Report and accounts for year to 31 December 2014

RNS Number : 1671G

Manx Financial Group PLC

02 March 2015

 



FOR IMMEDIATE RELEASE                                                                               Date 2 March 2014

Manx Financial Group PLC (the 'Company')

Report and accounts for the year ended 31 December 2014

Manx Financial Group PLC (LSE: MFX), the financial services group which includes Conister Bank Limited, Conister Card Services Limited and Edgewater Associates Limited, presents its final results for the year ended 31 December 2014.

Jim Mellon, Executive Chairman, commented: "I am pleased to report a record profit before tax for the Group of £1.73 million which represents a growth of 61% for the year.  2014 also marked the achievement of an important milestone whereby our total assets exceeded £100 million for the first time, to reach nearly £120 million at year-end. Our outlook for 2015 remains very promising."

The 2014 Audited Annual Report and Accounts will be available from the Company's website shortly and will also be posted to shareholders. www.mfg.im 

Financial Highlights

Profit before tax:	£1.7 million - up 61%      (2013: profit of £1.1 million)
Net interest income:	£10.8 million - up 31%      (2013: £8.3 million)
Loans:	£89.3 million - up 18%      (2013: £75.8 million)
Total assets:	£119.5 million - up 28%      (2013: £93.7 million)
Customer accounts:	£100.3 million - up 28%      (2013: £78.1 million)

Contacts: 

Manx Financial Group PLC

Denham Eke, Chief Executive

Tel: [phone]

Beaumont Cornish Limited Roland Cornish/Felicity Geidt Tel: [phone]

Britton Financial PR

Tim Blackstone

Tel: [phone]

Chairman's Statement

Review of performance

Dear Shareholders,

When I wrote to you last year, I commented that I believed that the Group had turned a significant corner by moving into sustained profitability. I am, therefore, pleased to report a record profit before tax for the Group of £1.73 million (2013: £1.07 million). This represents a growth of 61%, and has led to net profit for the year of £1.59 million (2013: £1.09 million), an increase of 46%, continuing progress from the 2014 Interim net profit of £0.72 million to a second half figure of £0.87 million. This outcome has further helped strengthen our balance sheet with a 17% increase in total equity to £9.98 million (2013: £8.53 million), providing a respectable Return on Equity of 15.9% and confirming that our strategy of growing lending through wholesale funding partnerships and retaining a disciplined approach to expenditure is working well for us. 2014 was also a year when we achieved an important milestone whereby our total assets exceeded £100 million for the first time, to reach nearly £120 million at year-end. Whilst increased liquidity is returning to the lending market in both the Isle of Man and the UK, there is still an imbalance between funding requirements and available loan finance. We remain well placed to take advantage of this gap.

Having addressed the issue of profitability, we now intend to further improve the Group's systems to provide enhanced functionality to our offering. Technology is rapidly changing how banks and financial services providers interact with their customers. For banks, both borrowers and lenders alike benefit from a more immediate delivery. The time of fully staffed branch networks, ATMs and overseas call centres is running out. New entrants to the lending market have taken advantage of the High Street banks' lack of appetite or ability to embrace digital life. These new lenders recognise that customers now, and even more so in the future, want to engage with their bank in ways and at times convenient to themselves, and not be driven by the constraints of defined opening hours and menu-driven telephone systems. Equally, as the understanding of risk becomes ever more sophisticated, the use of data-driven algorithms allows credit decisions in real-time, rather than tardy rulings by remote committees. Unlike the traditional banks, we are not shackled with expensive branch networks or legacy IT systems which hamper implementing the service delivery now required by customers. The advances in technology driven service provision also benefit financial advisors, who are now able to offer more focussed and more competitive solutions to their clients. As such, we are in an enviable position to benefit from the enhancements provided by this financial technology revolution and we intend to invest in this area in the coming years.

Manx Financial Group PLC

In terms of the 2014 outcome, our net interest income increased by 31% to £10.83 million (2013: £8.26 million) and net trading income rose by 13% to £7.25 million (2013: £6.42 million), which together led to a 12% growth in operating income. Personnel and operations costs increased by only 2% which resulted in profit before income tax growing by 61% to £1.73 million (2013: £1.07 million). After taxation, our profit for the year of £1.59 million (2013: £1.09 million), showed a growth of 46%. As a result, our basic earnings per share ("EPS") increased by 39% to 1.56 pence (2013: 1.12 pence), providing an imputed earnings multiple of 7.9 (based on 12.29 pence, being the Group's share Volume Weighted Average Price for January 2015) and our diluted EPS increased by 26% to 0.98 pence (2013: 0.78 pence).

Our total assets increased by 28% to £119.51 million (2013: (£93.72 million), including loans and advances rising by 18% to £89.34 million (2013: £75.82 million) and cash and near equivalents growing by 89% to £24.90 million (2013: £13.18 million). This was supported by a 28% increase in our customer accounts to £100.26 million (2013: £78.12 million). During the period shareholder equity grew by 17% to £9.98 million (2013: £8.53 million).

We announced the formation of Manx Financial Limited in the second half of 2014 and commenced trading in both the Isle of Man finance broking and the Isle of Man foreign exchange broking markets. These businesses are tapping into an unsatisfied demand and we already have a significant pipeline of opportunity, demonstrating encouraging progress to date. We expect all three new business streams to make a positive contribution to the Group during the course of the new financial year.

Conister Bank Limited

Net interest income grew by 26% to £10.83 million (2013: £8.61 million), leading to a 10% increase in net trading income to £6.02 million (2013: £5.46 million). Operating income grew by 11% to £6.15 million (2013: £5.54 million). Personnel and other costs reduced by 10% to £4.79 million (2013: £5.31 million). As a result, profit before tax increased by almost 400% to £1.02 million (2013: £0.21 million). This result was driven by a combination of improved lending through our wholesale funding partnerships, our interest rate strategy of locking in low cost of funds over the longer term, and by the prudent control of costs.

We continue to take a conservative approach to lending as evidenced by the 30% reduction in impaired loans to £3.00 million (2013: £4.31 million). The introduction of wholesale funding arrangements which include a capital indemnity element provides an additional level of security against losses.

We continue to match our loan and deposit books without the need to make any behavioural adjustments. Whilst this is a very prudent approach, we believe the reduced risk of any adverse liquidity event provides a greater level of stability upon which to grow our deposit base. Our matched funding also continues to provide a partial hedge against any future rise in interest rates.

We continue to carry a VAT debtor of £589,000 in relation to an on-going negotiation with the Isle of Man Government Customs & Excise Division (C&E). We have believed for a number of years that the VAT recovery rate for the business was neither fair nor reasonable and we have raised a number of queries in this regard with C&E. In parallel, there is a case being taken against HM Revenue & Customs by Volkswagen Financial Services (UK) which covers substantially the same issue and we have agreed with C&E to await the outcome of this case before proceeding with ours. Currently, the re-appeal for this case is scheduled for April 2015.

Edgewater Associates Limited

After a slow start to the year, driven mainly by Retail Distribution Review factors, the business returned a second half growth in profit pre-exceptional items of 12% to £0.18 million (2013: £0.16 million), a run rate of £0.36 million in a full year. Our strategy is to focus on renewal income to reduce earnings volatility. To achieve this, we continue to recruit and employ the most experienced IFAs and also to invest further in our IT platforms as part of the up-grading of our Group-wide systems.

We continue to look for additional IFA acquisitions to develop and consolidate this division of the Group's business. We have considered a number of potential targets and I hope to be able to announce some progress in the near future.

Conister Card Services Limited

We continue to look for ways to monetise our MasterCard^® licence to issue pre-paid cards in the Isle of Man and the UK. Despite a number of pre-paid card issuing companies struggling to gain market share and attain profitability, we believe that we found a viable strategy for success. As a consequence, I hope to be able to announce further developments in this area shortly.

Outlook

It is clear that the banking and financial services landscape is reaching a major watershed in which the twin forces of regulatory reform and the development of financial technology will allow those players capable of reacting quickly to gain a competitive advantage.

In November 2014, the UK's Competition and Markets Authority announced that it would launch a full investigation into retail banking. This is a move that we welcome and that we hope will produce positive outcomes for businesses such as our own by evening out the competitive landscape.

The second strand is the benefit available to consumers following the digitisation of financial services. As I have already indicated, we see acquiring suitable technology as our key priority to allow us access to new distribution channels and enabling the provision of our services digitally to customers 24/7. Banking and financial services are rapidly transforming from a people-intensive business to a data management business. We intend fully to embrace this change which will allow our staff to concentrate on maintaining and developing business relationships with enhanced customer services, both within our banking and our financial advice divisions. Only by doing so will we ensure we continue to deliver superior shareholder returns.

In 2014, the FCA initiated a review of every UK consumer credit license holder as a consequence of the responsibility for regulation moving from the Office of Fair Trading. The renewal process for FCA-approved consumer lending will commence in 2015.

Thus the outlook for the Group remains very promising for 2015. I anticipate that the trend of increasing profits will continue in the year to come. In addition, and as I mention above, we continue to seek suitable potential acquisitions for the banking and financial services divisions that are both priced fairly and will add additional profitability to our operations.

Finally, I would like to take this opportunity to thank both you, our shareholders, and our staff alike for their continued support of the Group and also remind you that 2015 will be the year that our principal subsidiary, Conister Bank, will have served the Isle of Man community continuously for 80 years - a notable achievement.

Jim Mellon

Executive Chairman

26 February 2015

Consolidated Income Statement

For the year ended 31 December	Notes			2014   £000					2013  £000
Interest income				13,634					10,750
Interest expense				(2,809)					(2,493)
Net interest income				10,825					8,257
Fee and commission income				1,276					1,399
Loss on joint venture	19			(2)					-
Fee and commission expense				(1,102)					(990)
Commission share schemes				(3,749)					(2,249)
Net trading income				7,248					6,417
Other operating income				97					163
Operating income				7,345					6,580
Personnel expenses				(2,931)					(2,863)
Other expenses	7			(1,950)					(1,657)
Provision for impairment on loan assets				(550)					(850)
Depositors' Compensation Scheme recovery	9			11					100
Depreciation				(228)					(252)
Realised gains on available for sale financial assets				32					18
Unrealised loss on financial assets carried at fair value				(1)					(3)
Profit before tax (payable) / recovery				1,728					1,073
Tax (payable) / recovery	11			(139)					14
Profit for the year				1,589					1,087
Basic earnings per share (pence)	12			1.56					1.12
Diluted earnings per share (pence)	12			0.98					0.78

Consolidated Statement of Other Comprehensive Income

For the year ended 31 December

Notes

2014   £000

2013  £000

Other comprehensive income:

Items that will be reclassified to profit or loss
Available for sale gains taken to equity			6		10
Items that will never be reclassified to profit or loss
Actuarial losses on defined benefit pension scheme taken to equity			(173)		(53)

Total comprehensive income for the period attributable to owners			1,422		1,044
Basic earnings per share (pence)	12		1.39		1.08
Diluted earnings per share (pence)	12		0.89		0.76

Consolidated and Company Statement of Financial Position

							Group				Company
As at 31 December			Notes				2014 £000		2013 £000		2014 £000		2013 £000
Assets
Cash and cash equivalents							6,123		4,183		-		-
Financial assets at a fair value through profit or loss							47		48		-		-
Available for sale financial instruments							18,775		9,000		-		-
Loans and advances to customers		17					89,338		75,819		-		-
Commissions receivable							326		289		-		-
Property, plant and equipment							605		629		-		-
Investment in Group undertakings		19					-		-		12,072		12,072
Amounts due from Group undertakings		19					-		-		350		76
Trade and other receivables		20					1,166		1,014		62		130
Investment in joint venture		19					499		-		-		-
Subordinated loan		19					-		-		3,900		2,000
Deferred tax asset		11					284		394		-		-
Goodwill		19					2,344		2,344		-		-
Total assets							119,507		93,720		16,384		14,278
Liabilities
Customer accounts							100,259		78,115		-		-
Creditors and accrued charges							1,715		754		20		9
Amounts owed to Group undertakings		19					-		-		2,421		1,848
Loan notes		23					7,165		6,065		7,165		6,065
Pension liability							388		252		-		-
Total liabilities							109,527		85,186		9,606		7,922
Equity
Called up share capital							18,933		18,933		18,933		18,933
Profit and loss account							(8,953)		(10,399)		(12,155)		(12,577)
Total equity							9,980		8,534		6,778		6,356
Total liabilities and equity							119,507		93,720		16,384		14,278

Consolidated Statement of Cash Flows 

For the year ended 31 December	Notes		2014 £000		2013 £000
RECONCILIATION OF PROFIT BEFORE TAXATION TO OPERATING CASH FLOWS
Profit before tax on continuing activities			1,728		1,073
Unrealised loss on financial assets carried at fair value			1		3
(Gain) / loss on disposal of property, plant and equipment			(5)		17
Loss on joint venture			2		-
Depreciation charge			228		252
Realised gains on available for sale investments			(32)		(18)
Actuarial loss on defined benefit pension scheme taken to equity			(173)		(53)
Pension liability			136		52
Share-based payment expense / (credit)			24		(50)
(Increase) / decrease in trade and other receivables			(152)		238
Increase / (decrease) in trade and other payables			934		(1,408)
(Increase) / decrease in commission debtors			(37)		23
Net cash inflow from trading activities			2,654		129
Increase in loans and advances to customers			(13,519)		(17,324)
Increase in deposit accounts			22,144		14,384
Cash inflow / (outflow) from operating activities			11,279		(2,811)

CASH FLOW STATEMENT
Cash flows from operating activities
Cash inflow / (outflow) from operating activities			11,279		(2,811)
Taxation paid			-		-
Net cash inflow / (outflow) from operating activities			11,279		(2,811)
Cash (outflow) / inflow from investing activities
Purchase of property, plant and equipment			(208)		(156)
(Purchase) / sale of available for sale financial instruments			(9,737)		3,512
Sale of property, plant and equipment			7		-
Investment in joint venture	19		(501)		-
Payment of deferred consideration			-		(335)
Net cash (outflow) / inflow from investing activities			(10,439)		3,021
Cash flows from financing activities
Issue of loan notes	23		1,100		2,055
Net cash inflow from financing activities			1,100		2,055
Increase in cash and cash equivalents			1,940		2,265
Included in cash flows are:
Interest received - cash amounts			13,360		9,072
Interest paid - cash amounts			(2,802)		(2,101)
Significant non-cash flows in the year
Conversion of loan notes to share capital			-		500

Consolidated and Company Statement of Changes in Equity

For the year ended 31 December Group	Share Capital £000		Retained Earnings £000		2014 £000		2013 £000
Balance as at 1 January	18,933		(10,399)		8,534		7,215
Profit for the year	-		1,589		1,589		1,087
Other comprehensive income	-		(167)		(167)		(43)
Transactions with owners:
Shares issued	-		-		-		500
Shares to be issued	-		-		-		(175)
Share-based payment credit / (expense)	-		24		24		(50)
Balance as at 31 December	18,933		(8,953)		9,980		8,534

For the year ended 31 December Company	Share Capital £000		Retained Earnings £000		2014 £000		2013 £000
Balance as at 1 January	18,933		(12,577)		6,356		5,649
Profit for the year	-		398		398		432
Transactions with owners:
Shares issued	-		-		-		500
Shares to be issued	-		-		-		(175)
Share-based payment credit / (expense)	-		24		24		(50)
Balance as at 31 December	18,933		(12,155)		6,778		6,356

7.      Other expenses

	2014 £000		2013 £000
Professional and legal fees	496		281
Marketing costs	131		122
IT costs	348		298
Establishment costs	355		502
Communication costs	71		48
Travel costs	72		94
Bank charges	71		77
Insurance	111		97
Irrecoverable VAT	206		(41)
Other costs	89		179
	1,950		1,657

9.      Depositors' Compensation Scheme

	2014		2013
	£000		£000
Provision in respect of the Isle of Man Government Depositors' Compensation Scheme	11		100

On 27 May 2009, Kaupthing Singer & Friedlander (Isle of Man) Limited activated the Isle of Man Government Depositors' Compensation Scheme (the Scheme) in connection with its liquidation. Three payments of £73,880 were made in to the Scheme. Repayments from the Financial Supervision Commission of £133,506 and £34,424 have been received and a further £53,710 is expected from the Scheme.

11.    Tax expense

	2014		2013
	£000		£000
Current tax expense
Current year	29		-
Deferred tax expense
Origination and reversal of temporary differences	12		(39)
Utilisation of previously recognised tax losses	123		50
Changes to estimates for prior years	(25)		(25)
	110		(14)
Total tax expense / (recovery)	139		(14)

			2014				2013
			£000				£000
Reconciliation of effective tax rate
Profit before tax on continuing operations			1,728				1,073
Tax using the Banking division's domestic tax rate	10.0%		173		10.0%		107
Effect of tax rates in foreign jurisdictions	0.9%		12		-		-
Non-deductible expenses	2.3%		40		40.1%		43
Tax exempt income	(3.3)%		(58)		(79.4)%		(85)
Timing differences in current year	(0.9)%		(15)		(14.0)%		(15)
Origination and reversal of temporary differences in deferred tax	0.6%		12		(36.4)%		(39)
Changes to estimates for prior years	(1.5)%		(25)		(23.4)%		(25)
Total tax expense	8.1%		139		(13.1)%		(14)

The main rate of corporation tax in the Isle of Man is 0% (2013: 0%).  However the profits of the Group's Manx banking activities are taxed at 10% (2013: 10%). The profits of the Group's subsidiaries that are subject to UK corporation tax are taxed at a rate of 21.5% (2013: 20%).

The value of tax losses carried forward and timing differences reduced to £284,000 (2013: £394,000) and resulted in an expense of £110,000 (2013: £14,000 credit) to the income statement.

12.    Earnings per share

				2014				2013
Profit for the year				£1,589,000				£1,087,000
Weighted average number of ordinary shares in issue				102,070,252				96,899,019
Basic earnings per share				1.56p				1.12p
Diluted earnings per share				0.98p				0.78p
Total comprehensive income for the period				£1,422,000				£1,044,000
Weighted average number of ordinary shares in issue				102,070,252				96,899,019
Basic earnings per share				1.39p				1.08p
Diluted earnings per share				0.89p				0.76p

The basic earnings per share calculation is based upon the profit for the year after taxation and the weighted average of the number of shares in issue throughout the year.

The diluted earnings per share calculation assumes that all convertible loan notes, warrants and share options have been converted/exercised at the beginning of the year where they are dilutive.

17.    Loans and advances to customers

Group	Gross Amount £000		2014 Impairment Allowance £000		Carrying Value £000		Gross Amount £000		2013 Impairment Allowance £000		Carrying Value £000
Hire Purchase balances	52,059		(881)		51,178		46,222		(813)		45,409
Finance lease balances	11,422		(714)		10,708		8,882		(707)		8,175
Litigation funding	-		-		-		2,164		(1,487)		677
Unsecured personal loans	3,514		(148)		3,366		3,815		(306)		3,509
Vehicle stocking plans	1,284		-		1,284		1,476		-		1,476
Block discounting	6,766		-		6,766		5,192		-		5,192
Secured commercial loans	7,347		(62)		7,285		6,991		(435)		6,556
Secured personal loans	8,751		-		8,751		4,834		(9)		4,825
	91,143		(1,805)		89,338		79,576		(3,757)		75,819

Collateral is held, in the form of underlying assets, for Hire Purchase, finance leases, vehicles stocking plans, block discounting, secured commercial and personal loans. An estimate of the fair value of collateral on past due or impaired loans and advances is not disclosed as it would be impractical to do so.

Specific allowance for impairment			2014 £000		2013 £000
Balance at 1 January			3,578		4,150
Specific allowance for impairment made			890		460
Release of allowances previously made			(212)		-
Write-offs			(2,502)		(1,032)
Balance at 31 December			1,754		3,578

Collective allowance for impairment			2014 £000		2013 £000
Balance at 1 January			179		162
Collective allowance for impairment made			23		17
Release of allowances previously made			(151)		-
Balance at 31 December			51		179
Total allowances for impairment			1,805		3,757

Advances on preferential terms are available to all Directors, management and staff. As at 31 December 2014 £125,983 (2013: £93,187) had been lent on this basis. In the Group's ordinary course of business, advances may be made to Shareholders but all such advances are made on normal commercial terms.

As detailed below, at the end of the current financial year two loan exposures exceeded 10% of the capital base of the Group (2013: two loan exposures).

Exposure	Outstanding Balance 2014 £000		Outstanding Balance 2013 £000		Facility limit £000
Block discounting facility	3,501		2,229		5,500

Hire Purchase and finance lease receivables

Loans and advances to customers include the following Hire Purchase and finance lease receivables:

			2014 £000		2013 £000
Less than one year			30,615		25,495
Between one and five years			50,456		42,754
Gross investment in Hire Purchase and finance lease receivables			81,071		68,249

The investment in Hire Purchase and finance lease receivables net of unearned income comprises:

			2014 £000		2013 £000
Less than one year			22,514		19,540
Between one and five years			40,967		35,564
Net investment in Hire Purchase and finance lease receivables			63,481		55,104

19.    Investment in Group undertakings

The Company has the following investments in subsidiaries incorporated in the Isle of Man:

Carrying value of investments	Nature of  Business	31 December 2014 % Holding	Date of Incorporation		Total 2014 £000		Total 2013 £000
Conister Bank Limited	Asset and Personal Finance	100	05.12.1935		10,067		10,067
TransSend Holdings Limited	Holding Company for Prepaid Card Division	100	05.11.2007		-		-
Bradburn Limited	Holding Company	100	15.05.2009		-		-
Edgewater Associates Limited	Wealth Management	100	24.12.1996		2,005		2,005
					12,072		12,072

Amounts owed to and from group undertakings are unsecured, interest-free and repayable on demand.

Subordinated loans

MFG has issued several subordinated loans as part of its equity funding into the Bank.  Interest charged is at the discretion of the lender.

			2014		2013
Creation	Maturity	Interest rate	£000		£000
22 July 2013	22 July 2018	7.00%	1,000		1,000
25 October 2013	22 October 2020	7.00%	1,000		1,000
11 February 2014	11 February 2024	7.00%	500		-
27 May 2014	27 May 2024	7.00%	500		-
9 July 2014	9 July 2024	7.00%	500		-
17 September 2014	17 September 2026	7.00%	400		-
Total subordinated loans			3,900		2,000

Goodwill

			Group 2014 £000		Group 2013 £000
Edgewater Associates Limited ("EWA")			1,849		1,849
ECF Asset finance PLC ("ECF")			454		454
Three Spires Insurance Services Limited ("Three Spires")			41		41
			2,344		2,344

Goodwill impairment

The goodwill is considered to have an indefinite life and is reviewed on an annual basis by comparing its estimated recoverable amount with its carrying value.

The estimated recoverable amount in relation to the goodwill generated on the purchase of EWA is based on the forecasted 3 year cash flow projections, extrapolated to 10 years using a 5% annual increment, and then discounted using a 12% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15% and 20% on stable profit levels.

The estimated recoverable amount in relation to the goodwill generated on the purchase of ECF is based on forecasted 3 year sales interest income calculated at 5% margin, extrapolated to 10 years using a 5% annual increment, and then discounted using a 12% discount factor. The sensitivity of the analysis was tested using additional discount factors of 15% and 20% on varying sales volumes.

There has been no change in the detailed method of measurement for EWA and ECF when compared to 2013.  The goodwill generated on the purchase of Three Spires has been reviewed at the current year end and is considered adequate given its income streams referred to EWA.  On the basis of the above reviews no impairment to goodwill has been made in the current year.

Investment in joint venture

On 7 August 2014, a joint venture agreement was entered into between Manx Financial Limited, previously a subsidiary of the Group, and Andrew Flowers.  Additional shares were issued such that 49.9% of the voting share capital was sold for £500,000, creating £1,000 share premium in the company.  Control was lost on this day and consequently the assets and liabilities of the subsidiary were derecognised.  There was no profit or loss incurred upon ceding control.  Manx Financial Group PLC has invested £50,000 for 50.1% of the voting share capital and has provided a corporate guarantee to block funders in Manx Financial Limited. 

20.    Trade and other receivables

	Group				Company
	2014 £000		2013 £000		2014 £000		2013 £000
Prepayments and other debtors	646		471		62		130
Depositors Compensation Scheme Receivable	54		77		-		-
VAT recoverable	466		466		-
	1,166		1,014		62		130

Included in trade and other receivables is an amount of £466,000 (2013: £466,000) relating to a reclaim of value added tax ("VAT").

Conister Bank Limited, as the Group VAT registered entity, has for some time considered the VAT recovery rate being obtained by the business was neither fair nor reasonable, specifically regarding the attribution of part of the residual input tax relating to the HP business not being considered as a taxable supply. Queries have been raised with the Isle of Man Government Customs & Excise Division ("C&E"), and several reviews of the mechanics of the recovery process were undertaken by the Company's professional advisors.

The decision of the First-Tier Tax Tribunal released 18 August 2011 in respect of Volkswagen Financial Services (UK) Limited v HM Revenue & Customs (TC01401) ("VWFS Decision") added significant weight to the case put by the Bank and a request for a revised Partial Exemption Special Method was submitted in December 2011. The proposal put forward by the Bank was that the revised method would allocate 50% of costs in respect of HP transactions to a taxable supply and 50% to an exempt supply. In addition at this time a Voluntary Disclosure was made as a retrospective claim for input VAT under-claimed in the last 4 years.

In November 2012, it was announced that the HMRC Upper Tribunal had overturned the First-Tier Tribunal in relation to the VWFS Decision. VWFS has subsequently been given leave to appeal and this was scheduled to be heard in October 2013. However, this was delayed by HMRC pending reference to a relevant European Court of judgement in the case of Banco Mais (C183/13). The judgement in this case was released on 10 July 2014 and ruled against the taxpayer; however the impact of the judgement on the VWFS case is unclear and the VWFS is still proceeding with the appeal to the Court of Appeal.  The re-appeal is now scheduled for April 2015.

The Bank's total exposure in relation to this matter is £589,000, comprising the debtor balance referred to above plus an additional £123,000 VAT reclaimed under the partial Exemption Special Method, in the period from Q4 2011 to Q3 2012 (from Q4 2012 the Bank reverted back to the previous method). On the basis of the discussions and correspondence which have taken place between the Bank and C&E, in addition to the VWFS appeal, the Directors are confident that the VAT claimed referred to above will be secured.

23.    Loan notes

		Group				Company
	Notes	2014 £000		2013 £000		2014 £000		2013 £000
Related parties
J Mellon	JM	1,750		1,750		1,750		1,750
Burnbrae Limited	BL	1,200		1,200		1,200		1,200
Southern Rock Insurance Company Limited	SR	460		460		460		460
Copper Development Corporation	CDC	500		500		500		500
		3,910		3,910		3,910		3,910
Unrelated parties	UP	3,255		2,155		3,255		2,155
		7,165		6,065		7,165		6,065

JM - Two loans, one of £500,000 maturing on 31 July 2017 with interest payable of 7% per annum, and one of £1,250,000 maturing on 26 February 2015, paying interest of 9% per annum. Both loans are convertible at the rate of 4 pence and 9 pence respectively.  JM is also entitled to 8.3 million warrants at an exercise price of 6 pence which lapse on 31 July 2017.  See note 30 for an extension of this loan note subsequent to the year end.

BL - One loan consisting of £1,200,000 maturing on 31 July 2017 with interest payable of 7% per annum.  Jim Mellon is the beneficial owner of BL and Denham Eke is also a director.  The loan is convertible at a rate of 4 pence.  BL is also entitled to 20 million warrants at an exercise price of 6 pence which lapse on 31 July 2017. 

SR - One loan consisting of £460,000 maturing on 26 February 2015 with interest payable of 9% per annum.  The loan is convertible at a rate of 9 pence. SR is also entitled to 8.3 million warrants at an exercise price of 6 pence which lapse on 24 October 2017.  Arron Banks, a significant Shareholder, holds a major stake in SR.  John Banks a non-executive Director is also a director of SR.  See note 30 for an extension of this loan subsequent to the year end.  

CDC - One loan of £350,000 maturing on 5 September 2017 with interest payable of 5% per annum, and another loan of £150,000 maturing on 3 October 2017 paying interest of 5% per annum. Denham Eke is a director of CDC.

UP - Fifteen loans consisting of an average £217,000, with an average interest payable of 5.33% per annum.  The earliest maturity date is 28 April 2015 and the latest maturity is 14 July 2019.

With respect to the convertible loans, the interest rate applied was deemed by the Directors to be equivalent to the market rate with no conversion option hence no equity component has been recognised with respect to any of these loans.

30.    Subsequent events

The two outstanding Convertible Loan Notes ("Notes") that were otherwise due for maturity on 26 February 2015 (see note 23) have been extended by five years.  The Notes together total £1.71 million, of which Jim Mellon, the Group's Executive Chairman, holds £1.25 million and Rock Holdings Limited (subsequently assigned to Southern Rock Insurance Limited), a company connected with John Banks, a non-executive Director of the Group, holds £0.46 million.

As a result, and having considered other methods of raising capital, the independent Directors have resolved, following negotiations with the lenders, to extend the two Notes for a further five years to 26 February 2020 at a reduced interest rate of 6.5%, down from the previous 9.0%. All other terms remain as those announced on 2 March 2010.

 

END

 

 

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