Annual Report • May 31, 2012
Annual Report
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| Highlights | 3 |
|---|---|
| Group Profile | 5 |
| Chairman's Statement | 11 |
| Operational and Financial Review | 15 |
| Directors and Senior Management | 31 |
| Corporate Governance | 39 |
| Directors' Remuneration Report | 47 |
| Statement of Directors' Responsibilities | 55 |
| Corporate Social Responsibility Report | 57 |
| Independent Auditors' Report to the Members of NCC Group plc |
61 |
| Consolidated Income Statement | 64 |
| Consolidated Statement of Comprehensive Income | 65 |
| Group Balance Sheet | 66 |
| Company Balance Sheet | 67 |
| Group Cash Flow Statement | 68 |
| Company Cash Flow Statement | 69 |
| Statements of Changes of Equity | 70 |
| Notes | 72 |
| Company Information | 115 |
| Contact Us | 117 |
* Operating profit is adjusted for amortisation of acquired intangibles of £3.7m (2011: £3.3m) exceptional items of £7.1m (2011: £1.1m) and share based payment charges of £0.9m (2011: £0.5m). Pre-tax profit is adjusted for these items and the unwinding of the discount on the acquisitions' contingent consideration of £0.2m (2011: £0.07m). The Directors believe the adjusted measures better reflect the on-going performance of the business.
NCC Group is a leading global provider of independent escrow and IT assurance services. As a trusted advisor, we provide comprehensive end-to-end information assurance for over 15,000 organisations worldwide in numerous countries, including 94 of the FTSE 100 and many Fortune 100 companies, to make the most efficient use of information and technology and to manage the associated risks.
The Group operates two main complementary divisions, NCC Group Escrow and NCC Group Assurance. Escrow trades under three brands, NCC Group Escrow UK, NCC Group Escrow Europe and NCC Group Escrow Associates in the US. Other than in North America where the iSEC brand is used, the Group's assurance services are sold as NCC Group Assurance.
As the cyber arms race and technology revolution continue to outpace the ability of organisations to cope with the plethora of security, performance and availability issues, we are best placed to help them manage the risk and limit the threat.
NCC Group provides freedom from doubt that business critical information, data, websites, applications and infrastructure are available, protected, and operating as they should be at all times.
Organisations rely on third party supplied applications and software packages every day to carry out key business functions and processes. These applications allow them to operate more effectively and efficiently and produce high quality, innovative products and services but if a software supplier goes out of business or changes hands, the availability of these applications is in doubt, and business continuity is at risk.
Our escrow and verification services assure the long-term availability of these applications, protecting both end users and software suppliers. We work with all parties involved in the development, supply and use of business critical software applications, assuring that source code, data and other information is constantly accessible and can be properly rebuilt from its components if required.
Today's cyber landscape presents an ever-evolving threat to the security of organisations' information and an increasing demand to meet complex legislative and compliance requirements. Cyber intruders are developing increasingly sophisticated ways to attack corporate networks and gain access to sensitive and valuable data.
Through expert security and penetration testing, forensic services, incident response, compliance advice, vulnerability research and logical and physical audits we can help organisations to strengthen their position in the cyber arms race. We can assist them in identifying risk and formulating a robust security strategy.
The essential websites, software and infrastructure that support an organisation don't just need protection from malicious attacks; they also need performance guaranteed. Flaws in code can prevent software from operating at optimum level and spikes in online traffic can throw websites offline.
From customer-facing websites to internal software applications, we provide comprehensive testing, monitoring and business analysis services, ensuring optimum quality and performance. Whether an organisation wants extra resources or tools to help test themselves, or whether they want to outsource to us, we provide a level of service to suit the organisation and the risks they face. We will help ensure that their infrastructure, software and websites deliver optimum performance, maximising business efficiency and return on investment.
U We test over 17.5 million web pages per week and we test 875 million objects per week for over 550 clients worldwide.
The Group has delivered yet another very strong performance in a subdued economic climate in the markets in which it operates, and which continue to be difficult to predict. Overall the Group performed well, growing organically as well as integrating and consolidating the acquisitions made over the last year or so.
Group revenues maintained their momentum, growing by 24% to £87.7m (2011: £71.0m). Excluding the acquisitions of iSEC and Escrow Associates in the previous financial year, this showed good underlying organic growth of 17%.
Group margins continued to be strong and adjusted operating profit margins were 27%. This was achieved despite the effects of the excellent growth seen in the Assurance businesses, which have lower margins than the Escrow operations.
Adjusted pre-tax profits and adjusted fully diluted earnings per share were up 27% to £22.6m (2011: £17.8m) and 24% to 46.7p (2011: 37.7p) respectively. The Group continues to be highly cash generative with operating cash conversion representing 131% of operating profit (2011: 133%).
This is the eighth successive year of delivering double digit improvements in revenue and profit by a combination of organic growth and integrated acquisitions. This year compound annual growth rates, over the eight years since flotation, were 32% for revenues and 21% and 31% for adjusted operating profits and dividends respectively, based on the proposed final dividend.
Reflecting the Board's commitment to the shareholders and following our progressive dividend policy, which tracks earnings growth, a final dividend of 11.0p is proposed making a total for the year of 16.1p, up 24%.
The UK escrow market has continued to be satisfactory, but remains cautious due to the significant downturn in new system upgrades and implementations and a still depressed level of general IT expenditure. Growth has continued to come largely from existing customers seeking to protect their existing IT assets.
The completed integration of US-based Escrow Associates has been very successful. We are now able to offer a much stronger client proposition to our US and international customer base. In the USA we now operate nationwide as Escrow Associates and we are increasingly positive about the growth potential of this business. The European Escrow business had a mixed year, with growth lower than expected.
The Assurance division saw very strong performances throughout, with all business lines making good progress. The Group undertook a major step by rebranding all its European businesses within a single framework, NCC Group Assurance.
This is the eighth successive year of delivering double digit improvements in revenue and profit by a combination of organic growth and integrated acquisitions
The Group's strategy continues to be to develop its two divisions organically, by creating new ideas, products and services, as well as looking for acquisitions in markets and geographies to widen NCC Group's reach and exploit new opportunities.
Whilst there has been only one small acquisition completed this year, there have been a number of on-going discussions with complementary and competitor businesses. Any transactions will only be contemplated if they are suitably priced, earnings enhancing and provided that there is the management capacity to manage and integrate them.
More importantly, the Group is looking to strengthen further its position as a foremost provider of IT security by using its experience and skills to help develop and deliver a safer internet. During the year the Board decided to apply for a generic top level domain (gTLD), .secure, within the ICANN (Internet Corporation for Assigned Names and Numbers) programme, full details of which are in the operating review. In brief, the Group is looking to provide a safer internet world in which to navigate and transact. This is a concept that we have championed strongly for a number of years and one which is badly needed. So far our passage through the rigorous ICANN application process has gone to plan.
The management of our key resource, our staff, remains vital for the Group's future. We have ensured that our staff retention has continued to be good, by remaining very proactive in developing and managing all aspects of individuals' roles, responsibilities and aspirations. Our goal is to ensure that we remain the employer of choice particularly in the assurance industry and in all matters concerning information and technology security.
NCC Group can only be as successful as the people we employ and the managers and Directors who help to lead and develop them. Currently we have our best team ever with many new recruits adding to this.
I am delighted that we have enhanced our core capabilities in so many parts of the business and on behalf of the Board, I would like to congratulate and thank each and every employee of NCC Group, all of whom have made this year such a successful one.
In May the Board reported the complete suspension of the implementation of the Group's new fully integrated IT system and the reversion back to the previous Group-wide IT system. The Group has written off £7m in respect of the assets capitalised on the balance sheet and the costs to revert back to the old system. There is more information in the Operational and Financial Review.
NCC Group has always maintained that, for a business such as ours, which acts as an independent trusted advisor to its clients, the highest standards of corporate governance and application of the most prudent accounting standards are essential.
NCC Group will continue to take every practical step to adhere to the UK Corporate Governance Code, with which we fully comply, wherever practicable, and will continue using FTSE 250 companies as our benchmark.
The Board is recommending a final dividend of 11.0p per share which makes a total for the year of 16.1p (2011: 13.0p). If approved at the Annual General Meeting, the dividend will be paid on 28 September 2012 to shareholders on the register at the close of business 31 August 2012. The ex-dividend date will be 29 August 2012.
The Group continues to grow carefully and sustainably. It will continue to transfer its international appeal further afield in the dynamic world of information technology and information security. The goal remains to deliver a safe internet and this will continue to provide a rich vein of opportunity to the Group, ably supported by the strong growth and reliability of Escrow.
NCC Group has a very strong market leading position in all of the markets in which it operates and is well positioned for sustainable growth in quickly developing markets. The development of our services and our unparalleled reputation for the highest quality of service delivery has lifted the Group clear of our competitors.
NCC Group will remain totally focused on risk mitigation and delivering client peace of mind, by offering our complementary range of services to all of our multinational clients. As our recent rebranding demonstrates, we are one company offering a complete set of services to help clients gain freedom from doubt.
The start to the year sees Group Escrow renewals forecast to be £17.9m (2011: £17.3m renewed in the year) and a verification order book of £1.7m (2011: £2.1m), of which £0.5m (2011: £0.4m) relates to Escrow Europe and Escrow US.
The Assurance division's order books have improved to £19.7m (2011: £17.8m) and it has £5.8m of monitoring renewals forecast for the coming financial year (2011: £5.3m).
The outlook for NCC Group remains very good and the Board remains confident in the Group's ability to deliver further sustainable growth and enhance shareholder value.
Paul Mitchell Non Executive Chairman NCC Group plc 5 July 2012
The Group increased revenue by 24% to £87.7m (2011: £71.0m). Excluding the full year effects of the acquisitions of iSEC and Escrow Associates in October 2010 and March 2011 respectively, organic Group revenue grew by 17% to £78.3m.
The Group half year split saw 48% of revenue delivered in the first half (2011: 46%) and 52% in the second half (2011: 54%). Moving forward it is expected that the split will return closer to the H1 40%: H2 60% split that the Group normally experiences.
69% (2011: 74%) of revenue £60.4m (2011: £52.6m) was derived from the UK. Europe contributed £6.2m (2011: £6.0m) with the rest of the world revenue increasing strongly by 71% to £21.1m (2011: £12.4m).
Despite the growth of the international businesses the marginally adverse movements of the Dollar and the Euro against Sterling had little impact on the Group's performance.
The Group's recurring income levels continue to grow across the business. In Escrow UK over 88% of all contracts renewed (2011: 88%). Assurance saw 74% of its revenues renewed (2011: 77%), this represents 51% of all customers (2011: 49%).
We have also seen renewing Assurance customers' expenditure increase from £29,767 to £68,821; with total average customer spend increasing to £39,486 from £21,066. In addition, 91% (2011: 91%) of the performance monitoring revenues were renewed and are recurring.
The Group continued to have minimal reliance on any one customer or sector. Within Assurance the largest customer represents 9% of Assurance revenue which is 6% of Group revenue. The largest customer in Escrow is 2% of total Group Escrow revenue.
| Top three sectors by division | Escrow | Assurance |
|---|---|---|
| Software & Computer Services | 12% | 41% |
| Banking & Insurance | 22% | 24% |
| Telecoms | 27% | 5% |
The Group continues to generate strong margins. Adjusted Group operating profit grew by 27% to £23.4m (2011: £18.4m), excluding the amortisation of acquired intangibles, the exceptional items and share-based charges of £0.9m (2011: £0.5m), as set out in the table on the page opposite.
Escrow's margin has continued to improve, driven by a combination of effective selling and price increases. Prices are expected to be increased in November 2012 as they were in 2011. The Group continues to monitor pricing and market sentiment and although price inflation is part of the UK economy, so is cost control.
In Assurance the business is seeing a general improvement in margins as more work comes from premium rate services such as operational response, managed services and forensics. This trend will continue going forward.
The Group half year split saw 46% of adjusted operating profits delivered in the first half and 54% in the second half, compared to 43% and 57% in 2011. The Group expects the profit split in future periods to revert to that seen in prior years.
In May the Board reported the complete suspension of the implementation of the Group's new fully integrated IT system and the reversion back to the previous Group-wide IT system.
The Group has written off the costs capitalised on the balance sheet in respect of software licences, non-usable hardware, 3rd party consultancy costs and capitalised staff costs of £6.1m, whilst costs of £0.9m have been provided in respect of the reversion back to the old system.
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Reported operating profit | 11,619 | 13,472 |
| Amortisation of acquired intangibles | 3,726 | 3,275 |
| Exceptional items | 7,111 | 1,144 |
| Share based payments | 946 | 516 |
| Adjusted operating profit | 23,402 | 18,407 |
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Reported profit before tax | 10,572 | 12,768 |
| Amortisation of acquired intangibles | 3,726 | 3,275 |
| Exceptional items | 7,111 | 1,144 |
| Unwinding of the discount on contingent consideration | 208 | 68 |
| Share based payments | 946 | 516 |
| Adjusted profit before tax | 22,563 | 17,771 |
Adjusted Group pre-tax profit increased 27% to £22.6m (2011: £17.8m). The Group's reported pre-tax profit was £10.6m (2011: £12.8m), after the inclusion of the unwinding of the discount on the acquisitions' contingent consideration, amortisation of intangible assets, share option charges and the exceptional items.
The Group's effective tax rate is 28% (2011: 27%) which is above the average standard UK rate of 25.7%. This is due to the increasing proportion of Group profits which are derived from the USA, the full impact of which is reduced by the continued decrease in UK corporation tax rates.
| Taxation recognised in the income statement | 2012 | 2011 |
|---|---|---|
| £000 | £000 | |
| Current tax expense | ||
| Current year | 2,308 | 3,724 |
| Adjustment to tax expense in respect of prior periods | 86 | (188) |
| Foreign tax | 1,711 | 648 |
| Total current tax | 4,105 | 4,184 |
| Deferred tax | (1,148) | (743) |
| Tax in income statement | 2,957 | 3,441 |
| Reconciliation of effective tax rate | 2012 | 2011 |
| £000 | £000 | |
| Profit before taxation | 10,572 | 12,768 |
| Current tax using the UK corporation tax rate of 25.7% (2011: 27.7%) | 2,714 | 3,546 |
| Effects of: | ||
| Items not taxable/deductible for tax purposes | (171) | 371 |
| Effect of rate change | 13 | (56) |
| Differences between the overseas tax rates | 232 | 12 |
| Movements in temporary differences not recognised | 51 | - |
| Adjustment to tax charge in respect of prior periods | 118 | (432) |
| Total tax expense | 2,957 | 3,441 |
Deferred tax recognised directly in equity was a charge of £62,000 (2011: credit of £341,000).
The adjusted basic earnings per share from continuing operations increased 23% to 47.9p (2011: 38.9p). The table below analyses the effect on the Group's basic earnings per share of the amortisation of acquired intangibles, unwinding of the discount on the contingent consideration for acquisitions and the effect of the exceptional items.
| 2012 | 2011 | |
|---|---|---|
| Pence | Pence | |
| Basic EPS as per the income statement | 22.2 | 27.5 |
| Amortisation of acquired intangibles | 7.8 | 6.7 |
| Exceptional items | 15.2 | 3.4 |
| Unwinding of the discount on the contingent consideration of the acquisitions | 0.6 | 0.2 |
| Share based payments | 2.1 | 1.1 |
| Adjusted basic EPS | 47.9 | 38.9 |
The adjusted fully diluted earnings per share from continuing operations increased 24% to 46.7p (2011: 37.7p) whilst reported fully diluted earnings per share was 21.7p (2011: 26.7p).
The Board is recommending a final dividend of 11.0p per ordinary share, making a total for the year of 16.1p. This represents cover of 3.0 times (2011: 3.0 times) based on basic adjusted earnings per share from continuing operations. Since the Group's flotation in July 2004, the dividend has increased from 2.5p, a compound annual growth rate of 31%.
The Group continues to be highly cash generative with operating cash flow before interest and tax of £24.6m (2011: £17.9m) which is 131% of operating profit before interest and tax (2011: 133%).
After accounting for net cash outflows of £7.5m for acquisitions and contingent acquisition payments made during this year, the Group ended the year with net debt of £22.7m (2011: £20.5m).
Total capital expenditure for the year remained tightly controlled at £7.3m (2011: £4.5m) which predominantly related to the refurbishment of the Group's Manchester headquarters, the Group's core IT systems and the investment in Artemis, the subsidiary formed to promote, develop and implement a safer internet through the Group's application for the generic top level domain (gTLD) .secure.
The Group's banking facility with RBS which provides a £35m revolving credit facility and a £2m overdraft, runs until July 2013. Interest on the facility is charged at 2% over LIBOR and 2% over base rate on the overdraft.
The facility provides the Group with the necessary capacity to meet its current acquisition objectives, although this is regularly reviewed to ensure that unnecessary fees are not incurred due to non-utilisation. The Group was utilising 76% of the facility at the year end.
Following the acquisition of Axzona, goodwill increased by 2% to £79.3m (2011: £77.9m). Due to the amortisation charge of £3.7m the cost of intangible assets relating to customer contracts and associated relationships decreased by 22% to £9.1m (2011: £11.7m). The value of goodwill has been assessed and no impairment reported. The contracts and customer relationships have been assigned a useful economic life of between three and twenty years and are to be amortised over that period.
In 2009 an extensive procurement process was run to select a technology supplier to specify, install and implement a new IT solution for the whole Group.
The new system was expected to provide a complete, integrated solution for all the Group's business processes as well as providing a systems backbone for NCC Group as it grew organically and by acquisition in the UK, Europe and North America. The solution selected was also intended to fix and standardise the business processes to allow commonality of workflows throughout the expanding Group.
Following a thorough period of extensive testing, which along with the design process had already seen an 18 month slippage, the system was piloted in the web monitoring part of the Assurance division in October 2011. In March 2012 it was then implemented in the UK Escrow business and the finance function.
Upon going live the new system caused immediate and significant disruption to the Group. It became clear that the solution would, if it remained in use as it was, significantly impair rather than improve business efficiency.
It was also confirmed in May, after extensive evaluations, that the provider had no product, or prospect of being able to deliver an integrated solution across the whole business, for the Assurance division to meet its essential resource scheduling requirements.
At this point and to curtail the substantial operational support costs and further development costs that were going to be required, the Board decisively suspended the implementation and agreed to revert back to the previous Group-wide IT system.
Given the substantial investment in time and resources, the Board has written off the £7.0m cost of the new system in the financial year to 31 May 2012. This figure includes the expected £0.9m cash cost of the reversion back to the old system, over the next three months.
The Board is extremely disappointed by the suspension of the implementation. After the roll back is completed, a new project team will be commissioned to look at all suitable options and alternatives.
In the interim, the solutions we are using, whilst not fully integrated, remain fit for purpose and scalable. The Group has a planning, scheduling and resourcing tool that integrates directly into the other system areas that will continue to support the Group's development in Assurance for the foreseeable future.
The reason to upgrade systems however remains the same. We need to install a Group-wide solution that has a low degree of bespoke development to allow easier upgrades and essentially more flexibility. The Group currently runs a totally bespoke version of its software with the associated limitations.
The Escrow businesses have had a solid year overall with strong performance in nearly all the key performance measures of profitability, renewals, terminations and verification testing.
From our global experiences the move to cloud computing has largely not happened for businesses' critical applications, with the pace of change being slower than is generally publicised. Our Escrow as a Service (EaaS) model has been extremely successful in supporting customers who have made the move to the cloud, as it delivers scalable cover that can protect all components in the outsource model, thus providing clients with the appropriate protection where something happens to either the relationship or the suppliers' ability to provide the service.
The Escrow division increased revenue by 12% to £27.9m (2011: £24.9m). Within this, Escrow UK revenue grew by 7% and Escrow US by 63%, although Escrow Europe only grew by 1% due to the ill health and subsequent departure of the General Manager responsible for the European businesses.
Excluding the full year effect of the acquisition of Escrow Associates in March 2011, Escrow US increased its revenue by 7%, although this is not absolutely representative as it is in part masked by the integration of the two operations.
Group Escrow profitability increased 12% to £16.3m (2011: £14.5m) with the UK contributing 81% (2011: 81%). Escrow US and Escrow Europe continued to increase profitability and contributed 12% and 7% of total Escrow operating profits respectively.
Group recurring revenues through the renewals process increased by 12% to £17.3m (2011: £15.4m). Group Verification revenues grew by 23% in the year to £5.3m (2011: £4.3m).
The Group's Escrow businesses have been, and always will continue to be, the cornerstone of NCC Group's profitability. They produce a substantial margin and very strong cash conversion as well as a high degree of recurring revenue, due to the contracts renewals rate of over 88%.
Escrow now accounts for 32% of the overall Group's revenue (2011: 35%) as the scale of the Assurance business grew due to faster organic growth and the full year effects of the recent acquisitions.
A process of harmonisation has begun throughout all of the Escrow locations that aims to adjust and standardise all price anomalies, where possible. Price increases were introduced in November 2011, effective from January 2012 for renewals, of between 3% and 4%. Verification pricing remained the same in the year.
This year saw a consistent and robust performance from the Escrow UK team. Growth levels were sufficient considering there were no real signs of any fundamental improvement in the economy.
In the second half of the Group's financial year, the software market felt the most vulnerable that it has for a while, with little sign of the initiation or implementation of any new large scale client projects. Most new sales came from increasing the level of protection required around existing environments. Most notable was the slowdown from the financial services sector despite the increased regulation being sought from the FSA.
Escrow UK revenue was £20.3m (2011: £19.0m). This 7% growth in revenue (2011: 6%) was delivered through contract growth and verifications, with only a limited amount coming from the effects of the price increase.
Escrow US increased its revenues by 63% to £4.42m (2011: £2.71m) and by just over 7% when adjusting for the annualised impact of the acquisition of Escrow Associates. Escrow Europe revenues only rose by 1% to £3.22m (2011: £3.18m) due to the leadership issues outlined earlier. The unit now has a new management team and structure and it is expected that double digit growth will quickly return.
Escrow Europe now has 17 employees and the North American Escrow businesses have 38 employees. The restructuring of Escrow Europe and the combining of the two USA Escrow operations has positioned them well to deliver strong growth plans through aggressive headcount increases.
The Assurance division is divided into three areas: security testing, audit and compliance; software testing and web performance, which broadly reflects the focus of our former acquired businesses. iSEC which operates in North America is included within security testing.
Each product area has seen strong performances with all elements making good progress. Assurance now accounts for 68% (2011: 65%) of Group revenues with total divisional revenues increasing 30% to £59.8m (2011: £46.1m). Excluding the acquisition of iSEC, organic revenue increased 23% to £52.2m, with very strong performances coming from security testing in the second half of the year. Operating profits jumped 58% to £10.3m (2011: £6.5m). The Assurance division businesses' margins increased to 17% (2011: 14%).
As with Escrow, the major challenge for the Assurance division is to increase renewal rates and renewal spend levels. This is most imperative in security testing and the web performance businesses. Security Testing includes penetration and application testing, operational response, forensics, and managed monitoring with the audit and compliance part covering social engineering, card and information security standards and security auditing. This area grew 51% including the full year effects of iSEC, but the underlying organic growth was an impressive 39%. This was achieved whilst ensuring that utilisation rates remained suitably low.
iSEC has continued to see encouraging growth and has delivered on its plans. The Group continues to benefit from iSEC's technical knowhow and presence and the global join up to provide a better service to customers. The first half of the performance based earn-out has been paid in full and it is expected that the second half will also be paid fully.
Web Performance had a recurring revenue rate of 91% (2011: 91%) which continues its strong track record of client retention. Through the coming year improvements to the service, additional product lines and potential new technologies will see this area continue to perform strongly. During the year the business area grew by 14%.
Software Testing has seen a 4% growth in revenue and continues to provide a number of major client opportunities for cross divisional and cross Group working.
In May 2012, the Group applied to register the .secure generic top level domain (gTLD) as part of the ICANN programme to create a new set of gTLDs. The .secure domain aims to create a universal environment for end users to operate and navigate the internet with complete safety and security.
The Group established a new wholly-owned subsidiary, Artemis Internet Inc. in San Francisco, to develop the critical infrastructure and know-how to deliver this project. It is headed by Alex Stamos, one of the founding partners of iSEC.
In addition NCC Group has set up the Domain Policy Working Group and it is expected that a number of influential organisations drawn from major financial, software and social media companies will be joining soon. The unit is focused on web security and the development of a set of innovative new security standards for websites, which support the Group's vision in building a more trustworthy internet.
To date the ICANN application has gone as expected. Our application is one of two for .secure.
The plan remains to invest progressively in Artemis over the next 15 months, subject to reaching key milestones. The total investment is likely to be c. £6m, but over the next 12 months it is expected that subject to being in the first wave of approvals, we will be investing £3m - £4m in the foundations of the project.
Employee recruitment and retention remains one of the most important objectives of the Group. The Group now employs 664 people across the world, supplemented by 150 associates.
Our objective is to offer careers and development opportunities that actively encourage all staff to stay and grow within the Group. The current employee retention rate is now close to 90% for the Group as a whole, with the technical teams running at over 98%.
NCC Group remains the largest provider of escrow services in the world, further strengthened by the acquisition and subsequent integration of Escrow Associates in North America. NCC Group remains the only provider mandating quality; offering the best value and strongest protection available, ahead of price. The Group does not intend to change that philosophy.
The dynamics of the escrow market have not materially changed since the Group floated in 2004 and the same market assumptions, as detailed by Gartner at the time, remain. The UK escrow market without verification testing is still niche and the Group estimates that the market size is approximately £100m, which still provides NCC Group with considerable headroom for growth.
Both in the public and private sector, corporations and organisations still typically believe that they have several times more cover than they actually have. They remain unaware that they are exposed to the degree that they are. The estimates of the European marketplace vary wildly, but the Gartner research suggests the market, in total, may be worth two or three times that of the UK.
To date we have not seen a marked move to cloud applications other than for non-business critical applications. The Group is extremely well equipped to harness this opportunity, if it comes, through its EaaS services which provide customers with peace of mind reflecting the importance of the application and sensitivity of the application to them. The service covers all aspects of SaaS and can, from a menu, provide all or separate aspects of the SaaS model to provide a suitable cost effective solution to our clients. EaaS can provide data, source code, data dictionary, architecture, back-up and quick start propositions extremely effectively to our customers.
UNITED STATES
% 22.472
(Illustration of our 2012 Q2 Global Origin of Hacks report, tracking the source countries of hacks from April-June 2012.)
If the last millennium was viewed on a timeline, the period from the invention of the computer and related by-products such as mobile devices until now would be a very small part. The changes and advances that have been witnessed over the past generation have been nothing short of phenomenal. Compared against history we now expect technology to advance by a generation every two years as the computer is less than a century old and yet it is globally relied upon as much as the wheel.
As a consequence governments, businesses and consumers are left struggling to keep up with the constant innovation and technological developments that are presented on a daily basis. But more importantly legislation has not caught up either.
The rapidly changing nature of the digital world has made it difficult to control and regulate cyber practices within the laws of any country, which in turn make it easier for cyber criminals to operate with impunity.
The development of the online ecosystem has been coupled with an increase in its misuse. The explosion in the use of the internet was unexpected, hence the need for IPv6 to create more IP addresses, but more importantly it was never designed with cyber criminals or warriors in mind, so security has been on the back foot since day one.
As a consequence, as the threats to the cyber landscape increase and develop in complexity, the need for solid defence on local, corporate and national levels increases in urgency. Today, data on the web proliferates at such a rate that as much is published on the internet daily, as was published from the start of the printed word up to 2002.
National security threats used to typically be of a physical nature, now the start of global cyber warfare is being more and more publically seen. In 2010 the Stuxnet worm targeted Iran's nuclear infrastructure and more recently Flame malware infiltrated the computers of high-level officials across the Middle East. Stuxnet has been attributed by the media to American and Israeli government authorities, as has the Duqu and Flame malware, and it is claimed it may even have been written by the same developers.
As the frequency and intensity of these government operations increase, there is a knock on effect to the commercial security industry. Ordinary cyber criminals and hacktivists are now using the techniques pioneered by nation state developers over the last decade. Despite all of the warnings and cash spent since the very public Aurora incident, where the Chinese directly attacked Google, the ease and likelihood of launching a successful APT attack (Advanced Persistent Threat) has not reduced.
It is clear that there is a pressing need to increase standards in cyber defences from large corporations to governments through to consumers. It is essential this is a proactive drive for change rather than as a consequence of a devastating cyber attack or war.
Standards need to be driven up across the board and one way to prompt this is by increasing transparency around security. This transparency must cover the way businesses view, act and respond to cyber security issues. They must also set out the reporting of corporate breaches and the consequences for those affected, as well as mapping out how incidents should be dealt with. Until organisations are publicly held to account for security breaches, there will be a lack of incentive for them to implement stringent digital policies and infrastructures.
The bedrock of most internet security is anti-virus detection software, but this is no longer effective. Whilst many see it as the security antidote, it is losing its potency because commercial anti-virus suppliers are struggling to respond to modern threats presented by nation-states and criminal enterprises.
Publicity over the failure of anti-virus has reached a crescendo with claims that consumer-grade antivirus products cannot provide protection against targeted malware created by well-resourced nation-states or criminals. This was exemplified by the failure of all commercial anti-virus vendors to detect recent state sponsored malware attacks despite samples of it already existing within their collective detection catalogues.
Anti-virus vendors will continue to struggle as the volume of malware increases and the methodologies of malware authors diversify. Whilst criminals have yet to reach the levels of nation state malware creators, governments and businesses need to develop much more sophisticated malware detection techniques than are being employed today.
The actual answer lies within enterprises themselves to strengthen significantly their corporate networks, test their protections vigorously and prepare a clear and comprehensive operational response plan. This will happen if there is better transparency, as admitting that a corporate security system failed can only serve to damage reputation and weaken customer trust, which should be motivation enough!
This drive for standards and transparent reporting is further supported by a cursory glance at three hot topics that are in the market today, all of which show some fundamental concerns that also are not being addressed. Individuals and corporations alike are all being affected with alarming results.
At a consumer level the cyber breach of the social networking website LinkedIn resulted in six million passwords being leaked in June 2012. In the following days, 60% of these hacked passwords were used, giving the criminals not only access to their LinkedIn accounts, but also to other accounts that shared the same passwords.
The breach, it has been widely alleged in the media, occurred because LinkedIn did not take strict enough security measures. If that was the case, it is a problem that could have been avoided and certainly one to avoid if there were bigger incentives to implement tighter security measures. But to be balanced, users of the social networks often make it easier for cyber criminals by only using one, often weak password, for all of their applications including banking and email.
The current trend towards Bring Your Own Device (BYOD) is a continuing theme as cost conscious enterprises push towards employee supplied devices and this has created a new conundrum for IT departments. How can an IT department support and enforce corporate data retention and protection policies on a variety of devices outside their physical control?
The easy, procurement-driven answer has been secure container technologies. While some of these proprietary products are certainly better protected than those developed through open standards, research conducted in our iSEC business has demonstrated that they do not protect against many of the threats claimed. Enterprise customers need help understanding how to accommodate BYOD in their corporate security strategy and to be realistic about the protection they provide against advanced attackers.
The proliferation of mobile and tablet devices has seen the uptake of Android based devices grow substantially. Unfortunately this has resulted in an exponential growth in malware with thousands of examples appearing. Android has become the perfect target for malware authors due to a combination of reasons; market share, that it is an open source development platform, the effects of collaboration of dozens of competing companies and lack of accountability for Android application distributors.
In the EU, unlike the US, there is no legal requirement for businesses to inform the authorities or their customers if they have been hacked. If it is customer data that has been compromised, there is no legal obligation to inform those affected. In the defence of hacked businesses, if they do not have to divulge the breach, why would they risk their reputation?
The lead set in the USA should be followed and this should not be limited to publicly traded companies. The current proposals from a European directive pressure companies into full disclosure, informing national information commissioners of the breaches that affect consumers and citizens within 24 hours. This is a start, but it is limited.
Non-compliance will result in heavy fines of up to 2% of annual turnover, so it should force a major increase in risk awareness. But as with all government initiatives take up will probably be lax. The recent EU cookie legislation demonstrates this, with Government websites still not complying despite the May deadline being passed and likewise one in five of all other sites failing to comply. In order to drive up standards across the board, it is imperative that businesses, governments and consumers are held to account when it comes to digital security.
Additionally there needs to be greater effort and collaboration on a national, continental and global scale. Transparency and openness should be the foundations from which to shore up defences and prepare our infrastructures in the fight against cybercrime.
Whilst this type of openness is a start in driving standards of cyber security upwards and may well foster sharing of threats and attacks, the EU directive is still more than two years away and that in the world of IT security is still a generation away.
The Group has transformed and consolidated its scale and international reach during the last 18 months. Totally focused on risk mitigation and delivering client peace of mind, the complementary range of services has the breadth and depth to provide multinational clients with total solutions to their business issues. As the recent rebranding demonstrates, NCC Group is one company offering a complete set of services to help clients gain freedom from doubt.
The Group will remain an independent, unbiased and trusted provider in a security marketplace that needs to put the client first. This can only be done where integrity and credibility as well as technical capability are the leading cultural values so as to ensure all clients' freedom from doubt.
The start to the year sees Group Escrow renewals at £17.9m up from £17.3m in the year to 31 May 2012 and a verification order book of £1.7m of which £0.5m relates to Escrow Europe and Escrow US.
The Assurance division order books have improved to £19.7m (2011: £17.8m) and have £5.8m of monitoring renewals forecast for the current financial year (2011: £5.3m).
The outlook for NCC Group remains very good in growing markets. The Board remains confident in its ability to deliver further sustainable growth.
Rob Cotton Chief Executive NCC Group plc 5 July 2012
Paul Mitchell Non Executive Chairman
Rob Cotton Chief Executive
The plc and Executive Board comprises the following Directors.
Paul Mitchell was appointed Non Executive Chairman of NCC Group in 1999. He is Managing Director of Rickitt Mitchell & Partners Limited, a corporate financial advisory firm based in Manchester. He is also a Non Executive Director of Styles & Wood Group plc and Little Green Paint Company Limited.
He is a qualified chartered accountant.
Rob Cotton has been Chief Executive since 2003, having joined the Group as Finance Director and Managing Director of Escrow in 2000.
He steered the Group through its move to the London Stock Exchange's main market in July 2007 following admission to AIM in July 2004, and through a management buy-out in April 2003. As well as delivering consistent organic growth in revenue and profits, he has instigated and overseen a series of strategic expansion plans including the acquisition of complementary businesses worldwide.
A qualified Chartered Accountant, he previously held a number of Director and senior management positions in industry.
Atul Patel Group Finance Director
Atul Patel joined the Group initially on an interim basis on 18 February 2011 before being appointed to the Board on a full time basis on 19 April 2011. He was formerly a Divisional Finance Director within Tribal Group plc being responsible for the Government and Health division, operating the finance and support functions as well as advising on business transformation and business integration.
A qualified Chartered Accountant, Atul joined the management consultancy division of PricewaterhouseCoopers after qualifying, where he focused on performance improvement and business transformation within global organisations.
Debbie Hewitt MBE Senior Independent Non Executive Director
Debbie Hewitt joined NCC Group in September 2008 as a Non Executive Director. She has an MBA and is a Fellow of the Chartered Institute of Personnel Development. She is Non Executive Chairman of Moss Bros plc, Evander and White Stuff and Non Executive Director of HR Owen plc, Redrow plc, Domestic and General Group and BGL Group.
David McKeith Non Executive Director
David McKeith joined NCC Group as a Non Executive Director in July 2009. He is a qualified chartered accountant. He is Non Executive Director of Sportech plc and Chairman of the Halle Orchestra and of Greater Manchester Chamber of Commerce.
Roger Rawlinson Managing Director - Assurance
The senior management team detailed below is responsible for the operation of the Group's two divisions. The members of the senior management team include:
Roger Rawlinson is responsible for the operational management of the Group's Assurance division. He has worked for NCC Group for over ten years in a variety of testing and consultancy roles and was appointed a Director in 2004.
Pete Stock Managing Director - Escrow
Felicity Brandwood Group Company Secretary and Operational Director - Escrow
Pete Stock joined the Group upon the acquisition of SDLC in 2010 and is now responsible for the management, development and continued growth of the Escrow division. Pete was the Managing Director of SDLC from its formation in 2001 through to its successful integration of the company into the Group. Prior to this Pete's extensive career in IT has included roles of developer, solutions architect and programme manager.
Felicity Brandwood, a qualified solicitor, was appointed a Director of Escrow in 2006 alongside her role as Group Company Secretary, having joined the Group in 1984. Felicity is responsible for operational controls and processes for Group Escrow.
The Directors present their annual report and financial statements for the year ended 31 May 2012.
.
The principal activity of the Group is the independent provision of IT assurance through escrow and assurance testing to both the public and private sectors worldwide. The performance in the year and the year end financial position were satisfactory and the Directors expect the Group to continue its growth for the foreseeable future.
The Company is required by the Companies Act 2006 to include a business review in the report which sets out a fair review of the business of the Group during the year ended 31 May 2012, its position at that date and the Group's likely future development. The contents of the Directors' Report, together with the Group Profile on page 5, the Chairman's Statement on pages 11 to 14 and the Operational and Financial Review on pages 15 to 30 and the Corporate Social Responsibility report on pages 57 to 60 constitute the business review and are therefore incorporated by reference into this Directors' Report.
Any forward looking statements made in this document represent management's best judgement as to what may occur in the future. However, the Group's actual results for the current and future fiscal periods and corporate developments will depend on a number of economic, competitive and other factors, some of which will be outside the control of the Group. Such factors could cause the Group's actual results for future periods to differ materially from those expressed in any forward looking statements made in this document.
The financial results of the Group are shown in the Consolidated Income Statement on page 64.
The Directors propose a final dividend of 11.0p per ordinary share which, together with the interim dividend of 5.1p per ordinary share paid on 24 February 2012, makes a total dividend of 16.1p for the year.
The final dividend will, if approved by shareholders at the Annual General Meeting (AGM), be paid on 28 September 2012 to shareholders on the register at the close of business on 31 August 2012. The ex-dividend date will be 29 August 2012. This represents cover of 3.0 times (2011: 3.0 times) based on basic adjusted earnings per share. The final dividend has not been accrued for in these financial statements.
At the Company's Annual General Meeting held on 21 September 2011, shareholders renewed the Company's authorities to make market purchases of up to 3,414,303 ordinary shares representing approximately 10% of the issued share capital. This authority was not used during the year or up to the date of this report. At the 2012 Annual General Meeting, shareholders will be asked to give a similar authority. The Company held no treasury shares during the year or up to the date of this report.
The holders of ordinary shares are entitled, amongst other rights, to receive the Company's annual reports and accounts, to attend and speak at general meetings of the Company, to appoint proxies and to exercise voting rights.
All rights and obligations attaching the Company's ordinary shares are set out in the Company's Articles of Association (Articles), copies of which can be obtained from the Companies House website or by writing to the Company Secretary. Unless otherwise provided in the Articles or the terms of issue of any shares, any shareholder may transfer any or all of his shares. The Directors may refuse to register a transfer of shares in certificated form that are not fully paid-up or otherwise in accordance with the Articles.
Details of the movements of the authorised and called up share capital of the Company are set out in note 23 to the financial statements.
Details of the Company's current Directors are set out on pages 31 to 32. Directors' interests in shares and share options in the Company are detailed in the Directors' Remuneration Report set out on pages 47 to 54.
The Company maintains Directors' and Officers' liability insurance which gives appropriate cover for any legal action brought against its Directors. The Directors' also have the benefit of the indemnity provisions contained in the Company's Articles.
On the basis of notifications received under the Disclosure and Transparency Rules (DTR5) and other notifications received by NCC Group plc from shareholders, shareholders being interested in 3% or more of the Company's issued ordinary share capital as at 31 May 2012 were as follows:
| Fund Manager | Number | Percent |
|---|---|---|
| Standard Life Investments | 3,315,373 | 9.65 |
| AXA Investment Managers | 3,157,859 | 9.20 |
| Montanaro Investment Managers | 3,124,239 | 9.10 |
| Legal & General Investment Management | 2,497,781 | 7.27 |
| Rob Cotton | 1,721,075 | 5.01 |
| Liontrust Asset Management | 1,491,170 | 4.34 |
| Hansa Capital Partners | 1,250,000 | 3.64 |
| Mawer Investment Management | 1,165,650 | 3.39 |
| Herald Investment Management | 1,070,000 | 3.12 |
| Capital Research & Management | 1,031,000 | 3.00 |
The shareholding percentages have been adjusted from those notified to reflect the current issued share capital. There were no other notifications received under DTR 5 between 31 May 2012 and 5 July 2012.
The corporate social responsibility section on pages 57 to 60 provides an update on the Group's policies and activities in respect of its wider stakeholders, employees, clients, suppliers, charities and the community, environmental, ethical and health and safety issues.
The principal financial risks and uncertainties the Group faces are described in note 21 to the annual report and accounts.
The Group faces operational risks and uncertainties which the Directors take all reasonable steps possible to mitigate, however the Directors recognise that they can never be eliminated completely.
The principal operational risks and uncertainties the Group faces include those in relation to the recruitment of additional staff to meet the Group's ambitious growth plans, the entry of a significant competitor to threaten the Group's leading position in its domestic escrow market, the occurrence of unforeseen difficulties in the integration of future acquisitions the Group may enter into and the dependence on key executives and senior managers.
There are no persons with whom the Company has contractual or other arrangements that are deemed to be essential to the Group.
Within the Group's revolving credit facility, the lender has the right to demand immediate payment of any outstanding balances upon a change of control of the Group following a takeover bid.
There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid.
The Directors who held office at the date of approval of this Directors' report confirm that so far as they are each aware, there is no relevant audit information of which the Company's auditors are unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information.
KPMG Audit Plc resigned as auditors on 2 December 2011 and Ernst & Young LLP was appointed in their place.
A resolution to reappoint Ernst & Young LLP as auditors will be put to the members at the Annual General Meeting.
The notice of the Company's Annual General Meeting to be held at the Manchester Technology Centre is sent to shareholders with this annual report along with details of the business to be proposed and explanatory notes.
By order of the Board.
Rob Cotton Chief Executive NCC Group plc 5 July 2012
NCC Group is committed and accountable to shareholders for high standards of corporate governance. This statement describes how the Group has applied the main principles of the UK Corporate Governance Code published by the Financial Reporting Council in June 2010 and describes the Group's compliance with the provisions of the code.
In respect of the year ended 31 May 2012, NCC Group has been in full compliance, other than as disclosed below, with the provisions set out in the UK Corporate Governance Code.
Provision A.3.1
The Company did not comply with the requirement that the Chairman meets the independence criteria set out below (see note 27).
Provision B.2.1
During the period the Company did not comply with the requirement that the board should establish a Nomination Committee of which the majority of members should be independent Non Executive Directors. The senior independent Non Executive Director does however have the casting vote.
The Board currently comprises two Executive Directors and three Non Executive Directors. During the year a suitably qualified recruitment company, was retained with a brief to help the Company to find two Non Executive Directors to refresh and complement the Board. After a series of interviews conducted with the Chairman, Senior Non Executive Director and other members of the Board, one suitable candidate with the relevant technical skills is under consideration and a further candidate is currently in the final interview process stage. The Nomination Committee will be recommending appointments to the Board in due course.
The Board and Committee responsibilities are set out in the table below:
| Audit | Remuneration | Nomination | |||
|---|---|---|---|---|---|
| Board | Committee | Committee | Committee | ||
| Paul Mitchell | Non Executive Chairman | Chairman | - | Member | Chairman |
| Rob Cotton | Chief Executive | Member | - | - | Member |
| Atul Patel | Group Finance Director | Member | - | - | - |
| Debbie Hewitt | Non Executive Director | Member | Member | Chairman | Member |
| David McKeith | Non Executive Director | Member | Chairman | Member | Member |
The Non Executive Chairman, Paul Mitchell, is responsible for the running of the Board and promoting a culture of openness and debate. Executive responsibility for the running of the Group's business rests with the Chief Executive Officer who is supported in this by the Group Finance Director and the Operational Board of NCC Group.
Debbie Hewitt is the Senior Independent Non Executive Director. The role of the Senior Independent Director is to provide a sounding board for the Chairman and to serve as an intermediary for other Directors when necessary. Her main responsibility is to be available to the shareholders should they have concerns that they have been unable to resolve through normal channels or when such channels would be inappropriate.
The Board normally meets on a monthly basis. During the year, the Board met on eleven scheduled occasions.
The performance of the Board is a fundamental component of the Company's success. During the year, each of the Board, Audit Committee, Remuneration Committee and Nomination Committee carried out an internal self-evaluation on their effectiveness and concluded that they continue to be effective and that no significant amendments are required to their operating procedures.
The Non Executive Directors met independently from the Executive Directors to discuss with the Chairman the overall functioning of the Board and his contribution in making it effective.
Each Director received an induction upon joining the board and the Chairman reviewed the performance of each Director and discussed their training and development needs. The Non Executive Directors have also met with the Chairman to appraise his performance.
The Non Executive Directors provide a strong independent element on the Board and are well placed to constructively challenge and help develop proposals on strategy and succession planning. Between them they bring an extensive and broad range experience to the Group and this will be extended by the appointment of an additional Non Executive Director.
The attendance of individual Directors at the scheduled Board meetings is shown in the table below. The Non Executive Directors are contracted to spend a minimum of 24 days per annum on NCC Group affairs.
| Board meetings attended | |||
|---|---|---|---|
| Paul Mitchell | Non Executive Chairman | 11/11 | |
| Rob Cotton | Chief Executive | 11/11 | |
| Atul Patel | Group Finance Director | 11/11 | |
| Debbie Hewitt | Senior Non Executive Director | 11/11 | |
| David McKeith | Non Executive Director | 11/11 |
After careful review, the Board has again concluded that Debbie Hewitt and David McKeith are independent. In coming to this assessment the Board considered the character of the individuals concerned and the fact that neither of them:
The Board is responsible to shareholders for the proper management of the Group, for its system of corporate governance and for the long term success of the Company. It receives information on (at least) a monthly basis to enable it to review trading performance, forecasts and strategy and it has a schedule of matters specifically reserved for its decision. The most significant of these are:
Operational management of the Group is delegated to the Operational Board of NCC Group.
Procedures exist to allow Directors to seek independent legal and professional advice in respect of their duties at the Company's expense where the circumstances are appropriate. In April 2012 a partner in Eversheds and a representative from "Business in the Community" gave a presentation to the Board on Corporate Social Responsibility (CSR) and current "best practice" in the area of CSR.
All Directors will submit themselves for re-election at the AGM every year.
The following formally constituted committees deal with specific aspects of the Group's affairs in accordance with their written terms of reference, which are reviewed regularly and are available on the Group's website www.nccgroup.com.
The Audit Committee, which is chaired by David McKeith the former North West Senior Partner of PricewaterhouseCoopers, comprises the two independent Non Executive Directors and meets at least three times a year. The Chairman, Chief Executive, Finance Director and external auditors attend these meetings as required by the Committee.
The purpose of the Committee is to assist the Board in the discharge of its responsibilities for financial reporting and corporate control, including risk and to provide a forum for reporting by the external auditors. The responsibilities of the Committee include:
The attendance of individual Committee members at Audit Committee meetings is shown in the table below:
| Meetings attended | |
|---|---|
| Debbie Hewitt | 3/3 |
| David McKeith | 3/3 |
During the year, the Audit Committee considered the following issues:
The Group again formally considered the need for an Internal Audit function, but was satisfied that the acquisition integration team could conduct this role on an ad-hoc basis if the need arose. Further, the internal controls and the Quality and Security procedures that are in place to support the regular internal and external audits that are conducted under the Group's ISO 9001 accredited quality assurance process provide a good degree of comfort. These current arrangements are deemed sufficient given the structure of the Group's accounting function and the size of the Group, but they will continue to be reviewed each year.
The Remuneration Committee, which is chaired by Debbie Hewitt and comprises the Non Executive Directors, meets at least three times a year and additionally as required. It is responsible for reviewing remuneration arrangements for members of the Board and other senior employees of the Group and for providing general guidance on aspects of remuneration policy throughout the Group.
The attendance of individual Committee members at Remuneration Committee meetings is shown in the table below:
| Meetings attended | |
|---|---|
| Paul Mitchell | 5/5 |
| Debbie Hewitt | 5/5 |
| David McKeith | 5/5 |
The Directors' remuneration report is set out on pages 47 to 54.
The Nomination Committee is chaired by Paul Mitchell and comprises the Chairman, the Chief Executive and the Non Executive Directors. The Committee is responsible for proposing candidates to the Board, having regard to the balance and structure of the Board.
The Committee met twice to update the Board on progress with the recruitment of a new Non Executive Director. It also reviewed its performance and updated its terms of reference.
The new terms of reference expressly state that in the event of equal votes being cast on any matter the Senior Independent Non Executive Director will have the casting vote. This is necessary as the Group recognises that the Non Executive Chairman is not independent.
The Board's process for the appointment of a new Non Executive Director is led by the Non Executive Chairman and for Executive Director positions by the Chief Executive. Candidates are recommended by third party advisors and where appropriate through assessment of internal candidates. The Committee recognises the benefits of having a balance of skills, experience, independence and knowledge and recognises the benefits of diversity.
Recommendations are then formally considered by the Nomination Committee.
| Meetings attended | |
|---|---|
| Paul Mitchell | 2/2 |
| Rob Cotton | 2/2 |
| Debbie Hewitt | 2/2 |
| David McKeith | 2/2 |
The Board is responsible for establishing and maintaining the Group's system of internal control. Internal control systems are designed to meet the particular needs of the Group and the risks to which it is exposed. By their nature however, internal control systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.
Key elements of the internal control system are described below. These have all been in place throughout the year and up to the date of this report and are reviewed regularly by the Board:
The choice of external auditor will be reviewed every five years or sooner if the Board considers it appropriate. During the year an independent tender process for the appointment of new auditors was carried out as KPMG Audit plc had been in place as auditors of the company for over 9 years. Proposals were received from Deloitte, Ernst & Young and KPMG. On 2 December 2011 Ernst & Young were appointed as auditors to the Group.
The Company operates a rigorous policy designed to ensure that the auditors' independence is not compromised by their undertaking inappropriate non-audit work.
The Audit Committee's approval is needed for (i) any fees for non-audit work paid to the auditors in excess of 50% of the audit fee paid to them for that financial year for any one assignment and (ii) for any assignment that would result in the total non-audit fees in that year exceeding the audit fee paid for that year.
All significant pieces of non-audit work are put to informal tender to suitable parties, this includes if appropriate the auditors. Upon review as to suitability and price the work will then be placed to the provider recommended after approval by the Audit Committee if such approval is necessary in accordance with the rules set out above.
During the year the Audit Committee approved fees payable to Ernst & Young as the Group's tax advisors, fees payable to Deloitte in respect of transaction and international tax services and corporate finance fees to Rickitt Mitchell. Since the appointment of Ernst & Young as auditors to the Company they have resigned as tax advisors and been replaced by Deloitte.
As reported to the audit committee £Nil non-audit work was undertaken by the external auditors in 2012 (2011: £Nil) following their appointment, thereby satisfying the committee that there is no effect on the auditors' independence. Ernst & Young were paid £81,639 in relation to their role as tax advisors, all associated work was commissioned before their appointment as auditors.
The Directors are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future, a period of not less than 12 months from the date of this report. For this reason, they continue to adopt the going concern basis in preparing the financial statements. See page 73 for the note on the Basis of Preparation.
The Company values the views of shareholders and recognises their interests in the Group's strategy and performance. It holds briefings with institutional fund managers, analysts and other investors, including staff shareholders, primarily following the announcement of interim and preliminary results, as well as at other times during the year as may be appropriate.
The Company's programme of investor relations activities is designed to ensure that the investing community receives a balanced and consistent view of the Group's performance. All shareholders are welcomed to the Annual General Meeting, at which the Board of Directors are available to answer questions from shareholders.
Communication is also provided through the Annual Report, the Interim Report and the investor relations area on the Company's website, www.nccgroup.com on which financial and other information is available and regularly updated.
The Board receives reports from the Group's broker twice a year that communicate feedback from institutional shareholders, reviews analyst coverage of the Group every month and receives reports twice a year from its financial public relations advisors regarding the views of analysts.
By order of the Board.
Rob Cotton Chief Executive NCC Group plc 5 July 2012
The Remuneration Committee advises the Board and makes recommendations to it about all elements of the remuneration packages of the Executive Directors. The members of the Remuneration Committee during the year were Debbie Hewitt who chairs the committee, Paul Mitchell and David McKeith. The Chief Executive attends the Remuneration Committee by invitation and assists the Committee with its considerations. No Director is involved in setting their own remuneration plan.
The Committee and the Board believe that in order to attract and maintain a senior management team of the right calibre it is necessary to provide competitive market-based packages which reward Group and individual performance and motivate senior executives to achieve stated business objectives and deliver outstanding shareholder returns. In addition, the Committee also considers the changes in size and complexity of the Group.
Remuneration packages comprise:
The Group introduced a number of share incentive schemes on flotation, of which all members of staff, including the Executive Directors are potential beneficiaries. These include a Long Term Incentive Plan (LTIP), a Save As You Earn (SAYE) scheme and a Company Share Option Plan (CSOP).
The remuneration policy is replicated throughout the Group and aims to attract and retain the best relevant staff and to focus their remuneration on the delivery of long term sustainable growth by using a mix of salary, benefits, bonus and longer term incentives.
Salaries are normally reviewed annually and any changes are effective from 1 June in each year. Pay reviews take into account Group and personal performance and externally benchmarked market data for comparable companies operating in IT services, management consulting and relevant high-tech sectors.
The salaries of Rob Cotton and Atul Patel, for the last two financial years are set out in the table on page 51.
The Remuneration Committee did not consider it necessary to use external remuneration consultants but the members had taken note of and reviewed the freely available market information on executive pay and also the proposals published by the Government on executive pay.
The Committee also considered the excellent performance of the Group over the last eight years, its increasing size and complexity and viewed this in light of the economic backdrop and remuneration levels being set in the rest of the business.
With effect from 1 June 2012, Rob Cotton's salary increases by 6% to £430,000 and Atul Patel's salary increases by 14% to £200,000, however Rob Cotton's overall package will increase by 4.1% and Atul Patel's by 10%. This year, the average employee remuneration increase for staff in the Group is above that of the Chief Executive. The increase in the remuneration of Atul Patel was above the average increase in the Group, as the Committee felt it appropriate in light of his performance in the year and against the market rate of remuneration of Finance Directors in similar businesses.
The performance related pay scheme for Executive Directors is largely the same as that of the Operational Directors and Senior Managers within the business and all are aligned with business objectives.
Payments under the scheme are based upon the achievement of profit targets set by the Remuneration Committee. The profit target is based on delivery of the Group's own internal plans overlaid on to the financial forecasts and expectations in the investor community. The internal plans are detailed and focus on the delivery of long term sustainable profit growth and are compared to the market expectations of the Group.
The Group does not include personal or other financial objectives in the remuneration plan as this could result in payments being made where the Group's performance is unacceptable and measures such as cash targets or personal performance are not regarded as sufficiently tangible to directly enhance the value of the Group. The Remuneration Committee however can, if exceptional circumstances occur that are beyond the Executive's control, use its discretion to pay Executives an appropriate bonus.
The bonus scheme does not start to reward until 90% (2011: 90%) of the stringent, internal target set is achieved and are capped at 120% (2011: 110%). The maximum bonus payable to Rob Cotton under the scheme is £280,000 (2011: £240,000) and for 100% achievement of the performance criteria, £200,000. For Atul Patel the same criteria apply, with £75,000 being paid for 100% achievement of performance. At 90% £26,250 is payable and the scheme is capped at £135,000 for achieving 120%.
For 2011/2012 the maximum bonuses of £240,000 and £105,000 were paid to Rob Cotton and Atul Patel respectively as the Group achieved 110.3% of the performance targets set. The increase in the bonus performance cap from 110% to 120% is to provide the Executive team with the incentive to maximise the Group's performance further.
The Remuneration Committee believe that this simple and transparent scheme prevents short term decisions being made and ensures that the Senior Management team is purely focused on the delivery of business performance to significantly enhance shareholder value.
Executive Directors are entitled to a company pension contribution of 10% of basic salary, providing they make a contribution of not less than 5%, which is paid into the Group defined contribution personal pension scheme, which is also open to all permanent employees.
Benefits in kind include the provision of a car or car allowance, payment of private fuel, car insurances, private medical insurance, life assurance and permanent health insurance.
The Group's policy is to award share incentives to Executive Directors in order to align their interests with those of the Company's shareholders. Rob Cotton and Atul Patel are precluded from joining the CSOP, but have participated in the LTIP scheme during the financial year.
The Remuneration Committee agreed, in 2005, to extend participation in the LTIP to other senior executives within the Group. The maximum award is equal to the Director's or Senior Executive's annual basic salary in the year of award.
The Group's LTIP schemes are based on the earnings per share (EPS) performance of the Group over a performance period of three years. The Committee is satisfied that using a single criteria works to motivate and encourage long term growth and enhancing shareholder value as it is setting demanding objectives on the Executives who receive the awards.
The Committee has rejected the use of Total Shareholder Returns as a measure as there are no similar comparable organisations to compare the Group against and comparing the share performance against such a diverse sector as the Software and Services sector is far outside the sphere of influence of the Executives. If this criterion had been included the rewards for the participating Executives and Senior Managers would be considerably higher. The Committee also dismissed the option of making part of any award against personal or internal objectives as they are not outwardly clear to the investor community and are unlikely to directly deliver increased shareholder value.
Should a change in control of the Group occur, crystallisation of any LTIP awards are within the discretion of the Remuneration Committee. The Remuneration Committee cannot amend the rules of any of the share schemes without prior shareholder approval.
Rob Cotton joined the SAYE Scheme at the time of flotation and has continued to subscribe to the scheme. Atul Patel joined the SAYE scheme on 4 August 2011.
The service contracts and letters of appointment of the Directors include the following terms:
| Date of contract | Notice period | |
|---|---|---|
| Executive | ||
| Rob Cotton | 8 July 2004 | 1 year |
| Atul Patel | 19 April 2011 | 6 months |
| Non Executive | ||
| Paul Mitchell | 26 June 2007 | 3 months |
| Debbie Hewitt | 18 September 2008 | 3 months |
| David McKeith | 29 July 2009 | 3 months |
The Executive Directors offer themselves, like the Non Executive Directors, for re-election every year.
Payments on termination for Executive Directors are restricted to the value of salary and contractual benefits for the notice period. There are no predetermined special provisions for Executive Directors with regard to compensation in the event of loss of office.
Directors had the following beneficial interest in the issued share capital of the Company.
| Ordinary Shares of 1p each 2012 |
Ordinary Shares of 1p each 2011 |
|
|---|---|---|
| Executive | ||
| Rob Cotton | 1,721,075 | 1,674,289 |
| Atul Patel | 5,000 | - |
| Non Executive | ||
| Paul Mitchell | 196,600 | 196,600 |
| Debbie Hewitt | 5,665 | 5,665 |
| David McKeith | 5,000 | 5,000 |
The auditors have audited the information in the following tables:
The remuneration of the Directors for the year ended 31 May 2012 was as follows:
| Year ended 31 May 2012 | Salary | Bonus | Pension | Benefits | Fees | Total |
|---|---|---|---|---|---|---|
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Executive | ||||||
| Rob Cotton | 405 | 240 | 41 | 31 | - | 717 |
| Atul Patel | 175 | 105 | 18 | 22 | - | 320 |
| Non Executive | ||||||
| Paul Mitchell | - | - | - | - | 70 | 70 |
| Debbie Hewitt | - | - | - | - | 45 | 45 |
| David McKeith | 38 | - | - | - | - | 38 |
| 618 | 345 | 59 | 53 | 115 | 1,190 |
The remuneration of the Directors for the year ended 31 May 2011 was as follows:
| Year ended 31 May 2011 | Salary | Bonus | Pension | Benefits | Fees | Total |
|---|---|---|---|---|---|---|
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Executive | ||||||
| Rob Cotton | 375 | 160 | 38 | 32 | - | 605 |
| Atul Patel | 33 | 20 | - | 5 | - | 58 |
| John Gittins - Note 1 | 216 | - | 20 | 20 | - | 256 |
| Non Executive | ||||||
| Paul Mitchell | - | - | - | - | 65 | 65 |
| James Wallace - Note 2 | 19 | - | - | - | - | 19 |
| Debbie Hewitt - Note 3 | - | - | - | - | 47 | 47 |
| David McKeith | 38 | - | - | - | - | 38 |
| 681 | 180 | 58 | 57 | 112 | 1,088 |
Note 1 John Gittins left the Group on 25 February 2011 with immediate effect. Under the terms of his Service Agreement he was entitled to six months' notice but the company chose to waive the requirement for him to work this period.
No compensation or termination payments were due under his agreement, but his notice period and payments in lieu of all contractual obligations were paid in full and are included in the table as salary. Under the terms of his Service Agreement he was excluded from the bonus scheme and no bonus was paid in respect of that bonus year. He was also excluded from any invitations to the LTIP.
Note 2 James Wallace stepped down as a Non Executive Director from the Board on 21 September 2010 at the Annual General Meeting. No compensation or termination payments were due or paid.
Note 3 Debbie Hewitt was paid £3,750 for Chairing the Remuneration Committee for the period from September 2009 to 31 May 2010.
The Group has a number of share option schemes whereby Directors and staff are able to subscribe for ordinary shares in the Company.
As at 31 May 2012 Rob Cotton and Atul Patel held options over ordinary shares as follows. There have been no changes between the end of the financial year and the date of this report.
| Market value | Maximum Options |
Maximum Options |
Earliest | |||||
|---|---|---|---|---|---|---|---|---|
| at date | held at | held at | Exercise | Performance | exercise | |||
| Director | Date of grant | of grant | 1 June 2011 | 31 May 2012 | price | conditions | date | Expiry date |
| Rob Cotton | 18/07/08 | £3.56 | 98,315 | - | nil* | 1 | 01/06/11 | 18/06/12 |
| Rob Cotton | 07/07/09 | £3.30 | 109,256 | 109,256 | nil* | 1 | 01/06/12 | 07/07/13 |
| Rob Cotton | 23/07/10 | £4.20 | 89,115 | 89,115 | nil* | 1 | 01/06/13 | 23/07/14 |
| Rob Cotton | 02/08/10 | £3.38 | 2,662 | 2,662 | £3.38 | 2 | 01/10/13 | 31/03/14 |
| Rob Cotton | 11/07/11 | £6.49 | - | 62,355 | nil* | 1 | 01/06/14 | 11/07/15 |
| Atul Patel | 11/07/11 | £6.49 | - | 26,943 | nil* | 1 | 01/06/14 | 11/07/15 |
| Atul Patel | 04/08/11 | £6.95 | - | 1,766 | £5.11 | 3 | 01/10/14 | 31/03/15 |
*exercise price of £1 on each occasion
On 30 September 2011 Rob Cotton exercised options granted to him under the NCC Group LTIP scheme over 53,286 shares, 45,029 shares were forfeited as the Group achieved 54.2% of the performance criteria set. The market price of the company's shares on this date was £6.70.
The Remuneration Committee recommends the granting of additional share options to the value of Executive Director's annual salary under the same performance criteria as under the current LTIP.
The following graph shows the total shareholder return, with dividends reinvested, from 12 July 2004, the date the Company's flotation on the London Stock Exchange (AIM) against the corresponding changes in hypothetical holding in shares in both the FTSE All Share Index and the FTSE Software and Computer Services Index.
The FTSE All Share and FTSE Software and Computer Services indices both represent broad equity indices' in which the company is a constituent member. Inclusion of the FTSE All Share Index gives a market capitalisation-based perspective, whilst the FTSE Software and Computer Services Index provides an industry sector perspective.
During the year the Company's share price varied between £5.55 and £9.21 and ended the year at £7.65.
Approved by the Board and signed on its behalf:
Debbie Hewitt Chairman, Remuneration Committee NCC Group plc 5 July 2012
The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and regulations. Company law requires the Directors to prepare Group financial statements for each financial year. Under that law, the Directors are required to prepare Group financial statements under IFRSs as adopted by the European Union.
Under Company Law the Directors must not approve the Group financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. In preparing the Group financial statements the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are also responsible for preparing the Directors' Report, the Directors' Remuneration Report and the Corporate Governance Statement in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure and Transparency Rules.
Each of the Directors whose names and functions are set out on pages 39 to 46, confirm that, to the best of their knowledge:
By order of the Board.
Rob Cotton Chief Executive NCC Group plc 5 July 2012
NCC Group takes its corporate social responsibilities very seriously and recognises the important contributions to the business made by the wider community of stakeholders, in particular employees, clients, suppliers and the local communities in which it operates. The Board takes into account social, environmental and ethical issues in its discussions and decision making and makes the health and safety of employees a priority.
During the year a representative from Business in the Community has given a presentation to the Board on current good practice in the area of CSR. Atul Patel the Finance Director has been given CSR responsibility for the Group and has taken sustainability and environmental advice from Enworks, who specialise in this area, on what further measures the Group can take to reduce its carbon footprint.
People are at the heart of the Group's business and the support and involvement of the talented individuals who form its team is vital to the continued success of the Group overall. The Head of HR reports directly to the CEO of the business to ensure high level visibility and control of all employment related issues.
The Group is committed to its employees and actively attempts to improve their health and wellbeing and morale by encouraging fitness based activities and taking part in charitable events.
The Group has its own football team which plays weekly and organises two charitable football tournaments every year involving teams from the local business community. The team also competed in tournaments at Old Trafford to raise money for charity. NCC Group also has a very active netball team, cricket team and running club and for the more cerebral a book club.
Additionally, support is always given to relevant local charitable initiatives, for example, supporting a number of local sporting challenges such as an Olympic themed sports day, supporting over 20 entrants into the Manchester 10K charity run and several employees completing sponsored skydives and parachute jumps for charity.
The Group is committed to providing a productive working environment and recognises the importance of training and development. Each employee has a training record and is positively encouraged to up-skill. The Group employs a training manager who ensures all relevant staff have the necessary sales and management training.
The Group has a policy of keeping employees informed of, and engaged in, its business strategy through the Intranet, regular employee briefings and divisional meetings.
Comments and suggestions from employees on the Group's performance and management are actively encouraged and a free flow of information between the Directors, managers and employees ensures that everyone has an opportunity to contribute.
The Group is committed to diversity and offers equal opportunities to all; no employee or potential employee receives more or less favourable treatment due to their gender, age, race, national or ethnic origin, religion or belief, disability, sexual orientation, or marital status.
Should an existing employee's circumstances change, it is the Group's policy, wherever practicable, to provide continuing employment under normal terms and conditions and to provide training and career development and promotion wherever possible.
NCC Group values each and every client and is proud of the long standing nature of its client relationships. Continuing client satisfaction is central to it's on going success and is regularly measured and monitored through the ISO 9001 certified quality programme. This includes written and telephone satisfaction surveys each month.
Rare instances of negative feedback are treated with the utmost seriousness and dealt with swiftly by management through to resolution. Each Operational Director takes direct responsibility for customer satisfaction, with the CEO investigating directly where Divisional performances fail to meet the 80% threshold.
The Group recognises and understands that its relationships with those with whom it deals are the key to its success and, as such, takes its obligations and commitments to those people and organisations very seriously. The Group's independence, reputation as a supplier of quality services and the trust of its clients are all key assets that it aims to protect at all times. It aims to engender in its employees principles of honesty and integrity and the desire to work to the best of their ability. To ensure best service for the Group's clients all employees are required both to comply with the Company's Code of Ethics and to undergo training on the Bribery Act 2010.
The Group is committed to ensuring that as well as delivering consistently strong results as a business, it gives something back to the local community. It continues to support charitable organisations and actively encourages the involvement of its employees in fundraising by covering expenses and awarding additional days' holiday. A plan has been put in place to sponsor five local junior football teams by buying their football kit to encourage children to take an interest in sport and keeping fit.
For the last twelve months the Group very actively supported The Christie, the globally renowned Manchester cancer hospital.
During the year the Group has participated in the Microsoft Apprentice scheme and provided work experience as part of an undergraduate degree course. In addition the Group is setting up an in-house functional testing team and will recruit locally for apprentices to develop and train as part of that team.
The Group's policy is to pay suppliers in accordance with terms and conditions agreed when orders are placed. Although the Group does not follow any code or standard on payment policy, where terms have not been specifically agreed, invoices dated in one calendar month are paid close to the end of the following month.
At 31 May 2012, the Group had an average of 46 days purchases outstanding in trade creditors (2011: 40 days).
An Ethical Supplier's Policy has been adopted and is in the course of being implemented across the Group to ensure (inter alia) that all suppliers to the Group comply with Health and Safety law, have an environmental policy and behave ethically towards their employees.
As a service provider with no manufacturing facilities the impact of the Group's operations on the environment is limited compared with other industries, however it recognises its responsibility to respect and limit damage to the environment in every way it can. Accordingly the Group's Environmental Policy aims to:
Initiatives that have been put in place:
Initiatives that are being worked on:
An initial set of KPIs have been identified and baselined to provide a marker against which to measure improvements. The KPIs have been collected using information in relation to the UK offices only. The base line key environmental measures are as follows:
| Measure | Baseline |
|---|---|
| Electricity usage | 3312KW per day |
| Paper usage | 3.5 reams per worked day |
| Printer cartridge usage | 0.6 cartridges per worked day |
| Average CO2 value of company car fleet |
148 |
The Group is committed to the good health and wellbeing of its employees and strives to provide and maintain a safe and pleasant environment for all employees, clients and visitors to its premises and to comply with the relevant health and safety legislation. The refurbishment of the Manchester Head office has been completed this year and provides a safe pleasant and modern working environment for staff. Continued investment is planned in the coming financial year to enhance the working environments of employees in all our offices. One Health and Safety claim from a former employee arose in the year (2011: nil).
By order of the Board.
Rob Cotton Chief Executive NCC Group plc 5 July 2012
We have audited the financial statements of NCC Group plc for the year ended 31 May 2012 which comprise the consolidated income statement, consolidated statement of comprehensive income, group balance sheet, company balance sheet, group cash flow statement, company cash flow statement, statement of changes of equity and the related notes 1 to 28. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
As explained more fully in the Statement of Directors' Responsibilities set out on pages 55 - 56, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group's and the parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
Under the Listing Rules we are required to review:
(Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor Manchester 5 July 2012
| 2012 | 2011 | ||
|---|---|---|---|
| £000 | £000 | ||
| Revenue | 2 | 87,713 | 70,995 |
| Cost of sales | (54,140) | (44,873) | |
| Gross profit | 33,573 | 26,122 | |
| Administrative expenses before amortisation of intangible assets, share based payments, impairment losses and exceptional items |
(10,171) | (7,715) | |
| Operating profit before amortisation, share based payments, impairment losses and exceptional items |
23,402 | 18,407 | |
| Amortisation of intangible assets | (3,726) | (3,275) | |
| Share based payments | 22 | (946) | (516) |
| Impairment loss | 3 | (6,104) | - |
| Exceptional items | 3 | (1,007) | (1,144) |
| Total administrative expenses | (21,954) | (12,650) | |
| Operating profit | 2 | 11,619 | 13,472 |
| Financial income | 6 | 3 | 8 |
| Finance expense excluding unwinding of discount | (842) | (644) | |
| Net financing costs excluding unwinding of discount | (839) | (636) | |
| Unwinding of discount relating to contingent consideration on business combinations | (208) | (68) | |
| Financial expenses | 6 | (1,050) | (712) |
| Net financing costs | (1,047) | (704) | |
| Profit before taxation | 4 | 10,572 | 12,768 |
| Taxation | 7 | (2,957) | (3,441) |
| Profit for the year | 7,615 | 9,327 | |
| Discontinued operations | |||
| Loss for the period from discontinued operations | 9 | - | (1,098) |
| Profit for the year | 7,615 | 8,229 | |
| Attributable to equity holders of the parent company | 7,615 | 8,229 | |
| Earnings per share from continuing operations | 10 | ||
| Basic earnings per share | 22.2p | 27.5p | |
| Diluted earnings per share | 21.7p | 26.7p | |
| Earnings per share from continuing and discontinued operations | |||
| Basic earnings per share | 22.2p | 24.3p | |
| Diluted earnings per share | 21.7p | 23.5p |
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Profit for the year | 7,615 | 8,229 |
| Other comprehensive income | ||
| Foreign exchange translation differences | 357 | 418 |
| Total comprehensive income for the period | 7,972 | 8,647 |
| Attributable to: | ||
| Equity holders of the parent | 7,972 | 8,647 |
At 31 May 2012
| Notes | 2012 | 2011 | |||
|---|---|---|---|---|---|
| £000 | £000 | £000 | £000 | ||
| Non-current assets | |||||
| Intangible assets | 12 | 89,499 | 93,759 | ||
| Plant and equipment | 13 | 5,068 | 2,755 | ||
| Deferred tax assets | 16 | 1,943 | 1,150 | ||
| Total non-current assets | 96,510 | 97,664 | |||
| Current assets | |||||
| Trade and other receivables | 14 | 21,347 | 18,389 | ||
| Cash and cash equivalents | 5,450 | 4,701 | |||
| Total current assets | 26,797 | 23,090 | |||
| Total assets | 123,307 | 120,754 | |||
| Equity | |||||
| Issued capital | 23 | 343 | 341 | ||
| Share premium | 23,244 | 22,830 | |||
| Retained earnings | 36,730 | 33,230 | |||
| Currency translation reserve | 41 | (316) | |||
| Total equity attributable to equity holders of the parent | 60,358 | 56,085 | |||
| Non-current liabilities | |||||
| Other financial liabilities | 19 | 579 | 206 | ||
| Deferred tax liability | 16 | 1,343 | 1,518 | ||
| Contingent consideration on acquisitions | 19 | 250 | 4,536 | ||
| Interest bearing loans | 19,21 | 28,149 | 25,182 | ||
| Total non-current liabilities | 30,321 | 31,442 | |||
| Current liabilities | |||||
| Trade and other payables | 17 | 11,593 | 10,326 | ||
| Contingent consideration on acquisitions | 17 | 3,493 | 5,840 | ||
| Deferred revenue | 18 | 15,926 | 15,023 | ||
| Current tax payable | 712 | 2,038 | |||
| Provisions | 20 | 904 | - | ||
| Total current liabilities | 32,628 | 33,227 | |||
| Total liabilities | 62,949 | 64,669 | |||
| Total liabilities and equity | 123,307 | 120,754 |
These financial statements were approved by the Board of Directors on 5 July 2012 and were signed on its behalf by:
Rob Cotton Chief Executive NCC Group plc 4627044
At 31 May 2012
| Notes | 2012 | 2011 | |||
|---|---|---|---|---|---|
| £000 | £000 | £000 | £000 | ||
| Non-current assets | |||||
| Investments | 28 | 32,041 | 31,529 | ||
| Deferred tax assets | 16 | 252 | 168 | ||
| Total non-current assets | 32,293 | 31,697 | |||
| Current assets | |||||
| Other receivables | 14 | 80 | - | ||
| Cash and cash equivalents | 196 | 1,096 | |||
| Total current assets | 276 | 1,096 | |||
| Total assets | 32,569 | 32,793 | |||
| Equity | |||||
| Issued capital | 23 | 343 | 341 | ||
| Share premium | 23,244 | 22,830 | |||
| Retained earnings | 8,841 | 3,235 | |||
| Total equity | 32,428 | 26,406 | |||
| Current liabilities | |||||
| Trade and other payables | 17 | 23 | 6,387 | ||
| Current tax payable | 118 | - | |||
| Total current liabilities | 141 | 6,387 | |||
| Total liabilities | 141 | 6,387 | |||
| Total liabilities and equity | 32,569 | 32,793 |
These financial statements were approved by the Board of Directors on 5 July 2012 and were signed on its behalf by:
Rob Cotton Chief Executive NCC Group plc 4627044
| Notes | 2012 | 2011 | |
|---|---|---|---|
| £000 | £000 | ||
| Cash flow from operating activities | |||
| Profit for the year | 7,615 | 8,229 | |
| Adjustments for: | |||
| Depreciation charge | 13 | 1,574 | 1,190 |
| Share based charges | 22 | 725 | 408 |
| Amortisation of intangible assets | 12 | 3,726 | 3,275 |
| Impairment of intangible assets | 12 | 6,104 | - |
| Net financing costs | 1,047 | 704 | |
| Loss/(profit) on sale of plant and equipment | 10 | (18) | |
| Income tax expense | 2,957 | 3,014 | |
| Cash inflow for the year before changes in working capital | 23,758 | 16,802 | |
| Increase in trade and other receivables | (2,899) | (373) | |
| Increase in trade and other payables | 3,781 | 1,463 | |
| Cash generated from operating activities before interest and tax | 24,640 | 17,892 | |
| Interest paid | (735) | (663) | |
| Income taxes paid | (5,452) | (4,178) | |
| Net cash generated from operating activities | 18,453 | 13,051 | |
| Cash flows from investing activities | |||
| Interest received | 3 | 8 | |
| Acquisition of plant and equipment | (3,620) | (1,815) | |
| Development expenditure | 12 | (354) | - |
| Acquisition of intangible assets | 12 | (3,306) | (2,675) |
| Acquisition of business net of cash acquired | 15 | (7,498) | (14,432) |
| Net cash used in investing activities | (14,775) | (18,914) | |
| Cash flows from financing activities | |||
| Proceeds from the issue of ordinary share capital | 416 | 1,127 | |
| Draw down of borrowings | 2,354 | 9,099 | |
| Purchase of own shares | - | (856) | |
| Payment of bank loans | - | - | |
| Equity dividends paid | (4,778) | (3,855) | |
| Net cash from financing activities | (2,008) | 5,515 | |
| Net increase/(decrease) in cash and cash equivalents | 24 | 1,670 | (348) |
| Cash and cash equivalents at beginning of year | 4,701 | 4,631 | |
| Effect of foreign currency | (921) | 418 | |
| Cash and cash equivalents at end of year | 5,450 | 4,701 |
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Cash flow from operating activities | ||
| Profit for the year | 535 | 363 |
| Adjustments for: | ||
| Share based charges | 213 | 197 |
| Income tax expense | 60 | 91 |
| Cash inflow for the year before changes in working capital | 808 | 651 |
| (Decrease)/increase in payables | (6,471) | 1,517 |
| Cash (outflow)/inflow for the year before interest and tax | (5,663) | 2,168 |
| Interest paid | - | - |
| Net cash from operating activities | (5,663) | 2,168 |
| Cash flows from financing activities | ||
| Proceeds from the issue of ordinary share capital | 416 | 1,127 |
| Purchase of own shares | - | (856) |
| Equity dividends paid | (4,778) | (3,855) |
| Equity dividends received | 9,125 | 2,500 |
| Net cash from financing activities | 4,763 | (1,084) |
| Net (decrease)/increase in cash and cash equivalents | (900) | 1,084 |
| Cash and cash equivalents at beginning of year | 1,096 | 12 |
| Cash and cash equivalents at end of year | 196 | 1,096 |
| Group | Issued | Currency | |||
|---|---|---|---|---|---|
| Share | Share | Translation | Retained | ||
| capital | premium | reserve | earnings | Total | |
| £000 | £000 | £000 | £000 | £000 | |
| Balance at 1 June 2010 | 337 | 21,707 | (734) | 28,963 | 50,273 |
| Profit for the period | - | - | - | 8,229 | 8,229 |
| Foreign currency translation differences | - | - | 418 | - | 418 |
| Total comprehensive income for the period | - | - | 418 | 8,229 | 8,647 |
| Transactions with owners recorded directly in equity | - | - | - | - | - |
| Dividends to equity shareholders | - | - | - | (3,855) | (3,855) |
| Re-purchase of own shares | - | - | - | (856) | (856) |
| Share based payment transactions | - | - | - | 408 | 408 |
| Deferred tax on share based payments | - | - | - | 341 | 341 |
| Shares issued | 4 | 1,123 | - | - | 1,127 |
| Total contributions by and distributions to owners | 4 | 1,123 | - | (3,962) | (2,835) |
| Balance at 31 May 2011 | 341 | 22,830 | (316) | 33,230 | 56,085 |
| Issued | Currency | ||||
|---|---|---|---|---|---|
| Share capital |
Share premium |
Translation reserve |
Retained earnings |
Total | |
| £000 | £000 | £000 | £000 | £000 | |
| Balance at 1 June 2011 | 341 | 22,830 | (316) | 33,230 | 56,085 |
| Profit for the period | - | - | - | 7,615 | 7,615 |
| Foreign currency translation differences | - | - | 357 | - | 357 |
| Total comprehensive income for the period | - | - | 357 | 7,615 | 7,972 |
| Transactions with owners recorded directly in equity | |||||
| Dividends to equity shareholders | - | - | - | (4,778) | (4,778) |
| Re-purchase of own shares | - | - | - | - | - |
| Share based payment transactions | - | - | - | 725 | 725 |
| Deferred tax on share based payments | - | - | - | (62) | (62) |
| Shares issued | 2 | 414 | - | - | 416 |
| Total contributions by and distributions to owners | 2 | 414 | - | (4,115) | (3,699) |
| Balance at 31 May 2012 | 343 | 23,244 | 41 | 36,730 | 60,358 |
| Company | Share capital |
Share premium |
Retained earnings |
Total |
|---|---|---|---|---|
| £000 | £000 | £000 | £000 | |
| Balance at 1 June 2010 | 337 | 21,707 | 4,608 | 26,652 |
| Profit for the period | - | - | 2,862 | 2,862 |
| Foreign currency translation differences | - | - | - | - |
| Total comprehensive income for the period | - | - | 2,862 | 2,862 |
| Transactions with owners recorded directly in equity | ||||
| Dividends to equity shareholders | - | - | (3,855) | (3,855) |
| Share based payment transactions | - | - | 197 | 197 |
| Increase in subsidiary investment for share based charges | - | - | 210 | 210 |
| Deferred tax on share based payments | - | - | 69 | 69 |
| Shares issued | 4 | 1,123 | - | 1,127 |
| Re-purchase of own shares | - | - | (856) | (856) |
| Total contributions by and distributions to owners | 4 | 1,123 | (4,235) | (3,108) |
| Balance at 31 May 2011 | 341 | 22,830 | 3,235 | 26,406 |
| Share capital |
Share premium |
Retained earnings |
Total | |
|---|---|---|---|---|
| £000 | £000 | £000 | £000 | |
| Balance at 1 June 2011 | 341 | 22,830 | 3,235 | 26,406 |
| Profit for the period | - | - | 535 | 535 |
| Dividends received | 9,125 | 9,125 | ||
| Foreign currency translation differences | - | - | - | - |
| Total comprehensive income for the period | - | - | 9,660 | 9,660 |
| Transactions with owners recorded directly in equity | ||||
| Dividends to equity shareholders | - | - | (4,778) | (4,778) |
| Share based payment transactions | 213 | 213 | ||
| Increase in subsidiary investment for share based charges | - | - | 511 | 511 |
| Shares issued | 2 | 414 | - | 416 |
| Total contributions by and distributions to owners | 2 | 414 | (4,054) | (3,638) |
| Balance at 31 May 2012 | 343 | 23,244 | 8,841 | 32,428 |
NCC Group plc ("the Company") is a company incorporated in the UK.
The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the "Group"). The parent company financial statements present information about the Company as a separate entity and not about its Group.
Both the parent and the Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU ("Adopted IFRS"). On publishing the parent company financial statements here together with the Group financial statements, the Company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements.
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Operational and Financial Review on pages 15 to 30. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 15 to 30. In addition, note 21 to the financial statements includes the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit risk and liquidity risk.
The Group's forecast and projections taking into account reasonably possible changes in trading performance show that the Group is able to operate within the level of its current facility.
As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.
After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements.
The consolidated income statement for the year ended 31 May 2011 has been restated to present charges in respect of share based payments within administrative expenses rather than within cost of sales. The purpose of this restatement is to report the share based payments charges with other indirect salary expenses within administrative expenses. The impact of this restatement is an increase in administrative expenses of £0.5 million for the year ended 31 May 2011. Cost of sales has decreased by the same amount. The restatement has no impact on the Group's reported profit.
During the year, the following standards have been adopted for the first time; IAS24 Related Party Disclosures (revised) IFRIC14 Prepayments of a minimum funding requirement (amendment) Improvements to IFRSs (issued May 2010) and IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments
The adoption of these standards has not had a material effect on the financial statements of the Group.
A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 May 2012 and have not been applied in preparing these consolidated financial statements. None of these will have an effect on the consolidated financial statements of the Group. The key changes are as follows:
IFRS 9 - Financial Instruments. Effective for annual periods commencing on or after 1 January 2015.
IFRS 10 - Consolidated financial instruments. Effective for annual periods commencing on or after 1 January 2013.
IFRS 11 - Joint arrangements. Effective for annual periods commencing on or after 1 January 2013.
IFRS12 - Income Taxes (Amendment) — Deferred Taxes: Recovery of Underlying Assets. Effective for annual periods commencing on or after 1 January 2012.
IFRS13 - Fair Value Measurement. Effective for annual periods commencing on or after 1 January 2013.
Amendments to IFRS 7 - Financial Instruments: Disclosures. Effective for annual periods commencing on or after 1 July 2011.
Business combinations are accounted for by applying the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable.
For acquisitions on or after 1 June 2010, the Group measures goodwill at the acquisition date as:
When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts generally are recognised in the income statement.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred.
Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in the income statement.
On a transaction-by-transaction basis, the Group elects to measure non-controlling interests either at its fair value or at its proportionate interest in the recognised amount of the identifiable net assets of the acquiree at the acquisition date.
For acquisitions before 1 June 2010, goodwill represents the excess of the cost of the acquisition over the Group's interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess was negative, a bargain purchase gain was recognised immediately in profit or loss.
Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the cost of the acquisition.
Contingent consideration on business combinations was recognised only to the extent that it could be reliably estimated and it was probable that the consideration would be paid. Any subsequent changes to the carrying value of the contingent consideration were recognised as adjustments to goodwill.
Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Goodwill represents amounts arising on acquisition of subsidiaries. In respect of business acquisitions that have occurred since 1 June 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired including identifiable intangible assets. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable.
In respect of acquisitions prior to 1 June 2004, goodwill is included at its deemed cost, which represents the amount recorded under UK GAAP at 31 May 2004 which was broadly comparable, save that only separable intangibles were recognised and goodwill was amortised.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the investee.
Expenditure on research activities is recognised in the income statement as an expense as incurred.
Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Group intends, has the technical ability and has sufficient resources to complete development, future economic benefits are probable and if the Group can measure reliably the expenditure attributable to the intangible asset during its development. Development activities involve a plan or design for the production of new or substantially improved products or processes.
The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads and capitalised borrowing costs. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and less accumulated impairment losses.
Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred.
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and less accumulated impairment losses.
Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred.
Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance sheet date. Other intangibles are amortised from the date they are available for use. The estimated useful lives are as follows:
| Acquired customer contracts | between |
|---|---|
| and relationships | 3 and 20 years |
| Software | 3 years |
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.
An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
The carrying amounts of the Group's non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit"). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units, or ("CGU"). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination.
An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
Details of related party transactions are set out in note 27 to these financial statements.
Plant and equipment assets are carried at cost less accumulated depreciation and any recognised impairment in value. To the extent that borrowing costs relate to the acquisition, construction or production of a qualifying asset, borrowing costs are capitalised as part of the cost of that asset. Depreciation is charged to the income statement on a straight line basis over the estimated useful lives of each part of an item of plant and equipment. The rates applied are as follows:
| Computer equipment | - 20% to 33% |
|---|---|
| Plant and equipment | - 20% |
| Fixtures and fittings | - 10% to 20% |
| Motor vehicles | - 25% |
Plant and equipment is also tested for impairment whenever there is an indication of potential impairment.
Investments in subsidiaries are carried at cost less impairment.
Revenue represents the value of services provided during the period, excluding VAT and similar taxes.
The results of partially completed contracts whether fixed price or on a time and materials basis are dealt with on a percentage completion basis according to the number of days worked by including the profit or loss earned on work completed to the balance sheet date. Provisions are made for any losses on uncompleted contracts expected to be incurred after the balance sheet date.
Other than fees attributable to initial setup on the signing of a new contract, which is recognised when the contract is signed, maintenance and escrow agreement revenue is deferred and released to the income statement on a straight-line basis over the life of the related agreement, on the basis that the performance is deemed to fall evenly over the contract period.
The Group determines and presents operating segments based on the information that is provided to the CEO, who is the Group's chief operating decision maker in order to assess performance and to allocate resources.
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components. An operating segment's results are reviewed regularly by the CEO to make decisions about resources to be allocated to the segment and to assess its performance.
For the year ended 31 May 2012, the Group has two reportable segments, Group Escrow and Assurance Testing. Group Escrow and Assurance Testing are the Group's strategic business units offering different services and they are managed separately because they require different technology and marketing strategies. For each of the strategic business units, the CEO reviews internal management reports on at least a quarterly basis.
Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the income statement.
The assets and liabilities of overseas subsidiaries denominated in foreign currencies are translated at the closing rate and income statements of overseas subsidiary undertakings are translated at the average exchange rates. Gains and losses arising are taken to the currency translation reserve. They are released to the income statement upon disposal of the subsidiary to which they relate.
Operating lease rentals are charged to the income statement on a straight-line basis over the period of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense.
The Group operates a defined contribution pension scheme. The assets of the scheme are kept separately from those of the Group in an independently administered fund. The amount charged as expense in the income statement represents the contributions payable to the scheme in respect of the accounting period.
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
Share-based payment arrangements in which the Group receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Group.
The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.
Share-based payment transactions in which the Group receives goods or services by incurring a liability to transfer cash or other assets that is based on the price of the Group's equity instruments are accounted for as cash-settled share-based payments. The fair value of the amount payable to employees is recognised as an expense, with a corresponding increase in liabilities, over the period in which the employees become unconditionally entitled to payment. The liability is remeasured at each balance sheet date and at settlement date. Any changes in the fair value of the liability are recognised as personnel expense in profit or loss.
Where the Company grants options over its own shares to the employees of a subsidiary it recognises, in its individual financial statements, an increase in the cost of investment in that subsidiary equivalent to the equity-settled share-based payment charge recognised in respect of that subsidiary in its consolidated financial statements with the corresponding credit being recognised directly in equity.
Interest bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.
Net financing costs comprise interest payable and interest receivable on funds invested.
Interest income and interest payable is recognised in the income statement as they accrue and capitalised when interest charges are incurred in relation to the purchase of capitalised assets. To the extent that borrowing costs relate to the acquisition, construction or production of a qualifying asset, borrowing costs are capitalised as part of the cost of that asset.
Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the entity's right to receive payments is established.
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised.
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within the Group, the Company considers these to be insurance arrangements and accounts for them as such. In this respect the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.
Trade and other receivables are stated at their nominal amount less impairment losses.
Cash and cash equivalents comprise of cash in hand and deposits repayable on demand. Bank overdrafts that are repayable on demand form part of the Group's cash management and are included as a component of cash and cash equivalents for the purpose only of the statement of cash flows.
A discontinued operation is a component of the Group's business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale or distribution, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative statement of comprehensive income is restated as if the operation had been discontinued from the start of the comparative period.
The financial statements are prepared on the historical cost basis except for share based payment transactions and assets and liabilities acquired in a business combination which are measured at fair value.
The preparation of financial statements requires management to exercise judgement in applying the Group's accounting policies. It also requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an on-going basis, with revisions recognised in the period in which the estimates are revised and in any future periods affected. The areas involving a higher degree of judgement or complexity are set out below and in more detail in the related notes:
Assessment of intangible assets useful economic lives (note 1) The measurement of contingent consideration (note 15)
The areas involving the most sensitive estimates and assumptions that are significant to the financial statements are set out below and in more detail in the related notes:
Intangible assets (note 12) Impairment of assets (note 12)
The Group is organised into two operating segments Group Escrow and Assurance Testing each of which is separately reported. Whilst revenue and profitability are monitored by individual business units within these operational segments it is only at the operating level that resource allocation decisions are made. Performance is measured based on segment profit which comprises segment operating profit excluding amortisation of intangible assets, share based payment charges and exceptional items. Interest and tax are not allocated to business segments and there are no intra segment sales.
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Revenue by business segment | ||
| Escrow UK | 20,296 | 18,968 |
| Escrow Europe | 3,224 | 3,180 |
| Escrow USA | 4,424 | 2,707 |
| Total Group Escrow | 27,944 | 24,855 |
| Assurance Delivery | 51,760 | 39,111 |
| Monitoring Performance | 8,009 | 7,029 |
| Total Assurance Testing | 59,769 | 46,140 |
| Total revenue | 87,713 | 70,995 |
| Operating profit by business segment | ||
| Group Escrow | 16,320 | 14,488 |
| Assurance Testing | 10,259 | 6,507 |
| Segment operating profit | 26,579 | 20,995 |
| Head office costs | (3,177) | (2,588) |
| Operating profit before amortisation, charges for share based payments and exceptional items | 23,402 | 18,407 |
| Amortisation of intangible assets Group Escrow | (559) | (423) |
| Amortisation of intangible assets Assurance Testing | (3,167) | (2,852) |
| Share based payments | (946) | (516) |
| Operating profit before exceptional items | 18,730 | 14,616 |
| Exceptional items | (7,111) | (1,144) |
| Operating profit | 11,619 | 13,472 |
There are no customer contracts which account for more than 10% of segment revenue.
| Assets/(liabilities) by business segment | Assets | Liabilities | Assets | Liabilities |
|---|---|---|---|---|
| 2012 | 2012 | 2011 | 2011 | |
| £000 | £000 | £000 | £000 | |
| Group Escrow | 13,846 | (18,736) | 13,242 | (14,587) |
| Assurance Testing | 18,872 | (9,919) | 16,338 | (10,091) |
| Unallocated net assets | 90,589 | (34,294) | 91,174 | (39,991) |
| Total assets/(liabilities) | 123,307 | (62,949) | 120,754 | (64,669) |
Unallocated net assets consist of goodwill arising on consolidation, cash, tax payable and other centrally held assets and liabilities.
| Total costs incurred |
|||
|---|---|---|---|
| to acquire | |||
| Capital | segmental | ||
| Depreciation | expenditure | assets | |
| £000 | £000 | £000 | |
| 2012 | |||
| Group Escrow | 171 | 522 | - |
| Assurance Testing | 661 | 921 | 1,200 |
| Unallocated | 742 | 2,177 | - |
| Total | 1,574 | 3,620 | 1,200 |
| 2011 | |||
| Group Escrow | 132 | 103 | 4,825 |
| Assurance Testing | 560 | 546 | 9,758 |
| Unallocated | 498 | 1,317 | - |
| Total | 1,190 | 1,966 | 14,583 |
The table below provides an analysis of the Group's revenue by geographical market where the customer is based.
| Revenue by geographical origin and destination | 2012 | 2011 |
|---|---|---|
| £000 | £000 | |
| UK | 60,383 | 52,565 |
| Rest of Europe | 6,172 | 6,018 |
| Rest of the World | 21,158 | 12,412 |
| Total revenue | 87,713 | 70,995 |
The table below provides an analysis of the Group's assets/(liabilities) by geographical market where the assets/(liabilities) are based.
| Asset/ (liabilities) by geographical segment | Assets | Liabilities | Assets | Liabilities |
|---|---|---|---|---|
| 2012 | 2012 | 2011 | 2011 | |
| £000 | £000 | £000 | £000 | |
| UK | 87,989 | (40,470) | 86,508 | (40,306) |
| Rest of Europe | 4,893 | (2,358) | 5,615 | (2,722) |
| Rest of the World | 30,425 | (20,121) | 28,631 | (21,641) |
| Total assets/(liabilities) | 123,307 | (62,949) | 120,754 | (64,669) |
The Group identifies separately items as "exceptional". These are items which in the management's judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information.
| Exceptional items and acquisition related costs | 2012 | 2011 |
|---|---|---|
| £000 | £000 | |
| Impairment losses (see note 12) | (6,104) | - |
| Remedial costs | (904) | - |
| Acquisition related costs | (103) | (1,144) |
| Total | (7,111) | (1,144) |
Following the termination of the Group's IT system implementation project, the Group has written off the costs capitalised on the balance sheet in respect of software licences, non-usable hardware, 3rd party consultancy costs and capitalised staff costs of £6.1m.
As a result of the termination, remedial costs of £0.9m have been provided in respect of the Group's transfer of operations to its previous IT system, see note 20 for further information.
Acquisition related costs of £103,000 principally consist of professional fees incurred in relation to acquisitions and adjustments to deferred consideration balances (see note 6).
Exceptional costs in the year ended 31 May 2011 were £1,144,000 principally consisting of professional fees incurred in relation to the acquisitions of iSEC Partners Inc in October 2010 and Escrow Associates LLC in March 2011.
The tax effect in the income statement relating to the exceptional items recognised is:
| Exceptional items and acquisition related costs | 2012 | 2011 |
|---|---|---|
| £000 | £000 | |
| Credit in respect of impairment losses and remedial costs | (1,798) | - |
| Credit in respect of acquisition related costs | (101) | (458) |
| Total | (1,899) | (458) |
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Profit before taxation is stated after charging/(crediting): | ||
| Amounts receivable by auditors and their associates in respect of: | ||
| Audit of these financial statements | 30 | 36 |
| Audit of financial statements of subsidiaries pursuant to legislation | 36 | 46 |
| Total audit | 66 | 82 |
| Taxation compliance services | 43 | - |
| Total fees | 109 | 82 |
| Depreciation and other amounts written off tangible and intangible fixed assets: | ||
| Owned | 1,574 | 1,190 |
| Amortisation of intangible assets | 3,726 | 3,275 |
| Impairment losses (see note 3) | 6,104 | - |
| Exchange (gains)/losses | (46) | 17 |
| Operating lease rentals charged: | ||
| Hire of property, plant and equipment | 1,479 | 1,304 |
| Other operating leases | 802 | 665 |
| Loss/(profit) on disposal of fixed assets | 7 | (18) |
Directors' emoluments are disclosed in the Directors' remuneration report on pages 47 to 54.
The average monthly number of persons employed by the Group during the year, including Directors is analysed by category as follows:
| Number of employees | 2012 | 2011 |
|---|---|---|
| £000 | £000 | |
| Operational | 162 | 140 |
| Administration, sales and marketing | 450 | 389 |
| 612 | 529 |
The aggregate payroll costs of these persons were as follows:
| 2012 | 2011 |
|---|---|
| £000 | £000 |
| 34,403 Wages and salaries |
27,676 |
| 725 Share based payments (note 22) |
408 |
| 3,389 Social security costs |
2,900 |
| 649 Other pension costs (note 26) |
568 |
| 39,166 | 31,552 |
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Financial income | ||
| Interest on short term deposits | 3 | 8 |
| 3 | 8 | |
| Financial expenses | ||
| Interest payable on bank loans and overdrafts | (832) | (629) |
| Interest capitalised within the construction of intangible assets | 103 | 64 |
| Amortisation of deal fees on term loans | (113) | (79) |
| Contingent consideration finance expense (see below) | (208) | (68) |
| (1,050) | (712) |
Interest has been capitalised at the rate applying to the specific funds borrowed in respect of capital projects. Where specific funds are not borrowed to finance capital projects, a capitalisation rate, based on a weighted average of borrowings outstanding during the period, is applied to the expenditure on the asset. The rate applied during the current financial year is 2.2% (2011: 2.2%).
The contingent consideration finance expense of £208,000 (2011: £68,000) relates to the acquisition of SDLC Solutions Limited, NGS Meridian Limited, iSEC Partners Inc, Escrow Associates LLC and Axzona Limited.
Contingent consideration related to the acquisition of subsidiary undertakings has been discounted to present value. The unwinding of the discount on contingent consideration has been treated as a finance expense and is analysed in the table below:
| Contingent consideration finance expense | 2012 | 2011 |
|---|---|---|
| £000 | £000 | |
| SDLC | 41 | (9) |
| Meridian | - | (24) |
| iSEC Partners Inc | 135 | 97 |
| Escrow Associates LLC | 26 | 4 |
| Axzona | 6 | - |
| 208 | 68 |
The discount rate used was 3% (2011: 3%).
The total net present value of the contingent consideration as at 31 May is shown in the following table:
| Contingent consideration | 2012 | 2011 |
|---|---|---|
| £000 | £000 | |
| SDLC Solutions Limited | - | 3,625 |
| iSEC Partners Inc | 2,582 | 5,893 |
| Escrow Associates | 911 | 858 |
| Axzona Limited | 250 | - |
| 3,743 | 10,376 |
Current liabilities includes £3,493,000 (2011 £5,840,000) contingent consideration payable in relation to the acquisition of iSEC Partners Inc, Escrow Associates LLC and Axzona Limited (see note 17).
| Recognised in the income statement | 2012 | 2011 |
|---|---|---|
| £000 | £000 | |
| Current tax expense | ||
| Current year | 2,308 | 3,724 |
| Adjustment to tax expense in respect of prior periods | 86 | (188) |
| Foreign tax | 1,711 | 648 |
| Total current tax | 4,105 | 4,184 |
| Deferred tax (note 16) | (1,148) | (743) |
| Tax in income statement | 2,957 | 3,441 |
| Reconciliation of effective tax rate | 2012 | 2011 |
| £000 | £000 | |
| Profit before taxation | 10,572 | 12,768 |
| Current tax using the UK corporation tax rate of 25.67% (2011: 27%) | 2,714 | 3,546 |
| Effects of: | ||
| Items not (taxable)/deductible for tax purposes | (171) | 371 |
| Adjustment to tax charge in respect of prior periods | 118 | (432) |
| Differences between overseas tax rates | 232 | 12 |
| Movements in temporary differences not recognised | 51 | - |
| Effect of rate change | 13 | (56) |
| Total tax expense | 2,957 | 3,441 |
Deferred tax recognised directly in equity was a charge of £62,000 (2011: credit, £341,000).
The 2012 Budget on 21 March 2012 announced that the UK corporation tax rate will reduce to 22% by 2014. A reduction in the rate from 26% to 25% (effective from 1 April 2012) was substantively enacted on 5 July 2011, and a further reduction to 24% (effective from 1 April 2012) was substantially enacted on 26 March 2012. Further reductions to 23% (effective from 1 April 2013) and 22% (effective from 1 April 2014) were not substantially enacted at the balance sheet date.
These reductions will reduce the company's future current tax charge accordingly and further reduce the deferred tax asset/liability at 31 May 2012 (which has been calculated based on the rate of 24% substantively enacted at the balance sheet date).
It is anticipated that each further 1% rate reduction will further reduce the company's future current tax charge and reduce the company's deferred tax asset/liability by £6,000.
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Dividends paid and recognised in the year | 4,778 | 3,855 |
| Dividends proposed but not recognised in the year | 3,769 | 3,015 |
| Dividends per share paid and recognised in the year | 13.95p | 11.40p |
| Dividends per share proposed but not recognised in the year | 11.00p | 8.85p |
In October 2010 the Group withdrew from the General IT Consultancy market in order to focus on growing the Group Escrow and Assurance testing divisions, organically and by acquisition. Relevant information security services have been retained and operated from other appropriate parts of the Assurance testing division.
Expenses in the year ended 31 May 2011 included a charge of £950,000 in respect of the withdrawal from the advisory business.
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Results of discontinued operation | ||
| Revenue | - | 1,719 |
| Expenses | - | (3,244) |
| Results from operating activities | - | (1,525) |
| Income Tax | - | 427 |
| Loss for the period | - | (1,098) |
| Earnings per share from discontinued activities (pence) | ||
| Basic earnings per share | - | (3.2) |
| Diluted earnings per share | - | (3.2) |
The calculation of earnings per share is based on the following:
| 2012 | 2012 | 2011 | 2011 | |
|---|---|---|---|---|
| £000 | £000 | £000 | £000 | |
| Profit for the year from continuing operations | ||||
| used for earnings per share | 7,615 | 9,327 | ||
| Amortisation of intangible assets | 3,726 | 3,275 | ||
| Exceptional items (note 3) | 7,111 | 1,144 | ||
| Unwinding of discount (note 6) | 208 | 68 | ||
| Share based payments (note 22) | 946 | 516 | ||
| Tax arising on the above items | (3,207) | (1,149) | ||
| 8,784 | 3,854 | |||
| Adjusted profit from continuing operations used | ||||
| for adjusted earnings per share | 16,399 | 12,804 | 13,181 | |
| Number of shares |
Number of shares |
|||
| 000s | 000s | |||
| Basic weighted average number of shares in issue | 34,263 | 33,922 | ||
| Dilutive effect of share options | 831 | 1,048 |
Diluted weighted average shares in issue 35,094 34,970
The profit for the year dealt with in the accounts of the parent company was £535,000 (2011: £2,862,000).
| 12 Intangible assets - Group | |||
|---|---|---|---|
| -- | ------------------------------ | -- | -- |
| Customer | |||||
|---|---|---|---|---|---|
| Development | contracts and | ||||
| Software | costs | relationships | Goodwill | Total | |
| £000 | £000 | £000 | £000 | £000 | |
| Cost: | |||||
| At 1 June 2010 | 1,563 | - | 13,629 | 63,873 | 79,065 |
| Additions | 2,675 | - | 5,031 | 14,074 | 21,780 |
| At 31 May 2011 | 4,238 | - | 18,660 | 77,947 | 100,845 |
| Acquisitions through business combinations | - | - | 422 | 1,494 | 1,916 |
| Other acquisitions - internally developed | 3,306 | 354 | - | - | 3,660 |
| Reclassification to plant and equipment | (300) | - | - | - | (300) |
| Effects of movements in exchange rates | - | - | 296 | 888 | 1,184 |
| Contingent consideration adjustment | - | - | - | (1,000) | (1,000) |
| At 31 May 2012 | 7,244 | 354 | 19,378 | 79,329 | 106,305 |
| Amortisation: | |||||
| At 1 June 2010 | 9 | - | 3,802 | - | 3,811 |
| Charge for year | 145 | - | 3,130 | - | 3,275 |
| At 31 May 2011 | 154 | - | 6,932 | - | 7,086 |
| Charge for year | 259 | - | 3,467 | - | 3,726 |
| Impairment loss | 6,104 | - | - | - | 6,104 |
| Effects of movements in exchange rates | - | - | (110) | - | (110) |
| At 31 May 2012 | 6,517 | - | 10,289 | - | 16,806 |
| Net book value: | |||||
| At 31 May 2012 | 727 | 354 | 9,089 | 79,329 | 89,499 |
Following the board's decision to terminate the implementation of a new IT system and revert back to the previous Group-wide IT system, the Group has written off the costs capitalised on the balance sheet in respect of software licences, non-usable hardware, 3rd party consultancy costs and capitalised staff costs of £6.1m.
At 31 May 2011 4,084 - 11,728 77,947 93,759
As detailed in note 6, additions during the year ended 31 May 2012 include £103,000 of capitalised borrowing costs (2011: £64,000).
The Group has made one acquisition in the year, details of which is included in note 15.
Other adjustments are in respect of a revision to the deferred consideration balance held in respect of SDLC which was acquired in March 2010. During the year, the Directors have reassessed the amount that is expected to be paid in final settlement of the deferred consideration and as a result of this have reduced the value of goodwill by £1m as it is considered unlikely that the final amount will be payable.
The Company has no intangible assets.
Goodwill considered significant in comparison to the Group's total carrying amount of such assets have been allocated to cash generating units for the purposes of impairment testing as follows:
| Goodwill | 2012 | 2011 |
|---|---|---|
| £000 | £000 | |
| Cash generating units | ||
| Escrow | 22,871 | 22,871 |
| Escrow Europe | 6,653 | 6,487 |
| NCC Group Inc. | 6,831 | 6,315 |
| Escrow | 36,355 | 35,673 |
| Assurance Testing | 4,530 | 4,530 |
| NCC Group Performance Testing Limited | 7,890 | 6,396 |
| NCC Group Security Services Limited | 11,074 | 11,074 |
| SDLC Solutions Limited | 7,953 | 8,953 |
| iSEC Partners Inc. | 11,527 | 11,321 |
| Assurance | 42,974 | 42,274 |
| Total | 79,329 | 77,947 |
When assessing impairment, the recoverable amount of each CGU is based on value in use calculations. These calculations require the use of estimates, specifically: pre-tax cash flow projections; long-term growth rates; and a pre-tax market discount rate.
Cash flow projections are based on the Group's current two-year plan. Beyond the two-year plan these projections are extrapolated using an estimated long-term growth rate of 1%-2.5% (2011: 1%-2.5%) depending on the CGU. The growth rates used have been determined as the lower of the nominal GDP rates for the country in which the CGU is based and the long term compound annual growth rate in EBITDA estimated by management.
The discount rates used have been based on management's calculation of the weighted average cost of capital using the capital asset pricing model to calculate the cost of equity. A range of alpha factors were used to reflect the risk of the cash generating units.
The discount rate has been revised for each CGU to reflect the latest market assumptions for the risk-free rate, the Equity Risk Premium and the net cost of debt. Pre-tax market discount rates of 10.1% - 14.3% have been used in discounting the projected cash flows.
The Directors do not believe that a reasonably possible change of assumptions would cause the recoverable amounts to fall below book value for any of the cash generating units.
| Computer | Plant and | Fixtures and | Motor | ||
|---|---|---|---|---|---|
| equipment | equipment | fittings | vehicles | Total | |
| £000 | £000 | £000 | £000 | £000 | |
| Cost: | |||||
| At 1 June 2010 | 6,231 | 410 | 1,705 | 267 | 8,613 |
| Additions | 685 | - | 1,117 | 164 | 1,966 |
| Acquisition of Group Companies | 61 | - | 1 | - | 62 |
| Disposals | - | - | - | (201) | (201) |
| Movement in foreign exchange rates | - | - | - | - | - |
| At 31 May 2011 | 6,977 | 410 | 2,823 | 230 | 10,440 |
| Additions | 1,720 | - | 1,837 | 63 | 3,620 |
| Acquisition of Group Companies | 5 | - | - | - | 5 |
| Transfer from intangible assets | 300 | - | - | - | 300 |
| Disposals | (21) | - | (21) | (100) | (142) |
| Movement in foreign exchange rates | 5 | - | 11 | - | 16 |
| At 31 May 2012 | 8,986 | 410 | 4,650 | 193 | 14,239 |
| Depreciation: | |||||
| At 1 June 2010 | 5,044 | 395 | 1,059 | 65 | 6,563 |
| Charge for year | 896 | 7 | 234 | 53 | 1,190 |
| Disposals | - | - | - | (68) | (68) |
| At 31 May 2011 | 5,940 | 402 | 1,293 | 50 | 7,685 |
| Charge for year | 1,054 | 8 | 460 | 52 | 1,574 |
| Disposals | (15) | - | (24) | (40) | (79) |
| Movement in foreign exchange rates | (4) | - | (5) | - | (9) |
| At 31 May 2012 | 6,975 | 410 | 1,724 | 62 | 9,171 |
| Net book value: | |||||
| At 31 May 2012 | 2,011 | - | 2,926 | 131 | 5,068 |
At 31 May 2011 1,037 8 1,530 180 2,755
The company has no plant and equipment.
| Group | Group | Company | Company | |
|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | |
| £000 | £000 | £000 | £000 | |
| Trade receivables | 14,280 | 12,753 | - | - |
| Prepayments and accrued income | 7,067 | 5,636 | 80 | - |
| 21,347 | 18,389 | 80 | - |
On 4 August 2011 the Group acquired 100% of the share capital of Axzona Limited for a maximum consideration of £1.7m, of which up to a maximum of £0.5m has been withheld subject to the achievement of performance criteria specified in the purchase agreement. The performance conditions are required to be satisfied by 31 July 2012 and 31 July 2013. The contingent consideration is expected to be paid in August 2012 and August 2013.
The acquisition had the following effect on the Group's assets and liabilities:
| Acquisition | |
|---|---|
| amounts | |
| £000 | |
| Acquiree's identifiable net assets at the acquisition date: | |
| Plant and equipment | 5 |
| Trade and other receivables | 59 |
| Cash | 80 |
| Creditors & accruals | (242) |
| Deferred tax liability | (118) |
| Intangible assets purchased | 422 |
| Net identifiable assets | 206 |
| Goodwill on acquisition | 1,494 |
| Expected consideration to be paid | 1,700 |
| Less purchase consideration withheld | (500) |
| Net cash outflow | 1,200 |
| Cash acquired | (80) |
| Net cash outflow excluding cash acquired | 1,120 |
Goodwill has arisen on the acquisition because the purchase price exceeds the fair value of the separately identifiable net assets, liabilities and contingent liabilities acquired. Goodwill represents synergies, business processes and the assembled value of the work force including industry specific knowledge and technical skills. The amount recognised as contingent consideration reflects the amount which is considered probable to be paid and is based on profit forecasts. There are inherent uncertainties in deriving forecasts and the level of contingent consideration will be reassessed at each reporting date to reflect revisions to forecasts or differences between forecast and actual performance.
During the period from acquisition, the Company contributed £234,000 to Group income and (£12,000) to Group cash flows. It is not practical to disclose what the contribution to Group revenue and profits would have been had the acquisition of Axzona been completed on the first day of the current period, as financial information was not prepared on an IFRS basis prior to acquisition.
During the year, the Directors have reassessed the carrying value of the deferred consideration held in respect of the acquisition and consider it unlikely that the first instalment of £250,000 will be paid in August 2012 and have therefore recognised this in the income statement (see note 3).
During the year, £3,753,000 was paid in relation to the part settlement of the deferred consideration due on the acquisition of iSEC.
During the year, £2,625,000 was paid in relation to the part settlement of deferred consideration on the acquisition of SDLC Solutions Limited (see note 6).
Recognised deferred tax assets and liabilities are attributable to the following:
| Assets | Liabilities | Net | ||||
|---|---|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Plant and equipment | 183 | 335 | - | - | 183 | 335 |
| Short term temporary differences | 169 | 35 | - | - | 169 | 35 |
| Intangible assets | 796 | 231 | (946) | (1,414) | (150) | (1,183) |
| Share based payments | 765 | 549 | - | - | 765 | 549 |
| Tax losses | 30 | - | - | - | 30 | - |
| Tax deductible goodwill | - | - | (397) | (104) | (397) | (104) |
| Deferred tax asset/(liability) | 1,943 | 1,150 | (1,343) | (1,518) | 600 | (368) |
Movement in deferred tax during the year:
| 1 June | Recognised | Recognised | 31 May | ||
|---|---|---|---|---|---|
| 2011 | in income | in equity | Acquisitions | 2012 | |
| £000 | £000 | £000 | £000 | £000 | |
| Plant and equipment | 335 | (152) | - | - | 183 |
| Short term temporary differences | 35 | 134 | - | - | 169 |
| Intangible assets | (1,183) | 1,151 | - | (118) | (150) |
| Share based payments | 549 | 278 | (62) | - | 765 |
| Tax losses | - | 30 | - | - | 30 |
| Tax deductible goodwill | (104) | (293) | - | - | (397) |
| (368) | 1,148 | (62) | (118) | 600 |
Movement in deferred tax during the prior year:
| 1 June 2010 |
Recognised in income |
Recognised in equity |
31 May 2011 |
|
|---|---|---|---|---|
| £000 | £000 | £000 | £000 | |
| Plant and equipment | 275 | 60 | - | 335 |
| Short term temporary differences | 20 | 15 | - | 35 |
| Intangible assets | (2,314) | 1,131 | - | (1,183) |
| Share based payments | 567 | (359) | 341 | 549 |
| Tax deductible goodwill | - | (104) | - | (104) |
| (1,452) | 743 | 341 | (368) |
The Company has deferred tax assets related to share based payments of £252,000 (2011: £168,000).
The Group has not recognised a deferred tax asset of £101,000 (2011: £Nil) in respect of non UK tax losses due to the uncertainty over recoverability. These tax losses do not expire.
The Group has an unrecognised deferred tax liability of £800,000 (2011: £Nil) which would only arise in the event of the sale of the shares or assets in NCC Group Inc. Due to the remoteness of this event no provision has been made.
As at 31 May 2012, the temporary differences arising from un-remitted earnings of overseas subsidiaries was £2,486,000 (2011: £1,791,000) No material tax charges are expected to arise if they were to be distributed.
| Group | Group | Company | Company | |
|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | |
| £000 | £000 | £000 | £000 | |
| Trade payables | 2,630 | 2,305 | - | - |
| Amounts owed to Group undertakings | - | - | 23 | 6,188 |
| Contingent consideration on acquisitions | 3,493 | 5,840 | - | - |
| Non trade payables | 2,960 | 2,949 | - | 1 |
| Accruals | 6,003 | 5,072 | - | 198 |
| 15,086 | 16,166 | 23 | 6,387 |
| Group | Group | Company | Company | |
|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | |
| £000 | £000 | £000 | £000 | |
| Deferred revenue | 15,926 | 15,023 | - | - |
| 15,926 | 15,023 | - | - |
Deferred revenue of £11,662,000 (2011: £11,358,000) mainly consists of Escrow agreement revenue that has been deferred to be released to the income statement over the contract term in accordance with the Group's accounting policy.
Deferred revenue of £4,264,000 (2011: £3,665,000) consists of website monitoring and load testing agreement revenue that has been deferred to be released to the income statement over the contract term in accordance with the Group's accounting policy.
| Group | Group | Company | Company | |
|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | |
| £000 | £000 | £000 | £000 | |
| Secured bank loan | 28,257 | 25,367 | - | - |
| Issue costs | (220) | (265) | - | - |
| Amortisation of issue costs | 112 | 80 | - | - |
| Interest bearing loans | 28,149 | 25,182 | - | - |
| Deferred tax (note 16) | 1,343 | 1,518 | - | - |
| Contingent consideration on acquisitions (note 6) | 250 | 4,536 | - | - |
| Other financial liabilities | 579 | 206 | - | - |
| Total non current liabilities | 30,321 | 31,442 | - | - |
Other financial liabilities of £579,000 relates to the balance of a rent free period (2011: £206,000) which is released to the income statement over the term of the lease.
| Remedial | |
|---|---|
| costs | |
| £000 | |
| At 1 June 2011 | |
| Current | - |
| Non-current | - |
| Arising during the year | 904 |
| At 31 May 2012 | 904 |
| Analysed as: | |
| Current | 904 |
| Non-current | - |
Remedial costs relate to the costs expected to be incurred as a result of the termination of the Group's planned IT system implementation and transfer of operations to its previous IT system. This transfer is expected to be completed by October 2012.
The Group has exposure to the followings risks from its use of financial instruments:
The Board has overall responsibility for establishing appropriate management of exposure to risk. The Audit Committee oversees how management identify and address risks to the Group.
The Board's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.
The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total interest bearing loans as shown in the consolidated balance sheet, less cash and cash equivalents. Total capital is calculated as equity, as shown in the consolidated balance sheet, plus net debt.
As at 31 May 2012 the Group's gearing ratio was 30% (2011: 27%).
All instruments utilised by the Company and Group are for financing purposes. The day-to-day financial management and treasury are controlled centrally for all operations.
As at 31 May 2012 the Group and Company had no other financial instruments other than those disclosed below. The carrying value of all financial instruments in these financial statements represents their estimated fair value.
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group's receivables from customers. The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer.
The carrying value of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
| Group | Group | Company | Company | |
|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | |
| £000 | £000 | £000 | £000 | |
| Trade receivables | 14,280 | 12,753 | - | - |
| Cash and cash equivalents | 5,450 | 4,701 | 196 | 1,096 |
| 19,730 | 17,454 | 196 | 1,096 |
The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:
| Debtors by geographical segment | Group | Group | Company | Company |
|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | |
| £000 | £000 | £000 | £000 | |
| UK | 11,242 | 10,999 | - | - |
| Rest of Europe | 387 | 435 | - | - |
| Rest of the World | 2,651 | 1,319 | - | - |
| 14,280 | 12,753 | - | - |
The maximum exposure to credit risk at the reporting date by business segment was:
| Debtors by business segment | Group | Group | Company | Company |
|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | |
| £000 | £000 | £000 | £000 | |
| Group Escrow | 5,693 | 5,108 | - | - |
| Assurance Testing | 8,587 | 7,645 | - | - |
| 14,280 | 12,753 | - | - |
The trade receivables of the Group typically comprise of amounts due from a large number of small customers. The Group's customer base, whilst concentrated largely in the UK, represents a spread of industry sectors. The largest amount due from a single customer at the reporting date represented 3% of total Group receivables (2011: 5%). All of the Group's cash is held with financial institutions of high credit rating.
The ageing of trade receivables at the reporting date was:
| Group | 2012 | 2011 | |||
|---|---|---|---|---|---|
| Gross | Impairment | Gross | Impairment | ||
| £000 | £000 | £000 | £000 | ||
| Not past due | 9,485 | - | 8,013 | - | |
| Past due 0-30 days | 2,963 | - | 3,020 | - | |
| Past due 31-90 days | 1,282 | - | 1,370 | - | |
| Past due more than 90 days | 878 | (328) | 995 | (645) | |
| 14,608 | (328) | 13,398 | (645) |
The Company had no trade receivables (2011: £Nil).
The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of specific trade receivables. The movement in the allowance for impairment was:
| Group | Group | |
|---|---|---|
| 2012 | 2011 | |
| £000 | £000 | |
| Balance at 1 June | 645 | 324 |
| (Credit)/Charge for the year | (317) | 321 |
| Balance at 31 May | 328 | 645 |
The allowance accounts in respect of trade receivables are used to record impairment losses unless the Group is satisfied that no recovery of the amounts owing is possible; at that point the amount is considered irrecoverable and is written off against the financial asset directly. The Group reviews all debt more than 90 days past due and provides for impairment losses, net of any revenue which has been deferred, based on trading experience with that customer. The allowance is all for debts older than 90 days (2011: older than 90 days). The ageing of Group debt and associated impairment loss is reported to the Board on a monthly basis.
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group manages liquidity risks by regular reviews of forecast cash flows in line with contractual maturities of financial liabilities and the Revolving Credit Facility available. Forecast cash flows are reported to the Board on a monthly basis.
The following are the contractual maturities of financial liabilities, including interest payments of the Group:
| Carrying | Contractual | 6 months | 6-12 | 1-2 | 2-3 | |
|---|---|---|---|---|---|---|
| amount | Cash flows | or less | Months | Years | Years | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| At 31 May 2012 | ||||||
| Secured bank borrowings | (28,257) | (29,237) | (420) | (420) | (28,397) | - |
| Trade and other payables | (15,336) | (15,336) | (11,593) | (3,493) | (250) | - |
| At 31 May 2011 | ||||||
| Secured bank borrowings | (25,367) | (27,125) | (372) | (372) | (744) | (25,367) |
| Trade and other payables | (15,081) | (15,081) | (8,597) | - | (3,406) | (3,078) |
The financial liabilities of the Company all have contractual maturities within 6 months (2011: within 6 months).
The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of the Group entities. The Group's management review the size and probable timing of settlement of all financial assets and liabilities denominated in foreign currencies. The Group's exposure to currency risk is as follows:
| 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|
| Sterling | Euros | USD | AUD | Sterling | Euros | USD | AUD | |
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | |
| Loans and receivables | 11,242 | 387 | 2,516 | 135 | 10,999 | 435 | 1,280 | 39 |
| Cash and cash equivalents | 2,710 | 1,421 | 1,269 | 50 | 412 | 2,180 | 2,058 | 51 |
| Bank borrowings | 15,000 | - | 13,149 | - | 14,500 | - | 10,682 | - |
| Trade and other payables | 8,753 | 959 | 5,241 | 383 | 12,637 | 307 | 7,723 | 35 |
A change of 100 basis points in exchange rates would not have a significant impact on these financial statements.
The Group and Company finances its operations through a mixture of retained profits and bank borrowings. The Group borrows and invests surplus cash at floating rates of interest based upon bank base rate.
The financial assets of the Group at the end of the financial year were as follows:
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Sterling denominated financial assets | 2,710 | 412 |
| Euro denominated financial assets | 1,421 | 2,180 |
| US dollar denominated financial assets | 1,269 | 2,058 |
| AU dollar denominated financial assets | 50 | 51 |
| Current trade and other receivables | 21,347 | 18,389 |
| 26,797 | 23,090 |
The financial assets of the Company at the end of the financial year were as follows:
| 2012 | 2011 |
|---|---|
| £000 | £000 |
| 196 | 1,096 |
| 196 | 1,096 |
A change of 100 basis points in interest rates would not have a significant impact on these financial statements.
The financial liabilities of the Group and their maturity profile are as follows:
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Maturity | ||
| Less than 1 year | - | - |
| 1 to 2 years | - | - |
| Sterling denominated 2 to 3 years | 15,000 | 14,500 |
| US dollar denominated 2 to 3 years | 13,149 | 10,682 |
| 3 to 4 years | - | - |
| Current trade and other payables | 15,086 | 16,166 |
| 43,235 | 41,348 | |
The financial liabilities of the Company and their maturity profile are as follows:
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Maturity | ||
| Less than 1 year | - | - |
| 1 to 2 years | - | - |
| 2 to 3 years | - | - |
| 3 to 4 years | - | - |
| Current trade and other payables | 23 | 6,387 |
| Sterling denominated financial liabilities | 23 | 6,387 |
As at 31 May 2012 the Group had a multi-currency revolving credit facility of £35 million (2011: £35 million). The interest payable on drawn down funds is 2% above Libor (2011: 2%). The revolving credit facility is available until July 2013.
The Company has a number of share option schemes under which options to subscribe for the Company's shares have been granted to Directors and staff, details of which are illustrated in the tables below. Expected term of options represents the period over which the fair value calculations are based.
Under the Approved EMI Scheme, options granted will be subject to performance criteria. Options will vest if the average EPS growth for the 3 years following their grant is greater than 3% above RPI per annum. The options are to be settled in equity.
| Date of grant | Expected term of options |
Exercisable between |
Exercise Price |
2012 Number Outstanding |
|---|---|---|---|---|
| July 2004 | 6 years | July 2007 - July 2014 | £1.70 | 2,498 |
| August 2007 | 6 years | July 2010 - July 2017 | £3.85 | 24,755 |
| February 2008 | 6 years | Feb 2011 - Feb 2018 | £3.89 | 27,151 |
Under the CSOP Scheme, options granted will be subject to performance criteria. Options will vest if the average EPS growth for the 3 years following their grant is greater than 10% per annum. The options are to be settled in equity.
| Date of grant | Expected term of options |
Exercisable between |
Exercise Price |
2012 Number Outstanding |
|---|---|---|---|---|
| July 2009 | 6 years | July 2012 - July 2019 | £3.30 | 36,360 |
| July 2010 | 6 years | July 2013 - July 2020 | £4.27 | 4,682 |
The vesting condition for the award of the LTIP schemes relates to growth in the Group's EPS over the performance period. If growth is equal to 25% or more per annum then 100% of the award will vest. If, however, growth is less than 10% per annum, none of the award will vest. Between these two points, vesting is determined on a straight line basis. The options are to be settled in equity.
| Date of grant | Expected term of options |
Exercisable between |
Exercise Price |
2012 Number Outstanding |
|---|---|---|---|---|
| Jul 2009 | 3 years | June 2012 - June 2013 | Nil* | 236,113 |
| Jul 2010 | 3 years | June 2013 - June 2014 | Nil* | 195,577 |
| Jul 2011 | 3 years | June 2014 - June 2015 | Nil* | 164,739 |
*The option exercise price is nil however £1 is payable on each occasion of exercise.
The Company operates a Sharesave scheme, which is available to all UK based employees and full time Executive Directors of the Company and its subsidiaries who have worked for a qualifying period. All options are to be settled by equity.
Under the scheme the following options have been granted and are outstanding at year end.
| Date of grant | Expected term | Exercisable | Exercise | 2012 Number |
|---|---|---|---|---|
| of options | between | Price | Outstanding | |
| August 2009 | 3.25 years | September 2012 - February 2013 | £2.69 | 52,271 |
| August 2010 | 3.25 years | September 2013 - February 2014 | £3.38 | 124,018 |
| August 2011 | 3.25 years | September 2014 - February 2015 | £5.11 | 85,803 |
The following tables illustrate the number of share options for the schemes.
| Scheme | Number of instruments as at 1 June 2010 |
Instruments granted during the year |
Options exercised in the year |
Forfeitures in the year |
Number of instruments as at 31 May 2011 |
|---|---|---|---|---|---|
| Approved EMI scheme | 153,326 | - | (91,721) | - | 61,605 |
| Approved EMI scheme | 3,898 | - | (3,898) | - | - |
| Approved EMI scheme | 227,816 | - | (133,363) | (25,139) | 69,314 |
| Approved EMI scheme | 43,521 | - | (545) | (14,455) | 28,521 |
| CSOP scheme | 45,450 | - | - | (9,090) | 36,360 |
| CSOP scheme | - | 4,682 | - | - | 4,682 |
| Sharesave scheme | 131,110 | - | (130,162) | (948) | - |
| Sharesave scheme | 78,198 | - | (5,535) | (17,072) | 55,591 |
| Sharesave scheme | 81,814 | - | (1,992) | (23,161) | 56,661 |
| Sharesave scheme | - | 189,071 | (709) | (48,006) | 140,356 |
| LTIP | 274,996 | - | (199,091) | (75,905) | - |
| LTIP | 275,983 | - | - | (68,118) | 207,865 |
| LTIP | 316,537 | - | - | (80,424) | 236,113 |
| LTIP | - | 321,600 | - | (126,023) | 195,577 |
The weighted average share price at the time the share options were exercised in the year was £4.30.
The weighted average share price at the time the share options were forfeited in the year was £4.30.
| Scheme | Number of | Instruments | Options | Number of | |
|---|---|---|---|---|---|
| instruments as | granted during | exercised | Forfeitures | instruments as | |
| at 1 June 2011 | the year | in the year | in the year | at 31 May 2012 | |
| Approved EMI scheme | 61,605 | - | (59,107) | - | 2,498 |
| Approved EMI scheme | 69,314 | - | (44,559) | - | 24,755 |
| Approved EMI scheme | 28,521 | - | (1,370) | - | 27,151 |
| CSOP scheme | 36,360 | - | - | - | 36,360 |
| CSOP scheme | 4,682 | - | - | - | 4,682 |
| Sharesave scheme | 55,591 | - | (55,591) | - | - |
| Sharesave scheme | 56,661 | - | (1,045) | (3,345) | 52,271 |
| Sharesave scheme | 140,356 | - | (739) | (15,599) | 124,018 |
| Sharesave scheme | - | 99,397 | - | (13,594) | 85,803 |
| LTIP | 207,865 | - | (112,661) | (95,204) | - |
| LTIP | 236,113 | - | - | - | 236,113 |
| LTIP | 195,577 | - | - | - | 195,577 |
| LTIP | - | 164,739 | - | - | 164,739 |
The weighted average share price at the time the share options were exercised in the year was £7.20. The weighted average share price at the time the share options were forfeited in the year was £7.86.
The fair value of services received in return for share options is calculated with reference to the fair value of the award on the date of grant. The fair value is spread over the period during which the employee becomes unconditionally entitled to the award, adjusted to reflect actual and expected levels of vesting. Black-Scholes and Binomial models have been used to calculate the fair values of options on their grant date for all options issued after 7 November 2002 which had not vested by 1 January 2005.
| Fair value at | ||||||
|---|---|---|---|---|---|---|
| Grant | measurement | Exercise | Expected | Option | Risk-free | |
| Date | date | price | volatility | expected term | interest rate | |
| EMI | Jul-04 | £0.66 | £1.70 | 44% | 6 Years | 5.09% |
| EMI | Jul-05 | £1.07 | £2.57 | 40% | 6 Years | 5.09% |
| EMI | Jul-06 | £0.78 | £2.70 | 25% | 6 Years | 4.75% |
| EMI | Aug-07 | £1.19 | £3.85 | 25% | 6 Years | 6.00% |
| EMI | Feb-08 | £1.27 | £3.89 | 25% | 6 Years | 6.00% |
| CSOP | Aug-10 | £0.82 | £3.30 | 25% | 6 Years | 4.00% |
| CSOP | Aug-10 | £1.17 | £4.27 | 30% | 6 Years | 4.00% |
| SAYE | Sept-07 | £1.13 | £3.24 | 25% | 3.25 Years | 6.00% |
| SAYE | Sept-08 | £1.20 | £2.86 | 25% | 3.25 Years | 6.00% |
| SAYE | Aug-09 | £1.10 | £2.69 | 25% | 3.25 Years | 4.00% |
| SAYE | Aug-10 | £1.29 | £3.38 | 30% | 3.25 Years | 4.00% |
| SAYE | Aug-11 | £2.24 | £5.11 | 30% | 3.25 Years | 3.00% |
| LTIP | Oct-07 | £3.58 | £nil* | 25% | 3 Years | 6.00% |
| LTIP | Oct-08 | £3.41 | £nil* | 25% | 3 Years | 6.00% |
| LTIP | Jul-09 | £3.08 | £nil* | 25% | 3 Years | 4.00% |
| LTIP | Jul-10 | £3.92 | £nil* | 30% | 3 Years | 4.00% |
| LTIP | Jul -11 | £6.02 | £nil* | 30% | 3 Years | 3.00% |
The assumptions used in the model are illustrated in the table below:
* The option exercise price is nil however £1 is payable on each occasion of exercise.
The expected volatility is based on the historical volatility, adjusted for any expected changes to future volatility due to publicly available information. For the options granted in the year ending 31 May 2012, dividend yield assumed at the time of option grant is 2.7% (2011: 2.5%).
A charge of £946,000 (2011: £516,000) has been made to administrative expenses in the Group income statement in respect of share based payment transactions, including £221,000 of provision for National Insurance contributions (2011: £108,000). A charge of £213,000 (2011: £197,000) has been made to cost of sales in the Company income statement in respect of share based payment transactions, including £68,000 of provision for National Insurance contributions (2011: £71,000)
| Number of | |||
|---|---|---|---|
| shares | 2012 | 2011 | |
| £000 | £000 | ||
| Authorised | |||
| Ordinary shares of 1p each | 50,000,000 | 500 | 500 |
| 500 | 500 | ||
| Allotted, called up and fully paid | |||
| Ordinary shares of 1p each at the beginning of the year | 34,065,252 | 341 | 337 |
| Ordinary shares of 1p each issued in the year | 275,072 | 2 | 4 |
| Ordinary shares of 1p each at the end of the year | 34,340,324 | 343 | 341 |
During the year 275,000 shares were issued in relation to the exercise of employee share options for a total consideration of £416,000 settled in cash.
| At beginning of year |
Cash flow |
Non cash items |
At end of year |
|
|---|---|---|---|---|
| £000 | £000 | £000 | £000 | |
| Cash and cash equivalents per balance sheet | 4,701 | 1,670 | (921) | 5,450 |
| Cash and cash equivalents per cash flow statement | 4,701 | 1,670 | (921) | 5,450 |
Non-cash items principally relate to the effects of foreign currency.
a) Capital commitments at the end of the financial year, for which no provision has been made, are as follows:
| 2012 | 2011 | |
|---|---|---|
| £000 | £000 | |
| Contracted | - | 197 |
b) Non-cancellable operating lease rentals are payable as follows:
| 2012 | 2011 | |||
|---|---|---|---|---|
| Land and | Land and | |||
| Buildings | Other | Buildings | Other | |
| £000 | £000 | £000 | £000 | |
| Within 1 year | 178 | 83 | 201 | 125 |
| In second to fifth year inclusive | 1,379 | 203 | 1,322 | 215 |
| 1,557 | 286 | 1,523 | 340 |
There are no contingent liabilities not provided for at the end of the financial year.
The Group operates a defined contribution pension scheme that is open to all eligible employees. The pension cost charge for the year represents contributions payable by the Group to the fund and amounted to £649,000 (2011: £568,000). The outstanding contributions at the year end were £59,442 (2011: £77,572).
For the Company, the pension cost charge for the year represents contributions payable by the Company to the fund and amounted to £57,000 (2011: £59,000).
The Group's key management personnel comprises the Directors of the Group. The Group and Company's transactions with those Directors are disclosed in the Directors' Remuneration Report.
NCC Group's Non Executive Chairman Paul Mitchell is a director of Rickett Mitchell and Partners Limited and the Group conducted business to the value of £90,500 (2011: £399,500) with Rickett Mitchell and Partners Limited. Included within the charge is £25,500 relating to advice service received in connection with the acquisition made during the year ended 31 May 2012. Rickett Mitchell and Partners Limited provide an outsourced acquisition service which facilitates the delivery of acquisition targets which have been identified and approved by the Board.
The remaining £70,000 relates to the services of the Non Executive Chairman. Rickett Mitchell and Partners Limited also held 7,000 1.0p ordinary shares (2011: 7,000).
| Company | Shares in group undertakings |
|---|---|
| £000 | |
| At 1 June 2010 | 31,319 |
| Increase in subsidiary investment for share based charges | 210 |
| At 31 May 2011 | 31,529 |
| At 1 June 2011 | 31,529 |
| Increase in subsidiary investment for share based charges | 512 |
| At 31 May 2012 | 32,041 |
The cost represents the cost of acquiring the whole of the issued share capital of NCC Group (Solutions) Limited and its subsidiary undertakings. Fixed asset investments are recognised at cost. The principal undertakings in which the Company's interest at the year end is 100% are as follows:
| Subsidiary undertakings | Country of incorporation | |
|---|---|---|
| NCC Group (Solutions) Limited | England and Wales | Escrow & Assurance services |
| NCC Services Limited | England and Wales | Escrow & Assurance services |
| NCC Group Escrow Limited | England and Wales | Dormant |
| NCC Group, Inc. | USA | Escrow |
| NCC Group Employee's Trustees Limited | England and Wales | Employee Benefit Trust |
| NCC Group GmbH | Germany | Escrow |
| Escrow 4 Software Limited | England and Wales | Dormant |
| NCC Group Performance Testing Limited | England and Wales | Web site monitoring & load testing |
| NCC Group Security Services Limited | England and Wales | Ethical Security Testing |
| NCC Group Escrow Europe BV | Netherlands | Escrow |
| NCC Group Escrow Europe (Switzerland) AG | Switzerland | Escrow |
| Artemis Internet Limited | England and Wales | Dormant |
| Artemis Internet, Inc. | USA | Internet Security |
| NCC Group Pty Limited | Australia | Ethical Security Testing |
| NCC Group Audit Limited | England and Wales | Credit Card compliance auditor |
| NCC Group SDLC Limited | England and Wales | Software Testing |
| iSEC Partners Inc | USA | Ethical Security Testing |
| NCC Group Escrow Associates LLC | USA | Escrow |
| Axzona Limited | England and Wales | Software Testing |
The principal undertakings in which the Company's interest at the year end is less than 100% are as follows:
| Country of | Principal | ||
|---|---|---|---|
| Interest | incorporation | Activity | |
| NCC Group Escrow Europe (Israel) Limited | 25% | Israel | Escrow |
| Deposit AB | 25% | Sweden | Escrow |
| NCC Group Escrow Europe NV | 25% | Belgium | Escrow |
Paul Mitchell Non Executive Chairman Rob Cotton Chief Executive Atul Patel Group Finance Director Debbie Hewitt MBE Senior Independent Non Executive Director David McKeith Non Executive Director
Felicity Brandwood
Manchester Technology Centre Oxford Road Manchester M1 7EF
4627044
Cannacord Genuity Limited 88 Wood Street London EC2V 7QR
Peel Hunt LLP 111 Old Broad Street London EC2N 1PH
Rickitt Mitchell & Partners Limited Clarence House Clarence Street Manchester M2 4DW
Ernst & Young LLP 100 Barbirolli Square Manchester M2 3EY
Eversheds LLP 70 Great Bridgewater Street Manchester M1 5ES
The Royal Bank of Scotland plc 6th Floor 1 Spinningfields Square Manchester M3 3AP
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