Last checked at 19 Jun 2008 07:00
FOR IMMEDIATE RELEASE 19 June 2008
Managed Support Services plc
UNAUDITED PRELIMINARY RESULTS FOR THE SIX MONTHS ENDED 31 MARCH 2008
Managed Support Services plc announces its preliminary unaudited results for the six months ended 31 March 2008.
KEY POINTS
Current trading now profitable
Restructuring complete
Net cash balance at 31 March 2008, £6.4 million
Turnover £16 million, loss before tax £8.9 million
The Group has adopted a 31 March accounting year end
Commenting on the results, Simon Beart, Chief Executive said:
"We have successfully established profitable trading, a considerable result when the Group was losing £1 million a month, in cash, only six months ago. We now have a stable platform from which to rebuild shareholder value".
FOR FURTHER INFORMATION, PLEASE CONTACT:
| Managed Support Services plc: |
|
| Simon Beart, Chief Executive | 07710 444370 |
| Cenkos Securities plc: |
|
| Nick Wells | 020 7397 8900 |
| Stephen Keys |
|
| Buchanan Communications: |
|
| Richard Darby | 020 7466 5000 |
| Nicola Cronk |
|
CHIEF EXECUTIVE'S REVIEW
Introduction
We reported to shareholders in early March 2008, in respect of the 12 months ended September 2007. Those results reflected the costs of previous poor management and a total lack of financial controls. The result was a loss of some £42 million at the operating level.
This preliminary statement covers the subsequent six month period to 31 March 2008. The Group has now adopted a March year end. As forecast, the results for the six month period show further substantial losses. However, the major part of the trading losses were incurred prior to the changes in senior management. Trading losses were running at approximately £1m a month before the departure of the entire senior executive team. The substantial exceptional costs reflect the further closures and redundancies undertaken in February and March of this year.
Trading
The objectives of the new Board, at appointment on 21 November 2007, were to reduce cost, impose a basic control environment and as a first stage, achieve cash and profit stability.
In order to meet these objectives it was necessary to close loss making operations across the Group and to reduce headcount by some two thirds. The actions of the Board have obviously been rapid but rationalisations have not been conducted without planning. It has therefore been possible to transfer customer relationships and activity to the remaining, well managed units. Those trading units with a history of losses, poor management and weak controls were of necessity closed.
A more detailed analysis of the results for the last six months is set out in the Financial Commentary.
Group activities
The Group now comprises four trading units all operating in the Heating, Ventilation and Building Services markets. The largest unit is Woods Environmental, the Group's primary air conditioning installation unit. Classic, based in Kent, is a specialist shop fitter and hotel refurbishment unit. EPS is the Group's London based designer and supplier of catering equipment to the hotel industry. The final unit, Woods Facilities now represents the consolidated service and maintenance activities of the Group.
All four trading units now have an established management team and an understanding of the importance of a functional management structure with monitored targets for sales, finance, operations and maintenance. This structure is supplemented by a new financial control environment, designed to monitor and deliver agreed budgets.
Control Environment
Considerable reductions in underperforming finance and management resources were required. In many instances this required a substantial upgrade in individual roles. This task will only be completed when the implementation of a standard Groupwide MIS and accounting system has been implemented. This process will be managed on a generous timescale in order not to disturb the newly stabilised accounting processes.
Substantial time has also had to be diverted to documenting and resolving the previous failures of accounting compliance, negligent record keeping and the establishment of simple accounting disciplines in order that sales and costs are captured effectively and reliably. The failure to follow these basic disciplines in the past led to material write down of revenue and the absorption of unplanned costs.
The simplified and delegated unit structure, with frequent reporting and monitoring now means that such accounting lapses and completeness of income failures are unlikely to be repeated.
Markets
Our trading units are concentrated in the hotel, retail and commercial property development markets. These markets must be regarded as vulnerable in the event of a major downturn in economic activity. The Group is therefore probably not immune to the overall economic picture. However, historically, the four trading units have demonstrated a measure of resilience and have enjoyed higher margins than many competitors, reflecting added value and superior service levels.
In terms of sales visibility, the Group is no longer involved in long term contracts. This reduces risk exposure but means that sales visibility beyond three months is less clear. Processes are now in place in order to manage sales opportunities and the sales pipeline. These processes will provide improved clarity in respect of sales visibility.
Earn outs
The new Board inherited a confused and uncertain picture in respect of the various earn outs arranged as a result of the three acquisitions completed in May 2007. The Board is therefore pleased to confirm that an agreed final payment of £250,000 in respect of Classic has been made in the current year and that a mutually beneficial re-negotiation of the Woods earn out has also taken place. The final cash payout in respect of the Woods earn out has been agreed at £250,000 and will be payable in January 2009.
The final earn out in respect of EPS was complicated by drafting failures in the contract, as well as the under performance of the company since acquisition. This contract has now been satisfactorily re-negotiated. Loan notes issued under the previous arrangements to the value of £675,000 were redeemed for cash in April 2008. The Board's estimate of the future amount that may now ultimately be payable in respect of EPS, under the new arrangements, is approximately £700,000. This amount will be payable exclusively in cash and will be spread over three payments ending in December 2010, matching the relevant performance and non compete obligations.
There are now no earn out contracts that allow for the potential issue of further new shares. The total cash amount potentially remaining payable in respect of all earn outs is not expected to exceed £1 million and this amount is evenly spread over periods ending in December 2010. It is expected that the net cash profits generated by the relevant units in the interim periods should amply fund these obligations, failing which, reduced sums will be payable.
Legal matters
The Group has been engaged in submitting detailed documentation to the Serious Fraud Office ("SFO") in respect of certain events that took place prior to the Admission of the Company's shares to AIM in June 2006 and in the periods to November 2007. The SFO has now confirmed that it is investigating certain of these matters. The Board is very encouraged by this development, which it welcomes. It is not appropriate that the Board should comment further.
The Board is also actively pursuing legal redress from the primary vendors of various subsidiaries purchased by the Group at the time of the Company's Admission to AIM. These legal actions have incurred a considerable cash cost and will continue to do so. These actions will be delayed in the event of a criminal prosecution.
Name Change
Shareholders approved the name change of the Group to Managed Support Services plc (formerly Worthington Nicholls Group plc) on 14 April. This change of name confirms a clear break with the unfortunate events of the past and the failures of the previous Board. Customer reaction to the re-launch of the Group has been positive and the Group's reputation in the market will continue to improve now that projects are being managed professionally and delivered to customers' specifications.
Shareholders also approved the Long Term Incentive Plan at the recent Annual General Meeting. The Group is currently small and has endured significant upheaval. It is essential therefore, to be able to offer potential recruits and key existing management the possibility of material capital gain in order that the Group can benefit from skilled and proven management talent.
Court Reconstruction
In order that the Board can be in a position to consider the resumption of dividend payments, the parent company will be seeking a capital reconstruction, subject to Court approval. The requisite resolutions are set out in the Notice of Extraordinary General Meeting.
Board changes
It was announced earlier in the year that William Good would be leaving the Group at an appropriate time, having taken a leading role in delivering financial controls and financial stability across the Group since his appointment. We wish him the very best for the future.
We are pleased to report that Piers Wilson, MA (Oxon) ACA (40) will be joining the Group as Finance Director on 1 July 2008. Piers Wilson was recently Finance Director of ED&F Man Coffee, a $2.5 billion business, having previously been Head of Corporate Finance and Risk Management for the ED&F Man Holdings Group. Before joining ED&F Man, Piers Wilson was CFO of a NASDAQ quoted technology company and prior to that, Head of Corporate Development at Cable and Wireless Communications plc.
Piers Wilson qualified as a Chartered Accountant with Arthur Andersen in 1992. Following qualification, he specialised in corporate recovery and the turnaround of distressed companies.
We are very pleased to welcome Piers Wilson to the Board and we believe that his wide ranging skills and experience of complex turnarounds, as well as acquisitions, will be invaluable.
Prospects
The new Board has now had the opportunity in the period to 31 March 2008 to quantify known risks, correct inappropriate accounting, deliver rationalisations and to provide for the costs of the restructuring.
These actions have required substantial write offs in respect of current assets, the making of substantial provisions for future obligations and the writing down of the carrying values of previously acquired assets. Cumulative trading and exceptional losses now total some £50 million since October 2006.
The Board has taken all reasonable steps to ensure that there will be no further repetition of these costs and has worked closely with the Company's legal advisors and auditors in order to create a stable accounting platform going forward. The cash costs of meeting future provisions and obligations are well within the working capital capacity of the Group.
The Group is coming to the end of its first quarter's trading operating under new disciplines and procedures and with a greatly reduced cost base. The Board can confirm that trading has stabilised, as anticipated in our earlier statement of March 2008. The four reporting units have traded profitably to date in the current year. It is the Board's intention to confirm the outcome of the first quarter's trading at the Extraordinary General Meeting which has been convened for 30 July 2008.
As a result of the improved trading performance, the Group now has the stability and management capacity to consider both tactical and strategic acquisitions in order to deploy more efficiently the Group's surplus cash balances.
Simon Beart
Chief Executive
FINANCIAL COMMENTARY
Results
The results covered in this preliminary statement relate to the trading in the six month period from 1 October 2007 to 31 March 2008. The results for this period reflect the material trading losses incurred before the change of management and the further losses arising from the closure of businesses.
Revenue, being turnover for the period, was £16.4 million of which £6.6 million is represented by companies that have now either been closed or are being wound down. The underlying turnover rate for the four remaining trading business was therefore £9.8 million.
Operating loss
The Group's adjusted, operating loss was £3.98 million. The statutory loss before tax was £8.9 million. This amount represents underlying trading losses for all units of £3.98 million before exceptional items, closure costs and goodwill write offs. The total operating loss of £9.10 million for the period can therefore be analysed as £3.98 million for underlying trading, exceptional losses of £2.39 million for redundancies and for closure costs, and further goodwill write downs of £2.73 million.
The redundancy and closure costs relate to the headcount reduction of some 180 personnel during the period. The closure costs also reflect the projected cost of winding down and closing trading units with contractual commitments to complete.
The projected cash cost during the current fiscal year to fund the remaining vacant properties, closure costs, redundancy costs and continuing legal matters is estimated at approximately £1.8 million. Further cash costs in respect of these items from April 2009 onwards are expected to be no more than £0.3 million.
Balance sheet
As a result of trading losses and the further provisions described above, the Group's net assets have reduced from £13.9 million as at 30 September 2007 to £5.9 million. The net cash balance, net of loan notes and hire purchase debt, at 31 March 2008 of £6.4 million represents a substantial part of Group net assets.
Net cash bank balances at 17 June 2008 were £5.2 million, after funding restructuring costs in the current year in excess of £500,000 and cash earn out payments of £500,000.
Operating cash flow has therefore remained stable in recent months, after adjusting for the funding of further earn out payments and the cash cost of redundancies and closures. It is anticipated that working capital will stabilise at current levels. The Group will continue to offer early payment of trade creditors, in exchange for discounted pricing, in order to exploit the Group's strong balance sheet.
Movements in provisions
As at 30 September 2007 the Group had provisions for liabilities of £1.46 million relating primarily to loss making contracts and legal costs. The current balance is now £2.33 million analysed as to onerous leases £0.98 million, loss making contracts £0.65 million and legal fees of £0.7 million.
Acquisitions, deferred consideration
The estimated, total deferred consideration in respect of previous acquisitions as at 31 March 2008 is £2.12 million. Since the year end, the loan notes in respect of EPS have been redeemed for a cash payment of £675,000. A payment of £250,000 was made in April 2008 in respect of the acquisition of Woods, following satisfactory negotiation of the earn out and a final, agreed payment in respect of the Woods acquisition will be made, in cash, in January 2009 for £250,000.
In April 2008 the Group also made the final cash payment in respect of the acquisition of Classic being £250,000. The cash settlement of deferred acquisition obligations since 31 March 2008 is a total of £1.2 million. The remaining cash payment to be made in the current financial year will be the £250,000 in respect of Woods in January 2009.
Following satisfactory re-negotiation of the EPS earn out, the Directors' current best estimate of the outstanding amount payable in respect of EPS is £700,000, which amount is payable in cash against the operating profit to be delivered for the 12 months' trading to 31 December 2008. In the event that the appropriate target level is reached, the cash payments are scheduled as to approximately £200,000 in July 2009, approximately £200,000 in April 2010 and the remaining balance of approximately £300,000 will be payable on 31 December 2010.
Since the year end, the Group has taken the opportunity to acquire the order book of a small competitor. The total consideration payable was £150,000, including expenses. This amount will be expensed. This transaction did not involve the acquisition of a business, limited entity or trade, nor the assumption of any financial liabilities or obligations.
Impairment of goodwill, IFRS adoption
As at 30 September 2007, in the light of poor trading, total goodwill impairment of £32.5 million was required. The further closures and redundancies and the Directors' estimates of future profitability have required an additional goodwill impairment of £2.73 million. The Directors are now satisfied that the carrying values of the Group's remaining trading assets and the related goodwill figures are appropriately stated. Total goodwill remaining as at 31 March 2008 is £2.0 million.
The Group has adopted IFRS.
Court reconstruction
The failures of the previous management team that led to accounting irregularities, trading losses and substantial goodwill impairment also meant that the parent company incurred substantial losses. The consequences of these losses is that currently, the parent company is not in a position to consider the payment of dividends nor the repurchase of shares, due to the lack of distributable reserves.
Accordingly, at the forthcoming Extraordinary General Meeting resolutions are to be proposed to allow for a reduction in capital which, if approved by the Courts, is anticipated to take effect during the current calendar year. In the event the Court does give approval for the reconstruction, the Directors will give consideration to the resumption of the payment of dividends, subject to profitability. The Directors regard the payment of dividends as an important discipline.
Taxation
No taxation charge has been provided for the six month period to 31 March 2008. Certain of the Group's trading units are likely to confirm material tax losses carried forward relating to the two accounting periods to 31 March 2008.
In the event that the Group is profitable during the current financial year, the Board would not expect to pay a full tax charge as a result of these carried forward tax losses.
Bank facilities
The Group is in the process of consolidating its banking arrangements with Barclays Bank PLC. The Group has no need for loan facilities at present and expects to negotiate standard clearing and working capital facilities in due course.
William Good
Group Finance Director
Consolidated Income Statement
For the six months ended 31 March 2008
| Note | UNAUDITED Six months ended 31 March 2008 | UNAUDITED Six months ended 31 March 2008 | UNAUDITED Year ended 30 September 2007 | |
| Continuing operations | £'000 | £'000 | £'000 | |
| Revenue | 16,440 | 25,900 | ||
| Cost of sales | (13,586) | (22,903) | ||
| GROSS PROFIT | 2,854 | 2,997 | ||
| Administrative expenses, before items below | (6,838) | (9,675) | ||
| Other administrative expenses | ||||
| Bad debt provisions | 308 | (1,470) | ||
| Loss making contract provisions | (268) | (757) | ||
| Impairment of goodwill | (2,731) | (32,482) | ||
| Restructuring of activities | (2,489) | - | ||
| Impairment in investment property | - | (500) | ||
| TOTAL ADMINISTRATIVE EXPENSES | (12,018) | (44,884) | ||
| Other operating income | 61 | 104 | ||
| OPERATING LOSS | (9,103) | (41,783) | ||
| Financial income | 234 | 234 | ||
| Financial expenses | (37) | (245) | ||
| LOSS BEFORE TAX | (8,906) | (41,794) | ||
| Income tax expense | - | 20 | ||
| LOSS FOR THE FINANCIAL PERIOD | (8,906) | (41,774) | ||
| BASIC LOSS PER ORDINARY SHARE | 1 | (9.93p) | (54.35p) | |
Consolidated Balance Sheet
As at 31 March 2008
| UNAUDITED | UNAUDITED | ||
| Note | Six months ended 31 Mar 2008 | Year ended 30 Sept 2007 | |
| NON-CURRENT ASSETS | £'000 | £'000 | |
| Goodwill | 2,000 | 5,556 | |
| Other intangible assets | 666 | 1,000 | |
| Property, plant and equipment | 63 | 591 | |
| Investment property | - | 1,010 | |
| 2,729 | 8,157 | ||
| CURRENT ASSETS | |||
| Work in progress | 2 | 434 | 1,894 |
| Trade and other receivables | 3 | 5,393 | 8,001 |
| Cash and cash equivalents | 7,064 | 12,712 | |
| Assets held for sale | 1,010 | - | |
| 13,901 | 22,607 | ||
| TOTAL ASSETS | 16,630 | 30,764 | |
| CURRENT LIABILITIES | |||
| Bank overdrafts and loans | - | (1,140) | |
| Trade and other payables | 4 | (7,614) | (12,318) |
| Current tax liabilities | (87) | (301) | |
| Obligations under finance leases | (34) | (83) | |
| Provisions for liabilities | 5 | (1,214) | (1,457) |
| (8,949) | 15,299 | ||
| NET CURRENT ASSETS | 4,952 | 7,308 | |
| NON-CURRENT LIABILITIES | |||
| Trade and other payables | 4 | (700) | (1,525) |
| Obligations under Finance Lease | - | (64) | |
| Deferred tax liabilities | - | - | |
| Long term provisions | 5 | (1,123) | - |
| (1,823) | (1,589) | ||
| TOTAL LIABILITIES | (10,772) | (16,888) | |
| NET ASSETS | 5,858 | 13,876 | |
| EQUITY | |||
| Share capital | 6 | 902 | 870 |
| Share premium account | 55,816 | 55,816 | |
| Merger reserve | 4,163 | 3,520 | |
| Share based payments reserve | 454 | 241 | |
| Retained earnings | (55,477) | (46,571) | |
| TOTAL EQUITY | 5,858 | 13,876 | |
Consolidated Cash Flow Statement
Six months ended 31 March 2008
| UNAUDITED | UNAUDITED | ||
| Note | Six months ended 31 Mar 2008 | Year ended 30 Sept 2007 | |
| £'000 | £'000 | ||
| NET CASH USED IN OPERATING ACTIVITIES | 7 | (3,680) | (8,028) |
| INVESTING ACTIVITIES | |||
| Interest received | 234 | 234 | |
| Proceeds on disposal of property plant & equipment | 114 | 1,345 | |
| Purchases of property, plant and equipment | (214) | (532) | |
| Purchase of businesses | (850) | (4,858) | |
| NET CASH FROM OR (USED IN) INVESTING ACTIVITIES | (716) | (3,811) | |
| FINANCING ACTIVITIES | |||
| Dividends paid | - | (294) | |
| Repayment of borrowings | (1,140) | (923) | |
| Repayments of obligations under finance leases | (112) | 44 | |
| Share issues | - | 25,204 | |
| NET CASH (USED IN) OR FROM FINANCING ACTIVITIES | (1,252) | 24,031 | |
| NET (DECREASE) OR INCREASE IN CASH | (5,648) | 12,192 | |
| CASH AT THE BEGINNING OF PERIOD | 12,712 | 519 | |
| CASH AT THE END OF THE PERIOD | 8 | 7,064 | 12,712 |
1. LOSS PER ORDINARY SHARE
Loss per ordinary share is based on the loss for the period of £8.9 million (2007:£41.78 million) and 89,661,578 (2007: 76,854,682) ordinary shares being the weighted average number of ordinary shares in issue during the year.
| Six months ended 31 March 2008 | Loss £'000 | Weighted average No. of shares | Loss per share pence |
| Basic loss per share | (8,906) | 89,661,578 | (9.93) |
| Year ended 30 September 2007 | |||
| Basic loss per share | (41,774) | 76,854,682 | (54.35) |
2. WORK IN PROGRESS
| Group | ||
| 31 Mar 2008 | 30 Sept 2007 | |
| £'000 | £'000 | |
| Work in progress | 634 | 2,754 |
| Less provision | (200) | (860) |
| 434 | 1,894 | |
3. TRADE AND OTHER RECEIVABLES
| Group | ||
| 31 Mar 2008 | 30 Sept 2007 | |
| £'000 | £'000 | |
| Amounts receivable for the sale of goods | 4,688 | 7,246 |
| Amounts due from group undertakings | - | - |
| Other debtors | 117 | 325 |
| Prepayments | 233 | 430 |
| Corporation tax | 355 | - |
| 5,393 | 8,001 | |
The average credit period taken on sales of goods is 52 days. An allowance has been made for estimated irrecoverable amounts from the sale of goods of £1,163,000. In determining the recoverability of trade receivables, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. Accordingly, the Directors believe that there is no further credit provision risk required in excess of the allowance for doubtful receivables.
4. TRADE AND OTHER PAYABLES
| Group | ||
| 31 Mar 2008 | 30 Sept 2007 | |
| £'000 | £'000 | |
| Trade creditors | 3,481 | 6,733 |
| Amounts owed to group undertakings | - | - |
| Social security and other taxes | 558 | 952 |
| Other creditors | 2,176 | 4,563 |
| Accruals and deferred income | 2,099 | 1,595 |
| Total | 8,314 | 13,843 |
| Split as: | ||
| Non Current Liabilities | 700 | 1,525 |
| Current Liabilities | 7,614 | 12,318 |
| 8,314 | 13,843 | |
Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 42 days.
Included in other creditors is deferred and contingent purchase consideration for acquisitions of £2,124,750 (2007: £4,473,925).
5. PROVISIONS FOR LIABILITIES
|
| Onerous leases £'000 | Loss making contracts £'000 | Legal costs £'000 | Total £'000 |
| Group | ||||
| Balance at 1 October 2007 | - | 757 | 700 | 1,457 |
| Additional provision in the period | 987 | 268 | - | 1,255 |
| Utilisation of provision | - | (375) | - | (375) |
| Balance at 31 March 2008 | 987 | 650 | 700 | 2,337 |
| £'000 | ||||
| Included in current liabilities | 1,214 | |||
| Included in non-current liabilities | 1,123 | |||
| 2,337 | ||||
The onerous lease provision relates to leases which the group is committed to but for which no future benefit through usage is expected.
The loss making contract provisions relate to contracts in respect of which further costs are required to remediate or complete work and the Group is unlikely to recover these costs from the client.
The legal cost provision relates to work required to investigate accounting irregularities.
6. SHARE CAPITAL
| 31 Mar 2008 | 30 Sept 2007 | |||
| £'000 | £'000 | |||
| Authorised | ||||
| 115,000,000 ordinary shares of 1 pence each | 1,150 | 1,150 | ||
| Issued and fully paid | ||||
| 90,203,976 ordinary shares of 1 pence each (2007: 87,002,078) | 902 | 870 | ||
On 1 November 2007, the Company issued 3,201,898 shares as part of the deferred consideration in respect of Euro Property Services (London) Limited.
7. NOTES TO THE CASH FLOW STATEMENT
| Group | Group | |
| Six months to 31 Mar 2008 | Year to 30 Sept 2007 | |
| £'000 | £'000 | |
| Operating loss from continuing activities | (9,103) | (41,783) |
| Adjustments for: | ||
| Depreciation of property, plant and equipment | 458 | 232 |
| Impairment of property, Plant and equipment | - | 500 |
| Amortisation of intangible assets | 334 | 217 |
| Impairment of intangibles | 2,731 | 32,481 |
| Share based payments | 213 | 117 |
| Loss on disposal of property, plant and equipment | 170 | 104 |
| Write off of stock | - | 247 |
| Operating cash flows before movement in working capital | (5,197) | (7,885) |
| Decrease/(increase) in work in progress | 1,460 | (1,025) |
| Decrease in receivables | 2,964 | 270 |
| (Decrease)/increase in payables | (2,300) | 1,977 |
| Cash utilised by operations | (3,073) | (6,663) |
| Income taxes paid | (570) | (1,120) |
| Interest paid | (37) | (245) |
| Net cash flow from operating activities | (3,680) | (8,028) |
8. MOVEMENT IN NET (DEBT)/CASH
| 1 October 2007 | Cash flow | Other | 31 March 2008 | |
| £'000 | £'000 | £'000 | £'000 | |
| Cash at bank and in hand | 12,712 | (5,648) | - | 7,064 |
| Bank overdraft | (67) | 67 | - | - |
| Net cash | 12,645 | (5,581) | - | 7,064 |
| Debt due within one year | (1,073) | 1,073 | - | - |
| Debt due after one year | - | - | - | - |
| Loan notes | - | - | (675) | (675) |
| Hire purchase | (147) | 113 | - | (34) |
| Change in debt | (1,220) | 1,186 | (675) | (709) |
| Net (debt)/cash | 11,425 | (4,395) | (675) | 6,355 |
9. POST BALANCE SHEET EVENTS
On 3 April 2008, the Group redeemed £675,000 of interest bearing loan notes held by the vendors of Euro Property Services (London) Limited for cash.
The Group has acquired the order book of a small competitor for £150,000 including expenses.
10. EXPLANATION OF TRANSITION TO IFRS
This is the first year that the Company has presented its financial statements under IFRS. The following disclosures are required in the year of transition. The last financial statements under UK GAAP were for the year ended 30 September 2007 and the date of transition to IFRS was therefore 1 October 2006.
Key IFRS adjustments and their impact on the financial statements
IFRS 3 - Business combinations
Under IFRS 3, goodwill is no longer amortised and, instead, is assessed annually for impairment. Goodwill arising on acquisitions before 1 October 2006 will not be restated.
As a result of this change, the Group's operating profit will be increased by the goodwill previously amortised under UK GAAP. However where impairment has taken place on top of the amortisation the amortised amounts added back will be impaired down to their old amounts.
IFRS 3 also stipulates that intangible assets on acquisition should be separately recognised, the value of intangible assets as at the 30 September 2007 has been identified as being £1million.
Other adjustments - a further adjustment has been made to write off the deferred tax liability of £20,000 which was held on the balance sheet as at 30 September 2007 and to correct a mis-posting in the prior year between the share premium account and merger reserve.
The reconciliation between the prior period UK-GAAP financial information and IFRS are set out below.
Consolidated Profit and Loss
Reconciliation of profit for the year ended 30 September 2007
| UK | IFRS 3 Goodwill amortisation | IFRS 3 Impairment | Other Adjustment | IFRS | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| REVENUE | 25,900 | - | - | - | 25,900 |
| Cost of Sales | (22,903) | - | - | - | (22,903) |
| Gross profit | 2,997 | - | - | - | 2,997 |
| Administrative expenses | (20,311) | 10,636 | - | - 20 | (9,675) |
| Bad debt provisions | (1,470) | - | - | - | (1,470) |
| Loss making contract provision | (757) | - | - | - | (757) |
| Impairment of goodwill | (22,131) | - | (10,351) | - | (32,482) |
| Impairment in investment property | (500) | - | - | - | (500) |
| Administrative total | (45,169) | 10,636 | (10,351) | - | (44,864) 4) |
| Other Operating Income | 104 | - | 104 | ||
| OPERATING LOSS | (42,068) | 10,636 | (10,351) | - | (41,763) |
| Financial income | 234 | - | - | - | 234 |
| Financial expenses | (245) | - | - | - | (245) |
| LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION | (42,079) | 10,636 | (10,351) | - | (41,794) |
| Income tax expense | - | - | - | 20 | 20 |
| LOSS FOR THE FINANCIAL PERIOD | (42,079) | 10,636 | (10,351) | 20 | (41,774) |
Consolidated Balance Sheet
Reconciliation of equity at 30 September 2007
| IFRS 3 | ||||||
| UK GAAP | Goodwill amortisation | IFRS 3 Impairment | Other Adjustments | IFRS | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | ||
| NON-CURRENTASSETS Goodwill | 6,271 | 10,636 | (11,351) | - | 5,556 | |
| Intangible assets | 1,000 | - | 1,000 | |||
| Property, plant and equipment | 591 | - | - | - | 591 | |
| Investment properties | 1,010 | - | - | - | 1,010 | |
| 7,872 | 10,636 | (10,351) | - | 8,157 | ||
| CURRENT ASSETS | ||||||
| Inventories | 1,894 | - | - | - | 1,894 | |
| Trade and other receivables | 8,001 | - | - | - | 8,001 | |
| Cash and cash equivalents | 12,712 | - | - | - | 12,712 | |
| 22,607 | - | - | - | 22,607 | ||
| TOTAL ASSETS | 30,479 | 10,636 | (10,351) | - | 30,764 | |
| CURRENT LIABILITIES | ||||||
| Bank Overdrafts and Loans | (1,140) | - | - | - | (1,140) | |
| Trade and other payables | (12,318) | - | - | - | (12,318) | |
| Provisions (1,457) | - | - | - | (1,457) |
| |
| Obligations Under Finance Lease (83) | - | (83) | ||||
| Current tax liabilities (301) | - | - | - | (301) | ||
| (15,299) | - | - | - | (15,299) | ||
| NON-CURRENT LIABILITIES | ||||||
| Obligations Under Finance Lease | (64) | - | - | - | (64) | |
| Trade and other payables | (1,525) | - | - | - | (1,525) | |
| Deferred tax liabilities | (20) | - | - | 20 | - | |
| (1,609) | - | - | - | (1,589) | ||
| TOTAL LIABILITIES | (16,908) | - | - | 20 | (16,888) | |
| NET ASSETS | 13,571 | 10,636 | (10,351) | 20 | 13,876 | |
| EQUITY | ||||||
| Issued ordinary share capital | 870 | - | - | - | 870 | |
| Share premium account | 56,491 | - | - | (675) | 55,816 | |
| Merger reserve | 2,845 | - | - | 675 | 3,520 | |
| Share based payment reserve | 241 | - | - | - | 241 | |
| Retained earnings | (46,876) | 10,636 | (10,351) | 20 | (46,571) ) | |
| TOTAL EQUITY | 13,571 | 10,636 | (10,351) | 20 | 13,876 | |
Consolidated Balance Sheet
Reconciliation of equity at 1 October 2006
| IFRS 3 | |||||
| UK GAAP | Goodwill amortisation | IFRS 3 Impairment | Other Adjustments | IFRS | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| ASSETS Goodwill | 28,713 | - | - | - | 28,713 |
| Property, plant and equipment | 260 | - | - | - | 260 |
| Investment properties | 1,510 | - | - | - | 1,510 |
| TOTAL NON-CURRENT ASSETS | 30,483 | - | - | - | 30,483 |
| Inventories | 247 | - | - | - | 247 |
| Trade and other receivables | 5,503 | - | - | - | 5,503 |
| Cash and cash equivalents | 519 | - | - | - | 519 |
| TOTAL CURRENT ASSETS | 6,269 | - | - | - | 6,269 |
| TOTAL ASSETS | 36,752 | - | - | - | 36,752 |
| LIABILITIES | |||||
| Bank Loans and Borrowings | (986) | - | - | - | (986) |
| Obligations Under Finance Lease | (43) | - | - | - | (43) |
| Trade and other payables | (5,855) | - | - | - | (5,855) |
| Current tax liabilities | (732) | - | - | - | (732) |
| TOTAL CURRENT LIABILITIES | (7,616) | - | - | - | (7,616) |
| Bank Loans and Borrowings | (1,077) | - | - | - | (1,077) |
| Obligations Under Finance Lease | (60) | - | - | - | (60) |
| Trade and other payables | (326) | - | - | - | (326) |
| TOTAL NON-CURRENT LIABILITIES | (1,463) | - | - | - | (1,463) |
| TOTAL LIABILITIES | (9,079) | - | - | - | (9,079) |
| TOTAL ASSETS LESS TOTAL LIABILITIES | 27,673 | - | - | - | 27,673 |
| CAPITAL AND RESERVES Issued ordinary share capital | 662 | - | - | - | 662 |
| Share premium account | 30,802 | - | - | - | 30,802 |
| Merger reserve | 588 | - | - | - | 588 |
| Share based payment reserve | 124 | - | - | - | 124 |
| Retained earnings | (4,503) | - | - | - | (4,503) |
| TOTAL EQUITY | 27,673 | - | - | - | 27,673 |
11. The accounting policies adopted in the preparation of this unaudited preliminary announcement are consistent with those set
out in the unaudited Group financial statements for the six months ended 31 March 2008. This financial information does not
constitute the Company's Statutory Accounts.
The Statutory Accounts for the six months ended 31 March 2008 will be delivered to the Registrar of Companies in due course.
The Statutory Accounts for the year ended 30 September 2007 have been reported on with the following qualification by the Company's auditors, extracts of the qualification read as follows:
"In respect of the unsubstantiated journal entries the auditors were unable to determine whether proper accounting records have been kept. Also in respect of these unsubstantiated journal entries and the limitation on the audit relating to the group profit and loss account and cash flow statement for the period ended 30 September 2006, the auditors have not obtained all the information and explanations that they considered necessary for the purposes of their audit.
Except for any adjustments to the corresponding amounts that might have been found to be necessary had the auditors been able to obtain sufficient evidence concerning the group profit and loss account and group cash flow statement for the period ended 30 September 2006, the financial statements for year ended 30 September 2007 are unqualified".
The Statutory Accounts for the year ended 30 September 2007 have been delivered to the Registrar in due course.
It is intended to post the Annual Report to shareholders before the end of June 2008, copies of this report will be available from the Company Secretary at One Crown Square, Church Street East, Woking, Surrey. GU21 6HR and from the Company's website www.mssplc.com.
This announcement was approved by the Directors on 18 June 2008.