profit and loss on initial recognition or as held for trading. All gains or losses together with transactions costs are recognised
in the Statement of Comprehensive Income. The investments comprise both listed investments and unlisted investments. The fair
value of the listed investments which are traded in active markets are based on quoted market prices at the Statement of Financial
Position date. The appropriate quoted price for investments held is the current bid price.
The fair value of the unlisted investments which are not traded in an active market is determined by using valuation techniques. The
Group uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date.
Valuation techniques used include the use of comparable recent arm’s length transactions, reference to other instruments that are
substantially the same, discounted cash flow analysis and other valuation techniques commonly used by market participants making
the maximum use of market inputs and relying as little as possible on entity-specific inputs.
Trade and other receivables
Trade and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans
and receivables. Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost using
the effective interest method less provision for impairment.
Other financial assets
Other financial assets are non-derivative financial assets with fixed payments that are not quoted in an active market. They are
included in current assets, except for maturities greater than twelve months after the end of the reporting period. These are classified
as non-current assets.
Interest income is recognised by applying the effective interest rate and included within ‘Investment income’.
Placement fees
Placement fees incurred that are directly attributable to securing an investment management contract are deferred and amortised
over the investment period of the related fund.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, short-term deposits and short-term borrowings that are readily convertible
to a known amount of cash and are subject to an insignificant risk of changes in value.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Own shares
Company shares held by the EBT are deducted from the shareholders’ funds and classified as Own Shares until such time as they
vest unconditionally to participating employees and their families.
Trade payables
Trade payables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method,
unless otherwise stated.
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
41
Financial Statements
22 Accounting policies continued
Other payables
The Group’s consolidated funds may make short sales in which an investment is sold in anticipation of a decline in the market value
of that investment. Short sales are categorised as financial liabilities held at fair value through profit or loss, classified as held for
trading and are recorded at fair value.
Foreign currencies
Foreign currency transactions of individual companies are translated at the rates ruling when they occurred. Foreign currency monetary
assets and liabilities are translated at the rates ruling at the Statement of Financial Position date. Any differences are taken to the
Statement of Comprehensive Income.
On consolidation, the results of overseas operations are translated at the average rates of exchange during the year and their Statement
of Financial Positions are translated into sterling at the rates of exchange ruling on the Statement of Financial Position date. Exchange
differences that arise from translation of the opening net assets and results of foreign subsidiary undertakings are charged to the
exchange translation reserve.
The average rate ruling in the accounting period for US Dollars was US$1.58: £1 (2011: US$1.60: £1); the rate ruling at the Statement
of Financial Position date was US$1.62: £1 (2011: US$1.56: £1). The average rate ruling in the accounting period for Euros was
€1.21: £1 (2011: €1.15: £1); the rate ruling at the Statement of Financial Position date was €1.26: £1 (2011: €1.15: £1).
Derivatives
The group uses foreign exchange futures contracts as a hedge against the foreign exchange risk on future income denominated in
foreign currencies. At the Statement of Financial Position date these derivative contracts are recorded at their fair value. In instances
where the hedge accounting criteria are met changes in the fair value are recorded in other comprehensive income. The amounts
recognised in other comprehensive income are reclassified to profit or loss when the hedged item (such as the relevant foreign
exchange income) is recorded in profit.
Critical accounting judgements and key sources of estimation uncertainty
> Determining the value of unlisted investments
A number of accounting estimates and judgements are incorporated within current asset investments in respect of the valuation
of unlisted investments. The methodology used is described in note 19.
> Consolidation of managed funds
In determining whether managed funds should be consolidated key judgements include whether returns received by the Group
constitute an ownership interest and as to whether the Group controls the fund.
> Determining the share-based payment charge
In determining the value of share-based payments, key judgements include the volatility of Impax shares, Impax’s dividend yield
and the risk free rate.
> Determining the value of NIC payments due in respect of share schemes
In determining the amount of NIC that will be payable in respect of the Group’s share schemes the key estimates are the price of
the shares at the date when the NIC becomes payable and the NIC rate prevalent at that date. The Group uses the rate at the
Statement of Financial Position date as its estimate.
> Determining the value of deferred tax assets for tax deductions that will become deductible in respect of share-based
payment charges.
A share-based payment charge and associated NIC charges are recorded in the current year. Tax deductions in respect of these
will only be available in future years when the relevant individual exercises options or requests the Trustees of the Impax Employee
Benefit Trust to move their shares out of the Trust and accordingly a corresponding deferred tax asset is recognised. In
determining the size of the deferred tax asset the key judgements are the price of the shares at the date when the tax or NIC
becomes payable and the tax and NIC rates prevalent at that date. The Group uses the price/rates enacted at the Statement of
Financial Position date as its estimate.
> Impairment of goodwill
Goodwill has an indefinite useful life, is not subject to amortisation and is tested annually for impairment. In determining if goodwill
is impaired, the Group determines the recoverable amount of its CGUs by applying a discounted cash flow model. The Group’s
budgeted cash flows were approved by the Directors and use a growth rate of 2%. Impax Asset Management Group plc Annual Report and Accounts 2012
42
Company Statement of Financial Position
As at 30 September 2012
Company No: 03262305
2012 2011
Notes £000 £000 £000 £000
Assets
Property, plant and equipment 24 686 479
Investments 25 14,609 7,326
Deferred tax asset 29 105 56
Total non-current assets 15,400 7,861
Trade and other receivables 26 312 428
Investments 27 2,665 2,797
Cash invested in money market funds 9,594 8,546
Cash and cash equivalents 16 1,172
Total current assets 12,587 12,943
Total assets 27,987 20,804
Equity and Liabilities
Ordinary shares 30 1,156 1,156
Share premium 78 78
Own shares 31 (19) (59)
Treasury shares 31 (1,932) (453)
Retained earnings 16,187 8,955
Total equity 15,470 9,677
Liabilities
Trade and other payables 28 12,484 11,127
Bank overdraft 33
Total current liabilities 12,517 11,127
Total equity and liabilities 27,987 20,804
Authorised for issue and approved by the Board on 28 November 2012. The notes on pages 45 to 50 form part of these financial
statements.
Ian R Simm
Chief Executive Impax Asset Management Group plc Annual Report and Accounts 2012
43
Financial Statements
Note
Share
capital
£’000
Share
premium
£’000
Own shares
£’000
Treasury
shares
£’000
Retained
earnings
£’000
Total
£’000
As at 1 October 2010 1,156 78 (59) (453) 6,257 6,979
Long-term-incentive scheme – – – – 3,958 3,958
Loss for the year – – – – (609) (609)
Dividends paid – – – – (651) (651)
As at 30 September 2011 1,156 78 (59) (453) 8,955 9,677
Long-term incentive scheme – – – – 8,081 8,081
Loss for the year – – – – (50) (50)
Dividends paid 8 – – – – (759) (759)
Share buyback 31 – – – (1,479) – (1,479)
Share awards 31 – – 40 – (40) –
As at 30 September 2012 1,156 78 (19) (1,932) 16,187 15,470
The total of own shares and treasury shares is deducted from Retained earnings when calculating distributable profits.
The notes on pages 45 to 50 form part of these financial statements.
Company Statement of Changes in Equity
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
44
Company Statement of Cash Flows
For the Year Ended 30 September 2012
2012
£000
2011
£000
Operating Activities:
(Loss) before taxation (98) (458)
Adjustments for:
Investment income (2,036) (546)
Depreciation of property, plant and equipment 295 243
Fair value movements in investments 462 (512)
Impairment of investment 77 592
Share-based payment 2,453 1,282
Exceptional long-term incentive scheme charge (71) 453
Other long-term incentive scheme related charges 193 110
Operating cash flows before movement in working capital 1,275 1,164
Decrease in receivables 116 1,510
Increase in payables 758 2,940
Cash generated from operations 2,149 5,614
Corporation tax – –
Net cash generated from operating activities 2,149 5,614
Investing activities:
Interest received 36 52
Dividend received 2,000 497
Repayments/Proceeds on sale of investments 1,501 1,247
Purchase of investments (3,572) (83)
Disposal of investments 29 –
Purchase of property, plant and equipment (502) (424)
Net cash (used in)/generated from investing activities (508) 1,289
Financing activities:
Dividends paid (759) (651)
Increase in cash held in money market funds (1,048) (6,028)
Proceeds from borrowings 33 –
Share buy back (1,023) –
Net cash (used in) financing activities (2,797) (6,679)
Net (decrease)/increase in cash and cash equivalents (1,156) 224
Cash and cash equivalents at beginning of year 1,172 948
Effect of foreign exchange rate changes – –
Cash and cash equivalents at end of year 16 1,172 Impax Asset Management Group plc Annual Report and Accounts 2012
45
Financial Statements
23 Significant accounting policies
The separate financial statements of the Company are presented as required by the Companies Act 2006. The principal accounting
policies adopted are the same as those set out in the Group’s financial statements disclosures. In addition note 25 sets out the
accounting policy in respect of investments in subsidiary undertakings.
The Company has taken advantage of the exemption allowed under Section 408 of the Companies Act 2006 and has not
presented its own Statement of Comprehensive Income in these financial statements. The Company’s loss after tax for the year
amounted to £50,000 (2011: loss of £609,000).
24 Property, plant and equipment
Leasehold
improvements
£000
Fixtures,
fittings and
equipment
£000
Total
£000
Cost
As at 1 October 2010 445 304 749
Additions 296 128 424
Disposal – (29) (29)
As at 30 September 2011 741 403 1,144
Additions 368 137 505
Disposals (452) (58) (510)
As at 30 September 2012 657 482 1,139
Depreciation
As at 1 October 2010 281 170 451
Charge for the year 147 96 243
Disposals – (29) (29)
As at 30 September 2011 428 237 665
Charge for year 178 117 295
Disposals (452) (55) (507)
As at 30 September 2012 154 299 453
Net book value
As at 30 September 2012 503 183 686
As at 30 September 2011 313 166 479
As at 30 September 2010 115 182 297
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
46
Notes to the Financial Statements continued
For the Year Ended 30 September 2012
25 Non-current investments
Investments held by the Company in subsidiary undertakings are held at cost less any provision for impairment.
Other
investments
£000
Subsidiary
undertakings
£000
Total
£000
At 1 October 2010 13 6,023 6,036
Additions 52126
Capital contribution – 2,676 2,676
Impairment of investments – (592) (592)
Disposals/Repayment of invested capital – (820) (820)
At 30 September 2011 18 7,308 7,326
Additions – 3,234 3,234
Capital contribution – 5,627 5,627
Impairment of investments – (77) (77)
Disposals/Repayment of invested capital (1) (1,500) (1,501)
At 30 September 2012 17 14,592 14,609
The principal subsidiary undertakings are:
Country of
incorporation
Proportion of
ordinary capital held Nature of business
Impax Asset Management Limited UK 100% Financial services
Impax New Energy Investors (GP) Limited UK 100% Financial services
Impax New Energy Investors II (GP) Limited UK 100% Financial services
Impax New Energy Investors Management SARL Luxembourg 100% Financial services
Kern USA Inc USA 100% Holding company
Impax Asset Management (Hong Kong) Ltd Hong Kong 100% Financial services
Impax Asset Management (US) LLC USA 100% Financial services
A full list of subsidiaries will be attached to the Company’s Annual Return filed with Company’s House.
Charges relating to shares in the Company granted by the Trustees of the EBT to employees of subsidiary undertakings are accounted
for in the subsidiary undertaking. The charge to the subsidiary undertaking is proportionate to the number of shares allocated to
individuals in the entity as a percentage of the total shares allocated to employees of the Group. In the Company financial statements
this capital contribution has been recognised as an increase in the investment in subsidiaries.
Investments in subsidiary undertakings are divided between interest in shares and capital contributions as follows:
2012
£000
2011
£000
Interest in shares 5,013 3,356
Capital contribution 9,579 3,952
14,592 7,308
The principal other investment for the Company is in the fund Impax New Energy Investors SCA which is incorporated in
Luxembourg. The Company holds 14.24% of the capital of this partnership which represents its subscription capital. Impax Asset Management Group plc Annual Report and Accounts 2012
47
Financial Statements
26 Trade and other receivables
2012
£000
2011
£000
Amounts owed to Group undertakings – Receivables 6 71
Taxation and other social security – 128
Other receivables 79 42
Prepayments and accrued income 227 187
312 428
Due:
After one year – –
Within one year 312 428
312 428
27 Current asset investments
Unlisted
investments
£000
Listed
investments
£000
Total
£000
At 1 October 2010 2,323 332 2,655
Additions 57 – 57
Fair value movements 512 – 512
Repayments/disposals (95) (332) (427)
At 30 September 2011 2,797 – 2,797
Additions 338 – 338
Fair value movements (441) – (441)
Repayments/disposals (29) – (29)
At 30 September 2012 2,665 – 2,665
28 Trade and other payables
2012
£000
2011
£000
Trade payables 43 26
Amounts owed by Group undertakings 10,407 8,838
Taxation and other social security 716 643
Other payables 494 28
Accruals and deferred income 824 1,592
12,484 11,127
29 Deferred tax
The deferred tax asset included in the Company Statement of Financial Position is as follows:
Accelerated
capital
allowances
£000
Other
temporary
differences
£’000
Excess
management
charges
£’000
Exceptional
items
£’000
Share-based
payment
scheme
£’000
Total
£’000
As at 30 September 2011 14 (121) – 113 50 56
Charge/(credit) to the Income Statement 23 (120) – 113 (65) (49)
As at 30 September 2012 (9) (1) – – 115 105
As described in note 3 if and when the EBT Trustee agrees to transfer assets held in the EBT to beneficiaries and if the assets
transferred are in the form of the Company’s ordinary shares, the Company expects to be eligible for a corporation tax deduction
equal to the value of those ordinary shares. The Company has not recognised a deferred tax asset in respect of these amounts
which would total £925,000. The Company also has unrecognised capital losses of £1,267 ,000 (2011: £1,498,000). Impax Asset Management Group plc Annual Report and Accounts 2012
48
Notes to the Financial Statements continued
For the Year Ended 30 September 2012
30 Ordinary shares
2012
£000
2011
£000
Allotted and fully paid
115,582,431 ordinary shares of 1p each 1,156 1,156
31 Own shares and treasury shares
On 30 September 2012 the employment conditions for Ian Simm in respect of the 4,000,000 shares held in sub trusts of the EBT for
him and his beneficiaries were met. Accordingly the value of Own shares held reduced by £40,000.
During the period ended 30 September 2012, the Company purchased 3,459,000 of its own shares at an average price of 42 pence.
Total shares held in Treasury at 30 September 2012 were 4,699,000 (2011: 1,240,000).
32 Financial commitments
The Company has committed to invest up to €3,756,000 in Impax New Energy Investors LP . At 30 September 2012 the outstanding
commitment was €1,014,000 (2011: €1,011,000) which could be called on in the period to 19 August 2015.
The Company has committed to invest up to €3,298,000 in Impax New Energy Investors II LP . At 30 September 2012 the outstanding
commitment was €2,782,000 (2011: €3,187 ,000), which could be called on in the period to 22 March 2020.
At 30 September 2012 the Company had commitments under non-cancellable operating leases as follows:
Offices Other
2012
£’000
2011
£’000
2012
£’000
2011
£’000
Within one year 440 483 15 15
Between one and two years 440 440 14 29
Between two and five years 541 985 1 –
1,421 1,908 30 44
33 Financial risk management
The risk management processes of the Company are aligned to those of the Group as a whole. The Company’s specific risk
exposures are explained below.
Credit risk
The Company’s primary exposure to credit risk relates to cash and deposits that are placed with regulated financial institutions and
amounts due from subsidiaries.
At the Statement of Financial Position date, the credit risk regarding cash and cash equivalent balances of the asset management
business was spread by holding part of the balance with RBS (Standard & Poor’s credit rating A-1), and the remainder in a money
market fund managed by Blackrock which has a Standard & Poor’s credit rating of AAA. The risk of default is considered minimal.
Foreign exchange risk
The amount of the Company’s expenses denominated in foreign currencies is minimal.
The Company activities are principally conducted in GBP, EUR, and USD. Foreign exchange risk arises from income received in
these currencies together with a limited amount of exposure to costs payable. Impax Asset Management Group plc Annual Report and Accounts 2012
49
Financial Statements
33 Financial risk management continued
Foreign exchange risk continued
The Company’s exposure to foreign exchange rate risk at 30 September 2012 was:
EUR/GBP
£000
USD/GBP
£000
Assets
Non-current asset investments 17 3,121
Current asset investments 2,665 –
2,682 3,121
Liabilities
Trade and other payables 7 503
7 503
Net exposure 2,675 2,618
The Company’s exposure to foreign currency exchange rate risk at 30 September 2011 was:
EUR/GBP
£000
USD/GBP
£000
Assets
Non-current asset investments 18 –
Current asset investments 2,797 –
2,815 –
Liabilities
Trade and other payables – 886
– 886
Net exposure 2,815 (886)
The following tables demonstrate the estimated impact on Group post-tax profit and net assets and Company post-tax profit and net
assets caused by a 5% movement in the exchange rate used to revalue significant foreign assets and liabilities, assuming all other
variables are held constant. Post tax profit either increases or (decreases).
Post-tax profit
2012
£000
2011
£000
Translation of significant foreign assets and liabilities
GBP strengthens against the USD, up 5% (31) (104)
GBP weakens against the USD, down 5% 31 104
GBP strengthens against the EUR, up 5% (32) (33)
GBP weakens against the EUR, down 5% 32 33
Liquidity risk
Liquidity risk is the risk that the Company does not have sufficient financial resources to meets it obligations when they fall due or will
have to do so at cost. The Company can request to borrow cash through intragroup loans to maintain sufficient liquidity.
Interest rate risk
At reporting date the Company’s cash and cash equivalents, including bank overdrafts and cash held in money market deposits
balance of £9,594,000 (2011: £9,718,000) were its only financial instruments subject to variable interest rate risk. The impact of 0.5%
increase or decrease in interest rate on the post tax profit is not material to the Company.
Market risk
The Company has made investments in its own managed funds and the value of these investments are subject to equity market risk.
The significant holding at 30 September 2012 that is exposed to equity market price risk is in the Group’s investment held by IGMF.
If the valuation of the holdings in the fund fell by 5% this would have a £166,000 impact on the profit or loss statement.
The significant holdings at 30 September 2011 exposed to equity market price risk were the Group’s holdings in IARF. Impax Asset Management Group plc Annual Report and Accounts 2012
50
33 Financial risk management continued
Fair values of financial assets and liabilities
The Directors consider there to be no difference between the carrying value of the Group’s financial assets and liabilities and their
fair value.
The hierarchical classification of financial assets and liabilities measured at fair value are as follows:
30 September 2012
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Current investments – – 2,665 2,665
There were no movements between any of the levels in the year.
30 September 2011
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Current investments – – 2,797 2,797
The Company had no financial liabilities for 2012 or 2011.
Financial assets and liabilities by category
30 September 2012
Available
for sale
£000
1
FVTPL –
Held for
trading
£000
Loans
and
receivables
£000
Financial
liabilities
measured at
amortised
cost £000
Financial assets
Cash and cash equivalents – – 16 –
Cash held in money market funds – – 9,594 –
Trade and other receivables – – 79 –
Investments 17 2,665 – –
Total financial assets 17 2,665 9,689 –
Financial liabilities
Bank overdraft – – – (33)
Trade and other payables – – – (537)
Total financial liabilities – – – (570)
1
Fair value through profit and loss
30 September 2011
Available for
sale £000
1
FVTPL
– Held for
trading £000
Loans and
receivables
£000
Financial
liabilities
measured at
amortised
cost £000
Financial assets
Cash and cash equivalents – – 1,172 –
Cash held in money market funds – – 8,546 –
Trade and other receivables – – 42 –
Investments 18 2,797 – –
Total financial assets 18 2,797 9,760 –
Financial liabilities
Trade and other payables – – – (55)
Total financial liabilities – – – (55)
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
51
Financial Statements
Notice of Annual General Meeting
Notice is hereby given that the Annual General Meeting of Impax Asset Management Group plc (the “Company”) will be held at the
offices of the Company, Norfolk House, 31 St James’s Square, London SW1Y 4JR at 11.00am on 13 February 2013 for the following
purposes:
As Ordinary Business
To consider and, if thought fit, pass the following resolutions which will be proposed as ordinary resolutions:
1. To receive and adopt the Company’s annual accounts for the financial year ended 30 September 2012 together with the Directors’
Report and the Auditor’s Report on those accounts.
2. To re-elect Vince O’Brien as a Director.
3. To re-elect Ian R Simm as a Director.
4. To reappoint KPMG Audit Plc as auditor of the Company.
5. To authorise the Directors to fix the remuneration of the auditor.
6. To declare a final dividend in respect of the financial year ended 30 September 2012 of 0.75 pence per ordinary share payable
to the holders of ordinary shares on the register of members at the close of business on 25 January 2013.
As Special Business
To consider and, if thought fit, pass the following resolutions which will be proposed as special resolutions:
7. THAT the Directors of the Company be and are hereby empowered pursuant to section 570 of the Companies Act 2006 (the “Act”)
to allot equity securities (within the meaning of section 560 of the Act) for cash, pursuant to the authority conferred by an ordinary
resolution passed on 2 February 2009 or by way of a sale of treasury shares, as if section 561 of the Act did not apply to any such
allotment or sale, provided that the power conferred by this resolution shall be limited to:
(a) the allotment or sale of equity securities, either in connection with an issue or offer of equity securities (including, without limitation,
under a rights issue, open offer or similar arrangement) to holders of equity securities in proportion (as nearly as may be practicable)
to their respective holdings of equity securities, subject only to such exclusions or other arrangements as the Directors of
the Company may consider necessary or expedient to deal with any treasury shares, fractional entitlements or legal or practical
problems under the laws of any territory, or the requirements of any regulatory body or stock exchange in any territory; and
(b) the allotment or sale (otherwise than pursuant to resolution 7(a)) of equity securities up to an aggregate nominal value of £115,582.43.
The power conferred by this resolution shall expire (unless previously renewed, revoked or varied by the Company in general meeting)
at the conclusion of the Company’s next annual general meeting, except that the Company may at any time before such expiry make
any offer or agreement which would or might require equity securities to be allotted or sold after such expiry and the Directors of
the Company may allot or sell equity securities in pursuance of such an offer or agreement as if the authority conferred hereby had
not expired.
8. THAT the Company be and is generally authorised for the purposes of section 701 of the Act to make one or more market
purchases (within the meaning of section 693(4) of the Act) of its ordinary shares of 1 pence each provided that:
(a) the maximum aggregate number of ordinary shares that may be purchased is 11,558,243;
(b) the minimum price which may be paid for each ordinary share is 1 pence;
(c) the maximum price which may be paid for each ordinary share is not more than 105 per cent. of the average of the middle market
quotations for an ordinary share taken from the London Stock Exchange for the five business days immediately preceding the day
of purchase; and
(c) unless previously renewed, varied or revoked, the authority conferred by this resolution shall expire at the conclusion of the
Company’s next annual general meeting save that the Company may make a contract or contracts to purchase ordinary shares
under the authority conferred by this resolution prior to the expiry of such authority which will or may be executed wholly or partly
after the expiry of such authority and may make a purchase of ordinary shares in pursuance of any such contract or contracts.
By order of the Board
Zack Wilson
Company Secretary
14 December 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
52
Notice of Annual General Meeting continued
Notes:
1. Any member entitled to attend and vote at the meeting is entitled to appoint a proxy or proxies to attend, speak and vote in his or
her stead. A member may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different
shares. A member may not appoint more than one proxy to exercise rights attached to any one share. A proxy need not be a
member of the Company. A form of proxy is enclosed for use of members. Completion and return of a form of proxy or CREST
Proxy Instruction (as described in note 4) will not preclude a member from attending and voting in person at the meeting should
he or she so decide. You can only appoint a proxy using the procedures set out in these notes and the notes to the form of proxy.
If you appoint a proxy and attend the meeting in person, your proxy appointment will automatically be terminated.
2. To be valid, the form of proxy and the power of attorney or other authority (if any) under which it is signed (or a notarially certified
copy of such power of authority) must be deposited at the offices of Capita Registrars, PXS, 34 Beckenham Road, Beckenham,
Kent BR3 4TU by 11.00 a.m. on 11 February 2013. To change your proxy instructions simply submit a new proxy appointment
using the methods set out above and in the notes to the form of proxy. Note that the cut-off time for receipt of proxy appointments
also applies in relation to amended instructions; any amended proxy appointment received after the relevant cut-off time will be
disregarded.
3. To be entitled to attend and vote at the meeting (and for the purpose of the determination by the Company of the number of votes
they may cast), members must be entered in the Register of Members at 6.00 p.m. on 11 February 2013 (or, in the event of any
adjournment, 6.00 p.m. on the date which is two days before the time of the adjourned meeting).
4. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for
the meeting and any adjournment(s) thereof by using the procedures described in the CREST Manual. CREST personal members
or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s) should refer
to their CREST sponsors or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for
a proxy appointment or instruction made by means of CREST to be valid, the appropriate CREST message (a “CREST Proxy
Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications and must contain
the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to
be received by the Company’s agent, Capita Registrars Limited (CREST Participant ID: RA10), no later than 48 hours before the
time appointed for the meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp
applied to the message by the CREST Application Host) from which the Company’s agent is able to retrieve the message by
enquiry to CREST in the manner prescribed by CREST. CREST members and, where applicable, their CREST sponsors or voting
service provider(s) should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any
particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions.
It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored
member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such
action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this
connection, CREST members and, where applicable, their CREST sponsors or voting service provider(s) are referred in particular
to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The Company
may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5) of the Uncertificated Securities
Regulations 2001. Designed and produced by Emperor Design Consultants Ltd
Telephone +44 (0)20 7729 9090 www.emperordesign.co.uk
Directors
J Keith R Falconer (Chairman)
Ian R Simm (Chief Executive)
Guy de Froment (Non-Executive)
Peter J Gibbs (Non-Executive)
Vincent O’Brien (Non-Executive)
Mark B E White (Non-Executive)
Secretary
Zack Wilson
Registered Office
Norfolk House
31 St James’s Square
London
SW1Y 4JR
Auditor
KPMG Audit Plc
15 Canada Square
London
E14 5GL
Bankers
The Royal Bank of Scotland Group plc
3rd Floor
280 Bishopsgate
London
EC2M 4RB
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Nominated Adviser and Broker
Execution Noble & Co Limited
10 Paternoster Square
London
EC4M 7AL
Solicitors
Stephenson Harwood
1 Finsbury Circus
London
EC4M 7SH
Officers and Advisors Impax Asset Management Group plc
Norfolk House
31 St James’s Square
London
SW1Y 4JR
United Kingdom
T: +44 (0) 20 7434 1122
F: +44 (0) 20 7434 1123
E: [email protected]
www.impaxam.com
Impax Asset Management Group plc Annual Report and Accounts 2012 | Impax Asset Management Group plc Annual Report and Accounts 2012
4
Chief Executive’s Report
For the Year Ended 30 September 2012
We continue to focus on delivering solid
investment performance for our clients while
carefully extending our research coverage
and distribution channels.
Ian Simm
Chief Executive
Table 1: Assets under management and fund flows
£ million
AUM
1 Oct
2011 H1 H2
AUM
30 Sept
2012
“Impax-Label” listed equity products 712 – – 637
Inflows – 23 8 –
Outflows – (76) (52) –
Market movements & currency – 85 (63) –
Third party listed equity funds & accounts 792 – – 829
Inflows –7141 –
Outflows – (85) (66) –
Market movements & currency – 122 (46) –
Private Equity 392 (13) (17) 362
Total 1,896 127 (195) 1,828
During a financial year in which economic
confidence has swung between apparent
complacency and despair, the Impax
management team has continued to focus
on the core business of managing
portfolios of listed and private securities
on behalf of institutional investors, while
investing selectively in expanding the
Company’s capabilities.
Sector developments
For many years, at the time of writing
each semi-annual Impax report, a review
of recent developments in the sectors
in which the Company is investing has
produced a wealth of evidence of
strengthening market fundamentals:
this report is no different. Nevertheless,
investor confidence in some of these
sectors, for example solar panel
manufacturing, remains weak, and sector
benchmarks have underperformed
generic indices during 2012. Since the
interim statement, when I summarised
new policies to address climate change
and improve energy efficiency in several
countries, further capital expenditure on
water management and treatment in China
and additional regulations to curb pollution
in the United States, there have been
several notable announcements.
Probably most intriguing was the
reaffirmation that, in the light of the
Fukushima disaster in Japan, Germany is
committed to a full shutdown of all nuclear
power stations by 2022. This will require
an investment of at least €300 billion in
renewable energy, energy efficiency and
grid strengthening, and has been the
principal driver of sharp falls in the share
prices of the country’s principal power
utilities E.ON and RWE, which are unlikely
to receive full compensation for the
premature shutdown of their nuclear
assets. Meanwhile, Japan’s new energy
policy continues to evolve, with latest
estimates suggesting a cumulative
investment of US$1.5 trillion in renewables
and energy efficiency over the next
20 years.
Demand for energy efficient products
and services and for renewable energy
continued to expand in most European
countries. Although prospects for
renewable energy in the UK were called
into question by some vocal politicians,
this sector once again grew rapidly as
most countries sought to encourage lower
carbon power generation capacity.
In August, the Obama administration
raised the automotive manufacturers’
average fuel efficiency standard from
35.5 miles per gallon by 2016 to 54.5 miles
per gallon by 2025; in spite of Republican
objections, this was widely endorsed by
the manufacturers themselves, who
appreciated the policy certainty over a
time frame that allows them to manage
their product development.
It is likely that the regulatory framework
in the United States, which underpins
other sectors in which Impax invests,
will continue to strengthen in Obama’s
second term. The President has already
announced that addressing climate
change is a priority, while analysts are also
pointing to the potential for tighter rules
governing water abstraction in drought-
prone areas, investment in flood defence
and several initiatives related to higher
energy efficiency.
Impax’s target markets
The weakness of environmental stocks is
illustrated by the performance of the FTSE
Environmental Opportunities All Share
Index, which returned 3.4 per cent (net,
total return) between 1 January 2012
and 30 September 2012, compared to
the MSCI World Index which was up
8.8 per cent (net, total return) over the
same period.
During 2012, taking into account feedback
from a range of our clients and prospective
investors, we have slightly broadened
the definition of Impax’s target markets
to encompass “resource efficiency”,
comprising environmental markets and the
wider food and agriculture value chain.
Companies providing products and
services in the food and agriculture
sectors have many similar characteristics
to those in alternative energy, water and
waste management, particularly growth Impax Asset Management Group plc Annual Report and Accounts 2012
5
Chief Executive’s Report
linked to the rising demands of an
expanding population, limited resources
and broad evidence of mis-pricing as a
result of rapidly changing technology,
regulations and market structure.
This initiative is resonant with a number
of high profile studies examining the
implications for investors of the themes in
which Impax has expertise. In November
2011, McKinsey & Company published
“Resource Revolution: Meeting the world’s
energy, materials, food and water needs”,
an in-depth study of a range of new
market opportunities. Subsequently, in
August 2012, Towers Watson published
“Sustainability in Investment” which
pointed to a potential transformation in
the investment landscape arising from
emerging drivers including “resource
scarcity and climate change”.
We are excited about the potential for
offering additional investment services and
products in the broader resource efficiency
area. As reported in the interims, during
2012 we have recruited two experienced
investment professionals focused on global
food and agriculture and, on 1 December
2012, following test marketing, plan to
launch the Impax Food and Agriculture
Fund under the existing Impax Funds
(Ireland) plc platform with £2 million of seed
capital from the Company; this fund will be
marketed primarily to UK investors.
Assets under management
and fund flows
During the Period, Listed Equity funds that
we manage or advise had net outflows
of £136 million comprising £97 million
from “Impax-Label funds” and £39 million
from Third Party Funds and Accounts.
Gross inflows across all strategies were
£143 million and performance contributed
£97 million. However, this was offset by
outflows of £279 million. We believe that
the net outflows are broadly attributable
to weakness of environmental stocks
relative to global equities, particularly over
the past 18 months, and to investor
nervousness over the prospects for equity
markets in general.
We saw continued progress in building
our franchise in the United States. The
Pax World Global Green Fund (recently
renamed the Pax World Global
Environmental Fund), which we sub-advise,
attracted net inflows over the Period
expanding to US$52 million at the end of
the Period. As previously announced, in
December 201 1 we established Impax
Green Markets Fund, a Delaware-based
private fund, as a wrapper for our
Specialists strategy.
Following the completion of fund raising
for our second private equity fund in
September 2011, there were no additional
flows in this division during the Period.
However, AUM (in Sterling) declined due
to the impact of the weakening Euro.
Investment Performance
Listed Equity
During the Period our listed equity
strategies generally beat their comparator
indices of environmental stocks, but some
have trailed global indices.
We were particularly pleased by our
Water strategy which sustained its out-
performance over the Period, returning
19.2 per cent (total return, GBP) compared
to 17 .3 per cent (net return, GBP) for the
MSCI World Index. The strategy now has
a strong three year track record, making it
the best performing fund in its peer group
over this timeframe: since inception on
1 January 2008 to 30 September 2012,
this strategy was up 77 .5 per cent (total
return, GBP) while the MSCI World Index
was up 52.1 per cent (net return, GBP).
Our Specialists strategy, which invests
in small and mid-cap stocks, returned
6.7 per cent (total return, GBP) over the
Period compared to minus 0.8 per cent
(total return, GBP) for the corresponding
period for the FTSE ET50 Index which is
representative of the universe of small and
mid-cap environmental stocks. Over the
ten years to 30 September 2012, our
Specialists strategy has returned 162 per
cent (total return, GBP) while the FTSE
ET50 Index declined 61.5 per cent (total
return, GBP) and the MSCI World Index
was up 111 per cent (net return, GBP).
Our Leaders strategy, which invests in
both small-cap stocks as well as larger,
more diversified companies across the
environmental markets universe, returned
16.8 per cent over the Period (total return,
GBP). From inception on 3 March 2008
to 30 September 2012, this strategy
returned 24.9 per cent (total return, GBP)
while the MSCI World Index was up 23.4
per cent (net return, GBP) and the FTSE
Range of investment
strategies
AUM (£m)
(as at 30 September 2012)
Environmental
Specialists
Environmental
Leaders
Asia-Pacific
Water
Private Equity
759
276
205
226
362
Private Equity
North America
Asia-Pacific
Other Europe
UK/Ireland
36
58
626
746
362
AUM by geographic region
(client domicile)
(as at 30 September 2012)
Stable, diverse, client base
“Impax-Label” funds
(as at 30 September 2012)
637
241
588
362
Impax-Label Funds
Segregated accounts
White Label Funds
Private Equity Impax Asset Management Group plc Annual Report and Accounts 2012
6
Environmental Opportunities All Share
Index gained 16.5 per cent (total
return, GBP).
Private Equity
Our private equity business made solid
progress during the Period.
The power generation projects owned by
our first fund, Impax New Energy Investors
LP (“Fund I”), which has €125 million of
commitments, have continued to beat their
budgets, and in June the Fund was able to
make a further distribution to investors. As
previously reported, we will seek a full exit
from this fund when market conditions are
supportive; to this end, we are following
closely the development of regulations
affecting the energy sector in Spain, where
the majority of Fund I’s residual assets
are located.
Meanwhile, our team has continued to
deploy the €330 million of capital in Fund
II, focusing on investing to fund the
construction of onshore wind and solar
PV assets in the European Union and,
potentially, North America. During the
Period, Fund II purchased 109MW of
French and Polish wind assets, an Italian
solar PV investment and a 28MW wind
park in Germany; currently approximately
40 per cent of Fund II is invested or
committed for investment.
Distribution
As set out in previous statements, our
distribution strategy focuses on building
relationships with institutional investors
around the world, offering both direct
investment management expertise as
well as the sub-management of funds
established by third parties.
In the UK, our core market, from where
41 per cent of our AUM originates, we
have continued to build relationships with
new institutional investors and have begun
a systematic outreach programme to
family offices where Impax has historically
been under-represented. In consultation
with the Board of Impax Environmental
Markets plc, an investment trust with
ca. £327 million of net assets (as at
30 September 2012) and our largest client,
we have established a dedicated microsite
(www.impaxenvironmentalmarkets.co.uk)
to provide investors with more detailed
fund-specific information.
For many clients elsewhere in Europe, as
well as in Asia and Australia, we continue to
work closely with BNP Paribas Investment
Partners (“BNPP IP”) to improve the sales
prospects for several funds that we
sub-manage. Early next month, two of the
funds that follow the Leaders strategy will
merge and will also absorb a third fund,
creating a vehicle with ca. €120 million of
AUM, a size which should widen the fund’s
appeal to a wide group of investors. In
addition, we are particularly pleased that
BNPP IP has decided to extend the
marketing and sales of the BNP Paribas
Aqua fund which wraps our Water strategy,
beyond its established base in France to
cover most of Europe.
Our direct sales strategy in the US market
is to leverage our positive consultant
ratings in a small number of focused
channels covering endowments,
foundations and family offices, while also
nurturing third party relationships. To this
end, we recently recruited a Head of
Institutional Sales and Client Service who
has over 25 years’ experience of selling to
top tier institutions and who is based in a
new Impax office in New York City.
We were delighted to win three prestigious
asset management awards in 2012. In
May, Impax was named as the winner of
the “Sustainable, responsible, ethical
investment award” at the Financial Times
Business Pension and Investment
Provider 2012 Awards. In October, we
were recognised as “Impact Investor of
the Year” by The Asset in Hong Kong,
and in November as “Best Fund
Management Group” by Investment
Week at their Climate Change & Ethical
Investment Awards.
Infrastructure and support
In addition to satisfying client expectations
on operational matters, the regulatory
environment in which investment
management firms operate is becoming
increasingly complex, and it is essential
that we sustain an effective Support Team
across our offices in London, Hong Kong
and the United States.
In recent years we have consciously
invested in operations, IT, finance, legal,
compliance and HR capabilities in order
to establish a scalable platform for growth.
In principle, we are now adequately
resourced in these areas and can manage
a significant volume of additional assets on
this base. At the time of writing, alongside
other investment managers, we are
working with our clients to ensure
appropriate compliance with the emerging
requirements of the European Union’s
Alternative Investment Fund Managers
Directive, and are also closely monitoring
the implications of regulatory developments
in the other markets in which we operate.
The hiring of our food and agriculture
team, our Head of Distribution (who joined
on 1 October 2011) and our new Head of
Institutional Sales in the United States have
contributed to a headcount increase: at
the end of the Period our total headcount
was 56.5 full time equivalent staff, up from
50.4 at the start of the Period.
Outlook
Investors who had committed capital to
equity markets at the start of 2012 and are
only now reviewing the result should be
pleasantly surprised by the profit they have
made, but may also be concerned about
the level of volatility of their portfolio today.
In particular, rising political instability in the
Eurozone and the pending US “fiscal cliff”
have the potential to de-rail confidence
and, indirectly, erode corporate profitability.
Nevertheless, the outlook for resource
efficiency and environmental markets is
gradually improving and most sectors
have rallied in the last quarter, in some
cases out-performing generic indices.
After a sustained period in which
corporate earnings expectations have
been downgraded, results for many of our
holdings now appear to be improving,
while a recent increase in M&A activity
may prove positive for sentiment over the
coming months.
Given our mandates, Impax has delivered
solid investment performance in the year
despite the fragile nature of global
markets. We remain committed to our
core strategies and as we build on recent
investments, we are confident in our ability
to deliver robust returns for shareholders
when global economic confidence returns.
Ian R Simm
28 November 2012
Chief Executive’s Report continued | Impax Asset Management Group plc Annual Report and Accounts 2012
1
Highlights
Highlights 2012
Key facts 2012
> Attractive investment themes
– Rapidly growing markets
– Large population of dynamic
companies
– Market complexity leads to
mis-pricing
> Experienced team
– 56 people, including 28 specialist
investment professionals
– No changes to senior investment
team since inception
– Significant staff share ownership
> Extensive distribution networks
– In-house and committed third party
distributors
– Access to over 20 markets
> Stable investor base
– 95% of investors in “Impax label”
funds are institutional
> Scalable business model
– High capacity investment strategies
– Proven investment processes
– Established infrastructure
> Financial performance
– Revenue £18.6 million
– Operating earnings £4.6 million
1
– Loss before tax of £4.7 million
2
– Assets under management £1.83 billion
– Diluted earnings per share 2.57 pence (adjusted)
3
– Cash reserves of £19.3 million
– Proposed dividend 0.75 pence per share
> Investment performance
– Principal listed equity strategies beat their environmental comparator indices
– Water strategy grew by 19.2%
4
– Investee companies of the Private Equity funds continued to perform well
>Expansion
– Expansion of stock coverage to include Food & Agriculture sectors (fund to
launch 1 December 2012)
– Opening of an office in New York City and appointment of a Head of Institutional
Sales and Client Service in the United States
1
revenue less operating costs excluding £8.7 million charge due to share incentive schemes
2
includes £8.7 million charges associated with the Company’s historical share-based incentive schemes
3
adjusted to exclude the IFRS2 charge for share schemes satisfied by primary shares
4
net asset value per share from 1 October 2011 to 30 September 2012 | Impax Asset Management Group plc Annual Report and Accounts 2012
2
Chairman’s Statement
For the Year Ended 30 September 2012
The drivers behind resource efficiency and
environmental markets have once again
strengthened, further underpinning the
attractiveness of the investment area in
which Impax operates.
Sector overview
> Drivers of resource scarcity are
fundamental and are creating
unprecedented opportunities for
long-term investors
> Underlying markets growing rapidly
> Our investment universe now numbers
some 2,000 stocks with a combined
market capitalisation in excess of
£4.25 trillion
> Companies often mis-priced as
investors misunderstand technology
change and the impact of regulations
> Successful investing requires a deep
understanding of the industries in which
these companies operate, including the
entire value chain
1
revenue less operating costs excluding £8.7 million
(2011: £5.4 million) charge due to share incentive
schemes
2
adjusted to exclude the IFRS2 charge for share
schemes satisfied by primary shares
Keith Falconer
Chairman
Over the past 12 months, the prospects
for equity investors have remained
uncertain as growth in the global
economy has been elusive and problems
in the Eurozone intractable. In spite of
these headwinds, Impax has delivered
a robust performance and has continued
to invest in order to position the business
for further growth.
During the Company’s financial year from
1 October 2011 to 30 September 2012
(the “Period”), assets under discretionary
and advisory management (“AUM”)
initially rose from £1.90 billion to £2.03
billion at the end of the first half, before
falling back to £1.83 billion. Since the
end of the Period, equity markets have
weakened further and AUM declined
slightly, reaching £1.80 billion on
31 October 2012.
Notwithstanding sustained equity market
volatility, the drivers behind resource
efficiency and environmental markets
have once again strengthened, further
underpinning the attractiveness of the
investment areas in which Impax
operates. For example, acute drought in
the United States and the recent impact
of Hurricane Sandy have raised the
likelihood that a re-elected President
Obama will promote additional investment
in clean energy and water infrastructure,
while across the planet there has been a
notable increase in evidence pointing to
faster than expected climate change, for
example the steep decline in the summer
coverage of sea ice in the Arctic Ocean
compared to previous years.
Institutional investors are increasingly
interested in analysing the risks and
opportunities arising from these changes,
providing us with further opportunity for
dialogue and, we believe, the potential for
increased commitment of capital to our
funds and accounts. Accordingly, we
have continued to invest incrementally in
our capabilities, particularly in the areas
of client service in the United States
and the development of investment
management expertise across the food
and agriculture sectors.
Results for the year and
proposed dividend
Revenue to 30 September 2012 was
£18.6 million (2011: £20.9 million).
Operating earnings
1
for the year were
£4.6 million (2011: £6.2 million) and the
associated operating margin was 24 per
cent (2011: 30 per cent). The decrease in
revenue and profits compared to the
corresponding 2011 financial year reflect
a combination of lower average AUM for
the year and a moderately higher fixed
cost base arising from the investment we
have made in further strengthening the
Company’s platform to prepare for further
growth. Profit before tax (“PBT”) for the
Period was a loss of £4.7 million (2011:
profit of £1.7 million). PBT was impacted
by £8.7 million (2011: £5.4 million) of
charges associated with the Company’s
historical share-based incentive schemes.
£1.0 million of this charge is directly offset
by a corresponding tax gain. PBT also
included fair value losses of £0.7 million
arising primarily from the Company’s
investments into the Impax Green
Markets Fund which we have set up in
the United States for domestic investors,
and our first private equity fund, in part
due to the strengthening of Sterling
against the Euro and the Dollar.
The Board regards the most relevant
measure of the year’s earnings to be
diluted earnings per share (“EPS”). On
this basis diluted EPS for the year was
2.57 pence (adjusted
2
), including Impax Asset Management Group plc Annual Report and Accounts 2012
3
Highlights Chairman’s Statement
08
09
10
11
12
11.39
10.39
15.34
20.93
18.62
Revenue
£ million
08
09
10
11
12
4.15
2.88
3.83
6.24
4.55
Operating Earnings
£ million
08
09
10
11
12
3.07
2.58
3.49
3.74
2.57
Earnings per share
(diluted adjusted)
pence
08
09
10
11
12
0.35
0.40
0.60
0.70
0.75
Dividend
pence
08
09
10
11
12
1.09
1.26
1.82
1.90
1.83
AUM
£ billion
0.42 pence due to the fair value losses.
For 2011, diluted EPS was 3.74 pence
(adjusted
2
). Diluted EPS before adjustment
was (4.32) pence in 2012 and 0.93 pence
in 2011.
The Group’s balance sheet strengthened
during the year with continued cash
generation from operating activities. At
the end of the financial year, shareholders’
equity had increased to £22.6 million
(2011: £21.5 million) and cash reserves
held by operating entities of the Group
were £19.3 million (2011: £20.0 million).
The slight decrease in cash included the
impact of the Company’s US$5 million
seed investment into the Impax Green
Markets Fund. Current asset investments
held at the year-end were £8.7 million
(2011: £3.9 million). The Group remained
debt-free throughout the Period.
In light of the Company’s sustained strong
cash flow and progressive dividend policy,
the Board recommends an increased
dividend of 0.75 pence per share (2011:
0.70 pence per share). The dividend
proposal will be submitted for formal
approval by shareholders at the
forthcoming Annual General Meeting
on 13 February 2013. If approved,
the dividend will be paid on or around
20 February 2013. The record date for
the payment of the proposed dividend will
be 25 January 2013 and the ex-dividend
date will be 23 January 2013. In line with
the Company’s stated policy, the Board
does not currently intend to recommend
the payment of interim dividends.
Remuneration
In accordance with the Company’s
updated remuneration policy (which was
described in the 2011 Annual Report),
during the Period the Board confirmed the
grant of five million Employee Share Option
Plan (“ESOP”) options to management
and staff in respect of their performance
for the financial year ended 30 September
2011. The strike price was set at 49.6
pence and the options will vest on
31 December 2014.
Share Buy-backs and Share Issuance
During the Period the Board commenced
the buy-back of the Company’s shares
into Treasury, with the aim of reducing the
requirement to issue new shares to
satisfy the exercise of options awarded
under the ESOP . To date, 3.5 million
shares have been purchased since the
start of the buy-back programme, and
the Company expects further purchases
to be made from time to time while
continuing to evaluate attractive alternative
uses of the Company’s cash resources.
Separately, in accordance with the
approval given by Shareholders in January
2008, the Company plans shortly to issue
12.2 million shares which will be available
to satisfy exercises of vested option
schemes, taking the total shares in issue
to 127.7 million.
Prospects
Since the end of the Period we have
seen a clear outcome in the US elections
and evidence of a smooth leadership
transition in China, but on-going macro-
economic problems in the Eurozone.
Against this complex backdrop, equity
markets appear once again to be
factoring in a significant risk of
disappointment in corporate earnings
and outlook statements, and the potential
for increased allocations to equities by
institutional investors is unclear.
Nevertheless, as the case for active
investment in resource efficiency and
environmental markets becomes
more compelling and better understood
by investors, demand for specialist
investment management expertise should
continue to broaden and deepen. The
Impax team has been successfully
managing investment portfolios targeting
these markets for more than 14 years
and has a track record of planning for
and delivering growth across a range
of market circumstances. I am therefore
confident that the Company is well
positioned for further increase in
shareholder value as conditions improve.
J Keith R Falconer
28 November 2012 | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input Impax Asset Management Group plc
Annual Report and Accounts 2012 Impax Asset Management Group plc is a leading
investment manager dedicated to investing in the
opportunities created by the scarcity of natural
resources and the growing demand for cleaner , more
efficient products and services, through both listed
and private equity strategies.
We manage £1.8 billion for institutional and high net worth investors globally, and are committed
to providing strong, long-term risk-adjusted returns. The Company’s investment team numbers
28 professionals, with an average of 18 years’ relevant experience.
Our listed equity funds seek out mis-priced companies that are set to benefit from the long-term
trends of changing demographics, rising consumption, limited natural resources and urbanisation.
Investment is focused on a small number of deeply researched strategies in energy, water, waste,
food and agriculture and related markets.
Impax’s private equity infrastructure funds invest in power generation assets in the renewable
energy sector.
Impax is a thought leader in defining the environmental and resource efficiency markets, for example
through a partnership with FTSE to develop and manage the classification system underpinning the
FTSE Environmental Markets Index Series.
Contents
1 Highlights 2012
Impax – Key Facts
2 Chairman’s Statement
4 Chief Executive’s Report
7 Overview of Our Resource
Efficiency Markets
8 Directors
9 Senior Personnel
10 Directors’ Report
12 Statement of Directors’ Responsibilities
in Respect of the Directors’ Report
and the Financial Statements
13 Corporate Governance Report
15 Key Risks
16 Remuneration Report
18 Independent Auditor’s Report
19 Consolidated Statement
of Comprehensive Income
20 Consolidated Statement
of Financial Position
21 Consolidated Statement
of Changes in Equity
22 Consolidated Cash Flow Statement
23 Notes to the Financial Statements
42 Company Statement
of Financial Position
43 Company Statement
of Changes in Equity
44 Company Cash Flow Statement
Officers and Advisers Impax Asset Management Group plc Annual Report and Accounts 2012
1
Highlights
Highlights 2012
Key facts 2012
> Attractive investment themes
– Rapidly growing markets
– Large population of dynamic
companies
– Market complexity leads to
mis-pricing
> Experienced team
– 56 people, including 28 specialist
investment professionals
– No changes to senior investment
team since inception
– Significant staff share ownership
> Extensive distribution networks
– In-house and committed third party
distributors
– Access to over 20 markets
> Stable investor base
– 95% of investors in “Impax label”
funds are institutional
> Scalable business model
– High capacity investment strategies
– Proven investment processes
– Established infrastructure
> Financial performance
– Revenue £18.6 million
– Operating earnings £4.6 million
1
– Loss before tax of £4.7 million
2
– Assets under management £1.83 billion
– Diluted earnings per share 2.57 pence (adjusted)
3
– Cash reserves of £19.3 million
– Proposed dividend 0.75 pence per share
> Investment performance
– Principal listed equity strategies beat their environmental comparator indices
– Water strategy grew by 19.2%
4
– Investee companies of the Private Equity funds continued to perform well
>Expansion
– Expansion of stock coverage to include Food & Agriculture sectors (fund to
launch 1 December 2012)
– Opening of an office in New York City and appointment of a Head of Institutional
Sales and Client Service in the United States
1
revenue less operating costs excluding £8.7 million charge due to share incentive schemes
2
includes £8.7 million charges associated with the Company’s historical share-based incentive schemes
3
adjusted to exclude the IFRS2 charge for share schemes satisfied by primary shares
4
net asset value per share from 1 October 2011 to 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
2
Chairman’s Statement
For the Year Ended 30 September 2012
The drivers behind resource efficiency and
environmental markets have once again
strengthened, further underpinning the
attractiveness of the investment area in
which Impax operates.
Sector overview
> Drivers of resource scarcity are
fundamental and are creating
unprecedented opportunities for
long-term investors
> Underlying markets growing rapidly
> Our investment universe now numbers
some 2,000 stocks with a combined
market capitalisation in excess of
£4.25 trillion
> Companies often mis-priced as
investors misunderstand technology
change and the impact of regulations
> Successful investing requires a deep
understanding of the industries in which
these companies operate, including the
entire value chain
1
revenue less operating costs excluding £8.7 million
(2011: £5.4 million) charge due to share incentive
schemes
2
adjusted to exclude the IFRS2 charge for share
schemes satisfied by primary shares
Keith Falconer
Chairman
Over the past 12 months, the prospects
for equity investors have remained
uncertain as growth in the global
economy has been elusive and problems
in the Eurozone intractable. In spite of
these headwinds, Impax has delivered
a robust performance and has continued
to invest in order to position the business
for further growth.
During the Company’s financial year from
1 October 2011 to 30 September 2012
(the “Period”), assets under discretionary
and advisory management (“AUM”)
initially rose from £1.90 billion to £2.03
billion at the end of the first half, before
falling back to £1.83 billion. Since the
end of the Period, equity markets have
weakened further and AUM declined
slightly, reaching £1.80 billion on
31 October 2012.
Notwithstanding sustained equity market
volatility, the drivers behind resource
efficiency and environmental markets
have once again strengthened, further
underpinning the attractiveness of the
investment areas in which Impax
operates. For example, acute drought in
the United States and the recent impact
of Hurricane Sandy have raised the
likelihood that a re-elected President
Obama will promote additional investment
in clean energy and water infrastructure,
while across the planet there has been a
notable increase in evidence pointing to
faster than expected climate change, for
example the steep decline in the summer
coverage of sea ice in the Arctic Ocean
compared to previous years.
Institutional investors are increasingly
interested in analysing the risks and
opportunities arising from these changes,
providing us with further opportunity for
dialogue and, we believe, the potential for
increased commitment of capital to our
funds and accounts. Accordingly, we
have continued to invest incrementally in
our capabilities, particularly in the areas
of client service in the United States
and the development of investment
management expertise across the food
and agriculture sectors.
Results for the year and
proposed dividend
Revenue to 30 September 2012 was
£18.6 million (2011: £20.9 million).
Operating earnings
1
for the year were
£4.6 million (2011: £6.2 million) and the
associated operating margin was 24 per
cent (2011: 30 per cent). The decrease in
revenue and profits compared to the
corresponding 2011 financial year reflect
a combination of lower average AUM for
the year and a moderately higher fixed
cost base arising from the investment we
have made in further strengthening the
Company’s platform to prepare for further
growth. Profit before tax (“PBT”) for the
Period was a loss of £4.7 million (2011:
profit of £1.7 million). PBT was impacted
by £8.7 million (2011: £5.4 million) of
charges associated with the Company’s
historical share-based incentive schemes.
£1.0 million of this charge is directly offset
by a corresponding tax gain. PBT also
included fair value losses of £0.7 million
arising primarily from the Company’s
investments into the Impax Green
Markets Fund which we have set up in
the United States for domestic investors,
and our first private equity fund, in part
due to the strengthening of Sterling
against the Euro and the Dollar.
The Board regards the most relevant
measure of the year’s earnings to be
diluted earnings per share (“EPS”). On
this basis diluted EPS for the year was
2.57 pence (adjusted
2
), including Impax Asset Management Group plc Annual Report and Accounts 2012
3
Highlights Chairman’s Statement
08
09
10
11
12
11.39
10.39
15.34
20.93
18.62
Revenue
£ million
08
09
10
11
12
4.15
2.88
3.83
6.24
4.55
Operating Earnings
£ million
08
09
10
11
12
3.07
2.58
3.49
3.74
2.57
Earnings per share
(diluted adjusted)
pence
08
09
10
11
12
0.35
0.40
0.60
0.70
0.75
Dividend
pence
08
09
10
11
12
1.09
1.26
1.82
1.90
1.83
AUM
£ billion
0.42 pence due to the fair value losses.
For 2011, diluted EPS was 3.74 pence
(adjusted
2
). Diluted EPS before adjustment
was (4.32) pence in 2012 and 0.93 pence
in 2011.
The Group’s balance sheet strengthened
during the year with continued cash
generation from operating activities. At
the end of the financial year, shareholders’
equity had increased to £22.6 million
(2011: £21.5 million) and cash reserves
held by operating entities of the Group
were £19.3 million (2011: £20.0 million).
The slight decrease in cash included the
impact of the Company’s US$5 million
seed investment into the Impax Green
Markets Fund. Current asset investments
held at the year-end were £8.7 million
(2011: £3.9 million). The Group remained
debt-free throughout the Period.
In light of the Company’s sustained strong
cash flow and progressive dividend policy,
the Board recommends an increased
dividend of 0.75 pence per share (2011:
0.70 pence per share). The dividend
proposal will be submitted for formal
approval by shareholders at the
forthcoming Annual General Meeting
on 13 February 2013. If approved,
the dividend will be paid on or around
20 February 2013. The record date for
the payment of the proposed dividend will
be 25 January 2013 and the ex-dividend
date will be 23 January 2013. In line with
the Company’s stated policy, the Board
does not currently intend to recommend
the payment of interim dividends.
Remuneration
In accordance with the Company’s
updated remuneration policy (which was
described in the 2011 Annual Report),
during the Period the Board confirmed the
grant of five million Employee Share Option
Plan (“ESOP”) options to management
and staff in respect of their performance
for the financial year ended 30 September
2011. The strike price was set at 49.6
pence and the options will vest on
31 December 2014.
Share Buy-backs and Share Issuance
During the Period the Board commenced
the buy-back of the Company’s shares
into Treasury, with the aim of reducing the
requirement to issue new shares to
satisfy the exercise of options awarded
under the ESOP . To date, 3.5 million
shares have been purchased since the
start of the buy-back programme, and
the Company expects further purchases
to be made from time to time while
continuing to evaluate attractive alternative
uses of the Company’s cash resources.
Separately, in accordance with the
approval given by Shareholders in January
2008, the Company plans shortly to issue
12.2 million shares which will be available
to satisfy exercises of vested option
schemes, taking the total shares in issue
to 127.7 million.
Prospects
Since the end of the Period we have
seen a clear outcome in the US elections
and evidence of a smooth leadership
transition in China, but on-going macro-
economic problems in the Eurozone.
Against this complex backdrop, equity
markets appear once again to be
factoring in a significant risk of
disappointment in corporate earnings
and outlook statements, and the potential
for increased allocations to equities by
institutional investors is unclear.
Nevertheless, as the case for active
investment in resource efficiency and
environmental markets becomes
more compelling and better understood
by investors, demand for specialist
investment management expertise should
continue to broaden and deepen. The
Impax team has been successfully
managing investment portfolios targeting
these markets for more than 14 years
and has a track record of planning for
and delivering growth across a range
of market circumstances. I am therefore
confident that the Company is well
positioned for further increase in
shareholder value as conditions improve.
J Keith R Falconer
28 November 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
4
Chief Executive’s Report
For the Year Ended 30 September 2012
We continue to focus on delivering solid
investment performance for our clients while
carefully extending our research coverage
and distribution channels.
Ian Simm
Chief Executive
Table 1: Assets under management and fund flows
£ million
AUM
1 Oct
2011 H1 H2
AUM
30 Sept
2012
“Impax-Label” listed equity products 712 – – 637
Inflows – 23 8 –
Outflows – (76) (52) –
Market movements & currency – 85 (63) –
Third party listed equity funds & accounts 792 – – 829
Inflows –7141 –
Outflows – (85) (66) –
Market movements & currency – 122 (46) –
Private Equity 392 (13) (17) 362
Total 1,896 127 (195) 1,828
During a financial year in which economic
confidence has swung between apparent
complacency and despair, the Impax
management team has continued to focus
on the core business of managing
portfolios of listed and private securities
on behalf of institutional investors, while
investing selectively in expanding the
Company’s capabilities.
Sector developments
For many years, at the time of writing
each semi-annual Impax report, a review
of recent developments in the sectors
in which the Company is investing has
produced a wealth of evidence of
strengthening market fundamentals:
this report is no different. Nevertheless,
investor confidence in some of these
sectors, for example solar panel
manufacturing, remains weak, and sector
benchmarks have underperformed
generic indices during 2012. Since the
interim statement, when I summarised
new policies to address climate change
and improve energy efficiency in several
countries, further capital expenditure on
water management and treatment in China
and additional regulations to curb pollution
in the United States, there have been
several notable announcements.
Probably most intriguing was the
reaffirmation that, in the light of the
Fukushima disaster in Japan, Germany is
committed to a full shutdown of all nuclear
power stations by 2022. This will require
an investment of at least €300 billion in
renewable energy, energy efficiency and
grid strengthening, and has been the
principal driver of sharp falls in the share
prices of the country’s principal power
utilities E.ON and RWE, which are unlikely
to receive full compensation for the
premature shutdown of their nuclear
assets. Meanwhile, Japan’s new energy
policy continues to evolve, with latest
estimates suggesting a cumulative
investment of US$1.5 trillion in renewables
and energy efficiency over the next
20 years.
Demand for energy efficient products
and services and for renewable energy
continued to expand in most European
countries. Although prospects for
renewable energy in the UK were called
into question by some vocal politicians,
this sector once again grew rapidly as
most countries sought to encourage lower
carbon power generation capacity.
In August, the Obama administration
raised the automotive manufacturers’
average fuel efficiency standard from
35.5 miles per gallon by 2016 to 54.5 miles
per gallon by 2025; in spite of Republican
objections, this was widely endorsed by
the manufacturers themselves, who
appreciated the policy certainty over a
time frame that allows them to manage
their product development.
It is likely that the regulatory framework
in the United States, which underpins
other sectors in which Impax invests,
will continue to strengthen in Obama’s
second term. The President has already
announced that addressing climate
change is a priority, while analysts are also
pointing to the potential for tighter rules
governing water abstraction in drought-
prone areas, investment in flood defence
and several initiatives related to higher
energy efficiency.
Impax’s target markets
The weakness of environmental stocks is
illustrated by the performance of the FTSE
Environmental Opportunities All Share
Index, which returned 3.4 per cent (net,
total return) between 1 January 2012
and 30 September 2012, compared to
the MSCI World Index which was up
8.8 per cent (net, total return) over the
same period.
During 2012, taking into account feedback
from a range of our clients and prospective
investors, we have slightly broadened
the definition of Impax’s target markets
to encompass “resource efficiency”,
comprising environmental markets and the
wider food and agriculture value chain.
Companies providing products and
services in the food and agriculture
sectors have many similar characteristics
to those in alternative energy, water and
waste management, particularly growth Impax Asset Management Group plc Annual Report and Accounts 2012
5
Chief Executive’s Report
linked to the rising demands of an
expanding population, limited resources
and broad evidence of mis-pricing as a
result of rapidly changing technology,
regulations and market structure.
This initiative is resonant with a number
of high profile studies examining the
implications for investors of the themes in
which Impax has expertise. In November
2011, McKinsey & Company published
“Resource Revolution: Meeting the world’s
energy, materials, food and water needs”,
an in-depth study of a range of new
market opportunities. Subsequently, in
August 2012, Towers Watson published
“Sustainability in Investment” which
pointed to a potential transformation in
the investment landscape arising from
emerging drivers including “resource
scarcity and climate change”.
We are excited about the potential for
offering additional investment services and
products in the broader resource efficiency
area. As reported in the interims, during
2012 we have recruited two experienced
investment professionals focused on global
food and agriculture and, on 1 December
2012, following test marketing, plan to
launch the Impax Food and Agriculture
Fund under the existing Impax Funds
(Ireland) plc platform with £2 million of seed
capital from the Company; this fund will be
marketed primarily to UK investors.
Assets under management
and fund flows
During the Period, Listed Equity funds that
we manage or advise had net outflows
of £136 million comprising £97 million
from “Impax-Label funds” and £39 million
from Third Party Funds and Accounts.
Gross inflows across all strategies were
£143 million and performance contributed
£97 million. However, this was offset by
outflows of £279 million. We believe that
the net outflows are broadly attributable
to weakness of environmental stocks
relative to global equities, particularly over
the past 18 months, and to investor
nervousness over the prospects for equity
markets in general.
We saw continued progress in building
our franchise in the United States. The
Pax World Global Green Fund (recently
renamed the Pax World Global
Environmental Fund), which we sub-advise,
attracted net inflows over the Period
expanding to US$52 million at the end of
the Period. As previously announced, in
December 201 1 we established Impax
Green Markets Fund, a Delaware-based
private fund, as a wrapper for our
Specialists strategy.
Following the completion of fund raising
for our second private equity fund in
September 2011, there were no additional
flows in this division during the Period.
However, AUM (in Sterling) declined due
to the impact of the weakening Euro.
Investment Performance
Listed Equity
During the Period our listed equity
strategies generally beat their comparator
indices of environmental stocks, but some
have trailed global indices.
We were particularly pleased by our
Water strategy which sustained its out-
performance over the Period, returning
19.2 per cent (total return, GBP) compared
to 17 .3 per cent (net return, GBP) for the
MSCI World Index. The strategy now has
a strong three year track record, making it
the best performing fund in its peer group
over this timeframe: since inception on
1 January 2008 to 30 September 2012,
this strategy was up 77 .5 per cent (total
return, GBP) while the MSCI World Index
was up 52.1 per cent (net return, GBP).
Our Specialists strategy, which invests
in small and mid-cap stocks, returned
6.7 per cent (total return, GBP) over the
Period compared to minus 0.8 per cent
(total return, GBP) for the corresponding
period for the FTSE ET50 Index which is
representative of the universe of small and
mid-cap environmental stocks. Over the
ten years to 30 September 2012, our
Specialists strategy has returned 162 per
cent (total return, GBP) while the FTSE
ET50 Index declined 61.5 per cent (total
return, GBP) and the MSCI World Index
was up 111 per cent (net return, GBP).
Our Leaders strategy, which invests in
both small-cap stocks as well as larger,
more diversified companies across the
environmental markets universe, returned
16.8 per cent over the Period (total return,
GBP). From inception on 3 March 2008
to 30 September 2012, this strategy
returned 24.9 per cent (total return, GBP)
while the MSCI World Index was up 23.4
per cent (net return, GBP) and the FTSE
Range of investment
strategies
AUM (£m)
(as at 30 September 2012)
Environmental
Specialists
Environmental
Leaders
Asia-Pacific
Water
Private Equity
759
276
205
226
362
Private Equity
North America
Asia-Pacific
Other Europe
UK/Ireland
36
58
626
746
362
AUM by geographic region
(client domicile)
(as at 30 September 2012)
Stable, diverse, client base
“Impax-Label” funds
(as at 30 September 2012)
637
241
588
362
Impax-Label Funds
Segregated accounts
White Label Funds
Private Equity Impax Asset Management Group plc Annual Report and Accounts 2012
6
Environmental Opportunities All Share
Index gained 16.5 per cent (total
return, GBP).
Private Equity
Our private equity business made solid
progress during the Period.
The power generation projects owned by
our first fund, Impax New Energy Investors
LP (“Fund I”), which has €125 million of
commitments, have continued to beat their
budgets, and in June the Fund was able to
make a further distribution to investors. As
previously reported, we will seek a full exit
from this fund when market conditions are
supportive; to this end, we are following
closely the development of regulations
affecting the energy sector in Spain, where
the majority of Fund I’s residual assets
are located.
Meanwhile, our team has continued to
deploy the €330 million of capital in Fund
II, focusing on investing to fund the
construction of onshore wind and solar
PV assets in the European Union and,
potentially, North America. During the
Period, Fund II purchased 109MW of
French and Polish wind assets, an Italian
solar PV investment and a 28MW wind
park in Germany; currently approximately
40 per cent of Fund II is invested or
committed for investment.
Distribution
As set out in previous statements, our
distribution strategy focuses on building
relationships with institutional investors
around the world, offering both direct
investment management expertise as
well as the sub-management of funds
established by third parties.
In the UK, our core market, from where
41 per cent of our AUM originates, we
have continued to build relationships with
new institutional investors and have begun
a systematic outreach programme to
family offices where Impax has historically
been under-represented. In consultation
with the Board of Impax Environmental
Markets plc, an investment trust with
ca. £327 million of net assets (as at
30 September 2012) and our largest client,
we have established a dedicated microsite
(www.impaxenvironmentalmarkets.co.uk)
to provide investors with more detailed
fund-specific information.
For many clients elsewhere in Europe, as
well as in Asia and Australia, we continue to
work closely with BNP Paribas Investment
Partners (“BNPP IP”) to improve the sales
prospects for several funds that we
sub-manage. Early next month, two of the
funds that follow the Leaders strategy will
merge and will also absorb a third fund,
creating a vehicle with ca. €120 million of
AUM, a size which should widen the fund’s
appeal to a wide group of investors. In
addition, we are particularly pleased that
BNPP IP has decided to extend the
marketing and sales of the BNP Paribas
Aqua fund which wraps our Water strategy,
beyond its established base in France to
cover most of Europe.
Our direct sales strategy in the US market
is to leverage our positive consultant
ratings in a small number of focused
channels covering endowments,
foundations and family offices, while also
nurturing third party relationships. To this
end, we recently recruited a Head of
Institutional Sales and Client Service who
has over 25 years’ experience of selling to
top tier institutions and who is based in a
new Impax office in New York City.
We were delighted to win three prestigious
asset management awards in 2012. In
May, Impax was named as the winner of
the “Sustainable, responsible, ethical
investment award” at the Financial Times
Business Pension and Investment
Provider 2012 Awards. In October, we
were recognised as “Impact Investor of
the Year” by The Asset in Hong Kong,
and in November as “Best Fund
Management Group” by Investment
Week at their Climate Change & Ethical
Investment Awards.
Infrastructure and support
In addition to satisfying client expectations
on operational matters, the regulatory
environment in which investment
management firms operate is becoming
increasingly complex, and it is essential
that we sustain an effective Support Team
across our offices in London, Hong Kong
and the United States.
In recent years we have consciously
invested in operations, IT, finance, legal,
compliance and HR capabilities in order
to establish a scalable platform for growth.
In principle, we are now adequately
resourced in these areas and can manage
a significant volume of additional assets on
this base. At the time of writing, alongside
other investment managers, we are
working with our clients to ensure
appropriate compliance with the emerging
requirements of the European Union’s
Alternative Investment Fund Managers
Directive, and are also closely monitoring
the implications of regulatory developments
in the other markets in which we operate.
The hiring of our food and agriculture
team, our Head of Distribution (who joined
on 1 October 2011) and our new Head of
Institutional Sales in the United States have
contributed to a headcount increase: at
the end of the Period our total headcount
was 56.5 full time equivalent staff, up from
50.4 at the start of the Period.
Outlook
Investors who had committed capital to
equity markets at the start of 2012 and are
only now reviewing the result should be
pleasantly surprised by the profit they have
made, but may also be concerned about
the level of volatility of their portfolio today.
In particular, rising political instability in the
Eurozone and the pending US “fiscal cliff”
have the potential to de-rail confidence
and, indirectly, erode corporate profitability.
Nevertheless, the outlook for resource
efficiency and environmental markets is
gradually improving and most sectors
have rallied in the last quarter, in some
cases out-performing generic indices.
After a sustained period in which
corporate earnings expectations have
been downgraded, results for many of our
holdings now appear to be improving,
while a recent increase in M&A activity
may prove positive for sentiment over the
coming months.
Given our mandates, Impax has delivered
solid investment performance in the year
despite the fragile nature of global
markets. We remain committed to our
core strategies and as we build on recent
investments, we are confident in our ability
to deliver robust returns for shareholders
when global economic confidence returns.
Ian R Simm
28 November 2012
Chief Executive’s Report continued Impax Asset Management Group plc Annual Report and Accounts 2012
7
Markets & Technology
Overview of Our Resource Efficiency Markets
Impax invests in sectors where the need
to make efficient use of scarce resources
and mitigate negative environmental
effects is creating a broad range of
long-term growth opportunities.
Alternative Energy
Energy
Energy Efficiency
Global demand for energy continues to
grow and energy prices for most of the
world’s population look set to rise. Over
the next two decades, annual investment
in the energy sector is expected to
average US$1.5 trillion, of which 50% will
be in the electrical power sector. By 2035
it is estimated that China will consume
70% more energy in total than the USA;
yet per capita consumption will still only
be 50% of US levels. The increasing cost
of energy in many countries provides
a strong incentive to use sources as
efficiently as possible and to develop new
sources and methods of generation.
We categorise Energy investment
opportunities into two sectors:
Energy Efficiency which is focused on
services and technologies to minimise
energy wastage. The investment universe
in this sector includes companies in
power generation and storage, industrials,
buildings and transport. Alternative
Energy includes the independent power
producers, solar, wind, biofuels and
equipment companies.
We identify interesting investment
opportunities arising from the effective
roll-out of proven technologies in
established but expanding markets, for
example insulation materials. We are also
seeing rapid substitution by relatively
new technologies, such as light-emitting
diodes (LEDs) in conventional lighting,
and brisk growth in a number of new
markets, for example in smart meters.
Energy efficiency is the largest sub-sector
in which we invest, both in terms of portfolio
weighting and our investable universe.
We invest in both the providers of
alternative energy technologies, the
operators of energy assets and in
companies active across the entire
value chain.
Pollution Control
Water
Infrastructure & Technologies
The global market for water products and
services is currently estimated to be worth
some US$500bn. The United Nations
predicts that two-thirds of the world’s
population will be ‘water stressed’ by
2050, with over 2 billion people living in
countries facing water scarcity. The
cleaning up and recycling or disposal of
waste water is also proving a major
worldwide challenge. We see the growing
imbalance between supply and demand
for water as being underpinned by four key
factors: population growth, ageing
infrastructure, regulation and an increasing
incidence of extreme weather events.
We divide the Water sector into
Infrastructure & Technologies which
includes both the treatment and equipment
companies as well as utilities; and Pollution
Control which covers companies involved
in emissions abatement and the supply of
testing equipment.
We invest in opportunities across the
entire water value chain. In infrastructure
we see steady demand for pumps,
pipes and valves in developed countries
and much higher rates of growth for
these products in developing regions.
Companies active in water re-use,
conservation and irrigation equipment
markets are particularly attractive. In
water treatment we see a wide array of
opportunities in physical and chemical
water treatments, filtration, membrane
technology and desalination as well as
pollution monitoring and testing. Our
portfolios generally have exposure to
companies with early stage, late cycle
and defensive business models.
Environmental Support Services
Waste
Waste Management & Technologies
Waste management companies are
involved in the handling and disposal of
both general and hazardous waste from
individuals and industry as well as the
associated technologies for the sorting
and processing of materials. Recycling
and reuse of materials is now estimated
to be a US$200bn market, driven by the
increasing scarcity and cost of the
primary materials.
We categorise this sector into Waste
Management & Technologies;
comprising technology equipment
companies, recycling and processing, and
companies involved in the handling and
disposal of hazardous and general waste;
and Environmental Support Services
which includes environmental consultants
and the trading of environmental assets
such as pollution permits.
We invest across the waste sector in
general waste management, in hazardous
waste management which is attractive
as it is a defensive, non-cyclical market,
in the more cyclical recycling companies
particularly those active in rapidly growing
developing markets, and also in companies
supplying innovative waste technologies.
Agriculture
Food & Agriculture
Food
The global population is estimated to
reach 9 billion by 2050 which will mean an
additional 80 million people to feed each
year. To achieve this, food production must
rise by 70%, necessitating a significant
increase in the area of agricultural land and
substantial increases in the use of energy
and water. The key drivers for change are
the shifts in global demand, environmental
regulations and technological innovations.
We sub-divide our Food sector into
basic foods, packaging and food safety,
packaged food and ingredients, beverages,
distribution and commercial services and
diversified food and agriculture companies.
Under Agriculture we include companies
involved in agricultural inputs (such as
fertiliser, pesticides, animal feeds and
animal health products), machinery and
equipment, growers and processors and
agricultural logistics companies which are
involved in haulage, shipping and upstream
supply-chain solutions to the sector.
We invest in companies that are exploiting
inefficiencies arising from the revolution
in global supply-chains and new
opportunities to supply ancillary goods
and services. Impax Asset Management Group plc Annual Report and Accounts 2012
8
Directors
Keith Falconer
Chairman
Keith Falconer, is Chairman of Impax Asset
Management Group plc. He joined the
Group in January 2004. After qualifying as
a Chartered Accountant in 1979, he joined
Martin Currie the independent Edinburgh
based investment firm. The first part of his
career was spent managing portfolios on
behalf of institutional clients. Subsequently, he
became the Managing Director of Sales and
Marketing. He retired from Martin Currie at the
end of 2003 and is now also Chairman of
Aberdeen New Thai Investment Trust plc and
a number of other companies.
Peter Gibbs
Non-Executive Director
Peter Gibbs, is a Non-Executive Director of
Impax Asset Management Group plc. Peter
has spent his career in the asset management
industry at Bankers Trust, Mercury Asset
Management and Merrill Lynch Investment
Management. He is currently a Non-Executive
Director of United Kingdom Investment Ltd,
Friends Life Group plc, the Merrill Lynch UK
Pension Plan and Intermediate Captital
Group plc.
Ian Simm
Chief Executive
Ian Simm, is the Founder and Chief Executive
of Impax Asset Management Group plc.
Ian has been responsible for building IAM
since launch in 1998, particularly the firm’s
listed equity and infrastructure teams and
investment products. In addition to his
role as Chief Executive, Ian heads the firm’s
investment committees. Prior to Impax, Ian
was an engagement manager at McKinsey
& Company in the Netherlands where he led
teams to provide advice to clients in a range of
environmentally sensitive industries. He has a
first class honours degree in physics from
Cambridge University and a Master’s in Public
Administration from Harvard University.
Vince O’Brien
Non-Executive Director
Vincent O’Brien, is a Non-Executive Director of
Impax Asset Management Group plc. He is
currently a Director of Montagu Private Equity
and has worked in the private equity industry
for over 20 years. Originally qualifying as a
Chartered Accountant with Coopers and
Lybrand he joined Montagu Private Equity in
1993. Vince is a former Chairman of the BVCA
and served on its Council for seven years.
Guy de Froment
Non-Executive Director
Guy de Froment, is a Non-Executive Director
of Impax Asset Management Group plc. He
was previously Vice Chairman of BNP Paribas
Asset Management and joint CEO responsible
for Sales and Marketing. From 1997 to 2000,
he held the position of Chairman and CEO
of Paribas Asset Management. Prior to that
he worked for Barclays as Head of Continental
European Asset Management, having
previously spent 24 years in the Indosuez
Group during which time he was Chief
Executive of W. I. Carr and CEO of Indosuez
Asset Management.
Mark White
Non-Executive Director
Mark White, is a Non-Executive Director of
Impax Asset Management Group plc. He is
the CEO of LGT Capital Partners (UK) Ltd
following LGT Capital Partners’ acquisition of
KGR Capital. From 2001 to 2005, he was
Chief Executive Officer of JP Morgan Fleming
Asset Management (UK) Ltd. Prior to that,
he was CEO of Jardine Fleming Asset
Management in Hong Kong and CEO of
Chase Fleming Asset Management (UK) Ltd in
London. He is also a Non-Executive Director
of EB Asia Absolute Return Fund and F&C
Global Smaller Companies plc. Impax Asset Management Group plc Annual Report and Accounts 2012
9
Senior Personnel
Senior Personnel
Ominder Dhillon
Ominder Dhillon, is Head of Distribution for
Impax. Ominder joined Impax in October 2011
from Fidelity International where he was
Head of UK Institutional Distribution for three
years. Ominder previously spent nine years as
Director of Institutional Sales at Scottish
Widows Investment Partnership and, prior
to that, nine years at John Morrell & Associates
and Johnson Fry plc (later acquired by
Legg Mason).
Kaye Forrest
Kaye Forrest, joined Impax in May 2011,
on a part-time basis, as Director of Human
Resources. She has over 20 years’ HR
experience and expertise in coaching, talent
management, organisational development and
business transformation. Kaye previously held
the role of HR Director at Legal and General
and Sensormatic Ltd before setting up her
own consultancy business in 2007. She has
an MA in International HRM and is a Fellow
of the Chartered Institute of Personnel
and Development.
Bruce Jenkyn-Jones
Bruce Jenkyn-Jones, is a Director of IAM
and Managing Director for the Listed Equity
business. He has 19 years’ experience
working in environmental markets. Prior to
joining Impax in 1999 he was a utilities analyst
with BT Alex Brown and before that a senior
consultant at Environmental Resources
Management Ltd. Bruce is a graduate of
Oxford University and has a Master’s in
Environmental Technology from Imperial
College and an MBA from IESE (Barcelona).
Charlie Ridge
Charlie Ridge, is a Director of IAM and Chief
Financial Officer of Impax Asset Management
Group plc. Charlie has 25 years’ experience
working in financial services. Charlie joined
Impax from Deutsche Bank, where he was a
Managing Director within the Finance Division.
Prior to this he was UK Asset and Wealth
Management Chief Financial Officer, having
previously used his technical expertise in
financial and market risk related roles for the
Global Markets Division. Charlie has a degree
in Engineering Science from Durham
University and qualified as a Chartered
Accountant at Ernst & Young.
Peter Rossbach
Peter Rossbach, is a Director of IAM and
Managing Director for the Private Equity team
that manages Impax New Energy Investors
and Impax New Energy Investors II. From 1997
to 2000, he was Senior Investment Officer at
AMI Asset Management. Before AMI, he held
positions as Senior Investment Adviser to
EBRD, Vice President of Project Finance at
Mitsui Bank in New York, within the energy
project finance teams at Catalyst Energy,
Lowrey Lazard and at Standard and Poor’s
utility debt ratings services. Peter holds a
Bachelor’s degree and a Master’s in Public
Policy from Harvard University. Impax Asset Management Group plc Annual Report and Accounts 2012
10
Directors’ Report
For the Year Ended 30 September 2012
The Directors present their Report and the financial statements
for the year ended 30 September 2012.
Principal activities
The principal activity of the Group during the year was the
provision of investment services to funds specialising in the
environmental markets sector. The Group’s activities are both
authorised and regulated by the Financial Services Authority.
The principal activity of the Company was that of a holding
company.
Review of business
The review of the Group’s business is contained in the
Chairman’s Statement and Chief Executive’s Report on pages 2
to 6 which are incorporated into this report by reference. The
Corporate Governance Statement, set out on pages 13 to 14,
forms part of this report.
The Directors consider Assets Under Management (“AUM”),
revenue and profitability to be the key performance indicators
of the Group. AUM fell from £1,896m at 30 September 2011
to £1,828m at 30 September 2012. Revenue for the year was
£18,621,000 (2011: £20,931,000) and loss before tax was
£4,735,000 (2011: profit of £1,718,000).
Dividends
The Directors propose a dividend of 0.75 pence per share
(totalling £825,000) for the year ended 30 September 2012
(2011: 0.70p per share, totalling £759,000). The dividend will be
submitted for formal approval at the Annual General Meeting.
These financial statements do not reflect this dividend payable,
which will be accounted for in shareholders’ equity as
an appropriation of retained earnings in the year ended
30 September 2013.
The dividend for the year ended 30 September 2011 was paid
on 6 February 2012, being 0.70p per share. The trustees of
the Employee Benefit Trust waived their rights to part of this
dividend, leading to a total dividend payment of £759,000. This
payment is reflected in the Statements of Changes in Equity.
Directors and their interests in shares
The Directors of the Company during the year and at the date
of this report are set out below. The Directors’ interests and
those of their connected persons in the ordinary shares of the
Company, all of which are beneficial, at 30 September 2012
and 30 September 2011 were:
30 September
2012
30 September
2011
J Keith R Falconer
1
10,489,290 10,489,290
Ian R Simm
1
9,486,261 5,486,261
Peter J Gibbs 200,000 200,000
Mark B E White 300,000 300,000
Vince O’Brien 110,000 110,000
Guy de Froment – –
1
includes vested shares within sub-funds of the Impax Group Employee Benefit Trust
(‘EBT’) from which the individual may benefit
There have been no changes to the above holdings since 30
September 2012.
Ian Simm has a 5.88% interest in the capital of Impax Carried
Interest Partner LP, and a 5% interest in the capital of Impax
Carried Interest Partner II LP, entities in which the Company
holds an investment.
Ian Simm has also been granted options to acquire a further
450,000 ordinary shares at a strike price of 49.6p. These will
vest subject to his continued employment by the Group on
31 December 2014.
Substantial share interests
The following interests in three per cent or more of the issued
ordinary share capital excluding Treasury shares have been
notified to the Company as at 28 November 2012:
Number Percentage
BNP Paribas Investment Partners 32,220,000 29.1
J Keith R Falconer
2
10,489,290 9.5
Ian R Simm
2
9,486,261 8.6
Rathbone Investment Managers 7,092,080 6.4
DIAM Company 5,474,955 4.9
UBS Private Banking nominees 4,516,050 4.1
Bruce Jenkyn-Jones
2
3,750,000 3.4
2
includes vested shares within sub-funds of the EBT from which the individual
may benefit
In addition the EBT has a legal interest in a further 16,228,781
shares which have transferred to sub funds from which
individuals may benefit and holds 1,888,273 shares directly. Impax Asset Management Group plc Annual Report and Accounts 2012
11
Directors Report
Share management
Options over 15.3 million of the Company’s shares vested on
1 October 2012 and option holders will be able to exercise these
options following the announcement of these financial results
on 29 November 2012. All incentivisation schemes prior to the
ESOP have now fully vested. If approved by the Board, and
subject to the discretion of the trustee, 12.2 million shares will
be issued to the Impax Asset Management Group plc Employee
Benefit Trust 2012 (“2012 EBT”), which will also purchase 4.7
million shares from the Company being the entire current holding
of Treasury Shares. The share subscription and purchase will be
funded by a loan of £10 million which has been granted by the
Company to the 2012 EBT on commercial terms and will have
been drawn down prior to any acquisition of shares (or right to
acquire shares) by the trustee and which has no net effect on
the Group’s financial position.
The 2012 EBT is expected to conduct future market purchases
of the Company’s shares, reducing the requirement for the
Company to hold Treasury shares to satisfy option exercises.
Future option exercises will primarily be satisfied by the 2012 EBT.
People
Through our robust people management policies we aim to
attract and develop the best people. Our performance
management processes comprise a twice yearly performance
appraisal against agreed objectives and our core values. Output
from this performance process is used to inform decisions on
remuneration, career development and progression.
As part of creating a high-performance organisation, we
encourage all of our employees to fulfil their potential. We
provide our employees with access to a range of training and
development opportunities that are relevant to our business.
Environmental policy
The Group attaches great importance to its environmental
performance. In addition to ensuring that it is making the most
of commercial opportunities within the environmental markets
sector, the Group is committed to maintaining and improving
the sustainability of its working practices.
The Group is focused on minimising environmental impact in
three areas of its operations:
> Energy consumption: the Group has an energy efficiency
policy covering inter-alia lighting, heating and computers;
> Travel: the Group encourages staff to minimise travel and to
select public transport where appropriate and has a cycle
scheme; and
> Paper and materials use: the Group has a system to recover
office paper and encourages staff to avoid wastage of other
materials.
During the year we were awarded a Bronze Ska rating for the fit
out of our new office premises. Ska Ratings is an environmental
assessment method developed by RICS which rates the
environmental performance of a fit-out.
Corporate social responsibility
The Group, either directly or through individual members of staff
aims to support a number of charities or other non-profit making
organisations by contributing funds or volunteering services. The
Group seeks to focus such activity on areas directly relating to or
having an impact on the environment.
The following are ways the Company seeks to achieve this aim:
> Giving to Charity – the company operates a Give as You Earn
Scheme;
> Employee Volunteering – wherever possible we look for
opportunities to give employees a chance to make a positive
impact in the community; and
> Community and Industry Involvement – where an employee
has the opportunity to give some time to a local organisation
or a trade body the Company will give due consideration to
such requests.
Statement of disclosure to auditor
Each of the persons who are a Director at the date of approval
of this Annual Report confirms that:
(a) so far as the Director is aware, there is no relevant audit
information of which the Group’s auditors are unaware, and
(b) the Director has taken all the steps that he ought to have
taken as a Director in order to make himself aware of any
relevant audit information and to establish that the Group’s
auditor are aware of that information.
In accordance with section 489 (2) of the Companies Act 2006,
a resolution proposing that the Company’s auditor, KPMG Audit
Plc, be re-appointed will be put to the Annual General Meeting.
Creditor payment policy
The Group seeks to maintain good terms with all of its trading
partners. In particular, it is the Group’s policy to agree appropriate
terms and conditions for its transactions with suppliers and,
provided the supplier has complied with its obligations, to
abide by the terms of payment agreed. Trade creditor days
of the Group for the year ended 30 September 2012 were
30 (2011: 15).
By order of the Board
Zack Wilson
Company Secretary
28 November 2012
Registered office:
Norfolk House
31 St James’s Square
London SW1Y 4JR Impax Asset Management Group plc Annual Report and Accounts 2012
12
Statement of Directors’ Responsibilities
in Respect of the Directors’ Report and the Financial Statements
The Directors are responsible for preparing the Directors’ Report
and the financial statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare Group and
Parent Company financial statements for each financial year.
As required by the AIM Rules of the London Stock Exchange
they are required to prepare the Group financial statements
in accordance with IFRS as adopted by the EU and applicable
law and have elected to prepare the Parent Company financial
statements on the same basis.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Parent Company
and of their profit or loss for that period. In preparing each of the
Group and Parent Company financial statements, the Directors
are required to:
> select suitable accounting policies and then apply them
consistently;
> make judgments and estimates that are reasonable and
prudent;
> state whether they have been prepared in accordance with
IFRS as adopted by the EU; and
> prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
Parent Company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Parent Company and
enable them to ensure that its financial statements comply with
the Companies Act 2006. They have general responsibility for
taking such steps as are reasonably open to them to safeguard
the assets of the Group and to prevent and detect fraud and
other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on
the Company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Impax Asset Management Group plc Annual Report and Accounts 2012
13
Corporate Governance
Corporate Governance Report
For the Year Ended 30 September 2012
The Group is committed to maintaining good standards of
Corporate Governance. As an AIM quoted company, compliance
with the Finance Reporting Council’s UK Corporate Governance
Code (‘the Code’) is not mandatory. However the Board of
Directors (‘the Board’) seeks to comply with the principles of the
Code in so far as appropriate to the Group’s size and complexity.
This report describes how the Group has applied the principles
throughout the year.
The Board of Directors
The Board has overall responsibility for the Group. The Board
provides strategic direction to the executive management,
monitoring the Group’s operating and financial results, reviewing
management performance, overseeing the adequacy of risk
management and internal controls and ensuring the Company’s
obligations to its shareholders are met.
The Board has consisted of a Non-Executive Chairman, four
Non-Executive Directors and the Chief Executive during the
period. Details of the current Board members are given on page
8 of this report. Throughout the year the position of Chairman
and Chief Executive were held by separate individuals. There is a
clear division of responsibilities between the Chairman and Chief
Executive. The Board has appointed one of the Non-Executive
Directors (Peter Gibbs) to act as the Senior Independent
Director. The Board considers that three of the Non-Executive
Directors (Peter Gibbs, Mark White and Vince O’Brien) are
independent as envisaged by the Code. Guy de Froment is not
considered to be independent as he represents a significant
shareholder. The Chairman is also not considered to be
independent by nature of his significant shareholding and past
service to the Group. The Non-Executive Directors and
Chairman all have or have had senior executive experience and
offer insightful judgement on Board matters. The Non-Executive
Directors do not participate in any bonus schemes or share
ownership schemes and their appointments are non-
pensionable. There is a rigorous procedure to appoint new
Directors to the Board which is led by the Chairman. At
appropriate times the Board considers the balance of skills,
experience, independence and knowledge of the Group on the
Board and its diversity, including gender, how the board works
as a unit and other factors relevant to its effectiveness
The Board meets regularly throughout the year. It met six times
in the year ended 30 September 2012 to consider strategic
development and to review trading results and operational and
business issues. It has a formal agenda of items for consideration
at each meeting but also convenes at additional times when
required. Operational decisions are delegated to the executive
directors and senior management.
All Directors receive detailed Board papers and reports one
week prior to the regular Board meetings and have unlimited
access to the advice and services of senior management should
further information be required. There is provision for Board
members to solicit professional advice on Board matters at the
Company’s expense.
The Board has carried out a formal evaluation of its own
performance and individual Directors which was led by
the Chairman. The Board also completed an evaluation of
the Chairman’s performance which was led by the Senior
Independent Director. The evaluations confirmed a high rating
for performance.
All Directors are subject to reappointment by shareholders at
the first opportunity after their appointment and thereafter at
intervals of no more than three years.
As permitted by the Company’s Articles of Association, the
Company has maintained Qualifying Third-Party Indemnity
Provisions (as defined under relevant legislation) for the benefit
of the Company’s Directors throughout the period.
Board committees
The Board is assisted by two standing committees of the Board
which report to it on a regular basis. These committees have
clearly defined terms of reference.
Audit and Risk Committee
The Audit and Risk Committee is comprised of the following
Non-Executive Directors: Mark White (Chairman), Peter Gibbs,
Guy de Froment and Vince O’Brien. The Committee has met
four times in the year.
The Committee’s responsibilities include:
> monitoring the integrity of the financial statements and formal
announcements relating to the Company’s and Group’s
financial performance;
> reviewing the Group’s risk management processes and risk
reports;
> monitoring of the internal financial control procedures;
> making recommendations to the Board in relation to the
appointment, re-appointment and removal of the external
auditors and to approve the remuneration and terms of
engagement of the external auditors;
> the implementation of new accounting standards and
policies;
> reviewing arrangements by which staff of the Company may,
in confidence, raise concerns about possible improprieties in
financial reporting or other matters;
> reviewing and monitoring the external auditors’ independence
and objectivity and the effectiveness of the audit process;
> ensuring the objectivity and independence of the external
auditor by acting as primary contact with the external
auditors, meeting the external auditors without the presence
of management where considered necessary and receiving
all reports directly from the external auditors; and
> reporting to the Board on how it has discharged its
responsibilities.
Details of fees paid to the Company’s auditor are shown in
note 2 to the financial statements. In the opinion of the Board,
none of the non-audit services provided caused any concern
as to the auditor’s independence or objectivity. To ensure that
the independence and objectivity of the auditor is maintained,
the Committee monitors the scope of all work performed. Impax Asset Management Group plc Annual Report and Accounts 2012
14
Remuneration Committee
The Remuneration Committee is comprised of the four Non-
Executive Directors: Peter Gibbs (Chairman), Mark White, Guy
de Froment and Vince O’Brien. The Committee has met two
times this year.
The purpose of the Remuneration Committee is to ensure that
the Chief Executive and other senior employees are fairly
rewarded for their individual contribution to the overall
performance of the Group and that remuneration packages
provided do not promote undue risk taking. The Remuneration
Committee responds to this requirement in the way that meets
the best interest of shareholders. Further details regarding the
remuneration policy and payments made can be found in the
Remuneration Report on page 16-17.
Internal control
The Board has overall responsibility for the Group’s system of
internal controls including financial, operational, compliance and
risk management controls.
The Group’s fund management activities are regulated by the
Financial Services Authority, the US Securities and Exchange
Commission and in respect of its Hong Kong activities, the
Securities and Futures Commission. The Board has adopted
procedures and controls designed to ensure its obligations are met.
Details of the key risks facing the group and internal controls
acting to control or mitigate the risks are set out on page 15.
The Audit Committee and Board has concluded that there is
no need for an internal audit function given the Group’s existing
system of internal controls. This position will continue to be
reviewed.
Dialogue with institutional shareholders
The Company reports formally to shareholders at the half-year
and year end. At the Annual General Meeting of the Company,
a presentation is given and Directors are available to take
questions, both formally during the meeting, and informally after
the meeting. The Chairman, Chief Executive and Senior
Independent Director are available for dialogue with major
shareholders on the Company’s plans and objectives and from
time to time will meet with them.
Corporate Governance Report continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
15
Corporate Governance
The principal risks that the Group faces are described below.
Further information on financial risk is given in note 19 to the
financial statements. The Chief Financial Officer is responsible
for maintaining a risk register and for an on-going program to
monitor internal controls and processes put in place to control
or mitigate the risks identified. This includes reporting to the
Group’s Audit and Risk Committee on a quarterly basis.
Market risk
The Group’s Listed Equity business charges management fees
based on assets under management and accordingly its
revenue is exposed to market risk. The Group has chosen not to
hedge this risk.
The Group seeds investments in its own Listed Equity funds in
order to build a track record to market those funds more
effectively and is therefore directly exposed to the market
performance of the funds. The Group attempts to mitigate this
risk through the use of hedging instruments where appropriate
and intends to divest from these investments as commercial
and market conditions allow.
The Group also invests in its own private equity funds and is
therefore exposed to the performance of these funds.
Currency risk
A significant amount of the Group’s income is based on
assets denominated in foreign currencies. For the year ended
30 September 2012 and on an on-going basis the Group’s
strategy has been to put in place hedges, in the form of forward
rate contracts, where there was sufficient predictability over the
income to allow for an effective and efficient hedge. Otherwise
the Group converts foreign currency income to Sterling as soon
as practically possible after receipt.
The amount of the Group’s expenses denominated in foreign
currencies is not significant.
A proportion of the Group’s assets and liabilities are denominated
in foreign currency. The Group also owns a small number of minor
subsidiaries denominated in foreign currency.
Liquidity and cash flow risk
The Group’s approach to managing liquidity risk is to ensure that
it has sufficient cash on hand to meet liabilities when due under
both normal and stressed conditions and to satisfy regulatory
requirements. The Group produces cash flow forecasts covering
a twelve month period. The Group’s management and Board
review these forecasts. As shown in the note 19 to the financial
statements the group has significant cash reserves.
The Group is also exposed to the risk of default of counterparties
including banks and other institutions holding the Group’s
cash reserves. The Group seeks to manage this risk by only
depositing cash in institutions with high credit ratings and
by spreading cash holdings across at least 4 institutions.
Interest rate risk
The Group has interest bearing assets including cash balances
that earn interest at a floating rate. Interest rate fluctuations do
not have a significant impact on the Group.
Financial regulations
The Group’s operations are subject to financial regulations
including minimum capital requirements and compliance
procedures in each of the jurisdictions in which it operates.
The Group seeks to manage the risks associated with these
regulations by ensuring close monitoring of compliance with
the regulations and by tracking proposed changes and reacting
immediately when changes are required. The Group has a
dedicated Compliance Officer.
Key clients
The loss of a client or a significant investor in a large fund could
damage the financial position of the Group. The Group seeks to
manages this risk by maintaining regular contact with clients and
fund investors and by attempting to diversify earnings streams
so that it is less susceptible to such events.
Key employees
The success of the Group depends on the support and
experience of its key employees and in particular senior managers
and fund managers. The loss of key employees could have a
material adverse effect on its result or operations. The Group
seeks to manage this risk by offering competitive remuneration
packages, including share schemes and carried interest in
private equity funds, and by creating a supportive and enjoyable
working environment. During the year the Group retained all of
its key employees.
Operational risks
The Group has established a control framework so that the risk
of financial loss to the Group through operational failure is
minimised. As part of this the Group has obtained full ‘ISAE
3402’ (formerly known as SAS 70) certification, for the twelve
months ended 30 September 2012, of its Listed Equity business.
Furthermore, the Group has put in place measures to minimise
and manage possible risks of disruption to its business and
to ensure the safety of its staff. This plan has been put in place
to manage its strategic and operational business risks during
emergencies and is aimed at bringing together particular
responses such as IT disaster recovery, contingency plans,
off-site storage of records, data back-up and recovery
procedures, evacuation procedures and customer/staff
communications.
The Group has comprehensive insurance cover which is
reviewed each year prior to policy renewal.
Key Risks Impax Asset Management Group plc Annual Report and Accounts 2012
16
Remuneration Report
For the Year Ended 30 September 2012
Policy on chief executive and senior employees’
remuneration
The remuneration and terms and conditions of service of
the Directors and senior employees are determined by the
Board, based on recommendations made by the
Remuneration Committee.
For the year ended 30 September 2012 there are potentially
four main elements of the remuneration packages for the
Chief Executive and senior employees.
(i) Basic salary and benefits in kind
Basic salaries are recommended to the Board by the
Remuneration Committee taking into account the performance
of the individual and the rate for similar positions in comparable
companies. Benefits in kind include income protection, critical
illness insurance, life assurance and private medical insurance.
(ii) Variable remuneration
Variable Remuneration consists of a cash bonus and share-
based payments. Aggregate Variable Remuneration across the
Group will typically be capped at 45 per cent of earnings before
Variable Remuneration, interest and taxes; as the Group’s
profitability increases, this percentage is likely to fall in line with
market norms.
(a) Cash bonus
The cash bonus is determined based on the profitability of the
relevant area where the employee works and on the individual’s
personal performance.
(b) Share-based payment awards
As reported in the 2011 Annual Report for the years ended
30 September 2011 to 30 September 2014 the Board has
approved an Employee Share Option Plan (‘ESOP’) under which
the Chief Executive and senior employees are eligible to receive
up to 14 million share options over a four year period. The options
will have an exercise price set at a 10% premium to the average
share price of the 30 business days following the announcement
of results for the respective year. 5 million option awards were
made in respect of the year ended 30 September 2011. Option
awards in respect of the year ended 30 September 2012 have
been approved by the Board and will be communicated to
employees shortly after the date of this report.
The Chief Executive and other employees also continue to
benefit from share-based payment awards made under the
previous share-based incentive plan (the EIA Extension) as more
fully described in note 3 to the financial statements. These
awards vested on 30 September 2012.
(iii) Pensions
The Group pays a defined contribution to the pension schemes
of certain employees. The individual pension schemes are
private and their assets are held separately from those of
the Group.
In addition the Chief Executive and certain senior employees
have been awarded interests in the Impax Carried Interest
Partner LP and Impax Carried Interest Partner II LP . These
partnerships will receive payments from the Group’s private
equity funds depending on the fund’s performance. No such
payments were made during the year. The amounts will be
accounted for at the point they become payable. Impax Asset Management Group plc Annual Report and Accounts 2012
17
Remuneration
Directors remuneration during the year
Details of each Director’s remuneration are shown below.
Fees/
salary
£
Benefits in
kind
£
Pension
£
Bonus
£
2012
Total
£
2011
Total
£
J Keith R Falconer 65,000 – – – 65,000 65,000
Ian R Simm 211,538 6,022 5,250 234,000 456,810 667,908
Peter J Gibbs 30,000 – – – 30,000 30,000
Mark B E White 30,000 – – – 30,000 30,000
Guy de Froment 30,000 – – – 30,000 30,000
Vince O’Brien 30,000 – – – 30,000 30,000
396,538 6,022 5,250 234,000 641,810 852,908
On 30 September 2012 4,000,000 Ordinary Shares of the
Company, which were allocated to a sub fund of the Impax
Employee Benefit Trust of which Ian Simm and his family are
beneficiaries, ceased to be subject to the risk of revocation
arising from Ian Simm ceasing to be employed by the Company.
Based on the quoted share price of 38p on 30 September 2012
these shares had a value of £1,520,000.
During the year Ian Simm was granted 450,000 options over the
Company’s shares under the 2011 Employee Share Option Plan.
These options vest subject to him remaining employed on 31
December 2014 and have an exercise price of 49.6p.
The above disclosure does not include options that may be
awarded to Ian Simm pursuant to the 2012 Employee Share
Option Plan in respect of his service for the year ended 30
September 2012.
Service contracts
The Chief Executive is employed under a contract requiring one
year’s notice from either party. The Chairman and Non-Executive
Directors each receive payments under appointment letters which
are terminable by up to six months’ notice from either party.
Policy on non-executive directors’ remuneration
The Chairman and Non-Executive Directors each receive a
fee for their services. The fee is approved by the Board, mindful
of the individual’s time commitment and responsibilities
and of current market rates for comparable organisations
and appointments. The Non-Executive Directors and the
Chairman are reimbursed for their travelling and other minor
expenses incurred.
By Order of the Board
Peter Gibbs
Chairman, Remuneration Committee
28 November 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
18
Independent auditor’s report to the members of
Impax Asset Management Group plc
We have audited the financial statements of Impax Asset
Management Group Plc for the year ended 30th September
2012 set out on pages 19 to 50. The financial reporting
framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the EU and, as regards the parent
company financial statements, as applied in accordance with
the provisions of the Companies Act 2006.
This report is made solely to the company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the Companies
Act 2006. Our audit work has been undertaken so that we might
state to the company’s members those matters we are required
to state to them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the company and
the company’s members, as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities
Statement set out on page 12, the directors are responsible for
the preparation of the financial statements and for being satisfied
that they give a true and fair view. Our responsibility is to
audit, and express an opinion on, the financial statements in
accordance with applicable law and International Standards on
Auditing (UK and Ireland). Those standards require us to comply
with the Auditing Practices Board’s (APB’s) Ethical Standards
for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is
provided on the APB’s website at www.frc.org.uk/apb/scope/
private.cfm.
Opinion on financial statements
In our opinion:
> the financial statements give a true and fair view of the state
of the group’s and of the parent company’s affairs as at
30th September 2012 and of the group’s loss for the year
then ended;
> the group financial statements have been properly prepared
in accordance with IFRSs as adopted by the EU;
> the parent company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU
and as applied in accordance with the provisions of the
Companies Act 2006; and
> the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies
Act 2006
In our opinion the information given in the Directors’ Report for
the financial year for which the financial statements are prepared
is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters
where the Companies Act 2006 requires us to report to you if, in
our opinion:
> adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have not
been received from branches not visited by us; or
> the parent company financial statements are not in
agreement with the accounting records and returns; or
> certain disclosures of directors’ remuneration specified by law
are not made; or
> we have not received all the information and explanations we
require for our audit.
J M Mills (senior statutory auditor)
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
28 November 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
19
Financial Statements
Consolidated Statement of Comprehensive Income
For the Year Ended 30 September 2012
Notes
2012
£000
2011
£000
Revenue 1 18,621 20,931
Operating costs 2 (14,068) (14,696)
Share-based payment charge for EIA extension scheme 3 (7,757) (3,647)
Exceptional long-term incentive scheme NIC charge 3 112 (1,090)
Other long-term incentive scheme related charges 3 (1,091) (619)
Fair value (loss)/gain on investments (722) 785
Change in third party interest in consolidated fund (25) (117)
Investment income 5 195 171
(Loss)/Profit before taxation (4,735) 1,718
Taxation 6 86 (652)
(Loss)/Profit for the year (4,649) 1,066
Other comprehensive income
Tax benefit on long-term incentive schemes 178 46
(Decrease)/Increase in value of cashflow hedges (210) 213
Tax on change in value of cashflow hedges 54 (55)
Exchange differences on translation of foreign operations (271) 20
Exchange differences on translation of foreign 124 –
operations attributable to third party interests
Total other comprehensive income (125) 224
Total comprehensive income for the period attributable to
equity holders of the Parent Company (4,744) 1,290
Basic earnings per share 7 (4.32)p 0.98p
Diluted earnings per share 7 (4.32)p 0.93p
The statement has been prepared on the basis that all operations are continuing operations.
The notes on pages 23 to 41 form part of these financial statements. Impax Asset Management Group plc Annual Report and Accounts 2012
20
Consolidated Statement of Financial Position
As at 30 September 2012
2012 2011
Notes £000 £000 £000 £000
Assets
Goodwill 9 1,629 1,629
Intangible assets 146 39
Property, plant and equipment 10 703 491
Investments 17 18
Total non-current assets 2,495 2,177
Trade and other receivables 11 2,814 3,173
Derivative asset 3 213
Investments 12 8,710 3,930
Current tax asset 25 47
Margin account 156
Cash invested in money market funds and long-term deposit accounts 13 14,094 8,546
long-term deposit accounts
Cash and cash equivalents 13 5,577 12,870
Total current assets 31,379 28,779
Total assets 33,874 30,956
Equity and Liabilities
Ordinary shares 16 1,156 1,156
Share premium 78 78
Exchange translation reserve (283) (136)
Own shares 17 (19) (59)
Treasury shares 17 (1,932) (453)
Hedging reserve 2 158
Retained earnings 23,567 20,756
Total equity 22,569 21,500
Trade and other payables 14 7,364 7,858
Third party interest in consolidated fund 15 2,682
Current tax liability 46 12
Total current liabilities 10,092 7,870
Deferred tax liability 6 1,213 1,586
Total non-current liabilities 1,213 1,586
Total equity and liabilities 33,874 30,956
Authorised for issue and approved by the Board on 28 November 2012. The notes on pages 23 to 41 form part of these financial
statements.
Ian R Simm
Chief Executive Impax Asset Management Group plc Annual Report and Accounts 2012
21
Financial Statements
Consolidated Statement of Changes in Equity
For the Year Ended 30 September 2012
Note
Share
capital
£000
Share
premium
£000
Exchange
translation
reserve
£000
Own shares
£000
Treasury
shares
£000
Hedging
reserve
£000
Retained
earnings
£000
Total
Equity
£000
Balance at 1 October 2010 1,156 78 (156) (59) (453) – 16,337 16,903
Dividends paid –––––– (651) (651)
Long-term incentive scheme
charge – – – – – – 3,958 3,958
Tax benefit on long-term incentive
schemes – ––––– 46 46
Cash flow hedge – –––– 213 – 213
Tax benefit on cash flow hedge – – – – – (55) – (55)
Exchange differences on
translation of foreign operations – – 20 – – – – 20
Profit for the year – – – – – – 1,066 1,066
Balance at 30 September 2011 1,156 78 (136) (59) (453) 158 20,756 21,500
Dividends paid 8 – – – – – – (759) (759)
Share buy-back 17 – – – – (1,479) – – (1,479)
Long-term incentive scheme
charge – – – – – – 8,081 8,081
Tax benefit on long-term incentive
schemes – – – – – – 178 178
Cash flow hedge – – – – – (210) – (210)
Tax benefit on cash flow hedge – – – – – 54 – 54
Exchange differences on
translation of foreign operations – – (271) – – – – (271)
Exchange differences on
translation of foreign operations
attributable to 3rd party interests – – 124 – – – – 124
Share awards – – – 40 – – (40) –
(Loss) for the year – – – – – – (4,649) (4,649)
Balance at 30 September 2012 1,156 78 (283) (19) (1,932) 2 23,567 22,569
The notes on pages 23 to 41 form part of these financial statements. Impax Asset Management Group plc Annual Report and Accounts 2012
22
Consolidated Cash Flow Statement
For the Year Ended 30 September 2012
Note
2012
£000
2011
£000
Operating Activities:
(Loss)/Profit before taxation (4,735) 1,718
Adjustments for:
Investment income (195) (171)
Depreciation of property, plant and equipment 308 243
Amortisation of intangible assets 59 53
Fair value losses/(gains) 722 (785)
Share-based payment 8,081 3,958
Exceptional long-term incentive scheme NIC charge (112) 1,054
Other long-term incentive scheme related charges 1,091 619
Change in third party interest in consolidated fund 25 117
Operating cash flows before movement in working capital 5,244 6,806
Decrease in receivables 357 741
(Increase) in margin account (156) –
(Decrease) in payables (1,441) (931)
Cash generated from operations 4,004 6,616
Corporation tax refunded 2 162
Net cash generated from operating activities 4,006 6,778
Investing activities:
Investment income received 196 77
Settlement of loans receivable – 2,337
Settlement of investment related hedges (388) –
Proceeds on sale/redemption of investments 28 426
Purchase of investments held by the consolidated funds (7,336) –
Sale of investments held by the consolidated funds 1,797 3,489
Purchase of investments (355) (53)
Purchase of intangible assets (167) (16)
Purchase of property, plant and equipment (523) (437)
Net cash (used in)/generated from investing activities (6,748) 5,823
Financing activities:
Dividends paid (759) (651)
Treasury shares acquired (1,023) –
Increase in cash held in money market funds and long-term deposit accounts (5,548) (6,028)
Investment by third party into consolidated fund 2,781 –
Redemption of preference shares issued by the consolidated fund – (1,623)
Net cash (used in) financing activities (4,549) (8,302)
Net (decrease)/increase in cash and cash equivalents (7,291) 4,299
Cash and cash equivalents at beginning of year 12,870 8,563
Effect of foreign exchange rate changes (2) 8
Cash and cash equivalents at end of year 13 5,577 12,870 Impax Asset Management Group plc Annual Report and Accounts 2012
23
Financial Statements
Notes to the Financial Statements
For the Year Ended 30 September 2012
1 Analysis of revenue and assets
The Group has two reportable segments: “Listed Equity” and “Private Equity”. The results of these segments have been aggregated
into a single reportable segment for the purposes of these financial statements because they have characteristics so similar that they
can be expected to have essentially the same future prospects. These segments have common investors, operate under the same
regulatory regimes and their distribution channels are substantially the same. Additionally management allocates the resources of the
Group as though there is one operating unit.
Analysis of revenue by type of service:
2012
£000
2011
£000
Investment management 17,565 20,311
Transaction fees 800 192
Advisory fees 256 428
18,621 20,931
Analysis of revenue by the location of customers:
2012
£000
2011
£000
UK 13,008 14,532
Rest of the world 5,613 6,399
18,621 20,931
Analysis of ‘Rest of the world’ customer location:
2012
£000
2011
£000
Ireland 1,361 2,125
France 974 2,448
Luxembourg 1,229 282
Netherlands 744 844
Other 1,305 700
5,613 6,399
Revenue from three of the Group’s customers individually represented more than 10% of Group revenue (2011: two), equating to
£2,176,000, £3,290,000 and £6,355,000 (2011: £3,878,000 and £5,333,000).
Revenue includes £18,365,000 (2011: £20,660,000) from related parties.
All material non-current assets, excluding deferred tax assets and financial instruments, are located in the UK.
2 Operating costs
2012
£000
2011
£000
Wages and salaries, social security and pension costs and variable bonuses (see note 4) 8,736 9,214
2009 Share option plan share-based payment charge (see note 3) 179 179
Employee share option plan share-based payment charge (see note 3) 145 132
Other staff costs including contractors and Non-Executive Directors’ fees 910 668
Depreciation of property, plant and equipment (see note 10) 308 243
Amortisation of intangible assets 59 53
Auditor’s remuneration – subsidiary undertakings audit fees 43 43
Auditor’s remuneration – parent company audit fees 45 45
Auditor’s remuneration – tax compliance 14 14
Auditor’s remuneration – other 38 92
Premises related 972 519
Travel 328 277
Information technology and communication 726 704
Other costs 1,565 2,513
14,068 14,696 Impax Asset Management Group plc Annual Report and Accounts 2012
24
3 Share-based payment charges and other long-term incentive scheme charges
Share-based payment charges
Employee Incentive Arrangement (Extension Scheme) (“EIA Extension”)
Under this scheme, share-based payment awards were granted in April 2011 to employees when the Trustee of the Impax Group
Employee Benefit Trust 2004 (“the EBT”) agreed to allocate four million ordinary shares to a sub-fund of the EBT of which Ian Simm,
the Company’s Chief Executive, and his family are beneficiaries and when 14.05 million Long-term Incentive Plan (“LTIP”) options
were awarded to other employees.
The awards allocated to the EBT sub-fund for Ian Simm and his family ceased to be subject to revocation due to Ian Simm’s
continued employment by the Company on 30 September 2012.
LTIP options have a 1p or nil exercise price and vest to individuals remaining employed on 30 September 2012. They are exercisable
over a period from 1 October 2012 to 31 December 2020.
The Group accrues for the International Financial Reporting Standard (“IFRS”) 2 Share-Based Payment charge for shares allocated
under the EBT and LTIP options from the date of grant, to the date of vesting. This charge, which totalled £7 ,757 ,000 for the year
(2011: £3,647,000) is excluded from the Group’s definition of adjusted earnings as explained in note 7. The awards granted were
valued at a weighted average price of 64p using the Black Scholes Merton model with the following inputs:
Weighted average share price on grant 68p
Exercise price 1p/0p
Expected volatility 35%
Weighted average option life 5.2yrs
Expected dividend rate 1.00%
Risk free interest rate 1.68%
The expected volatility was determined by reviewing the historical volatility of the Company and that of comparator companies.
The awards made to Ian Simm and his family were valued at 68p using the same model and assumptions as described above except
that the option life was 1.5 years.
2009 Share Option Plan
In December 2009 1,240,000 zero exercise price options over the Company’s shares were granted to certain employees. The awards
vested on 30 September 2012 subject to the continued employment of the participant. The charge for the year in relation to this
scheme is offset by an equal reduction in the total cash bonus pool paid to employees.
2011 Employee Share Option Plan
In November 2011, the Board approved the grant of 5,000,000 options over the Company’s shares to certain employees in respect of
services provided from 1 October 2010. The strike price of the options was set at a 10% premium to the average market price of the
Company’s shares for the 30 business days following the announcement of the results for the year ended 30 September 2011 being
49.6p. The options do not have performance conditions but do have a time vesting condition such that the options vest subject to
continued employment on 31 December 2014. The options granted were valued at a price of 9.1p using the Black Scholes Merton
model. The charge for the year in relation to this scheme is offset by an equal reduction in the total cash bonus pool paid to employees.
2012 Employee Share Option Plan
In November 2012, the Board approved the grant of 3,000,000 options over the Company’s shares to certain employees in respect
of services provided from 1 October 2011. The strike price of the options will be set at a 10% premium to the average market price of
the Company’s shares for the 30 business days following the announcement of the results for the year ended 30 September 2012.
The options will not have performance conditions but will have a time vesting condition such that the options vest subject to
continued employment on 31 December 2015. The options granted were valued at a price of 7.8p using the Black Scholes Merton
model. The charge for the year in relation to this scheme is offset by an equal reduction in the total cash bonus pool paid to
employees. The employees will be notified of the key terms and conditions of these awards shortly after the announcement of
results for the year ended 30 September 2012.
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
25
Financial Statements
3 Share-based payment charges and other long-term incentive scheme charges continued
An analysis of the options over the Company’s shares is provided below.
2012
Number of options
Weighted
average
exercise
price
p
Options outstanding at the start of the year 15,186,940 0.8
Options granted during the year
1
5,108,000 48.6
Options forfeited during the year – NA
Options exercised during the year – NA
Options expired during the year – NA
Options outstanding at the end of the year 20,294,940 12.8
Options exercisable at the end of the year 11,779,940 0.8
1
as noted above a further 3,000,000 options were approved for grant in November 2012
For the options outstanding at the end of the period the exercise prices were either nil, 1p or 49.6p and the weighted average
remaining contractual life was 5.97 years.
The total expense recognised for the year arising from share-based payment transactions was £8,081,000 (2011: £3,958,000).
Exceptional long-term incentive scheme NIC charge
The Statement of Comprehensive Income for the year ended 30 September 2011 includes an exceptional charge of £1,090,000 in
respect of Employer’s National Insurance Contributions (“NIC”) in connection with the Group’s Employee Incentive Arrangement (“EIA
Original Scheme”). The Statement of Comprehensive Income for the year ended 30 September 2012 includes a credit of £112,000 in
respect of adjustments to the charge made arising from fluctuations in the Company’s share price.
Under the EIA Original Scheme, a total of 16,777 ,045 shares were allocated to sub-funds for the benefit of employees and their
families under the EBT. These shares ceased to be subject to the risk of revocation for the employee ceasing employment on
30 September 2007 , 2008 and 2009. The Group recorded an IFRS 2 Share-Based Payment charge in the periods to 30 September
2009 in respect of these awards. During the year ended 31 December 2011, the Government made various changes to taxation of
awards delivered and yet to be delivered under employee benefit trusts. In light of these changes the Group now expects that some
or all of the EBT beneficiaries will, at some stage, request the EBT Trustee, at its discretion to transfer Impax ordinary shares or
other assets held in the name of employees and their families from the EBT to one or more of the beneficiaries whereupon the Group
would be required to pay Employer’s NIC on the value of the shares or other assets removed. In line with the requirements of IFRS
the Group has provided for these future payments. Given its one-off nature and size, the charge and any subsequent amendment to
it are classified as exceptional.
If and when the EBT Trustee agrees to transfer assets held in the EBT to beneficiaries and if the assets transferred are in the form of
the Company’s ordinary shares, the Group also expects to be eligible for a corporation tax deduction equal to the value of those
ordinary shares. Where the Trustee has transferred ordinary shares out of the Trust during the year, the benefit of the tax deduction
has been recognised in these financial statements. If the amount of the tax deduction exceeds the cumulative share-based payment
expense the excess of the associated tax benefit is recognised in Other Comprehensive Income. Any amount included in Other
Comprehensive Income is included in the Group’s definition of adjusted earnings as explained in note 7. During the year the
Trustee transferred 2,850,000 shares out of the EBT giving rise to a total tax benefit of £335,000 (2011: £60,000) with £157 ,000
(2011: £15,000) recorded in loss for the period and £178,000 (2011: £46,000) in Other Comprehensive Income. At the date of this
report 12,228,781 shares awarded under the EIA Original Scheme remained in the EBT.
Other long-term incentive scheme related charges
2012
£000
2011
£000
EIA Extension NIC Charge 548 333
Additional payments 543 286
1,091 619
EIA Extension NIC charge
The Group accrues for the Employer’s NIC payable in respect of the EIA Extension over the same period as the related share-based
payment charge. The amount accrued will vary according to the price of the underlying shares. Impax Asset Management Group plc Annual Report and Accounts 2012
26
3 Share-based payment charges and other long-term incentive scheme charges continued
Additional payments
Individuals receiving LTIP Options are eligible for a retention payment payable after the end of the financial year in which each
employee exercises his or her LTIP Options. The payment will be equal to the corporation tax benefit realised by the Group on the
exercise of the LTIP options minus the amount of the Employer’s NIC suffered by the Group on the exercise of the LTIP options.
The Group accrues for this payment over the same period as the related share-based payment charge.
The Group has also accrued for payments totalling £203,000 to individuals to whom the Trustee of the EBT distributed Impax shares
during the year ended 30 September 2012.
4 Employment Costs
2012
£000
2011
£000
Wages, salaries and variable bonuses 7,014 7,609
Social security costs 880 889
Pensions 842 716
8,736 9,214
The Group contributes to private pension schemes. The assets of the schemes are held separately from those of the Group in
independently administered funds. The pension cost represents contributions payable by the Group to the funds. Contributions
totalling £669,000 (2011: £469,000) were payable to the funds at the year end and are included in trade and other payables.
The average number of persons (excluding Non-Executive Directors and including temporary staff), employed during the year was 55
(2011: 48).
2012
No.
2011
No.
Listed Equity 30 25
Private Equity 12 11
Group 13 12
55 48
Details related to emoluments paid to Directors and Directors rights to share awards are included in the Remuneration Report.
Key management personnel are defined as members of the Board and/or the Executive Committee. The remuneration of key
management personnel during the year was £2,050,400 with £4,577 ,920 of share-based payments (2011: £2,566,194 with £2,117 ,971
of share-based payments).
5 Investment Income
2012
£000
2011
£000
Bank interest 123 77
Other investment income 72 94
195 171
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
27
Financial Statements
6 Taxation
2012
£000
2011
£000
(a) Analysis of charge for the year
Current tax expense:
UK corporation tax 178 46
Foreign taxes 30 11
Adjustment in respect of prior years 25 (131)
Total current tax 233 (74)
Deferred tax (credit)/expense:
Credit/(Charge) for the year (427) 819
Adjustment in respect of prior years 108 (93)
Total deferred tax (319) 726
Total income tax (credit)/expense (86) 652
(b) Factors affecting the tax charge for the year
The tax assessment for the period is higher than the average rate of corporation tax in the UK of 25% (2011: higher). The differences
are explained below:
2012
£000
2011
£000
(Loss)/Profit before tax (4,735) 1,718
Effective tax (credit)/charge at 25% (2011: 27%) (1,184) 464
Effects of:
Non-deductible expenses and charges 1,262 610
Non-taxable income (35) –
Tax effect of previously unrecognised tax losses (132) (45)
Adjustment in respect of previous years 132 (224)
Effect of higher tax rates in foreign jurisdictions 4 4
Change in UK tax rates (133) (157)
Total income tax (credit)/expense (86) 652
(c) Deferred Tax
The deferred tax (liability) included in the Consolidated Statement of Financial Position is as follows:
Accelerated
capital
allowances
Other
temporary
differences
£000
Excess
management
charges
£000
Income not
yet taxable
£000
Share-based
payment
scheme
£000
Total
£000
As at 1 October 2010 6 64 196 (1,110) 39 (805)
Charge to equity – 55 – – – 55
Charge/(credit) to the income statement (9) (135) 196 1,178 (504) 726
As at 30 September 2011 15 144 – (2,288) 543 (1,586)
(Credit) to equity – (54) – – – (54)
Charge/(credit) to the income statement 24 (8) – 357 (692) (319)
As at 30 September 2012 (9) 206 – (2,645) 1,235 (1,213)
As described in note 3, if and when the EBT Trustee agrees to transfer assets held in the EBT to beneficiaries and if the assets
transferred are in the form of the Company’s ordinary shares, the Group expects to be eligible for a corporation tax deduction equal
to the value of those ordinary shares. The Group has not recognised a deferred tax asset in respect of these amounts which totals
£1,417 ,000. The Group also has unrecognised capital losses of £1,267 ,000 (2011: £1,498,000). Impax Asset Management Group plc Annual Report and Accounts 2012
28
7 Earnings and earnings per share
Adjusted earnings
In order to better reflect the underlying economic performance of the Group, an adjusted earnings has been calculated.
The adjustment i) excludes the IFRS 2 Share-Based Payment charge in respect of schemes where shares awarded are satisifed
by the issue of new shares (EIA Original and EIA Extension Schemes), and ii) includes the tax benefit recognised in other
comprehensive income in respect of transfers out of the EBT and the exercising of options over the Company’s shares.
2012
£000
2011
£000
Earnings (4,649) 1,066
Share-based payment charge (see note 3) 7,757 3,647
Tax benefit on long-term incentive scheme included in other comprehensive income 178 46
Adjusted earnings 3,286 4,759
The earnings per share on an IFRS and adjusted basis are as shown below.
Adjusted earnings per share
Adjusted
earnings
for the year
£000
No. of
shares
(weighted
average)
£000
Earnings
per share
2012
Basic adjusted 3,286 107,609 3.05p
Diluted adjusted 3,286 127,748 2.57p
2011
Basic adjusted 4,759 108,454 4.39p
Diluted adjusted 4,759 127,356 3.74p
The number of ordinary shares for the purposes of adjusted diluted earnings per share includes all shares awarded under the EIA
Extension and reconciles to the number of ordinary shares used in the calculation of basic adjusted earnings per share as follows:
2012
‘000
2011
‘000
Weighted average number of ordinary shares used in the calculation of basic adjusted earnings per share 107,609 108,454
Weighted average number of treasury and own shares intended to be used to satisfy outstanding share awards 7,973 7,128
Shares in issue 115,582 115,582
Shares intended to be issued to satisfy outstanding share awards 12,166 11,774
Weighted average number of ordinary shares used in the calculation of diluted adjusted earnings per share 127,748 127,356
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
29
Financial Statements
7 Earnings and earnings per share continued
IFRS earnings per share
Earnings
for the year
£000
No. of
shares
(weighted
average)
£000
Earnings
per share
2012
Basic (4,649) 107,609 (4.32)p
Diluted (4,649) 107,609 (4.32)p
2011
Basic 1,066 108,454 0.98p
Diluted 1,066 114,433 0.93p
The weighted average number of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average
number of ordinary shares used in the calculation of basic earnings per share as follows:
2012
‘000
2011
‘000
Weighted average number of ordinary shares used in the calculation of basic earnings per share 107,609 108,454
Additional dilutive shares re share schemes –
1
19,187
Adjustment to reflect future service from employees receiving awards – (13,208)
Weighted average number of ordinary shares used in the calculation of diluted earnings per share 107,609 114,433
1
since there is a loss after tax for the period there are no dilutive shares
8 Dividend
The Directors propose a dividend of 0.75p per share for the year ended 30 September 2012 (2011: 0.70p per share). The dividend will
be submitted for formal approval at the Annual General Meeting to be held on 13 February 2013. These financial statements do not
reflect this dividend payable, which will be accounted for in shareholders’ equity as an appropriation of retained earnings in the year
ended 30 September 2013.
The dividend for the year ended 30 September 2011 was paid on 6 February 2012, being 0.70p per share. The Trustees of the EBT
waived their rights to part of this dividend, leading to a total dividend payment of £759,000. This payment is reflected in the Statement
of Changes in Equity.
9 Goodwill
Goodwill
£000
Cost
At 1 October 2010, 30 September 2011 and 2012 1,629
Goodwill arose on the acquisition of Impax Capital Limited on 18 June 2001.
The Group tests goodwill for impairment annually or more frequently if there are indications that goodwill may be impaired.
The Group has determined the recoverable amount of its cash-generating units (“CGUs”) by calculating their value in use using a
discounted cash flow model. The cash flow forecasts were derived from the Group budget for the year ended 30 September 2013
and thereafter using a conservative growth rate of 2%. The key assumptions used to calculate the cash flows in the budget were
expected fund flows (based on an aggregation of flows by product) and a post tax discount rate of 10.5%. The discount rate was
derived from the Group’s weighted average cost of capital (“WACC”) which we consider is reflective of a market participants
discount rate.
Consistent with the fact that the goodwill arose in respect of an acquisition made in 2001, there is significant headroom before an
impairment would be required. As an indication, if the discount rate was increased by 3% there would be no impairment charge. Impax Asset Management Group plc Annual Report and Accounts 2012
30
10 Property, plant and equipment
Leasehold
improvements
£000
Fixtures,
fittings and
equipment
£000
Total
£000
Cost
As at 1 October 2010 460 422 882
Additions 297 140 437
Disposals – (29) (29)
As at 30 September 2011 757 533 1,290
Additions 373 150 523
Disposals (468) (176) (644)
As at 30 September 2012 662 507 1,169
Accumulated Depreciation
As at 1 October 2010 345 240 585
Charge for the year 147 96 243
Disposals – (29) (29)
As at 30 September 2011 492 307 799
Charge for the year 183 125 308
Disposals (516) (125) (641)
As at 30 September 2012 159 307 466
Net book value
As at 30 September 2012 503 200 703
As at 30 September 2011 265 226 491
As at 30 September 2010 115 182 297
11 Trade and other receivables
2012
£000
2011
£000
Trade receivables 486 904
Taxation and other social security – 69
Other receivables 176 79
Prepayments and accrued income 2,152 2,121
2,814 3,173
An analysis of the aging of Group trade receivables is provided below:
2012
£000
2011
£000
Not past due 287 749
Past due but not impaired:
31-60 days 199 12
61-90 days – 69
More than 90 days – 74
486 904
All outstanding amounts listed above have been received at the date of this report. There was no significant concentration of fees
owed by an individual client. There were no amounts that were impaired at reporting date.
A total of £1,863,000 trade and other receivables were due from related parties (2011: £2,669,000).
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
31
Financial Statements
12 Current asset investments
Unlisted
investments
£000
Listed
investments
£000
Total
£000
At 1 October 2010 2,481 4,526 7,007
Additions 54 – 54
Fair value movements 679 106 785
Repayments/disposals (95) (3,821) (3,916)
At 30 September 2011 3,119 811 3,930
Additions 355 6,795 7,150
Fair value movements (419) 148 (271)
Repayments/disposals (28) (1,797) (1,825)
Exchange differences – (274) (274)
At 30 September 2012 3,027 5,683 8,710
Listed investments
Listed investments held at 30 September 2012 include those held by the consolidated subsidiary Impax Green Markets Fund LP
(“IGMF”) and at 30 September 2011 by the Impax Absolute Return Fund (“IARF”). These listed investments are recorded at market
value using quoted market prices that are available at the Statement of Financial Position date. The quoted market price is the current
bid price.
Impax Green Markets Fund (“IGMF”)
In December 2011 the Group launched IGMF and invested, from its cash reserves, $5,000,000 into the fund. IGMF invests in listed
equities using the Group’s Environmental Specialists Strategy. The Group’s investment represented 53.8 per cent of the IGMF’s net
asset value (“NAV”) from the date of launch to 30 September 2012 and accordingly IGMF has been consolidated throughout this
period, with its underlying investments classified as listed investments in the table above.
Impax Absolute Return Fund (“IARF”)
On 21 May 2007 , the Company made an investment of €2,200,000 (£1,507 ,000) in IARF. This fund was managed by a subsidiary of
the Company. The investment took the form of a subscription of 22,000 Euro Class A shares in the IARF, at €100 per share. During
the year ended 30 September 2010, the shares were redenominated as sterling shares. During the year ended 30 September 2011
the fund Directors made the decision to close the fund to external investors and accordingly redeemed their preference shares. The
fund’s trading activity ceased during the year ended 30 September 2012 and the Group’s seed capital has been redeemed at a profit
of £190,000.
Unlisted investments
The unlisted investments principally represent the Company’s investment in Impax New Energy Investors LP and Impax New Energy
Investors II LP (“INEI” and “INEI II”). Further details of the Group’s commitments to these partnerships are disclosed in note 18.
The unlisted investments include £2,665,000 in related parties of the Group (2011: £2,797 ,000) Impax Asset Management Group plc Annual Report and Accounts 2012
32
13 Cash and cash equivalents and cash invested in money market funds and long-term deposit accounts
In order to mitigate bank default risk and to access favourable interest rates the Group invests part of its surplus cash in money market
funds and long-term deposits. The Group can redeem investments in the former within 24 hours; long-term deposits range between
six to twelve months. The Group considers its total cash reserves to be the total of its cash at bank and in hand held by operating
entities of the Group, and cash invested in money market funds and long-term deposit accounts. Amounts held are shown below.
Cash reserves:
2012
£000
2011
£000
Cash and cash equivalents 5,577 12,870
Cash invested in money market funds and long-term deposit accounts 14,094 8,546
19,671 21,416
For the purposes of the cash flow statement, cash and cash equivalents includes the following:
2012
£000
2011
£000
Cash at bank and in hand
– Held by operating entities of the Group 5,240 11,499
– Held by the consolidated funds 337 1,371
5,577 12,870
14 Trade and other payables
2012
£000
2011
£000
Trade payables 94 142
Taxation and other social security 2,591 643
Financial liabilities held for trading – 541
Other payables 553 121
Accruals and deferred income 4,126 6,411
7,364 7,858
The financial instruments held for trading relate to Listed Equity investments which were sold short by the IARF during the year ended
30 September 2011.
Trade payables includes £nil owed to related parties of the Group (2011: £22,000)
15 Third party interest in consolidated fund
2012
£000
2011
£000
At fair value 2,682 –
Third party interest is representative of the net assets of IGMF which are not attributable to the Group. As described in note 12, IGMF
is a subsidiary of the Group and its net assets and operating results are consolidated into the Group’s results at year end. The
Group’s interest in the subsidiary is 53.8% at 30 September 2012 (2011: nil).
16 Ordinary shares
2012
£000
2011
£000
Allotted and fully paid
115,582,431 ordinary shares of 1p each 1,156 1,156
17 Own shares and treasury shares
On 30 September 2012 the employment conditions for Ian Simm in respect of the 4,000,000 shares held in sub-trusts of the EBT for
him and his beneficiaries were met. Accordingly the value of Own Shares held reduced by £40,000.
During the period ended 30 September 2012, the Company purchased 3,459,000 of its own shares at an average price of 42 pence.
Total shares held in Treasury at 30 September 2012 were 4,699,000 (2011: 1,240,000).
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
33
Financial Statements
18 Financial commitments
The Group has committed to invest up to €3,756,000 into Impax New Energy Investors LP . At 30 September 2012 the outstanding
commitment was €1,014,000 (2011: €1,011,000) which could be called on in the period to 19 August 2015.
The Group has committed to invest up to €3,298,000 into Impax New Energy Investors II LP . At 30 September 2012 the outstanding
commitment was €2,782,000 (2011: €3,187 ,000) which could be called on in the period to 22 March 2020.
At 30 September 2012 the Group had commitments under non-cancellable operating leases as follows:
Offices Other
2012
£000
2011
£000
2012
£000
2011
£000
Within one year 440 483 15 15
Between one and two years 440 440 14 29
Between two and five years 541 985 1 –
1,421 1,908 30 44
19 Financial risk management
Risk management is integral to the business of the Group. There are systems of controls in place to create an acceptable balance
between the potential cost should such a risk occur and the cost of managing those risks. Management continually monitors the
Group’s risk management process to ensure that an appropriate balance between risk and control is achieved. This section provides
details of the Group’s exposure to financial risks and describes the methods used by management to control such risk.
The Group’s financial instruments comprise cash and various items, such as loans receivable, current asset investments, derivative
instruments, trade receivables and trade payables that arise directly from its operations.
Credit risk
Credit risk is the potential financial loss resulting from the failure of a counterparty to settle their financial and contractual obligations
to the Group, as and when they fall due. The Group’s maximum exposure to credit risk is represented by the carrying value of its
financial assets.
The Group’s primary exposure to credit risk relates to its cash and cash equivalents and cash in money market funds and long-term
deposits that are placed with regulated financial institutions. At the balance sheet date, the credit risk regarding cash balances of the
operating entities of the Group was spread by holding part of the balance with RBS (Standard & Poor’s credit rating A-1), part with
Lloyds (Standard & Poor’s credit rating A-1) and the remainder in money market funds managed by Blackrock and Goldman Sachs
(Standard & Poor’s credit rating of AAA).
The Group is exposed to credit risk on trade receivables, representing investment management fees due. An analysis of the aging of
these is provided in note 11.
Foreign exchange risk
Foreign exchange risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in
foreign exchange rates. A significant amount of the Group’s income is denominated in GBP, EUR and USD. The Group’s foreign
exchange risk arises from income received in these currencies, together with a limited amount of exposure to expenses in foreign
currencies.
The strategy of the Group for the year ended 30 September 2012 has been to convert earned income back to sterling and to use
hedges where there is sufficient predictability over inflows to allow for an effective and efficient hedge. At the year end the Group had
outstanding forward rate foreign currency contracts to sell Euro and buy sterling. These have been designated as cashflow hedges
against Euro income and recognised in profit in October 2012 and January 2013. The fair value of these instruments at 30 September
2012 was £3,000 which is recognised in equity. £409,000 was reclassified from equity to the income statement during the year on
maturity of the hedges. Impax Asset Management Group plc Annual Report and Accounts 2012
34
19 Financial risk management continued
Foreign exchange risk continued
The Group’s exposure to foreign exchange rate risk at 30 September 2012 was:
EUR/GBP
£000
USD/GBP
£000
Other/GBP
£000
EUR/USD
£000
Other/USD
£000
Assets
Non current asset investments 17 – – – –
Current asset investments 2,665 364 – 1,115
1
2,250
1
Trade and other receivables 785 59 135 – –
Cash and cash equivalents 52 248 1 – –
3,519 671 136 1,115 2,250
1
these amounts relate only to the consolidation fund and do not take account of any offsetting benefit or charge from the market value hedges held (see below)
Liabilities
Trade and other payables 7 36 25 – –
Third party interest in consolidated funds – – – 515 1,040
7 36 25 515 1,040
Net exposure 3,512 635 111 600 1,210
The Group’s exposure to foreign exchange rate risk at 30 September 2011 was:
EUR/GBP
£000
USD/GBP
£000
Other/GBP
£000
EUR/USD
£000
Other/USD
£000
Assets
Non current asset investments 18 – – – –
Current asset investments 2,797 323 272 179
Trade and other receivables 1,041 559 253 – –
Cash and cash equivalents 31 19 – – –
3,887 901 253 272 179
Liabilities
Trade and other payables – 550 – – 226
– 550 – – 226
Net exposure 3,887 351 253 272 (47)
The following table demonstrates the estimated impact on Group post-tax profit and net assets caused by a 5% movement in the
exchange rate used to revalue significant foreign assets and liabilities, assuming all other variables are held constant. Post-tax profit
will either increase or (decrease) as shown.
Post-tax profit
2012
£000
2011
£000
Translation of significant foreign assets and liabilities
GBP strengthens against the USD, up 5% (24) (13)
GBP weakens against the USD, down 5% 24 13
GBP strengthens against the EUR, up 5% (133) (144)
GBP weakens against the EUR, down 5% 133 144
Liquidity risk and regulatory capital requirements
Liquidity risk is the risk that the Group does not have sufficient financial resources to meets its obligations when they fall due or will
have to do so at a cost. The Group monitors its liquidity risk using cash flow forecasts taking into account the commitments made to
its private equity funds (see note 18) and the cash required to meet the Group’s investment plans and its regulatory capital requirements.
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
35
Financial Statements
19 Financial risk management continued
Liquidity risk and regulatory capital requirements continued
The Group considers its share capital, share premium and retained earnings to constitute its total capital. These are shown in the
Statement of Changes in Equity. Certain companies of the Group are regulated and must maintain liquid capital resources to comply
with the capital requirements of the Financial Services Authority (“the FSA”). Throughout the period the companies have significantly
exceeded these requirements. The policy of the Group is to retain sufficient capital to enable it to meet its growth objectives and
to satisfy regulatory requirements. The Group has no borrowings but may seek to borrow cash if sufficiently attractive business
opportunities arise which cannot be met from internal resources. The Company has no plans to raise additional equity and is currently
buying back shares to enable it to meet commitments under its Employee Share Ownership Plan.
At 30 September 2012, the Group had cash and cash equivalents and cash in money market funds and long-term deposit accounts
of £19,671,000. This is £12,307 ,000 in excess of trade and other payables. The Group in addition had other current assets of
£11,708,000.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market
interest rates.
The Group is exposed to interest rate risk on its interest-bearing assets, specifically cash balances that earn interest at a floating rate.
The average interest rate on the cash balances during the year was 0.6% (2011: 0.6%).
A 0.5% increase in interest rates would have increased group profit after tax by £92,000 (2011: £57 ,000). An equal change in the
opposite direction would have decreased profit after tax by £92,000 (2011: £57 ,000).
Market risk
The significant holding at 30 September 2012 that is exposed to equity market price risk is the Group’s investment in the IGMF fund.
The Group has attempted to hedge against the risk of market falls by the use of derivative contracts. The derivative contracts consists
of short positions against a global equity index and are arranged through BNP Paribas, a related party. Any outstanding amounts on
the short positions are settled daily.
The significant holdings at 30 September 2011 exposed to equity market price risk were the Group’s holdings in IARF.
As noted in note 12, the investment in the unlisted Private Equity funds are recorded at fair value, with fair value being calculated using
the discounted cashflow method. The key assumptions for this valuation were the discount rate and the inflation rate. The discount
rate was determined by reference to market transactions for equivalent assets. The inflation rate was determined based on historical
data. A rise of 1% in the discount rate applied to cashflows would result in a decrease in profit from operations and net assets of
£248,000. A 1% reduction in the discount rate would result in a corresponding increase of £295,000 in profit from operations and net
assets. A rise of 0.5% in the inflation rate applied in the calculations would increase profit from operations and net assets by £215,000.
A fall of 0.5% in the inflation rate would decrease profit from operation and net assets by £202,000.
Fair values of financial assets and liabilities
The Directors consider there to be no difference between the carrying value of the Group’s financial assets and liabilities and their
fair value.
The hierarchical classification of financial assets and liabilities measured at fair value are as follows:
30 September 2012
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Current investments 5,681 – 3,029 8,710
Third party interest in consolidated Funds (2,682) – – (2,682)
There were no movements between any of the levels in the year.
30 September 2011
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Current investments 810 – 3,120 3,930
Trade and other payables (541) – – (541) Impax Asset Management Group plc Annual Report and Accounts 2012
36
19 Financial risk management continued
Financial assets and liabilities by category
30 September 2012
Available
for sale
£000
1
FVTPL –
designated
on initial
recognition
£000
1
FVTPL –
Held for
trading
£000
Loans and
receivables
£000
Financial
liabilities
measured at
amortised
cost
£000
Financial assets
Cash and cash equivalents – – – 5,577 –
Cash held in money market funds and long-term deposits – – – 14,094 –
Trade and other receivables – – – 662 –
Investments 17 3,029 5,681 –
Total financial assets 17 3,029 5,681 20,333 –
Financial liabilities
Trade and other payables – – – – 647
Third party interest in consolidated funds –––– 2,682
Total financial liabilities – – – – 3,329
1
FVTPL = Fair value through profit and loss
30 September 2011
Available
for sale
£000
*FVTPL –
designated
on initial
recognition
£000
*FVTPL
– Held for
trading
£000
Loans and
receivables
£000
Financial
liabilities
measured at
amortised
cost
£000
Financial assets
Cash and cash equivalents – – – 12,870 –
Cash held in money market funds – – – 8,546 –
Trade and other receivables – – – 983 –
Investments 18 3,120 810 – –
Total financial assets 18 3,120 810 22,399 –
Financial liabilities
Trade and other payables – – 541 – 263
Total financial liabilities – – 541 – 263
20 Ultimate controlling party
The Group has no ultimate controlling party.
21 Related party transactions
Impax New Energy Investors LP, Impax New Energy Investors II LP, Impax New Energy Investors II-B LP, Impax New Energy Investors
SCA, Impax Carried Interest Partners LP and Impax Carried Interest Partners II LP are related parties of the Group by virtue of
subsidiaries being the General Partners to these funds.
BNP Paribas Investment Partners is a related party of the Group by virtue of owning a 29.1% equity holding.
Other funds managed by subsidiaries of the group are also related parties by virtue of its management contracts.
Transactions with related parties have been included in the relevant notes where appropriate.
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
37
Financial Statements
22 Accounting policies
Presentation of Financial Statements
Impax Asset Management Group plc is a public limited company that is incorporated and domiciled in the United Kingdom, and is
listed on the Alternative Investment Market (“AIM”). The address of the registered office is given on the last page of these financial
statements. The nature of the Group’s operations and its principal activities are set out in the Directors’ Report on pages 10 to 11.
Basis of accounting
The financial statements have been prepared in accordance with International Financial Reporting Standards adopted for use by
the European Union.
The Directors have, at the time of approving the financial statements, a reasonable expectation that the Group has adequate
resources to continue in operational existence for the foreseeable future and have concluded that it is appropriate to adopt the
going concern basis in preparing the financial statements of the Group.
The financial statements have been prepared under the historical cost convention, with the exception of the revaluation of certain
investments and derivatives being measured at fair value.
The Group and Company adopted the following new standards in the year:
> IFRS 7 Financial Instruments: Disclosures (Amendment): Part of IASB’s annual improvement project published in May 2010, the
amendment reduced the volume of disclosures regarding collateral held and clarified requirements when carrying amounts of
financial assets do not reflect the maximum exposure to credit risk. A further amendment clarified that an entity may present an
analysis of each component of other comprehensive income whether in the statement of changes in equity or in the notes to the
financial statements.
> IAS 24 Related Party Disclosures (Amendment): This amendment clarified the definition of a related party to simplify the
identification of related party relationships.
The following new standards and amendments issued are effective from 1 January 2013 unless stated otherwise and have not been
early adopted:
> Amendment to IAS 1 Presentation of Items of Other Comprehensive Income changes the grouping of items presented in the other
comprehensive income based on whether they will be reclassified to profit or loss in future or not. Effective from 1 July 2012;
> Amendment to IAS 32 Financial instruments: Presentation (Effective from 1 January 2014) provides additional guidance for
offsetting financial assets and liabilities while amendments to IFRS 7 Financial instruments: Disclosures set out the corresponding
new disclosure requirements;
> IAS 19 Employee Benefits (Revised) primarily results in changes to the measurement, recognition and disclosure of post-
employment benefit plans and termination costs;
> IAS 27 Separate Financial Statements (Revised) and IAS 28 Investments in Associates and Joint Ventures (Revised) are revised
accordingly as they are largely replaced by IFRS 10 and 11, respectively;
> IFRS 9 Financial Instruments: Classification and Measurement replaces the current models for classification and measurement
of financial instruments. Financial assets are to be classified into two measurement categories: those measured as at fair value
and those measured at amortised cost. Classification depends on an entity’s business model and the contractual cash flow
characteristics of the instrument. Financial liabilities are not affected by the changes. Effective from 1 January 2015;
> IFRS 10 Consolidated Financial Statements revises the concept of control to relate it to whether an investor has exercisable power
over an investee and consequently has exposure or rights to variable returns. Consolidation procedures remain unchanged;
> IFRS 11 Joint Arrangements requires joint ventures to be accounted for using the equity accounting method while joint operations
are accounted for based on the rights and obligations of each party in the arrangement;
> IFRS 12 Disclosure of Interests in Other Entities consolidates and enhances disclosure requirements relating to interests of an
entity in other entities;
> IFRS 13 Fair Value Measurement provides guidance on how to measure fair value where fair value is required or permitted under
IFRS and enhances disclosures requirements.
IAS 27 (Revised) and IFRSs 9 to 13 are subject to endorsement by the European Union.
Adoption of IFRS 9, 10, 11, 12 and 13 could have a significant effect on the Group’s financial statements, the impact of which is still
being considered by management. Impax Asset Management Group plc Annual Report and Accounts 2012
38
22 Accounting policies continued
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the
Company (its subsidiaries) made up to 30 September each year. Control is achieved where the Company has the power to govern
the financial and operating policies of a subsidiary so as to obtain benefits from its activities.
Subsidiaries are accounted for using the acquisition method of accounting whereby the Group’s results include the results of the
acquired business from the date of acquisition until the date of disposal.
All intra-Group transactions and balances are eliminated in full on consolidation.
Investments in funds in which the Group has more than 50% of the share of the net assets are consolidated from the date that control
is gained until the date that control is lost due to dilution or sale of the fund holding. The Group’s investment holding instrument in its
consolidated fund is classified as a liability in the fund’s own financial statements. This is on the basis that the instruments may be
redeemed by the Investor at any time, or subject to a notice period, such that the fund is required to utilise its assets to buy out the
Investor’s share and thereby reduce the net assets of the fund; such an investment is classified as a puttable interest under IFRS and
recorded as a liability (equal to the fair value of the fund’s assets and other liabilities). Upon consolidation the proportion of the fund
attributable to the non-controlling interest is classified as a current liability and shown as ‘Third party interest in consolidated fund’ in
the Statement of Financial Position and the corresponding profit/loss attributable to the non-controlling interest as a ‘Change in third
party interest in consolidated funds’.
In instances where the Group acts as the Manager and General Partner of a fund in a Limited Partnership structure, the Group only
receives compensation for its performance as Manager which is on market terms. Accordingly the Group does not consolidate these
funds as it receives no ownership benefits.
The Company includes the assets and liabilities of the EBT within its Statement of Financial Position. In the event of the winding up of
the Company, neither the shareholders nor the creditors would be entitled to the assets of the EBT.
Investments in associates
An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint
venture. The Group, in common with industry standard practice, seeds new funds with its own resources in order to establish a track
record so that the funds may then be marketed to external investors. As new investors join the fund the Group’s interest will dilute and
ultimately the Group may divest entirely as commercial considerations allow. Investments in associates that are held by the Group are
carried in the Statement of Financial Position at fair value, a treatment permitted by IAS 28 Investment in Associates. IAS 28 allows
investments held by venture capital and similar organisations to be excluded from the scope of the standard, provided that those
investments upon initial recognition are designated as fair value through profit or loss or held for trading and accounted for in
accordance with IAS 39 Financial Instruments: Recognition and Measurement, with changes in fair value recognised in profit or loss
in the period of change.
Revenue recognition
Revenue represents sales to external customers at invoiced amounts less value added tax or local taxes. Revenue is recognised in
the Statement of Comprehensive Income as follows.
(a) Investment management, administration and advisory fees contractually receivable are recognised in the period in which the work
is performed and the respective fees are earned. Performance fees arising upon the achievement of specified targets are
recognised at the respective fund’s period end, when such performance fees are confirmed as receivable.
(b) Interest income is accrued on a time basis, by reference to the principal outstanding and the interest rate applicable.
Other investment income, including dividends, is recognised when the right to receive payment is established.
Leases
All leases are operating leases. Rentals payable are charged to the Income Statement on a straight-line basis over the lease term.
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
39
Financial Statements
22 Accounting policies continued
Long-term incentive scheme charge
The fair value of employee services received in exchange for the grant of shares or share options is recognised as an expense. The
fair value of the shares and share options awarded is determined at the date the employee is deemed to be fully aware of their potential
entitlement and all conditions of vesting (termed the ‘grant date’). The expense is charged over the period starting when the employee
commenced the relevant services (termed ‘the service commencement date’) to the vesting date. In instances where the grant date
occurs after the date of signing these financial statements the fair value is initially estimated by assuming that the grant date is the
reporting date.
Pensions
The Group and Company operate defined contribution personal pension schemes for employees. The assets of the schemes are
held separately from those of the Group and Company in independently administered funds. Payments made in relation to the
schemes are charged as an employee benefit expense to the Statement of Comprehensive Income when they are due.
Taxation
Current tax is based on taxable profits for the year after all potential reliefs available have been utilised. Taxable profits differ from
‘profit before tax’ as reported in the Statement of Comprehensive Income because it excludes items that are taxable or deductible in
other years and items that are not taxable or deductible in the current year. The Group’s liability for current tax is calculated using tax
rates that have been enacted or substantively enacted at the Statement of Financial Position date. In the United Kingdom tax
deductions are available in respect of the award of the Company’s shares. In instances where the tax deduction is greater than the
associated share-based payment charge due to differences in the Company’s share price that amount, tax effected, is recognised in
other comprehensive income.
Deferred tax is provided in full in respect of taxation deferred by temporary differences between the treatment of certain items for
taxation and accounting purposes. Deferred tax assets are not recognised to the extent that their recoverability is uncertain.
The carrying amounts of deferred tax assets are reviewed at each Statement of Financial Position date and regarded as recoverable
and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be
suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability or the asset is realised.
Goodwill
Goodwill arising on consolidation represents the excess of the cost of acquisition over the fair value of the identifiable assets, liabilities
and contingent liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is recognised as an
asset and is tested for impairment annually, or on such occasions that events or changes in circumstances indicate that its value
might be impaired.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Positive goodwill arising on acquisitions before the date of the transition to IFRS has been retained at the previous UK GAAP amount
and is tested for impairment annually.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses.
Depreciation is provided on a straight-line basis over the estimated useful lives shown below:
> Leasehold improvements life of the lease
> Fixtures, fittings and equipment three years
Intangible fixed assets - software licences
Purchased licences are stated at cost less accumulated depreciation and any accumulated impairment losses and associated
implementation costs.
Amortisation is provided on a straight-line basis over the life of the licence up to a maximum of three years. Impax Asset Management Group plc Annual Report and Accounts 2012
40
22 Accounting policies continued
Impairment of assets
At the Statement of Financial Position date, the Group reviews the carrying amount of assets to determine whether there is any
indication that those assets have suffered an impairment loss or if events or changes in circumstances indicate that the carrying value
may not be recoverable. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the
extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group
estimates the recoverable amount of the cash-generating unit to which the asset belongs.
If the recoverable amount of an asset is estimated to be less than its carrying amount, the impairment loss is recognised as an expense.
When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been
determined had no impairment loss been recognised for the asset. A reversal of an impairment loss is recognised as income
immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as
a revaluation increase. Impairment losses relating to goodwill are not reversed.
Current asset investments
Current asset investments are categorised as financial assets at fair value through profit or loss and are designated at fair value
through profit and loss on initial recognition or as held for trading. All gains or losses together with transactions costs are recognised
in the Statement of Comprehensive Income. The investments comprise both listed investments and unlisted investments. The fair
value of the listed investments which are traded in active markets are based on quoted market prices at the Statement of Financial
Position date. The appropriate quoted price for investments held is the current bid price.
The fair value of the unlisted investments which are not traded in an active market is determined by using valuation techniques. The
Group uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date.
Valuation techniques used include the use of comparable recent arm’s length transactions, reference to other instruments that are
substantially the same, discounted cash flow analysis and other valuation techniques commonly used by market participants making
the maximum use of market inputs and relying as little as possible on entity-specific inputs.
Trade and other receivables
Trade and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans
and receivables. Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost using
the effective interest method less provision for impairment.
Other financial assets
Other financial assets are non-derivative financial assets with fixed payments that are not quoted in an active market. They are
included in current assets, except for maturities greater than twelve months after the end of the reporting period. These are classified
as non-current assets.
Interest income is recognised by applying the effective interest rate and included within ‘Investment income’.
Placement fees
Placement fees incurred that are directly attributable to securing an investment management contract are deferred and amortised
over the investment period of the related fund.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, short-term deposits and short-term borrowings that are readily convertible
to a known amount of cash and are subject to an insignificant risk of changes in value.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Own shares
Company shares held by the EBT are deducted from the shareholders’ funds and classified as Own Shares until such time as they
vest unconditionally to participating employees and their families.
Trade payables
Trade payables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method,
unless otherwise stated.
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
41
Financial Statements
22 Accounting policies continued
Other payables
The Group’s consolidated funds may make short sales in which an investment is sold in anticipation of a decline in the market value
of that investment. Short sales are categorised as financial liabilities held at fair value through profit or loss, classified as held for
trading and are recorded at fair value.
Foreign currencies
Foreign currency transactions of individual companies are translated at the rates ruling when they occurred. Foreign currency monetary
assets and liabilities are translated at the rates ruling at the Statement of Financial Position date. Any differences are taken to the
Statement of Comprehensive Income.
On consolidation, the results of overseas operations are translated at the average rates of exchange during the year and their Statement
of Financial Positions are translated into sterling at the rates of exchange ruling on the Statement of Financial Position date. Exchange
differences that arise from translation of the opening net assets and results of foreign subsidiary undertakings are charged to the
exchange translation reserve.
The average rate ruling in the accounting period for US Dollars was US$1.58: £1 (2011: US$1.60: £1); the rate ruling at the Statement
of Financial Position date was US$1.62: £1 (2011: US$1.56: £1). The average rate ruling in the accounting period for Euros was
€1.21: £1 (2011: €1.15: £1); the rate ruling at the Statement of Financial Position date was €1.26: £1 (2011: €1.15: £1).
Derivatives
The group uses foreign exchange futures contracts as a hedge against the foreign exchange risk on future income denominated in
foreign currencies. At the Statement of Financial Position date these derivative contracts are recorded at their fair value. In instances
where the hedge accounting criteria are met changes in the fair value are recorded in other comprehensive income. The amounts
recognised in other comprehensive income are reclassified to profit or loss when the hedged item (such as the relevant foreign
exchange income) is recorded in profit.
Critical accounting judgements and key sources of estimation uncertainty
> Determining the value of unlisted investments
A number of accounting estimates and judgements are incorporated within current asset investments in respect of the valuation
of unlisted investments. The methodology used is described in note 19.
> Consolidation of managed funds
In determining whether managed funds should be consolidated key judgements include whether returns received by the Group
constitute an ownership interest and as to whether the Group controls the fund.
> Determining the share-based payment charge
In determining the value of share-based payments, key judgements include the volatility of Impax shares, Impax’s dividend yield
and the risk free rate.
> Determining the value of NIC payments due in respect of share schemes
In determining the amount of NIC that will be payable in respect of the Group’s share schemes the key estimates are the price of
the shares at the date when the NIC becomes payable and the NIC rate prevalent at that date. The Group uses the rate at the
Statement of Financial Position date as its estimate.
> Determining the value of deferred tax assets for tax deductions that will become deductible in respect of share-based
payment charges.
A share-based payment charge and associated NIC charges are recorded in the current year. Tax deductions in respect of these
will only be available in future years when the relevant individual exercises options or requests the Trustees of the Impax Employee
Benefit Trust to move their shares out of the Trust and accordingly a corresponding deferred tax asset is recognised. In
determining the size of the deferred tax asset the key judgements are the price of the shares at the date when the tax or NIC
becomes payable and the tax and NIC rates prevalent at that date. The Group uses the price/rates enacted at the Statement of
Financial Position date as its estimate.
> Impairment of goodwill
Goodwill has an indefinite useful life, is not subject to amortisation and is tested annually for impairment. In determining if goodwill
is impaired, the Group determines the recoverable amount of its CGUs by applying a discounted cash flow model. The Group’s
budgeted cash flows were approved by the Directors and use a growth rate of 2%. Impax Asset Management Group plc Annual Report and Accounts 2012
42
Company Statement of Financial Position
As at 30 September 2012
Company No: 03262305
2012 2011
Notes £000 £000 £000 £000
Assets
Property, plant and equipment 24 686 479
Investments 25 14,609 7,326
Deferred tax asset 29 105 56
Total non-current assets 15,400 7,861
Trade and other receivables 26 312 428
Investments 27 2,665 2,797
Cash invested in money market funds 9,594 8,546
Cash and cash equivalents 16 1,172
Total current assets 12,587 12,943
Total assets 27,987 20,804
Equity and Liabilities
Ordinary shares 30 1,156 1,156
Share premium 78 78
Own shares 31 (19) (59)
Treasury shares 31 (1,932) (453)
Retained earnings 16,187 8,955
Total equity 15,470 9,677
Liabilities
Trade and other payables 28 12,484 11,127
Bank overdraft 33
Total current liabilities 12,517 11,127
Total equity and liabilities 27,987 20,804
Authorised for issue and approved by the Board on 28 November 2012. The notes on pages 45 to 50 form part of these financial
statements.
Ian R Simm
Chief Executive Impax Asset Management Group plc Annual Report and Accounts 2012
43
Financial Statements
Note
Share
capital
£’000
Share
premium
£’000
Own shares
£’000
Treasury
shares
£’000
Retained
earnings
£’000
Total
£’000
As at 1 October 2010 1,156 78 (59) (453) 6,257 6,979
Long-term-incentive scheme – – – – 3,958 3,958
Loss for the year – – – – (609) (609)
Dividends paid – – – – (651) (651)
As at 30 September 2011 1,156 78 (59) (453) 8,955 9,677
Long-term incentive scheme – – – – 8,081 8,081
Loss for the year – – – – (50) (50)
Dividends paid 8 – – – – (759) (759)
Share buyback 31 – – – (1,479) – (1,479)
Share awards 31 – – 40 – (40) –
As at 30 September 2012 1,156 78 (19) (1,932) 16,187 15,470
The total of own shares and treasury shares is deducted from Retained earnings when calculating distributable profits.
The notes on pages 45 to 50 form part of these financial statements.
Company Statement of Changes in Equity
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
44
Company Statement of Cash Flows
For the Year Ended 30 September 2012
2012
£000
2011
£000
Operating Activities:
(Loss) before taxation (98) (458)
Adjustments for:
Investment income (2,036) (546)
Depreciation of property, plant and equipment 295 243
Fair value movements in investments 462 (512)
Impairment of investment 77 592
Share-based payment 2,453 1,282
Exceptional long-term incentive scheme charge (71) 453
Other long-term incentive scheme related charges 193 110
Operating cash flows before movement in working capital 1,275 1,164
Decrease in receivables 116 1,510
Increase in payables 758 2,940
Cash generated from operations 2,149 5,614
Corporation tax – –
Net cash generated from operating activities 2,149 5,614
Investing activities:
Interest received 36 52
Dividend received 2,000 497
Repayments/Proceeds on sale of investments 1,501 1,247
Purchase of investments (3,572) (83)
Disposal of investments 29 –
Purchase of property, plant and equipment (502) (424)
Net cash (used in)/generated from investing activities (508) 1,289
Financing activities:
Dividends paid (759) (651)
Increase in cash held in money market funds (1,048) (6,028)
Proceeds from borrowings 33 –
Share buy back (1,023) –
Net cash (used in) financing activities (2,797) (6,679)
Net (decrease)/increase in cash and cash equivalents (1,156) 224
Cash and cash equivalents at beginning of year 1,172 948
Effect of foreign exchange rate changes – –
Cash and cash equivalents at end of year 16 1,172 Impax Asset Management Group plc Annual Report and Accounts 2012
45
Financial Statements
23 Significant accounting policies
The separate financial statements of the Company are presented as required by the Companies Act 2006. The principal accounting
policies adopted are the same as those set out in the Group’s financial statements disclosures. In addition note 25 sets out the
accounting policy in respect of investments in subsidiary undertakings.
The Company has taken advantage of the exemption allowed under Section 408 of the Companies Act 2006 and has not
presented its own Statement of Comprehensive Income in these financial statements. The Company’s loss after tax for the year
amounted to £50,000 (2011: loss of £609,000).
24 Property, plant and equipment
Leasehold
improvements
£000
Fixtures,
fittings and
equipment
£000
Total
£000
Cost
As at 1 October 2010 445 304 749
Additions 296 128 424
Disposal – (29) (29)
As at 30 September 2011 741 403 1,144
Additions 368 137 505
Disposals (452) (58) (510)
As at 30 September 2012 657 482 1,139
Depreciation
As at 1 October 2010 281 170 451
Charge for the year 147 96 243
Disposals – (29) (29)
As at 30 September 2011 428 237 665
Charge for year 178 117 295
Disposals (452) (55) (507)
As at 30 September 2012 154 299 453
Net book value
As at 30 September 2012 503 183 686
As at 30 September 2011 313 166 479
As at 30 September 2010 115 182 297
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
46
Notes to the Financial Statements continued
For the Year Ended 30 September 2012
25 Non-current investments
Investments held by the Company in subsidiary undertakings are held at cost less any provision for impairment.
Other
investments
£000
Subsidiary
undertakings
£000
Total
£000
At 1 October 2010 13 6,023 6,036
Additions 52126
Capital contribution – 2,676 2,676
Impairment of investments – (592) (592)
Disposals/Repayment of invested capital – (820) (820)
At 30 September 2011 18 7,308 7,326
Additions – 3,234 3,234
Capital contribution – 5,627 5,627
Impairment of investments – (77) (77)
Disposals/Repayment of invested capital (1) (1,500) (1,501)
At 30 September 2012 17 14,592 14,609
The principal subsidiary undertakings are:
Country of
incorporation
Proportion of
ordinary capital held Nature of business
Impax Asset Management Limited UK 100% Financial services
Impax New Energy Investors (GP) Limited UK 100% Financial services
Impax New Energy Investors II (GP) Limited UK 100% Financial services
Impax New Energy Investors Management SARL Luxembourg 100% Financial services
Kern USA Inc USA 100% Holding company
Impax Asset Management (Hong Kong) Ltd Hong Kong 100% Financial services
Impax Asset Management (US) LLC USA 100% Financial services
A full list of subsidiaries will be attached to the Company’s Annual Return filed with Company’s House.
Charges relating to shares in the Company granted by the Trustees of the EBT to employees of subsidiary undertakings are accounted
for in the subsidiary undertaking. The charge to the subsidiary undertaking is proportionate to the number of shares allocated to
individuals in the entity as a percentage of the total shares allocated to employees of the Group. In the Company financial statements
this capital contribution has been recognised as an increase in the investment in subsidiaries.
Investments in subsidiary undertakings are divided between interest in shares and capital contributions as follows:
2012
£000
2011
£000
Interest in shares 5,013 3,356
Capital contribution 9,579 3,952
14,592 7,308
The principal other investment for the Company is in the fund Impax New Energy Investors SCA which is incorporated in
Luxembourg. The Company holds 14.24% of the capital of this partnership which represents its subscription capital. Impax Asset Management Group plc Annual Report and Accounts 2012
47
Financial Statements
26 Trade and other receivables
2012
£000
2011
£000
Amounts owed to Group undertakings – Receivables 6 71
Taxation and other social security – 128
Other receivables 79 42
Prepayments and accrued income 227 187
312 428
Due:
After one year – –
Within one year 312 428
312 428
27 Current asset investments
Unlisted
investments
£000
Listed
investments
£000
Total
£000
At 1 October 2010 2,323 332 2,655
Additions 57 – 57
Fair value movements 512 – 512
Repayments/disposals (95) (332) (427)
At 30 September 2011 2,797 – 2,797
Additions 338 – 338
Fair value movements (441) – (441)
Repayments/disposals (29) – (29)
At 30 September 2012 2,665 – 2,665
28 Trade and other payables
2012
£000
2011
£000
Trade payables 43 26
Amounts owed by Group undertakings 10,407 8,838
Taxation and other social security 716 643
Other payables 494 28
Accruals and deferred income 824 1,592
12,484 11,127
29 Deferred tax
The deferred tax asset included in the Company Statement of Financial Position is as follows:
Accelerated
capital
allowances
£000
Other
temporary
differences
£’000
Excess
management
charges
£’000
Exceptional
items
£’000
Share-based
payment
scheme
£’000
Total
£’000
As at 30 September 2011 14 (121) – 113 50 56
Charge/(credit) to the Income Statement 23 (120) – 113 (65) (49)
As at 30 September 2012 (9) (1) – – 115 105
As described in note 3 if and when the EBT Trustee agrees to transfer assets held in the EBT to beneficiaries and if the assets
transferred are in the form of the Company’s ordinary shares, the Company expects to be eligible for a corporation tax deduction
equal to the value of those ordinary shares. The Company has not recognised a deferred tax asset in respect of these amounts
which would total £925,000. The Company also has unrecognised capital losses of £1,267 ,000 (2011: £1,498,000). Impax Asset Management Group plc Annual Report and Accounts 2012
48
Notes to the Financial Statements continued
For the Year Ended 30 September 2012
30 Ordinary shares
2012
£000
2011
£000
Allotted and fully paid
115,582,431 ordinary shares of 1p each 1,156 1,156
31 Own shares and treasury shares
On 30 September 2012 the employment conditions for Ian Simm in respect of the 4,000,000 shares held in sub trusts of the EBT for
him and his beneficiaries were met. Accordingly the value of Own shares held reduced by £40,000.
During the period ended 30 September 2012, the Company purchased 3,459,000 of its own shares at an average price of 42 pence.
Total shares held in Treasury at 30 September 2012 were 4,699,000 (2011: 1,240,000).
32 Financial commitments
The Company has committed to invest up to €3,756,000 in Impax New Energy Investors LP . At 30 September 2012 the outstanding
commitment was €1,014,000 (2011: €1,011,000) which could be called on in the period to 19 August 2015.
The Company has committed to invest up to €3,298,000 in Impax New Energy Investors II LP . At 30 September 2012 the outstanding
commitment was €2,782,000 (2011: €3,187 ,000), which could be called on in the period to 22 March 2020.
At 30 September 2012 the Company had commitments under non-cancellable operating leases as follows:
Offices Other
2012
£’000
2011
£’000
2012
£’000
2011
£’000
Within one year 440 483 15 15
Between one and two years 440 440 14 29
Between two and five years 541 985 1 –
1,421 1,908 30 44
33 Financial risk management
The risk management processes of the Company are aligned to those of the Group as a whole. The Company’s specific risk
exposures are explained below.
Credit risk
The Company’s primary exposure to credit risk relates to cash and deposits that are placed with regulated financial institutions and
amounts due from subsidiaries.
At the Statement of Financial Position date, the credit risk regarding cash and cash equivalent balances of the asset management
business was spread by holding part of the balance with RBS (Standard & Poor’s credit rating A-1), and the remainder in a money
market fund managed by Blackrock which has a Standard & Poor’s credit rating of AAA. The risk of default is considered minimal.
Foreign exchange risk
The amount of the Company’s expenses denominated in foreign currencies is minimal.
The Company activities are principally conducted in GBP, EUR, and USD. Foreign exchange risk arises from income received in
these currencies together with a limited amount of exposure to costs payable. Impax Asset Management Group plc Annual Report and Accounts 2012
49
Financial Statements
33 Financial risk management continued
Foreign exchange risk continued
The Company’s exposure to foreign exchange rate risk at 30 September 2012 was:
EUR/GBP
£000
USD/GBP
£000
Assets
Non-current asset investments 17 3,121
Current asset investments 2,665 –
2,682 3,121
Liabilities
Trade and other payables 7 503
7 503
Net exposure 2,675 2,618
The Company’s exposure to foreign currency exchange rate risk at 30 September 2011 was:
EUR/GBP
£000
USD/GBP
£000
Assets
Non-current asset investments 18 –
Current asset investments 2,797 –
2,815 –
Liabilities
Trade and other payables – 886
– 886
Net exposure 2,815 (886)
The following tables demonstrate the estimated impact on Group post-tax profit and net assets and Company post-tax profit and net
assets caused by a 5% movement in the exchange rate used to revalue significant foreign assets and liabilities, assuming all other
variables are held constant. Post tax profit either increases or (decreases).
Post-tax profit
2012
£000
2011
£000
Translation of significant foreign assets and liabilities
GBP strengthens against the USD, up 5% (31) (104)
GBP weakens against the USD, down 5% 31 104
GBP strengthens against the EUR, up 5% (32) (33)
GBP weakens against the EUR, down 5% 32 33
Liquidity risk
Liquidity risk is the risk that the Company does not have sufficient financial resources to meets it obligations when they fall due or will
have to do so at cost. The Company can request to borrow cash through intragroup loans to maintain sufficient liquidity.
Interest rate risk
At reporting date the Company’s cash and cash equivalents, including bank overdrafts and cash held in money market deposits
balance of £9,594,000 (2011: £9,718,000) were its only financial instruments subject to variable interest rate risk. The impact of 0.5%
increase or decrease in interest rate on the post tax profit is not material to the Company.
Market risk
The Company has made investments in its own managed funds and the value of these investments are subject to equity market risk.
The significant holding at 30 September 2012 that is exposed to equity market price risk is in the Group’s investment held by IGMF.
If the valuation of the holdings in the fund fell by 5% this would have a £166,000 impact on the profit or loss statement.
The significant holdings at 30 September 2011 exposed to equity market price risk were the Group’s holdings in IARF. Impax Asset Management Group plc Annual Report and Accounts 2012
50
33 Financial risk management continued
Fair values of financial assets and liabilities
The Directors consider there to be no difference between the carrying value of the Group’s financial assets and liabilities and their
fair value.
The hierarchical classification of financial assets and liabilities measured at fair value are as follows:
30 September 2012
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Current investments – – 2,665 2,665
There were no movements between any of the levels in the year.
30 September 2011
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
Current investments – – 2,797 2,797
The Company had no financial liabilities for 2012 or 2011.
Financial assets and liabilities by category
30 September 2012
Available
for sale
£000
1
FVTPL –
Held for
trading
£000
Loans
and
receivables
£000
Financial
liabilities
measured at
amortised
cost £000
Financial assets
Cash and cash equivalents – – 16 –
Cash held in money market funds – – 9,594 –
Trade and other receivables – – 79 –
Investments 17 2,665 – –
Total financial assets 17 2,665 9,689 –
Financial liabilities
Bank overdraft – – – (33)
Trade and other payables – – – (537)
Total financial liabilities – – – (570)
1
Fair value through profit and loss
30 September 2011
Available for
sale £000
1
FVTPL
– Held for
trading £000
Loans and
receivables
£000
Financial
liabilities
measured at
amortised
cost £000
Financial assets
Cash and cash equivalents – – 1,172 –
Cash held in money market funds – – 8,546 –
Trade and other receivables – – 42 –
Investments 18 2,797 – –
Total financial assets 18 2,797 9,760 –
Financial liabilities
Trade and other payables – – – (55)
Total financial liabilities – – – (55)
Notes to the Financial Statements continued
For the Year Ended 30 September 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
51
Financial Statements
Notice of Annual General Meeting
Notice is hereby given that the Annual General Meeting of Impax Asset Management Group plc (the “Company”) will be held at the
offices of the Company, Norfolk House, 31 St James’s Square, London SW1Y 4JR at 11.00am on 13 February 2013 for the following
purposes:
As Ordinary Business
To consider and, if thought fit, pass the following resolutions which will be proposed as ordinary resolutions:
1. To receive and adopt the Company’s annual accounts for the financial year ended 30 September 2012 together with the Directors’
Report and the Auditor’s Report on those accounts.
2. To re-elect Vince O’Brien as a Director.
3. To re-elect Ian R Simm as a Director.
4. To reappoint KPMG Audit Plc as auditor of the Company.
5. To authorise the Directors to fix the remuneration of the auditor.
6. To declare a final dividend in respect of the financial year ended 30 September 2012 of 0.75 pence per ordinary share payable
to the holders of ordinary shares on the register of members at the close of business on 25 January 2013.
As Special Business
To consider and, if thought fit, pass the following resolutions which will be proposed as special resolutions:
7. THAT the Directors of the Company be and are hereby empowered pursuant to section 570 of the Companies Act 2006 (the “Act”)
to allot equity securities (within the meaning of section 560 of the Act) for cash, pursuant to the authority conferred by an ordinary
resolution passed on 2 February 2009 or by way of a sale of treasury shares, as if section 561 of the Act did not apply to any such
allotment or sale, provided that the power conferred by this resolution shall be limited to:
(a) the allotment or sale of equity securities, either in connection with an issue or offer of equity securities (including, without limitation,
under a rights issue, open offer or similar arrangement) to holders of equity securities in proportion (as nearly as may be practicable)
to their respective holdings of equity securities, subject only to such exclusions or other arrangements as the Directors of
the Company may consider necessary or expedient to deal with any treasury shares, fractional entitlements or legal or practical
problems under the laws of any territory, or the requirements of any regulatory body or stock exchange in any territory; and
(b) the allotment or sale (otherwise than pursuant to resolution 7(a)) of equity securities up to an aggregate nominal value of £115,582.43.
The power conferred by this resolution shall expire (unless previously renewed, revoked or varied by the Company in general meeting)
at the conclusion of the Company’s next annual general meeting, except that the Company may at any time before such expiry make
any offer or agreement which would or might require equity securities to be allotted or sold after such expiry and the Directors of
the Company may allot or sell equity securities in pursuance of such an offer or agreement as if the authority conferred hereby had
not expired.
8. THAT the Company be and is generally authorised for the purposes of section 701 of the Act to make one or more market
purchases (within the meaning of section 693(4) of the Act) of its ordinary shares of 1 pence each provided that:
(a) the maximum aggregate number of ordinary shares that may be purchased is 11,558,243;
(b) the minimum price which may be paid for each ordinary share is 1 pence;
(c) the maximum price which may be paid for each ordinary share is not more than 105 per cent. of the average of the middle market
quotations for an ordinary share taken from the London Stock Exchange for the five business days immediately preceding the day
of purchase; and
(c) unless previously renewed, varied or revoked, the authority conferred by this resolution shall expire at the conclusion of the
Company’s next annual general meeting save that the Company may make a contract or contracts to purchase ordinary shares
under the authority conferred by this resolution prior to the expiry of such authority which will or may be executed wholly or partly
after the expiry of such authority and may make a purchase of ordinary shares in pursuance of any such contract or contracts.
By order of the Board
Zack Wilson
Company Secretary
14 December 2012 Impax Asset Management Group plc Annual Report and Accounts 2012
52
Notice of Annual General Meeting continued
Notes:
1. Any member entitled to attend and vote at the meeting is entitled to appoint a proxy or proxies to attend, speak and vote in his or
her stead. A member may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different
shares. A member may not appoint more than one proxy to exercise rights attached to any one share. A proxy need not be a
member of the Company. A form of proxy is enclosed for use of members. Completion and return of a form of proxy or CREST
Proxy Instruction (as described in note 4) will not preclude a member from attending and voting in person at the meeting should
he or she so decide. You can only appoint a proxy using the procedures set out in these notes and the notes to the form of proxy.
If you appoint a proxy and attend the meeting in person, your proxy appointment will automatically be terminated.
2. To be valid, the form of proxy and the power of attorney or other authority (if any) under which it is signed (or a notarially certified
copy of such power of authority) must be deposited at the offices of Capita Registrars, PXS, 34 Beckenham Road, Beckenham,
Kent BR3 4TU by 11.00 a.m. on 11 February 2013. To change your proxy instructions simply submit a new proxy appointment
using the methods set out above and in the notes to the form of proxy. Note that the cut-off time for receipt of proxy appointments
also applies in relation to amended instructions; any amended proxy appointment received after the relevant cut-off time will be
disregarded.
3. To be entitled to attend and vote at the meeting (and for the purpose of the determination by the Company of the number of votes
they may cast), members must be entered in the Register of Members at 6.00 p.m. on 11 February 2013 (or, in the event of any
adjournment, 6.00 p.m. on the date which is two days before the time of the adjourned meeting).
4. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for
the meeting and any adjournment(s) thereof by using the procedures described in the CREST Manual. CREST personal members
or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s) should refer
to their CREST sponsors or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for
a proxy appointment or instruction made by means of CREST to be valid, the appropriate CREST message (a “CREST Proxy
Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications and must contain
the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to
be received by the Company’s agent, Capita Registrars Limited (CREST Participant ID: RA10), no later than 48 hours before the
time appointed for the meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp
applied to the message by the CREST Application Host) from which the Company’s agent is able to retrieve the message by
enquiry to CREST in the manner prescribed by CREST. CREST members and, where applicable, their CREST sponsors or voting
service provider(s) should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any
particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions.
It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored
member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such
action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this
connection, CREST members and, where applicable, their CREST sponsors or voting service provider(s) are referred in particular
to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The Company
may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5) of the Uncertificated Securities
Regulations 2001. Designed and produced by Emperor Design Consultants Ltd
Telephone +44 (0)20 7729 9090 www.emperordesign.co.uk
Directors
J Keith R Falconer (Chairman)
Ian R Simm (Chief Executive)
Guy de Froment (Non-Executive)
Peter J Gibbs (Non-Executive)
Vincent O’Brien (Non-Executive)
Mark B E White (Non-Executive)
Secretary
Zack Wilson
Registered Office
Norfolk House
31 St James’s Square
London
SW1Y 4JR
Auditor
KPMG Audit Plc
15 Canada Square
London
E14 5GL
Bankers
The Royal Bank of Scotland Group plc
3rd Floor
280 Bishopsgate
London
EC2M 4RB
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Nominated Adviser and Broker
Execution Noble & Co Limited
10 Paternoster Square
London
EC4M 7AL
Solicitors
Stephenson Harwood
1 Finsbury Circus
London
EC4M 7SH
Officers and Advisors Impax Asset Management Group plc
Norfolk House
31 St James’s Square
London
SW1Y 4JR
United Kingdom
T: +44 (0) 20 7434 1122
F: +44 (0) 20 7434 1123
E: [email protected]
www.impaxam.com
Impax Asset Management Group plc Annual Report and Accounts 2012 ### summary: |
share our Technology ...
...share our Passion
surgical innovations group plc
Annual report and accounts 2010 surgical innovations group plc specialises in
the design and manufacture of innovative devices
for use in minimally invasive surgery (Mis) and
industrial markets.
Specialising in the design and manufacture of creative
solutions for MIS and industrial markets, our pioneering
products are user orientated with ergonomics at the
core of our technology.
our growth strategy:
Continuous innovation and product development
Technology transfer into other areas of MIS
Development of both new and existing OEM relationships
Continued expansion through organic
growth of SI brand in international markets
Explore acquisition opportunities in new
therapeutic markets Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 01
Review of the year 01 - 19
At a glance: Highlights 01
The Queen’s Award 02
At a glance: Our business 04
Chairman’s statement 06
Business and financial review 08
Corporate social responsibility 16
Governance 20 - 35
Board of Directors 20
Senior management and advisers 22
Clinical Advisory Board 24
Surgical Innovations’ trade marks 26
Report of the Directors 27
Report on remuneration 31
Corporate governance 34
Accounts 36 - 61
Report of the independent auditor – Group 36
Consolidated statement of comprehensive income 37
Consolidated balance sheet 38
Consolidated cash flow statement 39
Consolidated statement of changes in equity 40
Notes to the consolidated financial statements 41
Report of the independent auditor – Company 56
Company balance sheet 57
Notes to the Company financial statements 58
Five-year summary 61
Shareholder information 62 - 68
Notice of Annual General Meeting 62
Explanatory notes to the Notice of Annual General Meeting 66
Form of proxy 67
Warning to shareholders – boiler room scams IBC
Revenue (£m)
Operating margins (%)
Pre-tax profit (£m)
Net cash generated from operating activities (£m)
Review of the year
At a glance: Highlights
£7 .045m
+55%
07 08 09 10
4.770
4.312
4.541
7 .045
22%
07 08 09 10
15
19
6
22
£1 .549m
+487%
£2.202m
07
07
08
08
09
09
10
10
0.731
0.428
0.820
0.700
0.264
1.439
1.549
2.202
Financial highlights
Revenue increased 55% to £7 .045 million
(2009: £4.541 million)
Pre-tax profit increased 487% to
£1.549 million (2009: £264,000)
Operating margins increased to 22%
(2009: 6%)
Net cash of £2.2 million generated from
operating activities
Basic earnings per share of 0.48p
(2009: 0. 14p)
Operational highlights
Own brand sales increased 30% to
£3.852 million (2009: £2.956 million);
driven by flagship Resposable
®
products
OEM revenues increased 71% to
£2.506 million (2009: £1.463 million)
Industrial sales boosted by delivery
of £616,000 order
Continued major investment in research
and development, plant and manufacturing
Visit our website:
www.surginno.com The Queen’s Award
Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 02
Surgical Innovations (SI) celebrates winning the Queen’s Award.
Announced on the Queen’s birthday – 21 April 2010 – SI was awarded
the Queen’s Award for Enterprise, the UK’s most prestigious award for
outstanding innovation and business performance.
Receiving the award under the Innovation category , the accolade
acknowledges the technical and clinical excellence SI has achieved
with its pioneering YelloPort+plus
®
– a port access system which
acts as a channel into the body allowing surgeons to carry out
delicate keyhole procedures.
The awards are made each year by Her Majesty Queen Elizabeth II,
on the advice of the Prime Minister , who is assisted by an Advisory
Committee that includes representatives of Government, industry
and commerce and the trade unions.
Speaking about the award Graham Bowland, Managing Director
of Surgical Innovations, said: “We are delighted to win such a
prestigious royal award for our contribution to the healthcare
industry . This award acknowledges the commitment and also
the dedication made by every single one of our employees from
design through to production and also acknowledges Yorkshire’s
thriving healthcare technology sector” .
Chairman Doug Liversidge CBE, added: “The Board would like
to extend its congratulations and say a personal thank you to
everyone involved in this achievement and their contribution
towards the overall success of the Group. ”
“ Designing and developing YelloPort+plus
®
was a real milestone in the history of Surgical
Innovations and travelling to Buckingham
Palace to meet the Queen was a real honour
and pleasure. It certainly is a day I will
always remember. ”
Mike White
Product Development Director Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 03
After the presentation, the Rt Hon David Blunkett MP revealed
how he was a “guinea pig” for the device while he was serving as
Home Secretary. The Labour MP spoke about how he was
diagnosed with gastro-oesophageal reflux during this time and
was introduced to SI’s co-founder Professor Mike McMahon who
operated on him using SI’s instruments.
Other awards we’ve won:
Regional Innovation Award 2010
Medilink Yorkshire and Humber Innovation
and Healthcare Business Award 2010
Individual of the Y ear
(Large Company) 2010
Yorkshire Productivity Awards
Y orkshire Innovator Award 2010
TheBusinessDesk.com
Yorkshire Business Masters 2010
“ I’m here as a recipient of the wonders
of instrumentation that have been
created by this company. ”
Rt Hon David Blunkett
Labour MP
00%
Read more stories like this
www.surginno.com/news Surgical Innovations Group plc Annual report and accounts 2010 04
At a glance: Our business
Review of the year
SI Brand
Specialising in the design and manufacture of creative solutions
for MIS and industrial markets, our pioneering products are user
orientated with ergonomics at the core of our technology .
SI reports under three operating statements:
OEM
We design and manufacture our own successful
brand of Resposable
®
medical devices
SI has introduced advancements such as
YelloPort +plus
®
laparoscopic port access
system, Logi
®
Range resposable laparoscopic
instrument system, FastClamp endoscopic
clamping system and Quick
®
Range single use
laparoscopic instrumentation.
We are proud to be an OEM supplier to several
leading medical device manufacturers
It is testament to our design and manufacturing
skills that our products are in demand by highly
renowned medical companies. SI can offer an
effective solution, providing expertise in the design
and development of an instrument combined with our
manufacturing capability to produce a final device
ready for ultimate sale.
Industrial
We are excited about the growth of the
Group’s business providing industrial
solutions for major international companies
The solutions are based on our core technology
developed over the years in our surgical
instruments business. We believe that there is
scope to develop and expand this segment using
our core technology.
Strategy:
New product development to enhance
the SI brand
Increase our network of specialist
distributors
Expand the use of YelloPort+plus
®
within the US market
Strategy:
Develop the OEM proposition to provide
a full-service solution from concept,
through to the development and
manufacture of innovative devices
Use SI’ s core intellectual property to create
medical device solutions for OEM partners
Continue promotion and adoption of
SI’s resposable philosophy with major
medical device companies
Strategy:
Continue to seek opportunities where
SI’s intellectual property can be
adapted to industrial applications
Continue to engage with major
industrial partners Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 05
OEM revenue
£2,506,000
00%
00%
Read more on this division
page 10 - 11
Read more on this division
page 12 - 13
SI Brand revenue
£3,852,000
Percentage of Group revenue
Key product ranges:
YelloPort+plus
®
Logi
®
Range
Logic
®
Range
36%
54%
Percentage of Group revenue
Percentage of Group revenue
Companies we are working with:
Gyrus
T elefle x
CareFusion
Key Industrial applications:
Aero engine
Power generation
10%
Industrial revenue
£687 ,000
00%
Read more on this division
page 14 - 15
00%
International growth
The growth strategy of the business is based upon
the distribution of SI branded products through
our worldwide independent dealer network.
00%
Read more online
www.surginno.com Surgical Innovations Group plc Annual report and accounts 2010 06
Chairman’s statement
Review of the year
I am pleased to report a record year in
the continuing development of the Group.
Our strategy of producing innovative, high
quality and cost-effective instruments to an
increasingly cost-conscious market, coupled
with the strong investment in 2008 and 2009,
has really started to bear fruit, both for our
own branded and OEM products.
Given the growth of the business, and to
provide greater clarity of progress in the key
markets in which we operate, the Group
is for the first time reporting across three
segments: SI Brand, OEM and Industrial.
Results
Revenue for the period was £7 .045 million
(2009: £4.541 million) and profit before tax
increased nearly five-fold to £1.549 million
(2009: £264,000).
A large part of this growth has arisen from
sales in the OEM segment which accounted
for 35% of total revenue (2009: 32%).
A year of progress and innovation
“ The Group has undergone
yet another year of
transformation, successfully
meeting the demands
of rapid growth. We have
continued to invest heavily
in the business while R&D
capability has undergone
a step-change to speed up
new product development
and improvements to our
existing technology . ”
Doug Liversidge CBE
Chairman
Summary of Chairman’s statement
Total revenue for the period increased by
55% to £7 .045 million and profit before tax
increased nearly five-fold to £1.548 million
Capitalised investment in R&D rose by
57% to £1.674 million
The Board is confident about future growth
prospects of the business for 2011 Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 07
Sales growth of SI branded products was
driven by our Resposable
®
products and
overall revenues were boosted by the delivery
of a £616,000 order in the Industrial segment
in May 2010; sales to industrial customers
accounted for 10% of total revenues for 2010.
Retained profit for the period was £1 .788 million
(2009: £525,000) including a taxation.
Cash flow and investment
During the year the Group generated net cash
of £2.202 million from operating activities,
enabling the Group to continue its strong
investment in product development with
capitalised investment in research and
development (R&D) increasing by 57%
to £1.674 million (2009: £1.066 million),
reflecting a step-change in the structure
of the R&D team as well as a stronger
focus on new product development.
Elsewhere capital expenditure remained
strong with £628,000 invested in plant
and equipment while the total number
of employees and agency staff increased
from 76 at the end of 2009 to 117 at the end
of 2010. We have continued to make staff
appointments in all areas of the business,
while the R&D team has been re-organised
in such a way as to encourage product
concept generation.
The Clinical Advisory Board now consists
of nine highly experienced surgeons covering
a wide range of specialisms in MIS, with
Mr Marco Adamo and Mr Jon Conroy joining
the Board in January 2011, the latter extending
the team’s expertise into arthroscopy.
Dividend
In 2009, SI successfully applied to the courts
to cancel the Group’s accumulated losses.
The purpose of this was to enable the Board
to implement a dividend strategy at such time
as it considers appropriate. While a strategy
remains under review, the Board believes that
at this stage in the Group’s development it
would be more appropriate to continue its
focus on strong inward investment.
Acquisitions
The Board continues to review acquisition
opportunities in the area of MIS where
strong synergies exist with the Group and
where our R&D expertise and in-house
manufacturing capabilities can create
improvements to the products and cost
savings for the end user.
Outlook
Trading in the period since the year end has
been encouraging, particularly from the core
business, where we have seen further orders
for SI branded products, particularly for
YelloPort+plus
®
. The R&D team continues
to improve the SI branded product range to
generate a wider range of new products and
enhancements for our global distributor
network and affirm our position as a leading
innovator within the field of MIS.
In February 2011 we were pleased to announce
the four-year exclusive contract for a minimum
of $2.2 million with US-based Mediflex
Surgical Products (“Mediflex”) with regard
to the inclusion of YelloPort+plus
®
in surgical
trays in the US.
We are also being approached by several other
OEM customers to develop new laparoscopic
products on an exclusive basis.
We remain confident about the future growth
prospects of the business for the remainder
of 2011 and further into 2012 and 2013 as
new products are launched towards the end
of this year and the increasing traction with
OEM customers gains momentum.
I would like to thank the Board and staff
for their tireless work in 2010 and their
contribution to the rapid growth of the
business. We are better positioned than ever
to take full advantage of the opportunities
that are available to us and I look forward
to reporting on the continuing success
of the Group over the coming year.
Doug Liversidge CBE
Chairman
19 April 2011
00%
Innovation
In 2010 SI officially received the Queen ’ s Award for
Enterprise for their pioneering YelloPort+plus
®
device
– a port access system which acts as a channel into
the body allowing surgeons to carry out delicate
keyhole procedures. Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 08
Business and financial review
Operating review
The investment made in the Group throughout
2008 and 2009 started to make a material
impact in 2010 and resulted in a year of
record performance.
All three segments of the business demonstrated
significant growth in 2010. The main focus
remains our core business of MIS, either
through our own branded products or on
behalf of our OEM customers.
We continued to make significant investment in
R&D as well as in our manufacturing capability .
R&D
The Group ’ s continuing success and growth is
dependent on its ability to create new concepts
and intellectual property in the field of MIS.
Significant investment of £1 .834 million was
made in 2010 (2009: £1 .066 million) in the R&D
team as well in a change in its structure. R&D
now employs 28 individuals and is divided into
concept and development teams.
The concept team of seven has been given
a wide brief to generate new ideas across all
areas of MIS. Working closely with the Clinical
Advisory Board, the team has a target to
generate six concepts per annum which can
be transferred to the development team for
further work. The team is working on a
‘‘ The investment made in
the Group throughout 2008
and 2009 started to make
a material impact in 2010
and resulted in a year of
record performance. ’’
Significant investment in research
and development
Graham Bowland
Chief Executive Officer
Summary of Business and financial review
Own-brand sales driven by flagship
Resposable
®
products
Significantly improved trading with
OEM partners
Industrial sales boosted by delivery of
£616,000 order
Continued significant investment in R&D
across a range of products
Creation and expansion of concept and
product development teams Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 09
number of new products and improvements
which are on course to be brought to the
market by the end of 2011. Furthermore, in
2010 the Group filed nine new UK patents
as compared to five in 2009.
The R&D team has also benefited from the
investment in in-house manufacturing, a 3D
printer and advanced CAD technology, with
the result that new ideas and prototypes can
now be presented to potential customers in
a matter of days rather than months.
Looking forward, the Group expects to continue
its high level of investment in R&D as part of an
ongoing strategy to ensure a regular stream of
new products and continual product improvement.
Manufacturing
During 2010, £628,000 was invested
in tooling, plant and machinery; this was
a continuation of the £839,000 invested
in 2009. The focus in 2010 was in areas
where additional capacity was required,
and in plastic injection moulding, which
now enables the Group to manufacture
in-house instrumentation in their entirety.
The manufacturing facility now operates
a continuous daily three-shift system,
constituting a much higher return on capital
employed as compared to 2009. Capacity has
increased in all areas of the facility and this
has been complemented by the introduction
of lean manufacturing practices to optimise
process performance; this will continue
throughout 2011. Computerised data control
measuring has now been introduced to all
areas of the machine shop, giving us the
ability to analyse tolerance information and
enhance quality control.
Our facility allows for further capacity in the
foreseeable future and investment scheduled
for the current financial year will facilitate
the continued growth and optimisation of
Number of patents filed in
the UK alone
9 patents
in 2010
in the UK
alone
09 10
5
9
At a glance: key performance indicators
Research and development
The Group expects to continue its high level of
investment in R&D as part of an ongoing strategy
to ensure a regular stream of new products and
continual product improvement.
The Directors have monitored the overall progress of the Group and the individual
strategic elements by reference to certain financial and non-financial KPIs:
Financial performance
KPIs are in place to measure sales, profitability, rate of divisional growth, cash generation
and returns on capital employed.
Customer satisfaction
KPIs are established to measure and improve customer relationships, quality of service
and our order delivery times.
Employee satisfaction
KPIs are agreed to measure staff morale, training needs and personal development.
Leadership
KPIs are set to measure the performance of Directors and management in conjunction
with overall Group strategy and planning.
Innovation
KPIs are positioned to measure the creativity and inventiveness of employees to improve
the number of patents filed, design rights applied for and internal products developed.
00%
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3.00p
2.00p
1.00p
0.00p
Mar 03
Nov 10
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Mar 06
Nov 05
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Share price performance
Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 10
Business and financial review continued
Operating review continued
Manufacturing continued
the manufacturing arm. Injection
moulding capacity will be expanded and
further automation within the cleanrooms
is planned as part of our wider initiative to
improve operating efficiencies throughout
the Group.
SI Brand
Revenues from SI branded products increased
over the period by 30% to £3.852 million
(2009: £2.956 million). This growth was driven
by SI’s flagship Resposable
®
products,
YelloPort+plus
®
and Logi
®
Range.
Demand for Resposable
®
instruments, where
some elements are disposable and others
reusable, reflects a culture change within
the medical device industry and provides
cost-effective solutions to an increasingly
cost-conscious environment.
The sales and marketing of SI’s products
continued apace in its target regions. The
business development team now consists
of four full time employees who are looking
to expand distribution of SI’s products
through its network of over 45 dealers in
Europe, the Middle East, India, Australasia
and the US. The team continues to attend
international exhibitions in these territories.
In 2010 it became evident that the routes
to market in the US are different for each
product. For example, the most effective way
to distribute the Logi
®
Range is via a master
dealer, while YelloPort+plus
®
benefits from
being distributed via serviced tray companies.
Since the year end we announced a $2.2 million
contract with Mediflex Surgical Products with
regard to the inclusion of YelloPort+plus
®
in surgical trays throughout the US.
In the UK, the Group extended its exclusive
distribution partnership with Elemental
Healthcare for a further three years, with
particular focus on YelloPort+plus
®
and
Logi
®
Range instruments.
New product development and product
enhancement for the SI brand continues
apace and is driven by the R&D team’s close
working relationship with the Clinical
Advisory Board.
All our existing products are under continuous
scrutiny by the R&D team to improve quality
and performance, as well as product line
extensions. Investment in our own machinery
allows us to provide a greater range of disposable
elements that complement the reusable parts.
We are currently expanding the Logi
®
Range
to include a broader range of jaws in different
sizes introducing it to new areas of
laparoscopic surgery .
With increasing focus on safer surgery and
cosmesis (the cosmetic aspect surgery),
there is a drive for smaller and even less
invasive surgery . To respond to this, SI is taking
the strategic step of developing a range of
3mm Resposable
®
instrumentation which is
compatible with its existing non-disposable
handles that are already in the market place.
SI is also designing percutaneous instruments –
surgical devices that access the patient
through a needle puncture rather than a port –
and updates on these developments will be
provided in due course.
As a result the Group has steadily built a
reputation as a leading innovator in the field
of MIS.
OEM
Revenues in the OEM segment increased
during the period by 71% to £2.506 million
(2009: £1 .463 million), of which royalties were
£347 ,000. The growth in this part of the business
is a reflection of our strong relationships with
large medical device companies such as Gyrus,
T eleflex Medical and CareFusion.
Our Product Ranges
design icon
Logi
®
Logic
®
Quick
®
YelloPort
®
YelloPort+plus
® Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 11
What have we done?
Revenues from SI products increased over the period by 30%
to £3.852 million (2009: £2.956 million).
Since the y ear end w e announced a $ 2.2 million contr ac t with Medifl e x
Surgical Products with regard to the inclusion of YelloPort+plus
®
in surgical trays throughout the US.
In the UK, the Group extended its exclusive distribution partnership
with Elemental Healthcare for a further three years.
What’s next?
The business development team is looking to expand further the
international distribution network.
De v el opment o f de vices using SI ’ s fl e x t ec hnol ogy .
Expansion of the Logi
®
Range enabling the devices to be used
in a broader range of laparoscopic procedures.
Taking the strategic approach of developing a range of 3mm
Resposable
®
instrumentation to meet future patient demand
for improved surgical cosmesis.
Demand for Resposable
®
instruments, where some
elements are disposable and others reusable, reflects
a culture change within the medical device industry
and provides cost-effective solutions to an increasingly
cost-conscious environment.
Si brand
Resposable
®
technology is saving hospitals thousands
of pounds a year
Hospitals that switch to Resposable
®
technology – surgical
instruments that combine both disposable and reusable components –
can save thousands of pounds a year, according to information
released by SI and its UK distributor Elemental Healthcare.
Carrying out the study into the use of YelloPort+plus
®
, the
companies discovered that those hospitals who had switched from
disposable to Resposable
®
saved £108,000 over 500 procedures.
‘‘ We don’t want patients and surgeons to have
to compromise on quality, which is why our
Resposable
®
range has been designed to satisfy
both surgeons and procurement managers. It has
the high quality aspect of a disposable product, yet
still provides the cost effectiveness of a reusable. ’’
David Marsh
Co-founder and Joint Managing Director Surgical Innovations Group plc Annual report and accounts 2010 12
Review of the year
Business and financial review continued
Operating review continued
OEM continued
The OEM business is reliant on our partners
to drive business on our behalf and it can, on
occasion, be unpredictable in terms of repeat
revenue streams from individual partnerships.
T o counteract this we collaborate closely with
our partners to gain understanding of the
challenges they encounter in the marketing and
acceptance of their specific OEM product lines.
The greatest attraction to our OEM customers
is undoubtedly our strategic positioning of a
value-added, full-service offering of design,
regulation and manufacturing. This approach
has made us of particular interest to US medical
device companies and it is from here that the
majority of enquiries are now being generated.
Crucially and strategically, the Group retains
the full intellectual property rights for any
devices it develops in return for providing
exclusive worldwide distribution rights to the
OEM customer over a fixed period of time.
Importantly the Group is not offering contract
manufacturing or a long-term assignment of
a licence, with the exception of revenues that
are generated from royalties. The ownership
of all intellectual property enables the Group
to take back distribution rights at the end of
any distribution agreement or if sales targets
are not met.
Industrial
Total revenues for the Industrial segment
during the year were £687 ,000 (2009: £122,000).
As previously stated, the delivery of a
£616,000 order in May 2010 significantly
boosted sales and revenues. As predicted,
sales in the second half of the year returned
to historic levels. We continue to seek
opportunities where our intellectual property
can be adapted to industrial applications and
the Group continues to engage with major
industrial partners. We look forward to
updating shareholders on our progress.
Employees and management
In 2010 we continued to make appointments
across all areas of the business increasing
the total number of employees and agency
staff to 117 (2009: 76). I would like to thank
all our staff and management for their
support and hard work in the last year.
Financial review
Revenue
Revenue increased 55% to £7 .045 million
(2009: £4.541 million). This increase was as
a result of a 71% increase in OEM revenues
to £2.506 million together with increases in
the other two reporting segments, SI Brand
and Industrial.
Gross margin
Gross margin has increased to 50%
(2009: 42%) with the Group again targeting
an improvement in 2011 with increasing
volumes, operational efficiencies and
substantial investment in machinery.
Operating expenses
The Group’s operating expenses increased
in 2010 by £404,000 (26%) as a consequence
of investment in business development
personnel and associated sales and
marketing costs.
Employee numbers increased substantially
during the year in areas which will add future
value to the business and provide a level
of customer service that benefits our
organisation. As a consequence, operating
expenses are projected to increase in 2011
but at levels that provide overall Group
profitability within planned objectives.
Notwithstanding our investment in personnel,
the Group continues to rigorously control
costs and is aware of the need to generate
cash within the business as a means of
funding future capital and product investment.
OEM revenue growth (£m)
£2.506m
+71%
09 10
1.463
2.506 Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 13
OEM
What have we done?
Total revenues for the OEM segment during the year were £2,506,000
(2009: £1,463,000).
La unc h o f ins tr umenta tion r ang e f or T el e fl e x Medical .
Continued collaboration with Gyrus Medical.
Successful transfer of SI valve technology within third-party port
access system.
What’s next?
Continued collabor a tion with T el e fl e x Medical t o ensur e success f ul
adoption of developed technology.
Promotion of SI’s OEM proposition to US medical device companies.
Development of new intellectual property with exclusive rights
to key OEM partners.
The Group’s ability to conceive, develop and
manufacture products to order for OEM partners,
while retaining full intellectual property rights, is
a key factor in securing SI’s future growth.
Surgical Innovations wins five-year contract with T eleflex Medical
Buil ding upon a pr e vious r ela tionship , T el e fl e x ap pr oac hed SI t o
develop new handle technology. The articulating reusable handles
ha v e been under de v el opment b y T el e fl e x and SI f or tw o y ear s and
the unique , fl e xibl e na tur e impr o v es the er g onomics and ease o f
use for surgeons performing keyhole surgery. SI retains the full
intellectual property rights for the devices, subject to the rights of
T el e fl e x t o utilise the int ell ec tual pr operty in the sal e o f the de vices
pursuant to the Supply Agreement. The initial roll out of the
technology will be throughout Europe with the potential for
expansion into the US.
‘‘ This order represents an important milestone
for our OEM business. We have been working
successfully with Teleflex for more than ten years
and we are delighted to continue this successful
relationship. Our in-house design, prototype and
manufacturing facilities allow us to develop new
and improved technologies. ’’
Graham Bowland
Chief Executive Officer Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 14
Business and financial review continued
Financial review continued
Finance income and costs
The net financial expense for the year was
£30,000 (2009: £27 ,000). This reflects the
reduced returns available on the Group’s
cash deposits coupled with the cost of asset
finance. We continue to finance assets
used in the manufacturing processes of the
business, ensuring funds remain within the
Group for both internal product development
and our working capital needs.
Profitability and operating margins
The Group’s operating profit for 2010 was
£1.579 million (2009: £291,000). This is after
charging £8,000 of non-cash expenditure
relating to share-based payments. We are
greatly encouraged by the substantial uplift
in operating margin to 22% (2009: 6%). We
believe there is further room for improvement
through product mix and continued capital
investment within the manufacturing facility.
Capitalised development costs
The Group has a policy of continuous product
development both for SI Brand and OEM
partner devices. As in previous years, the
Board is confident in the success of these
products and accordingly £1.674 million of
costs have been capitalised during the year,
increasing the total amount of capitalised
costs to £3.984 million.
YelloPort+plus
®
continues to generate revenues
and under the Group’s accounting policy
£73,000 of associated development costs
were amortised in the period (2009: £101,000)
together with £111,000 in relation to other
products where revenue commenced in
the period.
Following review the Board recognised an
impairment charge of £334,000 within the
financial statements and at 31 December 2010
confirmed that no further provision for
impairment was necessary.
Foreign currency
The Group maintains foreign currency bank
accounts and, wherever possible, supplier
payments are made in Euros or Dollars
to utilise currency receipts.
The Group has used forward exchange
contracts and will continue to monitor the
need for such contracts depending upon
the level of natural hedging achievable.
Taxation
The Group recognised a tax credit of £239,000
resulting from deferred tax, reflecting the
extent to which recoverability of tax losses
can be foreseen with reasonable certainty.
The Group holds deferred tax assets on the
balance sheet of £432,000 (2009: £193,000).
In addition there are a further £16. 100 million
(2009: £14.600 million) of tax losses that have
not been recognised.
Earnings per share (EPS)
The Group achieved 0.48p (2009: 0.14p)
underlying basic EPS in 2010. There were
shares issued during the year and full details
of all the EPS calculations are set out in note
6 to the accounts.
Cash and net funds
At the end of 2010 the Group had £442,000
(2009: £622,000) in net funds. Net funds are
defined as cash and cash equivalents less
obligations under finance leases.
Working capital
Working capital increased to £3.942 million
(2009: £3.630 million) as a result of a reduction
of £211,000 in trade and other payables
to £607 ,000 (2009: £818,000). The business
generated net cash from operations of
£2.202 million (2009: £1.439 million), however ,
after accounting for the acquisition
of non-current assets of £2.044 million
(2009: £1.517 million), there was a net cash
increase in the year of £60,000
(2009: decrease of £316,000).
Industrial revenue growth (£’000)
£687 ,000
+463%
09 10
122
687 Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 15
What have we done?
Total revenues for the Industrial segment during the year were
£687 ,000 (2009: £122,000).
Delivered a £616,000 order in May 2010 for our key industrial partner.
What’s next?
Continue to seek opportunities where SI’s intellectual property can be
adapted to industrial applications.
Continue to engage with major industrial partners.
The Group’s Industrial segment provides industrial
solutions for major international companies. We
believe there is scope to develop and expand this
segment using our core technology .
indUS trial
Surgical Innovations delivers major industrial order
On 17 May 2010, SI announced that it had delivered a £616,000
order to one of its key industrial partners. The order, originally due
for completion in December 2009, was delayed as a consequence
o f thir d par ty t ec hnical difficulties , whic h w er e r esolv ed in Mar c h
2010. This is the largest single order the Group has received within
its industrial division.
‘‘ Fulfilling this order represents an important step
for our industrial division and we are delighted that
a commercially successful outcome has arisen
from the eighteen month development project.
We look forward to continuing development of the
industrial business as we strive to develop the
technology for a wider range of applications within
the field. ”
Graham Bowland
Chief Executive Officer Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 16
Corporate social responsibility
Committed to our stakeholders
Impact on society
At Surgical Innovations we strive to play
an integral role in society and our core value
is to meet the needs of forward-thinking
surgeons and clinicians by supplying
high-quality, cost-effective instrumentation
that empowers surgeons and provides
patients with an improved quality of life.
SI has chosen to bring “manufacturing home”
to West Yorkshire – a goal that has been
achieved through total capital investment of
£2.6 million since moving facilities in April
2008. This strategic move has enabled us to
design and manufacture all products
in-house thereby tripling our workforce by
the end of 2010. It has also led to a significant
reduction in the Group’s carbon footprint.
On a fundraising level, SI organises internal
activities to raise money for a local children’s
charity and we actively encourage employee
participation in local fundraising events,
such as a recent abseiling event at the
Royal Armouries (Leeds). Many members
of the SI team also regularly participate
in sponsored sporting challenges for their
own individual charities for which SI has
a policy of financially matching employee
sponsorship contributions.
Environmental impact
SI’ s objective is to create a climate of excellence,
not only for our products and services, but also
for employees and persons affected by our
activities and the environment. In order to achieve
this we have an Environmental Policy and
are committed to regular monitoring of our
environmental performance against objectives
regulated by a committed managed system.
The Environmental Policy reviews the impact
of all SI’ s policies, operations and investment
decisions and covers emissions and fuel
efficiency , noise, waste, energy use and recycling.
Relations with suppliers, partners and
contractors
SI uses criteria of a reputable standard to select
major suppliers, partners and contractors
and ties to ensure that all our major suppliers
meet the requirements of our ISO 9001:2000.
Recently we helped two of our major suppliers
to implement this criteria by continued support
and encouragement. In all cases we will try
to ensure a long-term partnership which
benefits all parties involved.
Relations with regional stakeholders
Working with key stakeholders across the region
allows SI to play a key role in the healthcare
sector of Yorkshire and Humber, and enjoying
a long-standing relationship with both
Medilink and Medipex enables the Company
to benefit from the sector expertise available.
Relations with regional educational institutes
Surgical Innovations strives to play an
integral role in society and 2010 has seen
the Company venture further into the wider
community, recognising the importance to
invest in the younger generation by working
with local schools and universities.
A group of BTEC Science students from a
local high school visited Surgical Innovations
in February to learn about the potential career
opportunities available to them before being
given a tour of the factory and set a
design challenge.
Alongside this activity, SI has been working
the Thackray Medical Museum to create an
individual exhibit for the museum which will
go on display in the next quarter. The purpose
of the exhibit is to showcase SI’s world-leading
products, explaining the history of the Company
and encouraging schoolchildren to understand
the diverse opportunities available in a medical
career – from doctor to designer.
Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 17
The strategy for SI’s work with the
younger generations is to inform and educate
schoolchildren on the opportunities available
to them through design and manufacturing
with a company such as SI and to plant the
seed of enthusiasm required for a career
in innovation.
Implementing this strategy, SI held an
Open Day, welcoming school leavers in the
area to learn more about the manufacturing
apprenticeships on offer, whilst gaining an
overall appreciation of the business.
Working with universities in the region, SI
is currently running two Knowledge Transfer
Partnerships (KTP) with the University of
Leeds and the University of Bradford.
KTPs aim to help businesses improve their
competitiveness and productivity through
the better use of knowledge, technology and
skills that reside within the knowledge
base, through specifically managed projects
organised by SI and the universities to ensure
commercial benefit.
In addition to this, SI is also working with both
the University of Bradford and the University
of Leeds to sponsor students through their
Masters degree studies. This collaboration
will enable students to work on specific
SI projects, guided by representatives of
academia and industry, to provide them
with valuable research and development
knowledge within a commercial environment.
Relations with employees
SI has a happy and motivated team of
employees and endeavours to ensure the
highest working standards for all staff.
An example of this is Business Improvement
Training, which is carried out through the NVQ
Awards, designed to give employees an
important insight into the layout and
processes of SI’s business.
SI has a number of safe working practices in
place. These include sending representatives
on the NEBOSH programme, a nationally
recognised qualification that covers the main
legal requirements for health and safety in
the UK.
A Health and Safety Committee, made up
of employees from across the organisation,
is in place to continually review and update
the Health and Safety Policy. This ensures a
safe working environment for both employees
and visitors to the SI facility.
To assess staff performance, annual
appraisals are carried out by department
heads and an annual ‘Employee of the Year’
award takes place to recognise and reward
Who we collaborate with: Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 18
Corporate social responsibility continued
Relations with employees continued
achievements made throughout the year.
There are also regular team building events to
increase staff morale, unite the organisation
and encourage inter-departmental interaction.
In a bid to ensure a work life balance, SI offers
flexibility in working hours and extended
holidays for long service, as well as extra time
off at Christmas if all work is completed on
time. These excellent terms of employment,
which are above and beyond industry norms,
have led to a high working morale and high
staff retention; many employees have worked
for SI for over ten years.
SI has employed an HR Manager who will
look at reviewing and implementing policies
and procedures with an objective of gaining
the Investors in People accreditation.
Relations with customers
SI’s ultimate customer is the surgeon and
the true evaluator of SI products. A high
proportion of sales consist of repeat
purchases, which is a meaningful indicator
of quality, as surgeons will only use products
that deliver their needs and offer patients
the highest level of care.
SI continually looks to improve the quality
of these products by advancing technologies,
seeking to understand customer requirements
and being advised by its Clinical Advisory
Board, which is made up of internationally
renowned surgeons.
All products are designed to meet the
requirements of ISO 9001:2000 and
ISO 13485:2003 for sales in Europe and
where appropriate meet similar regulations
throughout the world. Specific quality
objectives are also set by the management
team during the quality system review
process and these are communicated
to all employees on a regular basis.
Finally, to ensure that all our products exceed
customers ’ expectations SI continually monitors
their performance, carrying out post market
surveillance with all our customers
and distributors.
VIP visits
2010 has been a busy year for SI, with VIP
visits from across the country.
Following his appointment as Prime Minister
in June 2010, we were delighted to welcome
the Rt Honourable David Cameron to our
Leeds facility on his first major visit since
the election.
Greg Mulholland, MP for Leeds, spoke
after his visit: “We are incredibly proud
that this innovative company is designing
and manufacturing leading-edge surgical
equipment and exporting all round the world.
It shows that, with vision, flair and drive,
British companies can be world leaders.
It is so exciting that Surgical Innovations
is doing this right here in Leeds” .
Following this exciting visit, SI was honoured
once again when HRH The Princess Royal
visited the Head Office in February 2011.
HRH The Princess Royal met staff and took
a tour of the design and manufacturing
facilities before officially opened the Company’s
Injection Moulding Centre.
The visit was a real honour and further
recognition of the achievements of the
entire team in recent years.
Some of the country’s finest surgeons
travelled to Leeds to mark the event as well
as UK and international distributors and a
number of stakeholders to celebrate the
success of SI and highlight how the Company
is waving the British flag of excellence around
the world.
2010 has been a busy year for SI, with VIP
visits from across the country Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 19
“This highlights how close collaboration
and strong innovation have helped to develop
Surgical Innovations into a successful
company that is waving the British flag
of excellence around the world. ” Surgical Innovations Group plc Annual report and accounts 2010 20
Governance
Board of Directors
Name: Doug Liversidge CBE
Position: Non-executive Chairman
Age: 74
Board committees: Remuneration
Committee (Chairman), Audit Committee
Doug was educated in Sheffield and graduated
with a degree in Metallurgy in 1957 . Employed
for 21 years at British Steel, Doug attained the
position of Chief Quality Manager.
After moving to G W Thornton as Managing Director
and subsequently appointed Chief Executive, Doug
guided the company through its flotation on the
London Stock Exchange in March 1987 and was
instrumental in the company winning numerous
prestigious business awards including the Queen’s
Award to Industry for Export Achievement and twice
the Cutlers Acclaim Award for Corporate Growth.
In 1991, Doug was awarded South Yorkshire
Businessman of the Year.
Until recently he was Chairman of Medilink Yorkshire
and Humber and proud to hold the office of Master
Cutler in Hallamshire from 1998 to 1999. In 2000,
Doug was appointed Chairman of the South Yorkshire
Learning & Skills Council by Government Office, Leeds
and awarded the CBE in the 2000 New Year’s Honours
List for services to industry.
Name: Graham Bowland
Position: Chief Executive Officer
and Company Secretary
Age: 49
Graham graduated from Cardiff University with
an honours degree in Physics in 1982. He qualified
as a Chartered Accountant in 1987 whilst working
for a local firm of chartered accountants.
After gaining substantial experience in the private
sector, Graham joined SI in February 1999 as
Financial Controller and was promoted in the
same year to the Group Board as Finance
Director and Company Secretary.
Appointed Joint Managing Director of Surgical
Innovations Limited in 2000 and made sole
Managing Director in 2008, Graham has been
instrumental in building upon the Company’s
reputation within the industry for innovation and
in-house manufacturing. In 2010, Graham became
Group Chief Executive Officer, continuing to build
the Company’s strategy as well as representing the
Leeds city region on its Innovation Panel reporting
to the Leeds Enterprise Partnership.
Name: Colin Glass
Position: Non-executive Director
Age: 67
Board committees: Audit Committee
(Chairman), Remuneration Committee
Colin is a Chartered Accountant and a partner in
Winburn Glass Norfolk. He is a founder Director of
Surgical Innovations Limited and was instrumental
in securing early funding and in the reverse takeover
of Haemocell plc in 1998, which resulted in the
quotation of the Company on AIM.
Colin is a Non-executive Director of several companies,
including Straight PLC and Getech Group PLC. He is the
Chairman of SI’s Audit Committee and a member of
SI’s Remuneration Committee. Using his expertise
in financial and corporate advisory matters, Colin
has built up a wide range of contacts from various
industries and organisations which benefit the
companies with which he is involved. Annual report and accounts 2010 Surgical Innovations Group plc 21
Governance 20 - 35
Name: Ray Simkins
Position: Non-executive Director
Age: 67
Board committees: Remuneration
committee, Audit Committee
Ray is a mechanical engineer by training and has
qualifications from Buckingham Technical College
and Massachusetts Institute of Technology (MIT).
He has worked for Getz since 1966 where he
has represented their business interests in the
US, Japan, Thailand, Malaysia and Singapore.
He is currently President of the Getz Group with
interests throughout the Asia/Pacific region.
Ray has been a Non-executive Director since 1996
and was instrumental in securing investment from
Getz prior to the reverse takeover of Haemocell plc
in 1998. Ray is a member of both the SI’s Audit
and Remuneration Committees and, with a wealth
of experience in international distribution
management, he provides invaluable input into
many aspects of the Board’s activities.
Name: Professor Mike McMahon
Position: Non-executive Clinical Director
Age: 68
Mike, a founder Director of Surgical Innovations
Limited, became Non-executive Clinical Director
in October 2007 , holds a Chair in Surgery at the
University of Leeds and is Consultant Surgeon
at the Nuffield Hospital, Leeds.
He is the immediate past President of the
Association of Laparoscopic Surgeons of
Great Britain and Ireland (ALS) and was recently
a Royal College of Surgeons tutor in MIS. He also
established the Leeds Institute for Minimally
Invasive Therapy .
Mike’s past roles include President of the Pancreatic
Society of Great Britain and Ireland and Chairman
of the Education Committee of the European
Association of Endoscopic Surgery. Surgical Innovations Group plc Annual report and accounts 2010 22
Governance
Senior management and advisers
Mike graduated from Brunel University with a first
class honours degree in product design in 1996.
After winning the James Dyson award for product
design at London’s New Designers exhibition,
he worked for Dyson Appliances before joining
SI as a design engineer in 1997 .
The first project that Mike was involved with at SI,
Logic
®
, went on to win Best Medical Device in the
1999 Plastics and Rubber Weekly (PRW) Awards
for Excellence and has patents filed worldwide.
A member of the Chartered Society of Designers
since 2002, Mike was appointed to the Management
Board of SI as Design Director in 2006 and is
dedicated to expanding the Company’s product
portfolio with innovative, ergonomic and commercially
successful instrumentation.
Name: Mike White
Position: Product Development Director
Age: 37
Paul joined the Company as Manufacturing
Director in 2005. He has a background in mechanical
engineering with extensive experience of manufacturing
both in the UK and overseas.
Paul began his career as an apprentice at
Renolds Power Transmission in Bradford before
moving into management at a sub-contract
engineering company in Heckmondwike. He then
moved into production management at Pinco,
Bradford, a textile engineering manufacturer.
Paul also spent eight months in the US, where he
was responsible for setting up a textile engineering
plant, before returning to the UK where he joined SI.
Paul has been instrumental in the recent setting
up of in-house manufacturing thereby enabling
the more effective and efficient manufacture
of products.
Name: Paul Birtles
Position: Manufacturing Director
Age: 45
Name: Stephen Seed
Position: Quality Manager
Age: 45
Stephen was educated in Sheffield and graduated
with a degree in Mineral Processing in 1988.
He began his quality career in the County Durham
mining industry, soon moving into the chemical
industry and then into engineering.
Stephen now has over 20 years’ experience as
a quality manager. He is a Chartered Quality
Professional, member of the Chartered Quality
Institute and is a qualified lead auditor for ISO 13485,
the medical device manufacturing standard.
Stephen joined SI as Quality Manager in 2006, since
when he has completely rewritten the Company’s
quality systems and employed his Lean Six Sigma
experience to continually improve procedures
and practices. Annual report and accounts 2010 Surgical Innovations Group plc 23
Governance 20 - 35
Duncan studied Business Studies at Sheffield
Polytechnic, completing his studies in 1977 . He then
went on to study for his professional accountancy
examinations, becoming an Associate Member
of the Chartered Institute of Management
Accountants (CIMA) in 1984.
Duncan has spent the majority of his professional
career working in both civil and mechanical
engineering businesses. He joined SI in 2008
as a member of the senior management team and
has since built a strong financial and administrative
team providing valuable support to the Board of
Directors and the Company.
Name: Duncan Pidsley
Position: Financial Controller
Age: 54
Name: Mark Hughes
Position: Business Development Manager
Age: 29
Mark is fluent in Spanish and has a strong
command of several other European languages,
having left Durham University in 2004 with a BA (Hons)
in Modern European Languages and an MSc
in Computer Science.
Mark has developed his career working in UK based
business in both national and international business
sales roles, managing challenging relationships
with large firms such as Smith and Nephew
and Caterpillar.
Joining Surgical Innovation Limited’s export sales
team in late 2009, Mark travels thousands of miles
a year to meet distributors and visit international
exhibitions and his five-strong team has made
significant contribution to the 2010 sales growth.
Company Secretary and registered office
N Graham Bowland
Clayton Wood House
6 Clayton Wood Bank
Leeds LS16 6QZ
Registered number
2298163
Nominated adviser
Seymour Pierce Limited
20 Old Bailey
London EC4M 7EN
Solicitors
Walker Morris
Kings Court
12 King Street
Leeds LS1 2HL
Auditor
Grant Thornton UK LLP
No 1 Whitehall Riverside
Leeds LS1 4BN
Broker
Seymour Pierce Limited
20 Old Bailey
London EC4M 7EN
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Bankers
HSBC Bank Plc
7 Prospect Crescent
Harrogate HG1 1RN
Financial public relations
The Communications Portfolio
7 Ensign House
Admirals Way
London E14 9XQ Surgical Innovations Group plc Annual report and accounts 2010 24
Governance
Clinical Advisory Board
Peter qualified from Leeds Medical School in 1983
with honours after initially gaining a first class
honours degree in Pathology in 1980. After basic
surgical training at The General Infirmary in Leeds
and becoming a Fellow of the Royal College of
Surgeons, he went on to complete a Doctorate in
Medicine with research into new techniques in the
surgery for inflammatory bowel disease. This work
was awarded the prestigious Patey Prize by the
Surgical Research Society in 1990.
His research interests continued as a Lecturer
in Surgery at the University of Liverpool before
working as a Chief Resident at the Mayo Clinic,
Rochester, Minnesota.
In 1996, he was appointed to the staff at the Leeds
General Infirmary and has gone on to develop a
national referral practice for the management of
recurrent pelvic malignancy. He has been involved
in the laparoscopic management of colon and rectal
disease since its inception and currently runs an
active training and research fellowship. He has
lectured throughout the world and has published
over 160 papers.
Ian graduated as an Operating Department
Practitioner in 1994. He has continued to train
in this area and in 2004 completed a Diploma
in Advanced Surgical Practice at Huddersfield
University and went on to complete The Royal
College of Surgeons Basic Skills course. He is
a surgical first assistant for the Leeds General
Infirmary, where he has worked since 1981.
Ian specialises in laparoscopic bariatric surgery,
upper GI and cholorectal surgery. He has been
the first assistant in over 500 bariatric cases
and 50 colorectal pouch procedures in the UK.
Name: Peter Sagar
Key speciality: Colorectal
Name: Ian Brayshaw
Key speciality: Laparoscopic bariatric
Philippe qualified from the Medical School in Nancy
and then qualified from Poitiers in general surgery
in 1986 and urology in 1989. He is now a consultant
at King’s College Hospital in London, Honorary
Professor of Urology at The Beijing Hospital and
Honorary Consultant Laparoscopist at Guy’s
Hospital and University College of London Hospital.
His main field of interest lies in pioneering
laparoscopic procedures and he has performed over
2,000 major laparoscopic procedures in oncological
urology, uro-gynaecology and abdominal surgery.
Philippe has been teaching and mentoring radical
prostatectomy in 40 centres for the past three years.
He is currently a course director for laparoscopic
skills (BAUS, China, RCS, UCLH, ESI) and is an adviser
to the Royal College of Surgeons for laparoscopic
skills courses. He is an adviser on the board
of the International Society of Cryosurgery.
Name: Phillippe Grange
Key speciality: Laparoscopy and Urology
Marco is a Consultant Surgeon and Bariatric
Surgery Lead at the prestigious University College
London Hospital (UCLH) where he has worked since
2007 . He graduated in 1995 with full marks and
honours in Palermo, Italy, and also completed his
training in general surgery at the same university.
He has been living in the United Kingdom since
2000, dedicating his activity to advanced
laparoscopic surgery and laparoscopic bariatric
(obesity) surgery. He was awarded an MD by the
University of Leeds for his research on appetite
hormones and bariatric surgery.
He is a pioneer of single incision bariatric surgery
having performed the first single incision
laparoscopic sleeve gastrectomy in the UK and
often runs advanced training courses for UK and
European surgeons in laparoscopic bariatric
surgery and laparoscopic hernia surgery.
Name: Marco Adamo
Key speciality: Bariatric
The Clinical Advisory Board brings
together a wealth of experience
and expertise. It works closely
with the design team to develop
and test products. Annual report and accounts 2010 Surgical Innovations Group plc 25
Governance 20 - 35
Gary comes to us as the Director of Surgery at
St Francis Hospital, New York with an international
reputation in minimally invasive surgery and
surgical oncology. Having trained in South Africa
as a gastrointestinal surgical oncologist, he
pioneered numerous laparoscopic techniques
and was responsible for the development
of flexible laparoscopy, which has become
an integral part of minimally invasive
intra-abdominal solid tumour resection and
minimally invasive esophagectomy (MIE).
He spent the past decade as Chief of General
Surgery at Long Island Jewish Medical Center
and, in 2005, was appointed Vice Chairman of
Surgery for the NSLIJ Health System and Site
Director for Surgery at the LIJ Medical Center.
He is Associate Professor of Clinical Surgery
at the Albert Einstein College of Medicine.
Upon immigrating to the US, Gary was appointed
Assistant Professor of Surgery at SUNY Stony Brook.
During that tenure he was appointed Medical
Director of the Operating Room at University
Hospital and was appointed Chairman of the
Medical Executive Committee in 1998.
He has published extensively in his field and
has been invited to lecture throughout the world,
including Britain, South Africa, Chile, Argentina
and Colombia. He is also a standing member of
the American College of Surgeons’ Ultrasound
Education Faculty.
Gary has patents in surgical safety devices and
has lectured internationally on optimising the
surgical care environment. He participates on
many national clinical trials in novel cancer
therapies and is on the Clinical Advisory Board
of numerous cutting edge technology companies.
Alberic was Senior Lecturer in Surgery at
St George’s Hospital Medical School from 1990
to 2003, Consultant General and Upper Digestive
Surgeon at St George’s Hospital from 2004 to 2007
and Director of Bariatric Surgery at University
College London Hospital from 2007 to 2009.
He has been a Council member of the
British Obesity Surgery Society (BOSS) for
four years and is currently President of the
society. He chairs the National Bariatric
Surgery Registry Data Committee.
He first undertook laparoscopic cholecystectomy
in 1991, TEPP hernia repair in 1992 and was the
first UK surgeon to offer day-case laparoscopic
cholecystectomy and hernia repair.
He has been active in bariatric surgery since
1995 when he took on the aftercare of a cohort
of patients who had undergone weight-loss
surgery in the 1970s and 80s. The team he now
leads has 14 years’ experience in the NHS and
the independent sector.
Alfred, consultant at University College Hospital,
London, achieved a distinction in obstetrics and
gynaecology in 1985 and went on to obtain his
Doctorate in Medicine from the University of
London in 1993.
Alfred gained his Part II to become a Member of the
Royal College of Obstetricians and Gynaecologists
in 1993, having obtained Part I in 1987 .
He has written a book entitled “Basic Urogynaecology”
(1993) and has also contributed to many others,
including “The Investigation and Management of
Urinary Incontinence in Women” (1995) and a more
recent chapter in R Kearney , A Cutner “Laparoscopic
Colposuspension and Paravaginal Repair” . Alfred has
been a member of several committees and currently
holds the position of President of the BSGE.
Jon is a Consultant Orthopaedic Surgeon specialising
in joint replacements and arthropscopic, or “keyhole” ,
surgeries to the hip and knee and is a member of the
British Hip Society, International Society of Hip
Arthroscopy, The British Orthopaedic Association
and a Fellow of The Royal College of Surgeons
of England. He also holds a Masters degree in
Mechanical Engineering from the University of
Leeds and has published research in several
medical journals and won the GlaxoSmithKline
Orthopaedic Essay Prize in 2005 and the John Fitton
Prize for Orthopaedic Specialist Registrars in 2006.
Name: Gary Gecelter
Key speciality: MIS and Oncology
Name: Alberic Fiennes
Key speciality: Bariatric
Name: Alfred Cutner
Key speciality: Gynaecology and Urology
Name: Jon Conroy
Key speciality: Orthopaedics Governance
Surgical Innovations Group plc Annual report and accounts 2010 26
South
UK EU US Africa
Logi
® ®
™ ™
Logic
® ® ®
™
Quick
®
®
™ ™
Resposable
® ®
™ ™
Surgical Innovations
™
™
®
®
SwingTop
® ® ®
®
YelloPort
® ® ®
®
YelloPort+plus
® ® ®
®
FrictionFinish
™
®
™ ™
Surgical Innovations’ trade marks
as at 31 December 2010 Annual report and accounts 2010 Surgical Innovations Group plc 27
Governance 20 - 35
The Directors present their annual report, together with the audited financial statements, for the year ended 31 December 2010.
Principal activities and business review
The Company is the holding company of a group whose principal activities in the year involved the design, development and manufacture of
devices for use in minimally invasive surgery (MIS) and industrial markets. Surgical devices are targeted at the operating theatre environment
in both public and private hospitals. In international markets, the Group sells through independent healthcare distributors, through original
equipment manufacture (OEM) and licensing contracts with major suppliers of medical equipment. A review of the Group’s activities during
the year is included within the Chairman’s statement on pages 6 and 7 and the Business and financial review on pages 8 to 15.
Results and dividends
The Consolidated statement of comprehensive income for the year is set out on page 37 .
The Directors believe that at this stage in the Group’s development it would be more appropriate to continue its focus on strong inward
investment and hence are not recommending the payment of a dividend and the whole of the gain will be transferred to reserves.
Research and development
The Group’s activities in this area have focused principally on the continuing development of innovative instruments for use in the field of MIS.
Employees
The commitment and ability of our employees are key factors in achieving the Group’s objectives.
Employment policies are based on the provision of appropriate training, whilst annual personal appraisals support skill and career development.
The Board encourages management feedback at all levels to facilitate the development of the Group’s business. The Group seeks to keep
its employees informed on all matters affecting them by regular management and departmental meetings. The Company operates an
Enterprise Management Incentive (EMI) share option scheme.
It is the Group’s policy to give full and fair consideration to all applications for employment from disabled persons having regard to their particular
aptitudes and abilities and to encourage the training and career development of all personnel employed by the Group, including disabled persons.
Should an employee become disabled, the Group would, where practicable, seek to continue the employment and arrange appropriate training.
Directors
The names of the current Directors of the Company and their biographical details are set out on pages 20 and 21. All Directors served
throughout the year.
Directors’ interests
The interests in the share capital of the Company of those Directors in office at the end of the year were as follows:
31 December 1 January
2010 2010
Ordinary shares of 1p each Beneficial Beneficial
D B Liversidge CBE 5, 171,821 4,171,821
N G Bowland 4,217 ,498 1,617,498
C Glass 4,881,602 3,881,602
R Simkins 2,369,461 2,369,461
M J McMahon 13,188,281 12,188,281
Apart from the interests disclosed above and the options referred to on page 33, no Directors held interests, at any time during the year, in the
share capital of the Company or other Group companies. There have been changes in Directors’ interests between the year end and 19 April 2011.
Otherwise than as disclosed in note 16, no Director has an interest in any material contract, other than contracts of service and employment,
to which the Group was a party.
Copies of the Directors’ service contracts are available for inspection at the registered office of the Company, Clayton Wood House,
6 Clayton Wood Bank, Leeds LS16 6QZ, and will be available at this year’s Annual General Meeting (AGM) for 15 minutes prior to and during
the whole course of the Meeting.
Report of the Directors Governance
Surgical Innovations Group plc Annual report and accounts 2010 28
Report of the Directors continued
Substantial shareholdings
Other than the Directors’ own holdings, the Board has been notified that as at 14 April 2011 the following shareholders on the Company’s
share register were interested in 3% or more of the issued ordinary share capital of the Company:
Number
of shares %
Getz Bros & Co. (BVI) Inc. 49,248,810 12.55
Barclayshare Nominees Limited 31,124,894 7.94
R C Greig Nominees Limited 23,699,054 6.04
Pershing Nominees Limited 20,530,492 5.23
The Bank of New York (Nominees) 19,155,416 4.88
TD Waterhouse Nominees (Europe) 15,539,075 3.96
HSDL Nominees Limited 13,546,962 3.45
Share issues
During the year the following ordinary shares of 1p were issued in respect of exercised share options:
600,000 at 1.5p
3,000,000 at 1.7p
3,050,000 at 2.0p
1,000,000 at 3.0p
Creditor payment policy
The Group’s current policy concerning the payment of suppliers is to:
settle the terms of payment with those suppliers when agreeing the terms of each transaction;
ensure that those suppliers are made aware of the terms of payment by inclusion of the relevant terms in contracts; and
pay in accordance with its contractual and other legal obligations.
The payment policy applies to all payments to creditors for revenue and capital supplies of goods and services without exception.
The Company has trade creditors.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Report of the Directors and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have to prepare the
financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). Under
company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state
of affairs and profit or loss of the Company and Group for that period. In preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and accounting estimates that are reasonable and prudent;
applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions
and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements
comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities. Annual report and accounts 2010 Surgical Innovations Group plc 29
Governance 20 - 35
Statement of Directors’ responsibilities continued
Insofar as each of the Directors is aware:
there is no relevant audit information of which the Company’s auditor is unaware; and
the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and
to establish that the auditor is aware of that information.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Summary of Key Performance Indicators (KPIs)
The Directors have monitored the overall progress of the Group and the individual strategic elements by reference to certain financial
and non‑financial KPIs.
Financial performance
KPIs are in place to measure sales, profitability, rate of divisional growth, cash generation and returns on capital employed.
Customer satisfaction
KPIs are established to measure and improve customer relationships, quality of service and our order delivery times.
Employee satisfaction
KPIs are agreed to measure staff morale, training needs and personal development.
Leadership
KPIs are set to measure the performance of Directors and management in conjunction with overall Group strategy and planning.
Innovation
KPIs are positioned to measure the creativity and inventiveness of employees to improve the number of patents filed, design rights applied
for and internal products developed.
Charitable donations
The Group made a small number of charitable donations during the year, principally to local projects and sponsorship of employees charitable
fundraising events.
Political donations
The Group made no political donations.
Principal risks and uncertainties
The management of the business and the nature of the Group’s strategy are subject to a number of risks.
The Directors have set out below the principal risks facing the business.
The Directors are of the opinion that a thorough risk management process is adopted which involves the formal review of all the risks
identified below. Where possible, processes are in place to monitor and mitigate such risks.
Patents and proprietary rights
The Group’s success is dependent upon its ability to establish, file and protect intellectual property relating to the development of its
proprietary products for eventual sale or license. Whilst the Group seeks patent protection where appropriate for its developments, there can
be no assurance that patent applications will mature into granted patents or that existing patents will provide the Group with sufficient
protection in the case of infringement by third parties, or be successfully challenged or revoked by competitors.
Regulatory approval
As an international business a significant proportion of the Group’s products require registration from national or federal regulatory bodies
prior to being offered for sale. With our major product lines now having FDA approval in the US, we are subject to their audit and inspection
of our manufacturing facilities. There is no guarantee that any product developed by the Group will obtain and maintain national registration
or that the Group will always pass regulatory audit of its manufacturing processes. Failure to do so could have severe consequences upon
the Group’s ability to sell products in the relevant country.
Product obsolescence
Due to the nature of the market in which the Group operates, products are subject to technological advances and, as a result, obsolescence.
The Directors are committed to the research and development strategy in place and are confident that the Group is able to react effectively
to the developments within the market. Governance
Surgical Innovations Group plc Annual report and accounts 2010 30
Report of the Directors continued
Principal risks and uncertainties continued
Dependence upon reimbursement
The commercial success of the Group’s products is partly dependent upon reimbursement levels for laparoscopic procedures set by governments,
health authorities, private insurers and other organisations. There is no guarantee that changes in reimbursement policy in the Group’s main
markets will not have an impact on the ability to sell products into those markets.
Financial risk
The Directors are confident that the banking facilities currently in place are more than adequate for the Group’s working capital requirements
for the foreseeable future.
Some of the Group’s sales and purchases are made in currencies other than Sterling and consideration is given to the use of forward currency
contracts to reduce the exposure.
The Directors are satisfied that credit risk is adequately managed and the level of bad debts is consistent with the nature of the industry;
further details with regard to this are given in note 12.
Auditor
Grant Thornton UK LLP has indicated its willingness to continue in office. A resolution for its re‑appointment as independent auditor will be
proposed at the AGM.
By order of the Board
N G Bowland
Chief Executive Officer
19 April 2011 Annual report and accounts 2010 Surgical Innovations Group plc 31
Governance 20 - 35
Report on remuneration
Executive Director’s remuneration
The Board recognises that the Executive Director’s remuneration is of legitimate concern to the shareholders. The Group operates within
an innovative and competitive arena that places constant demands on the technical abilities of the Group. Its performance depends on the
individual contributions of the Executive Director and employees and it believes in rewarding all those who have made a positive contribution
in the development of the Group.
Remuneration Committee
The Remuneration Committee, which meets as required, is made up of the following Directors:
D B Liversidge CBE (Chairman)
C Glass
R Simkins
Remuneration policy
The principal objective is to develop policies and recommend proposals appropriate to facilitating the recruitment, retention and motivation
of the Executive Director and in so doing to avoid the Group bearing more than a reasonable and necessary cost. Where practical and
appropriate, the remuneration of the Executive Director (and other senior management) is aligned with the interests of shareholders.
The Remuneration Committee considers that a successful remuneration policy needs to be sufficiently flexible to take account of future
changes in the Group’s business environment and in remuneration practice. Any changes to policy for years after 2010 will be described
in future Reports on remuneration.
The remuneration of the Executive Director comprises four main elements:
basic salary: to remain competitive in the marketplace, reflecting the experience, level of competence of the individual and comparative
base salaries elsewhere within the Group;
annual bonus payment: to provide additional short‑term remuneration which directly reflects Group and individual performance;
share options: through the regular grant of options to reward achievements of target and outstanding business performance over the
longer term; and
pension arrangements: to enable the Director to make appropriate provision for retirement.
It is Group policy that a significant proportion of the remuneration of the Executive Director should be performance related.
Contracts of service
No Director has a service contract with a notice period in excess of one year. Governance
Surgical Innovations Group plc Annual report and accounts 2010 32
Report on remuneration continued
Directors’ emoluments – information subject to audit
Details of Directors’ emoluments for the year are as follows:
Salary
and Total Total Pension Pension
fees Benefits emoluments emoluments contributions contributions
2010 2010 2010 2009 2010 2009
£’000 £’000 £’000 £’000 £’000 £’000
Executive
N G Bowland 118 7 125 103 6 4
Non‑executive
D B Liversidge CBE
1
28 — 28 25 — —
C Glass
2
20 — 20 13 — —
R Simkins
3
20 — 20 13 — —
M J McMahon 20 — 20 13 — —
Total 206 7 213 167 6 4
1. D B Liversidge’s fees are paid to Quest Investments Limited, a company of which he is a Director.
2. C Glass’ fees are paid to Winburn Glass Norfolk, a firm of which he is a partner.
3. R Simkins’ fees are paid to Getz Bros & Co. Inc., a company of which he is Vice President.
Benefits received consist of the provision of motor cars and private health.
At 31 December 2010 a loan of £18,600 made available to N G Bowland in 2009 was still repayable.
Pension contributions represent payments made to defined contribution schemes. Non‑executive Directors are not entitled to retirement benefits.
Remuneration of the Non‑executive Directors is determined by the Board. Annual report and accounts 2010 Surgical Innovations Group plc 33
Governance 20 - 35
Directors’ share options
Details of the share options held by Directors are as follows:
At Exercised At
1 January during 31 December Option
2010 the year 2010 price Date granted
D B Liversidge CBE 1,000,000 1,000,000 — 1.70p November 2000
1
1,000,000 — 1,000,000 1.70p April 2001
1
1,500,000 — 1,500,000 1.70p November 2007
1
1,000,000 — 1,000,000 1.50p January 2009
1
400,000 — 400,000 1.70p November 2009
1
N G Bowland 1,000,000 1,000,000 — 3.00p November 2000
1
1,000,000 1,000,000 — 2.00p November 2001
1
2,545,454 — 2,545,454 3.50p November 2007
2
1,454,546 — 1,454,546 1.70p November 2007
1
2,000,000 600,000 1,400,000 1.50p January 2009
1
2,200,000 2,200,000 1.70p November 2009
1
C Glass 1,000,000 1,000,000 — 1.70p November 2000
1
1,000,000 — 1,000,000 1.70p April 2001
1
1,500,000 — 1,500,000 1.70p November 2007
1
1,000,000 — 1,000,000 1.50p January 2009
1
400,000 — 400,000 1.70p November 2009
1
R Simkins 2,000,000 — 2,000,000 1.70p May 2001
1
1,500,000 — 1,500,000 1.70p November 2007
1
1,000,000 — 1,000,000 1.50p January 2009
1
400,000 — 400,000 1.70p November 2009
1
M J McMahon 1,000,000 1,000,000 — 1.70p November 2000
1
1,000,000 — 1,000,000 1.70p April 2001
1
1,500,000 — 1,500,000 1.70p November 2007
1
1,000,000 — 1,000,000 1.50p January 2009
1
400,000 — 400,000 1.70p November 2009
1
1. Share options are exercisable between nil and ten years from the date of the grant.
2. Share options are exercisable between three and ten years from the date of the grant.
The market price of the Company’s shares at the end of the financial year was 5.30p and the range of market prices during the year was
between 1.63p and 5.30p.
On behalf of the Board
D B Liversidge CBE
Non‑executive Chairman
19 April 2011 Governance
Surgical Innovations Group plc Annual report and accounts 2010 34
Corporate governance
Principles of good governance
The Board continues to support the principles of good governance. The Board has adopted such procedures as it considers practical and
appropriate for a group of its size so as to affect good governance.
Application of principles
Directors
The Company supports the concept of an effective Board leading and controlling the Group. The Board is responsible for approving Group
policy and strategy. It meets regularly and has a schedule of matters specifically reserved to it for decision. Management supplies the Board
with appropriate and timely information and the Directors are free to seek any further information they consider necessary. All Directors have
access to advice from the Company Secretary and independent professionals at the Group’s expense. Training is available for new Directors
and other Directors as necessary.
The Board members are:
D B Liversidge CBE – Non‑executive Chairman
N G Bowland – Chief Executive Officer
C Glass – Non‑executive Director
R Simkins – Non‑executive Director
M J McMahon – Non‑executive Director
Accountability and audit
The Board is responsible for maintaining a sound system of internal control to safeguard shareholders’ investments and the Company’s assets.
The Audit Committee comprises C Glass (Chairman), D B Liversidge CBE and R Simkins who are all Non‑executive Directors.
The Committee considers the appointment and terms of engagement of the external auditor and assesses the independence of the external
auditor and reviews the auditor’s policy for the rotation of audit partners.
The terms of reference of the Committee include reviewing the scope and results of the external audit and its effectiveness.
Communication with shareholders
The Board is committed to effective communication between the Group and its shareholders.
It regards the AGM as a means of communicating directly with private investors and encourages their participation. All Directors normally
attend the AGM and private investors have the opportunity to meet the Directors and discuss any issues on an informal basis. Separate
resolutions are passed on each issue so that they can be given proper consideration and there is a resolution to approve the annual report
and accounts.
The shareholders can gain access to information on the Group, as well as to the annual report and accounts, through the website, www.surginno.com. Annual report and accounts 2010 Surgical Innovations Group plc 35
Governance 20 - 35
Internal controls
The Board of Directors is ultimately responsible for the Group’s management and internal control systems. During the financial period and
to the date of approval of the financial statements, it has reviewed the operation and effectiveness of the Group’s systems of internal control,
which can provide only a reasonable but not absolute assurance against material misstatement or loss.
The Board discharges its responsibility for internal financial control through the following key procedures:
the establishment of an organisational structure appropriate to the size of the business, with clearly defined levels of authority and division
of responsibilities for approval of external payments and receipt and dispatch of goods;
a comprehensive budgeting and financial reporting system which compares actual performance with budget on a monthly basis; and
the formulation by the Board of policies and of approval procedures in a number of key areas such as credit control, expenditure
authorisation, stock ordering and quality assurance.
Going concern
On the basis of the budget for 2011 and forecasts prepared by the Directors, the Board has a reasonable expectation that the Company and
the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the
going concern basis in preparing the financial statements.
On behalf of the Board
D B Liversidge CBE
Non‑executive Chairman
19 April 2011 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 36
Report of the independent auditor – Group
to the members of Surgical Innovations Group plc
Independent auditor’s report to the members of Surgical Innovations Group plc
We have audited the Group financial statements of Surgical Innovations Group plc for the year ended 31 December 2010 which comprise the
Consolidated statement of comprehensive income, the Consolidated balance sheet, the Consolidated cash flow statement, the Consolidated
statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation
is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditor
As explained more fully in the Statement of Directors’ responsibilities set out on pages 28 and 29, the Directors are responsible for the
preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express
an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm.
Opinion on financial statements
In our opinion the Group financial statements:
give a true and fair view of the state of the Group’s affairs as at 31 December 2010 and of its profit for the year then ended;
have been properly prepared in accordance with IFRSs as adopted by the European Union; and
have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Report of the Directors for the financial year for which the Group financial statements are prepared
is consistent with the Group financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
certain disclosures of Directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the parent company financial statements of Surgical Innovations Group plc for the year ended 31 December 2010.
Timothy Lincoln
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountant
Leeds
19 April 2011 Annual report and accounts 2010 Surgical Innovations Group plc 37
Accounts 36 - 61
Consolidated statement of comprehensive income
for the year ended 31 December 2010
2010 2009
Non-recurring Non‑recurring
Headline costs Total Headline costs Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
Revenue 2 7,045 — 7,045 4,541 — 4,541
Cost of sales (3,526) — (3,526) (2,447) (200) (2,647)
Gross profit 3,519 — 3,519 2,094 (200) 1,894
Other operating expenses (1,932) — (1,932) (1,528) — (1,528)
Share‑based payments (8) — (8) (75) — (75)
Operating profit 3 1,579 — 1,579 491 (200) 291
Finance costs 5 (39) — (39) (40) — (40)
Finance income 9 — 9 13 — 13
Profit before taxation 1,549 — 1,549 464 (200) 264
Taxation 6 239 — 239 261 — 261
Profit and total comprehensive income for the period
attributable to the owners of the parent 1,788 — 1,788 725 (200) 525
Earnings per share, total and continuing
Basic 7 0.48p 0.14p
Diluted 7 0.45p 0.14p
The Consolidated statement of comprehensive income above relates to continuing operations.
The Group has no recognised gains or losses other than the results for the year as set out above.
The accompanying accounting policies and notes form part of the financial statements. Accounts
Surgical Innovations Group plc Annual report and accounts 2010 38
2010 2009
Notes £’000 £’000
Assets
Non‑current assets
Property, plant and equipment 8 2,477 2,056
Intangible assets 9 3,295 2,139
Deferred tax asset 6 432 193
6,204 4,388
Current assets
Inventories 10 2,033 2,047
Trade receivables 11 2, 168 2,135
Other current assets 11 513 460
Cash and cash equivalents 2,622 2,508
7 ,336 7,150
Total assets 13,540 11,538
Equity and liabilities
Equity attributable to equity holders of the parent company
Share capital 13 3,815 3,738
Share premium account 75 18,809
Capital reserve 329 329
Retained earnings 6,369 (14,236)
Total equity 10,588 8,640
Non‑current liabilities
Obligations under finance leases 653 511
653 511
Current liabilities
Bank overdraft 1, 177 1,123
Trade and other payables 607 818
Obligations under finance leases 350 252
Accruals 165 194
2,299 2,387
Total liabilities 2,952 2,898
Total equity and liabilities 13,540 11,538
The accompanying accounting policies and notes form part of the financial statements.
The financial statements on pages 37 to 55 were approved by the Board of Directors on 19 April 2011 and were signed on its behalf by:
D B Liversidge CBE
Director
19 April 2011
Company registered number: 2298163
Consolidated balance sheet
as at 31 December 2010 Annual report and accounts 2010 Surgical Innovations Group plc 39
Accounts 36 - 61
Year ended Year ended
31 December 31 December
2010 2009
£’000 £’000
Cash flows from operating activities
Operating profit 1,579 291
Adjustments for:
Depreciation of property, plant and equipment 448 345
Amortisation of intangible assets 518 101
Share‑based payment 8 75
Operating cash flows before movement in working capital 2,553 812
Decrease/(increase) in inventories 14 (331)
(Increase)/decrease in receivables (86) 913
(Decrease)/increase in payables (240) 47
Cash generated from operations 2,241 1,441
Interest paid (39) (40)
Tax received — 38
Net cash generated from operating activities 2,202 1,439
Cash flows from investing activities
Interest received 9 13
Acquisition of non‑current assets (2,044) (1,517)
Net cash used in investment activities (2,035) (1,504)
Cash flows from financing activities
Cash received from issue of shares 152 —
Repayment of bank loans — (6)
Repayment of obligations under finance leases (259) (245)
Net cash used in financing activities (107) (251)
Net increase in cash and cash equivalents 60 (316)
Cash and equivalents at beginning of period 1,385 1,701
Cash and cash equivalents at end of period 1,445 1,385
Cash at bank and in hand 2,622 2,508
Bank overdraft (1, 177) (1,123)
Cash and cash equivalents at end of period 1,445 1,385
Consolidated cash flow statement
for the year ended 31 December 2010 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 40
Share Share Capital Retained
capital premium reserve earnings Total
£’000 £’000 £’000 £’000 £’000
Balance as at 1 January 2009 3,738 18,809 329 (14,836) 8,040
Employee share‑based payment options — — — 75 75
Profit and total comprehensive income for the period — — — 525 525
Balance as at 31 December 2009 3,738 18,809 329 (14,236) 8,640
Employee share‑based payment options — — — 8 8
Reorganisation — (18,809) — 18,809 —
Transactions with owners 77 75 — — 152
Profit and total comprehensive income for the period — — — 1,788 1,788
Balance as at 31 December 2010 3,815 75 329 6,369 10,588
Consolidated statement of changes in equity
for the year ended 31 December 2010 Annual report and accounts 2010 Surgical Innovations Group plc 41
Accounts 36 - 61
1. Group accounting policies under IFRS
(a) Basis of preparation
These financial statements have been prepared on the basis of the IFRS accounting policies set out below.
The financial statements have been prepared in accordance with IFRS as adopted for use by the European Union, including IFRIC
interpretations and in line with those provisions of the Companies Act 2006 applicable to companies reporting under IFRS.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Group’s accounting policies.
The Directors have considered the available cash resources of the Group and its current forecasts and are satisfied that the Group has
adequate resources to continue in operational existence for the foreseeable future and so the going concern basis has been adopted in the
preparation of these financial statements.
The financial statements have been prepared under the historical cost convention.
The consolidated financial statements are presented in Sterling, rounded to the nearest thousand.
These accounts reflect the first time adoption of improvements to IFRS and amendments to IFRS 1 and IFRS 2. The effect of the adoption
of these standards has been presentational only. Given this, the opening comparative balance sheet has not been represented as the
information is unchanged from that presented previously.
(b) Consolidation
Subsidiaries
The Group financial statements consolidate those of the parent company and of its subsidiary undertakings. The results of subsidiaries,
accounted for under the merger accounting method, are included in the Consolidated statement of comprehensive income as if they had
always been part of the Group. Intra‑group sales and results are eliminated on consolidation and all sales and results relate to external
transactions only.
(c) Foreign currency translation
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates
of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated statement of comprehensive income.
(d) Property, plant and equipment
These are stated at the cost of acquisition less any provision for depreciation. Cost includes expenditure that is directly attributable to the
acquisition of the items.
The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying
value may not be recoverable.
The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each financial year end.
Depreciation is charged so as to write off the cost of property, plant and equipment less estimated residual value over their estimated useful
economic lives at the following rates:
Office and computer equipment – 10–20% per annum
Plant and machinery – 10% per annum
Tooling – 20% per annum
Placed equipment – 33.3% per annum
Leasehold improvements – Over the remaining term of the lease
Tooling developed for the Group’s own products is only depreciated when brought into use.
Placed equipment relates to equipment placed in clinical settings to generate a stream of recurring revenue from the single use element
of the equipment.
Notes to the consolidated financial statements Accounts
Surgical Innovations Group plc Annual report and accounts 2010 42
Notes to the consolidated financial statements continued
1. Group accounting policies under IFRS continued
(e) Intangible assets
Research and development
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
Development expenditure arising from the Group’s development activities is capitalised and amortised over the life of the product only if the
Group can demonstrate the following:
the technical feasibility of completing the intangible asset so it will be available for use or sale;
the intention to complete the intangible asset and use or sell it;
the ability to use or sell the intangible asset;
that it is probable that the asset created will generate future economic benefits;
there is the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible
asset; and
the development cost of the asset can be measured reliably.
Where no intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.
Capitalised development costs are amortised over the life of the product within cost of sales, which is usually no more than ten years.
(f) Impairment of non‑financial assets
Impairment reviews are carried out on a development project by project basis periodically and where there is a specific indicator
of impairment. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is based
on the accounting policy in (e) above and is greater than its estimated recoverable amount. The recoverable amount is the higher of an
asset’s fair value less costs to sell and its value in use.
(g) Inventories
Inventories are stated at the lower of cost (using weighted average) and net realisable value.
Cost is the purchase cost, including transport, for raw materials, together with a proportion of manufacturing overheads based on normal
levels of activity, for work in progress and finished goods.
Net realisable value is based on estimated normal selling price, less further costs expected to be incurred to completion and sale. Provision
is made for obsolete, slow moving or defective items where appropriate. Such provisions are based upon established future sales and
historical experience.
(h) Trade receivables
Trade receivables are recognised initially at fair value, thereafter at amortised costs less provision for impairment. A provision for impairment
of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the
original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value
of estimated future cash flows. The amount of the loss is recognised in the Consolidated statement of comprehensive income, as are
subsequent recoveries of amounts previously written off.
(i) Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held on call at banks and bank overdrafts. Bank overdrafts are shown within
borrowings in current liabilities on the balance sheet.
(j) Trade payables
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate.
(k) Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from proceeds. Annual report and accounts 2010 Surgical Innovations Group plc 43
Accounts 36 - 61
1. Group accounting policies under IFRS continued
(l) Income tax
The charge for current tax is based on the results for the period as adjusted for items which are non‑assessable or disallowed and any
adjustment to tax payable in respect of previous years. It is calculated using rates that have been enacted or substantively enacted by the
balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the
carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit.
In principle, deferred tax liabilities are recognised for all taxable and temporary differences and deferred tax assets are recognised to the extent that
it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not
recognised if the temporary difference arises from the initial recognition of goodwill (or negative goodwill) or from the initial recognition (other than
in business combination) of other assets and liabilities in a transaction which affects neither the taxable profit nor the accounting profit.
Tax benefits are not recognised unless the tax positions are probable of being sustained. Once considered to be probable, management
reviews each material tax benefit to assess whether a deferred tax asset should be recognised, based on the ability under tax statute
to recover those tax losses and through the assessment of probable future taxable profits in which to recover those tax losses.
Where the Group is able to control the distribution of reserves from subsidiaries, and there is no intention to distribute the reserves, deferred
tax is not recognised for these temporary differences.
Deferred tax is calculated at the rates that are enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited
in the Consolidated statement of comprehensive income, except when it relates to items credited or charged directly to equity, in which case
the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends
to settle its current tax assets and liabilities on a net basis.
Information as to the calculation of the income tax expense is included in note 6.
(m) Employee benefits
Pension obligations
The Group provides pension benefits to its employees through contributions to defined contribution Group personal pension policies.
The amounts charged to the Consolidated statement of comprehensive income are the contributions payable in the period.
Share‑based compensation
All share‑based payment arrangements granted after 7 November 2002 that had not vested by 1 January 2006 are recognised in the financial
statements. The Group issues share options to certain employees which are measured at fair value and recognised as an expense in the
Consolidated statement of comprehensive income with a corresponding increase in profit and loss reserve. The fair value of the employee
services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting
period is determined by reference to the fair value of the options granted.
The fair values of these payments are measured at the dates of grant and are recognised over the period during which employees become
unconditionally entitled to the awards. At each balance sheet date, the Group revises its estimate of the number of options that are expected
to vest. It recognises the impact of the revision to original estimates, if any, in the Consolidated statement of comprehensive income, with
a corresponding adjustment to retained earnings.
(n) Income recognition
Revenue
Revenue is the total amount receivable by the Group for the supply of goods and services, excluding VAT and trade discounts. It is recognised
that significant risks and rewards are transferred when title of goods passes and the Group fulfils its contractual obligations.
Royalty income
Royalty income is derived from agreements with other parties for them to manufacture and distribute products. Such royalty income
is recognised in the same period as the licensee makes the related sale.
Design contracts
As soon as the outcome of a design contract can be estimated reliably, contract revenue and expenses are recognised in the Consolidated
statement of comprehensive income in proportion to the stage of completion of the contract. The stage of completion is assessed by reference
to work performed. An expected loss on the contract is recognised immediately in the Consolidated statement of comprehensive income.
Interest income
Interest income is recognised using the effective interest rate method. Accounts
Surgical Innovations Group plc Annual report and accounts 2010 44
Notes to the consolidated financial statements continued
1. Group accounting policies under IFRS continued
(n) Income recognition continued
Government grants
Government grants are recognised in the Consolidated statement of comprehensive income so as to match them with the expenditure
towards which they are intended to contribute. To the extent that the grants received are intended as a specific reduction against certain
assets, they are recognised in the Consolidated statement of comprehensive income over the expected useful life of the related assets.
(o) Leases
Where the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated
as a finance lease. The asset is recorded in the balance sheet as property, plant and equipment and is depreciated over its estimated useful
life or the term of the lease, whichever is the shorter. Future instalments under such leases, net of finance charges, are included in creditors.
Rentals under operating leases are charged on a straight‑line basis over the lease term.
(p) Significant areas of judgement
In applying the aforementioned accounting policies, management has made appropriate estimates in key areas and the actual outcome may
differ from those calculated. The key sources of estimation and judgement uncertainty at the balance sheet date that have a significant risk
of causing material adjustment to the carrying amount of assets and liabilities in the next financial year are:
Forecasts and discount rates
The carrying value of a number of items on the balance sheet is dependant on the estimates of future cash flows arising from the Group’s operations:
the impairment test for capitalised development costs is dependant upon forecasts of the cash flows resulting from expected sales and
cost of sales over the projected life of the relevant product. Allowance is also made for any future costs of associated product development.
An impairment charge of £334,000 (2009: nil) resulted from the annual impairment testing conducted in 2010; and
the realisation of deferred tax assets recognised is dependant on the generation of sufficient future taxable profits. The Group recognises
deferred tax assets where it is likely that the benefit will be realised and recognises no more than three years (2009: five years) of future
profitability given uncertainty after this timeframe.
Trade receivables
The Group provides, in certain agreed situations, products on extended credit terms in order to establish a presence in an export market.
The Directors constantly review the likelihood of realisation of these receivables and make provision based on their best estimates when
the full value of the receivable will not be recoverable.
(q) Provisions
The Group measures provisions at the Directors’ best estimates of the expenditure required to settle the obligation at the balance sheet date.
These estimates are made taking account of information available and different possible outcomes.
(r) Equity
Equity is broken down into the elements listed below:
“Share capital” represents the nominal value of equity shares;
“Share premium” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses
of the share issue;
“Capital reserve” represents the excess over nominal value of the fair value consideration attributed to equity shares issued in part
settlement for subsidiary company shares acquired; and
“Retained earnings” .
As at 31 December 2010, the following standard and interpretation is in issue but not yet effective:
IAS 24 (revised 2009) Related Party Disclosures (effective 1 January 2011).
The effect of the adoption of this new standard is expected to be presentational only. Annual report and accounts 2010 Surgical Innovations Group plc 45
Accounts 36 - 61
2. Segmental reporting
For management purposes the Group is organised into three business segments: SI Brand, OEM and Industrial. These revenue streams are
the basis on which the Group reports its segment information.
Segment results, assets and liabilities include assets directly attributable to a segment as well as those that can be allocated on a reasonable
basis. Unallocated items comprise mainly corporate assets and liabilities and head office expenses.
These operating segments are monitored and strategic decisions are made on the basis of adjusted segment operating results.
Business segments
The principal activities of the SI Brand business unit are the research, development, manufacture and distribution of SI branded minimally invasive devices.
The principal activities of the OEM business unit are the research, development, manufacture and distribution of minimally invasive devices
for third party medical device companies through either own label or co‑branding.
The principal activities of the industrial business unit are the research, development, manufacture and sale of minimally invasive technology
products for industrial application.
The following segmental analysis has been produced to provide a reconciliation between the information used by the key decision maker
within the business and the information as it is presented under IFRS.
SI Brand OEM Industrial Total
Year ended 31 December 2010 £’000 £’000 £’000 £’000
Revenue 3,852 2,506 687 7 ,045
Result
Segment result 1,151 930 390 2,471
Unallocated expenses — — — (892)
Profit from operations — — — 1,579
Finance income — — — 9
Finance costs — — — (39)
Profit before taxation — — — 1,549
Tax — — — 239
Profit for the year — — — 1,788
Included within the segment/operating results are the following significant non‑cash items:
SI Brand OEM Industrial Unallocated Total
£’000 £’000 £’000 £’000 £’000
Depreciation of property, plant and equipment 262 70 — 108 440
Amortisation of intangible assets 134 50 — — 184
Impairment of intangible assets 63 4 267 — 334
Share‑based payments — — — 8 8
Capitalisation of intangible assets 884 635 115 — 1,634
SI Brand OEM Industrial Total
Year ended 31 December 2009 £’000 £’000 £’000 £’000
Revenue 2,956 1,463 122 4,541
Result
Segment result 1,240 255 70 1,565
Unallocated expenses — — — (1,274)
Profit from operations — — — 291
Finance income — — — 13
Finance costs — — — (40)
Profit before taxation — — — 264
Tax — — — 261
Profit for the year — — — 525 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 46
Notes to the consolidated financial statements continued
2. Segmental reporting continued
Business segments continued
Included within the segment/operating results are the following significant non‑cash items:
SI Brand OEM Industrial Unallocated Total
£’000 £’000 £’000 £’000 £’000
Depreciation of property, plant and equipment 193 35 — 117 345
Amortisation of intangible assets 101 — — — 101
Impairment of intangible assets — — — — —
Share‑based payments — — — 75 75
Capitalisation of intangible assets 638 305 122 — 1,065
Unallocated costs include those costs that cannot be split between segments.
The reportable segment assets and liabilities at 31 December 2010 and capital expenditure are as follows:
SI Brand OEM Industrial Unallocated Total
£’000 £’000 £’000 £’000 £’000
Assets 7,317 2,122 55 4,046 13,540
Liabilities — — — 13,540 13,540
Assets Liabilities
£’000 £’000
Segment assets/liabilities 9,494 —
Unallocated:
Property, plant and equipment 477 —
Prepayments and accrued income 232 —
Other debtors 283 —
Cash and cash equivalents 2,622 —
Deferred tax asset 432 —
Borrowings — 2,180
Trade and other payables — 607
Accruals — 165
Equity — 10,588
13,540 13,540
The reportable segment assets and liabilities at 31 December 2009 and capital expenditure are as follows:
SI Brand OEM Industrial Unallocated Total
£’000 £’000 £’000 £’000 £’000
Assets 7,124 707 150 3,557 11,538
Liabilities — — — 11,538 11,538
Assets Liabilities
£’000 £’000
Segment assets/liabilities 7,981 —
Unallocated:
Property, plant and equipment 396 —
Prepayments and accrued income 299 —
Other debtors 161 —
Cash and cash equivalents 2,508 —
Deferred tax asset 193 —
Borrowings — 1,886
Trade and other payables — 818
Accruals — 194
Equity — 8,640
11,538 11,538 Annual report and accounts 2010 Surgical Innovations Group plc 47
Accounts 36 - 61
2. Segmental reporting continued
Business segments continued
Segment assets consist primarily of property , plant and equipment, intangible assets, inventories and trade and other receivables. Assets not
allocated to a segment primarily consist of tangible fixed assets, prepayments and accrued income and cash and cash equivalents.
Liabilities are not capable of allocation to individual segments.
Geographical analysis
2010 2009
£’000 £’000
United Kingdom 2, 119 1,454
Europe 2,908 1,827
US 1,410 624
Rest of World 608 636
7 ,045 4,541
Revenues are allocated geographically on the basis of where revenues were received from and not from the ultimate final destination of use.
During 2010, £1, 110,000 (16%) of the Group’s revenue depended on a single customer in the OEM segment (2009: £606,000 (15%)).
3. Operating profit
The profit for the year is stated after charging:
2010 2009
£’000 £’000
Depreciation of owned assets 231 273
Depreciation of assets held under finance lease 217 72
Amortisation of capitalised development costs 184 101
Impairment of capitalised development costs 334 —
Research and development costs 160 —
Foreign exchange losses 31 169
Auditor’s remuneration:
– fees payable to the Company’s auditor for the audit of the Company’s annual financial statements 22 25
– tax compliance fees 15 15
Operating lease rentals:
– land and buildings 151 150
The amortisation and impairment of capitalised development costs are accounted for within other operating expenses within the
Consolidated statement of comprehensive income.
4. Employees
The average monthly number of employees (including Executive Directors) employed by the Group during the year was as follows:
2010 2009
Number Number
Directors 1 1
Production 39 39
Development 21 12
Administration 13 11
74 63
The costs incurred in respect of these employees were:
2010 2009
£’000 £’000
Wages and salaries 1,820 1,262
Social security costs 165 119
Pension costs 48 37
2,033 1,418
A detailed analysis of Directors’ emoluments is shown in the table on page 32. Accounts
Surgical Innovations Group plc Annual report and accounts 2010 48
Notes to the consolidated financial statements continued
4. Employees continued
Key management including non‑executives
2010 2009
£’000 £’000
Salaries 484 371
Social Security costs 44 38
Pension costs 16 14
Share‑based payments 8 75
Total 552 498
5. Finance costs
2010 2009
£’000 £’000
On finance leases 22 14
On bank overdrafts 17 26
39 40
6. Taxation
Tax on profit
2010 2009
£’000 £’000
Over provision from previous years — 202
Deferred tax credit recognised in year 239 59
Tax credit on profit 239 261
Factors affecting the tax charge for the year
The taxation assessed for the year is lower than the standard rate of Corporation Tax in the UK at 28% (2009: 28%). The differences are
explained as follows:
2010 2009
£’000 £’000
Profit on ordinary activities before taxation 1,549 264
Corporation Tax at standard rate of 28% (2009: 28%) 434 74
Effects of:
Research and development enhanced expenditure (386) (250)
Expenses not tax deductible 8 22
Capital allowances for the year in excess of depreciation (237) (411)
Other short‑term timing differences — 506
Over provision from previous years — (202)
Utilisation and recognition of trading losses (58) —
Tax credit for the year (239) (261)
Deferred taxation
The movement in the deferred taxation account during the year was:
2010 2009
£’000 £’000
Balance brought forward 193 134
Consolidated statement of comprehensive income movement arising during the year 239 59
Balance carried forward 432 193
The deferred taxation recognised in the financial statements at 27% is set out below:
2010 2009
£’000 £’000
Trade losses 432 193 Annual report and accounts 2010 Surgical Innovations Group plc 49
Accounts 36 - 61
6. Taxation continued
Deferred taxation continued
The recoverability of the deferred tax asset is dependent on future taxable profits in excess of those arising from the reversal of deferred tax
liabilities. The recognition of the deferred tax assets is based upon profit forecasts for the three‑year period ending 31 December 2013.
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial
reporting purposes:
2010 2009
£’000 £’000
Deferred tax assets 4,347 4,594
Deferred tax liabilities (839) (651)
Net unrecognised deferred tax assets 3,508 3,943
At the balance sheet date, the Group has unused tax losses of £17 .7 million (2009: £15.3 million) available for offset against certain future
profits. A deferred tax asset of £432,000 (2009: £193,000) has been recognised in respect of such losses. No deferred tax asset has been
recognised in respect of the remaining £16. 1 million (2009: £14.6 million) of such losses due to the difficulty in making reliable predictions
of future profit streams.
7 . Earnings per ordinary share
Basic earnings per ordinary share
The calculation of basic earnings per ordinary share for the year ended 31 December 2010 was based upon the profit attributable to ordinary
shareholders of £1,788,000 (2009: £525,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2010
of 375,812,587 (2009: 373,841,902).
Diluted earnings per ordinary share
The calculation of diluted earnings per ordinary share for the year ended 31 December 2010 was based upon the profit attributable to ordinary
shareholders of £1,788,000 (2009: £525,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2010
of 397 ,339,910 (2009: 373,841,902). All share options at the financial year end were anti‑dilutive.
2010 2009
Earnings £’000 £’000
Earnings for the purpose of basic and diluted earnings per ordinary share 1,788 525
8. Property, plant and equipment
Office and Improvements
Plant and computer Placed to leasehold
Tooling machinery equipment equipment property Total
£’000 £’000 £’000 £’000 £’000 £’000
Gross carrying amount 31 December 2009 1,521 1,638 719 183 257 4,318
Accumulated depreciation and impairment (1, 129) (482) (556) (71) (24) (2,262)
Carrying amount 31 December 2009 392 1, 156 163 112 233 2,056
Gross carrying amount 31 December 2010 1,661 2, 126 811 277 312 5, 187
Accumulated depreciation and impairment (1,233) (651) (641) (133) (52) (2,710)
Carrying amount 31 December 2010 428 1,475 170 144 260 2,477
Office and Improvements
Plant and computer Placed to leasehold
Tooling machinery equipment equipment property Total
£’000 £’000 £’000 £’000 £’000 £’000
Carrying amount 1 January 2009 342 562 151 91 197 1,343
Additions – separately acquired 139 700 107 54 58 1,058
Depreciation (89) (106) (95) (33) (22) (345)
Carrying amount 31 December 2009 392 1, 156 163 112 233 2,056
Additions – separately acquired 140 488 92 94 55 869
Depreciation (104) (169) (85) (62) (28) (448)
Carrying amount 31 December 2010 428 1,475 170 144 260 2,477 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 50
Notes to the consolidated financial statements continued
8. Property, plant and equipment continued
Leased plant and equipment
The Group leases tooling, plant and machinery and fixtures and fittings under a number of finance lease arrangements. The carrying amount
and depreciation charge for such assets are disclosed below:
2010 2009
£’000 £’000
Tooling
Net book value 70 115
Depreciation charge for the year 46 23
Plant and machinery
Net book value 1,329 982
Depreciation charge for the year 142 76
Office and computer equipment
Net book value 89 27
Depreciation charge for the year 29 12
Security
At 31 December 2010, the property, plant and equipment of the Group are subject to a fixed and floating charge to secure both the bank loan
and overdraft facility.
9. Intangible assets
Capitalised Capitalised
development development
costs costs
2010 2009
£’000 £’000
Cost
At 1 January 2010 2,310 1,244
Additions 1,674 1,066
At 31 December 2010 3,984 2,310
Accumulated amortisation
At 1 January 2010 171 70
Charge for the year 184 101
Impairment charge for the year 334 —
At 31 December 2010 689 171
Carrying amount
At 31 December 2010 3,295 2,139
At 31 December 2009 2, 139 1,174
The £3,984,000 of capitalised development costs, net of £73,000 of Government grant, represents expenditure that fulfils the requirements
of IAS 38. These costs will be amortised over the future commercial life of the product, commencing on the sale of the first commercial item,
up to a maximum product life cycle of ten years, and taking account of expected market conditions and penetration.
Included within the above are assets that are currently unavailable for use and these have been assessed for annual impairment as required
by the Group’s accounting policies; Intangible Assets and Impairment of Non Financial Assets.
10. Inventories
2010 2009
£’000 £’000
Raw materials 1,396 990
Finished goods 637 1,057
2,033 2,047
Included in the analysis above are provisions against inventory amounting to £14,000 (2009: £200,000). Annual report and accounts 2010 Surgical Innovations Group plc 51
Accounts 36 - 61
10. Inventories continued
In 2010 a total of £3,068,000 of inventories was included in profit and loss as an expense within cost of sales (2009: £2,210,000). Cost
of sales included an amount of £164,000 resulting from write down of inventories (2009: £323,000).
Inventories are pledged as securities for bank overdrafts.
The Group’s inventories are comprised of products which are not generally subject to rapid obsolescence on account of technological,
deterioration in condition or market trends. Consequently, management considers that there is little risk of significant adjustments to the
Group’s inventory assets within the next financial year.
11. Trade and other receivables
2010 2009
£’000 £’000
Trade receivables 2, 168 2,135
Prepayments and accrued income 231 299
Other debtors 282 161
2,681 2,595
All amounts are short term. The carrying value of trade receivables is considered a reasonable approximation to fair value.
Of the trade receivables, £1,028,276 relates to five customers (2009: £1, 104,000).
All of the Group’s trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables were found
to be impaired and a provision of £19,000 (2009: £33,000) was recorded accordingly.
In addition some of the unimpaired trade receivables are past due at the reporting date. The age of financial assets past due but not impaired
is shown below:
2010 2009
£’000 £’000
Not more than three months 109 101
More than three months but not more than six months 13 60
More than six months but not more than one year — 156
More than one year 61 96
The Group is exposed to credit risk through offering extended credit terms to those customers operating in markets where extended payment
terms are themselves taken by local government and state organisations. This risk is managed through constant review and personal
knowledge of the customer concerned. Payment plans are agreed and monitored in all such cases to minimise credit risk.
12. Financial instruments
The Group is exposed to market risk through its use of financial instruments. The Group’s risk management is co‑ordinated by the Directors
who focus actively on securing the Group’s short to medium‑term cash flows through regular review of all the operating activities of the
business. Long‑term financial investments are managed to generate lasting returns.
The Group does not actively engage in the trading of financial assets for speculative purposes nor does it write options. The most significant
financial risks to which the Group is exposed are described in the following sections.
Foreign currency sensitivity
Exposures to currency exchange rates arise from the Group’s overseas sales and purchases, most of which are denominated in Euros and Dollars.
To mitigate the Group’s exposure to foreign currency risk, cash flows in Euros and Dollars are monitored on an ongoing basis.
Foreign currency denominated financial assets and liabilities are set out below:
2010 2009 2010 2009
€’000 €’000 $’000 $’000
Financial assets 360 310 839 907
Financial liabilities 2 123 41 4
Short‑term exposure 358 187 798 903
The Group has no long‑term foreign exchange exposure. Accounts
Surgical Innovations Group plc Annual report and accounts 2010 52
Notes to the consolidated financial statements continued
12. Financial instruments continued
Foreign currency sensitivity continued
The Group has significant short‑term exposure to the Dollar at 31 December 2010. An analysis of the effect of a reasonable possible movement of the
currency rate against the Dollar during 2011 of +3% shows potential foreign currency gains of £9,000 on 31 December 2010 Dollar trade receivables.
The Group gives consideration to the use of forward currency contracts to reduce foreign currency exposure and, at 31 December 2010, there
are partial forward currency contracts with the value of £20,000.
Credit risk analysis
The Group’s exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date and which are
set out below:
2010 2009
£’000 £’000
Cash and cash equivalents 2,622 2,508
Trade and other receivables 2,450 2,296
5,072 4,804
The Group continually monitors defaults of customers and other counterparties and incorporates this information into its credit risk controls.
Management considers that all of the above financial assets that are not impaired for each of the reporting dates under review are of good
credit quality, including those that are past due.
In respect of trade and other receivables that are not impaired, the Group is not exposed to any significant credit risk exposure to any single
counterparty or any group of counterparties having similar characteristics. The credit risk for liquid funds is considered negligible, since the
counterparty is a reputable bank with a high quality external credit rating.
Liquidity risk analysis
The Group manages its liquidity needs by carefully monitoring all scheduled cash outflows. Liquidity needs are monitored in various time
bands, on a day‑to‑day and week‑to‑week basis, as well as on the basis of a rolling four‑week projection. Longer‑term needs are monitored
as part of the Group’s regular rolling monthly re‑forecasting process.
The Group maintains cash to meet its liquidity requirements for up to twelve‑month periods.
Funding for long‑term liquidity is additionally secured by an adequate amount of committed credit both through working capital and asset
finance facilities.
During the year ended 31 December 2010, the Group continued to have access to sufficient funds to meet its business expansion needs.
Excess cash is placed on short‑term interest‑bearing deposit accounts.
The Group policy is to generate sufficient cash from operating activities to adequately meet cash requirements for investment activities.
The Group’s liabilities have contractual maturities which are summarised below:
Current Non-cur r ent
Within Within Over
6 months 6–12 months 12 months
31 December 2010 £’000 £’000 £’000
Finance lease obligations 178 177 817
Trade and other payables 607 — —
Bank overdraft 1,177 — —
1,962 177 817
Current Non‑current
Within Within Over
6 months 6–12 months 12 months
31 December 2009 £’000 £’000 £’000
Finance lease obligations 153 139 593
Trade and other payables 818 — —
Bank overdraft 1,123 — —
2,094 139 593 Annual report and accounts 2010 Surgical Innovations Group plc 53
Accounts 36 - 61
12. Financial instruments continued
Maturity profile of borrowings
2010 2009
£’000 £’000
Gross lease payments not later than one year 355 292
Later than one year but not more than five years 817 593
Future finance charges (169) (122)
Summary of financial assets and liabilities by category
2010 2009
£’000 £’000
Loans and other receivables
Trade and other receivables 2,450 2,296
Cash 2,622 2,508
5,072 4,804
2010 2009
£’000 £’000
Current liabilities
Trade payables: financial liabilities measured at amortised cost 607 818
Other short‑term financial liabilities 1,527 1,375
2, 134 2,193
Non‑current liabilities 653 511
2,787 2,704
Net financial assets and liabilities 2,285 2,100
Management is of the opinion that the carrying value of the above assets and liabilities is equal to their fair value.
The Group’s capital management objectives are:
to ensure its ability to continue as a going concern; and
to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.
The Group monitors capital on the basis of carrying amount of equity less cash and cash equivalents as presented on the face of the
balance sheet.
The financial assets of SI Group plc are cash and cash equivalents and trade receivables, and fair value is deemed to be not materially
different to the carrying value.
13. Share capital
2010 2009
£’000 £’000
Authorised 600,000,000
(2009: 600,000,000) ordinary shares of 1p each 6,000 6,000
Allotted, called up and fully paid 381,491,902
(2009: 373,841,902) ordinary shares of 1p each 3,815 3,738 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 54
Notes to the consolidated financial statements continued
13. Share capital continued
At 31 December 2010, the following share options were outstanding:
Number of shares Exercise dates
At Exercised Lapsed At Option Date from which
1 January in during 31 December price per option may Date on which
Scheme and date of grant 2010 year year 2010 1p share be exercised option expires
Executive
November 2000* 1,000,000 1,000,000 — — 3.0p November 2003 November 2010
Non‑executive unapproved
November 2000 3,000,000 3,000,000 — — 1.7p November 2003 November 2010
April 2001 5,000,000 — — 5,000,000 1.7p April 2004 April 2011
November 2007 6,000,000 — — 6,000,000 1.7p November 2009 November 2017
January 2009 4,000,000 — — 4,000,000 1.5p November 2009 January 2019
November 2009 1,600,000 — — 1,600,000 1.7p November 2009 November 2019
Enterprise management
July 2001 2,200,000 2,050,000 150,000 — 2.0p July 2004 July 2011
November 2007 5,545,454 — — 5,545,454 3.5p November 2010 November 2017
January 2009 2,000,000 — — 2,000,000 3.5p January 2012 January 2019
Unapproved
April 2001 1,000,000 1,000,000 — — 2.0p April 2004 April 2011
November 2007 1,454,546 — — 1,454,546 1.7p November 2009 November 2017
January 2009 2,000,000 600,000 — 1,400,000 1.5p November 2009 January 2019
November 2009 2,200,000 — — 2,200,000 1.7p November 2009 November 2019
* These share options do not fall within the recognition and measurement of IFRS 2 and as such no charge for share‑based payments is recognised in the
Consolidated statement of comprehensive income in respect of them.
Share‑based payments
The total share‑based payment charge for the year was £8,000.
Share options were exercised during the current year (2009: none).
The fair values of options granted during the year were determined using the Black‑Scholes pricing model. All the options issued in the year
vested immediately. The following principal assumptions were used in the valuation:
Volatility – 20%
Option life – 1 year
Risk‑free investment rate – 2.5%
Certain share options issued prior to 7 November 2002 (and so were outside the scope of the recognition and measurement requirements
of IFRS 2) had their option price reduced during the year. Under IFRS 2, where an award granted before 7 November 2002 is modified after
IFRS 2’s effective date, the incremental fair value (measured as the difference in the fair value of the award calculated immediately before
and immediately after modification) should be expensed over the remaining vesting period.
The following principal assumptions were used in the valuation:
Volatility – 20%
Option life – 1 year
Risk‑free investment rate – 2.5%
In total £8,000 of employee remuneration expense (all of which related to equity‑settled share‑based payment transactions) has been
included in the profit for 2010 (2009: £75,000) and credited to retained earnings. Annual report and accounts 2010 Surgical Innovations Group plc 55
Accounts 36 - 61
14 Share premium
Share
premium
£’000
Balance as at 31 December 2009 18,809
Reorganisation (18,809)
Issue of ordinary share capital 75
Balance as at 31 December 2010 75
Share premium comprises the cumulative difference between the net proceeds and nominal value of the Company’s issued equity share capital.
During the year the Group obtained court approval to offset the accumulated share premium at 1 January 2010 against the accumulated
retained earnings at 1 January 2010.
15. Contingent liabilities and financial commitments
These are as follows:
(a) Contingent liabilities
There were no contingent liabilities at 31 December 2010 (2009: £nil).
(b) Operating leases
At 31 December 2010 the Group had annual commitments under non‑cancellable operating leases as follows:
2010 2009
Land and Land and
buildings buildings
£’000 £’000
Within one year 147 147
One to five years 590 590
Over five years 218 365
(c) Capital commitments
At 31 December 2010 the Group had no capital commitments (2009: £nil).
16. Transactions with related parties
A summary of transactions during the year and outstanding amounts at the balance sheet date is as follows:
Amounts Amounts
invoiced payable at
to the 31 December
Company 2010
£’000 £’000
Quest Investments Limited
1
25 3
Winburn Glass Norfolk
2
23 2
Getz Bros & Co. Inc.
3
15 —
N G Bowland
4
— 19
ACP
5
107 54
As disclosed in the Report on remuneration:
1. Director’s fees for D B Liversidge CBE are paid to Quest Investments Limited, a company of which he is a Director.
2. Director’s fees and advisory fees for C Glass are paid to Winburn Glass Norfolk, a firm of which he is a partner.
3. Director’s fees and advisory fees for R Simkins are paid to Getz Bros & Co. Inc., a company of which he is Vice President.
4. At 31 December 2010 £18,600 from a loan of £20,000 made available to N G Bowland in 2009 was still repayable.
5. ACP acts as the master distributor for Surgical Innovations in the Far East. During the year Surgical Innovations invoiced ACP £106,933 for products and
at 31 December 2010 there was an amount owing to Surgical Innovations of £54, 141. 13. R Simkins is the ultimate beneficial owner of ACP .
There is no controlling party at Surgical Innovations Group plc.
17 . Pensions
The Company currently operates a defined contribution Group personal pension plan for the benefit of employees. Company contributions
in 2010 were £48,000 (2009: £37 ,000). Accounts
Surgical Innovations Group plc Annual report and accounts 2010 56
Report of the independent auditor – Company
to the members of Surgical Innovations Group plc
Independent auditor’s report to the members of Surgical Innovations Group plc
We have audited the parent company financial statements of Surgical Innovations Group plc for the year ended 31 December 2010 which
comprise the Company balance sheet and the related notes. The financial reporting framework that has been applied in their preparation
is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditor
As explained more fully in the Statement of Directors’ responsibilities set out on pages 28 and 29, the Directors are responsible for the
preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit
and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm.
Opinion on financial statements
In our opinion the parent company financial statements:
give a true and fair view of the state of the Company’s affairs as at 31 December 2010;
have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Report of the Directors for the financial year for which the financial statements are prepared
is consistent with the parent company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from
branches not visited by us;
the parent company financial statements are not in agreement with the accounting records and returns;
certain disclosures of Directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the Group financial statements of Surgical Innovations Group plc for the year ended 31 December 2010.
Timothy Lincoln
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountant
Leeds
19 April 2011 Annual report and accounts 2010 Surgical Innovations Group plc 57
Accounts 36 - 61
Company balance sheet
as at 31 December 2010
2010 2009
Notes £’000 £’000 £’000 £’000
Fixed assets
Investments 2 1,018 1,018
Current assets
Debtors 3 3,319 3,508
Cash at bank 2,536 2,345
5,855 5,853
Creditors: amounts falling due within one year 4 (68) (94)
Net current assets 5,787 5,759
Net assets 6,805 6,777
Capital and reserves
Called up share capital 5 3,815 3,738
Share premium account 6 75 18,809
Accumulated profit/(losses) 6 2,915 (15,770)
2,990 3,039
Shareholders’ funds 6,805 6,777
The accompanying accounting policies and notes form part of these financial statements.
The financial statements on pages 37 to 55 were approved by the Board of Directors on 19 April 2011 and were signed on its behalf by:
D B Liversidge CBE
Director
19 April 2011
Company number: 2298163 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 58
Notes to the Company financial statements
1. Accounting policies
(a) Basis of preparation
The financial statements have been prepared under the historical cost basis and UK GAAP .
(b) Investment in subsidiary undertakings
The Company’s investment in subsidiary undertakings is stated at cost less any provision for impairment.
(c) Share‑based compensation
All share‑based payment arrangements granted after 7 November 2002 that had not vested by 1 January 2006 are recognised in the financial
statements. The Group issues share options to certain employees which are measured at fair value and recognised as an expense in the profit and loss
account with a corresponding increase in profit and loss reserve. The fair value of the employee services received in exchange for the grant of the options
is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted.
The fair values of these payments are measured at the dates of grant and are recognised over the period during which employees become unconditionally
entitled to the awards. At each balance sheet date, the Group revises its estimate of the number of options that are expected to vest. It recognises
the impact of the revision to original estimates, if any , in the profit and loss account, with a corresponding adjustment to retained earnings.
2. Investments
Company £’000
Cost
At 31 December 2010 and 1 January 2010 1,551
Provision for diminution in value
At 31 December 2010 and 1 January 2010 533
Net book value at 31 December 2010 and 1 January 2010 1,018
The principal trading subsidiaries of the Group comprise:
Country of
incorporation Proportion
Company Description of shares held Nature of business and operation held
Surgical Innovations Limited Ordinary £1 shares Design and manufacture of minimally invasive devices Great Britain 100%
Haemocell Limited Ordinary £1 shares Design and manufacture of autologous blood products Great Britain 100%
3. Debtors
2010 2009
£’000 £’000
Prepayments and accrued income 10 9
Other debtors 42 44
Amounts due from subsidiary undertakings 3,267 3,455
3,319 3,508 Annual report and accounts 2010 Surgical Innovations Group plc 59
Accounts 36 - 61
4. Creditors: amounts falling due within one year
2010 2009
£’000 £’000
Accruals and deferred income 56 75
Other creditors 12 19
68 94
5. Share capital
2010 2009
£’000 £’000
Authorised 600,000,000
(2009: 600,000,000) ordinary shares of 1p each 6,000 6,000
Allotted, called up and fully paid 381,491,902
(2009: 373,841,902) ordinary shares of 1p each 3,815 3,738
Details of the share options are contained in note 13 of the consolidated financial statements.
During the year the following ordinary shares of 1p were issued in respect of exercised share options:
600,000 at 1.5p
3,000,000 at 1.7p
3,050,000 at 2.0p
1,000,000 at 3.0p
A total of 7 ,650,000 ordinary shares with a total nominal value of £76,500 were issued for consideration amounting to £151,000.
6. Reserves
Share Accumulated
premium profits/(losses)
£’000 £’000
At 1 January 2010 18,809 (15,770)
Premium on shares issued 75 —
Reorganisation of reserves (18,809) 18,809
Loss for the year — (132)
Employee share‑based payments — 8
At 31 December 2010 75 2,915 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 60
7 . Reconciliation of movements in shareholders’ funds
2010 2009
£’000 £’000
Loss for the financial year (132) (233)
Issue of shares 152 —
Employee share‑based payments 8 75
Net increase/(decrease) in shareholders’ funds 28 (158)
Opening shareholders’ funds 6,777 6,935
Closing shareholders’ funds 6,805 6,777
8. Loss for the financial year of Surgical Innovations Group plc
The loss for the financial year dealt with in the financial statements of the holding company, Surgical Innovations Group plc, was £132,000
(2009: £232,700).
As permitted by Section 408 of the Companies Act 2006, the profit and loss account has not been included in these financial statements.
9. Transactions with related parties
A summary of transactions during the year and outstanding amounts at the balance sheet date is as follows:
Amounts
Amounts payable at
invoiced to 31 December
the Group 2010
£’000 £’000
Quest Investments Limited
1
25 3
Winburn Glass Norfolk
2
23 2
Getz Bros & Co. Inc.
3
15 —
As disclosed in the Report on remuneration:
1. Director’s fees for D B Liversidge CBE are paid to Quest Investments Limited, a company of which he is a Director.
2. Director’s fees and advisory fees for C Glass are paid to Winburn Glass Norfolk, a firm of which he is a partner.
3. Director’s fees and advisory fees for R Simkins are paid to Getz Bros & Co. Inc., a company of which he is Vice President.
Notes to the Company financial statements continued Annual report and accounts 2010 Surgical Innovations Group plc 61
Accounts 36 - 61
IFRS
2010 2009 2008 2007 2006
£’000 £’000 £’000 £’000 £’000
Revenue 7 ,045 4,541 4,312 4,770 4,460
Cost of sales (3,526) (2,447) (2,032) (2,377) (2,593)
Gross profit 3,519 2,094 2,280 2,393 1,867
Other operating expenses (1,932) (1,528) (1,500) (1,708) (1, 132)
Operating profit 1,587 566 780 685 735
Losses from discontinued operations — (200) — — —
Share‑based payments (8) (75) — — —
Finance income 9 13 118 96 —
Finance costs (39) (40) (78) (50) (39)
Profit before taxation 1,549 264 820 731 696
Taxation 239 261 (190) 34 —
Retained profit for the year 1,788 525 630 765 696
Earnings per ordinary share (basic) 0.48p 0.14p 0.17p 0.24p 0.27p
Earnings per ordinary share (diluted) 0.46p 0.14p 0.17p 0.23p 0.27p
Five-year summary Shareholder information
Surgical Innovations Group plc Annual report and accounts 2010 62
Notice is hereby given that the Annual General Meeting of the Company will be held at Clayton Wood House, 6 Clayton Wood Bank, Leeds
LS16 6QZ on 20 June 2011 at 1.00pm. You will be asked to consider the following resolutions:
Ordinary business
To consider and, if thought fit, pass the following resolutions which will be proposed as ordinary resolutions:
1 To receive and adopt the audited accounts for the year ended 31 December 2010 and the Reports of the Directors and auditor thereon.
2 To re‑elect Mr D B Liversidge CBE as a Director of the Company, in accordance with article 107 of the Company’s articles of association,
who offers himself for re‑election as a Director.
3 To re‑elect Mr N G Bowland as a Director of the Company, in accordance with article 107 of the Company’s articles of association,
who offers himself for re‑election as a Director.
4 To re‑appoint Grant Thornton UK LLP as auditor of the Company to hold office until the conclusion of the next general meeting at which
accounts are laid before the Company and to authorise the Directors to determine the auditor’s remuneration.
5 To authorise the Board generally and unconditionally pursuant to Section 551 of the Companies Act 2006 (the Act) to exercise all powers of
the Company to allot shares in the Company and to grant rights to subscribe for or to convert any security into such shares in the Company
(Rights) up to an aggregate nominal amount of £1,313,059.67 (being approximately one‑third of the issued share capital of the Company
as at the date of this notice) provided that this authority shall expire on the earlier of the date falling six months from the expiry of the
Company’s current financial year and the date of the next Annual General Meeting of the Company after the passing of this resolution
unless varied, revoked or renewed by the Company in general meeting, save that the Board may before the expiry of the authority granted
by this resolution make a further offer or agreement which would or might require shares to be allotted or Rights to be granted after such
expiry and the Board may allot shares and grant Rights in pursuance of such an offer or agreement as if the authority conferred by this
resolution had not expired and the authority granted by this resolution is in substitution for all previous authorities granted to the Directors
to allot shares and grant Rights which (to the extent that they remain in force and unexercised) are revoked but without prejudice to any
allotment or grant of Rights made or entered into prior to the date of this resolution 4.
Special business
To consider, and if thought fit, pass the following resolutions which will be proposed as special resolutions.
6 To empower the Board (subject to the passing of the previous resolution) pursuant to Sections 570 and 573 of the Act to allot equity
securities (within the meaning of Section 560 of the Act) for cash pursuant to the authority conferred upon them by the previous resolution
as if Section 561(1) of the Act did not apply to any such allotment, provided that this power shall be limited to:
6. 1 the allotment of equity securities in connection with a rights issue in favour of ordinary shareholders where the equity securities
respectively attributable to the interests of all ordinary shareholders are proportionate (as nearly as may be) to the respective
numbers of ordinary shares held by them but subject to such exclusions or other arrangements as the Directors may deem
necessary or expedient in relation to fractional entitlements, treasury shares, record dates or legal or practical problems under the
law of, or the requirements of, any recognised regulatory body or any stock exchange in any territory; and
6.2 the allotment (otherwise than pursuant to sub‑paragraph 6.1 above) of equity securities up to an aggregate nominal amount
of £393,917 .90 (being approximately 10% of the issued share capital of the Company at the date of this notice),
and shall expire on the earlier of the date falling six months from the end of the current financial year of the Company and the date of the
next Annual General Meeting after the passing of this resolution save that the Company may, before the expiry of any power contained in
this resolution, make a further offer or agreement which would or might require equity securities to be allotted after such expiry and the
Board may allot equity securities in pursuance of such offer or agreement as if the power conferred by this resolution had not expired.
Notice of Annual General Meeting Annual report and accounts 2010 Surgical Innovations Group plc 63
Shareholder information 62 - 68
Special business continued
7 To authorise the Company generally and unconditionally for the purpose of Section 701 of the Act to make one or more market purchases
(within the meaning of Section 693(4) of the Act) of ordinary shares of 1p each in the capital of the Company (Ordinary Shares) provided that:
7 . 1 the maximum aggregate number of Ordinary Shares authorised by this resolution to be purchased is 39,391,790 shares
(representing approximately 10% of the Company’s issued share capital as at the date of this notice);
7 .2 the minimum price which may be paid for such Ordinary Shares is 1p per share (exclusive of advance corporation tax and expenses);
7 .3 the maximum price (exclusive of advance corporation tax and expenses) which may be paid for an Ordinary Share is not more
than the higher of 5% above the average of the middle market quotations for an Ordinary Share as derived from the London Stock
Exchange Daily Official List for the five business days immediately preceding the day on which the Ordinary Share is purchased
and the amount stipulated by Article 5(1) of the Buy‑back and Stabilisation Regulation (Commission Regulation 2273/2003); and
7 .4 unless previously revoked or varied, the authority conferred by this resolution shall expire on the earlier of the date falling six
months from the end of the current financial year of the Company and the date of the next Annual General Meeting of the Company
save that the Company may, before such expiry, make a contract or contracts to purchase Ordinary Shares after such expiry as if the
power conferred by this resolution had not expired.
By order of the Board
N G Bowland Registered office:
Company Secretary Clayton Wood House
19 April 2011 6 Clayton Wood Bank
Leeds LS16 6QZ Shareholder information
Surgical Innovations Group plc Annual report and accounts 2010 64
Notice of Annual General Meeting continued
Notes
1. This notice is the formal notification to shareholders of the Company’s Annual General Meeting, its date, time and place, and the matters
to be considered. If you are in doubt as to what action to take you should consult an independent adviser.
2. Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001 (as amended) and Section 360B of the Companies Act 2006,
only those shareholders registered in the register of members of the Company at 1.00pm on 16 June 2011 as holders of ordinary shares
of 1p each in the capital of the Company shall be entitled to attend and vote at the meeting in respect of the number of shares registered
in their name at that time. Changes to entries in the register of members of the Company after 1.00pm on 16 June 2011 shall be disregarded
in determining the rights of any person to attend and vote at the meeting.
3. A member entitled to attend, speak and vote may appoint a proxy to attend, speak and vote instead of him or her. A member may appoint
more than one proxy in relation to the meeting provided that each proxy is appointed to exercise the rights attached to a different share
or shares held by that member. A proxy need not be a member of the Company. A form of proxy is included at the end of this document and
contains notes for its completion.
To be valid, the form of proxy and any power of attorney or the authority under which it is signed (or a notarially certified copy of it) must
be completed and lodged at the Registrars of the Company, Capita Registrars, at PXS, 34, Beckenham Road, Beckenham, Kent BR3 4TU
not later than 1.00pm on 16 June 2011.
4. Completion and return of a form of proxy does not preclude a member from subsequently attending and voting at the meeting. If a member
appoints a proxy or proxies and then decides to attend the Annual General Meeting in person and vote using his poll card, then the vote
in person will override the proxy vote(s). If the vote in person is in respect of the member’s entire holding, then all proxy votes will be
disregarded. If, however, the member votes at the meeting in respect of less than the member’s entire holding, then if the member indicates
on his polling card that all proxies are to be disregarded, that shall be the case, but if the member does not specifically revoke proxies, then
the vote in person will be treated in the same way as if it were the last received proxy and earlier proxies will only be disregarded to the
extent that to count them would result in the number of votes being cast exceeding the member’s entire holding.
5. To change your proxy instructions simply submit a new proxy appointment using the methods set out above. Note that the cut‑off time for
receipt of proxy appointments (see note 3 above) also apply in relation to amended instructions; any amended proxy appointment received
after the relevant cut‑off time will be disregarded.
Where you have appointed a proxy using the hard copy proxy form and would like to change the instructions using another hard copy proxy
form, please contact Capita Registrars at PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU.
If you submit more than one valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will
take precedence.
6. In order to revoke a proxy instruction you will need to inform the Company by sending a signed hard copy notice clearly stating your intention
to revoke your proxy appointment to Capita Registrars. In the case of a member which is a company, the revocation notice must be executed
under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any
other authority under which the revocation notice is signed (or a duly certified copy of such power or authority) must be included with the
revocation notice.
The revocation notice must be received by Capita Registrars at PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU no later than 1.00pm
on 16 June 2011. If you attempt to revoke your proxy appointment but the revocation is received after the time specified then, subject
to paragraph 5 above, your appointment will remain valid. Annual report and accounts 2010 Surgical Innovations Group plc 65
Shareholder information 62 - 68
Notes continued
7 . Copies of the following documents will be available for inspection at the registered office of the Company during normal business hours
until the date of the Annual General Meeting and on that day, at the place of the meeting from at least 15 minutes prior to the meeting until
its conclusion:
Directors’ service contracts; and
letters of appointment for Non‑executive Directors.
8. As at 19 April 2011 (being the last practicable business day prior to the publication of this notice) the Company’s issued share capital
consisted of 393,917 ,902 ordinary shares of 1p each, with one voting right per share.
9. If a corporation is a member of the Company, it may by resolution of its directors or other governing body authorise one or more persons
to act as its representative or representatives at the Meeting and any such representative or representatives shall be entitled to exercise
on behalf of the corporation all the powers that the corporation could exercise if it were an individual member of the Company.
Corporate representatives should bring with them either an original or certified copy of the appropriate board resolution or an original
letter confirming the appointment, provided it is on the corporation’s letterhead and is signed by an authorised signatory and accompanied
by evidence of the signatory’s authority.
10. A member may not use any electronic address (within the meaning of Section 333(4) of the Companies Act 2006) provided in this Notice
of Meeting (or in any related or accompanying document (including the form of proxy) to communicate with the Company for any purposes
other than those expressly stated. Shareholder information
Surgical Innovations Group plc Annual report and accounts 2010 66
Explanatory notes to the Notice of Annual General Meeting
The notes on the following pages give an explanation of the proposed resolutions.
Resolutions 1 to 5 are proposed as ordinary resolutions. This means that for each of those resolutions to be passed, more than half of the
votes cast must be in favour of the resolution.
Resolutions 6 to 9 are proposed as special resolutions. This means that for each of those resolutions to be passed, at least three quarters
of the votes cast must be in favour of the resolution.
Resolution 1 – Accounts
The Directors will present their report, the auditor’s report and the audited financial statements for the financial year ended 31 December 2010
to the meeting as required by law.
Resolutions 2 and 3 – Re-election of Directors
At each general meeting one‑third of the directors for the time being are required to retire. If the number of relevant directors is not a multiple
of three, the number nearest to but not exceeding one‑third of Directors should be obliged to retire. Directors due to retire by rotation are
those longest in office since their last re‑election and as between persons who become or were last re‑elected on the same day those due
to retire shall (unless otherwise agreed among themselves) be determined by lot. A retiring Director is eligible for re‑election. In line with past
practice, two Directors will retire by rotation. Doug Liversidge and Graham Bowland retire by rotation and are offering themselves for re‑election.
Resolution 4 – Re-appointment of auditor
The Company is required to appoint an auditor at each general meeting at which accounts are laid, to hold office until the next general meeting.
The present auditor, Grant Thornton UK LLP , is willing to continue in office for a further year and this resolution proposes its reappointment
and, in accordance with standard practice, authorises the Directors to determine the level of the auditor’s remuneration.
Resolution 5 – Authority to allot shares
The resolution grants the Directors authority to allot relevant securities up to an aggregate nominal amount of £1,313,059.67 being
approximately one‑third of the Company’s ordinary share capital in issue at 19 April 2011. It is not the Directors’ current intention to allot
relevant securities pursuant to this resolution. This authority replaces the existing authority to allot relevant securities but does not affect
the ability to allot shares under the share option schemes.
Resolution 6 – Disapplication of statutory pre-emption rights
This resolution disapplies the statutory pre‑emption rights which would otherwise apply on an issue of shares for cash pursuant to a rights
issue where the securities attributable to the interests of all shareholders are proportionate (as nearly as may be) to the number of shares
held and generally up to a further £393,917 .90 being 10% of the Company’s ordinary share capital in issue at 19 April 2011. This replaces
the existing authority to disapply pre‑emption rights and expires at the conclusion of the next Annual General Meeting of the Company .
Resolution 7 – Purchase of own shares
In certain circumstances it may be advantageous for the Company to purchase its own shares and this resolution seeks authority to do this.
The Directors would only consider making purchases if they believed that such purchases would be in the best interests of shareholders
generally, having regard to the effect on earnings per share and the Company’s overall financial position.
The resolution gives general authority for the Company to make purchases of up to 39,391,790 ordinary shares (being 10% of the
Company’s ordinary share capital in issue at 19 April 2011) at a minimum price of 1p and a maximum price being the higher of 5% above
the average of the middle market quotations for ordinary shares for the five business days prior to the purchase and the price stipulated by
Article 5(1) of the Buy‑back and Stabilisation Regulations 2003 (being the higher of the price of the last independent trade and the highest
current independent bid on the trading venue where the purchase is carried out).
Companies are permitted to retain any of their own shares which they have purchased as treasury stock with a view to possible re‑issue
at a future date, rather than cancelling them. The Company will consider holding any of its own shares that it purchases pursuant to the
authority conferred by this resolution as treasury stock. This would give the Company the ability to re‑issue treasury shares quickly and cost
effectively, and would provide the Company with additional flexibility in the management of its capital base. Annual report and accounts 2010 Surgical Innovations Group plc 67
I/We, the undersigned, being (a) member/member(s) of Surgical Innovations Group plc, hereby appoint the Chairman of the Meeting or,
Name of proxy .................................................................................................................. Number of shares ..................................................................
(IN BLOCK CAPITALS PLEASE)
as my/our proxy to vote for me/us and on my/our behalf at the Annual General Meeting of the Company to be held at Clayton Wood House,
6 Clayton Wood Bank, Leeds LS16 6QZ on 20 June 2011 at 1.00pm and at any adjournment thereof. I/We wish my/our proxy to vote as shown
below in respect of the resolutions set out in the Notice of the Meeting.
Please indicate by ticking the box if this proxy appointment is one of multiple appointments being made. *
For the appointment of one or more proxy, please refer to explanatory note 2 (overleaf).
For Against Vote
withheld*
1 To receive and adopt the audited accounts for the year ended 31 December 2010 and the
Reports of the Directors and auditor thereon.
2 To re‑elect Mr D B Liversidge CBE as a Director of the Company.
3 To re‑elect Mr N G Bowland as a Director of the Company.
4 To re‑appoint Grant Thornton UK LLP as auditor of the Company and to authorise the
Directors to determine the auditor’s remuneration.
5 To authorise the Board to allot shares in the Company and to grant rights to subscribe
for or to convert any security into such shares.
6 To empower the Board to allot equity securities for cash.
7 To authorise the Company to make one or more market purchases of ordinary shares of 1p
each in the capital of the Company (Ordinary Shares).
If you want your proxy to vote in a certain way on the resolutions specified, please place an “X” in the appropriate box. If you fail to select any of
the given options your proxy can vote as he/she chooses or can decide not to vote at all. The proxy can also do this on any other resolution that
is put to the meeting.
* The “Vote Withheld” option is to enable you to abstain on any particular resolution. However, it should be noted that a “Vote Withheld” is not a
vote in law and will not be counted in the calculation of the proportion of the votes “For” and “Against” a resolution.
Signed .......................................................................................... Dated this ......................................... day of ........................................................ 2011
Name ......................................................................................................................................................................................................................................
Address...................................................................................................................................................................................................................................
Form of proxy
Surgical Innovations Group plc
Shareholder information
Surgical Innovations Group plc Annual report and accounts 2010 68
Notes:
1. Every holder has the right to appoint some other person(s) of their choice, who need not be a shareholder as his/her proxy to exercise all
or any of his/her rights, to attend, speak and vote on their behalf at the meeting. If you wish to appoint a person other than the Chairman,
please insert the name of your chosen proxy holder in the space provided (see above). If the proxy is being appointed in relation to
less than your full voting entitlement, please enter in the box next to the proxy holder’s name (see above) the number of shares in
relation to which they are authorised to act as your proxy. If left blank your proxy will be deemed to be authorised in respect of your
full voting entitlement (or if this proxy form has been issued in respect of a designated account for a shareholder, the full voting
entitlement for that designated account).
2. To appoint more than one proxy you may photocopy this form. Please indicate the proxy holder’s name and the number of shares in
relation to which they are authorised to act as your proxy (which, in aggregate, should not exceed the number of shares held by you).
Please also indicate if the proxy instruction is one of multiple instructions being given.
3. The “Vote Withheld” option is provided to enable you to abstain on any particular resolution. However, it should be noted that a “Vote
Withheld” is not a vote in law and will not be counted in the calculation of the proportion of the votes “For” and “Against” a resolution.
4. Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, entitlement to attend and vote at the meeting and the
number of votes which may be cast thereat will be determined by reference to the Register of Members of the Company at 6.00pm
on the day which is two days before the day of the meeting or adjourned meeting. Changes to entries on the Register of Members after
that time shall be disregarded in determining the rights of any person to attend and vote at the meeting.
5. To appoint one or more proxies or to give an instruction to a proxy (whether previously appointed or otherwise) via the CREST system,
CREST messages must be received by the issuer’s agent (ID number RA10) not later than 48 hours before the time appointed for holding
the meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp generated by the CREST
system) from which the issuer’s agent is able to retrieve the message. The Company may treat as invalid a proxy appointment sent by
CREST in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.
6. The completion and return of this form will not preclude a member from attending the meeting and voting in person. If you attend the
meeting in person, your proxy appointment will automatically be terminated.
7 . To be effective, all votes must be lodged not less than 48 hours before the time of the meeting at the office of the Company’s registrars
at: Capita Registrars, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU.
Form of proxy continued
Surgical Innovations Group plc
Over the last year, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence
concerning investment matters. These are typically from overseas based “brokers” who target UK shareholders, offering to sell them what
often turn out to be worthless or high risk shares in US or UK investments. These operations are commonly known as “boiler rooms” . These
“brokers” can be very persistent and extremely persuasive and a 2006 survey by the Financial Services Authority (FSA) has reported that
the average amount lost by investors is around £20,000.
It is not just the novice investor that has been duped in this way; many of the victims had been successfully investing for several years.
Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free company reports.
If you receive any unsolicited investment advice:
make sure you get the correct name of the person and organisation;
check that they are properly authorised by the FSA before getting involved by visiting www.fsa.gov.uk/register;
report the matter to the FSA either by calling 0845 606 1234 or visiting www.moneymadeclear.fsa.gov.uk; and
if the calls persist, hang up.
If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme.
The FSA can be contacted by completing an online form at www.fsa.gov.uk/pages/doing/regulated/law/alerts/overseas.shtml.
Details of any share dealing facilities that the Company endorses will be included in Company mailings.
More detailed information on this or similar activity can be found on the FSA website www.moneymadeclear.fsa.gov.uk.
Warning to shareholders – boiler room scams Think surgery ...
...Think surgical innova Tions
surgical innovations group plc
Clayton Wood House
6 Clayton Wood Bank
Leeds LS16 6QZ
T. +44 (0) 113 230 7597
F . +44 (0) 113 230 7598
W. www.sigroupplc.com
For investor relations enquiries please email:
[email protected]
For sales enquiries please email:
[email protected]
For general enquiries please email:
[email protected] | Surgical Innovations Group plc Annual report and accounts 2010 04
At a glance: Our business
Review of the year
SI Brand
Specialising in the design and manufacture of creative solutions
for MIS and industrial markets, our pioneering products are user
orientated with ergonomics at the core of our technology .
SI reports under three operating statements:
OEM
We design and manufacture our own successful
brand of Resposable
®
medical devices
SI has introduced advancements such as
YelloPort +plus
®
laparoscopic port access
system, Logi
®
Range resposable laparoscopic
instrument system, FastClamp endoscopic
clamping system and Quick
®
Range single use
laparoscopic instrumentation.
We are proud to be an OEM supplier to several
leading medical device manufacturers
It is testament to our design and manufacturing
skills that our products are in demand by highly
renowned medical companies. SI can offer an
effective solution, providing expertise in the design
and development of an instrument combined with our
manufacturing capability to produce a final device
ready for ultimate sale.
Industrial
We are excited about the growth of the
Group’s business providing industrial
solutions for major international companies
The solutions are based on our core technology
developed over the years in our surgical
instruments business. We believe that there is
scope to develop and expand this segment using
our core technology.
Strategy:
New product development to enhance
the SI brand
Increase our network of specialist
distributors
Expand the use of YelloPort+plus
®
within the US market
Strategy:
Develop the OEM proposition to provide
a full-service solution from concept,
through to the development and
manufacture of innovative devices
Use SI’ s core intellectual property to create
medical device solutions for OEM partners
Continue promotion and adoption of
SI’s resposable philosophy with major
medical device companies
Strategy:
Continue to seek opportunities where
SI’s intellectual property can be
adapted to industrial applications
Continue to engage with major
industrial partners Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 05
OEM revenue
£2,506,000
00%
00%
Read more on this division
page 10 - 11
Read more on this division
page 12 - 13
SI Brand revenue
£3,852,000
Percentage of Group revenue
Key product ranges:
YelloPort+plus
®
Logi
®
Range
Logic
®
Range
36%
54%
Percentage of Group revenue
Percentage of Group revenue
Companies we are working with:
Gyrus
T elefle x
CareFusion
Key Industrial applications:
Aero engine
Power generation
10%
Industrial revenue
£687 ,000
00%
Read more on this division
page 14 - 15
00%
International growth
The growth strategy of the business is based upon
the distribution of SI branded products through
our worldwide independent dealer network.
00%
Read more online
www.surginno.com | Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 01
Review of the year 01 - 19
At a glance: Highlights 01
The Queen’s Award 02
At a glance: Our business 04
Chairman’s statement 06
Business and financial review 08
Corporate social responsibility 16
Governance 20 - 35
Board of Directors 20
Senior management and advisers 22
Clinical Advisory Board 24
Surgical Innovations’ trade marks 26
Report of the Directors 27
Report on remuneration 31
Corporate governance 34
Accounts 36 - 61
Report of the independent auditor – Group 36
Consolidated statement of comprehensive income 37
Consolidated balance sheet 38
Consolidated cash flow statement 39
Consolidated statement of changes in equity 40
Notes to the consolidated financial statements 41
Report of the independent auditor – Company 56
Company balance sheet 57
Notes to the Company financial statements 58
Five-year summary 61
Shareholder information 62 - 68
Notice of Annual General Meeting 62
Explanatory notes to the Notice of Annual General Meeting 66
Form of proxy 67
Warning to shareholders – boiler room scams IBC
Revenue (£m)
Operating margins (%)
Pre-tax profit (£m)
Net cash generated from operating activities (£m)
Review of the year
At a glance: Highlights
£7 .045m
+55%
07 08 09 10
4.770
4.312
4.541
7 .045
22%
07 08 09 10
15
19
6
22
£1 .549m
+487%
£2.202m
07
07
08
08
09
09
10
10
0.731
0.428
0.820
0.700
0.264
1.439
1.549
2.202
Financial highlights
Revenue increased 55% to £7 .045 million
(2009: £4.541 million)
Pre-tax profit increased 487% to
£1.549 million (2009: £264,000)
Operating margins increased to 22%
(2009: 6%)
Net cash of £2.2 million generated from
operating activities
Basic earnings per share of 0.48p
(2009: 0. 14p)
Operational highlights
Own brand sales increased 30% to
£3.852 million (2009: £2.956 million);
driven by flagship Resposable
®
products
OEM revenues increased 71% to
£2.506 million (2009: £1.463 million)
Industrial sales boosted by delivery
of £616,000 order
Continued major investment in research
and development, plant and manufacturing
Visit our website:
www.surginno.com | Surgical Innovations Group plc Annual report and accounts 2010 06
Chairman’s statement
Review of the year
I am pleased to report a record year in
the continuing development of the Group.
Our strategy of producing innovative, high
quality and cost-effective instruments to an
increasingly cost-conscious market, coupled
with the strong investment in 2008 and 2009,
has really started to bear fruit, both for our
own branded and OEM products.
Given the growth of the business, and to
provide greater clarity of progress in the key
markets in which we operate, the Group
is for the first time reporting across three
segments: SI Brand, OEM and Industrial.
Results
Revenue for the period was £7 .045 million
(2009: £4.541 million) and profit before tax
increased nearly five-fold to £1.549 million
(2009: £264,000).
A large part of this growth has arisen from
sales in the OEM segment which accounted
for 35% of total revenue (2009: 32%).
A year of progress and innovation
“ The Group has undergone
yet another year of
transformation, successfully
meeting the demands
of rapid growth. We have
continued to invest heavily
in the business while R&D
capability has undergone
a step-change to speed up
new product development
and improvements to our
existing technology . ”
Doug Liversidge CBE
Chairman
Summary of Chairman’s statement
Total revenue for the period increased by
55% to £7 .045 million and profit before tax
increased nearly five-fold to £1.548 million
Capitalised investment in R&D rose by
57% to £1.674 million
The Board is confident about future growth
prospects of the business for 2011 Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 07
Sales growth of SI branded products was
driven by our Resposable
®
products and
overall revenues were boosted by the delivery
of a £616,000 order in the Industrial segment
in May 2010; sales to industrial customers
accounted for 10% of total revenues for 2010.
Retained profit for the period was £1 .788 million
(2009: £525,000) including a taxation.
Cash flow and investment
During the year the Group generated net cash
of £2.202 million from operating activities,
enabling the Group to continue its strong
investment in product development with
capitalised investment in research and
development (R&D) increasing by 57%
to £1.674 million (2009: £1.066 million),
reflecting a step-change in the structure
of the R&D team as well as a stronger
focus on new product development.
Elsewhere capital expenditure remained
strong with £628,000 invested in plant
and equipment while the total number
of employees and agency staff increased
from 76 at the end of 2009 to 117 at the end
of 2010. We have continued to make staff
appointments in all areas of the business,
while the R&D team has been re-organised
in such a way as to encourage product
concept generation.
The Clinical Advisory Board now consists
of nine highly experienced surgeons covering
a wide range of specialisms in MIS, with
Mr Marco Adamo and Mr Jon Conroy joining
the Board in January 2011, the latter extending
the team’s expertise into arthroscopy.
Dividend
In 2009, SI successfully applied to the courts
to cancel the Group’s accumulated losses.
The purpose of this was to enable the Board
to implement a dividend strategy at such time
as it considers appropriate. While a strategy
remains under review, the Board believes that
at this stage in the Group’s development it
would be more appropriate to continue its
focus on strong inward investment.
Acquisitions
The Board continues to review acquisition
opportunities in the area of MIS where
strong synergies exist with the Group and
where our R&D expertise and in-house
manufacturing capabilities can create
improvements to the products and cost
savings for the end user.
Outlook
Trading in the period since the year end has
been encouraging, particularly from the core
business, where we have seen further orders
for SI branded products, particularly for
YelloPort+plus
®
. The R&D team continues
to improve the SI branded product range to
generate a wider range of new products and
enhancements for our global distributor
network and affirm our position as a leading
innovator within the field of MIS.
In February 2011 we were pleased to announce
the four-year exclusive contract for a minimum
of $2.2 million with US-based Mediflex
Surgical Products (“Mediflex”) with regard
to the inclusion of YelloPort+plus
®
in surgical
trays in the US.
We are also being approached by several other
OEM customers to develop new laparoscopic
products on an exclusive basis.
We remain confident about the future growth
prospects of the business for the remainder
of 2011 and further into 2012 and 2013 as
new products are launched towards the end
of this year and the increasing traction with
OEM customers gains momentum.
I would like to thank the Board and staff
for their tireless work in 2010 and their
contribution to the rapid growth of the
business. We are better positioned than ever
to take full advantage of the opportunities
that are available to us and I look forward
to reporting on the continuing success
of the Group over the coming year.
Doug Liversidge CBE
Chairman
19 April 2011
00%
Innovation
In 2010 SI officially received the Queen ’ s Award for
Enterprise for their pioneering YelloPort+plus
®
device
– a port access system which acts as a channel into
the body allowing surgeons to carry out delicate
keyhole procedures. | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input share our Technology ...
...share our Passion
surgical innovations group plc
Annual report and accounts 2010 surgical innovations group plc specialises in
the design and manufacture of innovative devices
for use in minimally invasive surgery (Mis) and
industrial markets.
Specialising in the design and manufacture of creative
solutions for MIS and industrial markets, our pioneering
products are user orientated with ergonomics at the
core of our technology.
our growth strategy:
Continuous innovation and product development
Technology transfer into other areas of MIS
Development of both new and existing OEM relationships
Continued expansion through organic
growth of SI brand in international markets
Explore acquisition opportunities in new
therapeutic markets Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 01
Review of the year 01 - 19
At a glance: Highlights 01
The Queen’s Award 02
At a glance: Our business 04
Chairman’s statement 06
Business and financial review 08
Corporate social responsibility 16
Governance 20 - 35
Board of Directors 20
Senior management and advisers 22
Clinical Advisory Board 24
Surgical Innovations’ trade marks 26
Report of the Directors 27
Report on remuneration 31
Corporate governance 34
Accounts 36 - 61
Report of the independent auditor – Group 36
Consolidated statement of comprehensive income 37
Consolidated balance sheet 38
Consolidated cash flow statement 39
Consolidated statement of changes in equity 40
Notes to the consolidated financial statements 41
Report of the independent auditor – Company 56
Company balance sheet 57
Notes to the Company financial statements 58
Five-year summary 61
Shareholder information 62 - 68
Notice of Annual General Meeting 62
Explanatory notes to the Notice of Annual General Meeting 66
Form of proxy 67
Warning to shareholders – boiler room scams IBC
Revenue (£m)
Operating margins (%)
Pre-tax profit (£m)
Net cash generated from operating activities (£m)
Review of the year
At a glance: Highlights
£7 .045m
+55%
07 08 09 10
4.770
4.312
4.541
7 .045
22%
07 08 09 10
15
19
6
22
£1 .549m
+487%
£2.202m
07
07
08
08
09
09
10
10
0.731
0.428
0.820
0.700
0.264
1.439
1.549
2.202
Financial highlights
Revenue increased 55% to £7 .045 million
(2009: £4.541 million)
Pre-tax profit increased 487% to
£1.549 million (2009: £264,000)
Operating margins increased to 22%
(2009: 6%)
Net cash of £2.2 million generated from
operating activities
Basic earnings per share of 0.48p
(2009: 0. 14p)
Operational highlights
Own brand sales increased 30% to
£3.852 million (2009: £2.956 million);
driven by flagship Resposable
®
products
OEM revenues increased 71% to
£2.506 million (2009: £1.463 million)
Industrial sales boosted by delivery
of £616,000 order
Continued major investment in research
and development, plant and manufacturing
Visit our website:
www.surginno.com The Queen’s Award
Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 02
Surgical Innovations (SI) celebrates winning the Queen’s Award.
Announced on the Queen’s birthday – 21 April 2010 – SI was awarded
the Queen’s Award for Enterprise, the UK’s most prestigious award for
outstanding innovation and business performance.
Receiving the award under the Innovation category , the accolade
acknowledges the technical and clinical excellence SI has achieved
with its pioneering YelloPort+plus
®
– a port access system which
acts as a channel into the body allowing surgeons to carry out
delicate keyhole procedures.
The awards are made each year by Her Majesty Queen Elizabeth II,
on the advice of the Prime Minister , who is assisted by an Advisory
Committee that includes representatives of Government, industry
and commerce and the trade unions.
Speaking about the award Graham Bowland, Managing Director
of Surgical Innovations, said: “We are delighted to win such a
prestigious royal award for our contribution to the healthcare
industry . This award acknowledges the commitment and also
the dedication made by every single one of our employees from
design through to production and also acknowledges Yorkshire’s
thriving healthcare technology sector” .
Chairman Doug Liversidge CBE, added: “The Board would like
to extend its congratulations and say a personal thank you to
everyone involved in this achievement and their contribution
towards the overall success of the Group. ”
“ Designing and developing YelloPort+plus
®
was a real milestone in the history of Surgical
Innovations and travelling to Buckingham
Palace to meet the Queen was a real honour
and pleasure. It certainly is a day I will
always remember. ”
Mike White
Product Development Director Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 03
After the presentation, the Rt Hon David Blunkett MP revealed
how he was a “guinea pig” for the device while he was serving as
Home Secretary. The Labour MP spoke about how he was
diagnosed with gastro-oesophageal reflux during this time and
was introduced to SI’s co-founder Professor Mike McMahon who
operated on him using SI’s instruments.
Other awards we’ve won:
Regional Innovation Award 2010
Medilink Yorkshire and Humber Innovation
and Healthcare Business Award 2010
Individual of the Y ear
(Large Company) 2010
Yorkshire Productivity Awards
Y orkshire Innovator Award 2010
TheBusinessDesk.com
Yorkshire Business Masters 2010
“ I’m here as a recipient of the wonders
of instrumentation that have been
created by this company. ”
Rt Hon David Blunkett
Labour MP
00%
Read more stories like this
www.surginno.com/news Surgical Innovations Group plc Annual report and accounts 2010 04
At a glance: Our business
Review of the year
SI Brand
Specialising in the design and manufacture of creative solutions
for MIS and industrial markets, our pioneering products are user
orientated with ergonomics at the core of our technology .
SI reports under three operating statements:
OEM
We design and manufacture our own successful
brand of Resposable
®
medical devices
SI has introduced advancements such as
YelloPort +plus
®
laparoscopic port access
system, Logi
®
Range resposable laparoscopic
instrument system, FastClamp endoscopic
clamping system and Quick
®
Range single use
laparoscopic instrumentation.
We are proud to be an OEM supplier to several
leading medical device manufacturers
It is testament to our design and manufacturing
skills that our products are in demand by highly
renowned medical companies. SI can offer an
effective solution, providing expertise in the design
and development of an instrument combined with our
manufacturing capability to produce a final device
ready for ultimate sale.
Industrial
We are excited about the growth of the
Group’s business providing industrial
solutions for major international companies
The solutions are based on our core technology
developed over the years in our surgical
instruments business. We believe that there is
scope to develop and expand this segment using
our core technology.
Strategy:
New product development to enhance
the SI brand
Increase our network of specialist
distributors
Expand the use of YelloPort+plus
®
within the US market
Strategy:
Develop the OEM proposition to provide
a full-service solution from concept,
through to the development and
manufacture of innovative devices
Use SI’ s core intellectual property to create
medical device solutions for OEM partners
Continue promotion and adoption of
SI’s resposable philosophy with major
medical device companies
Strategy:
Continue to seek opportunities where
SI’s intellectual property can be
adapted to industrial applications
Continue to engage with major
industrial partners Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 05
OEM revenue
£2,506,000
00%
00%
Read more on this division
page 10 - 11
Read more on this division
page 12 - 13
SI Brand revenue
£3,852,000
Percentage of Group revenue
Key product ranges:
YelloPort+plus
®
Logi
®
Range
Logic
®
Range
36%
54%
Percentage of Group revenue
Percentage of Group revenue
Companies we are working with:
Gyrus
T elefle x
CareFusion
Key Industrial applications:
Aero engine
Power generation
10%
Industrial revenue
£687 ,000
00%
Read more on this division
page 14 - 15
00%
International growth
The growth strategy of the business is based upon
the distribution of SI branded products through
our worldwide independent dealer network.
00%
Read more online
www.surginno.com Surgical Innovations Group plc Annual report and accounts 2010 06
Chairman’s statement
Review of the year
I am pleased to report a record year in
the continuing development of the Group.
Our strategy of producing innovative, high
quality and cost-effective instruments to an
increasingly cost-conscious market, coupled
with the strong investment in 2008 and 2009,
has really started to bear fruit, both for our
own branded and OEM products.
Given the growth of the business, and to
provide greater clarity of progress in the key
markets in which we operate, the Group
is for the first time reporting across three
segments: SI Brand, OEM and Industrial.
Results
Revenue for the period was £7 .045 million
(2009: £4.541 million) and profit before tax
increased nearly five-fold to £1.549 million
(2009: £264,000).
A large part of this growth has arisen from
sales in the OEM segment which accounted
for 35% of total revenue (2009: 32%).
A year of progress and innovation
“ The Group has undergone
yet another year of
transformation, successfully
meeting the demands
of rapid growth. We have
continued to invest heavily
in the business while R&D
capability has undergone
a step-change to speed up
new product development
and improvements to our
existing technology . ”
Doug Liversidge CBE
Chairman
Summary of Chairman’s statement
Total revenue for the period increased by
55% to £7 .045 million and profit before tax
increased nearly five-fold to £1.548 million
Capitalised investment in R&D rose by
57% to £1.674 million
The Board is confident about future growth
prospects of the business for 2011 Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 07
Sales growth of SI branded products was
driven by our Resposable
®
products and
overall revenues were boosted by the delivery
of a £616,000 order in the Industrial segment
in May 2010; sales to industrial customers
accounted for 10% of total revenues for 2010.
Retained profit for the period was £1 .788 million
(2009: £525,000) including a taxation.
Cash flow and investment
During the year the Group generated net cash
of £2.202 million from operating activities,
enabling the Group to continue its strong
investment in product development with
capitalised investment in research and
development (R&D) increasing by 57%
to £1.674 million (2009: £1.066 million),
reflecting a step-change in the structure
of the R&D team as well as a stronger
focus on new product development.
Elsewhere capital expenditure remained
strong with £628,000 invested in plant
and equipment while the total number
of employees and agency staff increased
from 76 at the end of 2009 to 117 at the end
of 2010. We have continued to make staff
appointments in all areas of the business,
while the R&D team has been re-organised
in such a way as to encourage product
concept generation.
The Clinical Advisory Board now consists
of nine highly experienced surgeons covering
a wide range of specialisms in MIS, with
Mr Marco Adamo and Mr Jon Conroy joining
the Board in January 2011, the latter extending
the team’s expertise into arthroscopy.
Dividend
In 2009, SI successfully applied to the courts
to cancel the Group’s accumulated losses.
The purpose of this was to enable the Board
to implement a dividend strategy at such time
as it considers appropriate. While a strategy
remains under review, the Board believes that
at this stage in the Group’s development it
would be more appropriate to continue its
focus on strong inward investment.
Acquisitions
The Board continues to review acquisition
opportunities in the area of MIS where
strong synergies exist with the Group and
where our R&D expertise and in-house
manufacturing capabilities can create
improvements to the products and cost
savings for the end user.
Outlook
Trading in the period since the year end has
been encouraging, particularly from the core
business, where we have seen further orders
for SI branded products, particularly for
YelloPort+plus
®
. The R&D team continues
to improve the SI branded product range to
generate a wider range of new products and
enhancements for our global distributor
network and affirm our position as a leading
innovator within the field of MIS.
In February 2011 we were pleased to announce
the four-year exclusive contract for a minimum
of $2.2 million with US-based Mediflex
Surgical Products (“Mediflex”) with regard
to the inclusion of YelloPort+plus
®
in surgical
trays in the US.
We are also being approached by several other
OEM customers to develop new laparoscopic
products on an exclusive basis.
We remain confident about the future growth
prospects of the business for the remainder
of 2011 and further into 2012 and 2013 as
new products are launched towards the end
of this year and the increasing traction with
OEM customers gains momentum.
I would like to thank the Board and staff
for their tireless work in 2010 and their
contribution to the rapid growth of the
business. We are better positioned than ever
to take full advantage of the opportunities
that are available to us and I look forward
to reporting on the continuing success
of the Group over the coming year.
Doug Liversidge CBE
Chairman
19 April 2011
00%
Innovation
In 2010 SI officially received the Queen ’ s Award for
Enterprise for their pioneering YelloPort+plus
®
device
– a port access system which acts as a channel into
the body allowing surgeons to carry out delicate
keyhole procedures. Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 08
Business and financial review
Operating review
The investment made in the Group throughout
2008 and 2009 started to make a material
impact in 2010 and resulted in a year of
record performance.
All three segments of the business demonstrated
significant growth in 2010. The main focus
remains our core business of MIS, either
through our own branded products or on
behalf of our OEM customers.
We continued to make significant investment in
R&D as well as in our manufacturing capability .
R&D
The Group ’ s continuing success and growth is
dependent on its ability to create new concepts
and intellectual property in the field of MIS.
Significant investment of £1 .834 million was
made in 2010 (2009: £1 .066 million) in the R&D
team as well in a change in its structure. R&D
now employs 28 individuals and is divided into
concept and development teams.
The concept team of seven has been given
a wide brief to generate new ideas across all
areas of MIS. Working closely with the Clinical
Advisory Board, the team has a target to
generate six concepts per annum which can
be transferred to the development team for
further work. The team is working on a
‘‘ The investment made in
the Group throughout 2008
and 2009 started to make
a material impact in 2010
and resulted in a year of
record performance. ’’
Significant investment in research
and development
Graham Bowland
Chief Executive Officer
Summary of Business and financial review
Own-brand sales driven by flagship
Resposable
®
products
Significantly improved trading with
OEM partners
Industrial sales boosted by delivery of
£616,000 order
Continued significant investment in R&D
across a range of products
Creation and expansion of concept and
product development teams Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 09
number of new products and improvements
which are on course to be brought to the
market by the end of 2011. Furthermore, in
2010 the Group filed nine new UK patents
as compared to five in 2009.
The R&D team has also benefited from the
investment in in-house manufacturing, a 3D
printer and advanced CAD technology, with
the result that new ideas and prototypes can
now be presented to potential customers in
a matter of days rather than months.
Looking forward, the Group expects to continue
its high level of investment in R&D as part of an
ongoing strategy to ensure a regular stream of
new products and continual product improvement.
Manufacturing
During 2010, £628,000 was invested
in tooling, plant and machinery; this was
a continuation of the £839,000 invested
in 2009. The focus in 2010 was in areas
where additional capacity was required,
and in plastic injection moulding, which
now enables the Group to manufacture
in-house instrumentation in their entirety.
The manufacturing facility now operates
a continuous daily three-shift system,
constituting a much higher return on capital
employed as compared to 2009. Capacity has
increased in all areas of the facility and this
has been complemented by the introduction
of lean manufacturing practices to optimise
process performance; this will continue
throughout 2011. Computerised data control
measuring has now been introduced to all
areas of the machine shop, giving us the
ability to analyse tolerance information and
enhance quality control.
Our facility allows for further capacity in the
foreseeable future and investment scheduled
for the current financial year will facilitate
the continued growth and optimisation of
Number of patents filed in
the UK alone
9 patents
in 2010
in the UK
alone
09 10
5
9
At a glance: key performance indicators
Research and development
The Group expects to continue its high level of
investment in R&D as part of an ongoing strategy
to ensure a regular stream of new products and
continual product improvement.
The Directors have monitored the overall progress of the Group and the individual
strategic elements by reference to certain financial and non-financial KPIs:
Financial performance
KPIs are in place to measure sales, profitability, rate of divisional growth, cash generation
and returns on capital employed.
Customer satisfaction
KPIs are established to measure and improve customer relationships, quality of service
and our order delivery times.
Employee satisfaction
KPIs are agreed to measure staff morale, training needs and personal development.
Leadership
KPIs are set to measure the performance of Directors and management in conjunction
with overall Group strategy and planning.
Innovation
KPIs are positioned to measure the creativity and inventiveness of employees to improve
the number of patents filed, design rights applied for and internal products developed.
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2.00p
1.00p
0.00p
Mar 03
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Share price performance
Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 10
Business and financial review continued
Operating review continued
Manufacturing continued
the manufacturing arm. Injection
moulding capacity will be expanded and
further automation within the cleanrooms
is planned as part of our wider initiative to
improve operating efficiencies throughout
the Group.
SI Brand
Revenues from SI branded products increased
over the period by 30% to £3.852 million
(2009: £2.956 million). This growth was driven
by SI’s flagship Resposable
®
products,
YelloPort+plus
®
and Logi
®
Range.
Demand for Resposable
®
instruments, where
some elements are disposable and others
reusable, reflects a culture change within
the medical device industry and provides
cost-effective solutions to an increasingly
cost-conscious environment.
The sales and marketing of SI’s products
continued apace in its target regions. The
business development team now consists
of four full time employees who are looking
to expand distribution of SI’s products
through its network of over 45 dealers in
Europe, the Middle East, India, Australasia
and the US. The team continues to attend
international exhibitions in these territories.
In 2010 it became evident that the routes
to market in the US are different for each
product. For example, the most effective way
to distribute the Logi
®
Range is via a master
dealer, while YelloPort+plus
®
benefits from
being distributed via serviced tray companies.
Since the year end we announced a $2.2 million
contract with Mediflex Surgical Products with
regard to the inclusion of YelloPort+plus
®
in surgical trays throughout the US.
In the UK, the Group extended its exclusive
distribution partnership with Elemental
Healthcare for a further three years, with
particular focus on YelloPort+plus
®
and
Logi
®
Range instruments.
New product development and product
enhancement for the SI brand continues
apace and is driven by the R&D team’s close
working relationship with the Clinical
Advisory Board.
All our existing products are under continuous
scrutiny by the R&D team to improve quality
and performance, as well as product line
extensions. Investment in our own machinery
allows us to provide a greater range of disposable
elements that complement the reusable parts.
We are currently expanding the Logi
®
Range
to include a broader range of jaws in different
sizes introducing it to new areas of
laparoscopic surgery .
With increasing focus on safer surgery and
cosmesis (the cosmetic aspect surgery),
there is a drive for smaller and even less
invasive surgery . To respond to this, SI is taking
the strategic step of developing a range of
3mm Resposable
®
instrumentation which is
compatible with its existing non-disposable
handles that are already in the market place.
SI is also designing percutaneous instruments –
surgical devices that access the patient
through a needle puncture rather than a port –
and updates on these developments will be
provided in due course.
As a result the Group has steadily built a
reputation as a leading innovator in the field
of MIS.
OEM
Revenues in the OEM segment increased
during the period by 71% to £2.506 million
(2009: £1 .463 million), of which royalties were
£347 ,000. The growth in this part of the business
is a reflection of our strong relationships with
large medical device companies such as Gyrus,
T eleflex Medical and CareFusion.
Our Product Ranges
design icon
Logi
®
Logic
®
Quick
®
YelloPort
®
YelloPort+plus
® Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 11
What have we done?
Revenues from SI products increased over the period by 30%
to £3.852 million (2009: £2.956 million).
Since the y ear end w e announced a $ 2.2 million contr ac t with Medifl e x
Surgical Products with regard to the inclusion of YelloPort+plus
®
in surgical trays throughout the US.
In the UK, the Group extended its exclusive distribution partnership
with Elemental Healthcare for a further three years.
What’s next?
The business development team is looking to expand further the
international distribution network.
De v el opment o f de vices using SI ’ s fl e x t ec hnol ogy .
Expansion of the Logi
®
Range enabling the devices to be used
in a broader range of laparoscopic procedures.
Taking the strategic approach of developing a range of 3mm
Resposable
®
instrumentation to meet future patient demand
for improved surgical cosmesis.
Demand for Resposable
®
instruments, where some
elements are disposable and others reusable, reflects
a culture change within the medical device industry
and provides cost-effective solutions to an increasingly
cost-conscious environment.
Si brand
Resposable
®
technology is saving hospitals thousands
of pounds a year
Hospitals that switch to Resposable
®
technology – surgical
instruments that combine both disposable and reusable components –
can save thousands of pounds a year, according to information
released by SI and its UK distributor Elemental Healthcare.
Carrying out the study into the use of YelloPort+plus
®
, the
companies discovered that those hospitals who had switched from
disposable to Resposable
®
saved £108,000 over 500 procedures.
‘‘ We don’t want patients and surgeons to have
to compromise on quality, which is why our
Resposable
®
range has been designed to satisfy
both surgeons and procurement managers. It has
the high quality aspect of a disposable product, yet
still provides the cost effectiveness of a reusable. ’’
David Marsh
Co-founder and Joint Managing Director Surgical Innovations Group plc Annual report and accounts 2010 12
Review of the year
Business and financial review continued
Operating review continued
OEM continued
The OEM business is reliant on our partners
to drive business on our behalf and it can, on
occasion, be unpredictable in terms of repeat
revenue streams from individual partnerships.
T o counteract this we collaborate closely with
our partners to gain understanding of the
challenges they encounter in the marketing and
acceptance of their specific OEM product lines.
The greatest attraction to our OEM customers
is undoubtedly our strategic positioning of a
value-added, full-service offering of design,
regulation and manufacturing. This approach
has made us of particular interest to US medical
device companies and it is from here that the
majority of enquiries are now being generated.
Crucially and strategically, the Group retains
the full intellectual property rights for any
devices it develops in return for providing
exclusive worldwide distribution rights to the
OEM customer over a fixed period of time.
Importantly the Group is not offering contract
manufacturing or a long-term assignment of
a licence, with the exception of revenues that
are generated from royalties. The ownership
of all intellectual property enables the Group
to take back distribution rights at the end of
any distribution agreement or if sales targets
are not met.
Industrial
Total revenues for the Industrial segment
during the year were £687 ,000 (2009: £122,000).
As previously stated, the delivery of a
£616,000 order in May 2010 significantly
boosted sales and revenues. As predicted,
sales in the second half of the year returned
to historic levels. We continue to seek
opportunities where our intellectual property
can be adapted to industrial applications and
the Group continues to engage with major
industrial partners. We look forward to
updating shareholders on our progress.
Employees and management
In 2010 we continued to make appointments
across all areas of the business increasing
the total number of employees and agency
staff to 117 (2009: 76). I would like to thank
all our staff and management for their
support and hard work in the last year.
Financial review
Revenue
Revenue increased 55% to £7 .045 million
(2009: £4.541 million). This increase was as
a result of a 71% increase in OEM revenues
to £2.506 million together with increases in
the other two reporting segments, SI Brand
and Industrial.
Gross margin
Gross margin has increased to 50%
(2009: 42%) with the Group again targeting
an improvement in 2011 with increasing
volumes, operational efficiencies and
substantial investment in machinery.
Operating expenses
The Group’s operating expenses increased
in 2010 by £404,000 (26%) as a consequence
of investment in business development
personnel and associated sales and
marketing costs.
Employee numbers increased substantially
during the year in areas which will add future
value to the business and provide a level
of customer service that benefits our
organisation. As a consequence, operating
expenses are projected to increase in 2011
but at levels that provide overall Group
profitability within planned objectives.
Notwithstanding our investment in personnel,
the Group continues to rigorously control
costs and is aware of the need to generate
cash within the business as a means of
funding future capital and product investment.
OEM revenue growth (£m)
£2.506m
+71%
09 10
1.463
2.506 Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 13
OEM
What have we done?
Total revenues for the OEM segment during the year were £2,506,000
(2009: £1,463,000).
La unc h o f ins tr umenta tion r ang e f or T el e fl e x Medical .
Continued collaboration with Gyrus Medical.
Successful transfer of SI valve technology within third-party port
access system.
What’s next?
Continued collabor a tion with T el e fl e x Medical t o ensur e success f ul
adoption of developed technology.
Promotion of SI’s OEM proposition to US medical device companies.
Development of new intellectual property with exclusive rights
to key OEM partners.
The Group’s ability to conceive, develop and
manufacture products to order for OEM partners,
while retaining full intellectual property rights, is
a key factor in securing SI’s future growth.
Surgical Innovations wins five-year contract with T eleflex Medical
Buil ding upon a pr e vious r ela tionship , T el e fl e x ap pr oac hed SI t o
develop new handle technology. The articulating reusable handles
ha v e been under de v el opment b y T el e fl e x and SI f or tw o y ear s and
the unique , fl e xibl e na tur e impr o v es the er g onomics and ease o f
use for surgeons performing keyhole surgery. SI retains the full
intellectual property rights for the devices, subject to the rights of
T el e fl e x t o utilise the int ell ec tual pr operty in the sal e o f the de vices
pursuant to the Supply Agreement. The initial roll out of the
technology will be throughout Europe with the potential for
expansion into the US.
‘‘ This order represents an important milestone
for our OEM business. We have been working
successfully with Teleflex for more than ten years
and we are delighted to continue this successful
relationship. Our in-house design, prototype and
manufacturing facilities allow us to develop new
and improved technologies. ’’
Graham Bowland
Chief Executive Officer Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 14
Business and financial review continued
Financial review continued
Finance income and costs
The net financial expense for the year was
£30,000 (2009: £27 ,000). This reflects the
reduced returns available on the Group’s
cash deposits coupled with the cost of asset
finance. We continue to finance assets
used in the manufacturing processes of the
business, ensuring funds remain within the
Group for both internal product development
and our working capital needs.
Profitability and operating margins
The Group’s operating profit for 2010 was
£1.579 million (2009: £291,000). This is after
charging £8,000 of non-cash expenditure
relating to share-based payments. We are
greatly encouraged by the substantial uplift
in operating margin to 22% (2009: 6%). We
believe there is further room for improvement
through product mix and continued capital
investment within the manufacturing facility.
Capitalised development costs
The Group has a policy of continuous product
development both for SI Brand and OEM
partner devices. As in previous years, the
Board is confident in the success of these
products and accordingly £1.674 million of
costs have been capitalised during the year,
increasing the total amount of capitalised
costs to £3.984 million.
YelloPort+plus
®
continues to generate revenues
and under the Group’s accounting policy
£73,000 of associated development costs
were amortised in the period (2009: £101,000)
together with £111,000 in relation to other
products where revenue commenced in
the period.
Following review the Board recognised an
impairment charge of £334,000 within the
financial statements and at 31 December 2010
confirmed that no further provision for
impairment was necessary.
Foreign currency
The Group maintains foreign currency bank
accounts and, wherever possible, supplier
payments are made in Euros or Dollars
to utilise currency receipts.
The Group has used forward exchange
contracts and will continue to monitor the
need for such contracts depending upon
the level of natural hedging achievable.
Taxation
The Group recognised a tax credit of £239,000
resulting from deferred tax, reflecting the
extent to which recoverability of tax losses
can be foreseen with reasonable certainty.
The Group holds deferred tax assets on the
balance sheet of £432,000 (2009: £193,000).
In addition there are a further £16. 100 million
(2009: £14.600 million) of tax losses that have
not been recognised.
Earnings per share (EPS)
The Group achieved 0.48p (2009: 0.14p)
underlying basic EPS in 2010. There were
shares issued during the year and full details
of all the EPS calculations are set out in note
6 to the accounts.
Cash and net funds
At the end of 2010 the Group had £442,000
(2009: £622,000) in net funds. Net funds are
defined as cash and cash equivalents less
obligations under finance leases.
Working capital
Working capital increased to £3.942 million
(2009: £3.630 million) as a result of a reduction
of £211,000 in trade and other payables
to £607 ,000 (2009: £818,000). The business
generated net cash from operations of
£2.202 million (2009: £1.439 million), however ,
after accounting for the acquisition
of non-current assets of £2.044 million
(2009: £1.517 million), there was a net cash
increase in the year of £60,000
(2009: decrease of £316,000).
Industrial revenue growth (£’000)
£687 ,000
+463%
09 10
122
687 Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 15
What have we done?
Total revenues for the Industrial segment during the year were
£687 ,000 (2009: £122,000).
Delivered a £616,000 order in May 2010 for our key industrial partner.
What’s next?
Continue to seek opportunities where SI’s intellectual property can be
adapted to industrial applications.
Continue to engage with major industrial partners.
The Group’s Industrial segment provides industrial
solutions for major international companies. We
believe there is scope to develop and expand this
segment using our core technology .
indUS trial
Surgical Innovations delivers major industrial order
On 17 May 2010, SI announced that it had delivered a £616,000
order to one of its key industrial partners. The order, originally due
for completion in December 2009, was delayed as a consequence
o f thir d par ty t ec hnical difficulties , whic h w er e r esolv ed in Mar c h
2010. This is the largest single order the Group has received within
its industrial division.
‘‘ Fulfilling this order represents an important step
for our industrial division and we are delighted that
a commercially successful outcome has arisen
from the eighteen month development project.
We look forward to continuing development of the
industrial business as we strive to develop the
technology for a wider range of applications within
the field. ”
Graham Bowland
Chief Executive Officer Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 16
Corporate social responsibility
Committed to our stakeholders
Impact on society
At Surgical Innovations we strive to play
an integral role in society and our core value
is to meet the needs of forward-thinking
surgeons and clinicians by supplying
high-quality, cost-effective instrumentation
that empowers surgeons and provides
patients with an improved quality of life.
SI has chosen to bring “manufacturing home”
to West Yorkshire – a goal that has been
achieved through total capital investment of
£2.6 million since moving facilities in April
2008. This strategic move has enabled us to
design and manufacture all products
in-house thereby tripling our workforce by
the end of 2010. It has also led to a significant
reduction in the Group’s carbon footprint.
On a fundraising level, SI organises internal
activities to raise money for a local children’s
charity and we actively encourage employee
participation in local fundraising events,
such as a recent abseiling event at the
Royal Armouries (Leeds). Many members
of the SI team also regularly participate
in sponsored sporting challenges for their
own individual charities for which SI has
a policy of financially matching employee
sponsorship contributions.
Environmental impact
SI’ s objective is to create a climate of excellence,
not only for our products and services, but also
for employees and persons affected by our
activities and the environment. In order to achieve
this we have an Environmental Policy and
are committed to regular monitoring of our
environmental performance against objectives
regulated by a committed managed system.
The Environmental Policy reviews the impact
of all SI’ s policies, operations and investment
decisions and covers emissions and fuel
efficiency , noise, waste, energy use and recycling.
Relations with suppliers, partners and
contractors
SI uses criteria of a reputable standard to select
major suppliers, partners and contractors
and ties to ensure that all our major suppliers
meet the requirements of our ISO 9001:2000.
Recently we helped two of our major suppliers
to implement this criteria by continued support
and encouragement. In all cases we will try
to ensure a long-term partnership which
benefits all parties involved.
Relations with regional stakeholders
Working with key stakeholders across the region
allows SI to play a key role in the healthcare
sector of Yorkshire and Humber, and enjoying
a long-standing relationship with both
Medilink and Medipex enables the Company
to benefit from the sector expertise available.
Relations with regional educational institutes
Surgical Innovations strives to play an
integral role in society and 2010 has seen
the Company venture further into the wider
community, recognising the importance to
invest in the younger generation by working
with local schools and universities.
A group of BTEC Science students from a
local high school visited Surgical Innovations
in February to learn about the potential career
opportunities available to them before being
given a tour of the factory and set a
design challenge.
Alongside this activity, SI has been working
the Thackray Medical Museum to create an
individual exhibit for the museum which will
go on display in the next quarter. The purpose
of the exhibit is to showcase SI’s world-leading
products, explaining the history of the Company
and encouraging schoolchildren to understand
the diverse opportunities available in a medical
career – from doctor to designer.
Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 17
The strategy for SI’s work with the
younger generations is to inform and educate
schoolchildren on the opportunities available
to them through design and manufacturing
with a company such as SI and to plant the
seed of enthusiasm required for a career
in innovation.
Implementing this strategy, SI held an
Open Day, welcoming school leavers in the
area to learn more about the manufacturing
apprenticeships on offer, whilst gaining an
overall appreciation of the business.
Working with universities in the region, SI
is currently running two Knowledge Transfer
Partnerships (KTP) with the University of
Leeds and the University of Bradford.
KTPs aim to help businesses improve their
competitiveness and productivity through
the better use of knowledge, technology and
skills that reside within the knowledge
base, through specifically managed projects
organised by SI and the universities to ensure
commercial benefit.
In addition to this, SI is also working with both
the University of Bradford and the University
of Leeds to sponsor students through their
Masters degree studies. This collaboration
will enable students to work on specific
SI projects, guided by representatives of
academia and industry, to provide them
with valuable research and development
knowledge within a commercial environment.
Relations with employees
SI has a happy and motivated team of
employees and endeavours to ensure the
highest working standards for all staff.
An example of this is Business Improvement
Training, which is carried out through the NVQ
Awards, designed to give employees an
important insight into the layout and
processes of SI’s business.
SI has a number of safe working practices in
place. These include sending representatives
on the NEBOSH programme, a nationally
recognised qualification that covers the main
legal requirements for health and safety in
the UK.
A Health and Safety Committee, made up
of employees from across the organisation,
is in place to continually review and update
the Health and Safety Policy. This ensures a
safe working environment for both employees
and visitors to the SI facility.
To assess staff performance, annual
appraisals are carried out by department
heads and an annual ‘Employee of the Year’
award takes place to recognise and reward
Who we collaborate with: Review of the year
Surgical Innovations Group plc Annual report and accounts 2010 18
Corporate social responsibility continued
Relations with employees continued
achievements made throughout the year.
There are also regular team building events to
increase staff morale, unite the organisation
and encourage inter-departmental interaction.
In a bid to ensure a work life balance, SI offers
flexibility in working hours and extended
holidays for long service, as well as extra time
off at Christmas if all work is completed on
time. These excellent terms of employment,
which are above and beyond industry norms,
have led to a high working morale and high
staff retention; many employees have worked
for SI for over ten years.
SI has employed an HR Manager who will
look at reviewing and implementing policies
and procedures with an objective of gaining
the Investors in People accreditation.
Relations with customers
SI’s ultimate customer is the surgeon and
the true evaluator of SI products. A high
proportion of sales consist of repeat
purchases, which is a meaningful indicator
of quality, as surgeons will only use products
that deliver their needs and offer patients
the highest level of care.
SI continually looks to improve the quality
of these products by advancing technologies,
seeking to understand customer requirements
and being advised by its Clinical Advisory
Board, which is made up of internationally
renowned surgeons.
All products are designed to meet the
requirements of ISO 9001:2000 and
ISO 13485:2003 for sales in Europe and
where appropriate meet similar regulations
throughout the world. Specific quality
objectives are also set by the management
team during the quality system review
process and these are communicated
to all employees on a regular basis.
Finally, to ensure that all our products exceed
customers ’ expectations SI continually monitors
their performance, carrying out post market
surveillance with all our customers
and distributors.
VIP visits
2010 has been a busy year for SI, with VIP
visits from across the country.
Following his appointment as Prime Minister
in June 2010, we were delighted to welcome
the Rt Honourable David Cameron to our
Leeds facility on his first major visit since
the election.
Greg Mulholland, MP for Leeds, spoke
after his visit: “We are incredibly proud
that this innovative company is designing
and manufacturing leading-edge surgical
equipment and exporting all round the world.
It shows that, with vision, flair and drive,
British companies can be world leaders.
It is so exciting that Surgical Innovations
is doing this right here in Leeds” .
Following this exciting visit, SI was honoured
once again when HRH The Princess Royal
visited the Head Office in February 2011.
HRH The Princess Royal met staff and took
a tour of the design and manufacturing
facilities before officially opened the Company’s
Injection Moulding Centre.
The visit was a real honour and further
recognition of the achievements of the
entire team in recent years.
Some of the country’s finest surgeons
travelled to Leeds to mark the event as well
as UK and international distributors and a
number of stakeholders to celebrate the
success of SI and highlight how the Company
is waving the British flag of excellence around
the world.
2010 has been a busy year for SI, with VIP
visits from across the country Review of the year 01 - 19
Annual report and accounts 2010 Surgical Innovations Group plc 19
“This highlights how close collaboration
and strong innovation have helped to develop
Surgical Innovations into a successful
company that is waving the British flag
of excellence around the world. ” Surgical Innovations Group plc Annual report and accounts 2010 20
Governance
Board of Directors
Name: Doug Liversidge CBE
Position: Non-executive Chairman
Age: 74
Board committees: Remuneration
Committee (Chairman), Audit Committee
Doug was educated in Sheffield and graduated
with a degree in Metallurgy in 1957 . Employed
for 21 years at British Steel, Doug attained the
position of Chief Quality Manager.
After moving to G W Thornton as Managing Director
and subsequently appointed Chief Executive, Doug
guided the company through its flotation on the
London Stock Exchange in March 1987 and was
instrumental in the company winning numerous
prestigious business awards including the Queen’s
Award to Industry for Export Achievement and twice
the Cutlers Acclaim Award for Corporate Growth.
In 1991, Doug was awarded South Yorkshire
Businessman of the Year.
Until recently he was Chairman of Medilink Yorkshire
and Humber and proud to hold the office of Master
Cutler in Hallamshire from 1998 to 1999. In 2000,
Doug was appointed Chairman of the South Yorkshire
Learning & Skills Council by Government Office, Leeds
and awarded the CBE in the 2000 New Year’s Honours
List for services to industry.
Name: Graham Bowland
Position: Chief Executive Officer
and Company Secretary
Age: 49
Graham graduated from Cardiff University with
an honours degree in Physics in 1982. He qualified
as a Chartered Accountant in 1987 whilst working
for a local firm of chartered accountants.
After gaining substantial experience in the private
sector, Graham joined SI in February 1999 as
Financial Controller and was promoted in the
same year to the Group Board as Finance
Director and Company Secretary.
Appointed Joint Managing Director of Surgical
Innovations Limited in 2000 and made sole
Managing Director in 2008, Graham has been
instrumental in building upon the Company’s
reputation within the industry for innovation and
in-house manufacturing. In 2010, Graham became
Group Chief Executive Officer, continuing to build
the Company’s strategy as well as representing the
Leeds city region on its Innovation Panel reporting
to the Leeds Enterprise Partnership.
Name: Colin Glass
Position: Non-executive Director
Age: 67
Board committees: Audit Committee
(Chairman), Remuneration Committee
Colin is a Chartered Accountant and a partner in
Winburn Glass Norfolk. He is a founder Director of
Surgical Innovations Limited and was instrumental
in securing early funding and in the reverse takeover
of Haemocell plc in 1998, which resulted in the
quotation of the Company on AIM.
Colin is a Non-executive Director of several companies,
including Straight PLC and Getech Group PLC. He is the
Chairman of SI’s Audit Committee and a member of
SI’s Remuneration Committee. Using his expertise
in financial and corporate advisory matters, Colin
has built up a wide range of contacts from various
industries and organisations which benefit the
companies with which he is involved. Annual report and accounts 2010 Surgical Innovations Group plc 21
Governance 20 - 35
Name: Ray Simkins
Position: Non-executive Director
Age: 67
Board committees: Remuneration
committee, Audit Committee
Ray is a mechanical engineer by training and has
qualifications from Buckingham Technical College
and Massachusetts Institute of Technology (MIT).
He has worked for Getz since 1966 where he
has represented their business interests in the
US, Japan, Thailand, Malaysia and Singapore.
He is currently President of the Getz Group with
interests throughout the Asia/Pacific region.
Ray has been a Non-executive Director since 1996
and was instrumental in securing investment from
Getz prior to the reverse takeover of Haemocell plc
in 1998. Ray is a member of both the SI’s Audit
and Remuneration Committees and, with a wealth
of experience in international distribution
management, he provides invaluable input into
many aspects of the Board’s activities.
Name: Professor Mike McMahon
Position: Non-executive Clinical Director
Age: 68
Mike, a founder Director of Surgical Innovations
Limited, became Non-executive Clinical Director
in October 2007 , holds a Chair in Surgery at the
University of Leeds and is Consultant Surgeon
at the Nuffield Hospital, Leeds.
He is the immediate past President of the
Association of Laparoscopic Surgeons of
Great Britain and Ireland (ALS) and was recently
a Royal College of Surgeons tutor in MIS. He also
established the Leeds Institute for Minimally
Invasive Therapy .
Mike’s past roles include President of the Pancreatic
Society of Great Britain and Ireland and Chairman
of the Education Committee of the European
Association of Endoscopic Surgery. Surgical Innovations Group plc Annual report and accounts 2010 22
Governance
Senior management and advisers
Mike graduated from Brunel University with a first
class honours degree in product design in 1996.
After winning the James Dyson award for product
design at London’s New Designers exhibition,
he worked for Dyson Appliances before joining
SI as a design engineer in 1997 .
The first project that Mike was involved with at SI,
Logic
®
, went on to win Best Medical Device in the
1999 Plastics and Rubber Weekly (PRW) Awards
for Excellence and has patents filed worldwide.
A member of the Chartered Society of Designers
since 2002, Mike was appointed to the Management
Board of SI as Design Director in 2006 and is
dedicated to expanding the Company’s product
portfolio with innovative, ergonomic and commercially
successful instrumentation.
Name: Mike White
Position: Product Development Director
Age: 37
Paul joined the Company as Manufacturing
Director in 2005. He has a background in mechanical
engineering with extensive experience of manufacturing
both in the UK and overseas.
Paul began his career as an apprentice at
Renolds Power Transmission in Bradford before
moving into management at a sub-contract
engineering company in Heckmondwike. He then
moved into production management at Pinco,
Bradford, a textile engineering manufacturer.
Paul also spent eight months in the US, where he
was responsible for setting up a textile engineering
plant, before returning to the UK where he joined SI.
Paul has been instrumental in the recent setting
up of in-house manufacturing thereby enabling
the more effective and efficient manufacture
of products.
Name: Paul Birtles
Position: Manufacturing Director
Age: 45
Name: Stephen Seed
Position: Quality Manager
Age: 45
Stephen was educated in Sheffield and graduated
with a degree in Mineral Processing in 1988.
He began his quality career in the County Durham
mining industry, soon moving into the chemical
industry and then into engineering.
Stephen now has over 20 years’ experience as
a quality manager. He is a Chartered Quality
Professional, member of the Chartered Quality
Institute and is a qualified lead auditor for ISO 13485,
the medical device manufacturing standard.
Stephen joined SI as Quality Manager in 2006, since
when he has completely rewritten the Company’s
quality systems and employed his Lean Six Sigma
experience to continually improve procedures
and practices. Annual report and accounts 2010 Surgical Innovations Group plc 23
Governance 20 - 35
Duncan studied Business Studies at Sheffield
Polytechnic, completing his studies in 1977 . He then
went on to study for his professional accountancy
examinations, becoming an Associate Member
of the Chartered Institute of Management
Accountants (CIMA) in 1984.
Duncan has spent the majority of his professional
career working in both civil and mechanical
engineering businesses. He joined SI in 2008
as a member of the senior management team and
has since built a strong financial and administrative
team providing valuable support to the Board of
Directors and the Company.
Name: Duncan Pidsley
Position: Financial Controller
Age: 54
Name: Mark Hughes
Position: Business Development Manager
Age: 29
Mark is fluent in Spanish and has a strong
command of several other European languages,
having left Durham University in 2004 with a BA (Hons)
in Modern European Languages and an MSc
in Computer Science.
Mark has developed his career working in UK based
business in both national and international business
sales roles, managing challenging relationships
with large firms such as Smith and Nephew
and Caterpillar.
Joining Surgical Innovation Limited’s export sales
team in late 2009, Mark travels thousands of miles
a year to meet distributors and visit international
exhibitions and his five-strong team has made
significant contribution to the 2010 sales growth.
Company Secretary and registered office
N Graham Bowland
Clayton Wood House
6 Clayton Wood Bank
Leeds LS16 6QZ
Registered number
2298163
Nominated adviser
Seymour Pierce Limited
20 Old Bailey
London EC4M 7EN
Solicitors
Walker Morris
Kings Court
12 King Street
Leeds LS1 2HL
Auditor
Grant Thornton UK LLP
No 1 Whitehall Riverside
Leeds LS1 4BN
Broker
Seymour Pierce Limited
20 Old Bailey
London EC4M 7EN
Registrars
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Bankers
HSBC Bank Plc
7 Prospect Crescent
Harrogate HG1 1RN
Financial public relations
The Communications Portfolio
7 Ensign House
Admirals Way
London E14 9XQ Surgical Innovations Group plc Annual report and accounts 2010 24
Governance
Clinical Advisory Board
Peter qualified from Leeds Medical School in 1983
with honours after initially gaining a first class
honours degree in Pathology in 1980. After basic
surgical training at The General Infirmary in Leeds
and becoming a Fellow of the Royal College of
Surgeons, he went on to complete a Doctorate in
Medicine with research into new techniques in the
surgery for inflammatory bowel disease. This work
was awarded the prestigious Patey Prize by the
Surgical Research Society in 1990.
His research interests continued as a Lecturer
in Surgery at the University of Liverpool before
working as a Chief Resident at the Mayo Clinic,
Rochester, Minnesota.
In 1996, he was appointed to the staff at the Leeds
General Infirmary and has gone on to develop a
national referral practice for the management of
recurrent pelvic malignancy. He has been involved
in the laparoscopic management of colon and rectal
disease since its inception and currently runs an
active training and research fellowship. He has
lectured throughout the world and has published
over 160 papers.
Ian graduated as an Operating Department
Practitioner in 1994. He has continued to train
in this area and in 2004 completed a Diploma
in Advanced Surgical Practice at Huddersfield
University and went on to complete The Royal
College of Surgeons Basic Skills course. He is
a surgical first assistant for the Leeds General
Infirmary, where he has worked since 1981.
Ian specialises in laparoscopic bariatric surgery,
upper GI and cholorectal surgery. He has been
the first assistant in over 500 bariatric cases
and 50 colorectal pouch procedures in the UK.
Name: Peter Sagar
Key speciality: Colorectal
Name: Ian Brayshaw
Key speciality: Laparoscopic bariatric
Philippe qualified from the Medical School in Nancy
and then qualified from Poitiers in general surgery
in 1986 and urology in 1989. He is now a consultant
at King’s College Hospital in London, Honorary
Professor of Urology at The Beijing Hospital and
Honorary Consultant Laparoscopist at Guy’s
Hospital and University College of London Hospital.
His main field of interest lies in pioneering
laparoscopic procedures and he has performed over
2,000 major laparoscopic procedures in oncological
urology, uro-gynaecology and abdominal surgery.
Philippe has been teaching and mentoring radical
prostatectomy in 40 centres for the past three years.
He is currently a course director for laparoscopic
skills (BAUS, China, RCS, UCLH, ESI) and is an adviser
to the Royal College of Surgeons for laparoscopic
skills courses. He is an adviser on the board
of the International Society of Cryosurgery.
Name: Phillippe Grange
Key speciality: Laparoscopy and Urology
Marco is a Consultant Surgeon and Bariatric
Surgery Lead at the prestigious University College
London Hospital (UCLH) where he has worked since
2007 . He graduated in 1995 with full marks and
honours in Palermo, Italy, and also completed his
training in general surgery at the same university.
He has been living in the United Kingdom since
2000, dedicating his activity to advanced
laparoscopic surgery and laparoscopic bariatric
(obesity) surgery. He was awarded an MD by the
University of Leeds for his research on appetite
hormones and bariatric surgery.
He is a pioneer of single incision bariatric surgery
having performed the first single incision
laparoscopic sleeve gastrectomy in the UK and
often runs advanced training courses for UK and
European surgeons in laparoscopic bariatric
surgery and laparoscopic hernia surgery.
Name: Marco Adamo
Key speciality: Bariatric
The Clinical Advisory Board brings
together a wealth of experience
and expertise. It works closely
with the design team to develop
and test products. Annual report and accounts 2010 Surgical Innovations Group plc 25
Governance 20 - 35
Gary comes to us as the Director of Surgery at
St Francis Hospital, New York with an international
reputation in minimally invasive surgery and
surgical oncology. Having trained in South Africa
as a gastrointestinal surgical oncologist, he
pioneered numerous laparoscopic techniques
and was responsible for the development
of flexible laparoscopy, which has become
an integral part of minimally invasive
intra-abdominal solid tumour resection and
minimally invasive esophagectomy (MIE).
He spent the past decade as Chief of General
Surgery at Long Island Jewish Medical Center
and, in 2005, was appointed Vice Chairman of
Surgery for the NSLIJ Health System and Site
Director for Surgery at the LIJ Medical Center.
He is Associate Professor of Clinical Surgery
at the Albert Einstein College of Medicine.
Upon immigrating to the US, Gary was appointed
Assistant Professor of Surgery at SUNY Stony Brook.
During that tenure he was appointed Medical
Director of the Operating Room at University
Hospital and was appointed Chairman of the
Medical Executive Committee in 1998.
He has published extensively in his field and
has been invited to lecture throughout the world,
including Britain, South Africa, Chile, Argentina
and Colombia. He is also a standing member of
the American College of Surgeons’ Ultrasound
Education Faculty.
Gary has patents in surgical safety devices and
has lectured internationally on optimising the
surgical care environment. He participates on
many national clinical trials in novel cancer
therapies and is on the Clinical Advisory Board
of numerous cutting edge technology companies.
Alberic was Senior Lecturer in Surgery at
St George’s Hospital Medical School from 1990
to 2003, Consultant General and Upper Digestive
Surgeon at St George’s Hospital from 2004 to 2007
and Director of Bariatric Surgery at University
College London Hospital from 2007 to 2009.
He has been a Council member of the
British Obesity Surgery Society (BOSS) for
four years and is currently President of the
society. He chairs the National Bariatric
Surgery Registry Data Committee.
He first undertook laparoscopic cholecystectomy
in 1991, TEPP hernia repair in 1992 and was the
first UK surgeon to offer day-case laparoscopic
cholecystectomy and hernia repair.
He has been active in bariatric surgery since
1995 when he took on the aftercare of a cohort
of patients who had undergone weight-loss
surgery in the 1970s and 80s. The team he now
leads has 14 years’ experience in the NHS and
the independent sector.
Alfred, consultant at University College Hospital,
London, achieved a distinction in obstetrics and
gynaecology in 1985 and went on to obtain his
Doctorate in Medicine from the University of
London in 1993.
Alfred gained his Part II to become a Member of the
Royal College of Obstetricians and Gynaecologists
in 1993, having obtained Part I in 1987 .
He has written a book entitled “Basic Urogynaecology”
(1993) and has also contributed to many others,
including “The Investigation and Management of
Urinary Incontinence in Women” (1995) and a more
recent chapter in R Kearney , A Cutner “Laparoscopic
Colposuspension and Paravaginal Repair” . Alfred has
been a member of several committees and currently
holds the position of President of the BSGE.
Jon is a Consultant Orthopaedic Surgeon specialising
in joint replacements and arthropscopic, or “keyhole” ,
surgeries to the hip and knee and is a member of the
British Hip Society, International Society of Hip
Arthroscopy, The British Orthopaedic Association
and a Fellow of The Royal College of Surgeons
of England. He also holds a Masters degree in
Mechanical Engineering from the University of
Leeds and has published research in several
medical journals and won the GlaxoSmithKline
Orthopaedic Essay Prize in 2005 and the John Fitton
Prize for Orthopaedic Specialist Registrars in 2006.
Name: Gary Gecelter
Key speciality: MIS and Oncology
Name: Alberic Fiennes
Key speciality: Bariatric
Name: Alfred Cutner
Key speciality: Gynaecology and Urology
Name: Jon Conroy
Key speciality: Orthopaedics Governance
Surgical Innovations Group plc Annual report and accounts 2010 26
South
UK EU US Africa
Logi
® ®
™ ™
Logic
® ® ®
™
Quick
®
®
™ ™
Resposable
® ®
™ ™
Surgical Innovations
™
™
®
®
SwingTop
® ® ®
®
YelloPort
® ® ®
®
YelloPort+plus
® ® ®
®
FrictionFinish
™
®
™ ™
Surgical Innovations’ trade marks
as at 31 December 2010 Annual report and accounts 2010 Surgical Innovations Group plc 27
Governance 20 - 35
The Directors present their annual report, together with the audited financial statements, for the year ended 31 December 2010.
Principal activities and business review
The Company is the holding company of a group whose principal activities in the year involved the design, development and manufacture of
devices for use in minimally invasive surgery (MIS) and industrial markets. Surgical devices are targeted at the operating theatre environment
in both public and private hospitals. In international markets, the Group sells through independent healthcare distributors, through original
equipment manufacture (OEM) and licensing contracts with major suppliers of medical equipment. A review of the Group’s activities during
the year is included within the Chairman’s statement on pages 6 and 7 and the Business and financial review on pages 8 to 15.
Results and dividends
The Consolidated statement of comprehensive income for the year is set out on page 37 .
The Directors believe that at this stage in the Group’s development it would be more appropriate to continue its focus on strong inward
investment and hence are not recommending the payment of a dividend and the whole of the gain will be transferred to reserves.
Research and development
The Group’s activities in this area have focused principally on the continuing development of innovative instruments for use in the field of MIS.
Employees
The commitment and ability of our employees are key factors in achieving the Group’s objectives.
Employment policies are based on the provision of appropriate training, whilst annual personal appraisals support skill and career development.
The Board encourages management feedback at all levels to facilitate the development of the Group’s business. The Group seeks to keep
its employees informed on all matters affecting them by regular management and departmental meetings. The Company operates an
Enterprise Management Incentive (EMI) share option scheme.
It is the Group’s policy to give full and fair consideration to all applications for employment from disabled persons having regard to their particular
aptitudes and abilities and to encourage the training and career development of all personnel employed by the Group, including disabled persons.
Should an employee become disabled, the Group would, where practicable, seek to continue the employment and arrange appropriate training.
Directors
The names of the current Directors of the Company and their biographical details are set out on pages 20 and 21. All Directors served
throughout the year.
Directors’ interests
The interests in the share capital of the Company of those Directors in office at the end of the year were as follows:
31 December 1 January
2010 2010
Ordinary shares of 1p each Beneficial Beneficial
D B Liversidge CBE 5, 171,821 4,171,821
N G Bowland 4,217 ,498 1,617,498
C Glass 4,881,602 3,881,602
R Simkins 2,369,461 2,369,461
M J McMahon 13,188,281 12,188,281
Apart from the interests disclosed above and the options referred to on page 33, no Directors held interests, at any time during the year, in the
share capital of the Company or other Group companies. There have been changes in Directors’ interests between the year end and 19 April 2011.
Otherwise than as disclosed in note 16, no Director has an interest in any material contract, other than contracts of service and employment,
to which the Group was a party.
Copies of the Directors’ service contracts are available for inspection at the registered office of the Company, Clayton Wood House,
6 Clayton Wood Bank, Leeds LS16 6QZ, and will be available at this year’s Annual General Meeting (AGM) for 15 minutes prior to and during
the whole course of the Meeting.
Report of the Directors Governance
Surgical Innovations Group plc Annual report and accounts 2010 28
Report of the Directors continued
Substantial shareholdings
Other than the Directors’ own holdings, the Board has been notified that as at 14 April 2011 the following shareholders on the Company’s
share register were interested in 3% or more of the issued ordinary share capital of the Company:
Number
of shares %
Getz Bros & Co. (BVI) Inc. 49,248,810 12.55
Barclayshare Nominees Limited 31,124,894 7.94
R C Greig Nominees Limited 23,699,054 6.04
Pershing Nominees Limited 20,530,492 5.23
The Bank of New York (Nominees) 19,155,416 4.88
TD Waterhouse Nominees (Europe) 15,539,075 3.96
HSDL Nominees Limited 13,546,962 3.45
Share issues
During the year the following ordinary shares of 1p were issued in respect of exercised share options:
600,000 at 1.5p
3,000,000 at 1.7p
3,050,000 at 2.0p
1,000,000 at 3.0p
Creditor payment policy
The Group’s current policy concerning the payment of suppliers is to:
settle the terms of payment with those suppliers when agreeing the terms of each transaction;
ensure that those suppliers are made aware of the terms of payment by inclusion of the relevant terms in contracts; and
pay in accordance with its contractual and other legal obligations.
The payment policy applies to all payments to creditors for revenue and capital supplies of goods and services without exception.
The Company has trade creditors.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Report of the Directors and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have to prepare the
financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). Under
company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state
of affairs and profit or loss of the Company and Group for that period. In preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and accounting estimates that are reasonable and prudent;
applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions
and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements
comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities. Annual report and accounts 2010 Surgical Innovations Group plc 29
Governance 20 - 35
Statement of Directors’ responsibilities continued
Insofar as each of the Directors is aware:
there is no relevant audit information of which the Company’s auditor is unaware; and
the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and
to establish that the auditor is aware of that information.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Summary of Key Performance Indicators (KPIs)
The Directors have monitored the overall progress of the Group and the individual strategic elements by reference to certain financial
and non‑financial KPIs.
Financial performance
KPIs are in place to measure sales, profitability, rate of divisional growth, cash generation and returns on capital employed.
Customer satisfaction
KPIs are established to measure and improve customer relationships, quality of service and our order delivery times.
Employee satisfaction
KPIs are agreed to measure staff morale, training needs and personal development.
Leadership
KPIs are set to measure the performance of Directors and management in conjunction with overall Group strategy and planning.
Innovation
KPIs are positioned to measure the creativity and inventiveness of employees to improve the number of patents filed, design rights applied
for and internal products developed.
Charitable donations
The Group made a small number of charitable donations during the year, principally to local projects and sponsorship of employees charitable
fundraising events.
Political donations
The Group made no political donations.
Principal risks and uncertainties
The management of the business and the nature of the Group’s strategy are subject to a number of risks.
The Directors have set out below the principal risks facing the business.
The Directors are of the opinion that a thorough risk management process is adopted which involves the formal review of all the risks
identified below. Where possible, processes are in place to monitor and mitigate such risks.
Patents and proprietary rights
The Group’s success is dependent upon its ability to establish, file and protect intellectual property relating to the development of its
proprietary products for eventual sale or license. Whilst the Group seeks patent protection where appropriate for its developments, there can
be no assurance that patent applications will mature into granted patents or that existing patents will provide the Group with sufficient
protection in the case of infringement by third parties, or be successfully challenged or revoked by competitors.
Regulatory approval
As an international business a significant proportion of the Group’s products require registration from national or federal regulatory bodies
prior to being offered for sale. With our major product lines now having FDA approval in the US, we are subject to their audit and inspection
of our manufacturing facilities. There is no guarantee that any product developed by the Group will obtain and maintain national registration
or that the Group will always pass regulatory audit of its manufacturing processes. Failure to do so could have severe consequences upon
the Group’s ability to sell products in the relevant country.
Product obsolescence
Due to the nature of the market in which the Group operates, products are subject to technological advances and, as a result, obsolescence.
The Directors are committed to the research and development strategy in place and are confident that the Group is able to react effectively
to the developments within the market. Governance
Surgical Innovations Group plc Annual report and accounts 2010 30
Report of the Directors continued
Principal risks and uncertainties continued
Dependence upon reimbursement
The commercial success of the Group’s products is partly dependent upon reimbursement levels for laparoscopic procedures set by governments,
health authorities, private insurers and other organisations. There is no guarantee that changes in reimbursement policy in the Group’s main
markets will not have an impact on the ability to sell products into those markets.
Financial risk
The Directors are confident that the banking facilities currently in place are more than adequate for the Group’s working capital requirements
for the foreseeable future.
Some of the Group’s sales and purchases are made in currencies other than Sterling and consideration is given to the use of forward currency
contracts to reduce the exposure.
The Directors are satisfied that credit risk is adequately managed and the level of bad debts is consistent with the nature of the industry;
further details with regard to this are given in note 12.
Auditor
Grant Thornton UK LLP has indicated its willingness to continue in office. A resolution for its re‑appointment as independent auditor will be
proposed at the AGM.
By order of the Board
N G Bowland
Chief Executive Officer
19 April 2011 Annual report and accounts 2010 Surgical Innovations Group plc 31
Governance 20 - 35
Report on remuneration
Executive Director’s remuneration
The Board recognises that the Executive Director’s remuneration is of legitimate concern to the shareholders. The Group operates within
an innovative and competitive arena that places constant demands on the technical abilities of the Group. Its performance depends on the
individual contributions of the Executive Director and employees and it believes in rewarding all those who have made a positive contribution
in the development of the Group.
Remuneration Committee
The Remuneration Committee, which meets as required, is made up of the following Directors:
D B Liversidge CBE (Chairman)
C Glass
R Simkins
Remuneration policy
The principal objective is to develop policies and recommend proposals appropriate to facilitating the recruitment, retention and motivation
of the Executive Director and in so doing to avoid the Group bearing more than a reasonable and necessary cost. Where practical and
appropriate, the remuneration of the Executive Director (and other senior management) is aligned with the interests of shareholders.
The Remuneration Committee considers that a successful remuneration policy needs to be sufficiently flexible to take account of future
changes in the Group’s business environment and in remuneration practice. Any changes to policy for years after 2010 will be described
in future Reports on remuneration.
The remuneration of the Executive Director comprises four main elements:
basic salary: to remain competitive in the marketplace, reflecting the experience, level of competence of the individual and comparative
base salaries elsewhere within the Group;
annual bonus payment: to provide additional short‑term remuneration which directly reflects Group and individual performance;
share options: through the regular grant of options to reward achievements of target and outstanding business performance over the
longer term; and
pension arrangements: to enable the Director to make appropriate provision for retirement.
It is Group policy that a significant proportion of the remuneration of the Executive Director should be performance related.
Contracts of service
No Director has a service contract with a notice period in excess of one year. Governance
Surgical Innovations Group plc Annual report and accounts 2010 32
Report on remuneration continued
Directors’ emoluments – information subject to audit
Details of Directors’ emoluments for the year are as follows:
Salary
and Total Total Pension Pension
fees Benefits emoluments emoluments contributions contributions
2010 2010 2010 2009 2010 2009
£’000 £’000 £’000 £’000 £’000 £’000
Executive
N G Bowland 118 7 125 103 6 4
Non‑executive
D B Liversidge CBE
1
28 — 28 25 — —
C Glass
2
20 — 20 13 — —
R Simkins
3
20 — 20 13 — —
M J McMahon 20 — 20 13 — —
Total 206 7 213 167 6 4
1. D B Liversidge’s fees are paid to Quest Investments Limited, a company of which he is a Director.
2. C Glass’ fees are paid to Winburn Glass Norfolk, a firm of which he is a partner.
3. R Simkins’ fees are paid to Getz Bros & Co. Inc., a company of which he is Vice President.
Benefits received consist of the provision of motor cars and private health.
At 31 December 2010 a loan of £18,600 made available to N G Bowland in 2009 was still repayable.
Pension contributions represent payments made to defined contribution schemes. Non‑executive Directors are not entitled to retirement benefits.
Remuneration of the Non‑executive Directors is determined by the Board. Annual report and accounts 2010 Surgical Innovations Group plc 33
Governance 20 - 35
Directors’ share options
Details of the share options held by Directors are as follows:
At Exercised At
1 January during 31 December Option
2010 the year 2010 price Date granted
D B Liversidge CBE 1,000,000 1,000,000 — 1.70p November 2000
1
1,000,000 — 1,000,000 1.70p April 2001
1
1,500,000 — 1,500,000 1.70p November 2007
1
1,000,000 — 1,000,000 1.50p January 2009
1
400,000 — 400,000 1.70p November 2009
1
N G Bowland 1,000,000 1,000,000 — 3.00p November 2000
1
1,000,000 1,000,000 — 2.00p November 2001
1
2,545,454 — 2,545,454 3.50p November 2007
2
1,454,546 — 1,454,546 1.70p November 2007
1
2,000,000 600,000 1,400,000 1.50p January 2009
1
2,200,000 2,200,000 1.70p November 2009
1
C Glass 1,000,000 1,000,000 — 1.70p November 2000
1
1,000,000 — 1,000,000 1.70p April 2001
1
1,500,000 — 1,500,000 1.70p November 2007
1
1,000,000 — 1,000,000 1.50p January 2009
1
400,000 — 400,000 1.70p November 2009
1
R Simkins 2,000,000 — 2,000,000 1.70p May 2001
1
1,500,000 — 1,500,000 1.70p November 2007
1
1,000,000 — 1,000,000 1.50p January 2009
1
400,000 — 400,000 1.70p November 2009
1
M J McMahon 1,000,000 1,000,000 — 1.70p November 2000
1
1,000,000 — 1,000,000 1.70p April 2001
1
1,500,000 — 1,500,000 1.70p November 2007
1
1,000,000 — 1,000,000 1.50p January 2009
1
400,000 — 400,000 1.70p November 2009
1
1. Share options are exercisable between nil and ten years from the date of the grant.
2. Share options are exercisable between three and ten years from the date of the grant.
The market price of the Company’s shares at the end of the financial year was 5.30p and the range of market prices during the year was
between 1.63p and 5.30p.
On behalf of the Board
D B Liversidge CBE
Non‑executive Chairman
19 April 2011 Governance
Surgical Innovations Group plc Annual report and accounts 2010 34
Corporate governance
Principles of good governance
The Board continues to support the principles of good governance. The Board has adopted such procedures as it considers practical and
appropriate for a group of its size so as to affect good governance.
Application of principles
Directors
The Company supports the concept of an effective Board leading and controlling the Group. The Board is responsible for approving Group
policy and strategy. It meets regularly and has a schedule of matters specifically reserved to it for decision. Management supplies the Board
with appropriate and timely information and the Directors are free to seek any further information they consider necessary. All Directors have
access to advice from the Company Secretary and independent professionals at the Group’s expense. Training is available for new Directors
and other Directors as necessary.
The Board members are:
D B Liversidge CBE – Non‑executive Chairman
N G Bowland – Chief Executive Officer
C Glass – Non‑executive Director
R Simkins – Non‑executive Director
M J McMahon – Non‑executive Director
Accountability and audit
The Board is responsible for maintaining a sound system of internal control to safeguard shareholders’ investments and the Company’s assets.
The Audit Committee comprises C Glass (Chairman), D B Liversidge CBE and R Simkins who are all Non‑executive Directors.
The Committee considers the appointment and terms of engagement of the external auditor and assesses the independence of the external
auditor and reviews the auditor’s policy for the rotation of audit partners.
The terms of reference of the Committee include reviewing the scope and results of the external audit and its effectiveness.
Communication with shareholders
The Board is committed to effective communication between the Group and its shareholders.
It regards the AGM as a means of communicating directly with private investors and encourages their participation. All Directors normally
attend the AGM and private investors have the opportunity to meet the Directors and discuss any issues on an informal basis. Separate
resolutions are passed on each issue so that they can be given proper consideration and there is a resolution to approve the annual report
and accounts.
The shareholders can gain access to information on the Group, as well as to the annual report and accounts, through the website, www.surginno.com. Annual report and accounts 2010 Surgical Innovations Group plc 35
Governance 20 - 35
Internal controls
The Board of Directors is ultimately responsible for the Group’s management and internal control systems. During the financial period and
to the date of approval of the financial statements, it has reviewed the operation and effectiveness of the Group’s systems of internal control,
which can provide only a reasonable but not absolute assurance against material misstatement or loss.
The Board discharges its responsibility for internal financial control through the following key procedures:
the establishment of an organisational structure appropriate to the size of the business, with clearly defined levels of authority and division
of responsibilities for approval of external payments and receipt and dispatch of goods;
a comprehensive budgeting and financial reporting system which compares actual performance with budget on a monthly basis; and
the formulation by the Board of policies and of approval procedures in a number of key areas such as credit control, expenditure
authorisation, stock ordering and quality assurance.
Going concern
On the basis of the budget for 2011 and forecasts prepared by the Directors, the Board has a reasonable expectation that the Company and
the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the
going concern basis in preparing the financial statements.
On behalf of the Board
D B Liversidge CBE
Non‑executive Chairman
19 April 2011 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 36
Report of the independent auditor – Group
to the members of Surgical Innovations Group plc
Independent auditor’s report to the members of Surgical Innovations Group plc
We have audited the Group financial statements of Surgical Innovations Group plc for the year ended 31 December 2010 which comprise the
Consolidated statement of comprehensive income, the Consolidated balance sheet, the Consolidated cash flow statement, the Consolidated
statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation
is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditor
As explained more fully in the Statement of Directors’ responsibilities set out on pages 28 and 29, the Directors are responsible for the
preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express
an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm.
Opinion on financial statements
In our opinion the Group financial statements:
give a true and fair view of the state of the Group’s affairs as at 31 December 2010 and of its profit for the year then ended;
have been properly prepared in accordance with IFRSs as adopted by the European Union; and
have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Report of the Directors for the financial year for which the Group financial statements are prepared
is consistent with the Group financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
certain disclosures of Directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the parent company financial statements of Surgical Innovations Group plc for the year ended 31 December 2010.
Timothy Lincoln
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountant
Leeds
19 April 2011 Annual report and accounts 2010 Surgical Innovations Group plc 37
Accounts 36 - 61
Consolidated statement of comprehensive income
for the year ended 31 December 2010
2010 2009
Non-recurring Non‑recurring
Headline costs Total Headline costs Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
Revenue 2 7,045 — 7,045 4,541 — 4,541
Cost of sales (3,526) — (3,526) (2,447) (200) (2,647)
Gross profit 3,519 — 3,519 2,094 (200) 1,894
Other operating expenses (1,932) — (1,932) (1,528) — (1,528)
Share‑based payments (8) — (8) (75) — (75)
Operating profit 3 1,579 — 1,579 491 (200) 291
Finance costs 5 (39) — (39) (40) — (40)
Finance income 9 — 9 13 — 13
Profit before taxation 1,549 — 1,549 464 (200) 264
Taxation 6 239 — 239 261 — 261
Profit and total comprehensive income for the period
attributable to the owners of the parent 1,788 — 1,788 725 (200) 525
Earnings per share, total and continuing
Basic 7 0.48p 0.14p
Diluted 7 0.45p 0.14p
The Consolidated statement of comprehensive income above relates to continuing operations.
The Group has no recognised gains or losses other than the results for the year as set out above.
The accompanying accounting policies and notes form part of the financial statements. Accounts
Surgical Innovations Group plc Annual report and accounts 2010 38
2010 2009
Notes £’000 £’000
Assets
Non‑current assets
Property, plant and equipment 8 2,477 2,056
Intangible assets 9 3,295 2,139
Deferred tax asset 6 432 193
6,204 4,388
Current assets
Inventories 10 2,033 2,047
Trade receivables 11 2, 168 2,135
Other current assets 11 513 460
Cash and cash equivalents 2,622 2,508
7 ,336 7,150
Total assets 13,540 11,538
Equity and liabilities
Equity attributable to equity holders of the parent company
Share capital 13 3,815 3,738
Share premium account 75 18,809
Capital reserve 329 329
Retained earnings 6,369 (14,236)
Total equity 10,588 8,640
Non‑current liabilities
Obligations under finance leases 653 511
653 511
Current liabilities
Bank overdraft 1, 177 1,123
Trade and other payables 607 818
Obligations under finance leases 350 252
Accruals 165 194
2,299 2,387
Total liabilities 2,952 2,898
Total equity and liabilities 13,540 11,538
The accompanying accounting policies and notes form part of the financial statements.
The financial statements on pages 37 to 55 were approved by the Board of Directors on 19 April 2011 and were signed on its behalf by:
D B Liversidge CBE
Director
19 April 2011
Company registered number: 2298163
Consolidated balance sheet
as at 31 December 2010 Annual report and accounts 2010 Surgical Innovations Group plc 39
Accounts 36 - 61
Year ended Year ended
31 December 31 December
2010 2009
£’000 £’000
Cash flows from operating activities
Operating profit 1,579 291
Adjustments for:
Depreciation of property, plant and equipment 448 345
Amortisation of intangible assets 518 101
Share‑based payment 8 75
Operating cash flows before movement in working capital 2,553 812
Decrease/(increase) in inventories 14 (331)
(Increase)/decrease in receivables (86) 913
(Decrease)/increase in payables (240) 47
Cash generated from operations 2,241 1,441
Interest paid (39) (40)
Tax received — 38
Net cash generated from operating activities 2,202 1,439
Cash flows from investing activities
Interest received 9 13
Acquisition of non‑current assets (2,044) (1,517)
Net cash used in investment activities (2,035) (1,504)
Cash flows from financing activities
Cash received from issue of shares 152 —
Repayment of bank loans — (6)
Repayment of obligations under finance leases (259) (245)
Net cash used in financing activities (107) (251)
Net increase in cash and cash equivalents 60 (316)
Cash and equivalents at beginning of period 1,385 1,701
Cash and cash equivalents at end of period 1,445 1,385
Cash at bank and in hand 2,622 2,508
Bank overdraft (1, 177) (1,123)
Cash and cash equivalents at end of period 1,445 1,385
Consolidated cash flow statement
for the year ended 31 December 2010 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 40
Share Share Capital Retained
capital premium reserve earnings Total
£’000 £’000 £’000 £’000 £’000
Balance as at 1 January 2009 3,738 18,809 329 (14,836) 8,040
Employee share‑based payment options — — — 75 75
Profit and total comprehensive income for the period — — — 525 525
Balance as at 31 December 2009 3,738 18,809 329 (14,236) 8,640
Employee share‑based payment options — — — 8 8
Reorganisation — (18,809) — 18,809 —
Transactions with owners 77 75 — — 152
Profit and total comprehensive income for the period — — — 1,788 1,788
Balance as at 31 December 2010 3,815 75 329 6,369 10,588
Consolidated statement of changes in equity
for the year ended 31 December 2010 Annual report and accounts 2010 Surgical Innovations Group plc 41
Accounts 36 - 61
1. Group accounting policies under IFRS
(a) Basis of preparation
These financial statements have been prepared on the basis of the IFRS accounting policies set out below.
The financial statements have been prepared in accordance with IFRS as adopted for use by the European Union, including IFRIC
interpretations and in line with those provisions of the Companies Act 2006 applicable to companies reporting under IFRS.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Group’s accounting policies.
The Directors have considered the available cash resources of the Group and its current forecasts and are satisfied that the Group has
adequate resources to continue in operational existence for the foreseeable future and so the going concern basis has been adopted in the
preparation of these financial statements.
The financial statements have been prepared under the historical cost convention.
The consolidated financial statements are presented in Sterling, rounded to the nearest thousand.
These accounts reflect the first time adoption of improvements to IFRS and amendments to IFRS 1 and IFRS 2. The effect of the adoption
of these standards has been presentational only. Given this, the opening comparative balance sheet has not been represented as the
information is unchanged from that presented previously.
(b) Consolidation
Subsidiaries
The Group financial statements consolidate those of the parent company and of its subsidiary undertakings. The results of subsidiaries,
accounted for under the merger accounting method, are included in the Consolidated statement of comprehensive income as if they had
always been part of the Group. Intra‑group sales and results are eliminated on consolidation and all sales and results relate to external
transactions only.
(c) Foreign currency translation
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates
of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated statement of comprehensive income.
(d) Property, plant and equipment
These are stated at the cost of acquisition less any provision for depreciation. Cost includes expenditure that is directly attributable to the
acquisition of the items.
The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying
value may not be recoverable.
The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each financial year end.
Depreciation is charged so as to write off the cost of property, plant and equipment less estimated residual value over their estimated useful
economic lives at the following rates:
Office and computer equipment – 10–20% per annum
Plant and machinery – 10% per annum
Tooling – 20% per annum
Placed equipment – 33.3% per annum
Leasehold improvements – Over the remaining term of the lease
Tooling developed for the Group’s own products is only depreciated when brought into use.
Placed equipment relates to equipment placed in clinical settings to generate a stream of recurring revenue from the single use element
of the equipment.
Notes to the consolidated financial statements Accounts
Surgical Innovations Group plc Annual report and accounts 2010 42
Notes to the consolidated financial statements continued
1. Group accounting policies under IFRS continued
(e) Intangible assets
Research and development
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
Development expenditure arising from the Group’s development activities is capitalised and amortised over the life of the product only if the
Group can demonstrate the following:
the technical feasibility of completing the intangible asset so it will be available for use or sale;
the intention to complete the intangible asset and use or sell it;
the ability to use or sell the intangible asset;
that it is probable that the asset created will generate future economic benefits;
there is the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible
asset; and
the development cost of the asset can be measured reliably.
Where no intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.
Capitalised development costs are amortised over the life of the product within cost of sales, which is usually no more than ten years.
(f) Impairment of non‑financial assets
Impairment reviews are carried out on a development project by project basis periodically and where there is a specific indicator
of impairment. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is based
on the accounting policy in (e) above and is greater than its estimated recoverable amount. The recoverable amount is the higher of an
asset’s fair value less costs to sell and its value in use.
(g) Inventories
Inventories are stated at the lower of cost (using weighted average) and net realisable value.
Cost is the purchase cost, including transport, for raw materials, together with a proportion of manufacturing overheads based on normal
levels of activity, for work in progress and finished goods.
Net realisable value is based on estimated normal selling price, less further costs expected to be incurred to completion and sale. Provision
is made for obsolete, slow moving or defective items where appropriate. Such provisions are based upon established future sales and
historical experience.
(h) Trade receivables
Trade receivables are recognised initially at fair value, thereafter at amortised costs less provision for impairment. A provision for impairment
of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the
original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value
of estimated future cash flows. The amount of the loss is recognised in the Consolidated statement of comprehensive income, as are
subsequent recoveries of amounts previously written off.
(i) Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held on call at banks and bank overdrafts. Bank overdrafts are shown within
borrowings in current liabilities on the balance sheet.
(j) Trade payables
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate.
(k) Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from proceeds. Annual report and accounts 2010 Surgical Innovations Group plc 43
Accounts 36 - 61
1. Group accounting policies under IFRS continued
(l) Income tax
The charge for current tax is based on the results for the period as adjusted for items which are non‑assessable or disallowed and any
adjustment to tax payable in respect of previous years. It is calculated using rates that have been enacted or substantively enacted by the
balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the
carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit.
In principle, deferred tax liabilities are recognised for all taxable and temporary differences and deferred tax assets are recognised to the extent that
it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not
recognised if the temporary difference arises from the initial recognition of goodwill (or negative goodwill) or from the initial recognition (other than
in business combination) of other assets and liabilities in a transaction which affects neither the taxable profit nor the accounting profit.
Tax benefits are not recognised unless the tax positions are probable of being sustained. Once considered to be probable, management
reviews each material tax benefit to assess whether a deferred tax asset should be recognised, based on the ability under tax statute
to recover those tax losses and through the assessment of probable future taxable profits in which to recover those tax losses.
Where the Group is able to control the distribution of reserves from subsidiaries, and there is no intention to distribute the reserves, deferred
tax is not recognised for these temporary differences.
Deferred tax is calculated at the rates that are enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited
in the Consolidated statement of comprehensive income, except when it relates to items credited or charged directly to equity, in which case
the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends
to settle its current tax assets and liabilities on a net basis.
Information as to the calculation of the income tax expense is included in note 6.
(m) Employee benefits
Pension obligations
The Group provides pension benefits to its employees through contributions to defined contribution Group personal pension policies.
The amounts charged to the Consolidated statement of comprehensive income are the contributions payable in the period.
Share‑based compensation
All share‑based payment arrangements granted after 7 November 2002 that had not vested by 1 January 2006 are recognised in the financial
statements. The Group issues share options to certain employees which are measured at fair value and recognised as an expense in the
Consolidated statement of comprehensive income with a corresponding increase in profit and loss reserve. The fair value of the employee
services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting
period is determined by reference to the fair value of the options granted.
The fair values of these payments are measured at the dates of grant and are recognised over the period during which employees become
unconditionally entitled to the awards. At each balance sheet date, the Group revises its estimate of the number of options that are expected
to vest. It recognises the impact of the revision to original estimates, if any, in the Consolidated statement of comprehensive income, with
a corresponding adjustment to retained earnings.
(n) Income recognition
Revenue
Revenue is the total amount receivable by the Group for the supply of goods and services, excluding VAT and trade discounts. It is recognised
that significant risks and rewards are transferred when title of goods passes and the Group fulfils its contractual obligations.
Royalty income
Royalty income is derived from agreements with other parties for them to manufacture and distribute products. Such royalty income
is recognised in the same period as the licensee makes the related sale.
Design contracts
As soon as the outcome of a design contract can be estimated reliably, contract revenue and expenses are recognised in the Consolidated
statement of comprehensive income in proportion to the stage of completion of the contract. The stage of completion is assessed by reference
to work performed. An expected loss on the contract is recognised immediately in the Consolidated statement of comprehensive income.
Interest income
Interest income is recognised using the effective interest rate method. Accounts
Surgical Innovations Group plc Annual report and accounts 2010 44
Notes to the consolidated financial statements continued
1. Group accounting policies under IFRS continued
(n) Income recognition continued
Government grants
Government grants are recognised in the Consolidated statement of comprehensive income so as to match them with the expenditure
towards which they are intended to contribute. To the extent that the grants received are intended as a specific reduction against certain
assets, they are recognised in the Consolidated statement of comprehensive income over the expected useful life of the related assets.
(o) Leases
Where the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated
as a finance lease. The asset is recorded in the balance sheet as property, plant and equipment and is depreciated over its estimated useful
life or the term of the lease, whichever is the shorter. Future instalments under such leases, net of finance charges, are included in creditors.
Rentals under operating leases are charged on a straight‑line basis over the lease term.
(p) Significant areas of judgement
In applying the aforementioned accounting policies, management has made appropriate estimates in key areas and the actual outcome may
differ from those calculated. The key sources of estimation and judgement uncertainty at the balance sheet date that have a significant risk
of causing material adjustment to the carrying amount of assets and liabilities in the next financial year are:
Forecasts and discount rates
The carrying value of a number of items on the balance sheet is dependant on the estimates of future cash flows arising from the Group’s operations:
the impairment test for capitalised development costs is dependant upon forecasts of the cash flows resulting from expected sales and
cost of sales over the projected life of the relevant product. Allowance is also made for any future costs of associated product development.
An impairment charge of £334,000 (2009: nil) resulted from the annual impairment testing conducted in 2010; and
the realisation of deferred tax assets recognised is dependant on the generation of sufficient future taxable profits. The Group recognises
deferred tax assets where it is likely that the benefit will be realised and recognises no more than three years (2009: five years) of future
profitability given uncertainty after this timeframe.
Trade receivables
The Group provides, in certain agreed situations, products on extended credit terms in order to establish a presence in an export market.
The Directors constantly review the likelihood of realisation of these receivables and make provision based on their best estimates when
the full value of the receivable will not be recoverable.
(q) Provisions
The Group measures provisions at the Directors’ best estimates of the expenditure required to settle the obligation at the balance sheet date.
These estimates are made taking account of information available and different possible outcomes.
(r) Equity
Equity is broken down into the elements listed below:
“Share capital” represents the nominal value of equity shares;
“Share premium” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses
of the share issue;
“Capital reserve” represents the excess over nominal value of the fair value consideration attributed to equity shares issued in part
settlement for subsidiary company shares acquired; and
“Retained earnings” .
As at 31 December 2010, the following standard and interpretation is in issue but not yet effective:
IAS 24 (revised 2009) Related Party Disclosures (effective 1 January 2011).
The effect of the adoption of this new standard is expected to be presentational only. Annual report and accounts 2010 Surgical Innovations Group plc 45
Accounts 36 - 61
2. Segmental reporting
For management purposes the Group is organised into three business segments: SI Brand, OEM and Industrial. These revenue streams are
the basis on which the Group reports its segment information.
Segment results, assets and liabilities include assets directly attributable to a segment as well as those that can be allocated on a reasonable
basis. Unallocated items comprise mainly corporate assets and liabilities and head office expenses.
These operating segments are monitored and strategic decisions are made on the basis of adjusted segment operating results.
Business segments
The principal activities of the SI Brand business unit are the research, development, manufacture and distribution of SI branded minimally invasive devices.
The principal activities of the OEM business unit are the research, development, manufacture and distribution of minimally invasive devices
for third party medical device companies through either own label or co‑branding.
The principal activities of the industrial business unit are the research, development, manufacture and sale of minimally invasive technology
products for industrial application.
The following segmental analysis has been produced to provide a reconciliation between the information used by the key decision maker
within the business and the information as it is presented under IFRS.
SI Brand OEM Industrial Total
Year ended 31 December 2010 £’000 £’000 £’000 £’000
Revenue 3,852 2,506 687 7 ,045
Result
Segment result 1,151 930 390 2,471
Unallocated expenses — — — (892)
Profit from operations — — — 1,579
Finance income — — — 9
Finance costs — — — (39)
Profit before taxation — — — 1,549
Tax — — — 239
Profit for the year — — — 1,788
Included within the segment/operating results are the following significant non‑cash items:
SI Brand OEM Industrial Unallocated Total
£’000 £’000 £’000 £’000 £’000
Depreciation of property, plant and equipment 262 70 — 108 440
Amortisation of intangible assets 134 50 — — 184
Impairment of intangible assets 63 4 267 — 334
Share‑based payments — — — 8 8
Capitalisation of intangible assets 884 635 115 — 1,634
SI Brand OEM Industrial Total
Year ended 31 December 2009 £’000 £’000 £’000 £’000
Revenue 2,956 1,463 122 4,541
Result
Segment result 1,240 255 70 1,565
Unallocated expenses — — — (1,274)
Profit from operations — — — 291
Finance income — — — 13
Finance costs — — — (40)
Profit before taxation — — — 264
Tax — — — 261
Profit for the year — — — 525 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 46
Notes to the consolidated financial statements continued
2. Segmental reporting continued
Business segments continued
Included within the segment/operating results are the following significant non‑cash items:
SI Brand OEM Industrial Unallocated Total
£’000 £’000 £’000 £’000 £’000
Depreciation of property, plant and equipment 193 35 — 117 345
Amortisation of intangible assets 101 — — — 101
Impairment of intangible assets — — — — —
Share‑based payments — — — 75 75
Capitalisation of intangible assets 638 305 122 — 1,065
Unallocated costs include those costs that cannot be split between segments.
The reportable segment assets and liabilities at 31 December 2010 and capital expenditure are as follows:
SI Brand OEM Industrial Unallocated Total
£’000 £’000 £’000 £’000 £’000
Assets 7,317 2,122 55 4,046 13,540
Liabilities — — — 13,540 13,540
Assets Liabilities
£’000 £’000
Segment assets/liabilities 9,494 —
Unallocated:
Property, plant and equipment 477 —
Prepayments and accrued income 232 —
Other debtors 283 —
Cash and cash equivalents 2,622 —
Deferred tax asset 432 —
Borrowings — 2,180
Trade and other payables — 607
Accruals — 165
Equity — 10,588
13,540 13,540
The reportable segment assets and liabilities at 31 December 2009 and capital expenditure are as follows:
SI Brand OEM Industrial Unallocated Total
£’000 £’000 £’000 £’000 £’000
Assets 7,124 707 150 3,557 11,538
Liabilities — — — 11,538 11,538
Assets Liabilities
£’000 £’000
Segment assets/liabilities 7,981 —
Unallocated:
Property, plant and equipment 396 —
Prepayments and accrued income 299 —
Other debtors 161 —
Cash and cash equivalents 2,508 —
Deferred tax asset 193 —
Borrowings — 1,886
Trade and other payables — 818
Accruals — 194
Equity — 8,640
11,538 11,538 Annual report and accounts 2010 Surgical Innovations Group plc 47
Accounts 36 - 61
2. Segmental reporting continued
Business segments continued
Segment assets consist primarily of property , plant and equipment, intangible assets, inventories and trade and other receivables. Assets not
allocated to a segment primarily consist of tangible fixed assets, prepayments and accrued income and cash and cash equivalents.
Liabilities are not capable of allocation to individual segments.
Geographical analysis
2010 2009
£’000 £’000
United Kingdom 2, 119 1,454
Europe 2,908 1,827
US 1,410 624
Rest of World 608 636
7 ,045 4,541
Revenues are allocated geographically on the basis of where revenues were received from and not from the ultimate final destination of use.
During 2010, £1, 110,000 (16%) of the Group’s revenue depended on a single customer in the OEM segment (2009: £606,000 (15%)).
3. Operating profit
The profit for the year is stated after charging:
2010 2009
£’000 £’000
Depreciation of owned assets 231 273
Depreciation of assets held under finance lease 217 72
Amortisation of capitalised development costs 184 101
Impairment of capitalised development costs 334 —
Research and development costs 160 —
Foreign exchange losses 31 169
Auditor’s remuneration:
– fees payable to the Company’s auditor for the audit of the Company’s annual financial statements 22 25
– tax compliance fees 15 15
Operating lease rentals:
– land and buildings 151 150
The amortisation and impairment of capitalised development costs are accounted for within other operating expenses within the
Consolidated statement of comprehensive income.
4. Employees
The average monthly number of employees (including Executive Directors) employed by the Group during the year was as follows:
2010 2009
Number Number
Directors 1 1
Production 39 39
Development 21 12
Administration 13 11
74 63
The costs incurred in respect of these employees were:
2010 2009
£’000 £’000
Wages and salaries 1,820 1,262
Social security costs 165 119
Pension costs 48 37
2,033 1,418
A detailed analysis of Directors’ emoluments is shown in the table on page 32. Accounts
Surgical Innovations Group plc Annual report and accounts 2010 48
Notes to the consolidated financial statements continued
4. Employees continued
Key management including non‑executives
2010 2009
£’000 £’000
Salaries 484 371
Social Security costs 44 38
Pension costs 16 14
Share‑based payments 8 75
Total 552 498
5. Finance costs
2010 2009
£’000 £’000
On finance leases 22 14
On bank overdrafts 17 26
39 40
6. Taxation
Tax on profit
2010 2009
£’000 £’000
Over provision from previous years — 202
Deferred tax credit recognised in year 239 59
Tax credit on profit 239 261
Factors affecting the tax charge for the year
The taxation assessed for the year is lower than the standard rate of Corporation Tax in the UK at 28% (2009: 28%). The differences are
explained as follows:
2010 2009
£’000 £’000
Profit on ordinary activities before taxation 1,549 264
Corporation Tax at standard rate of 28% (2009: 28%) 434 74
Effects of:
Research and development enhanced expenditure (386) (250)
Expenses not tax deductible 8 22
Capital allowances for the year in excess of depreciation (237) (411)
Other short‑term timing differences — 506
Over provision from previous years — (202)
Utilisation and recognition of trading losses (58) —
Tax credit for the year (239) (261)
Deferred taxation
The movement in the deferred taxation account during the year was:
2010 2009
£’000 £’000
Balance brought forward 193 134
Consolidated statement of comprehensive income movement arising during the year 239 59
Balance carried forward 432 193
The deferred taxation recognised in the financial statements at 27% is set out below:
2010 2009
£’000 £’000
Trade losses 432 193 Annual report and accounts 2010 Surgical Innovations Group plc 49
Accounts 36 - 61
6. Taxation continued
Deferred taxation continued
The recoverability of the deferred tax asset is dependent on future taxable profits in excess of those arising from the reversal of deferred tax
liabilities. The recognition of the deferred tax assets is based upon profit forecasts for the three‑year period ending 31 December 2013.
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial
reporting purposes:
2010 2009
£’000 £’000
Deferred tax assets 4,347 4,594
Deferred tax liabilities (839) (651)
Net unrecognised deferred tax assets 3,508 3,943
At the balance sheet date, the Group has unused tax losses of £17 .7 million (2009: £15.3 million) available for offset against certain future
profits. A deferred tax asset of £432,000 (2009: £193,000) has been recognised in respect of such losses. No deferred tax asset has been
recognised in respect of the remaining £16. 1 million (2009: £14.6 million) of such losses due to the difficulty in making reliable predictions
of future profit streams.
7 . Earnings per ordinary share
Basic earnings per ordinary share
The calculation of basic earnings per ordinary share for the year ended 31 December 2010 was based upon the profit attributable to ordinary
shareholders of £1,788,000 (2009: £525,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2010
of 375,812,587 (2009: 373,841,902).
Diluted earnings per ordinary share
The calculation of diluted earnings per ordinary share for the year ended 31 December 2010 was based upon the profit attributable to ordinary
shareholders of £1,788,000 (2009: £525,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2010
of 397 ,339,910 (2009: 373,841,902). All share options at the financial year end were anti‑dilutive.
2010 2009
Earnings £’000 £’000
Earnings for the purpose of basic and diluted earnings per ordinary share 1,788 525
8. Property, plant and equipment
Office and Improvements
Plant and computer Placed to leasehold
Tooling machinery equipment equipment property Total
£’000 £’000 £’000 £’000 £’000 £’000
Gross carrying amount 31 December 2009 1,521 1,638 719 183 257 4,318
Accumulated depreciation and impairment (1, 129) (482) (556) (71) (24) (2,262)
Carrying amount 31 December 2009 392 1, 156 163 112 233 2,056
Gross carrying amount 31 December 2010 1,661 2, 126 811 277 312 5, 187
Accumulated depreciation and impairment (1,233) (651) (641) (133) (52) (2,710)
Carrying amount 31 December 2010 428 1,475 170 144 260 2,477
Office and Improvements
Plant and computer Placed to leasehold
Tooling machinery equipment equipment property Total
£’000 £’000 £’000 £’000 £’000 £’000
Carrying amount 1 January 2009 342 562 151 91 197 1,343
Additions – separately acquired 139 700 107 54 58 1,058
Depreciation (89) (106) (95) (33) (22) (345)
Carrying amount 31 December 2009 392 1, 156 163 112 233 2,056
Additions – separately acquired 140 488 92 94 55 869
Depreciation (104) (169) (85) (62) (28) (448)
Carrying amount 31 December 2010 428 1,475 170 144 260 2,477 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 50
Notes to the consolidated financial statements continued
8. Property, plant and equipment continued
Leased plant and equipment
The Group leases tooling, plant and machinery and fixtures and fittings under a number of finance lease arrangements. The carrying amount
and depreciation charge for such assets are disclosed below:
2010 2009
£’000 £’000
Tooling
Net book value 70 115
Depreciation charge for the year 46 23
Plant and machinery
Net book value 1,329 982
Depreciation charge for the year 142 76
Office and computer equipment
Net book value 89 27
Depreciation charge for the year 29 12
Security
At 31 December 2010, the property, plant and equipment of the Group are subject to a fixed and floating charge to secure both the bank loan
and overdraft facility.
9. Intangible assets
Capitalised Capitalised
development development
costs costs
2010 2009
£’000 £’000
Cost
At 1 January 2010 2,310 1,244
Additions 1,674 1,066
At 31 December 2010 3,984 2,310
Accumulated amortisation
At 1 January 2010 171 70
Charge for the year 184 101
Impairment charge for the year 334 —
At 31 December 2010 689 171
Carrying amount
At 31 December 2010 3,295 2,139
At 31 December 2009 2, 139 1,174
The £3,984,000 of capitalised development costs, net of £73,000 of Government grant, represents expenditure that fulfils the requirements
of IAS 38. These costs will be amortised over the future commercial life of the product, commencing on the sale of the first commercial item,
up to a maximum product life cycle of ten years, and taking account of expected market conditions and penetration.
Included within the above are assets that are currently unavailable for use and these have been assessed for annual impairment as required
by the Group’s accounting policies; Intangible Assets and Impairment of Non Financial Assets.
10. Inventories
2010 2009
£’000 £’000
Raw materials 1,396 990
Finished goods 637 1,057
2,033 2,047
Included in the analysis above are provisions against inventory amounting to £14,000 (2009: £200,000). Annual report and accounts 2010 Surgical Innovations Group plc 51
Accounts 36 - 61
10. Inventories continued
In 2010 a total of £3,068,000 of inventories was included in profit and loss as an expense within cost of sales (2009: £2,210,000). Cost
of sales included an amount of £164,000 resulting from write down of inventories (2009: £323,000).
Inventories are pledged as securities for bank overdrafts.
The Group’s inventories are comprised of products which are not generally subject to rapid obsolescence on account of technological,
deterioration in condition or market trends. Consequently, management considers that there is little risk of significant adjustments to the
Group’s inventory assets within the next financial year.
11. Trade and other receivables
2010 2009
£’000 £’000
Trade receivables 2, 168 2,135
Prepayments and accrued income 231 299
Other debtors 282 161
2,681 2,595
All amounts are short term. The carrying value of trade receivables is considered a reasonable approximation to fair value.
Of the trade receivables, £1,028,276 relates to five customers (2009: £1, 104,000).
All of the Group’s trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables were found
to be impaired and a provision of £19,000 (2009: £33,000) was recorded accordingly.
In addition some of the unimpaired trade receivables are past due at the reporting date. The age of financial assets past due but not impaired
is shown below:
2010 2009
£’000 £’000
Not more than three months 109 101
More than three months but not more than six months 13 60
More than six months but not more than one year — 156
More than one year 61 96
The Group is exposed to credit risk through offering extended credit terms to those customers operating in markets where extended payment
terms are themselves taken by local government and state organisations. This risk is managed through constant review and personal
knowledge of the customer concerned. Payment plans are agreed and monitored in all such cases to minimise credit risk.
12. Financial instruments
The Group is exposed to market risk through its use of financial instruments. The Group’s risk management is co‑ordinated by the Directors
who focus actively on securing the Group’s short to medium‑term cash flows through regular review of all the operating activities of the
business. Long‑term financial investments are managed to generate lasting returns.
The Group does not actively engage in the trading of financial assets for speculative purposes nor does it write options. The most significant
financial risks to which the Group is exposed are described in the following sections.
Foreign currency sensitivity
Exposures to currency exchange rates arise from the Group’s overseas sales and purchases, most of which are denominated in Euros and Dollars.
To mitigate the Group’s exposure to foreign currency risk, cash flows in Euros and Dollars are monitored on an ongoing basis.
Foreign currency denominated financial assets and liabilities are set out below:
2010 2009 2010 2009
€’000 €’000 $’000 $’000
Financial assets 360 310 839 907
Financial liabilities 2 123 41 4
Short‑term exposure 358 187 798 903
The Group has no long‑term foreign exchange exposure. Accounts
Surgical Innovations Group plc Annual report and accounts 2010 52
Notes to the consolidated financial statements continued
12. Financial instruments continued
Foreign currency sensitivity continued
The Group has significant short‑term exposure to the Dollar at 31 December 2010. An analysis of the effect of a reasonable possible movement of the
currency rate against the Dollar during 2011 of +3% shows potential foreign currency gains of £9,000 on 31 December 2010 Dollar trade receivables.
The Group gives consideration to the use of forward currency contracts to reduce foreign currency exposure and, at 31 December 2010, there
are partial forward currency contracts with the value of £20,000.
Credit risk analysis
The Group’s exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date and which are
set out below:
2010 2009
£’000 £’000
Cash and cash equivalents 2,622 2,508
Trade and other receivables 2,450 2,296
5,072 4,804
The Group continually monitors defaults of customers and other counterparties and incorporates this information into its credit risk controls.
Management considers that all of the above financial assets that are not impaired for each of the reporting dates under review are of good
credit quality, including those that are past due.
In respect of trade and other receivables that are not impaired, the Group is not exposed to any significant credit risk exposure to any single
counterparty or any group of counterparties having similar characteristics. The credit risk for liquid funds is considered negligible, since the
counterparty is a reputable bank with a high quality external credit rating.
Liquidity risk analysis
The Group manages its liquidity needs by carefully monitoring all scheduled cash outflows. Liquidity needs are monitored in various time
bands, on a day‑to‑day and week‑to‑week basis, as well as on the basis of a rolling four‑week projection. Longer‑term needs are monitored
as part of the Group’s regular rolling monthly re‑forecasting process.
The Group maintains cash to meet its liquidity requirements for up to twelve‑month periods.
Funding for long‑term liquidity is additionally secured by an adequate amount of committed credit both through working capital and asset
finance facilities.
During the year ended 31 December 2010, the Group continued to have access to sufficient funds to meet its business expansion needs.
Excess cash is placed on short‑term interest‑bearing deposit accounts.
The Group policy is to generate sufficient cash from operating activities to adequately meet cash requirements for investment activities.
The Group’s liabilities have contractual maturities which are summarised below:
Current Non-cur r ent
Within Within Over
6 months 6–12 months 12 months
31 December 2010 £’000 £’000 £’000
Finance lease obligations 178 177 817
Trade and other payables 607 — —
Bank overdraft 1,177 — —
1,962 177 817
Current Non‑current
Within Within Over
6 months 6–12 months 12 months
31 December 2009 £’000 £’000 £’000
Finance lease obligations 153 139 593
Trade and other payables 818 — —
Bank overdraft 1,123 — —
2,094 139 593 Annual report and accounts 2010 Surgical Innovations Group plc 53
Accounts 36 - 61
12. Financial instruments continued
Maturity profile of borrowings
2010 2009
£’000 £’000
Gross lease payments not later than one year 355 292
Later than one year but not more than five years 817 593
Future finance charges (169) (122)
Summary of financial assets and liabilities by category
2010 2009
£’000 £’000
Loans and other receivables
Trade and other receivables 2,450 2,296
Cash 2,622 2,508
5,072 4,804
2010 2009
£’000 £’000
Current liabilities
Trade payables: financial liabilities measured at amortised cost 607 818
Other short‑term financial liabilities 1,527 1,375
2, 134 2,193
Non‑current liabilities 653 511
2,787 2,704
Net financial assets and liabilities 2,285 2,100
Management is of the opinion that the carrying value of the above assets and liabilities is equal to their fair value.
The Group’s capital management objectives are:
to ensure its ability to continue as a going concern; and
to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.
The Group monitors capital on the basis of carrying amount of equity less cash and cash equivalents as presented on the face of the
balance sheet.
The financial assets of SI Group plc are cash and cash equivalents and trade receivables, and fair value is deemed to be not materially
different to the carrying value.
13. Share capital
2010 2009
£’000 £’000
Authorised 600,000,000
(2009: 600,000,000) ordinary shares of 1p each 6,000 6,000
Allotted, called up and fully paid 381,491,902
(2009: 373,841,902) ordinary shares of 1p each 3,815 3,738 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 54
Notes to the consolidated financial statements continued
13. Share capital continued
At 31 December 2010, the following share options were outstanding:
Number of shares Exercise dates
At Exercised Lapsed At Option Date from which
1 January in during 31 December price per option may Date on which
Scheme and date of grant 2010 year year 2010 1p share be exercised option expires
Executive
November 2000* 1,000,000 1,000,000 — — 3.0p November 2003 November 2010
Non‑executive unapproved
November 2000 3,000,000 3,000,000 — — 1.7p November 2003 November 2010
April 2001 5,000,000 — — 5,000,000 1.7p April 2004 April 2011
November 2007 6,000,000 — — 6,000,000 1.7p November 2009 November 2017
January 2009 4,000,000 — — 4,000,000 1.5p November 2009 January 2019
November 2009 1,600,000 — — 1,600,000 1.7p November 2009 November 2019
Enterprise management
July 2001 2,200,000 2,050,000 150,000 — 2.0p July 2004 July 2011
November 2007 5,545,454 — — 5,545,454 3.5p November 2010 November 2017
January 2009 2,000,000 — — 2,000,000 3.5p January 2012 January 2019
Unapproved
April 2001 1,000,000 1,000,000 — — 2.0p April 2004 April 2011
November 2007 1,454,546 — — 1,454,546 1.7p November 2009 November 2017
January 2009 2,000,000 600,000 — 1,400,000 1.5p November 2009 January 2019
November 2009 2,200,000 — — 2,200,000 1.7p November 2009 November 2019
* These share options do not fall within the recognition and measurement of IFRS 2 and as such no charge for share‑based payments is recognised in the
Consolidated statement of comprehensive income in respect of them.
Share‑based payments
The total share‑based payment charge for the year was £8,000.
Share options were exercised during the current year (2009: none).
The fair values of options granted during the year were determined using the Black‑Scholes pricing model. All the options issued in the year
vested immediately. The following principal assumptions were used in the valuation:
Volatility – 20%
Option life – 1 year
Risk‑free investment rate – 2.5%
Certain share options issued prior to 7 November 2002 (and so were outside the scope of the recognition and measurement requirements
of IFRS 2) had their option price reduced during the year. Under IFRS 2, where an award granted before 7 November 2002 is modified after
IFRS 2’s effective date, the incremental fair value (measured as the difference in the fair value of the award calculated immediately before
and immediately after modification) should be expensed over the remaining vesting period.
The following principal assumptions were used in the valuation:
Volatility – 20%
Option life – 1 year
Risk‑free investment rate – 2.5%
In total £8,000 of employee remuneration expense (all of which related to equity‑settled share‑based payment transactions) has been
included in the profit for 2010 (2009: £75,000) and credited to retained earnings. Annual report and accounts 2010 Surgical Innovations Group plc 55
Accounts 36 - 61
14 Share premium
Share
premium
£’000
Balance as at 31 December 2009 18,809
Reorganisation (18,809)
Issue of ordinary share capital 75
Balance as at 31 December 2010 75
Share premium comprises the cumulative difference between the net proceeds and nominal value of the Company’s issued equity share capital.
During the year the Group obtained court approval to offset the accumulated share premium at 1 January 2010 against the accumulated
retained earnings at 1 January 2010.
15. Contingent liabilities and financial commitments
These are as follows:
(a) Contingent liabilities
There were no contingent liabilities at 31 December 2010 (2009: £nil).
(b) Operating leases
At 31 December 2010 the Group had annual commitments under non‑cancellable operating leases as follows:
2010 2009
Land and Land and
buildings buildings
£’000 £’000
Within one year 147 147
One to five years 590 590
Over five years 218 365
(c) Capital commitments
At 31 December 2010 the Group had no capital commitments (2009: £nil).
16. Transactions with related parties
A summary of transactions during the year and outstanding amounts at the balance sheet date is as follows:
Amounts Amounts
invoiced payable at
to the 31 December
Company 2010
£’000 £’000
Quest Investments Limited
1
25 3
Winburn Glass Norfolk
2
23 2
Getz Bros & Co. Inc.
3
15 —
N G Bowland
4
— 19
ACP
5
107 54
As disclosed in the Report on remuneration:
1. Director’s fees for D B Liversidge CBE are paid to Quest Investments Limited, a company of which he is a Director.
2. Director’s fees and advisory fees for C Glass are paid to Winburn Glass Norfolk, a firm of which he is a partner.
3. Director’s fees and advisory fees for R Simkins are paid to Getz Bros & Co. Inc., a company of which he is Vice President.
4. At 31 December 2010 £18,600 from a loan of £20,000 made available to N G Bowland in 2009 was still repayable.
5. ACP acts as the master distributor for Surgical Innovations in the Far East. During the year Surgical Innovations invoiced ACP £106,933 for products and
at 31 December 2010 there was an amount owing to Surgical Innovations of £54, 141. 13. R Simkins is the ultimate beneficial owner of ACP .
There is no controlling party at Surgical Innovations Group plc.
17 . Pensions
The Company currently operates a defined contribution Group personal pension plan for the benefit of employees. Company contributions
in 2010 were £48,000 (2009: £37 ,000). Accounts
Surgical Innovations Group plc Annual report and accounts 2010 56
Report of the independent auditor – Company
to the members of Surgical Innovations Group plc
Independent auditor’s report to the members of Surgical Innovations Group plc
We have audited the parent company financial statements of Surgical Innovations Group plc for the year ended 31 December 2010 which
comprise the Company balance sheet and the related notes. The financial reporting framework that has been applied in their preparation
is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditor
As explained more fully in the Statement of Directors’ responsibilities set out on pages 28 and 29, the Directors are responsible for the
preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit
and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm.
Opinion on financial statements
In our opinion the parent company financial statements:
give a true and fair view of the state of the Company’s affairs as at 31 December 2010;
have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Report of the Directors for the financial year for which the financial statements are prepared
is consistent with the parent company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from
branches not visited by us;
the parent company financial statements are not in agreement with the accounting records and returns;
certain disclosures of Directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the Group financial statements of Surgical Innovations Group plc for the year ended 31 December 2010.
Timothy Lincoln
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountant
Leeds
19 April 2011 Annual report and accounts 2010 Surgical Innovations Group plc 57
Accounts 36 - 61
Company balance sheet
as at 31 December 2010
2010 2009
Notes £’000 £’000 £’000 £’000
Fixed assets
Investments 2 1,018 1,018
Current assets
Debtors 3 3,319 3,508
Cash at bank 2,536 2,345
5,855 5,853
Creditors: amounts falling due within one year 4 (68) (94)
Net current assets 5,787 5,759
Net assets 6,805 6,777
Capital and reserves
Called up share capital 5 3,815 3,738
Share premium account 6 75 18,809
Accumulated profit/(losses) 6 2,915 (15,770)
2,990 3,039
Shareholders’ funds 6,805 6,777
The accompanying accounting policies and notes form part of these financial statements.
The financial statements on pages 37 to 55 were approved by the Board of Directors on 19 April 2011 and were signed on its behalf by:
D B Liversidge CBE
Director
19 April 2011
Company number: 2298163 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 58
Notes to the Company financial statements
1. Accounting policies
(a) Basis of preparation
The financial statements have been prepared under the historical cost basis and UK GAAP .
(b) Investment in subsidiary undertakings
The Company’s investment in subsidiary undertakings is stated at cost less any provision for impairment.
(c) Share‑based compensation
All share‑based payment arrangements granted after 7 November 2002 that had not vested by 1 January 2006 are recognised in the financial
statements. The Group issues share options to certain employees which are measured at fair value and recognised as an expense in the profit and loss
account with a corresponding increase in profit and loss reserve. The fair value of the employee services received in exchange for the grant of the options
is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted.
The fair values of these payments are measured at the dates of grant and are recognised over the period during which employees become unconditionally
entitled to the awards. At each balance sheet date, the Group revises its estimate of the number of options that are expected to vest. It recognises
the impact of the revision to original estimates, if any , in the profit and loss account, with a corresponding adjustment to retained earnings.
2. Investments
Company £’000
Cost
At 31 December 2010 and 1 January 2010 1,551
Provision for diminution in value
At 31 December 2010 and 1 January 2010 533
Net book value at 31 December 2010 and 1 January 2010 1,018
The principal trading subsidiaries of the Group comprise:
Country of
incorporation Proportion
Company Description of shares held Nature of business and operation held
Surgical Innovations Limited Ordinary £1 shares Design and manufacture of minimally invasive devices Great Britain 100%
Haemocell Limited Ordinary £1 shares Design and manufacture of autologous blood products Great Britain 100%
3. Debtors
2010 2009
£’000 £’000
Prepayments and accrued income 10 9
Other debtors 42 44
Amounts due from subsidiary undertakings 3,267 3,455
3,319 3,508 Annual report and accounts 2010 Surgical Innovations Group plc 59
Accounts 36 - 61
4. Creditors: amounts falling due within one year
2010 2009
£’000 £’000
Accruals and deferred income 56 75
Other creditors 12 19
68 94
5. Share capital
2010 2009
£’000 £’000
Authorised 600,000,000
(2009: 600,000,000) ordinary shares of 1p each 6,000 6,000
Allotted, called up and fully paid 381,491,902
(2009: 373,841,902) ordinary shares of 1p each 3,815 3,738
Details of the share options are contained in note 13 of the consolidated financial statements.
During the year the following ordinary shares of 1p were issued in respect of exercised share options:
600,000 at 1.5p
3,000,000 at 1.7p
3,050,000 at 2.0p
1,000,000 at 3.0p
A total of 7 ,650,000 ordinary shares with a total nominal value of £76,500 were issued for consideration amounting to £151,000.
6. Reserves
Share Accumulated
premium profits/(losses)
£’000 £’000
At 1 January 2010 18,809 (15,770)
Premium on shares issued 75 —
Reorganisation of reserves (18,809) 18,809
Loss for the year — (132)
Employee share‑based payments — 8
At 31 December 2010 75 2,915 Accounts
Surgical Innovations Group plc Annual report and accounts 2010 60
7 . Reconciliation of movements in shareholders’ funds
2010 2009
£’000 £’000
Loss for the financial year (132) (233)
Issue of shares 152 —
Employee share‑based payments 8 75
Net increase/(decrease) in shareholders’ funds 28 (158)
Opening shareholders’ funds 6,777 6,935
Closing shareholders’ funds 6,805 6,777
8. Loss for the financial year of Surgical Innovations Group plc
The loss for the financial year dealt with in the financial statements of the holding company, Surgical Innovations Group plc, was £132,000
(2009: £232,700).
As permitted by Section 408 of the Companies Act 2006, the profit and loss account has not been included in these financial statements.
9. Transactions with related parties
A summary of transactions during the year and outstanding amounts at the balance sheet date is as follows:
Amounts
Amounts payable at
invoiced to 31 December
the Group 2010
£’000 £’000
Quest Investments Limited
1
25 3
Winburn Glass Norfolk
2
23 2
Getz Bros & Co. Inc.
3
15 —
As disclosed in the Report on remuneration:
1. Director’s fees for D B Liversidge CBE are paid to Quest Investments Limited, a company of which he is a Director.
2. Director’s fees and advisory fees for C Glass are paid to Winburn Glass Norfolk, a firm of which he is a partner.
3. Director’s fees and advisory fees for R Simkins are paid to Getz Bros & Co. Inc., a company of which he is Vice President.
Notes to the Company financial statements continued Annual report and accounts 2010 Surgical Innovations Group plc 61
Accounts 36 - 61
IFRS
2010 2009 2008 2007 2006
£’000 £’000 £’000 £’000 £’000
Revenue 7 ,045 4,541 4,312 4,770 4,460
Cost of sales (3,526) (2,447) (2,032) (2,377) (2,593)
Gross profit 3,519 2,094 2,280 2,393 1,867
Other operating expenses (1,932) (1,528) (1,500) (1,708) (1, 132)
Operating profit 1,587 566 780 685 735
Losses from discontinued operations — (200) — — —
Share‑based payments (8) (75) — — —
Finance income 9 13 118 96 —
Finance costs (39) (40) (78) (50) (39)
Profit before taxation 1,549 264 820 731 696
Taxation 239 261 (190) 34 —
Retained profit for the year 1,788 525 630 765 696
Earnings per ordinary share (basic) 0.48p 0.14p 0.17p 0.24p 0.27p
Earnings per ordinary share (diluted) 0.46p 0.14p 0.17p 0.23p 0.27p
Five-year summary Shareholder information
Surgical Innovations Group plc Annual report and accounts 2010 62
Notice is hereby given that the Annual General Meeting of the Company will be held at Clayton Wood House, 6 Clayton Wood Bank, Leeds
LS16 6QZ on 20 June 2011 at 1.00pm. You will be asked to consider the following resolutions:
Ordinary business
To consider and, if thought fit, pass the following resolutions which will be proposed as ordinary resolutions:
1 To receive and adopt the audited accounts for the year ended 31 December 2010 and the Reports of the Directors and auditor thereon.
2 To re‑elect Mr D B Liversidge CBE as a Director of the Company, in accordance with article 107 of the Company’s articles of association,
who offers himself for re‑election as a Director.
3 To re‑elect Mr N G Bowland as a Director of the Company, in accordance with article 107 of the Company’s articles of association,
who offers himself for re‑election as a Director.
4 To re‑appoint Grant Thornton UK LLP as auditor of the Company to hold office until the conclusion of the next general meeting at which
accounts are laid before the Company and to authorise the Directors to determine the auditor’s remuneration.
5 To authorise the Board generally and unconditionally pursuant to Section 551 of the Companies Act 2006 (the Act) to exercise all powers of
the Company to allot shares in the Company and to grant rights to subscribe for or to convert any security into such shares in the Company
(Rights) up to an aggregate nominal amount of £1,313,059.67 (being approximately one‑third of the issued share capital of the Company
as at the date of this notice) provided that this authority shall expire on the earlier of the date falling six months from the expiry of the
Company’s current financial year and the date of the next Annual General Meeting of the Company after the passing of this resolution
unless varied, revoked or renewed by the Company in general meeting, save that the Board may before the expiry of the authority granted
by this resolution make a further offer or agreement which would or might require shares to be allotted or Rights to be granted after such
expiry and the Board may allot shares and grant Rights in pursuance of such an offer or agreement as if the authority conferred by this
resolution had not expired and the authority granted by this resolution is in substitution for all previous authorities granted to the Directors
to allot shares and grant Rights which (to the extent that they remain in force and unexercised) are revoked but without prejudice to any
allotment or grant of Rights made or entered into prior to the date of this resolution 4.
Special business
To consider, and if thought fit, pass the following resolutions which will be proposed as special resolutions.
6 To empower the Board (subject to the passing of the previous resolution) pursuant to Sections 570 and 573 of the Act to allot equity
securities (within the meaning of Section 560 of the Act) for cash pursuant to the authority conferred upon them by the previous resolution
as if Section 561(1) of the Act did not apply to any such allotment, provided that this power shall be limited to:
6. 1 the allotment of equity securities in connection with a rights issue in favour of ordinary shareholders where the equity securities
respectively attributable to the interests of all ordinary shareholders are proportionate (as nearly as may be) to the respective
numbers of ordinary shares held by them but subject to such exclusions or other arrangements as the Directors may deem
necessary or expedient in relation to fractional entitlements, treasury shares, record dates or legal or practical problems under the
law of, or the requirements of, any recognised regulatory body or any stock exchange in any territory; and
6.2 the allotment (otherwise than pursuant to sub‑paragraph 6.1 above) of equity securities up to an aggregate nominal amount
of £393,917 .90 (being approximately 10% of the issued share capital of the Company at the date of this notice),
and shall expire on the earlier of the date falling six months from the end of the current financial year of the Company and the date of the
next Annual General Meeting after the passing of this resolution save that the Company may, before the expiry of any power contained in
this resolution, make a further offer or agreement which would or might require equity securities to be allotted after such expiry and the
Board may allot equity securities in pursuance of such offer or agreement as if the power conferred by this resolution had not expired.
Notice of Annual General Meeting Annual report and accounts 2010 Surgical Innovations Group plc 63
Shareholder information 62 - 68
Special business continued
7 To authorise the Company generally and unconditionally for the purpose of Section 701 of the Act to make one or more market purchases
(within the meaning of Section 693(4) of the Act) of ordinary shares of 1p each in the capital of the Company (Ordinary Shares) provided that:
7 . 1 the maximum aggregate number of Ordinary Shares authorised by this resolution to be purchased is 39,391,790 shares
(representing approximately 10% of the Company’s issued share capital as at the date of this notice);
7 .2 the minimum price which may be paid for such Ordinary Shares is 1p per share (exclusive of advance corporation tax and expenses);
7 .3 the maximum price (exclusive of advance corporation tax and expenses) which may be paid for an Ordinary Share is not more
than the higher of 5% above the average of the middle market quotations for an Ordinary Share as derived from the London Stock
Exchange Daily Official List for the five business days immediately preceding the day on which the Ordinary Share is purchased
and the amount stipulated by Article 5(1) of the Buy‑back and Stabilisation Regulation (Commission Regulation 2273/2003); and
7 .4 unless previously revoked or varied, the authority conferred by this resolution shall expire on the earlier of the date falling six
months from the end of the current financial year of the Company and the date of the next Annual General Meeting of the Company
save that the Company may, before such expiry, make a contract or contracts to purchase Ordinary Shares after such expiry as if the
power conferred by this resolution had not expired.
By order of the Board
N G Bowland Registered office:
Company Secretary Clayton Wood House
19 April 2011 6 Clayton Wood Bank
Leeds LS16 6QZ Shareholder information
Surgical Innovations Group plc Annual report and accounts 2010 64
Notice of Annual General Meeting continued
Notes
1. This notice is the formal notification to shareholders of the Company’s Annual General Meeting, its date, time and place, and the matters
to be considered. If you are in doubt as to what action to take you should consult an independent adviser.
2. Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001 (as amended) and Section 360B of the Companies Act 2006,
only those shareholders registered in the register of members of the Company at 1.00pm on 16 June 2011 as holders of ordinary shares
of 1p each in the capital of the Company shall be entitled to attend and vote at the meeting in respect of the number of shares registered
in their name at that time. Changes to entries in the register of members of the Company after 1.00pm on 16 June 2011 shall be disregarded
in determining the rights of any person to attend and vote at the meeting.
3. A member entitled to attend, speak and vote may appoint a proxy to attend, speak and vote instead of him or her. A member may appoint
more than one proxy in relation to the meeting provided that each proxy is appointed to exercise the rights attached to a different share
or shares held by that member. A proxy need not be a member of the Company. A form of proxy is included at the end of this document and
contains notes for its completion.
To be valid, the form of proxy and any power of attorney or the authority under which it is signed (or a notarially certified copy of it) must
be completed and lodged at the Registrars of the Company, Capita Registrars, at PXS, 34, Beckenham Road, Beckenham, Kent BR3 4TU
not later than 1.00pm on 16 June 2011.
4. Completion and return of a form of proxy does not preclude a member from subsequently attending and voting at the meeting. If a member
appoints a proxy or proxies and then decides to attend the Annual General Meeting in person and vote using his poll card, then the vote
in person will override the proxy vote(s). If the vote in person is in respect of the member’s entire holding, then all proxy votes will be
disregarded. If, however, the member votes at the meeting in respect of less than the member’s entire holding, then if the member indicates
on his polling card that all proxies are to be disregarded, that shall be the case, but if the member does not specifically revoke proxies, then
the vote in person will be treated in the same way as if it were the last received proxy and earlier proxies will only be disregarded to the
extent that to count them would result in the number of votes being cast exceeding the member’s entire holding.
5. To change your proxy instructions simply submit a new proxy appointment using the methods set out above. Note that the cut‑off time for
receipt of proxy appointments (see note 3 above) also apply in relation to amended instructions; any amended proxy appointment received
after the relevant cut‑off time will be disregarded.
Where you have appointed a proxy using the hard copy proxy form and would like to change the instructions using another hard copy proxy
form, please contact Capita Registrars at PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU.
If you submit more than one valid proxy appointment, the appointment received last before the latest time for the receipt of proxies will
take precedence.
6. In order to revoke a proxy instruction you will need to inform the Company by sending a signed hard copy notice clearly stating your intention
to revoke your proxy appointment to Capita Registrars. In the case of a member which is a company, the revocation notice must be executed
under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any
other authority under which the revocation notice is signed (or a duly certified copy of such power or authority) must be included with the
revocation notice.
The revocation notice must be received by Capita Registrars at PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU no later than 1.00pm
on 16 June 2011. If you attempt to revoke your proxy appointment but the revocation is received after the time specified then, subject
to paragraph 5 above, your appointment will remain valid. Annual report and accounts 2010 Surgical Innovations Group plc 65
Shareholder information 62 - 68
Notes continued
7 . Copies of the following documents will be available for inspection at the registered office of the Company during normal business hours
until the date of the Annual General Meeting and on that day, at the place of the meeting from at least 15 minutes prior to the meeting until
its conclusion:
Directors’ service contracts; and
letters of appointment for Non‑executive Directors.
8. As at 19 April 2011 (being the last practicable business day prior to the publication of this notice) the Company’s issued share capital
consisted of 393,917 ,902 ordinary shares of 1p each, with one voting right per share.
9. If a corporation is a member of the Company, it may by resolution of its directors or other governing body authorise one or more persons
to act as its representative or representatives at the Meeting and any such representative or representatives shall be entitled to exercise
on behalf of the corporation all the powers that the corporation could exercise if it were an individual member of the Company.
Corporate representatives should bring with them either an original or certified copy of the appropriate board resolution or an original
letter confirming the appointment, provided it is on the corporation’s letterhead and is signed by an authorised signatory and accompanied
by evidence of the signatory’s authority.
10. A member may not use any electronic address (within the meaning of Section 333(4) of the Companies Act 2006) provided in this Notice
of Meeting (or in any related or accompanying document (including the form of proxy) to communicate with the Company for any purposes
other than those expressly stated. Shareholder information
Surgical Innovations Group plc Annual report and accounts 2010 66
Explanatory notes to the Notice of Annual General Meeting
The notes on the following pages give an explanation of the proposed resolutions.
Resolutions 1 to 5 are proposed as ordinary resolutions. This means that for each of those resolutions to be passed, more than half of the
votes cast must be in favour of the resolution.
Resolutions 6 to 9 are proposed as special resolutions. This means that for each of those resolutions to be passed, at least three quarters
of the votes cast must be in favour of the resolution.
Resolution 1 – Accounts
The Directors will present their report, the auditor’s report and the audited financial statements for the financial year ended 31 December 2010
to the meeting as required by law.
Resolutions 2 and 3 – Re-election of Directors
At each general meeting one‑third of the directors for the time being are required to retire. If the number of relevant directors is not a multiple
of three, the number nearest to but not exceeding one‑third of Directors should be obliged to retire. Directors due to retire by rotation are
those longest in office since their last re‑election and as between persons who become or were last re‑elected on the same day those due
to retire shall (unless otherwise agreed among themselves) be determined by lot. A retiring Director is eligible for re‑election. In line with past
practice, two Directors will retire by rotation. Doug Liversidge and Graham Bowland retire by rotation and are offering themselves for re‑election.
Resolution 4 – Re-appointment of auditor
The Company is required to appoint an auditor at each general meeting at which accounts are laid, to hold office until the next general meeting.
The present auditor, Grant Thornton UK LLP , is willing to continue in office for a further year and this resolution proposes its reappointment
and, in accordance with standard practice, authorises the Directors to determine the level of the auditor’s remuneration.
Resolution 5 – Authority to allot shares
The resolution grants the Directors authority to allot relevant securities up to an aggregate nominal amount of £1,313,059.67 being
approximately one‑third of the Company’s ordinary share capital in issue at 19 April 2011. It is not the Directors’ current intention to allot
relevant securities pursuant to this resolution. This authority replaces the existing authority to allot relevant securities but does not affect
the ability to allot shares under the share option schemes.
Resolution 6 – Disapplication of statutory pre-emption rights
This resolution disapplies the statutory pre‑emption rights which would otherwise apply on an issue of shares for cash pursuant to a rights
issue where the securities attributable to the interests of all shareholders are proportionate (as nearly as may be) to the number of shares
held and generally up to a further £393,917 .90 being 10% of the Company’s ordinary share capital in issue at 19 April 2011. This replaces
the existing authority to disapply pre‑emption rights and expires at the conclusion of the next Annual General Meeting of the Company .
Resolution 7 – Purchase of own shares
In certain circumstances it may be advantageous for the Company to purchase its own shares and this resolution seeks authority to do this.
The Directors would only consider making purchases if they believed that such purchases would be in the best interests of shareholders
generally, having regard to the effect on earnings per share and the Company’s overall financial position.
The resolution gives general authority for the Company to make purchases of up to 39,391,790 ordinary shares (being 10% of the
Company’s ordinary share capital in issue at 19 April 2011) at a minimum price of 1p and a maximum price being the higher of 5% above
the average of the middle market quotations for ordinary shares for the five business days prior to the purchase and the price stipulated by
Article 5(1) of the Buy‑back and Stabilisation Regulations 2003 (being the higher of the price of the last independent trade and the highest
current independent bid on the trading venue where the purchase is carried out).
Companies are permitted to retain any of their own shares which they have purchased as treasury stock with a view to possible re‑issue
at a future date, rather than cancelling them. The Company will consider holding any of its own shares that it purchases pursuant to the
authority conferred by this resolution as treasury stock. This would give the Company the ability to re‑issue treasury shares quickly and cost
effectively, and would provide the Company with additional flexibility in the management of its capital base. Annual report and accounts 2010 Surgical Innovations Group plc 67
I/We, the undersigned, being (a) member/member(s) of Surgical Innovations Group plc, hereby appoint the Chairman of the Meeting or,
Name of proxy .................................................................................................................. Number of shares ..................................................................
(IN BLOCK CAPITALS PLEASE)
as my/our proxy to vote for me/us and on my/our behalf at the Annual General Meeting of the Company to be held at Clayton Wood House,
6 Clayton Wood Bank, Leeds LS16 6QZ on 20 June 2011 at 1.00pm and at any adjournment thereof. I/We wish my/our proxy to vote as shown
below in respect of the resolutions set out in the Notice of the Meeting.
Please indicate by ticking the box if this proxy appointment is one of multiple appointments being made. *
For the appointment of one or more proxy, please refer to explanatory note 2 (overleaf).
For Against Vote
withheld*
1 To receive and adopt the audited accounts for the year ended 31 December 2010 and the
Reports of the Directors and auditor thereon.
2 To re‑elect Mr D B Liversidge CBE as a Director of the Company.
3 To re‑elect Mr N G Bowland as a Director of the Company.
4 To re‑appoint Grant Thornton UK LLP as auditor of the Company and to authorise the
Directors to determine the auditor’s remuneration.
5 To authorise the Board to allot shares in the Company and to grant rights to subscribe
for or to convert any security into such shares.
6 To empower the Board to allot equity securities for cash.
7 To authorise the Company to make one or more market purchases of ordinary shares of 1p
each in the capital of the Company (Ordinary Shares).
If you want your proxy to vote in a certain way on the resolutions specified, please place an “X” in the appropriate box. If you fail to select any of
the given options your proxy can vote as he/she chooses or can decide not to vote at all. The proxy can also do this on any other resolution that
is put to the meeting.
* The “Vote Withheld” option is to enable you to abstain on any particular resolution. However, it should be noted that a “Vote Withheld” is not a
vote in law and will not be counted in the calculation of the proportion of the votes “For” and “Against” a resolution.
Signed .......................................................................................... Dated this ......................................... day of ........................................................ 2011
Name ......................................................................................................................................................................................................................................
Address...................................................................................................................................................................................................................................
Form of proxy
Surgical Innovations Group plc
Shareholder information
Surgical Innovations Group plc Annual report and accounts 2010 68
Notes:
1. Every holder has the right to appoint some other person(s) of their choice, who need not be a shareholder as his/her proxy to exercise all
or any of his/her rights, to attend, speak and vote on their behalf at the meeting. If you wish to appoint a person other than the Chairman,
please insert the name of your chosen proxy holder in the space provided (see above). If the proxy is being appointed in relation to
less than your full voting entitlement, please enter in the box next to the proxy holder’s name (see above) the number of shares in
relation to which they are authorised to act as your proxy. If left blank your proxy will be deemed to be authorised in respect of your
full voting entitlement (or if this proxy form has been issued in respect of a designated account for a shareholder, the full voting
entitlement for that designated account).
2. To appoint more than one proxy you may photocopy this form. Please indicate the proxy holder’s name and the number of shares in
relation to which they are authorised to act as your proxy (which, in aggregate, should not exceed the number of shares held by you).
Please also indicate if the proxy instruction is one of multiple instructions being given.
3. The “Vote Withheld” option is provided to enable you to abstain on any particular resolution. However, it should be noted that a “Vote
Withheld” is not a vote in law and will not be counted in the calculation of the proportion of the votes “For” and “Against” a resolution.
4. Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, entitlement to attend and vote at the meeting and the
number of votes which may be cast thereat will be determined by reference to the Register of Members of the Company at 6.00pm
on the day which is two days before the day of the meeting or adjourned meeting. Changes to entries on the Register of Members after
that time shall be disregarded in determining the rights of any person to attend and vote at the meeting.
5. To appoint one or more proxies or to give an instruction to a proxy (whether previously appointed or otherwise) via the CREST system,
CREST messages must be received by the issuer’s agent (ID number RA10) not later than 48 hours before the time appointed for holding
the meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp generated by the CREST
system) from which the issuer’s agent is able to retrieve the message. The Company may treat as invalid a proxy appointment sent by
CREST in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.
6. The completion and return of this form will not preclude a member from attending the meeting and voting in person. If you attend the
meeting in person, your proxy appointment will automatically be terminated.
7 . To be effective, all votes must be lodged not less than 48 hours before the time of the meeting at the office of the Company’s registrars
at: Capita Registrars, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU.
Form of proxy continued
Surgical Innovations Group plc
Over the last year, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence
concerning investment matters. These are typically from overseas based “brokers” who target UK shareholders, offering to sell them what
often turn out to be worthless or high risk shares in US or UK investments. These operations are commonly known as “boiler rooms” . These
“brokers” can be very persistent and extremely persuasive and a 2006 survey by the Financial Services Authority (FSA) has reported that
the average amount lost by investors is around £20,000.
It is not just the novice investor that has been duped in this way; many of the victims had been successfully investing for several years.
Shareholders are advised to be very wary of any unsolicited advice, offers to buy shares at a discount or offers of free company reports.
If you receive any unsolicited investment advice:
make sure you get the correct name of the person and organisation;
check that they are properly authorised by the FSA before getting involved by visiting www.fsa.gov.uk/register;
report the matter to the FSA either by calling 0845 606 1234 or visiting www.moneymadeclear.fsa.gov.uk; and
if the calls persist, hang up.
If you deal with an unauthorised firm, you will not be eligible to receive payment under the Financial Services Compensation Scheme.
The FSA can be contacted by completing an online form at www.fsa.gov.uk/pages/doing/regulated/law/alerts/overseas.shtml.
Details of any share dealing facilities that the Company endorses will be included in Company mailings.
More detailed information on this or similar activity can be found on the FSA website www.moneymadeclear.fsa.gov.uk.
Warning to shareholders – boiler room scams Think surgery ...
...Think surgical innova Tions
surgical innovations group plc
Clayton Wood House
6 Clayton Wood Bank
Leeds LS16 6QZ
T. +44 (0) 113 230 7597
F . +44 (0) 113 230 7598
W. www.sigroupplc.com
For investor relations enquiries please email:
[email protected]
For sales enquiries please email:
[email protected]
For general enquiries please email:
[email protected] ### summary: |
eg solutions plc
Annual report and accounts
for the year ended 31 January 2008
Stock exchange code: EGS
eg solutions plc, The Roller Mill, Teddesley Road, Penkridge, Staffordshire, ST19 5BD, UK
t: +44 (0) 1785 715772 f: +44 (0) 1785 712541
[email protected] www.eguk.co.uk
eg solutions plc Annual report and accounts 2008
eg solutions plc is a global business software
application vendor. Our software provides historic,
real-time and predictive Operational MI. When
implemented with our training programme for
managers and team leaders to use this
intelligence, we guarantee improvements in
operational results in short timescales.
The Company, which is listed on the Alternative
Investment Market (‘AIM’) of the London Stock
Exchange, is committed to customer satisfaction
and the ongoing development of its operations
management solutions.
corporate statement
contents
Highlights 1
Chairman’s Statement 2
Chief Executive’s Review 4
Board of Directors 10
Advisers 11
Directors’ Report 12
Corporate Governance Statement 16
Directors’ Remuneration Report 19
Directors’ Responsibilities in the Preparation
of the Financial Statements 21
Independent Auditors’ Report 22
Consolidated Balance Sheet 24
Company Balance Sheet 25
Consolidated Income Statement 26
Consolidated Statement of Recognised
Income and Expense 26
Consolidated Cash Flow Statement 27
Company Cash Flow Statement 28
Consolidated Financial Statements
Summary of Significant Accounting Policies 29
Notes to the Consolidated Financial Statements 34
Notice of Annual General Meeting 53
Form of Proxy 55 eg solutions plc
Annual report and accounts
for the year ended 31 January 2008
Stock exchange code: EGS
eg solutions plc, The Roller Mill, Teddesley Road, Penkridge, Staffordshire, ST19 5BD, UK
t: +44 (0) 1785 715772 f: +44 (0) 1785 712541
[email protected] www.eguk.co.uk
eg solutions plc Annual report and accounts 2008
eg solutions plc is a global business software
application vendor. Our software provides historic,
real-time and predictive Operational MI. When
implemented with our training programme for
managers and team leaders to use this
intelligence, we guarantee improvements in
operational results in short timescales.
The Company, which is listed on the Alternative
Investment Market (‘AIM’) of the London Stock
Exchange, is committed to customer satisfaction
and the ongoing development of its operations
management solutions.
corporate statement
contents
Highlights 1
Chairman’s Statement 2
Chief Executive’s Review 4
Board of Directors 10
Advisers 11
Directors’ Report 12
Corporate Governance Statement 16
Directors’ Remuneration Report 19
Directors’ Responsibilities in the Preparation
of the Financial Statements 21
Independent Auditors’ Report 22
Consolidated Balance Sheet 24
Company Balance Sheet 25
Consolidated Income Statement 26
Consolidated Statement of Recognised
Income and Expense 26
Consolidated Cash Flow Statement 27
Company Cash Flow Statement 28
Consolidated Financial Statements
Summary of Significant Accounting Policies 29
Notes to the Consolidated Financial Statements 34
Notice of Annual General Meeting 53
Form of Proxy 55 Our software provides real-time, consistent operational intelligence across a balanced
range of performance indicators to enable you to make the right operational decisions
— providing capacity planning, line balancing and timely reporting at multiple levels so
you can effecitvely measure, manage and improve your business operations.
Over 40,000 users trust eg — Our software is working hard for client businesses
across the globe.
A global
operational
intelligence system
What we do
eg operational intelligence
®
— the definitive software for
producing real-time Operations Management Information
(‘MI’), provides the most comprehensive Operations MI
available, supports the achievement of operational excellence
and enables organisations to achieve dramatic improvements
in service, efficiency and reduced costs in weeks —
guaranteed.
The eg principles of operational management
®
are based
on tried, tested and proven methodologies taken from
industry. They form the basis of a Manager and Team Leader
training and development programme in Operations
Management. Through training and skills transfer, Managers
and Team Leaders learn how to use eg operational
intelligence
®
to provide a consistent approach to
actively managing work, resources and performance.
eg operational excellence™ can be achieved by
using improved Operations MI and the eg principles of
operational management
®
to improve the end-to-end
customer service and quality experience.
operational management
practice you can measure
operational excellence
improvement you can measure
operational intelligence
performance you can measure
www.eguk.co.uk
Key
eg offices
eg operational intelligence
®
users
eg is the only business software application vendor that guarantees return on
investment and is paid based on the results delivered — implementations will pay
for themselves, typically within 6 months.
With over 40 current client sites, we have a wide range of reference sites to assure
you of our ability to deliver real performance improvement into your organisation. Our software provides real-time, consistent operational intelligence across a balanced
range of performance indicators to enable you to make the right operational decisions
— providing capacity planning, line balancing and timely reporting at multiple levels so
you can effecitvely measure, manage and improve your business operations.
Over 40,000 users trust eg — Our software is working hard for client businesses
across the globe.
A global
operational
intelligence system
What we do
eg operational intelligence
®
— the definitive software for
producing real-time Operations Management Information
(‘MI’), provides the most comprehensive Operations MI
available, supports the achievement of operational excellence
and enables organisations to achieve dramatic improvements
in service, efficiency and reduced costs in weeks —
guaranteed.
The eg principles of operational management
®
are based
on tried, tested and proven methodologies taken from
industry. They form the basis of a Manager and Team Leader
training and development programme in Operations
Management. Through training and skills transfer, Managers
and Team Leaders learn how to use eg operational
intelligence
®
to provide a consistent approach to
actively managing work, resources and performance.
eg operational excellence™ can be achieved by
using improved Operations MI and the eg principles of
operational management
®
to improve the end-to-end
customer service and quality experience.
operational management
practice you can measure
operational excellence
improvement you can measure
operational intelligence
performance you can measure
www.eguk.co.uk
Key
eg offices
eg operational intelligence
®
users
eg is the only business software application vendor that guarantees return on
investment and is paid based on the results delivered — implementations will pay
for themselves, typically within 6 months.
With over 40 current client sites, we have a wide range of reference sites to assure
you of our ability to deliver real performance improvement into your organisation. Key Business Highlights
Continued expansion into new international
markets and demonstration of applicability
of our solutions in the global marketplace.
Secured clients in three of our five target
international markets. Sales revenues of
three times the original expectations for
the first year of international business have
been achieved.
Launched new and improved versions of our
eg operational intelligence® software
suite which have been adopted by over 5,000
users across seven companies, including our
important home market. Also completed
development of eg activity manager™, a
new module of our software.
Successful application of a Software as a
Service (“SaaS”) licence model based on the
hosted solution launched last year and
secured first long-term licence agreement for
a minimum of £330k of licence revenue
spread over the next three years.
Strategic review undertaken to achieve cost
reductions; £900,000 on an annualised basis.
Four new contract wins secured since the
start of the new 2008 financial year:
Nationwide Building Society — a further
implementation in a core UK market.
Co-operative Financial Services —
integration to automate the processing of
inbound and outbound correspondence
with three other partners.
Co-operative Travel Group which
demonstrates another successful
application outside of financial services.
A major South African life office employing
approximately 5,000 people; an initial
proof of concept project.
Highlights
eg solutions plc
annual report and accounts 2008
www.eguk.co.uk
1
Our solutions are tried, tested and proven to work in
any organisation where process driven operations are
critical to business performance — we have completed
implementations and improved performance in blue
chip companies throughout the world.
“The cost savings made possible by eg were
considerable. eg promised to deliver a cost benefit of
at least 20% — the actual cost benefit was 29%.” Chairman’s Statement
eg solutions plc
annual report and accounts 2008
2
Introduction
As previously stated in our last Annual Report, during
2007 we intended to concentrate on reducing costs and
strengthening the fundamentals of our business in order
to return to profitable growth. We did not expect to
achieve this overnight and, whilst our financial
performance has been disappointing, our core objectives
have remained on track. There are clear signs of recovery
across the Group.
We have also given particular attention to business
development within new markets and have made further
investment in our core products in order to meet our
customers’ requirements of improving operational
effectiveness in a global marketplace.
The work we have done will enable us to secure more
stable and sustainable growth in the future. With the
launch of new and improved versions of our software we
have also enjoyed some success in securing a number of
new contracts during the period. It is pleasing to note
that this new business also reflects our progress in
developing international markets.
Financial Review
Financial performance for the full year ended 31 January
2008 was below expectations, but improvements in
profitability across the Group during the second half of
the year are clearly visible.
The financial year was one of operational transition and
margin recovery. We have undertaken initiatives to
reduce costs, whilst ensuring that overheads remain
under strict control. As a result costs are now below pre-
flotation levels.
Although these measures resulted in the Company
returning to profit in the closing months of the financial
year, revenues from the majority of sales closed in the
same period were not recognisable until after the
financial year end. Therefore, these sales will contribute
towards revenues in the current financial year ending
31 January 2009.
Revenue in the period was maintained at the same level
as the previous two half year periods at £4.1m for the
year (down by £1.3m on the previous year). The Loss
before Tax was £815,000 including one-off investment
costs of £392,000 (2007: £41,000). The retained loss for
the financial year was £656,000 (2007: Profit £6,000).
Loss per share was 5.0 pence per share (2007: 0.0 pence
per share).
Cash balance was £0.88m (2007: cash £2.43m).
Gross margin was 65.3%, which is in line with our target
and better than the average for the software sector.
“. . . during 2007 we intended to concentrate on
reducing costs and strengthening the fundamentals
of our business in order to return to profitable
growth . . . there are clear signs of recovery across
the Group . . . the full recovery of the business
requires 18 to 24 months to complete, and we are
reasonably satisfied with progress made to date.” eg solutions plc
annual report and accounts 2008
3
www.eguk.co.uk
Dividend
The Board will not be declaring a dividend at the full
year stage.
People
During the financial year we were very pleased to
announce the appointment of Paul Bird as Finance
Director and Company Secretary with effect from
3 September 2007. It was very unfortunate to have to
report Paul Bird’s decision to resign from the Board of
eg in order to allow him to assume another position
elsewhere. The Board is fully aware that another
personnel change at such a senior level within the
Company is far from ideal.
Therefore, we were delighted to announce the recent
appointment of Violetta Parylo as Finance Director and
Company Secretary with effect from Monday 19 May
2008. Violetta brings 14 years’ experience in delivering
strategic, financial and business value to the Company
having held a number of senior finance positions within
both UK and international companies. Paul will remain
with the Company until the end of his contracted notice
period in order to execute an efficient ‘hand-over’ to
his successor.
In November 2007 we also announced the resignation of
Jonathan Pyke as Non-executive Director. Jonathan, who
had been with eg since our flotation on AIM in 2005,
resigned to pursue a full-time position with another
company. He was a valued member of the Board and we
extend our very best wishes to him for the future.
We fully acknowledge the important role that Non-
executive Directors have to play in the future growth and
development of eg and, therefore, we are actively
seeking a suitable candidate that will add value to the
Company going forward. Shareholders will be updated on
any appointment in due course.
Across the Company our offices are well managed and
driven by a long-serving team of people at operational
level, all of whom remain fully committed to the overall
success of eg. On behalf of the Board and shareholders,
I would like to take this opportunity to thank all of our
staff who have continued to work hard during what has
been an arduous year for the Company.
Overview
Although 2007 was a tough year, eg continues to be a
vibrant and dynamic organisation that is firmly focused
on implementing key objectives to return the business to
its previous levels of revenue growth and profitability.
As we have indicated in previous announcements to
shareholders, the full recovery of the business requires
18 to 24 months to complete, and we are reasonably
satisfied with progress made to date.
As a Company, we fully recognise the importance of
nurturing appropriate new business opportunities both
within the UK and overseas and will continue to develop
this strategy for the foreseeable future.
Finally, and on an extremely positive note, the Company
celebrated its 20th birthday just before the financial year
end in January 2008. This was a significant milestone
that clearly reflects the longevity of the business and the
high levels of customer satisfaction with which we have
become synonymous.
Rodney Baker-Bates
Non-executive Chairman
18 March 2008 Chief Executive’s Review
eg solutions plc
annual report and accounts 2008
4
Business Review
The Company has made a number of significant
developments during the period under review. Our
objectives were to reduce costs, to expand into new
international markets and to build our repeatable
revenues. At the same time, we needed to continue to
enhance our software to meet customer requirements
across the globe.
We are pleased to update shareholders on the following:
Cost Reduction
Our primary focus during the year was to reduce our cost
base. The main area of spend in eg is people and the
required reduction in headcount needed to be achieved
with sensitivity. The cost reduction work was completed
in the first half of the year with the actual cost reductions
beginning to take effect from June 2007 onwards. In
total, cost reductions of £900,000 on an annualised basis
have been achieved, bringing our UK cost base below
pre-flotation levels. Although the outturn for the full year
was still an operating loss, the loss in the second half of
the year was £215,000 compared to £682,000 in the first
half. In total, an operating loss of £897,000 was
generated including £392,000 in one-off costs associated
with the redundancies, setting up in new markets and the
additional cost of an interim Finance Director required in
the first half of the year.
Gross Margin for the year was 65.3% and, although this
is below the level achieved in the previous financial year
(72.9%), it is in line with our target and well ahead of
the sector average.
Expansion into New Markets
At the same time as reducing our costs, we have
continued to focus on developing new international
markets in order to reduce revenue concentration on UK
financial services. In 2007 we secured clients in three of
our five target international markets. Sales revenues of
three times the original expectations for eg’s first year of
international business have been achieved.
We are pleased with the success of our implementation
projects within South Africa, India and the Netherlands
which clearly demonstrate the applicability of our
solutions in the global marketplace. Our international
business has also given us the opportunity to
demonstrate the successful application of a Software as a
Service (“SaaS”) licence model based on the hosted
solution launched earlier in the year.
The continued expansion into these overseas markets will
remain a key strategy for the foreseeable future in order
to mitigate the risks of over concentration on UK
markets.
UK Business Development
In December 2007 we were delighted to secure a
significant piece of new business with a major UK Life &
Pensions Company within our core UK market.
We are providing this client with the new and improved
version of eg operational intelligence® software,
which was launched in April 2007, together with the eg
principles of operational management®. This
contract win was an important development as it
demonstrates our continued focus and commitment to
our very important home market, whilst we also
concentrate on international expansion.
eg continues to enjoy high levels of repeat business from
existing clients and, as a result of this and other work
undertaken throughout the 2007 financial year, we have
begun to reduce our exposure to ‘lumpiness’ in our
revenues. eg solutions plc
annual report and accounts 2008
5
www.eguk.co.uk
We have also significantly reduced any dependency on
single clients/projects and worked hard to secure more
long-term contractual income, with a particular shift
towards securing three to five year licensing agreements.
Together with a high proportion of repeat revenues, these
actions reduce our exposure to more unpredictable new
business wins.
Product Development
£0.7m of research and development costs have been
capitalised during the course of the financial year
under IFRS.
The financial year marked a significant milestone in our
product offering to clients when, in April 2007, we
launched new and improved versions of our eg
operational intelligence® software suite, incorporating
eg work manager®.
The benefits of these new versions are extensive and
include improved functionality covering end-to-end
process and milestone measurement, customer
experience management (encompassing new service and
quality metrics), as well as management across multiple
time zones and an overall improved ‘look and feel’ for
both users and managers. As a result eg now has the
only operational intelligence tool that provides historic,
real-time and predictive management information at
multiple levels, both within and between businesses,
whilst at the same time enabling reporting by customer,
channel and process.
Our Research and Development team in South Africa has
completed the development of eg activity manager™, a
new module of our software that enables our clients to
track actual processing time in comparison with target
processing time on an ongoing basis.
“In 2007 we secured clients in three of our five
target international markets . . . We are pleased with
the success of our implementation projects within
South Africa, India and the Netherlands which
clearly demonstrate the applicability of our solutions
in the global marketplace.” Chief Executive’s Review continued
eg solutions plc
annual report and accounts 2008
6
Given the increased pressure for businesses to deliver
improved customer service at the lowest possible cost,
eg’s leading edge operational intelligence together with
training and implementation services that enable
companies to achieve guaranteed and sustainable
improvements resonate well with these requirements.
During the year, the new and improved versions of our
software have been adopted by over 5,000 users, across
seven companies, bringing our total worldwide users to
over 40,000.
Current Trading
Our clients, across many different markets both in the UK
and abroad, continue to confirm that our software,
implementation and training services generate the
dramatic improvements that we promise. The three new
contract wins that we secured within the first trading
month of the 2008 financial year are clear evidence of
the continued interest in our solutions from a number of
sectors within the UK.
Firstly, Nationwide Building Society has commissioned a
further implementation in the Specialist Lending Division
in Bournemouth. This follows the recent upgrade to the
new versions of the eg operational intelligence®
software suite that took place between November 2007
and January 2008. In this new project Nationwide will
use eg’s software to migrate UCB Homeloans into the
Bournemouth operations centre.
At Co-operative Financial Services, the Group has
secured a major software services project to embed the
eg operational intelligence® software suite into an
integrated solution that will automate the processing of
inbound and outbound correspondence. The full solution
will be developed in partnership with three other
companies: Xerox, Communisis and Exstream. eg will
provide the operations management components of the
solution including work and process management, and
the automatic production of historic, real-time and
predictive MI.
Finally, a further new implementation will take place in
the Travel and Tour Operator Payments teams of the Co-
operative Travel Group. eg’s software was already
installed in the Financial Shared Services teams of The
Co-operative Group before the retailer merged with
United Co-operative last year. This new implementation
will take place in the Travel and Tour Operator Payments
division of the merged Group. The new version of the eg
operational intelligence® software suite will be
implemented, demonstrating another application of the
enhanced functionality of the software outside financial
services.
We are pleased that during the year we have secured our
first long-term licence agreement. It is an objective of
the Company to secure a higher proportion of renewable
income and whilst eg has significant annual revenue
generated from maintenance contracts we wish to
increase this guaranteed revenue stream through the
addition of long-term renewable licence contracts. To this
end we have signed a contract with a customer for a
minimum of £330k of licence revenue to be spread over
the next three years, with the potential for significant
uplift as licence numbers increase.
These new contract wins clearly demonstrate that the
Company is becoming increasingly better placed to take
advantage of the opportunities provided by different
sectors and the requirements of global operational
management in general. eg solutions plc
annual report and accounts 2008
7
www.eguk.co.uk
Future Outlook
Although we have achieved many of our turnaround
objectives, we still have work to do on our strategy to
further improve sustainability. At the same time the
market environment has become extremely
unpredictable. We therefore remain cautious in our
outlook for 2008.
However, we are pleased that our order book for the
forthcoming year is already £3m, 50% higher than at the
same point in the 2007 financial year. The sales pipeline
is healthy and, on this basis, we will continue to
demonstrate continued recovery during 2008.
Shareholders should be aware that during the recession
of 2001 to 2003 eg outperformed the rest of the software
industry by consistently growing in both revenue and
profit during this difficult period.
This positive historical performance demonstrates the
continued demand for our products during downturns in
the IT market in general and our reduced vulnerability to
falls in IT spending amongst our clients.
The Chairman, Chief Executive and senior management
team were all in place during the last market downturn
and, together with the cost reductions we have made, we
believe that we are well placed to repeat our 2001 to
2003 performance in terms of growth and value for
shareholders.
“Contract wins that we secured within the first trading
month of the 2008 financial year are clear evidence of the
continued interest of our solutions from a number of sectors
within the UK.”
Chief Executive’s Review continued Chief Executive’s Review continued
eg solutions plc
annual report and accounts 2008
8
Financial Review
Overview
In the year ended 31 January 2008 turnover was
£4.12m, a reduction of £1.35m (2007: £5.47m).
Operating losses increased from a loss of £0.15m in 2007
to produce a loss of £0.90m.
International Financial Reporting Standards
(“IFRS”)
The Group has produced its financial statements under
IFRS. Comparison values shown in the operational and
Business Review and the Directors’ Report are based on
prior year IFRS. An extract of the result for 2006–07
under UK GAAP and IFRS is produced on pages 48 to 52.
Revenue Analysis
The Group produced a disappointing first half result with
revenues of £2.07m, 39.7% down on 2006 (£3.43m).
Revenue earned in the second half of the year was
£2.05m compared with £2.04m in the same period for
the prior year.
The Group segments its operations on the basis of
‘geographical segmentation of operations’. The Group has
determined that this is the most appropriate segmental
split to reflect the nature of the Group’s operations. The
Group has two distinct companies operating in different
geographical areas with different economic and political
conditions and a different maturity of client and client
requirements.
The Group has a subsidiary undertaking in South Africa.
Revenue generated from South African operations
totalled £0.35m, of which 63.2% was generated in the
second half of the year.
The Group operating loss of £0.90m includes a charge of
£0.65m for development expenditure. The Group
operating loss in 2007 was £0.15m, after charging
development expenditure of £0.55m. The Group’s cash
balances reduced during the year; however, interest
earned was £0.08m.
Loss Before Taxation
The loss before taxation was £0.82m (2007: loss
£41,000).
Taxation
The Group has benefited from the favourable tax relief
given on development expenditure which results in a
higher tax credit. The effective rate of taxation credit is
20% (2007: Effective rate of tax credit 114%).
Earnings Per Share
Loss per share on a basic and fully diluted basis were
(5.0p) and (5.0p) respectively. In the prior year the
basic earnings per share was 0.0p and on a fully diluted
basis 0.0p.
Dividend
There were no dividends paid during the year. The
Directors do not recommend a final dividend.
Research and Development & Capital Expenditure
The Group spent £1.24m on direct staff costs for
research and development, of which £0.59m was
capitalised. An additional £0.13m, in relation to
associated overheads, was also capitalised. In 2007 the
Group expended £0.81m on direct staff costs developing
its software product, of which £0.26m was capitalised. An
additional £0.03m, in relation to associated overheads,
was also capitalised. The majority of the expenditure
relates to the development of new and enhanced
software offerings.
At interim results the value of capitalised development
was based solely on the value of directly attributable
staffing costs. As part of the year end process the
capitalisation has been extended to incorporate an
appropriate amount of indirect overheads. This additional
allocation was performed following a full review of
development costs in line with audit recommended best
practice. This allocation adjustment has affected the
periods 31 January 2006 and 31 January 2007 and is
reflected within the IFRS comparisons for prior years. eg solutions plc
annual report and accounts 2008
9
www.eguk.co.uk
Cash Flow
The Group is debt free and at 31 January had interest
earning cash balances of £0.88m (2007: £2.43m). Cash
outflow in the year from operating activities was £0.85m
(2007: inflow £0.87m) resulting principally from reduced
turnover creating a net cash outflow from operations.
Going Concern
Based on normal business planning and control
procedures, the Directors have a reasonable expectation
that the Group has adequate resources to continue in
operational existence for the foreseeable future. For this
reason, the Directors continue to adopt the going concern
basis in preparing the accounts.
Elizabeth Gooch
Chief Executive Officer
18 March 2008
“eg continues to enjoy high levels of repeat business
from existing clients . . . we have also significantly
reduced any dependency on single clients/projects
and worked hard to secure more long-term
contractual income.”
Chief Executive’s Review continued Board of Directors
eg solutions plc
annual report and accounts 2008
10
1 Rodney Baker-Bates
Non-executive Chairman
Rodney, 63, is a Chartered Accountant, a Fellow of
the Institute of Bankers and the Institute of
Management Consultants. A former Chief Executive of
Prudential Financial Services, he previously worked in
senior roles at the BBC, Midland Bank and Chase
Manhattan Bank. Rodney is also Chairman of
Britannia Building Society, Helphire Group, Stobart
Group, Assura Group and FirstAssist Insurance
Services.
2 Elizabeth Gooch
Chief Executive Officer
Elizabeth Gooch started her career in the 1980s as an
in-house consultant at Forward Trust, a subsidiary of
Midland Bank. She then moved to Birmingham
Midshires before establishing eg in 1988. After
working for some manufacturers, Elizabeth introduced
their proactive management of processing and
operations into the back offices of financial services
businesses. Based on this experience, Elizabeth
designed and launched the eg Operational Intelligence
software suite.
Today, having successfully implemented eg’s
Operational Management solutions in large financial
services companies such as HBOS, Norwich Union and
Scottish Equitable, Elizabeth stands out as one of
Staffordshire’s rare IT entrepreneurs and was
recognised as the seventh leading female
entrepreneur in Management Today’s top 100
entrepreneurs 2006 and 2007.
3 Paul Bird
Finance Director
Paul Bird joined eg as Finance Director with
responsibility for Commercial aspects, Software and
Operations. Previously serving at South Staffordshire
Plc, firstly as Director of Finance (software and
outsourcing) and, since 2004, as Finance and
Commercial Director of Echo Managed Services Ltd,
Paul has valuable financial and commercial expertise
and extensive knowledge of growing businesses. Paul
holds an MBA, an MA in Commercial and Contract
Law, a Postgraduate diploma in Employment Law, an
MSc in Policy and Management and qualifications in
accountancy.
1 2 3 Advisers
eg solutions plc
annual report and accounts 2008
11
www.eguk.co.uk
4 Andrew McRae
Non-executive Director
Andy McRae has more than 20 years of international
business experience, much spent within the support
services sector. Most recently, Andy was Managing
Director, UK & Ireland for Hays PLC, the leading
specialist recruitment company. A qualified UK
Chartered Accountant, prior to assuming senior
general management roles, Andy held a number of
senior financial positions in the UK. In 1999, Andy led
the public-to-private management buy-out of Coutts
Consulting Group with backing from 3i. The business
was sold after three years yielding a significant gain
to shareholders.
Registered Office
eg solutions plc
The Roller Mill
Teddesley Road
Penkridge
Staffordshire
ST19 5BD
Auditors
Baker Tilly UK Audit LLP
Registered Auditor &
Chartered Accountants
Festival Way
Stoke-on-Trent
Staffordshire
ST1 5BB
Solicitors
TLT Solicitors
Sea Containers House
20 Upper Ground
Blackfriars Bridge
London
SE1 9LH
Nominated Adviser
Brewin Dolphin
Securities Limited
National House
36 St Ann Street
Manchester
M60 2EP
4 Directors’ Report
eg solutions plc
annual report and accounts 2008
12
The Directors submit their report and the financial
statements of eg solutions plc for the year ended
31 January 2008.
Principal Activities
The principal activity of the Group is that of an IT and
software support services business delivering guaranteed
improvements in operations management. The Group
uses proprietary software packages and an operations
management methodology based on production
management techniques. The Group delivers measurable
operational improvements in large back office
environments.
Business Review
Revenue in the period was £4.1m which was £1.4m lower
than in 2007. The retained loss for the year is
(£656,000) (2007: profit £6,000).
The information that fulfils the requirements of the
Business Review including Key Performance Indicators
can be found in the Chairman’s Statement and Chief
Executive’s Review on pages 2 to 9 which is incorporated
in this report by reference.
The purpose of this Annual Report is to provide
information to the members of the Group. The Annual
Report contains certain forward-looking statements with
respect to the operations, performance and financial
condition of the Group. By nature these statements
involve uncertainty since future events and
circumstances can cause results and developments to
differ materially from those anticipated. The forward-
looking statements reflect knowledge and information
available at the date of preparation of this Annual Report
and the Group undertakes no obligation to update these
forward-looking statements. Nothing in this Annual
Report should be construed as a profit forecast.
Results and Dividends
The trading results for the year are set out on page 26.
The Directors do not recommend a final dividend on the
ordinary shares (2007: NIL).
Future Developments
The Group has been carrying out a consolidation and is
now embarked upon a growth strategy which will extend
its activities in financial services, into other new UK
market sectors in addition to developing its activities
outside of the UK. The Group established an operation in
South Africa and secured contracts within the territory. In
addition, the Group is planning to expand upon its entry
in Northern Europe over the coming period.
Key Performance Indicators
The Group’s progress on its strategic objectives is
monitored by the Board of Directors by reference to the
following Key Performance Indicators (KPIs). The matters
mentioned in the Chairman’s Statement are a reflection
of the performance of the business set out in the table
below along with comparative prior year performance
data. Directors’ Report continued
eg solutions plc
annual report and accounts 2008
13
www.eguk.co.uk
Note 2008 2007
Revenue A £4,123,000 £5,472,000
Revenue reduction B (24.7%) (6.9%)
Gross margin % C 65.3% 72.9%
Operating (loss)/profit % D (21.8%) (2.8%)
Net (loss)/profit % E (15.9%) 0.1%
Retained cash balances A £878,000 £2,431,000
Cash flow from operating activities inflow/(outflow) A £(849,000) £869,000
Research and development expenditure on staffing costs
(including capitalised staff development costs) A £1,235,000 £806,000
Debtor days F 27 25
Creditor days F 47 32
A Revenue, Cash at bank and in hand, Cash flow from operating activities and Research and Development
staffing expenditure are as extracted from the financial statements.
B Revenue Reduction compares the change in revenue from one year to the next expressed in percentage terms.
C Gross Margin is the gross profit as a percentage of revenue. Gross profit and revenue are taken from the
income statement in the financial statements.
D Operating (loss)/profit percentage is operating (loss)/profit as a percentage of revenue. Operating
(loss)/profit and revenue are taken from the income statement in the financial statements.
E Net (loss)/profit percentage is net (loss)/profit as a percentage of revenue. Net (loss)/profit after tax and
revenue are taken from the income statement in the financial statements.
F Debtor days represent the length of time taken by customers to pay their bills and Creditor days represent
the length of time taken by the Group to pay its suppliers. The number of days outstanding has been
calculated by comparing the outstanding balance for trade debtors and trade creditors with the value of sales
or purchases respectively, inclusive of VAT, and calculating the period for which they remain unpaid using the
count-back method.
During the next financial period the Group intends to
review its KPIs and ensure these reflect its geographical
segmentation and provide further tools for Board and
Management to assess performance in line with
growth strategies.
Political and Charitable Contributions
During the year the Group made charitable donations
of £7,050, principally to local charities serving the
communities in which the Group operates.
Research and Development
The Group invests in the continual modification and
improvement of its products to meet technological
advances and customer and new market requirements.
Employee Involvement and Disability
The Group’s policy is to consult and discuss with
employees any matters likely to affect their interests.
Information on matters of concern to employees is
provided in order to achieve a common awareness of the
regular and frequent financial and economic factors
affecting the Group’s performance.
The Group’s policy is to recruit disabled workers for those
vacancies that they are able to fill. All necessary
assistance with initial training courses is given. Once
employed, a career plan is developed so as to ensure
suitable opportunities for each disabled person.
Arrangements are made, wherever possible, for retraining
employees who become disabled to enable them to
perform work identified as appropriate to their aptitudes. Beneficial
Ordinary shares Ordinary shares
of 1p each of 1p each
31 January 2008 31 January 2007
Beneficial
RP Baker-Bates 475,000 475,000
EA Gooch 8,793,200 8,793,200
A McRae 20,000 20,000
J Pyke (Director until 23 November 2007) 6,600 6,600
EA Gooch has non-beneficial interests in 1,176,470 shares which are held on behalf of the eg solutions plc Employee
Benefit Trust.
under review. The Group also works with a diversity of
partners to mitigate the risk inherent in working with a
single partner.
Operations
The Group’s facilities could be disrupted by events
beyond its control such as fire or other issues.
The Group prepares recovery plans for most foreseeable
situations so that our business operations would continue
should these situations occur.
Directors
The following Directors have held office since
1 February 2007:
RP Baker-Bates
EA Gooch
A McRae
J Pyke (resigned 23 November 2007)
P Bird (appointed 3 September 2007)
M Wilton (resigned 31 August 2007)
Directors’ Interests in Shares
Directors’ interests in the shares of the Group, including
family interests, were as follows:
Risks and Uncertainties
There are a number of potential risks and uncertainties
which could have a material impact on the Group’s long-
term performance and cause actual results to differ
materially from expected and historical results.
Management seeks to identify material risks and put in
place contingency plans to mitigate the Group’s potential
exposure. The Group’s risk management policies and
procedures are also discussed in the Corporate
Governance Statement on pages 16 to 18. A summary of
the key risks is given below:
Competitor Risk
The market for operations management improvement is
becoming increasingly competitive. To mitigate this risk,
management works to build strong customer
relationships and develop the Group’s product offering.
Commercial Relationships
Some of the products utilise interfaces with proprietary
software licensed by independent, third party software
developers. Any absence of key third-party products
could have a material impact on the business.
To mitigate this risk, all key commercial relationships and
developments in technology in the marketplace are kept
14
eg solutions plc
annual report and accounts 2008
Directors’ Report continued Directors’ Report continued
www.eguk.co.uk
15
eg solutions plc
annual report and accounts 2008
Substantial Shareholdings
On 31 January 2008, other than the Directors whose interests are shown on page 14, the following held more than 3%
of the issued share capital:
Percentage of Issued
Investor Shares Held Share Capital
ISIS Equity Partners LLP 2,034,741 14.2%
Brewin Dolphin Securities Ltd 1,111,731 7.8%
Unicorn Asset Management 588,635 4.1%
Transact Integrated Portfolio Service 558,538 3.9%
Cornelian Asset Managers Ltd 479,412 3.4%
The Directors who were in office on the date of approval of these financial statements have confirmed, as far as they are
aware, that there is no relevant audit information of which the Auditors are unaware. Each of the Directors have
confirmed that they have taken all steps that they ought to have taken as Directors in order to make themselves aware
of any relevant audit information and to establish that it has been communicated to the Auditors.
This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies
Act 1985.
Policy on Payment of Creditors
It is Group policy to agree and clearly communicate
the terms of payment as part of the commercial
arrangements negotiated with suppliers and then to pay
according to those terms based on the timely receipt of
an accurate invoice.
Trade creditor days based on creditors at 31 January
2008 were 47 days (2007: 32 days).
Auditors
The Directors, having been notified of the cessation of
the partnership known as Baker Tilly, resolved that Baker
Tilly UK Audit LLP be appointed as successor Auditors
with effect from 1 April 2007, in accordance with the
provisions of the Companies Act 1989, S26(5).
Baker Tilly UK Audit LLP have expressed their willingness
to continue in office as Auditors and a resolution to
reappoint Baker Tilly UK Audit LLP will be proposed at the
forthcoming Annual General Meeting.
Annual General Meeting
The Annual General Meeting of the Company will be held
at 10.30 am on 17 June 2008 at the offices of TLT
Solicitors, Sea Containers House, 20 Upper Ground,
Blackfriars Bridge, London, SE1 9LH.
By order of the Board
P Bird
Secretary
18 March 2008
By order of the Board Corporate Governance Statement
eg solutions plc
annual report and accounts 2008
16
Principles of Corporate Governance
As a company listed on AIM, the Company is not
governed by the Combined Code adopted by the London
Stock Exchange (“the Combined Code”) but is required to
operate principles of good governance and best practice.
Accordingly, the Directors are committed to the
Combined Code and believe that an effective system of
corporate governance supports the enhancement of
shareholder value. These principles have been in place
since the Company’s flotation on 6 June 2005.
Board Structure
During the year the Board comprised the Non-executive
Chairman, the Chief Executive Officer, the Finance
Director and one other independent Non-executive
Director. A second independent Non-executive Director
resigned on 23 November 2007.
The Board is responsible to shareholders for the proper
management of the Company. A statement of Directors’
responsibilities in respect of the accounts is set out on
page 21. The Non-executive Directors have a particular
responsibility to ensure that the strategies proposed by
the Executive Directors are fully considered. To enable
the Board to discharge its duties all Directors have full
and timely access to all relevant information. There is a
procedure for all Directors in furtherance of their duties
to take independent professional advice, if necessary, at
the expense of the Company. The Board has a formal
schedule of matters reserved to it and meets at least
quarterly. It is responsible for overall strategy, approval
of major capital expenditure projects and consideration of
significant financing matters.
The following Committees, which have written terms of
reference, deal with specific aspects of the Company’s
affairs:
The Nomination Committee is chaired by the
Chairman and comprises the Board. The Committee is
responsible for proposing candidates for appointment
to the Board, having regard to the balance and
structure of the Board. In appropriate cases
recruitment consultants are used to assist the
process. All Directors are subject to re-election at
least every three years.
The Remuneration Committee is responsible for
making recommendations to the Board on the
Company’s framework of Executive remuneration and
its cost. The Committee determines the contract
terms, remuneration and other benefits for each of
the Executive Directors and senior employees,
including performance related bonus schemes,
pension rights and compensation payments. The
Board itself determines the remuneration of the Non-
executive Directors. The Committee comprises the
Non-executive Directors and it is chaired by the
Chairman. The Directors’ Remuneration Report is set
out on pages 19 to 20.
The Audit Committee comprises two Non-executive
Directors and is chaired by Andrew McRae. Its prime
tasks are to review the scope of external audit, to
receive regular reports from Baker Tilly and to review
the half-yearly and annual accounts before they are
presented to the Board, focusing in particular on
accounting policies and areas of management,
judgement and estimation. The Committee is
responsible for monitoring the controls which are in
force to ensure the integrity of the information
reported to the shareholders. eg solutions plc
annual report and accounts 2008
17
www.eguk.co.uk
The Committee acts as a forum for discussion of internal
control issues and contributes to the Board’s review of
the effectiveness of the Company’s internal control and
risk management systems and processes. The Committee
also considers the need for an internal audit function. It
advises the Board on the appointment of external
auditors and on their remuneration for both audit and
non-audit work, and discusses the nature and scope of
the audit with the external auditors. The Committee,
which meets at least twice per year, provides a forum for
reporting by the Company’s external Auditors. Meetings
are also attended, by invitation, by the Chief Executive
Officer and Finance Director.
The Audit Committee also undertakes a formal
assessment of the Auditors’ independence each year
which includes:
a review of the non-audit services provided to the
Company and related fees;
discussion with the Auditors of a written report
detailing all relationships with the Company and any
other parties that could affect independence or the
perception of independence;
a review of the Auditors’ own procedures for ensuring
the independence of the audit firm and partners and
staff involved in the audit, including the regular
rotation of the audit partner; and
obtaining written confirmation from the Auditors that,
in their professional judgement, they are
independent.
An analysis of the fees payable to the external audit firm
in respect of both audit and non-audit services during the
year is set out in Note 4 to the financial statements.
Internal Control
The Directors are responsible for the Group’s system of
internal control and reviewing its effectiveness.
The Board has designed the Group’s system of internal
control in order to provide the Directors with reasonable
assurance that its assets are safeguarded, that
transactions are authorised and properly recorded and that
material errors and irregularities are either prevented or
would be detected within a timely period. However, no
system of internal control can eliminate the risk of failure
to achieve business objectives or provide absolute
assurance against material misstatement or loss.
The key elements of the control system in operation are:
The Board meets regularly with a formal schedule of
matters reserved to it for decision. It has put in place
an organisational structure with clear lines of
responsibility defined and with appropriate delegation
of authority.
There are established procedures for the planning,
approval and monitoring of capital expenditure and
information systems for monitoring the Group’s
financial performance against approved budgets and
forecasts.
The departmental heads are required annually to
undertake a full assessment process to identify and
quantify the risks that face their businesses and
functions, and assess the adequacy of the prevention,
monitoring and modification practices in place for
those risks. In addition, regular reports about
significant risks and associated control and monitoring
procedures are reported to the Board to enable the
Directors to review the effectiveness of the system of
internal control. The process adopted by the Group
accords with the guidance contained in the document
“Internal Control Guidance for Directors on the
Combined Code” issued by the Institute of Chartered
Accountants in England and Wales.
Corporate Governance Statement continued Corporate Governance Statement continued
eg solutions plc
annual report and accounts 2008
18
The Audit Committee receives reports from external
Auditors on a regular basis and from Executive Directors
of the Company. During the period the Audit Committee
has reviewed the effectiveness of the system of internal
control as described above. The Board receives periodic
reports from all Committees.
There are no other significant issues disclosed in the
annual report and accounts for the year ended
31 January 2008 and up to the date of approval of the
annual report and accounts that have required the Board
to deal with any related material internal control issues.
The Directors confirm that the Board has reviewed the
effectiveness of the system of internal control as
described during the period.
Relations With Shareholders
The Group values its dialogue with both institutional and
private investors. Effective two-way communication with
fund managers, institutional investors and analysts is
actively pursued and this encompasses issues such as
performance, policy and strategy. All key individuals have
made themselves available for meetings with investors
on issues relating to the Group’s strategy and
governance. During the year the Directors held meetings
with institutional investors covering the majority of
shareholders in the Group.
Private investors are encouraged to participate in the
Annual General Meeting at which the Chairman presents
a review of the results and comments on current
business activity. The Chairmen of the Audit,
Remuneration and Nomination Committees will be
available at the Annual General Meeting to answer any
shareholder questions.
This year’s Annual General Meeting will be held on
17 June 2008. The notice of the Annual General Meeting
may be found on page 53. eg solutions plc
annual report and accounts 2008
19
www.eguk.co.uk
Remuneration Committee
The Group has established a Remuneration Committee
which is constituted in accordance with the
recommendations of the Combined Code. The members
of the Committee are A McRae who is an independent
Non-executive Director and the Committee is chaired by
RP Baker-Bates.
In determining the Directors’ remuneration for the year,
the Committee consulted the Chief Executive Officer, EA
Gooch, about its proposals.
Remuneration Policy
The policy of the Committee is to reward Executive
Directors in line with the current remuneration of
Directors in comparable businesses in order to recruit,
motivate and retain high quality Executives within a
competitive marketplace.
There are four main elements of the remuneration
packages for Executive Directors and Senior
Management:
basic annual salary (including Directors’ fees) and
benefits;
annual bonus payments;
share option incentives; and
pension arrangements.
Basic Salary
Basic salary is reviewed at the discretion of the
Remuneration Committee. In addition to basic salary, the
Executive Directors also receive certain benefits in kind,
principally a car allowance, private medical insurance and
life and critical illness insurance.
Annual Bonus
The Committee establishes the objectives which must be
met for each financial year if a cash bonus is to be paid.
The purpose of the bonus is to reward Executive
Directors and other senior employees for achieving above
average performance which also benefits shareholders.
Share Options
Certain Executive Directors have options granted to them
under the terms of the Share Option Scheme which is
open to all employees. Under the Scheme, options are
allocated at the discretion of the Remuneration
Committee and are subject to performance criteria
relating to increases in earnings per share. Share options
granted to Directors who have resigned during the year
are returned to the pool for further distribution.
Pension Arrangements
Executive Directors are members of defined contribution
pension schemes and a contribution of 10% of basic
annual salary is paid by the Group. No other payments to
Directors are pensionable.
Directors’ Contracts
It is the Group’s policy that Executive Directors should
have contracts with an indefinite term providing for a
maximum of six months’ notice. In the event of early
termination, the Directors’ contracts provide for
compensation up to a maximum of basic salary for the
notice period.
Non-executive Directors
The fees of Non-executive Directors are determined by
the Board as a whole, having regard to the commitment
of time required and the level of fees in similar
companies. Non-executive Directors are not eligible to
participate in the Group’s pension scheme.
Non-executive Directors are employed on contracts with
an indefinite term providing for a maximum of one year’s
notice for the Chairman and three months’ notice for the
other Non-executives.
Directors’ Remuneration Report Directors’ Remuneration Report continued
eg solutions plc
annual report and accounts 2008
20
Aggregate Directors’ Remuneration
2008 2007
£’000 £’000
Emoluments 429 473
Money purchase pension contributions 23 59
Total 452 532
Total Total
Salary Benefits Bonuses 2008 2007
£’000 £’000 £’000 £’000 £’000
RP Baker-Bates 30 30 30
EA Gooch 185 26 211 212
P Bird (appointed
3 September 2007) 42 5 15 62
A McRae 15 15 13
M Wilton (resigned
31 August 2007) 100 100
J Pyke (resigned
23 November 2007) 11 11 62
DJ Blain (resigned
31 January 2007) 145
P Thomas (resigned
3 October 2006) 10
PE Maguire (resigned
21 December 2005) 1
383 31 15 429 473
The pension contributions payable by the Group in respect of each Director during the year were:
2008 2007
£’000 £’000
RP Baker-Bates — —
EA Gooch 19 26
P Bird 4 —
A McRae — —
J Pyke — —
DJ Blain (resigned 31 January 2007) 25
PE Maguire (resigned 21 December 2005) 8
23 59
Approval
This report was approved by the Board of Directors on 18 March 2008 and signed on its behalf by:
P Bird
Secretary
18 March 2008
This report was approved by the Board of Directors on 18 March 2008 and signed on its behalf by:
P Bird eg solutions plc
annual report and accounts 2008
21
www.eguk.co.uk
The Directors are responsible for preparing the Annual
Report and the financial statements in accordance with
applicable law and International Financial Reporting
Standards.
Company law requires the Directors to prepare financial
statements for each financial year which give a true and
fair view, in accordance with International Financial
Reporting Standards, of the state of affairs of the Group
and of the profit and loss of the Group for that period. In
preparing those financial statements, the Directors are
required to:
1. select suitable accounting policies and then apply
them consistently;
2. make judgements and estimates that are reasonable
and prudent;
3. state whether applicable Accounting Standards have
been followed, subject to any material departures
disclosed and explained in the financial statements;
and
4. prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the
Group will continue in business.
The Directors are responsible for keeping proper
accounting records which disclose with reasonable
accuracy at any time the financial position of the Group
and to enable them to ensure that the financial
statements comply with the requirements of the
Companies Act 2006. They are also responsible for
safeguarding the assets of the Group and hence for
taking reasonable steps for the prevention and detection
of fraud and other irregularities.
They are responsible for ensuring that the annual report
includes information required by the AIM Rules of the
Financial Services Authority.
The Directors are also responsible for the maintenance
and integrity of the corporate and financial information of
the information included on the eg solutions plc website.
The work carried out by the Auditors does not involve
consideration of these matters and, accordingly, the
Auditors accept no responsibility for any changes that
may have occurred to the information contained in the
financial statements since they were initially presented
on the website.
Legislation in the United Kingdom governing the
preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Going Concern
The Directors confirm that they are satisfied that the
Group has adequate resources to continue in business for
the foreseeable future. For this reason, they continue to
adopt the going concern basis in preparing the financial
statements.
Directors’ Responsibilities in the
Preparation of the Financial Statements Independent Auditors’ Report
to the Members of eg solutions plc
eg solutions plc
annual report and accounts 2008
22
We have audited the Group and parent Company financial
statements on pages 24 to 52.
This report is made solely to the Company’s members, as
a body, in accordance with section 235 of the Companies
Act 1985. Our audit work has been undertaken so that
we might state to the Company’s members those matters
we are required to state to them in an Auditors’ report
and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to
anyone other than the Company and the Company’s
members as a body for our audit work, for this report, or
for the opinions we have formed.
Respective Responsibilities of Directors and
Auditors
The Directors’ responsibilities for preparing the Annual
Report and the financial statements in accordance with
applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union
(“EU”) are set out in the Statement of Directors’
Responsibilities.
Our responsibility is to audit the financial statements in
accordance with relevant legal and regulatory
requirements and International Standards on Auditing
(UK and Ireland).
We report to you our opinion as to whether the financial
statements give a true and fair view and are properly
prepared in accordance with the Companies Act 1985.
We also report to you if, whether in our opinion, the
information given in the Directors’ Report is consistent
with the financial statements.
In addition, we report to you if, in our opinion, the
Company has not kept proper accounting records, if we
have not received all the information and explanations we
require for our audit, or if information specified by law
regarding Directors’ remuneration and other transactions
is not disclosed.
We read other information contained in the Annual
Report, and consider whether it is consistent with the
audited financial statements. This other information
comprises the Chairman’s Statement, Chief Executive
Officer’s Review, the Financial Review, the Directors’
Report, the Corporate Governance Statement and the
Directors’ Remuneration Report. We consider the
implications for our report if we become aware of any
apparent misstatements or material inconsistencies with
the financial statements. Our responsibilities do not
extend to any other information.
Basis of Audit Opinion
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) issued by the
Auditing Practices Board. An audit includes examination,
on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an
assessment of the significant estimates and judgements
made by the Directors in the preparation of the financial
statements, and of whether the accounting policies are
appropriate to the Company’s circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all
the information and explanations which we considered
necessary in order to provide us with sufficient evidence
to give reasonable assurance that the financial
statements are free from material misstatement, whether
caused by fraud or other irregularity or error. In forming
our opinion we also evaluated the overall adequacy of the
presentation of information in the financial statements. eg solutions plc
annual report and accounts 2008
23
www.eguk.co.uk
Opinion
In our opinion:
the Group financial statements give a true and fair
view, in accordance with IFRSs as adopted by the
European Union, as applied in accordance with the
provisions of the Companies Act 1985, of the state of
the Group’s affairs as at 31 January 2008 and of its
loss for the year then ended;
the parent Company financial statements give a true
and fair view, in accordance with IFRSs as adopted by
the European Union, as applied in accordance with
the provisions of the Companies Act 1985, of the
state of the parent Company’s affairs as at
31 January 2008;
the financial statements have been properly prepared
in accordance with the Companies Act 1985; and
the information given in the Directors’ Report is
consistent with the financial statements.
Baker Tilly UK Audit LLP
Registered Auditor and Chartered Accountants
Festival Way
Stoke-on-Trent
Staffordshire
ST1 5BB
9 May 2008
Independent Auditors’ Report continued Consolidated Balance Sheet
at 31 January 2008
At 31 January At 31 January
2008 2007
Notes £’000 £’000
Assets
Non-current assets
Development asset 10 911 319
Property, plant and equipment 12 117 132
1,028 451
Current assets
Trade and other receivables 15 849 520
Current tax receivable 157 99
Cash and cash equivalents 878 2,431
1,884 3,050
Total assets 2,912 3,501
Liabilities
Current liabilities
Trade and other payables 17 969 970
969 970
Non-current liabilities
Deferred tax liabilities 19 82 92
82 92
Total liabilities 1,051 1,062
Net assets 1,861 2,439
Equity
Share capital 20 143 143
Share premium 21 2,910 2,910
Share-based payment reserve 21 191 123
Own shares held (1,000) (1,000)
Retained earnings 23 (383) 263
Total equity 1,861 2,439
The financial statements on pages 24 to 52 were approved by the Board of Directors and authorised for issue on
18 March 2008 and are signed on its behalf by:
EA Gooch
Chief Executive Officer
eg solutions plc
annual report and accounts 2008
24 eg solutions plc
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25
www.eguk.co.uk
Company Balance Sheet
at 31 January 2008
At 31 January At 31 January
2008 2007
Notes £’000 £’000
Assets
Non-current assets
Development asset 11 911 319
Property, plant and equipment 13 87 132
998 451
Current assets
Trade and other receivables 16 1,310 520
Current tax receivable 157 99
Cash and cash equivalents 725 2,431
2,192 3,050
Total assets 3,190 3,501
Liabilities
Current liabilities
Trade and other payables 18 1,049 970
1,049 970
Non-current liabilities
Deferred tax liabilities 19 140 92
140 92
Total liabilities 1,189 1,062
Net assets 2,001 2,439
Equity
Share capital 20 143 143
Share premium 22 2,910 2,910
Share-based payment reserve 22 191 123
Own shares held (1,000) (1,000)
Retained earnings 24 (243) 263
Total equity 2,001 2,439 eg solutions plc
annual report and accounts 2008
26
Consolidated Income Statement
for the year ended 31 January 2008
Year ended Year ended
31 January 31 January
2008 2007
Notes £’000 £’000
Revenue 1 4,123 5,472
Cost of sales (660) (904)
Research and development expenditure (647) (545)
Amortisation of development expenditure (124) (35)
Total cost of sales (1,431) (1,484)
Gross profit 2,692 3,988
Administrative expenses (3,589) (4,142)
Loss from operations 3 (897) (154)
Investment income 6 82 113
Loss before tax (815) (41)
Income tax expense 7 159 47
Loss after tax (656) 6
Earnings/(loss) per share — —
From continuing operations
Basic 9 (5.0p) 0.0p
Diluted 9 (5.0p) 0.0p
Consolidated Statement of
Recognised Income and Expense
for the year ended 31 January 2008
2008 2007
£’000 £’000
Currency translation differences 10 —
Net income for the year directly recognised in equity 10 —
Profit for the year (656) 6
Total recognised income for the year (646) 6
Attributable to:
Equity holders of the parent (646) 6
(646) 6 Consolidated Cash Flow Statement
for the year ended 31 January 2008
Year ended Year ended
31 January 31 January
2008 2007
Notes £’000 £’000
Operating activities
Cash generated from operations 26 (940) 1,094
Income taxes received/(paid) 91 (225)
Net cash from/(used in) operating activities (849) 869
Investing activities
Purchases of other intangible assets (716) (283)
Purchases of property, plant and equipment (70) (80)
Interest received 82 113
Net cash used in investing activities (704) (250)
Financing activities
Dividends paid — (223)
Net cash (used in)/from financing activities — (223)
Net increase/(decrease) in cash and cash equivalents (1,553) 396
Cash and cash equivalents at beginning of year 2,431 2,035
Cash and cash equivalents at end of year
Bank balances and cash 878 2,431
eg solutions plc
annual report and accounts 2008
27
www.eguk.co.uk Company Cash Flow Statement
for the year ended 31 January 2008
Year ended Year ended
31 January 31 January
2008 2007
Notes £’000 £’000
Operating activities
Cash generated from operations 27 (1,139) 1,094
Income taxes received/(paid) 91 (225)
Net cash from/(used in) operating activities (1,048) 869
Investing activities
Purchases of other intangible assets (716) (283)
Purchases of property, plant and equipment (24) (80)
Interest received 82 113
Net cash used in investing activities (658) (250)
Financing activities
Dividends paid — (223)
Net cash (used in)/from financing activities — (223)
Net increase/(decrease) in cash and cash equivalents (1,706) 396
Cash and cash equivalents at beginning of year 2,431 2,035
Cash and cash equivalents at end of year
Bank balances and cash 725 2,431
eg solutions plc
annual report and accounts 2008
28 Consolidated Financial Statements
Summary of Significant Accounting Policies
The financial statements have been prepared in accordance with International Financial Reporting Standards as
endorsed by the EU (“IFRS”) for the first time.
This is the first year that the Group has presented its financial statements under IFRS. The following disclosures
are required in the year of transition. The last financial statements under UK GAAP were for the year ended
31 January 2007 and the date of transition to IFRS was therefore 1 February 2006.
The financial statements have been prepared on the historical cost basis, except for the revaluation of land and
buildings and certain financial instruments. The principal accounting policies adopted are set out below.
Basis of Consolidation
The consolidated financial statements of the Group incorporate the financial statements of the Group and
enterprises controlled by the Group (its subsidiaries) made up to 31 January each year.
Subsidiaries
Subsidiaries are entities over which the Group has the power to govern the financial and operating policies to
obtain economic benefit to the Group. Subsidiaries are fully consolidated from the effective date of acquisition or
up to the effective date of disposal, as appropriate.
All intra-Group transactions, balances, and unrealised gains on transactions between Group companies are
eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an
impairment of the asset transferred.
Segmental Reporting
The Group has elected to segment its operations on the basis of ‘geographical segmentation of operations’. The
Group has determined that this is the most appropriate segmental split to reflect the nature of the Group’s
operations. The Group has two distinct companies operating in different geographical areas with different
economic and political conditions and a different maturity of client and client requirements. These are:
EGUK — United Kingdom
EGSA — South Africa
Tangible Fixed Assets and Depreciation
Tangible fixed assets are stated at cost or valuation, net of depreciation and any provision for impairment.
Depreciation is provided on all tangible fixed assets at rates calculated to write each asset down to its estimated
residual value over its expected useful life, as follows:
Computer Equipment — 50% straight-line
Office Equipment — 15% reducing balance
Fixtures and Fittings — 15% reducing balance
Motor Vehicles — 25% reducing balance.
Impairment of tangible and intangible assets
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to
determine whether there is any indication that those assets have suffered an impairment loss. If any such
indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the
impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets,
the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An
intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an
indication that the asset may be impaired.
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annual report and accounts 2008
29
www.eguk.co.uk Consolidated Financial Statements
Summary of Significant Accounting Policies continued
Retirement Benefits
The Company operates a defined Contribution Pension Scheme. The assets of the scheme are held separately
from those of the Company in an independently administered fund. The amount charged to the profit and loss
account in respect of pension costs and other post-retirement benefits is the contributions payable in the year.
Differences between contributions payable in the year and contributions actually paid are shown as either
accruals or prepayments in the balance sheet.
Foreign Currencies
Transactions in currencies other than sterling, the presentational and functional currency of the Company, are
recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date,
monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing
on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in
foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains
and losses arising on retranslation are included in the income statement for the period, except for exchange
differences on non-monetary assets and liabilities, which are recognised directly in equity, where the changes in
fair value are recognised directly in equity.
On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates
prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for
the period. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation
reserve. Such translation differences are recognised as income or as expenses in the period in which the
operation is disposed of.
Taxation
The tax expense represents the sum of the current tax expense and deferred tax expense.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported
in the income statement because it excludes items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is
calculated by using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax bases used in the computation of
taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are
recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible temporary differences can be utilised.
Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of
goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a
transaction which affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and
associates, and interests in joint ventures, except where the Group is able to control the reversal of the
temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or
the liability is settled based upon tax rates that have been enacted or substantively enacted by the balance sheet
date. Deferred tax is charged or credited in the income statement, except when it relates to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in equity.
eg solutions plc
annual report and accounts 2008
30 Cash and Cash Equivalents
Cash and cash equivalents comprise cash in hand and at bank and other short-term deposits held by the Group
with maturities of less than three months.
Share-Based Payments
The Group has applied the requirements of IFRS 2 Share-based Payments. In accordance with the transitional
provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were
unvested as of 1 February 2006.
The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based
payments are measured at fair value at the date of grant. The fair value determined at the grant date of equity-
settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s
estimate of shares that will eventually vest. Fair value is measured by use of the Black–Scholes model. The
expected life used in the model has been adjusted, based on management’s best estimate, for the effect of non-
transferability, exercise restrictions, and behavioural considerations.
Employee Share Ownership Plans
The Company operates an ESOP trust and has de facto control of the shares held by the trust and bears their
benefits and risks. The Group records certain assets and liabilities of the trust as its own. Finance costs and
administrative expenses are charged as they accrue.
Financial Risk Management Objectives and Policies
The Group’s activities will expose the Group to a number of risks including market risk (foreign currency risk,
price risk and interest rate risk), credit risk and liquidity risk. The Group manages these risks through an effective
risk management programme and appropriate use of derivatives. Exposures to financial risks are monitored by
Group Treasury and Financial Operations management and they are required to produce a monthly risk report
comprising all risk and an indication of the business impact of those risks.
The risk reports are provided to the Board of Directors in advance of the monthly Board meetings and are
discussed by the Board to ensure that the risk mitigation procedures are compliant with the Group policy and that
any new risks are appropriately managed.
Price Risk
The Group’s products are tailored to realise benefits for customers and to meet individual requirements. Prices
are negotiated with each customer on the basis of their specification of the product.
Credit Risk
The Group has focused on selling to a ‘blue chip’ customer base thereby minimising the risk of incurring
bad debts.
Liquidity
At the year end the Group had £878k in net cash balances. The policy is to ensure that operating profits are
turned into cash balances during the year.
Cash Flow Risk
The Group’s policy is to remain broadly cash neutral over the coming financial year.
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annual report and accounts 2008
31
www.eguk.co.uk
Consolidated Financial Statements
Summary of Significant Accounting Policies continued Consolidated Financial Statements
Summary of Significant Accounting Policies continued
Foreign Currency Risk
The Group is exposed to minimal foreign currency risk through transactions with overseas customers.
Leases
Leases in which a significant portion of the risk and rewards of ownership are retained by the lessor are classified
as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are
charged to the income statement on a straight-line basis over the period of the lease.
New Standards, Interpretations and Amendments to Published Standards
Effective for the Group for the financial year beginning 1 February 2008
IFRIC 11 ‘IFRS 2 — Group and Treasury Share Transactions’
Effective for the Group for future financial years
Amendment to IAS 23 ‘Borrowing Costs’
IFRS 8 ‘Operating Segments’
IFRIC 12 ‘Service Concession Arrangements’
Revision of IAS 1 ‘Presentation of Financial Statements’
Amendments to IFRS 3 ‘Business Combinations’
Amendments to IAS 27 ‘Consolidated and separate financial statements’
Amendments to IFRS 2 ‘Share Based Payment’
Amendments to IAS 32 ‘Financial Instruments’
The Group has considered the above new standards, interpretations and amendments to published standards
that are not yet effective and concluded they are either not relevant to the Group or that they would not have
significant impact on the Group’s financial statements, apart from additional disclosures.
Critical Accounting Estimates and Judgements
Revenue Recognition
Maintenance Contracts
Income in respect of maintenance contracts is invoiced on an annual basis and recognised as earned.
Long-Term Contracts
Long-term contracts are assessed on a contract by contract basis and reflected in the Income Statement by
recording revenue and related costs as contract activity progresses.
Revenue is ascertained in a manner appropriate to the stage of completion of the contract, and credit taken for
profit earned to date when the outcome of the contract can be assessed with reasonable certainty. Amounts
recoverable on long-term contracts, which are included in debtors, are stated at the net sales value of the work
done less amounts received as progress payments on account. Excess progress payments are included in
creditors as payments on account. Cumulative costs incurred net of amounts transferred to cost of sales, less
provision for contingencies and anticipated future losses on contracts are included as long-term contract balances
in stock.
eg solutions plc
annual report and accounts 2008
32 Development Assets
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
An internally generated intangible asset arising from the Group’s software development is recognised only if all of
the following conditions are met:
an asset is created that can be identified (such as software and new processes);
it is probable that the asset created will generate future economic benefits;
the development cost of the asset can be measured reliably;
the product or process is technically and commercially feasible; and
sufficient resources are available to complete the development and to either sell or use the asset.
Where no internally generated intangible asset can be recognised, development expenditure is recognised as an
expense in the period in which it is incurred.
Internally generated intangible assets are amortised on a straight-line basis over their useful lives (6 years).
eg solutions plc
annual report and accounts 2008
33
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Consolidated Financial Statements
Summary of Significant Accounting Policies continued Notes to the Consolidated Financial Statements
for the year ended 31 January 2008
1 Revenue
An analysis of the Group’s revenue is as follows:
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
Continuing operations
United Kingdom 3,775 5,472
South Africa 348 —
4,123 5,472
2 Segmental Information
Business Segments
The Group has elected to segment its operations of the basis of ‘geographical segmentation of operations’.
The Group has determined that this is the most appropriate segmental split to reflect the nature of the
Group’s operations. The Group has two distinct companies operating in different geographical areas with
different economic and political conditions and a different maturity of client and client requirements.
These are:
EGUK — United Kingdom
EGSA — South Africa
Segment information about these companies is presented below.
Income Statement UK SA Eliminations Consolidated
Revenue
External sales 3,775 348 — 4,123
Inter-segment sales 300 125 (425) —
Total revenue 4,075 473 (425) 4,123
Cost of sales
External cost of sales 1,361 70 — 1,431
Inter-segment cost of sales 71 314 (385) —
Total cost of sales 1,432 384 (385) 1,431
Gross profit 2,643 89 (40) 2,692
Administrative expenses 3,298 291 3,589
Inter-segment administrative expenses 34 — (34) —
Operating loss (689) (202) (6) (897)
Finance income 82 —— 82
Loss before tax (607) (202) (6) (815)
Income tax expense 101 58 — 159
Loss after tax (506) (144) (6) (656)
eg solutions plc
annual report and accounts 2008
34 2 Segmental Information continued
Balance Sheet UK SA Eliminations Consolidated
Non-current assets
Property, plant and equipment 87 30 — 117
Intangible assets 911 —— 911
Total non-current assets 998 30 — 1,028
Current assets
Trade and other receivables 1,310 138 (599) 849
Current tax receivable 157 —— 157
Cash and cash equivalents 725 153 — 878
Total current assets 2,192 291 (599) 1,884
Total assets 3,190 321 (599) 2,912
Equity
Issued capital 143 —— 143
Share premium 2,910 —— 2,910
Other reserves 191 —— 191
Own shares held (1,000) —— (1,000)
Retained earnings (243) (134) (6) (383)
Shareholders’ Funds 2,001 (134) (6) 1,861
Non-current liabilities
Deferred tax 140 (58) — 82
Total non-current liabilities 140 (58) — 82
Current liabilities
Trade and other payables 1,049 513 (593) 969
Total current liabilities 1,049 513 (593) 969
Total liabilities 1,189 455 (593) 1,051
Total liabilities and equity 3,190 321 (599) 2,912
Based on risks and returns, the Directors consider that the secondary reporting format is by business
segment. The Directors consider that there is only one business segment being IT and Software Support
Services. Therefore, the disclosures for the secondary segment have already been given in these financial
statements.
3 Loss from operations
Loss from operations has been arrived at after charging/(crediting):
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
Net foreign exchange losses/(gains) 9 —
Research and development costs 647 545
Amortisation of development expenditure 124 35
Depreciation on owned assets 85 89
Staff costs (see note 5) 3,122 3,070
Auditors’ remuneration for audit services (see note 4) 33 16
eg solutions plc
annual report and accounts 2008
35
www.eguk.co.uk
Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
4 Amounts Payable to Baker Tilly and their Associates in Respect of both Audit and Non-Audit
Services
2008 2007
£’000 £’000
Audit services:
Baker Tilly
Statutory audit of parent accounts — 14
Tax services — 2
Baker Tilly UK Audit LLP
Statutory audit of parent and consolidated accounts 18 —
Other services:
IFRS audit re 2007 statements 2 —
Baker Tilly Tax & Advisory Services LLP
Interim tax advice 1 —
Directors tax 1 —
Interim tax advice 2 —
Share options advice 1 —
Tax services 3 —
Charles Orbach & Co — South Africa
Statutory audit of subsidiary accounts 5 —
33 16
5 Staff Costs
The average monthly number of employees (including Executive Directors) for the year for each of the
Group’s principal divisions was as follows:
Year ended Year ended
31 January 31 January
2008 2007
Number Number
Implementation and training services 9 20
Software Support and Development 19 13
Sales and Marketing 8 7
Management and Administration 10 9
46 49
The aggregate remuneration for the above persons comprised:
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
Wages and salaries 2,752 2,658
Social security costs 234 316
Other pension costs 136 96
3,122 3,070
eg solutions plc
annual report and accounts 2008
36 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
5 Staff Costs continued
Aggregate Directors’ Remuneration
2008 2007
£’000 £’000
Emoluments 429 473
Money purchase pension contributions 23 59
Total 452 532
Total Total
Salary Benefits Bonuses 2008 2007
£’000 £’000 £’000 £’000 £’000
RP Baker-Bates 30 30 30
EA Gooch 185 26 211 212
P Bird (appointed
3 September 2007) 42 5 15 62
A McRae 15 15 13
M Wilton (resigned
31 August 2007) 100 100
J Pyke (resigned
23 November 2007) 11 11 62
DJ Blain — 145
P Thomas — 10
PE Maguire — 1
383 31 15 429 473
6 Investment Income
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
Interest on bank deposits 82 113
7 Taxation
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
Current tax
Domestic (156) (113)
Adjustments in respect of prior periods 7 —
(149) (113)
Deferred tax
Current tax 16 72
Adjustments in respect of prior periods (26) (6)
Tax attributable to the Group and its subsidiaries (159) (47)
Domestic income tax is calculated at 30% (2007: 30%) of the estimated assessable profit for the year.
Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
eg solutions plc
annual report and accounts 2008
37
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
7 Taxation continued
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
The charge for the year can be reconciled to the profit per
the income statement as follows
Loss before tax (815) (41)
Tax at the domestic income tax rate 30% (2007: 30%) (245) (12)
Tax effects of expenses that are not deductible in determining taxable profit 67 58
Other timing differences (3) 1
Research and development (98) (66)
Marginal rate of tax 137 (8)
Prior year adjustments (19) (20)
Effect of different tax rates of subsidiaries operating in other jurisdictions 2 —
Tax credit (159) (47)
Effective tax rate for the year 20% 114%
8 Dividends
In respect of the current year, the Directors propose that no dividend will be paid to shareholders.
9 (Loss)/Earnings Per Share
Year ended Year ended
31 January 31 January
2008 2007
From continuing operations £’000 £’000
Basic (5.0p) 0.0p
Diluted (5.0p) 0.0p
EPS has been calculated using the following methodology:
Profit/(Loss) after Tax
Allotted issued and fully paid share less shares owned by the Employee Benefit Trust.
Diluted EPS has been calculated using the following methodology:
Profit/(Loss) after Tax
Allotted issued and fully paid shares less shares owned by the Employee Benefit Trust that are not currently
allocated as options.
As the Basic EPS is a negative value, the effects of anti-dilutive potential ordinary shares are ignored in
calculating diluted EPS.
eg solutions plc
annual report and accounts 2008
38 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
10 Development Assets Consolidated
Development
costs
£’000
Cost
At 1 February 2006 75
Acquisitions — internally developed 283
Disposals —
At 1 February 2007 358
Acquisitions — internally developed 716
Disposals —
At 31 January 2008 1,074
Amortisation and impairment
At 1 February 2006 4
Amortisation for the year 35
Disposals —
At 1 February 2007 39
Amortisation for the year 124
Disposals —
At 31 January 2008 163
Carrying amount
At 31 January 2008 911
At 31 January 2007 319
Amortisation of £124k (2007: £35k) has been charged to costs of sales.
11 Development Assets Company
Development
costs
£’000
Cost
At 1 February 2006 75
Acquisitions — internally developed 283
Disposals —
At 1 February 2007 358
Acquisitions — internally developed 716
Disposals —
At 31 January 2008 1,074
Amortisation and impairment
At 1 February 2006 4
Amortisation for the year 35
Disposals —
At 1 February 2007 39
Amortisation for the year 124
Disposals —
At 31 January 2008 163
Carrying amount
At 31 January 2008 911
At 31 January 2007 319
Amortisation of £124k (2007: £35k) has been charged to costs of sales.
eg solutions plc
annual report and accounts 2008
39
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
12 Property, Plant and Equipment Consolidated
Computer and Fixtures and
office equipment fittings Motor vehicles Total
£’000 £’000 £’000 £’000
Cost or valuation
At 1 February 2006 306 96 6 408
Additions 68 12 — 80
Disposals —— ——
At 1 February 2007 374 108 6 488
Additions 70 —— 70
Disposals —— ——
At 31 January 2008 444 108 6 558
Accumulated depreciation
At 1 February 2006 211 52 4 267
Depreciation charge for the year 81 71 89
Disposals —— ——
At 1 February 2007 292 59 5 356
Depreciation charge for the year 78 7— 85
Disposals —— ——
At 31 January 2008 370 66 5 441
Net book value
At 31 January 2008 74 42 1 117
At 31 January 2007 82 49 1 132
Depreciation expense of £85k (2007: £89k) has been charged to administration expenses.
13 Property, Plant and Equipment Company
Computer and Fixtures and
office equipment fittings Motor vehicles Total
£’000 £’000 £’000 £’000
Cost or valuation
At 1 February 2006 306 96 6 408
Additions 68 12 — 80
Disposals —— ——
At 1 February 2007 374 108 6 488
Additions 24 —— 24
Disposals —— ——
At 31 January 2008 398 108 6 512
Accumulated depreciation
At 1 February 2007 211 52 4 267
Depreciation charge for the year 81 71 89
Disposals —— ——
At 1 February 2007 292 59 5 356
Depreciation charge for the year 62 7— 69
Disposals —— ——
At 31 January 2008 354 66 5 425
Net book value
At 31 January 2008 44 42 1 87
At 31 January 2007 82 49 1 132
Depreciation expense of £69k (2007: £89k) has been charged to administration expenses.
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annual report and accounts 2008
40 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
14 Subsidiaries
Details of the Group’s subsidiaries at 31 January 2008 are as follows:
Place of Proportion of Proportion
incorporation ownership of voting
(or registration) interest power held Principal
Name of subsidiary and operation %% activity
eg International Ltd UK 100 100 Dormant
eg USA Inc USA 100 100 Dormant
eg Operations Management South Africa 100 100 Consultancy
(Pty) Ltd and Software
The only cost in relation to dormant companies is an annual filing charge paid through the parent Company.
15 Other Financial Assets Consolidated
Trade and other receivables are as follows:
2008 2007
£’000 £’000
Trade debtors 614 293
Other debtors 29 15
Prepayments and deferred income 206 212
849 520
At 31 January 2008 all trade receivables were denominated in GBP.
The Directors consider that the carrying amount of trade and other receivables approximates to their
fair value.
16 Other Financial Assets Company
Trade and other receivables are as follows:
2008 2007
£’000 £’000
Trade debtors 614 293
Inter-Company debtor 479 —
Other debtors 25 15
Prepayments and deferred income 192 212
1,310 520
At 31 January 2008 all trade receivables were denominated in GBP.
The Directors consider that the carrying amount of trade and other receivables approximates to their
fair value.
Other Debtors include £24k (2007: £nil) due from EA Gooch. The maximum amount outstanding during
the year was £24k (2007: £34k).
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annual report and accounts 2008
41
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
17 Other Financial Liabilities Consolidated
Trade and other payables are as follows:
2008 2007
£’000 £’000
Payments on account 195 162
Trade creditors 305 321
Other tax and social security 193 206
Accruals and deferred income 276 281
969 970
Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs.
The Directors consider that the carrying amount of trade payables approximates to their fair value.
18 Other Financial Liabilities Company
Trade and other payables are as follows:
2008 2007
£’000 £’000
Payments on account 193 162
Trade creditors 280 321
Inter-Company creditor 119 —
Other tax and social security 190 206
Accruals and deferred income 267 281
1,049 970
Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs.
The Directors consider that the carrying amount of trade payables approximates to their fair value.
19 Deferred Tax
2008 2007
Group £’000 £’000
Analysis for financial reporting purposes
Deferred tax liabilities 248 92
Deferred tax assets (166) —
Net position at 31 December 82 92
The movement in the year in the Group’s net deferred tax position was as follows:
2008 2007
£’000 £’000
At 1 January 92 26
Charge to income for the year 16 72
Adjustment in respect of prior period (26) (6)
At 31 December 82 92
eg solutions plc
annual report and accounts 2008
42 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
19 Deferred Tax continued
The following are the major deferred tax liabilities and assets recognised by the Group and the movements
thereon during the period:
Accelerated tax
depreciation
Deferred tax liabilities £’000
At 1 February 2006 26
Charge to income for the year 72
Adjustment in respect of prior period (6)
At 31 January 2007 92
Charge to income for the year 158
Adjustment in respect of prior period (2)
At 31 January 2008 248
Share-based
payments Tax losses Total
Deferred tax assets £’000 £’000 £’000
Charge to income for the year —— —
At 31 January 2007 —— —
Charge to income for the year 20 (162) (142)
Adjustment in respect of prior period (24) — (24)
At 31 January 2008 (4) (162) (166)
At the balance sheet date, the Group has unused tax losses of £578,000 (2007: £nil) available for offset
against future profits. A deferred tax asset of £162,000 (2007: £nil) has been recognised in respect of
such losses.
2008 2007
Company £’000 £’000
Analysis for financial reporting purposes
Deferred tax liabilities 248 92
Deferred tax assets (108) —
Net position at 31 January 140 92
The movement in the year in the Company’s net deferred tax position was as follows:
2008 2007
£’000 £’000
At 1 February 92 26
Charge to income for the year 74 72
Adjustment in respect of prior period (26) (6)
At 31 January 140 92
eg solutions plc
annual report and accounts 2008
43
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
19 Deferred Tax continued
The following are the major deferred tax liabilities and assets recognised by the Company and the
movements thereon during the period:
Accelerated tax
depreciation
Deferred tax liabilities £’000
At 1 February 2006 26
Charge to income for the year 72
Adjustment in respect of prior period (6)
At 31 January 2007 92
Charge to income for the year 158
Adjustment in respect of prior period (2)
At 31 January 2008 248
Share-based
payments Tax losses Total
Deferred tax assets £’000 £’000 £’000
At 1 February 2006 —— —
Charge to income for the year —— —
At 31 January 2007 —— —
Charge to income for the year 20 (104) (84)
Adjustment in respect of prior period (24) — (24)
At 31 January 2008 (4) (104) (108)
At the balance sheet date, the Company has unused tax losses of £369,000 (2007: £nil) available for
offset against future profits. A deferred tax assets of £103,000 (2007: £nil) has been recognised in
respect of such losses.
20 Share Capital
2008 2007
£’000 £’000
Authorised
50,000,000 ordinary shares of 1p each 500 500
Allotted issued and fully paid
14,293,847 ordinary shares of 1p each 143 143
There were no movements in the Share Capital of the Group in either the 2008 or 2007 reporting
period.
The Group has one class of ordinary shares which carry no right to fixed income. During the year ended
31 January 2008, the Group issued nil shares (2007: 45,000) under the Group’s share option plan
(note 25).
eg solutions plc
annual report and accounts 2008
44 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
21 Capital Reserves Consolidated
Share Share-based
premium payment reserve Total
£’000 £’000 £’000
Balance at 1 February 2007 2,910 123 3,033
Charge for the year — 68 68
Balance at 31 January 2008 2,910 191 3,101
22 Capital Reserves Company
Share Share-based
premium payment reserve Total
£’000 £’000 £’000
Balance at 1 February 2007 2,910 123 3,033
Charge for the year — 68 68
Balance at 31 January 2008 2,910 191 3,101
23 Retained Earnings Consolidated
£’000
Balance at 1 February 2007 263
Dividends paid —
Net loss for the year (656)
Foreign exchange difference 10
Balance at 31 January 2008 (383)
24 Retained Earnings Company
£’000
Balance at 1 February 2007 263
Dividends paid —
Net loss for the year (506)
Balance at 31 January 2008 (243)
eg solutions plc
annual report and accounts 2008
45
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
25 Share-Based Payments
Equity-Settled Share Option Plan
The Group plan provides for a grant price equal to the average quoted market price of the Group shares
on the date of grant. The vesting period is generally three to four years. If options remain unexercised
after a period of ten years from the date of grant, the options expire.
Furthermore, options are forfeited if the employee leaves the Group before the options vest.
2008 2007
Weighted average Weighted average
exercise price exercise price
Options (£) Options (£)
Outstanding at 1 January 520,000 687,500
Granted during the year nil 45,000
Forfeited during the year nil nil
Exercised during the year nil nil
Expired during the year 100,000 212,500
Outstanding at 31 January 2008 420,000 £0.48 520,000 £0.57
Exercisable at 31 January 2008 nil
The options outstanding at 31 January 2008 had an exercise price between 3.5 pence and 161.5 pence,
and a weighted average remaining contractual life of six years.
The inputs into the Black–Scholes option pricing model are as follows:
2008 2007
Weighted average share price £0.47 £0.98
Weighted average exercise price £0.48 £0.57
Expected volatility 30% 52.8%
Expected life 4 years 4 years
Risk-free rate 4.5% 5.2%
Expected dividends 1.0% 1.0%
Expected volatility was determined by calculating the historical volatility of a comparable business, prior to
the period when the Company’s shares were listed on the AIM market, over the previous four years. The
expected life used in the model has been adjusted, based upon the management’s best estimate for the
effects of non-transferability, exercise restrictions, and behavioural considerations.
100,000 options were granted in prior periods and lapsed on by 31 January 2008:
20 April 2005: 40,000 options
14 July 2005: 24,000 options
19 December 2005: 6,000 options
3 April 2006: 15,000 options
28 July 2006: 5,000 options
eg solutions plc
annual report and accounts 2008
46 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
26 Reconciliation of Consolidated Profit Before Tax to Net Cash Generated by Operations
2008 2007
£’000 £’000
Profit/(loss) before tax (897) (154)
Adjustments for:
Depreciation of property, plant and equipment 85 89
Amortisation of intangible assets 124 35
Share option charge 68 51
Foreign exchange (gains)/losses 10 —
Operating cash flows before movements in working capital (610) 21
Decrease/(increase) in receivables (329) 990
Increase/(decrease) in payables (1) 83
Cash generated by operations (940) 1,094
27 Reconciliation of Company Profit Before Tax to Net Cash Generated by Operations
2008 2007
£’000 £’000
Profit/(loss) before tax (689) (154)
Adjustments for:
Depreciation of property, plant and equipment 69 89
Amortisation of intangible assets 124 35
Share option charge 68 51
Operating cash flows before movements in working capital (428) 21
Decrease/(increase) in receivables (790) 990
Increase/(decrease) in payables 79 83
Cash generated by operations (1,139) 1,094
28 Related Party Transactions
Trading transactions
During the year, Group companies entered into the following transactions, for the purchase of goods and
services, with related parties who are not members of the Group
2008 2007
£’000 £’000
Related parties 15 5
The above value relates to a single party related to the Group due to the owner/manager of the business
being a close family member (as defined under IAS 24) of the Chief Executive of the Group. In accordance
with AIM Rules, this disclosure has been made as the value of purchases exceeds 0.25% of total
purchases.
Other Debtors include £24k (2007: £nil) due from EA Gooch. The maximum amount outstanding during
the year was £24k (2007: £34k).
The Group purchased the associated services under its normal terms of trade and payment was made
under normal trading arrangements.
eg solutions plc
annual report and accounts 2008
47
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
29 Explanation of Transition to IFRS
This is the first year that the Group has presented its financial statements under IFRS. The following
disclosures are required in the year of transition. The last financial statements under UK GAAP were for the
year ended 31 January 2007 and the date of transition to IFRS was therefore 1 February 2007. The Group
prepared its opening balance sheet at that date.
The main changes from preparing the results under IFRS rather than UK GAAP that affect the Group loss and
net asset position relate to the treatment of research and development expenditure.
Research and development expenditure was previously expensed as incurred under UK GAAP.
Under IFRS, development expenditure that results in new or substantially improved products or processes,
where it is deemed probable that recovery will take place, are capitalised and amortised on a straight-line
basis over the products expected useful economic life.
The adoption of IFRS does not impact the amount of cash previously disclosed under UK GAAP in any of the
periods of account.
Exemptions from full retrospective application elected by the Company
Property, Plant and Equipment
The Company has elected to adopt the UK GAAP accounting values as the deemed cost for IFRS.
Exceptions from full retrospective application followed by the Company
Estimates
All estimates made by the Company in preparing the Financial Statements under IFRS as at 1 February 2006
are consistent with estimates made under UK GAAP at that date.
Reconciliation of Net Income for the Year Ended 31 January 2007
IAS 38
Intangible
UK GAAP fixed assets IFRS
£’000 £’000 £’000
Revenue 5,472 5,472
Cost of sales (877) (877)
Development expenditure (833) (833)
Development expenditure capitalised 261 261
Amortisation of development expenditure (35) (35)
Total cost of sales (1,710) 226 (1,484)
Gross profit 3,762 226 3,988
Administrative expenses (4,164) (4,164)
Administrative expenses capitalised 22 22
Operating profit (402) 248 (154)
Finance income 113 113
Finance costs —
Profit before income tax (289) 248 (41)
Income tax (expense) 116 (69) 47
Profit for the financial year (173) 179 6
Earnings/(loss) per share — basic (1.3p) 0.0p
Fully diluted (1.3p) 0.0p
eg solutions plc
annual report and accounts 2008
48 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
29 Explanation of Transition to IFRS continued
Reconciliation of Equity from UK GAAP to IFRS at 1 February 2006
IAS 38
Intangible
UK GAAP fixed assets IFRS
£’000 £’000 £’000
Equity
Issued capital 143 143
Share premium 2,910 2,910
Other reserves 72 72
Own shares held (1,000) (1,000)
Retained earnings 431 49 480
Shareholders’ funds 2,556 49 2,605
eg solutions plc
annual report and accounts 2008
49
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
29 Explanation of Transition to IFRS continued
Reconciliation of Consolidated Balance Sheet from UK GAAP to IFRS at 31 January 2007
IAS 38
Intangible
UK GAAP fixed assets IFRS
£’000 £’000 £’000
Non-current assets 132 132
Property, plant and equipment 319 319
Intangible assets
Total non-current assets 132 319 451
Current assets
Trade and other receivables 619 619
Cash and cash equivalents 2,431 2,431
Total current assets 3,050 3,050
Total assets 3,182 319 3,501
Equity
Issued capital 143 143
Share premium 2,910 2,910
Other reserves 123 123
Own shares held (1,000) (1,000)
Retained earnings 35 228 263
Shareholders’ funds 2,211 228 2,439
Non-current liabilities
Deferred tax 1 91 92
Total non-current liabilities 1 91 92
Current liabilities
Trade and other payables 689 689
Deferred revenue 281 281
Current tax payable —— —
Total current liabilities 970 — 970
Total liabilities 971 91 1,062
Total liabilities and equity 3,182 319 3,501
eg solutions plc
annual report and accounts 2008
50 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
29 Explanation of Transition to IFRS continued
Reconciliation of Profit Before Tax to Net Cash Generated by Operations UK GAAP to IFRS for the Year Ended
31 January 2007
IAS 38
Intangible
UK GAAP fixed assets IFRS
£’000 £’000 £’000
Loss before tax (402) 248 (154)
Adjustments for:
Depreciation of property, plant and equipment 89 — 89
Amortisation of intangible assets — 35 35
Share option charge 51 — 51
Operating cash flows before movements in working capital (262) 283 21
Decrease/(increase) in receivables 990 — 990
Increase/(decrease) in payables 83 — 83
Cash generated by operations 811 283 1,094
eg solutions plc
annual report and accounts 2008
51
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
29 Explanation of Transition to IFRS continued
Reconciliation of Cash Flow Statement UK GAAP to IFRS for the Year Ended 31 January 2007
IAS 38
Intangible
UK GAAP fixed assets IFRS
£’000 £’000 £’000
Cash generated by operations 811 283 1,094
Income taxes paid (225) — (225)
Net cash from/(used in) operating activities 586 283 869
Investing activities
Purchases of other intangible assets — (283) (283)
Purchases of property, plant and equipment (80) — (80)
Interest received 113 — 113
Net cash (used in)/from investing activities 33 (283) (250)
Financing activities
Dividends paid (223) — (223)
Net cash (used in)/from financing activities (223) — (223)
Net increase/(decrease) in cash and cash equivalents 396 — 396
Cash and cash equivalents at beginning of year 2,035 — 2,035
Cash and cash equivalents at end of year
Bank balances and cash 2,431 — 2,431
eg solutions plc
annual report and accounts 2008
52 Notice of Annual General Meeting
eg solutions plc (the “Company”)
To the holders of ordinary shares
Notice is hereby given that the Annual General Meeting of the Company will be held at the offices of TLT Solicitors,
Sea Containers House, 20 Upper Ground, Blackfriars Bridge, London, SE1 9LH on Tuesday 17 June 2008 at 10.30 am,
for the following purposes and, if thought fit, approve the following resolutions:
As Ordinary business
1. That the Directors’ Report and the annual report and accounts for the year ended 31 January 2008 be adopted and
approved.
2. That the Directors’ Remuneration Report for the year ended 31 January 2008 be approved.
3. That Baker Tilly UK Audit LLP be reappointed as Auditors and the Directors be authorised to fix their remuneration.
4. That Rodney Pennington Baker-Bates who retires by rotation be reappointed.
5. That Elizabeth Ann Gooch who retires by rotation be reappointed.
6. That Violetta Elizabeth Parylo who has been appointed since the last Annual General Meeting be reappointed.
As Ordinary resolution
7. That the Directors of the Company be generally and unconditionally authorised (without prejudice to all subsisting
authorities) pursuant to Section 80 of the Companies Act 1985 to exercise all the powers of the Company to allot all
the authorised but unissued shares (being 35,706,153 Ordinary Shares) in the capital of the Company (being
relevant securities within the meaning of Section 80(2) of the said Act), such authority to expire at the conclusion of
the next Annual General Meeting of the Company or, if earlier, on the expiry of 15 months from the passing of this
resolution, save that the Company may make offers or agreements before such expiry which would or might require
relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of
such an offer or agreement as if the authority conferred thereby had not expired.
As Special resolution
8. That, subject to and conditional upon the passing of resolution 7 above, the Directors of the Company be
empowered pursuant to Section 95 of the Companies Act 1985 to allot for cash equity securities (as defined for the
purposes of Section 89 to 96 of the said Act) pursuant to the authority conferred by resolution 7 above as if Section
89 (1) did not apply to any such allotment provided that the power conferred by this resolution shall be limited to
the allotment of equity securities (a) up to an aggregate nominal amount of £14,294 being approximately 10% of
the Company’s issued share capital or (b) in connection with an offer of equity securities by way of rights to the
holders of existing shares in proportion (as nearly as may be) to their respective holdings of ordinary shares on a
record date fixed by the Directors but subject to such exclusions or other arrangements as the Directors may
consider necessary or expedient to deal with any legal or practical problems under the laws or the requirements of
any regulatory body or any stock exchange in any territory or in connection with fractional entitlements or otherwise
howsoever, such power to expire at the conclusion of the next Annual General Meeting of the Company or, if earlier,
on the expiry of 15 months from the passing of this resolution, save that the Company may make offers or
agreements before such expiry which would or might require equity securities to be allotted after such expiry and
the Directors may allot equity securities in pursuance of such an offer or agreement as if the power conferred
thereby had not expired.
eg solutions plc
annual report and accounts 2008
53
www.eguk.co.uk Notice of Annual General Meeting continued
9. To authorise the Company generally and unconditionally, pursuant to Section 166 of the Companies Act 1985, to
make market purchases (as defined in Section 163 of the said Act) of up to 1,429,385 ordinary shares of 1p each in
the capital of the Company representing 10% of the Company’s issued share capital on such terms and in such
manner as the Directors of the Company may from time to time determine, provided that the amount paid for each
share (exclusive of expenses) shall not be more than 5% above the average of the middle market quotation for the
Company’s ordinary shares as derived from the Daily Official List of London Stock Exchange plc for the five business
days before the purchase is made, and in any event not less than 1p per ordinary share; and the authority herein
contained shall expire at the conclusion of the next annual general meeting of the Company or 15 months following
the passing of this Resolution, whichever is the first to occur, provided that the Company may, before such expiry,
make a contract to purchase its own shares which would or might be executed wholly or partly after such expiry, and
the Company may make a purchase of its own shares in pursuance of such contract as if the authority hereby
conferred had not expired.
By Order of the Board
P Bird
Secretary
9 May 2008
Registered Office:
The Roller Mill
Teddesley Road
Penkridge
Staffordshire
ST19 5BD
eg solutions plc
annual report and accounts 2008
54 Form of Proxy
eg solutions plc
annual report and accounts 2008
55
www.eguk.co.uk
For use at the 2008 Annual General Meeting of the Company to be held at the offices of TLT Solicitors, Sea Containers
House, 20 Upper Ground, Blackfriars Bridge on Tuesday 17 June 2008 at 10.30 am.
I/We
_______________________________________________________________________________________________
(full name in block capitals)
of _________________________________________ (address) ___________________________________________
being a member/members of eg solutions plc hereby appoint the Chairman of the meeting
or*________________________________________ number of shares _____________________________________
as my/our proxy to vote for me/us on my/our behalf at the Annual General Meeting of the Company to be held on
17 June 2008 and at any adjournment thereof. I/We direct my/our proxy to vote in respect of the resolutions set out
in the notice of Annual General Meeting as follows:
Please tick here if you are appointing more than one proxy
Please indicate with an X in the space below how you wish your proxy to vote on the resolutions set out in the notice
convening the Annual General Meeting. If no indication is given, your proxy may vote or abstain from voting as he/she
thinks fit.
RESOLUTIONS
For Against Abstain
1. That the Directors’ Report and the annual report and accounts for the year ended
31 January 2008 be adopted and approved.
2. That the Directors’ Remuneration Report for the year ended 31 January 2008 be approved.
3. That Baker Tilly UK Audit LLP be reappointed as Auditors and the Directors be authorised
to fix their remuneration.
4. That Rodney Pennington Baker-Bates who retires by rotation be reappointed.
5. That Elizabeth Ann Gooch who retires by rotation be reappointed.
6. That Violetta Elizabeth Parylo who has been appointed since the last Annual General
Meeting be reappointed.
7. To authorise Directors to allot unissued shares.
8. To empower the Directors to allot equity securities for cash.
9. To authorise the Company to make market purchases of its shares.
Dated ________________________________________________________2008
Member’s signature _________________________________________________
* To appoint as a proxy a person other than the Chairman of the meeting insert the full name in the space provided. To
appoint more than one proxy you may photocopy this form. Please indicate the proxy holder’s name and the number of
shares in relation to which they are authorised to act as your proxy (which, in aggregate, should not exceed the number
of shares held by you). Please also indicate if the proxy instruction is one of multiple instructions being given. All forms
must be signed and should be returned together in the same envelope. A proxy need not be a member of the Company.
Notes
a. A member of the Company is entitled to appoint a proxy to exercise all or any of his rights to attend, speak and vote at a general meeting of the
Company. A member may appoint more than one proxy, provided that each proxy is appointed to exercise the rights attaching to different
shares. A proxy need not be a member.
b. To be effective, the instrument appointing a proxy and any authority under which it is signed (or a notarially certified copy of such authority) for
the Annual General Meeting to be held at the offices of TLT Solicitors, Sea Containers House, 20 Upper Ground, Blackfriars Bridge on Tuesday
17 June 2008 at 10.30 am and any adjournment(s) thereof must be returned to the office of the Registrars by 15 June 2008. In each case the
proxy appointments must be received by the Company not less than 48 hours before the time appointed for holding the meeting or any
adjournment thereof. A form of proxy is enclosed with this notice. The appointment of a proxy does not preclude a member from attending the
meeting and voting in person, in which case any votes of the proxy will be superseded.
c. A corporation must execute the Form of Proxy under either its common seal or the hand of a duly authorised officer or attorney.
d. The Form of Proxy is for use in respect of the shareholder account specified above only and should not be amended or submitted in respect of a
different account.
e. The ‘Abstain’ option is to enable you to abstain on any particular resolution. Such a vote is not a vote in law and will not be counted in the votes
‘For’ and ‘Against’ a resolution.
f. Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, only those members entered on the register of members of the
Company as at 15 June 2008 shall be entitled to attend or vote at the meeting in respect of the number of shares registered in their name at
that time. Changes to entries on the register of members after that time shall be disregarded in determining the rights of any person to attend
or vote at the meeting.
g. In order to facilitate voting by corporate representatives at the meeting, arrangements will be put in place at the meeting so that:
(i) if a corporate shareholder has appointed the Chairman of the meeting as its corporate representative with instructions to vote on a poll in
accordance with the directions of all of the other corporate representatives for that shareholder at the meeting, then on a poll those corporate
representatives will give voting directions to the Chairman and the Chairman will vote (or withhold a vote) as corporate representative in
accordance with those directions; and
(ii) if more than one corporate representative for the same corporate shareholder attends the meeting but the corporate shareholder has not
appointed the Chairman of the meeting as its corporate representative, a designated corporate representative will be nominated, from those
corporate representatives who attend, who will vote on a poll and the other corporate representatives will give voting directions to that
designated corporate representative. Corporate shareholders are referred to the guidance issued by the Institute of Chartered Secretaries
and Administrators on proxies and corporate representatives (www.icsa.org.uk)
h. Copies of the Directors’ service contracts and non-executive Directors’ letters of appointment with the company will be available for inspection at
the Registered Office of the Company during usual business hours on any weekday (Saturdays and public holidays excluded) from the date of
this Notice to the date of the meeting and from 15 minutes prior to and until the close of the meeting.
BUSINESS REPLY SERVICE
Licence No. MB122
Capita Registrars (Proxies)
PO Box 25
Beckenham
Kent
BR3 4BR
Second fold
Third fold
and tuck in flap opposite
First fold
1 1 Our software provides real-time, consistent operational intelligence across a balanced
range of performance indicators to enable you to make the right operational decisions
— providing capacity planning, line balancing and timely reporting at multiple levels so
you can effecitvely measure, manage and improve your business operations.
Over 40,000 users trust eg — Our software is working hard for client businesses
across the globe.
A global
operational
intelligence system
What we do
eg operational intelligence
®
— the definitive software for
producing real-time Operations Management Information
(‘MI’), provides the most comprehensive Operations MI
available, supports the achievement of operational excellence
and enables organisations to achieve dramatic improvements
in service, efficiency and reduced costs in weeks —
guaranteed.
The eg principles of operational management
®
are based
on tried, tested and proven methodologies taken from
industry. They form the basis of a Manager and Team Leader
training and development programme in Operations
Management. Through training and skills transfer, Managers
and Team Leaders learn how to use eg operational
intelligence
®
to provide a consistent approach to
actively managing work, resources and performance.
eg operational excellence™ can be achieved by
using improved Operations MI and the eg principles of
operational management
®
to improve the end-to-end
customer service and quality experience.
operational management
practice you can measure
operational excellence
improvement you can measure
operational intelligence
performance you can measure
www.eguk.co.uk
Key
eg offices
eg operational intelligence
®
users
eg is the only business software application vendor that guarantees return on
investment and is paid based on the results delivered — implementations will pay
for themselves, typically within 6 months.
With over 40 current client sites, we have a wide range of reference sites to assure
you of our ability to deliver real performance improvement into your organisation. eg solutions plc
Annual report and accounts
for the year ended 31 January 2008
Stock exchange code: EGS
eg solutions plc, The Roller Mill, Teddesley Road, Penkridge, Staffordshire, ST19 5BD, UK
t: +44 (0) 1785 715772 f: +44 (0) 1785 712541
[email protected] www.eguk.co.uk
eg solutions plc Annual report and accounts 2008
eg solutions plc is a global business software
application vendor. Our software provides historic,
real-time and predictive Operational MI. When
implemented with our training programme for
managers and team leaders to use this
intelligence, we guarantee improvements in
operational results in short timescales.
The Company, which is listed on the Alternative
Investment Market (‘AIM’) of the London Stock
Exchange, is committed to customer satisfaction
and the ongoing development of its operations
management solutions.
corporate statement
contents
Highlights 1
Chairman’s Statement 2
Chief Executive’s Review 4
Board of Directors 10
Advisers 11
Directors’ Report 12
Corporate Governance Statement 16
Directors’ Remuneration Report 19
Directors’ Responsibilities in the Preparation
of the Financial Statements 21
Independent Auditors’ Report 22
Consolidated Balance Sheet 24
Company Balance Sheet 25
Consolidated Income Statement 26
Consolidated Statement of Recognised
Income and Expense 26
Consolidated Cash Flow Statement 27
Company Cash Flow Statement 28
Consolidated Financial Statements
Summary of Significant Accounting Policies 29
Notes to the Consolidated Financial Statements 34
Notice of Annual General Meeting 53
Form of Proxy 55 | Chief Executive’s Review
eg solutions plc
annual report and accounts 2008
4
Business Review
The Company has made a number of significant
developments during the period under review. Our
objectives were to reduce costs, to expand into new
international markets and to build our repeatable
revenues. At the same time, we needed to continue to
enhance our software to meet customer requirements
across the globe.
We are pleased to update shareholders on the following:
Cost Reduction
Our primary focus during the year was to reduce our cost
base. The main area of spend in eg is people and the
required reduction in headcount needed to be achieved
with sensitivity. The cost reduction work was completed
in the first half of the year with the actual cost reductions
beginning to take effect from June 2007 onwards. In
total, cost reductions of £900,000 on an annualised basis
have been achieved, bringing our UK cost base below
pre-flotation levels. Although the outturn for the full year
was still an operating loss, the loss in the second half of
the year was £215,000 compared to £682,000 in the first
half. In total, an operating loss of £897,000 was
generated including £392,000 in one-off costs associated
with the redundancies, setting up in new markets and the
additional cost of an interim Finance Director required in
the first half of the year.
Gross Margin for the year was 65.3% and, although this
is below the level achieved in the previous financial year
(72.9%), it is in line with our target and well ahead of
the sector average.
Expansion into New Markets
At the same time as reducing our costs, we have
continued to focus on developing new international
markets in order to reduce revenue concentration on UK
financial services. In 2007 we secured clients in three of
our five target international markets. Sales revenues of
three times the original expectations for eg’s first year of
international business have been achieved.
We are pleased with the success of our implementation
projects within South Africa, India and the Netherlands
which clearly demonstrate the applicability of our
solutions in the global marketplace. Our international
business has also given us the opportunity to
demonstrate the successful application of a Software as a
Service (“SaaS”) licence model based on the hosted
solution launched earlier in the year.
The continued expansion into these overseas markets will
remain a key strategy for the foreseeable future in order
to mitigate the risks of over concentration on UK
markets.
UK Business Development
In December 2007 we were delighted to secure a
significant piece of new business with a major UK Life &
Pensions Company within our core UK market.
We are providing this client with the new and improved
version of eg operational intelligence® software,
which was launched in April 2007, together with the eg
principles of operational management®. This
contract win was an important development as it
demonstrates our continued focus and commitment to
our very important home market, whilst we also
concentrate on international expansion.
eg continues to enjoy high levels of repeat business from
existing clients and, as a result of this and other work
undertaken throughout the 2007 financial year, we have
begun to reduce our exposure to ‘lumpiness’ in our
revenues. eg solutions plc
annual report and accounts 2008
5
www.eguk.co.uk
We have also significantly reduced any dependency on
single clients/projects and worked hard to secure more
long-term contractual income, with a particular shift
towards securing three to five year licensing agreements.
Together with a high proportion of repeat revenues, these
actions reduce our exposure to more unpredictable new
business wins.
Product Development
£0.7m of research and development costs have been
capitalised during the course of the financial year
under IFRS.
The financial year marked a significant milestone in our
product offering to clients when, in April 2007, we
launched new and improved versions of our eg
operational intelligence® software suite, incorporating
eg work manager®.
The benefits of these new versions are extensive and
include improved functionality covering end-to-end
process and milestone measurement, customer
experience management (encompassing new service and
quality metrics), as well as management across multiple
time zones and an overall improved ‘look and feel’ for
both users and managers. As a result eg now has the
only operational intelligence tool that provides historic,
real-time and predictive management information at
multiple levels, both within and between businesses,
whilst at the same time enabling reporting by customer,
channel and process.
Our Research and Development team in South Africa has
completed the development of eg activity manager™, a
new module of our software that enables our clients to
track actual processing time in comparison with target
processing time on an ongoing basis.
“In 2007 we secured clients in three of our five
target international markets . . . We are pleased with
the success of our implementation projects within
South Africa, India and the Netherlands which
clearly demonstrate the applicability of our solutions
in the global marketplace.” Chief Executive’s Review continued
eg solutions plc
annual report and accounts 2008
6
Given the increased pressure for businesses to deliver
improved customer service at the lowest possible cost,
eg’s leading edge operational intelligence together with
training and implementation services that enable
companies to achieve guaranteed and sustainable
improvements resonate well with these requirements.
During the year, the new and improved versions of our
software have been adopted by over 5,000 users, across
seven companies, bringing our total worldwide users to
over 40,000.
Current Trading
Our clients, across many different markets both in the UK
and abroad, continue to confirm that our software,
implementation and training services generate the
dramatic improvements that we promise. The three new
contract wins that we secured within the first trading
month of the 2008 financial year are clear evidence of
the continued interest in our solutions from a number of
sectors within the UK.
Firstly, Nationwide Building Society has commissioned a
further implementation in the Specialist Lending Division
in Bournemouth. This follows the recent upgrade to the
new versions of the eg operational intelligence®
software suite that took place between November 2007
and January 2008. In this new project Nationwide will
use eg’s software to migrate UCB Homeloans into the
Bournemouth operations centre.
At Co-operative Financial Services, the Group has
secured a major software services project to embed the
eg operational intelligence® software suite into an
integrated solution that will automate the processing of
inbound and outbound correspondence. The full solution
will be developed in partnership with three other
companies: Xerox, Communisis and Exstream. eg will
provide the operations management components of the
solution including work and process management, and
the automatic production of historic, real-time and
predictive MI.
Finally, a further new implementation will take place in
the Travel and Tour Operator Payments teams of the Co-
operative Travel Group. eg’s software was already
installed in the Financial Shared Services teams of The
Co-operative Group before the retailer merged with
United Co-operative last year. This new implementation
will take place in the Travel and Tour Operator Payments
division of the merged Group. The new version of the eg
operational intelligence® software suite will be
implemented, demonstrating another application of the
enhanced functionality of the software outside financial
services.
We are pleased that during the year we have secured our
first long-term licence agreement. It is an objective of
the Company to secure a higher proportion of renewable
income and whilst eg has significant annual revenue
generated from maintenance contracts we wish to
increase this guaranteed revenue stream through the
addition of long-term renewable licence contracts. To this
end we have signed a contract with a customer for a
minimum of £330k of licence revenue to be spread over
the next three years, with the potential for significant
uplift as licence numbers increase.
These new contract wins clearly demonstrate that the
Company is becoming increasingly better placed to take
advantage of the opportunities provided by different
sectors and the requirements of global operational
management in general. eg solutions plc
annual report and accounts 2008
7
www.eguk.co.uk
Future Outlook
Although we have achieved many of our turnaround
objectives, we still have work to do on our strategy to
further improve sustainability. At the same time the
market environment has become extremely
unpredictable. We therefore remain cautious in our
outlook for 2008.
However, we are pleased that our order book for the
forthcoming year is already £3m, 50% higher than at the
same point in the 2007 financial year. The sales pipeline
is healthy and, on this basis, we will continue to
demonstrate continued recovery during 2008.
Shareholders should be aware that during the recession
of 2001 to 2003 eg outperformed the rest of the software
industry by consistently growing in both revenue and
profit during this difficult period.
This positive historical performance demonstrates the
continued demand for our products during downturns in
the IT market in general and our reduced vulnerability to
falls in IT spending amongst our clients.
The Chairman, Chief Executive and senior management
team were all in place during the last market downturn
and, together with the cost reductions we have made, we
believe that we are well placed to repeat our 2001 to
2003 performance in terms of growth and value for
shareholders.
“Contract wins that we secured within the first trading
month of the 2008 financial year are clear evidence of the
continued interest of our solutions from a number of sectors
within the UK.”
Chief Executive’s Review continued Chief Executive’s Review continued
eg solutions plc
annual report and accounts 2008
8
Financial Review
Overview
In the year ended 31 January 2008 turnover was
£4.12m, a reduction of £1.35m (2007: £5.47m).
Operating losses increased from a loss of £0.15m in 2007
to produce a loss of £0.90m.
International Financial Reporting Standards
(“IFRS”)
The Group has produced its financial statements under
IFRS. Comparison values shown in the operational and
Business Review and the Directors’ Report are based on
prior year IFRS. An extract of the result for 2006–07
under UK GAAP and IFRS is produced on pages 48 to 52.
Revenue Analysis
The Group produced a disappointing first half result with
revenues of £2.07m, 39.7% down on 2006 (£3.43m).
Revenue earned in the second half of the year was
£2.05m compared with £2.04m in the same period for
the prior year.
The Group segments its operations on the basis of
‘geographical segmentation of operations’. The Group has
determined that this is the most appropriate segmental
split to reflect the nature of the Group’s operations. The
Group has two distinct companies operating in different
geographical areas with different economic and political
conditions and a different maturity of client and client
requirements.
The Group has a subsidiary undertaking in South Africa.
Revenue generated from South African operations
totalled £0.35m, of which 63.2% was generated in the
second half of the year.
The Group operating loss of £0.90m includes a charge of
£0.65m for development expenditure. The Group
operating loss in 2007 was £0.15m, after charging
development expenditure of £0.55m. The Group’s cash
balances reduced during the year; however, interest
earned was £0.08m.
Loss Before Taxation
The loss before taxation was £0.82m (2007: loss
£41,000).
Taxation
The Group has benefited from the favourable tax relief
given on development expenditure which results in a
higher tax credit. The effective rate of taxation credit is
20% (2007: Effective rate of tax credit 114%).
Earnings Per Share
Loss per share on a basic and fully diluted basis were
(5.0p) and (5.0p) respectively. In the prior year the
basic earnings per share was 0.0p and on a fully diluted
basis 0.0p.
Dividend
There were no dividends paid during the year. The
Directors do not recommend a final dividend.
Research and Development & Capital Expenditure
The Group spent £1.24m on direct staff costs for
research and development, of which £0.59m was
capitalised. An additional £0.13m, in relation to
associated overheads, was also capitalised. In 2007 the
Group expended £0.81m on direct staff costs developing
its software product, of which £0.26m was capitalised. An
additional £0.03m, in relation to associated overheads,
was also capitalised. The majority of the expenditure
relates to the development of new and enhanced
software offerings.
At interim results the value of capitalised development
was based solely on the value of directly attributable
staffing costs. As part of the year end process the
capitalisation has been extended to incorporate an
appropriate amount of indirect overheads. This additional
allocation was performed following a full review of
development costs in line with audit recommended best
practice. This allocation adjustment has affected the
periods 31 January 2006 and 31 January 2007 and is
reflected within the IFRS comparisons for prior years. eg solutions plc
annual report and accounts 2008
9
www.eguk.co.uk
Cash Flow
The Group is debt free and at 31 January had interest
earning cash balances of £0.88m (2007: £2.43m). Cash
outflow in the year from operating activities was £0.85m
(2007: inflow £0.87m) resulting principally from reduced
turnover creating a net cash outflow from operations.
Going Concern
Based on normal business planning and control
procedures, the Directors have a reasonable expectation
that the Group has adequate resources to continue in
operational existence for the foreseeable future. For this
reason, the Directors continue to adopt the going concern
basis in preparing the accounts.
Elizabeth Gooch
Chief Executive Officer
18 March 2008
“eg continues to enjoy high levels of repeat business
from existing clients . . . we have also significantly
reduced any dependency on single clients/projects
and worked hard to secure more long-term
contractual income.”
Chief Executive’s Review continued | Key Business Highlights
Continued expansion into new international
markets and demonstration of applicability
of our solutions in the global marketplace.
Secured clients in three of our five target
international markets. Sales revenues of
three times the original expectations for
the first year of international business have
been achieved.
Launched new and improved versions of our
eg operational intelligence® software
suite which have been adopted by over 5,000
users across seven companies, including our
important home market. Also completed
development of eg activity manager™, a
new module of our software.
Successful application of a Software as a
Service (“SaaS”) licence model based on the
hosted solution launched last year and
secured first long-term licence agreement for
a minimum of £330k of licence revenue
spread over the next three years.
Strategic review undertaken to achieve cost
reductions; £900,000 on an annualised basis.
Four new contract wins secured since the
start of the new 2008 financial year:
Nationwide Building Society — a further
implementation in a core UK market.
Co-operative Financial Services —
integration to automate the processing of
inbound and outbound correspondence
with three other partners.
Co-operative Travel Group which
demonstrates another successful
application outside of financial services.
A major South African life office employing
approximately 5,000 people; an initial
proof of concept project.
Highlights
eg solutions plc
annual report and accounts 2008
www.eguk.co.uk
1
Our solutions are tried, tested and proven to work in
any organisation where process driven operations are
critical to business performance — we have completed
implementations and improved performance in blue
chip companies throughout the world.
“The cost savings made possible by eg were
considerable. eg promised to deliver a cost benefit of
at least 20% — the actual cost benefit was 29%.” | Chairman’s Statement
eg solutions plc
annual report and accounts 2008
2
Introduction
As previously stated in our last Annual Report, during
2007 we intended to concentrate on reducing costs and
strengthening the fundamentals of our business in order
to return to profitable growth. We did not expect to
achieve this overnight and, whilst our financial
performance has been disappointing, our core objectives
have remained on track. There are clear signs of recovery
across the Group.
We have also given particular attention to business
development within new markets and have made further
investment in our core products in order to meet our
customers’ requirements of improving operational
effectiveness in a global marketplace.
The work we have done will enable us to secure more
stable and sustainable growth in the future. With the
launch of new and improved versions of our software we
have also enjoyed some success in securing a number of
new contracts during the period. It is pleasing to note
that this new business also reflects our progress in
developing international markets.
Financial Review
Financial performance for the full year ended 31 January
2008 was below expectations, but improvements in
profitability across the Group during the second half of
the year are clearly visible.
The financial year was one of operational transition and
margin recovery. We have undertaken initiatives to
reduce costs, whilst ensuring that overheads remain
under strict control. As a result costs are now below pre-
flotation levels.
Although these measures resulted in the Company
returning to profit in the closing months of the financial
year, revenues from the majority of sales closed in the
same period were not recognisable until after the
financial year end. Therefore, these sales will contribute
towards revenues in the current financial year ending
31 January 2009.
Revenue in the period was maintained at the same level
as the previous two half year periods at £4.1m for the
year (down by £1.3m on the previous year). The Loss
before Tax was £815,000 including one-off investment
costs of £392,000 (2007: £41,000). The retained loss for
the financial year was £656,000 (2007: Profit £6,000).
Loss per share was 5.0 pence per share (2007: 0.0 pence
per share).
Cash balance was £0.88m (2007: cash £2.43m).
Gross margin was 65.3%, which is in line with our target
and better than the average for the software sector.
“. . . during 2007 we intended to concentrate on
reducing costs and strengthening the fundamentals
of our business in order to return to profitable
growth . . . there are clear signs of recovery across
the Group . . . the full recovery of the business
requires 18 to 24 months to complete, and we are
reasonably satisfied with progress made to date.” eg solutions plc
annual report and accounts 2008
3
www.eguk.co.uk
Dividend
The Board will not be declaring a dividend at the full
year stage.
People
During the financial year we were very pleased to
announce the appointment of Paul Bird as Finance
Director and Company Secretary with effect from
3 September 2007. It was very unfortunate to have to
report Paul Bird’s decision to resign from the Board of
eg in order to allow him to assume another position
elsewhere. The Board is fully aware that another
personnel change at such a senior level within the
Company is far from ideal.
Therefore, we were delighted to announce the recent
appointment of Violetta Parylo as Finance Director and
Company Secretary with effect from Monday 19 May
2008. Violetta brings 14 years’ experience in delivering
strategic, financial and business value to the Company
having held a number of senior finance positions within
both UK and international companies. Paul will remain
with the Company until the end of his contracted notice
period in order to execute an efficient ‘hand-over’ to
his successor.
In November 2007 we also announced the resignation of
Jonathan Pyke as Non-executive Director. Jonathan, who
had been with eg since our flotation on AIM in 2005,
resigned to pursue a full-time position with another
company. He was a valued member of the Board and we
extend our very best wishes to him for the future.
We fully acknowledge the important role that Non-
executive Directors have to play in the future growth and
development of eg and, therefore, we are actively
seeking a suitable candidate that will add value to the
Company going forward. Shareholders will be updated on
any appointment in due course.
Across the Company our offices are well managed and
driven by a long-serving team of people at operational
level, all of whom remain fully committed to the overall
success of eg. On behalf of the Board and shareholders,
I would like to take this opportunity to thank all of our
staff who have continued to work hard during what has
been an arduous year for the Company.
Overview
Although 2007 was a tough year, eg continues to be a
vibrant and dynamic organisation that is firmly focused
on implementing key objectives to return the business to
its previous levels of revenue growth and profitability.
As we have indicated in previous announcements to
shareholders, the full recovery of the business requires
18 to 24 months to complete, and we are reasonably
satisfied with progress made to date.
As a Company, we fully recognise the importance of
nurturing appropriate new business opportunities both
within the UK and overseas and will continue to develop
this strategy for the foreseeable future.
Finally, and on an extremely positive note, the Company
celebrated its 20th birthday just before the financial year
end in January 2008. This was a significant milestone
that clearly reflects the longevity of the business and the
high levels of customer satisfaction with which we have
become synonymous.
Rodney Baker-Bates
Non-executive Chairman
18 March 2008 | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input eg solutions plc
Annual report and accounts
for the year ended 31 January 2008
Stock exchange code: EGS
eg solutions plc, The Roller Mill, Teddesley Road, Penkridge, Staffordshire, ST19 5BD, UK
t: +44 (0) 1785 715772 f: +44 (0) 1785 712541
[email protected] www.eguk.co.uk
eg solutions plc Annual report and accounts 2008
eg solutions plc is a global business software
application vendor. Our software provides historic,
real-time and predictive Operational MI. When
implemented with our training programme for
managers and team leaders to use this
intelligence, we guarantee improvements in
operational results in short timescales.
The Company, which is listed on the Alternative
Investment Market (‘AIM’) of the London Stock
Exchange, is committed to customer satisfaction
and the ongoing development of its operations
management solutions.
corporate statement
contents
Highlights 1
Chairman’s Statement 2
Chief Executive’s Review 4
Board of Directors 10
Advisers 11
Directors’ Report 12
Corporate Governance Statement 16
Directors’ Remuneration Report 19
Directors’ Responsibilities in the Preparation
of the Financial Statements 21
Independent Auditors’ Report 22
Consolidated Balance Sheet 24
Company Balance Sheet 25
Consolidated Income Statement 26
Consolidated Statement of Recognised
Income and Expense 26
Consolidated Cash Flow Statement 27
Company Cash Flow Statement 28
Consolidated Financial Statements
Summary of Significant Accounting Policies 29
Notes to the Consolidated Financial Statements 34
Notice of Annual General Meeting 53
Form of Proxy 55 eg solutions plc
Annual report and accounts
for the year ended 31 January 2008
Stock exchange code: EGS
eg solutions plc, The Roller Mill, Teddesley Road, Penkridge, Staffordshire, ST19 5BD, UK
t: +44 (0) 1785 715772 f: +44 (0) 1785 712541
[email protected] www.eguk.co.uk
eg solutions plc Annual report and accounts 2008
eg solutions plc is a global business software
application vendor. Our software provides historic,
real-time and predictive Operational MI. When
implemented with our training programme for
managers and team leaders to use this
intelligence, we guarantee improvements in
operational results in short timescales.
The Company, which is listed on the Alternative
Investment Market (‘AIM’) of the London Stock
Exchange, is committed to customer satisfaction
and the ongoing development of its operations
management solutions.
corporate statement
contents
Highlights 1
Chairman’s Statement 2
Chief Executive’s Review 4
Board of Directors 10
Advisers 11
Directors’ Report 12
Corporate Governance Statement 16
Directors’ Remuneration Report 19
Directors’ Responsibilities in the Preparation
of the Financial Statements 21
Independent Auditors’ Report 22
Consolidated Balance Sheet 24
Company Balance Sheet 25
Consolidated Income Statement 26
Consolidated Statement of Recognised
Income and Expense 26
Consolidated Cash Flow Statement 27
Company Cash Flow Statement 28
Consolidated Financial Statements
Summary of Significant Accounting Policies 29
Notes to the Consolidated Financial Statements 34
Notice of Annual General Meeting 53
Form of Proxy 55 Our software provides real-time, consistent operational intelligence across a balanced
range of performance indicators to enable you to make the right operational decisions
— providing capacity planning, line balancing and timely reporting at multiple levels so
you can effecitvely measure, manage and improve your business operations.
Over 40,000 users trust eg — Our software is working hard for client businesses
across the globe.
A global
operational
intelligence system
What we do
eg operational intelligence
®
— the definitive software for
producing real-time Operations Management Information
(‘MI’), provides the most comprehensive Operations MI
available, supports the achievement of operational excellence
and enables organisations to achieve dramatic improvements
in service, efficiency and reduced costs in weeks —
guaranteed.
The eg principles of operational management
®
are based
on tried, tested and proven methodologies taken from
industry. They form the basis of a Manager and Team Leader
training and development programme in Operations
Management. Through training and skills transfer, Managers
and Team Leaders learn how to use eg operational
intelligence
®
to provide a consistent approach to
actively managing work, resources and performance.
eg operational excellence™ can be achieved by
using improved Operations MI and the eg principles of
operational management
®
to improve the end-to-end
customer service and quality experience.
operational management
practice you can measure
operational excellence
improvement you can measure
operational intelligence
performance you can measure
www.eguk.co.uk
Key
eg offices
eg operational intelligence
®
users
eg is the only business software application vendor that guarantees return on
investment and is paid based on the results delivered — implementations will pay
for themselves, typically within 6 months.
With over 40 current client sites, we have a wide range of reference sites to assure
you of our ability to deliver real performance improvement into your organisation. Our software provides real-time, consistent operational intelligence across a balanced
range of performance indicators to enable you to make the right operational decisions
— providing capacity planning, line balancing and timely reporting at multiple levels so
you can effecitvely measure, manage and improve your business operations.
Over 40,000 users trust eg — Our software is working hard for client businesses
across the globe.
A global
operational
intelligence system
What we do
eg operational intelligence
®
— the definitive software for
producing real-time Operations Management Information
(‘MI’), provides the most comprehensive Operations MI
available, supports the achievement of operational excellence
and enables organisations to achieve dramatic improvements
in service, efficiency and reduced costs in weeks —
guaranteed.
The eg principles of operational management
®
are based
on tried, tested and proven methodologies taken from
industry. They form the basis of a Manager and Team Leader
training and development programme in Operations
Management. Through training and skills transfer, Managers
and Team Leaders learn how to use eg operational
intelligence
®
to provide a consistent approach to
actively managing work, resources and performance.
eg operational excellence™ can be achieved by
using improved Operations MI and the eg principles of
operational management
®
to improve the end-to-end
customer service and quality experience.
operational management
practice you can measure
operational excellence
improvement you can measure
operational intelligence
performance you can measure
www.eguk.co.uk
Key
eg offices
eg operational intelligence
®
users
eg is the only business software application vendor that guarantees return on
investment and is paid based on the results delivered — implementations will pay
for themselves, typically within 6 months.
With over 40 current client sites, we have a wide range of reference sites to assure
you of our ability to deliver real performance improvement into your organisation. Key Business Highlights
Continued expansion into new international
markets and demonstration of applicability
of our solutions in the global marketplace.
Secured clients in three of our five target
international markets. Sales revenues of
three times the original expectations for
the first year of international business have
been achieved.
Launched new and improved versions of our
eg operational intelligence® software
suite which have been adopted by over 5,000
users across seven companies, including our
important home market. Also completed
development of eg activity manager™, a
new module of our software.
Successful application of a Software as a
Service (“SaaS”) licence model based on the
hosted solution launched last year and
secured first long-term licence agreement for
a minimum of £330k of licence revenue
spread over the next three years.
Strategic review undertaken to achieve cost
reductions; £900,000 on an annualised basis.
Four new contract wins secured since the
start of the new 2008 financial year:
Nationwide Building Society — a further
implementation in a core UK market.
Co-operative Financial Services —
integration to automate the processing of
inbound and outbound correspondence
with three other partners.
Co-operative Travel Group which
demonstrates another successful
application outside of financial services.
A major South African life office employing
approximately 5,000 people; an initial
proof of concept project.
Highlights
eg solutions plc
annual report and accounts 2008
www.eguk.co.uk
1
Our solutions are tried, tested and proven to work in
any organisation where process driven operations are
critical to business performance — we have completed
implementations and improved performance in blue
chip companies throughout the world.
“The cost savings made possible by eg were
considerable. eg promised to deliver a cost benefit of
at least 20% — the actual cost benefit was 29%.” Chairman’s Statement
eg solutions plc
annual report and accounts 2008
2
Introduction
As previously stated in our last Annual Report, during
2007 we intended to concentrate on reducing costs and
strengthening the fundamentals of our business in order
to return to profitable growth. We did not expect to
achieve this overnight and, whilst our financial
performance has been disappointing, our core objectives
have remained on track. There are clear signs of recovery
across the Group.
We have also given particular attention to business
development within new markets and have made further
investment in our core products in order to meet our
customers’ requirements of improving operational
effectiveness in a global marketplace.
The work we have done will enable us to secure more
stable and sustainable growth in the future. With the
launch of new and improved versions of our software we
have also enjoyed some success in securing a number of
new contracts during the period. It is pleasing to note
that this new business also reflects our progress in
developing international markets.
Financial Review
Financial performance for the full year ended 31 January
2008 was below expectations, but improvements in
profitability across the Group during the second half of
the year are clearly visible.
The financial year was one of operational transition and
margin recovery. We have undertaken initiatives to
reduce costs, whilst ensuring that overheads remain
under strict control. As a result costs are now below pre-
flotation levels.
Although these measures resulted in the Company
returning to profit in the closing months of the financial
year, revenues from the majority of sales closed in the
same period were not recognisable until after the
financial year end. Therefore, these sales will contribute
towards revenues in the current financial year ending
31 January 2009.
Revenue in the period was maintained at the same level
as the previous two half year periods at £4.1m for the
year (down by £1.3m on the previous year). The Loss
before Tax was £815,000 including one-off investment
costs of £392,000 (2007: £41,000). The retained loss for
the financial year was £656,000 (2007: Profit £6,000).
Loss per share was 5.0 pence per share (2007: 0.0 pence
per share).
Cash balance was £0.88m (2007: cash £2.43m).
Gross margin was 65.3%, which is in line with our target
and better than the average for the software sector.
“. . . during 2007 we intended to concentrate on
reducing costs and strengthening the fundamentals
of our business in order to return to profitable
growth . . . there are clear signs of recovery across
the Group . . . the full recovery of the business
requires 18 to 24 months to complete, and we are
reasonably satisfied with progress made to date.” eg solutions plc
annual report and accounts 2008
3
www.eguk.co.uk
Dividend
The Board will not be declaring a dividend at the full
year stage.
People
During the financial year we were very pleased to
announce the appointment of Paul Bird as Finance
Director and Company Secretary with effect from
3 September 2007. It was very unfortunate to have to
report Paul Bird’s decision to resign from the Board of
eg in order to allow him to assume another position
elsewhere. The Board is fully aware that another
personnel change at such a senior level within the
Company is far from ideal.
Therefore, we were delighted to announce the recent
appointment of Violetta Parylo as Finance Director and
Company Secretary with effect from Monday 19 May
2008. Violetta brings 14 years’ experience in delivering
strategic, financial and business value to the Company
having held a number of senior finance positions within
both UK and international companies. Paul will remain
with the Company until the end of his contracted notice
period in order to execute an efficient ‘hand-over’ to
his successor.
In November 2007 we also announced the resignation of
Jonathan Pyke as Non-executive Director. Jonathan, who
had been with eg since our flotation on AIM in 2005,
resigned to pursue a full-time position with another
company. He was a valued member of the Board and we
extend our very best wishes to him for the future.
We fully acknowledge the important role that Non-
executive Directors have to play in the future growth and
development of eg and, therefore, we are actively
seeking a suitable candidate that will add value to the
Company going forward. Shareholders will be updated on
any appointment in due course.
Across the Company our offices are well managed and
driven by a long-serving team of people at operational
level, all of whom remain fully committed to the overall
success of eg. On behalf of the Board and shareholders,
I would like to take this opportunity to thank all of our
staff who have continued to work hard during what has
been an arduous year for the Company.
Overview
Although 2007 was a tough year, eg continues to be a
vibrant and dynamic organisation that is firmly focused
on implementing key objectives to return the business to
its previous levels of revenue growth and profitability.
As we have indicated in previous announcements to
shareholders, the full recovery of the business requires
18 to 24 months to complete, and we are reasonably
satisfied with progress made to date.
As a Company, we fully recognise the importance of
nurturing appropriate new business opportunities both
within the UK and overseas and will continue to develop
this strategy for the foreseeable future.
Finally, and on an extremely positive note, the Company
celebrated its 20th birthday just before the financial year
end in January 2008. This was a significant milestone
that clearly reflects the longevity of the business and the
high levels of customer satisfaction with which we have
become synonymous.
Rodney Baker-Bates
Non-executive Chairman
18 March 2008 Chief Executive’s Review
eg solutions plc
annual report and accounts 2008
4
Business Review
The Company has made a number of significant
developments during the period under review. Our
objectives were to reduce costs, to expand into new
international markets and to build our repeatable
revenues. At the same time, we needed to continue to
enhance our software to meet customer requirements
across the globe.
We are pleased to update shareholders on the following:
Cost Reduction
Our primary focus during the year was to reduce our cost
base. The main area of spend in eg is people and the
required reduction in headcount needed to be achieved
with sensitivity. The cost reduction work was completed
in the first half of the year with the actual cost reductions
beginning to take effect from June 2007 onwards. In
total, cost reductions of £900,000 on an annualised basis
have been achieved, bringing our UK cost base below
pre-flotation levels. Although the outturn for the full year
was still an operating loss, the loss in the second half of
the year was £215,000 compared to £682,000 in the first
half. In total, an operating loss of £897,000 was
generated including £392,000 in one-off costs associated
with the redundancies, setting up in new markets and the
additional cost of an interim Finance Director required in
the first half of the year.
Gross Margin for the year was 65.3% and, although this
is below the level achieved in the previous financial year
(72.9%), it is in line with our target and well ahead of
the sector average.
Expansion into New Markets
At the same time as reducing our costs, we have
continued to focus on developing new international
markets in order to reduce revenue concentration on UK
financial services. In 2007 we secured clients in three of
our five target international markets. Sales revenues of
three times the original expectations for eg’s first year of
international business have been achieved.
We are pleased with the success of our implementation
projects within South Africa, India and the Netherlands
which clearly demonstrate the applicability of our
solutions in the global marketplace. Our international
business has also given us the opportunity to
demonstrate the successful application of a Software as a
Service (“SaaS”) licence model based on the hosted
solution launched earlier in the year.
The continued expansion into these overseas markets will
remain a key strategy for the foreseeable future in order
to mitigate the risks of over concentration on UK
markets.
UK Business Development
In December 2007 we were delighted to secure a
significant piece of new business with a major UK Life &
Pensions Company within our core UK market.
We are providing this client with the new and improved
version of eg operational intelligence® software,
which was launched in April 2007, together with the eg
principles of operational management®. This
contract win was an important development as it
demonstrates our continued focus and commitment to
our very important home market, whilst we also
concentrate on international expansion.
eg continues to enjoy high levels of repeat business from
existing clients and, as a result of this and other work
undertaken throughout the 2007 financial year, we have
begun to reduce our exposure to ‘lumpiness’ in our
revenues. eg solutions plc
annual report and accounts 2008
5
www.eguk.co.uk
We have also significantly reduced any dependency on
single clients/projects and worked hard to secure more
long-term contractual income, with a particular shift
towards securing three to five year licensing agreements.
Together with a high proportion of repeat revenues, these
actions reduce our exposure to more unpredictable new
business wins.
Product Development
£0.7m of research and development costs have been
capitalised during the course of the financial year
under IFRS.
The financial year marked a significant milestone in our
product offering to clients when, in April 2007, we
launched new and improved versions of our eg
operational intelligence® software suite, incorporating
eg work manager®.
The benefits of these new versions are extensive and
include improved functionality covering end-to-end
process and milestone measurement, customer
experience management (encompassing new service and
quality metrics), as well as management across multiple
time zones and an overall improved ‘look and feel’ for
both users and managers. As a result eg now has the
only operational intelligence tool that provides historic,
real-time and predictive management information at
multiple levels, both within and between businesses,
whilst at the same time enabling reporting by customer,
channel and process.
Our Research and Development team in South Africa has
completed the development of eg activity manager™, a
new module of our software that enables our clients to
track actual processing time in comparison with target
processing time on an ongoing basis.
“In 2007 we secured clients in three of our five
target international markets . . . We are pleased with
the success of our implementation projects within
South Africa, India and the Netherlands which
clearly demonstrate the applicability of our solutions
in the global marketplace.” Chief Executive’s Review continued
eg solutions plc
annual report and accounts 2008
6
Given the increased pressure for businesses to deliver
improved customer service at the lowest possible cost,
eg’s leading edge operational intelligence together with
training and implementation services that enable
companies to achieve guaranteed and sustainable
improvements resonate well with these requirements.
During the year, the new and improved versions of our
software have been adopted by over 5,000 users, across
seven companies, bringing our total worldwide users to
over 40,000.
Current Trading
Our clients, across many different markets both in the UK
and abroad, continue to confirm that our software,
implementation and training services generate the
dramatic improvements that we promise. The three new
contract wins that we secured within the first trading
month of the 2008 financial year are clear evidence of
the continued interest in our solutions from a number of
sectors within the UK.
Firstly, Nationwide Building Society has commissioned a
further implementation in the Specialist Lending Division
in Bournemouth. This follows the recent upgrade to the
new versions of the eg operational intelligence®
software suite that took place between November 2007
and January 2008. In this new project Nationwide will
use eg’s software to migrate UCB Homeloans into the
Bournemouth operations centre.
At Co-operative Financial Services, the Group has
secured a major software services project to embed the
eg operational intelligence® software suite into an
integrated solution that will automate the processing of
inbound and outbound correspondence. The full solution
will be developed in partnership with three other
companies: Xerox, Communisis and Exstream. eg will
provide the operations management components of the
solution including work and process management, and
the automatic production of historic, real-time and
predictive MI.
Finally, a further new implementation will take place in
the Travel and Tour Operator Payments teams of the Co-
operative Travel Group. eg’s software was already
installed in the Financial Shared Services teams of The
Co-operative Group before the retailer merged with
United Co-operative last year. This new implementation
will take place in the Travel and Tour Operator Payments
division of the merged Group. The new version of the eg
operational intelligence® software suite will be
implemented, demonstrating another application of the
enhanced functionality of the software outside financial
services.
We are pleased that during the year we have secured our
first long-term licence agreement. It is an objective of
the Company to secure a higher proportion of renewable
income and whilst eg has significant annual revenue
generated from maintenance contracts we wish to
increase this guaranteed revenue stream through the
addition of long-term renewable licence contracts. To this
end we have signed a contract with a customer for a
minimum of £330k of licence revenue to be spread over
the next three years, with the potential for significant
uplift as licence numbers increase.
These new contract wins clearly demonstrate that the
Company is becoming increasingly better placed to take
advantage of the opportunities provided by different
sectors and the requirements of global operational
management in general. eg solutions plc
annual report and accounts 2008
7
www.eguk.co.uk
Future Outlook
Although we have achieved many of our turnaround
objectives, we still have work to do on our strategy to
further improve sustainability. At the same time the
market environment has become extremely
unpredictable. We therefore remain cautious in our
outlook for 2008.
However, we are pleased that our order book for the
forthcoming year is already £3m, 50% higher than at the
same point in the 2007 financial year. The sales pipeline
is healthy and, on this basis, we will continue to
demonstrate continued recovery during 2008.
Shareholders should be aware that during the recession
of 2001 to 2003 eg outperformed the rest of the software
industry by consistently growing in both revenue and
profit during this difficult period.
This positive historical performance demonstrates the
continued demand for our products during downturns in
the IT market in general and our reduced vulnerability to
falls in IT spending amongst our clients.
The Chairman, Chief Executive and senior management
team were all in place during the last market downturn
and, together with the cost reductions we have made, we
believe that we are well placed to repeat our 2001 to
2003 performance in terms of growth and value for
shareholders.
“Contract wins that we secured within the first trading
month of the 2008 financial year are clear evidence of the
continued interest of our solutions from a number of sectors
within the UK.”
Chief Executive’s Review continued Chief Executive’s Review continued
eg solutions plc
annual report and accounts 2008
8
Financial Review
Overview
In the year ended 31 January 2008 turnover was
£4.12m, a reduction of £1.35m (2007: £5.47m).
Operating losses increased from a loss of £0.15m in 2007
to produce a loss of £0.90m.
International Financial Reporting Standards
(“IFRS”)
The Group has produced its financial statements under
IFRS. Comparison values shown in the operational and
Business Review and the Directors’ Report are based on
prior year IFRS. An extract of the result for 2006–07
under UK GAAP and IFRS is produced on pages 48 to 52.
Revenue Analysis
The Group produced a disappointing first half result with
revenues of £2.07m, 39.7% down on 2006 (£3.43m).
Revenue earned in the second half of the year was
£2.05m compared with £2.04m in the same period for
the prior year.
The Group segments its operations on the basis of
‘geographical segmentation of operations’. The Group has
determined that this is the most appropriate segmental
split to reflect the nature of the Group’s operations. The
Group has two distinct companies operating in different
geographical areas with different economic and political
conditions and a different maturity of client and client
requirements.
The Group has a subsidiary undertaking in South Africa.
Revenue generated from South African operations
totalled £0.35m, of which 63.2% was generated in the
second half of the year.
The Group operating loss of £0.90m includes a charge of
£0.65m for development expenditure. The Group
operating loss in 2007 was £0.15m, after charging
development expenditure of £0.55m. The Group’s cash
balances reduced during the year; however, interest
earned was £0.08m.
Loss Before Taxation
The loss before taxation was £0.82m (2007: loss
£41,000).
Taxation
The Group has benefited from the favourable tax relief
given on development expenditure which results in a
higher tax credit. The effective rate of taxation credit is
20% (2007: Effective rate of tax credit 114%).
Earnings Per Share
Loss per share on a basic and fully diluted basis were
(5.0p) and (5.0p) respectively. In the prior year the
basic earnings per share was 0.0p and on a fully diluted
basis 0.0p.
Dividend
There were no dividends paid during the year. The
Directors do not recommend a final dividend.
Research and Development & Capital Expenditure
The Group spent £1.24m on direct staff costs for
research and development, of which £0.59m was
capitalised. An additional £0.13m, in relation to
associated overheads, was also capitalised. In 2007 the
Group expended £0.81m on direct staff costs developing
its software product, of which £0.26m was capitalised. An
additional £0.03m, in relation to associated overheads,
was also capitalised. The majority of the expenditure
relates to the development of new and enhanced
software offerings.
At interim results the value of capitalised development
was based solely on the value of directly attributable
staffing costs. As part of the year end process the
capitalisation has been extended to incorporate an
appropriate amount of indirect overheads. This additional
allocation was performed following a full review of
development costs in line with audit recommended best
practice. This allocation adjustment has affected the
periods 31 January 2006 and 31 January 2007 and is
reflected within the IFRS comparisons for prior years. eg solutions plc
annual report and accounts 2008
9
www.eguk.co.uk
Cash Flow
The Group is debt free and at 31 January had interest
earning cash balances of £0.88m (2007: £2.43m). Cash
outflow in the year from operating activities was £0.85m
(2007: inflow £0.87m) resulting principally from reduced
turnover creating a net cash outflow from operations.
Going Concern
Based on normal business planning and control
procedures, the Directors have a reasonable expectation
that the Group has adequate resources to continue in
operational existence for the foreseeable future. For this
reason, the Directors continue to adopt the going concern
basis in preparing the accounts.
Elizabeth Gooch
Chief Executive Officer
18 March 2008
“eg continues to enjoy high levels of repeat business
from existing clients . . . we have also significantly
reduced any dependency on single clients/projects
and worked hard to secure more long-term
contractual income.”
Chief Executive’s Review continued Board of Directors
eg solutions plc
annual report and accounts 2008
10
1 Rodney Baker-Bates
Non-executive Chairman
Rodney, 63, is a Chartered Accountant, a Fellow of
the Institute of Bankers and the Institute of
Management Consultants. A former Chief Executive of
Prudential Financial Services, he previously worked in
senior roles at the BBC, Midland Bank and Chase
Manhattan Bank. Rodney is also Chairman of
Britannia Building Society, Helphire Group, Stobart
Group, Assura Group and FirstAssist Insurance
Services.
2 Elizabeth Gooch
Chief Executive Officer
Elizabeth Gooch started her career in the 1980s as an
in-house consultant at Forward Trust, a subsidiary of
Midland Bank. She then moved to Birmingham
Midshires before establishing eg in 1988. After
working for some manufacturers, Elizabeth introduced
their proactive management of processing and
operations into the back offices of financial services
businesses. Based on this experience, Elizabeth
designed and launched the eg Operational Intelligence
software suite.
Today, having successfully implemented eg’s
Operational Management solutions in large financial
services companies such as HBOS, Norwich Union and
Scottish Equitable, Elizabeth stands out as one of
Staffordshire’s rare IT entrepreneurs and was
recognised as the seventh leading female
entrepreneur in Management Today’s top 100
entrepreneurs 2006 and 2007.
3 Paul Bird
Finance Director
Paul Bird joined eg as Finance Director with
responsibility for Commercial aspects, Software and
Operations. Previously serving at South Staffordshire
Plc, firstly as Director of Finance (software and
outsourcing) and, since 2004, as Finance and
Commercial Director of Echo Managed Services Ltd,
Paul has valuable financial and commercial expertise
and extensive knowledge of growing businesses. Paul
holds an MBA, an MA in Commercial and Contract
Law, a Postgraduate diploma in Employment Law, an
MSc in Policy and Management and qualifications in
accountancy.
1 2 3 Advisers
eg solutions plc
annual report and accounts 2008
11
www.eguk.co.uk
4 Andrew McRae
Non-executive Director
Andy McRae has more than 20 years of international
business experience, much spent within the support
services sector. Most recently, Andy was Managing
Director, UK & Ireland for Hays PLC, the leading
specialist recruitment company. A qualified UK
Chartered Accountant, prior to assuming senior
general management roles, Andy held a number of
senior financial positions in the UK. In 1999, Andy led
the public-to-private management buy-out of Coutts
Consulting Group with backing from 3i. The business
was sold after three years yielding a significant gain
to shareholders.
Registered Office
eg solutions plc
The Roller Mill
Teddesley Road
Penkridge
Staffordshire
ST19 5BD
Auditors
Baker Tilly UK Audit LLP
Registered Auditor &
Chartered Accountants
Festival Way
Stoke-on-Trent
Staffordshire
ST1 5BB
Solicitors
TLT Solicitors
Sea Containers House
20 Upper Ground
Blackfriars Bridge
London
SE1 9LH
Nominated Adviser
Brewin Dolphin
Securities Limited
National House
36 St Ann Street
Manchester
M60 2EP
4 Directors’ Report
eg solutions plc
annual report and accounts 2008
12
The Directors submit their report and the financial
statements of eg solutions plc for the year ended
31 January 2008.
Principal Activities
The principal activity of the Group is that of an IT and
software support services business delivering guaranteed
improvements in operations management. The Group
uses proprietary software packages and an operations
management methodology based on production
management techniques. The Group delivers measurable
operational improvements in large back office
environments.
Business Review
Revenue in the period was £4.1m which was £1.4m lower
than in 2007. The retained loss for the year is
(£656,000) (2007: profit £6,000).
The information that fulfils the requirements of the
Business Review including Key Performance Indicators
can be found in the Chairman’s Statement and Chief
Executive’s Review on pages 2 to 9 which is incorporated
in this report by reference.
The purpose of this Annual Report is to provide
information to the members of the Group. The Annual
Report contains certain forward-looking statements with
respect to the operations, performance and financial
condition of the Group. By nature these statements
involve uncertainty since future events and
circumstances can cause results and developments to
differ materially from those anticipated. The forward-
looking statements reflect knowledge and information
available at the date of preparation of this Annual Report
and the Group undertakes no obligation to update these
forward-looking statements. Nothing in this Annual
Report should be construed as a profit forecast.
Results and Dividends
The trading results for the year are set out on page 26.
The Directors do not recommend a final dividend on the
ordinary shares (2007: NIL).
Future Developments
The Group has been carrying out a consolidation and is
now embarked upon a growth strategy which will extend
its activities in financial services, into other new UK
market sectors in addition to developing its activities
outside of the UK. The Group established an operation in
South Africa and secured contracts within the territory. In
addition, the Group is planning to expand upon its entry
in Northern Europe over the coming period.
Key Performance Indicators
The Group’s progress on its strategic objectives is
monitored by the Board of Directors by reference to the
following Key Performance Indicators (KPIs). The matters
mentioned in the Chairman’s Statement are a reflection
of the performance of the business set out in the table
below along with comparative prior year performance
data. Directors’ Report continued
eg solutions plc
annual report and accounts 2008
13
www.eguk.co.uk
Note 2008 2007
Revenue A £4,123,000 £5,472,000
Revenue reduction B (24.7%) (6.9%)
Gross margin % C 65.3% 72.9%
Operating (loss)/profit % D (21.8%) (2.8%)
Net (loss)/profit % E (15.9%) 0.1%
Retained cash balances A £878,000 £2,431,000
Cash flow from operating activities inflow/(outflow) A £(849,000) £869,000
Research and development expenditure on staffing costs
(including capitalised staff development costs) A £1,235,000 £806,000
Debtor days F 27 25
Creditor days F 47 32
A Revenue, Cash at bank and in hand, Cash flow from operating activities and Research and Development
staffing expenditure are as extracted from the financial statements.
B Revenue Reduction compares the change in revenue from one year to the next expressed in percentage terms.
C Gross Margin is the gross profit as a percentage of revenue. Gross profit and revenue are taken from the
income statement in the financial statements.
D Operating (loss)/profit percentage is operating (loss)/profit as a percentage of revenue. Operating
(loss)/profit and revenue are taken from the income statement in the financial statements.
E Net (loss)/profit percentage is net (loss)/profit as a percentage of revenue. Net (loss)/profit after tax and
revenue are taken from the income statement in the financial statements.
F Debtor days represent the length of time taken by customers to pay their bills and Creditor days represent
the length of time taken by the Group to pay its suppliers. The number of days outstanding has been
calculated by comparing the outstanding balance for trade debtors and trade creditors with the value of sales
or purchases respectively, inclusive of VAT, and calculating the period for which they remain unpaid using the
count-back method.
During the next financial period the Group intends to
review its KPIs and ensure these reflect its geographical
segmentation and provide further tools for Board and
Management to assess performance in line with
growth strategies.
Political and Charitable Contributions
During the year the Group made charitable donations
of £7,050, principally to local charities serving the
communities in which the Group operates.
Research and Development
The Group invests in the continual modification and
improvement of its products to meet technological
advances and customer and new market requirements.
Employee Involvement and Disability
The Group’s policy is to consult and discuss with
employees any matters likely to affect their interests.
Information on matters of concern to employees is
provided in order to achieve a common awareness of the
regular and frequent financial and economic factors
affecting the Group’s performance.
The Group’s policy is to recruit disabled workers for those
vacancies that they are able to fill. All necessary
assistance with initial training courses is given. Once
employed, a career plan is developed so as to ensure
suitable opportunities for each disabled person.
Arrangements are made, wherever possible, for retraining
employees who become disabled to enable them to
perform work identified as appropriate to their aptitudes. Beneficial
Ordinary shares Ordinary shares
of 1p each of 1p each
31 January 2008 31 January 2007
Beneficial
RP Baker-Bates 475,000 475,000
EA Gooch 8,793,200 8,793,200
A McRae 20,000 20,000
J Pyke (Director until 23 November 2007) 6,600 6,600
EA Gooch has non-beneficial interests in 1,176,470 shares which are held on behalf of the eg solutions plc Employee
Benefit Trust.
under review. The Group also works with a diversity of
partners to mitigate the risk inherent in working with a
single partner.
Operations
The Group’s facilities could be disrupted by events
beyond its control such as fire or other issues.
The Group prepares recovery plans for most foreseeable
situations so that our business operations would continue
should these situations occur.
Directors
The following Directors have held office since
1 February 2007:
RP Baker-Bates
EA Gooch
A McRae
J Pyke (resigned 23 November 2007)
P Bird (appointed 3 September 2007)
M Wilton (resigned 31 August 2007)
Directors’ Interests in Shares
Directors’ interests in the shares of the Group, including
family interests, were as follows:
Risks and Uncertainties
There are a number of potential risks and uncertainties
which could have a material impact on the Group’s long-
term performance and cause actual results to differ
materially from expected and historical results.
Management seeks to identify material risks and put in
place contingency plans to mitigate the Group’s potential
exposure. The Group’s risk management policies and
procedures are also discussed in the Corporate
Governance Statement on pages 16 to 18. A summary of
the key risks is given below:
Competitor Risk
The market for operations management improvement is
becoming increasingly competitive. To mitigate this risk,
management works to build strong customer
relationships and develop the Group’s product offering.
Commercial Relationships
Some of the products utilise interfaces with proprietary
software licensed by independent, third party software
developers. Any absence of key third-party products
could have a material impact on the business.
To mitigate this risk, all key commercial relationships and
developments in technology in the marketplace are kept
14
eg solutions plc
annual report and accounts 2008
Directors’ Report continued Directors’ Report continued
www.eguk.co.uk
15
eg solutions plc
annual report and accounts 2008
Substantial Shareholdings
On 31 January 2008, other than the Directors whose interests are shown on page 14, the following held more than 3%
of the issued share capital:
Percentage of Issued
Investor Shares Held Share Capital
ISIS Equity Partners LLP 2,034,741 14.2%
Brewin Dolphin Securities Ltd 1,111,731 7.8%
Unicorn Asset Management 588,635 4.1%
Transact Integrated Portfolio Service 558,538 3.9%
Cornelian Asset Managers Ltd 479,412 3.4%
The Directors who were in office on the date of approval of these financial statements have confirmed, as far as they are
aware, that there is no relevant audit information of which the Auditors are unaware. Each of the Directors have
confirmed that they have taken all steps that they ought to have taken as Directors in order to make themselves aware
of any relevant audit information and to establish that it has been communicated to the Auditors.
This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies
Act 1985.
Policy on Payment of Creditors
It is Group policy to agree and clearly communicate
the terms of payment as part of the commercial
arrangements negotiated with suppliers and then to pay
according to those terms based on the timely receipt of
an accurate invoice.
Trade creditor days based on creditors at 31 January
2008 were 47 days (2007: 32 days).
Auditors
The Directors, having been notified of the cessation of
the partnership known as Baker Tilly, resolved that Baker
Tilly UK Audit LLP be appointed as successor Auditors
with effect from 1 April 2007, in accordance with the
provisions of the Companies Act 1989, S26(5).
Baker Tilly UK Audit LLP have expressed their willingness
to continue in office as Auditors and a resolution to
reappoint Baker Tilly UK Audit LLP will be proposed at the
forthcoming Annual General Meeting.
Annual General Meeting
The Annual General Meeting of the Company will be held
at 10.30 am on 17 June 2008 at the offices of TLT
Solicitors, Sea Containers House, 20 Upper Ground,
Blackfriars Bridge, London, SE1 9LH.
By order of the Board
P Bird
Secretary
18 March 2008
By order of the Board Corporate Governance Statement
eg solutions plc
annual report and accounts 2008
16
Principles of Corporate Governance
As a company listed on AIM, the Company is not
governed by the Combined Code adopted by the London
Stock Exchange (“the Combined Code”) but is required to
operate principles of good governance and best practice.
Accordingly, the Directors are committed to the
Combined Code and believe that an effective system of
corporate governance supports the enhancement of
shareholder value. These principles have been in place
since the Company’s flotation on 6 June 2005.
Board Structure
During the year the Board comprised the Non-executive
Chairman, the Chief Executive Officer, the Finance
Director and one other independent Non-executive
Director. A second independent Non-executive Director
resigned on 23 November 2007.
The Board is responsible to shareholders for the proper
management of the Company. A statement of Directors’
responsibilities in respect of the accounts is set out on
page 21. The Non-executive Directors have a particular
responsibility to ensure that the strategies proposed by
the Executive Directors are fully considered. To enable
the Board to discharge its duties all Directors have full
and timely access to all relevant information. There is a
procedure for all Directors in furtherance of their duties
to take independent professional advice, if necessary, at
the expense of the Company. The Board has a formal
schedule of matters reserved to it and meets at least
quarterly. It is responsible for overall strategy, approval
of major capital expenditure projects and consideration of
significant financing matters.
The following Committees, which have written terms of
reference, deal with specific aspects of the Company’s
affairs:
The Nomination Committee is chaired by the
Chairman and comprises the Board. The Committee is
responsible for proposing candidates for appointment
to the Board, having regard to the balance and
structure of the Board. In appropriate cases
recruitment consultants are used to assist the
process. All Directors are subject to re-election at
least every three years.
The Remuneration Committee is responsible for
making recommendations to the Board on the
Company’s framework of Executive remuneration and
its cost. The Committee determines the contract
terms, remuneration and other benefits for each of
the Executive Directors and senior employees,
including performance related bonus schemes,
pension rights and compensation payments. The
Board itself determines the remuneration of the Non-
executive Directors. The Committee comprises the
Non-executive Directors and it is chaired by the
Chairman. The Directors’ Remuneration Report is set
out on pages 19 to 20.
The Audit Committee comprises two Non-executive
Directors and is chaired by Andrew McRae. Its prime
tasks are to review the scope of external audit, to
receive regular reports from Baker Tilly and to review
the half-yearly and annual accounts before they are
presented to the Board, focusing in particular on
accounting policies and areas of management,
judgement and estimation. The Committee is
responsible for monitoring the controls which are in
force to ensure the integrity of the information
reported to the shareholders. eg solutions plc
annual report and accounts 2008
17
www.eguk.co.uk
The Committee acts as a forum for discussion of internal
control issues and contributes to the Board’s review of
the effectiveness of the Company’s internal control and
risk management systems and processes. The Committee
also considers the need for an internal audit function. It
advises the Board on the appointment of external
auditors and on their remuneration for both audit and
non-audit work, and discusses the nature and scope of
the audit with the external auditors. The Committee,
which meets at least twice per year, provides a forum for
reporting by the Company’s external Auditors. Meetings
are also attended, by invitation, by the Chief Executive
Officer and Finance Director.
The Audit Committee also undertakes a formal
assessment of the Auditors’ independence each year
which includes:
a review of the non-audit services provided to the
Company and related fees;
discussion with the Auditors of a written report
detailing all relationships with the Company and any
other parties that could affect independence or the
perception of independence;
a review of the Auditors’ own procedures for ensuring
the independence of the audit firm and partners and
staff involved in the audit, including the regular
rotation of the audit partner; and
obtaining written confirmation from the Auditors that,
in their professional judgement, they are
independent.
An analysis of the fees payable to the external audit firm
in respect of both audit and non-audit services during the
year is set out in Note 4 to the financial statements.
Internal Control
The Directors are responsible for the Group’s system of
internal control and reviewing its effectiveness.
The Board has designed the Group’s system of internal
control in order to provide the Directors with reasonable
assurance that its assets are safeguarded, that
transactions are authorised and properly recorded and that
material errors and irregularities are either prevented or
would be detected within a timely period. However, no
system of internal control can eliminate the risk of failure
to achieve business objectives or provide absolute
assurance against material misstatement or loss.
The key elements of the control system in operation are:
The Board meets regularly with a formal schedule of
matters reserved to it for decision. It has put in place
an organisational structure with clear lines of
responsibility defined and with appropriate delegation
of authority.
There are established procedures for the planning,
approval and monitoring of capital expenditure and
information systems for monitoring the Group’s
financial performance against approved budgets and
forecasts.
The departmental heads are required annually to
undertake a full assessment process to identify and
quantify the risks that face their businesses and
functions, and assess the adequacy of the prevention,
monitoring and modification practices in place for
those risks. In addition, regular reports about
significant risks and associated control and monitoring
procedures are reported to the Board to enable the
Directors to review the effectiveness of the system of
internal control. The process adopted by the Group
accords with the guidance contained in the document
“Internal Control Guidance for Directors on the
Combined Code” issued by the Institute of Chartered
Accountants in England and Wales.
Corporate Governance Statement continued Corporate Governance Statement continued
eg solutions plc
annual report and accounts 2008
18
The Audit Committee receives reports from external
Auditors on a regular basis and from Executive Directors
of the Company. During the period the Audit Committee
has reviewed the effectiveness of the system of internal
control as described above. The Board receives periodic
reports from all Committees.
There are no other significant issues disclosed in the
annual report and accounts for the year ended
31 January 2008 and up to the date of approval of the
annual report and accounts that have required the Board
to deal with any related material internal control issues.
The Directors confirm that the Board has reviewed the
effectiveness of the system of internal control as
described during the period.
Relations With Shareholders
The Group values its dialogue with both institutional and
private investors. Effective two-way communication with
fund managers, institutional investors and analysts is
actively pursued and this encompasses issues such as
performance, policy and strategy. All key individuals have
made themselves available for meetings with investors
on issues relating to the Group’s strategy and
governance. During the year the Directors held meetings
with institutional investors covering the majority of
shareholders in the Group.
Private investors are encouraged to participate in the
Annual General Meeting at which the Chairman presents
a review of the results and comments on current
business activity. The Chairmen of the Audit,
Remuneration and Nomination Committees will be
available at the Annual General Meeting to answer any
shareholder questions.
This year’s Annual General Meeting will be held on
17 June 2008. The notice of the Annual General Meeting
may be found on page 53. eg solutions plc
annual report and accounts 2008
19
www.eguk.co.uk
Remuneration Committee
The Group has established a Remuneration Committee
which is constituted in accordance with the
recommendations of the Combined Code. The members
of the Committee are A McRae who is an independent
Non-executive Director and the Committee is chaired by
RP Baker-Bates.
In determining the Directors’ remuneration for the year,
the Committee consulted the Chief Executive Officer, EA
Gooch, about its proposals.
Remuneration Policy
The policy of the Committee is to reward Executive
Directors in line with the current remuneration of
Directors in comparable businesses in order to recruit,
motivate and retain high quality Executives within a
competitive marketplace.
There are four main elements of the remuneration
packages for Executive Directors and Senior
Management:
basic annual salary (including Directors’ fees) and
benefits;
annual bonus payments;
share option incentives; and
pension arrangements.
Basic Salary
Basic salary is reviewed at the discretion of the
Remuneration Committee. In addition to basic salary, the
Executive Directors also receive certain benefits in kind,
principally a car allowance, private medical insurance and
life and critical illness insurance.
Annual Bonus
The Committee establishes the objectives which must be
met for each financial year if a cash bonus is to be paid.
The purpose of the bonus is to reward Executive
Directors and other senior employees for achieving above
average performance which also benefits shareholders.
Share Options
Certain Executive Directors have options granted to them
under the terms of the Share Option Scheme which is
open to all employees. Under the Scheme, options are
allocated at the discretion of the Remuneration
Committee and are subject to performance criteria
relating to increases in earnings per share. Share options
granted to Directors who have resigned during the year
are returned to the pool for further distribution.
Pension Arrangements
Executive Directors are members of defined contribution
pension schemes and a contribution of 10% of basic
annual salary is paid by the Group. No other payments to
Directors are pensionable.
Directors’ Contracts
It is the Group’s policy that Executive Directors should
have contracts with an indefinite term providing for a
maximum of six months’ notice. In the event of early
termination, the Directors’ contracts provide for
compensation up to a maximum of basic salary for the
notice period.
Non-executive Directors
The fees of Non-executive Directors are determined by
the Board as a whole, having regard to the commitment
of time required and the level of fees in similar
companies. Non-executive Directors are not eligible to
participate in the Group’s pension scheme.
Non-executive Directors are employed on contracts with
an indefinite term providing for a maximum of one year’s
notice for the Chairman and three months’ notice for the
other Non-executives.
Directors’ Remuneration Report Directors’ Remuneration Report continued
eg solutions plc
annual report and accounts 2008
20
Aggregate Directors’ Remuneration
2008 2007
£’000 £’000
Emoluments 429 473
Money purchase pension contributions 23 59
Total 452 532
Total Total
Salary Benefits Bonuses 2008 2007
£’000 £’000 £’000 £’000 £’000
RP Baker-Bates 30 30 30
EA Gooch 185 26 211 212
P Bird (appointed
3 September 2007) 42 5 15 62
A McRae 15 15 13
M Wilton (resigned
31 August 2007) 100 100
J Pyke (resigned
23 November 2007) 11 11 62
DJ Blain (resigned
31 January 2007) 145
P Thomas (resigned
3 October 2006) 10
PE Maguire (resigned
21 December 2005) 1
383 31 15 429 473
The pension contributions payable by the Group in respect of each Director during the year were:
2008 2007
£’000 £’000
RP Baker-Bates — —
EA Gooch 19 26
P Bird 4 —
A McRae — —
J Pyke — —
DJ Blain (resigned 31 January 2007) 25
PE Maguire (resigned 21 December 2005) 8
23 59
Approval
This report was approved by the Board of Directors on 18 March 2008 and signed on its behalf by:
P Bird
Secretary
18 March 2008
This report was approved by the Board of Directors on 18 March 2008 and signed on its behalf by:
P Bird eg solutions plc
annual report and accounts 2008
21
www.eguk.co.uk
The Directors are responsible for preparing the Annual
Report and the financial statements in accordance with
applicable law and International Financial Reporting
Standards.
Company law requires the Directors to prepare financial
statements for each financial year which give a true and
fair view, in accordance with International Financial
Reporting Standards, of the state of affairs of the Group
and of the profit and loss of the Group for that period. In
preparing those financial statements, the Directors are
required to:
1. select suitable accounting policies and then apply
them consistently;
2. make judgements and estimates that are reasonable
and prudent;
3. state whether applicable Accounting Standards have
been followed, subject to any material departures
disclosed and explained in the financial statements;
and
4. prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the
Group will continue in business.
The Directors are responsible for keeping proper
accounting records which disclose with reasonable
accuracy at any time the financial position of the Group
and to enable them to ensure that the financial
statements comply with the requirements of the
Companies Act 2006. They are also responsible for
safeguarding the assets of the Group and hence for
taking reasonable steps for the prevention and detection
of fraud and other irregularities.
They are responsible for ensuring that the annual report
includes information required by the AIM Rules of the
Financial Services Authority.
The Directors are also responsible for the maintenance
and integrity of the corporate and financial information of
the information included on the eg solutions plc website.
The work carried out by the Auditors does not involve
consideration of these matters and, accordingly, the
Auditors accept no responsibility for any changes that
may have occurred to the information contained in the
financial statements since they were initially presented
on the website.
Legislation in the United Kingdom governing the
preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Going Concern
The Directors confirm that they are satisfied that the
Group has adequate resources to continue in business for
the foreseeable future. For this reason, they continue to
adopt the going concern basis in preparing the financial
statements.
Directors’ Responsibilities in the
Preparation of the Financial Statements Independent Auditors’ Report
to the Members of eg solutions plc
eg solutions plc
annual report and accounts 2008
22
We have audited the Group and parent Company financial
statements on pages 24 to 52.
This report is made solely to the Company’s members, as
a body, in accordance with section 235 of the Companies
Act 1985. Our audit work has been undertaken so that
we might state to the Company’s members those matters
we are required to state to them in an Auditors’ report
and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to
anyone other than the Company and the Company’s
members as a body for our audit work, for this report, or
for the opinions we have formed.
Respective Responsibilities of Directors and
Auditors
The Directors’ responsibilities for preparing the Annual
Report and the financial statements in accordance with
applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union
(“EU”) are set out in the Statement of Directors’
Responsibilities.
Our responsibility is to audit the financial statements in
accordance with relevant legal and regulatory
requirements and International Standards on Auditing
(UK and Ireland).
We report to you our opinion as to whether the financial
statements give a true and fair view and are properly
prepared in accordance with the Companies Act 1985.
We also report to you if, whether in our opinion, the
information given in the Directors’ Report is consistent
with the financial statements.
In addition, we report to you if, in our opinion, the
Company has not kept proper accounting records, if we
have not received all the information and explanations we
require for our audit, or if information specified by law
regarding Directors’ remuneration and other transactions
is not disclosed.
We read other information contained in the Annual
Report, and consider whether it is consistent with the
audited financial statements. This other information
comprises the Chairman’s Statement, Chief Executive
Officer’s Review, the Financial Review, the Directors’
Report, the Corporate Governance Statement and the
Directors’ Remuneration Report. We consider the
implications for our report if we become aware of any
apparent misstatements or material inconsistencies with
the financial statements. Our responsibilities do not
extend to any other information.
Basis of Audit Opinion
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) issued by the
Auditing Practices Board. An audit includes examination,
on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an
assessment of the significant estimates and judgements
made by the Directors in the preparation of the financial
statements, and of whether the accounting policies are
appropriate to the Company’s circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all
the information and explanations which we considered
necessary in order to provide us with sufficient evidence
to give reasonable assurance that the financial
statements are free from material misstatement, whether
caused by fraud or other irregularity or error. In forming
our opinion we also evaluated the overall adequacy of the
presentation of information in the financial statements. eg solutions plc
annual report and accounts 2008
23
www.eguk.co.uk
Opinion
In our opinion:
the Group financial statements give a true and fair
view, in accordance with IFRSs as adopted by the
European Union, as applied in accordance with the
provisions of the Companies Act 1985, of the state of
the Group’s affairs as at 31 January 2008 and of its
loss for the year then ended;
the parent Company financial statements give a true
and fair view, in accordance with IFRSs as adopted by
the European Union, as applied in accordance with
the provisions of the Companies Act 1985, of the
state of the parent Company’s affairs as at
31 January 2008;
the financial statements have been properly prepared
in accordance with the Companies Act 1985; and
the information given in the Directors’ Report is
consistent with the financial statements.
Baker Tilly UK Audit LLP
Registered Auditor and Chartered Accountants
Festival Way
Stoke-on-Trent
Staffordshire
ST1 5BB
9 May 2008
Independent Auditors’ Report continued Consolidated Balance Sheet
at 31 January 2008
At 31 January At 31 January
2008 2007
Notes £’000 £’000
Assets
Non-current assets
Development asset 10 911 319
Property, plant and equipment 12 117 132
1,028 451
Current assets
Trade and other receivables 15 849 520
Current tax receivable 157 99
Cash and cash equivalents 878 2,431
1,884 3,050
Total assets 2,912 3,501
Liabilities
Current liabilities
Trade and other payables 17 969 970
969 970
Non-current liabilities
Deferred tax liabilities 19 82 92
82 92
Total liabilities 1,051 1,062
Net assets 1,861 2,439
Equity
Share capital 20 143 143
Share premium 21 2,910 2,910
Share-based payment reserve 21 191 123
Own shares held (1,000) (1,000)
Retained earnings 23 (383) 263
Total equity 1,861 2,439
The financial statements on pages 24 to 52 were approved by the Board of Directors and authorised for issue on
18 March 2008 and are signed on its behalf by:
EA Gooch
Chief Executive Officer
eg solutions plc
annual report and accounts 2008
24 eg solutions plc
annual report and accounts 2008
25
www.eguk.co.uk
Company Balance Sheet
at 31 January 2008
At 31 January At 31 January
2008 2007
Notes £’000 £’000
Assets
Non-current assets
Development asset 11 911 319
Property, plant and equipment 13 87 132
998 451
Current assets
Trade and other receivables 16 1,310 520
Current tax receivable 157 99
Cash and cash equivalents 725 2,431
2,192 3,050
Total assets 3,190 3,501
Liabilities
Current liabilities
Trade and other payables 18 1,049 970
1,049 970
Non-current liabilities
Deferred tax liabilities 19 140 92
140 92
Total liabilities 1,189 1,062
Net assets 2,001 2,439
Equity
Share capital 20 143 143
Share premium 22 2,910 2,910
Share-based payment reserve 22 191 123
Own shares held (1,000) (1,000)
Retained earnings 24 (243) 263
Total equity 2,001 2,439 eg solutions plc
annual report and accounts 2008
26
Consolidated Income Statement
for the year ended 31 January 2008
Year ended Year ended
31 January 31 January
2008 2007
Notes £’000 £’000
Revenue 1 4,123 5,472
Cost of sales (660) (904)
Research and development expenditure (647) (545)
Amortisation of development expenditure (124) (35)
Total cost of sales (1,431) (1,484)
Gross profit 2,692 3,988
Administrative expenses (3,589) (4,142)
Loss from operations 3 (897) (154)
Investment income 6 82 113
Loss before tax (815) (41)
Income tax expense 7 159 47
Loss after tax (656) 6
Earnings/(loss) per share — —
From continuing operations
Basic 9 (5.0p) 0.0p
Diluted 9 (5.0p) 0.0p
Consolidated Statement of
Recognised Income and Expense
for the year ended 31 January 2008
2008 2007
£’000 £’000
Currency translation differences 10 —
Net income for the year directly recognised in equity 10 —
Profit for the year (656) 6
Total recognised income for the year (646) 6
Attributable to:
Equity holders of the parent (646) 6
(646) 6 Consolidated Cash Flow Statement
for the year ended 31 January 2008
Year ended Year ended
31 January 31 January
2008 2007
Notes £’000 £’000
Operating activities
Cash generated from operations 26 (940) 1,094
Income taxes received/(paid) 91 (225)
Net cash from/(used in) operating activities (849) 869
Investing activities
Purchases of other intangible assets (716) (283)
Purchases of property, plant and equipment (70) (80)
Interest received 82 113
Net cash used in investing activities (704) (250)
Financing activities
Dividends paid — (223)
Net cash (used in)/from financing activities — (223)
Net increase/(decrease) in cash and cash equivalents (1,553) 396
Cash and cash equivalents at beginning of year 2,431 2,035
Cash and cash equivalents at end of year
Bank balances and cash 878 2,431
eg solutions plc
annual report and accounts 2008
27
www.eguk.co.uk Company Cash Flow Statement
for the year ended 31 January 2008
Year ended Year ended
31 January 31 January
2008 2007
Notes £’000 £’000
Operating activities
Cash generated from operations 27 (1,139) 1,094
Income taxes received/(paid) 91 (225)
Net cash from/(used in) operating activities (1,048) 869
Investing activities
Purchases of other intangible assets (716) (283)
Purchases of property, plant and equipment (24) (80)
Interest received 82 113
Net cash used in investing activities (658) (250)
Financing activities
Dividends paid — (223)
Net cash (used in)/from financing activities — (223)
Net increase/(decrease) in cash and cash equivalents (1,706) 396
Cash and cash equivalents at beginning of year 2,431 2,035
Cash and cash equivalents at end of year
Bank balances and cash 725 2,431
eg solutions plc
annual report and accounts 2008
28 Consolidated Financial Statements
Summary of Significant Accounting Policies
The financial statements have been prepared in accordance with International Financial Reporting Standards as
endorsed by the EU (“IFRS”) for the first time.
This is the first year that the Group has presented its financial statements under IFRS. The following disclosures
are required in the year of transition. The last financial statements under UK GAAP were for the year ended
31 January 2007 and the date of transition to IFRS was therefore 1 February 2006.
The financial statements have been prepared on the historical cost basis, except for the revaluation of land and
buildings and certain financial instruments. The principal accounting policies adopted are set out below.
Basis of Consolidation
The consolidated financial statements of the Group incorporate the financial statements of the Group and
enterprises controlled by the Group (its subsidiaries) made up to 31 January each year.
Subsidiaries
Subsidiaries are entities over which the Group has the power to govern the financial and operating policies to
obtain economic benefit to the Group. Subsidiaries are fully consolidated from the effective date of acquisition or
up to the effective date of disposal, as appropriate.
All intra-Group transactions, balances, and unrealised gains on transactions between Group companies are
eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an
impairment of the asset transferred.
Segmental Reporting
The Group has elected to segment its operations on the basis of ‘geographical segmentation of operations’. The
Group has determined that this is the most appropriate segmental split to reflect the nature of the Group’s
operations. The Group has two distinct companies operating in different geographical areas with different
economic and political conditions and a different maturity of client and client requirements. These are:
EGUK — United Kingdom
EGSA — South Africa
Tangible Fixed Assets and Depreciation
Tangible fixed assets are stated at cost or valuation, net of depreciation and any provision for impairment.
Depreciation is provided on all tangible fixed assets at rates calculated to write each asset down to its estimated
residual value over its expected useful life, as follows:
Computer Equipment — 50% straight-line
Office Equipment — 15% reducing balance
Fixtures and Fittings — 15% reducing balance
Motor Vehicles — 25% reducing balance.
Impairment of tangible and intangible assets
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to
determine whether there is any indication that those assets have suffered an impairment loss. If any such
indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the
impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets,
the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An
intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an
indication that the asset may be impaired.
eg solutions plc
annual report and accounts 2008
29
www.eguk.co.uk Consolidated Financial Statements
Summary of Significant Accounting Policies continued
Retirement Benefits
The Company operates a defined Contribution Pension Scheme. The assets of the scheme are held separately
from those of the Company in an independently administered fund. The amount charged to the profit and loss
account in respect of pension costs and other post-retirement benefits is the contributions payable in the year.
Differences between contributions payable in the year and contributions actually paid are shown as either
accruals or prepayments in the balance sheet.
Foreign Currencies
Transactions in currencies other than sterling, the presentational and functional currency of the Company, are
recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date,
monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing
on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in
foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains
and losses arising on retranslation are included in the income statement for the period, except for exchange
differences on non-monetary assets and liabilities, which are recognised directly in equity, where the changes in
fair value are recognised directly in equity.
On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates
prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for
the period. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation
reserve. Such translation differences are recognised as income or as expenses in the period in which the
operation is disposed of.
Taxation
The tax expense represents the sum of the current tax expense and deferred tax expense.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported
in the income statement because it excludes items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is
calculated by using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax bases used in the computation of
taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are
recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible temporary differences can be utilised.
Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of
goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a
transaction which affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and
associates, and interests in joint ventures, except where the Group is able to control the reversal of the
temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or
the liability is settled based upon tax rates that have been enacted or substantively enacted by the balance sheet
date. Deferred tax is charged or credited in the income statement, except when it relates to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in equity.
eg solutions plc
annual report and accounts 2008
30 Cash and Cash Equivalents
Cash and cash equivalents comprise cash in hand and at bank and other short-term deposits held by the Group
with maturities of less than three months.
Share-Based Payments
The Group has applied the requirements of IFRS 2 Share-based Payments. In accordance with the transitional
provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were
unvested as of 1 February 2006.
The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based
payments are measured at fair value at the date of grant. The fair value determined at the grant date of equity-
settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s
estimate of shares that will eventually vest. Fair value is measured by use of the Black–Scholes model. The
expected life used in the model has been adjusted, based on management’s best estimate, for the effect of non-
transferability, exercise restrictions, and behavioural considerations.
Employee Share Ownership Plans
The Company operates an ESOP trust and has de facto control of the shares held by the trust and bears their
benefits and risks. The Group records certain assets and liabilities of the trust as its own. Finance costs and
administrative expenses are charged as they accrue.
Financial Risk Management Objectives and Policies
The Group’s activities will expose the Group to a number of risks including market risk (foreign currency risk,
price risk and interest rate risk), credit risk and liquidity risk. The Group manages these risks through an effective
risk management programme and appropriate use of derivatives. Exposures to financial risks are monitored by
Group Treasury and Financial Operations management and they are required to produce a monthly risk report
comprising all risk and an indication of the business impact of those risks.
The risk reports are provided to the Board of Directors in advance of the monthly Board meetings and are
discussed by the Board to ensure that the risk mitigation procedures are compliant with the Group policy and that
any new risks are appropriately managed.
Price Risk
The Group’s products are tailored to realise benefits for customers and to meet individual requirements. Prices
are negotiated with each customer on the basis of their specification of the product.
Credit Risk
The Group has focused on selling to a ‘blue chip’ customer base thereby minimising the risk of incurring
bad debts.
Liquidity
At the year end the Group had £878k in net cash balances. The policy is to ensure that operating profits are
turned into cash balances during the year.
Cash Flow Risk
The Group’s policy is to remain broadly cash neutral over the coming financial year.
eg solutions plc
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31
www.eguk.co.uk
Consolidated Financial Statements
Summary of Significant Accounting Policies continued Consolidated Financial Statements
Summary of Significant Accounting Policies continued
Foreign Currency Risk
The Group is exposed to minimal foreign currency risk through transactions with overseas customers.
Leases
Leases in which a significant portion of the risk and rewards of ownership are retained by the lessor are classified
as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are
charged to the income statement on a straight-line basis over the period of the lease.
New Standards, Interpretations and Amendments to Published Standards
Effective for the Group for the financial year beginning 1 February 2008
IFRIC 11 ‘IFRS 2 — Group and Treasury Share Transactions’
Effective for the Group for future financial years
Amendment to IAS 23 ‘Borrowing Costs’
IFRS 8 ‘Operating Segments’
IFRIC 12 ‘Service Concession Arrangements’
Revision of IAS 1 ‘Presentation of Financial Statements’
Amendments to IFRS 3 ‘Business Combinations’
Amendments to IAS 27 ‘Consolidated and separate financial statements’
Amendments to IFRS 2 ‘Share Based Payment’
Amendments to IAS 32 ‘Financial Instruments’
The Group has considered the above new standards, interpretations and amendments to published standards
that are not yet effective and concluded they are either not relevant to the Group or that they would not have
significant impact on the Group’s financial statements, apart from additional disclosures.
Critical Accounting Estimates and Judgements
Revenue Recognition
Maintenance Contracts
Income in respect of maintenance contracts is invoiced on an annual basis and recognised as earned.
Long-Term Contracts
Long-term contracts are assessed on a contract by contract basis and reflected in the Income Statement by
recording revenue and related costs as contract activity progresses.
Revenue is ascertained in a manner appropriate to the stage of completion of the contract, and credit taken for
profit earned to date when the outcome of the contract can be assessed with reasonable certainty. Amounts
recoverable on long-term contracts, which are included in debtors, are stated at the net sales value of the work
done less amounts received as progress payments on account. Excess progress payments are included in
creditors as payments on account. Cumulative costs incurred net of amounts transferred to cost of sales, less
provision for contingencies and anticipated future losses on contracts are included as long-term contract balances
in stock.
eg solutions plc
annual report and accounts 2008
32 Development Assets
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
An internally generated intangible asset arising from the Group’s software development is recognised only if all of
the following conditions are met:
an asset is created that can be identified (such as software and new processes);
it is probable that the asset created will generate future economic benefits;
the development cost of the asset can be measured reliably;
the product or process is technically and commercially feasible; and
sufficient resources are available to complete the development and to either sell or use the asset.
Where no internally generated intangible asset can be recognised, development expenditure is recognised as an
expense in the period in which it is incurred.
Internally generated intangible assets are amortised on a straight-line basis over their useful lives (6 years).
eg solutions plc
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33
www.eguk.co.uk
Consolidated Financial Statements
Summary of Significant Accounting Policies continued Notes to the Consolidated Financial Statements
for the year ended 31 January 2008
1 Revenue
An analysis of the Group’s revenue is as follows:
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
Continuing operations
United Kingdom 3,775 5,472
South Africa 348 —
4,123 5,472
2 Segmental Information
Business Segments
The Group has elected to segment its operations of the basis of ‘geographical segmentation of operations’.
The Group has determined that this is the most appropriate segmental split to reflect the nature of the
Group’s operations. The Group has two distinct companies operating in different geographical areas with
different economic and political conditions and a different maturity of client and client requirements.
These are:
EGUK — United Kingdom
EGSA — South Africa
Segment information about these companies is presented below.
Income Statement UK SA Eliminations Consolidated
Revenue
External sales 3,775 348 — 4,123
Inter-segment sales 300 125 (425) —
Total revenue 4,075 473 (425) 4,123
Cost of sales
External cost of sales 1,361 70 — 1,431
Inter-segment cost of sales 71 314 (385) —
Total cost of sales 1,432 384 (385) 1,431
Gross profit 2,643 89 (40) 2,692
Administrative expenses 3,298 291 3,589
Inter-segment administrative expenses 34 — (34) —
Operating loss (689) (202) (6) (897)
Finance income 82 —— 82
Loss before tax (607) (202) (6) (815)
Income tax expense 101 58 — 159
Loss after tax (506) (144) (6) (656)
eg solutions plc
annual report and accounts 2008
34 2 Segmental Information continued
Balance Sheet UK SA Eliminations Consolidated
Non-current assets
Property, plant and equipment 87 30 — 117
Intangible assets 911 —— 911
Total non-current assets 998 30 — 1,028
Current assets
Trade and other receivables 1,310 138 (599) 849
Current tax receivable 157 —— 157
Cash and cash equivalents 725 153 — 878
Total current assets 2,192 291 (599) 1,884
Total assets 3,190 321 (599) 2,912
Equity
Issued capital 143 —— 143
Share premium 2,910 —— 2,910
Other reserves 191 —— 191
Own shares held (1,000) —— (1,000)
Retained earnings (243) (134) (6) (383)
Shareholders’ Funds 2,001 (134) (6) 1,861
Non-current liabilities
Deferred tax 140 (58) — 82
Total non-current liabilities 140 (58) — 82
Current liabilities
Trade and other payables 1,049 513 (593) 969
Total current liabilities 1,049 513 (593) 969
Total liabilities 1,189 455 (593) 1,051
Total liabilities and equity 3,190 321 (599) 2,912
Based on risks and returns, the Directors consider that the secondary reporting format is by business
segment. The Directors consider that there is only one business segment being IT and Software Support
Services. Therefore, the disclosures for the secondary segment have already been given in these financial
statements.
3 Loss from operations
Loss from operations has been arrived at after charging/(crediting):
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
Net foreign exchange losses/(gains) 9 —
Research and development costs 647 545
Amortisation of development expenditure 124 35
Depreciation on owned assets 85 89
Staff costs (see note 5) 3,122 3,070
Auditors’ remuneration for audit services (see note 4) 33 16
eg solutions plc
annual report and accounts 2008
35
www.eguk.co.uk
Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
4 Amounts Payable to Baker Tilly and their Associates in Respect of both Audit and Non-Audit
Services
2008 2007
£’000 £’000
Audit services:
Baker Tilly
Statutory audit of parent accounts — 14
Tax services — 2
Baker Tilly UK Audit LLP
Statutory audit of parent and consolidated accounts 18 —
Other services:
IFRS audit re 2007 statements 2 —
Baker Tilly Tax & Advisory Services LLP
Interim tax advice 1 —
Directors tax 1 —
Interim tax advice 2 —
Share options advice 1 —
Tax services 3 —
Charles Orbach & Co — South Africa
Statutory audit of subsidiary accounts 5 —
33 16
5 Staff Costs
The average monthly number of employees (including Executive Directors) for the year for each of the
Group’s principal divisions was as follows:
Year ended Year ended
31 January 31 January
2008 2007
Number Number
Implementation and training services 9 20
Software Support and Development 19 13
Sales and Marketing 8 7
Management and Administration 10 9
46 49
The aggregate remuneration for the above persons comprised:
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
Wages and salaries 2,752 2,658
Social security costs 234 316
Other pension costs 136 96
3,122 3,070
eg solutions plc
annual report and accounts 2008
36 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
5 Staff Costs continued
Aggregate Directors’ Remuneration
2008 2007
£’000 £’000
Emoluments 429 473
Money purchase pension contributions 23 59
Total 452 532
Total Total
Salary Benefits Bonuses 2008 2007
£’000 £’000 £’000 £’000 £’000
RP Baker-Bates 30 30 30
EA Gooch 185 26 211 212
P Bird (appointed
3 September 2007) 42 5 15 62
A McRae 15 15 13
M Wilton (resigned
31 August 2007) 100 100
J Pyke (resigned
23 November 2007) 11 11 62
DJ Blain — 145
P Thomas — 10
PE Maguire — 1
383 31 15 429 473
6 Investment Income
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
Interest on bank deposits 82 113
7 Taxation
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
Current tax
Domestic (156) (113)
Adjustments in respect of prior periods 7 —
(149) (113)
Deferred tax
Current tax 16 72
Adjustments in respect of prior periods (26) (6)
Tax attributable to the Group and its subsidiaries (159) (47)
Domestic income tax is calculated at 30% (2007: 30%) of the estimated assessable profit for the year.
Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
eg solutions plc
annual report and accounts 2008
37
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
7 Taxation continued
Year ended Year ended
31 January 31 January
2008 2007
£’000 £’000
The charge for the year can be reconciled to the profit per
the income statement as follows
Loss before tax (815) (41)
Tax at the domestic income tax rate 30% (2007: 30%) (245) (12)
Tax effects of expenses that are not deductible in determining taxable profit 67 58
Other timing differences (3) 1
Research and development (98) (66)
Marginal rate of tax 137 (8)
Prior year adjustments (19) (20)
Effect of different tax rates of subsidiaries operating in other jurisdictions 2 —
Tax credit (159) (47)
Effective tax rate for the year 20% 114%
8 Dividends
In respect of the current year, the Directors propose that no dividend will be paid to shareholders.
9 (Loss)/Earnings Per Share
Year ended Year ended
31 January 31 January
2008 2007
From continuing operations £’000 £’000
Basic (5.0p) 0.0p
Diluted (5.0p) 0.0p
EPS has been calculated using the following methodology:
Profit/(Loss) after Tax
Allotted issued and fully paid share less shares owned by the Employee Benefit Trust.
Diluted EPS has been calculated using the following methodology:
Profit/(Loss) after Tax
Allotted issued and fully paid shares less shares owned by the Employee Benefit Trust that are not currently
allocated as options.
As the Basic EPS is a negative value, the effects of anti-dilutive potential ordinary shares are ignored in
calculating diluted EPS.
eg solutions plc
annual report and accounts 2008
38 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
10 Development Assets Consolidated
Development
costs
£’000
Cost
At 1 February 2006 75
Acquisitions — internally developed 283
Disposals —
At 1 February 2007 358
Acquisitions — internally developed 716
Disposals —
At 31 January 2008 1,074
Amortisation and impairment
At 1 February 2006 4
Amortisation for the year 35
Disposals —
At 1 February 2007 39
Amortisation for the year 124
Disposals —
At 31 January 2008 163
Carrying amount
At 31 January 2008 911
At 31 January 2007 319
Amortisation of £124k (2007: £35k) has been charged to costs of sales.
11 Development Assets Company
Development
costs
£’000
Cost
At 1 February 2006 75
Acquisitions — internally developed 283
Disposals —
At 1 February 2007 358
Acquisitions — internally developed 716
Disposals —
At 31 January 2008 1,074
Amortisation and impairment
At 1 February 2006 4
Amortisation for the year 35
Disposals —
At 1 February 2007 39
Amortisation for the year 124
Disposals —
At 31 January 2008 163
Carrying amount
At 31 January 2008 911
At 31 January 2007 319
Amortisation of £124k (2007: £35k) has been charged to costs of sales.
eg solutions plc
annual report and accounts 2008
39
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
12 Property, Plant and Equipment Consolidated
Computer and Fixtures and
office equipment fittings Motor vehicles Total
£’000 £’000 £’000 £’000
Cost or valuation
At 1 February 2006 306 96 6 408
Additions 68 12 — 80
Disposals —— ——
At 1 February 2007 374 108 6 488
Additions 70 —— 70
Disposals —— ——
At 31 January 2008 444 108 6 558
Accumulated depreciation
At 1 February 2006 211 52 4 267
Depreciation charge for the year 81 71 89
Disposals —— ——
At 1 February 2007 292 59 5 356
Depreciation charge for the year 78 7— 85
Disposals —— ——
At 31 January 2008 370 66 5 441
Net book value
At 31 January 2008 74 42 1 117
At 31 January 2007 82 49 1 132
Depreciation expense of £85k (2007: £89k) has been charged to administration expenses.
13 Property, Plant and Equipment Company
Computer and Fixtures and
office equipment fittings Motor vehicles Total
£’000 £’000 £’000 £’000
Cost or valuation
At 1 February 2006 306 96 6 408
Additions 68 12 — 80
Disposals —— ——
At 1 February 2007 374 108 6 488
Additions 24 —— 24
Disposals —— ——
At 31 January 2008 398 108 6 512
Accumulated depreciation
At 1 February 2007 211 52 4 267
Depreciation charge for the year 81 71 89
Disposals —— ——
At 1 February 2007 292 59 5 356
Depreciation charge for the year 62 7— 69
Disposals —— ——
At 31 January 2008 354 66 5 425
Net book value
At 31 January 2008 44 42 1 87
At 31 January 2007 82 49 1 132
Depreciation expense of £69k (2007: £89k) has been charged to administration expenses.
eg solutions plc
annual report and accounts 2008
40 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
14 Subsidiaries
Details of the Group’s subsidiaries at 31 January 2008 are as follows:
Place of Proportion of Proportion
incorporation ownership of voting
(or registration) interest power held Principal
Name of subsidiary and operation %% activity
eg International Ltd UK 100 100 Dormant
eg USA Inc USA 100 100 Dormant
eg Operations Management South Africa 100 100 Consultancy
(Pty) Ltd and Software
The only cost in relation to dormant companies is an annual filing charge paid through the parent Company.
15 Other Financial Assets Consolidated
Trade and other receivables are as follows:
2008 2007
£’000 £’000
Trade debtors 614 293
Other debtors 29 15
Prepayments and deferred income 206 212
849 520
At 31 January 2008 all trade receivables were denominated in GBP.
The Directors consider that the carrying amount of trade and other receivables approximates to their
fair value.
16 Other Financial Assets Company
Trade and other receivables are as follows:
2008 2007
£’000 £’000
Trade debtors 614 293
Inter-Company debtor 479 —
Other debtors 25 15
Prepayments and deferred income 192 212
1,310 520
At 31 January 2008 all trade receivables were denominated in GBP.
The Directors consider that the carrying amount of trade and other receivables approximates to their
fair value.
Other Debtors include £24k (2007: £nil) due from EA Gooch. The maximum amount outstanding during
the year was £24k (2007: £34k).
eg solutions plc
annual report and accounts 2008
41
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
17 Other Financial Liabilities Consolidated
Trade and other payables are as follows:
2008 2007
£’000 £’000
Payments on account 195 162
Trade creditors 305 321
Other tax and social security 193 206
Accruals and deferred income 276 281
969 970
Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs.
The Directors consider that the carrying amount of trade payables approximates to their fair value.
18 Other Financial Liabilities Company
Trade and other payables are as follows:
2008 2007
£’000 £’000
Payments on account 193 162
Trade creditors 280 321
Inter-Company creditor 119 —
Other tax and social security 190 206
Accruals and deferred income 267 281
1,049 970
Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs.
The Directors consider that the carrying amount of trade payables approximates to their fair value.
19 Deferred Tax
2008 2007
Group £’000 £’000
Analysis for financial reporting purposes
Deferred tax liabilities 248 92
Deferred tax assets (166) —
Net position at 31 December 82 92
The movement in the year in the Group’s net deferred tax position was as follows:
2008 2007
£’000 £’000
At 1 January 92 26
Charge to income for the year 16 72
Adjustment in respect of prior period (26) (6)
At 31 December 82 92
eg solutions plc
annual report and accounts 2008
42 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
19 Deferred Tax continued
The following are the major deferred tax liabilities and assets recognised by the Group and the movements
thereon during the period:
Accelerated tax
depreciation
Deferred tax liabilities £’000
At 1 February 2006 26
Charge to income for the year 72
Adjustment in respect of prior period (6)
At 31 January 2007 92
Charge to income for the year 158
Adjustment in respect of prior period (2)
At 31 January 2008 248
Share-based
payments Tax losses Total
Deferred tax assets £’000 £’000 £’000
Charge to income for the year —— —
At 31 January 2007 —— —
Charge to income for the year 20 (162) (142)
Adjustment in respect of prior period (24) — (24)
At 31 January 2008 (4) (162) (166)
At the balance sheet date, the Group has unused tax losses of £578,000 (2007: £nil) available for offset
against future profits. A deferred tax asset of £162,000 (2007: £nil) has been recognised in respect of
such losses.
2008 2007
Company £’000 £’000
Analysis for financial reporting purposes
Deferred tax liabilities 248 92
Deferred tax assets (108) —
Net position at 31 January 140 92
The movement in the year in the Company’s net deferred tax position was as follows:
2008 2007
£’000 £’000
At 1 February 92 26
Charge to income for the year 74 72
Adjustment in respect of prior period (26) (6)
At 31 January 140 92
eg solutions plc
annual report and accounts 2008
43
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
19 Deferred Tax continued
The following are the major deferred tax liabilities and assets recognised by the Company and the
movements thereon during the period:
Accelerated tax
depreciation
Deferred tax liabilities £’000
At 1 February 2006 26
Charge to income for the year 72
Adjustment in respect of prior period (6)
At 31 January 2007 92
Charge to income for the year 158
Adjustment in respect of prior period (2)
At 31 January 2008 248
Share-based
payments Tax losses Total
Deferred tax assets £’000 £’000 £’000
At 1 February 2006 —— —
Charge to income for the year —— —
At 31 January 2007 —— —
Charge to income for the year 20 (104) (84)
Adjustment in respect of prior period (24) — (24)
At 31 January 2008 (4) (104) (108)
At the balance sheet date, the Company has unused tax losses of £369,000 (2007: £nil) available for
offset against future profits. A deferred tax assets of £103,000 (2007: £nil) has been recognised in
respect of such losses.
20 Share Capital
2008 2007
£’000 £’000
Authorised
50,000,000 ordinary shares of 1p each 500 500
Allotted issued and fully paid
14,293,847 ordinary shares of 1p each 143 143
There were no movements in the Share Capital of the Group in either the 2008 or 2007 reporting
period.
The Group has one class of ordinary shares which carry no right to fixed income. During the year ended
31 January 2008, the Group issued nil shares (2007: 45,000) under the Group’s share option plan
(note 25).
eg solutions plc
annual report and accounts 2008
44 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
21 Capital Reserves Consolidated
Share Share-based
premium payment reserve Total
£’000 £’000 £’000
Balance at 1 February 2007 2,910 123 3,033
Charge for the year — 68 68
Balance at 31 January 2008 2,910 191 3,101
22 Capital Reserves Company
Share Share-based
premium payment reserve Total
£’000 £’000 £’000
Balance at 1 February 2007 2,910 123 3,033
Charge for the year — 68 68
Balance at 31 January 2008 2,910 191 3,101
23 Retained Earnings Consolidated
£’000
Balance at 1 February 2007 263
Dividends paid —
Net loss for the year (656)
Foreign exchange difference 10
Balance at 31 January 2008 (383)
24 Retained Earnings Company
£’000
Balance at 1 February 2007 263
Dividends paid —
Net loss for the year (506)
Balance at 31 January 2008 (243)
eg solutions plc
annual report and accounts 2008
45
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
25 Share-Based Payments
Equity-Settled Share Option Plan
The Group plan provides for a grant price equal to the average quoted market price of the Group shares
on the date of grant. The vesting period is generally three to four years. If options remain unexercised
after a period of ten years from the date of grant, the options expire.
Furthermore, options are forfeited if the employee leaves the Group before the options vest.
2008 2007
Weighted average Weighted average
exercise price exercise price
Options (£) Options (£)
Outstanding at 1 January 520,000 687,500
Granted during the year nil 45,000
Forfeited during the year nil nil
Exercised during the year nil nil
Expired during the year 100,000 212,500
Outstanding at 31 January 2008 420,000 £0.48 520,000 £0.57
Exercisable at 31 January 2008 nil
The options outstanding at 31 January 2008 had an exercise price between 3.5 pence and 161.5 pence,
and a weighted average remaining contractual life of six years.
The inputs into the Black–Scholes option pricing model are as follows:
2008 2007
Weighted average share price £0.47 £0.98
Weighted average exercise price £0.48 £0.57
Expected volatility 30% 52.8%
Expected life 4 years 4 years
Risk-free rate 4.5% 5.2%
Expected dividends 1.0% 1.0%
Expected volatility was determined by calculating the historical volatility of a comparable business, prior to
the period when the Company’s shares were listed on the AIM market, over the previous four years. The
expected life used in the model has been adjusted, based upon the management’s best estimate for the
effects of non-transferability, exercise restrictions, and behavioural considerations.
100,000 options were granted in prior periods and lapsed on by 31 January 2008:
20 April 2005: 40,000 options
14 July 2005: 24,000 options
19 December 2005: 6,000 options
3 April 2006: 15,000 options
28 July 2006: 5,000 options
eg solutions plc
annual report and accounts 2008
46 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
26 Reconciliation of Consolidated Profit Before Tax to Net Cash Generated by Operations
2008 2007
£’000 £’000
Profit/(loss) before tax (897) (154)
Adjustments for:
Depreciation of property, plant and equipment 85 89
Amortisation of intangible assets 124 35
Share option charge 68 51
Foreign exchange (gains)/losses 10 —
Operating cash flows before movements in working capital (610) 21
Decrease/(increase) in receivables (329) 990
Increase/(decrease) in payables (1) 83
Cash generated by operations (940) 1,094
27 Reconciliation of Company Profit Before Tax to Net Cash Generated by Operations
2008 2007
£’000 £’000
Profit/(loss) before tax (689) (154)
Adjustments for:
Depreciation of property, plant and equipment 69 89
Amortisation of intangible assets 124 35
Share option charge 68 51
Operating cash flows before movements in working capital (428) 21
Decrease/(increase) in receivables (790) 990
Increase/(decrease) in payables 79 83
Cash generated by operations (1,139) 1,094
28 Related Party Transactions
Trading transactions
During the year, Group companies entered into the following transactions, for the purchase of goods and
services, with related parties who are not members of the Group
2008 2007
£’000 £’000
Related parties 15 5
The above value relates to a single party related to the Group due to the owner/manager of the business
being a close family member (as defined under IAS 24) of the Chief Executive of the Group. In accordance
with AIM Rules, this disclosure has been made as the value of purchases exceeds 0.25% of total
purchases.
Other Debtors include £24k (2007: £nil) due from EA Gooch. The maximum amount outstanding during
the year was £24k (2007: £34k).
The Group purchased the associated services under its normal terms of trade and payment was made
under normal trading arrangements.
eg solutions plc
annual report and accounts 2008
47
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
29 Explanation of Transition to IFRS
This is the first year that the Group has presented its financial statements under IFRS. The following
disclosures are required in the year of transition. The last financial statements under UK GAAP were for the
year ended 31 January 2007 and the date of transition to IFRS was therefore 1 February 2007. The Group
prepared its opening balance sheet at that date.
The main changes from preparing the results under IFRS rather than UK GAAP that affect the Group loss and
net asset position relate to the treatment of research and development expenditure.
Research and development expenditure was previously expensed as incurred under UK GAAP.
Under IFRS, development expenditure that results in new or substantially improved products or processes,
where it is deemed probable that recovery will take place, are capitalised and amortised on a straight-line
basis over the products expected useful economic life.
The adoption of IFRS does not impact the amount of cash previously disclosed under UK GAAP in any of the
periods of account.
Exemptions from full retrospective application elected by the Company
Property, Plant and Equipment
The Company has elected to adopt the UK GAAP accounting values as the deemed cost for IFRS.
Exceptions from full retrospective application followed by the Company
Estimates
All estimates made by the Company in preparing the Financial Statements under IFRS as at 1 February 2006
are consistent with estimates made under UK GAAP at that date.
Reconciliation of Net Income for the Year Ended 31 January 2007
IAS 38
Intangible
UK GAAP fixed assets IFRS
£’000 £’000 £’000
Revenue 5,472 5,472
Cost of sales (877) (877)
Development expenditure (833) (833)
Development expenditure capitalised 261 261
Amortisation of development expenditure (35) (35)
Total cost of sales (1,710) 226 (1,484)
Gross profit 3,762 226 3,988
Administrative expenses (4,164) (4,164)
Administrative expenses capitalised 22 22
Operating profit (402) 248 (154)
Finance income 113 113
Finance costs —
Profit before income tax (289) 248 (41)
Income tax (expense) 116 (69) 47
Profit for the financial year (173) 179 6
Earnings/(loss) per share — basic (1.3p) 0.0p
Fully diluted (1.3p) 0.0p
eg solutions plc
annual report and accounts 2008
48 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
29 Explanation of Transition to IFRS continued
Reconciliation of Equity from UK GAAP to IFRS at 1 February 2006
IAS 38
Intangible
UK GAAP fixed assets IFRS
£’000 £’000 £’000
Equity
Issued capital 143 143
Share premium 2,910 2,910
Other reserves 72 72
Own shares held (1,000) (1,000)
Retained earnings 431 49 480
Shareholders’ funds 2,556 49 2,605
eg solutions plc
annual report and accounts 2008
49
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
29 Explanation of Transition to IFRS continued
Reconciliation of Consolidated Balance Sheet from UK GAAP to IFRS at 31 January 2007
IAS 38
Intangible
UK GAAP fixed assets IFRS
£’000 £’000 £’000
Non-current assets 132 132
Property, plant and equipment 319 319
Intangible assets
Total non-current assets 132 319 451
Current assets
Trade and other receivables 619 619
Cash and cash equivalents 2,431 2,431
Total current assets 3,050 3,050
Total assets 3,182 319 3,501
Equity
Issued capital 143 143
Share premium 2,910 2,910
Other reserves 123 123
Own shares held (1,000) (1,000)
Retained earnings 35 228 263
Shareholders’ funds 2,211 228 2,439
Non-current liabilities
Deferred tax 1 91 92
Total non-current liabilities 1 91 92
Current liabilities
Trade and other payables 689 689
Deferred revenue 281 281
Current tax payable —— —
Total current liabilities 970 — 970
Total liabilities 971 91 1,062
Total liabilities and equity 3,182 319 3,501
eg solutions plc
annual report and accounts 2008
50 Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
29 Explanation of Transition to IFRS continued
Reconciliation of Profit Before Tax to Net Cash Generated by Operations UK GAAP to IFRS for the Year Ended
31 January 2007
IAS 38
Intangible
UK GAAP fixed assets IFRS
£’000 £’000 £’000
Loss before tax (402) 248 (154)
Adjustments for:
Depreciation of property, plant and equipment 89 — 89
Amortisation of intangible assets — 35 35
Share option charge 51 — 51
Operating cash flows before movements in working capital (262) 283 21
Decrease/(increase) in receivables 990 — 990
Increase/(decrease) in payables 83 — 83
Cash generated by operations 811 283 1,094
eg solutions plc
annual report and accounts 2008
51
www.eguk.co.uk Notes to the Consolidated Financial Statements continued
for the year ended 31 January 2008
29 Explanation of Transition to IFRS continued
Reconciliation of Cash Flow Statement UK GAAP to IFRS for the Year Ended 31 January 2007
IAS 38
Intangible
UK GAAP fixed assets IFRS
£’000 £’000 £’000
Cash generated by operations 811 283 1,094
Income taxes paid (225) — (225)
Net cash from/(used in) operating activities 586 283 869
Investing activities
Purchases of other intangible assets — (283) (283)
Purchases of property, plant and equipment (80) — (80)
Interest received 113 — 113
Net cash (used in)/from investing activities 33 (283) (250)
Financing activities
Dividends paid (223) — (223)
Net cash (used in)/from financing activities (223) — (223)
Net increase/(decrease) in cash and cash equivalents 396 — 396
Cash and cash equivalents at beginning of year 2,035 — 2,035
Cash and cash equivalents at end of year
Bank balances and cash 2,431 — 2,431
eg solutions plc
annual report and accounts 2008
52 Notice of Annual General Meeting
eg solutions plc (the “Company”)
To the holders of ordinary shares
Notice is hereby given that the Annual General Meeting of the Company will be held at the offices of TLT Solicitors,
Sea Containers House, 20 Upper Ground, Blackfriars Bridge, London, SE1 9LH on Tuesday 17 June 2008 at 10.30 am,
for the following purposes and, if thought fit, approve the following resolutions:
As Ordinary business
1. That the Directors’ Report and the annual report and accounts for the year ended 31 January 2008 be adopted and
approved.
2. That the Directors’ Remuneration Report for the year ended 31 January 2008 be approved.
3. That Baker Tilly UK Audit LLP be reappointed as Auditors and the Directors be authorised to fix their remuneration.
4. That Rodney Pennington Baker-Bates who retires by rotation be reappointed.
5. That Elizabeth Ann Gooch who retires by rotation be reappointed.
6. That Violetta Elizabeth Parylo who has been appointed since the last Annual General Meeting be reappointed.
As Ordinary resolution
7. That the Directors of the Company be generally and unconditionally authorised (without prejudice to all subsisting
authorities) pursuant to Section 80 of the Companies Act 1985 to exercise all the powers of the Company to allot all
the authorised but unissued shares (being 35,706,153 Ordinary Shares) in the capital of the Company (being
relevant securities within the meaning of Section 80(2) of the said Act), such authority to expire at the conclusion of
the next Annual General Meeting of the Company or, if earlier, on the expiry of 15 months from the passing of this
resolution, save that the Company may make offers or agreements before such expiry which would or might require
relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of
such an offer or agreement as if the authority conferred thereby had not expired.
As Special resolution
8. That, subject to and conditional upon the passing of resolution 7 above, the Directors of the Company be
empowered pursuant to Section 95 of the Companies Act 1985 to allot for cash equity securities (as defined for the
purposes of Section 89 to 96 of the said Act) pursuant to the authority conferred by resolution 7 above as if Section
89 (1) did not apply to any such allotment provided that the power conferred by this resolution shall be limited to
the allotment of equity securities (a) up to an aggregate nominal amount of £14,294 being approximately 10% of
the Company’s issued share capital or (b) in connection with an offer of equity securities by way of rights to the
holders of existing shares in proportion (as nearly as may be) to their respective holdings of ordinary shares on a
record date fixed by the Directors but subject to such exclusions or other arrangements as the Directors may
consider necessary or expedient to deal with any legal or practical problems under the laws or the requirements of
any regulatory body or any stock exchange in any territory or in connection with fractional entitlements or otherwise
howsoever, such power to expire at the conclusion of the next Annual General Meeting of the Company or, if earlier,
on the expiry of 15 months from the passing of this resolution, save that the Company may make offers or
agreements before such expiry which would or might require equity securities to be allotted after such expiry and
the Directors may allot equity securities in pursuance of such an offer or agreement as if the power conferred
thereby had not expired.
eg solutions plc
annual report and accounts 2008
53
www.eguk.co.uk Notice of Annual General Meeting continued
9. To authorise the Company generally and unconditionally, pursuant to Section 166 of the Companies Act 1985, to
make market purchases (as defined in Section 163 of the said Act) of up to 1,429,385 ordinary shares of 1p each in
the capital of the Company representing 10% of the Company’s issued share capital on such terms and in such
manner as the Directors of the Company may from time to time determine, provided that the amount paid for each
share (exclusive of expenses) shall not be more than 5% above the average of the middle market quotation for the
Company’s ordinary shares as derived from the Daily Official List of London Stock Exchange plc for the five business
days before the purchase is made, and in any event not less than 1p per ordinary share; and the authority herein
contained shall expire at the conclusion of the next annual general meeting of the Company or 15 months following
the passing of this Resolution, whichever is the first to occur, provided that the Company may, before such expiry,
make a contract to purchase its own shares which would or might be executed wholly or partly after such expiry, and
the Company may make a purchase of its own shares in pursuance of such contract as if the authority hereby
conferred had not expired.
By Order of the Board
P Bird
Secretary
9 May 2008
Registered Office:
The Roller Mill
Teddesley Road
Penkridge
Staffordshire
ST19 5BD
eg solutions plc
annual report and accounts 2008
54 Form of Proxy
eg solutions plc
annual report and accounts 2008
55
www.eguk.co.uk
For use at the 2008 Annual General Meeting of the Company to be held at the offices of TLT Solicitors, Sea Containers
House, 20 Upper Ground, Blackfriars Bridge on Tuesday 17 June 2008 at 10.30 am.
I/We
_______________________________________________________________________________________________
(full name in block capitals)
of _________________________________________ (address) ___________________________________________
being a member/members of eg solutions plc hereby appoint the Chairman of the meeting
or*________________________________________ number of shares _____________________________________
as my/our proxy to vote for me/us on my/our behalf at the Annual General Meeting of the Company to be held on
17 June 2008 and at any adjournment thereof. I/We direct my/our proxy to vote in respect of the resolutions set out
in the notice of Annual General Meeting as follows:
Please tick here if you are appointing more than one proxy
Please indicate with an X in the space below how you wish your proxy to vote on the resolutions set out in the notice
convening the Annual General Meeting. If no indication is given, your proxy may vote or abstain from voting as he/she
thinks fit.
RESOLUTIONS
For Against Abstain
1. That the Directors’ Report and the annual report and accounts for the year ended
31 January 2008 be adopted and approved.
2. That the Directors’ Remuneration Report for the year ended 31 January 2008 be approved.
3. That Baker Tilly UK Audit LLP be reappointed as Auditors and the Directors be authorised
to fix their remuneration.
4. That Rodney Pennington Baker-Bates who retires by rotation be reappointed.
5. That Elizabeth Ann Gooch who retires by rotation be reappointed.
6. That Violetta Elizabeth Parylo who has been appointed since the last Annual General
Meeting be reappointed.
7. To authorise Directors to allot unissued shares.
8. To empower the Directors to allot equity securities for cash.
9. To authorise the Company to make market purchases of its shares.
Dated ________________________________________________________2008
Member’s signature _________________________________________________
* To appoint as a proxy a person other than the Chairman of the meeting insert the full name in the space provided. To
appoint more than one proxy you may photocopy this form. Please indicate the proxy holder’s name and the number of
shares in relation to which they are authorised to act as your proxy (which, in aggregate, should not exceed the number
of shares held by you). Please also indicate if the proxy instruction is one of multiple instructions being given. All forms
must be signed and should be returned together in the same envelope. A proxy need not be a member of the Company.
Notes
a. A member of the Company is entitled to appoint a proxy to exercise all or any of his rights to attend, speak and vote at a general meeting of the
Company. A member may appoint more than one proxy, provided that each proxy is appointed to exercise the rights attaching to different
shares. A proxy need not be a member.
b. To be effective, the instrument appointing a proxy and any authority under which it is signed (or a notarially certified copy of such authority) for
the Annual General Meeting to be held at the offices of TLT Solicitors, Sea Containers House, 20 Upper Ground, Blackfriars Bridge on Tuesday
17 June 2008 at 10.30 am and any adjournment(s) thereof must be returned to the office of the Registrars by 15 June 2008. In each case the
proxy appointments must be received by the Company not less than 48 hours before the time appointed for holding the meeting or any
adjournment thereof. A form of proxy is enclosed with this notice. The appointment of a proxy does not preclude a member from attending the
meeting and voting in person, in which case any votes of the proxy will be superseded.
c. A corporation must execute the Form of Proxy under either its common seal or the hand of a duly authorised officer or attorney.
d. The Form of Proxy is for use in respect of the shareholder account specified above only and should not be amended or submitted in respect of a
different account.
e. The ‘Abstain’ option is to enable you to abstain on any particular resolution. Such a vote is not a vote in law and will not be counted in the votes
‘For’ and ‘Against’ a resolution.
f. Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001, only those members entered on the register of members of the
Company as at 15 June 2008 shall be entitled to attend or vote at the meeting in respect of the number of shares registered in their name at
that time. Changes to entries on the register of members after that time shall be disregarded in determining the rights of any person to attend
or vote at the meeting.
g. In order to facilitate voting by corporate representatives at the meeting, arrangements will be put in place at the meeting so that:
(i) if a corporate shareholder has appointed the Chairman of the meeting as its corporate representative with instructions to vote on a poll in
accordance with the directions of all of the other corporate representatives for that shareholder at the meeting, then on a poll those corporate
representatives will give voting directions to the Chairman and the Chairman will vote (or withhold a vote) as corporate representative in
accordance with those directions; and
(ii) if more than one corporate representative for the same corporate shareholder attends the meeting but the corporate shareholder has not
appointed the Chairman of the meeting as its corporate representative, a designated corporate representative will be nominated, from those
corporate representatives who attend, who will vote on a poll and the other corporate representatives will give voting directions to that
designated corporate representative. Corporate shareholders are referred to the guidance issued by the Institute of Chartered Secretaries
and Administrators on proxies and corporate representatives (www.icsa.org.uk)
h. Copies of the Directors’ service contracts and non-executive Directors’ letters of appointment with the company will be available for inspection at
the Registered Office of the Company during usual business hours on any weekday (Saturdays and public holidays excluded) from the date of
this Notice to the date of the meeting and from 15 minutes prior to and until the close of the meeting.
BUSINESS REPLY SERVICE
Licence No. MB122
Capita Registrars (Proxies)
PO Box 25
Beckenham
Kent
BR3 4BR
Second fold
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and tuck in flap opposite
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1 1 Our software provides real-time, consistent operational intelligence across a balanced
range of performance indicators to enable you to make the right operational decisions
— providing capacity planning, line balancing and timely reporting at multiple levels so
you can effecitvely measure, manage and improve your business operations.
Over 40,000 users trust eg — Our software is working hard for client businesses
across the globe.
A global
operational
intelligence system
What we do
eg operational intelligence
®
— the definitive software for
producing real-time Operations Management Information
(‘MI’), provides the most comprehensive Operations MI
available, supports the achievement of operational excellence
and enables organisations to achieve dramatic improvements
in service, efficiency and reduced costs in weeks —
guaranteed.
The eg principles of operational management
®
are based
on tried, tested and proven methodologies taken from
industry. They form the basis of a Manager and Team Leader
training and development programme in Operations
Management. Through training and skills transfer, Managers
and Team Leaders learn how to use eg operational
intelligence
®
to provide a consistent approach to
actively managing work, resources and performance.
eg operational excellence™ can be achieved by
using improved Operations MI and the eg principles of
operational management
®
to improve the end-to-end
customer service and quality experience.
operational management
practice you can measure
operational excellence
improvement you can measure
operational intelligence
performance you can measure
www.eguk.co.uk
Key
eg offices
eg operational intelligence
®
users
eg is the only business software application vendor that guarantees return on
investment and is paid based on the results delivered — implementations will pay
for themselves, typically within 6 months.
With over 40 current client sites, we have a wide range of reference sites to assure
you of our ability to deliver real performance improvement into your organisation. eg solutions plc
Annual report and accounts
for the year ended 31 January 2008
Stock exchange code: EGS
eg solutions plc, The Roller Mill, Teddesley Road, Penkridge, Staffordshire, ST19 5BD, UK
t: +44 (0) 1785 715772 f: +44 (0) 1785 712541
[email protected] www.eguk.co.uk
eg solutions plc Annual report and accounts 2008
eg solutions plc is a global business software
application vendor. Our software provides historic,
real-time and predictive Operational MI. When
implemented with our training programme for
managers and team leaders to use this
intelligence, we guarantee improvements in
operational results in short timescales.
The Company, which is listed on the Alternative
Investment Market (‘AIM’) of the London Stock
Exchange, is committed to customer satisfaction
and the ongoing development of its operations
management solutions.
corporate statement
contents
Highlights 1
Chairman’s Statement 2
Chief Executive’s Review 4
Board of Directors 10
Advisers 11
Directors’ Report 12
Corporate Governance Statement 16
Directors’ Remuneration Report 19
Directors’ Responsibilities in the Preparation
of the Financial Statements 21
Independent Auditors’ Report 22
Consolidated Balance Sheet 24
Company Balance Sheet 25
Consolidated Income Statement 26
Consolidated Statement of Recognised
Income and Expense 26
Consolidated Cash Flow Statement 27
Company Cash Flow Statement 28
Consolidated Financial Statements
Summary of Significant Accounting Policies 29
Notes to the Consolidated Financial Statements 34
Notice of Annual General Meeting 53
Form of Proxy 55 ### summary: |
LiDCO Group Plc annual report & accounts for the year ended 31 January 2011
2010
/
11 LiDCO Annual Report
2010/11
LiDCO Group Plc
www.lidco.com
Early intervention to avoid potentially dangerous
and life threatening events has been proven
to reduce complications and length of hospital
stay in high risk surgery patients.
LiDCO manufactures minimally invasive
hemodynamic monitoring equipment and
disposables. Our products are the result
of a multi-disciplinary developmental approach
that transforms complex physiological data into
useable and effective information.
01 Highlights
02 Products
03 Market access
04 Evidence and awareness
05 Translational skills
06 Chairman’s statement
08 Chief Executive Officer’s statement
14 Board of Directors and Company Secretary
15 Clinical Advisory Group
16 Corporate Governance report
18 Corporate social responsibility statement
20 Directors’ remuneration report
24 Directors’ report
28 Independent auditor’s report (Group)
29 Consolidated comprehensive income statement
30 Consolidated balance sheet
31 Consolidated cash flow statement
32 Consolidated statement of changes in shareholders’ equity
33 Notes to the financial statements
49 Independent auditor’s report (Company)
50 Company balance sheet
51 Notes to the financial statements
53 Company information
53 Advisers to the Company
Click on the headings below
to navigate through the document 1
LiDCO Annual Report
2010/11
Financial highlights
Total revenue increased by 16% to £6.24m (2009/10: £5.37m)
Traded profitably in second half of the year
UK sales increased 29% to £2.36m (2009/10: £1.82m)
Recurring revenues of £3.68m, representing 59% of total revenues
Gross profit up 28% to £4.22m; gross margin 68% (2009/10: 61%)
Operating loss reduced 68% to £498,000 (2009/10: £1.54m)
Lowest ever annual cash outflow before financing of £433,000 (2009/10: £1.04m)
Cash balance of £1.40m (2009/10: £1.85m)
Loss per share 0.22p (2009/10: 0.87p)
Operational highlights
524 monitors sold/placed – installed base of 2001 units at year end
Disposable sales of 47,948 units – up 26% (2009/10: 37,918)
Study shows use reduces mortality in shock patients
LiDCOrapid v1.03 and blood pressure module completed in September
LiDCO monitors now have connectivity to Philips and GE hospital information systems
LiDCO study day receives Royal College of Nursing accreditation
Post period end
Argon appointed LiDCO as UK distributor for their critical care products with distribution commencing in May 2011
Revenue
(million)
2006
2007
£3.44
2007
2008
£4.05
2008
2009
£4.53
2009
2010
£5.37
£6.24
2010
2011
Loss from operations
(million)
2006
2007
£2.6
2007
2008
£2.0
2008
2009
£1.8
2009
2010
£1.5
£0.5
2010
2011
Net cash outflow before financing
(million)
2006
2007
£1.6
2007
2008
£1.7
2008
2009
£1.8
2009
2010
£1.0
£0.4
2010
2011 2
LiDCO Annual Report
2010/11
Products
LiDCO researches, develops, manufactures and sells innovative medical devices,
primarily for critical care and cardiovascular risk hospital patients who require real-time
hemodynamic monitoring while undergoing major surgery, intensive care and cardiac
procedures. LiDCO’s products provide critical hemodynamic data regarding the
performance of a patient’s heart and effectiveness of the blood circulation in delivering
oxygen to the body’s tissues. Improved hemodynamic monitoring reduces length
of stay and complications in high risk surgery patients.
Patent protected
LiDCO products are innovative and unique.
They are protected as strongly as possible
by proprietary intellectual property rights –
patents, copyright, trademarks and
confidentiality/secrecy arrangements
(know-how).
Large and growing
market opportunity
They are designed for point-of-care use
and are minimally invasive, portable and
easy to use at a patient’s bedside. They
address a potential worldwide market
opportunity of US$1.2 billion per annum.
R&D activities
LiDCO has a product development
programme of incremental product
improvement/evolution improving ease
of use and enabling convergence and
integration of multiple monitoring
parameters, either on LiDCO monitor screens
or third party monitors via software licensing. 3
LiDCO Annual Report
2010/11
Market access
LiDCO’s distribution strategy is to put effective arrangements in place in order
to access the market opportunity at a cost which allows the Company to meet
its strategic goals and meet market expectations. LiDCO targets territories that
are developing in terms of hemodynamic monitoring, where strong distribution
networks are available that can be supported from LiDCO’s UK base.
UK sales summary
• Total revenue up 29% at £2.36m (2009/10: £1.82m)
• Monitor revenue up 52% to £0.50m (2009/10: £0.33m)
– ICU: LiDCOplus monitor revenue up 49% to £0.30m
– Surgery: LiDCOrapid monitor revenue up 118% to £0.20m
• Disposables sales of £1.80m up 21% (2009/10: £1.49m)
• Other income £55,000 (2009/10: nil)
USA sales summary
• Distribution revenue up 26% to £1.89m (2009/10: £1.50m)
• LiDCOrapid monitor revenue steady at £0.68m (2009/10: £0.68m)
• LiDCOrapid smart card sales up 54% to £0.83m (2009/10: £0.54m)
• Licence fee and other income of £0.38m up 35% (2009/10: £0.28m)
Continental Europe sales summary
• Total revenue down by 13% to £0.86m (2009/10: £0.99m)
• Monitor sales revenue of £0.32m down 40% (2009/10: £0.53m)
• Sensor/smart card sales up 17% to £0.54m (2009/10: £0.46m)
Rest of World and licence fee income
• Total revenue up 135% at £0.66m (2009/10: £0.28m)
• Monitor revenue up 225% to £0.39m (2009/10: £0.12m)
• Sensor/smart card sales up by 117% to £0.13m (2009/10: £0.06m)
• Licence fee and other income of £0.14m (2009/10: £0.10m)
29%
increase in UK
total sales
26%
increase in US
distribution revenue
17%
increase in sales of sensor/smart card
sales in continental Europe
225%
increase in monitor revenues
from Rest of World 4
LiDCO Annual Report
2010/11
Evidence and awareness
Complications from major surgery in patients undergoing emergency
surgery, or surgery in patients with limited cardiovascular reserves are
common. Not only are complications such as infections costly to treat and
necessitate longer hospital stay, they also have long-term consequences
negatively influencing both survival and quality of life in survivors.
We now know that these complications
are potentially avoidable with the use of
a pre-emptive ‘enhanced recovery’ strategy
that involves better monitoring through use
of advanced hemodynamic monitors such
as those provided by LiDCO.
Sufficient evidence has now been
accumulated to demonstrate that the
relatively inexpensive upfront costs
of hemodynamic monitoring are easily
outweighed by the short-term benefits
to the patient and hospital in terms
of reduced length of stay.
The ‘body of clinical evidence’ has resulted
in the emergence and availability in the
UK of guidelines on fluid management,
a ‘How To, Why To’ guide and more recently
a Commission for Quality and Innovation
(CQUIN) payment that links a proportion
of the hospital’s income to the adoption
of improved practice.
More than 100 published papers and
presentations have been given on LiDCO’s
technology, with 25 abstracts and papers
during the last year alone. Positive outcome
data is available for both high risk surgery
and shock patients with LiDCO being the
sole technology used in two current large
multi-centre outcome trials:
• MOnIToR USA transplantation study donor
• OPTIMISE UK high risk surgery study
Hospital departmental strategy and use
of advanced hemodynamic monitors
is heavily influenced by the accumulated
body of clinical evidence. Adoption
incentives have followed resulting in the
expectation that the minimally invasive
hemodynamic monitoring market will
grow to a value of US$1.2 billion per annum
worldwide and in the UK – where a lot of the
research was pioneered – by 17% per annum.
Professional body guidance
92.1%
50%
36.3%
6.8%
CE/senior management decision
2.6%
Other
12%
Hospital policy
Top requirements for cardiac output monitor
Factors that influence the decision to implement
fluid optimisation/enhanced recovery
78%
ease of use
46%
suitable for broadest
application of use
71%
accuracy
45%
size of body
of evidence
Body of clinical evidence
Departmental/clinical strategy
Source: UK lntensive Care Society market survey 2010 5
LiDCO Annual Report
2010/11
Translational skills
Productive use of LiDCO’s hemodynamic monitoring products has to be supported
by excellence in clinical education. In April 2010 LiDCO established a Hemodynamic
Workshop in collaboration with doctors at St George’s Hospital in London, aimed
at teaching hemodynamic optimization techniques to senior physicians. This course
is accredited by the UK’s Royal College of Anaesthetists for continuing medical
education points.
The course has been very well received
by all attendees and we have seen a high
degree of participation both domestically
and by European doctors for the courses
organised for this year.
In July 2010 LiDCO received accreditation
from the UK Royal College of Nursing (RCN)
for its LiDCOplus monitor competency-
based study day. The course is designed
for all critical care nurses, nurse educators,
professional development nurses, nurse
consultants and junior doctors.
Our plans are to considerably expand both
of these educational activities. We are highly
committed to helping our hospital customers
to translate these skills into practice.
Dr Maurizio Cecconi
presenting at
St George’ s Hospital at
LiDCO’s Hemodynamic
Monitoring Workshop 6
LiDCO Annual Report
2010/11
2010/11 was another good year
for LiDCO. Continuing with our
strategy for growth, we saw
revenues increase by 16% and the
number of disposables sold grow
by 26%. Despite returning a profit
in the second half of the year,
the difficult economic climate
experienced in our target markets
impeded us from recording a profit
for the year as a whole, though
we were able to record an EBITDA
of £141,000.
Chairman’s statement
We have ended the year with a robust cash
position and no debt. LiDCO’s strategy for
growth continues to be focused on the
three key areas of products, market access
and evidence and awareness.
Products
Concern over associated risks means
that demand for invasive catheter-based
hemodynamic monitoring products
continues to decline. LiDCO’s minimally
invasive technology enables measurement,
analysis, audit and sharing of real-time and
historic hemodynamic data, both in critical
care units (LiDCOplus) and the operating
theatre (LiDCOrapid). Both the LiDCOplus
and the LiDCOrapid are high value, high
margin products with strong intellectual
property protection.
We continued to improve our products
during the year with software upgrades
and additional features that improve
delivery of data to the clinician.
Compatibility with other healthcare
systems and technologies has further
enhanced our products’ appeal, and LiDCO
monitors now have connectivity to Philips’
and GE’s hospital information systems.
The marketing collaboration signed with
Argon Medical in the UK in March of this
year will provide our UK sales force with
additional, well established products
complementing and strengthening our
own offering.
Market access
Minimally invasive hemodynamic monitoring
is the fastest growing segment within the
European patient monitoring market, and
the UK is leading Europe in terms of its rate
of adoption of the technology. In the UK we
have a direct sales and nurse educator team
successfully increasing our installed base
in this major market and growing sales
by 29% in the year.
In the USA, our partner is Covidien:
a leading global healthcare products
company. In 2010 Covidien strengthened
its sales team, surgery franchise and
combination technology offering,
enhancing LiDCO’s access to this
lucrative market.
Theresa Wallis
Chairman 7
LiDCO Annual Report
2010/11
Evidence and awareness
An increasing body of evidence shows
improved patient outcomes from the use
of less invasive hemodynamic monitoring
technologies. In 2010, clinicians demonstrated
the effectiveness of LiDCO products
in a variety of fields including: major and
bariatric surgery, obstetrics, intensive care
and cardiology. Studies have also been
published showing reduced mortality
in shock patients as well as reduced length
of stay and complications in surgery
patients that have been hemodynamically
monitored using LiDCO’s products.
Financial position
LiDCO’s operating loss for the year reduced
from £1.54m to £498,000, on turnover of
£6.24m. With its cash usage reaching its
lowest level ever, at £433,000, the Group
ended the year with £1.40m in cash.
Dr David Band
In April, Dr David Band, the Group’s
co-founder and Scientific Director resigned
from the Board after many years of service.
We are very grateful for his important
contribution to the Group. I am delighted
he has agreed to continue advising LiDCO
with regard to product development.
Prospects
Hospitals are under increasing pressure
to cut costs and improve efficiency and
patient outcomes. These challenges
present significant opportunities for LiDCO,
as our products can reduce costly patient
complications and hospital stay lengths,
while providing significant improvements
to quality of care. We have worked hard
to position ourselves to respond to the
escalating demand.
I am grateful to our shareholders for their
continuing loyalty to LiDCO in 2010/11
and my fellow directors for their support.
I would also like to acknowledge the
valuable contribution made by our Clinical
Advisory Group. Finally I wish to thank our
staff for their enthusiasm and commitment
throughout the year. The year ahead will
be another challenging one but we are well
placed to continue our progress.
Theresa Wallis
Chairman
15 April 2011
16%
increase in revenues
this year
26%
growth in unit sales
of disposables
The pressures on hospitals to cut
costs and improve efficiency present
significant opportunities for LiDCO. 8
LiDCO Annual Report
2010/11
The market
The directors estimate that the potential
number of patients in Europe who could
benefit from hemodynamic monitoring
is six times the number currently being
monitored. The cost of critical care
continues to grow. Heightened awareness
of the benefits from the use of LiDCO’s
technology such as reductions in infections,
length of stay and costs are all contributing
to increased sales.
The market for minimally invasive
hemodynamic monitors breaks down into
three categories: intensive care (ICU), high
risk surgery and alternate sites such as trauma
and ‘outreach’ (i.e. outside the ICU) care sites.
LiDCO monitors have the potential to play
major roles in each of these arenas.
Reducing surgical complications such
as infections is a key growth driver for our
business. In the US, it is estimated that
surgical site infections alone cost US$10bn
per annum. The need to prevent central line
infection and septic complications has led
to a drive to reduce the use of invasive
central venous catheters. Use of LiDCO’s
technology can reduce central venous
catheter use by up to 80% in high risk
surgery (Green D, Paklet L (2010) Latest
Chief Executive Officer’s statement
LiDCO had another very good year.
The monitor base increased by a net
233 units (13%) to 2001 units, with
524 units sold or placed during the
year. Disposables income increased
in our intensive care and surgery
markets by 8% and 39% respectively.
Overall revenues were up 16% on the
previous year to £6.24m with gross
profit up 28% to £4.22m. Expenses
were kept under tight control
resulting in administration costs
reducing by 2%. Average product
margins were maintained at 76%.
Cash outflows before financing were
at a record low with the Group
trading profitably during the second
half of the year. Over the prior year
the loss fell by over £1m with the loss
per share reducing by 75% to 0.22p.
developments in peri-operative monitoring
of the high-risk major surgery patient.
International Journal of Surgery 8 90-99).
With a US$1.2bn market potential in surgery
and intensive care, the global market for
minimally invasive hemodynamic
monitoring products is large and growing.
The experience level of clinicians in the ICU
is declining due to the retirement of staff
experienced in the use of older invasive
catheter based technologies. Consequently
there is a growing need for reliable, accurate
and easily adoptable products that can
deliver more cost effective care. The
minimally invasive market now represents
53% of the European hemodynamic
monitoring market value, followed by the
invasive and non-invasive markets which
represent 42% and 5% of sales respectively.
It is projected that the European minimally
invasive hemodynamic monitoring market
will grow at a compound rate of 12% per
annum; from US$51m today to US$112m
by 2017 (iData 2011 patient monitoring
research report). The UK represents the
biggest European market for, and fastest
rate of adoption of, minimally invasive
technology. Sales in the UK are projected
to grow by an average of 17% per annum
from US$14m in 2010 to US$42m in 2017.
The NHS in the UK is now the largest
healthcare organisation in the world, with
an annual spend of £100bn. LiDCO has
a direct sales force in the UK where our sales
revenues increased last year by a noteworthy
29%. We are resourced to take advantage
of this fast growing domestic market
opportunity. Acquiring the sales and
marketing rights to the Argon critical
care products has further broadened and
strengthened our hemodynamic offering
to our UK customers.
Evidence and awareness
The minimally invasive hemodynamic
market is documented as the fastest
growing sector in the European hospital
monitoring field. The potential size of the
market, its growth rate and the increasing
presence of clinical guidelines for adoption
of hemodynamic monitoring is inevitably
resulting in an increasing appetite from the
major corporate players to participate
in providing these advanced products.
The pressure on hospitals to reduce costs
while improving efficiency is intensifying.
In the UK, the NHS QIPP (Quality, Innovation,
Productivity and Prevention) and ERAS
(Enhanced Recovery After Surgery)
programmes have resulted in a higher focus
on adopting advanced hemodynamic
monitoring technology. For example,
in a 2010 survey of UK hospitals by the
British Intensive Care Society, 77% of hospitals
had, or were planning to implement,
fluid-optimisation of their colorectal
cancer surgery patients. The three most
important issues determining their choice
of technology were ease of use/adoption,
Dr Terence O’Brien
Chief Executive Officer 9
LiDCO Annual Report
2010/11
trending accuracy and suitability of use
for the broadest variety of patients.
The LiDCOrapid was specifically designed
to be easy to set up and usable in the fluid
and drug management of any patient with
arterial line access. Our surgical product
is proving very adoptable, with UK sales
of LiDCOrapid disposables increasing
by 137% in the year.
Cumulatively more than 100 publications
are in print referencing our technology.
During 2010 alone 25 research abstracts
and papers on the use of LiDCO monitors
were presented and published. Using
LiDCO technology for high-risk surgery
patients has been shown to help reduce
complications – particularly infections –
by more than a third, reducing hospital stay
by an average of 12 days per patient and
costs by £4,800 per patient (Pearse et al.
Early goal-directed therapy after major
surgery reduces complications and duration
of hospital stay. A randomized, controlled trial.
Crit. Care 2005, 9 (6) 687-693).
In September 2010, the Journal of Critical
Care published the findings of a study from
the University of Iowa, showing that using
the LiDCOplus monitor significantly reduced
the mortality rate in patients treated for
shock (Hata et al. Reduced mortality with non
invasive hemodynamic monitoring of shock,
Journal of Critical Care, 26:2, pages 224.e1-
224.e8). Treatment of patients using LiDCO’s
monitor significantly reduced the observed
mortality rate to 13% against 32% and 20%
in the two invasively monitored groups and
37% in the unmonitored patient groups.
These results add to the previous findings
of Pearse et al who reported that supportive
care guided by LiDCO’s lithium dilution and
arterial waveform assessments of cardiac
output was associated with reduced peri-
operative morbidity compared with
conventional assessment.
Two further large multi-centre outcome
trials are progressing well. In the UK, the
LiDCOrapid cardiac output monitor was
chosen as the sole monitoring system
to be used in OPTIMISE, a government-
supported trial which aims to improve
surgical outcomes by optimising a patient’s
cardiovascular management. The trial,
covering 12 centres, is the largest of its
type to date; it is underway and currently
recruiting patients.
The LiDCOplus is the sole hemodynamic
monitor used in a 960 patient US-
Government funded multi-centre trial –
MOnIToR (Monitoring Organ donors
to Improve Transplantation Results).
The results of earlier studies using
LiDCOplus to monitor and develop
a treatment protocol designed to improve
the hemodynamic status of donors
generated considerable interest within
the US transplantation community.
As with the OPTIMISE trial, the MOnIToR
trial is progressing well.
To facilitate adoption and productive
use of its equipment, LiDCO’s monitoring
products are also supported by excellence
in clinical education. In April 2010 LiDCO
established a Hemodynamic Workshop
in collaboration with doctors at St George’s
Hospital in London aimed at teaching
hemodynamic optimisation techniques
to senior physicians. This course is accredited
by the UK’s Royal College of Anaesthetists
for continuing medical education points.
The course has been very well received
by all the consultant level attendees and
we have seen a high degree of participation
and take up by our European distributors
of places for courses held this year. In July
LiDCO received accreditation from the
Royal College of Nursing (RCN) for its
LiDCOplus monitor competency-based
study day. The course is designed for
all critical care nurses, nurse educators,
professional development nurses, nurse
consultants and junior doctors. Our plans
are to considerably expand both of these
educational activities.
Products and applications
LiDCO applies several common criteria
to its products. They must be innovative,
protectable, and applicable to significant
clinical applications. They must have a large
addressable market and deliver significant
margins. The manufacturing process must
also be low cost with very high reliability.
Each LiDCO monitor addresses a particular
market. Launched in 2008, the LiDCOrapid
principally focuses on high risk surgery
patients with arterial lines, but also addresses
alternate site use – for example in trauma,
obstetrics and shock. The LiDCOplus is used
mainly in the intensive care arena.
During the year several new product
developments were introduced, for example:
• a software upgrade to the LiDCOrapid,
including a module to expand access
to blood pressure data;
• a translation facility to convert information
from English into 22 languages; and
• improved communication with Philips
and GE hospital information systems.
Sales and distribution
Revenue was up 16% to £6.24m (2009/10:
£5.37m). A similar number of LiDCO
monitors were sold or placed in the year
(524 vs. 565 units in 2009/10) with monitor
capital income up 5%. The monitor base
at the year end was 2,001 units, with a net
increase of 233 units (13%) in the year.
As explained in the Financial Review,
from this year we are now reporting our
installed base as the net number of sold
and placed units over the last seven years.
Our monitors have an expected life of seven
years in use, so we have decided to assume
all monitors over seven years old will
no longer be disposable income generating.
From here on the installed base will only
increment by the difference between those
monitors sold in the year and those retired
i.e. that were sold eight years ago. The
LiDCOrapid portion of the installed base
grew by 474 units and now represents
in excess of 50% of the monitor base.
US$10bn
annual estimated cost of surgical
site infections in the US
US$1.2bn
global market potential in surgery and intensive
care for minimally invasive hemodynamic products 10
LiDCO Annual Report
2010/11
Chief Executive Officer’s statement continued
Disposables income was higher for both
our intensive care and surgery markets
by 8% and 39% respectively and by 18%
overall. Disposables numbers were also up
26% at 47,938 units (2009/10: 37,918 units).
Export sales represent 62% of total income –
slightly down from 66% in the prior period,
reflecting the very strong UK sales growth
seen in the period as well as economic
weakness in some parts of continental Europe.
LiDCO’s strategy is to sell directly to the
high value, high growth UK hospital
market via its strong, direct sales force and
is expecting to take a significant share
of the domestic market growth. In export
territories we are focusing on addressable
markets i.e. those where we expect good
growth and where we have access to
specialist distribution partners with the
attributes and commitment to sell our
products and develop our market within
their territory. These include the US, Japan,
Scandinavia, Eastern Europe, the Middle
East and Latin America.
In the US there are almost 5,000 hospitals
performing surgery and within these
hospitals there are over 100,000 intensive
care beds. In addition to the challenge
of selling to this large and geographically
spread out hospital market, there are
a significant number of regional and/or
national accounts to work with. Once sales
traction is gained in the US, these hospital
groups and group purchasing organisations
(such as Premier and Novation) become
increasingly important customers.
Over the years it is clear that fully accessing
the growing USA hemodynamic monitoring
market has become logistically and
financially impossible for the smaller and
even larger sized companies. Therefore,
in order to address a significant share
of this opportunity we have established
a distribution agreement in the US with
the Respiratory and Monitoring division
of Covidien plc (‘Covidien’). Covidien has
a long standing and substantial existing
oximetry monitoring business and more
recently made significant investment
in the monitoring market, acquiring two
additional US monitoring companies
(Aspect and Somanetics) with a very
significant total investment of US$460m.
Collectively the Respiratory and Monitoring
division now has one of the largest
monitoring equipment sales forces available
today in the US. Importantly this group sells
into over 80% of operating rooms in the
major hospitals. In the US Covidien is now
able to offer customers a suite of monitoring
systems that can collectively monitor
respiratory function, brain oxygenation and
through the LiDCOrapid the underlying
hemodynamic status. These products are
a natural fit together and offer, in particular,
advantages to the management of high risk
surgery patients. Accordingly, we believe
that the commitment by Covidien
to promoting LiDCO’s LiDCOrapid monitor
along side their own products is strong.
Covidien achieved the first year’s minimum
sales requirements and our business with
them grew 26% over the prior year. This was
a good result, as inevitably amalgamations
of this scale take a lot of effort and time out
from the field. Indeed, training of the new
members of the consolidated sales force
and internal national accounts sales teams
on LiDCO’s product is still taking place.
We expect the number of evaluations
and pipeline to continue to build as the
recently trained representatives also start
to contribute to the sales efforts. Clearly
Covidien has made a significant investment
in the monitoring field and has the interest,
infrastructure, resources and products
necessary to access in particular a significant
share of the high risk surgery hemodynamic
monitoring market.
Geographic sales and trading
UK sales summary
• Total revenue up 29% at £2.36m
(2009/10: £1.82m)
• Monitor revenue up 52% to £0.50m
(2009/10: £0.33m)
– ICU: LiDCOplus monitor revenue
up 49% to £0.30m
– Surgery: LiDCOrapid monitor revenue
up 118% to £0.20m
• Disposables sales of £1.80m up 21%
(2009/10: £1.49m)
• Other income £55,000 (2009/10: nil)
Our focus last year was to maintain our ICU
business and grow our LiDCOrapid surgery
interest. Our direct sales force had a very
good year achieving both these goals. Total
income was up 29% to £2.36m, with the
UK representing 38% of our total worldwide
sales. Monitor and disposables income
increased across both the ICU and surgery
markets. As expected the greatest growth
was experienced in the surgery segment
where LiDCOrapid monitor sales were
up 118% and smart card disposables
up 137%. The monitor base increased
by a net 24 units (9%) to 300 units in the UK,
with 61 units sold placed during the year.
The total number of disposables sold
increased from 14,055 to 17,605.
In the UK there will be intense pressure
on the NHS in terms of revenue and capital
spend in the new financial year starting
this month. We believe this will continue
to drive hospitals to focus on reducing
costs while improving efficiency. ERAS
programmes within the NHS will most likely
continue to be prioritized, despite the
Review of revenue and units sold and placed
%
Year to Year to Increase/ Increase/
31 Jan 2011 31 Jan 2010 (decrease) (decrease)
Revenue by type (£’000)
– Monitors 1,953 1,855 98 5%
– Sensors/smart cards/use fees 3,681 3,125 556 18%
– Licence fees and other income 603 387 216 56%
– Total revenues 6,237 5,367 870 16%
Monitors (units) 524 565 (41) (7%)
Sold 515 536 (21)
Placed 9 29 (20)
Sensor, smart card and fee
per use sales (units) 47,938 37,918 10,020 26%
Monitor base (7 year net) 2,001 1,768 233 13% 11
LiDCO Annual Report
2010/11
worsening economic conditions. We expect
these conditions will deliver sales growth
of our surgery product in particular. Fluid
and hemodynamic monitoring is already
adopted, or planned in the majority of UK
hospitals. Additional sales growth should
come from increasing use in a number
of surgical procedures.
We announced in March 2011 that LiDCO
was appointed by Argon Medical Devices
Inc. (‘Argon’) to take over their existing UK
critical care sales. Argon acquired the critical
care business of Becton Dickinson (‘BD’)
in late 2010. We are delighted that Argon
has decided to extend the relationship
we previously established with BD’s
Japanese critical care group. We expect
to start selling Argon’s products from May
2011. UK customers will then be able to buy
an expanded and related group of critical
care and surgery products including the
arterial pressure transducer necessary for
use with our monitors.
USA sales summary
• Distribution revenue up 26% to £1.89m
(2009/10: £1.50m)
• LiDCOrapid monitor revenue steady
£0.68m (2009/10: £0.68m)
• LiDCOrapid smart card sales up 54%
to £0.83m (2009/10: £0.54m)
• Licence fee and other income of £0.38m
up 35% (2009/10: £0.28m)
Sales to Covidien were up 26% during the
period. Comparisons across the period
are complicated by the stocking orders
taken in both periods and the subsequent
temporary sales disruption from acquisition
and integration of the Aspect and
Somanetics sales forces. We are pleased
to report that Covidien has achieved the
minimum sales in the first year of our
contract. Overall Covidien has purchased
657 LiDCOrapid monitors representing
both sales stock and a demonstration/
evaluation pool. Covidien has shown a high
level of commitment to developing the
high risk surgical market opportunity and
is putting a significant amount of time into
training and incentivising the sales force.
LiDCO has retained sales responsibility
for the ICU-focused LiDCOplus product
sales in the US with our direct sales force.
Direct sales have decreased to £464,000
(2009/10: £773,000) with £111,000 of the
fall the inevitable result of the transfer
to Covidien of LiDCOrapid sales in accounts
that were previously a direct sales business.
Capital revenues (i.e. new monitor sales)
from the LiDCOplus fell from £184,000
to £83,000 due to the reduced sales effort
as four of the LiDCO sales team transferred
to Covidien. LiDCOplus sensor sales declined
from £422,000 to £341,000, a consequence
of some customers now purchasing the
LiDCOrapid – where previously they would
have purchased the LiDCOplus – and
reduced geographic sales coverage outside
our key accounts.
LiDCOplus consumable sales to our key
accounts (i.e. accounts where we can
support the business) declined modestly –
by only £43,000. Most of this decline was
due to product substitution in a small
number of accounts towards use of the
LiDCOrapid. Going forward we expect the
core key account direct business to be
supportable and maintainable while we
focus on the bigger and more addressable
surgery opportunity for the LiDCOrapid.
We continue to believe there is a significant
ICU market in the US for our more precise
and sensor calibrated monitor.
Continental Europe sales summary
• Total revenue down by 13% to £0.86m
(2009/10: £0.99m)
• Monitor sales revenue of £0.32m down
40% (2009/10: £0.53m)
• Sensor/smart card sales up 17% to £0.54m
(2009/10: £0.46m)
We reported at the interim stage that the
economic climate in Europe had been
weak, delaying capital and disposable
purchases in some countries. Where
economic conditions have been poor this
has affected our distributors’ business.
In contrast, where finances are stronger,
e.g. in Eastern Europe, we have seen a very
significant increase in sales. The results are
therefore very mixed; ranging from increases
of 71% in Slovenia to an 82% fall in business
in Italy, previously our best performing
territory. Despite the challenging conditions,
underlying disposable income was up by 17%.
We expect sales to increase modestly in 2011
as the economic climate gradually improves.
Rest of World and licence fee income
• Total revenue up 135% at £0.66m
(2009/10: £0.28m)
• Monitor revenue up 225% to £0.39m
(2009/10: £0.12m)
• Sensor/smart card sales up by 117%
to £0.13m (2009/10: £0.06m)
• Licence fee and other income of £0.14m
(2009/10: £0.10m)
Sales in the ROW were up 135%, reflecting
increases across the board in licence fees,
monitor and disposable revenues. This was
a good performance with particularly good
results seen in Brazil and the Middle East.
Minimally invasive hemodynamic monitoring
is becoming well established in Japan.
We believe the Japanese hemodynamic
monitoring high risk surgery market has
a potential market value of US$285 million
per annum, with reimbursement currently
available. With respect to our distribution
arrangements in Japan, in October 2010
Argon announced that it had acquired the
critical care division of BD. LiDCO had signed
a distribution agreement with BD in April
2009 for sales of the LiDCOrapid in Japan
and a registration application file for product
approval has been prepared for submission.
We expect registration and reimbursement
to be approved late 2011/early 2012.
Negotiations with distribution parties
in Japan are well advanced and a Heads
of Agreement has been signed – we expect
to be able to further update shareholders
in the near future.
73%
reduction in post-tax losses
US$285m
potential annual value of Japanese high risk
surgery market for hemodynamic monitoring 12
LiDCO Annual Report
2010/11
Financial review
Turnover increased by 16% to £6.24m
(2009/10: £5.37m). Losses after tax
decreased significantly by 73%
to £390,000 (2009/10: £1,427,000)
and the loss per share was reduced
to 0.22 pence (2009/10: 0.87 pence).
Exports rose by 9% to £3.88m but
with a strong increase in sales in the
UK represented 62% of sales, down
from 66% the previous year.
During the year a total of 524 monitors
(2009/10: 565 monitors) were sold or placed.
Historically the reported installed base has
represented the total monitors sold or placed
since the first sales in 2001. It is inevitable
that some of the earlier monitors will now
have been replaced by newer models
or may simply be no longer in use and
in common with some other companies
in our sector, the installed base has been
restated based on the number of units sold
or placed within the last seven years.
The restated installed base of monitors
at the year end was 2,001 (2009/10: 1,768)
representing a net increase in the year
of 233 monitors. Some of the installed base
will be demonstration and evaluation
monitors sold to distributors. The monitors
sold/placed in the year comprised 474
LiDCOrapid monitors and 50 LiDCOplus
monitors with 515 (2009/10: 536) of the
monitors being sold and nine (2009/10: 29)
being placed.
Recurring revenues from the sales
of disposables, service contracts and fees
for use increased by 18% to £3.68m (2009/10:
£3.13m) and represent 59% of total revenues.
The number of disposables sold increased
by 26% to 47,938 (2009/10: 37,918).
The average product margin across all
products after external procurement costs
increased slightly during the period from
75% to 76%. Future profitability will
significantly depend on margins achieved
on disposables and these have remained
high during the year. Margins achieved
on LiDCOplus sensors remained steady
at 86% and on LiDCOrapid smart cards
increased marginally to 93% (2009/10: 92%).
Sales of LiDCOrapid smart cards which
rose by 39% will be an important growth
revenue stream in future years. In the UK
where hemodynamic output monitoring
has been demonstrated to help to reduce
hospital costs and where we have detailed
usage information, we have seen the
average use rate increase from 3.5 to 4.7
uses per monitor per month, with use
in some hospitals as high as 15 uses per
monitor per month.
The overall gross margin on sales was 67%,
up from 61% in the previous year largely
due to reduced Med One payments in the
period which amounted to £526,000
(2009/10: £688,000). Med One payments
are expected to reduce to about £230,000
in 2011/12 and be minimal in the following
year. Total overheads fell by £118,000 (2%)
compared with the previous year. As noted
previously, the comparative effect
of transferring most of the US sales force
to Aspect (now Covidien) in July 2009 was
to reduce costs by about £325,000. This
reduction was offset most significantly
by additional sales and marketing costs
in the UK where sales increased by 29%.
Taxation
As the Group is still at the pre-profit stage
there was no tax charge for the year and
in addition the Group has a deferred tax
asset of £5.6m although this has not been
recognised in the accounts. The Group
qualifies for research and development tax
credits, which are estimated as £109,000
(2009/10: £122,000) and are shown in the
income statement.
Cash, financing and working capital
The net cash outflow before financing
activities was £433,000 (2009/10: £1,044,000),
its lowest rate since flotation in July 2001.
Cash balances at 31 January amounted
to £1,404,000 and the Company has no
bank borrowings. The Board anticipates
this will be sufficient to see the Company
through to profitability and positive cashflow.
Stock at the year end decreased slightly
to £1.05m and represents 18% (2009/10: 22%)
of non-licence fee revenue. Expenditure
on fixed and intangible assets in the year
of £556,000 compares with £608,000 the
previous year and is below the charge for
depreciation and amortisation of £639,000.
Expenditure on fixed and intangible assets
is not expected to rise significantly in the
foreseeable future.
Product development
New product development
The latest revision of the LiDCOrapid
software, version 1.03 and the development
of the universal pressure waveform module
were completed in the year. The new
software release introduced a number
of features focused on further developing
the LiDCOrapid graphical user interface
and simplifying use of, and connectivity
to, our monitors.
Summary of developments
concluded during 2010
Universal pressure waveform module
This allows wider hospital use of our
technology by allowing a broader range
of arterial blood pressure catheters
to be accessed.
LiDCO monitor language localisation
Converts the information on the LiDCOrapid
monitors’ screens from English into
22 languages.
RS232 communication changes
Allowing the LiDCOrapid monitor
to communicate with a wider range
of hospital information systems. One such
communication project, announced in
October, was to connect to GE’s Centricity
Clinical Information Systems in Europe, the
Middle East and Africa. This follows our
previous software development enabling
a link between LiDCO’s proprietary stand-
alone monitoring system and Philips’
patient monitors via the Philips VueLink.
Chief Executive Officer’s statement continued 13
LiDCO Annual Report
2010/11
LIDCO software evolution
Given the growing interest in fluid
management and hemodynamic monitoring,
we are exploring further refining the
graphical user interface and core algorithm
software architecture to allow for potential
OEM solutions, whereby elements of the
software could be more easily licenced
to third parties. Research is also underway
into the performance of the core algorithm
with alternate, often less high fidelity, signal
sources with the objective of widening the
patient applications and thereby increasing
the addressable market for our technology.
Regarding our intensive care product
the LiDCOplus we intend to update the
LiDCOplus monitor software to v 4.02. This
will involve updating the operating system,
adding the blood pressure module option
and further improving ease of use and
calibration methodology.
We believe that there is a significant market
for a combined graphical user interface that
can realise the clinical synergy between
Covidien’s Bispectral Index (BIS) depth
of anesthesia product and the LiDCOrapid
monitor. The former ensures the correct
depth of anesthesia is achieved, and the
LiDCOrapid is used to restore and maintain
blood pressure and cardiac output
to appropriate levels after anesthesia
induction and during surgery. A prospective
study at King’s College Hospital, London,
strongly suggested that this combination
display could significantly improve
the management of patients’ levels
of anesthesia, fluid and hemodynamic
status. The project to develop a combined
graphical user interface (GUI) is advancing
with a communication interface already
developed. Work is now progressing to
finalise the screen design. This development
project is expected to conclude around
the last quarter of 2011. Patent applications
have been filed on both the basic structure
of the LiDCOrapid monitor GUI and this has
been followed by a second application
on the combined hemodynamic and depth
of anesthesia GUI display.
Regulatory and quality review
During the year LiDCO Limited was
successfully audited against the
requirements of ISO13485:2003,
ISO9001:2008, the EU Medical Devices
Directive and the Health Canada Medical
Device Regulations, allowing continued
certification of the Company and our
products. Also during the year, LiDCO was
successfully inspected by the UK MHRA,
to ensure continued compliance with
Good Distribution Practice requirements.
Our activities and products comply with the
requirements of all relevant EU Directives –
the Waste Electrical and Electronic
Equipment (WEEE) regulations; the
Restrictions of the use of certain Hazardous
Substances in Electrical and Electronic
Equipment (RoHS) regulations; the
Registration, Evaluation and Authorisation
of Chemicals (REACH) regulations; the Waste
Batteries and Accumulators regulations; the
Batteries and Accumulators (Placing on the
Market) regulations; the Machinery Directive
and the Eco Design Directive.
LiDCO’s products are registered in a number
of major territories and registration of LiDCO
products is ongoing in Japan.
Outlook and prospects
We are pleased to be reporting another year
of considerable progress. Looking ahead,
independent research shows that cardiac
output monitoring is now the fastest
growing sector within the European
monitoring market with the minimally
invasive products now representing more
than 50% of sales (source: 2011 iData
Research). With our pressure waveform
based technology, international distribution
partners and increasing evidence and
awareness, we are confident of continuing
commercial progress. We traded profitably
in the second half of the year and for the full
year on an EBITDA basis. We look forward
to building on this and making further
progress in 2011 and beyond.
On a personal note my co-founder and
Scientific Director, Dr David Band, has
retired from the Board this month. David
has worked with me on the Board since the
Company’s foundation and has contributed
enormously to bringing the Company
to its current position. His many contributions
to medical science over the last 50 years
have had a profound impact on the
management of high risk patients. We thank
David for all he has done. I am delighted
to say he will be staying with us and
continue advising LiDCO with regards
to product development.
Dr Terence O’Brien
Chief Executive Officer
15 April 2011 14
LiDCO Annual Report
2010/11
Board of Directors and Company Secretary
Theresa Wallis
Non-Executive Chairman
John Barry
Sales and Marketing Director
Dr Terence O’Brien
Chief Executive Officer
Paul Clifford
Finance Director
Ian Brown
Non-Executive Director
John Rowland
Company Secretary 15
LiDCO Annual Report
2010/11
Theresa Wallis
Non-Executive Chairman
Ms Wallis has spent most of her career
in financial services, moving into the
technology commercialisation sector in 2001.
She worked for the London Stock Exchange
for 13 years, where from 1995 she was chief
operating officer of AIM, the market for smaller
growing companies, having managed the
market’s development and launch in 1994/5.
From 2001 to end 2006 she was a principal
executive of ANGLE plc, a venture
management and consulting business
focusing on the commercialisation
of technology. Since 2001 she has held
a number of non-executive directorships
and she is currently a non-executive director
of Special Products Limited. She is also
a member of the Quoted Companies
Alliance’s Executive Committee.
Dr Terence O’Brien
Chief Executive Officer
Dr O’Brien co-founded the Group in 1991.
Prior to that, he held senior positions with
biomedical companies including Sandoz SA,
Pharmacia AB, Meadox Medical Inc,
Novamedix Ltd, Enzymatix Ltd and Surgicraft
Ltd. Dr O’Brien was associate commercial
director at Enzymatix, which subsequently
listed on the London Stock Exchange as
ChiroScience Plc. Over the last 25 years
Dr O’Brien has been involved in the research
and development and subsequent marketing
of a number of medical device technologies
that are now standards of care in the
anesthesia, critical care and surgery markets.
John Barry
Sales and Marketing Director
Mr Barry joined the Group in February 2001.
He entered the medical industry working
for Baxter Healthcare Inc. In 1997 he was
appointed director of marketing for critical
care in Europe and in 1999, when Baxter
Healthcare sold Edwards Lifesciences
Corporation, Mr Barry was appointed
director of marketing for the cardiac
surgery business of Edwards Lifesciences
Corporation in Europe, the Middle East
and Africa.
Clinical Advisory
Group
Paul Clifford
Finance Director
Mr Clifford qualified as a chartered
accountant with Touche Ross (now Deloittes)
in 1975. He joined the Group in April 2008
having spent 28 years in finance positions
in technology companies. In 1991 he co-
founded BCS Computing Limited, a private
equity backed concern investing in computer
software companies. He became finance
director of software group, Comino in 1996,
prior to its flotation on AIM in 1997. In 2006,
Comino was acquired by AIM quoted Civica
plc and Mr Clifford became finance director
of Civica UK Limited, its £80m turnover main
operating subsidiary, leaving in 2008.
Mr Clifford is also a non-executive director
of AIM quoted Prologic plc.
Ian Brown
Non-Executive Director
Mr Brown has over 25 years’ experience
in the medical devices industry and has
extensive experience of developing and
introducing new medical devices to the
market in the UK and overseas. Between
1986 and 2003, he was an executive director
and shareholder in a medical device start-up
company (Novamedix Group), initially
as sales and marketing director and later
as managing director. The company was
progressively sold to a major US healthcare
group (Ofix). In his early career, Mr Brown
worked in a number of UK and international
sales and marketing positions for Johnson &
Johnson, Smiths Industries and Pharmacia AB.
John Rowland
Company Secretary
Mr Rowland joined the Group in October
2007 qualifying as a Chartered Secretary
in 1983. Prior to joining the Group he was
Group Company Secretary of Robert Dyas,
the high street retailer, between 2000 and
2007 and remains a trustee of their pension
scheme. He has also served as Company
Secretary of Aegis Group plc and The Birkdale
Group plc both media companies and
as an Assistant Company Secretary of National
Westminster Bank PLC. Mr Rowland has
previously held senior positions with
Gestetner Holdings plc and Raybeck plc.
Dr Max Jonas
Dr Jonas is a Consultant Intensivist and Senior
Lecturer in critical care working at Southampton
University Hospitals. He is currently the Director
of the 28 bed general intensive care unit and has
specific interests in hemodynamics and the
assessment of monitoring equipment. He is an
elected member of the Council of the Intensive
Care Society and has completed a six year term
of the technology assessment section of the
European Society of Intensive Care Medicine.
He is the ex-president of the Society of Critical
Care Technologists.
Professor David Bennett
David Bennett is visiting Professor of Intensive
Care at King’s College Hospital, London and was
formerly Professor of Intensive Care Medicine
at St George’s Hospital London, where until 2003
he was director of the mixed medical/surgical
intensive care unit, a position he held for more
than 25 years. David has chaired numerous
scientific committees, was honorary secretary
of the European Society of Intensive Care
Medicine and editor-in-chief of Clinical Intensive
Care. He is on the editorial board of Intensive Care
Medicine and Critical Care. He reviews regularly for
these journals and also for Critical Care Medicine
and Anesthesia and Analgesia.
Professor Michael Pinsky
Professor Pinsky is Professor of Critical Care
Medicine, Bioengineering, Cardiovascular Diseases
and Anesthesiology at the University of Pittsburgh
School of Medicine, USA and is a member of the
editorial board of the Journal of Critical Care and
Critical Care Forum. He is editor-in-chief of the
eMedicine textbook Critical Care Medicine. He was
awarded Docteur honoris causa from the Université
de Paris V (Le Sorbonne). He has a wide range
of research interests – among them being the
study of heart-lung interactions, hemodynamic
monitoring, cardiovascular physiology, sepsis and
outcomes research. He is a world leading authority
on the application of both existing invasive, and
the more recent introduced minimally invasive,
monitoring technologies.
Dr Christopher Wolff
Dr Wolff holds the post of senior research fellow
at The Centre for Clinical Pharmacology, The William
Harvey Research Institute, Bart’s and London
Queen Mary School of Medicine and Dentistry,
London. He is a clinician, physiologist and
mathematician and has major research interests
in respiratory and cardiovascular physiology.
Dr David Band
Dr Band was appointed to the Clinical Advisory
Group in April 2011. He co-founded LiDCO
in 1991, is the co-inventor of the LiDCO system
and until April 2011 was the Group’s Scientific
Director. He is a specialist in the field of respiratory
physiology, electrochemistry and ion-selective
electrodes. He has a degree in medicine and was
a reader in applied physiology in the Division
of Physiology, GKT School of Biomedical Sciences,
St Thomas’ campus. 16
LiDCO Annual Report
2010/11
The UK Corporate Governance Code
Companies that have shares traded on AIM, the London Stock Exchange’s market for smaller growing companies, are not required to comply
with the disclosures of The UK Corporate Governance Code. However, the Board is committed to maintaining the highest standards
of corporate governance, where appropriate for a company of its size.
The Board of Directors
The Board currently consists of three executive directors and two non-executive directors. The non-executive directors are free from any
relationship with the executive management of the Company and the Board considers that both non-executive directors, other than through
their shareholdings, are independent directors. The non-executive directors bring a wide range of skills and experience to the Board.
The Chairman of the Board is Ms Wallis and Mr Brown is the senior independent non-executive director. Directors’ biographies are provided
on page 15.
There were 10 Board meetings during the year. The attendance of the individual directors at the Board Meetings and the Audit and
Remuneration Committee Meetings was as follows:
Attendance record at Board meetings and Committees
Board Audit Remuneration Nomination
Name Position Meetings Committee Committee Committee
Ms T A Wallis Non-executive Chairman 10 (10) 2(2) 6(6) n/a
Dr T K O’Brien Chief Executive Officer 9 (10) n/a n/a n/a
Mr P L Clifford Finance Director 10 (10) n/a n/a n/a
Dr D M Band Scientific Director 6 (10) n/a n/a n/a
Mr J G Barry Sales & Marketing Director 9 (10) n/a n/a n/a
Mr I G Brown Non-executive Director 10(10) 2(2) 6(6) n/a
Numbers in brackets denote the total number of meetings during the year.
All the directors have access to the advice and services of the Company Secretary, whose appointment and removal is a matter for the Board
as a whole. All directors are able to take independent advice in the furtherance of their duties, if necessary, at the Company’s expense.
The Company Secretary supports both the Board and the Committees.
Under the Company’s Articles of Association, all new directors are required to resign and seek re-election at the first Annual General Meeting
following their appointment. All directors are required to seek re-election at intervals of no more than three years.
Board evaluation and performance
In February 2011, the Board carried out an evaluation of the performance, functioning and composition of the Board and its Committees.
This involved the Chairman having a discussion with each director individually following which the findings were collated and discussed
by the Board and actions were agreed. It is the Board’s intention to continue to review annually its performance and that of its Committees.
Corporate Governance report 17
LiDCO Annual Report
2010/11
Committees of the Board
Audit Committee
The members of the Committee are Ms Wallis (Chairman) and Mr Brown. The external auditors also attend meetings. The Committee considers
financial reporting and internal controls. It also reviews the scope and results of the external audit and the independence and objectivity
of the auditors. It meets at least twice a year and reviews the interim and annual financial statements before they are submitted for approval
by the Board. The Committee met twice during the year. The Committee considers annually whether the auditors remain independent for the
purposes of the audit. This year the fee for non-audit work is £13,000 against an audit fee of £43,000. The Committee is satisfied that the auditors
remain independent for the purposes of the annual audit. The Committee considers that given the size of the Company and its current stage
of development a separate internal audit function cannot be justified, but the matter is re-considered annually by the Committee.
Remuneration Committee
The members of the Committee are Ms Wallis (Chairman) and Mr Brown. The Committee reviews and sets the remuneration of the executive
directors. It also reviews the policy for the salaries and bonuses of all other staff. It advises on share schemes and approves the granting
of share options. The Committee met six times during the year.
Nomination Committee
The members of the Committee are Ms Wallis (Chairman), Mr Brown and Dr O’Brien. The Committee considers, at the request of the Board,
candidates for new appointments to the Board and advises on all matters relating to Board appointments. The Committee did not meet during
the year.
Relations with shareholders
The Company seeks to maintain and enhance good relations with its shareholders. The Company’s interim and annual reports are supplemented
by public announcements to the market on technological and commercial progress. All investors have access to up-to-date information
on the Company via its website, www.lidco.com, which also provides contact details for investor relations enquiries. All shareholders are invited
to make use of the Company’s Annual General Meeting to raise any questions regarding the management or performance of the Company.
The Chief Executive, Finance Director and Chairman meet regularly with shareholders and the investing community and report to the Board
feedback from those meetings. Both non-executive directors have the opportunity to attend shareholder meetings. The Board is kept
informed on market views about the Company. 18
LiDCO Annual Report
2010/11
The Company recognises the importance of corporate social responsibility.
At the core of LiDCO are its medical products for hemodynamic monitoring which have been developed over a number of years and continue
to be developed. The original objective of the design of these products was to translate specialist physiological parameters and principles into
useable information and tangible protocols to improve clinical outcomes. The Company has been successful in achieving this objective and
its products, which are used in hospitals in many parts of the world, are life saving and help surgeons to improve the outcome of clinical
operations for the benefit of the patient both during and after surgery and help hospitals to reduce their costs.
LiDCO works with its employees, customers and suppliers to conduct its business in an ethical way. The Company is of a relatively small size,
but growing. Thus the Company’s commitment to corporate social responsibility is dynamic and is reviewed when considered appropriate.
Employees
The Company recognises that an essential part of its continued success is the support and involvement of its employees.
• Effective communication is essential to ensure its employees are fully engaged with the business. The senior management team meets
regularly throughout the year as a forum to discuss interdepartmental issues and briefing sessions are also held by the Chief Executive
to update employees on Company progress, strategy and objectives.
• Employees have annual appraisals to set objectives, identify strengths and areas for development.
• Training is provided where necessary to enhance job performance and aid development.
• The Company has a share option scheme with a high level of employee participation.
• The Company regularly reviews the benefits offered to employees.
Environment
Whilst not of substantial impact compared with many other manufacturing industries, nevertheless the Company recognises its activities
have an impact on the environment and acknowledges its responsibility to ensure this is minimised.
• In accordance with the requirements of the Waste Electrical and Electronic Equipment Regulations (WEEE), the Company has signed
up to a compliance system to recycle and dispose of electrical equipment waste.
• Where possible, other products are recycled within the Company.
• Paper, cardboard and ink cartridge recycling collection facilities are in place in London and Cambridge.
• Redundant computer equipment is offered to employees or disposed of in accordance with good practice.
• Company purchased vehicles are run on diesel fuel for fuel efficiency.
• The Company continually reviews the chemicals it uses in its manufacturing processes with the aim of using the least toxic and most
environmentally friendly products commensurate with producing high quality products.
Corporate social responsibility statement 19
LiDCO Annual Report
2010/11
Ethics and values
• The Company designs and manufactures life saving products which help clinicians to improve the outcome of clinical operations
for the benefit of patients both during and after surgery and helps hospitals to reduce their costs.
• The Company aims for all employees to have job satisfaction, a safe and secure working environment, the feeling that their achievements
are recognised and an opportunity to develop their full potential.
• The Company recognises customer needs for a high level of customer service and quality of its products, at the right price.
Health and safety
• As a producer of medical products the Company operates in a highly regulated environment and is subject to regular inspection and audit.
• The Company uses an external specialist to advise on its health and safety policy and practice. Stringent procedures are in place in areas
of the Company where risks are apparent, and the Company provides a physically safe working environment, training, protective clothing
and equipment to all employees who undertake their duties.
• All Company car drivers are provided with a full driving risk assessment and training upon joining, and a further paper based risk assessment
is completed every three years.
• Health and safety matters are regularly reviewed at Board meetings.
Shareholders
The Company aims to treat its stakeholders in a responsible manner. It maintains regular contact with its major shareholders to explain
developments in the business and all shareholders are invited to question management at the Annual General Meeting. See also ‘Relations
with shareholders’ in the Corporate Governance Report on page 17. 20
LiDCO Annual Report
2010/11
The directors present their Remuneration Report which covers the remuneration of both the executive and non-executive directors.
The report will be subject to shareholder vote at the forthcoming Annual General Meeting in June 2011.
Committee membership
The membership of the Remuneration Committee is made up of the following non-executive directors:
T A Wallis (Chairman)
I G Brown
Neither of the Committee members has any day-to-day involvement in the running of the Company, nor do they have any business or other
relationship that could affect, or appear to affect, the exercise of their independent judgement, other than as shareholders. No director plays
a part in any decision about his or her own remuneration.
Remuneration policy
The Committee determines on behalf of the Board, the remuneration for the executive directors and reviews remuneration policies for all
employees. Remuneration levels are set in order to attract high calibre recruits and to retain and motivate those directors and employees once
they have joined the Company to ensure the future success of the business and to deliver shareholder value. This is achieved by a combination
of base salary, bonuses and share options, which are offered to executive directors and employees at all levels. The Committee met six times
in the year.
Base salary
All executive directors receive a base salary and, if appropriate, an allowance in lieu of benefits. The salary reflects the experience, level
of competence and days worked of the individual to whom it applies, as judged by the Committee, taking into account salary levels
in the market.
Annual bonus
The executive directors who served during the year are members of the Company’s Senior Management Bonus Scheme. Under the terms
of the Scheme, the Remuneration Committee assesses the directors’ individual performances soon after the end of the financial year, judged
against pre-determined targets.
The criteria for awarding bonuses during the year included corporate and individual objectives. The principal corporate objective on which the
directors are judged is operating profit/loss. Bonuses are capped at 50% of base salary.
Remuneration policy of the non-executive directors
The Board determines the remuneration of the non-executive directors. The non-executive directors do not participate in the Group’s share
option schemes and are not eligible for annual incentive payments or benefits in kind.
Directors’ remuneration report 21
LiDCO Annual Report
2010/11
Remuneration of directors
Year ended 31 January 2011
Allowance
Salary in lieu of
and fees benefits Benefits Bonus Total 2010
£’000 £’000 £’000 £’000 £’000 £’000
T A Wallis 44 – – – 44 44
T K O’Brien 185 38 1 22 246 259
J G Barry 175 35 4 19 233 241
P L Clifford 96 20 1 11 128 92
D M Band 46 9 – 3 58 61
I G Brown 29 – – – 29 28
Total 575 102 6 55 738 725
Contracts of service
Details of the service contracts currently in place for the directors who have served during the year are as follows:
Executive directors
The service contracts of Dr O’Brien and Mr Barry are dated 29 June 2001 and are not set for a specific term but include a rolling 12 months’
notice period. Mr Clifford, who is part-time, has a service contract with the Company dated 21 April 2008 as with the other executive directors,
this is not for a specific term, but includes a rolling six months’ notice period.
Non-executive directors
The non-executive directors do not have service contracts with the Company. The letter of appointment for each non-executive director states
that they are appointed for an initial period of three years. At the end of the initial period, the appointment may be renewed for a further
period if the Company and the director agree. In keeping with best practice, these appointments are terminable without notice by either party.
The Chairman’s appointment is for a term ending 19 December 2011 and Mr Brown’s appointment for a term ending 11 October 2011. 22
LiDCO Annual Report
2010/11
Directors’ interests in share options
Options were granted to the executive directors as follows:
Options
Options granted Lapsed Options
at 31 Jan Date of during during at 31 Jan Exercise Exercisable Expiry
Name Option type 2010 grant the year the year 2011 price (p) from date
T K O’Brien EMI 750,000 Dec-2002 750,000 13.00 Dec-2005 Dec-2012
EMI 11,627 Apr-2005 11,627 21.50 Apr-2008 Apr-2015
Unapproved 265,768 Apr-2005 265,768 21.50 Apr-2008 Apr-2015
EMI 150,000 May-2009 150,000 12.67 May-2012 May-2019
1,177,395 Nil Nil 1,177,395
D M Band EMI 750,000 Dec-2002 750,000 13.00 Dec-2005 Dec-2012
EMI 11,627 Apr-2005 11,627 21.50 Apr-2008 Apr-2015
Unapproved 53,489 Apr-2005 53,489 21.50 Apr-2008 Apr-2015
815,116 Nil Nil 815,116
J G Barry Unapproved 106,250 July-2001 106,250 0.50 July-2004 Jul-2011
Unapproved 211,000 Dec-2002 211,000 13.00 Dec-2005 Dec-2012
EMI 539,000 Dec-2002 539,000 13.00 Dec-2005 Dec-2012
Unapproved 90,000 Nov-2003 90,000 28.25 Nov-2006 Nov-2013
Unapproved 356,844 Apr-2005 356,844 21.50 Apr-2008 Apr-2015
Unapproved 192,436 Apr-2005 192,436 22.00 Dec-2005 Apr-2015
Unapproved 328,539 Apr-2005 328,539 22.00 Apr-2006 Apr-2015
Unapproved 656,903 Apr-2005 656,903 22.00 Sep-2006 Apr-2015
EMI 136,045 Apr-2005 136,045 22.00 Dec-2005 Apr-2015
Unapproved 45,000 Jun-2006 45,000 21.00 Jun-2009 Jun-2016
Unapproved 75,000 Jun-2007 75,000 12.50 Jun-2010 Jun-2017
Unapproved 83,333 Apr-2008 83,333 7.50 Apr-2011 Apr-2018
EMI 266,667 Apr-2008 266,667 7.50 Apr-2011 Apr-2018
Unapproved 150,000 May-2009 150,000 12.67 May-2012 May-2019
Unapproved – Jun-2010 100,000 100,000 19.92 Jun-2013 Jun-2020
3,237,017 100,000 Nil 3,337,017
P L Clifford Approved 66,000 Apr-2008 66,000 7.50 Apr-2011 Apr-2018
Approved 75,000 May-2009 75,000 12.67 May 2012 May-2019
EMI – Jun-2010 100,000 100,000 19.92 Jun-2013 Jun-2020
141,000 100,000 Nil 241,000
Totals 5,370,528 200,000 Nil 5,570,528
The share price was 18.25p on 1 February 2010 and 18.75p on 31 January 2011, with high and low during the year of 24.50p and
16.50p respectively.
Directors’ remuneration report
continued 23
LiDCO Annual Report
2010/11
Pensions
No pension contributions were payable by the Group during the year (2009/10: £nil).
Shareholder return
The graph below shows the share price performance since January 2006, using the FTSE TechMARK Mediscience Index as a comparator,
which the directors consider to be a suitable benchmark index.
Theresa Wallis
Chairman of the Remuneration Committee
15 April 2011
31 Jan
2006
31 Jan
2007
31 Jan
2008
31 Jan
2009
31 Jan
2010
31 Jan
2011
0
5
10
15
20
25
30 LiDCO Ord 0.5p
TechMARK
MediScience
Index rebased 24
LiDCO Annual Report
2010/11
The directors of LiDCO Group Plc present their annual report and audited financial statements (Annual Report) for the year ended
31 January 2011.
Principal activities, business review and business risks
The principal activity of the Group is the development, manufacture and sale of cardiac monitoring equipment.
The Chairman’s statement, the Chief Executive Officer’s Statement and Corporate Social Responsibility Statement form part of this
business review.
The key commercial risks associated with the business are:
• healthcare spending – the Group’s performance is affected by hospitals’ expenditure and any, or developing, capital budgetary constraints,
which the Group mitigates by targeting its efforts and resources according to sales opportunities where budgets are likely to be available
and a wider geographic sales growth predominantly through its specialist distributor network;
• competitive activity from other producers of hemodynamic monitors who sell competing products which may restrict the Group’s ability
to maintain or make further progress in increasing its share of the growing minimally invasive hemodynamic monitoring market. The Group
addresses this by encouraging independent clinical validation of its products, introducing product developments/enhancements and
supporting clinical studies that focus on patient outcome improvement and economic benefits; and
• the Group relies on distributors for its sales and marketing activities outside the UK. The Group mitigates the risk of distributor
underperformance by selecting distributors with the requisite resources, skills, access to customers and creditworthiness and by providing
training programmes and extensive support both in the initial phase following appointment and on an ongoing basis.
The key financial risk is the management and maintenance of sufficient cash balances to support the ongoing development, supply and
marketing of the LiDCO products.
Results and dividends
The Group’s revenue for the year was £6,237,000 (2009/10: £5,367,000). The Group made a consolidated loss after taxation of £390,000
(2009/10: £1,427,000). The directors do not recommend the payment of a dividend (2009/10: £nil).
The Company’s share price at 29 January 2011 was 18.75p (2010: 18.25p).
Research and development
The Group continued to develop the LiDCO products during the year. Details of the costs expended on research and development are set out
in notes 3 and 8 to the financial statements on pages 39 and 42 respectively.
Share capital and share premium account
Full details of the issued share capital of the Company, together with details of the movements in the Company’s issued share capital and the
share premium accounts during the year, are shown in notes 14 on page 47 and 4 on page 52 to the financial statements.
Directors
The directors of the Company who served during the year are set out below; short biographies are set out on page 15.
T A Wallis Non-executive Chairman
T K O’Brien Chief Executive Officer
P L Clifford Finance Director
D M Band Scientific Director
J G Barry Sales and Marketing Director
I G Brown Non-executive Director
Mr Brown and Mr Clifford retire by rotation and, being eligible, offer themselves for re-election at the forthcoming Annual General Meeting.
Dr Band resigned as a director on 18 April 2011 and joined the Clinical Advisory Group.
Directors’ remuneration
The Remuneration Report, which includes information regarding directors’ service contracts, appointment arrangements and interests in share
options, can be found on pages 21 and 22.
Directors’ report 25
LiDCO Annual Report
2010/11
Directors’ interests in shares
The directors who held office at 31 January 2011 had beneficial interests in the ordinary shares of the Company as shown below:
Directors’ shareholdings
Ordinary shares of 0.5p each
31 January 31 January
2011 2010
Number Number
T A Wallis 301,037 301,037
T K O’Brien 11,516,563 11,516,563
P L Clifford 575,000 500,000
D M Band 7,160,832 7,160,832
J G Barry 429,642 429,642
I G Brown 200,000 200,000
The directors have no interests in the shares of the Company’s subsidiary undertakings.
Directors’ indemnities and Directors’ and Officers’ insurance
The Company has exercised the power given by shareholders at the 2006 Annual General Meeting to extend the indemnities to directors and
officers against liability to third parties. The directors also have Directors’ and Officers’ insurance cover in place in respect of personal liabilities
which may be incurred by directors and officers in the course of their service with the Company.
Employment policy
Equal opportunity is given to all employees regardless of their gender, race or ethnic origin, religion, age, disability, or sexual orientation.
The Company’s policy is to encourage the involvement of all employees in the development and performance of the Group. Employees are
briefed on the Group’s activities through meetings and discussions with management and all employees are encouraged to give their views
on matters of common concern through the line management. A significant number of employees have share options.
Supplier payment policy
It is and will continue to be the policy of the Group to negotiate with suppliers so as to obtain the best available terms taking account
of quality, delivery, price and period of settlement and, having agreed those terms, to abide by them. The Group’s average creditor payment
period as at 31 January 2011 was 41 days (2010: 25 days). 26
LiDCO Annual Report
2010/11
Significant shareholdings
As at 11 April 2011, the Company has been notified that the following shareholders, other than directors, had the following interest of 3% or
more of the Company’s ordinary share capital:
Number of shares
in which there Percentage
Shareholder is an interest notified
*
Ingalls & Snyder Llc 27,878,594 16.02%
Cheviot Asset Management Limited 13,956,163 8.02%
H J Leitch 13,177,489 7.57%
P A Brewer 11,724,727 6.74%
R M Greenshields 9,042,407 5.20%
Liontrust Intellectual Capital Trust 8,738,639 5.02%
Octopus Investments Limited 5,634,200 3.24%
*
The percentages shown are based on the issued share capital at that date.
Directors’ responsibilities for the financial statements accounts
The directors are responsible for preparing the Annual Report and Group financial statements in accordance with applicable law and
International Financial Reporting Standards as adopted by the European Union. The parent company financial statements have been prepared
in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs
of the Company and the Group and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are
required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the
financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue
in business.
In so far as the directors are aware:
• there is no relevant audit information of which the Company’s auditors are unaware; and
• the directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish
that the auditors are aware of that information.
The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position
of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation
in other jurisdictions.
Directors’ report
continued 27
LiDCO Annual Report
2010/11
Going concern
The Company’s business activities, together with a review of the market and the company’s distribution channels are set out in the Chief Executive
Officer’s Statement on pages 8 to 13. In addition, note 13 to the financial statements includes the Company’s policies for managing its capital;
its financial risk; details of its financial instruments; and its exposures to credit risk and liquidity risk.
The Company has a number of customers across different geographic areas and considerable recurring revenue streams through the sales
of its disposable sensors and smart cards which represented 59% of its total revenues in the year to 31 January 2011.
The Group finances its operations through shareholders’ funds and has no borrowings. The directors have a reasonable expectation that
the Company has adequate resources to continue in operational existence for the foreseeable future based on forecasts for the two years
to 31 January 2013. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
Financial risk management
The Financial Risk Management objectives and policies of the Group, including the exposure to interest rate risk, liquidity risk and currency risk
are set out in note 13 to the financial statements on pages 44 to 46.
Key Performance Indicators (KPIs)
The Board monitors progress against the Group’s strategy and by reference to the KPIs, specifically revenue growth, gross margin, working
capital levels and market position. These KPIs have been addressed in the Chief Executive Officer’s Review and the Financial Review.
Internal controls, regulation and risk management
The composition of the Board and the senior management team provides a suitable range of knowledge and experience to enable adequate
risk monitoring. The Company has implemented an organisational structure with clearly defined responsibilities and lines of accountability.
Detailed budgets are prepared annually and progress against budget are reviewed monthly. Underpinning the monthly financial reporting
is a system of internal control, based on authorisation procedures.
The adequacy of internal controls and the internal control structures was reviewed by the Board during the year.
As a medical device Company, LiDCO also has a system of regulatory controls, to ensure compliance with all requirements of the Medicines
and Healthcare Products Regulatory Agency (MHRA), the US Food and Drug Administration (FDA) and other medical bodies. During the year
the Company was compliant with ISO13485 (Medical Devices – Quality Management Systems) and ISO 9001 (Quality Management Systems).
The Board has established a process involving all departments for the comprehensive assessment of key risks to the business. The risk register
is updated on an ongoing basis and regularly reviewed by the Board. Actions to mitigate risk are identified and agreed.
Auditors
A resolution to re-appoint Grant Thornton UK LLP as auditors and to authorise the directors to set their remuneration will be proposed at the
forthcoming Annual General Meeting.
Annual General Meeting
The Notice to convene the Annual General Meeting of the Company to be held on Wednesday 29 June 2011 is set out on page 3 of the
separate circular which includes an explanation of each resolution.
By order of the Board
John Rowland
Company Secretary
15 April 2011 28
LiDCO Annual Report
2010/11
We have audited the Group financial statements of LiDCO Group Plc for the year ended 31 January 2011 which comprise the consolidated
comprehensive income statement, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement
of changes in shareholders equity and the related notes. The financial reporting framework that has been applied in their preparation
is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the Company’s members, as a body, in accordance with chapter 3 of part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the Group financial
statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group
financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require
us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm.
Opinion on financial statements
In our opinion the Group financial statements:
• give a true and fair view of the state of the Group’s affairs as at 31 January 2011 and of its loss for the year then ended;
• have been properly prepared in accordance with IFRS as adopted by the European Union; and
• have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the Group financial statements are prepared
is consistent with the Group financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the parent company financial statements of LiDCO Group Plc for the year ended 31 January 2011.
Christopher Smith
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
London
15 April 2011
Independent auditor’s report to the members of LiDCO Group Plc 29
LiDCO Annual Report
2010/11
Consolidated comprehensive income statement
For the year ended 31 January 2011
Year Year
ended ended
31 January 31 January
2011 2010
Note £’000 £’000
Revenue 2 6,237 5,367
Cost of sales (2,021) (2,074)
Gross profit 4,216 3,293
Administrative expenses (4,714) (4,832)
Loss from operations 3 (498) (1,539)
Finance income 8 5
Finance expense – (11)
Loss before tax (490) (1,545)
Income tax 5 100 118
Loss and total comprehensive expense for the year attributable to equity holders of the parent (390) (1,427)
Loss per share (basic and diluted) (p) 6 (0.22) (0.87)
All transactions arise from continuing operations.
There were no items of other comprehensive income for the financial year.
The accompanying accounting policies and notes form an integral part of these financial statements. 30
LiDCO Annual Report
2010/11
2011 2010
Note £’000 £’000
Non-current assets
Property, plant and equipment 7 513 587
Intangible assets 8 755 764
1,268 1,351
Current assets
Inventory 9 1,047 1,094
Trade and other receivables 10 1,607 1,649
Current tax 109 120
Cash and cash equivalents 1,404 1,846
4,167 4,709
Current liabilities
Trade and other payables 11 (767) (603)
Deferred income 11 (74) (614)
Borrowings 11 (10) (10)
(851) (1,227)
Net current assets 3,316 3,482
Total assets less current liabilities 4,584 4,833
Equity attributable to equity holders of the parent
Share capital 14 870 869
Share premium 25,393 25,393
Merger reserve 8,513 8,513
Retained earnings (30,196) (29,956)
Total equity 4,580 4,819
Non-current liabilities
Finance lease liability 12 4 14
Total non-current liabilities 4 14
Total equity and non-current liabilities 4,584 4,833
The financial statements were approved by the Board of Directors on 15 April 2011.
Theresa Wallis Terence O’Brien
Director Director
The accompanying accounting policies and notes form an integral part of these financial statements.
Consolidated balance sheet
At 31 January 2011 31
LiDCO Annual Report
2010/11
Consolidated cash flow statement
For the year ended 31 January 2011
Year Year
ended ended
31 January 31 January
2011 2010
£’000 £’000
Loss before tax (490) (1,545)
Net finance (income)/costs (8) 6
Depreciation and amortisation charges 639 672
Share-based payments 150 46
Decrease/(increase) in inventories 47 (41)
Decrease in receivables 42 37
Increase/(decrease) in payables 164 (302)
Decrease/(increase) in deferred income (540) 577
Interest paid – (11)
Income tax credit received 111 118
Net cash inflow/(outflow) from operating activities 115 (443)
Cash flows from investing activities
Purchase of property, plant and equipment (127) (132)
Purchase of intangible assets (429) (474)
Interest received 8 5
Net cash used in investing activities (548) (601)
Net cash outflow before financing (433) (1,044)
Cash flows from financing activities
Repayment of finance lease (10) (10)
Issue of ordinary share capital 1 3,021
Invoice discounting financing facility – (364)
Net cash (outflow)/inflow from financing activities (9) 2,647
Net (decrease)/increase in cash and cash equivalents (442) 1,603
Opening cash and cash equivalents 1,846 243
Closing cash and cash equivalents 1,404 1,846
The accompanying accounting policies and notes form an integral part of these financial statements. 32
LiDCO Annual Report
2010/11
Share Share Merger Retained Total
capital premium reserve earnings equity
£’000 £’000 £’000 £’000 £’000
At 1 February 2009 710 22,531 8,513 (28,575) 3,179
Issue of share capital 159 2,862 – – 3,021
Share-based payment expense – – – 46 46
Transactions with owners 159 2,862 – 46 3,067
Loss and total comprehensive expense for the year – – – (1,427) (1,427)
At 31 January 2010 869 25,393 8,513 (29,956) 4,819
Issue of share capital 1––– 1
Share-based payment expense – – – 150 150
Transactions with owners 1 – – 150 151
Loss and total comprehensive expense for the year – – – (390) (390)
At 31 January 2011 870 25,393 8,513 (30,196) 4,580
The share premium account represents the excess over the nominal value for shares allotted.
The merger reserve represents a non-distributable reserve arising from historic acquisitions.
The accompanying accounting policies and notes form an integral part of these financial statements.
Consolidated statement of changes in shareholders’ equity
For the year ended 31 January 2011 33
LiDCO Annual Report
2010/11
Notes to the financial statements
For the year ended 31 January 2011
1 Principal accounting policies
The Group’s principal activity is the development, manufacture and sale of cardiac monitoring equipment. LiDCO Group Plc is the Group’s
ultimate parent company. It is incorporated and domiciled in England & Wales and situated at the address shown on page 53. The Group’s
shares are quoted on the AIM section of the London Stock Exchange.
Basis of preparation
These financial statements have been prepared in accordance with the principal accounting policies adopted by the Group, International
Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations (IFRIC) as adopted by the EU and those parts of the
Companies Act 2006 applicable to companies reporting under IFRS. They are presented in sterling, which is the functional currency of the
parent company.
The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge
of current events and actions, actual results may ultimately differ from those estimates.
The accounting policies have been applied consistently throughout all periods presented in these financial statements. These accounting
policies comply with each IFRS that is mandatory for accounting periods ending on 31 January 2011.
The Group’s consolidated financial statements are prepared in accordance with the principal accounting policies adopted by the Group as set
out below and International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations (IFRIC) as adopted
for use in the European Union (EU), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The following standards have been amended or implemented during the year. The Group’s consolidated financial statements have been
prepared in accordance with these changes where relevant.
• IFRS 2 (amendments), ‘Group cash-settled share-based payment transactions’ , incorporates IFRIC 8, ‘Scope of IFRS 2’ , and IFRIC 11, ‘IFRS 2 –
Group and treasury share transactions’ , and expands on the guidance in IFRIC 11 to address the classification of group arrangements.
• IFRS 3 (revised), ‘Business combinations’ , and consequential amendments to IAS 27, ‘Consolidated and separate financial statements’ , IAS 28,
‘Investments in associates’ , and IAS 31, ‘Interests in joint ventures’ , are effective prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009.
• IFRS 5 (amendment), ‘Non-current assets held for sale and discontinued operations’ , clarifies the disclosures required in respect of non-current
assets (or disposal groups) classified as held for sale or discontinued operations.
• IAS 1 (amendment), ‘Presentation of financial statements’ , clarifies that the potential settlement of a liability by the issue of equity is not
relevant to its classification as current or non-current.
• IAS 27 (revised) requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control
and these transactions will no longer result in goodwill or gains and losses.
• IAS 36 (amendment), ‘Impairment of assets’ , clarifies that the largest cash generating unit (or group of units) to which goodwill should
be allocated for the purposes of impairment testing is an operating segment, as defined by paragraph 5 of IFRS 8, ‘Operating segments’ .
• IFRIC 9, ‘Reassessment of embedded derivatives and IAS 39, Financial instruments: Recognition and measurement’ , requires an entity
to assess whether an embedded derivative should be separated from a host contract when the entity reclassifies a hybrid financial asset
out of the ‘fair value through profit or loss’ category.
• IFRIC 16, ‘Hedges of a net investment in a foreign operation’ , states that, in a hedge of a net investment in a foreign operation, qualifying
hedging instruments may be held by any entity or entities within the group, including the foreign operation itself, as long as the
designation, documentation and effectiveness requirements of IAS 39 that relate to a net investment hedge are satisfied.
• IFRIC 17, ‘Distribution of non-cash assets to owners’ , provides guidance on accounting for arrangements whereby an entity distributes
non-cash assets to shareholders either as a distribution of reserves or as dividends.
• IFRIC 18, ‘Transfers of assets from customers’ clarifies the requirements of IFRSs for agreements in which an entity receives an item of property,
plant and equipment from a customer.
These standards are effective but the Group has not adopted them early. 34
LiDCO Annual Report
2010/11
IFRS standards and interpretations not yet adopted
Standard issued but not yet effective
The following standards and interpretations are in issue but not yet adopted by the EU:
• IFRS 9 Financial Instruments (effective 1 January 2013)
• Improvements to IFRS issued May 2010 (some changes effective 1 July 2010, others effective 1 January 2011)
• Disclosures – Transfers of Financial Assets – Amendments to IFRS 7 (effective 1 July 2011)
• Deferred Tax: Recovery of Underlying Assets – Amendments to IAS 12 Income Taxes (effective 1 January 2012)
• Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters – Amendments to IFRS 1 First-time Adoption of International
Financial Reporting Standards (effective 1 July 2011)
The current endorsement status is listed on the EFRAG website under ‘Endorsement Status’: http://www.efrag.org/homepage.asp
Going concern
The Company’s business activities, together with a review of the market and the Company’s distribution channels are set out in the Chief
Executive Officer’s Statement on pages 8 to 13. In addition, note 13 to the financial statements include the Company’s policies for managing
its capital; its financial risk; details of its financial instruments; and its exposures to credit risk and liquidity risk.
The Company has a number of customers across different geographic areas and considerable recurring revenue streams through the sales
of its disposable sensors and smart cards which represented 59% of its total revenues in the year to 31 January 2011.
The Group finances its operations through shareholders’ funds and has no borrowings. The directors have a reasonable expectation that the
Company has adequate resources to continue in operational existence for the foreseeable future based on forecasts for the two years
to 31 January 2013. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
Accounting convention
The financial statements are prepared under the historic cost convention. The measurement basis and significant accounting policies are set
out below.
Basis of consolidation
The Group’s consolidated financial statements consolidate those of the Company and of its subsidiary undertakings drawn up to 31 January 2011.
Subsidiary undertakings are all entities over which the Group has the power to control the financial and operating policies so as to obtain
economic benefits from its activities. The Group obtains and exercises control through voting rights.
Business combinations are dealt with by the purchase method. The purchase method involves the recognition at fair value of all identifiable
assets and liabilities, including contingent liabilities of the subsidiary at the acquisition date whether or not they were recognised in the
statements of the subsidiary prior to acquisition. On initial recognition the assets and liabilities of the subsidiary are included in the
consolidated balance sheet at their fair values which are also used as the bases for subsequent measurement in accordance with the Group
accounting policies. The results of any subsidiary undertakings acquired during the period, where applicable, are included from the date
of acquisition. All intra-Group transactions, balances, income and expenses are eliminated on consolidation.
Revenue recognition
Revenues are recognised at fair value of the consideration receivable net of the amount of value added taxes.
Sale of goods
Sales revenue comprises revenue earned (net of returns, discounts and allowances) from the provision of products to entities outside the
consolidated entity. Sales revenue is recognised when the risks and rewards of ownership of the goods passes to the customer, which
is normally upon delivery, and when the amount of revenue can be measured reliably.
The Group has an arrangement for the placing of monitors in hospitals with Med One Capital Funding, LLC, a US company that has trading
relationships with the majority of US hospitals. When the Group has sold monitors to Med One they are entitled to a portion of the monthly
revenue from the sale of consumables relating to those monitors for a period of three years. The full revenue arising from the sale of such
consumables is recognised as revenue by the Group and payments made to Med One in this way are included within cost of sales.
Licence fees
Licence fees are recognised in accordance with the substance of the relevant distribution agreement, provided that it is probable that the
economic benefit associated with the transaction will flow to the Group and the amount of revenue can be reliably measured. Licence fees
received in advance of the recognition of those fees is shown as deferred income.
Notes to the financial statements
continued 35
LiDCO Annual Report
2010/11
Delivery of services
Revenue from rendering services is recognised in the period in which the service is provided.
Interest income
Interest income is brought to account as it accrues, using the effective interest method.
Other income
Other income is brought to account when the consolidated entity’s right to receive income is established and the amount can be reliably measured.
Research and development
Research expenditure is charged to the income statement in the period in which it is incurred.
Development costs are capitalised when all the following conditions are satisfied:
• completion of the intangible asset is technically feasible so that it will be available for use or sale;
• the Group intends to complete the intangible asset and use or sell it;
• the Group has the ability to use or sell the intangible asset;
• the intangible asset will generate probable future economic benefits;
• there are adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
• the expenditure attributable to the intangible asset during its development can be measured reliably.
Capitalised development costs which comprise cost of materials, labour and attributable overheads are amortised over a period of three
to five years.
Development costs not meeting the criteria for capitalisation are expensed as incurred.
Intangible assets – development costs
Intangible assets represent costs relating to product registration in new countries, software development costs and clinical trials on the
LiDCO system. Where the directors are satisfied as to the technical, commercial and financial viability of these projects, the expenditure
has been capitalised and is amortised in equal amounts over the useful life.
The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying
value may not be recoverable. The amortisation periods generally applicable are:
Clinical trials Three years
Product registration costs Five years
Software development Three years
Property, plant and equipment
Property, plant and equipment are stated at cost, net of depreciation. Depreciation is calculated to write down the cost less estimated residual
value of these assets by equal annual instalments over their estimated useful economic lives which are re-assessed annually. The periods/rates
generally applicable are:
Leasehold improvements Over the expected life of the lease
Plant and machinery 10% per annum
Fixtures and fittings 12.5% per annum
Office equipment 20% per annum
Computer equipment 33% per annum
Medical monitors 20% per annum
Medical monitors include equipment on long-term loan to hospitals for active use where the hospital pays for disposables. Also included
in this category is equipment for demonstration purposes, clinical trials and testing. 36
LiDCO Annual Report
2010/11
Leases
Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance
leases. Assets held under finance leases are capitalised at the lower of fair value or present value of the minimum lease payments in the
balance sheet and depreciated over their estimated useful economic lives. The interest element of leasing payments represents a constant
proportion of the capital balance outstanding and is charged to the income statement over the period of the lease.
All other leases are regarded as operating leases and the payments made under them are charged to the income statement on a straight-line
basis over the lease term.
Inventories
Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course
of business, less the estimated costs of selling expenses.
The cost of inventories is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing
them to their existing locations and condition.
Income tax
Current tax is the tax currently payable based on the taxable result for the year.
Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference
between the carrying amounts of assets and liabilities and their tax bases. In addition, tax losses available to be carried forward as well as other
income tax credits to the Group are assessed for recognition as deferred tax assets.
Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the
underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and
liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively
enacted at the balance sheet date.
Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate
to items that are charged or credited directly to other comprehensive income or equity (such as the revaluation of land) in which case the
related deferred tax is also charged or credited directly to equity.
Foreign currency
Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities
in foreign currencies are translated at the rates of exchange ruling at the balance sheet. Any gain or loss arising from a change in exchange
rates subsequent to the date of the transaction is included as an exchange gain or loss in the income statement.
Trade and other receivables
Trade receivables, which generally have 30-90 day terms, are initially recognised at fair value and subsequently at amortised cost using the
effective interest method, less provisions for impairment. Provision against trade receivables is made when there is objective evidence that
the group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the
write-down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand and demand deposits with an original maturity of three months or less, and
which are subject to an insignificant risk of change in value.
Financial liabilities and equity
Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements
entered into and the definitions of a financial liability and an equity instrument. Financial liabilities are obligations to pay cash or other
financial assets and are recognised when the Group becomes party to the contractual provisions of the instrument and are initially recorded
at fair value net of issue costs. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting
all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below.
Notes to the financial statements
continued 37
LiDCO Annual Report
2010/11
Financial liabilities
The Group’s financial liabilities include borrowings, trade and other creditors. Financial liabilities are measured initially at fair value net
of transaction costs and thereafter at amortised cost using the effective interest rate method.
Share-based payments
The Group has three equity-settled share-based remuneration schemes for employees. Where share options are awarded to employees,
the fair value of the options at the date of grant is calculated using a pricing model and is charged to the income statement over the vesting
period. Market related performance conditions are factored into the fair value of the options granted and a charge is made irrespective
of whether the market related performance conditions are satisfied. In respect of awards with non market related performance conditions,
an estimate of the proportion that will vest is made at the award date which is adjusted if the number of share options expected to vest
differs from the previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period.
Where the Group issues share warrants in respect of distributor arrangements, the fair value of the options at the date of grant is calculated
using a pricing model and is charged to the income statement over the vesting period.
Impairment
The carrying values of property, plant and equipment and intangible assets with finite lives are reviewed for impairment when events
or changes in circumstances indicate the carrying value may be impaired. If any such indication exists the recoverable amount of the asset
is estimated in order to determine the extent of impairment loss.
Key judgements in applying the entity’s accounting policies
The Group’s management makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based
on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk
of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Useful lives of intangible assets and property, plant and equipment
Intangible assets and property, plant and equipment are amortised or depreciated over their useful lives. Useful lives are based on the
management’s estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness.
Changes to estimates can result in significant variations in the carrying value and amounts charged to the income statement in specific
periods (notes 7 and 8).
Inventory
The Group reviews the net realisable value of, and demand for, its inventory on a regular basis to provide assurance that recorded inventory
is stated at the lower of cost or net realisable value. Factors that could impact estimated demand and selling prices include the timing and
success of future technological innovations, competitor actions, supplier prices and economic trends (note 9).
Trade receivables
Trade receivables are primarily due from three groups: hospitals in the UK and USA where direct sales are made, global distributors
predominantly in the USA and independent distributors, predominantly in Europe and the Rest of the World. In making provision for
overdue trade receivables, management consider the first two groups to be generally of lower risk than those due from independent
distributors and apply a lower level of provision. The size of the distributor together with its financial credit rating and the length
of relationship with the Group are also taken into account (note 10).
Licence income
The Group may receive licence fees in connection with the granting of exclusive distribution rights for overseas territories. When recognising
such licence fees management considers the substance of the relevant distribution agreement. Any work that the Group needs to undertake
to fulfil its obligation is taken into consideration and the period over which the work is likely to be performed. Revenue is only recognised
provided that it is probable that the economic benefit associated with the transaction will flow to the Group and the amount of revenue can
be reliably measured. Normally such licence fees are received on signature of the distribution agreement. 38
LiDCO Annual Report
2010/11
2 Revenue and segmental information
The Group has one segment – the supply of monitors, consumables and support services associated with the use of the LiDCO’s cardiac
monitoring equipment. Geographical and product type analysis is used by the chief operating decision maker to monitor sales activity and
is presented below:
Turnover and result by geographical region
Year ended Year ended
31 January 31 January
2011 2010
Group revenue £’000 £’000
UK 2,356 1,822
USA 2,358 2,273
Continental Europe 859 990
Rest of World 664 282
6,237 5,367
Result
UK 495 113
USA 965 459
Continental Europe 449 402
Rest of World 373 127
Total 2,282 1,101
Unallocated costs (2,780) (2,640)
Loss from operations (498) (1,539)
Products and services
Year ended Year ended
31 January 31 January
2011 2010
£’000 £’000
Monitor sales 2,009 1,855
Consumables sales and recurring revenues 3,681 3,125
Licence fees and other income 547 387
6,237 5,367
Payments to Med One as detailed in note 1 under revenue recognition relating to consumables and included within cost of sales amounted
to £526,000 (2009/10: £688,000) during the year.
The Group can identify trade receivables and trade payables relating to the geographical areas. As noted above, the Group has one segment
and other assets and liabilities together with non sales related overheads are not accounted for on a segment by segment basis. Accordingly,
segment assets, liabilities and segment cash flows are not provided.
All non-current assets are located in the United Kingdom.
Material customers
During the year a customer based in the USA accounted for more than 10% of the Group’s total revenue. Revenue recognised during the year is
as follows:
2011 2011 2010 2010
£’000 % revenue £’000 % revenue
Revenue recognised 1,894 30% 1,526 28%
Notes to the financial statements
continued 39
LiDCO Annual Report
2010/11
3 Loss from operations
The loss on operations before taxation is stated after:
Year ended Year ended
31 January 31 January
2011 2010
£’000 £’000
Auditors’ remuneration:
– Fees payable to the Company auditors for the audit of the Group accounts 18 17
Fees payable to the company auditors for other services:
– Audit of the Company’s subsidiaries 25 25
– Other services relating to the interim review
*
8 9
– Other services
*
5 1
Research and development expenditure 146 109
Depreciation of property, plant and equipment 201 216
Amortisation of intangible assets 438 456
Operating leases – rental of land and buildings 165 165
Share-based payment charge in respect of distributor arrangements 120 63
Write down of inventories 47 46
Exchange rate (gains)/losses (9) 23
The cost of goods sold during the year amounted to £1,225,000 (2009: £1,224,000).
*
Non-audit services comprise £8,000 for interim review services. The Board considers it cost effective for the auditors to provide these services.
4 Staff costs
Staff costs during the year were as follows:
Year ended Year ended
31 January 31 January
2011 2010
Group £’000 £’000
Wages and salaries 2,019 1,970
Social security costs 209 179
Share-based payments charge 30 (97)
2,258 2,052
The average number of employees (including executive directors) of the Company during the year was:
2011 2010
Number Number
Production 11 10
Sales 14 16
Administration 12 13
37 39
The remuneration of directors and key management personnel is set out below. Additional information on directors’ and key management
remuneration, share option, long-term incentive plans, pension contributions and entitlements can be found in the audited section of the
Directors’ Remuneration Report on pages 21 to 23 and forms part of these accounts.
2011 2010
£’000 £’000
Short-term employee benefits 738 725
Share-based payments 10 (22) 40
LiDCO Annual Report
2010/11
5 Tax on loss on ordinary activities
The tax credit is based on the loss for the year and represents:
Year ended Year ended
31 January 31 January
2011 2010
£’000 £’000
United Kingdom corporation tax at 28% (2010: 28%) – –
United States income taxes 9 4
Research and development expenditure tax credits – current year (109) (120)
– prior year – (2)
Total tax (100) (118)
United States tax has been calculated at the federal/state tax rates applicable to profits arising in the respective states.
The tax assessed for the year differs from the standard rate of corporation tax applied to the trading results. The differences are explained below:
Loss on ordinary activities multiplied by standard rate of corporation tax in the United Kingdom of 28% (2010: 28%) (137) (433)
Effect of:
Expenses not deductible for tax purposes 13 24
Depreciation for the period in excess of capital allowances (20) 50
Prior year adjustment – (2)
(Decrease)/increase in tax losses (5) 217
Other temporary differences 39 13
Additional deduction for research and development expenditure (111) (99)
Losses surrendered for research and development tax credit 221 231
United States income taxes 9 3
Research and development expenditure tax credits (109) (122)
Total tax income (100) (118)
The above table reconciles the income tax credit with the accounting loss at the standard rate of UK corporation tax.
The current year research and development tax credit of £109,000 (2010: £120,000) represents 14% (2010: 24.5%) of the Group’s qualifying
research and development spend.
The amount of the unused tax losses and temporary differences for which no deferred tax asset was recognised at the balance sheet date was:
Year ended Year ended
31 January 31 January
2011 2010
£’000 £’000
Unused losses (available indefinitely) 24,149 23,408
Temporary differences (available indefinitely) 304 427
24,453 23,835
The related deferred tax asset of approximately £5.6m (2010: £6.7m) in respect of trading losses of the subsidiary have not been recognised
as it is unlikely to be recognisable in the foreseeable future.
Notes to the financial statements
continued 41
LiDCO Annual Report
2010/11
6 Loss per share
The calculation of basic earnings per share is based on the loss attributable to ordinary shareholders divided by the weighted average
number of shares in issue during the year. The calculation of diluted earnings per share is based on the calculation described above adjusted
to allow for the issue of shares on the assumed conversion of all dilutive options. Share options are regarded as dilutive when, and only when,
their conversion to ordinary shares would increase the loss per share.
Year ended Year ended
31 January 31 January
2011 2010
£’000 £’000
Loss after tax for the financial year (390) (1,427)
Number Number
(’000) (’000)
Weighted average number of ordinary shares 173,963 164,597
Loss per share – basic and diluted (p) (0.22) (0.87)
7 Property, plant and equipment
Leasehold Plant and Fixtures Computer Medical
improvements machinery and fittings equipment monitors Total
£’000 £’000 £’000 £’000 £’000 £’000
Cost
At 1 February 2009 555 431 171 450 477 2,084
Additions – 5 1 47 81 134
Disposals – – (3) (21) (66) (90)
At 31 January 2010 555 436 169 476 492 2,128
Additions 1 6 4 21 95 127
At 31 January 2011 556 442 173 497 587 2,255
Accumulated depreciation
At 1 February 2009 355 308 138 416 196 1,413
Charge for the year 53 32 15 28 88 216
Disposals – – (3) (19) (66) (88)
At 31 January 2010 408 340 150 425 218 1,541
Charge for the year 53 34 8 27 79 201
At 31 January 2011 461 374 158 452 297 1,742
Carrying amount at 31 January 2011 95 68 15 45 290 513
Carrying amount at 31 January 2010 147 96 19 51 274 587
Plant and equipment is depreciated at various rates depending on the estimated life of the item of plant or equipment. The rates of depreciation
are shown in note 1.
Medical monitors include equipment on long term loan to hospitals for active use where the hospital pays for disposables. Also included in this
category is equipment for demonstration purposes, clinical trials and testing.
The carrying amount of the Group’s plant and equipment includes £14,000 (2010: £24,000) in respect of assets held under finance leases. 42
LiDCO Annual Report
2010/11
8 Intangible assets
Product Product
Clinical trials registration development Total
£’000 £’000 £’000 £’000
Cost
At 1 February 2009 116 556 1,980 2,652
Additions – 73 401 474
At 31 January 2010 116 629 2,381 3,126
Additions – 77 352 429
At 31 January 2011 116 706 2,733 3,555
Accumulated amortisation
At 1 February 2009 101 260 1,545 1,906
Charge for the year 15 119 322 456
At 31 January 2010 116 379 1,867 2,362
Charge for the year – 88 350 438
At 31 January 2011 116 467 2,217 2,800
Carrying amount at 31 January 2011 – 239 516 755
Carrying amount at 31 January 2010 – 250 514 764
Intangible assets includes assets that are internally generated and amortised over their estimated useful lives. Amortisation costs are included
in administrative expenses. The rates of amortisation are shown in note 1.
9 Inventory
2011 2010
£’000 £’000
Raw materials and consumables 310 246
Finished goods and goods for resale 737 848
1,047 1,094
At 31 January 2011, inventories stated net of allowances for obsolete or slow moving items, was £85,000 (2010: £106,000).
Notes to the financial statements
continued 43
LiDCO Annual Report
2010/11
10 Trade and other receivables
2011 2010
£’000 £’000
Trade receivables 1,432 1,473
Other receivables 12 51
Prepayments 163 125
1,607 1,649
All amounts are short-term and the directors consider that the carrying amount of trade and other receivables approximates to their fair value.
All of the Group’s trade and other receivables have been reviewed for indicators of impairment. At 31 January 2011, trade receivables of £1.07m
(2010: £1.10m) were fully performing. In addition, some of the unimpaired trade receivables are past due as at the reporting date. The age
of trade receivables past due but not impaired is as follows:
2011 2010
£’000 £’000
Not more than three months 195 182
More than three months but not more than six months 31 94
More than six months but not more than one year 30 15
More than one year 104 79
360 370
Movements in Group provisions for impairment of trade receivables are as follows, which are included within administrative expenses in the
income statement.
2011 2010
£’000 £’000
Opening balance 6 95
Provision for receivables impairment 32 94
Receivables written off in year (9) (183)
Closing balance 29 6
The other classes within trade and other receivables do not contain impaired assets.
11 Current liabilities
2011 2010
£’000 £’000
Trade payables 534 332
Social security and other taxes 67 65
Accruals 166 206
Deferred income 74 614
Finance leases 10 10
851 1,227
The directors consider that the carrying amount of trade and other payables approximates to their fair value. 44
LiDCO Annual Report
2010/11
12 Non-current liabilities
2011 2010
£’000 £’000
Finance leases 4 14
13 Financial instruments
Financial risks
The Group’s financial instruments comprise cash and liquid resources, borrowings and items such as trade receivables and trade payables that
arise from its operations.
The main risks that arise from the Group’s financial instruments are credit, interest rate, liquidity and currency risk. The Board reviews and agrees
policies for managing each of these risks and they are summarised below.
Credit risk
The Group’s credit risk is primarily attributable to trade receivables. The amounts presented in the balance sheet are net of allowances for
doubtful receivables, estimates by management based on prior experience of customers which is typified by a small number of high value
accounts and their assessment of the current economic environment. The maximum exposure is £2,848,000 (2010: £3,370,000).
The credit risk on liquid funds is limited because the counterparties are reputable international banks.
Liquidity risk
The Group seeks to manage this financial risk by ensuring sufficient liquidity through the use of variable rate bank facilities is available to meet
foreseeable needs and to invest surplus cash assets safely and profitably.
Liquidity risk analysis
The Group manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial liabilities as well
as cash-outflows due in day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis.
The Group maintains cash and marketable securities to meet its liquidity requirements. Funding for long-term liquidity needs is additionally
secured by an adequate amount of committed credit facilities.
As at 31 January 2011, the Group’s liabilities have contractual maturities which are summarised below:
Current Non-current
Within 6 to 12 1 to 5 Over 5
6 months months years years
31 January 2011 £’000 £’000 £’000 £’000
Finance lease obligations 554 –
Trade payables 767–––
77254 –
This compares to the maturity of the Group’s financial liabilities in the previous reporting period as follows:
Current Non-current
Within 6 to 12 1 to 5 Over 5
6 months months years years
31 January 2010 £’000 £’000 £’000 £’000
Finance lease obligations 5 5 14 –
Trade payables 603–––
608 5 14 –
Notes to the financial statements
continued 45
LiDCO Annual Report
2010/11
Market Risks
Interest rate risk
The Group finances its operations through a mixture of shareholder funds and variable rate bank facilities. The Group accepts the risk attached
to interest rate fluctuations as interest rates have been relatively stable or declined over the last three years and the interest expense is a small
proportion of total administrative expenses.
Currency risk
The Group manages currency risk by assessing the net exposure in each non-sterling currency in which exposure arises. The only significant
exposure relates to US dollars. The Group accepts the risk attached to fluctuations in the US dollar exchange rate as US dollar payables are
partly mitigated by US dollar receivables from sales.
Group interest rate profile
Floating rate
Cash current Deposit and
bank accounts reserve account Total
Financial assets at 31 January 2011 £’000 £’000 £’000
Currency
Sterling 75 1,272 1,347
US dollars 28 – 28
Euro 29 – 29
132 1,272 1,404
Summary of financial assets and liabilities by category
The carrying amounts of the Group’s financial assets and liabilities as recognised at the balance sheet date of the reporting periods under
review may also be categorised as follows. See note 1, ‘principal accounting policies’ , covering financial assets and financial liabilities for
explanations about how the category of instruments affects their subsequent measurement.
2011 2010
Current assets £’000 £’000
Loans and receivables:
– Trade and other receivables 1,444 1,524
– Cash and cash equivalents 1,404 1,846
2,848 3,370
2011 2010
Non-current liabilities £’000 £’000
Finance lease obligations 4 14
4 14
2011 2010
Current liabilities £’000 £’000
Financial liabilities measured as amortised cost:
– Borrowings 10 10
Trade payables and other short term financial liabilities 601 332
611 342 46
LiDCO Annual Report
2010/11
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return
to shareholders through the optimal use of equity.
The Board reviews the capital structure, including the level of indebtedness and foreign currency holdings as required whether included
as cash or other working capital balances.
The Group is exposed to translation and transaction foreign exchange risk. The currency where the Group is most exposed to foreign currency
volatility is US dollars.
The Group had the following balances denominated in US dollars:
US Dollars
2011 2010
£’000 £’000
Trade and other receivables 46 79
Cash and cash equivalents 28 394
Trade and other payables (30) (37)
44 436
No hedging instruments are used. The Group keeps under review the extent of its exposure to currency fluctuations, which relate entirely
to trading transactions.
The following table illustrates the sensitivity of the net result for the year and equity in regards to the Group’s financial assets and financial
liabilities and the Sterling to US dollar exchange rates. It assumes a percentage change in the exchange rate based on the foreign currency
financial instruments held at each balance sheet date. Both of these percentages have been determined based on the average market volatility
in exchange rates in the previous 12 months.
US Dollars
2011 2010
Currency fluctuation 11% 11%
If Sterling had strengthened against the US dollar by the percentage above retrospectively, then this would have had the following impact:
US Dollars
2011 2010
£’000 £’000
Net result for the year (67) (76)
Equity (67) (76)
If Sterling had weakened against the US dollar by the percentage above retrospectively, then this would have had the following impact:
US Dollars
2011 2010
£’000 £’000
Net result for the year 67 76
Equity 67 76
Exposure to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above
is considered to be representative of the Group’s exposure to currency risk.
Fair values of financial assets and liabilities
There was no difference between the fair value and the book value of financial assets and liabilities.
Notes to the financial statements
continued 47
LiDCO Annual Report
2010/11
14 Share capital
2011 2010
Number of Number of
shares shares
Issued and fully paid – ordinary shares of 0.5 pence each 000 000
At the beginning of the year 173,942 141,983
Issued for cash 42 31,959
At the end of the year 173,984 173,942
£’000 £’000
At the beginning of the year 869 710
Issued for cash 1 159
At the end of the year 870 869
On 23 August 2010 42,500 shares were issued at 0.5p per share on exercise of share options.
15 Share-based payments
Equity-settled share option schemes
The Group has three equity-settled share option schemes for employees. Where share options are awarded to employees, the fair value of the
options at the date of grant is calculated using a pricing model and is charged to the income statement over the vesting period. Market related
performance conditions are factored into the fair value of the options granted and a charge is made irrespective of whether the market related
performance conditions are satisfied. In respect of awards with non-market related performance conditions, an estimate of the proportion that
will vest is made at the award date and this is trued up or down at each accounting period.
2011 2010
Weighted Weighted
average average
exercise exercise
Number price (p) Number price (p)
Outstanding at the beginning of the year 10,526,079 15.8 9,353,872 15.9
Issued in the year 751,000 19.9 1,309,000 13.3
Forfeited during the year (259,500) 13.9 (94,293) 18.4
Exercised during the year (42,500) 0.5 (42,500) 0.5
Outstanding at the end of the year 10,975,079 16.4 10,526,079 15.8
Exercisable at the end of the year 7,334,579 18.0 7,377,079 18.0
Fair value is determined by reference to the fair value of the instrument granted to the employee. The expected life used in the model has been
adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
These fair values were calculated using a Black-Scholes option pricing model with the following assumptions:
2011 2010
Weighted average share price (p) 19.9 13.3
Weighted average exercise price (p) 19.9 13.3
Expected volatility 50% 50%
Expected life (years) 3.5 3.5
Risk free rate 2% 3.0% -3.5%
Expected dividend yield – –
The expected volatility is based on the Group’s historical share price averaged over a period equal to the expected life. The expected life is the
average expected period to exercise. The risk free rate of return is based on UK Government gilts. The share options outstanding at the end
of the year have exercise prices of between 0.5p and 28.25p per share and a weighted average remaining contractual life of 4.5 years. 48
LiDCO Annual Report
2010/11
Share warrants in respect of distributor arrangements
On 28 July 2009 the Group issued share warrants in respect of an arrangement with a distributor. Warrants were issued over a total of 13,915,324
shares at an exercise price of 14.3 pence which represented a 20% premium over the mid market price for a period of 10 days before and
10 days after the date of the distributor agreement. The fair value of the warrants at the date of grant has been calculated using the same
pricing model as that used for the equity-settled share option schemes and will be charged to the income statement over the vesting period.
The distributor may exercise the warrants subject to purchasing certain minimum quantities of monitors and disposables during the first and
second years of the distribution agreement.
16 Capital commitments
At 31 January 2011 the Company had placed forward orders for the purchase of monitors and monitor components to the value of £1,382,000
(2010: £390,000). Delivery of these orders is scheduled between February 2011 and June 2013.
17 Contingent liabilities
There were no contingent liabilities at 31 January 2011 or 31 January 2010.
18 Leasing commitments
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
2011 2010
Land and Land and
buildings Other buildings Other
Group £’000 £’000 £’000 £’000
In one year or less 11 39 45 73
Between one and five years –37 15 46
11 76 60 119
19 Related party transactions
During the year, no contracts of significance other than those disclosed within the Directors’ Remuneration Report were existing or entered
into by the Group or its subsidiaries in which the directors had a material interest.
Key management compensation
Compensation for directors who are the only employees with responsibility for planning, directing and controlling the Group is disclosed
in the directors’ remuneration report.
Transactions between the Company and its subsidiaries which are related parties are eliminated on consolidation. There were no transactions
between the Company and its subsidiaries.
Notes to the financial statements
continued 49
LiDCO Annual Report
2010/11
Independent auditor’s report to the members of LiDCO Group Plc
We have audited the parent company financial statements of LiDCO Group Plc for the year ended 31 January 2011 which comprise the parent
company balance sheet, and the related notes. The financial reporting framework that has been applied in their preparation is applicable law
and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the parent company
financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the
parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm.
Opinion on financial statements
In our opinion the parent company financial statements:
• give a true and fair view of the state of the Company’s affairs as at 31 January 2011;
• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
• have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent
with the parent company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from
branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the Group financial statements of LiDCO Group Plc for the year ended 31 January 2011.
Christopher Smith
Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
London
15 April 2011 50
LiDCO Annual Report
2010/11
2011 2010
Note £’000 £’000
Fixed assets
Investments 2 65 65
65 65
Current assets
Debtors 3 5 5
Amount due from subsidiary undertakings 3 14,339 14,338
Cash at bank 66 11
14,410 14,354
Current liabilities
Creditors: Amounts falling due within one year – –
– –
Net current assets 14,410 14,354
Total assets less current liabilities 14,475 14,419
Net assets 14,475 14,419
Shareholders’ funds
Share capital 4 870 869
Share premium 5 25,393 25,393
Retained earnings 5 (11,788) (11,843)
Shareholders’ funds 14,475 14,419
The financial statements were approved by the Board of Directors on 15 April 2011.
Theresa Wallis Terence O’Brien
Director Director
The accompanying accounting policies and notes form an integral part of these financial statements.
Company balance sheet
At 31 January 2011 51
LiDCO Annual Report
2010/11
Notes to the financial statements
For the year ended 31 January 2011
1 Principal accounting policies
Basis of preparation
The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by that Act, the
separate financial statements have been prepared in accordance with all applicable United Kingdom accounting standards. The principal
accounting policies of the Company are set out below.
The financial statements have been prepared on the historical cost basis.
Going concern
The Company’s business activities, together with a review of the market and the Company’s distribution channels are set out in the Chief
Executive Officer’s Statement on pages 8 to 13. In addition, note 13 to the financial statements include the Company’s policies for managing
its capital; its financial risk; details of its financial instruments; and its exposures to credit risk and liquidity risk.
The Company has a number of customers across different geographic areas and considerable recurring revenue streams through the sales
of its disposable sensors and smart cards which represented 59% of its total revenues in the year to 31 January 2011.
The Group finances its operations through shareholders’ funds and has no borrowings. The directors have a reasonable expectation that
the Company has adequate resources to continue in operational existence for the foreseeable future based on forecasts for the two years
to 31 January 2013. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
Investments
Investments in subsidiary undertakings are stated at cost less provision for impairment.
Foreign currency
Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities
in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. Any gain or loss arising from a change in exchange
rates subsequent to the date of the transaction is included as an exchange gain or loss in the profit and loss account.
Financial liabilities and equity
Financial liabilities and equity instruments issued by the Company are classified according to the substance of the contractual arrangements
entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual
interest in the assets of the Company after deducting all of its liabilities.
Share-based payment charges
The Group has three equity-settled share-based remuneration schemes for employees. Where share options are awarded to employees, the fair
value of the options at the date of grant is calculated using a pricing model and is charged to the income statement over the vesting period.
Market related performance conditions are factored into the fair value of the options granted and a charge is made irrespective of whether the
market related performance conditions are satisfied. In respect of awards with non-market related performance conditions, an estimate of the
proportion that will vest is made at the award date which is adjusted if the number of share options expected to vest differs from the previous
estimates. Any cumulative adjustment prior to vesting is recognised in the current period.
Where the Group issues share warrants in respect of distributor arrangements, the fair value of the options at the date of grant is calculated
using a pricing model and is charged to the income statement over the vesting period.
2 Investments
Shares in subsidiary
undertakings
Company £’000
Cost and net book value
At 1 February 2010 and at 31 January 2011 65
The Company’s beneficial interest in subsidiary undertakings consists of:
Country of registration Beneficial holding Nature of business
LiDCO Limited England and Wales 100% Medical instruments and appliances
Cassette Analytical Systems Limited England and Wales 100% Dormant 52
LiDCO Annual Report
2010/11
3 Debtors
2011 2010
£’000 £’000
Other debtors 5 5
Amount due from subsidiary 14,339 14,338
14,344 14,343
The amount due from subsidiary relates to the ongoing funding provided to the principal trading subsidiary, LiDCO Limited, whilst it continues
to be loss-making. The directors made a provision for impairment of £12m in the year to 31 January 2008, and consider that no further
impairment provision is necessary at 31 January 2011. The timing of the repayment of this debt is uncertain and unlikely to be within one year.
4 Share capital
2011 2010
£’000 £’000
Allotted, called up and fully paid
173,984,054 ordinary shares of 0.5p each 870 869
On 23 August 2010 42,500 shares were issued at 0.5p per share on exercise of share options.
5 Reserves
Share Other Equity Profit & loss
premium reserve reserve account
£’000 £’000 £’000 £’000
At 1 February 2010 25,393 – – (11,843)
Profit for the year – – – 55
At 31 January 2011 25,393 – – (11,788)
6 Reconciliation of shareholders’ funds
2011 2010
£’000 £’000
Profit for the year 55 2
Shares issued 1 159
Share premium account – 2,862
56 3,023
Opening shareholders’ funds 14,419 11,396
Closing shareholders’ funds 14,475 14,419
7 Loss for the financial year
In accordance with the exemption given by section 408 of the Companies Act 2006, the holding company has not presented its own profit and
loss account. The profit for the year of the Company was £55,000 (2009/10: £2,000).
8 Related party transactions
There were no transactions between the Company and its subsidiary, which are related parties.
Notes to the financial statements
continued 53
LiDCO Annual Report
2010/11
Company information
Company registration number:
2659005
Registered office:
16 Orsman Road
Hoxton
London, N1 5QJ
Company website:
www.lidco.com
Directors and Secretary:
Ms T A Wallis Non-Executive Chairman
Dr T K O’Brien Chief Executive Officer
Dr D M Band Scientific Director
Mr J G Barry Sales and Marketing Director
Mr I G Brown Non-Executive Director
Mr P L Clifford Finance Director
Mr J P Rowland Company Secretary
Solicitors:
Hewitsons LLP
Shakespeare House
42 Newmarket Road
Cambridge
CB5 8EP
Auditors:
Grant Thornton UK LLP
Registered Auditors
Chartered Accountants
Grant Thornton House
Melton Street
Euston Square
London
NW1 2EP
Registrars:
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Nominated adviser
and stockbroker:
FinnCap Limited
60 New Broad Street
London
EC2M 1JJ
Bankers:
NatWest Bank Plc
63-65 Piccadilly
London
W1J 0AJ
Advisers to the Company LiDCO Group Plc
UK Office:
16 Orsman Road
Hoxton
London N1 5QJ
T: + 44 (0) 20 7749 1500
F: + 44 (0) 20 7749 1501
Sales and Marketing:
Unit M
South Cambridgeshire Business Park
Babraham Road
Sawston
Cambridge CB22 3JH
T: + 44 (0) 1223 830666
F: + 44 (0) 1223 837241
www.lidco.com
Designed by www.randallwilkinson.co.uk
Printed by Pegasus Colourprint | 8
LiDCO Annual Report
2010/11
The market
The directors estimate that the potential
number of patients in Europe who could
benefit from hemodynamic monitoring
is six times the number currently being
monitored. The cost of critical care
continues to grow. Heightened awareness
of the benefits from the use of LiDCO’s
technology such as reductions in infections,
length of stay and costs are all contributing
to increased sales.
The market for minimally invasive
hemodynamic monitors breaks down into
three categories: intensive care (ICU), high
risk surgery and alternate sites such as trauma
and ‘outreach’ (i.e. outside the ICU) care sites.
LiDCO monitors have the potential to play
major roles in each of these arenas.
Reducing surgical complications such
as infections is a key growth driver for our
business. In the US, it is estimated that
surgical site infections alone cost US$10bn
per annum. The need to prevent central line
infection and septic complications has led
to a drive to reduce the use of invasive
central venous catheters. Use of LiDCO’s
technology can reduce central venous
catheter use by up to 80% in high risk
surgery (Green D, Paklet L (2010) Latest
Chief Executive Officer’s statement
LiDCO had another very good year.
The monitor base increased by a net
233 units (13%) to 2001 units, with
524 units sold or placed during the
year. Disposables income increased
in our intensive care and surgery
markets by 8% and 39% respectively.
Overall revenues were up 16% on the
previous year to £6.24m with gross
profit up 28% to £4.22m. Expenses
were kept under tight control
resulting in administration costs
reducing by 2%. Average product
margins were maintained at 76%.
Cash outflows before financing were
at a record low with the Group
trading profitably during the second
half of the year. Over the prior year
the loss fell by over £1m with the loss
per share reducing by 75% to 0.22p.
developments in peri-operative monitoring
of the high-risk major surgery patient.
International Journal of Surgery 8 90-99).
With a US$1.2bn market potential in surgery
and intensive care, the global market for
minimally invasive hemodynamic
monitoring products is large and growing.
The experience level of clinicians in the ICU
is declining due to the retirement of staff
experienced in the use of older invasive
catheter based technologies. Consequently
there is a growing need for reliable, accurate
and easily adoptable products that can
deliver more cost effective care. The
minimally invasive market now represents
53% of the European hemodynamic
monitoring market value, followed by the
invasive and non-invasive markets which
represent 42% and 5% of sales respectively.
It is projected that the European minimally
invasive hemodynamic monitoring market
will grow at a compound rate of 12% per
annum; from US$51m today to US$112m
by 2017 (iData 2011 patient monitoring
research report). The UK represents the
biggest European market for, and fastest
rate of adoption of, minimally invasive
technology. Sales in the UK are projected
to grow by an average of 17% per annum
from US$14m in 2010 to US$42m in 2017.
The NHS in the UK is now the largest
healthcare organisation in the world, with
an annual spend of £100bn. LiDCO has
a direct sales force in the UK where our sales
revenues increased last year by a noteworthy
29%. We are resourced to take advantage
of this fast growing domestic market
opportunity. Acquiring the sales and
marketing rights to the Argon critical
care products has further broadened and
strengthened our hemodynamic offering
to our UK customers.
Evidence and awareness
The minimally invasive hemodynamic
market is documented as the fastest
growing sector in the European hospital
monitoring field. The potential size of the
market, its growth rate and the increasing
presence of clinical guidelines for adoption
of hemodynamic monitoring is inevitably
resulting in an increasing appetite from the
major corporate players to participate
in providing these advanced products.
The pressure on hospitals to reduce costs
while improving efficiency is intensifying.
In the UK, the NHS QIPP (Quality, Innovation,
Productivity and Prevention) and ERAS
(Enhanced Recovery After Surgery)
programmes have resulted in a higher focus
on adopting advanced hemodynamic
monitoring technology. For example,
in a 2010 survey of UK hospitals by the
British Intensive Care Society, 77% of hospitals
had, or were planning to implement,
fluid-optimisation of their colorectal
cancer surgery patients. The three most
important issues determining their choice
of technology were ease of use/adoption,
Dr Terence O’Brien
Chief Executive Officer 9
LiDCO Annual Report
2010/11
trending accuracy and suitability of use
for the broadest variety of patients.
The LiDCOrapid was specifically designed
to be easy to set up and usable in the fluid
and drug management of any patient with
arterial line access. Our surgical product
is proving very adoptable, with UK sales
of LiDCOrapid disposables increasing
by 137% in the year.
Cumulatively more than 100 publications
are in print referencing our technology.
During 2010 alone 25 research abstracts
and papers on the use of LiDCO monitors
were presented and published. Using
LiDCO technology for high-risk surgery
patients has been shown to help reduce
complications – particularly infections –
by more than a third, reducing hospital stay
by an average of 12 days per patient and
costs by £4,800 per patient (Pearse et al.
Early goal-directed therapy after major
surgery reduces complications and duration
of hospital stay. A randomized, controlled trial.
Crit. Care 2005, 9 (6) 687-693).
In September 2010, the Journal of Critical
Care published the findings of a study from
the University of Iowa, showing that using
the LiDCOplus monitor significantly reduced
the mortality rate in patients treated for
shock (Hata et al. Reduced mortality with non
invasive hemodynamic monitoring of shock,
Journal of Critical Care, 26:2, pages 224.e1-
224.e8). Treatment of patients using LiDCO’s
monitor significantly reduced the observed
mortality rate to 13% against 32% and 20%
in the two invasively monitored groups and
37% in the unmonitored patient groups.
These results add to the previous findings
of Pearse et al who reported that supportive
care guided by LiDCO’s lithium dilution and
arterial waveform assessments of cardiac
output was associated with reduced peri-
operative morbidity compared with
conventional assessment.
Two further large multi-centre outcome
trials are progressing well. In the UK, the
LiDCOrapid cardiac output monitor was
chosen as the sole monitoring system
to be used in OPTIMISE, a government-
supported trial which aims to improve
surgical outcomes by optimising a patient’s
cardiovascular management. The trial,
covering 12 centres, is the largest of its
type to date; it is underway and currently
recruiting patients.
The LiDCOplus is the sole hemodynamic
monitor used in a 960 patient US-
Government funded multi-centre trial –
MOnIToR (Monitoring Organ donors
to Improve Transplantation Results).
The results of earlier studies using
LiDCOplus to monitor and develop
a treatment protocol designed to improve
the hemodynamic status of donors
generated considerable interest within
the US transplantation community.
As with the OPTIMISE trial, the MOnIToR
trial is progressing well.
To facilitate adoption and productive
use of its equipment, LiDCO’s monitoring
products are also supported by excellence
in clinical education. In April 2010 LiDCO
established a Hemodynamic Workshop
in collaboration with doctors at St George’s
Hospital in London aimed at teaching
hemodynamic optimisation techniques
to senior physicians. This course is accredited
by the UK’s Royal College of Anaesthetists
for continuing medical education points.
The course has been very well received
by all the consultant level attendees and
we have seen a high degree of participation
and take up by our European distributors
of places for courses held this year. In July
LiDCO received accreditation from the
Royal College of Nursing (RCN) for its
LiDCOplus monitor competency-based
study day. The course is designed for
all critical care nurses, nurse educators,
professional development nurses, nurse
consultants and junior doctors. Our plans
are to considerably expand both of these
educational activities.
Products and applications
LiDCO applies several common criteria
to its products. They must be innovative,
protectable, and applicable to significant
clinical applications. They must have a large
addressable market and deliver significant
margins. The manufacturing process must
also be low cost with very high reliability.
Each LiDCO monitor addresses a particular
market. Launched in 2008, the LiDCOrapid
principally focuses on high risk surgery
patients with arterial lines, but also addresses
alternate site use – for example in trauma,
obstetrics and shock. The LiDCOplus is used
mainly in the intensive care arena.
During the year several new product
developments were introduced, for example:
• a software upgrade to the LiDCOrapid,
including a module to expand access
to blood pressure data;
• a translation facility to convert information
from English into 22 languages; and
• improved communication with Philips
and GE hospital information systems.
Sales and distribution
Revenue was up 16% to £6.24m (2009/10:
£5.37m). A similar number of LiDCO
monitors were sold or placed in the year
(524 vs. 565 units in 2009/10) with monitor
capital income up 5%. The monitor base
at the year end was 2,001 units, with a net
increase of 233 units (13%) in the year.
As explained in the Financial Review,
from this year we are now reporting our
installed base as the net number of sold
and placed units over the last seven years.
Our monitors have an expected life of seven
years in use, so we have decided to assume
all monitors over seven years old will
no longer be disposable income generating.
From here on the installed base will only
increment by the difference between those
monitors sold in the year and those retired
i.e. that were sold eight years ago. The
LiDCOrapid portion of the installed base
grew by 474 units and now represents
in excess of 50% of the monitor base.
US$10bn
annual estimated cost of surgical
site infections in the US
US$1.2bn
global market potential in surgery and intensive
care for minimally invasive hemodynamic products 10
LiDCO Annual Report
2010/11
Chief Executive Officer’s statement continued
Disposables income was higher for both
our intensive care and surgery markets
by 8% and 39% respectively and by 18%
overall. Disposables numbers were also up
26% at 47,938 units (2009/10: 37,918 units).
Export sales represent 62% of total income –
slightly down from 66% in the prior period,
reflecting the very strong UK sales growth
seen in the period as well as economic
weakness in some parts of continental Europe.
LiDCO’s strategy is to sell directly to the
high value, high growth UK hospital
market via its strong, direct sales force and
is expecting to take a significant share
of the domestic market growth. In export
territories we are focusing on addressable
markets i.e. those where we expect good
growth and where we have access to
specialist distribution partners with the
attributes and commitment to sell our
products and develop our market within
their territory. These include the US, Japan,
Scandinavia, Eastern Europe, the Middle
East and Latin America.
In the US there are almost 5,000 hospitals
performing surgery and within these
hospitals there are over 100,000 intensive
care beds. In addition to the challenge
of selling to this large and geographically
spread out hospital market, there are
a significant number of regional and/or
national accounts to work with. Once sales
traction is gained in the US, these hospital
groups and group purchasing organisations
(such as Premier and Novation) become
increasingly important customers.
Over the years it is clear that fully accessing
the growing USA hemodynamic monitoring
market has become logistically and
financially impossible for the smaller and
even larger sized companies. Therefore,
in order to address a significant share
of this opportunity we have established
a distribution agreement in the US with
the Respiratory and Monitoring division
of Covidien plc (‘Covidien’). Covidien has
a long standing and substantial existing
oximetry monitoring business and more
recently made significant investment
in the monitoring market, acquiring two
additional US monitoring companies
(Aspect and Somanetics) with a very
significant total investment of US$460m.
Collectively the Respiratory and Monitoring
division now has one of the largest
monitoring equipment sales forces available
today in the US. Importantly this group sells
into over 80% of operating rooms in the
major hospitals. In the US Covidien is now
able to offer customers a suite of monitoring
systems that can collectively monitor
respiratory function, brain oxygenation and
through the LiDCOrapid the underlying
hemodynamic status. These products are
a natural fit together and offer, in particular,
advantages to the management of high risk
surgery patients. Accordingly, we believe
that the commitment by Covidien
to promoting LiDCO’s LiDCOrapid monitor
along side their own products is strong.
Covidien achieved the first year’s minimum
sales requirements and our business with
them grew 26% over the prior year. This was
a good result, as inevitably amalgamations
of this scale take a lot of effort and time out
from the field. Indeed, training of the new
members of the consolidated sales force
and internal national accounts sales teams
on LiDCO’s product is still taking place.
We expect the number of evaluations
and pipeline to continue to build as the
recently trained representatives also start
to contribute to the sales efforts. Clearly
Covidien has made a significant investment
in the monitoring field and has the interest,
infrastructure, resources and products
necessary to access in particular a significant
share of the high risk surgery hemodynamic
monitoring market.
Geographic sales and trading
UK sales summary
• Total revenue up 29% at £2.36m
(2009/10: £1.82m)
• Monitor revenue up 52% to £0.50m
(2009/10: £0.33m)
– ICU: LiDCOplus monitor revenue
up 49% to £0.30m
– Surgery: LiDCOrapid monitor revenue
up 118% to £0.20m
• Disposables sales of £1.80m up 21%
(2009/10: £1.49m)
• Other income £55,000 (2009/10: nil)
Our focus last year was to maintain our ICU
business and grow our LiDCOrapid surgery
interest. Our direct sales force had a very
good year achieving both these goals. Total
income was up 29% to £2.36m, with the
UK representing 38% of our total worldwide
sales. Monitor and disposables income
increased across both the ICU and surgery
markets. As expected the greatest growth
was experienced in the surgery segment
where LiDCOrapid monitor sales were
up 118% and smart card disposables
up 137%. The monitor base increased
by a net 24 units (9%) to 300 units in the UK,
with 61 units sold placed during the year.
The total number of disposables sold
increased from 14,055 to 17,605.
In the UK there will be intense pressure
on the NHS in terms of revenue and capital
spend in the new financial year starting
this month. We believe this will continue
to drive hospitals to focus on reducing
costs while improving efficiency. ERAS
programmes within the NHS will most likely
continue to be prioritized, despite the
Review of revenue and units sold and placed
%
Year to Year to Increase/ Increase/
31 Jan 2011 31 Jan 2010 (decrease) (decrease)
Revenue by type (£’000)
– Monitors 1,953 1,855 98 5%
– Sensors/smart cards/use fees 3,681 3,125 556 18%
– Licence fees and other income 603 387 216 56%
– Total revenues 6,237 5,367 870 16%
Monitors (units) 524 565 (41) (7%)
Sold 515 536 (21)
Placed 9 29 (20)
Sensor, smart card and fee
per use sales (units) 47,938 37,918 10,020 26%
Monitor base (7 year net) 2,001 1,768 233 13% 11
LiDCO Annual Report
2010/11
worsening economic conditions. We expect
these conditions will deliver sales growth
of our surgery product in particular. Fluid
and hemodynamic monitoring is already
adopted, or planned in the majority of UK
hospitals. Additional sales growth should
come from increasing use in a number
of surgical procedures.
We announced in March 2011 that LiDCO
was appointed by Argon Medical Devices
Inc. (‘Argon’) to take over their existing UK
critical care sales. Argon acquired the critical
care business of Becton Dickinson (‘BD’)
in late 2010. We are delighted that Argon
has decided to extend the relationship
we previously established with BD’s
Japanese critical care group. We expect
to start selling Argon’s products from May
2011. UK customers will then be able to buy
an expanded and related group of critical
care and surgery products including the
arterial pressure transducer necessary for
use with our monitors.
USA sales summary
• Distribution revenue up 26% to £1.89m
(2009/10: £1.50m)
• LiDCOrapid monitor revenue steady
£0.68m (2009/10: £0.68m)
• LiDCOrapid smart card sales up 54%
to £0.83m (2009/10: £0.54m)
• Licence fee and other income of £0.38m
up 35% (2009/10: £0.28m)
Sales to Covidien were up 26% during the
period. Comparisons across the period
are complicated by the stocking orders
taken in both periods and the subsequent
temporary sales disruption from acquisition
and integration of the Aspect and
Somanetics sales forces. We are pleased
to report that Covidien has achieved the
minimum sales in the first year of our
contract. Overall Covidien has purchased
657 LiDCOrapid monitors representing
both sales stock and a demonstration/
evaluation pool. Covidien has shown a high
level of commitment to developing the
high risk surgical market opportunity and
is putting a significant amount of time into
training and incentivising the sales force.
LiDCO has retained sales responsibility
for the ICU-focused LiDCOplus product
sales in the US with our direct sales force.
Direct sales have decreased to £464,000
(2009/10: £773,000) with £111,000 of the
fall the inevitable result of the transfer
to Covidien of LiDCOrapid sales in accounts
that were previously a direct sales business.
Capital revenues (i.e. new monitor sales)
from the LiDCOplus fell from £184,000
to £83,000 due to the reduced sales effort
as four of the LiDCO sales team transferred
to Covidien. LiDCOplus sensor sales declined
from £422,000 to £341,000, a consequence
of some customers now purchasing the
LiDCOrapid – where previously they would
have purchased the LiDCOplus – and
reduced geographic sales coverage outside
our key accounts.
LiDCOplus consumable sales to our key
accounts (i.e. accounts where we can
support the business) declined modestly –
by only £43,000. Most of this decline was
due to product substitution in a small
number of accounts towards use of the
LiDCOrapid. Going forward we expect the
core key account direct business to be
supportable and maintainable while we
focus on the bigger and more addressable
surgery opportunity for the LiDCOrapid.
We continue to believe there is a significant
ICU market in the US for our more precise
and sensor calibrated monitor.
Continental Europe sales summary
• Total revenue down by 13% to £0.86m
(2009/10: £0.99m)
• Monitor sales revenue of £0.32m down
40% (2009/10: £0.53m)
• Sensor/smart card sales up 17% to £0.54m
(2009/10: £0.46m)
We reported at the interim stage that the
economic climate in Europe had been
weak, delaying capital and disposable
purchases in some countries. Where
economic conditions have been poor this
has affected our distributors’ business.
In contrast, where finances are stronger,
e.g. in Eastern Europe, we have seen a very
significant increase in sales. The results are
therefore very mixed; ranging from increases
of 71% in Slovenia to an 82% fall in business
in Italy, previously our best performing
territory. Despite the challenging conditions,
underlying disposable income was up by 17%.
We expect sales to increase modestly in 2011
as the economic climate gradually improves.
Rest of World and licence fee income
• Total revenue up 135% at £0.66m
(2009/10: £0.28m)
• Monitor revenue up 225% to £0.39m
(2009/10: £0.12m)
• Sensor/smart card sales up by 117%
to £0.13m (2009/10: £0.06m)
• Licence fee and other income of £0.14m
(2009/10: £0.10m)
Sales in the ROW were up 135%, reflecting
increases across the board in licence fees,
monitor and disposable revenues. This was
a good performance with particularly good
results seen in Brazil and the Middle East.
Minimally invasive hemodynamic monitoring
is becoming well established in Japan.
We believe the Japanese hemodynamic
monitoring high risk surgery market has
a potential market value of US$285 million
per annum, with reimbursement currently
available. With respect to our distribution
arrangements in Japan, in October 2010
Argon announced that it had acquired the
critical care division of BD. LiDCO had signed
a distribution agreement with BD in April
2009 for sales of the LiDCOrapid in Japan
and a registration application file for product
approval has been prepared for submission.
We expect registration and reimbursement
to be approved late 2011/early 2012.
Negotiations with distribution parties
in Japan are well advanced and a Heads
of Agreement has been signed – we expect
to be able to further update shareholders
in the near future.
73%
reduction in post-tax losses
US$285m
potential annual value of Japanese high risk
surgery market for hemodynamic monitoring 12
LiDCO Annual Report
2010/11
Financial review
Turnover increased by 16% to £6.24m
(2009/10: £5.37m). Losses after tax
decreased significantly by 73%
to £390,000 (2009/10: £1,427,000)
and the loss per share was reduced
to 0.22 pence (2009/10: 0.87 pence).
Exports rose by 9% to £3.88m but
with a strong increase in sales in the
UK represented 62% of sales, down
from 66% the previous year.
During the year a total of 524 monitors
(2009/10: 565 monitors) were sold or placed.
Historically the reported installed base has
represented the total monitors sold or placed
since the first sales in 2001. It is inevitable
that some of the earlier monitors will now
have been replaced by newer models
or may simply be no longer in use and
in common with some other companies
in our sector, the installed base has been
restated based on the number of units sold
or placed within the last seven years.
The restated installed base of monitors
at the year end was 2,001 (2009/10: 1,768)
representing a net increase in the year
of 233 monitors. Some of the installed base
will be demonstration and evaluation
monitors sold to distributors. The monitors
sold/placed in the year comprised 474
LiDCOrapid monitors and 50 LiDCOplus
monitors with 515 (2009/10: 536) of the
monitors being sold and nine (2009/10: 29)
being placed.
Recurring revenues from the sales
of disposables, service contracts and fees
for use increased by 18% to £3.68m (2009/10:
£3.13m) and represent 59% of total revenues.
The number of disposables sold increased
by 26% to 47,938 (2009/10: 37,918).
The average product margin across all
products after external procurement costs
increased slightly during the period from
75% to 76%. Future profitability will
significantly depend on margins achieved
on disposables and these have remained
high during the year. Margins achieved
on LiDCOplus sensors remained steady
at 86% and on LiDCOrapid smart cards
increased marginally to 93% (2009/10: 92%).
Sales of LiDCOrapid smart cards which
rose by 39% will be an important growth
revenue stream in future years. In the UK
where hemodynamic output monitoring
has been demonstrated to help to reduce
hospital costs and where we have detailed
usage information, we have seen the
average use rate increase from 3.5 to 4.7
uses per monitor per month, with use
in some hospitals as high as 15 uses per
monitor per month.
The overall gross margin on sales was 67%,
up from 61% in the previous year largely
due to reduced Med One payments in the
period which amounted to £526,000
(2009/10: £688,000). Med One payments
are expected to reduce to about £230,000
in 2011/12 and be minimal in the following
year. Total overheads fell by £118,000 (2%)
compared with the previous year. As noted
previously, the comparative effect
of transferring most of the US sales force
to Aspect (now Covidien) in July 2009 was
to reduce costs by about £325,000. This
reduction was offset most significantly
by additional sales and marketing costs
in the UK where sales increased by 29%.
Taxation
As the Group is still at the pre-profit stage
there was no tax charge for the year and
in addition the Group has a deferred tax
asset of £5.6m although this has not been
recognised in the accounts. The Group
qualifies for research and development tax
credits, which are estimated as £109,000
(2009/10: £122,000) and are shown in the
income statement.
Cash, financing and working capital
The net cash outflow before financing
activities was £433,000 (2009/10: £1,044,000),
its lowest rate since flotation in July 2001.
Cash balances at 31 January amounted
to £1,404,000 and the Company has no
bank borrowings. The Board anticipates
this will be sufficient to see the Company
through to profitability and positive cashflow.
Stock at the year end decreased slightly
to £1.05m and represents 18% (2009/10: 22%)
of non-licence fee revenue. Expenditure
on fixed and intangible assets in the year
of £556,000 compares with £608,000 the
previous year and is below the charge for
depreciation and amortisation of £639,000.
Expenditure on fixed and intangible assets
is not expected to rise significantly in the
foreseeable future.
Product development
New product development
The latest revision of the LiDCOrapid
software, version 1.03 and the development
of the universal pressure waveform module
were completed in the year. The new
software release introduced a number
of features focused on further developing
the LiDCOrapid graphical user interface
and simplifying use of, and connectivity
to, our monitors.
Summary of developments
concluded during 2010
Universal pressure waveform module
This allows wider hospital use of our
technology by allowing a broader range
of arterial blood pressure catheters
to be accessed.
LiDCO monitor language localisation
Converts the information on the LiDCOrapid
monitors’ screens from English into
22 languages.
RS232 communication changes
Allowing the LiDCOrapid monitor
to communicate with a wider range
of hospital information systems. One such
communication project, announced in
October, was to connect to GE’s Centricity
Clinical Information Systems in Europe, the
Middle East and Africa. This follows our
previous software development enabling
a link between LiDCO’s proprietary stand-
alone monitoring system and Philips’
patient monitors via the Philips VueLink.
Chief Executive Officer’s statement continued 13
LiDCO Annual Report
2010/11
LIDCO software evolution
Given the growing interest in fluid
management and hemodynamic monitoring,
we are exploring further refining the
graphical user interface and core algorithm
software architecture to allow for potential
OEM solutions, whereby elements of the
software could be more easily licenced
to third parties. Research is also underway
into the performance of the core algorithm
with alternate, often less high fidelity, signal
sources with the objective of widening the
patient applications and thereby increasing
the addressable market for our technology.
Regarding our intensive care product
the LiDCOplus we intend to update the
LiDCOplus monitor software to v 4.02. This
will involve updating the operating system,
adding the blood pressure module option
and further improving ease of use and
calibration methodology.
We believe that there is a significant market
for a combined graphical user interface that
can realise the clinical synergy between
Covidien’s Bispectral Index (BIS) depth
of anesthesia product and the LiDCOrapid
monitor. The former ensures the correct
depth of anesthesia is achieved, and the
LiDCOrapid is used to restore and maintain
blood pressure and cardiac output
to appropriate levels after anesthesia
induction and during surgery. A prospective
study at King’s College Hospital, London,
strongly suggested that this combination
display could significantly improve
the management of patients’ levels
of anesthesia, fluid and hemodynamic
status. The project to develop a combined
graphical user interface (GUI) is advancing
with a communication interface already
developed. Work is now progressing to
finalise the screen design. This development
project is expected to conclude around
the last quarter of 2011. Patent applications
have been filed on both the basic structure
of the LiDCOrapid monitor GUI and this has
been followed by a second application
on the combined hemodynamic and depth
of anesthesia GUI display.
Regulatory and quality review
During the year LiDCO Limited was
successfully audited against the
requirements of ISO13485:2003,
ISO9001:2008, the EU Medical Devices
Directive and the Health Canada Medical
Device Regulations, allowing continued
certification of the Company and our
products. Also during the year, LiDCO was
successfully inspected by the UK MHRA,
to ensure continued compliance with
Good Distribution Practice requirements.
Our activities and products comply with the
requirements of all relevant EU Directives –
the Waste Electrical and Electronic
Equipment (WEEE) regulations; the
Restrictions of the use of certain Hazardous
Substances in Electrical and Electronic
Equipment (RoHS) regulations; the
Registration, Evaluation and Authorisation
of Chemicals (REACH) regulations; the Waste
Batteries and Accumulators regulations; the
Batteries and Accumulators (Placing on the
Market) regulations; the Machinery Directive
and the Eco Design Directive.
LiDCO’s products are registered in a number
of major territories and registration of LiDCO
products is ongoing in Japan.
Outlook and prospects
We are pleased to be reporting another year
of considerable progress. Looking ahead,
independent research shows that cardiac
output monitoring is now the fastest
growing sector within the European
monitoring market with the minimally
invasive products now representing more
than 50% of sales (source: 2011 iData
Research). With our pressure waveform
based technology, international distribution
partners and increasing evidence and
awareness, we are confident of continuing
commercial progress. We traded profitably
in the second half of the year and for the full
year on an EBITDA basis. We look forward
to building on this and making further
progress in 2011 and beyond.
On a personal note my co-founder and
Scientific Director, Dr David Band, has
retired from the Board this month. David
has worked with me on the Board since the
Company’s foundation and has contributed
enormously to bringing the Company
to its current position. His many contributions
to medical science over the last 50 years
have had a profound impact on the
management of high risk patients. We thank
David for all he has done. I am delighted
to say he will be staying with us and
continue advising LiDCO with regards
to product development.
Dr Terence O’Brien
Chief Executive Officer
15 April 2011 | 1
LiDCO Annual Report
2010/11
Financial highlights
Total revenue increased by 16% to £6.24m (2009/10: £5.37m)
Traded profitably in second half of the year
UK sales increased 29% to £2.36m (2009/10: £1.82m)
Recurring revenues of £3.68m, representing 59% of total revenues
Gross profit up 28% to £4.22m; gross margin 68% (2009/10: 61%)
Operating loss reduced 68% to £498,000 (2009/10: £1.54m)
Lowest ever annual cash outflow before financing of £433,000 (2009/10: £1.04m)
Cash balance of £1.40m (2009/10: £1.85m)
Loss per share 0.22p (2009/10: 0.87p)
Operational highlights
524 monitors sold/placed – installed base of 2001 units at year end
Disposable sales of 47,948 units – up 26% (2009/10: 37,918)
Study shows use reduces mortality in shock patients
LiDCOrapid v1.03 and blood pressure module completed in September
LiDCO monitors now have connectivity to Philips and GE hospital information systems
LiDCO study day receives Royal College of Nursing accreditation
Post period end
Argon appointed LiDCO as UK distributor for their critical care products with distribution commencing in May 2011
Revenue
(million)
2006
2007
£3.44
2007
2008
£4.05
2008
2009
£4.53
2009
2010
£5.37
£6.24
2010
2011
Loss from operations
(million)
2006
2007
£2.6
2007
2008
£2.0
2008
2009
£1.8
2009
2010
£1.5
£0.5
2010
2011
Net cash outflow before financing
(million)
2006
2007
£1.6
2007
2008
£1.7
2008
2009
£1.8
2009
2010
£1.0
£0.4
2010
2011 | 6
LiDCO Annual Report
2010/11
2010/11 was another good year
for LiDCO. Continuing with our
strategy for growth, we saw
revenues increase by 16% and the
number of disposables sold grow
by 26%. Despite returning a profit
in the second half of the year,
the difficult economic climate
experienced in our target markets
impeded us from recording a profit
for the year as a whole, though
we were able to record an EBITDA
of £141,000.
Chairman’s statement
We have ended the year with a robust cash
position and no debt. LiDCO’s strategy for
growth continues to be focused on the
three key areas of products, market access
and evidence and awareness.
Products
Concern over associated risks means
that demand for invasive catheter-based
hemodynamic monitoring products
continues to decline. LiDCO’s minimally
invasive technology enables measurement,
analysis, audit and sharing of real-time and
historic hemodynamic data, both in critical
care units (LiDCOplus) and the operating
theatre (LiDCOrapid). Both the LiDCOplus
and the LiDCOrapid are high value, high
margin products with strong intellectual
property protection.
We continued to improve our products
during the year with software upgrades
and additional features that improve
delivery of data to the clinician.
Compatibility with other healthcare
systems and technologies has further
enhanced our products’ appeal, and LiDCO
monitors now have connectivity to Philips’
and GE’s hospital information systems.
The marketing collaboration signed with
Argon Medical in the UK in March of this
year will provide our UK sales force with
additional, well established products
complementing and strengthening our
own offering.
Market access
Minimally invasive hemodynamic monitoring
is the fastest growing segment within the
European patient monitoring market, and
the UK is leading Europe in terms of its rate
of adoption of the technology. In the UK we
have a direct sales and nurse educator team
successfully increasing our installed base
in this major market and growing sales
by 29% in the year.
In the USA, our partner is Covidien:
a leading global healthcare products
company. In 2010 Covidien strengthened
its sales team, surgery franchise and
combination technology offering,
enhancing LiDCO’s access to this
lucrative market.
Theresa Wallis
Chairman 7
LiDCO Annual Report
2010/11
Evidence and awareness
An increasing body of evidence shows
improved patient outcomes from the use
of less invasive hemodynamic monitoring
technologies. In 2010, clinicians demonstrated
the effectiveness of LiDCO products
in a variety of fields including: major and
bariatric surgery, obstetrics, intensive care
and cardiology. Studies have also been
published showing reduced mortality
in shock patients as well as reduced length
of stay and complications in surgery
patients that have been hemodynamically
monitored using LiDCO’s products.
Financial position
LiDCO’s operating loss for the year reduced
from £1.54m to £498,000, on turnover of
£6.24m. With its cash usage reaching its
lowest level ever, at £433,000, the Group
ended the year with £1.40m in cash.
Dr David Band
In April, Dr David Band, the Group’s
co-founder and Scientific Director resigned
from the Board after many years of service.
We are very grateful for his important
contribution to the Group. I am delighted
he has agreed to continue advising LiDCO
with regard to product development.
Prospects
Hospitals are under increasing pressure
to cut costs and improve efficiency and
patient outcomes. These challenges
present significant opportunities for LiDCO,
as our products can reduce costly patient
complications and hospital stay lengths,
while providing significant improvements
to quality of care. We have worked hard
to position ourselves to respond to the
escalating demand.
I am grateful to our shareholders for their
continuing loyalty to LiDCO in 2010/11
and my fellow directors for their support.
I would also like to acknowledge the
valuable contribution made by our Clinical
Advisory Group. Finally I wish to thank our
staff for their enthusiasm and commitment
throughout the year. The year ahead will
be another challenging one but we are well
placed to continue our progress.
Theresa Wallis
Chairman
15 April 2011
16%
increase in revenues
this year
26%
growth in unit sales
of disposables
The pressures on hospitals to cut
costs and improve efficiency present
significant opportunities for LiDCO. | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input LiDCO Group Plc annual report & accounts for the year ended 31 January 2011
2010
/
11 LiDCO Annual Report
2010/11
LiDCO Group Plc
www.lidco.com
Early intervention to avoid potentially dangerous
and life threatening events has been proven
to reduce complications and length of hospital
stay in high risk surgery patients.
LiDCO manufactures minimally invasive
hemodynamic monitoring equipment and
disposables. Our products are the result
of a multi-disciplinary developmental approach
that transforms complex physiological data into
useable and effective information.
01 Highlights
02 Products
03 Market access
04 Evidence and awareness
05 Translational skills
06 Chairman’s statement
08 Chief Executive Officer’s statement
14 Board of Directors and Company Secretary
15 Clinical Advisory Group
16 Corporate Governance report
18 Corporate social responsibility statement
20 Directors’ remuneration report
24 Directors’ report
28 Independent auditor’s report (Group)
29 Consolidated comprehensive income statement
30 Consolidated balance sheet
31 Consolidated cash flow statement
32 Consolidated statement of changes in shareholders’ equity
33 Notes to the financial statements
49 Independent auditor’s report (Company)
50 Company balance sheet
51 Notes to the financial statements
53 Company information
53 Advisers to the Company
Click on the headings below
to navigate through the document 1
LiDCO Annual Report
2010/11
Financial highlights
Total revenue increased by 16% to £6.24m (2009/10: £5.37m)
Traded profitably in second half of the year
UK sales increased 29% to £2.36m (2009/10: £1.82m)
Recurring revenues of £3.68m, representing 59% of total revenues
Gross profit up 28% to £4.22m; gross margin 68% (2009/10: 61%)
Operating loss reduced 68% to £498,000 (2009/10: £1.54m)
Lowest ever annual cash outflow before financing of £433,000 (2009/10: £1.04m)
Cash balance of £1.40m (2009/10: £1.85m)
Loss per share 0.22p (2009/10: 0.87p)
Operational highlights
524 monitors sold/placed – installed base of 2001 units at year end
Disposable sales of 47,948 units – up 26% (2009/10: 37,918)
Study shows use reduces mortality in shock patients
LiDCOrapid v1.03 and blood pressure module completed in September
LiDCO monitors now have connectivity to Philips and GE hospital information systems
LiDCO study day receives Royal College of Nursing accreditation
Post period end
Argon appointed LiDCO as UK distributor for their critical care products with distribution commencing in May 2011
Revenue
(million)
2006
2007
£3.44
2007
2008
£4.05
2008
2009
£4.53
2009
2010
£5.37
£6.24
2010
2011
Loss from operations
(million)
2006
2007
£2.6
2007
2008
£2.0
2008
2009
£1.8
2009
2010
£1.5
£0.5
2010
2011
Net cash outflow before financing
(million)
2006
2007
£1.6
2007
2008
£1.7
2008
2009
£1.8
2009
2010
£1.0
£0.4
2010
2011 2
LiDCO Annual Report
2010/11
Products
LiDCO researches, develops, manufactures and sells innovative medical devices,
primarily for critical care and cardiovascular risk hospital patients who require real-time
hemodynamic monitoring while undergoing major surgery, intensive care and cardiac
procedures. LiDCO’s products provide critical hemodynamic data regarding the
performance of a patient’s heart and effectiveness of the blood circulation in delivering
oxygen to the body’s tissues. Improved hemodynamic monitoring reduces length
of stay and complications in high risk surgery patients.
Patent protected
LiDCO products are innovative and unique.
They are protected as strongly as possible
by proprietary intellectual property rights –
patents, copyright, trademarks and
confidentiality/secrecy arrangements
(know-how).
Large and growing
market opportunity
They are designed for point-of-care use
and are minimally invasive, portable and
easy to use at a patient’s bedside. They
address a potential worldwide market
opportunity of US$1.2 billion per annum.
R&D activities
LiDCO has a product development
programme of incremental product
improvement/evolution improving ease
of use and enabling convergence and
integration of multiple monitoring
parameters, either on LiDCO monitor screens
or third party monitors via software licensing. 3
LiDCO Annual Report
2010/11
Market access
LiDCO’s distribution strategy is to put effective arrangements in place in order
to access the market opportunity at a cost which allows the Company to meet
its strategic goals and meet market expectations. LiDCO targets territories that
are developing in terms of hemodynamic monitoring, where strong distribution
networks are available that can be supported from LiDCO’s UK base.
UK sales summary
• Total revenue up 29% at £2.36m (2009/10: £1.82m)
• Monitor revenue up 52% to £0.50m (2009/10: £0.33m)
– ICU: LiDCOplus monitor revenue up 49% to £0.30m
– Surgery: LiDCOrapid monitor revenue up 118% to £0.20m
• Disposables sales of £1.80m up 21% (2009/10: £1.49m)
• Other income £55,000 (2009/10: nil)
USA sales summary
• Distribution revenue up 26% to £1.89m (2009/10: £1.50m)
• LiDCOrapid monitor revenue steady at £0.68m (2009/10: £0.68m)
• LiDCOrapid smart card sales up 54% to £0.83m (2009/10: £0.54m)
• Licence fee and other income of £0.38m up 35% (2009/10: £0.28m)
Continental Europe sales summary
• Total revenue down by 13% to £0.86m (2009/10: £0.99m)
• Monitor sales revenue of £0.32m down 40% (2009/10: £0.53m)
• Sensor/smart card sales up 17% to £0.54m (2009/10: £0.46m)
Rest of World and licence fee income
• Total revenue up 135% at £0.66m (2009/10: £0.28m)
• Monitor revenue up 225% to £0.39m (2009/10: £0.12m)
• Sensor/smart card sales up by 117% to £0.13m (2009/10: £0.06m)
• Licence fee and other income of £0.14m (2009/10: £0.10m)
29%
increase in UK
total sales
26%
increase in US
distribution revenue
17%
increase in sales of sensor/smart card
sales in continental Europe
225%
increase in monitor revenues
from Rest of World 4
LiDCO Annual Report
2010/11
Evidence and awareness
Complications from major surgery in patients undergoing emergency
surgery, or surgery in patients with limited cardiovascular reserves are
common. Not only are complications such as infections costly to treat and
necessitate longer hospital stay, they also have long-term consequences
negatively influencing both survival and quality of life in survivors.
We now know that these complications
are potentially avoidable with the use of
a pre-emptive ‘enhanced recovery’ strategy
that involves better monitoring through use
of advanced hemodynamic monitors such
as those provided by LiDCO.
Sufficient evidence has now been
accumulated to demonstrate that the
relatively inexpensive upfront costs
of hemodynamic monitoring are easily
outweighed by the short-term benefits
to the patient and hospital in terms
of reduced length of stay.
The ‘body of clinical evidence’ has resulted
in the emergence and availability in the
UK of guidelines on fluid management,
a ‘How To, Why To’ guide and more recently
a Commission for Quality and Innovation
(CQUIN) payment that links a proportion
of the hospital’s income to the adoption
of improved practice.
More than 100 published papers and
presentations have been given on LiDCO’s
technology, with 25 abstracts and papers
during the last year alone. Positive outcome
data is available for both high risk surgery
and shock patients with LiDCO being the
sole technology used in two current large
multi-centre outcome trials:
• MOnIToR USA transplantation study donor
• OPTIMISE UK high risk surgery study
Hospital departmental strategy and use
of advanced hemodynamic monitors
is heavily influenced by the accumulated
body of clinical evidence. Adoption
incentives have followed resulting in the
expectation that the minimally invasive
hemodynamic monitoring market will
grow to a value of US$1.2 billion per annum
worldwide and in the UK – where a lot of the
research was pioneered – by 17% per annum.
Professional body guidance
92.1%
50%
36.3%
6.8%
CE/senior management decision
2.6%
Other
12%
Hospital policy
Top requirements for cardiac output monitor
Factors that influence the decision to implement
fluid optimisation/enhanced recovery
78%
ease of use
46%
suitable for broadest
application of use
71%
accuracy
45%
size of body
of evidence
Body of clinical evidence
Departmental/clinical strategy
Source: UK lntensive Care Society market survey 2010 5
LiDCO Annual Report
2010/11
Translational skills
Productive use of LiDCO’s hemodynamic monitoring products has to be supported
by excellence in clinical education. In April 2010 LiDCO established a Hemodynamic
Workshop in collaboration with doctors at St George’s Hospital in London, aimed
at teaching hemodynamic optimization techniques to senior physicians. This course
is accredited by the UK’s Royal College of Anaesthetists for continuing medical
education points.
The course has been very well received
by all attendees and we have seen a high
degree of participation both domestically
and by European doctors for the courses
organised for this year.
In July 2010 LiDCO received accreditation
from the UK Royal College of Nursing (RCN)
for its LiDCOplus monitor competency-
based study day. The course is designed
for all critical care nurses, nurse educators,
professional development nurses, nurse
consultants and junior doctors.
Our plans are to considerably expand both
of these educational activities. We are highly
committed to helping our hospital customers
to translate these skills into practice.
Dr Maurizio Cecconi
presenting at
St George’ s Hospital at
LiDCO’s Hemodynamic
Monitoring Workshop 6
LiDCO Annual Report
2010/11
2010/11 was another good year
for LiDCO. Continuing with our
strategy for growth, we saw
revenues increase by 16% and the
number of disposables sold grow
by 26%. Despite returning a profit
in the second half of the year,
the difficult economic climate
experienced in our target markets
impeded us from recording a profit
for the year as a whole, though
we were able to record an EBITDA
of £141,000.
Chairman’s statement
We have ended the year with a robust cash
position and no debt. LiDCO’s strategy for
growth continues to be focused on the
three key areas of products, market access
and evidence and awareness.
Products
Concern over associated risks means
that demand for invasive catheter-based
hemodynamic monitoring products
continues to decline. LiDCO’s minimally
invasive technology enables measurement,
analysis, audit and sharing of real-time and
historic hemodynamic data, both in critical
care units (LiDCOplus) and the operating
theatre (LiDCOrapid). Both the LiDCOplus
and the LiDCOrapid are high value, high
margin products with strong intellectual
property protection.
We continued to improve our products
during the year with software upgrades
and additional features that improve
delivery of data to the clinician.
Compatibility with other healthcare
systems and technologies has further
enhanced our products’ appeal, and LiDCO
monitors now have connectivity to Philips’
and GE’s hospital information systems.
The marketing collaboration signed with
Argon Medical in the UK in March of this
year will provide our UK sales force with
additional, well established products
complementing and strengthening our
own offering.
Market access
Minimally invasive hemodynamic monitoring
is the fastest growing segment within the
European patient monitoring market, and
the UK is leading Europe in terms of its rate
of adoption of the technology. In the UK we
have a direct sales and nurse educator team
successfully increasing our installed base
in this major market and growing sales
by 29% in the year.
In the USA, our partner is Covidien:
a leading global healthcare products
company. In 2010 Covidien strengthened
its sales team, surgery franchise and
combination technology offering,
enhancing LiDCO’s access to this
lucrative market.
Theresa Wallis
Chairman 7
LiDCO Annual Report
2010/11
Evidence and awareness
An increasing body of evidence shows
improved patient outcomes from the use
of less invasive hemodynamic monitoring
technologies. In 2010, clinicians demonstrated
the effectiveness of LiDCO products
in a variety of fields including: major and
bariatric surgery, obstetrics, intensive care
and cardiology. Studies have also been
published showing reduced mortality
in shock patients as well as reduced length
of stay and complications in surgery
patients that have been hemodynamically
monitored using LiDCO’s products.
Financial position
LiDCO’s operating loss for the year reduced
from £1.54m to £498,000, on turnover of
£6.24m. With its cash usage reaching its
lowest level ever, at £433,000, the Group
ended the year with £1.40m in cash.
Dr David Band
In April, Dr David Band, the Group’s
co-founder and Scientific Director resigned
from the Board after many years of service.
We are very grateful for his important
contribution to the Group. I am delighted
he has agreed to continue advising LiDCO
with regard to product development.
Prospects
Hospitals are under increasing pressure
to cut costs and improve efficiency and
patient outcomes. These challenges
present significant opportunities for LiDCO,
as our products can reduce costly patient
complications and hospital stay lengths,
while providing significant improvements
to quality of care. We have worked hard
to position ourselves to respond to the
escalating demand.
I am grateful to our shareholders for their
continuing loyalty to LiDCO in 2010/11
and my fellow directors for their support.
I would also like to acknowledge the
valuable contribution made by our Clinical
Advisory Group. Finally I wish to thank our
staff for their enthusiasm and commitment
throughout the year. The year ahead will
be another challenging one but we are well
placed to continue our progress.
Theresa Wallis
Chairman
15 April 2011
16%
increase in revenues
this year
26%
growth in unit sales
of disposables
The pressures on hospitals to cut
costs and improve efficiency present
significant opportunities for LiDCO. 8
LiDCO Annual Report
2010/11
The market
The directors estimate that the potential
number of patients in Europe who could
benefit from hemodynamic monitoring
is six times the number currently being
monitored. The cost of critical care
continues to grow. Heightened awareness
of the benefits from the use of LiDCO’s
technology such as reductions in infections,
length of stay and costs are all contributing
to increased sales.
The market for minimally invasive
hemodynamic monitors breaks down into
three categories: intensive care (ICU), high
risk surgery and alternate sites such as trauma
and ‘outreach’ (i.e. outside the ICU) care sites.
LiDCO monitors have the potential to play
major roles in each of these arenas.
Reducing surgical complications such
as infections is a key growth driver for our
business. In the US, it is estimated that
surgical site infections alone cost US$10bn
per annum. The need to prevent central line
infection and septic complications has led
to a drive to reduce the use of invasive
central venous catheters. Use of LiDCO’s
technology can reduce central venous
catheter use by up to 80% in high risk
surgery (Green D, Paklet L (2010) Latest
Chief Executive Officer’s statement
LiDCO had another very good year.
The monitor base increased by a net
233 units (13%) to 2001 units, with
524 units sold or placed during the
year. Disposables income increased
in our intensive care and surgery
markets by 8% and 39% respectively.
Overall revenues were up 16% on the
previous year to £6.24m with gross
profit up 28% to £4.22m. Expenses
were kept under tight control
resulting in administration costs
reducing by 2%. Average product
margins were maintained at 76%.
Cash outflows before financing were
at a record low with the Group
trading profitably during the second
half of the year. Over the prior year
the loss fell by over £1m with the loss
per share reducing by 75% to 0.22p.
developments in peri-operative monitoring
of the high-risk major surgery patient.
International Journal of Surgery 8 90-99).
With a US$1.2bn market potential in surgery
and intensive care, the global market for
minimally invasive hemodynamic
monitoring products is large and growing.
The experience level of clinicians in the ICU
is declining due to the retirement of staff
experienced in the use of older invasive
catheter based technologies. Consequently
there is a growing need for reliable, accurate
and easily adoptable products that can
deliver more cost effective care. The
minimally invasive market now represents
53% of the European hemodynamic
monitoring market value, followed by the
invasive and non-invasive markets which
represent 42% and 5% of sales respectively.
It is projected that the European minimally
invasive hemodynamic monitoring market
will grow at a compound rate of 12% per
annum; from US$51m today to US$112m
by 2017 (iData 2011 patient monitoring
research report). The UK represents the
biggest European market for, and fastest
rate of adoption of, minimally invasive
technology. Sales in the UK are projected
to grow by an average of 17% per annum
from US$14m in 2010 to US$42m in 2017.
The NHS in the UK is now the largest
healthcare organisation in the world, with
an annual spend of £100bn. LiDCO has
a direct sales force in the UK where our sales
revenues increased last year by a noteworthy
29%. We are resourced to take advantage
of this fast growing domestic market
opportunity. Acquiring the sales and
marketing rights to the Argon critical
care products has further broadened and
strengthened our hemodynamic offering
to our UK customers.
Evidence and awareness
The minimally invasive hemodynamic
market is documented as the fastest
growing sector in the European hospital
monitoring field. The potential size of the
market, its growth rate and the increasing
presence of clinical guidelines for adoption
of hemodynamic monitoring is inevitably
resulting in an increasing appetite from the
major corporate players to participate
in providing these advanced products.
The pressure on hospitals to reduce costs
while improving efficiency is intensifying.
In the UK, the NHS QIPP (Quality, Innovation,
Productivity and Prevention) and ERAS
(Enhanced Recovery After Surgery)
programmes have resulted in a higher focus
on adopting advanced hemodynamic
monitoring technology. For example,
in a 2010 survey of UK hospitals by the
British Intensive Care Society, 77% of hospitals
had, or were planning to implement,
fluid-optimisation of their colorectal
cancer surgery patients. The three most
important issues determining their choice
of technology were ease of use/adoption,
Dr Terence O’Brien
Chief Executive Officer 9
LiDCO Annual Report
2010/11
trending accuracy and suitability of use
for the broadest variety of patients.
The LiDCOrapid was specifically designed
to be easy to set up and usable in the fluid
and drug management of any patient with
arterial line access. Our surgical product
is proving very adoptable, with UK sales
of LiDCOrapid disposables increasing
by 137% in the year.
Cumulatively more than 100 publications
are in print referencing our technology.
During 2010 alone 25 research abstracts
and papers on the use of LiDCO monitors
were presented and published. Using
LiDCO technology for high-risk surgery
patients has been shown to help reduce
complications – particularly infections –
by more than a third, reducing hospital stay
by an average of 12 days per patient and
costs by £4,800 per patient (Pearse et al.
Early goal-directed therapy after major
surgery reduces complications and duration
of hospital stay. A randomized, controlled trial.
Crit. Care 2005, 9 (6) 687-693).
In September 2010, the Journal of Critical
Care published the findings of a study from
the University of Iowa, showing that using
the LiDCOplus monitor significantly reduced
the mortality rate in patients treated for
shock (Hata et al. Reduced mortality with non
invasive hemodynamic monitoring of shock,
Journal of Critical Care, 26:2, pages 224.e1-
224.e8). Treatment of patients using LiDCO’s
monitor significantly reduced the observed
mortality rate to 13% against 32% and 20%
in the two invasively monitored groups and
37% in the unmonitored patient groups.
These results add to the previous findings
of Pearse et al who reported that supportive
care guided by LiDCO’s lithium dilution and
arterial waveform assessments of cardiac
output was associated with reduced peri-
operative morbidity compared with
conventional assessment.
Two further large multi-centre outcome
trials are progressing well. In the UK, the
LiDCOrapid cardiac output monitor was
chosen as the sole monitoring system
to be used in OPTIMISE, a government-
supported trial which aims to improve
surgical outcomes by optimising a patient’s
cardiovascular management. The trial,
covering 12 centres, is the largest of its
type to date; it is underway and currently
recruiting patients.
The LiDCOplus is the sole hemodynamic
monitor used in a 960 patient US-
Government funded multi-centre trial –
MOnIToR (Monitoring Organ donors
to Improve Transplantation Results).
The results of earlier studies using
LiDCOplus to monitor and develop
a treatment protocol designed to improve
the hemodynamic status of donors
generated considerable interest within
the US transplantation community.
As with the OPTIMISE trial, the MOnIToR
trial is progressing well.
To facilitate adoption and productive
use of its equipment, LiDCO’s monitoring
products are also supported by excellence
in clinical education. In April 2010 LiDCO
established a Hemodynamic Workshop
in collaboration with doctors at St George’s
Hospital in London aimed at teaching
hemodynamic optimisation techniques
to senior physicians. This course is accredited
by the UK’s Royal College of Anaesthetists
for continuing medical education points.
The course has been very well received
by all the consultant level attendees and
we have seen a high degree of participation
and take up by our European distributors
of places for courses held this year. In July
LiDCO received accreditation from the
Royal College of Nursing (RCN) for its
LiDCOplus monitor competency-based
study day. The course is designed for
all critical care nurses, nurse educators,
professional development nurses, nurse
consultants and junior doctors. Our plans
are to considerably expand both of these
educational activities.
Products and applications
LiDCO applies several common criteria
to its products. They must be innovative,
protectable, and applicable to significant
clinical applications. They must have a large
addressable market and deliver significant
margins. The manufacturing process must
also be low cost with very high reliability.
Each LiDCO monitor addresses a particular
market. Launched in 2008, the LiDCOrapid
principally focuses on high risk surgery
patients with arterial lines, but also addresses
alternate site use – for example in trauma,
obstetrics and shock. The LiDCOplus is used
mainly in the intensive care arena.
During the year several new product
developments were introduced, for example:
• a software upgrade to the LiDCOrapid,
including a module to expand access
to blood pressure data;
• a translation facility to convert information
from English into 22 languages; and
• improved communication with Philips
and GE hospital information systems.
Sales and distribution
Revenue was up 16% to £6.24m (2009/10:
£5.37m). A similar number of LiDCO
monitors were sold or placed in the year
(524 vs. 565 units in 2009/10) with monitor
capital income up 5%. The monitor base
at the year end was 2,001 units, with a net
increase of 233 units (13%) in the year.
As explained in the Financial Review,
from this year we are now reporting our
installed base as the net number of sold
and placed units over the last seven years.
Our monitors have an expected life of seven
years in use, so we have decided to assume
all monitors over seven years old will
no longer be disposable income generating.
From here on the installed base will only
increment by the difference between those
monitors sold in the year and those retired
i.e. that were sold eight years ago. The
LiDCOrapid portion of the installed base
grew by 474 units and now represents
in excess of 50% of the monitor base.
US$10bn
annual estimated cost of surgical
site infections in the US
US$1.2bn
global market potential in surgery and intensive
care for minimally invasive hemodynamic products 10
LiDCO Annual Report
2010/11
Chief Executive Officer’s statement continued
Disposables income was higher for both
our intensive care and surgery markets
by 8% and 39% respectively and by 18%
overall. Disposables numbers were also up
26% at 47,938 units (2009/10: 37,918 units).
Export sales represent 62% of total income –
slightly down from 66% in the prior period,
reflecting the very strong UK sales growth
seen in the period as well as economic
weakness in some parts of continental Europe.
LiDCO’s strategy is to sell directly to the
high value, high growth UK hospital
market via its strong, direct sales force and
is expecting to take a significant share
of the domestic market growth. In export
territories we are focusing on addressable
markets i.e. those where we expect good
growth and where we have access to
specialist distribution partners with the
attributes and commitment to sell our
products and develop our market within
their territory. These include the US, Japan,
Scandinavia, Eastern Europe, the Middle
East and Latin America.
In the US there are almost 5,000 hospitals
performing surgery and within these
hospitals there are over 100,000 intensive
care beds. In addition to the challenge
of selling to this large and geographically
spread out hospital market, there are
a significant number of regional and/or
national accounts to work with. Once sales
traction is gained in the US, these hospital
groups and group purchasing organisations
(such as Premier and Novation) become
increasingly important customers.
Over the years it is clear that fully accessing
the growing USA hemodynamic monitoring
market has become logistically and
financially impossible for the smaller and
even larger sized companies. Therefore,
in order to address a significant share
of this opportunity we have established
a distribution agreement in the US with
the Respiratory and Monitoring division
of Covidien plc (‘Covidien’). Covidien has
a long standing and substantial existing
oximetry monitoring business and more
recently made significant investment
in the monitoring market, acquiring two
additional US monitoring companies
(Aspect and Somanetics) with a very
significant total investment of US$460m.
Collectively the Respiratory and Monitoring
division now has one of the largest
monitoring equipment sales forces available
today in the US. Importantly this group sells
into over 80% of operating rooms in the
major hospitals. In the US Covidien is now
able to offer customers a suite of monitoring
systems that can collectively monitor
respiratory function, brain oxygenation and
through the LiDCOrapid the underlying
hemodynamic status. These products are
a natural fit together and offer, in particular,
advantages to the management of high risk
surgery patients. Accordingly, we believe
that the commitment by Covidien
to promoting LiDCO’s LiDCOrapid monitor
along side their own products is strong.
Covidien achieved the first year’s minimum
sales requirements and our business with
them grew 26% over the prior year. This was
a good result, as inevitably amalgamations
of this scale take a lot of effort and time out
from the field. Indeed, training of the new
members of the consolidated sales force
and internal national accounts sales teams
on LiDCO’s product is still taking place.
We expect the number of evaluations
and pipeline to continue to build as the
recently trained representatives also start
to contribute to the sales efforts. Clearly
Covidien has made a significant investment
in the monitoring field and has the interest,
infrastructure, resources and products
necessary to access in particular a significant
share of the high risk surgery hemodynamic
monitoring market.
Geographic sales and trading
UK sales summary
• Total revenue up 29% at £2.36m
(2009/10: £1.82m)
• Monitor revenue up 52% to £0.50m
(2009/10: £0.33m)
– ICU: LiDCOplus monitor revenue
up 49% to £0.30m
– Surgery: LiDCOrapid monitor revenue
up 118% to £0.20m
• Disposables sales of £1.80m up 21%
(2009/10: £1.49m)
• Other income £55,000 (2009/10: nil)
Our focus last year was to maintain our ICU
business and grow our LiDCOrapid surgery
interest. Our direct sales force had a very
good year achieving both these goals. Total
income was up 29% to £2.36m, with the
UK representing 38% of our total worldwide
sales. Monitor and disposables income
increased across both the ICU and surgery
markets. As expected the greatest growth
was experienced in the surgery segment
where LiDCOrapid monitor sales were
up 118% and smart card disposables
up 137%. The monitor base increased
by a net 24 units (9%) to 300 units in the UK,
with 61 units sold placed during the year.
The total number of disposables sold
increased from 14,055 to 17,605.
In the UK there will be intense pressure
on the NHS in terms of revenue and capital
spend in the new financial year starting
this month. We believe this will continue
to drive hospitals to focus on reducing
costs while improving efficiency. ERAS
programmes within the NHS will most likely
continue to be prioritized, despite the
Review of revenue and units sold and placed
%
Year to Year to Increase/ Increase/
31 Jan 2011 31 Jan 2010 (decrease) (decrease)
Revenue by type (£’000)
– Monitors 1,953 1,855 98 5%
– Sensors/smart cards/use fees 3,681 3,125 556 18%
– Licence fees and other income 603 387 216 56%
– Total revenues 6,237 5,367 870 16%
Monitors (units) 524 565 (41) (7%)
Sold 515 536 (21)
Placed 9 29 (20)
Sensor, smart card and fee
per use sales (units) 47,938 37,918 10,020 26%
Monitor base (7 year net) 2,001 1,768 233 13% 11
LiDCO Annual Report
2010/11
worsening economic conditions. We expect
these conditions will deliver sales growth
of our surgery product in particular. Fluid
and hemodynamic monitoring is already
adopted, or planned in the majority of UK
hospitals. Additional sales growth should
come from increasing use in a number
of surgical procedures.
We announced in March 2011 that LiDCO
was appointed by Argon Medical Devices
Inc. (‘Argon’) to take over their existing UK
critical care sales. Argon acquired the critical
care business of Becton Dickinson (‘BD’)
in late 2010. We are delighted that Argon
has decided to extend the relationship
we previously established with BD’s
Japanese critical care group. We expect
to start selling Argon’s products from May
2011. UK customers will then be able to buy
an expanded and related group of critical
care and surgery products including the
arterial pressure transducer necessary for
use with our monitors.
USA sales summary
• Distribution revenue up 26% to £1.89m
(2009/10: £1.50m)
• LiDCOrapid monitor revenue steady
£0.68m (2009/10: £0.68m)
• LiDCOrapid smart card sales up 54%
to £0.83m (2009/10: £0.54m)
• Licence fee and other income of £0.38m
up 35% (2009/10: £0.28m)
Sales to Covidien were up 26% during the
period. Comparisons across the period
are complicated by the stocking orders
taken in both periods and the subsequent
temporary sales disruption from acquisition
and integration of the Aspect and
Somanetics sales forces. We are pleased
to report that Covidien has achieved the
minimum sales in the first year of our
contract. Overall Covidien has purchased
657 LiDCOrapid monitors representing
both sales stock and a demonstration/
evaluation pool. Covidien has shown a high
level of commitment to developing the
high risk surgical market opportunity and
is putting a significant amount of time into
training and incentivising the sales force.
LiDCO has retained sales responsibility
for the ICU-focused LiDCOplus product
sales in the US with our direct sales force.
Direct sales have decreased to £464,000
(2009/10: £773,000) with £111,000 of the
fall the inevitable result of the transfer
to Covidien of LiDCOrapid sales in accounts
that were previously a direct sales business.
Capital revenues (i.e. new monitor sales)
from the LiDCOplus fell from £184,000
to £83,000 due to the reduced sales effort
as four of the LiDCO sales team transferred
to Covidien. LiDCOplus sensor sales declined
from £422,000 to £341,000, a consequence
of some customers now purchasing the
LiDCOrapid – where previously they would
have purchased the LiDCOplus – and
reduced geographic sales coverage outside
our key accounts.
LiDCOplus consumable sales to our key
accounts (i.e. accounts where we can
support the business) declined modestly –
by only £43,000. Most of this decline was
due to product substitution in a small
number of accounts towards use of the
LiDCOrapid. Going forward we expect the
core key account direct business to be
supportable and maintainable while we
focus on the bigger and more addressable
surgery opportunity for the LiDCOrapid.
We continue to believe there is a significant
ICU market in the US for our more precise
and sensor calibrated monitor.
Continental Europe sales summary
• Total revenue down by 13% to £0.86m
(2009/10: £0.99m)
• Monitor sales revenue of £0.32m down
40% (2009/10: £0.53m)
• Sensor/smart card sales up 17% to £0.54m
(2009/10: £0.46m)
We reported at the interim stage that the
economic climate in Europe had been
weak, delaying capital and disposable
purchases in some countries. Where
economic conditions have been poor this
has affected our distributors’ business.
In contrast, where finances are stronger,
e.g. in Eastern Europe, we have seen a very
significant increase in sales. The results are
therefore very mixed; ranging from increases
of 71% in Slovenia to an 82% fall in business
in Italy, previously our best performing
territory. Despite the challenging conditions,
underlying disposable income was up by 17%.
We expect sales to increase modestly in 2011
as the economic climate gradually improves.
Rest of World and licence fee income
• Total revenue up 135% at £0.66m
(2009/10: £0.28m)
• Monitor revenue up 225% to £0.39m
(2009/10: £0.12m)
• Sensor/smart card sales up by 117%
to £0.13m (2009/10: £0.06m)
• Licence fee and other income of £0.14m
(2009/10: £0.10m)
Sales in the ROW were up 135%, reflecting
increases across the board in licence fees,
monitor and disposable revenues. This was
a good performance with particularly good
results seen in Brazil and the Middle East.
Minimally invasive hemodynamic monitoring
is becoming well established in Japan.
We believe the Japanese hemodynamic
monitoring high risk surgery market has
a potential market value of US$285 million
per annum, with reimbursement currently
available. With respect to our distribution
arrangements in Japan, in October 2010
Argon announced that it had acquired the
critical care division of BD. LiDCO had signed
a distribution agreement with BD in April
2009 for sales of the LiDCOrapid in Japan
and a registration application file for product
approval has been prepared for submission.
We expect registration and reimbursement
to be approved late 2011/early 2012.
Negotiations with distribution parties
in Japan are well advanced and a Heads
of Agreement has been signed – we expect
to be able to further update shareholders
in the near future.
73%
reduction in post-tax losses
US$285m
potential annual value of Japanese high risk
surgery market for hemodynamic monitoring 12
LiDCO Annual Report
2010/11
Financial review
Turnover increased by 16% to £6.24m
(2009/10: £5.37m). Losses after tax
decreased significantly by 73%
to £390,000 (2009/10: £1,427,000)
and the loss per share was reduced
to 0.22 pence (2009/10: 0.87 pence).
Exports rose by 9% to £3.88m but
with a strong increase in sales in the
UK represented 62% of sales, down
from 66% the previous year.
During the year a total of 524 monitors
(2009/10: 565 monitors) were sold or placed.
Historically the reported installed base has
represented the total monitors sold or placed
since the first sales in 2001. It is inevitable
that some of the earlier monitors will now
have been replaced by newer models
or may simply be no longer in use and
in common with some other companies
in our sector, the installed base has been
restated based on the number of units sold
or placed within the last seven years.
The restated installed base of monitors
at the year end was 2,001 (2009/10: 1,768)
representing a net increase in the year
of 233 monitors. Some of the installed base
will be demonstration and evaluation
monitors sold to distributors. The monitors
sold/placed in the year comprised 474
LiDCOrapid monitors and 50 LiDCOplus
monitors with 515 (2009/10: 536) of the
monitors being sold and nine (2009/10: 29)
being placed.
Recurring revenues from the sales
of disposables, service contracts and fees
for use increased by 18% to £3.68m (2009/10:
£3.13m) and represent 59% of total revenues.
The number of disposables sold increased
by 26% to 47,938 (2009/10: 37,918).
The average product margin across all
products after external procurement costs
increased slightly during the period from
75% to 76%. Future profitability will
significantly depend on margins achieved
on disposables and these have remained
high during the year. Margins achieved
on LiDCOplus sensors remained steady
at 86% and on LiDCOrapid smart cards
increased marginally to 93% (2009/10: 92%).
Sales of LiDCOrapid smart cards which
rose by 39% will be an important growth
revenue stream in future years. In the UK
where hemodynamic output monitoring
has been demonstrated to help to reduce
hospital costs and where we have detailed
usage information, we have seen the
average use rate increase from 3.5 to 4.7
uses per monitor per month, with use
in some hospitals as high as 15 uses per
monitor per month.
The overall gross margin on sales was 67%,
up from 61% in the previous year largely
due to reduced Med One payments in the
period which amounted to £526,000
(2009/10: £688,000). Med One payments
are expected to reduce to about £230,000
in 2011/12 and be minimal in the following
year. Total overheads fell by £118,000 (2%)
compared with the previous year. As noted
previously, the comparative effect
of transferring most of the US sales force
to Aspect (now Covidien) in July 2009 was
to reduce costs by about £325,000. This
reduction was offset most significantly
by additional sales and marketing costs
in the UK where sales increased by 29%.
Taxation
As the Group is still at the pre-profit stage
there was no tax charge for the year and
in addition the Group has a deferred tax
asset of £5.6m although this has not been
recognised in the accounts. The Group
qualifies for research and development tax
credits, which are estimated as £109,000
(2009/10: £122,000) and are shown in the
income statement.
Cash, financing and working capital
The net cash outflow before financing
activities was £433,000 (2009/10: £1,044,000),
its lowest rate since flotation in July 2001.
Cash balances at 31 January amounted
to £1,404,000 and the Company has no
bank borrowings. The Board anticipates
this will be sufficient to see the Company
through to profitability and positive cashflow.
Stock at the year end decreased slightly
to £1.05m and represents 18% (2009/10: 22%)
of non-licence fee revenue. Expenditure
on fixed and intangible assets in the year
of £556,000 compares with £608,000 the
previous year and is below the charge for
depreciation and amortisation of £639,000.
Expenditure on fixed and intangible assets
is not expected to rise significantly in the
foreseeable future.
Product development
New product development
The latest revision of the LiDCOrapid
software, version 1.03 and the development
of the universal pressure waveform module
were completed in the year. The new
software release introduced a number
of features focused on further developing
the LiDCOrapid graphical user interface
and simplifying use of, and connectivity
to, our monitors.
Summary of developments
concluded during 2010
Universal pressure waveform module
This allows wider hospital use of our
technology by allowing a broader range
of arterial blood pressure catheters
to be accessed.
LiDCO monitor language localisation
Converts the information on the LiDCOrapid
monitors’ screens from English into
22 languages.
RS232 communication changes
Allowing the LiDCOrapid monitor
to communicate with a wider range
of hospital information systems. One such
communication project, announced in
October, was to connect to GE’s Centricity
Clinical Information Systems in Europe, the
Middle East and Africa. This follows our
previous software development enabling
a link between LiDCO’s proprietary stand-
alone monitoring system and Philips’
patient monitors via the Philips VueLink.
Chief Executive Officer’s statement continued 13
LiDCO Annual Report
2010/11
LIDCO software evolution
Given the growing interest in fluid
management and hemodynamic monitoring,
we are exploring further refining the
graphical user interface and core algorithm
software architecture to allow for potential
OEM solutions, whereby elements of the
software could be more easily licenced
to third parties. Research is also underway
into the performance of the core algorithm
with alternate, often less high fidelity, signal
sources with the objective of widening the
patient applications and thereby increasing
the addressable market for our technology.
Regarding our intensive care product
the LiDCOplus we intend to update the
LiDCOplus monitor software to v 4.02. This
will involve updating the operating system,
adding the blood pressure module option
and further improving ease of use and
calibration methodology.
We believe that there is a significant market
for a combined graphical user interface that
can realise the clinical synergy between
Covidien’s Bispectral Index (BIS) depth
of anesthesia product and the LiDCOrapid
monitor. The former ensures the correct
depth of anesthesia is achieved, and the
LiDCOrapid is used to restore and maintain
blood pressure and cardiac output
to appropriate levels after anesthesia
induction and during surgery. A prospective
study at King’s College Hospital, London,
strongly suggested that this combination
display could significantly improve
the management of patients’ levels
of anesthesia, fluid and hemodynamic
status. The project to develop a combined
graphical user interface (GUI) is advancing
with a communication interface already
developed. Work is now progressing to
finalise the screen design. This development
project is expected to conclude around
the last quarter of 2011. Patent applications
have been filed on both the basic structure
of the LiDCOrapid monitor GUI and this has
been followed by a second application
on the combined hemodynamic and depth
of anesthesia GUI display.
Regulatory and quality review
During the year LiDCO Limited was
successfully audited against the
requirements of ISO13485:2003,
ISO9001:2008, the EU Medical Devices
Directive and the Health Canada Medical
Device Regulations, allowing continued
certification of the Company and our
products. Also during the year, LiDCO was
successfully inspected by the UK MHRA,
to ensure continued compliance with
Good Distribution Practice requirements.
Our activities and products comply with the
requirements of all relevant EU Directives –
the Waste Electrical and Electronic
Equipment (WEEE) regulations; the
Restrictions of the use of certain Hazardous
Substances in Electrical and Electronic
Equipment (RoHS) regulations; the
Registration, Evaluation and Authorisation
of Chemicals (REACH) regulations; the Waste
Batteries and Accumulators regulations; the
Batteries and Accumulators (Placing on the
Market) regulations; the Machinery Directive
and the Eco Design Directive.
LiDCO’s products are registered in a number
of major territories and registration of LiDCO
products is ongoing in Japan.
Outlook and prospects
We are pleased to be reporting another year
of considerable progress. Looking ahead,
independent research shows that cardiac
output monitoring is now the fastest
growing sector within the European
monitoring market with the minimally
invasive products now representing more
than 50% of sales (source: 2011 iData
Research). With our pressure waveform
based technology, international distribution
partners and increasing evidence and
awareness, we are confident of continuing
commercial progress. We traded profitably
in the second half of the year and for the full
year on an EBITDA basis. We look forward
to building on this and making further
progress in 2011 and beyond.
On a personal note my co-founder and
Scientific Director, Dr David Band, has
retired from the Board this month. David
has worked with me on the Board since the
Company’s foundation and has contributed
enormously to bringing the Company
to its current position. His many contributions
to medical science over the last 50 years
have had a profound impact on the
management of high risk patients. We thank
David for all he has done. I am delighted
to say he will be staying with us and
continue advising LiDCO with regards
to product development.
Dr Terence O’Brien
Chief Executive Officer
15 April 2011 14
LiDCO Annual Report
2010/11
Board of Directors and Company Secretary
Theresa Wallis
Non-Executive Chairman
John Barry
Sales and Marketing Director
Dr Terence O’Brien
Chief Executive Officer
Paul Clifford
Finance Director
Ian Brown
Non-Executive Director
John Rowland
Company Secretary 15
LiDCO Annual Report
2010/11
Theresa Wallis
Non-Executive Chairman
Ms Wallis has spent most of her career
in financial services, moving into the
technology commercialisation sector in 2001.
She worked for the London Stock Exchange
for 13 years, where from 1995 she was chief
operating officer of AIM, the market for smaller
growing companies, having managed the
market’s development and launch in 1994/5.
From 2001 to end 2006 she was a principal
executive of ANGLE plc, a venture
management and consulting business
focusing on the commercialisation
of technology. Since 2001 she has held
a number of non-executive directorships
and she is currently a non-executive director
of Special Products Limited. She is also
a member of the Quoted Companies
Alliance’s Executive Committee.
Dr Terence O’Brien
Chief Executive Officer
Dr O’Brien co-founded the Group in 1991.
Prior to that, he held senior positions with
biomedical companies including Sandoz SA,
Pharmacia AB, Meadox Medical Inc,
Novamedix Ltd, Enzymatix Ltd and Surgicraft
Ltd. Dr O’Brien was associate commercial
director at Enzymatix, which subsequently
listed on the London Stock Exchange as
ChiroScience Plc. Over the last 25 years
Dr O’Brien has been involved in the research
and development and subsequent marketing
of a number of medical device technologies
that are now standards of care in the
anesthesia, critical care and surgery markets.
John Barry
Sales and Marketing Director
Mr Barry joined the Group in February 2001.
He entered the medical industry working
for Baxter Healthcare Inc. In 1997 he was
appointed director of marketing for critical
care in Europe and in 1999, when Baxter
Healthcare sold Edwards Lifesciences
Corporation, Mr Barry was appointed
director of marketing for the cardiac
surgery business of Edwards Lifesciences
Corporation in Europe, the Middle East
and Africa.
Clinical Advisory
Group
Paul Clifford
Finance Director
Mr Clifford qualified as a chartered
accountant with Touche Ross (now Deloittes)
in 1975. He joined the Group in April 2008
having spent 28 years in finance positions
in technology companies. In 1991 he co-
founded BCS Computing Limited, a private
equity backed concern investing in computer
software companies. He became finance
director of software group, Comino in 1996,
prior to its flotation on AIM in 1997. In 2006,
Comino was acquired by AIM quoted Civica
plc and Mr Clifford became finance director
of Civica UK Limited, its £80m turnover main
operating subsidiary, leaving in 2008.
Mr Clifford is also a non-executive director
of AIM quoted Prologic plc.
Ian Brown
Non-Executive Director
Mr Brown has over 25 years’ experience
in the medical devices industry and has
extensive experience of developing and
introducing new medical devices to the
market in the UK and overseas. Between
1986 and 2003, he was an executive director
and shareholder in a medical device start-up
company (Novamedix Group), initially
as sales and marketing director and later
as managing director. The company was
progressively sold to a major US healthcare
group (Ofix). In his early career, Mr Brown
worked in a number of UK and international
sales and marketing positions for Johnson &
Johnson, Smiths Industries and Pharmacia AB.
John Rowland
Company Secretary
Mr Rowland joined the Group in October
2007 qualifying as a Chartered Secretary
in 1983. Prior to joining the Group he was
Group Company Secretary of Robert Dyas,
the high street retailer, between 2000 and
2007 and remains a trustee of their pension
scheme. He has also served as Company
Secretary of Aegis Group plc and The Birkdale
Group plc both media companies and
as an Assistant Company Secretary of National
Westminster Bank PLC. Mr Rowland has
previously held senior positions with
Gestetner Holdings plc and Raybeck plc.
Dr Max Jonas
Dr Jonas is a Consultant Intensivist and Senior
Lecturer in critical care working at Southampton
University Hospitals. He is currently the Director
of the 28 bed general intensive care unit and has
specific interests in hemodynamics and the
assessment of monitoring equipment. He is an
elected member of the Council of the Intensive
Care Society and has completed a six year term
of the technology assessment section of the
European Society of Intensive Care Medicine.
He is the ex-president of the Society of Critical
Care Technologists.
Professor David Bennett
David Bennett is visiting Professor of Intensive
Care at King’s College Hospital, London and was
formerly Professor of Intensive Care Medicine
at St George’s Hospital London, where until 2003
he was director of the mixed medical/surgical
intensive care unit, a position he held for more
than 25 years. David has chaired numerous
scientific committees, was honorary secretary
of the European Society of Intensive Care
Medicine and editor-in-chief of Clinical Intensive
Care. He is on the editorial board of Intensive Care
Medicine and Critical Care. He reviews regularly for
these journals and also for Critical Care Medicine
and Anesthesia and Analgesia.
Professor Michael Pinsky
Professor Pinsky is Professor of Critical Care
Medicine, Bioengineering, Cardiovascular Diseases
and Anesthesiology at the University of Pittsburgh
School of Medicine, USA and is a member of the
editorial board of the Journal of Critical Care and
Critical Care Forum. He is editor-in-chief of the
eMedicine textbook Critical Care Medicine. He was
awarded Docteur honoris causa from the Université
de Paris V (Le Sorbonne). He has a wide range
of research interests – among them being the
study of heart-lung interactions, hemodynamic
monitoring, cardiovascular physiology, sepsis and
outcomes research. He is a world leading authority
on the application of both existing invasive, and
the more recent introduced minimally invasive,
monitoring technologies.
Dr Christopher Wolff
Dr Wolff holds the post of senior research fellow
at The Centre for Clinical Pharmacology, The William
Harvey Research Institute, Bart’s and London
Queen Mary School of Medicine and Dentistry,
London. He is a clinician, physiologist and
mathematician and has major research interests
in respiratory and cardiovascular physiology.
Dr David Band
Dr Band was appointed to the Clinical Advisory
Group in April 2011. He co-founded LiDCO
in 1991, is the co-inventor of the LiDCO system
and until April 2011 was the Group’s Scientific
Director. He is a specialist in the field of respiratory
physiology, electrochemistry and ion-selective
electrodes. He has a degree in medicine and was
a reader in applied physiology in the Division
of Physiology, GKT School of Biomedical Sciences,
St Thomas’ campus. 16
LiDCO Annual Report
2010/11
The UK Corporate Governance Code
Companies that have shares traded on AIM, the London Stock Exchange’s market for smaller growing companies, are not required to comply
with the disclosures of The UK Corporate Governance Code. However, the Board is committed to maintaining the highest standards
of corporate governance, where appropriate for a company of its size.
The Board of Directors
The Board currently consists of three executive directors and two non-executive directors. The non-executive directors are free from any
relationship with the executive management of the Company and the Board considers that both non-executive directors, other than through
their shareholdings, are independent directors. The non-executive directors bring a wide range of skills and experience to the Board.
The Chairman of the Board is Ms Wallis and Mr Brown is the senior independent non-executive director. Directors’ biographies are provided
on page 15.
There were 10 Board meetings during the year. The attendance of the individual directors at the Board Meetings and the Audit and
Remuneration Committee Meetings was as follows:
Attendance record at Board meetings and Committees
Board Audit Remuneration Nomination
Name Position Meetings Committee Committee Committee
Ms T A Wallis Non-executive Chairman 10 (10) 2(2) 6(6) n/a
Dr T K O’Brien Chief Executive Officer 9 (10) n/a n/a n/a
Mr P L Clifford Finance Director 10 (10) n/a n/a n/a
Dr D M Band Scientific Director 6 (10) n/a n/a n/a
Mr J G Barry Sales & Marketing Director 9 (10) n/a n/a n/a
Mr I G Brown Non-executive Director 10(10) 2(2) 6(6) n/a
Numbers in brackets denote the total number of meetings during the year.
All the directors have access to the advice and services of the Company Secretary, whose appointment and removal is a matter for the Board
as a whole. All directors are able to take independent advice in the furtherance of their duties, if necessary, at the Company’s expense.
The Company Secretary supports both the Board and the Committees.
Under the Company’s Articles of Association, all new directors are required to resign and seek re-election at the first Annual General Meeting
following their appointment. All directors are required to seek re-election at intervals of no more than three years.
Board evaluation and performance
In February 2011, the Board carried out an evaluation of the performance, functioning and composition of the Board and its Committees.
This involved the Chairman having a discussion with each director individually following which the findings were collated and discussed
by the Board and actions were agreed. It is the Board’s intention to continue to review annually its performance and that of its Committees.
Corporate Governance report 17
LiDCO Annual Report
2010/11
Committees of the Board
Audit Committee
The members of the Committee are Ms Wallis (Chairman) and Mr Brown. The external auditors also attend meetings. The Committee considers
financial reporting and internal controls. It also reviews the scope and results of the external audit and the independence and objectivity
of the auditors. It meets at least twice a year and reviews the interim and annual financial statements before they are submitted for approval
by the Board. The Committee met twice during the year. The Committee considers annually whether the auditors remain independent for the
purposes of the audit. This year the fee for non-audit work is £13,000 against an audit fee of £43,000. The Committee is satisfied that the auditors
remain independent for the purposes of the annual audit. The Committee considers that given the size of the Company and its current stage
of development a separate internal audit function cannot be justified, but the matter is re-considered annually by the Committee.
Remuneration Committee
The members of the Committee are Ms Wallis (Chairman) and Mr Brown. The Committee reviews and sets the remuneration of the executive
directors. It also reviews the policy for the salaries and bonuses of all other staff. It advises on share schemes and approves the granting
of share options. The Committee met six times during the year.
Nomination Committee
The members of the Committee are Ms Wallis (Chairman), Mr Brown and Dr O’Brien. The Committee considers, at the request of the Board,
candidates for new appointments to the Board and advises on all matters relating to Board appointments. The Committee did not meet during
the year.
Relations with shareholders
The Company seeks to maintain and enhance good relations with its shareholders. The Company’s interim and annual reports are supplemented
by public announcements to the market on technological and commercial progress. All investors have access to up-to-date information
on the Company via its website, www.lidco.com, which also provides contact details for investor relations enquiries. All shareholders are invited
to make use of the Company’s Annual General Meeting to raise any questions regarding the management or performance of the Company.
The Chief Executive, Finance Director and Chairman meet regularly with shareholders and the investing community and report to the Board
feedback from those meetings. Both non-executive directors have the opportunity to attend shareholder meetings. The Board is kept
informed on market views about the Company. 18
LiDCO Annual Report
2010/11
The Company recognises the importance of corporate social responsibility.
At the core of LiDCO are its medical products for hemodynamic monitoring which have been developed over a number of years and continue
to be developed. The original objective of the design of these products was to translate specialist physiological parameters and principles into
useable information and tangible protocols to improve clinical outcomes. The Company has been successful in achieving this objective and
its products, which are used in hospitals in many parts of the world, are life saving and help surgeons to improve the outcome of clinical
operations for the benefit of the patient both during and after surgery and help hospitals to reduce their costs.
LiDCO works with its employees, customers and suppliers to conduct its business in an ethical way. The Company is of a relatively small size,
but growing. Thus the Company’s commitment to corporate social responsibility is dynamic and is reviewed when considered appropriate.
Employees
The Company recognises that an essential part of its continued success is the support and involvement of its employees.
• Effective communication is essential to ensure its employees are fully engaged with the business. The senior management team meets
regularly throughout the year as a forum to discuss interdepartmental issues and briefing sessions are also held by the Chief Executive
to update employees on Company progress, strategy and objectives.
• Employees have annual appraisals to set objectives, identify strengths and areas for development.
• Training is provided where necessary to enhance job performance and aid development.
• The Company has a share option scheme with a high level of employee participation.
• The Company regularly reviews the benefits offered to employees.
Environment
Whilst not of substantial impact compared with many other manufacturing industries, nevertheless the Company recognises its activities
have an impact on the environment and acknowledges its responsibility to ensure this is minimised.
• In accordance with the requirements of the Waste Electrical and Electronic Equipment Regulations (WEEE), the Company has signed
up to a compliance system to recycle and dispose of electrical equipment waste.
• Where possible, other products are recycled within the Company.
• Paper, cardboard and ink cartridge recycling collection facilities are in place in London and Cambridge.
• Redundant computer equipment is offered to employees or disposed of in accordance with good practice.
• Company purchased vehicles are run on diesel fuel for fuel efficiency.
• The Company continually reviews the chemicals it uses in its manufacturing processes with the aim of using the least toxic and most
environmentally friendly products commensurate with producing high quality products.
Corporate social responsibility statement 19
LiDCO Annual Report
2010/11
Ethics and values
• The Company designs and manufactures life saving products which help clinicians to improve the outcome of clinical operations
for the benefit of patients both during and after surgery and helps hospitals to reduce their costs.
• The Company aims for all employees to have job satisfaction, a safe and secure working environment, the feeling that their achievements
are recognised and an opportunity to develop their full potential.
• The Company recognises customer needs for a high level of customer service and quality of its products, at the right price.
Health and safety
• As a producer of medical products the Company operates in a highly regulated environment and is subject to regular inspection and audit.
• The Company uses an external specialist to advise on its health and safety policy and practice. Stringent procedures are in place in areas
of the Company where risks are apparent, and the Company provides a physically safe working environment, training, protective clothing
and equipment to all employees who undertake their duties.
• All Company car drivers are provided with a full driving risk assessment and training upon joining, and a further paper based risk assessment
is completed every three years.
• Health and safety matters are regularly reviewed at Board meetings.
Shareholders
The Company aims to treat its stakeholders in a responsible manner. It maintains regular contact with its major shareholders to explain
developments in the business and all shareholders are invited to question management at the Annual General Meeting. See also ‘Relations
with shareholders’ in the Corporate Governance Report on page 17. 20
LiDCO Annual Report
2010/11
The directors present their Remuneration Report which covers the remuneration of both the executive and non-executive directors.
The report will be subject to shareholder vote at the forthcoming Annual General Meeting in June 2011.
Committee membership
The membership of the Remuneration Committee is made up of the following non-executive directors:
T A Wallis (Chairman)
I G Brown
Neither of the Committee members has any day-to-day involvement in the running of the Company, nor do they have any business or other
relationship that could affect, or appear to affect, the exercise of their independent judgement, other than as shareholders. No director plays
a part in any decision about his or her own remuneration.
Remuneration policy
The Committee determines on behalf of the Board, the remuneration for the executive directors and reviews remuneration policies for all
employees. Remuneration levels are set in order to attract high calibre recruits and to retain and motivate those directors and employees once
they have joined the Company to ensure the future success of the business and to deliver shareholder value. This is achieved by a combination
of base salary, bonuses and share options, which are offered to executive directors and employees at all levels. The Committee met six times
in the year.
Base salary
All executive directors receive a base salary and, if appropriate, an allowance in lieu of benefits. The salary reflects the experience, level
of competence and days worked of the individual to whom it applies, as judged by the Committee, taking into account salary levels
in the market.
Annual bonus
The executive directors who served during the year are members of the Company’s Senior Management Bonus Scheme. Under the terms
of the Scheme, the Remuneration Committee assesses the directors’ individual performances soon after the end of the financial year, judged
against pre-determined targets.
The criteria for awarding bonuses during the year included corporate and individual objectives. The principal corporate objective on which the
directors are judged is operating profit/loss. Bonuses are capped at 50% of base salary.
Remuneration policy of the non-executive directors
The Board determines the remuneration of the non-executive directors. The non-executive directors do not participate in the Group’s share
option schemes and are not eligible for annual incentive payments or benefits in kind.
Directors’ remuneration report 21
LiDCO Annual Report
2010/11
Remuneration of directors
Year ended 31 January 2011
Allowance
Salary in lieu of
and fees benefits Benefits Bonus Total 2010
£’000 £’000 £’000 £’000 £’000 £’000
T A Wallis 44 – – – 44 44
T K O’Brien 185 38 1 22 246 259
J G Barry 175 35 4 19 233 241
P L Clifford 96 20 1 11 128 92
D M Band 46 9 – 3 58 61
I G Brown 29 – – – 29 28
Total 575 102 6 55 738 725
Contracts of service
Details of the service contracts currently in place for the directors who have served during the year are as follows:
Executive directors
The service contracts of Dr O’Brien and Mr Barry are dated 29 June 2001 and are not set for a specific term but include a rolling 12 months’
notice period. Mr Clifford, who is part-time, has a service contract with the Company dated 21 April 2008 as with the other executive directors,
this is not for a specific term, but includes a rolling six months’ notice period.
Non-executive directors
The non-executive directors do not have service contracts with the Company. The letter of appointment for each non-executive director states
that they are appointed for an initial period of three years. At the end of the initial period, the appointment may be renewed for a further
period if the Company and the director agree. In keeping with best practice, these appointments are terminable without notice by either party.
The Chairman’s appointment is for a term ending 19 December 2011 and Mr Brown’s appointment for a term ending 11 October 2011. 22
LiDCO Annual Report
2010/11
Directors’ interests in share options
Options were granted to the executive directors as follows:
Options
Options granted Lapsed Options
at 31 Jan Date of during during at 31 Jan Exercise Exercisable Expiry
Name Option type 2010 grant the year the year 2011 price (p) from date
T K O’Brien EMI 750,000 Dec-2002 750,000 13.00 Dec-2005 Dec-2012
EMI 11,627 Apr-2005 11,627 21.50 Apr-2008 Apr-2015
Unapproved 265,768 Apr-2005 265,768 21.50 Apr-2008 Apr-2015
EMI 150,000 May-2009 150,000 12.67 May-2012 May-2019
1,177,395 Nil Nil 1,177,395
D M Band EMI 750,000 Dec-2002 750,000 13.00 Dec-2005 Dec-2012
EMI 11,627 Apr-2005 11,627 21.50 Apr-2008 Apr-2015
Unapproved 53,489 Apr-2005 53,489 21.50 Apr-2008 Apr-2015
815,116 Nil Nil 815,116
J G Barry Unapproved 106,250 July-2001 106,250 0.50 July-2004 Jul-2011
Unapproved 211,000 Dec-2002 211,000 13.00 Dec-2005 Dec-2012
EMI 539,000 Dec-2002 539,000 13.00 Dec-2005 Dec-2012
Unapproved 90,000 Nov-2003 90,000 28.25 Nov-2006 Nov-2013
Unapproved 356,844 Apr-2005 356,844 21.50 Apr-2008 Apr-2015
Unapproved 192,436 Apr-2005 192,436 22.00 Dec-2005 Apr-2015
Unapproved 328,539 Apr-2005 328,539 22.00 Apr-2006 Apr-2015
Unapproved 656,903 Apr-2005 656,903 22.00 Sep-2006 Apr-2015
EMI 136,045 Apr-2005 136,045 22.00 Dec-2005 Apr-2015
Unapproved 45,000 Jun-2006 45,000 21.00 Jun-2009 Jun-2016
Unapproved 75,000 Jun-2007 75,000 12.50 Jun-2010 Jun-2017
Unapproved 83,333 Apr-2008 83,333 7.50 Apr-2011 Apr-2018
EMI 266,667 Apr-2008 266,667 7.50 Apr-2011 Apr-2018
Unapproved 150,000 May-2009 150,000 12.67 May-2012 May-2019
Unapproved – Jun-2010 100,000 100,000 19.92 Jun-2013 Jun-2020
3,237,017 100,000 Nil 3,337,017
P L Clifford Approved 66,000 Apr-2008 66,000 7.50 Apr-2011 Apr-2018
Approved 75,000 May-2009 75,000 12.67 May 2012 May-2019
EMI – Jun-2010 100,000 100,000 19.92 Jun-2013 Jun-2020
141,000 100,000 Nil 241,000
Totals 5,370,528 200,000 Nil 5,570,528
The share price was 18.25p on 1 February 2010 and 18.75p on 31 January 2011, with high and low during the year of 24.50p and
16.50p respectively.
Directors’ remuneration report
continued 23
LiDCO Annual Report
2010/11
Pensions
No pension contributions were payable by the Group during the year (2009/10: £nil).
Shareholder return
The graph below shows the share price performance since January 2006, using the FTSE TechMARK Mediscience Index as a comparator,
which the directors consider to be a suitable benchmark index.
Theresa Wallis
Chairman of the Remuneration Committee
15 April 2011
31 Jan
2006
31 Jan
2007
31 Jan
2008
31 Jan
2009
31 Jan
2010
31 Jan
2011
0
5
10
15
20
25
30 LiDCO Ord 0.5p
TechMARK
MediScience
Index rebased 24
LiDCO Annual Report
2010/11
The directors of LiDCO Group Plc present their annual report and audited financial statements (Annual Report) for the year ended
31 January 2011.
Principal activities, business review and business risks
The principal activity of the Group is the development, manufacture and sale of cardiac monitoring equipment.
The Chairman’s statement, the Chief Executive Officer’s Statement and Corporate Social Responsibility Statement form part of this
business review.
The key commercial risks associated with the business are:
• healthcare spending – the Group’s performance is affected by hospitals’ expenditure and any, or developing, capital budgetary constraints,
which the Group mitigates by targeting its efforts and resources according to sales opportunities where budgets are likely to be available
and a wider geographic sales growth predominantly through its specialist distributor network;
• competitive activity from other producers of hemodynamic monitors who sell competing products which may restrict the Group’s ability
to maintain or make further progress in increasing its share of the growing minimally invasive hemodynamic monitoring market. The Group
addresses this by encouraging independent clinical validation of its products, introducing product developments/enhancements and
supporting clinical studies that focus on patient outcome improvement and economic benefits; and
• the Group relies on distributors for its sales and marketing activities outside the UK. The Group mitigates the risk of distributor
underperformance by selecting distributors with the requisite resources, skills, access to customers and creditworthiness and by providing
training programmes and extensive support both in the initial phase following appointment and on an ongoing basis.
The key financial risk is the management and maintenance of sufficient cash balances to support the ongoing development, supply and
marketing of the LiDCO products.
Results and dividends
The Group’s revenue for the year was £6,237,000 (2009/10: £5,367,000). The Group made a consolidated loss after taxation of £390,000
(2009/10: £1,427,000). The directors do not recommend the payment of a dividend (2009/10: £nil).
The Company’s share price at 29 January 2011 was 18.75p (2010: 18.25p).
Research and development
The Group continued to develop the LiDCO products during the year. Details of the costs expended on research and development are set out
in notes 3 and 8 to the financial statements on pages 39 and 42 respectively.
Share capital and share premium account
Full details of the issued share capital of the Company, together with details of the movements in the Company’s issued share capital and the
share premium accounts during the year, are shown in notes 14 on page 47 and 4 on page 52 to the financial statements.
Directors
The directors of the Company who served during the year are set out below; short biographies are set out on page 15.
T A Wallis Non-executive Chairman
T K O’Brien Chief Executive Officer
P L Clifford Finance Director
D M Band Scientific Director
J G Barry Sales and Marketing Director
I G Brown Non-executive Director
Mr Brown and Mr Clifford retire by rotation and, being eligible, offer themselves for re-election at the forthcoming Annual General Meeting.
Dr Band resigned as a director on 18 April 2011 and joined the Clinical Advisory Group.
Directors’ remuneration
The Remuneration Report, which includes information regarding directors’ service contracts, appointment arrangements and interests in share
options, can be found on pages 21 and 22.
Directors’ report 25
LiDCO Annual Report
2010/11
Directors’ interests in shares
The directors who held office at 31 January 2011 had beneficial interests in the ordinary shares of the Company as shown below:
Directors’ shareholdings
Ordinary shares of 0.5p each
31 January 31 January
2011 2010
Number Number
T A Wallis 301,037 301,037
T K O’Brien 11,516,563 11,516,563
P L Clifford 575,000 500,000
D M Band 7,160,832 7,160,832
J G Barry 429,642 429,642
I G Brown 200,000 200,000
The directors have no interests in the shares of the Company’s subsidiary undertakings.
Directors’ indemnities and Directors’ and Officers’ insurance
The Company has exercised the power given by shareholders at the 2006 Annual General Meeting to extend the indemnities to directors and
officers against liability to third parties. The directors also have Directors’ and Officers’ insurance cover in place in respect of personal liabilities
which may be incurred by directors and officers in the course of their service with the Company.
Employment policy
Equal opportunity is given to all employees regardless of their gender, race or ethnic origin, religion, age, disability, or sexual orientation.
The Company’s policy is to encourage the involvement of all employees in the development and performance of the Group. Employees are
briefed on the Group’s activities through meetings and discussions with management and all employees are encouraged to give their views
on matters of common concern through the line management. A significant number of employees have share options.
Supplier payment policy
It is and will continue to be the policy of the Group to negotiate with suppliers so as to obtain the best available terms taking account
of quality, delivery, price and period of settlement and, having agreed those terms, to abide by them. The Group’s average creditor payment
period as at 31 January 2011 was 41 days (2010: 25 days). 26
LiDCO Annual Report
2010/11
Significant shareholdings
As at 11 April 2011, the Company has been notified that the following shareholders, other than directors, had the following interest of 3% or
more of the Company’s ordinary share capital:
Number of shares
in which there Percentage
Shareholder is an interest notified
*
Ingalls & Snyder Llc 27,878,594 16.02%
Cheviot Asset Management Limited 13,956,163 8.02%
H J Leitch 13,177,489 7.57%
P A Brewer 11,724,727 6.74%
R M Greenshields 9,042,407 5.20%
Liontrust Intellectual Capital Trust 8,738,639 5.02%
Octopus Investments Limited 5,634,200 3.24%
*
The percentages shown are based on the issued share capital at that date.
Directors’ responsibilities for the financial statements accounts
The directors are responsible for preparing the Annual Report and Group financial statements in accordance with applicable law and
International Financial Reporting Standards as adopted by the European Union. The parent company financial statements have been prepared
in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs
of the Company and the Group and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are
required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the
financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue
in business.
In so far as the directors are aware:
• there is no relevant audit information of which the Company’s auditors are unaware; and
• the directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish
that the auditors are aware of that information.
The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position
of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation
in other jurisdictions.
Directors’ report
continued 27
LiDCO Annual Report
2010/11
Going concern
The Company’s business activities, together with a review of the market and the company’s distribution channels are set out in the Chief Executive
Officer’s Statement on pages 8 to 13. In addition, note 13 to the financial statements includes the Company’s policies for managing its capital;
its financial risk; details of its financial instruments; and its exposures to credit risk and liquidity risk.
The Company has a number of customers across different geographic areas and considerable recurring revenue streams through the sales
of its disposable sensors and smart cards which represented 59% of its total revenues in the year to 31 January 2011.
The Group finances its operations through shareholders’ funds and has no borrowings. The directors have a reasonable expectation that
the Company has adequate resources to continue in operational existence for the foreseeable future based on forecasts for the two years
to 31 January 2013. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
Financial risk management
The Financial Risk Management objectives and policies of the Group, including the exposure to interest rate risk, liquidity risk and currency risk
are set out in note 13 to the financial statements on pages 44 to 46.
Key Performance Indicators (KPIs)
The Board monitors progress against the Group’s strategy and by reference to the KPIs, specifically revenue growth, gross margin, working
capital levels and market position. These KPIs have been addressed in the Chief Executive Officer’s Review and the Financial Review.
Internal controls, regulation and risk management
The composition of the Board and the senior management team provides a suitable range of knowledge and experience to enable adequate
risk monitoring. The Company has implemented an organisational structure with clearly defined responsibilities and lines of accountability.
Detailed budgets are prepared annually and progress against budget are reviewed monthly. Underpinning the monthly financial reporting
is a system of internal control, based on authorisation procedures.
The adequacy of internal controls and the internal control structures was reviewed by the Board during the year.
As a medical device Company, LiDCO also has a system of regulatory controls, to ensure compliance with all requirements of the Medicines
and Healthcare Products Regulatory Agency (MHRA), the US Food and Drug Administration (FDA) and other medical bodies. During the year
the Company was compliant with ISO13485 (Medical Devices – Quality Management Systems) and ISO 9001 (Quality Management Systems).
The Board has established a process involving all departments for the comprehensive assessment of key risks to the business. The risk register
is updated on an ongoing basis and regularly reviewed by the Board. Actions to mitigate risk are identified and agreed.
Auditors
A resolution to re-appoint Grant Thornton UK LLP as auditors and to authorise the directors to set their remuneration will be proposed at the
forthcoming Annual General Meeting.
Annual General Meeting
The Notice to convene the Annual General Meeting of the Company to be held on Wednesday 29 June 2011 is set out on page 3 of the
separate circular which includes an explanation of each resolution.
By order of the Board
John Rowland
Company Secretary
15 April 2011 28
LiDCO Annual Report
2010/11
We have audited the Group financial statements of LiDCO Group Plc for the year ended 31 January 2011 which comprise the consolidated
comprehensive income statement, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement
of changes in shareholders equity and the related notes. The financial reporting framework that has been applied in their preparation
is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
This report is made solely to the Company’s members, as a body, in accordance with chapter 3 of part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the Group financial
statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group
financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require
us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm.
Opinion on financial statements
In our opinion the Group financial statements:
• give a true and fair view of the state of the Group’s affairs as at 31 January 2011 and of its loss for the year then ended;
• have been properly prepared in accordance with IFRS as adopted by the European Union; and
• have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the Group financial statements are prepared
is consistent with the Group financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the parent company financial statements of LiDCO Group Plc for the year ended 31 January 2011.
Christopher Smith
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
London
15 April 2011
Independent auditor’s report to the members of LiDCO Group Plc 29
LiDCO Annual Report
2010/11
Consolidated comprehensive income statement
For the year ended 31 January 2011
Year Year
ended ended
31 January 31 January
2011 2010
Note £’000 £’000
Revenue 2 6,237 5,367
Cost of sales (2,021) (2,074)
Gross profit 4,216 3,293
Administrative expenses (4,714) (4,832)
Loss from operations 3 (498) (1,539)
Finance income 8 5
Finance expense – (11)
Loss before tax (490) (1,545)
Income tax 5 100 118
Loss and total comprehensive expense for the year attributable to equity holders of the parent (390) (1,427)
Loss per share (basic and diluted) (p) 6 (0.22) (0.87)
All transactions arise from continuing operations.
There were no items of other comprehensive income for the financial year.
The accompanying accounting policies and notes form an integral part of these financial statements. 30
LiDCO Annual Report
2010/11
2011 2010
Note £’000 £’000
Non-current assets
Property, plant and equipment 7 513 587
Intangible assets 8 755 764
1,268 1,351
Current assets
Inventory 9 1,047 1,094
Trade and other receivables 10 1,607 1,649
Current tax 109 120
Cash and cash equivalents 1,404 1,846
4,167 4,709
Current liabilities
Trade and other payables 11 (767) (603)
Deferred income 11 (74) (614)
Borrowings 11 (10) (10)
(851) (1,227)
Net current assets 3,316 3,482
Total assets less current liabilities 4,584 4,833
Equity attributable to equity holders of the parent
Share capital 14 870 869
Share premium 25,393 25,393
Merger reserve 8,513 8,513
Retained earnings (30,196) (29,956)
Total equity 4,580 4,819
Non-current liabilities
Finance lease liability 12 4 14
Total non-current liabilities 4 14
Total equity and non-current liabilities 4,584 4,833
The financial statements were approved by the Board of Directors on 15 April 2011.
Theresa Wallis Terence O’Brien
Director Director
The accompanying accounting policies and notes form an integral part of these financial statements.
Consolidated balance sheet
At 31 January 2011 31
LiDCO Annual Report
2010/11
Consolidated cash flow statement
For the year ended 31 January 2011
Year Year
ended ended
31 January 31 January
2011 2010
£’000 £’000
Loss before tax (490) (1,545)
Net finance (income)/costs (8) 6
Depreciation and amortisation charges 639 672
Share-based payments 150 46
Decrease/(increase) in inventories 47 (41)
Decrease in receivables 42 37
Increase/(decrease) in payables 164 (302)
Decrease/(increase) in deferred income (540) 577
Interest paid – (11)
Income tax credit received 111 118
Net cash inflow/(outflow) from operating activities 115 (443)
Cash flows from investing activities
Purchase of property, plant and equipment (127) (132)
Purchase of intangible assets (429) (474)
Interest received 8 5
Net cash used in investing activities (548) (601)
Net cash outflow before financing (433) (1,044)
Cash flows from financing activities
Repayment of finance lease (10) (10)
Issue of ordinary share capital 1 3,021
Invoice discounting financing facility – (364)
Net cash (outflow)/inflow from financing activities (9) 2,647
Net (decrease)/increase in cash and cash equivalents (442) 1,603
Opening cash and cash equivalents 1,846 243
Closing cash and cash equivalents 1,404 1,846
The accompanying accounting policies and notes form an integral part of these financial statements. 32
LiDCO Annual Report
2010/11
Share Share Merger Retained Total
capital premium reserve earnings equity
£’000 £’000 £’000 £’000 £’000
At 1 February 2009 710 22,531 8,513 (28,575) 3,179
Issue of share capital 159 2,862 – – 3,021
Share-based payment expense – – – 46 46
Transactions with owners 159 2,862 – 46 3,067
Loss and total comprehensive expense for the year – – – (1,427) (1,427)
At 31 January 2010 869 25,393 8,513 (29,956) 4,819
Issue of share capital 1––– 1
Share-based payment expense – – – 150 150
Transactions with owners 1 – – 150 151
Loss and total comprehensive expense for the year – – – (390) (390)
At 31 January 2011 870 25,393 8,513 (30,196) 4,580
The share premium account represents the excess over the nominal value for shares allotted.
The merger reserve represents a non-distributable reserve arising from historic acquisitions.
The accompanying accounting policies and notes form an integral part of these financial statements.
Consolidated statement of changes in shareholders’ equity
For the year ended 31 January 2011 33
LiDCO Annual Report
2010/11
Notes to the financial statements
For the year ended 31 January 2011
1 Principal accounting policies
The Group’s principal activity is the development, manufacture and sale of cardiac monitoring equipment. LiDCO Group Plc is the Group’s
ultimate parent company. It is incorporated and domiciled in England & Wales and situated at the address shown on page 53. The Group’s
shares are quoted on the AIM section of the London Stock Exchange.
Basis of preparation
These financial statements have been prepared in accordance with the principal accounting policies adopted by the Group, International
Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations (IFRIC) as adopted by the EU and those parts of the
Companies Act 2006 applicable to companies reporting under IFRS. They are presented in sterling, which is the functional currency of the
parent company.
The preparation of financial statements in accordance with IFRS requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge
of current events and actions, actual results may ultimately differ from those estimates.
The accounting policies have been applied consistently throughout all periods presented in these financial statements. These accounting
policies comply with each IFRS that is mandatory for accounting periods ending on 31 January 2011.
The Group’s consolidated financial statements are prepared in accordance with the principal accounting policies adopted by the Group as set
out below and International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations (IFRIC) as adopted
for use in the European Union (EU), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The following standards have been amended or implemented during the year. The Group’s consolidated financial statements have been
prepared in accordance with these changes where relevant.
• IFRS 2 (amendments), ‘Group cash-settled share-based payment transactions’ , incorporates IFRIC 8, ‘Scope of IFRS 2’ , and IFRIC 11, ‘IFRS 2 –
Group and treasury share transactions’ , and expands on the guidance in IFRIC 11 to address the classification of group arrangements.
• IFRS 3 (revised), ‘Business combinations’ , and consequential amendments to IAS 27, ‘Consolidated and separate financial statements’ , IAS 28,
‘Investments in associates’ , and IAS 31, ‘Interests in joint ventures’ , are effective prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009.
• IFRS 5 (amendment), ‘Non-current assets held for sale and discontinued operations’ , clarifies the disclosures required in respect of non-current
assets (or disposal groups) classified as held for sale or discontinued operations.
• IAS 1 (amendment), ‘Presentation of financial statements’ , clarifies that the potential settlement of a liability by the issue of equity is not
relevant to its classification as current or non-current.
• IAS 27 (revised) requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control
and these transactions will no longer result in goodwill or gains and losses.
• IAS 36 (amendment), ‘Impairment of assets’ , clarifies that the largest cash generating unit (or group of units) to which goodwill should
be allocated for the purposes of impairment testing is an operating segment, as defined by paragraph 5 of IFRS 8, ‘Operating segments’ .
• IFRIC 9, ‘Reassessment of embedded derivatives and IAS 39, Financial instruments: Recognition and measurement’ , requires an entity
to assess whether an embedded derivative should be separated from a host contract when the entity reclassifies a hybrid financial asset
out of the ‘fair value through profit or loss’ category.
• IFRIC 16, ‘Hedges of a net investment in a foreign operation’ , states that, in a hedge of a net investment in a foreign operation, qualifying
hedging instruments may be held by any entity or entities within the group, including the foreign operation itself, as long as the
designation, documentation and effectiveness requirements of IAS 39 that relate to a net investment hedge are satisfied.
• IFRIC 17, ‘Distribution of non-cash assets to owners’ , provides guidance on accounting for arrangements whereby an entity distributes
non-cash assets to shareholders either as a distribution of reserves or as dividends.
• IFRIC 18, ‘Transfers of assets from customers’ clarifies the requirements of IFRSs for agreements in which an entity receives an item of property,
plant and equipment from a customer.
These standards are effective but the Group has not adopted them early. 34
LiDCO Annual Report
2010/11
IFRS standards and interpretations not yet adopted
Standard issued but not yet effective
The following standards and interpretations are in issue but not yet adopted by the EU:
• IFRS 9 Financial Instruments (effective 1 January 2013)
• Improvements to IFRS issued May 2010 (some changes effective 1 July 2010, others effective 1 January 2011)
• Disclosures – Transfers of Financial Assets – Amendments to IFRS 7 (effective 1 July 2011)
• Deferred Tax: Recovery of Underlying Assets – Amendments to IAS 12 Income Taxes (effective 1 January 2012)
• Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters – Amendments to IFRS 1 First-time Adoption of International
Financial Reporting Standards (effective 1 July 2011)
The current endorsement status is listed on the EFRAG website under ‘Endorsement Status’: http://www.efrag.org/homepage.asp
Going concern
The Company’s business activities, together with a review of the market and the Company’s distribution channels are set out in the Chief
Executive Officer’s Statement on pages 8 to 13. In addition, note 13 to the financial statements include the Company’s policies for managing
its capital; its financial risk; details of its financial instruments; and its exposures to credit risk and liquidity risk.
The Company has a number of customers across different geographic areas and considerable recurring revenue streams through the sales
of its disposable sensors and smart cards which represented 59% of its total revenues in the year to 31 January 2011.
The Group finances its operations through shareholders’ funds and has no borrowings. The directors have a reasonable expectation that the
Company has adequate resources to continue in operational existence for the foreseeable future based on forecasts for the two years
to 31 January 2013. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
Accounting convention
The financial statements are prepared under the historic cost convention. The measurement basis and significant accounting policies are set
out below.
Basis of consolidation
The Group’s consolidated financial statements consolidate those of the Company and of its subsidiary undertakings drawn up to 31 January 2011.
Subsidiary undertakings are all entities over which the Group has the power to control the financial and operating policies so as to obtain
economic benefits from its activities. The Group obtains and exercises control through voting rights.
Business combinations are dealt with by the purchase method. The purchase method involves the recognition at fair value of all identifiable
assets and liabilities, including contingent liabilities of the subsidiary at the acquisition date whether or not they were recognised in the
statements of the subsidiary prior to acquisition. On initial recognition the assets and liabilities of the subsidiary are included in the
consolidated balance sheet at their fair values which are also used as the bases for subsequent measurement in accordance with the Group
accounting policies. The results of any subsidiary undertakings acquired during the period, where applicable, are included from the date
of acquisition. All intra-Group transactions, balances, income and expenses are eliminated on consolidation.
Revenue recognition
Revenues are recognised at fair value of the consideration receivable net of the amount of value added taxes.
Sale of goods
Sales revenue comprises revenue earned (net of returns, discounts and allowances) from the provision of products to entities outside the
consolidated entity. Sales revenue is recognised when the risks and rewards of ownership of the goods passes to the customer, which
is normally upon delivery, and when the amount of revenue can be measured reliably.
The Group has an arrangement for the placing of monitors in hospitals with Med One Capital Funding, LLC, a US company that has trading
relationships with the majority of US hospitals. When the Group has sold monitors to Med One they are entitled to a portion of the monthly
revenue from the sale of consumables relating to those monitors for a period of three years. The full revenue arising from the sale of such
consumables is recognised as revenue by the Group and payments made to Med One in this way are included within cost of sales.
Licence fees
Licence fees are recognised in accordance with the substance of the relevant distribution agreement, provided that it is probable that the
economic benefit associated with the transaction will flow to the Group and the amount of revenue can be reliably measured. Licence fees
received in advance of the recognition of those fees is shown as deferred income.
Notes to the financial statements
continued 35
LiDCO Annual Report
2010/11
Delivery of services
Revenue from rendering services is recognised in the period in which the service is provided.
Interest income
Interest income is brought to account as it accrues, using the effective interest method.
Other income
Other income is brought to account when the consolidated entity’s right to receive income is established and the amount can be reliably measured.
Research and development
Research expenditure is charged to the income statement in the period in which it is incurred.
Development costs are capitalised when all the following conditions are satisfied:
• completion of the intangible asset is technically feasible so that it will be available for use or sale;
• the Group intends to complete the intangible asset and use or sell it;
• the Group has the ability to use or sell the intangible asset;
• the intangible asset will generate probable future economic benefits;
• there are adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
• the expenditure attributable to the intangible asset during its development can be measured reliably.
Capitalised development costs which comprise cost of materials, labour and attributable overheads are amortised over a period of three
to five years.
Development costs not meeting the criteria for capitalisation are expensed as incurred.
Intangible assets – development costs
Intangible assets represent costs relating to product registration in new countries, software development costs and clinical trials on the
LiDCO system. Where the directors are satisfied as to the technical, commercial and financial viability of these projects, the expenditure
has been capitalised and is amortised in equal amounts over the useful life.
The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying
value may not be recoverable. The amortisation periods generally applicable are:
Clinical trials Three years
Product registration costs Five years
Software development Three years
Property, plant and equipment
Property, plant and equipment are stated at cost, net of depreciation. Depreciation is calculated to write down the cost less estimated residual
value of these assets by equal annual instalments over their estimated useful economic lives which are re-assessed annually. The periods/rates
generally applicable are:
Leasehold improvements Over the expected life of the lease
Plant and machinery 10% per annum
Fixtures and fittings 12.5% per annum
Office equipment 20% per annum
Computer equipment 33% per annum
Medical monitors 20% per annum
Medical monitors include equipment on long-term loan to hospitals for active use where the hospital pays for disposables. Also included
in this category is equipment for demonstration purposes, clinical trials and testing. 36
LiDCO Annual Report
2010/11
Leases
Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance
leases. Assets held under finance leases are capitalised at the lower of fair value or present value of the minimum lease payments in the
balance sheet and depreciated over their estimated useful economic lives. The interest element of leasing payments represents a constant
proportion of the capital balance outstanding and is charged to the income statement over the period of the lease.
All other leases are regarded as operating leases and the payments made under them are charged to the income statement on a straight-line
basis over the lease term.
Inventories
Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course
of business, less the estimated costs of selling expenses.
The cost of inventories is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing
them to their existing locations and condition.
Income tax
Current tax is the tax currently payable based on the taxable result for the year.
Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference
between the carrying amounts of assets and liabilities and their tax bases. In addition, tax losses available to be carried forward as well as other
income tax credits to the Group are assessed for recognition as deferred tax assets.
Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the
underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and
liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively
enacted at the balance sheet date.
Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate
to items that are charged or credited directly to other comprehensive income or equity (such as the revaluation of land) in which case the
related deferred tax is also charged or credited directly to equity.
Foreign currency
Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities
in foreign currencies are translated at the rates of exchange ruling at the balance sheet. Any gain or loss arising from a change in exchange
rates subsequent to the date of the transaction is included as an exchange gain or loss in the income statement.
Trade and other receivables
Trade receivables, which generally have 30-90 day terms, are initially recognised at fair value and subsequently at amortised cost using the
effective interest method, less provisions for impairment. Provision against trade receivables is made when there is objective evidence that
the group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the
write-down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand and demand deposits with an original maturity of three months or less, and
which are subject to an insignificant risk of change in value.
Financial liabilities and equity
Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements
entered into and the definitions of a financial liability and an equity instrument. Financial liabilities are obligations to pay cash or other
financial assets and are recognised when the Group becomes party to the contractual provisions of the instrument and are initially recorded
at fair value net of issue costs. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting
all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below.
Notes to the financial statements
continued 37
LiDCO Annual Report
2010/11
Financial liabilities
The Group’s financial liabilities include borrowings, trade and other creditors. Financial liabilities are measured initially at fair value net
of transaction costs and thereafter at amortised cost using the effective interest rate method.
Share-based payments
The Group has three equity-settled share-based remuneration schemes for employees. Where share options are awarded to employees,
the fair value of the options at the date of grant is calculated using a pricing model and is charged to the income statement over the vesting
period. Market related performance conditions are factored into the fair value of the options granted and a charge is made irrespective
of whether the market related performance conditions are satisfied. In respect of awards with non market related performance conditions,
an estimate of the proportion that will vest is made at the award date which is adjusted if the number of share options expected to vest
differs from the previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period.
Where the Group issues share warrants in respect of distributor arrangements, the fair value of the options at the date of grant is calculated
using a pricing model and is charged to the income statement over the vesting period.
Impairment
The carrying values of property, plant and equipment and intangible assets with finite lives are reviewed for impairment when events
or changes in circumstances indicate the carrying value may be impaired. If any such indication exists the recoverable amount of the asset
is estimated in order to determine the extent of impairment loss.
Key judgements in applying the entity’s accounting policies
The Group’s management makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based
on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk
of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Useful lives of intangible assets and property, plant and equipment
Intangible assets and property, plant and equipment are amortised or depreciated over their useful lives. Useful lives are based on the
management’s estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness.
Changes to estimates can result in significant variations in the carrying value and amounts charged to the income statement in specific
periods (notes 7 and 8).
Inventory
The Group reviews the net realisable value of, and demand for, its inventory on a regular basis to provide assurance that recorded inventory
is stated at the lower of cost or net realisable value. Factors that could impact estimated demand and selling prices include the timing and
success of future technological innovations, competitor actions, supplier prices and economic trends (note 9).
Trade receivables
Trade receivables are primarily due from three groups: hospitals in the UK and USA where direct sales are made, global distributors
predominantly in the USA and independent distributors, predominantly in Europe and the Rest of the World. In making provision for
overdue trade receivables, management consider the first two groups to be generally of lower risk than those due from independent
distributors and apply a lower level of provision. The size of the distributor together with its financial credit rating and the length
of relationship with the Group are also taken into account (note 10).
Licence income
The Group may receive licence fees in connection with the granting of exclusive distribution rights for overseas territories. When recognising
such licence fees management considers the substance of the relevant distribution agreement. Any work that the Group needs to undertake
to fulfil its obligation is taken into consideration and the period over which the work is likely to be performed. Revenue is only recognised
provided that it is probable that the economic benefit associated with the transaction will flow to the Group and the amount of revenue can
be reliably measured. Normally such licence fees are received on signature of the distribution agreement. 38
LiDCO Annual Report
2010/11
2 Revenue and segmental information
The Group has one segment – the supply of monitors, consumables and support services associated with the use of the LiDCO’s cardiac
monitoring equipment. Geographical and product type analysis is used by the chief operating decision maker to monitor sales activity and
is presented below:
Turnover and result by geographical region
Year ended Year ended
31 January 31 January
2011 2010
Group revenue £’000 £’000
UK 2,356 1,822
USA 2,358 2,273
Continental Europe 859 990
Rest of World 664 282
6,237 5,367
Result
UK 495 113
USA 965 459
Continental Europe 449 402
Rest of World 373 127
Total 2,282 1,101
Unallocated costs (2,780) (2,640)
Loss from operations (498) (1,539)
Products and services
Year ended Year ended
31 January 31 January
2011 2010
£’000 £’000
Monitor sales 2,009 1,855
Consumables sales and recurring revenues 3,681 3,125
Licence fees and other income 547 387
6,237 5,367
Payments to Med One as detailed in note 1 under revenue recognition relating to consumables and included within cost of sales amounted
to £526,000 (2009/10: £688,000) during the year.
The Group can identify trade receivables and trade payables relating to the geographical areas. As noted above, the Group has one segment
and other assets and liabilities together with non sales related overheads are not accounted for on a segment by segment basis. Accordingly,
segment assets, liabilities and segment cash flows are not provided.
All non-current assets are located in the United Kingdom.
Material customers
During the year a customer based in the USA accounted for more than 10% of the Group’s total revenue. Revenue recognised during the year is
as follows:
2011 2011 2010 2010
£’000 % revenue £’000 % revenue
Revenue recognised 1,894 30% 1,526 28%
Notes to the financial statements
continued 39
LiDCO Annual Report
2010/11
3 Loss from operations
The loss on operations before taxation is stated after:
Year ended Year ended
31 January 31 January
2011 2010
£’000 £’000
Auditors’ remuneration:
– Fees payable to the Company auditors for the audit of the Group accounts 18 17
Fees payable to the company auditors for other services:
– Audit of the Company’s subsidiaries 25 25
– Other services relating to the interim review
*
8 9
– Other services
*
5 1
Research and development expenditure 146 109
Depreciation of property, plant and equipment 201 216
Amortisation of intangible assets 438 456
Operating leases – rental of land and buildings 165 165
Share-based payment charge in respect of distributor arrangements 120 63
Write down of inventories 47 46
Exchange rate (gains)/losses (9) 23
The cost of goods sold during the year amounted to £1,225,000 (2009: £1,224,000).
*
Non-audit services comprise £8,000 for interim review services. The Board considers it cost effective for the auditors to provide these services.
4 Staff costs
Staff costs during the year were as follows:
Year ended Year ended
31 January 31 January
2011 2010
Group £’000 £’000
Wages and salaries 2,019 1,970
Social security costs 209 179
Share-based payments charge 30 (97)
2,258 2,052
The average number of employees (including executive directors) of the Company during the year was:
2011 2010
Number Number
Production 11 10
Sales 14 16
Administration 12 13
37 39
The remuneration of directors and key management personnel is set out below. Additional information on directors’ and key management
remuneration, share option, long-term incentive plans, pension contributions and entitlements can be found in the audited section of the
Directors’ Remuneration Report on pages 21 to 23 and forms part of these accounts.
2011 2010
£’000 £’000
Short-term employee benefits 738 725
Share-based payments 10 (22) 40
LiDCO Annual Report
2010/11
5 Tax on loss on ordinary activities
The tax credit is based on the loss for the year and represents:
Year ended Year ended
31 January 31 January
2011 2010
£’000 £’000
United Kingdom corporation tax at 28% (2010: 28%) – –
United States income taxes 9 4
Research and development expenditure tax credits – current year (109) (120)
– prior year – (2)
Total tax (100) (118)
United States tax has been calculated at the federal/state tax rates applicable to profits arising in the respective states.
The tax assessed for the year differs from the standard rate of corporation tax applied to the trading results. The differences are explained below:
Loss on ordinary activities multiplied by standard rate of corporation tax in the United Kingdom of 28% (2010: 28%) (137) (433)
Effect of:
Expenses not deductible for tax purposes 13 24
Depreciation for the period in excess of capital allowances (20) 50
Prior year adjustment – (2)
(Decrease)/increase in tax losses (5) 217
Other temporary differences 39 13
Additional deduction for research and development expenditure (111) (99)
Losses surrendered for research and development tax credit 221 231
United States income taxes 9 3
Research and development expenditure tax credits (109) (122)
Total tax income (100) (118)
The above table reconciles the income tax credit with the accounting loss at the standard rate of UK corporation tax.
The current year research and development tax credit of £109,000 (2010: £120,000) represents 14% (2010: 24.5%) of the Group’s qualifying
research and development spend.
The amount of the unused tax losses and temporary differences for which no deferred tax asset was recognised at the balance sheet date was:
Year ended Year ended
31 January 31 January
2011 2010
£’000 £’000
Unused losses (available indefinitely) 24,149 23,408
Temporary differences (available indefinitely) 304 427
24,453 23,835
The related deferred tax asset of approximately £5.6m (2010: £6.7m) in respect of trading losses of the subsidiary have not been recognised
as it is unlikely to be recognisable in the foreseeable future.
Notes to the financial statements
continued 41
LiDCO Annual Report
2010/11
6 Loss per share
The calculation of basic earnings per share is based on the loss attributable to ordinary shareholders divided by the weighted average
number of shares in issue during the year. The calculation of diluted earnings per share is based on the calculation described above adjusted
to allow for the issue of shares on the assumed conversion of all dilutive options. Share options are regarded as dilutive when, and only when,
their conversion to ordinary shares would increase the loss per share.
Year ended Year ended
31 January 31 January
2011 2010
£’000 £’000
Loss after tax for the financial year (390) (1,427)
Number Number
(’000) (’000)
Weighted average number of ordinary shares 173,963 164,597
Loss per share – basic and diluted (p) (0.22) (0.87)
7 Property, plant and equipment
Leasehold Plant and Fixtures Computer Medical
improvements machinery and fittings equipment monitors Total
£’000 £’000 £’000 £’000 £’000 £’000
Cost
At 1 February 2009 555 431 171 450 477 2,084
Additions – 5 1 47 81 134
Disposals – – (3) (21) (66) (90)
At 31 January 2010 555 436 169 476 492 2,128
Additions 1 6 4 21 95 127
At 31 January 2011 556 442 173 497 587 2,255
Accumulated depreciation
At 1 February 2009 355 308 138 416 196 1,413
Charge for the year 53 32 15 28 88 216
Disposals – – (3) (19) (66) (88)
At 31 January 2010 408 340 150 425 218 1,541
Charge for the year 53 34 8 27 79 201
At 31 January 2011 461 374 158 452 297 1,742
Carrying amount at 31 January 2011 95 68 15 45 290 513
Carrying amount at 31 January 2010 147 96 19 51 274 587
Plant and equipment is depreciated at various rates depending on the estimated life of the item of plant or equipment. The rates of depreciation
are shown in note 1.
Medical monitors include equipment on long term loan to hospitals for active use where the hospital pays for disposables. Also included in this
category is equipment for demonstration purposes, clinical trials and testing.
The carrying amount of the Group’s plant and equipment includes £14,000 (2010: £24,000) in respect of assets held under finance leases. 42
LiDCO Annual Report
2010/11
8 Intangible assets
Product Product
Clinical trials registration development Total
£’000 £’000 £’000 £’000
Cost
At 1 February 2009 116 556 1,980 2,652
Additions – 73 401 474
At 31 January 2010 116 629 2,381 3,126
Additions – 77 352 429
At 31 January 2011 116 706 2,733 3,555
Accumulated amortisation
At 1 February 2009 101 260 1,545 1,906
Charge for the year 15 119 322 456
At 31 January 2010 116 379 1,867 2,362
Charge for the year – 88 350 438
At 31 January 2011 116 467 2,217 2,800
Carrying amount at 31 January 2011 – 239 516 755
Carrying amount at 31 January 2010 – 250 514 764
Intangible assets includes assets that are internally generated and amortised over their estimated useful lives. Amortisation costs are included
in administrative expenses. The rates of amortisation are shown in note 1.
9 Inventory
2011 2010
£’000 £’000
Raw materials and consumables 310 246
Finished goods and goods for resale 737 848
1,047 1,094
At 31 January 2011, inventories stated net of allowances for obsolete or slow moving items, was £85,000 (2010: £106,000).
Notes to the financial statements
continued 43
LiDCO Annual Report
2010/11
10 Trade and other receivables
2011 2010
£’000 £’000
Trade receivables 1,432 1,473
Other receivables 12 51
Prepayments 163 125
1,607 1,649
All amounts are short-term and the directors consider that the carrying amount of trade and other receivables approximates to their fair value.
All of the Group’s trade and other receivables have been reviewed for indicators of impairment. At 31 January 2011, trade receivables of £1.07m
(2010: £1.10m) were fully performing. In addition, some of the unimpaired trade receivables are past due as at the reporting date. The age
of trade receivables past due but not impaired is as follows:
2011 2010
£’000 £’000
Not more than three months 195 182
More than three months but not more than six months 31 94
More than six months but not more than one year 30 15
More than one year 104 79
360 370
Movements in Group provisions for impairment of trade receivables are as follows, which are included within administrative expenses in the
income statement.
2011 2010
£’000 £’000
Opening balance 6 95
Provision for receivables impairment 32 94
Receivables written off in year (9) (183)
Closing balance 29 6
The other classes within trade and other receivables do not contain impaired assets.
11 Current liabilities
2011 2010
£’000 £’000
Trade payables 534 332
Social security and other taxes 67 65
Accruals 166 206
Deferred income 74 614
Finance leases 10 10
851 1,227
The directors consider that the carrying amount of trade and other payables approximates to their fair value. 44
LiDCO Annual Report
2010/11
12 Non-current liabilities
2011 2010
£’000 £’000
Finance leases 4 14
13 Financial instruments
Financial risks
The Group’s financial instruments comprise cash and liquid resources, borrowings and items such as trade receivables and trade payables that
arise from its operations.
The main risks that arise from the Group’s financial instruments are credit, interest rate, liquidity and currency risk. The Board reviews and agrees
policies for managing each of these risks and they are summarised below.
Credit risk
The Group’s credit risk is primarily attributable to trade receivables. The amounts presented in the balance sheet are net of allowances for
doubtful receivables, estimates by management based on prior experience of customers which is typified by a small number of high value
accounts and their assessment of the current economic environment. The maximum exposure is £2,848,000 (2010: £3,370,000).
The credit risk on liquid funds is limited because the counterparties are reputable international banks.
Liquidity risk
The Group seeks to manage this financial risk by ensuring sufficient liquidity through the use of variable rate bank facilities is available to meet
foreseeable needs and to invest surplus cash assets safely and profitably.
Liquidity risk analysis
The Group manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial liabilities as well
as cash-outflows due in day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis.
The Group maintains cash and marketable securities to meet its liquidity requirements. Funding for long-term liquidity needs is additionally
secured by an adequate amount of committed credit facilities.
As at 31 January 2011, the Group’s liabilities have contractual maturities which are summarised below:
Current Non-current
Within 6 to 12 1 to 5 Over 5
6 months months years years
31 January 2011 £’000 £’000 £’000 £’000
Finance lease obligations 554 –
Trade payables 767–––
77254 –
This compares to the maturity of the Group’s financial liabilities in the previous reporting period as follows:
Current Non-current
Within 6 to 12 1 to 5 Over 5
6 months months years years
31 January 2010 £’000 £’000 £’000 £’000
Finance lease obligations 5 5 14 –
Trade payables 603–––
608 5 14 –
Notes to the financial statements
continued 45
LiDCO Annual Report
2010/11
Market Risks
Interest rate risk
The Group finances its operations through a mixture of shareholder funds and variable rate bank facilities. The Group accepts the risk attached
to interest rate fluctuations as interest rates have been relatively stable or declined over the last three years and the interest expense is a small
proportion of total administrative expenses.
Currency risk
The Group manages currency risk by assessing the net exposure in each non-sterling currency in which exposure arises. The only significant
exposure relates to US dollars. The Group accepts the risk attached to fluctuations in the US dollar exchange rate as US dollar payables are
partly mitigated by US dollar receivables from sales.
Group interest rate profile
Floating rate
Cash current Deposit and
bank accounts reserve account Total
Financial assets at 31 January 2011 £’000 £’000 £’000
Currency
Sterling 75 1,272 1,347
US dollars 28 – 28
Euro 29 – 29
132 1,272 1,404
Summary of financial assets and liabilities by category
The carrying amounts of the Group’s financial assets and liabilities as recognised at the balance sheet date of the reporting periods under
review may also be categorised as follows. See note 1, ‘principal accounting policies’ , covering financial assets and financial liabilities for
explanations about how the category of instruments affects their subsequent measurement.
2011 2010
Current assets £’000 £’000
Loans and receivables:
– Trade and other receivables 1,444 1,524
– Cash and cash equivalents 1,404 1,846
2,848 3,370
2011 2010
Non-current liabilities £’000 £’000
Finance lease obligations 4 14
4 14
2011 2010
Current liabilities £’000 £’000
Financial liabilities measured as amortised cost:
– Borrowings 10 10
Trade payables and other short term financial liabilities 601 332
611 342 46
LiDCO Annual Report
2010/11
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return
to shareholders through the optimal use of equity.
The Board reviews the capital structure, including the level of indebtedness and foreign currency holdings as required whether included
as cash or other working capital balances.
The Group is exposed to translation and transaction foreign exchange risk. The currency where the Group is most exposed to foreign currency
volatility is US dollars.
The Group had the following balances denominated in US dollars:
US Dollars
2011 2010
£’000 £’000
Trade and other receivables 46 79
Cash and cash equivalents 28 394
Trade and other payables (30) (37)
44 436
No hedging instruments are used. The Group keeps under review the extent of its exposure to currency fluctuations, which relate entirely
to trading transactions.
The following table illustrates the sensitivity of the net result for the year and equity in regards to the Group’s financial assets and financial
liabilities and the Sterling to US dollar exchange rates. It assumes a percentage change in the exchange rate based on the foreign currency
financial instruments held at each balance sheet date. Both of these percentages have been determined based on the average market volatility
in exchange rates in the previous 12 months.
US Dollars
2011 2010
Currency fluctuation 11% 11%
If Sterling had strengthened against the US dollar by the percentage above retrospectively, then this would have had the following impact:
US Dollars
2011 2010
£’000 £’000
Net result for the year (67) (76)
Equity (67) (76)
If Sterling had weakened against the US dollar by the percentage above retrospectively, then this would have had the following impact:
US Dollars
2011 2010
£’000 £’000
Net result for the year 67 76
Equity 67 76
Exposure to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above
is considered to be representative of the Group’s exposure to currency risk.
Fair values of financial assets and liabilities
There was no difference between the fair value and the book value of financial assets and liabilities.
Notes to the financial statements
continued 47
LiDCO Annual Report
2010/11
14 Share capital
2011 2010
Number of Number of
shares shares
Issued and fully paid – ordinary shares of 0.5 pence each 000 000
At the beginning of the year 173,942 141,983
Issued for cash 42 31,959
At the end of the year 173,984 173,942
£’000 £’000
At the beginning of the year 869 710
Issued for cash 1 159
At the end of the year 870 869
On 23 August 2010 42,500 shares were issued at 0.5p per share on exercise of share options.
15 Share-based payments
Equity-settled share option schemes
The Group has three equity-settled share option schemes for employees. Where share options are awarded to employees, the fair value of the
options at the date of grant is calculated using a pricing model and is charged to the income statement over the vesting period. Market related
performance conditions are factored into the fair value of the options granted and a charge is made irrespective of whether the market related
performance conditions are satisfied. In respect of awards with non-market related performance conditions, an estimate of the proportion that
will vest is made at the award date and this is trued up or down at each accounting period.
2011 2010
Weighted Weighted
average average
exercise exercise
Number price (p) Number price (p)
Outstanding at the beginning of the year 10,526,079 15.8 9,353,872 15.9
Issued in the year 751,000 19.9 1,309,000 13.3
Forfeited during the year (259,500) 13.9 (94,293) 18.4
Exercised during the year (42,500) 0.5 (42,500) 0.5
Outstanding at the end of the year 10,975,079 16.4 10,526,079 15.8
Exercisable at the end of the year 7,334,579 18.0 7,377,079 18.0
Fair value is determined by reference to the fair value of the instrument granted to the employee. The expected life used in the model has been
adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
These fair values were calculated using a Black-Scholes option pricing model with the following assumptions:
2011 2010
Weighted average share price (p) 19.9 13.3
Weighted average exercise price (p) 19.9 13.3
Expected volatility 50% 50%
Expected life (years) 3.5 3.5
Risk free rate 2% 3.0% -3.5%
Expected dividend yield – –
The expected volatility is based on the Group’s historical share price averaged over a period equal to the expected life. The expected life is the
average expected period to exercise. The risk free rate of return is based on UK Government gilts. The share options outstanding at the end
of the year have exercise prices of between 0.5p and 28.25p per share and a weighted average remaining contractual life of 4.5 years. 48
LiDCO Annual Report
2010/11
Share warrants in respect of distributor arrangements
On 28 July 2009 the Group issued share warrants in respect of an arrangement with a distributor. Warrants were issued over a total of 13,915,324
shares at an exercise price of 14.3 pence which represented a 20% premium over the mid market price for a period of 10 days before and
10 days after the date of the distributor agreement. The fair value of the warrants at the date of grant has been calculated using the same
pricing model as that used for the equity-settled share option schemes and will be charged to the income statement over the vesting period.
The distributor may exercise the warrants subject to purchasing certain minimum quantities of monitors and disposables during the first and
second years of the distribution agreement.
16 Capital commitments
At 31 January 2011 the Company had placed forward orders for the purchase of monitors and monitor components to the value of £1,382,000
(2010: £390,000). Delivery of these orders is scheduled between February 2011 and June 2013.
17 Contingent liabilities
There were no contingent liabilities at 31 January 2011 or 31 January 2010.
18 Leasing commitments
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
2011 2010
Land and Land and
buildings Other buildings Other
Group £’000 £’000 £’000 £’000
In one year or less 11 39 45 73
Between one and five years –37 15 46
11 76 60 119
19 Related party transactions
During the year, no contracts of significance other than those disclosed within the Directors’ Remuneration Report were existing or entered
into by the Group or its subsidiaries in which the directors had a material interest.
Key management compensation
Compensation for directors who are the only employees with responsibility for planning, directing and controlling the Group is disclosed
in the directors’ remuneration report.
Transactions between the Company and its subsidiaries which are related parties are eliminated on consolidation. There were no transactions
between the Company and its subsidiaries.
Notes to the financial statements
continued 49
LiDCO Annual Report
2010/11
Independent auditor’s report to the members of LiDCO Group Plc
We have audited the parent company financial statements of LiDCO Group Plc for the year ended 31 January 2011 which comprise the parent
company balance sheet, and the related notes. The financial reporting framework that has been applied in their preparation is applicable law
and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the parent company
financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the
parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm.
Opinion on financial statements
In our opinion the parent company financial statements:
• give a true and fair view of the state of the Company’s affairs as at 31 January 2011;
• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
• have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent
with the parent company financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from
branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Other matter
We have reported separately on the Group financial statements of LiDCO Group Plc for the year ended 31 January 2011.
Christopher Smith
Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
London
15 April 2011 50
LiDCO Annual Report
2010/11
2011 2010
Note £’000 £’000
Fixed assets
Investments 2 65 65
65 65
Current assets
Debtors 3 5 5
Amount due from subsidiary undertakings 3 14,339 14,338
Cash at bank 66 11
14,410 14,354
Current liabilities
Creditors: Amounts falling due within one year – –
– –
Net current assets 14,410 14,354
Total assets less current liabilities 14,475 14,419
Net assets 14,475 14,419
Shareholders’ funds
Share capital 4 870 869
Share premium 5 25,393 25,393
Retained earnings 5 (11,788) (11,843)
Shareholders’ funds 14,475 14,419
The financial statements were approved by the Board of Directors on 15 April 2011.
Theresa Wallis Terence O’Brien
Director Director
The accompanying accounting policies and notes form an integral part of these financial statements.
Company balance sheet
At 31 January 2011 51
LiDCO Annual Report
2010/11
Notes to the financial statements
For the year ended 31 January 2011
1 Principal accounting policies
Basis of preparation
The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by that Act, the
separate financial statements have been prepared in accordance with all applicable United Kingdom accounting standards. The principal
accounting policies of the Company are set out below.
The financial statements have been prepared on the historical cost basis.
Going concern
The Company’s business activities, together with a review of the market and the Company’s distribution channels are set out in the Chief
Executive Officer’s Statement on pages 8 to 13. In addition, note 13 to the financial statements include the Company’s policies for managing
its capital; its financial risk; details of its financial instruments; and its exposures to credit risk and liquidity risk.
The Company has a number of customers across different geographic areas and considerable recurring revenue streams through the sales
of its disposable sensors and smart cards which represented 59% of its total revenues in the year to 31 January 2011.
The Group finances its operations through shareholders’ funds and has no borrowings. The directors have a reasonable expectation that
the Company has adequate resources to continue in operational existence for the foreseeable future based on forecasts for the two years
to 31 January 2013. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
Investments
Investments in subsidiary undertakings are stated at cost less provision for impairment.
Foreign currency
Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities
in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. Any gain or loss arising from a change in exchange
rates subsequent to the date of the transaction is included as an exchange gain or loss in the profit and loss account.
Financial liabilities and equity
Financial liabilities and equity instruments issued by the Company are classified according to the substance of the contractual arrangements
entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual
interest in the assets of the Company after deducting all of its liabilities.
Share-based payment charges
The Group has three equity-settled share-based remuneration schemes for employees. Where share options are awarded to employees, the fair
value of the options at the date of grant is calculated using a pricing model and is charged to the income statement over the vesting period.
Market related performance conditions are factored into the fair value of the options granted and a charge is made irrespective of whether the
market related performance conditions are satisfied. In respect of awards with non-market related performance conditions, an estimate of the
proportion that will vest is made at the award date which is adjusted if the number of share options expected to vest differs from the previous
estimates. Any cumulative adjustment prior to vesting is recognised in the current period.
Where the Group issues share warrants in respect of distributor arrangements, the fair value of the options at the date of grant is calculated
using a pricing model and is charged to the income statement over the vesting period.
2 Investments
Shares in subsidiary
undertakings
Company £’000
Cost and net book value
At 1 February 2010 and at 31 January 2011 65
The Company’s beneficial interest in subsidiary undertakings consists of:
Country of registration Beneficial holding Nature of business
LiDCO Limited England and Wales 100% Medical instruments and appliances
Cassette Analytical Systems Limited England and Wales 100% Dormant 52
LiDCO Annual Report
2010/11
3 Debtors
2011 2010
£’000 £’000
Other debtors 5 5
Amount due from subsidiary 14,339 14,338
14,344 14,343
The amount due from subsidiary relates to the ongoing funding provided to the principal trading subsidiary, LiDCO Limited, whilst it continues
to be loss-making. The directors made a provision for impairment of £12m in the year to 31 January 2008, and consider that no further
impairment provision is necessary at 31 January 2011. The timing of the repayment of this debt is uncertain and unlikely to be within one year.
4 Share capital
2011 2010
£’000 £’000
Allotted, called up and fully paid
173,984,054 ordinary shares of 0.5p each 870 869
On 23 August 2010 42,500 shares were issued at 0.5p per share on exercise of share options.
5 Reserves
Share Other Equity Profit & loss
premium reserve reserve account
£’000 £’000 £’000 £’000
At 1 February 2010 25,393 – – (11,843)
Profit for the year – – – 55
At 31 January 2011 25,393 – – (11,788)
6 Reconciliation of shareholders’ funds
2011 2010
£’000 £’000
Profit for the year 55 2
Shares issued 1 159
Share premium account – 2,862
56 3,023
Opening shareholders’ funds 14,419 11,396
Closing shareholders’ funds 14,475 14,419
7 Loss for the financial year
In accordance with the exemption given by section 408 of the Companies Act 2006, the holding company has not presented its own profit and
loss account. The profit for the year of the Company was £55,000 (2009/10: £2,000).
8 Related party transactions
There were no transactions between the Company and its subsidiary, which are related parties.
Notes to the financial statements
continued 53
LiDCO Annual Report
2010/11
Company information
Company registration number:
2659005
Registered office:
16 Orsman Road
Hoxton
London, N1 5QJ
Company website:
www.lidco.com
Directors and Secretary:
Ms T A Wallis Non-Executive Chairman
Dr T K O’Brien Chief Executive Officer
Dr D M Band Scientific Director
Mr J G Barry Sales and Marketing Director
Mr I G Brown Non-Executive Director
Mr P L Clifford Finance Director
Mr J P Rowland Company Secretary
Solicitors:
Hewitsons LLP
Shakespeare House
42 Newmarket Road
Cambridge
CB5 8EP
Auditors:
Grant Thornton UK LLP
Registered Auditors
Chartered Accountants
Grant Thornton House
Melton Street
Euston Square
London
NW1 2EP
Registrars:
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Nominated adviser
and stockbroker:
FinnCap Limited
60 New Broad Street
London
EC2M 1JJ
Bankers:
NatWest Bank Plc
63-65 Piccadilly
London
W1J 0AJ
Advisers to the Company LiDCO Group Plc
UK Office:
16 Orsman Road
Hoxton
London N1 5QJ
T: + 44 (0) 20 7749 1500
F: + 44 (0) 20 7749 1501
Sales and Marketing:
Unit M
South Cambridgeshire Business Park
Babraham Road
Sawston
Cambridge CB22 3JH
T: + 44 (0) 1223 830666
F: + 44 (0) 1223 837241
www.lidco.com
Designed by www.randallwilkinson.co.uk
Printed by Pegasus Colourprint ### summary: |
TRANSFORMING TRAVEL
ANNUAL REPORT 2005
Principal and Registered Office
FırstGroup plc
395 King Street
Aberdeen AB24 5RP
Telephone: 01224 650100
Facsimile: 01224 650140
Registered in Scotland
number SC157176
London Office
FırstGroup plc
Third Floor
E Block
Macmillan House
Paddington Station
London W2 1FG
Telephone: 020 7291 0505
Facsimile: 020 7636 1338
The paper used to produce this report is
made from Totally Chlorine Free (TCF) pulps
sourced from fully sustainable forests.
www.fırstgroup.com
FirstGroup plc Annual Report 2005
Designed and produced by Pauffley Ltd www.pauffley.com Printed by Royle Corporate Print 02 Group overview
03 Financial highlights
04 Chairman’s statement
05 Chief Executive’s review
13 Financial review
17 Board of Directors
18 Corporate governance
23 Directors’ remuneration report
30 Directors’ report
32 Directors’ responsibilities
33 Financial statements contents
34 Consolidated profit and loss account
35 Balance sheets
36 Consolidated cash flow statement
36 Reconciliation of net cash flows to movement in net debt
37 Consolidated statement of total recognised gains and losses
37 Reconciliation of movements in equity shareholders’ funds
38 Notes to the financial statements
60 Independent auditors’ report
61 Group financial summary
62 Shareholder information
THAT’S IT FOR THIS YEAR, BUT IF YOU WANT
MORE INFORMATION ON FIRSTGROUP OR YOU
WANT TO BOOK YOUR JOURNEY PLEASE PAY
US A VISIT AT WWW.FIRSTGROUP .COM WE ARE THE UK’S LARGEST SURFACE TRANSPORT
COMPANY, WITH A TURNOVER OF £2.7 BILLION
PER YEAR AND SOME 67,000 EMPLOYEES ACROSS
THE UK AND NORTH AMERICA.
OUR VISION IS QUITE SIMPLY, TO TRANSFORM
TRAVEL BY PROVIDING PUBLIC TRANSPORT
SERVICES THAT ARE SAFE, RELIABLE, HIGH
QUALITY, PERSONAL AND ACCESSIBLE.
THIS MEANS FINDING SMART, YET PRACTICAL
SOLUTIONS TO EVERYDAY TRANSPORT ISSUES.
IN THIS REPORT WE DEMONSTRATE HOW WE
ARE DELIVERING OUR PROMISES TO OUR
CUSTOMERS, EMPLOYEES, SHAREHOLDERS
AND THE COMMUNITIES THAT WE SERVE.
01 GROUP OVERVIEW
UK BUS
We are the UK’s largest bus operator, running
more than one in five of all local bus services.
A fleet of some 9,300 buses carries 2.8 million
passengers every day in over 40 major towns
and cities. The majority of our operations are in
urban areas where the bus is the most effective
means of tackling traffic congestion. We are
working in partnership with local authorities and
other stakeholders to provide cost effective,
transport solutions that improve services and
offer more choice for passengers.
UK RAIL
We are one of the UK’s largest rail operators
with four passenger rail franchises: First
Great Western, First Great Western Link,
First TransPennine Express and First ScotRail.
We also operate Hull Trains, a non-franchised
open access operator. We run nearly one-sixth
of the UK passenger rail network, with a
balanced portfolio of intercity, commuter and
regional rail operations. We also provide freight
services through GB Railfreight. We have a
strong track record of delivery and of investing
in improved services, such as new rolling stock
and customer facilities across all of our
rail operations.
NORTH AMERICA
Headquartered in Cincinnati, Ohio, our three
operations are spread across the US
and Canada.
First Student
We are the second largest provider of student
transportation in North America with a fleet of
over 20,000 yellow school buses, carrying
nearly 2 million students every day across
the US and Canada.
First Transit
We are one of the largest private sector
providers of transit management and
contracting, managing public transport systems
on behalf of transit authorities in cities such as
Atlanta, Los Angeles, Houston and Seattle.
We are also one of the largest providers of
airport shuttle bus services in the US, serving
airports in cities such as Cincinnati, Miami and
Philadelphia. We also manage call centres,
paratransit operations and other light
transit activities.
First Services
Our Services operation is the largest private
sector provider of vehicle maintenance and
support services in the US. We provide fleet
maintenance for public sector customers such
as the Federal Government, cities and fire and
police departments. We also provide a range of
services including vehicle maintenance, logistics
support and facilities management to public and
private sector clients including the US Navy
and US Air Force.
02 FINANCIAL HIGHLIGHTS
2005 2004
Turnover (£m) 2,693.4 2,479.0
Operating profit
1
(£m) 211.6 204.1
Profit before taxation (£m) 128.9 122.8
Profit on ordinary activities after tax (£m) 96.2 92.2
Adjusted basic earnings per share
1
(pence) 28.2 27.3
Basic earnings per share (pence) 22.5 22.3
Dividend per share (pence) 12.815 11.65
EBITDA
2
(£m) 319.2 307.1
EBITDA: interest cover
3
6.6x 7.2x
1
Before goodwill amortisation, bid costs, other exceptional items and profit on disposal of fixed assets.
2
Operating profit before goodwill amortisation, bid costs, other exceptional items and profit on disposal of fixed assets, plus depreciation.
3
Calculated as EBITDA
2
divided by net interest payable and similar charges before exceptional items.
TURNOVER UP 8.6% TO £2,693M
ADJUSTED BASIC EARNINGS PER SHARE UP 3.3% TO 28.2P
DIVIDEND PER SHARE UP 10.0% TO 12.815P
UK RAIL: EXCELLENT OPERATING PERFORMANCE –
SHORTLISTED FOR FOUR NEW FRANCHISES
NORTH AMERICA: CONTINUED EXPANSION, NOW OPERATING
>20,000 SCHOOL BUSES
UK BUS: REVENUE UP 6% – FURTHER GROWTH IN URBAN
QUALITY PARTNERSHIP AREAS
TURNOVER (£m)
UK Bus £960.7m
UK Rail £1,059.7m
North America £665.8m
Excluding other turnover £7.2m.
OPERATING PROFIT (£m)
UK Bus £107.1m
UK Rail £67.7m
North America £61.2m
Operating profit in UK Rail is stated after charging the
finance cost of assets, which is implicit in the operating
lease rentals, whereas UK and US Bus operating profits
are stated before finance charges. Interest costs, as
disclosed in note 6 to the accounts, were £48.3m.
Excluding central items of £15.4m and financing
element of leases £9.0m.
03 CHAIRMAN’S STATEMENT
04
OUR STRATEGY REMAINS TO INCREASE SHAREHOLDER VALUE
BY CONTINUING TO GROW IN OUR CORE BUSINESSES AND
EXPLORE OPPORTUNITIES TO DEVELOP IN NEW MARKETS. WE
REMAIN COMMITTED TO A PROGRESSIVE DIVIDEND POLICY AND
SHARE REPURCHASES WHILE RETAINING OUR CREDIT RATING.
The accident at Ufton Nervet in November,
in which one of our First Great Western
trains collided with a vehicle obstructing the
line at a level crossing, resulted in the tragic
loss of seven lives, including our train driver.
On behalf of the Board of FirstGroup plc and
all of our employees I would like to express
our condolences to the families of the
bereaved and to the injured.
The safety of passengers and staff is
our highest priority. Buses and trains
remain among the safest ways to travel
and we continuously strive to improve
our performance to achieve the
highest standards.
I am pleased to report another year of good
progress across the Group. Turnover has
increased to £2,693m (2004: £2,479m)
and profit before tax increased to £128.9m
(2004: £122.8m). EBITDA (Group operating
profit* plus depreciation) increased to
£319.2m (2004: £307.1m). Adjusted basic
earnings per share has increased to 28.2p
(2004: 27.3p) and the Board has proposed
a final dividend, subject to approval by
shareholders, of 8.69p making a full year
payment of 12.815p, an increase of 10%.
Before goodwill amortisation and exceptional
items, the dividend is covered 2.2 times
and will be paid on 26 August 2005 to
shareholders on the register on 22 July
2005. The dividend increase reflects the
Board’s confidence in the Group’s strong
cash generation and growth prospects.
The Board is confident that this level of
dividend growth is sustainable for the
medium term.
A number of strategic acquisitions and rail
franchise wins occurred during the year
which further strengthened our core
business. In October we commenced
operation of First ScotRail, Scotland’s
national railway and the UK’s largest rail
franchise, providing over 2,000 passenger
services a day. We have also been shortlisted
for four new rail franchises; Greater Western,
Integrated Kent, Thameslink/Great Northern
and Docklands Light Railway. In North
America we made the strategic acquisition,
through First Services, of SKE Support
Services Inc. enabling us to enter the large
Federal services market and almost doubling
the size of our existing services operation.
I am pleased to report the successful
integration of this business which we expect
to be able to expand further. During the year
we made a significant acquisition in our
North American student business adding
a further 1,900 school buses to our fleet.
Dr Mike Mitchell, previously Business
Change Director, who stepped down from
the Board last year prior to his planned
retirement, left the Group in April 2005 and
subsequently took up the post of Director
General of Railways at the Department for
Transport. I would like to thank Mike for his
contribution to the Group and wish him
every success in his new role.
I would like to take this opportunity to thank
our employees for their continued hard work
and commitment in delivering another year of
strong growth and earnings, including those
employees at First North Western who left
the Group during the year. I would also like
to welcome new employees including those
at First ScotRail and First Great Western Link
and staff who joined through acquisitions
made in North America.
Our UK Bus business continues to generate
strong cash flows and we are actively
working with Government and Local
Authorities to introduce services that meet
the needs of the communities, alongside bus
priority schemes and other measures to
reduce traffic congestion. We look forward
to building on our strong record of delivery
in the rail industry and submitting our exciting
proposals for the development of new
franchises. In North America we continue
to grow our Student, Transit and Services
businesses. Since we entered the market six
years ago we have grown First Student by
some 10,000 buses and overall we have
increased earnings in our North American
businesses by over 70%.
Our strategy remains to increase shareholder
value by continuing to grow in our core
businesses and explore opportunities to
develop in new markets. While we continue
to invest for growth we remain committed
to a progressive dividend policy and share
repurchases of up to £30m per annum,
while retaining our BBB credit rating.
Martin Gilbert
Chairman
*Operating profit referred to in this statement and in the
Chief Executive’s Review and Financial Review refers to
operating profit before goodwill amortisation, bid costs
and other exceptional items. CHIEF EXECUTIVE’S REVIEW
OVERVIEW
Safety
The safety and security of our passengers
and staff is at the forefront of everything we
do and we continue to promote a culture
of ‘Safety First’ throughout our business.
We continually assess our processes and
working practices and strive to meet the
highest possible standards. I am pleased to
report that during the period we have again
seen some encouraging trends in key safety
indicators and we will continue to ensure
that we build on these improvements. The
separate Corporate Responsibility Report
details the progress we have made to further
improve our performance in respect of safety,
environmental management and other key
areas of our business.
Results
I am very pleased to report another
successful year with expansion in our core
markets in the US and UK. Group turnover
increased by 8.6% to £2,693m (2004:
£2,479m). Operating profit was £211.6m
(2004: £204.1m). The Group generated
EBITDA (operating profit plus depreciation)
of £319.2m (2004: £307.1m) enabling us to
continue to invest in the business as well as
increasing the dividend by 10% and returning
£29.7m to shareholders through the further
repurchase of equity during the year.
Since the acquisition of our North American
business and the growth of our UK rail
operations the Group’s revenue profile has
substantially altered. Some 80% of the
revenue in our North American operations
is secured under medium-term contracts.
The Group has contracts with government
agencies and other large organisations in
both North America and the UK representing
a secure revenue stream worth £4.9 billion.
As we expand our North American
businesses and continue to grow our UK
rail operations we expect this figure to
increase significantly.
UK RAIL
The UK Rail division operates passenger
and freight services in the UK. Passenger
rail franchises consist of First Great Western,
First Great Western Link, First TransPennine
Express and First ScotRail. We also operate
Hull Trains, a non-franchised open access
intercity passenger train operator, and
we provide rail freight services through
GB Railfreight.
Results
Turnover in the Group’s rail division
increased to £1,059.7m (2004: £945.0m)
and operating profit was £67.7m (2004:
£49.8m). These excellent results reflect
the strong operating performance and
increased passenger volumes across all
of our train operating companies and the
commencement of First ScotRail in
October 2004.
Current operations
On 17 October we commenced operation of
First ScotRail. The handover went smoothly
and, despite the adverse weather at the start
of the year, operator delays have been
reduced by 5% on the comparable period
last year. This reflects the enormous effort
and investment being applied to fleet
reliability and performance. Passenger
journeys have increased by 8% on the
comparable period last year and we have
introduced an improved timetable to provide
increased capacity and cleaner, more
frequent services. In April we introduced the
final delivery of new Class 170 Turbostar
trains, funded by the Scottish Executive and
Strathclyde Passenger Transport, which will
provide longer trains and extra seats on a
number of routes. In February we launched
JourneyCheck, the UK’s first fully integrated
train information service, enabling
passengers to receive instant information
on how services are running and details of
planned engineering works using real time
information via website, WAP and PDA
phones and through SMS text messaging.
First TransPennine Express, which
commenced operation on 1 February 2004,
05
THE SAFETY AND SECURITY OF OUR PASSENGERS AND STAFF IS
AT THE FOREFRONT OF EVERYTHING WE DO AND WE CONTINUE
TO PROMOTE A CULTURE OF ‘SAFETY FIRST’ THROUGHOUT
OUR BUSINESS. CHIEF EXECUTIVE’S REVIEW CONTINUED
has performed well with passenger income
increased by 11.5%. Passenger volumes are
running ahead of our expectations as a result
of increased road congestion on the main
commuter corridor between Manchester and
Leeds. A new timetable was introduced in
December offering passengers faster journey
times, additional services and extra capacity.
In March work commenced to build a new
train-care depot in Manchester with a
second new depot planned for York. In
spring 2006 we will introduce 51 new
Siemens trains for the franchise, offering
passengers in the region a modern, high-
performance intercity fleet and a step-
change in the quality of service we are
able to offer.
Operational performance on First Great
Western has continued to improve. In
January we opened a new First Class
business lounge at London Paddington
for passengers. Our investment in the new
lounge recognises that the ability to ‘work
on the move’ is a key attraction of train
travel and provides a range of facilities
including a meeting room, internet access
as well as complimentary newspapers
and refreshments. In February, First Great
Western launched the redesigned High
Speed Train carriages in preparation for the
Greater Western franchise bid. A number
of improvements have been made to the
exterior including a striking new livery. The
interior has been redesigned, with customer
input, to create a contemporary and modern
on-board environment with improved
customer services such as an updated
buffet facility and Wi-Fi technology.
We were delighted that First Great Western’s
Chippenham Station won the award for
‘Station Excellence’ at the HSBC Rail
Awards. This award, which has been won
by First Great Western for the last two years,
follows a significant investment in the
refurbishment of the station.
On 1 April 2004 we commenced operation of
the First Great Western Link franchise which
operates surburban services from London
Paddington. In December we launched an
integrated timetable for First Great Western
and First Great Western Link. This major
overhaul to the scheduling of services enables
us to offer up to 20% increased capacity on
surburban services and improved long
distance services to Wales and the South
West. In June we will launch the new
Heathrow Connect service, in partnership with
British Airports Authority, calling at intermediate
stops between London Paddington and
Heathrow using new electric trains.
Hull Trains, our non-franchised, open access
intercity train company operating between
London Kings Cross and Hull, performed well
during the year with passenger growth of
20%. In June we introduced a new weekday
service and received further regulatory
approval in December for an additional
Saturday service.
GB Railfreight
GB Railfreight (GBRf), our rail freight
company, has continued to show
encouraging growth. New business was
won during the year including contracts for
Royal Mail and the Tarmac Group. During
the period GBRf took delivery of new
container wagons and refurbished
locomotives to support the new contracts.
We were delighted that GBRf won ‘Rail
Business of the Year’ and picked up the
‘Rolling Stock Excellence’ award at the
HSBC Rail Awards in February this year.
We believe that there is scope to further
expand this business by offering a high level
of service and a flexible business model.
Franchise bidding
We are delighted to be shortlisted for a
further four new enlarged rail franchises:
Integrated Kent, Greater Western,
Thameslink/Great Northern and Docklands
Light Railway. We have an excellent track
record of delivery and operation of various
types of railway franchises including intercity,
London commuter, suburban and regional
railways. In addition we have managed and
20%
WE LAUNCHED A NEW INTEGRATED TIMETABLE FOR
FIRST GREAT WESTERN AND FIRST GREAT WESTERN LINK
DESIGNED TO BRING CUSTOMER AND PERFORMANCE
BENEFITS SUCH AS BETTER PUNCTUALITY AND RELIABILITY,
IMPROVED CONNECTIONS AND INCREASED CAPACITY, BY
UP TO 20%, ON PEAK TIME SERVICES.
06 06 implemented the introduction of new rolling
stock across four of our rail franchises.
We have a highly experienced team in place
and look forward to consulting widely and
working with all of the stakeholders to
develop exciting proposals for the future
of these franchises.
Outlook UK Rail
The strong performance of our rail operations
reflects the innovation and investment we
have put into the business. Our aim is to
bring a consistently high standard of service
at affordable prices to our passengers.
We have an active programme of new
franchise bids under way which offer
excellent prospects for the future growth
of the division.
NORTH AMERICA
In North America the Group is the second
largest operator of student transportation
with over 20,000 yellow school buses
carrying nearly 2 million students every day
across the US and Canada. We operate the
largest transit contracting and management
business in North America and we have an
expanding services division.
Results
This has been another year of strong
growth within our North American Division.
Turnover from our three businesses
increased to £665.8m or $1,230.2m
(2004: £620.7m or $1,051.6m), an increase
in dollar terms of 17%. Operating profit
was £61.2m or $113.2m (2004: £63.5m or
$109.2m). Operating profit in First Student
was impacted by $5.2m as a result of fewer
trading days in the year due primarily to a
late Labor Day in the calendar, which meant
that the North Eastern and mid Atlantic
regions of the US had a later school start,
and the early occurrence of Easter this year.
The lost revenue days will be added to the
end of the school year and therefore will be
recognised in our results in 2005/06.
Our three North American businesses
continue to generate excellent returns with
EBITDA of £108.1m or $199.9m (2004:
£107.1m or $183.7m) and remain self-
financing for maintenance capital expenditure,
organic growth and in-fill acquisitions.
First Student
I am pleased with the performance of this
business during the year. During the period
we retained over 90% of our current
business that came up for renewal. US Dollar
turnover increased by 9.4%. Operating profit
was impacted by the reduced number of
trading days this period, as outlined above,
which will be added to 2005/06. In addition
we also experienced an increase in state
employer’s payroll taxes in the states in
which we operate. We now operate over
20,000 yellow school buses in the US and
Canada. The increase in the period is largely
due to the acquisition of Cardinal Coach
Lines, made in the last quarter of the year,
which operates some 1,900 school buses in
the provinces of Alberta, British Columbia,
Ontario and the North West Territories of
Canada and Los Angeles, California. We
continued to make good progress
throughout the year gaining contracts to
operate approximately 700 buses gained
through new business wins, in-fill
acquisitions and organic growth within
existing contracts.
Looking forward we are confident that we
will be able to continue to grow through a
combination of organic growth, share shift,
conversions and acquisitions at our target
margins.
First Transit
US Dollar turnover increased by 15.2% and
operating profit by 3.7%. We won new
contracts to operate and manage transit
systems in Virginia, Massachusetts, Ohio,
New Hampshire, Idaho, Georgia, California,
Pennsylvania, New Jersey, Texas, Arkansas,
South Carolina and North Carolina. During
the year we were very pleased to retain the
contract to operate the largest paratransit
call centre in New York and to win two
WE CONTINUE TO EXPAND OUR NORTH AMERICAN SCHOOL
BUS OPERATION. WE NOW OPERATE OVER 20,000 YELLOW
SCHOOL BUSES, CARRYING NEARLY 2 MILLION STUDENTS
ACROSS THE USA AND CANADA EVERY DAY.
>20,000
NORTH AMERICA TURNOVER ($m)
Student $674.4m
Transit $380.7m
Services $175.1m
07 CHIEF EXECUTIVE’S REVIEW CONTINUED
further contracts for call centres in Portland,
Oregon. In November we acquired a small
business in New York providing paratransit
services in the Greater Buffalo area. We have
significantly developed our shuttle business,
providing buses at airports, universities and
for corporate organisations. We are now one
of the largest operators of airport shuttle
services in the US, providing bus services at
airports in cities such as Cincinnati, Miami,
Houston and Philadelphia. During the year
we were pleased to win further shuttle
service contracts to serve Baltimore Airport
and for the University of Texas.
First Transit’s strategy is to focus on the
higher margin, faster growing call centre,
paratransit, logistics consultancy and
public/private shuttle bus markets where
we can utilise our management expertise
and continue to profitably expand these
businesses.
First Services
This has been a very successful year for our
Services division, which provides a range of
outsourced vehicle maintenance, operations
and support services to the public and
private sectors. US Dollar turnover increased
by 67.6% and operating profit by 96.1%
reflecting eight months trading contribution
from our support services business acquired
in August, together with strong growth in
First Vehicle Services.
We were very pleased to retain all of our
contracts that came up for renewal during
the period. In addition, we won new
business to provide vehicle maintenance
services to customers including the State of
Virginia, City of Pittsburgh and McGuire Air
Force Base in New Jersey.
We were particularly pleased that two of our
vehicle maintenance contracts received
recognition, from leading industry
publications, in the categories of ‘Best
Fleets’ and ‘Top Fleet Managers’ in the US.
In August we acquired SKE Support
Services Inc., now First Support Services,
which has annualised turnover of $88m and
provides a range of services including vehicle
fleet maintenance, logistics support and
facilities management to the US Federal
Government and the private sector.
In December, First Support Services,
with their partners The Day and Zimmerman
Group Inc. and Parsons Corporation, won
the substantial contract to provide a range
of land-based support services to the
US Navy.
We are delighted with the performance of
this strategic acquisition which has
integrated well and provides us with entry
to the growing US Federal market, one of
North America’s largest procurers of
support services.
Investment
Our North American business is self-funding
for maintenance capital expenditure and
growth through contract wins and in-fill
acquisitions. Each new investment, including
new contract bids, must meet our internal rate
of return targets. All of the acquisitions made
by this division have delivered excellent returns
reinforcing our rigorous criteria for investment.
Outlook North America
We are extremely pleased with the
performance of our North American division
which continues to deliver excellent returns
for shareholders. We are confident that
further growth will be achieved through our
proven strategy of combining organic growth
with well matched acquisitions.
UK BUS
The Group is the largest bus operator in the
UK with a fleet of 9,300 buses, and a market
share of approximately 23%. We carry some
2.8 million passengers every day.
Results
Turnover increased to £960.7m (2004:
£906.2m) and operating profit before lease
OUR NORTH AMERICAN SERVICES DIVISION HAD A VERY
SUCCESSFUL YEAR, ALMOST DOUBLING IN SIZE AND
EARNINGS. THE STRATEGIC ACQUISITION OF SKE GAVE
US ENTRY TO THE GROWING US FEDERAL MARKET, ONE
OF THE LARGEST PROCURERS OF SUPPORT SERVICES
IN NORTH AMERICA.
08 financing costs was £107.1m (2004:
£111.2m). Operating profit was impacted
by £5.0m as a result of a strike in South
Yorkshire that was settled in the summer. We
continue to focus on service quality with the
aim of improving vehicle reliability and
minimising lost mileage. During the year we
have made significant investment in our
maintenance and engineering functions. We
expect to see the full benefit of this increased
investment over the next few years and are
encouraged to see that during the period
lost mileage was significantly reduced. While
margins remain under pressure in UK Bus
our focus is to achieve sustainable growth in
profits through high-quality customer service
and increased patronage.
Contracted bus services
We have continued to see good growth in our
London bus operations. Growth in the
London tendered bus market is moderating
following the successful implementation of the
congestion charge in 2003 and the substantial
increase in buses introduced to meet the
additional service requirements. We are well
placed with enlarged depot facilities at
Willesden Junction that will enhance our
competitive advantage if the congestion
charge is extended to West London. Similarly
we are developing a facility in Dagenham that
will provide increased capacity and position us
well for the significant demographic growth
anticipated in the Thames Gateway area.
In addition to developing our commercial
services we have grown our contracted bus
and coach operations. Private Hire and
Contract business is now organised on a
national basis and a dedicated sales and
delivery team is in place. During the period
contracts were secured with customers
including Network Rail, Virgin Trains, National
Express Coaches and Manchester Metrolink.
We operated contract services in connection
with special events such as the Glastonbury
Festival, York Railfest and Royal Ascot.
Urban areas
In urban operations outside London, which
represent almost 60% of UK Bus turnover,
we continue to see growth in those areas
where we are able to work with Local
Authorities to provide traffic management
measures to improve congestion. Passenger
growth continues to be driven by a mixture
of marketing initiatives and partnerships with
Local Authorities to develop bus priority
schemes. Our policy is to target capital
investment to those areas where there is
a clear commitment to support the use of
public transport.
Passenger growth was strong in areas such
as Bristol and York where we have Quality
Partnerships in place. The Overground, our
successful simplified route and fares
structure, continues to provide growth in
areas such as Leicester and Leeds where
passenger growth has increased by up to
60% on individual routes since introduction.
In York, where we have seen passenger
growth of up to 40% on individual routes,
we now operate five Park and Ride schemes.
During the year we carried over 3 million
passengers in our Park and Ride operations
across the city.
In March we launched our premium urban
travel concept known as ftr. The Secretary
of State for Transport joined over 175 key
stakeholders, including Local Authorities, to
launch the ‘Streetcar’ vehicle which will be
used to deliver the ftr package. We
developed Streetcar in partnership with the
Wright Group and Volvo after consulting
extensively with customers, engineers and
drivers. It is designed to offer an economical
alternative to light rail services, giving
passengers an exceptionally high-quality,
light rail-like, product with dedicated road
space in congested areas, but with the route
flexibility of a bus. The advantage of ftr is
that it can be introduced quickly, without
major upheaval on roads and at a fraction of
the cost of a light rail scheme. The first ftr
service will begin in York later this year and
detailed plans are being developed for other
IN JULY WE OPENED OUR FIFTH PARK
AND RIDE SITE IN YORK WHICH IS ALREADY
OPERATING OVER 15,000 JOURNEYS PER
WEEK. DURING THE YEAR MORE THAN
3 MILLION PASSENGERS USED OUR PARK
AND RIDE SERVICES ACROSS YORK.
09
P +
Park and Ride
09 CHIEF EXECUTIVE’S REVIEW CONTINUED
WE HAVE LAUNCHED A NEW CONCEPT IN PUBLIC TRANSPORT.
f t r LOOKS LIKE A TRAM, USES DEDICATED ROAD SPACE
IN CONGESTED AREAS, BUT HAS THE ROUTE FLEXIBILITY OF
A BUS. OUR AIM IS TO TAKE 10% OF CAR JOURNEYS OFF THE
ROADS, ON THE CORRIDORS THAT f t r SERVES, WITHIN FIVE
TO SIX YEARS.
schemes in cities such as Leeds, Sheffield,
Swansea, Reading, Bath and Glasgow.
We continue to develop new initiatives to
promote our services to a wide range of
customers. During the year we successfully
piloted a high-frequency, low fare shuttle
service using mid-life vehicles to link lower-
income inner city suburbs with the city centre
in Leicester. This proved extremely
successful with encouraging passenger and
revenue growth and we plan to extend this
trial to other targeted areas during 2005.
Rural operations
In our rural operations, which represent
approximately 20% of our UK Bus business,
we are developing projects that will meet the
Government’s joint objectives of social
inclusion and reducing traffic congestion.
Kickstart funding, which provides support for
services which have the potential to become
commercially viable, is already active in
Scotland and has recently been introduced
in England and Wales with further schemes
expected later in the year.
We continually look for innovative ways in
which we can better serve the rural
communities in which we operate. Our dial-
a-ride service operating in Carmarthenshire
recently won the ‘Community Transport
Award’ at the Welsh Transport Awards. In
the South West we have worked with
Plymouth and Cornwall councils to provide a
new fleet of specially branded buses for
operation on the ferry bus corridor between
South East Cornwall and Plymouth, a key
travel to work corridor.
Yellow school bus
During the year we were pleased to
commence operation of two further yellow
school bus operations in Northampton and
Carmarthenshire. This initiative continues to
attract interest and it is our view that, with
support from Government and Local
Authorities, there is significant potential to
develop this business.
Investment
We have continued to focus our capital
expenditure in urban areas with high
passenger growth such as Glasgow,
Portsmouth, Halifax and Huddersfield. During
the year £66.2m was spent on new, low-floor,
easy access vehicles and £11.7m has been
spent on facilities, including a new depot in
Chelmsford. New buses have also been
ordered for Aberdeen, Bath, Edinburgh,
Leicester, Manchester, Northampton and
Swansea and will be delivered later this year.
Costs
This was a year of significant investment in
our engineering function with the continued
roll out of standardised maintenance
procedures across all companies and
depots, new approaches to the timing of
inspection and repair, together with greater
emphasis on staff training. We expect these
reforms to reduce unit costs over the
medium term.
Lost mileage, our principal measure of
service quality, improved during the year
and we have targeted further reductions for
2005/06. Towards the end of last year the
Traffic Commissioners and Department for
Transport published new standards for bus
service punctuality, and Local Authorities in
England were given new duties to take
account of bus services under the Traffic
Management Act. We are currently
developing Punctuality Improvement
Partnerships with local highway authorities
to progress these changes which we
believe will give further impetus to bus
priority measures.
Outlook UK Bus
We welcome the Government’s
announcement that free concessionary travel
for pensioners and disabled people will be
introduced in England from April 2006. We
will be reviewing our networks in advance of
the introduction to enable concessionary fare
passengers to benefit from the new travel
opportunities that will be created.
10 FirstGroup
Poland
Czech
Republic
WE WERE THE FIRST IN OUR INDUSTRY TO SOURCE BUS
DRIVERS AND ENGINEERS FROM ALTERNATIVE LABOUR
MARKETS, IN PARTICULAR EASTERN EUROPE. SO FAR WE
HAVE RECRUITED SOME 350 STAFF FROM POLAND, THE
CZECH REPUBLIC, PORTUGAL, MALTA AND SLOVAKIA TO
ADDRESS THE IMPORTANT ISSUE OF RECRUITMENT AND
RETENTION IN OUR INDUSTRY.
Our UK Bus business continues to generate
strong cash flows. Overall revenue growth
has been strong and we expect this to
continue in the current year. Our focus
remains on increasing passenger volumes,
continuing to develop the business in other
areas such as contracted bus services, while
maintaining a rigorous cost control and
process improvement programme.
EMPLOYEES
We further strengthened the Executive
Management Team with the appointments of
Nicola Shaw, formerly Managing Director of
Operations at the Strategic Rail Authority and
Andrew Haines, formerly Managing Director
of South West Trains. Nicola, who joins as
Business Change Director, will focus on the
Group’s bus operations. Andrew will become
Managing Director of the Rail Division. Both
are highly respected within the industry and I
am confident that they will make a significant
contribution to the Group.
I would like to thank all our staff for their
continued commitment to the Group. Our
aim is to offer our staff opportunities to
develop and grow to reach their full potential.
We continually engage with our staff to better
understand their views and concerns
through a range of informal meetings
at depot level to a more formal staff
satisfaction survey.
The recruitment and retention of high-quality
staff is a key issue within our industry. We
continue to implement a range of initiatives
within our operating companies to address
this important issue. In our UK Bus division
we were the first in the industry to source
drivers and engineers from alternative labour
markets primarily in Eastern Europe. We
have recruited some 350 staff from Poland,
the Czech Republic, Portugal, Malta and
Slovakia. We are pleased that employee
turnover in our North American division has
reduced again this year.
We continue to encourage our staff to further
their development and careers within the
Group. During the year we extended our
National Vocational Qualification (NVQ) and
BTEC programmes in the UK. Some 16% of
bus drivers are now qualified to NVQ level 2
in Road Passenger Transport and within the
last year 60 supervisors and managers
gained qualifications in Team Leadership. We
are actively developing workplace learning
centres, in partnership with the Transport
and General Workers Union, and now have
32 learning centres reaching 30% of
employees in the UK. We have plans to
significantly increase the coverage over
the next two years so that more of our
UK employees can gain access to
workplace learning.
In the US, both First Transit and First Vehicle
Services participate in the Automotive
Service Excellence (ASE) programme for
training and testing technicians. Within First
Transit 35% of eligible employees hold ASE
certificates and within First Vehicle Services
the figure is 70%. First Vehicle Services
continues to support staff development
through non-vocational training and
encourages employees in self-development
activities. At First Student we have
introduced the ‘Smith System of Defensive
Driving’ to enable school bus drivers
to perform their duties safely in all
traffic conditions.
In FirstGroup America we continue to
develop our management training
programmes. First Student implemented two
new programmes this year. The first is
designed to update managers on
communication techniques, interviewing and
recruitment, financial reporting and customer
service skills. The second programme has
been designed for new Contract Managers
and covers First Student’s approach to
safety, operations management and human
resources such as the importance of
diversity in the workplace.
First Transit continues to train frontline
supervisors in an intensive four-day training
course through ‘First Transit University’ which
11 CHIEF EXECUTIVE’S REVIEW CONTINUED
teaches new and existing managers the
Company’s approach to safety, operations
management, client relations and human
resources. First Transit has also formed a
General Managers Advisory Group with
representatives from eight contract locations.
The Advisory Group provides a focus group
to discuss specific issues for feedback to
the Board.
ENVIRONMENT AND
COMMUNITY
Our environmental management framework
is now well established and all our
companies and depots are audited against
the requirements of the Group Environmental
Management System. During the year we
established the Group Environment Forum to
set the minimum performance standards for
each operating company and identify key
objectives and targets for improvement.
As a result of local depot initiatives and
incentives for staff, energy usage in our
depots continued to reduce during the year.
For example, water usage fell by a further
4.4% and energy consumption by 6% in our
UK Bus division alone. Our bus operating
companies reduced the overall general
waste arising by a further 5%. As part of our
ongoing awareness campaign an additional
7,027 staff have received environmental
training over the past 12 months.
During the year we continued to support
Future Forests, a ‘carbon neutral’ tree
planting initiative to offset CO 2
emissions.
Through our support 1,500 trees have
been planted in Devon. In connection with
Future Forests we also supported an
awareness campaign for primary school
children in the South West to promote
the environmental benefits associated with
public transport.
We are pleased to feature in the FTSE4Good
Environmental Index as well as in the
Business in the Community Corporate Social
Responsibility Index, covering the broader
corporate social responsibility issues. In
recognition of our commitment to improving
the environment we were delighted to
receive the National Green Apple Award
for the fourth consecutive year as well as
environmental awards from Network Rail,
the Bus Industry Awards and the Railway
Industry Innovation Awards.
During the year the Group and its staff in
the UK and North America have continued
to support a number of local and national
charities. All of our operating companies
support local events either through donations,
sponsorship or use of resources and facilities
made available to them by the Group. Further
details of all these activities can be found in
our Corporate Responsibility Report which is
published separately and is available on our
website www.firstgroup.com.
GROUP OUTLOOK
I look forward to continued growth in our
three North American businesses all of which
have highly dependable revenue streams of
which approximately 80% are covered by
medium-term contracts. In UK Rail we are
well positioned to benefit from rail
refranchising having been shortlisted for four
new rail franchises, worth up to £1.1 billion
of turnover, in the current round. In UK Bus
we are seeing further growth in areas where
we can work with Local Authorities to
implement bus priority and other traffic
management measures and we continue
to focus on cost control and process
improvements. Our strategy remains to use
the Group’s strong free cash flows to invest
in the business and explore opportunities for
growth in new markets, increase dividends
and buy back shares, while maintaining a
strong balance sheet. I am confident about
our future prospects. Trading in the new
financial year has started well and is in line
with our expectations.
Moir Lockhead
Chief Executive
-6.0%
OUR ENVIRONMENTAL MANAGEMENT FRAMEWORK IS NOW
WELL ESTABLISHED AND WE ARE ENCOURAGED BY THE
CONTINUED REDUCTION IN ENERGY USAGE IN OUR DEPOTS.
IN THE BUS DIVISION ALONE, ENERGY CONSUMPTION
FELL BY A FURTHER 6% THIS YEAR AS A RESULT OF LOCAL
DEPOT INITIATIVES AND INCENTIVES FOR STAFF.
12 FINANCIAL REVIEW
13
OVERVIEW
The Group has a portfolio of businesses in
the UK and North America which generate
strong and predictable revenue streams with
48% of turnover arising from contracts with
government and statutory bodies in the UK
and North America. The Group’s strong free
cash flows are used to increase shareholder
value by investing for growth, increasing
dividends and repurchasing shares.
The results for the year to 31 March 2005
have to be taken in the context of the
changes in rail franchises. First Great Eastern
and Anglia were exited at the start of the
year and First Great Western Link
commenced on 1 April 2004. Subsequently
we lost the First North West Trains franchise.
However the award of the First ScotRail
franchise together with a very strong
performance by First TransPennine Express
resulted in UK Rail exceeding last year’s
operating profit by £17.9m.
The overall results represent a 5.0%
improvement in profit before tax with
operating profit and adjusted basic earnings
per share (EPS) up by 3.7% and 3.3%
respectively despite a 9.5% drop in the
average US$ exchange rate compared to
2003/04. The final dividend has been set at
8.69 pence per share which together with
the interim dividend of 4.125 pence gives a
full year dividend of 12.815 pence, an
increase of 10% on 2003/04. We are
confident that this level of dividend growth
can be sustained in the medium term.
Dividend cover, pre-goodwill amortisation
and exceptional items, was 2.2 times. In
addition during 2004/05 we have invested
over £170m in capital expenditure and
acquisitions and have returned £29.7m to
shareholders through share repurchases.
Over the last five years the Group has
returned £115m to shareholders by way
of share buy-backs.
The Group has a strong balance sheet
backed by a secure long-term financial
structure with an average debt duration of
9.0 years at 31 March 2005. The financial
structure was further enhanced in March
2005 with the signing of a new committed
£520m five-year bank facility which
significantly improved pricing and terms
and increased the duration of the Group’s
medium term committed borrowing facilities.
RESULTS
Turnover was £2,693.4m (2004: £2,479.0m),
an increase of 8.6%. Operating profit was
£211.6m (2004: £204.1m), an increase of
3.7% and profit before tax was up 5.0%.
The results for the year reflect a particularly
strong performance from the Rail division
where the performances of all our new
franchises have exceeded expectations.
There were lower profits in UK Bus due to a
strike in South Yorkshire and North American
profits were down due to a lower number of
operating days during the year, increased
costs of unemployment taxes and adverse
foreign exchange movements year on year.
UK Bus turnover was £960.7m (2004:
£906.2m), an increase of 6.0%. Operating
profit was £107.1m (2004: £111.2m), a
reduction of 3.7%. In our London division we
successfully increased activity by starting
contracts to operate 91 additional buses and
revenues have increased by 13% when
compared to last year. UK Bus results were
hit by a strike in South Yorkshire that had a
profit impact of approximately £5m. The year
also saw a £7m investment in engineering
that has already led to improved reliability
and lower lost mileage. This investment is
supported by the arrival of over 300 new
buses during the first quarter of 2005/06.
Consequently we anticipate another strong
year of revenue growth.
UK Rail turnover was £1,059.7m (2004:
£945.0m), an increase of 12.1%. Operating
profit was £67.7m (2004: £49.8m), an
increase of 35.9%. Inclusion of the operating
results for a full year of First TransPennine
Express and First Great Western Link
franchises and the commencement of the
First ScotRail franchise more than made up
for the loss of the First Great Eastern and
First North Western franchises. The first full
year of First TransPennine Express saw an
11.5% increase in passenger revenue.
Similarly First ScotRail has started well with
strong revenue growth.
North American turnover was £665.8m
(2004: £620.7m). At constant exchange
rates, this represents an increase of 17.0%.
Operating profit was £61.2m (2004:
£63.5m). In US Dollar terms this represents
an increase of 3.7%. During the year, both
First Transit and First Services delivered
improved profits. First Services operating
profit increased year on year by 96.1% and
included the successful acquisition of SKE,
gaining entry to the important Federal market.
First Student earnings were adversely
affected by £2.8m due to a lower number
of operating days in the year compared to
2003/04 which is expected to be recovered
in 2005/06. In addition First Student results
Year to 31 March 2005 Year to 31 March 2004
Operating Operating Operating Operating
Turnover profit
1
margin
1
Turnover profit
1
margin
1
Divisional results £m £m % £m £m %
UK Bus 960.7 107.1 11.1 906.2 111.2 12.3
UK Rail 1,059.7 67.7 6.4 945.0 49.8 5.3
North America 665.8 61.2 9.2 620.7 63.5 10.2
Financing elements of leases
2
– (9.0) – – (8.3) –
Other
3
7.2 (15.4) – 7.1 (12.1) –
Total Group 2,693.4 211.6 7.9 2,479.0 204.1 8.2
1
Before goodwill amortisation, bid costs, other exceptional items and profit on disposal of fixed assets.
2
Financing element of UK PCV operating lease costs.
3
Tram operations, central management, Group information technology and other items.
Throughout the financial review, operating profit, operating margin and EBITDA are defined as being before goodwill
amortisation, bid costs and other exceptional items. FINANCIAL REVIEW CONTINUED
14
were impacted by £3.6m due to higher costs
for State Unemployment Taxes in many of
the States in which it operates. This reflects
changes in the way that the rules are
applied. The Cardinal acquisition sees the
number of yellow school buses operated rise
to 20,200 and this coupled with the reversal
of the 2004/05 operating days issue means
that prospects for 2005/06 remain excellent.
Central costs were higher than last year due
to a number of non-recurring initiatives
including an upgrade of information
technology systems, the International
Financial Reporting Standards convergence
project and development of new human
resources policies and procedures.
PROPERTY
Property gains on disposal of £3.3m (2004:
£19.6m) were realised during the year as
part of the Group’s ongoing programme of
disposing of older UK Bus depots in high
value city centre locations and reinvesting
in out of town brownfield sites with more
modern and efficient facilities.
GOODWILL
The goodwill amortisation charge was
£25.8m (2004: £25.9m) with favourable
foreign exchange movements of £0.8m
offsetting £0.7m of incremental goodwill on
acquisitions made either during 2004/05 or
the preceding financial year.
BID COSTS AND OTHER
EXCEPTIONAL ITEMS
Bid costs of £11.9m (2004: £6.7m) were
incurred during the year and comprised
principally rail refranchising costs for the
ScotRail, Integrated Kent, East Coast and
Greater Western franchises. There were no
other costs categorised as exceptional
during the year (2004: £6.8m).
INTEREST PAYABLE AND
SIMILAR CHARGES
The net interest charge was £48.3m (2004:
£42.8m) with the increase of £5.5m
principally due to a higher average level of
net debt and an increase in the notional
interest charge on long-term insurance
provisions. The net interest charge is covered
6.6 times (2004: 7.2 times) by earnings
before interest, taxation, depreciation and
amortisation (EBITDA).
There was no exceptional interest charge
during 2004/05 whereas in 2003/04 there
was an exceptional charge of £18.7m in
relation to the cancellation of certain interest
rate swaps.
TAXATION
The taxation charge on profit before goodwill
amortisation, bid costs and other exceptional
items was £44.4m (2004: £48.4m)
representing an effective rate of 27.2%
(2004: 30.0%). The reduction in the effective
rate reflects favourable settlements achieved
during the year and it is anticipated that
these benefits will extend into 2005/06.
Tax relief on US goodwill, bid costs and other
exceptional items reduced the tax charge to
£32.7m (2004: £30.6m). No tax has been
provided on property gains as it is not
envisaged that tax will become payable on
these gains.
The actual cash cost of taxation to the
Group was £19.0m (2004: £21.3m) which
is 15% (2004: 17%) of profit before tax. The
group pays a minimal amount of tax on its
profits in the US. At 31 March 2005, in
excess of $200m of accumulated tax losses
were carried forward to be used against
future profits in the US. We therefore believe
that the level of the cash tax in the US will
remain at a minimal level for the medium
term. A full reconciliation of the cash tax rate
to the UK standard rate of corporation tax is
set out in note 8 to the financial statements.
DIVIDENDS
The final dividend of 8.69 pence per ordinary
share together with the interim dividend of
4.125 pence per ordinary share, gives a full
year dividend of 12.815 pence, an increase
of 10.0%. The final dividend will be paid on
26 August 2005 to shareholders on the
register of members at the close of business
on 22 July 2005.
EPS
Adjusted basic EPS, before goodwill
amortisation, bid costs, other exceptional
items and profit on disposal of fixed assets,
was 28.2 pence (2004: 27.3 pence), an
increase of 3.3%. Basic EPS was 22.5
pence (2004: 22.3 pence). 15
CASH FLOW
The Group’s businesses continue to
generate strong operating profits which are
converted into cash. EBITDA for the year
was £319.2m (2004: £307.1m) up 3.9%.
EBITDA from North American operations
was up 8.8% in US Dollar terms. EBITDA
by division is set out above.
During the period there was a working
capital outflow of £62.0m of which the
largest element was the working capital
outflow on the loss of the First Great Eastern
and First North Western franchises.
Offsetting this was an inflow of a similar
magnitude on the commencement of the
First Great Western Link and First ScotRail
franchises. In addition there was a working
capital outflow of £17m in relation to cash
settlements with the SRA and a £12m
outflow from the reversal of the First
TransPennine position from last year. Pension
payments of £12m were made during the
year over and above the profit and loss
charge and growth in both the UK and North
America accounted for £17m of the working
capital outflow.
CAPITAL EXPENDITURE AND
ACQUISITIONS
Capital expenditure, as set out in note 12 to
the financial statements, was £135.3m
(2004: £164.7m). Capital expenditure was
predominantly in North American operations
of £36.7m, UK Bus operations of £70.4m,
UK Rail £14.1m and UK properties £11.7m.
All the acquisitions made in 2004/05 were in
North America. The principal acquisitions
during the year were SKE Support Services,
Inc which gained the Group entry into the
rating, which must not be less than ‘A’ rated.
The Group does not enter into speculative
financial transactions and uses financial
instruments for certain risk management
purposes only.
Interest rate risk
With regard to net interest rate risk, the
Group reduces exposure by using a
combination of fixed rate debt and interest
rate derivatives to achieve an overall hedged
position over the medium term of between
75% to 100%.
Commodity price risk
In the year, the UK was insulated from the
rise in crude oil prices due to a fully hedged
position. North America also benefited from
having 80% of its requirements hedged
against crude oil price risk. Looking ahead,
we now have over 80% coverage of our UK
requirements for 2005/06 (total annual usage
2.5m barrels) at an average rate of $36 per
barrel (2004/05: average of $25 per barrel).
In North America (total annual usage 0.7m
barrels) for 2005/06 we have 64% coverage
on crude oil price risk at an average price
of $27 per barrel (2004/05: average of
$27 per barrel).
We anticipate that the impact of rising fuel
prices will be partly mitigated by future
pricing/yield activities.
Foreign currency risk
Group policies on currency risk affecting
cash flow and profits are maintained to
minimise exposures to the Group by using
a combination of hedge positions and
derivative instruments where appropriate.
With regard to balance sheet translation risk,
Year to 31 March 2005 Year to 31 March 2004
Turnover EBTIDA EBTIDA Turnover EBTIDA EBTIDA
EBITDA by division £m £m % £m £m %
UK Bus 960.7 160.5 16.7 906.2 163.4 18.0
UK Rail 1,059.7 72.6 6.9 945.0 55.2 5.8
North America 665.8 108.1 16.2 620.7 107.1 17.3
Financing element of leases – (9.0) – – (8.3) –
Other 7.2 (13.0) – 7.1 (10.3) –
Total Group 2,693.4 319.2 11.9 2,479.0 307.1 12.4
Federal market, and Cardinal Coach Lines
Limited which operates 1,900 yellow school
buses. In addition three smaller yellow school
bus businesses and one Call Centre were
acquired. The total consideration for all
acquisitions made during the year was
£37.2m and provisional goodwill arising
on all acquisitions amounted to £25.8m.
FUNDING AND RISK
MANAGEMENT
In February 2005 the Group’s BBB
stable rating was reconfirmed by Standard
and Poors.
At the year end, total bank borrowing
facilities amounted to £595.9m of which
£526.6m is committed. Of these £526.6m
committed facilities, £213.6m were utilised at
31 March 2005, of which £180.2m was
drawn in cash and the balance of £33.4m
drawn in letters of credit.
The maturity profile of committed banking
facilities is regularly reviewed and well in
advance of their expiry such facilities are
extended or replaced. In March 2005 the
Group entered into a new five-year £520m
bank facility provided by a strong bank group.
At 31 March 2005 the Group’s debt maturity
profile was 9.0 years (2004: 9.7 years).
As the Group is a net borrower, it minimises
cash and bank deposits, which arise
principally in the Rail companies. The Group
can only withdraw cash and bank deposits
from the Rail companies on a permanent
basis to the extent of retained profits. The
Group limits deposits to short terms, and
with any one bank to the maximum of £30m,
depending upon the individual bank’s credit FINANCIAL REVIEW CONTINUED
16
the Group hedges part of its exposure to the
impact of exchange rate movements on
translation of foreign currency net assets by
holding currency swaps and net borrowings
in foreign currencies. At 31 March 2005
foreign currency net assets were hedged
35% (2004: 34%).
NET DEBT
The Group’s net debt at 31 March 2005 was
£663.1m and was comprised as above.
BALANCE SHEET AND
NET ASSETS
Net assets increased by £3.2m over the year
principally reflecting retained earnings for the
year of £39.1m, net movement in minority
interest (net of dividends paid to minority
shareholders) for the year of £8.5m. These
positive movements were partly offset by
unfavourable foreign exchange movements
of £14.2m and share repurchases of
£29.7m.
SHARES IN ISSUE
During the year 9.4m shares were
repurchased for a total consideration of
£29.7m (see notes 22 and 23). Of these
4.2m shares were cancelled during the year
whereas 5.2m shares were held as Treasury
Shares at year end. As at 31 March 2005
there were 393.6m (2004: 403.0m) shares
in issue excluding Treasury Shares. The
weighted average number of shares in
issue for the purpose of EPS calculations
(excluding own shares held in trust for
employees and Treasury Shares) was
399.2m (2004: 410.0m).
FOREIGN EXCHANGE
The results of the North American businesses
have been translated at an average rate of
£1:$1.85 (2004: £1:$1.69). The period end
rate was £1:$1.87 (2004: £1:$1.81).
PENSIONS
Pensions and post retirement costs have
continued to be accounted for on a SSAP
24 basis. The total charge to the profit and
loss account was £47.0m (2004: £34.2m).
The Group has continued to apply the
transitional rules and disclosures under
FRS 17. At 31 March 2005, after taking
account of deferred taxation, the FRS 17 net
deficit in the Group pension funds, excluding
Rail franchises, was approximately £139m
(2004: £162m). In addition it should be noted
that a post-tax deficit of £43m (2004: £28m)
relates to Rail franchises where the Group
has an obligation to fund the pension
scheme during the franchise period but
does not have any liability beyond the end
of the franchise.
INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRS)
The Group is well advanced in the
conversion to IFRS and will report under
IFRS for the first time in the Interim results
for financial year 2005/06. The principal
differences in accounting treatment under
IFRS are considered to be pensions,
goodwill, intangible assets, dividends,
taxation, financial instruments and share-
based payments. Although the impact will
vary by division, we do not anticipate a
material impact on Group operating profit.
ACCOUNTING POLICIES
The Group has adopted UITF 38
‘Accounting for ESOP Trusts’. Investments in
own shares are now deducted from
shareholders’ funds whereas previously such
investments were treated as fixed assets.
Further details are set out in note 1 to the
financial statements.
Dean Finch
Finance Director
Fixed Variable Total
Analysis of net debt £m £m £m
Cash – 83.8 83.8
Rail ring-fenced cash and deposits – 70.3 70.3
Sterling bond (2013 6.875%) (296.0) – (296.0)
Bond (2019 6.125%)* (231.9) – (231.9)
Sterling bank loans and overdrafts – (227.1) (227.1)
US Dollar bank and other loans and overdrafts (0.9) (1.1) (2.0)
Canadian Dollar bank and other loans and overdrafts (6.9) (8.2) (15.1)
HP and finance leases (13.7) (10.4) (24.1)
Loan notes (8.7) (12.3) (21.0)
Interest rate swaps, net (57.0) 57.0 –
Total (615.1) (48.0) (663.1)
*The 2019 bond was swapped to US Dollars, and is shown net of arrangement costs and foreign exchange gains
on retranslation to Sterling at year end. BOARD OF DIRECTORS
17
1. MARTIN GILBERT LLD MA LLB CA
Chairman
Chairman of the Nomination Committee
1,3
A Chartered Accountant, he is one of the
founding directors and Chief Executive of
Aberdeen Asset Management PLC. He was
appointed to the Board of FirstGroup plc in
1995. He is Chairman of Chaucer Holdings
PLC and a director of a number of investment
trusts. He is a non-executive director of
Primary Health Properties PLC. Age 49.
2. MOIR LOCKHEAD OBE
Deputy Chairman and Chief Executive;
Chairman of the Safety Committee
3,4,5
Chief Executive and Deputy Chairman since
the Group's formation in 1995. Originally
a mechanical engineer he joined Grampian
Transport in 1985 as General Manager and
went on to lead the successful employee
buy-out of GRT Bus Group PLC. In 1996
he was awarded the OBE for services to
the bus industry and he is a past President
of the Confederation of Passenger Transport.
Age 60.
3. DEAN FINCH BSC MBA ACA
Finance Director
4,5
Appointed to the Board as Commercial
Director in February 2004 and subsequently
appointed Finance Director later that year.
He is also responsible for all of the Group’s
rail activities including re-franchising. He joined
the company in 1999 as Commercial Director
Rail Division and was subsequently appointed
Managing Director of the Rail Division in
August 2001. He qualified as a Chartered
Accountant with KPMG where he worked for
12 years specialising in Corporate Transaction
Support Services including working for the
Office of Passenger Rail Franchising on the
privatisation of train operating companies.
Age 38.
4. DAVID LEEDER BSC FILT
Director UK Bus
4,5
Appointed to the Board in May 2004.
He joined the Group in 2001 as Managing
Director UK Bus. He has held various senior
posts in the transport industry including
Chief Executive of Travel West Midlands and
subsequently Group Marketing Director of
National Express Group plc. He is a Fellow
of the Institute of Logistics and Transport
and a past President of the Confederation
of Passenger Transport. Age 39.
5. DAVID DUNN CA
Senior Independent Non-Executive Director;
Chairman of the Audit Committee
1,2,3
Appointed to the Board as a Non-Executive
Director in December 1999. He is a Chartered
Accountant and is Non-Executive Chairman
of Brammer plc. He is also a Non-Executive
Director of Croda International plc and
SMG plc. Age 60.
6. JAMES FORBES CBE MSC BSC CENG MIEE
Non-Executive Director; Chairman of the
Remuneration Committee
1,2,3
Appointed to the Board in April 2000, he is
the former Chief Executive of Scottish and
Southern Energy plc. His career began with
the South of Scotland Electricity Board and
he has since held various senior posts in the
electricity industry. Age 58.
7. JOHN SIEVWRIGHT MA CA
Non-Executive Director
1,2,3
Appointed to the Board in May 2002. He is
Managing Director and Chief Operating Officer
of Global Markets and Investment Banking for
Merrill Lynch & Co. A Chartered Accountant,
he has held various senior management
positions in banking in London, New York,
Dublin and Japan. He is a member of the
North American Board of the Michael Smurfit
Business School, Dublin. Age 50.
8. MARTYN WILLIAMS
Non-Executive Employee Director
Appointed to the Board as Employee Director
in January 2003. He is employed as a
customer services supervisor in Swansea
and has worked for the Group for 27 years.
Age 50.
B LOUISE RUPPEL LLB
Company Secretary
1
Member of the Audit Committee
2
Member of the Remuneration Committee
3
Member of the Nomination Committee
4
Member of the Safety Committee
5
Member of the Executive Committee
2. 1. 3. 4.
5. 6. 7. 8. CORPORATE GOVERNANCE
18
The Company applies all of the main and supporting principles of good governance set out in section 1 of the Combined Code on Corporate
Governance published by the Financial Reporting Council in July 2003 (the ‘Code’). The way in which it applies those principles is set out
below. Except as described in paragraph 1.1 (b) below, the Company complies with all of the provisions of section 1 of the Code.
1. THE BOARD AND ITS PRINCIPAL COMMITTEES
Details of the Board, its members and its principal committees are set out below.
1.1 The Board
(a) Board structure and responsibilities
The Board currently consists of the Chairman, three Executive Directors and four Non-Executive Directors. The Board meets at least eight
times each year and is responsible for setting and reviewing the Company’s strategy and objectives, reviewing the financial and operational
performance of each of the Group’s business units, agreeing and reviewing progress against the Group’s annual budgets and setting and
reviewing on a regular basis its longer-term business plans. It also has a schedule of matters specifically reserved to it including approval of
the annual and interim financial statements, financing arrangements, material capital commitments, business acquisitions and disposals,
relationships with regulatory authorities and operating and accounting policies.
During the year, the Board met eight times and all members of the Board attended all meetings held whilst they were Directors, with the
exception of John Sievwright who attended seven meetings. The Board also held a number of separate strategy meetings.
(b) Board balance and independence
The independence of the Non-Executive Directors has been reviewed against the definition of independence in the Code. David Dunn, Jim
Forbes and John Sievwright are considered to be independent within this definition. As Martyn Williams is an employee of one of the Group’s
subsidiaries, he cannot be considered to be independent. However, the Board feels very strongly that it is extremely beneficial for its
employees to be represented on the Board in this way so that important employee-related issues can be raised at the highest level and a
two-way communication process between the management of the Company and its employees is maintained.
Therefore at present, the Company does not comply with the Code provision that at least one half of the Board, excluding the Chairman,
is made up of Non-Executive Directors who are considered by the Board to be independent. The Board has engaged Spencer Stuart,
executive search consultants, to assist in the search for a new independent Non-Executive Director. Discussions with a suitable candidate
are at an advanced stage and it is anticipated that the Company will be in a position to make an announcement on the appointment of
a new independent Non-Executive Director prior to the Annual General Meeting to be held on 14 July 2005. The appointment of a further
independent Non-Executive Director will ensure compliance by the Company with the Code. The Directors are confident that notwithstanding
such non-compliance, and as reinforced by the performance evaluation referred to below, the Board and its Committees remain and will
continue to be effective. The Directors are satisfied that the current Board possesses the breadth of business, financial and international
experience necessary to manage effectively an organisation of the size and complexity of the Group.
(c) Roles of the Chairman and Chief Executive
The Chairman
The Chairman of the Board is Martin Gilbert. He has a written statement of responsibilities which has been approved by the Board:
The Chairman is responsible for:
• leadership of the Board, ensuring its effectiveness on all aspects of its role and setting its agenda, taking into account the issues relevant
to the Group and the concerns of all Board members.
• ensuring, with the Chief Executive and Company Secretary, the provision of accurate, timely and clear information to the Board.
• ensuring effective communication with shareholders and that the Board develops an understanding of the views of major investors.
• managing the Board, ensuring that sufficient time is allowed for the discussion of complex or contentious issues.
• ensuring a regular evaluation of the performance of the Board as a whole, its Committees and individual Directors.
• taking the lead in identifying and meeting the development needs of individual Directors and the Board as a whole, with a view to
enhancing the overall effectiveness of the team.
• facilitating the effective contribution of Non-Executive Directors and ensuring constructive relations between Executive and Non-Executive
Directors.
• ensuring, with the Chief Executive and Company Secretary, that new Directors receive a comprehensive induction programme to ensure
their early contribution to the Board.
• encouraging active engagement by all members of the Board.
In accordance with the Company’s Articles of Association, Martin Gilbert is standing for re-election at the Annual General Meeting this year.
The Board is of the opinion, reinforced by the performance evaluation review referred to below, that Martin Gilbert’s significant and in-depth
knowledge and experience of the Group’s business, combined with his external business experience enables him to provide effective
leadership of the Board and to continue to make a positive contribution to the Group’s ongoing business. 19
The Chairman’s other significant business commitments, which remain unchanged from last year, are described in his biography on page 17.
The Board performance evaluation process confirmed that the other Board members are satisfied that Martin Gilbert has the necessary time
available to devote to the proper performance of his duties as Chairman.
The Chief Executive
The Chief Executive is Moir Lockhead. The Chief Executive also has a written statement of responsibilities which has been approved by
the Board:
The Chief Executive is responsible for:
• running the day-to-day business of the Group, within the authorities delegated to him by the Board.
• ensuring implementation across the Group of the policies and strategy set by the Board for the Group.
• day-to-day management of the executive and senior management team.
• leading the development of senior management within the Group with the aim of assisting the training and development of suitable
individuals for future Director roles.
• ensuring that the Chairman is kept appraised in a timely manner of the issues facing the Group and of any important events and
developments.
• leading the development of the Group’s future strategy including identifying and assessing opportunities for the growth of its business and
reviewing the performance of its existing businesses.
(d) Senior Non-Executive Director
David Dunn, who chairs the Audit Committee, is the Senior Independent Non-Executive Director. He is available to shareholders if they have
concerns which contact through the normal channels of Chairman, Chief Executive or Finance Director has failed to resolve or for which such
contact is inappropriate.
(e) Information and professional development of Board members
The Board receives detailed papers on the business to be conducted at each meeting well in advance and individual Board members have
direct access to senior executives should they wish to receive additional information on any of the items for discussion. The head of each
operating division attends Board meetings on a regular basis to ensure that the Board is properly informed about the performance of and
current issues facing that division. Management give presentations on current issues facing the business. A number of Board meetings each
year are held on site at operating locations in the UK and USA allowing the Directors to visit the Group’s operations and to discuss key issues
with local operational management and stakeholders.
All Directors have access to the advice and services of the Company Secretary and, if necessary, can seek independent professional advice
at the Company’s expense in the furtherance of their duties. The Company Secretary is responsible for advising the Board on corporate
governance matters and for ensuring compliance with Board procedures.
Directors receive induction on appointment to the Board, which is tailored to their individual needs. This includes meetings with senior
management and relevant external advisers. In addition, information is provided on their responsibilities and obligations under law, regulation
and best practice guidelines. The induction process is supported during the year by the programme of business presentations and
operational visits described above.
The Board also receives updates, as required, on changes to the law and the regulatory regimes affecting the Group.
(f) Performance evaluation
During the course of the year, the Board undertook an evaluation of its performance. The Chairman led the process, assisted by the
Company Secretary. The objectives of this exercise were to ensure that the Board, its Committees and each individual Director continued
to act effectively and to fulfil the duties and responsibilities expected of them, and also to identify any additional training requirements.
A tailored questionnaire was developed, which each Director completed. The responses were analysed and discussed at a special meeting
of the Nomination Committee. In addition, the Non-Executive Directors held a separate meeting at which the performance of the Executive
Directors was discussed. The Senior Independent Director held a separate meeting with the Non-Executive Directors to discuss the
evaluation of the performance of the Chairman. No significant issues were raised in the course of the evaluation process.
(g) Re-election of Directors
As required by the Company’s Articles of Association, Directors offer themselves for re-election at least once every three years. Any Director
appointed during the year is required to seek re-appointment by shareholders at the next Annual General Meeting. The biographical details
of all the Directors, including those seeking re-election at the 2005 Annual General Meeting, are set out on page 17. The Company’s Articles
of Association do not contain any age limits for Directors.
(h) Appointment of Non-Executive Directors
Non-Executive Directors are appointed by the Board for an initial term of three years, subject to re-appointment by shareholders. They have
letters of appointment, which are available on request for inspection. None of the Non-Executive Directors has yet to serve a term of six years. CORPORATE GOVERNANCE CONTINUED
20
(i) Directors’ and officers’ liability insurance
The Company maintained Directors’ and Officers’ liability insurance cover throughout the year. The cover was renewed on 1 April 2005.
2. COMMITTEES OF THE BOARD
In addition to the Audit, Remuneration and Nomination Committees, the terms of reference for which are published on the Company’s website
and details of which are set out below, the Board has also delegated certain matters to Committees. The principal such Committees are:
2.1 Executive Safety Committee (‘ESC’)
The ESC is chaired by the Chief Executive and meets on a monthly basis. It comprises the Executive Directors, other senior managers and
safety officers. The ESC reviews the Group’s safety performance and practices, develops safety policies and procedures and follows up on
outstanding issues. During the year, a number of meetings were attended by independent safety experts and senior representatives of
relevant industry bodies, including Her Majesty’s Railway Inspectorate.
2.2 Executive Management Board (‘EMB’)
The EMB, which comprises the Executive Directors and certain senior business managers, is chaired by the Chief Executive. It acts as a
general operating management committee and meets on a monthly basis to review outstanding issues and to consider the Group’s
operational and financial performance.
2.3 Executive Committee
The Executive Committee comprises the Executive Directors and meets on an ad hoc basis to consider matters which arise in the ordinary
course of the Group’s operations. It is chaired by the Chief Executive and has specific delegated powers within prescribed limits to deal with
matters arising in the ordinary course which need to be considered before the next scheduled Board meeting.
2.4 Nomination Committee and appointments to the Board
The Nomination Committee is chaired by the Chairman and includes David Dunn, Jim Forbes, John Sievwright and Moir Lockhead. Martyn
Williams attends meetings of the Committee at the invitation of the chairman of the Committee to represent the Group’s employees. The
Committee meets as required to discuss appointments to the Board of both Executive and Non-Executive Directors. Its recommendations
are then put to the full Board for consideration. External search consultants are used to assist the process, where appropriate.
The Employee Director is elected by the Employee Directors’ forum, which comprises the Employee Directors and representatives of each
of the Company’s UK subsidiaries, and generally serves a three-year term.
During the year, the Committee met twice. Items considered by the Committee include the results of the Board performance evaluation
process described above and also potential appointments to the Board. In its deliberations, the Committee is required to have regard to the
skills and experience needed for the future commercial and strategic development of the Group. All members of the Committee attended
each meeting.
Although none of the Executive Directors currently holds any such positions, the Company’s policy is to permit Executive Directors to accept
a limited number of outside non-executive directorships, recognising that this is an effective way to broaden their knowledge and expertise.
However, no such appointment can be taken up without prior Board approval. The Company’s policy on fees relating to such outside
directorships is set out on page 25 of the Directors’ remuneration report.
2.5 Remuneration Committee
The Remuneration Committee, under the chairmanship of Jim Forbes, met four times during the year and, with the exception of John
Sievwright who attended three meetings, all members of the Committee attended all of its meetings. Details of the membership of the
Remuneration Committee are set out in the Directors’ remuneration report on pages 23 to 29, together with a statement of the Group’s
remuneration strategy and policy. Full details of Directors’ remuneration appear on page 26.
2.6 Audit Committee
The Audit Committee is chaired by David Dunn and includes Martin Gilbert, Jim Forbes and John Sievwright. It met four times during the year
and all members attended each of those meetings. The Group Director of Internal Audit and the Company’s external auditors also attended
three of those meetings. Executive Directors and other senior managers attended where requested and as appropriate.
The Board considers that each member of the Committee has sufficient and recent financial experience to enable the Committee to discharge
its functions effectively.
Under its remit, the Committee keeps under review the effectiveness of the Company’s financial reporting and internal control policies and
procedures for the identification, assessment and reporting of risk. It also keeps under review the nature, scope and results of the audits
conducted by the internal audit department and the external auditors, the consistency of accounting policies and reporting across the Group
and it reviews the half-year and full-year financial statements before they are presented to the Board. 21
The Committee considers the Group’s compliance with the Code and its related guidance and oversees the objectivity and effectiveness of
internal audit. The work of the internal audit department is focused on areas of priority as identified by risk analysis and in accordance with
an annual audit plan approved by the Committee and the Board. Reports are sent to senior executives of the Group and subsidiary units and
there is a follow-up process to ensure that actions to resolve identified control weaknesses are implemented. The Group Director of Internal
Audit has the right of direct access to the chairman of the Committee.
The Committee is responsible for making recommendations to the Board in respect of the appointment or re-appointment of the Group’s
external auditors and, subject to the approval of shareholders, recommends to the Board the audit fee to be paid to the external auditors.
The Committee is also charged with monitoring the independence of the external auditors and the objectivity and effectiveness of the external
audit process. The objectivity and independence of the external auditors is considered on a regular basis, with particular regard to the level
of non-audit fees. The majority of non-audit work is put out to tender, with the exception of due diligence work on acquisitions or potential
acquisitions in both the UK and overseas, where the current auditors’ knowledge of the Company’s business processes and controls means
that they are best placed to undertake this work cost-effectively on the Company’s behalf. The majority of the non-audit work undertaken by
the auditors during the year was associated with acquisition-related due diligence and reviews of the financial models for the Company’s rail
franchise bids. Details of the audit and non-audit fees, including a breakdown of the non-audit fee, are set out in note 7 to the financial
statements. The external auditors have direct access to the Committee to raise any matters that may concern them.
The Committee reviews with management a detailed analysis of the Group’s financial information prior to completion and announcement
of the half-year and full-year results and receives a report from the external auditors on the audit process. If necessary, the external auditors
also meet separately with the Audit Committee and/or the Chairman, Chief Executive and Finance Director. The Annual Report and Financial
Statements and interim results go through a detailed verification and due diligence process involving external advisers.
The Committee may request the Executive Directors and any other officers of the Group to attend its meetings but none have the right of
attendance. Committee meetings may be requested by the external or internal auditors if they consider it necessary.
The business considered and discussed by the Committee during the year included the reports of the external auditors on the half-year and
full-year results, the 2005/06 Group Internal Audit Plan and budget, papers concerning any regular and special audits and an executive
summary of each internal audit report, risk analysis assessments and a review of the implications of changes in accounting standards and
the application and implementation of International Financial Reporting Standards.
3. FINANCIAL REPORTING
The Directors have a commitment to best practice in the Group’s external financial reporting in order to present a balanced and
comprehensible assessment of the Group’s financial position and prospects to its shareholders, employees, customers, suppliers and other
third parties. This commitment encompasses all published information including but not limited to the year-end and interim financial
statements, regulatory news announcements and other public information. A statement of the Directors’ responsibility for preparing the
financial statements may be found on page 32.
4. INTERNAL CONTROLS
The Board has established procedures to meet the requirements of the Code and its related guidance on internal controls. These procedures,
which are subject to regular review, provide an ongoing process for identifying, evaluating and managing any significant risks faced by the
Group.
4.1 Responsibility
The Board has overall responsibility for the system of internal control and assessing risk. The responsibility for establishing detailed control
and risk management procedures within each subsidiary lies with the Executive Directors and subsidiary unit managing directors. A sound
system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide
reasonable and not absolute assurance against material misstatement or loss.
4.2 Control environment
The Board is committed to business integrity, high ethical and moral values and professionalism in all its activities, principles with which all
managers and employees are required to comply. The Group has a Code of Ethics, which applies to all of its subsidiary undertakings, a copy
of which is available on the Company’s website.
The Group has a defined divisional organisational structure with lines of authority and delegated responsibility which allows the Board to plan,
execute, control and monitor the business in a manner consistent with the Group’s objectives. The day-to-day business management is
delegated to the Executive Directors and subsidiary unit managing directors under the overall direction of the Chief Executive. As noted
above, the Board reserves to itself a number of specific items, which ensures that it retains control over key business decisions and significant
transactions in terms of size, type or risk. A number of the Group’s key functions, including treasury, taxation, insurance, corporate finance,
legal, corporate communications and procurement are dealt with centrally. Each of these functions is monitored by an Executive Director. CORPORATE GOVERNANCE CONTINUED
22
4.3 Monitoring
The Group adopts a financial reporting and information system which complies with generally accepted accounting practice. The Group
Finance Manual, circulated by the Group Finance function to all subsidiaries, details the Group accounting policies and procedures with
which subsidiaries must comply. These are also available on the Group’s intranet. Budgets are prepared by subsidiary company management
and are subject to review by both Group management and the Executive Directors. Monthly forecasts are completed during the year and
compared against actions required. Each subsidiary unit prepares a monthly report of operating performance, with a commentary on
variances against budget, forecasts and prior year. Similar reports are prepared at a Group level. Key performance indicators, both financial
and operational, are monitored on a weekly basis. In addition, business units participate in strategic reviews which include consideration of
long-term financial projections and the evaluation of business alternatives.
A process of annual self-assessment and hierarchical reporting provides for a documented and auditable trail of accountability from
the subsidiary units to senior management to the Executive Directors. This process includes an internal control questionnaire and risk
assessment and is signed off by the subsidiary unit directors. This process and the supporting documentation are reviewed by both
the internal and external auditors. Detailed action plans are developed from these questionnaires to resolve any control weaknesses
or significant risks identified.
4.4 Risk assessment
The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. As an
integral part of planning and review, management from each business area and major projects identify their risks, the probability of the risks
occurring, the impact on the business should the risks occur and the actions taken to manage the risks. The risks are assessed on a regular
basis and could be associated with a variety of internal and external sources including regulatory requirements, disruption to information
systems, industrial relations issues, control breakdowns and social, ethical and environmental issues.
4.5 Whistleblowing
The Group has established procedures whereby employees of the Group may, in confidence, raise concerns relating to matters of potential
fraud or other improprieties. These procedures also cover other issues affecting employees including health and safety issues. The confidential
hotline, which covers all businesses across the Group and each country in which it operates, was re-launched during the year and the
Committee is confident that these ‘whistleblowing’ arrangements are satisfactory and will enable the proportionate and independent
investigation of such matters and appropriate follow-up action to be taken.
4.6 Review of effectiveness of financial controls
The Directors confirm that they have reviewed the effectiveness of the system of internal control for the year under review and to the date of
approval of the Annual Report and Financial Statements through the monitoring process described above. In addition, the Directors confirm
that they have conducted a specific annual review of the effectiveness of the Group’s internal audit function.
5. RELATIONS WITH SHAREHOLDERS
The Group recognises the importance of regular communication with all of its shareholders. The full Annual Report and Financial Statements
are made available to all shareholders and an Interim Report is published and sent to shareholders at the half-year. These reports are intended
to provide shareholders and other interested parties with a clear and balanced understanding of the Group’s operational performance, its
financial results and prospects.
All investors are kept informed of key business activities, decisions, appointments etc. via regulatory news and press releases and the
Group’s website. There is also regular dialogue with institutional shareholders throughout the year and general presentations are made by the
Chief Executive and Finance Director following the announcement of the full and half-year results. Other Directors, including Non-Executive
Directors, attend meetings with major shareholders if requested.
Regular reports on investor relations activity and feedback from investors are submitted to the Board and senior management.
The Non-Executive Directors have also had informal contact with major shareholders regarding the Group during the year and they
expect that informal dialogue to continue.
6. ANNUAL GENERAL MEETING
All shareholders have the opportunity to put questions to the Directors at the Company’s Annual General Meeting, at which a report is made
on the highlights of the key business developments during the year under review. The Chairmen of each of the Nomination, Remuneration
and Audit Committees attend the Annual General Meeting to answer specific questions from shareholders. All Directors were present at the
2004 Annual General Meeting.
Notice of the Annual General Meeting is circulated to all shareholders at least 20 working days prior to the meeting. Separate resolutions are
proposed at the Annual General Meeting on each substantially separate issue. Proxy votes are counted on all resolutions and, where votes
are taken on a show of hands, the proxy results are subsequently announced to the meeting. DIRECTORS’ REMUNERATION REPORT
23
This report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002 (the ‘Regulations’). It also meets the
requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the main supporting principles
of the Combined Code on Corporate Governance published by the Financial Reporting Council in July 2003 (the ‘Code’) relating to Directors’
remuneration. The Company complies with all of the provisions of the Code. A resolution to approve this report will be proposed at the
Company’s Annual General Meeting to be held on 14 July 2005.
The Regulations require the Company’s auditors to report to the Company’s shareholders on the ‘auditable’ part of the Directors’
remuneration report and to state whether in their opinion that part of the report has been properly prepared in accordance with the
Companies Act 1985 (as amended by the Regulations). This report has therefore been divided into separate sections for audited and
unaudited information.
UNAUDITED INFORMATION
Remuneration Committee
The Remuneration Committee (the ‘Committee’) is chaired by Jim Forbes. The other current members of the Committee are David Dunn and
John Sievwright. The Board considers each of the members of the Committee to be independent in accordance with the Code. None of the
members of the Committee has any personal financial interest (other than as a shareholder) in the matters to be decided, conflict of interest
arising from cross-directorships or any involvement in the day-to-day running of the business.
The remit of the Remuneration Committee was adopted in March 2004 in the light of the recent revisions to the Code and its terms of
reference are available on request and are also published on the Company’s website. These terms of reference will be kept under review to
take into account any changes to the Code and corporate governance practice. The principal purpose of the Committee is to consider
matters related to the remuneration of the Executive Directors and senior management below Board level.
The Committee met four times during the year and all members attended each meeting, with the exception of John Sievwright, who attended
three meetings.
In determining the Executive Directors’ remuneration for the year, the Committee considered publicly available information, including the
remuneration packages of those holding equivalent posts at the Company’s peers within the transport industry and the FTSE350 in general.
The Committee appointed Deloitte & Touche LLP Executive Compensation Consulting to provide advice on remuneration matters to the
Committee including a benchmarking exercise in relation to the Group and its peers and advice on the structure of longer-term incentive
schemes. Deloitte & Touche LLP also acts as the Group’s external auditor. As such, the appointment as remuneration advisors is also subject
to pre-approval by the Audit Committee. Information on other services provided by Deloitte & Touche LLP is given in Note 7 to the financial
statements. All services provided by Deloitte & Touche LLP are carried out in accordance with the requirements of the UK Audit Practices
Board Ethical Standard 5, relating to non-audit services performed by a company’s auditors. The Committee also consults with the Chief
Executive although no Director participates in discussions concerning his own remuneration.
Remuneration policy
Aim
The aim of the Committee is to design remuneration packages for the Company’s Executives which attract, retain and motivate the high-
calibre individuals necessary to maintain the Group’s position as a leader in the public transportation industry. In implementing its policy, the
Committee has given full consideration to the Principles of Good Governance of the Code with regard to Directors’ remuneration.
Structure of remuneration packages
There are currently four main elements to the executive remuneration package:
• basic salary and benefits in kind
• annual cash and deferred share bonus (both paid under the Executive Annual Bonus Plan)
• share options
• pension provision
The Committee considers the remuneration package as a whole, balancing each of the individual elements to ensure that overall, the
remuneration received by each Executive Director is competitive but not excessive, contains an appropriate balance between fixed and
variable (performance-related) remuneration and that each Executive Director has sufficient long-term incentive to ensure that his interests
are aligned with those of shareholders. A high proportion of each Director’s potential remuneration is performance-related.
During the year, the Committee, with the assistance of Deloitte & Touche LLP , undertook a comprehensive review of the total remuneration
packages of the Executive team to ensure that they remain competitive. As a result of this review, and following consultation with the
Company’s major institutional shareholders, the Committee has determined to increase the maximum level of bonus payable under the
Executive Annual Bonus Plan for the year commencing 1 April 2005 from 80% to 110% of basic salary for the Chief Executive and from
80% to 100% of basic salary for the other Executive Directors. Up to half of the award will be payable in shares with the deferral period for
such shares increased from three to five years. These changes will also apply to senior management within the Group.
To take account of shareholder feedback during the consultation exercise, the Committee is currently considering the best means of providing
a longer-term incentive to the Executive team in the future. DIRECTORS’ REMUNERATION REPORT CONTINUED
24
The remuneration of the Executive Directors is made up of the following components:
Basic salary and benefits in kind
The basic salary and benefits in kind for each Executive Director are determined by the Committee for each financial year and when an
individual changes position or responsibility. In determining appropriate levels, the Committee considers the Group as a whole and also the
packages received by similar individuals at the Company’s peers in the public transport sector and the FTSE 350. Details of the salaries and
benefits in kind received by each of the Executive Directors in the year are shown on page 26.
Executive annual bonus plan
The Group operates a discretionary performance-related bonus plan for its senior management under which payment of bonuses is linked to
achievement of budgeted annual Group operating profit targets and personal objectives (including safety targets). Where an Executive Director
is also directly responsible for one or more operating division(s), payment of a proportion of the bonus is also linked to the profitability of those
divisions. The Committee considers and agrees the Group and divisional objectives for all Executive Directors and the personal objectives for
the Chief Executive. The Chief Executive, in consultation with the Committee, agrees the personal objectives for the other Executive Directors.
Bonus payments comprise a mixture of cash and deferred share awards. Share awards for the years to 31 March 2005 were deferred for three
years and will lapse if the relevant individual leaves the Group during the deferral period for any reason other than redundancy, retirement or ill-
health. The Committee considers it is appropriate for a proportion of the annual bonus to be taken in the form of deferred shares as this acts
as a retention mechanism and also aligns that Executive’s longer-term interests with those of the Company’s shareholders.
As the award of any bonus is already dependent on the achievement of stringent targets, the Committee considers that it is not appropriate to
attach further performance conditions on vesting of the deferred share element of any bonus other than that the relevant Executive remains
employed by the Group and has not tendered his resignation at the end of the deferral period.
Each year, the Board sets challenging budget targets for the Group as a whole and for each business unit within the Group. The Committee’s
policy continues to be that bonuses will be payable for Group performance against budget of between 90% and 110% although the level of bonus
payable is heavily skewed towards performance in excess of 100% of budget. As mentioned above, a separate portion of the bonus is dependent
upon achievement of safety objectives (up to 25%) and a further portion is dependent on achievement of personal objectives (up to 25%).
The maximum level of bonus payable to an Executive Director in the year to 31 March 2005 was 80% of basic salary, although actual awards for
the year under review ranged from 58% to 75%. If the maximum bonus were payable, the Chief Executive would receive half of his bonus in
cash and the remaining half in the form of deferred shares. For the other Executive Directors, the proportions would be 25% and 55%,
respectively.
Going forward, as a result of the review carried out by Deloitte & Touche LLP , and following consultation with its major institutional
shareholders, the Committee has determined that the maximum level of bonus payable under the plan for the year commencing 1 April 2005
will be 110% of basic salary for the Chief Executive and 100% of basic salary for the other Executive Directors. Bonuses will continue to be
based on a combination of Group and divisional financial performance (up to 70%) and safety and personal objectives (up to 30%). This is
considered to be appropriate given the increase in the maximum award potential.
For all Executive Directors, up to 50% of the award will be payable in shares. The deferral period for these shares will be increased from three
to five years in order to provide long-term lock-in and to further align the Directors’ interests with those of shareholders. These changes will
also apply to senior management within the Group. The Company consulted its major institutional shareholders on these proposed changes.
The bonus arrangements will be kept under review by the Committee for future years to ensure that they remain appropriate.
Share Option Schemes
Executive Share Option Scheme
The Company operates an Executive Share Option Scheme (‘ESOS’) for Executive Directors and other senior management. Under this
scheme, during the year, options to acquire shares in the Company were granted to Executive Directors and senior management. The exercise
price for such options was based on the average of the middle market quotations for shares in the Company for the three dealing days prior to
the date of grant. The Committee has discretion under this scheme to make awards of up to 200% of basic salary but awards were made
during the year at 1.33x basic salary for the Chief Executive and 1x salary for the other Executive Directors.
The performance target applicable to the awards made in the three years to 31 March 2004 is that growth in the Company’s annualised earnings
per share (‘EPS’) over the three-year performance period must exceed the increase in the retail prices index (‘RPI’) over the same period by an
average of at least 3% per annum. The performance period can be extended for one year if this performance target has not been met over the
initial three years but the EPS increase must still exceed the increase in RPI over the four-year period by an average of at least 3% per annum.
For the options awarded in respect of the year under review, this was reduced to an average of at least 2% per annum for the three-year
performance period but an additional measure was introduced. For the maximum award to vest, the Company’s total shareholder return (‘TSR’)
over the performance period must place the Company in the top 25% of companies in a group of the Company’s listed transport peers.
A proportion of the options between 0 and 100% (determined on a sliding scale) will vest if the Company’s performance against that peer group is
between the 25th and 50th percentile. No options will vest if the Company’s performance is below the 50th percentile. Unlike the awards made in
previous years, the performance period may not be extended if the targets have not been met at the end of the three-year performance period. 25
The companies in the original TSR comparator group for the options awarded in this year are Associated British Ports Holdings PLC,
Arriva plc, BAA plc, The Go-Ahead Group plc, The Mersey Docks & Harbour Company, TBI plc, National Express Group plc, Exel plc,
Tibbett & Britten (now part of Exel plc), Avis Europe plc, Stagecoach Group plc, British Airways plc, Peninsular & Oriental Steam Navigation
Company and EasyJet plc.
If the performance targets are met, an option may be exercised without any further condition at any time during the rest of its ten-year life. If the
holder leaves the Group before the end of the performance period by reason of ill-health, injury, disability, redundancy or retirement, an option
may be exercised within 12 months if the performance target has been satisfied at the date of leaving. Early exercise of options may also be
permitted within specific periods if there is a change of control of the Company as a result of a takeover, reconstruction, amalgamation or
voluntary winding-up of the Company but only to the extent that the relevant performance targets have then been met on a pro rata basis.
Where the performance period includes the transition to the new International Accounting Standards, the definition of ‘annualised EPS’ is under
review. The Committee, advised by the Audit Committee and the external auditors, will agree decisions regarding the management of the
transition and will make any necessary adjustments to ensure that comparisons continue to be made on a fair, consistent and reasonable basis.
Taking into account institutional shareholder feedback in the consultation exercise described above, the Committee is currently considering
the suitability of share option awards as a means of providing a longer-term incentive to the Executive team going forwards.
Save As You Earn (SAYE) Scheme
The Company operates a SAYE Scheme for eligible employees under which options may be granted on an annual basis at a discount of up
to 20% of market value. The Executive Directors are eligible to participate in the SAYE Scheme.
Buy As You Earn (BAYE) Scheme
The Company operates a Share Incentive Plan under the title ‘Buy As You Earn’. The scheme, which is open to all UK employees of the
Group (including the Executive Directors), enables employees to purchase partnership shares from their gross income (before income tax and
National Insurance deductions). The Company provides two matching shares for every three partnership shares, subject to a maximum
Company contribution of shares to the value of £20 a month. The shares are held in trust for up to five years, in which case, no income tax or
National Insurance will be payable. The matching shares will be forfeited if the corresponding partnership shares are removed from trust within
three years from award.
Retirement benefits
Executive Directors are members of a number of defined benefit Group pension schemes. Their dependants are eligible for dependants’
pensions and the payment of a lump sum in the event of death in service. Further details are set out on page 27.
Service contracts
It is the Company’s policy to restrict notice periods for Executive Directors to a maximum of 12 months. In line with this policy, all of the
Executive Directors have service contracts with an undefined term but which provide for a notice period of 12 months.
The contracts contain a provision, exercisable at the discretion of the Company, to pay an amount in lieu of notice on early termination of the
contract. Such payments are limited to basic salary plus certain benefits but would not include entitlement to bonus or share options. There
are no contractual provisions governing payment of compensation on early termination of the contracts. If it becomes necessary to consider
early termination of a service contract, the Company will have regard to all the circumstances of the case, including mitigation, when
determining any compensation to be paid. Details of the Executive Directors’ contracts are set out below:
Date of service contract
Moir Lockhead 5 March 2001
Dean Finch as of 26 February 2004
David Leeder 3 September 2001
Iain Lanaghan
1
29 November 2002
Mike Mitchell
2
2 July 1997
1 Retired as a Director on 31 May 2004.
2 Retired as a Director on 3 September 2004.
Where Board approval is given for an Executive Director to accept an outside non-executive directorship, unless the appointment is in
connection with Group business, the individual Director is entitled to retain any fees received.
Non-Executive Directors
All Non-Executive Directors have a letter of appointment and their fees are determined by the Board based on surveys of fees paid to Non-
Executive Directors of comparable companies. These letters of appointment are available for inspection at the Company’s registered office
during normal business hours and will be made available at the Annual General Meeting.
Non-Executive Directors cannot participate in any of the Company’s share option schemes and, other than the Group Employee Director, are
not eligible to join a Company pension scheme. Each of the Non-Executive Directors, other than the Group Employee Director, has elected to
receive 40% of his fees in the form of shares in the Company in order to ensure that their interests are more closely aligned to those of the
Company’s shareholders. The shares are purchased on a monthly basis in the market. The appointment of each of the Non-Executive Directors
is subject to early termination without compensation if he is not re-appointed at a meeting of shareholders where he is up for re-election. DIRECTORS’ REMUNERATION REPORT CONTINUED
26
Total shareholder return
The following graph shows, for the last five financial years of the Company, the total shareholder return on a holding of shares in the Company
as against that of a hypothetical holding of shares made up of shares of the same kinds and number as those by reference to which the
FTSE 250 Index and the FTSE All-Share Transport Index are calculated.
This graph is included to meet the relevant legislative requirements and is not directly relevant to the performance criteria used for the
Company’s Executive Share Option Scheme. Nonetheless, the indices used were selected as the Company believes that they are the most
appropriate and representative indices against which to measure the Company’s performance for this purpose.
AUDITED INFORMATION
Directors’ remuneration
Details of the Directors’ remuneration for the year ended 31 March 2005 are set out on the following pages.
Emoluments and compensation
The total salaries, fees and benefits paid to, or receivable by, each person who served as a Director of the Company at any time during the
year for the period of such directorship are shown in the table below. These include any and all payments for services as a Director of the
Company, its subsidiaries or otherwise in connection with the management of the Group.
Cash Benefits
Salary bonus in kind Fees Total Total
2005 2005 2005
1
2005 2005 2004
£000 £000 £000 £000 £000 £000
Executive Directors
Moir Lockhead 400 160 30 – 590 575
Dean Finch 250 63 17 – 330 32
Iain Lanaghan
2
37 – – – 37 302
David Leeder
3
236 49 18 – 303 –
Mike Mitchell
4
107 72 8 – 187 361
Non-Executive Directors
Martin Gilbert – – – 108 108 103
David Dunn – – – 35 35 34
Jim Forbes – – – 35 35 34
John Sievwright – – – 35 35 34
Martyn Williams – – – 14 14 14
Total 1,030 344 73 227 1,674 1,489
1
The Directors received the following non-cash benefits in the year: Moir Lockhead: £24,000 company car, £5,000 private fuel and £1,000 medical insurance for himself and
spouse; Dean Finch: £11,000 company car, £5,000 private fuel and £1,000 medical insurance for himself and family; David Leeder: £12,000 company car, £5,000 private fuel
and £1,000 medical insurance for himself; Iain Lanaghan: £1,000 medical insurance for himself and family (full year); Mike Mitchell: £14,000 company car/cash car allowance;
£3,000 private fuel and £1,000 medical insurance for himself and family (full year).
2
Retired as a Director on 31 May 2004. To ensure an orderly handover to the incoming Finance Director, it was agreed that he would continue as an employee of the Group for
a period of up to ten months. His employment with the Group terminated on 31 March 2005. Other than a payment of £1,000, and compensation of £7,950 for the loss of
share options under the Group’s SAYE scheme and matching shares under the Group’s BAYE scheme (representing the value of those options and shares at the termination
date), in line with best practice guidelines, no lump sum payment was made but he continued to receive his salary and benefits on a monthly basis. Accordingly, in the
remainder of the year under review, he received salary payments of £183,000 in addition to those disclosed in the table. No bonus was paid to him in respect of the year under
review nor were any share options awarded to him under the Executive Share Option Scheme in that year.
3
Appointed as a Director on 1 May 2004.
4
Retired as a Director on 3 September 2004 but continued as an employee of the Group for the remainder of the year under review. Accordingly, during the year, he received
salary payments of £135,000 and cash bonus of £100,000 in addition to the amounts disclosed in the table.
50
100
150
200
250
Total shareholder return index
Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 Mar 05
FirstGroup plc Total Shareholder Return FTSE All-Share Transport Index Total Shareholder Return
Source: Datastream
FTSE 250 Index Total Shareholder Return 27
Retirement benefits
Details of the retirement benefits for each of the Directors are set out in the table below:
Moir Dean David Iain Mike
Lockhead Finch Leeder
1
Lanaghan
1
Mitchell
1
Scheme
23333
Normal retirement age 65
4
60 60 60 65
Directors’ contributions in the year or date of retirement (£) 25,397 11,730 10,753 2,295 6,071
Increase in accrued pension during the year (net of inflation) (£ pa) 3,979 2,404 2,172 895 28,931
(plus 11,937 cash)
Increase in accrued pension during the year (£ pa) 9,454 2,705 2,337 1,270
5
30,717
6
(plus 28,362 cash)
Accrued pension as at 31 March 2005 (£ pa) 186,058 12,425 8,160 13,370
5
88,342
6
(plus 558,174 cash)
Transfer value of increase in accrued pension (net of inflation) during the year (£) 83,082 14,646 13,239 8,341
5
236,310
6
Transfer value of accrued pension at 31 March 2004 (£) 3,457,401 56,319 34,773 107,154 640,534
Transfer value of accrued pension at 31 March 2005 (£) 3,884,910 75,695 49,738 124,608
5
947,936
6
Increase in transfer value over the year, net of Directors’ contributions (£ pa) 402,112 7,646 4,212 15,159
5
301,331
6
Company contribution to FURBS during the year or to date of retirement (£)
7
–– 10,312 4,664 –
1
Iain Lanaghan and Mike Mitchell retired from the Board on 31 May 2004 and 3 September 2004, respectively and David Leeder joined the Board on 1 May 2004. The details
shown in the table relate to the portion of the year when they were Directors.
2
Aberdeen City Council No.2 Pension Fund.
3
FirstGroup Flexible Benefits Scheme.
4
Normal retirement age under relevant scheme is 65 but benefits can be taken without reduction at 60 so transfer values for the purpose of this table have been calculated
using a retirement age of 60.
5
The increase in accrued pension (net of inflation) for the full year was £3,392; the increase in accrued pension for the full year was £3,767; the accrued pension as at
31 March 2005 was £15,867; the transfer value of the increase in accrued pension (net of inflation) during the full year was £31,613; the transfer value of the accrued pension
at 31 March 2005 was £147,880 and the increase in transfer value over the full year net of Director’s contributions was £26,956.
6
Mike Mitchell’s benefits accrued since 1 November 1999 are payable without reduction from age 60 (except for added years purchased with his own contributions). His earlier
benefits are based on a retirement age of 65. The transfer values shown are calculated for each part of his pension based on the earliest age they are payable without
reduction. The increase in transfer value over the relevant period net of inflation includes £215,872 in respect of an augmentation to rectify an administrative oversight on a prior
intra-Group transfer of his employment which resulted in the statutory earnings cap mistakenly being applied. The increase in accrued pension (net of inflation) for the full year
was £34,786; the increase in accrued pension for the full year was £36,572; the accrued pension as at 31 March 2005 was £94,197; the transfer value of the increase in
accrued pension (net of inflation) during the full year was £307,182; the transfer value of the accrued pension at 31 March 2005 was £1,018,809 and the increase in transfer
value over the full year net of Director’s contributions was £332,068.
7
The full year FURBS contribution for Iain Lanaghan was £27,983. Iain Lanaghan and David Leeder received additional salary payments to compensate them for the tax liability
arising from the FURBS contributions.
The Group does not have one pension scheme but instead operates a number of different schemes. All of the schemes in which the
Executive Directors participate are defined benefit schemes and are not limited in membership to Executive Directors. Dean Finch and David
Leeder are accruing benefits which are subject to the three year average of the Inland Revenue earnings cap (in the case of Dean Finch) and
the one year average of the Inland Revenue earnings cap (in the case of David Leeder). DIRECTORS’ REMUNERATION REPORT CONTINUED
28
Directors’ share options
The outstanding share options under the ESOS, deferred share bonus, long-term incentive plan (‘LTIP’) and SAYE Scheme granted to each of
the serving Directors are set out in the table below. No price was paid for the award of any option. Except as disclosed below in relation to
Iain Lanaghan and Mike Mitchell, there have been no changes to the terms and conditions of any option awarded to Directors.
At beginning Lapsed/
of year or Granted Exercised waived
date of during during during At end
appointment the year the year the year of year
1
Exercise Date from
(number of (number of (number of (number of (number of price which Expiry
Current Directors Scheme shares) shares) shares) shares) shares) (pence) exercisable date
Moir Lockhead LTIP 2000
2
110,168 – 110,168 –– nil 31.3.03 31.3.10
ESOS:
2001 130,985 ––– 130,985 346.5 15.8.04 15.8.11
2002 173,784 ––– 173,784 269 21.6.05 21.6.12
2003 166,958 ––– 166,958 287 18.11.06 18.11.13
2004 – 193,277 –– 193,277 275.08 10.6.07 10.6.14
Deferred share bonus
3
:
2001
4
31,633 – 31,633 –– nil 1.4.04 1.4.05
2002 25,080 ––– 25,080 nil 1.4.05 1.4.06
2003 28,559 ––– 28,559 nil 1.4.06 1.4.07
2004 – 34,062 –– 34,062 nil 1.4.07 1.4.08
Dean Finch ESOS:
2001 18,470 ––– 18,470 346.5 15.8.04 15.8.11
2002 24,535 ––– 24,535 269 21.6.05 21.6.12
2003 58,930 ––– 58,930 287 18.11.06 18.11.13
2004 – 90,883 –– 90,883 275.08 10.6.07 10.6.14
Deferred share bonus
3
:
2001
5
4,800 – 4,800 –– nil 1.4.04 1.4.05
2002 11,660 ––– 11,660 nil 1.4.05 1.4.06
2003 13,720 ––– 13,720 nil 1.4.06 1.4.07
2004 – 27,029 –– 27,029 nil 1.4.07 1.4.08
David Leeder ESOS:
2002 26,914 ––– 26,914 269 21.6.05 21.6.12
2003 64,643 ––– 64,643 287 18.11.06 18.11.13
2004 – 90,883 –– 90,883 275.08 10.6.07 10.6.14
Deferred share bonus
3
:
2002 14,983 ––– 14,983 nil 1.4.05 1.4.06
2003 7,163 ––– 7,163 nil 1.4.06 1.4.07
2004 – 19,941 –– 19,941 nil 1.4.07 1.4.08
SAYE 2002/03 4,921 ––– 4,921 192 1.2.06 31.8.06
Martyn Williams SAYE:
2002/03 787 ––– 787 192 1.2.06 31.8.06
2003/04 636 ––– 636 232 1.2.07 31.8.07
2004/05 – 567 –– 567 267 1.2.08 31.8.08 29
Directors’ share options continued
At beginning Lapsed/ At end
of year or Granted Exercised waived of year
date of during during during or date of
appointment the year the year the year retirement
1
Exercise Date from
(number of (number of (number of (number of (number of price which Expiry
Former Directors Scheme shares) shares) shares) shares) shares) (pence) exercisable date
Iain Lanaghan
6
LTIP 2000
7
55,932 ––– 55,932 nil 31.3.03 31.3.10
ESOS:
2001 50,000 ––– 50,000 346.5 15.8.04 15.8.11
2002 78,067 ––– 78,067 269 21.6.05 21.6.12
2003 75,000 ––– 75,000 287 18.11.06 18.11.13
Deferred share bonus
3
:
2001
8
10,707 ––– 10,707 nil 1.4.04 1.4.05
2002 12,733 ––– 12,733 nil 1.4.05 1.4.06
2003 17,063 ––– 17,063 nil 1.4.06 1.4.07
2004 – 18,800 –– 18,800 nil 1.4.07 1.4.08
SAYE 2002/03
9
4,921 ––– 4,921 192 1.2.06 31.8.06
Mike Mitchell
10
ESOS:
2001 60,606 ––– 60,606 346.5 15.8.04 15.8.11
2002 88,067 ––– 88,067 269 21.6.05 21.6.12
2003 84,607 ––– 84,607 287 18.11.06 18.11.13
Deferred share bonus
3
:
2001
11
22,667 ––– 22,667 nil 1.4.04 1.4.05
2002 16,903 ––– 16,903 nil 1.4.05 1.4.06
2003 19,249 ––– 19,249 nil 1.4.06 1.4.07
2004 – 18,713 –– 18,713 nil 1.4.07 1.4.08
SAYE 2002/03
9
4,921 ––– 4,921 192 1.2.06 31.8.06
1
Details shown for Mike Mitchell as at 3 September 2004 and Iain Lanaghan as at 31 May 2004 (date of retirement as a Director).
2
Exercised on 17 December 2004. The closing price on the date of exercise was 348p and the notional pre-tax gain on exercise was £383,385.
3
The figures shown represent the number of nil-cost options which were granted under the deferred share element of the Executive Annual Bonus Plan in respect of the
2000/01, 2001/02, 2002/03 and 2003/04 financial years. The cash values of the 2004/05 award are Moir Lockhead: £120,000, Dean Finch: £125,000 and David Leeder:
£95,600. These awards will take the form of nil cost options over shares which will, subject to satisfaction of the requirements of the plan, vest on 1 April 2008. The number
of shares under option will depend on the market price of shares at the close of business on 11 May 2005.
4
Exercised on 8 February 2005. The closing price on the date of exercise was 364.75p and the notional pre-tax gain on exercise was £115,381.
5
Exercised on 9 July 2004. The closing price on the date of exercise was 283.25p and the notional pre-tax gain on exercise was £13,596.
6
Retired as a Director on 31 May 2004. The Committee exercised its discretion to permit him to retain all share options awarded under the Group’s Executive Share Option
Scheme and deferred share awards made under the Executive Annual Bonus Plan following termination of his employment as if he remained an employee of the Company
(subject to relevant performance criteria and the rules of the relevant schemes).
7
Exercised on 21 June 2004 following retirement from the Board. The closing price on the date of exercise was 284.5p and the notional pre-tax gain on exercise was £159,127.
8
Exercised on 1 June 2004 following retirement from the Board. The closing price on the date of exercise was 274p and the notional pre-tax gain on exercise was £29,337.
9
Lapsed on leaving the Group.
10
Retired as a Director on 3 September 2004 but continued as an employee for the full year. By agreement with the Company, Mike Mitchell took early retirement from the Group
in April 2005. He was subsequently appointed as Director General of Railways in HM Department for Transport. HM Government requires him to exercise all of his options and
sell all of his shares in the Company prior to taking up that appointment. Accordingly, as he was a ‘good leaver’ under the terms of the Executive Annual Bonus Plan, the
Committee has exercised its discretion to allow him to exercise the deferred share awards made to him earlier than their normal exercise dates. In addition, the Remuneration
Committee determined that all of the bonus payable to Mike Mitchell in respect of the year under review should be paid in cash and accordingly, no deferred share awards will
be made to him in respect of the year. Details of the cash bonus paid are set out in the table on page 26.
11
Exercised on 11 November 2004 following retirement from the Board. The closing price on the date of exercise was 328.5p and the notional pre-tax gain on exercise
was £74,461.
Market price of FirstGroup plc shares
The market price of FirstGroup plc shares at 31 March 2005 was 343.25p and the range during the year was 256p to 379.25p.
This report was approved by the Board of Directors, on the recommendation of the Remuneration Committee, on 5 May 2005 and signed
on its behalf by
BL Ruppel
Company Secretary
10 May 2005 DIRECTORS’ REPORT
30
The Directors have pleasure in submitting their Annual Report and Financial Statements for the year ended 31 March 2005.
PRINCIPAL ACTIVITIES
The principal activity of the Group is the provision of passenger transport services.
REVIEW OF THE BUSINESS
Reviews of the business and principal events and likely future developments are given in the Chairman’s statement, Chief Executive’s review
and in the Financial review set out on pages 4 to 16.
RESULTS AND DIVIDENDS
The results for the year are set out in the consolidated profit and loss account on page 34. The Directors recommend payment of a final
dividend of £34.2m (8.69p per share), which, with the interim dividend of £16.4m (4.125p per share) paid on 9 February 2005, gives a total
dividend of £50.6m (12.815p per share) for the year. The proposed final dividend, if approved, will be paid on 26 August 2005 to shareholders
on the register at the close of business on 22 July 2005.
SHARE CAPITAL
Details of changes in share capital, including purchases by the Company of its own shares, are set out in notes 22 and 23 to the financial
statements. Authority for the Company to make market purchases of up to 60,000,000 of its own shares was renewed at the 2004 Annual
General Meeting. This authority remains in place until the 2005 Annual General Meeting, when it is intended to seek a further renewal.
DIRECTORS
The Directors of the Company who served during the year were Martin Gilbert, Moir Lockhead, David Dunn, Dean Finch, Jim Forbes, David
Leeder (appointed 1 May 2004), Iain Lanaghan (retired 31 May 2004), Mike Mitchell (retired 3 September 2004), John Sievwright and Martyn
Williams. Biographical details of all the serving Directors are set out on page 17.
In accordance with the Company’s Articles of Association, Martin Gilbert and David Dunn will retire by rotation at the forthcoming Annual
General Meeting and, being eligible, offer themselves for re-election. Martyn Williams’ term of office as Employee Director expires on
31 December 2005 and he is therefore not offering himself for re-election at the Annual General Meeting this year. Details of the fees and
remuneration of the Directors and their service contracts or terms of appointment are set out in the Directors’ remuneration report on
pages 23 to 29.
DIRECTORS’ INTERESTS
The Directors who held office at the end of the year had the following interests in the ordinary shares of the Company:
Ordinary 5p shares
Beneficial Non-beneficial Beneficial Non-beneficial
David Dunn 17,329 – 21,817 –
Dean Finch 1,500 – 1,500 –
Jim Forbes 9,329 – 13,817 –
Martin Gilbert 48,273 – 62,219 –
David Leeder 817 – 1,364 –
Moir Lockhead 1,440,723 470,690 1,132,524 470,690
John Sievwright 16,829 – 21,317 –
Martyn Williams 965 – 965 –
Details of the Directors’ share options are set out in the Directors’ remuneration report on pages 28 to 29. Moir Lockhead also holds nominal
non-beneficial interests in a number of the Company’s subsidiary undertakings.
Between 1 April 2005 and 10 May 2005, the following changes occurred to Directors’ interests: on 21 April 2005, David Leeder acquired 46
shares pursuant to the Company’s Buy As You Earn Scheme. On 25 April 2005, Martin Gilbert acquired 1,099 shares and each of David
Dunn, Jim Forbes and John Sievwright acquired 353 shares under the standing arrangements whereby they have elected to receive 40% of
their monthly fees in the form of shares in the Company.
No Director is materially interested in any significant contract or agreement with the Group, other than their service contracts.
At beginning of year
or subsequent appointment At end of year 31
SIGNIFICANT INTERESTS
At 10 May 2005, the Company had been advised of the following holders of 3% or more of its issued share capital for the purpose of section
198 of the Companies Act 1985:
Ordinary 5p shares %
Barclays PLC 13,390,197 7.87
M&G Investment Management Limited 21,321,854 5.35
Legal & General Investment Management Limited 15,204,942 3.81
JPMorgan Fleming Asset Management Limited 12,358,252 3.10
EMPLOYEES
The Group is committed to employee involvement and uses a variety of methods to inform, consult and involve its employees in the business.
These include subsidiary company newsletters and circulars and also First Edition, a Group-wide newsletter, which is sent to all employees
across the Group on a biannual basis. Senior managers within each division meet regularly to discuss current issues and employees are
encouraged to discuss any issues with management at any time. Each Division also operates a confidential hotline which staff can use to
report health and safety, employment-related and other issues concerning them.
The Group also has a regular dialogue with employees and representatives from Trades Unions. Each operating company has either an
elected Company Council or, more typically, an Employee Director on its board. This principle extends to the plc Board where one of the
Employee Directors is elected by his or her peers to represent employees across the Group.
Each Division has its own information and consultation arrangements and levels of employee involvement in the business differ. However,
in the UK, the Group has worked with Trades Unions to set up a number of joint schemes, including workplace learning, credit unions, new
national policies on assaults, drugs and alcohol, the restructuring of Group pension schemes and a joint committee to review staff uniform
procedures.
The Group is committed to wide employee ownership. During the year, employees continued to have the opportunity to participate in the
Group’s Save As You Earn and Buy As You Earn schemes, details of which are set out in note 31 to the financial statements.
First is committed to equality of opportunity in all its employment practices, policies and procedures. To this end, within the framework of
the law, we are committed wherever practicable to achieving and maintaining a workforce which broadly reflects the local catchment area
within which we operate. We aim to ensure that no employee or potential employee will receive less favourable treatment due to their race,
colour, nationality, ethnic origin, religion, sex, gender reassignment, sexual orientation, religion, marital status, trade union membership, age
or disability.
CORPORATE SOCIAL RESPONSIBILITY
The system of internal control described on pages 21 to 22 covers significant risks associated with social, environmental and health and
safety issues. The Group publishes a separate Corporate Responsibility Report covering these matters, which will be available on our website
at www.firstgroup.com.
CHARITABLE AND POLITICAL CONTRIBUTIONS
The Group made various donations to UK charities totalling approximately £40,000 during the year (2004: £34,000). It also made a donation
of £65,000 to the Asian Tsunami appeal. No payments were made for political purposes.
CREDITORS
It is the Group’s policy to abide by the payment terms agreed with suppliers wherever it is satisfied that the supplier has provided goods and
services in accordance with agreed terms and conditions. A number of significant purchases including fuel, tyres and commitments under hire
purchase contracts, finance leases and operating leases are paid by direct debit. At 31 March 2005, the Group had the equivalent of 27
days’ (2004: 39 days’) purchases outstanding, based on the ratio of Group trade creditors at the end of the year to the amounts invoiced
during the year by trade creditors. The Company does not have any trade creditors in its balance sheet. DIRECTORS’ REPORT CONTINUED
32
ANNUAL GENERAL MEETING
The Annual General Meeting will be held at the Aberdeen Exhibition and Conference Centre, Bridge of Don, Aberdeen, Scotland, AB23
8BL on Thursday 14 July 2005 at 11.00 am. The Notice of Meeting is contained in a separate letter from the Chairman accompanying
this Annual Report.
GOING CONCERN
Whilst any consideration of future matters involves making a judgment, at a particular point in time, about future events which are
inherently uncertain, after making inquiries, the Directors have formed the judgment, at the time of approving these financial statements,
that there is a reasonable expectation that the Company and the Group have adequate resources to continue operating for the
foreseeable future. For this reason, they continue to adopt the going concern basis in preparing these financial statements.
By order of the Board
B. Louise Ruppel 395 King Street
Company Secretary Aberdeen
10 May 2005 AB24 5RP
DIRECTORS’ RESPONSIBILITIES
United Kingdom Company law requires that the Directors prepare financial statements for each financial year which give a true and fair view
of the state of affairs of the Company and the Group at the end of the financial year and of the profit or loss of the Group for that period.
In preparing those financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and estimates that are reasonable and prudent; and
• state whether applicable accounting standards have been followed.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial
position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 1985.
They are also responsible for the system of internal control, for safeguarding the assets of the Company and the Group and hence for taking
reasonable steps to prevent and detect fraud and other irregularities. FINANCIAL STATEMENTS CONTENTS
34 Consolidated profit and loss account
35 Balance sheets
36 Consolidated cash flow statement
36 Reconciliation of net cash flows to movement in net debt
37 Consolidated statement of total recognised gains and losses
37 Reconciliation of movements in equity shareholders’ funds
60 Independent auditors’ report
61 Group financial summary
62 Shareholder information
Notes to the financial statements
38 Principal accounting policies
40 Profit and loss account analysis and
segmental information
41 Operating costs
41 Bid costs and other exceptional
items
41 Employees’ and Directors’
remuneration
41 Net interest payable and similar
charges
42 Profit on ordinary activities before
taxation
42 Tax on profit on ordinary activities
43 Equity dividends
43 Earnings per share (EPS)
43 Goodwill
44 Tangible fixed assets
45 Fixed asset investments
46 Stocks
46 Debtors
46 Current asset investments
46 Cash at bank and in hand
47 Creditors
48 Financial assets and liabilities
49 Provisions for liabilities
and charges
50 Deferred tax
50 Called up share capital
50 Reserves
51 Notes to the consolidated cash
flow statement
52 Analysis of net debt
53 Major non-cash transactions
53 Summary of purchase of businesses
and subsidiary undertakings
53 Commitments
54 Contingent liabilities
54 Pension schemes
59 Share schemes
33 CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year ended 31 March 2005
34
Before Before goodwill Goodwill
goodwill Goodwill amortisation, bid amortisation,
amortisation amortisation costs and other bid costs and
and and exceptional other exceptional
bid costs bid costs Total items items Total
2005 2005 2005 2004 2004 2004
Notes £m £m £m £m £m £m
Turnover
Continuing operations 2,649.0 – 2,649.0 2,479.0 – 2,479.0
Acquisitions 44.4 – 44.4 –– –
Group turnover 2 2,693.4 – 2,693.4 2,479.0 – 2,479.0
Operating profit
Continuing operations 204.7 (37.0) 167.7 204.1 (39.4) 164.7
Acquisitions 6.9 (0.7) 6.2 –– –
Group operating profit 2 211.6 (37.7) 173.9 204.1 (39.4) 164.7
Group operating profit before goodwill
amortisation, bid costs and other exceptional items 211.6 – 211.6 204.1 – 204.1
Goodwill amortisation 2 – (25.8) (25.8) – (25.9) (25.9)
Bid costs 4 – (11.9) (11.9) – (6.7) (6.7)
Other exceptional items 4 ––– – (6.8) (6.8)
Group operating profit 2 211.6 (37.7) 173.9 204.1 (39.4) 164.7
Profit on disposal of fixed assets – 3.3 3.3 – 19.6 19.6
Profit on ordinary activities before interest 2 211.6 (34.4) 177.2 204.1 (19.8) 184.3
Net interest payable and similar charges 6 (48.3) – (48.3) (42.8) (18.7) (61.5)
Profit on ordinary activities before taxation 7 163.3 (34.4) 128.9 161.3 (38.5) 122.8
Tax on profit on ordinary activities 8 (44.4) 11.7 (32.7) (48.4) 17.8 (30.6)
Profit on ordinary activities after taxation 118.9 (22.7) 96.2 112.9 (20.7) 92.2
Equity minority interests (6.5) – (6.5) (0.9) – (0.9)
Profit for the financial year 112.4 (22.7) 89.7 112.0 (20.7) 91.3
Equity dividends paid and proposed 9 (50.6) – (50.6) (47.3) – (47.3)
Retained profit for the financial year 23 61.8 (22.7) 39.1 64.7 (20.7) 44.0
Adjusted Actual Adjusted Actual
Basic earnings per share 10 28.2p 22.5p 27.3p 22.3p
Cash earnings per share 10 55.1p – 52.4p –
Diluted earnings per share – 22.3p – 22.2p BALANCE SHEETS
At 31 March 2005
35
Group Company
2004 2004
2005 (restated*) 2005 (restated*)
Notes £m £m £m £m
Assets employed:
Fixed assets
Goodwill 11 450.6 461.2 – –
Tangible fixed assets 12 840.2 797.6 – –
Investments 13 – – 1,684.0 1,683.9
1,290.8 1,258.8 1,684.0 1,683.9
Current assets
Stocks 14 40.1 35.1 – –
Debtors 15 437.8 394.7 933.9 1,219.2
Investments 16 7.5 30.3 – –
Cash at bank and in hand 17 146.6 94.9 – –
632.0 555.0 933.9 1,219.2
Creditors: amounts falling due within one year 18 (660.8) (647.9) (744.5) (1,066.2)
Net current (liabilities)/assets
Amounts due within one year (87.0) (143.0) 189.4 153.0
Amounts due after more than one year 15 58.2 50.1 – –
Net current (liabilities)/assets (28.8) (92.9) 189.4 153.0
Total assets less current liabilities 1,262.0 1,165.9 1,873.4 1,836.9
Creditors: amounts falling due after more than one year 18 (756.3) (682.8) (714.5) (652.6)
Provisions for liabilities and charges 20 (147.5) (128.1) – –
358.2 355.0 1,158.9 1,184.3
Financed by:
Capital and reserves
Called up share capital 22 19.9 20.1 19.9 20.1
Share premium account 23 238.8 238.8 238.8 238.8
Revaluation reserve 23 1.8 3.4 – –
Other reserves 23 4.6 4.4 262.1 261.9
Own shares 23 (18.9) (0.6) (18.4) (0.6)
Profit and loss account 23 101.4 86.8 656.5 664.1
Equity shareholders’ funds 347.6 352.9 1,158.9 1,184.3
Equity minority interests 10.6 2.1 – –
358.2 355.0 1,158.9 1,184.3
*See note 1
These financial statements were approved by the Board of Directors on 10 May 2005 and were signed on its behalf by:
Moir Lockhead Director
Dean Finch Director CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 March 2005
RECONCILIATION OF NET CASH FLOWS TO MOVEMENT
IN NET DEBT
For the year ended 31 March 2005
36
2005 2004
Notes £m £m
Net cash inflow from operating activities 24(a) 247.2 312.3
Returns on investment and servicing of finance 24(b) (33.7) (65.2)
Taxation
Corporation tax paid (16.1) (23.7)
Capital expenditure and financial investment 24(c) (97.2) (147.3)
Acquisitions and disposals 24(d) (37.2) (49.7)
Equity dividends paid (48.0) (45.9)
Cash inflow/(outflow) before use of liquid resources and financing 15.0 (19.5)
Management of liquid resources
Decrease in liquid bank deposits 22.8 15.4
Financing 24(e) 39.9 46.2
Increase in cash in year 77.7 42.1
2005 2004
Notes £m £m
Increase in cash in year 77.7 42.1
Cash inflow from increase in debt and HP contract and finance lease financing (70.0) (75.4)
Debt acquired on acquisition of businesses (20.6) –
Lease and hire purchase contracts acquired with new franchise (2.2) –
Movement in current asset investments (22.8) (15.4)
Fees on issue of Bond and loan facility – 1.3
Amortisation of debt issuance fees (1.5) (0.8)
Foreign exchange differences 7.0 41.9
Movement in net debt in year (32.4) (6.3)
Net debt at beginning of year 25 (630.7) (624.4)
Net debt at end of year 25 (663.1) (630.7) CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS
AND LOSSES
For the year ended 31 March 2005
37
RECONCILIATION OF MOVEMENTS IN EQUITY
SHAREHOLDERS’ FUNDS
For the year ended 31 March 2005
Group Company
2005 2004 2005 2004
£m £m £m £m
Profit for the financial year 89.7 91.3 55.4 115.9
Foreign exchange differences (14.2) (63.0) (0.5) 1.3
Total recognised gains for the year 75.5 28.3 54.9 117.2
Group Company
2004 2004
2005 (restated*) 2005 (restated*)
£m £m £m £m
Profit for the financial year 89.7 91.3 55.4 115.9
Dividends (50.6) (47.3) (50.6) (47.3)
39.1 44.0 4.8 68.6
Shares issued to QUEST (0.5) – – –
Own shares purchased and cancelled (11.9) (29.2) (11.9) (29.2)
Movement in EBT, QUEST and Treasury Shares during the year (17.8) 0.1 (17.8) 0.1
Foreign exchange differences (14.2) (63.0) (0.5) 1.3
Net (reduction in)/addition to equity shareholders’ funds (5.3) (48.1) (25.4) 40.8
Equity shareholders’ funds at beginning of year 352.9 401.0 1,184.3 1,143.5
Equity shareholders’ funds at end of year 347.6 352.9 1,158.9 1,184.3
*See note 1
No note of historical cost profits and losses is given as there are no material differences between the results as set out in the consolidated profit and
loss account, and their historical cost equivalents. NOTES TO THE FINANCIAL STATEMENTS
38
1 Principal accounting policies
The following accounting policies have been applied consistently throughout the year and the preceding year, with the exception of the policy for
accounting for ESOP Trusts which is explained in note (b) below, in dealing with items which are considered material in relation to the Group’s
financial statements.
(a) Basis of preparation
The financial statements have been prepared under the historical cost convention, modified to include the revaluation of certain fixed assets, and
in accordance with applicable United Kingdom accounting standards.
(b) Change in accounting policies
UITF 38 ‘Accounting for ESOP Trusts’ has been adopted. Investments in own shares are now deducted from shareholders’ funds whereas
previously such investments were treated as an asset. The impact of this restatement is to reduce shareholders’ funds at 31 March 2004 by £0.6m.
(c) Basis of consolidation
The consolidated financial statements incorporate the accounts of the Company and all of its subsidiary undertakings; all accounts are made up to
31 March 2005.
The results of subsidiary undertakings are included in the financial statements under the principles of FRS 6 from the date control passes.
No profit and loss account is presented for the Company as permitted by section 230 of the Companies Act 1985. The retained profit for the
Company for the year to 31 March 2005 is set out in note 23.
In the accounts of the Company, investments in subsidiary undertakings are stated at cost less provision for impairment. Dividends received
and receivable are credited to the profit and loss account to the extent that they represent a realised profit for the Company.
(d) Goodwill
Goodwill arising on acquisitions made after 1 April 1998 is shown on the balance sheet as an intangible fixed asset.
Where capitalised goodwill is regarded as having a limited useful economic life, it is amortised over that life. Where capitalised goodwill is
regarded as having an indefinite useful economic life, it is not amortised. Where capitalised goodwill is amortised over a life of greater than 20
years, or is not amortised, annual impairment reviews are conducted to compare the book value with the recoverable amount. If the recoverable
amount has fallen below the book value, the goodwill is written down to the recoverable amount immediately.
The Companies Act 1985 requires goodwill that is treated as an asset to be amortised systematically over a finite period. In order to show a
true and fair view of the Group’s results, goodwill of £68.6m arising on the acquisitions of Mainline and Capital Citybus is not being amortised
because of a number of factors which have led the Directors to conclude that the goodwill has an indefinite life. These include the stability of the
bus industry, its lack of fundamental change and the Group’s track record in maintaining and enhancing the values of its businesses. This
treatment of goodwill as having an indefinite life is in accordance with FRS 10. It is not possible to quantify the effect on the Group’s results if the
Act were to be followed, as it would depend on the finite life that was used.
Capitalised goodwill arising on other acquisitions is being amortised over a period of up to 20 years on a straight-line basis.
Capitalised goodwill arising on foreign acquisitions is denominated in the currency in which the acquired company’s assets and liabilities
are recorded.
Fair value accounting adjustments are made in respect of acquisitions. In the year of acquisition, some adjustments are made using provisional
estimates, based on information available at the time the financial statements are prepared, and amendments are sometimes necessary in the
following accounting period, with a corresponding adjustment to goodwill, when the information necessary to determine these estimates
is available.
Prior to 1 April 1998, all goodwill arising on acquisitions was written off to reserves. This goodwill has not been reinstated on the balance
sheet. On disposal of the businesses concerned this goodwill is included in determining the gain or loss on disposal in the profit and loss account.
(e) Turnover
Turnover of the Group comprises principally of revenue from train passenger and freight services, road passenger transport, and certain
management and maintenance services in the UK and North America. Where appropriate, amounts are shown net of rebates and sales taxes.
Turnover in UK Rail includes franchise agreement receipts from the Strategic Rail Authority (‘SRA’). Payments to the SRA for amounts due
under the terms of a franchise are included in operating costs. Turnover also includes amounts attributable to the train operating companies
(‘TOCs’), predominantly based on models of route usage, by the Railway Settlement Plan in respect of passenger receipts. Where season tickets
are issued in excess of one week’s duration, the attributable share of income is deferred within creditors and is recognised in the profit and loss
account over the period covered by the season ticket.
UK Bus turnover principally comprises amounts receivable from ticket sales and concessionary fare schemes. Concessionary amounts are
recognised in the period in which the service is provided based on a predetermined formula as agreed with the relevant local authority.
Other Bus and services revenue from contracts with government bodies and similar organisations are recognised as the services are provided. 39
1 Principal accounting policies continued
(f) Fixed assets and depreciation
Depreciation is provided to write off the cost or valuation less residual value of tangible fixed assets over their estimated useful economic lives
as follows:
Freehold buildings – 50 years straight line
Long leasehold buildings – 50 years straight line
Short leasehold properties – period of lease
Passenger carrying vehicles – 7 to 15 years straight line
Other plant and equipment – 3 to 25 years straight line
No depreciation is provided on freehold land, the land element of long leasehold properties or on assets in the course of construction.
Surpluses or deficits arising on the revaluation of tangible fixed assets are credited or debited to a revaluation reserve. On a subsequent
disposal of a revalued asset, the revaluation surplus or deficit relating to this asset is transferred to the profit and loss account reserve.
From 1 April 1999 the Group’s policy has been not to revalue tangible fixed assets. Properties that had been revalued before that date retained
their book value, in accordance with the transitional rules of FRS 15.
(g) Hire purchase contracts and leases
Assets held under hire purchase contracts and under finance leases, which are those leases where substantially all the risks and rewards of
ownership of the asset have passed to the Group are recorded in the balance sheet as tangible fixed assets. Depreciation is provided on these
assets over their estimated useful lives or lease term, as appropriate.
Future obligations under hire purchase contracts and finance leases are included in creditors, net of finance charges. Payments are
apportioned between the finance element, which is charged to the profit and loss account as interest, and the capital element, which reduces the
outstanding obligations. The finance charges are calculated in relation to the reducing amount of obligations outstanding and are charged to the
profit and loss account on the same basis.
All other leases are operating leases and the rental charges are taken to the profit and loss account on a straight-line basis over the life of the lease.
(h) Government grants and subsidies
Rail support grants and amounts receivable for tendered services and concessionary fare schemes are included in turnover and are recognised in
the profit and loss account as the related expenditure is incurred.
(i) Stocks and work in progress
Stocks are valued at the lower of cost and net realisable value.
(j) Pre-contract expenditure
Pre-contract expenditure is expensed as incurred except where it is virtually certain that a contract will be awarded. In such circumstances, pre-
contract expenditure is recognised as an asset and is expensed to the profit and loss account on a straight-line basis over the term of the contract.
(k) Foreign currencies
Assets and liabilities denominated in foreign currencies are translated into sterling at rates of exchange ruling at the year end and results of foreign
enterprises are translated at the average rates of exchange during the year. Differences on exchange arising on the retranslation of net investments
in foreign enterprises and from the translation of results at an average rate are taken to reserves. Where foreign currency borrowings or currency
swaps are used to finance or hedge investments in foreign enterprises, the gain or loss on translation is also taken to reserves. All other exchange
differences are dealt with through the profit and loss account.
(l) Taxation
The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the
treatment of certain items for taxation and accounting purposes. Provision is made for deferred tax on all timing differences except those arising
from the revaluation of fixed assets for which there is no binding agreement to sell on property gains if it is anticipated that rollover relief will be
available and on the undistributed profits of overseas subsidiaries, associates and joint ventures. Deferred tax is calculated at the rates at which it
is estimated the tax will arise. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be
recovered. The deferred tax provision is not discounted to net present value. NOTES TO THE FINANCIAL STATEMENTS CONTINUED
40
1 Principal accounting policies continued
(m) Pension costs
Retirement benefits are provided for most employees of the Group principally by means of defined benefit pension schemes. These are funded by
contributions from the Group and employees. The Group’s contributions are charged to the profit and loss account, based on recommendations
by independent actuaries, in such a way as to provide for the liabilities evenly over the average remaining working lives of the employees. The
difference between the charge to the profit and loss account and the contributions paid by the Group is shown as an asset or a liability in the
balance sheet and the tax effect of this timing difference is included in deferred taxation.
For defined contribution schemes the amount charged to the profit and loss account in respect of pension costs is the contributions payable
in the year. Differences between contributions payable and contributions actually paid are shown as either accruals or prepayments in the
balance sheet.
(n) Financial instruments
Various derivative instruments are utilised by the Group principally to manage interest rate, fuel and foreign exchange risks. The Group does not
enter into speculative derivative contracts. All such instruments are used for hedging purposes to alter the risk profile of an existing underlying
exposure of the Group, in line with the Group’s risk management policies. The main instruments used during the year were fixed interest rate
swaps, fuel swaps and currency swaps. Amounts payable or receivable in respect of interest rate swaps and fuel derivatives are recognised as
adjustments to interest expense and fuel costs respectively over the period of the contracts.
(o) Insurance
The Group’s policy is to self-insure high frequency, low value claims within the businesses. To provide protection above these types of losses,
cover is obtained through third-party insurance policies. Provision is made, on a discounted basis, for the estimated cost of settling insurance
claims for incidents occurring prior to balance sheet date.
(p) Debt
Debt is initially stated at the amount of the net proceeds after the deduction of issue costs. The carrying amount is increased by the amortisation
of debt issuance fees in respect of the accounting period and reduced by repayments made in the period.
2 Profit and loss account analysis and segmental information Continuing Total Total
operations Acquisitions* 2005 2004
£m £m £m £m
Group turnover 2,649.0 44.4 2,693.4 2,479.0
Group operating costs
– General (2,444.3) (37.5) (2,481.8) (2,274.9)
– Goodwill amortisation (25.1) (0.7) (25.8) (25.9)
– Bid costs and other exceptional items (note 4) (11.9) – (11.9) (13.5)
Total Group operating costs (note 3) (2,481.3) (38.2) (2,519.5) (2,314.3)
Group operating profit 167.7 6.2 173.9 164.7
*Acquisitions during the year to 31 March 2005 relate entirely to the North America division (for details see note 27).
Operating profit before
goodwill amortisation,
bid costs and other
Turnover exceptional items Net assets/(liabilities)
2005 2004 2005 2004 2005 2004
Segmental information is as follows: £m £m £m £m £m £m
UK Bus 960.7 906.2 107.1 111.2 232.5 228.3
UK Rail 1,059.7 945.0 67.7 49.8 7.2 (4.4)
North America 665.8 620.7 61.2 63.5 450.9 435.8
Financing element of UK Bus leases – – (9.0) (8.3) – –
Group items 7.2 7.1 (15.4) (12.1) (332.4) (304.7)
2,693.4 2,479.0 211.6 204.1 358.2 355.0
Bid costs (note 4) (11.9) (6.7)
Other exceptional items (note 4) – (6.8)
Goodwill amortisation (note 11) (25.8) (25.9)
Group operating profit 173.9 164.7
Profit on disposal of fixed assets 3.3 19.6
Profit on ordinary activities before interest 177.2 184.3
All of the Group turnover and Group operating profit for the year was generated in the United Kingdom, except that shown above as being generated
in North America. There is no material difference between turnover earned by origin and destination. 41
Continuing Total Total
operations Acquisitions 2005 2004
3 Operating costs £m £m £m £m
Materials and consumables 264.4 14.1 278.5 258.9
Staff costs (note 5) 1,215.6 15.8 1,231.4 1,099.9
External charges 869.8 6.4 876.2 826.6
Depreciation, amortisation and other amounts written off fixed assets 131.5 1.9 133.4 128.9
2,481.3 38.2 2,519.5 2,314.3
Total Total
Rail Other 2005 2004
4 Bid costs and other exceptional items £m £m £m £m
Restructuring costs ––– 6.8
Bid costs 10.9 1.0 11.9 6.7
10.9 1.0 11.9 13.5
The tax effect in 2005 was a credit of £3.6m (2004: credit of £4.1m).
5 Employees’ and Directors’ remuneration
2005 2004
The average number of persons employed by the Group (including Directors) during the year was as follows: No. No.
Operational 61,585 56,483
Administration 5,782 5,414
67,367 61,897
2005 2004
The aggregate payroll costs of these persons were as follows: £m £m
Wages and salaries 1,101.5 996.4
Social security costs 82.9 69.3
Other pension costs 47.0 34.2
1,231.4 1,099.9
Disclosures on Directors’ remuneration, share options, long-term incentive schemes and pension entitlements required by the Companies Act
1985 and those specified for audit by the Financial Services Authority are contained in the tables/notes within the Directors’ remuneration report
on pages 23 to 29 and form part of these audited financial statements.
2005 2004
6 Net interest payable and similar charges £m £m
Bond and bank facilities 43.3 37.5
Loan notes 1.6 1.5
Finance charges payable in respect of hire purchase contracts and finance leases 2.2 3.3
47.1 42.3
Income from short-term deposits and other investments (4.3) (2.4)
Notional interest on provisions 5.5 2.9
Net interest payable and similar charges before exceptional items 48.3 42.8
Cancellation of interest rate swaps – 18.7
48.3 61.5 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
42
7 Profit on ordinary activities before taxation
2005 2004
Profit on ordinary activities before taxation is stated after charging/(crediting) the following: £m £m
Depreciation and amounts written off tangible fixed assets 107.6 103.0
Goodwill amortisation 25.8 25.9
Rentals payable under operating leases
– plant and machinery 20.4 19.4
– track and station access 281.4 272.2
– hire of rolling stock 84.9 78.4
– other assets 11.8 11.4
Net rents receivable from property (0.3) (0.3)
Deloitte & Touche LLP audit fee 0.6 0.5
Deloitte & Touche LLP and associates’ non-audit fees 0.3 1.1
The Company’s audit fee amounted to £0.1m (2004: £0.1m).
Non-audit fees comprised due diligence on acquisitions of £119,000 (2004: £474,000), UK Rail franchise reviews of £nil (2004: £280,000),
other assurance services including the review of the interim accounts of £80,000 (2004: £122,000), UK bond issue £nil (2004: £50,000),
International Financial Reporting Standards work £60,000 (2004: £50,000), tax advisory services of £nil (2004: £33,000) and other non-audit
services of £50,000 (2004: £69,000).
2005 2004
8 Tax on profit on ordinary activites £m £m £m £m
Current taxation
UK corporation tax charge for the year 21.8 20.3
Adjustment in respect of prior years (3.5) 0.2
18.3 20.5
Overseas taxation charge
Current year 0.7 0.8
Total current taxation 19.0 21.3
Deferred taxation (see note 20)
Origination and reversal of timing differences 17.5 10.0
Adjustment in respect of prior years (3.8) (0.7)
13.7 9.3
32.7 30.6
The standard rate of taxation for the year, based on the UK standard rate of corporation tax is 30%. The actual current tax charge for the current
and previous year differed from the standard rate for the reasons set out in the following reconciliation:
2005 2004
% %
Standard rate of taxation 30.0 30.0
Factors affecting charge
Disallowable expenses 1.2 1.7
Property disposals (0.8) (4.8)
Capital allowances in excess of depreciation (10.5) (11.5)
Other timing differences (4.9) (2.2)
Foreign tax charged at different rates 2.4 2.7
Utilisation of tax losses brought forward (0.3) (0.3)
Unrelieved tax losses carried forward 0.4 1.6
Prior years’ tax charge (2.7) 0.2
14.8 17.4
No provision has been made for deferred tax on revalued property. The tax on the gains arising would only become payable if the property were sold
without rollover relief being available. The tax which would be payable under such circumstances is estimated to be £0.2m (2004: £0.2m). These
assets are expected to be used in the continuing operations of the business and, therefore no tax is expected to be paid in the foreseeable future.
No deferred tax has been recognised on property gains as it is anticipated that rollover relief will be available. To benefit from the relief the
proceeds should be reinvested in new property within three years of disposal. The tax that would be payable assuming that reinvestment was not
made within three years amounts to £7.0m (2004: £6.0m).
No deferred tax has been provided on the future remittance of overseas reserves as it is not expected that the reserves will be repatriated to
the UK in the foreseeable future. 43
2005 2004
9 Equity dividends £m £m
Ordinary shares of 5p each
– Interim paid 4.125p (2004: 3.75p) per share 16.4 15.5
– Final proposed 8.69p (2004: 7.9p) per share 34.2 31.8
50.6 47.3
10 Earnings per share (EPS)
Basic EPS is based on earnings of £89.7m (2004: £91.3m) and on the weighted average number of ordinary shares of 399.2m (2004: 410.0m) in
issue. Diluted EPS is based on the same earnings and on the weighted average number of ordinary shares of 402.0m (2004: 411.5m).
2005 2004
No. No.
A reconciliation of the number of shares used in the basic and diluted measures is set out below: (m) (m)
Weighted average number of shares used in basic calculation 399.2 410.0
SAYE share options 2.6 1.5
Executive share options 0.2 –
402.0 411.5
The adjusted basic EPS and adjusted cash EPS measures are intended to demonstrate recurring elements of the results of the Group before
goodwill amortisation, bid costs and other exceptional items. Both the adjusted basic and cash measures of EPS use the same weighted average
number of ordinary shares as the basic EPS measure. A reconciliation of the earnings used in these measures is set out below:
2005 2004
Earnings Earnings
per share per share
£m (p) £m (p)
Profit for basic EPS calculation 89.7 22.5 91.3 22.3
Goodwill amortisation 25.8 6.4 25.9 6.3
Taxation effect of this adjustment (8.1) (2.0) (8.1) (2.0)
Bid costs and other exceptional items 11.9 3.0 13.5 3.3
Taxation effect of this adjustment (3.6) (0.9) (4.1) (1.0)
Exceptional interest rate charge –– 18.7 4.6
Taxation effect of this adjustment –– (5.6) (1.4)
Profit on disposal of fixed assets (3.3) (0.8) (19.6) (4.8)
Profit for adjusted basic EPS calculation 112.4 28.2 112.0 27.3
Depreciation* 107.4 26.9 103.0 25.1
Profit for adjusted cash EPS calculation 219.8 55.1 215.0 52.4
*Depreciation charge of £107.6m per note 12 less £0.2m of depreciation attributable to equity minority interests.
11 Goodwill £m
Cost
At 1 April 2004 562.6
Additions 25.8
Exchange rate differences (13.9)
At 31 March 2005 574.5
Amortisation
At 1 April 2004 101.4
Charge for year 25.8
Exchange rate differences (3.3)
At 31 March 2005 123.9
Net book value
At 31 March 2005 450.6
At 31 March 2004 461.2 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
44
Passenger Other
Land and carrying plant and
buildings vehicle fleet equipment Total
12 Tangible fixed assets £m £m £m £m
Cost or valuation
At 1 April 2004 141.5 1,174.0 154.6 1,470.1
Subsidiary undertakings and businesses acquired 2.9 29.5 2.4 34.8
Additions 12.2 96.5 26.6 135.3
Disposals (6.9) (32.9) (21.1) (60.9)
Exchange rate differences (0.6) (13.0) (1.1) (14.7)
At 31 March 2005 149.1 1,254.1 161.4 1,564.6
Depreciation
At 1 April 2004 21.5 548.5 102.5 672.5
Subsidiary undertakings and businesses acquired ––––
Charge for year 3.0 88.0 16.6 107.6
Disposals (0.7) (29.4) (19.2) (49.3)
Exchange rate differences (0.1) (5.7) (0.6) (6.4)
At 31 March 2005 23.7 601.4 99.3 724.4
Net book value
At 31 March 2005 125.4 652.7 62.1 840.2
At 31 March 2004 120.0 625.5 52.1 797.6
2005 2004
The net book value of land and buildings comprises: £m £m
Freehold 104.2 101.0
Long leasehold 17.2 15.6
Short leasehold 4.0 3.4
125.4 120.0
Depreciation is not provided on the land element of freehold and long leasehold property which amounts to £35.5m (2004: £31.7m).
2005 2004
The assets that have been revalued comprise the following land and buildings: £m £m
At 1993 professional valuations 9.6 12.6
Aggregate depreciation thereon (1.2) (1.3)
Net book value 8.4 11.3
Historical cost of revalued assets 9.2 10.9
Aggregate depreciation based on historical cost (2.6) (3.0)
Historical net book value 6.6 7.9
The 1993 professional valuations were carried out by RICS Chartered Surveyors on the basis of open market value for existing use.
Included in the net book value above is £105.3m (2004: £133.0m) of tangible fixed assets held under hire purchase contracts and finance leases.
The depreciation charge on these assets during the year was £12.4m (2004: £18.1m). 45
Other
13 Fixed asset investments
investments
Group £m
Cost
At 1 April 2004 and 31 March 2005 7.5
Provision
At 1 April 2004 and 31 March 2005 (7.5)
Net book value
At 31 March 2005 –
At 31 March 2004 –
Unlisted
subsidiary Other
undertakings investments Total
Company £m £m £m
Cost
At 1 April 2004 1,689.3 8.1 1,697.4
Additions 0.1 – 0.1
At 31 March 2005 1,689.4 8.1 1,697.5
Provision
At 1 April 2004 and 31 March 2005 (5.4) (8.1) (13.5)
Net book value
At 31 March 2005 1,684.0 – 1,684.0
At 31 March 2004 1,683.9 – 1,683.9
Subsidiary undertakings
The principal subsidiary undertakings of FirstGroup plc at the end of the year were:
UK local bus and coach operators First Midland Red Buses Limited Transit contracting, fleet maintenance
CentreWest London Buses Limited First PMT Limited and other services
First Aberdeen Limited+ First Somerset & Avon Limited First Transit, Inc†
First Beeline Buses Limited First South Yorkshire Limited SKE Support Services, Inc†
First Bristol Limited First Wessex Limited
First Capital East Limited First West Yorkshire Limited Rail companies
First Capital North Limited First York Limited Great Western Trains Company Limited
First Cymru Buses Limited Leicester CityBus Limited (94%) North Western Trains Company Limited
First Devon & Cornwall Limited Northampton Transport Limited FirstInfo Limited
First Eastern Counties Limited First/Keolis TransPennine Limited (55%)
First Edinburgh Limited+ North America school bus operators Hull Trains Company Limited (80%)
First Essex Buses Limited First Student, Inc† GB Railfreight Limited
First Glasgow (No. 1) Limited+ FirstBus Canada Limited‡ First Great Western Link Limited
First Glasgow (No. 2) Limited+ FirstGroup America, Inc† First ScotRail Limited
First Hampshire and Dorset Limited FirstGroup USA, Inc†
First Manchester Limited Cardinal Transportation Group, Inc†
Cardinal Coach Lines Limited‡ (60%) NOTES TO THE FINANCIAL STATEMENTS CONTINUED
46
13 Fixed asset investments continued
All subsidiary undertakings are wholly owned at the end of the year except where percentage of ownership is shown above. All these companies
above are incorporated in Great Britain and registered in England and Wales except those marked + which are registered in Scotland, those
marked † which are incorporated in the United States of America and those marked ‡ which are registered in Canada.
All shares held in subsidiary undertakings are ordinary shares, with the exception of Leicester CityBus Limited where the Group owns 100% of
its redeemable cumulative preference shares, as well as 94% of its ordinary shares.
All of these subsidiary undertakings are owned via intermediate holding companies.
There are, in addition to those listed above, a number of subsidiary undertakings which are mostly intermediate holding companies or were
dormant throughout the year. A full list of subsidiary undertakings is filed with the Annual Return to the Registrar of Companies.
Other investments
The interest in other investments at the end of the year is a 6% interest in the ordinary share capital of Prepayment Cards Limited, which is
incorporated in Great Britain and registered in England and Wales.
2005 2004
14 Stocks £m £m
Spare parts and consumables 30.7 24.0
Property development work in progress 9.4 11.1
40.1 35.1
There is no material difference between the balance sheet value of stocks and their replacement cost.
Group Company
2005 2004 2005 2004
15 Debtors £m £m £m £m
Amounts due within one year
Trade debtors 258.2 233.9 – –
Amounts due from subsidiary undertakings – – 917.7 1,203.0
Corporation tax recoverable – – 15.3 15.3
Deferred taxation – – 0.9 0.9
Other debtors 61.1 52.7 – –
Pension funds’ prepayments 12.1 10.4 – –
Other prepayments and accrued income 48.2 47.6 – –
379.6 344.6 933.9 1,219.2
Amounts due after more than one year
Pension funds’ prepayments 57.0 48.7 – –
Other prepayments and accrued income 1.2 1.4 – –
58.2 50.1 – –
437.8 394.7 933.9 1,219.2
Group Company
2005 2004 2005 2004
16 Current asset investments £m £m £m £m
Ring-fenced bank deposits 7.5 30.3 – –
Group Company
2005 2004 2005 2004
17 Cash at bank and in hand £m £m £m £m
Ring-fenced cash 62.8 68.7 – –
Other cash 83.8 26.2 – –
146.6 94.9 – –
Under the terms of the Rail franchise agreements, cash can only be distributed by the train operating companies either up to the amount of
retained profits or in relation to prescribed liquidity ratios. The ring-fenced cash represents that which is not available for distribution or the amount
required to satisfy the contractual liquidity ratio at the balance sheet date. 47
Group Company
2005 2004 2005 2004
18 Creditors £m £m £m £m
Amounts due within one year
Bank loans and overdrafts 49.6 52.0 179.6 174.4
Other loans 1.8 – – –
Obligations under hire purchase contracts and finance leases 9.0 20.8 – –
Loan notes 0.5 0.3 0.3 0.3
Trade creditors 122.4 156.4 – –
Amounts due to subsidiary undertakings – – 498.0 834.4
Corporation tax 28.2 25.1 – –
Other tax and social security 24.6 21.2 – –
Other creditors 42.2 15.9 – –
Pension funds’ creditors 9.5 11.7 – –
Accruals and deferred income 324.6 271.8 31.5 24.7
Season ticket deferred income 13.3 40.3 – –
Proposed dividends 35.1 32.4 35.1 32.4
660.8 647.9 744.5 1,066.2
Group Company
2005 2004 2005 2004
£m £m £m £m
Amounts falling due after more than one year
Bank loans
Due in more than one year but not more than two years 1.3 – – –
Due in more than two years but not more than five years 182.5 110.6 180.0 110.6
Due in more than five years 3.1 – – –
Other loans
Due in more than one year but not more than two years 1.3 – – –
Due in more than two years but not more than five years 3.3 – – –
Due in more than five years 1.3 – – –
Obligations under hire purchase contracts and finance leases
Due in more than one year but not more than two years 2.5 7.7 – –
Due in more than two years but not more than five years 7.5 3.6 – –
Due in more than five years 5.1 4.8 – –
Loan notes
Due in more than one year but not more than two years 20.5 21.0 6.6 6.9
£300.0m Sterling bond – 6.875% 2013 296.0 295.5 296.0 295.5
£250.0m bond – 6.125% 2019 231.9 239.6 231.9 239.6
756.3 682.8 714.5 652.6
Bank loans and overdrafts
Whilst advances under bank facilities are generally repayable within a few months of the balance sheet date, they have been classified by
reference to the maturity date of the longest refinancing permitted under these facilities in accordance with FRS 4. The bank loans and overdrafts
are unsecured.
The maturity profile of the undrawn committed borrowing facilities is as follows:
2005 2004
Facilities maturing: £m £m
Within one year 6.4 –
More than two years 340.0 390.4
346.4 390.4
Hire purchase contracts and finance leases
Hire purchase contract and finance lease liabilities are secured on the assets to which they relate. The contracts vary in length between four and
12 years. NOTES TO THE FINANCIAL STATEMENTS CONTINUED
48
18 Creditors continued
Loan notes
The loan notes have been classified by reference to the earliest date on which the loan note holders can request redemption. Loan notes of
£20.0m (2004: £20.5m) are supported by unsecured bank guarantees.
Bonds
The £300m bond is repayable in 2013 and is shown net of £4.0m (2004: £4.5m) of issue related costs which are being amortised over the term of
the bond.
The £250m bond is repayable in 2019 and is swapped to US Dollars. The Sterling equivalent shown is net of a foreign exchange gain of
£16.9m (2004: gain of £9.1m) on retranslation at year end and is also net of £1.2m (2004: £1.3m) of issue related costs which are being
amortised over the term of the bond.
Certain subsidiaries have issued unsecured guarantees to the Company’s bondholders. These unsecured guarantees rank pari passu with
unsecured guarantees provided by those subsidiaries to the Group’s bank lenders participating in the Group’s £520m syndicated bank facility.
19 Financial assets and liabilities
Foreign currencies
At 31 March 2005, the Group’s profit and loss account was not exposed to material exchange rate risk from monetary assets and liabilities
denominated in foreign currencies as all such material balances are used to hedge the Group’s overseas net assets.
Interest rates
After taking into account interest rate swaps entered into by the Group, details of the interest rate profile of the Group’s financial liabilities, excluding
cash, was as follows:
Fixed rate liabilities
Weighted
Total average Weighted
financial Floating Fixed interest average
liabilities rate rate rate period
£m £m £m % years
At 31 March 2005
Sterling 562.6 192.8 369.8 6.95 7.2
US Dollars 234.1 1.1 233.0 3.40 0.5
Canadian Dollars 20.5 8.3 12.2 7.45 2.5
Euros –––––
817.2 202.2 615.0
At 31 March 2004
Sterling 490.3 108.7 381.6 6.97 8.0
US Dollars 249.6 83.3 166.3 2.89 2.5
Canadian Dollars 8.0 8.0–––
Euros 8.0 8.0–––
755.9 208.0 547.9
No new interest rate derivatives were entered into during 2004/05. Certain US Dollar fixed rate swaps were terminated in March 2005 and new
US Dollar interest rate collars to March 2009 were entered into shortly after the year end.
Bank margins negotiated on floating rate debt range from 0.225% to 0.8% over Sterling LIBOR and US Dollar LIBOR where applicable, or the
bank base rate for the currency concerned.
Financial assets, which consist wholly of cash on deposit and in hand of £154.1m (2004: £125.2m), are all denominated in Sterling except
£15.3m (2004: £3.0m) in US Dollars and £0.8m (2004: £0.6m) in Canadian Dollars. Deposited cash earns interest at commercial rates negotiated
with counterparty banks. 49
19 Financial assets and liabilities continued
Fair values
Details of the book values and fair values of the financial assets and liabilities are as follows:
2005 2005 2004 2004
Book Fair Book Fair
value value value value
£m £m £m £m
Bank deposits 7.5 7.5 30.3 30.3
Cash at bank and in hand 146.6 146.6 94.9 94.9
Bank and other loans and overdrafts (244.2) (245.3) (162.6) (162.6)
Obligations under hire purchase contracts and finance leases (24.1) (24.8) (36.9) (38.4)
Loan notes (21.0) (27.7) (21.3) (25.8)
Interest rate swaps – (2.7) – (6.5)
Fuel derivatives – 31.4 – 9.5
£300m bond (296.0) (320.0) (295.5) (316.3)
£250m bond (swapped to US Dollars) (231.9) (236.6) (239.6) (243.8)
(663.1) (671.6) (630.7) (658.7)
In order to protect the Group’s financial position and performance against net interest rate risk, the Group uses interest rate swaps and fixed rate
debt. As a result of movements in interest rates, differences arise between book values and fair values, which are categorised as unrecognised gains
and losses as required under FRS 13.
The Group also protects its financial position and performance against fuel price risk using a range of fuel derivatives. Movements in fuel prices
relative to the prices provided by the derivatives gives rise to differences between book and fair values which are categorised as unrecognised gains
and losses as required under FRS 13.
Fair values for derivatives and the bonds have been supplied externally by the respective counterparties and banks using market rates prevailing
at year end. The book value of the £300m bond is stated at its par value less issue costs of £4.0m (2004: £4.5m). The book value of the £250m
bond, which is swapped to US Dollars is stated at its par value less issue costs of £1.2m (2004: £1.3m) and net of an unrealised foreign exchange
gain of £16.9m (2004: gain of £9.1m). Fair values for hire purchase debt and loan notes have been determined by discounting future cash flows that
will arise under these liabilities.
The movement in net unrecognised gains and losses on instruments used to hedge interest rate risk and fuel price risk are as follows:
Net unrecognised gains/(losses)
2005 2004
£m £m
At beginning of year 3.0 (15.7)
Arising in previous year but recognised in the year (4.3) 23.4
Arising before beginning of year and remaining at the end of the year (1.3) 7.7
Arising in the year 29.9 (4.7)
At end of year 28.6 3.0
It is expected that £26.8m of the net unrecognised gains (2004: £3.0m) will be recognised in the following year. Further information on financial
instruments is given in the Financial review on pages 13 to 16.
20 Provisions for liabilities and charges Deferred Insurance
tax claims Pensions Total
Group £m £m £m £m
At 1 April 2004 96.4 25.8 5.9 128.1
Provided in the year 13.7 20.9 – 34.6
Utilised in the year – (17.6) (0.2) (17.8)
Subsidiary undertakings acquired (2.2) – – (2.2)
Notional interest – 5.5 – 5.5
Exchange rate differences (0.6) (0.1) – (0.7)
At 31 March 2005 107.3 34.5 5.7 147.5
Most of the insurance claims are expected to be settled within eight years. The pensions payments will be spread over several decades. NOTES TO THE FINANCIAL STATEMENTS CONTINUED
50
21 Deferred tax
2005 2004
Group £m £m
Capital allowances in excess of depreciation 134.3 124.8
Other timing differences 13.5 12.7
Trading losses (40.5) (41.1)
Deferred tax provision 107.3 96.4
22 Called up share capital
2005 2004
Group and Company £m £m
Authorised
Ordinary shares of 5p each 30.0 30.0
Allotted, called up and fully paid
Ordinary shares of 5p each 19.9 20.1
No.
The changes in the number and amount of issued share capital during the year are set out below: (m) £m
At beginning of year 403.0 20.1
Shares cancelled (4.2) (0.2)
At end of year 398.8 19.9
Between 14 May 2004 and 14 September 2004, 4,200,000 shares were repurchased at a total cost of £11.9m and cancelled. In addition
between 22 September 2004 and 23 March 2005, 5,200,000 shares were repurchased for a total cost of £17.8m and are being held as Treasury
Shares at 31 March 2005.
Share Profit
23 Reserves premium Revaluation Own and loss
account reserve shares account
Group £m £m £m £m
At 1 April 2004 238.8 3.4 – 86.8
Prior year adjustment on adoption of UITF 38 (note 1) – – (0.6) –
At 1 April 2004 as restated 238.8 3.4 (0.6) 86.8
Cancellation of shares – – – (11.9)
Retained profit for the year – – – 39.1
Movement in EBT, QUEST and Treasury Shares during the year – – (18.3) –
Foreign exchange differences – – – (14.2)
Transfer of realised revaluation reserve – (1.6) – 1.6
At 31 March 2005 238.8 1.8 (18.9) 101.4
Own shares
Details of the number and market value of own shares held in the FirstGroup plc ESOP and other employee trusts are as follows:
No. 2005 No. 2004
(m) £m (m) £m
Own shares held by trustees 1.6 5.5 2.7 7.3
Own shares vested unconditionally (1.3) (4.5) (2.5) (6.6)
0.3 1.0 0.2 0.7
The number of own shares held by the Group at the end of the year was 5,487,369 (2004: 246,431) FirstGroup plc ordinary shares of 5p each. Of
these, 22,906 (2004: 206,422) were held by the FirstGroup plc Employee Benefit Trust, 264,463 (2004: 40,099) by the FirstGroup plc Qualifying
Employee Share Ownership Trust (QUEST) and 5,200,000 (2004: nil) were held as Treasury Shares. The shares held by the QUEST are being used
to satisfy exercises of savings related share options. Both trusts and Treasury Shares have waived the rights to dividend income from the
FirstGroup plc shares. The market value of the shares at 31 March 2005 was £18.9m (2004: £0.7m). 51
23 Reserves continued
Capital
redemption Capital Total other
reserve reserve reserves
£m £m £m
At 1 April 2004 1.7 2.7 4.4
Cancellation of shares 0.2 – 0.2
At 31 March 2005 1.9 2.7 4.6
The cumulative amount of positive and negative goodwill arising from acquisitions of subsidiaries and associates written off directly to reserves at
the end of the year was £429.6m and £4.7m respectively (2004: £429.6m and £4.7m).
Share Profit
premium Own and loss
account shares account
Company £m £m £m
At 1 April 2004 238.8 – 664.1
Prior year adjustment on adoption of UITF 38 (note 1) – (0.6) –
At 1 April 2004 as restated 238.8 (0.6) 664.1
Cancellation of shares – – (11.9)
Retained profit for the year – – 4.8
Movement in EBT, QUEST and Treasury Shares during the year – (17.8) –
Foreign exchange differences – – (0.5)
At 31 March 2005 238.8 (18.4) 656.5
Capital
redemption Capital Merger Total other
reserve reserve reserve reserves
£m £m £m £m
At 1 April 2004 1.7 93.8 166.4 261.9
Cancellation of shares 0.2 – – 0.2
At 31 March 2005 1.9 93.8 166.4 262.1
2005 2004
24 Notes to the consolidated cash flow statement £m £m
(a) Reconciliation of operating profit to net cash inflow from operating activities
Operating profit 173.9 164.7
Depreciation and other amounts written off tangible fixed assets 107.6 103.0
Amortisation charges 25.8 25.9
Loss on sale of non-property fixed assets 1.9 1.3
Increase in stocks (2.6) (1.3)
Increase in debtors (51.0) (49.4)
(Decrease)/increase in creditors and provisions (8.4) 68.1
Net cash inflow from operating activities 247.2 312.3
(b) Returns on investments and servicing of finance
Interest received 6.8 2.4
Interest paid (35.1) (44.3)
Dividends paid to minority shareholders (3.1) –
Cancellation of interest rate swaps – (18.7)
Interest element of hire purchase contracts and finance lease payments (2.3) (3.3)
Fees on issue of bond and loan facilities – (1.3)
Net cash outflow from returns on investments and servicing of finance (33.7) (65.2) NOTES TO THE FINANCIAL STATEMENTS CONTINUED
52
24 Notes to the consolidated cash flow statement continued
2005 2004
(c) Capital expenditure and financial investment £m £m
Purchase of tangible fixed assets (124.3) (179.8)
Sale of fixed asset properties 22.9 25.4
Sale of other tangible fixed assets 4.2 7.1
Net cash outflow from capital expenditure and financial investment (97.2) (147.3)
(d) Acquisitions and disposals
Purchase of subsidiary undertakings (25.3) (33.7)
Purchase of businesses (15.4) (26.4)
Net cash acquired with purchase of subsidiary undertakings and businesses 3.5 10.4
Net cash outflow from acquisitions and disposals (37.2) (49.7)
(e) Financing
Own shares repurchased (29.7) (29.2)
Bond 2019 – 250.0
Shares purchased by Employee Benefit Trust and QUEST (0.3) –
New bank loans 90.4 –
Repayments of amounts borrowed:
– Bank loans – (149.2)
– Loan notes (0.3) (0.6)
New hire purchase contracts and finance leases – 10.2
Capital element of hire purchase and finance lease payments (20.2) (35.0)
Net cash inflow from financing 39.9 46.2
At Other At
31 March non-cash 31 March
2004 Cash flow changes 2005
25 Analysis of net debt £m £m £m £m
Cash at bank and in hand 94.9 52.9 (1.2) 146.6
Bank overdrafts (33.0) 24.8 – (8.2)
Cash 61.9 77.7 (1.2) 138.4
Current asset investments 30.3 (22.8) – 7.5
Bank and other loans due within one year (19.0) (21.1) (3.1) (43.2)
Bank and other loans due after one year (110.6) (69.4) (12.8) (192.8)
Sterling bond 2013 (295.5) – (0.5) (296.0)
Sterling bond 2019 (239.6) – 7.7 (231.9)
Obligations under hire purchase contracts and finance leases (36.9) 20.2 (7.4) (24.1)
Loans and loan notes (21.3) 0.3 – (21.0)
Financing (722.9) (70.0) (16.1) (809.0)
Net debt (630.7) (15.1) (17.3) (663.1)
Current asset investments represent unencumbered bank deposits of maturity of less than one year. 53
26 Major non-cash transactions
Other non-cash movements in note 25 include £7.0m (2004: £41.9m) of foreign exchange movements.
2005 2004
27 Summary of purchase of businesses and subsidiary undertakings £m £m
Provisional fair values of net assets acquired:
Tangible assets 34.8 15.5
Other current assets 17.1 7.3
Cash at bank and in hand 3.5 –
Loans and finance leases (20.6) –
Minority shareholders’ interests (4.2) –
Other creditors (19.2) (11.3)
11.4 11.5
Goodwill (note 11) 25.8 14.9
37.2 26.4
Satisfied by cash paid and payable 37.2 26.4
There was no material difference between the book value and the provisional fair values of the net assets acquired and there were no adjustments
required in respect of accounting policy alignments.
The businesses and subsidiary undertakings acquired during the year contributed £8.1m (2004: £8.6m) to the Group’s net operating cash
flows. There were no other cash flow movements from the businesses acquired during the year or the previous year.
The businesses and subsidiary undertakings acquired during the year and dates of acquisition were:
SKE Support Services, Inc 1 August 2004
Orange County Limousine Service 10 August 2004
FirstCall South Towns Wheelchair Van Service, Inc 1 November 2004
Village Bus Company, Inc 1 November 2004
Cardinal Coach Lines Limited 1 January 2005
Godeffroy Car Company, Inc 11 February 2005
28 Commitments
Capital commitments
Capital commitments at the end of the year for which no provision has been made are as follows:
2005 2004
£m £m
Contracted for but not provided 97.8 2.1
Capital commitments at 31 March 2005 principally represent buses ordered in both the United Kingdom and North America.
Operating leases
The rail businesses have contracts with Network Rail for access to the railway infrastructure (track, stations and depots). They also have contracts
under which they lease rolling stock.
Commitments for payments in the next year under these operating leases are as follows:
2005 2004
£m £m
Operating leases which expire:
Within one year 139.4 13.2
From one to five years 11.5 223.1
Over five years 206.1 52.6
357.0 288.9 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
54
28 Commitments continued
Commitments for payments in the next year under other operating leases are as follows:
Land and Land and
buildings Other buildings Other
2005 2005 2004 2004
£m £m £m £m
Operating leases which expire:
Within one year 2.5 5.4 0.7 3.0
From one to five years 8.1 14.5 8.4 14.8
Over five years 1.7 0.3 2.0 1.6
12.3 20.2 11.1 19.4
29 Contingent liabilities
To support subsidiary undertakings in their normal course of business, the Company has indemnified certain banks and insurance companies who
have issued performance bonds for £225.1m as at 31 March 2005 (2004: £186.8m) and letters of credit for £149.2m as at 31 March 2005 (2004:
£138.0m). The performance bonds relate to the North American businesses (£123.9m) and the UK Rail franchise operations (£101.2m). The letters
of credit relate substantially to insurance arrangements in the UK and North America.
The Company has provided a £15.5m (2004: £15.5m) unsecured loan facility to Great Western Trains Company Limited (GWT), a £3.2m
unsecured loan facility to First/Keolis TransPennine Limited (TPE) and a £13.6m unsecured loan facility to First ScotRail Limited as required by the
Director of Passenger Rail Franchising. Neither of the TPE or GWT loans were drawn at 31 March 2005 or 31 March 2004, while the ScotRail loan
was fully drawn at 31 March 2005.
The Company is party to certain unsecured guarantees granted to banks for overdraft and cash management facilities provided to itself and
subsidiary undertakings. The Company has given certain unsecured guarantees for the liabilities of its subsidiary undertakings arising under certain
loan notes, hire purchase contracts, finance leases, operating leases, supply contracts and certain pension scheme arrangements. It also provides
unsecured cross guarantees to certain subsidiary undertakings as required by VAT legislation. UK bus subsidiaries have provided unsecured
guarantees on a joint and several basis to Trustees of the UK Occupational Pension Scheme.
Certain of the Company’s subsidiaries have issued unsecured guarantees to the Company’s bondholders. These unsecured guarantees rank
pari passu with unsecured guarantees provided by those subsidiaries to lenders participating in the Group’s £520m syndicated bank facility.
30 Pension schemes
The Group operates or participates in a number of pension schemes which cover the majority of UK employees and certain North American
employees. These are principally defined benefit schemes under which benefits provided are based on employees’ number of years of service and
final salary. The scope of benefits varies between schemes. The assets of the schemes are held in separately administered trusts which are
managed independently of the Group’s finances by investment managers appointed by the schemes’ trustees.
Formal independent actuarial valuations are undertaken at least triennially.
The various defined benefit schemes include five UK Bus Division schemes where the subsidiary undertaking is a participating employer in a
scheme operated by a local authority. These schemes are subject to relevant local government regulations. Great Western Trains Company
Limited, First ScotRail Limited, First Great Western Link Limited, GB Rail and TransPennine Express have sections in the Railways Pension
Scheme (RPS) which is an industry-wide arrangement for employees of those companies previously owned by British Railways Board. All other
Group schemes are self-administered.
At their last triennial valuations, the defined benefit schemes had funding levels between 68.0% and 121.0%. The market value of the assets at
31 March 2005 for all defined benefit schemes totalled £1,580m (2004: £1,254m).
Contributions are paid to all defined benefit schemes in accordance with rates recommended by the schemes’ actuaries. The total charge to
the profit and loss account in the year in respect of defined benefit schemes was £43.4m (2004: £31.9m).
The valuation assumptions used for accounting purposes have been made uniform to Group standards, as appropriate, when each scheme is
actuarially valued. For these new valuations (excluding the local government and RPS schemes), the assumptions which are being used are that
the rate of return on investment will be 7.0% pre-retirement (6.75% in respect of future benefit accrual), and 6.0% post-retirement (5.75% in
respect of future benefit accrual), the rate of earnings growth will be 4.0%, and the rate of inflation will be 2.5%. These new valuations are made
using the projected unit method. 55
30 Pension schemes continued
Prepayment
A net prepayment of £59.6m (2004: £47.4m) is included in the Group’s consolidated balance sheet in respect of the sum of the cumulative
differences between contributions paid by the Group into the schemes and the charge to the profit and loss account under SSAP 24, and the
surpluses and deficits that have been recognised on acquisition.
For accounting purposes the pension costs for the RPS are determined by spreading the expected company cash contributions over the term
of the relevant franchise.
Defined contribution schemes
In addition, the Group operates some defined contribution schemes, the assets of which are held in separately administered trusts. The cost of
these in the year was £3.6m (2004: £2.3m).
The Group pays certain costs on behalf of the various pension schemes and then re-charges the costs to the schemes.
Transitional FRS 17 disclosures
The additional disclosures required by FRS 17 during the transitional period for the defined benefit schemes are set out below. They are based on
the most recent actuarial valuations described above, which have been updated by independent professionally qualified actuaries to take account
of the requirements of FRS 17.
The main financial assumptions (per annum) used in this update were as follows:
2005 2004 2003
% %%
Rate of increase in salaries 4.1 4.1 3.6
Rate of increase of pensions in payment* 2.6 2.6 2.1
Rate of increase of pensions in deferment 2.6 2.6 2.1
Discount rate 5.5 5.7 5.7
Inflation assumption 2.6 2.6 2.1
*Certain in-house bus schemes’ pensions in payment receive LPI increases of 2.5% (2004: 2.5%) and LPI increases with a minimum of 3% assumed to be 3.3% (2004: 3.3%).
The value of the schemes’ assets and the expected rates of return as at 31 March 2005 were:
Expected rate
of return UK Bus Rail US Total
%£m£m£m£m
Equities 8.8 718.9 365.5 11.2 1,095.6
Bonds 4.7 230.3 47.9 4.2 282.4
Property 6.7 80.8 41.0 – 121.8
Other 3.6 54.7 24.4 0.7 79.8
1,084.7 478.8 16.1 1,579.6
Total market value of assets 1,084.7 478.8 16.1 1,579.6
Present value of scheme liabilities (1,276.4) (539.5) (25.4) (1,841.3)
Pension deficits (191.7) (60.7) (9.3) (261.7)
Related deferred tax asset 57.5 18.2 3.5 79.2
Net pension deficit (134.2) (42.5) (5.8) (182.5)
As noted in the Financial review, the net FRS 17 deficit of £182.5m at 31 March 2005 comprises a £139.3m deficit (2004: £162.0m deficit)
relating to non-Rail schemes (including a £0.7m surplus (2004: £0.6m deficit) in respect of GB Railfreight and Hull Trains) and a £43.2m deficit
(2004: £27.5m deficit) relating to Rail franchises where no liability will be borne beyond the period of the franchise. NOTES TO THE FINANCIAL STATEMENTS CONTINUED
56
30 Pension schemes continued
The value of the schemes’ assets and the expected rates of return as at 31 March 2004 were:
Expected rate
of return UK Bus Rail US Total
%£m£m£m£m
Equities 8.8 610.5 234.8 8.9 854.2
Bonds 4.7 205.2 37.4 2.4 245.0
Property 6.7 88.2 22.9 – 111.1
Other 4.1 42.3 – 1.4 43.7
946.2 295.1 12.7 1,254.0
Total market value of assets 946.2 295.1 12.7 1,254.0
Present value of scheme liabilities (1,165.7) (335.2) (25.3) (1,526.2)
Pension deficits (219.5) (40.1) (12.6) (272.2)
Related deferred tax asset 65.9 12.0 4.8 82.7
Net pension deficit (153.6) (28.1) (7.8) (189.5)
The value of the schemes’ assets and the expected rates of return as at 31 March 2003 were:
Expected rate
of return UK Bus Rail US Total
%£m£m£m£m
Equities 8.8 469.8 146.8 6.5 623.1
Bonds 4.5 184.7 18.5 2.8 206.0
Property 6.7 46.5 14.6 – 61.1
Other 3.6 42.2 – 1.5 43.7
743.2 179.9 10.8 933.9
Total market value of assets 743.2 179.9 10.8 933.9
Present value of scheme liabilities (1,006.4) (209.1) (27.3) (1,242.8)
Pension deficits (263.2) (29.2) (16.5) (308.9)
Related deferred tax asset 79.0 8.8 6.4 94.2
Net pension deficit (184.2) (20.4) (10.1) (214.7) 57
30 Pension schemes continued
If FRS 17 had been adopted in these financial statements, the Group’s net assets and profit and loss reserve would have been as follows:
2005 2004
£m £m
Net assets excluding pension liability 358.2 355.0
Pension liability (182.5) (189.5)
175.7 165.5
Less: SSAP 24 items included in net assets that will be reversed on implementation of FRS 17 (41.7) (33.2)
Net assets on FRS 17 basis 134.0 132.3
Profit and loss reserve excluding pension liability 101.4 86.8
Pension reserve (182.5) (189.5)
(81.1) (102.7)
Less: SSAP 24 items included in net assets that will be reversed on implementation of FRS 17 (41.7) (33.2)
Profit and loss reserve on FRS 17 basis (122.8) (135.9)
It should be noted that the £122.8m profit and loss deficit above is on a consolidated basis. As at 31 March 2005 FirstGroup plc had £656.5m of
retained profits available for distribution.
Had the Group adopted FRS 17 the amounts charged to the profit and loss account would have been as follows:
Analysis of amount charged to operating profit:
2005 2004
£m £m
Current service costs 46.1 41.4
Past service costs – 0.9
Gain on settlements and curtailments – (1.9)
Total operating charge 46.1 40.4
Analysis of amount (credited)/charged to net finance charges:
2005 2004
£m £m
Expected return on pension scheme assets (89.7) (66.6)
Interest on pension scheme liabilities 80.3 68.7
Net (credit)/charge (9.4) 2.1
Analysis of the actuarial gain in the statement of total recognised gains and losses (STRGL):
2005 2004
£m £m
Actual return less expected return on pension scheme assets 44.2 141.0
Experience gains and losses arising on scheme liabilities 20.3 6.4
Changes in assumptions underlying the present value of scheme liabilities (53.7) (106.1)
Actuarial gain recognised in STRGL 10.8 41.3 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
58
30 Pension schemes continued
Movement in schemes’ deficit during the year:
2005 2004
£m £m
Deficit at beginning of year (272.2) (308.9)
Movement in year:
Acquisitions and new Rail franchises (19.2) (4.6)
Current service cost (46.1) (41.4)
Contributions 55.6 42.5
Past service costs – (0.9)
Curtailment costs – 1.9
Net finance income /(cost) 9.4 (2.1)
Actuarial gain 10.8 41.3
Deficit at end of year (261.7) (272.2)
History of experience gains and losses 2005 2004 2003
Difference between the expected and actual return on scheme assets:
Amount (£m) 44.2 141.0 (300.2)
Percentage of scheme assets (%) 2.8 11.2 32.1
Experience gains on scheme liabilities:
Amount (£m) 20.3 6.4 26.8
Percentage of the present value of scheme liabilities (%) 1.1 0.4 2.2
Total actuarial gain/(loss) in the statement of total recognised gains and losses:
Amount (£m) 10.8 41.3 (282.9)
Percentage of the present value of scheme liabilities (%) 0.6 2.7 22.8 59
31 Share schemes
(a) Savings related share option scheme
The Company operates an Inland Revenue approved savings related share option scheme. Grants were made in December 2002, December
2003 and December 2004. The scheme is based on eligible employees being granted options and their agreement to opening a sharesave
account with a nominated savings carrier and to save weekly or monthly over a specified period. Sharesave accounts are held with Lloyds TSB.
The right to exercise the option is at the employee’s discretion at the end of the period previously chosen for a period of six months.
The number of options outstanding under each grant at the end of the year was as follows:
2005 2004
Earliest
Number of Ordinary 5p Number of Ordinary 5p Exercise exercise
Grant date employees shares employees shares price (p) date
December 2002 4,356 4,995,147 5,229 5,945,274 192.00 February 06
December 2003 1,919 1,407,555 2,497 1,903,176 232.00 February 07
December 2004 3,382 2,698,997 – – 267.00 February 08
9,657 9,101,699 7,726 7,848,450
(b) Buy As You Earn (BAYE) scheme
BAYE enables eligible employees to purchase shares from their gross income. The Company provides two matching shares for every three shares
bought by employees, subject to a maximum Company contribution of shares to the value of £20 per month. If the shares are held in trust for five
years or more, no income tax and national insurance will be payable. The matching shares will be forfeited if the corresponding partnership shares
are removed from trust within three years of award.
At 31 March 2005 there were 4,313 (2004: 3,938) participants in the BAYE scheme who have cumulatively purchased 1,361,344 (2004:
730,258) shares with the Company contributing 438,584 (2004: 217,513) matching shares on a cumulative basis.
(c) Executive share option scheme
The executive share option scheme (ESOS), together with the deferred share element of the Executive Bonus Scheme replaced the Long-term
incentive plan (LTIP). Options are exercisable between three and ten years of the date of grant provided that the pre-determined performance
criteria are met. Further details of the scheme including the performance criteria, are included in the Directors’ remuneration report.
Details of executive share options outstanding at 31 March 2005 are set out below:
Ordinary 5p shares
2005 2004 Exercise Date original
Scheme No. No. price (p) option granted
FirstGroup Executive Share Option Scheme 732,326 742,715 346.5 August 01
FirstGroup Executive Share Option Scheme 1,097,584 1,148,189 269.0 June 02
FirstGroup Executive Share Option Scheme 1,206,346 1,246,983 287.0 November 03
FirstGroup Executive Share Option Scheme 1,381,893 – 275.1 June 04
4,418,149 3,137,887
The performance period for the August 2001 ESOS expired on 31 March 2004. As the performance criterion was exceeded the participants
became eligible to exercise their awards on 15 August 2004 and have seven years from this date to exercise their options.
The initial performance period for the May 2002 ESOS expired on 31 March 2005. The performance criterion was not achieved and under the
rules of the scheme the performance period has been extended for a further 12 months.
(d) LTIP
Options still unexercised under the LTIP are as follows:
Ordinary 5p shares
2005 2004 Award
Date of award No. No. price (p)
3 July 2000 151,298 369,644 236.00 INDEPENDENT AUDITORS’ REPORT
TO THE MEMBERS OF FIRSTGROUP PLC
60
We have audited the financial statements of FirstGroup plc for the year ended 31 March 2005 which comprise the consolidated profit and loss
account, the balance sheets, the consolidated cash flow statement, the reconciliation of net cash flows to movement in net debt, the consolidated
statement of total recognised gains and losses, the reconciliation of movements in equity shareholders’ funds and the related notes 1 to 31.
These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the part
of the Directors’ remuneration report that is described as having been audited.
This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work
has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and
for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the
Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As described in the statement of Directors’ responsibilities, the Company’s Directors are responsible for the preparation of the financial statements
in accordance with applicable United Kingdom law and accounting standards. They are also responsible for the preparation of the other
information contained in the annual report including the Directors’ remuneration report. Our responsibility is to audit the financial statements and
the part of the Directors’ remuneration report described as having been audited in accordance with relevant United Kingdom legal and regulatory
requirements and auditing standards.
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part
of the Directors’ remuneration report described as having been audited have been properly prepared in accordance with the Companies Act 1985.
We also report to you if, in our opinion, the Directors’ report is not consistent with the financial statements, if the Company has not kept proper
accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law
regarding Directors’ remuneration and transactions with the Company and other members of the Group is not disclosed.
We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the July 2003 FRC
Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required
to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s
corporate governance procedures or its risk and control procedures.
We read the Directors’ report and the other information contained in the annual report for the above year as described in the contents section
including the unaudited part of the Directors’ remuneration report and consider the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the financial statements.
Basis of audit opinion
We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’
remuneration report described as having been audited. It also includes an assessment of the significant estimates and judgements made by
the Directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the circumstances of the
Company and the Group, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ remuneration report described
as having been audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also
evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ remuneration report
described as having been audited.
Opinion
In our opinion:
• the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 March 2005 and of the profit of
the Group for the year then ended; and
• the financial statements and part of the Directors’ remuneration report described as having been audited have been properly prepared in
accordance with the Companies Act 1985.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
London
United Kingdom
10 May 2005 GROUP FINANCIAL SUMMARY
61
2005 2004 2003 2002 2001
Consolidated profit and loss account £m £m £m £m £m
Group turnover 2,693.4 2,479.0 2,291.0 2,164.1 2,054.0
Operating profit before goodwill amortisation, bid costs and other exceptional items 211.6 204.1 216.1 215.0 214.3
Goodwill amortisation (25.8) (25.9) (25.8) (27.3) (25.9)
Bid costs and other exceptional items (11.9) (13.5) (10.6) (20.5) (53.5)
Operating profit 173.9 164.7 179.7 167.2 134.9
Profit before interest 177.2 184.3 189.7 164.2 201.3
Net interest payable (48.3) (42.8) (56.3) (56.3) (64.5)
Exceptional interest charge – (18.7) – – –
Profit before taxation 128.9 122.8 133.4 107.9 136.8
Taxation (32.7) (30.6) (35.8) (33.9) (55.2)
Profit after taxation 96.2 92.2 97.6 74.0 81.6
EBITDA 319.2 307.1 315.3 310.1 302.7
Earnings per share pence pence pence pence pence
Adjusted basic 28.2 27.3 26.8 25.8 23.4
Basic 22.5 22.3 23.4 17.6 18.4
Cash 55.1 52.4 50.6 48.5 44.1
Dividend per share 12.8 11.7 11.0 10.3 9.4
Consolidated balance sheets £m £m £m £m £m
Fixed assets* 1,290.8 1,258.8 1,272.5 1,344.5 1,326.2
Net current liabilities (28.8) (92.9) (115.5) (127.4) (210.6)
Creditors: amounts due after more than one year (756.3) (682.8) (630.9) (687.9) (622.6)
Provision for liabilities and charges (147.5) (128.1) (124.0) (110.7) (93.8)
Equity minority interests (10.6) (2.1) (1.1) (1.0) (0.9)
Equity shareholders’ funds* 347.6 352.9 401.0 417.5 398.3
Share data
Number of shares in issue million million million million million
At year end (excluding Treasury Shares) 393.6 403.0 413.4 419.8 422.4
Average 399.2 410.0 416.7 419.8 422.2
Share price pence pence pence pence pence
At year end 343 268 240 302 305
High 379 306 339 365 312
Low 256 219 200 243 140
Market capitalisation £m £m £m £m £m
At year end 1,369 1,078 992 1,268 1,288
*Prior years restated on adoption of UITF 38. SHAREHOLDER INFORMATION
62
Shareholder enquiries
The Company’s share register is
maintained on our behalf by Lloyds TSB
Registrars, who are responsible for making
dividend payments and updating the
register, including details of changes to
shareholders’ addresses and purchases and
sales of the Company’s shares. If you have
any questions about your shareholding in the
Company or need to notify any changes to
your personal details you should contact:
Lloyds TSB Registrars, The Causeway,
Worthing, West Sussex BN99 6DA.
Telephone: 0870 600 3973.
Employees with queries about shares held
in the Company’s employee share
schemes should contact Lloyds TSB
Registrars at the same address or by
telephoning 0870 241 3938.
Duplicate shareholder accounts
If you receive more than one copy of
Company mailings this may indicate that
more than one account is held in your name
on the Register. This happens when the
registration details of separate transactions
differ slightly. If you believe more than one
account exists in your name you may
contact the Registrars to request that the
accounts are combined. There is no charge
for this service.
Direct dividend payments
If you would like your dividend to be paid
directly into your bank or building society
account, you should contact the Registrars
or complete the dividend mandate attached
to your dividend cheque. Mandating your
dividends has a number of advantages.
Firstly, the dividend will go into your account
on the payment date – there is no chance of
it being delayed in the post and you do not
have to wait for a cheque to clear. Secondly,
the payment method is more secure than
receiving a cheque through the post. Thirdly,
you still receive tax information about the
dividend, which is sent direct to you at your
registered address.
Online information
The Registrars also provide an online service
enabling you to access details of your
shareholding. To view your details and a
range of general information about holding
shares, visit www.shareview.co.uk.
FirstGroup policy on discounts for
shareholders
Shareholders are reminded that it is not
Group policy to offer travel or other
discounts to shareholders, as they may be
used only by a small number of individuals.
The Group would rather maximise dividends,
which are of benefit to all shareholders.
Unsolicited mail
As the Company’s share register is, by law,
open to public inspection, shareholders may
receive unsolicited mail from organisations
that use it as a mailing list. To limit the
amount of unsolicited mail you receive, write
to the Mailing Preference Society,
FREEPOST 22, London, W1E 7EZ or
register online at www.mpsonline.org.uk. 63
Shareholder profile
Number of
At 30 April 2005 holders % Shares held %
By category
Individuals 45,897 96.3 59,315,165 14.9
Banks and nominees 1,549 3.3 328,325,173 82.3
Insurance and assurance 3 – 1,158,151 0.3
Other companies 205 0.4 9,952,211 2.5
Other institutions 2 – 621 –
47,656 100.0 398,751,321 100.0
By size of holding
1-1,000 37,226 78.1 9,292,135 2.3
1,001-5,000 8,069 16.9 17,850,500 4.5
5,001-10,000 1,246 2.6 8,655,822 2.2
10,001-100,000 804 1.7 21,305,002 5.3
Over 100,000 311 0.7 341,647,862 85.7
47,656 100.0 398,751,321 100.0
Financial calendar
Annual General Meeting 14 July 2005
Shares trade ex dividend 20 July 2005
Record date for final dividend* 22 July 2005
Final dividend payment 26 August 2005
Interim results announced November 2005
Interim dividend paid February 2006
Preliminary announcement of full year results May 2006
*Shareholders recorded on the register at this date will receive the final dividend. 64 02 Group overview
03 Financial highlights
04 Chairman’s statement
05 Chief Executive’s review
13 Financial review
17 Board of Directors
18 Corporate governance
23 Directors’ remuneration report
30 Directors’ report
32 Directors’ responsibilities
33 Financial statements contents
34 Consolidated profit and loss account
35 Balance sheets
36 Consolidated cash flow statement
36 Reconciliation of net cash flows to movement in net debt
37 Consolidated statement of total recognised gains and losses
37 Reconciliation of movements in equity shareholders’ funds
38 Notes to the financial statements
60 Independent auditors’ report
61 Group financial summary
62 Shareholder information
THAT’S IT FOR THIS YEAR, BUT IF YOU WANT
MORE INFORMATION ON FIRSTGROUP OR YOU
WANT TO BOOK YOUR JOURNEY PLEASE PAY
US A VISIT AT WWW.FIRSTGROUP .COM TRANSFORMING TRAVEL
ANNUAL REPORT 2005
Principal and Registered Office
FırstGroup plc
395 King Street
Aberdeen AB24 5RP
Telephone: 01224 650100
Facsimile: 01224 650140
Registered in Scotland
number SC157176
London Office
FırstGroup plc
Third Floor
E Block
Macmillan House
Paddington Station
London W2 1FG
Telephone: 020 7291 0505
Facsimile: 020 7636 1338
The paper used to produce this report is
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sourced from fully sustainable forests.
www.fırstgroup.com
FirstGroup plc Annual Report 2005
Designed and produced by Pauffley Ltd www.pauffley.com Printed by Royle Corporate Print | CHIEF EXECUTIVE’S REVIEW
OVERVIEW
Safety
The safety and security of our passengers
and staff is at the forefront of everything we
do and we continue to promote a culture
of ‘Safety First’ throughout our business.
We continually assess our processes and
working practices and strive to meet the
highest possible standards. I am pleased to
report that during the period we have again
seen some encouraging trends in key safety
indicators and we will continue to ensure
that we build on these improvements. The
separate Corporate Responsibility Report
details the progress we have made to further
improve our performance in respect of safety,
environmental management and other key
areas of our business.
Results
I am very pleased to report another
successful year with expansion in our core
markets in the US and UK. Group turnover
increased by 8.6% to £2,693m (2004:
£2,479m). Operating profit was £211.6m
(2004: £204.1m). The Group generated
EBITDA (operating profit plus depreciation)
of £319.2m (2004: £307.1m) enabling us to
continue to invest in the business as well as
increasing the dividend by 10% and returning
£29.7m to shareholders through the further
repurchase of equity during the year.
Since the acquisition of our North American
business and the growth of our UK rail
operations the Group’s revenue profile has
substantially altered. Some 80% of the
revenue in our North American operations
is secured under medium-term contracts.
The Group has contracts with government
agencies and other large organisations in
both North America and the UK representing
a secure revenue stream worth £4.9 billion.
As we expand our North American
businesses and continue to grow our UK
rail operations we expect this figure to
increase significantly.
UK RAIL
The UK Rail division operates passenger
and freight services in the UK. Passenger
rail franchises consist of First Great Western,
First Great Western Link, First TransPennine
Express and First ScotRail. We also operate
Hull Trains, a non-franchised open access
intercity passenger train operator, and
we provide rail freight services through
GB Railfreight.
Results
Turnover in the Group’s rail division
increased to £1,059.7m (2004: £945.0m)
and operating profit was £67.7m (2004:
£49.8m). These excellent results reflect
the strong operating performance and
increased passenger volumes across all
of our train operating companies and the
commencement of First ScotRail in
October 2004.
Current operations
On 17 October we commenced operation of
First ScotRail. The handover went smoothly
and, despite the adverse weather at the start
of the year, operator delays have been
reduced by 5% on the comparable period
last year. This reflects the enormous effort
and investment being applied to fleet
reliability and performance. Passenger
journeys have increased by 8% on the
comparable period last year and we have
introduced an improved timetable to provide
increased capacity and cleaner, more
frequent services. In April we introduced the
final delivery of new Class 170 Turbostar
trains, funded by the Scottish Executive and
Strathclyde Passenger Transport, which will
provide longer trains and extra seats on a
number of routes. In February we launched
JourneyCheck, the UK’s first fully integrated
train information service, enabling
passengers to receive instant information
on how services are running and details of
planned engineering works using real time
information via website, WAP and PDA
phones and through SMS text messaging.
First TransPennine Express, which
commenced operation on 1 February 2004,
05
THE SAFETY AND SECURITY OF OUR PASSENGERS AND STAFF IS
AT THE FOREFRONT OF EVERYTHING WE DO AND WE CONTINUE
TO PROMOTE A CULTURE OF ‘SAFETY FIRST’ THROUGHOUT
OUR BUSINESS. CHIEF EXECUTIVE’S REVIEW CONTINUED
has performed well with passenger income
increased by 11.5%. Passenger volumes are
running ahead of our expectations as a result
of increased road congestion on the main
commuter corridor between Manchester and
Leeds. A new timetable was introduced in
December offering passengers faster journey
times, additional services and extra capacity.
In March work commenced to build a new
train-care depot in Manchester with a
second new depot planned for York. In
spring 2006 we will introduce 51 new
Siemens trains for the franchise, offering
passengers in the region a modern, high-
performance intercity fleet and a step-
change in the quality of service we are
able to offer.
Operational performance on First Great
Western has continued to improve. In
January we opened a new First Class
business lounge at London Paddington
for passengers. Our investment in the new
lounge recognises that the ability to ‘work
on the move’ is a key attraction of train
travel and provides a range of facilities
including a meeting room, internet access
as well as complimentary newspapers
and refreshments. In February, First Great
Western launched the redesigned High
Speed Train carriages in preparation for the
Greater Western franchise bid. A number
of improvements have been made to the
exterior including a striking new livery. The
interior has been redesigned, with customer
input, to create a contemporary and modern
on-board environment with improved
customer services such as an updated
buffet facility and Wi-Fi technology.
We were delighted that First Great Western’s
Chippenham Station won the award for
‘Station Excellence’ at the HSBC Rail
Awards. This award, which has been won
by First Great Western for the last two years,
follows a significant investment in the
refurbishment of the station.
On 1 April 2004 we commenced operation of
the First Great Western Link franchise which
operates surburban services from London
Paddington. In December we launched an
integrated timetable for First Great Western
and First Great Western Link. This major
overhaul to the scheduling of services enables
us to offer up to 20% increased capacity on
surburban services and improved long
distance services to Wales and the South
West. In June we will launch the new
Heathrow Connect service, in partnership with
British Airports Authority, calling at intermediate
stops between London Paddington and
Heathrow using new electric trains.
Hull Trains, our non-franchised, open access
intercity train company operating between
London Kings Cross and Hull, performed well
during the year with passenger growth of
20%. In June we introduced a new weekday
service and received further regulatory
approval in December for an additional
Saturday service.
GB Railfreight
GB Railfreight (GBRf), our rail freight
company, has continued to show
encouraging growth. New business was
won during the year including contracts for
Royal Mail and the Tarmac Group. During
the period GBRf took delivery of new
container wagons and refurbished
locomotives to support the new contracts.
We were delighted that GBRf won ‘Rail
Business of the Year’ and picked up the
‘Rolling Stock Excellence’ award at the
HSBC Rail Awards in February this year.
We believe that there is scope to further
expand this business by offering a high level
of service and a flexible business model.
Franchise bidding
We are delighted to be shortlisted for a
further four new enlarged rail franchises:
Integrated Kent, Greater Western,
Thameslink/Great Northern and Docklands
Light Railway. We have an excellent track
record of delivery and operation of various
types of railway franchises including intercity,
London commuter, suburban and regional
railways. In addition we have managed and
20%
WE LAUNCHED A NEW INTEGRATED TIMETABLE FOR
FIRST GREAT WESTERN AND FIRST GREAT WESTERN LINK
DESIGNED TO BRING CUSTOMER AND PERFORMANCE
BENEFITS SUCH AS BETTER PUNCTUALITY AND RELIABILITY,
IMPROVED CONNECTIONS AND INCREASED CAPACITY, BY
UP TO 20%, ON PEAK TIME SERVICES.
06 06 implemented the introduction of new rolling
stock across four of our rail franchises.
We have a highly experienced team in place
and look forward to consulting widely and
working with all of the stakeholders to
develop exciting proposals for the future
of these franchises.
Outlook UK Rail
The strong performance of our rail operations
reflects the innovation and investment we
have put into the business. Our aim is to
bring a consistently high standard of service
at affordable prices to our passengers.
We have an active programme of new
franchise bids under way which offer
excellent prospects for the future growth
of the division.
NORTH AMERICA
In North America the Group is the second
largest operator of student transportation
with over 20,000 yellow school buses
carrying nearly 2 million students every day
across the US and Canada. We operate the
largest transit contracting and management
business in North America and we have an
expanding services division.
Results
This has been another year of strong
growth within our North American Division.
Turnover from our three businesses
increased to £665.8m or $1,230.2m
(2004: £620.7m or $1,051.6m), an increase
in dollar terms of 17%. Operating profit
was £61.2m or $113.2m (2004: £63.5m or
$109.2m). Operating profit in First Student
was impacted by $5.2m as a result of fewer
trading days in the year due primarily to a
late Labor Day in the calendar, which meant
that the North Eastern and mid Atlantic
regions of the US had a later school start,
and the early occurrence of Easter this year.
The lost revenue days will be added to the
end of the school year and therefore will be
recognised in our results in 2005/06.
Our three North American businesses
continue to generate excellent returns with
EBITDA of £108.1m or $199.9m (2004:
£107.1m or $183.7m) and remain self-
financing for maintenance capital expenditure,
organic growth and in-fill acquisitions.
First Student
I am pleased with the performance of this
business during the year. During the period
we retained over 90% of our current
business that came up for renewal. US Dollar
turnover increased by 9.4%. Operating profit
was impacted by the reduced number of
trading days this period, as outlined above,
which will be added to 2005/06. In addition
we also experienced an increase in state
employer’s payroll taxes in the states in
which we operate. We now operate over
20,000 yellow school buses in the US and
Canada. The increase in the period is largely
due to the acquisition of Cardinal Coach
Lines, made in the last quarter of the year,
which operates some 1,900 school buses in
the provinces of Alberta, British Columbia,
Ontario and the North West Territories of
Canada and Los Angeles, California. We
continued to make good progress
throughout the year gaining contracts to
operate approximately 700 buses gained
through new business wins, in-fill
acquisitions and organic growth within
existing contracts.
Looking forward we are confident that we
will be able to continue to grow through a
combination of organic growth, share shift,
conversions and acquisitions at our target
margins.
First Transit
US Dollar turnover increased by 15.2% and
operating profit by 3.7%. We won new
contracts to operate and manage transit
systems in Virginia, Massachusetts, Ohio,
New Hampshire, Idaho, Georgia, California,
Pennsylvania, New Jersey, Texas, Arkansas,
South Carolina and North Carolina. During
the year we were very pleased to retain the
contract to operate the largest paratransit
call centre in New York and to win two
WE CONTINUE TO EXPAND OUR NORTH AMERICAN SCHOOL
BUS OPERATION. WE NOW OPERATE OVER 20,000 YELLOW
SCHOOL BUSES, CARRYING NEARLY 2 MILLION STUDENTS
ACROSS THE USA AND CANADA EVERY DAY.
>20,000
NORTH AMERICA TURNOVER ($m)
Student $674.4m
Transit $380.7m
Services $175.1m
07 CHIEF EXECUTIVE’S REVIEW CONTINUED
further contracts for call centres in Portland,
Oregon. In November we acquired a small
business in New York providing paratransit
services in the Greater Buffalo area. We have
significantly developed our shuttle business,
providing buses at airports, universities and
for corporate organisations. We are now one
of the largest operators of airport shuttle
services in the US, providing bus services at
airports in cities such as Cincinnati, Miami,
Houston and Philadelphia. During the year
we were pleased to win further shuttle
service contracts to serve Baltimore Airport
and for the University of Texas.
First Transit’s strategy is to focus on the
higher margin, faster growing call centre,
paratransit, logistics consultancy and
public/private shuttle bus markets where
we can utilise our management expertise
and continue to profitably expand these
businesses.
First Services
This has been a very successful year for our
Services division, which provides a range of
outsourced vehicle maintenance, operations
and support services to the public and
private sectors. US Dollar turnover increased
by 67.6% and operating profit by 96.1%
reflecting eight months trading contribution
from our support services business acquired
in August, together with strong growth in
First Vehicle Services.
We were very pleased to retain all of our
contracts that came up for renewal during
the period. In addition, we won new
business to provide vehicle maintenance
services to customers including the State of
Virginia, City of Pittsburgh and McGuire Air
Force Base in New Jersey.
We were particularly pleased that two of our
vehicle maintenance contracts received
recognition, from leading industry
publications, in the categories of ‘Best
Fleets’ and ‘Top Fleet Managers’ in the US.
In August we acquired SKE Support
Services Inc., now First Support Services,
which has annualised turnover of $88m and
provides a range of services including vehicle
fleet maintenance, logistics support and
facilities management to the US Federal
Government and the private sector.
In December, First Support Services,
with their partners The Day and Zimmerman
Group Inc. and Parsons Corporation, won
the substantial contract to provide a range
of land-based support services to the
US Navy.
We are delighted with the performance of
this strategic acquisition which has
integrated well and provides us with entry
to the growing US Federal market, one of
North America’s largest procurers of
support services.
Investment
Our North American business is self-funding
for maintenance capital expenditure and
growth through contract wins and in-fill
acquisitions. Each new investment, including
new contract bids, must meet our internal rate
of return targets. All of the acquisitions made
by this division have delivered excellent returns
reinforcing our rigorous criteria for investment.
Outlook North America
We are extremely pleased with the
performance of our North American division
which continues to deliver excellent returns
for shareholders. We are confident that
further growth will be achieved through our
proven strategy of combining organic growth
with well matched acquisitions.
UK BUS
The Group is the largest bus operator in the
UK with a fleet of 9,300 buses, and a market
share of approximately 23%. We carry some
2.8 million passengers every day.
Results
Turnover increased to £960.7m (2004:
£906.2m) and operating profit before lease
OUR NORTH AMERICAN SERVICES DIVISION HAD A VERY
SUCCESSFUL YEAR, ALMOST DOUBLING IN SIZE AND
EARNINGS. THE STRATEGIC ACQUISITION OF SKE GAVE
US ENTRY TO THE GROWING US FEDERAL MARKET, ONE
OF THE LARGEST PROCURERS OF SUPPORT SERVICES
IN NORTH AMERICA.
08 financing costs was £107.1m (2004:
£111.2m). Operating profit was impacted
by £5.0m as a result of a strike in South
Yorkshire that was settled in the summer. We
continue to focus on service quality with the
aim of improving vehicle reliability and
minimising lost mileage. During the year we
have made significant investment in our
maintenance and engineering functions. We
expect to see the full benefit of this increased
investment over the next few years and are
encouraged to see that during the period
lost mileage was significantly reduced. While
margins remain under pressure in UK Bus
our focus is to achieve sustainable growth in
profits through high-quality customer service
and increased patronage.
Contracted bus services
We have continued to see good growth in our
London bus operations. Growth in the
London tendered bus market is moderating
following the successful implementation of the
congestion charge in 2003 and the substantial
increase in buses introduced to meet the
additional service requirements. We are well
placed with enlarged depot facilities at
Willesden Junction that will enhance our
competitive advantage if the congestion
charge is extended to West London. Similarly
we are developing a facility in Dagenham that
will provide increased capacity and position us
well for the significant demographic growth
anticipated in the Thames Gateway area.
In addition to developing our commercial
services we have grown our contracted bus
and coach operations. Private Hire and
Contract business is now organised on a
national basis and a dedicated sales and
delivery team is in place. During the period
contracts were secured with customers
including Network Rail, Virgin Trains, National
Express Coaches and Manchester Metrolink.
We operated contract services in connection
with special events such as the Glastonbury
Festival, York Railfest and Royal Ascot.
Urban areas
In urban operations outside London, which
represent almost 60% of UK Bus turnover,
we continue to see growth in those areas
where we are able to work with Local
Authorities to provide traffic management
measures to improve congestion. Passenger
growth continues to be driven by a mixture
of marketing initiatives and partnerships with
Local Authorities to develop bus priority
schemes. Our policy is to target capital
investment to those areas where there is
a clear commitment to support the use of
public transport.
Passenger growth was strong in areas such
as Bristol and York where we have Quality
Partnerships in place. The Overground, our
successful simplified route and fares
structure, continues to provide growth in
areas such as Leicester and Leeds where
passenger growth has increased by up to
60% on individual routes since introduction.
In York, where we have seen passenger
growth of up to 40% on individual routes,
we now operate five Park and Ride schemes.
During the year we carried over 3 million
passengers in our Park and Ride operations
across the city.
In March we launched our premium urban
travel concept known as ftr. The Secretary
of State for Transport joined over 175 key
stakeholders, including Local Authorities, to
launch the ‘Streetcar’ vehicle which will be
used to deliver the ftr package. We
developed Streetcar in partnership with the
Wright Group and Volvo after consulting
extensively with customers, engineers and
drivers. It is designed to offer an economical
alternative to light rail services, giving
passengers an exceptionally high-quality,
light rail-like, product with dedicated road
space in congested areas, but with the route
flexibility of a bus. The advantage of ftr is
that it can be introduced quickly, without
major upheaval on roads and at a fraction of
the cost of a light rail scheme. The first ftr
service will begin in York later this year and
detailed plans are being developed for other
IN JULY WE OPENED OUR FIFTH PARK
AND RIDE SITE IN YORK WHICH IS ALREADY
OPERATING OVER 15,000 JOURNEYS PER
WEEK. DURING THE YEAR MORE THAN
3 MILLION PASSENGERS USED OUR PARK
AND RIDE SERVICES ACROSS YORK.
09
P +
Park and Ride
09 CHIEF EXECUTIVE’S REVIEW CONTINUED
WE HAVE LAUNCHED A NEW CONCEPT IN PUBLIC TRANSPORT.
f t r LOOKS LIKE A TRAM, USES DEDICATED ROAD SPACE
IN CONGESTED AREAS, BUT HAS THE ROUTE FLEXIBILITY OF
A BUS. OUR AIM IS TO TAKE 10% OF CAR JOURNEYS OFF THE
ROADS, ON THE CORRIDORS THAT f t r SERVES, WITHIN FIVE
TO SIX YEARS.
schemes in cities such as Leeds, Sheffield,
Swansea, Reading, Bath and Glasgow.
We continue to develop new initiatives to
promote our services to a wide range of
customers. During the year we successfully
piloted a high-frequency, low fare shuttle
service using mid-life vehicles to link lower-
income inner city suburbs with the city centre
in Leicester. This proved extremely
successful with encouraging passenger and
revenue growth and we plan to extend this
trial to other targeted areas during 2005.
Rural operations
In our rural operations, which represent
approximately 20% of our UK Bus business,
we are developing projects that will meet the
Government’s joint objectives of social
inclusion and reducing traffic congestion.
Kickstart funding, which provides support for
services which have the potential to become
commercially viable, is already active in
Scotland and has recently been introduced
in England and Wales with further schemes
expected later in the year.
We continually look for innovative ways in
which we can better serve the rural
communities in which we operate. Our dial-
a-ride service operating in Carmarthenshire
recently won the ‘Community Transport
Award’ at the Welsh Transport Awards. In
the South West we have worked with
Plymouth and Cornwall councils to provide a
new fleet of specially branded buses for
operation on the ferry bus corridor between
South East Cornwall and Plymouth, a key
travel to work corridor.
Yellow school bus
During the year we were pleased to
commence operation of two further yellow
school bus operations in Northampton and
Carmarthenshire. This initiative continues to
attract interest and it is our view that, with
support from Government and Local
Authorities, there is significant potential to
develop this business.
Investment
We have continued to focus our capital
expenditure in urban areas with high
passenger growth such as Glasgow,
Portsmouth, Halifax and Huddersfield. During
the year £66.2m was spent on new, low-floor,
easy access vehicles and £11.7m has been
spent on facilities, including a new depot in
Chelmsford. New buses have also been
ordered for Aberdeen, Bath, Edinburgh,
Leicester, Manchester, Northampton and
Swansea and will be delivered later this year.
Costs
This was a year of significant investment in
our engineering function with the continued
roll out of standardised maintenance
procedures across all companies and
depots, new approaches to the timing of
inspection and repair, together with greater
emphasis on staff training. We expect these
reforms to reduce unit costs over the
medium term.
Lost mileage, our principal measure of
service quality, improved during the year
and we have targeted further reductions for
2005/06. Towards the end of last year the
Traffic Commissioners and Department for
Transport published new standards for bus
service punctuality, and Local Authorities in
England were given new duties to take
account of bus services under the Traffic
Management Act. We are currently
developing Punctuality Improvement
Partnerships with local highway authorities
to progress these changes which we
believe will give further impetus to bus
priority measures.
Outlook UK Bus
We welcome the Government’s
announcement that free concessionary travel
for pensioners and disabled people will be
introduced in England from April 2006. We
will be reviewing our networks in advance of
the introduction to enable concessionary fare
passengers to benefit from the new travel
opportunities that will be created.
10 FirstGroup
Poland
Czech
Republic
WE WERE THE FIRST IN OUR INDUSTRY TO SOURCE BUS
DRIVERS AND ENGINEERS FROM ALTERNATIVE LABOUR
MARKETS, IN PARTICULAR EASTERN EUROPE. SO FAR WE
HAVE RECRUITED SOME 350 STAFF FROM POLAND, THE
CZECH REPUBLIC, PORTUGAL, MALTA AND SLOVAKIA TO
ADDRESS THE IMPORTANT ISSUE OF RECRUITMENT AND
RETENTION IN OUR INDUSTRY.
Our UK Bus business continues to generate
strong cash flows. Overall revenue growth
has been strong and we expect this to
continue in the current year. Our focus
remains on increasing passenger volumes,
continuing to develop the business in other
areas such as contracted bus services, while
maintaining a rigorous cost control and
process improvement programme.
EMPLOYEES
We further strengthened the Executive
Management Team with the appointments of
Nicola Shaw, formerly Managing Director of
Operations at the Strategic Rail Authority and
Andrew Haines, formerly Managing Director
of South West Trains. Nicola, who joins as
Business Change Director, will focus on the
Group’s bus operations. Andrew will become
Managing Director of the Rail Division. Both
are highly respected within the industry and I
am confident that they will make a significant
contribution to the Group.
I would like to thank all our staff for their
continued commitment to the Group. Our
aim is to offer our staff opportunities to
develop and grow to reach their full potential.
We continually engage with our staff to better
understand their views and concerns
through a range of informal meetings
at depot level to a more formal staff
satisfaction survey.
The recruitment and retention of high-quality
staff is a key issue within our industry. We
continue to implement a range of initiatives
within our operating companies to address
this important issue. In our UK Bus division
we were the first in the industry to source
drivers and engineers from alternative labour
markets primarily in Eastern Europe. We
have recruited some 350 staff from Poland,
the Czech Republic, Portugal, Malta and
Slovakia. We are pleased that employee
turnover in our North American division has
reduced again this year.
We continue to encourage our staff to further
their development and careers within the
Group. During the year we extended our
National Vocational Qualification (NVQ) and
BTEC programmes in the UK. Some 16% of
bus drivers are now qualified to NVQ level 2
in Road Passenger Transport and within the
last year 60 supervisors and managers
gained qualifications in Team Leadership. We
are actively developing workplace learning
centres, in partnership with the Transport
and General Workers Union, and now have
32 learning centres reaching 30% of
employees in the UK. We have plans to
significantly increase the coverage over
the next two years so that more of our
UK employees can gain access to
workplace learning.
In the US, both First Transit and First Vehicle
Services participate in the Automotive
Service Excellence (ASE) programme for
training and testing technicians. Within First
Transit 35% of eligible employees hold ASE
certificates and within First Vehicle Services
the figure is 70%. First Vehicle Services
continues to support staff development
through non-vocational training and
encourages employees in self-development
activities. At First Student we have
introduced the ‘Smith System of Defensive
Driving’ to enable school bus drivers
to perform their duties safely in all
traffic conditions.
In FirstGroup America we continue to
develop our management training
programmes. First Student implemented two
new programmes this year. The first is
designed to update managers on
communication techniques, interviewing and
recruitment, financial reporting and customer
service skills. The second programme has
been designed for new Contract Managers
and covers First Student’s approach to
safety, operations management and human
resources such as the importance of
diversity in the workplace.
First Transit continues to train frontline
supervisors in an intensive four-day training
course through ‘First Transit University’ which
11 CHIEF EXECUTIVE’S REVIEW CONTINUED
teaches new and existing managers the
Company’s approach to safety, operations
management, client relations and human
resources. First Transit has also formed a
General Managers Advisory Group with
representatives from eight contract locations.
The Advisory Group provides a focus group
to discuss specific issues for feedback to
the Board.
ENVIRONMENT AND
COMMUNITY
Our environmental management framework
is now well established and all our
companies and depots are audited against
the requirements of the Group Environmental
Management System. During the year we
established the Group Environment Forum to
set the minimum performance standards for
each operating company and identify key
objectives and targets for improvement.
As a result of local depot initiatives and
incentives for staff, energy usage in our
depots continued to reduce during the year.
For example, water usage fell by a further
4.4% and energy consumption by 6% in our
UK Bus division alone. Our bus operating
companies reduced the overall general
waste arising by a further 5%. As part of our
ongoing awareness campaign an additional
7,027 staff have received environmental
training over the past 12 months.
During the year we continued to support
Future Forests, a ‘carbon neutral’ tree
planting initiative to offset CO 2
emissions.
Through our support 1,500 trees have
been planted in Devon. In connection with
Future Forests we also supported an
awareness campaign for primary school
children in the South West to promote
the environmental benefits associated with
public transport.
We are pleased to feature in the FTSE4Good
Environmental Index as well as in the
Business in the Community Corporate Social
Responsibility Index, covering the broader
corporate social responsibility issues. In
recognition of our commitment to improving
the environment we were delighted to
receive the National Green Apple Award
for the fourth consecutive year as well as
environmental awards from Network Rail,
the Bus Industry Awards and the Railway
Industry Innovation Awards.
During the year the Group and its staff in
the UK and North America have continued
to support a number of local and national
charities. All of our operating companies
support local events either through donations,
sponsorship or use of resources and facilities
made available to them by the Group. Further
details of all these activities can be found in
our Corporate Responsibility Report which is
published separately and is available on our
website www.firstgroup.com.
GROUP OUTLOOK
I look forward to continued growth in our
three North American businesses all of which
have highly dependable revenue streams of
which approximately 80% are covered by
medium-term contracts. In UK Rail we are
well positioned to benefit from rail
refranchising having been shortlisted for four
new rail franchises, worth up to £1.1 billion
of turnover, in the current round. In UK Bus
we are seeing further growth in areas where
we can work with Local Authorities to
implement bus priority and other traffic
management measures and we continue
to focus on cost control and process
improvements. Our strategy remains to use
the Group’s strong free cash flows to invest
in the business and explore opportunities for
growth in new markets, increase dividends
and buy back shares, while maintaining a
strong balance sheet. I am confident about
our future prospects. Trading in the new
financial year has started well and is in line
with our expectations.
Moir Lockhead
Chief Executive
-6.0%
OUR ENVIRONMENTAL MANAGEMENT FRAMEWORK IS NOW
WELL ESTABLISHED AND WE ARE ENCOURAGED BY THE
CONTINUED REDUCTION IN ENERGY USAGE IN OUR DEPOTS.
IN THE BUS DIVISION ALONE, ENERGY CONSUMPTION
FELL BY A FURTHER 6% THIS YEAR AS A RESULT OF LOCAL
DEPOT INITIATIVES AND INCENTIVES FOR STAFF.
12 | FINANCIAL HIGHLIGHTS
2005 2004
Turnover (£m) 2,693.4 2,479.0
Operating profit
1
(£m) 211.6 204.1
Profit before taxation (£m) 128.9 122.8
Profit on ordinary activities after tax (£m) 96.2 92.2
Adjusted basic earnings per share
1
(pence) 28.2 27.3
Basic earnings per share (pence) 22.5 22.3
Dividend per share (pence) 12.815 11.65
EBITDA
2
(£m) 319.2 307.1
EBITDA: interest cover
3
6.6x 7.2x
1
Before goodwill amortisation, bid costs, other exceptional items and profit on disposal of fixed assets.
2
Operating profit before goodwill amortisation, bid costs, other exceptional items and profit on disposal of fixed assets, plus depreciation.
3
Calculated as EBITDA
2
divided by net interest payable and similar charges before exceptional items.
TURNOVER UP 8.6% TO £2,693M
ADJUSTED BASIC EARNINGS PER SHARE UP 3.3% TO 28.2P
DIVIDEND PER SHARE UP 10.0% TO 12.815P
UK RAIL: EXCELLENT OPERATING PERFORMANCE –
SHORTLISTED FOR FOUR NEW FRANCHISES
NORTH AMERICA: CONTINUED EXPANSION, NOW OPERATING
>20,000 SCHOOL BUSES
UK BUS: REVENUE UP 6% – FURTHER GROWTH IN URBAN
QUALITY PARTNERSHIP AREAS
TURNOVER (£m)
UK Bus £960.7m
UK Rail £1,059.7m
North America £665.8m
Excluding other turnover £7.2m.
OPERATING PROFIT (£m)
UK Bus £107.1m
UK Rail £67.7m
North America £61.2m
Operating profit in UK Rail is stated after charging the
finance cost of assets, which is implicit in the operating
lease rentals, whereas UK and US Bus operating profits
are stated before finance charges. Interest costs, as
disclosed in note 6 to the accounts, were £48.3m.
Excluding central items of £15.4m and financing
element of leases £9.0m.
03 | CHAIRMAN’S STATEMENT
04
OUR STRATEGY REMAINS TO INCREASE SHAREHOLDER VALUE
BY CONTINUING TO GROW IN OUR CORE BUSINESSES AND
EXPLORE OPPORTUNITIES TO DEVELOP IN NEW MARKETS. WE
REMAIN COMMITTED TO A PROGRESSIVE DIVIDEND POLICY AND
SHARE REPURCHASES WHILE RETAINING OUR CREDIT RATING.
The accident at Ufton Nervet in November,
in which one of our First Great Western
trains collided with a vehicle obstructing the
line at a level crossing, resulted in the tragic
loss of seven lives, including our train driver.
On behalf of the Board of FirstGroup plc and
all of our employees I would like to express
our condolences to the families of the
bereaved and to the injured.
The safety of passengers and staff is
our highest priority. Buses and trains
remain among the safest ways to travel
and we continuously strive to improve
our performance to achieve the
highest standards.
I am pleased to report another year of good
progress across the Group. Turnover has
increased to £2,693m (2004: £2,479m)
and profit before tax increased to £128.9m
(2004: £122.8m). EBITDA (Group operating
profit* plus depreciation) increased to
£319.2m (2004: £307.1m). Adjusted basic
earnings per share has increased to 28.2p
(2004: 27.3p) and the Board has proposed
a final dividend, subject to approval by
shareholders, of 8.69p making a full year
payment of 12.815p, an increase of 10%.
Before goodwill amortisation and exceptional
items, the dividend is covered 2.2 times
and will be paid on 26 August 2005 to
shareholders on the register on 22 July
2005. The dividend increase reflects the
Board’s confidence in the Group’s strong
cash generation and growth prospects.
The Board is confident that this level of
dividend growth is sustainable for the
medium term.
A number of strategic acquisitions and rail
franchise wins occurred during the year
which further strengthened our core
business. In October we commenced
operation of First ScotRail, Scotland’s
national railway and the UK’s largest rail
franchise, providing over 2,000 passenger
services a day. We have also been shortlisted
for four new rail franchises; Greater Western,
Integrated Kent, Thameslink/Great Northern
and Docklands Light Railway. In North
America we made the strategic acquisition,
through First Services, of SKE Support
Services Inc. enabling us to enter the large
Federal services market and almost doubling
the size of our existing services operation.
I am pleased to report the successful
integration of this business which we expect
to be able to expand further. During the year
we made a significant acquisition in our
North American student business adding
a further 1,900 school buses to our fleet.
Dr Mike Mitchell, previously Business
Change Director, who stepped down from
the Board last year prior to his planned
retirement, left the Group in April 2005 and
subsequently took up the post of Director
General of Railways at the Department for
Transport. I would like to thank Mike for his
contribution to the Group and wish him
every success in his new role.
I would like to take this opportunity to thank
our employees for their continued hard work
and commitment in delivering another year of
strong growth and earnings, including those
employees at First North Western who left
the Group during the year. I would also like
to welcome new employees including those
at First ScotRail and First Great Western Link
and staff who joined through acquisitions
made in North America.
Our UK Bus business continues to generate
strong cash flows and we are actively
working with Government and Local
Authorities to introduce services that meet
the needs of the communities, alongside bus
priority schemes and other measures to
reduce traffic congestion. We look forward
to building on our strong record of delivery
in the rail industry and submitting our exciting
proposals for the development of new
franchises. In North America we continue
to grow our Student, Transit and Services
businesses. Since we entered the market six
years ago we have grown First Student by
some 10,000 buses and overall we have
increased earnings in our North American
businesses by over 70%.
Our strategy remains to increase shareholder
value by continuing to grow in our core
businesses and explore opportunities to
develop in new markets. While we continue
to invest for growth we remain committed
to a progressive dividend policy and share
repurchases of up to £30m per annum,
while retaining our BBB credit rating.
Martin Gilbert
Chairman
*Operating profit referred to in this statement and in the
Chief Executive’s Review and Financial Review refers to
operating profit before goodwill amortisation, bid costs
and other exceptional items. | You are a seasoned marketing PR professional brainstorming a captivating summary for a press release at BUSINESS WIRE and PRNewswire. Your task is to perform abstractive summarization on this text. Use your understanding of the content to express the main ideas and crucial details in a shorter, coherent, and natural sounding text. ### Input TRANSFORMING TRAVEL
ANNUAL REPORT 2005
Principal and Registered Office
FırstGroup plc
395 King Street
Aberdeen AB24 5RP
Telephone: 01224 650100
Facsimile: 01224 650140
Registered in Scotland
number SC157176
London Office
FırstGroup plc
Third Floor
E Block
Macmillan House
Paddington Station
London W2 1FG
Telephone: 020 7291 0505
Facsimile: 020 7636 1338
The paper used to produce this report is
made from Totally Chlorine Free (TCF) pulps
sourced from fully sustainable forests.
www.fırstgroup.com
FirstGroup plc Annual Report 2005
Designed and produced by Pauffley Ltd www.pauffley.com Printed by Royle Corporate Print 02 Group overview
03 Financial highlights
04 Chairman’s statement
05 Chief Executive’s review
13 Financial review
17 Board of Directors
18 Corporate governance
23 Directors’ remuneration report
30 Directors’ report
32 Directors’ responsibilities
33 Financial statements contents
34 Consolidated profit and loss account
35 Balance sheets
36 Consolidated cash flow statement
36 Reconciliation of net cash flows to movement in net debt
37 Consolidated statement of total recognised gains and losses
37 Reconciliation of movements in equity shareholders’ funds
38 Notes to the financial statements
60 Independent auditors’ report
61 Group financial summary
62 Shareholder information
THAT’S IT FOR THIS YEAR, BUT IF YOU WANT
MORE INFORMATION ON FIRSTGROUP OR YOU
WANT TO BOOK YOUR JOURNEY PLEASE PAY
US A VISIT AT WWW.FIRSTGROUP .COM WE ARE THE UK’S LARGEST SURFACE TRANSPORT
COMPANY, WITH A TURNOVER OF £2.7 BILLION
PER YEAR AND SOME 67,000 EMPLOYEES ACROSS
THE UK AND NORTH AMERICA.
OUR VISION IS QUITE SIMPLY, TO TRANSFORM
TRAVEL BY PROVIDING PUBLIC TRANSPORT
SERVICES THAT ARE SAFE, RELIABLE, HIGH
QUALITY, PERSONAL AND ACCESSIBLE.
THIS MEANS FINDING SMART, YET PRACTICAL
SOLUTIONS TO EVERYDAY TRANSPORT ISSUES.
IN THIS REPORT WE DEMONSTRATE HOW WE
ARE DELIVERING OUR PROMISES TO OUR
CUSTOMERS, EMPLOYEES, SHAREHOLDERS
AND THE COMMUNITIES THAT WE SERVE.
01 GROUP OVERVIEW
UK BUS
We are the UK’s largest bus operator, running
more than one in five of all local bus services.
A fleet of some 9,300 buses carries 2.8 million
passengers every day in over 40 major towns
and cities. The majority of our operations are in
urban areas where the bus is the most effective
means of tackling traffic congestion. We are
working in partnership with local authorities and
other stakeholders to provide cost effective,
transport solutions that improve services and
offer more choice for passengers.
UK RAIL
We are one of the UK’s largest rail operators
with four passenger rail franchises: First
Great Western, First Great Western Link,
First TransPennine Express and First ScotRail.
We also operate Hull Trains, a non-franchised
open access operator. We run nearly one-sixth
of the UK passenger rail network, with a
balanced portfolio of intercity, commuter and
regional rail operations. We also provide freight
services through GB Railfreight. We have a
strong track record of delivery and of investing
in improved services, such as new rolling stock
and customer facilities across all of our
rail operations.
NORTH AMERICA
Headquartered in Cincinnati, Ohio, our three
operations are spread across the US
and Canada.
First Student
We are the second largest provider of student
transportation in North America with a fleet of
over 20,000 yellow school buses, carrying
nearly 2 million students every day across
the US and Canada.
First Transit
We are one of the largest private sector
providers of transit management and
contracting, managing public transport systems
on behalf of transit authorities in cities such as
Atlanta, Los Angeles, Houston and Seattle.
We are also one of the largest providers of
airport shuttle bus services in the US, serving
airports in cities such as Cincinnati, Miami and
Philadelphia. We also manage call centres,
paratransit operations and other light
transit activities.
First Services
Our Services operation is the largest private
sector provider of vehicle maintenance and
support services in the US. We provide fleet
maintenance for public sector customers such
as the Federal Government, cities and fire and
police departments. We also provide a range of
services including vehicle maintenance, logistics
support and facilities management to public and
private sector clients including the US Navy
and US Air Force.
02 FINANCIAL HIGHLIGHTS
2005 2004
Turnover (£m) 2,693.4 2,479.0
Operating profit
1
(£m) 211.6 204.1
Profit before taxation (£m) 128.9 122.8
Profit on ordinary activities after tax (£m) 96.2 92.2
Adjusted basic earnings per share
1
(pence) 28.2 27.3
Basic earnings per share (pence) 22.5 22.3
Dividend per share (pence) 12.815 11.65
EBITDA
2
(£m) 319.2 307.1
EBITDA: interest cover
3
6.6x 7.2x
1
Before goodwill amortisation, bid costs, other exceptional items and profit on disposal of fixed assets.
2
Operating profit before goodwill amortisation, bid costs, other exceptional items and profit on disposal of fixed assets, plus depreciation.
3
Calculated as EBITDA
2
divided by net interest payable and similar charges before exceptional items.
TURNOVER UP 8.6% TO £2,693M
ADJUSTED BASIC EARNINGS PER SHARE UP 3.3% TO 28.2P
DIVIDEND PER SHARE UP 10.0% TO 12.815P
UK RAIL: EXCELLENT OPERATING PERFORMANCE –
SHORTLISTED FOR FOUR NEW FRANCHISES
NORTH AMERICA: CONTINUED EXPANSION, NOW OPERATING
>20,000 SCHOOL BUSES
UK BUS: REVENUE UP 6% – FURTHER GROWTH IN URBAN
QUALITY PARTNERSHIP AREAS
TURNOVER (£m)
UK Bus £960.7m
UK Rail £1,059.7m
North America £665.8m
Excluding other turnover £7.2m.
OPERATING PROFIT (£m)
UK Bus £107.1m
UK Rail £67.7m
North America £61.2m
Operating profit in UK Rail is stated after charging the
finance cost of assets, which is implicit in the operating
lease rentals, whereas UK and US Bus operating profits
are stated before finance charges. Interest costs, as
disclosed in note 6 to the accounts, were £48.3m.
Excluding central items of £15.4m and financing
element of leases £9.0m.
03 CHAIRMAN’S STATEMENT
04
OUR STRATEGY REMAINS TO INCREASE SHAREHOLDER VALUE
BY CONTINUING TO GROW IN OUR CORE BUSINESSES AND
EXPLORE OPPORTUNITIES TO DEVELOP IN NEW MARKETS. WE
REMAIN COMMITTED TO A PROGRESSIVE DIVIDEND POLICY AND
SHARE REPURCHASES WHILE RETAINING OUR CREDIT RATING.
The accident at Ufton Nervet in November,
in which one of our First Great Western
trains collided with a vehicle obstructing the
line at a level crossing, resulted in the tragic
loss of seven lives, including our train driver.
On behalf of the Board of FirstGroup plc and
all of our employees I would like to express
our condolences to the families of the
bereaved and to the injured.
The safety of passengers and staff is
our highest priority. Buses and trains
remain among the safest ways to travel
and we continuously strive to improve
our performance to achieve the
highest standards.
I am pleased to report another year of good
progress across the Group. Turnover has
increased to £2,693m (2004: £2,479m)
and profit before tax increased to £128.9m
(2004: £122.8m). EBITDA (Group operating
profit* plus depreciation) increased to
£319.2m (2004: £307.1m). Adjusted basic
earnings per share has increased to 28.2p
(2004: 27.3p) and the Board has proposed
a final dividend, subject to approval by
shareholders, of 8.69p making a full year
payment of 12.815p, an increase of 10%.
Before goodwill amortisation and exceptional
items, the dividend is covered 2.2 times
and will be paid on 26 August 2005 to
shareholders on the register on 22 July
2005. The dividend increase reflects the
Board’s confidence in the Group’s strong
cash generation and growth prospects.
The Board is confident that this level of
dividend growth is sustainable for the
medium term.
A number of strategic acquisitions and rail
franchise wins occurred during the year
which further strengthened our core
business. In October we commenced
operation of First ScotRail, Scotland’s
national railway and the UK’s largest rail
franchise, providing over 2,000 passenger
services a day. We have also been shortlisted
for four new rail franchises; Greater Western,
Integrated Kent, Thameslink/Great Northern
and Docklands Light Railway. In North
America we made the strategic acquisition,
through First Services, of SKE Support
Services Inc. enabling us to enter the large
Federal services market and almost doubling
the size of our existing services operation.
I am pleased to report the successful
integration of this business which we expect
to be able to expand further. During the year
we made a significant acquisition in our
North American student business adding
a further 1,900 school buses to our fleet.
Dr Mike Mitchell, previously Business
Change Director, who stepped down from
the Board last year prior to his planned
retirement, left the Group in April 2005 and
subsequently took up the post of Director
General of Railways at the Department for
Transport. I would like to thank Mike for his
contribution to the Group and wish him
every success in his new role.
I would like to take this opportunity to thank
our employees for their continued hard work
and commitment in delivering another year of
strong growth and earnings, including those
employees at First North Western who left
the Group during the year. I would also like
to welcome new employees including those
at First ScotRail and First Great Western Link
and staff who joined through acquisitions
made in North America.
Our UK Bus business continues to generate
strong cash flows and we are actively
working with Government and Local
Authorities to introduce services that meet
the needs of the communities, alongside bus
priority schemes and other measures to
reduce traffic congestion. We look forward
to building on our strong record of delivery
in the rail industry and submitting our exciting
proposals for the development of new
franchises. In North America we continue
to grow our Student, Transit and Services
businesses. Since we entered the market six
years ago we have grown First Student by
some 10,000 buses and overall we have
increased earnings in our North American
businesses by over 70%.
Our strategy remains to increase shareholder
value by continuing to grow in our core
businesses and explore opportunities to
develop in new markets. While we continue
to invest for growth we remain committed
to a progressive dividend policy and share
repurchases of up to £30m per annum,
while retaining our BBB credit rating.
Martin Gilbert
Chairman
*Operating profit referred to in this statement and in the
Chief Executive’s Review and Financial Review refers to
operating profit before goodwill amortisation, bid costs
and other exceptional items. CHIEF EXECUTIVE’S REVIEW
OVERVIEW
Safety
The safety and security of our passengers
and staff is at the forefront of everything we
do and we continue to promote a culture
of ‘Safety First’ throughout our business.
We continually assess our processes and
working practices and strive to meet the
highest possible standards. I am pleased to
report that during the period we have again
seen some encouraging trends in key safety
indicators and we will continue to ensure
that we build on these improvements. The
separate Corporate Responsibility Report
details the progress we have made to further
improve our performance in respect of safety,
environmental management and other key
areas of our business.
Results
I am very pleased to report another
successful year with expansion in our core
markets in the US and UK. Group turnover
increased by 8.6% to £2,693m (2004:
£2,479m). Operating profit was £211.6m
(2004: £204.1m). The Group generated
EBITDA (operating profit plus depreciation)
of £319.2m (2004: £307.1m) enabling us to
continue to invest in the business as well as
increasing the dividend by 10% and returning
£29.7m to shareholders through the further
repurchase of equity during the year.
Since the acquisition of our North American
business and the growth of our UK rail
operations the Group’s revenue profile has
substantially altered. Some 80% of the
revenue in our North American operations
is secured under medium-term contracts.
The Group has contracts with government
agencies and other large organisations in
both North America and the UK representing
a secure revenue stream worth £4.9 billion.
As we expand our North American
businesses and continue to grow our UK
rail operations we expect this figure to
increase significantly.
UK RAIL
The UK Rail division operates passenger
and freight services in the UK. Passenger
rail franchises consist of First Great Western,
First Great Western Link, First TransPennine
Express and First ScotRail. We also operate
Hull Trains, a non-franchised open access
intercity passenger train operator, and
we provide rail freight services through
GB Railfreight.
Results
Turnover in the Group’s rail division
increased to £1,059.7m (2004: £945.0m)
and operating profit was £67.7m (2004:
£49.8m). These excellent results reflect
the strong operating performance and
increased passenger volumes across all
of our train operating companies and the
commencement of First ScotRail in
October 2004.
Current operations
On 17 October we commenced operation of
First ScotRail. The handover went smoothly
and, despite the adverse weather at the start
of the year, operator delays have been
reduced by 5% on the comparable period
last year. This reflects the enormous effort
and investment being applied to fleet
reliability and performance. Passenger
journeys have increased by 8% on the
comparable period last year and we have
introduced an improved timetable to provide
increased capacity and cleaner, more
frequent services. In April we introduced the
final delivery of new Class 170 Turbostar
trains, funded by the Scottish Executive and
Strathclyde Passenger Transport, which will
provide longer trains and extra seats on a
number of routes. In February we launched
JourneyCheck, the UK’s first fully integrated
train information service, enabling
passengers to receive instant information
on how services are running and details of
planned engineering works using real time
information via website, WAP and PDA
phones and through SMS text messaging.
First TransPennine Express, which
commenced operation on 1 February 2004,
05
THE SAFETY AND SECURITY OF OUR PASSENGERS AND STAFF IS
AT THE FOREFRONT OF EVERYTHING WE DO AND WE CONTINUE
TO PROMOTE A CULTURE OF ‘SAFETY FIRST’ THROUGHOUT
OUR BUSINESS. CHIEF EXECUTIVE’S REVIEW CONTINUED
has performed well with passenger income
increased by 11.5%. Passenger volumes are
running ahead of our expectations as a result
of increased road congestion on the main
commuter corridor between Manchester and
Leeds. A new timetable was introduced in
December offering passengers faster journey
times, additional services and extra capacity.
In March work commenced to build a new
train-care depot in Manchester with a
second new depot planned for York. In
spring 2006 we will introduce 51 new
Siemens trains for the franchise, offering
passengers in the region a modern, high-
performance intercity fleet and a step-
change in the quality of service we are
able to offer.
Operational performance on First Great
Western has continued to improve. In
January we opened a new First Class
business lounge at London Paddington
for passengers. Our investment in the new
lounge recognises that the ability to ‘work
on the move’ is a key attraction of train
travel and provides a range of facilities
including a meeting room, internet access
as well as complimentary newspapers
and refreshments. In February, First Great
Western launched the redesigned High
Speed Train carriages in preparation for the
Greater Western franchise bid. A number
of improvements have been made to the
exterior including a striking new livery. The
interior has been redesigned, with customer
input, to create a contemporary and modern
on-board environment with improved
customer services such as an updated
buffet facility and Wi-Fi technology.
We were delighted that First Great Western’s
Chippenham Station won the award for
‘Station Excellence’ at the HSBC Rail
Awards. This award, which has been won
by First Great Western for the last two years,
follows a significant investment in the
refurbishment of the station.
On 1 April 2004 we commenced operation of
the First Great Western Link franchise which
operates surburban services from London
Paddington. In December we launched an
integrated timetable for First Great Western
and First Great Western Link. This major
overhaul to the scheduling of services enables
us to offer up to 20% increased capacity on
surburban services and improved long
distance services to Wales and the South
West. In June we will launch the new
Heathrow Connect service, in partnership with
British Airports Authority, calling at intermediate
stops between London Paddington and
Heathrow using new electric trains.
Hull Trains, our non-franchised, open access
intercity train company operating between
London Kings Cross and Hull, performed well
during the year with passenger growth of
20%. In June we introduced a new weekday
service and received further regulatory
approval in December for an additional
Saturday service.
GB Railfreight
GB Railfreight (GBRf), our rail freight
company, has continued to show
encouraging growth. New business was
won during the year including contracts for
Royal Mail and the Tarmac Group. During
the period GBRf took delivery of new
container wagons and refurbished
locomotives to support the new contracts.
We were delighted that GBRf won ‘Rail
Business of the Year’ and picked up the
‘Rolling Stock Excellence’ award at the
HSBC Rail Awards in February this year.
We believe that there is scope to further
expand this business by offering a high level
of service and a flexible business model.
Franchise bidding
We are delighted to be shortlisted for a
further four new enlarged rail franchises:
Integrated Kent, Greater Western,
Thameslink/Great Northern and Docklands
Light Railway. We have an excellent track
record of delivery and operation of various
types of railway franchises including intercity,
London commuter, suburban and regional
railways. In addition we have managed and
20%
WE LAUNCHED A NEW INTEGRATED TIMETABLE FOR
FIRST GREAT WESTERN AND FIRST GREAT WESTERN LINK
DESIGNED TO BRING CUSTOMER AND PERFORMANCE
BENEFITS SUCH AS BETTER PUNCTUALITY AND RELIABILITY,
IMPROVED CONNECTIONS AND INCREASED CAPACITY, BY
UP TO 20%, ON PEAK TIME SERVICES.
06 06 implemented the introduction of new rolling
stock across four of our rail franchises.
We have a highly experienced team in place
and look forward to consulting widely and
working with all of the stakeholders to
develop exciting proposals for the future
of these franchises.
Outlook UK Rail
The strong performance of our rail operations
reflects the innovation and investment we
have put into the business. Our aim is to
bring a consistently high standard of service
at affordable prices to our passengers.
We have an active programme of new
franchise bids under way which offer
excellent prospects for the future growth
of the division.
NORTH AMERICA
In North America the Group is the second
largest operator of student transportation
with over 20,000 yellow school buses
carrying nearly 2 million students every day
across the US and Canada. We operate the
largest transit contracting and management
business in North America and we have an
expanding services division.
Results
This has been another year of strong
growth within our North American Division.
Turnover from our three businesses
increased to £665.8m or $1,230.2m
(2004: £620.7m or $1,051.6m), an increase
in dollar terms of 17%. Operating profit
was £61.2m or $113.2m (2004: £63.5m or
$109.2m). Operating profit in First Student
was impacted by $5.2m as a result of fewer
trading days in the year due primarily to a
late Labor Day in the calendar, which meant
that the North Eastern and mid Atlantic
regions of the US had a later school start,
and the early occurrence of Easter this year.
The lost revenue days will be added to the
end of the school year and therefore will be
recognised in our results in 2005/06.
Our three North American businesses
continue to generate excellent returns with
EBITDA of £108.1m or $199.9m (2004:
£107.1m or $183.7m) and remain self-
financing for maintenance capital expenditure,
organic growth and in-fill acquisitions.
First Student
I am pleased with the performance of this
business during the year. During the period
we retained over 90% of our current
business that came up for renewal. US Dollar
turnover increased by 9.4%. Operating profit
was impacted by the reduced number of
trading days this period, as outlined above,
which will be added to 2005/06. In addition
we also experienced an increase in state
employer’s payroll taxes in the states in
which we operate. We now operate over
20,000 yellow school buses in the US and
Canada. The increase in the period is largely
due to the acquisition of Cardinal Coach
Lines, made in the last quarter of the year,
which operates some 1,900 school buses in
the provinces of Alberta, British Columbia,
Ontario and the North West Territories of
Canada and Los Angeles, California. We
continued to make good progress
throughout the year gaining contracts to
operate approximately 700 buses gained
through new business wins, in-fill
acquisitions and organic growth within
existing contracts.
Looking forward we are confident that we
will be able to continue to grow through a
combination of organic growth, share shift,
conversions and acquisitions at our target
margins.
First Transit
US Dollar turnover increased by 15.2% and
operating profit by 3.7%. We won new
contracts to operate and manage transit
systems in Virginia, Massachusetts, Ohio,
New Hampshire, Idaho, Georgia, California,
Pennsylvania, New Jersey, Texas, Arkansas,
South Carolina and North Carolina. During
the year we were very pleased to retain the
contract to operate the largest paratransit
call centre in New York and to win two
WE CONTINUE TO EXPAND OUR NORTH AMERICAN SCHOOL
BUS OPERATION. WE NOW OPERATE OVER 20,000 YELLOW
SCHOOL BUSES, CARRYING NEARLY 2 MILLION STUDENTS
ACROSS THE USA AND CANADA EVERY DAY.
>20,000
NORTH AMERICA TURNOVER ($m)
Student $674.4m
Transit $380.7m
Services $175.1m
07 CHIEF EXECUTIVE’S REVIEW CONTINUED
further contracts for call centres in Portland,
Oregon. In November we acquired a small
business in New York providing paratransit
services in the Greater Buffalo area. We have
significantly developed our shuttle business,
providing buses at airports, universities and
for corporate organisations. We are now one
of the largest operators of airport shuttle
services in the US, providing bus services at
airports in cities such as Cincinnati, Miami,
Houston and Philadelphia. During the year
we were pleased to win further shuttle
service contracts to serve Baltimore Airport
and for the University of Texas.
First Transit’s strategy is to focus on the
higher margin, faster growing call centre,
paratransit, logistics consultancy and
public/private shuttle bus markets where
we can utilise our management expertise
and continue to profitably expand these
businesses.
First Services
This has been a very successful year for our
Services division, which provides a range of
outsourced vehicle maintenance, operations
and support services to the public and
private sectors. US Dollar turnover increased
by 67.6% and operating profit by 96.1%
reflecting eight months trading contribution
from our support services business acquired
in August, together with strong growth in
First Vehicle Services.
We were very pleased to retain all of our
contracts that came up for renewal during
the period. In addition, we won new
business to provide vehicle maintenance
services to customers including the State of
Virginia, City of Pittsburgh and McGuire Air
Force Base in New Jersey.
We were particularly pleased that two of our
vehicle maintenance contracts received
recognition, from leading industry
publications, in the categories of ‘Best
Fleets’ and ‘Top Fleet Managers’ in the US.
In August we acquired SKE Support
Services Inc., now First Support Services,
which has annualised turnover of $88m and
provides a range of services including vehicle
fleet maintenance, logistics support and
facilities management to the US Federal
Government and the private sector.
In December, First Support Services,
with their partners The Day and Zimmerman
Group Inc. and Parsons Corporation, won
the substantial contract to provide a range
of land-based support services to the
US Navy.
We are delighted with the performance of
this strategic acquisition which has
integrated well and provides us with entry
to the growing US Federal market, one of
North America’s largest procurers of
support services.
Investment
Our North American business is self-funding
for maintenance capital expenditure and
growth through contract wins and in-fill
acquisitions. Each new investment, including
new contract bids, must meet our internal rate
of return targets. All of the acquisitions made
by this division have delivered excellent returns
reinforcing our rigorous criteria for investment.
Outlook North America
We are extremely pleased with the
performance of our North American division
which continues to deliver excellent returns
for shareholders. We are confident that
further growth will be achieved through our
proven strategy of combining organic growth
with well matched acquisitions.
UK BUS
The Group is the largest bus operator in the
UK with a fleet of 9,300 buses, and a market
share of approximately 23%. We carry some
2.8 million passengers every day.
Results
Turnover increased to £960.7m (2004:
£906.2m) and operating profit before lease
OUR NORTH AMERICAN SERVICES DIVISION HAD A VERY
SUCCESSFUL YEAR, ALMOST DOUBLING IN SIZE AND
EARNINGS. THE STRATEGIC ACQUISITION OF SKE GAVE
US ENTRY TO THE GROWING US FEDERAL MARKET, ONE
OF THE LARGEST PROCURERS OF SUPPORT SERVICES
IN NORTH AMERICA.
08 financing costs was £107.1m (2004:
£111.2m). Operating profit was impacted
by £5.0m as a result of a strike in South
Yorkshire that was settled in the summer. We
continue to focus on service quality with the
aim of improving vehicle reliability and
minimising lost mileage. During the year we
have made significant investment in our
maintenance and engineering functions. We
expect to see the full benefit of this increased
investment over the next few years and are
encouraged to see that during the period
lost mileage was significantly reduced. While
margins remain under pressure in UK Bus
our focus is to achieve sustainable growth in
profits through high-quality customer service
and increased patronage.
Contracted bus services
We have continued to see good growth in our
London bus operations. Growth in the
London tendered bus market is moderating
following the successful implementation of the
congestion charge in 2003 and the substantial
increase in buses introduced to meet the
additional service requirements. We are well
placed with enlarged depot facilities at
Willesden Junction that will enhance our
competitive advantage if the congestion
charge is extended to West London. Similarly
we are developing a facility in Dagenham that
will provide increased capacity and position us
well for the significant demographic growth
anticipated in the Thames Gateway area.
In addition to developing our commercial
services we have grown our contracted bus
and coach operations. Private Hire and
Contract business is now organised on a
national basis and a dedicated sales and
delivery team is in place. During the period
contracts were secured with customers
including Network Rail, Virgin Trains, National
Express Coaches and Manchester Metrolink.
We operated contract services in connection
with special events such as the Glastonbury
Festival, York Railfest and Royal Ascot.
Urban areas
In urban operations outside London, which
represent almost 60% of UK Bus turnover,
we continue to see growth in those areas
where we are able to work with Local
Authorities to provide traffic management
measures to improve congestion. Passenger
growth continues to be driven by a mixture
of marketing initiatives and partnerships with
Local Authorities to develop bus priority
schemes. Our policy is to target capital
investment to those areas where there is
a clear commitment to support the use of
public transport.
Passenger growth was strong in areas such
as Bristol and York where we have Quality
Partnerships in place. The Overground, our
successful simplified route and fares
structure, continues to provide growth in
areas such as Leicester and Leeds where
passenger growth has increased by up to
60% on individual routes since introduction.
In York, where we have seen passenger
growth of up to 40% on individual routes,
we now operate five Park and Ride schemes.
During the year we carried over 3 million
passengers in our Park and Ride operations
across the city.
In March we launched our premium urban
travel concept known as ftr. The Secretary
of State for Transport joined over 175 key
stakeholders, including Local Authorities, to
launch the ‘Streetcar’ vehicle which will be
used to deliver the ftr package. We
developed Streetcar in partnership with the
Wright Group and Volvo after consulting
extensively with customers, engineers and
drivers. It is designed to offer an economical
alternative to light rail services, giving
passengers an exceptionally high-quality,
light rail-like, product with dedicated road
space in congested areas, but with the route
flexibility of a bus. The advantage of ftr is
that it can be introduced quickly, without
major upheaval on roads and at a fraction of
the cost of a light rail scheme. The first ftr
service will begin in York later this year and
detailed plans are being developed for other
IN JULY WE OPENED OUR FIFTH PARK
AND RIDE SITE IN YORK WHICH IS ALREADY
OPERATING OVER 15,000 JOURNEYS PER
WEEK. DURING THE YEAR MORE THAN
3 MILLION PASSENGERS USED OUR PARK
AND RIDE SERVICES ACROSS YORK.
09
P +
Park and Ride
09 CHIEF EXECUTIVE’S REVIEW CONTINUED
WE HAVE LAUNCHED A NEW CONCEPT IN PUBLIC TRANSPORT.
f t r LOOKS LIKE A TRAM, USES DEDICATED ROAD SPACE
IN CONGESTED AREAS, BUT HAS THE ROUTE FLEXIBILITY OF
A BUS. OUR AIM IS TO TAKE 10% OF CAR JOURNEYS OFF THE
ROADS, ON THE CORRIDORS THAT f t r SERVES, WITHIN FIVE
TO SIX YEARS.
schemes in cities such as Leeds, Sheffield,
Swansea, Reading, Bath and Glasgow.
We continue to develop new initiatives to
promote our services to a wide range of
customers. During the year we successfully
piloted a high-frequency, low fare shuttle
service using mid-life vehicles to link lower-
income inner city suburbs with the city centre
in Leicester. This proved extremely
successful with encouraging passenger and
revenue growth and we plan to extend this
trial to other targeted areas during 2005.
Rural operations
In our rural operations, which represent
approximately 20% of our UK Bus business,
we are developing projects that will meet the
Government’s joint objectives of social
inclusion and reducing traffic congestion.
Kickstart funding, which provides support for
services which have the potential to become
commercially viable, is already active in
Scotland and has recently been introduced
in England and Wales with further schemes
expected later in the year.
We continually look for innovative ways in
which we can better serve the rural
communities in which we operate. Our dial-
a-ride service operating in Carmarthenshire
recently won the ‘Community Transport
Award’ at the Welsh Transport Awards. In
the South West we have worked with
Plymouth and Cornwall councils to provide a
new fleet of specially branded buses for
operation on the ferry bus corridor between
South East Cornwall and Plymouth, a key
travel to work corridor.
Yellow school bus
During the year we were pleased to
commence operation of two further yellow
school bus operations in Northampton and
Carmarthenshire. This initiative continues to
attract interest and it is our view that, with
support from Government and Local
Authorities, there is significant potential to
develop this business.
Investment
We have continued to focus our capital
expenditure in urban areas with high
passenger growth such as Glasgow,
Portsmouth, Halifax and Huddersfield. During
the year £66.2m was spent on new, low-floor,
easy access vehicles and £11.7m has been
spent on facilities, including a new depot in
Chelmsford. New buses have also been
ordered for Aberdeen, Bath, Edinburgh,
Leicester, Manchester, Northampton and
Swansea and will be delivered later this year.
Costs
This was a year of significant investment in
our engineering function with the continued
roll out of standardised maintenance
procedures across all companies and
depots, new approaches to the timing of
inspection and repair, together with greater
emphasis on staff training. We expect these
reforms to reduce unit costs over the
medium term.
Lost mileage, our principal measure of
service quality, improved during the year
and we have targeted further reductions for
2005/06. Towards the end of last year the
Traffic Commissioners and Department for
Transport published new standards for bus
service punctuality, and Local Authorities in
England were given new duties to take
account of bus services under the Traffic
Management Act. We are currently
developing Punctuality Improvement
Partnerships with local highway authorities
to progress these changes which we
believe will give further impetus to bus
priority measures.
Outlook UK Bus
We welcome the Government’s
announcement that free concessionary travel
for pensioners and disabled people will be
introduced in England from April 2006. We
will be reviewing our networks in advance of
the introduction to enable concessionary fare
passengers to benefit from the new travel
opportunities that will be created.
10 FirstGroup
Poland
Czech
Republic
WE WERE THE FIRST IN OUR INDUSTRY TO SOURCE BUS
DRIVERS AND ENGINEERS FROM ALTERNATIVE LABOUR
MARKETS, IN PARTICULAR EASTERN EUROPE. SO FAR WE
HAVE RECRUITED SOME 350 STAFF FROM POLAND, THE
CZECH REPUBLIC, PORTUGAL, MALTA AND SLOVAKIA TO
ADDRESS THE IMPORTANT ISSUE OF RECRUITMENT AND
RETENTION IN OUR INDUSTRY.
Our UK Bus business continues to generate
strong cash flows. Overall revenue growth
has been strong and we expect this to
continue in the current year. Our focus
remains on increasing passenger volumes,
continuing to develop the business in other
areas such as contracted bus services, while
maintaining a rigorous cost control and
process improvement programme.
EMPLOYEES
We further strengthened the Executive
Management Team with the appointments of
Nicola Shaw, formerly Managing Director of
Operations at the Strategic Rail Authority and
Andrew Haines, formerly Managing Director
of South West Trains. Nicola, who joins as
Business Change Director, will focus on the
Group’s bus operations. Andrew will become
Managing Director of the Rail Division. Both
are highly respected within the industry and I
am confident that they will make a significant
contribution to the Group.
I would like to thank all our staff for their
continued commitment to the Group. Our
aim is to offer our staff opportunities to
develop and grow to reach their full potential.
We continually engage with our staff to better
understand their views and concerns
through a range of informal meetings
at depot level to a more formal staff
satisfaction survey.
The recruitment and retention of high-quality
staff is a key issue within our industry. We
continue to implement a range of initiatives
within our operating companies to address
this important issue. In our UK Bus division
we were the first in the industry to source
drivers and engineers from alternative labour
markets primarily in Eastern Europe. We
have recruited some 350 staff from Poland,
the Czech Republic, Portugal, Malta and
Slovakia. We are pleased that employee
turnover in our North American division has
reduced again this year.
We continue to encourage our staff to further
their development and careers within the
Group. During the year we extended our
National Vocational Qualification (NVQ) and
BTEC programmes in the UK. Some 16% of
bus drivers are now qualified to NVQ level 2
in Road Passenger Transport and within the
last year 60 supervisors and managers
gained qualifications in Team Leadership. We
are actively developing workplace learning
centres, in partnership with the Transport
and General Workers Union, and now have
32 learning centres reaching 30% of
employees in the UK. We have plans to
significantly increase the coverage over
the next two years so that more of our
UK employees can gain access to
workplace learning.
In the US, both First Transit and First Vehicle
Services participate in the Automotive
Service Excellence (ASE) programme for
training and testing technicians. Within First
Transit 35% of eligible employees hold ASE
certificates and within First Vehicle Services
the figure is 70%. First Vehicle Services
continues to support staff development
through non-vocational training and
encourages employees in self-development
activities. At First Student we have
introduced the ‘Smith System of Defensive
Driving’ to enable school bus drivers
to perform their duties safely in all
traffic conditions.
In FirstGroup America we continue to
develop our management training
programmes. First Student implemented two
new programmes this year. The first is
designed to update managers on
communication techniques, interviewing and
recruitment, financial reporting and customer
service skills. The second programme has
been designed for new Contract Managers
and covers First Student’s approach to
safety, operations management and human
resources such as the importance of
diversity in the workplace.
First Transit continues to train frontline
supervisors in an intensive four-day training
course through ‘First Transit University’ which
11 CHIEF EXECUTIVE’S REVIEW CONTINUED
teaches new and existing managers the
Company’s approach to safety, operations
management, client relations and human
resources. First Transit has also formed a
General Managers Advisory Group with
representatives from eight contract locations.
The Advisory Group provides a focus group
to discuss specific issues for feedback to
the Board.
ENVIRONMENT AND
COMMUNITY
Our environmental management framework
is now well established and all our
companies and depots are audited against
the requirements of the Group Environmental
Management System. During the year we
established the Group Environment Forum to
set the minimum performance standards for
each operating company and identify key
objectives and targets for improvement.
As a result of local depot initiatives and
incentives for staff, energy usage in our
depots continued to reduce during the year.
For example, water usage fell by a further
4.4% and energy consumption by 6% in our
UK Bus division alone. Our bus operating
companies reduced the overall general
waste arising by a further 5%. As part of our
ongoing awareness campaign an additional
7,027 staff have received environmental
training over the past 12 months.
During the year we continued to support
Future Forests, a ‘carbon neutral’ tree
planting initiative to offset CO 2
emissions.
Through our support 1,500 trees have
been planted in Devon. In connection with
Future Forests we also supported an
awareness campaign for primary school
children in the South West to promote
the environmental benefits associated with
public transport.
We are pleased to feature in the FTSE4Good
Environmental Index as well as in the
Business in the Community Corporate Social
Responsibility Index, covering the broader
corporate social responsibility issues. In
recognition of our commitment to improving
the environment we were delighted to
receive the National Green Apple Award
for the fourth consecutive year as well as
environmental awards from Network Rail,
the Bus Industry Awards and the Railway
Industry Innovation Awards.
During the year the Group and its staff in
the UK and North America have continued
to support a number of local and national
charities. All of our operating companies
support local events either through donations,
sponsorship or use of resources and facilities
made available to them by the Group. Further
details of all these activities can be found in
our Corporate Responsibility Report which is
published separately and is available on our
website www.firstgroup.com.
GROUP OUTLOOK
I look forward to continued growth in our
three North American businesses all of which
have highly dependable revenue streams of
which approximately 80% are covered by
medium-term contracts. In UK Rail we are
well positioned to benefit from rail
refranchising having been shortlisted for four
new rail franchises, worth up to £1.1 billion
of turnover, in the current round. In UK Bus
we are seeing further growth in areas where
we can work with Local Authorities to
implement bus priority and other traffic
management measures and we continue
to focus on cost control and process
improvements. Our strategy remains to use
the Group’s strong free cash flows to invest
in the business and explore opportunities for
growth in new markets, increase dividends
and buy back shares, while maintaining a
strong balance sheet. I am confident about
our future prospects. Trading in the new
financial year has started well and is in line
with our expectations.
Moir Lockhead
Chief Executive
-6.0%
OUR ENVIRONMENTAL MANAGEMENT FRAMEWORK IS NOW
WELL ESTABLISHED AND WE ARE ENCOURAGED BY THE
CONTINUED REDUCTION IN ENERGY USAGE IN OUR DEPOTS.
IN THE BUS DIVISION ALONE, ENERGY CONSUMPTION
FELL BY A FURTHER 6% THIS YEAR AS A RESULT OF LOCAL
DEPOT INITIATIVES AND INCENTIVES FOR STAFF.
12 FINANCIAL REVIEW
13
OVERVIEW
The Group has a portfolio of businesses in
the UK and North America which generate
strong and predictable revenue streams with
48% of turnover arising from contracts with
government and statutory bodies in the UK
and North America. The Group’s strong free
cash flows are used to increase shareholder
value by investing for growth, increasing
dividends and repurchasing shares.
The results for the year to 31 March 2005
have to be taken in the context of the
changes in rail franchises. First Great Eastern
and Anglia were exited at the start of the
year and First Great Western Link
commenced on 1 April 2004. Subsequently
we lost the First North West Trains franchise.
However the award of the First ScotRail
franchise together with a very strong
performance by First TransPennine Express
resulted in UK Rail exceeding last year’s
operating profit by £17.9m.
The overall results represent a 5.0%
improvement in profit before tax with
operating profit and adjusted basic earnings
per share (EPS) up by 3.7% and 3.3%
respectively despite a 9.5% drop in the
average US$ exchange rate compared to
2003/04. The final dividend has been set at
8.69 pence per share which together with
the interim dividend of 4.125 pence gives a
full year dividend of 12.815 pence, an
increase of 10% on 2003/04. We are
confident that this level of dividend growth
can be sustained in the medium term.
Dividend cover, pre-goodwill amortisation
and exceptional items, was 2.2 times. In
addition during 2004/05 we have invested
over £170m in capital expenditure and
acquisitions and have returned £29.7m to
shareholders through share repurchases.
Over the last five years the Group has
returned £115m to shareholders by way
of share buy-backs.
The Group has a strong balance sheet
backed by a secure long-term financial
structure with an average debt duration of
9.0 years at 31 March 2005. The financial
structure was further enhanced in March
2005 with the signing of a new committed
£520m five-year bank facility which
significantly improved pricing and terms
and increased the duration of the Group’s
medium term committed borrowing facilities.
RESULTS
Turnover was £2,693.4m (2004: £2,479.0m),
an increase of 8.6%. Operating profit was
£211.6m (2004: £204.1m), an increase of
3.7% and profit before tax was up 5.0%.
The results for the year reflect a particularly
strong performance from the Rail division
where the performances of all our new
franchises have exceeded expectations.
There were lower profits in UK Bus due to a
strike in South Yorkshire and North American
profits were down due to a lower number of
operating days during the year, increased
costs of unemployment taxes and adverse
foreign exchange movements year on year.
UK Bus turnover was £960.7m (2004:
£906.2m), an increase of 6.0%. Operating
profit was £107.1m (2004: £111.2m), a
reduction of 3.7%. In our London division we
successfully increased activity by starting
contracts to operate 91 additional buses and
revenues have increased by 13% when
compared to last year. UK Bus results were
hit by a strike in South Yorkshire that had a
profit impact of approximately £5m. The year
also saw a £7m investment in engineering
that has already led to improved reliability
and lower lost mileage. This investment is
supported by the arrival of over 300 new
buses during the first quarter of 2005/06.
Consequently we anticipate another strong
year of revenue growth.
UK Rail turnover was £1,059.7m (2004:
£945.0m), an increase of 12.1%. Operating
profit was £67.7m (2004: £49.8m), an
increase of 35.9%. Inclusion of the operating
results for a full year of First TransPennine
Express and First Great Western Link
franchises and the commencement of the
First ScotRail franchise more than made up
for the loss of the First Great Eastern and
First North Western franchises. The first full
year of First TransPennine Express saw an
11.5% increase in passenger revenue.
Similarly First ScotRail has started well with
strong revenue growth.
North American turnover was £665.8m
(2004: £620.7m). At constant exchange
rates, this represents an increase of 17.0%.
Operating profit was £61.2m (2004:
£63.5m). In US Dollar terms this represents
an increase of 3.7%. During the year, both
First Transit and First Services delivered
improved profits. First Services operating
profit increased year on year by 96.1% and
included the successful acquisition of SKE,
gaining entry to the important Federal market.
First Student earnings were adversely
affected by £2.8m due to a lower number
of operating days in the year compared to
2003/04 which is expected to be recovered
in 2005/06. In addition First Student results
Year to 31 March 2005 Year to 31 March 2004
Operating Operating Operating Operating
Turnover profit
1
margin
1
Turnover profit
1
margin
1
Divisional results £m £m % £m £m %
UK Bus 960.7 107.1 11.1 906.2 111.2 12.3
UK Rail 1,059.7 67.7 6.4 945.0 49.8 5.3
North America 665.8 61.2 9.2 620.7 63.5 10.2
Financing elements of leases
2
– (9.0) – – (8.3) –
Other
3
7.2 (15.4) – 7.1 (12.1) –
Total Group 2,693.4 211.6 7.9 2,479.0 204.1 8.2
1
Before goodwill amortisation, bid costs, other exceptional items and profit on disposal of fixed assets.
2
Financing element of UK PCV operating lease costs.
3
Tram operations, central management, Group information technology and other items.
Throughout the financial review, operating profit, operating margin and EBITDA are defined as being before goodwill
amortisation, bid costs and other exceptional items. FINANCIAL REVIEW CONTINUED
14
were impacted by £3.6m due to higher costs
for State Unemployment Taxes in many of
the States in which it operates. This reflects
changes in the way that the rules are
applied. The Cardinal acquisition sees the
number of yellow school buses operated rise
to 20,200 and this coupled with the reversal
of the 2004/05 operating days issue means
that prospects for 2005/06 remain excellent.
Central costs were higher than last year due
to a number of non-recurring initiatives
including an upgrade of information
technology systems, the International
Financial Reporting Standards convergence
project and development of new human
resources policies and procedures.
PROPERTY
Property gains on disposal of £3.3m (2004:
£19.6m) were realised during the year as
part of the Group’s ongoing programme of
disposing of older UK Bus depots in high
value city centre locations and reinvesting
in out of town brownfield sites with more
modern and efficient facilities.
GOODWILL
The goodwill amortisation charge was
£25.8m (2004: £25.9m) with favourable
foreign exchange movements of £0.8m
offsetting £0.7m of incremental goodwill on
acquisitions made either during 2004/05 or
the preceding financial year.
BID COSTS AND OTHER
EXCEPTIONAL ITEMS
Bid costs of £11.9m (2004: £6.7m) were
incurred during the year and comprised
principally rail refranchising costs for the
ScotRail, Integrated Kent, East Coast and
Greater Western franchises. There were no
other costs categorised as exceptional
during the year (2004: £6.8m).
INTEREST PAYABLE AND
SIMILAR CHARGES
The net interest charge was £48.3m (2004:
£42.8m) with the increase of £5.5m
principally due to a higher average level of
net debt and an increase in the notional
interest charge on long-term insurance
provisions. The net interest charge is covered
6.6 times (2004: 7.2 times) by earnings
before interest, taxation, depreciation and
amortisation (EBITDA).
There was no exceptional interest charge
during 2004/05 whereas in 2003/04 there
was an exceptional charge of £18.7m in
relation to the cancellation of certain interest
rate swaps.
TAXATION
The taxation charge on profit before goodwill
amortisation, bid costs and other exceptional
items was £44.4m (2004: £48.4m)
representing an effective rate of 27.2%
(2004: 30.0%). The reduction in the effective
rate reflects favourable settlements achieved
during the year and it is anticipated that
these benefits will extend into 2005/06.
Tax relief on US goodwill, bid costs and other
exceptional items reduced the tax charge to
£32.7m (2004: £30.6m). No tax has been
provided on property gains as it is not
envisaged that tax will become payable on
these gains.
The actual cash cost of taxation to the
Group was £19.0m (2004: £21.3m) which
is 15% (2004: 17%) of profit before tax. The
group pays a minimal amount of tax on its
profits in the US. At 31 March 2005, in
excess of $200m of accumulated tax losses
were carried forward to be used against
future profits in the US. We therefore believe
that the level of the cash tax in the US will
remain at a minimal level for the medium
term. A full reconciliation of the cash tax rate
to the UK standard rate of corporation tax is
set out in note 8 to the financial statements.
DIVIDENDS
The final dividend of 8.69 pence per ordinary
share together with the interim dividend of
4.125 pence per ordinary share, gives a full
year dividend of 12.815 pence, an increase
of 10.0%. The final dividend will be paid on
26 August 2005 to shareholders on the
register of members at the close of business
on 22 July 2005.
EPS
Adjusted basic EPS, before goodwill
amortisation, bid costs, other exceptional
items and profit on disposal of fixed assets,
was 28.2 pence (2004: 27.3 pence), an
increase of 3.3%. Basic EPS was 22.5
pence (2004: 22.3 pence). 15
CASH FLOW
The Group’s businesses continue to
generate strong operating profits which are
converted into cash. EBITDA for the year
was £319.2m (2004: £307.1m) up 3.9%.
EBITDA from North American operations
was up 8.8% in US Dollar terms. EBITDA
by division is set out above.
During the period there was a working
capital outflow of £62.0m of which the
largest element was the working capital
outflow on the loss of the First Great Eastern
and First North Western franchises.
Offsetting this was an inflow of a similar
magnitude on the commencement of the
First Great Western Link and First ScotRail
franchises. In addition there was a working
capital outflow of £17m in relation to cash
settlements with the SRA and a £12m
outflow from the reversal of the First
TransPennine position from last year. Pension
payments of £12m were made during the
year over and above the profit and loss
charge and growth in both the UK and North
America accounted for £17m of the working
capital outflow.
CAPITAL EXPENDITURE AND
ACQUISITIONS
Capital expenditure, as set out in note 12 to
the financial statements, was £135.3m
(2004: £164.7m). Capital expenditure was
predominantly in North American operations
of £36.7m, UK Bus operations of £70.4m,
UK Rail £14.1m and UK properties £11.7m.
All the acquisitions made in 2004/05 were in
North America. The principal acquisitions
during the year were SKE Support Services,
Inc which gained the Group entry into the
rating, which must not be less than ‘A’ rated.
The Group does not enter into speculative
financial transactions and uses financial
instruments for certain risk management
purposes only.
Interest rate risk
With regard to net interest rate risk, the
Group reduces exposure by using a
combination of fixed rate debt and interest
rate derivatives to achieve an overall hedged
position over the medium term of between
75% to 100%.
Commodity price risk
In the year, the UK was insulated from the
rise in crude oil prices due to a fully hedged
position. North America also benefited from
having 80% of its requirements hedged
against crude oil price risk. Looking ahead,
we now have over 80% coverage of our UK
requirements for 2005/06 (total annual usage
2.5m barrels) at an average rate of $36 per
barrel (2004/05: average of $25 per barrel).
In North America (total annual usage 0.7m
barrels) for 2005/06 we have 64% coverage
on crude oil price risk at an average price
of $27 per barrel (2004/05: average of
$27 per barrel).
We anticipate that the impact of rising fuel
prices will be partly mitigated by future
pricing/yield activities.
Foreign currency risk
Group policies on currency risk affecting
cash flow and profits are maintained to
minimise exposures to the Group by using
a combination of hedge positions and
derivative instruments where appropriate.
With regard to balance sheet translation risk,
Year to 31 March 2005 Year to 31 March 2004
Turnover EBTIDA EBTIDA Turnover EBTIDA EBTIDA
EBITDA by division £m £m % £m £m %
UK Bus 960.7 160.5 16.7 906.2 163.4 18.0
UK Rail 1,059.7 72.6 6.9 945.0 55.2 5.8
North America 665.8 108.1 16.2 620.7 107.1 17.3
Financing element of leases – (9.0) – – (8.3) –
Other 7.2 (13.0) – 7.1 (10.3) –
Total Group 2,693.4 319.2 11.9 2,479.0 307.1 12.4
Federal market, and Cardinal Coach Lines
Limited which operates 1,900 yellow school
buses. In addition three smaller yellow school
bus businesses and one Call Centre were
acquired. The total consideration for all
acquisitions made during the year was
£37.2m and provisional goodwill arising
on all acquisitions amounted to £25.8m.
FUNDING AND RISK
MANAGEMENT
In February 2005 the Group’s BBB
stable rating was reconfirmed by Standard
and Poors.
At the year end, total bank borrowing
facilities amounted to £595.9m of which
£526.6m is committed. Of these £526.6m
committed facilities, £213.6m were utilised at
31 March 2005, of which £180.2m was
drawn in cash and the balance of £33.4m
drawn in letters of credit.
The maturity profile of committed banking
facilities is regularly reviewed and well in
advance of their expiry such facilities are
extended or replaced. In March 2005 the
Group entered into a new five-year £520m
bank facility provided by a strong bank group.
At 31 March 2005 the Group’s debt maturity
profile was 9.0 years (2004: 9.7 years).
As the Group is a net borrower, it minimises
cash and bank deposits, which arise
principally in the Rail companies. The Group
can only withdraw cash and bank deposits
from the Rail companies on a permanent
basis to the extent of retained profits. The
Group limits deposits to short terms, and
with any one bank to the maximum of £30m,
depending upon the individual bank’s credit FINANCIAL REVIEW CONTINUED
16
the Group hedges part of its exposure to the
impact of exchange rate movements on
translation of foreign currency net assets by
holding currency swaps and net borrowings
in foreign currencies. At 31 March 2005
foreign currency net assets were hedged
35% (2004: 34%).
NET DEBT
The Group’s net debt at 31 March 2005 was
£663.1m and was comprised as above.
BALANCE SHEET AND
NET ASSETS
Net assets increased by £3.2m over the year
principally reflecting retained earnings for the
year of £39.1m, net movement in minority
interest (net of dividends paid to minority
shareholders) for the year of £8.5m. These
positive movements were partly offset by
unfavourable foreign exchange movements
of £14.2m and share repurchases of
£29.7m.
SHARES IN ISSUE
During the year 9.4m shares were
repurchased for a total consideration of
£29.7m (see notes 22 and 23). Of these
4.2m shares were cancelled during the year
whereas 5.2m shares were held as Treasury
Shares at year end. As at 31 March 2005
there were 393.6m (2004: 403.0m) shares
in issue excluding Treasury Shares. The
weighted average number of shares in
issue for the purpose of EPS calculations
(excluding own shares held in trust for
employees and Treasury Shares) was
399.2m (2004: 410.0m).
FOREIGN EXCHANGE
The results of the North American businesses
have been translated at an average rate of
£1:$1.85 (2004: £1:$1.69). The period end
rate was £1:$1.87 (2004: £1:$1.81).
PENSIONS
Pensions and post retirement costs have
continued to be accounted for on a SSAP
24 basis. The total charge to the profit and
loss account was £47.0m (2004: £34.2m).
The Group has continued to apply the
transitional rules and disclosures under
FRS 17. At 31 March 2005, after taking
account of deferred taxation, the FRS 17 net
deficit in the Group pension funds, excluding
Rail franchises, was approximately £139m
(2004: £162m). In addition it should be noted
that a post-tax deficit of £43m (2004: £28m)
relates to Rail franchises where the Group
has an obligation to fund the pension
scheme during the franchise period but
does not have any liability beyond the end
of the franchise.
INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRS)
The Group is well advanced in the
conversion to IFRS and will report under
IFRS for the first time in the Interim results
for financial year 2005/06. The principal
differences in accounting treatment under
IFRS are considered to be pensions,
goodwill, intangible assets, dividends,
taxation, financial instruments and share-
based payments. Although the impact will
vary by division, we do not anticipate a
material impact on Group operating profit.
ACCOUNTING POLICIES
The Group has adopted UITF 38
‘Accounting for ESOP Trusts’. Investments in
own shares are now deducted from
shareholders’ funds whereas previously such
investments were treated as fixed assets.
Further details are set out in note 1 to the
financial statements.
Dean Finch
Finance Director
Fixed Variable Total
Analysis of net debt £m £m £m
Cash – 83.8 83.8
Rail ring-fenced cash and deposits – 70.3 70.3
Sterling bond (2013 6.875%) (296.0) – (296.0)
Bond (2019 6.125%)* (231.9) – (231.9)
Sterling bank loans and overdrafts – (227.1) (227.1)
US Dollar bank and other loans and overdrafts (0.9) (1.1) (2.0)
Canadian Dollar bank and other loans and overdrafts (6.9) (8.2) (15.1)
HP and finance leases (13.7) (10.4) (24.1)
Loan notes (8.7) (12.3) (21.0)
Interest rate swaps, net (57.0) 57.0 –
Total (615.1) (48.0) (663.1)
*The 2019 bond was swapped to US Dollars, and is shown net of arrangement costs and foreign exchange gains
on retranslation to Sterling at year end. BOARD OF DIRECTORS
17
1. MARTIN GILBERT LLD MA LLB CA
Chairman
Chairman of the Nomination Committee
1,3
A Chartered Accountant, he is one of the
founding directors and Chief Executive of
Aberdeen Asset Management PLC. He was
appointed to the Board of FirstGroup plc in
1995. He is Chairman of Chaucer Holdings
PLC and a director of a number of investment
trusts. He is a non-executive director of
Primary Health Properties PLC. Age 49.
2. MOIR LOCKHEAD OBE
Deputy Chairman and Chief Executive;
Chairman of the Safety Committee
3,4,5
Chief Executive and Deputy Chairman since
the Group's formation in 1995. Originally
a mechanical engineer he joined Grampian
Transport in 1985 as General Manager and
went on to lead the successful employee
buy-out of GRT Bus Group PLC. In 1996
he was awarded the OBE for services to
the bus industry and he is a past President
of the Confederation of Passenger Transport.
Age 60.
3. DEAN FINCH BSC MBA ACA
Finance Director
4,5
Appointed to the Board as Commercial
Director in February 2004 and subsequently
appointed Finance Director later that year.
He is also responsible for all of the Group’s
rail activities including re-franchising. He joined
the company in 1999 as Commercial Director
Rail Division and was subsequently appointed
Managing Director of the Rail Division in
August 2001. He qualified as a Chartered
Accountant with KPMG where he worked for
12 years specialising in Corporate Transaction
Support Services including working for the
Office of Passenger Rail Franchising on the
privatisation of train operating companies.
Age 38.
4. DAVID LEEDER BSC FILT
Director UK Bus
4,5
Appointed to the Board in May 2004.
He joined the Group in 2001 as Managing
Director UK Bus. He has held various senior
posts in the transport industry including
Chief Executive of Travel West Midlands and
subsequently Group Marketing Director of
National Express Group plc. He is a Fellow
of the Institute of Logistics and Transport
and a past President of the Confederation
of Passenger Transport. Age 39.
5. DAVID DUNN CA
Senior Independent Non-Executive Director;
Chairman of the Audit Committee
1,2,3
Appointed to the Board as a Non-Executive
Director in December 1999. He is a Chartered
Accountant and is Non-Executive Chairman
of Brammer plc. He is also a Non-Executive
Director of Croda International plc and
SMG plc. Age 60.
6. JAMES FORBES CBE MSC BSC CENG MIEE
Non-Executive Director; Chairman of the
Remuneration Committee
1,2,3
Appointed to the Board in April 2000, he is
the former Chief Executive of Scottish and
Southern Energy plc. His career began with
the South of Scotland Electricity Board and
he has since held various senior posts in the
electricity industry. Age 58.
7. JOHN SIEVWRIGHT MA CA
Non-Executive Director
1,2,3
Appointed to the Board in May 2002. He is
Managing Director and Chief Operating Officer
of Global Markets and Investment Banking for
Merrill Lynch & Co. A Chartered Accountant,
he has held various senior management
positions in banking in London, New York,
Dublin and Japan. He is a member of the
North American Board of the Michael Smurfit
Business School, Dublin. Age 50.
8. MARTYN WILLIAMS
Non-Executive Employee Director
Appointed to the Board as Employee Director
in January 2003. He is employed as a
customer services supervisor in Swansea
and has worked for the Group for 27 years.
Age 50.
B LOUISE RUPPEL LLB
Company Secretary
1
Member of the Audit Committee
2
Member of the Remuneration Committee
3
Member of the Nomination Committee
4
Member of the Safety Committee
5
Member of the Executive Committee
2. 1. 3. 4.
5. 6. 7. 8. CORPORATE GOVERNANCE
18
The Company applies all of the main and supporting principles of good governance set out in section 1 of the Combined Code on Corporate
Governance published by the Financial Reporting Council in July 2003 (the ‘Code’). The way in which it applies those principles is set out
below. Except as described in paragraph 1.1 (b) below, the Company complies with all of the provisions of section 1 of the Code.
1. THE BOARD AND ITS PRINCIPAL COMMITTEES
Details of the Board, its members and its principal committees are set out below.
1.1 The Board
(a) Board structure and responsibilities
The Board currently consists of the Chairman, three Executive Directors and four Non-Executive Directors. The Board meets at least eight
times each year and is responsible for setting and reviewing the Company’s strategy and objectives, reviewing the financial and operational
performance of each of the Group’s business units, agreeing and reviewing progress against the Group’s annual budgets and setting and
reviewing on a regular basis its longer-term business plans. It also has a schedule of matters specifically reserved to it including approval of
the annual and interim financial statements, financing arrangements, material capital commitments, business acquisitions and disposals,
relationships with regulatory authorities and operating and accounting policies.
During the year, the Board met eight times and all members of the Board attended all meetings held whilst they were Directors, with the
exception of John Sievwright who attended seven meetings. The Board also held a number of separate strategy meetings.
(b) Board balance and independence
The independence of the Non-Executive Directors has been reviewed against the definition of independence in the Code. David Dunn, Jim
Forbes and John Sievwright are considered to be independent within this definition. As Martyn Williams is an employee of one of the Group’s
subsidiaries, he cannot be considered to be independent. However, the Board feels very strongly that it is extremely beneficial for its
employees to be represented on the Board in this way so that important employee-related issues can be raised at the highest level and a
two-way communication process between the management of the Company and its employees is maintained.
Therefore at present, the Company does not comply with the Code provision that at least one half of the Board, excluding the Chairman,
is made up of Non-Executive Directors who are considered by the Board to be independent. The Board has engaged Spencer Stuart,
executive search consultants, to assist in the search for a new independent Non-Executive Director. Discussions with a suitable candidate
are at an advanced stage and it is anticipated that the Company will be in a position to make an announcement on the appointment of
a new independent Non-Executive Director prior to the Annual General Meeting to be held on 14 July 2005. The appointment of a further
independent Non-Executive Director will ensure compliance by the Company with the Code. The Directors are confident that notwithstanding
such non-compliance, and as reinforced by the performance evaluation referred to below, the Board and its Committees remain and will
continue to be effective. The Directors are satisfied that the current Board possesses the breadth of business, financial and international
experience necessary to manage effectively an organisation of the size and complexity of the Group.
(c) Roles of the Chairman and Chief Executive
The Chairman
The Chairman of the Board is Martin Gilbert. He has a written statement of responsibilities which has been approved by the Board:
The Chairman is responsible for:
• leadership of the Board, ensuring its effectiveness on all aspects of its role and setting its agenda, taking into account the issues relevant
to the Group and the concerns of all Board members.
• ensuring, with the Chief Executive and Company Secretary, the provision of accurate, timely and clear information to the Board.
• ensuring effective communication with shareholders and that the Board develops an understanding of the views of major investors.
• managing the Board, ensuring that sufficient time is allowed for the discussion of complex or contentious issues.
• ensuring a regular evaluation of the performance of the Board as a whole, its Committees and individual Directors.
• taking the lead in identifying and meeting the development needs of individual Directors and the Board as a whole, with a view to
enhancing the overall effectiveness of the team.
• facilitating the effective contribution of Non-Executive Directors and ensuring constructive relations between Executive and Non-Executive
Directors.
• ensuring, with the Chief Executive and Company Secretary, that new Directors receive a comprehensive induction programme to ensure
their early contribution to the Board.
• encouraging active engagement by all members of the Board.
In accordance with the Company’s Articles of Association, Martin Gilbert is standing for re-election at the Annual General Meeting this year.
The Board is of the opinion, reinforced by the performance evaluation review referred to below, that Martin Gilbert’s significant and in-depth
knowledge and experience of the Group’s business, combined with his external business experience enables him to provide effective
leadership of the Board and to continue to make a positive contribution to the Group’s ongoing business. 19
The Chairman’s other significant business commitments, which remain unchanged from last year, are described in his biography on page 17.
The Board performance evaluation process confirmed that the other Board members are satisfied that Martin Gilbert has the necessary time
available to devote to the proper performance of his duties as Chairman.
The Chief Executive
The Chief Executive is Moir Lockhead. The Chief Executive also has a written statement of responsibilities which has been approved by
the Board:
The Chief Executive is responsible for:
• running the day-to-day business of the Group, within the authorities delegated to him by the Board.
• ensuring implementation across the Group of the policies and strategy set by the Board for the Group.
• day-to-day management of the executive and senior management team.
• leading the development of senior management within the Group with the aim of assisting the training and development of suitable
individuals for future Director roles.
• ensuring that the Chairman is kept appraised in a timely manner of the issues facing the Group and of any important events and
developments.
• leading the development of the Group’s future strategy including identifying and assessing opportunities for the growth of its business and
reviewing the performance of its existing businesses.
(d) Senior Non-Executive Director
David Dunn, who chairs the Audit Committee, is the Senior Independent Non-Executive Director. He is available to shareholders if they have
concerns which contact through the normal channels of Chairman, Chief Executive or Finance Director has failed to resolve or for which such
contact is inappropriate.
(e) Information and professional development of Board members
The Board receives detailed papers on the business to be conducted at each meeting well in advance and individual Board members have
direct access to senior executives should they wish to receive additional information on any of the items for discussion. The head of each
operating division attends Board meetings on a regular basis to ensure that the Board is properly informed about the performance of and
current issues facing that division. Management give presentations on current issues facing the business. A number of Board meetings each
year are held on site at operating locations in the UK and USA allowing the Directors to visit the Group’s operations and to discuss key issues
with local operational management and stakeholders.
All Directors have access to the advice and services of the Company Secretary and, if necessary, can seek independent professional advice
at the Company’s expense in the furtherance of their duties. The Company Secretary is responsible for advising the Board on corporate
governance matters and for ensuring compliance with Board procedures.
Directors receive induction on appointment to the Board, which is tailored to their individual needs. This includes meetings with senior
management and relevant external advisers. In addition, information is provided on their responsibilities and obligations under law, regulation
and best practice guidelines. The induction process is supported during the year by the programme of business presentations and
operational visits described above.
The Board also receives updates, as required, on changes to the law and the regulatory regimes affecting the Group.
(f) Performance evaluation
During the course of the year, the Board undertook an evaluation of its performance. The Chairman led the process, assisted by the
Company Secretary. The objectives of this exercise were to ensure that the Board, its Committees and each individual Director continued
to act effectively and to fulfil the duties and responsibilities expected of them, and also to identify any additional training requirements.
A tailored questionnaire was developed, which each Director completed. The responses were analysed and discussed at a special meeting
of the Nomination Committee. In addition, the Non-Executive Directors held a separate meeting at which the performance of the Executive
Directors was discussed. The Senior Independent Director held a separate meeting with the Non-Executive Directors to discuss the
evaluation of the performance of the Chairman. No significant issues were raised in the course of the evaluation process.
(g) Re-election of Directors
As required by the Company’s Articles of Association, Directors offer themselves for re-election at least once every three years. Any Director
appointed during the year is required to seek re-appointment by shareholders at the next Annual General Meeting. The biographical details
of all the Directors, including those seeking re-election at the 2005 Annual General Meeting, are set out on page 17. The Company’s Articles
of Association do not contain any age limits for Directors.
(h) Appointment of Non-Executive Directors
Non-Executive Directors are appointed by the Board for an initial term of three years, subject to re-appointment by shareholders. They have
letters of appointment, which are available on request for inspection. None of the Non-Executive Directors has yet to serve a term of six years. CORPORATE GOVERNANCE CONTINUED
20
(i) Directors’ and officers’ liability insurance
The Company maintained Directors’ and Officers’ liability insurance cover throughout the year. The cover was renewed on 1 April 2005.
2. COMMITTEES OF THE BOARD
In addition to the Audit, Remuneration and Nomination Committees, the terms of reference for which are published on the Company’s website
and details of which are set out below, the Board has also delegated certain matters to Committees. The principal such Committees are:
2.1 Executive Safety Committee (‘ESC’)
The ESC is chaired by the Chief Executive and meets on a monthly basis. It comprises the Executive Directors, other senior managers and
safety officers. The ESC reviews the Group’s safety performance and practices, develops safety policies and procedures and follows up on
outstanding issues. During the year, a number of meetings were attended by independent safety experts and senior representatives of
relevant industry bodies, including Her Majesty’s Railway Inspectorate.
2.2 Executive Management Board (‘EMB’)
The EMB, which comprises the Executive Directors and certain senior business managers, is chaired by the Chief Executive. It acts as a
general operating management committee and meets on a monthly basis to review outstanding issues and to consider the Group’s
operational and financial performance.
2.3 Executive Committee
The Executive Committee comprises the Executive Directors and meets on an ad hoc basis to consider matters which arise in the ordinary
course of the Group’s operations. It is chaired by the Chief Executive and has specific delegated powers within prescribed limits to deal with
matters arising in the ordinary course which need to be considered before the next scheduled Board meeting.
2.4 Nomination Committee and appointments to the Board
The Nomination Committee is chaired by the Chairman and includes David Dunn, Jim Forbes, John Sievwright and Moir Lockhead. Martyn
Williams attends meetings of the Committee at the invitation of the chairman of the Committee to represent the Group’s employees. The
Committee meets as required to discuss appointments to the Board of both Executive and Non-Executive Directors. Its recommendations
are then put to the full Board for consideration. External search consultants are used to assist the process, where appropriate.
The Employee Director is elected by the Employee Directors’ forum, which comprises the Employee Directors and representatives of each
of the Company’s UK subsidiaries, and generally serves a three-year term.
During the year, the Committee met twice. Items considered by the Committee include the results of the Board performance evaluation
process described above and also potential appointments to the Board. In its deliberations, the Committee is required to have regard to the
skills and experience needed for the future commercial and strategic development of the Group. All members of the Committee attended
each meeting.
Although none of the Executive Directors currently holds any such positions, the Company’s policy is to permit Executive Directors to accept
a limited number of outside non-executive directorships, recognising that this is an effective way to broaden their knowledge and expertise.
However, no such appointment can be taken up without prior Board approval. The Company’s policy on fees relating to such outside
directorships is set out on page 25 of the Directors’ remuneration report.
2.5 Remuneration Committee
The Remuneration Committee, under the chairmanship of Jim Forbes, met four times during the year and, with the exception of John
Sievwright who attended three meetings, all members of the Committee attended all of its meetings. Details of the membership of the
Remuneration Committee are set out in the Directors’ remuneration report on pages 23 to 29, together with a statement of the Group’s
remuneration strategy and policy. Full details of Directors’ remuneration appear on page 26.
2.6 Audit Committee
The Audit Committee is chaired by David Dunn and includes Martin Gilbert, Jim Forbes and John Sievwright. It met four times during the year
and all members attended each of those meetings. The Group Director of Internal Audit and the Company’s external auditors also attended
three of those meetings. Executive Directors and other senior managers attended where requested and as appropriate.
The Board considers that each member of the Committee has sufficient and recent financial experience to enable the Committee to discharge
its functions effectively.
Under its remit, the Committee keeps under review the effectiveness of the Company’s financial reporting and internal control policies and
procedures for the identification, assessment and reporting of risk. It also keeps under review the nature, scope and results of the audits
conducted by the internal audit department and the external auditors, the consistency of accounting policies and reporting across the Group
and it reviews the half-year and full-year financial statements before they are presented to the Board. 21
The Committee considers the Group’s compliance with the Code and its related guidance and oversees the objectivity and effectiveness of
internal audit. The work of the internal audit department is focused on areas of priority as identified by risk analysis and in accordance with
an annual audit plan approved by the Committee and the Board. Reports are sent to senior executives of the Group and subsidiary units and
there is a follow-up process to ensure that actions to resolve identified control weaknesses are implemented. The Group Director of Internal
Audit has the right of direct access to the chairman of the Committee.
The Committee is responsible for making recommendations to the Board in respect of the appointment or re-appointment of the Group’s
external auditors and, subject to the approval of shareholders, recommends to the Board the audit fee to be paid to the external auditors.
The Committee is also charged with monitoring the independence of the external auditors and the objectivity and effectiveness of the external
audit process. The objectivity and independence of the external auditors is considered on a regular basis, with particular regard to the level
of non-audit fees. The majority of non-audit work is put out to tender, with the exception of due diligence work on acquisitions or potential
acquisitions in both the UK and overseas, where the current auditors’ knowledge of the Company’s business processes and controls means
that they are best placed to undertake this work cost-effectively on the Company’s behalf. The majority of the non-audit work undertaken by
the auditors during the year was associated with acquisition-related due diligence and reviews of the financial models for the Company’s rail
franchise bids. Details of the audit and non-audit fees, including a breakdown of the non-audit fee, are set out in note 7 to the financial
statements. The external auditors have direct access to the Committee to raise any matters that may concern them.
The Committee reviews with management a detailed analysis of the Group’s financial information prior to completion and announcement
of the half-year and full-year results and receives a report from the external auditors on the audit process. If necessary, the external auditors
also meet separately with the Audit Committee and/or the Chairman, Chief Executive and Finance Director. The Annual Report and Financial
Statements and interim results go through a detailed verification and due diligence process involving external advisers.
The Committee may request the Executive Directors and any other officers of the Group to attend its meetings but none have the right of
attendance. Committee meetings may be requested by the external or internal auditors if they consider it necessary.
The business considered and discussed by the Committee during the year included the reports of the external auditors on the half-year and
full-year results, the 2005/06 Group Internal Audit Plan and budget, papers concerning any regular and special audits and an executive
summary of each internal audit report, risk analysis assessments and a review of the implications of changes in accounting standards and
the application and implementation of International Financial Reporting Standards.
3. FINANCIAL REPORTING
The Directors have a commitment to best practice in the Group’s external financial reporting in order to present a balanced and
comprehensible assessment of the Group’s financial position and prospects to its shareholders, employees, customers, suppliers and other
third parties. This commitment encompasses all published information including but not limited to the year-end and interim financial
statements, regulatory news announcements and other public information. A statement of the Directors’ responsibility for preparing the
financial statements may be found on page 32.
4. INTERNAL CONTROLS
The Board has established procedures to meet the requirements of the Code and its related guidance on internal controls. These procedures,
which are subject to regular review, provide an ongoing process for identifying, evaluating and managing any significant risks faced by the
Group.
4.1 Responsibility
The Board has overall responsibility for the system of internal control and assessing risk. The responsibility for establishing detailed control
and risk management procedures within each subsidiary lies with the Executive Directors and subsidiary unit managing directors. A sound
system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide
reasonable and not absolute assurance against material misstatement or loss.
4.2 Control environment
The Board is committed to business integrity, high ethical and moral values and professionalism in all its activities, principles with which all
managers and employees are required to comply. The Group has a Code of Ethics, which applies to all of its subsidiary undertakings, a copy
of which is available on the Company’s website.
The Group has a defined divisional organisational structure with lines of authority and delegated responsibility which allows the Board to plan,
execute, control and monitor the business in a manner consistent with the Group’s objectives. The day-to-day business management is
delegated to the Executive Directors and subsidiary unit managing directors under the overall direction of the Chief Executive. As noted
above, the Board reserves to itself a number of specific items, which ensures that it retains control over key business decisions and significant
transactions in terms of size, type or risk. A number of the Group’s key functions, including treasury, taxation, insurance, corporate finance,
legal, corporate communications and procurement are dealt with centrally. Each of these functions is monitored by an Executive Director. CORPORATE GOVERNANCE CONTINUED
22
4.3 Monitoring
The Group adopts a financial reporting and information system which complies with generally accepted accounting practice. The Group
Finance Manual, circulated by the Group Finance function to all subsidiaries, details the Group accounting policies and procedures with
which subsidiaries must comply. These are also available on the Group’s intranet. Budgets are prepared by subsidiary company management
and are subject to review by both Group management and the Executive Directors. Monthly forecasts are completed during the year and
compared against actions required. Each subsidiary unit prepares a monthly report of operating performance, with a commentary on
variances against budget, forecasts and prior year. Similar reports are prepared at a Group level. Key performance indicators, both financial
and operational, are monitored on a weekly basis. In addition, business units participate in strategic reviews which include consideration of
long-term financial projections and the evaluation of business alternatives.
A process of annual self-assessment and hierarchical reporting provides for a documented and auditable trail of accountability from
the subsidiary units to senior management to the Executive Directors. This process includes an internal control questionnaire and risk
assessment and is signed off by the subsidiary unit directors. This process and the supporting documentation are reviewed by both
the internal and external auditors. Detailed action plans are developed from these questionnaires to resolve any control weaknesses
or significant risks identified.
4.4 Risk assessment
The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. As an
integral part of planning and review, management from each business area and major projects identify their risks, the probability of the risks
occurring, the impact on the business should the risks occur and the actions taken to manage the risks. The risks are assessed on a regular
basis and could be associated with a variety of internal and external sources including regulatory requirements, disruption to information
systems, industrial relations issues, control breakdowns and social, ethical and environmental issues.
4.5 Whistleblowing
The Group has established procedures whereby employees of the Group may, in confidence, raise concerns relating to matters of potential
fraud or other improprieties. These procedures also cover other issues affecting employees including health and safety issues. The confidential
hotline, which covers all businesses across the Group and each country in which it operates, was re-launched during the year and the
Committee is confident that these ‘whistleblowing’ arrangements are satisfactory and will enable the proportionate and independent
investigation of such matters and appropriate follow-up action to be taken.
4.6 Review of effectiveness of financial controls
The Directors confirm that they have reviewed the effectiveness of the system of internal control for the year under review and to the date of
approval of the Annual Report and Financial Statements through the monitoring process described above. In addition, the Directors confirm
that they have conducted a specific annual review of the effectiveness of the Group’s internal audit function.
5. RELATIONS WITH SHAREHOLDERS
The Group recognises the importance of regular communication with all of its shareholders. The full Annual Report and Financial Statements
are made available to all shareholders and an Interim Report is published and sent to shareholders at the half-year. These reports are intended
to provide shareholders and other interested parties with a clear and balanced understanding of the Group’s operational performance, its
financial results and prospects.
All investors are kept informed of key business activities, decisions, appointments etc. via regulatory news and press releases and the
Group’s website. There is also regular dialogue with institutional shareholders throughout the year and general presentations are made by the
Chief Executive and Finance Director following the announcement of the full and half-year results. Other Directors, including Non-Executive
Directors, attend meetings with major shareholders if requested.
Regular reports on investor relations activity and feedback from investors are submitted to the Board and senior management.
The Non-Executive Directors have also had informal contact with major shareholders regarding the Group during the year and they
expect that informal dialogue to continue.
6. ANNUAL GENERAL MEETING
All shareholders have the opportunity to put questions to the Directors at the Company’s Annual General Meeting, at which a report is made
on the highlights of the key business developments during the year under review. The Chairmen of each of the Nomination, Remuneration
and Audit Committees attend the Annual General Meeting to answer specific questions from shareholders. All Directors were present at the
2004 Annual General Meeting.
Notice of the Annual General Meeting is circulated to all shareholders at least 20 working days prior to the meeting. Separate resolutions are
proposed at the Annual General Meeting on each substantially separate issue. Proxy votes are counted on all resolutions and, where votes
are taken on a show of hands, the proxy results are subsequently announced to the meeting. DIRECTORS’ REMUNERATION REPORT
23
This report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002 (the ‘Regulations’). It also meets the
requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the main supporting principles
of the Combined Code on Corporate Governance published by the Financial Reporting Council in July 2003 (the ‘Code’) relating to Directors’
remuneration. The Company complies with all of the provisions of the Code. A resolution to approve this report will be proposed at the
Company’s Annual General Meeting to be held on 14 July 2005.
The Regulations require the Company’s auditors to report to the Company’s shareholders on the ‘auditable’ part of the Directors’
remuneration report and to state whether in their opinion that part of the report has been properly prepared in accordance with the
Companies Act 1985 (as amended by the Regulations). This report has therefore been divided into separate sections for audited and
unaudited information.
UNAUDITED INFORMATION
Remuneration Committee
The Remuneration Committee (the ‘Committee’) is chaired by Jim Forbes. The other current members of the Committee are David Dunn and
John Sievwright. The Board considers each of the members of the Committee to be independent in accordance with the Code. None of the
members of the Committee has any personal financial interest (other than as a shareholder) in the matters to be decided, conflict of interest
arising from cross-directorships or any involvement in the day-to-day running of the business.
The remit of the Remuneration Committee was adopted in March 2004 in the light of the recent revisions to the Code and its terms of
reference are available on request and are also published on the Company’s website. These terms of reference will be kept under review to
take into account any changes to the Code and corporate governance practice. The principal purpose of the Committee is to consider
matters related to the remuneration of the Executive Directors and senior management below Board level.
The Committee met four times during the year and all members attended each meeting, with the exception of John Sievwright, who attended
three meetings.
In determining the Executive Directors’ remuneration for the year, the Committee considered publicly available information, including the
remuneration packages of those holding equivalent posts at the Company’s peers within the transport industry and the FTSE350 in general.
The Committee appointed Deloitte & Touche LLP Executive Compensation Consulting to provide advice on remuneration matters to the
Committee including a benchmarking exercise in relation to the Group and its peers and advice on the structure of longer-term incentive
schemes. Deloitte & Touche LLP also acts as the Group’s external auditor. As such, the appointment as remuneration advisors is also subject
to pre-approval by the Audit Committee. Information on other services provided by Deloitte & Touche LLP is given in Note 7 to the financial
statements. All services provided by Deloitte & Touche LLP are carried out in accordance with the requirements of the UK Audit Practices
Board Ethical Standard 5, relating to non-audit services performed by a company’s auditors. The Committee also consults with the Chief
Executive although no Director participates in discussions concerning his own remuneration.
Remuneration policy
Aim
The aim of the Committee is to design remuneration packages for the Company’s Executives which attract, retain and motivate the high-
calibre individuals necessary to maintain the Group’s position as a leader in the public transportation industry. In implementing its policy, the
Committee has given full consideration to the Principles of Good Governance of the Code with regard to Directors’ remuneration.
Structure of remuneration packages
There are currently four main elements to the executive remuneration package:
• basic salary and benefits in kind
• annual cash and deferred share bonus (both paid under the Executive Annual Bonus Plan)
• share options
• pension provision
The Committee considers the remuneration package as a whole, balancing each of the individual elements to ensure that overall, the
remuneration received by each Executive Director is competitive but not excessive, contains an appropriate balance between fixed and
variable (performance-related) remuneration and that each Executive Director has sufficient long-term incentive to ensure that his interests
are aligned with those of shareholders. A high proportion of each Director’s potential remuneration is performance-related.
During the year, the Committee, with the assistance of Deloitte & Touche LLP , undertook a comprehensive review of the total remuneration
packages of the Executive team to ensure that they remain competitive. As a result of this review, and following consultation with the
Company’s major institutional shareholders, the Committee has determined to increase the maximum level of bonus payable under the
Executive Annual Bonus Plan for the year commencing 1 April 2005 from 80% to 110% of basic salary for the Chief Executive and from
80% to 100% of basic salary for the other Executive Directors. Up to half of the award will be payable in shares with the deferral period for
such shares increased from three to five years. These changes will also apply to senior management within the Group.
To take account of shareholder feedback during the consultation exercise, the Committee is currently considering the best means of providing
a longer-term incentive to the Executive team in the future. DIRECTORS’ REMUNERATION REPORT CONTINUED
24
The remuneration of the Executive Directors is made up of the following components:
Basic salary and benefits in kind
The basic salary and benefits in kind for each Executive Director are determined by the Committee for each financial year and when an
individual changes position or responsibility. In determining appropriate levels, the Committee considers the Group as a whole and also the
packages received by similar individuals at the Company’s peers in the public transport sector and the FTSE 350. Details of the salaries and
benefits in kind received by each of the Executive Directors in the year are shown on page 26.
Executive annual bonus plan
The Group operates a discretionary performance-related bonus plan for its senior management under which payment of bonuses is linked to
achievement of budgeted annual Group operating profit targets and personal objectives (including safety targets). Where an Executive Director
is also directly responsible for one or more operating division(s), payment of a proportion of the bonus is also linked to the profitability of those
divisions. The Committee considers and agrees the Group and divisional objectives for all Executive Directors and the personal objectives for
the Chief Executive. The Chief Executive, in consultation with the Committee, agrees the personal objectives for the other Executive Directors.
Bonus payments comprise a mixture of cash and deferred share awards. Share awards for the years to 31 March 2005 were deferred for three
years and will lapse if the relevant individual leaves the Group during the deferral period for any reason other than redundancy, retirement or ill-
health. The Committee considers it is appropriate for a proportion of the annual bonus to be taken in the form of deferred shares as this acts
as a retention mechanism and also aligns that Executive’s longer-term interests with those of the Company’s shareholders.
As the award of any bonus is already dependent on the achievement of stringent targets, the Committee considers that it is not appropriate to
attach further performance conditions on vesting of the deferred share element of any bonus other than that the relevant Executive remains
employed by the Group and has not tendered his resignation at the end of the deferral period.
Each year, the Board sets challenging budget targets for the Group as a whole and for each business unit within the Group. The Committee’s
policy continues to be that bonuses will be payable for Group performance against budget of between 90% and 110% although the level of bonus
payable is heavily skewed towards performance in excess of 100% of budget. As mentioned above, a separate portion of the bonus is dependent
upon achievement of safety objectives (up to 25%) and a further portion is dependent on achievement of personal objectives (up to 25%).
The maximum level of bonus payable to an Executive Director in the year to 31 March 2005 was 80% of basic salary, although actual awards for
the year under review ranged from 58% to 75%. If the maximum bonus were payable, the Chief Executive would receive half of his bonus in
cash and the remaining half in the form of deferred shares. For the other Executive Directors, the proportions would be 25% and 55%,
respectively.
Going forward, as a result of the review carried out by Deloitte & Touche LLP , and following consultation with its major institutional
shareholders, the Committee has determined that the maximum level of bonus payable under the plan for the year commencing 1 April 2005
will be 110% of basic salary for the Chief Executive and 100% of basic salary for the other Executive Directors. Bonuses will continue to be
based on a combination of Group and divisional financial performance (up to 70%) and safety and personal objectives (up to 30%). This is
considered to be appropriate given the increase in the maximum award potential.
For all Executive Directors, up to 50% of the award will be payable in shares. The deferral period for these shares will be increased from three
to five years in order to provide long-term lock-in and to further align the Directors’ interests with those of shareholders. These changes will
also apply to senior management within the Group. The Company consulted its major institutional shareholders on these proposed changes.
The bonus arrangements will be kept under review by the Committee for future years to ensure that they remain appropriate.
Share Option Schemes
Executive Share Option Scheme
The Company operates an Executive Share Option Scheme (‘ESOS’) for Executive Directors and other senior management. Under this
scheme, during the year, options to acquire shares in the Company were granted to Executive Directors and senior management. The exercise
price for such options was based on the average of the middle market quotations for shares in the Company for the three dealing days prior to
the date of grant. The Committee has discretion under this scheme to make awards of up to 200% of basic salary but awards were made
during the year at 1.33x basic salary for the Chief Executive and 1x salary for the other Executive Directors.
The performance target applicable to the awards made in the three years to 31 March 2004 is that growth in the Company’s annualised earnings
per share (‘EPS’) over the three-year performance period must exceed the increase in the retail prices index (‘RPI’) over the same period by an
average of at least 3% per annum. The performance period can be extended for one year if this performance target has not been met over the
initial three years but the EPS increase must still exceed the increase in RPI over the four-year period by an average of at least 3% per annum.
For the options awarded in respect of the year under review, this was reduced to an average of at least 2% per annum for the three-year
performance period but an additional measure was introduced. For the maximum award to vest, the Company’s total shareholder return (‘TSR’)
over the performance period must place the Company in the top 25% of companies in a group of the Company’s listed transport peers.
A proportion of the options between 0 and 100% (determined on a sliding scale) will vest if the Company’s performance against that peer group is
between the 25th and 50th percentile. No options will vest if the Company’s performance is below the 50th percentile. Unlike the awards made in
previous years, the performance period may not be extended if the targets have not been met at the end of the three-year performance period. 25
The companies in the original TSR comparator group for the options awarded in this year are Associated British Ports Holdings PLC,
Arriva plc, BAA plc, The Go-Ahead Group plc, The Mersey Docks & Harbour Company, TBI plc, National Express Group plc, Exel plc,
Tibbett & Britten (now part of Exel plc), Avis Europe plc, Stagecoach Group plc, British Airways plc, Peninsular & Oriental Steam Navigation
Company and EasyJet plc.
If the performance targets are met, an option may be exercised without any further condition at any time during the rest of its ten-year life. If the
holder leaves the Group before the end of the performance period by reason of ill-health, injury, disability, redundancy or retirement, an option
may be exercised within 12 months if the performance target has been satisfied at the date of leaving. Early exercise of options may also be
permitted within specific periods if there is a change of control of the Company as a result of a takeover, reconstruction, amalgamation or
voluntary winding-up of the Company but only to the extent that the relevant performance targets have then been met on a pro rata basis.
Where the performance period includes the transition to the new International Accounting Standards, the definition of ‘annualised EPS’ is under
review. The Committee, advised by the Audit Committee and the external auditors, will agree decisions regarding the management of the
transition and will make any necessary adjustments to ensure that comparisons continue to be made on a fair, consistent and reasonable basis.
Taking into account institutional shareholder feedback in the consultation exercise described above, the Committee is currently considering
the suitability of share option awards as a means of providing a longer-term incentive to the Executive team going forwards.
Save As You Earn (SAYE) Scheme
The Company operates a SAYE Scheme for eligible employees under which options may be granted on an annual basis at a discount of up
to 20% of market value. The Executive Directors are eligible to participate in the SAYE Scheme.
Buy As You Earn (BAYE) Scheme
The Company operates a Share Incentive Plan under the title ‘Buy As You Earn’. The scheme, which is open to all UK employees of the
Group (including the Executive Directors), enables employees to purchase partnership shares from their gross income (before income tax and
National Insurance deductions). The Company provides two matching shares for every three partnership shares, subject to a maximum
Company contribution of shares to the value of £20 a month. The shares are held in trust for up to five years, in which case, no income tax or
National Insurance will be payable. The matching shares will be forfeited if the corresponding partnership shares are removed from trust within
three years from award.
Retirement benefits
Executive Directors are members of a number of defined benefit Group pension schemes. Their dependants are eligible for dependants’
pensions and the payment of a lump sum in the event of death in service. Further details are set out on page 27.
Service contracts
It is the Company’s policy to restrict notice periods for Executive Directors to a maximum of 12 months. In line with this policy, all of the
Executive Directors have service contracts with an undefined term but which provide for a notice period of 12 months.
The contracts contain a provision, exercisable at the discretion of the Company, to pay an amount in lieu of notice on early termination of the
contract. Such payments are limited to basic salary plus certain benefits but would not include entitlement to bonus or share options. There
are no contractual provisions governing payment of compensation on early termination of the contracts. If it becomes necessary to consider
early termination of a service contract, the Company will have regard to all the circumstances of the case, including mitigation, when
determining any compensation to be paid. Details of the Executive Directors’ contracts are set out below:
Date of service contract
Moir Lockhead 5 March 2001
Dean Finch as of 26 February 2004
David Leeder 3 September 2001
Iain Lanaghan
1
29 November 2002
Mike Mitchell
2
2 July 1997
1 Retired as a Director on 31 May 2004.
2 Retired as a Director on 3 September 2004.
Where Board approval is given for an Executive Director to accept an outside non-executive directorship, unless the appointment is in
connection with Group business, the individual Director is entitled to retain any fees received.
Non-Executive Directors
All Non-Executive Directors have a letter of appointment and their fees are determined by the Board based on surveys of fees paid to Non-
Executive Directors of comparable companies. These letters of appointment are available for inspection at the Company’s registered office
during normal business hours and will be made available at the Annual General Meeting.
Non-Executive Directors cannot participate in any of the Company’s share option schemes and, other than the Group Employee Director, are
not eligible to join a Company pension scheme. Each of the Non-Executive Directors, other than the Group Employee Director, has elected to
receive 40% of his fees in the form of shares in the Company in order to ensure that their interests are more closely aligned to those of the
Company’s shareholders. The shares are purchased on a monthly basis in the market. The appointment of each of the Non-Executive Directors
is subject to early termination without compensation if he is not re-appointed at a meeting of shareholders where he is up for re-election. DIRECTORS’ REMUNERATION REPORT CONTINUED
26
Total shareholder return
The following graph shows, for the last five financial years of the Company, the total shareholder return on a holding of shares in the Company
as against that of a hypothetical holding of shares made up of shares of the same kinds and number as those by reference to which the
FTSE 250 Index and the FTSE All-Share Transport Index are calculated.
This graph is included to meet the relevant legislative requirements and is not directly relevant to the performance criteria used for the
Company’s Executive Share Option Scheme. Nonetheless, the indices used were selected as the Company believes that they are the most
appropriate and representative indices against which to measure the Company’s performance for this purpose.
AUDITED INFORMATION
Directors’ remuneration
Details of the Directors’ remuneration for the year ended 31 March 2005 are set out on the following pages.
Emoluments and compensation
The total salaries, fees and benefits paid to, or receivable by, each person who served as a Director of the Company at any time during the
year for the period of such directorship are shown in the table below. These include any and all payments for services as a Director of the
Company, its subsidiaries or otherwise in connection with the management of the Group.
Cash Benefits
Salary bonus in kind Fees Total Total
2005 2005 2005
1
2005 2005 2004
£000 £000 £000 £000 £000 £000
Executive Directors
Moir Lockhead 400 160 30 – 590 575
Dean Finch 250 63 17 – 330 32
Iain Lanaghan
2
37 – – – 37 302
David Leeder
3
236 49 18 – 303 –
Mike Mitchell
4
107 72 8 – 187 361
Non-Executive Directors
Martin Gilbert – – – 108 108 103
David Dunn – – – 35 35 34
Jim Forbes – – – 35 35 34
John Sievwright – – – 35 35 34
Martyn Williams – – – 14 14 14
Total 1,030 344 73 227 1,674 1,489
1
The Directors received the following non-cash benefits in the year: Moir Lockhead: £24,000 company car, £5,000 private fuel and £1,000 medical insurance for himself and
spouse; Dean Finch: £11,000 company car, £5,000 private fuel and £1,000 medical insurance for himself and family; David Leeder: £12,000 company car, £5,000 private fuel
and £1,000 medical insurance for himself; Iain Lanaghan: £1,000 medical insurance for himself and family (full year); Mike Mitchell: £14,000 company car/cash car allowance;
£3,000 private fuel and £1,000 medical insurance for himself and family (full year).
2
Retired as a Director on 31 May 2004. To ensure an orderly handover to the incoming Finance Director, it was agreed that he would continue as an employee of the Group for
a period of up to ten months. His employment with the Group terminated on 31 March 2005. Other than a payment of £1,000, and compensation of £7,950 for the loss of
share options under the Group’s SAYE scheme and matching shares under the Group’s BAYE scheme (representing the value of those options and shares at the termination
date), in line with best practice guidelines, no lump sum payment was made but he continued to receive his salary and benefits on a monthly basis. Accordingly, in the
remainder of the year under review, he received salary payments of £183,000 in addition to those disclosed in the table. No bonus was paid to him in respect of the year under
review nor were any share options awarded to him under the Executive Share Option Scheme in that year.
3
Appointed as a Director on 1 May 2004.
4
Retired as a Director on 3 September 2004 but continued as an employee of the Group for the remainder of the year under review. Accordingly, during the year, he received
salary payments of £135,000 and cash bonus of £100,000 in addition to the amounts disclosed in the table.
50
100
150
200
250
Total shareholder return index
Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 Mar 05
FirstGroup plc Total Shareholder Return FTSE All-Share Transport Index Total Shareholder Return
Source: Datastream
FTSE 250 Index Total Shareholder Return 27
Retirement benefits
Details of the retirement benefits for each of the Directors are set out in the table below:
Moir Dean David Iain Mike
Lockhead Finch Leeder
1
Lanaghan
1
Mitchell
1
Scheme
23333
Normal retirement age 65
4
60 60 60 65
Directors’ contributions in the year or date of retirement (£) 25,397 11,730 10,753 2,295 6,071
Increase in accrued pension during the year (net of inflation) (£ pa) 3,979 2,404 2,172 895 28,931
(plus 11,937 cash)
Increase in accrued pension during the year (£ pa) 9,454 2,705 2,337 1,270
5
30,717
6
(plus 28,362 cash)
Accrued pension as at 31 March 2005 (£ pa) 186,058 12,425 8,160 13,370
5
88,342
6
(plus 558,174 cash)
Transfer value of increase in accrued pension (net of inflation) during the year (£) 83,082 14,646 13,239 8,341
5
236,310
6
Transfer value of accrued pension at 31 March 2004 (£) 3,457,401 56,319 34,773 107,154 640,534
Transfer value of accrued pension at 31 March 2005 (£) 3,884,910 75,695 49,738 124,608
5
947,936
6
Increase in transfer value over the year, net of Directors’ contributions (£ pa) 402,112 7,646 4,212 15,159
5
301,331
6
Company contribution to FURBS during the year or to date of retirement (£)
7
–– 10,312 4,664 –
1
Iain Lanaghan and Mike Mitchell retired from the Board on 31 May 2004 and 3 September 2004, respectively and David Leeder joined the Board on 1 May 2004. The details
shown in the table relate to the portion of the year when they were Directors.
2
Aberdeen City Council No.2 Pension Fund.
3
FirstGroup Flexible Benefits Scheme.
4
Normal retirement age under relevant scheme is 65 but benefits can be taken without reduction at 60 so transfer values for the purpose of this table have been calculated
using a retirement age of 60.
5
The increase in accrued pension (net of inflation) for the full year was £3,392; the increase in accrued pension for the full year was £3,767; the accrued pension as at
31 March 2005 was £15,867; the transfer value of the increase in accrued pension (net of inflation) during the full year was £31,613; the transfer value of the accrued pension
at 31 March 2005 was £147,880 and the increase in transfer value over the full year net of Director’s contributions was £26,956.
6
Mike Mitchell’s benefits accrued since 1 November 1999 are payable without reduction from age 60 (except for added years purchased with his own contributions). His earlier
benefits are based on a retirement age of 65. The transfer values shown are calculated for each part of his pension based on the earliest age they are payable without
reduction. The increase in transfer value over the relevant period net of inflation includes £215,872 in respect of an augmentation to rectify an administrative oversight on a prior
intra-Group transfer of his employment which resulted in the statutory earnings cap mistakenly being applied. The increase in accrued pension (net of inflation) for the full year
was £34,786; the increase in accrued pension for the full year was £36,572; the accrued pension as at 31 March 2005 was £94,197; the transfer value of the increase in
accrued pension (net of inflation) during the full year was £307,182; the transfer value of the accrued pension at 31 March 2005 was £1,018,809 and the increase in transfer
value over the full year net of Director’s contributions was £332,068.
7
The full year FURBS contribution for Iain Lanaghan was £27,983. Iain Lanaghan and David Leeder received additional salary payments to compensate them for the tax liability
arising from the FURBS contributions.
The Group does not have one pension scheme but instead operates a number of different schemes. All of the schemes in which the
Executive Directors participate are defined benefit schemes and are not limited in membership to Executive Directors. Dean Finch and David
Leeder are accruing benefits which are subject to the three year average of the Inland Revenue earnings cap (in the case of Dean Finch) and
the one year average of the Inland Revenue earnings cap (in the case of David Leeder). DIRECTORS’ REMUNERATION REPORT CONTINUED
28
Directors’ share options
The outstanding share options under the ESOS, deferred share bonus, long-term incentive plan (‘LTIP’) and SAYE Scheme granted to each of
the serving Directors are set out in the table below. No price was paid for the award of any option. Except as disclosed below in relation to
Iain Lanaghan and Mike Mitchell, there have been no changes to the terms and conditions of any option awarded to Directors.
At beginning Lapsed/
of year or Granted Exercised waived
date of during during during At end
appointment the year the year the year of year
1
Exercise Date from
(number of (number of (number of (number of (number of price which Expiry
Current Directors Scheme shares) shares) shares) shares) shares) (pence) exercisable date
Moir Lockhead LTIP 2000
2
110,168 – 110,168 –– nil 31.3.03 31.3.10
ESOS:
2001 130,985 ––– 130,985 346.5 15.8.04 15.8.11
2002 173,784 ––– 173,784 269 21.6.05 21.6.12
2003 166,958 ––– 166,958 287 18.11.06 18.11.13
2004 – 193,277 –– 193,277 275.08 10.6.07 10.6.14
Deferred share bonus
3
:
2001
4
31,633 – 31,633 –– nil 1.4.04 1.4.05
2002 25,080 ––– 25,080 nil 1.4.05 1.4.06
2003 28,559 ––– 28,559 nil 1.4.06 1.4.07
2004 – 34,062 –– 34,062 nil 1.4.07 1.4.08
Dean Finch ESOS:
2001 18,470 ––– 18,470 346.5 15.8.04 15.8.11
2002 24,535 ––– 24,535 269 21.6.05 21.6.12
2003 58,930 ––– 58,930 287 18.11.06 18.11.13
2004 – 90,883 –– 90,883 275.08 10.6.07 10.6.14
Deferred share bonus
3
:
2001
5
4,800 – 4,800 –– nil 1.4.04 1.4.05
2002 11,660 ––– 11,660 nil 1.4.05 1.4.06
2003 13,720 ––– 13,720 nil 1.4.06 1.4.07
2004 – 27,029 –– 27,029 nil 1.4.07 1.4.08
David Leeder ESOS:
2002 26,914 ––– 26,914 269 21.6.05 21.6.12
2003 64,643 ––– 64,643 287 18.11.06 18.11.13
2004 – 90,883 –– 90,883 275.08 10.6.07 10.6.14
Deferred share bonus
3
:
2002 14,983 ––– 14,983 nil 1.4.05 1.4.06
2003 7,163 ––– 7,163 nil 1.4.06 1.4.07
2004 – 19,941 –– 19,941 nil 1.4.07 1.4.08
SAYE 2002/03 4,921 ––– 4,921 192 1.2.06 31.8.06
Martyn Williams SAYE:
2002/03 787 ––– 787 192 1.2.06 31.8.06
2003/04 636 ––– 636 232 1.2.07 31.8.07
2004/05 – 567 –– 567 267 1.2.08 31.8.08 29
Directors’ share options continued
At beginning Lapsed/ At end
of year or Granted Exercised waived of year
date of during during during or date of
appointment the year the year the year retirement
1
Exercise Date from
(number of (number of (number of (number of (number of price which Expiry
Former Directors Scheme shares) shares) shares) shares) shares) (pence) exercisable date
Iain Lanaghan
6
LTIP 2000
7
55,932 ––– 55,932 nil 31.3.03 31.3.10
ESOS:
2001 50,000 ––– 50,000 346.5 15.8.04 15.8.11
2002 78,067 ––– 78,067 269 21.6.05 21.6.12
2003 75,000 ––– 75,000 287 18.11.06 18.11.13
Deferred share bonus
3
:
2001
8
10,707 ––– 10,707 nil 1.4.04 1.4.05
2002 12,733 ––– 12,733 nil 1.4.05 1.4.06
2003 17,063 ––– 17,063 nil 1.4.06 1.4.07
2004 – 18,800 –– 18,800 nil 1.4.07 1.4.08
SAYE 2002/03
9
4,921 ––– 4,921 192 1.2.06 31.8.06
Mike Mitchell
10
ESOS:
2001 60,606 ––– 60,606 346.5 15.8.04 15.8.11
2002 88,067 ––– 88,067 269 21.6.05 21.6.12
2003 84,607 ––– 84,607 287 18.11.06 18.11.13
Deferred share bonus
3
:
2001
11
22,667 ––– 22,667 nil 1.4.04 1.4.05
2002 16,903 ––– 16,903 nil 1.4.05 1.4.06
2003 19,249 ––– 19,249 nil 1.4.06 1.4.07
2004 – 18,713 –– 18,713 nil 1.4.07 1.4.08
SAYE 2002/03
9
4,921 ––– 4,921 192 1.2.06 31.8.06
1
Details shown for Mike Mitchell as at 3 September 2004 and Iain Lanaghan as at 31 May 2004 (date of retirement as a Director).
2
Exercised on 17 December 2004. The closing price on the date of exercise was 348p and the notional pre-tax gain on exercise was £383,385.
3
The figures shown represent the number of nil-cost options which were granted under the deferred share element of the Executive Annual Bonus Plan in respect of the
2000/01, 2001/02, 2002/03 and 2003/04 financial years. The cash values of the 2004/05 award are Moir Lockhead: £120,000, Dean Finch: £125,000 and David Leeder:
£95,600. These awards will take the form of nil cost options over shares which will, subject to satisfaction of the requirements of the plan, vest on 1 April 2008. The number
of shares under option will depend on the market price of shares at the close of business on 11 May 2005.
4
Exercised on 8 February 2005. The closing price on the date of exercise was 364.75p and the notional pre-tax gain on exercise was £115,381.
5
Exercised on 9 July 2004. The closing price on the date of exercise was 283.25p and the notional pre-tax gain on exercise was £13,596.
6
Retired as a Director on 31 May 2004. The Committee exercised its discretion to permit him to retain all share options awarded under the Group’s Executive Share Option
Scheme and deferred share awards made under the Executive Annual Bonus Plan following termination of his employment as if he remained an employee of the Company
(subject to relevant performance criteria and the rules of the relevant schemes).
7
Exercised on 21 June 2004 following retirement from the Board. The closing price on the date of exercise was 284.5p and the notional pre-tax gain on exercise was £159,127.
8
Exercised on 1 June 2004 following retirement from the Board. The closing price on the date of exercise was 274p and the notional pre-tax gain on exercise was £29,337.
9
Lapsed on leaving the Group.
10
Retired as a Director on 3 September 2004 but continued as an employee for the full year. By agreement with the Company, Mike Mitchell took early retirement from the Group
in April 2005. He was subsequently appointed as Director General of Railways in HM Department for Transport. HM Government requires him to exercise all of his options and
sell all of his shares in the Company prior to taking up that appointment. Accordingly, as he was a ‘good leaver’ under the terms of the Executive Annual Bonus Plan, the
Committee has exercised its discretion to allow him to exercise the deferred share awards made to him earlier than their normal exercise dates. In addition, the Remuneration
Committee determined that all of the bonus payable to Mike Mitchell in respect of the year under review should be paid in cash and accordingly, no deferred share awards will
be made to him in respect of the year. Details of the cash bonus paid are set out in the table on page 26.
11
Exercised on 11 November 2004 following retirement from the Board. The closing price on the date of exercise was 328.5p and the notional pre-tax gain on exercise
was £74,461.
Market price of FirstGroup plc shares
The market price of FirstGroup plc shares at 31 March 2005 was 343.25p and the range during the year was 256p to 379.25p.
This report was approved by the Board of Directors, on the recommendation of the Remuneration Committee, on 5 May 2005 and signed
on its behalf by
BL Ruppel
Company Secretary
10 May 2005 DIRECTORS’ REPORT
30
The Directors have pleasure in submitting their Annual Report and Financial Statements for the year ended 31 March 2005.
PRINCIPAL ACTIVITIES
The principal activity of the Group is the provision of passenger transport services.
REVIEW OF THE BUSINESS
Reviews of the business and principal events and likely future developments are given in the Chairman’s statement, Chief Executive’s review
and in the Financial review set out on pages 4 to 16.
RESULTS AND DIVIDENDS
The results for the year are set out in the consolidated profit and loss account on page 34. The Directors recommend payment of a final
dividend of £34.2m (8.69p per share), which, with the interim dividend of £16.4m (4.125p per share) paid on 9 February 2005, gives a total
dividend of £50.6m (12.815p per share) for the year. The proposed final dividend, if approved, will be paid on 26 August 2005 to shareholders
on the register at the close of business on 22 July 2005.
SHARE CAPITAL
Details of changes in share capital, including purchases by the Company of its own shares, are set out in notes 22 and 23 to the financial
statements. Authority for the Company to make market purchases of up to 60,000,000 of its own shares was renewed at the 2004 Annual
General Meeting. This authority remains in place until the 2005 Annual General Meeting, when it is intended to seek a further renewal.
DIRECTORS
The Directors of the Company who served during the year were Martin Gilbert, Moir Lockhead, David Dunn, Dean Finch, Jim Forbes, David
Leeder (appointed 1 May 2004), Iain Lanaghan (retired 31 May 2004), Mike Mitchell (retired 3 September 2004), John Sievwright and Martyn
Williams. Biographical details of all the serving Directors are set out on page 17.
In accordance with the Company’s Articles of Association, Martin Gilbert and David Dunn will retire by rotation at the forthcoming Annual
General Meeting and, being eligible, offer themselves for re-election. Martyn Williams’ term of office as Employee Director expires on
31 December 2005 and he is therefore not offering himself for re-election at the Annual General Meeting this year. Details of the fees and
remuneration of the Directors and their service contracts or terms of appointment are set out in the Directors’ remuneration report on
pages 23 to 29.
DIRECTORS’ INTERESTS
The Directors who held office at the end of the year had the following interests in the ordinary shares of the Company:
Ordinary 5p shares
Beneficial Non-beneficial Beneficial Non-beneficial
David Dunn 17,329 – 21,817 –
Dean Finch 1,500 – 1,500 –
Jim Forbes 9,329 – 13,817 –
Martin Gilbert 48,273 – 62,219 –
David Leeder 817 – 1,364 –
Moir Lockhead 1,440,723 470,690 1,132,524 470,690
John Sievwright 16,829 – 21,317 –
Martyn Williams 965 – 965 –
Details of the Directors’ share options are set out in the Directors’ remuneration report on pages 28 to 29. Moir Lockhead also holds nominal
non-beneficial interests in a number of the Company’s subsidiary undertakings.
Between 1 April 2005 and 10 May 2005, the following changes occurred to Directors’ interests: on 21 April 2005, David Leeder acquired 46
shares pursuant to the Company’s Buy As You Earn Scheme. On 25 April 2005, Martin Gilbert acquired 1,099 shares and each of David
Dunn, Jim Forbes and John Sievwright acquired 353 shares under the standing arrangements whereby they have elected to receive 40% of
their monthly fees in the form of shares in the Company.
No Director is materially interested in any significant contract or agreement with the Group, other than their service contracts.
At beginning of year
or subsequent appointment At end of year 31
SIGNIFICANT INTERESTS
At 10 May 2005, the Company had been advised of the following holders of 3% or more of its issued share capital for the purpose of section
198 of the Companies Act 1985:
Ordinary 5p shares %
Barclays PLC 13,390,197 7.87
M&G Investment Management Limited 21,321,854 5.35
Legal & General Investment Management Limited 15,204,942 3.81
JPMorgan Fleming Asset Management Limited 12,358,252 3.10
EMPLOYEES
The Group is committed to employee involvement and uses a variety of methods to inform, consult and involve its employees in the business.
These include subsidiary company newsletters and circulars and also First Edition, a Group-wide newsletter, which is sent to all employees
across the Group on a biannual basis. Senior managers within each division meet regularly to discuss current issues and employees are
encouraged to discuss any issues with management at any time. Each Division also operates a confidential hotline which staff can use to
report health and safety, employment-related and other issues concerning them.
The Group also has a regular dialogue with employees and representatives from Trades Unions. Each operating company has either an
elected Company Council or, more typically, an Employee Director on its board. This principle extends to the plc Board where one of the
Employee Directors is elected by his or her peers to represent employees across the Group.
Each Division has its own information and consultation arrangements and levels of employee involvement in the business differ. However,
in the UK, the Group has worked with Trades Unions to set up a number of joint schemes, including workplace learning, credit unions, new
national policies on assaults, drugs and alcohol, the restructuring of Group pension schemes and a joint committee to review staff uniform
procedures.
The Group is committed to wide employee ownership. During the year, employees continued to have the opportunity to participate in the
Group’s Save As You Earn and Buy As You Earn schemes, details of which are set out in note 31 to the financial statements.
First is committed to equality of opportunity in all its employment practices, policies and procedures. To this end, within the framework of
the law, we are committed wherever practicable to achieving and maintaining a workforce which broadly reflects the local catchment area
within which we operate. We aim to ensure that no employee or potential employee will receive less favourable treatment due to their race,
colour, nationality, ethnic origin, religion, sex, gender reassignment, sexual orientation, religion, marital status, trade union membership, age
or disability.
CORPORATE SOCIAL RESPONSIBILITY
The system of internal control described on pages 21 to 22 covers significant risks associated with social, environmental and health and
safety issues. The Group publishes a separate Corporate Responsibility Report covering these matters, which will be available on our website
at www.firstgroup.com.
CHARITABLE AND POLITICAL CONTRIBUTIONS
The Group made various donations to UK charities totalling approximately £40,000 during the year (2004: £34,000). It also made a donation
of £65,000 to the Asian Tsunami appeal. No payments were made for political purposes.
CREDITORS
It is the Group’s policy to abide by the payment terms agreed with suppliers wherever it is satisfied that the supplier has provided goods and
services in accordance with agreed terms and conditions. A number of significant purchases including fuel, tyres and commitments under hire
purchase contracts, finance leases and operating leases are paid by direct debit. At 31 March 2005, the Group had the equivalent of 27
days’ (2004: 39 days’) purchases outstanding, based on the ratio of Group trade creditors at the end of the year to the amounts invoiced
during the year by trade creditors. The Company does not have any trade creditors in its balance sheet. DIRECTORS’ REPORT CONTINUED
32
ANNUAL GENERAL MEETING
The Annual General Meeting will be held at the Aberdeen Exhibition and Conference Centre, Bridge of Don, Aberdeen, Scotland, AB23
8BL on Thursday 14 July 2005 at 11.00 am. The Notice of Meeting is contained in a separate letter from the Chairman accompanying
this Annual Report.
GOING CONCERN
Whilst any consideration of future matters involves making a judgment, at a particular point in time, about future events which are
inherently uncertain, after making inquiries, the Directors have formed the judgment, at the time of approving these financial statements,
that there is a reasonable expectation that the Company and the Group have adequate resources to continue operating for the
foreseeable future. For this reason, they continue to adopt the going concern basis in preparing these financial statements.
By order of the Board
B. Louise Ruppel 395 King Street
Company Secretary Aberdeen
10 May 2005 AB24 5RP
DIRECTORS’ RESPONSIBILITIES
United Kingdom Company law requires that the Directors prepare financial statements for each financial year which give a true and fair view
of the state of affairs of the Company and the Group at the end of the financial year and of the profit or loss of the Group for that period.
In preparing those financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and estimates that are reasonable and prudent; and
• state whether applicable accounting standards have been followed.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial
position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 1985.
They are also responsible for the system of internal control, for safeguarding the assets of the Company and the Group and hence for taking
reasonable steps to prevent and detect fraud and other irregularities. FINANCIAL STATEMENTS CONTENTS
34 Consolidated profit and loss account
35 Balance sheets
36 Consolidated cash flow statement
36 Reconciliation of net cash flows to movement in net debt
37 Consolidated statement of total recognised gains and losses
37 Reconciliation of movements in equity shareholders’ funds
60 Independent auditors’ report
61 Group financial summary
62 Shareholder information
Notes to the financial statements
38 Principal accounting policies
40 Profit and loss account analysis and
segmental information
41 Operating costs
41 Bid costs and other exceptional
items
41 Employees’ and Directors’
remuneration
41 Net interest payable and similar
charges
42 Profit on ordinary activities before
taxation
42 Tax on profit on ordinary activities
43 Equity dividends
43 Earnings per share (EPS)
43 Goodwill
44 Tangible fixed assets
45 Fixed asset investments
46 Stocks
46 Debtors
46 Current asset investments
46 Cash at bank and in hand
47 Creditors
48 Financial assets and liabilities
49 Provisions for liabilities
and charges
50 Deferred tax
50 Called up share capital
50 Reserves
51 Notes to the consolidated cash
flow statement
52 Analysis of net debt
53 Major non-cash transactions
53 Summary of purchase of businesses
and subsidiary undertakings
53 Commitments
54 Contingent liabilities
54 Pension schemes
59 Share schemes
33 CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year ended 31 March 2005
34
Before Before goodwill Goodwill
goodwill Goodwill amortisation, bid amortisation,
amortisation amortisation costs and other bid costs and
and and exceptional other exceptional
bid costs bid costs Total items items Total
2005 2005 2005 2004 2004 2004
Notes £m £m £m £m £m £m
Turnover
Continuing operations 2,649.0 – 2,649.0 2,479.0 – 2,479.0
Acquisitions 44.4 – 44.4 –– –
Group turnover 2 2,693.4 – 2,693.4 2,479.0 – 2,479.0
Operating profit
Continuing operations 204.7 (37.0) 167.7 204.1 (39.4) 164.7
Acquisitions 6.9 (0.7) 6.2 –– –
Group operating profit 2 211.6 (37.7) 173.9 204.1 (39.4) 164.7
Group operating profit before goodwill
amortisation, bid costs and other exceptional items 211.6 – 211.6 204.1 – 204.1
Goodwill amortisation 2 – (25.8) (25.8) – (25.9) (25.9)
Bid costs 4 – (11.9) (11.9) – (6.7) (6.7)
Other exceptional items 4 ––– – (6.8) (6.8)
Group operating profit 2 211.6 (37.7) 173.9 204.1 (39.4) 164.7
Profit on disposal of fixed assets – 3.3 3.3 – 19.6 19.6
Profit on ordinary activities before interest 2 211.6 (34.4) 177.2 204.1 (19.8) 184.3
Net interest payable and similar charges 6 (48.3) – (48.3) (42.8) (18.7) (61.5)
Profit on ordinary activities before taxation 7 163.3 (34.4) 128.9 161.3 (38.5) 122.8
Tax on profit on ordinary activities 8 (44.4) 11.7 (32.7) (48.4) 17.8 (30.6)
Profit on ordinary activities after taxation 118.9 (22.7) 96.2 112.9 (20.7) 92.2
Equity minority interests (6.5) – (6.5) (0.9) – (0.9)
Profit for the financial year 112.4 (22.7) 89.7 112.0 (20.7) 91.3
Equity dividends paid and proposed 9 (50.6) – (50.6) (47.3) – (47.3)
Retained profit for the financial year 23 61.8 (22.7) 39.1 64.7 (20.7) 44.0
Adjusted Actual Adjusted Actual
Basic earnings per share 10 28.2p 22.5p 27.3p 22.3p
Cash earnings per share 10 55.1p – 52.4p –
Diluted earnings per share – 22.3p – 22.2p BALANCE SHEETS
At 31 March 2005
35
Group Company
2004 2004
2005 (restated*) 2005 (restated*)
Notes £m £m £m £m
Assets employed:
Fixed assets
Goodwill 11 450.6 461.2 – –
Tangible fixed assets 12 840.2 797.6 – –
Investments 13 – – 1,684.0 1,683.9
1,290.8 1,258.8 1,684.0 1,683.9
Current assets
Stocks 14 40.1 35.1 – –
Debtors 15 437.8 394.7 933.9 1,219.2
Investments 16 7.5 30.3 – –
Cash at bank and in hand 17 146.6 94.9 – –
632.0 555.0 933.9 1,219.2
Creditors: amounts falling due within one year 18 (660.8) (647.9) (744.5) (1,066.2)
Net current (liabilities)/assets
Amounts due within one year (87.0) (143.0) 189.4 153.0
Amounts due after more than one year 15 58.2 50.1 – –
Net current (liabilities)/assets (28.8) (92.9) 189.4 153.0
Total assets less current liabilities 1,262.0 1,165.9 1,873.4 1,836.9
Creditors: amounts falling due after more than one year 18 (756.3) (682.8) (714.5) (652.6)
Provisions for liabilities and charges 20 (147.5) (128.1) – –
358.2 355.0 1,158.9 1,184.3
Financed by:
Capital and reserves
Called up share capital 22 19.9 20.1 19.9 20.1
Share premium account 23 238.8 238.8 238.8 238.8
Revaluation reserve 23 1.8 3.4 – –
Other reserves 23 4.6 4.4 262.1 261.9
Own shares 23 (18.9) (0.6) (18.4) (0.6)
Profit and loss account 23 101.4 86.8 656.5 664.1
Equity shareholders’ funds 347.6 352.9 1,158.9 1,184.3
Equity minority interests 10.6 2.1 – –
358.2 355.0 1,158.9 1,184.3
*See note 1
These financial statements were approved by the Board of Directors on 10 May 2005 and were signed on its behalf by:
Moir Lockhead Director
Dean Finch Director CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 March 2005
RECONCILIATION OF NET CASH FLOWS TO MOVEMENT
IN NET DEBT
For the year ended 31 March 2005
36
2005 2004
Notes £m £m
Net cash inflow from operating activities 24(a) 247.2 312.3
Returns on investment and servicing of finance 24(b) (33.7) (65.2)
Taxation
Corporation tax paid (16.1) (23.7)
Capital expenditure and financial investment 24(c) (97.2) (147.3)
Acquisitions and disposals 24(d) (37.2) (49.7)
Equity dividends paid (48.0) (45.9)
Cash inflow/(outflow) before use of liquid resources and financing 15.0 (19.5)
Management of liquid resources
Decrease in liquid bank deposits 22.8 15.4
Financing 24(e) 39.9 46.2
Increase in cash in year 77.7 42.1
2005 2004
Notes £m £m
Increase in cash in year 77.7 42.1
Cash inflow from increase in debt and HP contract and finance lease financing (70.0) (75.4)
Debt acquired on acquisition of businesses (20.6) –
Lease and hire purchase contracts acquired with new franchise (2.2) –
Movement in current asset investments (22.8) (15.4)
Fees on issue of Bond and loan facility – 1.3
Amortisation of debt issuance fees (1.5) (0.8)
Foreign exchange differences 7.0 41.9
Movement in net debt in year (32.4) (6.3)
Net debt at beginning of year 25 (630.7) (624.4)
Net debt at end of year 25 (663.1) (630.7) CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS
AND LOSSES
For the year ended 31 March 2005
37
RECONCILIATION OF MOVEMENTS IN EQUITY
SHAREHOLDERS’ FUNDS
For the year ended 31 March 2005
Group Company
2005 2004 2005 2004
£m £m £m £m
Profit for the financial year 89.7 91.3 55.4 115.9
Foreign exchange differences (14.2) (63.0) (0.5) 1.3
Total recognised gains for the year 75.5 28.3 54.9 117.2
Group Company
2004 2004
2005 (restated*) 2005 (restated*)
£m £m £m £m
Profit for the financial year 89.7 91.3 55.4 115.9
Dividends (50.6) (47.3) (50.6) (47.3)
39.1 44.0 4.8 68.6
Shares issued to QUEST (0.5) – – –
Own shares purchased and cancelled (11.9) (29.2) (11.9) (29.2)
Movement in EBT, QUEST and Treasury Shares during the year (17.8) 0.1 (17.8) 0.1
Foreign exchange differences (14.2) (63.0) (0.5) 1.3
Net (reduction in)/addition to equity shareholders’ funds (5.3) (48.1) (25.4) 40.8
Equity shareholders’ funds at beginning of year 352.9 401.0 1,184.3 1,143.5
Equity shareholders’ funds at end of year 347.6 352.9 1,158.9 1,184.3
*See note 1
No note of historical cost profits and losses is given as there are no material differences between the results as set out in the consolidated profit and
loss account, and their historical cost equivalents. NOTES TO THE FINANCIAL STATEMENTS
38
1 Principal accounting policies
The following accounting policies have been applied consistently throughout the year and the preceding year, with the exception of the policy for
accounting for ESOP Trusts which is explained in note (b) below, in dealing with items which are considered material in relation to the Group’s
financial statements.
(a) Basis of preparation
The financial statements have been prepared under the historical cost convention, modified to include the revaluation of certain fixed assets, and
in accordance with applicable United Kingdom accounting standards.
(b) Change in accounting policies
UITF 38 ‘Accounting for ESOP Trusts’ has been adopted. Investments in own shares are now deducted from shareholders’ funds whereas
previously such investments were treated as an asset. The impact of this restatement is to reduce shareholders’ funds at 31 March 2004 by £0.6m.
(c) Basis of consolidation
The consolidated financial statements incorporate the accounts of the Company and all of its subsidiary undertakings; all accounts are made up to
31 March 2005.
The results of subsidiary undertakings are included in the financial statements under the principles of FRS 6 from the date control passes.
No profit and loss account is presented for the Company as permitted by section 230 of the Companies Act 1985. The retained profit for the
Company for the year to 31 March 2005 is set out in note 23.
In the accounts of the Company, investments in subsidiary undertakings are stated at cost less provision for impairment. Dividends received
and receivable are credited to the profit and loss account to the extent that they represent a realised profit for the Company.
(d) Goodwill
Goodwill arising on acquisitions made after 1 April 1998 is shown on the balance sheet as an intangible fixed asset.
Where capitalised goodwill is regarded as having a limited useful economic life, it is amortised over that life. Where capitalised goodwill is
regarded as having an indefinite useful economic life, it is not amortised. Where capitalised goodwill is amortised over a life of greater than 20
years, or is not amortised, annual impairment reviews are conducted to compare the book value with the recoverable amount. If the recoverable
amount has fallen below the book value, the goodwill is written down to the recoverable amount immediately.
The Companies Act 1985 requires goodwill that is treated as an asset to be amortised systematically over a finite period. In order to show a
true and fair view of the Group’s results, goodwill of £68.6m arising on the acquisitions of Mainline and Capital Citybus is not being amortised
because of a number of factors which have led the Directors to conclude that the goodwill has an indefinite life. These include the stability of the
bus industry, its lack of fundamental change and the Group’s track record in maintaining and enhancing the values of its businesses. This
treatment of goodwill as having an indefinite life is in accordance with FRS 10. It is not possible to quantify the effect on the Group’s results if the
Act were to be followed, as it would depend on the finite life that was used.
Capitalised goodwill arising on other acquisitions is being amortised over a period of up to 20 years on a straight-line basis.
Capitalised goodwill arising on foreign acquisitions is denominated in the currency in which the acquired company’s assets and liabilities
are recorded.
Fair value accounting adjustments are made in respect of acquisitions. In the year of acquisition, some adjustments are made using provisional
estimates, based on information available at the time the financial statements are prepared, and amendments are sometimes necessary in the
following accounting period, with a corresponding adjustment to goodwill, when the information necessary to determine these estimates
is available.
Prior to 1 April 1998, all goodwill arising on acquisitions was written off to reserves. This goodwill has not been reinstated on the balance
sheet. On disposal of the businesses concerned this goodwill is included in determining the gain or loss on disposal in the profit and loss account.
(e) Turnover
Turnover of the Group comprises principally of revenue from train passenger and freight services, road passenger transport, and certain
management and maintenance services in the UK and North America. Where appropriate, amounts are shown net of rebates and sales taxes.
Turnover in UK Rail includes franchise agreement receipts from the Strategic Rail Authority (‘SRA’). Payments to the SRA for amounts due
under the terms of a franchise are included in operating costs. Turnover also includes amounts attributable to the train operating companies
(‘TOCs’), predominantly based on models of route usage, by the Railway Settlement Plan in respect of passenger receipts. Where season tickets
are issued in excess of one week’s duration, the attributable share of income is deferred within creditors and is recognised in the profit and loss
account over the period covered by the season ticket.
UK Bus turnover principally comprises amounts receivable from ticket sales and concessionary fare schemes. Concessionary amounts are
recognised in the period in which the service is provided based on a predetermined formula as agreed with the relevant local authority.
Other Bus and services revenue from contracts with government bodies and similar organisations are recognised as the services are provided. 39
1 Principal accounting policies continued
(f) Fixed assets and depreciation
Depreciation is provided to write off the cost or valuation less residual value of tangible fixed assets over their estimated useful economic lives
as follows:
Freehold buildings – 50 years straight line
Long leasehold buildings – 50 years straight line
Short leasehold properties – period of lease
Passenger carrying vehicles – 7 to 15 years straight line
Other plant and equipment – 3 to 25 years straight line
No depreciation is provided on freehold land, the land element of long leasehold properties or on assets in the course of construction.
Surpluses or deficits arising on the revaluation of tangible fixed assets are credited or debited to a revaluation reserve. On a subsequent
disposal of a revalued asset, the revaluation surplus or deficit relating to this asset is transferred to the profit and loss account reserve.
From 1 April 1999 the Group’s policy has been not to revalue tangible fixed assets. Properties that had been revalued before that date retained
their book value, in accordance with the transitional rules of FRS 15.
(g) Hire purchase contracts and leases
Assets held under hire purchase contracts and under finance leases, which are those leases where substantially all the risks and rewards of
ownership of the asset have passed to the Group are recorded in the balance sheet as tangible fixed assets. Depreciation is provided on these
assets over their estimated useful lives or lease term, as appropriate.
Future obligations under hire purchase contracts and finance leases are included in creditors, net of finance charges. Payments are
apportioned between the finance element, which is charged to the profit and loss account as interest, and the capital element, which reduces the
outstanding obligations. The finance charges are calculated in relation to the reducing amount of obligations outstanding and are charged to the
profit and loss account on the same basis.
All other leases are operating leases and the rental charges are taken to the profit and loss account on a straight-line basis over the life of the lease.
(h) Government grants and subsidies
Rail support grants and amounts receivable for tendered services and concessionary fare schemes are included in turnover and are recognised in
the profit and loss account as the related expenditure is incurred.
(i) Stocks and work in progress
Stocks are valued at the lower of cost and net realisable value.
(j) Pre-contract expenditure
Pre-contract expenditure is expensed as incurred except where it is virtually certain that a contract will be awarded. In such circumstances, pre-
contract expenditure is recognised as an asset and is expensed to the profit and loss account on a straight-line basis over the term of the contract.
(k) Foreign currencies
Assets and liabilities denominated in foreign currencies are translated into sterling at rates of exchange ruling at the year end and results of foreign
enterprises are translated at the average rates of exchange during the year. Differences on exchange arising on the retranslation of net investments
in foreign enterprises and from the translation of results at an average rate are taken to reserves. Where foreign currency borrowings or currency
swaps are used to finance or hedge investments in foreign enterprises, the gain or loss on translation is also taken to reserves. All other exchange
differences are dealt with through the profit and loss account.
(l) Taxation
The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the
treatment of certain items for taxation and accounting purposes. Provision is made for deferred tax on all timing differences except those arising
from the revaluation of fixed assets for which there is no binding agreement to sell on property gains if it is anticipated that rollover relief will be
available and on the undistributed profits of overseas subsidiaries, associates and joint ventures. Deferred tax is calculated at the rates at which it
is estimated the tax will arise. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be
recovered. The deferred tax provision is not discounted to net present value. NOTES TO THE FINANCIAL STATEMENTS CONTINUED
40
1 Principal accounting policies continued
(m) Pension costs
Retirement benefits are provided for most employees of the Group principally by means of defined benefit pension schemes. These are funded by
contributions from the Group and employees. The Group’s contributions are charged to the profit and loss account, based on recommendations
by independent actuaries, in such a way as to provide for the liabilities evenly over the average remaining working lives of the employees. The
difference between the charge to the profit and loss account and the contributions paid by the Group is shown as an asset or a liability in the
balance sheet and the tax effect of this timing difference is included in deferred taxation.
For defined contribution schemes the amount charged to the profit and loss account in respect of pension costs is the contributions payable
in the year. Differences between contributions payable and contributions actually paid are shown as either accruals or prepayments in the
balance sheet.
(n) Financial instruments
Various derivative instruments are utilised by the Group principally to manage interest rate, fuel and foreign exchange risks. The Group does not
enter into speculative derivative contracts. All such instruments are used for hedging purposes to alter the risk profile of an existing underlying
exposure of the Group, in line with the Group’s risk management policies. The main instruments used during the year were fixed interest rate
swaps, fuel swaps and currency swaps. Amounts payable or receivable in respect of interest rate swaps and fuel derivatives are recognised as
adjustments to interest expense and fuel costs respectively over the period of the contracts.
(o) Insurance
The Group’s policy is to self-insure high frequency, low value claims within the businesses. To provide protection above these types of losses,
cover is obtained through third-party insurance policies. Provision is made, on a discounted basis, for the estimated cost of settling insurance
claims for incidents occurring prior to balance sheet date.
(p) Debt
Debt is initially stated at the amount of the net proceeds after the deduction of issue costs. The carrying amount is increased by the amortisation
of debt issuance fees in respect of the accounting period and reduced by repayments made in the period.
2 Profit and loss account analysis and segmental information Continuing Total Total
operations Acquisitions* 2005 2004
£m £m £m £m
Group turnover 2,649.0 44.4 2,693.4 2,479.0
Group operating costs
– General (2,444.3) (37.5) (2,481.8) (2,274.9)
– Goodwill amortisation (25.1) (0.7) (25.8) (25.9)
– Bid costs and other exceptional items (note 4) (11.9) – (11.9) (13.5)
Total Group operating costs (note 3) (2,481.3) (38.2) (2,519.5) (2,314.3)
Group operating profit 167.7 6.2 173.9 164.7
*Acquisitions during the year to 31 March 2005 relate entirely to the North America division (for details see note 27).
Operating profit before
goodwill amortisation,
bid costs and other
Turnover exceptional items Net assets/(liabilities)
2005 2004 2005 2004 2005 2004
Segmental information is as follows: £m £m £m £m £m £m
UK Bus 960.7 906.2 107.1 111.2 232.5 228.3
UK Rail 1,059.7 945.0 67.7 49.8 7.2 (4.4)
North America 665.8 620.7 61.2 63.5 450.9 435.8
Financing element of UK Bus leases – – (9.0) (8.3) – –
Group items 7.2 7.1 (15.4) (12.1) (332.4) (304.7)
2,693.4 2,479.0 211.6 204.1 358.2 355.0
Bid costs (note 4) (11.9) (6.7)
Other exceptional items (note 4) – (6.8)
Goodwill amortisation (note 11) (25.8) (25.9)
Group operating profit 173.9 164.7
Profit on disposal of fixed assets 3.3 19.6
Profit on ordinary activities before interest 177.2 184.3
All of the Group turnover and Group operating profit for the year was generated in the United Kingdom, except that shown above as being generated
in North America. There is no material difference between turnover earned by origin and destination. 41
Continuing Total Total
operations Acquisitions 2005 2004
3 Operating costs £m £m £m £m
Materials and consumables 264.4 14.1 278.5 258.9
Staff costs (note 5) 1,215.6 15.8 1,231.4 1,099.9
External charges 869.8 6.4 876.2 826.6
Depreciation, amortisation and other amounts written off fixed assets 131.5 1.9 133.4 128.9
2,481.3 38.2 2,519.5 2,314.3
Total Total
Rail Other 2005 2004
4 Bid costs and other exceptional items £m £m £m £m
Restructuring costs ––– 6.8
Bid costs 10.9 1.0 11.9 6.7
10.9 1.0 11.9 13.5
The tax effect in 2005 was a credit of £3.6m (2004: credit of £4.1m).
5 Employees’ and Directors’ remuneration
2005 2004
The average number of persons employed by the Group (including Directors) during the year was as follows: No. No.
Operational 61,585 56,483
Administration 5,782 5,414
67,367 61,897
2005 2004
The aggregate payroll costs of these persons were as follows: £m £m
Wages and salaries 1,101.5 996.4
Social security costs 82.9 69.3
Other pension costs 47.0 34.2
1,231.4 1,099.9
Disclosures on Directors’ remuneration, share options, long-term incentive schemes and pension entitlements required by the Companies Act
1985 and those specified for audit by the Financial Services Authority are contained in the tables/notes within the Directors’ remuneration report
on pages 23 to 29 and form part of these audited financial statements.
2005 2004
6 Net interest payable and similar charges £m £m
Bond and bank facilities 43.3 37.5
Loan notes 1.6 1.5
Finance charges payable in respect of hire purchase contracts and finance leases 2.2 3.3
47.1 42.3
Income from short-term deposits and other investments (4.3) (2.4)
Notional interest on provisions 5.5 2.9
Net interest payable and similar charges before exceptional items 48.3 42.8
Cancellation of interest rate swaps – 18.7
48.3 61.5 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
42
7 Profit on ordinary activities before taxation
2005 2004
Profit on ordinary activities before taxation is stated after charging/(crediting) the following: £m £m
Depreciation and amounts written off tangible fixed assets 107.6 103.0
Goodwill amortisation 25.8 25.9
Rentals payable under operating leases
– plant and machinery 20.4 19.4
– track and station access 281.4 272.2
– hire of rolling stock 84.9 78.4
– other assets 11.8 11.4
Net rents receivable from property (0.3) (0.3)
Deloitte & Touche LLP audit fee 0.6 0.5
Deloitte & Touche LLP and associates’ non-audit fees 0.3 1.1
The Company’s audit fee amounted to £0.1m (2004: £0.1m).
Non-audit fees comprised due diligence on acquisitions of £119,000 (2004: £474,000), UK Rail franchise reviews of £nil (2004: £280,000),
other assurance services including the review of the interim accounts of £80,000 (2004: £122,000), UK bond issue £nil (2004: £50,000),
International Financial Reporting Standards work £60,000 (2004: £50,000), tax advisory services of £nil (2004: £33,000) and other non-audit
services of £50,000 (2004: £69,000).
2005 2004
8 Tax on profit on ordinary activites £m £m £m £m
Current taxation
UK corporation tax charge for the year 21.8 20.3
Adjustment in respect of prior years (3.5) 0.2
18.3 20.5
Overseas taxation charge
Current year 0.7 0.8
Total current taxation 19.0 21.3
Deferred taxation (see note 20)
Origination and reversal of timing differences 17.5 10.0
Adjustment in respect of prior years (3.8) (0.7)
13.7 9.3
32.7 30.6
The standard rate of taxation for the year, based on the UK standard rate of corporation tax is 30%. The actual current tax charge for the current
and previous year differed from the standard rate for the reasons set out in the following reconciliation:
2005 2004
% %
Standard rate of taxation 30.0 30.0
Factors affecting charge
Disallowable expenses 1.2 1.7
Property disposals (0.8) (4.8)
Capital allowances in excess of depreciation (10.5) (11.5)
Other timing differences (4.9) (2.2)
Foreign tax charged at different rates 2.4 2.7
Utilisation of tax losses brought forward (0.3) (0.3)
Unrelieved tax losses carried forward 0.4 1.6
Prior years’ tax charge (2.7) 0.2
14.8 17.4
No provision has been made for deferred tax on revalued property. The tax on the gains arising would only become payable if the property were sold
without rollover relief being available. The tax which would be payable under such circumstances is estimated to be £0.2m (2004: £0.2m). These
assets are expected to be used in the continuing operations of the business and, therefore no tax is expected to be paid in the foreseeable future.
No deferred tax has been recognised on property gains as it is anticipated that rollover relief will be available. To benefit from the relief the
proceeds should be reinvested in new property within three years of disposal. The tax that would be payable assuming that reinvestment was not
made within three years amounts to £7.0m (2004: £6.0m).
No deferred tax has been provided on the future remittance of overseas reserves as it is not expected that the reserves will be repatriated to
the UK in the foreseeable future. 43
2005 2004
9 Equity dividends £m £m
Ordinary shares of 5p each
– Interim paid 4.125p (2004: 3.75p) per share 16.4 15.5
– Final proposed 8.69p (2004: 7.9p) per share 34.2 31.8
50.6 47.3
10 Earnings per share (EPS)
Basic EPS is based on earnings of £89.7m (2004: £91.3m) and on the weighted average number of ordinary shares of 399.2m (2004: 410.0m) in
issue. Diluted EPS is based on the same earnings and on the weighted average number of ordinary shares of 402.0m (2004: 411.5m).
2005 2004
No. No.
A reconciliation of the number of shares used in the basic and diluted measures is set out below: (m) (m)
Weighted average number of shares used in basic calculation 399.2 410.0
SAYE share options 2.6 1.5
Executive share options 0.2 –
402.0 411.5
The adjusted basic EPS and adjusted cash EPS measures are intended to demonstrate recurring elements of the results of the Group before
goodwill amortisation, bid costs and other exceptional items. Both the adjusted basic and cash measures of EPS use the same weighted average
number of ordinary shares as the basic EPS measure. A reconciliation of the earnings used in these measures is set out below:
2005 2004
Earnings Earnings
per share per share
£m (p) £m (p)
Profit for basic EPS calculation 89.7 22.5 91.3 22.3
Goodwill amortisation 25.8 6.4 25.9 6.3
Taxation effect of this adjustment (8.1) (2.0) (8.1) (2.0)
Bid costs and other exceptional items 11.9 3.0 13.5 3.3
Taxation effect of this adjustment (3.6) (0.9) (4.1) (1.0)
Exceptional interest rate charge –– 18.7 4.6
Taxation effect of this adjustment –– (5.6) (1.4)
Profit on disposal of fixed assets (3.3) (0.8) (19.6) (4.8)
Profit for adjusted basic EPS calculation 112.4 28.2 112.0 27.3
Depreciation* 107.4 26.9 103.0 25.1
Profit for adjusted cash EPS calculation 219.8 55.1 215.0 52.4
*Depreciation charge of £107.6m per note 12 less £0.2m of depreciation attributable to equity minority interests.
11 Goodwill £m
Cost
At 1 April 2004 562.6
Additions 25.8
Exchange rate differences (13.9)
At 31 March 2005 574.5
Amortisation
At 1 April 2004 101.4
Charge for year 25.8
Exchange rate differences (3.3)
At 31 March 2005 123.9
Net book value
At 31 March 2005 450.6
At 31 March 2004 461.2 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
44
Passenger Other
Land and carrying plant and
buildings vehicle fleet equipment Total
12 Tangible fixed assets £m £m £m £m
Cost or valuation
At 1 April 2004 141.5 1,174.0 154.6 1,470.1
Subsidiary undertakings and businesses acquired 2.9 29.5 2.4 34.8
Additions 12.2 96.5 26.6 135.3
Disposals (6.9) (32.9) (21.1) (60.9)
Exchange rate differences (0.6) (13.0) (1.1) (14.7)
At 31 March 2005 149.1 1,254.1 161.4 1,564.6
Depreciation
At 1 April 2004 21.5 548.5 102.5 672.5
Subsidiary undertakings and businesses acquired ––––
Charge for year 3.0 88.0 16.6 107.6
Disposals (0.7) (29.4) (19.2) (49.3)
Exchange rate differences (0.1) (5.7) (0.6) (6.4)
At 31 March 2005 23.7 601.4 99.3 724.4
Net book value
At 31 March 2005 125.4 652.7 62.1 840.2
At 31 March 2004 120.0 625.5 52.1 797.6
2005 2004
The net book value of land and buildings comprises: £m £m
Freehold 104.2 101.0
Long leasehold 17.2 15.6
Short leasehold 4.0 3.4
125.4 120.0
Depreciation is not provided on the land element of freehold and long leasehold property which amounts to £35.5m (2004: £31.7m).
2005 2004
The assets that have been revalued comprise the following land and buildings: £m £m
At 1993 professional valuations 9.6 12.6
Aggregate depreciation thereon (1.2) (1.3)
Net book value 8.4 11.3
Historical cost of revalued assets 9.2 10.9
Aggregate depreciation based on historical cost (2.6) (3.0)
Historical net book value 6.6 7.9
The 1993 professional valuations were carried out by RICS Chartered Surveyors on the basis of open market value for existing use.
Included in the net book value above is £105.3m (2004: £133.0m) of tangible fixed assets held under hire purchase contracts and finance leases.
The depreciation charge on these assets during the year was £12.4m (2004: £18.1m). 45
Other
13 Fixed asset investments
investments
Group £m
Cost
At 1 April 2004 and 31 March 2005 7.5
Provision
At 1 April 2004 and 31 March 2005 (7.5)
Net book value
At 31 March 2005 –
At 31 March 2004 –
Unlisted
subsidiary Other
undertakings investments Total
Company £m £m £m
Cost
At 1 April 2004 1,689.3 8.1 1,697.4
Additions 0.1 – 0.1
At 31 March 2005 1,689.4 8.1 1,697.5
Provision
At 1 April 2004 and 31 March 2005 (5.4) (8.1) (13.5)
Net book value
At 31 March 2005 1,684.0 – 1,684.0
At 31 March 2004 1,683.9 – 1,683.9
Subsidiary undertakings
The principal subsidiary undertakings of FirstGroup plc at the end of the year were:
UK local bus and coach operators First Midland Red Buses Limited Transit contracting, fleet maintenance
CentreWest London Buses Limited First PMT Limited and other services
First Aberdeen Limited+ First Somerset & Avon Limited First Transit, Inc†
First Beeline Buses Limited First South Yorkshire Limited SKE Support Services, Inc†
First Bristol Limited First Wessex Limited
First Capital East Limited First West Yorkshire Limited Rail companies
First Capital North Limited First York Limited Great Western Trains Company Limited
First Cymru Buses Limited Leicester CityBus Limited (94%) North Western Trains Company Limited
First Devon & Cornwall Limited Northampton Transport Limited FirstInfo Limited
First Eastern Counties Limited First/Keolis TransPennine Limited (55%)
First Edinburgh Limited+ North America school bus operators Hull Trains Company Limited (80%)
First Essex Buses Limited First Student, Inc† GB Railfreight Limited
First Glasgow (No. 1) Limited+ FirstBus Canada Limited‡ First Great Western Link Limited
First Glasgow (No. 2) Limited+ FirstGroup America, Inc† First ScotRail Limited
First Hampshire and Dorset Limited FirstGroup USA, Inc†
First Manchester Limited Cardinal Transportation Group, Inc†
Cardinal Coach Lines Limited‡ (60%) NOTES TO THE FINANCIAL STATEMENTS CONTINUED
46
13 Fixed asset investments continued
All subsidiary undertakings are wholly owned at the end of the year except where percentage of ownership is shown above. All these companies
above are incorporated in Great Britain and registered in England and Wales except those marked + which are registered in Scotland, those
marked † which are incorporated in the United States of America and those marked ‡ which are registered in Canada.
All shares held in subsidiary undertakings are ordinary shares, with the exception of Leicester CityBus Limited where the Group owns 100% of
its redeemable cumulative preference shares, as well as 94% of its ordinary shares.
All of these subsidiary undertakings are owned via intermediate holding companies.
There are, in addition to those listed above, a number of subsidiary undertakings which are mostly intermediate holding companies or were
dormant throughout the year. A full list of subsidiary undertakings is filed with the Annual Return to the Registrar of Companies.
Other investments
The interest in other investments at the end of the year is a 6% interest in the ordinary share capital of Prepayment Cards Limited, which is
incorporated in Great Britain and registered in England and Wales.
2005 2004
14 Stocks £m £m
Spare parts and consumables 30.7 24.0
Property development work in progress 9.4 11.1
40.1 35.1
There is no material difference between the balance sheet value of stocks and their replacement cost.
Group Company
2005 2004 2005 2004
15 Debtors £m £m £m £m
Amounts due within one year
Trade debtors 258.2 233.9 – –
Amounts due from subsidiary undertakings – – 917.7 1,203.0
Corporation tax recoverable – – 15.3 15.3
Deferred taxation – – 0.9 0.9
Other debtors 61.1 52.7 – –
Pension funds’ prepayments 12.1 10.4 – –
Other prepayments and accrued income 48.2 47.6 – –
379.6 344.6 933.9 1,219.2
Amounts due after more than one year
Pension funds’ prepayments 57.0 48.7 – –
Other prepayments and accrued income 1.2 1.4 – –
58.2 50.1 – –
437.8 394.7 933.9 1,219.2
Group Company
2005 2004 2005 2004
16 Current asset investments £m £m £m £m
Ring-fenced bank deposits 7.5 30.3 – –
Group Company
2005 2004 2005 2004
17 Cash at bank and in hand £m £m £m £m
Ring-fenced cash 62.8 68.7 – –
Other cash 83.8 26.2 – –
146.6 94.9 – –
Under the terms of the Rail franchise agreements, cash can only be distributed by the train operating companies either up to the amount of
retained profits or in relation to prescribed liquidity ratios. The ring-fenced cash represents that which is not available for distribution or the amount
required to satisfy the contractual liquidity ratio at the balance sheet date. 47
Group Company
2005 2004 2005 2004
18 Creditors £m £m £m £m
Amounts due within one year
Bank loans and overdrafts 49.6 52.0 179.6 174.4
Other loans 1.8 – – –
Obligations under hire purchase contracts and finance leases 9.0 20.8 – –
Loan notes 0.5 0.3 0.3 0.3
Trade creditors 122.4 156.4 – –
Amounts due to subsidiary undertakings – – 498.0 834.4
Corporation tax 28.2 25.1 – –
Other tax and social security 24.6 21.2 – –
Other creditors 42.2 15.9 – –
Pension funds’ creditors 9.5 11.7 – –
Accruals and deferred income 324.6 271.8 31.5 24.7
Season ticket deferred income 13.3 40.3 – –
Proposed dividends 35.1 32.4 35.1 32.4
660.8 647.9 744.5 1,066.2
Group Company
2005 2004 2005 2004
£m £m £m £m
Amounts falling due after more than one year
Bank loans
Due in more than one year but not more than two years 1.3 – – –
Due in more than two years but not more than five years 182.5 110.6 180.0 110.6
Due in more than five years 3.1 – – –
Other loans
Due in more than one year but not more than two years 1.3 – – –
Due in more than two years but not more than five years 3.3 – – –
Due in more than five years 1.3 – – –
Obligations under hire purchase contracts and finance leases
Due in more than one year but not more than two years 2.5 7.7 – –
Due in more than two years but not more than five years 7.5 3.6 – –
Due in more than five years 5.1 4.8 – –
Loan notes
Due in more than one year but not more than two years 20.5 21.0 6.6 6.9
£300.0m Sterling bond – 6.875% 2013 296.0 295.5 296.0 295.5
£250.0m bond – 6.125% 2019 231.9 239.6 231.9 239.6
756.3 682.8 714.5 652.6
Bank loans and overdrafts
Whilst advances under bank facilities are generally repayable within a few months of the balance sheet date, they have been classified by
reference to the maturity date of the longest refinancing permitted under these facilities in accordance with FRS 4. The bank loans and overdrafts
are unsecured.
The maturity profile of the undrawn committed borrowing facilities is as follows:
2005 2004
Facilities maturing: £m £m
Within one year 6.4 –
More than two years 340.0 390.4
346.4 390.4
Hire purchase contracts and finance leases
Hire purchase contract and finance lease liabilities are secured on the assets to which they relate. The contracts vary in length between four and
12 years. NOTES TO THE FINANCIAL STATEMENTS CONTINUED
48
18 Creditors continued
Loan notes
The loan notes have been classified by reference to the earliest date on which the loan note holders can request redemption. Loan notes of
£20.0m (2004: £20.5m) are supported by unsecured bank guarantees.
Bonds
The £300m bond is repayable in 2013 and is shown net of £4.0m (2004: £4.5m) of issue related costs which are being amortised over the term of
the bond.
The £250m bond is repayable in 2019 and is swapped to US Dollars. The Sterling equivalent shown is net of a foreign exchange gain of
£16.9m (2004: gain of £9.1m) on retranslation at year end and is also net of £1.2m (2004: £1.3m) of issue related costs which are being
amortised over the term of the bond.
Certain subsidiaries have issued unsecured guarantees to the Company’s bondholders. These unsecured guarantees rank pari passu with
unsecured guarantees provided by those subsidiaries to the Group’s bank lenders participating in the Group’s £520m syndicated bank facility.
19 Financial assets and liabilities
Foreign currencies
At 31 March 2005, the Group’s profit and loss account was not exposed to material exchange rate risk from monetary assets and liabilities
denominated in foreign currencies as all such material balances are used to hedge the Group’s overseas net assets.
Interest rates
After taking into account interest rate swaps entered into by the Group, details of the interest rate profile of the Group’s financial liabilities, excluding
cash, was as follows:
Fixed rate liabilities
Weighted
Total average Weighted
financial Floating Fixed interest average
liabilities rate rate rate period
£m £m £m % years
At 31 March 2005
Sterling 562.6 192.8 369.8 6.95 7.2
US Dollars 234.1 1.1 233.0 3.40 0.5
Canadian Dollars 20.5 8.3 12.2 7.45 2.5
Euros –––––
817.2 202.2 615.0
At 31 March 2004
Sterling 490.3 108.7 381.6 6.97 8.0
US Dollars 249.6 83.3 166.3 2.89 2.5
Canadian Dollars 8.0 8.0–––
Euros 8.0 8.0–––
755.9 208.0 547.9
No new interest rate derivatives were entered into during 2004/05. Certain US Dollar fixed rate swaps were terminated in March 2005 and new
US Dollar interest rate collars to March 2009 were entered into shortly after the year end.
Bank margins negotiated on floating rate debt range from 0.225% to 0.8% over Sterling LIBOR and US Dollar LIBOR where applicable, or the
bank base rate for the currency concerned.
Financial assets, which consist wholly of cash on deposit and in hand of £154.1m (2004: £125.2m), are all denominated in Sterling except
£15.3m (2004: £3.0m) in US Dollars and £0.8m (2004: £0.6m) in Canadian Dollars. Deposited cash earns interest at commercial rates negotiated
with counterparty banks. 49
19 Financial assets and liabilities continued
Fair values
Details of the book values and fair values of the financial assets and liabilities are as follows:
2005 2005 2004 2004
Book Fair Book Fair
value value value value
£m £m £m £m
Bank deposits 7.5 7.5 30.3 30.3
Cash at bank and in hand 146.6 146.6 94.9 94.9
Bank and other loans and overdrafts (244.2) (245.3) (162.6) (162.6)
Obligations under hire purchase contracts and finance leases (24.1) (24.8) (36.9) (38.4)
Loan notes (21.0) (27.7) (21.3) (25.8)
Interest rate swaps – (2.7) – (6.5)
Fuel derivatives – 31.4 – 9.5
£300m bond (296.0) (320.0) (295.5) (316.3)
£250m bond (swapped to US Dollars) (231.9) (236.6) (239.6) (243.8)
(663.1) (671.6) (630.7) (658.7)
In order to protect the Group’s financial position and performance against net interest rate risk, the Group uses interest rate swaps and fixed rate
debt. As a result of movements in interest rates, differences arise between book values and fair values, which are categorised as unrecognised gains
and losses as required under FRS 13.
The Group also protects its financial position and performance against fuel price risk using a range of fuel derivatives. Movements in fuel prices
relative to the prices provided by the derivatives gives rise to differences between book and fair values which are categorised as unrecognised gains
and losses as required under FRS 13.
Fair values for derivatives and the bonds have been supplied externally by the respective counterparties and banks using market rates prevailing
at year end. The book value of the £300m bond is stated at its par value less issue costs of £4.0m (2004: £4.5m). The book value of the £250m
bond, which is swapped to US Dollars is stated at its par value less issue costs of £1.2m (2004: £1.3m) and net of an unrealised foreign exchange
gain of £16.9m (2004: gain of £9.1m). Fair values for hire purchase debt and loan notes have been determined by discounting future cash flows that
will arise under these liabilities.
The movement in net unrecognised gains and losses on instruments used to hedge interest rate risk and fuel price risk are as follows:
Net unrecognised gains/(losses)
2005 2004
£m £m
At beginning of year 3.0 (15.7)
Arising in previous year but recognised in the year (4.3) 23.4
Arising before beginning of year and remaining at the end of the year (1.3) 7.7
Arising in the year 29.9 (4.7)
At end of year 28.6 3.0
It is expected that £26.8m of the net unrecognised gains (2004: £3.0m) will be recognised in the following year. Further information on financial
instruments is given in the Financial review on pages 13 to 16.
20 Provisions for liabilities and charges Deferred Insurance
tax claims Pensions Total
Group £m £m £m £m
At 1 April 2004 96.4 25.8 5.9 128.1
Provided in the year 13.7 20.9 – 34.6
Utilised in the year – (17.6) (0.2) (17.8)
Subsidiary undertakings acquired (2.2) – – (2.2)
Notional interest – 5.5 – 5.5
Exchange rate differences (0.6) (0.1) – (0.7)
At 31 March 2005 107.3 34.5 5.7 147.5
Most of the insurance claims are expected to be settled within eight years. The pensions payments will be spread over several decades. NOTES TO THE FINANCIAL STATEMENTS CONTINUED
50
21 Deferred tax
2005 2004
Group £m £m
Capital allowances in excess of depreciation 134.3 124.8
Other timing differences 13.5 12.7
Trading losses (40.5) (41.1)
Deferred tax provision 107.3 96.4
22 Called up share capital
2005 2004
Group and Company £m £m
Authorised
Ordinary shares of 5p each 30.0 30.0
Allotted, called up and fully paid
Ordinary shares of 5p each 19.9 20.1
No.
The changes in the number and amount of issued share capital during the year are set out below: (m) £m
At beginning of year 403.0 20.1
Shares cancelled (4.2) (0.2)
At end of year 398.8 19.9
Between 14 May 2004 and 14 September 2004, 4,200,000 shares were repurchased at a total cost of £11.9m and cancelled. In addition
between 22 September 2004 and 23 March 2005, 5,200,000 shares were repurchased for a total cost of £17.8m and are being held as Treasury
Shares at 31 March 2005.
Share Profit
23 Reserves premium Revaluation Own and loss
account reserve shares account
Group £m £m £m £m
At 1 April 2004 238.8 3.4 – 86.8
Prior year adjustment on adoption of UITF 38 (note 1) – – (0.6) –
At 1 April 2004 as restated 238.8 3.4 (0.6) 86.8
Cancellation of shares – – – (11.9)
Retained profit for the year – – – 39.1
Movement in EBT, QUEST and Treasury Shares during the year – – (18.3) –
Foreign exchange differences – – – (14.2)
Transfer of realised revaluation reserve – (1.6) – 1.6
At 31 March 2005 238.8 1.8 (18.9) 101.4
Own shares
Details of the number and market value of own shares held in the FirstGroup plc ESOP and other employee trusts are as follows:
No. 2005 No. 2004
(m) £m (m) £m
Own shares held by trustees 1.6 5.5 2.7 7.3
Own shares vested unconditionally (1.3) (4.5) (2.5) (6.6)
0.3 1.0 0.2 0.7
The number of own shares held by the Group at the end of the year was 5,487,369 (2004: 246,431) FirstGroup plc ordinary shares of 5p each. Of
these, 22,906 (2004: 206,422) were held by the FirstGroup plc Employee Benefit Trust, 264,463 (2004: 40,099) by the FirstGroup plc Qualifying
Employee Share Ownership Trust (QUEST) and 5,200,000 (2004: nil) were held as Treasury Shares. The shares held by the QUEST are being used
to satisfy exercises of savings related share options. Both trusts and Treasury Shares have waived the rights to dividend income from the
FirstGroup plc shares. The market value of the shares at 31 March 2005 was £18.9m (2004: £0.7m). 51
23 Reserves continued
Capital
redemption Capital Total other
reserve reserve reserves
£m £m £m
At 1 April 2004 1.7 2.7 4.4
Cancellation of shares 0.2 – 0.2
At 31 March 2005 1.9 2.7 4.6
The cumulative amount of positive and negative goodwill arising from acquisitions of subsidiaries and associates written off directly to reserves at
the end of the year was £429.6m and £4.7m respectively (2004: £429.6m and £4.7m).
Share Profit
premium Own and loss
account shares account
Company £m £m £m
At 1 April 2004 238.8 – 664.1
Prior year adjustment on adoption of UITF 38 (note 1) – (0.6) –
At 1 April 2004 as restated 238.8 (0.6) 664.1
Cancellation of shares – – (11.9)
Retained profit for the year – – 4.8
Movement in EBT, QUEST and Treasury Shares during the year – (17.8) –
Foreign exchange differences – – (0.5)
At 31 March 2005 238.8 (18.4) 656.5
Capital
redemption Capital Merger Total other
reserve reserve reserve reserves
£m £m £m £m
At 1 April 2004 1.7 93.8 166.4 261.9
Cancellation of shares 0.2 – – 0.2
At 31 March 2005 1.9 93.8 166.4 262.1
2005 2004
24 Notes to the consolidated cash flow statement £m £m
(a) Reconciliation of operating profit to net cash inflow from operating activities
Operating profit 173.9 164.7
Depreciation and other amounts written off tangible fixed assets 107.6 103.0
Amortisation charges 25.8 25.9
Loss on sale of non-property fixed assets 1.9 1.3
Increase in stocks (2.6) (1.3)
Increase in debtors (51.0) (49.4)
(Decrease)/increase in creditors and provisions (8.4) 68.1
Net cash inflow from operating activities 247.2 312.3
(b) Returns on investments and servicing of finance
Interest received 6.8 2.4
Interest paid (35.1) (44.3)
Dividends paid to minority shareholders (3.1) –
Cancellation of interest rate swaps – (18.7)
Interest element of hire purchase contracts and finance lease payments (2.3) (3.3)
Fees on issue of bond and loan facilities – (1.3)
Net cash outflow from returns on investments and servicing of finance (33.7) (65.2) NOTES TO THE FINANCIAL STATEMENTS CONTINUED
52
24 Notes to the consolidated cash flow statement continued
2005 2004
(c) Capital expenditure and financial investment £m £m
Purchase of tangible fixed assets (124.3) (179.8)
Sale of fixed asset properties 22.9 25.4
Sale of other tangible fixed assets 4.2 7.1
Net cash outflow from capital expenditure and financial investment (97.2) (147.3)
(d) Acquisitions and disposals
Purchase of subsidiary undertakings (25.3) (33.7)
Purchase of businesses (15.4) (26.4)
Net cash acquired with purchase of subsidiary undertakings and businesses 3.5 10.4
Net cash outflow from acquisitions and disposals (37.2) (49.7)
(e) Financing
Own shares repurchased (29.7) (29.2)
Bond 2019 – 250.0
Shares purchased by Employee Benefit Trust and QUEST (0.3) –
New bank loans 90.4 –
Repayments of amounts borrowed:
– Bank loans – (149.2)
– Loan notes (0.3) (0.6)
New hire purchase contracts and finance leases – 10.2
Capital element of hire purchase and finance lease payments (20.2) (35.0)
Net cash inflow from financing 39.9 46.2
At Other At
31 March non-cash 31 March
2004 Cash flow changes 2005
25 Analysis of net debt £m £m £m £m
Cash at bank and in hand 94.9 52.9 (1.2) 146.6
Bank overdrafts (33.0) 24.8 – (8.2)
Cash 61.9 77.7 (1.2) 138.4
Current asset investments 30.3 (22.8) – 7.5
Bank and other loans due within one year (19.0) (21.1) (3.1) (43.2)
Bank and other loans due after one year (110.6) (69.4) (12.8) (192.8)
Sterling bond 2013 (295.5) – (0.5) (296.0)
Sterling bond 2019 (239.6) – 7.7 (231.9)
Obligations under hire purchase contracts and finance leases (36.9) 20.2 (7.4) (24.1)
Loans and loan notes (21.3) 0.3 – (21.0)
Financing (722.9) (70.0) (16.1) (809.0)
Net debt (630.7) (15.1) (17.3) (663.1)
Current asset investments represent unencumbered bank deposits of maturity of less than one year. 53
26 Major non-cash transactions
Other non-cash movements in note 25 include £7.0m (2004: £41.9m) of foreign exchange movements.
2005 2004
27 Summary of purchase of businesses and subsidiary undertakings £m £m
Provisional fair values of net assets acquired:
Tangible assets 34.8 15.5
Other current assets 17.1 7.3
Cash at bank and in hand 3.5 –
Loans and finance leases (20.6) –
Minority shareholders’ interests (4.2) –
Other creditors (19.2) (11.3)
11.4 11.5
Goodwill (note 11) 25.8 14.9
37.2 26.4
Satisfied by cash paid and payable 37.2 26.4
There was no material difference between the book value and the provisional fair values of the net assets acquired and there were no adjustments
required in respect of accounting policy alignments.
The businesses and subsidiary undertakings acquired during the year contributed £8.1m (2004: £8.6m) to the Group’s net operating cash
flows. There were no other cash flow movements from the businesses acquired during the year or the previous year.
The businesses and subsidiary undertakings acquired during the year and dates of acquisition were:
SKE Support Services, Inc 1 August 2004
Orange County Limousine Service 10 August 2004
FirstCall South Towns Wheelchair Van Service, Inc 1 November 2004
Village Bus Company, Inc 1 November 2004
Cardinal Coach Lines Limited 1 January 2005
Godeffroy Car Company, Inc 11 February 2005
28 Commitments
Capital commitments
Capital commitments at the end of the year for which no provision has been made are as follows:
2005 2004
£m £m
Contracted for but not provided 97.8 2.1
Capital commitments at 31 March 2005 principally represent buses ordered in both the United Kingdom and North America.
Operating leases
The rail businesses have contracts with Network Rail for access to the railway infrastructure (track, stations and depots). They also have contracts
under which they lease rolling stock.
Commitments for payments in the next year under these operating leases are as follows:
2005 2004
£m £m
Operating leases which expire:
Within one year 139.4 13.2
From one to five years 11.5 223.1
Over five years 206.1 52.6
357.0 288.9 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
54
28 Commitments continued
Commitments for payments in the next year under other operating leases are as follows:
Land and Land and
buildings Other buildings Other
2005 2005 2004 2004
£m £m £m £m
Operating leases which expire:
Within one year 2.5 5.4 0.7 3.0
From one to five years 8.1 14.5 8.4 14.8
Over five years 1.7 0.3 2.0 1.6
12.3 20.2 11.1 19.4
29 Contingent liabilities
To support subsidiary undertakings in their normal course of business, the Company has indemnified certain banks and insurance companies who
have issued performance bonds for £225.1m as at 31 March 2005 (2004: £186.8m) and letters of credit for £149.2m as at 31 March 2005 (2004:
£138.0m). The performance bonds relate to the North American businesses (£123.9m) and the UK Rail franchise operations (£101.2m). The letters
of credit relate substantially to insurance arrangements in the UK and North America.
The Company has provided a £15.5m (2004: £15.5m) unsecured loan facility to Great Western Trains Company Limited (GWT), a £3.2m
unsecured loan facility to First/Keolis TransPennine Limited (TPE) and a £13.6m unsecured loan facility to First ScotRail Limited as required by the
Director of Passenger Rail Franchising. Neither of the TPE or GWT loans were drawn at 31 March 2005 or 31 March 2004, while the ScotRail loan
was fully drawn at 31 March 2005.
The Company is party to certain unsecured guarantees granted to banks for overdraft and cash management facilities provided to itself and
subsidiary undertakings. The Company has given certain unsecured guarantees for the liabilities of its subsidiary undertakings arising under certain
loan notes, hire purchase contracts, finance leases, operating leases, supply contracts and certain pension scheme arrangements. It also provides
unsecured cross guarantees to certain subsidiary undertakings as required by VAT legislation. UK bus subsidiaries have provided unsecured
guarantees on a joint and several basis to Trustees of the UK Occupational Pension Scheme.
Certain of the Company’s subsidiaries have issued unsecured guarantees to the Company’s bondholders. These unsecured guarantees rank
pari passu with unsecured guarantees provided by those subsidiaries to lenders participating in the Group’s £520m syndicated bank facility.
30 Pension schemes
The Group operates or participates in a number of pension schemes which cover the majority of UK employees and certain North American
employees. These are principally defined benefit schemes under which benefits provided are based on employees’ number of years of service and
final salary. The scope of benefits varies between schemes. The assets of the schemes are held in separately administered trusts which are
managed independently of the Group’s finances by investment managers appointed by the schemes’ trustees.
Formal independent actuarial valuations are undertaken at least triennially.
The various defined benefit schemes include five UK Bus Division schemes where the subsidiary undertaking is a participating employer in a
scheme operated by a local authority. These schemes are subject to relevant local government regulations. Great Western Trains Company
Limited, First ScotRail Limited, First Great Western Link Limited, GB Rail and TransPennine Express have sections in the Railways Pension
Scheme (RPS) which is an industry-wide arrangement for employees of those companies previously owned by British Railways Board. All other
Group schemes are self-administered.
At their last triennial valuations, the defined benefit schemes had funding levels between 68.0% and 121.0%. The market value of the assets at
31 March 2005 for all defined benefit schemes totalled £1,580m (2004: £1,254m).
Contributions are paid to all defined benefit schemes in accordance with rates recommended by the schemes’ actuaries. The total charge to
the profit and loss account in the year in respect of defined benefit schemes was £43.4m (2004: £31.9m).
The valuation assumptions used for accounting purposes have been made uniform to Group standards, as appropriate, when each scheme is
actuarially valued. For these new valuations (excluding the local government and RPS schemes), the assumptions which are being used are that
the rate of return on investment will be 7.0% pre-retirement (6.75% in respect of future benefit accrual), and 6.0% post-retirement (5.75% in
respect of future benefit accrual), the rate of earnings growth will be 4.0%, and the rate of inflation will be 2.5%. These new valuations are made
using the projected unit method. 55
30 Pension schemes continued
Prepayment
A net prepayment of £59.6m (2004: £47.4m) is included in the Group’s consolidated balance sheet in respect of the sum of the cumulative
differences between contributions paid by the Group into the schemes and the charge to the profit and loss account under SSAP 24, and the
surpluses and deficits that have been recognised on acquisition.
For accounting purposes the pension costs for the RPS are determined by spreading the expected company cash contributions over the term
of the relevant franchise.
Defined contribution schemes
In addition, the Group operates some defined contribution schemes, the assets of which are held in separately administered trusts. The cost of
these in the year was £3.6m (2004: £2.3m).
The Group pays certain costs on behalf of the various pension schemes and then re-charges the costs to the schemes.
Transitional FRS 17 disclosures
The additional disclosures required by FRS 17 during the transitional period for the defined benefit schemes are set out below. They are based on
the most recent actuarial valuations described above, which have been updated by independent professionally qualified actuaries to take account
of the requirements of FRS 17.
The main financial assumptions (per annum) used in this update were as follows:
2005 2004 2003
% %%
Rate of increase in salaries 4.1 4.1 3.6
Rate of increase of pensions in payment* 2.6 2.6 2.1
Rate of increase of pensions in deferment 2.6 2.6 2.1
Discount rate 5.5 5.7 5.7
Inflation assumption 2.6 2.6 2.1
*Certain in-house bus schemes’ pensions in payment receive LPI increases of 2.5% (2004: 2.5%) and LPI increases with a minimum of 3% assumed to be 3.3% (2004: 3.3%).
The value of the schemes’ assets and the expected rates of return as at 31 March 2005 were:
Expected rate
of return UK Bus Rail US Total
%£m£m£m£m
Equities 8.8 718.9 365.5 11.2 1,095.6
Bonds 4.7 230.3 47.9 4.2 282.4
Property 6.7 80.8 41.0 – 121.8
Other 3.6 54.7 24.4 0.7 79.8
1,084.7 478.8 16.1 1,579.6
Total market value of assets 1,084.7 478.8 16.1 1,579.6
Present value of scheme liabilities (1,276.4) (539.5) (25.4) (1,841.3)
Pension deficits (191.7) (60.7) (9.3) (261.7)
Related deferred tax asset 57.5 18.2 3.5 79.2
Net pension deficit (134.2) (42.5) (5.8) (182.5)
As noted in the Financial review, the net FRS 17 deficit of £182.5m at 31 March 2005 comprises a £139.3m deficit (2004: £162.0m deficit)
relating to non-Rail schemes (including a £0.7m surplus (2004: £0.6m deficit) in respect of GB Railfreight and Hull Trains) and a £43.2m deficit
(2004: £27.5m deficit) relating to Rail franchises where no liability will be borne beyond the period of the franchise. NOTES TO THE FINANCIAL STATEMENTS CONTINUED
56
30 Pension schemes continued
The value of the schemes’ assets and the expected rates of return as at 31 March 2004 were:
Expected rate
of return UK Bus Rail US Total
%£m£m£m£m
Equities 8.8 610.5 234.8 8.9 854.2
Bonds 4.7 205.2 37.4 2.4 245.0
Property 6.7 88.2 22.9 – 111.1
Other 4.1 42.3 – 1.4 43.7
946.2 295.1 12.7 1,254.0
Total market value of assets 946.2 295.1 12.7 1,254.0
Present value of scheme liabilities (1,165.7) (335.2) (25.3) (1,526.2)
Pension deficits (219.5) (40.1) (12.6) (272.2)
Related deferred tax asset 65.9 12.0 4.8 82.7
Net pension deficit (153.6) (28.1) (7.8) (189.5)
The value of the schemes’ assets and the expected rates of return as at 31 March 2003 were:
Expected rate
of return UK Bus Rail US Total
%£m£m£m£m
Equities 8.8 469.8 146.8 6.5 623.1
Bonds 4.5 184.7 18.5 2.8 206.0
Property 6.7 46.5 14.6 – 61.1
Other 3.6 42.2 – 1.5 43.7
743.2 179.9 10.8 933.9
Total market value of assets 743.2 179.9 10.8 933.9
Present value of scheme liabilities (1,006.4) (209.1) (27.3) (1,242.8)
Pension deficits (263.2) (29.2) (16.5) (308.9)
Related deferred tax asset 79.0 8.8 6.4 94.2
Net pension deficit (184.2) (20.4) (10.1) (214.7) 57
30 Pension schemes continued
If FRS 17 had been adopted in these financial statements, the Group’s net assets and profit and loss reserve would have been as follows:
2005 2004
£m £m
Net assets excluding pension liability 358.2 355.0
Pension liability (182.5) (189.5)
175.7 165.5
Less: SSAP 24 items included in net assets that will be reversed on implementation of FRS 17 (41.7) (33.2)
Net assets on FRS 17 basis 134.0 132.3
Profit and loss reserve excluding pension liability 101.4 86.8
Pension reserve (182.5) (189.5)
(81.1) (102.7)
Less: SSAP 24 items included in net assets that will be reversed on implementation of FRS 17 (41.7) (33.2)
Profit and loss reserve on FRS 17 basis (122.8) (135.9)
It should be noted that the £122.8m profit and loss deficit above is on a consolidated basis. As at 31 March 2005 FirstGroup plc had £656.5m of
retained profits available for distribution.
Had the Group adopted FRS 17 the amounts charged to the profit and loss account would have been as follows:
Analysis of amount charged to operating profit:
2005 2004
£m £m
Current service costs 46.1 41.4
Past service costs – 0.9
Gain on settlements and curtailments – (1.9)
Total operating charge 46.1 40.4
Analysis of amount (credited)/charged to net finance charges:
2005 2004
£m £m
Expected return on pension scheme assets (89.7) (66.6)
Interest on pension scheme liabilities 80.3 68.7
Net (credit)/charge (9.4) 2.1
Analysis of the actuarial gain in the statement of total recognised gains and losses (STRGL):
2005 2004
£m £m
Actual return less expected return on pension scheme assets 44.2 141.0
Experience gains and losses arising on scheme liabilities 20.3 6.4
Changes in assumptions underlying the present value of scheme liabilities (53.7) (106.1)
Actuarial gain recognised in STRGL 10.8 41.3 NOTES TO THE FINANCIAL STATEMENTS CONTINUED
58
30 Pension schemes continued
Movement in schemes’ deficit during the year:
2005 2004
£m £m
Deficit at beginning of year (272.2) (308.9)
Movement in year:
Acquisitions and new Rail franchises (19.2) (4.6)
Current service cost (46.1) (41.4)
Contributions 55.6 42.5
Past service costs – (0.9)
Curtailment costs – 1.9
Net finance income /(cost) 9.4 (2.1)
Actuarial gain 10.8 41.3
Deficit at end of year (261.7) (272.2)
History of experience gains and losses 2005 2004 2003
Difference between the expected and actual return on scheme assets:
Amount (£m) 44.2 141.0 (300.2)
Percentage of scheme assets (%) 2.8 11.2 32.1
Experience gains on scheme liabilities:
Amount (£m) 20.3 6.4 26.8
Percentage of the present value of scheme liabilities (%) 1.1 0.4 2.2
Total actuarial gain/(loss) in the statement of total recognised gains and losses:
Amount (£m) 10.8 41.3 (282.9)
Percentage of the present value of scheme liabilities (%) 0.6 2.7 22.8 59
31 Share schemes
(a) Savings related share option scheme
The Company operates an Inland Revenue approved savings related share option scheme. Grants were made in December 2002, December
2003 and December 2004. The scheme is based on eligible employees being granted options and their agreement to opening a sharesave
account with a nominated savings carrier and to save weekly or monthly over a specified period. Sharesave accounts are held with Lloyds TSB.
The right to exercise the option is at the employee’s discretion at the end of the period previously chosen for a period of six months.
The number of options outstanding under each grant at the end of the year was as follows:
2005 2004
Earliest
Number of Ordinary 5p Number of Ordinary 5p Exercise exercise
Grant date employees shares employees shares price (p) date
December 2002 4,356 4,995,147 5,229 5,945,274 192.00 February 06
December 2003 1,919 1,407,555 2,497 1,903,176 232.00 February 07
December 2004 3,382 2,698,997 – – 267.00 February 08
9,657 9,101,699 7,726 7,848,450
(b) Buy As You Earn (BAYE) scheme
BAYE enables eligible employees to purchase shares from their gross income. The Company provides two matching shares for every three shares
bought by employees, subject to a maximum Company contribution of shares to the value of £20 per month. If the shares are held in trust for five
years or more, no income tax and national insurance will be payable. The matching shares will be forfeited if the corresponding partnership shares
are removed from trust within three years of award.
At 31 March 2005 there were 4,313 (2004: 3,938) participants in the BAYE scheme who have cumulatively purchased 1,361,344 (2004:
730,258) shares with the Company contributing 438,584 (2004: 217,513) matching shares on a cumulative basis.
(c) Executive share option scheme
The executive share option scheme (ESOS), together with the deferred share element of the Executive Bonus Scheme replaced the Long-term
incentive plan (LTIP). Options are exercisable between three and ten years of the date of grant provided that the pre-determined performance
criteria are met. Further details of the scheme including the performance criteria, are included in the Directors’ remuneration report.
Details of executive share options outstanding at 31 March 2005 are set out below:
Ordinary 5p shares
2005 2004 Exercise Date original
Scheme No. No. price (p) option granted
FirstGroup Executive Share Option Scheme 732,326 742,715 346.5 August 01
FirstGroup Executive Share Option Scheme 1,097,584 1,148,189 269.0 June 02
FirstGroup Executive Share Option Scheme 1,206,346 1,246,983 287.0 November 03
FirstGroup Executive Share Option Scheme 1,381,893 – 275.1 June 04
4,418,149 3,137,887
The performance period for the August 2001 ESOS expired on 31 March 2004. As the performance criterion was exceeded the participants
became eligible to exercise their awards on 15 August 2004 and have seven years from this date to exercise their options.
The initial performance period for the May 2002 ESOS expired on 31 March 2005. The performance criterion was not achieved and under the
rules of the scheme the performance period has been extended for a further 12 months.
(d) LTIP
Options still unexercised under the LTIP are as follows:
Ordinary 5p shares
2005 2004 Award
Date of award No. No. price (p)
3 July 2000 151,298 369,644 236.00 INDEPENDENT AUDITORS’ REPORT
TO THE MEMBERS OF FIRSTGROUP PLC
60
We have audited the financial statements of FirstGroup plc for the year ended 31 March 2005 which comprise the consolidated profit and loss
account, the balance sheets, the consolidated cash flow statement, the reconciliation of net cash flows to movement in net debt, the consolidated
statement of total recognised gains and losses, the reconciliation of movements in equity shareholders’ funds and the related notes 1 to 31.
These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the part
of the Directors’ remuneration report that is described as having been audited.
This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work
has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and
for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the
Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As described in the statement of Directors’ responsibilities, the Company’s Directors are responsible for the preparation of the financial statements
in accordance with applicable United Kingdom law and accounting standards. They are also responsible for the preparation of the other
information contained in the annual report including the Directors’ remuneration report. Our responsibility is to audit the financial statements and
the part of the Directors’ remuneration report described as having been audited in accordance with relevant United Kingdom legal and regulatory
requirements and auditing standards.
We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part
of the Directors’ remuneration report described as having been audited have been properly prepared in accordance with the Companies Act 1985.
We also report to you if, in our opinion, the Directors’ report is not consistent with the financial statements, if the Company has not kept proper
accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law
regarding Directors’ remuneration and transactions with the Company and other members of the Group is not disclosed.
We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the July 2003 FRC
Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required
to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s
corporate governance procedures or its risk and control procedures.
We read the Directors’ report and the other information contained in the annual report for the above year as described in the contents section
including the unaudited part of the Directors’ remuneration report and consider the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the financial statements.
Basis of audit opinion
We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’
remuneration report described as having been audited. It also includes an assessment of the significant estimates and judgements made by
the Directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the circumstances of the
Company and the Group, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide
us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ remuneration report described
as having been audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also
evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ remuneration report
described as having been audited.
Opinion
In our opinion:
• the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 March 2005 and of the profit of
the Group for the year then ended; and
• the financial statements and part of the Directors’ remuneration report described as having been audited have been properly prepared in
accordance with the Companies Act 1985.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
London
United Kingdom
10 May 2005 GROUP FINANCIAL SUMMARY
61
2005 2004 2003 2002 2001
Consolidated profit and loss account £m £m £m £m £m
Group turnover 2,693.4 2,479.0 2,291.0 2,164.1 2,054.0
Operating profit before goodwill amortisation, bid costs and other exceptional items 211.6 204.1 216.1 215.0 214.3
Goodwill amortisation (25.8) (25.9) (25.8) (27.3) (25.9)
Bid costs and other exceptional items (11.9) (13.5) (10.6) (20.5) (53.5)
Operating profit 173.9 164.7 179.7 167.2 134.9
Profit before interest 177.2 184.3 189.7 164.2 201.3
Net interest payable (48.3) (42.8) (56.3) (56.3) (64.5)
Exceptional interest charge – (18.7) – – –
Profit before taxation 128.9 122.8 133.4 107.9 136.8
Taxation (32.7) (30.6) (35.8) (33.9) (55.2)
Profit after taxation 96.2 92.2 97.6 74.0 81.6
EBITDA 319.2 307.1 315.3 310.1 302.7
Earnings per share pence pence pence pence pence
Adjusted basic 28.2 27.3 26.8 25.8 23.4
Basic 22.5 22.3 23.4 17.6 18.4
Cash 55.1 52.4 50.6 48.5 44.1
Dividend per share 12.8 11.7 11.0 10.3 9.4
Consolidated balance sheets £m £m £m £m £m
Fixed assets* 1,290.8 1,258.8 1,272.5 1,344.5 1,326.2
Net current liabilities (28.8) (92.9) (115.5) (127.4) (210.6)
Creditors: amounts due after more than one year (756.3) (682.8) (630.9) (687.9) (622.6)
Provision for liabilities and charges (147.5) (128.1) (124.0) (110.7) (93.8)
Equity minority interests (10.6) (2.1) (1.1) (1.0) (0.9)
Equity shareholders’ funds* 347.6 352.9 401.0 417.5 398.3
Share data
Number of shares in issue million million million million million
At year end (excluding Treasury Shares) 393.6 403.0 413.4 419.8 422.4
Average 399.2 410.0 416.7 419.8 422.2
Share price pence pence pence pence pence
At year end 343 268 240 302 305
High 379 306 339 365 312
Low 256 219 200 243 140
Market capitalisation £m £m £m £m £m
At year end 1,369 1,078 992 1,268 1,288
*Prior years restated on adoption of UITF 38. SHAREHOLDER INFORMATION
62
Shareholder enquiries
The Company’s share register is
maintained on our behalf by Lloyds TSB
Registrars, who are responsible for making
dividend payments and updating the
register, including details of changes to
shareholders’ addresses and purchases and
sales of the Company’s shares. If you have
any questions about your shareholding in the
Company or need to notify any changes to
your personal details you should contact:
Lloyds TSB Registrars, The Causeway,
Worthing, West Sussex BN99 6DA.
Telephone: 0870 600 3973.
Employees with queries about shares held
in the Company’s employee share
schemes should contact Lloyds TSB
Registrars at the same address or by
telephoning 0870 241 3938.
Duplicate shareholder accounts
If you receive more than one copy of
Company mailings this may indicate that
more than one account is held in your name
on the Register. This happens when the
registration details of separate transactions
differ slightly. If you believe more than one
account exists in your name you may
contact the Registrars to request that the
accounts are combined. There is no charge
for this service.
Direct dividend payments
If you would like your dividend to be paid
directly into your bank or building society
account, you should contact the Registrars
or complete the dividend mandate attached
to your dividend cheque. Mandating your
dividends has a number of advantages.
Firstly, the dividend will go into your account
on the payment date – there is no chance of
it being delayed in the post and you do not
have to wait for a cheque to clear. Secondly,
the payment method is more secure than
receiving a cheque through the post. Thirdly,
you still receive tax information about the
dividend, which is sent direct to you at your
registered address.
Online information
The Registrars also provide an online service
enabling you to access details of your
shareholding. To view your details and a
range of general information about holding
shares, visit www.shareview.co.uk.
FirstGroup policy on discounts for
shareholders
Shareholders are reminded that it is not
Group policy to offer travel or other
discounts to shareholders, as they may be
used only by a small number of individuals.
The Group would rather maximise dividends,
which are of benefit to all shareholders.
Unsolicited mail
As the Company’s share register is, by law,
open to public inspection, shareholders may
receive unsolicited mail from organisations
that use it as a mailing list. To limit the
amount of unsolicited mail you receive, write
to the Mailing Preference Society,
FREEPOST 22, London, W1E 7EZ or
register online at www.mpsonline.org.uk. 63
Shareholder profile
Number of
At 30 April 2005 holders % Shares held %
By category
Individuals 45,897 96.3 59,315,165 14.9
Banks and nominees 1,549 3.3 328,325,173 82.3
Insurance and assurance 3 – 1,158,151 0.3
Other companies 205 0.4 9,952,211 2.5
Other institutions 2 – 621 –
47,656 100.0 398,751,321 100.0
By size of holding
1-1,000 37,226 78.1 9,292,135 2.3
1,001-5,000 8,069 16.9 17,850,500 4.5
5,001-10,000 1,246 2.6 8,655,822 2.2
10,001-100,000 804 1.7 21,305,002 5.3
Over 100,000 311 0.7 341,647,862 85.7
47,656 100.0 398,751,321 100.0
Financial calendar
Annual General Meeting 14 July 2005
Shares trade ex dividend 20 July 2005
Record date for final dividend* 22 July 2005
Final dividend payment 26 August 2005
Interim results announced November 2005
Interim dividend paid February 2006
Preliminary announcement of full year results May 2006
*Shareholders recorded on the register at this date will receive the final dividend. 64 02 Group overview
03 Financial highlights
04 Chairman’s statement
05 Chief Executive’s review
13 Financial review
17 Board of Directors
18 Corporate governance
23 Directors’ remuneration report
30 Directors’ report
32 Directors’ responsibilities
33 Financial statements contents
34 Consolidated profit and loss account
35 Balance sheets
36 Consolidated cash flow statement
36 Reconciliation of net cash flows to movement in net debt
37 Consolidated statement of total recognised gains and losses
37 Reconciliation of movements in equity shareholders’ funds
38 Notes to the financial statements
60 Independent auditors’ report
61 Group financial summary
62 Shareholder information
THAT’S IT FOR THIS YEAR, BUT IF YOU WANT
MORE INFORMATION ON FIRSTGROUP OR YOU
WANT TO BOOK YOUR JOURNEY PLEASE PAY
US A VISIT AT WWW.FIRSTGROUP .COM TRANSFORMING TRAVEL
ANNUAL REPORT 2005
Principal and Registered Office
FırstGroup plc
395 King Street
Aberdeen AB24 5RP
Telephone: 01224 650100
Facsimile: 01224 650140
Registered in Scotland
number SC157176
London Office
FırstGroup plc
Third Floor
E Block
Macmillan House
Paddington Station
London W2 1FG
Telephone: 020 7291 0505
Facsimile: 020 7636 1338
The paper used to produce this report is
made from Totally Chlorine Free (TCF) pulps
sourced from fully sustainable forests.
www.fırstgroup.com
FirstGroup plc Annual Report 2005
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