6 Apr 2009 07:00
| Press Release | 6 April 2009 |
Lighthouse Group plc
("Lighthouse" or "the Group")
Preliminary Results
Lighthouse Group plc (AIM:LGT), the UK's largest autonomous Independent Financial Advice and Wealth Management group, today announces preliminary results for the year ended 31 December 2008.
Highlights
| • | Strong cash position, with £12 million cash and no bank debt |
| • | Integration of Sumus Plc since the merger in May 2008 has been successful, with cost savings of £1 million already achieved |
| • | Reported revenues up to £54.4 million (2007: £52.9 million) assisted by the Sumus contribution for 8 months, although on a like-for-like basis the weakening in investment business resulted in a 26% decline in revenues |
| • | Additional cost control successfully implemented to address weaker revenues in second half of 2008 |
| • | Impairment charge of £7.6 million in relation to the carrying value of intangible assets and goodwill. This is considered to be conservative and has no impact on the trading or cash position of the Group One-off and non-recurring prior year adjustment of £1.5m relating primarily to the acquisition of Carrwood Barker Holdings in December 2005. This has no effect on the Group's cash position nor on the Group's 2007 and 2008 results |
| • | Intention to resume dividend payments with an interim dividend of 0.2p per share in September or October 2009 |
Since the period end
| • | Addition of Godfrey Pearson business in January 2009 strengthens the Group's affinity relationships, which provide new business leads and recurring revenues |
Commenting on the results, David Hickey, Executive Chairman of Lighthouse Group plc, said: "The Group has performed well against the challenging economic backdrop. We went into the recession in a strong financial position, with significant cash resources and no bank debt. During the period we have focused on the integration of Sumus, which is on target, as well as improving the quality of earnings by increasing the recurring revenues as a proportion of total revenues.
"We are pursuing both organic growth through the recruitment of advisers, as well as continuing to assess acquisition opportunities. The Board is confident that the Group is well positioned for the coming year and the challenges that the industry as a whole will face, and to capitalise on the upturn when it occurs."
- Ends -
For further information, please contact:
| Lighthouse Group plc | |
| David Hickey, Executive Chairman | Tel: +44 (0) 20 7065 5646 |
| Allan Rosengren, Joint Chief Executive | Tel: +44 (0) 117 929 1012 |
| Malcolm Streatfield, Joint Chief Executive | Tel: +44 (0) 20 7065 5646 |
| www.lighthousegroup.plc.uk | |
| Shore Capital and Corporate Limited | Tel: +44 (0) 20 7408 4090 |
| (Nominated Adviser to the Company) | |
| Dru Danford | |
| Stephane Auton |
Media enquiries:
| Abchurch Communications | Tel: +44 (0) 20 7398 7700 |
| Heather Salmond | Tel: +44 (0) 20 7398 7704 |
| heather.salmond@abchurch-group.com | |
| Joanne Shears | Tel: +44 (0) 20 7398 7709 |
| joanne.shears@abchurch-group.com | www.abchurch-group.com |
| Winningtons PR | |
| Tom Cooper | Tel: +44(0)117 920 0092 |
| tom.cooper@winningtons.co.uk | www.winningtons.co.uk |
Chairman's statement
Introduction
These results for the year to 31st December 2008 include those of Sumus Plc ("Sumus"), following the completion of the merger with Lighthouse Group plc ("Lighthouse" or "the Group") on 6th May 2008.
These results are a creditable performance against a deteriorating economic background. Trading for the year commenced well, however, as the economic and investment environment became more challenging towards the end of the first half, revenues weakened and thereafter declined steadily as the year progressed, mirroring the instability in the broader investment markets. Although the results for the year at the EBITDA level (before related non recurring re-organisation expenses) are in line with the Board's expectations, stated at the time of the Interim Statement released in September, the subsequent decline in revenues has resulted in impairments in the carrying values of certain subsidiary businesses.
Despite these tougher trading conditions, the Group's strong financial position is evidenced by net assets of approximately £13 million, net of impairment costs and a prior year charge together totalling some £9 million, cash balances of approximately £12 million and a complete absence of bank borrowings and the usual associated financial covenants.
Subject to the fulfilment of certain conditions, more fully described below, the Directors of Lighthouse propose to announce the payment of a dividend of 0.2 pence per share at the announcement of the Interim results for the year ending 31 December 2009.
Trading Highlights
| Year ended 31st December 2008 £m | Year ended 31st December 2007 £m | |
| Revenue | 54.4 | 52.9 |
| Gross profit | 15.4 | 16.6 |
| Operating costs | 14.9 | 14.2 |
| EBITDA * | 0.55 | 2.46 |
| Adjustments re depreciation, amortisation, impairment, non recurring costs and net interest (Loss)/profit before taxation | 9.0 (8.5) | 0.6 1.9 |
| Pence | Pence | |
| Basic (loss)/earnings per share Dividend per share paid in year | (6.98) 1.2 | 2.58 - |
*Earnings before interest, tax, depreciation, amortisation, impairment and non recurring items
1p of the 1.2p paid in 2008 in respect of dividends related to the special and final dividends from 2007 announced in April 2008, leaving an interim dividend of 0.2p as having been declared and paid in respect of 2008.
Financial Review
Reported revenues for the year increased by approximately £1.5 million to £54.4 million when compared to 2007. This disguises a marked decline in revenues for the recently enlarged Group as Sumus contributed revenues of £15.3 million in the period from 6th May 2008 to 31st December 2008. On a like-for-like basis therefore, the decline was £13.8 million, equivalent to 26 per cent. This demonstrates the scale of the decline in activity levels experienced during the second half of the year when investment business in particular dropped sharply.
As a result of revenues weakening, gross profit declined to £15.4 million compared to £16.6 million in 2007. Similarly, on a like-for-like basis, this represents a decline of £3.2 million in 2008, equivalent to 19 per cent. on the prior year.
At the EBITDA level (earnings before interest, tax, depreciation, amortisation and non recurring costs) the Group's results decreased to £553,000 from £2.5 million in 2007.
The non recurring costs in 2008 of £981,000 represented reorganisation costs arising from the merger with Sumus and subsequent cost saving reviews (2007: £546,000 in respect of the settlement of legal costs in respect of a former employee claim and one other potential litigation case).
Net interest received was £362,000 (2007: £355,000) after deducting £164,000 (2007: £nil) payable on the trade facility which financed the cash element of the merger with Sumus.
Net assets at 31st December 2008 stood at £12.8 million (2007: £12.6 million as restated) of which cash balances were £12.3 million (2007: £9.0 million). The Group has always favoured security over marginally enhanced interest rates, and hence cash deposits are held in a small number of the major UK banks. The net assets at 31 December 2008 are after impairment charges in relation to goodwill and intangible assets of £7.6 million (2007: £Nil).
The Group has a five year trading facility of £4.5 million (2007: £nil), which was provided by LV= to fund the partial cash alternative aspect of the merger with Sumus. This facility is repayable in semi annual instalments between 2010 and 2012, principally out of future recurring income derived from the LV= transaction completed in 2007. The facility has no financial performance covenants.
Merger with Sumus
This merger brought together the two largest AIM quoted autonomous IFA and Wealth Management groups, to create the largest such entity in the U.K., with some 850 advisers providing nationwide coverage through a number of IFA brands. Both Lighthouse and Sumus have a track record of profitability, liquid balance sheets with no bank debt, and good regulatory histories over a lengthy period.
The merged Group has drawn directors and employees from both former entities, and the new management team has combined very effectively. A number of functions have been fully integrated, including financial reporting, IT, HR and executive reporting structures. Other operating procedures and policies are also being reviewed to develop and maintain best practice across the Group.
A financial benefit of these actions has been the early attainment of the previously announced target of £1 million of annualised post merger cost savings. During the second half of the year, management worked to match the decline in revenues with further cost savings, resulting in additional cost reviews, and total savings of £2.5 million have since been achieved. The bulk of the resulting financial benefits will accrue during 2009.
Recurring Revenues
The Group continues to focus on growing the proportion of recurring revenues. This is in line with the Group's core philosophy of developing long-term relationships with its clients and is invariably linked to providing on-going advice for them. The focus is also beneficial to advisers and the Group as it improves visibility of earnings for both.
I am therefore pleased to report a significant rise in recurring income to £15.3 million for the year, compared with £10.5 million in 2007, an increase of 45 per cent. This includes an increase of £1.2 million (or 12 per cent.) in the pre merger business of the Group and a first time contribution of £3.7 million from Sumus.
Prior Year Adjustment
The financial statements include a prior year adjustment of £1.5 million which arose as a result of misstatements in the accounting for the trading of Carrwood Barker Holdings Limited following its acquisition by the Group in December 2005. The misstatements arose prior to and during the migration of its customer and commissions data in August 2006 onto a new commissions system operated by the Group.
The misstatements were of a one off and non recurring nature and impacted only on reported results for periods prior to 1 January 2007. The net effect was to overstate the cumulative retained earnings and total equity attributable to the equity holders of the Group by £1,468,364 as at 1 January 2007 and 31 December 2007 and to overstate trade and other receivables and total assets by £161,159 and to understate trade and other payables and total liabilities by £1,307,205 as at those dates.
There was no effect on the Group's previously reported cash flows, originally or subsequently, nor on the financial results of the Group for 2007 or 2008.
All of the financial reporting processes relating to income collection and related payments have been reviewed to ensure that the enhanced reconciliation procedures are sufficient to prevent recurrence of such issues in future.
Retail Distribution Implementation Programme
This was set up as the Retail Distribution Review ("RDR") by H.M. Treasury and the Financial Services Authority ("FSA") was charged with taking it forward. The aim of the RDR is to ensure that consumers have sufficient confidence in the retail financial market to want to use its products and services more often. Following industry consultation, the FSA has now commenced the move towards implementation of its current proposals.
The proposals deal with a number of areas which will, in time, affect IFAs. Amongst these is improved transparency of customer charging at both the manufacturing and advice stages of retail financial products, and potentially, the way in which charges are set. In addition, many IFAs will be required to increase further their professional qualifications through additional examinations and continuing professional education.
While there is little in the proposals which should cause concerns in principle, the implementation timetables will be critical. Significant changes in IFA qualification levels, in a relatively short timeframe, may disadvantage many experienced advisers, and by extension, consumers, if the result is fewer advisers and higher costs of advice. Moreover, changes in IFA remuneration mechanisms will require significant changes in manufacturer and advisers' systems. It is to be hoped that sufficient time will be allowed to ensure that the retail financial services industry is not forced into substantial re-engineering while the current recession persists.
Dividends
The Group continues to place significant importance on the payment of dividends. However, as a result of the impairment charges referred to earlier, there are currently insufficient retained earnings to recommend a final dividend for 2008. Accordingly, the Group intends to reclassify the balance on the share premium account and merger reserve, amounting to £8.5 million in aggregate, as distributable reserves. This procedure was successfully used in the past by the Group and will commence formally, assuming that the relevant resolutions are passed by shareholders at the forthcoming AGM. Thereafter application will be made to the Courts.
Subject to the satisfactory conclusions of the arrangements referred to above, and of the sufficiency of the Group's profits at that time, it is the Boards' intention to resume dividend payments by declaring an Interim dividend of 0.2 pence per share, which it expects will be paid to shareholders in September or October 2009. Record and payment dates will be confirmed after the Court procedures have been satisfactorily completed.
Lighthouse GP
Formerly known as Godfrey Pearson, this business was brought into the Group on 12 January 2009. It has approximately 50 advisers and is focused on providing advice typically to professionals such as veterinary surgeons, teachers, doctors and dentists. The business is trading broadly in line with expectations and has been satisfactorily integrated. This transaction now brings the number of IFAs within the Group who work on the basis of exclusive affinity relationships with various professions, trade unions, and other associations, to nearly 300. Given the attractions of new business leads, professional clients, and the recurring revenues typically associated with affinity arrangements, the Group is keen to continue to grow its proportion of such activities.
Financial Strength
Lighthouse's financial strength sets the Group apart from others in the sector. National IFA and network groups have often been thinly capitalised, or heavily dependent on bank debt. During cyclical downturns the pressures of reduced profits and cash flows, together with the serious dangers of breaching banking covenants and regulatory capital thresholds, have together threatened the existence of many such firms to the detriment of advisers, clients and shareholders.
By contrast Lighthouse always strives to husband its cash resources, avoid bank debt, and where transactions are contemplated, to concentrate only on those which are earnings enhancing and do not reduce Group cash levels or profits. This makes the Group a secure home for advisers.
With net assets of approximately £13 million, current cash balances of approximately £12 million and no bank debt, the Board believes that the Group is amongst the strongest autonomous IFA groups in the UK.
Outlook
The current volatility and dislocation seen in the financial markets has combined to create considerable uncertainty for investment business. In addition, fear of redundancy has delayed the increase in the savings ratio usually associated with recessions. Despite negligible returns, people continue to prioritise liquidity over investment. The collapse in mortgage availability for residential property transactions has severely reduced the number of mortgage transactions and associated protection products.
While retirement related advice remains strong, most other IFA income has reduced noticeably during the past three quarters, and there is little sign of any significant reversal in the short term. Accordingly, while the Group expects to continue trading profitably, it does not expect to see any significant growth in revenues per adviser during 2009. Increased emphasis has therefore been placed on the selective recruitment of additional advisers, and results so far this year are encouraging.
In the meantime the Group continues to trade profitably and its operations continue to generate surplus cash. Since the year end it has traded in line with expectations.
Finally, I would like to express my thanks to our independent financial advisers in each of our divisions for their professionalism and loyalty to the Group, and to all my fellow employees and directors, for their contributions during the year.
David Hickey
Chairman
6 April 2009
| Note | 2008 £ | 2007 £ | |
| Revenue | 3 | 54,392,607 | 52,941,313 |
| Cost of sales | (38,957,603) | (36,317,910) | |
| Gross profit | 15,435,004 | 16,623,403 | |
| Administrative expenses | |||
| Other operating expenses | (14,881,743) | (14,166,971) | |
| Earnings before interest, tax, depreciation, amortisation and non recurring items | 553,261 | 2,456,432 | |
| Non recurring operating expenses | 5 | (981,165) | (546,335) |
| Total operating expenses | (15,862,908) | (14,713,306) | |
| Impairment charge on goodwill and intangibles | 10 | (7,572,318) | - |
| Depreciation and amortisation | 5 | (856,478) | (368,189) |
| Total administrative expenses | (24,291,704) | (15,081,495) | |
| Operating (loss)/profit | 5 | (8,856,700) | 1,541,908 |
| Finance revenue | 6 | 574,836 | 410,939 |
| Finance costs | 6 | (212,365) | (55,835) |
| (Loss)/profit before taxation | (8,494,229) | 1,897,012 | |
| Tax credit | 7 | 721,212 | - |
| (Loss)/profit for the year | (7,773,017) | 1,897,012 | |
| (Loss)/profit for the year attributable to: | |||
| Equity holders of the parent | (7,843,777) | 1,897,012 | |
| Minority interest | 70,760 | - | |
| (7,773,017) | 1,897,012 | ||
| Basic (loss)/earnings per share | 8 | (6.98)p | 2.58p |
| Diluted (loss)/earnings per share | 8 | (6.98)p | 2.31p |
All activities are classed as continuing.
The attached notes on pages form an integral part of this preliminary financial information
Lighthouse Group Plc
Group statement of changes in equity for the year ended 31 December 2008
Group
| Share capital | Share premium account | Merger reserve | Special non distributable reserve arising from reduction in share premium | Reserves arising from share based payments | Retained earnings | Total attributable to equity shareholders | Minority Interests | Total | |
| £ | £ | £ | £ | £ | £ | £ | £ | £ | |
| At 1 January 2008 As originally reported | 836,377 | 5,695,963 | 2,002,685 | 1,999,374 | 1,991,810 | 1,579,529 | 14,105,738 | - | 14,105,738 |
| Prior year adjustment (note 22) | - | - | - | - | - | (1,468,364) | (1,468,364) | - | (1,468,364) |
| At 1 January 2008 - restated | 836,377 | 5,695,963 | 2,002,685 | 1,999,374 | 1,991,810 | 111,165 | 12,637,374 | - | 12,637,374 |
| Issue of ordinary share capital | 440,631 | - | 8,354,892 | - | - | - | 8,795,523 | - | 8,795,523 |
| Acquired with Sumus Limited (note 13) | - | - | - | - | - | - | - | 115,464 | 115,464 |
| Total recognised income and expense for the year | - | - | - | - | - | (7,843,777) | (7,843,777) | 70,760 | (7,773,017) |
| Diminution in fair value of available-for-sale financial asset (note 12) | - | - | - | - | - | (18,099) | (18,099) | - | (18,099) |
| Transfer on impairment | (7,572,318) | 7,572,318 | - | - | - | ||||
| Share based payment | - | - | - | - | 176,915 | - | 176,915 | - | 176,915 |
| Dividends paid | - | - | - | - | - | (1,092,588) | (1,092,588) | (79,840) | (1,172,428) |
| At 31 December 2008 | 1,277,008 | 5,695,963 | 2,785,259 | 1,999,374 | 2,168,725 | (1,270,981) | 12,655,348 | 106,384 | 12,761,732 |
| At 1 January 2007 as originally reported | 752,669 | 15,713,946 | 2,002,685 | - | 1,934,008 | (10,218,109) | 10,185,199 | - | 10,185,199 |
| Prior year adjustment (note 22) | - | - | - | - | - | (1,468,364) | (1,468,364) | - | (1,468,364) |
| At 1 January 2007 - Restated | 752,669 | 15,713,946 | 2,002,685 | - | 1,939,008 | (11,686,473) | 8,716,835 | - | 8,716,835 |
| Issue of ordinary share capital | 83,708 | 1,882,017 | - | - | - | - | 1,965,725 | - | 1,965,725 |
| Total recognised income and expense for the year | - | - | - | - | - | 1,897,012 | 1,897,012 | - | 1,897,012 |
| Share based payment | - | - | - | - | 57,802 | - | 57,802 | - | 57,802 |
| Reduction in share premium account | - | (11,900,000) | - | 1,999,374 | - | 9,900,626 | - | - | - |
| At 31 December 2007 as restated | 836,377 | 5,695,963 | 2,002,685 | 1,999,374 | 1,991,810 | 111,165 | 12,637,374 | - | 12,637,374 |
The attached notes on pages form an integral part of this preliminary financial information
| Note | 2008 £ | 2007 Restated £ | |
| Assets Non current assets | |||
| Intangible assets | 10 | 12,013,116 | 8,260,470 |
| Property, plant and equipment | 11 | 339,507 | 363,962 |
| Available for sale Investments | 12 | 98,810 | - |
| 12,451,433 | 8,624,432 | ||
| Current assets | |||
| Trade and other receivables | 14 | 5,074,959 | 8,110,817 |
| Cash and cash equivalents | 15 | 12,288,553 | 8,953,784 |
| 17,363,512 | 17,064,601 | ||
| Total assets | 29,814,945 | 25,689,033 | |
| Current liabilities | |||
| Trade and other payables | 16 | 8,173,412 | 9,597,170 |
| Provisions | 17 | 1,865,531 | 2,271,057 |
| 10,038,943 | 11,868,227 | ||
| Non current liabilities | |||
| Trade and other payables | 16 | 4,500,000 | - |
| Deferred tax liabilities | 7 | 1,641,754 | - |
| Provisions | 17 | 872,516 | 1,183,432 |
| 7,014,270 | 1,183,432 | ||
| Total liabilities | 17,053,213 | 13,051,659 | |
| Net assets | 12,761,732 | 12,637,374 | |
| Capital and reserves | |||
| Called up share capital | 19 | 1,277,008 | 836,377 |
| Share premium account | 5,695,963 | 5,695,963 | |
| Merger reserve | 2,785,259 | 2,002,685 | |
| Special non distributable reserve | 1,999,374 | 1,999,374 | |
| Other reserves - share based payments | 2,168,725 | 1,991,810 | |
| Retained earnings | 22 | (1,270,981) | 111,165 |
| Total equity attributable to equity holders of the company | 12,655,348 | 12,637,374 | |
| Minority interests | 106,384 | - | |
| Total equity | 12,761,732 | 12,637,374 | |
The attached notes form an integral part of this preliminary financial information.
Lighthouse Group plc
Consolidated Cash Flow Statement for the year ended 31 December 2008
| Note | 2008 £ | 2007 £ | |
| Operating activities | |||
| Group (loss)/profit before tax for the year | (8,494,229) | 1,897,012 | |
| Adjustments to reconcile profit for the year to net cash (outflows)/inflows from operating activities | |||
| Finance revenues | (574,836) | (410,939) | |
| Finance costs | 212,365 | 55,835 | |
| Loss on disposal of property, plant and equipment | 10 | 2,426 | |
| Depreciation of property, plant and equipment | 200,509 | 218,257 | |
| Amortisation of intangible assets | 655,969 | 149,932 | |
| Impairment of intangible assets | 7,572,318 | - | |
| Share based payments | 176,915 | 57,802 | |
| Adjustment for net settlement of revenue against cost of asset purchase | - | (140,632) | |
| Decrease/(increase) in trade and other receivables | 4,233,395 | 1,348,341 | |
| (Decrease)/increase in trade and other payables | (3,998,751) | (2,320,607) | |
| Movement in provisions | (1,567,606) | 172,118 | |
| Cash (utilised by)/generated from operations | (1,583,941) | 1,029,545 | |
| Finance costs paid | (196,365) | (55,835) | |
| Income taxes paid | (315,828) | - | |
| Net cash (outflow)/inflow from operating activities | (2,096,134) | 973,710 | |
| Investing activities | |||
| Payments to acquire intangible assets | (61,410) | (63,775) | |
| Purchase of property, plant and equipment | (97,750) | (99,428) | |
| Proceeds from sale of fixed assets | 500 | - | |
| Expenses associated with acquisitions | - | (115,288) | |
| Finance revenues received | 574,836 | 410,939 | |
| Net inflow associated with acquisition of subsidiary undertakings being cash acquired £5,048,468 less cash consideration paid £2,925,144 | 13 | 2,123,324 | - |
| Net cash inflow from investing activities | 2,539,500 | 132,448 | |
| Financing activities | |||
| Proceeds from share issue | 1,027 | 1,047,738 | |
| Expenses associated with issue of share capital | (437,196) | - | |
| Proceeds from new trade facility | 4,500,000 | - | |
| Dividends paid to equity shareholders | (1,092,588) | - | |
| Dividends paid to minority interests | (79,840) | - | |
| Net cash inflow from financing activities | 2,891,403 | 1,047,738 | |
| Increase in cash and cash equivalents | 3,334,769 | 2,153,896 | |
| Cash and cash equivalents at the beginning of the year | 8,953,784 | 6,799,888 | |
| Cash and cash equivalents at the year end | 15 | 12,288,553 | 8,953,784 |
The attached notes form an integral part of this preliminary financial information.
Lighthouse Group plc
Notes to the preliminary financial information for the year ended 31 December 2008
Basis of preparation
The preliminary financial information, which comprises the Consolidated Income Statement, the Consolidated Statement of Changes in Equity, the Consolidated Balance Sheet and the Consolidated Cashflow Statement of the Group together with the related explanatory notes has been prepared on the basis of the accounting policies which follow and which set out the material policies which have been applied in preparing the financial statements of the Group for the year ended 31 December 2008. The Group's financial statements are presented in Sterling.
Non statutory accounts
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2008 or 2007, but is derived from those accounts. Statutory accounts for 2007 have been delivered to the registrar of companies, and those for 2008 will be delivered in due course. The auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 237 (2) or (3) of the Companies Act 1985.
1. Authorisation of financial statements and statement of compliance with IFRS
The Group financial statements of Lighthouse Group plc for the year ended 31 December 2008 were authorised for issue by the board of directors on 6 April 2009 and the balance sheets were signed on the board's behalf by David Hickey and Peter Smith. Lighthouse Group plc is a public limited company incorporated and domiciled in England and Wales. The company's ordinary shares are traded on the London Alternative Investment Market.
The group's consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted for use in the European Union and as applied in accordance with the provisions of the Companies Act 1985. The principal accounting policies adopted by the group are set out in note 2.
2. Accounting policies
Critical estimates and assumptions
The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
Information about significant areas of uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is as set out below or is included in the following notes:
| ● | Going concern - see below |
| ● | utilisation of tax losses - note 7 |
| ● | measurement of the recoverable amounts of cash-generating units containing goodwill and intangible assets - note 10 |
| ● | accounting for business combinations - note 13 |
| ● | measurement of the recoverable amount of trade receivables - note 14 |
| ● | measurement of potential clawbacks and complaints by customers - notes 14 and 17 |
| ● | valuation of financial instruments - see below |
| ● | measurement of share based payments - note 20 |
Going concern
The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Business Reviews contained within the Chairman's Statement, Joint Chief Executives' Review and the Report of the Directors within the Annual Report, copies of which will be distributed to shareholders in advance of the forthcoming Annual General Meeting. The financial position of the Group, its cash flows and its liquidity position are described in the Financial Review section of the Joint Chief Executives' Review of the Annual Report. In addition note 18 to the preliminary financial information includes the Group's objectives, policies and processes for managing its capital, its financial risk management objectives and its exposure to credit risk and liquidity risk.
The Group has considerable financial resources with £12 million of cash at bank and no bank debt or other financial liabilities with any restrictive or financial covenants and has long established relationship with its clients, advisers and providers. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.
After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the preliminary financial information.
Lapse provision
In the event of a clawback of indemnity commission in respect of policies cancelled during the indemnity period the Group has an obligation to settle the liability. The provision is calculated by reference to historical data resulting from past claims, referenced to present day sales of indemnity products. An amount relating to the recoverable adviser element of the provision is included within debtors.
Complaints provision
The Group has an obligation to settle upheld complaints. Any complaint is recorded and assessed as to its validity and financial quantum. Cases where there is a 50% or greater likelihood of redress are provided for in full. Save for the excess, which is recoverable from the adviser, the amount payable in redress is recoverable from Professional Insurance cover. The Group's exposure is therefore limited to recovering the excess from the adviser. Recoverability is assessed on an adviser by adviser basis and provision made where necessary. Bad debt provision
A small number of advisers are indebted to the Group. This debt ordinarily arises from clawbacks or complaint insurance excesses applied to the adviser's account. Each one of these is reviewed regularly in conjunction with the amounts retained from advisers to cover potential clawbacks and provision made where recovery is deemed necessary.
Goodwill and intangibles
Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill and intangibles are reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
For the purposes of impairment testing, goodwill is allocated to the related cash-generating units monitored by management. Where the recoverable amount of the cash-generating unit is less than its carrying amount, including goodwill, an impairment loss is recognised in the Consolidated Income Statement.
Basis of consolidation
The preliminary financial information comprises the preliminary financial information of Lighthouse Group plc and its subsidiaries as at 31 December each year.
Subsidiaries are consolidated from the date of acquisition when the Group obtains control and cease to be consolidated from the date on which control is transferred out of the Group. Where there is a loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting year during which the Group has control. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct or indirect ownership of voting rights; currently exercisable or convertible potential voting rights; or by way of contractual agreement.
All intra group balances and transactions, income and expenses and profit and losses from intra-group transactions, are eliminated in full.
Revenue recognition
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.
Revenue is measured at the fair value of the consideration received, is stated net of value added tax and is earned within the United Kingdom as commissions, fees and administration charges.
Commission income comprises commissions receivable on inception of a new policy or investment product ('initial commissions') and commission receivable on renewal ('renewal commissions').
Initial commissions are recognised when the policy goes on risk after taking account of provisions for the potential cancellation of policies where commission is received under indemnity terms. Renewal commissions are recognised when received.
Fees for financial advice, administration charges and other services are recognised as the services are provided.
Interest income represents bank interest receivable on the Group's cash balances and is recognised as it is earned over the term of the deposit.
Business combinations and Goodwill
Goodwill recognised under UK GAAP prior to the date of transition to IFRS is stated at net book value as at the transition date. Business combinations after 1 January 2006 are accounted for under IFRS 3 using the purchase method. Any excess of the cost of a business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities is recognised in the Consolidated Balance Sheet as goodwill. Goodwill at the transition date and any that arises on acquisitions is not amortised. To the extent that the net fair value of the acquired entity's identifiable assets, liabilities and contingent liabilities is greater than the cost of the investment, a gain is recognised immediately in the Consolidated Income Statement.
Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
For the purposes of impairment testing, goodwill is allocated to the related cash-generating units monitored by management. Where the recoverable amount of the cash-generating unit is less than its carrying amount, including goodwill, an impairment loss is recognised in the Consolidated Income Statement. Any impairment is allocated first against goodwill and then against intangibles.
The carrying amount of goodwill allocated to a cash-generating unit is taken into account when determining the gain or loss on disposal of the unit, or an operation within it.
Intangible assets
Intangible assets acquired separately are capitalised at cost and those identified in a business combination are capitalised at fair value as at the date of acquisition. An intangible asset acquired as part of a business combination is recognised outside goodwill if the asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably. Following initial recognition, the carrying amount of an intangible asset is its cost less any accumulated amortisation and any accumulated impairment losses.
Intangibles with a finite life have no residual value and are amortised on a straight line basis over their expected useful lives as follows:
| Commissions processing software and development | 5 years |
| Acquired customer relationships | 9-13 years |
| Acquired Appointed Representative contracts | 13 years |
Intangible assets are tested for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.
Property, plant and equipment
Property, plant and equipment is stated at cost less any accumulated depreciation and any impairment in value. Cost comprises the aggregate amount paid and the fair value of any other consideration given to acquire the asset and includes costs directly attributable to making the asset capable of operating as intended. Depreciation is calculated to write off the cost of the asset over its estimated useful life to its residual value based on prices prevailing at the balance sheet date, on a straight-line basis as follows:
| Leasehold improvements | Lower of life of lease or 10 years |
| Office equipment | 5 - 10 years |
| Computer equipment | 3 years |
| Motor vehicles | 4 years |
All property, plant and equipment is reviewed for impairment when there are indications that the carrying value may not be recoverable. If there is evidence of impairment then the asset is written down to its recoverable amount. Any depreciation or impairment is charged in the Income Statement as an expense. Useful lives and residual values are reviewed annually.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the derecognition of the asset is included in the Income Statement in the period of derecognition.
Impairment of assets
At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists or when annual impairment testing for an asset is required, the Group makes a formal estimate of the asset's recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. In assessing value in use, the estimated future cash flows are discounted to their present value using a post tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses on continuing operations are recognised in the Consolidated Income Statement in the expense categories consistent with the function of the impaired asset.
For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group makes an estimate of recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation or amortisation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the Consolidated Income Statement unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. Impairment losses recognised in relation to goodwill are not reversed for subsequent increases in its recoverable amount.
Financial instruments
Non-derivative financial instruments
Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.
Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit and loss, any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose only of the cash flow statement.
Accounting for finance income and expenses is discussed in notes 3 and 6.
Available-for-sale financial assets
The Group's investment in a certain debt security is classified as an available-for-sale financial asset. Subsequent to initial recognition, such assets are recognised at fair value and changes therein, other than impairment losses, are recognised directly in equity. When an investment is derecognised, the cumulative gain or loss on equity is transferred to profit and loss.
Other non derivative financial instruments
Other non derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses.
Share capital - ordinary shares
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, expected future cashflows are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability.
Where the Group expects some or all of a provision to be reimbursed, for example, under an insurance policy, the reimbursement is recognised as a separate asset but only when recovery is virtually certain. The expense relating to any provision is presented in the Income Statement net of any reimbursement. Where discounting is used, the increase in the provision due to unwinding the discount is recognised as a finance cost.
The provision for clawback of indemnity commission represents the expected value of commissions potentially reclaimable by product providers in respect of policies cancelled during the indemnity period based on past experience of such claims. An amount relating to the element of clawbacks recoverable from advisers is included within debtors.
Pension schemes
The Group maintains a number of defined contribution schemes and contributions are charged to the Income Statement in the year in which they are due.
Finance income and expenses
Finance income comprises interest income on funds invested (including available-for-sale financial assets) and gains on disposal of available-for-sale financial assets. Interest income is recognised as it accrues in the Income Statement, using the effective interest method.
Finance expenses comprise interest expense on borrowings and other financial liabilities (such as trade facilities) and impairment losses recognised on financial assets. All borrowing costs and related finance expenses are recognised in the Income Statement using the effective interest method.
Income tax
Income tax expense comprises current and deferred tax. Income tax expense is recognised in the Income Statement except where it relates to an item recognised directly in equity, in which case the related tax is also recognised directly in equity.
Current tax is the expected tax payable on the taxable income for the year, using rates enacted or substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years.
Deferred tax is recognised using the balance sheet method providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. For the purposes of this policy intangible assets arising as a result of a business combination is treated as a temporary difference and deferred tax provided accordingly.
Deferred tax is not recognised for the following temporary differences:
| ● | Where the deferred tax liability arises from the initial recognition of goodwill; |
| ● | Where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss; and |
| ● | In respect of taxable temporary differences associated with investments in subsidiaries, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. |
Deferred income tax assets (including unutilised tax losses carried forward) are recognised only to the extent that the directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
Non recurring items
The Group presents as non recurring items within the relevant income or expenditure category on the face of the Income Statement, those material items of income and expense which, because of the nature and expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in the year, so as to facilitate comparison with prior periods and to better assess trends in financial performance.
Development costs
Development expenditure on an individual project is recognised as an intangible asset when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the asset and the ability to measure reliably the expenditure during development.
Following initial recognition of the development expenditure as an asset, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over the period of expected future benefit. During the period of development, the asset is tested for impairment annually.
Share based payments
The cost of equity settled transactions with employees is measured by reference to the fair value at the date which they are granted and is recognised as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award. Fair value is determined using an appropriate pricing model. In valuing equity settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of the company .
No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.
At each Balance Sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate of the achievement or otherwise of non-market conditions and of the number of equity instruments that will ultimately vest or in the case of an instrument subject to a market condition, be treated as vesting as described above. The movement in cumulative expense since the previous balance sheet date is recognised in the Income Statement, with a corresponding entry in equity.
Where the terms of equity settled awards are modified or a new award is designated as replacing a cancelled or settled award, the cost based on the original award terms continues to be recognised over the original vesting period. In addition, an expense is recognised over the remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair value of the original award and the fair value of the modified award, both measured on the date of modification. No reduction is recognised if this difference is negative.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in the Income Statement for the award is expensed immediately. Any compensation paid up to the fair value of the award at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the Income Statement.
The Group has taken advantage of the transitional provisions of IFRS 2 in respect of equity settled awards so as to apply IFRS 2 only to those equity settled awards granted after 7 November 2002 that had not vested before 1 January 2006.
Share option awards of the parent company's equity instruments in respect of settling grants to employees of a subsidiary company of the parent are disclosed as a charge to the profit and loss and a credit to the equity within the relevant subsidiary company, which better describes the underlying nature of the transaction.
Leases
Leases where the lessor retains a significant portion of the risks and benefits of ownership of the asset are classified as operating leases and rentals payable are charged in the Income Statement on a straight line basis over the lease term.
Assets held under finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease, with a corresponding liability being recognised for the lower of the fair value of the leased asset and the present value of the minimum lease payments. Lease payments are apportioned between the reduction of the lease liability and finance charges in the Income Statement so as to achieve a constant rate of interest on the remaining balance of the liability. Assets held under finance leases are depreciated over the shorter of the estimated useful life of the asset and the lease term.
Standards, amendments and interpretations to existing standards that are not yet effective or have not been early adopted by the Group
The following standards, interpretations and amendments to existing standards have been released by the IASB and IFRIC. The effective dates stated here are those given in the original IASB/IFRIC standards and interpretations. As the Group prepares its financial statements in accordance with IFRS as adopted by the European Union, the application of new standards and interpretations will be subject to their having been endorsed for use in the EU via the EU Endorsement Mechanism. In the majority of cases this will result in an effective date consistent with that given in the original standard or interpretation but the need for endorsement restricts the Group's discretion to early adopt standards. The standards and interpretations shown below are awaiting endorsement and cannot be early adopted by the Group:
| International Accounting Standards (IAS / IFRS) | Effective date | |
| IFRS 1 | Revised First Time Adoption of IFRS | 1 July 2009 |
| IFRS 3 | Business Combinations (revised January 2008) | 1 July 2009 |
| IFRS 7 | Amendment to IFRS 7 - Improving Disclosures about Financial Instruments (revised March 2009) | 1 January 2009 |
| IAS 27 | Amendment to IAS 27 - Consolidated and Separate Financial Statements (revised January 2008) | 1 July 2009 |
| IAS 39 | Amendment to IAS 39 - Financial Instruments: Recognition & Measurement: Eligible Hedged Items (revised July 2008) | 1 July 2009 |
| IAS 39 | Amendment to IAS 39 - Reclassification of Financial Assets: Effective Date & Transition (revised November 2008) | 1 July 2008 |
| IAS 39 | Amendment to IAS 39 and IFRIC 9 - Embedded Derivatives (revised March 2009) | 30 June 2009 |
| International Financial Reporting Interpretations Committee (IFRIC) | ||
| IFRIC 12 | Service Concession Arrangements | 1 January 2008 |
| IFRIC 15 | Agreements for the Construction of Real Estate | 1 January 2009 |
| IFRIC 16 | Hedges of a Net Investment in a Foreign Operation | 1 October 2008 |
| IFRIC 17 | Distributions of Non-Cash Assets to Owners | 1 July 2009 |
| IFRIC 18 | Transfers of Assets from Customers | 1 July 2009 |
The following standards and amendments to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2009 or later periods, but the Group has not early adopted them:
| International Accounting Standards (IAS / IFRS) | Effective date | |
| IFRS 2 | Amendment to IFRS 2 - Vesting Conditions and Cancellations | 1 January 2009 |
| IFRS 8 | Operating Segments | 1 January 2009 |
| IAS 1 | Presentation of Financial Statements (revised September 2007) | 1 January 2009 |
| IAS 23 | Borrowing Costs (revised March 2007) | 1 January 2009 |
| IAS 27 | Amendment to IAS 27 - Consolidated and Separate Financial Statements (revised January 2008) | 1 July 2009 |
Whilst the revised IAS 1 will have no impact on the measurement of the Group's results or net assets it is likely to result in certain changes in the presentation of the Group's financial statements from 2009 onwards.
The amendment to IFRS 2 restricts the definition of vesting conditions to include only service conditions (requiring a specified period of service to be completed) and performance conditions (requiring the other party to achieve a personal goal or contribute to achieving a corporate target). All other features are not vesting conditions, and whereas a failure to achieve such a condition was previously regarded as a forfeiture (giving rise to a reversal of amounts previously charged to profit) it must be reflected in the grant date fair value of the award and treated as a cancellation, which results in either an acceleration of the expected charge, or a continuation over the remaining vesting period, depending on whether the condition is under the control of the entity or counterparty. The amendment is mandatory for periods beginning on or after 1 January 2009 and the Group is currently assessing its impact on the financial statements, although it is not expected to be material.
The Group does not anticipate early adoption of the revised IFRS 3 and so will apply it prospectively to all business combinations on or after 1 July 2009. Whilst it is not possible to estimate the outcome of adoption, the key features of the revised IFRS 3 include a requirement for acquisition-related costs to be expensed and not included in the purchase price; and for contingent consideration to be recognised at fair value on the acquisition date (with subsequent changes recognised in the income statement and not as a change to goodwill).
IFRS 8 which applies to financial statement prepared in respect of accounting periods beginning on or after 1 January 2009 requires reporting entities to provide a segmental analysis based on the components of the Group that the chief operating decision maker ("CODM") monitors in order to make decisions about operating matters. In the opinion of the directors, the CODM applicable to the Group is the Board of Lighthouse Group plc.
The directors have considered the question of early adoption of IFRS 8 and have concluded that it would be more appropriate to adopt the requirements it introduces when it becomes effective in 2009. Aside from any additional segmental analysis that may be disclosed in future financial statements, the other potential impact of implementing IFRS 8 could be a redefinition of the constitution of the Cash Generating Units for the purposes of allocation of goodwill and intangible assets and as a consequence of the results of any future impairment reviews.
The Directors do not anticipate that the adoption of the remaining standards and interpretations will have a material impact on the Group's financial statements in the period of initial application.
3. Revenue and segment reporting
The revenue and profit before taxation are attributable to the principal activity of the Group and relate to services provided in the United Kingdom. All of the group's divisions sell the same products and there is no geographical basis to differentiate any particular division.
The Group operates in one primary business segment, being that of supplying Independent Financial Advice (IFA) and IFA Network services. In the opinion of the directors the risks and returns of each class of business e. g. investments, pensions, assurance and mortgage products are not significantly different from each other and so they make up one business segment as a whole. Further information concerning the revenues achieved for each class of business will be set out in the Joint Chief Executives' Review within the Annual Report.
The secondary segment is geographic and as the Group operates wholly within the UK no further segmental analysis is appropriate or required.
Finance revenue
Finance revenue is bank interest earned on the Group's bank deposits.
4. Directors' emoluments and staff costs
The staff costs for the year, including executive directors' remuneration, were as follows:
| 2008 £ | 2007 £ | |
| Wages and salaries- advisers | 1,686,426 | 2,166,821 |
| Wages and salaries- other staff | 5,969,177 | 5,373,584 |
| Share based payment | 176,915 | 57,802 |
| Social security costs | 858,608 | 838,009 |
| Other pension costs | 176,358 | 143,413 |
| 8,867,483 | 8,579,629 | |
| The average monthly number of employees during the year was as follows: | Number | Number |
| Executive directors | 5 | 4 |
| Administration staff | 214 | 197 |
| 219 | 201 |
| Directors | 2008 £ | 2007 £ |
| Aggregate emoluments | 985,614 | 820,698 |
| Compensation for loss of office | 391,784 | - |
| Company contributions to money purchase pension schemes | 11,667 | - |
| 1,389,065 | 820,698 | |
| Highest paid director | ||
| Aggregate emoluments | 231,373 | 242,757 |
| Company contributions to money purchase pension schemes | - | - |
| 231,373 | 242,757 |
None of the directors exercised any share options during the year (2007: none).
5. Group operating (loss)/profit
The operating (loss)/profit is stated after charging:
| 2008 £ | 2007 £ | |
| Depreciation of property, plant and equipment - owned | 200,509 | 218,257 |
| Amortisation of intangible assets | 655,969 | 149,932 |
| Impairment of goodwill and intangible assets | 7,572,318 | - |
| Leasehold property - minimum lease payments | 439,849 | 348,836 |
| Increase in debt provision | 149,351 | 56,920 |
| Hire of equipment under operating leases | 52,345 | 43,865 |
| Non recurring operating expenses (see below) | 981,165 | 546,335 |
Auditors' remuneration
During the year the Group obtained the following services from the Group's auditor as detailed below:
| 2008 £ | 2007 £ | |
| Audit of the financial statements | 43,000 | 36,800 |
| Other fees to auditors: | ||
| Local statutory audits for subsidiaries | 61,500 | 72,000 |
| Other fees to auditor -Taxation services | 20,000 | 9,450 |
| Other fees to auditor - Regulatory services | 6,000 | 29,700 |
| Other fees to auditor - Conversion to IFRS | - | 34,000 |
| Other services | 17,500 | 13,470 |
| 148,000 | 195,420 |
| Fees to former auditor | 2008 £ | 2007 £ |
| Audit of the 2007 financial statements | 8,800 | - |
| Other fees to auditor - Reduction in share premium | 5,500 | - |
| Other fees to auditor - Acquisition of Sumus Limited | 76,300 | - |
| 90,600 | - |
Fees in relation to the acquisition of Sumus Limited have been treated as an acquisition cost (see note 13).
Non recurring operating expenses
| 2008 | 2007 | |
| £ | £ | |
| Re-organisational costs subsequent to business combination (note 13) | 981,165 | - |
| Costs arising from the settlement of legal costs in respect of a claim relating to a former employee court case | - | 333,729 |
| Settlement of potential litigation against the trustee of the Group's EBT | - | 212,606 |
| 981,165 | 546,335 |
6. Finance revenue and expense
| 2008 £ | 2007 £ | |
| Revenue - Bank interest income | 574,836 | 410,939 |
| Expense - Finance expense on short term funding | (48,445) | (55,835) |
| Expense - Interest on trade facility | (163,920) | - |
| Total expense | (212,365) | (55,835) |
7. Taxation
| (a) Analysis of charge in year | |||||||
| 2008 | 2007 | ||||||
| £ | £ | ||||||
| Current tax: | |||||||
| UK corporation tax charge at 28.5% | 79,207 | - | |||||
| Deferred tax credit | (800,419) | - | |||||
| Tax credit on loss on ordinary activities | (721,212) | - | |||||
| (b) Reconciliation of the total tax charge | |||||||
| The tax assessed for the year is different to the standard rate of corporation tax in the | |||||||
| UK. The difference is explained below: | |||||||
| 2008 | 2007 | ||||||
| £ | £ | ||||||
| (Loss)/profit on ordinary activities before tax | (8,494,229) | 1,897,012 | |||||
| Profit on ordinary activities multiplied by standard rate | |||||||
| of corporation tax in the UK of 28.5% (2007: 30%) | (2,420,855) | 569,104 | |||||
| Effects of: | |||||||
| Provisions for impairment not deductible for tax purposes | 1,475,283 | - | |||||
| Share based payment charge not deductible for tax purposes | 50,421 | 17,341 | |||||
| Expenses not deductible for tax purposes | 30,600 | 18,089 | |||||
| Non taxable income | - | (123,588) | |||||
| Capital allowances for period in excess of depreciation | (11,859) | (17,716) | |||||
| Other permanent differences | (18,722) | - | |||||
| Brought forward tax losses utilised | (450,467) | (463,230) | |||||
| Current year losses not relieved | 607,924 | - | |||||
| Differences in rates | 16,463 | - | |||||
| Tax credit for year | (721,212) | - | |||||
(c) Deferred tax
The deferred tax balances can be analysed as follows:
| 2008 | 2007 | |||
| Provided | Unprovided | Provided | Unprovided | |
| £ | £ | £ | £ | |
| Difference between accumulated depreciation and capital allowances | - | (3,021) | - | (84,287) |
| Trading losses | - | (1,960,745) | - | (1,707,600) |
| On fair value of intangible assets arising on business combination (note 13) | 1,641,754 | - | - | - |
| Deferred tax liability/(asset) | 1,641,754 | (1,963,766) | - | (1,791,887) |
The movement in the provision for deferred tax during the year was as follows:
| 2008 | 2007 | |||
| £ | £ | |||
| Provision at 1 January | - | - | ||
| Arising on intangible asset acquired as part of business combination with Sumus Limited during year (note 13) | 2,442,173 | - | ||
| Credit to income statement during the year | (800,419) | - | ||
| Provision at 31 December | 1,641,754 | - | ||
The Board is of the opinion that, given the available losses and the uncertainty as to the timescale over which they may be utilised, it would be inappropriate currently to recognise any deferred tax assets in respect of the losses at this stage. However the Board is keeping this position under review.
8. Earnings per ordinary share
The calculation of earnings per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year, excluding shares held by the Trust.
The calculation of diluted earnings per share is based on the basic earnings per share, adjusted to allow for the issue of shares on the assumed conversion of all dilutive options.
Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below:
| 2008 | 2007 | |||||
| Earnings £ | Weighted average number of shares | Per share amount pence | Earnings £ | Weighted average number of shares | Per share amount pence | |
| Basic earnings per share | ||||||
| The basic earnings per share can be analysed as follows: | ||||||
| On EBITDA * | 553,261 | 112,434,966 | 0.49p | 2,456,432 | 73,396,354 | 3.35p |
| Effects of: | ||||||
| Exceptional expense | (981,165) | 112,434,966 | (0.87)p | (546,335) | 73,396,354 | (0.74)p |
| Depreciation and amortisation | (856,478) | 112,434,966 | (0.76)p | (368,189) | 73,396,354 | (0.50)p |
| Impairment charge | (7,572,318) | 112,434,966 | (6.74)p | - | 73,396,354 | - |
| Net finance revenue | 362,471 | 112,434,966 | 0.32p | 355,104 | 73,396,354 | 0.47p |
| Tax credit | 721,212 | 112,434,966 | 0.64p | - | 73,396,354 | - |
| Minority interests | (70,760) | 112,434,966 | (0.06)p | - | 73,396,354 | - |
| (Losses)/profits attributable to ordinary shareholders | (7,843,777) | 112,434,966 | (6.98)p | 1,897,012 | 73,396,354 | 2.58p |
| Dilutive effect | ||||||
| Options | - | - | - | 8,894,626 | ||
| Diluted earnings per share | (7,843,777) | 112,434,966 | (6.98)p | 1,897,012 | 82,290,980 | 2.31p |
There are 17,525,419 options (2007:591,168) which could potentially dilute earnings per share in the future, but were not included within the calculation of diluted loss per share as they were anti-dilutive for the periods presented.
*Earnings before exceptional expenses, interest, tax, depreciation and amortisation, and impairment charges.
9. Dividends paid and proposed
| 2008 £ | 2007 £ | |
| Special dividend at 0.5p per share | 418,594 | |
| Final dividend for 2007 at 0.5p per share (2006: Nil) | 418,594 | - |
| Interim dividend for 2008 at 0.2p per share (2007: Nil) | 255,400 | - |
| 1,092,588 | - |
10. Intangible assets
| Goodwill £ | Commissions processing software and development costs £ | Acquired customer relationships £ | Acquired Appointed Representative and adviser contracts £ | Total £ | |
| Cost | |||||
| At 1January 2007 | 8,877,466 | 224,946 | - | - | 9,102,412 |
| Additions | - | 63,775 | 1,183,282 | - | 1,247,057 |
| Adjustment in respect of earn-out not met | (552,480) | - | - | - | (552,480) |
| At 31 December 2007 | 8,324,986 | 288,721 | 1,183,282 | - | 9,796,989 |
| Additions - acquisitions (note 13) | 3,197,477 | - | - | 8,722,047 | 11,919,524 |
| Additions - software development | - | 61,409 | - | - | 61,409 |
| At 31 December 2008 | 11,522,463 | 350,130 | 1,183,282 | 8,722,047 | 21,777,922 |
| Amortisation | |||||
| At 1 January 2007 | 1,373,718 | 12,869 | - | - | 1,386,587 |
| Charge for the year | - | 51,325 | 98,607 | - | 149,932 |
| At 1 January 2008 | 1,373,718 | 64,194 | 98,607 | - | 1,536,519 |
| Charge for the year | - | 61,743 | 131,475 | 462,751 | 655,969 |
| Impairment charge | 5,176,432 | - | - | 2,395,886 | 7,572,318 |
| At 31 December 2008 | 6,550,150 | 125,937 | 230,082 | 2,858,637 | 9,764,806 |
| Net book amount At 31 December 2008 | 4,972,313 | 224,193 | 953,200 | 5,863,410 | 12,013,116 |
| Net book amount At 31 December 2007 | 6,951,268 | 224,527 | 1,084,675 | - | 8,260,470 |
The goodwill of £3,197,477 arising on acquisition represents the intangible assets that could not be individually separated and reliably measured due to their nature and reflects the strategic importance of broadening the Group's business offering, and the value attributed to the brands, the management and workforce so acquired. The Group has determined that it has two business segments and cash generating units (CGU) for the purposes of assessing the carrying value of goodwill, being the original businesses acquired by the Group prior to 2007 and those acquired in 2008 by way of the merger with Sumus Limited. These two CGUs had attributed goodwill of £6,951,268 and £3,197,477 respectively before any impairment charge arising during the year.
The addition to intangibles during the year relates to the value attributed to the Appointed Representative and adviser contracts arising from the acquisition of Sumus Limited on 6 May 2008 (see note 13) and the addition to goodwill represents the excess of the fair value of the consideration paid in respect of the business combination over the value attributed to those intangible assets and the fair value of the other assets and liabilities so acquired (see note 13).
The recoverable amount of each CGU is determined by a value in use calculation using cash flow projections based on the Group's latest approved budget for the 2009 financial year and its estimate of future cash flows after that date. The long term cash flow projection extrapolates the 2009 budget figures over five years using a zero growth rate in 2009 and 2010 and 5% for the three subsequent years and is discounted using a post tax discount rate of 10.8% (which equates to a pre tax discount rate of 15%). The cash flows in perpetuity are then extrapolated from the end of that five year period using a 3% growth rate (being the directors' best estimate of the long term growth rate of the UK economy) and are discounted at the same post tax discount rate of 10.8%.
The calculation of values in use is most sensitive to the assumed rate of growth in cash flows which has been based on a modest assessment of the impact future external market conditions on investors' appetite for investment products and the discount rate which has been set on the basis of management's assessment of the risks applicable to the future cash flows of the CGU in question. In the opinion of management there is no discernable difference in the risk profile of either CGU and accordingly the same discount rate has been applied to the estimated future cash flows of each CGU. The impairment review included a sensitivity analysis on the key assumptions in the cash flow projections and the rate at which the projections were discounted to arrive at the final value in use.
The impact of a 1% variation in the assumed growth rate and post tax discount rates applied to the estimated future cash flows of the CGUs as part of the impairment review would be as follows:
| Increase/(decrease) in value in use of pre merger Lighthouse CGU | Increase/(decrease) of value in use of Sumus CGU | |
| £m | £m | |
| A 1% increase in the growth rate assumed from 2014 onwards | 102 | 767 |
| A 1% decrease in the growth rate assumed from 2012 onwards | (190) | (747) |
| A 1% decrease in the post tax discount rate applied to the estimated future cash flows | 257 | 780 |
| A 1% increase in the post tax discount rate applied to the estimated future cash flows | (237) | (998) |
The sensitivity in respect of an increase of 1% in the future growth rate has been applied from 2014 on as in the opinion of the directors any recovery to growth in the market for the distribution of retail financial product in the UK in the short to medium term is uncertain.
The impairment reviews of the goodwill and other intangible assets arising on the business combination between the company and Sumus Limited undertaken as at 31 December 2008 and of the net book value of the goodwill held by the Group as at 1 January 2008 indicated a deficit in comparing the discounted value in use with the fair values of the consideration paid (and hence the values attributed to the goodwill and other intangible assets so acquired or held) and as a result impairment charges of £5,593,363 and £1,978,955 are respectively required. The aggregate impairment of £7,572,318 has been charged to the Income Statement in 2008. The impairments arose as a result of the impact of the severe deterioration in the economic conditions prevalent in the UK economy in the latter part of 2008 which the directors expect to continue through 2009 and into 2010. This had the result of a significant reduction in the estimated future cash flows of the CGU so acquired from those anticipated at the time of the merger in May 2008 and also of the CGU held by the Group as at 1 January 2008..
11. Property, plant and equipment
| Motor vehicles £ | Leasehold improvements £ | Office & computer equipment £ | Total £ | |
| Cost | ||||
| At 1 January 2007 | - | 161,522 | 1,333,813 | 1,495,335 |
| Additions at cost | - | - | 99,428 | 99,428 |
| Disposals | - | - | (17,594) | (17,594) |
| At 1 January 2008 | - | 161,522 | 1,415,647 | 1,577,169 |
| Additions at cost | - | 2,704 | 95,046 | 97,750 |
| Acquisitions (note 13) | 10,590 | - | 68,223 | 78,813 |
| Disposals | - | - | (921) | (921) |
| At 31 December 2008 | 10,590 | 164,226 | 1,577,995 | 1,752,811 |
| Depreciation | ||||
| At 1 January 2007 | - | 70,394 | 939,724 | 1,010,118 |
| Provided in the year | - | 17,042 | 201,215 | 218,257 |
| Disposals | - | - | (15,168) | (15,168) |
| At 1 January 2008 | - | 87,436 | 1,125,771 | 1,213,207 |
| Provided in the year | 9,091 | 17,042 | 174,376 | 200,509 |
| Disposals | - | - | (412) | (412) |
| At 31 December 2008 | 9,091 | 104,478 | 1,299,735 | 1,413,304 |
| Net book amount | ||||
| At 31 December 2008 | 1,499 | 59,748 | 278,260 | 339,507 |
| Net book amount | ||||
| At 31 December 2007 | - | 74,086 | 289,876 | 363,962 |
12. Investments
| 2008 £ | 2007 £ | |
| Fair value of listed investment acquired with Sumus Limited (note 13) | 116,909 | - |
| Diminution of fair value in period to 31 December 2008 charged to equity | (18,099) | - |
| Fair value at 31 December 2008 | 98,810 | - |
13. Business combinations
On 6 May 2008, the Group acquired by way of a merger (which has been accounted for as an acquisition as required by IFRS 3 and the Group's accounting policy set out above) the entire issued share capital of Sumus Limited for a total consideration of £12,156,838 which was satisfied by a combination of cash and equity shares as detailed below.
The book and fair value of the net assets and liabilities at the date of acquisition were as follows:
| Pre acquisition book value | Accounting policy alignment adjustments | Fair value adjustments | Recognised values on acquisition | |
| £ | £ | £ | £ | |
| Intangible assets | 3,061,871 | - | 5,660,176 | 8,722,047 |
| Property, plant and equipment | 78,813 | - | - | 78,813 |
| Other investments | 26,500 | - | 90,409 | 116,909 |
| Trade and other receivables | 1,600,359 | (225,687) | (23,538) | 1,351,134 |
| Other receivables | 31,102 | - | - | 31,102 |
| Cash and cash equivalents | 5,048,468 | - | - | 5,048,468 |
| Trade and other payables | (2,481,004) | (80,508) | (226,174) | (2,787,686) |
| Corporation tax liabilities | (243,415) | - | - | (243,415) |
| Deferred tax | - | (857,324) | (1,584,849) | (2,442,173) |
| Provisions | (800,374) | - | - | (800,374) |
| Net identifiable assets and liabilities | 6,322,320 | (1,163,519) | 3,916,024 | 9,074,825 |
| Minority interests | (115,464) | |||
| 8,959,361 | ||||
| Goodwill on acquisition | 3,197,477 | |||
| Consideration | 12,156,838 | |||
| Satisfied by: | ||||
| Fair value of 43,960,446 shares issued as fully paid (note 19) | 9,231,694 | |||
| Cash | 2,925,144 | |||
| 12,156,838 |
Pre-acquisition carrying amounts were determined based upon applicable IFRSs immediately prior to the acquisition. The value of assets and liabilities recognised on acquisition are their estimated fair values. In determining the fair values of the Appointed Representative and adviser contracts the Group applied a post tax discount rate of 10.8% (equating to a pre tax discount rate of 15%) to the estimated future cash inflows of the Sumus sub group Cash Generating Unit ("CGU").
The accounting alignment adjustments set out above arose as follows:
| £'000 | £'000 | |
| Change in revenue recognition policy from submission to Group policy of being on risk | (225,687) | |
| Amendment to Group policy re recognition of unmatched business | (259,274) | |
| Less trade and other payables impact of revenue recognition change above | 178,766 | |
| (80,508) | ||
| Provision for deferred tax on recognition of intangible asset not previously recognised | (857,324) | |
| As stated above | (1,163,519) |
The fair value adjustments set out above arose as follows:
| £'000 | £'000 | |
| Recognition of intangible assets arising on business combination | 5,660,176 | |
| Increase in carrying value of available-for-sale investment to fair value from cost | 90,409 | |
| Provisions against trade and other receivables | (23,538) | |
| Provision for business combination transaction costs | (216,175) | |
| Sundry accruals required | (9,999) | |
| (226,174) | ||
| Provision for deferred tax on intangible asset arising on business combination | (1,584,849) | |
| As stated above | 3,916,024 |
In the 8 months to 31 December 2008 Sumus Limited and its subsidiaries contributed revenues of £15,356,831 and a profit before tax of £629,886. If the acquisition had occurred on 1 January 2008, management estimates that the consolidated revenues would have been £64,242,563 and the consolidated loss for the year before tax (after the impairment charges of £7,572,318) would have been £7,779,801.
Reconciliation of amounts paid
| £ | |
| Cash consideration paid | (2,825,816) |
| Transaction costs paid | (99,328) |
| Cash acquired | 5,048,468 |
| 2,123,324 |
14. Trade and other receivables
| 2008 £ | 2007 Restated £ | |
| Trade receivables | 4,001,439 | 6,128,254 |
| Amounts owed by group undertakings | - | - |
| Other receivables | 447,426 | 964,151 |
| Prepayments and accrued income | 626,094 | 1,018,412 |
| 5,074,959 | 8,110,817 |
Trade receivables are non interest bearing and generally on industry terms of 90 days.
Trade receivables include amounts recoverable from advisers in respect of the clawback of indemnity commission and complaints; other receivables include amounts recoverable from insurers in respect of the complaints provision (note 17).
As at 31 December 2008 the provision for impairment against trade receivables was £283,273 increased by the charge to the Income Statement from the brought forward balance of £149,351 (2007 brought forward £133,922).
As at 31 December, the ageing analysis of trade receivables is as follows:
| Past due but not impaired | |||||||
| Total | Future due | Neither past due nor impaired | 30 days | 60 days | 90 days | >90 days | |
| £ | £ | £ | £ | £ | £ | £ | |
| 2008 | 4,001,439 | 1,169,685 | 1,314,429 | 808,336 | 273,804 | 158,410 | 276,775 |
| 2007 (restated) | 6,128,254 | 1,645,166 | 2,414,325 | 817,815 | 555,445 | 438,152 | 257,351 |
15. Cash and short term deposits
| 2008 £ | 2007 £ | |
| Short-term deposits | 2,551,137 | 8,770,789 |
| Cash at bank and in hand | 9,737,416 | 182,995 |
| 12,288,553 | 8,953,784 |
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one week and one month depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. The fair value of cash and cash equivalents is £12,288,553 (2007: £8,953,784).
16. Trade and other payables
Current:
| 2008 £ | 2007 Restated £ | |
| Trade payables | 6,292,336 | 8,078,215 |
| Other taxation and social security | 428,102 | 443,618 |
| Other payables | 176,511 | 1,653 |
| Accruals and deferred income | 1,269,669 | 1,073,684 |
| Corporation tax | 6,794 | - |
| 8,173,412 | 9,597,170 |
Included within other payables is an amount of £ 12,718 (2007: £11,594) in respect of unpaid pension contributions.
Terms and conditions of the above trade and other payables:
Trade payables are non interest-bearing and are normally settled on receipt of funds from product providers, or within 30 days in respect of overheads. Other taxation and social security are non interest-bearing and have an average term of 1 month.
Accruals and deferred income are non interest-bearing and are settled according to their specific circumstances.
Corporation tax liabilities are paid in quarterly instalments commencing halfway through the accounting period in which they arise in those subsidiaries which currently pay corporation tax.
Non-current:
| 2008 £ | 2007 £ | |
| Other financial liabilities - trade facility (secured) | 4,500,000 | - |
| 4,500,000 | - |
The trade facility was obtained from a UK financial institution and was fully utilised in defraying the cash consideration arising on the business combination with Sumus Limited (see note 13). It is secured solely on monies held within a specific bank account operated by the Group and the balance on that account as at 31 December 2008 was £Nil. The facility is repayable in 5 semi annual instalments commencing in May 2010 and the outstanding balance attracts interest at 1% per annum above the LIBOR rate, payable quarterly in arrears.
The trade facility therefore matures as follows:
| In one to two years | £1,800,000 |
| In two to five years | £2,700,000 |
There are no other covenants or other security arrangements applicable to the facility.
The group has entered into commercial leases on certain properties, motor vehicles and items of equipment. These leases have an average duration of between 3 and 6 years. Only the property lease agreements contain an option for renewal, and no restrictions are placed upon the lessee by entering into these leases.
Future minimum rentals payable under non-cancellable operating leases are as follows:
| 2008 £ | 2007 £ | |
| Future minimum payments due: | ||
| Not later than one year | 463,829 | 340,878 |
| After one year but not more than five years | 574,726 | 430,871 |
| After five years | - | - |
| 1,038,555 | 771,749 |
17. Provisions
| Provision for clawback of indemnity commission £ | Complaints provision £ | Total £ | |
| At 1 January 2008 | |||
| Current | 2,094,290 | 176,767 | 2,271,057 |
| Non-current | 556,710 | 626,722 | 1,183,432 |
| 2,651,000 | 803,489 | 3,454,489 | |
| Acquired with Sumus Limited | 350,374 | 450,000 | 800,374 |
| Charged/(released) to the Income Statement | 1,888,375 | (478,221) | 1,410,154 |
| Utilised during the year | (2,673,597) | (253,373) | (2,926,970) |
| At 31 December 2008 | 2,216,152 | 521,895 | 2,738,047 |
| Analysed as: | |||
| Current | 1,750,714 | 114,817 | 1,865,531 |
| Non-current | 465,438 | 407,078 | 872,516 |
| 2,216,152 | 521,895 | 2,738,047 |
Provision for clawback of indemnity commission
The provision for clawback of indemnity commission represents the expected cost of clawbacks from product providers for subsequent policy cancellations and mid term adjustments in respect of policies written at 31 December 2008. The amount represents the gross obligation and, where these amounts can be recovered from network members an asset is recognised. At 31 December 2008, the gross amount recognised was £1,647,985 (2007: £2,450,266).
Complaints provision
The complaints provision represents the expected cost of settling claims from clients and the amount represents the gross obligation and, where these amounts can be recovered from network members and insurers an asset is recognised. At 31 December 2008, the amount recognised within trade and other debtors was £133,139 (2007 £769,092).
18. Financial risk management objectives and policies
The Group's financial instruments comprise an available-for sale investment, cash, receivables and payables. The Group have financed their operations principally from equity share issues and operational cash flows.
Credit risk
The Group trades only with established third party financial institutions. In addition, receivable balances are monitored on an ongoing basis with the result that the Group's exposure to bad debts is not significant. The maximum exposure is the carrying amount as disclosed in Note 14.
With respect to credit risk arising from the other financial assets of the Group, which comprise an available-for-sale asset, cash and cash equivalents, the Group's exposure to credit risk arises from the possibility of default of the relevant regulated financial institution or authorised deposit taker, with a maximum exposure equal to the carrying amount of these instruments. The Group monitors such risks by reviewing the length and disposition of its deposits on a regular basis.
Concentration risk
This is the risk that material loss might arise from an excessive placing of the Group's financial resources with a counter party that might subsequently default, resulting in loss to the Group.
In order to manage this risk, the Group reviews the level of business undertaken with its institutional counter parties on a regular basis with periodic reports being submitted to senior management and the Board.
Interest rate risk
The Group also has a non-derivative financial instrument, being a secured trade facility, on which interest accrues at the interbank lending rate plus 1%. The amount outstanding in respect of this instrument is significantly less than the monies the Group has on deposit with UK clearing financial institutions and as the interest rate varies with LIBOR any fluctuations in such costs should be adequately covered by finance income from its cash deposits.
With regard to finance revenue the Group had significant cash balances throughout the year and as at 31 December 2008. Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.
The following table demonstrates the sensitivity to a reasonably possible change in the interest rate, with all other variables held constant, of the Group's profit before tax.
| Increase/decrease in interest rates | Effect on profit before tax | Effect on equity | |
| £ | £ | ||
| For the 12 months ended 31 December 2008 | +1% | 106,212 | 106,212 |
| -1% | (106,212) | (106,212) | |
| For the 12 months ended 31 December 2007 | +1% | 79,000 | 79,000 |
| -1% | (78,537) | (78,537) |
Liquidity risk
The Group's liquidity risk is that it would not have sufficient financial resources, even whilst solvent, to enable it to pay its obligations as they fall due or only at excessive cost. The Group manages its liquidity risk by ensuring that commissions payable to advisers are not remitted until funds have been received by the Group, and by monthly treasury management where projected cash flow requirements are monitored and reviewed. In addition, the Group retains sufficient working capital and ready cash balances o ensure that its requirements are met on a day-to-day basis. The table below summarises the maturity profile of the Group's financial liabilities at 31 December 2008 based on contractual undiscounted payments.
| On demand | Less than 3 months | 3 to 12 months | 1 to 5 years | Greater than 5 years | Total | |
| £ | £ | £ | £ | £ | £ | |
| Year ended 31 December 2008 | ||||||
| Trade and other payables | 6,144,914 | 143,861 | - | 4,500,000 | - | 10,788,775 |
| Other financial liabilities | 1,404,595 | 384,488 | 151,918 | - | - | 1,941,001 |
| 7,549,509 | 528,349 | 151,918 | 4,500,000 | - | 12,727,776 | |
| Restated | ||||||
| Year ended 31 December 2007 | ||||||
| Trade and other payables | 7,856,853 | 221,362 | - | - | - | 8,078,215 |
| Other financial liabilities | 415,450 | 758,633 | 344,872 | - | - | 1,518,955 |
| 8,272,303 | 979,995 | 344,872 | - | - | 9,597,170 |
Market price risk
The Group's income is directly aligned to the external economic conditions in the markets in which it operates, namely the distribution of retail financial products in the UK. Lower market returns may reduce investors' appetite for investment products, and reduce the income derived from funds-based products. In order to manage this risk the Group reviews the spread of its income and average adviser production on a regular basis, enabling it to take corrective action to mitigate the impact of such market variations. .
Fair value of financial instruments
There is no significant difference between the book values and fair values of the financial assets and liabilities and the latter are reviewed on a regular basis to ensure that no such exposure arises or, if it does, to enable the Group to take action to mitigate or eliminate any such potential loss.
Borrowing facilities
The Group did not have any undrawn committed borrowing facilities available at 31 December 2008 (2007 - £nil).
Currency risk
The Group is not exposed to currency risk as it does not trade in foreign currencies.
Capital management
The primary objective of the Group's capital management policy is to ensure that it maintains a credit rating and strong regulatory and group capital ratios in order to support its business and maximise shareholder value. The Group has financed its operations principally from equity shares. It manages its capital structure and makes adjustments to it in the light of changes in economic conditions. The Board regularly monitors the position based on regular management information. No changes were made in the objectives, policies or processes in the year.
Treasury management
The most significant treasury matters dealt with by the group are raising finance and investing surplus cash in high quality assets. Clear parameters have been established, including authority levels, on the type and use of financial instruments to manage these exposures, which at present do not permit the use of any derivatives or hedges. Regular reports are provided to senior management and treasury operations are subject to periodic independent reviews by the Board.
19. Authorised and issued share capital
| 2008 | 2007 | ||||||
| Authorised | Number | £ | Number | £ | |||
| Ordinary shares of 1p each | |||||||
| At 31 December | 120,000,000 | 1,200,000 | 120,000,000 | 1,200,000 | |||
| Allotted issued and fully paid | |||||||
| Ordinary shares of 1p each | |||||||
| At 1 January | 83,637,838 | 836,377 | 75,266,983 | 752,669 | |||
| Issued on 6 May 2008 to acquire Sumus Ltd (note 13) | 43,960,446 | 439,604 | - | - | |||
| Issued on 2 April 2007 to acquire customer relationships from Liverpool Victoria Financial Advice Services Ltd. | - | - | 4,172,672 | 41,727 | |||
| Issued on 2 April 2007 for cash raising £1,045,259 | - | - | 4,181,034 | 41,810 | |||
| Options exercised during the year at 23.5p | - | - | 10,256 | 102 | |||
| Options exercised during the year at 1p | 102,700 | 1,027 | 6,893 | 69 | |||
| 127,700,984 | 1,277,008 | 83,637,838 | 836,377 | ||||
| Under the Company's Unapproved Share Option Scheme the following options were held at 31 December 2008 | |||||||||||
| Number of share options at 31 December 2007 | Number of share options granted in the year | Number of share options exercised in the year | Number of share options lapsed in the year | Date of grant | Number of share options at 31 December 2008 | Exercise Price (p) | Exercise period | ||||
| 15,625 | - | - | (15,625) | - | 160.0 | 27/10/03 | and | 26/10/10 | |||
| 161,540 | - | - | - | 161,540 | 32.5 | 23/01/06 | and | 22/01/13 | |||
| 95,238 | - | - | (95,238) | - | 21.0 | 10/07/09 | and | 09/07/16 | |||
| 4,817,464 | - | - | (629,884) | 4,187,580 | 24.0 | 23/10/10 | and | 22/10/17 | |||
| - | 2,887,848 | - | - | 12/05/08 | 2,887,848 | 21.5 | 12/05/11 | and | 11/05/18 | ||
| 5,089,867 | 2,887,848 | - | (740,747) | 7,236,968 | |||||||
| Under the Company's Unapproved Share Option Scheme the following options were held at 31 December 2007 | |||||||||||
| Number of share options at 31 December 2006 | Number of share options granted in the year | Number of share options exercised in the year | Number of share options lapsed in the year | Date of grant | Number of share options at 31 December 2007 | Exercise Price (p) | Exercise period | ||||
| 15,625 | - | - | - | 15,625 | 160.0 | 27/10/03 | and | 26/10/10 | |||
| 161,540 | - | - | - | 161,540 | 32.5 | 23/01/06 | and | 22/01/13 | |||
| 95,238 | - | - | - | 95,238 | 21.0 | 10/07/09 | and | 09/07/16 | |||
| - | 4,817,464 | - | - | 23/10/07 | 4,817,464 | 24.0 | 23/10/10 | and | 22/10/17 | ||
| 272,403 | 4,817,464 | - | - | 5,089,867 | |||||||
| Under the Company's Unapproved Share Option Scheme for advisers the following options were held at 31 December 2008 | |||||||||||||
| Number of share options at 31 December 2007 | Number of share options granted in the year | Number of share options exercised in the year | Number of share options lapsed in the year | Date of grant | Number of share options at 31 December 2008 | Exercise Price (p) | Exercise period | ||||||
| 318,343 | - | (8,201) | - | 310,142 | 1.0 | 30/09/04 | and | 30/12/14 | |||||
| 107,582 | - | (93,813) | - | 13,769 | 1.0 | 17/08/04 | and | 16/08/14 | |||||
| 425,925 | - | (102,014) | 323,911 | ||||||||||
| Under the Company's Unapproved Share Option Scheme for advisers the following options were held at 31 December 2007 | |||||||||||||
| Number of share options at 31 December 2006 | Number of share options granted in the year | Number of share options exercised in the year | Number of share options lapsed in the year | Date of grant | Number of share options at 31 December 2007 | Exercise Price (p) | Exercise period | ||||||
| 325,236 | - | (6,893) | - | 318,343 | 1.0 | 30/09/04 | and | 30/12/14 | |||||
| 107,582 | - | - | - | 107,582 | 1.0 | 17/08/04 | and | 16/08/14 | |||||
| 100,000 | - | - | (100,000) | - | 22.0 | 06/05/07 | and | 30/09/14 | |||||
| 532,818 | - | (6,893) | (100,000) | 425,925 | |||||||||
| Under the Company's Approved Share Option Scheme the following options were held at 31 December 2008 | |||||||||
| Number of share options at 31 December 2007 | Number of share options granted in the year | Number of share options exercised in the year | Number of share options lapsed in the year | Date of grant | Number of share options at 31 December 2008 | Exercise Price (p) | Exercise period | ||
| 3,200 | - | - | - | 3,200 | 162.0 | 06/04/04 | and | 05/04/11 | |
| 384,614 | - | - | (15,385) | 369,229 | 32.5 | 23/01/06 | and | 22/01/13 | |
| 15,386 | - | - | - | 15,386 | 23.5 | 01/05/06 | and | 30/04/13 | |
| 35,897 | - | - | - | 35,897 | 25.0 | 15/08/06 | and | 14/08/13 | |
| 15,385 | - | - | - | 15,385 | 26.5 | 04/02/07 | and | 03/02/14 | |
| 51,281 | - | - | (5,128) | 46,153 | 19.0 | 13/12/07 | and | 12/12/14 | |
| 50,000 | - | - | - | 50,000 | 20.0 | 01/05/08 | and | 30/04/15 | |
| 142,857 | - | - | - | 142,857 | 21.0 | 10/07/09 | and | 09/07/16 | |
| 462,159 | - | - | (145,944) | 316,215 | 18.5 | 25/04/09 | and | 24/04/16 | |
| 230,768 | - | - | (10,256) | 220,512 | 21.0 | 15/03/09 | and | 14/03/16 | |
| 25,000 | - | - | - | 25,000 | 21.0 | 01/06/09 | and | 31/05/16 | |
| 140,000 | - | - | (39,000) | 101,000 | 20.0 | 06/03/10 | and | 05/03/17 | |
| 65,000 | - | - | - | 65,000 | 29.0 | 27/07/10 | and | 26/07/17 | |
| 684,871 | - | - | (10,256) | 674,615 | 24.0 | 23/10/10 | and | 22/10/17 | |
| - | 50,000 | - | - | 31/03/08 | 50,000 | 22.5 | 31/03/11 | and | 30/03/18 |
| - | 574,036 | - | (24,184) | 12/05/08 | 549,852 | 21.5 | 12/05/11 | and | 11/05/18 |
| 2,306,418 | 624,036 | - | (250,153) | 2,680,301 | |||||
| Under the Company's Approved Share Option Scheme the following options were held at 31 December 2007 | |||||||||
| Number of share options at 31 December 2006 | Number of share options granted in the year | Number of share options exercised in the year | Number of share options lapsed in the year | Date of grant | Number of share options at 31 December 2007 | Exercise Price (p) | Exercise period | ||
| 3,200 | - | - | - | 3,200 | 162.0 | 06/04/04 | and | 05/04/11 | |
| 394,870 | - | - | (10,256) | 384,614 | 32.5 | 23/01/06 | and | 22/01/13 | |
| 35,898 | (10,256) | (10,256) | 15,386 | 23.5 | 01/05/06 | and | 30/04/13 | ||
| 100,000 | - | - | (100,000) | - | 28.0 | 31/12/03 | and | 02/01/07 | |
| 35,897 | - | - | - | 35,897 | 25.0 | 15/08/06 | and | 14/08/13 | |
| 15,385 | - | - | - | 15,385 | 26.5 | 04/02/07 | and | 03/02/14 | |
| 51,281 | - | - | - | 51,281 | 19.0 | 13/12/07 | and | 12/12/14 | |
| 50,000 | - | - | - | 50,000 | 20.0 | 01/05/08 | and | 30/04/15 | |
| 142,857 | - | - | - | 142,857 | 21.0 | 10/07/09 | and | 09/07/16 | |
| 697,292 | - | - | (235,133) | 462,159 | 18.5 | 25/04/09 | and | 24/04/16 | |
| 230,768 | - | - | - | 230,768 | 21.0 | 15/03/09 | and | 14/03/16 | |
| - | 158,500 | - | (18,500) | 06/03/07 | 140,000 | 20.0 | 06/03/10 | and | 05/03/17 |
| - | 65,000 | - | - | 27/7/07 | 65,000 | 29.0 | 27/07/10 | and | 26/07/17 |
| - | 684,871 | - | - | 23/10/07 | 684,871 | 24.0 | 23/10/10 | and | 22/10/17 |
| 1,757,448 | 908,371 | (10,256) | (374,145) | 2,281,418 | |||||
20. Share-based payments
| (a) | There are three share option schemes currently operated by the Group. These are as follows: The approved scheme for employees This plan is open to all employees once they have been in service for a length of time as from time to time agreed by the Board. The options will vest if the employee remains in service for a period of three years from the date of the option was granted. The exercise price of the option is the prevailing market price at the date of grant. The contractual life of the option is ten years and there are no cash settlement alternatives. There are no performance conditions attached and the options lapse should the employee leave. |
| The unapproved scheme for advisers This plan exists in order to provide incentives to some advisers, notably on acquisitions, and to align adviser expectations to that of shareholders. Grant of options is at the discretion of the Board. The vesting period ranges from immediate to 21 months and is dependent on the adviser being regulated through the Group at the time of exercise. The contractual life of the options range from 18 months to 10 years and the options lapse should the adviser cease to be registered through Lighthouse. There are no performance conditions attached. | |
| The unapproved scheme for employees. The terms for this plan are identical to the approved scheme for employees; the scheme exists for those employees who are granted options in excess of the H M Revenue and Customs limits. |
| (b) | The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options during the year. |
| 2008 | 2008 | 2007 | 2007 | |
| Number | WAEP (pence) | Number | WAEP (pence) | |
| Outstanding at 1 January | 7,822,210 | 23.00 | 2,562,669 | 20.84 |
| Granted during the year | 3,511,884 | 21.50 | 5,750,835 | 24.00 |
| Forfeited during the year | (990,900) | 26.01 | (374,145) | 20.00 |
| Exercised | (102,014) | 1.00 | (17,149) | 14.00 |
| Expired during the year | - | - | (100,000) | 28.00 |
| Outstanding at 31 December | 10,241,180 | 22.57 | 7,822,210 | 23.00 |
| Exercisable 31 December | 1,027,594 | 21.06 | 1,108,853 | 21.00 |
Included within the opening balance are options over 18,825 (2007:18,825) shares that have not been recognised in accordance with IFRS 2 as the options were granted before 7 November 2002. These options have not subsequently been modified and therefore do not need to be accounted for in accordance with IFRS 2.
The weighted average share price of the options exercised in the year at the date of exercise is 23.27 pence (2007: 28.00 pence).
For the share options outstanding at 31 December 2008, the weighted average remaining contractual life is 8.5 years (2007: 9.04 years).
The weighted average fair value of options granted during the year was 21.50 pence (2007: 24.00 pence). The range of exercise prices for options outstanding at 31 December 2008 and 2007 was 1 pence - 162 pence.
| (c) | During 2006, an appointment on revocable sub-trusts of 8,125,000 shares was made from the EBT (the Lighthouse Independent Financial Advisers Limited Remuneration Trust). The charge arising under IFRS 2 was recognised in full in the year based upon the share price as at the date of appointment. |
| (d) | Expense charged to the profit and loss account. The total expense recognised for the year arising from equity compensation plans was as follows: |
| 2008 | 2007 | |
| £ | £ | |
| Fair value of options | 176,915 | 57,802 |
| 176,915 | 57,802 |
| (e) | Fair value of options granted during the year |
| The fair value of options granted during the year, estimated by using a binomial option pricing model was £0.096 (2007 £0.112). The fair value of options was estimated on the date of grant, based upon the following weighted average assumptions: |
| 2008 | 2007 | |
| Share price | 21.5p | 24.0p |
| Exercise price | 21.5p | 24.0p |
| Expected volatility | 30% | 30% |
| Historical volatility | 30% | 30% |
| Expected life | 8 years | 8 years |
| Risk free interest rate | 4.55% | 4.55% |
The expected volatility used was based upon the historical volatility of the share price over a period equivalent to the expected life of the options prior to the date of the grant.
21. Reserves
The Group has an investment in own shares amounting to £nil (2007: £nil) in respect of shares held by Atlas Trust Company (Jersey) Limited as Trustee to the EBT (the Lighthouse Independent Financial Advisers Limited Remuneration Trust). The EBT holds 8,479,646 (2007: 8,125,000) ordinary shares in the Company which represent 8,125,000 shares acquired for £nil consideration from the founding members and directors of the Company prior to its flotation in October 2000, together with the re-investment by the Trustee of dividends subsequently received by the EBT in 354,646 of the ordinary shares of the Company. The Trustee is guided by the wishes of the remuneration committee of the Board regarding eligibility for receipt of discretionary benefits under the EBT. These include exceptional performance, teamwork, loyalty, length of service and other significant contributions to the overall development and success of the Group. The market value of the shares held by the trust at 31 December 2008 was £890,363 (2007: £1,990,625). The shares were provisionally appointed on revocable sub-trusts in 2006.
On 7 September 2007 the High Court approved a petition to allow the offset of losses of the parent company against the share premium account of the company. Accordingly the share premium account was reduced by £9,900,626 to offset the accumulated losses of the company as at 31 December 2006. The share premium account was further reduced by an amount of £1,999,374 by transfer to a special reserve to be used to offset losses arising in the company in that year, excluding dividends from subsidiary companies paid in the year, of £1,909,010 with the balance of £90,364 to be held as an non distributable reserve.
22. Prior year adjustment
The prior year adjustment arose as a result of misstatements in the accounting for the trading of Carrwood Barker Holdings Limited following its acquisition by the Group in December 2005. The misstatements arose prior to and during the migration of its customer and commissions data in August 2006 onto a new commissions system operated by the Group.
The misstatements were of a one off and non recurring nature and impacted only reported results for periods prior to 1 January 2007. The net effect was to overstate the cumulative retained earnings and total equity attributable to the equity holders of the Group by £1,468,364 as at 1 January 2007 and 31 December 2007 and to overstate trade and other receivables and total assets by £161,159 and understate trade and other payables and current and total liabilities by £1,307,205 as at those dates.
There was no effect on the Group's previously reported cash flows.
23. Commitments and contingent liabilities
Capital commitments
The Group had no capital commitments as at 31 December 2008 or 31 December 2007.
24. Related party transactions
During the year ended 31 December 2008, the Group made payments of £18,340 (2007: £3,902) to Nautilus Trust (Jersey) Limited, holders of the 8,479,646 shares in the Employee Benefit Trust, in respect of their services as trustees of the Lighthouse Independent Financial Advisers Limited Remuneration Trust.
During the year, the Group paid property rents totalling £67,267 (2007: £nil) to Capitecs Limited, a company under the control of A Rosengren, who is a director of the Company, and J P Telling who are both directors of Capitecs Limited. At 31 December 2008 the amount due to Capitecs Limited was £nil (2007: £nil).
In addition during the year the Group paid property rents totalling £13,333 (2007: £Nil) in respect of a property occupied by a subsidiary company and owned by a consortium in which Capitecs Limited holds a one third interest. As already noted, Capitecs Limited is under the control of Allan Rosengren, who is a director of the company, and J P Telling who are both directors of Capitecs Limited.
Other than the above, there have been no transactions with key management personnel except as disclosed in the Directors' Remuneration Report.
25. Post balance sheet events
On 12 January 2009 the Group facilitated the transfer en bloc to LighthouseGP Limited (formerly LighthousePersonal Limited), a wholly owned subsidiary of the Company, of 45 Independent Financial Advisers formerly authorised by Godfrey Pearson Limited on both self-employed and employed terms. In return , the Group has agreed to guarantee payments to be made by Graduate Financial Services Limited, the ultimate parent company of Godfrey Pearson Limited, over a three year period in respect of a loan from Lloyds Banking Group Plc up to a maximum of £433,260, including future interest payable.