Mercia Asset Regulatory News (MERC)

21 Aug 2008 07:00



News release

21 August 2008

Merchant Securities plc

Final results for the year ended 31 March 2008

Merchant Securities plc ("the Group"), the financial services group specialising in institutional and private client stockbroking, corporate finance, corporate broking and private equity, announces its final results for the year ended 31 March 2008.

Financial and operational highlights:

Significant progress made by the Group in achieving its strategy of building a diversified financial services company;

Turnover up 30% to  £5,337,254;

Underlying operating loss before tax of £153,165 (excluding £625,318 of non recurring expenses, amortisation of intangible assets and impairment of investments held for sale);

Strengthened balance sheet, with net cash balances of £1.8 million at the balance sheet date augmented by an additional £1.5 million net of expenses raised by a share placing in June 2008;

Dom Maklerski IDM Spolka Akcyjna, ("IDMSA") a large stockbroker based in Poland, subscribed in placing and now holds 17.06% of the increased share capital;

John East & Partners Limited acquired in October 2007;

Richard Crossley, No 1 rated Extel analyst, and his team joined the Group in July 2008; and

The contracts for differences business is performing well.

John Green, Chairman, Merchant Securities plc, says:

"We expect market conditions to remain difficult, but believe that the diversity of our business activities, namely institutional and private client stockbroking including dealing in contracts for differences for clients, corporate finance and corporate broking, together with a reduced cost base, will assist the Company as we strive to deliver the best possible result for shareholders." 

For further information please contact:

Merchant Securities plc Patrick Claridge (Chief Executive)

020 7375 9010

Arden Partners plc Richard Day/Matthew Armitt	020 7398 1600
Broadgate Roland Cross/Emma Murphy	020 7726 6111

CHAIRMAN'S STATEMENT

Introduction

I am pleased to present our results for the year ended 31 March 2008, which has seen significant progress made by the Company in achieving its strategy of building a diversified financial services group. Much progress has been made in highly challenging market conditions.

The financial performance reflects the investment made in restructuring the Company which, together with market conditions, contributed to a loss before taxation of £778,000 for the year ended 31 March 2008.

Strategic Development

During the year the Company made real progress in developing its core activities and strengthening the infrastructure of the business. We have furthered our aspirations in the corporate finance arena with the acquisition of John East & Partners Limited ("JEP") in October last year. JEP, which has been established some 20 years, is a broadly based corporate finance and corporate broking business. It is a member of the London Stock Exchange, an authorised nominated adviser to companies quoted on AIM and has 40 retained corporate clients, 37 of which are quoted on AIM. It traded profitably in the financial year in the period since its acquisition. JEP's executive chairman, John East, joined the board of the Company following completion of the acquisition.

In February, Merchant Securities Group Limited ("MSGL") introduced a new, upgraded private client investment management system and settlement and clearing functions were transferred to Pershing Securities Limited, a leading international clearing house.

Since the year end our institutional offering has been strengthened with the recruitment of Richard Crossley, John Coulson and Richard Bayley. Richard Crossley has been ranked in the Thomson Extel Survey since its inception and was voted No 1 technical and strategic analyst for 2004 - 2007. John Coulson has over 30 years' experience of institutional sales in the City, with such firms as Laurence Prust & Co, James Capel and WestLBPanmure, now Panmure Gordon & Co, where he was head of sales. Richard Bayley has a Ph.D in pure mathematics from Queen Mary College, University of London and works with Richard Crossley, bringing a systematic approach to the technical analysis behind the daily publication, "Mercantalyst", an insightful and highly regarded technical review of trends in markets.

The contract for differences ("CFD") activity is a growing and successful part of MSGL's business and has been further strengthened by the recruitment of a specialist team headed by John Readings. 

In July 2008 we raised £1.58 million by way of a placing which was supported by management, Gartmore and Dom Maklerski IDM Spółka Akcyjna ("IDMSA"). IDMSA is a Polish independent, non-bank brokerage house with 18 offices throughout Poland and is a member of and listed on the Warsaw Stock Exchange with a market capitalisation of approximately £75 million. In 2007 IDMSA concluded fund raising transactions with a total value of approximately £500 million. We welcome the involvement of IDMSA, which now holds 8 million shares in the Company, equivalent to 17.1 per cent. of our share capital, and hope for a strategic and collaborative relationship.

  Operational and financial review

In a trading update issued on 1 May, we estimated the post tax loss for the year under review to be in the region of £600,000, after taking into account non-recurring items of approximately £400,000.

In the event, the loss before taxation was £778,000 including non-recurring items of £400,000. A tax credit reduced the loss after taxation to £736,000. Included in the loss for the year were non cash items of £226,000, being amortisation of the intangible asset and goodwill created following the acquisition of JEP, a revaluation of investments held for sale and the impairment of an investment written off against reserves in last years' accounts. Under IFRS, the impairment is now considered permanent and has had to be taken through the profit and loss account, although, because the loss was recognised through reserves last year, there is no impact on the net assets of the group. 

The proceeds of the placing referred to above, have increased net assets of the Group to £9.8 million and our cash balances at the end of July 2008 were £2.9 million. The Group has no debt, with the exception of very modest equipment leases.

In June 2008, Merchant Securities Group Limited ("MSGL") entered into an agreement with the Financial Services Authority ("FSA") to settle an investigation by the FSA of the firm's systems and controls for the protection of customer information. The settlement resulted in MSGL being fined £77,000, although the FSA found no evidence of any theft or compromise of customer information. We took heed of the FSA's concerns and immediately undertook a thorough review of all systems and controls for the protection of customer data to ensure that they were robust and we are confident that any shortcomings in systems and controls identified by the FSA have been fully resolved.

Board Changes

During the year under review and after the year end there have been a number of board changes. John East joined the board in October last year and Steve Whelton, our former finance director left the Company in March to be replaced by Christopher Hyde who joined the board at the end of March. Following the reorganisation referred to below, Tony Fabrizi stepped down from the board to concentrate on corporate finance. Tony was instrumental in the creation of the group and thanks are due to him for his contribution. Patrick Claridge, formerly chief operating officer replaced him as acting chief executive and the Company today announces that he has been confirmed in that position. More recently, Christopher Hyde left the Company by mutual consent and we have appointed an experienced interim group financial controller, with a view to making a permanent appointment as soon as possible.

Outlook

Whilst all activities of the Company were adversely affected by the deterioration in markets, the board believes that its strategy of developing a diversified financial services group remains the correct approach. We will seek to enhance our institutional and private client activities and maintain our involvement in the private equity arena, where we believe that a funding gap exists for unquoted companies with a value of less than £5 million.

The board recently instigated a plan to reorganise and streamline operations and reduce overheads. To this end substantial progress has been made in the first quarter of the current financial year. The CFD business continues to grow, benefiting from the current volatility in markets and is now making a positive contribution. JEP's income has diminished as the flotation market has contracted, but its general broadly based corporate finance activities and contracted retainer income, together with one large IPO, has enabled it to generate a small profit in the first quarter of the current financial year. Overall the Group as a whole has continued to trade at a loss in the current financial year. To mitigate this, costs have been taken out of the business and all costs are under detailed scrutiny. Costs have also been incurred prior to the generation of revenue by the new institutional equity team.

We expect market conditions to remain difficult, but believe that the diversity of our business activities, namely institutional and private client broking, trading CFDs and corporate finance and corporate broking, combined with a reduced cost base, will assist the Group as we strive to deliver the best possible result for shareholders.

Finally, I would like to thank our shareholders for their support and also express my thanks to all members of staff who have worked so hard in a difficult year.

John Green

Chairman

21 August 2008

  Financial statements for the year ended 31 March 2008

CONSOLIDATED INCOME STATEMENT

		Year ended 31 March 2008			Year ended 31 March 2007
	NOTES	£	£		£	£
Revenue	1		5,337,254			4,090,737
Cost of sales	1		(1,481,062	)		(352,740	)
Gross profit	1		3,856,192			3,737,997
Other income	1		43,929			9,135
General administrative expenses		4,345,996			3,471,019
Impairment of goodwill	2	-			422,041
Amortisation of intangible assets	2	60,000			-
Revaluation of investments held for sale	2,7	72,704			95,875
Impairment of available-for-sale investments	2	93,567			-
Non-recurring items and AIM admission expenses	2	399,047			385,950
			(4,971,314	)		(4,374,885	)
Operating profit / (loss)	4		(1,071,193	)		(627,753	)
Investment revenues	3		416,423			195,249
Finance costs	3		(120,380	)		(83,190	)
Loss on disposal of fixed assets			-			(11,733	)
(Loss) / Profit on disposal of available-for-sale investments	7		(3,333	)		89,418
(Loss) / Profit before taxation			(778,483	)		(438,009	)
Taxation			42,836			(76,859	)
(Loss) / Profit for the year attributable to equity holders of the Company			(735,647	)		(514,868	)
Earnings per share
Basic and diluted	6		(2.97p	)		(3.23p	)

The profit / (loss) for the year attributable to equity holders of the Company is as follows:
(Loss) / profit before tax, goodwill impairment, revaluation of investments and non-recurring items			(153,165	)		465,857
Impairment of goodwill		-			422,041
Amortisation of intangible assets		60,000			-
Revaluation of investments held for sale		72,704			95,875
Impairment of available-for-sale investments		93,567			-
Non-recurring items and AIM admission expenses		399,047			385,950
	2		(625,318	)		(903,866	)
			(778,483	)		(438,009	)
Taxation			42,836			(76,859	)
			(735,647	)		(514,868	)

No dividends were paid during the year (2007: £Nil).

  

CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSES

		Year ended 31 March 2008		Year ended 31 March 2007
	NOTES	£		£
Loss on revaluation of available-for-sale shares, options and warrants taken to equity	7	(25,191	)	(58,907	)
Deferred tax on losses on available-for-sale shares, options and warrants		8,549		17,672
Net expenses recognised directly in equity		(16,642	)	(41,235	)
Permanent diminution in value of investments		93,567		-
Released from equity on disposal of assets		-		(110,684	)
Gain/(loss) for the year		-		(514,868	)
Total recognised income and expense for the year		76,925		(666,787	)

  CONSOLIDATED BALANCE SHEET AS AT 31 MARCH 2008

				2008			2007
		NOTES		£	£		£	£
Non-current assets
Goodwill					5,127,860			2,708,015
Intangible assets					1,329,000			-
Property, plant and equipment					385,762			76,489
Available-for-sale investments		7			49,569			74,760
Trade and other receivables		8			150,000			-
					7,042,191			2,859,264
Current assets
Trade and other receivables		8		3,085,655			3,022,949
Trading investments		7		346,636			390,000
Cash and cash equivalents		9		1,793,344			2,113,638
Deferred tax asset				-			35,654
					5,225,635			5,562,241
Current liabilities
Trade and other payables		10		3,367,473			2,999,528
Current tax liabilities				45,678			113,607
					(3,413,151	)		(3,113,135	)
Net current assets					1,812,484			2,449,106
Non-current liabilities
Deferred tax liabilities					(34,579	)		(22,428	)
Total assets less liabilities					8,820,096			5,285,942
Equity
Share capital		11			3,114,727			1,942,000
Share premium account					10,340,169			7,408,351
Other reserves					(3,845,350	)		(3,845,350	)
Retained earnings					(977,537	)		(241,890	)
Revaluation reserve / (deficit)					35,690			(41,235	)
Share-based payment reserve		12			152,397			64,066
Equity attributable to equity holders of the Company					8,820,096			5,285,942

  CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH 2008

			2008		2007
	NOTES		£		£
Cash flows from operating activities
Cash generated from / (used in) operations	14		(826,384	)	1,103,544
Interest received	3		416,423		195,249
Interest paid	3		(120,380	)	(83,190	)
Tax paid			(101,238	)	(9,993	)
Net cash generated from / (used in) operating activities			(631,579	)	1,205,610
Cash flows from investing activities
Acquisition of subsidiary business	13		(1,064,080	)	(3,534,858	)
Reverse acquisition of MSPLC			-		43,486
Purchase of property, plant and equipment			(139,180	)	(42,877	)
Proceeds from / (cost of) disposal of tangible fixed assets			-		(96	)
Proceeds from disposal of available-for-sale investments			10,000		273,918
Net cash generated from / (used in) investing activities			(1,193,260	)	(3,260,427	)
Cash flows from financing activities
Proceeds from issue of shares			1,504,545		4,055,000
Net cash generated from / (used in) financing activities			1,504,545		4,055,000
Net increase / (decrease) in cash and cash equivalents			(320,294	)	2,000,183
Cash and cash equivalents at beginning of year			2,113,638		113,455
Cash and cash equivalents at end of year			1,793,344		2,113,638

 

	Private client and institutional broking £		Corporate finance and private equity £		Unallocated       £		TOTAL 2008     £
Revenue	3,027,287		2,309,967		-		5,337,254
Cost of sales	(890,393	)	(590,669	)	-		(1,481,062	)
Gross profit	2,136,894		1,719,298		-		3,856,192
Other income	20,000		23,929		-		43,929
	2,156,894		1,743,227		-		3,900,121
Administrative expenses	(2,116,181	)	(1,367,463	)	(862,352	)	(4,345,996	)
Impairment of goodwill	-		(60,000	)	-		(60,000	)
Revaluation of investments held for sale	-		(72,704	)	-		(72,704	)
Impairment of available-for-sale investments	-		-		(93,567	)	(93,567	)
Non-recurring costs	-		-		(399,047	)	(399,047	)
Operating (loss) / profit	40,713		243,060		(1,354,966	)	(1,071,193	)
Investment revenues	-		-		416,423		416,423
Finance costs	-		-		(120,380	)	(120,380	)
Loss on disposal of fixed assets	-		-		-		-
Loss on disposal of available-for-sale investments	-		-		(3,333	)	(3,333	)
(Loss) / profit before taxation	40,713		243,060		(1,062,256	)	(778,483	)
Taxation	-		-		42,836		42,836
(Loss) / profit after taxation	40,713		243,060		(1,019,420	)	(735,647	)
Other information
Capital additions (including those resulting from acquisition)	134,256		261,848		4,924		401,028
Share based payments	-		-		117,397		117,397
Depreciation	11,842		37,201		40,580		89,623
Balance sheet
Assets	2,949,891		3,687,213		5,475,755		12,112,859
Liabilities	2,187,302		556,378		707,203		3,450,883

	Private client and institutional broking £		Corporate finance and private equity £		Unallocated       £		TOTAL 2007     £
Revenue	2,577,231		1,513,506		-		4,090,737
Cost of sales	(352,740	)	-		-		(352,740	)
Gross profit	2,224,491		1,513,506		-		3,737,997
Other income	9,135		-		-		9,135
Intra-departmental adjustments	674,229		(674,229	)	-		-
	2,907,855		839,277		-		3,747,132
Administrative expenses	(2,027,365	)	(514,606	)	(929,048	)	(3,471,019	)
Impairment of goodwill	-		-		(422,041	)	(422,041	)
Revaluation of investments held for sale	-		-		(95,875	)	(95,875	)
AIM admission expenses	-		-		(225,950	)	(225,950	)
Other non-recurring costs	(160,000	)	-		-		(160,000	)
Operating (loss) / profit	720,490		324,671		(1,672,914	)	(627,753	)
Investment revenues	-		-		195,249		195,249
Finance costs	-		-		(83,190	)	(83,190	)
Loss on disposal of fixed assets	-		-		(11,733	)	(11,733	)
Profit on disposal of available-for-sale investments	-		-		89,418		89,418
(Loss) / profit before taxation	720,490		324,671		(1,483,170	)	(438,009	)
Taxation	-		-		(76,859	)	(76,859	)
(Loss) / profit after taxation	720,490		324,671		(1,560,029	)	(514,868	)
Other information
Capital additions (including those resulting from acquisition)	26,588		2,116		331,811		360,515
Share based payments	-		-		35,000		35,000
Depreciation	8,863		960		31,850		41,673
Balance sheet
Assets	4,593,407		154,179		3,673,919		8,421,505
Liabilities	(2,585,621	)	(154,575	)	(395,367	)	(3,135,563	)

	Notes	2008 £		2007 £
Write-off of goodwill		-		422,041
Amortisation of intangibles		60,000		-
Revaluation of investments held for sale		72,704		95,875
FSA breach and one-off professional costs		253,000		-
Severance payments		95,233		-
Recruitment costs		50,814		-
AIM admission expenses		-		225,950
Fund closure expenses		-		160,000
Impairment of available-for-sale investments		93,567		-
		625,318		903,866

	2008 £		2007 £
Interest receivable in respect of client bank accounts	332,858		132,319
Interest receivable in respect of Group company bank accounts	52,777		55,632
Other interest receivable	30,788		7,298
	416,423		195,249

	2008 £		2007 £
Interest payable to clients	120,067		60,705
Interest on bank overdrafts	3		20,862
Other interest	310		1,623
	120,380		83,190

	2008 £		2007 £
Auditors’ remuneration – audit services	81,500		34,848
Auditors’ remuneration – tax advice	9,185		12,530
Auditors’ remuneration – Other	21,502		2,581
Operating leases – land and buildings	165,208		89,226
Operating leases – machinery	19,718		19,696
Depreciation of property, plant and equipment	89,164		41,673
Impairment of goodwill	-		422,041
Amortisation of intangible assets	60,000		-
Share-based payments	117,397		35,000

Directors’ remuneration	2008 £		2007 £
Aggregate emoluments (excluding pension contributions)	599,844		820,994
Highest paid director (included within the above)	191,600		236,245

Earnings for the purpose of basic and diluted earnings per share		2008 £					2007 £
Net (loss) / profit attributable to equity holders of MSPLC			(735,647	)				(514,868			)
Amortisation of intangible assets / Impairment of goodwill	60,000				422,041
Revaluation of investments held-for-sale	72,704				95,875
Impairment of available-for-sale investments	93,567				-
Non-recurring costs	399,047				385,950
Expenses added back			625,318					903,866
			(110,329	)				388,998
Notional tax relief of 26.6% in respect of fund closure expenses			-					42,560
Notional net profit after adding back above expenses			(110,329	)				431,558
Number of shares
Weighted average number of ordinary shares for the purpose of calculating basic earnings per share			24,757,165					15,932,619
Weighted average number of ordinary shares for the purpose of calculating diluted earnings per share			29,230,411					18,056,542
Earnings per share (EPS)
Basic and diluted EPS based on profit/(loss) attributable to equity holders			(2.97p	)				(3.23p			)
Basic EPS after adding back above expenses			(0.45p	)				2.71p
Diluted EPS after adding back above expenses			(0.38p	)				2.39p

Non-current investments	2008 £		2007 £
Investments available for sale at start of year at cost	133,667		184,500
IFRS revaluation adjustment brought forward	(58,907	))	158,120
Investments available for sale at start of year at fair value	74,760		342,620
Disposal of investments	-		(342,620	))
Investments acquired at fair value on acquisition of subsidiary	-		133,667
Revaluation at year end	(25,191	))	(58,907	))
At 31 March 2008	49,569		74,760

Current investments	2008 £		2007 £
Investments held for sale at start of year at fair value	390,000		-
Disposal of investments	(13,333	))	-
Investments acquired at fair value on acquisition of subsidiary	42,673		485,875
Revaluation of investments at year end	(72,704	))	(95,875	))
Fair value of investments held for sale at end of year	346,636		390,000

Amounts falling due within one year	2008 £		2007 £
Receivable from clients	1,806,819		1,987,195
Less provision for impairment of receivables from clients	(20,000	))	(6,638)
Receivable from counterparties	521,951		604,851
Less provision for impairment of receivables from counterparties	(121,872	))	-
Other receivables	24,058		180,228
Prepayments and accrued income	874,699		257,313
	3,085,655		3,022,949

Amounts falling due after more than one year	2008 £		2007 £
Other receivables	150,000		-
	150,000		-

	2008 £		2007 £
Amounts owed to clients and other counterparties	2,142,289		2,315,545
Other taxes and social security	210,385		65,407
Accruals and deferred income	880,085		518,317
Other payables	134,714		100,259
	3,367,473		2,999,528

Dates of grant	24 August 2007 – 25 March 2008	30 June 2006 – 30 October 2006
Exercisable two years following date of grant	24 August 2009 – 24 March 2018	30 June 2008 – 29 October 2016
Number of shares	2,142,719	2,246,160
Exercise price per share	25.00p-36.50p	29.94p
Expected fair value per share	7.51p-8.41p	0.5p-23.56p
The fair value of the options has been calculated using the Black-Scholes-Merton model with the following inputs. Expected volatility is based on the historical share price volatility.
Share price at date of grant	27.39p-36.50p	14.97p-50.00p
Expected life	2.5 years	2.18 – 2.5 years
Expected volatility	29.9%	29.9%
Risk free rate	4.08% - 4.57%	4.68%
Expected dividend yield	-	-

	2008		2007
EMI Share option scheme	Number of shares	Weighted average exercise price	Number of shares	Weighted average exercise price
1 April	2,246,160	29.94p	-	-
Granted	2,142,719	32.79p	2,246,160	29.94p
Exercised	-		-
Forfeited	(285,406)	31.89p	-
31 March	4,103,473	31.33p	2,246,160	29.94p
Exercisable	-		-

Dates of grant	24 August 2007 – 9 October 2007	30 June 2006
Exercisable two years following date of grant	24 August 2009 – 8 October 2017	30 June 2008 – 29 June 2016
Number of shares	688,276	668,063
Exercise price per share	35.00p-36.50p	29.94p
Expected fair value per share	7.51p-8.41p	0.5p

The fair value of the options has been calculated using the Black-Scholes-Merton model with the following inputs. Expected volatility is based on the historical share price volatility.
Share price at date of grant	27.39p-36.50p	14.97p
Expected life	2.5 years	2.5 years
Expected volatility	29.9%	29.9%
Risk free rate	4.08% - 4.57%	4.68%
Expected dividend yield	-	-

	2008		2007
EXSOS Share option scheme	Number of shares	Weighted average exercise price	Number of shares	Weighted average exercise price
1 April	668,063	29.94p	-	-
Granted	688,276	36.13p	668,063	29.94p
Exercised	-
Forfeited	-
31 March	1,356,339	33.08p	668,063	29.94p
Exercisable	-		-

Net assets acquired	Book value £		Adjustment £		Fair value £
Property, plant and equipment	264,605		-		264,605
Trade and other receivables	153,594		-		153,594
Trading investments	42,673		-		42,673
Cash and cash equivalents	1,700,000		-		1,700,000
Trade and other payables	(494,689	)	-		(494,689	)
Taxation liability	(91,748	)	-		(91,748	)
Deferred tax liability	(19,200	)	-		(19,200	)
Goodwill	-		2,419,845		2,419,845
Trademarks	-		523,000		523,000
Customer relationships	-		828,000		828,000
Non-compete agreement	-		38,000		38,000
	1,555,235		3,808,845		5,364,080
Consideration paid:
- cash					2,670,182
- shares issued (7,428,571 ordinary shares of 10 pence)					2,600,000
Costs of acquisition					93,898
					5,364,080

Cash consideration paid	(2,670,182	)
Cash and cash equivalents acquired	1,700,000
	(970,182	)

Trademarks	523,000
Customer relationships	828,000
Non-compete agreement	38,000
	1,389,000

	Year ended		Year ended
	31 March 2008 £		31 March 2007 £
Operating (loss) / profit for the year	(1,071,193	)	(627,753	)
Adjustments for:
Depreciation	89,623		41,673
Impairment of goodwill	-		422,041
Amortisation of intangible assets	60,000		-
Revaluation of investments held for sale	72,704		95,875
Impairment of available for sale investments	93,567		-
Share based payment expense	117,397		35,000
Loss on sale of investments	3,333		-
Changes in working capital:
Increase in debtors	(59,112	)	(461,303	)
(Decrease) / increase in creditors	(132,703	)	1,598,011
Net cash (outflow) / inflow from operating activities	(826,384	)	1,103,544

Shareholder	Number of shares	Percentage held
Dom Maklerski IDM Spolka Akcyjna “IDMSA”	8,000,000	17.06%
Gartmore Investment Limited	7,499,505	15.99%
Anthony Fabrizi	5,458,001	11.64%
John East	4,495,000	9.58%
David Worlidge	2,562,857	5.46%
Patrick Claridge	2,348,028	5.01%

 

ENDFR FKKKNKBKBPFB