Final Results

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

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