Craven House Capital Regulatory News (CRV)

30 Jun 2008 07:00



Medsea Estates Group PLC

PRELIMINARY RESULTS for the year ended 31st December 2007 

Chairman's Statement

Turnover rose 30% in the year to £10.5 million, but I regret to report that the Group recorded a loss before tax of £1.3 million. Clearly this was a very disappointing performance, but reflects the position we announced in our trading update in February. The Group's revenue in the second half of the year was only £4.6 million on a re-stated basis, a reflection not only of slowing activity, but also of the difficulties we have experienced as a result of our dependence on third parties to complete the sales processes in a timely manner.

The Board has taken the decision to change the Group's revenue recognition policy, so we are no longer taking into account income that is in the pipeline. Additionally, we have decided that the degree of influence Medsea now exercises over its investments is no longer sufficient in all cases to justify their inclusion as associates and accordingly certain investments have been reclassified as available for sale investments and profits will now be recognised when they crystallise rather than on the equity basis.

Basically, 2007 was characterised by two distinct halves: the first half of the year witnessed exceptionally strong sales growth for our Italian business as the attractiveness of properties in Calabria led to record sales of 608 units in the first half year. The unexpected complexity of operating in this market however led to cancellations and, most importantly commission collection delays in the second half of the year.

In general, our experience to date in the burgeoning Italian market has brought the following issues to light:

•  The process by which reservations are converted to firm, billable and collectable commissions has been generally hampered by regulatory and third party inefficiencies

•  Delays in Medsea receiving such commissions have resulted in a cash flow squeeze for both Medsea and its agents, with the latter resulting in a throttling of the new business pipeline

•  Costs related to the expansion in the Italian market impacted profitability in the second half of the year

The Group has focused heavily on easing the commission backlog and is hopeful that the use of its call centre and other initiatives will enable commissions to flow more readily in the coming months.

Quite clearly, recent events in the credit markets have placed pressure on the markets in which Medsea operates. Cancellations are often linked to financial pressures experienced by buyers. The Spanish market has been experiencing a downturn already for a number of years and market forces have created a buyer's market. Medsea is not immune to such developments and is continually right sizing the business to reflect these conditions. Nevertheless, the general trend of Northern Europeans seeking either a primary or secondary home in the Mediterranean has not ceased and reduced prices are likely to increase the attractiveness for new buyers.

As an AIM company, we notified in our interim results announcement that the Group is now required to report according to International Financial Reporting Standards. In fact, this change from UK GAAP has no material impact on our numbers, but we have taken the opportunity provided by this change to review the accounting policies that we were advised to implement when the Group was floated on AIM. 

The reality is that whilst the policy in relation to income recognition was absolutely proper, the alternative approach to which we have now changed provides a better measure of performance and where management should focus their attention. This change also has the advantage that our results will no longer be affected by actual cancellations being at different levels to cancellation provisions in our accounts as the latter will no longer be needed. An explanation of the impact of these changes is provided in the financial statements.

January 2008 started better than we had expected, but since then sales have continued to decline which has led the company to implement a series of cost-cutting measures. We believe this will enable us to emerge as a stronger Group once market conditions improve.

Tony Gatehouse

Chairman

  

Finance Review

Income Statement

Year on year increase in turnover to £10,537,000 represents an increase of 30% over the year 2006. Loss before tax has increased to £1,297,000 compared to a loss of £1,048,000 in the previous year.

Gross margins improved from 13.7% in 2006 to 21.5% in 2007, but this was off-set by an increase in administrative costs of £1,400,000.

The results for the year have been drawn up using a different income recognition policy to that hitherto. The basic effect is that only income that has been invoiced or is invoicable by the year end has been taken to the profit and loss account. This means that commissions that would have been receivable and payable under the previous policy have not been included in these accounts.

Due to external changes and the impact of the credit squeeze, the Group has reviewed the degree of influence it currently exercises in relation to its Associates. As a result the directors consider that the Group no longer exercises the appropriate influence in respect of two of the investments, and these have been re-classified as available for sale financial assets.

Earnings per share, basic and diluted, in the year are minus 1.76 pence compared to minus 1.67 pence in 2006.

Balance Sheet

There has been a significant increase in the sums invested in Associates, resulting from the matters referred to in note 26 of the 2006 accounts and in note 25 of these accounts. This has in turn resulted in the decrease in trade receivables as reported at the 2006 year end.

It is now expected that the profits from Associates will start to crystalise in 2009.

Cash Flow

The Group raised £735,000 through a share placing in June 2007.

The net cash outflow during the year in respect of operating activities reflects the impact of the loss recorded.

  

MEDSEA GROUP ESTATES PLC AND SUBSIDIARY UNDERTAKINGS
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2007
													2007		2006
															As restated
													£'000		£'000
Revenue													10,537		8,066
Cost of sales													(8,274)		(6,963)
Administrative expenses													(3,556)		(2,121)
Finance income													24		1
Finance expense													(28)		(31)
Loss before taxation													(1,297)		(1,048)
Tax (charge)/credit on loss													(14)		(129)
Loss for the year													(1,311)		(1,177)
Attributable to:
Equity holders of the parent Minority interests													(1,307)  (4)		(1,172) (5)
													(1,311)		(1,177)
Loss per share (pence)
Basic and diluted													(1.76)		(1.67)
None of the group´s activities was acquired or discontinued during the above periods.

  

CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2007
							2007		2006
									As re-stated
							£'000		£'000
ASSETS
Non-current assets
Other intangible assets							4		6
Property, plant and equipment							1,057		871
Investments in associates							646		-
Other financial assets							100		92
							1,807		969
Current assets
Inventories							165		301
Trade and other receivables							1,788		2,319
Current tax recoverable							15		-
Cash and cash equivalents							317		944
							2,285		3,564
Total assets							4,092		4,533
EQUITY AND LIABILITIES
Shareholders' equity
Share capital							7,798		7,063
Share premium							22		22
Other reserve							128		117
Revaluation reserve							51		46
Merger reserve							(7,058)		(7,058)
Foreign currency translation reserve							(170)		(109)
Retained earnings							(475)		778
Minority interests							-		4
							296		863
Non-current liabilities
Long-term borrowings							209		300
Deferred tax							-		91
							209		391
Current liabilities
Trade and other payables							3,065		3,031
Short-term borrowings							522		248
							3,587		3,279
Total equity and liabilities							4,092		4,533

  

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2007
													2007		2006 re-stated
													£'000		£'000
Cash flows from operating activities
Profit/(loss) before tax													(1,297)		(1,048)
Adjustments for:
	Depreciation												127		121
	Foreign exchange												(63)		(90)
	Finance income												(24)		(1)
	Finance expense												28		31
	Amortisation of other intangible assets												2		3
	Loss / (profit) on sale of property, plant and equipment												15		(52)
	Decrease / (increase) in trade and other receivables												548		(477)
	Decrease / (increase) in inventories												136		(119)
	Increase in trade and other payables												47		2,246
Cash (absorbed by) / generated from operations													(481)		614
Tax on profits paid													(137)		(164)
Interest paid													(28)		(31)
Net cash (absorbed by) / generated from operating activities													(647)		419
Cash from investing activities
Interest received													24		1
Purchase of property, plant and equipment													(256)		(107)
Proceeds from the sale of property, plant and equipment													-		276
Payments to acquire shares in associates													(654)		-
Payments to acquire other intangible assets													(1)		(7)
Net cash (used) / generated in investing activities													(887)		163
Cash from financing activities
Receipt of borrowings													123		352
Share issues													735		-
Other loans													(13)		(118)
Capital element of finance lease (payments)/receipts													(27)		55
Net cash generated from financing activites													818		289
Net (decrease)/ increase in cash and cash equivalents													(715)		871
Cash and cash equivalents at the beginning of the period													944		73
Cash and cash equivalents at the end of the period													229		944
Cash and cash equivalents consists of:
	Cash and cash equivalents included in current assets												317		944
	Bank overdraft included in current liabilities												(88)		-
													229		944

  

1. Basis of preparation

The financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain non-current assets and in accordance with applicable International Financial Reporting Standards (IFRS) as adopted for use by the European Union.

These are the Group's first IFRS consolidated financial statements. IFRS 1 'First-time adoption of International Financial Reporting Standards' has been applied. An explanation as to how the transition in respect of IFRS has affected the reported financial position, financial performance and cash flow of the group is provided below in the reconciliations of equity and profit or loss for the comparative periods reported under UK GAAP to those reported for those periods under IFRSs; the impact of the change in the accounting policy for income recognition is also explained.

The group financial statements consolidate Medsea Estates Group PLC and all its subsidiary undertakings drawn up to 31 December each year. Medsea Estates Group PLC acquired shares in Medsea UK Limited and its subsidiaries on 16 July 2004. The financial statements have been prepared using merger accounting so that all the combining entities' results are shown from 1 January 2004.

As this business combination occurred before the transition date to IFRS of 1 January 2006, the exemption from retrospective application of IFRS3 Business Combinations has been taken.

2. Operating loss
The operating loss is arrived at after charging:									2007		2006
									£'000		£'000
Depreciation of owned assets									109		111
Depreciation of leased assets									18		10
Amortisation of intangible assets									2		3
Loss/(Profit) on disposal of property, plant and equipment									15		(52)
Hire of equipment - operating leases - motor vehicles									655		373
Hire of equipment - operating leases - land and buildings									143		174
Auditors' remuneration - other services									27		2
Auditors' remuneration - audit services									40		31

		Share capital		Share premium		Other reserves *		Revaluation reserve		Merger reserve		Foreign Currency Translation Reserve		Retained earnings		Minority interests		Total Equity
		£'000		£'000		£'000		£'000		£'000		£'000		£'000		£'000		£'000
Balance at 1 January 2006		7,063		22		117		96		(7,058)		-		1,944		9		2,193
Loss for the year		-		-		-		-		-		-		(1,172)		-		(1,172)
Exchange differences arising on translation of foreign operations		-		-		-		(1)		-		(109)		(43)		-		(153)
Minority interest		-		-		-		-		-		-		-		(5)		(5)
Sales of revalued properties		-		-		-		(49)		-		-		49		-		-
Total recognised income and expense for the period		7,063		22		117		46		(7,058)		(109)		778		4		863
Payment of dividends		-		-		-		-		-		-		-		-		-
Balance at 31 December 2006 carried forward		7,063		22		117		46		(7,058)		(109)		778		4		863
Balance at 1 January 2007 brought forward		7,063		22		117		46		(7,058)		(109)		778		4		863
Loss for the period		-		-		-		-		-		-		(1,307)		-		(1,307)
Exchange differences arising on translation of foreign operations		-		-		11		5		-		(61)		54		-		9
Minority interest						-		-		-		-		-		(4)		(4)
Sales of revalued properties		-		-		-		-		-		-		-		-		-
Total recognised income and expense for the year		7,063		22		128		51		(7,058)		(170)		(475)		-		(439)
Issue of shares		735		-		-		-		-		-		-		-		735
Payment of dividends		-		-		-		-		-		-		-		-		-
Balance at 31 December 2007 carried forward		7,798		22		128		51		(7,058)		(170)		(475)		-		296

* Each company in the Group registered in Spain is required to transfer 10% of its profit each year to a non-distributable reserve until the balance on that reserve reaches 20% of that company's paid up share capital. This balance is reflected under other reserves and the reserve was fully funded at 31 December 2007

 

 

4. Explanation of transition to IFRS and change in Revenue Recognition Policy

The Group has applied IFRS1, First Time Adoption of International Financial Reporting Standards in preparing these consolidated financial statements. The Group's transition date is 1st January 2006 and as such an opening IFRS balance sheet has been prepared at that date. Consequently, 2006 comparative information has been restated under these new accounting standards.

IFRS 1 allows certain exemptions from full retrospective application of certain standards. In preparing these consolidated financial statements, the group has elected to apply the business combinations exemption in IFRS 1. Therefore, it has not restated the business combinations that took place prior to the 1 January 2006 transition date, which resulted in the creation of the merger reserve.

As part of adopting IFRS, the Directors have also decided to alter the accounting policy in respect of revenue recognition.

Hitherto commission income and the consequent commission payable have been accrued in full at the time that clients made payment of a non-refundable reservation deposit to the developer. To allow for subsequent cancellations, a cancellation provision was then made against these accruals in order to reduce the accrued income and expenditure in the accounts to levels that would be comparable with what was actually invoiced. Because of the sometimes protracted period between reservation and completion, establishing the correct level of cancellation provision has become increasingly difficult. Accordingly, the consolidated accounts will now report on commission receivable on the basis of whether it was invoiced or invoicable by the end of the accounting period concerned. This means that commission (both receivable and payable) is only being recognised if the client purchasers have paid the first full instalment on their property purchase (often 50% of the selling price) which then triggers the contractual arrangement whereby commission can be claimed from the developer

Due to external changes and the impact of the credit squeeze, the Group has reviewed the degree of influence it currently exercises in relation to its Associates. As a result the directors consider that the Group no longer exercises the appropriate influence in respect of two of the investments, and these have been re-classified as available for sale financial assets

  

5. Reconciliation of the consolidated income statement for the year ended 31 December 2006
					Effect of	Effect of
					change to	change to	Restated		Effect of	Restated
				2006	status of	income	2006		transition	2006
				UK GAAP	associates	recognition	UK GAAP		to IFRS	IFRS
				£'000	£'000	£'000	£'000		£'000	£'000
Revenue				13,300	-	(5,234)	8,066		-	8,066
Cost of sales				(8,849)	-	1,886	(6,963)		-	(6,963)
Administrative expenses				(2,229)	-	108	(2,121)		-	(2,121)
Share of operating profit in associates				702	(702)	-	-		-	-
Finance income				1	-	-	1		-	1
Finance expense				(31)	-	-	(31)		-	(31)
Profit/(loss) before taxation				2,894	(702)	(3,240)	(1,048)		-	(1,048)
Tax (charge)/credit on loss				(1,019)		890	(129)		-	(129)
Profit/(loss) for the year				1,875	(702)	(2,350)	(1,177)		-	(1,177)
Attributable to:
Equity holders of the parent				1,880	(702)	(2,350)	(1,172)		-	(1,172)
Minority interests				(5)	-	-	(5)		-	(5)
Retained profit/(loss) for the year				1,875	(702)	(2,350)	(1,177)		-	(1,177)
Earnings/(loss) per share (pence)
Basic and diluted				2.66			(1.67)			(1.67)
6. Reconciliation of consolidated equity at 31 December 2006 (last date of UK GAAP statements)
					Effect of	Effect of
					change to	change to	Restated	Effect of		Restated
			2006		status of	income	2006	transition		2006
			UK GAAP		associates	recognition	UK GAAP	to IFRS		IFRS
			£'000		£'000	£'000	£'000	£'000		£'000
ASSETS
Non-current assets
Other intangible assets			6		-	-	6	-		6
Property, plant and equipment			871		-	-	871	-		871
Investments in associates			687		(687)	-	-	-		-
Other financial assets			-		92	-	92	-		92
			1,564		(595)	-	969	-		969
Current assets
Inventories			301		-	-	301	-		301
Trade and other receivables			12,245		-	(9,926)	2,319	-		2,319
Cash and cash equivalents			944		-	-	944	-		944
			13,490		-	(9,926)	3,564	-		3,564
Total assets			15,054		(595)	(9,926)	4,533	-		4,533
EQUITY AND LIABILITIES
Shareholders' equity
Share capital			7,063		-	-	7,063	-		7,063
Share premium			22		-	-	22	-		22
Other reserve			117		-	-	117	-		117
Revaluation reserve			46		-	-	46	-		46
Merger reserve			(7,058)		-	-	(7,058)	-		(7,058)
Foreign currency translation reserve			-		-	-	0	(109)		(109)
Retained earnings			5,446		(595)	(4,182)	669	109		778
Minority interests			4		-	-	4	-		4
			5,640		(595)	(4,182)	863	-		863
Non-current liabilities
Long-term borrowings			300		-	-	300	-		300
Deferred tax			1,535		-	(1,444)	91	-		91
			1,835		-	(1,444)	391	-		391
Current liabilities
Trade and other payables			7,331		-	(4,300)	3,031	-		3,031
Short-term borrowings			248		-	-	248	-		248
Current tax payable			-		-	-	-	-		-
			7,579		-	(4,300)	3,279	-		3,279
Total equity and liabilities			15,054		(595)	(9,962)	4,533	-		4,533

  

Re-statement of Interim results as at 30 June 2007

These numbers are unaudited and do not form part of the financial statements for the year 2007. They are furnished for information purposes.

UNAUDITED CONSOLIDATED INCOME STATEMENT
AS AT 30 JUNE 2007
Group reconciliation of profit for the 6 months to 30 June 2007
		Unaudited		Unaudited		Unaudited		Unaudited
		Original		Effect of		Effect of		Restated
		30 June		change to		change to		30 June
		2007		status of		Income		2007
				associates		Recognition
		£'000		£'000		£'000		£'000
Revenue		5,515		-		406		5,921
Cost of sales		(4,278)		-		(116)		(4,394)
Administrative expenses		(1,395)		-		(11)		(1,406)
Share of operating profit in associates		226		(226)		(226)		-
Finance income		4		-		0		4
Finance expense		(14)		-		-		(14)
Profit/(loss) before taxation		58		(226)		53		111
Tax on profit/(loss)		(35)		-		(50)		(15)
Profit/(loss) after taxation		93		(226)		3		96

  

UNAUDITED CONSOLIDATED BALANCE SHEET
Group reconciliation of equity at 30 June 2007
			Unaudited		Unaudited		Unaudited	Unaudited
			Original		Effect of		Effect of	Restated
			30 June		change to		change to	30 June
			2007		status of		Income	2007
					associates		Recognition
			£'000		£'000		£'000	£'000
Non-current assets
Other intangible assets			6		-		-	6
Property, plant and equipment			962		-		-	962
Investments in associates			1,064		(839)		(747)	317
Other financial assets			0		92		-	92
			2,032		(747)		(747)	1,285
Current assets
Inventories			192		-		-	192
Trade and other receivables			11,691				(9,553)	2,138
Cash and cash equivalents			1,672		-		-	1,672
			13,555		-		(9,553)	4,002
Total assets			15,587		(747)		(10,300)	5,287
Shareholders' equity
Share capital			7,798		-		-	7,798
Share premium			22		-		-	22
Other reserve			117		-		-	117
Revaluation reserve			46		-		-	46
Merger reserve			(7,058)		-		-	(7,058)
Retained earnings			5,489		(747)		(4,658)	831
Minority interests			(1)		-		-	(1)
			6,413		(747)		(4,658)	1,755
Non-current liabilities
Long-term borrowings			249		-		-	249
Deferred tax			1,328				(1,325)	3
			1,577		-		(1,325)	252
Current liabilities
Trade and other payables			7,460				(4,317)	3,143
Short-term borrowings			137		-		-	137
			7,597		-		(4,317)	3,280
Total equity and liabilities			15,587		(747)		(10,300)	5,287

  

Publication of non-statutory accounts 

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in Section 240 of the Companies Act 1985. Statutory accounts for 2007 will be delivered to the Registrar following the Company's Annual General Meeting. 

The Independent Auditors have reported on these accounts. Their report was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. 

Other information 

The report and accounts for the year ended 31 December 2007 will be posted to shareholders shortly and laid before the Group's Annual General Meeting.

Copies will also be available via the website (www. www.medseaestates-ir.com) in accordance with AIM Rule 26 and at the Company's registered office, Medsea Estates Group PLC, 85 Elsenham Street, London, SW18 5NX.

ENDFR SEDEFUSASEDM