RNS Number : 5547K
Croma Group PLC
22 December 2008
CROMA GROUP PLC
("Croma" or "the Group")
FINAL RESULTS
FOR THE YEAR TO 30TH JUNE 2008
The Board of Croma, the AIM listed avionics, access security and installation systems, and asset protection specialist, is pleased to
announce its final results for the year to 30th June 2008 which reflect an improvement in trading together with an increase in turnover and
contracts won.
KEY POINTS
* 2008 is the first year the Group has delivered a trading profit from its core operations;
* Increase in turnover for the year to �7.11m (2007 - �5.05m), the highest level yet for the business;
* Gross profit grew to �2.43m (2007 - �1.54m), an increase in gross margin to 34.24% (2007 - 30.49%). This turnaround is
attributable to the reduction in costs and the strong performance of the avionics and asset protection businesses;
* Non-cash expenses, financing costs and the closure of businesses resulted in a loss for the period of �669,089 (2007 loss -
�4,516,821);
* New contracts secured worth over �600,000 broadening the spread of customers and their activities;
* The majority of the Group's activities are carried out for major governmental organisations;
* Board restructuring;
* Appointment to the Board of James Sullivan who will take charge of Technical aspects of group operations.
Nick Hewson, Non-Executive Chairman of Croma, said: "I am delighted to be able to report to you on the Group's first trading profit from
core activities, albeit that due to movements in non-cash expenses, the Group has declared a pre-tax loss for the period. Radical cost
cutting and a strong product and service proposition together with good and continuing lines of finance have enabled the Group to show its
true colours. The Group is well set with a strong customer base, to grow its order books and deliver profitable growth, despite the overall
economic climate. Many thanks to the management and staff of the business who have worked so hard to deliver these results."
An electronic copy of the annual report is available from the Group's website www.cromagroup.co.uk and copies have been sent to
shareholders together with the Notice of AGM and EGM.
Enquiries:
Croma Group plc
Sebastian Morley, CEO 07768 006909
Seymour Pierce Limited
Mark Percy 020 7107 8000
CHAIRMAN'S STATEMENT
FOR THE YEAR ENDED 30 JUNE 2008
I have pleasure in announcing the results of the Group for the year ended 30 June 2008, my first year as your Chairman.
Financials
2008 is the first year the Group has delivered a trading profit from its continuing operations, albeit that due to movements in non-cash
expenses, the Group has declared a pre-tax loss for the period.
Turnover grew to �7.11m (2007 - �5.05m), the highest level yet for the business, delivering a gross profit of �2.43m (2007 - �1.54m), an
increase in gross margin to 34.24% (2007 - 30.49%). Our loss from operations before finance charges was reduced dramatically to �263,758
(2007 - loss �3.79m), and this was struck after charging a number of non-cash items notably: goodwill impairment of �445,486 against the
Photobase subsidiary which is in long term recovery, but, the Directors believe, worth the effort; a charge of �101,306 (2007 - �106,893) in
connection with share options granted, most of which will shortly lapse; and a charge of �27,895 (2007 - �124,886) in connection with
recognising the equity element of the convertible loan notes issued.
Excluding these non-cash charges, the group made a profit of �283,034 (2007 - loss �890,414) before finance costs, a turnaround on the
2007 year of over �1.0m and the first time the business has delivered a trading profit from its core business activities. This turnaround is
entirely attributable to the severe pruning of the head office costs and the strong performance of our avionics and asset protection
businesses. Management and staff of these businesses are to be commended.
Our finance costs were �230,564 net, (2007 - net cost �88,892) giving a loss before tax from continuing activities of �494,322 (2007 -
loss �3.879m), and much of that increase in finance cost is the servicing of loan notes and factoring agreements entered into during the
year, when it became clear that the Group could trade profitably and generate positive cash flow.
The full loss for the period attributable to shareholders was �669,089 (2007 - loss �4,516,821) after allowing for the closure of the
CCTV operations at a cost of �174,767 (2007 - loss �637,812). The Board does not anticipate any further material losses arising from the
closure of these businesses.
Business Review
The Group now comprises three key business areas: avionics, access security and installation systems, and asset protection including man
guarding and key holding.
Most of the major customer propositions involved in the R & D Design Services business, by value, are derived from proprietary software
which we have developed in-house and which gives us a strong route to securing business activity and an even stronger route to retaining it.
The majority of the Group's activities are carried out for major governmental organisations including the UK prisons service, the UK
police services, and the UK armed forces and businesses linked to the defence sector. The Group also has a number of material contracts with
defence supply organisations particularly in the avionics industry including Agusta with whom we recently signed a long term contract out to
2013, and we recently secured a contract worth �600,000 a year with Shasun Pharma Solutions, which broadens our spread customers and their
activities
In December 2007 it became clear that the CCTV operation could not survive without considerable support from the Group, which support
would have resulted in further substantial losses to the Group, and therefore we closed this operation.
Board Changes
The Board has been considerably reduced in size (and cost!) during the year, and as reported more fully in the last financial
statements, three directors of the Company resigned: the former Executive Chairman, John French, the former Financial Director, David
Bretel, and a non-executive director, Gerry Thompson. The Board reiterates its thanks to them all for their services to the Group.
Gerald McGill has agreed to act as a part-time Finance Director and and we will be announcing as at the date of this statement the
appointment to the Board of the Managing Director of the avionics business, James Sullivan, who will take charge of technical aspects of
Group operations, as well as contribute to general corporate matters. Sebastian Morley, CEO, and myself, welcome both these gentlemen to the
Board and look forward to developing the business further with them.
Financing arrangements
In view of the challenging times globally, the Board has reviewed all its arrangements with its sources of finance for normal operations
being the invoice discounting and unsecured undrawn bank overdrafts. We have spoken with our providers of invoice discount finance and
expect their continued support for our businesses and as such the Board is satisfied that it has taken the steps it should take, given the
considerable amount of finance that the Group obtains from sales invoice discounting. There are no other material clearing bank style
working capital arrangements other than undrawn facilities available to the subsidiary businesses which again are still in place, following
confirmation with the relevant banks.
AGM and EGM
Along with the Annual general meeting to be held on 28th January 2009, an Extraordinary meeting will be held to comply with Companies
Act 1985 Section 142 requirements.
Outlook
The Board believes it has now dealt with the majority of the legacy issues it faced, and cleaned up a number of the businesses. They are
now, in general, cash positive and growing, with increasing order books. The business is financed by long term share capital and convertible
loan notes, as well as invoice discounting agreements, and there is minimal unsecured bank overdraft debt.
We still have considerable issues to deal with at our Photobase subsidiary and I hope to be able to report good news on that front in
the interim statement which is due in March 2009.
It only remains for me to thank all our management and staff, our customers and suppliers, and our shareholders and bond holders for
their continued support during the year.
Nick Hewson
Non-executive Chairman
19 December 2008
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 30 JUNE 2008
2008 2007
Notes � �
Revenue 7,108,051 5,052,508
Cost of sales (4,674,306) (3,512,227)
------------- -------------
Gross profit 2,433,745 1,540,281
Goodwill impairment (445,486) (2,792,693)
Other administrative expenses (2,252,017) (2,537,705)
Administrative expenses (2,697,503) (5,330,398)
------------- --------------
Loss from operations (263,758) (3,790,117)
Financial income 4,635 1,505
Financial expenses (235,199) (90,397)
---------- -----------
Loss before taxation (494,322) (3,879,009)
Taxation expense - -
--------------- ---------------
Loss from continuing operations (494,322) (3,879,009)
Loss from discontinued operations (174,767) (637,812)
net of tax
--------------- ---------------
Loss for the year attributable to (669,089) (4,516,821)
equityshareholders
--------------- ---------------
Loss per share for loss
attributable to equity
shareholders
Continuing operations
Loss per share * basic (0.29p) (2.58p)
Loss per share - diluted (0.29p) (2.58p)
Discontinued operations
Loss per share * basic (0.10p) (0.42p)
Loss per share - diluted (0.10p) (0.42p)
Loss per share * basic (0.39p) (3.00p)
Loss per share - diluted (0.39p) (3.00p
CONSOLIDATED BALANCE SHEET
AS AT 30 JUNE 2008
Assets Notes 2008 2008 2007 2007
� � � �
Non-current assets
Property, plant and equipment 234,560 191,109
Goodwill 2 2,148,650 2,594,136
Total non-current assets 2,383,210 2,785,245
Current assets
Inventories 299,319 311,212
Trade and other receivables 1,484,404 1,427,328
Cash 62,375 131,792
Total current assets 1,846,098 1,870,332
Total assets 4,229,308 4,655,577
Liabilities
Non-current liabilities
Convertible loan notes (1,295,848) (839,814)
Non convertible loan notes - (251,263)
Bank loan - (45,373)
Deferred tax (2,828) (2,828)
Total non current liabilities (1,298,676) (1,139,278)
Current Liabilities
Trade and other payables (212,281) (775,311)
Tax (446,556) (491,891)
Accruals and deferred income (498,850) (448,034)
Deferred consideration - (34,948)
Bank overdrafts and loans (309,007) (482,329)
Total current liabilities (1,466,694) (2,232,513)
Total liabilities 2,765,370 3,371,791
Total net assets 1,463,938 1,283,786
Capital and reserves attributable to equity holders
of the company
Share capital 9,161,453 8,441,413
Share premium 1,388,522 1,388,522
Retained earnings (9,578,219) (8,909,130)
Other reserves 492,182 362,981
Total equity 1,463,938 1,283,786
These financial statements were approved and authorised for issue by the board of directors
on 19 December 2008 and signed on their behalf by
G M McGill,
Director
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 30 JUNE 2008
Notes 2008 2007
� �
Cashflows from operating activities
Loss before taxation (669,089) (4,516,821)
Adjustments for:
Depreciation 37,412 76,827
Impairment of Goodwill 445,486 2,792,693
Gain on sale of property, plant and equipment (1,325) -
Add back of the share based payment expense 101,306 106,893
Financial Income (4,635) (1,505)
Financial Expenses 235,199 90,397
Cashflows from operating activities before
changes in
working capital and provisions; 144,354 (1,451,516)
(Increase)/Decrease in inventories 11,893 229,749
(Increase)/Decrease in trade and other (57,076) (120,493)
receivables
(Decrease)/Increase in trade and other (536,828) 845,182
payables
__________ __________
Cash generated from operations (437,657) (497,078)
Interest received 4,635 1,505
Interest paid (137,441) (90,397)
Income taxes (20,721) (222,021)
__________ __________
Net cashflows from operating activities (591,184) (807,991)
Cash Flows from investing activities
Purchase of property, plant and equipment (83,347) (35,990)
Proceeds on disposal of property, plant and 3,809 5,909
equipment
__________ __________
Net cash used in investing activities (79,538) (30,081)
Cash flows from financing activities
Issue of Loan Notes 420,000 750,000
Repayment of borrowings (50,024) -
Issue of Share Capital - cash issue 400,000 100,000
__________ __________
Net cash from financing activities 769,976 850,000
__________ __________
Net (decrease)/increase in cash and cash 99,254 11,928
equivalents
__________ __________
Cash and cash equivalents at beginning of (305,164) (317,092)
year
__________ __________
Cash and cash equivalents at end of year (205,910) (305,164)
========== ==========
Notes to the preliminary announcement
The financial information in the announcement does not constitute the Company's statutory accounts for the year ended 30 June 2008,
prepared in accordance with IFRSs as adopted by the EU, or the period ended 30 June 2007, which were prepared under UK GAAP, but is derived
from these accounts. The statutory accounts for the year ended 30 June 2007 have been delivered to the Registrar of Companies and those for
2008 will be delivered following the Company's annual general meeting. The auditors reported on those accounts, their reports were
unqualified, did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their
reports and did not contain statements under the Companies Act 1985, s. 237(2) or (3).
While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and
measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient
information to comply with IFRSs. The Group will publish full financial statements that comply with IFRSs today.
This is the first time the Group has prepared its preliminary announcement in accordance with Adopted IFRSs, having previously prepared
its preliminary announcement in accordance with UK accounting standards. The date of transition to IFRS is 1 July 2006.
1. Accounting Policies
Basis of preparation
The preliminary announcement has been prepared and approved by the directors in accordance with International Financial Reporting
Standards (IFRSs), International Accounting Standards and Interpretations (collectively IFRS) issued by the International Accounting
Standards Board (IASB) as adopted by the European Union ("adopted IFRSs").
In preparing this preliminary announcement, the Group has elected to take advantage of certain transitional provisions within IFRS 1
'First time adoption of International Financial Reporting Standards' which offer exemption from presenting comparative information or
applying IFRSs retrospectively. The most significant of these provisions are the exemption from applying IFRS 3 'Business Combinations' to
acquisitions which occurred prior to the transition date.
This is the first time the Group has prepared its preliminary announcement in accordance with IFRSs, having previously prepared its
financial statements in accordance with UK GAAP accounting standards. Details of how the transition from UK accounting standards to EU
adopted IFRS has affected the group's reported financial position, financial performance and cash flows are given in the statutory financial
statements.
Going concern
The Group's activities are funded by a combination of long term equity capital, and convertible loan notes and short term invoice
discounting and bank overdraft facilities. The day to day operations are funded by cash generated from trading and primarily invoice
discounting facilities.
Whilst there are inevitable pressures from the current general economic climate, the Board remains positive about the growth available
within its main trading operations. This growth, which is substantially based on new contracts has been factored into the Board's profit and
cash flow projections, as have reasonably possible changes from the current economic climate. These projections suggest that the Group will
meet its obligations as they fall due with the use of existing uncommitted invoice discounting facilities. These facilities are due for
review in March 2009 and based on the informal discussions the Board has had with these finance providers, as referred to in the Chairman's
statement, have an expectation that these facilities will continue to be available to the Group for the foreseeable future.
The financial statements do notreflect the adjustments that would be necessary were the trading performance of the Group to deteriorate
and/or the funding available from invoice discounting were not available.
Changes in accounting policies - first time adoption
In preparing this preliminary announcement, the group has elected to apply the following transitional arrangements permitted by IFRS 1
'First-time Adoption of International Financial Reporting Standards':
* Business combinations effected before 1 July 2006, including those that were accounted for using the merger method of accounting
under UK accounting standards, have not been restated.
* The carrying amount of capitalised goodwill at 30 June 2006 that arose on business combinations accounted for using the
acquisition method under UK GAAP was frozen at this amount and tested for impairment at 1 July 2006.
* Where the liability component of a compound financial instrument was not outstanding at 30 June 2008, the portion of equity
representing the cumulative interest accreted on the liability component and the portion of equity representing the original equity
component of the instrument have not been disclosed as separate components of equity.
* IFRS 2 'Share-based payments' has been applied to employee options granted after 7 November 2002 that had not vested by 1 July
2006.
The Group has made estimates under IFRSs at the date of transition, which are consistent with those estimates made for the same date
under UK GAAP unless there is objective evidence that those estimates were in error, i.e. the Group has not reflected any new information in
its opening IFRS balance sheet but reflected that new information in its income statement for subsequent periods.
As a result of adopting IFRS there have been changes to the presentation of the preliminary announcement.
In preparing its opening IFRS balance sheet, the Group has adjusted amounts reported previously in preliminary announcements prepared in
accordance with its previous basis of accounting (UK GAAP). An explanation of how the transition from UK GAAP to IFRS has affected the
Group's financial position and performance is set out below.
IAS 36 'Impairment of Assets'. This has not impacted on either the profit in the year to 30 June 2008 or the net assets at that date.
There is no difference in Group net assets under IFRS and UK GAAP at 30 June 2008 as the impairment review and associated charge in the
period to 30th June 2007 aligns the carrying value of the goodwill under UK GAAP and IFRS. However, the adoption of IAS36 has had an impact
on the net assets at 1st July 2006 and on losses incurred in the period to 30th June 2007.
IFRS 5 'Discontinued operations'. The transactions relating to Croma Defence Systems Limited, which went into liquidation in the year
are disclosed as discontinued in accordance with this standard.
IAS 1 'Presentation of financial statements'. This preliminary announcement has been prepared in accordance with this standard.
IFRS 7 'Financial instruments: disclosures'. This introduces requirements to disclose risks arising from financial statements, and
therefore disclosures that relate to credit risk and liquidity risk are discussed below. The Group is not exposed to market or currency
risk.
IFRS 8 'Operating segments'. The analysis of operating segments is shown in the full financial statements.
Basis of consolidation
Where the Company has the power, either directly or indirectly, to govern the financial and operating policies of another entity or
business so as to obtain benefits from its activities, it is classified as a subsidiary. The preliminary announcement presents the results
of the company and its subsidiaries ("the Group") as if they formed a single entity. Inter-company transactions and balances between Group
companies are therefore eliminated in full.
Revenue and profit recognition
Income of the Group is derived from a number of different sources. These sources are service based as well as for the sale of goods.
Following the principles of IAS 18 'Revenue', the policies for income recognition in respect of each of the different sources of income are
such that income is recognised to the extent that the group has obtained the right to consideration through its performance or delivery of a
service as well as the sale of a product. Certain forms of income require a contractual obligation to be entered into between the Group and
the customer:
* Security Personnel services are recognised in the month in which the work is carried out for the client.
* Keyholding income is recognised in equal instalments over the period of the contract.
* Sale of Goods are recognised at the point that they are delivered to clients' premises on signature of a goods received note.
* The fair value of any revenues associated with the sale of software licences is recognised on delivery of the product to the
customer.
* Maintenance fees are recognised over the term of the contract. Where a maintenance fee is not itemised in the contract but is
still provided as part of the contractual arrangement, an apportionment is taken as the maintenance amount, based upon its fair value. The
value of this amount is held as deferred income under 'Accruals and deferred income' in the balance sheet.
Goodwill
Goodwill represents the excess of the cost of a business combination over the interest in the fair value of identifiable assets,
liabilities and contingent liabilities acquired. Cost comprises the fair value of assets given, liabilities assumed and equity instruments
issued, plus any direct costs of acquisition.
Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated income statement.
Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess
is credited in full to the consolidated income statement on the acquisition date.
At the date of transition to IFRS at 1st July 2006, the goodwill carrying amount under UK GAAP was tested for impairment and based on
the conditions existing at the transition date no impairment was identified. Thus, the carrying amount of goodwill in Croma Group PLC's IFRS
opening balance was equal to the goodwill carrying amount under UK GAAP. From the date of transition to IFRS, Croma Group PLC discontinued
the amortisation of goodwill and implemented annual impairment tests for goodwill.
Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial
year end. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use
and fair value less costs to sell), the asset is written down accordingly.
Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset's
cash-generating unit (i.e. the lowest group of assets in which the asset belongs for which there are separately identifiable cash flows).
Goodwill is allocated on initial recognition to each of the group's cash-generating units that are expected to benefit from the synergies of
the combination giving rise to the goodwill.
Impairment charges are included in the administrative expenses line item in the consolidated income statement, except to the extent they
reverse gains previously recognised in the consolidated statement of recognised income and expense. An impairment loss recognised for
goodwill is not reversed.
Business combinations
The preliminary announcement incorporates the results of business combinations using the purchase method. In the consolidated balance
sheet, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the
acquisition date. The results of acquired operations are included in the consolidated income statement from the date on which control is
obtained.
The group had taken the exemption not to apply IFRS 3 retrospectively to business combinations occurring prior to the date of transition
to IFRS. As noted above, goodwill arising on these combinations has been retained at its carrying value as at 1 July 2006. In accordance
with IAS 36, the group only recognises impairments after that date.
Development costs
Research expenditure is recognised as an expense as it is incurred. Development expenditure is written off in the same way unless the
directors are satisfied as to the technical, commercial and financial viability of the individual projects. If the criteria of IAS 38 have
been met, then the expense is capitalised.
Segment reporting
All activities originate in the UK. The Group has 3 operating subsidiaries, Vigilant Security (Scotland) Limited, ('Vigilant'), R & D
Design Services Limited ('RDDS') and Photobase Limited ('Photobase'). As each subsidiary is engaged in a different marketplace and have
their own profiles of risk and rewards the directors consider that these 3 companies best represent the material business segments of the
Group. These segments also reflect the internal reporting structure within the Group. Vigilant provides security services to customers. The
revenue of RDDS predominately consists of the sale of goods to its customers. While RDDS has some revenue for the provision of related
services to the goods that it sells, this is not considered a material business segment in its own right. Photobase revenue mostly consists
of the provision of maintenance, hardware and software to its customers.
The discontinued activity of Croma Defence Systems Limited is shown as such separately.
Property, plant and equipment
Property, plant and equipment are stated at costs less depreciation. Depreciation is provided on all property, plant and equipment at
rates calculated to write off the cost of each asset less its estimated residual value evenly over its estimated useful life, as follows:
Freehold property - 4% on cost
Plant and equipment - 25% on cost
Computer equipment - 15% on cost
Office equipment - 15% on cost
Motor vehicles - 25% on cost
Inventories
Inventories are valued at the lower of cost and net realisable value. Cost is based on the cost of purchase on a first in first out
basis together with costs in bringing it to its present condition and location. Work in progress and finished goods include attributable
overheads. Net realisable value is based on estimated selling price less additional costs to completion and disposal.
Dividends
Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when interim
dividends are paid. In the case of final dividends, this is when approved by the shareholders at the AGM.
Deferred taxation
Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the balance sheet differs from
its tax base, except for differences arising on:
* the initial recognition of goodwill;
* the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the
transaction affects neither accounting or taxable profit; and
* investments in subsidiaries and jointly controlled entities where the group is able to control the timing of the reversal of the
difference and it is probable that the difference will not reverse in the foreseeable future.
Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against
which the difference can be utilised.
The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the balance sheet
date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered).
Deferred tax assets and liabilities are offset when the group has a legally enforceable right to offset current tax assets and
liabilities and the deferred tax assets and liabilities relate to taxed levied by the same tax authority on either:
* the same taxable group company; or
* different group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets
and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are
expected to be settled or recovered.
Operating leases
Rentals payable under operating leases are charged to the income statement on a straight line basis over the term of the lease.
Financial Instruments
Financial assets and financial liabilities are initially recognised in the group's balance sheet when the group becomes a party to the
contractual provisions of the instrument at their fair value and thereafter at amortised cost.
Share capital
Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial
liability. The Group's ordinary shares are classified as equity instruments.
Finance cost
Finance costs of debt are recognised in the income statement over the term of such instruments at a constant periodic rate on the
carrying amount.
Financial assets
Trade receivables are recorded at their amortised cost less any provision for doubtful receivables. Trade receivables due in more than
one year are discounted to their present value. Impairment provisions are recognised when there is objective evidence (such as significant
financial difficulties on the part of the counterparty or default or significant delay in payment) that the group will be unable to collect
all of the amounts due under the terms receivable the amount of such provision being the difference between the net carrying amount and the
present value of the future expected cashflows associated with the impaired receivable. For trade receivables which are reported net, such
provisions are reported in a separate allowance account with the loss being recognised within administrative expenses in the income
statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against
the associated provision.
These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise
principally through the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of
contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their
acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for
impairment. The provision at 30th June 2008 across the Group was �71,260 (2007- �61,073). The effect of discounting on these financial
instruments is not considered to be material
Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the
counterpart or default or significant delay in payment) that the group will be unable to collect all of the amounts due under the terms
receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected
cash flows associated with the impaired receivable. For trade receivables, which are reported net, such provisions are recorded in a
separate allowance account with the loss being recognised within administrative expenses in the income statement. On confirmation that the
trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.
From time to time, the Group elects to renegotiate the terms of trade receivables due from customers with which it has previously had a good
trading history. Such renegotiations will lead to changes in the timing of payments rather than changes to the amounts owed and, in
consequence, the new expected cash flows are discounted at the original effective interest rate.
The Group's loans and receivables comprise trade and other receivables and cash and cash equivalents in the balance sheet. We deem cash
equivalents to be deposits that we hold with a maturity of under 3 months. Cash and cash equivalents includes cash in hand, deposits held at
call with banks with an original maturity of less than 3 months, and bank overdrafts. Bank overdrafts are shown within loans and borrowings
in current liabilities on the balance sheet.
Financial Liabilities
(a) Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the
instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which
ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the balance
sheet. Interest expense in this context includes initial transaction costs and premia payable on redemptions, as well as any interest or
coupon payable while the liability is outstanding.
(b) Trade payables and other short-term monetary liabilities, are initially recognised at their amortised cost.
(c) The proceeds received on issue of the Group's convertible debt are allocated into their liability and equity components. The amount
initially attributed to the debt component equals the discounted cash flows using a market rate of interest that would be payable on a
similar debt instrument that does not include an option to convert. Subsequently, the debt component is accounted for as a financial
liability measured at amortised cost.
The difference between the fair value of the convertible debt instrument as a whole and the amount allocated to the debt component is
credited direct to equity and is not subsequently re-measured. On conversion, the debt and equity elements are credited to share capital and
share premium as appropriate.
The interest expense of the liability component is calculated by applying the effective interest rate to the liability component of the
instrument. The difference between this amount and the interest paid is added to the carrying amount of the convertible loan note.
Issue costs are apportioned between the liability and equity components of the convertible loan notes based on their relative carrying
amounts at the date of issue. The proportion relating to the equity component is charged directly to equity.
(d) All other financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of
a financial liability. The Group's ordinary shares are classified as equity instruments.
The Group considers its capital to comprise its ordinary share capital, deferred share capital, share premium, share option (IFRS2
reserve) and accumulated retained earnings.
Share options
Where share options are awarded to employees, the fair value of the options as measured at the date of grant is charged to the income
statement over the vesting period. Non market vesting conditions are taken into account by adjusting the number of options of equity
instruments that are expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting
period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options
granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are
satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition. Share options are equity and not a
financial liability.
Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured
immediately before and after the modification is also charged to the income statement over the remaining vesting period.
Financial risks
The Group is exposed through its operations to the following financial risks:
* Credit risk
* Fair value or cash flow interest rate risk
* Foreign exchange risk
* Other market price risk
* Liquidity risk
In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes
the Group's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative
information in respect of these risks is presented throughout these financial statements.
There have been no substantive changes in the Group's exposure to financial instrument risks, its objectives, policies and processes for
managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note.
Financial Instruments
The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows:
Financial assets 2008 2007
� �
Trade receivables 1,437,941 1,309,412
Cash at bank 62,375 131,792
Total 1,500,316 1,441,204
Financial liabilities 2008 2007
� �
Trade payables 185,634 686,280
Bank overdrafts - 155,258
Bank loans 40,722 45,373
Convertible loan notes 1,295,848 839,814
Invoice discounting 268,285 281,698
Non convertible loan notes - 251,263
Total 1,790,489 2,259,686
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group's financial risk management objectives and policies and pays
close attention to its responsibilities in this regard. The Board meet regularly and discuss the effectiveness of risk management processes
and ways in which they can be improved upon. The Board also receives monthly reports from the Group Finance director through which it
reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets.
The overall objective of the Board is to set policies that seek to reduce financial risk as far as possible without unduly affecting
the Group's competitiveness and flexibility. Further details regarding these policies are set out below:
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or a counterparty to a financial instrument fails to meet its
contractual obligations. The Group is mainly exposed to credit risk from credit sales. It is Group policy, implemented locally, to assess
the credit risk of new customers before entering contracts. Such credit ratings are taken into account by local business practices.
Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. The Group has banking
arrangements with several long established banks and financial institutions.
The Group does not enter into derivatives to manage credit risk, although in certain isolated cases may take steps to mitigate such
risks if it is sufficiently concentrated.
The maximum credit risk exposure at 30 June 2008 is represented by the balance of cash at bank and trade and other receivables at that
date. The Group has a small percentage of bad debt which is not material. The bad debt charge within the Group for the year to 30 June 2008
was �19,666 (2007 - �15,975). .
Liquidity risk
Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt
instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.
The Group's policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To
achieve this aim, it seeks to maintain cash balances (or agreed facilities) to meet expected requirements for a period of at least 45 days.
The Board receives rolling 12-month cash flow projections on a monthly basis as well as information regarding cash. At the balance sheet
date, these projections indicated that the group expected to have sufficient liquid resources to meet its obligations under all reasonably
expected circumstances.
The liquidity risk of each group entity is reviewed centrally by the Group board. The budgets are set locally and agreed by the board in
advance, enabling the group's cash requirements to be anticipated. Where facilities of group entities need to be increased, approval must be
sought from the Group Finance Director. Where the amount of the facility is above a certain level agreement of the Board is needed.
Foreign exchange and market risk
The Group does not have any marketable instruments and therefore is not affected by market price risk.
The Group neither sells nor purchases a significant value of items in foreign currencies, and takes appropriate measures to mitigate
currency risk when it does.
Standards issued by the International Accounting Standards Board (IASB) not effective for the current year and not adopted by the
Group.
The following standards and interpretations have been issued by the IASB. They become effective after the current year and have not been
early adopted by the Group:
International Financial Reporting Standards Effective To be adopted by the
(IFRS) date Group during years
commencing
Amendment to Share-based Payment: 01.01.2009 30.06.2010
IFRS 2 Vesting Conditions
and Cancellations
This amendment
clarifies that
vesting conditions
are service
conditions and
performance
conditions only, and
specifies that all
cancellations should
receive the same
accounting
treatment. The
amendment is still
to be endorsed by
the EU.
IFRS 3 -revised Business 01.07.2008 30.06.2009
Combinations
This standard may
result in
significant changes
to apply to
acquisition
accounting,
including treatment
of acquisition costs
and recognition of
intangible assets
acquired. The
standard will not
require a
restatement of
previous business
combinations. The
standard is still to
be endorsed by the
EU
Amendment to Consolidated and 01.07.2009 30.06.2010
IAS 27 Separate Financial
Statements
This amendment
relates to
acquisitions of
subsidiaries
achieved in stages
and disposals of
interests.
The amendment does
not require the
restatement of
previous
transactions, and
must be adopted at
the same time as
IFRS 3 Revised. The
amendment is still
to be endorsed by
the EU.
Amendments to Presentation of 01.01.2009 30.06.2010
IAS 1- revised Financial
Statements: A
Revised Presentation
The amendment
affects the
presentation of
owner changes in
equity and of
comprehensive
income. This does
not impact
recognition or
measurement of
assets and
liabilities.
The amendment is
still to be endorsed
by the EU.
Amendment to Borrowing Costs 01.01.2009 30.06.2010
IAS 23 The amendment
removes the option
of immediately
recognising as an
expense borrowing
costs that relate to
assets that take a
substantial period
of time to get ready
for use or sale. The
amendment is still
to be endorsed by
the EU
Improvements to IFRSs This clarifies the 01.01.2009 30.06.2010
requirements of
IFRSs and eliminates
inconsistencies
between the
standards.
The amendment is
still to be endorsed
by the EU.
Standards issued by the International Accounting Standards Board (IASB) not effective for the current year and not adopted by the
Group (cont.d).
International Financial Reporting Interpretations Committee (IFRIC)
IFRIC 16 Hedges of a Net Investment in a Foreign Operation 01.10.2008 30.06.2010
IFRIC 16 clarifies reporting on hedge instruments and foreign
currency accounting in respect of foreign operations.
IFRIC 16 is still to be endorsed by the EU.
IFRIC 17 Distribution of Non-Cash Assets to Owners 01.07.2009 30.06.2010
IFRIC 17 clarifies the accounting treatment when dividends are
paid to a company's owners other than by cash.
IFRIC 17 is still to be endorsed by the EU.
The impact on the future adoption of these standards in the Group's financial statements is not expected to be material. Additionally,
the proposed amendments to IAS32, IFRS1 and IFRIC15 are not expected to have any impact on the Group's financial statements.
Hedge accounting
Hedge accounting is applied to financial assets and financial liabilities only where all of the following criteria are met:
* At the inception of the hedge there is formal designation and documentation of the hedging relationship and the Group's risk
management objective and strategy for undertaking the hedge.
* For cash flow hedges, the hedged item in a forecast transaction is highly probable and presents an exposure to variations in cash
flows that could ultimately affect profit or loss.
* The cumulative change in the fair value of the hedging instrument is expected to be between 80-125% of the cumulative change in
the fair value or cash flows of the hedged item attributable to
the risk hedged (i.e. it is expected to be highly effective).
* The effectiveness of the hedge can be reliably measured. The hedge remains highly effective on each date it is tested. The Group
has chosen to test the effectiveness of its hedges on a quarterly basis.
The Group does not hold in the current of previous financial years any assets or liabilities that meet the criteria above or has issued
derivative instruments for speculative purposes.
2 Intangible fixed assets - Group
Total
�
Cost
At 1 July 2006 5,646,832
Reduction in earnout provision (260,003)
At 30 June 2007 5,386,829
At 30 June 2008 5,386,829
Accumulated impairment
At 1 July 2006 -
Impairment 2,792,693
At 30 June 2007 2,792,693
Impairment 445,486
At 30 June 2008 3,238,179
Net book value
At 1 July 2006 5,646,832
At 30 June 2007 2,594,136
At 30 June 2008 2,148,650
The directors calculated the impairment as the difference between the carrying value and the net present value of cashflows anticipated
to be generated from each of the groups cash generating units, being each of its subsidiaries, on a value in use basis.
Information relating to the impairment:
Growth Discount No. of years Carrying Carrying
Rate factor of period Value Value
of forecast 2008 2007
� �
Vigilant Security (Scotland) 35% 12% 2 1,396,390 1,396,390
Limited
Photobase Limited 0% 26% 2 0 445,486
R&D Design Services Limited 6% 15% 2 752,260 752,263
Total 2,148,650 2,594,136
Growth rates anticipated in the first 12 months are based on recent business levels and reflect an appropriate level of tender wins. For
Vigilant the growth rate is based on growth in turnover that has already been achieved through contract wins, along with an expectation of
further wins. Growth in turnover from 2006 to 2007 was 68% and from 2007 to 2008 was 44%, so this forecast is in the view of the board
achievable. For RDDS the growth rate of 6% represents turnover already added through contract wins.
A discount of 12% has been applied to Vigilant Security (Scotland) Limited, representing the relatively stable nature of the business
model, its past performance and anticipated wins. A discount rate of 15% has been applied to R& D Design Services Limited, again
representing the stable nature of the business albeit slightly riskier than Vigilant due to its business model and past performance. A
discount rate of 26% has been applied to Photobase Limited due to the high risk and uncertainty attached to this business, which is forecast
to generate a net cash outflow. For this reason the goodwill associated with it has been impaired to �nil this year
The net present value of the value in use cashflows that are forecast to be generated for Vigilant and RDDS exceed the carrying value of
goodwill, by �377,991 and �687,322 respectively, but with Photobase were less than the carrying value.
The discount factors are based on a risk weighted cost of capital, considering each entities' risks. Factors that have been considered
in calculating the risk include trading record, experience of management, customer profiles, and credit risk, such as debtor payment terms
and how they are complied with. If discount rates used were reduced by 25% to 7.5% for Vigilant and 9% for RDDS it is estimated that the
recoverable amount of goodwill would increase to �5,589,524 for Vigilant (with a 10% growth rate) and �11,759,345 for RDDS. If the discount
rates were increased by 25% to 12.5% and 15% respectively, it is estimated that the recoverable amount of goodwill would be still exceed
carrying value by �16,827 for Vigilant and �454,097 for RDDS.
Impairment losses recognised in the period
The directors have considered the carrying value of goodwill in relation to Photobase Limited and have decided that there is no
remaining value and it should be fully impaired. The whole impairment of goodwill of Photobase Limited of �445,483 is reflected in
administrative expenses. While the company continues to trade it has had to change its business model significantly over the last year to do
so, and as such the remaining goodwill cannot be considered to have any value.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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