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Medsea Estates Group - Final Results

RNS Number : 8069X Medsea Estates Group PLC 30 June 2008 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: (1,307) (1,172) (5) Equity holders of the parent (4) Minority interests (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 Retained earnings Minority interests Total Equity Translation Reserve #'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 - - - (1) - (109) (43) - (153) foreign operations 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 - - 11 5 - (61) 54 - 9 foreign operations 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 702 (702) - - - - associates 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 - - - 0 (109) (109) reserve 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 226 (226) (226) - associates 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. This information is provided by RNS The company news service from the London Stock Exchange END FR SEDEFUSASEDM

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