21st Mar 2005 07:02
Raven Mount plc21 March 2005 21 March 2005 RAVEN MOUNT PLC Preliminary Results for the year ended 31 December 2004 Headlines • Group loss before tax was £(6.9) million (2003: £(5.0) million) on turnover of £106.0 million (2003: £60.4 million) including £23.0 million from the sale of Stockton-on-Tees. • Continued difficult housing market across Southern England with turnover from housing sales of £71.2 million (2003: £51.8 million). • Significant cash generation of £31.3 million during year with net funds of £4.0 million as at the year end. • Completion of the acquisition of The Raven Group in December 2004 for up to a maximum of £39.9 million, payable in Ordinary shares. • Net assets of £95.1 million (2003: £72.5 million). • Final Dividend of 0.5p per Ordinary share in addition to a Special Dividend of 1.0p per Ordinary share paid at the Interim. • Pension deficit under FRS17 increased to £16.3 million (2003: £11.3 million) (not included in balance sheet). • Net assets per Ordinary share of 90p (on a fully diluted basis) (2003: 112p) excluding the pension fund deficit. • Strategy to develop new niche businesses in the property sector. Commenting on the results, Anton Bilton, Chairman, said: "2004 has been both a difficult and transforming year for our Company. Difficult, because the legacy strategy we inherited had created various projectswhich were clearly not going to be profitable and which have been and continueto be time consuming to conclude. Furthermore, the cultural and strategicchanges required have placed and continue to place a necessary, thoughunwelcome, burden on management time away from new business and intorestructuring. Transforming, because there is light at the end of the tunnel and that once thefull effects of these changes come into effect over the forthcoming years wewill have a much leaner and more focused team capable of reinventing a businessthat should generate consistent growth in the future. We are now set on a very positive footing with no net debt, cash in the bank, ahighly incentivised team and an opportunistic attitude to seeking value in thisinteresting market." Enquiries: Raven Mount Plc 020 7235 0422Anton BiltonBim Sandhu Chairman's Statement 2004 has been both a difficult and transforming year for our Company. Difficult, because the legacy strategy we inherited had created various projectswhich were clearly not going to be profitable and which have been and continueto be time consuming to conclude. Furthermore, the cultural and strategicchanges required have placed and continue to place a necessary, thoughunwelcome, burden on management time away from new business and intorestructuring. Transforming, because there is light at the end of the tunnel and that once thefull effects of these changes come into effect over the forthcoming years wewill have a much leaner and more focused team capable of reinventing a businessthat should generate consistent growth in the future. To recap 2004, after the completion of the acquisition of Swan Hill Group PLC ("Swan Hill") in December 2003 your directors began a strategic review of the SwanHill business. In March 2004 that initial review was completed and the Companywas offered for sale. This sales process did not lead to a satisfactory offer being received for theCompany and it was therefore terminated in June 2004. During the summer months your Board looked at alternative proposals for thereinvention of the business and concluded that the best way forward was theacquisition of my and my partner, and Raven Mount co-director, Bim Sandhu'sresidential property interests entirely for Ordinary shares in Raven Mount, theterms of which acquisition were explained in the letter to you of 26 November2004. This acquisition brought with it both myself and Bim as, respectively, full timeExecutive Chairman and Chief Executive as well as a team of executives from ourprivate group of companies: The Raven Group. It is our absolute intention tomake Raven Mount our principal vehicle going forward and one in which we have adirect alignment of interest with shareholders because of the large size of ourindividual shareholdings in the Company. The results to 31 December 2004 recognise the fact that the company spent theyear going through a period of transformation and reinvention and, as such, ithas certainly been a year of one-off costs. The loss before tax of £6.9 millionincludes trading losses and provisions on legacy problem sites. It alsorecognises the costs incurred for the closure of the Horsham and French officesand the costs incurred in the aborted sale process. Notwithstanding these results and given the strength of our balance sheet andour intentions to create a consistent earnings driven business going forward wewill be paying a final dividend payment of 0.5p per Ordinary share for the yearend with expectations of enhancing that dividend payment in the future. The housing market in the south east for homes valued in excess of £350,000continued to be difficult and led to a reduction in sales margins for reasonsset out in the Chief Executive's Report. We remain concerned at the stagnationin this market and in expectation of a new strategy and in a conscious effort tobring in cash the Company pursued an active sales program including sellingconsented land where construction had not already commenced. This leads me on to the future and effectively the first real year of ourinvolvement. The first half of 2005 continues to be a period of transformation during whichthe Swan Hill and Raven teams will be integrated. Once this assimilation iscompleted the relevant teams will focus on utilising their skillsets infulfilling our revised strategy of the development of niche businesses in theproperty sector. The first of these specialises in the Assisted Living market. Assisted Living iseffectively the provision of residential accommodation to the elderly but withthe added benefit of earnings being derived not only from sales of individualdwellings but also from the provision of services ranging from meals through tohealthcare. In entering this market your Company has acquired, through the purchase of TheRaven Group, an early stage joint venture with an existing established operatorwith specific Assisted Living experience such that their operational skills canbe mixed with The Raven Group's land acquisition skills and Swan Hill'sconstruction management capabilities. This is an exciting market with a strongdemand curve emanating from a naturally growing demographic. The quality ofaccommodation and care provided by these sites leaves one to wonder whether theend may be in sight for the private sector nursing home market as elderly peoplechoose the more independent lifestyle offered by Assisted Living centres ratherthan the existing austere and soulless nursing home offering. We expect to develop further niche operations in the property development sectorboth in the UK and overseas where we can utilise our diverse in-house skillsets.We are currently actively exploring these opportunities both on a proprietarybasis and as a possible external manager. I hope to bring you further news ofthese activities in the year ahead. On a final note, I wish to express my sincere gratitude and thanks to both theentire Swan Hill and Raven teams who have all suffered through a year ofuncertainty. We are now set on a very positive footing with no net debt, cash in the bank, ahighly incentivised team and an opportunistic attitude to seeking value in thisinteresting market. Anton Bilton Executive Chairman 21 March 2005 Chief Executive's Report 2004 has been a troublesome year for the Swan Hill business that had beenacquired by Raven Mount because of the difficult economic conditions in itstraditional business area of high value housing, the historically flawed modelfor purchasing land which has been exposed by such conditions and theuncertainty throughout the year created for staff over the future management andownership of the Company. Market conditions and the impact on the Swan Hill business Whilst generally the housing market in the UK remained robust, until towards theend of the year, the market for Swan Hill's traditional higher value housing hasremained weak throughout. In particular, the Company experienced tough tradingconditions in the second half of the year. Generally, sales have been farslower and the prices achieved significantly lower than had been forecast whenthe projects were first conceptualised by former management. In addition, costshave been significantly higher than had been forecast as a result of risinglabour costs in the construction industry in the South, an historically weakfocus on cost control and a lack of direct and clear internal accountability forsuch costs. This was not helped by the uncertainty over the future of theCompany. The result is that margins have been severely squeezed and a number ofprojects have become loss making or marginally profitable at an operating level. The profits to be derived from the remaining traditional Swan Hill schemes whichare currently being developed are therefore limited. The financial impact hasbeen exacerbated on a number of major sites, in particular Sibford Ferris, whereSwan Hill, in addition to being a developer, is acting as the main contractor.The higher risks and higher employee and administrative costs of acting as amain contractor had not been sufficiently taken into account when purchasingland with the result that when things have gone wrong they have tended to goseverely wrong. Whilst full provisioning has now been made on loss making sites,such as Sibford Ferris, for all known costs, the overall profitability of theCompany will continue to suffer as the central employee and administrative costsof acting as the contractor on such sites can only be booked in the accountingperiod that they are incurred. There will be no profits from such sites tooffset these internal costs and the sites are therefore economically loss makinggoing forward. Such losses will be reflected in this year's and next year'sresults. Further, there will be no return on the working capital employed insuch sites. Your directors have undertaken a review of all major developments in light ofthis experience on costs and sales values and this has resulted in a number ofsite sales where development work had not commenced and of write-downs on manysites where development work was in progress. The only new major developmentsite on which work commenced during the year was Paramount, Swindon. The onlyreason for this was that Swan Hill was contractually committed by previousmanagement under the terms of a joint venture agreement entered into with theowner of the site to commence works on site. If there had been no contractualcommitment we would not have started development on this site as the site iscurrently only marginally profitable at an operating level. If sales valuesfall or costs increase by small margins then this will become a loss makingsite. It has also become apparent that Swan Hill's basis for booking profits ondevelopments was such that profits became back-end loaded in a rising market,and front-end loaded in a falling market, all other things being equal, ondevelopments that straddle financial years. The result of the recent fallingmarket for the Swan Hill product has meant that too much profit was booked inprior years and an adjustment of £1.3 million to the carrying value of stock hasbeen made in this year's accounts to reflect the over recording of profits inearlier years on sales from certain sites. In addition, the directors have decided that, given the limited profitability ofthe Swan Hill developments and the reduction in staff numbers in the contractingpart of the business it is no longer considered appropriate to allocate aproportion of overheads to the cost of stock. The effect of this on profits forthe year was £2.2 million. The future for the Swan Hill business As at the year end 436 units were being developed (ie excluding plots to besold) by the Swan Hill business on which the average selling price is expectedto be £268,000. The Company has exchanged or sold 102 units as at 13 March2005. The Swan Hill sites are being developed out and sold as quickly as marketconditions will allow. It is expected that the majority of the capital employedin that business will be released in the next two to three years. This capitalwill be redeployed into other areas as noted in the Chairman's Statement. Other than in relation to existing sites or in exceptional circumstances theCompany will no longer act as a main contractor on its own development sites.This will mean that staff numbers, 88 (as at 31 December 2004) including 17staff who joined the Group as part of The Raven Group purchase, are likely to bereduced from the current levels over the next two to three years as the SwanHill sites are completed and sold. Although every effort will be made to redeploy employees with the requisiteskills into other areas, there will be additional redundancy costs and closurecosts as the Company moves to smaller premises more suitable for its needs orsublets space that it no longer requires. The Swan Hill Pension Fund The Pension Fund was identified during the unsuccessful sale process last yearas a major weakness of the Company and was the overriding reason for the failureto find a buyer. Shareholders should appreciate that it is not just the growingsize of the deficit which was of concern but also the uncertainty over the sizeof the deficit. I believe that this uncertainty does not apply just to ourpension fund but to almost all pension funds with such deficits and it shouldnot be looked at as a problem for this company alone. As at 31 December 2004 and using the assumptions set out in the financialstatements the FRS17 deficit is £16.3 million before any adjustment for deferredtax. However, over a long period of time, small changes in actuarialassumptions can have a relatively large impact on the deficit. This is starklydemonstrated by the fact that if the assumed rates of price inflation, pensionincreases and salary increases were each increased by as little as 0.1% (eg from2.8% pa to 2.9% pa in the case of the price inflation assumption), other thingsbeing equal, the FRS 17 deficit would increase by approximately £1.0 million.In the document sent to shareholders on 26 November 2004, in relation to theacquisition of The Raven Group, the Independent Directors announced that as at30 September 2004 and allowing for longer life expectancy, the FRS17 deficitincreased to £18.1 million. The deficit as at 31 December 2004 of £16.3 millionhas been calculated on a consistent basis to the 30 September 2004 deficit. Thefall was principally caused by strong investment returns in the last quarter of2004. The actuarial review which is due this year will result in a significantincrease in the contributions that the Trustees are likely to require from theCompany and this will be a considerable drag on the profitability of the Companyfor a number of years. Management will however continue to work with the Trustees to seek legitimateways to mitigate the pension fund problem and the uncertainty that goes withthat but there are elements of it which may remain unsolvable, for example,increases in mortality rates increases the deficit. Shareholders should beaware that recent and proposed changes in pensions legislation severely limitthe Company's flexibility in trying to mitigate the problem and will no doubtlead to increased costs in running the scheme. The purchase of Raven Property Holdings Plc ("The Raven Group" or "RPH") The Raven Group's expertise with respect to property development lies inobtaining planning permission. With some exceptions, notably Yaxley, Swan Hillhas traditionally purchased land with planning permission and therefore has notbenefited from the uplift in value created by obtaining planning. The purchase of The Raven Group and its planning expertise should ensure thatmargins increase in future years. However, shareholders should note that underthe terms of the purchase agreement any uplift in the value created throughplanning gains of the projects being undertaken by The Raven Group at the timeof the takeover will be to the benefit of the former Raven Group shareholders inthe form of additional deferred consideration (subject to a maximum as notedbelow). That said, profits created through the development of such projectswill all accrue to Raven Mount. The additional margin generated by The RavenGroup through planning gains will therefore only accrue to Raven Mount on thoseprojects which are identified following the takeover and on which planningpermission is subsequently obtained. In this context I would highlight that the slow and cumbersome planning processin this country will mean that such additional gains will not materialise for atleast three or four years. This period takes into account the time taken toidentify and purchase a site, the subsequent period for obtaining planning andsigning legal agreements, the development of the site and the eventual sale ofunits on that site. However, I am pleased to announce that significant progress has been madesubsequent to the year end in obtaining planning permissions and signing theassociated legal agreements on those projects set out in detail in theAcquisition Agreement. Most significantly the Company has signed the Section106 legal agreements in respect of planning for its major development at HighRoyds Hospital in Leeds and, subject to the signing of the Listed BuildingConsent, the purchase is expected to be completed this summer. This serves tohighlight the cumbersome planning process referred to above as it has taken overa year to achieve the Section 106 consent after planning had been granted by theplanning committee. The Company has also obtained planning permission for its development at Lewes,subject to a Section 106 legal agreement which is expected to be signed shortly.Planning permission for Sheffield Phase 1 has already been received, the legalagreements completed and purchase of this site is due for completion in thesecond half of the year. The Raven Group has this month received planningcommittee approval for the much larger Sheffield Phase 2 development. We wouldexpect to complete the legal agreements shortly but the timing of the purchaseis dependent on when the vendor can provide vacant possession. Further detailsof these properties are set out in the Operating and Financial Review. As part of the purchase of The Raven Group the Company has acquired 415 plotswhich have full planning permission as at today's date and a further 1,044 plotsor units on which the relevant planning committee have resolved to grantplanning permission but where formal consent has not been granted e.g. becausethe Section 106 legal agreements may be outstanding. This includes 882 plotswhich are held in joint ventures and 400 plots which have been sold, subject toobtaining planning, to other housebuilders or Registered Social Landlords. TheCompany has also acquired a number of other sites which are in various stages ofthe acquisition and planning process. The accounting treatment of the purchase of The Raven Group under current UKGAAP is sufficiently significant that the effects on the consolidated financialstatements require explanation. A detailed explanation of the accountingtreatment for the acquisition of The Raven Group is contained in the Operatingand Financial Review. Shareholders may wonder why your Board considers that the likely Fair Value ofthe assets acquired for the purposes of calculating the goodwill is deemed to be£31.7 million when the maximum consideration payable is £39.9 million. This isbecause UK GAAP requires that the directors assess the Fair Value of the assetsacquired on a replacement cost basis. As there is a great deal of uncertaintyas to the value of some of those assets (e.g. because planning is uncertain and/or some way off) the values attributed are thus provisional and will bereassessed at the next accounting date when the fair values are likely to bemore certain. Your directors will therefore reestimate the Fair Value of theassets acquired and reconsider the accounting goodwill calculation at the end ofthe current accounting year. Included in the consolidated Raven Mount balance sheet as at 31 December 2004 is£18.0 million of potential further Ordinary share capital and £26.5 million offurther assets that may be acquired and are shown within the share of grossassets in joint ventures and stock figures. Current financial position Raven Mount had net cash of £4.0 million on its balance sheet at the year enddue to actions taken by management during 2004 to sell sites on whichdevelopment work had not commenced. The Group currently has, as at 11 March2005, net cash balances of £9.9 million. The major cash movement since the yearend has been the sale of Yaxley. The Swan Hill business will continue togenerate strong cash flows as sites are developed and sold. Of particularimportance is that Swan Hill has exchanged on all but 2 of the 70 units on itsClifton, Bristol development. The Clifton development should be completed atthe end of this year with sales booked for the first half of next year. Raven Mount is therefore financially strong and can look to the medium term tolong term with confidence as it seeks to reinvent itself into more profitableareas of business. Finally, I should like to join Anton in thanking all employees, in particularSwan Hill staff, for their continuing efforts during a period of uncertainty. Bim Sandhu Chief Executive 21 March 2005 Operating and Financial Review The operating review outlines the results for the year to 31 December 2004,incorporating the figures of Raven Property Holdings Plc ("RPH") from 20December 2004, being the date of completion, and gives an overview of theongoing developments of both Swan Hill and the newly acquired RPH assets. Results The Group achieved total turnover of £83.0 million excluding share of turnoverfrom joint ventures (2003: £59.4 million). Housing turnover increased to £71.2million (200 units sold) compared to £51.8 million for 2003 (192 units sold),with average selling prices of £356,000 a rise of £86,000 on the previous year.Land sales totalled £10.3 million (2003: £4.4 million) predominantly as a resultof the sale of six sites announced on 12 September 2004; an additional £3.2million of which is due on completion in April 2005. Losses before taxation were £(6.9) million (2003: £(5.0) million) includingexceptional costs of £0.9 million (2003: £3.5 million). Overview of Swan Hill The principal sites open for sale are located as follows: Cheltenham Clifton, Bristol Guildford Hampton HaslemereHill Head Paramount, Swindon Selsey Sibford Ferris Stoke Bishop, BristolStourton Temple Combe Wadhurst Weybridge As mentioned in our Interim Report, the more benign conditions for the housingmarket in Southern England at the start of 2004 were short lived. As the yearprogressed the consumer became increasingly wary of the possibility of falls inhousing values. Indeed in many areas prices at which transactions actuallyproceeded did fall. The group priority has been to realise the cash locked up in the Swan Hillbranded sites and if it was necessary to increase the use of sales incentives tokeep this on track we have done so. This has of course reduced the margin wehave traded at during the second half of the year. The sites that have made a particularly significant contribution to turnover areWeybridge, Enham Alamein (near Andover), Horsham, Rode (in Somerset) and TempleCombe. As previously announced, the Horsham office was closed and its operationsincorporated within the Staines office. During 2004 the Company disposed of its commercial property development atStockton-on-Tees and commercial land at Cagnes sur Mer in France, leaving theCompany with a residual interest in the French scheme. Swan Hill France isbeing wound down with the office in Paris having been closed. It has no ongoingemployees and is looking to sell its remaining interests. Overview of RPH The following is a summary of the main RPH assets acquired by the Group. High Royds Hospital, Leeds RPH holds 50 per cent. of the issued ordinary share capital in a joint venturewith Country and Metropolitan Homes Plc for the development of residential realestate, comprising a redundant hospital occupying a site of some 212 acres, 7miles North West of Leeds at Menston near Guiseley. Planning consent has beengranted and a Section 106 agreement has been signed for 533,000 square feet ofprivate residential space, 62,000 square feet of affordable housing and 151,000square feet of employment generating use. We are awaiting the signing of theListed Building consent. In total 541 new homes are planned to be built, inaddition to the conversion of 7 existing residential units and 87 assistedliving units. Of the 533,000 square feet of residential space the new build element (217units) excluding the affordable housing element, has been sold, subject toplanning, to a major house builder. The remaining private housing is plannedto be created from the conversion of the listed buildings into 215 new units.The affordable housing, comprising 109 units has been presold to a RegisteredSocial Landlord. The commercial element is planned to encompass a full range ofcommunity, retail and business uses including an assisted living operationproviding accommodation for 110 elderly persons, office space, nursery, doctors'surgery and recreational facilities. Kelham Riverside Phases 1 and 2, Sheffield, Yorkshire The site is located in Sheffield, Yorkshire close to Kelham Island. It consistsof a large tract of riverside development land which has been packaged into twophases. Phase 1 benefits from full planning permission and comprises 145 units,approximately 8,000 square feet of offices and approximately 20,000 of retail.Completion of the purchase of the site is currently expected in October 2005. In relation to Phase 2, planning has been received for 339 residential units.The Company is expecting the completion of the related legal agreement in thefirst half of the year. Purchase of this site and therefore any development isdependent in obtaining vacant possession and this is not expected to be achievedthis year. The New England Quarter, Station Road, Brighton, East Sussex The site is adjacent to Brighton Station and in close proximity to the mainshopping areas of Brighton. Contracts have recently been exchanged on thepurchase of this eight acre site from J. Sainsbury's Developments for theresidential development of land adjoining Brighton Station. The site hasplanning permission for the development of 247 new build flats and townhouses(of which 74 flats are for social housing). The site is being developed in ajoint venture with Barratt Homes who will be responsible for the construction ofthe site. Development works have commenced on site under licence and thecompletion of the purchase is expected to be in the next few months. Baxter's Former Print Works, Lewes, East Sussex The site is situated off the main high street in Lewes which is regarded asbeing the crafts, arts and intellectual centre of East Sussex, metres away fromthe High Street and in close proximity to the train station. Planning permissionhas been obtained for a total of 54 units which includes 27 flats, one 4 bedroomhouse, 14 social housing units and 12 live/work units. The Raven Group isnegotiating the Section 106 agreement with the local council. Clifton Hall, Clifton Village, Clifton, Nottingham Clifton Hall is a Grade 1 listed mansion dating from the late 16th centurysituated approximately 3 miles south-west of Nottingham City centre. Planningconsent has been granted for the conversion of the mansion into 2 houses and forthe development of 14 new build houses (24,970 square feet) subject to a section106 agreement and approval from the Government Office of East Midlands. Nosignificant progress has occurred since the year end. Raven Audley Court ("RAC") RAC is a 50:50 joint venture between RPH and Nicholas Sanderson for the fundingand management of a portfolio of assisted living centres. Assisted Livingcentres provide independent units of accommodation for the elderly and offer avariety of additional services. RAC is currently managing 2 centres owned byNicholas Sanderson and the RPH facility at Flete House. It is currently in theearly stages of identifying and purchasing several sites. RPH is currentlyseeking to renegotiate this joint venture so that in return for providingadditional funding RPH increases its equity interest in the joint venture. Flete House, Ermington, Ivybridge, Devon Flete House is the first development undertaken by RPH to operate through RAC asan assisted living development offering independent living to residents withintheir own homes with support services on site. This is a 29 unit scheme, 6 ofwhich have been sold to existing tenants and one further sale has been madeafter the year end to an outside purchaser. The property is currently beingrefurbished. Financial Review Shareholders' funds at the year end increased to £95.1 million (2003: £72.5million) following the acquisition of RPH. This includes £18.0 million relatingto deferred consideration under the terms of the acquisition. Net cash as atthe year end was £4.0 million a positive movement of £29.1 million (2003: netdebt £(25.1) million). Strong positive cash movements during the year resulted from the sale of theGroup's residual commercial assets, strategic land sales and the net cash inflowfrom the housing operations. The interest charge for the year, including jointventures, was consequently reduced to £1.1 million (2003: £1.4 million). Turnover for the year was £106.0 million (2003: £60.4 million), including £23.0million from joint ventures (2003: £1.1 million), £71.2 million from housing(2003: £51.8 million) and £10.3 million (2003: £4.4 million) from land sales.Group operating losses were £(6.3) million (2003: £(4.5) million), includingexceptional costs of £0.9 million (2003: £3.5 million), with a loss before taxof £(6.9) million (2003: £(5.0) million). A final dividend of 0.5p per Ordinary share is proposed in addition to the 1.0pspecial dividend announced at the Interims, totalling 1.5p for the year. The Directors have carried out a thorough review of the carrying value of stockand have, as a result, increased provisions against work in progress by afurther £1.9 million on the half year. In addition, profits taken on sales inprevious years have not correctly reflected all appropriate costs and thereduced margin on a number of sites. As a consequence, an adjustment of £1.3million has been made to stock and profits to reflect this. Previously capitalised overheads totalling £2.2 million have also been writtenoff stock to reduce it to its realisable value. The level of committed facilities from our bankers was maintained at £25million, which together with £15 million of overdraft, provided total bankfacilities of £40 million, excluding bank facilities available to RPH orspecific subsidiaries. As part of the acquisition of RPH, the Company inherited bank loans of £3.2million. Pension Fund Under Financial Reporting Standard 17 'Retirement Benefits', the deficitdisclosed in respect of the final salary pension scheme has increased during theyear from £11.3 million to £16.3 million as at the end of 2004. The deficitwidened notwithstanding the improved performance of the world stock marketsduring the year due to increased liabilities arising from projected higherinflation and, therefore, higher future pension payments and to a lower discountrate. The deficit disclosed under FRS17 is highly sensitive both to absolutemarket value of the scheme's assets at any point in time as well as theunderlying assumptions in arriving at the scheme's liabilities includinginflation and discount assumptions as well as mortality rates. Under FRS17, thetotal market value of the pension scheme's assets as at 31 December 2004 were£52.4 million and the present value of its liabilities were £68.7 million. Following the actuarial valuation of the pension scheme as at 5 April 2002, theactuary recommended additional annual contributions of £780,000 over the nextsix years. Under SSAP24, the pension cost charged to the profit and loss accountwas £729,000. The next actuarial valuation for the purpose of settingcontributions is due to take place as at 5 April 2005. The directors anticipatethat the additional contributions are likely to increase materially from currentlevels following this review. The accounting for the purchase of The Raven Group Under the Acquisition Agreement the purchase consideration for The Raven Groupwas to be an Initial Consideration of £17.890 million. This was to be satisfiedby the issue of 22,362,500 shares, based on the book value of the net assets ofThe Raven Group being £10.390 million and a £7.5 million notional value attachedto 'business goodwill'. Further amounts of up to £22.010 million could be duedepending on the successful outcome of various property transactions which havebeen acquired. Accordingly, there was a total maximum consideration of £39.900million (all of which would be satisfied by the issue of Raven Mount PlcOrdinary shares). At the date of acquisition of RPH, your directors are required to assess theFair Value of the assets and liabilities acquired and the Fair Value of thetotal consideration that will be payable. The Fair Value of the stock is based on an assessment of its replacement cost.In accordance with UK GAAP, the Fair Value of the stock is reflected in theconsolidated balance sheet, gross of tax. The fair value of the considerationis based on a total of the following: a) the book value of the net assets acquired; b) a premium payable in respect of goodwill; c) the difference between the replacement cost of stock andactual costs incurred or to be incurred, net of a notional 30% deduction fortax. The Fair Value of the consideration therefore takes account of the notionaleffect of tax whilst that of the stock does not. This gives rise to a negativegoodwill balance, being the difference between the Fair Values of theconsideration and the net assets. The balance therefore reflects the negativegoodwill arising due to this tax effect, less the premium payable as part of theacquisition. One adverse effect of the above will be an artificially high effective tax ratein the consolidated profit and loss account when the stock is realised. This issimply an effect of the above accounting treatment and does not reflect actual,higher tax payments by the Company (as those additional tax payments have beeneffectively paid by the vendors in calculating the consideration received bythem). At 31 December 2004, the directors have assessed the Fair Value of the totalconsideration as £29,949,000, including acquisition expenses of £1,208,000, andthe fair value of the net assets acquired as £31,462,000. This gives rise tonegative goodwill of £1,513,000. Following the confirmation of the net assets acquired from RPH, the whole of theinitial consideration has now been settled together with a further £636,000 ofthe additional consideration. The Fair Values noted above are provisional at this stage and UK GAAP allowsthese to be reassessed at the end of the next accounting period. GROUP PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2004 2004 2003 £'000 £'000 Turnover (including share of trading joint ventures) 105,972 60,418 Less: share of turnover of trading joint ventures (22,966) (1,059) Group turnover 83,006 59,359 Group operating (loss)/profit before exceptional administrative expenses and impairment of goodwill (5,578) 1,843Exceptional administrative expenses (918) (3,454)Impairment of goodwill 170 (2,853)Group operating loss (6,326) (4,464) Share of operating profit in trading joint ventures 1,138 906 Total operating loss : Group and share oftrading joint ventures (5,188) (3,558) Loss on closure of operations (550) (99) Loss on ordinary activities before interest and taxation (5,738) (3,657) Net interest payable and similar charges - Group (791) (733) - Joint ventures (326) (637) Loss on ordinary activities before taxation (6,855) (5,027) Tax on ordinary activities 1,938 50 Loss on ordinary activities after taxation (4,917) (4,977) Dividends (1,049) (1,040) Retained loss for the financial year (5,966) (6,017) Basic loss per Ordinary share (7.8)p (8.3)pDividend per Ordinary share 1.5p 1.75pNet assets per Ordinary share (fully diluted) 90p 112p All amounts in the current and prior year relate to continuing activities. BALANCE SHEET AS AT 31 DECEMBER 2004 As restated Group Group 2004 2003 £'000 £'000Fixed assets Intangible assets (1,513) 0 Tangible assets 438 607 Investments Investments in trading joint ventures: Share of gross assets 12,886 19,760 Less: share of gross liabilities (2,973) (19,655) 9,913 105 Investment in associates 49 0 9,962 105 8,887 712Current assets Stocks 87,846 107,413 Debtors : Amounts falling due within one year 7,682 6,482Debtors : Amounts falling due after one year 897 6,184 8,579 12,666 Cash at bank 8,040 2,516 104,465 122,595 Creditors: Amounts falling due within one year (14,253) (49,564) Net current assets 90,212 73,031 Total assets less current liabilities 99,099 73,743 Bank loans falling due in more than one year (2,188) 0 Provisions for liabilities and charges (1,789) (1,279) Net assets 95,122 72,464 As restated Group Group 2004 2003 £'000 £'000Capital and reserves Called up share capital 84 111Shares to be issued - deferred consideration 19,696 1,907Share premium account 1,998 1,998Capital redemption reserve 50 0Reserve for own shares (150) (150)Reverse acquisition reserve 60,467 60,370Merger reserve 10,765 0Profit and loss account 2,212 8,228 Equity shareholders' funds 95,122 72,464 The accounts were approved by the Board of Directors on 21 March 2005. GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 2004 2004 2003 2003 £'000 £'000 £'000 £'000Net cash inflow/(outflow)from operating activities 33,751 (12,102) Returns on investments andservicing of finance Interest received 79 23Interest paid (963) (686) Net cash outflow from returns oninvestment and servicing of finance (884) (663) Taxation 0 (128) Capital expenditure andfinancial investment Purchase of tangible fixed assets (112) (133)Disposal of tangible fixed assets 19 0Disposal of own shares 0 141 Net cash (outflow)/inflow for capitalexpenditure and financial investment (93) 8 Acquisitions and disposals Disposals of subsidiaries and investments 0 21Acquisitions of subsidiaries (319) (240)RPH acquisition - net overdrafts (562) 0 (881) (219) Equity dividends paidto shareholders (621) (2,608) Cash inflow/(outflow)before financing 31,272 (15,712) Financing Issue of shares 104 2,034Redemption of preference shares (50) 0Repayment of debt due within one year 0 (4,668)Repayment of debt due in more than one year (66) 0 Net cash outflow from financing (12) (2,634) Increase/(decrease) in net cash 31,260 (18,346) STATEMENT OF GROUP TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31 DECEMBER 2004 2004 2003 £'000 £'000 Loss on ordinary activities after taxation (4,917) (4,977)Translation differences on foreign currency net investments 3 486Hedging differences on foreign currency borrowings (3) (457) Total losses recognised in the year (4,917) (4,948) Reconciliation of movements in Shareholders' Funds As restated Group Group 2004 2003 £'000 £'000 Loss on ordinary activities after taxation (4,917) (4,977)Dividends payable (1,049) (1,040) Retained loss (5,966) (6,017) Issue of new shares 23 71Other reserve movement arising from reverse acquisition 0 3,864Shares to be issued on acquisition of Raven Property Holdings Plc 17,959 0Merger reserve arising on acquisition of Raven Property Holdings Plc 10,765 0Premium arising on exercise of share options in Swan Hill Group PLC 97 0Redemption of preference shares (50) 0Reduction in value of shares to be issued on reverse acquisition of Swan Hill Group PLC (170) 0Translation difference on foreign currency investments 0 29 Net addition to/(reduction of) shareholders' funds 22,658 (2,053) Opening shareholders' funds (as restated) 72,464 74,517 Closing shareholders' funds 95,122 72,464 Cash Flow notes (a) Reconciliation of operating losses to cash flow from operating activities 2004 2003 £'000 £'000 Group operating loss (6,326) (4,464)Depreciation charge 264 312Impairment of goodwill (170) 2,853Write down of investment in joint venture (375) 0Loss on closure of an operation (298) 0Decrease/(increase) in stocks 43,252 (15,076)Decrease/ (increase) in debtors 8,960 (3,082)(Decrease)/increase in creditors (12,066) 6,537Increase in provisions 510 818 Net cash inflow/(outflow) from operating activities 33,751 (12,102) (b) Reconciliation of net cash flow to movements in net funds/(debt) 2004 2003 £'000 £'000 Decrease/(increase) in net cash/(overdraft) 31,260 (18,346)Decrease in debt due within one year 0 4,668Decrease in debt due in more than one year 66 0Change in net debt resulting from cash flows 31,326 (13,678) Bank loans acquired on acquisition ofRaven Property Holdings Plc (2,254) 0 Net debt at 1 January (25,061) (11,383) Net funds/(debt) at 31 December 4,011 (25,061) (c) Analysis of changes in net funds/(debt) Acquisition of Raven At 1 Jan Property At 31 Dec 2004 Holdings Plc Cashflows 2004 £'000 £'000 £'000 £'000 Cash at bank and in hand 2,516 0 5,524 8,040Bank overdrafts (27,577) 0 25,736 (1,841) (25,061) 0 31,260 6,199Bank loans due inmore than one year 0 (2,254) 66 (2,188) (25,061) (2,254) 31,326 4,011 Notes: 1. Basis of consolidation The consolidated accounts comprise the accounts of the Company and itssubsidiaries drawn up to 31 December 2004. On 17 December 2003 the Company became the legal parent company of Swan HillGroup PLC ("Swan Hill") in a share-for-share transaction. Due to the relativevalues of the companies, the former Swan Hill shareholders became the majorityshareholders with 96% of the enlarged share capital. Further, the Company'scontinuing operations were those of Swan Hill. Accordingly, the substance ofthe combination was that Swan Hill acquired Raven Mount Plc ("Raven Mount") in areverse acquisition. Under the requirements of the Companies Act 1985 it would normally be necessaryfor the Company's consolidated accounts to follow the legal form of the businesscombination. In that case the pre-combination results would be those of RavenMount, which would exclude Swan Hill. Swan Hill would then be brought into theGroup from 17 December 2003. However, this would portray the combination as anacquisition of Swan Hill by Raven Mount and would, in the opinion of thedirectors, fail to give a true and fair view of the substance of the businesscombination. Accordingly, the directors have adopted reverse acquisitionaccounting as the basis of consolidation in order to give a true and fair view. In invoking the true and fair override the directors note that reverseacquisition accounting is endorsed under International Financial ReportingStandard 3 and that the Urgent Issues Task Force of the UK's AccountingStandards Board considered the subject and concluded that there are instanceswhere it is right and proper to invoke the true and fair override in such a way. As a consequence of applying reverse acquisition accounting, the results for theyear ended 31 December 2003 comprise the results of Swan Hill for its year ended31 December 2003 plus those of Raven Mount from 17 December 2003, the date ofthe reverse acquisition, to 31 December 2003. Goodwill amounting to £2.85million arose on the difference between the sum of the fair value of RavenMount's share capital and the costs of acquisition, and the fair value of itsnet assets at the reverse acquisition date. The goodwill has been written offin the year ended 31 December 2003 because Raven Mount had no continuingbusiness and therefore the goodwill has no intrinsic value. Had normalacquisition accounting been applied, a negative goodwill balance would havearisen which accounts substantially for the difference in shareholders' fundsillustrated in the table below. The effects on the consolidated financial statements of adopting reverseacquisition accounting, rather than following the legal form, are widespread.However, the following table indicates the principal effect on the compositionof the consolidated reserves as at 31 December 2004. Reverse Normal Impact of reverse acquisition acquisition acquisition accounting accounting accounting £'000 £'000 £'000 Called up share capital 84 84 0Shares to be issued - deferred consideration 19,696 19,696 0Share premium account 1,998 1,998 0Capital redemption reserve 50 50 0Reserve for own shares (150) (150) 0Merger reserve 10,765 58,589 (47,824)Reverse acquisition reserve 60,467 0 60,467Profit & loss account 2,212 (6,456) 8,668 95,122 73,811 21,311 Comparative Results The figures reported for the year ended 31 December 2003 have been compiled fromthe 2003 Swan Hill Group PLC annual report and accounts and the results of RavenMount Plc for the period from 17 December 2003 to 31 December 2003. Theindependent auditors' report of the 2003 Swan Hill accounts, issued by theCompany's previous auditors, were unqualified and did not contain a statementunder section 237 (2) or (3) of the Companies Act 1985. Basis of Preparation The financial statements have been prepared on a basis consistent with theaccounting policies set out in the Swan Hill annual report and accounts for theyear ended 31 December 2003, except for the following change in respect of theinvestment in own shares. In accordance with UITF 38, the investment in ownshares is shown as a deduction in arriving at shareholders' funds rather than asan asset on the balance sheet. This has had the effect of reducingshareholders' funds by £150,000 at 31 December 2004 and 31 December 2003. 2. Net interest payable and similar charges 2004 2003 £'000 £'000 Interest receivable - group 86 23 - joint ventures 28 23 114 46 Interest payable and similar charges - group 864 725 - joint ventures 354 660 - unwinding of discount in lease provision 13 31 1,231 1,416 Net interest payable and similar charges - group 791 733 - joint ventures 326 637 1,117 1,370 3. TaxationRelated Shares:
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