FRM.L Regulatory News (FRM)

1 Feb 2010 07:00



FORMATION GROUP PLC

('Formation' or 'the Group')

Preliminary Results for the year ended 31 August 2009

Business Highlights

Disposal of a number of Group subsidiary undertakings to certain of the Group's existing management for a total cash consideration of £16.5 million, representing approximately 7.47 pence per share - a premium of approximately 36% of the mid market price at the time of the announcement

Post year end disposal of certain assets of the Group's wealth management businesses for a total anticipated consideration payable over a 3 to 5 year period of approximately £575,000. These disposals have resulted in the Group exiting it's loss making wealth management activities

Agreement entered into with JV Finance Limited, to form JV Finance Ventures Limited in order to acquire the land at the Aldgate property development and in order to settle in full, the indebtedness owed to Heritable Bank's administrator

Re-focused property business following the management buy-out

John Lawrence, Chairman of Formation said;

"This year has seen significant change within the Group. The decision by the board, and subsequent approval by shareholders, to accept an offer from certain of the Group's existing management team for five of the Group's nine subsidiaries was a significant point in the Group's history.

This decision, coupled with the exit from its wealth management businesses subsequent to the year end, has now enabled the Group to focus on its property business.

These decisions were not taken lightly and whilst the composition of the Group's business interests has changed substantially, the board considers these decisions to be in the long term best interests of all stakeholders.

The Group faced a significant challenge within its property business following the collapse of Heritable Bank and the well documented knock-on effect this event had on the property development at Commercial Street, above Aldgate East tube station, London. This development was part funded through the issue of Junior Unsecured Loan Notes and Subordinated Junior Unsecured Loan Notes to retail investors, including clients of the Group's wealth management businesses. Certain of these loan notes carry a guarantee from the Group. These banking events are unprecedented and whilst the development works had stalled for over 12 months and with no obvious resolution in sight, it was incumbent upon the board to look closely at how best to protect the interests of all its stakeholders; shareholders, clients and the Loan Note holders.

Enquiries:

Formation Group PLC - Noel O'Carroll; Interim Chief Executive Officer - 020 7920 7590

NOMAD to Formation Group PLC; Zeus Capital Limited - Ross Andrews / Tom Rowley - 0161 831 1512

CHAIRMAN'S STATEMENT

This year has seen significant change within the Group. The decision by the board, and subsequent approval by shareholders, to accept an offer from certain of the Group's existing management team for five of the Group's nine subsidiaries was a significant point in the Group's history.

This decision, coupled with the exit from its wealth management businesses subsequent to the year end, has now enabled the Group to focus on its property business.

These decisions were not taken lightly and whilst the composition of the Group's business interests has changed substantially, the board considers these decisions to be in the long term best interests of all stakeholders.

The Group faced a significant challenge within its property business following the collapse of Heritable Bank and the well documented knock-on effect this event had on the property development at Commercial Street, above Aldgate East tube station, London. This development was part funded through the issue of Junior Unsecured Loan Notes and Subordinated Junior Unsecured Loan Notes to retail investors, including clients of the Group's wealth management businesses. Certain of these loan notes carry a guarantee from the Group. These banking events are unprecedented and whilst the development works had stalled for over 12 months and with no obvious resolution in sight, it was incumbent upon the board to look closely at how best to protect the interests of all its stakeholders; shareholders, clients and the Loan Note holders.

The MBO approach and resultant deal has better equipped the Group to tackle this key issue and I am pleased that we were recently able to announce a Joint Venture agreement with JV Finance Limited in order to take steps to complete the development by securing the land from Heritable's administrators. This deal saw JV Finance Ventures Limited agreeing to pay £11 million in full and final settlement of indebtedness of £32.9 million. Formation will pay 50% of this settlement figure with JV Finance Limited paying the remaining 50% with both sharing the development profit proceeds equally.

This still remains a challenging time for the Group and there remains much to do in order to complete the Aldgate development. Having re-focused the business post the MBO and having concluded the Asset deals within the business's wealth management division, our strategy and efforts have been firmly focused on the Aldgate development, and how we may resolve and realise value from this.

The next stage on the pathway to achieving this objective is to secure new, post Heritable Bank funding in order to build out the development. These discussions are now underway but could not have taken place until we reached agreement with the Bank's administrator. Once funding is in place, construction works can then re-commence. There has also been substantial sales interest for large parts of the development and given its location, the board remains optimistic that we will successfully navigate our way through this difficult situation.

The Board and Staff

This has understandably been a difficult and challenging period for the Group. I would firstly like to place on record my thanks to all board members and staff, past and present, for the manner in which both the MBO deal and subsequent wealth management disposals were conducted. As announced on 25 January 2010, I have decided not to put myself forward for re-election at the forthcoming AGM. I have enjoyed my 10 years with the Group immensely and wish the board all the very best for the future. Whilst I will serve my 12 months notice as the Group undertakes the search for my replacement, I would like to take this opportunity to place on record my thanks to our NOMAD; Zeus Capital, our lawyers; DLA Piper and our Auditors; Grant Thornton for their assistance and corporate advice. I also welcome Desmond Khan (FCCA) to the board. Desmond is the Finance Director of the Group's main trading subsidiary; Formation Design & Build. Desmond brings a wealth of property experience to the Group. Finally, our staff continue to put this business first and their effort and dedication continues to be highly valued and very much appreciated.

John E Lawrence MBE - Non-Executive Chairman 1 February 2010

INTERIM CHIEF EXECUTIVE OFFICER'S REPORT

Introduction

The unprecedented collapses in markets and institutions have, without doubt, been a dominant and limiting factor for the Group during the last twelve months. The potential contingent property liability linked to the Aldgate development (specifically the previously disclosed £11.6 million liability which is 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, cast uncertainty over the Group.

However, the underlying performance of the Group's core management services, and selected other professional services led to a successful management buy-out ("MBO") of a number of Group subsidiary companies in August 2009. This, together with the sale post year end of the wealth management business, has resulted in a debt free, cash positive business with a sole focus on the property sector which is already showing signs of some recovery. There will doubtless be those who prosper from recent recessionary events, it is our objective to be one of those companies.

Results

The trading results for the year have been impacted by the sale of the MBO companies. For the year ended 31 August 2009, the Group revenue from continuing operations was £19.0 million (2008: £25.0 million) resulting in a loss before taxation and exceptional items from continuing operations of £2.9 million (2008: profit of £0.6 million).

Dividend

Historically the Group has always sought to reward shareholders by way of an annual dividend payment. Last year was the first time for some considerable time that we did not pay a dividend. This was after careful consideration set in context with the uncertainty we found ourselves in following the Administration of Heritable Bank PLC. Whilst that situation is yet to be fully resolved, the Directors, after careful consideration have decided not to pay a shareholder dividend. This decision will be revisited at the forthcoming Interim Results. 

Business Overview

The Company is now a construction and property development/management business generating income through project developing/management of large scale building developments.

We are currently involved namely in four large schemes which are each at various stages of the planning/ development process. These schemes are:

Inevitably, this area of our business has, and will continue in the short term to come under pressure. Bank debt, so often a pre-requisite to large scale developments is in shorter supply with banks being more selective and aggressive with their terms. We are fortunate to have forged an inner London reputation in the construction sector and continue to focus on this geographical area which is undoubtedly seeing a quicker recovery than other areas of the country.

Development Updates

Various feasibility studies, small site management and architectural works in association with smaller planning applications continue as part of our routine business process. The four large developments which form the core of our committed business are progressing as follows.

Risks and Uncertainties

Potential Property Liabilities

The administration order in relation to Heritable Bank PLC, first detailed within our Preliminary announcement in November 2008, resulted in uncertainty over a contingent underwriting liability in relation to the Aldgate development. The Group's current maximum liability under this arrangement remains £11.6 million.

However, the post balance sheet announcement on 14 December 2009, that Julius Properties Limited ("JPL") had reached agreement with the administrators of Heritable Bank plc regarding the Aldgate development, was an important development for the Group. JPL has agreed to pay the administrator £11 million in full and final settlement of the £32.9 million indebtedness.

Formation Group and its 50/50 joint venture party, JV Finance Limited, each agreed to inject £5.5 million into a joint venture, JV Ventures Limited, with the total of £11 million to be paid to JPL, in return for any profits generated from the Aldgate development.

The Board believes that the joint venture represents a significant and positive step forward towards the repayment of the loan note investors in the Aldgate development, which would in turn extinguish the Group's contingent liability.

Discussions will now commence with certain institutions to secure the requisite funding to enable the build out of the development. Once this funding has been secured, Formation Design & Build will be contractually engaged by the new joint venture company to project manage the onsite construction.

We will then be in a position to provide a completion timescale and liaise with all development investors to discuss what, if any impact, we expect on the timeline of loan note repayment. Under the terms of the existing loan note agreements a return is due to investors in August 2011.

Divested Business

As the Chairman has already explained, the last 12 months has seen a substantial refocus in the Group's activities. The recommendation by the board and subsequent approval by shareholders to dispose of certain non-property related businesses has however enabled the Group to become debt free with the cash reserves to enable it to participate in the Aldgate solution. Whilst it is of paramount importance to ensure we are in a position to repay the Loan Notes, we expect to financially benefit from the Joint Venture once the development is completed, sold and loan notes repaid. We would not have had this opportunity if the MBO had not taken place and we would be at significantly greater risk from the potential contingent liability perspective had this deal not concluded. In addition to the cash injection of over £16 million, the deal also saw the transfer of responsibility for the existing James Grant Media acquisition deferred consideration to the MBO team, representing a further saving of approximately £4.0 million to the Group.

Outlook

The business has undergone significant change within the last 12 months. Whilst it is undoubtedly better equipped as a debt free and cash positive business to tackle the challenges presented by the unprecedented collapse of Heritable Bank PLC, those challenges remain, albeit to a lesser extent given the post year end agreement reached with the Bank's administrators.

The outlook is best summarised as cautiously optimistic. Optimistically we will conclude the key development at Aldgate, honour the loan note guarantee from certain retail investors and we anticipate that the business will prosper from a property recovery.

Noel O'Carroll - Interim Chief Executive Officer 

1 February 2010

 

  Consolidated Income Statement

For the year ended 31 August 2009 Continuing operations Revenue Cost of sales	Notes 2	2009  £'000 18,953 (15,911)	2008  £'000 25,006 (18,586)
Gross profit		3,042	6,420
Administrative expenses		(5,477)	(5,554)
Operating (loss)/profit from continuing operations	2	(2,435)	866
Investment income		4	119
Finance costs		(486)	(319)
(Loss)/profit before taxation and exceptional items		(2,917)	666
Exceptional Items		(17,824)	-
(Loss)/profit before taxation		(20,741)	666
Taxation		277	(224)
(Loss)/profit for the year from continuing operations		(20,464)	442
Discontinued operations
(Loss)/profit for the year from discontinued operations	3	(6,307)	2,310
(Loss)/profit for the year		(26,771)	2,752
Attributable to:
Equity holders of the parent		(26,793)	2,703
Minority interests		22	49
		(26,771)	2,752
(Loss)/earnings per share
From continuing operations
Basic	4	(9.56p)	0.21p
Diluted	4	(9.56p)	0.20p
From discontinued operations
Basic	4	(2.96p)	1.06p
Dilute	4	(2.96p)	1.04p
From continuing and discontinued operations
Basic	4	(12.52p)	1.27p
Diluted	4	(12.52p)	1.24p

 

  Consolidated Statement of Recognised Income and Expense

For the year ended 31 August 2009
	2009	2008
	£'000	£'000
(Loss)/profit for the year	(26,771)	2,752
Exchange gain on foreign currency translation of foreign operations	44	40
Total recognised income and expense for the year	(26,727)	2,792
Attributable to:
Equity holders of the parent	(26,749)	2,743
Minority interests	22	49
	(26,727)	2,792

  Consolidated Balance Sheet

31 August 2009
		2009	2008
		£'000	£'000
Non-current assets
Goodwill		10,805	47,409
Other intangible assets		3	18
Property plant and equipment		73	330
Non-current financial assets		-	4,862
Deferred tax asset		229	135
		11,110	52,754
Current assets
Inventories		22	2,222
Trade and other receivables		2,140	6,978
Cash and cash equivalents		15,154	4,028
		17,316	13,228
Total assets		28,426	65,982
Current liabilities
Trade and other payables		(4,958)	(11,562)
Current income tax liabilities		(536)	(1,503)
Obligations under finance leases		-	(9)
Bank overdrafts and loans		(7,010)	(1,833)
		(12,504)	(14,907)
Net current assets/(liabilities)		4,812	(1,679)
Non-current liabilities
Trade and other payables		-	(3,605)
Obligations under finance leases		-	(8)
Bank loans		-	(4,010)
		-	(7,623)
Total liabilities		(12,504)	(22,530)
Net assets		15,922	43,452

 

  Consolidated Balance Sheet cont…

31 August 2009
		2009	2008
		£'000	£'000
Equity
Share capital		2,205	2,205
Share premium account		2,106	2,106
Treasury shares		(602)	(102)
Capital redemption reserve		61	61
Merger reserve		11,265	20,326
Currency reserve		94	50
Share option reserve		55	324
Retained earnings		738	18,142
Total equity attributable to the parent's shareholders		15,922	43,112
Minority interests		-	340
Total equity		15,922	43,452

 

Consolidated Cash Flow Statement

For the year ended 31 August 2009 Notes Operating activities Cash (used in)/generated by operations 6Income taxes paid Interest paid	2009  £'000 (38) (1,239)  (432)	2008  £'000 3,153  (1,036)  (219)
Net cash (outflow)/inflow from operating activities	(1,709)	1,898
Investing activities
Interest received	59	194
Proceeds on disposal of property, plant and equipment	1	-
Purchases of property, plant and equipment	(89)	(113)
Deferred consideration paid	(3,310)	(1,190)
Acquisition of subsidiaries	-	(9,418)
Cash acquired with subsidiaries	-	2,688
Acquisition expenses	-	(878)
Net proceeds on disposal of subsidiary companies	16,477	1,007
Fees and costs relating to the disposal of subsidiaries	(295)	-
Cash disposed of with subsidiary companies	(702)	-
Net cash generated by/(used in) investing activities	12,141	(7,710)
Financing activities
Dividends paid	-	(235)
Purchase of own shares	(500)	(207)
Net proceeds from sale of own shares	-	828
New loans	2,000	6,000
Loan repayments	(833)	(157)
Repayments of obligations under finance leases	(17)	(34)
Net cash generated by financing activities	650	6,195
Net increase in cash and cash equivalents	11,082	383
Cash and cash equivalents at the beginning of the year	4,028	3,605
Effect of foreign exchange rate changes	44	40
Cash and cash equivalents at the end of the year	15,154	4,028

FORMATION GROUP PLC

 

Notes to the preliminary announcement 

For the year ended 31 August 2009

1. Basis of Preparation 

The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 August 2009 or 31 August 2008 but is derived from those accounts. Copies of the Company's audited statutory accounts for the year ended 31 August 2009 will be despatched to shareholders shortly.

The financial statements have been prepared on a going concern basis. The Group has significant surplus cash balances as at 31 August 2009, generated from the sale of certain subsidiary undertakings during the year. In addition greater certainty has been achieved post year end regarding the completion of the Aldgate property development.

The Directors have prepared working capital forecasts for the period to 31 January 2011. The working capital forecasts assume that no cash outflows in respect of the loan note guarantee will occur.

The Directors are satisfied that the forecast level of trading performance and cash flows are achievable and that the Group will therefore be able to continue to operate for the foreseeable future.

The auditor's report contained in the 2008 statutory accounts included an emphasis of matter paragraph, and did not include any further statements under section 237 (2) or (3) of the Companies Act 1985. 

Whilst the information included in this announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement in itself does not include sufficient information to comply with IFRS. 

2. Segment Information 

For management purposes, before the disposal of subsidiaries in the period, the Group was organised into two operating divisions; Management Services and Professional Services. These divisions were the basis on which the Group reports its primary segment information. Management Services provided career management and representation advice to entertainers and athletes within the sports and entertainment sectors. Professional Services include wealth management, accountancy and taxation, financial brokerage and construction project management services. These services are provided to individuals, sporting institutions and trusts within the sport, music, entertainment and property sectors.

During the period, all subsidiaries in the Management Services division were sold along with certain subsidiaries within the Professional Services division. The remaining subsidiaries all operate in the Professional Services division.

  Segment information about these businesses is presented below:

2009 Revenue	Management Services £'000 7,008		Professional Services £'000 23,077	Discontinued operations £'000 (11,132)		Total £'000 18,953
Segment operating profit/(loss)	569		2,914	(4,334)		(851)
Unallocated corporate expenses						(1,584)
Operating loss						(2,435)
Investment income						4
Finance costs						(486)
Loss before taxation and exceptional items						(2,917)
Exceptional Items						(17,824)
Taxation						277
Loss for the year from continuing operations						(20,464)
Loss for the year from discontinued operations						(6,307)
Loss for the year						(26,771)
2008 Revenue		Management Services £'000 5,989	Professional Discontinued Services operations £'000 £'000 28,952 (9,935)				Total £'000 25,006
Segment operating profit		1,664	3,245		(2,614)		2,295
Unallocated corporate expenses							(1,429)
Operating profit							866
Investment income							119
Finance costs							(319)
Profit before taxation							666
Taxation							(224)
Profit for the year from continuing operations							442
Profit for the year from discontinued operations							2,310
Profit for the year							2,752

3. Discontinued Operations

 

The results of the discontinued operations which have been included in the consolidated income statement, were as follows:

Revenue Cost of sales	2009 £’000 11,132 (398)	2008 £’000 9,936 (477)
Gross profit	10,734	9,459
Administrative expenses	(6,400)	(6,183)
Operating profit from discontinued operations	4,334	3,276
Exceptional items	-	(662)
Investment income	55	74
Profit before taxation	4,389	2,688
Attributable tax expense	(847)	(999)
Profit for discontinued operations	3,542	1,689
(Loss)/profit on disposal of discontinued operations before taxation	(9,849)	621
Attributable tax expense	-	-
(Loss)/profit on disposal of discontinued operations	(9,849)	2,310
(Loss)/profit attributable to discontinued operations	(6,307)	2,310

 

 

Of the (loss)/profit on disposal of discontinued operations, a profit of £nil (2008: £621,000) arose on the disposal of the Sports Marketing division.

During the year, the Group had a net cash inflow from investing activities relating to the disposal of various subsidiary companies in the Group of £15,431,000. (2008: £1,007,000 inflow relating to Sports Marketing division).

The effect of discontinued operations on segment results is disclosed in note 2.

4. Earnings per Share

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

5. Dividends

 

Amounts recognised as distributions to equity holders in the year:

 

	2009 £'000	2008 £'000
Operating (loss)/profit from continuing operations	(2,435)	866
Operating profit from discontinued operations	4,334	2,614
Depreciation of property, plant and equipment	111	115
Amortisation of intangible assets	7	8
Share option charge	154	128
Loss on sale of tangible fixed assets	-	9
Operating cash flows before movements in working capital	2,171	3,740
Decrease/(increase) in inventories	569	(343)
(Increase)/decrease in receivables	(3,349)	161
Decrease in payables	(571)	(405)
Cash (used in)/generated by operations	(38)	3,153

7. Annual Report and Accounts

 

The annual report will be sent to shareholders on or about 2 February 2010. 

Additional copies will be available from that date on the Company's website; www.formationgroupplc.com.

8. Annual General Meeting

The Annual General Meeting of the Company will be held on 26 February 2010 at the offices of the Group's lawyers; DLA Piper in Manchester. 

ENDFR KKCDNOBKDCDB