Preliminary Results
Fairpoint Group PLC
26 February 2008
Fairpoint Group Plc (formerly Debt Free Direct Group plc)
Unaudited Preliminary Results for the eight months ended 31 December 2007
Fairpoint Group Plc ('Fairpoint' or 'the Group'), a leading provider of advice
and solutions to financially stressed consumers, today announces its preliminary
results for the 8 month period ended 31 December 2007.
Highlights
. Financial highlights
- Revenue growth of 3% on an annualised basis to £19.5m (year to 30
April 2007: £28.5m)
- EBITDA from ongoing operations of £2.2m (year to 30 April 2007:
£10.9m)
- Loss after tax of £1.1m (year to 30 April 2007: profit of £6.9m),
including a loss from discontinued operations of £1.3m (year to 30
April 2007: £0.4m)
. Market share growth in a difficult market
- 28% market share in October 2007
- IVA cases under supervision has grown 47% to 14,600 from 9,900 in
April 2007
- Revenue growth from activities excluding core IVAs
- Divestment of Australia operation allows focus on core UK operations
. Increased costs of acquisition in the period, falling in last quarter
- Average cost per lead has risen 39% to £89 (year to 30 April 2007:
£64)
- Average cost per lead falling in final quarter to less than £75
. Balance sheet grown through acquisition
- Clear Start UK Limited acquired in June 2007 for £12.1m
- Net assets have grown to £33.2m (30 April 2007: £23.1m)
- Share Premium Reserve cancelled adding £14m to distributable reserves
. Strengthened funding position
- Long term £16m funding line completed in January 2008
. Positive outlook after a difficult period
- Clear IVA market leader
- Broadening the range of products and services dedicated to financially
stressed consumers
- Increasing barriers to entry and strategic advantages
- Strong platform for growth over next 2 years
Mike Blackburn, Chairman, said:
'I am pleased that we have emerged from the challenging market conditions of
last year as the clear market leader in IVAs. Furthermore, our broadening range
of products and services, and falling costs of customer acquisition, should
allow us to further capitalise on this position in 2008 as we enter the next
phase of the Group's development with much confidence.'
Andrew Redmond, Chief Executive Officer, said:
'After 5 years of solid growth in profits since coming to market, 2007 was a
challenging year for the Group. However, despite the much publicised industry
head winds we reacted quickly to external pressures and, in a period where we
saw our largest competitors fall by the wayside, we were able to grow our IVA
market share and deliver EBITDA from ongoing operations of £2.2 million during
this 8 month period. We are confident that the Group's strategy of widening its
product and service offering, combined with the synergies and cost savings being
achieved following the acquisition of Clear Start, mean that solid foundations
are in place and we will return to profitable growth in 2008.'
Chairman's Statement
Introduction
At the time of the Interim Results announcement, I advised shareholders of the
intention to change the Group's accounting reference point to December 31.
Accordingly, these Report and Accounts cover an eight month period from May 1
2007 to December 31 2007.
We have emerged from a challenging year where the well-documented issues
affecting the IVA industry impacted the Group's profitability. However, we have
consolidated our position as the market leader in a growing and maturing market.
This has meant that we have grown market share at a faster rate than we would
have expected.
The Chief Executive Officer's Review provides an in-depth commentary on the
dynamics of change and how the Group has responded. Whilst some of our
competitors have fallen by the wayside, Fairpoint has strengthened both its
strategic and operational platforms, reinforcing its market-leading position.
Key Features
The acquisition of Clear Start has brought complementary strengths to our
marketing efforts with its skills in indirect and internet-based interfaces to
financially distressed consumers. At the same time the Group's management team
has been augmented, and the synergies identified when the deal was announced are
being delivered.
The disposal of our Australian operations maximises shareholder value given
higher returns on investment available in the UK.
At the end of the year we created Fairpoint Group, a combination of the existing
group companies with renewed strategic objectives to broaden our range of
financial services. We now reach an expanded pool of potential customers to whom
we can offer a broader range of in-house solutions both at the initial point of
contact but also through the life of the customer relationship.
Performance
Revenues increased by 3% on an annualised basis, following the acquisition of
Clear Start. Adjusted profits were affected by a near 40% increase in the
marketing cost per lead (64% in the first half), compared to the average cost in
2007, this occurring at the same time as a decline in the IVA market. This has
resulted in EBITDA from ongoing operations of £2.2 million (PBT adjusted for
interest, amortization and depreciation) compared to £10.9million for the 12
months to 30th April 2007 and a loss after tax of £1.1 million, which includes a
£1.3 million loss from discontinued operations. Towards the end of the period
there was the added impact of a move to fees based on a 'percentage of
realisations' methodology, which was agreed with the major creditors during the
period. Despite the short term impact on our revenue and profitability, the new
fee regime has meant a number of market participants could not operate
profitably or continue to compete. This is expected to be beneficial to the
Group both in terms of the competitive landscape and relative profitability, as
we have consistently recovered more debt for creditors than our remaining
competitors.
Meanwhile, the stock of back book cases under supervision, agreed on historic
terms, provides a strong underpinning to revenue, profit and cashflow. The
contribution from new non-IVA activities, currently 20% and growing, are
predicted to contribute further to the Group's performance going forward.
As we announced in the interims our accounting policy was revised with regard to
revenue recognition resulting in a £4.7million one-off adjustment to current
year revenue. This has now been treated as a prior year adjustment in the
accounts, which enables a better comparison with past results, and more detail
is provided in the financial review.
Strategy
Following the acquisition of Clear Start UK Limited ('Clear Start') in June 2007
and the creation of an enlarged group with a broadening service range, the Group
changed its name to Fairpoint.
We will continue to be the market-leading provider of IVA solutions to
over-indebted consumers but also offer a broader range of debt solutions, as
well as a new suite of lifetime products and services aimed at assisting
consumers through the rehabilitation cycle and thereafter.
Current macro market factors mean that the broadening of our service range is
increasingly important to both our customers and to creditors. It also creates
growth opportunities for the Group, as well as having a positive impact on
seasonality and working capital. In addition, it should produce a better
balanced revenue stream derived from a full range of products with differing
strengths through the economic cycle. Our growth will be organic and, when
earnings enhancing, through appropriate acquisitions.
We are uniquely positioned to deliver this strategy, and have developed barriers
to entry and competitive advantages:
• Cash-generative back book
• Large scale and low cost operations
• Bespoke technology for advice and process automation (BAM and IMS)
• Differentiated creditor relationships and accreditation-ready status
• Considerable sector marketing experience, with a rigorous analytical
methodology
• Established channels that enable us to speak to over 150,000 potential new
customers per year
• Funding facilities in place
Dividend
Shareholders will be asked to approve a final dividend of 4p per share at the
forthcoming Annual General Meeting.
Board Changes
In this reporting period John Reynard, a non-executive director, retired in the
summer and Paul Latham, Group Finance Director, retired at the year-end, along
with Lord Hoyle the Senior Independent Director. Each in their separate way
contributed significantly to the growth of the business and I thank them warmly
for so doing. John and Paul remain shareholders and Lord Hoyle continues to be
involved in a consultancy capacity.
Charles Mindenhall joined the Board in the summer consequent upon the
acquisition of Clear Start where he was a founding director. Simon Gilbert, an
executive with Hanover Investors, our largest shareholder, was appointed during
the autumn. Each bring new thinking and attributes to the Board's deliberations
and are deeply involved on a regular basis which I welcome.
Further appointments are expected to be announced shortly.
Summary
After 5 years of solid growth in profits since our flotation, 2007 was a
disappointing year. However, our Management Team has reacted quickly to the
external factors that have impacted the business and we are now on track to
commence a further period of strong growth.
I am pleased that we have emerged from the difficult market conditions of last
year as the clear market leader in IVAs. Our broadening range of products and
services, and falling costs of customer acquisition, will allow us to further
capitalise on this position in 2008.
J.M.B.
Chief Executive Officer's Review
Overview
Towards the end of 2007, Fairpoint Group plc was created out of the acquisition
of Clear Start by Debt Free Direct. This brought together the UK's market
leader of IVA solutions with Clear Start's differentiated channels to market and
creditor relationships.
Overall, 2007 proved to be a very difficult time for the IVA industry and for
our Group. The early part of the year was impacted by increased competition,
creditor reluctance to accept IVAs and consumer unease caused by alarmist press
coverage. The latter part of the year was further impacted by reduced fee
levels, brought about by creditor pressure; some reduction in realisations,
caused by inflation in the basic costs of living (meaning the average consumer
was able to pay less into their plan) and December, which is a seasonally weak
month. Not only does it have a short trading period but staffing is increased
for the 50% growth in lead volumes that occurs in January. These, together with
the costs associated with integrating Clear Start, significantly reduced
profitability and resulted in a loss for the period taking into account
impairments of intangible assets and discontinued operations of £1.1 million,
compared to profit of £7.4 million in the 12 months to April 2007. However, from
October we saw the indications of the dynamics of the new market which we are
beginning to experience. In particular market share wins meant IVA volumes
showed some encouraging signs as well as improving lead generation. Advertising
costs and competitive pressure continued to reduce through the end of the period
and stability in the new fee arrangements was experienced.
Revenue for the group in the 8 months to December 2007 was up by 3% on an
annualised basis, following the acquisition of Clear Start, with EBITDA from
ongoing operations of £2.2 million (PBT adjusted for interest, amortization and
depreciation). This compared to EBITDA of £10.9 million in the 12 months to
April 2007.
We completed a strategic review following the acquisition of Clear Start and
confirmed our intention to broaden our range of products and services for
financially stressed consumers and accelerate the growth on non-IVA products and
services. The strategic review also identified significant synergies and cost
savings resulting from the merger of Clear Start and operational efficiencies
that will lead to reduced costs over the course of 2008.
We have emerged from this period as the market leader with a strong position and
by the fourth quarter had grown market share to 28%; a faster rate than we would
have expected and on reduced advertising spend albeit against a market backdrop
of declining overall IVA registrations as a number of competitors exited the
market. We expect reducing competition and limited growth in the overall IVA
market to continue into the first quarter of 2008 before the market starts
showing significant growth again from the second quarter onwards.
The macro economic climate continues to be increasingly favourable. A recent
KPMG report forecast 130,000 borrowers entering into IVAs or bankruptcies in
2008, a rise of 19% over last year. We also expect 2008 to be a record year for
the numbers seeking debt advice from the Group.
1. Market Backdrop
Industry wide protocol
The Insolvency Service ('IS') and the British Bankers' Association ('BBA')
launched an initiative to bring together the debt advice and credit industries
to agree a working protocol. Fairpoint was extensively involved in the working
parties to develop the code of practice and has representation on the Standing
Committee which is responsible for the implementation and future development of
the protocol.
Audit and accreditation
An audit and accreditation process has now been developed for the industry by
The Insolvency Exchange ('TIX'). Fairpoint welcomes this and was the first of
two providers to be successfully audited and 'accreditation ready'.
This creates a competitive advantage for those providers who are prepared to
invest in process and people to deliver excellent advice and service.
Agreement upon fees
Running alongside the BBA and IS initiative have been negotiations upon a fair
basis for IVA fees. This has led to an environment where IVA providers' fees are
based upon what they return to lenders. Fairpoint already has industry leading
returns and, consequently, will achieve more under this fee basis than other
providers with poorer returns.
Consolidating Market
The changing regulatory and fee environment has, as we predicted, caused some
casualties. Two of our largest competitors have effectively exited the IVA
market. We have not pursued the acquisition of any of these failing businesses
primarily because their channels to market were in no way differentiated to
ours, and we have picked up share without the cost of acquisition.
The current phase of consolidation has been by way of players leaving the
market. The next phase is likely to be deal driven. We will consolidate with
strong targets that give us new channels to market or broaden our product range.
2. Operational Highlights
Acquisitions and Disposals
The Group acquired Clear Start UK Limited in June 2007 for a total consideration
of £12.1 million satisfied through the issue of ordinary shares. Clear Start has
significantly enhanced our ability to generate cost effective advertising leads
and improve our contribution per lead as a result. The operation currently
processes in the region of 5,000 leads per month.
The acquisition has in the short term led to increased overheads and direct
costs as we operate across two sites in Adlington and Nottingham. These are
forecast to fall as we complete the full integration of the business, getting
the full benefit of £2 million synergies in 2008.
Towards the end of the period, the Group decided to cease all new business
activity in Debt Free Direct Australia and has subsequently disposed of the
residual back book. The decision maximises shareholder value sooner rather than
later, given higher returns on investment available in the UK.
Fairpoint Group
During the fourth quarter of 2007 we completed a strategic review with the
creation of Fairpoint Group, and a renewed set of strategic objectives to:
o Continue industry consolidation plans as market leader, following the
successful integration of Clear Start
o Develop as a broader based financial services company with a full range
of solutions for 'financially stressed' consumers
o Accelerate the growth of non-IVA products and services
Commensurate with the values that have guided the Group to date and helped us to
create a market leading position, we continue to believe that the best advice to
both consumers and creditors will build 'most trusted advisor' relationships,
which will allow us to provide services throughout the lifetime of our customer
relationships.
Going into 2008 our priority objectives for the year are:
1. Roll-out a process of continual operational improvement and reducing costs
in our core IVA business:
o Enhancing conversion rates
o Reducing variable and fixed costs
This has become possible due to the significant progress in professionalising
our functional skills as well as the changes in the competitive landscape.
2. To extend into adjacent target markets:
o 'over-indebted but not appropriate for IVA'
o 'over-indebted but unable to consolidate'
3. To develop core debt solutions that address these adjacent target
markets, and cross-sell products to maximise our contribution per lead:
o Debt repayment solutions alongside our existing IVA capability
o Cross-sell products to support our customers through their rehabilitation
process, such as:
. Insurance (coming on-stream during H1)
. Banking and Payment Card (coming on-stream during H2)
. Budgeting and Switching (coming on-stream during H1)
4. To develop new customer acquisition channels that bring down
further the costs of advertising and support the extension into new market
segments.
3. Current trading
Fairpoint's lead volumes and lead acquisition costs both improved significantly
in the final quarter of 2007. This has continued through the start of the new
year. Lead volumes have increased significantly in January with cost per lead
continuing to fall, although recent evidence of lower realisations is unlikely
to mean that the full benefit of this growth will be realised.
Whilst our mortgage and loan business has been impacted by the credit crunch
which slowed trading in November and December, the business remains strongly
profitable and is expected to grow with our lead volumes.
We continue to exercise strong cost control, with monthly overheads falling and
the integration of Clear Start remaining on track to complete in the second
quarter, delivering anticipated synergies of £2 million in 2008. These synergies
come through in operational efficiency improving the profitability of the back
book and a reduction in overheads. This, and the full benefits of our realigned
strategy, will be experienced in the second half, which benefits from the
marketing investment made in the first quarter. We are now looking forward to a
period of renewed stability and growth in our market and a return to profitable
growth for our Group.
Financial Review
Financial performance
Results
The past eight month period has been one of considerable change within the debt
advice market and the IVA market in particular. These changes, combined with the
impact of the acquisition of Clear Start, are reflected in the Group's financial
performance.
• Turnover of £19.5 million, representing 3% growth on an annualised basis
• EBITDA from ongoing operations of £2.2 million, compared to £10.9m in
the 12 months to April 2007
• Loss from discontinued operations of £1.3 million and impairment of
intangible assets of £1.1 million
• Resulting loss after tax of £1.1 million, compared to profit of £7.4
million in the 12 months to April 2007
• Clear Start acquired in June for fair value consideration of £12.1 million
• Shareholders' funds have grown to £33.2 million from £23.1 million last
year
• Proposed final dividend of 4 pence for the eight month period (6 pence
for the year ended 30th April 2007)
• Significant growth in IVA back book off-balance sheet asset during the
period
The trading results for the period and the Group's financial position at the
period-end are detailed in the financial statements which follow this review.
During the period the Group conducted a full review of its IVA revenue
recognition, and has reappraised the recognition profile to better reflect the
actual mix of costs and revenues over time in an IVA case. The net impact of
these changes, which has been accounted for as a prior year adjustment, is to
increase revenue and PBT in the prior year by approximately £2.4 million, whilst
increasing net assets by approximately £3.3 million. At the interim
announcement, this was treated as a one-off item of £4.7 million in the current
year. This is now shown in the accounts as a prior year adjustment, which
enables a more meaningful comparison with past results.
The financial statements of the Group have been prepared in accordance with
International Financial Reporting Standards and the Group has elected to apply
the trainsitional arrangements permitted by IFRS 1 'First-time Adoption of
International Financial Reporting Standards'
Overview of financial performance
Overall, revenue for the group in the 8 months to December 2007 was up by 3% on
an annualised basis. Total IVA numbers in England and Wales fell 16% in the
final three quarters of 2007 compared to the same period in 2006. However, I am
particularly pleased that the Group managed to grow its volumes by increasing
market share over this period, particularly in the last quarter.
Mortgage and loan related commissions have grown by 44% on an annualised basis
to £1.6 million. This follows our in-house broking business becoming fully
operational in January 2007, significantly enhancing our existing remortgage
business. Our business was impacted by the credit crunch in the late autumn
where conversion rates fell as many products were re-priced or withdrawn slowing
our previous growth, although current trading has seen some recovery in
conversions in line with historic levels.
During the first six months of the period increased competition led to an
increase in the cost per lead, which reduced later in the period as competitors
retreated from the market and in the final two months of the year this cost fell
to less than £75 per lead, allowing for a recovery in gross margin as reported
in our interim statement.
The continued delivery of new IVA cases together with the acquisition of Clear
Start has resulted in the 'bank' of supervisory cases growing 50% in the eight
month period to nearly 15,000 cases at the end of the period. This 'bank' of
cases provides a robust and significant cash flow to the group.
The Group has decided to cease all new business activity in Debt Free Direct
Australia and dispose of the residual back book. The decision maximises
shareholder value sooner rather than later, given higher returns on
investment available in the UK. It was believed that the Australian operation
would have remained cash negative throughout 2008. The loss for the period from
the discontinued operations was £1.3 million.
At the period end the fair value of intangible assets was reviewed for
impairment, as a result of which the Group has concluded that the contract for
exclusive supply of lead volumes from Money Advice Direct Limited amounting to
£1.1 million was impaired, due to the low quality of leads. A full charge for
this impairment has been taken through amortisation.
The share premium account was cancelled during the period and £14 million
transferred to distributable reserves.
The Group does not operate defined benefit pension schemes.
Finally, I am pleased that the Group has secured long term loan financing from
our existing banking partners, Royal Bank of Scotland. The provision of a £16
million facility at a competitive rate of interest allows us to service our
existing working capital requirements and provides further funds with which the
Group can act in a rapidly consolidating marketplace.
Key Performance Indicators
12 Months 8 Months
to Apr 07 to Dec 07
Average number of leads 8,900 10,204 Whilst lead levels grew, 2007 was characterised by
per month reduced response rates due to increased competition
and creditor positioning. Our volumes rose as we
achieved market share gains.
Marketing cost per lead 64 89 Dramatic increase in competition from January,
(£) falling at the end of the period
Contribution per lead 189 170 Increasing revenues from non-IVA solutions were
(£) offset by new fee agreements
Cases under supervision 7,724 13,070 Continued growth in the back book
Monthly contribution 12 9 Impacted by Clear Start acquisition; benefits now
per case (£) beginning to be realised
Central overhead (£) 317,000 480,000* Increased in 2007 after acquisition of Clear Start;
synergies now being implemented
* Clear Start overheads taken on during the period
Analyst Presentation
There will be an analyst presentation to discuss the results at 11.00am on 26
February 2008 at Financial Dynamics, Holborn Gate, 26 Southampton Buildings,
London WC2A 1PB.
Those analysts wishing to attend are asked to contact Nick Henderson / David
Cranmer at Financial Dynamics on +44 20 7269 7114 / +44 20 7269 7217 or at
nick.henderson@fd.com./ david.cranmer@fd.com
Enquiries
Fairpoint Group plc
Andrew Redmond, Chief Executive Officer 0845 296 0100
Andrew Heath, Finance Director Designate 0845 296 0200
Numis Securities
Chris Wilkinson 020 7260 1000
Lee Aston
Financial Dynamics
Ed Gascoigne-Pees 020 7269 7132
Nick Henderson 020 7269 7114
Notes
At Fairpoint we develop and operate consumer financial services businesses.
We select markets or opportunities which show certain characteristics:
• Growing and sustainable consumer demand.
• Caused by deep-rooted market, regulatory or economic factors.
• Where innovation and effective channel execution can give sustainable
differentiation.
As such our customers tend to be going through a period of life to which the
mass financial services market is unable to provide a solution.
We make it our business to understand our customers in depth, to help them
through their short term circumstances, and to continue that relationship, if
they so choose, into the future. The solutions offered range from basic advice,
such as simply destroying credit cards and curbing unnecessary expenditure, to
the following solutions:
• consolidation loan
• re-mortgage
• informal arrangement
• individual voluntary arrangement (IVA)
• bankruptcy
Fairpoint always seeks (unlike many of its competitors who sell specific
products) to systematically and impartially deliver the best advice to the
consumer and recommend them the most appropriate solution.
Over the last few years we have been very much focused on the over-indebted
market in the UK. Debt Free Direct has pioneered the debt advice and solutions
industry and is a clear leader in the provision of IVAs, while Clear Start's
impartial approach has appealed to a new segment of consumers, and has helped to
take the relationships with the banks into a new era.
Our main objectives are to:
• introduce to our existing customer base a further range of 'most wanted'
financial products and solutions;
• continue to increase our market share, in particular as the market goes
through a phase of consolidation;
• address the new growth market of cases where customers are over-extended
on debt that is secured against their property.
In the meantime we will continue to explore opportunities in markets that fit
our investment criteria.
Fairpoint is based in Chorley, Lancashire, and was admitted to AIM in December
2002.
Unaudited Consolidated Income Statement for the 8 Months ended 31 December 2007
8 Months to 31 12 Months to
December 2007 30 April 2007
Notes
£'000 £'000
Continuing operations
Revenue 19,545 28,505
Cost of sales (7,936) (7,082)
Gross profit 11,609 21,423
Administrative expenses (11,915) (10,964)
EBITDA 2,159 10,931
Depreciation (417) (390)
Impairment of Intangibles (1,147) -
Amortisation (901) (82)
(Loss)/Profit from operations (306) 10,459
Finance income 227 166
Finance costs (422) (22)
(Loss)/Profit before taxation (501) 10,603
Tax credit/(expense) 3 703 (2,834)
Profit for the period from continuing operations 202 7,769
Discontinued operations
Loss for the period from discontinued operations (1,309) (428)
(Loss)/Profit for the period (1,107) 7,341
All of the loss for the period is attributable to equity holders of the parent.
Earnings /(loss) per ordinary share
Profit from continuing operations 4 0.49 20.75
(Loss) from discontinued operations (3.20) (1.14)
Total (Loss)/profit from operations (2.71) 19.61
Diluted earnings /(loss) per ordinary share
Profit from continuing operations 4 0.49 20.06
(Loss) from discontinued operations (3.20) (1.10)
Total (Loss)/profit from operations (2.71) 18.96
8 Months to 31 12 Months
December 2007 to 31 April 2007
£'000 £'000
Exchange differences on translation of foreign operations (54) (12)
Net loss recognised directly in equity (54) (12)
(Loss)/Profit for the period (1,107) 7,341
Total recognised income and expense in the period (1,161) 7,329
All of the above recognised income and expense is attributable to equity holders
of the parent.
Unaudited Consolidated Balance Sheet at 31 December 2007
As at As at
31 December 30 April
2007 2007
Notes £'000 £'000
ASSETS
Non Current Assets
Property, plant and equipment 2,216 2,153
Goodwill 11,318 1,934
Other intangible assets 5,722 2,494
Total Non Current Assets 19,256 6,581
Current Assets
Trade receivables 22,657 20,745
Other current assets 2,177 1,678
Cash and cash equivalents - 373
Current tax asset 275 -
Non current assets classified as held for sale 59 -
Total Current Assets 25,168 22,796
Total Assets 44,424 29,377
EQUITY
Share capital 424 376
Share premium account - 13,777
Merger reserve 11,842 -
Other reserves 254 -
Retained earnings 20,748 8,977
Translation reserve (62) (12)
Total equity attributable to equity holders of the parent 33,206 23,118
LIABILITIES
Non Current Liabilities
Long-term borrowings 402 972
Deferred tax liabilities 895 97
Total Non Current Liabilities 1,297 1,069
Current Liabilities
Bank overdraft 5,636 -
Trade and other payables 2,958 3,143
Current tax liabilities - 1,293
Short-term borrowings 1,079 754
Provisions 107 -
Liabilities directly associated with non-current assets classified as
held for sale 141 -
Total Current Liabilities 9,921 5,190
Total Liabilities 11,218 6,259
Total Equity and Liabilities 44,424 29,377
Unaudited Consolidated Cash Flow Statement for the 8 Months ended 31 December
2007
8 Months to 12 Months
31 December to 30 April
2007 2007
£'000 £'000
Cash flows from continuing operating activities
(Loss)/Profit on continuing operations before tax (501) 10,603
Share based payments charge 38 44
Depreciation of property, plant and equipment 367 390
Amortisation of intangible assets and development expenditure 903 82
Impairment of intangible assets 1,147 -
Loss on sale of property, plant and equipment 52 133
Interest received (227) (166)
Interest expense 422 22
Foreign exchange translation (54) (12)
Increase in trade and other receivables (520) (10,187)
(Decrease)/ increase in trade and other payables (1,916) 681
Cash flows from discontinued operations (1,294) (411)
Cash (absorbed by) generated from operations (1,583) 1,179
Interest paid (206) (22)
Income taxes paid (1,151) (2,156)
Net cash absorbed by operating activities (2,940) (999)
Cash flows from investing activities
Acquisition of subsidiaries, inclusive of costs and net of cash acquired (538) -
Purchase of property, plant and equipment (PPE) (366) (1,867)
Proceeds from sale of PPE 2 -
Interest received 6 166
Purchase of intangible assets (672) (2,376)
Discontinued operations (34) (89)
Net cash absorbed by investing activities (1,602) (4,166)
Cash flows from financing activities
Equity dividends paid (1,129) (1,683)
Proceeds from issue of share capital 236 203
Proceeds from long-term borrowings - 1,700
Payment of long-term borrowings (486) -
Payment of finance lease liabilities (88) (49)
Net cash (absorbed by) generated from financing activities (1,467) 171
Net change in cash and cash equivalents (6,009) (4,994)
Cash and cash equivalents at start of period 373 5,367
Cash and cash equivalents at end of period (5,636) 373
Notes to the Unaudited Preliminary Announcement for the Eight Months ended 31
December 2007
1 Status of Financial Information
The financial information set out above does not constitute the company's
statutory accounts for the periods ended 31 December 2007 or 30 April 2007.
Statutory accounts for 30 April 2007 have been delivered to the Registrar of
Companies. The auditors have reported on those accounts; their report was
unqualified, did not include reference to any matters to which the auditors drew
attention by way of emphasis without qualifying their report and did not contain
statements under the Companies Act 1985, s 237(2) or (3). The statutory accounts
for 31 December 2007 are expected to be finalised on the basis of the financial
information presented by the directors in this preliminary announcement and will
be delivered to the Registrar of Companies following the company's annual
general meeting.
2 Prior year adjustment and first time adoption of International Financial
Reporting Standards (IFRS)
The table below shows the impact of certain prior year adjustments made to the
prior year accounts and also the adjustments resulting from the transition to
IFRS.
Reconciliation of UK GAAP consolidated profit and loss account to IFRS income
statement for the year ended 30 April 2007
UK GAAP
Prior Effect of
Year transition to
UK GAAP Adjustment IFRS IFRS
Notes £000 £000 £000 £000
Revenue l 27,995 2,034 (1,524) 28,505
Cost of sales f,l (6,041) - (1,041) (7,082)
Gross profit 21,954 2,034 (2,565) 21,423
Admin expenses a,b,e,l (12,976) - 2,012 (10,964)
EBITDA 9,777 2,034 (880) 10,931
Depreciation e,l (486) - 96 (390)
Amortisation a,e (313) - 231 (82)
Profit from operations 8,978 2,034 (553) 10,459
Finance income 166 - - 166
Finance expense (22) - - (22)
Profit before taxation 9,122 2,034 (553) 10,603
Tax expense d (2,612) (610) 388 (2,834)
Profit/(Loss) for the 6,510 1,424 (165) 7,769
year
Discontinued operations l - - (428) (428)
Profit/(Loss) for the year 6,510 1,424 (593) 7,341
Reconciliation of consolidated balance sheet at 1 May 2006 from UK GAAP to IFRS
UK GAAP
Notes UK GAAP Prior Effect of
Year transition to
Adjustment IFRS IFRS
£000 £000 £000 £000
ASSETS
Non Current Assets
Property, plant and equipment i 928 - (192) 736
Goodwill 1,934 - - 1,934
Other intangible assets i 8 - 192 200
Total Non Current Assets 2,870 - - 2,870
Trade receivables a 8,152 2,329 - 10,481
Other current assets j 2,070 - (170) 1,900
Cash and cash equivalents 5,367 - - 5,367
Total Current Assets 15,589 2,329 (170) 17,748
Total Assets 18,459 2,329 (170) 20,618
EQUITY
Share capital 373 - - 373
Share premium account 13,577 - - 13,577
Retained earnings a,b,c,d,e,g,i 2,409 1,630 (766) 3,273
Total equity attributable to equity holders of 16,359 1,630 (766) 17,223
the parent
LIABILITIES
Non current Liabilities
Long-term borrowings 25 - - 25
Provisions 18 - - 18
Deferred tax liabilities 21 - - 21
Total Non Current Liabilities 64 - - 64
Current Liabilities
Trade and other payables j 1,715 - 922 2,637
Current tax liabilities a,h 321 699 (326) 694
Total Current Liabilities 2,036 699 596 3,331
Total Liabilities 2,100 699 596 3,395
Total Equity and Liabilities 18,459 2,329 (170) 20,618
Reconciliation of consolidated balance sheet at 30 April 2007 from UK GAAP to
IFRS
Notes UK GAAP
Prior Effect of
Year transition to
UK GAAP Adjustment IFRS IFRS
£000 £000 £000 £000
ASSETS
Non Current Assets
Property, plant and equipment i 2,900 - (747) 2,153
Goodwill e 1,622 - 312 1,934
Other intangible assets d,i, 26 - 2,468 2,494
Total Non Current Assets 4,548 2,033 6,581
Trade receivables a,b 16,384 4,361 - 20,745
Other current assets c,j 4,612 - (2,934) 1,678
Cash and cash equivalents 373 - - 373
Total Current Assets 21,369 4,361 (2,934) 22,796
Total Assets 25,917 4,361 (901) 29,377
EQUITY
Share capital 376 - - 376
Share premium account 13,777 - - 13,777
Retained earnings a,b,d,e,g,i,j 7,268 3,052 (1,343) 8,977
Translation reserve g - - (12) (12)
Total equity attributable to equity holders of 21,421 3,052 (1,355) 23,118
the parent
LIABILITIES
Non current Liabilities
Long-term borrowings 972 - - 972
Deferred tax liabilities 97 - - 97
Total Non Current Liabilities 1,069 - - 1,069
Current Liabilities
Trade and other payables h,f 1,973 - 1,170 3,143
Current tax liabilities h,a,b 700 1,309 (716) 1,293
Short-term borrowings 754 - - 754
Total Current Liabilities 3,427 1,309 454 5,190
Total Liabilities 4,496 1,309 454 6,259
Total Equity and Liabilities 25,917 4,361 (901) 29,377
Explanations of the adjustments made to the UK GAAP income statement and balance
sheets are as follows:
Adjustments of previously reported UK GAAP.
a. IVA Income recognition
The Board has reconsidered the timing profile of IVA income recognition
following a detailed review of actual revenues and costs and taking into account
information made available to it from discussions with creditors during the
period. This adjustment, treated as a correction of a prior period error as
previously reported under UK GAAP, increases revenue and retained earnings in
the period to 30 April 2007 by £2,412,000 (April 2006: £1,404,000) and
£1,688,000 (April 2006: £983,000) respectively and increases trade debtors and
other receivables by £4,741,000 (April 2006: £2,329,000). As a result, the
corporate tax liability has increased by £1,422,000 (April 2006: £699,000).
b. Revenue recognition
The board has reconsidered the mortgage revenue recognition policy after a
detailed review of conversion and acceptance rates. The Group will recognise
revenue from re-mortgage commission on completion of a remortgage rather than on
approval of a mortgage offer. This adjustment, treated as a correction of a
prior period error under previously reported UK GAAP, decreases revenue and
retained earnings in 2007 by £378,000 and £265,000 respectively and decreases
accrued income by £378,000. As a result, the corporation tax liability has
decreased by £113,000.
The transition to IFRS resulted in the following changes:
c. Bad debts offset
The bad debt expense has been restated to net off bad debts against revenue,
decreasing revenue and administrative expenses by £1,420,000.
d. Intangible assets
Under UK GAAP, the costs of an exclusive arrangement were included in
prepayments and expensed across the life of the arrangement. Under IFRS the
amount of £1,721,000 has been included in intangible assets and is amortised
over the period of the arrangement.
e. Goodwill
Goodwill is not amortised under IFRS but is measured at cost less impairment
losses. Under UK GAAP, goodwill was amortised on a straight-line basis over the
time that the Group was estimated to benefit from it. The change does not
affect equity at 1 May 2006 because, as permitted by IFRS 1, goodwill arising on
acquisitions before 1 May 2006 (date of transition to IFRS) has been frozen at
the UK GAAP amounts subject to being tested for impairment at that date, the
results of which assessment indicated no such impairment. The adjustments
increase profits for the year to 30 April 2007 by £312,000 with corresponding
increases in retained earnings.
f. Short-term employee benefits
IAS 19 Employee benefits requires the expense of services rendered that increase
employees' entitlement to future compensated absence (i.e. paid holiday) to be
recognised in the period. Therefore, the cost of holidays earned but not taken
at the balance sheet date has been accrued for. The adjustments decrease
profits for the year to 30 April 2007 by £108,000; retained earnings are reduced
by £206,000 at 1 May 2006 and £314,000 at 30 April 2007.
g. Other reserves
Under IFRS, any cumulative translation differences on consolidation of overseas
subsidiaries are set to zero as at 1 May 2006. The Group had no overseas
subsidiaries at the date of transition, as such there were no differences in
transition.
The foreign exchange differences arising after that date on consolidation have
been credited to the translation reserve within equity rather than to retained
earnings. The adjustment is £12,000 for the year to 30 April 2007. The Group
had no overseas subsidiaries at the date of transition, as such there were no
differences at transition.
h. Deferred tax
Differences in timing between the recognition of accounting for tax charges
under IAS and the deduction of amounts in the corporation tax computations now
create temporary differences resulting in deferred tax rather than permanent
differences under UK GAAP on which no deferred tax balances were recognised.
The reversal of goodwill amortisation has resulted in the creation of a deferred
tax liability and the recognition of holiday pay accruals under IAS and the
restatement of cost of sales has resulted in a deferred tax asset.
IAS 12 applies to all share based payments and is not time restricted to those
issued post 7 November 2002. Under IAS 12 the deferred tax recognised through
the profit and loss account cannot exceed 30% of the share-based payment charge
on a cumulative basis; the balance is therefore adjusted to equity.
The adjustments increase profits for the year to 30 April 2007 by £387,000;
retained earnings are increased by £326,000 at 1 May 2006 and £716,000 at 30
April 2007.
i. Capitalised software
Under UK GAAP, the cost of capitalised software is classified within property,
plant and equipment. Under IAS 38 these costs are classified as intangible
assets. The balance sheet impact of the reclassification is to increase
intangible assets and decrease property, plant and equipment by £192,000 at 1
May 2006 and £747,000 at 30 April 2007. The UK GAAP depreciation charge in
respect of capitalised software is replaced with an equal amortisation charge
under IAS 38 and consequently there is no net impact on the income statement,
however there has been a movement of £80,000 for the year to 30 April 2007 from
other administrative expenses to amortisation.
j. Cost of sales
Under UK GAAP, marketing and related expenditures are permitted to be recognised
over the period in which separately identifiable revenue was generated. Under
IAS 38, marketing costs are recognised at the point that services are delivered.
The adjustments decrease profits for the year to 30 April 2007 by £1,183,000.
Retained earnings are reduced by £886,000 at 1 May 2006, which is split between
an increase of £716,000 in trade and other payables and a decrease of £170,000
in other current assets; and £2,069,000 at 30 April 2007, which is split between
an increase of £856,000 in trade and other payables and a decrease of £1,213,000
in other current assets.
k. Exemptions
IFRS 1 First-time Adoption of International Financial Reporting Standards sets
out the transition rules, which must be applied, when IFRS is adopted for the
first time. The standard sets out certain mandatory exemptions to retrospective
application and certain optional exemptions. The most significant optional
exemptions available and taken by the Group are as follows:
(i) Business combinations: the Group has adopted the exemption under IFRS
1 relating to business combinations which occurred before the date of
transition, 1 May 2006. The goodwill arising from combinations before that date
therefore remains at the amount shown under UK GAAP at 1 May 2006, subject to
any subsequent impairment.
(ii) Share-based transactions: The Group adopted the exemption in IFRS 1
which allows a first-time adopter to apply the standard only to share options
and equity instruments granted after 7 November 2002 that have not vested by 1
May 2006.
l. Discontinued operations
As a results of the classification of DFD Australia Pty as discontinued in the
current year, IFRS5 requires the comparative results to be re-presented. This
has an impact of (£104,000) on revenue with no overall impact on retained
earnings. IFRS5 does not require re-presentation of the balance sheet for the
reclassification.
3 Tax (Credit) /expense
8 Months 8 Months 12 Months 12 Months
Ended Ended Ended Ended
31 December 31 December 30 April 30 April
2007 2007 2007 2007
£'000 £'000 £'000 £'000
Current tax expense
UK corporation tax and income tax of
overseas operations on (loss)/profits
for the period/year (373) 2,757
Adjustment for under/(over) provision
in prior periods (44) -
_______ _______
(417) 2,757
Deferred tax expense
Origination and reversal of temporary
differences - 77
Adjustment for under/(over) provision
in prior periods (286) -
_______ _______
(286) 77
_______ _______
Total tax (credit)/charge (703) 2,834
_______ _______
The reasons for the difference between the actual tax charge for the year and
the standard rate of corporation tax in the UK applied to profits for the year
are as follows:
8 Months 12 Months
Ended Ended
31 December 30 April
2007 2007
£'000 £'000
(Loss)/Profit before tax from continuing and discontinued operations (1,809) 10,175
Expected tax credit based on the standard rate of
corporation tax in the UK of 30% (2006 - 30%) (543) 3,053
Expenses not deductible for tax purposes 623 211
Short term timing differences (9) -
Accelerated capital allowances 4 (77)
Different tax rates 27 (3)
Prior year deferred tax (285) -
Prior year current tax (46) -
Prior year adjustment 240 -
Effect of transition to IFRS (714) -
Share option relief - (232)
Other differences - (118)
Total tax (credit) / charge (703) 2,834
4 Earnings per share
8 Months 12 Months
Ended Ended
31 December 30 April
2007 2007
£'000 £'000
Numerator
Continuing operations
Profit for the period - used in basis and diluted EPS 202 7,769
_______ _______
Discontinuing operations
Loss for the period - used in basis and diluted EPS (1,309) (428)
_______ _______
Total operations
(Loss)/Profit for the period - used in basis and diluted EPS (1,107) 7,341
_______ _______
Denominator
Weighted average number of shares used in basic EPS 40,909,680 37,438,505
Effects of:
- employee share options - 1,287,198
_______ _______
Weighted average number of shares used in diluted EPS 40,909,680 38,725,703
_______ _______
Certain employee options have also been excluded from the calculation of diluted
EPS as their exercise price is greater than the weighted average share price
during the year (ie they are out-of-the-money) and therefore would not be
advantageous for the holders to exercise those options.
5 Dividends
8 Months 12 Months
Ended Ended
31 December 30 April
2007 2007
£'000 £'000
Final dividend of 3 pence (2007; 1.5 pence) per ordinary share
proposed and paid during the period/year relating
to the previous year's results 1,129 561
Interim dividend of nil pence (2007; 3 pence) per ordinary share
paid during the period/year - 1,122
_______ _______
1,129 1,683
_______ _______
The directors are proposing a final dividend of 4 pence (2007; 3 pence) per
share totalling £1,696,000 (2007; £1,129,000). This dividend has not been
accrued at the balance sheet date.
6 Acquisitions during the period
Clear Start UK Limited
On 26th June 2007 the company acquired the entire issued share capital of
Clearstart Limited. The consideration was £12.1m satisfied on completion by
£11.1m in shares with £1.0m of deferred share consideration issued on 20th
December 2007.
The following table sets out the book values of the identifiable assets and
liabilities acquired and their values to the group:
Book value Aligning of Fair Provisional
accounting fair value to
policies value adjustments the group
£'000 £'000 £'000 £'000
Assets
Property, plant and equipment 303 - (45) 258
Other intangible assets - - 4,530 4,530
Trade receivables 1,384 680 - 2,064
Cash and cash equivalents 100 - - 100
Liabilities
Trade and other payables (2,469) - - (2,469)
Deferred tax liabilities 276 - (1,359) (1,083)
Net Assets (406) 680 3,126 3,400
Goodwill 9,384
Costs of acquisition (640)
Consideration 12,144
Satisfied by
Shares issued 11,124
Deferred share consideration 1,020
12,144
The goodwill is attributable to the significant synergies which are expected to
arise from the integration of this business with that of the Group and those
intangibles such as the workforce which are not recognised separately.
Since the acquisition date, Clear Start UK Limited has contributed £132,000 to
group profit, If the acquisition had occurred on 1 May 2007, group turnover from
continuing operations would have been £20,940,000 and group profit for the
period would have been (£755,000).
Other intangible assets comprise the Clear Start brand identified on
acquisition.
Goodwill has been adjusted from the amount shown in the interim financial
statements of £7,929,000 due to the recognition of deferred tax on Intangible
Assets.
The fair value of the shares issued was determined by reference to their quoted
market price of £2.62 at the date of acquisition.
Under the terms of the acquisition a further 2,363,940 shares may be issued
dependent on the performance of Fairpoint Group plc shares in the period from
27th June 2007 to 26th June 2009. At the balance sheet date no further
consideration had been incurred and it is not possible to reliably estimate any
future consideration. The shares prices attached to the earn-out shares range
from £3.19 to £5.44.
This information is provided by RNS
The company news service from the London Stock Exchange
Wednesday, 15th May 2024
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