MIL.L Regulatory News (MIL)

6 Sep 2005 07:05

Millfield Group PLC06 September 2005 Millfield Group plc Results for the year ended 31 March 2005 Millfield Group plc ("Millfield" or the "company" or the "group"), a leadingindependent financial services advisory group, today announces its auditedresults for the year ended 31 March 2005. The successful integration of the Inter-Alliance Group Plc ("Inter-Alliance")has created the UK's largest branded independent financial advisory distributiongroup. The merger necessitated large-scale reconstruction of the business overthe past year and this will create significant cost savings going forward. Withimproved stock market conditions, coupled with a favourable interest rateenvironment, the group is confident that it will reap the rewards of thatreconstruction and is on target to achieve operating profitability from thefourth quarter 2005. Highlights • Turnover up 103% to £85million (2004: £41.9million) • On a proforma basis, including twelve month's results for Inter-Alliance, the group generated combined turnover of £123 million • Gross profit up 76% to £26 million (2004: £14.8 million) • Operating loss before goodwill amortisation, impairment losses and exceptional items of £8.9 million (2004: £9.3 million loss) • Loss before amortisation and tax of £18.1 million (2004: £10.8 million loss) • On target to achieve operating profitability from the fourth quarter 2005 onwards • Lifetime's sale to Norwich Union expected to result in an exceptional gain of at least £4.9 million • Three major business initiatives launched • 26% reduction in the run rate for overhead costs from £49 million at time of merger to £36 million now • Further annualised savings of £4 million expected in fourth quarter of 2005 Commenting on the results, Paul Tebbutt, Chief Executive of Millfield, said: "Our view has always been that effective implementation of the merged businesseswill deliver enhanced profitability and growth. Our grounds for optimism arebased on the fact that we can now focus on working more effectively with ouradvisers and Principals of our advisory firms to increase turnover, margin,profitability, recruitment and retention in the knowledge that the long termsavings market is recovering after several difficult years. "Improved stock market conditions, the reduction of interest rates and thegrowth in pensions business in the third and fourth quarters, ahead of keygovernment reforms next year, will boost distribution businesses that have scalein terms of advisers and clients, both of which we now have. Therefore, we areon schedule to achieve operating profitability from the fourth quarter 2005onwards." Enquiries Millfield Group plc Paul Tebbutt, Chief Executive - 020 8604 2607 Arthur Milton, Interim Finance Director - 020 8604 2623 Llewellyn-Slade PR Limited Mark Llewellyn-Slade - 01444 242792 Sabine Raabe - 07050-123095 Notes to editors • Millfield Group plc was floated on the Alternative Investment Market of the London Stock Exchange in March 2001 • Millfield Group plc is a national independent financial advisory group offering truly independent financial advice to both businesses and individuals, primarily in the pensions, life assurance, investment and mortgage sectors. It has two authorised companies in the UK, Millfield Partnership Limited and Sage Financial Services. • Further information available on the Millfield website: www.millfield-partnership.co.uk Chairman's Statement Introduction This year has seen the merger of Millfield and Inter-Alliance Group Plc ("Inter-Alliance") which has transformed the scale of these two businesses tocreate a financial services distributor with critical mass. Activity around themerger and the integration of the businesses has dominated the year. The Millfield Inter-Alliance Merger We announced on 6 August 2004 that the Boards of Millfield and Inter-Alliancehad reached agreement on the terms of the proposed merger of the two groups andthe transaction completed on 1 October 2004. The merger was structured as theacquisition of the entire share capital of Inter-Alliance by Millfield in an allshare offer, which resulted in the shareholdings in the new group being owned84% by the original Millfield shareholders and 16% by the Inter-Allianceshareholders. Working capital to support the new group was provided by way of £15 million ofloans from five leading financial institutions, namely AXA Sun Life Plc, FriendsProvident Life and Pensions Limited, Prudential UK Services Limited, ScottishWidows plc and Skandia Life Assurance (Holdings) Limited. The UK financial services sector continues to face major demands for change.The drivers of this change are economic, political and regulatory in origin.The implementation in December 2001 of major parts of the Financial Services andMarkets Act 2000, followed by the issue of CP121 "Reforming Polarisation"consultation paper in January 2002 and in 2004 by the issue of CP 04/03 "Reforming Polarisation: a menu for being open with consumers" placed a greaterregulatory burden on market participants. In November 2004 the FSA publishedthe rules for the new depolarised and multi-tie environment which we implementedon 1 June 2005 and regulation of General Insurance also came within the ambit ofthe FSA with effect from 14 January 2005. This continuous regulatory change inthe sector has encouraged a trend towards consolidation. Millfield intends to remain as a regulated business and is now distinctivelypositioned with a range of regulated distribution channels from which advisersand Principals of firms can choose. These different channels are supported by agroup service functions which provides cost effective support services such asIT, compliance, finance and a framework for marketing and networking within thegroup. The combination of the two businesses has created a market leader which hascritical mass. Results The results for the year fall into two halves, pre and post merger. • First half results continued the trend of recent years with turnover up by 48% to £27.3m (£18.4m in the comparative period), through organic growth and margins; costs also held flat, resulting overall in sharply reduced losses. • In the second half turnover of the combined businesses was maintained at the same level as in the first half while activity was focused on integration. A reduced gross margin of 27.6% compared to the first half reflects the change to a lower margin mix in the combined business. • Exceptional costs of £8.0m were incurred in integrating the new group and reducing the cost base for the future. The overall result was an operating loss before goodwill amortisation andexceptional items of £8.9m. Trading Update Turnover has grown modestly in the first four months of this year, reflectingthe reduced level of distraction with the completion of most of the actions inthe integration programme. Margins were at around 27%. Overhead costs havebeen reduced by 26% and now run at a rate of £3 million per month. New Share Issue On 17 May 2004, we successfully completed a placing to raise £3.84 million,before expenses of £0.22 million. The primary purpose of the issue was toprovide additional working capital. Lifetime Group Limited During the year, Lifetime continued its work on developing the infrastructureand systems required to deliver its online personal portfolio service. Theservice was launched in April 2005. On 8 October 2004 Norwich Union agreed to make a further investment of £13.0million into Lifetime, taking their shareholding from 49.9% to 70%. Under theterms of the subscription £824,400, before expenses of £80,000, was paid toMillfield. This transaction resulted in Millfield's fixed asset investmentbeing below 25% of Lifetime's capital and the business was subsequentlyaccounted for as an investment rather than as a joint venture. On 5 August 2005 the group's shareholding in Lifetime was sold to Norwich Unionfor £9m of initial consideration, with an additional contingent deferredconsideration of up to £6m (see note 32 to the financial statements), a portionof which will be ceded to advisers. The sale will allow Norwich Union tocontinue to invest in and develop the business whilst allowing Millfield toretain a participation in the upside as the business grows. The sale willresult in an exceptional gain of at least £4.9m for Millfield and will enhancethe capital adequacy position of the group. Board The Board of the company consists of myself as chairman, Paul Tebbutt, BryanBeeston, Mike Duncan and Arthur Milton as executive directors and Mike Walmsley,Tom Morton and Peter Connell as non-executive directors. Following the merger with Inter-Alliance, Keith Carby and Michael Burne joinedthe Board and then on 10 November 2004 ceased to be directors. Following the merger Roger Brosch has resigned from the Board, as has DarrellSmith although he remains as an important executive within the Group. Since theyear end David Stockdale, the IFA representative director, has resigned from theBoard to concentrate on his primary role as a Millfield IFA. He has beenreplaced as IFA representative director by Peter Connell. Also after the yearend, Harry Roome has resigned as Group Finance Director and been replaced inthat role on an interim basis by Arthur Milton. I should like to thank RogerBrosch, Darrell Smith, David Stockdale and Harry Roome for the significantcontribution which they have made at board level to the development of thegroup. The Group Executive Board, the main operational board for the group, is now madeup of Paul Tebbutt, Chief Executive, Bryan Beeston, Group Sales Director, MikeDuncan, Operations Director, Arthur Milton, Interim Finance Director, FrankGorrie, Managing Director Sage Network, Darrell Smith, Millfield PartnershipSales Director and Neil Stevens, Marketing Director. Outlook Although the group has made losses for the financial year, and continues to makelosses at a reduced level to date, a number of the integration initiatives havenow been completed and further cost savings are expected to achieve operatingprofitability in the fourth quarter 2005; accordingly, the directors believe thebusiness is a going concern. We have laid the foundations for the new group to move ahead successfully. Wehave implemented a structure which allows us to focus on the growth of a coregroup of businesses, each with a single operational base. The group is now verydistinctively positioned in the IFA and advisory market which is otherwisepredominantly served by non-regulated service providers and networks. As aresult we have a strong recruitment pipeline and have seen growth in turnoverrecommence. The group's gross margin for the current year will be dependent on the mix ofbusiness between the different channels. Current margins are around 27% andwe anticipate progressive growth through the year, as income from complementarybusiness initiatives develops, with the aim of achieving margin levels of 30%. As a result of the integration and restructuring of the group, we have achieveda 26% reduction in the run rate for overhead costs from £49 million at the timeof the merger to £36 million now. We consider that this is still too high andexpect to achieve annualised savings of a further £4 million commencing in thefourth quarter of 2005. We now have a group which has the critical mass to be a major force in a rapidlychanging and consolidating distribution marketplace. We have made excellentprogress towards building the successful and profitable business that weenvisaged at the time of the merger. Conclusion Millfield has been built on the strength of its advisers and staff. Inevitablythe merger of the two groups caused considerable strains and as we move forwardI would particularly like to thank everyone in the group for their efforts overthe last year under particularly trying circumstances. Richard Mansell-Jones Non-Executive Chairman 5 September 2005 Chief Executive's Review Results I set out below the results for the group for the year ended 31 March 2005: Six months to Six months to Year ended 30 September 2004 31 March 2005 31 March 2005 £m £m £mTurnover 27.3 57.7 85.0Cost of sales (17.2) (41.8) (59.0)Gross profit 10.1 15.9 26.0Administrative expenses before (12.4) (22.5) (34.9)goodwill and exceptional itemsOperating loss before goodwill (2.3) (6.6) (8.9)amortisation and exceptional items At 31 March 2005, companies within the group held £7.8m of cash balances. The above results for the six months to 31 March 2005 include Inter-Allianceresults post-merger. On a proforma basis, including twelve month's results forInter-Alliance, the group generated combined turnover of £123m. Our main focus in the six months to 31 March 2005 was to complete the corporaterestructure and integration programme following the merger with Inter-Alliancein October 2004. As part of this we reduced the cost base of the group from £49mto £36m. We achieved this within 6 months, however not without impact on thelevel of exceptional items which came in at £8.0m. These comprised propertyclosures and onerous lease charges, £4.9m, redundancy and legal costs £1.9m,integration corporate restructuring costs £350k and fixed asset write-offs of£760k. Our integration programme is now substantially complete but has been moretime-consuming and costly than originally expected. We are implementing furtherannualised cost savings of £4m between September 2005 and January 2006. Inconsequence the Board expects the business to achieve operating profitability inthe fourth quarter 2005 onwards with an annualised cost base of £32m. The group now has significantly greater scale with annualised revenues of £123mand is now much better positioned to capture opportunities from the rapidlyevolving marketplace. Our view has always been that effective implementation of the merged businesseswill deliver enhanced profitability and growth. The merger created the UK'slargest branded independent financial advisory distribution group. There willalways be a premium for face-to-face advice and ongoing services; our specialistadvisers have demonstrated substantial increases in their fee and commissionincome. The UK market is coming to terms with the fact that high qualityfinancial advice has to be paid for either by way of fees or a combination offees and commissions. Our grounds for optimism are based on the fact that we can now focus on workingmore effectively with our advisers and Principals of advisory firms to increaseturnover, margin, profitability, recruitment and retention in the knowledge thatthe long term savings market is recovering after several difficult years.Improved stock market conditions, the reduction in interest rates and the growthin pensions business in the third and fourth quarters ahead of key governmentreforms next year will boost distributor businesses that have scale in terms ofadvisers and clients, both of which we now have. Operating Companies Millfield Partnership - high quality professional IFAs / advisers with strongbrand image which is distinctive, relevant and consistent. This is Millfield's National branch based business where the advisers arereferred to as partners. Our commitment to independent advice is paramount tothe advisers and their client proposition; we are focusing on making it easierfor advisers and their clients to do business with us in what continues to be ahighly regulated marketplace. There were 708 advisers at 31 March 2005 (2004 inMillfield and Inter-Alliance - 942) operating from 30 company-let offices with asmall number choosing to operate remotely from home offices. On a proformabasis, turnover for the combined group in the year was £61.5 million, givingproductivity per adviser of £71,000. Millfield Enterprise - a group of entrepreneurial firms building theirbusinesses within the framework of Millfield Millfield Enterprise incorporates the firms within Millfield AssociatePartnership ("MAP") and those previously in Inter-Alliance Group Practices. Thefirms within Millfield Enterprise provide their own premises and localfacilities whilst receiving all of the Millfield central services. There were81 firms (22 MAP and 59 others) with 551 advisers (238 MAP and 313 others) at 31March 2005 (2004 in Millfield and Inter-Alliance - 466). On a proforma basis,turnover for the combined group in the year was £31.5 million, givingproductivity per adviser of £60,000. Millfield owns 30% of one of the MAP firmsand 25% of four others; there were previously stepped acquisition agreements inplace for MAP firms which are currently being renegotiated and Millfield doesnot expect to own more than 49% of any of these firms. Sage Financial Services - a premium network. Sage provides core services to its member firms encompassing compliance,training & competence, commission processing and professional indemnityinsurance. There were 262 firms with 377 advisers at 31 March 2005 (2004 inInter-Alliance - 168 firms with 338 advisers). On a proforma basis, turnoverfor the combined group in the year was £15.3 million and productivity peradviser was approximately £47,000. RST Group - an Accounting business specialising in the small business market RST comprises a firm of accountants based in the north of England and Scotlandand a financial services firm providing services to the client base. There are18 accounting professionals and 10 financial advisers. During the year thebusiness has been through a period of consolidation and there are now 10 officesand 102 staff (2004 - 14 offices and 113 staff). Turnover in the year was £4.8million (2004 - £4.3 million) and resulted in a loss before goodwillamortisation and interest of £0.2 million (2004 - £0.7 million). They arecurrently on plan and making a small operating profit. Inter-Alliance International - a freestanding offshore financial advisorybusiness with headquarters in Cyprus The international business operates in 20 countries and has 111 advisers (2004in Inter-Alliance - 20 countries and 124 advisers) in the Middle East, the FarEast and Africa, predominantly offering services to expatriates. On a proformabasis, turnover for the combined group in the year was £9.1 million and resultedin profits before interest and goodwill amortisation of £0.3 million. Marketing / coaching One of the key features that has attracted so many advisers to Millfield is theappeal of working in an entrepreneurial and sharing culture, which focuses onteamwork, networking, innovation, a positive approach and a "can do" attitude.People seldom improve without a model so we are taking the attributes of our topachievers and specialists in order to develop other advisers to enhance theirbusiness performance and client services going forward. Other specialist areas include: • Millfield Employer Partnership. Our positioning as a national IFA has enabled us to develop a structure for the employee benefits market which takes the traditional support for the employer and adds individual advice for each employee; • Millfield Business Solutions provides a range of services to the SME market; • Millfield Private Client Services specialises in the complex needs of High Net Worth individuals; • Millfield Care Partnership is now a leader in providing advice and services to the long-term elderly care market; and • our professional connections programme develops business with other professional firms, particularly solicitors, accountants and estate agents. Specialist training, advanced qualifications and knowledge within niche marketsegments is provided through Millfield Academy which is supported by leadinginsurance groups, fund managers and specialist firms. Since the year end we have launched three major business initiatives: 1. Multi-tie. Depolarisation was implemented on 1 June 2005 and at the same time we launched our multi-tie division, Millfield Alliance. This allows advisers to offer over 100 products from our six multi-tie partners (Axa, Friends Provident, Norwich Union, Prudential, Scottish Widows and Skandia) and to operate over 'whole of market' to facilitate the servicing of existing client policies. 2. Mortgages. On 12 May 2005 we launched phase 1 of the Millfield Mortgage Solutions Club, providing specialist support to advisers and their clients in this complex market which is continuously evolving with new product offerings. 3. Lifetime. Lifetime was set up in June 2002 to provide a multi-asset class distribution and administration Wrap Account platform for IFA's which includes the transmission and settlement of orders on behalf of clients of IFAs. A "Wrap Account" is an Internet based investment service which enables advisers and their clients to view all their financial assets on one platform. The business was launched with a pilot group of Millfield advisers on 25 April 2005 and is now being progressively rolled out throughout the group. Integration of the Merged Group Since the merger, we have achieved our key objective of undertaking all of themain elements of the integration of the two businesses. The group structure hasnow been considerably simplified and we have successfully exited non-corebusinesses, details of which are set out below. As a result, the group is nowpositioned to focus on the growth and development of its main trading activity. The main areas involved in the integration and restructuring of the group havebeen: Corporate Structure and Branding - at 31 March 2005, the businesses ofInter-Alliance Group Plc and Inter-Alliance (Group Practices) Limited weretransferred to Millfield Partnership Limited. The UK National advisory businessnow trades under the Millfield brand and the Inter-Alliance brand is only usedfor the group's International business. Chief Executive's Review (continued) Integration of the Merged Group (continued) Training - we have integrated the internal training arrangements for the groupinto Millfield Academy, a non-profit making company funded by the productproviders. Operations - the operations of the businesses have been merged. The mainchanges were: • Premises. A rationalisation plan is being implemented to reduce group properties from 46 at the merger to 14 strategic locations and 7 satellites. 13 properties have already been closed, including the Inter-Alliance head office buildings, and the balance will be closed by 31 December 2005. Our Hull operations centre has moved to new premises. • Staffing. Staff numbers in the core business engaged in overhead activities have been reduced by 29% from 546 at the time of the merger to 389 at 31 August 2005. • Systems. Millfield Partnership has been migrated onto the Atlas system. We have transferred to a new purpose built, hosted IT operations centre and switched to Telstra, the AAA rated carrier, as a single telecoms supplier. • Business Processes. A single set of processes has been implemented for each distribution channel. • Purchasing. A review has taken place of the group's main suppliers. Commissions - Common fee and commission terms were implemented across the groupwith effect from 1 April 2005. Business Closures / Disposals In order to focus on the opportunities in the core business and to contain costsa number of non-core businesses are being closed or divested. Millfield Moncur Jackson Limited - this company was closed on 10 August 2004 andits business transferred to a new Millfield Associate Partnership firm. Simply Millfield - the operations of this company were transferred fromManchester to our Hull business centre in May 2004 and the business transferredinto Millfield Partnership from 31 March 2005. Product Innovations Limited - this firm was sold to its management on 14 January2005. Inter-Alliance (Mortgages) Limited - this company was sold to its management on9 February 2005 and has become a member of the Sage network. Intelliflo - the external software business of Intelliflo was sold to itsmanagement on 17 December 2004. The company has been renamed Millfield AtlasPlc and it retains ownership of the Atlas source code. Trinon Limited - this non-regulated network which had 86 advisers ceased tradingfollowing regulatory changes. The majority of these advisers and relatedbusiness now fall under Sage Financial Services Limited. Legacy Protect Limited - this company's business was no longer viable followingregulatory changes and it ceased taking on new business from 14 July 2005 andits remaining advisers transferred to Millfield Partnership, resulting in a netreduction in adviser numbers in the group of 32. Millfield Packaging 4 Mortgages Limited - this company closed to new business on16 August 2005 following the group's decision to fully outsource mortgagepackaging. Future Distribution Landscape In my opinion the current regulatory and policy initiatives will do little tochange the fundamentals of the industry. The existing IFA market will remainlargely untouched as it focuses on specialist advice, fees and higher net worthclients, parts of the IFA industry serving the mid market will continue toconvert to multi-tie status as this facilitates more streamlined processing andservicing. Product providers have taken direct equity stakes in excess of 10% in IFAcompanies and networks, this follows depolarisation and allows verticalintegration as providers have been seeking to capitalise distributors. Overallproduct providers naturally want to focus on larger businesses so scaling up hasimportant capital benefits. This trend will continue throughout 2005/2006. The balance of power between manufacturers and distributors is shifting. Theadvent of Wrap accounts will accelerate this and it will present IFAs with theability to transform their businesses through valuing their client assets underadvice and building recurring fee income. The main drivers of profitability are adviser numbers, productivity, grossmargin and expenses. We will reduce administration expenses such that improvingrevenues and operational performance will increase profitability over the next 2years. I believe that some of the above factors combine to present a once in ageneration opportunity for the group. Millfield can be "the sector transformer"creating new kinds of value in the marketplace through treating its advisersfairly and advisers treating their clients fairly. Paul Tebbutt Chief Executive 5 September 2005 Consolidated Profit & Loss Account for the year ended 31 March 2005 Existing Total Total Note operations Acquisitions 2005 2004 £'000 £'000 £'000 £'000 TURNOVER 1, 2 ,3 51,929 33,027 84,956 41,899 Cost of sales (33,922) (25,069) (58,991) (27,057)Gross profit 18,007 7,958 25,965 14,842 Operating loss before goodwill amortisation, impairmentlosses and exceptional items (5,821) (3,044) (8,865) (9,327) Impairment losses - - - (2,166)Amortisation of goodwill (1,542) (373) (1,915) (1,388)Exceptional items 5 (4,026) (3,944) (7,970) - Administrative expenses (29,396) (15,319) (44,715) (27,723) OPERATING LOSS 3, 4 (11,389) (7,361) (18,750) (12,881) Share of operating loss in: Joint venture (1,444) - (1,444) (1,517) Associate (105) - (105) (53)Profit on disposal of subsidiaries 19 - 19 -Profit on disposal of joint venture interest 12 824 - 824 -Interest receivable and similar income: Group 208 120 328 198 Joint venture 20 - 20 39Interest payable and similar charges: Group (924) (18) (942) (153) Joint venture (11) - (11) -LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (12,802) (7,259) (20,061) (14,367)Tax on loss on ordinary activities 8 8 (1) 7 (27)LOSS ON ORDINARY ACTIVITIES AFTER TAXATION (12,794) (7,260) (20,054) (14,394)Equity minority interests 399 (11) 388 324 RETAINED LOSS FOR THE YEAR 21,22 (12,395) (7,271) (19,666) (14,070) Basic and diluted loss per share 9 ( 18.4p) (16.7p) CONTINUING OPERATIONS All of the group's activities of significance are continuing. CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 2005 2004 £'000 £'000Loss attributable to members of the company (19,666) (14,070)Surplus arising on issue of shares in joint venture 1,713 2,227(note 12)Total recognised gains and losses relating to the year (17,953) (11,843) Consolidated Balance Sheet 31 March 2005 Restated 2005 2004 Note £'000 £'000 £'000 £'000FIXED ASSETS Goodwill 10 28,665 14,977Tangible assets 11 3,001 4,098Investments 12 3,980 3,384 35,646 22,459CURRENT ASSETS Stocks 15 5 6Debtors 16 21,944 12,894Investments 17 251 251Cash at bank and in hand 7,773 4,515 29,973 17,666 CREDITORS: amounts falling due within one year 18 (21,804) (10,686) NET CURRENT ASSETS 8,169 6,980 TOTAL ASSETS LESS CURRENT LIABILITIES 43,815 29,439 CREDITORS: amounts falling due after more than one year 19 (14,731) (2,161) 29,084 27,278PROVISION FOR LIABILITIES AND CHARGES 20 (12,430) (4,336) MINORITY INTERESTS Equity minority interests 32 280 NET ASSETS 16,686 23,222 CAPITAL AND RESERVES Called up share capital 21 207 160Deferred consideration 21 1,751 1,309Share premium account 21 48,482 44,876Merger reserve 21 19,031 11,709Capital reserve 21 3,940 2,227Profit and loss account 21 (56,725) (37,059) EQUITY SHAREHOLDERS' FUNDS 21,22 16,686 23,222 Company Balance Sheet 31 March 2005 2005 2004 Note £'000 £'000 £'000 £'000FIXED ASSETS Goodwill 10 43 246Investments 12 56,812 64,522 56,855 64,768 CURRENT ASSETS Debtors 16 20,441 8,409Cash at bank and in hand 50 1,457 20,491 9,866 CREDITORS: amounts falling due within one year 18 (27,216) (20,454) NET CURRENT LIABILITIES (6,725) (10,588) TOTAL ASSETS LESS CURRENT LIABILITIES 50,130 54,180 CREDITORS: amounts falling due after more thanone year 19 (11,151) (1,340) NET ASSETS 38,979 52,840 CAPITAL AND RESERVES Called up share capital 21 207 160Deferred consideration 21 1,694 1,309Share premium account 21 48,482 44,876Merger reserve 21 17,502 10,180Profit and loss account 21 (28,906) (3,685) EQUITY SHAREHOLDERS' FUNDS 21 38,979 52,840 Consolidated Cash Flow Statement for the year ended 31 March 2005 Note 2005 2004 £'000 £'000 Net cash outflow from operating activities 28 (10,578) (8,652)Returns on investments and servicing of finance 29 (86) 45Taxation 29 (12) -Capital expenditure and financial investment 29 (601) (1,478)Acquisitions and disposals 29 (327) (558)Cash outflow before financing (11,604) (10,643)Financing 29 14,949 8,448Increase/(decrease) in cash in the year 3,345 (2,195) 1. ACCOUNTING POLICIES Basis of preparation The financial statements have been prepared under the historical cost conventionand in accordance with applicable United Kingdom law and accounting standards,on the going concern basis. The group made a loss for the financial year of £19.7m (2004: £14.1m) and hascontinued to make losses at a reduced level up to the date of signing thesefinancial statements. A number of integration initiatives subsequent to themerger with Inter-Alliance Group Plc have now been completed and the directorsexpect to achieve further cost savings which will bring the business tooperating profitability in the fourth quarter 2005. The directors have preparedcash flow forecasts and believe that the group will generate increasing levelsof income and be able to satisfy regulatory capital adequacy requirements. Accordingly, the directors have prepared the financial statements on a goingconcern basis consistent with this assumption. In the event that these forecasts are not achieved it may be necessary to raiseadditional funds to maintain the group's regulatory capital adequacy position.The directors intend to implement further measures to strengthen the groupbalance sheet over the next year and are confident that it will be possible forthe group to obtain funding from other sources. No sources of additional capitalhave yet been committed. The financial statements do not include any adjustmentsthat would result from either a failure to achieve these forecasts or, ifnecessary for regulatory solvency purposes, further funding. Basis of consolidation The group financial statements consolidate the financial statements of thecompany and its subsidiaries, joint ventures and associates drawn up to the yearended 31 March 2005, the results of subsidiaries acquired and sold during theyear being consolidated from and until the date on which control passedrespectively. One exception to this is that the overseas subsidiaries thatformed part of the Inter-Alliance Group acquired during the year, Inter-AllianceInternational Group (Cyprus) Limited, Sterling Associates Limited, PGMS HoldingsLimited and their subsidiaries, have been consolidated based on their financialstatements drawn up to 31 December 2004 as a result of certain overseasregulatory restrictions and the need to avoid unreasonable delays to financialinformation. Hence only three months results are consolidated in the year ended31 March 2005. The directors believe that this will have no significant impacton the users of these financial statements. All subsidiaries use the group accounting policies. Joint ventures are those undertakings not recognised as subsidiaries in whichthe group has a participating interest and are jointly controlled. These areaccounted for under the gross equity method, the group's share of net assetsincluded in investments in the consolidated balance sheet and the group's shareof results included in the consolidated profit and loss account. Associates are those undertakings, not recognised as subsidiaries, in which thegroup has a participating interest and exercises significant influence. Thegroup's share of the results of associates, accounted for under the gross equitymethod, is included in the profit and loss account and its share of their netassets is included in investments in the group balance sheet. Millfield Group plc has taken advantage of section 230(3) of the Companies Act1985 exempting it from producing an individual profit and loss account. Theprofit and loss of the company has been approved by the Board of Directors inaccordance with section 230(3). The loss after taxation of the company for theyear amounted to £25,221,170 (2004 - £3,353,440). 1. ACCOUNTING POLICIES (continued) Turnover Initial policy commission income is recognised at the date of inception ofpolicies, provision being made for expected lapses based on lapse experience.Renewal commission is recognised as it falls due. Fee based business isrecognised when services have been provided and an invoice issued. Investments Fixed asset investments are held at historic cost and a provision is made forany impairment where necessary. Current asset investments are held at the lower of cost and net realisablevalue. Tangible fixed assets Tangible fixed assets are stated at cost or valuation, net of depreciation andany provisions for impairment. Depreciation is provided at the following annual rates in order to write offeach asset over its estimated useful life: Long leasehold premises Straight line over period of leaseLand and buildings 5% reducing balanceMotor vehicles 25% on costOffice equipment 20% on costFixtures and fittings 20% on costComputer equipment 33% on costSoftware 25% on cost Intangible fixed assets Goodwill arising on the acquisition of subsidiary undertakings and businesses,representing any excess of the fair value of the consideration given over thefair value of the identifiable assets and liabilities acquired, is capitalisedand written off on a straight line basis over its useful economic life, which isa maximum of 20 years. The directors regard this as a reasonable maximum for theestimated useful life of goodwill since it is difficult to make projectionsexceeding this period. Provision is made for any impairment. Goodwill on investments made in small independent financial advisory businessesis written off on a straight line basis over the term of the earn-out agreementswhich are between 15 and 44 months in length. Stocks and Work in Progress Stocks and work in progress are valued at the lower of cost and net realisablevalue. Cost includes all direct expenditure and an appropriate proportion ofvariable overheads. Work in progress is valued at book value less any element ofprofit contained in that value. Due allowance is made for any work in progresswhich has not been billed for an excessive period of time. Operating lease commitments Rentals paid under operating leases are charged to the profit and loss accountas incurred. Pension contributions The group made contributions to personal pension plans for certain employees.Contributions payable for the year are charged in the profit and loss account asthey become payable. Foreign currency Transactions in foreign currencies are recorded in sterling at the rate ofexchange at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies are translated into sterling at the rates ofexchange prevailing on the balance sheet date and gains and losses ontranslation are included in the profit and loss account. 1. ACCOUNTING POLICIES (continued) Deferred taxation Deferred taxation is provided in full on timing differences that result in anobligation at the balance sheet date to pay more tax, or a right to pay lesstax, at a future date, at rates expected to apply when they crystallise based oncurrent tax rates and law. Timing differences arise from the inclusion of itemsof income and expenditure in taxation computations in periods different fromthose in which they are included in the financial statements. Deferred tax assets are recognised to the extent that it is regarded as morelikely than not that they will be recovered. Deferred tax assets and liabilities are not discounted. 2. TURNOVER Turnover was substantially derived from within the United Kingdom and from theprincipal activity of the group, that of independent financial advisers. Thegroup also provides accountancy services through its subsidiary RST AccountantsLimited. 3. SEGMENT INFORMATION Turnover in respect of accountancy services contributed less than 10% of totalgroup revenue and the directors do not consider this a separately identifiablebusiness segment. Therefore, information by business segment has not beendisclosed. Results by origin and destination were as follows: Geographical Segments United Kingdom Rest of the World Group 2005 2004 2005 2004 2005 2004 £'000 £'000 £'000 £'000 £'000 £'000Turnover:Sales to third parties 82,090 41,899 2,866 - 84,956 41,899Segment and operating (loss)/profitSegment and operating (loss)/profit (18,898) (12,881) 148 - (18,750) (12,881)Share of operating loss in joint venture (1,444) (1,517) - - (1,444) (1,517)Share of operating loss in associate (105) (53) - - (105) (53)Profit on disposal of subsidiaries 19 - - - 19 -Profit on disposal of joint venture 824 - - - 824 -interestInterest payable/(receivable) and similar (605) 84charges (net)Loss on ordinary activities before taxation (20,061) (14,367) Net assets 16,833 23,222 (147) - 16,686 23,222 The results from the United Kingdom include £30,161,000 derived fromacquisitions during the year. The results from Rest of the World were derived entirely from acquisitionsduring the year. Since the overseas subsidiaries have been consolidated to 31December 2004, these reflect only three months' results. 4. OPERATING LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION 2005 2004 £'000 £'000The operating loss is stated after charging/(crediting): Depreciation of tangible fixed assets- owned assets 1,546 1,205Loss on disposal and amounts written-off fixed assets 842 -Amortisation of goodwill 1,915 1,388Government grants (30) -Operating leases - rent and service charges- plant and machinery 1,036 750- other 3,256 1,604Auditors' remuneration for audit services- group 332 291- company - -Auditors' remuneration - non audit services- group 144 49- company 41 - Audit costs for the company in the current and prior years were borne by asubsidiary. In addition to the amount for non audit services charged to the profit and lossaccount for the year, the group paid £376,028 in fees to Deloitte & Touche LLPfor a working capital review in connection with the acquisition ofInter-Alliance Group Plc. This is capitalised in investments and goodwill in thecompany and group balance sheets respectively. In 2004, fees of £456,678relating to the placing were charged to share premium. The following is a more detailed and comprehensive analysis of auditor'sremuneration: Group Company 2005 2004 2005 2004 £'000 £'000 £'000 £'000 Services as auditors - current year charges 324 291 - - - under accrued for previous year 8 - - - 332 291 - -Further assurance services - Working capital review 376 - 376 - - Tax compliance 91 49 - - Tax advisory services 29 - 29 -Consulting services 24 457 12 457 852 797 417 457 Group services as auditors includes £66,000 (2004 - £22,000) which relates tofees derived from subsidiary company auditors other than the group auditorsDeloitte & Touche LLP. 5. EXCEPTIONAL ITEMS 2005 2004 £'000 £'000 Fixed asset write-off 764 -Property closure and onerous lease charges 4,920 -Redundancy and legal costs 1,931 -Integration and corporate restructuring costs 355 - 7,970 - 6. DIRECTORS' INTERESTS Aggregate directors' remuneration 2005 2004 £'000 £'000Directors' emoluments 942 1,004Compensation for loss of office 383 -Group contributions to money purchase plans 25 47Total 1,350 1,051 Emoluments of the highest paid director 269 231 Group contributions to money purchase plan on behalf of the highest paid - 28director included in emoluments above Number NumberThe number of directors whose money purchase plans received contributions 2 4 The directors made gains totalling £44,399 upon exercise of share options. Options granted to directors during the year totalled 2,821,000 the terms ofwhich are disclosed in note 26. 7. STAFF COSTS 2005 2004 £'000 £'000Staff costs during the year (including directors)Wages and salaries 16,851 16,182Social security costs 1,673 1,662Pension contributions 312 239 18,836 18,083The average number of employees during the year comprised: Number NumberAdministration staff (includes ex-paraplanners and PAs, recharged to advisers) 711 535 8. TAX ON LOSS ON ORDINARY ACTIVITIES The group corporation tax charge on ordinary activities for the year is £7,319(2004 - £26,690) comprising deferred tax charged of £Nil (2004 - £Nil). Factors affecting tax charge for the current year The tax assessed for the period is lower than that resulting from applying thestandard rate of corporation tax in the UK: 30% (2004 - 30%). The differences are explained below: 2005 2004 £'000 £'000Loss before tax per consolidated Profit & Loss Account (20,061) (14,367) Tax at 30%: 6,018 4,310Effects of:Expenses not deductible for tax purposes (734) (759)Depreciation in excess of capital allowances (298) (587)Creation of tax losses (3,666) (2,744)Movement in short term timing differences 9 49Amortisation of goodwill (488) (294)Exceptional items (834) -Prior period adjustments - (2)Current tax charge 7 (27) Factors that may affect the future tax charge A deferred tax asset has not been recognised in respect of timing differencesrelating to revenue losses and timing differences on the plant and machinerygeneral pool as the group has not generated taxable profits to date. The amountof the asset not recognised is £28,005,000 (2004 - £9,112,000). The asset willbe recognised to the extent that sufficiently reliable evidence exists of itsbeing recoverable in the foreseeable future. 9. LOSS PER SHARE The calculation of loss per share on losses attributable to shareholders isbased on losses and equity minority interests after taxation of £19,665,931(2004 - £14,070,000) and on 107,150,350 (2004 - 84,370,328) ordinary shares,being the weighted average number of shares in issue during the year. FRS 14 requires the presentation of diluted EPS when a company could be calledupon to issue shares that would decrease net profit or increase net loss pershare. For a loss making company with outstanding share options, the exercise ofin-the-money options would reduce rather than increase the net loss per shareand thus such options are not dilutive as defined in the FRS. Similarly,although net loss per share would be increased by the exercise ofout-of-the-money options, it seems inappropriate to assume that option holderswould act irrationally and exercise those options. Accordingly no adjustment hasbeen made to diluted EPS for either in-the-money or out-of-the-money shareoptions and, since there are no other diluted future issues, the diluted lossper share is the same as the basic loss per share for the year. 10. GOODWILL Group Company £'000 £'000COST At 1 April 2004 19,593 458Additions 15,185 -Revaluations 686 -Adjustments to fair value 290 -Disposals (561) -Transfers to associates (520) - At 31 March 2005 34,673 458 AMORTISATION At 1 April 2004 4,616 212Charge for the year 1,915 203Disposals (449) -Transfers to associates (74) - At 31 March 2005 6,008 415 NET BOOK VALUE At 31 March 2005 28,665 43At 31 March 2004 14,977 246 In accordance with FRS 11, 'Impairment of fixed assets and goodwill', the