Full year results

RNS Number : 5608I

NCC Group PLC

04 July 2013

 



4 July 2013

NCC Group

Full year results

NCC Group plc (LSE: NCC, "NCC Group" or "the Group"), the international, independent provider of Escrow and Assurance, has reported its full year results for the 12 months to 31 May 2013.

Financial

§ Group revenue increased 13% to £99.2m (2012: £87.7m)- 8% organic growth

§ Group adjusted operating margin* 24% (2012: 27%)

§ Reported operating profit £19.8m (2012: £11.6m)

§ Group adjusted pre-tax profit* £23.0m (2012: £22.6m)

§ Adjusted fully diluted earnings per share** 8.4p (2012: 7.8p)

§ Total dividend** up 16% to 3.1p (2012: 2.68p)

§ Cash conversion ratio is 116% of operating profit (2012: 131%)

Operational

§ Group Escrow revenue growth maintained at 2%

o  Escrow UK saw solid revenue growth of 3%

o  Operating margin at 59% (2012: 58%)

§ Assurance division now established as multinational information security business

o  Strong revenue growth of 18% (10% organic)

o  Operating margin maintained at 17% (2012: 17%)

§ Artemis development of .secure on track for 2014 launch

o  ICANN initial evaluation completed and approved

Outlook for 2013/2014

§ Group Escrow renewals forecast to increase to £18.0m (2012: £17.7m)

§ Group Escrow verification order book £2.3m (2012: £1.7m)

§ Assurance Testing order book and renewals up 20% to £30.7m (2012: £25.5m)

*Operating profit is adjusted for amortisation of acquired intangibles, exceptional items and share based payment charges. Pre-tax profit is adjusted for these items and the unwinding of the discount on the acquisitions' contingent consideration. 

**The comparative dividend per share and earnings per share are calculated after the five for one bonus issue on 18 December 2012. 

Rob Cotton, NCC Group Chief Executive, commented:

"We have delivered a solid performance which has seen revenues up 13%, 8% organically.

"We continue to strengthen our market leading position in growing markets.  Our .secure venture is making good progress and is on track to start generating revenue in 2014.

"With total renewals and order book of £51m already secured for the current financial year and our global reach and product range providing a platform for sustained long term growth, the outlook for the Group remains very good."

Enquiries:

NCC Group  (www.nccgroup.com)	[phone]
Rob Cotton, Chief Executive
Atul Patel, Group Finance Director
College Hill
Adrian Duffield/Rozi Morris	[phone]

Overview

NCC Group has delivered a strong performance, albeit at a slower rate than over the last 10 years.  The economic climate in which the Group operates remains subdued and difficult to predict, particularly for Escrow.  Some US operations in both Assurance and Escrow did not perform as strongly as originally expected. 

The Group continued to grow organically as well as by integrating and consolidating the acquisitions made over the last year or so.  In the last 12 months the Group acquired two further Assurance businesses in New York.

Group revenues maintained their momentum, growing by 13% to £99.2m (2012: £87.7m).  Organic revenue grew by 8% with underlying growth of 10%, excluding the positive effects of an unusually large one off operational response contract in Assurance in the first four months of the last financial year.

Group margins continued to be strong with adjusted operating profit margins at 24% (2012: 27%).  This was achieved despite the effects of the costs incurred by Artemis, alongside the growth seen in the Assurance businesses, which have lower margins than the Escrow operations.

Adjusted pre-tax profits and adjusted fully diluted earnings per share were up to £23.0m (2012: £22.6m) and 8.4p (2012: 7.8p) respectively.  The Group continues to be highly cash generative with operating cash conversion representing 116% of operating profit (2012: 131%).

Reflecting the Group's progressive dividend policy, which at least tracks earnings growth, a final dividend of 2.12p is recommended by the Board making a total for the year of 3.1p, up 16%.  Since the Group's flotation in July 2004, the dividend has increased from 0.42p, a compound annual growth rate of 29%.

Group strategy

The Group's strategy continues to be to develop its three divisions organically.  It is also looking to strengthen its position as a foremost provider of IT security by acquisition in order to widen its reach and exploit new opportunities.  By using its experience and skills NCC Group helps develop and deliver a safer Internet world in which to navigate and transact, for enterprises and consumers alike. 

This is a concept the Group has championed for a number of years.  With its investment in Artemis, the Group is seeking to acquire the generic Top Level Domain (gTLD) .secure in order to provide a more secure mechanism to transact and access data across the Internet.  To date, the project remains on time and on budget, having passed the ICANN initial evaluation, with an expectation that the service will start to be delivered for major customers during the second half of this financial year.

Current trading and outlook

The Group's good growth track record was slowed briefly by a number of unrelated issues as it consolidated the various business units to exploit the scale and international reach that has now been attained.

All of these issues have been addressed, although Intrepidus has yet to be fully integrated.  More importantly, a structure is now in place that will allow the Group to benefit from the significant opportunities that exist across Assurance's markets.  

NCC Group is now a truly global organisation, with a tremendous reputation for innovation, quality and world leading delivery.  This positions it well for sustainable growth in the rapidly developing markets in which it operates.

The Group is beginning to see improving and more certain market conditions.  The start to this financial year has seen solid growth in the Group's performance.  Group Escrow renewals are forecast to be £18.0m (2012: £17.7m renewed in the year) and the verification order book is £2.3m (2012: £1.7m), of which £0.7m (2012: £0.5m) relates to Escrow Europe and Escrow US. 

The Assurance division's order books have improved strongly to £24.2m (2012: £19.7m) and it forecasts £6.5m (2012: £5.8m) of monitoring renewals for the coming financial year.

Financial review

Revenue

The Group increased revenue by 13% to £99.2m (2012: £87.7m).  Organic revenue growth was 8%, excluding the contribution from the two US businesses acquired in August 2012, Matasano Security LLC and Intrepidus Group, Inc.  Excluding the impact of the unusually large one-off operational response contract in Assurance in the first four months of the last financial year, the underlying organic growth was 10%.

The Group H1:H2 revenue split was 48%:52% (2012: 48%:52%).  It is expected in the current year that the split will return closer to the 43%:57% split that the Group normally experiences.

In the year 64% (2012: 69%) of revenue, £63.1m (2012: £60.4m) was derived from the UK.  Europe contributed £7.7m (2012: £6.2m) with the Rest of the World revenue increasing strongly to £28.4m (2012: £21.1m), some 29% of Group revenue.

Group Escrow now accounts for 29% of the Group's revenue (2012: 32%) as the Assurance business saw faster organic growth and benefitted from the recent acquisitions. 

During the year currency movements had little impact on the Group's performance. 

The Group's recurring income levels continue to grow.  In Escrow UK over 88% of all contracts renewed (2012: 88%).  Assurance saw 77% of its revenues renewed (2012: 74%), this now represents 63% of all customers (2012: 51%).  In addition, 91% (2012: 91%) of the performance monitoring revenues renewed and are recurring.

The increasing number of customers who are renewing in Assurance includes a greater proportion of smaller customers and this has resulted in renewing Assurance customers' expenditure decreasing from £68,821 to £57,724; with total average customer spend marginally decreasing to £38,425 from £39,486. 

Group revenue by market sector

The Group continued to have minimal reliance on any one customer or sector.  Within Assurance the largest customer represents 5% of Assurance revenue which is 3% of Group revenue.  The largest customer in Escrow is 2% of total Group Escrow revenue.

Top three sectors by Division	Escrow	Assurance
Software computer services	15%	34%
Banks & insurance	23%	30%
Telecoms	18%	7%

Group revenue split by sector

Sector	%
Banking & insurance	28
Charity	1
Education	1
Healthcare	2
Local government	1
Manufacturing	3
National government	4
Professional & support services	2
Retail	5
Software & computer services	30
Telecommunications	9
Travel	5
Utilities	1
Support services	5
Other	3

Profitability and margins

The Group continues to generate strong margins.  Adjusted Group operating profit grew by 2% to £23.9m (2012: £23.4m), including spend on Artemis and excluding the amortisation of acquired intangibles, exceptional items and share-based charges as set out in the table below.

Despite the increased percentage of revenue from the non-escrow businesses and Artemis spend, overall adjusted operating margins remained strong at 24% (2012: 27%).

Escrow's margin has continued to improve, driven by a combination of effective selling and cost control.  The Group continues to monitor pricing and market sentiment and although price inflation is part of the current prevailing UK economy, so is cost control.

In Assurance the margin has remained constant year on year despite the weaker performance seen in some of its units.  In the UK businesses there has been a general improvement in margins as more work has come from premium rate services but there has been a lower than expected utilisation in North America.  The Group expects to see a strengthening of the division's margins this coming year.

The Group half year split saw 47% of adjusted operating profits delivered in the first half and
53% in the second half, very similar to 2012.  The Group expects the profit split in future periods to revert closer to that seen in prior years.

In May 2012 the Board reported the complete suspension of the implementation of the Group's new fully integrated IT system and the reversion back to the previous Group-wide IT system and this was shown as an exceptional item in that year.  Contained within exceptional items in 2013 are the one off legal charges of £0.4m.

		Operating profit
		2013	2012
		£000	£000
Reported operating profit		19,827	11,619
	Amortisation of acquired intangibles	3,612	3,726
	Exceptional items	(261)	7,111
	Share based payments	760	946
	Adjusted operating profit Adjusted operating profit	23,938	23,402

	Profit before tax
	2013	2012
	£000	£000
Reported profit before tax	18,758	10,572
Amortisation of acquired intangibles	3,612	3,726
Exceptional items	(261)	7,111
Unwinding of the discount on contingent consideration	167	208
Share based payments	760	946
Adjusted profit before tax	23,036	22,563

Adjusted Group pre-tax profit marginally improved to £23.0m (2012: £22.6m) after an interest charge of £0.9m.  The Group's reported pre-tax profit was £18.8m (2012: £10.6m), after the inclusion of the unwinding of the discount on the acquisitions' contingent consideration, amortisation of acquired intangible assets, share based payment charges and the exceptional items.

Taxation

The Group's effective tax rate is 23% (2012: 28%), which is below the average standard UK rate of 24% (2012: 26%).  This decrease in the effective rate is due to a combination of a decreasing UK tax rate, the US tax treatment of Artemis costs and acquisition related expenses, and a larger tax charge to equity relating to share based payments.

Taxation recognised in the income statement

		2013	2012
		£000	£000
Current tax expense
Current year		4,499	2,308
Adjustment to tax expense in respect of prior periods		(61)	86
Foreign tax		625	1,711
Total current tax		5,063	4,105
Deferred tax		(789)	(1,148)
Tax in income statement		4,274	2,957

Reconciliation of effective tax rate

		2013	2012
		£000	£000
Profit before taxation		18,758	10,572
Current tax using the UK corporation tax rate of 23.8% (2012: 25.7%)		4,470	2,714
Effects of:
Items not taxable/deductible for tax purposes		(57)	(171)
Effect of rate change		22	13
Differences between the overseas tax rates		122	232
Movements in temporary differences not recognised		71	51
Adjustment to tax charge in respect of prior periods		(354)	118
Total tax expense		4,274	2,957

Current and deferred tax recognised directly in equity was a charge of £402,000 (2012: charge of £62,000).

Earnings per share

The adjusted basic earnings per share from continuing operations increased 8% to 8.6p (2012: 8.0p).  The table shows the effect on the Group's basic earnings per share of the amortisation of acquired intangibles, share based payment charges, unwinding of the discount on the contingent consideration for acquisitions and the effect of the exceptional items.   The comparative information below has been restated to reflect the bonus issue of shares made on 18 December 2012.

	2013 Pence	(restated) 2012 Pence
Basic EPS as per the income statement	7.0	3.7
Amortisation of acquired intangibles	1.3	1.3
Exceptional items	(0.1)	2.5
Unwinding of the discount on the contingent consideration of the acquisitions	0.1	0.1
Share based payments	0.3	0.4
Adjusted basic EPS	8.6	8.0

The adjusted fully diluted earnings per share from continuing operations increased 8% to 8.4p (2012: 7.8p) whilst reported fully diluted earnings per share was 6.9p (2012: 3.6p). 

Dividends

The Board is recommending a final dividend of 2.12p per ordinary share, making a total for the year of 3.1p.  This represents cover of 2.8 times (2012: 3.0 times) based on basic adjusted earnings per share from continuing operations.  If approved at the Annual General Meeting, the dividend will be paid on the 20 September 2013 to shareholders on the register at the close of business 23 August 2013.   The ex-dividend date will be 21 August 2013.

Cash

The Group continues to be highly cash generative with operating cash flow before interest and tax of £23.0m (2012: £24.6m), which gives a cash conversion ratio of 116% of operating profit before interest and tax (2012: 131%).  It is expected as the mix of business continues to change due to the increase in Assurance revenues the percentage will be 100% - 110%.

After accounting for net cash outflows of £10.5m for acquisitions and contingent acquisition payments, the Group ended the year with net debt of £25.3m (2012: £22.7m).

Total capital expenditure remained tightly controlled at £4.9m (2012: £7.3m) which includes the Group's continued investment in Artemis.  

The Group's banking facility with the Royal Bank of Scotland, which provides a £40m revolving credit facility and a £5m overdraft, runs until July 2016.  Interest on the facility is charged between 1.5% and 2.25% over LIBOR based on the Group's net debt/EBITDA ratio.

The facility provides the Group with the necessary capacity to meet its current acquisition objectives, although this is regularly reviewed to ensure that unnecessary fees are not incurred due to non-utilisation.  The Group was utilising67% of the facility at the year-end.

Balance sheet

Following the acquisitions of Matasano Security and Intrepidus, goodwill increased by 16% to £92.2m (2012: £79.3m) and the net book value of intangible assets relating to customer contracts and associated relationships increased to £9.8m (2012: £9.1m). 

The value of goodwill has been assessed and no impairment reported.  The contracts and customer relationships have been assigned a useful economic life of between three and 20 years and will be amortised over that period.

Shareholders' funds at the end of the year were £70.5m (2012: £60.4m).

IT systems & IT claim

The Group is currently completing negotiations for a replacement system to provide an end-to-end solution for all the Group's businesses.  The new system will not only overcome some of the inflexibility that was going to exist in the SAP environment but will still be sufficiently rigid to allow strong control.

In terms of the failed SAP implementation, over a year has passed since Ciber UK was informed of our decision to revert to our former system due to the operational issues that had arisen.  Dates for mediation are being finalised and it will take place by the end of the calendar year.  All the costs incurred in the claim to date have been expensed.

Operational review

Group Escrow

The Escrow businesses have had a challenging year overall, although good performances have been seen in nearly all the key measures of profitability, renewals, terminations and verification testing.

The Escrow division increased revenue by 2% to £28.5m (2012: £27.9m).  Within this, Escrow UK revenue grew by 3%, Escrow US by 1% but Escrow Europe declined by 1%.

Group Escrow profitability increased 3% to £16.7m (2012: £16.3m) with the UK contributing 81% (2012: 81%). 

Group Escrow recurring revenues, renewals, increased to £17.7m (2012: £17.3m). Group Verification revenues grew by 15% in the year to £6.1m (2012: £5.3m).

The Group's Escrow businesses have always been and will continue to be, the cornerstone of NCC Group's profitability.  They produce a substantial margin and very strong cash conversion as well as a high degree of recurring revenue, due to the consistent contracts renewals rate of over 88%. 

Overall Group Escrow operating margins improved due to good cost control, strengthening to 59% (2012: 58%). 

Escrow UK

This year saw a consistent and robust performance from the Escrow UK team.  Growth levels were sufficient considering there were no real signs of any fundamental improvement in the economy, but latterly the Group has started to see an upturn as the IT sector appears to be seeing a slight improvement in market confidence and sentiment.

Escrow UK revenue was £20.9m (2012: £20.3m).  This 3% growth in revenue (2012: 7%) was delivered through contract growth and verifications, with only a limited amount coming from the effects of the price increase. 

Escrow UK recurring revenues increased to £12.4m (2012: £12.3m) and terminations remain below 12%.

Escrow Europe and Escrow US

Escrow US revenues grew by 1% to £4.4m (2012: £4.4m).  The management changes in North America affected the business, particularly in San Francisco where there has been significant change.   In San Francisco the business contracted by 10% due to the loss of key personnel whilst in Atlanta revenues grew by 16%. 

Escrow Europe revenues grew by an extremely encouraging 6% in the second half of the year, but overall for the full year fell by 1% to £3.2m (2012: £3.2m).  The second half performance reflected the efforts of the new, stable management team and structure.

Assurance

The Assurance division is divided into two areas, security testing, audit and compliance and web performance, which broadly reflect the focus of the former acquired businesses.  iSEC which operates in North America is included within security testing, as are newly acquired Matasano and Intrepidus.

Overall each product area has seen strong performance with all elements making good progress.  Assurance now accounts for 71% (2012: 68%) of Group revenues with total divisional revenues increasing 18% to £70.7m (2012: £59.8m).

Excluding the acquisitions of Matasano and Intrepidus, organic revenue increased 10% to £66.0m, with a very strong performance coming from security testing in the second half of the year. 

Operating profits increased 17% to £12.0m (2012: £10.3m). The Assurance division businesses' margins remained strong at 17% (2012: 17%).

As with Escrow, the major challenge for the Assurance division is to increase renewal rates and renewal spend levels.  This is most imperative in security testing to help complement the very strong renewal rates seen in the web performance businesses. 

Security testing includes penetration and application security testing, operational response, forensics and managed monitoring.  The audit and compliance area includes social engineering, card and information security standards and security auditing.  This area grew 17% whilst also ensuring that utilisation rates remained suitably low to combat any staff retention issues.

The Group continues to benefit from iSEC's technical knowhow and presence to provide a better service to customers.  However, a change in the sales processes caused by the departure of one of the iSEC founders was required, including the recruitment of a complete sales team to win and renew customer contracts in California.  The team was mobilised and effective within three months but there was a period of disappointing delivery and very low levels of utilisation.  This has now been corrected and sales and contract wins are running back at the required levels.

Web Performance had a recurring revenue rate of 91% (2012: 91%), which continues its strong track record of client retention.  Through the coming year, improvements to the service, additional product lines and potential new technologies will see this area continue to perform strongly.  During the year the business area grew by 9%.

The Assurance testing teams currently comprise over 270 qualified testers in the UK and USA.

Artemis - creating a safer internet - .secure

In May 2012, the Group applied to register the .secure generic top level domain (gTLD) as part of the ICANN programme to create a new set of gTLDs.  The .secure domain aims to create a universal environment for end users to operate and navigate the internet with complete safety and security.

The Group established a new wholly owned subsidiary, Artemis Internet Inc. ('Artemis') in San Francisco, to develop the critical infrastructure and know-how to deliver this project. To date the ICANN application has gone as expected.  The Group's application is one of two for .secure as a gTLD.

On 21 June 2013, it was confirmed by ICANN that the application for .secure had completed and passed the initial evaluation process.  This is a key milestone towards gaining ownership and included background screening, technical and financial capability testing and a review of Artemis's registry services.

The Group has invested a total of £2.3m in the project during the year, of which £1.2m has been expensed as the costs were in respect of sales and marketing. This project remains on time and on budget.

The Group plans to invest progressively in Artemis and it expects to offer a service to its customers through .secure or its own branded gTLD during the second half of the financial year. 

Employees, recruitment and retention

Employee recruitment and retention remains one of the most important objectives for the Group.  The objective is to offer careers and development opportunities that actively encourage all staff to stay and grow within the Group.  Retention remains in line with the Group expectations, which is for permanent staff annual turnover not to be more than10%.

The Group now employs 725 people across the world, supplemented by 185 associates.

Markets

Escrow - SaaS and a safe way back

NCC Group remains one of the leading global providers of escrow services.  The market dynamics remain unchanged since the introduction of software escrow in 1982.  Both public and private sector corporations and organisations still believe that they have several times more cover than they actually have. 

This will ultimately get worse as organisations are not sure how to get escrow protection in hosted or co-located Software as a Service (SaaS) environments as there are a number of points that need to be considered when outsourcing the applications and hardware to "as a service" environments.

The move to cloud computing still has not largely happened for businesses' critical applications, with the pace of change being slower than is generally publicised.  But with low up front costs, rapid deployment and high scalability SaaS will continue to grow in popularity. 

The failure of a traditional application owner is typically not accompanied by the loss of infrastructure, data, Internet communications and application support, all of which can be lost following the failure of a SaaS owner.

In order to protect customers from a SaaS owner failure or the breakdown of the relationship if service levels are not delivered, a mechanism has to be put in place to address the fundamental infrastructure, data, communications and IT support issues.  Duplicating infrastructure and data are not cost effective for most SaaS customers.

What is needed is a mechanism to allow time for the customer to transition to an alternative for the infrastructure, data and communications used to run the application uninterrupted if the SaaS supplier fails.  Many SaaS vendors already use Infrastructure as a Service (IaaS) for either their primary or business continuity platform for the same reasons customers are turning to SaaS for their applications. This provides them with low up front costs, rapid deployment and high scalability.

NCC Group's solution is to deliver a cost effective service for customers that keeps the infrastructure and communications used to run the SaaS solution, provided by a third party infrastructure provider, still operational.  Not having this capability as part of the solution will cause an interruption of service for the customer, which is an unacceptable risk where business critical SaaS applications are being used.

Infrastructures needed by SaaS vendors with large numbers of concurrent users require significant numbers of virtual servers both for the primary platform and consequently for the corresponding business continuity platform.  IaaS vendors will provide virtual servers inexpensively as long as these servers are dormant.

The solutions NCC Group is developing provide protection to SaaS customers regardless of whether the IaaS is used for the SaaS vendors' primary or business continuity platform.  As an IaaS based solution, NCC Group SaaS Escrow has by far the greatest potential to provide SaaS customers with the protection many are seeking at a price they can afford.   

Assurance - The need for change in the cyber world

Improvements in security have failed to keep up with the ever-increasing pace of function led improvements in technology.  With that has also come an acceptance that being hacked is now an everyday experience.  A once traumatic event that would have attracted considerable publicity, today hardly warrants a footnote, unless it is of a scale, magnitude or complexity that could shock even a hardened security expert. 

The sophistication of hackers is now at a level that would not embarrass a government operation but more ominously governments are becoming more open about the level of their operations, as they are clearly becoming more engaged in complex cyber warfare - both within their own country and against other perceived cyber hostile nations. 

The lack of backlash against revelations such as the recent US Prism scandal seems to suggest that the majority of ordinary individuals do not mind if they are observed by the nation in which they live.  However, in terms of control of personal financial data and individual identity, corporations and governments really need to treat it more seriously. 

Part of this remains an NCC Group theme, that there is a clear and pressing need to increase standards in cyber defences from large corporations to governments through to consumers.  One way to prompt this is by increasing transparency around security. 

This transparency must cover the way businesses view, act and respond to cyber security issues.  They must also set out the reporting of corporate breaches and the consequences for those affected, as well as mapping out how incidents should be dealt with.  Until organisations are publicly held to account for security breaches, there will be a lack of incentive for them to implement stringent digital policies and infrastructures.

The answer lies within enterprises themselves to strengthen significantly their corporate networks, test their protections vigorously and prepare a clear and comprehensive operational response plan.  This will happen if there is better transparency, as admitting that a corporate security system failed can only serve to damage reputation and weaken customer trust, which should be motivation enough!

The adoption of .secure and the policies, processes and protocols that it mandates will help drive this change.  By subscribing to the .secure framework, the hard work of determining and driving change is done within.  Through a team of the most globally recognised organisations, ranging from internet pioneers through to retailers and the largest financial institutions, all sectors and user groups are being considered.  Allowing the creation of commonly accepted policies that mandate best practice of internet and information security is the best starting point. 

Overlaying that in an environment where only the organisation with the actual right to the domain can apply to own it and all of its algorithmic derivatives and lookalikes, will aid the user so that the most common spoof attacks become impossible to create.  Whilst it will never ensure that a site or an organisation will not be hacked, it significantly blunts the hacker's armoury of basic tools.

This type of change needs to happen, resignation to being hacked and compromised should not be an accepted consequence of using the Internet. 

Consolidated income statement

For the year ended 31 May 2013

			(restated)
	Notes	2013	2012
		£000	£000
Revenue	2	99,225	87,713
Cost of sales		(63,376)	(54,140)
Gross profit		35,849	33,573
Administrative expenses before amortisation of acquired intangible assets, share based payments, impairment losses and exceptional items		(11,911)	(10,171)
Operating profit before amortisation of acquired intangibles, share based payments, impairment losses and exceptional items		23,938	23,402
Amortisation of acquired intangible assets		(3,612)	(3,726)
Share based payments		(760)	(946)
Impairment losses	3	-	(6,104)
Exceptional items	3	261	(1,007)
Total administrative expenses		(16,022)	(21,954)
Operating profit	2	19,827	11,619
Financial income	6	18	3
Finance expense excluding unwinding of discount		(920)	(842)
Net financing costs excluding unwinding of discount		(902)	(839)
Unwinding of discount relating to contingent consideration on business combinations		(167)	(208)
Financial expenses	6	(1,087)	(1,050)
Net financing costs		(1,069)	(1,047)
Profit before taxation	4	18,758	10,572
Taxation	7	(4,274)	(2,957)
Profit for the year		14,484	7,615
Attributable to equity holders of the parent company		14,484	7,615
Earnings per share from continuing operations	9
Basic earnings per share		7.0p	3.7p
Diluted earnings per share		6.9p	3.6p

Consolidated Statement of comprehensive income

for the year ended 31 May 2013

		2013	2012
		£000	£000
Profit for the year		14,484	7,615
Other comprehensive income
Foreign exchange translation differences		876	357
Total comprehensive income for the year, net of tax		15,360	7,972
Attributable to:
Equity holders of the parent		15,360	7,972

Group balance sheet

at 31 May 2013

	Notes	2013		2012
		£000	£000	£000	£000
Non-current assets
Intangible assets	11	105,680		89,499
Plant and equipment	12	5,131		5,068
Deferred tax assets	15	987		1,943
Total non-current assets			111,798		96,510
Current assets
Trade and other receivables	13	24,474		21,347
Cash and cash equivalents		4,589		5,450
Total current assets		29,063		26,797
Total assets			140,861		123,307
Equity
Issued capital		2,075		343
Share premium		23,086		23,244
Retained earnings		44,392		36,730
Currency translation reserve		917		41
Total equity attributable to equity holders of the parent			70,470		60,358
Non-current liabilities
Other financial liabilities	18	577		579
Deferred tax liability	15	1,048		1,343
Contingent consideration on acquisitions	18	4,765		250
Interest bearing loans	18,	29,852		28,149
Total non-current liabilities			36,242		30,321
Current liabilities
Trade and other payables	16	12,554		11,593
Contingent consideration on acquisitions	16	2,177		3,493
Deferred revenue	17	16,847		15,926
Current tax payable		2,571		712
Provisions	19	-		904
Total current liabilities			34,149		32,628
Total liabilities			70,391		62,949
Total liabilities and equity			140,861		123,307

Group cash flow statement

for the year ended 31 May 2013

	Notes	2013	2012
		£000	£000
Cash flow from operating activities
profit for the year		14,484	7,615
Adjustments for:
Depreciation charge	12	1,964	1,574
Share based charges (net of national insurance contributions)		690	725
Amortisation of intangible assets	11	3,929	3,726
Impairment of intangible assets	11	-	6,104
Net financing costs		1,069	1,047
(Profit)/loss on sale of plant and equipment		(27)	10
Adjustments to contingent consideration	3	(1,239)	(250)
Income tax expense		4,274	2,957
Cash inflow for the year before changes in working capital		25,144	23,508
Increase in trade and other receivables		(2,482)	(2,899)
Increase in trade and other payables		289	4,031
Cash generated from operating activities before interest and tax		22,951	24,640
Interest paid		(791)	(735)
Income taxes paid		(2,993)	(5,452)
Net cash generated from operating activities		19,167	18,453
Cash flows from investing activities
Interest received		18	3
Acquisition of plant and equipment		(1,974)	(3,620)
Development expenditure	11	(2,895)	(3,660)
Acquisition of business net of cash acquired	14	(10,455)	(7,498)
Net cash used in investing activities		(15,306)	(14,775)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital		294	416
Draw down of borrowings		1,157	2,354
Equity dividends paid		(5,830)	(4,778)
Net cash used in financing activities		(4,379)	(2,008)
Net (decrease)/increase in cash and cash equivalents		(518)	1,670
Cash and cash equivalents at beginning of year		5,450	4,701
Effect of foreign currency		(343)	(921)
Cash and cash equivalents at end of year		4,589	5,450

Statements of changes of equity

for the year ended 31 May 2013

Group

	Issued Share  capital	Share  premium	Currency Translation reserve		Retained earnings	Total
	£000	£000	£000		£000	£000
Balance at 1 June 2011	341	22,830	(316)		33,230	56,085
Profit for the year	-	-	-		7,615	7,615
Foreign currency translation differences	-	-	357		-	357
Total comprehensive income for the period	-	-	357		7,615	7,972
Transactions with owners recorded directly in equity
Dividends to equity shareholders	-	-	-		(4,778)	(4,778)
Share based payment transactions	-	-	-		725	725
Current and deferred tax on share based payments	-	-	-		(62)	(62)
Shares issued	2	414	-		-	416
Total contributions by and distributions to owners	2	414	-		(4,115)	(3,699)
Balance at 31 May 2012	343	23,244	41		36,730	60,358
	Issued Share capital	Share  premium	Currency Translation reserve		Retained  earnings	Total
	£000	£000	£000		£000	£000
Balance at 1 June 2012	343	23,244	41		36,730	60,358
Profit for the year	-	-	-		14,484	14,484
Foreign currency translation differences	-	-	876		-	876
Total comprehensive income for the period	-	-	876		14,484	15,360
Transactions with owners recorded directly in equity
Dividends to equity shareholders	-	-	-		(5,830)	(5,830)
Share bonus issue	1,729	(1,729)	-		-	-
Share based payment transactions	-	-	-		690	690
Current and deferred tax on share based payments	-	-	-		(402)	(402)
Shares issued	3	291	-		-	294
Purchase of own shares		1,280			(1,280)	-
Total contributions by and distributions to owners	1,732	(158)	-		(6,822)	(5,248)
Balance at 31 May 2013	2,075	23,086	917		44,392	70,470

1 Accounting policies

Basis of preparation

NCC Group plc ("the Company") is a company incorporated in the UK.

The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the "Group").  The parent company financial statements present information about the Company as a separate entity and not about its Group.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 May 2013 or 31 May 2012, but is derived from those accounts.  Statutory accounts for 2012 have been delivered to the registrar of companies, and those for 2013 will be delivered in due course.  The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The Group financial statements consolidate those of the company and its subsidiaries (together referred to as the "Group").  The parent company financial statements present information about the Company as a separate entity and not about its Group.

Both the parent and 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 IFRS").  On publishing the parent company financial statements here together with the Group financial statements, the Company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements.

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Operational and Financial Review. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review. 

Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for the following items in the statement of financial position;

Liabilities for equity settled share based payment agreements are measured at fair value

Assets and liabilities acquired in a business combination are measured at fair value

Functional and presentation currency

The Group and Company financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£'000) except when otherwise indicated.

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 Operational and Financial reviews.  The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review. 

The Group funds its strategic acquisitions and meets its day to day working capital requirements via a revolving credit facility of £40m and an overdraft of £5m.  This facility was agreed in April 2013 and is not due for renewal until July 2016.

The Group's forecast and projections taking into account reasonably possible changes in trading performance show that the Group is able to operate within the level of this facility and as a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain external economic outlook. 

After making enquiries, the Directors have a reasonable expectation that the company and the Group have adequate resources to continue in operational existence for the foreseeable future. 

Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

Restatement

On the 18 December 2012, NCC Group made a bonus issue of five ordinary shares for every one share held.  The consolidated income statement for the year ended 31 May 2012 has been restated to present the Group's basic earnings per share on a consistent basis.  The restatement has no impact on the Group's reported profit. 

2          Segmental information

The Group is organised into three operating segments (2012: two) Group Escrow, Assurance Testing and Artemis each of which is separately reported.  The Directors have assessed the newly formed Artemis to be a separate operating segment from Assurance Testing as it will be managed separately, will require different technology and offer a different range of services.

Whilst revenue and profitability are monitored by individual business units within these operational segments it is only at the operating level that resource allocation decisions are made.  Performance is measured based on segment profit which comprises segment operating profit excluding amortisation of intangible assets, share based payment charges and exceptional items.  Interest and tax are not allocated to business segments and there are no intra-segment sales.

	2013 £000	2012 £000
Revenue by business segment
Escrow UK	20,888	20,296
Escrow Europe	3,180	3,224
Escrow USA	4,449	4,424
Total Group Escrow	28,517	27,944
Security Testing, Audit and Compliance	61,947	51,760
Web Performance	8,761	8,009
Total Assurance Testing	70,708	59,769
Artemis	-	-
Total revenue	99,225	87,713

All revenue is in relation to services provided.

	2013 £000	2012 £000
Operating profit by business segment
Group Escrow	16,737	16,320
Assurance Testing	12,022	10,259
Artemis	(1,174)	-
Segment operating profit	27,585	26,579
Head office costs	(3,647)	(3,177)
Operating profit before amortisation of acquired intangibles, charges for share based payments and exceptional items	23,938	23,402
Amortisation of acquired intangible assets Group Escrow	(712)	(559)
Amortisation of acquired intangible assets Assurance Testing	(2,900)	(3,167)
Share based payments	(760)	(946)
Operating profit before exceptional items	19,566	18,730
Exceptional items	261	(7,111)
Operating profit	19,827	11,619

There are no customer contracts which account for more than 10% of segment revenue.

	Assets	Liabilities	Assets	Liabilities
	2013	2013	2012	2012
	£000	£000	£000	£000
Assets/(liabilities) by business segment
Group Escrow	13,689	(14,758)	13,846	(18,736)
Assurance Testing	16,006	(7,532)	18,872	(9,919)
Artemis	1,539	(2,974)	-	-
Unallocated	109,627	(45,127)	90,589	(34,294)
Total assets/(liabilities)	140,861	(70,391)	123,307	(62,949)

Unallocated net assets consist of goodwill arising on consolidation, cash, tax payable and other centrally held assets and liabilities.

2013		Depreciation	Capital expenditure	Total costs incurred to acquire segmental assets
		£000	£000	£000
Group Escrow		273	521	-
Assurance Testing		784	805	7,824
Artemis		2	22	-
Unallocated		905	649	-
Total		1,964	1,997	7,824

2012		Depreciation	Capital expenditure	Total costs incurred to acquire segmental assets
		£000	£000	£000
Group Escrow		171	522	-
Assurance Testing		661	921	1,200
Artemis		-	-	-
Unallocated		742	2,177	-
Total		1,574	3,620	1,200

The table below provides an analysis of the Group's revenue by geographical market where the customer is based.

	2013 £000	2012 £000
Revenue by geographical origin and destination
UK	63,090	60,383
Rest of Europe	7,702	6,172
Rest of the World	28,433	21,158
Total revenue	99,225	87,713

The table below provides an analysis of the Group's assets/(liabilities) by geographical market where the assets/(liabilities) are based.

	Assets	Liabilities	Assets	Liabilities
	2013	2013	2012	2012
	£000	£000	£000	£000
Asset/ (liabilities) by geographical segment
UK	89,001	(33,022)	87,989	(40,470)
Rest of Europe	3,711	(2,087)	4,893	(2,358)
Rest of the World	48,149	(35,282)	30,425	(20,121)
Total assets/(liabilities)	140,861	(70,391)	123,307	(62,949)

3          Exceptional items

The Group identifies separately items as "exceptional".  These are items which in the management's judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information. Subsequent revisions of estimates for items initially recognised as exceptional provisions are recorded as exceptional items in the year that the revision is made. 

	2013 £000	2012 £000
Operating exceptional items
Impairment losses (see note 11)	-	(6,104)
Legal fees	(372)	-
Unused remedial costs	219	(904)
Acquisition related costs	(825)	(353)
Revision to estimates of contingent consideration (see note 14)	1,239	250
Total	261	(7,111)

Legal fees of £0.4m are primarily in respect of legal advice received in relation to the Groups claim to recover capitalised and other costs incurred as part of the Groups IT system implementation which was terminated in May 2012.  These are in part offset by the £0.2m release of the £0.9m previously provided for the completion of the Groups transfer of operations to its previous IT system (see note 19).

Acquisition related costs of £0.8m (2012: £0.4m) principally consist of professional fees incurred in relation to the acquisitions made during the current and previous years (see note 14).

In accordance with IFRS3, the Directors have re-assessed the carrying value of contingent consideration held in respect of business acquisitions and this has resulted in a £1.2m release of provisions held (2012: £250,000)(see note 14).

Impairment losses of £6.1m related to the write off of costs capitalised following the termination of the Groups IT system implementation project in May 2012.

The tax effect in the income statement relating to the exceptional items recognised is:

	2013 £000	2012 £000
Exceptional items and acquisition related costs
Credit in respect of impairment losses and remedial costs	-	(1,798)
Credit in respect of legal fees	(85)	-
Credit in respect of acquisition related costs	(83)	(101)
Revision to estimates of contingent consideration	-	-
Total	(168)	(1,899)

4          Expenses and auditors' remuneration

	2013	2012
	£000	£000
Profit before taxation is stated after charging/(crediting):
Amounts receivable by auditors and their associates in respect of:
Audit of these financial statements	27	22
Audit of financial statements of subsidiaries pursuant to legislation	36	36
Total audit	63	58
Other assurance services	8	8
Taxation compliance services	2	43
Total fees	73	109
Depreciation and other amounts written off tangible and intangible fixed assets:
Owned	1,964	1,574
Amortisation of intangible assets	3,929	3,726
Impairment losses (see note 3)	-	6,104
Exchange (gains)/losses	(3)	(46)
Operating lease rentals charged:
Hire of property, plant and equipment	1,687	1,759
Other operating leases	864	802
(Profit)/loss on disposal of fixed assets	(27)	7

5          Staff numbers and costs

Group

The average monthly number of persons employed by the Group during the year, including Directors is analysed by category as follows:

	Number of employees
	2013	2012
Operational	278	236
Administration, sales and marketing	443	376
	721	612

The aggregate payroll costs of these persons were as follows:

	2013	2012
	£000	£000
Wages and salaries	42,440	34,403
Share based payments	690	725
Social security costs	3,918	3,389
Other pension costs	856	649
	47,904	39,166

6          Net financing costs

	2013	2012
	£000	£000
Financial income
Interest on short term deposits	18	3
	18	3
Financial expenses
Interest payable on bank loans and overdrafts	(791)	(832)
Interest capitalised within the construction of intangible assets	-	103
Amortisation of deal fees on term loans	(129)	(113)
Contingent consideration finance expense (see below)	(167)	(208)
	(1,087)	(1,050)

Contingent consideration related to the acquisition of subsidiary undertakings has been discounted to present value.

The contingent consideration finance expense of £167,000 (2012: £208,000) relates to the acquisitions of iSEC Partners Inc, Matasano Security LLC and Intrepidus Group, Inc.  The unwinding of the discount on contingent consideration has been treated as a finance expense and is analysed in the table below:

Contingent consideration finance expense			2013	2012
			£000	£000
SDLC			-	41
iSEC Partners Inc			12	135
Escrow Associates LLC			-	26
Axzona			-	6
Matasano Security LLC			88	-
Intrepidus Group, Inc			67	-
			167	208

The discount rate used was 3% (2012: 3%).

The total net present value of the contingent consideration as at 31 May is shown in the following table:

Contingent consideration			2013	2012
			£000	£000
Matasano Security LLC			4,184	-
Intrepidus			2,758	-
iSEC Partners Inc			-	2,582
Escrow Associates			-	911
Axzona Limited			-	250
			6,942	3,743

Current liabilities includes £2,177,000 (2012: £3,493,000) in respect of contingent considerations (see note 16).

7          Taxation

Recognised in the income statement

		2013	2012
		£000	£000
Current tax expense
Current year		4,499	2,308
Adjustment to tax expense in respect of prior periods		(61)	86
Foreign tax		625	1,711
Total current tax		5,063	4,105
Deferred tax (note 15)		(789)	(1,148)
Tax in income statement		4,274	2,957

Reconciliation of effective tax rate

		2013	2012
		£000	£000
Profit before taxation		18,758	10,572
Current tax using the UK corporation tax rate of 23.83% (2012: 25.67%)		4,470	2,714
Effects of:
Items not (taxable)/deductible for tax purposes		(57)	(171))
Adjustment to tax charge in respect of prior periods		(354)	118
Differences between overseas tax rates		122	232
Movements in temporary differences not recognised		71	51
Effect of rate change		22	13
Total tax expense		4,274	2,957

Current and deferred tax recognised directly in equity was a charge of £402,000 (2012: £62,000).

A reduction in the UK corporation tax rate from 26% to 25% (effective from 1 April 2012) was substantively enacted on 5 July 2011, and further reductions to 24% (effective from 1 April 2012) and 23% (effective from 1 April 2013) were substantively enacted on 26 March 2012 and 3 July 2012 respectively.  This will reduce the Company's future current tax charge accordingly.  The deferred tax liability at 31 May 2013 has been calculated based on the rate of 23% substantively enacted at the balance sheet date.

The March 2013 Budget announced that the rate will further reduce to 20% by 2015 in addition to the planned reduction to 21% by 2014 previously announced in the December 2012 Autumn Statement.  It is not anticipated that the further 3% rate reduction will have a material impact on the Group's deferred tax asset/liability.

8          Dividends

On the 18 December 2012, NCC Group made a bonus issue of five ordinary shares for every one share held.  The comparative information provided in the table below has been restated to present the dividend per share had the bonus issue taken place prior to 31 May 2012.

		(restated)
	2013 £000	2012 £000
Dividends paid and recognised in the year	5,830	4,778
Dividends proposed but not recognised in the year	4,400	3,796
Dividends per share paid and recognised in the year	2.81p	2.33p
Dividends per share proposed but not recognised in the year	2.12p	1.83p

9          Earnings per share

The calculation of earnings per share is based on the following:

	2013	2013	2012	2012
	£000	£000	£000	£000
Profit for the year from continuing operations used for earnings per share		14,484		7,615
Amortisation of acquired intangible assets	3,612		3,726
Exceptional items (note 3)	(261)		7,111
Unwinding of discount (note 6)	167		208
Share based payments	760		946
Tax arising on the above items	(937)		(3,207)
				8,784
Adjusted profit from continuing operations used for adjusted earnings per share		17,825		16,399
				(restated)
		Number of shares		Number of shares
		000s		000s
Basic weighted average number of shares in issue		207,303		205,578
Dilutive effect of share options		4,132		4,986
Diluted weighted average shares in issue		211,435		210,564

On the 18 December 2012, NCC Group made a bonus issue of five ordinary shares for every one share held. The comparative information in the table above has therefore been restated.

The average market value of the Company's shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding.

10         Profit attributable to members of the parent company

The loss for the year dealt with in the accounts of the parent company was £319,000 (2012: profit, £535,000).

11         Intangible assets - Group

	Software	Development costs	Customer  contracts and relationships	Goodwill	Total
	£000	£000	£000	£000	£000
Cost:
At 1 June 2011	4,238	-	18,660	77,947	100,845
Acquisitions through business combinations	-	-	422	1,494	1,916
Other acquisitions - internally developed	3,306	354	-	-	3,660
Reclassification to plant and equipment	(300)	-	-	-	(300)
Effects of movements in exchange rates	-	-	296	888	1,184
Contingent consideration adjustment	-	-	-	(1,000)	(1,000)
At 31 May 2012	7,244	354	19,378	79,329	106,305
Acquisitions through business combinations	-	-	3,958	11,371	15,329
Other acquisitions - internally developed	-	2,895	-	-	2,895
Effects of movements in exchange rates	-	23	481	1,489	1,993
At 31 May 2013	7,244	3,272	23,817	92,189	126,522
Amortisation:
At 31 May 2011	154	-	6,932	-	7,086
Charge for year	259	-	3,467	-	3,726
Impairment loss	6,104	-	-	-	6,104
Effects of movements in exchange rates	-	-	(110)	-	(110)
At 31 May 2012	6,517	-	10,289	-	16,806
Charge for year	270	47	3,612	-	3,929
Effects of movements in exchange rates	-	-	107	-	107
At 31 May 2013	6,787	47	14,008	-	20,842
Net book value:
At 31 May 2013	457	3,225	9,809	92,189	105,680
At 31 May 2012	727	354	9,089	79,329	89,499

As detailed in note 6, additions during the year ended 31 May 2013 include £Nil of capitalised borrowing costs (2012: £103,000).

The remaining useful economic life of customer contracts and relationships is between 1 and 8 years.

The Group has made two acquisitions in the year, details of which are included in note 14.

The Company has no intangible assets.

For the purpose of impairment testing, goodwill has been allocated to the Group's three operating divisions, which are also operating segments, as these represent the lowest level at which goodwill is monitored for internal management purposes.

Goodwill considered significant in comparison to the Group's total carrying amount of such assets have been allocated to cash generating units for the purposes of impairment testing as follows:

		Goodwill
		2013	2012
Cash generating units		£000	£000
Escrow		22,871	22,871
Escrow Europe		7,071	6,653
Escrow USA		7,045	6,831
Total Group Escrow		36,987	36,355
Assurance Testing		47,312	35,084
Web performance		7,890	7,890
Total Assurance Testing		55,202	42,974
Artemis		-	-
Total		92,189	79,329

When assessing impairment, the recoverable amount of each CGU is based on value in use calculations.  These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax market discount rate.

Cash flow projections are based on the Group's current two-year plan.  Beyond the two-year plan these projections are extrapolated using an estimated long-term growth rate of 1%-2.5% (2012: 1%-2.5%) depending on the CGU.  The growth rates used have been determined as the lower of the nominal GDP rates for the country in which the CGU is based and the long term compound annual growth rate in EBITDA estimated by management.

The discount rates used have been based on management's calculation of the weighted average cost of capital using the capital asset pricing model to calculate the cost of equity.  A range of alpha factors were used to reflect the risk of the cash generating units.

The discount rate has been revised for each CGU to reflect the latest market assumptions for the risk-free rate, the Equity Risk Premium and the net cost of debt. Pre-tax market discount rates of 10.2% - 14.7% have been used in discounting the projected cash flows (2012:10.1% - 14.3%.)

The Directors do not believe that a reasonably possible change of assumptions would cause the recoverable amounts to fall below book value for any of the cash generating units.

12         Plant and equipment - Group

	Computer equipment	Plant and equipment	Fixtures and fittings	Motor vehicles	Total
	£000	£000	£000	£000	£000
Cost:
At 1 June 2012	6,977	410	2,823	230	10,440
Additions	1,720	-	1,837	63	3,620
Acquisition of Group Companies	5	-	-	-	5
Transfer from intangible assets	300	-	-	-	300
Disposals	(21)	-	(21)	(100)	(142)
Movement in foreign exchange rates	5	-	11	-	16
At 31 May 2012	8,986	410	4,650	193	14,239
Additions	1,136	-	717	154	2,007
Disposals	-	-	-	(37)	(37)
Movement in foreign exchange rates	15	-	20	-	35
At 31 May 2013	10,137	410	5,387	310	16,244
Depreciation:
At 1 June 2012	5,940	402	1,293	50	7,685
Charge for year	1,054	8	460	52	1,574
Disposals	(15)	-	(24)	(40)	(79)
Movement in foreign exchange rates	(4)	-	(5)	-	(9)
At 31 May 2012	6,975	410	1,724	62	9,171
Charge for year	1,342	-	573	49	1,964
Disposals	-	-	-	(31)	(31)
Movement in foreign exchange rates	6	-	3	-	9
At 31 May 2013	8,323	410	2,300	80	11,113
Net book value:
At 31 May 2013	1,814	-	3,087	230	5,131
At 31 May 2012	2,011	-	2,926	131	5,068

The company has no plant and equipment.

13         Trade and other receivables

	Group	Group	Company	Company
	2013	2012	2013	2012
	£000	£000	£003	£000
Trade receivables	16,598	14,280	-	-
Prepayments and accrued income	7,876	7,067	-	80
Amounts owed by group undertakings	-	-	2,499	-
	24,474	21,347	2,499	80

14         Acquisitions

On 1 August 2012 the Group acquired 100% of the partnership interests of Matasano Security LLC for a maximum consideration of £8.1m, of which up to a maximum of £4.3m 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 July 2013 and 31 July 2014.  The contingent consideration is expected to be paid in November 2013 and November 2014.

The acquisition had the following effect on the Group's assets and liabilities:

			Fair values
			£000
Acquiree's identifiable net assets at the acquisition date:
Plant and equipment			-
Trade and other receivables			460
Cash			38
Creditors & accruals			(363)
Current tax liability			(120)
Deferred tax liability			-
Intangible assets purchased			2,163
Net identifiable assets			2,178
Goodwill on acquisition			5,694
Expected consideration to be paid			7,872
Less purchase consideration withheld			(3,922)
Net cash outflow			3,950
Cash acquired			(38)
Net cash outflow excluding cash acquired			3,912

The trade receivables comprise gross contractual amounts due of £447,000. None of the receivables have been impaired and the full contractual amounts have been collected.

Goodwill of £5.7m has arisen on the acquisition because the purchase price exceeds the fair value of the separately identifiable net assets, liabilities and contingent liabilities acquired. Goodwill represents synergies, business processes and the assembled value of the work force including industry specific knowledge and technical skills.  The goodwill is expected to be deductible for tax purposes

During the period from acquisition, the Company contributed £3,346,000 to Group revenues. . It is not practical to separately disclose the Company's profits post acquisition due to its integration into the Group's Assurance Division.  It is not practical to disclose what the contribution to Group revenue and profits would have been had the acquisition of Matasano Security Services LLC been completed on the first day of the current period, as financial information was not prepared on an IFRS basis prior to acquisition.

Contingent consideration

As noted above, as part of the sale and purchase agreement, a contingent consideration was agreed of up to a maximum of £4.3m which is withheld subject to the achievement of performance criteria specified in the purchase agreement and is based on profit growth forecasts and market multiples. The Group has included £4.1m as contingent consideration which represents its fair value at the acquisition date, using a discount rate of 3%. At 31 May 2013 there have been no adjustments to this fair value.

On 17 August 2012 the Group acquired 100% of the share capital of Intrepidus Group Inc. for a maximum consideration of £7.1m, of which up to a maximum of £3.5m 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 August 2013 and 31 August 2014.  The contingent consideration is expected to be paid in December 2013 and December 2014.

The acquisition had the following effect on the Group's assets and liabilities:

			Fair values
			£000
Acquiree's identifiable net assets at the acquisition date:
Plant and equipment			-
Trade and other receivables			186
Cash			184
Creditors & accruals			(328)
Deferred tax liability			(718)
Intangible assets purchased			1,795
Net identifiable assets			1,119
Goodwill on acquisition			5,677
Expected consideration to be paid			6,796
Less purchase consideration withheld			(3,525)
Net cash outflow			3,271
Cash acquired			(184)
Net cash outflow excluding cash acquired			3,087

The trade receivables comprise gross contractual amounts due of £185,000. None of the receivables have been impaired and the full contractual amounts have been collected.

Goodwill of £5.7m has arisen on the acquisition because the purchase price exceeds the fair value of the separately identifiable net assets, liabilities and contingent liabilities acquired.  Goodwill represents synergies, business processes and the assembled value of the work force including industry specific knowledge and technical skills.  The goodwill is not expected to be deductible for tax purposes.

During the period from acquisition, the Company contributed £1,337,000 to Group revenue. It is not practical to separately disclose the Company's profits post acquisition due to its integration into the Group's Assurance Division. It is not practical to disclose what the contribution to Group revenue and profits would have been had the acquisition of Intrepidus Group Inc. been completed on the first day of the current period, as financial information was not prepared on an IFRS basis prior to acquisition.

Contingent consideration

As noted above, as part of the sale and purchase agreement, a contingent consideration was agreed of up to a maximum of £3.5m which is withheld subject to the achievement of performance criteria specified in the purchase agreement and is based on profit growth forecasts and market multiples.

Due to the inherentuncertainties in deriving forecasts the level of contingent consideration is reassessed at each reporting date to reflect revisions to forecasts or differences between forecast and actual performance.  As a result, as at 31 May 2013 the contingent consideration has been decreased to £2.4m to reflect the current estimate of its fair value, using a discount rate of 3%. The fair value adjustment of £1m is recognised within exceptional administration expenses (see note 3).

During the period, as a result of the acquisitions noted above, total acquisition related costs of £825,000 were incurred (see note 3).

During the period, £2.6m was paid in relation to the final settlement of the deferred consideration due on the acquisition of iSec partners LLC.

During the period, £856,000 was paid in relation to the final settlement of the deferred consideration due on the acquisition of Escrow Associates.

During the year, the Directors have reassessed the carrying value of the contingent consideration held in respect of Axzona Limited and as a result of this review the fair value of the contingent consideration has decreased to £Nil (2012: £250,000) as it is now considered unlikely that the final payment due in August 2013 will be paid.  The fair value adjustment is recognised within exceptional administration expenses (see note 3).

15         Deferred tax assets and liabilities

Group

Recognised deferred tax assets and liabilities are attributable to the following:

	Assets		Liabilities		Net
	2013	2012	2013	2012	2013	2012
	£000	£000	£000	£000	£000	£000
Plant and equipment	304	183	-	-	304	183
Short term temporary differences	266	169	-	-	266	169
Intangible assets	-	796	(225)	(946)	(225)	(150)
Share based payments	417	765	-	-	417	765
Tax losses	-	30	-	-	-	30
Tax deductible goodwill	-	-	(823)	(397)	(823)	(397)
Deferred tax asset/(liability)	987	1,943	(1,048)	(1,343)	(61)	600

Movement in deferred tax during the year:

		1 June 2012	Recognised in income	Recognised in equity	Acquisitions	31 May 2013
		£000	£000	£000	£000	£000
Plant and equipment		183	121	-	-	304
Short term temporary differences		169	97	-	-	266
Intangible assets		(150)	643	-	(718)	(225)
Share based payments		765	384	(732)	-	417
Tax losses		30	(30)	-	-	-
Tax deductible goodwill		(397)	(426)	-	-	(823)
		600	789	(732)	(718)	(61)

		1 June 2011	Recognised in income	Recognised in equity	Acquisitions	31 May 2012
		£000	£000	£000	£000	£000
Plant and equipment		335	(152)	-	-	183
Short term temporary differences		35	134	-	-	169
Intangible assets		(1,183)	1,151	-	(118)	(150)
Share based payments		549	278	(62)	-	765
Tax losses		-	30	-	-	30
Tax deductible goodwill		(104)	(293)	-	-	(397)
		(368)	1,148	(62)	(118)	600

The Company has deferred tax assets related to share based payments of £138,000 (2012: £252,000).

The Group has not recognised a deferred tax asset on non UK losses of £375,000 (2012: £101,000) due to the uncertainty over recoverability. These tax losses do not expire.

The Group has an unrecognised deferred tax liability of £Nil (2012: £800,000) which would only arise in the event of the sale of the shares or assets in NCC Group Inc. 

As at 31 May 2013, the temporary differences arising from un-remitted earnings of overseas subsidiaries was £477,000 (2012: £2,486,000). No material tax charges are expected to arise if they were to be distributed and therefore a deferred tax liability in respect of unremitted earnings has not been recognised.

16         Trade and other payables

	Group	Group	Company	Company
	2013	2012	2013	2012
	£000	£000	£000	£000
Trade payables	2,944	2,630	-	-
Amounts owed to Group undertakings	-	-	-	23
Contingent consideration on acquisitions	2,177	3,493	-	-
Non trade payables	4,251	2,960	-	-
Accruals	5,359	6,003	-	-
	14,731	15,086	-	23

17         Deferred revenue

	Group	Group	Company	Company
	2013	2012	2013	2012
	£000	£000	£000	£000
Deferred revenue	16,847	15,926	-	-
	16,847	15,926	-	-

Deferred revenue of £12,084,000 (2012: £11,662,000) mainly consists of Escrow agreement revenue that has been deferred to be released to the income statement over the contract term in accordance with the group's accounting policy.

Deferred revenue of £3,252,000 (2012: £4,264,000) consists of website monitoring and load testing agreement revenue that has been deferred to be released to the income statement over the contract term in accordance with the group's accounting policy.  The remaining deferred revenue of £1,511,000 (2012: £Nil) relates to Assurance revenue.

18         Non-current liabilities

	Group	Group	Company	Company
	2013	2012	2013	2012
	£000	£000	£000	£000
Secured bank loan	30,080	28,257	-	-
Issue costs	(357)	(220)	-	-
Amortisation of issue costs	129	112	-	-
Interest bearing loans	29,852	28,149	-	-
Deferred tax (note 15)	1,048	1,343	-	-
Contingent consideration                                                             on acquisitions (note 6)	4,765	250	-	-
Other financial liabilities	577	579	-	-
Total non current liabilities	36,242	30,321	-	-

 

For more information about the contractual terms of the Groups interesting bearing secured bank loan, which is measured at amortised cost, see note 20.

Other financial liabilities of £577,000 relates to the balance of a rent free period (2012: £579,000) which is released to the income statement over the term of the lease.

19          Provisions

	Remedial costs
	£000
At 1 June 2012
Current	904
Non-current	-
Utilised during the year	(685)
Reversed during the year (see note 3)	(219)
At 31 May 2013	-
Analysed as:
Current	-
Non-current	-

Remedial costs related to the costs expected to be incurred as a result of the termination of the Group's planned IT system implementation and transfer of operations to its previous IT system.

20         Related party transactions

The Group's key management personnel comprises the Directors of the Group.  The Group and Company's transactions with those Directors are disclosed in the Directors' Remuneration Report.

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 £295,000 (2012: £90,500) with Rickitt Mitchell and Partners Limited.  Included within the charge is £230,000 relating to advice received in connection with the acquisitions made during the year ended 31 May 2013.   Rickitt Mitchell and Partners Limited provide an outsourced acquisition service which facilitates the delivery of acquisition targets which have been identified and approved by the board.

The remaining £65,000 relates to the services of the Non Executive Chairman.  Rickitt Mitchell and Partners Limited also held 1,179,600 1.0p ordinary shares (2012: 1,179,600).

21 Principal risks and uncertainties

The Group faces operational risks and uncertainties which the directors take all reasonable steps possible to mitigate, however the Directors recognise that they can never be eliminated completely.

The principal operational risks and uncertainties the Group faces include those in relation to the recruitment of additional staff to meet the Group's ambitious growth plans, the entry of a significant competitor to threaten the Group's leading position in its domestic Escrow market, the occurrence of unforeseen difficulties in the integration of future acquisitions the Group may enter into and the dependence on key executives and senior managers.

There are no persons with whom the Company has contractual or other arrangements that are deemed to be essential to the Group.

 

END

 

 

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