Final Results

Berkeley Berry Birch PLC 29 July 2005 Preliminary Results 2005 29 July 2005: Berkeley Berry Birch plc ('the Group'), the financial services distribution group, today announces its preliminary results for the 12 months to 31 March 2005. Highlights • Turnover broadly in line with previous year at £67 million • Gross profit margin improved from 26.4% to 27.3% • Operating loss before goodwill amortisation and impairment and other exceptional items significantly reduced from £4.9 million to £1.6 million • Operating loss of £24.5 million after goodwill impairment charge of £19.6 million • Subject to finalising the terms of a past business review, closure of the FSA investigation into BIA's sales of life and regular savings products expected to be announced shortly • BBN FS has been informed by the FSA that the investigation into the sale of its business has been discontinued • The Directors are pursuing all options to enable the regulatory capital position to be resolved Commenting on the preliminary results for the Group, Clifford Lockyer, Executive Chairman and Group Chief Executive, said: 'Although the operating loss before goodwill amortisation and impairment and other exceptional items has been substantially reduced, the growth of the business has been hindered by the impact of the FSA investigations. Subject to finalising the terms of a past business review, I am pleased to report that BIA and the FSA are close to settling the investigation into BIA's sales of life and regular savings products. In addition, BBN FS has been informed by the FSA that the investigation into the sale of its business has been discontinued. The closure of these investigations will assist us in addressing the regulatory capital position and return management's focus to the development of the business.' Commenting on the outlook, he said: 'The trading performance in the first quarter of the new financial year has been disappointing. However, the Directors are confident that, should the FSA investigations be concluded in the form and timeframe currently anticipated, an improvement will be achieved through higher sales, further cost reduction measures and other income generating initiatives.' For further information, please contact: Berkeley Berry Birch plc Clifford Lockyer Executive Chairman and Group Chief Executive Telephone - 07967 680565 CHAIRMAN AND CHIEF EXECUTIVE'S STATEMENT Introduction The last year has been a very challenging period for the board of Berkeley Berry Birch plc. We have been faced with two FSA investigations, one into the sale of the business of Berry Birch & Noble Financial Services Limited ('BBN FS') to a fellow group company and related matters and the other into the sales of certain savings products, as well as issues over the regulatory capital position of the Group's financial advisory subsidiaries. Subject to finalising the terms of a past business review, I am pleased to report that Berkeley Independent Advisers Limited ('BIA') and the FSA are close to settling the investigation into BIA's sales of life and regular savings products, the anticipated costs of which are reflected in these results. In addition, BBN FS has been informed by the FSA that the investigation into the sale of its business has been discontinued. The closure of these investigations will assist us in addressing the regulatory capital position, which the directors are making their utmost efforts to resolve. Turnover for the year at £67 million was broadly unchanged from that achieved in the previous year. Turnover growth has been hindered by the effects of the FSA investigations, which have resulted in sales of certain products being suspended and difficulties over recruiting and retaining advisers. The gross profit margin showed further improvement, increasing from 26.4% last year to 27.3% in the current year. The operating loss, before the impact of goodwill and other exceptional items, has been significantly reduced from £4.9 million last year to £1.6 million this year, largely due to cost reduction measures. Exceptional items included in the operating loss amounted to £1.8 million, comprising £1.4 million for anticipated costs arising from the BIA regulatory investigation and a further charge of £0.4 million for onerous lease costs. Following a review of the carrying value of the goodwill that arose on the acquisition of the Berkeley Financial Services Group, principally in respect of BIA, a goodwill impairment provision of £19.6 million has been included. After allowing for goodwill amortisation of £1.5 million the operating loss was £24.5 million compared with £9.6 million in the previous year. During the year, we sold part of our database of customers to the original vendors of Professional Financial Solutions Limited ('PFS') which we acquired in January 2003. The sale resulted in a loss of £1.1 million, included in the profit and loss account under the caption 'disposal of subsidiary undertakings and businesses', largely reflecting the write off of the goodwill arising on the PFS acquisition. The total charge under this caption was £1.7 million, which also includes a reduction of £0.6 million in respect of the gain reported last year on the liquidation of BBN FS as described below. Liquidation of BBN FS We have reached agreement with the liquidator over his claim that the business of BBN FS was sold to another group company at under-value. Whilst we maintain that we did not act improperly in respect of the sale, and that the price at which the business was transferred is supported by external valuations, the directors considered that reaching a swift conclusion was in the best interests of the Group. Therefore, we have agreed to make an ex-gratia payment of £600,000 to the liquidator without accepting any liability. The charge, included in disposal of subsidiary undertakings and businesses in the profit and loss account, is £554,000, which also takes into account legal fees incurred and a provision made in the March 2004 accounts. Regulatory investigation in respect of BIA The FSA investigation into the sales of whole of life and regular savings plan products by members of the Group's regulated network, BIA, commenced in September 2004. Whilst we believe that current surrender values of these products exceed the premiums paid, we are investigating if clients have suffered any opportunity loss. In the FSA's view there were management and procedural failings in BIA, which have resulted in a fine from the FSA. The BIA management concerned are no longer with the Group and we have taken action to prevent this reoccurring. We have agreed to undertake a past business review into the sales of these products, which will be overseen by a 'skilled person', and we are in the process of finalising the terms of this review with the FSA. We have included an exceptional charge of £1,396,000 for the anticipated costs that will arise in respect of this investigation which comprise the fine, the costs of the 'skilled person' for the past business review and legal costs incurred. Capital adequacy At 31 March 2005 the Group's three regulated financial services subsidiaries had a combined capital resource requirement deficit of around £10 million based on their unaudited year-end FSA returns. The unaudited returns as at 30 June 2005, which are based on unaudited management accounts, indicate a combined deficit of approximately £12 million. The deficit at the end of March 2005 is substantially higher than the £2.4 million reported in the announcement made on 25 April 2005. The increase is due to the change in policy to report provisions gross of amounts recoverable from third parties and the impact of year-end adjustments. Under the FSA rules, the debtor created by the change in policy is excluded in arriving at the regulatory capital position. We are in the process of applying for a waiver to this rule which, if granted, would reduce the deficits at 31 March 2005 and 30 June 2005 by approximately £4 million and £6 million respectively. The FSA has commenced formal regulatory enforcement action, which could result in the FSA cancelling the permissions granted to the subsidiaries to act as Independent Financial Advisers. If these permissions were to be withdrawn, the going concern basis on which these results have been prepared would be inappropriate. Auditors' report Our auditors have indicated to us that, if the uncertainty regarding the capital adequacy and ultimately the going concern basis on which the results are prepared is not resolved by the time they come to issue their audit report on the published financial statements, they will need to refer to it in that report. Network division The performance of the Network division was hindered by the impact of the FSA investigation into sales of certain products by members of BIA. In December 2004, we took the decision to suspend sales of the products concerned, which reduced sales in the final quarter of the Group's financial year. The number of advisers authorised by the BIA Network fell from 623 at 31 March 2004 to 452 at 31 March 2005, reflecting the adverse publicity surrounding the Group and the general move in the industry towards advisers being directly authorised. This latter factor was reflected in the number of directly authorised advisers using BIA's services increasing from 34 to 134 over the same period. Turnover for BIA fell by 3% year on year. The Group's non-regulated network, Direct Protect Limited, ceased to accept new business from 14 January 2005 when general insurance business became regulated by the FSA. As a result, sales from this network were 6% lower than the previous year. As previously announced, Direct Protect Limited entered into creditors' voluntary liquidation in June 2005. Direct Protect Limited's balance sheet at 31 March 2005 has been adjusted to reflect the anticipated effect of the liquidation with additional charges being made to the profit and loss account as a result. Despite the lower revenues and the charges in respect of adjusting Direct Protect Limited's balance sheet, the Network division's operating profit, before exceptional items and the impact of goodwill, only fell from £0.8 million to £0.7 million, largely due to underlying cost reduction. Financial Advisory division Adviser numbers in the Financial Advisory division increased by 5% year on year. At 31 March 2005, the division had 71 employed and 105 self-employed advisers. Turnover for the division increased by 12% to £18.1 million reflecting the higher number of advisers and improved productivity. The operating loss, before exceptional items and the impact of goodwill, for the Financial Advisory division was reduced from £3.9 million to £2.0 million. This significant reduction was due to the improved margin from the increased revenue and the benefit of cost reduction. Insurance division Turnover from the Insurance division increased by 7% to £4.6 million, largely from organic growth within Berry Birch & Noble Insurance Brokers Limited as well as a full year's contribution from the MacRobins plc insurance broking business acquired in July 2003. This improvement is due to a stable business environment, particularly for the personal lines business, which has previously been affected by insurers discontinuing their products and services. Operating profit, before exceptional items and the impact of goodwill, in respect of the Insurance division increased from £0.7 million to £0.9 million, with the benefit of the higher sales revenue and cost reduction. Central costs Central costs, which largely comprise the overheads of the parent company and the underwriting result from the Group's captive insurance company, fell from £2.5 million to £1.3 million. This gain reflects both cost reductions in respect of the parent company and an improved underwriting result from the captive. Board changes Following the board changes over recent months, the board currently comprises two executive directors and one non-executive director. I am confident that the conclusion of the FSA investigations and the resolution of the regulatory capital position will enable the board to be properly re-constituted with the appropriate experience, skills and mix of executive and non-executive directors. As part of our cost reduction measures, the board had to take the difficult decision to make the Divisional Chief Executive roles redundant. Following this decision, Michael Cleary, the Financial Services Division Chief Executive, left the Group on 30 June 2005. Nicholas Davenport, who was Chief Executive for the Insurance division, has remained with the Group as a director on the plc board and has been playing a vital role in assisting the Group in resolving the issues it faces. Our non-executive director is John Joyce, who joined us on 1 February 2005. John has supported the executive directors during the Group's current difficulties, for which the Group owes him a considerable debt of gratitude. Outlook The first quarter of the new financial year has been disappointing in terms of trading performance, which continues to be impacted by the ongoing FSA investigations. However, the Directors are confident that, should the investigations be concluded in the form and timeframe currently anticipated, an improvement can be achieved in the current unsatisfactory trading performance of the Group. This improvement will be achieved through higher sales, further cost reduction measures and other income generating initiatives. Clifford P Lockyer Executive Chairman and Group Chief Executive 29 July 2005 UNAUDITED CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 31 March 2005 Note 2005 2004 £'000 £'000 Turnover 2 67,283 66,511 Cost of sales (48,914) (48,922) -------- -------- Gross profit 18,369 17,589 Administrative expenses (42,828) (27,234) (including exceptional items in note 3) -------- -------- Operating loss (24,459) (9,645) -------- -------- Operating loss 2 (1,624) (4,903) (before goodwill amortisation and impairment and other exceptional items) Goodwill amortisation and impairment and other 3 (22,835) (4,742) exceptional items -------- -------- Operating loss (24,459) (9,645) -------- -------- Profit on disposal of property 64 - Disposal of subsidiary undertakings and 4 (1,693) 1,083 businesses Net interest receivable 375 252 -------- -------- Loss on ordinary activities before taxation (25,713) (8,310) Taxation 5 27 70 -------- -------- Loss on ordinary activities after taxation (25,686) (8,240) Minority interests 24 (11) -------- -------- Loss for the financial period (25,662) (8,251) ======== ======== Restated (see note 6) Loss per share 6 Adjusted basic and diluted (1.3p) (5.1p) Basic and diluted (28.2p) (9.2p) ======== ======== All recognised gains and losses in the current and prior year are included in the profit and loss account. UNAUDITED CONSOLIDATED BALANCE SHEET As at 31 March 2005 Note 2005 2004 Restated (see note 1) £'000 £'000 Fixed assets Intangible assets 3,806 26,621 Tangible assets 998 2,259 -------- -------- 4,804 28,880 -------- -------- Current assets Debtors 10,075 13,594 Cash at bank 12,749 10,622 -------- -------- 22,824 24,216 Creditors: amounts falling due within one year (12,383) (12,236) -------- -------- Net current assets 10,441 11,980 -------- -------- Total assets less current liabilities 15,245 40,860 Creditors: amounts falling due after more than one year Borrowings (32) (477) Other creditors (310) (328) Provisions for liabilities and charges (10,901) (9,414) -------- -------- Net assets 4,002 30,641 ======== ======== Capital and reserves Called up share capital 9,179 8,987 Share premium account 17,019 17,019 Shares to be issued - 1,231 Revaluation reserve - 358 Merger reserve 5,589 26,319 Profit and loss account (27,970) (23,482) -------- -------- Equity shareholders' funds 7 3,817 30,432 Minority interests 185 209 -------- -------- Capital employed 4,002 30,641 ======== ======== UNAUDITED CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 March 2005 Note 2005 2004 Restated (see note 1) £'000 £'000 Net cash inflow/(outflow) from operating activities 8 1,801 (2,696) -------- -------- Returns on investments and servicing of finance Interest received 411 325 Interest paid (29) (73) Interest element of finance lease rentals (7) (8) -------- -------- Net cash inflow from returns on investments and servicing of finance 375 244 -------- -------- Taxation 53 28 -------- -------- Capital expenditure and financial investment Purchase of tangible fixed assets (424) (481) Sale of tangible fixed assets 1,116 10 Increase in bank deposit given as security (100) (500) -------- -------- Net cash inflow/(outflow) from capital expenditure and financial investment 592 (971) -------- -------- Acquisitions and disposals Purchase of subsidiary undertakings (19) (392) Cash acquired with subsidiary undertaking - 665 Purchase of business operations (218) (257) Disposal of subsidiary undertakings - 190 Costs paid in respect of disposal of subsidiary undertakings (121) (74) Cash in subsidiary undertakings disposed of - (950) -------- -------- Net cash outflow from acquisitions and disposals (358) (818) -------- -------- Net cash inflow/(outflow) before management of liquid resources and financing 2,463 (4,213) -------- -------- Management of liquid resources Decrease in short term deposits - 700 -------- -------- Net cash inflow from management of liquid resources - 700 -------- -------- Financing Loan repayments (416) (203) Capital element of finance lease repayments (28) (37) -------- -------- Net cash outflow from financing (444) (240) -------- -------- Increase/(decrease) in cash in the year 9 2,019 (3,753) Net cash at 1 April 10,122 13,875 -------- -------- Net cash at 31 March 10 12,141 10,122 ======== ======== NOTES TO THE UNAUDITED FINANCIAL STATEMENTS 1. Accounting policies and basis of preparation These results have been prepared on a going concern basis. At 31 March 2005 the regulated companies in the Group had a combined regulatory capital resource requirement deficit of around £10 million based on their unaudited year-end FSA returns. The FSA has commenced formal regulatory enforcement action, which could result in the FSA cancelling the permissions granted to the subsidiaries under Part IV of the Financial Services and Markets Act 2000 to act as Independent Financial Advisers. If these permissions were to be withdrawn, the going concern basis on which these results have been prepared would be inappropriate. In such circumstances, adjustments are likely to have to be made to the net assets shown in the accounts to reduce assets to their more immediately recoverable amounts and to provide for further liabilities that may arise. The unaudited financial information has been prepared under the historical cost convention as modified by the revaluation of freehold buildings and in accordance with applicable accounting standards using the accounting policies set out in the Group's Annual Report and Accounts for the year ended 31 March 2004 except as explained below. The financial information has been extracted from the draft unaudited financial statements. The auditors have indicated that, due to the uncertainties set out above, their audit report is likely to be modified to draw attention to the fundamental uncertainty in respect of the ability of the Group to continue as a going concern. As a result of a review of the Group's accounting policies in the context of its present trading arrangements with its network members and current accounting trends in the industry, the directors have decided to revise the policies in respect of the disclosure of certain provisions. These provisions, principally in respect of indemnity commission, which were previously shown net of related amounts recoverable, are now to be shown gross of expected recoveries, which are to be shown separately as assets. This change in accounting policy has been recognised in the accounts as a prior year adjustment and comparative figures for 2004 have been restated. The change increased both debtors and provisions at 31 March 2004 by £6,082,000 and at 31 March 2005 by £6,595,000. There was no impact on the profit and loss accounts for the years ended 31 March 2004 and 2005. The summary of results for the years ended 31 March 2005 and 31 March 2004 does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985. The full financial statements for the year ended 31 March 2004 have been reported on under section 235 by the Group's auditors and delivered to the Registrar of Companies. The audit report was unqualified and did not contain a statement under section 237(2) or section 237 (3) of the Companies Act 1985. 2. Segmental information 2005 2004 £'000 £'000 Turnover Network division 44,596 46,010 Financial advisory division 18,120 16,242 Insurance division 4,567 4,259 -------- -------- 67,283 66,511 -------- -------- Operating loss before goodwill amortisation and impairment and other exceptional items Network division 744 831 Financial advisory division (2,037) (3,902) Insurance division 940 714 Central costs (1,271) (2,546) -------- -------- (1,624) (4,903) ======== ======== The analysis of the operating loss before exceptional items, goodwill amortisation and exceptional items is shown before management charges levied by the parent company. The Group's entire turnover and operating loss arises within the United Kingdom. 3. Goodwill amortisation and impairment and other exceptional items 2005 2004 £'000 £'000 Exceptional items included in the operating loss (1,776) (1,335) Goodwill impairment (19,559) (1,872) Goodwill amortisation (1,500) (1,535) -------- -------- (22,835) (4,742) ======== ======== Exceptional items included in the operating loss are in respect of costs incurred in connection with the FSA's investigation into the Group's Network subsidiary, Berkeley Independent Advisers Limited, concerning the suitability of sales of whole of life and regular savings plan products (£1,396,000) and provision for onerous property lease costs (£380,000). Exceptional items in the year ended 31 March 2004 were in respect of adviser fees arising from the potential merger with Inter-Alliance Group PLC (£795,000) and provision for onerous property lease costs (£540,000). The goodwill impairment is in respect of the goodwill arising on the acquisition of Berkeley Financial Services Group in January 2002. The goodwill impairment charge in the year ended 31 March 2004 was in respect of the goodwill arising on the acquisition of the Berry Birch & Noble Financial Planning (Weston) Limited in December 2002. 4. Disposal of subsidiary undertakings and businesses The loss comprises a reduction of £554,000 in respect of the gain reported last year on the liquidation of Berry Birch & Financial Services Limited and a charge of £1,139,000 in respect of the sale of part of the Group's database of customers. 5. Taxation Taxation relates to amendments to prior years. No tax is payable for the current year due to the availability of losses. 6. Loss per share The calculation of the basic loss per share is based on the loss for the year and the weighted average number of shares in issue during the year of 90,826,000 (2004: 89,485,000). At 31 March 2005 and 31 March 2004 there were no rights over shares that have a dilutive effect on the loss per share and hence the diluted loss per share is the same as the basic loss per share. Additional disclosure has been provided in respect of loss per share as follows: 2005 2004 Restated Basic loss per share before goodwill amortisation and impairment and other exceptional items (1.3p) (5.1p) Goodwill impairment and amortisation (23.2p) (3.8p) Exceptional items (3.7p) (0.3p) -------- -------- Basic loss per share (28.2p) (9.2p) ========= ======== Exceptional items include amounts in respect of the disposal of tangible fixed assets, subsidiary undertakings and businesses as well as exceptional items included as part of the operating loss. Previously, the exceptional items excluded to arrive at the adjusted loss per share only related to those included within the operating loss. The comparatives for the year ended 31 March 2004 have been restated accordingly. 7. Reconciliation of movement in equity shareholders' funds 2005 2004 £'000 £'000 Loss for the financial period (25,662) (8,251) Ordinary shares issued, net of expenses 278 323 Shares to be issued - 427 Adjustment to deferred considerations (1,231) (5,825) -------- -------- Net change in equity shareholders' funds (26,615) (13,326) Opening equity shareholders' funds 30,432 43,758 -------- -------- Closing equity shareholders' funds 3,817 30,432 ======== ======== 8. Net cash inflow/(outflow) from operating activities 2005 2004 Restated £'000 £'000 Operating loss (24,459) (9,645) Movement in debtors 3,703 (3,860) Movement in creditors and provisions 900 6,704 Goodwill amortisation and impairment 21,059 3,407 Other non cash items 598 698 -------- -------- Net cash inflow/(outflow) from operating activities 1,801 (2,696) ======== ======== 9. Reconciliation of net cash flow to movement in net funds 2005 2004 £'000 £'000 Increase/(decrease) in cash in the year 2,019 (3,753) Cash outflow from decrease in debt and lease financing 445 240 Cash flow from change in liquid resources - (700) -------- -------- Change in net funds resulting from cash flows 2,464 (4,213) Debt removed on disposal of subsidiary undertaking - 158 Finance leases acquired on acquisition of subsidiary undertaking - (20) New finance leases (57) - Net funds at start of year 9,455 13,530 -------- -------- Net funds at end of year 11,862 9,455 ======== ======== 10. Analysis of net funds At 1 April Cash flow Other At 31 March 2004 changes 2005 £'000 £'000 £'000 £'000 Cash and bank balances 10,122 2,027 - 12,149 Overdrafts - (8) - (8) ------ ------ ------ ------ 10,122 2,019 - 12,141 ------ ------ ------ ------ Debt due after one year (459) 262 197 - Debt due within one year (174) 155 (197) (216) Finance leases (34) 28 (57) (63) ------ ------ ------ ------ (667) 445 (57) (279) ------ ------ ------ ------ ------ ------ ------ ------ Total 9,455 2,464 (57) 11,862 ====== ====== ====== ====== Cash and bank balances at 31 March 2005 shown above exclude a bank deposit of £600,000 (2004: £500,000) which does not meet the definition of either cash or liquid resources under FRS1. End July 29th, 2005 This information is provided by RNS The company news service from the London Stock Exchange

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