FRM.L Regulatory News (FRM)

FORMATION GROUP PLC

('Formation' or 'the Group')

Preliminary Results for the year ended 31 August 2012

Business Highlights

·; The Group has continued its drive to cut overheads in order to ensure a lean cost base going forward.

·; As announced on 18th January 2012, following completion of the disposal of the Aldgate development by Julius Properties Limited ("JPL"), the Group has been released from the contingent liability relating to Formation's guarantee to assist JPL in repaying Aldgate East Property Company Limited a maximum of £11.55 million in respect of capital and interest on loan notes.

·; The Whitechapel Property Fund Limited has been repaid its initial investment plus agreed interest in full .This repayment releases Formation of its guarantee to the fund and consequently has extinguished the contingent liability of £3.95m. The Group has an entitlement to a profit share from the remaining unsold units within this development which is anticipated to be circa £1.24m. This amount has been provided fully for in the audited accounts.

·; Additionally, the Group settled a longstanding dispute with Gestifute which led to a net cash inflow.

·; The Group is now fully focused on its property activities.

David Kennedy, Chairman of Formation reports that:

The Group has achieved the majority of its targets over the past year, in a difficult and challenging environment. I would like to place on record my thanks to all board members and staff for their efforts throughout the year. It is now evident that these efforts are achieving results which will make for a secure capital based Property Group going forward.

Enquiries:

Formation Group PLC - David Kennedy; Chief Executive Officer - 020 7920 7590

NOMAD to Formation Group PLC;

Zeus Capital Limited - Ross Andrews / Andrew Jones - 0161 831 1512

CHAIRMAN'S STATEMENT

The difficulties and challenges facing the company were no less than in the previous year. Financial markets are slowly improving and we look forward to realising the Group's plans in moving forward in the construction / property sector over the coming year. There has again been improvement in the Group's underlying financial performance this year. Expected profits from a longstanding involvement in a property development at 52-58 Commercial Road, London E1 have been recognised in this year's results. The continued efforts of the Directors and management are showing through financially as anticipated. The larger litigation issues surrounding the Group have been resolved in 2012 leaving the Board free to focus on the Group's future development.

The Chief Executive Officer's Report provides further detail on the individual projects, companies and properties within the Group at present. The large contingent liability exposures (£15.52million) on both Aldgate and Whitechapel were extinguished in January 2012. The Board believes that this together with the resolution of the major litigation issues surrounding the Group has transformed its credit rating for banking purposes. It anticipates that access to future cash will allow the Group to drive further improvements, generate profits and enhance shareholder value.

This has been a transition year for the Group. It has streamlined its overheads and subsequent to the year end, issued termination of employment notices to D Khan and N O'Carroll to further minimise costs. The Group looks forward to the future with confidence. 

The Board and Staff

The Group has achieved the majority of its targets over the past year, in a difficult and challenging environment. I would like to place on record my thanks to all board members and staff for their efforts throughout the year. It is now evident that these efforts are achieving results which will make for a secure capital based Property Group going forward.

David Kennedy

Chairman

CHIEF EXECUTIVE OFFICER'S REPORT

Introduction

This has continued to be a tough year for the Group. The weakness in financial markets and continued lack of investor and consumer confidence has curtailed the Group's workload and ability to grow. The tough measures taken in recent years in regard to staffing, overheads etc. are, however, now benefiting the Group's position.

The potential contingent property liability linked to the Aldgate development (the previously disclosed £11.55m liability which was attached to certain Loan Notes provided by a number of retail investors), which in turn was dependent upon the bank funding agreement with Heritable Bank Plc, had previously cast some uncertainty over the Group. The Group and its investment partner, JV Finance Limited have as reported in last year's accounts, invested combined funds of £18.2million into JV Finance Ventures Limited in order to discharge the amounts owed to the Administrator of Heritable Bank Plc and outstanding construction costs. This investment, of which the Group contributed £6.7 million has secured the release of the Aldgate site from Heritable Bank Plc and the necessary construction warranties for the future development of the site.

An RNS update on Aldgate in August 2011 announced that Julius Properties Limited ("JPL") (owner of Aldgate site) had conditionally disposed of its interest in the site to a UK national housebuilder, Redrow.

The conditions of this agreement had to be satisfied by 22 February 2012 and the consideration payable under the disposal agreement was to be split with part payable on completion and part being deferred. The deferred portion of the consideration was to be payable within 30 months of the completion date.

JPL has, since this announcement on the 13th January 2012, completed the disposal of Aldgate. The contingent liability relating to Formation's guarantee to assist JPL in repaying Aldgate East Property Company Limited a maximum of £11.55 million in respect of capital and interest on loan notes is therefore now extinguished.

The Directors also anticipate that JPL will, after receipt of the deferred element of the consideration, be able to substantially repay the loans provided by JV Finance Ventures Limited in which Formation has a 36.88% equity interest.

The Group had positive outcomes in its sports related litigation in 2011. The acquisition of Proactive Sports Management Limited, a previously owned company, in July 2010 proved beneficial in the finalisation of some of these sports related litigation issues. Post year end in 2012 the remaining sports related litigation issues have been resolved, on satisfactory terms. 

The primary focus of the Group now remains on consolidation and the property sector. The Group expects to receive settlement of the deferred consideration payments from Aldgate by January 2014. The Directors look forward to future growth in the property sector and consolidating its cash position.

Results

The trading results for the year have been impacted by the weak property market and lack of availability of development funding. Continued litigation costs over the year have also impacted results. For the year ended 31 August 2012, the Group revenue from continuing operations was £2.4 million (2011: £6.0 million) resulting in a profit before taxation and exceptional items from continuing operations of £0.7 million (2011 loss: £1.5 million).

Dividend

Historically the Group has always sought to reward shareholders by way of an annual dividend payment. In the last four years however the Group has not done so following careful consideration set in context with the uncertainty we found ourselves in following the administration of Heritable Bank PLC.

Whilst we have strengthened our position in this regard, trading remains weak, hence the Directors, after careful consideration have decided not to pay a shareholders dividend. The decision will continue to be reviewed and monitored as the Groups resources and performance improves.

Business Overview

The Group is now predominately a construction and property development / management business, generating income through project development and management of small / medium scale building projects. Rental incomes are also generated on various residential and commercial investments retained by the Group and its subsidiaries.

Some schemes in which we have been involved this year are:

(i) 9 - 15 The Parade, Stroud Green Road, London N4.

Project management on the construction of 35 apartments and a large ground floor and basement retail unit.

(ii) 110 - 114 Elmore Street, London N1.

Project management on the conversion of a warehouse into 17 apartments, a house and a commercial unit.

(iii) 1-6 Batemans Row, London EC1

Project management on the construction of 5 large penthouse apartments in a restricted inner London location above a seven storey building incorporating 36 residential units and commercial spaces.

(iv) Anlaby House, 37 Boundary Street, London E1

Project management on the construction of 3 penthouse apartments above a seven storey mixed use building.

(v) 63-65 Princelet Street, London E1

Project management on the construction of 10 apartments involving the conversion and rooftop extension of a warehouse building in a restricted inner London location.

(vi) 2-6 Columbia Road, London E1

Project management on the conversion of an existing residential building into 7 apartments.

(vii) 16-28 Salter Street, London E14

Project management on the demolition of a warehouse and new build construction of 18 apartments and a commercial unit adjoining the entrance to Westferry Road, Docklands Light Railway station.

(viii) 115-119 Park Road, London N8

Project management on the new build construction of 9 apartments and associated carparking on the site of a former pub.

(ix) 15-17 Leman Street, London E1

Co -ordination and management of the entire planning process in successfully obtaining a planning permission for a 251 bedroom hotel in Aldgate.

As stated in previous years, this area of our business has and continues in the short term to come under pressure. Bank debt, is in short supply with banks being more selective and aggressive with their terms. This situation reduces our ability to expand, although there is growing evidence of recent improvements on this front.

Proactive Sports Management Limited (a previously owned company) was acquired in 2010, primarily to assist in the conduct of various sports related litigation cases. The company has no employees and no longer manages sports personnel

Investment Properties Retained

The Group currently has an interest in the following investment properties.

(1)52-58 Commercial Road, London E1.

Formation Group Plc had an entitlement to 40% of the profits of Rocquefort Properties Limited. This company presently retains commercial properties at the above address including,17,000 sq ft of office and education use, a 1,500 sq ft retail unit, 25 basement car parking spaces and ground rent income from 142 residential units. The profit element on these properties attributable to Formation Group Plc is expected to be £1.24 million, as disclosed on the face of the consolidated income statement. It is likely that some of these properties will be sold in 2013 to consolidate the Group's financial position.

(2)175 180 Church Road, St.George,Bristol.

FG (Bristol) Limited, a wholly owned subsidiary of Formation Group Plc, currently owns 15 apartments, 3 retail units and associated car parking at the above address. The apartments are income producing, whilst two of the retail units are unlet. Current gross rental income is £95,654 p.a. Dunbar Assets Plc currently provide non recourse funding, secured upon the scheme, of £2,101,049.

(3) York House, Upper Piccadilly, Bradford.

FG (Bradford) Limited, a wholly owned subsidiary of Formation Group Plc, currently owns 24 apartments and a retail unit at the above address. The apartments are income producing and the commercial unit remains available to let. Current gross rental income is £74,610 p.a. Dunbar Assets Plc currently provide non recourse funding, secured upon the scheme of £2,184,049.

Risks and Uncertainties

Going concern

As highlighted in note 1, the ability of the Group to continue trading as a going concern is dependent on the realisation of cash from The Whitechapel Development and new construction contracts being won in the next twelve months. There is a significant level of uncertainty over the ability of the Group to continue as a going concern, however, we have a reasonable expectation that the group has access to resources to continue in operational existence for the foreseeable future.

Divested Business

The past four years have seen a substantial refocus in the Group's activities. The recommendation by the Board and subsequent approval by shareholders to dispose of certain non - related businesses has strengthened the Group's financial position and made the necessary cash reserves available to participate in resolving Aldgate's banking difficulty, as a result of Heritable Bank Plc's demise. The subsequent conditional sale by Julius Property Limited of its interest in Aldgate has moved the Group a step closer to recouping its investment in Aldgate's rescue.

Restructuring over the past four years has ensured that the core property business remains competitive, whilst also maintaining a strong nucleus with future access to cash reserves which will enable the Group to grow and prosper.

Outlook

The business has undergone significant change and challenges over the past four years. It has been creative in its approach to such change and challenges, acquiring a previously owned company to assist in the conduct of its sports related litigation, quickly winding down and liquidating companies in order to reduce its cost exposure and making the hard decisions on staff and overheads as necessary in order to survive in an extremely difficult trading environment.

The outlook continues to be best summarised as cautiously optimistic. We believe the company is now in a position where it is ready to prosper from any recovery in the property and finance / lending markets that materialise. The company anticipates having recourse to its cash investment in Aldgate by January 2014 and the reinvestment benefits which may follow.

David Kennedy - Chief Executive Officer

28 February 2013

Consolidated statement of comprehensive income

for the year ended 31 August 2012

Consolidated statement of financial position

31 August 2012

Consolidated statement of changes in equity

31 August 2012

Consolidated statement of cash flows

for the year ended 31 August 2012

1. Basis of preparation

The accounts have been prepared in accordance with the Companies Act 2006 and United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), under the historical cost convention. As permitted by the Companies Act 2006, no separate profit and loss account has been presented in respect of the Company. Formation Group Plc reported a profit for the financial year of £2,001,000 (2011: loss of £11,155,000).

The consolidated financial statements of Formation Group Plc, which are presented separately, have been prepared in accordance with International Financial Reporting Standards as adopted by the EU.

Basis of preparation and Going Concern

The Directors have prepared working capital forecasts for the period to 28 February 2014. The ability of the company to continue trading as a going concern is dependent on the expected realisation of profits of £1.24 million due to the company from its share in the profits of The Whitechapel Development. This in a large part ensures that the company generates enough working capital to trade until February, 2014 when the repayment of it's investment in the Aldgate Development commences.

The directors have concluded that the combination of these circumstances represent a material uncertainty that casts significant doubt upon the company's ability to continue as a going concern. Nevertheless after making enquiries, and considering the uncertainties described above, the directors have a reasonable expectation that the company will have adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the annual report and accounts.

2. Earnings per share

The calculation of basic and diluted earnings per share is based on the following profits and numbers of shares:

Earnings per share is calculated by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue during the year.

The share options in issue are anti-dilutive in respect of the basic loss per share calculations in 2012 and 2011 and have therefore not been included.

3. Reconciliation of profit from continuing operations to net cash inflow from operating activities:

Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short term highly liquid investments with a maturity of three months or less.

4. Annual Report and Accounts

The annual report will be sent to shareholders shortly. Additional copies will be available on the Company's website: www.formationgroupplc.com

5. Annual General Meeting

Formation's Annual General Meeting is to be held on the 27th March ,2013 at the offices of Imparando (UK) Limited, 3rd Floor, 52-58 Commercial Road, London E1 1LP at 11 am.