Frp Advisory Group Regulatory News (FRP)

26 Feb 2008 07:26

Fairpoint Group PLC26 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 adviceand solutions to financially stressed consumers, today announces its preliminaryresults 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 oflast year as the clear market leader in IVAs. Furthermore, our broadening rangeof products and services, and falling costs of customer acquisition, shouldallow us to further capitalise on this position in 2008 as we enter the nextphase 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 achallenging year for the Group. However, despite the much publicised industryhead winds we reacted quickly to external pressures and, in a period where wesaw our largest competitors fall by the wayside, we were able to grow our IVAmarket share and deliver EBITDA from ongoing operations of £2.2 million duringthis 8 month period. We are confident that the Group's strategy of widening itsproduct and service offering, combined with the synergies and cost savings beingachieved following the acquisition of Clear Start, mean that solid foundationsare 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 theintention to change the Group's accounting reference point to December 31.Accordingly, these Report and Accounts cover an eight month period from May 12007 to December 31 2007. We have emerged from a challenging year where the well-documented issuesaffecting the IVA industry impacted the Group's profitability. However, we haveconsolidated 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 wouldhave expected. The Chief Executive Officer's Review provides an in-depth commentary on thedynamics of change and how the Group has responded. Whilst some of ourcompetitors have fallen by the wayside, Fairpoint has strengthened both itsstrategic and operational platforms, reinforcing its market-leading position. Key Features The acquisition of Clear Start has brought complementary strengths to ourmarketing efforts with its skills in indirect and internet-based interfaces tofinancially distressed consumers. At the same time the Group's management teamhas been augmented, and the synergies identified when the deal was announced arebeing delivered. The disposal of our Australian operations maximises shareholder value givenhigher returns on investment available in the UK. At the end of the year we created Fairpoint Group, a combination of the existinggroup companies with renewed strategic objectives to broaden our range offinancial services. We now reach an expanded pool of potential customers to whomwe can offer a broader range of in-house solutions both at the initial point ofcontact but also through the life of the customer relationship. Performance Revenues increased by 3% on an annualised basis, following the acquisition ofClear Start. Adjusted profits were affected by a near 40% increase in themarketing cost per lead (64% in the first half), compared to the average cost in2007, this occurring at the same time as a decline in the IVA market. This hasresulted in EBITDA from ongoing operations of £2.2 million (PBT adjusted forinterest, amortization and depreciation) compared to £10.9million for the 12months 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 periodthere was the added impact of a move to fees based on a 'percentage ofrealisations' methodology, which was agreed with the major creditors during theperiod. Despite the short term impact on our revenue and profitability, the newfee regime has meant a number of market participants could not operateprofitably or continue to compete. This is expected to be beneficial to theGroup both in terms of the competitive landscape and relative profitability, aswe have consistently recovered more debt for creditors than our remainingcompetitors. Meanwhile, the stock of back book cases under supervision, agreed on historicterms, provides a strong underpinning to revenue, profit and cashflow. Thecontribution from new non-IVA activities, currently 20% and growing, arepredicted to contribute further to the Group's performance going forward. As we announced in the interims our accounting policy was revised with regard torevenue recognition resulting in a £4.7million one-off adjustment to currentyear revenue. This has now been treated as a prior year adjustment in theaccounts, which enables a better comparison with past results, and more detailis provided in the financial review. Strategy Following the acquisition of Clear Start UK Limited ("Clear Start") in June 2007and the creation of an enlarged group with a broadening service range, the Groupchanged its name to Fairpoint. We will continue to be the market-leading provider of IVA solutions toover-indebted consumers but also offer a broader range of debt solutions, aswell as a new suite of lifetime products and services aimed at assistingconsumers through the rehabilitation cycle and thereafter. Current macro market factors mean that the broadening of our service range isincreasingly important to both our customers and to creditors. It also createsgrowth opportunities for the Group, as well as having a positive impact onseasonality and working capital. In addition, it should produce a betterbalanced revenue stream derived from a full range of products with differingstrengths through the economic cycle. Our growth will be organic and, whenearnings enhancing, through appropriate acquisitions. We are uniquely positioned to deliver this strategy, and have developed barriersto 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 theforthcoming Annual General Meeting. Board Changes In this reporting period John Reynard, a non-executive director, retired in thesummer and Paul Latham, Group Finance Director, retired at the year-end, alongwith Lord Hoyle the Senior Independent Director. Each in their separate waycontributed significantly to the growth of the business and I thank them warmlyfor so doing. John and Paul remain shareholders and Lord Hoyle continues to beinvolved in a consultancy capacity. Charles Mindenhall joined the Board in the summer consequent upon theacquisition of Clear Start where he was a founding director. Simon Gilbert, anexecutive with Hanover Investors, our largest shareholder, was appointed duringthe autumn. Each bring new thinking and attributes to the Board's deliberationsand 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 adisappointing year. However, our Management Team has reacted quickly to theexternal factors that have impacted the business and we are now on track tocommence a further period of strong growth. I am pleased that we have emerged from the difficult market conditions of lastyear as the clear market leader in IVAs. Our broadening range of products andservices, and falling costs of customer acquisition, will allow us to furthercapitalise 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 acquisitionof Clear Start by Debt Free Direct. This brought together the UK's marketleader of IVA solutions with Clear Start's differentiated channels to market andcreditor relationships. Overall, 2007 proved to be a very difficult time for the IVA industry and forour Group. The early part of the year was impacted by increased competition,creditor reluctance to accept IVAs and consumer unease caused by alarmist presscoverage. The latter part of the year was further impacted by reduced feelevels, brought about by creditor pressure; some reduction in realisations,caused by inflation in the basic costs of living (meaning the average consumerwas able to pay less into their plan) and December, which is a seasonally weakmonth. Not only does it have a short trading period but staffing is increasedfor the 50% growth in lead volumes that occurs in January. These, together withthe costs associated with integrating Clear Start, significantly reducedprofitability and resulted in a loss for the period taking into accountimpairments 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, fromOctober we saw the indications of the dynamics of the new market which we arebeginning to experience. In particular market share wins meant IVA volumesshowed some encouraging signs as well as improving lead generation. Advertisingcosts and competitive pressure continued to reduce through the end of the periodand stability in the new fee arrangements was experienced. Revenue for the group in the 8 months to December 2007 was up by 3% on anannualised basis, following the acquisition of Clear Start, with EBITDA fromongoing operations of £2.2 million (PBT adjusted for interest, amortization anddepreciation). This compared to EBITDA of £10.9 million in the 12 months toApril 2007. We completed a strategic review following the acquisition of Clear Start andconfirmed our intention to broaden our range of products and services forfinancially stressed consumers and accelerate the growth on non-IVA products andservices. The strategic review also identified significant synergies and costsavings resulting from the merger of Clear Start and operational efficienciesthat will lead to reduced costs over the course of 2008. We have emerged from this period as the market leader with a strong position andby the fourth quarter had grown market share to 28%; a faster rate than we wouldhave expected and on reduced advertising spend albeit against a market backdropof declining overall IVA registrations as a number of competitors exited themarket. We expect reducing competition and limited growth in the overall IVAmarket to continue into the first quarter of 2008 before the market startsshowing significant growth again from the second quarter onwards. The macro economic climate continues to be increasingly favourable. A recentKPMG report forecast 130,000 borrowers entering into IVAs or bankruptcies in2008, a rise of 19% over last year. We also expect 2008 to be a record year forthe 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 industriesto agree a working protocol. Fairpoint was extensively involved in the workingparties to develop the code of practice and has representation on the StandingCommittee which is responsible for the implementation and future development ofthe protocol. Audit and accreditation An audit and accreditation process has now been developed for the industry byThe Insolvency Exchange ("TIX"). Fairpoint welcomes this and was the first oftwo providers to be successfully audited and "accreditation ready". This creates a competitive advantage for those providers who are prepared toinvest 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 fairbasis for IVA fees. This has led to an environment where IVA providers' fees arebased upon what they return to lenders. Fairpoint already has industry leadingreturns and, consequently, will achieve more under this fee basis than otherproviders with poorer returns. Consolidating Market The changing regulatory and fee environment has, as we predicted, caused somecasualties. Two of our largest competitors have effectively exited the IVAmarket. We have not pursued the acquisition of any of these failing businessesprimarily because their channels to market were in no way differentiated toours, and we have picked up share without the cost of acquisition. The current phase of consolidation has been by way of players leaving themarket. The next phase is likely to be deal driven. We will consolidate withstrong 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 considerationof £12.1 million satisfied through the issue of ordinary shares. Clear Start hassignificantly enhanced our ability to generate cost effective advertising leadsand improve our contribution per lead as a result. The operation currentlyprocesses in the region of 5,000 leads per month. The acquisition has in the short term led to increased overheads and directcosts as we operate across two sites in Adlington and Nottingham. These areforecast to fall as we complete the full integration of the business, gettingthe full benefit of £2 million synergies in 2008. Towards the end of the period, the Group decided to cease all new businessactivity in Debt Free Direct Australia and has subsequently disposed of theresidual back book. The decision maximises shareholder value sooner rather thanlater, given higher returns on investment available in the UK. Fairpoint Group During the fourth quarter of 2007 we completed a strategic review with thecreation 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 tocreate a market leading position, we continue to believe that the best advice toboth consumers and creditors will build "most trusted advisor" relationships,which will allow us to provide services throughout the lifetime of our customerrelationships. 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 professionalisingour 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 targetmarkets, 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 downfurther the costs of advertising and support the extension into new marketsegments. 3. Current trading Fairpoint's lead volumes and lead acquisition costs both improved significantlyin the final quarter of 2007. This has continued through the start of the newyear. Lead volumes have increased significantly in January with cost per leadcontinuing to fall, although recent evidence of lower realisations is unlikelyto mean that the full benefit of this growth will be realised. Whilst our mortgage and loan business has been impacted by the credit crunchwhich slowed trading in November and December, the business remains stronglyprofitable and is expected to grow with our lead volumes. We continue to exercise strong cost control, with monthly overheads falling andthe integration of Clear Start remaining on track to complete in the secondquarter, delivering anticipated synergies of £2 million in 2008. These synergiescome through in operational efficiency improving the profitability of the backbook and a reduction in overheads. This, and the full benefits of our realignedstrategy, will be experienced in the second half, which benefits from themarketing investment made in the first quarter. We are now looking forward to aperiod of renewed stability and growth in our market and a return to profitablegrowth for our Group. Financial Review Financial performance Results The past eight month period has been one of considerable change within the debtadvice market and the IVA market in particular. These changes, combined with theimpact of the acquisition of Clear Start, are reflected in the Group's financialperformance. • 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 theperiod-end are detailed in the financial statements which follow this review. During the period the Group conducted a full review of its IVA revenuerecognition, and has reappraised the recognition profile to better reflect theactual mix of costs and revenues over time in an IVA case. The net impact ofthese changes, which has been accounted for as a prior year adjustment, is toincrease revenue and PBT in the prior year by approximately £2.4 million, whilstincreasing net assets by approximately £3.3 million. At the interimannouncement, this was treated as a one-off item of £4.7 million in the currentyear. This is now shown in the accounts as a prior year adjustment, whichenables a more meaningful comparison with past results. The financial statements of the Group have been prepared in accordance withInternational Financial Reporting Standards and the Group has elected to applythe trainsitional arrangements permitted by IFRS 1 "First-time Adoption ofInternational Financial Reporting Standards" Overview of financial performance Overall, revenue for the group in the 8 months to December 2007 was up by 3% onan annualised basis. Total IVA numbers in England and Wales fell 16% in thefinal three quarters of 2007 compared to the same period in 2006. However, I amparticularly pleased that the Group managed to grow its volumes by increasingmarket share over this period, particularly in the last quarter. Mortgage and loan related commissions have grown by 44% on an annualised basisto £1.6 million. This follows our in-house broking business becoming fullyoperational in January 2007, significantly enhancing our existing remortgagebusiness. Our business was impacted by the credit crunch in the late autumnwhere conversion rates fell as many products were re-priced or withdrawn slowingour previous growth, although current trading has seen some recovery inconversions in line with historic levels. During the first six months of the period increased competition led to anincrease in the cost per lead, which reduced later in the period as competitorsretreated from the market and in the final two months of the year this cost fellto less than £75 per lead, allowing for a recovery in gross margin as reportedin our interim statement. The continued delivery of new IVA cases together with the acquisition of ClearStart has resulted in the "bank" of supervisory cases growing 50% in the eightmonth period to nearly 15,000 cases at the end of the period. This "bank" ofcases provides a robust and significant cash flow to the group. The Group has decided to cease all new business activity in Debt Free DirectAustralia and dispose of the residual back book. The decision maximisesshareholder value sooner rather than later, given higher returns on investment available in the UK. It was believed that the Australian operationwould have remained cash negative throughout 2008. The loss for the period fromthe discontinued operations was £1.3 million. At the period end the fair value of intangible assets was reviewed forimpairment, as a result of which the Group has concluded that the contract forexclusive 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 forthis impairment has been taken through amortisation. The share premium account was cancelled during the period and £14 milliontransferred 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 fromour existing banking partners, Royal Bank of Scotland. The provision of a £16million facility at a competitive rate of interest allows us to service ourexisting working capital requirements and provides further funds with which theGroup can act in a rapidly consolidating marketplace. Key Performance Indicators 12 Months 8 Months to Apr 07 to Dec 07Average number of leads 8,900 10,204 Whilst lead levels grew, 2007 was characterised byper 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 periodContribution per lead 189 170 Increasing revenues from non-IVA solutions were(£) offset by new fee agreementsCases under supervision 7,724 13,070 Continued growth in the back bookMonthly contribution 12 9 Impacted by Clear Start acquisition; benefits nowper case (£) beginning to be realisedCentral 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 26February 2008 at Financial Dynamics, Holborn Gate, 26 Southampton Buildings,London WC2A 1PB. Those analysts wishing to attend are asked to contact Nick Henderson / DavidCranmer at Financial Dynamics on +44 20 7269 7114 / +44 20 7269 7217 or atnick.henderson@fd.com./ david.cranmer@fd.com Enquiries Fairpoint Group plcAndrew Redmond, Chief Executive Officer 0845 296 0100Andrew Heath, Finance Director Designate 0845 296 0200 Numis SecuritiesChris Wilkinson 020 7260 1000Lee Aston Financial DynamicsEd Gascoigne-Pees 020 7269 7132Nick 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 themass financial services market is unable to provide a solution. We make it our business to understand our customers in depth, to help themthrough their short term circumstances, and to continue that relationship, ifthey so choose, into the future. The solutions offered range from basic advice,such as simply destroying credit cards and curbing unnecessary expenditure, tothe following solutions: • consolidation loan • re-mortgage • informal arrangement • individual voluntary arrangement (IVA) • bankruptcy Fairpoint always seeks (unlike many of its competitors who sell specificproducts) to systematically and impartially deliver the best advice to theconsumer and recommend them the most appropriate solution. Over the last few years we have been very much focused on the over-indebtedmarket in the UK. Debt Free Direct has pioneered the debt advice and solutionsindustry and is a clear leader in the provision of IVAs, while Clear Start'simpartial approach has appealed to a new segment of consumers, and has helped totake 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 fitour investment criteria. Fairpoint is based in Chorley, Lancashire, and was admitted to AIM in December2002. 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 £'000Continuing operationsRevenue 19,545 28,505Cost of sales (7,936) (7,082)Gross profit 11,609 21,423Administrative expenses (11,915) (10,964) EBITDA 2,159 10,931Depreciation (417) (390)Impairment of Intangibles (1,147) -Amortisation (901) (82) (Loss)/Profit from operations (306) 10,459Finance income 227 166Finance costs (422) (22)(Loss)/Profit before taxation (501) 10,603Tax credit/(expense) 3 703 (2,834)Profit for the period from continuing operations 202 7,769Discontinued operationsLoss 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 shareProfit 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 shareProfit 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) 7,341Total recognised income and expense in the period (1,161) 7,329 All of the above recognised income and expense is attributable to equity holdersof 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 AssetsProperty, plant and equipment 2,216 2,153Goodwill 11,318 1,934Other intangible assets 5,722 2,494Total Non Current Assets 19,256 6,581Current AssetsTrade receivables 22,657 20,745Other current assets 2,177 1,678Cash and cash equivalents - 373Current tax asset 275 -Non current assets classified as held for sale 59 -Total Current Assets 25,168 22,796Total Assets 44,424 29,377 EQUITYShare capital 424 376Share premium account - 13,777Merger reserve 11,842 -Other reserves 254 -Retained earnings 20,748 8,977Translation reserve (62) (12)Total equity attributable to equity holders of the parent 33,206 23,118LIABILITIESNon Current LiabilitiesLong-term borrowings 402 972Deferred tax liabilities 895 97Total Non Current Liabilities 1,297 1,069Current LiabilitiesBank overdraft 5,636 -Trade and other payables 2,958 3,143Current tax liabilities - 1,293Short-term borrowings 1,079 754Provisions 107 -Liabilities directly associated with non-current assets classified asheld for sale 141 -Total Current Liabilities 9,921 5,190Total Liabilities 11,218 6,259Total Equity and Liabilities 44,424 29,377 Unaudited Consolidated Cash Flow Statement for the 8 Months ended 31 December2007 8 Months to 12 Months 31 December to 30 April 2007 2007 £'000 £'000Cash flows from continuing operating activities(Loss)/Profit on continuing operations before tax (501) 10,603Share based payments charge 38 44Depreciation of property, plant and equipment 367 390Amortisation of intangible assets and development expenditure 903 82Impairment of intangible assets 1,147 -Loss on sale of property, plant and equipment 52 133Interest received (227) (166)Interest expense 422 22Foreign exchange translation (54) (12)Increase in trade and other receivables (520) (10,187)(Decrease)/ increase in trade and other payables (1,916) 681Cash flows from discontinued operations (1,294) (411)Cash (absorbed by) generated from operations (1,583) 1,179Interest paid (206) (22)Income taxes paid (1,151) (2,156)Net cash absorbed by operating activities (2,940) (999) Cash flows from investing activitiesAcquisition 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 166Purchase of intangible assets (672) (2,376)Discontinued operations (34) (89)Net cash absorbed by investing activities (1,602) (4,166)Cash flows from financing activitiesEquity dividends paid (1,129) (1,683)Proceeds from issue of share capital 236 203Proceeds from long-term borrowings - 1,700Payment of long-term borrowings (486) -Payment of finance lease liabilities (88) (49)Net cash (absorbed by) generated from financing activities (1,467) 171Net change in cash and cash equivalents (6,009) (4,994)Cash and cash equivalents at start of period 373 5,367Cash and cash equivalents at end of period (5,636) 373 Notes to the Unaudited Preliminary Announcement for the Eight Months ended 31December 2007 1 Status of Financial Information The financial information set out above does not constitute the company'sstatutory accounts for the periods ended 31 December 2007 or 30 April 2007.Statutory accounts for 30 April 2007 have been delivered to the Registrar ofCompanies. The auditors have reported on those accounts; their report wasunqualified, did not include reference to any matters to which the auditors drewattention by way of emphasis without qualifying their report and did not containstatements under the Companies Act 1985, s 237(2) or (3). The statutory accountsfor 31 December 2007 are expected to be finalised on the basis of the financialinformation presented by the directors in this preliminary announcement and willbe delivered to the Registrar of Companies following the company's annualgeneral meeting. 2 Prior year adjustment and first time adoption of International FinancialReporting Standards (IFRS) The table below shows the impact of certain prior year adjustments made to theprior year accounts and also the adjustments resulting from the transition toIFRS. Reconciliation of UK GAAP consolidated profit and loss account to IFRS incomestatement 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) 28,505Cost of sales f,l (6,041) - (1,041) (7,082)Gross profit 21,954 2,034 (2,565) 21,423Admin expenses a,b,e,l (12,976) - 2,012 (10,964) EBITDA 9,777 2,034 (880) 10,931Depreciation e,l (486) - 96 (390)Amortisation a,e (313) - 231 (82) Profit from operations 8,978 2,034 (553) 10,459 Finance income 166 - - 166Finance expense (22) - - (22)Profit before taxation 9,122 2,034 (553) 10,603Tax expense d (2,612) (610) 388 (2,834)Profit/(Loss) for the 6,510 1,424 (165) 7,769yearDiscontinued 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 ASSETSNon Current AssetsProperty, plant and equipment i 928 - (192) 736Goodwill 1,934 - - 1,934 Other intangible assets i 8 - 192 200Total Non Current Assets 2,870 - - 2,870 Trade receivables a 8,152 2,329 - 10,481Other current assets j 2,070 - (170) 1,900Cash 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 EQUITYShare capital 373 - - 373Share premium account 13,577 - - 13,577Retained 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) 17,223the parent LIABILITIESNon current LiabilitiesLong-term borrowings 25 - - 25 Provisions 18 - - 18 Deferred tax liabilities 21 - - 21 Total Non Current Liabilities 64 - - 64 Current LiabilitiesTrade and other payables j 1,715 - 922 2,637Current tax liabilities a,h 321 699 (326) 694Total Current Liabilities 2,036 699 596 3,331Total Liabilities 2,100 699 596 3,395Total Equity and Liabilities 18,459 2,329 (170) 20,618 Reconciliation of consolidated balance sheet at 30 April 2007 from UK GAAP toIFRS Notes UK GAAP Prior Effect of Year transition to UK GAAP Adjustment IFRS IFRS £000 £000 £000 £000 ASSETSNon Current AssetsProperty, plant and equipment i 2,900 - (747) 2,153Goodwill e 1,622 - 312 1,934Other intangible assets d,i, 26 - 2,468 2,494Total Non Current Assets 4,548 2,033 6,581 Trade receivables a,b 16,384 4,361 - 20,745Other current assets c,j 4,612 - (2,934) 1,678Cash and cash equivalents 373 - - 373Total Current Assets 21,369 4,361 (2,934) 22,796 Total Assets 25,917 4,361 (901) 29,377 EQUITYShare capital 376 - - 376Share premium account 13,777 - - 13,777Retained earnings a,b,d,e,g,i,j 7,268 3,052 (1,343) 8,977Translation reserve g - - (12) (12)Total equity attributable to equity holders of 21,421 3,052 (1,355) 23,118the parentLIABILITIESNon current LiabilitiesLong-term borrowings 972 - - 972Deferred tax liabilities 97 - - 97Total Non Current Liabilities 1,069 - - 1,069Current LiabilitiesTrade and other payables h,f 1,973 - 1,170 3,143Current tax liabilities h,a,b 700 1,309 (716) 1,293Short-term borrowings 754 - - 754Total Current Liabilities 3,427 1,309 454 5,190Total Liabilities 4,496 1,309 454 6,259Total Equity and Liabilities 25,917 4,361 (901) 29,377 Explanations of the adjustments made to the UK GAAP income statement and balancesheets are as follows: Adjustments of previously reported UK GAAP. a. IVA Income recognition The Board has reconsidered the timing profile of IVA income recognitionfollowing a detailed review of actual revenues and costs and taking into accountinformation made available to it from discussions with creditors during theperiod. This adjustment, treated as a correction of a prior period error aspreviously reported under UK GAAP, increases revenue and retained earnings inthe 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 andother receivables by £4,741,000 (April 2006: £2,329,000). As a result, thecorporate 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 adetailed review of conversion and acceptance rates. The Group will recogniserevenue from re-mortgage commission on completion of a remortgage rather than onapproval of a mortgage offer. This adjustment, treated as a correction of aprior period error under previously reported UK GAAP, decreases revenue andretained earnings in 2007 by £378,000 and £265,000 respectively and decreasesaccrued income by £378,000. As a result, the corporation tax liability hasdecreased 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 inprepayments and expensed across the life of the arrangement. Under IFRS theamount of £1,721,000 has been included in intangible assets and is amortisedover the period of the arrangement. e. Goodwill Goodwill is not amortised under IFRS but is measured at cost less impairmentlosses. Under UK GAAP, goodwill was amortised on a straight-line basis over thetime that the Group was estimated to benefit from it. The change does notaffect equity at 1 May 2006 because, as permitted by IFRS 1, goodwill arising onacquisitions before 1 May 2006 (date of transition to IFRS) has been frozen atthe UK GAAP amounts subject to being tested for impairment at that date, theresults of which assessment indicated no such impairment. The adjustmentsincrease profits for the year to 30 April 2007 by £312,000 with correspondingincreases in retained earnings. f. Short-term employee benefits IAS 19 Employee benefits requires the expense of services rendered that increaseemployees' entitlement to future compensated absence (i.e. paid holiday) to berecognised in the period. Therefore, the cost of holidays earned but not takenat the balance sheet date has been accrued for. The adjustments decreaseprofits for the year to 30 April 2007 by £108,000; retained earnings are reducedby £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 overseassubsidiaries are set to zero as at 1 May 2006. The Group had no overseassubsidiaries at the date of transition, as such there were no differences intransition. The foreign exchange differences arising after that date on consolidation havebeen credited to the translation reserve within equity rather than to retainedearnings. The adjustment is £12,000 for the year to 30 April 2007. The Grouphad no overseas subsidiaries at the date of transition, as such there were nodifferences at transition. h. Deferred tax Differences in timing between the recognition of accounting for tax chargesunder IAS and the deduction of amounts in the corporation tax computations nowcreate temporary differences resulting in deferred tax rather than permanentdifferences under UK GAAP on which no deferred tax balances were recognised. The reversal of goodwill amortisation has resulted in the creation of a deferredtax liability and the recognition of holiday pay accruals under IAS and therestatement 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 thoseissued post 7 November 2002. Under IAS 12 the deferred tax recognised throughthe profit and loss account cannot exceed 30% of the share-based payment chargeon 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 30April 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 intangibleassets. The balance sheet impact of the reclassification is to increaseintangible assets and decrease property, plant and equipment by £192,000 at 1May 2006 and £747,000 at 30 April 2007. The UK GAAP depreciation charge inrespect of capitalised software is replaced with an equal amortisation chargeunder 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 fromother administrative expenses to amortisation. j. Cost of sales Under UK GAAP, marketing and related expenditures are permitted to be recognisedover the period in which separately identifiable revenue was generated. UnderIAS 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 betweenan increase of £716,000 in trade and other payables and a decrease of £170,000in other current assets; and £2,069,000 at 30 April 2007, which is split betweenan increase of £856,000 in trade and other payables and a decrease of £1,213,000in other current assets. k. Exemptions IFRS 1 First-time Adoption of International Financial Reporting Standards setsout the transition rules, which must be applied, when IFRS is adopted for thefirst time. The standard sets out certain mandatory exemptions to retrospectiveapplication and certain optional exemptions. The most significant optionalexemptions available and taken by the Group are as follows: (i) Business combinations: the Group has adopted the exemption under IFRS1 relating to business combinations which occurred before the date oftransition, 1 May 2006. The goodwill arising from combinations before that datetherefore remains at the amount shown under UK GAAP at 1 May 2006, subject toany subsequent impairment. (ii) Share-based transactions: The Group adopted the exemption in IFRS 1which allows a first-time adopter to apply the standard only to share optionsand equity instruments granted after 7 November 2002 that have not vested by 1May 2006. l. Discontinued operations As a results of the classification of DFD Australia Pty as discontinued in thecurrent year, IFRS5 requires the comparative results to be re-presented. Thishas an impact of (£104,000) on revenue with no overall impact on retainedearnings. IFRS5 does not require re-presentation of the balance sheet for thereclassification. 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 andthe standard rate of corporation tax in the UK applied to profits for the yearare 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) 10,175Expected tax credit based on the standard rate of corporation tax in the UK of 30% (2006 - 30%) (543) 3,053Expenses not deductible for tax purposes 623 211Short 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 dilutedEPS as their exercise price is greater than the weighted average share priceduring the year (ie they are out-of-the-money) and therefore would not beadvantageous 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) pershare totalling £1,696,000 (2007; £1,129,000). This dividend has not beenaccrued 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 ofClearstart Limited. The consideration was £12.1m satisfied on completion by£11.1m in shares with £1.0m of deferred share consideration issued on 20thDecember 2007. The following table sets out the book values of the identifiable assets andliabilities 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 £'000AssetsProperty, plant and equipment 303 - (45) 258Other intangible assets - - 4,530 4,530Trade receivables 1,384 680 - 2,064Cash and cash equivalents 100 - - 100LiabilitiesTrade and other payables (2,469) - - (2,469)Deferred tax liabilities 276 - (1,359) (1,083) Net Assets (406) 680 3,126 3,400Goodwill 9,384Costs of acquisition (640)Consideration 12,144Satisfied byShares issued 11,124Deferred share consideration 1,020 12,144 The goodwill is attributable to the significant synergies which are expected toarise from the integration of this business with that of the Group and thoseintangibles such as the workforce which are not recognised separately. Since the acquisition date, Clear Start UK Limited has contributed £132,000 togroup profit, If the acquisition had occurred on 1 May 2007, group turnover fromcontinuing operations would have been £20,940,000 and group profit for theperiod would have been (£755,000). Other intangible assets comprise the Clear Start brand identified onacquisition. Goodwill has been adjusted from the amount shown in the interim financialstatements of £7,929,000 due to the recognition of deferred tax on IntangibleAssets. The fair value of the shares issued was determined by reference to their quotedmarket price of £2.62 at the date of acquisition. Under the terms of the acquisition a further 2,363,940 shares may be issueddependent on the performance of Fairpoint Group plc shares in the period from27th June 2007 to 26th June 2009. At the balance sheet date no furtherconsideration had been incurred and it is not possible to reliably estimate anyfuture consideration. The shares prices attached to the earn-out shares rangefrom £3.19 to £5.44. This information is provided by RNS The company news service from the London Stock Exchange