30th Apr 2008 07:02
Watermark Group PLC30 April 2008 30 April 2008Embargoed, 0700hrs Watermark Group Plc Preliminary Results for the year ended 31 December 2007 Watermark Group plc ("Watermark" or the "Group"), a leading provider ofin-flight products, catering and cabin management services to the airline andtravel industry today announces its results for the year ended 31 December 2007. Financial Highlights • Group revenues up 13% to £105.8 million (2006:£93.4 million)• Operating loss before exceptional items of £5.5 million (2006:profit £1.2 million)• Goodwill write down of £20.6 million and other exceptional costs of £4.2 million• Loss before taxation of £32.0 million (2006:£3.1 million)• Refinancing agreement subject to shareholder consent (announced 31 March 2008) o Underwriting of a £7.5 million issue of new ordinary shares o Early conversion of existing £8 million convertible bonds into new ordinary shares. Operational Highlights • Products Division o Renewed focus on innovation, design and product development o Initiatives taken to improve operating margins• Services Division o Strong focus on operating margins and cash flow o Restructuring implemented in Q3 last year o Considerably reduced labour costs o Greater focus on customer service o Major seven year contract win for Air Fayre with United Airlines• Appointment of Carl Fry as interim Chief Financial Officer Commenting on the outlook for the Group, Stephen Yapp, Chairman of Watermarksaid, "Since the refinancing in June of last year the Group has undergoneconsiderable and necessary change, and although the 2007 results aredisappointing in that they reflect the difficulties the business has beenthrough, the foundations have been firmly laid for a much improved 2008. "Trading in both divisions is in line with expectations for the first few monthsof 2008, reflecting the benefits of both the operational restructuring and thenew management structure and with the Group targeting a return to profitabilityin the existing business." For further information please contact: Stephen Yapp Jeremy Carey/Matt RidsdaleWatermark Group Tavistock CommunicationsTel: +44 (0) 20 8606 2000 Tel: +44 (0) 20 7920 [email protected] [email protected] Executive Chairman's Letter to Shareholders Introduction Dear Shareholder Since receiving shareholder support to refinance the Company in June of lastyear, the Group has undergone considerable and necessary change. The newManagement Team have been focused on the turnaround of three key areas, namely: - Restoring underlying profitability;- Focusing on cash flow and- Resuming growth. Significant improvements have been achieved and although the 2007 results aredisappointing in that they reflect the difficulties the business has beenthrough, the foundations have been firmly laid for a much improved 2008. As setout below, the Company has announced proposals for a capital restructuring,including a £7.5 million fundraising, in order to deal with the Group's cashrequirements. As explained in our Interim Report 2007, the intention of the new ManagementTeam was to move to a "bottom up approach" to running the business units of theGroup thus allowing the two Divisions to focus on their own independent goalsand objectives and to create individual identities, whilst still generatingsynergies for the benefit of the Group as a whole. The introduction of the newManagement Team has supported these objectives and the Group now has a clear andfocused direction and strategy. The final steps to implementing the newManagement Team and structure were taken in January 2008 and the year has begunwell under this new management style. Results Group revenues were £105.8 million (2006 £93.4 million) with the increaselargely attributable to sales to Air Canada of £17.3 million under the Encompasssupply chain management contract which commenced this year. The operating lossbefore exceptional items was £5.5 million (2006 profit £1.2 million) principallyreflecting a poor performance in the Services Division. The Group incurred exceptional costs of £4.2 million (2006 £3.6 million) duringthe year and the Board has also taken the decision to write down goodwill in theServices Division by £20.6 million resulting in an operating loss for the yearof £30.3 million (2006 £2.4 million). The write down of goodwill arose throughthe annual impairment test. Interest and financing costs were £1.7 million (2006£0.7 million) giving a loss before taxation of £32.0 million (2006 £3.1million). There was an increase in cash and cash equivalents of £7.7 million and net debtat the end of December was £13.5 million (2006 £6.5 million). Net assets stoodat £6.1 million (2006 £37.5 million). At the half year stage a number of items were identified that had beeninappropriately accounted for during 2006, which resulted in an increased lossbefore tax and a reduction in net assets of £0.9 million for the year toDecember 2006. A further review was carried out at the year end that concludedthat further adjustments to the 2006 results are required leading to a totalincrease in loss before tax of £1.2 million and reduction in net assets of £1.3million for the year to December 2006. Accordingly the comparative figurescontained in the final statements for 2006 have been restated by the aboveamounts. Products Division Progress in the Products Division since the refinancing has been pleasing.Accountability and visibility in the business have been improved and this hashelped restore gross margins and operating performance in the second half of theyear. As advised in the Interim Report 2007, David Young joined the Group inJanuary 2008 as Managing Director of the Products Division. Under David'sleadership, the Division is already focusing on a number of further initiativesdesigned to improve margins, expand the current supplier base and reduceoverheads. In support of the repositioning exercise there will be a number of keyappointments, including a Product Director, a role which the Management Teambelieve is pivotal to the success of the Products Division and will help thedrive to return the Division as a leader in its market place. The Products Division remains profitable and the team are concentrating onimproving innovation and design which, supported by a strong product developmentethos, will yield benefits in the medium term. Going forward, the Division will be managed with a close eye on gross margins,stock and working capital levels as well as the absolute level of overhead cost. Services Division Without doubt the Services Division has made progress in a number of key areassince the reported poor performance of the first half of 2007. The Divisionalstructure implemented in the third quarter is working well and the engagement ofspecialist operational advisers has given the Division renewed clarity and focusit requires to build a profitable business on a more stable platform. Labourcosts have been reduced considerably and the new structure, which has now beenin place for several months, is proving beneficial. We identified the need torebalance the customer focus in the Division, which was achieved in early 2008with the appointment of a General Manager, Customer Services. Many of the operational benchmarks in the Services Division are non-financialand these form an important component of managing the business day to day. Theimproved visibility, accountability and responsibility has helped improveservice and reporting. From a financial point of view, the Division will focuson cashflow, particularly working capital and stock management, and operatingmargin as the key indicators of performance. People In addition to the Board changes announced in our Interim Report 2007, Carl Fryhas joined the Group as Chief Financial Officer in an interim position. Carl hassignificant experience of serving on the Boards of both publicly listed andprivate companies. Until last year he was Group Finance Director of TelecityGroup plc. Carl joined Telecity following its merger with Redbus Interhouse plcin January 2006, where he was previously Group Finance Director from 2000. Our people are critical to the success of the business and during this difficultperiod they have shown commitment and character. It is these strong attributesthat have allowed us to undertake the significant change which has been requiredin the organisation during the second half of 2007. On behalf of the Board Iwould like to thank our employees for their dedication and continued support. Post balance sheet event On 31 March the Company announced proposals for a capital restructuring underwhich the holders of the Company's £8 million convertible bonds have agreedconditional on shareholder approval to refinance the Group through the earlyconversion of their bonds into ordinary shares at a conversion price of 7.5p pershare and to underwrite a £7.5 million issue of ordinary shares at a price of7.5p per share. As part of these proposals the holders of the bonds will receive6.2 million warrants with an exercise price of 15p and with an expiry term offour years. The capital restructuring arose through the Company's requirementfor additional financial resources to meet the cash needs of the business andalso from the financing requirements relating to the contract with UnitedAirlines referred to below. A circular setting out details of the proposals andseeking shareholder consent will be sent to shareholders in due course. At the same time the Company also announced that it was considering moving thetrading in the Company's ordinary shares to the AIM market of the London StockExchange, which the Directors believe would be a more appropriate market for theCompany. Further, we were also pleased to announce that Air Fayre had been successful inwinning a seven year contract with United Airlines to serve all of United'sinternational and domestic in-flight catering needs out of its Los Angeles hub.The contract is scheduled to be operational at the end of 2008. These events mark a turning point for the Group, which we believe will lay thefoundations for growth in the near term. Summary & outlook Trading in both Divisions is in line with expectations for the first few monthsof 2008, reflecting the benefits of both the operational restructuring and thenew management structure that was implemented during the final quarter of 2007. Although significant progress has been made, 2008 will be a year of furtherchallenges with the Group targeting a return to profitability in the existingbusiness. Stephen Yapp30 April 2008 Unaudited summarised consolidated income statement for the 12 months to 31December 2007 Before Total exceptional Exceptional 12 months to items items 31 December 2007 £'000 £'000 £'000------------------------------------------------------------------------------ Revenue 105,849 - 105,849 Cost of sales (77,697) - (77,697)------------------------------------------------------------------------------Gross profit 28,152 - 28,152 Operating and administrative costs (excluding exceptionalitems) (33,390) - (33,390) Movement in fair value of derivative financialinstruments (311) - (311) Exceptional itemsImpairment of goodwill - (20,600) (20,600) Asset retirement - (2,066) (2,066) Costs of refinancing - (1,836) (1,836) Re-organisation costs - (309) (309)------------------------------------------------------------------------------Total operating and administrative expenses (33,701) (24,811) (58,512) Operating loss (5,549) (24,811) (30,360) Finance costs (1,706) - (1,706) Finance income 23 - 23------------------------------------------------------------------------------ (1,683) - (1,683) Loss before tax attributable to equity shareholders (7,232) (24,811) (32,043) Income tax credit 53 - 53------------------------------------------------------------------------------Loss after tax attributable to equity shareholders (7,179) (24,811) (31,990)============================================================================== Loss per share (pence)Basic 69.5pDiluted 69.5p Restated summarised consolidated income statement for the 12 months to 31December 2006 Before exceptional Exceptional 12 months to items items 31 December 2006 £'000 £'000 £'000------------------------------------------------------------------------------ Revenue 93,362 - 93,362 Cost of sales (58,168) - (58,168)------------------------------------------------------------------------------Gross profit 35,194 - 35,194 Operating and administrative costs (excluding exceptionalitems) (35,206) - (35,206) Credit in respect of negative goodwill 102 - 102 Movement in fair value of derivative financialinstruments 465 - 465 Write back of provision for contract losses 619 - 619 Exceptional itemsWrite back of provision for contract losses - 1,447 1,447 Re-organisation costs - (2,933) (2,933) Bad debts - (1,261) (1,261) Other costs - (797) (797)------------------------------------------------------------------------------Total operating and administrative expenses (34,020) (3,544) (37,564) Operating profit/(loss) 1,174 (3,544) (2,370) Finance costs (673) - (673) Finance income 4 - 4 Movement in fair value of financial assets (19) - (19)------------------------------------------------------------------------------ (688) - (688)Profit/(loss) before tax attributable to equityshareholders 486 (3,544) (3,058) Income tax expense (506) (434) (940)------------------------------------------------------------------------------Loss after tax attributable to equity shareholders (20) (3,978) (3,998)============================================================================== Loss per share (pence)Basic 9.1pDiluted 9.1p Unaudited summarised consolidated balance sheet as at 31 December 2007 31 December Restated 2007 31 December 2006 £'000 £'000-------------------------------------------------------------------------AssetsNon-current assetsProperty, plant and equipment 9,358 9,838Goodwill 10,010 30,610Intangible assets 430 2,583------------------------------------------------------------------------- 19,798 43,031Current assetsInventories 7,148 4,487Trade and other receivables 15,896 18,801Prepayments 646 887Current income tax 98 165Cash and short-term deposits 2,001 9,766Fair value of derivative financial instruments 13 324------------------------------------------------------------------------- 25,802 34,430-------------------------------------------------------------------------Total assets 45,600 77,461=========================================================================Equity and liabilitiesEquity attributable to equity shareholdersof the parentIssued share capital 467 446Share premium account 21,582 21,582Shares to be issued - 2,125Capital redemption reserve 24 24Merger reserve 7,621 5,321Equity element of convertible bonds 282 -Foreign currency translation reserve (703) (542)Retained earnings (23,166) 8,574-------------------------------------------------------------------------Total equity 6,107 37,530 Non-current liabilitiesInterest bearing loans and borrowings 14,235 272Deferred income tax liabilities - 196------------------------------------------------------------------------- 14,235 468 Current liabilitiesTrade and other payables 24,003 20,394Interest bearing loans and borrowings 1,239 16,017Deferred consideration due within one year - 2,518Current income tax 16 534------------------------------------------------------------------------- 25,258 39,463-------------------------------------------------------------------------Total liabilities 39,493 39,931-------------------------------------------------------------------------Total equity and liabilities 45,600 77,461========================================================================= Unaudited summarised consolidated cash flow statement for the 12 months to 31December 2007 12 months to Restated 31 December 12 months to 2007 31 December 2006 £'000 £'000-------------------------------------------------------------------------Net cash flows from operating activitiesLoss after tax (31,990) (3,998)Tax (credit)/expense (53) 940Depreciation and amortisation 1,660 1,574Negative goodwill on acquisition of subsidiary - (102)Exceptional impairment of goodwill 20,600 -Exceptional asset retirement 2,066 -Exceptional bad debts - 1,261Share based payment expense 250 198Finance income (23) (4)Finance cost 1,706 673Movement in fair value of financial assets - 19Movement in fair value of forward exchange rate contracts 311 (465)Movement in other non-cash items (93) -Increase in inventories (2,690) (1,053)Decrease in trade and other receivables 3,055 3,325Increase in trade and other payables 3,904 4,338------------------------------------------------------------------------- Cash inflows (used in)/generated from operations (1,297) 6,706 Interest received 23 4Interest paid (1,162) (440)Income taxes paid (594) (336)-------------------------------------------------------------------------Net cash inflows (used in)/generated from operating activities (3,030) 5,934------------------------------------------------------------------------- Cash flows from investing activitiesProceeds from sale of property, plant and equipment 110 7,618Purchase of property, plant and equipment (1,059) (744)Purchase of intangible assets (144) (1,672)Acquisition of subsidiaries, net of cash acquired (2,322) (2,678)-------------------------------------------------------------------------Net cash flows (used in)/generated from investing activities (3,415) 2,524 ------------------------------------------------------------------------- Cash flows from financing activitiesProceeds from issue of convertible bonds 8,000 - Proceeds from borrowings 6,500 -Proceeds from issue of shares - 65Repayment of borrowings owed to acquisition vendors - (6,919)Payment of hire purchase and finance lease obligations (324) (558)Dividends paid to equity shareholders - (994)-------------------------------------------------------------------------Net cash flows generated from/(used in) financing activities 14,176 (8,406)------------------------------------------------------------------------- Net increase in cash and cash equivalents 7,731 52Net foreign exchange difference (31) 284Cash and cash equivalents at beginning of year (5,699) (6,035)-------------------------------------------------------------------------Cash and cash equivalents at end of year 2,001 (5,699)========================================================================= Unaudited summarised consolidated statement of changes in equity for the 12months to 31 December 2007 Equity Foreign Issued Share Shares Capital based currency share premium to be redemption Merger financial translation Retained Total capital account issued reserve reserve instruments reserve earnings equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000------------------------------------------------------------------------------------------------------------------ At 1January 2007 446 21,582 2,125 24 5,321 - (542) 8,574 37,530 Currency translationdifferences - - - - - - (161) - (161) Loss for the year - - - - - - - (31,990) (31,990) Cost of share basedpayments - - - - - - - 250 250 Issue of sharecapital 21 - (2,125) - 2,300 - - - 196 Equity element ofconvertiblebonds - - - - - 282 - - 282------------------------------------------------------------------------------------------------------------------At 31 December2007 467 21,582 - 24 7,621 282 (703) (23,166) 6,107================================================================================================================== Notes to the unaudited preliminary announcement for the year ended 31 December 2007 1. Publication of non-statutory accounts The financial information set out in this unaudited preliminary announcementdoes not constitute statutory accounts as defined in section 240 of theCompanies Act 1985. The unaudited summarised consolidated balance sheet as at 31December 2007 and the unaudited summarised consolidated income statement,unaudited summarised consolidated cash flow statement, unaudited summarisedconsolidated statement of changes in equity and associated notes for the yearthen ended have been extracted from the Group's draft 2007 financial statements.The Company's auditors have not yet reported on these financial statements, buthave indicated that their audit report will contain an emphasis on the matterparagraph drawing attention to the material uncertainty around going concern asexplained in Note 2 below. The financial information for the year ended 31 December 2006 is derived fromthe statutory accounts for that year which have been delivered to the Registrarof Companies, amended as explained in Note 3 below. The auditors reported onthose accounts; their report was unqualified and did not contain a statementunder s.237(2) or (3) Companies Act 1985. 2. Basis of preparation and statement of compliance Watermark Group Plc has prepared its consolidated financial statements inaccordance with International Financial Reporting Standards as adopted by theEuropean Union "IFRS". The Group has also complied with IFRSs as issued by theASB. Going concern The Group has incurred an operating loss before exceptional items of £5,549,000and a loss after tax attributable to equity shareholders of £31,990,000 for theyear. During the year the Company issued £8,000,000 Secured Fixed RateConvertible Bonds due 2010 (the "Bonds") to provide additional working capital.However, in the absence of additional cash resources for which the Board hastaken action as described below, the Group's forecasts show that during the next12 months its existing borrowing facilities will not be sufficient to provide itwith the financial resources necessary to pursue its chosen strategy and henceto enable it to continue in operational existence in its current form. In addition to the existing business but as a core component of the strategy,the Company requires further cash resources to enable it to finance theexpansion of its Air Fayre operations in Los Angeles, USA following the award inMarch 2008 of a seven year contract by United Airlines (the "LA contract").Under the LA contract, cash resources will be required to fund the acquisitionof fixed assets, to fund start-up costs and to meet working capitalrequirements. In order to meet the foregoing financing requirements the Company has enteredinto proposals for a capital restructuring and also proposes to raise debtfinance in the USA to finance a proportion of the expenditure required on fixedassets in relation to the LA contract. Under the capital restructuring proposalscertain of the holders of the Bonds (the "Bondholders") who between them alsohold approximately 21% of the existing ordinary equity, have agreed, conditionalon shareholder approval, to underwrite an issue of new ordinary shares at aprice of 7.5 pence per share (the "Underwriting") to raise approximately£6,500,000 net of all expenses of the capital restructuring and to convert theoutstanding principal and accumulated interest on their Bonds into new ordinaryshares at a conversion price of 7.5 pence per new ordinary share. As part ofthese arrangements the Bondholders have agreed to provide the Company with anunsecured loan facility of £2,000,000 on normal commercial terms. This facilityis currently available to the Company and will be repaid upon the allotment ofnew ordinary shares pursuant to the Underwriting. The Company's existing borrowing facilities comprise a medium-term loan of£6,500,000 and a multi-purpose facility of £1,500,000. The medium-term loan isrepayable as to £312,500 on 30 June 2008, £625,000 forthwith followingcompletion of the proposed fund-raising referred to below and in any event by 31July 2008, £312,500 on 31 March 2009 and the balance of £5,250,000 in June 2009.The multi-purpose facility is available, amongst other uses, as an overdraftfacility and as a guarantee facility. It is repayable on demand and reviewedannually in June. The Directors have not received any indication from the bankthat it intends to withdraw this facility. A circular setting out details of the proposed capital restructuring and seekingshareholder consent will be sent to shareholders in due course. The availabilityof the proceeds of the issue of new ordinary shares pursuant to the Underwritingof approximately £6,500,000 net of all expenses will be subject to shareholderapproval at an extraordinary general meeting (the "EGM") of the Company expectedto be called in due course. Assuming approval by shareholders at the proposedEGM, it is expected that the proceeds will be available during July 2008. Under the proposals to raise debt finance in the USA to finance a proportion ofthe expenditure required on fixed assets in relation to the LA contract, it isintended to finance the acquisition of the truck fleet and certain other fixedassets amounting in total to approximately £2,100,000 using asset-basedfinancing. Enquiries made by the Directors indicate that such finance should beavailable, although no such facility has been entered into. In assessing the financing requirements of the Group the Directors have preparedforecasts incorporating the foregoing additional cash resources showing theGroup remains within its existing borrowing facility limits and continues tocomply with its banking covenants. As noted above the Company's borrowingfacilities expire in June 2009. The Directors intend to seek appropriate newborrowing facilities and are confident that such facilities will be available. In considering the going concern position of the Group the Directors have madethe following principal assumptions: 1) The proposed capital restructuring is approved by shareholders at the EGM and, in particular, that (a) the proceeds of the issue of new ordinary shares pursuant to the Underwriting to raise approximately £6,500,000 net of all expenses is received by the Company in July 2008 and (b) that the unsecured loan facility of £2,000,000 continues to be available until the net proceeds of £6,500,000 are received. 2) Financing facilities amounting in total to approximately £2,100,000 are available in the USA to finance the acquisition of the truck fleet and certain other fixed assets required under the LA contract. 3) The forecasts prepared by the Directors for the purposes of assessing the financing requirements of the Group as set out above are accurate in all material respects and also that as a consequence the Group remains within its borrowing facility limits and continues to comply with its banking covenants. 4) The Company's multi-purpose facility of £1,500,000 is not withdrawn prior to June 2009. 5) Appropriate new borrowing facilities will be available following expiry of the Company's existing borrowing facilities in June 2009. On the basis of the foregoing assumptions the Directors consider that the Grouphas adequate financial resources to continue in operational existence for theforeseeable future and, therefore, that it is appropriate to adopt thegoing concern basis. The unaudited preliminary announcement does not include anyof the adjustments that would result if the Group was unable to continue as agoing concern. 3. Restatement and reclassification of prior year's results A review of the Group's operational and accounting systems, processes andinternal controls was carried out during the year. This review identified anumber of items which had not been accounted for appropriately during 2006. Inaccordance with IAS8 Accounting Policies, Changes in Estimates and Errors, thenature of the errors and the impact on each financial item affected is statedbelow. The effect of the prior year adjustments is to increase the loss before taxationattributable to equity shareholders by £1,228,000. The prior year restatementsare as follows: • The carrying value of inventory in the Services Division and Products Division has been reduced by £323,000 and £133,000, respectively, with corresponding charges to cost of sales. Within the Services Division the closing stock position at 31 December 2006 was overstated due to valuation errors. Within the Products Division, a provision should have been made during 2006 against faulty products with a value of £68,000 returned by the customer before the year end. Additionally, a provision of £65,000 should have been made for obsolete stock relating to airline branded goods remaining unsold after contracts had been fulfilled before the end of 2006. • An adjustment has been made to reduce revenue by £311,000, to write off all goodwill recorded upon acquisition of International Catering Limited ("ICL") by £209,000 and to credit the difference of £102,000 to the income statement for the resultant negative goodwill arising upon acquisition. This is the result of incorrectly recording in the post-acquisition period, a waiver of certain debts owed by ICL to the vendor as income of the Group. • A charge of £188,000 has been made to operating and administrative costs to correct foreign exchange gains which were incorrectly recorded in revenue, but which were payable to the joint venture party of a subsidiary company. • An adjustment of £140,000 was made to reduce revenue for overbilling to major customers. • A charge of £100,000 has been made to operating and administrative costs for a claim made over the termination of an agency agreement which was not set up as a liability of the Group at the time the claim was lodged. • An adjustment has been made to reduce revenue by £95,000 for contributions made by the vendor of ICL for the purchase of certain assets. This contribution had been incorrectly included as income rather than being offset against the deposit paid for the assets. • An adjustment has been made to reduce revenue by £50,000 for a contribution made by a supplier towards the marketing of a new asset purchase which should have been recorded as deferred income until delivery of the asset was taken. • Depreciation expense was reduced by £10,000 for the correction in the value of certain trucks capitalised in prior years. • Exceptional re-organisation costs have been restated to reclassify labour costs of £269,000 and asset write offs of £102,000 to non-exceptional operating and administrative costs and cost of sales, respectively. The effect of the restatement on the unaudited preliminary announcement issummarised in the table below: Consolidated income statement Restated 12 months to 31 December 2006 £'000----------------------------------------------------------------------------Decrease in revenue 596Increase in cost of sales 558Increase in operating and administrative costs 447Credit in respect of negative goodwill (102)----------------------------------------------------------------------------Reduction in operating profit before exceptional items 1,499Increase in exceptional other costs 100Decrease in exceptional re-organisation costs (371)----------------------------------------------------------------------------Increase in loss before taxation attributable to equity shareholders 1,228============================================================================ Consolidated balance sheet Restated 31 December 2006 £'000----------------------------------------------------------------------------Decrease in property, plant and equipment 86Decrease in goodwill 209Decrease in inventories 456Decrease in trade and other receivables 140Decrease in prepayments 95Increase in trade and other payables 338----------------------------------------------------------------------------Reduction in net assets 1,324============================================================================Decrease in retained earnings brought forward (96)============================================================================ As a result of the above prior year adjustments and reclassifications, the basicand diluted loss per share has increased by 2.8 pence from 6.3 pence to 9.1pence. 4. Segmental reporting The Watermark Group is organised on a worldwide basis into two primary businesssegments, the Products and the Services Divisions. These reportable segments arethe two strategic divisions for which monthly financial information is providedto the Board. The Products Division provides a broad range of travel supplies predominately tothe international travel industry on a global basis. The Services Division is amajor supplier of catering and media services to the international travelindustry within the United Kingdom. Both divisions provide marketing, design andconsultancy services. The Services Division is also engaged in supply chainmanagement. Whilst the Group's two divisions are managed on a worldwide basis, they operatein three principal geographical areas of the world which are the United Kingdom,Europe and the Middle East; Asia and the Americas. The main region wheresignificant Group revenues are earned is the United Kingdom, Europe and MiddleEast and this business is conducted from the United Kingdom. Operations in Asiaare conducted through the Group's Hong Kong subsidiary and in the Americasthrough the Group's United States subsidiary, whose offices are in Miami. Information on primary reporting by business segment and secondary reporting bygeographical region is shown below. Segment revenue, expenses and results include transfers and transactions betweenbusiness segments and between geographical segments. Such transactions areaccounted for at competitive market prices which would be charged tounaffiliated clients for similar goods. All inter-segment transactions areeliminated on consolidation. Segment assets include all operating assets used by a segment and consistprincipally of operating cash, receivables, inventories, goodwill and property,plant and equipment, net of allowances and provisions. Whilst most assets can bedirectly attributed to individual segments, the carrying value of certain assetsused jointly by two or more segments is allocated to the segments on areasonable basis. Where assets cannot be apportioned, they are classified asunallocated corporate assets. Segment liabilities include all operating liabilities and consist principally ofaccount payables, wages, and accrued liabilities. Where allocation is notpossible across more than one segment, such liabilities are classified asunallocated corporate liabilities. Segment assets and liabilities do not include receivable or payable balances inrespect of income taxes. Exceptional items relate to significant non-recurring expenditure of an unusualnature. Segmental information by business segment for 12 months to 31 December 2007 Products Services Division Division Eliminations Total 12 months to 12 months to 12 months to 12 months to 31 December 31 December 31 December 31 December 2007 2007 2007 2007 £'000 £'000 £'000 £'000----------------------------------------------------------------------------------------RevenueTravel supplies, catering and media services 32,581 56,014 - 88,595 Supply chain management - 17,254 - 17,254 Net sales to other segments 2,605 - (2,605) -----------------------------------------------------------------------------------------Total revenue 35,186 73,268 (2,605) 105,849======================================================================================== ResultSegment result before exceptional items 587 (6,200) (39) (5,652)Exceptional costsImpairment of goodwill - (20,600) - (20,600)Re-organisation costs - (262) - (262)----------------------------------------------------------------------------------------Segment result 587 (27,062) (39) (26,514)=========================================================================Unallocated corporate items 103Exceptional costsAsset retirement (2,066)Costs of refinancing (1,836)Re-organisation costs (47) --------Operating loss (30,360)Interest expense (1,706)Interest income 23Income tax credit 53 --------Loss after tax (31,990) ========Other informationSegment assets 11,067 29,479 (1,597) 38,949Unallocated corporate assets 6,553 -------- 45,502Current income tax 98 --------Consolidated assets 45,600 ========Segment liabilities (6,730) (18,825) 1,558 (23,997)Unallocated corporate liabilities (15,480) -------- (39,477)Current income tax (16) --------Consolidated liabilities (39,493) ======== Products Services Division Division Eliminations Total 12 months to 12 months to 12 months to 12 months to 31 December 31 December 31 December 31 December 2007 2007 2007 2007 £'000 £'000 £'000 £'000----------------------------------------------------------------------------------------Capital expenditure including intangible assets 250 866 87 1,203 --------------------------------------------------------Depreciation, impairment and amortisation 395 15,695 170 16,260 --------------------------------------------------------Other non-cash (income)/expenses included within segment results (105) 78 184 157 -------------------------------------------------------- Segmental information by geographical region for 12 months to 31 December 2007 Capital Turnover Segment assets expenditure 12 months to as at 12 months to 31 December 31 December 31 December 2007 2007 2007 £'000 £'000 £'000------------------------------------------------------------------------------------United Kingdom, Europe and Middle East 75,113 31,991 1,129Asia 9,391 4,682 74Americas 21,345 8,829 ------------------------------------------------------------------------------------- 105,849 45,502 1,203==================================================================================== Restated segmental information by business segment for 12 months to 31 December2006 Products Services Division Division Eliminations Total 12 months to 12 months to 12 months to 12 months to 31 December 31 December 31 December 31 December 2006 2006 2006 2006 £'000 £'000 £'000 £'000----------------------------------------------------------------------------------------RevenueTravel supplies, catering and media services 33,872 59,240 - 93,112 Marketing, design, consultancy and commission - 250 - 250 Net sales to other segments 130 152 (282) -----------------------------------------------------------------------------------------Total revenue 34,002 59,642 (282) 93,362========================================================================================ResultSegment result before exceptional items (122) 1,925 - 1,803 Exceptional itemsWrite back of provision for contract losses - 1,447 - 1,447 Re-organisation costs (872) (2,061) - (2,933) Bad debts (1,178) (83) - (1,261) Other costs (530) (267) - (797)----------------------------------------------------------------------------------------Segment result (2,702) 961 - (1,741)=========================================================================Unallocated corporate expenses (629) ---------Operating loss (2,370) Interest expense (673) Interest income 4Movement in fair value of financial assets (19) Income tax (940) ---------Loss after tax (3,998) =========Other informationSegment assets 22,293 52,444 - 74,737Unallocated corporate assets 2,559 --------- 77,296Current income tax 165 --------- 77,461 =========Segment liabilities (17,128) (14,321) - (31,449)Unallocated corporate liabilities (7,752) --------- (39,201)Deferred and current income tax liabilities (730) ---------Consolidated liabilities (39,931) =========Capital expenditure including intangible assets 1,026 1,390 - 2,416----------------------------------------------------------------------------------------Depreciation, impairment and amortisation 407 1,167 - 1,574----------------------------------------------------------------------------------------Other non-cash expenses included within segment results 138 60 - 198---------------------------------------------------------------------------------------- Restated segmental information by geographical region for 12 months to 31December 2006 Capital Turnover Segment assets expenditure 12 months to as at 12 months to 31 December 31 December 31 December 2006 2006 2006 £'000 £'000 £'000------------------------------------------------------------------------------------United Kingdom, Europe and Middle East 77,592 68,722 2,409 Asia 9,210 4,409 7Americas 6,560 4,165 ------------------------------------------------------------------------------------- 93,362 77,296 2,416==================================================================================== 5. Exceptional items Restated 12 months to 12 months to 31 December 31 December 2007 2006 £'000 £'000------------------------------------------------------------------------------Impairment of goodwill 20,600 -Asset retirement 2,066 -Costs of refinancing 1,836 -Write back of provision for contract losses - (1,447)Bad debts - 1,261Other costs - 797------------------------------------------------------------------------------ 24,502 611Re-organisation costs- Redundancy and salary costs 262 2,237- Property closures - 521- Legal and professional 47 175------------------------------------------------------------------------------Total re-organisation costs 309 2,933------------------------------------------------------------------------------Total exceptional items 24,811 3,544============================================================================== Goodwill impairment The Group tested the carrying value of its goodwill for impairment as at 31December 2007 based on future cash flow projections for each of itscash-generating units, and as a result, has made an impairment charge againstgoodwill of £20,600,000. £18,900,000 of this charge relates to Air Fayre Limitedand IFRS (UK) Limited and £1,700,000 relates to Media On The Move Limited, whichare both cash-generating units within the Services Division. Asset retirement During 2007, the Group wrote down the value of its Axapta Enterprise Resourceand Planning ("ERP") software and certain associated hardware by £1,930,000 and£136,000, respectively, for a total charge of £2,066,000. The ERP software hadbeen implemented in the Group in 2004 and due to the change in businessprocesses subsequent to the implementation, a number of the modules that hadbeen customised and developed during implementation were no longer relevant tothe needs of the business. These modules have been identified as generating nofuture value to the Group and, accordingly, have been retired from use. Costs of refinancing During 2007, the Group expensed costs in the amount of £1,836,000 which relateto the re-organisation of its financial structure and which culminated in theissue of £8,000,000 secured fixed rate convertible bonds due in 2010 and theconversion of the previous bank overdraft facility into a £6,500,000 term loanand a new £1,500,000 bank overdraft facility. Write back for provision for contract losses During 2006, the Group provided for anticipated contract losses when conductingits fair valuation exercise upon the purchase of International Catering Limited.The Group fair valued the losses at £2,066,000 at the date of acquisition. Theprovision was to be written back over the remaining life of the loss makingcontracts. The main loss making contract was terminated early by the clientduring 2006 and as a result the remaining provision was written back as anexceptional credit to the income statement on the termination date. Theexceptional credit in 2006 amounted to £1,447,000. Bad debts During 2006, the Group provided for bad debts amounting to £1,261,000. Themajority of the provision amounting to £1,070,000 related to Russian and MiddleEastern clients in the Products Division. Additionally, the Group had provided£191,000 for the outstanding debts relating to its associate, AeroTV Limited,which had ceased trading after the year end. Re-organisation costs In April 2006, the Group purchased International Catering Limited and commenceda restructuring programme. International Catering Limited continues to providecatering to the international airline industries, but has transitioned itsoperations to an outsource model from a fully in-house caterer, although theCompany does retain a small in-house kitchen. During 2006, the Group incurredsignificant costs to reorganise the business and in 2007, additional costs of£262,000 for redundancy and salary costs and £47,000 for professional fees wereincurred, which were above the initial estimates made in 2006. The costsincurred in 2006 include redundancy costs of £1,374,000 (as restated), propertyclosure costs of £346,000 and legal costs of £135,000. During 2006, Air Fayre Limited also incurred redundancy costs amounting to£206,000, relating predominately to the closure of its airside unit at Heathrow. During 2006, the Products Division incurred exceptional re-organisation costsamounting to £804,000 which related to additional costs incurred to fully closethe Hampshire office. Included within this figure were redundancies aboveinitial estimates amounting to £589,000 and further property closure and legalcosts amounting to £215,000. The Products Division also commenced are-organisation of its worldwide operations and as at 31 December 2006 hadincurred redundancy costs amounting to £68,000 which had been recognised in theaccounts in 2006. The 2006 exceptional re-organisation costs have been restated to reclassifylabour costs of £269,000 and asset write offs of £102,000 to non-exceptionaloperating and administrative costs and cost of sales, respectively. 6. Loss per share Loss per share is calculated by dividing the net loss for the year attributableto equity shareholders (numerator) of the parent by the weighted average numberof ordinary shares in issue during the year (denominator). Diluted earnings per share is calculated using the same numerator with thedenominator adjusted for the dilutive effects of share options and shares to beissued in respect of past acquisitions. As the Group has made a loss in thecurrent year and previous year, no adjustment is made to the denominator for theimpact of share options and shares to be issued because the potential shares areanti-dilutive. Adjusted loss per share, both basic and dilutive, use the denominator describedin the appropriate paragraphs above. For both adjusted basic loss per share andadjusted diluted loss per share, the numerator is adjusted to remove the posttax impact of exceptional items from the calculations. The weighted average number of shares in issue during the year was 46,004,784(2006: 44,023,354). The following represents loss data used to calculate basic, diluted and adjustedloss per share: Restated 12 months to 12 months to 31 December 31 December 2007 2006Loss table £'000 £'000------------------------------------------------------------------------------ Loss after tax attributable to equity shareholders (31,990) (3,998)- Exceptional items (post tax) 24,811 3,978- Movement in the fair value of financial assets held at fair value through profit or loss - 19------------------------------------------------------------------------------Adjusted net loss after tax attributable to equity shareholders (7,179) (1)============================================================================== Loss per share table Loss per share 12 Restated Loss per months to 31 share 12 months to December 2007 31 December 2006 Pence Pence Basic loss per share 69.5 9.1Diluted loss per share 69.5 9.1Adjusted basic loss per share 15.6 nilAdjusted diluted loss per share 15.6 nil 7. Additional cash flow information 1 January Exchange Non-cash 31 December 2007 Cash flow differences movements 2007 £'000 £'000 £'000 £'000 £'000---------------------------------------------------------------------------------------Cash and cash equivalents 9,766 (7,734) (31) - 2,001 Bank loans maturing within 3 months and overdrafts (15,465) 15,465 - - ----------------------------------------------------------------------------------------(Decrease)/increase in cash for the year (5,699) 7,731 (31) - 2,001 Finance lease and hire purchase contracts (824) 324 - - (500) Convertible bonds - (8,000) - (474) (8,474)Bank loan - (6,500) - - (6,500)---------------------------------------------------------------------------------------Net debt (6,523) (6,445) (31) (474) (13,473)======================================================================================= 1 January Exchange Non-cash 31 December 2006 Cash flow differences movements 2006 £'000 £'000 £'000 £'000 £'000--------------------------------------------------------------------------------------- Cash and cash equivalents 6,373 3,490 (97) - 9,766 Bank loans maturing within 3 months andoverdrafts (12,408) (3,438) 381 - (15,465)---------------------------------------------------------------------------------------Increase/(decrease) in cash for the year (6,035) 52 284 - (5,699) Finance lease and hire purchase contracts (1,315) 558 - (67) (824)---------------------------------------------------------------------------------------Net debt (7,350) 610 284 (67) (6,523)======================================================================================= 8. Annual accounts The annual report and accounts will be posted to all shareholders in May 2008and will available from the Company's registered office: The Encompass CentreInternational AvenueHestonMiddlesexTW5 9NJ This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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