15th Mar 2007 07:02
F&C Asset Management PLC15 March 2007 To: London Stock ExchangeAttention: RNSFrom: F&C Asset Management plc (FCAM)Date: Embargoed until 7am on 15 March 2007 Preliminary Announcement for the year ended 31 December 2006 (Unaudited) Financial and Business Highlights • Embedded multi-boutique model • Improving investment performance • Record net fund sales in UK retail • New business focused in higher margin areas - increase in average fee rate • Three year growth plan adopted by Board, eight initiatives launched in 2007 • We are setting ourselves a target of increasing underlying EPS by 50% from 2007 to 2009 2006 2005Assets under management (at year-end) £104.1bn £131.0bn Net revenue+ £248.2m £267.2m Loss before tax £(30.6)m £(106.3)m Underlying profit before taxation*++ £88.7m £107.8m Operating margin* 36.5% 44.1% Basic loss per ordinary share (4.9)p (16.4)p Underlying earnings per ordinary share* 12.8p 15.9p Interim dividend 4.0p 4.0p Proposed final dividend 7.0p 7.0p Total dividends per ordinary share 11.0p 11.0p * before amortisation and impairment of intangibles, BCP compensation receipt, restructuring costs and the cost of the Re-Investment Plan + excluding BCP compensation receipt ++ excluding minority interest Enquiries: Alain Grisay, Chief Executive Officer Telephone: 020 7011 5100 David Logan, Chief Financial Officer Telephone: 020 7011 4223 Jason Hollands, Head of Group Communications Telephone: 020 7011 4168 Chairman's Statement Results For the year 2006, the Company recorded underlying earnings per share of 12.8pence. This compares with 15.9 pence per share achieved in 2005. The decline ofapproximately 3.0 pence per share is broadly equivalent to the impact of theloss of Resolution Life assets as forecast and described in these pages lastyear. Despite this reduction, the Company continued to operate at the higher endof industry margins. The basic loss for the year reduced from 16.4 pence in 2005to 4.9 pence in 2006. Net outflows were not, however, limited to those of Resolution Life. Outflows inour institutional client base more than offset the considerable institutionalinflows and record net retail sales. These developments have been announcedthroughout the year and are detailed in the Chief Executive's Report thatfollows and in greater detail in the Annual Report and Financial Statements thatwill be issued to shareholders later in the month. Outlook and strategy In light of the above and against a backdrop of accelerating change within theindustry, the Board reassessed the three year outlook and the appropriatestrategy for the Company. We remain committed to our model of a well diversifiedbusiness with a pan-European focus. Execution of this strategy will, however,both require and warrant, accelerated investment in people, infrastructure,specialist product capability and distribution. The Board has therefore decidedon an increase in investment expenditure to better position the Company forfuture growth. This will depress reported earnings in the short term but, webelieve, create greater shareholder value in the medium term. Both AlainGrisay's Chief Executive's Report and the Business Review that will be containedwithin the 2006 Annual Report & Financial Statements elaborate on specific goalsand initiatives, some of which are well underway. Dividend and dividend policy For 2006, the Board has decided to maintain its recent dividend level. We havetherefore recommended an unchanged final dividend of 7.0 pence, payable on 17May 2007 to shareholders on the register at 13 April 2007. Looking forward, and consistent with the above outlook and strategy, we havereviewed our dividend policy and will rebase this in 2007 to achieve cover of atleast 1.5 times earnings. Thereafter it is our intention to pursue a policy ofprogressive dividend growth. Board changes The year began with the appointment of a new Chief Executive, Alain Grisay. Inhis first twelve months at the helm, Alain has streamlined management, placedinvestment performance at centre stage, and raised the bar across the Company.In short, Alain has been putting in place the building blocks for a return togrowth. The Board's decision on strategy represents its confidence in Alain'sability to deliver. In addition to the appointment of a new Chief Executive, the Company alsorecruited a new Chief Financial Officer, David Logan. David was previously apartner in the asset management practice of Deloitte. David joined the Board asan Executive Director in July 2006. As previously announced, Howard Carter and Ian Paterson Brown, Chief Executiveand Chief Financial Officer respectively, retired from the Board in May 2006.Additionally, Karen McPherson, an independent Non-executive Director and Chairof the Remuneration Committee, retired from the Board in the fourth quarter. In July, the Board approved a detailed succession plan for Non-executives. Thefollowing changes reflect the implementation of that plan: Keith Satchell, a Non-independent, Non-executive Director retired from the Boardof F&C upon his retirement from Friends Provident. Jim Smart, Group Finance Director of Friends Provident, joined the Board of F&Cin January 2007 as a Non-independent, Non-executive Director. Christopher Jemmett, Senior Independent Director, Deputy Chairman and Chairmanof the Audit & Compliance Committee, reached the normal retirement age of 70 in2006 and will therefore retire from the Board at the forthcoming Annual GeneralMeeting. David Gray, Independent Director and member of the Audit & Compliance andNomination Committees, has served the Company for almost eight years and willretire from the Board at the forthcoming Annual General Meeting. Nicholas MacAndrew will, on conclusion of the forthcoming Annual GeneralMeeting, join the Board as an Independent Non-executive Director and become amember of the Audit & Compliance Committee. Nick has both a finance and assetmanagement background. He currently serves on a number of boards and is Chairmanof Save the Children. We would like to thank all retiring Directors for their support and dedicationover the years and extend a warm welcome to the Board to David, Jim and Nick. Summary We recorded major net outflows during the calendar year; despite this, theCompany maintained an operating margin at the higher end of industry standards.Looking forward, and in order to better meet competitive challenges and moreconfidently exploit growth opportunities, we have decided to spend more in theshort term to make more in the medium term. The new executive team now in placeis already well advanced in the necessary initiatives. On behalf of the Board, I would like to thank our employees for their tremendouseffort over the last year and our shareholders for their support and confidencein the Company and its future. Robert Jenkins Chairman 15 March 2007 Chief Executive's Report In last year's report, having just been appointed as Chief Executive, I set outour view that asset management is a service industry and therefore our businessphilosophy should be to seek to excel in everything that our clients expect fromus. I am pleased to report that over the last year this straightforward view hasbeen embedded as the cornerstone of our corporate culture through our ''Performance First'' initiative. This entailed defining first quartile standardsfor all areas of activity and setting measurable objectives at both thedepartment and the individual level. A winning organisational culture is theprerequisite to the successful implementation of strategy. It is particularly pleasing to note the transformational impact of PerformanceFirst across many areas of the business. Importantly this focus on service hasreceived external validation from clients. For example, we were awarded thefollowing accolades for excellence in service: • 2006 Gold Standard Award for Fund Management (Incisivemedia, UK)• 2006 Four Star Award for Good Service (Financial Adviser, UK)• 2006 Best Investment Trust Group (Professional Adviser, UK)• 2006 Best Sales Support Award (Funds & Finance, Germany) Critically, portfolio performance has improved across key asset classes and thisis reflected in our decision to broadly retain the size of our bonus pool,despite a reduction in revenues, to ensure we incentivise, retain and attracttalent. In our UK retail business 64 per cent of our actively managed open-endedfunds beat their sector medians over the year and 37 per cent delivered firstquartile performance. Fourteen of our funds have gained Standard & Poors FundResearch ratings and seven F&C managers achieved coveted Citywire ratings during2006; more than we have ever had. Institutional performance has also improvedwith 53 per cent of accounts, representing 70 per cent of institutional assets,meeting or beating client objectives during 2006 compared to 46 per cent overthree years. The core of our business structure remains the development of a ''multi-boutique'' model. In essence this involves establishing a portfolio ofcentres of excellence where investment teams have a high degree of ownership andaccountability over their processes and products, while the business providesthem with a shared support platform to leverage our scale as a large assetmanager. These teams are rewarded on the basis of their investment success. During the year, we upgraded and added significantly to our human capital.Market recognition coupled with strong performance brought immediateimprovements in our retail open ended fund sales which saw a 98 per cent netincrease on the previous year. The improvement in performance lays importantfoundations for organic growth in our institutional business, where significantinflows in our traditional asset classes will require sustained strong trackrecords. Newer product areas however, such as Liability Driven Investments, arealready achieving consultant recognition. Our support areas have also been strengthened, enabling the timely delivery ofcritical projects in Finance and IT. In addition to the focus on investment performance and client servicing, thesuccessful placement of an innovative £260 million subordinated debt has enabledthe Company to refinance existing facilities while considerably strengtheningits balance sheet. Going forward, we will continue to focus on performance asthe key foundation to generate shareholder value, and, to capitalise on ourimproving performance, we will strengthen our distribution capabilities. As previously disclosed, over the course of 2006 we experienced significantoutflows from the merger of Resolution Life Group Limited and Britannic Groupplc in 2005 which resulted in the termination of our contract with Resolution.We suffered further losses as a result of poor investment performance inprevious years and because of a trend in The Netherlands for pension funds tomove from balanced to specialist mandates, irrespective of performance. Weexpect our 2007 earnings to be depressed by the full impact of thesedevelopments. Our remaining maximum exposure to Dutch balanced mandates that are not underlong term contracts is only 7 per cent of our total assets under management(excluding notified future withdrawals) and we have no reason to believe thatthis entire book of business is at risk. We continue to work closely with ourDutch balanced clients to ensure the delivery of good performance and clientservicing. Importantly, the rebuilding of performance is the first step towards thegeneration of new business. We also believe that trends in the industry provideus with opportunities to win new specialist mandates and we will thereforecontinue to target business and develop products in higher fee and specialistareas. With the merger integration firmly behind us, the Board reviewed the Company's2006 achievements and management's three year plans in January 2007 and, basedon this review, has endorsed a strategy of accelerated investment in people andinfrastructure to support the delivery of enhanced investment performance and anumber of new product initiatives. These initiatives have the potential togenerate significant organic growth and new, diverse revenue streams. For example, during 2007 the accelerated growth plan includes: • Launch of a Liability Driven Investment (LDI) pooled solution• Strengthening of our alternative investments propositions• Launch of Collateralised Debt Obligations (CDO) platform• Further development of our Private Equity Fund of Fund business• Leverage our Global Tactical Asset Allocation (GTAA) skills with new products• Development of our real estate activities• Further expansion of our multi-manager capabilities, products and distribution• Enhance cross-selling of products and skills into different markets In summary, I am very encouraged by the progress against our previously statedobjectives and am confident in our plans for the future. We believe these willgenerate significant shareholder value and we are setting ourselves a target ofincreasing underlying earnings per share by 50% from 2007 to 2009. Alain L. GrisayChief Executive15 March 2007 Consolidated Income Statement for the year ended 31 December 2006 2006 2005 Notes £000 £000RevenueInvestment management fees 257,667 277,356Other income 3,677 691Total revenue 261,344 278,047Fee and commission expenses (10,530) (10,895)Net revenue 250,814 267,152Movements on unit-linked assets 106,700 162,605Movements on unit-linked liabilities (105,007) (161,321)Operating expensesOperating expenses (159,397) (150,695)Re-Investment Plan costs (11,593) (22,162)Impairment of intangible assets - management 3 (58,478) (111,500)contractsAmortisation of intangible assets - management 3 (43,046) (55,801)contractsTotal operating expenses before restructuring costs (272,514) (340,158)Operating loss before restructuring costs (20,007) (71,722)Restructuring costs:- Reorganisation costs post acquisition of F&CGH (9,704) (22,405)Group- Operations outsourcing - (2,235)Operating loss after restructuring costs (29,711) (96,362)Finance revenue 20,614 15,570Finance costs (22,077) (19,495)Impairment in associates and other financial (764) (5,026)investmentsLoss on disposal of subsidiaries and associates (61) (672)Share of profit/(loss) of associates 1,445 (339)Loss before tax (30,554) (106,324)Tax - Policyholders (836) (118)Tax - Shareholders 8,864 29,169Tax income 1 8,028 29,051Loss for the year (22,526) (77,273)Attributable to:Equity holders of the parent (23,525) (77,273)Minority interests 999 -Loss for the year (22,526) (77,273)Basic loss per share 2 (4.91)p (16.36)pDiluted loss per share 2 (4.78)p (15.77)pMemo - dividends proposed 33,761 33,381 - dividends paid 52,660 51,817 Consolidated Balance Sheet as at 31 December 2006 As at As at Notes 31 December 31 December 2006 2005 £000 £000AssetsNon-current assetsProperty, plant and equipment 12,799 11,242Intangible assets:- Goodwill 3 569,846 577,946- Management contracts 3 284,315 416,141- Other intangible assets 3 1,131 1,641 3 855,292 995,728Other financial investments 2,074 3,397Trade and other receivables 2,500 2,500Investment in associates 1,406 335Deferred acquisition costs 7,863 8,342Deferred tax assets 33,445 34,083Total non-current assets 915,379 1,055,627Current assetsFinancial investments 1,128,841 982,943Reinsurance assets 2,345 2,617Stock of units and shares 740 676Trade and other receivables 86,224 92,858Deferred acquisition costs 3,367 3,018Cash and cash equivalents:- Policyholders 53,272 28,152- Shareholders 214,311 118,045 267,583 146,197 Total current assets 1,489,100 1,228,309Total assets 2,404,479 2,283,936 LiabilitiesNon-current liabilitiesInterest bearing loans and borrowings 258,511 34,800Trade and other payables 3,984 -Provisions 9,148 12,960Pension deficit 4 45,403 48,032Deferred income 13,733 14,351Deferred tax liabilities 86,079 125,295Total non-current liabilities 416,858 235,438Current liabilitiesInvestment contract liabilities 1,175,105 1,006,928Insurance contract liabilities 2,345 2,617Interest bearing loans and borrowings 5,000 185,000Trade and other payables 62,220 58,724Provisions 9,317 6,463Employee benefits 32,815 29,954Deferred income 4,242 3,679Current tax payable 12,817 9,713Total current liabilities 1,303,861 1,303,078Total liabilities 1,720,719 1,538,516Equity attributable to equity holders of the parentShare capital 485 484Share premium account 32,594 30,730Merger reserve 520,677 606,146Other reserves (2,708) 52,179Retained earnings 132,282 56,379Total equity attributable to equity holders of the parent 683,330 745,918Minority interests 430 (498)Total equity 6 683,760 745,420Total liabilities and equity 2,404,479 2,283,936 Consolidated Statement of Recognised Income and Expense for the year ended 31 December 2006 Notes 2006 2005 £000 £000Loss for the year (22,526) (77,273) Foreign exchange movements on translation of foreign operations (4,422) (4,246)Actuarial gain/(loss) on defined benefit pension schemes 2,483 (30,734)Gain on available for sale financial investments 1,887 893Fair value gains transferred to the Income Statement (2,382) (1,120)Tax (expense)/income on items taken directly to equity 1 (761) 8,597Other 98 449Net expense recognised directly in equity (3,097) (26,161)Total recognised income and expense for the year (25,623) (103,434)Attributable to:Equity holders of the parent (26,622) (103,434)Minority interests 999 - (25,623) (103,434) Condensed Consolidated Cash Flow Statement for the year ended 31 December 2006 Notes 2006 2005 £000 £000Cash generated from operating activities 128,954 44,364Income tax paid (18,293) (14,359)Net cash inflow from operating activities 110,661 30,005Cash flows from investing activitiesProceeds from sale of property, plant and equipment 1 94Acquisition of property, plant and equipment (4,077) (3,701)Payment to increase investment in associate - (485)Compensation receipt from Resolution plc 3 27,000 -Purchase of intangibles - management contracts - (1,249)Purchase of intangibles - software (701) (989)Return of capital from investments 97 132Proceeds from disposal of subsidiaries - 10Cash transferred on disposal of subsidiary - (824)Payments to acquire investments (1,815) (35)Proceeds from disposal of investments 165 -Loan to associate (ISIS EP LLP) - (2,500)Expenses of F&CGH Group acquisition (207) (624)Capital distributions received from associates 374 -Investment income - investments 6,416 5,840Investment income - interest 5,741 3,472Investment income - dividends 10 32Net cash inflow/(outflow) from investing activities 33,004 (827)Cash flows from financing activitiesProceeds from issue of share capital 1,865 1,776Repayment of loan from Eureko B.V. (9,000) -Repayment of loans from FP Group (205,000) -Proceeds from long-term borrowings 260,000 -Payments in respect of expenses for long-term borrowings (2,095) -Interest paid on loans (14,045) (13,498)Other interest paid (568) (392)Equity dividends paid (52,660) (51,817)Interest on Preference Shares (53) (47)Purchase of own shares (684) (87)Net cash outflow from financing activities (22,240) (64,065)Net increase/(decrease) in cash and cash equivalents 121,425 (34,887)Effect of exchange rate fluctuations on cash held (39) -Cash and cash equivalents at 1 January 146,197 181,084Cash and cash equivalents at 31 December 267,583 146,197Cash and cash equivalentsShareholders 214,311 118,045Policyholders 53,272 28,152 267,583 146,197 Basis of preparation and accounting policies Basis of preparation The financial information included in this announcement has been extracted fromthe Consolidated Financial Statements of F&C Asset Management plc and itssubsidiaries (the Group) which have been prepared in accordance withInternational Financial Reporting Standards (IFRS), as adopted by the EuropeanUnion and those parts of the Companies Act 1985 applicable to companiesreporting under IFRS. The Consolidated Financial Statements are presented inpounds Sterling, rounded to the nearest thousand, except where otherwiseindicated. Accounting estimates assumptions and judgements The preparation of the financial statements necessitates the use of estimates,assumptions and judgements. These estimates, assumptions and judgements affectthe reported amounts of assets, liabilities and contingent liabilities at thebalance sheet date as well as the reported income and expenses for the year.While estimates are based on management's best knowledge and judgement usinginformation and financial data available to them, the actual outcome may differfrom these estimates. Accounting policies The accounting policies adopted in the preparation of the Consolidated FinancialStatements for the year to 31 December 2006 are consistent with those followedin the preparation of the Annual Report and Financial Statements for the yearended 31 December 2005 and have been applied consistently throughout the Groupfor the purposes of the Consolidated Financial Statements for the years ended 31December 2006 and 31 December 2005. The 2005 Annual Report and FinancialStatements are available on our website (www.fandc.com) or from our registeredoffice. Restatement of comparatives Certain 2005 comparative figures in the Consolidated Income Statement have beenrestated to be consistent with the presentation and classification adopted for2006. These changes are presentational in nature, reflect evolving bestpractice under IFRS and do not change the previously reported financial resultsfor the year ended 31 December 2005. Notes to the Consolidated Financial Statements 1. Income tax (a) Analysis of tax income in the year The major components of tax (income)/expense are: Consolidated income statement 2006 2005 £000 £000 Current income tax:UK 18,460 13,281Double tax relief in UK on overseas earnings (5,315) (2,606)Overseas 9,032 10,391Adjustments in respect of previous years 519 (1,640)Deferred income tax:Relating to origination and reversal of temporary differences (28,928) (49,810)Adjustments in respect of previous years (1,796) 1,333Tax income reported in the consolidated income statement (8,028) (29,051) Consolidated statement of changes in equity 2006 2005 £000 £000 Deferred and current income tax related to items charged or credited directly toequity:Share-based payments - 672Loss on financial investments (148) (68)Unremitted earnings (14) -Actuarial gain/(loss) on defined benefit pension schemes 923 (9,201)Tax expense/(income) recognised directly in equity 761 (8,597) (b) Factors affecting the tax income for the year A reconciliation between the actual tax income and the accounting lossmultiplied by the Group's domestic tax rate for the years ended 31 December 2006and 2005 is as follows: 2006 2005 £000 £000Loss before tax (30,554) (106,324)At the Group's statutory income tax rate of 30.0% (2005: 30.0%) (9,166) (31,897)Adjustments in respect of previous years (1,277) (307)Disallowed expenses 1,185 1,917Non-taxable income (399) (265)Overseas tax at differing tax rates 642 634Utilisation of unrecognised losses (302) (1,309)Share-based payments 1,289 2,176Tax income reported in the consolidated income statement (8,028) (29,051) 2. Earnings per Share Basic earnings per share amounts are calculated by dividing net profit/(loss)for the year attributable to ordinary equity holders of the parent by theweighted average number of Ordinary Shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit/(loss) for the period attributable to ordinary equity holders of the parent bythe weighted average number of Ordinary Shares outstanding during the year plusthe weighted average number of Ordinary Shares that would be issued on theconversion of all the dilutive potential Ordinary Shares into Ordinary Shares. In the opinion of the Directors the profit before amortisation and impairment ofintangibles, the BCP compensation receipt, restructuring costs and the cost ofthe Re-Investment Plan more accurately reflects the underlying earningsperformance of the Group. Reconciliation of Earnings per Share 2006 2006 2005 2005 Basic Diluted Basic Diluted p p p pLoss per Ordinary Share (4.91) (4.78) (16.36) (15.77)BCP compensation receipt, net of tax (0.38) -Amortisation of intangibles, net of tax 6.29 8.27Cost of the Re-Investment Plan, net of tax 1.81 3.82Restructuring costs, net of tax:- Reorganisation post acquisition of F&CGH Group 1.45 3.32- Operations outsourcing - 0.33Impairment of intangibles, net of tax 8.54 16.52Underlying earnings per share* 12.80 15.90 *Defined as earnings per Ordinary Share before amortisation and impairment ofintangibles, BCP compensation receipt, restructuring costs and the cost of theRe-Investment Plan. The following reflects the income and share capital data used in the basic anddiluted earnings per share calculations: Income 2006 2005 £000 £000Loss attributable to ordinary equity holders of the parent for basic loss per share (23,525) (77,273)BCP compensation receipt, net of tax (1,817) -Amortisation of intangibles, net of tax 30,132 39,061Cost of the Re-Investment Plan, net of tax 8,668 18,025Restructuring costs, net of tax:- Reorganisation post acquisition of F&CGH Group 6,975 15,684- Operations outsourcing - 1,564Impairment of intangibles, net of tax 40,935 78,050Underlying profit attributable to ordinary equity holders of the parent** 61,368 75,111 ** Defined as profit attributable to ordinary equity holders of the parentbefore amortisation and impairment of intangibles, BCP compensation receipt,restructuring costs and the cost of the Re-Investment Plan. 2006 2005Share capital No. No.Weighted average number of Ordinary Shares (excluding treasury shares) for basic loss 479,285,850 472,408,007per share Dilutive potential Ordinary Shares:Weighted average number of 1995 ESOS options exercisable - 3,105Weighted average number of 2002 ESOS options exercisable 475,912 880,389Weighted average number of Share Save Scheme options exercisable 193,233 278,082Weighted average number of The Re-Investment Plan options exercisable 9,820,735 15,210,652Weighted average number of The Long Term Remuneration Plan options exercisable 1,995,924 986,064Weighted average number of Purchased Equity Plan options exercisable 501,598 206,945Dilutive potential weighted average number of Ordinary Shares 492,273,252 489,973,244 3. Goodwill and other intangible assets Management Other intangible contracts assets - software and licences Total Goodwill £000 £000 £000 £000Cost:At 1 January 2005 577,946 626,230 4,979 1,209,155Additions - 1,249 1,555 2,804Disposals - - (2,359) (2,359)Foreign exchange losses - (7,630) (91) (7,721)At 31 December 2005 577,946 619,849 4,084 1,201,879 Additions - - 165 165Disposals (8,100) (43,200) (76) (51,376)Foreign exchange losses - (3,302) (22) (3,324)At 31 December 2006 569,846 573,347 4,151 1,147,344 Amortisation and impairment:At 1 January 2005 - 36,407 4,473 40,880Amortisation charge for the year - 55,801 420 56,221Disposals - - (2,359) (2,359)Impairment losses - 111,500 - 111,500Foreign exchange gains - - (91) (91)At 31 December 2005 - 203,708 2,443 206,151 Amortisation charge for the year - 43,046 665 43,711Disposals - (16,200) (66) (16,266)Impairment losses - 58,478 - 58,478Foreign exchange gains - - (22) (22)At 31 December 2006 - 289,032 3,020 292,052 Net book values:At 31 December 2004 577,946 589,823 506 1,168,275At 31 December 2005 577,946 416,141 1,641 995,728 At 31 December 2006 569,846 284,315 1,131 855,292 Goodwill arose on business combinations and relates to the business as a wholefollowing the fundamental integration, rationalisation and re-organisations,which took place after each acquisition. As such, goodwill is not allocated tocash generating units below the overall entity level. From 1 January 2004, theGroup's date of transition to IFRS, goodwill is no longer amortised but subjectto annual impairment testing. Goodwill has been tested for impairment at thebalance sheet date, as described below. The accumulated impairment losses at 31December 2006 relating to goodwill were £nil (2005 - £nil). Management contracts predominantly relate to contracts arising from businessacquisitions. Their descriptions, carrying amounts at the year-end, remainingamortisation periods and estimated useful lives are as follows: 31 December 2006 31 December 2005 Net book Remaining Estimated Net book Remaining Estimated values amortisation useful values amortisation useful life period life period £000 (years) (years) £000 (years) (years)RSAI insurance contracts 3,740 5 10 32,500 6 10RSAI retail contracts 29,865 5 10 35,295 6 10F&C insurance contracts 94,084 8 10 108,465 9 10F&C institutional contracts 57,425 4/8 4/10 105,963 9 10(non-fixed/fixed)F&C investment trust contracts 30,422 91/2 10 55,713 19 20F&C advisory and sub-advisory 54,018 8 10 61,631 9 10contractsF&C OEICs 13,615 8 10 15,366 9 10 283,169 414,933 The balance of management contracts relates to a private equity book of businessacquired during 2005, and has a carrying value of £1,146,000, with 18 yearsamortisation period remaining out of an estimated useful life of 20 years (2005- £1,208,000 and 19 years remaining). The accumulated impairment losses at 31 December 2006 relating to managementcontracts were £169,978,000 (2005 - £111,500,000). Details of impairmentrecognised in the year relating to F&C institutional and investment trustcontracts, and changes to their estimated remaining useful lives, are discussedbelow. As indicated in the 2005 annual report and financial statements, Resolution plcwithdrew the majority of its assets in the first quarter of 2006. The agreedcompensation of £27,000,000 received from Resolution during the year has beenrecognised as proceeds in respect of the deemed disposal of intangible assets.The cost, with respect to the original valuation, of the assets disposed of was£43,200,000 and the related cumulative amortisation amounted to £16,200,000.Therefore the carrying value of the disposed asset equalled the proceedsreceived giving rise to neither a gain nor a loss. The £8,100,000 disposal ofgoodwill in the year is in respect of the remaining deferred tax relating to the£27,000,000 carrying value of the intangible assets disposed of. Impairment testing of goodwill and intangible assets with finite lives Goodwill The recoverable amount of goodwill has been determined based on a value in usecalculation using cash flow projections based on the latest annual financialbudget approved by the Board. The discount rate applied to cash flow projections is 8.9% (2005: 8.9%). This isbased on the Group's weighted average cost of capital, calculated as at theyear-end, and takes into account the relative risks associated with the Group'svarious revenue streams. Projected revenues for the first year are based on the Board-approved budget.Beyond this, revenues assume growth of 5.75% per annum (2005: 6%) which is inline with the Group's long-term view of market growth, and consistent with thatexperienced across the markets in which assets are invested. Revenues earnedfrom significant contracts with a fixed term are assumed to terminate at the endof the fixed term, with operating costs falling by an amount which assumesassociated profit margins of 70%. Projected operating costs for the first year are driven by the budgeted Groupprofit margin for 2007. Thereafter costs assume growth of a minimum of 3.75% perannum (2005: 3.5%), to accord with anticipated future inflation and salaryincreases, with the margin capped at 45% (2005: 45%) as a measure of prudence,based on historical performance. A terminal value has been calculated and added to the net present value in orderto ascertain an overall value in use of the business. The recoverable value isthen compared to the carrying value of goodwill, management contracts and otherintangible assets, net of associated deferred tax provisions, and property,plant and equipment in order to ascertain whether any impairment exists. TheDirectors consider the terminal value to reflect fairly the long-term nature ofthe business and the Board's current view that there is no reason to believethat the business will not continue ad infinitum. As this annual impairment review of goodwill determined a surplus, no impairmenthas been recognised in the year in respect of goodwill (2005: £nil). 31 December 2006 31 December 2005 £000 £000 Carrying amount of goodwill 569,846 577,946 The key assumptions referred to above, to which the calculated value in use ismost sensitive, are as follows: 2006 2005 Discount rate 8.9% 8.9%Revenue growth rate 5.75% 6.0%Cost inflation rate 3.75% 3.5%Capped operating margin 45.0% 45.0% In order to assess the sensitivity of the key assumptions on the carrying valueof goodwill, analysis was conducted to ascertain the change that would berequired to derive a recoverable amount which approximated the carrying value ofgoodwill. The absolute levels of the discount rate, the revenue growth rate orthe cost inflation rate which most closely equated to a match in the recoverableamount and carrying value of goodwill were 12.6%, 4.05% and 6.15% respectively(2005: 11.8%, 4.1% and 5.7%). Intangible assets with finite lives During 2006 the business continued to experience a level of fund outflows whichwas higher than anticipated. This level of lost business will impact futurerevenues and was significant enough to be considered an indicator of potentialimpairment of certain intangible assets, namely the related investmentmanagement contracts. In accordance with IAS 36 'Impairment of Assets', an impairment review of theseassets was undertaken. The review resulted in impairment losses being recognisedin respect of management contracts as follows: 2006 2005 £000 £000F&C investment trust contracts 22,194 56,100F&C institutional contracts 36,284 55,400Total impairment recognised in the Income Statement 58,478 111,500 The above contracts relate to the investment trust management contracts andinstitutional fund management contracts acquired as a result of the businesscombination of the ISIS and F&CGH Groups on 11 October 2004. The recoverable amounts of the assets have been determined based on value in usecalculations using cash flow projections based on the latest annual financialbudget approved by the Board. The discount rate applied to the cash flow projections is 9.4% (2005 - 9.4%) forinvestment trust contracts, 9.4% (2005 - 9.4%) for institutional contracts withno fixed term, and 8.4% (2005 - 8.4%) for fixed term institutional contracts.These rates reflect the varying risks and uncertainties inherent in the revenuesfrom the underlying assets, using the Group's weighted average cost of capitalof 8.9% (2005 - 8.9%) as a benchmark. The revenue projections assume growth of 5.75% (2005 - 6%) per annum, in linewith the Group's long-term view of market growth, and consistent with thatexperienced across the markets in which the managed assets are invested. Theprojections are derived using the estimated useful lives of the underlyingcontracts and assume a constant loss of revenues over the projection periods. Operating costs for the first year of the projections are driven by the budgetedGroup profit margin for 2007. Thereafter, costs are driven by the Group'sprojected operating profit margins, as determined for the purposes of thegoodwill impairment review. Impairment has been determined by comparing the results of the value in usecalculations in respect of the remaining contracts at the year end to thecarrying value (cost less aggregate amortisation and prior impairment) of theassets at 31 December 2006, with any deficits arising constituting impairment tobe recognised for the year. Having continued to lose contracts at a higher than anticipated rate, the Groupreconsidered the average expected lives of the related assets. The reappraisalat the half-year stage revised the estimate of the remaining useful lives of theinvestment trusts and non-fixed term institutional management contracts to 10years and 6 years respectively, with effect from 1 July 2006. Following furtherbusiness outflows in the second half of the year, the Board revisited the usefullife estimates of the affected assets at the year end and as a result, witheffect from 1 January 2007, the remaining life of non-fixed term institutionalcontracts is now assessed as 4 years. The original estimate of the useful lives on acquisition of the assets inOctober 2004 was 20 years for investment trusts and 10 years for non-fixed terminstitutional contracts. The estimated useful lives of all other categories ofmanagement contracts remain unchanged. The revised useful lives represent a change in accounting estimate andaccelerate the amortisation of the remaining value of the assets from July 2006and again from January 2007. The effect of these changes increased theamortisation charge in the second half of 2006 by £1,686,000, and the charge infuture years will be increased by £2,555,000 compared to continuing to amortiseover the lives assigned from 1 July 2006, until such time as the assets becomefully amortised. 4. Defined benefit pension schemes The following tables summarise the aggregate defined benefit pension deficit ofthe Group and the key assumptions which drive the quantum of the deficit: 31 December 31 December 2006 2005 £000 £000Defined benefit pension obligations (179,755) (164,129)Plan assets 134,352 116,097 Gross pension deficit (45,403) (48,032) Expected long-term rates of return on plan assets 31 December 31 December 2006 2005 Equities 7.00% 7.00%Gilts 5.00% 5.00%Corporate Bonds 5.00% 4.70%Other 7.00% -Cash 4.50% 4.00% Key assumptions used to determine benefit obligations At 31 December At 31 December 2006 2005 Discount rate 4.60% - 5.00% 4.25% - 4.70%Rate of salary increase 2.50% - 4.25% 2.75% - 4.00%Rate of inflation increase 1.75% - 3.00% 1.75% - 2.75% Mortality assumptions Mortality assumptions remain unchanged since 31 December 2005. 5. Contingencies Contingent liabilities: (a) Shareholding in F&C Group Management Limited In December 2000, Eureko B.V. agreed to acquire 90% of the issued share capitalof F&C Group (Holdings) Limited from Hypo Vereins Bank. Approximately 73% ofthe ordinary issued shares of F&C Group Management Limited, a subsidiary companyof F&C Group (Holdings) Limited, were held in the form of two bearer sharewarrants which could not be located (the "old Share Warrants''). Since a bearer share warrant issued by a company entitles the bearer to theshares specified therein, there is a risk that a third party holding the oldShare Warrants may claim it is entitled to the specified shares in F&C GroupManagement Limited. If a third party were successful in establishing a claim inrelation to the old Share Warrants, F&C Group (Holdings) Limited could be liableto indemnify F&C Group Management Limited under the indemnity arrangements,which could have a material adverse effect on the Group's business, results ofoperations and/or financial condition. Under the terms of the merger in 2004, Eureko Holdings has given a specificindemnity (guaranteed by Eureko B.V.) to the Group in respect of losses arisingin relation to the old Share Warrants in F&C Group Management Limited (includingin respect of the indemnity granted by F&C Group (Holdings) Limited to F&C GroupManagement Limited) which is capped at approximately £432 million. While there is a possibility that a third party may seek to establish that it isentitled to the shares specified in the old Share Warrants, the Group has beeninformed that Eureko B.V. was advised at the time of the Merger that theprospect of a third party succeeding in such a claim is remote. (b) VAT Tribunal Appeal - VAT on investment trust management fees In a current UK Value Added Tax (VAT) tribunal appeal, a UK investment trust isseeking to establish that management services to UK investment trusts should bea VAT exempt supply, rather than a taxable supply in accordance with current UKVAT law. If this case were successful, a number of Group companies, in commonwith other fund managers in the UK, would face claims from those investmenttrusts to which they have supplied services for repayment of the VAT they havecharged to them. The Association of Investment Companies ("The AIC") (a party tothe above litigation) has indicated that it believes claims dating back as faras 1990 may be lodged with fund managers by investment trusts. Under current VATlaw, companies in the Group can submit repayment claims to HM Revenue andCustoms (HMRC), but only dating back as far as 2001, being the maximum timeperiod permitted. However, separate legal proceedings have challenged thevalidity of how the 'capping rules' introduced by HMRC in 1997 are applied. Ifthis case is successful AND it is held that VAT should not be charged oninvestment trust management fees, then the Group may be eligible to reclaim VATfrom HMRC in respect of the period between 1990 and 1996, which would be used topartially fund the repayment back to investment trusts. The Group has begun toreceive protective claims from a number of its investment trust clients and haslodged protective claims with HMRC. On 1 March 2007 the Advocate General issuedan opinion on the case which is in favour of investment trusts. However, untilthe decision of the European Court of Justice and the subsequent UK VAT tribunaldecision are known, the Directors are not able to judge the likelihood that theinvestment trusts and the AIC will be successful, nor are they able to quantifythe claims that may be received or the extent to which such claims could bemitigated and therefore, are not able to quantify the potential liability. Contingent assets: (a) European court case - Management services to authorised unittrusts and OEICs Following a recent European court case ("the Abbey National case"), it has beenruled that certain services provided for the management of authorised unittrusts and Open Ended Investment Companies should be exempt from VAT. As aresult of certain outsourced arrangements, certain services provided to theGroup are now exempt and the Group may recover VAT erroneously paid in respectof previous periods. This VAT was previously treated as irrecoverable from theGroup's perspective. HMRC set 1 October 2006 as the date from which changesarising from this court case were to be implemented. The Group is currentlyworking with suppliers to establish the potential quantum of historic output VATwhich may be recovered by the Group, as it is linked to the extent of protectiveclaims submitted by our suppliers. The Directors are not able to calculate an accurate monetary estimate of anyfinancial benefit arising until they know the extent of cash receivable fromsuppliers, the extent to which some of this may be repayable to clients' fundswhich bore the original cost, and the extent of any sums repayable to HMRC, asthese were originally the subject of "partial exemption" rules and hence theGroup may have already received some of the input VAT. (b) Compensation from Eureko - defined pension deficit Under the terms of the Sale and Purchase Agreement relating to the merger in2004, the Group has contractual protection such that it will be reimbursed forthe quantum of the pension deficit (at the date of the merger) in respect ofoverseas defined benefit pension arrangements. The execution of thiscontractual arrangement is ongoing and the quantum payable to the Group can onlybe finalised once certain employees have taken a decision whether to transfertheir historic pension benefits into the new scheme. As a result, it is not yetpossible to determine the extent of any amount receivable by the Group. 6. Consolidated reconciliation of equity 2006 2005 £000 £000Total equity at 1 January 745,420 877,658 Items reported in the Consolidated Statement of Recognised Income and (25,623) (103,434)Expense Ordinary dividends paid (52,660) (51,817) Share-based payment charges credited to equity 15,690 21,822 Share capital allotted on exercise of options 1,865 1,776 Partners' capital injected - 2 Partners' drawings (500) (500) Cash received into Treasury as settlement of options 252 - Purchase of own shares (684) (87) Total equity at 31 December 683,760 745,420 Attributable to:Equity holders of the parent 683,330 745,918Minority interests 430 (498) 683,760 745,420 7. Other information The financial information set out above for the years ended 31 December 2006 and31 December 2005 has been extracted from the unaudited and audited FinancialStatements respectively for those years. The information does not constitutestatutory accounts in terms of the Companies Act 1985. The Annual Report andFinancial Statements for 2005 received an unqualified audit opinion and havebeen filed with the Registrar of Companies. The Report and Financial Statementsfor the year ended 31 December 2006 will be filed within the statutory period,following the Annual General Meeting. Copies of the 2006 Annual Report and Financial Statements will be posted toshareholders later this month and will be available for inspection at theregistered office of the company at 80 George Street, Edinburgh EH2 3BU. A copy of the analyst presentation which takes place at 9am today is availableon the Company's website www.fandc.com. A video recording of the presentationwill be made and will also be available on the Company's website. This announcement and the information contained herein are not for publicationor distribution in and shall not constitute or form any part of any offer orinvitation to subscribe for, underwrite or otherwise acquire, or anysolicitation of any offer to purchase or subscribe for, securities including inthe United States, Canada, Australia, Japan or any other jurisdiction where suchactivity is unlawful. This announcement and the information contained herein do not constitute anoffer of securities for sale in the United States of America. Neither thisannouncement nor any copy of it may be taken or distributed into the UnitedStates of America or distributed or published, directly or indirectly, in theUnited States of America. Any failure to comply with this restriction mayconstitute a violation of US securities law. The securities referred to hereinhave not been and will not be registered under the US Securities Act of 1993, asamended (the "Securities Act") and may not be offered or sold in the UnitedStates unless they are registered under the Securities Act or pursuant to anavailable exemption therefrom. No public offering of securities is being madein the United States. Forward-looking statements This announcement may contain certain "forward-looking statements" with respectto certain of the Group's plans and its current goals and expectations relatingto its future financial condition, performance, results, strategy andobjectives. Statements containing the words "believes", "intends", "expects","plans", "seeks" and "anticipates", and words of similar meaning, are forward-looking. By their nature, all forward-looking statements involve risk and uncertaintybecause they relate to future events and circumstances which are beyond theGroup's control including among other things, UK domestic and global economicand business conditions, market related risks such as fluctuations in interestrates and exchange rates, and the performance of financial markets generally,the policies and actions of regulatory authorities, the impact of competition,inflation and deflation, the timing, impact and other uncertainties of futureacquisitions or combinations within relevant industries, and the impact ofchanges in capital, solvency or accounting standards, and tax and otherlegislation and regulations in the jurisdictions in which the Group operates. As a result, the Group's actual future financial condition, performance andresults may differ materially from the plans, goals, and expectations set forthin the Group's forward-looking statements. F&C undertakes no obligation toupdate the forward-looking statements contained in this announcement. Nothing inthis announcement should be considered as a profit forecast. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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