RNS Number:6327O
Zenith Hygiene Group plc
25 February 2008
Zenith Hygiene Group PLC
Audited Preliminary Results for the Year Ended
31 August 2007
Zenith Hygiene Group plc ("Zenith" Or "The Group"), a manufacturer and supplier
of cleaning and hygiene products to industrial and Institutional users, today
reports audited preliminary results for the year ended 31 August 2007.
As previously reported in a number of announcements during the second half of
2007 this has been a very difficult year for Zenith with challenging integration
of previous acquisitions, poorer trading and the emergence of significant
accounting issues which has led to restatement of the accounts for 2006 and a
significant loss for 2007.
Pre tax loss of �8.6million comprising:
* �2.6 million underlying operating loss before charging �4.5 million of
exceptional items of which:
�2.0 million of write downs of asset values, increased liabilities and
restructuring
�2.5 million of impairment of goodwill
And before charging:
�0.8m of goodwill amortisation and share option expense
�0.7 million of interest costs
The Board have instigated and substantially finished a full business review that
has led to:
* Gavin Gracie, who has significant turnaround expertise, appointed as
Interim Chief Operating Officer
* New Finance Director and Finance Team appointed
* Increased banking facilities to provide adequate working capital headroom
* Operational management stepped down from the Board to focus on operations
* Appointment of consultants to review of warehouse and distribution
operations
* New management teams across all areas
* Introduction of new systems and controls
As a result, costs are being better controlled, margins are increasing, customer
service is improving, but, the major impact of the changes that have been made
will not be fully realised until fiscal year 2009.
Ringo Francis will step down from his Board responsibilities as Chairman and
Chief Executive as of this announcement, but will retain an ongoing business
development role. Gavin Gracie will take up the full time role of Chief
Executive Officer and Simon Barrell will take on the Chairmanship in an acting
capacity providing stringent corporate governance.
Ringo Francis, said:
"Significant steps have been taken to put Zenith back on the right path in all
areas of our business. New management is in place targeting customer service
levels, funding has been agreed and there is a hugely positive atmosphere in the
business. The Group continues to attract new customers, margins are improving,
costs are being better controlled, although the turnaround of the business will
take some time given the magnitude of the issues it has faced."
24 February 2008
Enquiries:
Zenith Hygiene
Gavin Gracie, Chief Executive 07939 694722
Ian Selby, Group Finance Director 07939 694638
College Hill
Matthew Smallwood 020 7457 2020
Chairman's Statement
Introduction
The year ended 31 August 2007 has been a difficult year for Zenith with the
challenging integration of previous acquisitions, poorer trading and the
emergence of significant accounting issues which has led to the restatement of
the accounts for 2006 and significant losses in 2007. As a result the Board
instigated a full business review, which has led to a business recovery plan
being produced and initial measures implemented. As part of this review, Gavin
Gracie joined the business as Interim Chief Operating Officer.
Key actions are:
* Appointment of Gavin Gracie as Interim Chief Operating
Officer
* New Finance Director and Finance Team appointed
* Increased banking facilities to provide adequate
working capital headroom Operational management stepped down from the Board to
focus on operations
* Appointment of consultants to review of warehouse and
distribution operations
* New management teams across all areas
* Introduction of new systems and controls
Many of these actions have already been implemented with the benefits already
beginning to be seen. Costs are being better controlled, margins are increasing,
customer service is improving, but, the major impact of the changes that have
been made will not be fully realised until fiscal year 2009.
Finance and Results
During the period of the business review, various critical failures in
accounting came to light which have resulted in the Board having to restate the
2006 accounts and make significant write offs and provisions in the 2007
accounts.
The Group recorded revenues of �38.1 million (2006: �34.3 million as restated)
and recorded a loss after tax of �8.6 million (2006: �2.9 million as restated).
The underlying operating loss was �2.6 million (2006 � 0.8 million) before
charging �4.5 million of exceptional items (2006 restated �1.2 million) which
includes �2.0 million of write downs of asset values, increased liabilities and
restructuring (2006 �1.2 million) and �2.5 million of goodwill impairment (2006
� nil ), other costs of �0.8 million of goodwill amortisation and share option
expense (2006 �0.7 million) and �0.7 million of interest costs (2006 �0.4
million)
Richard Colwell, the previous Finance Director left in March 2007 and was
replaced with an Interim Finance Director, Julie Rowlands, pending the
appointment of Ian Selby who joined the Group in mid-November 2007.
In the second half of financial year 2007 issues came to light concerning GRNI
(goods received not invoiced) and customer rebates which was reported in our
announcement of 6 September 2007. On further investigation the Board ascertained
issues existed surrounding the accounting within the Group and the Board decided
that the scale of the issues required them to appoint forensic accountants,
Quest. In the course of Quest's investigations it quickly became apparent that
internal controls were being circumvented, and ledgers, procedures and results
reported were unreliable.
The result of the adjustments required to be processed after the review of the
accounting records and the adoption of FRS20 has led to further charges against
the 2006 profit of �3.4million. This includes adjustments to turnover of �1.2
million relating to customer rebates and adjustments to the sales ledger. The
remaining adjustments relate to stock, debtors and fixed asset write downs and
under-accrued liabilities. The previously stated 2006 operating profit on
ordinary activities of �0.67million is now shown as a loss of �2.7million.
The 2007 results have been disappointing with turnover increasing 11% but with
cost of sales increasing by 23%, leading to a reduction in gross margin
percentage from a restated 46% to 40%. Sales growth reflects the inclusion of
GWP Chemicals "GWP" for the full year (2006 8 months) and the full year impact
of key accounts gained in 2006. Cost of sales increased with overruns on fixed
price and non-standard contracts, and a breakdown in the controls over GRNI.
These issues are currently being addressed. Since the year end the Group has
seen an improvement of the gross margin in excess of management targets and a
reduction in operating overheads run rate in excess of �1million per annum
In addition the overheads of the business had increased by �1.4million in 2007
which, along with the reduction in gross margin has resulted in an operating
loss before exceptional charges of �3.4million (2006: �1.4million). Exceptional
costs were �4.5million (2006: �1.2million) and included an impairment of
goodwill relating to the acquisition of GWP of �2.5million. This acquisition in
2006 has not delivered the benefits anticipated . The turnover acquired has
reduced partly as the Group has exited from non profitable business and lost
some of the acquired customer base.
The overall loss before tax for the year was �8.6million. Losses for the half
year were announced as �0.5 million. In the light of further investigation it is
apparent that the losses at the half year were considerably greater than the
operating losses announced in the interim 2007 results and that the losses
recorded for the full year had accrued more or less evenly across the full year.
During the period of the review, the Board has kept the Group's bankers, The
Royal Bank of Scotland Plc, fully informed of all developments. They have
remained supportive throughout this very difficult time and have now agreed
increased facilities. These are fully explained in the Finance Director's
Report.
Corporate Restructuring
The Board recognised that there was a requirement to split the day to day
management of the business from the plc Board Structure. An Operating Board was
set up with Tony Cousins, Derek Lafbery and Colin Fogarty stepping down from the
plc Board along with all functional heads. In addition Alex Watson retired
during the year.
The main Group Board takes responsibility for strategy, Shareholders, Corporate
Governance and Controls. The Board has set terms of reference for its committees
and its operations. A layer of management has been removed from the business
shortening and straightening reporting lines. Management and staff are all now
more clearly tasked and responsible. Management training and development are a
key planning priority in the immediate future.
I would like to thank Alex Watson, Tony Cousins, Derek Lafbery, Julie Rowlands,
and Colin Fogarty for their assistance as members of the plc Board.
Operations
The Group, with five distribution centres, is now in a position to deliver
nationwide to large groups providing service levels usually attributable to
small distributors. The Group is continuing to build on this capability with
other efficiency gains. The level of on time "first time and in full deliveries"
is a key indicator and although this has been weak for some time we are now
seeing steady improvements, albeit with target rates still some way off.
Customer attrition rates were slightly elevated in 2007 again mainly due to the
continuing difficulties at our subsidiary GWP. Attrition in other areas has
been consistent with previous years.
The Group's Warehouse and Distribution capability has been severely stretched by
the increase in order volumes over the last few years with the acquisitions of
smaller groups. In particular the integration of GWP was very poorly managed
and has been the cause of both operational and financial issues. Other
acquisitions have been profitable, but some have been poorly integrated, leaving
legacy transactions and agreements.
Following pressure on the Welham Green warehouse the Group took over a large
warehouse in Swanley, moving the previous St Paul's Cray operations to the new
facility in November 2006 and transferring a large number of London deliveries.
The move was made, during the Group's peak trading time and has been a cause of
ongoing difficulties. A new warehouse management team was appointed in January
2008 and has already made substantial in-roads into the issues, the staff
turnover is stabilising and percentage on-time deliveries are improving daily.
The increase in the scale and complexity of operations exposed weak management,
poor processes and a lack of skills and training. Recognising these issues, the
Board appointed Consilium (a Wincanton subsidiary) to review Warehouse and
Distribution practices. Interim recommendations have already been acted upon
with dramatic improvements in Customer Deliveries, Health and Safety, Transport
and Warehousing. Many further cost savings are being identified and implemented
daily. Overall customer service levels were below internal targets throughout
the year. New systems and focus on quality and targets have raised the
percentage of "first time on time in full" deliveries since September 2007. The
Board anticipates further significant cost reductions and efficiency
improvements although the full impact of these will not flow through until 2009
financial year.
Transport management remains a key component of the Group's ability to service
customer demands. Investment in route planning has been poor, staff were poorly
trained and management has been weak. In addition, with the reported increased
business activity, the vehicle fleet replacement program will need to be
accelerated. Addressing these areas is a key part of the Consilium initiative.
Industry standard route planning techniques are being introduced along with
in-cab solutions to enhance our productivity and customer service levels.
Drivers remain our "shop window" with customers.
Manufacturing operations were consolidated at Lisburn in Ireland at the SBC
plant in August 2006, closing the previous GWP plant at Elland. The powder
plant at Oldham continued operations and has now been transferred into the SBC
management remit. SBC undertook significant cost reduction exercises during the
period, removing one shift and cutting costs on transport. SBC has taken on the
manufacture of many products previously bought-in for the Group and is providing
significantly more competitive products. New formulations are delivering
enhanced products which are widely recognised both by regulatory bodies and
commerce. Utilising the significant spare capacity of this operation is a
sizeable upside potential to the Group.
The industry is facing several key challenges presently. First, there are
substantial cost pressures with prices rising for paper, packaging and increases
in the costs of transport, particularly into London. Although we continue to
work with our supply chain to find cost and efficiency savings we have,
regrettably, had to pass some of these costs onto customers. Second, the
practice of supplying dosing and dispenser equipment to customers free of charge
adds significant overheads. The industry's ability to continue to supply
smaller customers' on this basis will be extremely challenging. Third, the
industry access to market is labour intensive and costly. In the current
economic environment new more efficient and less costly alternatives need to be
pioneered. The Group is taking active measures to address the issues raised by
these challenges.
Outlook
As a result of these matters I am stepping down from Board responsibilities as
of today, whilst retaining a senior role in the business focused on business
development.
Gavin Gracie who has been the interim COO since September 2007 and behind many
of the changes that have taken place in the period has accepted the position of
Chief Executive. He is a valuable asset to the business.
The Board has appointed Simon Barrell as Acting Chairman of the Group.
Significant steps have been taken to put Zenith back on the right path in all
areas of our business. New management is in place targeting customer service
levels, funding has been agreed and there is a positive atmosphere in the
business. The Group continues to attract new customers, margins are improving,
costs are being better controlled, although the turnaround of the business will
take some time given the magnitude of the issues it has faced.
Finally, I would like to thank our hard working dedicated staff, our customers
and suppliers for their continuing loyalty.
Ringo Francis
Chairman and Chief Executive
24 February 2008
Finance Director's Report
Internal Controls
The Group is required to maintain a robust set of internal controls and
reporting methodologies to provide internal and external stakeholders assurance
as to the Group's financial position and that its asset base is adequately
protected. During the year ended 31 August 2006 many key internal financial
controls broke down or were overridden, a situation which then worsened during
the first part of year ended 31 August 2007.
Widespread control failures centred on an inadequately staffed and qualified
finance function using a poorly set up accounting system. This resulted in a
lack of checks and balances in the department and difficulty in establishing
clear audit trails to determine the underlying substance behind transactions.
These failings masked the Group's financial problems and only started becoming
apparent in the spring of 2007.
Year ended 31 August 2006
The results reported were a Group profit of �0.06million and a net asset
position of �12.9million.
In June 2007 significant errors were found in the handling of goods received not
invoiced ('GRNI') and the recording of liabilities regarding rebates payable to
customers. These were initially expected to be approximately �0.9 million in
aggregate. As part of the business review process announced in September 2007,
the scope of the investigation was widened, and in November 2007 the forensic
accountancy firm Quest was appointed. Further areas of material errors relating
to 2006 accounts and internal control weaknesses were identified through this
process.
2006 Results Restatement
2006 revenues were overstated by �1.2million due to the understatement of
reserves for customer rebates of �0.6million, increased sales ledger provisions
of �0.3 million and a reclassification of 'marketing support' payments from
operating costs to revenue of �0.3 million.
2006 costs of sale were understated by �1.1million. The largest element was due
to an inappropriate method of accounting for GRNI whereby the provision was
understated by �0.5million. �0.2million arose from the correction of an
informal practice which assumed that goods not invoiced by suppliers within
three months would not be charged for, and �0.3million from adjusting for
overstated amounts of stock in transit between group companies. Differences
between physical stock counts and accounting records of approximately
�0.4million were not reflected in the accounts, and slow moving stock worth
�0.2million was not provided against. A significant element of this arose due
to the acquisition and subsequent integration of GWP.
This reduced gross margins to 46.3% compared to the 51.2 % previously reported.
Administrative costs were understated by approximately �1.1million.
�0.75million arose from the treatment of bonuses, with �0.25million due to 2006
bonuses to staff and directors which were paid in 2007 but were not accrued at
the end of 2006. The remaining �0.5million was due to bonus shares and related
payroll taxes, issued to directors in 2006 but not accounted for against
profits. Errors totalling �0.25million were found in the accounting treatment of
dosing and dispensing fixed assets no longer in use by customers. The remainder
arose from various accruals being understated and the incorrect capitalisation
of certain internal administrative costs as part of goodwill arising on
acquisition.
The aggregate of these adjustments along with the adoption of FRS20 was to
reduce profit before taxation by �3.6million to a loss of �3.2million which was
offset by a reversal of taxation charges of �0.3million leaving the retained
loss as �2.9million.
Results for the Year Ended 31 August 2007
Revenues
Revenues increased by 11% to �38.1million (2006: restated �34.3million) due to
the results of businesses acquired in 2006 being reported on for a full year and
new customers signed in the year. The result was lower than expected due to
higher than expected customer rebates and customer churn, notably but not
limited to the business of GWP Chemicals (acquired in December 2005).
Gross Margins
Gross margin was �15.3million (2006: �15.9million) and represented 40% (2006:
restated 46%) of revenue. Certain fixed price contracts were not controlled
effectively resulting in significantly reduced margins. With improved controls
this has been addressed. Significant additional provisions were made against
slower moving inventory items which have further reduced gross margin.
Administrative Costs
Excluding goodwill and exceptional costs, referred to separately, underlying
operating costs increased by 8% to �18million. (2006: �16.7million)
Staff and salary costs increased to �11.0million (2006: restated �10.5million)
reflecting the increased headcount arising from acquisitions made in 2006. Since
the end of the year a program of cost reduction has been implemented to reduce
the Group's fixed cost base.
Exceptional Items and Accounting Adjustments
Costs of restructuring manufacturing and distribution operations and ongoing
acquisition integration which commenced in 2006, continued into 2007 resulting
in a charge of �0.4 million. Professional fees arising from the abortive
private equity bid which ended in March 2007 and financial reviews carried out
in the summer of 2007 resulted in professional fees of �0.4 million.
The review of accounting treatment identified various balances being carried on
the balance sheet as being incorrect. These involved tangible fixed assets,
where the Group had failed to keep a proper register resulting in a write down
of �0.9million and additional inventory provisions of �0.3million.
The ongoing investigations and rectification of the Group's financial operations
has continued into the new financial year and costs of these investigations will
be included in 2008.
Goodwill
An impairment review was carried out to compare the carrying value of
investments against their future expected cash flows. These were determined by
reviewing the acquired customer bases, change in margins and customer retention
rates from the date of acquisition integration to the balance sheet date.
Goodwill associated with the acquisition of GWP group was determined to be
carried at approximately �2.5million in excess of cash flow values and
consequently, a charge has been taken against profits and is recorded as an
exceptional cost. This is in addition to the usual amortisation charge of
�0.7million (2006 �0.5 million) as set out in the accounting policies.
Interest Payable
The Group's net bank debt increased during the year as the additional facilities
were utilised. This increased debt combined with higher base rates has
increased the bank interest expense to �0.7 million (2006: �0.4million)
Share Based Payments
The Group is required to report under FRS 20 for the first time and this has
been applied to both the current year and the comparative period, the charge
being �0.06 million (2006 �0.16 million). A Black Scholes valuation methodology
has been applied.
Dividend
A dividend of �0.35 million (2006: �0.4m) was paid on 4 March 2007. In addition
an interim dividend of �0.1 million was proposed at the release of the interim
results for the six months ended 28 February 2007 on 16 May 2007. This was then
suspended on 12 July 2007 as the Group's financial situation deteriorated.
Result
The Group recorded a loss of �8.6 million (2006: �2.9 million) which was taken
to reserves.
Cash and Net Debt
During the year the facility was increased by �2 million to be a core term loan
of �10 million with an additional �1 million overdraft facility. The Group has
operated under short term waiver of covenants since the summer of 2007 and has
remained within its existing facilities. The Group experienced net cash out
flows from operations of �0.2 million prior to servicing of interest payments
�0.6 million, capital expenditure �1.9 million, deferred acquisition
consideration �0.2 million and a dividend of �0.35 million.
Additional Banking Facilities
The Group's Bankers agreed additional facilities on 22 February 2008 and the
extension of its term from an on call basis to a fixed date of 31 August 2009.
The key terms of this are set out below
1. A fixed term loan of �6 million carrying an interest charge of 2% over LIBOR.
2. A mezzanine facility of �3.75 million carrying an interest charge of 3% over
LIBOR payable on a quarterly basis across the term. In addition a further
charge of the LIBOR rate plus 7% is payable on 31 August 2009.
3. An overdraft facility of up to �3 million repayable on an on demand basis
carrying an interest charge of LIBOR plus 2%.
4. The Group issued warrants over ordinary shares to the bank equal to 10% of
the Group's fully diluted share capital. Future increases in fully diluted share
capital would require issuance of further warrants to the Bank. These warrants
will survive for 5 years from the date of this announcement and will have a
subscription price of five pence each.
In addition the Group will comply with certain financial covenants and will
incur arrangement and ongoing monitoring fees.
As at 31 August 2007 all Bank indebtedness is shown as due within one year in
current liabilities. Following the renewal of facilities a maximum of �3million
would be shown as a current liability.
Finance Department
Since the end of the year the finance team has been greatly strengthened by the
recruitment of highly qualified staff into key roles. This includes a group
financial controller, a group financial planning manager and a chief accountant.
These positions, whilst reflecting additional costs compared to previous years
are essential in order for the group to have appropriate internal controls and
effective internal and external reporting. The team will continue to focus on
restoring internal controls, developing use of internal systems and providing
commercial support to the business.
Ian Selby
24 February 2008
Consolidated Profit and Loss Account for the year ended 31 August 2007
Results Exceptional Total Results Exceptional Restated
before before total
Exceptional items 2007 Exceptional items 2006
items
items
Note �'000 �'000 �'000 �'000 �'000 �'000
Turnover 38,056 - 38,056 34,297 - 34,297
Cost of sales (22,724) - (22,724) (18,402) - (18,402)
Gross profit 15,332 - 15,332 15,895 - 15,895
Other income 72 - 72 28 - 28
Share option expense (55) - (55) (159) - (159)
Goodwill amortisation (714) - (714) (512) - (512)
Goodwill impairment 3 - (2,465) (2,465) - - -
Other exceptional 3 - (2,034) (2,034) - (1,237) (1,237)
charges
Other administrative (18,037) - (18,037) (16,684) - (16,684)
expenses
Total administrative (18,806) (4,499) (23,305) (17,355) (1,237) (18,592)
expenses
Operating loss (3,402) (4,499) (7,901) (1,432) (1,237) (2,669)
Net interest payable 4 (697) (395)
Loss on ordinary (8,598) (3,064)
activities before
taxation
Tax on loss on ordinary 5 (40) 155
activities
Loss for the financial (8,638) (2,909)
year
Basic and diluted loss (42.2)p (15.6)p
per share
All operations are continuing.
Consolidated Statement of Total Recognised Gains and Losses for the year ended
31 August 2007
Restated
2007 2006
Note �'000 �'000
Loss for the financial year (8,638) (2,909)
Total recognised gains and losses for the year (8,638) (2,909)
Prior year restatement 2 (3,374) -
Total gains and losses since last annual report (12,012) (2,909)
Consolidated Balance Sheet at 31 August 2007
Restated
2007 2006
�'000 �'000
Fixed assets
Intangible assets 7,472 10,651
Tangible assets 4,842 5,564
12,314 16,215
Current assets
Stocks 2,568 3,767
Debtors 7,251 9,405
Cash at bank and in hand - 415
9,819 13,587
Creditors: Amounts falling due within one year (21,048) (12,686)
Net current (liabilities)/assets (11,229) 901
Total assets less current liabilities 1,085 17,116
Creditors: Amounts falling due after more than one year (210) (7,348)
Provisions for liabilities (110) (70)
Net assets 765 9,698
Capital and reserves
Called up share capital 1,030 1,016
Shares to be issued - 370
Share premium account 10,442 10,086
Other reserve 326 326
Merger reserve (210) (210)
Share option reserve 214 159
Profit and loss account (11,037) (2,049)
Equity shareholders' funds 765 9,698
Consolidated Cash Flow Statement for the year ended 31 August 2007
2007 Restated 2006
Note �'000 �'000
Net cash outflow from operating activities 7 (248) (424)
Returns on investments and servicing of finance 8 (615) (277)
Tax - (32)
Capital expenditure and financial investment 8 (1,898) (2,109)
Acquisitions 8 (200) (6,558)
Equity dividends paid 8 (350) (400)
Cash outflow before financing (3,311) (9,800)
Financing 8 2,723 10,939
(Decrease )/increase in cash (588) 1,139
Reconciliation of net cash flow to movement in net debt
Restated 2006
2007
�'000 �'000
(Decrease) / increase in cash in the year (588) 1,139
Loan notes repaid - 900
Loans repaid - 521
Loans drawn down (3,000) (7,000)
Debt factoring repayments 52 100
Cash outflow from decrease in debt and lease financing 225 249
Change in net debt arising from cash flows (3,311) (4,091)
New finance leases and hire purchase agreements (52) (324)
Debt acquired with subsidiary - (573)
Movement in net debt in the period (3,363) (4,988)
Net debt at 1 September 2006 (7,203) (2,215)
Net debt at 31 August 2007 (10,566) (7,203)
Reconciliation of movements in group shareholders' funds for the year ended 31
August 2007
Restated
2006
2007
�'000 �'000
Loss for the financial year (8,638) (2,909)
Dividends paid (350) (400)
Shares issued on acquisition of subsidiary enterprise - 860
Share placing - 6,075
Issue costs - 3
Shares issued under block listing - 337
Share option expense 55 159
Net change in shareholders' funds (8,933) 4,125
Opening shareholders' funds at 1 September 9,698 5,573
Closing shareholders' funds at 31 August 765 9,698
Notes to the Preliminary Results for the year ended 31 August 2007
1. Accounting policies
Basis of preparation
The financial statements are prepared under the historical cost convention and
in accordance with United Kingdom generally accepted accounting standards and
the Companies Act 1985.
The Group accounts consolidate the accounts of the parent company and all of its
subsidiary undertakings. The results and net assets of undertakings acquired are
included in the Group profit and loss account and balance sheet from the
effective date of acquisition (with the exception of Zenith Hygiene Systems
Limited) using the acquisition method of accounting.
The results of Zenith Hygiene Systems Limited (which was acquired by way of a
group reorganisation effected through a share for share exchange) have been
consolidated using the merger method of accounting, as permitted and set out in
FRS 6 'Acquisitions and Mergers'. The results and cash flows of the relevant
entities are combined from the beginning of the year in which the merger
occurred and their assets and liabilities measured at the amounts at which they
were previously recorded.
The accounting policies are consistent with the prior year, except for the
introduction of FRS 20 and the change of accounting for the cost of investment
which has resulted in a change in accounting policy. This change is set out in
detail below
During the years ended 31 August 2006 and 2007, the Group experienced widespread
failures in controls, as set out in the Chairman's Statement and Finance
Director's Report, and proper accounting records were not kept. These control
failures are now being addressed by the Directors. At the end of the year, the
Group was able to carry out a reconstruction of accounting records and was
therefore able to prepare these financial statements.
Going Concern
The financial statements have been prepared on a going concern basis, although
the Group incurred significant trading losses and increases in net debt during
both the years ended 31 August 2007 and 31 August 2006. The Directors have
carried out a restructuring program and have agreed additional facilities
totaling �12.75 million with the Group's bankers as set out in the Finance
Director's Report and in note 29. The Directors have also prepared detailed
profit and cash flow projections for the period to 31 August 2009 which show
that the Group should remain within its facilities throughout this period. As a
result, the Directors are of the opinion that the Group has adequate working
capital to continue as a going concern for the foreseeable future and, in
particular, for a period of at least 12 months from the date of approval of
these financial statements.
Prior year restatement
Implementation of a new accounting standard
The Group has changed its accounting policy for employee share options. Under
Financial Reporting Standard (FRS) 20, Share-based payment, the Group is
required to recognise an expense for share-based payments in the profit and loss
account. Details of the accounting policy adopted are given below. The impact of
this change in accounting treatment has been to reduce the Group's operating
profit for the year by �55,000 (2006: �159,000). There is no impact on net
assets.
Correction of fundamental accounting errors
The Group has identified material errors in the preparation of its results for
the year ended 31 August 2006. These are reported on in detail in the Finance
Directors' Report and in Note 2, Prior Year Restatement. The aggregate of
these changes reduced net assets at 31 August 2006 by �3,215,000.
Goodwill
Goodwill is the excess of the cost of an acquired entity over the aggregate of
the fair values of that entity's identifiable assets and liabilities.
Goodwill relating to acquisitions made is shown in the balance sheet as an asset
and is amortised evenly over its estimated useful economic life of five to
twenty years, as set out in note 11. In addition to systematic amortisation, the
book value is written down to recoverable amount when any impairment is
identified.
Investments
Fixed asset investments are recorded at cost less provision for impairment
except in the case of the investment in Zenith Hygiene Systems Limited, which is
recorded at the nominal value of the shares issued, as permitted by Companies
Act 1985. Where the business and substantially all the assets and liabilities
of an acquired group entity are transferred to another group entity through a
hive-across, the cost of investment in the transferor is reallocated to that of
the recipient group entity.
This treatment represents a departure from the requirements of the Companies Act
1985 which, in the Directors' opinion, is necessary to show a true and fair
view. If this cost of investment was not transferred, the value in the original
investee companies would have to be impaired as they no longer have the ability
to generate future earnings and this would not present a true and fair view as
there has been no change in the businesses held by the Group. If the true and
fair override had not been applied, investments at 31 August 2007 would have
been impaired by a further �5.5 million.
Turnover
Turnover comprises the value of sales excluding value added tax and after trade
discounts and rebates. Turnover is recognised upon the sale being invoiced and
the products being delivered. In addition, rebates that are payable at fixed
rates and predetermined intervals, are accrued and recognised as a deduction
from the corresponding sales. Support payments for promotional and other costs
incurred by some major customers are recognised in the accounts against revenue
and are either taken against revenue over the life of the relevant agreement or
as incurred, depending on the nature of the customer agreement.
Stocks
Stocks and work in progress are valued at the lower of cost and estimated net
realisable value. The cost of work in progress and finished goods (where
manufactured by the Group) comprises materials and direct labour costs and
overheads directly attributable to bringing the product to its present location
and condition.
Pensions
The Group operates a defined contribution pension scheme. The amount charged to
the profit and loss account in respect of pension costs is the contributions
payable in the year. Differences between contributions payable in the year and
contributions actually paid are shown as either accruals or prepayments in the
balance sheet.
Tangible fixed assets and depreciation
Tangible fixed assets are stated at cost net of depreciation and any provision
for impairment.
Depreciation is provided evenly on the cost of tangible fixed assets, to write
them down to their estimated residual values over their expected useful lives.
Where there is evidence of impairment, fixed assets are written down to the
recoverable amount and charged to operating profit.
Depreciation is provided on all tangible fixed assets at rates calculated to
write off the cost of each asset, less estimated residual value on a
straight-line basis, over its expected useful life, as follows:
Land not depreciated
Freehold buildings 50 - 75 years
Leasehold improvements over life of lease
Automatic dosing equipment 4-6 years
Dispensing equipment 2-3 years
Motor vehicles 4-5 years
Fixtures, fittings, equipment and computer equipment 4-10 years
Leased assets
Where the group/company enters into a lease that transfers substantially all the
risks and rewards of ownership of an asset to the lessee, the lease is treated
as a finance lease. The asset is recorded in the balance sheet as a tangible
fixed asset at the present value of the minimum lease payments and is
depreciated over the shorter of the lease term and the asset's useful economic
life. Future installments under such leases, net of finance charges, are
included in creditors. Rentals payable are apportioned between the finance
element, which is charged to the profit and loss account at a constant rate of
charge on the balance of capital repayments outstanding, and the capital
element, which reduces the outstanding obligation.
Hire purchase contracts which are of a financing nature are accounted for on a
basis similar to finance leases. Other hire purchase contracts are accounted for
on a basis similar to for operating leases
Taxation
Current tax, including UK corporation tax and foreign tax, is provided at
amounts expected to be paid (or recovered) using the tax rates and laws that
have been enacted or substantially enacted by the balance sheet date.
Deferred taxation
Deferred tax is provided, except as noted below, on timing differences that have
arisen but not reversed by the balance sheet date, where the timing differences
result in an obligation to pay more tax, or a right to pay less tax, in the
future. Timing differences arise because of differences between the treatment of
certain items for accounting and taxation purposes.
Deferred tax assets are recognised to the extent that it is regarded as more
likely than not that they will be recovered.
Deferred tax is measured at the tax rates that are expected to apply in the
periods when the timing differences are expected to reverse, based on tax rates
and law enacted or substantively enacted at the balance sheet date. Deferred tax
assets and liabilities are not discounted.
Where law or accounting standards require gains and losses to be recognised in
the statement of total recognised gains and losses, the related taxation is also
taken directly to the statement of total recognised gains and losses in due
course.
Equity-settled share-based payment
The Group operates an equity-settled share-based compensation plan. The fair
value of the employee services received in exchange for the grant of share
options is measured at grant date and recognised as an expense on a straight
line basis over the vesting period, based on the Group's estimate of shares that
will eventually vest. Fair value is determined by reference to the Black Scholes
option pricing model. At each balance sheet date, the Group revises its
estimate of the number of options that are expected to become exercisable.
When share options are exercised, the proceeds received, net of any transaction
costs, are credited to share capital (nominal value) and share premium. All
share-based payment arrangements granted after 7 November 2002 that had not
vested prior to 1 January 2006 are recognised in the financial statements. No
share options were granted prior to 7 November 2002.
Upon exercise of share options, the proceeds received net of attributable
transaction costs are credited to share capital, and where appropriate share
premium.
Research and development
Research and development expenditure is taken the profit and loss account as
incurred.
Foreign exchange
Transactions in foreign currencies are recorded at the rate ruling at the date
of the transaction. Monetary assets and liabilities denominated in foreign
currencies are retranslated at the rate of exchange ruling at the balance sheet
date. All exchange differences arising are taken to the profit and loss account.
2. Prior Year Restatement
The Group has identified material errors in the preparation of its results for
the year ended 31 August 2006 which are summarised in the table below. These
are reported on in detail in the Directors' Report. In addition, the Group has
adopted FRS 20, Share-based payment, for the first time in these financial
statements, resulting in a prior year restatement due to a change in accounting
policy.
2006
�'000
Change in accounting policy
Share option expense required under adoption of FRS20 159
Material errors
Reversal of taxation charge in previous year as a result of losses (355)
Understatement of cost of sales arising from an under accrual against stock received from 626
group companies and third party suppliers
Stock adjustments to reflect differences between physical inventory and carrying amounts 541
in the ledgers and under provisions against slow moving items
Impairment of capitalised dosing and dispensing equipment at customer sites where the 249
account is no longer current or has been closed
Directors bonus paid in shares in March 2006 and associated payroll taxes which were not 564
charged against profits for the year ended 31 August 2006
Under accrual against customer rebate liabilities & discounts causing an overstatement of 561
revenues
Staff and Directors bonuses arising in the year to 31 August 2006 and paid in 2007 but 251
not accrued at the balance sheet date
Adjustments to trade debtors including an increased provision against doubtful debts and 444
correction of sales ledger errors
Under accrual of administrative costs including staff related items. 238
Administrative costs held in prepayments which should have been written off to profit in 96
the period
3,374
3. Exceptional Charges
Restated
2007 2006
�'000 �'000
Arising from reorganisation of operations 436 1,237
Professional fees arising from private equity bids and financial consultancy 386 -
fees regarding bank renegotiation
Stock Provisions 324 -
Fixed asset impairment 888 -
Goodwill impairment 2,465 -
4,499 1,237
The costs for reorganisation of operations which commenced in 2006 and continued
into 2007 related to integration of acquisitions and realignment of the
distribution function. These costs and others detailed in the table above are
discussed more fully in the Financial Directors Report.
4. Net interest payable
Restated
2007 2006
�'000 �'000
Interest payable
Interest payable on bank loans and overdrafts 646 327
Finance leases and hire purchase contracts 51 59
Debt factoring 1 9
Loan notes - -
698 395
Interest receivable
Interest received from bank and treasury accounts 1 -
1 -
Net interest payable 697 395
5. Taxation
(i) Tax on loss on ordinary activities
Restated
2007 2006
�'000 �'000
Current tax:
UK corporation tax on profits of the period - 20
Adjustments in respect of prior periods - (172)
- (152)
Deferred tax:
Origination and reversal of timing differences 40 (3)
40 (3)
Tax charge / (credit) on loss on ordinary activities 40 (155)
(ii) Current tax reconciliation
Restated
2007 2006
�'000 �'000
Loss on ordinary activities before tax (8,598) (3,064)
Theoretical tax at UK corporation tax rate 30% (2006: 30%) (2,579) (919)
Effects of:
Expenses not deductible for tax purposes 240 124
Capital allowances for period in excess of depreciation 273 216
Increase in tax losses 1,107 546
Amortisation and impairment of goodwill 954 50
Other short term timing differences 5 3
Adjustments in respect of prior periods - (172)
Actual current tax credit for period - (152)
6. Loss per share
2007 2006 RESTATED
Basic and diluted loss per share (42.2)p (15.6)p
The calculation of loss per share is based on the loss after taxation of
�8,638,000 (2006: restated loss �2,909,000) and on 20,476,859 ordinary shares
(2006: 18,612,000 ordinary shares), the weighted average number of shares in
issue during the year.
The share options in issue are non-dilutive in both periods as the Group was
loss making therefore the dilutive loss per share is the same as the basic loss
per share. The warrants referred to in note 29 to these accounts may be
dilutive in future periods.
7. Reconciliation of operating loss to net cash flow from operating activities
Restated
2007 2006
�'000 �'000
Operating loss (7,901) (2,669)
Depreciation 1,780 1,447
Impairment of fixed assets 888 249
Loss on disposal of tangible fixed assets 4 4
Increase / (decrease) in stocks 1,199 (1,093)
Increase / (decrease) in debtors 2,154 (962)
(Increase) / decrease in creditors (1,606) 1,593
Goodwill amortisation 714 512
Goodwill impairment 2,465 -
Non cash share based payment cost - 336
Adjustments to employee share schemes 55 159
Net cash outflow from operating activities (248) (424)
8. Gross cash flows
Restated
2007 2006
�'000 �'000
Returns on investment and servicing of finance
Interest paid (565) (218)
Interest element of finance lease rentals payment (51) (59)
Interest received 1 -
(615) (277)
Capital expenditure and financial investment
Payments to acquire tangible fixed assets (1,920) (2,136)
Receipts from sale of tangible fixed assets 22 27
(1,898) (2,109)
Acquisition
Payments to acquire subsidiary undertakings (200) (5,976)
Overdraft acquired with subsidiary undertakings - (770)
Cash acquired with subsidiary undertakings - 188
(200) (6,558)
Financing
Issue of ordinary share capital - 6,076
Expenses paid in connection with share issue - (367)
Loan drawn down 3,000 7,000
Capital element of finance lease rental payments (225) (249)
Debt factoring repayments (52) (100)
Repayment of loans - (521)
Repayment of loan notes - (900)
2,723 10,939
9. Analysis of changes in net debt
Restated 31 August
1 September
2006 Cash flow Non-cash flow 2007
�'000 �'000 �'000 �'000
Cash at bank and in hand 415 (415) - -
Bank overdraft - (173) - (173)
415 (588) - (173)
Debt due within one year - (3,000) (7,000) (10,000)
Debt due after one year - debt factoring (52) 52 - -
Debt due after one year (7,000) - 7,000 -
Finance leases/HP (566) 225 (52) (393)
Net debt (7,203) (3,311) (52) (10,566)
10. Post Balance Sheet Events
The Group's Bankers agreed additional facilities on 22 February 2008 and the
extension of its term from an on call basis to a fixed date of 31 August 2009.
The key terms of this are set out below
1. A fixed term loan of �6 million carrying an interest charge of 2% over
LIBOR.
2. A mezzanine facility of �3.75 million carrying an interest charge of 3%
over LIBOR payable on a quarterly basis across the term. In addition a further
charge of the LIBOR rate plus 7% is payable on 31 August 2009.
3. An overdraft facility of up to �3 million repayable on an on demand
basis carrying an interest charge of LIBOR plus 2%.
4. The Group issued warrants over ordinary shares to the bank equal to 10%
of the group's fully diluted share capital. Future increases in fully diluted
share capital would require issuance of further warrants to the Bank. These
warrants will survive for 5 years from the date of this announcement and will
have a subscription price of five pence each.
In addition the Group will provide certain financial covenants and will incur
arrangement and ongoing monitoring fees.
As at 31 August 2007 all Bank indebtedness is shown as due within one year in
current liabilities. Following the renewal of facilities a maximum of �3million
would be shown as a current liability.
11. Sundry Information
This preliminary statement, which has been agreed with the auditors, was
approved by the Board on 24 February 2008. It is not the Group's statutory
accounts for the year ended 31 August 2007 but has been extracted from them.
Copies of the report and accounts for the year to 31 August 2007 will be posted
to shareholders shortly and may be obtained from the Groups's registered offices
and website.
The statutory accounts for the year ended 31 August 2007 received an audit
report which was qualified regarding the keeping of books and records and did
not contain a statement under s237 (2) or (3) of the Companies Act 1985. The
statutory accounts for the year ended 31 August 2005 have been delivered to the
Registrar of Companies but the audited 31 August 2007 accounts have not yet been
filed.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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