Final Results

22nd Dec 2008 07:00



CROMA GROUP PLC

("Croma" or "the Group")

FINAL RESULTS

FOR THE YEAR TO 30TH JUNE 2008

The Board of Croma, the AIM listed avionics, access security and installation systems, and asset protection specialist, is pleased to announce its final results for the year to 30th June 2008 which reflect an improvement in trading  together with an increase in turnover and contracts won. 

KEY POINTS

2008 is the first year the Group has delivered a trading profit from its core operations; 

Increase in turnover for the year to £7.11m (2007 - £5.05m), the highest level yet for the business;

Gross profit grew to £2.43m (2007 - £1.54m), an increase in gross margin to 34.24% (2007 - 30.49%). This turnaround is attributable to the reduction in costs and the strong performance of the avionics and asset protection businesses;

Non-cash expenses, financing costs and the closure of businesses resulted in a loss for the period of £669,089 (2007 loss - £4,516,821);

New contracts secured worth over £600,000 broadening the spread of customers and their activities;

The majority of the Group's activities are carried out for major governmental organisations;

Board restructuring;

Appointment to the Board of James Sullivan who will take charge of Technical aspects of group operations.

Nick Hewson, Non-Executive Chairman of Croma, said: "I am delighted to be able to report to you on the Group's first trading profit from core activities, albeit that due to movements in non-cash expenses, the Group has declared a pre-tax loss for the period. Radical cost cutting and a strong product and service proposition together with good and continuing lines of finance have enabled the Group to show its true colours. The Group is well set with a strong customer base, to grow its order books and deliver profitable growth, despite the overall economic climate. Many thanks to the management and staff of the business who have worked so hard to deliver these results."

An electronic copy of the annual report is available from the Group's website www.cromagroup.co.uk and copies have been sent to shareholders together with the Notice of AGM and EGM.

Enquiries:

Croma Group plc

Sebastian Morley, CEO 07768 006909

Seymour Pierce Limited

Mark Percy 020 7107 8000

 

  CHAIRMAN'S STATEMENT

FOR THE YEAR ENDED 30 JUNE 2008

I have pleasure in announcing the results of the Group for the year ended 30 June 2008, my first year as your Chairman. 

Financials

2008 is the first year the Group has delivered a trading profit from its continuing operations, albeit that due to movements in non-cash expenses, the Group has declared a pre-tax loss for the period. 

Turnover grew to £7.11m (2007 - £5.05m), the highest level yet for the business, delivering a gross profit of £2.43m (2007 - £1.54m), an increase in gross margin to 34.24% (2007 - 30.49%). Our loss from operations before finance charges was reduced dramatically to £263,758 (2007 - loss £3.79m), and this was struck after charging a number of non-cash items notably: goodwill impairment of £445,486 against the Photobase subsidiary which is in long term recovery, but, the Directors believe, worth the effort; a charge of £101,306 (2007 - £106,893) in connection with share options granted, most of which will shortly lapse; and a charge of £27,895 (2007 - £124,886) in connection with recognising the equity element of the convertible loan notes issued.

Excluding these non-cash charges, the group made a profit of £283,034 (2007 - loss £890,414) before finance costs, a turnaround on the 2007 year of over £1.0m and the first time the business has delivered a trading profit from its core business activities. This turnaround is entirely attributable to the severe pruning of the head office costs and the strong performance of our avionics and asset protection businesses. Management and staff of these businesses are to be commended.

Our finance costs were £230,564 net, (2007 - net cost £88,892) giving a loss before tax from continuing activities of £494,322 (2007 - loss £3.879m), and much of that increase in finance cost is the servicing of loan notes and factoring agreements entered into during the year, when it became clear that the Group could trade profitably and generate positive cash flow. 

The full loss for the period attributable to shareholders was £669,089 (2007 - loss £4,516,821) after allowing for the closure of the CCTV operations at a cost of £174,767 (2007 - loss £637,812). The Board does not anticipate any further material losses arising from the closure of these businesses.

 

Business Review

The Group now comprises three key business areas: avionics, access security and installation systems, and asset protection including man guarding and key holding. 

Most of the major customer propositions involved in the R & D Design Services business, by value, are derived from proprietary software which we have developed in-house and which gives us a strong route to securing business activity and an even stronger route to retaining it. 

The majority of the Group's activities are carried out for major governmental organisations including the UK prisons service, the UK police services, and the UK armed forces and businesses linked to the defence sector. The Group also has a number of material contracts with defence supply organisations particularly in the avionics industry including Agusta with whom we recently signed a long term contract out to 2013, and we recently secured a contract worth £600,000 a year with Shasun Pharma Solutions, which broadens our spread customers and their activities

In December 2007 it became clear that the CCTV operation could not survive without considerable support from the Group, which support would have resulted in further substantial losses to the Group, and therefore we closed this operation.

Board Changes

The Board has been considerably reduced in size (and cost!) during the year, and as reported more fully in the last financial statements, three directors of the Company resigned: the former Executive Chairman, John French, the former Financial Director, David Bretel, and a non-executive director, Gerry Thompson. The Board reiterates its thanks to them all for their services to the Group.

Gerald McGill has agreed to act as a part-time Finance Director and and we will be announcing as at the date of this statement the appointment to the Board of the Managing Director of the avionics business, James Sullivan, who will take charge of technical aspects of Group operations, as well as contribute to general corporate matters. Sebastian Morley, CEO, and myself, welcome both these gentlemen to the Board and look forward to developing the business further with them.

Financing arrangements

In view of the challenging times globally, the Board has reviewed all its arrangements with its sources of finance for normal operations being the invoice discounting and unsecured undrawn bank overdrafts. We have spoken with our providers of invoice discount finance and expect their continued support for our businesses and as such the Board is satisfied that it has taken the steps it should take, given the considerable amount of finance that the Group obtains from sales invoice discounting. There are no other material clearing bank style working capital arrangements other than undrawn facilities available to the subsidiary businesses which again are still in place, following confirmation with the relevant banks.

 

 

AGM and EGM

Along with the Annual general meeting to be held on 28th January 2009, an Extraordinary meeting will be held to comply with Companies Act 1985 Section 142 requirements.

 

Outlook

The Board believes it has now dealt with the majority of the legacy issues it faced, and cleaned up a number of the businesses. They are now, in general, cash positive and growing, with increasing order books. The business is financed by long term share capital and convertible loan notes, as well as invoice discounting agreements, and there is minimal unsecured bank overdraft debt. 

We still have considerable issues to deal with at our Photobase subsidiary and I hope to be able to report good news on that front in the interim statement which is due in March 2009. 

It only remains for me to thank all our management and staff, our customers and suppliers, and our shareholders and bond holders for their continued support during the year.

Nick Hewson

Non-executive Chairman

19 December 2008

 

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 30 JUNE 2008

 

			2008	2007
	Notes		£	£
Revenue			7,108,051	5,052,508
Cost of sales			(4,674,306)	(3,512,227)
			-------------	-------------
Gross profit			2,433,745	1,540,281
Goodwill impairment			(445,486)	(2,792,693)
Other administrative expenses			(2,252,017)	(2,537,705)
Administrative expenses			(2,697,503)	(5,330,398)
			-------------	--------------
Loss from operations			(263,758)	(3,790,117)
Financial income			4,635	1,505
Financial expenses			(235,199)	(90,397)
			----------	-----------
Loss before taxation			(494,322)	(3,879,009)
Taxation expense			-	-
			---------------	---------------
Loss from continuing operations			(494,322)	(3,879,009)
Loss from discontinued operations net of tax			(174,767)	(637,812)
			---------------	---------------
Loss for the year attributable to equityshareholders			(669,089)	(4,516,821)
			---------------	---------------
Loss per share for loss attributable to equity shareholders
Continuing operations
Loss per share – basic			(0.29p)	(2.58p)
Loss per share - diluted			(0.29p)	(2.58p)
Discontinued operations
Loss per share – basic			(0.10p)	(0.42p)
Loss per share - diluted			(0.10p)	(0.42p)
Loss per share – basic			(0.39p)	(3.00p)
Loss per share - diluted			(0.39p)	(3.00p

 

 

CONSOLIDATED BALANCE SHEET

AS AT 30 JUNE 2008

Assets		Notes	2008 £		2008 £		2007 £		2007 £
Non-current assets
Property, plant and equipment					234,560				191,109
Goodwill		2			2,148,650				2,594,136
Total non-current assets					2,383,210				2,785,245
Current assets
Inventories			299,319				311,212
Trade and other receivables			1,484,404				1,427,328
Cash			62,375				131,792
Total current assets					1,846,098				1,870,332
Total assets					4,229,308				4,655,577
Liabilities
Non-current liabilities
Convertible loan notes			(1,295,848)				(839,814)
Non convertible loan notes			-				(251,263)
Bank loan			-				(45,373)
Deferred tax			(2,828)				(2,828)
Total non current liabilities					(1,298,676)				(1,139,278)
Current Liabilities
Trade and other payables			(212,281)				(775,311)
Tax			(446,556)				(491,891)
Accruals and deferred income			(498,850)				(448,034)
Deferred consideration			-				(34,948)
Bank overdrafts and loans			(309,007)				(482,329)
Total current liabilities					(1,466,694)				(2,232,513)
Total liabilities					2,765,370				3,371,791
Total net assets					1,463,938				1,283,786
Capital and reserves attributable to equity holders of the company
Share capital					9,161,453				8,441,413
Share premium					1,388,522				1,388,522
Retained earnings					(9,578,219)				(8,909,130)
Other reserves					492,182				362,981
Total equity					1,463,938				1,283,786

 

These financial statements were approved and authorised for issue by the board of directors

on 19 December 2008 and signed on their behalf by

G M McGill, 

Director

  CONSOLIDATED CASH FLOW STATEMENT

FOR THE YEAR ENDED 30 JUNE 2008

	Notes	2008	2007
		£	£
Cashflows from operating activities
Loss before taxation		(669,089)	(4,516,821)
Adjustments for:
Depreciation		37,412	76,827
Impairment of Goodwill		445,486	2,792,693
Gain on sale of property, plant and equipment		(1,325)	-
Add back of the share based payment expense		101,306	106,893
Financial Income		(4,635)	(1,505)
Financial Expenses		235,199	90,397
Cashflows from operating activities before changes in
working capital and provisions;		144,354	(1,451,516)
(Increase)/Decrease in inventories		11,893	229,749
(Increase)/Decrease in trade and other receivables		(57,076)	(120,493)
(Decrease)/Increase in trade and other payables		(536,828)	845,182
		__________	__________
Cash generated from operations		(437,657)	(497,078)
Interest received		4,635	1,505
Interest paid		(137,441)	(90,397)
Income taxes		(20,721)	(222,021)
		__________	__________
Net cashflows from operating activities		(591,184)	(807,991)
Cash Flows from investing activities
Purchase of property, plant and equipment		(83,347)	(35,990)
Proceeds on disposal of property, plant and equipment		3,809	5,909
		__________	__________
Net cash used in investing activities		(79,538)	(30,081)
Cash flows from financing activities
Issue of Loan Notes		420,000	750,000
Repayment of borrowings		(50,024)	-
Issue of Share Capital - cash issue		400,000	100,000
		__________	__________
Net cash from financing activities		769,976	850,000
		__________	__________
Net (decrease)/increase in cash and cash equivalents		99,254	11,928
		__________	__________
Cash and cash equivalents at beginning of year		(305,164)	(317,092)
		__________	__________
Cash and cash equivalents at end of year		(205,910)	(305,164)
		==========	==========

Notes to the preliminary announcement

The financial information in the announcement does not constitute the Company's statutory accounts for the year ended 30 June 2008, prepared in accordance with IFRSs as adopted by the EU, or the period ended 30 June 2007, which were prepared under UK GAAP, but is derived from these accounts. The statutory accounts for the year ended 30 June 2007 have been delivered to the Registrar of Companies and those for 2008 will be delivered following the Company's annual general meeting. The auditors reported on those accounts, their reports were unqualified, did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and did not contain statements under the Companies Act 1985, s. 237(2) or (3).

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Group will publish full financial statements that comply with IFRSs today.

This is the first time the Group has prepared its preliminary announcement in accordance with Adopted IFRSs, having previously prepared its preliminary announcement in accordance with UK accounting standards. The date of transition to IFRS is 1 July 2006.

1. Accounting Policies

Basis of preparation

The preliminary announcement has been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRSs), International Accounting Standards and Interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) as adopted by the European Union ("adopted IFRSs").

In preparing this preliminary announcement, the Group has elected to take advantage of certain transitional provisions within IFRS 1 'First time adoption of International Financial Reporting Standards' which offer exemption from presenting comparative information or applying IFRSs retrospectively. The most significant of these provisions are the exemption from applying IFRS 3 'Business Combinations' to acquisitions which occurred prior to the transition date.

This is the first time the Group has prepared its preliminary announcement in accordance with IFRSs, having previously prepared its financial statements in accordance with UK GAAP accounting standards. Details of how the transition from UK accounting standards to EU adopted IFRS has affected the group's reported financial position, financial performance and cash flows are given in the statutory financial statements.

Going concern

The Group's activities are funded by a combination of long term equity capital, and convertible loan notes and short term invoice discounting and bank overdraft facilities. The day to day operations are funded by cash generated from trading and primarily invoice discounting facilities.

 

Whilst there are inevitable pressures from the current general economic climate, the Board remains positive about the growth available within its main trading operations. This growth, which is substantially based on new contracts has been factored into the Board's profit and cash flow projections, as have reasonably possible changes from the current economic climate. These projections suggest that the Group will meet its obligations as they fall due with the use of existing uncommitted invoice discounting facilities. These facilities are due for review in March 2009 and based on the informal discussions the Board has had with these finance providers, as referred to in the Chairman's statement, have an expectation that these facilities will continue to be available to the Group for the foreseeable future. 

The financial statements do notreflect the adjustments that would be necessary were the trading performance of the Group to deteriorate and/or the funding available from invoice discounting were not available.

Changes in accounting policies - first time adoption

In preparing this preliminary announcement, the group has elected to apply the following transitional arrangements permitted by IFRS 1 'First-time Adoption of International Financial Reporting Standards':

Business combinations effected before 1 July 2006, including those that were accounted for using the merger method of accounting under UK accounting standards, have not been restated.

The carrying amount of capitalised goodwill at 30 June 2006 that arose on business combinations accounted for using the acquisition method under UK GAAP was frozen at this amount and tested for impairment at 1 July 2006.

Where the liability component of a compound financial instrument was not outstanding at 30 June 2008, the portion of equity representing the cumulative interest accreted on the liability component and the portion of equity representing the original equity component of the instrument have not been disclosed as separate components of equity.

IFRS 2 'Share-based payments' has been applied to employee options granted after 7 November 2002 that had not vested by 1 July 2006.

The Group has made estimates under IFRSs at the date of transition, which are consistent with those estimates made for the same date under UK GAAP unless there is objective evidence that those estimates were in error, i.e. the Group has not reflected any new information in its opening IFRS balance sheet but reflected that new information in its income statement for subsequent periods.

As a result of adopting IFRS there have been changes to the presentation of the preliminary announcement.

In preparing its opening IFRS balance sheet, the Group has adjusted amounts reported previously in preliminary announcements prepared in accordance with its previous basis of accounting (UK GAAP). An explanation of how the transition from UK GAAP to IFRS has affected the Group's financial position and performance is set out below.

IAS 36 'Impairment of Assets'. This has not impacted on either the profit in the year to 30 June 2008 or the net assets at that date. There is no difference in Group net assets under IFRS and UK GAAP at 30 June 2008 as the impairment review and associated charge in the period to 30th June 2007 aligns the carrying value of the goodwill under UK GAAP and IFRS. However, the adoption of IAS36 has had an impact on the net assets at 1st July 2006 and on losses incurred in the period to 30th June 2007. 

IFRS 5 'Discontinued operations'. The transactions relating to Croma Defence Systems Limited, which went into liquidation in the year are disclosed as discontinued in accordance with this standard.

IAS 1 'Presentation of financial statements'. This preliminary announcement has been prepared in accordance with this standard.

IFRS 7 'Financial instruments: disclosures'. This introduces requirements to disclose risks arising from financial statements, and therefore disclosures that relate to credit risk and liquidity risk are discussed below. The Group is not exposed to market or currency risk.

IFRS 8 'Operating segments'. The analysis of operating segments is shown in the full financial statements.

Basis of consolidation

 

Where the Company has the power, either directly or indirectly, to govern the financial and operating policies of another entity or business so as to obtain benefits from its activities, it is classified as a subsidiary. The preliminary announcement presents the results of the company and its subsidiaries ("the Group") as if they formed a single entity. Inter-company transactions and balances between Group companies are therefore eliminated in full.

Revenue and profit recognition

Income of the Group is derived from a number of different sources. These sources are service based as well as for the sale of goods. Following the principles of IAS 18 'Revenue', the policies for income recognition in respect of each of the different sources of income are such that income is recognised to the extent that the group has obtained the right to consideration through its performance or delivery of a service as well as the sale of a product. Certain forms of income require a contractual obligation to be entered into between the Group and the customer:

Security Personnel services are recognised in the month in which the work is carried out for the client.

Keyholding income is recognised in equal instalments over the period of the contract.

Sale of Goods are recognised at the point that they are delivered to clients' premises on signature of a goods received note.

The fair value of any revenues associated with the sale of software licences is recognised on delivery of the product to the customer.

Maintenance fees are recognised over the term of the contract. Where a maintenance fee is not itemised in the contract but is still provided as part of the contractual arrangement, an apportionment is taken as the maintenance amount, based upon its fair value. The value of this amount is held as deferred income under 'Accruals and deferred income' in the balance sheet.

  Goodwill

Goodwill represents the excess of the cost of a business combination over the interest in the fair value of identifiable assets, liabilities and contingent liabilities acquired. Cost comprises the fair value of assets given, liabilities assumed and equity instruments issued, plus any direct costs of acquisition.

Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated income statement. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated income statement on the acquisition date.

At the date of transition to IFRS at 1st July 2006, the goodwill carrying amount under UK GAAP was tested for impairment and based on the conditions existing at the transition date no impairment was identified. Thus, the carrying amount of goodwill in Croma Group PLC's IFRS opening balance was equal to the goodwill carrying amount under UK GAAP. From the date of transition to IFRS, Croma Group PLC discontinued the amortisation of goodwill and implemented annual impairment tests for goodwill.

Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly.

Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset's cash-generating unit (i.e. the lowest group of assets in which the asset belongs for which there are separately identifiable cash flows). Goodwill is allocated on initial recognition to each of the group's cash-generating units that are expected to benefit from the synergies of the combination giving rise to the goodwill.

Impairment charges are included in the administrative expenses line item in the consolidated income statement, except to the extent they reverse gains previously recognised in the consolidated statement of recognised income and expense. An impairment loss recognised for goodwill is not reversed.

Business combinations

The preliminary announcement incorporates the results of business combinations using the purchase method. In the consolidated balance sheet, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated income statement from the date on which control is obtained.

The group had taken the exemption not to apply IFRS 3 retrospectively to business combinations occurring prior to the date of transition to IFRS. As noted above, goodwill arising on these combinations has been retained at its carrying value as at 1 July 2006. In accordance with IAS 36, the group only recognises impairments after that date.

 

Development costs

Research expenditure is recognised as an expense as it is incurred. Development expenditure is written off in the same way unless the directors are satisfied as to the technical, commercial and financial viability of the individual projects. If the criteria of IAS 38 have been met, then the expense is capitalised.

Segment reporting

All activities originate in the UK. The Group has 3 operating subsidiaries, Vigilant Security (Scotland) Limited, ('Vigilant'), R & D Design Services Limited ('RDDS') and Photobase Limited ('Photobase'). As each subsidiary is engaged in a different marketplace and have their own profiles of risk and rewards the directors consider that these 3 companies best represent the material business segments of the Group. These segments also reflect the internal reporting structure within the Group. Vigilant provides security services to customers. The revenue of RDDS predominately consists of the sale of goods to its customers. While RDDS has some revenue for the provision of related services to the goods that it sells, this is not considered a material business segment in its own right. Photobase revenue mostly consists of the provision of maintenance, hardware and software to its customers.

The discontinued activity of Croma Defence Systems Limited is shown as such separately. 

Property, plant and equipment

Property, plant and equipment are stated at costs less depreciation. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost of each asset less its estimated residual value evenly over its estimated useful life, as follows:

Freehold property - 4% on cost

Plant and equipment - 25% on cost

Computer equipment - 15% on cost

Office equipment - 15% on cost

Motor vehicles - 25% on cost

Inventories

Inventories are valued at the lower of cost and net realisable value. Cost is based on the cost of purchase on a first in first out basis together with costs in bringing it to its present condition and location. Work in progress and finished goods include attributable overheads. Net realisable value is based on estimated selling price less additional costs to completion and disposal.

  

Dividends

Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when interim dividends are paid. In the case of final dividends, this is when approved by the shareholders at the AGM.

Deferred taxation

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the balance sheet differs from its tax base, except for differences arising on:

the initial recognition of goodwill;

the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and

investments in subsidiaries and jointly controlled entities where the group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future.

Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised.

The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered).

Deferred tax assets and liabilities are offset when the group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxed levied by the same tax authority on either:

the same taxable group company; or

different group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

Operating leases

Rentals payable under operating leases are charged to the income statement on a straight line basis over the term of the lease.

Financial Instruments

Financial assets and financial liabilities are initially recognised in the group's balance sheet when the group becomes a party to the contractual provisions of the instrument at their fair value and thereafter at amortised cost.

  

Share capital

Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Group's ordinary shares are classified as equity instruments.

Finance cost

Finance costs of debt are recognised in the income statement over the term of such instruments at a constant periodic rate on the carrying amount.

Financial assets

Trade receivables are recorded at their amortised cost less any provision for doubtful receivables. Trade receivables due in more than one year are discounted to their present value. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the group will be unable to collect all of the amounts due under the terms receivable the amount of such provision being the difference between the net carrying amount and the present value of the future expected cashflows associated with the impaired receivable. For trade receivables which are reported net, such provisions are reported in a separate allowance account with the loss being recognised within administrative expenses in the income statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. The provision at 30th June 2008 across the Group was £71,260 (2007- £61,073). The effect of discounting on these financial instruments is not considered to be material 

Financial Liabilities

(a) Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the balance sheet. Interest expense in this context includes initial transaction costs and premia payable on redemptions, as well as any interest or coupon payable while the liability is outstanding.

(b) Trade payables and other short-term monetary liabilities, are initially recognised at their amortised cost.

(c) The proceeds received on issue of the Group's convertible debt are allocated into their liability and equity components. The amount initially attributed to the debt component equals the discounted cash flows using a market rate of interest that would be payable on a similar debt instrument that does not include an option to convert. Subsequently, the debt component is accounted for as a financial liability measured at amortised cost.

The difference between the fair value of the convertible debt instrument as a whole and the amount allocated to the debt component is credited direct to equity and is not subsequently re-measured. On conversion, the debt and equity elements are credited to share capital and share premium as appropriate.

The interest expense of the liability component is calculated by applying the effective interest rate to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying amount of the convertible loan note.

Issue costs are apportioned between the liability and equity components of the convertible loan notes based on their relative carrying amounts at the date of issue. The proportion relating to the equity component is charged directly to equity.

(d) All other financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Group's ordinary shares are classified as equity instruments.

The Group considers its capital to comprise its ordinary share capital, deferred share capital, share premium, share option (IFRS2 reserve) and accumulated retained earnings.

Share options

Where share options are awarded to employees, the fair value of the options as measured at the date of grant is charged to the income statement over the vesting period. Non market vesting conditions are taken into account by adjusting the number of options of equity instruments that are expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition. Share options are equity and not a financial liability.

Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification is also charged to the income statement over the remaining vesting period.

Financial risks

The Group is exposed through its operations to the following financial risks:

Credit risk

Fair value or cash flow interest rate risk

Foreign exchange risk

Other market price risk

Liquidity risk

In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements.

There have been no substantive changes in the Group's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note.

Financial Instruments

The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows:

Financial assets	2008	2007
	£	£
Trade receivables	1,437,941	1,309,412
Cash at bank	62,375	131,792
Total	1,500,316	1,441,204
Financial liabilities	2008	2007
	£	£
Trade payables	185,634	686,280
Bank overdrafts	-	155,258
Bank loans	40,722	45,373
Convertible loan notes	1,295,848	839,814
Invoice discounting	268,285	281,698
Non convertible loan notes	-	251,263
Total	1,790,489	2,259,686

General objectives, policies and processes

The Board has overall responsibility for the determination of the Group's financial risk management objectives and policies and pays close attention to its responsibilities in this regard. The Board meet regularly and discuss the effectiveness of risk management processes and ways in which they can be improved upon. The Board also receives monthly reports from the Group Finance director through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets.

The overall objective of the Board is to set policies that seek to reduce financial risk as far as possible without unduly affecting the Group's competitiveness and flexibility. Further details regarding these policies are set out below:

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or a counterparty to a financial instrument fails to meet its contractual obligations. The Group is mainly exposed to credit risk from credit sales. It is Group policy, implemented locally, to assess the credit risk of new customers before entering contracts. Such credit ratings are taken into account by local business practices.

Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. The Group has banking arrangements with several long established banks and financial institutions.

The Group does not enter into derivatives to manage credit risk, although in certain isolated cases may take steps to mitigate such risks if it is sufficiently concentrated.

The maximum credit risk exposure at 30 June 2008 is represented by the balance of cash at bank and trade and other receivables at that date. The Group has a small percentage of bad debt which is not material. The bad debt charge within the Group for the year to 30 June 2008 was £19,666 (2007 - £15,975). .

Liquidity risk

Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.

The Group's policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To achieve this aim, it seeks to maintain cash balances (or agreed facilities) to meet expected requirements for a period of at least 45 days.

The Board receives rolling 12-month cash flow projections on a monthly basis as well as information regarding cash. At the balance sheet date, these projections indicated that the group expected to have sufficient liquid resources to meet its obligations under all reasonably expected circumstances.

The liquidity risk of each group entity is reviewed centrally by the Group board. The budgets are set locally and agreed by the board in advance, enabling the group's cash requirements to be anticipated. Where facilities of group entities need to be increased, approval must be sought from the Group Finance Director. Where the amount of the facility is above a certain level agreement of the Board is needed.

Foreign exchange and market risk

The Group does not have any marketable instruments and therefore is not affected by market price risk. 

The Group neither sells nor purchases a significant value of items in foreign currencies, and takes appropriate measures to mitigate currency risk when it does.

  Standards issued by the International Accounting Standards Board (IASB) not effective for the current year and not adopted by the Group.

The following standards and interpretations have been issued by the IASB. They become effective after the current year and have not been early adopted by the Group:

 

International Financial Reporting Standards (IFRS)		Effective  date commencing	To be adopted by the Group during years
Amendment to  IFRS 2	Share-based Payment: Vesting Conditions and Cancellations This amendment clarifies that vesting conditions are service conditions and performance conditions only, and specifies that all cancellations should receive the same accounting treatment. The amendment is still to be endorsed by the EU.	01.01.2009	30.06.2010
IFRS 3 -revised	Business Combinations This standard may result in significant changes to apply to acquisition accounting, including treatment of acquisition costs and recognition of intangible assets acquired. The standard will not require a restatement of previous business combinations. The standard is still to be endorsed by the EU	01.07.2008	30.06.2009
Amendment to  IAS 27	Consolidated and Separate Financial Statements This amendment relates to acquisitions of subsidiaries achieved in stages and disposals of interests. The amendment does not require the restatement of previous transactions, and must be adopted at the same time as IFRS 3 Revised. The amendment is still to be endorsed by the EU.	01.07.2009	30.06.2010
Amendments to  IAS 1- revised	Presentation of Financial Statements: A Revised Presentation The amendment affects the presentation of owner changes in equity and of comprehensive income. This does not impact recognition or measurement of assets and liabilities. The amendment is still to be endorsed by the EU.	01.01.2009	30.06.2010
Amendment to  IAS 23	Borrowing Costs The amendment removes the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. The amendment is still to be endorsed by the EU	01.01.2009	30.06.2010
Improvements to IFRSs	This clarifies the requirements of IFRSs and eliminates inconsistencies between the standards. The amendment is still to be endorsed by the EU.	01.01.2009	30.06.2010

  Standards issued by the International Accounting Standards Board (IASB) not effective for the current year and not adopted by the Group (cont.d).

 

International Financial Reporting Interpretations Committee (IFRIC)
IFRIC 16	Hedges of a Net Investment in a Foreign Operation IFRIC 16 clarifies reporting on hedge instruments and foreign currency accounting in respect of foreign operations. IFRIC 16 is still to be endorsed by the EU.	01.10.2008	30.06.2010
IFRIC 17	Distribution of Non-Cash Assets to Owners IFRIC 17 clarifies the accounting treatment when dividends are paid to a company's owners other than by cash. IFRIC 17 is still to be endorsed by the EU.	01.07.2009	30.06.2010

The impact on the future adoption of these standards in the Group's financial statements is not expected to be material. Additionally, the proposed amendments to IAS32, IFRS1 and IFRIC15 are not expected to have any impact on the Group's financial statements.

Hedge accounting

Hedge accounting is applied to financial assets and financial liabilities only where all of the following criteria are met:

At the inception of the hedge there is formal designation and documentation of the hedging relationship and the Group's risk management objective and strategy for undertaking the hedge.

For cash flow hedges, the hedged item in a forecast transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect profit or loss.

The cumulative change in the fair value of the hedging instrument is expected to be between 80-125% of the cumulative change in the fair value or cash flows of the hedged item attributable to

the risk hedged (i.e. it is expected to be highly effective).

The effectiveness of the hedge can be reliably measured. The hedge remains highly effective on each date it is tested. The Group has chosen to test the effectiveness of its hedges on a quarterly basis.

The Group does not hold in the current of previous financial years any assets or liabilities that meet the criteria above or has issued derivative instruments for speculative purposes.

 

  

2 Intangible fixed assets - Group

Total

£

Cost
At 1 July 2006			5,646,832
Reduction in earnout provision			(260,003)
At 30 June 2007			5,386,829
At 30 June 2008			5,386,829
Accumulated impairment
At 1 July 2006			-
Impairment			2,792,693
At 30 June 2007			2,792,693
Impairment			445,486
At 30 June 2008			3,238,179
Net book value
At 1 July 2006			5,646,832
At 30 June 2007			2,594,136
At 30 June 2008			2,148,650

The directors calculated the impairment as the difference between the carrying value and the net present value of cashflows anticipated to be generated from each of the groups cash generating units, being each of its subsidiaries, on a value in use basis.

 

Information relating to the impairment: 

	Growth  Rate	Discount  factor	No. of years of period of forecast	Carrying  Value 2008 £	Carrying  Value  2007 £
Vigilant Security (Scotland) Limited	35%	12%	2	1,396,390	1,396,390
Photobase Limited	0%	26%	2	0	445,486
R&D Design Services Limited	6%	15%	2	752,260	752,263
Total				2,148,650	2,594,136

 

Growth rates anticipated in the first 12 months are based on recent business levels and reflect an appropriate level of tender wins. For Vigilant the growth rate is based on growth in turnover that has already been achieved through contract wins, along with an expectation of further wins. Growth in turnover from 2006 to 2007 was 68% and from 2007 to 2008 was 44%, so this forecast is in the view of the board achievable. For RDDS the growth rate of 6% represents turnover already added through contract wins.

 

A discount of 12% has been applied to Vigilant Security (Scotland) Limited, representing the relatively stable nature of the business model, its past performance and anticipated wins. A discount rate of 15% has been applied to R& D Design Services Limited, again representing the stable nature of the business albeit slightly riskier than Vigilant due to its business model and past performance. A discount rate of 26% has been applied to Photobase Limited due to the high risk and uncertainty attached to this business, which is forecast to generate a net cash outflow. For this reason the goodwill associated with it has been impaired to £nil this year The net present value of the value in use cashflows that are forecast to be generated for Vigilant and RDDS exceed the carrying value of goodwill, by £377,991 and £687,322 respectively, but with Photobase were less than the carrying value.

The discount factors are based on a risk weighted cost of capital, considering each entities' risks. Factors that have been considered in calculating the risk include trading record, experience of management, customer profiles, and credit risk, such as debtor payment terms and how they are complied with. If discount rates used were reduced by 25% to 7.5% for Vigilant and 9% for RDDS it is estimated that the recoverable amount of goodwill would increase to £5,589,524 for Vigilant (with a 10% growth rate) and £11,759,345 for RDDS. If the discount rates were increased by 25% to 12.5% and 15% respectively, it is estimated that the recoverable amount of goodwill would be still exceed carrying value by £16,827 for Vigilant and £454,097 for RDDS.

Impairment losses recognised in the period

The directors have considered the carrying value of goodwill in relation to Photobase Limited and have decided that there is no remaining value and it should be fully impaired. The whole impairment of goodwill of Photobase Limited of £445,483 is reflected in administrative expenses. While the company continues to trade it has had to change its business model significantly over the last year to do so, and as such the remaining goodwill cannot be considered to have any value.

 

ENDFR GUGUUPUPRGBB

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