Final Results

RNS Number : 5678Q

Mattioli Woods PLC

02 September 2014

 

2 September 2014

Mattioli Woods plc

("Mattioli Woods" or "the Group")

Final results

Mattioli Woods plc (AIM: MTW.L), the specialist wealth management and employee benefits business, today reports its final results for the year ended 31 May 2014. 

Financial highlights

·     Revenue up 25.4% to £29.35m (2013: £23.41m)

·     Recurring revenues represent 78.1% (2013: 70.7%)

·     Adjusted EPS^1,2 up 16.9% to 28.23p (2013: 24.15p)

·     Adjusted EBITDA³ up 14.2% to £6.77m (2013: £5.93m)

·     Proposed total dividend up 30.0% to 9.10p (2013: 7.00p)

·     Strong financial position with net cash of £9.51m (2013: £8.05m)

¹Basic EPS up 14.9% to 22.09p (2013: 19.23p).

²Before acquisition-related costs, amortisation and impairment of intangible assets other than computer software. 

³Earnings before interest, taxation, depreciation, amortisation and acquisition-related costs. 

Operational highlights

·     Total client assets up 27.2% to £4.63bn (2013: £3.64bn)

·     Discretionary AuM of £0.75bn (2013: £0.19bn)

·     Appointed manager of Custodian REIT in March 2014

·     Acquisition of Atkinson Bolton in July 2013

Recent developments

·     Appointment of Alan Fergusson as Employee Benefits Director

·     Appointment of Carol Duncumb as Non-Executive Director

·     Acquisition of UK Wealth Management's pension business in August 2014

·     Bringing our three core businesses together under one brand

·     Planned further investment in technology

·     Well positioned for growth

Commenting on the final results, Bob Woods, Executive Chairman, said:

"I am delighted to report another year of strong growth, with our total client assets under management, administration and advice increasing by 27.2% to £4.63bn at the year-end. 

"Revenue was up 25.4% to £29.35m which, coupled with an Adjusted EBITDA margin of 23.1% and a lower effective tax rate, resulted in Adjusted EPS increasing 16.9% to 28.23p. 

"The Board is pleased to recommend a 30.0% increase in total dividend for the year to 9.10p and remains committed to growing the dividend, while maintaining an appropriate level of dividend cover. 

"We have strengthened our offering over the course of the year, with the acquisition of Atkinson Bolton and the appointment of our subsidiary, Custodian Capital, as discretionary investment manager of Custodian REIT plc.  Our brand has been enhanced by us bringing our three core businesses together under the Mattioli Woods name and we have strengthened our Board via two new appointments. 

"With increasing complexity and continuing consolidation in both the SIPP and other key sectors in which we operate, we are confident there will be new opportunities to expand Mattioli Woods' operations, both organically and by acquisition. 

"I believe our ability to deliver proactive advice with a growing suite of our own products and services is a powerful combination, which will keep the Group well positioned to secure further profitable growth over the coming years." 

For further information please contact:

Mattioli Woods plc
Bob Woods, Executive Chairman	Tel: [phone]
[e-mail]	www.mattioliwoods.com
Ian Mattioli, Chief Executive
[e-mail]
Nathan Imlach, Finance Director
[e-mail]

Canaccord Genuity Limited
Martin Green	Tel: [phone]
Bruce Garrow	www.canaccordgenuity.com

Media enquiries:

FTI Consulting
Laura Ewart	Tel: [phone]
[e-mail]	www.fticonsulting.com

Analyst presentation

There will be an analyst presentation to discuss the results at 9.30am today at FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD.  Those analysts wishing to attend are asked to contact Laura Ewart at FTI Consulting on [phone] or at [e-mail]. 

Strategic report

Chairman's statement

I am pleased to report another year of profitable growth, with the Group's total client assets under management, administration and advice having increased by 27.2% to £4.63 billion at the year-end.  Legislation and regulation continue to drive unprecented changes in our key markets, creating exciting opportunities we are working hard to capitalise upon. 

The latest thematic review of the self-invested personal pension ("SIPP") sector by the Financial Conduct Authority ("FCA") identified widespread failings within certain operators and this, coupled with recently announced increases in the regulatory capital requirement for SIPP operators, is expected to drive further consolidation in one of our core markets.  Against this backdrop, we were delighted to announce our acquisition of the pension administration business of UK Wealth Management Limited ("UKWM") from Ashcourt Rowan plc last month. 

Growing our business both organically and by acquisition is a key part of our strategy.  The recent "Mattioli Woods" rebrand of Kudos Financial Services Limited ("Kudos") and Atkinson Bolton Consulting Limited ("Atkinson Bolton") further integrates these previous acquisitions and is a major step forward in the continued development of our brand. 

In March 2014 Custodian REIT plc ("Custodian REIT"), a new closed-ended property investment company, listed on the Main Market of the London Stock Exchange.  It raised £55.0m of new money on admission and acquired £95.2m of UK commercial property sourced from an existing portfolio of 48 properties held by clients of Mattioli Woods.  Our subsidiary, Custodian Capital Limited ("Custodian Capital") was appointed as the discretionary investment manager.  As manager, Custodian Capital receives accounting and administration fees plus an annual management charge based on the net asset value of Custodian REIT, enhancing the Group's recurring revenues. 

Mattioli Woods has been shortlisted again as 'Best SSAS Provider' at the Investment Life & Pensions Moneyfacts Awards 2014, having been 'Highly Commended' in this category in the 2013 awards.  This continued industry recognition is very pleasing. 

Market overview

The Government's intention to provide full access to pension funds from retirement has brought clarity to the issue of "ownership" and accordingly pensions have been made much more attractive.  I expect the proposed changes to be good for the Group and the industry in general, with new opportunities for pension planning already being welcomed by our clients. 

Changes in employee benefits as a result of auto-enrolment, the introduction of a charge cap on auto-enrolment pension schemes in April 2015 and the abolition of provider commissions in April 2016 are obliging many employers to review their benefit and reward strategies.  We have developed the products, services and advice that modern employers need to recruit and retain staff.  We expect an improving UK economy to offer us new opportunities to engage with a broader number of employers, to whom we can deliver a full range of employee benefits services, including auto-enrolment, healthcare, executive financial counselling, international benefit consulting and 'Create' - our flexible benefits solution. 

As a result of these changes, we expect employee benefits revenues to move away from up-front commissions, reducing revenues in the short term, but leading to higher fee-based recurring revenues going forward. 

Assets under management, administration and advice

Total client assets under management, administration and advice increased by 27.2% to £4.63bn at 31 May 2014 (2013: £3.64bn) as follows:

	31 May 2014 £m	31 May 2013 £m
SSAS	1,390.8	1,362.5
SIPP	1,546.7	1,264.8
Funds Under Trusteeship	2,937.5	2,627.3
Employee benefits	926.2	640.3
Personal assets	762.5	376.7
Assets under management, administration and advice4	4,626.2	3,644.3

⁴Certain pension scheme assets, including clients' own commercial properties, are only subject to a statutory valuation at a benefit crystallisation event.  

In addition to net organic growth of £532.4m in total client assets, we added £442.4m of client assets on the acquisition of Atkinson Bolton.  We added a further £7.1m of assets under administration on our appointment to The HD SIPP in June 2013, having worked closely with The Insolvency Service, the FCA and HM Revenue & Customs to secure the position of members following the failure of the previous operator. 

Our discretionary portfolio management service allows us to deliver a more efficient wealth management service to our clients.  At 31 May 2014, our discretionary assets under management had increased to £0.75bn (2013: £0.19bn) with £238.3m added on the acquisition of Atkinson Bolton and a further £142.2m of funds under management being added on Custodian Capital's appointment as manager of Custodian REIT.  

The Group also operates our own open-ended investment company ("OEIC"), the FP Thoroughbred Core Alpha Fund ("the Thoroughbred OEIC"), which held £54.7m of our clients' assets at 31 May 2014, the majority of which were under discretionary management. 

Following the year end, we added a further £190.0m of funds under trusteeship on the acquisition of UKWM's pension business. 

Strategy and acquisitions

Our business is structured to deliver comprehensive wealth management to affluent clients across the UK, centred on their retirement planning needs.  Our services include pension consultancy and administration, financial planning, discretionary and advisory investment management and employee benefits advice. 

Our strategy remains focused on the pursuit of strong organic growth, supplemented by strategic acquisitions.  All acquisitions completed to date have not just been earnings enhancing but have also broadened and deepened our expertise and services.  The acquisition of Atkinson Bolton in July 2013 is a good example, providing an excellent cultural and strategic fit, adding funds under management and bringing to the Group our first in-house investment fund, the Thoroughbred OEIC. 

The acquisition of UKWM's pension business extends our existing relationship with Ashcourt Rowan and its advisers.  As financial markets change, there is real benefit in organisations such as Ashcourt Rowan and Mattioli Woods entering into strategic partnerships to deliver better service and long term security for clients, while enhancing profitability. 

With increasing complexity and continuing consolidation in both the SIPP and other key sectors in which we operate, we are confident there will be further opportunities to expand Mattioli Woods' operations by acquisition, further accelerating our organic growth. 

Staff

I would again like to thank all our staff for their enormous enthusiasm and commitment in responding to the challenges created by the financial markets.  Maintaining capacity to take advantage of growing demand remains a key priority.  We continue to invest in our graduate recruitment programme, with a total of 16 new graduates joining the Group (2013: 13).  Our total headcount at the end of the period was 378 (2013: 283). 

We enjoy a strong team spirit and continue to build upon this by facilitating employee equity participation through the Mattioli Woods plc Share Incentive Plan ("the Plan").  The proportion of eligible staff investing via the Plan has increased to 56% (2013: 55%).  I am delighted that the value of employee share holdings held via the Plan has surpassed £1.80m and we will continue to encourage broader participation in the Plan. 

We plan further recruitment over the coming year and were delighted to announce the creation of The Mattioli Woods Business Academy ("the Academy") in partnership with Gateway College, Leicester.  The Academy has been developed to create opportunities locally for young people and assist the Group in recruiting and developing staff with the right skills, experience and values. 

Beginning this month, the Academy will offer two-year placements for up to 24 students each year, leading to Level 3 qualifications in Business and Finance (equivalent to 3 'A' Levels) and a wealth of workplace experience. 

Board changes

We are delighted to announce the appointment of Alan Fergusson to the Board.  Alan leads our employee benefits division, having joined the Group as Employee Benefits Director of Kudos on its acquisition in 2011.  Alan brings a wealth of experience in all aspects of employee benefits, including work place savings and ancillary schemes.  Alan also sits on the board of Worldwide Broker Network ("WBN"), the world's largest network of independent insurance brokers and employee benefits consultants.  As our employee benefits business grows, our international strategy is part of that development and being able to contribute to the WBN on a strategic level will benefit both ourselves and our clients. 

We are also delighted to announce the appointment of Carol Duncumb as a Non-Executive Director.  Carol brings considerable commercial experience at board level in both executive and non-executive roles, with a particular interest in e-commerce. 

Dividends

The Board is pleased to recommend the payment of a final dividend for the year of 6.00 pence (2013: 4.67 pence) per ordinary share.  If approved, the final dividend will be paid on 21 October 2014 to shareholders on the register at the close of business on 12 September 2014.  This makes a proposed total dividend for the year of 9.10 pence per share (2013: 7.00 pence), a year-on-year increase of 30.0% (2013: 26.1%).  The Board remains committed to growing the dividend, while maintaining an appropriate level of dividend cover. 

Outlook

Trading in the current period is in line with the Board's expectations.  A key part of our strategy is the  delivery of an integrated and scaleable technology platform to be used throughout the Group.  Over the next 12 months, we plan a further £1.0m of capital investment in our bespoke pension administration and wealth management platform, with the aim of enhancing the services we offer clients and realising operational efficiencies across our business as a whole.  It is our ambition to give clients a consolidated view of all their assets, building upon our existing client service proposition. 

I believe our ability to deliver proactive advice with a growing suite of our own products and services is a powerful combination, which will keep the Group well positioned to secure further profitable growth over the coming years. 

Bob Woods

Chairman

1 September 2014

Strategic report

Chief Executive's review

Introduction

We continue our transition from small to big as a business built on the integrity and expertise of our people, who continue to help and advise our clients with real passion.  As we position the Group for the future, one of our key aims is to grow our clients' investment assets. 

I am pleased to report another successful year in the development of a broader 21^st century financial services business.  Revenue in the year ended 31 May 2014 was up 25.4% to £29.35m (2013: £23.41m), with £2.66m of revenue generated by Atkinson Bolton and £0.65m representing the additional impact of a full year's contribution from the pension business we acquired from Ashcourt Rowan plc in April 2013.  Recurring revenues⁵ represented 78.1% (2013: 70.7%) of total Group revenues. 

EBITDA⁶ was up 14.9% to £6.62m (2013: £5.76m).  As anticipated, we saw a fall in EBITDA margin to 22.6% (2013: 24.6%) with further investment in the infrastructure of our business and a fall in banking revenues as a result of further cuts in bank interest rates.  Adjusted earnings per share⁷ increased by 16.9% on the prior year. 

⁵Annual pension consultancy and administration fees; level, renewal and trail commissions; banking income and annual property management charges. 

⁶Earnings before interest, taxation, depreciation and amortisation. 

⁷Basic EPS up 14.9% to 22.09p (2013: 19.23p). 

Our success is based upon the delivery of quality advice, services and products, growing our clients' assets and enhancing their financial outcomes.  The foundation of our success is the development of our people. 

Organic revenue growth of 11.3% or £2.63m was driven by our largely home-grown consultancy team, while the acquisition of quality businesses has helped us extend the range of services we can offer clients.  I am delighted we have created a business our clients' are proud to be a part of, our people feel proud to work for and is one that recognises and rewards talent and hard work. 

Our focus is on ensuring we continue to address our clients' changing needs and our ambition is to see our brand become an even stronger force in the UK financial services sector. 

Industry overview

Mattioli Woods operates within the UK's financial services industry, which is subject to the effects of volatile markets and economic conditions.  In recent years, we have seen a period of unprecedented change in legislation, regulation and customer needs.  We continue to take advantage of the opportunities this creates, with our specialists dedicated to keeping up with the pace of change.  Our entrepreneurial model allows us to adapt and advise our clients accordingly. 

Our markets are serviced by a wide range of suppliers offering diverse services to individual and corporate clients.  These markets are fragmented and remain highly competitive, although many commentators suggest that recent changes, particularly the RDR and increased regulatory capital requirements, will drive margin compression and industry consolidation. 

We expect  margin pressure to lead other organisations in our sector to develop increasingly integrated business models, as they seek to access more value through the supply chain and offer a broader range of services.  At the same time, we expect to see further consolidation as firms pursue economies of scale. 

Our services

Our core wealth management and pension offering serves the higher end of the market, including controlling directors and owner-managed businesses, professionals, executives and affluent retirees.  Our comprehensive range of employee benefit services is particularly suitable for medium-sized to larger corporates. 

The Group's income is derived from five key service lines:

·     Direct pension consultancy and administration;

·     Wealth management;

·     Employee benefits;

·     Third party pension administration; and

·     Property management.

Direct pension consultancy and administration

We are a leading provider of SIPP and SSAS pension schemes, which are often central to our clients' wealth management strategies.  We maintain our technical edge through our widely acknowledged understanding of UK pension legislation, which allows our consultancy team to deliver meaningful guidance to our clients. 

Revenues from the provision and administration of SIPPs and SSASs were £10.56m (2013: £9.05m), representing 36.0% (2013: 38.7%) of Group revenues, of which 95.6% (2013: 95.4%) are recurring.  Our client base primarily comprises owner-managers, senior executives and members of the professions.  Additional fees are generated from the provision of specialist ad hoc consultancy services.  

An increase in client activity and the number of new schemes written led to increased fee income of £9.43m (2013: £7.51m).  This was partially offset by an decrease in banking revenues to £1.13m (2013: £1.54m).  Continued low interest rates, exacerbated by the government's "Funding for Lending" scheme, are expected to maintain pressure on banking revenues in this new financial year, although this may be partially offset by demand for advice on investment into other asset classes. 

We gained 316 (2013: 282) direct⁸ SSAS and SIPP schemes in the year, representing 9.3% (2013: 8.5%) of schemes at the start of the year.  We remain focused on maintaining the quality of new business, with an average SIPP scheme transfer value of £0.43m (2013: £0.42m) and SSAS scheme transfer value of £0.73m (2013: £0.44m).  We continue to achieve strong client retention with a 8.3% (2013: 3.2%) overall increase in the number of direct schemes administered at the year-end.  Our external loss rate⁹ improved to 3.2% (2013: 3.6%) and the overall attrition rate¹⁰ fell to 3.6% (2013: 4.2%), partly as a result of previous acquisitions now having fully bedded-in. 

⁸SSAS and SIPP schemes where Mattioli Woods acts as pension consultant and administrator. 

⁹Direct schemes lost to an alternative provider as a percentage of average scheme numbers during the period. 

¹⁰Direct schemes lost as a result of death, annuity purchase, external transfer or cancellation as a percentage of average scheme numbers during the period.   

Wealth management

Discretionary portfolio management and the provision of bespoke investment advice sit at the heart of our long term investment propositions, embracing both family assets and pension assets.  Revenues increased 39.4% to £8.98m (2013: £6.44m), with £1.47m of this increase from the acquisition of Atkinson Bolton.  Wealth management represented 30.6% (2013: 27.5%) of total Group revenues, with the proportion of recurring revenues increasing to 76.9% (2013: 54.2%) due to the growth in discretionary funds under management and the introduction of adviser charging following the implementation of the RDR on 1 January 2013.  Our investment advisory revenues increased to £3.78m (2013: £1.56m), with our adviser charges based on the value of assets under advice during the period. 

At the year end our discretionary assets under management had increased to £0.75bn (2013: £0.19bn), generating initial placement fees and ongoing management charges of £4.12m (2013: £1.92m).  The increase in adviser and discretionary management charges more than offset the anticipated fall in investment commissions to £1.83m (2013: £2.97m). 

The growth of funds under management and advice enhances the quality of our earnings through an increase in recurring revenues.  As with other firms, these income streams are directly linked to the value of funds under management and advice, and are therefore effected by the performance of financial markets. 

Employee benefits

Employee benefits are a focus for businesses seeking to attract and retain quality employees.  The market is moving towards 'total reward' and we are at the forefront of the advice, services and products needed by employers to achieve this.  We offer specialist consultancy on group pension arrangements, from the complexities of final salary schemes, through to defined contribution schemes and a wider range of ancillary employee benefits such as flexible benefits, medical insurance, executive financial planning and educational services.  We work with employers to review existing or implement new reward and benefit packages and provide ongoing advice to ensure these packages remain competitive and up-to-date with changes in legislation.

We recommend, operate and administer schemes on a global basis, providing advice on life cover, medical insurance, salary protection, rewards and lifestyle-related benefits. 

Employee benefits revenues increased to £5.65m (2013: £4.37m), aided by £1.19m from Atkinson Bolton and some significant new client wins.  Employee benefits revenues now represent 19.3% of total revenue (2013: 18.7%), of which 47.4% (2013: 38.5%) are recurring.  The acquisition of Atkinson Bolton extended our employee benefits proposition and we expect new opportunities will arise from the drive towards a focus on total reward and flexible benefits in the corporate market.  However, new rules governing workplace pensions are to be introduced in April 2015 and April 2016, which are expected to reduce our corporate pension revenues in the short term, but lead to higher fee-based recurring revenues going forward. 

Third party pension administration

Our third party administration offering was established in August 2010 following the acquisition of City Pensions Limited (trading under the "City Trustees" brand).  City Trustees' generates income from the setting up and administration of pension schemes under an administration-only model, with its products being distributed via independent financial advisers, wealth managers and other intermediaries. 

City Trustees has developed an excellent reputation for providing bespoke pensions administration coupled with first-rate client service and has been awarded the Defaqto 5-star rating for its SIPP. 

Third party administration revenues increased by 34.8% to £2.13m (2013: £1.58m), representing 7.2% (2013: 6.7%) of total revenues, of which 89.4% (2013: 94.8%) are recurring.  This strong revenue growth was driven primarily by the acquisition of Ashcourt Rowan plc's pension administration business in April 2013.  Administration fees increased to £1.73m (2013: £1.14m) and associated banking revenues were £0.40m (2013: £0.44m). 

Property management

Mattioli Woods' subsidiary Custodian Capital Limited ("Custodian Capital") has facilitated direct commercial property ownership for clients via limited partnership or private limited company ("syndicated") arrangements, aiming to invest in good quality commercial or residential property with conservative levels of gearing, to deliver a long-term income stream and the possibility of capital growth. 

Custodian Capital initiated £2.3m (2013: £11.0m) of investment into one (2013: six) new partnership during the period, with direct property ownership continuing to appeal to clients attracted by the opportunity to develop a well-diversified portfolio of prime commercial property.  However, in June 2013 the FCA issued a policy statement entitled "Restrictions on the retail distribution of Unregulated Collective Investment Schemes and close substitutes". 

Historically, we have been permitted to promote these products to clients who were advised by an appropriately authorised financial advisor.  The impact of the policy statement was to reduce our ability to use the limited partnership structure, meaning we can only facilitate direct property investment on behalf of clients satisfying certain specific criteria. 

The Board therefore considered that the establishment of a new UK Real Estate Investment Trust ("REIT") listed on the London Stock Exchange would provide an attractive alternative structure for investment in commercial property, both for existing and new investors. 

Custodian REIT plc ("Custodian REIT") launched on 26 March 2014, acquiring £95.2m of UK commercial property from an existing portfolio of 48 properties held by clients of Mattioli Woods in syndicated structures.  Custodian Capital was appointed as discretionary investment manager of Custodian REIT, which is a significant milestone for Mattioli Woods, marking the next phase in the development of our business.  We were delighted with the positive response to the launch of Custodian REIT from our existing clients and the strong demand from new investors, with gross proceeds of £55.0m being raised through an initial public offering.  The new funds raised have allowed Custodian REIT to take advantage of a pipeline of opportunities to grow its diverse portfolio of property.  As manager, we are focused on Custodian REIT delivering an attractive level of income together with the potential for capital growth from a balanced portfolio of real estate assets. 

Property management revenues increased to £2.04m (2013: £1.96m) or 6.9% of total revenue (2013: 8.4%), of which 65.8% (2013: 63.4%) represented recurring annual management charges.  We plan to grow and develop the REIT with further new capital raisings.  At 31 July 2014, the value of investment properties held by Custodian REIT had increased to £132.0m with a further 18 properties having been acquired since the launch date. 

Key performance indicators

The directors consider the key performance indicators ("KPIs") for the Group are as follows:

Strategy/objective	Performance indicator
Organic growth and growth by acquisition	Revenue - total income (excluding VAT) from all revenue streams.
Operating efficency	EBITDA margin - profit generated from the Group's operating activities before any financing income or costs, taxation, depreciation and amortisation as a proportion of revenue.
Shareholder value and financial performance	EBITDA - profit generated from the Group's operating activities before any financing income or costs, taxation, depreciation and amortisation as a proportion of revenue.
Shareholder value and financial performance	Adjusted EPS - total comprehensive income for the year, net of taxation, attributable to equity holders of the Company, adjusted to add back acquisition costs expensed under IFRS3 (Revised) and the amortisation of intangible assets other than computer software, divided by the number of ordinary shares in issue.
Growth in the value of assets under management, administration and advice	Assets under management, administration and advice - the value of all client assets the business gives advice upon, manages or administers.
Excellent client service and retention	Client loss rate - the number of direct SSAS and SIPP schemes lost as a result of death, annuity purchase, external transfer or cancellation as a percentage of average scheme numbers during the period.
Financial stability	Debtors' days - this is the average number of days' sales outstanding in trade receivables at any time.

Financial performance and future developments

Group results

Revenues were up 25.4% to £29.35m (2013: £23.41m), with sustained demand for the Group's services.  We are particularly pleased with the continued development of our broader wealth management proposition, strong post-acquisition performance of Atkinson Bolton and growth in City Trustees during the year.  The Group's revenue mix changed during the period, with further diversification of our key revenue streams as follows: 

·     36.0% direct pension consultancy and administration (2013: 38.7%);

·     30.6% wealth management (2013: 27.5%);

·     19.3% employee benefits (2013: 18.7%);

·     7.2% property management (2013: 8.4%); and

·     6.9% third party pension administration (2013: 6.7%). 

Unadjusted EBITDA increased 14.9% to £6.62m (2013: £5.76m), with an anticipated fall in EBITDA margin to 22.6% (2013: 24.6%) as a result of continued investment in our people and systems and further cuts in bank interest rates. 

To facilitate a like-for-like comparison with prior years, acquisition costs of £0.15m incurred on the Atkinson Bolton acquisition completed during the year have been added back in calculating adjusted EBITDA and adjusted profit before tax.  Adjusted EBITDA¹¹ increased 14.2% to £6.77m (2013: £5.93m), while adjusted EBITDA margin fell to 23.1% (2013: 25.3%).  As highlighted in my Industry Overview, I anticipate we will see some continued pressure on margins, with the impact of low interest rates and weak economic growth on investment returns putting stress on the total expense ratios incurred by clients. 

Net finance revenue

Net finance revenues of £0.04m (2013: £0.04m) remain in line with low interest rates.  The Group has maintained a positive net cash position, with average balances broadly in line with the prior year. 

Taxation

The effective rate of taxation on profit on ordinary activities fell to 16.3% (2013: 22.2%) due to further cuts in the UK corporation tax rate and a reversal of deferred tax liabilities on acquired intangibles to reflect the rate change.  The net deferred taxation liability carried forward at 31 May 2014 was £2.10m (2013: £1.83m). 

Earnings per share and dividend

Adjusted EPS¹² increased 16.9% to 28.23p (2013: 24.15p).  Basic EPS was up 14.9% to 22.09p (2013: 19.23p), primarily due to revenue growth increasing operating profits, coupled with lower corporate tax rates.  Diluted earnings per share increased 15.8% to 21.80p (2013: 18.84p), with 297,437 options issued under the Company's share option plans being exercised during the period.  A proposed increase of 30.0% in the total dividend for the year to 9.10p (2013: 7.00p) demonstrates our desire to deliver value to shareholders and confidence in the outlook for our business. 

¹¹Adding back £0.15m (2013: £0.17m) of acquisition costs expensed under IFRS3 (Revised). 

¹²Before acquisition - related costs, amortisation and impairment of intangible assets other than computer software.   

Cash flow

Net cash generated from operations was £5.05m (2013: £6.41m) with EBITDA of £6.62m (2013: £5.76m).  The Group conversion of EBITDA into operating cash flow was 76.3% (2013: 111.3%), with a £1.07m increase in trade receivables to 55 days' sales (2013: 52 days) as a result of:

·     Strong growth in direct pension fees, which are invoiced six months in arrears; and

·     The shift away from investment commissions paid direct from the product provider to adviser charges invoiced in arrears based on the value of assets under advice. 

This, coupled with a £0.49m increase in accrued time costs (2013: decrease of £0.38m), a £0.37m decrease in provisions (2013: increase of £0.14m) and a £0.09m decrease in trade and other payables (2013: increase of £0.96m), created a cash outflow from working capital of £2.02m (2013: inflow £0.53m). 

Outstanding trade payables fell slightly to 42 days' purchases (2013: 44 days). 

Capital expenditure in the year was £0.89m (2013: £0.69m), with the most significant costs being investment in new computer hardware, software and the purchase of new company cars following expansion of the consultancy team.  Further investment in the Group's management information systems and technology is planned over the coming year, to enhance reporting and our clients' ability to review their affairs on-line. 

Bank facilities

The Group has renewed its borrowing facilities with Lloyds Bank plc ("Lloyds"), which consist of a £5.0m overdraft facility with interest payable at the bank's base rate plus 1.1875% on the first £0.50m and plus 1.375% on borrowings in excess of £0.50m.  The Lloyds facility is repayable upon demand and renewable on 31 January 2015.  At 31 May 2014, the Group had unused borrowing facilities of £5.0m (2013: £5.0m). 

Capital structure

The Group's capital structure is as follows:

	2014 £000	2013 £000
Net funds	(9,511)	(8,047)
Shareholders' equity	35,544	29,100
Capital employed	26,033	21,053

The Group has remained negatively geared, with the gearing ratio falling from (7.5)% to (8.8)% as a result of the increase in Group trade and other payables to £6.39m (2013: £5.87m) being offset by the increase in net cash balances of £9.51m (2013: £8.05m). 

Acquisitions

The acquisition of Atkinson Bolton in July 2013 enables us to provide a broader range of services to both existing Mattioli Woods clients and former Atkinson Bolton clients.  It is another exciting step forward in the development of Mattioli Woods as a broader wealth management business. 

We were also pleased to acquire the pension administration business of UKWM in August 2014.  We expect to see more acquisition opportunities as other small SIPP operators look to exit the market. 

Relationships

The Group's performance and value to our shareholders are influenced by other stakeholders, principally our clients, suppliers, employees, the Government and our strategic partners.  Our approach to all these parties is founded on the principle of open and honest dialogue, based on a mutual understanding of needs and objectives. 

Relationships with our clients are managed on an individual basis through our account managers and consultants.  Employees have performance development reviews and employee forums provide a communication route between employees and management.  Mattioli Woods also participates in trade associations and industry groups, which give us access to client and supplier groups and decision-makers in Government and other regulatory bodies.  Mattioli Woods is a member of the Association of Member-directed Pension Schemes and the Quoted Companies Alliance. 

Resources

The Group aims to safeguard the assets that give it competitive advantage, including its reputation for quality and proactive advice, its technical competency and its people. 

Our core values provide a framework for responsible and ethical business practices.  Structures for accountability from our administration teams through to the operational management team and the Group's Board are clearly defined.  The proper operation of the supporting processes and controls are regularly reviewed by the Audit Committee and take into account ethical considerations, including procedures for 'whistle-blowing'. 

Forward looking statements

The strategic report is prepared for the members of Mattioli Woods and should not be relied upon by any other party for any other purpose.  Where the report contains forward-looking statements these are made by the directors in good faith based on the information available to them at the time of their approval of this report.  Consequently, such statements should be treated with caution due to the inherent uncertainties, including both economic and business risks underlying such forward looking statements and information.  The Group undertakes no obligation to update these forward looking statements. 

Principal risks and uncertainties

There are a number of potential risks which could hinder the implementation of our strategy and have a material impact on our long term performance.  These arise from internal or external events, acts or omissions which could pose a threat to the Group. 

As part of our ongoing commitment to developing our services to best meet our clients' requirements, during the year we commissioned a leading research specialist to carry out our first ever in-depth client satisfaction survey.

The survey covered many areas, including the client experience, perceptions of the organisation's positioning, breadth of services, strengths and weaknesses.  It included questions on communication, relationships, attitudes, fees and billing.  The interviews were conducted in line with the Market Research Society's Code of Conduct.

We are proud of our consistently high client retention rate, but continue seeking ways to strengthen this.  We believe the most significant risk we face is potential damage to our reputation as a result of poor client service and we are determined not to let standards slip.  We address this through ongoing quality control procedures and the provision of regular training for all our staff.  We recently strengthened our team through the appointment of a Customer Relations Officer, who has extensive customer management experience gained both within and outside of our sector.

Pension regulations will continue to be reviewed.  Future changes may not produce an environment that is advantageous to the Group and any changes in regulation may be retrospective.  To address this risk, we are committed to ensuring that our views are expressed during consultation exercises and that we respond positively and rapidly to new regulations. 

We also recognise that a significant skills shortage would represent a risk to growth.  We are mitigating this risk through investment in our graduate recruitment programme and by providing incentives to motivate and retain our existing employees. 

One source of revenue is based on the value of cash balances held in clients' schemes.  These balances are not included in the Consolidated or Company statements of financial position.  A continued low interest rate environment creates a risk of a decline in earnings due to a decline in balances or interest turn.  To mitigate this risk, we work hard on developing our banking relationships to ensure we can access competitive interest rates for our clients. 

The Group has an indirect exposure to security price risk on investments held by clients, with trailing (or funds based) investment commissions, property management fees, discretionary portfolio management fees and adviser charges being based on the value of client assets under management, administration or advice.  Periods of volatility in a particular asset class may see changes in how our investment revenues are derived.  However, a great strength of our business is that we can continue to derive income from investments in all asset classes, while ensuring our clients' investment strategies are appropriately aligned to the prevailing market conditions and suitable for their financial needs. 

The table below outlines the current risk factors for the business identified by the Group.  The risk factors mentioned below do not purport to be exhaustive as there may be additional risks that materialise over time that the Group has not yet identified or deemed to have a potentially material adverse effect on the business:

Industry risks
Risk type	Risk	Mitigating factors
Changes in investment markets and poor investment performance	Volatility may adversely affect trading and/or the value of the Group's funds under administration and advice, from which we derive revenues.	·      Majority of clients' funds held within registered pension schemes, where less likely to withdraw funds and lose tax benefits.  ·      Client banking arrangements enable clients to shelter from market volatility through diversification, while continuing to generate revenues for the Group.  ·      Market volatility is closely monitored by the Investment Committee.
Changing markets and increased competition	The Group operates in a highly competitive environment with evolving characteristics and trends.	·      Consolidating market position develops the Group's pricing power. ·      Full control over scalable and flexible MWeb administration platform. ·      Experienced management team with a strong track record.  ·      Loyal customer base and strong client retention. ·      Broad service offering gives diversified revenue streams.
Evolving technology	The Group's technology could become obsolete if we are unable to develop our systems to accommodate changing client needs, new products and the emergence of new industry standards.	·      Track record of successful development. ·      High awareness of the importance of technology at Board level. ·      Expanded systems development with objective to create one Group-wide platform.
Regulatory risk	The Group may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations.	·      Strong compliance culture.  ·      External professional advisers are engaged to review and advise upon control environment.  ·      Business model and culture embraces FCA principles, including treating clients fairly.  ·      Financial strength provides comfort should capital resource requirements be increased.
Changes in tax law	Changes in tax legislation could reduce the attractiveness of long-term savings via pension schemes, particularly SSASs and SIPPs.	·      The Government has a desire to encourage long-term savings to plan for an ageing population, which is currently under-provided for.  ·      Changes in pension legislation create the need for clients to seek advice.  ·      The development of the Groups' wealth management services reduces dependency on pension planning.

Operational risks
Risk type	Risk	Mitigating factors
Damage to the Group's reputation	There is a risk of reputational damage as a result of employee misconduct, failure to manage inside information or conflicts of interest, fraud, improper practice, poor client service or advice.	·      Strong compliance culture with a focus on positive customer outcomes. ·      High level of internal controls, including checks on new staff.  ·      Well trained staff who ensure the interests of clients are met in the services provided.
Errors, breakdown or security breaches in respect of the Group's software or information technology systems	Serious or prolonged breaches, errors or breakdowns in the Group's software or information technology systems could negatively impact customer confidence.  It could also breach contracts with customers and data protection laws, rendering us liable to disciplinary action by governmental and regulatory authorities, as well as to claims by our clients.	·      Ongoing review of data security.  ·      IT performance, scalability and security are deemed top priorities by the Board. ·      Experienced in-house team of IT professionals and established name suppliers.
Business continuity	In addition to the failure of IT systems, there is a risk of disruption to the business as a result of power failure, fire, flood, acts of terrorism, re-location problems and the like.	·      Periodic review of Business Continuity Plan, considering best practice methodologies. ·      Disaster recovery leads and a disaster recovery team in place.  Business impact analysis has been conducted per department for further planning.
Fraud risk	There is a risk an employee defrauds either the Group or a client.	·      City Trustees has permission to hold and control client money and the Group ensures the control environment mitigates against the misappropriation of client assets.  ·      Strong corporate controls require dual signatures for all payments and Board approval for all expenditure greater than £10,000.  ·      Assessment of fraud risk reviewed every six months in conjunction with the external auditors.  ·      Clients have view-only access to information and hence risk of fraud due to external attack on the Company's IT systems is assessed as low.
Key personnel risk	The loss of, or inability to recruit, key personnel could have a material adverse effect on the Group's business, results of operations or financial condition.	·      Succession planning is a key consideration throughout the Group. ·      Success of the Group should attract high calibre candidates. ·      Share-based schemes in operation to incentivise staff and encourage retention. ·      Recruitment programmes in place to attract appropriate new staff.  ·      Continued development of a cross functional acquisition team brought into acquisition projects at an early stage. ·      Keyman reliance cover for company founders.
Litigation or claims made against the Group	Risk of liability related to litigation from clients or third parties and assurance that a claim or claims will not be covered by insurance or, if covered, will exceed the limits of available insurance coverage, or that any insurer will become insolvent and will not meet its obligations to provide the Group with cover.	·      Appropriate levels of Professional Indemnity insurance cover regularly reviewed with the Group's advisers.  ·      Comprehensive internal review procedures, including compliance sign-off, for advice and marketing materials.  ·      Maintenance of three charging models; time cost, fixed and asset based aligned to specific service propositions. ·      Restricted status for our consultants to enable the recommendation of our own products versus others in the market place.
Reliance on third parties	Any regulatory breach or service failure on the part of an outsourced service provider could expose the Group to the risk of regulatory sanctions and reputational damage.	·      Due diligence is part of the selection process for key suppliers. ·      Ongoing review of relationships and concentration of risk with key business partners.
Strategic risk	Risk that management will pursue inappropriate strategies or implement the Group's strategy ineffectively.	·      Experienced management team with successful track record to date. ·      Management have demonstrated a thorough understanding of the market and monitor this through regular meetings with clients.
Financial risks
Risk type	Risk	Mitigating factors
Counterparty default	That the counterparty to a financial obligation will default on repayments.	·      The Group trades only with recognised, creditworthy third parties.  ·      All customers who wish to trade on credit terms are subject to credit verification procedures.  ·      All receivables are reviewed on an ongoing basis for risk of non-collection and any doubtful balances are provided against.
Bank default	The risk that a bank could fail.	·      We only use banks with strong credit ratings ·      Client deposits spread across multiple banks. ·      Regular review and challenge of treasury policy by management.
Concentration risk	A component of credit risk, arising from a lack of diversity in business activities or geographical risk.	·      The client base is broad, without significant exposure to any individual client or group of clients. ·      Broad service offering gives diversified revenue streams.
Liquidity risk	The risk the Group is unable to meet liabilities as they become due because of an inability to liquidate assets or obtain adequate funding.	·      Cash generative business. ·      Group maintains a surplus above regulatory and working capital requirements. ·      Treasury management provides for the availability of liquid funds at short notice.
Interest rate risks	Risk of decline in earnings due to a decline in interest turn.  Low interest rates make it harder to structure compelling capital-protected products for clients.	·      Good relationships with key banking partners.  ·      Access to competitive interest rates due to scale of our business.
Underwriting risk (structured products)	When arranging new structured products for promotion to the Group's clients, the Group may need to guarantee a minimum aggregate investment to secure appropriate terms for the product.  If actual client investment is less than the underwritten amount, we would incur the cost of unwinding the hedges underlying the unsold element of the product.	·      New products created in line with client demand. ·      Potential unwind costs are carefully considered by the Investment Committee prior to the launch of each structured product.

Corporate social responsibility

Mattioli Woods has a long-standing commitment to ensure our staff can engage with their local communities and charities.  This social awareness is present throughout the business, from our employees to our clients, our professional connections and the suppliers we use. 

We have developed innovative partnerships with community organisations and charities including Rainbows, LOROS Hospice, County Air Ambulance Service, Age UK, Eye Camps and the Royal National Lifeboat Institution.  The most recent Mattioli Woods Charity Dinner was hosted by Theo Paphitis and raised over £25,000 for a number of organisations and charities. 

We continue to sponsor wheelchair racer Sammi Kinghorn, who is a member of the Scottish Commonwealth Squad and hopes to represent Team GB at the next Paralympic games. 

In addition, we sponsor a variety of sports related events, which we believe bring many benefits to the local community.  We are headline sponsors at the Leicester Sports Awards and the Mattioli Woods Rothley 10k is one of the most celebrated charity road running races in Leicestershire.  One of Cambridgeshire's largest annual charity events, the Chariots of Fire relay race, has been supported by our Newmarket office for the past 11 years.  Our colleagues in Aberdeen sponsor Glack Attack, a 5km obstacle mud run held on Glack Hill, Aberdeenshire.  By sharing the success stories from events like these we hope to encourage other aspiring individuals and teams in the future. 

We also have our own charitable trust, which this year donated over £5,000 to support children and young people in East Anglia. 

Approval

The strategic report in its entirety has been approved by the Board of Directors and signed on its behalf by:

Ian Mattioli

Chief Executive

1 September 2014

Consolidated statement of comprehensive income

For the year ended 31 May 2014

	Note	2014 £000	2013 £000
Revenue	4	29,347	23,405
Employee benefits expense		(16,857)	(12,832)
Other administrative expenses		(5,423)	(4,693)
Share based payments		(386)	(102)
Amortisation and impairment	8	(1,176)	(854)
Depreciation		(367)	(304)
Loss on disposal of property, plant & equipment		(64)	(23)
Operating profit before financing		5,074	4,597
Finance revenue		43	53
Finance costs		(2)	(12)
Net finance revenue		41	41
Profit before tax		5,115	4,638
Income tax expense		(834)	(1,031)
Profit for the year		4,281	3,607
Other comprehensive income for the year, net of tax		-	-
Total comprehensive income for the year, net of tax		4,281	3,607
Attributable to:
Equity holders of the parent		4,281	3,607
Earnings per ordinary share:
Basic (pence)	6	22.09	19.23
Adjusted (pence)		28.23	24.15
Diluted (pence)	6	21.80	18.84
Proposed total dividend per share (pence)	7	9.10	7.00

The operating profit for each period arises from the Group's continuing operations.  The profit of the Company for the financial year, after taxation, was £3.47m (2013: £3.05m). 

Consolidated and Company statements of financial position           Registered number: 3140521

As at 31 May 2014

		2014		2013
		Group	Company	Group	Company
	Note	£000	£000	£000	£000
Assets
Property, plant and equipment		1,326	1,165	1,103	928
Intangible assets	8	29,001	10,192	24,060	10,303
Deferred tax asset		367	298	225	153
Investments		-	19,623	-	13,698
Total non-current assets		30,694	31,278	25,388	25,082
Trade and other receivables		10,568	8,835	8,769	6,810
Financial assets		-	-	239	235
Investments		39	-	-	-
Cash and short-term deposits	10	9,514	3,181	8,047	4,554
Total current assets		20,121	12,016	17,055	11,599
Total assets		50,815	43,294	42,443	36,681
Equity
Issued capital	11	200	200	188	188
Share premium	11	8,001	8,001	8,616	8,616
Merger reserve	11	4,040	4,040	-	-
Capital redemption reserve	11	2,000	2,000	2,000	2,000
Equity - share based payments	11	1,046	1,040	777	777
Retained earnings	11	20,257	19,105	17,519	17,176
Total equity attributable to equity holders of the parent		35,544	34,386	29,100	28,757
Non-current liabilities
Deferred tax liability		2,464	284	2,059	273
Provisions	12	1,781	1,334	2,193	1,699
Total non-current liabilities		4,245	1,618	4,252	1,972
Current liabilities
Trade and other payables		6,386	3,802	5,874	3,831
Income tax payable		632	-	502	-
Provisions		4,008	3,488	2,715	2,121
Total current liabilities		11,026	7,290	9,091	5,952
Total liabilities		15,271	8,908	13,343	7,924
Total equities and liabilities		50,815	43,294	42,443	36,681

The consolidated financial information was approved by the Board of directors and authorised for issue on 1 September 2014 and is signed on its behalf by:

Bob Woods                                                                            Nathan Imlach

Executive Chairman                                                                 Finance Director

Consolidated and Company statements of changes in equity

For the year ended 31 May 2014

Group	Issued capital (Note 11) £000	Share premium (Note 11) £000	Merger reserve (Note 11) £000	Equity - share based payments (Note 11) £000	Capital redemption reserve (Note 11) £000	Retained earnings (Note 11) £000	Total equity £000
As at 1 June 2012	181	7,641	-	626	2,000	15,021	25,469
Profit for the year	-	-	-	-	-	3,607	3,607
Total comprehensive income	-	-	-	-	-	3,607	3,607
Transactions with owners of the Group, recognised directly in equity
Issue of share capital	7	975	-	-	-	-	982
Share-based payments	-	-	-	1	-	-	1
Deferred tax taken to equity	-	-	-	31	-	-	31
Current tax taken to equity	-	-	-	119	-	-	119
Dividends paid	-	-	-	-	-	(1,109)	(1,109)
As at 31 May 2013	188	8,616	-	777	2,000	17,519	29,100
Profit for the year	-	-	-	-	-	4,281	4,281
Total comprehensive income	-	-	-	-	-	4,281	4,281
Transactions with owners of the Group, recognised directly in equity
Issue of share capital	12	568	2,857	-	-	-	3,437
Share-based payments	-	-	-	94	-	-	94
Deferred tax taken to equity	-	-	-	129	-	-	129
Current tax taken to equity	-	-	-	46	-	-	46
Dividends paid	-	-	-	-	-	(1,543)	(1,543)
Reserves transfer	-	(1,183)	1,183	-	-	-	-
As at 31 May 2014	200	8,001	4,040	1,046	2,000	20,257	35,544

Consolidated and Company statements of changes in equity

For the year ended 31 May 2014 (continued)

Company	Issued capital (Note 11) £000	Share premium (Note 11) £000	Merger reserve (Note 11) £000	Equity - share based payments (Note 11) £000	Capital redemption reserve (Note 11) £000	Retained earnings (Note 11) £000	Total equity £000
As at 1 June 2012	181	7,641	-	626	2,000	15,232	25,680
Profit for the year	-	-	-	-	-	3,053	3,053
Total comprehensive income	-	-	-	-	-	3,053	3,053
Transactions with owners of the Company, recognised directly in equity
Issue of share capital	7	975	-	-	-	-	982
Share-based payments	-	-	-	1	-	-	1
Deferred tax taken to equity	-	-	-	31	-	-	31
Current tax taken to equity	-	-	-	119	-	-	119
Dividends paid	-	-	-	-	-	(1,109)	(1,109)
As at 31 May 2013	188	8,616	-	777	2,000	17,176	28,757
Profit for the year	-	-	-	-	-	3,472	3,472
Total comprehensive income	-	-	-	-	-	3,472	3,472
Transactions with owners of the Company, recognised directly in equity
Issue of share capital	12	568	2,857	-	-	-	3,437
Share-based payments	-	-	-	88	-	-	88
Deferred tax taken to equity	-	-	-	129	-	-	129
Current tax taken to equity	-	-	-	46	-	-	46
Dividends paid	-	-	-	-	-	(1,543)	(1,543)
Reserves transfer	-	(1,183)	1,183	-	-	-	-
As at 31 May 2014	200	8,001	4,040	1,040	2,000	19,105	34,386

Consolidated and Company statements of cash flows

For the year ended 31 May 2014

		Group 2014	Company 2014	Group 2013	Company 2013
	Note	£000	£000	£000	£000
Operating activities
Profit for the year excluding dividends received Adjustments for:		4,281	1,972	3,607	2,053
Depreciation		367	290	304	239
Amortisation and impairment	8	1,176	405	854	376
Investment income		(43)	(20)	(53)	(43)
Interest expense		2	2	12	12
Loss on disposal of property, plant and equipment		64	33	23	24
Equity-settled share-based payments		213	208	102	102
Cash-settled share-based payments		172	172	-	-
Income tax expense		834	485	1,031	585
Cash flows from operating activities before changes in working capital and provisions		7,066	3,547	5,880	3,348
(Increase)/decrease in trade and other receivables		(1,560)	(1,687)	(576)	145
(Decrease)/increase in trade and other payables		(90)	(28)	964	551
(Decrease)/increase in provisions		(366)	(65)	140	281
Cash generated from operations		5,050	1,767	6,408	4,325
Interest paid		(2)	(2)	(12)	(12)
Income taxes paid		(1,330)	(781)	(1,257)	(557)
Net cash flows from operating activities		3,718	984	5,139	3,756
Investing activities
Proceeds from sale of property, plant and equipment		37	37	23	22
Purchase of property, plant and equipment		(647)	(597)	(434)	(399)
Purchase of software	8	(294)	(294)	(260)	(190)
Consideration paid on acquisition of subsidiaries	3	(2,164)	(2,164)	(1,583)	(1,583)
Cash received on acquisition of subsidiaries	3	1,628	-	-	-
Acquisition of businesses	3	-	-	(656)	-
Investment in subsidiaries		-	-	-	(750)
New loans advanced to property syndicates		-	-	(2,450)	(2,446)
Loan repayments from property syndicates		239	235	3,288	3,288
Interest received		43	19	53	43
Dividends received		-	1,500	-	1,000
Net cash flows from investing activities		(1,158)	(1,264)	(2,019)	(1,015)
Financing activities
Proceeds from the issue of share capital		475	475	881	881
Payment of costs of share issue		(25)	(25)	-	-
Proceeds from directors' loans		-	-	13	13
Dividends paid	7	(1,543)	(1,543)	(1,109)	(1,109)
Net cash flows from financing activities		(1,093)	(1,093)	(215)	(215)
Net increase/(decrease) in cash and cash equivalents		1,467	(1,373)	2,905	2,526
Cash and cash equivalents at start year	10	8,047	4,554	5,142	2,028
Cash and cash equivalents at end of year	10	9,514	3,181	8,047	4,554

Notes to the consolidated financial information

1          Corporate information

Mattioli Woods plc ("the Company") is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the AIM market of the London Stock Exchange plc.  The consolidated financial information has been prepared on a historical cost basis and are presented in pounds, with all values rounded to the nearest thousand pounds (£000) except when otherwise indicated.  The consolidated financial information was authorised for issue in accordance with a resolution of the Directors on 1 September 2014. 

The consolidated financial information comprises extracts from the financial statements of Mattioli Woods plc and its subsidiaries ("the Group") as at 31 May each year.  The nature of the Group's operations and its principal activities are set out in the Chief Executive's Review. 

2       Basis of preparation and accounting policies

2.1    Basis of preparation

The consolidated financial information has been prepared in accordance with International Financial Reporting Standards adopted by the International Accounting Standards Board ("IASB") and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB (together "IFRS") as adopted by the European Union ("EU"), and in accordance with the requirements of the Companies Act applicable to companies reporting under IFRS. 

The consolidated financial information has been prepared on a consistent basis with the year ended 31 May 2013, with no changes to the accounting framework adopted or accounting policies applied.  At the date of authorisation of the consolidated financial information, the following standards and interpretations which have not been applied in the consolidated financial information were in issue but not yet effective:

Standard or interpretation	Periods commencing on or after
IFRS 9                                     Financial Instruments	1 January 2015
IFRS 10                       Consolidated Financial Statements	1 January 2014
IFRS 11                       Joint Arrangements	1 January 2014
IFRS 12                       Disclosures of Interests in Other Entities	1 January 2014
IAS 27 (revised)           Separate Financial Statements	1 January 2014
IAS 32 (amended)        Offsetting Financial Assets and Financial Liabilities	1 January 2014

Other than to expand certain disclosures within the consolidated financial information, the Directors do not expect the adoption of the standards and interpretations listed above will have a material impact on the financial statements of the Group in the future periods. 

The principal accounting policies adopted are set out below and have been applied consistently throughout the current and previous financial year. 

2.2       Significant accounting policies

Basis of consolidation

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases.  The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.  All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full. 

Business combinations

Business combinations are accounted for using the purchase accounting method.  This involves assessing whether any assets acquired meet the criteria for recognition as separately identifiable intangible assets.  Intangible assets are measured on initial recognition at their fair value at the date of acquisition.  Client portfolios are valued by discounting their future expected cash flows over their expected useful lives, based on the Group's historic experience.  Expected future cash flows are estimated based on the historic revenues and costs associated with the operation of that client portfolio.  The discount rates used estimate the cost of capital, adjusted for risk. 

2.3       Key sources of judgements and estimation uncertainty

Impairment of client portfolios

The Group reviews whether acquired client portfolios are impaired at least on an annual basis.  This comprises an estimation of the fair value less cost to sell and the value in use of the acquired client portfolios.  In assessing value in use, the estimated future cash flows expected to arise from each client portfolio is discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to that asset. 

The key assumption used in arriving at a fair value less cost of sale are those around valuations based on earnings multiples and values based on assets under management.  These have been determined by looking at valuations of similar businesses and the consideration paid in comparable transactions.  Management has used a range of multiples resulting in an average of 7.5x EBITDA to arrive at a fair value. 

The key assumptions used in respect of value in use calculations are those regarding growth rates and anticipated changes to revenues and costs during the period covered by the calculations.  Changes to revenue and costs are based upon management's expectation.  The Group prepares its annual budget and five-year cash flow forecasts derived therefrom, thereafter extrapolating these cash flows using a terminal growth rate of 2.5% (2013: 2.5%), which management considers conservative against industry average long-term growth rates. 

The carrying amount of client portfolios at 31 May 2014 was £17.24m (2013: £14.48m).  No impairments have been made during the year (2013: £nil) based upon the Directors' review. 

Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis.  This requires an estimation of the value in use of the cash-generating units to which the goodwill has been allocated.  In assessing value in use, the estimated future cash flows expected to arise from the cash-generating unit are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to that asset. 

The key assumptions used in respect of value in use calculations are those regarding growth rates and anticipated changes to revenues and costs during the period covered by the calculations, based upon management's expectation.  The carrying amount of goodwill at 31 May 2014 was £10.77m (2013: £8.73m).  No impairments have been made during the year (2013: £nil) based upon the Directors' review. 

Capitalised software

The costs of internal software developments are capitalised where they are judged to have an economic value that will extend into the future and meet the recognition criteria in IAS38.  Internally generated software is then amortised over an estimated useful life, assessed by taking into consideration the useful life of comparable software packages.  The carrying amount of capitalised software at 31 May 2014 was £0.65m (2013: £0.51m). 

Deferred tax assets

Deferred tax assets include temporary differences related to employee benefits settled via the issue of share options.  Recognition of the deferred tax assets assumes share options will have a positive value at the date of vesting, which is greater than the exercise price.  The carrying amount of deferred tax assets at 31 May 2014 was £0.37m (2013: £0.22m). 

Recoverability of accrued time costs

The Group recognises accrued income in respect of time costs incurred on clients' affairs during the accounting period, which have not been invoiced at the reporting date.  This requires an estimation of the recoverability of the time costs incurred but not invoiced to clients.  The carrying amount of accrued time costs at 31 May 2014 was £3.34m (2013: £2.85m). 

Accrued commission income

Accrued commission income is recognised in respect of commissions due to the Group on investments and bank deposits placed during the accounting period which have not been received at the reporting date.  This requires an estimation of the amount of commission income that will be received subsequent to the reporting date in respect of the accounting period, which is based on the value of historic commission receipts and investments placed by clients under advice.  The carrying amount of accrued commission income at 31 May 2014 was £0.45m (2013: £0.43m). 

Contingent consideration

The Group has entered into certain acquisition agreements that provide for a contingent consideration to be paid.  A provision is recognised for all amounts management anticipates will be paid under the relevant acquisition agreement.  This requires management to make an estimate of the expected future cash flows from the acquired client portfolio and determine a suitable discount rate for the calculation of the present value of those cash flows.  The carrying amount of contingent consideration provided for at 31 May 2014 was £4.46m (2013: £3.79m). 

Acquisitions and business combinations

When an acquisition arises the Group is required under IFRS to calculate the Puchase Price Allocation ("PPA").  The PPA requires companies to report the fair value of assets and liabilities acquired and it establishes useful lives for identified assets. 

Subjectivity is involved in PPA with the estimation of the future value of brands, technology, customer relationships and goodwill. 

Provisions

As detailed in Note 12, the Group recognises provisions for client claims, contingent consideration payable on acquisitions, commission clawbacks and other obligations which exist at the reporting date.  These provisions are estimates and the actual amount and timing of future cash flows are dependent on future events.  Management reviews these provisions at each reporting date to ensure they are measured at the current best estimate of the expenditure required to settle the obligation.  Any difference between the amounts previously recognised and the current estimate is recognised immediately in the statement of comprehensive income. 

3. Business combinations

Acquisition of Atkinson Bolton

On 29 July 2013, Mattioli Woods acquired 100% of the voting equity interests of Thoroughbred Wealth Management Limited ("TWM") and its subsidiary Atkinson Bolton Consulting Limited ("ABC") (together "Atkinson Bolton").  TWM is the holding company of ABC, an employee benefits and wealth management business based in Newmarket.  ABC offers a full discretionary management service and operates its own Open Ended Investment Company ("OEIC"), the FP Thoroughbred Core Alpha Fund. 

The acquisition has been accounted for using the acquisition method.  The fair value of the identifiable assets and liabilities of Atkinson Bolton as at the date of acquisition was:

	Fair value recognised on acquisition £000	Previous carrying value £000
Property, plant and equipment	44	44
Software	1	1
Client portfolio	3,785	-
Cash and short-term deposits	1,628	1,628
Trade receivables	152	152
Provision for impairment of receivables	(34)	(34)
Investments	37	37
Prepayments and accrued income	122	122
Deferred tax asset	1	1
Total assets	5,736	1,951
Trade payables	(135)	(135)
Accruals	(98)	(98)
Deferred income and other payables	(369)	(369)
Income tax payable	(308)	(308)
Deferred tax liabilities	(757)	-
Provisions	(181)	(153)
Total liabilities	(1,848)	(1,063)
Total identifiable net assets at fair value	3,888
Goodwill arising on acquisition	2,037
Total acquisition cost	5,925
Analysed as follows:
Deferred contingent consideration	2,750
Discounting of deferred consideration	(273)
Fair value of deferred contingent consideration	2,477
New shares in Mattioli Woods	2,867
Cash paid	581
Total acquisition cost	5,925

Cash inflow on acquisition	£000
Cash paid	(581)
Acquisition costs	(175)
Net cash acquired with the subsidiary (included in cash flows from investing activities)	1,628
Net cash inflow	872

From the date of acquisition Atkinson Bolton has contributed £2.66m to revenue and £0.39m to the Group profit for the period.  If the combination had taken place at the beginning of the period, Group revenue from continuing operations would have been £29.92m and the profit for the period would have been £4.28m . 

Atkinson Bolton is an excellent cultural and strategic fit with Mattioli Woods, offering real synergies for both organisations.  These synergies include the ability to promote additional services to existing and prospective clients of each business.  In addition, the acquisition adds further specialist wealth management expertise to the Group and extends its existing operations by adding fund management to our range of services.  The goodwill recognised above is attributed to the expected benefits from combining the assets and activities of Atkinson Bolton with those of the Group.  The primary components of this residual goodwill comprise:

·     Revenue synergies expected to be available to Mattioli Woods as a result of the transaction;

·     The workforce;

·     The knowledge and know-how resident in Atkinson Bolton's modus operandi; and

·     New opportunities available to the combined business, as a result of both Atkinson Bolton and the existing business becoming part of a more sizeable listed company. 

None of the recognised goodwill is expected to be deductible for income tax purposes.  The client portfolio will be amortised on a straight-line basis over an estimated useful life of 20 years, based on the Group's historic experience. 

Transaction costs of £0.175m incurred during the course of the acquisition have been expensed and are included in administrative expenses in the consolidated statement of comprehensive income and consolidated statement of cash flows in the period in which they were incurred. 

Contingent consideration

The Group has entered into certain acquisition agreements that provide for contingent consideration to be paid.  These agreements and the basis of calculation of the net present value of the contingent consideration are summarised below.  While it is not possible to determine the exact amount of contingent consideration (as this will depend on the performance of the acquired businesses during the period), the Group estimates the net present value of contingent consideration payable within the next 12 months is £3.19m (2013: £1.73m). 

During the period, the Group acquired Atkinson Bolton for an initial consideration of £3.45m (excluding cash acquired with the business) comprising £0.58m in cash and 946,256 ordinary shares in Mattioli Woods (which were valued at £2.87m based on the closing price of a Mattioli Woods share on 29 July 2013), plus contingent consideration of up to £2.75m.  The share purchase agreement dated 29 July 2013 ("the Agreement") states contingent consideration is payable in cash in the four years following completion if certain financial targets are met based on growth in the EBITDA generated by Atkinson Bolton during the period. 

However, the Group plans to integrate the operations of Atkinson Bolton into its wealth management and employee benefits divisions, with the legal entities comprising Atkinson Bolton becoming dormant following this transfer.  Consequently, on 26 August 2014 the parties agreed to vary the Agreement such that up to £2.75m of contingent consideration is payable as follows: 

·     Up to £1.60m payable as up to £0.8m in cash and up to £0.80m to be satisfied by the allotment and issue of new ordinary shares in Mattioli Woods (with the number of shares to be issued calculated based on the closing price of a Mattioli Woods share on 2 September 2014), if the EBITDA generated by Atkinson Bolton for the 12 months following completion meets certain financial targets; and

·     Up to £1.15m payable in cash if certain financial targets are met based on compound annual growth in the EBITDA generated by Mattioli Woods in the three years from 1 August 2014 to 31 July 2017. 

The Group estimates the net present value of the remaining contingent consideration at 31 May 2014 to be £2.48m using cash flows approved by the Board covering the contingent consideration period and expects the maximum contingent consideration will be payable. 

On 23 April 2013, the Group acquired the trade and certain assets of Ashcourt Rowan Administration Limited, 100% of the share capital of Ashcourt Rowan Pension Trustees Limited and 100% of the share capital of Robinson Gear (Management Services) Limited for an initial cash consideration of £0.66m plus contingent consideration of up to £0.625m payable in cash in the five years following completion if certain targets are met based on growth in revenues and client retention during that period.  The Group estimates the net present value of the remaining contingent consideration at 31 May 2014 to be £0.45m using cash flows approved by the Board covering the contingent consideration period. 

On 26 August 2011 the Group acquired Kudos for a total initial consideration of £5.52m (excluding cash acquired with the business) comprising £4.33m in cash and 462,572 ordinary shares in Mattioli Woods (which were valued at £1.19m based on the closing price of a Mattioli Woods share on 26 August 2011), plus contingent consideration of up to £4.75m payable in cash in the three years following completion if certain financial targets are met based on growth in recurring revenues and EBITDA generated during the period.  The Group estimates the net present value of the remaining contingent consideration at 31 May 2014 to be £1.54m using cash flows approved by the Board covering the contingent consideration period. 

4. Revenue

Revenue disclosed in the statement of comprehensive income is analysed as follows:

	2014 £000	2013 £000
Rendering of services	21,229	14,879
Commission income	8,118	8,526
	29,347	23,405

5. Segment information

The Group's operating segments remain unchanged and comprise the following:

·     Direct pension consultancy and administration - fees earned by Mattioli Woods for setting up and administering pension schemes under an advice-led model.  Additional fees are generated from consultancy services provided for special one-off activities and the provision of bespoke scheme banking arrangements;

·     Third party pension administration - fees earned by City Trustees for setting up and administering pension schemes under an administration-only model.  Additional fees are generated from provision of bespoke scheme banking arrangements;

·     Wealth management - income generated from the placing of investments on behalf of clients;

·     Property management - income generated where Custodian Capital manages collective property investment vehicles, facilitates direct commercial property investments on behalf of clients or acts as the external discretionary manager for Custodian REIT plc; and

·     Employee benefits - income generated by the Group's employee benefits operations. 

Each segment represents a revenue stream subject to risks and returns that are different to other operating segments, although each operating segment's products and services are offered to broadly the same market.  The Group operates exclusively within the United Kingdom.

The pension consultancy, administration and wealth management operations of Mattioli Woods utilise the same intangible and tangible assets, and the segments have been financed as a whole, rather than individually.  The Group's operating segments are managed together as one business.  Accordingly, certain costs are not allocated across the individual operating segments, as they are managed on a group basis.  Segment profit or loss reflects the measure of segment performance reviewed by the Board of Directors (the Chief Operating Decision Maker). 

Operating segments

The following tables present revenue and profit information regarding the Group's operating segments for the two years ended 31 May 2014 and 2013 respectively. 

Year ended 31 May 2014	Direct pension consultancy and administration £000	Third-party pension administration £000	Wealth management £000	Property management £000	Employee benefits £000	Total segments £000	Corporate costs £000	Consolidated £000
Revenue External client	10,559	2,126	8,979	2,035	5,648	29,347	-	29,347
Total revenue	10,559	2,126	8,979	2,035	5,648	29,347	-	29,347
Results Segment result	2,023	460	2,195	209	1,128	6,015	(900)	5,115

Year ended 31 May 2013	Direct pension consultancy and administration £000	Third-party pension administration £000	Wealth management £000	Property management £000	Employee benefits £000	Total segments £000	Corporate costs £000	Consolidated £000
Revenue External client	9,049	1,582	6,444	1,958	4,372	23,405	-	23,405
Total revenue	9,049	1,582	6,444	1,958	4,372	23,405	-	23,405
Results Segment result	2,275	285	1,855	435	771	5,621	(983)	4,638

Segment assets

The following table presents segment assets of the Group's operating segments:

		31 May 2014	31 May 2013
		£000	£000
Direct pension consultancy and administration		12,261	11,296
Third-party pension administration		4,007	4,395
Wealth management		9,214	6,098
Property management		697	1,453
Employee benefits		10,777	8,179
Total segments		36,956	31,421
Corporate assets		13,859	11,022
Total assets		50,815	42,443

Segment assets exclude property, plant and equipment, certain items of computer software, investments, current and deferred tax balances, and cash balances, as these assets are considered corporate in nature and are not allocated to a specific operating segment.  Acquired intangibles and amortisation thereon relate to a specific transaction and are allocated between individual operating segments based on the revenue mix of the cash generating units at the time of acquisition.  The subsequent delivery of services to acquired clients may be across a number or all operating segments, comprising different operating segments to those the acquired intangibles have been allocated to. 

Liabilities have not been allocated between individual operating segments, as they cannot be allocated on anything other than an arbitrary basis. 

Adjustments and eliminations

Certain administrative expenses including acquisition costs, amortisation of software, depreciation of property, plant and equipment, legal and professional fees and professional indemnity insurance are not allocated between segments managed on a unified basis and which utilise the same intangible and tangible assets. 

Finance income and expenses, gains and losses on the disposal of assets, taxes, intangible assets and certain other assets and liabilities are not allocated to individual segments as they are managed on a group basis.  Capital expenditure consists of additions of property, plant and equipment and intangible assets, including assets from the acquisition of subsidiaries. 

		31 May 2014	31 May 2013
Reconciliation of profit		£000	£000
Total segments		6,015	5,621
Acquisition costs		(157)	(175)
Depreciation		(367)	(304)
Amortisation and impairment		(119)	(91)
Loss on disposal of assets		(34)	(23)
Unallocated overheads		(254)	(414)
Bank charges		(10)	(17)
Finance income		43	53
Finance costs		(2)	(12)
Group profit before tax		5,115	4,638

		31 May 2014	31 May 2013
Reconciliation of assets		£000	£000
Segment operating assets		36,956	31,421
Property, plant and equipment		1,326	1,103
Intangible assets		977	823
Investments		39	-
Deferred tax asset		367	224
Prepayments and other receivables		1,636	825
Cash and short-term deposits		9,514	8,047
Total assets		50,815	42,443

6. Earnings per ordinary share

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year. 

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. 

The income and share data used in the basic and diluted earnings per share computations is as follows:

	2014 £000	2013 £000
Net profit and diluted net profit attributable to equity holders of the Company	4,281	3,607
Weighted average number of ordinary shares:	000s	000s
Issued ordinary shares at start period	18,813	18,137
Effect of shares issued during the year ended 31 May 2013	-	517
Effect of shares issued during the year ended 31 May 2014	563	107
Basic weighted average number of shares	19,376	18,761
Effect of dilutive options at the statement of financial position date	258	390
Diluted weighted average number of shares	19,634	19,151

The Company has granted options under the Share Option Plan, the Consultants' Share Option Plan and the LTIP to certain of its senior managers and directors to acquire (in aggregate) up to 6.56% of its issued share capital.  Under IAS 33 Earnings Per Share, contingently issuable ordinary shares are treated as outstanding and included in the calculation of diluted earnings per share if the conditions (the events triggering the vesting of the option) are satisfied.  At 31 May 2014 the conditions attached to 217,519 options granted under the LTIP were not satisfied.  If the conditions had been satisfied, diluted earnings per share would have been 21.57p per share (2013: 18.79p). 

The only transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements have been the issue of 20,210 ordinary shares under the Mattioli Woods plc Share Incentive Plan and the issue of 14,750 ordinary shares to satisfy the exercise of options under the Share Option Plan. 

7. Dividends paid and proposed

	2014 £000	2013 £000
Declared and paid during the year:
Equity dividends on ordinary shares:
- Final dividend for 2013: 4.67p (2012: 3.70p)	925	673
- Interim dividend for 2014: 3.10p (2013: 2.33)	618	436
Dividends paid	1,543	1,109
Proposed for approval by shareholders at the AGM:
Final dividend for 2014: 6.00p (2013: 4.67p)	1,201	925

8. Intangible assets

Group	Internally generated software £000	Software £000	Client portfolios £000	Goodwill £000	Other £000	Total £000
Gross carrying amount:
At 1 June 2012	412	577	15,654	8,734	35	25,412
Arising on acquisitions	-	-	1,517	-	-	1,517
Additions	183	77	-	-	-	260
Disposals	-	(1)	-	-	-	(1)
At 31 May 2013	595	653	17,171	8,734	35	27,188
Arising on acquisitions	-	1	3,785	2,037	-	5,823
Additions	214	80	-	-	-	294
Disposals	-	-	-	-	-	-
At 31 May 2014	809	734	20,956	10,771	35	33,305
Amortisation and impairment:
At 1 June 2012	33	283	1,959	-	-	2,275
Amortisation during the year	51	55	737	-	11	854
On disposals	-	(1)	-	-	-	(1)
At 31 May 2013	84	337	2,696	-	11	3,128
Amortisation during the year	71	74	1,020	-	11	1,176
At 31 May 2014	155	411	3,716	-	22	4,304
Carrying amount:
At 31 May 2014	654	323	17,240	10,771	13	29,001
At 31 May 2013	511	316	14,475	8,734	24	24,060
At 31 May 2012	379	294	13,695	8,734	35	23,137

Company	Internally generated software £000	Software £000	Client portfolios £000	Goodwill £000	Total £000
Gross carrying amount:
At 1 June 2012	412	506	7,124	4,335	12,377
Additions	183	7	-	-	190
At 31 May 2013	595	513	7,124	4,335	12,567
Additions	214	80	-	-	294
At 31 May 2014	809	593	7,124	4,335	12,861
Amortisation and impairment:
At 1 June 2012	33	275	1,580	-	1,888
Amortisation during the year	51	40	285	-	376
At 31 May 2013	84	315	1,865	-	2,264
Amortisation during the year	71	49	285	-	405
At 31 May 2014	155	364	2,150	-	2,669
Carrying amount:
At 31 May 2014	654	229	4,974	4,335	10,192
At 31 May 2013	511	198	5,259	4,335	10,303
At 31 May 2012	379	231	5,544	4,335	10,489

Software

Software is amortised over its useful economic life of four years on a reducing balance basis.  Internally generated software represents the development costs of the Group's bespoke pension administration platform, "MWeb".  The directors believe MWeb will be the principal pension administration platform used throughout the Group for the foreseeable future.  Internally generated software is amortised on a straight-line basis over an estimated useful life of 10 years. 

Client portfolios

Client portfolios represent individual client portfolios acquired through business combinations.  Client portfolios are amortised on a straight-line basis over an estimated useful life of between 10 and 25 years, based on the Group's historic experience. 

Goodwill

Goodwill arises where the price paid for an acquisition is greater than the fair value of the net assets acquired.  Goodwill arising on business combinations is subject to annual impairment testing. 

Other intangibles

Other intangibles represent external costs incurred in obtaining a licence.  Other intangibles are amortised on a straight-line basis over a useful economic life of three years. 

9. Share based payments

Share Option Plan

The Company operates the Share Option Plan by which certain of the executive directors and other senior executives are able to subscribe for ordinary shares in the Company at an exercise price of £1.32 per share, equal to the placing price of the shares issued on 15 November 2005.  The options vested when profit-based performance conditions were fulfilled.  The contractual life of each option expires on 31 May 2015.  At 31 May 2014 the total number of options outstanding and exercisable under the Share Option Plan was 82,500 (2013: 134,581). 

Consultants' Share Option Plan

The Company also operates the Consultants' Share Option Plan by which certain senior executives are able to subscribe for ordinary shares in the Company.  Options granted under the Consultants' Share Option Plan are summarised as follows:

Date of grant	Exercise price £	At 1 June 2013 No.	Granted during the year No.	Exercised during the year No.	Lapsed during the year No.	At 31 May 2014 No.
5 September 2006	2.21	234,377	-	(82,500)	-	151,877
4 September 2007	2.79	170,456	-	(16,260)	-	154,196
8 September 2009	2.16	170,456	-	-	(42,614)	127,842
		575,289	-	(98,760)	(42,614)	433,915

The exercise price of the options is equal to the market price of the shares at the close of business on the day immediately preceding the date of grant.  The options vest when the option holders achieve certain individual performance hurdles.  No options vested during the year as a result of the associated performance conditions being fulfilled.  If the performance hurdles, which are linked to individual sales revenues, are not met over the five financial years commencing on 1 June before the date of grant, the options lapse. 

Long Term Incentive Plan

During the period, Mattioli Woods granted awards to the Company's executive directors and certain senior employees under the LTIP.  Conditional share awards ("Equity-settled") grant participating employees a conditional right to become entitled to options with an exercise price of 1 pence over ordinary shares in the Company.  Conditional cash awards ("Cash-settled") grant participating employees a conditional right to be paid a cash amount based on the proceeds of the sale of a specified number of Ordinary Shares following the vesting of the award.  Movements in the LTIP scheme during the period were as follows:

LTIP options			31 May 2014 Equity-settled No.	31 May 2014 Cash-settled No.	31 May 2013 Equity-settled No.	31 May 2013 Cash-settled No.
Outstanding as at 1 June			-	-	-	-
Granted during the year			217,519	148,149	-	-
Exercised during the year			-	-	-	-
Forfeited during the year			-	-	-	-
Outstanding at 31 May			217,519	148,149	-	-
Exercisable at 31 May			-	-	-	-

The LTIP awards are subject to the achievement of corporate profitability targets measured over a three year performance period ending on 31 May 2016 and will vest following publication of the Group's audited results for the year ending 31 May 2016.  The amounts shown above represent the maximum opportunity for the participants in the LTIP. 

Share Incentive Plan

The Company introduced the Mattioli Woods plc Share Incentive Plan ("the SIP") in July 2008.  Participants in the SIP are entitled to purchase, at market value, up to a prescribed number of new 1p ordinary shares in the Company at the end of each month for which they will receive a like for like matching share.  These ordinary shares rank pari passu with existing issued ordinary shares of the Company.

A total of 79,646 (2013: 109,328) new ordinary shares were issued to the 189 employees who participated in the SIP during the year.  At 31 May 2014 the SIP held 407,040shares on their behalf, with a further 2,699 of forfeited shares not allocated to any specific employee. 

Share based payments expense

The expense for share based payments made in respect of employee services under the LTIP is recognised over the expected vesting period of the awards.  The expense recognised during the year ended 31 May 2014 is £253,771(2013: £nil), of which £81,655 arises from equity-settled share based payment transactions and £172,116 arises from cash-settled share based payment transactions. 

The expense for share based payments made in respect of employee services under the Share Option Plan and the Consultants' Share Option Plan is recognised over the expected vesting period of the awards.  The expense recognised during the year ended 31 May 2014 is £11,593 (2013: £831), which arises entirely from equity-settled share based payment transactions. 

The expense for share based payments in respect of "Matching shares" issued under the SIP is recognised in the period the shares are granted to the participating employee.  The expense recognised during the year ended 31 May 2014 is £120,279(2013: £100,654), which arises entirely from equity-settled share based payment transactions. 

Summary of share options

The following table illustrates the number and weighted average exercise prices ("WAEP") of, and movements in, share options during the year.

Share options	2014 No.	2014 WAEP £	2013 No.	2013 WAEP £
Outstanding as at 1 June	709,870	2.17	1,276,870	1.79
Granted during the year	217,519	0.01	-	-
Exercised	(150,841)	1.97	(567,000)	1.32
Forfeited during the year	(42,614)	-	-	-
Outstanding at 31 May	733,934	2.23	709,870	2.17
Exercisable at 31 May	388,573	2.25	539,414	2.17

The weighted average share price at the date of exercise for share options exercised during the year was £3.74.  For the share options outstanding as at 31 May 2014, the weighted average remaining contractual life is 3.6 years (2013: 3.8 years).  The WAEP for options outstanding at the end of the year was £2.23 (2013: £2.17), with the option exercise prices ranging from £1.32 to £2.79. 

The fair value of equity-settled share options granted is estimated as at the date of grant using the Black Scholes Merton model, taking into account the terms and conditions upon which the options were granted. 

10. Cash and short-term deposits

For the purpose of the statement of cashflows, cash and cash equivalents comprise the following at 31 May:

	Group 2014 £000	Company 2014 £000	Group 2013 £000	Company 2013 £000
Cash at banks and on hand	9,514	3,181	8,047	4,554
Short-term deposits	-	-	-	-
	9,514	3,181	8,047	4,554
Bank overdrafts	-	-	-	-
Cash and cash equivalents	9,514	3,181	8,047	4,554

Cash at banks earns interest at floating rates based on daily bank deposit rates.  Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.  The fair value of cash and short-term deposits is £9.51m (2013: £8.05m). 

At 31 May 2014, the Group had £5.0m (2013: £5.0m) of undrawn committed borrowing facilities available, in respect of which all conditions precedent had been met. 

11. Issued capital and reserves

Share capital	Ordinary shares  of 1p	Ordinary shares of 1p £
Authorised
At 1 June 2012, 31 May 2013 and 31 May 2014	30,000,000	300,000
Issued and fully paid
At 1 June 2012	18,136,801	181,368
Exercise of employee share options	567,000	5,670
Shares issued under the SIP	109,328	1,093
At 31 May 2013	18,813,129	188,131
Exercise of employee share options	150,841	1,508
Shares issued under the SIP	79,646	797
Shares issued for consideration	946,256	9,463
At 31 May 2014	19,989,872	199,899

Rights, preferences and restrictions on shares

All ordinary shares carry equal rights and no privileges are attached to any shares in the Company.  All the shares are freely transferable, except as otherwise provided by law.  The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.  All shares rank equally with regard to the Company's residual assets.

Share schemes and share incentive plan

The Company has three share schemes under which options to subscribe for the Company's shares have been granted to certain executives and senior employees (Note 9). 

The Company also operates a share incentive plan.  Participants in the SIP are entitled to purchase up to a prescribed number of new ordinary shares in the Company in any year.  At the Directors' discretion, the Company may also award additional shares to participants in the SIP.  Ordinary shares issued under the SIP rank pari passu with existing issued ordinary shares of the Company.  Dividends paid on shares held within the SIP are used to buy new ordinary shares in the Company of 1p each.

Other reserves

Group		Equity - share based payments £000	Merger Reserve £000	Share premium account £000	Capital redemption reserve £000	Retained earnings £000
At 1 June 2012	626		-	7,641	2,000	15,021
Share based payments	1		-	-	-	-
Shares issued under the SIP	-		-	232	-	-
Shares issued on exercise of options	-		-	743	-	-
Deferred tax asset recognised in equity	31		-	-	-	-
Profit for the financial year	-		-	-	-	3,607
Dividends paid	-		-	-	-	(1,109)
Current tax charge taken to equity	119		-	-	-	-
At 31 May 2013	777		-	8,616	2,000	17,519
Reserve transfer	-		1,183	(1,183)	-	-
Share based payments	94		-	-	-	-
Shares issued under the SIP	-		-	298	-	-
Shares issued on acquisition of TWM	-		2,857	-	-	-
Costs of issuing new shares	-		-	(25)	-	-
Shares issued on exercise of options	-		-	295	-	-
Deferred tax asset recognised in equity	129		-	-	-	-
Profit for the financial year	-		-	-	-	4,281
Dividends paid	-		-	-	-	(1,543)
Current tax charge taken to equity	46		-	-	-	-
At 31 May 2014	1,046		4,040	8,001	2,000	20,257

11. Issued capital and reserves (continued)

Company	Equity - share based  payments £000	Merger reserve £000	Share premium account £000	Capital redemption reserve £000	Retained earnings £000
At 1 June 2012	626	-	7,641	2,000	15,232
Share based payments	1	-	-	-	-
Shares issued under the SIP	-	-	232	-	-
Shares issued on exercise of options	-	-	743	-	-
Deferred tax asset recognised in equity	31	-	-	-	-
Profit for the financial year	-	-	-	-	3,053
Dividends paid	-	-	-	-	(1,109)
Current tax charge taken to equity	119	-	-	-	-
		-
At 31 May 2013	777	-	8,616	2,000	17,176
Reserve transfer	-	1,183	(1,183)	-	-
Share based payments	88	-	-	-	-
Shares issued as consideration	-	2,857	-	-	-
Costs of issuing new shares	-	-	(25)	-	-
Shares issued under the SIP	-	-	298	-	-
Shares issued on exercise of options	-	-	295	-	-
Deferred tax asset recognised in equity	129	-	-	-	-
Profit for the financial year	-	-	-	-	3,472
Dividends paid	-	-	-	-	(1,543)
Current tax charge taken to equity	46	-	-	-	-
At 31 May 2014	1,040	4,040	8,001	2,000	19,105

In the year ended 31 May 2012 the Company issued new ordinary shares as consideration for the shares acquired in TCF Global Independent Financial Services Limited.  The excess of the fair value of the shares acquired over the nominal value of the shares issued has been re-allocated from share premium reserve to merger reserve as required by the Companies Act. 

The following table describes the nature and purpose of each reserve within equity:

Reserve	Description and purpose
Equity - share based payments	The fair value of equity instruments granted by the Company in respect of share based payment transactions.
Share premium	Amounts subscribed for share capital in excess of nominal value less any associated issue costs that have been capitalised.
Capital redemption reserve	Amounts transferred from share capital on redemption of issued shares.
Merger reserve	Where shares are issued as consideration for shares in another company, the excess of the fair value of the shares acquired over the nominal value of the shares issued is recognised in the merger reserve.
Retained earnings	All other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere.

12. Provisions

Group	Client claims £000	Contingent consideration £000	Dilapidations £000	Clawbacks £000	Employers' NIC on share options £000	Onerous contracts £000	LTIP cash liability £000	Other £000	Total £000
At 1 June 2013	556	3,792	140	341	29	42	-	8	4,908
Arising during the year	292	2,355	-	3	139	-	172	-	2,961
Acquisitions (Note 3)	65	-	65	51	-	-	-	-	181
Used during the year	(388)	(1,583)	(20)	(101)	(19)	(42)	-	(8)	(2,161)
Unused amounts reversed	-	(100)	-	-	-	-	-	-	(100)
At 31 May 2014	525	4,464	185	294	149	-	172	-	5,789
Current 2013	556	1,733	35	341	-	42	-	8	2,715
Non-current 2013	-	2,059	105	-	29	-	-	-	2,193
At 31 May 2013	556	3,792	140	341	29	42	-	8	4,908
Current 2014	525	3,189	-	294	-	-	-	-	4,008
Non-current 2014	-	1,275	185	-	149	-	172	-	1,781
At 31 May 2014	525	4,464	185	294	149	-	172	-	5,789

12. Provisions (continued)

Company	Client claims £000	Contingent consideration £000	Dilapidations £000	Clawbacks £000	Employers' NIC on share options £000	LTIP cash liability £000	Total £000
At 1 June 2013	494	3,167	121	9	29	-	3,820
Acquisitions	-	2,431	-	-	-	-	2,431
Arising during the year	128	-	-	-	139	172	439
Used during the year	(245)	(1,583)	-	-	(19)	-	(1,847)
Unused amounts reversed	-	-	(21)	-	-	-	(21)
At 31 May 2014	377	4,015	100	9	149	172	4,822
Current 2013	494	1,583	35	9	-		2,121
Non-current 2013	-	1,584	86	-	29		1,699
At 31 May 2013	494	3,167	121	9	29		3,820
Current 2014	377	3,102	-	9	-	-	3,488
Non-current 2014	-	913	100	-	149	172	1,334
At 31 May 2014	377	4,015	100	9	149	172	4,822

Client claims

A provision is recognised for the estimated potential liability when the Group becomes aware of a possible client claim.  No discount rate is applied to the projected cash flows due to their short term nature.

Contingent consideration

The Group has entered into certain acquisition agreements that provide for contingent consideration to be paid.  Details of these agreements and the basis of calculation of the net present value of the contingent consideration is summarised in Note 3.  The Group estimates the net present value of contingent consideration payable within the next 12 months is £3.19m (2013: £1.73m).

Dilapidations

Under the terms of the leases for the Group's premises, the Group has an obligation to return the properties in a specified condition at the end of the lease term.  The Group provides for the estimated net present value of the cost of any dilapidations.  The discount rate applied to the cash flow projections is 5.0%.

Clawbacks

The Group receives certain initial commissions on indemnity terms and hence the Group provides for the expected level of clawback, based on past experience.  No discount rate is applied to the projected cash flows due to their short term nature.

Onerous contracts

The Group acquired an onerous contract for the provision of an IT system as part of the acquisition of Ashcourt Rowan's pension business ("the Pension Business").  Management assessed the expected benefit and costs associated with this contract and concluded that whilst the costs of the obligation exceeded the benefit it was appropriate to provide against the contract in full.

LTIP cash liability

The Group has granted cash settled options to certain Executive Directors.  The amount of any cash entitlement on vesting of an award will be directly linked to the value of a specified number of the Company's shares at the vesting date. 

Other

Prior to the Group's acquisition of the Pension Business, its employees had been notified the business was to be restructured, creating a potential liability for certain employee-related costs related to the restructuring.  Following acquisition, the Group relocated the Pension Business from Birmingham to Leicester and became liable for those employee-related costs relating to the restructuring.  The provision could be quantified and it was regarded as more likely than not that an outflow of resources will be required to settle the obligation.  The liability has been settled during the year. 

13. Commitments and contingencies

Operating lease agreements - Group as lessee

Mattioli Woods plc has entered into three commercial leases for its premises at Grove Park, Enderby.  The lease for the Head Office, MW House, has a duration of 20 years, from 10 June 2005.  The amount of annual rental is to be reviewed at three-yearly intervals.  The first lease for part of the ground floor of Gateway House (an office building adjacent to MW House) has a duration of ten years from 1 February 2008.  A second lease for part of the ground floor of Gateway House has a duration of ten years from 1 December 2009.  For both leases, the amount of annual rental is to be reviewed at the end of the fifth year. 

Mattioli Woods plc has also entered into a commercial lease for its premises at 22 Park Street, London, which expires on 23 January 2016.  The annual rental of £40,059 will not be reviewed. 

Kudos Financial Services Limited (formerly Kudos Indpendent Financial Services Limtied) has entered into a lease for its premises at 8 Queens Terrace, Aberdeen, which has a duration of ten years from 1 June 2008.  Following a review on 1 June 2013 the annual rental is £110,000. 

Atkinson Bolton Consulting Limited has entered into a lease for its premises at Cheveley House, Fordham Road, Newmarket, which expires on 24 March 2016.  The annual rental is £115,500. 

As part of certain acquisitions, the Group acquired operating lease obligations for office equipment.  No restrictions were placed upon the Group by entering into these leases.  Future minimum rentals payable under non-cancellable operating leases as at 31 May are as follows:

	Office equipment		Land and buildings
Group	2014 £000	2013 £000	2014 £000	2013 £000
Not later than one year	28	44	667	533
After one year but not more than five years	51	6	1,935	1,990
More than five years	-	-	1,708	2,042
	79	50	4,310	4,565

	Office equipment		Land and buildings
Company	2014 £000	2013 £000	2014 £000	2013 £000
Not later than one year	-	-	388	374
After one year but not more than five years	-	-	1,216	1,352
More than five years	-	-	1,116	1,302
	-	-	2,720	3,028

Group operating lease charges during the year were £653,561 (2013: £524,456) for land and buildings and £47,163 (2013: £27,442) for office equipment. 

Capital commitments

At 31 May 2014 the Group had no capital commitments (2013: £116,255).

Client claims

The Group operates in a legal and regulatory environment that exposes it to certain litigation risks.  As a result, the Group occasionally receives claims in respect of products and services provided and which arise in the ordinary course of business.  The Group provides for potential losses that may arise out of contingencies where the estimated potential liability is not covered by the Group's professional indemnity insurance (Note 12). 

A number of claims were notified to the Group's professional indemnity insurers ("the insurers") in respect of the period from 18 February 2010 to 17 August 2011.  The insurers have declined to indemnify the Group in respect of certain of these claims.  The Group is of the opinion that the insurers' position is without any merit and is challenging their view.  The estimated compensation payable should the clients' claims be successful, with no indemnity provided by the insurers, is £300,000.  To the extent the Group believes it is possible but not probable that a claim will succeed and result in an economic outflow, no additional provision is made in these financial statements. 

Contingencies in respect of legal matters are subject to many uncertainties and the outcome of individual matters is not predictable with assurance.  Significant judgment is required in assessing probability and making estimates in respect of contingencies, and the Group's final liabilities may ultimately be different.  The Group's total potential liability recorded in respect of litigation, arbitration and regulatory proceedings is determined on a case-by-case basis and represents, where appropriate, an estimate of the probable economic outflow after considering, among other factors, the progress of each case, the Group's experience and the experience of others in similar cases, and the opinions and views of legal counsel. 

FSCS levy

From time to time the Financial Services Compensation Scheme ("FSCS") has raised interim levies on the Investment Intermediation sub-class arising from revisions to the FSCS' earlier estimates of the compensation it expected to pay out following the failure of firms in the Investment Intermediation and General Insurance Intermediation sub-classes. 

In the year ended 31 May 2014 the FSCS did not raise an interim levy from investment intermediaries to pay for the costs of compensating clients in investment failures. This meant the Group was not required to contribute.  In the prior year the interim levy was £20m, which resulted in the Group contributing £29,601.  Consequently, no provision has been made in these financial statements for an FSCS interim levy for the year ending 31 May 2015. 

14. Events after the reporting date

Acquisition of UK Wealth Management Limited's pension business

On 11 August 2014 the Company's subsidiary City Pensions Limited ("City Pensions") acquired the pension administration business of UK Wealth Management Limited ("UKWM"), a wholly owned subsidiary of Ashcourt Rowan plc ("Ashcourt Rowan" or "the Seller"), for a total cash consideration of up to £0.355m, comprising an initial consideration of £0.275m (subject to adjustment for the value of working capital acquired) plus contingent deferred consideration of up to £0.08m subject to certain revenue and client retention targets being met during the two years following completion. 

The acquisition comprised the trade and certain assets of Pension Administration Limited ("PAL"), 100% of the share capital of Ropergate Trustees Limited from PAL Group Holdings Limited ("PALGH"), 100% of the share capital of Simmonds Ford Trustees Limited and 100% of the share capital of Acomb Trustees Limited from ATL Group Limited ("ATL") (together "UKWM Pensions").  PAL, PALGH and ATL were wholly owned indirectly by UKWM and ultimately owned by Ashcourt Rowan.  Ashcourt Rowan completed the acquisition of UKWM in April 2014. 

UKWM Pensions provides trustee and administration services to over 400 SIPP and SSAS schemes, with total funds under trusteeship of over £190.0m.  In the year ended 31 December 2013, the portfolio generated annual revenues of £0.34m.  The acquisition is expected to be earnings enhancing in the first full year of ownership, following the realisation of synergies and other benefits from combining the assets and activities of UKWM Pensions with those of Mattioli Woods. 

Due to the acquisition occurring after the end of the reporting period and the proximity of the date of acquisition to the date of issue of this consolidated financial information, the Directors are unable to provide the full disclosures required to meet the requirements of IFRS3 relating to acquisitions after the end of the reporting period but before the financial statements are authorised for issue.  Specifically, the purchase price allocation process is not yet complete, due to:

·     The Seller not being required to deliver and not having delivered completion accounts setting out the financial position of the UKWM Pensions as at the date of acquisition; and

·     The impracticality of measuring each identifiable asset and liability acquired at its IFRS acquisition date fair value for inclusion in these consolidated financial statements before completion accounts have been agreed. 

The acquisition will be accounted for using the acquisition method and it is not anticipated there will be any goodwill to recognise as a result of the transaction.  Transaction costs incurred during the year ended 31 May 2014 are included in administrative expenses in the consolidated statement of comprehensive income and operating cash flows in the statement of cash flows. 

The fair values to be attributed to the assets acquired and liabilities assumed will be finalised during the 12 months following acquisition.  A fair value table will be presented in Mattioli Woods' interim report for the six months ending 30 November 2014 and its consolidated financial statements for the year ending 31 May 2015.  The directors' estimate of the fair values of the identifiable assets and liabilities of UKWM if the acquisition had been completed on 31 July 2014 are presented for illustrative purposes only as follows:

	Illustrative fair value to be recognised on acquisition (unaudited) £000	Previous carrying value (unaudited) £000
Client portfolio	467	467
Trade and other receivables	95	95
Assets	562	562
Deferred income and other payables	(207)	(207)
Liabilities	(207)	(207)
Total identifiable net assets at fair value	355
Total acquisition cost	355
Analysed as follows:
Initial cash consideration	275
Deferred contingent consideration	80
Total acquisition cost	355
Cash outflow on acquisition	£000
Cash paid	275
Acquisition costs	50
Net cash outflow	325

The client portfolio will be amortised on a straight-line basis over an estimated useful life based on the Group's historic experience. 

Deed of variation of share purchase agreement

On 29 July 2013, Mattioli Woods acquired 100% of the voting equity interests of TWM and its subsidiary ABC (together "Atkinson Bolton") (see Note 3).  The share purchase agreement ("the Agreement") states contingent deferred consideration of up to £2.75m is payable in cash in the four years following completion if certain financial targets are met based on growth in the EBITDA generated by Atkinson Bolton during the period. 

On 26 August 2014 the parties agreed to vary the Agreement such that the contingent consideration is payable as follows: 

·     Up to £1.60m payable as up to £0.8m in cash and up to £0.80m to be satisfied by the allotment and issue of new ordinary shares in Mattioli Woods, if the EBITDA generated by Atkinson Bolton in the 12 months following completion meets certain financial targets; and

·     Up to £1.15m payable in cash if certain financial targets are met based on compound annual growth in the EBITDA generated by Mattioli Woods in the three years from 1 August 2014 to 31 July 2017. 

Taxation

The UK Government has enacted tax changes which will have a significant effect on the Group's future tax position.  The rate of corporation tax reduced from 23% to 21% from 1 April 2014, with a further 1% reduction to a rate of 20% from 1 April 2015. 

These rate changes will affect the amount of future cash tax payments to be made by the Group and will also reduce the size of deferred tax assets and liabilities in the Group's statement of financial position. 

15. Distribution of the annual report and accounts to members

The announcement set out above does not constitute a full financial statement of the Group's affairs for the year ended 31 May 2013 or 2014.  The Group's auditors have reported on the full accounts of each year and have accompanied them with an unqualified report.  The accounts have yet to be delivered to the Registrar of Companies. 

The annual report and accounts will be posted to shareholders in due course, and will be available on our website (www.mattioliwoods.com) and for inspection by the public at the Group's head office address: MW House, 1 Penman Way, Grove Park, Enderby, Leicester LE19 1SY during normal business hours on any weekday.  Further copies will be available on request. 

The Company's annual general meeting will take place on 16 October 2014 at the Group's head office. 

 

END

 

 

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