Preliminary Results
Aurora Russia Limited
16 April 2007
16 April 2007
Aurora Russia Limited
Maiden Preliminary Results 2006
Aurora Russia Limited ('Aurora Russia' or the 'Company'), the AIM-quoted
investment vehicle established to make equity or equity-related investments in
small and mid-sized private companies in Russia, today announces its maiden
preliminary results for the period from its incorporation on 22 February 2006 to
31 December 2006 (the 'period').
Operational highlights
• First three investments since listing have been made:
o £5.1 million acquisition of stake in OSG Records Management
group of companies in July 2006
- Over 60% growth in revenues from $5 million in 2005 to
over $8 million in 2006
o £12.5 million investment to launch Kreditmart, a mortgage and
consumer finance broker in September 2006
- Opening of first branch in Russia and approval of first
mortgage customers in March 2007
o £10.4 million investment in Unistream Bank, a money transfer
business, announced in November 2006
- First part of acquisition completed on 13 April 2007 for
£6.9 million
- Unistream transferred approximately $1.84 billion in
2006
• The Manager is looking at a number of opportunities in the financial,
business, and consumer services sectors
Financial highlights
• Net asset value as at 31 December 2006 £71.9 million, representing
95.9p per share
• Cash and cash equivalents as at 31 December 2006 of £65.8 million
• Net loss for the period of £321,000
• Diluted loss per share for the period 0.43p
Commenting, Sir Trevor Chinn, Chairman of Aurora Russia, said:
'We continue to be very positive about the prospects for the three investments
made to date. OSG is the largest records management operator in Russia and we
expect revenues to continue to grow at over 30% annually. Kreditmart, our
wholly owned mortgage and consumer finance company, has now opened its first
retail branch in Moscow and has approved its first customers. Unistream
continues to experience high growth and is now considered to be one of the
largest Russian money transfer businesses.
'The growth of the Russian economy in 2006 showed no signs of abating with GDP
growth estimated at 6.7 per cent. The Board is confident for the future as the
Manager has a number of potential transactions that it is currently evaluating.'
Enquiries:
Aurora Russia Limited
James Cook, Moscow +7 495 644 1662
John McRoberts, London +44 (0) 20 7839 7112
Financial Dynamics
Ed Gascoigne-Pees +44 (0) 20 7269 7132
Felicity Murdoch +44 (0) 20 7269 7243
Chairman's statement
I am delighted to present Aurora Russia Limited's ('Aurora Russia' or the
'Company') first annual report. The Company was incorporated in Guernsey on 22
February 2006 and was admitted to trading on AIM on 24 March 2006, raising £75
million (before expenses) through a placing of 75,000,000 ordinary shares at £1
per share.
These results reflect the period from incorporation on 22 February 2006 to 31
December 2006. In this period, Aurora Russia recorded a net loss of £321,000 or
0.43p per share. Administration and operating expenses predominantly related to
the Investment Management Fee. However, as required under IFRS, amortisation of
£470,137 was charged in the period relating to the Investment Manager's option.
This option has been independently valued at £3 million and will be amortised
over a period of five years. Initial administration and operating expenses of
£303,000 incurred by Kreditmart have been charged in arriving at the result for
the period. At the end of the period the Company's net asset value was £71.9
million or 95.9p per share, and the Company had cash available for investment of
£43.5 million.
Aurora Russia has an investment strategy of making equity and equity related
investments in small and mid-sized private Russian companies, focused on the
financial, business and consumer services sectors, where the Directors believe
that there is potential for growth together with viable exit opportunities.
Aurora Russia, advised by Aurora Investments Advisors Limited (the 'Manager'),
has already successfully committed to three of the transactions outlined in its
Admission Document and the Manager has a number of potential transactions that
it is currently evaluating.
We continue to be very positive about the prospects for the three investments
made to date. OSG Records Management, the regional market leader in records
management, continues to grow its revenues at a strong pace in line with
expectations. Kreditmart, our wholly owned mortgage and consumer finance
company, has now opened its first retail branch in Moscow and has approved its
first mortgage customers. Unistream continues to experience high growth and is
now considered to be one of the largest Russian money transfer businesses.
The growth of the Russian economy in 2006 showed no signs of abating with GDP
growth estimated at 6.7 per cent. The Russian government continues with its
economic reform agenda and has recently relaxed regulatory restraints to make
investing in the region easier. For example, in January 2006 the Central Bank of
Russia (CBR) relaxed the criteria required for foreign investors to be able to
make an investment in a Russian bank. As a direct result of this, Aurora Russia
is able to make its initial investment in Unistream, a US$13.6 million
investment in new shares for a 17.7 per cent stake, earlier, as this did not
need CBR approval. A further investment, the purchase of an 8.3 per cent holding
from Uniastrum Bank, which will take Aurora Russia's stake to 26 per cent, is
subject to CBR approval.
Accounting Policy and Valuation Policy
In a recent judgement the Financial Reporting Review Panel has enforced the
requirement that investments held for resale be consolidated when the holding is
greater than 50 per cent. Therefore, Aurora Russia's results consolidate those
of Kreditmart and it is anticipated that any future investment resulting in
Aurora Russia holding a controlling stake will be consolidated.
Whitebrooks (OSG's parent company) is held as an investment at cost. If the
Company's valuation committee concludes that that the value of Whitebrooks,
Unistream or any other minority investment has appreciated, then an adjustment
will be made to the holding value of such investment, with the resulting
increase recorded as an investment gain in the Income Statement.
Hedging policy
The Board has decided to hedge the Company's foreign currency exposure on its
investments and, in the period to date, this has been achieved through the use
of forward exchange contracts. Any profits or losses on such contracts are taken
to the Income Statement and are offset against currency fluctuations in the
valuation of the underlying investments.
Change of Accounting Reference Date
The Board, having reviewed the current reporting arrangements, has concluded
that it is in the best interests of the Company to change its accounting
reference date from 31 December to 31 March in order to allow its investee
companies more time to provide their audited financial statements. Therefore,
the next audited financial statements of Aurora Russia will be for the 15 month
period to 31 March 2008. In this transitional period the Company will issue
unaudited interim results for the 6 months to 30 June 2007 and also for the year
to 31 December 2007.
Directorate Changes
The Directors were delighted to welcome Christopher Cowan to the board on 9
February 2007. Chris brings with him over 40 years experience working for
international companies in a finance role which includes over 13 years acting as
a group finance director. As a Non Executive Director of Aurora Russia, Chris
will chair the Valuation Committee and sit on the Audit Committee.
Cowasji Magol left the board on 9 February 2007 and I would like to take this
opportunity to thank him for his contribution both during and since the IPO of
the Company.
Outlook
We expect the next twelve months to be an extremely interesting period for
Russia, with Duma elections in December followed by the Presidential elections
in March 2008. There may well be some uncertainty in the market as a result of
these political events but the business community in Russia anticipates that the
economic reform policies will continue irrespective of who is elected as
President.
The Board is confident that Aurora Russia will continue to provide its investors
with exposure to quality growth companies in the financial, business and
consumer services sectors.
Sir Trevor Chinn
Chairman of the Board
Aurora Russia Limited
Investment Manager's report
We are delighted to report that since Aurora Russia's admission to AIM, we have
been successful in making investments in three of the four companies highlighted
in its Admission Document; OSG Records Management, Kreditmart and Unistream.
These three businesses have enormous potential for growth.
OSG Records Management remains the dominant market leader in Russia. Whilst the
Russian formal records management market is developing very quickly, in our view
it is still in its infancy and may be as little as 1 per cent of its potential
size.
The Russian mortgage market continues to grow exponentially. With a strong
foundation of existing lien-free home equity as a result of the privatisation of
housing, Russia has a solid platform for continued growth in this sector.
Russian GDP in 2006 was approximately US$1,011 billion and mortgage lending in
the year was therefore less than 1 per cent of GDP. According to Alfa Bank,
Russia's largest private bank, the mortgage market is expected to more than
double in 2007 to approximately US$17 billion by the year end. We believe that
through Kreditmart, Aurora Russia is well-positioned to capture its share of
this growth while providing affordable housing and consumer finance solutions to
Russia's emerging middle class.
The Russian money transfer market is showing extremely high rates of growth.
Whilst the global money transfer market doubled to US$260 billion between 2002
and 2006, a recent report from the World Bank, based on statistics from the CBR,
estimates that Russian outbound remittances almost doubled to US$6 billion
between 2005 and 2006, and that Russian inbound transfers grew 25 per cent to
US$1 .3billion over the same period. Although there are no reliable statistics
on intra-Russia remittances, experts estimate it at approximately US$8 billion
and growing at double-digit rates. All combined, Russia is one of the fastest
growing money transfer regions in the world - an opportunity on which Unistream
is well positioned to capitalise.
We are encouraged by the macroeconomic indicators for the Russian economy, which
continues to show sustained expansion, an annual GDP growth of in excess of six
per cent, growing reserves, repayment of the Paris Club debt, and lower domestic
interest rates. The sectors in which we are investing are well positioned to
benefit directly from these factors. Russia has a strong foundation for
continued growth in 2007.
Investment in OSG Records Management
On 24 July 2006, Aurora Russia made its first investment paying US$9.4 million
(£5.1 million) for 40.31 per cent (37.1 per cent on a fully diluted basis) of
the common shares of Whitebrooks, the parent company of the OSG Records
Management Group. Aurora Russia also provided the company with a US$5 million
short-term convertible working capital facility of which US$1.6 million has so
far been drawn down by the company.
OSG Records Management is the largest operator in Russia (the majority of its
business is in Russia), Ukraine and Kazakhstan, and is considered the regional
market leader in records management, providing cost-effective total records
management, document storage, data security and confidential data destruction
solutions. OSG Records Management also has a presence in Poland, Bulgaria, China
and Turkey.
Its 2006 revenues were in excess of US$8 million compared with just under US$5
million in 2005. We anticipate that revenues will continue to grow at an annual
rate of over 30 per cent.
Investment in Kreditmart
On 22 September, we committed £12.5 million to launch Kreditmart, a wholly owned
finance company distributing mortgages, equity release loans and other consumer
finance products. The company has a strong management team which comes from the
leading mortgage and consumer finance institutions in Russia and the company
currently employs 38 people. Kreditmart plans to open 10 loan shops operating in
seven regions across Russia by the end of 2007 and to build a book of mortgage
assets. According to plan Kreditmart has opened its head office, its first loan
shop in Moscow and has approved its first mortgage customers. It plans to open
its next loan shop in St Petersburg in May 2007.
James Cook, director of Aurora Russia and previously Chairman and CEO of GE
Consumer Finance in Russia, provides hands on operational support to the Company
on a daily basis. James' track record includes the successful launch and
roll-out of Russia's first mortgage bank, DeltaCredit (sold to Societe Generale
in 2005), and DeltaBank, Russia's leading issuer of VISA credit cards (sold to
GE Consumer Finance in 2004).
Investment in Unistream
On 30 November, Aurora Russia signed an agreement to invest US$20 million for a
26 per cent stake in Unistream Bank, a leading money transfer business in
Russia. The investment will be used to roll out up to 550 money transfer cash
desks over the next few years. Management accounts show that in 2006 Unistream
transferred approximately US$1.84 billion making it one of the largest domestic
Russian money transfer companies. Aurora Russia is in the process of investing
US$13.6 million into the company in return for a 17.7 per cent stake. Once the
approval of the CBR has been received for Aurora Russia to own more than 20% of
a Russian bank, the Company will purchase an additional 8.3 per cent holding
from Uniastrum Bank, the founder of Unistream, for US$6.4 million, thereby
bringing its shareholding to 26 per cent.
Unistream continues to grow very quickly, capitalising on high rates of
migration from the surrounding regions and the CIS to Moscow and by increasing
its share of the market primarily through an aggressive pricing policy and
advertising programme.
We expect 2007 to continue to bring good investment opportunities as we continue
to build our pipeline of potential transactions.
John McRoberts and James Cook
Aurora Investment Advisors Limited
Consolidated Income Statement
For the period from incorporation on 22 February 2006 to 31 December 2006
Notes £'000
Administration and operating expenses 3 (2,689)
Unrealised loss on revaluation of investments 7 (272)
Net exchange gains 179
Operating loss (2,782)
Bank interest receivable 2,459
Loan interest receivable 2
Finance income 2,461
Net loss for the period 15 (321)
Loss per share - Basic 4 (0.43p)
Loss per share - Diluted 4 (0.43p)
All items in the above statement derive from continuing operations.
All income is attributable to the equity holders of the parent company. There
are no minority interests.
The accompanying notes on pages 11 to 23 form an integral part of these
financial statements.
Consolidated Balance Sheet
As at 31 December 2006
Notes £'000
Non-current assets
Plant and equipment 5 3
Investments - at fair value through profit and loss 7 15,401
Loan receivable 7 563
15,967
Current assets
Trade and other receivables 8 274
Cash and cash equivalents 65,778
66,052
Total assets 82,019
Current liabilities
Derivative financial liabilities 9 8
Trade and other payables 10 10,362
Total liabilities 10,370
Total net assets 71,649
Equity
Share capital 11 750
Share premium 12 -
Special reserve 13 70,750
Share options reserve 14 470
Revenue reserve - deficit 15 (321)
Total equity 71,649
Net asset value per share - Basic 16 95.5p
The accounts on pages 6 to 23 were approved by the Board of Directors on 4 April
2007 and signed on its behalf by:
Director Director
Stephen Coe Sir Trevor Chinn
The accompanying notes on pages 11 to 23 form an integral part of these
financial statements.
Company Balance Sheet
As at 31 December 2006
Notes £'000
Non-current assets
Investment in subsidiary - at fair value through profit and loss 6 12,500
Investments - at fair value through profit and loss 7 15,401
Loan receivable 7 563
28,464
Current assets
Trade and other receivables 8 153
Cash and cash equivalents 63,850
64,003
Total assets 92,467
Current liabilities
Derivative financial liabilities 9 8
Trade and other payables 10 20,512
Total liabilities 20,520
Total net assets 71,947
Equity
Share capital 11 750
Share premium 12 -
Special reserve 13 70,750
Share options reserve 14 470
Revenue reserve - deficit 15 (23)
Total equity 71,947
Net asset value per share - Basic 16 95.9p
The accounts on pages 6 to 23 were approved by the Board of Directors on 4 April
2007 and signed on its behalf by:
Director Director
Stephen Coe Sir Trevor Chinn
The accompanying notes on pages 11 to 23 form an integral part of these
financial statements.
Consolidated Statement of Changes in Equity
For the period from incorporation on 22 February 2006 to 31 December 2006
Notes Share Share Special Revenue Share Total
Capital Premium Reserve Reserve Options
Reserve
£'000 £'000 £'000 £'000 £'000 £'000
Issue of ordinary share 11, 12 750 70,750 71,500
capital, net of issue
costs
Conversion of share 12, 13 (70,750) 70,750 -
premium account
Net loss for the period 15 (321) (321)
Recognition in respect of 17 470 470
share-based payments
At 31 December 2006 750 - 70,750 (321) 470 71,649
The accompanying notes on pages 11 to 23 form an integral part of these
financial statements.
Consolidated Cash Flow Statement
For the period from incorporation on 22 February 2006 to 31 December 2006
Notes £'000
Cash flows from operating activities
Operating loss (2,782)
Adjustments for:
Increase in operating trade and other receivables (157)
Increase in operating trade and other payables 122
Revaluation of investments 272
Recognised share based payments 470
Derivative financial liability 8
Net cash outflow from operating activities (2,067)
Cash flows from investing activities
Acquisition of investments (5,464)
Acquisition of fixed assets 5 (3)
Loan advanced (562)
Bank interest received 2,374
Net cash outflow from investing activities (3,655)
Cash flows from financing activities
Proceeds from issue of ordinary share capital 11 75,000
Issue costs 12 (3,500)
Net cash inflow from financing activities 71,500
Net increase in cash and cash equivalents 65,778
Opening cash and cash equivalents -
Closing cash and cash equivalents 65,778
The accompanying notes on pages 11 to 23 form an integral part of these
financial statements.
Notes to the Financial Statements
For the period from incorporation on 22 February 2006 to 31 December 2006
1. General information
Aurora Russia Limited ('the Company') was incorporated in Guernsey on 22
February 2006, and was listed on AIM on 24 March 2006. The Company was
established to acquire interests in small and mid-sized private companies in
Russia, focusing on the financial, business and consumer services sectors.
2. Accounting Policies
Basis of preparation
The financial statements are prepared in accordance with International Financial
Reporting Standards ('IFRS'), which comprise standards and interpretations
approved by the International Accounting Standards Board and International
Accounting Standards and Standing Interpretations Committee interpretations
approved by the International Accounting Standards Committee that remain in
effect and applicable legal and regulatory requirements of Guernsey Law and of
AIM.
The financial statements do not include a company Income Statement as in the
opinion of the Directors this would not be materially different from the
consolidated Income Statement.
The financial statements have been prepared on the historical cost basis
modified by the revaluation of investments and financial instruments. The
principal accounting policies adopted are set out below.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and any entities controlled by the Company (its subsidiaries) made
up to 31 December each year. Control is achieved where the Company has the power
to govern the financial and operating policies of an investee entity so as to
obtain benefits from its activities.
On acquisition the assets and liabilities and contingent liabilities of a
subsidiary are measured at their fair values at the date of acquisition. Any
excess of the cost of acquisition over the fair values of the identifiable net
assets acquired is recognised as goodwill. Any deficiency of the cost of
acquisition below the fair values of the identifiable net assets acquired (ie
discount on acquisition) is credited to the income statement in the period of
acquisition.
The results of subsidiaries acquired or disposed of during the period are
included in the consolidated income statement from the effective date of
acquisition or up to the effective date of disposal, as appropriate.
Where necessary, adjustments are made to the financial statements of
subsidiaries to bring the accounting policies used into line with those used by
the Group.
All intra-group transactions, balances, income and expenses are eliminated on
consolidation.
Functional and presentation currencies
The Directors have selected sterling as the presentation currency of the
Company. The Directors have also selected sterling as the Company's functional
currency, as the Company is listed on AIM and has received and provided all its
funding in that currency. The majority of the Company's investments are expected
to be denominated in US dollars or Russian roubles.
Income
Interest income is accrued on a time basis.
Dividend income from investments is recognised when the Company's right to
receive payment has been established, normally the ex-dividend date.
Expenses
All expenses are accounted for on an accruals basis and are presented as revenue
items, except for expenses that are incidental to the disposal of an investment,
which are deducted from the disposal proceeds, and certain set up expenses (see
note below).
Segmental reporting
The Directors are of the opinion that the Group is engaged in a single segment
of business being investment business and in one geographical area, Russia.
Taxation
The Company is exempt from Guernsey taxation on income derived outside Guernsey
and bank interest earned in Guernsey under the Income Tax (Exempt Bodies)
(Guernsey) Ordinance 1989, for which it pays an annual fee of £600.
The Group is liable to Russian tax arising on its activities in Russia.
The Group is liable to Cypriot tax arising on the activities of its Cypriot
subsidiary.
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on taxable profit for the period. Taxable
profit differs from net profit as reported in the income statement because it
excludes items of income and expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible. The
Group's liability for current tax is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the temporary
difference arises from goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a transaction that
affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries, except where the Group is able to
control the reversal of the temporary difference and it is probable that the
temporary difference will not reverse in the foreseeable future.
Foreign currency transactions
Transactions in currencies other than sterling are translated at the foreign
exchange rate ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date are
translated into sterling at the exchange rate ruling at that date. Foreign
exchange differences arising on translation are recognised in the Income
Statement. Non-monetary assets and liabilities that are measured in terms of
historical cost in a foreign currency are translated using the exchange rate at
the date of the transaction. Non-monetary assets and liabilities denominated in
foreign currencies that are stated at fair value are translated into sterling at
foreign exchange rates ruling at the dates the fair value was determined.
On consolidation, the assets and liabilities of the Group's overseas operations
are translated at exchange rates prevailing on the balance sheet date. Income
and expenses are translated at the average exchange rates for the period unless
exchange rates fluctuate significantly. Exchange differences arising, if any,
are classified as equity and transferred to the Group's translation reserve.
Such translation differences are recognised as income or expenses in the period
in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the rate prevailing on the balance sheet date.
Forward exchange contracts
The Group's activities expose it to financial risks of changes in foreign
currency exchange rates. The Group uses forward foreign exchange contracts to
hedge these exposures, and not for speculative purposes. At the balance sheet
date outstanding forward exchange contracts are measured at their marked to
market price, and are included in the financial statements as either a
derivative asset or liability. Gains or losses arising on forward foreign
exchange contracts are taken to the Income Statement.
Financial Instruments
Financial assets and financial liabilities are recognised on the Group's balance
sheet when the Group becomes a party to the contractual provisions of the
instrument, including unconditional commitments to make investments. The Group
shall offset financial assets and liabilities if the Group has a legally
enforceable right to set off the recognised amounts and interests and intends to
settle on a net basis.
Investments
Investments, including investments in subsidiaries, are designated as fair value
through profit and loss. Investments are initially recognised at cost on a trade
date basis. The investments are subsequently re-measured at fair value, which is
determined by the Directors on the recommendation of the Valuation Committee.
Unrealised gains or losses arising from the revaluation of investments are taken
directly to the Income Statement, together with any gains or losses on forward
foreign exchange contracts designed to hedge the currency exposure related to
those investments. Investments deemed to be denominated in a foreign currency
are revalued in sterling terms even if there is no revaluation of the investment
in its currency of denomination.
The fair value of the investments is arrived at on the basis of the
recommendation of the Company's Valuation Committee. Fair value is determined by
the Valuation Committee as follows:
Unquoted securities are valued based on the realisation value which is estimated
by the Committee with prudence and good faith. The Committee will take into
account the guidelines and principals for valuation of Portfolio Companies set
out by the European Venture Capital Association (EVCA), with particular
consideration of the following factors:
• Fair value is the amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction
• In estimating fair value for an investment, the Committee will apply a
methodology that is appropriate in the light of the nature, facts and
circumstances of the investment and its materiality in the context of
the total investment portfolio and will use reasonable assumptions and
estimations.
• An appropriate methodology incorporates available information about
all factors that are likely materially to affect the fair value of the
investment. The valuation methodologies are applied consistently from
period to period, except where a change would result in a better
estimate of fair value. Any changes in valuation methodologies will be
clearly disclosed in the financial statements.
The most widely used methodologies are listed below. In assessing which
methodology is appropriate, the Committee is predisposed towards those
methodologies that draw upon market-based measures of risk and return.
• Cost of recent investment
• Earnings multiple
• Net assets
• Available market prices
Cash and cash equivalents
Cash in banks and short term deposits that are held to maturity are carried at
cost. Cash and cash equivalents consist of cash in hand and short term deposits
in banks with an original maturity of three months or less.
Trade receivables
Trade receivables do not carry any interest and are short-term in nature. They
are accordingly stated at their nominal value as reduced by appropriate
allowances for estimated irrecoverable amounts.
Trade payables
Trade payables are not interest bearing and are stated at their nominal value.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangement entered into. An equity instrument is
any contract that evidences a residual interest in the assets of the Group after
deducting all of its liabilities. Financial liabilities and equity instruments
are recorded at the proceeds received, net of issue costs.
Provisions
A provision is recognised in the balance sheet when the Group has a present
legal or constructive obligation as a result of a past event, and it is probable
that an outflow of economic benefits will be required to settle the obligation,
and the obligation can be reliably measured. If the effect is material,
provisions are determined by discounting the expected future cash flows at a
pre-tax rate that reflects current market assessments of the time value of money
and, where appropriate, the risks specific to the liability.
Set up expenses
The preliminary expenses of the Company directly attributable to the Offer and
costs associated with the establishment of the Company that would otherwise have
been avoided are taken to the share premium account.
Share based payments
Share options granted to the manager in respect of ongoing services are
conditional upon the achievement of certain performance conditions.
The share options have been valued by an independent valuer in the financial
statements as at the date the options were granted. The resulting value is
amortised in the Income Statement over the expected life of the options. The
options may have a dilutive effect upon the earnings per share and the net asset
value of the Company and the Group.
Use of estimates
The preparation of the Group's financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and contingencies at the time of the Group's financial statements,
and revenue and expenses during the reporting period. Actual results could
differ from those estimated. Significant estimates in the Group's financial
statements include the amounts recorded for the fair value of the investments.
By their nature, these estimates and assumptions are subject to measurement
uncertainty and the effect on the Group's financial statements of changes in
estimates in future periods could be significant.
Standards, interpretations and amendments to published statements not yet
effective
Certain new standards, interpretations and amendments to existing standards have
been published that are mandatory for the Group's accounting policies for
periods beginning on or after 1 January 2007 but which the Group has not early
adopted. These are:
• IFRS 7, Financial Instruments: Disclosures; and
• Complementary amendment to IAS 1, presentation of Financial Statements -
Capital Disclosures
IFRS 7 introduces new disclosures to improve the information about financial
instruments. It requires the disclosure of qualitative and quantitative
information about exposure to risks arising from financial instruments,
including specified minimum disclosures about credit risk, liquidity risk and
market risk, including sensitivity analysis to these risks. It replaces
disclosure requirements in IAS 32, Financial Instruments: Disclosure and
Presentation. It is applicable to all entities that report under IFRS. The
amendment to IAS 1 introduces disclosures about the level of an entity's capital
and how it manages capital. The directors have assessed the impact of IFRS 7 and
the amendment to IAS 1 and concluded that the main additional disclosures will
be the sensitivity analysis to these risks. The Group will apply IFRS 7 and the
amendment to IAS 1 from annual periods beginning 1 January 2007. The impact of
all other Standards and Interpretations not yet adopted is not expected to be
material.
3. Administration and operating expenses
The net loss for the period has been arrived at after charging the following
items of expenditure:
£'000
Investment management fee 1,500
Auditors' remuneration - Company 32
Auditors' remuneration - Kreditmart 10
Directors' remuneration 135
Share based payments 470
Other operating and administrative expenses - Company 249
Other operating and administrative expenses - Kreditmart 293
2,689
Auditors' remuneration relates entirely to the provision of audit services. In
addition Deloitte & Touche LLP earned the following fees during the period:
£'000
Reporting accountants' fees 60
Consultancy fees 15
75
Reporting accountants' fees related to the set up of the Company and accordingly
were charged against the Company's share premium account (see note 12).
Consultancy fees related to the set up of the Company's subsidiary Kreditmart
Finance Limited and have been capitalised.
4. Earnings per share
£'000
The calculation of the basic and diluted earnings per share is based on the following data:
Loss for the purposes of basic and diluted loss per share being net loss attributable to equity (321)
holders of the parent
Weighted average number of ordinary shares for the purpose of basic loss per share: 75,000,000
Effect of dilutive potential ordinary shares:
Options -
Weighted average number of ordinary shares for the purpose of diluted loss per share: 75,000,000
5. Plant and equipment
Plant and
equipment
£'000
Cost:
Additions 3
At 31 December 2006 3
Net book value:
At 31 December 2006 3
The assets were purchased in December 2006 and will be depreciated with effect
from 1 January 2007. As a result there is no depreciation charge for the period.
The useful lives of the assets are estimated as follows:
Plant and equipment 3 years
6. Investment in subsidiary - at fair value through profit and loss
The financial statements of the Group consolidate the results, assets and
liabilities of the subsidiary companies listed below:
Name of subsidiary undertaking Country of Class of % of class Principal
incorporation share held activity
Kreditmart Finance Limited Cyprus Ordinary 100.0% Consumer
finance
The investment in Kreditmart Finance Limited ('KFL') was approved by the Board
on 11 September 2006. KFL was incorporated and acquired by the Company on 19
September 2006. A total of £12,500,000 was committed to set up and fund the
establishment of the company. At the balance sheet date a total of £2,333,332
had been drawn down from this commitment.
7. Investments - at fair value through profit and loss
£'000 £'000 £'000
Fair value Cost Unrealised
gain/(loss)
Whitebrooks Investments Limited 5,036 5,308 (272)
Unistream Bank 10,365 10,365 -
15,401 15,673 (272)
The investment in Whitebrooks Investments Limited ('WIL') was completed on 24
July 2006. The Company acquired a 40.3% stake in WIL, diluted to 37.1% after the
agreement of a management option scheme. The precise percentage of the stake
will vary dependent on the reported revenue of WIL for the year ended 31
December 2006.
On 27 November 2006 the Board approved the purchase of a 26% stake in Unistream
Bank ('UB') at a cost of US$20 million, subsequent to which conditional
agreements were signed on 30 November 2006. The proposed deal was announced to
AIM on 30 November 2006. As at the balance sheet date, however, the conditions
had not yet been fully satisfied and no funds had been paid out.
As a result of the size of the stakes in these two companies, WIL and UB could
potentially qualify as associated companies, which would normally require that
they be equity accounted in the books of the Company. However, the Company has
taken advantage of the exemption available to it under IAS 28, and hence
accounts for these as investments at fair value through profit and loss.
In the view of the Valuation Committee, insufficient time has elapsed from the
acquisition of the investments to permit any meaningful upwards revaluation of
the investments. There are no factors of which the Committee is aware that would
lead it to value the investments at less than cost price in their currency of
denomination.
The unrealised loss on the investment in Whitebrooks Investments Limited arises
due to a revaluation in sterling terms of the US dollar cost of the investment.
In addition to its investment in the shares of Whitebrooks Investments Limited,
the Company agreed on 24 July 2006 to provide the investee company with a loan
facility of US$5 million. The drawn down amount of the loan is repayable on or
before 22 December 2007, however it is likely that any amounts still outstanding
at maturity would be rolled over for a further period. In the event of default
the loan is convertible into ordinary shares of the borrower.
The outstanding balance as at 31 December 2006 was as follows:
US$'000 £'000
Loan drawn down plus capitalised interest 1,103 563
8. Trade and other receivables
Company Group
£'000 £'000
Sundry debtors and prepayments 11 132
Bank interest receivable 86 86
Amount receivable from related party 56 56
153 274
The related party balance is due from Aurora Investment Advisors Limited, and is
interest free, unsecured and repayable on demand. This balance has since been
repaid.
9. Derivative financial liabilities
The Group utilises forward foreign exchange contracts to hedge its exposure to
movements in exchange rates. At the balance sheet date the fair value of
unsettled forward foreign exchange contracts for the Group and the Company was a
liability of £8,383.
The following contracts were open at the Balance Sheet date (Group and Company): -
Sell US$ 9,732,178.09 at 1.96046 to buy £4,964,231.91 for value 29 June 2007;
Sell US$ 1,100,000.00 at 1.9665 to buy £559,369.44 for value 29 June 2007.
10. Trade and other payables
Company Group
£'000 £'000
Kreditmart Finance Limited - undrawn investment commitment 10,166 -
Unistream Bank - undrawn investment commitment 10,214 10,214
Expense accruals 132 148
20,512 10,362
11. Share capital
£'000
Authorised share capital:
200,000,000 ordinary shares of 1p each: 2,000
Issued share capital:
75,000,000 fully paid ordinary shares of 1 p each: 750
The Company has one class of ordinary shares which carry no right to fixed
income.
2 shares were issued on 24 February 2006 for a consideration of £1 each.
74,999,998 shares were issued on 20 March 2006 for a cash consideration of £1
each.
12. Share premium
Company Group
£'000 £'000
Premium arising on issue of ordinary shares 74,250 74,250
Transaction costs on issue of ordinary shares (3,500) (3,500)
Conversion to special distributable reserve (70,750) (70,750)
Balance as at 31 December 2006 - -
On 5 April 2006 the Royal Court of Guernsey confirmed the reduction of the
capital by way of cancellation of the Company's share premium account. The
amount cancelled has been credited to a Special reserve (see note 13).
13. Special reserve
Company Group
£'000 £'000
On conversion from share premium 70,750 70,750
Balance as at 31 December 2006 70,750 70,750
The Special reserve is a distributable reserve to be used for all purposes
permitted under Guernsey company law, including the buy back of shares and the
payment of dividends.
14. Share options reserve
Company Group
£'000 £'000
Recognised fair value of share options issued during the period 470 470
470 470
Details of share-based payments in the period are shown in note 17.
15. Revenue reserve - deficit
Company Group
£'000 £'000
Net loss for the period (23) (321)
Balance as at 31 December 2006 (23) (321)
Any surplus or deficit arising from net profits or losses after payment of
dividends is taken to this reserve.
16. Net asset value per share
Company Group
Net asset value £71,947,000 £71,649,000
Number of shares in issue 75,000,000 75,000,000
Net asset value per share 95.9p 95.5p
17. Share based payments
Terms
The Company has granted an option to the Manager to subscribe for ordinary
shares representing 20% of the issued share capital of the Company after the
exercise of the Manager option at the placing price per ordinary share (subject
to adjustments for any dividends per share paid by the Company prior to exercise
by the Manager); provided that the total shareholder return on the ordinary
shares as compared to the placing price has increased by at least 12% per annum
from the date of admission until exercise measured by reference to the average
of the closing mid-market prices of the ordinary shares in the three months
prior to the date on which the Manager option becomes exercisable (the 'hurdle
rate') and, provided further that if any additional ordinary shares are issued
following admission as part of any secondary fundraising, the exercise price of
the Manager option in respect of such additional shares shall be the issue price
paid for such shares pursuant to such secondary fundraising (subject to
adjustments for any dividends per share paid by the Company prior to exercise by
the Manager). The Manager option is exercisable at any time during the period
between the third and tenth anniversaries of the date of admission; provided
that the hurdle rate has been met prior to the date of exercise of the Manager
option. The Manager option shall also become exercisable at any time between the
date of admission and the tenth anniversary thereof in the event of a takeover
of the Company or the Company's liquidation. In such circumstances, the Manager
does not need to satisfy the hurdle rate in order to exercise the Manager
option.
Change in the period
Number Exercise
price
Options granted during the period 18,750,000 100p
Outstanding at the end of the period 18,750,000
Exercisable options at the end of the period -
The options outstanding at 31 December 2006 had a remaining contractual life of
9 years 3 months.
Calculation of the fair value of equity settled share based payments
All share based payments have been valued using the Monte Carlo model. The key
inputs to this model that drive the option value are:
Share price at grant of options 100p
Exercise price 100p
Expected volatility 20%
Risk free rate 4.39%
Effective dividend yield 0%
Based on the above valuation the total value of the options granted at the date
of grant was £3,000,000.
The directors have estimated that the hurdle rate will be achieved, and hence
the options will vest, after 5 years. The value of the options will be charged
to the income statement on a pro rata basis over the course of the 5 years
ending 20 March 2011. The charge arising for the period ended 31 December 2006
is £470,137.
18. Financial risk factors
Liquidity risk
The Company has yet to invest the majority of the funds raised from its listing,
and as a result has a high level of cash and cash equivalents at the balance
sheet date. The cash and cash equivalents are placed with financial institutions
on a range of terms, from call to 6 months notice.
Credit risk
The Company is exposed to credit risk in respect of its cash and cash
equivalents, arising from possible default of the relevant counterparty, with a
maximum exposure equal to the carrying value of those assets. The credit risk on
liquid funds is limited because the counterparties are banks with high
credit-ratings assigned by international credit-rating agencies. The Company
monitors the placement of cash balances on an ongoing basis.
The Company is also exposed to credit risk in respect of the loans granted to
Whitebrooks Investments Limited, with a maximum exposure equal to the value of
the loans advanced. Under the terms of the loan agreement, should the loans not
be repaid by the maturity date, they are converted into ordinary shares of the
borrower.
Currency risk
Currency risk is the risk that the value of financial instruments will fluctuate
due to changes in foreign exchange rates. Currency risk arises when future
commercial transactions and recognised assets and liabilities are denominated in
a currency that is not the Company's reporting currency. The Company is exposed
to foreign exchange risk arising from various currency exposures primarily with
respect to US Dollars and the Russian Rouble. In particular the Company's
investment in Whitebrook Investments Limited has been made in US Dollars. The
Company has put in place hedging arrangements to mitigate its US Dollar exposure
and to neutralise the impact of currency fluctuations for sterling investors.
The Company does not use such currency derivatives for speculative purposes.
An analysis of the Group's net currency exposure is as follows:
Currency of denomination Sterling US Dollars Russian Total
Roubles
£'000 £'000 £'000 £'000
Total assets 76,283 5,599 137 82,019
Total liabilities (10,370) - - (10,370)
Off balance sheet assets 5,524 - - 5,524
Off balance sheet liabilities - (5,524) - (5,524)
Net currency exposure 71,437 75 137 71,649
Market risk
Market price risk arises principally from uncertainty concerning future values
of financial instruments used in the Group's operations. It represents the
potential loss the Group might suffer through holding interests in unquoted
private companies whose value may fluctuate and which may be difficult to value
and/or to realise. The Company seeks to mitigate such risk by assessing such
risks as part of the due diligence process related to all potential investments,
and by establishing a clear exit strategy for all potential investments.
Interest rate risk
The Group is subject to risks associated with changes in interest rates in
respect of interest earned on its cash balances. The Group seeks to mitigate
this risk by monitoring the placement of cash balances on an ongoing basis in
order to maximise the interest rates obtained.
19. Events after the balance sheet date
On 5 March 2007 the Company advanced a further loan of US$500,000 to Whitebrooks
Investments Limited under the terms of the loan facility agreed on 24 July 2006
20. Related party transactions
Transactions between the Company and any subsidiaries which are related parties
have been eliminated on consolidation and are not disclosed in this note.
John McRoberts and James Cook each hold 47.5% of the ordinary share capital and
42.5% of the non-voting preference share capital of Aurora Investment Advisors
Limited ('AIAL'). A trust created by Sir Trevor Chinn (in which he has no
interest) holds 10% of the non-voting preference shares in AIAL.
AIAL receives a fee for its services as investment manager and advisor. The
total charge to the Income Statement during the period was £1,500,000.
During the period the Company has paid certain expenses which have subsequently
been determined to be chargeable to AIAL. As a result there is a balance due
from AIAL at the balance sheet date in the sum of £55,785. This balance has
since been repaid.
The Company pays fees to Investec Administration Services Limited ('IASL') for
its services as administrator. The total charge to the Income Statement during
the period was £67,010, of which £18,750 was outstanding at the period end.
Steve Coe, a director of the Company, is also a director of IASL.
The directors of the Company received fees for their services, details of which
are provided in the Directors' Report. The total charge to the Income Statement
during the period was £118,205, of which £34,167 was outstanding at the period
end. Other director related party transactions are provided in the Directors'
Report.
On 17 July 2006, John McRoberts exercised options in respect of 152 shares in
Whitebrooks Investments Limited ('WIL') at an average price of US$275 per share.
The options were granted to Mr McRoberts by an unrelated shareholder in WIL in
connection with consultancy work performed for the shareholders of WIL during
2004 and early 2005. Mr McRoberts still holds options in respect of a further
848 shares at an average price of US$275 granted by Tim Slesinger, the largest
shareholder in WIL.
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