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Zenith Hygiene Group plc

30 May 2008                            AIM:ZHG 

Zenith Hygiene Group plc

Interim Results for the 6 months ended 29 February 2008

Zenith Hygiene Group plc ('Zenith' or 'the Company' or 'the Group'), the independent manufacturer and supplier of cleaning and non-food ancillary products to the food service, leisure, education and healthcare markets, today announces its interim results for the six months ended 29 February 2008.

Overview

The first half of the year has, as detailed in the 2007 annual report, been overshadowed by the business review carried out by the Company's new management team and by the investigation of the certain significant issues affecting the 2006 and 2007 accounts. This has taken up a lot of management time and has caused significant disruption and cost to the business.

Whilst this continues to be a difficult time for the Group, steady progress is being made to resolve the issues faced following the review.

Financial Highlights 

Results for the six months ended 29 February 2008

• Turnover down 6% to £17.5m (2007: £18.6m)

• Gross margins increased from 44% to 48%

• Cash generated from operating activities of £1.1m (2007: £0.5m)

• Operating result improved to near break even. Loss before restructuring charges of £0.2m (2007: £1.2m)

• Group loss before tax decreased by 35% to £1.1m (2007: £1.7m), including restructuring and exceptional costs of £0.5m (2007: £0.2m)

• Group net borrowings reduced to £9.95m (31 August 2007: £10.2m)

Results for the six months ended 28 February 2007

• Due to the previously highlighted inadequate accounting records and internal controls, comparative figures for this half year period have now also been restated.

• Reconciliation between the original interim results published on 16 May 2007 and the restated results can be found in Appendix 1 to these accounts. 

Operational Highlights

• Group continues to operate within its banking covenants

• Considerable increases in input and distribution costs

• Significant improvements in delivery, control and resolution of customer issues made by the new warehouse and distribution management team

Gavin Gracie, Chief Executive of Zenith Hygiene Group, commented:

'Whilst it is disappointing to be reporting a loss for the first six months, progress has been made in turning the business around.  The increase in gross margins and the implementation of some of the results of the review have led to the Group reporting an operating profit before restructuring and share option expenses, and also generating cash from operating activities.

Although the Group continues to improve its performance and is providing very competitive service levels to customers, as stated at the time of the full year results , the full turnaround of the business will still take some time given the magnitude of the issues it has faced.'

For further information, please contact:

Zenith Hygiene Group plc

Gavin Gracie, Chief Executive               07939 694722

Ian Selby, Group Finance Director         07939 694638

Oriel Securities Limited

Malcolm Strang                                   020 7710 7600

Michael Shaw

Scott Harris                

Stephen Scott                                     020 7653 0030

James O'Shaughnessy 



ZENITH HYGIENE GROUP plc 

Interim Financial Statements

for the six months ended 29 February 2008

Contents

	Page
Chairman's statement	1-2
Independent review report	3-4
Consolidated interim income statement (unaudited)	5
Consolidated interim balance sheet (unaudited)	6
Consolidated interim cash flow statement (unaudited)	7
Consolidated statement of changes in shareholders' equity (unaudited)	8
Notes to the interim financial statements (unaudited)	9-14
Appendix I - Reconciliation of 2007 comparative information (unaudited)	15
Appendix II - UK GAAP to IFRS reconciliation (unaudited)	16-21

Interim Financial Statements

 

for the six months ended 29 February 2008

 

Chairman's Statement

 

Results

The first half of the year has, as detailed in the 2007 annual report, been overshadowed by the business review carried out by the Company's new management team into the performance in 2006 and 2007 . This has taken up a lot of management time and has caused significant disruption and cost to the business.

Results for the Six Months ended 29 February 2008

Whilst it is disappointing to be reporting a loss for the first six months, progress has been made in turning the business around. Turnover is down 6% on 2007 at £17.5m (2007:£18.6m) reflecting the loss of some lower margin customers, resulting in gross margins increasing from 44% to 48%.

However, the increase in gross margins and the implementation of some of the results of the review has led to the Group being able to report a near breakeven operating result, before restructuring charges of £0.2m compared to £1.2m in the previous period. 

The Group has generated cash from operating activities of £1.1m (2007: £0.5m). This has been utilised in the investment of fixed assets, primarily dosing and dispensing equipment, and the payment of bank interest.

The Group made a loss before tax of £1.1m (2007:£1.7m). This includes restructuring and exceptional costs of £0.5m (2007: £0.2m) relating to:

• professional and consulting fees associated with financial and operational reviews; 

• additional costs associated with the re-creation of the August 2007 balance sheet; and

• costs incurred in reorganising the group to realise productivity and efficiency gains.  

Interest payable increased to £0.4m (2007 £0.2m), due to increased average net debt in the period and was based on the banking arrangements in place prior to the grant of additional facilities on 22 February 2008. The interest charge for the remaining six months will be higher due to the additional facilities arranged with the bank. The impact of arrangement fees and revised interest rates on the first six months was not material.

This is the first set of results prepared under International Financial Reporting Standards. Details of the transition are set out in Appendix II to these accounts. 

Results for the Six Months ended 28 February 2007

The 2007 Annual Report and Accounts, reported inadequate accounting records and internal controls for the year, with the year end balance sheet requiring a reconstruction involving the use of forensic accountants.  

The 2007 half year comparative period was also affected by the inadequate accounting records. On the grounds of resource constraint a full reconstruction similar to that at August 2007 has not been performed, however, as a result of the review the comparative figures in this statement have today been restated. 

These figures have been prepared by adjusting the underlying accounting records for issues which were known, as a result of the recent financial review, to have specifically affected the results for the first six months of 2007.  These largely related to items identified as prior year adjustments affecting the year ended 31 August 2006, where the costs were originally incorrectly recorded as being attributed to 2007. Further adjustments have been made by reviewing certain costs against those recorded in the annual audited accounts and revising certain estimates. The interim results originally published on 16 May 2007 were not reviewed by the auditors. 

A reconciliation between those originally published on 16 May 2007 and the restated results is included in Appendix I to these accounts. 

Banking Facilities

The Group had net bank borrowings of £9.96m at the end of the review period, compared to £10.2m as at the audited balance sheet of 31 August 2007.  

As explained in the audited accounts for the year ended 31 August 2007 the Group's banking facilities were increased on 22 February 2008 to £12.75m of which the final £1.0m of the overdraft facility is due for drawdown on 1 June 2008.  

The Group has continued to operate within its banking facilities.

Operations

During the period in which the business review has been undertaken, the Group has continued to experience lower than expected performance against 'first time on time in full deliveries'. This has been a continuing issue over the previous 18 months and major steps are being taken in this area to improve our delivery performance. Customer churn has been at a similar level to prior periods.  

The Group has noticed a cooling economy and during this same period has faced considerable increases in raw material and distribution costs. At present a very limited amount of these costs have been passed on to customers.

Major changes were made to the warehouse and distribution management early in 2008 calendar year. The new team has made significant improvements in delivery, control and resolving customer issues. Bulk manufacturing of both liquid and powder products has been integrated under single management with overall manufacturing performance being satisfactory.  

Outlook

Whilst this continues to be a difficult time for the Group, steady progress is being made to resolve the issues faced following the review.  

Although Zenith continues to improve its performance and is providing competitive service levels to customers, as stated at the time of the full year results, the full 'turnaround of the business will take some time given the magnitude of the issues it has faced'.  

I would like to thank staff, customers and suppliers for their continued support over the last six months.

Simon Barrell
Acting Chairman

29 May 2008

 

Independent Review Report

to Zenith Hygiene Group plc

Introduction

We have been engaged by the Company to review the interim financial statements in the half-yearly financial report for the six months ended 29 February 2008 which comprise the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement, Statement of changes in shareholders' equity, the notes to the interim financial statements and Appendices I and II.  We have read the other information contained in the interim report which comprises only the Chairman's Statement and considered whether it contains any apparent misstatements or material inconsistencies with the financial information.

This report is made solely to the Company in accordance with guidance contained in ISRE (UK and Ireland) 2410, 'Review of Interim Financial Information performed by the Independent Auditor of the Entity'. Our review work has been undertaken so that we might state to the Company those matters we are required to state to them in a review 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, for our review work, for this report, or for the conclusion we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the AIM Rules of the London Stock Exchange plc.

As disclosed in the notes to the interim financial statements, the next annual financial statements of the Group will be prepared in accordance with International Financial Reporting Standards as adopted by the European Union.  This interim report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' and the requirements of IFRS 1 'First-time Adoption of International Financial Reporting Standards' relevant to interim reports.

The accounting policies are consistent with those that the Directors intend to use in the next annual financial statements.

Our Responsibility 

Our responsibility is to express to the Company a conclusion on the interim financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 

Limitation of scope - comparative results to 28 February 2007

The half yearly financial report for the six months ended 28 February 2007 was issued without the inclusion of an independent review report by the auditor, and we carried out no work on the financial statements for that period included within this report. As set out in the notes to the interim financial statements, in the opinion of the Directors, proper accounting records were not maintained during the comparative period. The Directors have adjusted the reported comparative results for the assumed impact of prior year adjustments identified during the preparation of the annual financial statements for the year ended 31 August 2007. They have also reviewed certain key cost categories, as set out in Appendix I, and have adjusted for inconsistent run rates in the comparative period.

We have not carried out a review of the interim financial statements for the six months ended 28 February 2007 in accordance with International Standard on Review Engagements (UK and Ireland) 2410. Our review has been limited to verifying that these comparative financial statements have been prepared in accordance 

with management's assumptions as stated in Appendix I and we make no comment on whether these results have been prepared in accordance with International Accounting Standard 34.

Conclusion

Except for the effect of the limitation of scope referred to in the preceding paragraph, based on our review, nothing has come to our attention that causes us to believe that the interim financial statements in the half-yearly financial report for the six months ended 29 February 2008 are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the AIM Rules of the London Stock Exchange plc.

Based on our review, the restated results for the comparative period of six months ended 28 February 2007 have been prepared, in all material respects, in accordance with the assumptions set out in Appendix I.

GRANT THORNTON UK LLP
AUDITOR

29 May 2008

 

Consolidated Income Statement

for the six months ended 29 February 2008

		February 2008	February 2007	August 2007
	Note	(unaudited)	(unaudited)	(unaudited)
		£'000s	£'000s	£'000s
Revenue	3	17,508	18,566	38,056
Cost of sales		(9,158)	(10,376)	(22,724)
Gross profit		8,350	8,190	15,332
Other income		21	7	72
Distribution costs		(3,428)	(3,687)	(7,557)
Goodwill impairment		-	-	(1,509)
Restructuring & other exceptional costs	4	(499)	(237)	(2,034)
Share option expense		-	(23)	(55)
Other administrative expenses		(5,124)	(5,672)	(10,480)
Total administrative expenses		(5,623)	(5,932)	(14,078)
Operating loss		(680)	(1,422)	(6,231)
Finance expense		(440)	(245)	(697)
Loss before taxation		(1,120)	(1,667)	(6,928)
Taxation	5	-	(20)	(40)
Loss for the period		(1,120)	(1,687)	(6,968)
Basic and diluted loss per share	6	(5.44)p	(8.28)p	(34.03)p

Consolidated Balance Sheet

for the six months ended 29 February 2008

		February 2008	February 2007	August 2007
	Note	(unaudited)	(unaudited)	(unaudited)
		£'000s	£'000s	£'000s
Assets
Non-current assets
Goodwill	7	7,734	9,243	7,734
Other intangible assets		181	366	196
Property, plant & equipment		4,518	5,463	4,646
Total non-current assets		12,433	15,072	12,576
Current assets
Inventories		2,311	3,613	2,568
Trade and other receivables		6,387	9,184	7,251
Cash and cash equivalents		-	455	-
Total current assets		8,698	13,252	9,819
Liabilities
Current liabilities
Financial liabilities - borrowings	8	(374)	(152)	(10,357)
Trade and other payables		(10,944)	(13,205)	(10,771)
Current tax liabilities		(20)	(20)	(20)
Total current liabilities		(11,338)	(13,377)	(21,148)
Net current liabilities		(2,640)	(125)	(11,329)
Non-current liabilities
Financial liabilities - borrowings	8	(9,876)	(8,331)	(210)
Deferred tax liabilities		(110)	(90)	(110)
Total non-current liabilities		(9,986)	(8,421)	(320)
Net (liabilities) / assets		(193)	6,526	927
Shareholders' equity
Share capital		1,030	1,030	1,030
Share premium		10,442	10,442	10,442
Other reserve		326	326	326
Merger reserve		(210)	(210)	(210)
Share option reserve		214	182	214
Accumulated losses		(11,995)	(5,244)	(10,875)
Total (deficit) / equity attributable to shareholders		(193)	6,526	927

 

Consolidated Cash Flow Statement

for the six months ended 29 February 2008

 

	6 months to	6 months to	12 months to
	February 2008	February 2007	August 2007
	(unaudited)	(unaudited)	(unaudited)
	£'000s	£'000s	£'000s
Loss before taxation	(1,120)	(1,667)	(6,928)
Adjustments for:
Depreciation	982	862	1,778
Impairment of property, plant & equipment	-	-	888
Loss on disposal of property, plant & equipment	-	2	4
Impairment of goodwill	1	-	1,509
Foreign exchange gain	(44)	-	-
Investment income	-	-	(1)
Interest expense	440	244	698
Adjustment to employee share scheme	-	23	55
	259	(536)	(1,997)
Decrease in trade & other receivables	912	221	2,154
Decrease in inventories	257	154	1,199
Increase / (decrease) in trade payables	180	910	(1,606)
Cash generated from operations	1,608	749	(250)
Interest paid	(427)	(244)	(615)
Corporation taxes paid	(48)	-	-
Net cash from operating activities	1,133	505	(865)
Cash flows from investing activities
Acquisition of subsidiaries	(20)	(200)	(200)
Purchase of intangible assets	(14)	(90)	(115)
Purchase of property, plant & equipment	(827)	(1,010)	(1,805)
Sale of property, plant & equipment	-	-	22
Interest received	-	-	1
Net cash used in investing activities	(861)	(1,300)	(2,097)
Cash flows from financing activities
(Repayment) / proceeds from long term borrowings	(250)	1,000	3,000
Payment of finance lease liabilities	(97)	(113)	(225)
Payment of other loans	-	(52)	(52)
Dividends paid	-	-	(350)
Net cash used in financing activities	(347)	835	2,373
Net (decrease) / increase in cash and cash equivalents	(75)	40	(589)
Cash and cash equivalents at beginning of period	(174)	415	415
Foreign exchange	44	-	-
Cash and cash equivalents at end of period	(205)	455	(174)

 

Statement of changes in shareholders' equity

for the six months ended 29 February 2008

		Share capital	Share premium	Shares to be issued	Other reserve	Merger reserve	Share option reserve	Accumulated losses	Total
		£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
At 1 September 2007		1,030	10,442	-	326	(210)	214	(10,875)	927
Net loss recognised directly in equity
Loss for the period		-	-	-	-	-	-	(1,120)	(1,120)
Total recognised income and expense for the period		-	-	-	-	-	-	(1,120)	(1,120)
At 29 February 2008		1,030	10,442	-	326	(210)	214	(11,995)	(193)

 

For the six months ended 28 February 2007

At 1 September 2006		1,016	10,086	370	326	(210)	159	(3,557)	8,190
Changes in equity
Employee share scheme		-	-	-	-	-	23	-	23
Net loss recognised directly in equity
Loss for the period		-	-	-	-	-	-	(1,687)	(1,687)
Total recognised income and expense for the period		-	-	-	-	-	23	(1,687)	(1,664)
Shares issued		14	356	(370)	-	-	-	-	-
At 28 February 2007		1,030	10,442	-	326	(210)	182	(5,244)	6,526

 

For the year ended 31 August 2007

At 1 September 2006		1,016	10,086	370	326	(210)	159	(3,557)	8,190
Changes in equity
Employee share scheme		-	-	-	-	-	55	-	55
Net loss recognised directly in equity
Loss for the year		-	-	-	-	-	-	(6,968)	(6,968)
Total recognised income and expense for the year		-	-	-	-	-	55	(6,968)	(6,913)
Shares issued		14	356	(370)	-	-	-	-	-
Dividends paid		-	-	-	-	-	-	(350)	(350)
									-
At 31 August 2007		1,030	10,442	-	326	(210)	214	(10,875)	927

 

Notes to the Interim Financial Statements

for the six months ended 29 February 2008

The consolidated interim financial statements have been prepared in accordance with the AIM Rules for Companies and IAS 34, Interim Financial Reporting, and on a basis consistent with accounting policies set out in note 1, which will be applied when the Group prepares its first set of annual financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU for the financial year ending 31 August 2008.

These are the Group's first interim financial statements prepared under the recognition and measurement principles of IFRS and therefore IFRS 1, 'First-time Adoption of International Financial Reporting Standards' has been applied. An explanation of the transition to IFRS is provided in Appendix II.

Zenith's consolidated interim financial statements are presented in Pounds Sterling (£), which is also the functional currency of the parent company. The interim financial statements are unaudited and do not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. They do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 August 2007.

The financial information for the year ended 31 August 2007 has been derived from the published statutory accounts as restated by the IFRS adjustments set out in Appendix II. A copy of the full accounts for that period, on which the auditors issued a qualified report on the basis that proper books and records had not been kept for that period, is available at Zenith House, A1(M) Business Centre, Dixons Hill Road, Welham Green, Hertfordshire, AL9 7JE, and from the Group's website www.zhgplc.com. These consolidated interim financial statements have been approved for issue by the board of directors on 29 May 2008.

During the years ended 31 August 2006 and 2007 and the first part of the six months ended 29 February 2008, the Group experienced widespread failures in controls, as set out in the Chairman's Statement , and proper accounting records were not kept. These control failures are continuing to be addressed by the Directors.  For the year ended  31 August 2007 and at 29 February 2008, the Group was able to carry out a reconstruction of accounting records and therefore was able to prepare the financial statements for the year ended 31 August 2007 and the interim financial statements for the six months ended 29 February 2008.

 

1. Significant accounting policies

The Group interim financial statements have been prepared under the historical cost convention except for the valuation of financial instruments. A summary of the significant Group accounting policies adopted in the preparation of the financial statements is set out below.

Going concern

The interim financial statements have been prepared on a going concern basis. Although the Group incurred trading losses and significant restructuring charges and cash outflows during the 6 month period ended 29 February 2008, the directors believe that the effects of internal restructuring combined with the current sales pipeline and increased banking facilities should bring about improved operating results.  The directors have also updated the detailed profit and cash flow projections for the period to 31 August 2009 which show that the Group should remain within its facilities throughout this period. As a result, the directors are of the opinion that the Group has adequate working capital to continue as a going concern for the foreseeable future and, in particular, for a period of 12 months from the date of approval of these interim financial statements.

First time adoption of IFRS

The Group's transition date is 1 September 2006, and the Group prepared its opening balance sheet at that date in accordance with IFRS that are expected to be effective at 1 September 2006 except as specified below. In preparing these financial statements, the Group applied mandatory exceptions and certain of the optional exemptions available in IFRS 1 from the full retrospective application of IFRS:

Optional exemptions to full retrospective restatement elected by the Group

The Group has taken the business combination exemption, which allows that IFRS 3 not be applied to business combinations that took place prior to 1 September 2006, the date of transition to IFRS.

Mandatory exceptions to full retrospective restatement applied by the Group

Estimates under IFRS at the date of transition are consistent with estimates made at the same time under UK GAAP. Reconciliations and explanations of the effect of the transition from UK GAAP to IFRS on the Group's equity and its profit or loss are provided in Appendix II. 

Basis of consolidation

The consolidated financial statements incorporate the results, assets, liabilities and cash flows of the company and each of its subsidiaries for the six months ended 29 February 2008, 28 February 2007 and year ended 31 August 2007. Subsidiaries are entities controlled by the Group. Control is deemed to exist when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results, assets, liabilities and cash flows of subsidiaries are included in the consolidated financial statements from the date control commences until the date that control ceases. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group.

Intra-group balances and transactions are eliminated on consolidation.  Unrealised gains on transactions between the Group and its subsidiaries are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred.

Goodwill

Goodwill on acquisition of subsidiaries represents the excess of the cost of an acquisition over the fair value of the Group's share of the identifiable net assets of the acquired subsidiary. Goodwill is not amortised, but tested at least annually for impairment, and carried at cost less accumulated impairment losses. Impairment losses are immediately recognised in the income statement and are not subsequently reversed.

Impairment of intangible assets and property, plant and equipment

The Group tests goodwill at least annually for impairment, and whenever there is an indication that the asset may be impaired. All other intangible assets and property, plant and equipment are tested for impairment when indicators of impairment exist. Impairment is determined with reference to the higher of fair value less costs to sell and value in use.

Financial Instruments

The Group classifies financial instruments, or their component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement.

Financial assets and liabilities are recognized on the Group's balance sheet when the Group becomes party to the contractual provisions of the instrument. The particular recognition and measurement methods adopted by the group's financial instruments are disclosed below:

Trade and other receivables

Trade and other receivables do not carry interest and are stated at their nominal value, as reduced by appropriate allowances for estimated irrecoverable amounts. A provision for impairment of trade receivables is established when there is evidence that the Group will not be able to collect all the amounts 

due according to the original terms of these receivables. The amount of provision is the difference between the carrying value and the present value of estimated future cash flows, discounted at the effective interest rate. Impairment losses are recognized in the income statement.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and deposits on call with banks.

Trade and other payables

Trade and other payables are not interest bearing and are stated at their settlement value.

Borrowings

Borrowings include bank overdrafts, bank fixed term loans and obligations under hire purchase contracts and finance leases. These balances are interest bearing and interest is accrued in accordance with the terms of the loans and agreements to reflect the Group's obligations at the balance sheet date.

Recognition of short-term compensated absences  

The Group has recognised an accrual for the outstanding compensated holiday due to employees at each balance sheet date based on the service provided by the employees to that date.

Other significant accounting policies

The remaining accounting policies used in the consolidated interim financial statements are consistent with those applied in the Group's most recent annual financial statements. Full details of the Group's accounting policies are detailed in its Annual Report and Accounts for the year ended 31 August 2007. These were published on 24 February 2008 and are available on the Group's website. 

2.  Critical accounting judgements and key sources of estimation uncertainty

In the process of applying the Group accounting policies, the following judgements have had the most significant effect on the amounts recognised in the financial statements. Furthermore, key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are as follows:

Operating lease commitments

The Group has entered into commercial property leases in relation to offices. The Group has determined that the present value of outstanding lease payments does not exceed the market value of the properties and has considered all other factors when determining whether a transfer of risk and rewards has taken place. As a result, these leases have been treated as operating leases.

Income taxes

The determination of the Group's tax liabilities requires the interpretation of tax law. The Group obtains appropriate professional advice from its tax advisers in relation to all significant tax matters. The directors believe that the judgements made in determining the Group's tax liabilities are reasonable and appropriate; however, actual experience may differ and materially affect future tax charges.

Impairment of intangible assets and property, plant and equipment

Value in use is estimated using adjusted future cash flows. Significant assumptions are made in estimating future cash flows about future events including future market conditions and future growth rates. Changes in these assumptions could affect the outcome of impairment reviews.  See note 7 for further detail.

3.  Segmental analysis

Analysis by area of geographical operations

The Group has one class of business, cleaning products, which is analysed by geographical segment below:

		6 months to	6 months to	12 months to
		February 2008	February 2007	August 2007
		£’000	£’000	£’000
Revenue
UK		17,167	18,151	37,039
Other EU countries		341	415	1,017
Total revenue		17,508	18,566	38,056

 

4.  Restructuring and other exceptional costs

		6 months to	6 months  to	12 months to
		February 2008	February 2007	August 2007
		£’000	£’000	£’000
Restructuring of operations		302	237	436
Operating and financial review		448	-	-
Prior period accounting adjustments		-	-	1,212
Release of prior period accounting adjustments		(251)	-	-
Professional fees arising from private equity bids and financial consultancy fees regarding bank renegotiation		-	-	386
		499	237	2,034

 

5.  Taxation

The amounts represent the movement in deferred tax liabilities principally due to accelerated capital allowances.  

6. Loss per share

 

	6 months to	6 months to	12 months  to
	February 2008	February 2007	August 2007
	£’000s	£’000s	£’000s
Loss after taxation	(1,120)	(1,687)	(6,968)
Weighted average number of ordinary shares	20,591,056	20,362,661	20,476,859
Basic and diluted loss per share	(5.44)p	(8.28)p	(34.03)p

 

 

 

The basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.

The share options in issue are anti-dilutive as in all periods the Group was loss making therefore the dilutive loss per share is the same as the basic loss per share.  

7.  Goodwill

 

	February 2008	February 2007	August 2007
	£’000s	£’000s	£’000s
Cost
At beginning and end of period	10,651	10,651	10,651
Aggregate impairment
At beginning of period	(2,917)	(1,408)	(1,408)
Impairment during the period	-	-	(1,509)
At end of period	(2,917)	(1,408)	(2,917)
Net book value	7,734	9,243	7,734

Goodwill principally represents the expected net present value of future cash flows arising from customers brought in through acquisition. Where the carrying value is greater than the present value of these future cash flows an impairment charge is recognised. 

An impairment review was carried out at 31 August 2007 to compare on an individual basis the carrying value of investments against the net present value of their future expected cash flows.  This included a review of changes in gross margin, customer retention rates and costs of distribution.  This impairment review was rolled back to 31 August 2006 to provide an estimate of the impairment of goodwill as required by IFRS1, First-time Adoption of International Financial Reporting Standards. A discount rate of 12.75% was used comprising the cost of capital and an equity risk premium.

Goodwill associated with the acquisition of the GWP group and Baker Hygiene & Health Care Supplies was determined to be carried at approximately £1.2 million and £0.2 million in excess of the net present value of their future cash flow values respectively as at 1 September 2006 and a further £1.1 million and £0.2 million in excess of the net present value of their future cash flows as at 31 August 2007. Additional impairments totaling £0.2 million were also identified as at 31 August 2007. Consequently, an impairment charge of £1.5 million was recognised in the year to 31 August 2007 as well as an additional impairment charge against the opening reserves as at 1 September 2006 of £1.4 million.

The table below shows the movement in the carrying value of goodwill under UK GAAP and IFRS for the year to 31 August 2007.  The total charge under UK GAAP amounted to £3,179,000 comprising £2,465,000 of impairment and £714,000 of amortisation. This compares to a total impairment charge under IFRS of £2,917,000. The difference between the two charges and the carrying value of goodwill under IFRS and UK GAAP of £262,000 represents the amortisation charged under UK GAAP on investments where the net present value of future cash flows is in excess of their carrying value.  

		Charge	IFRS		Charge	UK GAAP
		£'000s	£'000s		£'000s	£'000s
Balance at 1 September 2006			10,651			10,651
Impairment charge per IAS 38		(1,408)			-
			(1,408)			-
Revised balance 1 September 2006			9,243			10,651
Amortisation in the year		-			(714)
Impairment charge		(1,509)			(2,465)
			(1,509)			(3,179)
Balance as at 31 August 2007		(2,917)	7,734		(3,179)	7,472

  

8.  Financial liabilities - Borrowings

	February 2008	February 2007	August 2007
	£’000s	£’000s	£’000s
Current
Bank loans and overdrafts due within one year or on demand	(205)	-	(10,174)
Finance lease obligations (other current liabilities)	(169)	(152)	(183)
	(374)	(152)	(10,357)
Non-current
Bank loans	(9,750)	(8,000)	-
Finance lease obligations (other non-current liabilities)	(126)	(331)	(210)
	(9,876)	(8,331)	(210)

 

On 22 February 2008 the group concluded renegotiation of its banking facilities.  The principal terms of the ongoing facility are set out below:

 

 

1.     A fixed term loan of £6 million carrying an interest charge of 2% over LIBOR repayable on 31 August 2009.

      

 

2.    A mezzanine facility of £3.75 million carrying an interest charge of 3% over the bank's base lending rate payable on a

       quarterly  basis across the term.  In addition a further charge of LIBOR plus 7% is payable on 31 August 2009. 

 

3.    An overdraft facility of up to £3 million repayable on an on demand basis carrying an interest charge of LIBOR plus 2%. 

 

4.    The group issued warrants on 22 February 2008 over ordinary shares to the bank equal to 10% of the group's then issued

        share capital.  These warrants will survive for five years from the date of grant and have a subscription price of 5 pence each.

In addition the group has provided certain financial covenants and has incurred arrangement and ongoing monitoring fees.  

Appendix 1

Reconciliation of 2007 comparative information to that previously published

Restatement of results for the six months ended 28 February 2007
	£'000s
Originally reported loss for the six months ended 28 February 2007	(151)
Reversal of unsupported adjustments made to 2007 interims	(1,616)
Unwinding of prior year adjustments made at 31 August 2006 relating to 2007	1,495
Adjustments for costs potentially accrued	(1,730)
Total UK GAAP result	(2,002)
Adjustments made for translation to IFRS	315
Loss for the period under IFRS	(1,687)
Reconciliation of movement in net assets
	£'000s
Opening net assets 1 September 2006 as originally stated under UK GAAP	12,897
Prior year adjustments as reported in the 31 August 2007 financial statements	(3,199)
Restated loss for the period	(2,002)
Share option reserve movement in the period to 28 February 2007	23
IFRS adjustments (related to the six months ended 28 February 2007)	315
IFRS adjustments made to the transition balance sheet at 1 September 2006	(1,508)
Net assets as at 28 February 2007 under IFRS	6,526

Adjustments for under accrued costs arose from a comparison of those in the audited annual accounts for the year ended 31 August 2007 compared to those originally recorded in the books and records for the first half of the year. They specifically included customer rebates (£0.8 million), sales commissions (£0.2 million), provisions against bad debts (£0.3 million) as well as other smaller individual adjustments.

Appendix II

 

Reconciliation of equity and loss under UK GAAP to IFRS (unaudited)

Zenith Hygiene Group plc reported under UK GAAP in its previously published financial statements for the year ended 31 August 2007 and interim report for the six months ended 28 February 2007.  The analysis below shows a reconciliation of equity and loss as reported under UK GAAP as at 31 August 2007 and 28 February 2007 to the revised equity and loss under IFRS. In addition there is a reconciliation of equity under UK GAAP to IFRS at the transition date for the group, being 1 September 2006.

Adjustments from UK GAAP to IFRS

Adjustment (a) IAS 36, Impairment of assets.

Goodwill principally represents the expected net present value of future cash flows arising from customers brought in through acquisition. Where the carrying value is greater than the present value of these future cash flows an impairment charge is recognised. 

An impairment review was carried out at 31 August 2007 to compare on an individual basis the carrying value of investments against the net present value of their future expected cash flows.  This included a review of changes in gross margin, customer retention rates and costs of distribution.  This impairment review was rolled back to 31 August 2006 to provide an estimate of the impairment of goodwill as required by IFRS1, First-time Adoption of International Financial Reporting Standards. A discount rate of 12.75% was used comprising the cost of capital and an equity risk premium.

Goodwill associated with the acquisition of the GWP group and Baker Hygiene & Health Care Supplies were determined to be carried at approximately £1.2 million and £0.2 million in excess of the net present value of their future cash flow values respectively as at 1 September 2006 and a further £1.1 million and £0.2 million in excess of the net present value of their future cash flows as at 31 August 2007. Additional impairments totaling £0.2 million were also identified as at 31 August 2007. Consequently, an impairment charge of £1.5 million was recognised in the year to 31 August 2007 as well as an additional impairment charge against the opening reserves as at 1 September 2006 of £1.4 million.

Adjustment (b) Reclassification of computer software and licences to Other intangible assets

Computer software and licences were previously included under computers and equipment under UK GAAP. In accordance with IAS 38, Intangible Assets, computer software and licences meets the definition of an intangible asset and has therefore been reclassified as an intangible asset.

Adjustment (c) Recognition of short-term compensated absences in accordance with IAS 19, Employee Benefits.  

The Group has recognised an accrual for the outstanding compensated holiday due to employees at each balance sheet date based on the service provided by the employees to that date.

Reconciliation of consolidated loss for the year ended 31 August 2007 (unaudited)

		UK GAAP	(a)	IFRS
		£'000	£'000s	£'000s
Revenue		38,056	-	38,056
Cost of sales		(22,724)	-	(22,724)
Gross profit		15,332	-	15,332
Other income		72	-	72
Distribution costs		(7,557)	-	(7,557)
Goodwill impairment		(3,179)	1,670	(1,509)
Restructuring & other exceptional costs		(2,034)	-	(2,034)
Share option expense		(55)	-	(55)
Other administrative expenses		(10,480)	-	(10,480)
Total administrative expenses		(15,748)	1,670	(14,078)
Operating loss		(7,901)	1,670	(6,231)
Finance expense		(697)	-	(697)
Loss before taxation		(8,598)	1,670	(6,928)
Taxation		(40)	-	(40)
Loss for the period		(8,638)	1,670	(6,968)

  

Reconciliation of equity and loss under UK GAAP to IFRS (Unaudited)

Reconciliation of consolidated loss for the six months 28 February 2007

		UK GAAP	(a)	IFRS
		£'000	£'000s	£'000s
Revenue		18,566	-	18,566
Cost of sales		(10,376)	-	(10,376)
Gross profit		8,190	-	8,190
Other income		7	-	7
Distribution costs		(3,687)	-	(3,687)
Goodwill impairment		(315)	315	-
Restructuring & other exceptional costs		(237)	-	(237)
Share option expense		(23)	-	(23)
Other administrative expenses		(5,672)	-	(5,672)
Total administrative expenses		(6,247)	315	(5,932)
Operating loss		(1,737)	315	(1,422)
Finance expense		(245)	-	(245)
Loss before taxation		(1,982)	315	(1,667)
Taxation		(20)	-	(20)
Loss for the period		(2,002)	315	(1,687)

  

Reconciliation of equity and loss under UK GAAP to IFRS (unaudited)

Reconciliation of consolidated equity at 31 August 2007

	UK GAAP	(a)	(b)	(c)	IFRS
	£'000s	£'000s	£'000s	£'000s	£'000s
Assets
Non-current assets
Goodwill	7,472	262	-	-	7,734
Other intangible assets	-	-	196	-	196
Property, plant & equipment	4,842	-	(196)	-	4,646
Total non-current assets	12,314	262	-	-	12,576
Current assets
Inventories	2,568	-	-	-	2,568
Trade and other receivables	7,251	-	-	-	7,251
Cash and cash equivalents	-	-	-	-	-
Total current assets	9,819	-	-	-	9,819
Liabilities
Current liabilities
Financial liabilities - borrowings	(10,357)	-	-	-	(10,357)
Trade and other payables	(10,671)	-	-	(100)	(10,771)
Current tax liabilities	(20)	-	-	-	(20)
Total current liabilities	(21,048)	-	-	(100)	(21,148)
Net current liabilities	(11,229)	-	-	(100)	(11,329)
Non-current liabilities
Financial liabilities - borrowings	(210)	-	-	-	(210)
Deferred tax liabilities	(110)	-	-	-	(110)
Total non-current liabilities	(320)	-	-	-	(320)
Net assets	765	262	-	(100)	927
Shareholders' equity
Share capital	1,030	-	-	-	1,030
Share premium	10,442	-	-	-	10,442
Other reserve	326	-	-	-	326
Merger reserve	(210)	-	-	-	(210)
Share option reserve	214	-	-	-	214
Accumulated losses	(11,037)	262	-	(100)	(10,875)
Total equity attributable to shareholders	765	262	-	(100)	927

  

Reconciliation of equity and loss under UK GAAP to IFRS (unaudited)

Reconciliation of consolidated equity at 28 February 2007

	UK GAAP	(a)	(b)	(c)	IFRS
	£'000s	£'000s	£'000s	£'000s	£'000s
Assets
Non-current assets
Goodwill	10,336	(1,093)	-	-	9,243
Other intangible assets	-	-	366	-	366
Property, plant & equipment	5,829	-	(366)	-	5,463
Total non-current assets	16,165	(1,093)	-	-	15,072
Current assets
Inventories	3,613	-	-	-	3,613
Trade and other receivables	9,184	-	-	-	9,184
Cash and cash equivalents	455	-	-	-	455
Total current assets	13,252	-	-	-	13,252
Liabilities
Current liabilities
Financial liabilities - borrowings	(152)	-	-	-	(152)
Trade and other payables	(13,105)	-	-	(100)	(13,205)
Current tax liabilities	(20)	-	-	-	(20)
Total current liabilities	(13,277)	-	-	(100)	(13,377)
Net current liabilities	(25)	-	-	(100)	(125)
Non-current liabilities
Financial liabilities - borrowings	(8,331)	-	-	-	(8,331)
Deferred tax liabilities	(90)	-	-	-	(90)
Total non-current liabilities	(8,421)	-	-	-	(8,421)
Net assets	7,719	(1,093)	-	(100)	6,526
Shareholders' equity
Share capital	1,030	-	-	-	1,030
Share premium	10,442	-	-	-	10,442
Other reserve	326	-	-	-	326
Merger reserve	(210)	-	-	-	(210)
Share option reserve	182	-	-	-	182
Accumulated losses	(4,051)	(1,093)	-	(100)	(5,244)
Total equity attributable to shareholders	7,720	(1,093)	-	(100)	6,526

  

Reconciliation of equity and loss under UK GAAP to IFRS (unaudited)

Reconciliation of consolidated equity at 31 August 2006

	UK GAAP	(a)	(b)	(c)	IFRS
	£'000s	£'000s	£'000s	£'000s	£'000s
Assets
Non-current assets
Goodwill	10,651	(1,408)	-	-	9,243
Other intangible assets	-	-	239	-	239
Property, plant & equipment	5,564	-	(239)	-	5,325
Total non-current assets	16,215	(1,408)	-	-	14,807
Current assets
Inventories	3,767	-	-	-	3,767
Trade and other receivables	9,405	-	-	-	9,405
Cash and cash equivalents	415	-	-	-	415
Total current assets	13,587	-	-	-	13,587
Liabilities
Current liabilities
Financial liabilities - borrowings	(219)	-	-	-	(219)
Trade and other payables	(12,447)	-	-	(100)	(12,547)
Current tax liabilities	(20)	-	-	-	(20)
Total current liabilities	(12,686)	-	-	(100)	(12,786)
Net current assets	901	-	-	(100)	801
Non-current liabilities
Financial liabilities - borrowings	(7,348)	-	-	-	(7,348)
Deferred tax liabilities	(70)	-	-	-	(70)
Total non-current liabilities	(7,418)	-	-	-	(7,418)
Net assets	9,698	(1,408)	-	(100)	8,190
Shareholders' equity
Share capital	1,016	-	-	-	1,016
Shares to be issued	370	-	-	-	370
Share premium	10,086	-	-	-	10,086
Other reserve	326	-	-	-	326
Merger reserve	(210)	-	-	-	(210)
Share option reserve	159	-	-	-	159
Accumulated losses	(2,049)	(1,408)	-	(100)	(3,557)
Total equity attributable to shareholders	9,698	(1,408)	-	(100)	8,190

ENDIR KKLFLVEBBBBX