Preliminary Unaudited Results

19th Apr 2012 07:00



 

Notes to the Financial Statements

 

1. General Information

Specialist Energy Group plc (formerly Nviro Cleantech plc) is incorporated and resident in the Isle of Man. The Company's registered office and principal place of business is Peregrine Corporate Services, Burleigh Manor, Peel Road, Douglas, Isle of Man, IM1 5EP. Specialist Energy Group plc's shares are listed on the Alternative Investment Market (AIM).

 

Specialist Energy Group plc's consolidated financial statements are presented in Pounds Sterling (£), which is also the functional currency of the ultimate parent company. These consolidated financial statements are unaudited and are expected to be signed 30 April 2012. The Directors have not recommended a dividend.

 

The principal operating business of Specialist Energy Group plc is Hayward Tyler Group Limited ("Hayward Tyler"). Established in 1815 in the UK, Hayward Tyler designs, manufactures and services a comprehensive range of fluid filled electric motors and pumps. These units are custom designed to meet the most demanding of applications and environments. Focused on the power generation (conventional and nuclear), oil & gas (topside and deep subsea) and industrial markets, Hayward Tyler is a market leader in its technology solutions. Furthermore, Hayward Tyler supplies and services a range of mission critical motors and pumps for the Royal Navy submarine fleet in the UK. Hayward Tyler also undertakes service, overhaul and upgrading of third party motor and pump equipment across all sectors.

 

In addition to the head office in Luton, England, Hayward Tyler has manufacturing and service support facilities in Kunshan (China), in Delhi (India), in East Kilbride (Scotland) and in Vermont (USA). These facilities and staff provide cover 24 hours 7 days a week for maintenance, overhaul and repair.

 

2. Summary of significant accounting policies

2.1 Going concern

The consolidated financial statements have been prepared on a going concern basis. The Directors have taken note of the guidance issued by The Financial Reporting Council on Going Concern Assessments in determining that this is the appropriate basis of preparation of the financial statements and have considered a number of factors.

 

The Company's business activities and markets in which it operates, together with the factors likely to affect its future development, performance and position, are set out in the Chairman and Chief Executive's Statement. The financial position of the Company, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 9 to 11. Notes 29 to 31 to the financial statements set out the Company's objectives and procedures for managing its capital, financial, foreign currency and liquidity risk.

 

As highlighted in the Financial Review, the Company meets its day-to-day working capital requirements from progress payments from customers and bank revolving credit facilities. An offer of new borrowing facilities has been received and they are expected to be activated in the second quarter of 2012, subject to shareholder approval of an equity injection from the Company's largest shareholder together with loan facility documentation and related security. In addition, the Company has good visibility of future trading from its order book from a large number of customers across different geographic areas and market sectors. As a consequence, the Directors believe that the Company is well placed to manage its business risks successfully despite the continued uncertain economic outlook.

The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Company continues to adopt the going concern basis of accounting in preparing the annual financial statements.

 

 

2.2 Basis of preparationThe consolidated financial statements for the year ended 31 December 2011 have been prepared in accordance with IFRS as adopted by the European Union. The financial statements have been prepared under the historical cost basis for the purposes of inclusion in this document with the exception of some financial instruments which are carried at fair value (see note 31) and freehold properties which are held at revalued amounts (see note 18). The accounting policies set out below have been consistently applied to all the years presented.

 

2.3 Basis of consolidationThe Group financial statements consolidate those of the Company and all of its subsidiary undertakings drawn up to 31 December 2011. Subsidiaries are entities over which the Group has the power to control the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases.

 

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

 

2.4 Business combinationsFor business combinations occurring since 1 January 2010, the requirements of IFRS 3R have been applied. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred.

 

The Group recognises identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognised in the acquiree's financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values.

 

Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of a) fair value of consideration transferred, b) the recognised amount of any non-controlling interest in the acquiree and c) acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable net assets. If the fair values of identifiable net assets exceed the sum calculated above, the excess amount (ie gain on a bargain purchase) is recognised in profit or loss immediately.

 

2.5 Trading and non-trading

The consolidated income statement reports the results for the year under the headings Trading and Non-trading. Trading represents the underlying performance of Hayward Tyler together with head office costs. Non-trading includes the following elements:

§ The impairment of Nviro assets held for sale: £0.2 million (2010: £nil)

§ Impairment of freehold property: £2.6 million (2010: £nil)

§ Provision against receivables from jurisdictions, where due to political uncertainty, the collectability is in doubt: £0.8 million (2010: £nil)

§ Bank fees relating to the reverse acquisition: £0.1 million (2010: £0.1 million)

§ The movement in fair value of derivatives: charge of £1.1 million (2010: £1.2 million)

§ Deferred tax charge: £1.1 million (2010: £15,000).

 

2.6 Segmental reporting

In identifying its operating segments, management follows the Group's service lines, which represent the main products and services provided by the Group.

The activities undertaken by the manufacturing segment includes the design and manufacture of pumps and motors. The aftermarket segment provides a comprehensive range of aftermarket services and spares supporting the Group's own product range as well as those of other original equipment manufacturers. Each of these operating segments is managed separately as they require different resources and have a different customer base, including sales and marketing approach. All inter-segment transfers are carried out at arm's length prices.

 

The measurement policies the Group uses for segment reporting under IFRS 8 are the same as those used in its financial statements, except that:

§ post-employment benefit expenses

§ expenses relating to share-based payments

§ research costs relating to new business activities

are not included in arriving at the operating profit of the operating segments. In addition, corporate assets which are not directly attributable to the business activities of any operating segment are not allocated to a segment. There have been no changes from prior periods in the measurement methods used to determine reported segment profit or loss.

 

2.7 Foreign currency translation

The consolidated financial statements are presented in Pounds Sterling, which is also the functional currency of the parent company.

 

(a) Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). In the Group's financial statements, all assets, liabilities and transactions of the Group entities, with a functional currency other than the Pound Sterling (the Group's presentation currency) are translated into Pounds Sterling upon consolidation. The functional currencies of the entities in the Group have remained unchanged during the reporting period.

 

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency of the respective Group entity using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit or loss.

 

Non-monetary items measured at historical cost are translated using the exchange rates at the date of the transaction (not retranslated). Non-monetary items measured at fair value are translated using the exchange rates at the date when fair value was determined.

 

(c) Foreign subsidiaries

The assets and liabilities in the financial statements of foreign subsidiaries and related goodwill are translated at the rate of exchange ruling at the reporting date. Income and expenses are translated at the actual rate. The exchange differences arising from the retranslation of the opening net investment in subsidiaries are recognised in other comprehensive income and accumulated in the "Translation Reserve" in equity. On disposal of a foreign operation the cumulative translation differences are reclassified from equity to profit or loss when the gain or loss on disposal is recognised.

 

2.8 Property, plant and equipment

Land held for use in production or administration is stated at historical cost. As land is considered to have an unlimited useful life, related carrying amounts are not depreciated. Buildings for use in production or administration are stated at re-valued amounts less subsequent depreciation and impairment losses. Re-valued amounts are fair market values determined in appraisals by external professional valuers once every five years, unless market-based factors indicate a material change in fair value, in which case a further revaluation is performed.

 

Property and equipment held under finance leases are capitalised and included in property, plant and equipment. Such assets are depreciated over their expected useful lives (determined by reference to comparable owned assets) or over the term of the lease, if shorter.

Buildings, equipment and furniture and fittings are stated at cost or revaluation less depreciation and impairment losses. Depreciation is provided at rates calculated to write off the cost or revaluation of fixed assets, less their estimated residual value, over their expected useful lives on the following bases:

 

Buildings - 4%

Patterns and moulds - 20%

Plant & equipment - 10%

Fixtures & fittings - 20%

Leasehold improvements - over period of lease

Office equipment - 20%

 

Material residual value estimates and estimates of the useful life are updated as required, but at least annually, whether or not the asset is re-valued.

 

Gains or losses arising on the disposal of property, plant and equipment are determined as the difference between the disposal proceeds and the carrying amount of the assets and are recognised in profit or loss within 'other income' or 'other expenses'.

 

2.9 Leased assets

In accordance with IAS 17 Leases, the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards related to the ownership of the leased asset. The related asset is then recognised at the inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any. A corresponding amount is recognised as a finance leasing liability. Leases of land and buildings are classified separately and are split into a land and a building element, in accordance with the relative fair values of the leasehold interests at the date the asset is recognised initially.

 

Depreciation methods and useful lives for assets held under finance lease agreements correspond to those applied to comparable assets which are legally owned by the Group. The corresponding finance leasing liability is reduced by lease payments, less finance charges, which are expensed as part of finance costs.

 

The interest element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to profit or loss over the period of the lease.

All other leases are treated as operating leases. Payments on operating lease agreements are recognised as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.

 

2.10 Goodwill

Goodwill represents the excess of the acquisition cost in a business combination over the fair value of the Group's share of the identifiable net assets acquired. Goodwill is tested annually for impairment and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing.

 

2.11 Other intangible assets

Other intangible assets include capitalised development costs used in respect of the development of subsea motor technology. They are accounted for using the cost model whereby capitalised costs are amortised on a straight-line basis over their estimated useful life, which in this case is 10 years. Expenditure on research is recognised as an expense in the period in which it is incurred.

 

Costs that are directly attributable to the development phase of subsea motor technology are recognised as an intangible asset, provided they meet the following recognition requirements:

§ completion of the intangible to the development phase of the pump is technically feasible, so that it will be available for use or sale;

§ the Group intends to complete the intangible asset and use or sell it;

§ the Group has the ability to use or sell the intangible asset;

§ the intangible asset will generate probable future economic benefits. Among other things, this requires that there be a market for the output from the intangible asset or for the intangible asset itself, or, if it is to be used internally, the asset will be used in generating such benefits;

§ there are adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

§ the expenditure attributable to the intangible asset during its development can be measured reliably.

 

Development costs not meeting these criteria for capitalisation are expensed as incurred.

 

Directly attributable costs include employee costs incurred on the development along with an appropriate portion of relevant overheads. Development costs recognised as an intangible asset are subject to the same subsequent measurement method. However, until completion of the development project, the assets are subject to impairment testing only as described below in the note on impairments.

 

2.12 Impairment testing of goodwill, other intangible assets and property, plant and equipment

For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represents the lowest level within the Group at which management monitors goodwill. Cash-generating units to which goodwill has been allocated are tested for impairment at least annually. All other individual assets or cash-

generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. At each balance sheet date, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and the value in use of the asset. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset for which estimates of future cash flows have not been adjusted.

 

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Impairment losses for cash-generating units reduce first the carrying amount of any goodwill allocated to that cash-generating unit. Any remaining loss is charged pro rata to the other assets in the cash-generating unit.

With the exception of goodwill, where an impairment loss for an asset (or cash-generating unit) subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. The reversal of an impairment loss is recognised as income immediately.

 

2.13 Investments

Investments in undertakings are recorded at fair value of consideration paid less impairment.

 

2.14 Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises the direct purchase price, including all expenses directly attributable to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. Costs are assigned using the first in, first out cost formula. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.

 

2.15 Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and short-term deposits that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

 

2.16 Equity, reserves and dividend payments

Share capital represents the nominal value of shares that have been issued.

 

Share premium includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of shares are deducted from share premium, net of any related income tax benefits.

 

The foreign currency translation reserve represents differences arising on the retranslation of net investments in overseas subsidiary undertakings, based on the rate of exchange ruling at the balance sheet date.

 

The merger reserve of £14.5 million includes £9.9 million arising as a result of the acquisition of Southbank in January 2010. The merger reserve represents the difference between the nominal value of the share capital issued by Specialist Energy Group plc and its fair value at 20 January 2010, the date of the acquisition.

 

The reverse acquisition reserve arises as a result of the method of accounting for the acquisition of Southbank by Specialist Energy Group plc. In accordance with IFRS 3 Business Combinations (Revised 2008) the acquisition has been accounted for as a reverse acquisition.

 

Retained earnings include all current and prior period retained profits.

 

Dividend distributions payable to equity shareholders are included in 'other liabilities' when the dividends have been approved in a general meeting prior to the reporting date.

 

2.17 Taxation

The tax expense recognised in profit or loss represents the sum of the current tax and deferred tax. The current tax is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available in future against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

 

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, provided that they are enacted or substantially enacted by the end of the reporting period. Deferred tax liabilities are always provided for in full.

 

Deferred tax assets and liabilities are offset only when the Group has a right and intention to set off current tax assets and liabilities from the same taxation authority.

 

Changes in deferred tax assets or liabilities are recognised as a component of tax income or expense in profit or loss, except where they relate to items that are recognised in other comprehensive income or directly in equity, in which case the related deferred tax is also recognised in the other comprehensive income or directly in equity, respectively.

 

2.18 Post employment benefits

The Group provides post employment benefits through defined benefit plans as well as various defined contribution plans.

 

A defined contribution plan is a pension plan under which the Group pays fixed contributions into an independent entity. The Group has no legal or constructive obligations to pay further contributions after its payment of the fixed contribution. The contributions are recognised as an employee benefit expense when they are due.

 

Plans that do not meet the definition of a defined contribution plan are defined benefit plans. The defined benefit plans sponsored by the Group defines the amount of pension benefit that an employee will receive on retirement by reference to length of service and final salary. The legal obligation for any benefits remains with the Group, even if plan assets for funding the defined benefit plan have been set aside. Plan assets may include assets specifically designated to a long-term benefit fund as well as qualifying insurance policies.

 

The liability recognised in the statement of financial position for defined benefit plans is the present value of the defined benefit obligation at the reporting date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs.

 

Management estimates the defined benefit obligation annually with the assistance of independent actuaries. The estimate of its post-retirement benefit obligations is based on standard rates of inflation, medical cost trends and mortality. It also takes into account the Group's specific anticipation of future salary increases. Discount factors are determined close to each year-end by reference to high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability.

Actuarial gains and losses are recognised in the statement of other comprehensive income. Past service costs are recognised immediately in profit or loss, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period.

 

Interest expenses related to pension obligations and expected return on plan assets are included net in other finance costs in profit or loss. All other post employment benefit expenses are included in 'employee benefits expense'.

 

Short-term employee benefits, including holiday entitlement, are current liabilities included in 'pension and other employee obligations', measured at the undiscounted amount that the Group expects to pay as a result of the unused entitlement.

 

2.19 Share based payment

The Group has applied the requirements of IFRS 2 Share based payment. Prior to the reverse acquisition the Group issued equity settled share based payments to certain employees and third parties. These arrangements are no longer operating for the issue of new options and the Directors are giving consideration to new long term incentive plans.

 

Equity settled share based payments are measured at fair value at the date of the grant. The fair value determined at the grant date of the equity settled share based payments is expensed on a straight line basis over the vesting period, based on the Group's estimate of shares that will eventually vest and adjusted for the effect of non-market based vesting conditions. Fair value is measured by use of the Black Scholes model. The expected life used in the model has been adjusted, based on management's best estimate, for the effects on non-transferability, exercise restrictions and behavioural considerations.

 

2.20 Provisions, contingent liabilities and contingent assets

Provisions are recognised when present obligations as a result of a past event will probably lead to an outflow of economic resources from the Group and amounts can be estimated reliably. Timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events, for example, product warranties granted to a customer, legal disputes or onerous contracts.

 

Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. Where there are a number of similar

obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Provisions are discounted to their present values, where the time value of money is material.

 

Any reimbursement that the Group can be virtually certain to collect from a third party with respect to the obligation is recognised as a separate asset. However, this asset may not exceed the amount of the related provision. All provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.

 

In those cases where the possible outflow of economic resources as a result of present obligations is considered improbable or remote, or the amount provided for cannot be measured reliably, no liability is recognised, unless it was assumed in the course of a business combination. In a business combination contingent liabilities are recognised at their fair values in the course of the allocation of the purchase price to the assets and liabilities acquired in the business combination. They are subsequently measured at the higher amount of a comparable provision as described above and the amount initially recognised, less any amortisation.

 

Probable inflows of economic benefits to the Group that do not yet meet the recognition criteria of an asset are considered contingent assets and disclosed where an inflow of economic benefits is probable.

 

2.21 Revenue recognition

Revenue comprises revenue from the sale of goods and the rendering of services.

 

Revenue is measured at the fair value of consideration received or receivable and represents amounts obtained through trading activities, net of value added tax and trade discounts. The Group applies the revenue recognition criteria set out below to each separately identifiable component of the sales or service transaction in order to reflect the substance of the

transaction. The consideration received from these transactions is allocated to the separately identifiable component by taking into account the relative fair value of each component.

 

Revenue is recognised when the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the entity, the costs incurred or to be incurred can be measured reliably, and when the criteria for each of the Group's different activities has been met. These activity-specific recognition criteria are based on the goods or solutions provided to the customer and the contract conditions in each case, and are described below.

 

(a) Manufacture

The Group provides pumps and motors specifically customised to each customer. These contracts specify a fixed price for the development and installation of pumps and motors.

 

When the outcome can be assessed reliably, contract revenue and associated costs are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. Revenue is measured at the fair value of consideration received or receivable in relation to that activity.

 

When the Group cannot measure the outcome of a contract reliably, revenue is recognised only to the extent of the contract costs incurred and to the extent that such costs are recoverable. Contract costs are recognised in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the total expected loss is recognised immediately in profit or loss.

The stage of completion of any contract is assessed by management by taking into consideration all information available at the reporting date. The percentage of completion is calculated by comparing costs incurred to date with the total estimated costs of the contract.

The gross amount due from customers for contract work is presented as an asset within 'trade and other receivables' for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceeds progress billings. The gross amount due to customers for contract work is presented as a liability within 'other liabilities' for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less losses).

(b) Aftermarket

Sale of goods comprises the sale of spare parts and other aftermarket services, and is recognised when the Group has transferred to the buyer the significant risks and rewards of ownership of the goods and services supplied. Significant risks and rewards are generally considered to be transferred to the buyer when the customer has taken undisputed delivery of the goods and services.

 

(c) Interest income

Interest income and expenses are recorded on an accrual basis using the effective interest method.

2.22 Operating expenses

Operating expenses are recognised in profit or loss upon utilisation of the service or at the date of their origin. Expenditure for warranties is recognised and charged against the associated provision when the related revenue is recognised.

 

2.23 Borrowing costs

Borrowing costs primarily comprise interest on the Group's borrowings. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, are capitalised as part of the cost of that asset when it is probable that they will result in future economic benefits and the costs can be measured reliably. All other borrowing costs are expensed in the period in which they are incurred and reported within 'finance costs'.

 

2.24 Financial instruments

Financial assets and liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument.

 

Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred.

 

A financial liability is derecognised when it is extinguished, discharged, cancelled or expires.

 

Financial assets and financial liabilities are measured initially at fair value plus transactions costs, except for financial assets and financial liabilities carried at fair value through profit or loss, which are measured initially at fair value.

 

Financial assets and financial liabilities are measured subsequently as described below.

 

 

Financial assets

§ For the purpose of subsequent measurement, financial assets are classified into the following categories upon initial recognition:

§ loans and receivables and

 

 

The category determines subsequent measurement and whether any resulting income and expense is recognised in profit or loss or in other comprehensive income.

 

All financial assets except for those at fair value through profit or loss are subject to review for impairment at least at each reporting date. Financial assets are impaired when there is any objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine impairment are applied for each category of financial assets, which are described below.

 

All income and expenses relating to financial assets that are recognised in profit or loss are presented within 'finance costs' or 'finance income', except for impairment of trade receivables which is presented within 'other expenses'.

 

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition these are measured at

amortised cost using the effective interest method, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial. The Group's cash and cash

equivalents and trade and most other receivables fall into this category of financial instruments.

 

Individually significant receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty will default. Receivables that are not considered to be individually impaired are reviewed for impairment in groups, which are determined by reference to the industry and region of a counterparty and other available features of shared credit risk characteristics. The percentage of the write down is then based on recent historical counterparty default rates for each identified group. Impairment of trade receivables is presented within 'other expenses'.

 

Financial liabilities

The Group's financial liabilities include borrowings, trade and other payables and derivative financial instruments.

 

Financial liabilities are measured subsequently at amortised cost using the effective interest method, except for financial liabilities held for trading or designated at fair value through profit or loss, that are carried subsequently at fair value with gains or losses recognised in profit or loss.

 

All interest-related charges and, if applicable, changes in an instrument's fair value that are reported in profit or loss are included within 'finance costs' or 'finance income'.

 

Derivative financial instruments

Derivatives are financial assets or financial liabilities classified as held for trading and recorded at fair value through profit and loss.

 

Due to certain customer contracts being settled in foreign currencies, the Group enters into forward exchange contracts and swaps in order to reduce the exposure to foreign currency risk. The Group also uses a fixed rate swap to fix the rate of interest payable on some of its borrowings and an inflation swap as part of a fixed rate loan arrangement. Refer to note 31 for more details regarding the Group's use of derivatives.

 

2.25 Joint Ventures

A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control.

 

Jointly controlled entities are accounted for using the equity method. Investments in jointly controlled entities are carried in the balance sheet at the Group's share of the net assets of the joint venture, and the Group's share of profits or losses for each financial year are recognised in profit or loss.

 

3 Standards, amendments and interpretation to existing standards that are not yet effective and have not been adopted early by the Group

At the date of authorisation of these financial statements, certain new standards,amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Group.

 

Management anticipates that all of the pronouncements will be adopted in the Group's financial statements for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Group's financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Group's financial statements.

 

Annual Improvements 2010 (effective from 1 July 2010 and later)

The IASB has issued Improvements to IFRS 2010 (2010 Improvements). Most of these amendments become effective in annual periods beginning on or after 1 July 2010 or 1 January 2011. The 2010 Improvements amend certain provisions of IFRS 3R, clarify presentation of the reconciliation of each of the components of other comprehensive income and clarify certain disclosure requirements for financial instruments. The Group's preliminary assessments indicate that the 2010 Improvements will not have a material impact on the Group's financial statements.

 

IFRS 9 Financial Instruments (effective from 1 January 2013)

The IASB aims to replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety. The replacement standard (IFRS 9) is being issued in phases. To date, the chapters dealing with recognition, classification, measurement and derecognition of financial assets and liabilities have been issued. These chapters are effective for annual periods beginning 1 January 2015. Further chapters dealing with impairment methodology and hedge accounting are still being developed.

 

Management have yet to assess the impact that this amendment is likely to have on the financial statements of the Group. However, they do not expect to implement the amendments until all chapters of IFRS 9 have been published and they can comprehensively assess the impact of all changes.

 

4 Significant management judgements in applying accounting policies

The following are significant management judgements in applying accounting policies of the Group that have the most effect on the financial statements.

 

 

Internally generated development costs

Management monitors progress of internal research and development projects by using a project management system. Significant judgement is required in distinguishing research from the development phase. Development costs are recognised as an asset when all the criteria are met, whereas research costs are expensed as incurred.

 

To distinguish any research-type project phase from the development phase, it is the Group's accounting policy to also require a detailed forecast of sales or cost savings expected to be generated by the intangible asset. The forecast is incorporated into the Group's overall budget forecast as the capitalisation of development costs commences. This ensures that managerial accounting, impairment testing procedures and accounting for internally-generated intangible assets is based on the same data.

 

The Group's management also monitors whether the recognition requirements for development costs continue to be met and an assessment made of its recoverability. This is necessary as the economic success of any product development is uncertain and may be subject to future technical problems after the time of recognition.

 

Revenue recognition

The stage of completion of a contract is assessed by management taking into consideration all information available at the reporting date. In this process management carries out significant judgements about milestones, actual work performed and the estimated costs to complete the work. Further information on the Group's accounting policy for contracts is in note 2.21.

Deferred tax assets

The assessment of the probability of future taxable income in which deferred tax assets can be utilised is based on the Group's latest approved budget forecast, which is adjusted for significant non-taxable income and expenses and specific limits to the use of any unused tax loss or credit. The tax rules in the numerous jurisdictions in which the Group operates are also carefully taken into consideration. If a positive forecast of taxable income indicates the probable use of a deferred tax asset, especially when it can be utilised without a time limit,

that deferred tax asset is usually recognised in full. The recognition of deferred tax assets that are subject to certain legal or economic limits or uncertainties is assessed individually by management based on the specific facts and circumstances.

 

Leases

In applying the classification of leases in IAS 17, management considers its leases of equipment as finance lease arrangements. In some cases, the lease transaction is not always conclusive, and management uses judgement in determining whether the lease is a finance lease arrangement that transfers substantially all the risks and rewards incidental to ownership.

 

5 Estimation uncertainty

When preparing financial statements management undertakes a number of judgements, estimates and assumptions about recognition and measurement of assets, liabilities, income and expenses.

 The actual results may differ from the judgements, estimate and assumptions made by management, and will seldom equal the estimated results.

 

Information about significant judgements, estimates and assumptions that have the most significant effect on recognition and measurement of assets, liabilities, income and expenses are discussed below.

 

 

Manufacturing revenue

The stage of completion of any contract is assessed by management by taking into consideration all information available at the reporting date. In this process management formulates estimates regarding actual work performed and the estimated costs to complete the work.

 

Impairment - refer to note 15

An impairment loss is recognised for the amount by which an asset's or cash-generating unit's carrying amount exceeds its recoverable amount. To determine the recoverable amount, management estimates expected future cash flows from each asset or cash-generating unit and determines a suitable discount rate in order to calculate the present value of those cash flows. In the process of measuring expected future cash flows management makes assumptions about future gross profits. These assumptions relate to future events and circumstances. The actual results may vary, and may cause significant adjustments to the Group's assets within the next financial year. In most cases, determining the applicable

discount rate involves estimating the appropriate adjustment to market risk and the appropriate adjustment to asset-specific risk factors.

The Group has not recognised impairment losses for goodwill in its 2 cash-generating units. Management is not currently aware of any reasonable possible changes in key assumptions that would cause the carrying amount of goodwill to exceed its recoverable amount. The carrying value of goodwill at 31 December 2011 was £2.2 million (2010: £2.2 million).

 

Deferred tax asset - refer to note 21

Management estimates the deferred tax asset semi-annually with the assistance of independent tax advisers; however, the actual outcome may vary due to estimation uncertainties. The assessment of the probability of future taxable trading income in which deferred tax assets, in respect of trading losses, can be utilised is based on management's latest financial projections. If a positive projection of taxable income indicates the probable use of such deferred tax asset, especially when it can be utilised without a time limit, that deferred tax asset is usually recognised in full. The recognition of deferred tax assets that are subject to certain legal or economic limits or uncertainties is assessed individually by management based on the specific facts and circumstances. The value of deferred tax asset in respect of trading losses at 31 December 2011 was £2.8 million (2009: £4.2 million).

 

Defined benefit pension liability - refer to note 28

Management estimates the defined benefit pension liability annually with the assistance of independent actuaries; however, the actual outcome may vary due to estimation uncertainties. The estimate of its defined benefit pension gross liability of £13.1 million (2010: £13.1 million) is based on standard rates of inflation and mortality. The estimate does not include anticipation of future salary increases, as there are no members with benefits related to future salary progression. Discount factors are determined close to each year-end by reference to high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability. Estimation uncertainties exist particularly with regard to medical cost trends, which may vary significantly in future appraisals of the Group's defined benefit pension obligations. The value of the defined benefit pension liability at 31 December 2011 was £2.5 million (2010: £2.6 million).

 

Fair value of financial instruments - refer to note 31

Management uses valuation techniques in measuring the fair value of financial instruments, where active market quotes are not available. Details of the assumptions used are given in the notes regarding financial assets and liabilities. In applying the valuation techniques management makes maximum use of market inputs, and uses estimates and assumptions that are, as far as possible, consistent with observable data that market participants would use in pricing the instrument. Where applicable data is not observable, management uses its best estimate about the assumptions that market participants would make. These estimates may vary from the actual prices that would be achieved in an arm's length transaction at the reporting date. The value of the financial liabilities relating to derivatives at 31 December 2011 was £4.1 million (2010: £3.0 million).

 

Provisions - refer to note 26

The amount recognised for warranties for which customers are covered for the cost of repairs is estimated based on management's past experience and the future expectations of defects. The value of warranty provisions at 31 December 2011 was £0.6 million (2010: £1.0 million).

 

6 Segment information

Management currently identifies the Group's two service lines, Manufacturing and Aftermarket, as operating segments.

 

The activities undertaken by the Manufacturing segment include the manufacture of pumps and motors. The activities of the Aftermarket division include the servicing of, and provision of spares for, a wide range of pumps and motors.

 

The measurement policies the Group uses for segment reporting are the same as those used in its financial statements, except that:

§ post-employment benefit expenses;

§ expenses relating to share-based payments; and

§ research costs relating to new business activities

 

are not included in arriving at the operating profit of the operating segments. In addition, corporate assets which are not directly attributable to the business activities of any operating segment are not allocated to a segment. The measurement methods used to determine reported segment profit or loss are consistently applied. No asymmetrical allocations have been applied between segments.

 

Segment information can be analysed as follows for the reporting periods under review:

 

	Manufacturing	Aftermarket	Total
	£000	£000	£000
2011 Segment revenues from:
Total segment revenue	13,171	19,575	32,746
Inter segment	(225)	(425)	(650)
External customers	12,946	19,150	32,096
Cost and expenses	(13,907)	(14,705)	(28,612)
Segment operating (loss)/profit	(961)	4,445	3,484
Segment assets	8,713	9,123	17,836

 

 

	Manufacturing	Aftermarket		Total
	£000	£000		£000
2010 Segment revenues from:
Total segment revenue	18,700		21,517		40,217
Inter segment	(84)		(1,587)		(1,671)
External customers	18,616		19,930		38,546
Cost and expenses	(17,279)		(15,296)		(32,575)
Segment operating profit	1,337		4,634		5,971
Segment assets	10,096		8,059		18,155

 

The Group's revenues from external customers and its non-current assets (other than goodwill and deferred tax assets) are divided into the following geographical areas:

 

	2011 £000		2010 £000
	Revenue	Non-current Assets	Revenue	Non-current Assets
United Kingdom	4,599	7,908	4,490	10,823
USA	8,531	975	14,683	606
Other countries	18,966	60	19,373	62
	32,096	8,943	38,546	11,491

 

Revenues from external customers in the Group's domicile, United Kingdom, as well as its major market the USA have been identified on the basis of the customers' geographical location. Non-current assets are allocated based on their physical location.

 

No customer represented greater than 10% of Group revenue in either 2011 or 2010.

 

The totals presented for the Group's operating segments reconcile to the entity's key financial figures as presented in its financial statements as follows:

 

	2011	2010
	£000	£000
Segment revenues
Total segment revenues	32,746	40,217
Elimination of inter-segmental revenues	(650)	(1,671)
	32,096	38,546
Segment profit
Segment operating profit	3,484	5,971
Post employment benefit expenses	(185)	(185)
Other operating costs not allocated	(1,065)	(1,037)
Foreign currency exchange differences	83	(1,164)
Trading operating profit	2,317	3,585
Non-trading items (see note 2.5)	(3,610)	(3,715)
Operating loss after exceptional items	(1,293)	(130)
Finance costs	(1,787)	(1,941)
Share of results of joint venture	-	(2)
Group loss before tax	(3,080)	(2,073)

 

Segment total assets can be reconciled to Group assets as follows:

	2011	2010
	£000	£000
Segment total assets
Total segment assets	17,836	18,155
Group	37,946	39,236
Consolidation	(23,416)	(19,228)
Group total assets	32,366	38,163

 

 

7 Operating profit/(loss)

 

This is stated after charging:

	Year ended 31 December 2011	Year ended 31 December 2010
	£000	£000
Depreciation of owned assets	489	497
Depreciation of assets held under finance leases	83	62
Amortisation of other intangible assets	154	150
Auditor's remuneration:
Audit services - Fees payable to the company's auditor for the audit of the Company's annual accounts	16	17
- The audit of the Company's subsidiaries pursuant to legislation Non-audit services	71	68
- Taxation services	-	14
- Other services	10	29
Rentals under operating leases:
- Land and buildings	167	128
- Plant and equipment	86	104
Foreign currency exchange differences - (gain)/loss	(83)	1,164

 

Foreign currency exchange differences relate to a loss arising on the revaluation of net current assets £14,905 (2010: £1.0 million) and a gain on hedge contracts at rates that were favourable to actual rates £0.1 million (2010: loss £0.2 million).

 

Non-trading operating loss in 2011 is stated after impairment charges that relate to freehold property (£2.6 million), Nviro assets held for sale (£0.2 million) and £0.8 million provision against receivables from jurisdictions, where due to political uncertainty, the collectability is in doubt.

 

8 Employee remuneration

 

Employee benefits expense

The employee benefit expense during the year was as follows:

 

	Year ended 31 December 2011	Year ended 31 December 2010
	£000	£000
Wages and salaries	11,038	11,750
Social security costs	1,090	1,157
Pension costs	510	679
	12,638	13,586

 

 

The average numbers of employees during the year were as follows:

 

	Year ended 31 December 2011	Year ended 31 December 2010
	£000	£000
Manufacturing and aftermarket	178	185
General and administration	93	112
Selling	41	35
	312	332

 

Key management personnel

Key management of the Group are members of the Board of Directors in Specialist Energy Group plc. Remuneration in respect of the Directors including employer's national insurance cost was as follows:

 

	Year ended 31 December 2011	Year ended 31 December 2010
	£000	£000
Short term employee benefits	533	649
	533	649

 

The amounts set out above include remuneration in respect of the highest paid director as follows:

 

	Year ended 31 December 2011	Year ended 31 December 2010
	£000	£000
Short term employee benefits	203	318
	203	318

 

Further details of Directors' emoluments are given in the Report of the Remuneration Committee on page 21. None of the Directors participate in the Group's defined benefit plan. Details of related party transactions are given in note 32 to the financial statements.

 

9 Trading EBITDA

Trading earnings before interest, tax, depreciation and amortisation are as follows:

 

	Year ended 31 December 2011	Year ended 31 December 2010
	£000	£000
Trading EBITDA		0
Trading Operating profit	2, 317	3,585
Depreciation and amortisation	726	709
	3,043	4,294

 

 

 

10 Finance costs

 

	Year ended 31 December 2011	Year ended 31 December 2010
	£0000	£000
Finance cost:
Trading:
Interest payable on bank borrowing	529	547
Finance costs of pensions	95	90
	624	637
Non-trading:
Finance charges	55	109
Loss arising on fair value of derivative contracts	1,108	1,195
	1,787	1,941

 

11 Joint venture undertakings

The Group held a 50 per cent investment in Balama Nviro Limited, a company incorporated in the British Virgin Islands. Through this company, it held a 50 percent investment in a company also named Balama Nviro Limited, which was incorporated in Hong Kong. The principal activity of the joint venture was the development and exploitation of clean technologies. At 31 December 2011 the Company had disposed of its interests in the joint ventures.

 

12 Income tax expense

a) analysis of total tax charge

	Year ended 31 December 2011	Year ended 31 December 2010
	£000	£000
Current tax:		0
UK tax corporation tax at 26.5% (2010: 28%)	-	-
Amounts over provided in prior years	(43)	(40)
Overseas taxation	453	965
Adjustment in respect of prior year	(6)	(5)
Total current tax	404	920
Deferred tax
Accelerated capital allowances	(158)	(60)
Revaluation of foreign exchange contracts to fair value	(293)	(305)
Losses available for offset against future taxable income	38	26
Retirement benefit obligations	48	57
Less movement recorded in other comprehensive income	(24)	(5)
Other temporary differences	107	151
Effect of change in tax rate	371	-
Amounts over provided in prior years	1,017	151
Total deferred tax	1,106	15
Tax charge reported in the profit or loss	1,510	935

 

b) Reconciliation of loss before tax total tax credit

 

The relationship between the expected tax expense based on the domestic effective tax rate of Specialist Energy Group plc at 26.5% (2010: 28%) and the reported tax expense in the income statement can be reconciled as follows, also showing major components of tax expense:

 

	Year ended 31 December 2011	Year ended 31 December 2010
	£000	£000
Loss before tax	(3,080)	(2,073)
Domestic tax rate for Specialist Energy Group plc	26.5%	28%
Expected tax credit	(816)	(580)
Adjustment for tax-rate differences in foreign jurisdictions	218	507
Deferred tax not recognised Temporary differences:	472	176
Impairment of property	685	-
Impairment of goodwill	-	794
Amounts over provided in prior years	974	106
Adjustment for non-deductible expenses:
- other non-deductible expenses	(23)	(68)
	1,510	935
Tax charge

 

Note 21 provides information on the entity's deferred tax assets and liabilities, including the amounts recognised directly in the income statement.

 

13 Income tax asset/(liability)

 

	Year ended 31 December 2011	Year ended 31 December 2010
	£000	£000
Current tax assets	250	60
Current tax liabilities	(14)	(82)
Income tax receivable/(payable)	236	(22)

 

14 Earnings/(loss) per share

The calculation of the basic earnings/ (loss) per share is based on the earnings/(loss) attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year.

 

The calculation of diluted earnings/(loss) per share is based on the basic earnings/(loss) per share, adjusted to allow for the issue of shares and the post tax effect of dividends and/or interest, on the assumed conversion of all dilutive options and other dilutive potential ordinary shares.

 

	Year ended 31 December 2011	Year ended 31 December 2010
Loss per share calculations only
Loss attributable to ordinary shareholders:		0
Loss for the year (£000)	(4,590)	(3,008)
Trading operations (£000)	1,289	2,026
Weighted average number of shares (used for basic earnings per share)	35,507,404	24,551,164
Dilutive effect of options*	5,141	59,420
Weighted average number of shares (used for diluted earnings per share)	35,512,545	24,610,584
Basic loss per share (pence)	(12.93)	(12.25)
Diluted loss per share (pence) *	(12. 93)	(12.25)

 

*Anti-dilutive therefore loss per share does not increase

 

Dividends

No dividends have been declared during the current year (2010: nil).

 

15 Goodwill

The net carrying amount of goodwill can be analysed as follows:

 

Group	2011	2010
	£000	£000
Gross carrying amount
Carrying amount at 1 January	2,219	2,219
Addition of Nviro	-	2,835
Impairment loss	-	(2,835)
Carrying amount at 31 December	2,219	2,219

 

There is no impairment charge for the year (2010: £2.8 million). The impairment charge in 2010 of £2.8 million related to the goodwill created by the reverse acquisition. This goodwill represents the difference between the cost of the acquisition and the fair value of the assets of Nviro acquired. This approach is in line with the Group's stated intention to focus its resources on the Hayward Tyler business as well as the impairment to property, plant and equipment and intangible assets relating to the Nviro technologies.

 

For the purposes of annual impairment testing the carrying amount of goodwill is allocated to the following cash generating units ("CGU)". These are the smallest groupings of assets to which management is able to attribute cash flows reliably.

 

	2011	2010
	£000	£000
Manufacturing	368	368
Aftermarket	1,851	1,851
Carrying amount at 31 December	2,219	2,219

 

 

The recoverable amounts of the Manufacturing and Aftermarket cash-generating units were determined based on value-in-use calculations. The key assumptions used in the calculations were:

§ The forecast operating cash flows for the next five years based on approved budgets and plans. These budgets and plans are based on past performance and expectations for the market development of the CGU, taking into account the current economic climate and forecast assumptions (both internal and external where appropriate) around the relevant product markets.

§ An estimate of the long-term growth rate for the CGU representing management's best estimate of future long-term growth in the respective divisions.

§ A discount rate of 16% was used to discount future cash flows and reflects management's estimate of the weighted average cost of capital of the Group.

 

Impairment test are carried out at each reporting date and indicate headroom of circa £2.8 million (2010: £5.2 million) in respect of Manufacturing and therefore management does not believe that any reasonably possible change in assumptions would lead to any further impairment of the Manufacturing goodwill. The present values of future cash flows in respect of the Aftermarket division are far in excess of the carrying values of the associated assets including goodwill that management considers the likelihood of any impairment arising to be remote.

 

16 Other intangible assets

 

The Group's other intangible assets comprise solely internally generated development costs. The net carrying amounts for the reporting periods under review can be analysed as follows:

Group	2011		2010
	£000		£000
Gross carrying amount at 1 January
Balance at 1 January	1,490		1,485
Additions	-		5
Balance at 31 December	1,490		1,490
Accumulated amortisation and impairment
Balance at 1 January	392		242
Amortisation	154		150
Balance at 31 December	546		392
Carrying amount at 31 December	944		1,098

 

No research and development costs were expensed in the current year (2010: £nil).

 

The amortisation charge for the year is included within operating charges and disclosed in note 7.

 

17 Investments

The Company had the following investments in subsidiary undertakings:

	2011	2010
	£000	£000
Balance at 1 January	20,916	20,193
Additions	7,000	723
Balance at 31 December	27,916	20,916
Provision for impairment
Balance at 1 January	20,193	20,193
Impairment in year	-	-
Balance at 31 December	20,913	20,193
Net book value 31 December	7,723	723

 

The addition in 2011 reflects the capitalisation of Southbank UK Limited.

 

The Company owns more than 20% of the following companies;

 

Name of undertaking	Place of incorporation	%Ownership/ voting power	Principal activity
Southbank UK Limited	England & Wales	100	Holding company
Redglade Associates Limited	England & Wales	100	Property
Redglade Investments Limited	England & Wales	100	Property
Hayward Tyler Group Limited	England & Wales	100	Holding company
Hayward Tyler Limited	England & Wales	100	Trading
Hayward Tyler (UK )Limited	England & Wales	100	Dormant
Varley Pumps Limited	England & Wales	100	Trading
Hayward Tyler Subsea Limited	England & Wales	100	Dormant
Hayward Tyler Holdings Limited	England & Wales	100	Holding company
Hayward Tyler Holding Inc	United States	100	Holding company
Hayward Tyler Inc	United States	100	Trading
Hayward Tyler Pumps (Kunshan) Co Limited	China	100	Trading
Hayward Tyler India PTE Limited	India	100	Trading
Appleton & Howard Limited	England & Wales	100	Dormant
Hayward Tyler Fluid Dynamics Limited	England & Wales	100	Dormant
Hayward Tyler Fluid Handling Limited	England & Wales	100	Trading
Hayward Tyler Services Limited	England & Wales	100	Dormant
Hayward Tyler Pension Plan Trustees Limited	England & Wales	100	Manages pension scheme
Sumo Pumps Limited	England & Wales	100	Dormant
Hayward Tyler Engineered Products Limited	England & Wales	100	Dormant
Capital Engineering Services Limited	England & Wales	100	Dormant
Credit Montague Limited	England & Wales	100	Dormant
Mullins Limited	England & Wales	100	Dormant
Specialist Energy Group Limited	England & Wales	100	Dormant
Nviro Cleantech Limited	England & Wales	100	Holding company
Laseair Limited	England & Wales	80	No longer trading
Microrelease Limited	England & Wales	80	No longer trading
Organotect Inc	United States	65	No longer trading
Nviro Cleantech Inc	United States	100	Holding company
Vertus Technologies US LLC	United States	100	Holding company
Vertus Technologies Industrial LLC	United States	100	No longer trading
Vertus Technologies Limited	Cayman Islands	100	Holding company
Nviro Cleantech Limited	Cayman Islands	100	Holding company

 

All companies are owned indirectly by Specialist Energy Group plc except for Southbank UK Limited and Nviro Cleantech Limited and the results for all have been included within the consolidation.

 

18 Property, plant and equipment

 

The Group's property, plant and equipment comprise primarily land, buildings, plant and machinery and fixtures and fittings. The carrying amount can be analysed as follows:

 

Group	Freehold land and buildings	Short leasehold improvements	Plant and machinery	Fixtures and fittings	Total
	£000	£000	£000	£000	£000
Gross carrying amount
Balance at 1 January 2011	8,622	594	11,194	3,301	23,711
Exchange adjustments	-	18	61	12	91
Additions Reclassification	- -	22 100	554 (68)	171 (32)	747 -
Disposals	-	-	(131)	-	(131)
Balance at 31 December 2011	8,622	734	11,610	3,452	24,418
Depreciation and impairment
Balance at 1 January 2011	241	530	9,816	2,731	13,318
Exchange adjustments	-	12	41	22	75
Disposals Reclassification	- -	- 9	(131) (5)	- (4)	(131) -
Impairment	2,585	-	-	-	2,585
Charge for the year	59	24	282	207	572
Balance at 31 December 2011	2,885	575	10,003	2,956	16,419
Carrying amount at 31 December 2011	5,737	159	1,607	496	7,999
Gross carrying amount
Balance at 1 January 2010	8,622	564	10,747	3,207	23,140
Exchange adjustments	-	20	96	22	138
Additions	-	11	383	262	656
Disposals	-	(1)	(32)	(190)	(223)
Balance at 31 December 2010	8,622	594	11,194	3,301	23,711
Depreciation and impairment
Balance at 1 January 2010	182	489	9,477	2,722	12,870
Disposals	-	18	80	14	112
Exchange adjustments	-	(1)	(32)	(190)	(223)
Charge for the year	59	24	291	185	559
Balance at 31 December 2010	241	530	9,816	2,731	13,318
Carrying amount at 31 December 2010	8,381	64	1,378	570	10,393

It is a requirement that a full valuation of freehold land and buildings is carried out on a regular basis, which the Group undertakes every 5 years. The last full valuation was carried out for the financial statements for the year ended 31 December 2011. This valuation, which was undertaken by a major real estate company, led to an impairment of the value of the freehold land and buildings at the Group's Luton site. The basis of the valuation was market value on the assumption of existing use with work undertaken between 31 December 2011 and 10 February 2012.

 

 

All depreciation charges are included within operating charges and disclosed in note 7.

 

The Group's land and buildings have been pledged as security for bank borrowings.

 

Carrying value of finance leases assets included in plant and machinery amounted to £604,000 (2010: £324,000). The depreciation charged to the financial statements in the year in respect of finance leased assets amounted to £83,000 (2010: £62,000)

 

19 Inventories

Inventories recognised in the statement of financial position can be analysed as follows:

Group		2011	2010
		£000	£000
Raw materials and consumables		3,1362	3,367
Work in progress		915	168
Finished goods and goods for resale		1,120	1,370
		5,171	4,905

 

In 2011, no inventories were required to be written off (2010: £nil). No reversal of previous write-downs was recognised as a reduction of expense in 2011 or 2010.

 

In 2011 total inventory included in expenses amounted to £11,736,000 (2010: £13,115,040).

 

20 Trade and other receivables

	Group		Company
	2011	2010	2011	2010
	£000	£000	£000	£000
Current:
Trade receivables	8,523	5,172	-	-
Less: provision for impairment of receivables	(1,323)	(428)	-	-
Trade receivables - net	7,200	4,744	-	-
Gross amounts due from customers	2,581	3,284	-	-
Other receivables	347	191	54	-
Due from group undertakings	-	-	2,861	8,899
Trade and other receivables	10,128	8,219	2,915	8,899
Prepayments	480	462	2	2
VAT recoverable	17	72	-	-
Other current assets	497	534	2	2
Total current trade and other receivables	10, 625	8,753	2,917	8,901

 

The Directors believe that the carrying amounts of trade and other receivables approximate their fair values. The receivables are short term and non-interest bearing.

 

All of the Group's trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables were found to be impaired and a provision for impairment of receivables of £1,323,264 (2010: £427,986) has been made. £0.8 million of the charge for the year relates to provisions against receivables from jurisdictions where, due to political uncertainty, the collectability of part or all of the receivables are in doubt.

 

The movement in the provision for impairment of receivables can be reconciled as follows:

Group		2011		2010
		£000		£000
Balance at 1 January		428		47
Charge for the year		1,057		381
Impairment reversals		(162)		-
Balance at 31 December		1,323		428

 

An analysis of unimpaired trade receivables that are past due is given in note 29.

 

21 Deferred tax assets

 

Deferred tax movements for the year arising from temporary differences and unused tax losses of the group can be summarised as follows:

 

	2011	2010
	£000	£000
Balance at 1 January	5,851	5,871
Charge to income statement for the year (note 12)	(1,106)	(15)
Charge to other comprehensive income	(24)	(5)
Balance at 31 December	4,721	5,851

 

Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available in future against which deductible temporary differences can be utilised. This recognition is supported by the underlying profitability of the Group in 2011 and the future projected profitability of the Group.  

 

Deferred tax assets

 

	Balance at 1 January 2011	Charge to income for the year	Charge to other comprehensive income for the year	Balance at 31December 2011
	£000	£000	£000	£000
Accelerated tax depreciation	181	188	-	369
Retirement benefit obligations	716	(74)	(24)	617
Derivatives	799	217	-	1,016
Tax losses	4,150	(1,575)	-	2,825
Temporary differences	5	(112)	-	(107)
Total	5,851	(1,106)	(24)	4, 721

 

 

22 Cash and Cash equivalents

 

Cash and cash equivalents included the following components:

 

	Group		Company
	2011	2010	2011	2010
	£000	£000	£000	£000
Cash at bank and in hand	437	4,744	5	1,849
	437	4,744	5	1,849

 

At 31 December 2011 the Group had the following undrawn facilities:

Group	2011		2010
	£000		£000
Overdraft facility	549		958
Corporate charge card facility	67		19

 

The bank revolving credit facility, overdraft facility and loans are secured by fixed and floating charges over the Group's assets.

 

The short term bank borrowings under the revolving credit facilities have been classified under borrowings in Specialist Energy Group plc. A breakdown of cash and borrowings is set out below:

 

	Group		Company
	2011	2010	2011	2010
	£000	£000	£000	£000
Cash at bank and in hand	437	4,744	5	1,849
Short term bank borrowings	(4,806)	(4,350)	-	-
Short term bank loans	(4,875)	(3,302)	-	-
Non-current bank loans	(736)	(3,817)	-	-
Net debt	(9,980)	(6,725)	5	1,849

 

The Directors consider that the carrying amount of the cash and cash equivalents approximates their fair value.

 

23 Assets held for sale

 

In 2010, the Board resolved to dispose of the intangible assets relating to clean fuels technology contained within the Nviro segment (see note 15). These assets, which were available for immediate sale and which were expected to be sold in 2011 had been classified as assets held for sale and presented separately in the balance sheet. As the sale of these assets did not materialise they have been written down to nil in 2011.

 

24 Trade and other payables

 

	Group		Company
	2011	2010	2011	2010
	£000	£000	£000	£000
Current:
Trade payables	4,428	3,797	15	42
Payments on account	1,493	2,845	-	-
Social security and other taxes Due to group undertakings	507 -	260 -	- 41	- 26
	6,428	6,902	56	68

 

The carrying amounts of trade and other payables approximate to their fair values. All amounts shown above are short-term liabilities and are accruing no interest.

 

25 Other liabilities

 

Other liabilities can be summarised as follows:

	Group		Company
	2011	2010	2011	2010
	£000	£000	£000	£000
Accruals	2,966	3,669	2	43
Other payables	252	79	-	-
	3,218	3,748	2	43

 

26 Provisions

 

Group	2011	2010
	£000	£000
Annual leave	209	228
Warranty	593	962
Liquidated damages	262	21
	1,064	1,211

 

All provisions are considered current. The carrying amounts may be analysed as follows:

 

	Annual leave	Warranty	Liquidated damages	Total
	£000	£000	£000	£000
Carrying amount at 1 January 2011	228	962	21	1,211
Additional provisions	-	219	634	853
Unused amounts reversed	(19)	(530)	-	(549)
Amount utilised	-	(58)	(393)	(451)
Carrying amount at 31 December 2011	209	593	262	1,064

 

Annual leave provision

Paid holidays are regarded as an employee benefit and are charged to the profit or loss as the benefit is earned. A provision is made at the balance sheet date to reflect the fair value of the holidays earned but not taken.

 

Warranty provision

Provisions for warranty work represent the estimated cost of work provided under the terms of the contracts with customers with reference to the length and unexpired portion of the terms provided.

 

Liquidated damages

Provisions for liquidated damages are the liabilities estimated to arise on the expected delay in shipment of contracts that have been shipped prior to 31 December 2011.

 

27 Leases

 

Finance Leases

The Group leases various equipment under finance lease arrangements. The net carrying amount of the assets held under finance lease arrangements is £604,000 (2010: £324,000). The assets are included under "Plant and Machinery", which form an integral part of "property, plant and equipment" (see note 18).

 

The future aggregate minimum finance lease payments are as follows:

 

Group	2011		2010
	£000		£000
	Minimum payments	Present value of payments	Minimum payments	Present value of payments
No later than 1 year	66	51	78	64
Later than 1 year and no later than 5 years	51	38	115	90
	117	89	193	154
Less: Amounts representing finance charges	(28)		(39)
Present value of minimum lease payments	89		154

 

The lease agreement for the equipment includes fixed lease payments and a purchase option at the end of the lease term. The agreement is non-cancellable but does not contain any further restrictions. No contingent rents were recognised as an expense in the reporting periods under review.

 

Operating leases

The Group leases various offices, vehicles and equipment under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights.

The future aggregate minimum lease payments under non-cancellable operating leases are:

 

	2011	2010
Group	£000	£000
No later than 1 year	228	229
Later than 1 year and no later than 5 years	287	299
	515	528

 

Lease payments recognised as an expense during the period are shown in note 7. The Group's operating lease agreements do not contain any contingent rent clauses.

 

28 Pensions and other employee obligations

 

Within the UK the Group operates a defined benefit plan with benefits linked to final salary and a defined contribution plan. With effect from 1 June 2003 the defined benefit plan was closed to new UK employees who are offered membership of the defined contribution plan. The majority of UK employees are members of one of these arrangements. The method used in assessing the scheme liabilities is the projected unit method. A full valuation of the pension scheme is produced every three years (the last one being as at 1 January 2008) and updated annually to 31 December by independent qualified actuaries.

 

The liabilities recognised for pensions and other employee remuneration in the statement of financial position consist of the following amounts:

 

Group	2011	2010
	£000	£000
Net obligation	2,467	2,649

 

Scheme liabilities

The defined benefit obligation for the reporting periods under review are as follows:

 

Group	2011	2010
	£000	£000
Defined benefit obligation 1 January	13,137	12,937
Interest cost	725	738
Actuarial loss	126	333
Benefits paid	(862)	(871)
Defined benefits obligation 31 December	13,126	13,137

 

For determination of the pension obligation, the following actuarial assumptions were used:

 

Group	2011	2010
	£000	£000
Discount rate	4.6%	5.7%
Expected rate of return on plan assets	4.7%	6.2%
Expected rate of salary increases	-	-
Expected rate of pension increases	2.0%	3.5%
Inflation assumption	2.8%	3.5%
Mortality assumption	SIPA CMI	PA92YOB

SIPA CMI - for males and females projected on a year of birth basis using CMI (2010) projections with a long term rate of improvement of 1.5% per annum with a plus 2 year age rating.

 

PA92YOB - Year of birth tables with medium cohort projections and plus 2 year age rating.

 

These assumptions were developed by management under consideration of expert advice provided by Alexander Forbes, independent actuarial appraisers. These assumptions have led to the amounts determined as the Group's defined benefit obligations for the reporting periods under review and should be regarded as management's best estimate. However, the actual outcome may vary.

 

No assumption is made with regard to the expected rate of salary increases as there are no members with benefits related to future salary progression.

 

Scheme assets

The assets held by the pension fund can be reconciled from the opening balance to the reporting date as follows:

	2011	2010
Group	£000	£000
Fair value of plan assets at 1 January	10,488	10,176
Expected returns on plan assets	630	648
Actuarial gain/(loss)	218	350
Contributions by the group	185	185
Benefits paid	(862)	(871)
Fair value of plan assets at 31 December	10,659	10,488
Actual return on plan assets	848	998

 

Based on historical data, the Group expects contributions of £185,000 to be paid in 2012.

 

Plan assets include 419,639 shares in Specialist Energy Group plc. Plan assets can be broken down into the following major categories of investments:

 

Group	2011	2011	2010	2010
	£000	%	£000	%
Real estate funds	580	6	1,346	13
Equity investment funds	3,393	32	3,903	37
Gilts and LDI funds	3,427	32	-	-
Self related equities	122	1	306	3
Corporate bonds	2,895	27	4,741	45
Liquid funds	242	2	192	2
Total value of assets	10,659	100	10,488	100

 

The Group's defined benefit obligations and plan assets may be reconciled to the amounts presented on the face of the statement of financial position for each of the reporting periods under review as follows:

 

Group	2011	2010
	£000	£000
Defined benefit obligation	(13,126)	(13,137)
Fair value of plan assets	10,659	10,488
Total deficit	(2,467)	(2,649)

 

Scheme expenses

Total expenses resulting from the Group's defined benefit plans can be analysed as follows:

 

	2011	2010
Group	£000	£000
Interest costs	(725)	(738)
Expected returns on plan assets	630	648
Total expenses recognised in finance costs	(95)	(90)

 

The employee benefits expense for the year is £nil (2010: £nil).

Expected returns on plan assets are based on a weighted average of expected returns of the various assets in the plan, and include an analysis of historical returns and predictions about future returns. Expected returns on plan assets are estimated by independent pension scheme appraisals undertaken by external valuers in close co-ordination with each fund's treasury board. In 2011 the actual return on plan assets was £848,000 (2010: £998,000).

 

The actuarial gains and losses recorded in other comprehensive income are as follows:

 

	2011	2010
Group	£000	£000
Actuarial losses on liabilities	(126)	(333)
Actuarial gains on assets	218	350
Total gains recognised in other comprehensive income	92	17

 

The cumulative actuarial losses recognised in the statement of other comprehensive income at 31 December 2011 was losses £736,000 (2010: losses £828,000).

 

Group

 

Experience gains and losses	2011	2010	2009	2008	2007
	£000	£000	£000	£000	£000
Defined benefit obligation	(13,126)	(13,137)	(12,937)	(11,341)	(14,574)
Fair value of plan assets	10,659	10,488	10,176	10,672	13,599
Plan deficit	(2,467)	(2,649)	(2,761)	(669)	(975)
Experience adjustments:
Plan assets	218	350	(378)	(2,960)	(642)
Plan liabilities	-	-	-	1,593	(19)

 

29 Risk management objectives and policies

The Group's activities expose it to a variety of financial risks; foreign currency risk, credit risk, liquidity risk, cash flow risk and interest rate risk. The Group's overall risk management programmes focus on both credit risk and the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.

 

The Group's risk management is co-ordinated at its headquarters, in close co-operation with the Board of Directors, and focuses on actively securing the Group's and the Company's short to medium-term cash flows by minimising the exposure to financial markets.

 

While the Group does use derivatives in order to hedge its exposure to foreign currency risk and cash flow interest rate risk (see below) it does not engage in the trading of derivatives for speculative purposes nor does it write options. The most significant financial risks to which the Group and the Company are exposed are described below.

 

The Group is exposed to market risk through its use of financial instruments and specifically to currency risk, interest rate risk and certain other price risks, which result from both its operating and investing activities.

 

Foreign currency sensitivity

The Group operates in overseas markets and is subject to currency exposures of transactions undertaken during the year. Management's overarching objective is to minimise the extent of the Group's exposure to currency risk. In respect of transactional foreign currency risk the Group maintains a policy that all exposures on material committed transactions should be hedged as far as possible. The Group prepares rolling 12 month currency cash flow forecasts to enable currency exposures to be identified and then subsequently hedged.

 

The Group uses forward exchange contracts to hedge the impact on receipts and payments of the volatility in exchange rates of US Dollar and Euro to Pound Sterling. The notional principal amounts of the outstanding forward foreign exchange contracts at 31 December 2011 were USD3.7 million (2010: USD5.0 million). Hedge accounting is not applied in respect of these hedged transactions.

 

Derivative contracts are measured at fair value in the statement of financial position with movements in that fair value being recognised in profit or loss.

 

Currency exposures comprise the monetary assets and monetary liabilities of the Group that are not denominated in the functional currency of the operating unit involved. The significant currency risk arises from contracts raised in US Dollars.

 

The following table illustrates the sensitivity of profit and equity to a reasonably possible change in the US Dollar/Pound Sterling exchange rate of +/- 10%. These changes are considered to be reasonably possible based on observation of recent volatility in the currency markets. The calculations are based on a change in average US Dollar/Pound Sterling exchange rate for each period, and the foreign currency denominated financial instruments held at each reporting date that are sensitive to changes in the US Dollar/Pound Sterling exchange rate. All other variables are held constant.

 

	Impact on profit for the year £000
	+10%	-10%
31 December 2011	(208)	254
31 December 2010	(296)	362

 

There is no impact on equity arising from foreign exchange fluctuations as the Group does not use hedge accounting. Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Group's exposure to currency risk.

 

The Company does not have any currency exposures.

 

Interest rate sensitivity

The Group's borrowings include loans that carry variable rates of interest and thus expose the Group to cash flow risk. The Group's policy is to minimise interest costs and changes in the market value of debt. Interest rate risk is regularly monitored to ensure that the mix of variable and fixed rate borrowing is appropriate for the Group. Interest rate swaps are utilised that have the economic effect of converting borrowings from floating to fixed rates.

The Group has term borrowings of £4.8 million that have an effective fixed rate of interest. These borrowings include £0.8 million at a fixed rate of interest of 6.515% and £4.0 million with an interest rate swap attached that converts borrowings to a fixed rate of interest of 6.69%. The remaining term borrowings of £0.5 million have a floating rate of interest based on LIBOR. Gains and losses relating to movements in fair values of the hedging instruments associated with the fixed rate borrowings are recorded in profit or loss.

 

The Group's policy is to minimise interest rate cash flow risk exposures on long-term financing. The interest rate profile of the financial assets of the Group at 31 December 2011 is as follows:

 

Group	Fixed	Floating	Zero	Total
Interest rate profile	£000	£000	£000	£000
Receivables
Trade and other receivables	-	-	10,128	10,128
Payables
Trade and other payables	-	-	6,428	6,428
Bank loans	4,792	487	-	5,279
Amounts due under revolving credit facilities	-	4,806	-	4,806
Amounts due under finance lease agreements	332	-	-	332
	5,124	5,293	6,428	16,845
Cash	-	(437)	-	(437)
	5,124	4,856	6,428	16,408

 

The classification of the rate of interest on the bank loans of £4.8 million as fixed is after consideration of the impact of the floating-to-fixed interest rate swap.

 

The following table illustrates the sensitivity of profit and equity to a reasonably possible change in interest rates of +/- 0.5%. These changes are considered to be reasonably possible based on observation of current market conditions. The calculations are based on a change in average market interest rate for each period and the financial instruments held at each reporting date that are sensitive to changes in interest rates (i.e. net floating rate debt). All other variables are held constant.

 

	Impact on profit for the year £000
	+0.5%	-0.5%
31 December 2011	(24)	24
31 December 2010	(1)	1

 

The Company has minimal exposure to interest rate risk. It has no exposure to debt financing and has no interest rate bearing liabilities. It is exposed to interest rate risk on its financial assets being its cash at bank balances. The interest rate receivable on these balances is less than 0.5%. The Company gave careful consideration to which organisation it should use for its banking services and interest rates available was one aspect of the decision. The Directors currently believe that interest rate risk is at an acceptable level.

 

Credit risk analysis

The Group continuously monitors defaults of customers and other counterparties, identified either individually or by group, and incorporates this information into credit risk controls. Where available at reasonable cost, external credit ratings and/or reports on customers and other counterparties are obtained and used. The Group's policy is to deal only with creditworthy counterparties.

 

The Group's most significant exposure to credit risk is in respect of the possibility of any individual customer being unable to settle their debts as they fall due or as a result of changes in the political landscape that impact the Group's ability to collect debts from an individual jurisdiction. The credit risk associated with customers and jurisdictions is considered as part of the tender review process and is addressed initially via contract payment terms and, where appropriate, payment security. In certain circumstances it may lead to a decision by the Group to cease trading with individual customers or customers from certain jurisdictions.

The Group's maximum exposure to credit risk is limited to the carrying amount of financial assets recognised at the reporting date, as summarised below:

 

Group	2011	2010
	£000	£000
Classes of financial assets - carrying amounts
Trade and other receivables	10,128	8,219
Cash and cash equivalents	437	4,744

 

The Group's management considers that all the above financial assets that are not impaired or past due for each of the reporting dates under review are of good credit quality.

 

None of the Group's financial assets are secured by collateral or other credit enhancements.

 

Some of the unimpaired trade receivables are past due as at the reporting date. Financial assets past due but not impaired can be shown as follows:

 

Group	2011	2010
	£000	£000
Not more than 3 months	192	98
More than 3 months but less than 6 months	843	-
More than 6 but less than 12 months	999	-
	2,034	98

 

In respect of trade and other receivables, the Group is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. Trade receivables consist of a large number of customers in various industries and geographical areas. Based on historical information about customer default rates management consider the credit quality of trade receivables that are not past due or impaired to be good.

 

The credit risk for cash and cash equivalents is considered to be negligible since the counterparties are reputable banks with high quality external credit ratings.

 

The Company's credit risk arises principally from the Company's cash balances and the balances due to it from other Group undertakings. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. The concentration of the Company's credit risk is considered by counterparty, geography and currency. During the year and as at 31 December 2011 the Company held minimal cash balances (31 December 2010: £1.9 million). In addition, as at 31 December 2011 the Company had provided long term intercompany funding to its subsidiaries of £2.9 million (£8.9 million), the majority of which is regarded as recoverable in the fullness of time.

 

Liquidity risk analysis

The Group, together with the Company, manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term liabilities as well as forecast cash inflows and outflows due in day-to-day business. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis as well as on the basis of a rolling 30-day forecast and a rolling 13-week projection. Long-term liquidity needs for a 360-day lookout period are identified quarterly. Net cash requirements are compared to available borrowing facilities in order to determine headroom or any shortfalls.

 

The Group and the Company maintain cash and headroom to meet their liquidity requirements for 30-day periods at a minimum. Funding for long-term liquidity needs is additionally secured by an adequate amount of credit facilities and the ability to sell long-term investment in subsidiaries.

 

As at 31 December 2011, the liabilities that have contractual maturities (including interest payments where applicable) are summarised below:

 

	Group		Company
	Current (	Non-current (> 1 year)	Current (	Non-current (> 1 year)
	£000	£000	£000	£000
31 December 2011
Trade payables	4,428	-	15	-
Accruals and other payables	3,218	-	2	-
Short-term bank borrowings	4,806	-	-	-
Finance lease liabilities	73	259	-	-
Bank loans	4,802	477	-	-
Derivatives	-	4,066	-	-
Owed to Group undertakings	-	-	41	-
31 December 2010
Trade payables	3,797	-	42	-
Accruals and other payables	3,748	-	43	-
Short-term bank borrowings	4,350	-	-	-
Finance lease liabilities	63	92	-	-
Bank loans	3,239	3,725	-	-
Derivatives	-	2,958	-	-
Owed to Group undertakings	-	-	26	-

 

The above amounts reflect the contractual undiscounted cash flows, which may differ to the carrying values of the liabilities at the reporting date. Where the counterparty has a choice of when an amount is paid the liability has been included on the earliest date on which payment can be required. The Directors are of the view that the fair value of borrowings approximate to their carrying value.

 

30 Capital management objectives

 

The Group's capital management objectives are:

§ to ensure the Group's ability to continue as a going concern, and

§ to provide an adequate return to shareholders

by pricing products and services commensurately with the level of risk. The Group funds itself through equity and debt, which is defined as bank borrowings and finance leases.

 

 

 

 

The Group's capital is represented by the carrying amount of equity as presented on the face of the statement of financial position. The Group's goal in capital management is to maintain a balance of capital to overall financing, which is subject to regular Board review. The capital and overall financing for the reporting periods under review is summarised as follows:

 

Group	2011	2010
	£000	£000
Total equity	4,692	9,093
Total equity	4,692	9,093
Net borrowings	9,980	6,725
Overall financing	14,672	15,818

 

31 Financial assets and liabilities

 

31.1 Categories of financial assets and liabilities

The carrying amounts presented in the financial statements relate to the following categories of assets and liabilities:

 

	Group		Company
	2011	2010	2011	2010
	£000	£000	£000	£000
Financial assets
Current:
Loans and receivables:
- Trade and other receivables	10,128	8,219	2,915	8,899
- Cash and cash equivalents	437	4,744	5	1,849
Financial liabilities
Current:
Financial liabilities measured at amortised cost:
- Trade payables	4,428	3,797	15	42
- Borrowings	9,681	7,652	-	-
Financial liabilities at fair value through profit or loss:
- Derivative financial instruments - held for trading	4,066	2,958	-	-
Non-current
Financial liabilities measured at amortised cost
- Borrowings	736	3,817	-	-

 

See note 2.24 for a description of the accounting policies for each category of financial instrument. The fair values are presented in the related notes. A description of the Group's risk management objectives and policies for financial instruments is given in note 29.

 

31.2 Derivatives financial instruments

The fair value of forward and forward extras foreign currency contracts is calculated by reference to current market rates for contracts with similar maturity profiles. The fair value of interest rate and inflation swaps is calculated as the present value of the estimated future cash flows.

 

The derivative financial liabilities can be summarised as follows:

 

Group	2011	2010
	£000	£000
Forward exchange contracts - held for trading	104	-
Interest rate swap	1,073	850
Inflation swap	2,889	2,108
Fair value of derivative financial liabilities	4,066	2,958

 

The inflation swap was established in 2007 as part of a structured loan of £3.3 million and matures in 2032. The swap provides for the Group to receive a fixed rate increase of 2.545% on a nominal sum and to pay a floating rate increase. The latter is based on UK retail price index subject to a 5% cap and 0% collar. The loan has been significantly prepaid and at 31 December 2011 there was around £0.8 million loan outstanding.

 

The fair value measurements of all of the above derivative financial liabilities fall into Level 2 of the fair value hierarchy.

 

31.3 Financial results by category of financial instruments

The financial results by category of financial instruments can be summarised as follows:

 

	Group		Company
	2011	2010	2011	2010
	£000	£000	£000	£000
Loans and receivables - interest received	-	-	-	2
Financial liabilities measured at amortised cost -interest paid	(631)	(677)	-	-
Fair value movements on derivative financial instruments	(1,108)	(1,195)	-	-
	(1,739)	(1,872)	-	-

 

31.4 Borrowings

 

Borrowings comprise the following financial liabilities:

 

Group	Current		Non-current
	2011	2010	2011	2010
	£000	£000	£000	£000
Financial liabilities measured at amortised cost:
Short term bank borrowings and loans	9,608	7,589	477	3,725
Finance lease liabilities	73	63	259	92
	9,681	7,652	736	3,817

 

The bank loans are secured by fixed and floating charges over the Group assets. The rates of interest on the loans are detailed in note 29. The above bank loans contain terms and conditions that are normal for the commercial banking market. A breakdown of net debt is given in note 22.

 

There were no borrowings in the Company (2010: £nil).

 

32 Related party transactions

 

The Group's related parties include its subsidiaries, key management, post-employment benefit plans for the Group's employees and others as described below.

 

Unless otherwise stated, none of the transactions incorporate special terms and conditions and no guarantees were given or received. Outstanding balances are usually settled in cash.

 

Transactions with subsidiaries

Transactions and balances within the Group have been eliminated on consolidation.

Balances between the Company and its subsidiaries at the year end were as follows:

 

Company	2011	2010
	£000	£000
Amounts due from subsidiary undertakings:
- Southbank UK Limited - Redglade Investments Limited	1,820 1,041	8,329 -
- Nviro Cleantech Limited	-	349
- Nviro Cleantech Inc	-	32
- Vertus Technologies US LLC	-	17
- Vertus Technologies Industrial LLC	-	172
	2,861	8,899
Amounts owed to subsidiary undertakings:
- Redglade Associates Limited - Microrelease Limited - Laseair Limited	(15) (12) (14)	- (12) (14)
	(41)	(26)

Amounts due from subsidiary undertakings represent intercompany funding. In the case of Southbank UK Limited funding has been provided to finance working capital, particularly for Hayward Tyler, and to finance debt repayments. Funding has been provided to Redglade Investments Limited to finance debt repayments. In the case of the Nviro companies funding has been provided to meet the cost of closure of operations and the inter company balance of £620,000 written off. Amounts owed to subsidiary undertakings relate to trading balances.

 

Transactions with key management personnel

The transactions with directors and key management are disclosed in note 8. Apart from this, during the year the Group undertook transactions with Crown Passage House Limited, a company of which Ewan Lloyd-Baker is a director and City and Westminster Corporate Finance LLP, a firm of which John May is a partner.

 

Crown Passage House Limited was paid rent of £44,000 (2010: £36,667) during the year for the provision of an office. This transaction was undertaken by the Company.

 

City and Westminster Corporate Finance LLP were paid £25,556 (2010: £39,195) during the year for the provision of legal services to Hayward Tyler in respect of commercial contracts. These fees were charged on normal commercial terms.

 

Transactions with post-employment benefit plans

The defined benefit plan referred to in note 28 is a related party to the Group.

 

The assets in the pension scheme include shares in Specialist Energy Group plc. The Group's transactions with the pension scheme include contributions paid to the plan, which are disclosed in note 28. The Group has not entered into other transactions with the pension scheme, neither has it any outstanding balances at the reporting dates under review.

 

33 Commitments

	2011	2010
Group	£000	£000
Contracted for but not provided for	225	603
	225	603

 

34 Equity

 

Share capital

The share capital of Specialist Energy Group plc consists of fully paid ordinary shares with a par value of 1 pence per share.

 

Shares authorised and issued are summarised below.

 

Authorised share capital:	2011	2010
	£000	£000
40,000,000 ordinary shares of 1p	400	400
	400	400

 

Issued share capital:	2011	2011	2010	2010
	No.	£000	No.	£000
Allotted, called up and fully paid:
At beginning of period	35,507,404	355	66,093,190	66
Share consolidation*	-	-	(59,483,871)	-
Issued in January 2010	-	-	5,263,200	53
Issue of shares on acquisition	-	-	13,218,218	132
Issued in December 2010	-	-	10,416,667	104
Total	35,507,404	355	35,507,404	355

* See narrative below

 

Share consolidation

On 15 January 2010 the Company undertook a share re-organisation. At that time the existing authorised share capital of 400,000,000 ordinary shares and issued share capital of 66,093,190 ordinary shares of 0.1p each were consolidated into 40,000,000 authorised ordinary shares and 6,609,319 issued ordinary shares respectively of 1p each.

 

January 2010 issue

On 19 January 2010, prior to the transaction outlined below, a total of 5,263,200 new ordinary shares of 1p each were issued at 76p per share, raising gross proceeds of £4.0 million before expenses. The premium arising on this share issue of £3.7 million has been reflected in share premium.

 

Shares issued on acquisition

On 20 January 2010, the Company completed the reverse acquisition that led to the issue of 13,153,641 new ordinary shares of 1p each. The difference between the nominal value and fair value of the shares issued of £9.9 million has been reflected in the merger reserve.

 

December 2010 issue

On 24 December 2010, a total of 10,416,667 ordinary shares of 1p each were issued by the Company at 48p per share, raising gross proceeds of £5.0 million before expenses. The premium arising on this share issue of £4.6 million after the deduction of expenses has been reflected in share premium.

 

Each share in issue has the same right to receive dividend and the repayment of capital and represents one vote at the shareholders' meeting of Specialist Energy Group plc.

 

Share premium

Share premium consists of proceeds received in addition to the nominal value of the shares issued during the year, net of transaction costs. Costs of new shares charged to equity amounted to £0.5 million in 2010.  

 

35 Share options

 

35.1 Share options of the Company

 

The share option scheme was established prior to the reverse acquisition to incentivise the then directors and senior management, aid recruitment to the Company and its subsidiaries and to enable directors and senior employees to share in the benefit from the increased market capitalisation of the Company. The scheme ceased to operate at the date of the reverse acquisition. There are residual options outstanding at the reporting date as set out below.

 

	2011	2011	2010	2010
	No.	Weighted average exercise price (£)	No.	Weighted average exercise price (£)
Outstanding at beginning of period	59,420	0.44	1,631,196	0.32
Share consolidation*	-	-	(1,468,077)	-
Options granted	-	-	-	-
Options exercised	-	-	-	-
Options lapsed	(54,279)	0.43	(103,699)	0.25
Outstanding at end of period	5,141	0.51	59,420	0.44
Exercisable at end of period	5,141	0.51	59,420	0.44

 

* See narrative in note 34

 

The weighted average remaining contractual life of the options outstanding at 31 December 2011 was under 6 months (2010: 1 year 2 months). The outstanding options can be exercised at a price of £0.51 and can be exercised over a 5 to 6 month period. None of the Directors hold any options.

 

The Group recognised total expenses related to equity settled share based payment transactions in the form of options of £nil (2010: £nil).

 

36 Post balance sheet event

 

On 5 April 2012 the Company wrote to its shareholders with details of a proposed £5.0 million equity injection from the Company's largest shareholder and offer of £12.0 million of new borrowing facilities. The equity injection is subject to shareholder approval at a meeting to be held on 30 April 2012 and the borrowing facilities are conditional upon completion of the equity issue together with facility documentation and security. The new facilities, which are expected to be activated in the second quarter of 2012, extend debt maturity, increase the amount of borrowing facilities available and provide more flexible terms and conditions to the Group.

 

The new borrowing facilities comprise a 6 year term facility of £4.0 million, a 1 year revolving credit facility of £8.0 million renewable annually and ancillary arrangements such as bonds and guarantees and foreign exchange hedging facilities. Together these facilities will replace all of the Group's existing arrangements except for a USD1.5 million revolving credit facility of the US business.

 

The estimated refinancing cash flows are summarised as follows:

	£ million
Equity injection before costs	5.0
New borrowing facilities before costs	12.0
Repayment of borrowings	(9.6)
Termination of derivatives	(4.0)
Increase in available funds before costs	3.4

 

The derivatives are being terminated to help deliver the new borrowing facilities. This action has added benefits from (a) removing the risk that rising inflation impacts the Group through the inflation swap and (b) removing the high fixed interest rate paid by the Group.

 

The cost of terminating the derivatives is an estimate based on their fair value at 31 December 2011. This liability is included in the statement of financial position on page 25 under financial liabilities - derivatives.

 

 

 

 

ENDFR EAELPFAKAEAF

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Related Shares:

HAYT.L