18th Jul 2006 07:01
NCC Group PLC18 July 2006 18 July 2006 NCC Group pre tax profits up 44% NCC Group plc (AIM: NCC), a provider of Escrow Solutions, Testing Solutions andConsultancy, operating predominately in the UK and Europe, published itspreliminary results for the year ended 31 May 2006 today. Financial Highlights • Group revenue up by 15% to £20.7m (2005: £18.0m) • Escrow Solutions UK revenue up by 21% to £9.8m • Testing Solutions revenue up by 31% to £5.7m • Consultancy revenue down by 13% to £4.7m • Group IFRS operating profits up by 15% to £6.6m (2005: £5.8m) • Underlying Group operating profits* up by 23% to £7.5m (2005: £6.1m) • Escrow Solutions UK operating profits up by 27% to £6.1m • Testing Solutions operating profits up by 34% to £1.3m • Consultancy operating profits down by 36% to £0.6m • Group operating margins at 32% (2005: 32%) • Group pre tax profits up by 44% to £6.6m (2005: £4.6m) • Basic earnings per share up 37% to 14.0p (2005: 10.2p) • Final dividend proposed of 2.50p giving a total dividend of 3.50p, up 40% • Net cash positive at £1.3m (2005: £0.0m) • Annual UK renewals up to £8.1m (2006: £7.1m) Operational Highlights • Strong UK performance with operating profits growing by 21% to £6.9m (2005: £5.7m) • UK margins up at 34.1% (2005: 31.8%) • Two acquisitions in the US completed on 29 December 2005 and 7 July 2006 for a combined $6.5m (£3.7m) provides additional $1.4m (£0.8m) renewals base • £0.5m investment in German Escrow Solutions business completed *Underlying Group operating profits is Group UK GAAP operating profits excludingthe 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 demandingtrading conditions for parts of the business, particularly in the first half ofthe year. "Our Escrow solutions businesses, both in the UK and the recently acquired USoperations, are firmly established, providing us with extremely strong forwardearnings visibility and robust margins whilst our two largest testing operations- verification and penetration - are showing strong growth. "We are starting the current financial year with over £11.4m of orders andrenewals despite this being the weakest trading quarter." Enquiries: NCC Group (www.nccgroup.com) 0161 209 5200 Rob Cotton, Chief Executive Paul Edwards, Group Finance DirectorCollege 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 itsstrongest set of results yet. But, in delivering these, the Group has seen,confronted and overcome some of the most demanding trading times for parts ofthe business, as indicated at the half year. Overall, the Group delivered a 15% growth in revenue as it increased to £20.7m,from £18.0m in 2005. The growth in revenue led to a 15% growth in operatingprofits, which grew from £5.8m to £6.6m. The statutory accounts have been produced in accordance with IFRS, but if theyhad been produced under UK GAAP, the growth in operating profits would have beenover 17% as the Group has a charge of £0.5m in respect of share schemes.Additionally, when the Group excludes the £0.5m investment made into its GermanEscrow Solutions business in the last 12 months, the increase is over 26%. NCC Group continued to generate strong margins, with its operating margin being32% (2005: 32%) after the investment in Germany. If this investment is excludedthe margin would have improved to over 34%. Diluted earnings per share are up 36% to 13.6p per share (2005: 10.0p.) and theBoard is proposing a final dividend of 2.50p per share, which with an interim of1.0p per share, is a 40% increase on the previous year. NCC Group completed its first acquisition in December, which was a wellestablished US based Escrow Solutions provider based in San Jose, California fora total consideration of up to $5m (£2.9m). In early July this year the Groupsuccessfully completed a second acquisition of a smaller Escrow Solutionsprovider in the same region for a total consideration up to $1.5m (£0.8m). Both deals were funded from cash reserves and NCC Group was still £1.3m net cashpositive at the year end. Operating cash flow was 110% of operating profits. Financial review NCC Group revenue for the year to 30 May 2006 grew by 15% to £20.7m (2005:£18.0m). The split of revenue has changed with the Escrow Solutions divisionaccounting for 50% of revenue (2005: 46%), Testing Solutions 28% (2005: 24%) andConsultancy now the smallest division, accounting for 22% of revenue (2005:30%). The geographical split of revenue has marginally changed. However, the vastmajority of the revenue is still contributed by the UK at £17.7m (2005: £15.8m)or 85% (2005: 88%) of total revenue. Revenue from the rest of the world was£1.8m, an increase of 65% from 2005, with Europe contributing £1.3m (2005:£1.1m). Following the US acquisition in December 2005 and investment in the Germanbusiness, Escrow Solutions increased its revenue for the year by 26% to £10.4mfrom £8.2m in 2005. In line with prior years and supported by the US acquisition the Group'sperformance was better in the second half year than the first, 47% of revenuewas delivered in the first half (2005: 47%) and 53% in the second half (2005:53%). Currency fluctuations had no material impact on the Group's results. Group operating profit increased 15% to £6.6m from £5.8m in 2005. The operatingprofit margin remained constant at 32% (2005: 32%) but this was a significantincrease from 27% at the time of the interim results. The table below analyses the effect on Group operating profit of the investmentsmade in the US and German Escrow Solutions business. Both investments performedin line with expectations. The UK performance supported these investments with strong operating profitgrowth of 21% to £6.9m (2005: £5.7m) and an increase in operating margin of 34%(2005: 32%). £000's UK US Germany 2006 Group UK US Germany 2005 Group Revenue 20,193 371 183 20,747 17,831 - 140 17,971Operating 6,889 131 (384) 6,636 5,674 - 115 5,789profit/(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 employeebased share options of £0.5m (2005: £0.3m). The Board anticipates that thischarge will increase by £0.2m, if the proposed additional equivalent LTIPschemes are adopted in 2006/07. Excluding the £0.5m investment in the German operation, the £0.2m contributionfrom the US acquisition and the impact of IFRS, Group underlying operatingprofit would have been up 23% to £7.5m (2005: £6.1m) and margin to over 37%. The half year split of Group operating profit at 40:60 (2005: 45:55) was moremarked than the split of revenue following the re-alignment of the Consultancybusiness which delivered a much stronger second half. The Group's pre-tax profit was up 44% to £6.6m (2005: £4.6m). The Group's tax charge is 30.4% (2005: 30.3%) marginally above the standard UKrate 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 fullydiluted earning per share increased 36% to 13.6p (2005: 10.0p). In line with the continuing progressive dividend policy, the Board isrecommending a final dividend of 2.5p per ordinary share, making the total 3.5pfor the year. This represents cover of 4.0 times (2005: 4.1 times) based onbasic earnings. If approved at the Annual General Meeting, the dividend will bepaid on 29 September 2006 to shareholders on the register at 30 August 2006. Theex-dividend date will be 29 August 2006. Shareholder funds at the end of the year were £28.2m (2005: £23.9). The Group remains highly cash generative with operating cash flow beforeinterest and tax of £7.3m (2005: £7.6m) despite meeting the cost of theacquisition out of cash reserves. This is 110% of operating profit beforeinterest and tax (2005: 132%). Debtor days increased to 51 (2005: 45) duemainly to a greater balance of revenue invoiced in May 2006 in comparison withMay 2005. The Group ended the year with net cash of £1.3m (2005: £0.0m) even following theacquisition of the US based Escrow business which was financed from cashreserves. Capital expenditure remained constant at £0.8m (2005: £0.8m) and is likely tocontinue at a similar level going in to the new financial year. This reflectsthe continued growth of the business including the investment in establishingthe 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 realbenefit in all economic climates. NCC Group continues to encourage its clientsto reach the correct level of protection and encouragingly, the Group is seeinga good increase in their levels of risk awareness. Apart from customers taking on more escrow agreements, many are now includingVerification Testing as part of their minimum standard. At present one in tennew agreements are being ordered with Verification Testing and NCC Group isseeing 40% of verifications being repeated on an annual basis. Penetration Testing has seen, and will continue to see, strong growth. Hackingis "big business" with organised crime focussing on it as the rewards foridentity theft, banking and online frauds have continued to increase. There is a stigma for businesses in admitting to security breaches, as it isseen as a weakness. More alarmingly large scale fraud often simply goesundetected. The full impact of fraud and loss caused by hackers has never beencalculated or disclosed, nor is it likely to be. Even when two hackers wererecently arrested on suspicion of defrauding British business of £50m, it wasnot extensively reported by the media. Increasingly common is the fraud and theft of corporate information by employeesor temporary workers. The temporary worker is rarely checked or vetted but isoften afforded extensive levels of access to corporate networks. The increasein employee "plants" and security breaches within an organisation has beenexacerbated by the ease with which criminals can now sell the information theysteal. The proliferation of black market auction web sites has provided an easy way tobuy and sell hacking tools, bank details and individuals' personal identities.These sites rate and score the quality and integrity of the buyers and sellersin the same way as eBay. The most commonly advertised items are blocks ofstolen 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 theGroup takes every step to keep up with the real hackers. The Specialist Testing business continues to see the results of the good work ofthe last two years as it experiences strong consistent growth, due to the goodfit of its products and services with customer needs. NCC Group aims to ensureperformance and capability issues for customers are fully resolved prior to anylaunch or upgrade in to the market. The current day rate market is best described as "normally competitive." Thisposition is much better than last year when NCC Group started to see a downshiftin orders for its day rate businesses which lasted until early October forTesting Solutions and through to the start of 2006 for the Consultancy business. There is still a trend towards "over procurement" of public and local authorityconsultancy assignments. Work which should be awarded without a tender is nowbeing fully tendered, often just adding an inappropriate and burdensome stage tothe process. Whilst NCC Group strongly supports the value for money approach that effectiveprocurement 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 anysavings 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 theothers and each is run by an autonomous management team. There is no focus oncross selling, other than by the Escrow Solutions account management teams forVerification Testing. Each business unit is responsible for setting and, after Board approval,delivering its own plans, with each area being tasked with generating organicgrowth. Escrow Solutions The UK Escrow Solutions business is the cornerstone of the Group. NCC Group hasexperienced good growth in all its key performance measures of profitability,new contracts and beneficiaries, renewals and sales opportunities forVerification Testing. Profitability in the UK grew to £6.1m, an increase of 27% on revenue of £9.8m,up over 21%. UK contract renewals, which represented £7.1m in the year,benefited from improvements in the termination process. Contract terminations were less than 10% in the year and below 11% for agreementbeneficiaries. This is an improvement of at least 1% on the previous financialyear and still considerably below the 13% the Board uses as a guideline and safeplanning assumption. The beneficiary base has now grown to over 13,500 and the number of contracts isnow at nearly 7,000. On average, each customer now is a party to over twoagreements. The level of Escrow Solutions contract terminations has fallen to a record lowof less than 10%. This is the result of continued improvements to thetermination process. This coupled with the addition of the US acquisition hasresulted in contract renewals ending the year at £7.5m. The rate of agreement completions, renewals and terminations in the year to May2006 have been such that NCC Group is forecasting UK renewals for 2006/07 to be£8.1m. Testing Solutions Testing Solutions profitability grew to £1.3m in 2006, an increase of 34%, withrevenue growth of 31% to £5.7m. The business unit has seen very strong growthin each of the three testing areas as testing and the importance of riskmitigation moves further up the corporate agenda. Penetration Testing growingby 43% and both Verification Testing and Specialist Testing increasing revenueby over 20%. NCC Group carried out over 750 penetration tests in the last twelve months, agrowth of 43%. It now employs more testers than ever before, 15. In additionto new contracts and clients, the Group is also seeing a move to regular repeattesting, such that now it anticipates a repeat rate of at least 40%. The Escrow Solutions business is responsible for generating the sales leads forthe Full Verification Testing service, which is currently the Group's secondbiggest testing area. Once the lead is generated, it is the role of theverification consultants to deliver the verification in association with boththe owner of the application and the licensee. At present NCC Group expects onein ten new agreements to take a full verification and 40% verifications to berepeated again the following year. During the year the Group performed over 320verifications, a 34% increase on the prior year. Specialist Testing has had an exceptionally strong year as it has broadened bothits product appeal and client base. The performance of Specialist Testing inthe last 24 months has shown that the business is robust, consistent and a goodreliable contributor to Group profitability. This year saw the highest everlevels of revenue, profitability, utilisation and an overall strengthening ofthe day rate. Consultancy Consultancy revenue fell by 14% to £4.7m due to a very difficult year. Thefirst six months reported a small loss, but from January onwards, NCC Group sawa return to a more normal level of trading. Utilisation levels returned to the80% mark and with careful cost control and the selective use of flexibleresources, the Group generated a profit of £0.7m in the second half of the yearwhich was stronger than the prior half year by over 20%, despite there being a16% decline in revenue. Operating profits for the year were down by 36% to£0.6m. Consultancy remains an integral part of what NCC Group does and responded verywell to the challenges it faced. International developments In December 2005 the Group acquired the assets and renewals base of a top fiveUS escrow provider for a consideration of up to $5m (£2.9m). On 6 July 2006 NCCGroup completed the acquisition of the assets and renewals base of SourceHarbor, a small US escrow provider, for a consideration not exceeding $1.5m(£0.8m). These acquisitions provide the Group with a renewals base of over$1.4m (£0.8m) and give it a good initial foothold in to the US market. The Group will now develop an account management model to focus on maximisingits potential with the customer base it has acquired. The Board plans to lookfor bolt on acquisitions to underpin the business, whilst growing organically. Although, it is still too early to be definitive, NCC Group aims to invest inthese businesses at a level which will maintain a contribution from them whichis no lower than the current return. The potential for growth is considerable,particularly as there is currently no Verification Testing sold by thebusinesses. In Germany, NCC Group now has the infrastructure, systems and people in place tostart making inroads in to the market, having invested £0.5m. NCC Group currently has eight trained account managers and have high hopes ofbeing able to sell as effectively as in the UK, by way of a similar accountmanagement model. A small facility for additional testing resources in Argentina has also beenestablished in June 2006. Employees, recruitment and retention Recruitment and retention remains the biggest obstacle to growth for a peoplebusiness such as NCC Group. The Group employs 221 staff, similar to last yearbut a different mix. With the difficult first half of the year, consultancyfell in size through natural wastage and redeployment in to other areas of thebusiness. The main focus for recruitment is on Escrow Solutions, where NCC Group needsaccount managers of the highest quality and potential. A process for graduaterecruitment 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 isreviewing the options to develop a more substantial second location so as torecruit from an alternative resource pool. Whilst there are no definite plansas to its location, this will further enable NCC Group to meet our ambitiousgrowth plans. The Group remains committed to Manchester as the right locationfor Head Office and will continue to develop both people and infrastructurethere. Current trading and outlook The Board is committed to continuing its investment in people to deliver organicgrowth throughout the Group. This route has been a proven success and thesurest way to deliver the greatest returns. NCC Group will invest in appropriate carefully selected acquisitions, but theywill only be considered if they enhance the scale of its operations and arepriced to offer a suitable level of earnings enhancement. Despite the difficult conditions during the first half of last year, the Boardis confident in the Group's ability to deliver good growth. The start to thecurrent financial year sees Escrow renewals at £8.1m, up from £7.1m this timelast year. The Testing businesses order book improving to £1.6m from £1.5m withthe Consultancy business standing at £1.7m up from £1.3m last year. The outlook for NCC Group remains good. Consolidated income statementFor the year ended 31 May 2006 Notes 2006 2005 £000 £000 Revenue 2 20,747 17,971Cost 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 5,789Amortisation of intangible assets (47) -Total administrative expenses (3,464) (2,767) Operating profit 2 6,636 5,789 Financial income 6 175 162Financial 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 4,556Taxation 7 (1,993) (1,379)Profit for the year 4,558 3,177 Attributable to equity holders of the parent company 4,558 3,177Profit for the year 4,558 3,177 Earnings per share 9Basic earnings per share 14.0p 10.2pDiluted earnings per share 13.6p 10.0p Group balance sheetAt 31 May 2006 Notes 2006 2005 £000 £000 £000 £000Non current assetsIntangible assets 10 30,420 27,401Property, plant and equipment 11 1,257 1,002Deferred tax assets 14 423 166Total non-current assets 32,100 28,569 Current assetsTrade and other receivables 12 4,840 3,595Cash and cash equivalents 5,139 5,103Total current assets 9,979 8,698 Total assets 42,079 37,267 EquityIssued capital 20 326 326Share premium 19,913 19,819Retained earnings 7,964 3,755Currency translation reserve 15 -Total equity attributable to equityholders of the parent 28,218 23,900 Minority interest 21 - (23)Total equity 28,218 23,877 Non current liabilitiesInterest bearing loans 17 2,689 3,882Other financial liabilities 123 137Total non current liabilities 2,812 4,019 Current liabilitiesInterest bearing loans 18 1,200 1,200Trade and other payables 15 2,750 2,563Deferred revenue 16 6,037 4,885Current tax payable 1,062 723Total current liabilities 11,049 9,371Total liabilities 13,861 13,390Total liabilities and equity 42,079 37,267 Group cash flow statementFor the year ended 31 May 2006 Notes 2006 2005 £000 £000Cash inflow from operating activitiesProfit for the year 4,558 3,177Adjustments for:Depreciation charge 550 354Share based charges 468 297Amortisation of intangible assets 47 -Net financing costs 85 1,233Profit on sale of property, plant and equipment (9) (11)Income tax expense 1,993 1,379Profit for the year before changes in working capital 7,692 6,429Increase in receivables (1,045) (142)Increase in payables 636 1,374Cash 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 activitiesInterest received 175 123Proceeds from the sale of plant and equipment 34 34Acquisition 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 activitiesProceeds from the issue of ordinary share capital - 19,826VAT recovered on fees relating to the issue of capital 94 -Proceeds from borrowings - 5,975Payment of bank loans (1,200) (12,875)Receipt on disposal of interest rate swap - 39Payment 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 4,278Effect 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 inaccordance with the accounting policies set out in the financial statements ofNCC Group Plc for the year ended 31 May 2006 which have remained unchanged fromthe financial year 2005. The financial information set out above does not constitute the Group'sstatutory accounts for the year ended 31 May 2006 or 2005, but is derived fromthose accounts. Statutory accounts for the year ended 31 May 2005 have beenfiled with the Registrar of companies. The statutory accounts for 2006 will bedelivered to the Registrar of Companies following the Company's Annual GeneralMeeting. The auditors have reported on those accounts; their reports wereunqualified and did not contain a statement under Section 237(2) or (3) of theCompanies Act 1985. When published, the Company's Annual Report and Accounts will be sent toshareholders and will be made available to the public at the Company'sregistered office, Manchester Technology Centre, Oxford Road, Manchester. M17EF The accounting policies set out below have, unless otherwise stated, beenapplied consistently to all periods presented in these group financialstatements and in preparing an opening IFRS balance sheet at 1 June 2004 for thepurposes of the transition to Adopted IFRS. Transition to Adopted IFRS The Group and the company are preparing their financial statements in accordancewith 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 reportedfinancial position, financial performance and cash flows of the Group isprovided in note 28. IFRS 1 grants certain exemptions from the full requirements of IFRS in thetransition period. The following exemptions have been taken in these financialstatements: • Business combinations - Business combinations that took place prior to 1 June 2004 have not been restated. • Cumulative translation differences - Cumulative translation differences for all foreign operations have been set to zero at 1 June 2004. Intangible Assets and Goodwill Subject to the transitional relief in IFRS 1, all business combinations areaccounted for by applying the purchase method. Goodwill represents amountsarising on acquisition of subsidiaries. In respect of business acquisitions thathave occurred since 1 June 2004, goodwill represents the difference between thecost of the acquisition and the fair value of the net identifiable assetsacquired. Identifiable intangibles are those which can be sold separately orwhich arise from legal rights regardless of whether those rights are separable. Goodwill is stated at cost less any accumulated impairment losses. Goodwill isallocated to cash-generating units being the subsidiary companies acquired andis not amortised but is tested annually for impairment. In respect of acquisitions prior to 1 June 2004, goodwill is included at 1 June2004 on the basis of its deemed cost, which represents the amount recorded underUK GAAP which was broadly comparable save that only separable intangibles wererecognised and goodwill was amortised. Other intangible assets that are acquired by the Group are stated at cost lessaccumulated amortisation. Amortisation is charged to the income statement on astraight line basis over the estimated useful lives of intangible assets unlesssuch lives are indefinite. Intangible assets with an indefinite useful life andgoodwill are systematically tested for impairment at each balance sheet date orwhenever there is an indication of impairment. Other intangibles are amortisedfrom the date they are available for use. Acquired customer contracts andrelationships are amortised over their estimated useful economic life of 20years. 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 overthe estimated useful lives of each part of an item of property, plant andequipment. 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 anindication. Revenue Recognition Revenue represents the invoiced value of goods and services provided during theperiod, excluding VAT. The results of partially completed contracts whetherfixed price or on a time and materials basis are dealt with on a percentagecompletion basis by including the profit or loss earned on work completed to thebalance sheet date. Provisions are made for any losses on uncompleted contractsexpected to be incurred after the balance sheet date. Maintenance and EscrowSolutions agreement revenue is recognised on a straight-line basis over the lifeof the related agreement. Foreign Currencies Transactions in foreign currencies are recorded using the rate of exchangeruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies are translated using the rate of exchangeruling at the balance sheet date and the gains or losses on translation areincluded in the income statement. The assets and liabilities are translated at the closing rate and incomestatements of overseas subsidiary undertakings are translated at the averageexchange rates. Gains and losses arising on these transactions are taken to thetranslation reserve, net of exchange differences arising on related foreigncurrency borrowings. They are released to the income statement upon disposal. The Group has taken advantage of relief available in IFRS 1 to deem thecumulative translation differences for all foreign operations to be zero at thedate of transition to IFRS (1 June 2004). Pension Benefits The Group operates a defined contribution pension scheme. The assets of thescheme are kept separately from those of the Group in an independentlyadministered fund. The amount charged as expense in the income statementrepresents the contributions payable to the scheme in respect of the accountingperiod. Share-Based Payment Transactions The share option programme allows Group employees to acquire shares of theultimate parent company; these awards are granted by the ultimate parent. Thefair value of options granted is recognised as an employee expense with acorresponding increase in equity. The fair value is measured at grant date andspread over the period during which the employees become unconditionallyentitled to the options. The fair value of the options granted is measured usingan option valuation model, taking into account the terms and conditions uponwhich the options were granted. The amount recognised as an expense is adjustedto reflect the actual number of share options that vest except where forfeitureis due only to share prices not achieving the threshold for vesting. Net Financing Costs Net financing costs comprise interest payable, interest receivable on fundsinvested, dividend income and foreign exchange gains and losses recognised inthe income statement. Interest income and interest payable is recognised in the income statement as itaccrues. Dividend income is recognised in the income statement on the date theentity's right to receive the payments is established. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Taxis recognised in the income statement except to the extent that it relates toitems 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, andany adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amountsof assets and liabilities for financial reporting purposes and the amounts usedfor taxation purposes. The following temporary differences are not providedfor: the initial recognition of goodwill; the initial recognition of assets orliabilities that affect neither accounting nor taxable profit other than in abusiness combination, and differences relating to investments in subsidiaries tothe extent that they will probably not reverse in the foreseeable future. Theamount of deferred tax provided is based on the expected manner of realisationor settlement of the carrying amount of assets and liabilities, using tax ratesenacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Adopted IFRS Not Yet Applied The following adopted IFRS were available for early adoption but have not beenapplied by the Group in these financial statements; International accounting standards (IFRS) Effective dateIFRS 7 Financial Instruments: Disclosures 1 January 2007IAS 1 Amendment - Presentation of financial statements: Capital 1 January 2007 Disclosures International Financial Reporting Interpretations Committee (IFRIC) Effective dateIFRIC 4 Determining when an arrangement is a lease 1 January 2006IFRIC 6 Liabilities arising from participating in a specific market - 1 December 2005 waste electrical and electronic equipmentIFRIC 8 Scope of IFRS 2 1 May 2006 The directors do not anticipate that the adoption of these standards andinterpretations or any of the other standards available for early adoption willhave a material impact on the Group's financial statements. Certain of thesestandards and interpretations will require additional disclosures over and abovethose currently included in these financial statements in the period of initialapplication. The Company has not adopted amendments to IAS 39 and IFRS4 in relation tofinancial guarantee contracts which will apply for the year ended 31 May 2006.Where the Company enters into financial guarantee contracts to guarantee theindebtedness of other companies within the Group, the Company considers these tobe insurance contracts and accounts for them as such. In this respect, theCompany treats the guarantee contract as a contingent liability until such atime as it becomes probable that the Company will be required to make paymentunder the guarantee. The Company does not expect the amendments to have anyimpact 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 impairmentlosses. Cash and Cash Equivalents Cash and cash equivalents, for the purpose of the cash flow statement andbalance sheet, comprises cash in hand and deposits repayable on demand lessoverdrafts 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 primaryreporting format for segment information. 2006 2005 £000 £000Revenue by business segmentEscrow Solutions (UK) 9,832 8,098Escrow Solutions (Germany) 183 140Escrow Solutions (US) 371 -Total Escrow Solutions 10,386 8,238Testing Solutions 5,704 4,352Consultancy 4,657 5,381Total external revenue 20,747 17,971 Operating profit by business segmentEscrow Solutions (UK) 6,065 4,765Escrow Solutions (Germany) (384) 115Escrow Solutions (US) 131 -Total Escrow Solutions 5,812 4,880Testing Solutions 1,300 972Consultancy 616 956Segment operating profit 7,728 6,808Head office costs (1,092) (1,019)Operating profit 6,636 5,789 Net assets / (liabilities) by business segmentEscrow Solutions (UK) (3,934) (3,688)Escrow Solutions (Germany) 100 -Escrow Solutions (US) 2,936 -Total Escrow Solutions (898) (3,688)Consultancy 723 280Testing Solutions 194 48Unallocated net assets 28,195 27,237Total net assets 28,214 23,877 Unallocated net assets consist of goodwill arising on consolidation, cash, taxpayable and other centrally held assets and liabilities. The table below provides additional disclosure on revenue by geographical marketwhere the customer is based. 2006 2005 £000 £000Revenue by geographical segmentUK 17,699 15,790Rest of Europe 1,275 1,104Rest of the World 1,773 1,077Total revenue 20,747 17,971 Net assets by geographical segmentUK 25,178 23,877Rest of Europe 100 -Rest of the World 2,936 -Total revenue 28,214 23,877 3. Float Related Finance Costs During the twelve months ended 31 May 2006, float related finance costs of £nil(2005: £861,000 relating to the repayment of debt financing following theGroup's listing on Aim) were written off to the income statement. 4. Expenses and Auditors' Remuneration 2006 2005 £000 £000Profit before taxation is stated after charging/(crediting): Auditors' remuneration:Group 29 26Company 1 1Non audit 9 15 Depreciation and other amounts written off tangible and intangiblefixed assets:Owned 550 354 Amortisation of intangible assets 47 -Exchange losses 10 -Operating lease rentals charged:Hire of plant and equipment 270 300Other operating leases 385 340Profit on disposal of fixed assets (9) (11) 5. Staff Numbers and Costs The average number of persons employed by the Group during the year, includingdirectors is analysed by category as follows: Number of employees 2006 2005 Operational 66 55Administration, sales and marketing 142 134 208 189 The aggregate payroll costs of these persons were as follows: 2006 2005 £000 £000 Wages and salaries 7,853 6,968Share based payments (note 19) 468 297Social security costs 912 827Other pension costs (note 24) 231 195 9,464 8,287 6. Net Finance Income 2006 2005 £000 £000Financial incomeInterest on short term deposits 175 123Profit on disposal of interest rate swap - 39 175 162 Financial expensesInterest payable on bank loans and overdrafts (253) (526)Amortisation of deal fees on term loans (7) (8) (260) (534) 7. Taxation Recognised in the Income Statement 2006 2005 £000 £000Current tax expenseCurrent year 2,151 1,483Adjustment to tax charge in respect of prior periods (16) (9)Foreign tax 5 -Total current tax 2,140 1,474Deferred tax (see note 14) (147) (95)Tax in income statement 1,993 1,379 Reconciliation of Effective Tax Rate 2006 2005 £000 £000 Profit before taxation 6,551 4,556Current tax using the UK corporation tax rate of 30% (2005: 30%) 1,965 1,367 Effects of:Expenses not deductible for tax purposes 37 20Depreciation in excess of capital allowances 26 6Other timing differences 128 90Adjustment to tax charge in respect of prior periods (16) (9)Total current tax 2,140 1,474 Deferred tax recognised directly in equity was £103,000 (2005: nil) 8. Dividends 2006 2005 £000 £000 Dividends paid and recognised in the year 897 245Dividends proposed but not recognised in the year 734 571 Dividends per share paid and recognised in the year 2.75p 0.75pDividends per share proposed but not recognised in the year 2.50p 1.75p 9. Earnings per Share The calculation of earnings per share is based on the following: 2006 2005 £000 £000 Profit for the year 4,558 3,177 Number of Number of Shares Shares 000's 000'sBasic weighted average number of shares in issue 32,604 31,292Dilutive effect of share options 800 472Diluted weighted average shares in issue 33,404 31,764 10. Intangible Fixed Assets Customer Goodwill arising on Purchased Total contracts and consolidation Goodwill relationships £000 £000 £000 £000CostAt 1 June 2004 - 27,401 - 27,401Additions - - - -At 31 May 2005 - 27,401 - 27,401Additions 2,250 - 816 3,066At 31 May 2006 2,250 27,401 816 30,467 AmortisationAt 31 May 2005 - - - -Charge for year 47 - - 47At 31 May 2006 47 - - 47 Net book valueAt 31 May 2006 2,203 27,401 816 30,420Net book valueAt 31 May 2005 - 27,401 - 27,401 11. Property, Plant and Equipment Computer Plant and Fixtures and Motor Total equipment equipment fittings vehicles £000 £000 £000 £000 £000CostAt 1 June 2004 1,249 117 126 130 1,622Additions 241 227 328 38 834Disposals (3) - - (65) (68)At 31 May 2005 1,487 344 454 103 2,388Additions 609 14 46 161 830Disposals - - - (67) (67)At 31 May 2006 2,096 358 500 197 3,151 DepreciationAt 1 June 2004 878 88 59 51 1,076Charge for year 222 42 63 27 354On disposals (1) - - (43) (44)At 31 May 2005 1,099 130 122 35 1,386Charge for year 343 63 111 33 550On disposals - - - (42) (42)At 31 May 2006 1,442 193 233 26 1,894Net book valueAt 31 May 2006 654 165 267 171 1,257Net book valueAt 31 May 2005 388 214 332 68 1,002 12. Trade and Other Receivables Group Group Company Company 2006 2005 2006 2005 £000 £000 £000 £000 Trade debtors 3,464 2,653 - -Amounts owed by group undertakings - - 165 205Prepayments 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 escrowdivision of Recall Total Information Management Inc for a maximum considerationof £2,946,000 of which £400,000 has been withheld subject to the achievement ofperformance criteria specified in the purchase agreement. The performanceconditions are required to be satisfied by 31 December 2006. The acquisition had the following effect on the Group's assets and liabilities. Acquiree's Fair value Acquisition book values Adjustments amounts £000 £000 £000Acquiree's net assets at the acquisitiondate:Property, plant and equipment 6 - 6Trade and other receivables 200 - 200Deferred revenue (308) - (308)Intangible assets purchased - 2,250 2,250 Net identifiable assets / (liabilities) (102) 2,250 2,148Goodwill on acquisition 798Maximum consideration to be paid 2,946Less purchase consideration withheld (400)Net cash outflow 2,546 Goodwill has arisen on the acquisition because the purchase price exceeds thevalue of the net assets acquired. From the date of acquisition the US Escrow Solutions acquisition contributedoperating profit of £131,000 and revenue of £371,000 to the Group consolidatedincome statement for the year ended 31 May 2006. If the acquisition had occurred at the beginning of the financial year, the prorata consolidated revenue and operating profit for the year ended 31 May 2006would have been approximately £21.3m and £6.8m respectively. 14. Deferred Tax Assets Recognised deferred tax assets Deferred tax assets are attributable to the following: Assets Liabilities Net 2006 2005 2006 2005 2006 2005 £000 £000 £000 £000 £000 £000Property, plant and 81 68 (7) - 74 68equipmentShort term timing 9 9 - - 9 9differencesShare based payments 333 89 - - 333 89Deferred Tax assets / 423 166 (7) - 416 166(liabilities) Movement in deferred tax during the year Recognised Recognised 1 June 2005 in income in equity 31 May 2006 £000 £000 £000 £000Property, plant and equipment 68 7 - 75Short term timing differences 9 - - 9Share based payments 89 140 103 332 166 147 103 416 Movement in deferred tax during the prior year Recognised Recognised 1 June 2004 in income in equity 31 May 2005 £000 £000 £000 £000 Property, plant and 64 4 - 68equipmentShort term timing 7 2 - 9differencesShare based payments - 89 - 89 71 95 - 166 15. Trade and Other Payables Group Group Company Company 2006 2005 2006 2005 £000 £000 £000 £000 Trade creditors 448 332 - -Amounts owed to group - - 646 90undertakingsInterest 33 52 33 52Other taxation and social 804 951 - -securityAccruals 1,465 1,228 15 - 2,750 2,563 694 142 16. Deferred Revenue Group Group Company Company 2005 2005 2006 2005 £000 £000 £000 £000 Deferred revenue 6,037 4,885 - - 6,037 4,885 - - Deferred revenue of £6,037,000 (2005: £4,885,000) consists of Escrow Solutionsagreement revenue and maintenance revenue that has been deferred to be releasedto the income statement over the contract term on a pro-rata basis. 17. Non Current Liabilities Group Group Company Company 2006 2005 2006 2005 £000 £000 £000 £000 Unsecured bank loan 2,700 3,900 2,700 3,900Total 2,700 3,900 2,700 3,900 Issue costs (26) (26) (26) (26)Amortisation of issue costs 15 8 15 8Net 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 forall operations. During the year ended 31 May 2006 the Group realised proceeds of£nil (2005: £39,000) on disposal of an interest rate swap, the proceeds areincluded within interest receivable. Interest Rate Risk The Group and Company finances its operations through a mixture of retainedprofits and bank borrowings. The Group borrows and invests surplus cash atfloating rates of interest based upon bank base rate. The financial assets of the Group at the end of the financial year were asfollows 2006 2005 £000 £000 Sterling denominated floating rate financial assets 4,723 4,992Euro denominated floating rate financial assets 58 111US 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 asfollows 2006 2005 £000 £000 Sterling denominated floating rate financial assets 5 512 5 512 The financial liabilities of the Group and Company and their maturity profile isas follows Floating rate Floating rate borrowings 2006 borrowings 2005Maturity £000 £000Less than 1 year 1,200 1,2001 to 2 years 1,200 1,2002 to 3 years 1,200 1,2003 to 4 years 289 1,2004 to 5 years - 282Sterling denominated floating rate financial 3,889 5,082liabilities As at 31 May 2006 the Group and Company had a committed undrawn and unsecuredrevolving credit facility of £6.1 million. Liquidity Risk The Group and Company's operations are cash generative. The Group and Companyconsiders that it has sufficient financial resources to meet its foreseeablerequirements. 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 exposuresrelating to trading activities. The Group and Company's financial instrumentsare 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 tosubscribe 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 performancecriteria. Options will vest if the average EPS growth for the 3 years to 31 May2007 is greater than 3% above RPI per annum. The options are to be settled inequity. Date of grant Expected term of options Exercise 2006 Number Exercisable between price outstanding July 2004 6 years July 2007 - July 2014 £1.70 964,412July 2005 6 years July 2008 - July 2015 £2.565 42,882 LTIP Scheme The vesting condition for the award of the July 2004 LTIP is average growth ofEBITA over the life of the LTIP. If average EBITA growth is above 25% theshares will vest fully. If growth is less than 10% no shares will vest and ifthe average EBITA growth is between 10% and 25% the shares vest on a straightline basis between the two percentages. The vesting condition for the award of the July 2005 LTIP is split 50:50 betweenTotal Shareholder Return (TSR) & EPS. The TSR condition compares the Group'sTSR performance over the 3 year performance period with the TSR performance ofthe constituent companies of the FTSE software and computer services index.Where the Group's TSR performance equates to median level in the comparatorgroup, 30% of the award governed by the TSR condition will vest. 100% of theaward governed by the TSR condition will vest for upper quartile performance orabove. Between these two points, vesting will be determined on a straight linebasis. The EPS condition governs the vesting of the remaining 50% of the LTIP award andrelates to the growth in the Group's EPS over the performance period. If growthis equal to 25% or more per annum then 100% of the award governed by the EPScondition will vest. If, however, growth is less than 10% per annum, none of theaward governed by the EPS condition will vest. Between these two points, vestingis 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* 169,118July 2005 3 years May 2008 - May 2009 nil* 261,761 \* The option exercise is nil however £1 is payable on each occasion of exercise. Sharesave Scheme The company operates a Sharesave scheme, which is available to all employees andfull time Executive Directors of the Company and its subsidiaries who haveworked for a qualifying period. All options are to be settled by equity. Under the scheme the following options have been granted and are outstanding atyear end. Date of Grant Expected term of Exercise 2006 Number options Exercisable between price outstanding July 2004 3.25 years September 2007 - February £1.36 291,803 2008 July 2005 3.25 years September 2008 - February £2.07 49,771 2009 The following table illustrates the number of share options for the schemes. Scheme Number of Instruments Options Expired / Number of instruments as granted during the exercised in Forfeitures instruments at 1 June 2004 year the year in the year as at 31 May 2005 Approved EMI scheme - 1,249,578 - (117,498) 1,132,080Sharesave scheme - 395,076 - (51,398) 343,678LTIP - 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) 964,412Approved EMI scheme - 42,882 - - 42,882Sharesave scheme 343,678 - - (51,875) 291,803Sharesave scheme - 56,357 - (6,586) 49,771LTIP 169,118 - - - 169,118LTIP - 261,761 - - 261,761 The fair value of services received in return for share options is calculatedwith reference to the fair value of the award on the date of grant. The fairvalue is spread over the period during which the employee becomesunconditionally entitled to the award, adjusted to reflect actual and expectedlevels of vesting. Black-Scholes, Binomial and Monte Carlo simulation modelshave been used to calculate the fair values of options on their grant date forall 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 LTIPGrant Date July 2004 July 2005 July 2004 July 2005 July 2004 Sept 2005 Sept 2005 Fair value at measurement date £0.71 £1.07 £0.68 £1.00 £1.59 £1.87 £2.27 Exercise price £1.70 £2.565 £1.36 £2.07 £nil* £nil* £nil*Expected volatility 44% 40% 44% 40% 44% 40% 40%Option expected term 6 Years 6 Years 3.25 Years 3.25 Years 3 Years 3 Years 3 YearsRisk-free interest rate 5.09% 5.09% 5.06% 5.06% 5.01% 5.01% 5.01% * The option exercise is nil however £1 is payable on each occasion of exercise. The expected volatility is based on the historic volatility (calculated based onthe weighted average remaining life of the share options), adjusted for anyexpected changes to future volatility due to publicly available information.Dividend yield assumed at the time of option grant is 2.3%. A charge of £468,000 (2005: £297,000) has been made to cost of sales in thegroup income statement in respect of share based payment transactions. A chargeof £146,000 (2005: £79,000) has been made to cost of sales in the company incomestatement in respect of share based payment transactions. 20. Called Up Share Capital Number of shares 2006 2005 £000 £000AuthorisedOrdinary shares of 1p each 50,000,000 500 500 500 500 Allotted, called up and fullypaidOrdinary shares of 1p each 32,604,185 326 326 326 326 21. Minority Interests 2006 2005 £000 £000At beginning of year (23) (23)Acquired 23 -At end of year - (23)Equity - (3)Non-equity - (20) - (23) 22. Cash and Cash Equivalents At beginning Cash flow Non cash At end of of year items year £000 £000 £000 £000Cash and cash equivalents perbalance sheet 5,103 21 15 5,139Cash and cash equivalents per 5,103 21 15 5,139cash flow statement 23. Other Financial Commitments and Contingent Liabilities a) Capital commitments at the end of the financial year, for which no provisionhas been made, are as follows: 2006 2005 £000 £000Contracted - 55 b) Non-cancellable operating lease rentals are payable as follows: 2006 2005 Land and Land and Other Buildings Buildings Other £000 £000 £000 £000Within 1 year - 46 20 43In second to fifth year inclusive 407 225 334 198Over 5 years - - - - 407 271 354 241 There are no contingent liabilities not provided for at the end of the financialyear. 24. Pension Scheme The Group operates a defined contribution pension scheme that is open to alleligible employees. The pension cost charge for the year representscontributions payable by the group to the fund and amounted to £231,000 (2005:£195,000). The outstanding contributions at the year end were £32,707 (2005:£29,448). For the Company, the pension cost charge for the year represents contributionspayable by the company to the fund and amounted to £23,000 (2005: £20,000). 25. Related Party Transactions NCC Group's Non Executive chairman Paul Mitchell is a director of RickittMitchell and Partners Limited and the Group conducted business to the value of£115,000 (2005: £301,000) with Rickitt Mitchell and Partners Limited. Includedwithin the charge is £70,000 relating to advice received in connection with theacquisition of the business and assets of Recall Total Information Management'sescrow division, the remaining £45,000 relates to the services of the nonexecutive chairman. Included within the charge in 2005 is £266,000 relating tofinancial advice provided during the floatation of the Group on AIM, theremaining £35,000 relates to the services of the non executive chairman. RickittMitchell and Partners Limited also held 7,000 1p ordinary shares (2005: 7000). At 31 May 2006, there was a £25,000 outstanding balance between the Group andRickitt Mitchell and Partners Limited (2005: nil). The Group and Company's transactions with directors and key management personnelare disclosed in the Directors' Remuneration Report. 26. Fixed Asset Investments in Subsidiaries Shares in group undertakingsCompany £000 CostAt beginning and end of 29,145year The cost represents the cost of acquiring the whole of the issued share capitalof NCC Group (Solutions) Limited and its subsidiary undertakings. Fixed assetinvestments 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 ActivitySubsidiary undertakings NCC Group (Solutions) Limited England and Wales Escrow Solutions & Consultancy servicesNCC Services Limited England and Wales Escrow Solutions & Consultancy servicesNCC Escrow International Limited England and Wales DormantNCC Group Inc USA Escrow SolutionsNCC Group Employee's Trustees Limited England and Wales Employee Benefit TrustNCC 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 toprepare its consolidated accounts in accordance with International AccountingStandards (IAS) and International Financial Reporting Standards (IFRS) asadopted by the European Union (EU) from 1 January 2007, having previouslyprepared its accounts using UK Generally Accepted Accounting Principles (UKGAAP). The Group has adopted the standards early and therefore NCC Group hasreported under IFRS for the year ended 31 May 2006. There was no effect on the underlying cash generation and expenditures of theGroup, however there were some presentational changes on the adoption of IAS 7 "Cash Flow Statements". 28.a Effect of IFRS Adoption on Profit for the Year Ended 31 May 2005 Group Note 2005 31 May £000 Profit for the period under UK GAAP 1,895Share-based charges A (297)Tax movement on share options D 89Goodwill amortisation C 1,500Lease incentives B (15)Tax movement on lease incentives D 5Profit for the period reported under IFRS 3,177 28.b Effect of IFRS Adoption on Equity Group Note 2005 2004 31 May 31 May £000 £000 Total equity under UK GAAP 21,727 822Goodwill 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 consolidatedfinancial statements prepared in accordance with adopted IFRS. The accounting policies set out in note 1 have been applied in preparing thefinancial statements for the year ended 31 May 2006, the comparative informationpresented in these financial statements for the year ended 31 May 2005 and inthe preparation of an opening IFRS balance sheet at 31 May 2004 (the Group andCompany's date of transition). In preparing its opening IFRS balance sheet, the Group and Company have adjustedamounts reported previously in financial statements prepared in accordance withits old basis of accounting (UK GAAP). An explanation of how the transition fromUK 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 thenotes that accompany the tables. Transitional Arrangements upon First Time Adoption of IFRS (IFRS 1) IFRS 1 "First-time Adoption of International Financial Reporting Standards" setsout the transition rules, which must be applied, when IFRS is adopted for thefirst time. The standard sets out certain mandatory exemptions to retrospectiveapplication and certain optional exemptions. The most significant optionalexemptions available and taken by the Group are as follows: The Group and Company have elected not to apply retrospectively the provisionsof IFRS 3 "Business Combinations", to acquisitions that occurred prior to theGroup 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 2002which had not vested on or before 1 January 2005. The adjustments between UK GAAP and IFRS for the year are detailed below. A Share-Based Payments (IFRS 2) An additional charge of £468,000 for the year (2005: £297,000) has been made inthe Group IFRS income statement to spread the fair value of share options andLTIPs over the vesting period of those incentives. A charge of £146,000 (2005:£79,000) has been made to cost of sales in the company income statement inrespect of share based payment transactions. B Leasehold Incentives (SIC 15) An additional charge of £15,000 for the year (2005: £15,000) has been made inthe Group IFRS income statement to spread a lease incentive over the full leaseterm 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 anannual impairment test suggests that the carrying value is overstated. Thegoodwill amortisation charge of nil (2005: £1,500,000) under UK GAAP is reversedunder IFRS following an impairment review of the goodwill. D Taxation Effect of IFRS Adjustments (IAS 12) Under IAS 12 the following tax adjustments are required and result in a £140,000net increase in the tax charge for the year (2005: £94,000). The temporary difference between the recognition of the IFRS 2 charge for sharebased payments and the Group's expected future tax deduction under UK taxlegislation ("Schedule 23") is established as a deferred tax asset under IFRScalculated by reference to the intrinsic value of all unexercised share optionsat each balance sheet date (including those issued prior to November 2002 andnot otherwise valued under the IFRS transitional arrangements). The resultantcredit in the tax charge is restricted to the tax effect of the cumulative IFRS2 charge with the difference credited directly to the profit and loss reserve.This restriction also impacts the Schedule 23 tax credit previously recorded asan exceptional tax credit in the income statement under UK GAAP. The resultingadditional tax charge in the IFRS income statement for the year is £140,000(2005: £89,000). A tax adjustment has been recognised in relation to the lease incentive charge. E Dividends (IAS 10) Dividends are non adjusting post-balance sheet events under IFRS and can only beaccrued 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 ExchangeRelated Shares:
Ncc