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Friday 15 May, 2009

Sovereign Oilfield

Preliminary Results

RNS Number : 3008S
Sovereign Oilfield Group plc
15 May 2009
 





FOR IMMEDIATE RELEASE

15 MAY 2009

Ref: 0906



SOVEREIGN OILFIELD GROUP Plc


('Sovereign' or 'the Company' or 'the Group')


PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2008



Sovereign Oilfield Group Plc (AIM: SOGP), the Aberdeen-based diversified oilfield services group, is today pleased to announce its preliminary results for the year ended 31 March 2008.


Financial Highlights:


  • Turnover up 83% at £94.6m

(2007 - £51.5m)
  • EBITDA up 67% at £5.0m

(2007 - £3.0m)
  • Operating Profit £2.8m

(2007 - £2.8m)
  • Loss before tax £1.9m

(2007 - profit £1.8m)
  • Adjusted EPS loss per share 14.48p

(2007 - EPS 8.64p )


All of the above numbers are pre-exceptional items.


Operational Highlights


Graham Burgess, Chief Executive Officer of Sovereign, said:


'2008 was another year of growth as the Company integrated acquisitions and turnover grew 83% to £94.6m during the year with a small operating profit before finance costs and exceptional items.


Fabrication again delivered on plan while more than doubling turnover through acquisition and organic growth. Drilling profitability was dragged down by DDS but the Drilling Division otherwise made progress.


Debt finance costs increased during the year and loan terms hardened, so further acquisition plans were dropped and the Board moved to refinance the debt. 


This long process was ultimately successful in early 2009 with loan terms that significantly lower cost and improve cash flow such that the Board remain confident about the Group's prospects'. 




  Further information:


Sovereign Oilfield Group Plc                                       Tel: 01224 261900

Graham Burgess, Chief Executive Officer

Julie Cowie, Finance Director


Buchanan Communications                                        Tel: 0207 466 5000

Tim Thompson/Catherine Breen


Charles Stanley Securities - Nominated Advisor            Tel: 0207 149 6000

Mark Taylor/Freddy Crossley



About Sovereign Oilfield Group Plc


Sovereign, which joined AIM in September 2005, was formed in October 2003, by Dr Peter Felter and Mr Graham Burgess, for the specific purpose of developing an oilfield service company focused on:


  • The provision of engineering, fabrication and drilling services and personnel to oil and gas companies and contractors in the UK and internationally

  • The promotion of new 'high tech' IP and technologies for enhancing oil and gas drilling and production.



  Executive Chairman's Statement 


2008 was another year of growth for Sovereign with turnover growing to £94.6m (2007: £51.5m) as a result of the full year contributions from our acquisitions.  Profit performance for the period, after taking into account the corporate overhead and impairment charges, was disappointing with a loss after taxation of £7.4m in 2008 (2007: profit after taxation of £1.0m). 


The year started on a buoyant note. The Fabrication Division performed well showing sales growth during 2007 with some slowdown in early 2008. All companies made profits with the exception of our start up venture, OIL Middle East LLC in Abu Dhabi, which incurred a loss of £0.7m.  


Our Drilling Division, although again showing sales growth, had a more difficult time with our most challenging business DDS, failing to fulfil its potential.  The continued under-performance of DDS led to the Board taking the decision to start marketing DDS for sale in October 2007.  The business was finally sold in March 2009. 


In line with our previously stated objectives the Company had arranged to make three further acquisitions, while continuing to integrate the earlier acquisitions. This would have formed part of a process to create three substantial divisions in the Group.  Due to funding difficulties and the concurrent global economic situation, the Company pulled out of these transactions. 


Since the significant acquisition activity in the first four months of 2007 we have focussed on organic growth, increased integration and efficiency, and cost cutting. In addition, the Group has pursued refinancing in the very challenging business climate we have experienced since October 2007.  


Following a strategic review we plan to dispose of certain non-core assets in the months to come. 


In the light of our overall performance, the Board are not recommending the payment of an ordinary dividend. 


As a result of impairments and write-offs, our Balance Sheet net assets have been reduced to a level which is less than half our share capital. Under the Companies Act, we are required to call a shareholders' meeting advising members of this position and to consider what course of action needs to be taken. Accordingly, we will send out notice of a General Meeting to be held in June 2009 in due course. 


Since our shares were suspended from AIM in September 2008, the Board has been working tirelessly in a very difficult market to secure longer term working capital facilities to remove uncertainties surrounding the Group's ability to meet their day to day funding requirements going forward.  I am please to report that, with co-operation from our existing Lenders, we have now secured the necessary facilities and are satisfied it is appropriate for our financial statements to be prepared on a going concern basis.  Both our 2008 Annual Accounts and the 2008 Interim Report have today been published and as a result the Board expects the restoration of the Company's Ordinary Shares to trading on AIM shortly, pending posting of the 2008 annual report to Shareholders.


We appreciate the support and loyalty we have received from shareholders during this difficult period and hope for your continued loyalty.  We recognise this has also been challenging for our suppliers and customers and we appreciate their continuity of business.


Your Directors have confidence that steps taken in 2008 and early 2009 will establish a stronger platform for the Group's future growth and profitability. 


Despite the extra pressures on our Executive Directors and staff at all levels over the last few months, they have remained highly focussed and professional and deserve special mention and thanks.


I would also like to thank Dr Graham Dixon, who stepped down from the Board at the last AGM, for his reflective incisive contributions to the Board and the Company since listing, and wish him well for the future. 


Review of Operations

Throughout 2008, the oil and gas industry experienced sustained growth driven by strong oil and gas prices and continued high demand. As a result the services provided by our companies have generally experienced strong growth and high levels of activity.


Our clients are oil and gas and engineering companies who develop new oil and gas fields including many previously uneconomic smaller oil and gas fields, as well as rehabilitating older fields and adjoining facilities.  These activities require the fabrication and manufacturing skills and services, drilling equipment and personnel that Sovereign supplies to the oil and gas industry. 


It is expected that field development, particularly those adjacent to existing facilities and production maintenance and enhancement activities, will continue regardless of the recent decline in the oil price. Experience of past slowdowns suggests that oil and gas companies move to maintain or enhance production, at the expense of exploration. Indeed the large oil and gas companies have almost all recently confirmed increased annual budgets for 2009 and therefore we expect the same pattern to emerge this time as well. 


It is also apparent that the key costs pushing up the marginal cost of field development, particularly offshore, and thus limiting the development of even more new fields, were the cost of drilling rigs, particularly offshore rigs, and the cost of offshore subsea support vessels.  Both are now undergoing significant price corrections which will reduce the marginal development cost from the recent circa $55 per barrel to circa $20 - $25 per barrel, making development sensible at a $50 per barrel oil price, and therefore we expect our market to improve as 2009 progresses.  


To put the Group in a good position to continue to take advantage of these opportunities, Sovereign, in 2007, extended its range of fabrication services through the acquisition of Forfab Limited, a speciality tank, vessel and pressure vessel manufacturer, Labtech Services Limited ('Labtech') and Vertec Engineering Limited ('Vertec'), including Vertec's subsidiary Cooltime Engineering Services Limited ('Cooltime'), cabin and HVAC facility manufacturers.  The Group also opened a fabrication facility in Abu Dhabi through subsidiary OIL Engineering Middle East LLC ('OIL ME'), and continued developing its dimensional survey business Sovereign Dimensional Survey Limited ('SDS').  These acquisitions and developments strengthened and broadened our capabilities substantially.


Sovereign has also broadened its drilling services with the acquisition of RDT Precision Engineers Limited ('RDT') in February 2007.  RDT is a business based in Glasgow, Scotland, which manufactures precision components for subsea well heads and production 'trees' using computer controlled lathes and multi axis milling machines.


Each of the four acquired companies brought with it established relationships that have introduced new clients to Sovereign and our subsidiary companies, although the customer bases of our Group companies continue to have only limited overlap.


At May 2009, the Group has operating and sales offices in the UK, France, Dubai, Abu Dhabi and Russia, giving Sovereign significant geographical reach.


Our subsidiary companies are organised into two Divisions - Sovereign Fabrication Services Limited (the Fabrication Division) and Sovereign Oilfield Services Limited (the Drilling Division).  At May 2009 these comprised:


  • Sovereign Fabrication Services Limited includes Caledonian Petroleum Services Limited ('CPS'), OIL Engineering Limited ('OIL'), Forfab Limited ('Forfab'), Labtech Services Limited ('Labtech'), Vertec Engineering Limited ('Vertec'), Cooltime Engineering Services Limited ('Cooltime'), Sovereign Dimensional Survey Limited ('SDS') and OIL Engineering Middle East LLC ('OIL ME') in Abu Dhabi.


  • Sovereign Oilfield Services Limited includes Prodrill Engineering Limited ('Prodrill'), Serco SA ('Serco') in France, MaxWell Downhole Technology Limited ('MaxWell') and RDT Precision Engineers Limited ('RDT'). 


Diamant Drilling Services SA ('DDS') of Belgium was sold in March 2009; Sovereign Fishing and Remedial Services LLC ('SFRS') of Abu Dhabi is in the process of being closed down.


SALES 

Through both acquisition and organically, the Group has experienced significant growth with Group sales for the year ended 31 March 2008 increasing 83% to £94.6m (2007: £51.5m). 


Sovereign Fabrication Services Limited accounted for £68.6m (2007: £30.2m) of this turnover with Sovereign Oilfield Services Limited accounting for £26.0m (2007: £21.3m).


The Group's diverse range of customers continue to be the international (e.g. Total) and national (e.g. Dubai Petroleum) oil and gas companies, the major (e.g. Wood Group) and smaller oilfield engineering companies and other oilfield specialised service companies (e.g. FMC) to whom we supply our products and services over a wide geographical area and with whom we have good repeat business. 


The Group continued to take advantage of its supply chain management during the year by maximising intra-group co-operation.


Review of Subsidiaries


Sovereign Fabrication Services Limited

Turnover across the Fabrication Division has increased significantly on last year through a combination of organic growth and acquisition. 


Turnover for the year increased to £68.6m (2007: £30.2m). This comprised:


  • CPS, turnover of £14.3m for the year (2007: £11.6m) 

  • OIL, turnover of £11.7m (2007: £14.7m) 

  • Forfab, turnover of £19.2m (2 months in 2007: £2.4m)

  • Labtech, whose 11 month turnover was £11.8m (2007: £nil)**

  • Vertec, whose 11 month turnover was £6.5m (2007: £nil)**

  • Cooltime, whose 11 month turnover was £1.5m (2007: £nil)**

  • SDS, turnover of £2.6m (6 months in 2007: £1.5m)

  • OIL Engineering Middle East LLC, whose 11 month turnover was £1.0m (2007: £nil)


** Labtech, Vertec and Cooltime were acquired in April 2007 and OIL Engineering Middle East LLC commenced trading in May 2007.


EBITDA for the Fabrication Division for the period was £7.1m.


Labtech was acquired in April 2007 and specialises in the design, engineering and manufacture of onshore and offshore cabins (for engineering, laboratory and accommodation use), containers, and tool baskets.  Labtech employs approximately 130 people in its own 18,000 sq. ft. facility and a leased 12,000 sq. ft. facility.


Vertec, including its subsidiary Cooltime, was also acquired in April 2007.  Vertec specialises in the design, engineering and manufacture of onshore and offshore cabins and containers.  Cooltime specialises in heating, ventilating and air conditioning systems and refrigeration units.  Vertec and Cooltime employ approximately 70 people in 22,000 sq. ft. leased facilities in Aberdeen.  The client bases of Labtech and Vertec have little overlap.


OIL ME, Sovereign's Abu Dhabi fabrication business, which was registered in October 2006, has completed preparation of its 100,000 sq. ft. Abu Dhabi quayside facilities with installation of enhanced electrical power, beam cranes and building modifications.  OIL ME was awarded its first contract in May 2007 and was officially opened for business in June 2007, commencing trading with a high level of enquiries.


We believe that the Fabrication Division will continue to grow during the coming year in the UK and internationally.


Sovereign Oilfield Services Limited (the Drilling Division)

Turnover for the year increased to £26.0m (2007: £21.3m).  This comprised:


  • Prodrill, turnover increase to £11.6m (2007: £10.9m)

  • DDS, turnover of £6.8m (2007: £7.0m) 

  • SFRS, turnover of £1.1m (2007: £nil) 

  • Serco, turnover increased to £2.4m (2007: £1.8m)

  • MaxWell, turnover of £0.6m (2007: £1.2m)

  • RDT, turnover of £3.5m (1 month in 2007: £0.4m)


EBITDA for the Drilling Division for the period was £0.9m before exceptional items. 


DDS, whose turnover was down, produces and sells performance fixed cutter drill bits into its markets and although a comparatively small player with an estimated 1.1% of the world market, DDS has an average 6.5% market share in its main markets - Algeria, Indonesia, Venezuela and the UK, with slightly higher market shares in Libya and Pakistan and a growing share of the Saudi Arabian market.  DDS however continued to make losses and in October 2007, the Board decided to put DDS up for sale. Although initially receiving only limited interest, DDS was subsequently sold in March 2009 to Logan Oil Tools Inc.

  

MaxWell, which specialises in the design, manufacture and servicing of high-tech MWD and LWD tools utilising mud-pulse and electromagnetic transmission technology, had an agreed deferral of sales to Smith International mid-year, resulting in a decline in turnover and a resultant small loss for the year. Sales resumed in February 2008 and continued through to 2009.  


Serco SA, our oilfield fishing and tool rental business based in Pau, France, completed the commercialisation of its own Whipstock (a tool for deflecting the drill bit when drilling a new well out of the side of an existing well) and this has now been run successfully for a number of oil companies internationally.


Review and Outlook

While the Company was integrating the acquisitions of Spring 2007, the Group breached its covenants and new banking arrangements were put in place by the Group's Lenders as part of a standstill agreement at 31 March 2008. The Group incurred a one-off fee of £500,000 for breaching its covenants, had access to the undrawn £22m of its £50m loan facility withdrawn and had quarterly increasing ratcheted interest rates imposed. 


Your Board, having already put DDS up for sale in late 2007, was keen to find lower cost debt from alternative lenders, and so from November 2007 considered many mechanisms for refinancing and debt reduction.


In May 2008, freehold buildings held by two subsidiaries were sold for £3.9m cash. The buildings were leased back on a ten year extendable lease. Of the proceeds, £2.9m were used to pay down senior loan facilities.


Through the last fifteen months the Group has assisted a series of UK based banks to present full re-financing proposals to their credit committees in progressively more difficult debt markets. 


Subsequent to negotiations with a number of new Lenders, in April 2009, Sovereign's current Lender group proposed revised terms, subject to certain conditions.  


The new terms agreed provide for a waiver of all outstanding defaults until 31 May 2010, a reduction in margin payable on both senior and mezzanine facilities and a revised covenant package. No restructuring or arrangement fees are payable.


The conditions subsequent included the disposal of Vertec and certain Labtech assets, and the Group was pleased to issue an announcement on 11 May 2009 that it had signed an agreement for the sale of the shares of Vertec and certain rental assets owned by Labtech for £5.45m in cash, subject to shareholder approval.  All proceeds will be used to pay down existing debt levels.


A general meeting is due to be held on 27 May 2009 to ratify this transaction. The Directors unanimously recommend Shareholders to vote in favour of the Resolutions as the Directors intend to do in respect of their beneficial shareholdings amounting to 10,084,900 Ordinary Shares representing 58.24 percent of the issued Ordinary Shares.  


The Board believe the strength of the businesses and the Group, which have performed well under harsh financial conditions and high interest charges of over the last 18 months, is evident.


With new funding in place and the proactive support of Lenders going forward, the Board believes that the prospects for the Group are excellent.


Graham Burgess                                        DATE

Executive Chairman     



  Financial review

The second half of 2008 was a period of significant challenge for the Group.  With the global financial markets deteriorating the Group faced increased difficulties in its negotiations with both existing Lenders and new Lenders regarding a longer term re-structuring of the Group's debt facilities. 


Operational Performance 

The outturn for Group for the year ended 31 March 2008 did not meet expectation, primarily due to the performance of the Drilling Division, although the Fabrication Division did see a drop off in turnover towards the end of the 2007 and in the first quarter of 2008 due to market conditions. 


Turnover for the second half of the year was £48.6m, resulting in a total for the year of £94.6m (2007: £51.5m). The Fabrication Division accounted for £68.6m (73%), the Drilling Division £26.0m (27%).


New acquisitions (namely Forfab, RDT, Labtech and Vertec) contributed £39.8m of this improvement.  Turnover from the existing fabrication companies was £29.7m, an increase of £1.9m; £1.0m accruing from our new operations in the Middle East.


Turnover relating to the Drilling Division was also up £1.4m, mainly due to new fishing tool operations in the Middle East, which contributed £1.0m, and Prodrill £0.6m.


The gross profit margin for the Group (pre-exceptional items) for the year was 26.6% (2007: 28.3%), the decrease mainly attributable to the change in the mix of goods and services provided - with the lower margin Fabrication Division now accounting for 73% of turnover, up from 59% the previous year. The gross profit margin for the Fabrication Division was 25.6% (2007: 27.2%) and the Drilling Division 29.3% (2007: 30.8%).  The reduction in gross margin of the Fabrication Division is due to the growth of CPS and the acquisition of Forfab which have lower margins than other businesses within the Division. 


EBITDA for the Group pre-exceptional items was £5.0m, (2007: £3.0m), with Fabrication contributing £7.1m (2007: £3.6m) and Drilling £0.9m (2007: £1.5m) and corporate overheads of £3.0m (2007: £1.9m). 


The increase in corporate overhead reflects the enlarged organisation including staff costs, travel costs and professional fees. 


Whilst there was an increase in headcount, with four additional accountants as a result of the acquisition of Forfab, RDT, Labtech and Vertec, and the appointment of a senior manager to expand the fishing business, part of the increase in staff costs was due to a re-organisation of the Group with the promotion of the former managing director of CPS to Chief Operating Officer of the Fabrication Division. 


The start up of operations of OIL ME and SFRS in Abu Dhabi also brought additional travel costs, with frequent visits by senior management to Abu Dhabi initially until local management was appointed. 


Professional fees increased by 22% to £0.5m due an increase in audit fees and legal fees again due to the increased size and complexity of the Group. 


Operating profit before exceptional items is £2.8m (2007: £2.8m). 


Exceptional Items 

Exceptional items before tax for the year to 31 March 2008 amount to £5.6m. 


Of this amount £2.6m relates to an impairment write down in relation to DDS.  In principle, an asset is impaired when an entity is unable to recover the asset's balance sheet carrying value either through using it or selling it.  The ongoing losses of DDS and disposal of the business subsequent to year-end at a value substantially below the book value of its assets, which is discussed more fully in the funding section below, are indicators of impairment.  Following a detailed review we have written down the full amount of the goodwill attributed to the acquisition of DDS £0.7m, and part of the value of inventory and receivables £1.9m.


In addition to the above, as highlighted in the Interim Report, an exceptional finance charge of £0.5m was incurred as a result of renegotiation of our banking covenants in November 2007. 


At that time the terms of the original banking facilities were substantially modified. The modification was accounted for as an extinguishment of the original facility, resulting in an exceptional loss of £2.4m.


Abortive deal costs, relocation costs and a severance arrangement account for the balance of the exceptional charge. 


Operating profit after exceptional items is £0.1m (2007: £2.7m). 


The net loss, pre-exceptional items, for the 12 months to 31 March 2008 was £2,467,321 compared to a net profit of £1,453,155 for the corresponding period last year.  The basic loss per share was 14.48 pence (2007 earnings per share: 8.64 pence). 


Post-exceptional items the net loss was £7,433,872 (2007: profit £1,019,551) and basic loss per share was 43.46 pence (2007 earnings per share: 6.01 pence).  In addition to the exceptional items the larger loss for this period is mainly due to an increased interest charge as a result of increased borrowings and an increased cost of finance.


Funding

The Group started the year with net debt of £16.2m. During the first six months of 2007/8 net debt increased to £29.9m following the acquisition of Labtech and Vertec, the total acquisition cost of which was £8.1m, in addition to the increased working capital requirements of the enlarged Group. At 31 March 2008 the net debt was £32.8m, of which cash and short-term deposits were £1.4m (2007: £4.7m). 


Subsequent to the year end, with a rising cost of our funding against a backdrop of the continuing under performance of the Drilling Division and deterioration in market conditions, we reduced capital expenditure, opting to enter into operating leases for new machinery.  We also took steps to reduce corporate overheads whilst additional long-term financing was being sought. 


The Group commenced refinancing activities in May 2008. However this took much longer than anticipated, largely due to the unprecedented global financial downturn. Pending the conclusion of our refinancing the Directors delayed the publication of the Annual Report and Accounts which led to a suspension of the trading of our shares on AIM on 26 September 2008. 


On 21 November 2008 we secured additional working capital facilities from a number of our existing Lenders at rates equivalent to current senior debt which enabled us to address short-term liquidity issues. 


On 7 April 2009, the Group obtained consent for the company's date for suspension from AIM to be extended.  This extension was conditional on, amongst other things, our bankers confirming the provision of new funding facilities for the Company. 


The restructure of the existing debt, which has now been completed by the Group, removes both short and medium-term financing concerns.  The Directors believe we have sufficient funds for the foreseeable future.  The current financing opens the way for the resumption of the implementation of the Group's operational plans for the existing businesses.


Following the publication of our audited results for the year ended 31 March 2008 and the unaudited Interim Results for the 6 months ended 30 September 2008 the Board expects the restoration of the Company's Ordinary Shares to trading on AIM in the near future. In addition to the restructuring of the debt, the Group has been actively engaged in divesting of non-core businesses and assets.


In March 2009, the Group announced the sale of DDS, which was consistently loss making, to Logan Oil Tools Inc for consideration of up to approximately €527,000.  Further in May 2009, the Group sold Vertec Engineering Limited and the assets of Labtech's hire fleet to Offshore Containers Holdings Limited for £5.45m. The disposal of Vertec and Labtech's hire fleet are subject to shareholder approval. 


These funds will be used to reduce debt. 


The latter half of this period was a difficult one for the Company, but demonstrated the capability of the Board to act decisively in the face of adverse market conditions and place the Group in a much better position to face continuing challenging market conditions. 



Julie Cowie                                        DATE

Group Finance Director 

  AUTHORISATION OF FINANCIAL STATEMENTS AND STATEMENT OF COMPLIANCE WITH IFRS

The financial statements of Sovereign Oilfield Group Plc and its subsidiaries (the 'Group') for the year ended 31 March 2008 were authorised by the Board of Directors on 15 May 2009 and the balance sheet was signed on the Board's behalf by Graham Burgess and Julie Cowie. Sovereign Oilfield Group Plc is a public limited company incorporated and domiciled in Scotland.  The company's Ordinary Shares are traded on AiM on the London Stock Exchange. 


The Group's financial statements have been prepared in accordance with international Financial Reporting Standard's (IFRS) as adopted by the European Union as they apply to the financial statements of the Group for the year ended 31 March 2008. 


BASIS OF PREPARATION AND ACCOUNTING POLICIES 

The Directors have prepared the financial statements on the going concern basis which assumes that the Company will continue in operational existence for the foreseeable future. 


The Company and the Group meet their day to day working capital requirements and medium-term funding requirements through banking facilities. At 31 March 2008 the Group owed £3.2m to its Lenders and was in breach of its banking covenants. As at that date the Group had obtained a standstill from its Lenders in the form of an amendment and waiver letter regarding the defaults at 31 March 2008.  Subsequent to the year end, as disclosed in Note 28, the Group has agreed to an amendment of terms in respect of debt facilities in place at 

31 March 2008.  


The new banking terms agreed (subject to the conditions below) provide for a waiver of all outstanding defaults and a standstill regarding the repayment of debt until 31 May 2010 and the resumption of the normal debt repayment profile thereafter, a reduction in margin payable on both senior and mezzanine facilities and a revised covenant package.  


The revised covenant package incorporates financial covenants with regard to quarterly revenue and EBITDA. The failure of these covenant tests renders the entire facilities repayable on demand at the option of the Lenders.


The Directors have prepared trading and cash flow forecasts for a period in excess of one year from the date of approval of these financial statements which project that covenant tests will be met and facility limits will not be exceeded over the duration of the forecasts. The forecasts prepared make assumptions about the Group's ability to sustain its business model and the Directors have been actively monitoring the trading position in relation to the continued volatility in the financial markets. The forecasts also assume an element of cost reduction, particularly with regard to corporate overhead.  


The Group's business model has been subject to independent analysis, and sensitivities conducted to flex the assumptions to assess the robustness of the model.  


As part of the revised banking terms and conditions subsequent to the refinancing, the Group agreed to the disposal of one of its subsidiaries Vertec Engineering Limited and to dispose of certain assets of Labtech Services Limited.  


Although the proposed terms are fully valid and binding, if this condition is not fulfilled prior to end May 2009 the revised terms will become invalid.


The Group was pleased to issue an announcement on 11 May 2009 stating that we concluded the sale of these businesses, subject to shareholder approval. A general meeting is due to be held on 27 May 2009 to ratify this transaction, which requires a majority vote. The Directors intend to vote in favour of the resolutions, amounting to 10,084,900 Ordinary Shares representing 58.24 percent of the issued Ordinary Shares. John Graham Burgess and Dr Peter Gjedboe Felter have provided irrevocable undertakings to vote in favour of the Resolutions, their combined shareholding amounting to 56.895 percent of the issued Ordinary Shares, which will result in the resolution being carried.  


Taking in to account the above, until the shareholder vote has been conducted an uncertainty exists as to whether the Group will meet the conditions under which new facilities have been agreed. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and have therefore concluded that it is appropriate to adopt the going concern basis in preparing these financial statements.


TRANSITION TO IFRS


For all periods up to and including the year ended 31 March 2007, Sovereign Oilfield Group Plc prepared its financial statements in accordance with United Kingdom generally accepted accounting practice (UK GAAP).  These financial statements, for the year ended 31 March 2008, are the first the Group is required to prepare in accordance with international Financial Reporting Standards (iFRS) as adopted by the European Union (EU). 


Accordingly, the Group has prepared financial statements which comply with iFRS applicable for periods beginning on or after 1 April 2006 and the significant accounting policies meeting those requirements are described below. 


In preparing these financial statements, the Group has started from an opening balance sheet as at 1 April 2006, the Group's date of transition to IFRS, and made those changes in accounting policies and other restatements required by IFRS 1 for the first-time adoption of IFRS. in addition, the Group identified some adjustments as part of this process that do not arise from a GAAP difference and have therefore been classified as UK GAAP adjustments, rather than IFRS GAAP reclassifications or remeasurements. the principal adjustments made by the Group in restating its UK GAAP balance sheet as at 1 April 2006 and its previously published UK GAAP financial statements for the year ended 31 March 2007 are set out in Note 30. 


Exemptions applied 

IFRS 1 allows first-time adopters certain exemptions from the general requirement to apply IFRS as effective for March 2008 year ends retrospectively. the Group has taken the following exemptions: 


  • To apply IFRS 3 'Business combinations' prospectively from 1 April 2006. Financial information pertaining to acquisitions, disposal and restructuring occurring before 1 April 2006 has not been restated; 


  • To deem cumulative translation differences to be zero as at 1 April 2006; and 


  • Not to restate fair value adjustments and goodwill denominated in foreign currencies at the date of transition. 


SiGNiFicANt AccOuNtiNG POLiciES 

The Group's key accounting policies adopted in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. 


The Group's financial statements are presented in £Sterling and all values are rounded to the nearest £0.1 million pounds (£m) except where otherwise indicated. 


KEY SOuRcES OF EStiMAtiON uNcERtAiNtY 

The key source of estimation uncertainty that has a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year is the measurement and impairment of goodwill.  Changes in assumptions underlying the carrying value of certain Group assets could result in impairment.  The carrying value of goodwill at 31 March 2008 is £11.8m (Note 12). 


Sovereign completes a review of its goodwill annually, or more frequently where the circumstances require to assess whether those carrying values can be supported by the net present value of future cash flows derived from such assets.  This review examines the continued appropriateness of the assumptions in respect of highly uncertain matters upon which the carrying values of certain of the Group's assets are based. this includes an assessment of discount rates and long-term growth rates, future technological developments and the timing and quantum of future capital expenditure as well as several factors which may affect revenue and profitability identified within other risk factors in this section such as intensifying competition, pricing pressures, regulatory changes and the timing for introducing new products or services.  Due to the Group's substantial carrying value of goodwill under IFRS, the revision of any of these assumptions to reflect current or anticipated changes in operations or the financial condition of the Group could lead to an impairment in the carrying value of certain assets in the Group.  Whilst impairment does not impact reported cash flows, it does result in a non-cash charge in the consolidated income Statement and thus no assurance can be given that any future impairments would not affect the company's reported distributable reserves and therefore its ability to make distributions to its shareholders or repurchase its shares. 


BASiS OF cONSOLiDAtiON 

The Group financial statements consolidate the financial statements of the company and its subsidiary undertakings made up to 31 March 2008. 


The profits and losses of subsidiary undertakings are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights; currently exercisable or convertible potential voting rights; or by way of contractual agreement.  The financial statements of subsidiaries used in the preparation of the consolidated financial statements are prepared for the same reporting year as the parent company and are based on consistent accounting policies.  All inter-company balances and transactions, including unrealised profits arising from them, are eliminated. 


FOREiGN cuRRENcY tRANSLAtiON 

The Group's consolidated financial statements are presented in £sterling, which is the Group's functional currency.  That is the currency of the primary economic environment which the Group operates.  Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. 


Transactions in foreign currencies are initially recorded in the relevant entities' functional currency by applying the spot exchange rate ruling at the date of the transaction.  Monetary assets and liabilities denominated in foreign currencies are re-translated at the functional currency rate ruling at the balance sheet date.  All differences are taken to the income statement, except for differences on monetary assets and liabilities that form part of the Group's net investment in a foreign operation.  These are taken directly to equity until the disposal of the net investment, at which time they are recognised in profit or loss. 


The assets and liabilities of foreign operations are translated into sterling at the rate of exchange ruling at the balance sheet date.  Income and expenses are translated at weighted average exchange rates for the year.  The resulting exchange differences are taken directly to a separate component of equity.  On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement. 


Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. 


GOODWiLL 

Business combinations on or after 1 April 2006 are accounted for under IFRS 3 using the purchase method.  Any excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities is recognised in the balance sheet as goodwill and is not amortised.  To the extent that the net fair value of the acquired entity's identifiable assets, liabilities and contingent liabilities is greater than the cost of the investment, a gain is recognised immediately in the income statement.  Goodwill recognised as an asset as at 31 March 2006 is recorded at its carrying amount under UK GAAP and is not amortised.  Any goodwill arising on acquisition of equity accounted entities is included within the cost of those entities.  After initial recognition, goodwill is stated at cost less any accumulated impairment losses, with the carrying value being reviewed for impairment, at least annually and whenever events or changes in circumstances indicate that the carrying value may be impaired. 


For the purpose of impairment testing, goodwill is allocated to the related cash-generating units monitored by management, usually at business segment level or statutory company level as the case may be.  Where the recoverable amount of the cash-generating unit is less than its carrying amount, including goodwill, an impairment loss is recognised in the income statement. 


The carrying amount of goodwill allocated to a cash-generating unit is taken into account when determining the gain or loss on disposal of the unit, or of an operation within it. 


iNtANGiBLE FixED ASSEtS 

Intangible assets acquired separately from a business are carried initially at cost.  An intangible asset acquired as part of a business combination is recognised outside goodwill if the asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably.  Expenditure on internally developed intangible assets, excluding development costs, is taken to the income statement in the year in which it is incurred.  Expenditure relating to clearly defined and identifiable development projects is recognised as an intangible asset only after all the following criteria are met: 


  • The project's technical feasibility and commercial viability can be demonstrated; 

  • The availability of adequate technical and financial resources and an intention to complete the project have been confirmed; and 

  • The correlation between development costs and future revenues has been established. 


Following initial recognition, the historic cost model is applied, with intangible assets being carried at cost less accumulated amortisation and accumulated impairment losses.  Intangible assets with a finite life have no residual value and are amortised on a straight line basis over their expected useful lives with charges included in administrative expenses, as follows: 


  • Patents, licences and trademarks - over the duration of the legal agreement; 

  • Development expenditure - dependent on the nature of the project but typically 3 years; and 

  • Customers contracts and relationships - up to 5 years. 

  The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. in addition, the carrying value of capitalised development expenditure is reviewed for impairment annually before being brought into use. 


PROPERtY, PLANt AND EQuiPMENt 

Property, plant and equipment and other tangible assets are stated at cost less accumulated depreciation and accumulated impairment losses.  Cost comprises the aggregate amount paid and the fair value of any other consideration given to acquire the asset and includes costs directly attributable to making the asset capable of operating as intended. 


Depreciation is provided at the following annual rates in order to write off each asset to its residual value over its estimated useful life or if held under a finance lease, over the lease term, whichever is the shorter. 


Freehold                           2% on cost 

Leasehold property            over the term of the lease 

Leasehold improvements    over the term of the lease 

Plant and machinery          25% to 33% on cost 

Office equipment               10% to 50% on cost 

Motor vehicles                   20% to 25% on cost 


No depreciation is charged on freehold land. 


The carrying values of tangible fixed assets are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable, and are written down immediately to their recoverable amount.  Useful lives and residual values are reviewed annually and where adjustments are required these are made prospectively. 


LEASiNG AND HiRE PuRcHASE cOMMitMENtS 

Assets held under finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease, with a corresponding liability being recognised for the lower of the fair value of the leased asset and the present value of the minimum lease payments.  Lease payments are apportioned between the reduction of the lease liability and finance charges in the income statement so as to achieve a constant rate of interest on the remaining balance of the liability.  Assets held under finance leases are depreciated over the shorter of the estimated useful life of the asset and the lease term. 


Leases where the lessor retains a significant portion of the risks and benefits of ownership of the assets are classified as operating leases and rentals payable are charged in the income statement on a straight line basis over the lease term. 


iMPAiRMENt OF ASSEtS 

The Group assesses at each reporting date whether there is an indication that an asset may be impaired.  If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset's recoverable amount.  An asset's recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets.  Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.  In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.  Impairment losses on continuing operations are recognised in the income statement in those expense categories consistent with the function of the impaired asset. 


An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased.  If such indication exists, the recoverable amount is estimated.  A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised.  If that is the case the carrying amount of the asset is increased to its recoverable amount.  The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years.  Such reversal is recognised in profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase.  After such a reversal the depreciation charge is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. 


PROviSiONS FOR LiABiLitiES 

A provision is recognised when the Group has a legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the obligation can be made. 


If the effect is material, expected future cash flows are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. 


Where the Group expects some or all of a provision to be reimbursed, for example under an insurance policy, the reimbursement is recognised as a separate asset but only when recovery is virtually certain.  The expense relating to any provision is presented in the income statement net of any reimbursement.  Where discounting is used, the increase in the provision due to unwinding of the discount is recognised as a finance cost. 


iNvENtORiES 

Inventories are stated at the lower of cost and net realisable value.  Cost includes all costs incurred in bringing each product to its present location and condition, as follows: 


  • Raw materials, consumables and goods for resale - purchase cost on a first-in, first-out basis 

  • Work in progress and finished goods - cost of direct materials and labour plus attributable overheads based on a normal level of activity 


Net realisable value is based on estimated selling price less any further costs expected to be incurred to completion and disposal. 


tRADE AND OtHER REcEivABLES 

Trade receivables are recognised and carried at the lower of their original invoiced value and recoverable amount.  Where the time value of money is material, receivables are carried at amortised cost.  Provision is made when there is objective evidence that the Group will not be able to recover balances in full.  Balances are written off when the probability of recovery is assessed as being remote. 


cASH AND cASH EQuivALENtS 

Cash and short-term deposits in the balance sheet comprise cash at banks and in hand and short-term deposits with an original maturity of three months or less. 

  For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. 


iNcOME tAxES 

Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date. 


Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions: 


  • Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; 


  • In respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and 


  • Deferred income tax assets are recognised only to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. 


Deferred tax is measured on a non-discounted basis at the tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. 


Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity.  Otherwise income tax is recognised in the income statement. 


iNtERESt-BEARiNG LOANS AND BORROWiNGS 

Obligations for loans and borrowings are recognised when the Group becomes party to the related contracts and are measured initially at the fair value of the consideration received less directly attributable transaction costs. 


After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. 


Gains and losses arising on the repurchase, settlement or otherwise cancellation of liabilities are recognised respectively in finance revenue and finance cost. 


  FiNANciAL ASSEtS 

Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, receivables or as derivatives designated as hedging instruments in an effective hedge, as appropriate.  The Group determines the classification of its financial assets at initial recognition.  Financial assets are recognised initially at fair value. 


The Group's financial assets include cash and short-term deposits, trade and other receivables and derivative financial instruments. 


Financial assets at fair value through profit or loss include derivative financial instruments entered into by the Group that do not meet the hedge accounting criteria as defined by IAS 39.  Financial assets at fair value through profit and loss are carried in the balance sheet at fair value with gains and losses recognised in the income Statement. 


DEREcOGNitiON OF FiNANciAL ASSEtS AND LiABiLitiES 

A financial asset or liability is generally derecognised when the contract that gives rise to it is settled, sold, cancelled or expires. 


Where an existing financial liability is replaced by another from the same lender on substantially different terms, or terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in profit or loss. 


REvENuE REcOGNitiON 

Revenue is recognised to the extent that the Group obtains the right to consideration in exchange for its performance.  Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAt and other sales taxes or duty. 


The following criteria must also be met before revenue is recognised: 


Sale of goods 

Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on despatch of the goods.  Rendering of services and construction contracts Revenue from the sales of services and revenue from construction contracts is recognised by reference to the stage of completion.  The stage of completion of a contract is determined by reference to the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs.  Where the time taken to complete a construction contract extends over different accounting periods, revenue is recognised by reference to the stage of completion of the contract activity at the balance sheet date where the outcome can be measured reliably, otherwise it is recognised to the extent costs are incurred.  Losses on contracts are recognised in the period where such losses become probable. 


Interest income 

Revenue is recognised as interest accrues using the effective interest method. 


Rental income 

Revenue from the rental of equipment is recognised on a straight-line basis over the period of the rental contract. 


  GOvERNMENt GRANtS 

Government grants are recognised when it is reasonable to expect that the grants will be received and that all related conditions will be met, usually on submission of a valid claim for payment. 


Government grants in respect of capital expenditure are credited to a deferred income account and are released to profit over the expected useful lives of the relevant assets by equal annual instalments.  Grants of a revenue nature are credited to income so as to match them with the expenditure to which they relate 


PENSiON 

The Group operates a defined contribution pension scheme.  Contributions to the scheme are recognised in the income Statement in the period in which they become payable. 


ExcEPtiONAL itEMS 

Exceptional items are those items which, by virtue of their size or incidence, are presented separately in the Income Statement to enable a full understanding of the Group's financial performance. 



SHARE-BASED iNcENtivES 

The cost of equity-settled share based payments to employees is measured by reference to the fair value at the date at which they are granted and is recognised as an expense over the vesting period, which ends on the date on which the relevant become fully entitled to the award.  Fair value is measured by a Black-Scholes pricing model.  In valuing equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of the company (market conditions).  


No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.


At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate of the achievement or otherwise of non-market conditions and of the number of equity instruments that will ultimately vest or in the case of an instrument subject to a market condition, be treated as vesting as described above.  The movement in cumulative expense since the previous balance sheet date is recognised in the income Statement, with a corresponding entry in equity.


  NEW STANDARDS AND INTERPRETATIONS NOT APPLIED


The International Accounting Standards Board and the International Financial Reporting Interpretations Committee ('IFRIC') have issued the following standards and interpretations with effect dates as below:


IAS/IFRS Standards

Effective date

IFRS 8

1 January 2009

Operation segments


Amendments IAS 1

1 January 2009 

Presentation of financial statements


Amendments to IFRS 2

1 January 2009

Share-base payment: vesting conditions


and cancellations


Amendments to IAS 32 and IAS 1

1 January 2009

Puttable financial instruments 


and obligations arising on liquidation 


IFRS 3R

1 July 2009

Business combinations 


Amendments IAS 27

1 July 2009

Consolidated and separate financial 


statements 




Interpretations 

Effective date

IFRIC 12

1 January 2008

Service concession arrangements 


IFRIC 14

1 January 2008

IAS 19 - The limit on a defined benefit


asset, minimum funding requirements 


and their interaction


IFRIC 13

1 July 2008

Customer loyalty programmes



The Directors do not anticipate that the adoption of these standards or interpretations will have a material impact on the Group's accounts in the period of initial application. 

  Group Income Statement

For the Year Ended 31 March 2008

Note

Before exceptional items 

2008 

£m

Exceptional items 

2008 

£m

Total 2008

£m

Before exceptional 
 items 

2007 

£m  

Exceptional items

2007

£m

Total 

2007

£m

REVENUE

1

94.6

- 

94.6 

  51.5  

  - 

  51.5

Cost of sales

5

(69.4)

(1.6)

(71.0)

(36.9) 

  - 

(36.9)

GROSS PROFIT

 

  25.2

(1.6)

  23.6 

  14.6  

  - 

  14.6

Administrative expenses

5

(22.6)

(1.1)

(23.7)

(11.8) 


(0.1)

(11.9)

Other operating income


  0.2

  -

  0.2

  -  

  - 

  - 

GROUP OPERATING PROFIT

FROM CONTINUING OPERATIONS

3,5

2.8

(2.7)

0.1

2.8 

(0.1)

2.7

Finance revenue

7

  0.2

  -

  0.2

  0.1 

  -

  0.1

Finance costs

8

(4.9)

(2.9)

(7.8)

(1.2) 

(0.3)

(1.5)

 

 

(4.7)

(2.9)

(7.6)

(1.1) 

(0.3) 

(1.4)

(LOSS) / PROFIT FROM CONTINUING OPERATIONS BEFORE TAXATION


(1.9)

(5.6)

(7.5)

  1.7  

(0.4) 

1.3

Tax income / (expense) 

9

(0.6)

(0.7)

0.1

(0.3) 

  - 

(0.3)

(LOSS) / PROFIT FOR THE YEAR  ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

 

(2.5)

(4.9)

(7.4)

1.4 

(0.4)

1.0









(LOSS) / EARNINGS PER SHARE (PENCE)

10







BASIC, FOR (LOSS) / PROFIT FOR THE PERIOD ATTRIBUTABLE 








TO ORDINARY EQUITY HOLDERS OF THE PARENT


  - 

  - 

(43.46)

  - 

  - 

  6.01

DILUTED, FOR (LOSS) / PROFIT FOR THE PERIOD ATTRIBUTABLE








TO ORDINARY EQUITY HOLDERS OF THE PARENT

 

  - 

  - 

(43.46)

  - 

  - 

  5.83









ADJUSTED (LOSS) / EARNINGS PER SHARE (PENCE):

10







BASIC, FOR (LOSS) / PROFIT FOR THE PERIOD ATTRIBUTABLE 








TO ORDINARY EQUITY HOLDERS OF THE PARENT


  - 

  - 

(14.48)

  - 

  - 

  8.64

DILUTED, FOR (LOSS) / PROFIT FOR THE PERIOD ATTRIBUTABLE








TO ORDINARY EQUITY HOLDERS OF THE PARENT


  - 

  - 

(14.48)

  - 

  - 

  8.38

  Group Statement of Recognised Income and Expense 

For the Year Ended 31 March 2008


 

Note

 

2008 

£m 

2007

 £m 

INCOME AND EXPENSE RECOGNISED DIRECTLY IN EQUITY




Exchange differences on retranslation of foreign operations

 26

  0.8  

(0.1) 

NET INCOME / (EXPENSE) RECOGNISED DIRECTLY IN EQUITY


  0.8  

(0.1) 

(LOSS) / PROFIT FOR THE YEAR


(7.4) 

1.0  

TOTAL RECOGNISED INCOME AND EXPENSE FOR THE YEAR

 

(6.6) 

  0.9  





ATTRIBUTABLE TO:




Equity holders of the parent


(6.6)

  0.9  

Minority interest


  - 

  -   

 

 

(6.6)

  0.9  



  GROUP Balance Sheet

AS AT 31 March 2008



 

Note

2008 

£m 

2007 

£m 

NON-CURRENT ASSETS




Property, plant and equipment

11

  14.2  

  8.7  

Intangible assets

12

  14.2  

  10.1  

Financial assets

13

0.1  

  0.1  

Deferred tax asset

9(e)

-  

  0.3  

 

 

28.5  

19.2  

CURRENT ASSETS




Trade and other receivables

16

25.7  

18.6  

Inventories

17

  6.2  

  5.1  

Cash and short-term deposits

18

  1.4  

  4.7  

 

 

33.3  

28.4  

TOTAL ASSETS

 

  61.8  

  47.6  

CURRENT LIABILITIES




Trade and other payables

19

  19.7  

  14.5  

Interest-bearing loans and borrowings

20

  33.2  

  0.2  

Income tax payable


0.2  

  0.8  

 

 

53.1  

15.5  

NON-CURRENT LIABILITIES




Interest-bearing loans and borrowings

20

  1.0  

  18.0  

Deferred tax liabilities

9(e)

2.4  

  1.7  

Provisions

22

  0.1  

  0.1  

 

 

3.5  

19.8  

TOTAL LIABILITIES


56.6  

35.3  

NET ASSETS

 

5.2  

12.3  

CAPITAL AND RESERVES




Equity share capital

24, 26

  11.7  

  10.7  

Treasury shares

24, 26

(0.3) 

  -   

Other equity

26

  -   

  0.9  

Currency translation

26

  0.7  

(0.1)  

Retained earning

26

(6.9) 

  0.8  

TOTAL EQUITY

 

5.2  

12.3  


Approved by the Board on 15 May 2009


Mr Burgess

Miss Cowie

Directors


  

Group Cash Flow Statement

For the Year Ended 31 March 2008

Note

2008

£m

2007

£m





OPERATING ACTIVITIES




(Loss) / profit for the year


(7.4)

1.0

Adjustments to reconcile profit for the year to net cash flow 




from operating activities:




Tax on continuing operations


(0.1)

0.3

Net finance costs


7.6

1.4

Depreciation and impairment of property, plant and equipment


1.5

  0.5

Amortisation and impairment of intangible assets


1.4

(0.4)

Share-based payments 


  0.1

  - 

Non-cash compensation received 


(0.3)

-

Decrease in inventories 


0.7

-

(Increase) in trade and other receivables 


(1.9)

(4.3)

Increase / (decrease) in trade and other payables 


1.0

(1.4)

Cash generated from operations


  2.6

(2.9)

Income taxes paid


(1.1)

(1.0)

NET CASH FLOW FROM OPERATING ACTIVITIES


  1.5

(3.9)

INVESTING ACTIVITIES




Sale of property, plant and equipment


  0.8

  0.1

Outflow on acquisition of subsidiary undertakings


(8.3)

(5.5)

Payments to acquire property, plant and equipment


(4.1)

(1.6)

Payments to acquire intangible assets


(0.3)

(0.3)

NET CASH FLOW FROM INVESTING ACTIVITIES


(11.9)

(7.3)

FINANCING ACTIVITIES




Purchase of own shares


(0.3) 

  - 

Interest paid


(3.2) 

(1.1)

Proceeds from share issues


  - 

1.3

Refinancing costs


(0.4)

  -

Repayment of factored debt


(0.9)

  -

New borrowings


  14.5

  25.8

Payments to acquire borrowings 


  -

(2.8)

Repayment of borrowings


(2.4)

(9.6)

New finance leases and hire purchase contracts


  0.2

  0.3

Repayment of capital element of finance leases and hire purchase contracts



(0.3)

(0.2)

NET CASH FLOW FROM FINANCING ACTIVITIES


  7.2

13.7

(DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS


(3.2)

  2.5

Effect of exchange rates on cash and cash equivalents


-

(0.1)

Cash and cash equivalents at 1 April


  4.6

  2.2

CASH AND CASH EQUIVALENTS AT 31 MARCH

18

  1.4

  4.6


  NOTES TO THE ACCOUNTS 


1. REVENUE 

Revenue recognised in the income statement is analysed as follows:

Continuing operations

2008 Total 

Continuing operations

2007 Total 

 

£m

£m

£m

£m

Sale of goods

43.3

43.3

28.5

28.5

Rendering of services

14.1

14.1

12.3

12.3

Construction contracts

37.2

37.2

10.7

10.7

 

94.6

94.6

51.5

51.5

Finance revenue

0.2

0.2

0.1

0.1


94.8

94.8

51.6

51.6


No revenue was derived from exchanges of goods or services (2007: £nil).


2. SEGMENTAL INFORMATION

The primary segment reporting format is determined to be business segments as the Group's risks and rate of return are affected predominantly by differences in the products and services provided.  Secondary segment information is reported geographically.  The operating businesses are organised and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets.  


The drilling segment sells and rents out drilling equipment and provides contract personnel for the oil and gas industry.


The fabrication segment sells fabrication and manufacturing services for the oil and gas industry.  


The Group's geographical segments are based on the location of the Group's assets.  Sales to external customers disclosed in geographical segments are based on the geographical location of its customers. 

  Primary reporting format - business segments

The following tables present revenue and profit and certain asset and liability information regarding the Group's business segments for the years ended 31 March 2008 and 2007.


 

 

Continuing operations

 


Drilling

Fabrication

Corporate

Total

Year ended 31 March 2008

£m

£m

£m

£m

Revenue





Sales from external customers

26.0

68.6

-

94.6

Segment revenue

26.0

68.6

-

94.6

Results





Segment result

(1.8)

6.2

  - 

  4.4  

Unallocated expenses

  - 

  - 

(4.3)

(4.3)

operating (loss) / profit

(1.8)

  6.2  

(4.3)

0.1

Net finance costs

-

-

-

(7.6)

Loss before taxation

-

-

-

( 7.5) 

Tax income 

-

-

-

0.1

Loss for the year

-

-

-

(7.4)






Assets and liabilities





Segment assets

21.5

36.1

-

57.6

Unallocated assets

  - 

  - 

4.2

4.2

Total assets

21.5

36.1

4.2

  61.8  






Segment liabilities

7.6

12.1

  - 

19.7

Unallocated liabilities

  - 

  - 

36.9

36.9

Total liabilities

7.6

12.1

36.9

56.6






Other segment information





Capital expenditure:





Property, plant and equipment

  2.5 

4.8

  0.2 

7.5

Intangible assets

  0.3 

5.2

-

5.5

Depreciation

  0.6 

  0.8 

0.1

  1.5 

Amortisation

  0.1 

  - 

  0.6 

  0.7 

Share-based payment expense

  - 

  - 

  0.1 

  0.1 

Impairment losses recognised

0.7

-

-

0.7

Write-off of inventories

1.6

-

-

1.6

Impairment of receivables

0.3

0.2

-

0.5


Unallocated assets and liabilities comprise certain property, plant and equipment, interest-bearing loans and borrowings and taxation. 


Unallocated expenses are principally corporate overheads including staff costs, travel costs and professional fees. 

  


Continuing Operations



Drilling

Fabrication

Corporate

Total

Year ended 31 March 2007

£m

£m

£m

£m

Revenue





Sales from external customers

  21.3

  30.2

  - 

  51.5

Segment revenue

  21.3

  30.2

  - 

  51.5






Results





Segment result

0.6

3.3

-

3.9

Unallocated expenses

-

-

(1.2)

(1.2)

operating profit / (loss)

0.6

3.3

(1.2)

2.7

Net finance costs

-

-

-

( 1.4)

Profit before taxation

-

-

-

1.3

Tax expense

-

-

-

( 0.3)

Profit for the year

-

-

-

   1.0






Assets and liabilities





Segment asset

21.4

22.2

  - 

43.6

Unallocated assets

  - 

  - 

4.0

4.0

Total assets

21.4

22.2

4.0

47.6






Segment liabilities

  6.6

9.2

  -

15.8

Unallocated liabilities

  -

  - 

  19.5

  19.5

Total liabilities

  6.6

9.2

19.5

  35.3






Other segment information





Capital expenditure:





Property, plant and equipment

1.6

2.8

0.5

4.9

Intangible assets

1.8

0.8

0.1

2.7

Depreciation

0.2

0.2

  0.1

  0.5

Amortisation

0.1

  - 

-

0.1

Share-based payment expense

  - 

  - 

0.1

0.1

Write-off of inventories

0.1

  - 

  - 

  0.1

Impairment of receivables

0.1

  - 

  - 

  0.1

 

  Secondary reporting format - geographical segments 

The following tables present revenue, expenditure and certain asset information regarding the Group's geographical segments for the years ended 31 March 2008 and 2007.

UK and Europe

Africa

Middle East

Rest of the World

Total

Year ended 31 March 2008 

£m

£m

£m

£m

£m

Revenue






Sales to external customers and revenue from continuing operations 

75.5

6.2

6.0

6.9

94.6

Revenue from continuing operations

75.5

6.2

6.0

6.9

94.6







Other segment information






Segment assets

50.5

1.6

5.1

4.6

61.8

Total assets

50.5

1.6

5.1

4.6

61.8







Capital expenditure






Property, plant and equipment

6.0

-

1.3

0.2

7.5

Intangible assets

5.5

-

-

-

5.5



UK and Europe

Africa

Middle East

Rest of the World

Total

Year ended 31 March 2007

£m

£m

£m

£m

£m

Revenue






Sales to external customers

38.4

5.1

2.4

5.6

51.5

Revenue from continuing operations

38.4

5.1

2.4

5.6

51.5







Other segment information






Segment assets

39.0

2.0

1.9

4.7

47.6

Total assets

39.0

2.0

1.9

4.7

47.6







Capital expenditure






Property, plant and equipment

4.2

-

0.7

-

4.9

Intangible assets

2.7

-

-

-

2.7



  

3. GROUP OPERATING PROFIT 

This is stated after charging:

2008

2007

 

£m

£m




Research and development costs written off

  - 

  - 

Amortisation of deferred development costs

  0.1 

  0.1 

Total research and development costs

  0.1 

  0.1 

Depreciation of property, plant and equipment

  1.5 

  0.5 

Amortisation of intangible assets

  0.7 

  0.1 

Total depreciation and amortisation expense

  2.2 

0.6 

Net foreign currency differences

  (0.1) 

(0.1)

Cost of inventories recognised as an expense (included in cost of sales)



including: write-down of inventories to net realisable value

  1.6 

  0.1 

Operating lease payments - minimum lease payments

  1.0 

  0.7 

Government grants

-

-

Increase in provision for impairment of trade receivables recognised in administrative expenses

  0.5 

  0.1 


4. Auditors' Remuneration 

The group paid the following amounts to its auditors in respect of the audit of the financial statements and for other services provided to the Group.

2008

2007

 

£000

£000

Audit of the Group financial statements

162.7

68.0

Other fees to auditors

-auditing the accounts of subsidiaries paid to Group auditors

152.2

61.0

    

- auditing the accounts of subsidiaries paid to other auditors

5.4

4.0

    

- other services pursuant to legislation

4.0

-

    

- other services relating to taxation

9.0

14.0

    

- corporate finance fees

45.0

30.0

 

215.6

109.0


  

5. EXCEPTIONAL ITEMS

2008

2007


£m

£m

Recognised in arriving at operating profit from continuing operations:



Relocation costs

  0.2 

  0.1 

Abortive deal costs

  0.2 

  - 

Severance of employment arrangement (Note 24)

  (0.3) 

  - 

Impairment of goodwill of DDS (Note 12)

  0.7 

  - 

Impairment of trade receivables of DDS

  0.3 

  - 

Write-down of inventories of DDS

  1.6 

  - 

 

  2.7 

  0.1 

Recognised below operating profit:



Costs incurred in re-financing (Note 8)

-

0.3

Covenant breach (Note 8)

0.5

-

Write-down of arrangement fees (Note 20)

2.4

-


2.9

0.3


Relocation costs relate principally to the transfer of RDT to new premises.  Abortive deal costs relate to costs incurred in evaluating potential acquisitions which were not completed. 


The tax effect of the exceptional items is 28% of the gross value with the exception of the DDS impairments and write-downs, the abortive deal costs and the covenant breach which have no tax impact.


6. STAFF COSTS

Staff costs including Executive Directors

2008

2007


£m

£m

Wages and salaries

24.0

13.6

Social security costs

3.0

1.4

Other pension costs

0.4

0.2

 

27.4

15.2


The average monthly number of employees during the year

2008

2007


No 

No 

Management

44

20

Production and technical

560

247

Administration and sales

158

72

 

762

339


Details of Director's emoluments, in aggregate and by Director, together with details of pension entitlements, share options held and bonus payments, are shown in the table headed Directors' Remuneration in the Remuneration Report on page 21.

  

Pension costs

The Group operates a defined contribution scheme.  The assets of the scheme are held separately from those of the Group in an independently administered fund.  The pension cost charge represents contributions payable by the Group to the fund and amounted to £0.4m (2007: £0.2m).  At 31 March 2008 contributions amounting to £0.1m (2007: £nil) were payable to the fund and are included in creditors.


7. FINANCE REVENUE

2008

2007


£m

£m

Bank interest receivable

0.2

0.1

Total interest income for financial assets not at fair value through profit and loss

0.2

0.1

Fair value adjustment on loan hedged by an interest rate swap

  - 

  - 

Total finance revenue

0.2

0.1


8. FINANCE COSTS

2008

2007


£m

£m

Bank loans and overdrafts

4.2

1.2 

Total interest expense for financial liabilities not at fair value through profit and loss

4.2

1.2 

Finance charges payable under finance leases and hire purchase contracts

0.1 

-

Refinancing costs amortised

0.6 

-

Exceptional refinancing costs

-

0.3

Exceptional covenant breach costs

0.5 

-

Exceptional write-down of arrangement fees (Note 20)

2.4

-

Total finance costs

7.8

1.5


A one-off exceptional charge of £0.3m was incurred in 2007 in early settlement charges relating to previous banking facilities.  


A one-off exceptional charge of £0.5m was incurred in 2008 following the breach of banking covenants and a further £2.4m on the new terms of banking facilities (Note 20).


  9. TAXATION

(a)  Tax on profit on ordinary activities

Tax charged in the Income Statement

2008

2007


£m

£m

CURRENT INCOME TAX:



UK corporation tax - continuing operations

0.1

0.6 

Double taxation relief

-

(0.1) 


0.1

0.5

Foreign tax

0.1

0.1

Current income tax charge

0.2

0.6

Amounts overprovided in previous years

(0.3)

-

Total current income tax

(0.1)

0.6




DEFERRED TAX:



Origination and reversal of temporary differences

(0.3) 

- 

Impairment of deferred tax asset

0.3

 - 

Utilisation of prior year losses

 - 

(0.3) 

TOTAL DEFERRED TAX

-

(0.3) 

TAX (CREDIT) / CHARGE IN THE INCOME STATEMENT

(0.1)

0.3




THE TAX (credit) / CHARGE IN THE INCOME STATEMENT IS DISCLOSED AS FOLLOWS:



Income tax (income) / expense on continuing operations

(0.1)

0.3


  (b)  Reconciliation of the total tax charge

The tax rate in the Income Statement for the year is higher than the standard rate of corporation tax in the UK of 30% (2007: 30%).  The differences are reconciled below:

2008

2007


£m

£m

(Loss) / profit from continuing operations before taxation

(7.5)

1.3

Accounting (loss) / profit before income tax

(7.5)

1.3




Accounting (loss) / profit multiplied by the UK standard rate of corporation tax of 30% (2007: 30%)

(2.3)

0.4

Expenses not deductible for tax purposes and income not taxable

0.8

(0.1)

Higher taxes on overseas earnings

  0.1 

  - 

Tax losses not relieved in UK carried forward

0.1

0.3

Unrecognised tax losses

1.2

-

Tax overprovided in previous years

(0.3)

-

Impairment / (recognition) of deferred tax asset

0.3

(0.3)

Effect of deferred tax rate change 

-

-

TOTAL TAX (INCOME) / EXPENSE REPORTED IN THE INCOME STATEMENT

(0.1)

0.3

 

 

(c)  Unrecognised tax losses

The Group has tax losses which arose in Belgium of €3.7m (2007: €2.6 m) that are available indefinitely for offset against future taxable profits of the companies in which the losses arose. Deferred assets have not been recognised in respect of these losses as they may not be used to offset taxable profits elsewhere in the Group and they have arisen in subsidiaries that have been loss-making for some time.  In March 2009 DDS SA was sold without relief for offset of losses.


The Group has tax losses which arose in Abu Dhabi of £1.0m. Deferred tax assets have not been recognised in respect of these losses as they may not be used to offset taxable profits elsewhere in the Group.


The Group has tax losses of £1.4m arising in the UK available for offset against future taxable profits. Deferred tax assets have not been recognised in respect of these losses as their recovery is not deemed sufficiently probable. 

 

(d)  Change in Corporation Tax rate

The UK Corporation Tax rate will decrease from 30% to 28% from 1 April 2008.  The deferred tax balance has been adjusted in the current year to reflect this change.

  

(e) Deferred tax

The deferred tax included in the Balance Sheet is as follows:

2008

2007


£m

£m

Deferred tax liability



Accelerated capital allowances

  (0.5) 

  (0.3) 

Acquisition fair value adjustments

(1.9)

(1.4)

 

(2.4)

(1.7)




Deferred tax asset



Tax losses carried forward

-

0.3


-

0.3

Disclosed on the Balance Sheet



Deferred tax asset

-

0.3

Deferred tax liability

(2.4)

(1.7)


(2.4)

(1.4)




Deferred tax in the Income Statement



Accelerated capital allowances

(0.3)

-

Tax losses carried forward

-

  (0.3) 

Impairment of deferred tax assets 

0.3

-

 

-

(0.3)


10. (LOSS) / EARNINGS PER ORDINARY SHARE

Basic (loss) / earnings per share amounts are calculated by dividing (loss) / profit for the year attributable to ordinary equity holders of the parent by the weighted average number of Ordinary Shares outstanding during the year.  


Diluted (loss) / earnings per share amounts are calculated by dividing the (loss) / profit attributable to ordinary equity holders of the parent by the weighted average number of Ordinary Shares outstanding during the year plus the weighted average number of Ordinary Shares that would be issued on the conversion of all the dilutive potential Ordinary Shares into Ordinary Shares.


The following reflects income and share data used in the basic and diluted earnings per share computations:

2008

2007


£m

£m

(Loss) / profit for the year from continuing operations

(7.4)

1.0

Diluted (loss) / profit attributable to equity holders of the parent

(7.4)

1.0

    

2008

2007


£m

£m

Basic weighted average number of Shares

17.1

16.5

Dilutive potential Ordinary Shares:



Deferred consideration

-

0.5

Diluted weighted average number of Shares

17.1

17.0


  

There have been no other transactions involving Ordinary Shares or potential Ordinary Shares between the reporting date and the date of completion of these financial statements.


(Loss) / earnings per share from continuing operations before exceptional items

The Group presents as exceptional items on the face of the Income Statement, those material items of income and expense which, because of the nature and expected frequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in the year, so as to facilitate comparison with prior periods and to assess better trends in financial performance.


To this end, basic and diluted (loss) / earnings from continuing operations per share is also presented on this basis and using the weighted average number of Ordinary Shares for both basic and diluted amounts as per the table above.  The amounts for earnings per share from continuing operations before exceptional items are as follows:

2008

2007

Basic (loss) / earnings per share from continuing operations (pence)

(43.46)

6.01

Diluted (loss) / earnings per share from continuing operations (pence)

(43.46)

5.83


Net (loss) / profit from continuing operations before exceptional items and attributable to equity holders of the parent is derived as follows:

2008

2007


£m

£m

(Loss) / profit attributable to equity holders of the parent - continuing operations

(7.4)

1.0

Exceptional items after tax - attributable to equity holders of the parent

4.9

0.4

Diluted (loss) / profit from continuing operations before exceptional items attributable to equity holders of the parent

(2.5)

1.4


  

11. PROPERTY, PLANT AND EQUIPMENT

Land and buildings

Leasehold land and buildings

Leasehold improvements

Plant and machinery

Other

Total


£m

£m

£m

£m

£m

£m

COST OR VALUATION:







At 1 April 2006

2.4

0.4

0.2

1.7

0.5

5.2

Foreign currency adjustment

-

-

-

-

-

-

Additions

0.3

-

0.1

1.1

0.3

1.8

Acquisition of subsidiaries

1.4

-

-

1.7

-

3.1

Disposals

-

-

-

-

(0.1)

(0.1)

At 31 March 2007 and 1 April 2007

4.1

0.4

0.3

4.5

0.7

10.0

Foreign currency adjustment

-

0.1

0.1

0.1

0.1

0.4

Additions

-

0.1

1.3

1.9

0.9

4.2

Acquisition of subsidiaries

2.0

-

0.1

0.9

0.3

3.3

Disposals

-

-

-

(0.1)

(0.9)

(1.0)

AT 31 MARCH 2008

6.1

0.6

1.8

7.3

1.1

16.9

DEPRECIATION AND IMPAIRMENT:







At 1 April 2006

-

-

-

0.6

0.2

0.8

Foreign currency adjustment

-

-

-

-

-

-

Charged during the year

0.1

-

-

0.3

0.1

0.5

Disposals

-

-

-

-

-

-

At 31 March 2007 and 1 April 2007

0.1

-

-

0.9

0.3

1.3

Foreign currency adjustment

-

-

-

0.2

-

0.2

Charged during the year

0.1

0.1

0.1

0.9

0.3

1.5

Disposals

-

-

-

(0.1)

(0.2)

(0.3)

AT 31 MARCH 2008

0.2

0.1

0.1

1.9

0.4

2.7








NET BOOK VALUE AT 31 MARCH 2008

5.9

0.5

1.7

5.4

0.7

14.2








NET BOOK VALUE AT 31 MARCH 2007

4.0

0.4

0.3

3.6

0.4

8.7


Assets held under finance leases

The carrying value of plant and equipment held under finance leases and hire purchase contracts at 31 March 2008 was £971,575 (2007: £549,865).  Outwith acquisitions of subsidiaries, additions during the year include £250,188 (2007: £183,238) of plant and equipment held under finance leases and hire purchase contracts. 


The carrying value of leasehold property held under finance leases and hire purchases contracts at 31 March 2008 was £415,714 (2007: £399,678).  Additions during the year include £nil (2007: £nil) of leasehold property held under finance leases and hire purchase contracts. Leased assets under hire purchase contracts are pledged as security for the related finance lease and hire purchase liabilities.

  12. INTANGIBLE ASSETS AND IMPAIRMENT TESTING OF GOODWILL

Development costs and patents

Goodwill

Customer contracts and relationships

Total


£m

£m

£m

£m

COST





At 1 April 2006 

  0.4 

  8.3 

  - 

  8.7 

Additions - internal development

  0.3 

  - 

  - 

  0.3 

Deferred tax asset adjustment

  - 

  (0.3) 

  - 

  (0.3) 

Acquisition of subsidiary

  - 

  0.8 

  1.6 

     2.4 

At 31 March 2007 and 1 April 2007

  0.7 

  8.8 

  1.6 

  11.1 

Additions - internal development

  0.3 

  - 

  - 

  0.3 

Acquisition of subsidiary

  - 

  4.4 

  0.8 

  5.2 

At 31 March 2008

  1.0 

  13.2 

  2.4 

  16.6 

DEPRECIATION AND IMPAIRMENT





At 1 April 2006

  0.2 

  0.7 

  - 

  0.9 

Amortisation during the year

  - 

  - 

  0.1 

  0.1 

At 31 March 2007 and 1 April 2007

  0.2 

  0.7 

  0.1 

  1.0 

Amortisation during the year

  0.1 

-

  0.6 

  0.7 

Impairment loss

  - 

  0.7 

-

  0.7 

At 31 March 2008

  0.3 

  1.4 

  0.7 

  2.4 


NET BOOK VALUE AT 31 MARCH 2008

  0.7 

  11.8 

  1.7 

  14.2 


NET BOOK VALUE AT 31 MARCH 2007

  0.5 

  8.1 

  1.5 

  10.1 


Development costs are amortised over their useful life of 3 years.


Customer contracts and relationships were acquired through business combinations.  These intangible assets are measured using the cost model at £1.7m (2007: £1.5m) and have a five year useful life.


As from 1 April 2006, the date of transition to IFRS, goodwill was no longer amortised but is now subject to annual impairment testing.


Impairment testing of goodwill

Goodwill acquired through business combinations has been allocated to cash-generating units which are generally individual companies within the Group. The significant carrying values of goodwill at 31 March 2008 are set out in the table below. The amount allocated to 'Others' is not considered significant in comparison to the total carrying amount of goodwill.

£m

Labtech Holdings

3.6

Vertec (including Cooltime)

0.7

OIL

3.5

MaxWell

2.5

Forfab

0.8

Others

0.7


11.8


The Group tests goodwill annually for impairment, or more frequently if there are indications it might be impaired.

  

DDS Cash Generating Unit

The company was sold subsequent to the year-end in March 2009. Accordingly, the recoverable amount has been determined based on its fair value less costs to sell. The goodwill associated with this company of £0.7m has been written off in full in the financial year.  Operating losses of £2.1m incurred in 2008/9 prior to the company's disposal will be included in the consolidated results for the 2008/9 financial year.


MaxWell Cash Generating Unit 

The recoverable amount for MaxWell has been determined using actual cash flows for 2008/9 and cash flow projections from financial budgets approved by senior management for the 2009/10 financial year. The pre-tax discount rate applied to the cash flow projections is 12.5% and cash flows beyond 2009/10 are extrapolated for two years using a 6% growth rate and for the following two years using a 5% growth rate. 


MaxWell was profitable and cash generative in 2006/7 following its acquisition in March 2006. Over the following two financial years, the company has focused on broadening its range of down-hole tools by developing new and related products. That process has taken longer than anticipated but is substantially complete by May 2009. The results of the company for 2007/8 and 2008/9 reflect the focus on this development phase with the company making a loss before tax of £0.2m in both 2007/8 and 2008/9. The projections for 2009/10 show significant profitability and cash flow generation from 2009/10 onwards. The achievement of these projections is most sensitive to the assumptions on sales of the company's three principal ranges of tools, only one of which has generated significant sales to date. The remaining two ranges of tools, which account for approximately 50% of the projected sales, require the completion of ongoing assembly and the conversion of enquiries and quotes into firm orders at the anticipated margins. The projections for 2009/10 include sales of £3.7m.


The Directors recognise the inherent uncertainty in forecasting sales for products which have just been developed or whose assembly is nearing completion, however, they consider the projections to be reasonable based on discussions with potential customers during the development phase and the general level of interest in these products demonstrated by high levels of enquiries. If other factors remained unchanged and there were to be a shortfall in projected sales of in excess of 40%, it is likely that the goodwill associated with MaxWell would be impaired. The forecast cash flows of the company exceed the carrying value of goodwill by £2.1m and, in the event of a shortfall in projected sales, the Directors could cut costs within the business. 


Labtech, Vertec, OIL and Forfab Cash Generating Units

The recoverable amounts for each of these companies have been determined using actual cash flows for 2008/9 and cash flow projections from financial budgets approved by senior management for the 2009/10 financial year. The pre-tax discount rate applied to the cash flow projections is 12.5% and cash flows beyond 2011/12 are extrapolated for two years using a 2% growth rate. 


The main assumptions used in the value in use calculations relate to selling prices, sales volumes and margins. The market demand projections contain both volume and pricing assumptions but generally the pricing and margin assumptions assume growth in line with inflation.  


In assessing the value in use of these companies, management have considered the potential impact of reasonably possible changes in the main assumptions used and believe that there are no such changes that would cause the carrying value of the units to exceed their recoverable amounts. 


  13. FINANCIAL ASSETS

2008 

£m

2007

£m

Interest rate cap

0.1

0.1

 

0.1

0.1


On 12 March 2007, the Group entered into an interest rate hedge on 50% of the borrowing facility, i.e. £25.0m. 6 months LIBOR interest rates are capped at 7%.  The effective date of the hedge is 19 July 2007.  The agreement terminates on 19 January 2012.  


The fair value of the interest hedge as at 31 March 2008 is £37,058 (2007: £48,000).

  

14. INVESTMENTS

Details of the investments in which the Group holds 20% or more of the nominal value of any class of share capital, all of which is Ordinary Shares, are as follows:

Proportion of voting rights and share held




Group

Parent


Country of incorporation 

Name of company

%

%

Nature of Business

or registration

Sovereign Oilfield Services Limited

100%

100%

Intermediate holding company

Scotland

Sovereign Fabrication Services Limited

100%

100%

Intermediate holding company

Scotland

(formely OIL Corporate Limited)





MaxWell Downhole Technology Limited

100%

100%

Manufacturing & supply of 

Scotland




down-hole directional survey





tools for oil & gas industry


Sovereign Oilfield Services Middle East (SPC) ***

100%

-

Dormant company

Bahrain

Serco SA ***

100%

-

Fishing & down-hole tool rental

France




and manufacturer


OIL Engineering Limited ***

100%

-

General fabrication services

Scotland

Prodrill Engineering Limited ***

100%

-

Placement of engineering 

England




personnel to oil & gas industry


I-Sub Drilling Systems Limited ***

100%

-

Manufacturing and supply

Scotland




of down-hole tools


Diamant Drilling Services SA ***

100%

-

Designs & manufactures fixed

Belgium




cutter drill bits for oil & gas industry


Diamant Drilling Services Limited ***

100%

-

Sale of drill bits

Scotland

Diamant Drilling Services de Venezuela SA ***

100%

-

Sale of drill bits and other services

Venezuela

Caledonian Petroleum Services Limited ***

100%

-

General fabrication services

Scotland

Diamant Drilling Services International SA ***

100%

-

Dormant company

British Virgin Islands

OIL Engineering Middle East LLC ***

49%

-

General fabrication services

Abu Dhabi

Sovereign Dimensional Survey Limited ***

100%

-

Dimensional surveyors to oil &

Scotland




gas industry


Sovereign Fishing and Remedial Services Limited ***

100%

-

Fishing & down-hole tool rental

Scotland




and manufacturer


Sovereign Fishing and Remedial Services LLC ***

49%

-

Fishing & down-hole tool rental

Abu Dhabi




and manufacturer


Forfab Limited 

100%

-

General fabrication services

Scotland

Findgolden Limited 

100%

-

Intermediate holding company

Scotland

RDT Precision Engineers Limited ***

100%

-

Tool manufacturer for oil & gas industry

Scotland

Roller Precision Products Limited ***

100%

-

Dormant company

Scotland

Sovereign Energprom 

100%

-

Dormant company

Russia

Labtech Holdings Limited

100%

-

Intermediate holding company

Scotland

Cairngorm Holdings Limited

100%

-

Property holding company

Scotland

Labtech Services Limited

100%

-

General fabrication services

Scotland

Vertec Engineering Limited

100%

-

General fabrication services

Scotland

Cooltime Engineering Services Limited

100%

-

General fabrication services

Scotland

*** Held through subsidiary undertakings.

  

MaxWell Downhole Technology Limited

During the year further consideration of £90,584 was paid as a result of the finalisation of the contingent consideration.


Sovereign Energprom

During the year, Sovereign Energprom was formed and is 100% owned by a Group company.


Forfab Limited

During the year further professional fees relating to the acquisition of £47,870 were paid.


RDT Precision Engineers Limited

During the year further professional fees relating to the acquisition of £15,512 were paid.


Labtech Holding Company Limited and subsidiaries

On 18 April 2007, 100% of the issued share capital of Labtech Holding Company Limited was acquired with a cash consideration of £3.6m, along with loan notes of £2.4m, of which £1.8m was redeemable in November 2007, and £0.6m in April 2008.  Agreement was subsequently reached to redeem the loan notes in October 2007.  The amount of goodwill arising of £3.6m was capitalised.


Vertec Engineering Limited and Cooltime Engineering Services Limited

On 18 April 2007, 100% of the issued share capital of Vertec Engineering Limited and its subsidiary Cooltime Engineering Services Limited was acquired with a cash consideration of £1.9m.  The amount of goodwill arising of £0.7m was capitalised.


15. BUSINESS COMBINATIONS

Acquisition of Labtech Holding Company Limited

On 18 April 2007, the Group acquired 100% of the issued share capital of Labtech Holding Company Limited and subsidiaries ('Labtech Holdings'), an unlisted group of companies based in Scotland specialising in the design, engineering and manufacture of onshore and offshore cabins, containers, baskets, air conditioning and refrigeration units.  The acquisition has been accounted for using the purchase method of accounting. The financial statements include the results of Labtech for the eleven and a half month period from the acquisition date. Book and fair values of the net assets at the date of acquisition were as follows:

Book 

value 

Fair value to Group


£m

£m

Property, plant and equipment

2.6

2.6

Intangible assets

-

0.4

Trade receivables

2.4

2.4

Inventories

1.0

1.0

 

6.0

6.4

Trade payables

(2.4)

(2.5)

Deferred tax liabilities

(0.1)

(0.7)

Interest-bearing loans and borrowings

(0.2)

(0.2)

Income tax payable

(0.4)

(0.4)

 

(3.1)

(3.8)

NET ASSETS

2.9

2.6

Goodwill arising on acquisition


3.6

Total acquisition cost

 

6.2


  The total acquisition cost of £6.2m comprised £6.0m consideration and £0.2m acquisition costs.  The consideration consisted of a cash payment of £3.6m and loan notes of £2.4m, of which £1.8m was redeemable in November 2007, and £0.6m in April 2008.  Agreement was subsequently reached with the vendors that both tranches of loan notes would be redeemable prior to the dates above.  The actual date of redemption was 24 October 2007.


Cash flow on acquisition

 

Net cash acquired with the Company

-

Cash paid

6.2

Net cash outflow

6.2


From the date of acquisition to 31 March 2008, Labtech has contributed £1.2m to the net profit of the Group and revenue of £11.8m.


Included in the £3.6m of goodwill recognised above are certain intangible assets that cannot be individually separated and reliably measured from the acquiree due to their nature.  These items include the expected value of synergies and assembled workforce.


Acquisition of Vertec Engineering Limited and its subsidiary

On 18 April 2007, the Group acquired 100% of the issued share capital of Vertec Engineering Limited and its subsidiary, Cooltime Engineering Service Limited, ('Cooltime') an unlisted group of companies based in Scotland specialising in the design, engineering and manufacture of onshore and offshore cabins, containers, baskets, air conditioning and refrigeration units.  The acquisition has been accounted for using the purchase method of accounting. The financial statements include the results of Vertec and Cooltime for the eleven and a half month period from the acquisition date. The fair value of the identifiable assets and liabilities of Vertec and Cooltime as at the date of acquisition were as follows:

Book

Fair value


value

to Group


£m

£m

Property, plant and equipment

0.7

0.7

Intangible assets

-

0.4

Trade receivables

1.6

1.6

Inventories

0.7

0.7

 

3.0

3.4

Trade payables

(1.4)

(1.4)

Deferred tax liabilities

-

(0.3)

Bank overdraft

(0.1)

(0.1)

Interest-bearing loans and borrowings

(0.3)

(0.3)

Income tax payable

(0.1)

(0.1)

 

(1.9)

(2.2)

NET ASSETS

1.1

1.2

Goodwill arising on acquisition

 

0.7

Total acquisition cost

 

1.9


The consideration for Vertec was £1.9m, satisfied by a payment in cash.


Cash flow on acquisition

 

Net cash acquired with the Company

(0.1)

Cash paid

1.9

Net cash outflow

1.8


  From the date of acquisition to 31 March 2008, Vertec and Cooltime have contributed £0.2m to the net profit of the  Group and revenue of £7.8m.


Included in the £0.7m of goodwill recognised above are certain intangible assets that cannot be individually separated and reliably measured from the acquiree due to their nature.  These items include the expected value of synergies and assembled workforce.


Forfab Limited

On 22 January 2007, 100% of the issued share capital of Forfab Limited was acquired with shares of £48,850 and cash consideration of £4.9m, including legal fees. The amount of goodwill arising of £0.8m was capitalised.  

Book

Fair


value

value


£m

£m

Property, plant and equipment 

1.3

1.6

Stock

0.9

0.9

Debtors

4.8

4.8

Cash

0.7

0.7

Creditors

(3.6)

(3.6)

Provisions for liabilities and charges

(0.2)

(0.3)

NET ASSETS

3.9

4.1

Goodwill arising on acquisitions


0.8

CONSIDERATION 


4.9


The freehold property was fair valued following a professional valuation on acquisition.  


Findgolden Limited

On 28 February 2007, 100% of the issued share capital of Findgolden Limited and its trading subsidiary RDT Precision Engineers Limited and the dormant company Roller Precision Products Limited was acquired for a cash consideration of £2.4m, including legal fees. The amount of negative goodwill arising of £0.8m was credited to the Income Statement.  

Book

Fair


value

value


£m

£m

Property, plant and equipment

1.1

1.5

Intangible assets

-

1.6

Stock

0.2

0.2

Debtors

0.5

0.5

Cash

1.1

1.1

Creditors

(0.7)

(0.7)

Provisions for liabilities and charges

(0.2)

(0.8)

Loans and finance leases

(0.2)

(0.2)

NET ASSETS

1.8

3.2

Negative goodwill arising on acquisitions


(0.8)

CONSIDERATION 


2.4


The freehold property was fair valued following a professional evaluation on acquisition.  

16. TRADE AND OTHER RECEIVABLES

2008

2007


£m

£m

Trade receivables

18.1

15.0

Other debtors and prepayments

1.6

0.9

Income taxes recoverable

0.4

-

Other taxes recoverable

0.4

0.7

Accrued income 

5.2

2.0

 

25.7

18.6


Trade receivables are denominated in the following currencies:

2008

2007


£m

£m

Sterling

14.7

12.1

Euro

1.2

1.7

US dollar

1.8

1.2

Other currencies

0.4

-

 

18.1

15.0


Trade receivables are non-interest bearing and are generally on 30-90 day terms and are shown net of a provision for impairment. As at 31 March 2008, trade receivables of £0.5m (2007: £nil) were impaired and fully provided for. Movements in the provision for impairment of receivables were as follows:

2008

2007


£m

£m

At 1 April

-

-

Charge for the year

0.5 

-

At 31 March

0.5 

-


As at 31 March, the analysis of trade receivables that were past due but not impaired is as follows:

    



Past due but not impaired




Total

Neither past due nor impaired

<30 days

30-60 days

60-90 days

90-120 days

>120 days


£m

£m

£m

£m

£m

£m

£m

2008

18.1 

8.0

5.8

2.4

0.8

0.6

0.5 

2007

15.0 

9.1 

3.3 

1.0 

1.1 

0.5 

-

 

  

17. INVENTORIES

2008

2007


£m

£m

Raw materials and consumables

2.0

0.8

Work in progress

2.7

2.8

Finished goods and goods for resale

1.5

1.5

 

6.2

5.1


The difference between purchase price or production cost of stocks and their replacement cost is not material.


18. CASH AND SHORT-TERM DEPOSITS

2008

2007


£m

£m

Cash at bank in hand

1.4

2.6

Short-term deposits

-

2.1

 

1.4

4.7


Cash at bank earns interest at floating rates based on daily bank deposit rates.  Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.  The fair value of cash and cash equivalents is considered to be the same as their carrying value. 


For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise the following at 31 March: 

2008

2007


£m

£m

Cash at bank and in hand

1.4

2.6

Short-term deposits

-

2.1

Bank overdrafts

-

(0.1) 

 

1.4

4.6


19. TRADE AND OTHER PAYABLES

2008

2007


£m

£m

Trade payables

15.4 

9.9 

Other payables

3.3 

4.2 

Interest payable

1.0 

0.4 

 

19.7 

14.5 

 

  20. INTEREST-BEARING LOANS AND BORROWINGS 

2008

2007


£m

£m

CURRENT



Bank overdrafts

  - 

  0.1 

Current obligations under finance leases and hire purchase contracts (Note 21)

  0.3 

  0.1 

Current instalments due on bank loans

32.9

-


33.2

0.2



2008

2007


£m

£m

NON-CURRENT



Non-current obligations under finance leases and hire purchase contracts (Note 21)

  1.0 

  0.7 

Non-current instalments due on bank loans

  - 

  17.3 

 

  1.0 

  18.0 


The bank overdrafts and loans are secured by a floating charge over certain of the Group's assets and pledges over the shares of the parent company and its subsidiaries.


The Group breached its banking covenants during the year and new banking arrangements were put in place by the Group's Lenders as part of a standstill agreement at 31 March 2008.  The disclosures and classification of the company's bank loans are based on the contractual position at 31 March 2008.


Under the standstill agreement the terms of the facility were substantially modified. This is on the basis that the present value of the cash flows under the new facility, discounted using the original effective interest rate, were at least 10% different to the discounted present value of the facility being replaced. Accordingly, the transaction has been accounted for as an extinguishment of the old facility, resulting in an exceptional loss of £2.4m being recorded within Finance Costs in the Income Statement. This represents the difference between the book value of the old facility and the fair value of the new facility, the majority of the difference arising due to the substantial arrangement fees associated with the original facility.


The Group incurred a one-off charge of £0.5m for breaching its banking covenants which was expensed in full during the year. The Group has reclassified repayments of principal from Non-current to Current on the basis that the Company's Lenders are in position to serve the Company with a notice to repay the bank loans on demand. No such notices have been served and the Group has waivers in place for the breaches which occurred during the year. The loans are due for repayment in January 2012.


The Group has senior facilities of £17.4m and mezzanine facilities of £14.6m. The senior facilities bear interest at six-month LIBOR plus 3.5% to 8.5% (2007: LIBOR plus 3.5%) whilst the mezzanine facilities bear interest at six-month LIBOR plus 6% to 11% (2007: LIBOR plus 6%), plus a payment in kind of 6% (2007: 6%).  The payment in kind is not payable until January 2012 and £0.9m is included for the payment in kind in current instalments due on bank loans.  Commitment fees of 0.625% were payable on undrawn facilities until these facilities were withdrawn. At 31 March 2008, the Group no longer has undrawn facilities available to it (2007: £30.0m). The Group's borrowings are floating rate and the effective interest rate is six-month LIBOR plus 13.1%.


Subsequent to the year-end, the Group has agreed revised banking terms with its Lenders which are set out in Note 28.

  21. OBLIGATIONS UNDER LEASES AND HIRE PURCHASE CONTRACTS

The Group uses finance leases and hire purchase contracts to acquire plant and machinery.  These leases have terms of renewal but no purchase options and escalation clauses.  Renewals are at the option of the lessee.  Future minimum lease payments under finance leases and hire purchase contracts are as follows:

2008

2007


£m

£m

Future minimum payments due:



Not later than one year

0.4 

0.1 

After one year but not more than five years

0.6 

0.8

After five years

1.5 

- 


2.5 

0.9 

Less finance charges allocated to future payments

(1.2) 

(0.1)

Present value of minimum lease payments

1.3 

0.8 

The present value of minimum lease payments is analysed as follows:



Not later than one year

0.3 

0.1 

After one year but not more than two years

0.1 

0.3 

After two years but not more than five years

0.3 

0.4 

After five years

0.6

-

 

1.3 

0.8 


Operating lease agreements where the Group is lessee

The Group has entered into commercial leases on certain properties, motor vehicles and items of machinery. These leases have an average duration of between 1 and 5 years.  Only the property lease agreements contain an option for renewal, with such options being exercisable before the expiry of the lease term at rentals based on market prices at the time of exercise.  There are no restrictions placed upon the lessee by entering into these leases.


Future minimum rentals payable under non-cancellable operating leases are as follows:

2008

2007


£m

£m

Not later than one year

0.2

-

After one year but not more than five years

0.9

0.3

After five years 

-

0.7

 

1.1

1.0


  

22. PROVISIONS

Dilapidations on Leasehold buildings


£m

AT 1 APRIL 2007


Current

-

Non-current

0.1


0.1

Arising during the year

-

AT 31 MARCH 2008

0.1

Analysed as:


Current

-

Non-current

0.1

 

0.1


The dilapidations are expected to be payable in 2012. 


23. FINANCIAL INSTRUMENTS

The Group's principal financial liabilities comprise bank loans and trade and other payables. The main purpose of these financial liabilities is to raise finance for the Group's operations. The Group has trade and other receivables and cash and short-term deposits which arise directly from its operations.


The Group is exposed to interest rate risk, credit risk, foreign currency risk and liquidity risk.  


The Group's Board of Directors oversees the management of these risks. It reviews and agrees policies for managing each of these risks which are summarised below.


Interest rate risk 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group's exposure to the risk of changes in market interest rates relates primarily to the Group's bank loans with floating interest rates.


The Group has managed its risk by entering into an interest rate hedge which caps six month LIBOR at 7%.


The following table sets out the carrying amount, by maturity of the Group's financial instruments that are exposed to interest rate risk:

Within 1 year

1-2 years

2-3 

years

3-4 years

4-5

 years

More than 5 years

Total

Year ended 31 March 2008

£m

£m

£m

£m

£m

£m

£m

Fixed rate








Obligations under finance leases and hire purchase contracts

(0.3)

(0.1)

(0.1)

(0.1)

(0.1)

(0.6)

(1.3)


(0.3)

(0.1)

(0.1)

(0.1)

(0.1)

(0.6)

(1.3)


  

Within 1 year

1-2 years

2-3 years

3-4 years

4-5 years

More than 5 years

Total


£m

£m

£m

£m

£m

£m

£m

Floating rate








Cash

1.4

-

-

-

-

-

1.4

Bank loan

(32.9)

-

-

-

-

-

(32.9)


(31.5)

-

-

-

-

-

(31.5)



Within 1 year

1-2 years

2-3 years

3-4 years

4-5 years

More than 5 years

Total

Year ended 31 March  2007

£m

£m

£m

£m

£m

£m

£m

Fixed rate








Obligations under finance leases and hire purchase contracts

(0.1)

(0.3)

(0.2)

(0.1)

(0.1)

-

(0.8)


(0.1)

(0.3)

(0.2)

(0.1)

(0.1)

-

(0.8)



Within 1 year

1-2 years

2-3 years

3-4 years

4-5 years

More than 5 years

Total


£m

£m

£m

£m

£m

£m

£m

Floating rate








Cash

2.6

-

-

-

-

-

2.6

Short-term deposits

2.1

-

-

-

-

-

2.1

Bank overdrafts

(0.1)

-

-

-

-

-

(0.1)

Bank loan

-

-

-

-

(17.3)

-

(17.3)


4.6

-

-

-

(17.3)

-

(12.7)


Interest on financial instruments classified as floating rate is repriced at intervals of less than one year.  Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument.  The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk.


Interest rate sensitivity 

The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group's profit before tax (through impact on floating rate borrowings). The impact on the Group's equity is the same, subject to the tax at 28%. 

  

The 2008 analysis below reflects a larger reasonably possible change in interest rates than in 2007, due to increased volatility in the financial markets:

Increase / (decrease) in basis points

Effect on profit 

before tax

£m

2008



Sterling

20

(0.3)




Sterling

(20)

0.7




2007



Sterling

10

(0.2)




Sterling

(10)

0.2


Credit risk

There are no significant concentrations of credit risk within the Group unless otherwise disclosed.  The maximum credit risk exposure relating to financial assets is represented the carrying value of £19.5m as at the Balance Sheet date.  


The Group has established procedures to minimise the risk of default by trade debtors including detailed credit checks undertaken before a customer is accepted.  Historically, these procedures have proved effective in minimising the level of impaired and past due debtors.


Foreign currency risk 

Foreign currency risk is the risk that the fair value or future cash flows of financial instrument will fluctuate because of changes in foreign exchange rates. The Group's exposure to the risk of changes in foreign exchange rates relates primarily to the Group's operating activities (when revenue or expense are denominated in a difference currency from the Group's functional currency) and the Group's net investments in foreign subsidiaries.


The Group manages it foreign currency risk by insuring that sales, revenues and costs are matched as far as possible. The Group's principal exposures arise in overseas' subsidiaries with functional currencies of Euros where there are US$ sales not matched by US$ costs. There is also an exposure in the translation of the results of the Euro denominated subsidiaries into the group's functional currency.


The following table demonstrates the sensitivity to a reasonably possible change the US dollar and Euro exchange rates with all other variables held constant, of the Group's profit before tax (due to changes in the fair value of monetary assets and liabilities).

Increase 

Effect on profit


 in

before tax


basis points

£m

2008



US dollar

10

0.3

Euro

10

(0.6)




2007



US dollar

10

(0.3)

Euro

10

(0.3)


  

A decrease of 10 basis points would have an equal and opposite effect.


Liquidity Risk 

The Group monitors its liquidity risk to a shortage of funds using actual data, forecasts and models against which sensitivities are tested. The Group's objective is to achieve a balance between continuity of funding and flexibility through bank loans, finance leases and hire purchase contracts.  The Group meets its day to day working capital and medium-term funding requirements through banking facilities.  The Group secured new funding, including acquisition finance, in January 2007. The terms on which that funding was secured included covenants with which the Group was required to comply relating to earnings, cash flows, interest cover and leverage. Due to the performance of the Drilling Division, particularly DDS, the Group breached these covenants during the year and a standstill agreement and bank waivers were secured which included revised banking terms (Note 20). The Group has been working closely with its Lenders during 2008 and 2009 to secure new long-term facilities and signed new agreements with its Lenders subsequent to the year-end (Note 28). The new terms provide for a waiver of all outstanding defaults until 31 May 2010, a reduction in margin payable and a revised covenant package. The revised covenant package incorporates financial covenants with regard to quarterly revenue and earnings before interest, tax, depreciation and amortisation. The failure of the covenant tests renders the entire facilities repayable on demand of the option of the Lenders. 


The table below summarises the maturity profile of the Group's financial liabilities at 31 March 2008 and 2007 based on contractual undiscounted payments.  Interest rates on variable loans have been based on six-month LIBOR at the Balance Sheet date.

On demand

Less than 3 months

3-12 months

1-5

years

Total

Year ended 31 March 2008

£m

£m

£m

£m

£m

Interest-bearing loans and borrowings

32.9

  1.0 

3.8

22.1

59.8

Trade and other payables

3.0

10.5

5.2

-

  18.7 

 

   35.9 

  11.5 

9.0

22.1

78.5



On demand

Less than 3 months

3-12 months

1-5

years

Total

Year ended 31 March 2007

£m

£m

£m

£m

£m

Interest-bearing loans and borrowings

  - 

0.5

1.6

28.7

30.8

Trade and other payables

  2.2 

  10.9 

  2.4 

  - 

  15.5 

 

  2.2 

  11.5 

  4.0 

  28.7 

  46.3 



  Fair values of financial assets and financial liabilities 

Set out below is a comparison by category of carrying amounts and fair values of all of the Group's financial instruments.

Book value

Fair value


2008

2007

2008

2007


£m

£m

£m

£m

FINANCIAL ASSETS





Cash and short-term deposits

1.4

4.7

1.4

4.7

Derivative financial instruments

0.1

0.1

0.1

0.1






FINANCIAL LIABILITIES





Bank overdraft

-

(0.1)


(0.1)

Interest-bearing loans and borrowings:





Finance lease and hire purchase obligations

(1.3)

(0.8)

(1.3)

(0.8)

Floating rate borrowings

(32.9)

(17.3)

(32.9)

(17.3)


The fair value of derivative instruments is determined using quoted prices.


The carrying value of interest-bearing loans and borrowings are assumed to approximate their fair value given that they are floating rate and terms were signed shortly before the 2008 and 2007 year-ends.  The carrying values of trade receivables less impairment and trade payables are assumed to approximate their fair value. 


24. AUTHORISED AND ISSUED SHARE CAPITAL

2008

2007


No. of shares

No. of shares

AUTHORISED



Ordinary Shares of 1 pence each

40,000,000

40,000,000

 

40,000,000

40,000,000



2008

2007


£

No.

ALLOTTED, CALLED UP AND FULLY PAID



Ordinary Shares of 1 pence each:



At 1 April

17,046,211 

16,263,830 

Issued on refinancing agreement

- 

611,157 

Issued as deferred consideration

 - 

148,236 

Issued on acquisition of subsidiary

587,010 

22,988 

Purchased for cancellation

(317,917) 

- 

At 31 March

17,315,304 

17,046,211 


On 21 September 2007, 317,917 shares of 1 pence representing 1.9% of the issued share capital were purchased for cancellation at a price of 87 pence per share at a total cost of £305,817 including professional fees.


On 17 October 2007, 587,010 Ordinary Shares of 1 pence were issued to the vendors of MaxWell Downhole Technology Limited as contingent consideration. 


On 28 February 2008, 454,456 Ordinary Shares of 1 pence were transferred to the Company as part of a severance arrangement whereby an employee agreed to pay £250,000 to be satisfied by the transfer of these shares. The shares are held by the company as Treasury shares. 

  

25. SHARE-BASED PAYMENTS 

Employee share-option plan 

The Employees are granted options at the discretion of the Board of Directors. The options will vest if the employee remains in service for a period of two years from the date of grant. The exercise price of the options is equal to the estimated market price of shares on the date of grant. The contractual life of the options is 10 years and there are no cash settlement alternatives. 


The expense recognised for share-based payments in respect of employee services received during the year to 31 March 2008 is £84,344 (2007: £116,425).


The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year. 

2008

2008

2007

2007


No.

WAEP

No.

WAEP

Outstanding as at 1 April

610,000

£1.90

400,000

£1.63

Granted during the year

15,000

£1.91

315,000

£2.07

Expired during the year

(121,000)

£1.74

(105,000)

£1.40

Outstanding as at 31 March 

504,000

£1.93

610,000

£1.90

Exercisable at 31 March

240,000

£1.79

-

-


For the share options outstanding as at 31 March 2008, the weighted average remaining contractual life is 8.29 years (2007: 9.24 years).


The weighted average fair value of options granted during the year was £0.73 (2007: £0.81). The range of exercisable prices for options outstanding at the end of the year was £1.40 - £2.28 (2007: £1.40 - £2.28).


The fair value of equity-settled share options granted is estimated as at the date of grant using a Black-Scholes model, taking into account the terms and conditions upon which the options were granted. The following table lists the inputs to the model used for the years ended 31 March 2008 and 31 March 2007.

2008

2007

Dividend yield (%)

-

-

Expected share price volatility (%)

31.8

31.9

Risk-free interest rate (%)

4.4

4.4

Expected life of option (years)

5

5

Weighted average share price (£)

1.85

1.90


The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumptions that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome.


No other features of options grant were incorporated into the measurement of fair value.


  

26. STATEMENT OF CHANGES IN EQUITY

Equity share capital

Treasury share

Other equity

Currency translation

Retained earnings

Shareholder equity

Minority interests

Total equity


£m

£m

£m

£m

£m

£m

£m

£m

At 1 April 2006

9.0  

 - 

1.0

 - 

(0.3) 

9.7

0.1

9.8  

Total recognised income and expense for the year

 - 

 - 

- 

(0.1) 

1.0

0.9

-

0.9

Share-based payment reserve credit

-

-

-

-

0.1

0.1

-

0.1

Shares issued on acquisition

0.4

-

(0.1)

-

-

0.3

(0.1)

0.2

Shares issued for cash

1.3

-

-

-

-

1.3

-

1.3

At 31 March 2007 and 

1 April 2007

10.7

- 

0.9  

(0.1) 

0.8  

12.3

- 

12.3  

Total recognised income and expense for the year

- 

- 

- 

0.8  

(7.4) 

(6.6) 

- 

(6.6) 

Shares issued on acquisition

 1.0  

- 

(0.9) 

-

-

0.1  

- 

0.1

Purchase of Treasury shares

- 

(0.3) 

- 

-

-

(0.3) 

-

(0.3) 

Share buyback

-

-

-

-

(0.3)

(0.3) 

- 

(0.3) 

Share-based payment reserve credit

-

-

-

-

-

-

- 

-

At 31 March 2008

11.7  

(0.3) 

 - 

0.7

(6.9)

5.2

- 

5.2


EQUITY SHARE CAPITAL 

The balance classified as share capital includes the total net proceeds (both nominal value of £0.2m and share premium of £11.5m) on issue of the Company's equity share capital, comprising 1 pence Ordinary Shares.


FOREIGN CURRENCY TRANSLATION RESERVE 

The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries.  It is also used to record the effect of hedging net investments in foreign operations.

  

27. ADDITIONAL CASH FLOW INFORMATION

1 April

Cash

Debt on

Exchange

Non-cash

31 March


2007

flow

acquisition

differences

movements

2008


£m

£m

£m

£m

£m

£m

ANALYSIS OF GROUP NET DEBT







Cash and cash equivalents

4.6

(3.2) 

-

-

-

1.4

Loans

(20.0)

(12.1) 

-

-

(0.8) 

(32.9)

Finance leases

(0.8) 

(0.1) 

(0.5) 

0.1  

 -

(1.3)

 

(16.2) 

(15.4) 

(0.5) 

 0.1  

(0.8) 

(32.8) 



1 April

Cash

Debt on 

Exchange

Non-cash

31 March


2006

flow

acquisition

differences

movements

2007


£m

£m

£m

£m

£m

£m

ANALYSIS OF GROUP NET DEBT







Cash and cash equivalents

2.2

2.4

- 

-

 - 

4.6

Loans

(3.6) 

(16.3) 

 - 

-

(0.1) 

(20.0) 

Finance leases

(0.5) 

0.2  

(0.2) 

 -

(0.3) 

(0.8) 

 

(1.9) 

(13.7) 

(0.2) 

- 

(0.4) 

(16.2) 


NON-CASH MOVEMENTS

Non-cash movements include £0.8m representing non-cash interest in the form of payments in kind (Note 20).


28. POST BALANCE SHEET EVENT

Restructuring of Financing Arrangements

At 31 March 2008, the Group obtained a standstill from its Lenders in the form of an amendment and waiver letter regarding defaults at 31 March 2008. Contained within the letter were amendments to the terms of the Senior Facility Agreement and the Mezzanine Facility Agreement with reference to the ratcheting of interest margins from 3.5% to 8.5% on the senior facility and from 6% to 11% on the mezzanine facility over a period of time. In addition, the Company was required to pay a fee equal to 1% of the aggregate commitments, being £500,000. Conditions relating to the disposal of DDS were also included.  


Existing financial covenants were revised as part of the amendment and waiver letter, such covenants including tests around interest cover, senior leverage, leverage and capital expenditure.


Given the circumstances at the Balance Sheet date, bank loans were classified as current in accordance with IAS 1, and arrangement fees of £2.4m written off in accordance with IAS 39 as the terms of the existing facility were deemed to be substantially modified.


Subsequent to the year end, prior to the date of issue of the financial statements, the Group has agreed to an amendment of terms in respect of credit facilities in place at 31 March 2008. The new terms agreed provide for a waiver of all outstanding defaults until 31 May 2010, a reduction in margin payable on both senior and mezzanine facilities and a revised covenant package. No restructuring or arrangement fees are payable with regard to the negotiation of new commercial terms.

  

Under the new terms, for the period from 1 June 2009 to 31 March 2010 the senior facilities will bear interest at LIBOR plus 4%, whilst the mezzanine facilities will bear interest at a payment in kind of 6.5%. For the period from 1 April 2010 to 31 March 2011 the senior facilities will bear interest at LIBOR plus 5%, whilst the mezzanine facilities will bear interest at LIBOR plus 6.5%, plus a payment in kind of 3.5%.  


We estimate that the revised terms which cover the period to 31 March 2011, will result in net savings in finance costs of £3.4m.


The revised covenant package incorporates financial covenants with regard to quarterly revenue and EBITDA which the Board believe are acceptable. 


As part of the conditions subsequent, the Group agreed to the disposal of Vertec and certain Labtech assets. The Group was pleased to issue an announcement on 11 May 2009 that we agreed the sale of the shares of Vertec and the assets of Labtech's hire fleet for £5.45m, subject to shareholder approval. A general meeting is due to be held on 27 May 2009 to ratify this transaction. The Directors unanimously recommend Shareholders vote in favour of the Resolutions as the Directors intend to do in respect of their beneficial shareholdings amounting to 10,084,900 Ordinary Shares representing 58.24 percent of the issued Ordinary Shares. All proceeds will be used to pay down existing debt.


The gross assets of Labtech and Vertec were £1.2m and £2.0m as at 31 March 2008 and the operating profit was approximately £0.8m and £0.1m respectively. 


Further disposals are contemplated and shareholders will be informed at the appropriate time.


As part of the negotiation of new terms with the Existing Lending Consortium the Board of Directors revisited its strategic plan and reviewed in depth its business model, particularly with regard to expectations of future growth. In particular, we looked at the Group's ability to sustain its business model and have been actively monitoring our position in relation to the continued volatility in the financial markets, including The Group's exposure to liquidity risk.


The Group's business models have been subject to independent analysis, and sensitivities conducted to flex assumptions to identify how robust the models outputs are in practice. Further, we have taken into consideration the impact of recent events on our relationships with third parties such as customers and suppliers.


As noted in the Financial Directors Review on page 10 and 11 and in the Accounting Policies on pages 25 to 31, the Group has conducted tests in accordance with IAS 36 'Impairment of Assets' and these have been taken into account when making best estimates of future cash flows.


The Directors are satisfied that, based on the model outputs, the Group has sufficient headroom between cash requirements and facilities available to it as agreed by the Lending Consortium and therefore concluded that, at the date of signing the financial statements, the business is a going concern.


Disposal of Diamant Drilling Services SA

In March 2009, the Group announced the sale of DDS, which was consistently loss making, to Logan Oil Tools Inc for consideration of up to approximately €527,000. The consideration of up to €250,000 cash will be paid in 3 months from the date of disposal and a further contribution of up to €277,000, dependent on certain performance criteria, will become due within 6 months following completion. At the Balance Sheet date the recoverable amount has been determined on its fair value less costs to sell. The goodwill associated with this company of £0.7m has been written off in full. Operating losses of £2.1m incurred in the financial year 2008/9 prior to the company's disposal will be included in the consolidated results for the 2008/9 financial year.


The gross assets of DDS were £2.3m as at 31 March 2008 and the operating loss was approximately £0.3m. 


Sale and Leaseback of Property

In May 2008, freehold buildings held by two subsidiaries were sold for £3.9m cash. The buildings were leased back on a ten year extendable lease. The net book value of the disposal was £2.8m resulting in a potential tax charge of £0.4m. Of the proceeds, £2.9m were used to pay down Senior loan facilities.


29. CONTINGENT LIABILITIES

Proceedings have been initiated by a formed employee against DDS alleging unfair termination of employment. The outcome of this case cannot be determined with reasonable certainty. However in the directors' opinion the case against DDS has no merit and the possibility of a transfer of economic benefits in settlement is remote.


Proceedings have been initiated by a former consultancy agent against Serco SA alleging unfair termination of consultancy agreement and breach of contract. The outcome of this case cannot be determined with reasonable certainty. However in the directors' opinion the case against Serco SA has no merit and the possibility of a transfer of economic benefits in settlement is remote.


30. TRANSITION TO IFRS

For all periods up to and including the year ended 31 March 2007, the Group prepared its financial statements in accordance with United Kingdom generally accepted accounting practice (UK GAAP).  These financial statements, for the year ended 31 March 2008, are the first the Group is required to prepare in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).


Accordingly, the Group has prepared financial statements which comply with IFRS applicable for periods beginning on or after 1 April 2006 and the significant accounting policies meeting those requirements are described in the Basis of Preparation and Accounting Policies.


In preparing these financial statements, the Group has started from an opening Balance Sheet as at 1 April 2006, the Group's date of transition to IFRS, and made those changes in accounting policies and other restatements required by IFRS 1 for the first-time adoption of IFRS.  In addition, the Group identified some adjustments as part of this process that do not arise from a GAAP difference and have therefore been classified as UK GAAP adjustments, rather than IFRS reclassifications or remeasurements.  As such, this Note explains the principal adjustments made by the Group in restating its UK GAAP Balance Sheet as at 1 April 2006 and its previously published UK GAAP financial statements for the year ended 31 March 2007.


Exemptions applied

The general principle that should be applied on first-time adoption of IFRS is that standards in force at the first reporting date should be applied retrospectively.  However, IFRS 1 ('First Time Adoption of International Financial Reporting Standards') contains a number of exemptions which companies are permitted to apply. Sovereign has elected:  


  • To apply IFRS 3 'Business Combinations' prospectively from 1 April 2006.  Financial information pertaining to acquisitions, disposal and restructuring occurring before 1 April 2006 has not been restated. 


  • That cumulative currency translation differences for all foreign operations are deemed to be zero as at 1 April 2006.


  • Not to restate fair value adjustments and goodwill denominated in foreign currencies at the date of transition.


The difference resulting from the transition to IFRS are summarised in the following tables:

UK GAAP

Effect of



in IFRS

transition


Group reconciliation of profit and loss for the

format

to IFRS 

IFRS

period ended 31 March 2007

£m

£m

£m

Continuing operations




Sale of goods

36.4 

 - 

36.4 

Rendering of services

12.3 

 - 

12.3 

Acquired operations




Forfab Limited 

2.4 

-

2.4 

RDT Precision Engineers Limited

0.4 

 - 

0.4 

Revenue

51.5 

- 

51.5 

Cost of sales

 (36.9) 

- 

 (36.9) 

Gross profit

14.6 

 - 

14.6 

Administrative expenses (i), (ii), (iii)

 (13.1) 

1.2 

 (11.9) 


1.5 

1.2 

2.7 

Group operating profit 




Continuing operations

1.3 

- 

1.3 

Acquired operations




Forfab Limited

0.1

- 

0.1 

RDT Precision Engineers Limited

0.1

- 

0.1 


1.5 

1.2 

2.7 

Finance revenue

0.1 

 - 

0.1 

Finance costs

(1.5) 

- 

(1.5) 

Profit from continuing operations before taxation

0.1 

1.2 

1.3 

Tax expense

(0.3) 

 - 

(0.3) 

Profit for the year 

(0.2) 

1.2 

1.0 


(i)   Goodwill: Goodwill is subject to impairment testing under IFRS rather than the amortisation rules applied under UK GAAP. The impact of the reversal of the UK GAAP amortisation is to increase profit for the period by £0.7m.  Further, negative goodwill of £0.8m was recognised in the Income Statement during the period.


(ii)   Intangible assets: IFRS requires intangible assets, where meeting the IFRS definition and where fair value can be reliably measured, to be recognised separately from goodwill.  A value of £1.6m, subsumed in goodwill at the date of acquisition of RDT Precision Engineers Limited, has been attributed to intangible assets.  Amortisation of £31,683 has been recognised in the period.


(iii)   Deferred Tax: IFRS requires a charge to the Income Statement and reduction in goodwill where a potential deferred tax asset not recognised in the fair value exercise at the date of acquisition is recognised in a subsequent period. The impact of this adjustment is a charge to Administrative expenses of £0.3m and reduction in goodwill of £0.3m.


  

UK GAAP

Effect of



in IFRS

transition


Group reconciliation of equity

format

to IFRS 

IFRS

as at 1 April 2006

£m

£m

£m

Non-current assets




Property, plant and equipment

  4.4 

  - 

  4.4 

Intangible assets (i)

  7.8 

  0.9 

  8.7 

 

  12.2 

  0.9 

  13.1 

Current assets




Trade and other receivables

  8.3 

  (0.4) 

  7.9 

Prepayments

  0.7 

  - 

  0.7 

Inventories

  4.0 

  - 

  4.0 

Cash and short-term deposits

  2.2 

  - 

  2.2 

 

  15.2 

  (0.4) 

  14.8 

Total assets

  27.4 

  0.5 

  27.9 

Current liabilities




Trade and other payables (i), (iii)

  11.5 

  0.5 

  12.0 

Interest-bearing loans and borrowings

  0.6 

  - 

  0.6 

Income tax payable

  0.6 

  - 

  0.6 

 

  12.7 

  0.5 

  13.2 

Non-current liabilities




Other payables (iii)

  1.0 

  - 

  1.0 

Interest-bearing loans and borrowings

  3.1 

  - 

  3.1 

Provisions

  0.1 

  - 

  0.1 

Deferred tax liability

  - 

  0.7 

0.7


  4.2 

  0.7 

  4.9 

Total liabilities

16.9

1.2

18.1

Net assets

10.5

(0.7)

9.8

Capital and reserves




Equity share capital

  0.2 

  - 

  0.2 

Share premium

  8.8 

  - 

  8.8 

Retained earnings (ii)

  0.4 

  (0.7) 

  (0.3)

Other reserves (iii)

  1.0 

  - 

  1.0 


  10.4 

  (0.7) 

  9.7 

Minority interests

  0.1 

  - 

  0.1 

Total equity

  10.5 

  (0.7) 

  9.8 


(i)   Prior year adjustments: These adjustments reflect restatements made to goodwill, trade and other receivables and trade and other payables during 2007 in respect of earlier periods.  Under IFRS these would have been retrospectively included in the period to which the adjustment relates.  These were accounting errors relating to DDS, increasing goodwill by £0.9m, reducing trade debtors by £0.4m and increasing trade creditors by £0.5m.


(ii)   Deferred taxation: Under IFRS a provision for deferred taxation must be made in respect of the difference between the carrying value and tax base of land and buildings and other intangible assets acquired through a business combination.  This is recorded against retained earnings at 1 April 2006.


(iii)   Contingent consideration: Contingent consideration of £1.0m on the acquisition of Maxwell Downhole Technology Limited was settled in shares subsequent to the year ended 31 March 2006 and has been reclassfied from other payables to equity (other reserves).



  

UK GAAP

Effect of



in IFRS

transition


Unaudited Reconciliation of Equity and Net Assets

format

to IFRS 

IFRS

At 31 March 2007

£m

£m

£m

Non-current assets




Property, plant and equipment

  8.7 

  - 

  8.7 

Intangible assets (i), (ii)

  8.2 

1.9

10.1

Financial assets (iii)

  - 

  0.1 

  0.1 

Deferred tax asset (iv)

  0.3 

  - 

  0.3 

 

  17.2 

2.0

19.2

CURRENT ASSETS




Trade and other receivables

  18.6 

  - 

  18.6 

Inventories

  5.1 

  - 

  5.1 

Cash and short-term deposits

  4.7 

  - 

  4.7 

 

  28.4 

  - 

  28.4 

TOTAL ASSETS 

  45.6 

2.0

47.6

Current liabilities




Trade and other payables (v)

  14.7 

  - 

  14.7 

Income tax payable

  0.8 

  - 

  0.8 

 

  15.5 

  - 

  15.5 

Non-current liabilities




Interest-bearing loans and borrowings

  18.0 

  - 

  18.0 

Provisions

  0.1 

  - 

  0.1 

Deferred tax liabilities

  0.3 

  1.4 

  1.7 


  18.4 

  1.4 

  19.8 

Total liabilities

  33.9 

  1.4 

  35.3 

NET ASSETS 

  11.7 

0.6

12.3

Capital and reserves




Equity share capital

  0.2 

  - 

  0.2 

Share premium

  10.5 

  - 

  10.5 

Retained earnings (i), (iii), (iv), (vi)

  0.1 

0.6

0.7

Other reserves (v)

  0.9 

  - 

  0.9 

Total equity

11.7

0.6

12.3


(i)   Goodwill: Goodwill is subject to impairment testing under IFRS, rather than the amortisation rules applied under UK GAAP. The impact of the reversal of the UK GAAP amortisation is an increase in net assets of £0.7m.  This is recorded against retained earnings at 31 March 2007.  Further, negaitve goodwill of £0.8m was recognised in the Income Statement during the period.  This is recorded against retained earnings.


(ii)   Other intangible assets: A value of £1.6m, converted at the date of acquisition of RDT Precision Engineers Ltd, in February 2007, which was subsumed under goodwill under UK GAAP has been attributed to other intangible assets.  Amortisation of £31,683 has been recognised in the Income Statement in the period. 


(iii)   Financial assets: The Group uses interest rate caps to hedge its risk associated with interest rate fluctuations.  Under IFRS these interest rate caps are recognised at fair value on the Balance Sheet on the date on which the contract was entered into and are subsequently re-measured at fair value, with the associated charge in value reported in profit or loss.  At 31 March the fair value of this financial asset was £0.1m.  This is recorded against retained earnings.


(iv)   Deferred taxation: Under IFRS a provision for deferred taxation must be made in respect of the difference between the carrying value and tax base of land and buildings and other intangible assets acquired through a business combination.  On the acquisition of RDT Precision Engineers Ltd, in February 2007, a further £0.9m was recognised in respect of deferred taxation.  This is recorded against retained earnings.


(v)   Contingent consideration: Contingent consideration on the acquisition of Maxwell Downhole Technology Limited was settled in shares subsequent to the year ended 31 March 2007 and has been reclassfied from other payables to equity (other reserves). This is considered to be a UK GAAP adjustment.


(vi)   Deferred Tax: IFRS requires a charge to the Income Statement as reduction in goodwill where a potential deferred tax asset not recognised in the fair value exercise at the date of acquisition is recognised in a subsequent period. The impact of this adjustment is a charge to administrative expenses £0.3m and a reduction in goodwill of £0.3m.  


Company Accounting Policies 

The parent Company financial statements of Sovereign Oilfield Group Plc (the 'Company') are presented as required by the Companies Act 1985 and were approved for issue on 15 May 2009.  The financial statements are prepared in accordance with applicable accounting standards


Accounting convention

The financial statements are prepared under the historical cost convention.


Tangible fixed assets

Property, plant and machinery and other tangible assets are stated at cost less accumulated depreciation and accumulated impairment losses. Such cost includes costs directly attributable to making the asset capable of operating as intended.  


Depreciation is provided at the following annual rates in order to write off each asset over its estimated useful life.


Office equipment - 10% to 50% on cost.


The carrying values of tangible fixed assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.


Investments 

Investments held as fixed assets are stated at cost less provision for any permanent diminution in value.


Revenue recognition 

Revenue is recognised to the extent that the company obtains the right to consideration in exchange for its performance.


Revenue from services are recognised in the accounting period in which the services are rendered.


Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or duty.


  Deferred taxation

Deferred tax is provided in respect of all timing differences that have originated but not reversed at the Balance Sheet date where transaction or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, tax, with the following exceptions:


  • A deferred tax asset is regarded as recoverable and therefore only recognised when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.


  • Deferred tax is measured on a non-discounted basis at the tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted by the Balance Sheet date.


Foreign currencies 

Monetary assets and liabilities in foreign currencies are translated into sterling at the rates of exchange ruling at the Balance Sheet date.  Transactions in foreign currencies are translated into sterling at the rate of exchange ruling at the date of transaction.  Exchange differences are taken into account in arriving at the operating result.


Leasing and hire purchase commitments 

Assets obtained under hire purchase contracts or finance leases are capitalised in the Balance Sheet.  Those held under hire purchase contracts are depreciated over their estimated useful lives.  Those held under finance lease are depreciated over their estimated useful lives or the lease term, whichever is the shorter.  The interest element of those obligations is charged to the profit and loss account over the relevant period.  The capital element of the future payments is treated as a liability.


Rentals paid under operating leases are charged to the profit and loss account over the term of the lease.


Interest-bearing loans and borrowings

All interest-bearing loans and borrowings are initially recognised as net proceeds.  After initial recognition debt is increased by the finance cost in respect of the reporting period and reduced by payments made in respect of the debts of the period. 


Finance costs of debt are allocated over the term of the debt at a constant rate on the carrying amount.

 

Pension 

The Company operates a defined contribution pension scheme.  Contributions payable for the period are charged to the profit and loss account.


Related party transactions 

The Company has taken advantage of the exemption provided by FRS 8 not to disclose transactions between Group companies that have been eliminated on consolidation.




  

COMPANY BALANCE SHEET

AS AT 31 MARCH 2008 


2008

2007


Note

£000

£000

FIXED ASSETS




Intangible assets


  - 

  - 

Tangible assets

4

  0.1 

  0.1 

Investments

5

  5.0 

  7.1 

TOTAL FIXED ASSETS


  5.1 

  7.2 

CURRENT ASSETS




Debtors

6

31.4

  20.9 

Cash and short-term deposits


  0.3 

  0.5 

TOTAL CURRENT ASSETS 


31.7

  21.4 

Creditors: amounts falling due within one year

7

(34.7)

  (1.7) 

NET CURRENT (LIABILITIES) / ASSETS  


(3.0)

  19.7 

TOTAL ASSETS LESS CURRENT LIABILITIES 


2.1

  26.9 

Creditors: amounts falling due after one year

8

-

  (17.3) 

Provision for liabilities and charges


  - 

  - 

NET ASSETS 


  2.1 

  9.6 

CAPITAL AND RESERVES




Share capital

13

  0.2 

  0.2 

Reserve for own shares

13

  11.5 

  10.5 

Share premium account

13

  (0.3) 

-

Profit and loss account

13

(9.3)

  (1.1) 

TOTAL EQUITY SHAREHOLDERS' FUNDS


2.1

  9.6 


Approved by the Board on 15 May 2009


Mr Burgess

Miss Cowie

Directors


  1. BASIS OF PREPARATION 

The Directors have prepared the financial statements on the going concern basis which assumes that the Company will continue in operational existence for the foreseeable future. 


The Company and the Group meet their day to day working capital requirements and medium-term funding requirements through banking facilities. At 31 March 2008 the Group owed £32.9m to its Lenders and was in breach of its banking covenants. As at that date the Group had obtained a standstill from its Lenders in the form of an amendment and waiver letter regarding the defaults at 31 March 2008.  Subsequent to the year end, as disclosed in Note 28, the Group has agreed to an amendment of terms in respect of debt facilities in place at 

31 March 2008.  


The new banking terms agreed (subject to the conditions below) provide for a waiver of all outstanding defaults and a standstill regarding the repayment of debt until 31 May 2010 and the resumption of the normal debt repayment profile thereafter, a reduction in margin payable on both senior and mezzanine facilities and a revised covenant package.  


The revised covenant package incorporates financial covenants with regard to quarterly revenue and EBITDA. The failure of these covenant tests renders the entire facilities repayable on demand at the option of the Lenders.


The Directors have prepared trading and cash flow forecasts for a period in excess of one year from the date of approval of these financial statements which project that covenant tests will be met and facility limits will not be exceeded over the duration of the forecasts. The forecasts prepared make assumptions about the Group's ability to sustain its business model and the Directors have been actively monitoring the trading position in relation to the continued volatility in the financial markets. The forecasts also assume an element of cost reduction, particularly with regard to corporate overhead.  


The Group's business model has been subject to independent analysis, and sensitivities conducted to flex the assumptions to assess the robustness of the model.  


As part of the revised banking terms and conditions subsequent to the refinancing, the Group agreed to the disposal of one of its subsidiaries Vertec Engineering Limited and to dispose of certain assets of Labtech Services Limited.  


Although the proposed terms are fully valid and binding, if this condition is not fulfilled prior to end May 2009 the revised terms will become invalid.


The Group was pleased to issue an announcement on 11 May 2009 stating that we concluded the sale of these businesses, subject to shareholder approval. A general meeting is due to be held on 27 May 2009 to ratify this transaction, which requires a majority vote. The Directors intend to vote in favour of the resolutions, amounting to 10,084,900 Ordinary Shares representing 58.24 percent of the issued Ordinary Shares. John Graham Burgess and Dr Peter Gjedboe Felter have provided irrevocable undertakings to vote in favour of the Resolutions, their combined shareholding amounting to 56.895 percent of the issued Ordinary Shares, which will result in the resolution being carried.  


Taking in to account the above, until the shareholder vote has been conducted an uncertainty exists as to whether the Group will meet the conditions under which new facilities have been agreed. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and have therefore concluded that it is appropriate to adopt the going concern basis in preparing these financial statements.


2. LOSSES ATTRIBUTABLE TO SOVEREIGN OILFIELD GROUP PLC

The loss for the year dealt within the accounts of Sovereign Oilfield Group Plc was £7.9m (2007: £0.9m).  As provided by Section 230 of the Companies Act 1985, no profit and loss account is presented in respect of Sovereign Oilfield Group Plc.


3. EMPLOYEE COSTS

2008

2007


£m

£m

Staff costs, including Executive Directors:



Wages and salaries

  0.9 

  - 

Social security costs

  0.1 

  - 

Pension costs

  0.1 

  - 


  1.1 

  - 

Average number of employees during the year:



Management  

  3 

  - 

Administration and sales

  21 

  - 


  24 

  - 


Details of directors' emoluments, in aggregate and by director, together with details of pension entitlements, share options held and bonus payments, are shown in the Remuneration Report on page 21.


PENSION COSTS 

The Group operates a defined contribution scheme.  The assets of the scheme are held separately from those of the Group in an independently administered fund.  The pension cost charge represents contributions payable by the Company to the fund and amounted to £63,573 (2007: £nil).

  

4. TANGIBLE ASSETS

Office equipment and motor vehicles

Total


£ m

£ m

Cost



At 1 April 2007

  0.1 

  0.1 

Additions 

  - 

  - 

At 31 March 2008

  0.1 

  0.1 

Amortisation and depreciation



At 1 April 2007

  - 

  - 

Charge for the year

  - 

  - 

At 31 March 2008

  - 

  - 

Net book value at 31 March 2008

  0.1 

  0.1 

Net book value at 1 April 2007

0.1

0.1


5. INVESTMENTS

Details of the investments in which the Company holds 20% or more of the nominal value of any class of share capital are as follows:

Proportion of voting rights and shares held

Country of  

Name of company

Holding

%

Nature of Business

incorporation or registration

Sovereign Oilfield Services Limited

Ordinary Shares

100%

Intermediate holding company

Scotland

Sovereign Fabrication Services Limited 

(formely OIL Corporate Limited)

Ordinary Shares

100%

Intermediate holding company

Scotland


As part of a re-organisation the investment held in MaxWell Downhole Technology Limited was transferred to Sovereign Oilfield Services Limited at original investment value of £2.1m.


Details of subsidiary undertakings held by the companies above are set out in Note 14 on page 51.


6. DEBTORS

2008

2007


£m

£m

Trade debtors

  -  

  -  

Amounts owed by subsidiary undertakings

  31.1 

  20.7 

Other debtors

  0.2 

  0.2 

Deferred tax assets

  0.1 

  -  


31.4 

  20.9 


  

7. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR

2008

2007


£m

£m

Bank loans

32.8

-

Trade creditors

0.3

  0.2 

Contingent consideration on acquisition of subsidiaries

  - 

  0.9 

Amounts owed to subsidiary undertakings

0.1

  - 

Other taxes and social security costs

0.1

  0.1 

Accruals

1.4

  0.5 


34.7

  1.7 

 

8. CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR

2008

2007


£m

£m

Bank loans and overdrafts

-

  20.0 

Issue costs

-

  (2.7)


9. BORROWINGS

2007

2007


£m

£m

Amounts falling due within one year:



Bank loans

32.8

  - 

Other loans

  - 

  - 

Amounts falling due after one year:



Bank loans

-

  20.0 

Other loans

  - 

  - 

Total borrowings

  32.8 

  20.0 

Cash:



Cash at bank and in hand

  - 

  0.1 

Short-term deposits

  0.3 

  0.4 

Total cash

  0.3 

  0.5 

Net borrowings

  32.5 

  19.5 


Cash at bank earns interest at floating rates based on daily bank deposit rates.  Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Company and Group, and earn interest at the respective short-term deposit rates.  The fair value of cash and cash equivalents is considered to be the same as their carrying value.


  At 31 March 2008, the Company had available £nil (2007: £30.0m) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. 

Company

Company


2008

2007


£m

£m

Bank loans analysed by maturity



Amounts falling due:



Within one year

32.8

  - 

In more than one year, but not more than two years

  - 

  - 

In more than two years, but not more than five years

-

  20.0 

In over five years

  - 

  - 


  32.8 

  20.0 


The bank loans are secured over properties and on fixed and floating charges, deeds of pledge over shares and debentures over companies in the Group.


10. FINANCIAL INSTRUMENTS

An outline of the objectives, policies and strategies pursued by the Group and Company in relation to financial instruments is set out in the Financial Review on page 17 to 19 and Note 23, pages 59 to 62.


11. AUTHORISED AND ISSUED SHARE CAPITAL

See Note 24, page 62 for details of the share capital of the Company.


12 SHARE-BASED PAYMENTS

See Note 25, page 63 for details of the share based payments for the Company.


13 SHARE CAPITAL AND RESERVES


Share capital

Share premium account

Treasury shares

Profit

and loss account


Note

£m

£m

£m

£m

At 1 April 2007


  0.2 

  10.5 

  - 

(1.1) 

Shares issued

21

  - 

  1.0 

  - 

  - 

Share buy back


-

-

-

  (0.3) 

Treasury shares


-

-

  (0.3) 

-

Retained loss for the period


  - 

  - 

-

(7.9)

At 31 March 2008


  0.2 

  11.5 

  (0.3) 

(9.3) 


  14. POST BALANCE SHEET EVENTS

Restructuring of Financing Arrangements

At 31 March 2008 the Company and Group obtained a standstill from its Lenders in the form of an amendment and waiver letter regarding defaults at 31 March 2008. Contained within the letter were amendments to the terms of the Senior Facility Agreement and the Mezzanine Facility Agreement with reference to the ratcheting of interest margins from 3.5% to 8.5% on the senior facility and from 6% to 11% on the mezzanine facility over a period of time. In addition, the Company was required to pay a fee equal to 1% of the aggregate commitments, being £500,000. Conditions relating to the disposal of DDS were also included.  


Existing financial covenants were revised as part of the amendment and waiver letter, such covenants including tests around interest cover, senior leverage, leverage and capital expenditure.


Given the circumstances at the Balance Sheet date, bank loans were classified as current and arrangement fees of £2.4m written off as the terms of the existing facility were deemed to be substantially modified.


Subsequent to the year end, prior to the date of issue of the financial statements, the Company and Group have agreed to an amendment of terms in respect of credit facilities in place at 31 March 2008. The new terms agreed provide for a waiver of all outstanding defaults until 31 May 2010, a reduction in margin payable on both senior and mezzanine facilities and a revised covenant package. No restructuring or arrangement fees are payable with regard to the negotiation of new commercial terms.


Under the new terms, for the period from 1 June 2009 to 31 March 2010 the senior facilities will bear interest at LIBOR plus 4%, whilst the mezzanine facilities will bear interest at a payment in kind of 6.5%. For the period from 1 April 2010 to 31 March 2011 the senior facilities will bear interest at LIBOR plus 5%, whilst the mezzanine facilities will bear interest at LIBOR plus 6.5%, plus a payment in kind of 3.5%.  


We estimate that the revised terms which cover the period to 31 March 2011, will result in net savings in finance costs of £3.4m.


The revised covenant package incorporates financial covenants with regard to quarterly revenue and EBITDA which the Board believe are acceptable. 


As part of the conditions subsequent, the Group agreed to the disposal of Vertec and certain Labtech assets. The Group was pleased to issue an announcement on 11 May 2009 that we agreed the sale of the shares of Vertec and the assets of Labtech's hire fleet for £5.45m, subject to shareholder approval. A general meeting is due to be held on 27 May 2009 to ratify this transaction. The Directors unanimously recommend Shareholders vote in favour of the Resolutions as the Directors intend to do in respect of their beneficial shareholdings amounting to 10,084,900 Ordinary Shares representing 58.24 percent of the issued Ordinary Shares. All proceeds will be used to pay down existing debt.


The gross assets of Labtech and Vertec were £1.2m and £2.0m as at 31 March 2008 and the operating profit was approximately £0.8m and £0.1m respectively. 


Further disposals are contemplated and shareholders will be informed at the appropriate time.


As part of the negotiation of new terms with the Existing Lending Consortium the Board of Directors revisited its strategic plan and reviewed in depth its business model, particularly with regard to expectations of future growth. In particular, we looked at the Company and Group's ability to sustain its business model and have been actively monitoring our position in relation to the continued volatility in the financial markets, including The Group's exposure to liquidity risk.


The Group's business models have been subject to independent analysis, and sensitivities conducted to flex assumptions to identify how robust the models outputs are in practice. Further, we have taken into consideration the impact of recent events on our relationships with third parties such as customers and suppliers.


As noted in the Financial Directors Review on page 10 and 11 and in the Accounting Policies on pages 25 to 31, the Group has conducted tests in accordance with IAS 36 'Impairment of Assets' and these have been taken into account when making best estimates of future cash flows.


The Directors are satisfied that, based on the model outputs, the Company as part of the Group has sufficient headroom between cash requirements and facilities available to it as agreed by the Lending Consortium and therefore concluded that, at the date of signing the financial statements, the business is a going concern.


Disposal of Diamant Drilling Services SA

In March 2009, the Group announced the sale of DDS, which was consistently loss making, to Logan Oil Tools Inc for consideration of up to approximately €527,000. The consideration of up to €250,000 cash will be paid in 3 months from the date of disposal and a further contribution of up to €277,000, dependent on certain performance criteria, will become due within 6 months following completion. At the Balance Sheet date the recoverable amount has been determined on its fair value less costs to sell. The goodwill associated with this company of £0.7m has been written off in full. Operating losses of £2.1m incurred in the financial year 2008/9 prior to the company's disposal will be included in the consolidated results for the 2008/9 financial year.


The gross assets of DDS were £2.3m as at 31 March 2008 and the operating loss was approximately £0.3m. 


Sale and Leaseback of Property

In May 2008, freehold buildings held by two subsidiaries were sold for £3.9m cash. The buildings were leased back on a ten year extendable lease. The net book value of the disposal was £2.8m resulting in a potential tax charge of £0.4m. Of the proceeds, £2.9m were used to pay down senior loan facilities.




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