3rd Jul 2007 07:02
NCC Group PLC03 July 2007 3 July 2007 NCC Group plc 22% revenue growth by Escrow Solutions and 40% by Ethical Security Testing driveGroup full year profits up 23% NCC Group plc, (AIM: NCC, "NCC Group" or "the Group") the international,independent provider of Escrow Solutions, Assurance Testing and Consultancy,published its preliminary results for the year ended 31 May 2007 today. Financial Highlights • Group revenue up by 22% to £25.4m (2006: £20.7m) - Escrow Solutions revenue up by 22% to £15.0m - Assurance Testing revenue up by 53% to £5.8m (including Ethical Security Testing up 40%) - Consultancy revenue down by 2% to £4.6m • Group adjusted operating profits* up by 22% to £8.2m (2006: £6.7m) - Escrow Solutions operating profits up by 21% to £8.0m - Assurance Testing operating profits up by 25% to £0.7m - Consultancy operating profits up by 16% to £0.7m • Group adjusted pre tax profits** up by 23% to £8.1m (2006: £6.6m) • Adjusted fully diluted earnings per share** up 23% to 16.8p (2006: 13.7p) • Final dividend proposed of 3.25p, giving a total dividend of 4.75p, up 36% • Net cash positive at £0.9m following acquisitions (2006: £1.3m) Operational Highlights • Two acquisitions completed in the year; - Source Harbor, US Escrow Solutions provider on 7 July 2006 for up to £0.8m - Site Confidence, UK web site monitoring and load testing business on 23 January 2007 for up to £9.1m • Modified Group structure to focus on rapid market growth of Escrow Solutions and Assurance Testing (Load & Performance Testing and Ethical Security Testing) • Transfer to Full Listing expected on 13 July 2007 • Heads of terms signed to acquire another Assurance Testing Company for a maximum consideration of £4m • Total Group recurring revenue, monitoring renewals and order book for 2007 /8 currently stands at £19.0m * Adjusted for amortisation of acquired intangibles. ** Adjusted foramortisation of acquired intangibles and the unwinding of the discount of theSite Confidence deferred consideration. Rob Cotton, NCC Group Chief Executive commented: "These are another excellent set of results. We have also integrated twoacquired businesses and are completing the move to the Official List from AIM. "Following changes to the market and the integration of the acquisitions, wehave completed the modification of our operating structure. This will enable usto focus on exploiting the considerable market opportunities in the softwareescrow market, particularly following some high profile corporate failures; andon the web testing and assurance markets. In the latter, organised crimehacking has continued to increase significantly as the returns from identitytheft, banking and online frauds also continue to rise substantial. "With a sound business model, growing markets and excellent forward visibilityof our revenues, we are confident that we will be able to continue to developthe Group rapidly." Enquiries: NCC Group (www.nccgroup.com) 0161 209 5200 Rob Cotton, Chief Executive Paul Edwards, Group Finance Director Dresdner Kleinwort Charles Batten 020 7475 5799 College Hill Adrian Duffield / Corinna Dorward 020 7457 2020 Overview NCC Group has delivered another set of excellent results in its third and finalyear as an AIM listed company. The year produced record performances in anumber of areas and saw the completion of two acquisitions, furtherstrengthening the Group's capability in both Escrow Solutions and AssuranceTesting. Overall Group revenues grew by 22% to £25.4m (2006: £20.7m) with Group operatingprofits increasing by 20% to £8.0m (2006: £6.6m). The Group continued togenerate strong margins, with operating margin before amortisation holding firmat 32% (2006: 32%). Adjusted pre-tax profits were up 23% to £8.1m (2006: £6.6m) and adjustedearnings per share increased 23% to 16.8p (2006: 13.7p). In line with thecontinuing progressive dividend policy, the Board is recommending a finaldividend of 3.25p per share which makes a total of 4.75p for the year, up 36%(2006: 3.5p). The Group continued to be highly cash generative and was £0.9m net cash positiveat the year end, despite meeting the cost of acquisitions out of cash resources. The acquisition of Site Confidence, a Performance and Load Testing company, inJanuary 2007 for £9.1m, was a very positive move for the Group. Not only doesit complement the Assurance Testing offerings, it also allows the Group todevelop further its southern presence. Following the acquisition of Site Confidence and to reflect the changes inbusinesses over the last two years, the Group's structure has been modified overthe last 12 months. The Group is now structured along three business lines: • Escrow Solutions encompassing the Escrow businesses in the UK, Germany, United States and now including Verification Testing • Assurance Testing encompassing Performance and Load Testing, including Site Confidence and the Ethical Security Testing business • Consultancy Financial Review NCC Group revenues for the year ended 31 May 2007 increased by 22% to £25.4m(2006: £20.7m). Supported by the acquisition of Site Confidence, the Group'shalf year split was more weighted to the second half year than the first, with45% of revenue delivered in the first half (2006: 47%) compared to 55% in thesecond half (2006: 53%). Total Escrow Solutions accounted for 59% of Group revenue (2006: 59%) followingthe inclusion of Escrow Verification Testing within the division's incomestream. Assurance Testing now accounts for 23% (2006: 18%) with Consultancy,the smallest division, accounting for 18% of revenue (2006: 22%). With the continued growth in the US Escrow Solutions business and furtherpenetration into continental Europe from the UK, the geographical split ofrevenue has continued to evolve. However, the vast majority of the revenue isstill contributed by the UK at £20.6m (2006: £17.7m), 81% (2006: 85%) of totalrevenue. Revenue from the rest of the world has increased 71% to £3.0m (2006:£1.8m) with Europe contributing £1.8m (2006: £1.3m). Total Escrow Solutions revenue for the year increased by 22% to £15.0m (2006:£12.3m) driven by continued growth in the UK which increased its revenue by 16%to £11.4m (2006: £9.8m) and the acquisition of Source Harbor. The US increasedits revenue by 177% to £1.0m (2006: £0.4m) following a full year of trading.Escrow Verification Testing contributed a 25% increase in revenue to £2.4m(2006: £1.9m). Total Escrow Solutions contract terminations remain below 10%with annual renewals increasing by 21% to £9.4m (2006: £7.7m). The Assurance Testing division delivered strong revenue growth of 53% to £5.8m(2006: £3.8m). The continued demand for Ethical Security Testing has seen itsrevenue increase by 40%, although the move away from Specialist Testing has seena 29% (£0.5m) fall in revenues in 2007. The Performance and Load Testingbusiness of Site Confidence, which was acquired in January 2007, contributed£1.6m of revenue to the Assurance Testing business in a little over four monthsof NCC Group ownership. Consultancy revenues fell by 2% to £4.6m (2006: £4.7m) with as expected slightlystronger second half of the year. Adjusted Group operating profit, as set out in the table below, grew by 22% to£8.2m (2006: £6.7m). Adjusted operating margins remained at 32% (2006: 32%) asignificant increase from 29% at the time of the interim results. The half yearsplit of adjusted operating profit at 40:60 (2006: 40:60) was in line with prioryears. Operating profit Profit before tax 2007 2006 2007 2006Reported operating profit/profit before tax 7,952 6,636 7,785 6,551Amortisation of acquired intangibles 230 47 230 47Unwind of the discount on Site Confidence deferred consideration - - 102 -Adjusted operating profit/profit before tax 8,182 6,683 8,117 6,598 The operating profits, as set out in the table, increased by 20% to £7.9m (2006:£6.6m) are not adjusted for £0.6m (2006: £0.5m) of share based charges. The UK performed strongly with an increase in adjusted operating profit growthof 22% to £8.4m (2006: £6.9m), the adjusted operating margins also increased to35% up from 34% in 2006. The US performed inline with expectations followingits first full year of trading with adjusted operating profit increasing by 39%to £0.3m (2006: £0.2m). Germany incurred losses of £0.5m as costs were incurredin the process of winding down the operation. Currency fluctuations were minimal with a £11,000 adverse impact on the Group'sprofits in the financial year ended 31 May 2007. Adjusted pre-tax profit increased 23% to £8.1m (2006: £6.6m). The Group'sreported pre-tax profit was up 19% to £7.8m (2006: £6.6m). The Group's effective tax rate is 31.0% (2006: 30.4%). The rate is above thestandard UK rate of 30% largely as a result of the amortisation of theintangible asset and the unwinding of the discount on the retention payment forSite Confidence Limited, both of which are not allowable for tax purposes. At the year end the Group had unutilised tax losses carried forward in SiteConfidence. The Board has been advised these tax losses will be utilised and£0.9m has been recognised (2006: £nil) as a deferred tax asset associated withthese losses. The adjusted fully diluted earnings per share increased 23% to 16.8p (2006:13.7p). The basic earnings per share increased 18% to 16.5p (2006: 14.0p),whilst fully diluted earnings per share increased 17% to 15.9p (2006: 13.6p).Growth in earnings per share is marginally different from the growth in earningsdue to the fact that the weighted average number of dilutive share options hasincreased. The table below analyses the effect on the Group's fully diluted earnings pershare of the amortisation of acquired intangibles and unwind of the deferredconsideration on Site Confidence Limited. 2007 2006 Pence Pence Diluted EPS as per the income statement 15.9 13.6Amortisation of acquired intangibles 0.6 0.1Unwind of the discount on Site Confidence deferred consideration 0.3 -Adjusted diluted EPS 16.8 13.7 The Board is recommending a final dividend of 3.25p per share which makes atotal of 4.75p for the year up 36% (2006: 3.5p). If approved at the AnnualGeneral Meeting, the dividend will be paid on 28 September 2007 to shareholderson the register at 31 August 2007. The ex-dividend date will be 29 August 2007. The Group continues to be highly cash generative with operating cash flow beforeinterest and tax of £7.8m (2006: £7.3m) which is 98% of operating profit beforeinterest and tax (2006: 109%). A strong finish to the year has seen debtor daysincreased to 61 (2006: 51). Shareholders' funds at the end of the year were £33.4m (2006: £28.2m). After accounting for net cash out flows of £3.3m for the two acquisitions madeduring this year the Group ended the year with net cash of £0.9m (2006: £1.3m). Capital expenditure was reduced at £0.7m (2006: £0.8m) but it is likely toincrease marginally in the coming financial year as the Group upgrades its coreIT systems and develops unutilised space in its existing facilities toaccommodate future growth. Following the acquisitions of Source Harbor and Site Confidence, goodwillincreased by £7.1m and intangible assets relating to customer contracts andassociated relationships increased by £2.0m. The value of goodwill has beenassessed and no impairment has been evidenced. The contracts and customerrelationships have been assigned a useful economic life of between five andtwenty years and are to be amortised over that period. Current markets In the second half of the year, the Group saw returns from of its targetedsoftware owner campaigns and there has been an increase in software ownersproactively offering NCC Group Escrow Solutions to their customers. NCC Group has been aided by the newsworthy and very public demise of some highprofile software providers. Enlightened software owners are now keen todisassociate themselves from the dubious segments of the software developmentand reseller market and are more aware than ever that a licensee will demandescrow protection. The software owner schemes provide real added value as NCC Group activelymarkets escrow for them and take away the administrative burden. These schemesare paying positive returns to those who adopt them and the Group expects thistrend to continue. The launch and continuing enhancements of the on line portal, "Escrow Live" ismaking the process of account management and code depositing easier for allparties. Within the next few months the Group anticipates that owners will beable to have licensees join their agreement online with minimum administrationand involvement. The introduction of immediate escrow protection schemes arefurther making the process of obtaining escrow protection quicker, easier andmore accessible. The Escrow Solutions service continues to be a 'peace of mind' assuranceproposition which provides real benefit in all economic climates. NCC Groupcontinues to encourage clients to reach the correct level of protection and isseeing a good increase in their levels of risk awareness. Ethical Security Testing yet again continues to experience strong growth.Hacking is big business getting bigger and with it there is increased publicity,TK Maxx being a substantial recent example. Organised crime is committed to hacking as the returns from identity theft,banking and online frauds have continued to rise. The proliferation of blackmarket auction web sites continues as it has become even easier to buy and sellhacking tools, bank details and individuals' personal identities. The market research obtained from the Group's security awareness campaign inJanuary, which targeted Finance Directors of listed companies with USB memorysticks sent from an unidentified source, highlighted that individuals in seniorpositions still have a long way to go before information security is properlyunderstood. NCC Group is well placed to capitalise on the work that results from this lackof knowledge. The Ethical Security business combined with the InformationSecurity Consultancy offerings put NCC Group in a strong position to capitaliseon the market growth. The current day rate market is best described as "buoyantly competitive", with alot of invitations to propose for work. This position is much better than lastyear and the Group remains confident in the Consultancy offerings. Over thelast twelve months NCC Group has seen the Consultancy work fall into two maincategories, Information and Technology review, including process improvement andprocurement, and Information and Technology Security. The security side of the Consultancy division complements the Ethical SecurityTesting propositions and the Group offers advice to organisations to make surethat they are best placed to protect themselves and their business assets fromattack. NCC Group provides security advice from every perspective, especiallyfor those organisations that are covered by the Payment Card Industry (PCI) DataSecurity Standards. The Group's position in the information security market is further enhanced byits being accredited PCI Auditors, having CLAS consultants and one of thebiggest CHECK accredited security testing teams in the UK. Business Review Each operating division is managed independent and run by an autonomousmanagement team. There is no divisional focus on cross selling, although moreand more the Group is seeing a tie up between the information security side ofConsultancy and Ethical Security Testing. This trend will continue throughoutthe coming year as PCI Data Security Standards are introduced and audited inbusinesses accepting debit or credit card payments. Group Escrow Solutions The Escrow Solutions business remains the cornerstone of the Group representing59% of Group revenue. NCC Group has experienced good growth in all of its keyperformance measures of profitability, new contracts and beneficiaries, renewalsand for Verification Testing. Profitability grew to £8.0m (2006 £6.6m), an increase of 21% on revenue of £15m,with the UK contributing £13.8m. Group escrow renewals, represented £9.4m (2006: £7.7m) in the year, benefitingfrom continued tight controls over the termination process. Contractterminations were less than 10% in the year and below 11% for agreementbeneficiaries. This is again better than the Board's expectation and reflectsthe Group's flexibility and commitment to customer care in ensuring this levelof renewal. During the year the Board curtailed the investment in the German EscrowSolutions business and cut costs. NCC Group anticipates that the business willnow run at break even. The Board still ultimately believes that ContinentalEurope represents a real opportunity for the Group's Escrow Solutions ambitions.However, the level of growth achieved so far, against the costs incurred indelivering that growth, has failed to make a compelling case for furtherinvestment at this time. Worldwide the beneficiary base has now grown to 18,450 and the number ofcontracts is now at 9,138. In the UK NCC Group has 14,432 beneficiaries to7,440 agreements. In the UK we have 911 minimum annual fees on agreements. The rate of agreement completions, renewals and terminations have been such thatNCC Group is forecasting Group escrow renewals to be £10.5m for 2007/08 with UKrenewals forecast to be £9.5m. Escrow Verification Testing remains a predominantly UK sale, although the Groupis seeing very good progress within the US market with customers beginning tounderstand the benefits of increased levels of protection. The EscrowVerification Testing service delivered £2.4m of revenue (2006: £1.9m). TheBoard continues to see over 40% of verifications being repeated and have anorder book of £1.3m. Assurance Testing Assurance Testing consists of Ethical Security Testing and Performance and LoadTesting. Ethical Security Testing incorporates all of the Group's securitytesting, of which Penetration Testing is just one part. Performance and LoadTesting includes the web site monitoring and load testing business based aroundSite Confidence, as well as the parts of the original Specialist Testingbusiness, which is now mostly concerned with complementary Load Testingservices. In Assurance Testing, the Ethical Security Testing business saw an increase of40% in revenues to over £3.1m in the year and a 317% increase in profitabilitydespite the sizeable investment in the management structure. Site Confidenceand the Performance and Load Testing offering produced over £2.7m of income,with Site Confidence producing a contribution of £0.1m in the first four monthsof ownership. Assurance Testing profitability grew to £0.7m (2006: £0.6m), an increase of 25%,with revenue growth of 53% to £5.8m. As risk mitigation moves further up thecorporate agenda, the Board anticipates significant growth in this area goingforward. In adjusting the flow of information provided to the market, NCC Group hasdecided to report Ethical Security Testing's revenue and revenue growth insteadof the number of tests. The Group offers much more than just basic penetrationtests and it is now difficult to quantify what actually constitutes a test.Revenue growth was 40% to £3.1m (2006: £2.2m). In May 2007 we were delighted to be selected as one of only three approvedsuppliers under the CESG, the information assurance arm of the UK GovernmentCommunications Headquarters, Tailored Assurance Service scheme, which covers allaspects of the assurance proposition including security testing and InformationSecurity Consultancy. Performance and Load Testing offers a tremendous opportunity to the Group. Themovement away from the existing niche based offering was concluded with theacquisition of Site Confidence. The online monitoring business offers a highlevel of recurring revenues, with 90% of the blue chip customers renewing theirannual contracts. Site Confidence has a very strong presence in the web monitoring market and willprovide a platform for further developments in both load testing and 24/7monitoring products. Of particular interest is the development of a 24/7ethical security testing service. Consultancy Consultancy delivered a solid year although revenue fell by 2% to £4.6m as theGroup continued to stabilise its position in the market. Once again the Grouphad a stronger second half and as anticipated utilisation levels returned to the75% mark. The business has emerged as a key provider in the PCI Data Security Standardsarea and has seen good growth in the information security consultancy assecurity moves rapidly up the corporate agenda. Whilst this has helped reducethe reliance on local authority and central government, the Group has still seensuccess within the public sector, most notably in the housing sector. As a result of careful cost control and the appropriate use of flexibleresources, the Group generated a profit of £0.5m in the second half of the year.Operating profits grew by 16% to £0.7m (2006: £0.6m) for the year. Employees, Recruitment and Retention Recruitment and retention remains the biggest challenge to growth for a peoplebusiness. The Group has a headcount of 259, with 84 escrow account managers(2006: 67). NCC Group has begun to recruit in the new southern office in Dorking, but hasdeliberately taken a careful approach to ensure that the business processesfully function and that the business is properly integrated into the Group firstbefore stretching the onsite management team. With good progress to date the Group has recruited a number of Ethical SecurityTesting staff, are constructing an Ethical Security Testing laboratory andexpects to start extensive recruitment for escrow account managers during thenext six months. Acquisitions NCC Group will continue to invest in appropriate complementary businessactivities and is regularly involved in discussions with suitable targetcompanies but remains cautious. Currently the Group is optimistic that it will acquire another earningsenhancing Assurance Testing Company, for a consideration not greater than £4m.The Group has entered into a non-binding heads of terms agreement, with a viewto undertaking due diligence and then, subject to the outcome, completing thetransaction on or around the end of July 2007. Move to Full Listing As announced earlier this year the Board decided to transfer the Group's listingfrom AIM to the Official List, the main market in London. A full listing shouldnot only enhance the Group's corporate identity and profile but also support itsambitious growth plans. The Group expects to complete the process on 13 July2007. Current Trading and Outlook The Board believes that the Group has the right operational structure and strongbusiness culture in place to continue with its ambitious and exciting growthplans whilst the business continues to make a virtue of acting independently andto ensure equitable terms are provided for both parties. No parties arefavoured. The start to the year sees the total Group Escrow Solutions renewals at £10.5m,up from £9.4m this time last year and a verification order book of £1.3m. The Assurance Testing businesses' order books have improved to £2.2m from £1.6mwith £3.2m of monitoring renewals being forecast for 2007/08. The Consultancybusiness has £1.8m of orders up from £1.7m last year. NCC Group remains committed to the delivery of organic growth in both itsexisting businesses and newly acquired operations. The outlook for NCC Groupremains good and the Board remains very confident in the Group's ability todeliver growth. Consolidated income statementFor the year ended 31 May 2007 Notes 2007 2006 £000 £000 Revenue 2 25,400 20,747Cost of sales (13,365) (10,647)Gross profit 12,035 10,100 Administrative expenses before amortisation of intangible assets (3,853) (3,417)Earnings before interest, tax and amortisation 8,182 6,683Amortisation of intangible assets (230) (47)Total administrative expenses (4,083) (3,464) Operating profit 2 7,952 6,636 Financial income 5 109 175Finance expense excluding unwinding of discount (174) (260)Net financing costs excluding unwinding of discount (65) (85)Unwinding of discount effect relating to deferred consideration on business (102) -combinationsFinancial expenses 5 (276) (260) Net financing costs (167) (85) Profit before taxation 3 7,785 6,551Taxation 6 (2,411) (1,993)Profit for the year 5,374 4,558 Attributable to equity holders of the parent company 5,374 4,558Profit for the year 5,374 4,558 Earnings per share 8Basic earnings per share 16.5p 14.0pDiluted earnings per share 15.9p 13.6p Group balance sheetat 31 May 2007 Notes 2007 2006 £000 £000 £000 £000Non current assetsIntangible assets 10 39,302 30,420Plant and equipment 11 1,482 1,257Deferred tax assets 14 2,005 423Total non-current assets 42,789 32,100 Current assetsTrade and other receivables 12 7,757 4,840Cash and cash equivalents 4,377 5,139Total current assets 12,134 9,979 Total assets 54,923 42,079 EquityIssued capital 20 326 326Share premium 19,929 19,913Retained earnings 13,144 7,964Currency translation reserve 39 15Total equity attributable to equity holdersof the parent 33,438 28,218 Non current liabilitiesInterest bearing loans 17 3,500 2,689Other financial liabilities 17 3,782 123Deferred tax liability 14 473 -Total non current liabilities 7,755 2,812 Current liabilitiesInterest bearing loans 18 - 1,200Trade and other payables 15 3,931 2,750Deferred revenue 16 8,620 6,037Current tax payable 1,179 1,062Total current liabilities 13,730 11,049Total liabilities 21,485 13,861Total liabilities and equity 54,923 42,079 Group cash flow statementfor the year ended 31 May 2007 Notes 2007 2006 £000 £000Cash inflow from operating activitiesProfit for the year 5,374 4,558Adjustments for:Depreciation charge 688 550Share based charges 575 468Amortisation of intangible assets 230 47Net financing costs 167 85Profit on sale of plant and equipment - (9)Income tax expense 2,411 1,993Profit for the year before changes in working capital 9,445 7,692Increase in receivables (1,976) (1,045)Increase in payables 314 636Cash generated from operating activities before interest and tax 7,783 7,283Interest paid (166) (272)Income taxes paid (2,449) (1,808)Net cash generated from operating activities 5,168 5,203 Cash flows from investing activitiesInterest received 109 175Proceeds from the sale of plant and equipment 1 34Acquisition of plant and equipment (734) (824)Acquisition of business 13 (3,641) (2,546)Net cash used in investing activities (4,265) (3,161) Cash flows from financing activitiesProceeds from the issue of ordinary share capital 16 -VAT recovered on fees relating to the issue of capital - 94Proceeds from borrowings 3,500 -Payment of bank loans (3,900) (1,200)Payment for shares in minority interest - (18)Equity dividends paid (1,304) (897)Net cash from financing activities (1,688) (2,021) Net (decrease) / increase in cash and cash equivalents 22 (785) 21 Cash and cash equivalents at beginning of year 5,139 5,103Effect of exchange rate fluctuations on cash held 23 15Cash and cash equivalents at end of year 4,377 5,139 Statement of changes of equityfor the year ended 31 May 2007 Group Share Share Retained Currency Minority Total capital premium earnings translation interest Equity £000 £000 £000 £000 £000 £000Balance at 1 June 2005 326 19,819 3,755 - (23) 23,877Share based charges - - 468 - - 468Deferred tax on share basedpayments - - 103 - - 103Profit for the year - - 4,558 - - 4,558Currency translation reserve - - - 15 - 15Recovery of VAT on share issue - 94 - - - 94Purchase of minority interest - - (23) - 23 -Dividends to shareholders - - (897) - - (897)Balance at 31 May 2006 326 19,913 7,964 15 - 28,218 Balance at 1 June 2006 326 19,913 7,964 15 - 28,218Share based charges - - 575 - - 575Deferred tax on share based - - 535 - - 535paymentsProfit for the year - - 5,374 - - 5,374Shares issued - 16 - - - 16Currency translation reserve - - - 24 - 24Dividends to shareholders - - (1,304) - - (1,304)Balance at 31 May 2007 326 19,929 13,144 39 - 33,438 Notes 1 Accounting policies Basis of preparation NCC Group plc ("the Company") is a company incorporated in the UK. The Group financial statements consolidate those of the company and itssubsidiaries (together referred to as the "Group"). The parent companyfinancial statements present information about the Company as a separate entityand not about its Group. Both the parent and the Group financial statements have been prepared andapproved by the directors in accordance with International Financial ReportingStandards as adopted by the EU ("Adopted IFRS"). On publishing the parentcompany financial statements here together with the Group financial statements,the company is taking advantage of the exemption in s230 of the Companies Act1985 not to present its individual income statement and related notes that forma part of these approved financial statements. The accounting policies set out below have, unless otherwise stated, beenapplied consistently to all periods presented in these Group financialstatements. Basis of consolidation Subsidiaries are entities controlled by the Group. Control exists when the Grouphas the power, directly or indirectly, to govern the financial and operatingpolicies of an entity so as to obtain benefits from its activities. In assessingcontrol, potential voting rights that are currently exercisable or convertibleare taken into account. The financial statements of subsidiaries are included inthe consolidated financial statements from the date that control commences untilthe date that control ceases. Intangible assets and goodwill All business combinations are accounted for by applying the purchase method.Goodwill represents amounts arising on acquisition of subsidiaries. In respectof business acquisitions that have occurred since 1 June 2004, goodwillrepresents the difference between the cost of the acquisition and the fair valueof the net identifiable assets acquired. Identifiable intangibles are thosewhich can be sold separately or which arise from legal rights regardless ofwhether those rights are separable. Goodwill is stated at cost less any accumulated impairment losses. Goodwill isallocated to cash-generating units based on the allocation of the businessacquired and is not amortised but is tested annually for impairment. In respect of acquisitions prior to 1 June 2004, goodwill is included at 1 June2004 on the basis of its deemed cost, which represents the amount recorded underUK GAAP at 31 May 2004 which was broadly comparable save that only separableintangibles were not recognised and goodwill was amortised. Other intangible assets that are acquired by the Group are stated at cost lessaccumulated amortisation. Amortisation is charged to the income statement on astraight line basis over the estimated useful lives of intangible assets unlesssuch lives are indefinite. Goodwill is systematically tested for impairment ateach balance sheet date or whenever there is an indication of impairment. Otherintangibles are amortised from the date they are available for use. Acquiredcustomer contracts and relationships are amortised over their estimated usefuleconomic life of between 5 and 20 years. Related party transactions Details of related party transactions are set out in note 25 to these financialstatements. Plant and equipment Plant and equipment is stated at cost less accumulated depreciation.Depreciation is charged to the income statement on a straight line basis overthe estimated useful lives of each part of an item of plant and equipment. Theestimated useful lives are as follows: Computer equipment - 20% to 33%Plant and equipment - 20%Fixtures and fittings - 20%Motor vehicles - 25% Plant and equipment is also tested for impairment whenever there is anindication of potential impairment. Investments in subsidiaries Investments in subsidiaries are carried at cost less impairment and preacquisition dividends. Revenue recognition Revenue represents the value of services provided during the period, excludingVAT. Testing and consultancy The results of partially completed contracts whether fixed price or on a timeand materials basis are dealt with on a percentage completion basis according tothe number of days worked by including the profit or loss earned on workcompleted to the balance sheet date. Provisions are made for any losses onuncompleted contracts expected to be incurred after the balance sheet date. Escrow and web site monitoring Other than fees attributable to initial setup on the signing of a new contract,which is recognised when the contract is signed, maintenance and escrowsolutions agreement revenue is deferred and released to the income statement ona straight-line basis over the life of the related agreement, on the basis thatthe performance is deemed to fall evenly over the contract period. Foreign currencies Transactions in foreign currencies are recorded using the rate of exchangeruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies are translated using the rate of exchangeruling at the balance sheet date and the gains or losses on translation areincluded in the income statement. The assets and liabilities of overseas subsidiaries denominated in foreigncurrencies are translated at the closing rate and income statements of overseassubsidiary undertakings are translated at the average exchange rates. Gains andlosses arising on these transactions are taken to the translation reserve. Theyare released to the income statement upon disposal. Operating leases payments Operating lease rentals are charged to the income statement on a straight-linebasis over the period of the lease. Lease incentives received are recognised inthe income statement as an integral part of the total lease expense. Employee benefits - defined contribution plans The Group operates a defined contribution pension scheme. The assets of thescheme are kept separately from those of the Group in an independentlyadministered fund. The amount charged as expense in the income statementrepresents the contributions payable to the scheme in respect of the accountingperiod. Share-based payment transactions The share option programme allows Group employees to acquire shares of theparent company; these awards are granted by the parent. The fair value ofoptions granted is recognised as an employee expense with a correspondingincrease in equity. The fair value is measured at grant date and spread over theperiod during which the employees become unconditionally entitled to theoptions. The fair value of the options granted is measured using an optionvaluation model, taking into account the terms and conditions upon which theoptions were granted. The amount recognised as an expense is adjusted to reflectthe actual number of share options that vest except where forfeiture is due onlyto share prices not achieving the threshold for vesting. Interest bearing borrowings Interest bearing borrowings are recognised initially at fair value lessattributable transaction costs. Subsequent to initial recognition interestbearing borrowings are stated at amortised cost with any difference between costand redemption value being recognised in the income statement over the period ofthe borrowings on an effective interest basis. Net financing costs Net financing costs comprise interest payable, interest receivable on fundsinvested and dividend income. Interest income and interest payable is recognised in the income statement as itaccrues. Dividend income is recognised in the income statement on the date theentity's right to receive the payments is established and pre acquisitiondividends are deducted from the cost of investment. Contingent deferred consideration under business combinations Contingent consideration on business combinations is recognised only to theextent that it is probable that the consideration will be paid. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Taxis recognised in the income statement except to the extent that it relates toitems recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantively enacted at the balance sheet date, andany adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amountsof assets and liabilities for financial reporting purposes and the amounts usedfor taxation purposes. The following temporary differences are not provided forthe initial recognition of goodwill and the initial recognition of assets orliabilities that affect neither accounting nor taxable profit other than in abusiness combination. The amount of deferred tax provided is based on theexpected manner of realisation or settlement of the carrying amount of assetsand liabilities, using tax rates enacted or substantively enacted at the balancesheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Intra-group financial instruments Where the Company enters into financial guarantee contracts to guarantee theindebtedness of other companies within the Group, the Company considers these tobe insurance arrangements and accounts for them as such. In this respect theCompany treats the guarantee contract as a contingent liability until such timeas it becomes probable that the Company will be required to make a payment underthe guarantee. IFRS adopted for the first time In these financial statements the following new statements have been adopted forthe first time; IFRIC 4 Determining whether an arrangement contains a leaseIFRIC 6 Liabilities arising from participating in a specific market - waste electrical and electronic equipmentIFRIC 10 Interim financial reporting and impairmentAmendment to The effects of changes in foreign exchange rates - Net IAS 21 investment in a foreign operationAmendments to Financial instruments - Recognition and measurement - IAS 39 Hedging of future cash flows and the fair value option The adoption of these statements has had an immaterial impact upon theseaccounts. Adopted IFRS not yet applied The following adopted IFRS were available for early adoption but have not beenapplied by the Group in these financial statements; International accounting standards (IFRS)IFRS 7 Financial Instruments: DisclosuresIFRS 1 Amendment to IAS 1 - Capital disclosuresIFRS 8 Operating segments (not yet endorsed)IFRIC 7 HyperinflationIFRIC 8 Scope of IFRS 2 - Share based payments The directors do not anticipate that the adoption of these standards andinterpretations will have a material impact on the Group's financial statements.Certain of these standards and interpretations will require additionaldisclosures over and above those currently included in these financialstatements in the period of initial application. Trade and other receivables Trade and other receivables are stated at their nominal amount less impairmentlosses. Cash and cash equivalents Cash and cash equivalents comprise of cash in hand and deposits repayable ondemand. Bank overdrafts that are repayable on demand form part of the Group'scash management and are included as a component of cash and cash equivalents forthe purpose only of the statement of cash flows. Basis of measurement The financial statements are prepared on the historical cost basis. Use of estimates and judgements Information about the most significant areas of estimation and judgements isdescribed in the following notes; 10 Goodwill13 Acquisitions19 Measurement of share based payments 2 Segmental information The Group is organised into three primary business segments; Escrow Solutions,Assurance Testing and Consultancy. These three segments are the Group's primaryreporting format for segment information. All segments are located in the UKunless indicated otherwise. 2007 2006 £000 £000Revenue by business segmentEscrow Solutions 11,400 9,832Escrow Solutions (Germany) 203 183Escrow Solutions (US) 1,028 371Escrow Verification 2,390 1,907Total Escrow Solutions 15,021 12,293Assurance Testing 5,795 3,797Consultancy 4,584 4,657Total revenue 25,400 20,747 Operating profit by business segmentEscrow Solutions 7,357 6,065Escrow Solutions (Germany) (476) (384)Escrow Solutions (US) 248 178Escrow Verification 825 710Total Escrow Solutions 7,954 6,569Assurance Testing 740 590Consultancy 717 616Segment operating profit 9,411 7,775Head office costs (1,229) (1,092)Earnings before interest, tax and amortisation 8,182 6,683Amortisation of intangible assets Escrow (US) (118) (47)Amortisation of intangible assets Assurance Testing (112) -Operating profit 7,952 6,636 Interest and tax are not allocated to business segments and there are no intersegment sales. Assets Liabilities Assets Liabilities 2007 2007 2006 2006 £000 £000 £000 £000Assets / (liabilities) by business segmentEscrow Solutions 2,795 (6,890) 2,014 (6,224)Escrow Solutions (Germany) 175 (126) 272 (171)Escrow Solutions (US) 4,341 (664) 3,723 (787)Escrow Verification 624 (173) 355 (149)Total Escrow Solutions 7,935 (7,853) 6,364 (7,331)Consultancy 2,108 (666) 1,369 (646)Assurance Testing 7,199 (7,794) 813 (550)Unallocated net assets 37,681 (5,172) 33,533 (5,334)Total assets / (liabilities) 54,923 (21,485) 42,079 (13,861) Depreciation Capital Total costs expenditure incurred to acquire2006 segmental assets £000 £000 £000Escrow Solutions 250 347 -Escrow Solutions (Germany) 22 114 -Escrow Solutions (US) 7 93 2,546Escrow Verification 21 19 -Total Escrow Solutions 300 573 2,546Consultancy 110 87 -Assurance Testing 130 154 -Head office 10 10 -Total 550 824 2,546 2007 Depreciation Capital Total costs expenditure incurred to acquire segmental assets £000 £000 £000Escrow Solutions 298 317 -Escrow Solutions (Germany) 32 12 -Escrow Solutions (US) 52 89 1,124Escrow Verification 20 14 -Total Escrow Solutions 402 432 1,124Consultancy 85 60 -Assurance Testing 195 242 4,766Head office 6 5 -Total 688 739 5,890 Unallocated net assets consist of goodwill arising on consolidation, cash, taxpayable and other centrally held assets and liabilities. The table below provides additional disclosure on revenue by geographical marketwhere the customer is based. 2007 2006 £000 £000Revenue by geographical segmentUK 20,620 17,699Rest of Europe 1,756 1,275Rest of the World 3,024 1,773Total revenue 25,400 20,747 The table below provides additional disclosure on assets / (liabilities) bygeographical market where the assets / (liabilities) are based. Assets Liabilities Assets Liabilities 2007 2007 2006 2006 £000 £000 £000 £000Assets / (liabilities) by geographicalsegmentUK 50,407 (20,695) 38,084 12,903Rest of Europe 175 (126) 272 (171)Rest of the World 4,341 (664) 3,723 (787)Total assets / (liabilities) 54,923 (21,485) 42,079 (13,861) 3 Expenses and auditors' remuneration 2007 2006 £000 £000Profit before taxation is stated after charging/(crediting): Amounts receivable by audtitors and their associates in respect of:Audit of these financial statements 5 5Audit of financial statements of subsidiaries pursuant to legislation 29 24Other services pursuant to legislation 5 1Services relating to corporate finance transactions entered into or proposed - 9to be entered into by or on behalf of the Company or GroupDepreciation and other amounts written off tangible and intangible fixedassets:Owned 688 550Amortisation of intangible assets 230 47Exchange losses 11 10Operating lease rentals charged:Hire of property, plant and equipment 305 270Other operating leases 445 385Profit on disposal of fixed assets - (9) 4 Staff numbers and costs Group The average number of persons employed by the Group during the year, includingdirectors is analysed by category as follows: Number of employees 2007 2006 Operational 59 66Administration, sales and marketing 179 142 238 208 The aggregate payroll costs of these persons were as follows: 2007 2006 £000 £000 Wages and salaries 9,829 7,853Share based payments (note 19) 575 468Social security costs 1,120 912Other pension costs (note 24) 257 231 11,781 9,464 Company The average number of persons employed by the company during the year, includingdirectors is analysed by category as follows: Number of employees 2007 2006 Administration, sales and marketing 2 2 2 2 The aggregate payroll costs of these persons were as follows: 2007 2006 £000 £000 Wages and salaries 435 386Share based payments (note 19) 169 146Social security costs 62 51Other pension costs (note 24) 26 23 692 606 5 Net financing costs 2007 2006 £000 £000Financial incomeInterest on short term deposits 109 175 109 175 Financial expensesInterest payable on bank loans and overdrafts (163) (253)Amortisation of deal fees on term loans (11) (7)Deferred consideration finance expense (see below) (102) - (276) (260) The deferred consideration finance expense of £102,000 (2006: nil) relates tothe acquisition of Site Confidence Limited. The maximum consideration to be paidexcluding professional fees is £9,100,000 based on performance conditionsspecified in the purchase agreement of which £4,300,000 was paid in January2007, £891,000 was paid in June 2007 with the remaining balance of up to£3,909,000 due to be paid in June 2008. The deferred consideration has beendiscounted to present values and the unwinding of the discount has been treatedas a finance expense. The discount rate used is 6.5%. The total net presentvalue as at 31 May 2007 of the deferred contingent consideration recognised intrade and other payables (note 15) is £996,000 which includes £105,000 arisingfrom the acquisition of Source Harbor Inc. Additionally, the net present valueas at 31 May 2007 recognised in non current liabilities (note 17) is £3,625,000. 6 Taxation Recognised in the income statement 2007 2006 £000 £000Current tax expenseCurrent year 2,571 2,151Adjustment to tax expense in respect of prior periods (11) (16)Foreign tax 12 5Total current tax 2,572 2,140Deferred tax (see note 14) (161) (147)Tax in income statement 2,411 1,993 Reconciliation of effective tax rate 2007 2006 £000 £000 Profit before taxation 7,785 6,551Current tax using the UK corporation tax rate of 30% (2006:30%) 2,336 1,965 Effects of:Expenses not deductible for tax purposes 74 39Foreign tax 12 5Adjustment to tax charge in respect of prior periods (11) (16)Total current tax 2,411 1,993 Deferred tax recognised directly in equity was £535,000 (2006: £103,000) 7 Dividends 2007 2006 £000 £000Dividends paid and recognised in the year 1,304 897Dividends proposed but not recognised in the year 1,060 734 Dividends per share paid and recognised in the year 4.00p 2.75pDividends per share proposed but not recognised in the year 3.25p 2.50p 8 Earnings per share The calculation of earnings per share is based on the following: 2007 2006 £000 £000 Profit for the year 5,374 4,558 Number of Number of Shares Shares 000's 000'sBasic weighted average number of shares in issue 32,611 32,604Dilutive effect of share options 1,256 800Diluted weighted average shares in issue 33,867 33,404 9 Profit attributable to members of the parent company The loss for the year dealt with in the accounts of the parent company was£77,000 (2006: £751,000 profit). 10 Intangible assets - Group Note Customer Goodwill Total contracts and relationships £000 £000 £000CostAt 1 June 2005 - 27,401 27,401Additions 2,250 816 3,066At 31 May 2006 2,250 28,217 30,467Additions 13 1,964 7,148 9,112At 31 May 2007 4,214 35,365 39,579 AmortisationAt 31 May 2006 47 - 47Charge for year 230 - 230At 31 May 2007 277 - 277 Net book valueAt 31 May 2007 3,937 35,365 39,302Net book valueAt 31 May 2006 2,203 28,217 30,420 The Company has no intangible assets. Goodwill considered significant in comparison to the Group's total carryingamount of such assets have been allocated to cash generating units or groups ofcash generating units as follows: Goodwill 2007 2006Cash generating units £000 £000Escrow 22,871 22,871Assurance Testing 2,301 2,301Consultancy 2,229 2,229NCC Group plc 27,401 27,401NCC Group Inc 1,354 816Site Confidence Limited 6,610 - 35,365 28,217 NCC Group Inc includes goodwill on the acquisition of the escrow division ofRecall Information Management Inc and Source Harbor Inc. The recoverable amountof the cash generating units has been calculated with reference to its fairvalue in use. In calculating this value, management have used the followingassumptions. Management have used experience and taken a prudent approach indetermining the values assigned to each key assumption, sales levels are basedon historical trends and a prudent estimate of market growth. The period overwhich management approved forecasts are based is three years using a discountrate of 11.5%, the growth rate beyond 3 years is assumed to be zero. There issignificant headroom on this basis. 11 Plant and equipment - Group Computer Plant and Fixtures and Motor vehicles equipment equipment fittings Total £000 £000 £000 £000 £000CostAt 1 June 2005 1,487 344 454 103 2,388Additions 609 14 46 161 830Disposals - - - (67) (67)At 31 May 2006 2,096 358 500 197 3,151Additions 627 14 56 42 739Acquisition of Site 381 33 38 - 452Confidence LimitedDisposals (1) - - - (1)At 31 May 2007 3,103 405 594 239 4,341 DepreciationAt 1 June 2005 1,099 130 122 35 1,386Charge for year 343 63 111 33 550On disposals - - - (42) (42)At 31 May 2006 1,442 193 233 26 1,894Charge for year 458 64 109 57 688Acquisition of Site 244 10 23 - 277Confidence LimitedAt 31 May 2007 2,144 267 365 83 2,859 Net book valueAt 31 May 2007 959 138 229 156 1,482Net book valueAt 31 May 2006 654 165 267 171 1,257 The company has no plant and equipment 12 Trade and other receivables Group Group Company Company 2007 2006 2007 2006 £000 £000 £000 £000 Trade receivables 5,792 3,464 - -Amounts owed by group undertakings - - 235 165Prepayments and accrued income 1,965 1,376 - - 7,757 4,840 235 165 All receivables fall due within one year and impairment on trade receivables inthe year was immaterial. 13 Acquisitions A. On 7 July 2006, the Group acquired the trade and net assets of Source HarbourInc for a maximum consideration of £897,000 of which £111,000 has been withheldsubject to the achievement of performance criteria specified in the purchaseagreement. The performance conditions are required to be satisfied by September2007. The acquisition had the following effect on the Group's assets and liabilities: Acquiree's Fair value Acquisition book values Adjustments amounts £000 £000 £000Acquiree's net assets at the acquisition date:Plant and equipment 6 - 6Trade and other receivables 24 - 24Deferred revenue (74) - (74)Accruals (16) - (16)Customer contracts and relationships - 389 389 Net identifiable (liabilities) / assets (60) 389 329Goodwill on acquisition 568Maximum consideration to be paid including expenses 897Less purchase consideration withheld (111)Net cash outflow 786 Goodwill has arisen on the acquisition because the purchase price exceeds thefair value of the separately identifiable net assets acquired. Goodwillrepresents the value of a second US business as the group develops its presencein this important market. From the date of acquisition Source Harbor Inc contributed to the operatingprofit of the US Escrow Solutions business of £130,000 and revenue of £1,028,000to the Group consolidated income statement for the year ended 31 May 2007. B. On 23 January 2007 the Group acquired 97% of the share capital of SiteConfidence Limited for a maximum consideration of £9,100,000 of which £4,800,000has been withheld subject to the achievement of performance criteria specifiedin the purchase agreement. The present value of the deferred consideration on 23January 2007 was £4,464,000. Following the completion of a drag along exercise,100% of the share capital had been acquired by 8 March 2007. The performanceconditions are required to be satisfied by June 2008. The acquisition had the following effect on the Group's assets and liabilities. Acquiree's Fair value Acquisition book values Adjustments amounts £000 £000 £000Acquiree's net assets at the acquisition date:Plant and equipment 175 - 175Trade and other receivables 917 - 917Deferred tax asset - 893 893Deferred tax liability - (473) (473)Cash 2,249 - 2,249Deferred revenue (1,680) - (1,680)Accruals (1,036) - (1,036)Intangible assets purchased - 1,575 1,575 Net identifiable assets 625 1,995 2,620Goodwill on acquisition 6,610Maximum consideration to be paid including expenses 9,230Less purchase consideration withheld (4,464)Net cash outflow 4,766Cash acquired (2,249)Net cash outflow excluding cash acquired 2,517 Goodwill has arisen on the acquisition because the purchase price exceeds thefair value of the separately identifiable net assets acquired including£1,575,000 assigned to customer relationships and contracts. Goodwill representssynergies, business processes and the assembled value of the work forceincluding industry specific knowledge and technical skills. From the date of acquisition Site Confidence Limited contributed an operatingprofit before amortisation of intangible assets of £149,000 and revenue of£1,574,000 to the Group consolidated income statement for the year ended 31 May2007. After amortisation of intangible assets, operating profits were £37,000. C. On 30 December 2005, the Group acquired the trade and net assets of theescrow division of Recall Total Information Management Inc for a maximumconsideration of £2,946,000 of which £400,000 was withheld subject to theachievement of performance criteria specified in the purchase agreement. The performance conditions were required to be satisfied by 31 December 2006 andin May 2007 a final payment of £338,000 was made to complete the transaction.£30,000 of the difference between the accrual for withheld consideration and thefinal payment arose from an exchange rate gain. This has been accounted for byreducing the carrying value of goodwill. D. If all of the acquisitions had occurred at the beginning of the financialyear the actual consolidated revenue and operating profit for the year ended 31May 2007 would have been approximately £28.5m and £8.1m respectively. 14 Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net 2007 2006 2007 2006 2007 2006 £000 £000 £000 £000 £000 £000Plant and equipment 137 81 - (7) 137 74Short term temporary differences 13 9 - - 13 9Trade losses 815 - - - 815 -Intangible assets - - (473) - (473) -Share based payments 1,040 333 - - 1,040 333Deferred tax assets / (liabilities) 2,005 423 (473) (7) 1,532 416 Movement in deferred tax during the year 1 June 2006 Recognised Recognised Arising on 31 May 2007 in income In equity acquisition £000 £000 £000 £000 £000Plant and equipment 74 63 - - 137Short term temporary differences 9 4 - - 13Trade losses - (78) - 893 815Intangible assets - - - (473) (473)Share based payments 333 172 535 - 1,040 416 161 535 420 1,532 Movement in deferred tax during the prior year 1 June 2005 Recognised Recognised 31 May 2006 in income in equity £000 £000 £000 £000 Plant and equipment 68 7 - 75Short term temporary differences 9 - - 9Share based payments 89 140 103 332 166 147 103 416 The Company has no deferred tax assets or liabilities 15 Trade and other payables Group Group Company Company 2007 2006 2007 2006 £000 £000 £000 £000 Trade payables 431 448 - -Amounts owed to Group undertakings - - 5,807 646Interest payable 29 33 - 33Non trade payables 963 804 - -Deferred consideration on acquisition of 996 - - -subsidiary (note 5)Accruals 1,512 1,465 49 15 3,931 2,750 5,856 694 16 Deferred revenue Group Group Company Company 2007 2006 2007 2006 £000 £000 £000 £000 Deferred revenue 8,620 6,037 - - 8,620 6,037 - - Deferred revenue of £6,856,000 (2006: £6,037,000) consists of Escrow Solutionsagreement revenue and maintenance revenue that has been deferred to be releasedto the income statement over the contract term on a pro-rata basis. Deferred revenue of £1,764,000 (2006: nil) consists of internet monitoring andload testing agreement revenue that has been deferred to be released to theincome statement over the contract term on a pro-rata basis. 17 Non-current liabilities Group Group Company Company 2007 2006 2007 2006 £000 £000 £000 £000 Revolving credit facility (see note 18) 3,500 2,700 - 2,700Total 3,500 2,700 - 2,700 Issue costs (26) (26) (26) (26)Amortisation of issue costs 26 15 26 15Net book value 3,500 2,689 - 2,689 The issue costs have been amortised to zero since the term loan to which itrelates has been repaid. This note provides information about the contractual terms of the Group andCompany's interest bearing loans and borrowings for more information about theGroup and Company's exposure to interest rate and foreign currency risk see note18. Other non-current liabilities of £3,782,000 consist of £3,675,000 deferredconsideration (note 5) arising on the acquisition of Site Confidence Limited.Payment was withheld from the initial consideration subject to the performanceof conditions specified in the purchase agreement. Payment is due to be made in June 2008. The remaining £107,000 relates to thebalance of a rent free period (2006: £123,000) which is released to the incomestatement over the term of the lease. 18 Financial instruments Financial instruments policy All instruments utilised by the Company and Group are for financing purposes.The day-to-day financial management and treasury are controlled centrally forall operations. Interest rate risk The Group and Company finances its operations through a mixture of retainedprofits and bank borrowings. The Group borrows and invests surplus cash atfloating rates of interest based upon bank base rate. The financial assets of the Group at the end of the financial year were asfollows 2007 2006 £000 £000Sterling denominated financial assets 4,253 4,723Euro denominated financial assets 32 58US dollar denominated financial assets 92 358Current trade and other receivables 7,757 4,840 12,134 9,979 The financial assets of the Company at the end of the financial year were asfollows 2007 2006 £000 £000Sterling denominated financial assets 12 5 12 5 The financial liabilities of the Group and their maturity profile is as follows 2007 2006Maturity £000 £000Less than 1 year - 1,2001 to 2 years - 1,2002 to 3 years 3,500 1,2003 to 4 years - 289Current trade and other payables 3,931 2,750Sterling denominated financial liabilities 7,431 6,639 The financial liabilities of the Company and their maturity profile is asfollows 2007 2006Maturity £000 £000Less than 1 year - 1,2001 to 2 years - 1,2002 to 3 years - 1,2003 to 4 years - 289Current trade and other payables 5,856 694Sterling denominated financial liabilities 5,856 4,583 As at 31 May 2007 the Group had a committed undrawn and unsecured revolvingcredit facility of £6.3 million (2006: £6.1 million). The interest payable ondrawn down funds is 0.95% above Libor. As at 31 May 2007 the Company had a committed undrawn and unsecured revolvingcredit facility of nil (2006: £6.1 million term loan) the interest payable ondrawn down funds is 0.95% above Libor. The revolving credit facility is available until July 2009. Liquidity risk The Group and Company's operations are cash generative. The Group and Companyconsiders that it has sufficient financial resources to meet its foreseeablerequirements. Credit risk As at 31 May 2007 the Group and Company had no material exposure to credit risk. Currency exposure As at 31 May 2007 the Group and Company had no material currency exposuresrelating to trading activities. The Group and Company's financial instrumentsare materially denominated in sterling. Fair value of financial instruments As at 31 May 2007 the Group and Company had no other financial instruments. There is no material difference between the fair value and the carrying value ofthe financial instruments. 19 Share based payments The company has a number of share option schemes under which options tosubscribe for the Company's shares have been granted to directors and staff,details of which are illustrated in the tables below. Expected term of optionsrepresents the period over which the fair value calculations are based. Approved EMI scheme Under the Approved EMI Scheme, options granted will be subject to performancecriteria. Options will vest if the average EPS growth for the 3 years followingtheir grant is greater than 3% above RPI per annum. The options are to besettled in equity. 19 Share based payments (continued)Date of grant Expected term of Exercise 2007 Number options Exercisable between price Outstanding July 2004 6 years July 2007 - July 2014 £1.70 894,141July 2005 6 years July 2008 - July 2015 £2.565 13,644July 2006 6 years July 2009 - July 2016 £2.70 9,259 LTIP Schemes The vesting condition for the award of the July 2004 LTIP is average growth ofEBITA over the life of the LTIP. If average EBITA growth is above 25% theshares will vest fully. If growth is less than 10% no shares will vest and ifthe average EBITA growth is between 10% and 25% the shares vest on a straightline basis between the two percentages. The vesting condition for the award of the other LTIP schemes is split 50:50between Total Shareholder Return (TSR) & EPS. The TSR condition compares theGroup's TSR performance over the 3 year performance period with the TSRperformance of the constituent companies of the FTSE software and computerservices index. Where the Group's TSR performance equates to median level in thecomparator group, 30% of the award governed by the TSR condition will vest. 100%of the award governed by the TSR condition will vest for upper quartileperformance or above. Between these two points, vesting will be determined on astraight line basis. The EPS condition governs the vesting of the remaining 50% of the LTIP award andrelates to the growth in the Group's EPS over the performance period. If growthis equal to 25% or more per annum then 100% of the award governed by the EPScondition will vest. If, however, growth is less than 10% per annum, none of theaward governed by the EPS condition will vest. Between these two points, vestingis determined on a straight line basis. The options are to be settled in equity. Date of Grant Expected term of Exercisable between Exercise 2007 Number options price outstanding July 2004 3 years June 2007 - July 2008 nil* 169,118July 2005 3 years June 2008 - Sept 2009 nil* 261,761July 2006 3 years June 2009 - June 2010 nil* 280,553Sept 2006 3 years June 2009 - June 2010 nil* 53,180 \* The option exercise price is nil however £1 is payable on each occasion ofexercise. Sharesave scheme The company operates a Sharesave scheme, which is available to all employees andfull time Executive Directors of the Company and its subsidiaries who haveworked for a qualifying period. All options are to be settled by equity. Under the scheme the following options have been granted and are outstanding atyear end.Date of Grant Expected term of Exercise 2007 Number options Exercisable between price Outstanding July 2004 3.25 years September 2007 - February 2008 £1.36 276,477July 2005 3.25 years September 2008 - February 2009 £2.07 36,978August 2006 3.25 years September 2009 - February 2010 £2.16 24,580 The following tables illustrate the number of share options for the schemes. Scheme Number of Instruments Options Forfeitures in Number of instruments as granted during exercised in the year instruments as at 1June 2005 the year the year at 31 May 2006 Approved EMI scheme 1,132,080 - - (167,668) 964,412Approved EMI scheme - 42,882 - - 42,882Sharesave scheme 343,678 - - (51,875) 291,803Sharesave scheme - 56,357 - (6,586) 49,771LTIP 169,118 - - - 169,118LTIP - 261,761 - - 261,761 The weighted average share price at the time the share options were forfeited inthe year was £2.49. Scheme Number of Instruments Options Forfeitures in Number of instruments as granted during exercised in the year instruments as at 1June 2006 the year the year at 31 May 2007 Approved EMI scheme 964,412 - (7,572) (62,699) 894,141Approved EMI scheme 42,882 - - (29,238) 13,644Approved EMI scheme - 9,259 - - 9,259Sharesave scheme 291,803 - (2,212) (13,114) 276,477Sharesave scheme 49,771 - - (12,793) 36,978Sharesave scheme - 28,901 - (4,321) 24,580LTIP 169,118 - - - 169,118LTIP 261,761 - - - 261,761LTIP - 280,553 - - 280,553LTIP - 53,180 - - 53,180 The weighted average share price at the time the share options were exercised inthe year was £2.58. The weighted average share price at the time the share options were forfeited inthe year was £2.81. The fair value of services received in return for share options is calculatedwith reference to the fair value of the award on the date of grant. The fairvalue is spread over the period during which the employee becomesunconditionally entitled to the award, adjusted to reflect actual and expectedlevels of vesting. Black-Scholes, Binomial and Monte Carlo simulation modelshave been used to calculate the fair values of options on their grant date forall options issued after 7 November 2002 which had not vested by 1 January 2005. The assumptions used in the model are illustrated in the table below: Grant Date Fair value at Exercise Expected Option expected Risk-free measurement date price volatility term interest rateEMI Jul-04 £0.66 £1.70 44% 6 Years 5.09%EMI Jul-05 £1.07 £2.57 40% 6 Years 5.09%EMI Jul-06 £0.78 £2.70 25% 6 Years 4.75%SAYE Jul-04 £0.68 £1.36 44% 3.25 Years 5.06%SAYE Jul-05 £1.00 £2.07 40% 3.25 Years 5.06%SAYE Aug-06 £0.81 £2.16 25% 3.25 Years 4.76%LTIP Jul-04 £1.59 £nil* 44% 3 Years 5.01%LTIP Sep-05 £1.87 £nil* 40% 3 Years 5.01%LTIP Sep-05 £2.27 £nil* 40% 3 Years 5.01%LTIP Jul-06 £2.21 £nil* 25% 3 Years 4.79%LTIP Sep-06 £1.80 £nil* 25% 3 Years 4.97% * The option exercise price is nil however £1 is payable on each occasion ofexercise. The expected volatility is based on the historical volatility (calculated basedon the weighted average remaining life of the share options), adjusted for anyexpected changes to future volatility due to publicly available information.For the options granted in the year ending 31 May 2007, dividend yield assumedat the time of option grant is 1.6%. For other option schemes, dividend yieldassumed at the time of option grant was 2.3%. A charge of £575,000 (2006: £468,000) has been made to cost of sales in theGroup income statement in respect of share based payment transactions. A chargeof £169,000 (2006: £146,000) has been made to cost of sales in the Companyincome statement in respect of share based payment transactions. 20 Called up share capital Number of shares 2007 2006 £000 £000AuthorisedOrdinary shares of 1p each 50,000,000 500 500 500 500 Allotted, called up and fully paidOrdinary shares of 1p each at the beginning of the year 32,604,185 326 326Ordinary shares of 1p each issued in the year 9,784 - -Ordinary shares of 1p each at the end of the year 32,613,969 326 326 21 Minority interests 2007 2006 £000 £000At beginning of year - (23)Acquired - 23At end of year - -Equity - -Non-equity - - - - 22 Cash and cash equivalents At beginning of Cash flow Non cash At end of year items year £000 £000 £000 £000Cash and cash equivalents per balance sheet 5,139 (785) 23 4,377 Cash and cash equivalents per cash flow statement 5,139 (785) 23 4,377 23 Other financial commitments and contingent liabilities a) Capital commitments at the end of the financial year, for which no provisionhas been made, are as follows: 2007 2006 £000 £000Contracted 350 - b) Non-cancellable operating lease rentals are payable as follows: 2007 2006 Land and Land and Other Buildings Buildings £000 £000 Other £000 £000Within 1 year 14 66 - 46In second to fifth year inclusive 499 191 407 225 513 257 407 271 There are no contingent liabilities not provided for at the end of the financialyear. 24 Pension scheme The Group operates a defined contribution pension scheme that is open to alleligible employees. The pension cost charge for the year representscontributions payable by the Group to the fund and amounted to £257,000 (2006:£231,000). The outstanding contributions at the year end were £42,240 (2006:£32,707). For the Company, the pension cost charge for the year represents contributionspayable by the Company to the fund and amounted to £26,000 (2006: £23,000). 25 Related party transactions NCC Group's Non Executive chairman Paul Mitchell is a director of RickittMitchell and Partners Limited and the Group conducted business to the value of£239,000 (2006 : £115,000) with Rickitt Mitchell and Partners Limited. Includedwithin the charge is £194,000 relating to advice received in connection withacquisitions made during the year ended 31 May 2007. The remaining £45,000relates to the services of the Non Executive Chairman. Rickitt Mitchell andPartners Limited also held 7,000 1.0p ordinary shares (2006: 7,000). 26 Fixed asset investments in subsidiaries Shares in group undertakingsCompany £000 CostAt beginning and end of year 29,145 The cost represents the cost of acquiring the whole of the issued share capitalof NCC Group (Solutions) Limited and its subsidiary undertakings. Fixed assetinvestments are recognised at cost. The principal undertakings in which the Company's interest at the year end is100% are as follows: Country of PrincipalSubsidiary undertakings incorporation Activity NCC Group (Solutions) Limited England and Wales Escrow Solutions & Consultancy servicesNCC Services Limited England and Wales Escrow Solutions & Consultancy servicesNCC Escrow International Limited England and Wales DormantNCC Group Inc USA Escrow SolutionsNCC Group Employee's Trustees Limited England and Wales Employee Benefit TrustNCC Group GmbH Germany Escrow SolutionsEscrow 4 Software Limited England and Wales DormantSite Confidence Limited England and Wales Internet monitoring & load testing The Group does not have an interest in any other subsidiary undertakings. 27 Post balance sheet events On 21 March 2007 it was disclosed that the standard rate of corporation tax isto be changed to 28%. For the purposes of the Group and Company financialstatements to 31 May 2007, the standard rate of 30% as applicable prior to 31March 2008 has been applied, on the basis that these were enacted at the balancesheet date of 31 May 2007. This will also effect the time period over whichdeferred tax can be recovered. On 12 June 2007 it was announced that the Company expects trading in itsordinary shares to cease on AIM on Friday 13 July 2007. It is expected thatadmission of the Group's shares to the Official List will be simultaneous withthe de-listing from AIM and will become effective at 8.00am on Friday 13 July2007. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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